<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration Number 333-22365
4,000,000 SHARES
[LOGO SECURITY CAPITAL ATLANTIC INCORPORATED]
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
----------------
Security Capital Atlantic Incorporated ("ATLANTIC") is a highly focused real
estate operating company which engages in the development, acquisition,
operation and long-term ownership of multifamily communities in the
southeastern United States. ATLANTIC has elected to be taxed as a real estate
investment trust (a "REIT") for federal income tax purposes and pays regular
quarterly distributions to its shareholders.
All of the 4,000,000 shares of ATLANTIC's common stock, par value $.01 per
share (the "Shares"), offered hereby (the "Offering") are being sold by
ATLANTIC. See "Underwriting".
The last reported sale price of the Shares, which are listed under the
symbol "SCA", on the New York Stock Exchange (the "NYSE") on April 10, 1997
was $21.50. See "Price Range of ATLANTIC Shares and Distributions".
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN FACTORS
RELEVANT TO AN INVESTMENT IN THE SHARES.
----------------
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.
----------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) ATLANTIC(2)
----------------- ----------------- -----------------
<S> <C> <C> <C>
Per Share........................ $21.50 $1.13 $20.37
Total(3)......................... $86,000,000 $4,520,000 $81,480,000
</TABLE>
- --------
(1) ATLANTIC has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(2) Before deducting estimated expenses of $1,000,000 payable by ATLANTIC.
(3) ATLANTIC has granted the Underwriters an option for 30 days to purchase up
to an additional 600,000 Shares at the initial public offering price per
Share, less the underwriting discount, solely to cover over-allotments. If
such option is exercised in full, the total initial public offering price,
underwriting discount and proceeds to ATLANTIC will be $98,900,000,
$5,198,000 and $93,702,000, respectively. See "Underwriting".
----------------
The Shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
certificates for the Shares will be ready for delivery in book-entry form only
through the facilities of DTC in New York, New York, on or about April 16,
1997, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
DEAN WITTER REYNOLDS INC.
J.P. MORGAN & CO.
PRUDENTIAL SECURITIES INCORPORATED
----------------
The date of this Prospectus is April 10, 1997.
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
DIVERSIFIED TARGET MARKET
[MAP]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE
SHARES, AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE OFFERING.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-
THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
2
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed information
and financial statements appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information contained in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. Unless otherwise
indicated, all Share and per Share amounts have been adjusted to give effect to
ATLANTIC's one-for-two reverse Share split, which was effective on September
10, 1996. Pro forma information regarding communities owned at December 31,
1996 includes communities acquired through February 28, 1997 at their cost plus
budgeted renovations. All references to communities under control refer to
developments in planning that were under control as of February 28, 1997. The
term "in planning" means that construction is anticipated to commence within 12
months. The term "under control" means that ATLANTIC has an exclusive right
(through contingent contract or letter of intent) during a contractually
agreed-upon time period to acquire land for future development of multifamily
communities, subject to removal of contingencies during the due diligence
process, but does not currently own the land. Homestead Village(R) is a
registered trademark of Homestead Village Incorporated ("Homestead") and the
term "Homestead Village" as used herein shall be deemed to include a reference
to such registered trademark. See "Glossary" for the definitions of certain
other terms used in this Prospectus.
SECURITY CAPITAL ATLANTIC INCORPORATED
ATLANTIC's objective is to be the preeminent real estate operating company
focusing on multifamily communities in its southeastern United States target
market. Through its REIT Management Agreement with Security Capital (Atlantic)
Incorporated (the "REIT Manager" or "REIT Management"), ATLANTIC has access to
the services provided by the REIT Manager and its specialized service
affiliates, which provides ATLANTIC with the same resources as a fully
integrated operating company. The REIT Manager and its specialized service
affiliates have 77 professionals dedicated to implementing ATLANTIC's highly
focused operating strategy. ATLANTIC focuses on the development, acquisition,
operation and long-term ownership of multifamily communities. At February 28,
1997, ATLANTIC's portfolio consisted of 25,596 multifamily units, including
6,355 units under construction or in planning, in 16 metropolitan areas and 49
submarkets in growth areas of the southeastern United States. The total
expected investment cost of ATLANTIC's 70 operating communities, including
budgeted renovations and total budgeted development expenditures, was
approximately $969.9 million at February 28, 1997 and the total budgeted
development cost of ATLANTIC's 20 communities under construction or in planning
was approximately $397.0 million. Additionally, at February 28, 1997, ATLANTIC
had land in planning and under control for the development of 1,808 units with
a total budgeted development cost of $111.2 million.
ATLANTIC seeks to achieve long-term sustainable growth in per Share cash flow
by maximizing the operating performance of its core portfolio through value-
added operating systems and concentrating its experienced team of professionals
on developing and acquiring industry-leading multifamily communities in
targeted submarkets exhibiting strong job growth and favorable demographic
trends. Since its inception in 1993, ATLANTIC has employed a research-driven
investment approach, deploying its capital in markets and submarkets that
exhibit strong market fundamentals. ATLANTIC believes that population and
employment growth are the primary demand generators for multifamily product.
ATLANTIC believes that its future growth will be driven by (i) its research-
based investment strategy which focuses on a primary target market exhibiting
strong demographic trends and job growth prospects; (ii) an experienced
management team which provides ATLANTIC with several senior
3
<PAGE>
officers with the leadership, operational, investment and financial skills and
experience to oversee the operations of ATLANTIC; (iii) ongoing research and
development focused on identifying those submarkets and product types that will
offer continued opportunities for long-term cash flow growth; (iv) a
development strategy targeted at moderate income households which ATLANTIC
believes represent one of the largest and most underserved segments of the
renter population; (v) the acquisition and redevelopment of existing
multifamily communities in markets which are expected to experience favorable
growth in rents and income; (vi) a high-quality portfolio providing an internal
source of long-term cash flow growth; (vii) the substantial resources available
to ATLANTIC through its affiliation with Security Capital Group Incorporated
("Security Capital Group"); and (viii) a conservative balance sheet strategy
that is expected to provide ATLANTIC with significant incremental debt capacity
and allow ATLANTIC to take advantage of future investment opportunities on a
non-dilutive basis. See "The Merger Transaction" for a description of an
agreement that ATLANTIC has entered into with Security Capital Group, which
owns the REIT Manager and SCG Realty Services Atlantic Incorporated ("SCG
Realty Services"), its property management affiliate, to merge the REIT Manager
and SCG Realty Services into a newly formed subsidiary of ATLANTIC in exchange
for Shares.
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER
"RISK FACTORS" PRIOR TO MAKING AN INVESTMENT DECISION REGARDING THE SHARES
OFFERED HEREBY. THESE RISKS INCLUDE:
. The value of ATLANTIC's assets is not based on third-party appraisals;
therefore, the price of the Shares may be greater than the fair market value
of ATLANTIC's portfolio.
. The ability of Security Capital Group to exercise significant influence over
the business and policies of ATLANTIC due to its ownership of 56.9% of the
outstanding Shares (51.4% after the Offering), its right to nominate up to
three Directors and its right to prior approval over certain matters,
including ATLANTIC's operating budget and substantial deviations therefrom.
. Conflicts of interest between ATLANTIC and the REIT Manager, which is owned
by Security Capital Group, and other affiliates of Security Capital Group,
and the ability of Security Capital Group to influence decisions regarding
agreements with affiliates (which must be reviewed and approved at least
annually by ATLANTIC's independent Directors), which could result in
decisions that do not fully represent the interests of all shareholders. See
"The Merger Transaction".
. ATLANTIC's ability to pay future distributions depends on a number of
factors, any change in which could affect ATLANTIC's ability to pay future
distributions.
. General real estate investment considerations, such as (i) the effect of
local economic and other conditions on real estate values and the ability of
residents to make rental payments, along with the general illiquidity of
equity real estate investments, which may limit the ability of ATLANTIC to
change its asset base; (ii) a possible inability to refinance revolving
credit and mortgage indebtedness; (iii) the risks inherent in development
activities, including the risk that construction may not be completed on
schedule; and (iv) competition in seeking residents for communities owned,
communities for acquisition and land for development.
. Concentration of communities representing 34.3% of ATLANTIC's pro forma
revenues for the year ended December 31, 1996 in the Atlanta, Georgia
metropolitan area, which thus may be affected by changes in the economic
conditions of that area.
. Taxation of ATLANTIC as a corporation if it fails to continue to qualify as
a REIT for federal income tax purposes, and ATLANTIC's liability for certain
federal, state and local taxes on its income and property.
4
<PAGE>
. The possibility that ATLANTIC being externally managed by an affiliate of
its principal shareholder may adversely affect the market price of the
Shares. See "The Merger Transaction".
. Ability of ATLANTIC's Board of Directors (the "Board"), which is comprised
of a majority of independent Directors, to change certain policies of
ATLANTIC, including investment, financing and distribution policies, without
a vote of the shareholders, which could result in policies that do not fully
reflect the interests of all shareholders.
. Limitations on the shareholders' ability to change control of ATLANTIC due
to (i) restrictions on ownership of more than 9.8% of the number or value of
the outstanding shares of ATLANTIC's stock and possible redemption of shares
acquired or voidance of the transfer of shares acquired in excess of 9.8% of
the number or value of the outstanding shares of ATLANTIC's stock; (ii)
ATLANTIC's shareholder rights plan; (iii) ATLANTIC's classified Board; (iv)
the Board's ability to reclassify unissued shares of ATLANTIC's stock; and
(v) advance notice requirements to nominate Directors or bring other
business before annual or special shareholders' meetings.
. Possible adverse effect of increases in market interest rates on Share
prices.
. Potential liability of ATLANTIC for unanticipated or future environmental
liabilities and the potential expense of compliance with the Fair Housing
Amendments Act of 1988 and the Americans with Disabilities Act of 1990.
. Restrictions associated with tax-exempt bonds used to finance certain
communities which require that a certain percentage of units in those
communities be occupied by lower-income households.
. The possible effect on the market price of the future sale of a substantial
number of Shares.
. Dilution of net tangible book value of the Shares.
For a discussion of ATLANTIC's transactions with related parties and the
compensation therefor, see "Certain Relationships and Transactions".
HIGHLIGHTS
ATLANTIC's highlights for 1996 include:
. ATLANTIC's 34 communities that were fully operational throughout 1996 and
1995 realized an increase in adjusted net operating income of 4.88%. See
"Business--Strategy for Cash Flow and Distribution Growth--"Same Store'
Growth". This strong net operating income growth from the same store
portfolio generated 30% of ATLANTIC's funds from operations growth, and the
positive impact of acquisitions completed in 1996 generated an additional
29%. The remaining 41% of growth in funds from operations was produced by
the stabilization of new development communities. The contribution to funds
from operations growth from developments occurred even though ATLANTIC had
an average of $168.4 million of assets under development or in lease-up
during 1996. As these communities in lease-up begin to reach stabilization
in 1997 and subsequent years, they are expected to add significantly to
ATLANTIC's long-term performance. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources--Funds from Operations".
. The development of moderate income multifamily communities continues to be a
major component of ATLANTIC's investment strategy. During 1996, ATLANTIC
commenced construction of 2,815 units at a total expected investment cost of
$164.4 million. Of that total, 51.8% were moderate income communities.
During 1996, three developed communities (one of which was a moderate income
community) representing a total expected investment cost of $43.0 million
achieved stabilization, adding 804 units to ATLANTIC's stabilized portfolio.
5
<PAGE>
. ATLANTIC continues to take advantage of attractive investment opportunities
throughout its southeastern target market. During 1996, ATLANTIC acquired
13 communities consisting of 3,556 units, representing a total expected
investment cost of $171.7 million.
. ATLANTIC is implementing an asset optimization strategy pursuant to which
it may from time to time dispose of communities that are no longer
consistent with its long-term investment objectives and redeploy the
proceeds into strategic acquisitions and developments, preferably through
tax-deferred exchanges. During 1996, ATLANTIC completed the disposition of
four communities, realizing an aggregate gain of $6.7 million on aggregate
proceeds of $64.2 million.
. In May 1996, ATLANTIC closed a private placement of Shares that raised a
total of $249.3 million of net proceeds. The completion of this private
placement further enhanced the strength of ATLANTIC's balance sheet.
Proceeds from the private placement were used to fund investment activities
and repay borrowings under ATLANTIC's $350 million line of credit.
. On October 17, 1996, ATLANTIC sold its Homestead Village properties to a
newly formed company, Homestead, and entered into a funding commitment
agreement to fund the development of certain of such properties in exchange
for Homestead common stock and warrants that ATLANTIC subsequently
distributed to its shareholders. On a fully funded and converted basis,
ATLANTIC will own 15.35% of Homestead's common stock (assuming no further
equity offerings by Homestead, conversion of all convertible mortgage notes
and exercise of all outstanding warrants) as a result of its obligation to
fund up to $111.1 million of Homestead convertible mortgage notes, which
are expected to contribute significantly to ATLANTIC's future growth.
Homestead's common stock and warrants trade on the American Stock Exchange
(the "ASE") under the symbols "HSD" and "HSD.W", respectively. See "Certain
Relationships and Transactions--Homestead Transaction" and "--Funding
Commitment Agreement".
. ATLANTIC closed its initial public offering on October 18, 1996, raising
net proceeds of $110.0 million from the sale of 4,940,000 Shares at a price
of $24.00 per Share (before adjusting for the Homestead Distribution
described below). The proceeds from the offering were used to repay
borrowings under ATLANTIC's $350 million line of credit. At April 7, 1997,
ATLANTIC had 37,891,580 Shares outstanding. ATLANTIC's long-term debt as a
percentage of total long-term undepreciated book capitalization (the sum of
long-term debt and shareholders' equity after adding back accumulated
depreciation) was 17.4% at December 31, 1996 on an historical basis and
16.0% at December 31, 1996 on a pro forma basis as adjusted to give effect
to the Offering and the application of the proceeds therefrom.
. In December 1996, ATLANTIC replaced its secured line of credit with a new
$350 million unsecured line of credit. The new line of credit bears
interest at prime or, at ATLANTIC's option,
LIBOR plus 1.375% compared to the previous rate of LIBOR plus 1.5%. The
loan agreement provides for a further reduction in the interest rate
depending upon ATLANTIC's debt rating. ATLANTIC's objective is to achieve
an investment-grade debt rating in 1997. As of April 7, 1997, $289.5
million of borrowings were outstanding under the line of credit.
. During 1996, ATLANTIC's Share price increased from $23.00 (based on the
offering price for a private offering conducted from November 1995 to May
1996) to $24.50 (based on the closing price on the NYSE on December 31,
1996). In addition, shareholders received total cash distributions of $1.65
per Share in 1996 and a special distribution of 0.110875 shares of
Homestead common stock and warrants to purchase 0.074384 shares of
Homestead common stock per Share (the "Homestead Distribution"). The
securities distributed in the Homestead Distribution had a market value of
$2.67 per Share based on the closing prices of such securities on the ASE
on November 11, 1996, the day prior to the distribution date. See "Price
Range of ATLANTIC Shares and Distributions".
6
<PAGE>
OPERATING CHARACTERISTICS
ATLANTIC believes that its future growth will be driven by the following
operating characteristics:
. STRONG PRIMARY TARGET MARKET. ATLANTIC believes the southeastern United
States is geographically and economically diverse and, therefore, ATLANTIC
has a strong primary target market in which to seek future growth. Although
34.3% of ATLANTIC's pro forma revenues for the year ended December 31, 1996
are derived from the Atlanta, Georgia metropolitan area, as ATLANTIC
continues to develop and acquire new communities outside of Atlanta, it
expects the percentage of its revenues derived from communities located in
Atlanta to decline. ATLANTIC's primary target market cities are Atlanta,
Georgia; Birmingham, Alabama; Charlotte, North Carolina; Jacksonville,
Florida; Memphis, Tennessee; Nashville, Tennessee; Raleigh, North Carolina;
Richmond, Virginia; Southeast Florida (which includes Ft. Lauderdale and
West Palm Beach); Tampa, Florida; and Washington, D.C. Based on forecasts
published by Woods & Poole Economics, Inc., the projected population growth
in ATLANTIC's primary target market is 31.5% for the years 1997 through
2016, whereas the projected population growth of the United States as a
whole for the same period is 16.8%. For the same period, job growth is
projected to be 29.0% in ATLANTIC's primary target market, compared to 20.8%
for the United States as a whole. Depending on the level of new construction
starts by other multifamily developers, ATLANTIC believes that the
anticipated population and job growth in its primary target market should
contribute to ATLANTIC's objective of long-term growth in cash flow.
. EXPERIENCED MANAGEMENT TEAM. The REIT Manager provides ATLANTIC with both
strategic and day-to-day management, including research, investment
analysis, acquisition and due diligence, development, asset management,
capital markets, accounting and legal services. Through the REIT Management
Agreement, ATLANTIC has access to the services provided by the REIT Manager
and its specialized service affiliates, which provides ATLANTIC with access
to the same resources as a fully integrated operating company. ATLANTIC's
four senior executives have an average of 24 years of industry experience
developing and managing multifamily communities, thus providing ATLANTIC
with several senior officers with the leadership, operational, investment
and financial skills and experience to oversee the operations of ATLANTIC,
although ATLANTIC's future operations will depend, in part, on ATLANTIC's
ability to continue to retain and attract experienced personnel. See "The
Merger Transaction".
. RESEARCH AND DEVELOPMENT. ATLANTIC is dedicated to ongoing research and
development. ATLANTIC utilizes Security Capital Investment Research
Incorporated ("Security Capital Investment Research"), an affiliate of the
REIT Manager, to conduct comprehensive evaluations of its target market on a
submarket-by-submarket basis to identify those submarkets and product types
that present better prospects for long-term cash flow growth. These
evaluations, combined with ATLANTIC's extensive market experience in the
southeastern United States, enable ATLANTIC to identify submarkets that
offer continued opportunities for long-term cash flow growth. In addition to
market research, considerable resources are devoted to product research. The
REIT Manager continually evaluates and refines ATLANTIC's multifamily
communities to incorporate technologies and designs that will enhance long-
term livability for its residents. ATLANTIC believes that its research-based
investment strategy differs from other multifamily REITs in that the REIT
Manager and its affiliates have dedicated personnel who conduct
comprehensive proprietary evaluations of ATLANTIC's target market on a
submarket-by-submarket basis taking into account 24 key variables that
ATLANTIC has identified as having the greatest impact on multifamily
operating performance. A few of these variables include market demand
analysis, detailed supply evaluations of each submarket and other economic
and demographic data.
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. DEVELOPMENT OF MODERATE INCOME COMMUNITIES. As of February 28, 1997,
ATLANTIC's portfolio consisted of seven upper middle income communities with
a total expected investment cost of $132.8 million, 35 middle income
communities with a total expected investment cost of $564.6 million and 48
moderate income communities with a total expected investment cost of $669.5
million. ATLANTIC focuses primarily on moderate income communities (targeted
to residents earning 65% to 90% of a submarket's median household income,
who comprise one of the largest segments of the renter population). Moderate
income communities comprised 51.8% of ATLANTIC's 1996 development starts,
based on total budgeted development cost. In 1997, approximately 83.5% of
development starts and approximately 66.5% of ATLANTIC's total development
activities are expected to constitute moderate income communities, based on
total budgeted development cost. Few other REITs in ATLANTIC's primary
target market currently focus on the moderate income segment. Moreover,
ATLANTIC believes that less than 10% of the 1995 and 1996 multifamily starts
in ATLANTIC's primary target market cities constituted moderate income
product. Consequently, ATLANTIC believes that the moderate income segment is
a significantly underserved market with limited competition. Moderate income
residents are typically longer-term residents because they often lack the
financial resources required to purchase single-family homes. As a result,
resident turnover is often lower in moderate income communities than in
upper middle income or middle income communities. The total cost of
refurbishing and re-leasing a unit ranges from $700 to $1,500; therefore,
reducing resident turnover can have a material impact on an asset's
profitability. Due to market fundamentals and the operating characteristics
of moderate income communities, ATLANTIC believes that this product category
offers better prospects for long-term cash flow growth.
. OPPORTUNISTIC ACQUISITIONS. It is often advantageous for ATLANTIC to acquire
existing multifamily communities in markets that are expected to experience
favorable growth in rents and income. In many cases, communities can be
acquired and redeveloped at prices well below the cost to build a comparable
community in the same area. The REIT Manager has the capability to
thoroughly analyze and evaluate communities in an efficient manner which,
together with ATLANTIC's access to capital, provides ATLANTIC with a
competitive advantage in acquiring multifamily assets. From its inception on
October 26, 1993 to February 28, 1997, ATLANTIC had completed acquisitions
with a total expected investment cost of $979.0 million.
. HIGH QUALITY PORTFOLIO. As noted above, adjusted net operating income on a
"same store" basis increased 4.88% from 1995 to 1996 for the 34 communities
that were fully operational during both periods. As of February 28, 1997,
ATLANTIC's operating communities (excluding communities in lease-up) were
94.4% leased. ATLANTIC believes that this strong performance reflects the
quality of its portfolio and strength of its primary target market. In
addition, as of February 28, 1997, ATLANTIC's portfolio of multifamily
communities consisted of 57.6% of stabilized operating communities, 13.4% of
pre-stabilized operating communities and 29.0% of communities under
development, based on total expected investment cost. See "Business--
ATLANTIC's Operating System--Acquisitions". As the development communities
are completed and the pre-stabilized communities achieve stabilization, they
are expected to contribute significantly to ATLANTIC's objective of long-
term growth in cash flow.
. PORTFOLIO AND ASSET OPTIMIZATION. ATLANTIC develops and acquires communities
with a view to effective long-term ownership and operation. REIT Management
actively reviews ATLANTIC's asset base. These reviews generate operating and
capital plans and, with guidance from its affiliate, Security Capital
Investment Research, help ATLANTIC to identify submarkets and product types
that it believes will generate above average long-term growth opportunities.
Under its asset optimization program, ATLANTIC may from time to time dispose
of assets that no longer meet its long-term investment objectives and
redeploy the proceeds, preferably through tax-deferred exchanges, into
assets with better prospects for cash flow growth. As noted above, ATLANTIC
disposed of four operating communities during 1996.
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. RESOURCES AND EXPERIENCE OF PRINCIPAL SHAREHOLDER. Security Capital Group,
ATLANTIC's largest shareholder and the owner of the REIT Manager, owns 56.9%
of ATLANTIC's outstanding Shares (51.4% after the Offering). ATLANTIC
benefits from the substantial resources available to it through its
affiliation with Security Capital Group, including capital markets,
research, accounting and legal services. See "The Merger Transaction". To
provide for a wider distribution of ownership and greater liquidity,
Security Capital Group intends, over time, to allow its ownership interest
in ATLANTIC to fall to between 40% and 50% as ATLANTIC conducts equity
offerings, which is consistent with its ownership interests in the other
operating companies in which Security Capital Group invests.
. CONSERVATIVE BALANCE SHEET STRATEGY. ATLANTIC has a conservative balance
sheet strategy. Long-term debt as a percentage of total long-term
undepreciated book capitalization was 17.4% at December 31, 1996 on an
historical basis and 16.0% at December 31, 1996 on a pro forma basis as
adjusted to give effect to the Offering and the application of the proceeds
therefrom. In the future, ATLANTIC intends to access the public equity and
debt markets. ATLANTIC's objective is to achieve an investment-grade debt
rating in 1997 and to issue long-term, fixed-rate, fully amortizing
unsecured corporate debt, which will limit ATLANTIC's exposure to floating
rate or balloon financing. ATLANTIC's $350 million unsecured line of credit
enables ATLANTIC to take advantage of investment opportunities in its target
market without investing significant funds in short-term investments between
securities offerings. As of April 7, 1997, $289.5 million of borrowings were
outstanding under the line of credit and such outstanding borrowings are
expected to be approximately $299.0 million at the closing of the Offering.
This conservative balance sheet strategy is expected to provide ATLANTIC
with significant incremental debt capacity and allow ATLANTIC to take
advantage of future investment opportunities on a non-dilutive basis,
contributing to ATLANTIC's objective of long-term growth in cash flow.
THE OFFERING
<TABLE>
<S> <C>
Shares offered hereby............................ 4,000,000
Shares to be outstanding after the Offering...... 41,891,580
Use of proceeds.................................. To retire line of credit debt.
See "Use of Proceeds".
NYSE Symbol...................................... SCA
</TABLE>
TAX STATUS OF ATLANTIC
ATLANTIC has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), effective for the taxable year ended December
31, 1994. As a REIT, ATLANTIC generally will not be taxed on income it
currently distributes to its shareholders so long as it distributes at least
95% of its taxable income currently. REITs are subject to a number of
organizational and operational requirements. Even if ATLANTIC continues to
qualify for taxation as a REIT, ATLANTIC will be subject to certain federal,
state and local taxes on its income and property. See "Federal Income Tax
Considerations" and "Risk Factors--Taxation of ATLANTIC".
9
<PAGE>
THE MERGER TRANSACTION
In January 1997, Security Capital Group made a proposal to the Board that
Security Capital Group exchange the REIT Manager and SCG Realty Services for
Shares, with the result that ATLANTIC would become an internally managed REIT.
On March 24, 1997, Security Capital Group and ATLANTIC entered into a Merger
and Issuance Agreement (the "Merger Agreement"), which is subject to customary
conditions, including the approval of ATLANTIC's shareholders, pursuant to
which Security Capital Group will cause the REIT Manager and SCG Realty
Services to be merged into a newly formed subsidiary of ATLANTIC (the
"Merger"). The employees of the REIT Manager and SCG Realty Services will
become employees of ATLANTIC as a result of the Merger. In exchange for the
transfer of those businesses, ATLANTIC will issue to Security Capital Group
Shares valued at approximately $54.6 million. The number of Shares issuable to
Security Capital Group will depend on the average market price of the Shares
prior to the record date for determining ATLANTIC's shareholders entitled to
vote at the meeting in connection with the Merger, subject to a maximum and
minimum number of Shares. See "The Merger Transaction".
In order to allow ATLANTIC's shareholders to maintain their relative
ownership in ATLANTIC, concurrently with the proxy solicitation seeking
approval of the Merger, ATLANTIC will conduct a rights offering entitling its
shareholders (other than Security Capital Group) to purchase up to
approximately $51.6 million of additional Shares (based on the number of Shares
expected to be outstanding after the Offering and subject to adjustment for
further issuances of Shares prior to the record date therefor). The exercise
price for Shares in the rights offering is expected to be the same price at
which Shares will be issued to Security Capital Group under the Merger
Agreement if the price of the Shares remains within the range described below.
In addition, as part of the Merger transaction, and in order to allow holders
of Shares to participate in the Merger transaction, Security Capital Group will
issue warrants to purchase shares of Security Capital Group's Class B common
stock, par value $.01 per share (the "Class B Stock") pro rata to ATLANTIC's
shareholders (the "Warrant Issuance"), other than Security Capital Group, after
the closing of the Merger and the rights offering. See "The Merger
Transaction". Prospective investors are advised that the Warrant Issuance will
result in taxable ordinary income to ATLANTIC's shareholders who receive the
warrants, whether or not the shareholders sell the warrants received in the
Warrant Issuance. See "Federal Income Tax Considerations--Tax Effects of the
Merger".
ATLANTIC believes that the Merger will provide ATLANTIC with the ability to
continue to deploy capital without adding incremental overhead, thereby
generating incremental cash flow for ATLANTIC. Management believes that (i) the
Merger will enhance ATLANTIC's ability to possibly acquire other REITs, as the
REIT industry is expected to consolidate over the next several years; (ii) the
Merger will be viewed positively in the long term by both investors and the
analyst community and, as a result, will have a positive impact on long-term
value for ATLANTIC's shareholders; and (iii) the rating agencies will view the
Merger positively because the Merger will simplify ATLANTIC's organizational
structure (furthering ATLANTIC's objective of obtaining an investment-grade
debt rating in 1997).
For a more complete description of the Merger, see "The Merger Transaction".
For a discussion of certain tax consequences of the Merger and the related
transactions, see "Federal Income Tax Considerations--Tax Effects of the
Merger".
10
<PAGE>
COMMUNITIES
The information in the following table is as of December 31, 1996 for
communities owned at December 31, 1996, except total expected investment which
is as of February 28, 1997, and as of February 28, 1997 for communities
acquired since December 31, 1996 (dollar amounts in thousands). Additional
information on ATLANTIC's communities is contained in Schedule III, Real Estate
and Depreciation, in ATLANTIC's financial statements.
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ----- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
COMMUNITIES OWNED AS OF
DECEMBER 31, 1996:
OPERATING
COMMUNITIES(3):
MID-ATLANTIC:
Charlotte, North
Carolina:
STABILIZED:
Cameron Oaks.......... 1994 91.7% 264 $ 15,361 $ 15,441
Waterford Hills*...... 1995 86.3 270 12,617 14,068(4)
PRE-STABILIZED:
Cameron at Hickory
Grove(5)(6).......... 1996 97.5 202 8,392 8,456
Waterford Square
I*(6)................ 1996 (7) 408 19,653 21,051(4)
---- ----- ---------- ----------
Subtotals/Average... 91.3 1,144 56,023 59,016
---- ----- ---------- ----------
Greenville, South
Carolina:
PRE-STABILIZED:
Cameron Court(6)...... 1996 94.9 234 11,060 11,099
Memphis, Tennessee:
STABILIZED:
Cameron at Kirby
Parkway.............. 1994 95.7 324 10,174 10,256
Stonegate............. 1994 90.4 208 7,076 7,263
PRE-STABILIZED:
Cameron Century
Center............... 1996 92.1 420 15,928 16,563
Country Oaks(8)....... 1996 96.5 200 8,484 8,696
---- ----- ---------- ----------
Subtotals/Average... 93.6 1,152 41,662 42,778
---- ----- ---------- ----------
Nashville, Tennessee:
STABILIZED:
Arbor Creek(9)........ 1994 94.2 360 18,183 18,289
Enclave at Brentwood.. 1995 94.5 380 16,126 16,259
---- ----- ---------- ----------
Subtotals/Average... 94.4 740 34,309 34,548
---- ----- ---------- ----------
Raleigh, North
Carolina:
STABILIZED:
Cameron Square........ 1994 95.9 268 15,982 16,066
Waterford Point*...... 1996 98.5 336 15,839 17,549(4)
PRE-STABILIZED:
Cameron Lake.......... 1996 91.3 196 9,293 9,773
Cameron Ridge(10)..... 1996 98.7 228 10,131 10,424
Emerald Forest........ 1996 85.6 320 14,680 14,729
---- ----- ---------- ----------
Subtotals/Average... 93.9 1,348 65,925 68,541
---- ----- ---------- ----------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ----- ---------- -------------
<S> <C> <C> <C> <C> <C>
Richmond, Virginia:
STABILIZED:
Camden at Wellesley.... 1994 92.9% 340 $ 19,510 $ 19,564
Potomac Hunt(11)....... 1994 94.1 220 10,119 10,217
---- ----- -------- --------
Subtotals/Average.... 93.4 560 29,629 29,781
---- ----- -------- --------
Washington, D.C.:
STABILIZED:
Camden at Kendall
Ridge................. 1994 93.5 184 11,701 11,801
Cameron Saybrooke...... 1994 96.4 252 18,966 19,035
PRE-STABILIZED:
Sheffield Forest(6).... 1995 96.5 256 15,546 15,645
West Springfield
Terrace............... 1996 92.2 244 16,210 16,604
---- ----- -------- --------
Subtotals/Average.... 94.8 936 62,423 63,085
---- ----- -------- --------
Subtotals/Average--
Mid-Atlantic...... 93.7 6,114 301,031 308,848
---- ----- -------- --------
SOUTH ATLANTIC:
Atlanta, Georgia:
STABILIZED:
Azalea Park(12)(13).... 1995 92.6 447 25,768 25,971
Cameron Ashford........ 1994 91.5 365 24,912 24,963
Cameron
Briarcliff(11)........ 1994 91.4 220 14,249 14,323
Cameron Brook(12)(14).. 1994 95.5 440 22,428 22,528
Cameron Creek I (15)... 1994 91.8 404 24,544 24,637
Cameron Crest.......... 1994 95.5 377 23,824 23,935
Cameron Dunwoody....... 1994 84.0 238 16,852 16,955
Clairmont
Crest(12)(16)......... 1994 95.8 213 11,020 11,073
The Greens(12)(17)..... 1994 95.1 304 13,740 13,833
Lake Ridge............. 1993 95.5 268 17,372 17,458
Morgan's Landing....... 1993 93.9 165 8,671 8,696
Old Salem.............. 1994 98.8 172 8,116 8,244
Trolley Square......... 1994 92.2 270 13,906 13,988
Vinings Landing........ 1994 97.0 200 9,979 10,071
WintersCreek(12)(18)... 1995 94.0 200 7,787 7,923
Woodlands.............. 1995 89.6 644 25,741 26,217
PRE-STABILIZED:
Balmoral Village....... 1996 90.1 312 19,215 19,476
Cameron Forest(6)...... 1995 94.1 152 6,244 6,383
Cameron Place(6)....... 1995 93.9 212 8,075 8,173
Cameron Pointe(6)...... 1996 93.9 214 14,891 15,035
Cameron
Station(6)(12)(19).... 1995 95.4 348 16,080 16,242
---- ----- -------- --------
Subtotals/Average.... 93.1 6,165 333,414 336,124
---- ----- -------- --------
Birmingham, Alabama:
STABILIZED:
Cameron on the
Cahaba(20)............ 1995 96.0 400 18,925 19,032
Colony Woods I......... 1994 90.3 216 10,686 10,698
Colony Woods II*....... 1995 93.9 198 10,515 11,405(4)
Morning Sun Villas..... 1994 92.4 184 9,301 9,435
---- ----- -------- --------
Subtotals/Average.... 93.7 998 49,427 50,570
---- ----- -------- --------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ----- ---------- -------------
<S> <C> <C> <C> <C> <C>
Ft. Lauderdale/W. Palm Beach,
Florida:
STABILIZED:
Cypress Lakes......... 1995 98.3% 176 $ 8,510 $ 8,774
Parrot's Landing
I(12)(21)............ 1994 95.6 408 18,651 18,843
Spencer Run(11)....... 1994 93.2 384 19,471 19,797
Sun Pointe
Cove(12)(22)......... 1994 94.1 221 9,369 9,492
Trails at Meadow
Lakes................ 1995 99.5 189 8,840 8,968
PRE-STABILIZED:
Park Place at Turtle
Run.................. 1996 95.1 350 15,714 15,828
The Pointe at Bayberry
Lake................. 1996 94.8 308 17,021 17,238
----- ----- ---------- ----------
Subtotals/Average... 95.4 2,036 97,576 98,940
----- ----- ---------- ----------
Ft. Myers, Florida:
STABILIZED:
Forestwood(12)(23).... 1994 96.5 397 13,781 13,994
Jacksonville, Florida:
STABILIZED:
Bay Club.............. 1994 93.2 220 12,222 12,319
PRE-STABILIZED:
Cameron Lakes I*...... 1996 (7) 302 16,117 17,777(4)
----- ----- ---------- ----------
Subtotals/Average... 93.2 522 28,339 30,096
----- ----- ---------- ----------
Miami, Florida:
STABILIZED:
Park Hill(24)......... 1994 93.9 264 8,842 8,885
Orlando, Florida:
STABILIZED:
Camden Springs........ 1994 95.3 340 17,357 17,552
Cameron Villas I(25).. 1994 95.8 192 8,013 8,118
Cameron Villas
II(11)............... 1995 100.0 42 1,773 1,849
Kingston Village...... 1995 93.3 120 6,013 6,211
The Wellington I(11).. 1994 96.9 192 8,002 8,078
----- ----- ---------- ----------
Subtotals/Average... 95.7 886 41,158 41,808
----- ----- ---------- ----------
Sarasota, Florida:
STABILIZED:
Camden at Palmer
Ranch................ 1994 98.4 432 24,198 24,435
Tampa, Florida:
STABILIZED:
Camden Downs.......... 1994 96.4 250 12,592 12,667
Cameron Lakes......... 1995 96.1 207 8,651 8,700
Country Place
Village(26).......... 1995 98.4 188 8,322 8,572
Foxbridge on the
Bay(12)(27).......... 1994 98.3 358 10,955 11,007
Summer Chase(11)...... 1994 99.0 96 3,772 3,791
PRE-STABILIZED:
Cameron Bayshore...... 1996 98.5 328 10,712 11,487
----- ----- ---------- ----------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Subtotals/Average...... 97.8% 1,427 $ 55,004 $ 56,224
---- ------ ---------- ----------
Subtotals/Average--
South Atlantic...... 94.5 13,127 651,739 661,076
---- ------ ---------- ----------
Subtotals/Average--
Operating
Communities....... 94.2 19,241 952,770 969,924
---- ------ ---------- ----------
COMMUNITIES UNDER
CONSTRUCTION:
MID-ATLANTIC:
Charlotte, North Carolina:
Waterford Square II*..... 1998 N/A 286 6,592 17,181
Nashville, Tennessee:
Cameron Overlook*........ 1998 N/A 452 7,338 23,848
Raleigh, North Carolina:
Cameron Brooke*.......... 1997 N/A 228 10,070 12,885
Waterford Forest*(28).... 1997 N/A 384 20,349 21,574
---- ------ ---------- ----------
Subtotals.............. N/A 612 30,419 34,459
---- ------ ---------- ----------
Richmond, Virginia:
Cameron at Wyndham*...... 1998 N/A 312 4,404 20,048
Cameron Crossing I &
II*..................... 1998 N/A 424 11,202 26,622
---- ------ ---------- ----------
Subtotals.............. N/A 736 15,606 46,670
---- ------ ---------- ----------
Washington, D.C.:
Cameron at
Milestone*(28).......... 1997 N/A 444 30,344 30,974
Woodway at Trinity
Center*(28)............. 1997 N/A 504 35,583 37,836
---- ------ ---------- ----------
Subtotals.............. N/A 948 65,927 68,810
---- ------ ---------- ----------
Subtotals--Mid-
Atlantic............ N/A 3,034 125,882 190,968
---- ------ ---------- ----------
SOUTH ATLANTIC:
Atlanta, Georgia:
Cameron Creek II*(28).... 1997 N/A 260 19,332 19,758
Birmingham, Alabama:
Cameron at the Summit
I*...................... 1997 N/A 372 8,483 21,645
Ft. Lauderdale/W. Palm
Beach, Florida:
Parrot's Landing II*..... 1997 N/A 152 8,070 9,751
Jacksonville, Florida:
Cameron Deerwood*(28).... 1997 N/A 336 14,504 17,598
Cameron Lakes II*........ 1998 N/A 253 2,869 14,967
Cameron Timberlin Parc
I*(28).................. 1997 N/A 320 15,447 16,885
---- ------ ---------- ----------
Subtotals.............. N/A 909 32,820 49,450
---- ------ ---------- ----------
Subtotals--South
Atlantic............ N/A 1,693 68,705 100,604
---- ------ ---------- ----------
Subtotals--
Communities Under
Construction...... N/A 4,727 194,587 291,572
---- ------ ---------- ----------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
COMMUNITIES IN PLANNING AND OWNED:
SOUTH ATLANTIC:
Atlanta, Georgia:
Cameron Landing*
(29)................ 1998 N/A 368 $ 2,020 $ 21,630
Ft. Lauderdale/W. Palm
Beach, Florida:
Cameron Waterway*.... 1998 N/A 300 4,386 21,280
Jacksonville, Florida:
Cameron Timberlin
Parc II*............ 1999 N/A 200 1,389 10,500
----- ------ ---------- ----------
Subtotals--
Communities in
Planning and
Owned........... N/A 868 7,795 53,410
----- ------ ---------- ----------
LAND HELD FOR FUTURE
MULTIFAMILY
DEVELOPMENT........... N/A -- 2,083 --
----- ------ ---------- ----------
Total
Communities
Owned at
December 31,
1996.......... 94.2% 24,836 1,157,235 1,314,906
----- ------ ---------- ----------
COMMUNITIES ACQUIRED
THROUGH FEBRUARY 28, 1997:
COMMUNITIES IN PLANNING
AND OWNED:
MID-ATLANTIC:
Richmond, Virginia:
Cameron at Virginia
Center*............. N/A 264 -- 15,983
SOUTH ATLANTIC:
Atlanta, Georgia:
Cameron at Double
Bridge*............. N/A 232 -- 16,216
Cameron at
Northpoint*......... N/A 264 -- 19,821
----- ------ ---------- ----------
Subtotals.......... N/A 496 -- 36,037
----- ------ ---------- ----------
Subtotals--
Communities
Acquired Through
February 28,
1997............ N/A 760 -- 52,020
----- ------ ---------- ----------
Total
Communities
Owned at
February 28,
1997.......... 94.2% 25,596 $1,157,235 $1,366,926
===== ====== ========== ==========
</TABLE>
Additionally, at February 28, 1997, ATLANTIC had land in planning and under
control for the development of 1,808 units with a total budgeted development
cost of $111.2 million. The term "in planning" means that construction is
anticipated to commence within 12 months. The term "under control" means that
ATLANTIC has an exclusive right (through contingent contract or letter of
intent) during a contractually agreed-upon time period to acquire land for
future development of multifamily communities, subject to removal of
contingencies during the due diligence process, but does not currently own the
land. There can be no assurance that such land will be acquired. The unit and
total budgeted development cost information for these communities is based on
management's best estimates of the cost upon completion of these communities.
- -------
* Community developed by ATLANTIC.
(1) With respect to communities under construction or communities in planning
and owned, represents expected completion date.
(2) For operating communities, represents cost, including budgeted renovations
as of February 28, 1997. For communities under construction and in
planning, represents total budgeted development cost as of February 28,
1997, which includes the cost of land, fees, permits, payments to
contractors, architectural and engineering fees and interest and property
taxes to be capitalized during the construction period. The term "in
planning" means that construction is anticipated to commence within 12
months.
15
<PAGE>
(3) The term "stabilized" means that renovation, repositioning, new management
and new marketing programs (or development and marketing in the case of
newly developed communities) have been completed and in effect for a
sufficient period of time (but in no event longer than 12 months, except
in cases of major rehabilitation) to achieve 93% occupancy at market
rents. Prior to being "stabilized", a community is considered "pre-
stabilized". See "Business--ATLANTIC's Operating System--Acquisitions".
(4) The total expected investment cost of these developed communities includes
potential incentive payments to third-party developer/managers that had
not been earned by them at December 31, 1996.
(5) Cameron at Hickory Grove Apartments are subject to a deed of trust
securing a mortgage note of $6.0 million.
(6) Community was stabilized during the period from January 1, 1997 to
February 28, 1997.
(7) Community is in lease-up, therefore, the percentage leased is not given
because it is not representative of a fully operational community.
(8) Country Oaks Apartments are subject to a deed of trust securing a mortgage
note of $5.9 million.
(9) The land associated with the Arbor Creek Apartments is leased by ATLANTIC
through the year 2058 under an agreement with the Metropolitan Nashville
Airport Authority.
(10) Cameron Ridge Apartments are subject to a deed of trust securing a
mortgage note of $5.9 million.
(11) Community is pledged as additional security under ATLANTIC's 30-year
credit enhancement agreement with the Federal National Mortgage
Association ("FNMA"). For a discussion of the FNMA credit enhancement
agreement, see "Business--ATLANTIC's Operating System--Capital
Markets/Finance/Legal".
(12) The tax-exempt bond issue associated with this community is included in
ATLANTIC's credit enhancement agreement with FNMA.
(13) Azalea Park Apartments are subject to a deed of trust securing a mortgage
note related to $15.5 million of tax-exempt bonds.
(14) Cameron Brook Apartments are subject to a deed of trust securing a
mortgage note related to $19.5 million of tax-exempt bonds.
(15) Community was classified as pre-stabilized subsequent to December 31, 1996
due to the effects of lease-up activities at Phase II of this community.
(16) Clairmont Crest Apartments are subject to a deed of trust securing a
mortgage note related to $11.6 million of tax-exempt bonds.
(17) The Greens Apartments are subject to a deed of trust securing a mortgage
note related to $10.4 million of tax-exempt bonds.
(18) WintersCreek Apartments are subject to a deed of trust securing a mortgage
note related to $5.0 million of tax-exempt bonds.
(19) Cameron Station Apartments are subject to a deed of trust securing a
mortgage note related to $14.5 million of tax-exempt bonds.
(20) Cameron on the Cahaba Phase II Apartments, which consist of 250 units, are
subject to a deed of trust securing a mortgage note of $8.0 million.
(21) Parrot's Landing Phase I Apartments are subject to a deed of trust
securing a mortgage note related to $15.8 million of tax-exempt bonds.
(22) Sun Pointe Cove Apartments are subject to a deed of trust securing a
mortgage note related to $8.5 million of tax-exempt bonds.
(23) Forestwood Apartments are subject to a deed of trust securing a mortgage
note related to $11.5 million of tax-exempt bonds.
(24) Park Hill Apartments were being held for sale at December 31, 1996 and
were disposed of in April 1997.
(25) Cameron Villas I Apartments are subject to a deed of trust securing a
mortgage note of $6.3 million.
(26) Country Place Village Phase I Apartments, which consist of 88 units, are
subject to a deed of trust securing a mortgage note of $2.0 million.
(27) Foxbridge on the Bay Apartments are subject to a deed of trust securing a
mortgage note related to $10.4 million of tax-exempt bonds.
(28) Community was leasing completed units at February 28, 1997.
(29) Construction on this community began in February 1997.
16
<PAGE>
SUMMARY SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial information on a pro forma
basis for ATLANTIC (the "Pro Forma Financial Results") as of and for the year
ended December 31, 1996 and on an historical basis for ATLANTIC (the
"Historical Financial Results") as of and for the years ended December 31,
1996, 1995 and 1994 and the period from inception (October 26, 1993) through
December 31, 1993. Such selected financial information is qualified in its
entirety by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
financial statements and notes thereto included in this Prospectus. The Pro
Forma Financial Results are not necessarily indicative of what the actual
financial position and results of operations of ATLANTIC would have been as of
and for the periods indicated, nor do they purport to represent the financial
position and results of operations for future periods. Unless otherwise
indicated, all Share and per Share amounts have been adjusted to give effect to
ATLANTIC's one-for-two reverse Share split, which was effective on September
10, 1996.
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
------------ ------------------------------------------
PERIOD ENDED
YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------
1996 1996 1995 1994 1993(1)
------------ ---------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
Rental income.......... $ 148,361 $ 137,729 $ 103,634 $ 55,071 $ 156
Property management
fees paid to
affiliate............. 4,612 4,208 3,475 1,536 --
Property management
fees paid to third
parties............... 971 971 591 661 --
REIT management fee
paid to affiliate..... 11,652 10,445 6,923 3,671 12
General and
administrative
expenses.............. 641 673 646 266 1
Earnings before
extraordinary item.... 37,881 42,569 19,639 9,926 38
Extraordinary item--
loss on early
extinguishment of
debt.................. -- 3,940 -- -- --
Net earnings........... 37,881 38,629 19,639 9,926 38
Net earnings per Share
before extraordinary
item.................. 1.00 1.33 0.89 0.81 0.13
Net earnings per Share. $ 1.00 1.21 0.89 0.81 $ 0.13
Cash distributions
declared and paid..... N/A 53,064 35,119 14,648 --
Cash distributions
declared and paid per
Share................. N/A $ 1.65 $ 1.60 $ 1.20 --
Weighted average Shares
outstanding........... 37,897 32,028 21,944 12,227 286
<CAPTION>
PRO FORMA HISTORICAL
------------ ------------------------------------------
DECEMBER 31,
DECEMBER 31, ------------------------------------------
1996 1996 1995 1994 1993
------------ ---------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION:
Real estate owned, at
cost.................. $1,157,235 $1,157,235 $ 888,928 $ 631,260 $ 31,005
Total assets........... 1,135,065 1,135,065 885,824 637,846 31,850
Line of credit(2)...... 147,520 228,000 190,000 153,000 --
Mortgages payable...... 155,790 155,790 118,524 107,347 --
Total liabilities...... 355,943 436,423 328,886 271,216 178
Total shareholders'
equity................ $ 779,122 $ 698,642 $ 556,938 $ 366,630 $ 31,672
Number of Shares
outstanding........... 41,892 37,892 27,763 18,567 1,582
<CAPTION>
PRO FORMA HISTORICAL
------------ ------------------------------------------
PERIOD ENDED
YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------
1996 1996 1995 1994 1993(1)
------------ ---------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Net earnings........... $ 37,881 $ 38,629 $ 19,639 $ 9,926 $ 38
Add (Deduct):
Depreciation........... 22,534 20,824 15,925 8,770 28
Gain on disposition of
real estate........... -- (6,732) -- -- --
Gain on sale of
Homestead Assets...... -- (2,839) -- -- --
Provision for possible
loss on investments... 2,500 2,500 -- -- --
Extraordinary item--
loss on early
extinguishment of
debt.................. -- 3,940 -- -- --
---------- ---------- --------- --------- --------
Funds from
operations(3)......... $ 62,915 $ 56,322 $ 35,564 $ 18,696 $ 66
---------- ---------- --------- --------- --------
Net cash provided
(used) by operating
activities............ $ 60,949 $ 54,356 $ 39,732 $ 23,564 $ (492)
Net cash used by
investing activities.. (287,418) (287,418) (235,149) (390,077) (31,005)
Net cash provided by
financing activities.. 230,907 230,907 195,649 372,638 31,634
</TABLE>
- -------
(1) For the period from inception (October 26, 1993) to December 31, 1993.
(2) At April 7, 1997, ATLANTIC had $289.5 million of outstanding borrowings
under its $350 million unsecured line of credit and such outstanding
borrowings are expected to be approximately $299.0 million at the closing
of the Offering.
(3) ATLANTIC believes that funds from operations is helpful in understanding a
property portfolio in that such calculation reflects cash flow from
operating activities and the properties' ability to support interest
payments. For an explanation of funds from operations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources". Funds from operations should not be
considered as an alternative to net income or any other generally accepted
accounting principles ("GAAP") measurement of performance as an indicator
of ATLANTIC's operating performance or as an alternative to cash flows from
operating, investing or financing activities as a measure of liquidity. On
January 1, 1996, ATLANTIC adopted the National Association of Real Estate
Investment Trusts' ("NAREIT") new definition of funds from operations.
Under this new definition, loan cost amortization is not added back to net
earnings in determining funds from operations. For comparability, funds
from operations for the periods prior to January 1, 1996 give effect to
this new definition. The funds from operations measure presented by
ATLANTIC may not be comparable to similarly titled measures of other REITs.
17
<PAGE>
RISK FACTORS
Prospective investors should carefully consider, among other factors, the
matters described below. Each of these factors could adversely affect the
ability of ATLANTIC to make expected distributions to shareholders.
LACK OF INDEPENDENT VALUATION OF ASSETS
The value of ATLANTIC has not been determined on a community-by-community
basis because ATLANTIC is an ongoing business enterprise. Accordingly, no
appraisals, independent valuations or fairness opinions from a financial point
of view of the communities have been obtained in connection with the valuation
of ATLANTIC. Furthermore, the valuation of ATLANTIC is not based upon the
historical cost of assets or the current market value thereof. Therefore, the
price of the Shares may be greater than the fair market value of ATLANTIC's
portfolio.
INFLUENCE OF OFFICERS, DIRECTORS AND SIGNIFICANT SHAREHOLDER
Security Capital Group beneficially owns 56.9% of the outstanding Shares
(51.4% after the Offering). See "Principal Shareholders". Through its
ownership of Shares, Security Capital Group controls 56.9% (51.4% after the
Offering) of the vote on matters submitted for shareholder action, including
the election of Directors, and no other shareholder may hold more than 9.8% of
ATLANTIC's outstanding shares of stock. See "Description of Stock--Restriction
on Size of Holdings of Shares". Security Capital Group has the right to
nominate up to three Directors, depending on its level of ownership of Shares.
See "Certain Relationships and Transactions--Security Capital Group Investor
Agreement". The Directors so elected are in a position to exercise significant
influence over the affairs of ATLANTIC. Additionally, Security Capital Group
has the right to approve (i) ATLANTIC's annual operating budget and
substantial deviations therefrom, (ii) acquisitions or dispositions in a
single transaction or group of related transactions where the purchase price
exceeds $5 million and (iii) property management arrangements. Accordingly,
due to the foregoing, for so long as it continues to own at least 10% of the
outstanding Shares, Security Capital Group will retain significant influence
over the business and policies of ATLANTIC, which may result in decisions that
do not fully represent the interests of all shareholders of ATLANTIC. Security
Capital Group is also the owner of the REIT Manager and therefore will have
the ability to influence significantly the operations of ATLANTIC through the
REIT Manager as long as the REIT Manager manages ATLANTIC. See "The Merger
Transaction". To provide for a wider distribution of ownership and greater
liquidity, Security Capital Group intends, over time, to allow its ownership
interest in ATLANTIC to fall to between 40% and 50% as ATLANTIC conducts
equity offerings, which is consistent with its ownership interests in the
other operating companies in which Security Capital Group invests.
CONFLICTS OF INTEREST
ATLANTIC does not have any employees and relies on the REIT Manager for all
strategic and day-to-day management services. An affiliate of the REIT Manager
also provides property management services for approximately 88% of ATLANTIC's
multifamily communities.
Four officers of the REIT Manager and its affiliates (Jeffrey A. Klopf,
Senior Vice President of Security Capital Group, ATLANTIC and the REIT Manager
(securities offerings, corporate acquisitions and legal), Ariel Amir, Vice
President of Security Capital Group (securities offerings, corporate
acquisitions and legal), John H. Gardner, Jr., Senior Vice President of
ATLANTIC and the REIT Manager (multifamily dispositions) and Kathy B. Farr,
Vice President of ATLANTIC and the REIT Manager (multifamily dispositions))
may have conflicts of interest in allocating their time and efforts between
activities on behalf of ATLANTIC and other activities of the REIT Manager's
affiliates. Affiliates of the REIT Manager also provide management services to
Security Capital Pacific Trust ("PTR"), a NYSE-listed REIT which focuses on
multifamily communities in the western United States,
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and Security Capital Industrial Trust ("SCI"), a NYSE-listed REIT which
focuses on industrial real estate in the United States. Security Capital
Markets Group Incorporated ("Capital Markets Group"), Security Capital Group's
registered broker-dealer affiliate, devotes a substantial portion of its time
to these other REITs, Homestead, an ASE-listed real estate company which
focuses on extended-stay facilities in the United States, and Security Capital
Group. Messrs. Klopf and Amir provide centralized securities offering,
corporate acquisition and legal services to ATLANTIC and other affiliated real
estate companies, including PTR, SCI, Homestead and Security Capital Group,
and, as a result, do not focus their full efforts and attention on ATLANTIC.
Mr. Gardner and Ms. Farr provide multifamily disposition services to ATLANTIC
and PTR. In addition, the REIT Manager and its affiliates share a common
senior investment committee, which approves all acquisition and development
proposals before they are submitted to the respective REIT boards for
approval. PTR acquires multifamily communities but operates in a different
market than ATLANTIC. See "Policies With Respect to Certain Activities--
Conflict of Interest Policies" and "--Policies Applicable to the REIT Manager
and Officers and Directors of ATLANTIC".
The officers of ATLANTIC may also be subject to certain conflicts of
interest arising out of their positions with ATLANTIC and the REIT Manager and
its affiliates. These relationships may create conflicts between the promotion
of ATLANTIC's investment policies and those of the REIT Manager and its
affiliates. See "Policies With Respect to Certain Activities--Conflict of
Interest Policies".
Ned S. Holmes, a Director of ATLANTIC, is also Chairman and President of
Parkway Investments/Texas Inc., President and Chief Executive Officer of Laing
Properties, Inc. ("Laing") and an executive officer of certain of Laing's
affiliates. Laing and its affiliates engage in the acquisition, development
and management of multifamily communities and Mr. Holmes may therefore have
conflicts of interest in presenting acquisition or development opportunities
to ATLANTIC.
The owner of the REIT Manager, Security Capital Group, is ATLANTIC's
principal shareholder, and Security Capital Group could influence decisions
regarding the REIT Management Agreement, property management agreements
between ATLANTIC and affiliates of the REIT Manager and fees relating to such
agreements. Although all agreements with the REIT Manager and its affiliates
must be reviewed and approved at least annually by ATLANTIC's independent
Directors, no assurance of arm's-length negotiations can be given. See "The
Merger Transaction" for a description of an agreement that ATLANTIC has
entered into with Security Capital Group to merge the REIT Manager and SCG
Realty Services into a newly formed subsidiary of ATLANTIC in exchange for
Shares.
RISK OF INABILITY TO PAY FUTURE DISTRIBUTIONS
ATLANTIC's ability to pay future distributions depends on a number of
factors, including factors relating to the future operations of ATLANTIC.
These factors include, among other things, continued community occupancy,
capital expenditures and other costs relating to ATLANTIC's existing
communities. Some of the factors described above are beyond the control of
ATLANTIC, and a change in any such factor could affect ATLANTIC's ability to
pay future distributions. Hence, no assurance can be given as to ATLANTIC's
ability to pay future distributions. See "Price Range of ATLANTIC Shares and
Distributions".
GENERAL REAL ESTATE INVESTMENT RISKS
GENERAL
Real property investments are subject to varying degrees of risk. Real
estate cash flows and values are affected by a number of factors, including
changes in the general economic climate, local conditions (such as an
oversupply of multifamily communities or a reduction in rental demand in an
area), the quality and philosophy of management, competition from other
available multifamily
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communities and the ability of the owner to provide adequate maintenance and
insurance and to control operating costs. Although ATLANTIC seeks to minimize
these risks through the REIT Manager's market research and asset management
capabilities, these risks cannot be eliminated entirely. Real estate cash
flows and values are also affected by such factors as government regulations,
including zoning and tax laws, interest rate levels, the availability of
financing and potential liability under, and changes in, environmental and
other laws. Since a significant portion of ATLANTIC's income will be derived
from rental income from real property, ATLANTIC's income and distributable
cash flow would be adversely affected if a significant number of ATLANTIC's
residents were unable to meet their obligations to ATLANTIC, or if ATLANTIC
were unable to lease, on economically favorable terms, a significant number of
units in its multifamily communities.
Equity real estate investments are relatively illiquid and therefore may
tend to limit the ability of ATLANTIC to react promptly to changes in economic
or other conditions. In addition, certain significant expenditures associated
with equity investments (such as mortgage payments, real estate taxes and
maintenance costs) are generally not reduced when circumstances cause a
reduction in income from the investments. Like other REITs, ATLANTIC must
comply with safe harbor rules which enable a REIT to avoid punitive taxation.
Thus, ATLANTIC's ability to sell assets to change its asset base is restricted
by tax rules which impose holding periods for assets and potential
disqualification as a REIT upon certain asset sales.
DEBT FINANCING
To the extent it or its subsidiaries incur debt, ATLANTIC will be subject to
the risks associated with debt financing, including the risks that ATLANTIC's
cash flow from operations will be insufficient to meet required payments of
principal and interest, that ATLANTIC will be unable to refinance its
unsecured revolving line of credit or current or future mortgage indebtedness
on its communities, that the terms of such refinancings will not be as
favorable as the terms of existing indebtedness and that ATLANTIC will be
unable to make necessary capital expenditures for such purposes as renovations
and releasing units due to lack of available funds. If a community is
mortgaged to secure payment of indebtedness and ATLANTIC is unable to meet
mortgage payments, the community could be transferred to the mortgagee with a
consequent loss of income and asset value to ATLANTIC. ATLANTIC's policy will
be to generally arrange unsecured, fully amortizing, fixed rate long-term
debt. See "Policies With Respect to Certain Activities--Financing Policies".
RISKS OF REAL ESTATE DEVELOPMENT
ATLANTIC has developed or commenced development of 7,869 multifamily units
and expects to develop additional multifamily units in the future. Real estate
development involves significant risks in addition to those involved in the
ownership and operation of established multifamily communities, including the
risks that financing, if needed, may not be available on favorable terms for
development projects, that construction may not be completed on schedule
(resulting in increased debt service expense and construction costs) and that
communities may not be leased on profitable terms. Timely construction may be
adversely affected by local weather, local or national strikes and by local or
national shortages in materials, insulation, building supplies and energy and
fuel for equipment. ATLANTIC intends to finance future development with cash
on hand or revolving credit borrowings (which ATLANTIC expects to repay with
proceeds from sales of long-term debt or equity securities); however, until
such communities are developed and leased, they will not generate any cash
flow to ATLANTIC.
LAND USE AND ZONING CONSIDERATIONS
Governmental authorities at the federal, state and local levels are actively
involved in the promulgation and enforcement of regulations relating to land
use and zoning restrictions. Regulations may be promulgated which could have
the effect of restricting or curtailing certain uses of existing
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structures or requiring that such structures be renovated or altered in some
fashion. The establishment of such regulations could have the effect of
increasing the expenses and lowering the profitability of any of the
communities affected thereby.
CHANGES IN LAWS
Increased costs resulting from increases in real estate, income or transfer
taxes or other governmental requirements generally may not be passed through
directly to residents, inhibiting ATLANTIC's ability to recover such increased
costs. Substantial increases in rents, as a result of such increased costs,
may affect residents' ability to pay rent, causing increased vacancy. In
addition, changes in laws increasing potential liability for environmental
conditions or increasing the restrictions on discharges or other conditions
may result in significant unanticipated expenditures.
RISKS OF INVESTMENTS IN MORTGAGES
Although ATLANTIC's current policy is not to invest in mortgages unrelated
to its communities, ATLANTIC may invest in mortgages in connection with the
construction and development of new multifamily communities for ATLANTIC by
third parties. See "Policies With Respect to Certain Activities--Investment
Policies". Pursuant to a funding commitment agreement entered into in
connection with the Homestead transaction, ATLANTIC has invested and will
invest in convertible mortgage notes issued by Homestead. See "Certain
Relationships and Transactions--Homestead Transaction" and "--Funding
Commitment Agreement". In addition, ATLANTIC from time to time will invest in
mortgage loans to Atlantic Development Services Incorporated ("Atlantic
Development Services"), an entity in which ATLANTIC owns substantially all of
the economic interest, to fund the acquisition and development of certain
communities that meet ATLANTIC's investment criteria. See "Business--
ATLANTIC's Operating System--Developed Communities". Mortgage investments are
subject to certain risks, including that borrowers may not be able to make
debt service payments or pay principal when due, that the value of mortgaged
property may be less than the amounts owed, and that interest rates payable on
the mortgages may be lower than ATLANTIC's cost of funds. If ATLANTIC invested
in mortgages and if any of the above occurred, cash flows could be adversely
affected.
UNINSURED LOSS
ATLANTIC will initially carry comprehensive liability, fire, flood,
earthquake, extended coverage and rental loss insurance with respect to its
communities with policy specifications and insured limits customarily carried
for similar communities. There are, however, certain types of losses (such as
from wars) that may be either uninsurable or not economically insurable.
Should an uninsured loss occur, ATLANTIC could lose both its capital invested
in and anticipated profits from one or more communities.
COMPETITION
There are numerous commercial developers, real estate companies and other
owners of real estate that compete with ATLANTIC in seeking land for
development, communities for acquisition and disposition and residents for
communities. All of ATLANTIC's multifamily communities are located in
developed areas that include other multifamily communities. The number of
competitive multifamily communities in a particular area could have a material
adverse effect on ATLANTIC's ability to lease apartment units and on the rents
charged. In addition, other forms of single family and multifamily residential
communities provide housing alternatives to residents and potential residents
of ATLANTIC's multifamily communities.
CONCENTRATION OF COMMUNITIES IN ATLANTA
As of February 28, 1997, ATLANTIC's portfolio included $362.1 million of
communities, based on cost, that are located in the Atlanta, Georgia
metropolitan area, representing 34.3% of pro forma
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revenues for the year ended December 31, 1996, and thus may be affected by
changes in the economic conditions of that area. Conditions in the Atlanta
market, including the possibility of an economic downturn, could adversely
affect cash flows.
TAXATION OF ATLANTIC
TAX LIABILITIES AS A CONSEQUENCE OF THE FAILURE TO QUALIFY AS A REIT
ATLANTIC has elected to be taxed as a REIT under the Code, commencing with
its taxable year ending December 31, 1994. A qualified REIT generally is not
taxed on income it distributes to its shareholders as long as it distributes
at least 95% of its taxable income currently and it meets certain other
qualification requirements. No assurance can be given that ATLANTIC will
remain qualified as a REIT. No assurance can be given that legislation, new
regulations, administrative interpretations or court decisions will not
significantly change the rules applicable to ATLANTIC with respect to
qualification as a REIT or the federal income tax consequences of such
qualification.
If ATLANTIC fails to continue to qualify as a REIT, it will be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. In addition, unless entitled to
relief under certain statutory provisions, ATLANTIC will be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. The additional tax could significantly reduce cash
flows.
OTHER TAX LIABILITIES
Even if ATLANTIC continues to qualify as a REIT, it is subject to certain
federal, state and local taxes on its income and property. See "Federal Income
Tax Considerations--Other Tax Considerations".
EXTERNAL MANAGEMENT
ATLANTIC is externally managed by the REIT Manager, which is owned by
Security Capital Group, which also owns 56.9% of the outstanding Shares (51.4%
after the Offering). The REIT Manager's indirect Share ownership provides it
with economic interests comparable to other shareholders, but ATLANTIC being
externally managed may adversely affect the market price of the Shares. See
"The Merger Transaction" for a description of an agreement that ATLANTIC has
entered into with Security Capital Group to merge the REIT Manager and SCG
Realty Services into a newly formed subsidiary of ATLANTIC in exchange for
Shares.
CHANGES IN POLICIES
The major policies of ATLANTIC, including its policies with respect to
investments, financing, growth, debt capitalization, REIT qualification and
distributions, are determined by the Board. Although it has no present
intention to do so, the Board may amend or revise these and other policies
from time to time without a vote of the shareholders of ATLANTIC. See
"Policies With Respect to Certain Activities". Accordingly, shareholders will
have limited control over changes in policies of ATLANTIC.
LIMITATIONS ON ACQUISITION OF SHARES AND CHANGE IN CONTROL
OWNERSHIP LIMIT
In order to maintain its qualification as a REIT, not more than 50% in value
of the outstanding shares of ATLANTIC's stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities). Pursuant to the constructive ownership rules, Security
Capital Group's ownership of Shares is attributed to its shareholders for
purposes of the 50% test.
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ATLANTIC's 9.8% share ownership limit for shareholders other than Security
Capital Group may have the effect of delaying or preventing a change in
control of ATLANTIC without the consent of the Board even if a change in
control were in the shareholders' interests and may also (i) deter tender
offers for the Shares, which offers may be advantageous to shareholders, and
(ii) limit the opportunity for shareholders to receive a premium for their
Shares that might otherwise exist if an investor were attempting to acquire in
excess of 9.8% of the outstanding shares of ATLANTIC's stock or otherwise
effect a change in control of ATLANTIC.
PURCHASE RIGHTS
On March 12, 1996, the Board declared a dividend of one preferred share
purchase right (a "Purchase Right") for each Share outstanding. Each purchaser
of a Share subsequent to March 12, 1996 (including purchasers of Shares in the
Offering) will also receive a Purchase Right with each Share purchased. Each
Purchase Right entitles the holder, under certain circumstances, to purchase
from ATLANTIC two one-hundredths of a share of Series A Junior Participating
Preferred Stock, par value $.01 per share (the "Participating Preferred
Shares"), at a price of $40 per one one-hundredth of a Participating Preferred
Share, subject to adjustment. Purchase Rights are exercisable when a person or
group of persons (other than certain affiliates of ATLANTIC) acquires 20% or
more of the outstanding shares or announces a tender offer for 25% or more of
the outstanding shares. Under certain circumstances, each Purchase Right
entitles the holder to purchase, at the Purchase Right's then-current exercise
price, a number of Shares having a market value of twice the Purchase Right's
exercise price. The acquisition of ATLANTIC pursuant to certain mergers or
other business transactions would entitle each holder to purchase, at the
Purchase Right's then-current exercise price, a number of the acquiring
company's common shares having a market value at that time equal to twice the
Purchase Right's exercise price. The Purchase Rights held by certain 20%
shareholders (other than certain affiliates of ATLANTIC) would not be
exercisable.
The Purchase Rights may have the effect of delaying or preventing a change
in control of ATLANTIC without the consent of the Board even if a change in
control were in the shareholders' interests and may also adversely affect the
voting and other rights of shareholders. See "Description of Stock--Purchase
Rights".
CLASSIFIED BOARD
The Board has been divided into three classes of Directors. The terms of the
classes will expire in 1997, 1998 and 1999, respectively. Beginning in 1997,
as the term of a class expires, Directors for that class will be elected for a
three-year term and the Directors in the other two classes will continue in
office.
PREFERRED STOCK
ATLANTIC's Charter authorizes the Board to reclassify any unissued shares of
ATLANTIC's stock from time to time by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption. See
"Description of Stock--General" and "--Preferred Stock". Except as described
above under "--Purchase Rights", no such shares have been so reclassified to
date.
ADVANCE NOTICE PROVISIONS
For nominations or other business to be properly brought before an annual
meeting of shareholders by a shareholder, ATLANTIC's Bylaws require such
shareholder to deliver a notice to the Secretary, absent specified
circumstances, not less than 60 days nor more than 90 days prior to the
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first anniversary of the preceding year's annual meeting setting forth: (i) as
to each person whom the shareholder proposes to nominate for election or
reelection as a director, all information relating to such person that is
required to be disclosed in solicitations of proxies for the election of
directors pursuant to Regulation 14A of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"); (ii) as to any other business that the
shareholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of
such shareholder and of the beneficial owner, if any, on whose behalf the
proposal is made; and (iii) as to the shareholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made,
(x) the name and address of such shareholder as it appears on ATLANTIC's books
and of such beneficial owner and (y) the number of Shares which are owned
beneficially and of record by such shareholder and such beneficial owner, if
any.
The classified Board, the issuance of preferred stock and the advance notice
provisions discussed in the preceding paragraphs each could have the effect of
delaying or preventing a change in control of ATLANTIC even if a change in
control were in the shareholders' interests.
POSSIBLE ADVERSE CONSEQUENCE OF LIMITS ON OWNERSHIP OF SHARES
As noted above under "--Limitations on Acquisition of Shares and Change in
Control", under the REIT tax rules, not more than 50% in value of the
outstanding shares of ATLANTIC's stock may be owned, directly or indirectly,
by five or fewer individuals. ATLANTIC's Charter restricts the ownership of
more than 9.8% of the number or value of the outstanding shares of ATLANTIC's
stock by any single shareholder. The ownership limitation does not apply to
Security Capital Group. See "Certain Relationships and Transactions--Security
Capital Group Investor Agreement". The Board, in its sole discretion, may
waive this restriction if it is satisfied that ownership in excess of this
limit will not jeopardize ATLANTIC's status as a REIT. See "Description of
Stock--Restriction on Size of Holdings of Shares" for additional information
regarding the ownership limit.
EFFECT OF MARKET INTEREST RATES ON SHARE PRICES
One of the factors that may influence the price of the Shares in public
markets will be the annual yield on the price paid for Shares from
distributions by ATLANTIC. Thus, an increase in market interest rates may lead
purchasers of Shares to demand a higher annual yield, which could adversely
affect the market price of the Shares.
REGULATORY COMPLIANCE
POSSIBLE LIABILITY RELATING TO ENVIRONMENTAL LAWS
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner, developer or operator of real estate may be liable
for the costs of removal or remediation of certain hazardous or toxic
substances at, on, under or in its property. The costs of removal or
remediation of such substances could be substantial. Such laws often impose
such liability without regard to whether the owner or operator knew of, or was
responsible for, the release or presence of such hazardous or toxic
substances. The presence of such substances may adversely affect the owner's
ability to sell or rent such real estate or to borrow using such real estate
as collateral. Persons who arrange for the disposal or treatment of hazardous
or toxic substances also may be liable for the costs of removal or remediation
of such substances at the disposal or treatment facility, whether or not such
facility is owned or operated by such person. Certain environmental laws
impose liability for the release of asbestos-containing materials into the
air, pursuant to which third parties may seek recovery from owners or
operators of real properties for personal injuries associated with such
materials, and prescribe specific methods for the removal and disposal of such
materials, which may result in increased costs in connection with renovations
at ATLANTIC's communities.
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ATLANTIC has not been notified by any governmental authority of any non-
compliance, liability or other claim in connection with any of its communities
owned or being acquired at February 28, 1997, and ATLANTIC is not aware of any
environmental condition with respect to any of its communities that is likely
to be material. ATLANTIC has subjected each of its communities to a Phase I
environmental assessment (which does not involve invasive procedures such as
soil sampling or ground water analysis) by independent consultants. While some
of these assessments have led to further investigation and sampling, none of
the environmental assessments has revealed, nor is ATLANTIC aware of, any
environmental liability (including asbestos-related liability) that the REIT
Manager believes would have a material adverse effect on ATLANTIC's business,
financial condition or results of operations. No assurance can be given,
however, that these assessments and investigations reveal all potential
environmental liabilities, that no prior owner or operator created any
material environmental condition not known to ATLANTIC or the independent
consultants or that future uses and conditions (including, without limitation,
resident actions or changes in applicable environmental laws and regulations)
will not result in unreimbursed costs relating to environmental liabilities.
COMPLIANCE WITH THE FAIR HOUSING AMENDMENTS ACT OF 1988
The Fair Housing Amendments Act of 1988 (the "FHA") requires multifamily
communities first occupied after March 13, 1990 to be accessible to the
handicapped. Noncompliance with the FHA could result in the imposition of
fines or an award of damages to private litigants. ATLANTIC believes that its
communities that are subject to the FHA are in compliance with such law.
COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT OF 1990
ATLANTIC's communities and any newly developed or acquired multifamily
communities must comply with Title III of the Americans with Disabilities Act
of 1990 (the "ADA") to the extent that such communities are "public
accommodations" and/or "commercial facilities" as defined by the ADA.
Compliance with the ADA requirements requires that public accommodations
"reasonably accommodate" individuals with disabilities, which includes removal
of structural barriers to handicapped access in certain public areas of
ATLANTIC's communities, where such removal is readily achievable and that new
construction or alterations made to "commercial facilities" conform to
accessibility guidelines unless "structurally impracticable" for new
construction, or in excess of 20% of the cost of the alteration for existing
structures. The ADA does not, however, consider multifamily residential
communities, such as ATLANTIC's communities, to be public accommodations or
commercial facilities except to the extent portions of such communities, such
as a leasing office, are open to the public. ATLANTIC believes that its
communities comply with all present requirements under the ADA and applicable
state laws. Noncompliance with the ADA could result in the imposition of
injunctive relief, fines or an award of damages.
RESTRICTIONS ASSOCIATED WITH TAX-EXEMPT BOND FINANCINGS
ATLANTIC's portfolio includes communities which require that 20% of their
units be occupied by households whose income does not exceed 80% of the median
household income of the submarket in which the property is located; over 50%
of the households in such communities met such requirements in December 1996.
There can be no assurance that each community will continue to meet such
requirements in the future, in which case ATLANTIC may be required to
refinance the tax-exempt bonds used to finance such community.
EFFECT ON SHARE PRICE OF SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of Shares, or the perception that such sales
could occur, could adversely affect the prevailing market price for the
Shares. At April 7, 1997, ATLANTIC had 37,891,580 Shares issued and
outstanding, which were held of record by approximately 300 persons. All such
Shares may be sold in the public market pursuant to registration rights or
available exemptions from registration. See "Shares Available for Future
Sale". No prediction can be made regarding the effect of future sales of
Shares on the market prices of Shares.
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DILUTION
The pro forma net tangible book value per Share of ATLANTIC's assets after
the Offering will be lower than the initial public offering price per Share in
the Offering. Accordingly, persons acquiring Shares in the Offering will
experience immediate dilution of $2.90 per Share in the net tangible book
value of Shares acquired in the Offering. See "Dilution".
SECURITY CAPITAL ATLANTIC INCORPORATED
ATLANTIC's objective is to be the preeminent real estate operating company
focusing on multifamily communities in its southeastern United States target
market. Through its REIT Management Agreement with the REIT Manager, ATLANTIC
has access to the services provided by the REIT Manager and its specialized
service affiliates, which provides ATLANTIC with the same resources as a fully
integrated operating company. The REIT Manager and its specialized service
affiliates have 77 professionals dedicated to implementing ATLANTIC's highly
focused operating strategy. ATLANTIC focuses on the development, acquisition,
operation and long-term ownership of multifamily communities. At February 28,
1997, ATLANTIC's portfolio consisted of 25,596 multifamily units, including
6,355 units under construction or in planning, in 16 metropolitan areas and 49
submarkets in growth areas of the southeastern United States. The total
expected investment cost of ATLANTIC's 70 operating communities, including
budgeted renovations and total budgeted development expenditures, was
approximately $969.9 million at February 28, 1997 and the total budgeted
development cost of ATLANTIC's 20 communities under construction or in
planning was approximately $397.0 million. Additionally, at February 28, 1997,
ATLANTIC had land in planning and under control for the development of 1,808
units with a total budgeted development cost of $111.2 million.
ATLANTIC seeks to achieve long-term sustainable growth in per Share cash
flow by maximizing the operating performance of its core portfolio through
value-added operating systems and concentrating its experienced team of
professionals on developing and acquiring industry-leading multifamily
communities in targeted submarkets exhibiting strong job growth and favorable
demographic trends. Since its inception in 1993, ATLANTIC has employed a
research-driven investment approach, deploying its capital in markets and
submarkets that exhibit strong market fundamentals. ATLANTIC believes that
population and employment growth are the primary demand generators for
multifamily product.
ATLANTIC's executive offices are located at Six Piedmont Center, Atlanta,
Georgia 30305, and its telephone number is (404) 237-9292. ATLANTIC is a
Maryland corporation. Its predecessor was formed in October 1993 as a Delaware
corporation, and ATLANTIC was re-formed as a Maryland corporation in April
1994.
USE OF PROCEEDS
The proceeds to ATLANTIC from the sale of the Shares offered hereby, net of
all expenses of the Offering, are expected to be approximately $80.5 million.
The net proceeds of the Offering will be used to retire revolving credit debt
which was incurred for (i) the acquisition and development of multifamily
communities, (ii) capital improvements to communities, (iii) fundings under
ATLANTIC's funding commitment agreement with Homestead and (iv) general
corporate purposes. As of April 7, 1997, ATLANTIC had $289.5 million of
outstanding borrowings under its $350 million unsecured revolving line of
credit with Morgan Guaranty Trust Company of New York ("MGT"), as agent for a
syndicate of banks, and such outstanding borrowings are expected to be
approximately $299.0 million at the closing of the Offering. Borrowings under
the line of credit bear interest at prime (8.50% at April 7, 1997) or, at
ATLANTIC's option, LIBOR plus 1.375% (7.0625% at April 7, 1997). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Line of Credit".
26
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of ATLANTIC as of December
31, 1996 and as adjusted to give effect to the Offering and the application of
the proceeds therefrom. The table should be read in conjunction with the
financial statements of ATLANTIC included herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------
AS
HISTORICAL ADJUSTED
---------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Mortgage notes............................................ $155,790 $155,790
Shareholders' equity:
Shares of common stock, par value $.01 per share;
250,000,000 Shares authorized; 37,891,580 Shares
issued; 41,891,580 Shares issued as adjusted........... 379 419
Additional paid-in capital.............................. 747,640 828,080
Distributions in excess of net earnings................. (49,377) (49,377)
-------- --------
Total shareholders' equity............................ $698,642 $779,122
-------- --------
Total capitalization(1)............................... $854,432 $934,912
======== ========
</TABLE>
- --------
(1) Does not include borrowings under ATLANTIC's $350 million unsecured
revolving line of credit. At December 31, 1996, $228.0 million of
borrowings were outstanding under the line of credit ($147.5 million on an
as-adjusted basis).
PRICE RANGE OF ATLANTIC SHARES AND DISTRIBUTIONS
The Shares are listed on the NYSE under the symbol "SCA". As of April 7,
1997, ATLANTIC had 37,891,580 Shares issued and outstanding, which were held
of record by approximately 300 shareholders. The Shares commenced trading on
the NYSE on October 15, 1996 and the high and low sales prices of the Shares
as reported in the NYSE Composite Tape were $24 5/8 and $20 7/8, respectively,
for the fourth quarter of 1996 (as adjusted for the Homestead Distribution
described below), were $26 1/2 and $22, respectively, for the first quarter of
1997 and were $22 1/8 and $20 1/2, respectively, for the second quarter of
1997 (through April 7). The following table sets forth ATLANTIC's cash
distributions per Share for the periods indicated. Unless otherwise indicated,
all Share and per Share amounts have been adjusted to give effect to
ATLANTIC's one-for-two reverse Share split, which was effective on September
10, 1996.
<TABLE>
<CAPTION>
CASH
DISTRIBUTIONS
PER SHARE
-------------
<S> <C>
1995:
First Quarter................................................... $0.40
Second Quarter.................................................. $0.40
Third Quarter................................................... $0.40
Fourth Quarter.................................................. $0.40
-----
$1.60
=====
1996:
First Quarter................................................... $0.42
Second Quarter.................................................. $0.42
Third Quarter................................................... $0.42
Fourth Quarter.................................................. $0.39(1)
-----
$1.65
=====
1997:
First Quarter................................................... $0.39
</TABLE>
- --------
(1) In light of the Homestead transaction and ATLANTIC's initial public
offering, the Board adjusted the distribution in the fourth quarter of
1996.
27
<PAGE>
In addition to the quarterly cash distributions shown above, ATLANTIC made
the Homestead Distribution on November 12, 1996 to shareholders of record on
October 29, 1996. The securities distributed in the Homestead Distribution had
a market value of $2.67 per Share based on the closing prices of such
securities on the ASE on November 11, 1996, the day prior to the distribution
date. The Homestead Distribution resulted in an adjustment of $2.75 per Share
to ATLANTIC's Share price information on the NYSE on November 12, 1996.
Accordingly, ATLANTIC's October 1996 initial public offering price, as
adjusted for the Homestead Distribution, was $21.25 per Share (as compared to
the pre-adjustment price of $24.00 per Share).
ATLANTIC, in order to qualify as a REIT, is required to make distributions
(other than capital gain distributions) to its shareholders in amounts at
least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed
without regard to the dividends-paid deduction and its net capital gain) and
(B) 95% of the net income (after tax), if any, from foreclosure property minus
(ii) the sum of certain items of non-cash income. ATLANTIC's long-term
distribution strategy is to distribute what it believes is a conservative
percentage of its cash flow, permitting ATLANTIC to retain funds for capital
improvements and other investments while funding its distributions. ATLANTIC
has paid 13 consecutive quarterly cash distributions since its inception in
October 1993.
ATLANTIC announces the following year's projected annual distribution level
after the Board's annual budget review and approval in December of each year.
At its December 19, 1996 Board meeting, the Board announced a projected annual
distribution level of $1.56 per Share for 1997 and declared a distribution of
$0.39 per Share for the first quarter of 1997, which was paid on February 19,
1997. The payment of distributions is subject to the discretion of the Board
and is dependent upon the financial condition and operating results of
ATLANTIC. ATLANTIC's unsecured line of credit contains covenants which provide
that ATLANTIC's distributions for the preceding four quarters, excluding the
Homestead Distribution, may not exceed 95% (97% for distributions made before
December 31, 1996) of funds from operations (as defined in the credit
agreement) for the preceding four quarters.
ATLANTIC expects to continue to pay regular quarterly distributions to its
shareholders, but the historical distributions presented above prior to the
fourth quarter of 1996 did not take into account the cost of being a public
company and should not be considered to be indicative of future distributions.
ATLANTIC's ability to pay future distributions depends on a number of factors
including, among other things, continued property occupancy, capital
expenditures and other costs relating to ATLANTIC's existing communities and
ATLANTIC's financial condition and capital requirements. A change in any such
factor could affect ATLANTIC's ability to pay future distributions. Moreover,
ATLANTIC's operating results may be adversely affected if occupancy levels
decrease, if revolving credit borrowing costs increase or if any other adverse
changes occur. See "Risk Factors--Risk of Inability to Pay Future
Distributions".
Cash available for distribution will be affected by a number of factors,
including rental revenues from existing and new residents, the level of
acquisition and new leasing activity, ATLANTIC's operating expenses, the
interest expense and other debt service costs of ATLANTIC, the ability of
residents to meet their obligations, taxes payable by ATLANTIC and
unanticipated capital expenditures. ATLANTIC's policy is to expense, rather
than capitalize, repairs and maintenance, in determining net earnings and cash
available for distribution. Only major renovations, replacements or
improvements with a substantial expected economic life (such as roofs, parking
lots and additions) are capitalized. ATLANTIC has budgeted $8.8 million for
such purposes for the remainder of 1997. No assurances can be given that cash
available for distribution will be sufficient to pay future distributions.
Although ATLANTIC does not expect any future cash shortfalls, any such
shortfalls which do arise could result in reductions in ATLANTIC's cash
available for distribution which could result in lower than expected
distributions.
28
<PAGE>
In addition to the $8.8 million of budgeted capital expenditures, as of
February 28, 1997, ATLANTIC had $94.8 million of unfunded construction
commitments and $195.0 million of communities in planning (owned and under
control), of which $179.8 million had not been funded. In addition, pursuant
to its funding commitment agreement, ATLANTIC has agreed to provide secured
financing of up to approximately $111.1 million to Homestead in exchange for
convertible mortgage notes, of which $98.1 million had not been funded as of
February 28, 1997. See "Certain Relationships and Transactions--Funding
Commitment Agreement". ATLANTIC expects to finance its renovation, acquisition
and development investments and its funding commitment under its funding
commitment agreement with borrowings under its $350 million unsecured
revolving line of credit (which matures in December 1998) and future offerings
of debt and equity securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources".
For federal income tax purposes, distributions may consist of ordinary
income, capital gains, non-taxable return of capital or a combination thereof.
Distributions that exceed ATLANTIC's current and accumulated earnings and
profits (calculated for tax purposes) constitute a return of capital rather
than a dividend and reduce the shareholder's basis in the Shares. To the
extent that a distribution exceeds both current and accumulated earnings and
profits and the shareholder's basis in the Shares, it will generally be
treated as gain from the sale or exchange of that shareholder's Shares. For a
more complete discussion of the tax treatment of distributions to
shareholders, see "Federal Income Tax Considerations--Taxation of
Shareholders". ATLANTIC annually notifies shareholders of the taxability of
distributions paid during the preceding year. The following summarizes the
taxability of cash distributions paid in 1995 and 1994 on the Shares and the
estimated taxability for 1996.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Per Share:
Ordinary income............................................. $0.78 $0.92 $0.92
Return of capital........................................... 0.87 0.68 0.28
----- ----- -----
Total..................................................... $1.65 $1.60 $1.20
===== ===== =====
</TABLE>
The securities distributed to each ATLANTIC shareholder in the Homestead
Distribution were valued at $1.91 per Share for federal income tax purposes,
of which $0.90 was taxable as ordinary income and $1.01 was treated as a
return of capital. ATLANTIC's tax return for the year ended December 31, 1996
has not been filed, and the taxability information for 1996 is based upon the
best available data. ATLANTIC's tax returns for prior years have not been
examined by the Internal Revenue Service (the "IRS") and, therefore, the
taxability of distributions is subject to change.
29
<PAGE>
DILUTION
The initial public offering price per Share exceeds the net tangible book
value per Share. Therefore, the holders of Shares issued prior to the Offering
will realize an immediate increase in the net tangible book value of their
Shares, while purchasers of Shares sold in the Offering will realize an
immediate dilution in the net tangible book value of their Shares. Net
tangible book value per Share is determined by subtracting total liabilities
from total tangible assets and dividing the remainder by the number of Shares
that will be outstanding after the Offering. The following table illustrates
the dilution to purchasers of Shares sold in the Offering.
<TABLE>
<S> <C>
Initial Public Offering Price per Share(1)............................. $21.50
Net tangible book value per Share issued prior to the Offering......... 18.44
Pro forma increase in net tangible book value per Share attributable to
payments by purchasers of Shares sold in the Offering................. .16
------
Net pro forma tangible book value per Share after the Offering(2)...... 18.60
------
Dilution per Share..................................................... $(2.90)
======
</TABLE>
- --------
(1) Before deducting estimated expenses of the Offering.
(2) Based on the Pro Forma Financial Results contained elsewhere in this
Prospectus.
THE MERGER TRANSACTION
THE MERGER
In January 1997, Security Capital Group made a proposal to the Board that
Security Capital Group exchange the REIT Manager and SCG Realty Services for
Shares, with the result that ATLANTIC would become an internally managed REIT.
On March 24, 1997, Security Capital Group and ATLANTIC entered into the Merger
Agreement which is subject to customary conditions, including the approval of
ATLANTIC's shareholders. PTR and SCI entered into similar transactions with
Security Capital Group on that date; however, the Merger described below is
independent of such other transactions. Pursuant to the Merger Agreement,
Security Capital Group will cause the REIT Manager and SCG Realty Services to
be merged into a newly formed subsidiary of ATLANTIC. The employees of the
REIT Manager and SCG Realty Services will become employees of ATLANTIC as a
result of the Merger, which will be consummated as follows:
. Security Capital Group will transfer its interests in the REIT Manager
and SCG Realty Services to a newly formed subsidiary of ATLANTIC in
exchange for Shares valued at approximately $54.6 million, assuming that
the market price of the Shares is within the range described below.
. ATLANTIC's and Security Capital Group's respective shareholders must each
approve the Merger Agreement. It is currently expected that ATLANTIC's
shareholder vote will occur in the third quarter of 1997 and that
Security Capital Group's shareholder vote will occur on April 17, 1997
and, if approved, the Merger is expected to close in the third quarter of
1997.
. The number of Shares to be issued to Security Capital Group will be based
on the average market price of the Shares over the five-day period prior
to the record date for mailing the proxy statements seeking shareholder
approval of the Merger, subject to the price being within an 11.24% range
of the closing price of the Shares on the NYSE on March 14, 1997
($23.25). If the average market price of the Shares falls outside of the
range, then the number of Shares issuable to Security Capital Group will
be based on the high or low end of the range ($25.8633 or $20.6367), as
the case may be.
30
<PAGE>
. In order to allow ATLANTIC's shareholders to maintain their relative
ownership in ATLANTIC, concurrently with the proxy solicitation seeking
shareholder approval of the Merger, ATLANTIC will conduct a rights
offering entitling its shareholders (other than Security Capital Group)
to purchase up to approximately $51.6 million of additional Shares (based
on the number of Shares expected to be outstanding after the Offering and
subject to adjustment for further issuance of Shares prior to the record
date therefor). The exercise price for Shares in the rights offering is
expected to be the same price at which Shares will be issued to Security
Capital Group under the Merger Agreement if the average market price of
the Shares remains within the range described above. If the average
market price of the Shares is below the minimum price of the range, the
rights offering will be conducted at such average market price, and if
the average market price of the Shares is above the maximum price of the
range, the rights offering will be conducted at such maximum price. Any
Shares issued pursuant to the rights offering will be offered only by
means of a separate prospectus which will be delivered to ATLANTIC's
shareholders. The closing of the rights offering is contingent on the
consummation of the Merger transaction.
. As part of the Merger transaction, and in order to allow holders of
Shares to participate in the Merger transaction, Security Capital Group
will issue warrants pro rata to ATLANTIC's shareholders, other than
Security Capital Group, to acquire up to approximately $46.9 million in
value of shares of its Class B Stock after the closing of the Merger. The
number of warrants to be received by each shareholder in the Warrant
Issuance will be determined on the record date for the Warrant Issuance,
which date will be determined after ATLANTIC's shareholders have approved
the Merger. The number of shares of Class B Stock subject to the warrants
will be based on the market price of the Class B Stock on the date the
warrants are issued, which date will be within approximately 60 days
following the closing of the Merger. The warrants will each be
exercisable for one share of Class B Stock at the price of the Class B
Stock on the date the warrants are issued. It is expected that
application will be made to list the Class B Stock and the warrants on
the NYSE, although there can be no assurance that either, or both, the
Class B Stock or the warrants will be so listed. The warrants will expire
one year after issuance and will contain customary anti-dilution
provisions. Any securities issued pursuant to the Warrant Issuance will
be offered only by means of a separate proxy statement/prospectus which
will be delivered to ATLANTIC's shareholders.
No shareholder will be required to participate in the rights offering or to
pay any cash or other consideration for the warrants received in the Warrant
Issuance or surrender or exchange Shares in order to receive warrants.
However, the issuance of the warrants to purchase shares of Security Capital
Group's Class B Stock will result in taxable ordinary income to ATLANTIC's
shareholders. See "Federal Income Tax Considerations--Tax Effects of the
Merger".
The Merger transaction was initiated and structured by individuals who are
executive officers of Security Capital Group, which controls ATLANTIC, the
REIT Manager and SCG Realty Services. Although no independent representatives
have been retained to negotiate the terms of the transaction on behalf of
ATLANTIC, the Board created a special committee of independent Directors
consisting of Messrs. Garcia, Holmes and Richman to consider the proposal. The
special committee engaged Hogan & Hartson LLP as its legal counsel and J.P.
Morgan Securities Inc. as its financial advisor to advise it in analyzing and
evaluating the fairness of the transaction. None of the members of the special
committee is an officer of ATLANTIC or a Director or officer of the REIT
Manager or SCG Realty Services, or an officer or Director of Security Capital
Group. Mr. Garcia beneficially owns 11,000 Shares and no common stock of
Security Capital Group. Mr. Holmes beneficially owns 58,500 Shares and 67.11
shares of common stock of Security Capital Group. Mr. Richman beneficially
owns 11,000 Shares and 1,516 shares of common stock of Security Capital Group.
In addition, Messrs. Garcia, Holmes and Richman beneficially own $0, $508,358
and $856,318 aggregate principal amount of Security Capital Group's 12%
Convertible Subordinated Debentures due June 30, 2014 (the "2014 Convertible
Debentures"), respectively, which are convertible into an aggregate of 0, 49
and 819 shares of common stock, respectively. Directors of ATLANTIC, other
than members of the special
31
<PAGE>
committee beneficially own, in the aggregate, 24,649 Shares and 2,511 shares
of common stock of Security Capital Group. In addition, Directors of ATLANTIC,
other than members of the special committee, beneficially own in the aggregate
$151,248 principal amount of 2014 Convertible Debentures, which are
convertible into an aggregate of 144 shares of common stock.
RELATIONSHIP WITH SECURITY CAPITAL GROUP AFTER THE MERGER
Under the terms of the Merger Agreement, ATLANTIC will enter into a revised
investor agreement with Security Capital Group upon consummation of the Merger
which will provide that so long as Security Capital Group owns 25% or more of
the Shares, Security Capital Group will continue to have rights to direct
major policies of ATLANTIC. See "Certain Relationships and Transactions--
Security Capital Group Investor Agreement" for a description of the current
Investor Agreement. Security Capital Group will have the right, so long as it
owns between 10% and 25% of the Shares, to nominate one person to the Board.
So long as Security Capital Group owns 25% or more of the Shares, Security
Capital Group will be entitled to nominate a proportionate number of persons
to the Board, subject to a maximum of three nominees if the size of the Board
does not increase above the current size. Under the revised investor
agreement, ATLANTIC will be required to consult with Security Capital Group's
nominees to the Board prior to taking any action with respect to the
following: (i) finalization of the annual budget and substantial deviations
therefrom; (ii) the acquisition or sale of assets in a single transaction
where the price exceeds $25 million; and (iii) any contract for investment,
property management or leasing services or any service contract providing for
payments in excess of $1.0 million. ATLANTIC will have no obligation to follow
the advice of Security Capital Group with respect to the foregoing matters.
Under the revised investor agreement, Security Capital Group will also have
the right of prior approval with respect to the following matters: (i) the
issuance of equity securities or securities convertible into equity securities
(other than issuances in connection with option, dividend reinvestment and
similar plans) for less than the fair market value of such securities; (ii)
the issuance of any preferred stock which would result in the Fixed Charge
Coverage Ratio (as defined) being less than 1.4 to 1.0; (iii) adopting any
employee benefit plans under which Shares may be issued; (iv) the compensation
of senior officers of ATLANTIC; and (v) incurring additional indebtedness
which would result in the Interest Expense Coverage Ratio (as defined) being
less than 2.0 to 1.0. Finally, under the revised investor agreement, Security
Capital Group has the right to call a special meeting of shareholders to
consider a Security Capital Group proposed slate of nominee Directors in the
event that any of its approval rights are held to be unenforceable by a court.
Security Capital Group will be permitted to make job opportunities with its
affiliates, including PTR and SCI, available to the officers and employees of
ATLANTIC; provided that Security Capital Group gives the Board two weeks'
notice prior to making an opportunity available to a senior officer of
ATLANTIC.
Under the terms of the Merger Agreement, ATLANTIC will also enter into an
Administrative Services Agreement with a subsidiary of Security Capital Group.
Under this agreement, Security Capital Group will provide ATLANTIC with
certain administrative and other services requested by ATLANTIC. The fees
payable to Security Capital Group will be equal to Security Capital Group's
cost of providing such services plus 20%. For the initial term of the
agreement (through December 31, 1998), the fees payable to Security Capital
Group will not exceed approximately $5.2 million of which approximately $1.5
million will apply to the period between the closing of the Merger and
December 31, 1997 and the remainder will apply to 1998, but may be less than
such amount.
In addition, pursuant to a Protection of Business Agreement to be entered
into with Security Capital Group in connection with the Merger Agreement,
Security Capital Group will agree that, for a three-year term, neither it nor
any affiliate will provide substantially the same advice and services as those
being provided by the REIT Manager and SCG Realty Services to any person
within the United States owning or operating real property that is or is
planned to be used primarily for multifamily communities.
32
<PAGE>
BUSINESS
HIGHLY FOCUSED BUSINESS STRATEGY GROUNDED IN RESEARCH
Since its inception in 1993, ATLANTIC has employed a research-driven
investment approach, deploying its capital in markets and submarkets which
exhibit strong market fundamentals. ATLANTIC believes that population and
employment growth are the primary demand generators for multifamily product.
The following chart indicates the expected population and employment growth in
ATLANTIC's primary target market cities versus the United States as a whole
from 1997 to 2016. The chart is based on forecasts published by Woods & Poole
Economics, Inc., which bases its historical information on U.S. Census Bureau
Information. There can be no assurances that the forecasted population and job
growth shown below will in fact occur.
[CHART]
At February 28, 1997, ATLANTIC owned communities in 49 of the 150 submarkets
within its target market. REIT Management is continuously researching
additional submarkets and cities and ATLANTIC may add additional primary
target market cities in the future; however, ATLANTIC intends to remain
regionally focused in the southeastern United States.
ATLANTIC's initial investment strategy focused on two components: the
acquisition of a substantial base of established multifamily communities to
provide operating cash flow and the creation of an internal development
process focused primarily on the development of moderate income multifamily
communities. ATLANTIC expects to continue to selectively acquire upper middle
income communities and acquire and develop middle income communities; however,
the majority of its future investment activities will concentrate on
developing moderate income communities.
33
<PAGE>
The table below illustrates the growth in ATLANTIC's expected investment in
multifamily communities since its inception on October 26, 1993 to February
28, 1997:
<TABLE>
<CAPTION>
TOTAL EXPECTED INVESTMENT(1)
----------------------------------------------------
DECEMBER 31,
FEBRUARY ----------------------------------------
28, 1997 1996 1995 1994 1993
---------- ---------- ---------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating communities:
Acquired................ $ 978,996 $ 968,951 $ 788,920 $600,880 $29,591
Less dispositions....... (90,922) (90,922) (30,934) -- --
---------- ---------- ---------- -------- -------
Net acquired............ 888,074 878,029 757,986 600,880 29,591
Developed............... 81,850 81,832 25,462 -- --
---------- ---------- ---------- -------- -------
Total operating
communities.......... 969,924 959,861 783,448 600,880 29,591
Communities under
construction............. 313,202 290,486 176,740 63,006 13,588
Communities in planning
and owned(2)............. 83,800 53,410 69,788 53,096 --
---------- ---------- ---------- -------- -------
Total owned
communities.......... $1,366,926 $1,303,757 $1,029,976 $716,982 $43,179
========== ========== ========== ======== =======
Communities in planning
and under control(2)..... $ 111,195 $ 139,275 $ 48,261 $ 69,232 --
========== ========== ========== ======== =======
</TABLE>
- --------
(1) For operating communities, represents cost, including budgeted
renovations. For communities under construction and in planning,
represents total budgeted development cost, which includes the cost of
land, fees, permits, payments to contractors, architectural and
engineering fees and interest and property taxes to be capitalized during
the construction period, for communities in development. Does not include
land held for future development, which is less than 1% of assets based on
cost.
(2) The term "in planning" means that construction is anticipated to commence
within 12 months. The term "under control" means that ATLANTIC has an
exclusive right (through contingent contract or letter of intent) during a
contractually agreed-upon time period to acquire land for future
development of multifamily communities, subject to removal of
contingencies during the due diligence process, but does not currently own
the land.
ATLANTIC'S OPERATING SYSTEM
The REIT Manager and its specialized service affiliates have 77
professionals dedicated to implementing ATLANTIC's highly focused business
strategy. ATLANTIC's "Operating System" consists of six functional areas:
research, acquisitions, development, due diligence and investment analysis,
property management and capital markets/finance/legal. By focusing on a single
discipline, professionals within each of these areas develop substantial
expertise. Interaction and communication among these functional areas remain
fluid; but separation promotes certain checks and balances. For example, all
acquisition and development investments must be approved by a four-member
investment committee and ultimately by the investment committee of the Board.
RESEARCH
ATLANTIC is dedicated to ongoing research and development. ATLANTIC utilizes
Security Capital Investment Research, an affiliate of the REIT Manager, to
conduct comprehensive evaluations of its target market on a submarket-by-
submarket basis to identify those submarkets and product types that present
better prospects for long-term cash flow growth. These evaluations, combined
with ATLANTIC's extensive market experience in the southeastern United States,
enable ATLANTIC to identify submarkets that offer continued opportunities for
long-term cash flow growth. In addition to
34
<PAGE>
market research, considerable resources are devoted to product research. The
REIT Manager continually evaluates and refines ATLANTIC's multifamily
communities to incorporate technologies and designs that will enhance long-
term livability for its residents.
ACQUISITIONS
Since its inception in 1993, ATLANTIC has selectively acquired multifamily
communities where demographic trends and market trends indicate a high
likelihood of achieving superior operating results. As of February 28, 1997,
ATLANTIC's portfolio of communities acquired, net of dispositions, aggregated
17,727 operating units, representing a total expected investment cost,
including budgeted renovations, of $888.1 million.
ATLANTIC categorizes operating multifamily communities (which exclude
communities under development) as either "stabilized" or "pre-stabilized". The
term "stabilized" means that renovation, repositioning, new management and new
marketing programs (or development and marketing in the case of newly
developed communities) have been completed and in effect for a sufficient
period of time (but in no event longer than 12 months, except in cases of
major rehabilitation) to achieve 93% occupancy at market rents. Prior to being
"stabilized", a community is considered "pre-stabilized". Due to its active
investment program since inception, 18.9% of ATLANTIC's multifamily operating
portfolio ($183.2 million) was classified as pre-stabilized as of February 28,
1997, based on total expected investment cost. At February 28, 1997,
ATLANTIC's operating communities (excluding communities in lease-up) were
94.4% leased. For operating communities acquired by ATLANTIC, stabilized
operations generally have been achieved between six and 12 months after
acquisition. For communities that it is developing, ATLANTIC expects
stabilized operations generally to be achieved 12 to 18 months after
construction commences.
DEVELOPED COMMUNITIES
ATLANTIC has selectively developed multifamily communities where land costs
and demographic and market trends indicate a high likelihood of achieving
attractive, sustainable operating results. At February 28, 1997, ATLANTIC's
completed developed communities and its owned communities under construction
and in planning together comprised 35.0% of its multifamily portfolio, based
on total expected investment cost. As of February 28, 1997, the development
portion of ATLANTIC's multifamily portfolio consisted of the following:
<TABLE>
<CAPTION>
TOTAL EXPECTED
NUMBER OF UNITS INVESTMENT(1)
--------------- --------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Communities completed............................ 1,514 $ 81,850
Communities under construction................... 5,095 313,202
Communities in planning and owned(2)............. 1,260 83,800
----- --------
Totals....................................... 7,869 $478,852
===== ========
</TABLE>
- --------
(1) Represents total budgeted development cost, which includes the cost of
land, fees, permits, payments to contractors, architectural and
engineering fees and interest and property taxes to be capitalized during
the construction period. Does not include land held for future
development, which is less than 1% of assets, based on cost.
(2) Does not include land in planning and under control for the development of
1,808 units with a total budgeted development cost of $111.2 million.
ATLANTIC carefully manages development risks by obtaining zoning and public
approvals prior to purchasing land. ATLANTIC does not take construction risk,
but instead uses qualified third-party
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general contractors to build its communities, using guaranteed maximum price
contracts. ATLANTIC targets development for markets with high occupancy rates
and population and job growth trends that indicate increasing future demand.
ATLANTIC cannot eliminate all development risk, but believes that the
opportunities to better control its product and realize higher returns from
development communities compensate for any additional risk.
ATLANTIC traditionally has commenced development immediately after acquiring
a tract of land. However, in cases where land prices are favorable, ATLANTIC
has acquired and will acquire, on an unleveraged basis, prudent amounts of
zoned land for the development of future multifamily communities. In addition,
to provide for growth, ATLANTIC may utilize options and rights of first
refusal in order to control land for the development of future communities.
To enhance its flexibility in developing and acquiring multifamily
communities, ATLANTIC has and will enter into presale agreements to acquire
communities developed by third-party owner/developers where the developments
meet ATLANTIC's investment criteria. ATLANTIC has and will fund such
developments through development loans to these owner/developers. In addition,
to provide greater flexibility for the use of land acquired for development
and to dispose of excess parcels, ATLANTIC plans to make mortgage loans to
Atlantic Development Services to purchase land for development. ATLANTIC owns
all of the preferred stock of Atlantic Development Services, which entitles
ATLANTIC to substantially all of the net operating cash flow (95%) of Atlantic
Development Services. All of the common stock of Atlantic Development Services
is owned by an unaffiliated trust. The common stock is entitled to receive the
remaining 5% of net operating cash flow. As of February 28, 1997, the
outstanding balance of development and mortgage loans made by ATLANTIC to
third-party owner/ developers and Atlantic Development Services aggregated
$15.5 million and none, respectively. The activities of Atlantic Development
Services and third-party owner/developers are consolidated with ATLANTIC's
activities and all intercompany transactions have been eliminated in
consolidation.
DUE DILIGENCE AND INVESTMENT ANALYSIS
ATLANTIC believes that a REIT should have experienced personnel dedicated to
performing intelligent and thorough due diligence. The REIT Manager has four
full-time professionals performing due diligence for ATLANTIC. The REIT
Manager's professionals utilize due diligence information in screening
potential acquisitions and developments for ATLANTIC.
Prospective property investments are analyzed pursuant to several
underwriting criteria, including purchase price, competition and other market
factors, and prospects for long-term growth in cash flow. ATLANTIC's
investment decisions are based upon the expected contribution of the community
to long-term cash flow growth on an unleveraged basis. The expected economic
contribution is based on an evaluation of a community's stabilized operations,
including an estimate of all cash revenues from leases and other revenue
sources, minus expenses incurred in operating the community (including real
estate taxes, insurance, maintenance, turnover costs (such as carpet and
appliance replacement), personnel costs and utility charges, but excluding
depreciation, debt service and amortization of loan costs) and a reserve for
capital expenditures.
PROPERTY MANAGEMENT
ATLANTIC believes that a successful REIT must actively manage its
communities in order to increase cash flow and enhance the long-term economic
performance of the communities. Approximately 88% of ATLANTIC's operating
multifamily units are managed by SCG Realty Services, a property management
firm headquartered in Atlanta, Georgia, with the balance in various stages of
transition to SCG Realty Services' management. Security Capital Group is the
sole owner of SCG Realty Services and the REIT Manager. See "The Merger
Transaction" for a description of an
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agreement that ATLANTIC has entered into with Security Capital Group to merge
the REIT Manager and SCG Realty Services into a newly formed subsidiary of
ATLANTIC in exchange for Shares. The property management fee paid to SCG
Realty Services for the year ended December 31, 1996 was $4.2 million. For a
description of fees paid to SCG Realty Services, see "Certain Relationships
and Transactions--Property Management Company".
SCG Realty Services has approximately 425 employees. SCG Realty Services
emphasizes locally-based management and has ten local offices to serve
ATLANTIC's target market. This network improves SCG Realty Services' ability
to respond to changes in local market conditions and resident needs. ATLANTIC
believes that SCG Realty Services has developed superior operating procedures,
financial controls, information systems and training programs, which it
expects to positively affect rental returns and occupancy rates. In addition,
incentive compensation programs have been implemented for on-site property
managers to further improve the performance of the communities. The REIT
Manager has taken an active role in overseeing SCG Realty Services' management
of ATLANTIC's multifamily communities.
ATLANTIC recognizes that highly focused day-to-day management attention is
essential to maximize short-term and long-term cash flow from each of its
multifamily communities. As a result, SCG Realty Services has been
specifically dedicated to the pursuit of this single goal. The professionals
within SCG Realty Services focus only on ATLANTIC's communities. Therefore,
their attention is not diluted by competing demands of other customers. SCG
Realty Services and the REIT Manager work closely together to develop
innovative new ideas to maintain high resident satisfaction while maximizing
cash flow growth. During 1996, SCG Realty Services established a Regional
Information Management ("RIM") Center. The RIM Center concept is designed to
enable property-level management personnel to focus on community operating
performance while moving certain accounting and administrative functions to
the RIM Center. The RIM Center is designed to carry out these functions for
several area communities and thus benefit from economies of scale, better
accounting control and enhanced cash management capabilities. During 1996,
ATLANTIC entered into revenue sharing agreements with certain cable television
and telephone service providers which provide for ATLANTIC to receive a
percentage of the service providers' revenues generated from subscribing
residents in return for access to the resident base.
CAPITAL MARKETS/FINANCE/LEGAL
ATLANTIC believes that a successful REIT must have the ability to access the
equity and debt markets efficiently, expeditiously and cost-effectively.
ATLANTIC's ability to efficiently access the capital markets permits it to
capitalize on the development and acquisition opportunities that exist in its
target market. In order to maximize this function and enhance relationships
with major institutional sources of capital, Security Capital Group formed
Capital Markets Group, a registered broker-dealer affiliate. Capital Markets
Group's services are included in the REIT Manager's fee and do not result in a
separate charge to ATLANTIC. Capital Markets Group and the REIT Manager have
arranged private offerings for ATLANTIC including:
. In August 1994, ATLANTIC received approximately $10 million in gross
proceeds from a private offering of Shares at a price of $20.00 per Share;
. During the period March 1995 through June 1995, ATLANTIC received
approximately $160 million in gross proceeds from a private offering of
Shares at a price of $22.00 per Share; and
. During the period November 1995 through May 1996, ATLANTIC received
approximately $250 million in gross proceeds (at a commission cost of less
than 1% paid to an unaffiliated third party) from a private offering of
Shares at a price of $23.00 per Share (including approximately $28.9
million of Shares sold to Security Capital Group at a price of $23.136 per
Share).
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Capital Markets Group and the REIT Manager have arranged debt facilities for
ATLANTIC including:
. In June 1994, the REIT Manager arranged a three-year, $200 million secured
line of credit for ATLANTIC (increased to $225 million in September 1994),
at an interest rate of prime or, at ATLANTIC's option, LIBOR plus 2% or the
certificate of deposit rate plus 2.125%;
. In August 1995, the REIT Manager arranged for an increase in the line of
credit to $300 million and for a reduction in the interest rate to LIBOR
plus 1.75% or the certificate of deposit rate plus 1.875%;
. In March 1996, the REIT Manager arranged for a further reduction in the
line of credit's interest rate to LIBOR plus 1.50% or the certificate of
deposit rate plus 1.625%;
. In June 1996, the REIT Manager arranged for an increase in the line of
credit to $350 million and an extension of the term to June 1998; and
. In December 1996, the REIT Manager arranged a new unsecured line of credit
that replaced the previous secured line of credit. The new line of credit
bears interest at prime or, at ATLANTIC's option, LIBOR plus 1.375%. The
loan agreement provides for a further reduction in the interest rate
depending upon ATLANTIC's debt rating. ATLANTIC's objective is to achieve
an investment-grade debt rating in 1997.
ATLANTIC's increased borrowing capacity enables it to acquire communities
prior to equity and long-term debt offerings and to eliminate or minimize the
amount of cash it must invest in low-yielding short-term investments. ATLANTIC
believes its current leverage provides considerable flexibility to prudently
utilize long-term debt as a financing tool in the future. After it has
achieved a substantial equity base and an investment-grade debt rating,
ATLANTIC expects to arrange fully amortizing, fixed-rate, 15-year to 25-year
unsecured debt, the proceeds of which will be used primarily for the reduction
of line of credit balances related to multifamily acquisition and development.
This long-term financing strategy is expected to allow ATLANTIC to prudently
increase its capital base with debt and equity.
In July 1995, the REIT Manager negotiated a credit enhancement agreement
with FNMA that covers all of ATLANTIC's tax-exempt bond issues. Under the
agreement with FNMA, ATLANTIC makes monthly principal payments, based on a 30-
year amortization, into a principal reserve account. Of these bond issues,
$108.2 million have variable interest rates. To mitigate the variable interest
rate exposure, ATLANTIC entered into swap agreements. These swap agreements
effectively result in ATLANTIC paying interest at a fixed rate of 6.64%.
STRATEGY FOR CASH FLOW AND DISTRIBUTION GROWTH
ATLANTIC seeks to achieve long-term sustainable growth in cash flow by
maximizing the operating performance of its core portfolio through value-added
operating systems and concentrating its experienced team of professionals on
developing and acquiring industry-leading communities in targeted submarkets
exhibiting strong job growth and favorable demographic trends.
In addition to its strong primary target market, ATLANTIC believes that the
following key factors will drive ATLANTIC's future growth: research and
development, moderate income development, opportunistic acquisitions, "same
store" growth, portfolio and asset optimization and a conservative balance
sheet strategy.
RESEARCH AND DEVELOPMENT
ATLANTIC believes that its research-based investment strategy differs from
other multifamily REITs in that the REIT Manager and its affiliates have
dedicated personnel who conduct comprehensive proprietary evaluations of
ATLANTIC's target market on a submarket-by-submarket
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basis taking into account 24 key variables that ATLANTIC has identified as
having the greatest impact on multifamily operating performance. A few of
these variables include market demand analysis, detailed supply evaluations of
each submarket and other economic and demographic data. See "--ATLANTIC's
Operating System--Research".
DEVELOPMENT OF MODERATE INCOME COMMUNITIES
Multifamily communities are differentiated by the income levels of their
residents. In descending order, the full multifamily spectrum includes upper
middle income apartments, middle income apartments, moderate income
apartments, mobile home parks and government subsidized housing. ATLANTIC
deploys capital into the first three categories. ATLANTIC's upper middle
income communities appeal to residents whose incomes, which equal 115% to 140%
of submarket median household income, are often sufficient to purchase homes.
These communities typically feature large luxurious units and numerous
amenities, including large exercise facilities and attached garages.
ATLANTIC's middle income communities appeal to residents whose incomes equal
90% to 115% of submarket median household income. Middle income communities
have smaller units and fewer amenities than upper middle income communities.
ATLANTIC's moderate income communities accommodate residents with incomes
ranging from 65% to 90% of submarket median household income. Residents in
this category, which typically include couples, single parents and families
with one or two children, are value-driven and focus on unit livability and
practical amenities such as washer/dryer hookups, storage space and
playgrounds.
ATLANTIC's initial acquisitions were principally middle income communities
since the existing moderate income inventory in the southeastern United States
consisted primarily of older communities (15-30 years old) which had been
poorly managed, were either dilapidated or approaching obsolescence and would
not compete effectively for residents in ATLANTIC's market. Accordingly,
ATLANTIC's portfolio at February 28, 1997 includes a larger percentage of
upper middle income communities (9.7%, based on total expected investment
cost) and middle income communities (41.3%, based on total expected investment
cost) than moderate income communities (49.0%, based on total expected
investment cost).
As of February 28, 1997, ATLANTIC's portfolio consisted of seven upper
middle income communities with a total expected investment cost of $132.8
million, 35 middle income communities with a total expected investment cost of
$564.6 million and 48 moderate income communities with a total expected
investment cost of $669.5 million. ATLANTIC focuses primarily on moderate
income communities, which comprise one of the largest segments of the renter
population. Moderate income communities comprised 51.8% of ATLANTIC's 1996
development starts, based on total budgeted development cost. In 1997,
approximately 83.5% of development starts and approximately 66.5% of
ATLANTIC's total development activities are expected to constitute moderate
income communities, based on total budgeted development cost. The balance of
development starts are expected to consist of middle income communities.
Few other REITs in ATLANTIC's primary target market currently focus on the
moderate income segment. Moreover, ATLANTIC believes that less than 10% of the
1995 and 1996 multifamily starts in ATLANTIC's primary target market cities
constituted moderate income product. Consequently, ATLANTIC believes that the
moderate income segment is a significantly underserved market with limited
competition.
Moderate income residents are typically longer-term residents because they
often lack the financial resources required to purchase single-family homes.
As a result, resident turnover is often lower in moderate income communities
than in upper middle income or middle income communities particularly during
softening market conditions. The total cost of refurbishing and re-leasing a
unit ranges from $700 to $1,500; therefore, reducing resident turnover can
have a material impact on an asset's profitability.
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During the fourth quarter of 1996, certain of ATLANTIC's primary target
market cities experienced a slowing in collections growth principally due to
demand and supply imbalances. During this period, ATLANTIC's moderate income
communities outperformed ATLANTIC's product types as a whole. The table below
demonstrates the performance of ATLANTIC's moderate income communities in the
"same store" portfolio.
<TABLE>
<CAPTION>
COLLECTIONS CHANGE IN
FOURTH QUARTER 1996 GROWTH TURNOVER OCCUPANCY
------------------- ----------- -------- ---------
<S> <C> <C> <C>
Moderate income............................ 4.66% 60.1% 1.0%
All product types.......................... 1.00 65.7 -1.1
<CAPTION>
YEAR ENDED 1996
---------------
<S> <C> <C> <C>
Moderate income............................ 4.02 61.0 0.1
All product types.......................... 2.76 62.6 -0.3
</TABLE>
Due to market fundamentals and the operating characteristics of moderate
income communities, ATLANTIC believes that this category offers better
prospects for long-term cash flow growth.
ATLANTIC's research-driven development strategy is focused on developing
state of the art communities in attractive submarkets that responds to renter
preferences and demographic trends. ATLANTIC believes that developing
communities designed for long-term appeal to one of the largest segments of
the renter population (moderate income households) will allow ATLANTIC to
achieve more consistent rental increases and higher occupancies over the long
term and thereby realize superior cash flow growth. Development, principally
of moderate income communities, will be a critical factor driving ATLANTIC's
long-term growth. By year-end 1997, ATLANTIC anticipates that approximately
44.3% of its total portfolio will consist of communities ATLANTIC has
developed or is in the process of developing and approximately 64.5% of these
development communities will be moderate income product, based on total
expected investment cost. Over an extended period, management believes that
operating results from ATLANTIC's development starts will contribute
significantly to ATLANTIC's cash flow growth.
Development opportunities also permit ATLANTIC to incorporate technologies
and designs aimed at enhancing long-term rental growth and reducing ongoing
maintenance costs. ATLANTIC has had the opportunity to evaluate and refine its
multifamily communities through its history of development. ATLANTIC, unlike a
typical merchant builder, intends to be a long-term owner of the communities
that it develops. Hence, ATLANTIC emphasizes long-term durability by using
materials and designs that minimize ongoing operation and maintenance costs.
OPPORTUNISTIC ACQUISITIONS
It is often advantageous for ATLANTIC to acquire existing multifamily
communities in markets that are expected to experience favorable growth in
rents and income. In many cases, communities can be acquired and redeveloped
at prices well below the cost to build a comparable community in the same
area. The REIT Manager has the capability to thoroughly analyze and evaluate
communities in an efficient manner which, together with ATLANTIC's access to
capital, provides ATLANTIC with a competitive advantage in acquiring
multifamily assets. From its inception on October 26, 1993 to February 28,
1997, ATLANTIC had completed acquisitions with a total expected investment
cost of $979.0 million.
"SAME STORE" GROWTH
Net operating income on a "same store" basis (as adjusted for pre-stabilized
versus stabilized accounting differences) increased 4.88% from 1995 to 1996
for the 34 communities that were fully operational during both periods. The
accounting differences result from capitalizing certain costs during
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the period after acquisition when a community is being repositioned and is
classified as pre-stabilized and expensing those costs once repositioning is
completed and the community is classified as stabilized.
ATLANTIC believes that the underlying long-term conditions of its primary
target market, including its strong job growth, should continue to support
high occupancy levels and allow for consistent increases in rental income. In
addition, operating efficiencies and lower resident turnover resulting from
ATLANTIC's increasing focus on moderate income product are expected to reduce
operating costs and improve profit margins.
PORTFOLIO AND ASSET OPTIMIZATION
ATLANTIC develops and acquires communities with a view to effective long-
term operation and ownership. REIT Management actively reviews ATLANTIC's
asset base. These reviews generate operating and capital plans and, with
guidance from its affiliate, Security Capital Investment Research, help
ATLANTIC to identify submarkets and product types that it believes will
generate above average long-term growth opportunities. In evaluating each
multifamily community owned or being considered for acquisition or
development, the REIT Manager focuses on those components that it believes
provide the greatest opportunity for consistent rental increases and high
occupancies over the long term. Submarket locations and demographics, unit
mix, density and amenities of each community are important contributors to
long-term cash flow growth. Under its asset optimization program, ATLANTIC may
from time to time dispose of assets that no longer meet its long-term
investment objectives and redeploy the proceeds, preferably through tax-
deferred exchanges, into assets with better prospects for cash flow growth.
ATLANTIC's asset optimization strategy is based on the premise that it has a
finite amount of investment capital and that this capital should be deployed
where it can produce maximum cash flow growth. ATLANTIC believes that many of
its existing upper middle income communities will be candidates for exchange
or disposition given the increased competition from this product type being
developed by third parties. Consistent with its current strategy, ATLANTIC
expects to redeploy the proceeds from these dispositions into moderate income
communities with superior growth prospects. During 1996, ATLANTIC disposed of
four operating communities aggregating 1,184 units. A gain was recognized on
each disposition with the total gain aggregating $6.7 million on aggregate
proceeds of $64.2 million. Each disposition has been included in a tax-
deferred exchange.
CONSERVATIVE BALANCE SHEET STRATEGY
ATLANTIC has a conservative balance sheet strategy. Long-term debt as a
percentage of total long-term undepreciated book capitalization was 17.4% at
December 31, 1996 on a historical basis and 16.0% at December 31, 1996 on a
pro forma basis as adjusted to give effect to the Offering and the application
of the proceeds therefrom. In the future, ATLANTIC intends to access the
public equity and debt markets. ATLANTIC's objective is to achieve an
investment-grade debt rating in 1997 and to issue long-term, fixed rate, fully
amortizing unsecured corporate debt, which will limit ATLANTIC's exposure to
floating rate or balloon financing. ATLANTIC's $350 million unsecured line of
credit enables ATLANTIC to take advantage of investment opportunities in its
target market without investing significant funds in short-term investments
between securities offerings. As of April 7, 1997, $289.5 million of
borrowings were outstanding under the line of credit and such outstanding
borrowings are expected to be approximately $299.0 million at the closing of
the Offering. This conservative balance sheet strategy is expected to provide
ATLANTIC with significant incremental debt capacity and allow ATLANTIC to take
advantage of future investment opportunities on a non-dilutive basis,
contributing to ATLANTIC's objective of long-term growth in cash flow.
EMPLOYEES
ATLANTIC currently has no employees. The REIT Manager, whose sole activity
is advising ATLANTIC, manages the day-to-day operations of ATLANTIC. The REIT
Manager and its specialized
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service affiliates have assembled a team of 77 operating professionals,
collectively possessing extensive experience in multifamily real estate. The
majority of these persons are employed directly by and focused entirely on the
services provided by the REIT Manager, with the balance providing centralized
research, capital markets, legal and accounting services. See "The Merger
Transaction".
LEGAL PROCEEDINGS
ATLANTIC is a party to various claims and routine litigation arising in the
ordinary course of its business. ATLANTIC does not believe that the results of
any of such claims and litigation, individually or in the aggregate, will have
a material adverse effect on its business, financial position or results of
operations.
COMPETITION
There are numerous commercial developers, real estate companies and other
owners of real estate that compete with ATLANTIC in seeking land for
development, communities for acquisition and disposition and residents for
communities. All of ATLANTIC's multifamily communities are located in
developed areas that include other multifamily communities. The number of
competitive multifamily communities in a particular area could have a material
adverse effect on ATLANTIC's ability to lease units and on the rents charged.
In addition, other forms of single family and multifamily residential
communities provide housing alternatives to residents and potential residents
of ATLANTIC's multifamily communities.
AMERICANS WITH DISABILITIES ACT
ATLANTIC's communities must comply with Title III of the ADA to the extent
that such communities are "public accommodations" and/or "commercial
facilities" as defined by the ADA. The ADA does not consider multifamily
communities to be public accommodations or commercial facilities, except
portions of such facilities open to the public, such as the leasing office.
Noncompliance could result in imposition of fines or an award of damages to
private litigants. ATLANTIC believes that the mandated portions of its
communities comply with all present requirements under the ADA and applicable
state laws.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner, developer or operator of real estate may be liable
for the costs of removal or remediation of certain hazardous or toxic
substances at, on, under or in its property. The costs of removal or
remediation of such substances could be substantial. Such laws often impose
such liability without regard to whether the owner or operator knew of, or was
responsible for, the release or presence of such hazardous or toxic
substances. The presence of such substances may adversely affect the owner's
ability to sell or rent such real estate or to borrow using such real estate
as collateral. Persons who arrange for the disposal or treatment of hazardous
or toxic substances also may be liable for the costs of removal or remediation
of such substances at the disposal or treatment facility, whether or not such
facility is owned or operated by such person. Certain environmental laws
impose liability for the release of asbestos-containing materials into the
air, pursuant to which third parties may seek recovery from owners or
operators of real properties for personal injuries associated with such
materials, and prescribe specific methods for the removal and disposal of such
materials, which may result in increased costs in connection with renovations
at ATLANTIC's communities.
ATLANTIC has not been notified by any governmental authority of any non-
compliance, liability or other claim in connection with any of its communities
owned or being acquired at February 28, 1997,
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and ATLANTIC is not aware of any environmental condition with respect to any
of its communities that is likely to be material. ATLANTIC has subjected each
of its communities to a Phase I environmental assessment (which does not
involve invasive procedures such as soil sampling or ground water analysis) by
independent consultants. While some of these assessments have led to further
investigation and sampling, none of the environmental assessments has
revealed, nor is ATLANTIC aware of, any environmental liability (including
asbestos-related liability) that the REIT Manager believes would have a
material adverse effect on ATLANTIC's business, financial condition or results
of operations. No assurance can be given, however, that these assessments and
investigations reveal all potential environmental liabilities, that no prior
owner or operator created any material environmental condition not known to
ATLANTIC or the independent consultants or that future uses and conditions
(including, without limitation, resident actions or changes in applicable
environmental laws and regulations) will not result in unreimbursed costs
relating to environmental liabilities. See "Risk Factors--Regulatory
Compliance--Possible Liability Relating to Environmental Laws".
INSURANCE COVERAGE
ATLANTIC carries comprehensive general liability coverage on its owned
communities, with limits of liability customary within the industry, to insure
against liability claims and related defense costs. Similarly, ATLANTIC is
insured against the risk of direct physical damage in amounts necessary to
reimburse ATLANTIC on a replacement-cost basis for costs incurred to repair or
rebuild each community, including loss of rental income during the
reconstruction period (up to a six-month period).
REIT MANAGEMENT
GENERAL
The REIT Manager provides ATLANTIC with strategic and day-to-day management,
research, investment analysis, acquisition, development, marketing,
disposition of assets, asset management, due diligence, capital markets, and
legal and accounting services, all of which are included in the REIT
Management fee. ATLANTIC currently has no employees. Hence, ATLANTIC depends
on the quality of the management provided by the REIT Manager. ATLANTIC
believes that its relationship with the REIT Manager provides ATLANTIC with
access to high quality and depth of management personnel and resources,
savings from a dedicated capital markets group, and access to centralized
research, accounting and legal support. As of February 28, 1997, 77 operating
professionals were employed by the REIT Manager and its specialized service
affiliates. The REIT Manager also provides office and other facilities
supporting ATLANTIC's needs. The REIT Manager's address is the same as
ATLANTIC's. The owner of the REIT Manager, Security Capital Group, currently
owns 56.9% of ATLANTIC's outstanding Shares (51.4% after the Offering). See
"The Merger Transaction" for a description of an agreement that ATLANTIC has
entered into with Security Capital Group to merge the REIT Manager and SCG
Realty Services into a newly formed subsidiary of ATLANTIC in exchange for
Shares.
The owner of the REIT Manager has a substantial shareholder interest in
ATLANTIC, creating alignment of interest with ATLANTIC's shareholders.
Furthermore, the REIT Manager provides all its services for one fee, and an
affiliate provides property management services at market rates in a
competitive environment. The REIT Manager does not receive additional fees for
investment banking, financing, asset sales or similar services. See "--REIT
Manager Compensation".
The REIT Manager has organized itself such that each operating professional
specializes in a particular discipline (such as research, marketing,
development, acquisition, due diligence, asset management, capital markets or
financial operations) rather than being responsible for all functions on a
project-by-project basis. Local investments are approved by the REIT Manager's
investment committee, using uniform criteria, prior to being submitted to
ATLANTIC's investment committee.
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Regional operating professionals focus on specific target markets to ensure
attention to resident services.
ATLANTIC believes that the quality of management should be assessed in light
of the following factors:
MANAGEMENT DEPTH/SUCCESSION
ATLANTIC believes that management should have several senior executives with
the leadership, operational, investment and financial skills and experience to
oversee the entire operations of the REIT. ATLANTIC believes that several of
its senior officers could serve as the principal executive officer and
continue ATLANTIC's performance. See "--Directors and Officers of ATLANTIC,
the REIT Manager and Relevant Affiliates" below.
STRATEGIC VISION
ATLANTIC believes that management should have the strategic vision to
determine an investment focus that provides favorable initial yields and long-
term growth prospects. The REIT Manager has demonstrated its strategic vision
by focusing ATLANTIC on multifamily communities in the southeastern United
States, where demographic and supply factors have permitted high occupancies
at increasing rents.
ATLANTIC focuses primarily on moderate income communities, which comprise
one of the largest segments of the renter population. Few other REITs in
ATLANTIC's primary target market currently focus on the moderate income
segment. Consequently, ATLANTIC believes that the moderate income segment is a
significantly underserved market with limited competition.
RESEARCH CAPABILITY
ATLANTIC believes that management should have the means for researching
markets to determine appropriate investment opportunities. ATLANTIC divides
its target market cities into numerous submarkets for analysis purposes. The
REIT Manager and its affiliates have several persons who devote substantial
time to research, on a submarket-by-submarket basis, and are closely
supervised by senior officers of the REIT Manager.
INVESTMENT COMMITTEE PROCESS
ATLANTIC believes that investment committees should provide discipline and
guidance to the investment activities of the REIT in order to achieve its
investment goals. The four members of the REIT Manager's investment committee
have a combined 95 years experience in the real estate industry. See "--
Directors and Officers of ATLANTIC, the REIT Manager and Relevant Affiliates"
below. The investment committee receives detailed written analyses and
research, in a standardized format, from the REIT Manager's personnel and
evaluates all prospective investments pursuant to uniform underwriting
criteria prior to submission of investment recommendations to the investment
committee of the Board. The quality of the REIT Manager's investment committee
process is demonstrated by ATLANTIC's ability to achieve its investment goals
and generally realize its projected initial returns and growth from
multifamily investments.
DEVELOPMENT/REDEVELOPMENT AND ACQUISITION CAPABILITY
ATLANTIC believes that by internally developing projects and redeveloping
well-located operating communities, management can capture for the REIT the
value that normally escapes through sales premiums paid to successful
developers. The REIT Manager's personnel have substantial
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development and redevelopment experience, as described in "--Directors and
Officers of ATLANTIC, the REIT Manager and Relevant Affiliates" below. The
REIT Manager has 17 full-time professionals committed to development and
acquisition activities. The REIT Manager has arranged for over $979.0 million
of successful acquisitions for ATLANTIC. As of February 28, 1997, the REIT
Manager was developing 6,355 multifamily units for ATLANTIC with a total
budgeted development cost of $397.0 million. Additionally, as of February 28,
1997, ATLANTIC had land in planning and under control for the development of
1,808 units with a total budgeted development cost of $111.2 million. REIT
Management has engaged in substantial development on behalf of ATLANTIC at
attractive yields that have exceeded projections and ATLANTIC believes that
development will contribute to ATLANTIC's objective of long-term growth in
cash flow. See "Business--ATLANTIC's Operating System".
DISPOSITION CAPABILITY
The ability to identify and effectively complete the cost-effective
disposition of targeted communities is essential to the successful execution
of ATLANTIC's asset optimization strategy. During 1995 and 1996, ATLANTIC
disposed of 1,780 units, realizing an aggregate gain of $6.7 million on
aggregate proceeds of $95.1 million, which were redeployed into strategic
acquisitions and developments. Marketing efforts and related costs and
negotiation were conducted primarily by the REIT Manager and, therefore,
broker fees were minimal.
DUE DILIGENCE PROCESS
ATLANTIC believes that management should have experienced senior personnel
dedicated to performing intelligent and thorough due diligence. The REIT
Manager has four full time due diligence professionals and has developed
uniform systems and procedures for due diligence, as described under
"Business--ATLANTIC's Operating System--Due Diligence and Investment
Analysis". The REIT Manager's due diligence personnel have screened and
selected a large volume of investments.
OPERATING CAPABILITY
ATLANTIC believes that management can substantially improve funds from
operations by actively and effectively managing assets. As described under
"Business--ATLANTIC's Operating System", the REIT Manager and its affiliates
have devoted substantial personnel and financial resources to control and
effectively manage ATLANTIC's multifamily portfolio.
CAPITAL MARKETS CAPABILITY
ATLANTIC believes that management must be able effectively to raise equity
and debt capital in order for the REIT to achieve superior growth through
investment. As described under "Business--ATLANTIC's Operating System--Capital
Markets/Finance/Legal", REIT Management has successfully arranged funding for
ATLANTIC's investment program.
COMMUNICATIONS/SHAREHOLDER RELATIONS CAPABILITY
ATLANTIC believes that a REIT's success in capital markets and investment
activities can be enhanced by management's ability to effectively communicate
the REIT's strategy and performance to investors, sellers of property and the
financial media. The REIT Manager provides at its expense full time personnel
who prepare informational materials for and conduct periodic meetings with the
investment community and analysts.
ATLANTIC believes that successfully combining the foregoing attributes
significantly enhances a REIT's ability to increase cash flow and increase the
market valuation of the REIT's portfolio.
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REIT MANAGER COMPENSATION
The REIT Management Agreement requires ATLANTIC to pay an annual fee of 16%
of cash flow as defined in the REIT Management Agreement, payable monthly.
Cash flow is calculated by reference to ATLANTIC's cash flow from operations
plus (i) fees paid to the REIT Manager, (ii) extraordinary expenses incurred
at the request of the independent Directors of ATLANTIC (of which there have
been none since inception) and (iii) 33% of any interest paid by ATLANTIC on
convertible subordinated debentures (of which there have been none since
inception); and after deducting (i) regularly scheduled principal payments
(excluding prepayments or balloon payments) for debt with commercially
reasonable amortization schedules, (ii) assumed principal and interest
payments on senior unsecured debt treated as having regularly scheduled
principal and interest payments like a 20-year level-payment, fully amortizing
mortgage (of which there have been none since inception) and (iii)
distributions actually paid with respect to any non-convertible preferred
stock (of which there have been none since inception). Cash flow does not
include (i) realized gains or losses from dispositions of investments, (ii)
interest income from cash equivalent investments and the Homestead convertible
mortgage notes and dividend and interest income from Atlantic Development
Services, (iii) provisions for possible losses on investments and (iv)
extraordinary items. The REIT Manager also receives a fee of 0.20% per year on
the average daily balance of cash equivalent investments. The REIT Management
fee aggregated $10.4 million, $6.9 million and $3.7 million for 1996, 1995 and
1994, respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--REIT
Management Agreement".
DIRECTORS AND OFFICERS OF ATLANTIC, THE REIT MANAGER AND RELEVANT AFFILIATES
DIRECTORS OF ATLANTIC
Members of the REIT Manager's Investment Committee are designated by an
asterisk.
C. RONALD BLANKENSHIP--47--Advisory Director of ATLANTIC since September
1996 and Director from April 1996 to September 1996; Chairman of PTR and PTR's
REIT manager and Managing Director of Security Capital Group since March 1991;
from June 1988 to March 1991, Regional Partner, Trammell Crow Residential,
Chicago, Illinois (multifamily real estate development and property
management); prior thereto, Executive Vice President and Chief Financial
Officer, The Mischer Corporation, Houston, Texas (multibusiness holding
company with investments primarily in real estate). While with Trammell Crow
Residential, Mr. Blankenship was on the Management Board for Trammell Crow
Residential Services, a property management company that managed approximately
90,000 multifamily units nationwide, and was Chief Executive Officer of
Trammell Crow Residential Services-North, which managed 10,000 multifamily
units in the Midwest and Northeast. In his various positions prior to his
affiliation with PTR's REIT manager, Mr. Blankenship supervised the
development of approximately 9,300 multifamily units. Mr. Blankenship
supervises the overall operations of PTR and PTR's REIT manager.
MANUEL A. GARCIA III--53--Director of ATLANTIC since December 1995; Chief
Executive Officer of Davgar Restaurants, Inc. since May 1969 where he is the
owner/operator of ten Burger King Restaurants in central Florida, five Pebbles
Restaurants, Harvey's Bistro and Manuel's on the 28th Restaurant in Orlando,
Florida; Director of Sprint/United Telephone, The Foundation for Orange County
Public Schools, Florida State University Seminole Boosters' Association, a
Director and Member of the Executive Committee of the Florida Citrus Sports
Association and National Director of Cities in Schools. Mr. Garcia is also on
the Board of the National Conference of Christians and Jews and an Honorary
Director of the Boys' Clubs and Boy Scouts of Central Florida. In addition,
Mr. Garcia is a former member of former President Bush's Drug Advisory
Council.
NED S. HOLMES--52--Director of ATLANTIC since May 1994; President and Chief
Executive Officer of Laing since May 1990; member of the Board of Directors of
Pall Mall Properties, Ltd., United
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Kingdom, and Chairman and President of Parkway Investment/Texas Inc., a
Houston-based real estate investment and development company which specializes
in residential (apartment and townhouse), commercial (office and warehouse)
and subdivision projects. Mr. Holmes is also Senior Chairman of the Board of
Heritage Bank and Chairman of the Port Commission of the Port of Houston
Authority.
*CONSTANCE B. MOORE--41--Co-Chairman, Chief Operating Officer and Director
of ATLANTIC and the REIT Manager since January 1996, where she has overall
responsibility for operations of ATLANTIC; from May 1994 to December 1995,
Managing Director of PTR, Director and Managing Director of PTR's REIT
manager; Senior Vice President of Security Capital Group from March 1993 to
April 1994; from January 1990 to December 1992, President and Director of
Kingswood Realty Advisors, Inc., investment advisor to ICM Property Investors,
a NYSE-listed REIT, and from March 1991 to December 1992, President and
Director of ICM Property Investors; from April 1989 to December 1989,
consultant to Bedford Properties, a real estate development and management
firm where Ms. Moore was responsible for acquiring a controlling interest in
ICM Property Investors and Kingswood for Bedford; from January 1983 to
November 1988, Senior Vice President and Director of Consolidated Capital
Equities Corporation, where she was in charge of portfolio and asset
management for Consolidated Capital's $3.0 billion diversified debt and equity
portfolio.
*JAMES C. POTTS--50--Co-Chairman and Chief Investment Officer of ATLANTIC
and the REIT Manager since January 1996 and Director of ATLANTIC and the REIT
Manager since October 1993, where he has overall responsibility for
investments of ATLANTIC; Chairman of ATLANTIC and the REIT Manager from May
1994 to December 1995; from December 1992 to April 1994, Managing Director of
PTR's REIT manager, where he supervised the asset management of all of PTR's
multifamily communities and oversaw the relationship of PTR's REIT manager
with SCG Realty Services Incorporated, which provides on-site management for
these communities; from April 1984 to December 1992, Chief Executive Officer
of four regional multifamily management companies of Trammell Crow Residential
Services, which collectively managed approximately 52,000 units and employed
1,600 associates. Under Mr. Potts' direction, Trammell Crow Residential
Services supervised the lease-up of over 25,000 units, the assumption of
management of over 15,000 acquired units, and the increase in its third-party
asset management business from 14,000 to 30,000 units. Mr. Potts was also on
the Management Board of Trammell Crow Residential Services (managing 90,000
units nationwide).
JOHN M. RICHMAN--69--Director of ATLANTIC since September 1996; Counsel to
the law firm of Wachtell, Lipton, Rosen & Katz since January 1, 1990. Mr.
Richman is a member of the American, Illinois and New York Bar Associations.
He was Chairman and Chief Executive Officer of Kraft, Inc. from 1979 to 1989,
prior to which he was Senior Vice President--Administration and General
Counsel of that company. He is currently a Director of BankAmerica Corporation
and Bank of America National Trust and Savings Association, USX Corporation,
the Evanston Hospital Corporation and R. R. Donnelley and Sons Company. He is
also a Trustee of the Chicago Symphony Orchestra, Northwestern University and
The Johnson Foundation. In addition, Mr. Richman is a Director of The Chicago
Council on Foreign Relations and Lyric Opera of Chicago and a member of The
Business Council, The Commercial Club of Chicago and the Economic Club of
Chicago.
SENIOR OFFICERS OF ATLANTIC, THE REIT MANAGER AND RELEVANT AFFILIATES
CONSTANCE B. MOORE--See "--Directors of ATLANTIC" above.
JAMES C. POTTS--See "--Directors of ATLANTIC" above.
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*J. LINDSAY FREEMAN--51--Senior Vice President of ATLANTIC and the REIT
Manager since May 1994 and Director of the REIT Manager since March 1995,
responsible for operations; from June 1980 to March 1994, Senior Vice
President and Operating Partner of Lincoln Property Company in Atlanta,
Georgia, where he was responsible for acquisitions, financing, construction
and management of multifamily communities within the Atlantic region and
oversaw operations of 16,000 multifamily units.
JEFFREY A. KLOPF--48--Senior Vice President and Secretary of ATLANTIC, the
REIT Manager and Security Capital Group since January 1996, where he provides
securities offerings and corporate acquisition services and oversees the
provisions of legal services for affiliates of Security Capital Group; from
January 1988 to December 1995, partner of Mayer, Brown & Platt where he
practiced corporate and securities law.
*BRADLEY C. MILLER--49--Senior Vice President of ATLANTIC and the REIT
Manager since June 1996 and Director of the REIT Manager since February 1997,
responsible for investments; from October 1979 to May 1996, Senior Vice
President and Operating Partner of Lincoln Property Company in Tampa, Florida,
where he was responsible for acquisitions, financing, construction and
management of multifamily communities within the Atlantic region and oversaw
the development of over 6,500 new multifamily units and operations of 11,000
multifamily units.
WILLIAM KELL--40--Vice President and Controller of ATLANTIC and the REIT
Manager since January 1996, where he supervises accounting and financial
reporting for ATLANTIC; from June 1991 to December 1995, Vice President and
Controller of PTR, where he had overall responsibility for multifamily
accounting and financial reporting; from 1987 to 1991, Vice President and
Treasurer, Bohannon Development Corporation, El Paso, Texas (multifamily
development); prior thereto, Manager with KPMG Peat Marwick in its El Paso,
Texas office.
OTHER OFFICERS
STEVEN A. ABNEY--41--Vice President of ATLANTIC and the REIT Manager since
March 1997 where he has been responsible for property accounting and reporting
since April 1996; from August 1994 to March 1996, Division Controller for
Lincoln Property Company in Dallas, Texas, where he was responsible for
financial reporting activities for all Dallas/Ft. Worth area commercial
properties; from July 1989 to August 1994, Director of Finance and Accounting
for Bramalea USA Retail Group, a shopping center developer/manager in Dallas,
Texas.
ARIEL AMIR--37--Vice President of Security Capital Group since June 1994;
from September 1985 to April 1994, an attorney with the law firm of Weil,
Gotshal & Manges, New York, New York, where he practiced securities and
corporate law. Mr. Amir provides securities offerings and corporate
acquisition services to ATLANTIC and affiliated entities.
RAYMOND D. BARROWS--35--Vice President of ATLANTIC and the REIT Manager
since May 1994, where he is a member of the development group; prior thereto,
he supervised the due diligence group; from January 1994 to December 1995, a
member of ATLANTIC's asset management group and prior thereto, a member of
PTR's asset management group; from May 1990 to August 1993, Portfolio Manager
with The First National Bank of Chicago where he was responsible for
underwriting and structuring transactions for both project and corporate
facilities.
LESLIE L. BIVINS--43--Vice President of ATLANTIC and the REIT Manager since
June 1996, where she is responsible for asset and property management for the
States of Georgia and Alabama and with SCG Realty Services since May 1994;
from January 1992 to May 1994, Senior Regional Manager of Laing Management
Company in Atlanta, Georgia, where she was responsible for management of over
2,000 units throughout the southeastern United States; from November 1987
through December 1991, District Manager of Trammell Crow Residential, Atlanta,
Georgia, where she supervised the management of approximately 2,000
multifamily units in the Atlanta market.
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DARCY B. BORIS--34--Vice President of Security Capital Investment Research
since June 1995, and an associate from December 1994 to June 1995, where she
conducts strategic market analysis for ATLANTIC and affiliated companies;
Director of PTR's REIT manager since January 1997; from August 1993 to
November 1994, Ms. Boris worked for Capital Markets Group; in May 1993, she
obtained her M.B.A. from the University of California at Berkeley; from
January 1987 to September 1991, she was with Marcus & Millichap Incorporated,
as Project Manager for Summerhill Development Company, the multifamily
development subsidiary of Marcus & Millichap Incorporated, where she managed
the development of multifamily housing, and prior thereto, she was an analyst
for its property investment subsidiary.
NEIL T. BROWN--40--Vice President of ATLANTIC and the REIT Manager since
April 1996, where he is responsible for directing the development of new
multifamily communities in the mid-Atlantic region; from July 1992 to December
1995, Regional Vice President/Regional Partner of JPI Development Partners,
Inc. where he was responsible for all development activity in Florida; prior
thereto, Partner of Trammell Crow Residential where he was responsible for
development of residential projects in Dade and Broward Counties, Florida.
MARK J. CHAPMAN--39--Vice President of Security Capital Investment Research
since November 1995, where he is the director of the group and conducts
strategic market analysis for ATLANTIC and affiliated companies; from March
1995 to November 1995, Vice President of PTR, with asset management
responsibilities in five major markets; from November 1994 to March 1995, Vice
President of Security Capital Pacific Incorporated; from July 1989 to November
1994, Vice President at Copley Real Estate Advisors, Inc., where he directed
asset management for Copley assets located from Connecticut to Virginia,
valued in excess of $1.5 billion; prior thereto, Director of Asset Management
for Liberty Real Estate, with responsibility for assets east of the
Mississippi River, including multifamily, office and retail properties.
ANDREW W. COLQUITT--30--Vice President of ATLANTIC and the REIT Manager
since December 1996, where he is responsible for land acquisition for all
markets north of Florida; prior thereto, he was a member of the Development
Group; from March 1994 to October 1995, Development Associate for Trammell
Crow Residential in Portland, Oregon, where he was responsible for acquisition
and development management for the Portland development portfolio including
1,800 multifamily units; from June 1993 to February 1994, Acquisitions Analyst
for Prudential Real Estate Investors in San Francisco, with emphasis on
multifamily and office acquisitions; in May 1994, he obtained his M.B.A. from
the University of California at Berkeley; from June 1987 to June 1992, Cost
Engineer and Project Engineer for Holder Construction Company in Atlanta,
Georgia, with emphasis on project management, estimating and scheduling.
JOSEPH J. DOMINGUEZ--37--Vice President of ATLANTIC and the REIT Manager
since April 1996, where he is a member of the development group; prior
thereto, he was an associate in the development group; from November 1984 to
August 1995, Vice President of Operations for The Casden Company, where he had
overall responsibility for the start-up and operations of a general
contracting subsidiary; prior thereto, Project Manager with Pacific Southwest
Construction Company where he oversaw the construction of various residential
projects.
KATHY B. FARR--42--Vice President of ATLANTIC and the REIT Manager since
June 1995, where she is responsible for multifamily dispositions; from January
1994 to April 1995, Vice President of Corporate Finance with Irvine Apartment
Communities, where she was responsible for all aspects of financing, including
the company's working capital line of credit and construction financings for
all new development activity; from 1984 to 1993 with the Irvine Company, most
recently as Senior Director-Project Finance, where she was responsible for
negotiating and closing construction and permanent financings on residential
and commercial properties. Ms. Farr is also a Vice President of PTR and PTR's
REIT manager where she is responsible for multifamily dispositions.
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JOHN H. GARDNER, JR.--43--Senior Vice President of ATLANTIC and the REIT
Manager since September 1994, where he is responsible for overall multifamily
dispositions; Director of PTR's REIT manager since February 1995; Senior Vice
President of PTR and its REIT manager since September 1994, where he has
overall responsibility for multifamily dispositions; from December 1984 to
September 1994, Managing Director and Principal of Copley Real Estate Advisors
in Boston, where he had overall responsibility for the portfolio management
function for eight accounts valued at $7.5 billion.
RICHARD L. GLEICHAUF--45--Vice President of ATLANTIC and the REIT Manager
since March 1997 where he has been responsible for financial planning and
analysis since April 1996; from 1977 to 1996, manager with various El Paso
Energy Corporation subsidiaries in El Paso, Texas and Paris, France where he
was responsible for financial accounting, budgeting and forecasting, and
auditing; prior thereto with KPMG Peat Marwick in its El Paso, Texas office.
W. SCOTT HARTMAN--32--Vice President of ATLANTIC and the REIT Manager since
September 1996, where he oversees financing activities, coordinates external
financial reporting and supervises acquisition due diligence compliance
activities; prior thereto, he was in the Management Development Program with
Security Capital Group working in six-month rotational assignments with
Managing Directors of Security Capital Group and its affiliates; from May 1993
to May 1994, Research Analyst with AMB Institutional Realty Advisors; in May
1994, Mr. Hartman obtained his J.D. from The University of California,
Hastings College of the Law and his M.B.A. from The University of California,
Haas School of Business.
GEORGE E. KELLY--44--Vice President of ATLANTIC and the REIT Manager since
December 1996, where he is responsible for planning, coordinating and
executing the production of development of multifamily communities; from May
1995 to December 1996, Development Manager of ATLANTIC; from February 1995 to
April 1995, Real Estate and Construction Management Consultant to property
management companies; from August 1992 to April 1995, Assistant Vice President
of The Travelers Realty Investment Company in Atlanta, Georgia.
MARY CAPERTON LESTER--42--Vice President of ATLANTIC and the REIT Manager
since July 1995, where she is responsible for asset and property management in
the Mid-Atlantic region (except Georgia and Alabama) and with SCG Realty
Services since June 1994; prior thereto, she was a member of the asset
management group; from May 1993 to May 1994, she was with Summit Management
Company, where she specialized in new business development; from April 1984 to
May 1993, with Trammell Crow Residential Services, most recently as a Vice
President, where she was responsible for property operations, marketing and
new business development.
JEFFREY G. MEGRUE--35--Vice President of ATLANTIC and the REIT Manager since
July 1995, where he is a member of the development group; prior thereto, he
was an associate in the development group; from March 1993 to May 1994, he was
a member of the acquisition group of PTR; from June 1988 to February 1993,
Vice President of Trammell Crow Residential Services North; prior thereto,
Development Associate for the New Jersey/Pennsylvania division of Trammell
Crow Residential.
GLENN T. RAND--36--Vice President of ATLANTIC and of the REIT Manager since
June 1996, where he is responsible for asset and property management for the
State of Florida, and with SCG Realty Services since May 1995; from August
1987 to April 1995, Vice President of Trammell Crow Residential and Avalon
Properties, where he was responsible for operations and third party management
solicitation in southern Florida and the northeastern United States.
JAMES C. ROOT--41--Vice President of ATLANTIC and the REIT Manager since
December 1996, where he is responsible for major capital expenditures; from
February 1994 to December 1996,
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Construction Services Manager, where he was responsible for capital budgeting,
major repairs and renovations of over 13,000 units located throughout the
Southeast; from February 1993 to February 1994, Construction Manager and
Consultant in Chicago, Illinois, where he evaluated potential acquisitions for
Republic Management, a Houston-based, nationwide property management company;
from June 1992 to February 1993, Construction Services Director with Genmar
Realty Group, Inc. in Chicago, where he established the Construction
Department responsible for capital items for a nationwide portfolio of
communities.
ANN L. SCHUMACHER--38--Vice President of ATLANTIC and the REIT Manager since
July 1995 and a member of the accounting group since January 1994, where she
is responsible for accounting and financial reporting; from September 1988 to
October 1993, she was with Trammell Crow Company, most recently as Regional
Controller, where she managed the accounting department for the company's 26
million-square-foot industrial portfolio in Southern California and Arizona;
prior thereto, Senior Accountant for Price Waterhouse.
L. DOUGLAS SNIDER--43--Vice President of ATLANTIC and the REIT Manager since
July 1995, where he is responsible for directing the development of new
multifamily communities in the South Atlantic region; prior thereto, he was an
associate in the development group; from July 1993 to March 1995, Vice
President of Operations with American Constructors, where he was responsible
for all design/build activities; from June 1990 to July 1993, Vice President
of Robert L. Mayer Corporation, where he was responsible for residential and
commercial development activities.
C. MELVIN WHITE--57--Vice President of ATLANTIC and the REIT Manager since
April 1996, where he has been a member of the development group since August
1995; from September 1991 to August 1995, Founder/Partner of Sherrill and
Associates, an interior specialty contracting firm; from 1985 to 1991,
Construction Manager of Laing where he was responsible for construction of
garden apartments, personal care retirement facilities and mid-rise office
space.
SHAREHOLDER RELATIONS AND CAPITAL MARKETS
The following persons provide shareholder relations and capital markets
services to ATLANTIC:
K. SCOTT CANON--35--Vice President of Capital Markets Group since March 1997
and from August 1993 to January 1996, President of Capital Markets Group from
January 1996 to March 1997 and a member of Capital Markets Group since March
1992, where he participates in capital markets and institutional investor
relations; from September 1991 to March 1992, a personal account director for
Chase Manhattan Investment Services; from August 1987 to September 1991, a
member of private client services for Goldman, Sachs & Co. Mr. Canon is
registered with the National Association of Securities Dealers, Inc.
ROBERT H. FIPPINGER--53--Vice President of Capital Markets Group since June
1995 and with Security Capital Group since October 1994, where he directs
corporate communications services for affiliates of Security Capital Group;
from November 1991 to October 1994, with Grubb & Ellis, where he represented
corporate clients and provided tenant advisory services; from October 1988 to
January 1991, Executive Director of Techmart in Santa Clara, California; prior
thereto, Principal of Affiliated Capital Corp., a real estate development
company.
GERARD DE GUNZBURG--49--Senior Vice President of Capital Markets Group in
its New York office since January 1997 and Vice President from January 1993 to
December 1996, where he provides capital markets services for affiliates of
Security Capital Group; from June 1988 to December 1992, a consultant to
American and European companies; prior thereto, Director and Partner of
Lincoln Property Company, Europe, where he arranged real estate financing from
1976 to 1988. Mr. de Gunzburg is registered with the National Association of
Securities Dealers, Inc.
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ALISON C. HEFELE--37--Vice President of Capital Markets Group since February
1994, where she provides capital markets services for affiliates of Security
Capital Group; from January 1990 to February 1994, Vice President with
Prudential Real Estate Investors (strategic planning and business development
for institutional real estate investment management services); from September
1985 to January 1990, a management consultant with McKinsey & Company; prior
thereto, a financial analyst with Morgan Stanley Realty Inc. Ms. Hefele is
registered with the National Association of Securities Dealers, Inc.
GARRET C. HOUSE--32--Vice President of Capital Markets Group since September
1996, where he provides capital markets services for affiliates of Security
Capital Group; from May 1994 to August 1996, he assisted with financing
activities for affiliates of Security Capital Group, and prior thereto, he was
a member of the Management Development Program from May 1993 to May 1994; in
May 1993, he obtained his M.B.A. from Harvard Graduate School of Business
Administration; from July 1989 to July 1991, Project Manager for Nansay
Corporation in Los Angeles, California; from July 1987 to July 1989, Analyst
with Merrill Lynch Capital Markets in New York. Mr. House is registered with
the National Association of Securities Dealers, Inc.
JAMES H. POLK, III--54--Trustee of PTR since 1976; President of Capital
Markets Group since March 1997 and Managing Director of Capital Markets Group
from August 1992 to March 1997, where he provides capital markets services for
affiliates of Security Capital Group. Mr. Polk has been affiliated with PTR's
REIT manager since March 1991; prior thereto, he was President and Chief
Executive Officer of PTR for sixteen years. He is registered with the National
Association of Securities Dealers, Inc. and is a past President and Trustee of
NAREIT.
DONALD E. SUTER--40--Senior Vice President of Capital Markets Group since
September 1996, where he provides capital markets services for affiliates of
Security Capital Group; from October 1995 to April 1996, President and Chief
Operating Officer for Cullinan Properties Limited in Peoria, Illinois: from
July 1984 to October 1995, Mr. Suter was with LaSalle Partners in Chicago,
Illinois, where his last position held was Senior Vice President, Corporate
Finance Group. Mr. Suter is registered with the National Association of
Securities Dealers, Inc.
CLASSIFICATION OF DIRECTORS
Pursuant to the terms of ATLANTIC's Charter, the Directors are divided into
three classes. One class (consisting of Mr. Potts) will hold office for a term
expiring at the annual meeting of shareholders to be held in 1997, a second
class (consisting of Messrs. Garcia and Holmes) will hold office for a term
expiring at the annual meeting of shareholders to be held in 1998 and a third
class (consisting of Ms. Moore and Mr. Richman) will hold office for a term
expiring at the annual meeting of shareholders to be held in 1999. Each
Director will hold office for the term to which he or she is elected and until
his or her successor is duly elected and qualifies. At each annual meeting of
shareholders of ATLANTIC, the successors to the class of Directors whose terms
expire at such meeting will be elected to hold office for a term expiring at
the annual meeting of shareholders held in the third year following the year
of their election. See "Certain Provisions of Maryland Law and of ATLANTIC's
Charter and Bylaws". Security Capital Group has a right to nominate up to
three Directors, depending upon its level of ownership of Shares, as described
under "Certain Relationships and Transactions--Security Capital Group Investor
Agreement". Ms. Moore and Mr. Potts are deemed to be the nominees of Security
Capital Group.
COMMITTEES OF THE BOARD
The Board has established an Audit Committee consisting of Messrs. Garcia
and Holmes. The Audit Committee is responsible for making recommendations
concerning the engagement of independent public accountants, reviewing the
plans and results of the audit engagement with the
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independent public accountants, approving professional services provided by
the independent public accountants, reviewing the independence of the
independent public accountants, considering the range of audit and non-audit
fees and reviewing the adequacy of ATLANTIC's internal accounting controls.
The Board has established an Investment Committee consisting of Messrs.
Holmes and Potts. The Investment Committee is responsible for reviewing and
approving all asset acquisitions and other investment decisions between
meetings of the full Board. Any decisions made by the Investment Committee are
reported to the full Board at its next quarterly meeting. The Investment
Committee receives recommendations from the REIT Manager's investment
committee.
COMPENSATION OF DIRECTORS
ATLANTIC pays an annual retainer of $14,000 to Directors who are not
officers or employees of ATLANTIC, the REIT Manager or its affiliates. These
fees are currently paid to Directors in cash (quarterly on each meeting date)
and will be paid to the Directors in Shares (quarterly on each dividend
payment date) based on the then-current market price of the Shares following
the adoption by ATLANTIC of a dividend reinvestment and share purchase plan as
described below. Such Directors also receive $1,000 for each meeting attended
(other than telephonic meetings), which is also paid in cash. Non-employee
chairpersons of Board committees (other than the Investment Committee) receive
an additional annual retainer of $1,000 payable in cash and non-employee
members of the Investment Committee receive an additional annual retainer of
$4,000 payable in cash. In the event that ATLANTIC adopts a dividend
reinvestment and share purchase plan, both the retainer and fees will be paid
directly into such plan. Officers of ATLANTIC, the REIT Manager or its
affiliates who are Directors are not paid any Director fees.
In addition, pursuant to the Outside Directors Plan, each Outside Director,
as defined below, will be entitled to receive, on the date of each annual
meeting of shareholders, an option to purchase 1,000 Shares at a price per
Share equal to the closing price of one Share on the NYSE on such annual
meeting date. See "--Outside Directors Plan".
Directors are reimbursed for any out-of-town travel expenses incurred in
connection with attendance at Board meetings. Ms. Moore and Mr. Potts are not
separately compensated for serving as Directors.
OUTSIDE DIRECTORS PLAN
On March 12, 1996, the Board approved the Security Capital Atlantic
Incorporated Share Option Plan for Outside Directors (the "Outside Directors
Plan"). The Outside Directors Plan is incorporated by reference as an exhibit
to the Registration Statement of which this Prospectus forms a part and the
following summary of the material terms of the Outside Directors Plan is
qualified in its entirety by reference to the actual terms thereof.
The purpose of the Outside Directors Plan is to enable the Directors of
ATLANTIC who are not employees or officers of ATLANTIC or Security Capital
Group or any of its affiliates ("Outside Directors") to increase their
ownership of ATLANTIC and thereby further the identity of their interests with
those of ATLANTIC's other shareholders.
To achieve the foregoing objective, the Outside Directors Plan provides for
grants of options ("Options") to purchase Shares. The Secretary of ATLANTIC
(the "Administrator") administers the Outside Directors Plan with a view to
ATLANTIC's best interests and the Outside Directors Plan's objectives. The
Administrator has authority to adopt administrative guidelines, rules and
regulations relating to the Outside Directors Plan and to make all
determinations necessary or advisable for the implementation and
administration of the Outside Directors Plan.
53
<PAGE>
The number of Shares reserved for issuance upon exercise of Options granted
under the Outside Directors Plan is 100,000. Shares that are forfeited will
again become available for awards under the Outside Directors Plan.
In the event of changes in the outstanding Shares by reason of any increase
or decrease in the number of issued Shares resulting from a subdivision or
consolidation of Shares or the payment of a dividend in Shares, or any other
increase or decrease in the number of Shares, or merger or consolidation, or
other similar event, the Administrator shall make appropriate adjustments to
the aggregate number of Shares available under the Outside Directors Plan.
On the date of each annual meeting of shareholders of ATLANTIC for the years
1997 through and including 2006, each Outside Director serving on such date
(after the election of Directors in the meeting) will be granted an Option to
purchase 1,000 Shares at an exercise price equal to the closing price of the
Shares on the NYSE on such date. Also, each Outside Director serving at the
time of ATLANTIC's initial public offering was granted an Option to purchase
1,000 Shares at the initial public offering price of $21.25 per Share, after
adjusting for the Homestead Distribution.
Each Option will be immediately exercisable, but must be exercised before
the earliest of the following events to occur: the date that is three months
after the date that the Option holder's position as a Director terminates, the
date that is twelve months after the date the Director becomes disabled or
dies or the date that is five years after the date the Option is granted.
If fifty percent or more of the outstanding Shares are acquired in a cash
tender offer or exchange offer, each Option holder shall have the right to
exercise his or her Option in full or surrender his or her outstanding Option
in exchange for a cash payment from ATLANTIC in an amount equal to the excess
of the offer price or value over the Option price. If ATLANTIC dissolves, each
Option holder shall have the right to exercise his or her Option in full
before the date of the dissolution.
The Outside Directors Plan may be amended or terminated at any time by the
Board. The provisions relating to the amount, price and timing of grants under
the Outside Directors Plan may not be amended more than once every six months,
other than to comport with changes in the Code or the rules thereunder, unless
such amendment would not affect the exemption provided by Rule 16b-3
promulgated under the Exchange Act.
LIABILITY LIMITATION AND INDEMNIFICATION
Maryland law permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. ATLANTIC's Charter
contains such a provision which eliminates such liability to the maximum
extent permitted by Maryland law. ATLANTIC's officers and Directors are and
will be indemnified under ATLANTIC's Charter against certain liabilities.
ATLANTIC's Charter provides that ATLANTIC will, to the maximum extent
permitted by Maryland law in effect from time to time, indemnify and pay or
reimburse reasonable expenses in advance of final disposition of a proceeding
to (a) any individual who is a present or former Director or officer of
ATLANTIC or (b) any individual who, while a Director of ATLANTIC and at the
request of ATLANTIC, serves or has served another corporation, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, officer, partner or trustee of such corporation, partnership, joint
venture, employee benefit plan or other enterprise. ATLANTIC's Charter
authorizes ATLANTIC, with the approval of the Board, to provide such
indemnification and advancement of expenses to a person who served a
predecessor of ATLANTIC in any of the capacities described in (a) or (b) above
and to any employee or agent of ATLANTIC or its predecessors.
54
<PAGE>
Maryland law requires a corporation (unless its charter provides otherwise,
which ATLANTIC's Charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding
to which he or she is made a party by reason of his or her service in that
capacity. Maryland law permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a)
the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith or (ii) was
the result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services
or (c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. Maryland law permits ATLANTIC to advance
reasonable expenses to a director or officer upon ATLANTIC's receipt of (a) a
written affirmation by the Director or officer of his or her good faith belief
that he or she has met the standard of conduct necessary for indemnification
by ATLANTIC as authorized by ATLANTIC's Bylaws and (b) a written statement by
or on his or her behalf to repay the amount paid or reimbursed by ATLANTIC if
it shall ultimately be determined that the standard of conduct was not met.
Additionally, ATLANTIC has entered into indemnity agreements with each of
its officers and Directors which provide for reimbursement of all expenses and
liabilities of such officer or Director, arising out of any lawsuit or claim
against such officer or Director due to the fact that he or she was or is
serving as an officer or Director, except for such liabilities and expenses
(a) the payment of which is judicially determined to be unlawful, (b) relating
to claims under Section 16(b) of the Exchange Act or (c) relating to
judicially determined criminal violations.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to Directors,
officers or persons controlling ATLANTIC pursuant to the foregoing provisions,
ATLANTIC has been informed that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
COMMUNITIES
PORTFOLIO COMPOSITION
The following table indicates the composition of communities owned by
ATLANTIC at February 28, 1997:
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF ASSETS BASED
COMMUNITIES ON COST(1)
----------- -------------
<S> <C> <C>
Moderate Income....................................... 48 49.0%
Middle Income......................................... 35 41.3
Upper Middle Income................................... 7 9.7
--- ----
Total............................................... 90 100%
=== ====
</TABLE>
- --------
(1) For operating communities, represents cost, including budgeted
renovations. For communities under construction and in planning,
represents total budgeted development cost, which includes the cost of
land, fees, permits, payments to contractors, architectural and
engineering fees and interest and property taxes to be capitalized during
the construction period. Does not include land held for future
development, which is less than 1% of assets, based on cost.
55
<PAGE>
GEOGRAPHIC DISTRIBUTION
In order to effectively manage its multifamily communities, ATLANTIC has
organized its operations with a regional focus (Mid-Atlantic and South
Atlantic). ATLANTIC's multifamily communities are located in 16 metropolitan
areas in seven states and the District of Columbia. The table below
demonstrates the geographic distribution of ATLANTIC's portfolio (operating
communities and total communities, which includes operating communities and
owned communities under construction and in planning) at February 28, 1997:
<TABLE>
<CAPTION>
OPERATING COMMUNITIES TOTAL COMMUNITIES
------------------------- -------------------------
PERCENTAGE OF PERCENTAGE OF
NUMBER OF ASSETS BASED NUMBER OF ASSETS BASED
COMMUNITIES ON COST(1) COMMUNITIES ON COST(1)
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
MID-ATLANTIC:
Charlotte, North Carolina.. 4 6% 5 6%
Greenville, South
Carolina.................. 1 1 1 1
Memphis, Tennessee......... 4 4 4 3
Nashville, Tennessee....... 2 4 3 4
Raleigh, North Carolina.... 5 7 7 7
Richmond, Virginia......... 2 3 5 7
Washington, D.C. .......... 4 7 6 10
--- --- --- ---
Total Mid-Atlantic....... 22 32% 31 38%
--- --- --- ---
SOUTH ATLANTIC:
Atlanta, Georgia........... 21 35% 25 30%
Birmingham, Alabama........ 4 5 5 5
Ft. Lauderdale/West Palm
Beach, Florida............ 7 10 9 9
Ft. Myers, Florida......... 1 1 1 1
Jacksonville, Florida...... 2 3 6 7
Miami, Florida............. 1 1 1 1
Orlando, Florida........... 5 4 5 3
Sarasota, Florida.......... 1 3 1 2
Tampa, Florida............. 6 6 6 4
--- --- --- ---
Total South Atlantic..... 48 68% 59 62%
--- --- --- ---
Total.................. 70 100% 90 100%
=== === === ===
</TABLE>
- --------
(1) For operating communities, represents cost, including budgeted
renovations. For communities under construction and in planning,
represents total budgeted development cost, which includes the cost of
land, fees, permits, payments to contractors, architectural and
engineering fees and interest and property taxes to be capitalized during
the construction period. Does not include land held for future
development, which is less than 1% of assets, based on cost.
56
<PAGE>
COMMUNITIES
The information in the following table is as of December 31, 1996 for
communities owned at December 31, 1996, except total expected investment which
is as of February 28, 1997, and as of February 28, 1997 for communities
acquired since December 31, 1996 (dollar amounts in thousands). Additional
information on ATLANTIC's communities is contained in Schedule III, Real
Estate and Depreciation, in ATLANTIC's financial statements. No individual
community, or group of communities operated as a single business unit, amounts
to 10% or more of ATLANTIC's pro forma total assets at December 31, 1996 nor
does the gross revenue from any such communities amount to 10% or more of
ATLANTIC's pro forma gross revenues for the fiscal year ended December 31,
1996.
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ----- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
COMMUNITIES OWNED AS OF
DECEMBER 31, 1996:
OPERATING
COMMUNITIES(3):
MID-ATLANTIC:
Charlotte, North
Carolina:
STABILIZED:
Cameron Oaks.......... 1994 91.7% 264 $ 15,361 $ 15,441
Waterford Hills*...... 1995 86.3 270 12,617 14,068(4)
PRE-STABILIZED:
Cameron at Hickory
Grove(5)(6).......... 1996 97.5 202 8,392 8,456
Waterford Square
I*(6)................ 1996 (7) 408 19,653 21,051(4)
---- ----- ---------- ----------
Subtotals/Average... 91.3 1,144 56,023 59,016
---- ----- ---------- ----------
Greenville, South
Carolina:
PRE-STABILIZED:
Cameron Court(6)...... 1996 94.9 234 11,060 11,099
Memphis, Tennessee:
STABILIZED:
Cameron at Kirby
Parkway.............. 1994 95.7 324 10,174 10,256
Stonegate............. 1994 90.4 208 7,076 7,263
PRE-STABILIZED:
Cameron Century
Center............... 1996 92.1 420 15,928 16,563
Country Oaks(8)....... 1996 96.5 200 8,484 8,696
---- ----- ---------- ----------
Subtotals/Average... 93.6 1,152 41,662 42,778
---- ----- ---------- ----------
Nashville, Tennessee:
STABILIZED:
Arbor Creek(9)........ 1994 94.2 360 18,183 18,289
Enclave at Brentwood.. 1995 94.5 380 16,126 16,259
---- ----- ---------- ----------
Subtotals/Average... 94.4 740 34,309 34,548
---- ----- ---------- ----------
Raleigh, North
Carolina:
STABILIZED:
Cameron Square........ 1994 95.9 268 15,982 16,066
Waterford Point*...... 1996 98.5 336 15,839 17,549(4)
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ----- ---------- -------------
<S> <C> <C> <C> <C> <C>
PRE-STABILIZED:
Cameron Lake........... 1996 91.3% 196 $ 9,293 $ 9,773
Cameron Ridge(10)...... 1996 98.7 228 10,131 10,424
Emerald Forest......... 1996 85.6 320 14,680 14,729
---- ----- ---------- ----------
Subtotals/Average.... 93.9 1,348 65,925 68,541
---- ----- ---------- ----------
Richmond, Virginia:
STABILIZED:
Camden at Wellesley.... 1994 92.9 340 19,510 19,564
Potomac Hunt(11)....... 1994 94.1 220 10,119 10,217
---- ----- ---------- ----------
Subtotals/Average.... 93.4 560 29,629 29,781
---- ----- ---------- ----------
Washington, D.C.:
STABILIZED:
Camden at Kendall
Ridge................. 1994 93.5 184 11,701 11,801
Cameron Saybrooke...... 1994 96.4 252 18,966 19,035
PRE-STABILIZED:
Sheffield Forest(6).... 1995 96.5 256 15,546 15,645
West Springfield
Terrace............... 1996 92.2 244 16,210 16,604
---- ----- ---------- ----------
Subtotals/Average.... 94.8 936 62,423 63,085
---- ----- ---------- ----------
Subtotals/Average--
Mid-Atlantic...... 93.7 6,114 301,031 308,848
---- ----- ---------- ----------
SOUTH ATLANTIC:
Atlanta, Georgia:
STABILIZED:
Azalea Park(12)(13).... 1995 92.6 447 25,768 25,971
Cameron Ashford........ 1994 91.5 365 24,912 24,963
Cameron
Briarcliff(11)........ 1994 91.4 220 14,249 14,323
Cameron Brook(12)(14).. 1994 95.5 440 22,428 22,528
Cameron Creek I(15).... 1994 91.8 404 24,544 24,637
Cameron Crest.......... 1994 95.5 377 23,824 23,935
Cameron Dunwoody....... 1994 84.0 238 16,852 16,955
Clairmont
Crest(12)(16)......... 1994 95.8 213 11,020 11,073
The Greens(12)(17)..... 1994 95.1 304 13,740 13,833
Lake Ridge............. 1993 95.5 268 17,372 17,458
Morgan's Landing....... 1993 93.9 165 8,671 8,696
Old Salem.............. 1994 98.8 172 8,116 8,244
Trolley Square......... 1994 92.2 270 13,906 13,988
Vinings Landing........ 1994 97.0 200 9,979 10,071
WintersCreek(12)(18)... 1995 94.0 200 7,787 7,923
Woodlands.............. 1995 89.6 644 25,741 26,217
PRE-STABILIZED:
Balmoral Village....... 1996 90.1 312 19,215 19,476
Cameron Forest(6)...... 1995 94.1 152 6,244 6,383
Cameron Place(6)....... 1995 93.9 212 8,075 8,173
Cameron Pointe(6)...... 1996 93.9 214 14,891 15,035
Cameron
Station(6)(12)(19).... 1995 95.4 348 16,080 16,242
---- ----- ---------- ----------
Subtotals/Average.... 93.1 6,165 333,414 336,124
---- ----- ---------- ----------
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ----- ---------- -------------
<S> <C> <C> <C> <C> <C>
Birmingham, Alabama:
STABILIZED:
Cameron on the
Cahaba(20)........... 1995 96.0% 400 $ 18,925 $ 19,032
Colony Woods I........ 1994 90.3 216 10,686 10,698
Colony Woods II*...... 1995 93.9 198 10,515 11,405(4)
Morning Sun Villas.... 1994 92.4 184 9,301 9,435
----- ----- ---------- ----------
Subtotals/Average... 93.7 998 49,427 50,570
----- ----- ---------- ----------
Ft. Lauderdale/W. Palm Beach,
Florida:
STABILIZED:
Cypress Lakes......... 1995 98.3 176 8,510 8,774
Parrot's Landing
I(12)(21)............ 1994 95.6 408 18,651 18,843
Spencer Run(11)....... 1994 93.2 384 19,471 19,797
Sun Pointe
Cove(12)(22)......... 1994 94.1 221 9,369 9,492
Trails at Meadow
Lakes................ 1995 99.5 189 8,840 8,968
PRE-STABILIZED:
Park Place at Turtle
Run.................. 1996 95.1 350 15,714 15,828
The Pointe at Bayberry
Lake................. 1996 94.8 308 17,021 17,238
----- ----- ---------- ----------
Subtotals/Average... 95.4 2,036 97,576 98,940
----- ----- ---------- ----------
Ft. Myers, Florida:
STABILIZED:
Forestwood(12)(23).... 1994 96.5 397 13,781 13,994
Jacksonville, Florida:
STABILIZED:
Bay Club.............. 1994 93.2 220 12,222 12,319
PRE-STABILIZED:
Cameron Lakes I*...... 1996 (7) 302 16,117 17,777(4)
----- ----- ---------- ----------
Subtotals/Average... 93.2 522 28,339 30,096
----- ----- ---------- ----------
Miami, Florida:
STABILIZED:
Park Hill(24)......... 1994 93.9 264 8,842 8,885
Orlando, Florida:
STABILIZED:
Camden Springs........ 1994 95.3 340 17,357 17,552
Cameron Villas I(25).. 1994 95.8 192 8,013 8,118
Cameron Villas
II(11)............... 1995 100.0 42 1,773 1,849
Kingston Village...... 1995 93.3 120 6,013 6,211
The Wellington I(11).. 1994 96.9 192 8,002 8,078
----- ----- ---------- ----------
Subtotals/Average... 95.7 886 41,158 41,808
----- ----- ---------- ----------
Sarasota, Florida:
STABILIZED:
Camden at Palmer
Ranch................ 1994 98.4 432 24,198 24,435
Tampa, Florida:
STABILIZED:
Camden Downs.......... 1994 96.4 250 12,592 12,667
Cameron Lakes......... 1995 96.1 207 8,651 8,700
Country Place
Village(26).......... 1995 98.4 188 8,322 8,572
Foxbridge on the
Bay(12)(27).......... 1994 98.3 358 10,955 11,007
Summer Chase(11)...... 1994 99.0 96 3,772 3,791
PRE-STABILIZED:
Cameron Bayshore...... 1996 98.5 328 10,712 11,487
----- ----- ---------- ----------
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Subtotals/Average...... 97.8% 1,427 $ 55,004 $ 56,224
---- ------ ---------- ----------
Subtotals/Average--
South Atlantic...... 94.5 13,127 651,739 661,076
---- ------ ---------- ----------
Subtotals/Average--
Operating
Communities....... 94.2 19,241 952,770 969,924
---- ------ ---------- ----------
COMMUNITIES UNDER
CONSTRUCTION:
MID-ATLANTIC:
Charlotte, North Carolina:
Waterford Square II*..... 1998 N/A 286 6,592 17,181
Nashville, Tennessee:
Cameron Overlook*........ 1998 N/A 452 7,338 23,848
Raleigh, North Carolina:
Cameron Brooke*.......... 1997 N/A 228 10,070 12,885
Waterford Forest*(28).... 1997 N/A 384 20,349 21,574
---- ------ ---------- ----------
Subtotals.............. N/A 612 30,419 34,459
---- ------ ---------- ----------
Richmond, Virginia:
Cameron at Wyndham*...... 1998 N/A 312 4,404 20,048
Cameron Crossing I &
II*..................... 1998 N/A 424 11,202 26,622
---- ------ ---------- ----------
Subtotals.............. N/A 736 15,606 46,670
---- ------ ---------- ----------
Washington, D.C.:
Cameron at
Milestone*(28).......... 1997 N/A 444 30,344 30,974
Woodway at Trinity
Center*(28)............. 1997 N/A 504 35,583 37,836
---- ------ ---------- ----------
Subtotals.............. N/A 948 65,927 68,810
---- ------ ---------- ----------
Subtotals--Mid-
Atlantic............ N/A 3,034 125,882 190,968
---- ------ ---------- ----------
SOUTH ATLANTIC:
Atlanta, Georgia:
Cameron Creek II*(28).... 1997 N/A 260 19,332 19,758
Birmingham, Alabama:
Cameron at the Summit
I*...................... 1997 N/A 372 8,483 21,645
Ft. Lauderdale/W. Palm
Beach, Florida:
Parrot's Landing II*..... 1997 N/A 152 8,070 9,751
Jacksonville, Florida:
Cameron Deerwood*(28).... 1997 N/A 336 14,504 17,598
Cameron Lakes II*........ 1998 N/A 253 2,869 14,967
Cameron Timberlin Parc
I*(28).................. 1997 N/A 320 15,447 16,885
---- ------ ---------- ----------
Subtotals/Average...... N/A 909 32,820 49,450
---- ------ ---------- ----------
Subtotals--South
Atlantic............ N/A 1,693 68,705 100,604
---- ------ ---------- ----------
Subtotals--
Communities
Under
Construction...... N/A 4,727 194,587 291,572
---- ------ ---------- ----------
COMMUNITIES IN PLANNING AND OWNED:
SOUTH ATLANTIC:
Atlanta, Georgia:
Cameron Landing*(29)..... 1998 N/A 368 2,020 21,630
Ft. Lauderdale/W. Palm
Beach, Florida:
Cameron Waterway*........ 1998 N/A 300 4,386 21,280
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
YEAR TOTAL
ACQUIRED OR PERCENTAGE ATLANTIC EXPECTED
COMPLETED(1) LEASED UNITS INVESTMENT INVESTMENT(2)
------------ ---------- ------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jacksonville, Florida:
Cameron Timberlin
Parc II*............ 1999 N/A 200 $ 1,389 $ 10,500
----- ------ ---------- ----------
Subtotals--
Communities in
Planning and
Owned........... N/A 868 7,795 53,410
----- ------ ---------- ----------
LAND HELD FOR FUTURE
MULTIFAMILY
DEVELOPMENT........... N/A -- 2,083 --
----- ------ ---------- ----------
Total
Communities
Owned at
December
31, 1996...... 94.2% 24,836 1,157,235 1,314,906
----- ------ ---------- ----------
COMMUNITIES ACQUIRED
THROUGH FEBRUARY 28, 1997:
COMMUNITIES IN PLANNING
AND OWNED:
MID-ATLANTIC:
Richmond, Virginia:
Cameron at Virginia
Center*............. N/A 264 -- 15,983
SOUTH ATLANTIC:
Atlanta, Georgia:
Cameron at Double
Bridge*............. N/A 232 -- 16,216
Cameron at
Northpoint*......... N/A 264 -- 19,821
----- ------ ---------- ----------
Subtotals.......... N/A 496 -- 36,037
----- ------ ---------- ----------
Subtotals--
Communities
Acquired Through
February 28,
1997............ N/A 760 -- 52,020
----- ------ ---------- ----------
Total
Communities
Owned at
February 28,
1997.......... 94.2% 25,596 $1,157,235 $1,366,926
===== ====== ========== ==========
</TABLE>
Additionally, at February 28, 1997, ATLANTIC had land in planning and under
control for the development of 1,808 units with a total budgeted development
cost of $111.2 million. The term "in planning" means that construction is
anticipated to commence within 12 months. The term "under control" means that
ATLANTIC has an exclusive right (through contingent contract or letter of
intent) during a contractually agreed-upon time period to acquire land for
future development of multifamily communities, subject to removal of
contingencies during the due diligence process, but does not currently own the
land. There can be no assurance that such land will be acquired. The unit and
total budgeted development cost information for these communities is based on
management's best estimates of the cost upon completion of these communities.
- --------
* Community developed by ATLANTIC.
(1) With respect to communities under construction or communities in planning
and owned, represents expected completion date.
(2) For operating communities, represents cost, including budgeted
renovations as of February 28, 1997. For communities under construction
and in planning, represents total budgeted development cost as of
February 28, 1997, which includes the cost of land, fees, permits,
payments to contractors, architectural and engineering fees and interest
and property taxes to be capitalized during the construction period. The
term "in planning" means that construction is anticipated to commence
within 12 months.
(3) The term "stabilized" means that renovation, repositioning, new
management and new marketing programs (or development and marketing in
the case of newly developed communities) have been completed and in
effect for a sufficient period of time (but in no event longer than 12
months, except in cases of major rehabilitation) to achieve 93% occupancy
at market rents. Prior
61
<PAGE>
to being "stabilized", a community is considered "pre-stabilized". See
"Business--ATLANTIC's Operating System--Acquisitions".
(4) The total expected investment cost of these developed communities
includes potential incentive payments to third-party developer/managers
that had not been earned by them at December 31, 1996.
(5) Cameron at Hickory Grove Apartments are subject to a deed of trust
securing a mortgage note of $6.0 million.
(6) Community was stabilized during the period from January 1, 1997 to
February 28, 1997.
(7) Community is in lease-up, therefore, the percentage leased is not given
because it is not representative of a fully operational community.
(8) Country Oaks Apartments are subject to a deed of trust securing a
mortgage note of $5.9 million.
(9) The land associated with the Arbor Creek Apartments is leased by ATLANTIC
through the year 2058 under an agreement with the Metropolitan Nashville
Airport Authority.
(10) Cameron Ridge Apartments are subject to a deed of trust securing a
mortgage note of $5.9 million.
(11) Community is pledged as additional security under ATLANTIC's 30-year
credit enhancement agreement with FNMA. For a discussion of the FNMA
credit enhancement agreement, see "Business--ATLANTIC's Operating
System--Capital Markets/Finance/Legal".
(12) The tax-exempt bond issue associated with this community is included in
ATLANTIC's credit enhancement agreement with FNMA.
(13) Azalea Park Apartments are subject to a deed of trust securing a mortgage
note related to $15.5 million of tax-exempt bonds.
(14) Cameron Brook Apartments are subject to a deed of trust securing a
mortgage note related to $19.5 million of tax-exempt bonds.
(15) Community was classified as pre-stabilized subsequent to December 31,
1996 due to the effects of lease-up activities at Phase II of this
community.
(16) Clairmont Crest Apartments are subject to a deed of trust securing a
mortgage note related to $11.6 million of tax-exempt bonds.
(17) The Greens Apartments are subject to a deed of trust securing a mortgage
note related to $10.4 million of tax-exempt bonds.
(18) WintersCreek Apartments are subject to a deed of trust securing a
mortgage note related to $5.0 million of tax-exempt bonds.
(19) Cameron Station Apartments are subject to a deed of trust securing a
mortgage note related to $14.5 million of tax-exempt bonds.
(20) Cameron on the Cahaba Phase II Apartments, which consist of 250 units,
are subject to a deed of trust securing a mortgage note of $8.0 million.
(21) Parrot's Landing Phase I Apartments are subject to a deed of trust
securing a mortgage note related to $15.8 million of tax-exempt bonds.
(22) Sun Pointe Cove Apartments are subject to a deed of trust securing a
mortgage note related to $8.5 million of tax-exempt bonds.
(23) Forestwood Apartments are subject to a deed of trust securing a mortgage
note related to $11.5 million of tax-exempt bonds.
(24) Park Hill Apartments were being held for sale at December 31, 1996 and
were disposed of in April 1997.
(25) Cameron Villas I Apartments are subject to a deed of trust securing a
mortgage note of $6.3 million.
(26) Country Place Village Phase I Apartments, which consist of 88 units, are
subject to a deed of trust securing a mortgage note of $2.0 million.
(27) Foxbridge on the Bay Apartments are subject to a deed of trust securing a
mortgage note related to $10.4 million of tax-exempt bonds.
(28) Community was leasing completed units at February 28, 1997.
(29) Construction on this community began in February 1997.
62
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth the Pro Forma Financial Results as of and for
the year ended December 31, 1996, and the Historical Financial Results as of
and for the years ended December 31, 1996, 1995 and 1994 and the period from
inception (October 26, 1993) through December 31, 1993. Such selected
financial information is qualified in its entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto
included in this Prospectus. The Pro Forma Financial Results are not
necessarily indicative of what the actual financial position and results of
operations of ATLANTIC would have been as of and for the periods indicated,
nor do they purport to represent the financial position and results of
operations for future periods. Unless otherwise indicated, all Share and per
Share amounts have been adjusted to give effect to ATLANTIC's one-for-two
reverse Share split, which was effective on September 10, 1996.
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
------------ ------------------------------------------
PERIOD ENDED
YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------
1996 1996 1995 1994 1993(1)
------------ ---------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
Rental income.......... $ 148,361 $ 137,729 $ 103,634 $ 55,071 $ 156
Property management
fees paid to
affiliate............. 4,612 4,208 3,475 1,536 --
Property management
fees paid to third
parties............... 971 971 591 661 --
REIT management fee
paid to affiliate..... 11,652 10,445 6,923 3,671 12
General and
administrative
expenses.............. 641 673 646 266 1
Earnings before
extraordinary item.... 37,881 42,569 19,639 9,926 38
Extraordinary item--
loss on early
extinguishment of
debt.................. -- 3,940 -- -- --
Net earnings........... 37,881 38,629 19,639 9,926 38
Net earnings per Share
before extraordinary
item.................. 1.00 1.33 0.89 0.81 0.13
Net earnings per
Share................. $ 1.00 1.21 0.89 0.81 $ 0.13
Cash distributions
declared and paid..... N/A 53,064 35,119 14,648 --
Cash distributions
declared and paid per
Share................. N/A $ 1.65 $ 1.60 $ 1.20 --
Weighted average
Shares outstanding.... 37,897 32,028 21,944 12,227 286
<CAPTION>
PRO FORMA HISTORICAL
------------ ------------------------------------------
DECEMBER 31,
DECEMBER 31, ------------------------------------------
1996 1996 1995 1994 1993
------------ ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
FINANCIAL POSITION:
Real estate owned, at
cost.................. $1,157,235 $1,157,235 $ 888,928 $ 631,260 $ 31,005
Total assets........... 1,135,065 1,135,065 885,824 637,846 31,850
Line of credit(2)...... 147,520 228,000 190,000 153,000 --
Mortgages payable...... 155,790 155,790 118,524 107,347 --
Total liabilities...... 355,943 436,423 328,886 271,216 178
Total shareholders'
equity................ $ 779,122 $ 698,642 $ 556,938 $ 366,630 $ 31,672
Number of Shares
outstanding........... 41,892 37,892 27,763 18,567 1,582
<CAPTION>
PRO FORMA HISTORICAL
------------ ------------------------------------------
PERIOD ENDED
YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------
1996 1996 1995 1994 1993(1)
------------ ---------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Net earnings........... $ 37,881 $ 38,629 $ 19,639 $ 9,926 $ 38
Add (Deduct):
Depreciation......... 22,534 20,824 15,925 8,770 28
Gain on disposition
of real estate...... -- (6,732) -- -- --
Gain on sale of
Homestead Assets.... -- (2,839) -- -- --
Provision for
possible loss on
investments......... 2,500 2,500 -- -- --
Extraordinary item--
loss on early
extinguishment of
debt................ -- 3,940 -- -- --
---------- ---------- --------- --------- --------
Funds from
Operations(3)......... $ 62,915 $ 56,322 $ 35,564 $ 18,696 $ 66
---------- ---------- --------- --------- --------
Net cash provided
(used) by operating
activities............ $ 60,949 $ 54,356 $ 39,732 $ 23,564 $ (492)
Net cash used by
investing activities.. (287,418) (287,418) (235,149) (390,077) (31,005)
Net cash provided by
financing activities.. 230,907 230,907 195,649 372,638 31,634
</TABLE>
- -------
(1) For the period from inception (October 26, 1993) to December 31, 1993.
(2) At April 7, 1997, ATLANTIC had $289.5 million of outstanding borrowings
under its $350 million unsecured line of credit and such outstanding
borrowings are expected to be approximately $299.0 million at the closing
of the Offering.
(3) ATLANTIC believes that funds from operations is helpful in understanding a
property portfolio in that such calculation reflects cash flow from
operating activities and the properties' ability to support interest
payments. For an explanation of funds from operations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources". Funds from operations should not be
considered as an alternative to net income or any other GAAP measurement
of performance as an indicator of ATLANTIC's operating performance or as
an alternative to cash flows from operating, investing or financing
activities as a measure of liquidity. On January 1, 1996, ATLANTIC adopted
NAREIT's new definition of funds from operations. Under this new
definition, loan cost amortization is not added back to net earnings in
determining funds from operations. For comparability, funds from
operations for the periods prior to January 1, 1996 give effect to this
new definition. The funds from operations measure presented by ATLANTIC
may not be comparable to similarly titled measures of other REITs.
63
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with ATLANTIC's
financial statements and the notes thereto included in this Prospectus.
The statements contained in this discussion and elsewhere in this Prospectus
that are not historical facts are forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. These forward-looking statements are based on current expectations,
estimates and projections about the industry and markets in which ATLANTIC
operates, management's beliefs and assumptions made by management. Words such
as "expects", "anticipates", "intends", "plans", "believes", "seeks",
"estimates", variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees
of future performance and involve certain risks, uncertainties and assumptions
which are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in such forward-looking
statements. ATLANTIC undertakes no obligation to update publicly any forward-
looking statements, whether as a result of new information, future events or
otherwise. ATLANTIC's operating results depend primarily on income from
multifamily communities, which is substantially influenced by (i) the demand
for and supply of multifamily units in ATLANTIC's primary target market and
submarkets, (ii) operating expense levels, (iii) the effectiveness of
property-level operations and (iv) the pace and price at which ATLANTIC can
acquire and develop additional multifamily communities. Capital and credit
market conditions which affect ATLANTIC's cost of capital also influence
operating results.
OVERVIEW
Since its inception on October 26, 1993 and through December 31, 1996,
ATLANTIC has amassed a portfolio of 24,836 multifamily units with a total
expected investment cost of $1.30 billion located in the southeastern United
States. Additionally, at December 31, 1996, ATLANTIC had land in planning and
under control for the development of 2,228 units with a total budgeted
development cost of $139.3 million. ATLANTIC's investment in real estate has
been financed through both debt and equity. From inception through December
31, 1996, ATLANTIC has raised approximately $806.2 million in net equity,
primarily through private and public sales of Shares. Additionally, ATLANTIC
had long-term mortgage debt at December 31, 1996 of approximately $155.8
million which is secured by certain of the communities acquired. ATLANTIC's
$350 million unsecured line of credit provided the remaining investment
capital.
The following table summarizes ATLANTIC's multifamily investment activity
for 1996, 1995 and 1994 (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING COMMUNITIES:
Communities........................................ 70 58 43
Units.............................................. 19,241 15,823 11,990
Total investment(1)................................ $959,860 $783,448 $600,880
Cost per unit...................................... $49.9 $49.5 $50.1
DEVELOPMENT COMMUNITIES:
Starts During Year:
Communities........................................ 9 6 4
Units.............................................. 2,815 2,214 1,212
Total investment(1)................................ $164,442 $143,822 $64,054
Cost per unit...................................... $58.4 $65.0 $52.8
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Completions During Year:
Communities ...................................... 3 2 --
Units............................................. 1,046 468 --
Total investment(1)............................... $56,370 $25,462 --
Cost per unit..................................... $53.9 $54.4 --
Stabilizations During Year:
Communities....................................... 3 -- --
Units............................................. 804 -- --
Total investment(1)............................... $43,004 -- --
Cost per unit..................................... $53.5 -- --
Under Construction at Year-End:
Communities....................................... 14 8 4
Units............................................. 4,727 2,958 1,212
Total investment(1)............................... $290,486 $176,740 $63,006
Cost per unit..................................... $61.5 $59.7 $52.0
Investment to date................................ $194,587 $94,094 $20,741
ACQUISITIONS:
Communities....................................... 13 15 40
Units............................................. 3,556 3,961 11,307
Total investment(1)............................... $171,731 $182,242 $582,077
Cost per unit..................................... $48.3 $46.0 $51.5
DISPOSITIONS:
Communities....................................... 4 2 --
Units............................................. 1,184 596 --
Proceeds.......................................... $64,150 $30,934 --
Gain.............................................. $6,732 -- --
</TABLE>
- --------
(1) For operating communities, represents cost, including budgeted
renovations. For communities under construction, represents total budgeted
development cost, which includes the cost of land, fees, permits, payments
to contractors, architectural and engineering fees and interest and
property taxes to be capitalized during the construction period.
In addition to its multifamily investment activity, ATLANTIC developed
extended-stay lodging facilities known as Homestead Village that were sold to
Homestead, a newly formed company, in 1996, as discussed below in "--Liquidity
and Capital Resources--Investing and Financing Activities--Homestead
Transaction". ATLANTIC's investment, at cost, in Homestead Village properties
was $2.6 million at December 31, 1995. ATLANTIC did not begin developing
Homestead Village properties until 1995.
ATLANTIC's target market cities and submarkets have benefitted substantially
in recent periods from demographic trends (including population and job
growth) which increase the demand for multifamily units. Consequently, rental
rates for multifamily units have increased more than the inflation rate for
the last two years. Management of expense levels also influence operating
results. Over the past two years, rental expenses (other than real estate
taxes) as a percentage of rental revenues for multifamily communities have
generally remained flat due to a continual effort to reduce resident turnover.
Over the next few years, expenses are expected to increase at a rate slightly
lower than increases in rental revenue.
ATLANTIC believes that development of multifamily communities from the
ground up, which are built for long-term ownership and designed to meet broad
renter preferences and demographic trends, will provide a greater source of
long-term cash flow growth in the future. Therefore, while land prices are
favorable, ATLANTIC has acquired and will continue to acquire, on an
unleveraged basis, prudent amounts of land zoned for multifamily development.
ATLANTIC believes its ability to compete is significantly enhanced relative to
other companies because of the REIT Manager's depth of
65
<PAGE>
development and acquisition personnel and presence in local markets combined
with ATLANTIC's access to investment capital.
ATLANTIC's overall results of operations and financial condition for 1996,
1995 and 1994 have been significantly influenced by this investment activity.
Detailed information about this investment activity during 1996, which will
significantly influence future operations, is provided below.
CURRENT DEVELOPMENT ACTIVITY
At December 31, 1996, ATLANTIC had 4,727 units under construction,
representing a total expected investment cost of $290.5 million. These
development communities are summarized below (dollar amounts in thousands):
<TABLE>
<CAPTION>
DATE OF EXPECTED
FIRST STABILIZATION
TOTAL START DATE UNITS DATE
NUMBER INVESTMENT EXPECTED (QUARTER/ (QUARTER/ (QUARTER/
OF UNITS COST TO DATE INVESTMENT(1) YEAR) YEAR)(2) YEAR) % LEASED(3)
-------- ------------ ------------- ---------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMUNITIES UNDER
CONSTRUCTION AND IN
LEASE-UP(4):
MID-ATLANTIC:
Raleigh, North
Carolina:
Waterford Forest...... 384 $ 20,349 $ 21,574 2Q/95 3Q/96 3Q/97 64.3%
Washington, D.C.:
Cameron at Milestone.. 444 30,344 30,418 2Q/95 3Q/96 4Q/97 49.5
Woodway at Trinity
Center............... 504 35,583 37,836 2Q/95 3Q/96 2Q/98 49.4
----- -------- --------
Total Mid-Atlantic... 1,332 $ 86,276 $ 89,828
----- -------- --------
SOUTH ATLANTIC:
Atlanta, Georgia:
Cameron Creek II...... 260 $ 19,332 $ 19,445 2Q/95 3Q/96 3Q/97 41.9%
Jacksonville, Florida:
Cameron Deerwood...... 336 14,504 17,598 1Q/96 4Q/96 1Q/98 5.7
Cameron Timberlin Parc
I.................... 320 15,447 16,885 4Q/95 3Q/96 4Q/97 32.2
----- -------- --------
Total South
Atlantic............ 916 $ 49,283 $ 53,928
----- -------- --------
Total in Lease-up.. 2,248 $135,559 $143,756
----- -------- --------
OTHER COMMUNITIES UNDER
CONSTRUCTION:
MID-ATLANTIC:
Charlotte, North
Carolina:
Waterford Square II... 286 $ 6,592 $ 17,181 2Q/96 3Q/97 3Q/98 N/A
Nashville, Tennessee:
Cameron Overlook...... 452 7,338 23,848 2Q/96 3Q/97 1Q/99 N/A
Raleigh, North
Carolina:
Cameron Brooke........ 228 10,070 12,885 1Q/96 1Q/97 4Q/97 N/A
Richmond, Virginia:
Cameron at Wyndham.... 312 4,404 20,048 3Q/96 4Q/97 4Q/98 N/A
Cameron Crossing I &
II................... 424 11,202 26,622 1Q/96 2Q/97 4Q/98 N/A
----- -------- --------
Total Mid-Atlantic... 1,702 $ 39,606 $100,584
----- -------- --------
SOUTH ATLANTIC:
Birmingham, Alabama:
Cameron at the Summit
I.................... 372 $ 8,483 $ 21,531 2Q/96 3Q/97 3Q/98 N/A
Ft. Lauderdale/West
Palm Beach, Florida:
Parrot's Landing II... 152 8,070 9,648 2Q/96 1Q/97 4Q/97 N/A
Jacksonville, Florida:
Cameron Lakes II...... 253 2,869 14,967 4Q/96 4Q/97 3Q/98 N/A
----- -------- --------
Total South
Atlantic............ 777 $ 19,422 $ 46,146
----- -------- --------
Total Other........ 2,479 $ 59,028 $146,730
----- -------- --------
Total Communities
Under Construc-
tion............ 4,727 $194,587 $290,486
===== ======== ========
</TABLE>
- -------
(1) Represents total budgeted development cost, which includes the cost of
land, fees, permits, payments to contractors, architectural and
engineering fees and interest and property taxes to be capitalized during
the construction period.
(2) Represents the date that the first completed units were made available for
leasing (or are expected to be made available for leasing). ATLANTIC
begins leasing completed units prior to completion of the entire
community.
(3) The percentage leased is based on total units upon completion.
(4) A development community is considered in "lease-up" once ATLANTIC begins
leasing completed units.
66
<PAGE>
There are risks associated with ATLANTIC's development and construction
activities which include: development and acquisition opportunities explored
by ATLANTIC may be abandoned; construction costs of a community may exceed
original estimates due to increased materials, labor or other expenses, which
could make completion of the community uneconomical; occupancy rates and rents
at a newly completed community are dependent on a number of factors, including
market and general economic conditions, and may not be sufficient to make the
community profitable; financing may not be available on favorable terms for
the development of a community; and 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 the inability to obtain, or delays in obtaining, all necessary land-use,
building, occupancy and other required governmental permits and
authorizations. The occurrence of any of the events described above could
adversely affect ATLANTIC's ability to achieve its projected yields on
communities under development or redevelopment.
1996 ACQUISITION ACTIVITY
ATLANTIC completed the acquisition of $171.7 million of operating
communities, representing a total of 3,556 units, in 1996. These acquisitions
are summarized below (dollar amounts in thousands):
<TABLE>
<CAPTION>
TOTAL
EXPECTED ACQUISITION
UNITS INVESTMENT(1) DATE
----- ------------- -----------
<S> <C> <C> <C>
MID-ATLANTIC:
Charlotte, North Carolina:
Cameron at Hickory Grove...................... 202 $ 8,392 04/10/96
Greenville, South Carolina:
Cameron Court................................. 234 11,060 04/22/96
Memphis, Tennessee:
Cameron Century Center........................ 420 15,928 10/18/96
Country Oaks.................................. 200 8,484 09/05/96
Raleigh, North Carolina:
Cameron Lake.................................. 196 9,293 11/13/96
Cameron Ridge................................. 228 10,131 10/17/96
Emerald Forest................................ 320 14,680 12/19/96
Washington, D.C.:
West Springfield Terrace...................... 244 16,210 09/30/96
----- --------
Total Mid-Atlantic.......................... 2,044 $ 94,178
----- --------
SOUTH ATLANTIC:
Atlanta, Georgia:
Balmoral Village.............................. 312 $ 19,215 10/22/96
Cameron Pointe................................ 214 14,891 05/30/96
Ft. Lauderdale/West Palm Beach, Florida:
Park Place at Turtle Run...................... 350 15,714 04/22/96
The Pointe at Bayberry Lake................... 308 17,021 05/29/96
Tampa, Florida:
Cameron Bayshore.............................. 328 10,712 12/20/96
----- --------
Total South Atlantic........................ 1,512 $ 77,553
----- --------
Total..................................... 3,556 $171,731
===== ========
</TABLE>
- --------
(1) Represents cost, including budgeted renovations as of December 31, 1996.
67
<PAGE>
Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that judgments with respect to the cost of
improvements to bring an acquired community up to standards established for
the market position intended for that community will prove inaccurate, as well
as general investment risks associated with any new real estate investment.
Although ATLANTIC undertakes an evaluation of the physical condition of each
new community before it is acquired, certain defects or necessary repairs may
not be detected until after the community is acquired, which could
significantly increase ATLANTIC's total acquisition costs.
RESULTS OF OPERATIONS
Net earnings for the years ended December 31, 1996, 1995 and 1994 were $38.6
million, $19.6 million and $9.9 million, respectively. Net earnings increased
$19.0 million in 1996 over 1995 and $9.7 million in 1995 over 1994.
PROPERTY OPERATIONS
At December 31, 1996, ATLANTIC had 19,241 operating multifamily units as
compared to 15,823 operating multifamily units at December 31, 1995 and 11,990
operating multifamily units at December 31, 1994. The increased number of
communities in operation resulted in increases in rental income ($34.1 million
in 1996 over 1995 and $48.6 million in 1995 over 1994), rental expenses ($9.0
million in 1996 over 1995 and $12.6 million in 1995 over 1994), real estate
taxes ($2.7 million in 1996 over 1995 and $4.0 million in 1995 over 1994),
property management fees ($1.1 million in 1996 over 1995 and $1.9 million in
1995 over 1994) and depreciation ($4.9 million in 1996 over 1995 and $7.2
million in 1995 over 1994).
During the period prior to a community being stabilized (see "Business--
ATLANTIC's Operating System--Acquisitions"), the REIT Manager and the property
managers begin implementing expense controls, reconfiguring the resident mix,
supervising renovations and implementing a strategy to increase rental income.
The full benefits of the changes are not reflected until the communities are
stabilized. As a result of high levels of acquisitions of operating
communities since inception, 26.7% of ATLANTIC's operating multifamily
communities, based on total expected investment cost, were classified as pre-
stabilized at December 31, 1996 as compared to 25.7% at December 31, 1995 and
94.7% at December 31, 1994.
Because ATLANTIC will be completing construction on its current development
portfolio and acquiring additional operating communities in its target market,
ATLANTIC anticipates increases in rental income and property-level expenses in
subsequent periods.
Cash provided by operating activities was $54.4 million in 1996, an increase
of $14.6 million from the 1995 level of $39.7 million. Cash provided by
operating activities in 1995 increased by $16.2 million from the 1994 level.
These increases are primarily the result of the increased number of
communities in operation.
68
<PAGE>
COMMUNITIES FULLY OPERATING THROUGHOUT BOTH PERIODS
The following table presents the operating performance of ATLANTIC's 34
"same store" communities that were fully operational throughout 1996 and 1995.
Operating expenses and net operating income have been adjusted for pre-
stabilized versus stabilized accounting differences that result from
capitalizing certain costs during the period after acquisition when a
community is being repositioned and is classified as pre-stabilized and
expensing those costs once repositioning is completed and the community is
classified as stabilized. The same store communities consist of 9,458 units at
a total expected investment cost of $496.5 million (38.1% of ATLANTIC's total
portfolio) at December 31, 1996. A summary of the operating performance of the
same store communities in 1996 is as follows:
<TABLE>
<CAPTION>
1996 COMPARED
TO 1995
-------------
<S> <C>
Collections growth............................................. 2.76%
Operating expense decrease, as adjusted........................ -0.97%
Net operating income growth, as adjusted....................... 4.88%
<CAPTION>
1996
-------------
<S> <C>
Average physical occupancy..................................... 95.32%
Property operating expense ratio............................... 39.68%
Average rental rate per unit................................... $719
Recurring capital expenditures per unit........................ $209
</TABLE>
<TABLE>
<CAPTION>
ANNUAL
AVERAGE ANNUAL AVERAGE ANNUAL COLLECTIONS SAME STORE
PHYSICAL PHYSICAL GROWTH COMMUNITIES
OCCUPANCY 1996 OCCUPANCY 1995 (1996 OVER 1995) % BY MARKET
-------------- -------------- ---------------- -----------
<S> <C> <C> <C> <C>
MID-ATLANTIC:
Charlotte, North Caroli-
na..................... 95.92% 95.96% 4.54% 3.09%
Greenville, South Caro-
lina(1)................ -- -- -- --
Memphis, Tennessee(1)... -- -- -- --
Nashville, Tennessee.... 94.62 95.68 1.10 3.66
Raleigh, North Caroli-
na..................... 95.72 94.64 -0.94 3.22
Richmond, Virginia...... 94.71 96.17 2.90 3.93
Washington, D.C. ....... 94.62 94.38 0.37 6.18
----- ----- ----- ------
Total Mid-Atlantic.... 95.02% 95.32% 1.42% 20.08%
----- ----- ----- ------
SOUTH ATLANTIC:
Atlanta, Georgia........ 95.77% 96.31% 4.36% 42.21%
Birmingham, Alabama..... 92.25 95.40 -3.06 4.03
Ft. Lauderdale/West Palm
Beach, Florida......... 94.72 95.00 0.15 11.35
Jacksonville, Florida... 97.04 96.25 5.12 2.46
Orlando, Florida........ 95.06 95.05 3.64 6.72
Tampa/Ft.
Myers/Sarasota,
Florida................ 95.78 95.24 3.21 13.15
----- ----- ----- ------
Total South Atlantic.. 95.39% 95.72% 3.06% 79.92%
----- ----- ----- ------
Totals.............. 95.32% 95.65% 2.76% 100.00%
===== ===== ===== ======
</TABLE>
- --------
(1) ATLANTIC entered this market subsequent to January 1, 1995; therefore,
there are no communities for the same store comparison.
At January 1, 1994, ATLANTIC's portfolio consisted of only three pre-
stabilized operating communities and, consequently, comparisons for fully
operational communities between 1995 and 1994 are not meaningful.
69
<PAGE>
DEVELOPMENT DILUTION
ATLANTIC's development activity is dilutive to net earnings and funds from
operations in the short term, but is expected to add significantly to
ATLANTIC's long-term performance as the developments reach stabilization in
1997 and subsequent years.
During the construction period, the reduction to interest expense resulting
from the capitalization of interest on units under construction is less than
the operating income which could be earned on those expenditures if the
community were complete and earning a stabilized return, thus resulting in
dilution. Essentially, the return on investment during the construction period
is equivalent to ATLANTIC's cost of funds.
The lease-up phase commences when units are placed in service. During the
lease-up phase, ATLANTIC's policy is to expense operating expenses (including
pre-opening marketing expenses) and interest expense which during the
construction period is capitalized. The operating expenses and the interest
expense on such completed units will typically exceed rental revenues, due to
less than break-even occupancy, thus resulting in dilution in the form of a
"lease-up" deficit. These deficits are typically experienced for a period of
two to four months after "first units" are placed in service.
Development dilution begins to decline once occupancy increases and revenues
from completed units exceed the operating expenses and interest expense
associated with such completed units. However, the net operating income
generated during this pre-stabilized period is less than the net operating
income which would be earned if the community were stabilized. The time
required to achieve stabilization generally ranges from six to twelve months
after completion of construction.
INTEREST EXPENSE
The following summarizes ATLANTIC's interest expense (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
------------------------
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Mortgage.............................................. $ 9,484 $ 7,662 $3,363
Line of credit........................................ 16,947 15,784 6,670
Capitalized interest.................................. (10,250) (4,404) (793)
------- ------- ------
Total interest expense............................ $16,181 $19,042 $9,240
======= ======= ======
</TABLE>
Mortgage interest expense increased $1.8 million in 1996 as compared to 1995
and $4.3 million in 1995 as compared to 1994. These increases are the result
of additional weighted-average mortgage debt outstanding.
Line of credit interest expense increased $1.2 million in 1996 over 1995 and
$9.1 million in 1995 over 1994. The increase in 1996 is primarily a function
of an increase in the average outstanding balance ($204.3 million in 1996 as
compared to $178.3 million in 1995) partially offset by a lower weighted-
average daily interest rate (7.39% in 1996 as compared to 7.92% in 1995). The
increase in 1995 is primarily a function of an increase in the average
outstanding balance ($178.3 million in 1995 as compared to $65.6 million in
1994) and a higher weighted-average daily interest rate (7.92% in 1995 as
compared to 7.34% in 1994). The increases were also affected by amortization
of issuance costs and other loan-related costs.
The increases in interest expense were offset by increases in capitalized
interest of $5.8 million in 1996 over 1995 and $3.6 million in 1995 over 1994.
These increases in capitalized interest are the result of ATLANTIC's increased
development activity.
REIT MANAGEMENT FEE PAID TO AFFILIATE
The REIT Management fee paid by ATLANTIC increased by $3.5 million in 1996
over 1995 and $3.2 million in 1995 over 1994. Because the REIT Management fee
fluctuates with the level of
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ATLANTIC's cash flow calculated before the REIT Management fee, this increase
is expected based upon the larger increases in revenues than expenses
experienced by ATLANTIC during the year ended December 31, 1996. In the
future, interest income recognized on the convertible mortgage notes received
by ATLANTIC pursuant to the funding commitment agreement entered into as part
of the Homestead transaction will not be included in the calculation of the
REIT Management fee to be paid by ATLANTIC. Because this interest income is
not included in cash flow for purposes of calculating the REIT Management fee,
the REIT Management fee calculated as a percentage of ATLANTIC's funds from
operations will decline as the convertible mortgage notes are funded and the
related interest income increases. The REIT Management fee is described more
thoroughly below under "--Liquidity and Capital Resources--REIT Management
Agreement".
Additionally, as ATLANTIC arranges fully amortizing, fixed rate, long-term
unsecured debt, which it intends to arrange after achieving a substantial
equity base and an investment-grade debt rating, the REIT Management fee will
effectively decline in proportion to ATLANTIC's cash flow because regularly
scheduled principal payments or their assumed equivalent are deducted from the
cash flow amount on which the REIT Management fee is based. Currently,
principal and principal reserve account payments on long-term mortgage debt
are deducted in arriving at cash flow for purposes of calculating the REIT
Management fee, thus reducing REIT Management fee expense. See "The Merger
Transaction" for a description of an agreement that ATLANTIC has entered into
with Security Capital Group to merge the REIT Manager and SCG Realty Services
into a newly formed subsidiary of ATLANTIC in exchange for Shares.
GAINS ON DISPOSITIONS AND VALUATION OF LONG-LIVED INVESTMENTS
ATLANTIC's strategy is to build its asset base through the development and
acquisition of multifamily communities that will provide long-term growth in
cash flow. ATLANTIC's real estate investments have been made with a view to
effective long-term operation and ownership. ATLANTIC's "asset optimization
strategy" is based on market research and is aimed at optimizing its portfolio
composition. Under this strategy, ATLANTIC may from time to time dispose of
assets that no longer meet its long-term investment objectives and redeploy
the proceeds therefrom, preferably through tax-deferred exchanges, into assets
with better prospects for growth. As a result of this asset optimization
strategy, ATLANTIC disposed of four operating communities aggregating 1,184
units in 1996. A gain was recognized on each disposition with the total gain
aggregating $6.7 million on total proceeds of $67.2 million.
The four communities that were disposed of in 1996 accounted for $3.6
million and $5.2 million of net operating income during 1996 and 1995,
respectively. Each disposition was included in a tax-deferred exchange. At
December 31, 1996, ATLANTIC held a portion of the proceeds from one of these
dispositions aggregating $1.7 million in an interest-bearing escrow account.
These funds were used in the acquisition of a land parcel in January 1997,
completing the tax-deferred exchange. Two communities that ATLANTIC disposed
of in 1995 accounted for $2.4 million of net operating income during 1995.
Statement of Financial Accounting Standards No. 121, Accounting For The
Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of
("SFAS No. 121"), adopted by ATLANTIC effective January 1, 1996, establishes
accounting standards for the review of long-lived assets to be held and used
for impairment whenever the carrying amount of an asset may not be
recoverable. SFAS No. 121 also requires that certain long-lived assets to be
disposed of be reported at the lower of carrying amount or fair value less
cost to sell. ATLANTIC did not recognize any losses on the date it adopted
SFAS No. 121.
Long-lived investments held and used are periodically evaluated for
impairment and provisions for possible losses are made if required. As of
December 31, 1996, such investments are carried at cost, which is not in
excess of fair market value and no provisions for possible losses have been
made. ATLANTIC recognized a provision for possible loss of $2.5 million in
1996 associated with a
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community that was being held for sale on December 31, 1996. The carrying
value of this community at December 31, 1996 was $8.8 million. This community
was not depreciated during the period in which it was held for sale. ATLANTIC
disposed of this community in April 1997. This community accounted for
$1.0 million, $1.0 million and $0.5 million of net operating income for 1996,
1995 and 1994, respectively. This income is included in ATLANTIC's earnings
from operations in those years.
HOMESTEAD TRANSACTION
As more fully described under "--Liquidity and Capital Resources--Homestead
Transaction" and "Certain Relationships and Transactions--Homestead
Transaction", ATLANTIC sold its Homestead Village properties (one operating
property and 25 properties under construction or in planning (or the rights to
acquire such properties)) and paid $16.6 million in cash to Homestead on
October 17, 1996 in exchange for 4,201,220 shares of Homestead common stock.
ATLANTIC recognized a gain on the transaction of $2.8 million, net of expenses
of $1.3 million. The Homestead transaction was treated as a sale for financial
accounting purposes, but was treated as a contribution for tax purposes.
EXTRAORDINARY ITEM--LOSS ON EARLY EXTINGUISHMENT OF DEBT
In December 1996, ATLANTIC replaced its existing secured line of credit with
an unsecured line of credit. Such early extinguishment of debt resulted in the
write-off of unamortized loan costs of $3.9 million and is reflected as an
extraordinary item in the statement of earnings for the year ended December
31, 1996.
ENVIRONMENTAL MATTERS
ATLANTIC is subject to environmental regulations related to the ownership,
operation, development and acquisition of real estate. As part of its due
diligence procedures, ATLANTIC has conducted Phase I environmental assessments
on each community prior to acquisition. The cost of complying with
environmental regulations was not material to ATLANTIC's results of
operations. ATLANTIC is not aware of any environmental condition on any of its
communities that is likely to have a material adverse effect on ATLANTIC's
financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
ATLANTIC considers its liquidity and ability to generate cash from
operations and financings to be adequate and expects it to continue to be
adequate to meet ATLANTIC's development, acquisition, operating, debt service,
Homestead commitment and shareholder distribution requirements. At December
31, 1996, ATLANTIC had unfunded commitments for multifamily developments under
construction of $95.9 million and unfunded commitments of $111.1 million in
connection with the Homestead convertible mortgage notes described below.
INVESTING AND FINANCING ACTIVITIES
OVERVIEW. ATLANTIC's investment activities, which consisted primarily of
acquiring and developing multifamily communities, used approximately $287.4
million, $235.1 million and $390.1 million of cash for 1996, 1995 and 1994,
respectively.
ATLANTIC's financing activities provided net cash flow of $230.9 million,
$195.6 million and $372.6 million for 1996, 1995 and 1994, respectively.
Combined proceeds from equity offerings of $229.1 million in 1996, $205.8
million in 1995 (net of Share repurchases) and $239.7 million in 1994 were the
primary source of financing funds. Proceeds from line of credit borrowings,
net of repayments, were $38.0 million in 1996, $37.0 million in 1995 and
$153.0 million in 1994.
ATLANTIC expects to finance construction, development and acquisition of
multifamily communities primarily with cash on hand, borrowings under its line
of credit and cash from future securities offerings. After it has achieved a
substantial equity base and an investment-grade debt
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<PAGE>
rating, ATLANTIC intends to arrange fully amortizing, fixed rate, 15-year to
25-year unsecured debt to finance additional acquisitions and developments.
ATLANTIC believes that its current conservative ratio of long-term debt to
total long-term undepreciated book capitalization (which was 17.4% at December
31, 1996) provides considerable flexibility to prudently increase its capital
base by utilizing long-term debt as a financing tool in the future. Long-term
undepreciated book capitalization is defined as the sum of long-term debt and
shareholders' equity after adding back accumulated depreciation.
1994 INVESTING AND FINANCING ACTIVITIES. ATLANTIC's investment strategy in
1994 focused on two components: the acquisition of a substantial base of
existing operating communities to provide operating cash flow and the creation
of an internal development process. During 1994, ATLANTIC acquired 40
operating communities, 31 of which were obtained in two large portfolio
acquisitions. These 40 communities, located in 14 metropolitan areas, added
11,307 units to the portfolio for a total of 11,990 operating units. See the
table of investment activity under "--Overview" above.
ATLANTIC's investment in real estate during 1994 of approximately $600.3
million was financed through a combination of debt and equity. As partial
payment for one of the portfolio acquisitions, ATLANTIC issued $100.0 million
in Shares to the seller of the portfolio and subsequently repurchased certain
of these Shares with proceeds from later equity offerings. Sales of Shares
through a private placement raised an additional $239.7 million. Existing debt
of $107.5 million associated with certain of the communities acquired was
assumed by ATLANTIC. Additionally, ATLANTIC had net borrowings on its line of
credit during 1994 of $153.0 million.
1995 INVESTING AND FINANCING ACTIVITIES. In 1995, ATLANTIC acquired existing
communities aggregating 3,961 units and disposed of two communities
aggregating 596 units. Also in 1995, ATLANTIC began construction on 2,214
multifamily units. In the fourth quarter ATLANTIC completed construction on
its first two internally developed multifamily communities, a 270-unit
property in Charlotte, North Carolina and a 198-unit property in Birmingham,
Alabama. See the table of investment activity under "--Overview" above.
During 1995, ATLANTIC's net additional investment in real estate was $257.7
million bringing its total real estate investment at December 31, 1995 to
$888.9 million. Sales of Shares generated the largest source of capital in
1995. ATLANTIC sold $205.8 million of Shares, net of Share repurchases,
through two private placements. In connection with the acquisition of certain
communities in 1995, ATLANTIC assumed $24.7 million in existing debt.
Additional borrowings on its line of credit during 1995 aggregated $37
million.
1996 INVESTING AND FINANCING ACTIVITIES. In 1996, ATLANTIC acquired
operating communities aggregating 3,556 units and disposed of four communities
aggregating 1,184 units. Also in 1996, ATLANTIC began construction on 2,815
multifamily units. In 1996, ATLANTIC completed construction on three
internally developed multifamily communities (1,046 units), bringing the total
of completed internally developed multifamily communities to five (1,514
units). See the table of investment activity under "--Overview" above.
During 1996, ATLANTIC's net additional investment in real estate was $268.3
million bringing its total real estate investment at December 31, 1996 to
$1.16 billion. Sales of Shares generated the largest source of capital in
1996.
In 1996, ATLANTIC raised net proceeds of $119.1 million from a private
placement of Shares. The private placement, which began in 1995, raised a
total of $249.3 million, net of commissions and other expenses.
ATLANTIC's initial public offering of Shares was completed on October 18,
1996. The proceeds from the sale, net of the underwriters' commissions and
other expenses, were $110.0 million.
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<PAGE>
In connection with the acquisition of certain communities in 1996, ATLANTIC
assumed $17.9 million in existing debt. Additional borrowings on the line of
credit during 1996 aggregated $38.0 million. At December 31, 1996, ATLANTIC's
outstanding balance on its line of credit was $228.0 million.
At February 28, 1997, ATLANTIC had 5,095 units under construction with a
total budgeted development cost of $313.2 million of which $94.8 million was
unfunded. In addition, ATLANTIC owned multifamily developments in planning at
February 28, 1997 aggregating 1,260 units located in various target market
cities with a total budgeted development cost of $83.8 million. ATLANTIC's
multifamily developments under control at February 28, 1997 aggregated 1,808
units with a total budgeted development cost of $111.2 million. The foregoing
developments are subject to a number of conditions, and ATLANTIC cannot
predict with certainty that any of them will be consummated.
HOMESTEAD TRANSACTION. On October 17, 1996, ATLANTIC sold its moderate-
priced, purpose-built, extended-stay lodging facilities known as Homestead
Village properties to Homestead. In the transaction, ATLANTIC sold one
operating property and 25 properties under construction or in planning (or the
rights to acquire such properties) and paid $16.6 million in cash (the
"Homestead Assets"). In addition, ATLANTIC entered into a funding commitment
agreement to provide secured financing of up to $111.1 million to Homestead
for purposes of completing the development and construction of the properties
sold in the transaction. The Homestead transaction was treated as a sale for
financial accounting purposes, but was treated as a contribution for tax
purposes.
The transaction resulted in ATLANTIC receiving 4,201,220 shares of common
stock of Homestead in exchange for the Homestead Assets and 2,818,517
warrants, each to purchase one share of Homestead common stock at $10.00 per
share, in exchange for entering into the funding commitment agreement. On
November 12, 1996, ATLANTIC distributed the Homestead common stock and
warrants to its shareholders of record on October 29, 1996. ATLANTIC
shareholders received 0.110875 shares of Homestead common stock and 0.074384
Homestead warrants per Share. ATLANTIC will receive up to $98.0 million of
convertible mortgage notes from Homestead in exchange for funding up to $111.1
million under the funding commitment agreement. The difference between the
amounts funded and the convertible mortgage notes received of $13.1 million
(assuming full funding of the funding commitment) represents a mortgage note
premium that will be amortized as a reduction to interest income over the term
of the convertible mortgage notes.
ATLANTIC realized a gain of $2.8 million, after deducting expenses
associated with the transaction, representing the excess of the value of the
Homestead common stock received over the recorded basis of the Homestead
Assets. The Homestead warrants received represent a funding commitment fee
which has been valued at $6.5 million. The conversion feature of the
convertible mortgage notes has been valued at $6.9 million (assuming full
funding of the funding commitment). These deferred credits will be amortized
as an increase to interest income over the term of the convertible mortgage
notes. ATLANTIC intends to fund this commitment through cash on hand,
borrowings on its line of credit and sales of securities.
The convertible mortgage notes received from Homestead will bear interest at
9% per annum, will be due October 2006, will not be callable until 2001 and
will be convertible commencing March 31, 1997 at the option of the holder into
one share of Homestead common stock for every $11.50 of principal amount
outstanding. Upon full funding of ATLANTIC's convertible mortgage notes, its
conversion rights would represent a 15.35% ownership in Homestead (assuming no
further equity offerings by Homestead, conversion of all convertible mortgage
notes and exercise of all outstanding warrants). The effective yield on the
convertible mortgage notes, assuming conversion of all convertible mortgage
notes and exercise of all outstanding warrants, is estimated to be 8.46%,
after giving effect to the mortgage note premium, the funding commitment fee
and the conversion value of
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the convertible mortgage notes. At December 31, 1996, no funds had been
advanced pursuant to the funding commitment agreement and there were no
convertible mortgage notes outstanding. ATLANTIC advanced $23.0 million under
the funding commitment agreement through April 7, 1997 and $20.3 million of
mortgage notes was outstanding on such date.
ATLANTIC will deduct from net earnings the accretion of both the funding
commitment fee and the conversion value of the convertible mortgage notes in
calculating funds from operations. Therefore, the effective yield on the
convertible mortgage notes for purposes of calculating funds from operations
will be approximately 7.09% as compared to 8.46% for purposes of calculating
net earnings.
LINE OF CREDIT. ATLANTIC obtained a $200 million secured line of credit from
MGT, as agent for a group of lenders, in June 1994. In June 1996, the line of
credit was increased to $350 million. On December 18, 1996, ATLANTIC obtained
a $350 million unsecured line of credit agreement from MGT that replaced the
previous secured line of credit. Borrowings on the unsecured line of credit
bear interest at prime or, at ATLANTIC's option, LIBOR plus a margin ranging
from 1.0% to 1.375% (currently 1.375% as compared to 1.5% under the previous
agreement) depending on ATLANTIC's debt rating. ATLANTIC's objective is to
achieve an investment-grade debt rating in 1997. ATLANTIC currently pays a
commitment fee on the average unfunded line of credit balance of 0.1875%. If
ATLANTIC achieves an investment-grade debt rating, the commitment fee on the
average unfunded line of credit balance will range from 0.125% to 0.25% per
annum, depending on the amount of undrawn commitments. The line of credit
matures December 1998 and may be extended for one year with the approval of
MGT and the other participating lenders.
In August 1995, ATLANTIC entered into a swap agreement with Goldman Sachs
Capital Markets, L.P. covering $100 million of borrowings under the line of
credit, effectively mitigating a portion of its variable interest rate
exposure. Under this one-year agreement which became effective on February 5,
1996, ATLANTIC paid a fixed interest rate of 7.46% on the $100 million of
borrowings through December 17, 1996 and 7.335% thereafter. A swap agreement
with MGT took effect upon the expiration of the prior swap agreement on
February 5, 1997 and provides for a fixed interest rate of 7.325% on $100
million of borrowings through February 5, 1998. The interest rate that
ATLANTIC pays will be reduced if ATLANTIC achieves an investment-grade debt
rating and will range from 6.95% to 7.2% depending on the debt rating
achieved. ATLANTIC paid $0.3 million more in interest than it received under
the swap agreement during 1996. ATLANTIC is exposed to credit loss in the
event of non-performance by the swap counterparty; however, ATLANTIC believes
the risk of loss is minimal.
All debt incurrences under the line of credit are subject to certain
covenants as more fully described in the loan agreement. Specifically,
distributions for the preceding four quarters, excluding the Homestead
Distribution, may not exceed 95% (97% for distributions made before December
31, 1996) of ATLANTIC's funds from operations (as defined in the credit
agreement) for the preceding four quarters. ATLANTIC is in compliance with all
such covenants.
As of April 7, 1997, $289.5 million of borrowings were outstanding under the
line of credit.
MORTGAGE DEBT. At December 31, 1996, ATLANTIC had approximately $155.8
million of mortgages payable consisting of approximately $34.2 million of
fixed rate conventional mortgage debt and approximately $121.6 million of
mortgages that secure ten tax-exempt bond issues. This long-term mortgage
debt, which is substantially fully amortizing, has a weighted-average interest
rate of 6.95%, and provides ATLANTIC with favorable and conservative financial
leverage on its investment in communities associated with such debt.
Nine of ATLANTIC's ten tax-exempt bond issues have variable interest rates.
All of the tax-exempt bond issues are included in a credit enhancement
agreement with FNMA. Under the agreement with FNMA, ATLANTIC makes monthly
principal payments, based upon a 30-year amortization, into a principal
reserve account. To mitigate the variable interest rate exposure associated
with these bond
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issues, ATLANTIC has entered into swap agreements. Under these swap
agreements, ATLANTIC pays and receives interest on the aggregate principal
amount of the underlying bonds outstanding, net of the amount held in the
principal reserve account. These swap agreements effectively result in
ATLANTIC paying interest at a fixed rate of 6.64% on these nine tax-exempt
bond issues.
ATLANTIC's swap agreements related to its tax-exempt variable rate mortgages
are summarized as follows:
<TABLE>
<CAPTION>
AMOUNTS OF FIXED
BONDS TERM INTEREST RATE(1) ISSUER
---------- ---- ---------------- ------
<S> <C> <C> <C>
$23.1 million June 1995 to June 2002 6.48% General Re Financial Products Corporation
64.6 million June 1995 to June 2005 6.74 Morgan Guaranty Trust Company of New York
5.0 million March 1996 to March 2006 6.18 Morgan Guaranty Trust Company of New York
15.5 million August 1996 to August 2006 6.51 Morgan Stanley Derivative Products Inc.
----
Weighted-average interest rate.......... 6.64%
====
</TABLE>
- --------
(1) Includes the fixed interest rate provided by the swap agreements, annual
fees associated with the swap agreements and credit enhancement agreement
and amortization of capitalized costs associated with the credit
enhancement agreement.
To the extent the deposits in the principal reserve account with FNMA have
not been used to redeem any of the outstanding bonds, ATLANTIC pays interest
at the variable rates as provided by the mortgage agreements on that portion
of bonds outstanding which is equivalent to the balance in the principal
reserve fund ($1.1 million at December 31, 1996).
DISTRIBUTIONS
ATLANTIC's current distribution policy is to pay quarterly cash
distributions to shareholders based upon what it considers to be a reasonable
percentage of cash flow. Because depreciation is a non-cash expense, cash flow
typically will be greater than earnings from operations and net earnings.
Therefore, quarterly cash distributions will be higher than quarterly
earnings, resulting in a reduction to shareholders' equity.
Cash distributions paid on Shares in 1996, 1995 and 1994 were $1.65 per
Share, $1.60 per Share and $1.20 per Share, respectively. Additionally in
1996, ATLANTIC made the Homestead Distribution, which was valued at $58.2
million.
ATLANTIC paid a quarterly cash distribution of $0.42 per Share in each of
the first three quarters of 1996. On November 12, 1996, the Homestead
Distribution was made to shareholders of record on October 29, 1996. On
December 16, 1996, in light of the Homestead transaction and ATLANTIC's
initial public offering, ATLANTIC paid a reduced fourth quarter cash
distribution of $0.39 per Share to shareholders of record on December 2, 1996.
ATLANTIC announces the following year's projected annual distribution level
after the Board's annual budget review and approval in December of each year.
At its December 19, 1996 meeting, the Board announced a projected annual
distribution level of $1.56 per Share for 1997 and declared a distribution of
$0.39 per Share for the first quarter of 1997, which was paid on February 19,
1997. The payment of distributions is subject to the discretion of the Board
and is dependent upon the financial condition and operating results of
ATLANTIC.
FUNDS FROM OPERATIONS
Funds from operations represents ATLANTIC's net earnings computed in
accordance with GAAP, excluding gains (or losses) from real estate
transactions, provisions for losses, extraordinary items and depreciation. On
January 1, 1996, ATLANTIC adopted NAREIT's new definition of funds from
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operations. Under this new definition, loan cost amortization is not added
back to net earnings in determining funds from operations. For comparability,
funds from operations for the periods prior to January 1, 1996 give effect to
this new definition.
In 1996, ATLANTIC sold its Homestead Assets to Homestead, as more fully
described above under "--Homestead Transaction". Management believes that
funds from operations for 1996 and 1995 should be adjusted to reflect the
effects of the Homestead transaction on results of operations in order to be
comparable. Accordingly, the table below also presents pro forma funds from
operations, which have been calculated as if the Homestead transaction had
occurred on January 1, 1995. ATLANTIC did not own any Homestead properties in
1994 and, therefore, 1994 funds from operations have not been adjusted.
Management believes that the pro forma funds from operations information
presented below provides a more meaningful comparison of 1996 and 1995;
however, the pro forma funds from operations information is unaudited, does
not give effect to or adjust for any other events (such as subsequent
acquisitions and dispositions of communities or subsequent sales of Shares),
and is not necessarily indicative of what actual funds from operations would
have been if the Homestead transaction had occurred on January 1, 1995.
Funds from operations and pro forma funds from operations were as follows
(amounts in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net earnings............................... $ 38,629 $ 19,639 $ 9,926
Add (Deduct):
Depreciation............................. 20,824 15,925 8,770
Gain on disposition of real estate....... (6,732) -- --
Gain on sale of Homestead Assets......... (2,839) -- --
Provision for possible loss on
investments............................. 2,500 -- --
Extraordinary item-loss on early
extinguishment of debt.................. 3,940 -- --
---------- ---------- ----------
Funds from operations...................... 56,322 35,564 18,696
---------- ---------- ----------
Add (deduct) pro forma adjustments relating
to the sale of Homestead:
Reduction in rental income(1)............ (424) -- --
Reduction in rental expenses(1).......... 173 -- --
Increase in interest expense(2).......... (2,739) (3,448) --
Other, net............................... 34 59 --
REIT Management fee effect(3)............ 475 542 --
---------- ---------- ----------
Total pro forma adjustments............ (2,481) (2,847) --
---------- ---------- ----------
Pro forma funds from operations............ 53,841 32,717 18,696
Cash distributions paid.................... (53,064) (35,119) (14,648)
---------- ---------- ----------
Excess (deficit) of pro forma funds from
operations over cash distributions........ $ 777 $ (2,402) $ 4,048
========== ========== ==========
Weighted-average Shares outstanding (as
adjusted for reverse Share split)......... 32,028 21,944 12,227
========== ========== ==========
</TABLE>
- --------
(1) Represents the reduction in rental income and rental expenses that would
have occurred had the Homestead property that commenced operations in 1996
been sold as of January 1, 1995.
(2) Represents the increase in interest expense due to (i) the reduction in
capitalized interest that would have resulted from the sale of the
Homestead Village properties under development and (ii) the increased
borrowings necessary to fund the cash payment to Homestead upon closing of
the Homestead transaction, as if these two items had occurred on January
1, 1995.
(3) Represents the decrease in REIT Management fee that would have resulted
from the pro forma adjustments.
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Funds from operations should not be considered as an alternative to net
income or any other GAAP measurement of performance as an indicator of
ATLANTIC's operating performance or as an alternative to cash flows from
operating, investing or financing activities as a measure of liquidity. Cash
flow from financing activities is expected to be substantially equivalent to
cash used in investing activities, as ATLANTIC utilizes revolving credit
borrowings, to be refunded with sales of equity and long-term, fully
amortizing unsecured debt securities, to fund its investment activities.
ATLANTIC's policy is to expense, rather than capitalize, repairs and
maintenance, including carpet and appliance replacements, in determining net
income and funds from operations. Only major renovations, replacements or
improvements with a substantial expected economic life (such as roofs, parking
lots and additions) are capitalized. Therefore, the funds from operations
measure presented by ATLANTIC may not be comparable to similarly titled
measures of other REITs.
REIT MANAGEMENT AGREEMENT
ATLANTIC has a REIT management agreement (the "REIT Management Agreement")
pursuant to which the REIT Manager provides management services to ATLANTIC.
All officers of ATLANTIC are employees of the REIT Manager and ATLANTIC
currently has no employees. The REIT Manager provides both strategic and day-
to-day management of ATLANTIC, including research, investment analysis,
acquisition, development, marketing, disposition of assets, asset management,
due diligence, capital markets, legal and accounting services.
The REIT Management Agreement requires ATLANTIC to pay an annual fee of 16%
of cash flow as defined in the REIT Management Agreement, payable monthly.
Cash flow is calculated by reference to ATLANTIC's cash flow from operations
plus (i) fees paid to the REIT Manager, (ii) extraordinary expenses incurred
at the request of the independent Directors of ATLANTIC (of which there were
none in the periods reported), and (iii) 33% of any interest paid by ATLANTIC
on convertible subordinated debentures (of which there were none in the
periods reported); and after deducting (i) regularly scheduled principal
payments (excluding prepayments or balloon payments) for debt with
commercially reasonable amortization schedules, (ii) assumed principal and
interest payments on senior unsecured debt treated as having regularly
scheduled principal and interest payments like a 20-year level-payment, fully
amortizing mortgage (of which there were none in the periods reported) and
(iii) distributions actually paid with respect to any non-convertible
preferred stock (of which there were none in the periods reported). Cash flow
does not include: (i) realized gains or losses from dispositions of
investments, (ii) interest income from cash equivalent investments and the
Homestead convertible mortgage notes and dividend and interest income from
Atlantic Development Services, (iii) provisions for possible losses on
investments and (iv) extraordinary items.
The REIT Manager also receives a fee of 0.20% per year on the average daily
balance of cash equivalent investments. The REIT Management fee aggregated
$10.4 million, $6.9 million and $3.7 million for the years ended December 31,
1996, 1995 and 1994, respectively.
Total real estate operating, interest, general and administrative costs will
increase due to ATLANTIC's larger asset size, as well as unforeseen changes
that may occur. REIT Management fees paid by ATLANTIC will increase if cash
flow of ATLANTIC, as defined in the REIT Management Agreement, increases,
including such increases that may relate to increases in ATLANTIC's assets.
ATLANTIC does not expect its other operating costs and expenses to increase
except as a result of inflation, market conditions or other factors over which
the REIT Manager has no control. Operating costs for particular items,
however, may be increased if they are expected to result in greater decreases
in other expenses or increases in revenues from ATLANTIC's assets.
ATLANTIC must reimburse the REIT Manager for third-party and out-of-pocket
expenses relating to travel, transaction costs and similar costs relating to
the acquisition, development or disposition of assets or the obtaining of
financing for ATLANTIC and its operations. The REIT Manager will pay all
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of its own salary and other overhead expenses. ATLANTIC will not have any
employee expense; however, it will pay all of the third-party costs related to
its normal operations, including legal, accounting, travel, architectural,
engineering, shareholder relations, independent Director fees and similar
expenses, property management and similar fees paid on behalf of ATLANTIC, and
travel expenses incurred in seeking financing, community acquisitions,
community sales and similar activities on behalf of ATLANTIC and in attending
ATLANTIC Board, committee and shareholder meetings. Under the REIT Management
Agreement, the REIT Manager or any of its affiliates are not precluded from
rendering services to other investors, including REITs, even if such investors
compete with ATLANTIC. The REIT Manager is owned by ATLANTIC's largest
shareholder and, consequently, the REIT Manager has no intention of rendering
services to investors who compete with ATLANTIC.
The REIT Management Agreement is renewable by ATLANTIC annually, subject to
a determination by the independent Directors that the REIT Manager's
performance has been satisfactory and that the compensation payable to the
REIT Manager is fair. Each of ATLANTIC and the REIT Manager may terminate the
REIT Management Agreement on 60 days' notice. Because of the year-to-year
nature of the agreement, its maximum effect on ATLANTIC's results of
operations cannot be predicted, other than that REIT Management fees will
generally increase or decrease in proportion to cash flow increases or
decreases.
On March 24, 1997, Security Capital Group and ATLANTIC entered into the
Merger Agreement. Pursuant to the Merger Agreement, Security Capital Group
will cause the REIT Manager and SCG Realty Services to be merged into a newly
formed subsidiary of ATLANTIC. As a result of the Merger, the employees of the
REIT Manager and SCG Realty Services will become employees of ATLANTIC. For a
more complete description of the Merger, see "The Merger Transaction".
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The Board reserves the right to make exceptions to ATLANTIC's policies
described below for transactions when it believes that the transaction is in
the best long-term interests of ATLANTIC and its shareholders. The Board may
amend or revise ATLANTIC's policies from time to time without a vote of the
shareholders of ATLANTIC.
INVESTMENT POLICIES
Prospective community investments are analyzed pursuant to several
underwriting criteria, including purchase price, competition and other market
factors, and prospects for long-term growth in cash flow. ATLANTIC's
investment decisions are based upon the expected contribution of the community
to long-term cash flow growth on an unleveraged basis. The expected economic
contribution is based on an evaluation of a community's stabilized operations,
including an estimate of all cash revenues from leases and other revenue
sources, minus expenses incurred in operating the community (including real
estate taxes, insurance, maintenance, turnover costs (such as carpet and
appliance replacement), personnel costs and utility charges, but excluding
depreciation, debt service and amortization of loan costs) and a reserve for
capital expenditures.
It is ATLANTIC's policy to generally limit its investments such that (i) no
more than 10% of its assets are invested in land held for development other
than land under development or where development is in planning, (ii) ATLANTIC
will not be treated as an investment company under the Investment Company Act
of 1940 and (iii) ATLANTIC will not invest in mortgage loans, other than
mortgage loans to third-party owner/developers in connection with the
development of multifamily communities that are contractually required to be
sold to ATLANTIC upon completion or convertible mortgage loans to Homestead or
mortgage loans to entities in which ATLANTIC owns a substantial majority of
the economic interest and other than convertible mortgage loans where the
Board believes that such loans are in the best long-term interests of ATLANTIC
and its shareholders.
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ATLANTIC's strategy includes the development of industry-leading, moderate
income multifamily communities designed for the largest renter groups. Long
term, ATLANTIC believes that development will contribute as much, or more, to
its earnings growth than acquisitions.
While the current policy of ATLANTIC is to make equity investments in
multifamily communities exclusively, ATLANTIC may invest in other real estate
interests consistent with its qualification as a REIT. A change in this policy
could occur, for example, if ATLANTIC concludes that it may benefit from the
cash flow or any appreciation in the value of the community arising through
convertible mortgage investment.
Subject to the gross income and asset tests necessary for REIT
qualification, ATLANTIC may also invest in securities of other entities
engaged in real estate activities or securities of other issuers. See "Federal
Income Tax Considerations--Taxation of ATLANTIC". ATLANTIC does not currently
intend to invest in the securities of other issuers except in connection with
acquisitions of indirect interests in communities (normally, general or
limited partnership interests in special purpose partnerships controlled by
ATLANTIC and owning multifamily communities and except for preferred stock of
entities in which ATLANTIC has a substantial majority of the economic
interest).
FINANCING POLICIES
ATLANTIC does not intend to incur long-term, floating rate debt other than
in connection with property acquisitions in which the debt assumed is
impracticable to prepay or is tax-exempt debt. Because its assets are largely
long-term, ATLANTIC's debt is expected to be unsecured long-term, fixed rate,
fully amortizing debt. ATLANTIC has an unsecured line of credit for the
purpose of facilitating investment in developments and acquisitions as well as
for working capital. ATLANTIC may also determine to issue securities senior to
the Shares, including preferred stock and debt securities (either of which may
be convertible into Shares or be accompanied by warrants to purchase Shares).
ATLANTIC's financing policies are to replace line of credit borrowings with
the proceeds of equity offerings or unsecured long-term, fixed rate, fully
amortizing debt.
The proceeds of any borrowings by ATLANTIC may be used to pay distributions,
to provide working capital, to pay existing indebtedness or to finance
acquisitions, expansions or development of new multifamily communities.
CONFLICT OF INTEREST POLICIES
ATLANTIC does not intend to engage in principal transactions with officers
and Directors or to engage independent Directors to provide services to
ATLANTIC. In addition, transactions with the REIT Manager and its affiliates
are significantly restricted and must be reviewed and approved by a majority
of independent Directors. ATLANTIC will not borrow from or make loans to
affiliates, other than mortgage loans to entities in which ATLANTIC owns a
substantial majority of the economic interest, convertible mortgage loans to
Homestead or convertible mortgage loans where the Board believes that such
loans are in the best long-term interests of ATLANTIC and its shareholders.
With a view to resolving potential conflicts of interest and protecting the
interests of ATLANTIC's shareholders against such possible conflicts,
ATLANTIC's Charter requires that a majority of the Board be independent
Directors.
POLICIES APPLICABLE TO THE REIT MANAGER AND OFFICERS AND DIRECTORS OF ATLANTIC
The REIT Manager has agreed in writing not to engage in any principal
transaction with ATLANTIC, including but not limited to purchases, sales or
leases of communities or borrowing or lending of funds, except for
transactions approved by a majority of the independent Directors not otherwise
interested in such transaction as being fair and reasonable to ATLANTIC and on
terms and conditions not less favorable to ATLANTIC than those available from
unaffiliated third parties. The Homestead transaction would have been
prohibited by the terms of the REIT Management Agreement;
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the REIT Manager and ATLANTIC waived the prohibition and ATLANTIC's
shareholders approved the transaction. In addition to the requirements
described above, ATLANTIC will not engage in such transactions unless the
independent Directors believe that any such transaction is in the long-term
best interests of ATLANTIC and its shareholders. The sole activity of the REIT
Manager is advising ATLANTIC.
The REIT Management Agreement permits affiliates of the REIT Manager to
provide property management and other services to ATLANTIC for compensation.
The fees charged for such services must be comparable to fees that would be
charged by unaffiliated, qualified third parties. Any property management fees
are reviewed annually by the Board and must be approved by a majority of the
independent Directors.
With certain exceptions, officers and employees of the REIT Manager spend
all of their time on ATLANTIC's affairs. In the future, certain officers or
employees may be transferred to or from other affiliates of the REIT Manager,
consistent with REIT Management's plan for management depth and orderly
succession. See "The Merger Transaction--Relationship with Security Capital
Group After the Merger".
ATLANTIC does not intend to issue options or warrants to the REIT Manager or
its employees; however, in the event that ATLANTIC becomes an internally
managed REIT, ATLANTIC intends to adopt an employee incentive plan under which
options may be granted to employees, subject to Board and shareholder
approval. See "The Merger Transaction".
Under the law of Maryland (where ATLANTIC is incorporated), each Director is
obligated to offer to ATLANTIC any opportunity (with certain limited
exceptions) which comes to him or her and which ATLANTIC could reasonably be
expected to have an interest in developing. In addition, under Maryland law, a
contract or other transaction between ATLANTIC and a Director or between
ATLANTIC and another corporation or entity in which a Director of ATLANTIC is
a director or has a material financial interest is not void or voidable solely
because of such interest or the presence of the Director at the meeting at
which the contract or transaction is approved or the Director's vote in favor
thereof, if (a) the contract or transaction is approved or ratified, after
disclosure of the common directorship or interest, by the affirmative vote of
a majority of disinterested Directors, even if the disinterested Directors
constitute less than a quorum, or by a majority of the votes cast by
disinterested stockholders, or (b) the contract or transaction is fair and
reasonable to ATLANTIC.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
ATLANTIC may, but does not presently intend to, make investments other than
as previously described. All investments will be primarily related to
multifamily communities and the management and development thereof. The Board
has authority to reclassify unissued Shares into senior securities, to offer
Shares or other securities and, subject to certain restrictions, to repurchase
or otherwise reacquire Shares or any other securities and may engage in such
activities in the future. ATLANTIC's policy is not to make loans to its
officers or directors or to the REIT Manager; however, in the event that
ATLANTIC becomes an internally managed REIT, ATLANTIC may (i) adopt an
employee incentive plan, under which loans may be made to employees to
purchase Shares, subject to Board and shareholder approval, and (ii) make
relocation and other loans to employees, subject to Board approval. See "The
Merger Transaction". ATLANTIC may in the future make loans to partnerships and
joint ventures in which it participates in order to meet working capital
needs. ATLANTIC has not engaged in trading, underwriting or agency
distribution or sale of securities of other issuers and does not intend to do
so. ATLANTIC does not intend to engage in the purchase or sale of investments
(other than acquisition or disposition of communities in accordance with the
REIT rules and ATLANTIC's investment policies) and may on a selected basis in
the future offer securities in exchange for communities. ATLANTIC intends to
make annual and quarterly reports to shareholders. The annual reports will
contain audited financial statements.
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At all times, ATLANTIC intends to make investments in such a manner as to be
consistent with the requirements of the Code for ATLANTIC to qualify as a REIT
unless, because of changing circumstances or changes in the Code (or in
Treasury Regulations), the Board determines that it is no longer in the best
interests of ATLANTIC to qualify as a REIT.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
In addition to the transactions with affiliates described elsewhere in this
Prospectus, ATLANTIC has entered into the following transactions:
REIT MANAGEMENT AGREEMENT
Pursuant to the REIT Management Agreement, the REIT Manager assumed the day-
to-day management of ATLANTIC. The REIT Manager is owned by Security Capital
Group, which currently beneficially owns 56.9% of the outstanding Shares
(51.4% after the Offering). The REIT Manager's sole business and principal
occupation since its formation in October 1993 is advising ATLANTIC. The
services provided or coordinated by the REIT Manager include strategic and
day-to-day management, research, investment analysis, acquisition and due
diligence, multifamily community development, asset management, capital
markets, asset disposition, legal and accounting services. All such services
are included in the REIT Management fee, including capital markets and
development services, which most REITs capitalize (or, in the case of capital
markets, deduct from proceeds). The REIT Management fee is paid monthly and
was $10.4 million for the year ended December 31, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--REIT
Management Agreement". See "The Merger Transaction" for a description of an
agreement that ATLANTIC has entered into with Security Capital Group to merge
the REIT Manager and SCG Realty Services into a newly-formed subsidiary of
ATLANTIC in exchange for Shares.
SECURITY CAPITAL GROUP INVESTOR AGREEMENT
ATLANTIC and Security Capital Group are parties to an Investor Agreement,
dated as of October 28, 1993 (the "Investor Agreement"), which required
Security Capital Group to purchase $21.5 million in Shares, subject to certain
conditions. The Investor Agreement, among other things, requires ATLANTIC to
obtain Security Capital Group's approval of (i) the annual operating budget
and substantial deviations therefrom, (ii) contracts for investment
management, property management or leasing services or that contemplate annual
payments in excess of $100,000 and (iii) acquisitions or dispositions in a
single transaction or a group of related transactions where the purchase price
exceeds $5 million. The Investor Agreement also provides that, so long as
Security Capital Group owns at least 10% of the outstanding Shares, ATLANTIC
may not increase the Board to more than seven members. Security Capital Group
is entitled to designate one or more persons as Directors, and ATLANTIC is
obligated to use its best efforts to cause the election of such persons, as
follows: (i) so long as Security Capital Group owns at least 10%, but less
than 20%, of the outstanding Shares, it is entitled to nominate two persons;
and (ii) so long as Security Capital Group owns at least 20% of the
outstanding Shares, it is entitled to nominate three persons. See "The Merger
Transaction--Relationship with Security Capital Group After the Merger" for a
description of the revised investor agreement which would replace the current
Investor Agreement if the Merger is consummated.
SHAREHOLDERS' AGREEMENT
To facilitate ATLANTIC's acquisition of certain communities from Laing,
Security Capital Group granted Laing certain rights to require Security
Capital Group to purchase Laing's Shares at pre-agreed prices. ATLANTIC
assumed Security Capital Group's first put obligation for 2,500,000 Shares and
on March 31, 1995 purchased such Shares from Laing at $22.00 per Share. In
exchange for ATLANTIC's assumption of the first put obligation, Security
Capital Group purchased $94.8 million of Shares at $22.00 per Share from
ATLANTIC in a private offering. In November 1995, ATLANTIC assumed Security
Capital Group's second put obligation for 1,250,000 Shares at $23.136 per
Share. In exchange for ATLANTIC's assumption of the second put obligation,
Security Capital Group
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purchased 1,250,000 Shares at a price of $23.136 per Share and purchased an
additional $21.1 million of Shares at $23.00 per Share in a private offering.
Security Capital Group's purchase under the third put obligation of 1,250,000
Shares (representing all Shares owned by Laing) at $24.53 per Share occurred
on July 1, 1996.
PROPERTY MANAGEMENT COMPANY
Commencing May 12, 1994, SCG Realty Services, an affiliate of the REIT
Manager, began providing property management services for certain of
ATLANTIC's communities. The agreement terminates September 30, 1997, subject
to earlier termination by ATLANTIC on 30 days' notice, is renewable annually
upon approval of ATLANTIC's independent Directors and contemplates a fee to
SCG Realty Services of 3.5% per annum of community revenues for communities
located in Atlanta and Washington, D.C. markets and 3.75% per annum of
community revenues for all other communities, paid monthly, which was $4.2
million for the year ended December 31, 1996. The REIT Manager anticipates
that SCG Realty Services will manage additional ATLANTIC properties in the
future. Any management contracts executed with SCG Realty Services are
expected to be at market rates. See "Business--ATLANTIC's Operating System--
Property Management". See "The Merger Transaction" for a description of an
agreement that ATLANTIC has entered into with Security Capital Group to merge
the REIT Manager and SCG Realty Services into a newly formed subsidiary of
ATLANTIC in exchange for Shares.
HOMESTEAD TRANSACTION
In March 1996, the Board began considering ways for ATLANTIC to maximize
shareholder value with respect to its Homestead Village properties. In May
1996, ATLANTIC, PTR, Security Capital Group and Homestead entered into a
merger agreement, pursuant to which each of ATLANTIC, PTR and Security Capital
Group agreed to sell, through a series of merger transactions, all of their
respective assets relating to Homestead Village properties to Homestead, and
ATLANTIC and PTR agreed to enter into funding commitment agreements (see "--
Funding Commitment Agreement"). ATLANTIC's and PTR's respective shareholders
approved the Homestead transaction on September 13, 1996 and September 12,
1996, respectively, and the closing of the Homestead transaction occurred on
October 17, 1996, which resulted in ATLANTIC (a) owning 4,201,220 shares of
Homestead common stock, (b) owning 2,818,517 warrants to purchase one share of
Homestead common stock at $10.00 per share, (c) owning up to $98.0 million in
convertible mortgage notes as described below (see "--Funding Commitment
Agreement") and (d) providing a cash payment of $16.6 million to Homestead on
the closing date. The $16.6 million payment was required because ATLANTIC's
Homestead Village properties, only one of which was operating, were in earlier
stages of development than PTR's Homestead Village properties, therefore,
ATLANTIC had not funded the same percentage of total costs as PTR. The payment
also assured that ATLANTIC received all of its shares of Homestead common
stock at the closing of the transaction rather than in smaller increments over
time as funds are expended to complete the properties contributed by ATLANTIC.
ATLANTIC distributed the Homestead common stock and warrants which it received
to its shareholders pro rata in the Homestead Distribution on November 12,
1996. Each holder of record of a Share on October 29, 1996 received 0.110875
shares of Homestead common stock and warrants to purchase 0.074384 shares of
Homestead common stock.
FUNDING COMMITMENT AGREEMENT
Pursuant to a funding commitment agreement entered into at the closing of
the Homestead transaction, ATLANTIC agreed to make mortgage loans to Homestead
of up to $111.1 million, which amount was anticipated to be sufficient to
complete the development of the Homestead Village facilities contributed by
ATLANTIC. ATLANTIC received 2,818,517 warrants, each to purchase one share of
Homestead common stock, in exchange for its entering into the funding
commitment agreement, which ATLANTIC subsequently distributed pro rata to its
shareholders in the Homestead Distribution. Each Homestead warrant is
exercisable at $10.00 per share and expires October 27,
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1997. The exercise price was determined based on the overall structure of the
Homestead transaction and, in particular, considering Homestead's future
capital needs and a desire to provide liquidity to ATLANTIC's shareholders
with respect to their warrants. ATLANTIC will receive convertible mortgage
notes in respect of fundings under the funding commitment agreement in stated
amounts of up to $98.0 million. The effect of these provisions of the funding
commitment agreement is that ATLANTIC will fund $1,133,535 for each $1,000,000
principal amount of convertible mortgage loans. The convertible mortgage loans
will be recorded for financial reporting purposes at a premium of
approximately $13.1 million which will be amortized and recorded as an
adjustment to interest income over the ten-year term of the mortgage loans
using the effective interest method. The relative ownership percentages of
ATLANTIC, PTR and Security Capital Group in Homestead were determined based
upon the relative value of the contributed assets assuming that all of the
properties to be contributed had been developed and were fully operational.
ATLANTIC agreed to fund convertible mortgages to provide for the development
of the Homestead Village properties and to achieve its ownership allocations.
The funded amount of ATLANTIC under the convertible mortgages therefore was in
an amount that was anticipated, pursuant to development budgets, to be
sufficient to complete the development of the Homestead Village properties
contributed by ATLANTIC. The difference between the funded amount and the
stated amount of the convertible mortgage loans arose because the rate of
return on the existing Homestead Village facilities contributed by PTR was
projected to exceed the rate of return on the Homestead Village facilities
contributed by ATLANTIC and PTR to Homestead which were under construction or
in pre-development planning. This expected difference in the rates of return
arose because, as of July 1, 1996, PTR was expected to have 28 Homestead
Village facilities in operation and generating income, while ATLANTIC was
expected to have none and the average property development costs for the
existing PTR Homestead Village properties, on balance, were expected to be
less than those for the ATLANTIC and PTR Homestead Village properties
projected to be built in the future because a large portion of the existing
PTR Homestead Village properties were in planning or under development during
1992 and 1993 when land prices and construction costs were less than they were
when the transaction was negotiated and were anticipated to be over the next
18 months. Because of the foregoing factors, and as a result of Homestead's
desire to issue a single class of convertible mortgage notes bearing a 9% per
annum interest rate, the stated amounts of the convertible mortgage notes were
adjusted to provide an effective yield (after giving effect to the premium due
to the issuance of the Homestead warrants and the convertibility of the
mortgage notes) to each of ATLANTIC (8.46% on a fully funded basis) and PTR
(12.42% on a fully funded basis) that was reflective of the relative rates of
return anticipated to be realized on all of the facilities contributed by
ATLANTIC and PTR, respectively. The obligation of ATLANTIC is limited to a
specific dollar amount for each property identified in the funding commitment
agreement. Upon any determination by Homestead to commence development of a
property identified in the funding commitment agreement, Homestead is required
to notify ATLANTIC and ATLANTIC is required to fund up to the full amount of
its obligation with respect to such property. Homestead is required to
endeavor in good faith to complete the development of such property consistent
with the development plans for such property. Each mortgage note issued by
Homestead pursuant to the funding commitment agreement is convertible into
shares of Homestead common stock on the basis of one share of Homestead common
stock for every $11.50 of principal outstanding on the mortgage loan. The
obligation of Homestead to call for funding of, and the obligation of ATLANTIC
to provide funding for, the mortgage loans expire on March 31, 1998, except
with respect to properties for which Homestead has given notice that it
intends to develop. Interest on the mortgage notes accrues at the rate of 9%
per annum on the unpaid principal balance, payable every six months. The
mortgage notes are scheduled to mature on October 31, 2006, and are not
callable until October 27, 2001. Homestead has pledged the assets being
contributed by ATLANTIC as collateral for the mortgage loans being made by
ATLANTIC. At December 31, 1996, no funds had been advanced pursuant to the
funding commitment agreement and there were no convertible mortgage notes
outstanding. ATLANTIC advanced $23.0 million under the funding commitment
agreement through April 7, 1997 and $20.3 million of mortgage notes was
outstanding on such date.
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PROTECTION OF BUSINESS AGREEMENT
ATLANTIC entered into a protection of business agreement with Homestead at
the closing of the Homestead transaction which prohibits ATLANTIC and its
affiliates from engaging, directly or indirectly, in the extended-stay lodging
business except through Homestead and its subsidiaries. The agreement also
prohibits Homestead from, directly or indirectly, engaging in the ownership,
operation, development, management or leasing of multifamily properties. The
agreement does not prohibit ATLANTIC from: (i) owning securities of Homestead;
(ii) owning up to 5% of the outstanding securities of another person engaged
in owning, operating, developing, managing or leasing extended-stay lodging
properties, so long as it does not actively participate in the business of
such person; (iii) owning the outstanding securities of another person, a
majority-owned subsidiary, division, group, franchise or segment of which is
engaged in owning, operating, developing, managing or leasing extended-stay
lodging properties, so long as not more than 5% of such person's consolidated
revenues are derived from such properties; and (iv) owning securities of
another person primarily engaged in a business other than owning, operating,
developing, managing or leasing extended-stay lodging properties, including a
person primarily engaged in business as an owner, operator or developer of
hotel properties, whether or not such person owns, operates, develops, manages
or leases extended-stay lodging properties. The agreement does not prohibit
Homestead from: (i) owning securities of ATLANTIC, PTR or Security Capital
Group; (ii) owning up to 5% of the outstanding securities of another person
engaged in owning, operating, developing, managing or leasing garden-style
multifamily properties; and (iii) owning the outstanding securities of another
person, a majority-owned subsidiary, division, group, franchise or segment of
which is engaged in owning, operating, developing, managing or leasing garden-
style multifamily properties, so long as not more than 5% of such person's
consolidated revenues are derived from such properties. The agreement will
terminate in the event of an acquisition, directly or indirectly (other than
by purchase from ATLANTIC, PTR or Security Capital Group or any of their
respective affiliates), by any person (or group of associated persons acting
in concert), other than ATLANTIC, PTR or Security Capital Group or their
respective affiliates, of 25% or more of the outstanding voting stock of
Homestead, without the prior written consent of Homestead's board of
directors. Subject to earlier termination pursuant to the preceding sentence,
the protection of business agreement will terminate on October 17, 2006.
HOMESTEAD INVESTOR AGREEMENT
ATLANTIC entered into an investor and registration rights agreement with
Homestead at the closing of the Homestead transaction pursuant to which
ATLANTIC is entitled to designate one person for nomination to the Homestead
board of directors, and Homestead will use its best efforts to cause the
election of such nominee, until March 31, 1998 and for so long thereafter as
ATLANTIC has the right to convert in excess of $20.0 million in principal
amount of loans made pursuant to its funding commitment agreement. Such
nominee may, but need not, include the same person(s) nominated by Security
Capital Group pursuant to Security Capital Group's investor agreement with
Homestead. In addition, Homestead has granted to ATLANTIC registration rights
with respect to the distribution of all of the shares of Homestead common
stock issuable upon conversion of the convertible mortgage notes. Prior to
October 22, 1997, ATLANTIC may request one registration of those shares of
Homestead common stock which are issued upon conversion of any or all of the
convertible mortgage notes during such one-year period and which it intends to
distribute to its stockholders. After such one-year anniversary, ATLANTIC may
request three additional registrations pursuant to Rule 415 promulgated under
the Securities Act of all shares of Homestead common stock issued or issuable
upon conversion of the convertible mortgage notes. Such registration, except
for the fees and disbursements of counsel to ATLANTIC, shall be at the expense
of Homestead.
DEVELOPMENT AGREEMENT
ATLANTIC and Hanover Realty Services Inc. ("Hanover") are parties to several
development agreements, in connection with the acquisition and development of
six communities. In consideration for Hanover's development of these
communities the development agreements provide that ATLANTIC
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will make certain earnout payments to Hanover either in the form of cash,
Shares or shares of Security Capital Group's common stock, as determined in
the sole discretion of Hanover. The amount of such payments shall be
determined on a per site basis and shall be a percentage of the amount by
which annualized net operating income, capitalized at a rate as provided by
the agreement, exceeds the total actual project costs. In February 1997,
Hanover was paid $0.8 million with respect to one community. The aggregate
amount of such earnout amounts for the five remaining communities cannot
exceed $5.8 million. Hanover was not entitled to receive any earnout payments
at February 28, 1997 on the five remaining communities.
OTHER TRANSACTIONS WITH AFFILIATES
In ATLANTIC's March through June 1995 private offering, Security Capital
Group purchased $94.8 million of Shares at $22.00 per Share. In ATLANTIC's
December 1995 through May 1996 private offering, Security Capital Group
purchased an aggregate of $50 million of Shares, $21.1 million of which were
purchased at $23.00 per Share (which was the price per Share paid by other
investors in the offering) and $28.9 million of which were purchased at
$23.136 per Share. See "--Shareholders' Agreement". In ATLANTIC's October 1996
initial public offering, Security Capital Group purchased $10 million of
Shares at $24.00 per Share. Except as described above, all subscriptions were
made on the same terms and at the same times as made available to other
investors.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of April 7, 1997, the beneficial
ownership of Shares for (i) each person known to ATLANTIC to be the beneficial
owner of more than 5% of ATLANTIC's Shares, (ii) each Director of ATLANTIC and
(iii) all Directors and executive officers of ATLANTIC as a group. Unless
otherwise indicated in the footnotes, all of such interests are owned
directly, and the indicated person or entity has sole voting and dispositive
power.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF
OF BENEFICIAL OWNER BENEFICIALLY OWNED ALL SHARES
------------------- ------------------ ----------
<S> <C> <C>
Security Capital Group Incorporated ...... 21,545,669(1) 56.9%
125 Lincoln Avenue
Santa Fe, NM 87501
Ameritech Pension Trust .................. 2,223,320(2) 5.9
Ameritech Corporation
225 West Randolph Street
HQ-13A
Chicago, IL 60606
General Motors Investment Management
Corporation.............................. 2,173,913(3) 5.7
767 Fifth Avenue
New York, NY 10153
Manuel A. Garcia III...................... 11,000(4) *
P.O. Box 2066
Davgar Restaurants, Inc.
Winter Park, FL 32790
Ned S. Holmes ............................ 58,500(4)(5) *
Parkway Investments/Texas, Inc.
55 Waugh Drive
Houston, TX 77007
Constance B. Moore........................ 11,600 *
Six Piedmont Center
Atlanta, GA 30305
James C. Potts............................ 13,050 *
Six Piedmont Center
Atlanta, GA 30305
John M. Richman........................... 11,000(4) *
Wachtell, Lipton, Rosen & Katz
227 West Monroe Street, Suite 4825
Chicago, IL 60606
All Directors and executive officers as a
group
(9 persons).............................. 105,150 *
</TABLE>
- --------
* Less than 1%
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(1) These Shares are owned of record by SC Realty Incorporated, a wholly owned
subsidiary of Security Capital Group, and are pledged to secure Security
Capital Group's $300 million revolving line of credit facility with a
syndicate of banks. As of April 7, 1997, there were no outstanding
borrowings under the line of credit. The line of credit is also secured by
securities owned by Security Capital Group of PTR, SCI, Homestead and
Security Capital U.S. Realty, an entity based in Luxembourg which invests
in real estate operating companies in the United States. Security Capital
Group estimates that the aggregate market value of the pledged securities
exceeded $2.8 billion as of April 7, 1997. Security Capital Group was in
compliance with all covenants under the line of credit at December 31,
1996.
(2) This information is based on a Schedule 13G dated February 14, 1997.
According to the Schedule 13G, the Shares were not acquired for the
purpose of changing or influencing the control of ATLANTIC.
(3) 1,956,522 of these Shares are owned by the General Motors Hourly-Rate
Employees Pension Trust and 217,391 of these Shares are owned by the
General Motors Salaried Employees Pension Trust.
(4) Includes 1,000 Shares each for Messrs. Garcia, Holmes and Richman which
are issuable upon exercise of Options granted under the Outside Directors
Plan. See "REIT Management--Outside Directors Plan".
(5) Mr. Holmes directly owns 2,500 of these Shares. Mr. Holmes may be deemed
to beneficially own 55,000 of these Shares which are owned by Mr. Holmes'
wife and children and by Holmes Family Venture Ltd., a family entity with
respect to which Mr. Holmes shares voting and dispositive power.
DESCRIPTION OF STOCK
The following summary of the terms of the stock of ATLANTIC does not purport
to be complete and is subject to and qualified in its entirety by reference to
ATLANTIC's Charter and Bylaws, copies of which have been filed as exhibits to
the registration statement of which this Prospectus forms a part.
GENERAL
The authorized stock of ATLANTIC consists of 250,000,000 Shares. The Board
may classify or reclassify any unissued Shares from time to time by setting or
changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption. No holder of any class
of stock of ATLANTIC will have any preemptive right to subscribe to any
securities of ATLANTIC except as may be granted by the Board pursuant to an
agreement between ATLANTIC and a shareholder. Under Maryland law, shareholders
are generally not liable for ATLANTIC's debts or obligations solely as a
result of their status as shareholders. For a description of certain
provisions that could have the effect of delaying, deferring or preventing a
change in control, see "Risk Factors--Limitations on Acquisition of Shares and
Change in Control", "Certain Relationships and Transactions--Security Capital
Group Investor Agreement" and "Certain Provisions of Maryland Law and of
ATLANTIC's Charter and Bylaws".
The transfer agent and registrar for the Shares is The First National Bank
of Boston, 150 Royall Street, Canton, Massachusetts 02021.
COMMON STOCK
The outstanding Shares are fully paid and nonassessable. Each Share entitles
the holder to one vote on all matters requiring a vote of shareholders,
including the election of Directors. Shareholders do not have the right to
cumulate their votes in the election of Directors, which means that the
holders
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of a majority of the outstanding Shares can elect all of the Directors then
standing for election. Shareholders are entitled to such distributions as may
be authorized from time to time by the Directors out of assets legally
available therefor. ATLANTIC's current distribution policy is to pay quarterly
distributions to shareholders based on a reasonable percentage of funds from
operations. ATLANTIC paid no distributions in 1993. ATLANTIC has paid
consecutive distributions of $0.30 per Share for 1994 quarters, $0.40 per
Share for 1995 quarters and $0.42 per Share for the first three quarters of
1996.
On November 12, 1996, the Homestead Distribution was made to shareholders of
record on October 29, 1996. On December 16, 1996, in light of the Homestead
transaction and ATLANTIC's initial public offering, ATLANTIC paid a fourth
quarter 1996 distribution of $0.39 per Share. On February 19, 1997, ATLANTIC
paid a distribution of $0.39 per Share. See "Price Range of ATLANTIC Shares
and Distributions".
In the event of any liquidation, dissolution or winding-up of the affairs of
ATLANTIC, holders of Shares will be entitled, subject to the preferential
rights of holders of preferred stock, if any, to share ratably in the assets
of ATLANTIC remaining after provision for payment of liabilities to creditors.
Subject to the provisions of ATLANTIC's Charter regarding the restriction on
transfers of Shares, all Shares have equal distribution, liquidation and other
rights, and shall have no preference, preemptive, conversion or exchange
rights.
PREFERRED STOCK
The Board is empowered by ATLANTIC's Charter, without the approval of
shareholders, to classify or reclassify any unissued shares of ATLANTIC's
stock from time to time. Prior to the issuance of any such stock, the Board is
required to set, subject to the provisions of ATLANTIC's Charter regarding the
restriction on transfers of stock, the terms, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption for such
stock. The issuance of preferred stock could have the effect of delaying or
preventing a change in control of ATLANTIC and may adversely affect the voting
and other rights of shareholders. No shares of preferred stock are outstanding
and ATLANTIC has no present plans to issue any preferred stock other than as
contemplated by the Rights Agreement (as defined below).
PURCHASE RIGHTS
On March 12, 1996, the Board declared a dividend of one Purchase Right for
each Share outstanding at the close of business on March 12, 1996 (the "Rights
Record Date") to the holders of Shares of record as of the Rights Record Date.
The dividend was paid on the Rights Record Date. The holders of any additional
Shares issued after the Rights Record Date and before the redemption or
expiration of the Purchase Rights will also be entitled to one Purchase Right
for each such additional Share. Each Purchase Right entitles the registered
holder under certain circumstances to purchase from ATLANTIC two one-
hundredths of a Participating Preferred Share of ATLANTIC at a price of $40
per one one-hundredth of a Participating Preferred Share (the "Purchase
Price"), subject to adjustment. The description and terms of the Purchase
Rights are set forth in the Rights Agreement dated as of March 12, 1996
between ATLANTIC and The First National Bank of Boston, as rights agent (the
"Rights Agreement").
The Purchase Rights will be exercisable and will be evidenced by separate
certificates only after the earliest to occur of: (1) 10 business days
following a public announcement that a person or group of affiliated or
associated persons (excluding Security Capital Group) has acquired beneficial
ownership of 20% or more of the outstanding Shares (thereby becoming an
"Acquiring Person"), (2)
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15 business days (or such later date as may be determined by action of the
Board prior to such time as any person or group of affiliated persons becomes
an Acquiring Person) following the commencement of, or announcement of an
intention to make, a tender offer or exchange offer the consummation of which
would result in the beneficial ownership by a person or group of persons
(excluding Security Capital Group) of 25% or more of the outstanding Shares or
(3) 10 business days (or such later date as may be determined by action of the
Board prior to such time as any person or group of affiliated persons becomes
an Acquiring Person) after the date of filing by any person of, or the first
public announcement of the intention of any person to file, any application,
request, submission or other document with any federal or state regulatory
authority seeking approval of, attempting to rebut any presumption of control
upon, or otherwise indicating an intention to enter into, any transaction or
series of transactions the consummation of which would result in any person
(other than Security Capital Group) becoming the beneficial owner of 25% or
more of the outstanding Shares, other than a transaction in which newly issued
Shares are issued directly by ATLANTIC to such person (the first to occur of
such dates being called the "Rights Distribution Date"). With respect to any
of the Share certificates outstanding as of the Rights Record Date, until the
Rights Distribution Date, the Purchase Rights will be evidenced by such Share
certificate. Until the Rights Distribution Date (or earlier redemption or
expiration of the Purchase Rights), new Share certificates issued after the
Rights Record Date upon transfer or new issuance of Shares will contain a
notation incorporating the Rights Agreement by reference. Notwithstanding the
foregoing, if the Board in good faith determines that a person who would
otherwise be an Acquiring Person under the Rights Agreement has become such
inadvertently, and such person divests as promptly as practicable a sufficient
number of Shares so that such person would no longer be an Acquiring Person,
then such person shall not be deemed to be an Acquiring Person for purposes of
the Rights Agreement.
The Purchase Rights will expire on March 12, 2006 (the "Final Expiration
Date"), unless the Final Expiration Date is extended or unless the Rights are
earlier redeemed or exchanged by ATLANTIC, in each case as described below.
The Purchase Price payable, and the number of Participating Preferred Shares
or other securities or property issuable, upon exercise of the Purchase Rights
are subject to adjustment under certain circumstances from time to time to
prevent dilution. With certain exceptions, no adjustment in the Purchase Price
will be required until cumulative adjustments require an adjustment of at
least 1% in such Purchase Price.
Participating Preferred Shares purchasable upon exercise of the Purchase
Rights will not be redeemable. Each Participating Preferred Share will be
entitled to a minimum preferential quarterly distribution payment of $1.00 per
share but will be entitled to an aggregate distribution of 50 times the
distribution declared per Share. Each Participating Preferred Share will have
50 votes, voting together with the Shares. In the event of liquidation, the
holders of the Participating Preferred Shares will be entitled to a minimum
preferential liquidation payment of $1 per share, plus an amount equal to all
accrued and unpaid dividends thereon, but will be entitled to an aggregate
payment of 50 times the payment made per Share. In the event of any merger,
consolidation or other transaction in which Shares are exchanged, each
Participating Preferred Share will be entitled to receive 50 times the amount
received per Share. In the event of issuance of Participating Preferred Shares
upon exercise of the Purchase Rights, in order to facilitate trading, a
depositary receipt may be issued for each one one-hundredth of a Participating
Preferred Share. The Participating Preferred Shares will be protected by
customary antidilution provisions.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision will be made so that each holder
of a Purchase Right, other than Purchase Rights beneficially owned by the
Acquiring Person (which will thereafter be void), will thereafter have the
right to receive upon exercise a number of Shares having a market value
(determined in
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accordance with the Rights Agreement) of twice the Purchase Price. In lieu of
the issuance of Shares upon exercise of Purchase Rights, the Board may, under
certain circumstances, and if there is an insufficient number of Shares
authorized but unissued to permit the exercise in full of the Purchase Rights,
the Board is required to, take such action as may be necessary to cause
ATLANTIC to issue or pay upon the exercise of Purchase Rights, cash (including
by way of a reduction of purchase price), property, other securities or any
combination of the foregoing having an aggregate value equal to that of the
Shares which otherwise would have been issuable upon exercise of Purchase
Rights.
In the event that, after any person or group becomes an Acquiring Person,
ATLANTIC is acquired in a merger or other business combination transaction or
50% or more of its consolidated assets or earning power are sold, proper
provision will be made so that each holder of a Purchase Right will thereafter
have the right to receive, upon the exercise thereof at the then-current
Purchase Price, a number of shares of common stock of the acquiring company
having a market value (determined in accordance with the Rights Agreement) of
twice the Purchase Price.
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by that person or group of 50% or more of the outstanding
Shares, the Board may exchange the Purchase Rights (other than Purchase Rights
owned by that person or group which will have become void), in whole or in
part, at an exchange ratio of one Share (or one one-hundredth of a
Participating Preferred Share) per Purchase Right (subject to adjustment).
As soon as practicable after a Rights Distribution Date, ATLANTIC is
obligated to use its best efforts to file a registration statement under the
Securities Act relating to the securities issuable upon exercise of Purchase
Rights and to cause such registration statement to become effective as soon as
practicable.
At any time prior to the time a person or group of persons becomes an
Acquiring Person, the Board may redeem the Purchase Rights in whole, but not
in part, at a price of $0.01 per Purchase Right (the "Redemption Price")
payable in cash, Shares or any other form of consideration deemed appropriate
by the Board. The redemption of the Purchase Rights may be made effective at
such time, on such basis and with such conditions as the Board in its sole
discretion may establish. Immediately upon the effectiveness of any redemption
of the Purchase Rights, the right to exercise the Purchase Rights will
terminate and the only right of the holders of Purchase Rights will be to
receive the Redemption Price.
The terms of the Purchase Rights may be amended by the Board without the
consent of the holders of the Purchase Rights, except that from and after the
time any person or group of affiliated or associated persons becomes an
Acquiring Person no such amendment may adversely affect the interests of the
holders of the Purchase Rights.
The Purchase Rights have certain anti-takeover effects. The Purchase Rights
will cause substantial dilution to a person or group that attempts to acquire
ATLANTIC on terms not approved by its Board, except pursuant to an offer
conditioned on a substantial number of Purchase Rights being acquired. The
Purchase Rights should not interfere with any merger or other business
combination approved by the Board since the Purchase Rights may be redeemed by
ATLANTIC at the Redemption Price prior to the time that a person or group has
acquired beneficial ownership of 20% or more of the Shares. The form of Rights
Agreement specifying the terms of the Purchase Rights has been incorporated by
reference into the registration statement of which this Prospectus forms a
part and is incorporated herein by reference. The foregoing description of the
Purchase Rights does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the Rights Agreement, including the
definitions therein of certain terms.
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RESTRICTION ON SIZE OF HOLDINGS OF SHARES
ATLANTIC's Charter contains certain restrictions on the number of shares of
ATLANTIC's stock that individual shareholders may own. For ATLANTIC to qualify
as a REIT under the Code, no more than 50% in value of the shares of
ATLANTIC's stock (after taking into account options to acquire shares) may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities and constructive ownership among specified
family members) during the last half of a taxable year (other than the first
taxable year) or during a proportionate part of a short taxable year. The
shares of ATLANTIC's stock must also be beneficially owned (other than during
the first taxable year) by 100 or more persons during at least 335 days of a
taxable year or during a proportionate part of a shorter taxable year. Because
ATLANTIC is a REIT, its Charter contains restrictions on the acquisition of
shares of ATLANTIC's stock intended to ensure compliance with these
requirements.
Subject to certain exceptions specified in ATLANTIC's Charter, no holder may
own, or be deemed to own by virtue of the attribution provisions of the Code,
more than 9.8% (the "Ownership Limit") of the number or value of the issued
and outstanding shares of ATLANTIC's stock. The Board, upon receipt of a
ruling from the IRS or an opinion of counsel or other evidence satisfactory to
the Board and upon such other conditions as the Board may direct, may also
exempt a proposed transferee from the Ownership Limit. The proposed transferee
must give written notice to ATLANTIC of the proposed transfer no later than
the fifteenth day prior to any transfer which, if consummated, would result in
the intended transferee owning shares of ATLANTIC's stock in excess of the
Ownership Limit. The Board may require such opinions of counsel, affidavits,
undertakings or agreements as it may deem necessary or advisable in order to
determine or ensure ATLANTIC's status as a REIT. Any transfer of shares of
ATLANTIC's stock that would (i) create a direct or indirect ownership of
shares of ATLANTIC's stock in excess of the Ownership Limit, (ii) result in
the shares of ATLANTIC's stock being beneficially owned by fewer than 100
persons (determined without reference to any rules of attribution) as provided
in Section 856(a) of the Code or (iii) result in ATLANTIC being "closely held"
within the meaning of Section 856(h) of the Code, shall be null and void ab
initio, and the intended transferee will acquire no rights to the shares of
ATLANTIC's stock. The foregoing restrictions on transferability and ownership
will not apply if the Board determines, which determination must be approved
by the shareholders, that it is no longer in the best interests of ATLANTIC to
attempt to qualify, or to continue to qualify, as a REIT. ATLANTIC's Charter
excludes Security Capital Group (and its transferees) from the foregoing
ownership restriction.
Any shares the purported transfer of which would result in a person owning
shares of ATLANTIC's stock in excess of the Ownership Limit or cause ATLANTIC
to become "closely held" under Section 856(h) of the Code that is not
otherwise permitted as provided above will constitute excess shares ("Excess
Shares"), which will be transferred pursuant to ATLANTIC's Charter to a party
not affiliated with ATLANTIC designated by ATLANTIC as the trustee of a trust
for the exclusive benefit of an organization or organizations described in
Sections 170(b)(1)(A) and 170(c) of the Code and identified by the Board as
the beneficiary or beneficiaries of the trust (the "Charitable Beneficiary"),
until such time as the Excess Shares are transferred to a person whose
ownership will not violate the restrictions on ownership. While these Excess
Shares are held in trust, distributions on such Excess Shares will be paid to
the trust for the benefit of the Charitable Beneficiary and may only be voted
by the trustee for the benefit of the Charitable Beneficiary. Subject to the
Ownership Limit, the Excess Shares shall be transferred by the trustee at the
direction of ATLANTIC to any person (if the Excess Shares would not be Excess
Shares in the hands of such person). The purported transferee will receive the
lesser of (i) the price paid by the purported transferee for the Excess Shares
(or, if no consideration was paid, fair market value on the day of the event
causing the Excess Shares to be held in trust) and (ii) the price received
from the sale or other disposition of the Excess Shares held in trust. Any
proceeds in excess of the amount payable to the purported transferee will be
paid to the Charitable Beneficiary. In addition, such Excess Shares held in
trust are subject to purchase by ATLANTIC for a 90-day period
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at a purchase price equal to the lesser of (i) the price paid for the Excess
Shares by the purported transferee (or, if no consideration was paid, fair
market value at the time of the event causing the shares to be held in trust)
and (ii) the fair market value of the Excess Shares on the date ATLANTIC
elects to purchase. Fair market value, for these purposes, means the last
reported sales price reported on the NYSE on the trading day immediately
preceding the relevant date, or if not then traded on the NYSE, the last
reported sales price on the trading day immediately preceding the relevant
date as reported on any exchange or quotation system over or through which the
relevant class of shares of stock may be traded, or if not then traded over or
through any exchange or quotation system, then the market price on the
relevant date as determined in good faith by the Board.
From and after the purported transfer to the purported transferee of the
Excess Shares, the purported transferee shall cease to be entitled to
distributions (other than liquidating distributions), voting rights and other
benefits with respect to the Excess Shares except the right to payment on the
transfer of the Excess Shares as described above. Any distribution paid to a
purported transferee on Excess Shares prior to the discovery by ATLANTIC that
such Excess Shares have been transferred in violation of the provisions of the
Charter shall be repaid, upon demand, to ATLANTIC, which shall pay any such
amounts to the trust for the benefit of the Charitable Beneficiary. If the
foregoing transfer restrictions are determined to be void, invalid or
unenforceable by any court of competent jurisdiction, then the purported
transferee of any Excess Shares may be deemed, at the option of ATLANTIC, to
have acted as an agent on behalf of ATLANTIC in acquiring such Excess Shares
and to hold such Excess Shares on behalf of ATLANTIC.
All certificates representing Shares will bear a legend referring to the
restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5% (or such other percentage between of 1% and 5%, as
provided in the rules and regulations promulgated under the Code) of the
number or value of the outstanding shares of ATLANTIC's stock must give a
written notice containing certain information to ATLANTIC by January 31 of
each year. In addition, each shareholder shall upon demand be required to
disclose to ATLANTIC in writing such information with respect to the direct,
indirect and constructive ownership of shares of ATLANTIC's stock as the Board
deems reasonably necessary to comply with the provisions of the Code
applicable to a REIT, to determine ATLANTIC's status as a REIT, to comply with
the requirements of any taxing authority or governmental agency or to
determine any such compliance.
These ownership limitations could have the effect of discouraging a takeover
or other transaction in which holders of some, or a majority, of the Shares
might receive a premium for their Shares over the then-prevailing market price
or which such holders might believe to be otherwise in their best interest.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF ATLANTIC'S CHARTER AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and
ATLANTIC's Charter and Bylaws. The summary does not purport to be complete and
is subject to and qualified in its entirety by reference to Maryland law and
ATLANTIC's Charter and Bylaws, copies of which have been incorporated by
reference as exhibits to the Registration Statement of which this Prospectus
forms a part.
CLASSIFICATION OF THE BOARD
ATLANTIC's Charter provides that the number of Directors may be increased or
decreased from time to time by the vote of a majority of the Board but may not
be less than three. Pursuant to ATLANTIC's Charter, the Directors are divided
into three classes. One class will hold office initially for
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a term expiring at the annual meeting of shareholders to be held in 1997,
another class will hold office initially for a term expiring at the annual
meeting of shareholders to be held in 1998 and another class will hold office
initially for a term expiring at the annual meeting of shareholders to be held
in 1999. As the term of each class expires, Directors in that class will be
elected for a term of three years and until their successors are duly elected
and qualify. ATLANTIC believes that classification of the Board will help to
assure the continuity and stability of ATLANTIC's business strategies and
policies as determined by the Board.
The classified Director provision could have the effect of making the
removal of incumbent Directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of ATLANTIC, even though such an attempt might be beneficial to
ATLANTIC and its shareholders. At least two annual meetings of shareholders,
instead of one, will generally be required to effect a change in a majority of
the Board. Thus, the classified board provision could increase the likelihood
that incumbent Directors will retain their positions.
DIRECTOR LIABILITY LIMITATION AND INDEMNIFICATION
Maryland law permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. ATLANTIC's Charter
contains such a provision which eliminates such liability to the maximum
extent permitted by Maryland law.
ATLANTIC's officers and Directors are and will be indemnified under
ATLANTIC's Charter against certain liabilities. ATLANTIC's Charter provides
that ATLANTIC will, to the maximum extent permitted by Maryland law in effect
from time to time, indemnify and pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to (a) any individual who is a
present or former Director or officer of ATLANTIC or (b) any individual who,
while a Director of ATLANTIC and at the request of ATLANTIC, serves or has
served another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise. ATLANTIC's Charter authorizes ATLANTIC, with
the approval of the Board, to provide such indemnification and advancement of
expenses to a person who served a predecessor of ATLANTIC in any of the
capacities described in (a) or (b) above and to any employee or agent of
ATLANTIC or its predecessors.
Maryland law requires a corporation (unless its charter provides otherwise,
which ATLANTIC's Charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding
to which he or she is made a party by reason of his or her service in that
capacity. Maryland law permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a)
the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith or (ii) was
the result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services
or (c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. Maryland law permits ATLANTIC to advance
reasonable expenses to a director or officer upon ATLANTIC's receipt of (a) a
written affirmation by the Director or officer of his or her good faith belief
that he or she has met the standard of conduct necessary for indemnification
by ATLANTIC as authorized by ATLANTIC's Bylaws and (b) a written statement by
or
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on his or her behalf to repay the amount paid or reimbursed by ATLANTIC if it
shall ultimately be determined that the standard of conduct was not met.
Additionally, ATLANTIC has entered into indemnity agreements with each of
its officers and Directors which provide for reimbursement of all expenses and
liabilities of such officer or Director, arising out of any lawsuit or claim
against such officer or Director due to the fact that he or she was or is
serving as an officer or Director, except for such liabilities and expenses
(a) the payment of which is judicially determined to be unlawful, (b) relating
to claims under Section 16(b) of the Exchange Act or (c) relating to
judicially determined criminal violations.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Directors, officers or persons controlling ATLANTIC
pursuant to the foregoing provisions, ATLANTIC has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
BUSINESS COMBINATIONS
Under Maryland law, 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
of such an Interested Stockholder 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 such 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 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 (or with whose
affiliate) the business combination is to be effected, unless, among other
things, the corporation's stockholders receive a minimum price (as defined
under Maryland law) 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. These provisions of Maryland law do not apply, 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. The Board has exempted from these provisions of
Maryland law any business combination with Security Capital Group and its
affiliates and successors. As a result, Security Capital Group and its
affiliates and successors may be able to enter into business combinations with
ATLANTIC that may not be in the best interests of ATLANTIC's shareholders
without compliance by ATLANTIC with the super-majority vote requirements and
other provisions of the statute.
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CONTROL SHARE ACQUISITIONS
Maryland law 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 which, if aggregated with all other such shares of stock
previously acquired by the acquiror, or in respect of which the acquiror is
able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), 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 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 board of directors to call a special meeting of stockholders 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 stockholders 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
the absence of voting rights for the Control Shares, as of the date of the
last Control Share acquisition or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for Control Shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the 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 charter or bylaws
of the corporation.
ATLANTIC's Bylaws contain a provision exempting any and all acquisitions by
Security Capital Group and its affiliates and successors from the provisions
of the Control Share acquisition statute.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
For nominations or other business to be properly brought before an annual
meeting of shareholders by a stockholder, ATLANTIC's Bylaws require such
shareholder to deliver a notice to the Secretary, absent specified
circumstances, not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting setting forth: (i) as to
each person whom the shareholder proposes to nominate for election or
reelection as a Director, all information relating to such person that is
required to be disclosed in solicitations of proxies for the election of
directors, pursuant to Regulation 14A of the Exchange Act; (ii) as to any
other business that the shareholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting and any material
interest in such business of such shareholder and of the beneficial owner, if
any, on whose behalf the proposal is made; and (iii) as to the shareholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made, (x) the name and address of such shareholder
as they appear on ATLANTIC's books, and of such beneficial owner and (y) the
number of Shares which are owned beneficially and of record by such
shareholder and such beneficial owner, if any.
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SHARES AVAILABLE FOR FUTURE SALE
As of April 7, 1997, ATLANTIC had 37,891,580 Shares issued and outstanding,
which were held of record by approximately 300 shareholders. Upon completion
of the Offering, ATLANTIC will have 41,891,580 Shares issued and outstanding
and 3,000 Shares reserved for issuance upon exercise of outstanding Options.
ATLANTIC has reserved an additional 97,000 Shares for future issuance upon
exercise of Options under the Outside Directors Plan. See "REIT Management--
Outside Directors Plan". All of the 4,000,000 Shares to be issued by ATLANTIC
in the Offering (other than any Shares purchased by affiliates) will be
tradeable without restriction under the Securities Act, along with the
4,940,000 Shares issued in ATLANTIC's October 1996 initial public offering
(other than the 416,666 Shares which were purchased by Security Capital Group
and any other Shares which were purchased by affiliates). The rest of the
Shares currently issued and outstanding or reserved for issuance upon exercise
of options will be eligible for sale, subject to the volume resale, manner of
sale and notice limitations of Rule 144 of the Securities Act.
In general, under Rule 144, a person (or persons whose Shares are aggregated
in accordance with the Rule) who has beneficially owned his or her Shares for
at least two years (which period will be reduced to one year effective April
29, 1997), including any such persons who may be deemed "affiliates" of
ATLANTIC (as defined in the Securities Act), would be entitled to sell within
any three-month period a number of Shares that does not exceed the greater of
1% of the then outstanding number of Shares or the average weekly trading
volume of the Shares during the four calendar weeks preceding each such sale.
After Shares are held for three years (which period will be reduced to two
years effective April 29, 1997), a person who is not deemed an "affiliate" of
ATLANTIC is entitled to sell such Shares under Rule 144 without regard to the
volume limitations described above. Sales of Shares by affiliates will
continue to be subject to the volume limitations. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly or indirectly, through the
use of one or more intermediaries, controls, is controlled by, or is under
common control with, such issuer.
ATLANTIC has granted Security Capital Group, which beneficially owns
21,545,669 Shares, the right to demand, at any time, registration of all or
any part of the Shares owned by Security Capital Group pursuant to Rule 415 of
the Securities Act. In addition, ATLANTIC has agreed to file a registration
statement (in October 1997) pursuant to Rule 415 of the Securities Act for up
to $50 million of Shares on behalf of certain investors who purchased Shares
in ATLANTIC's last private offering. The persons entitled to register their
securities are responsible for all costs and expenses (other than ATLANTIC's
legal, audit and certain accounting fees) incident to any registration of the
type discussed in this paragraph.
No prediction can be made as to the effect, if any, that future sales of
Shares or the availability of Shares for future sale will have on the market
price prevailing from time to time. Sales of substantial amounts of Shares
(including Shares issued upon the exercise of options), or the perception that
such sales could occur, could adversely affect the prevailing market price of
the Shares.
FEDERAL INCOME TAX CONSIDERATIONS
ATLANTIC intends to operate in a manner that permits it to satisfy the
requirements for taxation as a REIT under the applicable provisions of the
Code. No assurance can be given, however, that such requirements will be met.
The following is a description of the federal income tax consequences to
ATLANTIC and its shareholders of the treatment of ATLANTIC as a REIT. Since
these provisions are highly technical and complex, each prospective purchaser
of ATLANTIC's Shares is urged to consult his or her own tax advisor with
respect to the federal, state, local, foreign and other tax consequences of
the purchase, ownership and disposition of the Shares.
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Based upon certain representations of ATLANTIC with respect to the facts as
set forth and explained in the discussion below, in the opinion of Mayer,
Brown & Platt, counsel to ATLANTIC, ATLANTIC has been organized in conformity
with the requirements for qualification as a REIT beginning with its taxable
year ended December 31, 1994, and its proposed method of operation described
in this Prospectus and as represented by management will enable it to satisfy
the requirements for such qualification.
This opinion is conditioned upon certain representations made by ATLANTIC as
to certain factual matters relating to ATLANTIC's organization and intended or
expected manner of operation. In addition, this opinion is based on the law
existing and in effect on the date hereof. ATLANTIC's qualification and
taxation as a REIT will depend upon ATLANTIC's ability to meet on a continuing
basis, through actual operating results, asset composition, distribution
levels and diversity of stock ownership, the various qualification tests
imposed under the Code discussed below. Mayer, Brown & Platt will not review
compliance with these tests on a continuing basis. No assurance can be given
that ATLANTIC will satisfy such tests on a continuing basis.
In brief, if certain detailed conditions imposed by the REIT provisions of
the Code are met, entities, such as ATLANTIC, that invest primarily in real
estate and that otherwise would be treated for federal income tax purposes as
corporations, are generally not taxed at the corporate level on their "REIT
taxable income" that is currently distributed to shareholders. This treatment
substantially eliminates the "double taxation" (at both the corporate and
shareholder levels) that generally results from the use of corporations.
If ATLANTIC fails to qualify as a REIT in any year, however, it will be
subject to federal income taxation as if it were a domestic corporation, and
its shareholders will be taxed in the same manner as shareholders of ordinary
corporations. In this event, ATLANTIC could be subject to potentially
significant tax liabilities, and therefore the amount of cash available for
distribution to its shareholders would be reduced or eliminated.
ATLANTIC elected REIT status effective for the taxable year ended December
31, 1994 and the Board currently intends that ATLANTIC will operate in a
manner that permits it to qualify as a REIT in each taxable year thereafter.
There can be no assurance, however, that this expectation will be fulfilled,
since qualification as a REIT depends on ATLANTIC continuing to satisfy
numerous asset, income and distribution tests described below, which in turn
will be dependent in part on ATLANTIC's operating results.
The following summary is based on the Code, its legislative history,
administrative pronouncements, judicial decisions and Treasury regulations,
subsequent changes to any of which may affect the tax consequences described
herein, possibly on a retroactive basis. The following summary is not
exhaustive of all possible tax considerations and does not give a detailed
discussion of any state, local or foreign tax considerations, nor does it
discuss all of the aspects of federal income taxation that may be relevant to
a prospective shareholder in light of his or her particular circumstances or
to certain types of shareholders (including insurance companies, tax-exempt
entities, financial institutions or broker-dealers, foreign corporations and
persons who are not citizens or residents of the United States) subject to
special treatment under the federal income tax laws.
TAXATION OF ATLANTIC
GENERAL
In any year in which ATLANTIC qualifies as a REIT, in general it will not be
subject to federal income tax on that portion of its REIT taxable income or
capital gain which is distributed to shareholders. ATLANTIC may, however, be
subject to tax at normal corporate rates upon any taxable income or capital
gain not distributed.
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Notwithstanding its qualification as a REIT, ATLANTIC may also be subject to
taxation in certain other circumstances. If ATLANTIC should fail to satisfy
either the 75% or the 95% gross income test (as discussed below), and
nonetheless maintains its qualification as a REIT because certain other
requirements are met, it will be subject to a 100% tax on the greater of the
amount by which ATLANTIC fails to satisfy either the 75% test or the 95% test,
multiplied by a fraction intended to reflect ATLANTIC's profitability.
ATLANTIC will also be subject to a tax of 100% on net income from any
"prohibited transaction", as described below, and if ATLANTIC has (i) net
income from the sale or other disposition of "foreclosure property" which is
held primarily for sale to customers in the ordinary course of business or
(ii) other non-qualifying income from foreclosure property, it will be subject
to tax on such income from foreclosure property at the highest corporate rate.
In addition, if ATLANTIC should fail to distribute during each calendar year
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year and (iii) any
undistributed taxable income from prior years, ATLANTIC would be subject to a
4% excise tax on the excess of such required distribution over the amounts
actually distributed. ATLANTIC may also be subject to the corporate
"alternative minimum tax", as well as tax in certain situations and on certain
transactions not presently contemplated. ATLANTIC will use the calendar year
both for federal income tax purposes and for financial reporting purposes.
In order to qualify as a REIT, ATLANTIC must meet, among others, the
following requirements:
SHARE OWNERSHIP TEST
ATLANTIC's shares of stock must be held by a minimum of 100 persons for at
least 335 days in each taxable year (or a proportional number of days in any
short taxable year). In addition, at all times during the second half of each
taxable year, no more than 50% in value of the stock of ATLANTIC may be owned,
directly or indirectly and by applying certain constructive ownership rules,
by five or fewer individuals, which for this purpose includes certain tax-
exempt entities. Any stock held by a qualified domestic pension or other
retirement trust will be treated as held directly by its beneficiaries in
proportion to their actuarial interest in such trust rather than by such
trust. Pursuant to the constructive ownership rules, Security Capital Group's
ownership of shares is attributed to its shareholders for purposes of the 50%
test.
In order to ensure compliance with the 50% test, ATLANTIC has placed certain
restrictions on the transfer of the shares of its stock to prevent additional
concentration of ownership. Moreover, to evidence compliance with these
requirements under United States Treasury Department ("Treasury") regulations,
ATLANTIC must maintain records which disclose the actual ownership of its
outstanding shares of stock. In fulfilling its obligations to maintain
records, ATLANTIC must and will demand written statements each year from the
record holders of designated percentages of shares of its stock disclosing the
actual owners of such shares (as prescribed by Treasury regulations). A list
of those persons failing or refusing to comply with such demand must be
maintained as a part of ATLANTIC's records. A shareholder failing or refusing
to comply with ATLANTIC's written demand must submit with his or her tax
returns a similar statement disclosing the actual ownership of shares of
ATLANTIC's stock and certain other information. In addition, ATLANTIC's
Charter provides restrictions regarding the transfer of shares of its stock
that are intended to assist ATLANTIC in continuing to satisfy the share
ownership requirements. See "Description of Stock--Restriction on Size of
Holdings of Shares". ATLANTIC intends to enforce the 9.8% limitation on
ownership of shares of its stock to assure that its qualification as a REIT
will not be compromised.
ASSET TESTS
At the close of each quarter of ATLANTIC's taxable year, ATLANTIC must
satisfy certain tests relating to the nature of its assets (determined in
accordance with GAAP). First, at least 75% of the value of ATLANTIC's total
assets must be represented by interests in real property, interests in
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mortgages on real property, shares in other REITs, cash, cash items, and
government securities (including certain government guaranteed securities) and
qualified temporary investments. Second, although the remaining 25% of
ATLANTIC's assets generally may be invested without restriction, securities in
this class may not exceed either (i) in the case of securities of any one non-
government issuer, 5% of the value of ATLANTIC's total assets or (ii) 10% of
the outstanding voting securities of any one such issuer. Where ATLANTIC
invests in a partnership, it will be deemed to own a proportionate share of
the partnership's assets.
GROSS INCOME TESTS
There are three separate percentage tests relating to the sources of
ATLANTIC's gross income which must be satisfied for each taxable year. For
purposes of these tests, where ATLANTIC invests in a partnership, ATLANTIC
will be treated as receiving its share of the income and loss of the
partnership, and the gross income of the partnership will retain the same
character in the hands of ATLANTIC as it has in the hands of the partnership.
The three tests are as follows:
1. THE 75% TEST. At least 75% of ATLANTIC's gross income for the taxable
year must be "qualifying income". Qualifying income generally includes: (i)
rents from real property (except as modified below); (ii) interest on
obligations collateralized by mortgages on, or interests in, real property;
(iii) gains from the sale or other disposition of interests in real
property and real estate mortgages, other than gain from property held
primarily for sale to customers in the ordinary course of ATLANTIC's trade
or business ("dealer property"); (iv) dividends or other distributions on
shares in other REITs, as well as gain from the sale of such shares; (v)
abatements and refunds of real property taxes; (vi) income from the
operation, and gain from the sale, of property acquired at or in lieu of a
foreclosure of the mortgage collateralized by such property ("foreclosure
property"); and (vii) commitment fees received for agreeing to make loans
collateralized by mortgages on real property or to purchase or lease real
property.
Rents received from a resident will not, however, qualify as rents from
real property in satisfying the 75% test (or the 95% gross income test
described below) if ATLANTIC, or an owner of 10% or more of ATLANTIC,
directly or constructively owns 10% or more of such resident. In addition,
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, an amount received or
accrued will not qualify as rents from real property (or as interest
income) for purposes of the 75% and 95% gross income tests if it is based
in whole or in part on the income or profits of any person, although an
amount received or accrued generally will not be excluded from "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Finally, for rents received to qualify as
rents from real property, ATLANTIC generally must not operate or manage the
property or furnish or render services to residents, other than through an
"independent contractor" from whom ATLANTIC derives no income, except that
the "independent contractor" requirement does not apply to the extent that
the services provided by ATLANTIC are "usually or customarily rendered" in
connection with the rental of multifamily units for occupancy only, or are
not otherwise considered "rendered to the occupant for his convenience".
2. THE 95% TEST. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of ATLANTIC's gross income for the
taxable year must be derived from the above-described qualifying income, or
from dividends, interest or gains from the sale or disposition of stock or
other securities that are not dealer property. Dividends (other than on
REIT shares) and interest on any obligations not collateralized by an
interest in real property are included for purposes of the 95% test, but
not for purposes of the 75% test.
For purposes of determining whether ATLANTIC complies with the 75% and
95% income tests, gross income does not include income from prohibited
transactions. A "prohibited
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transaction" is a sale of dealer property (excluding foreclosure property)
unless such property is held by ATLANTIC for at least four years and
certain other requirements (relating to the number of properties sold in a
year, their tax bases, and the cost of improvements made thereto) are
satisfied. See "--Taxation of ATLANTIC--General".
Even if ATLANTIC fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may still qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code.
These relief provisions will generally be available if: (i) ATLANTIC's
failure to comply was due to reasonable cause and not to willful neglect;
(ii) ATLANTIC reports the nature and amount of each item of its income
included in the tests on a schedule attached to its tax return; and (iii)
any incorrect information on this schedule is not due to fraud with intent
to evade tax. If these relief provisions apply, however, ATLANTIC will
nonetheless be subject to a special tax upon the greater of the amount by
which it fails either the 75% or 95% gross income test for that year.
3. THE 30% TEST. ATLANTIC must derive less than 30% of its gross income
for each taxable year from the sale or other disposition of: (i) real
property held for less than four years (other than foreclosure property and
involuntary conversions); (ii) stock or securities held for less than one
year; and (iii) property in a prohibited transaction. ATLANTIC does not
anticipate that it will have any substantial difficulty in complying with
this test.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, ATLANTIC is required to make distributions
(other than capital gain dividends) to its shareholders each year in an amount
at least equal to (i) the sum of (a) 95% of ATLANTIC's REIT taxable income
(computed without regard to the dividends paid deduction and the REIT's net
capital gain) and (b) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) the sum of certain items of non-cash income.
Such distributions must be paid in the taxable year to which they relate, or
in the following taxable year if declared before ATLANTIC timely files its tax
return for such year and if paid on or before the first regular dividend
payment after such declaration. To the extent that ATLANTIC does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its REIT taxable income, as adjusted, it will be subject to tax
on the undistributed amount at regular capital gains or ordinary corporate tax
rates, as the case may be.
ATLANTIC intends to make timely distributions sufficient to satisfy the
annual distribution requirements. It is possible that ATLANTIC may not have
sufficient cash or other liquid assets to meet the 95% distribution
requirement, due to timing differences between the actual receipt of income
and actual payment of expenses on the one hand, and the inclusion of such
income and deduction of such expenses in computing ATLANTIC's REIT taxable
income on the other hand. To avoid any problem with the 95% distribution
requirement, ATLANTIC will closely monitor the relationship between its REIT
taxable income and cash flow and, if necessary, intends to borrow funds in
order to satisfy the distribution requirement. However, there can be no
assurance that such borrowing would be available at such time.
If ATLANTIC fails to meet the 95% distribution requirement as a result of an
adjustment to ATLANTIC's tax return by the IRS, ATLANTIC may retroactively
cure the failure by paying a "deficiency dividend" (plus applicable penalties
and interest) within a specified period.
FAILURE TO QUALIFY
If ATLANTIC fails to qualify for taxation as a REIT in any taxable year and
the relief provisions do not apply, ATLANTIC will be subject to applicable
federal and state tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates. Distributions to shareholders
in any year in which ATLANTIC fails to qualify will not be deductible by
ATLANTIC, nor generally will
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they be required to be made under the Code. In such event, to the extent of
current and accumulated earnings and profits, all distributions to
shareholders will be taxable as ordinary income and, subject to certain
limitations in the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific
statutory provisions, ATLANTIC also will be disqualified from re-electing
taxation as a REIT for the four taxable years following the year during which
qualification was lost.
HOMESTEAD MORTGAGES
ATLANTIC holds mortgage notes of Homestead which are convertible into shares
of Homestead common stock. See "Certain Relationships and Transactions--
Funding Commitment Agreement". Pursuant to the terms of the funding commitment
agreement, ATLANTIC funded $1,133,535 for each $1,000,000 of convertible
mortgage loans. Accordingly, ATLANTIC is treated as having acquired the
convertible mortgage loans at a premium which ATLANTIC is entitled to amortize
as an offset to interest income (with a corresponding reduction in ATLANTIC's
tax basis) under a constant yield method over the terms of the convertible
mortgage notes if (as ATLANTIC intends) an election under Section 171 of the
Code is made. Interest paid by Homestead to ATLANTIC on the mortgage notes
constitutes qualified income for purposes of determining whether ATLANTIC
meets the gross income requirements for REIT qualification.
The terms of the mortgages provide for adjustment of the price for
conversion of the mortgages into the Homestead common stock if Homestead makes
certain distributions of stock, cash or other property to its shareholders. If
Homestead makes a distribution of cash or property resulting in an adjustment
to the conversion price, ATLANTIC, as a holder of such convertible mortgages,
may be viewed as receiving a "deemed distribution" under Section 305 of the
Code, even if ATLANTIC does not hold any Homestead common stock at such time.
The deemed distribution would constitute a taxable dividend, taxable as
ordinary income, to the extent that the earnings and profits of Homestead were
allocable to the deemed distribution. The amount of the deemed distribution
which exceeded the allocated earnings and profits of Homestead would be
considered a return of capital and would reduce ATLANTIC's tax basis in the
convertible mortgages (but not below zero) by the value of the deemed
distribution. To the extent that the value of the deemed distribution exceeds
ATLANTIC's tax basis in the convertible mortgages, the deemed distribution
would result in gain to ATLANTIC. ATLANTIC's tax basis in the convertible
mortgages would then immediately be increased by the value of the property
deemed to have been distributed.
Except as discussed below with respect to cash received in lieu of
fractional shares of Homestead common stock, ATLANTIC will not recognize gain
or loss upon the exercise of the conversion right. ATLANTIC's tax basis in the
Homestead common stock received upon the conversion will be equal to
ATLANTIC's tax basis in the mortgages converted. Upon conversion of the
mortgages, ATLANTIC will receive cash in lieu of any fractional shares of
Homestead common stock and will recognize gain to the extent that the cash
received exceeds ATLANTIC's tax basis in the portion of the mortgages
converted for cash in lieu of fractional shares. In the event that ATLANTIC
exercises its conversion right, it is expected that ATLANTIC, consistent with
its status as a REIT, will shortly thereafter distribute to its shareholders
or sell in the open market the Homestead common stock received. ATLANTIC will
recognize gain upon such distribution or sale of the Homestead common stock
received upon conversion in an amount equal to the excess of the fair market
value of the Homestead common stock over ATLANTIC's tax basis therein, and the
earnings and profits of ATLANTIC will be increased by the amount of any such
gain recognized. In computing its taxable income for the year in which any
Homestead common stock is distributed, ATLANTIC will be allowed a dividends-
paid deduction in an amount equal to the fair market value at the time of
distribution of the Homestead common stock distributed, but in no event in
excess of the earnings and profits of ATLANTIC.
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TAXATION OF SHAREHOLDERS
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as ATLANTIC qualifies as a REIT, distributions made to ATLANTIC's
taxable domestic shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income and 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
they do not exceed ATLANTIC's actual net capital gain for the taxable year)
without regard to the period for which the shareholder has held its Shares.
However, corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. To the extent that ATLANTIC makes
distributions in excess of current and accumulated earnings and profits, these
distributions are treated first as a tax-free return of capital to the
shareholder, reducing the tax basis of a shareholder's Shares by the amount of
such distribution (but not below zero), with distributions in excess of the
shareholder's tax basis taxable as capital gains (if the Shares are held as a
capital asset). See "Price Range of ATLANTIC Shares and Distributions". In
addition, any dividend declared by ATLANTIC in October, November or December
of any year and payable to a shareholder of record on a specific date in any
such month shall be treated as both paid by ATLANTIC and received by the
shareholder on December 31 of such year, provided that the dividend is
actually paid by ATLANTIC during January of the following calendar year.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of ATLANTIC. Federal income tax rules may
also require that certain minimum tax adjustments and preferences be
apportioned to ATLANTIC shareholders.
In general, any loss upon a sale or exchange of Shares by a shareholder who
has held such Shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss, to the extent of
distributions from ATLANTIC required to be treated by such shareholder as
long-term capital gains.
BACKUP WITHHOLDING
ATLANTIC will report to its domestic shareholders and to the IRS the amount
of dividends paid during each calendar year, and the amount of tax withheld,
if any, with respect thereto. Under the backup withholding rules, a
shareholder may be subject to backup withholding at applicable rates with
respect to dividends paid unless such shareholder (i) is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact or (ii) provides a taxpayer identification number, certifies as to
no loss of exemption from backup withholding and otherwise complies with
applicable requirements of the backup withholding rules. A shareholder that
does not provide ATLANTIC with its correct taxpayer identification number may
also be subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be credited against the shareholder's income tax liability.
In addition, ATLANTIC may be required to withhold a portion of capital gain
distributions made to any shareholders who fail to certify their nonforeign
status to ATLANTIC. See "--Taxation of Foreign Shareholders" below.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not
constitute unrelated business taxable income ("UBTI"). Subject to the
discussion below regarding a "pension-held REIT", based upon the ruling, the
analysis therein and the statutory framework of the Code, distributions by
ATLANTIC to a shareholder that is a tax-exempt entity should also not
constitute 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 that the Shares are not otherwise used in an unrelated trade
or business of the tax-exempt entity, and that ATLANTIC, consistent with its
present intent, does not hold a residual interest in a real estate mortgage
investment conduit.
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However, if any pension or other retirement trust that qualifies under
Section 401(a) of the Code ("qualified pension trust") holds more than 10% by
value of the interests in a "pension-held REIT" at any time during a taxable
year, a portion of the dividends paid to the qualified pension trust by such
REIT may constitute UBTI. For these purposes, a "pension-held REIT" is defined
as a REIT if (i) such REIT would not have qualified as a REIT but for the
provisions of the Code which look through such a qualified pension trust in
determining ownership of stock of the REIT and (ii) at least one qualified
pension trust holds more than 25% by value of the interests of such REIT or
one or more qualified pension trusts (each owning more than a 10% interest by
value in the REIT) hold in the aggregate more than 50% by value of the
interests in such REIT.
TAXATION OF FOREIGN SHAREHOLDERS
ATLANTIC will qualify as a "domestically-controlled REIT" so long as less
than 50% in value of its Shares is held by foreign persons (i.e., nonresident
aliens and foreign corporations, partnerships, trusts and estates). It is
currently anticipated that ATLANTIC will qualify as a domestically controlled
REIT. Under these circumstances, gain from the sale of the Shares by a foreign
person should not be subject to U.S. taxation, unless such gain is effectively
connected with such person's U.S. business or, in the case of an individual
foreign person, such person is present within the U.S. for more than 182 days
in such taxable year.
Distributions of cash generated by ATLANTIC's real estate operations (but
not by its sale or exchange of such communities) that are paid to foreign
persons generally will be subject to U.S. withholding tax at a rate of 30%,
unless (i) an applicable tax treaty reduces that tax and the foreign
shareholder files with ATLANTIC the required form evidencing such lower rate
or (ii) the foreign shareholder files an IRS Form 4224 with ATLANTIC claiming
that the distribution is "effectively connected" income. Treasury Regulations
proposed in 1996, which have not yet been adopted, and are therefore not
currently effective, would, if and when they become effective, revise in
certain respects the rules applicable to foreign shareholders with respect to
payments made after December 31, 1997.
Distributions of proceeds attributable to the sale or exchange by ATLANTIC
of U.S. real property interests are subject to income and withholding taxes
pursuant to the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"), and may be subject to branch profits tax in the hands of a
shareholder which is a foreign corporation if it is not entitled to treaty
relief or exemption. ATLANTIC is required by applicable Treasury Regulations
to withhold 35% of any distribution to a foreign person that could be
designated by ATLANTIC as a capital gain dividend; this amount is creditable
against the foreign shareholder's FIRPTA tax liability.
The federal income taxation of foreign persons is a highly complex matter
that may be affected by many other considerations. Accordingly, foreign
investors in ATLANTIC should consult their own tax advisors regarding the
income and withholding tax considerations with respect to their investment in
ATLANTIC.
TAX EFFECTS OF THE MERGER
The following is a summary of the material U.S. federal income tax
considerations of the Merger, the rights offering and the Warrant Issuance.
The Merger has been structured to constitute a tax-free reorganization
within the meaning of Section 368(a) of the Code and, as a condition to
closing, ATLANTIC will receive an opinion from Mayer, Brown & Platt to this
effect. Accordingly, neither Security Capital Group nor ATLANTIC will
recognize gain or loss on the Merger, and ATLANTIC's tax basis and holding
period for the assets acquired pursuant to the Merger will be the same as
Security Capital Group's. ATLANTIC, however,
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will be subject to a corporate-level tax if it disposes of any of the assets
acquired in the Merger at any time during the 10-year period beginning on the
closing date of the Merger. ATLANTIC does not currently anticipate disposing
of any of the acquired assets. While ATLANTIC will succeed to the federal
income tax liabilities of the REIT Manager and SCG Realty Services and will be
severally liable for the federal income tax liabilities of the Security
Capital Group consolidated federal income tax group, Security Capital Group
has agreed to indemnify ATLANTIC for such liabilities. The Merger will not
result in a taxable event to ATLANTIC's shareholders.
ATLANTIC will also receive an opinion from Mayer, Brown & Platt to the
effect that, based on representations of ATLANTIC with respect to stock
ownership, gross income, asset and distribution requirements applicable to
REITs, the Merger will not jeopardize ATLANTIC's qualification as a REIT under
the Code.
While the rights to purchase Shares of ATLANTIC is expected to constitute a
tax-free rights dividend, it is possible that an ATLANTIC shareholder would be
considered to have ordinary income upon receipt of the rights equal to the
fair market value of the rights at the time of the distribution. Moreover, if
the rights offering does not constitute a tax-free rights dividend, the
receipt of the rights by tax-exempt shareholders should be treated as
unrelated business taxable income. Further information concerning the sale,
disposition or exercise of the rights will be provided in the prospectus which
will be delivered to ATLANTIC's shareholders in connection with the rights
offering.
ATLANTIC's shareholders receiving Security Capital Group warrants pursuant
to the Warrant Issuance should have ordinary taxable income equal to the value
of the warrants at the time of the distribution. Moreover, the receipt of the
Security Capital Group warrants by tax-exempt shareholders should be treated
as unrelated business taxable income. Further information concerning the sale,
disposition, exercise or expiration of the warrants will be provided in the
proxy statement/prospectus which will be delivered to ATLANTIC's shareholders
in connection with the Merger.
OTHER TAX CONSIDERATIONS
TAX ON BUILT-IN GAIN
Pursuant to I.R.S. Notice 88-19, 1988-1 C.B. 486, a "C" corporation that
elects to be taxed as a REIT has to recognize any gain that would have been
realized if the "C" corporation had sold all of its assets for their
respective fair market values at the end of its last taxable year before the
taxable year in which it qualifies to be taxed as a REIT and immediately
liquidated unless the REIT elects to be taxed under rules similar to the rules
of Section 1374 of the Code.
Since ATLANTIC has made this election, if during the 10-year period
beginning on the first day of the first taxable year for which ATLANTIC
qualifies as a REIT (the "Recognition Period"), ATLANTIC recognizes gain on
the disposition of any asset held by ATLANTIC as of the beginning of such
Recognition Period, then, to the extent of the excess of (a) the fair market
value of such asset as of the beginning of such Recognition Period over (b)
ATLANTIC's adjusted basis in such asset as of the beginning of such
Recognition Period, such gain will be subject to tax at the highest regular
corporate rate. Because ATLANTIC acquired many of its communities in fully
taxable transactions and presently expects to hold each community beyond the
Recognition Period, it is not anticipated that ATLANTIC will pay a substantial
corporate level tax on its built-in gain.
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX CONSEQUENCES
Prospective shareholders should recognize that the present federal income
tax treatment of an investment in ATLANTIC 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
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with federal income taxation are constantly under review by persons involved
in the legislative process and by the IRS and the Treasury, 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 ATLANTIC.
STATE AND LOCAL TAXES
ATLANTIC and its shareholders may be subject to state or local taxation in
various jurisdictions, including those in which it or they transact business
or reside. The state and local tax treatment of ATLANTIC 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
Shares of ATLANTIC.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP AND SALE OF SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, ATLANTIC
has agreed to sell to each of the Underwriters named below, and each of such
Underwriters has severally agreed to purchase from ATLANTIC, the respective
number of Shares set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Goldman, Sachs & Co......................................... 1,000,000
Dean Witter Reynolds Inc.................................... 1,000,000
J.P. Morgan Securities Inc.................................. 1,000,000
Prudential Securities Incorporated.......................... 1,000,000
---------
Total................................................... 4,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the Shares offered
hereby, if any are taken.
The Underwriters propose to offer the Shares in part directly to the public
at the initial public offering price set forth on the cover page of this
Prospectus and in part to certain securities dealers at such price less a
concession of $0.62 per Share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $0.10 per Share to certain brokers
and dealers. After the Shares are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
Underwriters.
ATLANTIC has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 600,000
additional Shares solely to cover over-allotments, if any. If the Underwriters
exercise their over-allotment option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of Shares to be purchased by each of them, as shown in
the foregoing table, bears to the 4,000,000 Shares offered.
Security Capital Group and ATLANTIC have agreed that, during the period
beginning from the date of this Prospectus and continuing to and including the
date 90 days after the last closing of the
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Offering, and certain of ATLANTIC's Directors and officers have agreed that,
during the period beginning from the date of this Prospectus and continuing to
and including the date 180 days after the last closing of the Offering, they
will not offer, sell, contract to sell or otherwise dispose of any securities
of ATLANTIC (except (i) pursuant to employee or director stock option plans
existing, or on the conversion or exchange of convertible or exchangeable
securities outstanding, on the date of this Prospectus, (ii) pursuant to
rights offerings to existing shareholders (which may include sales of
unsubscribed and additional Shares to third parties), (iii) for the issuance
of limited partnership interests (which partnership interests may be
exchangeable for Shares after such 90-day period) and (iv) for the issuance of
Shares to Security Capital Group in connection with the Merger) which are
substantially similar to the Shares or which are convertible into or
exchangeable for securities which are substantially similar to the Shares
without the prior written consent of Goldman, Sachs & Co., except that
ATLANTIC may sell Shares to the Underwriters in connection with the Offering.
In connection with the Offering, the Underwriters may purchase and sell the
Shares in the open market. These transactions may include over-allotment and
stabilizing transactions and purchases to cover short positions created by the
Underwriters in connection with the Offering. Stabilizing transactions consist
of certain bids or purchases for the purpose of preventing or retarding a
decline in the market price of the Shares; and short positions created by the
Underwriters involve the sale by the Underwriters of a greater number of
Shares than they are required to purchase from ATLANTIC in the Offering. The
Underwriters also may impose a penalty bid, whereby selling concessions
allowed to broker-dealers in respect of the Shares sold in the Offering for
their account may be reclaimed by the Underwriters if such securities are
repurchased by the Underwriters in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Shares, which may be higher than the price that might otherwise prevail in the
open market. These transactions may be effected on the NYSE, in the over-the-
counter market or otherwise, and these activities, if commenced, may be
discontinued at any time.
ATLANTIC has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
Goldman, Sachs & Co., Dean Witter Reynolds Inc., J.P. Morgan Securities Inc.
and Prudential Securities Incorporated and their affiliates have in the past
provided investment banking services for affiliates of ATLANTIC, including
acting as representatives of the underwriters in ATLANTIC's initial public
offering in October 1996. In addition, Morgan Guaranty Trust Company of New
York, an affiliate of J.P. Morgan Securities Inc., is the agent under
ATLANTIC's unsecured $350 million line of credit that is scheduled to mature
in December 1998 and is the issuer under three swap agreements covering $69.6
million of bonds and $100 million under the line of credit. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources". Additionally, in connection with the
Homestead transaction, Goldman, Sachs & Co. provided a fairness opinion to PTR
and J.P. Morgan Securities Inc. provided a fairness opinion to ATLANTIC.
Finally, Goldman, Sachs & Co. has provided a fairness opinion to SCI's
committee of independent Trustees in connection with the proposed merger of
SCI's REIT manager and property manager into a newly formed subsidiary of SCI
in exchange for SCI common shares of beneficial interest and J.P. Morgan
Securities Inc. has provided a fairness opinion to ATLANTIC's independent
Directors in connection with the proposed Merger. See "The Merger
Transaction".
EXPERTS
The financial statements and related schedule of ATLANTIC included in this
Prospectus and elsewhere in the Registration Statement of which this
Prospectus forms a part have been audited by Ernst & Young LLP, independent
auditors, to the extent indicated in their reports thereon also appearing
elsewhere herein and in the Registration Statement. Such financial statements
have been included herein in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
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VALIDITY OF SHARES
The validity of the issuance of the Shares offered pursuant to this
Prospectus will be passed upon for ATLANTIC by Mayer, Brown & Platt, Chicago,
Illinois. Certain legal matters will be passed upon for the Underwriters by
Sullivan & Cromwell, New York, New York. Mayer, Brown & Platt has in the past
represented and is currently representing ATLANTIC, Security Capital Group and
certain of their affiliates. As to certain matters of Maryland law, Mayer,
Brown & Platt and Sullivan & Cromwell will rely upon the opinion of Ballard
Spahr Andrews & Ingersoll, Baltimore, Maryland.
ADDITIONAL INFORMATION
ATLANTIC is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: Seven World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained from the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such reports, proxy statements and other information can also be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York
10005. In addition, such reports, proxy statements and other information can
also be obtained from the Commission's Web site at http://www.sec.gov.
This Prospectus constitutes a part of a Registration Statement filed by
ATLANTIC with the Commission under the Securities Act. This Prospectus does
not contain all the information set forth in the Registration Statement,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. Statements contained in this Prospectus as to
the content of any contract or other document are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document incorporated by reference in, or filed as an exhibit to, the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules hereto. For further information
regarding ATLANTIC and the Shares offered hereby, reference is hereby made to
the Registration Statement and such exhibits and schedules.
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GLOSSARY
"Acquiring Person" means a person or group of affiliated or associated
persons (excluding certain affiliates of ATLANTIC and certain current
shareholders) that has acquired beneficial ownership of 20% or more of the
outstanding Shares.
"ADA" means the Americans with Disabilities Act of 1990.
"Administrator" means the Secretary of ATLANTIC as administrator of the
Outside Directors Plan.
"ASE" means the American Stock Exchange.
"ATLANTIC" means, as the context may require, Security Capital Atlantic
Incorporated, a Maryland corporation formed in April 1994, and/or its
predecessor and its subsidiaries.
"Atlantic Development Services" means Atlantic Development Services
Incorporated, an entity in which ATLANTIC owns substantially all of the
economic interest.
"Board" means ATLANTIC's Board of Directors.
"Capital Markets Group" means Security Capital Markets Group Incorporated,
an affiliate of the REIT Manager and a registered broker-dealer.
"Charitable Beneficiary" means an organization or organizations described in
Sections 170(b)(1)(A) and 170(c) of the Code and identified by the Board as
the beneficiary or beneficiaries of the Excess Shares trust.
"Class B Stock" means shares of Security Capital Group's Class B common
stock, par value $.01 per share.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Control Share acquisition" means, under Maryland law, the acquisition of
Control Shares, subject to certain exceptions.
"Control Shares" means, under Maryland law, voting shares of stock which, if
aggregated with all other such shares of stock previously acquired by the
acquiror, or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
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 of all voting power.
"Excess Shares" means shares of ATLANTIC's stock that would result in a
person owning shares of ATLANTIC's stock in excess of the Ownership Limit or
cause ATLANTIC to become "closely held" under Section 856(h) of the Code,
unless acquired in a permitted transfer.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FHA" means the Fair Housing Amendments Act of 1988.
"Final Expiration Date" means March 12, 2006.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"FNMA" means the Federal National Mortgage Association.
"Funds from operations" means net earnings (computed in accordance with
GAAP), excluding gains (or losses) from real estate transactions, provisions
for losses, extraordinary items and depreciation, and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for
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unconsolidated partnerships and joint ventures are calculated to reflect funds
from operations on the same basis.
"GAAP" means generally accepted accounting principles.
"Historical Financial Results" means selected financial information on an
historical basis for ATLANTIC as of and for the years ended December 31, 1996,
1995 and 1994 and the period from inception (October 26, 1993) through
December 31, 1993.
"Homestead" means Homestead Village Incorporated, a Maryland corporation.
"Homestead Assets" means the assets ATLANTIC contributed to Homestead on
October 17, 1996.
"Homestead Distribution" means the distribution on November 12, 1996 by
ATLANTIC of 0.110875 shares of Homestead common stock and warrants to purchase
0.074384 shares of Homestead common stock to each holder of a Share on October
29, 1996.
"In planning" means communities owned or under control by ATLANTIC (land
which is under control through contingent contract or letter of intent) with
construction anticipated to commence within 12 months.
"Interested Stockholder" means any person who beneficially owns 10% or more
of the voting power of a Maryland corporation's shares or an affiliate of a
Maryland 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.
"Investor Agreement" means the Investor Agreement dated October 28, 1993
between Security Capital Group and ATLANTIC.
"IRS" means the Internal Revenue Service.
"Laing" means Laing Properties, Inc.
"Merger" means the merger of the REIT Manager and SCG Realty Services into a
newly formed subsidiary of ATLANTIC.
"Merger Agreement" means the Merger and Issuance Agreement dated March 24,
1997 between Security Capital Group and ATLANTIC.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"NYSE" means the New York Stock Exchange, Inc.
"Offering" means the offering of Shares to the public by ATLANTIC pursuant
to this Prospectus.
"Options" means options to acquire Shares granted pursuant to the Outside
Directors Plan.
"Outside Directors" means the Directors of ATLANTIC who are not employees or
officers of ATLANTIC or Security Capital Group or any of its affiliates.
"Outside Directors Plan" means the Security Capital Atlantic Incorporated
Share Option Plan for Outside Directors.
"Ownership Limit" means 9.8% of the number or value of the issued and
outstanding shares of ATLANTIC's stock.
"Participating Preferred Shares" means the shares of Series A Junior
Participating Preferred Stock, $0.01 par value per share.
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"Pro Forma Financial Results" means selected financial information on a pro
forma basis for ATLANTIC as of and for the year ended December 31, 1996.
"PTR" means Security Capital Pacific Trust, a publicly traded REIT managed
by an affiliate of Security Capital Group.
"Purchase Price" means $40 per one one-hundredth of a Participating
Preferred Share.
"Purchase Right" means a preferred share purchase right entitling the
holder, under certain circumstances, to purchase Participating Preferred
Shares or Shares pursuant to the Rights Agreement.
"Recognition Period" means the 10-year period beginning on the first day of
the first taxable year for which ATLANTIC qualifies as a REIT.
"Redemption Price" means $0.01 per Purchase Right.
"REIT" means a real estate investment trust as defined under the Code.
"REIT Management Agreement" means the REIT management agreement pursuant to
which the REIT Manager assumed the day-to-day management of ATLANTIC.
"REIT Manager" or "REIT Management" means Security Capital (Atlantic)
Incorporated, a wholly owned subsidiary of Security Capital Group.
"Rights Agreement" means the Rights Agreement governing the terms upon which
the Purchase Rights will become exercisable.
"Rights Distribution Date" means the earlier to occur of (i) 10 days
following a public announcement that a person has become an Acquiring Person
or (ii) 15 business days (or such later date as may be determined by action of
the Board prior to such time as any person or group of affiliated persons
becomes an Acquiring Person) following the commencement of, or announcement of
an intention to make, a tender offer or exchange offer the consummation of
which would result in the beneficial ownership by a person or group of persons
(excluding certain affiliates of ATLANTIC and certain current shareholders) of
25% or more of the outstanding Shares.
"Rights Record Date" means March 12, 1996.
"SCG Realty Services" means SCG Realty Services Atlantic Incorporated, an
affiliate of the REIT Manager.
"SCI" means Security Capital Industrial Trust, a publicly traded REIT
managed by an affiliate of Security Capital Group.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Capital Group" means Security Capital Group Incorporated,
ATLANTIC's principal shareholder and the owner of the REIT Manager.
"Security Capital Investment Research" means Security Capital Investment
Research Incorporated, an affiliate of the REIT Manager.
"Shares" means the shares of common stock, par value $.01 per share, of
ATLANTIC.
"Stabilized" means that renovation, repositioning, new management and new
marketing programs (or development and marketing in the case of newly
developed communities) have been completed
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and in effect for a sufficient period of time (but in no event longer than 12
months, except in cases of major rehabilitation) to achieve 93% occupancy at
market rents. Prior to being "stabilized", a community is considered "pre-
stabilized".
"Treasury" means the United States Treasury Department.
"UBTI" means unrelated business taxable income as defined under the Code.
"Under control" means that ATLANTIC has an exclusive right (through
contingent contract or letter of intent), during a contractually agreed-upon
time period, to acquire land for future development of multifamily
communities, subject to removal of contingencies during the due diligence
process, but does not currently own the land.
"Underwriting Agreement" means the Underwriting Agreement between ATLANTIC
and the Underwriters.
"Underwriters" means the Underwriters named in the Prospectus.
"Warrant Issuance" means the issuance of warrants by Security Capital Group
to ATLANTIC's shareholders in connection with the Merger Agreement.
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SECURITY CAPITAL ATLANTIC
INCORPORATED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HISTORICAL:
Report of Independent Auditors.......................................... F-2
Balance Sheets as of December 31, 1996 and 1995......................... F-3
Statements of Earnings for the years ended December 31, 1996, 1995 and
1994................................................................... F-4
Statements of Shareholders' Equity for the years ended December 31,
1994, 1995 and 1996.................................................... F-5
Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994................................................................... F-6
Notes to Financial Statements........................................... F-7
Schedule III--Real Estate and Accumulated Depreciation.................. F-21
Note to Schedule III.................................................... F-26
PRO FORMA (UNAUDITED):
Summary of Pro Forma adjustments........................................ F-27
Pro Forma Balance Sheet as of December 31, 1996......................... F-28
Pro Forma Statement of Earnings for the year ended December 31, 1996.... F-29
Notes to Pro Forma Financial Statements................................. F-30
COMBINED HISTORICAL SUMMARY OF GROSS INCOME AND DIRECT OPERATING EXPENSES
PURSUANT TO RULE 3-14:
Report of Independent Auditors.......................................... F-34
Group C Communities Combined Historical Summary of Gross Income and
Direct Operating Expenses for the year ended December 31, 1995......... F-35
Notes to Group C Communities Combined Historical Summary of Gross Income
and Direct Operating Expenses.......................................... F-36
Report of Independent Auditors.......................................... F-37
Group D Communities Combined Historical Summary of Gross Income and
Direct Operating Expenses for the year ended December 31, 1995......... F-38
Notes to Group D Communities Combined Historical Summary of Gross Income
and Direct Operating Expenses.......................................... F-39
Report of Independent Auditors.......................................... F-41
Group E Communities Combined Historical Summary of Gross Income and
Direct Operating Expenses for the year ended December 31, 1995......... F-42
Notes to Group E Communities Combined Historical Summary of Gross Income
and Direct Operating Expenses.......................................... F-43
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
SECURITY CAPITAL ATLANTIC INCORPORATED
We have audited the accompanying balance sheets of Security Capital Atlantic
Incorporated as of December 31, 1996 and 1995, and the related statements of
earnings, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Security Capital Atlantic
Incorporated at December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Supplemental Schedule of Real
Estate and Accumulated Depreciation is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, is fairly stated
in all material respects in relation to the basic financial statements taken
as a whole.
Ernst & Young LLP
Dallas, Texas
February 3, 1997
F-2
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
---------- --------
<S> <C> <C>
ASSETS
------
Real estate.............................................. $1,157,235 $888,928
Less accumulated depreciation............................ 41,166 23,561
---------- --------
Net investments in real estate......................... 1,116,069 865,367
Cash and cash equivalents--unrestricted.................. 4,339 6,494
Cash and cash equivalents--restricted tax-deferred
exchange proceeds....................................... 1,672 --
Other assets............................................. 12,985 13,963
---------- --------
Total assets........................................... $1,135,065 $885,824
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Line of credit......................................... $ 228,000 $190,000
Mortgages payable...................................... 155,790 118,524
Distributions payable.................................. 14,778 --
Accounts payable....................................... 20,076 11,030
Accrued expenses and other liabilities................. 17,779 9,332
---------- --------
Total liabilities.................................... 436,423 328,886
---------- --------
Shareholders' equity:
Common shares (250,000,000 authorized, 37,891,580
issued and outstanding at December 31, 1996 and
27,762,817 issued and outstanding at December 31,
1995)................................................. 379 278
Additional paid-in capital............................. 747,640 576,824
Distributions in excess of net earnings................ (49,377) (20,164)
---------- --------
Total shareholders' equity........................... 698,642 556,938
---------- --------
Total liabilities and shareholders' equity........... $1,135,065 $885,824
========== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Revenues:
Rental income...................................... $137,729 $103,634 $55,071
Interest income.................................... 427 245 149
-------- -------- -------
138,156 103,879 55,220
-------- -------- -------
Expenses:
Rental expenses.................................... 36,808 27,814 15,260
Real estate taxes.................................. 12,293 9,570 5,595
Property management fees:
Paid to affiliate................................ 4,208 3,475 1,536
Paid to third parties............................ 971 591 661
Depreciation....................................... 20,824 15,925 8,770
Interest........................................... 16,181 19,042 9,240
REIT management fee paid to affiliate.............. 10,445 6,923 3,671
General and administrative......................... 673 646 266
Provision for possible loss on investments......... 2,500 -- --
Other.............................................. 255 254 295
-------- -------- -------
105,158 84,240 45,294
-------- -------- -------
Earnings from operations............................. 32,998 19,639 9,926
Gain on disposition of real estate................. 6,732 -- --
Gain on sale of Homestead Assets................... 2,839 -- --
-------- -------- -------
Earnings before extraordinary item................... 42,569 19,639 9,926
Extraordinary item--loss on early extinguishment of
debt.............................................. 3,940 -- --
-------- -------- -------
Net earnings......................................... $ 38,629 $ 19,639 $ 9,926
======== ======== =======
Weighted-average shares outstanding.................. 32,028 21,944 12,227
======== ======== =======
Per share amounts:
Earnings per share before extraordinary item....... $ 1.33 $ 0.89 $ 0.81
======== ======== =======
Net earnings per share............................. $ 1.21 $ 0.89 $ 0.81
======== ======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON DISTRIBUTIONS
SHARES ADDITIONAL IN EXCESS
AT PAR PAID-IN OF NET
VALUE CAPITAL EARNINGS TOTAL
------ ---------- ------------- --------
<S> <C> <C> <C> <C>
Balances at December 31, 1993........ $ 16 $ 31,618 $ 38 $ 31,672
Net earnings....................... -- -- 9,926 9,926
Distributions paid................. -- -- (14,648) (14,648)
Shares issued--private offerings... 170 339,510 -- 339,680
---- -------- -------- --------
Balances at December 31, 1994........ 186 371,128 (4,684) 366,630
Net earnings....................... -- -- 19,639 19,639
Distributions paid................. -- -- (35,119) (35,119)
Shares issued--private offerings... 130 289,578 -- 289,708
Shares repurchased................. (38) (83,882) -- (83,920)
---- -------- -------- --------
Balances at December 31, 1995........ 278 576,824 (20,164) 556,938
Net earnings....................... -- -- 38,629 38,629
Distributions paid................. -- -- (53,064) (53,064)
Distributions--Homestead........... -- (58,228) -- (58,228)
Distributions accrued.............. -- -- (14,778) (14,778)
Shares issued--private offerings... 52 119,125 -- 119,177
Shares issued--initial public
offering.......................... 49 109,919 -- 109,968
---- -------- -------- --------
Balances at December 31, 1996........ $379 $747,640 $(49,377) $698,642
==== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net earnings................................ $ 38,629 $ 19,639 $ 9,926
Adjustments to reconcile net earnings to net
cash flow provided by operating activities:
Depreciation and amortization............. 22,492 17,496 9,480
Provision for possible loss on
investments.............................. 2,500 -- --
Gain on disposition of real estate........ (6,732) -- --
Gain on sale of Homestead Assets.......... (2,839) -- --
Extraordinary item-loss on early
extinguishment of debt................... 3,940 -- --
Increase (decrease) in accounts payable... (374) 937 1,909
Increase in accrued expenses and other
liabilities.............................. 1,993 3,053 6,141
Increase in other assets.................. (5,253) (1,393) (3,892)
--------- --------- ---------
Net cash flow provided by operating
activities................................ 54,356 39,732 23,564
--------- --------- ---------
Investing activities:
Real estate investments..................... (331,440) (259,008) (390,077)
Proceeds from disposition of real estate.... 63,544 23,859 --
Cash payment to Homestead................... (16,595) -- --
Tax-deferred exchange proceeds held in es-
crow....................................... (1,672) -- --
Other....................................... (1,255) -- --
--------- --------- ---------
Net cash flow used by investing activities.. (287,418) (235,149) (390,077)
--------- --------- ---------
Financing activities:
Proceeds from sale of shares................ 229,145 289,708 239,680
Repurchase of shares........................ -- (83,920) --
Proceeds from line of credit................ 246,000 270,000 166,000
Payments on line of credit.................. (208,000) (233,000) (13,000)
Proceeds from mortgage debt................. 20,500 -- --
Distributions paid.......................... (53,064) (35,119) (14,648)
Debt issuance costs incurred................ (2,573) (5,019) (5,204)
Regularly scheduled mortgage principal
payments................................... (1,101) (623) (190)
Mortgage principal payments at maturity..... -- (6,378) --
--------- --------- ---------
Net cash flow provided by financing
activities................................. 230,907 195,649 372,638
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................ (2,155) 232 6,125
Cash and cash equivalents, beginning of
year....................................... 6,494 6,262 137
--------- --------- ---------
Cash and cash equivalents, end of year...... $ 4,339 $ 6,494 $ 6,262
========= ========= =========
</TABLE>
See Note 9 for information on non-cash investing and financing activities.
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Security Capital Atlantic Incorporated ("ATLANTIC") is an equity real estate
investment trust organized as a corporation under the laws of the State of
Maryland, which owns, acquires, develops and operates income-producing
multifamily communities in the southeastern United States.
Principles of Financial Presentation
The accounts of ATLANTIC and its wholly owned subsidiaries are consolidated
in the accompanying financial statements. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
ATLANTIC considers all cash on hand, demand deposits with financial
institutions and short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents.
Real Estate and Depreciation
Real estate is carried at cost, which is not in excess of net realizable
value. Costs directly related to the acquisition, renovation or development of
real estate are capitalized. Costs incurred in connection with the pursuit of
unsuccessful acquisitions are expensed at the time the pursuit is abandoned.
Repairs and maintenance, including carpet and appliance replacements, are
expensed as incurred. Renovations and improvements are capitalized and
depreciated over their estimated useful lives.
Depreciation is computed over the economic useful lives of depreciable
property on a straight-line basis. Communities are depreciated principally
over the following periods:
<TABLE>
<S> <C>
Buildings and improvements.................................. 20-40 years
Furnishings and other....................................... 2-10 years
</TABLE>
Make-Ready and Repairs and Maintenance
Make-ready expenses (expenses incurred in preparing a vacant multifamily
unit for the next resident) and repairs and maintenance, other than
acquisition-related renovation costs identified during ATLANTIC's pre-
acquisition due diligence, are expensed as incurred. ATLANTIC expenses carpet
and appliance repairs and replacements once all planned acquisition-related
renovation expenses for such items have been incurred.
F-7
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Interest
Periodically, ATLANTIC enters into swap agreements to manage its variable
interest rate exposure. Swap agreements are used to exchange interest rate
payment streams based on a notional principal amount. Under the swap
agreements, ATLANTIC pays a fixed rate of interest to a swap counterparty
pursuant to one agreement and receives a variable rate of interest from a swap
counterparty pursuant to another agreement. The amounts received from the
variable rate agreement are structured such that the amount received will
closely approximate the amount of variable interest due on a portion of the
underlying line of credit or mortgage note borrowings. The difference between
the variable amount received and the fixed amount paid represents either the
cost or the benefit of the interest rate swap agreement and is recorded as an
increase or decrease to the variable interest paid on the underlying debt
instrument.
During 1996, 1995 and 1994, the total interest paid in cash on all
outstanding debt was $24,677,000, $20,609,000 and $8,412,000, respectively.
ATLANTIC capitalizes interest as part of the cost of real estate projects
under development. Interest capitalized during 1996, 1995 and 1994 aggregated
$10,250,000, $4,404,000 and $793,000, respectively.
Cost of Raising Capital
Costs incurred in connection with the issuance of shares of common stock,
par value $.01 per share (the "Shares"), are deducted from shareholders'
equity. Costs incurred in connection with the incurrence or renewal of debt
are capitalized, included with other assets and amortized over the term of the
related loan or renewal term. Amortization of deferred financing costs
included in interest expense for 1996, 1995 and 1994 totaled $1,663,000,
$1,568,000 and $707,000, respectively.
Revenue Recognition
Rental and interest income are recorded on the accrual method of accounting.
Gains on sales of real estate are recorded when criteria required by Statement
of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate,
have been met. A provision for possible loss is made when collection of
receivables is considered doubtful.
Rental Expenses
Rental expenses include utilities, repairs and maintenance, make-ready costs
(including carpet and appliance replacement), property insurance, marketing,
landscaping, on-site personnel and other administrative costs.
Federal Income Taxes
ATLANTIC has made an election to be taxed as a real estate investment trust
under the Internal Revenue Code of 1986, as amended. ATLANTIC believes it
qualifies as a real estate investment trust. Accordingly, no provisions have
been made for federal income taxes in the accompanying financial statements.
Per Share Data
Per share data is computed based on the weighted average number of Shares
outstanding during the period. The Share and per Share amounts included in the
financial statements have been restated to reflect the reverse Share split
discussed in Note 6.
F-8
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Reclassifications
Certain of the 1995 and 1994 amounts have been reclassified to conform to
the 1996 presentation.
NOTE 2 HOMESTEAD TRANSACTION
On October 17, 1996, ATLANTIC sold its moderate-priced, purpose-built,
extended-stay lodging facilities known as Homestead Village(R) properties to
Homestead Village Incorporated ("Homestead"). In the transaction, ATLANTIC
sold one operating property and 25 properties under construction or in
planning (or the rights to acquire such properties) and paid $16.6 million in
cash (the "Homestead Assets"). In addition, ATLANTIC entered into a funding
commitment agreement to provide secured financing of up to $111.1 million to
Homestead for purposes of completing the development and construction of the
properties sold in the transaction. The Homestead transaction was treated as a
sale for financial accounting purposes, but was treated as a contribution for
tax purposes.
The transaction resulted in ATLANTIC receiving 4,201,220 shares of common
stock of Homestead in exchange for the Homestead Assets and 2,818,517 warrants
to purchase one share of Homestead common stock at $10 per share in exchange
for entering into the funding commitment agreement. On November 12, 1996,
ATLANTIC distributed the Homestead common stock and warrants to its
shareholders of record on October 29, 1996 (the "Homestead Distribution").
ATLANTIC shareholders received 0.110875 shares of Homestead common stock and
0.074384 Homestead warrants per Share. ATLANTIC will receive up to $98.0
million of convertible mortgage notes from Homestead in exchange for funding
up to $111.1 million under the funding commitment agreement. The difference
between the amounts funded and the convertible mortgage notes received of
$13.1 million (assuming full funding of the funding commitment) represents a
mortgage note premium that will be amortized as a reduction to interest income
over the term of the convertible mortgage notes.
ATLANTIC realized a gain of $2.8 million, after deducting expenses
associated with the transaction, representing the excess value of the
Homestead common stock received over the recorded basis of the Homestead
Assets. The Homestead warrants received represent a funding commitment fee
which has been valued at $6.5 million. The conversion feature of the
convertible mortgage notes has been valued at $6.9 million (assuming full
funding of the funding commitment). These deferred credits will be amortized
as an increase to interest income over the term of the convertible mortgage
notes.
The convertible mortgage notes received from Homestead will bear interest at
9% per annum, will be due October 2006, will not be callable until 2001 and
will be convertible commencing March 31, 1997 at the option of the holder into
one share of Homestead common stock for every $11.50 of principal amount
outstanding. Upon full funding of ATLANTIC's convertible mortgage notes, its
conversion rights would represent a 15.35% ownership in Homestead (assuming no
further equity offerings by Homestead, conversion of all convertible mortgage
notes and exercise of all outstanding warrants). The effective yield on the
convertible mortgage notes, assuming conversion of all convertible mortgage
notes and exercise of all outstanding warrants, is estimated to be 8.46%,
after giving effect to the mortgage note premium, the funding commitment fee
and the conversion value of the convertible mortgage notes. At December 31,
1996, no funds had been advanced pursuant to the funding commitment agreement
and there were no convertible mortgage notes outstanding. ATLANTIC advanced
$6.0 million under the funding commitment agreement in January 1997.
F-9
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3 REAL ESTATE
Investment in Real Estate
Investments in real estate, at cost, were as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1995
-------------------- -------------------
INVESTMENT UNITS INVESTMENT UNITS
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Multifamily:
Operating communities:
Acquired.................... $ 878,029 17,727 $757,986 15,355
Developed................... 74,741 1,514 23,097 468
---------- ------ -------- ------
952,770 19,241 781,083 15,823
Developments under
construction................. 194,587 4,727 94,094 2,958
Developments in planning:
Owned....................... 7,795 868(1) 9,830 1,258(1)
Under control(2)............ -- 2,228(1) -- 922(1)
---------- ------ -------- ------
7,795 3,096 9,830 2,180
Land held for future
development.................. 2,083 -- 1,294 --
---------- ------ -------- ------
Total multifamily(3)...... 1,157,235 27,064 886,301 20,961
---------- ------ -------- ------
Homestead Village(R)
properties(4).................. -- -- 2,627 2,515
---------- ------ -------- ------
Total..................... $1,157,235(5) 27,064 $888,928(5) 23,476
========== ====== ======== ======
</TABLE>
- --------
(1) Unit information is based on management's estimates and is unaudited.
(2) ATLANTIC's investment at December 31, 1996 and 1995 for multifamily
developments under control was $1.4 million and $0.6 million,
respectively, and is reflected in the "Other assets" caption of ATLANTIC's
balance sheets.
(3) At December 31, 1996, ATLANTIC had unfunded commitments for multifamily
developments under construction of $95.9 million, for a total completed
construction cost of $290.5 million. Cost for multifamily developments in
planning shown above are primarily for land acquisitions.
(4) ATLANTIC sold all of its Homestead Village(R) properties to Homestead on
October 17, 1996. The Homestead transaction is discussed in Note 2.
(5) Of ATLANTIC's investment in real estate, at cost, communities located in
Atlanta, Georgia aggregated 30.7% and 36.4% at December 31, 1996 and 1995,
respectively.
F-10
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The change in investments in real estate, at cost, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Beginning balances.............................. $ 888,928 $631,260 $ 31,005
Acquisitions and renovation expenditures........ 179,752 187,267 571,288
Development expenditures, including land
acquisitions................................... 179,783 101,335 28,967
Recurring capital expenditures.................. 2,783 -- --
Provision for possible loss..................... (2,500) -- --
Dispositions.................................... (59,988) (30,934) --
Sale of Homestead Assets........................ (31,523) -- --
---------- -------- --------
Ending balances................................. $1,157,235 $888,928 $631,260
========== ======== ========
</TABLE>
Third Party Owner/Developers
To enhance its flexibility in developing and acquiring multifamily
communities, ATLANTIC has and will enter into presale agreements to acquire
communities developed by third-party owner/developers where the developments
meet ATLANTIC's investment criteria. ATLANTIC has and will fund such
developments through development loans to these owner/developers. In addition,
to provide greater flexibility for the use of land acquired for development
and to dispose of excess parcels, ATLANTIC plans to make mortgage loans to
Atlantic Development Services Incorporated ("Atlantic Development Services")
to purchase land for development. ATLANTIC owns all of the preferred stock of
Atlantic Development Services, which entitles ATLANTIC to substantially all of
the net operating cash flow (95%) of Atlantic Development Services. All of the
common stock of Atlantic Development Services is owned by an unaffiliated
trust. The common stock is entitled to receive the remaining 5% of net
operating cash flow. As of December 31, 1996, the outstanding balance of
development and mortgage loans made by ATLANTIC to third-party
owner/developers and Atlantic Development Services aggregated $15,413,000 and
none, respectively. The activities of Atlantic Development Services and third-
party owner/developers are consolidated with ATLANTIC's activities and all
intercompany transactions have been eliminated in consolidation.
Gains and Losses from Dispositions or Impairments of Real Estate
ATLANTIC acquires and develops communities with a view to effective long-
term operation and ownership. Each year, REIT Management generates operating
and capital plans based on an ongoing active review of ATLANTIC's portfolio.
Based upon ATLANTIC's market research and in an effort to optimize its
portfolio composition, ATLANTIC may from time to time dispose of assets that
no longer meet its long-term investment objectives and redeploy the proceeds,
preferably through tax-deferred exchanges, into assets with better prospects
for growth.
As a result of this asset optimization strategy, ATLANTIC disposed of four
operating communities aggregating 1,184 units in 1996. A gain was recognized
on each disposition with the total gain aggregating $6,732,000. These four
communities accounted for $3,648,000 and $5,174,000 of net operating income
during 1996 and 1995, respectively. Each disposition has been included in a
tax-deferred exchange. At December 31, 1996, ATLANTIC held a portion of the
proceeds from one of these dispositions aggregating $1,672,000 in an interest-
bearing escrow account. These funds were used in the acquisition of a land
parcel in January 1997, completing the tax-deferred exchange.
ATLANTIC disposed of two communities in 1995. The proceeds from these
dispositions were not materially different from the book value of the assets
on the date of disposition. These two communities accounted for $2,409,000 of
net operating income during 1995.
F-11
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Statement of Financial Accounting Standards No. 121, Accounting For The
Impairment of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of
("SFAS No. 121"), adopted by ATLANTIC effective January 1, 1996, establishes
accounting standards for the review of long-lived assets to be held and used
for impairment whenever the carrying amount of an asset may not be
recoverable. SFAS No. 121 also requires that certain long-lived assets to be
disposed of be reported at the lower of carrying amount or fair value less
cost to sell. ATLANTIC did not recognize any losses on the date it adopted
SFAS No. 121.
Long-lived investments held and used are periodically evaluated for
impairment and provisions for possible losses are made if required. As of
December 31, 1996, such investments are carried at cost, which is not in
excess of fair market value and no provisions for possible losses have been
made. ATLANTIC recognized a provision for possible loss of $2,500,000 in 1996
associated with a community that is being held for sale. The carrying value of
this community at December 31, 1996 was $8,842,000. This community is not
being depreciated during the period in which it is being held for sale.
ATLANTIC expects the disposition of this community to occur in 1997. This
community accounted for $959,000, $1,023,000 and $501,000 of net operating
income for 1996, 1995 and 1994, respectively. This income is included in
ATLANTIC's earnings from operations in these years.
NOTE 4 LINE OF CREDIT AND MORTGAGES PAYABLE
Line of Credit
On December 18, 1996, ATLANTIC obtained a $350 million unsecured line of
credit from Morgan Guaranty Trust Company of New York ("MGT"), as agent for a
group of lenders, that replaced the previous $350 million secured line of
credit. Borrowings on the unsecured line of credit bear interest at prime or,
at ATLANTIC's option, LIBOR plus a margin ranging from 1.0% to 1.375%
(currently 1.375% as compared to 1.5% under the previous agreement) depending
on ATLANTIC's debt rating. ATLANTIC's objective is to achieve an investment-
grade debt rating in 1997. ATLANTIC currently pays a commitment fee on the
average unfunded line of credit balance of 0.1875%. If ATLANTIC achieves an
investment-grade debt rating, the commitment fee on the average unfunded line
of credit balance will range from 0.125% to 0.25% per annum, depending on the
amount of undrawn commitments. The line of credit matures December 1998 and
may be extended for one year with the approval of MGT and the other
participating lenders.
In 1996, ATLANTIC expensed all previously unamortized costs associated with
the secured line of credit that was extinguished in 1996. These costs
aggregated $3,940,000 and are reflected as an extraordinary item in ATLANTIC's
1996 statement of earnings.
All debt incurrences under the unsecured line of credit are subject to
certain covenants. Specifically, distributions for the preceding four
quarters, excluding the Homestead Distribution, may not exceed 95% (97% for
distributions made before December 31, 1996) of ATLANTIC's funds from
operations (as defined in the loan agreement) for the preceding four quarters.
ATLANTIC is in compliance with all such covenants.
A summary of ATLANTIC's line of credit borrowings is as follows (dollar
amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Total line of credit.... $350,000 $300,000 $225,000
Borrowings outstanding
at December 31......... 228,000 190,000 153,000
Weighted-average daily
borrowings............. 204,265 178,318 65,556
Maximum borrowings
outstanding at any
month end.............. 234,000 252,000 153,000
Weighted-average daily
interest rate.......... 7.39% 7.92% 7.34%
Weighted-average
interest rate at
December 31............ 7.24% 7.73% 8.17%
</TABLE>
F-12
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In August 1995, ATLANTIC entered into a swap agreement with Goldman Sachs
Capital Markets, L.P. covering $100 million of borrowings under the line of
credit, effectively mitigating a portion of its variable interest rate
exposure. Under this one-year agreement which became effective on February 5,
1996, ATLANTIC paid a fixed rate of interest of 7.46% on the $100 million of
borrowings through December 17, 1996 and 7.335% thereafter. Upon expiration of
the existing swap agreement on February 5, 1997, a swap agreement with MGT
will take effect. The new agreement will provide for a fixed rate of 7.325% on
$100 million of borrowings through February 5, 1998. The interest rate
ATLANTIC will pay under the new agreement will be reduced if ATLANTIC achieves
an investment-grade debt rating and will range from 6.95% to 7.2%, depending
on the rating achieved. ATLANTIC paid $332,000 more in interest than it
received under the swap agreement during 1996. ATLANTIC is exposed to credit
loss in the event of non-performance by the swap counterparty; however,
ATLANTIC believes the risk of loss is minimal.
Mortgages Payable
Mortgages payable consisted of the following at December 31, 1996 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
PERIODIC
INTEREST MATURITY PAYMENT PRINCIPAL
COMMUNITY RATE DATE TERMS BALANCE
--------- -------- -------- ---------------- ---------
<S> <C> <C> <C> <C>
Conventional fixed rate:
Cameron Ridge.............. 7.000% 09/18/98(1) fully amortizing $ 5,888
Country Place Village I.... 7.750 11/01/00 (2) 2,004
Country Oaks............... 7.655 07/01/02 (3) 5,933
Cameron at Hickory Grove... 8.000 07/10/03 (4) 5,979
Cameron Villas I........... 8.750 04/01/24 fully amortizing 6,343
Cameron on the Cahaba II... 7.125 03/01/29 fully amortizing 8,021
--------
34,168
--------
Tax exempt fixed rate or
variable rate subject to
swap agreements(5):
Cameron Station............ 6.000% 06/01/07 interest only 14,500
Azalea Park................ (6) 06/01/25 interest only 15,500
Cameron Brook.............. (6) 06/01/25 interest only 19,500
Clairmont Crest............ (6) 06/01/25 interest only 11,600
Forestwood................. (6) 06/01/25 interest only 11,485
Foxbridge on the Bay....... (6) 06/01/25 interest only 10,400
The Greens................. (6) 06/01/25 interest only 10,400
Parrot's Landing I......... (6) 06/01/25 interest only 15,835
Sun Pointe Cove............ (6) 06/01/25 interest only 8,500
WintersCreek............... (6) 06/01/25 interest only 5,000
Less amounts held in
principal reserve
fund(7)................... (1,098)
--------
121,622
--------
$155,790
========
Total annual weighted-
average interest rate..... 6.95%
========
</TABLE>
- --------
(1) This loan is callable at the option of the mortgage lender on September
10, 1998 and at subsequent five-year intervals through September 10, 2013.
(2) Interest and principal payments due monthly; balloon payment of $1,849,000
due at maturity.
F-13
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) Interest and principal payments due monthly; balloon payment of $5,539,000
due at maturity.
(4) Interest and principal payments due monthly; balloon payment of $5,556,000
due at maturity.
(5) These communities, in addition to others, are held by Security Capital
Atlantic Multifamily Incorporated, a wholly owned subsidiary of ATLANTIC.
Security Capital Atlantic Multifamily Incorporated is a legal entity that
is separate and distinct from ATLANTIC with separate assets and
liabilities and business operations.
(6) Interest rate is fixed through swap agreements executed in conjunction
with the credit enhancement agreement with the Federal National Mortgage
Association ("FNMA") discussed below. Through these swap agreements,
ATLANTIC has effectively mitigated its variable interest rate exposure.
(7) ATLANTIC has a 30-year credit enhancement agreement with FNMA related to
the tax-exempt bond issues. This credit enhancement agreement requires
ATLANTIC to make monthly payments on each mortgage, based on a 30-year
amortization, into a principal reserve account.
ATLANTIC's swap agreements related to its tax-exempt variable rate mortgages
are summarized as follows:
<TABLE>
<CAPTION>
AMOUNTS FIXED
OF INTEREST
BONDS TERM RATE(1) ISSUER
- ------- -------------------------- -------- ------
<S> <C> <C> <C>
$23.1
million June 1995 to June 2002 6.48% General Re Financial Products Corporation
64.6
million June 1995 to June 2005 6.74 Morgan Guaranty Trust Company of New York
5.0
million March 1996 to March 2006 6.18 Morgan Guaranty Trust Company of New York
15.5
million August 1996 to August 2006 6.51 Morgan Stanley Derivative Products Inc.
----
Weighted-average interest rate.... 6.64%
====
</TABLE>
- --------
(1) Includes the fixed interest rate provided by the swap agreements, annual
fees associated with the swap agreements and credit enhancement agreement
and amortization of capitalized costs associated with the credit
enhancement agreement.
ATLANTIC paid $1,832,000 more in interest during 1996 and $575,000 more in
interest during 1995 than it received under the swap agreements. The swap
agreements cover the principal amount of the bonds, net of amounts deposited
in the principal reserve fund. ATLANTIC pays interest on that portion of bonds
not covered by the swap agreements at the variable rates as provided by the
mortgage agreements. ATLANTIC is exposed to credit loss in the event of non-
performance by the swap counterparties; however, ATLANTIC believes the risk of
loss is minimal.
Real estate with an aggregate undepreciated cost at December 31, 1996 of
$50,714,000 and $206,963,000 serves as collateral for the conventional
mortgages payable and the tax-exempt mortgages payable, respectively.
The change in mortgages payable is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balances at January 1............................ $118,524 $107,347 $ --
Mortgages assumed................................ 17,867 24,678 107,537
Mortgage proceeds................................ 20,500 -- --
Regularly scheduled principal payments........... (1,101) (623) (190)
Reduction upon disposition of multifamily
community....................................... -- (6,500) --
Principal payments at maturity................... -- (6,378) --
-------- -------- --------
Balances at December 31.......................... $155,790 $118,524 $107,347
======== ======== ========
</TABLE>
F-14
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Approximate principal payments due on mortgages payable during each of the
years in the five-year period ending December 31, 2001 and thereafter are as
follows (in thousands):
<TABLE>
<S> <C>
1997................................................................... $ 1,537
1998................................................................... 7,136
1999................................................................... 1,577
2000................................................................... 3,554
2001................................................................... 1,812
Thereafter............................................................. 140,174
--------
$155,790
========
</TABLE>
NOTE 5 DISTRIBUTIONS
ATLANTIC made total cash distributions of $1.65 per Share in 1996, $1.60 per
Share in 1995 and $1.20 per Share in 1994. On December 19, 1996, ATLANTIC's
Board of Directors (the "Board") declared a distribution of $0.39 per Share
for the first quarter of 1997. The distribution is payable on February 19,
1997.
In addition, on November 12, 1996, ATLANTIC distributed 0.110875 shares of
Homestead common stock and warrants to purchase 0.074384 shares of Homestead
common stock per Share in the Homestead Distribution to each shareholder of
record on October 29, 1996. The Homestead Distribution was valued at $58.2
million based on the estimated fair value of the net assets sold to Homestead.
For federal income tax purposes, the following summarizes the taxability of
cash distributions paid for 1994 and 1995 and the estimated taxability for
1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Per Share:
Ordinary income....................................... $ 0.78 $ 0.92 $ 0.92
Return of capital..................................... 0.87 0.68 0.28
------- ------- -------
Total............................................... $ 1.65 $ 1.60 $ 1.20
======= ======= =======
</TABLE>
The securities distributed to each ATLANTIC shareholder in the Homestead
Distribution were valued at $1.91 per Share for federal income tax purposes,
of which $0.90 was taxable as ordinary income and $1.01 was treated as a
return of capital. ATLANTIC's tax return for the year ended December 31, 1996
has not been filed, and the taxability information for 1996 is based on the
best available data. ATLANTIC's tax returns for prior years have not been
examined by the Internal Revenue Service and, therefore, the taxability of
distributions and dividends is subject to change.
NOTE 6 SHAREHOLDERS' EQUITY
Shares Authorized
At December 31, 1996, 250,000,000 Shares were authorized. The Board may
classify or reclassify any unissued shares of ATLANTIC's stock from time to
time by setting or changing the preferences, conversion or other rights,
voting powers, restrictions, limitations as to distributions, qualifications
and terms or conditions of redemption of such shares. No such shares have been
reclassified, except as described under "Purchase Rights" below, and no
reclassified shares are issued or outstanding.
F-15
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Reverse Share Split
On September 10, 1996, the shareholders of ATLANTIC authorized a one-for-two
reverse split of ATLANTIC's Shares. A transfer from the common shares account
to additional paid-in capital was made to reflect the reduced number of Shares
outstanding after the split. All references in the accompanying financial
statements to the number of Shares and per Share amounts have been restated to
reflect the reverse Share split.
Ownership Restrictions and Significant Shareholder
ATLANTIC's Charter restricts beneficial ownership (or ownership generally
attributed to a person under the REIT tax rules) of ATLANTIC's outstanding
shares of stock by a single person, or persons acting as a group, to 9.8% of
ATLANTIC's outstanding shares of stock. The purpose of this provision is to
assist in protecting and preserving ATLANTIC's REIT status and to protect the
interest of shareholders in takeover transactions by preventing the
acquisition of a substantial block of shares unless the acquiror makes a cash
tender offer for all outstanding shares. For ATLANTIC to qualify as a REIT
under the Internal Revenue Code of 1986, as amended, not more than 50% in
value of its outstanding shares of stock may be owned by five or fewer
individuals at any time during the last half of ATLANTIC's taxable year. The
provision permits five persons to individually acquire up to a maximum of 9.8%
each of the outstanding shares of stock, or an aggregate of 49% of the
outstanding shares and, thus, assists the Board in protecting and preserving
ATLANTIC's REIT status for tax purposes.
Shares of stock owned by a person or group of persons in excess of these
limits are subject to redemption by ATLANTIC. The provision does not apply
where a majority of the Board, in its sole absolute discretion, waives such
limit after determining that the status of ATLANTIC as a REIT for federal
income tax purposes will not be jeopardized or the disqualification of
ATLANTIC as a REIT is advantageous to the shareholders.
The Board has exempted Security Capital Group Incorporated ("Security
Capital Group"), an affiliate of the REIT Manager (see Note 7), from the
ownership restrictions described above. Security Capital Group owned 56.9% of
the outstanding Shares at December 31, 1996. For tax purposes, Security
Capital Group's ownership is attributed to its shareholders.
Capital Offerings
On October 18, 1996, ATLANTIC completed an initial public offering of
4,940,000 Shares at a price of $24.00 per Share (before adjusting for the
Homestead Distribution described in Notes 2 and 5). The Shares, excluding the
416,666 Shares sold to Security Capital Group, were sold through an
underwritten offering. The proceeds from the sale of these 4,940,000 Shares,
net of underwriters' commission and other expenses, were approximately $110.0
million. The proceeds were used to repay borrowings under ATLANTIC's $350
million line of credit.
From inception through May 1996, ATLANTIC raised capital through various
private offerings. ATLANTIC sold a total of 31,701,580 Shares during this
period at prices ranging from $20 to $23.136 per Share. In addition, ATLANTIC
exchanged 5,000,000 Shares at a price of $20 per Share as partial
consideration for the acquisition of a pool of communities in May 1994. The
acquisition price was negotiated prior to the seller becoming a related party.
To facilitate ATLANTIC's transactions with the seller, Security Capital Group
granted the seller certain rights to require Security Capital Group to
purchase the 5,000,000 Shares owned by the seller at pre-agreed prices. In
consideration for Security Capital Group purchasing Shares through its private
offerings, ATLANTIC assumed Security Capital Group's obligation with respect
to 3,750,000 Shares. ATLANTIC repurchased these Shares directly from the
seller. The remaining 1,250,000 Shares were acquired directly from the seller
by Security Capital Group.
F-16
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Option Plan
On March 12, 1996, ATLANTIC adopted the Security Capital Atlantic
Incorporated Share Option Plan for Outside Directors (the "Outside Directors
Plan"). There are 100,000 Shares reserved for issuance upon exercise of
options granted under the Outside Directors Plan. The Outside Directors Plan
provides that each member of the Board who is not an employee of ATLANTIC or
the REIT Manager on the date of each annual meeting of ATLANTIC's shareholders
will receive an option to purchase 1,000 Shares at an exercise price equal to
the fair market value of the Shares on such date. The options will be granted
on the date of the annual meeting of shareholders for the years 1997 through
and including 2006. The options granted are for a term of five years and are
exercisable in whole or in part. At December 31, 1996, 3,000 options had been
granted at an exercise price of $24.00 per Share, none of which have been
exercised.
Purchase Rights
On March 12, 1996, the Board declared and paid a dividend of one preferred
share purchase right ("Purchase Right") for each Share outstanding at the
close of business on March 12, 1996 to the holders of ATLANTIC's Shares on
that date. Holders of additional Shares issued after March 12, 1996 and prior
to the expiration of the rights on March 12, 2006 will be entitled to one
Purchase Right for each additional Share.
Each Purchase Right entitles the holder, under certain circumstances, to
purchase from ATLANTIC two one-hundredths of a share of non-redeemable Series
A Junior Participating Preferred Stock of ATLANTIC, par value $0.01 per share
(the "Participating Preferred Shares"), at a price of $40 per one one-
hundredth of a Participating Preferred Share, subject to adjustment. ATLANTIC
has designated two one-hundredths of the total Shares outstanding at any point
in time as Participating Preferred Shares. Purchase Rights are exercisable
when a person or group of persons (other than certain affiliates of ATLANTIC)
acquire beneficial ownership of 20% or more of the outstanding Shares,
commence or announce a tender offer or exchange offer which would result in
the beneficial ownership by a person or group of persons (other than certain
affiliates of ATLANTIC) of 25% or more of the outstanding Shares or file or
announce their intention to file with any regulatory authority an application
seeking approval of any transaction which would result in the beneficial
ownership by a person or group of persons (other than certain affiliates of
ATLANTIC) of 25% or more of the outstanding Shares. Under certain
circumstances, each Purchase Right entitles the holder to purchase at the
Purchase Right's then current exercise price, a number of Shares having a
market value of twice the Purchase Right's exercise price. The acquisition of
ATLANTIC pursuant to certain mergers or other business transactions would
entitle each holder to purchase, at the Purchase Right's then current exercise
price, a number of the acquiring company's common shares having a market value
at that time equal to twice the Purchase Right's exercise price. The Purchase
Rights held by certain 20% shareholders (other than certain affiliates of
ATLANTIC) would not be exercisable. As of December 31, 1996, ATLANTIC had no
Participating Preferred Shares outstanding and the events required to exercise
the Purchase Rights had not occurred. Therefore, the Purchase Rights dividend
had no value and was not recorded in the financial statements.
NOTE 7 REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS
REIT Management Agreement
ATLANTIC has a REIT management agreement (the "REIT Management Agreement")
with Security Capital (Atlantic) Incorporated (the "REIT Manager") to provide
management services to ATLANTIC. The REIT Manager is a subsidiary of Security
Capital Group (see Note 6). All officers of
F-17
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ATLANTIC are employees of the REIT Manager and ATLANTIC currently has no
employees. The REIT Manager provides both strategic and day-to-day management
of ATLANTIC, including research, investment analysis, acquisition,
development, marketing, disposition of assets, asset management, due
diligence, capital markets, legal and accounting services.
The REIT Management Agreement requires ATLANTIC to pay an annual fee of 16%
of cash flow, as defined in the REIT Management Agreement, payable monthly.
Cash flow is calculated by reference to ATLANTIC's cash flow from operations
plus (i) fees paid to the REIT Manager, (ii) extraordinary expenses incurred
at the request of the independent Directors of ATLANTIC (of which there were
none in the periods reported) and (iii) 33% of any interest paid by ATLANTIC
on convertible subordinated debentures (of which there were none in the
periods reported); and after deducting (i) regularly scheduled principal
payments (excluding prepayments or balloon payments) for debt with
commercially reasonable amortization schedules, (ii) assumed principal and
interest payments on senior unsecured debt treated as having regularly
scheduled principal and interest payments like a 20-year level-payment, fully
amortizing mortgage (of which there were none in the periods reported) and
(iii) distributions actually paid with respect to any non-convertible
preferred stock (of which there were none in the periods reported). Cash flow
does not include: (i) realized gains or losses from dispositions of
investments, (ii) interest income from cash equivalent investments and the
Homestead convertible mortgage notes and dividend and interest income from
Atlantic Development Services, (iii) provisions for possible losses on
investments and (iv) extraordinary items.
The REIT Manager also receives a fee of 0.20% per year on the average daily
balance of cash equivalent investments. ATLANTIC must also reimburse the REIT
Manager for third-party and out-of-pocket expenses relating to travel,
transaction costs and similar costs relating to the acquisition, development
or disposition of assets or the obtaining of financing for ATLANTIC and its
operations. The REIT Manager will pay all of its own salary and other overhead
expenses. ATLANTIC will not have any employee expense; however, it will pay
all of the third-party costs related to its normal operations, including
legal, accounting, travel, architectural, engineering, shareholder relations,
independent Director fees and similar expenses, property management and
similar fees paid on behalf of ATLANTIC, and travel expenses incurred in
seeking financing, community acquisitions, community dispositions and similar
activities on behalf of ATLANTIC and in attending ATLANTIC Board, committee
and shareholder meetings.
The REIT Management Agreement is renewable by ATLANTIC annually, subject to
a determination by the independent Directors that the REIT Manager's
performance has been satisfactory and that the compensation payable to the
REIT Manager is fair. Each of ATLANTIC and the REIT Manager may terminate the
REIT Management Agreement on 60 days' notice. Because of the year-to-year
nature of the agreement, its maximum effect on ATLANTIC's results of
operations cannot be predicted, other than that REIT management fees will
generally increase or decrease in proportion to cash flow increases or
decreases.
Property Management Agreement
SCG Realty Services Atlantic Incorporated ("SCG Realty Services") provides
property management services to ATLANTIC. At January 31, 1997, SCG Realty
Services managed approximately 87% of ATLANTIC's multifamily communities.
Security Capital Group owns 100% of SCG Realty Services' voting shares.
The property management agreement, like the REIT Management Agreement, is
renewable annually and subject to a determination by the independent Directors
that SCG Realty Services' performance has been satisfactory and that the
compensation payable to SCG Realty Services is at rates prevailing in the
markets in which ATLANTIC operates. ATLANTIC may terminate the property
management agreement on 30 days' notice.
F-18
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data (in thousands except per Share amounts)
for 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1996:
Rental income.............. $30,809 $32,876 $35,959 $38,085 $137,729
======= ======= ======= ======= ========
Earnings before
extraordinary item........ $ 6,650 $ 9,747 $11,131 $15,041 $ 42,569
======= ======= ======= ======= ========
Net earnings............... $ 6,650 $ 9,747 $11,131 $11,101 $ 38,629
======= ======= ======= ======= ========
Earnings per Share before
extraordinary item........ $ 0.24 $ 0.32 $ 0.34 $ 0.41 $ 1.33
======= ======= ======= ======= ========
Net earnings per Share..... $ 0.24 $ 0.32 $ 0.34 $ 0.30 $ 1.21
======= ======= ======= ======= ========
Weighted-average Shares.... 27,777 30,393 32,952 36,925 32,028
======= ======= ======= ======= ========
1995:
Rental income.............. $22,952 $24,330 $26,969 $29,383 $103,634
======= ======= ======= ======= ========
Net earnings............... $ 4,175 $ 4,956 $ 5,333 $ 5,175 $ 19,639
======= ======= ======= ======= ========
Net earnings per Share..... $ 0.22 $ 0.23 $ 0.23 $ 0.21 $ 0.89
======= ======= ======= ======= ========
Weighted-average Shares.... 18,567 21,642 23,340 24,153 21,944
======= ======= ======= ======= ========
</TABLE>
The total of the four quarterly amounts for net earnings per Share may not
equal the total for the year. These differences result from the use of a
weighted average to compute the average number of Shares outstanding.
NOTE 9 SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities for the years ended December 31,
1996, 1995 and 1994 are as follows:
(a) As discussed in Note 2, in 1996, ATLANTIC received Homestead common
stock valued at $51,717,000 upon the sale of the Homestead Assets (assets
with a net book value of $31,028,000 and cash of $16,595,000). A gain of
$2,839,000, net of expenses of $1,255,000, was recognized on the
transaction.
(b) As discussed in Note 2, in 1996, ATLANTIC received warrants to
purchase Homestead common stock valued at $6,511,000 in exchange for
entering into a funding commitment agreement. The value of the warrants has
been recognized as deferred revenue.
(c) ATLANTIC made a $58,228,000 non-cash distribution to its shareholders
in November 1996 consisting of the Homestead common stock and warrants.
F-19
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(d) In December 1996, ATLANTIC declared a distribution for the first
quarter of 1997 in the amount of $14,778,000.
(e) In connection with the acquisition of communities, ATLANTIC assumed
mortgage debt in the amount of $17,867,000, $24,678,000 and $107,537,000 in
1996, 1995 and 1994, respectively.
(f) In 1994, ATLANTIC issued $100,000,000 of Shares in partial
consideration for the purchase of a pool of communities.
(g) ATLANTIC sold a community in 1995 that secured $6,500,000 of mortgage
debt.
NOTE 10 COMMITMENTS AND CONTINGENCIES
ATLANTIC is a party to various claims and routine litigation arising in the
ordinary course of business. ATLANTIC does not believe that the claims and
litigation, individually or in the aggregate, will have a material adverse
effect on its business, financial position or results of operations.
ATLANTIC is subject to environmental regulations related to the ownership,
operation, development and acquisition of real estate. As part of its due
diligence procedures, ATLANTIC has conducted Phase I environmental assessments
on each community prior to acquisition. The cost of complying with
environmental regulations was not material to ATLANTIC's results of
operations. ATLANTIC is not aware of any environmental condition on any of its
communities that is likely to have a material adverse effect on its business,
financial position or results of operations.
NOTE 11 FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, other assets, accrued
expenses and other liabilities approximates fair value as of December 31, 1996
and 1995 because of the short maturity of these instruments. Similarly, the
carrying value of line of credit borrowings approximates fair value as of
those dates because the interest rate fluctuates based on published market
rates. In the opinion of management, the interest rates associated with the
mortgages payable approximates the market interest rates for this type of
instrument, and as such, the carrying values approximate fair value at
December 31, 1996 and 1995, in all material respects.
NOTE 12 PROPOSED TRANSACTION
On January 22, 1997, ATLANTIC received a proposal from Security Capital
Group to exchange the REIT Manager and SCG Realty Services for Shares. As a
result of the proposed transaction, ATLANTIC would become an internally
managed REIT, and Security Capital Group would remain ATLANTIC's largest
shareholder. The Board has formed a special committee comprised of independent
Directors to review the proposed transaction. The proposed transaction is
subject to approval by the special committee, the Board and ATLANTIC's
shareholders.
F-20
<PAGE>
SCHEDULE III
SECURITY CAPITAL ATLANTIC
INCORPORATED
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1996
-------------------- CAPITALIZED --------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS LAND ACQUIIMPROVEMENTSSITION(C) DEPRECIATION
- ----------------------- ------- ------ ------------- ------------- ---------- --------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMUNITIES
ACQUIRED:
Atlanta, Georgia:
Azalea Park..... $15,500 $3,717 $21,076 $ 975 $3,717 $22,051 $ 25,768 $ 715
Balmoral
Village......... -- 2,871 16,270 74 2,871 16,344 19,215 73
Cameron
Ashford......... -- 3,672 20,841 399 3,672 21,240 24,912 1,551
Cameron
Briarcliff...... (b) 2,105 11,953 191 2,105 12,144 14,249 897
Cameron Brook... 19,500 3,318 18,784 326 3,318 19,110 22,428 1,279
Cameron Creek
I............... -- 3,627 20,589 328 3,627 20,917 24,544 1,473
Cameron Crest... -- 3,525 20,009 290 3,525 20,299 23,824 1,426
Cameron
Dunwoody........ -- 2,486 14,114 252 2,486 14,366 16,852 1,050
Cameron Forest.. -- 884 5,008 352 884 5,360 6,244 145
Cameron Place... -- 1,124 6,372 579 1,124 6,951 8,075 185
Cameron Pointe.. -- 2,172 12,306 413 2,172 12,719 14,891 192
Cameron
Station......... 14,500 2,338 13,246 496 2,338 13,742 16,080 354
Clairmont
Crest........... 11,600 1,603 9,102 315 1,603 9,417 11,020 626
The Greens...... 10,400 2,004 11,354 382 2,004 11,736 13,740 794
Lake Ridge...... -- 2,001 11,359 4,012 2,001 15,371 17,372 1,200
Morgan's
Landing......... -- 1,168 6,646 857 1,168 7,503 8,671 608
Old Salem....... -- 1,053 6,144 919 1,053 7,063 8,116 485
Trolley Square.. -- 2,031 11,528 347 2,031 11,875 13,906 911
Vinings
Landing......... -- 1,363 7,902 714 1,363 8,616 9,979 613
WintersCreek.... 5,000 1,133 6,434 220 1,133 6,654 7,787 233
Woodlands....... -- 3,785 21,471 485 3,785 21,956 25,741 761
Birmingham,
Alabama:
Cameron on the
Cahaba I........ -- 1,020 5,784 352 1,020 6,136 7,156 281
Cameron on the
Cahaba II....... 8,021 1,688 9,580 501 1,688 10,081 11,769 463
Colony Woods I.. -- 1,560 8,845 281 1,560 9,126 10,686 676
Morning Sun
Villas.......... -- 1,260 7,309 732 1,260 8,041 9,301 554
Charlotte, North
Carolina:........
Cameron at
Hickory Grove... 5,979 1,203 6,808 381 1,203 7,189 8,392 137
Cameron Oaks.... -- 2,255 12,800 306 2,255 13,106 15,361 974
<CAPTION>
CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIESL YEAR ACQUIRED
- ----------------------- ------------ --------
<S> <C> <C>
COMMUNITIES
ACQUIRED:
Atlanta, Georgia:
Azalea Park..... 1987 1995
Balmoral
Village......... 1990 1996
Cameron
Ashford......... 1990 1994
Cameron
Briarcliff...... 1989 1994
Cameron Brook... 1988 1994
Cameron Creek
I............... 1988 1994
Cameron Crest... 1988 1994
Cameron
Dunwoody........ 1989 1994
Cameron Forest.. 1981 1995
Cameron Place... 1979 1995
Cameron Pointe.. 1987 1996
Cameron
Station......... (c) 1995
Clairmont
Crest........... 1987 1994
The Greens...... 1986 1994
Lake Ridge...... 1979 1993
Morgan's
Landing......... 1983 1993
Old Salem....... 1968 1994
Trolley Square.. 1989 1994
Vinings
Landing......... 1978 1994
WintersCreek.... 1984 1995
Woodlands....... (d) 1995
Birmingham,
Alabama:
Cameron on the
Cahaba I........ 1987 1995
Cameron on the
Cahaba II....... 1990 1995
Colony Woods I.. 1991 1994
Morning Sun
Villas.......... 1985 1994
Charlotte, North
Carolina:........
Cameron at
Hickory Grove... 1988 1996
Cameron Oaks.... 1989 1994
</TABLE>
(see notes following table)
F-21
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1996
----------------------- CAPITALIZED --------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS LANDACQUISIMPROVEMENTSITION (C) DEPRECIATION
- ----------------------- ------- ------ ------------- ------------- ---------- --------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cypress Lakes... $ -- $1,225 $ 6,961 $ 324 $ 1,225 $ 7,285 $ 8,510 $ 271
Park Place at
Turtle Run...... -- 2,208 12,223 1,283 2,208 13,506 15,714 223
Parrot's Landing
I............... 15,835 2,691 15,276 684 2,691 15,960 18,651 1,072
The Pointe at
Bayberry Lake... -- 2,508 14,210 303 2,508 14,513 17,021 222
Spencer Run..... (b) 2,852 16,194 425 2,852 16,619 19,471 1,133
Sun Pointe
Cove............ 8,500 1,367 7,773 229 1,367 8,002 9,369 550
Trails at Meadow
Lakes........... -- 1,285 7,293 262 1,285 7,555 8,840 282
Ft. Myers,
Florida:
Forestwood...... 11,485 2,031 11,540 210 2,031 11,750 13,781 815
Greenville, South
Carolina:
Cameron Court... -- 1,602 9,369 89 1,602 9,458 11,060 163
Jacksonville,
Florida:
Bay Club........ -- 1,789 10,160 273 1,789 10,433 12,222 773
Memphis,
Tennessee:
Cameron Century
Center.......... -- 2,382 13,496 50 2,382 13,546 15,928 60
Cameron at Kirby
Parkway......... -- 1,386 7,959 829 1,386 8,788 10,174 686
Country Oaks.... 5,933 1,246 7,061 177 1,246 7,238 8,484 63
Stonegate....... -- 985 5,608 483 985 6,091 7,076 360
Miami, Florida:
Park Hill....... -- 1,650 9,377 (2,185)(e) 1,650 7,192 8,842 606
Nashville,
Tennessee:
Arbor Creek..... -- -- (f) 17,671 512 -- 18,183 18,183 1,267
Enclave at
Brentwood....... -- 2,263 12,847 1,016 2,263 13,863 16,126 605
Orlando, Florida:
Camden Springs.. -- 2,477 14,072 808 2,477 14,880 17,357 1,056
Cameron Villas
I............... 6,343 1,087 6,317 609 1,087 6,926 8,013 473
Cameron Villas
II.............. (b) 255 1,454 64 255 1,518 1,773 56
Kingston
Village......... -- 876 4,973 164 876 5,137 6,013 192
The Wellington.. (b) 1,155 6,565 282 1,155 6,847 8,002 466
Raleigh, North
Carolina:
Cameron Lake.... -- 1,385 7,848 60 1,385 7,908 9,293 35
Cameron Ridge... 5,888 1,503 8,519 109 1,503 8,628 10,131 38
Cameron Square.. -- 2,314 13,143 525 2,314 13,668 15,982 959
Emerald Forest.. -- 2,202 12,478 -- 2,202 12,478 14,680 --
Richmond,
Virginia:
Camden at
Wellesley....... -- 2,878 16,339 293 2,878 16,632 19,510 1,240
Potomac Hunt.... (b) 1,486 8,452 181 1,486 8,633 10,119 464
<CAPTION>
CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIESL YEAR ACQUIRED
- ----------------------- ------------ --------
<S> <C> <C>
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cypress Lakes... 1987 1995
Park Place at
Turtle Run...... 1989 1996
Parrot's Landing
I............... 1986 1994
The Pointe at
Bayberry Lake... 1988 1996
Spencer Run..... 1987 1994
Sun Pointe
Cove............ 1986 1994
Trails at Meadow
Lakes........... 1983 1995
Ft. Myers,
Florida:
Forestwood...... 1986 1994
Greenville, South
Carolina:
Cameron Court... 1991 1996
Jacksonville,
Florida:
Bay Club........ 1990 1994
Memphis,
Tennessee:
Cameron Century
Center.......... 1988 1996
Cameron at Kirby
Parkway......... 1985 1994
Country Oaks.... 1985 1996
Stonegate....... 1986 1994
Miami, Florida:
Park Hill....... 1968 1994
Nashville,
Tennessee:
Arbor Creek..... 1986 1994
Enclave at
Brentwood....... 1988 1995
Orlando, Florida:
Camden Springs.. 1986 1994
Cameron Villas
I............... 1982 1994
Cameron Villas
II.............. 1981 1995
Kingston
Village......... 1982 1995
The Wellington.. 1988 1994
Raleigh, North
Carolina:
Cameron Lake.... 1985 1996
Cameron Ridge... 1985 1996
Cameron Square.. 1987 1994
Emerald Forest.. 1986 1996
Richmond,
Virginia:
Camden at
Wellesley....... 1989 1994
Potomac Hunt.... 1987 1994
</TABLE>
(see notes following table)
F-22
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1996
---------------------- CAPITALIZED ------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS LAND ACQUIIMPROVEMENTSSITIO(C)N DEPRECIATION
- ----------------------- -------- -------- ------------- ------------- ---------- ------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sarasota,
Florida:
Camden at Palmer
Ranch........... $ -- $ 3,534 $ 20,057 $ 607 $ 3,534 $ 20,664 $ 24,198 $ 1,469
Tampa, Florida:
Camden Downs.... -- 1,840 10,447 305 1,840 10,752 12,592 780
Cameron
Bayshore........ -- 1,607 9,105 -- 1,607 9,105 10,712 --
Cameron Lakes... -- 1,126 6,418 1,107 1,126 7,525 8,651 365
Country Place
Village I....... 2,004 567 3,219 140 567 3,359 3,926 125
Country Place
Village II...... -- 644 3,658 94 644 3,752 4,396 141
Foxbridge on the
Bay............. 10,400 1,591 9,036 328 1,591 9,364 10,955 652
Summer Chase.... (b) 542 3,094 136 542 3,230 3,772 219
Washington, D.C.:
Camden at
Kendall Ridge... -- 1,708 9,698 295 1,708 9,993 11,701 755
Cameron at
Saybrooke....... -- 2,802 15,906 258 2,802 16,164 18,966 1,190
Sheffield
Forest.......... -- 2,269 12,859 418 2,269 13,277 15,546 374
West Springfield
Terrace......... -- 2,417 13,695 98 2,417 13,793 16,210 92
Less amounts
held in
principal
reserve
fund(g)......... (1,098) -- -- -- -- -- -- --
-------- -------- -------- ------- ---------- ---------- ---------- -------
Total Operating
Communities
Acquired........ $155,790 $124,701 $726,004 $27,324 $ 124,701 $ 753,328 $ 878,029 $38,948
-------- -------- -------- ------- ---------- ---------- ---------- -------
COMMUNITIES
DEVELOPED:
Birmingham,
Alabama:
Colony Woods
II.............. $ -- $ 1,254 $ -- $ 9,261 $ 1,551 $ 8,964 $ 10,515 $ 365
Charlotte, North
Carolina:
Waterford
Hills........... -- 1,508 -- 11,109 1,943 10,674 12,617 476
Waterford Square
I............... -- 1,890 -- 17,763 2,053 17,600 19,653 436
Jacksonville,
Florida:
Cameron Lakes
I............... -- 1,759 -- 14,358 1,959 14,158 16,117 216
Raleigh, North
Carolina:
Waterford
Point........... -- 985 -- 14,854 1,493 14,346 15,839 519
-------- -------- -------- ------- ---------- ---------- ---------- -------
Total Operating
Communities
Developed....... $ -- $ 7,396 $ -- $67,345 $ 8,999 $ 65,742 $ 74,741 $ 2,012
-------- -------- -------- ------- ---------- ---------- ---------- -------
TOTAL OPERATING
COMMUNITIES..... $155,790 $132,097 $726,004 $94,669 $ 133,700 $ 819,070 $ 952,770 $40,960
-------- -------- -------- ------- ---------- ---------- ---------- -------
<CAPTION>
CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIESL YEAR ACQUIRED
- ----------------------- ------------ --------
<S> <C> <C>
Sarasota,
Florida:
Camden at Palmer
Ranch........... 1988 1994
Tampa, Florida:
Camden Downs.... 1988 1994
Cameron
Bayshore........ 1984 1996
Cameron Lakes... 1986 1995
Country Place
Village I....... 1982 1995
Country Place
Village II...... 1983 1995
Foxbridge on the
Bay............. 1986 1994
Summer Chase.... 1988 1994
Washington, D.C.:
Camden at
Kendall Ridge... 1990 1994
Cameron at
Saybrooke....... 1990 1994
Sheffield
Forest.......... 1987 1995
West Springfield
Terrace......... 1978 1996
Less amounts
held in
principal
reserve
fund(g).........
Total Operating
Communities
Acquired........
COMMUNITIES
DEVELOPED:
Birmingham,
Alabama:
Colony Woods
II.............. 1995 1994
Charlotte, North
Carolina:
Waterford
Hills........... 1995 1993
Waterford Square
I............... 1996 1994
Jacksonville,
Florida:
Cameron Lakes
I............... 1996 1995
Raleigh, North
Carolina:
Waterford
Point........... 1996 1994
Total Operating
Communities
Developed.......
TOTAL OPERATING
COMMUNITIES.....
</TABLE>
(see notes following table)
F-23
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1996
--------------------- CAPITALIZED -------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS LAND ACQUIIMPROVEMENTSSITIO(C)N DEPRECIATION
- ----------------------- ------- ------- ------------- ------------- ---------- -------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMUNITIES UNDER
CONSTRUCTION:
Atlanta, Georgia:
Cameron Creek
II.............. $ -- $ 2,730 $ -- $ 16,602 $ 2,897 $ 16,435 $ 19,332 $ 39
Birmingham,
Alabama:
Cameron at the
Summit I........ -- 2,774 -- 5,709 2,778 5,705 8,483 --
Charlotte, North
Carolina:
Waterford Square
II.............. -- 2,014 -- 4,578 2,065 4,527 6,592 --
Ft.
Lauderdale/West
Palm Beach,
Florida:
Parrot's Landing
II.............. -- 1,328 -- 6,742 1,367 6,703 8,070 --
Jacksonville,
Florida:
Cameron
Deerwood........ -- 2,331 -- 12,173 2,332 12,172 14,504 --
Cameron Lakes
II.............. -- 1,340 -- 1,529 1,340 1,529 2,869 --
Cameron
Timberlin Parc
I............... -- 2,167 -- 13,280 2,282 13,165 15,447 16
Nashville,
Tennessee:
Cameron
Overlook........ -- 2,659 -- 4,679 2,659 4,679 7,338 --
Raleigh, North
Carolina:
Cameron Brooke.. -- 1,353 -- 8,717 1,382 8,688 10,070 --
Waterford
Forest.......... -- 2,371 -- 17,978 2,480 17,869 20,349 52
Richmond,
Virginia:
Cameron at
Wyndham......... -- 2,038 -- 2,366 2,052 2,352 4,404 --
Cameron Crossing
I & II.......... -- 2,752 -- 8,450 2,768 8,434 11,202 --
Washington, D.C.:
Cameron at
Milestone....... -- 5,477 -- 24,867 5,607 24,737 30,344 43
Woodway at
Trinity Center.. -- 5,342 -- 30,241 5,584 29,999 35,583 56
------ ------- ------ -------- ---------- ----------- ----------- ----
TOTAL
COMMUNITIES
UNDER
CONSTRUCTION.... $ -- $36,676 $ -- $157,911 $ 37,593 $ 156,994 $ 194,587 $206
------ ------- ------ -------- ---------- ----------- ----------- ----
<CAPTION>
CONSTRUCTION YEAR
MUTIFAMILY COMMUNITIESL YEAR ACQUIRED
- ----------------------- ------------ ---------
<S> <C> <C>
COMMUNITIES UNDER
CONSTRUCTION:
Atlanta, Georgia:
Cameron Creek
II.............. -- (h) 1994
Birmingham,
Alabama:
Cameron at the
Summit I........ -- 1996
Charlotte, North
Carolina:
Waterford Square
II.............. -- 1995
Ft.
Lauderdale/West
Palm Beach,
Florida:
Parrot's Landing
II.............. -- 1994
Jacksonville,
Florida:
Cameron
Deerwood........ -- (h) 1996
Cameron Lakes
II.............. -- 1996
Cameron
Timberlin Parc
I............... -- (h) 1995
Nashville,
Tennessee:
Cameron
Overlook........ -- 1996
Raleigh, North
Carolina:
Cameron Brooke.. -- 1995
Waterford
Forest.......... -- (h) 1995
Richmond,
Virginia:
Cameron at
Wyndham......... -- 1993
Cameron Crossing
I & II.......... -- 1995(i)
Washington, D.C.:
Cameron at
Milestone....... -- (h) 1995
Woodway at
Trinity Center.. -- (h) 1994
TOTAL
COMMUNITIES
UNDER
CONSTRUCTION....
</TABLE>
(see notes following table)
F-24
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONCLUDED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1996
---------------------- CAPITALIZED ---------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED CONSTRUCTION
MUTIFAMILY COMMUNITIESL BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS (C) DEPRECIATION YEAR
- ----------------------- -------- -------- ------------- ------------- -------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMMUNITIES IN
PLANNING:
Atlanta, Georgia:
Cameron
Landing......... $ -- $ 1,508 $ -- $ 512 $ 1,508 $ 512 $ 2,020 $ -- --
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cameron
Waterway........ -- 4,025 -- 361 4,029 357 4,386 -- --
Jacksonville,
Florida:
Cameron
Timberlin Parc
II.............. -- 1,294 -- 95 1,294 95 1,389 -- --
-------- -------- -------- -------- -------- -------- ---------- -------
TOTAL
COMMUNITIES IN
PLANNING........ $ -- $ 6,827 $ -- $ 968 $ 6,831 $ 964 $ 7,795 $ --
-------- -------- -------- -------- -------- -------- ---------- -------
LAND HELD FOR
FUTURE
DEVELOPMENT:
Birmingham,
Alabama:
Cameron at the
Summit II....... -- 2,008 -- 75 2,083 -- 2,083 -- --
-------- -------- -------- -------- -------- -------- ---------- -------
TOTAL LAND HELD
FOR FUTURE
DEVELOPMENT..... $ -- $ 2,008 $ -- $ 75 $ 2,083 $ -- $ 2,083 $ --
-------- -------- -------- -------- -------- -------- ---------- -------
TOTAL........... $155,790 $177,608 $726,004 $253,623 $180,207 $977,028 $1,157,235 $41,166
======== ======== ======== ======== ======== ======== ========== =======
<CAPTION>
YEAR
MUTIFAMILY COMMUNITIESL ACQUIRED
- ----------------------- --------
<S> <C>
COMMUNITIES IN
PLANNING:
Atlanta, Georgia:
Cameron
Landing......... 1996
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cameron
Waterway........ 1996
Jacksonville,
Florida:
Cameron
Timberlin Parc
II.............. 1995
TOTAL
COMMUNITIES IN
PLANNING........
LAND HELD FOR
FUTURE
DEVELOPMENT:
Birmingham,
Alabama:
Cameron at the
Summit II....... 1996
TOTAL LAND HELD
FOR FUTURE
DEVELOPMENT.....
TOTAL...........
</TABLE>
- ----
(a) For federal income tax purposes, ATLANTIC's aggregate cost of real estate
at December 31, 1996 was $1,133,431,000.
(b) Pledged as additional collateral under credit enhancement agreement with
the Federal National Mortgage Association.
(c) Phase I (108 units) was constructed in 1981 and Phase II (240 units) was
constructed in 1983.
(d) Phase I (332 units) was constructed in 1983 and Phase II (312 units) was
constructed in 1985.
(e) A provision for possible loss of $2,500,000 was recognized in December
1996 to more properly reflect the fair value of this community.
(f) The land associated with this community is leased by ATLANTIC through the
year 2058 under an agreement with the Metropolitan Nashville Airport
Authority.
(g) The FNMA credit enhancement agreement requires payments to be made to a
principal reserve fund.
(h) This community is leasing completed units.
(i) 19.24 acres purchased in 1995; 9.86 acres purchased in 1996.
F-25
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTE TO SCHEDULE III
AS OF DECEMBER 31, 1996
The following is a reconciliation of the carrying amount and related
accumulated depreciation of ATLANTIC's investment in real estate, at cost (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
CARRYING AMOUNT 1996 1995 1994
--------------- ---------- -------- --------
<S> <C> <C> <C>
Beginning balances........................ $ 888,928 $631,260 $ 31,005
Acquisitions and renovation expenditures.. 179,752 187,267 571,288
Development expenditures, including land
acquisitions............................. 179,783 101,335 28,967
Recurring capital expenditures............ 2,783 -- --
Provision for possible loss............... (2,500) -- --
Dispositions.............................. (59,988) (30,934) --
Sale of Homestead Assets.................. (31,523) -- --
---------- -------- --------
Ending balances........................... $1,157,235 $888,928 $631,260
========== ======== ========
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
ACCUMULATED DEPRECIATION 1996 1995 1994
------------------------ ---------- -------- --------
<S> <C> <C> <C>
Beginning balances........................ $ 23,561 $ 8,798 $ 28
Depreciation for the period............... 20,824 15,925 8,770
Accumulated depreciation of real estate
disposed of.............................. (3,219) (1,162) --
---------- -------- --------
Ending balances........................... $ 41,166 $ 23,561 $ 8,798
========== ======== ========
</TABLE>
F-26
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
PRO FORMA FINANCIAL STATEMENTS
SUMMARY OF PRO FORMA ADJUSTMENTS
(UNAUDITED)
The accompanying unaudited pro forma balance sheet as of December 31, 1996
reflects the sale of $86.0 million of Shares in this Offering (4,000,000
Shares at $21.50 per Share), net of estimated costs of issuance of $5.5
million, as if the Shares had been sold as of December 31, 1996. For pro forma
purposes, the proceeds from the sale of Shares in the Offering have been
assumed to be used to repay borrowings on ATLANTIC's $350 million line of
credit.
The accompanying unaudited pro forma statement of earnings for the the year
ended December 31, 1996 reflects: (i) the acquisition and disposition by
ATLANTIC of all communities acquired or disposed of from December 31, 1995
through February 28, 1997 as if these communities had been acquired or
disposed of as of January 1, 1996; (ii) the assumption of mortgage debt
associated with the acquisition of the communities acquired from December 31,
1995 through February 28, 1997 as if this mortgage debt had been assumed as of
January 1, 1996; (iii) the sale of Shares through private placement subsequent
to December 31, 1995, necessary to fund pro forma acquisitions as if the
Shares had been sold as of January 1, 1996; (iv) the sale of Shares in
ATLANTIC's initial public offering in October 1996, net of costs of issuance,
necessary to fund pro forma acquisitions as if the Shares had been sold as of
January 1, 1996; (v) the sale of ATLANTIC's Homestead Village(R) properties to
Homestead and subsequent distribution of the Homestead common stock and
warrants to ATLANTIC's shareholders as if the transaction had been consummated
on January 1, 1996; and (vi) the sale of $86.0 million of Shares in this
Offering (4,000,000 Shares at $21.50 per Share), net of estimated costs of
issuance of $5.5 million, as if the Shares had been sold as of January 1,
1996. For pro forma purposes, the proceeds from the sale of Shares in the
Offering have been assumed to be used to repay pro forma borrowings on
ATLANTIC's line of credit.
The pro forma financial statements do not reflect the funding of ATLANTIC's
obligation of approximately $111.1 million under a funding commitment
agreement with Homestead or receipt of the related convertible mortgage notes
of approximately $98.0 million, as this funding is related to future
development costs of the properties sold to Homestead.
The unaudited pro forma financial statements have been prepared by
management of ATLANTIC and do not purport to be indicative of the results
which would actually have been obtained had the transactions described above
been completed on the dates indicated or which may be obtained in the future.
The pro forma financial statements should be read in conjunction with the
historical financial statements of ATLANTIC included elsewhere herein.
F-27
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
PRO FORMA BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PROPOSED
COMMON
SHARE
HISTORICAL ISSUANCE(A) PRO FORMA
---------- ----------- ----------
ASSETS
<S> <C> <C> <C>
Real estate................................ $1,157,235 $ $1,157,235
Less accumulated depreciation............. 41,166 41,166
---------- ---------- ----------
Net investment in real estate............. 1,116,069 1,116,069
Cash and cash equivalents--unrestricted.... 4,339 4,339
Cash and cash equivalents--restricted tax-
deferred exchange proceeds................ 1,672 1,672
Other assets............................... 12,985 12,985
---------- ---------- ----------
Total assets............................ $1,135,065 $ $1,135,065
========== ========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
Liabilities:
Line of credit............................ $ 228,000 $ (80,480) $ 147,520
Mortgages payable......................... 155,790 155,790
Distributions payable..................... 14,778 14,778
Accounts payable.......................... 20,076 20,076
Accrued expenses and other liabilities.... 17,779 17,779
---------- ---------- ----------
Total liabilities....................... $ 436,423 $ (80,480) $ 355,943
---------- ---------- ----------
Shareholders' Equity:
Common shares (250,000,000 shares
authorized; 37,891,580 issued in
historical period and 41,891,580 issued
on pro forma basis)...................... 379 40 419
Additional paid-in capital................ 747,640 80,440 828,080
Distributions in excess of net earnings... (49,377) (49,377)
---------- ---------- ----------
Total shareholders' equity.............. 698,642 80,480 779,122
---------- ---------- ----------
Total liabilities and shareholders'
equity................................. $1,135,065 $ 0 $1,135,065
========== ========== ==========
</TABLE>
See accompanying notes to pro forma financial statements.
F-28
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
PRO FORMA STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS HISTORICAL PRO FORMA ADJUSTMENTS
---------- -------------- ------------- ----------------------------
HOMESTEAD ACQUISITIONS/
ATLANTIC TRANSACTION(B) SUBTOTAL DISPOSITIONS ACQUISITIONS OTHER PRO FORMA
---------- -------------- -------- ------------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental income.......... $137,729 $ (424) $137,305 $11,056 (c) $ $ $148,361
Interest income........ 427 (21) 406 406
-------- ------- -------- ------- ---------- ---------- --------
Total income.......... 138,156 (445) 137,711 11,056 148,767
-------- ------- -------- ------- ---------- ---------- --------
Expenses:
Rental expenses........ 50,072 (173) 49,899 4,279 (c) 54,178
Property management
fees paid to
affiliate............. 4,208 4,208 458 (c) (54)(d) 4,612
Depreciation........... 20,824 (43) 20,781 (735)(e) 2,488 (f) 22,534
Mortgage interest...... 9,484 9,484 785 (g) 10,269
Interest on line of
credit................ 6,697 2,739 9,436 (5,168)(h) 4,268
REIT management fees... 10,445 (475) 9,970 1,682 (i) 11,652
General and
administrative........ 673 (32) 641 641
Provision for possible
loss on investments... 2,500 2,500 2,500
Other.................. 255 (23) 232 232
-------- ------- -------- ------- ---------- ---------- --------
Total expenses........ 105,158 1,993 107,151 4,787 2,434 (3,486) 110,886
-------- ------- -------- ------- ---------- ---------- --------
Net earnings, excluding
gains on dispositions
and extraordinary item. $ 32,998 $(2,438) $ 30,560 $6,269 $ (2,434) $ 3,486 $ 37,881
======== ======= ======== ======= ========== ========== ========
Weighted-average shares
outstanding............ 32,028 32,028 5,869 (j) 37,897
======== ======== ========== ========
Net earnings per share,
excluding gains on
dispositions and
extraordinary item..... $ 1.03 $ 0.95 $ 1.00
======== ======== ========
</TABLE>
See accompanying notes to pro forma financial statements.
F-29
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO PRO FORMA FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
(a) Reflects the proposed issuance of 4,000,000 Shares at a price of $21.50
per Share. The total proceeds of $86.0 million, net of estimated costs of
issuance of $5.5 million, results in $80.5 million of cash available which,
for pro forma purposes, have been assumed to be used to repay borrowings on
ATLANTIC's $350 million line of credit.
(b) Reflects the sale of ATLANTIC's Homestead Village(R) properties to
Homestead as if the transaction had taken place on January 1, 1996 as follows:
(i) the elimination of the historical results of operations of ATLANTIC's
Homestead Village(R) properties from January 1, 1996 to the date of sale
(October 17, 1996), (ii) the recognition of additional interest expense and a
corresponding reduction in the REIT management fee resulting from the
additional borrowings that would have been necessary in 1996 to finance the
properties that were sold to Homestead and (iii) the recognition of the
historical interest expense that was capitalized on the properties sold to
Homestead and the corresponding reduction in the REIT management fee.
(c) All of ATLANTIC's acquisitions subsequent to December 31, 1995 were
acquired from unaffiliated third parties. These acquisitions are described
below:
<TABLE>
<CAPTION>
OCCUPANCY
ACQUISITION ACQUISITION AT DATE OF
COMMUNITY DATE LOCATION COST (IN 000'S) UNITS PRODUCT TYPE ACQUISITION
--------- ----------- -------- --------------- ----- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Cameron at Hickory Grove
(formerly Esprit)...... 4/10/96 Charlotte, NC $ 8,000 202 Moderate 93.6%
Cameron Court (formerly
Paces Court)........... 4/22/96 Greenville, SC 11,007 234 Middle 91.0
Park Place at Turtle Run
(formerly Park Place).. 4/22/96 Ft. Lauderdale, FL 14,355 350 Moderate 91.7
The Pointe at Bayberry
Lake................... 5/29/96 Ft. Lauderdale, FL 16,650 308 Moderate 90.9
Cameron Pointe.......... 5/30/96 Atlanta, GA 14,450 214 Middle 96.3
Country Oaks............ 9/5/96 Memphis, TN 8,250 200 Moderate 98.0
West Springfield
Terrace................ 9/30/96 Washington, DC 16,100 244 Moderate 94.7
Cameron Ridge (formerly
Lincoln Ridge)......... 10/17/96 Raleigh, NC 10,000 228 Middle 99.6
Cameron Century Center
(formerly Arbors of
Century Center)........ 10/18/96 Memphis, TN 15,800 420 Moderate 90.7
Balmoral Village........ 10/22/96 Atlanta, GA 19,125 312 Middle 95.5
Cameron Lake (formerly
Summer Lake)........... 11/12/96 Raleigh, NC 9,225 196 Moderate 84.1
Emerald Forest.......... 12/19/96 Raleigh, NC 14,625 320 Moderate 85.6
Cameron Bayshore (for-
merly Chesapeake)...... 12/20/96 Tampa, FL 10,700 328 Moderate 97.0
</TABLE>
F-30
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
This adjustment reflects historical gross income and rental expenses for all
communities acquired subsequent to December 31, 1995 for the period from
January 1, 1996 to the respective dates of acquisition (results of operations
after the date of acquisition are included in ATLANTIC's historical operating
results). It also reflects the removal from ATLANTIC's historical balances of
gross income and rental expenses for all communities disposed of subsequent to
December 31, 1995 for the period from January 1, 1996 to the respective dates
of disposition. The historical gross income and rental expenses relating to
the period prior to ATLANTIC's acquisition of the communities exclude amounts
which would not be comparable to the proposed future operations of the
communities such as certain interest income and income taxes.
The following tables summarize the historical income and expense amounts
shown on the pro forma statement of earnings (in thousands):
<TABLE>
<CAPTION>
RENTAL RENTAL
INCOME EXPENSES(1)
------- -----------
<S> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1996:
Group C Communities................................... $ 5,805 $ 2,481
Group D Communities................................... 6,180 2,505
Group E Communities................................... 11,645 4,753
Other communities acquired in 1996.................... 3,683 1,534
------- -------
Totals for the year................................. 27,313 11,273
Less: Post acquisition amounts already included in
ATLANTIC's historical balances................... (9,690) (3,616)
Less: Dispositions.................................... (6,567) (2,920)
------- -------
Net adjustment to ATLANTIC's historical balances.... $11,056 $ 4,737
======= =======
</TABLE>
- --------
(1) Includes property management fees and real estate taxes.
F-31
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
The following analysis reconciles the audited information for the Group C
Communities, the Group D Communities and the Group E Communities to the
amounts contained in the pro forma statement of earnings (in thousands):
<TABLE>
<CAPTION>
RENTAL RENTAL
INCOME EXPENSES (1)
------- ------------
<S> <C> <C>
Group C Communities: Audited results of
operations for the year ended December 31, 1995. $ 5,876 $3,043
Adjustment to reflect the results of operations
of Group C Communities for 1996............... (71)(2) (562)(2)
------- ------
Total 1996 Group C........................... $ 5,805 $2,481
======= ======
Group D Communities: Audited results of
operations for the year ended December 31, 1995. $ 6,173 $2,576
Adjustment to reflect the results of operations
of Group D Communities for 1996............... 7(2) (71)(2)
------- ------
Total 1996 Group D........................... $ 6,180 $2,505
======= ======
Group E Communities: Audited results of
operations for the year ended December 31, 1995. $11,347 $4,990
Adjustment to reflect the results of operations
of Group E Communities for 1996............... 298(2) (237)(2)
------- ------
Total 1996 Group E........................... $11,645 $4,753
======= ======
</TABLE>
- --------
(1) Includes property management fees and real estate taxes.
(2) Represents incremental income and expense adjustments necessary to
reconcile the 1995 audited results with the 1996 actual results.
(d) Reflects the difference for the year ended December 31, 1996 between
historical property management fee expense and ATLANTIC's pro forma property
management fee expense.
(e) Reflects the removal of depreciation expense recognized on communities
disposed of subsequent to December 31, 1995 which is included in ATLANTIC's
historical balances.
F-32
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
(f) Reflects depreciation expense from January 1, 1996 through the
acquisition date for all communities acquired subsequent to December 31, 1995
(depreciation expense after the date of acquisition is included in ATLANTIC's
historical operating results). This depreciation adjustment is based on
ATLANTIC's purchase cost assuming asset lives of ten to 40 years. Depreciation
is computed using a straight-line method.
(g) Reflects pro forma interest expense for the year ended December 31, 1996
on the three mortgage notes assumed in connection with acquisitions in 1996.
The interest rates on the mortgage notes varies from 7.0% to 8.0%.
(h) Represents the reduction to interest expense resulting from the pro
forma repayments on the line of credit. The interest reduction is calculated
using the weighted-average daily interest rate of 7.39% for 1996.
(i) Reflects the additional REIT management fee that would have been
incurred in the year ended December 31, 1996, had the pro forma acquisitions
and dispositions and the pro forma repayments on the line of credit all
occurred as of January 1, 1996.
(j) The number of Shares used in the calculation of the pro forma per Share
data was based on the weighted-average number of Shares outstanding during the
period, adjusted to give effect to Shares assumed to have been issued on
January 1, 1996 as necessary to complete the pro forma acquisitions and to
make the pro forma repayments on the line of credit.
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have audited the accompanying combined Historical Summary of Gross Income
and Direct Operating Expenses (the Historical Summary) of the Group C
Communities described in Note 1 for the year ended December 31, 1995. This
combined Historical Summary is the responsibility of the Group C Communities'
management. Our responsibility is to express an opinion on this combined
Historical Summary based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined Historical Summary is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined Historical
Summary. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the
overall presentation of the combined Historical Summary. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Security Capital Atlantic Incorporated as described in the accompanying
Note 1 of the combined Group C Communities and is not intended to be a
complete presentation of the income and expenses of the combined Group C
Communities.
In our opinion, the combined Historical Summary of Gross Income and Direct
Operating Expenses referred to above presents fairly, in all material
respects, the combined gross income and direct operating expenses as described
in Note 1 of the combined Group C Communities for the year ended December 31,
1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
West Palm Beach, Florida
April 26, 1996
F-34
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP C COMMUNITIES
COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Gross income:
Rental...................................................... $5,760,923
Other....................................................... 114,949
----------
Total gross income........................................ 5,875,872
----------
Direct operating expenses:
Utilities and other operating expenses...................... 1,279,237
Real estate taxes........................................... 615,907
Repairs and maintenance..................................... 783,851
Management fees............................................. 228,903
Advertising................................................. 88,289
Insurance................................................... 47,163
----------
Total direct operating expenses........................... 3,043,350
----------
Excess of gross income over direct operating expenses......... $2,832,522
==========
</TABLE>
See accompanying notes.
F-35
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP C COMMUNITIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
DECEMBER 31, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined Historical Summary of Gross Income and Direct Operating
Expenses (the "Historical Summary") for the year ended December 31, 1995,
relates to the operations of the following Group C Communities which were
acquired from unaffiliated parties by Security Capital Atlantic Incorporated
("ATLANTIC") between January 1, 1996 and April 29, 1996:
<TABLE>
<CAPTION>
ACQUISITION DATE COMMUNITY NAME LOCATION ACQUISITION COST
---------------- -------------- -------------------------- ----------------
(IN 000S)
<C> <S> <C> <C>
April 10, 1996 Cameron at Charlotte, North Carolina $ 8,000
Hickory
Grove
(formerly
Esprit)
April 22, 1996 Park Place Ft. Lauderdale, Florida 14,355
at Turtle
Run
(formerly
Park
Place)
April 22, 1996 Cameron Greenville, South Carolina 11,007
Court
(formerly
Paces
Court)
</TABLE>
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Registration Statement on Form S-11
of ATLANTIC. The combined Historical Summary is not intended to be a complete
presentation of combined income and expenses of the Group C Communities for
the year ended December 31, 1995, as certain costs such as depreciation,
amortization, certain mortgage interest, professional fees and other costs not
considered comparable to the future operations of the Group C Communities have
been excluded.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rental income from leasing activities consist of lease payments earned from
tenants under lease agreements with terms of one year or less.
Capitalization Policy
Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments are capitalized.
Advertising Expense
The cost of advertising is expensed as incurred.
Use of Estimates
The preparation of the combined Historical Summary in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined Historical
Summary and accompanying notes. Actual results could differ from those
estimates.
3. RELATED PARTY TRANSACTIONS
Management fees of $228,903 were paid to affiliates of the prior owners
under property management contracts.
4. DEBT ASSUMPTION
During 1995, the Cameron at Hickory Grove Apartments secured an 8.75%,
interest-only mortgage note with a balance of $6,660,000. ATLANTIC assumed
this mortgage note on April 10, 1996 in connection with the acquisition of the
community. Substantial modifications in the terms of the note were made prior
to the assumption by ATLANTIC. Therefore, on a continuing basis, the interest
expense incurred will differ from the amounts incurred prior to ATLANTIC's
assumption of the debt. Accordingly, no interest expense is recognized in the
accompanying combined Historical Summary.
F-36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have audited the accompanying combined Historical Summary of Gross Income
and Direct Operating Expenses (the Historical Summary) of the Group D
Communities described in Note 1 for the year ended December 31, 1995. This
combined Historical Summary is the responsibility of the Group D Communities'
management. Our responsibility is to express an opinion on this combined
Historical Summary based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined Historical Summary is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined Historical
Summary. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the
overall presentation of the combined Historical Summary. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Security Capital Atlantic Incorporated as described in the accompanying
Note 1 of the combined Group D Communities and is not intended to be a
complete presentation of the income and expenses of the combined Group D
Communities.
In our opinion, the combined Historical Summary of Gross Income and Direct
Operating Expenses referred to above presents fairly, in all material
respects, the combined gross income and direct operating expenses as described
in Note 1 of the combined Group D Communities for the year ended December 31,
1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
West Palm Beach, Florida
August 13, 1996
F-37
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP D COMMUNITIES
COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM JANUARY 1, 1996 THROUGH THE
EARLIER OF JUNE 30, 1996 OR DATE OF ACQUISITION
<TABLE>
<CAPTION>
1995 1996
---------- -----------
(UNAUDITED)
<S> <C> <C>
Gross income:
Rental................................................. $5,927,498 $2,530,039
Other.................................................. 245,113 95,154
---------- ----------
Total gross income................................... 6,172,611 2,625,193
---------- ----------
Direct operating expenses:
Utilities and other operating expenses................. 1,252,442 595,707
Real estate taxes...................................... 557,446 278,615
Repairs and maintenance................................ 336,297 78,735
Management fees........................................ 266,917 106,175
Advertising............................................ 65,935 35,320
Insurance.............................................. 97,417 58,141
---------- ----------
Total direct operating expenses...................... 2,576,454 1,152,693
---------- ----------
Excess of gross income over direct operating expenses.... $3,596,157 $1,472,500
========== ==========
</TABLE>
See accompanying notes.
F-38
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP D COMMUNITIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM JANUARY 1, 1996 THROUGH THE
EARLIER OF JUNE 30, 1996 OR DATE OF ACQUISITION (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined Historical Summary of Gross Income and Direct Operating
Expenses (the "Historical Summary") for the year ended December 31, 1995 and
the period from January 1, 1996 through the earlier of June 30, 1996 or the
date Security Capital Atlantic Incorporated (" ATLANTIC") acquired the
community (the "Date of Acquisition") relates to the operations of the
following Group D Communities which have been or are likely to be acquired
from unaffiliated parties by ATLANTIC between May 29, 1996 and September 30,
1996:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
DATE COMMUNITY NAME LOCATION COST
----------- -------------- -------- -----------
<S> <C> <C> <C>
(IN 000'S)
May 29, 1996 The Pointe at Bayberry Lake Ft. Lauderdale, Florida $ 16,650
May 30, 1996 Cameron Pointe (formerly Calibre Pointe) Atlanta, Georgia 14,450
-- (1) Country Oaks Memphis, Tennessee -- (1)
</TABLE>
- --------
(1) Community is under contract
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Registration Statement on Form S-11
of ATLANTIC. The combined Historical Summary is not intended to be a complete
presentation of combined income and expenses of the Group D Communities for
the year ended December 31, 1995 and the period from January 1, 1996 through
the earlier of June 30, 1996 or the Date of Acquisition, as certain costs such
as depreciation, amortization, certain mortgage interest, professional fees
and other costs not considered comparable to the future operations of the
Group D Communities have been excluded.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rental income from leasing activities consist of lease payments earned from
tenants under lease agreements with terms of one year or less.
Capitalization Policy
Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments are capitalized.
Advertising Expense
The cost of advertising is expensed as incurred.
Use of Estimates
The preparation of the combined Historical Summary in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined Historical
Summary and accompanying notes. Actual results could differ from those
estimates.
F-39
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP D COMMUNITIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES--(CONCLUDED)
Unaudited Interim Historical Summary
The combined Historical Summary for the period from January 1, 1996 through
the earlier of June 30, 1996 or the Date of Acquisition is unaudited. In the
opinion of management, all adjustments necessary for a fair presentation of
such combined Historical Summary have been included. The results of operations
for the period are not necessarily indicative of the Group D Communities'
future results of operations.
3. RELATED PARTY TRANSACTIONS
Management fees of $266,917 and $106,175 were paid to affiliates of the
prior owners under property management contracts in 1995 and 1996,
respectively.
4. DEBT ASSUMPTION
In June 1995, the Country Oaks Apartments secured a mortgage note in the
amount of $6,010,000. The note provides for monthly payments of $42,663,
including principal and interest at 7.655% through July 2002, at which time
all outstanding principal and interest will be due. ATLANTIC will assume this
note in connection with the acquisition of the community.
F-40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have audited the accompanying combined Historical Summary of Gross Income
and Direct Operating Expenses (the Historical Summary) of the Group E
Communities described in Note 1 for the year ended December 31, 1995. This
combined Historical Summary is the responsibility of the Group E Communities'
management. Our responsibility is to express an opinion on this combined
Historical Summary based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined Historical Summary is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined Historical
Summary. An audit also includes assessing the basis of accounting used and
significant estimates made by management, as well as evaluating the overall
presentation of the combined Historical Summary. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Security Capital Atlantic Incorporated as described in the accompanying
Note 1 of the combined Group E Communities and is not intended to be a
complete presentation of the income and expenses of the combined Group E
Communities.
In our opinion, the combined Historical Summary of Gross Income and Direct
Operating Expenses referred to above presents fairly, in all material
respects, the combined gross income and direct operating expenses as described
in Note 1 of the combined Group E Communities for the year ended December 31,
1995, in conformity with generally accepted accounting principles.
Dallas, Texas
January 31, 1997
F-41
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP E COMMUNITIES
COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1995 AND
THE PERIOD FROM JANUARY 1, 1996 THROUGH THE DATE OF ACQUISITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
------- -----------
(UNAUDITED)
<S> <C> <C>
Gross income:
Rental.................................................... $10,774 $9,022
Other..................................................... 573 554
------- ------
Total gross income...................................... 11,347 9,576
------- ------
Direct operating expenses:
Utilities and other operating expenses.................... 1,674 1,351
Real estate taxes......................................... 956 848
Repairs and maintenance................................... 1,470 1,198
Management fees........................................... 468 378
Interest on certain obligations assumed................... 437 341
Advertising............................................... 207 148
Insurance................................................. 215 176
------- ------
Total direct operating expenses......................... 5,427 4,440
------- ------
Excess of gross income over direct operating expenses....... $ 5,920 $5,136
======= ======
</TABLE>
See accompanying notes.
F-42
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP E COMMUNITIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1995 AND
THE PERIOD FROM JANUARY 1, 1996 THROUGH THE DATE OF ACQUISITION (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined Historical Summary of Gross Income and Direct Operating
Expenses (the "Historical Summary") for the year ended December 31, 1995 and
the period from January 1, 1996 through the date Security Capital Atlantic
Incorporated ("ATLANTIC") acquired the community (the "Date of Acquisition"),
relates to the operations of the following Group E Communities which were
acquired from unaffiliated parties by ATLANTIC between September 30, 1996 and
December 20, 1996:
<TABLE>
<CAPTION>
ACQUISITION
PRICE
DATE COMMUNITY NAME LOCATION (IN 000'S)
---- -------------- -------- -----------
<C> <S> <C> <C>
September 30, 1996 West Springfield Terrace Washington, D.C. $16,100
October 17, 1996 Cameron Ridge (formerly Lin- Raleigh, NC 10,000
coln Ridge)
October 18, 1996 Cameron Century Center Memphis, TN 15,800
(formerly Arbors at Century
Center)
October 22, 1996 Balmoral Village Atlanta, GA 19,125
December 20, 1996 Cameron Bayshore Tampa, FL 10,700
(formerly Chesapeake)
</TABLE>
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Registration Statement of Form S-11
of ATLANTIC. The combined Historical Summary is not intended to be a complete
presentation of combined income and expenses of the Group E Communities for
the year ended December 31, 1995 and the period from January 1, 1996 through
the Date of Acquisition, as certain costs such as depreciation, amortization,
certain mortgage interest, professional fees and other costs not considered
comparable to the future operations of the Group E Communities have been
excluded.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rental income from leasing activities consists of lease payments earned from
tenants under lease agreements with terms of one year or less.
Capitalization Policy
Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments are capitalized.
Advertising Expense
The cost of advertising is expensed as incurred.
F-43
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP E COMMUNITIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES--(CONTINUED)
Use of Estimates
The preparation of the combined Historical Summary in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined Historical
Summary and accompanying notes. Actual results could differ from those
estimates.
Unaudited Interim Historical Summary
The combined Historical Summary for the period from January 1, 1996 through
the Date of Acquisition is unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such combined Historical
Summary have been included. The results of operations for the period are not
necessarily indicative of the Group E Communities' future results of
operations.
3. RELATED PARTY TRANSACTIONS
Management fees of $73,000 and $73,000 in 1995 and 1996, respectively, and
allocated accounting costs of $53,000 and $49,000 in 1995 and 1996,
respectively, were paid to affiliates of the prior owners under property
management contracts.
4. DEBT ASSUMPTION
ATLANTIC assumed outstanding debt in connection with the acquisition of the
Lincoln Ridge Apartments. A 7% mortgage note with an outstanding balance of
$5,920,186 at October 17, 1996 (the date of acquisition) was assumed by
ATLANTIC. The note, which is collateralized by the community, matures on
September 10, 2013, subject to the lender's call options in 1998, 2003 or
2008. The mortgage note requires monthly principal and interest payments of
$50,660 until September 1998, at which time the interest rate will be based on
the prime rate or, at ATLANTIC's option, may be fixed at a rate based on the
current Treasury rate. Beginning in September, 1998, the note requires monthly
payments of interest and monthly principal payments beginning at $15,206,
increasing by approximately 9% annually.
The mortgage note had an outstanding balance of $6,071,000 at December 31,
1995. ATLANTIC's assumption of this mortgage note did not provide for any
modification to the original terms of the note through September 1998;
therefore, interest expense incurred prior to ATLANTIC's assumption is
representative of future interest expense. Accordingly, interest expense of
$437,000 and $341,000 for 1995 and 1996, respectively, is recognized in the
combined Historical Summary.
F-44
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF ATLANTIC SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 18
Security Capital Atlantic Incorporated.................................... 26
Use of Proceeds........................................................... 26
Capitalization............................................................ 27
Price Range of ATLANTIC Shares and Distributions.......................... 27
Dilution.................................................................. 30
The Merger Transaction.................................................... 30
Business.................................................................. 33
REIT Management........................................................... 43
Communities............................................................... 55
Selected Financial Information............................................ 63
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 64
Policies With Respect to Certain Activities............................... 79
Certain Relationships and Transactions.................................... 82
Principal Shareholders.................................................... 86
Description of Stock...................................................... 87
Certain Provisions of Maryland Law and of ATLANTIC's Charter and Bylaws... 92
Shares Available for Future Sale.......................................... 96
Federal Income Tax Considerations......................................... 96
Underwriting.............................................................. 105
Experts................................................................... 106
Validity of Shares........................................................ 107
Additional Information.................................................... 107
Glossary.................................................................. 108
Index to Financial Statements............................................. F-1
</TABLE>
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4,000,000 SHARES
LOGO
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
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PROSPECTUS
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GOLDMAN, SACHS & CO.
DEAN WITTER REYNOLDS INC.
J.P. MORGAN & CO.
PRUDENTIAL SECURITIES INCORPORATED
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<PAGE>
The inside front cover page contains a map of the Southeastern United States,
including the location of Registrants target market cities, operating
communities and communities under construction or in planning.
Page thirty-three contains a chart which indicates the expected population and
employment growth in the Registrants primary target market cities versus the
United States as a whole from 1997 to 2016.
The inside back cover page contains pictures of eight of the Registrant's
communities.
