-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OiKT1gAk90uPWhut1TkQzhkh/mSQuBdOd/xsGUX/N/Nb5syo/m+WuclFHGZwFhXM H4cAod0JMeoz+BGv4X+uzQ== 0000890566-97-002142.txt : 19971002 0000890566-97-002142.hdr.sgml : 19971002 ACCESSION NUMBER: 0000890566-97-002142 CONFORMED SUBMISSION TYPE: 424B5 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19971001 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MID AMERICA APARTMENT COMMUNITIES INC CENTRAL INDEX KEY: 0000912595 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 621543819 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B5 SEC ACT: SEC FILE NUMBER: 333-34775 FILM NUMBER: 97689546 BUSINESS ADDRESS: STREET 1: 6584 POPLAR AVE STREET 2: STE 340 CITY: MEMPHIS STATE: TN ZIP: 38138 BUSINESS PHONE: 9016826600 MAIL ADDRESS: STREET 1: 6584 POPLAR AVE STREET 2: SUITE 340 CITY: MEMPHIS STATE: TN ZIP: 38138 424B5 1 PROSPECTUS SUPPLEMENT (To Prospectus Dated September 9, 1997) 3,333,000 Shares Mid-America Apartment Communities, Inc. Common Stock ------------------ MID-AMERICA APARTMENT COMMUNITIES, INC. (THE "COMPANY") IS A REAL ESTATE INVESTMENT TRUST WHICH OWNS AND OPERATES APARTMENT COMMUNITIES PRIMARILY IN THE SOUTHEASTERN UNITED STATES AND TEXAS. THE COMPANY OWNS AND OPERATES 81 APARTMENT COMMUNITIES CONTAINING 21,943 APARTMENT UNITS IN 12 STATES. ------------------ ALL OF THE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE (THE "COMMON STOCK") OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. THE COMMON STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE (THE "NYSE") UNDER THE SYMBOL "MAA." THE LAST REPORTED SALE PRICE OF THE COMMON STOCK ON THE NYSE ON SEPTEMBER 30, 1997 WAS $29 11/16 PER SHARE. ------------------ SEE "RISK FACTORS" BEGINNING ON PAGE S-5 AND IN THE ACCOMPANYING PROSPECTUS FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------ PRICE $29 11/16 A SHARE ------------------
UNDERWRITING DISCOUNTS AND PRICE TO COMMIS- PROCEEDS TO PUBLIC SIONS(1) COMPANY(2) -------------- ------------- -------------- Per Share........................................ $29.6875 $1.5586 $28.1289 Total(3)......................................... $98,948,438 $5,194,814 $93,753,624 - ------------
(1) The Company and its principal subsidiary, Mid-America Apartments, L.P., have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriters." (2) Before deducting expenses payable by the Company estimated at $250,000. (3) The Company has granted the Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 499,950 additional shares of Common Stock at the price to public less underwriting discounts and commissions for the purpose of covering over-allotments, if any. If the Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions and proceeds to company will be $113,790,703, $5,974,036 and $107,816,667, respectively. See "Underwriters." ------------------ The shares of Common Stock are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein, and subject to approval of certain legal matters by Hunton & Williams, counsel for the Underwriters. It is expected that delivery of the Common Stock offered hereby will be made on or about October 6, 1997 at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ------------------ MORGAN STANLEY DEAN WITTER MORGAN KEEGAN & COMPANY, INC. RAYMOND JAMES & ASSOCIATES, INC. October 1, 1997 CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING, AND MAY BID FOR, AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS." NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED HEREBY, NOR DO THEY CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR, THE ACCOMPANYING PROSPECTUS, NOR ANY SALE OR OFFER MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. TABLE OF CONTENTS PROSPECTUS SUPPLEMENT PAGE ---- The Company.......................... S-3 Recent Developments.................. S-3 Risk Factors......................... S-5 Unaudited Pro Forma Condensed Combined Financial Statements...... S-7 Use of Proceeds...................... S-21 Price Range of Common Stock and Dividend History................... S-21 Capitalization....................... S-23 Underwriters......................... S-24 Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995................. S-25 Experts.............................. S-25 Legal Matters........................ S-25 Incorporation of Certain Documents by Reference.......................... S-25 PROSPECTUS Available Information................ 2 Incorporation of Certain Documents by Reference.......................... 2 Prospectus Summary................... 4 The Company.......................... 4 Risk Factors......................... 7 Use of Proceeds...................... 12 Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Distributions and Consolidated Ratio of Earnings to Fixed Charges...................... 13 Description of Capital Stock......... 14 Description of Debt Securities....... 18 Description of Securities Warrants... 28 Federal Income Tax Considerations.... 30 Plan of Distribution................. 43 Experts.............................. 44 Legal Matters........................ 44 S-2 UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. UNLESS OTHERWISE INDICATED, AS USED HEREIN, THE TERM "COMPANY" INCLUDES MID-AMERICA APARTMENT COMMUNITIES, INC., ITS PREDECESSOR AND THOSE ENTITIES OWNED OR CONTROLLED THEREBY, INCLUDING MID-AMERICA APARTMENTS, L.P. (THE "OPERATING PARTNERSHIP" OR "MAALP"). THE COMPANY GENERAL Mid-America Apartment Communities, Inc., a Tennessee corporation (the "Company" or "MAAC"), is a self-administered and self-managed umbrella partnership real estate investment trust ("REIT") which owns and operates 81 apartment communities (the "Communities") containing 21,943 apartment units in 12 states, and has agreements to acquire three apartment communities containing 602 apartment units. As measured by the number of apartment units owned, the Company is the sixth largest apartment REIT in the United States. Founded in 1977 by George E. Cates, the Company's Chairman of the Board of Directors and Chief Executive Officer, the Company's predecessor grew from an operator of a single 252-unit apartment community in Memphis, Tennessee into a fully-integrated owner and operator of 5,580 apartment units in 22 apartment communities in four southeastern states immediately prior to the Company's initial public offering of Common Stock in February 1994 (the "Initial Offering"). Since the Initial Offering, the Company's portfolio has increased by 59 apartment communities containing 16,363 apartment units. The Company seeks to acquire apartment communities appealing to middle and upper income residents in mid-size cities in the southeastern United States and Texas. Approximately 65% of the Company's apartment units are located in Tennessee, Florida and Texas markets. The Company's strategic focus is to provide its residents high quality apartment units in attractive community settings, characterized by extensive landscaping and attention to aesthetic detail. The Company's principal executive offices are located at 6584 Poplar Avenue, Suite 340, Memphis, Tennessee, 38138, and its telephone number is (901) 682-6600. RECENT DEVELOPMENTS PENDING TRANSACTION WITH FLOURNOY PROPERTIES GROUP On September 17, 1997, the Company, the Operating Partnership and Flournoy Development Company, a Georgia corporation ("FDC") entered into an Agreement and Plan of Reorganization (the "Plan of Reorganization") pursuant to which FDC will merge with and into the Company (the "FDC Merger") and the Company and the Operating Partnership will acquire all the assets of FDC and certain affiliated entities (collectively, the "Flournoy Properties Group" or "FPG") through a series of merger, exchange and purchase transactions (the "Reorganization"). The Flournoy Properties Group owns and operates 29 multifamily apartment communities containing an aggregate of 7,255 apartment units located primarily in Georgia, Florida, South Carolina and Tennessee. Completion of the Reorganization is conditioned upon certain consents and approvals and certain other closing conditions. The Company will also acquire FDC's construction, development and management businesses. As consideration for the transfer of the assets of the Flournoy Properties Group to the Company and the Operating Partnership upon consummation of the Reorganization, the Company shall issue to the shareholders of FDC an aggregate of 1,556,510 shares of Common Stock as consideration for the FDC Merger, and the Operating Partnership shall issue to the partners of the several partnerships holding the remaining assets included in the Flournoy Properties Group an aggregate of 481,704 Class A Common Units of limited partnership interests ("Class A Common Units") in the Operating Partnership. In addition, in connection with the Reorganization, the Company and the Operating Partnership are obligated under the Plan of Reorganization to prepay at the time of closing certain indebtedness of the Flournoy Properties Group which at June 30, 1997 totalled approximately $197.2 million and shall assume (either expressly S-3 or by operation of law) certain indebtedness of the Flournoy Properties Group which at June 30, 1997 totalled approximately $93.5 million. Finally, the Operating Partnership shall acquire certain properties of the Flournoy Properties Group for aggregate consideration of approximately $29.6 million cash. The Company currently expects to spend approximately $11 million in capital expenditures to reposition certain of the apartment communities acquired in the Reorganization. Upon completion of the Reorganization, John F. Flournoy, the Chairman of the Board and Chief Executive Officer of FDC, will become a director of the Company and W. Randall Jones, President of FDC, will become an advisory member of the Company's Board of Directors. The Company has completed substantially all of its due diligence with respect to, and has obtained approval from the Company's Board of Directors for the Reorganization. See "Risk Factors" in this Prospectus Supplement for a description of certain risks associated with the Reorganization. OTHER PENDING ACQUISITIONS In addition to the apartment communities to be acquired pursuant to the Reorganization, the Company has entered into agreements to acquire three apartment communities containing 602 apartment units for aggregate cash prices of approximately $21.9 million, excluding customary closing costs. S-4 RISK FACTORS RISK THAT REORGANIZATION WILL NOT CLOSE While the Company has entered into the Plan of Reorganization and has completed substantially all of its due diligence with respect to the Flournoy Properties Group, the closing of the Reorganization is not scheduled to occur until after the offering. The closing is subject to customary closing conditions, including the consent of lenders to the Company's assumption of certain indebtedness of the Flournoy Properties Group as a result of the Reorganization. In addition, the partners of 24 limited partnerships must consent to the disposition of certain properties to the Company in the Reorganization. There can be no assurance that the conditions to closing will be fulfilled or that the Company will complete the Reorganization. Failure of FDC or the Company to consummate the Reorganization will result in liquidated damages to the non-defaulting party of $250,000, provided, however, that if any defaulting party closes a substantially similar business combination with another person within one year after the date of termination of the Plan of Reorganization, the non-defaulting party shall be entitled to receive a termination fee of $8.5 million from the defaulting party, with the liquidated damages of $250,000 being credited against such termination fee. The Company has incurred approximately $250,000 in due diligence expenses in connection with investigating the Flournoy Properties Group. INDEBTEDNESS OF THE FLOURNOY PROPERTIES GROUP In connection with the Reorganization, the Company intends to refinance a substantial portion of the Flournoy Properties Group's indebtedness. The Company currently has no binding commitments to refinance such indebtedness and there can be no assurance that the Company will be able to refinance such indebtedness or obtain new financing on terms commensurate with the Company's expectations. In addition, the Company intends to assume a substantial portion of the Flournoy Properties Group's existing indebtedness which assumption requires the consent of the lenders and, with respect to certain indebtedness, the consent of the U.S. Department of Housing and Urban Development. Neither the Company nor the Flournoy Properties Group has yet obtained those consents and there can be no assurance that such consents will be forthcoming. Failure to timely obtain such consents could result in the Company needing to obtain other financing to repay such indebtedness and could result in prepayment penalties in order to complete the Reorganization. There can be no assurance that the Company will be able to obtain other financing or obtain financing on terms as favorable as the Flournoy Properties Group indebtedness which the Company intends to assume. SHORTAGE OF AUTHORIZED SHARES OF COMMON STOCK The Plan of Reorganization requires the Company to issue shares of Common Stock in partial consideration of the purchase price for the Flournoy Properties Group. Following completion of the offering, but prior to the closing of the Reorganization, the Company will need to increase the number of shares of authorized and unissued Common Stock to complete the issuance of the total number of shares of Common Stock issuable in the Reorganization. The Company plans to hold a special shareholders' meeting in November 1997 in order for the Company's shareholders to vote on a proposed amendment to the Company's charter to increase the number of authorized shares of Common Stock from 20,000,000 shares to 50,000,000 shares and to increase the number of authorized shares of preferred stock from 5,000,000 shares to 20,000,000 shares. There can be no assurance that a sufficient number of shareholders will vote to approve the amendment to the Company's charter. In the event the Company's shareholders do not approve the proposed increase in the number of authorized shares of Common Stock, in order to complete the Reorganization, the Company may be required to terminate its Dividend Reinvestment and Stock Purchase Plan (the "DRSPP") and redeem Class A Common Units in the Operating Partnership which are subsequently tendered for conversion for cash rather than the issuance of Common Stock which could require the Company to undertake substantial borrowings. S-5 OPERATIONAL RISKS OF GROWTH If the Reorganization is completed, the number of properties and size of operations of the Company will increase substantially. The Company intends to offer employment to substantially all of the employees of the Flournoy Properties Group, including property managers and regional managers. However, there can be no assurance that the Company will be able to retain the services of existing employees of the Flournoy Properties Group. To the extent the Company is unable to retain experienced personnel following the Reorganization, the amounts per share available for distribution to the Company's shareholders could be adversely affected. THIRD PARTY MANAGEMENT AGREEMENTS The Reorganization includes the Company's acquisition of FDC's property management services business. FDC currently manages 43 multi-family residential properties for third party property owners pursuant to separate management contracts. Management agreements pursuant to which FDC manages these properties provide that the management agreements may not be assigned without the consent of the property owner and that such management agreements may be terminated by the property owner upon 60 days' notice. There can be no assurance that any such consents to assignment will be forthcoming. S-6 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS BASIS OF PRESENTATION The following unaudited pro forma condensed combined financial statements give effect to the following transactions: (i) consummation of the FDC Merger and the Reorganization pursuant to which MAAC and MAALP shall acquire all the properties and assets comprising the Flournoy Properties Group, including FDC, in exchange for 1,556,510 shares of Common Stock, 481,704 Class A Common Units of MAALP, and approximately $29.6 million cash; in addition, MAAC is obligated to prepay certain FPG indebtedness totalling approximately $197.2 million at June 30, 1997 and to assume certain FPG indebtedness totalling approximately $93.5 million at June 30, 1997; (ii) the acquisition in 1996 of six Communities containing an aggregate of 1,760 apartment units for an aggregate cash price of $65.7 million (the "1996 Completed Acquisitions"); (iii) the acquisition in 1997 of nine Communities containing an aggregate of 2,600 apartment units for an aggregate cash purchase price of $107.6 million (the "1997 Completed Acquisitions") (the 1996 Completed Acquisitions and 1997 Completed Acquisitions, collectively, the "Completed Acquisitions"); (iv) the disposition in 1996 of three Communities containing an aggregate of 724 apartment units for an aggregate cash consideration of $17.8 million (the "Dispositions"); (v) the anticipated acquisition, subsequent to June 30, 1997, of three additional Communities containing an aggregate of 602 apartment units for an aggregate cash purchase price of $21.9 million, excluding customary closing costs (the "1997 Probable Acquisitions"); (vi) the issuance and sale in October 1996 of 2,000,000 shares of MAAC's 9.5% Series A Cumulative Preferred Stock (Liquidation Preference $25 per Share) (the "Series A Preferred Stock") for an aggregate net cash price of $47.8 million (the "October 1996 Preferred Stock Offering"), and the related use of such proceeds; and (vii) the issuance and sale in March 1997 of 2,300,000 shares of MAAC Common Stock for an aggregate net cash price of $62.6 million, and the related use of such proceeds. In addition, such unaudited pro forma condensed combined financial statements give effect to the following financing transactions that the Company expects to consummate prior to the closing of the Reorganization and the Company's assumptions with respect to the terms of such financing: (i) the issuance and sale of 3,333,000 shares of Common Stock at an assumed price of $29.50 per share for an estimated aggregate net cash price of $92.9 million (the "Common Stock Offering"); (ii) the issuance and sale of 3,200,000 shares of MAAC's 9% Preferred Stock (Liquidation Preference $25 per share) for an estimated aggregate net cash price of $77.4 million (the "Preferred Stock Offering"); and (iii) the establishment of a new $150 million secured term loan bearing interest at 7% per annum and the establishment of a new $150 million secured line of credit bearing interest at 7.65% per annum (collectively, the "New Credit Facilities") and the Company's initial anticipated borrowings thereunder. The Preferred Stock Offering and New Credit Facilities are intended to provide financing for the transactions described in the above paragraph. While the Company intends to undertake the financing transactions described above, there can be no assurance that such financings will occur on the terms assumed by the Company. The unaudited pro forma condensed combined balance sheet at June 30, 1997 has been prepared as if the Reorganization, the Common Stock Offering, the Preferred Stock Offering, the establishment of the New Credit Facilities and the 1997 Probable Acquisitions had been completed on that date. The unaudited pro forma condensed combined statements of operations for the six months ended June 30, 1997 and the year ended December 31, 1996 have been prepared as if each of the transactions described above had been consummated on January 1, 1996 and assuming that MAAC had qualified as a REIT and distributed all of its taxable income for the periods presented and, therefore, incurred no income tax expense. S-7 For purposes of these pro forma financial statements, the Reorganization has been accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16. In the opinion of MAAC's management, all significant adjustments necessary to reflect the effects of the foregoing transactions have been made. These unaudited pro forma financial statements have been prepared by MAAC based on the historical financial statements of FPG and MAAC, which have been previously filed with the Securities and Exchange Commission and are incorporated herein by reference. These unaudited pro forma financial statements should be read in conjunction with the foregoing historical financial statements, including the notes thereto. These pro forma combined financial statements are presented for comparative purposes only and are not indicative of what the actual financial position or results of operations of MAAC would have been had the foregoing transactions occurred on the dates indicated. S-8 MID-AMERICA APARTMENT COMMUNITIES, INC. PRO FORMA CONDENSED COMBINED BALANCE SHEET JUNE 30, 1997 (UNAUDITED) (DOLLARS IN THOUSANDS)
MAAC FPG PRO FORMA PRO FORMA(A) HISTORICAL(B) ADJUSTMENTS(C) COMBINED ------------ ------------- -------------- ------------ ASSETS: Rental real estate assets, net....... $712,106 $ 202,804 $ 158,497(D) $ 1,073,407 Construction in progress............. 14,123 7,632 (539)(E) 21,216 Real estate held for development..... -- 12,817 1,934(D) 14,751 ------------ ------------- -------------- ------------ Net real estate assets.......... 726,229 223,253 159,892 1,109,374 Cash and cash equivalents............ 5,214 4,075 (3,875)(F) 5,414 Trading securities................... -- 2,241 (2,241)(G) -- Restricted cash...................... 5,271 5,350 (1,527)(H) 9,094 Due from affiliates.................. -- 4,936 (4,936)(I) -- Deferred financing costs, net........ 2,856 5,012 (4,342)(J) 3,526 Other assets......................... 6,679 7,870 (428)(K) 14,121 ------------ ------------- -------------- ------------ Total assets.................... $746,249 $ 252,737 $ 142,543 $ 1,141,529 ============ ============= ============== ============ LIABILITIES: Notes payable........................ $318,670 $ 291,049 $ (130,222)(L) $ 479,497 Line of credit....................... 72,007 -- -- 72,007 Due to affiliates.................... -- 2,453 (1,029)(M) 1,424 Deferred development fees............ -- 1,347 (1,347)(N) -- Other liabilities.................... 15,914 18,072 (5,631)(O) 28,355 ------------ ------------- -------------- ------------ Total liabilities............... $406,591 $ 312,921 $ (138,229) $ 581,283 ============ ============= ============== ============ Minority interest.................... $ 45,282 $ -- $ 31,298(P) $ 76,580 SHAREHOLDERS' EQUITY: Preferred stock...................... 20 -- 32(Q) 52 Common stock......................... 134 -- 49(R) 183 Additional paid-in-capital........... 317,253 -- 197,368(S) 514,621 Accumulated deficit.................. (22,112) (60,184) 52,025(T) (30,271) Other................................ (919) -- -- (919) ------------ ------------- -------------- ------------ Total shareholders' equity...... 294,376 (60,184) 249,474 483,666 ------------ ------------- -------------- ------------ Total liabilities and shareholders' equity.......... $746,249 $ 252,737 $ 142,543 $ 1,141,529 ============ ============= ============== ============
PRO FORMA ADJUSTMENTS: (A) See MAAC Pro Forma on page S-12. (B) Reflects the unaudited combined historical balance sheet of FPG as of June 30, 1997. (C) MAAC may issue additional shares of Common Stock having a value of up to $7,500 ("Contingent Value Shares") if certain agreed upon conditions are satisfied during calendar years 1998, 1999 and 2000. When and if issued, the Contingent Value Shares will be recorded as additional purchase consideration based upon the fair value of the Common Stock at the date of issuance. The amount of the Contingent Value Shares potentially issuable by MAAC has not been included in the Pro Forma Condensed Combined Balance Sheet. (NOTES CONTINUED ON FOLLOWING PAGE) S-9 (D) Represents an increase in the carrying value of FPG properties resulting from the application of the purchase method of accounting. (E) Represents the elimination of income on a construction contract between MAAC and FPG. (F) Represents: Estimated proceeds from the sale of trading securities, net of estimated commissions of $67......... $ 2,174 Anticipated FPG distributions at the date of consummating the Reorganization......... (3,172) Contributions to FPG by the majority shareholder....... 201 Net change in cash resulting from the disposition of Section 42 partnership interests and related affiliate balances......... 1,639 Purchase of certain real estate assets and partnership interests in connection with the Reorganization.... (29,589) Prepayment of certain FPG mortgages and notes payable consisting of principal ($197,222), interest ($2,262), penalties ($7,620) and escrow refunds $1,385.. (205,719) Settlement of FPG's deferred compensation plan.......... (1,610) Legal, accounting, investment banking and other costs.... (5,000) Settlement of a portion of amounts due from majority FPG stockholder................ 595 Anticipated net proceeds from the Preferred Stock Offering................... 77,360 Anticipated net proceeds from the Common Stock Offering.. 92,916 Anticipated proceeds from the New Credit Facilities, net of issuance costs of $670.................... 66,330 ------------ $ (3,875) ============ (G) Represents the sale of trading securities. (H) Represents the refund ($1,385) of escrow deposits on FPG mortgages and notes payable expected to be prepaid and escrow deposits ($142) expected to be settled in connection with the sale of the Section 42 partnership interests. (I) Represents amounts which were eliminated in conjunction with the sale of the Section 42 partnership interests ($2,311), the settlement of certain Section 42 and other affiliate balances for cash ($1,610), the settlement of amounts due from the majority stockholder for cash ($595) and units in MAALP ($420). (J) Represents the write-off of FPG deferred financing costs ($5,012) resulting from the application of the purchase method of accounting to reflect the debt at fair value and deferred financing costs of $670 for new debt expected to be incurred as part of the New Credit Facilities. (K) Represents the elimination of amounts receivable by FPG under a construction contract between MAAC and FPG ($1,759), and an increase in the carrying value of certain non-rental FPG assets resulting from the application of the purchase method of accounting of $1,331. (L) Represents the anticipated prepayment of certain FPG mortgages and notes payable ($197,222) and anticipated additional borrowings under the New Credit Facilities in connection with the transactions of $67,000. (M) Represents amounts which were eliminated in conjunction with the sale of the Section 42 partnership interests ($413), the settlement of Section 42 and other affiliate balances for cash ($144) and the elimination of an affiliate balance ($472) related to a formation entity acquired for cash. (N) Represents the elimination of amounts resulting from the sale of the Section 42 partnership interests. S-10 (O) Represents the elimination of amounts payable by MAAC to FPG under a construction contract ($1,759), payment of accrued interest on FPG mortgages and notes payable expected to be prepaid in connection with the Reorganization ($2,262), and the termination of FPG's deferred compensation plan ($1,610). (P) Represents the issuance of 481,700 Class A Common Units in MAALP at consummation of the Reorganization at a market value of $13,819 (based upon $28.69 per unit) and an adjustment to minority interest for the issuance of Class A Common Units in connection with the Reorganization, the Common Stock Offering and a property acquisition of $17,479. (Q) Represents the issuance of 3,200,000 shares of preferred stock in the Preferred Stock Offering. (R) Represents the issuance of 3,333,000 shares of Common Stock in the Common Stock Offering, $33 ($29.50 per share), and the issuance of Common Stock in connection with the Reorganization, $16 ($28.69 per share).
(S) Represents: Net proceeds from the anticipated Preferred Stock Offering................................ $ 77,360 Net proceeds from the anticipated Common Stock Offering................................... 92,916 Issuance of 1,556,510 shares of Common Stock in connection with the Reorganization assuming a market value of $28.69 per share............................................. 44,652 Adjustment to minority interest of MAALP for the issuance of Class A Common Units......... (17,479) Par value of shares issued in the Common Stock Offering and the Preferred Stock Offering................................................................................ (81) ---------- $ 197,368 ========== (T) Represents: Elimination of income recognized on a construction contract between MAAC and FPG.......... $ (539) Anticipated prepayment penalties to be incurred in connection with the prepayment of certain FPG mortgages and notes payable subsequent to the Reorganization................ (7,620) Elimination of FPG accumulated deficit as a result of the application of the purchase method of accounting.................................................................... 60,184 ---------- $ 52,025 ==========
S-11 MID-AMERICA APARTMENT COMMUNITIES, INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1997 (UNAUDITED) (DOLLARS IN THOUSANDS)
MAAC COMPLETED PROBABLE MAAC HISTORICAL(U) ACQUISITIONS ACQUISITIONS PRO FORMA -------------- ------------- ------------- ---------- ASSETS: Real estate assets, net.............. $669,191 $20,798(V) $22,117(W) $712,106 Construction in progress............. 14,123 -- -- 14,123 -------------- ------------- ------------- ---------- Net real estate assets............. 683,314 20,798 22,117 726,229 Cash and cash equivalents............ 5,214 -- -- 5,214 Restricted cash...................... 5,271 -- -- 5,271 Deferred financing costs, net........ 2,751 100(X) 5(X) 2,856 Other assets......................... 6,679 -- -- 6,679 -------------- ------------- ------------- ---------- Total assets.................. $703,229 $20,898 $22,122 $746,249 ============== ============= ============= ========== LIABILITIES: Notes payable........................ $299,972 $15,149(Y) $ 3,549(Y) $318,670 Line of credit....................... 47,925 5,509(Z) 18,573(Z) 72,007 Other liabilities.................... 15,914 -- -- 15,914 -------------- ------------- ------------- ---------- Total liabilities............. 363,811 20,658 22,122 406,591 Minority interest.................... 45,042 240(AA) -- 45,282 SHAREHOLDERS' EQUITY: Cumulative preferred stock........... 20 -- -- 20 Common shares........................ 134 -- -- 134 Additional paid-in-capital........... 317,253 -- -- 317,253 Accumulated deficit.................. (22,112) -- -- (22,112) Other................................ (919) -- -- (919) -------------- ------------- ------------- ---------- Total shareholders' equity.... 294,376 -- -- 294,376 -------------- ------------- ------------- ---------- Total liabilities and shareholders' equity....... $703,229 $20,898 $22,122 $746,249 ============== ============= ============= ==========
MAAC PRO FORMA ADJUSTMENTS: (U) Reflects the unaudited historical consolidated balance sheet of MAAC as of June 30, 1997. (V) Increase represents Completed Acquisitions which were consummated subsequent to June 30, 1997. (W) Increase represents the 1997 Probable Acquisitions which are expectred to occur subsequent to June 30, 1997. (X) Increase represents deferred financing costs incurred in connection with the assumption of debt to fund the Completed Acquisitions which were consummated subsequent to June 30, 1997 and the 1997 Probable Acquisitions. (Y) Increase represents assumption of debt anticipated in connection with the Completed Acquisitions which were consummated subsequent to June 30, 1997 and the 1997 Probable Acquisitions. (Z) Increase represents additional borrowings which are anticipated in connection with the Completed Acquisitions which were consummated subsequent to June 30, 1997 and the 1997 Probable Acquisitions. (AA) Increase represents Class A Common Units in MAALP which were issued in connection with a property acquisition. S-12 MID-AMERICA APARTMENT COMMUNITIES, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
MAAC FPG COMBINED PRO FORMA(A) HISTORICAL(B) ADJUSTMENTS(C) PRO FORMA ------------ ------------- -------------- ---------- REVENUES: Property Rental.......................... $ 68,360 $24,422 -- $ 92,782 Other........................... 778 1,309 -- 2,087 Property management.................. -- 706 -- 706 Development.......................... -- 363 -- 363 Construction, net.................... -- 754 (539)(D) 215 Miscellaneous........................ 330 331 (269)(E) 392 ------------ ------------- -------------- ---------- TOTAL REVENUES............. 69,468 27,885 (808) 96,545 EXPENSES: Personnel............................ 7,231 2,863 -- 10,094 Building repairs / maintenance, utilities, landscaping, and other operating.......................... 11,550 4,241 (37)(F) 15,754 Real estate taxes and insurance...... 7,481 2,306 -- 9,787 Depreciation and amortization -- real estate assets...................... 13,719 5,422 259(G) 19,400 Depreciation and amortization -- non real estate assets................. 95 141 (10)(G) 226 Property management.................. -- 381 -- 381 General and administrative........... 3,223 2,367 (485)(H) 5,105 Interest............................. 15,409 11,958 (6,635)(I) 20,732 Amortization of deferred financing costs.............................. 444 299 (232)(J) 511 Offering expenses.................... -- 2,056 (2,056)(K) -- Other, net........................... -- -- -- -- ------------ ------------- -------------- ---------- TOTAL EXPENSES............. 59,152 32,034 (9,196) 81,990 ------------ ------------- -------------- ---------- Income before gains on sale of assets............................. 10,316 (4,149) 8,388 14,555 ------------ ------------- -------------- ---------- Gains on sale of assets.............. -- 2 (2)(L) -- ------------ ------------- -------------- ---------- Income before minority interest in operating partnership income....... 10,316 (4,147) 8,386 14,555 ------------ ------------- -------------- ---------- Minority interest in operating partnership income................. 1,630 -- 422(M) 2,052 ------------ ------------- -------------- ---------- Net income........................... 8,686 (4,147) 7,964 12,503 ------------ ------------- -------------- ---------- Dividend on preferred shares......... 2,375 -- 3,600(N) 5,975 ------------ ------------- -------------- ---------- Net income available for common shareholders....................... $ 6,311 $(4,147) $ 4,364 $ 6,528 ============ ============= ============== ========== Net income per common share.......... $ 0.36(O) ==========
S-13 PRO FORMA ADJUSTMENTS: (A) See MAAC Pro Forma on page S-15. (B) Reflects the historical combined statement of operations of FPG for the six months ended June 30, 1997. Certain reclassifications have been made to FPG's historical statement of operations to conform to MAAC's presentation. Subsequent to the Reorganization, MAAC expects to incur prepayment penalties of approximately $7,620 on notes payable of FPG which are expected to be prepaid. These nonrecurring costs are charged to operations as an extraordinary item when incurred. Such amounts have not been included in the Pro Forma Condensed Consolidated Statement of Operations. (C) MAAC may issue additional shares of Common Stock having a value of up to $7,500 if certain agreed upon conditions are satisfied during calendar years 1998, 1999 and 2000. When and if issued, the Contingent Value Shares will be recorded as additional purchase consideration based upon the fair value of the Common Stock at the date of issuance. The amount of the amortization charge related to the Contingent Value Shares potentially issuable by MAAC has not been included in the Pro Forma Condensed Combined Statement of Operations. (D) Represents the elimination of income recognized on a construction contract between MAAC and FPG. (E) Represents the elimination of nonrecurring income of FPG consisting of dividend income on trading securities ($18), distributions from the Section 42 interests which are expected to be disposed of prior to the Reorganization ($224) and other ($27). (F) Represents elimination of certain administrative fees of FPG. (G) Represents additional depreciation related to the increase in the cost of FPG properties resulting from the application of purchase method of accounting. (H) Represents reductions in general and administrative expenses as a result of the Reorganization due to a decrease in professional fees ($165) and a decrease in executive compensation and certain employee benefit costs ($320). (I) Represents the net reduction in interest and credit enhancement costs associated with the repayment of FPG mortgage and notes payable as a part of the transaction ($9,147) and interest on additional borrowings under the New Credit Facilities of $2,512. (J) Represents amortization of historical deferred financing costs of FPG which were eliminated in connection with applying the purchase method of accounting ($299) net of the amortization of deferred financing costs on new debt which is expected to be incurred of $67. (K) Represents elimination of accounting, legal and other costs incurred in connection with proposed public offering of FDC common stock which was abandoned during 1997. (L) Represents the elimination of nonrecurring gains on sales of assets. (M) Represents the change in minority interest in MAALP income as a result of the Reorganization, Common Stock Offering and a property acquisition where Class A Common Units were issued. (N) Represents dividends on the 3,200,000 shares of preferred stock which is expected to be issued in the Preferred Stock Offering. (O) Pro Forma net income available per common shares is based on 18,275 shares outstanding during the period and Pro Forma net income available for common shareholders. Extraordinary expenses related to the debt financings have been excluded from the calculation of Pro Forma net income available for common shareholders. S-14 MID-AMERICA APARTMENT COMMUNITIES, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
ADJUSTMENTS ---------------------------------------------- MAAC COMPLETED PROBABLE MAAC HISTORICAL(P) ACQUISITIONS(Q) ACQUISITIONS(R) OTHER PRO FORMA ------------- --------------- --------------- --------- --------- REVENUES: Property Rental.......................... $61,629 $ 4,992 $ 1,739 -- $68,360 Other........................... 600 128 50 -- 778 Miscellaneous................... 330 -- -- -- 330 ------------- --------------- --------------- --------- --------- TOTAL REVENUES............. 62,559 5,120 1,789 -- 69,468 EXPENSES: Personnel....................... 6,576 468 187 -- 7,231 Building repairs/maintenance, utilities, landscaping, and other operating............... 10,323 891 336 -- 11,550 Real estate taxes and insurance..................... 6,537 600 344 -- 7,481 Depreciation and amortization -- real estate assets............ 12,350 -- -- 1,369(S) 13,719 Depreciation and amortization -- non real estate assets........ 85 -- -- 10(T) 95 General and administrative...... 3,016 -- -- 207(U) 3,223 Interest........................ 13,097 -- -- 2,312(V) 15,409 Amortization of deferred financing costs............... 410 -- -- 34(W) 444 ------------- --------------- --------------- --------- --------- TOTAL EXPENSES............. $52,394 $ 1,959 $ 867 $ 3,932 $59,152 ------------- =============== =============== ========= ========= Income before minority interest in operating partnership income....... $10,165 $ 3,161 $ 922 $ (3,932) $10,316 ------------- --------------- --------------- --------- --------- Minority interest in operating partnership income................. 1,750 -- -- (120)(X) 1,630 ------------- --------------- --------------- --------- --------- Net income........................... 8,415 3,161 922 (3,812) 8,686 ------------- --------------- --------------- --------- --------- Dividends on preferred shares........ 2,375 -- -- -- 2,375 ------------- --------------- --------------- --------- --------- Net income available for common shareholders....................... $ 6,040 $ 3,161 $ 922 $ (3,812) $ 6,311 ============= =============== =============== ========= =========
S-15 MAAC PRO FORMA ADJUSTMENTS: (P) Reflects the unaudited historical consolidated statement of operations of MAAC for the six months ended June 30, 1997. (Q) Represents historical operating revenues and expenses from January 1, 1997 to the earlier of the acquisition date or June 30, 1997 for the 1997 Completed Acquisitions. (R) Represents historical operating revenues and expenses for the six months ended June 30, 1997 for the 1997 Probable Acquisitions. (S) Represents additional real estate depreciation and amortization resulting from the Completed Acquisitions and the 1997 Probable Acquisitions. (T) Represents additional non-real estate depreciation and amortization resulting from the Completed Acquisitions and the 1997 Probable Acquisitions. (U) Represents anticipated additional costs to operate MAAC resulting from property acquisitions. (V) Represents additional interest costs related to mortgage debt incurred or assumed in connection with the Completed Acquisitions and the 1997 Probable Acquisitions. (W) Represents additional amortization resulting from deferred financing costs incurred in connection with the Completed Acquisitions and the 1997 Probable Acquisitions. (X) Represents the change in the minority interest in the income of MAALP during the period. S-16 MID-AMERICA APARTMENT COMMUNITIES, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
MAAC FPG COMBINED PRO FORMA(A) HISTORICAL(B) ADJUSTMENTS(C) PRO FORMA ------------ ------------- -------------- ---------- REVENUES: Property Rental.......................... $134,591 $44,642 $-- $179,233 Other........................... 1,827 2,177 -- 4,004 Property management.................. -- 1,319 -- 1,319 Development.......................... -- 2,046 -- 2,046 Construction, net.................... -- 1,990 (136)(D) 1,854 Miscellaneous........................ 732 823 (296)(E) 1,259 ------------ ------------- -------------- ---------- TOTAL REVENUES............. 137,150 52,997 (432) 189,715 EXPENSES: Personnel............................ 13,944 5,286 -- 19,230 Building repairs / maintenance, utilities, landscaping, and other operating.......................... 23,218 8,573 (75)(F) 31,716 Real estate taxes and insurance...... 14,374 4,100 -- 18,474 Depreciation and amortization -- real estate assets...................... 26,145 10,191 1,170(G) 37,506 Depreciation and amortization -- non real estate assets................. 190 266 (4)(G) 452 Property management.................. -- 715 -- 715 General and administrative........... 6,912 4,548 (829)(H) 10,631 Interest............................. 29,992 21,338 (11,258)(I) 40,072 Amortization of deferred financing costs.............................. 739 449 (315)(J) 873 Offering expenses.................... -- 233 (233)(K) -- Other, net........................... -- -- 640(L) 640 ------------ ------------- -------------- ---------- TOTAL EXPENSES............. 115,514 55,699 (10,904) 160,309 ------------ ------------- -------------- ---------- Income before gains on sale of assets............................. 21,636 (2,702) 10,472 29,406 ------------ ------------- -------------- ---------- Gains on sale of assets.............. -- 1,320 (1,320)(M) -- Income before minority interest in operating partnership income....... 21,636 (1,382) 9,152 29,406 ------------ ------------- -------------- ---------- Minority interest in operating partnership income................. 3,419 -- 727(N) 4,146 ------------ ------------- -------------- ---------- Net income........................... 18,217 (1,382) 8,425 25,260 ------------ ------------- -------------- ---------- Dividend on preferred shares......... 4,750 -- 7,200(O) 11,950 ------------ ------------- -------------- ---------- Net income available for common shareholders....................... $ 13,467 $(1,382) $ 1,225 $ 13,310 ============ ============= ============== ========== Net income per common share.......... $ 0.73(P) ==========
PRO FORMA ADJUSTMENTS: (A) See MAAC Pro Forma on page S-19. (B) Reflects the historical combined statement of operations of FPG for the year ended December 31, 1996. Certain reclassifications have been made to FPG's historical statement of S-17 operations to conform to MAAC's presentation. Subsequent to the Reorganization, MAAC expects to incur prepayment penalties of approximately $7,620 on mortgages and notes payable to FPG which are expected to be prepaid. These nonrecurring costs will be charged to operations as an extraordinary item when incurred. Such amounts have not been included in the Pro Forma Condensed Combined Statement of Operations. (C) MAAC may issue additional shares of Common Stock having a value of up to $7,500 if certain agreed upon conditions are satisfied during calendar years 1998, 1999 and 2000. When and if issued, the Contingent Value Shares will be recorded as additional purchase consideration based upon the fair value of the Common Stock at the date of issuance. The amount of the Contingent Value Shares potentially issuable by MAAC has not been included in the Pro Forma Condensed Combined Statement of Operations. (D) Represents the elimination of income recognized on a construction contract between MAAC and FPG. (E) Represents the elimination of nonrecurring income recognized by FPG during 1966 related to dividends on trading securities ($34) and distributions from the Section 42 interests which are expected to be disposed to prior to the Reorganization ($262). (F) Represents elimination of certain administrative fees of FPG. (G) Represents depreciation related to the increase in the cost of FPG properties resulting from the application of the purchase method of accounting. (H) Represents reductions in general and administrative expenses as a result of the Reorganization due to decreases in professional fees ($105), and a decrease in executive compensation and certain employee benefit costs ($724). (I) Represents the net reduction in interest and credit enhancement costs associated with the expected prepayment of certain FPG mortgage and notes payable ($16,283) net of interest on additional borrowings under the New Credit Facilities of $5,025. (J) Represents amortization of historical deferred financing costs of FPG which were eliminated in connection with applying the purchase method of accounting ($449), net of the amortization of the deferred financing costs on new debt which is expected to be incurred of $134. (K) Represents elimination of accounting, legal and other costs incurred in connection with a proposed public offering of FDC common stock which was abandoned during 1997. (L) Represents the estimated additional income tax expense for the operation of Mid-America Services Corporation, a subsidiary of MAALP to be organized in connection with the Reorganization for the purpose of conducting third-party service businesses. (M) Represents the elimination of nonrecurring income of FPG on the sale of trading securities ($1,058) and on the liquidation of a single property partnership ($262). (N) Represents the change in minority interest in the MAALP income as a result of the Reorganization, the Common Stock Offering, and a property acquisition where Class A Common Units were issued. (O) Represents dividends on 3,200,000 shares of preferred stock which is expected to be issued in the Preferred Stock Offering. (P) Pro Forma net income available per common share is based on 18,275 shares outstanding during the period and Pro Forma net income available for common shareholders. Extraordinary expenses related to debt financings have been excluded from the calculation of Pro Forma net income available for common shareholders. S-18 MID-AMERICA APARTMENT COMMUNITIES, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
ADJUSTMENTS ----------------------------------------------------------------- MAAC COMPLETED PROBABLE HISTORICAL(Q) ACQUISITIONS(R) ACQUISITIONS(S) DISPOSITIONS(T) OTHER ------------- --------------- --------------- --------------- --------- REVENUES: Property Rental........................... $ 110,090 $23,186 $ 3,642 $(2,327) $ -- Other............................ 1,060 735 104 (72) -- Miscellaneous.................... 732 -- -- -- -- ------------- --------------- --------------- --------------- --------- TOTAL REVENUES.............. 111,882 23,921 3,746 (2,399) -- EXPENSES: Personnel........................ 11,702 2,237 331 (326) -- Building repairs/maintenance, utilities, landscaping, and other operating................ 19,226 3,846 739 (593) -- Real estate taxes and insurance........................ 11,642 2,442 491 (201) -- Depreciation and amortization -- real estate assets............. 21,288 -- -- (519) 5,376(U) Depreciation and amortization -- non real estate assets......... 155 -- -- (3) 38(V) General and administrative....... 6,154 -- -- -- 758(W) Interest......................... 25,766 -- -- -- 4,226(X) Amortization of deferred financing costs................ 661 -- -- -- 78(Y) ------------- --------------- --------------- --------------- --------- TOTAL EXPENSES.............. 96,594 8,525 1,561 (1,642) 10,476 ------------- --------------- --------------- --------------- --------- Income before gain on disposition of properties......................... 15,288 15,396 2,185 (757) (10,476) ------------- --------------- --------------- --------------- --------- Gain on dispositions of properties... 2,185 -- -- -- (2,185)(Z) ------------- --------------- --------------- --------------- --------- Income before minority interest in operating partnership.............. 17,473 15,396 2,185 (757) (12,661) ------------- --------------- --------------- --------------- --------- Minority interest in operating partnership income................. 3,213 -- -- -- 206(AA) ------------- --------------- --------------- --------------- --------- Net income........................... 14,260 15,396 2,185 (757) (12,867) ------------- --------------- --------------- --------------- --------- Dividends on preferred shares........ 990 -- -- -- 3,760(AB) ------------- --------------- --------------- --------------- --------- Net income available for common shareholders....................... $ 13,270 $15,396 $ 2,185 $ (757) $ (16,627) ============= =============== =============== =============== =========
MAAC PRO FORMA --------- REVENUES: Property Rental........................... $134,591 Other............................ 1,827 Miscellaneous.................... 732 --------- TOTAL REVENUES.............. 137,150 EXPENSES: Personnel........................ 13,944 Building repairs/maintenance, utilities, landscaping, and other operating................ 23,218 Real estate taxes and insurance........................ 14,374 Depreciation and amortization -- real estate assets............. 26,145 Depreciation and amortization -- non real estate assets......... 190 General and administrative....... 6,912 Interest......................... 29,992 Amortization of deferred financing costs................ 739 --------- TOTAL EXPENSES.............. 115,514 --------- Income before gain on disposition of properties......................... 21,636 --------- Gain on dispositions of properties... -- --------- Income before minority interest in operating partnership.............. 21,636 --------- Minority interest in operating partnership income................. 3,419 --------- Net income........................... 18,217 Dividends on preferred shares........ 4,750 --------- Net income available for common shareholders....................... $ 13,467 ========= S-19 MAAC PRO FORMA ADJUSTMENTS: (Q) Reflects the historical consolidated statement of operations of MAAC for the year ended December 31, 1996. (R) Represents historical operating revenues and expenses from January 1, 1996 to the earlier of the acquisition date or December 31, 1996 for the 1996 Completed Acquisitions and the 1997 Completed Acquisitions. (S) Represents historical operating revenues and expenses for the year ended December 31, 1996 for the 1997 Probable Acquisitions. (T) Represents historical operating revenues and expenses for the year ended December 31, 1996 Dispositions subsequent to January 1, 1996. (U) Represents real estate depreciation and amortization resulting from the Completed Acquisitions and the 1997 Probable Acquisitions. (V) Represents non-real estate depreciation and amortization resulting from the Completed Acquisitions and the 1997 Probable Acquisitions. (W) Represents anticipated additional costs to operate MAAC resulting from property acquisitions, net of anticipated savings resulting from the Dispositions. (X) Represents interest costs related to mortgage debt incurred or assumed in connection with the Completed Acquisitions and the 1997 Probable Acquisitions, net of reductions in interest expense resulting from the repayment of mortgage debt in connection with the Dispositions. (Y) Represents amortization of deferred financing costs incurred in connection with the financing of Completed Acquisitions and the 1997 Probable Acquisitions. (Z) Represents the elimination of nonrecurring gain on Dispositions. (AA) Represents the change in the minority interest in income of MAALP during the period. (AB) Represents dividends on the Series A Preferred Stock issued during 1996. S-20 USE OF PROCEEDS The net cash proceeds to the Company from the sale of the 3,333,000 shares of Common Stock offered hereby are estimated to be approximately $93.5 million after payment of all underwriting discounts and expenses of the offering (approximately $107.6 million if the Underwriters' over-allotment option is exercised in full). The Company will contribute the net proceeds (including net proceeds from the Underwriters' exercise of the over-allotment option, if any) of the offering to the Operating Partnership in exchange for additional interests in the Operating Partnership. The Operating Partnership will use substantially all of the net proceeds to repay outstanding borrowings under the Company's unsecured bank line of credit (the "Credit Line") and any excess will be used for general corporate purposes, including acquisitions. Amounts repaid under the Credit Line may be re-borrowed (subject to the terms and limits of the Credit Line) to finance acquisitions of additional apartment communities and for other corporate purposes. The Credit Line, which matures in December 1998, had an outstanding principal balance as of August 31, 1997 of approximately $69.0 million. Borrowings under the Credit Line bear interest at a floating rate equal to LIBOR plus 1.75% (7.36% at August 31, 1997) and are unsecured. PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY The Common Stock has been listed and traded on the New York Stock Exchange ("NYSE") under the symbol "MAA" since the Initial Offering in February 1994. On September 30, 1997, the last reported sale price of shares of Common Stock on the NYSE was $29.6875 and there were approximately 1,609 holders of record of the Common Stock. The Company estimates there are approximately 10,000 beneficial owners of the Common Stock. The following table sets forth the quarterly high and low sales prices of the Common Stock as reported on the NYSE and the dividends declared by the Company with respect to the periods indicated. DISTRIBUTION HIGH LOW PER SHARE ------ --------- ------------- 1995 First Quarter........................ $ 26 $ 25 3/4 $ .50 Second Quarter....................... $ 25 $ 24 3/4 $ .50 Third Quarter........................ $24 3/4 $ 24 5/8 $ .50 Fourth Quarter....................... $24 7/8 $ 24 3/8 $ .51 1996 First Quarter........................ $26 5/8 $ 24 $ .51 Second Quarter....................... $26 5/8 $ 25 1/8 $ .51 Third Quarter........................ $25 7/8 $ 23 7/8 $ .51 Fourth Quarter....................... $28 7/8 $ 24 3/4 $.535 1997 First Quarter........................ $29 5/8 $ 27 3/4 $.535 Second Quarter....................... $28 3/4 $ 25 3/4 $.535 Third Quarter........................ $30 5/16 $ 27 The Company's current annual distribution rate with respect to the Common Stock is $2.14 per share. The actual distributions made by the Company will be affected by a number of factors, including the gross revenues received from the Communities, the operating expenses of the Company, the interest expense incurred on borrowings and unanticipated capital expenditures. The Company pays a preferential regular monthly distribution on the Series A Preferred Stock at a fixed annual rate of $2.375 per share. No distribution may be made on the Common Stock unless all accrued distributions have been made with respect to the Series A Preferred Stock. No assurance can be given that the Company will be able to maintain its distribution rate on its Common Stock or make required distributions with respect to the Series A Preferred Stock. S-21 In January 1997, the Company implemented the DRSPP under which holders of Common Stock (and Series A Preferred Stock) may elect automatically to reinvest their distributions in additional shares of Common Stock and/or to make optional purchases of Common Stock free of brokerage commissions and charges. Shares purchased directly from the Company will be purchased at up to a 3% discount from their fair market value at the Company's discretion. To fulfill its obligations under the DRSPP, the Company may either issue additional shares of Common Stock or repurchase Common Stock in the open market. Distributions by the Company to the extent of its current or accumulated earnings and profits for federal income tax purposes generally will be taxable to shareholders as ordinary dividend income. For purposes of determining whether distributions on the Common Stock are out of current or accumulated earnings and profits, the Company's earnings and profits are allocated first to the Series A Preferred Stock and then allocated to the Common Stock. Distributions in excess of earnings and profits generally will be treated as a non-taxable reduction of the shareholder's basis in the Common Stock to the extent thereof, and thereafter as taxable gain. Such distributions will have the effect of deferring taxation until the earlier of exhaustion of a shareholder's basis in his Common Stock or sale of such shareholder's Common Stock. In order to maintain its qualification as a REIT, the Company must make annual distributions to shareholders of at least 95% of its taxable income (which does not include net capital gains). Under certain circumstances, the Company may be required to make distributions in excess of cash available for distribution in order to meet such distribution requirements. Because of such income tax requirements, debt service resulting from the Company's borrowings could result in federal income tax distribution requirements which exceed cash available for distribution, and in such event the Company would have to seek to borrow the amount of the deficiency or sell assets to obtain the cash necessary to make distributions to retain its qualification as a REIT for federal income tax purposes. Future distributions by the Company will be at the discretion of the Board of Directors and will depend on the actual funds available for distribution of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors deems relevant. For a discussion of the tax treatment of distributions to holders of shares of Common Stock, see "Federal Income Tax Considerations -- Taxation of Shareholders" in the accompanying Prospectus. S-22 CAPITALIZATION The following unaudited table sets forth the historical capitalization of the Company as of June 30, 1997 and capitalization as adjusted to give effect to the completion of the offering and the application of the net proceeds as described under the caption "Use of Proceeds." The information set forth in the following table should be read in conjunction with the financial statements and notes thereto incorporated herein and in the accompanying Prospectus by reference and the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" incorporated herein and in the accompanying Prospectus by reference. JUNE 30, 1997 -------------------------- HISTORICAL AS ADJUSTED ---------- ------------ (IN THOUSANDS) Debt: Notes payable................... $ 347,897 $278,897 ---------- Minority interest.................... 45,042 50,029 ---------- ------------ Shareholders' Equity: Preferred Stock, $.01 par value per share, 5,000,000 shares authorized, 2,000,000 shares of 9.5% Series A Cumulative Preferred Stock, Liquidation Preference $25 per share, issued and outstanding......... 20 20 Common Stock, $.01 par value per share, 20,000,000 shares authorized, 13,385,251 shares issued and outstanding, 16,718,251 shares issued and outstanding, as adjusted....... 134 167 Additional paid-in-capital...... 317,253 405,737 Other........................... (919) (919) Accumulated deficit............. (22,112) (22,112) ---------- ------------ Total shareholders equity....................... 294,376 382,893 ---------- ------------ Total Capitalization................. $ 687,315 $711,819 ========== ============ S-23 UNDERWRITERS Under the terms and subject to the conditions contained in an Underwriting Agreement dated the date hereof, the Underwriters named below have severally agreed to purchase, and the Company has agreed to sell to the Underwriters severally, the respective number of shares of Common Stock set forth opposite their respective names below: UNDERWRITER NUMBER OF SHARES - ------------------------------------- ---------------- Morgan Stanley & Co., Incorporated... 2,333,000 Morgan Keegan & Company, Inc......... 500,000 Raymond James & Associates, Inc...... 500,000 ---------------- Total......................... 3,333,000 ================ The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the Common Stock are subject to the approval of certain legal matters by counsel for the Underwriters and to certain other conditions. The Underwriters are obligated to take and pay for all of the shares of Common Stock offered hereby (other than those covered by the Underwriters' over-allotment option described below) if any such shares are taken. The Underwriters initially propose to offer part of the Common Stock directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $.9352 per share of Common Stock. After the initial offering of the shares of Common Stock offered hereby, the offering price and other selling terms may from time to time be varied by the Underwriters. Pursuant to the Underwriting Agreement, the Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus Supplement, to purchase up to 499,950 additional shares of Common Stock at the public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The Underwriters may exercise such option to purchase solely for the purpose of covering over-allotments, if any, made in connection with the offering. In order to facilitate the offering of the Common Stock, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may over-allot in connection with the offering, creating a short position in the Common Stock for their own account. In addition, to cover over-allotments or to stabilize the price of the Common Stock, the Underwriters may bid for, and purchase, shares of Common Stock in the open market. Finally, the Underwriters may reclaim selling concessions allowed to an underwriter or a dealer for distributing the Common Stock in the offering, if the Underwriters repurchase previously distributed shares of Common Stock in transactions to cover short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The Company and certain executive officers have agreed not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock for a period of 120 days after the date of this Prospectus Supplement, without the prior written consent of Morgan Stanley & Co. Incorporated, as representative of the several underwriters, provided that the Company may issue shares under its stock option, employee stock ownership, and dividend reinvestment and stock purchase plans during such 120-day period. The Company and the Operating Partnership have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. S-24 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements set forth herein or incorporated by reference herein from the Company's filings under the Securities Exchange Act of 1934, as amended (see "Incorporation by Reference" herein and in the accompanying Prospectus), contain forward-looking statements, including, without limitation, statements relating to the timing and anticipated capital expenditures of the Company's development programs. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, the actual results may differ materially from those set forth in the forward-looking statements. Certain factors that might cause such difference include general economic conditions, local real estate conditions, construction delays due to unavailability of construction materials, weather conditions or other delays beyond the control of the Company. Consequently, such forward-looking statements should be regarded solely as reflections of the Company's current operating and development plans and estimates. These plans and estimates are subject to revision from time to time as additional information becomes available, and actual results may differ from those indicated in the referenced statements. EXPERTS The combined financial statements of Flournoy Properties Group as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996 have been incorporated by reference in the accompanying Prospectus and in the Registration Statement, of which the accompanying Prospectus is a part, in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, which report is incorporated by reference therein, and upon the authority of said firm as experts in accounting and auditing. LEGAL MATTERS Certain legal matters, including the legality of the Common Stock being offered hereby, are being passed upon for the Company by Baker, Donelson, Bearman & Caldwell. Certain legal matters related to the Offering are being passed upon for the Underwriters by Hunton & Williams. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE In addition to the documents incorporated by reference in the accompanying Prospectus, the Company's Current Reports on Form 8-K dated September 19, 1997 and September 30, 1997 heretofore filed by the Company with the Commission (File No. 1-2762) are incorporated herein by reference. The Company will provide without charge to each person to whom this Prospectus Supplement and the accompanying Prospectus is delivered, upon written or oral request of such person, a copy of any or all of the documents incorporated by reference herein (not including the exhibits to such documents, unless such exhibits are specifically incorporated by reference in such documents). Requests for such copies should be directed to: Mid-America Apartment Communities, Inc., 6584 Poplar Avenue, Suite 340, Memphis, Tennessee, 38138, Attention: Lynn A. Johnson, Secretary, telephone (901) 682-6600. S-25 PROSPECTUS MID-AMERICA APARTMENT COMMUNITIES, INC. $233,875,000 DEBT SECURITIES, PREFERRED STOCK, COMMON STOCK AND SECURITIES WARRANTS MID-AMERICA APARTMENT COMMUNITIES, INC. (THE "COMPANY") MAY FROM TIME TO TIME OFFER AND SELL IN ONE OR MORE SERIES (I) ITS UNSECURED DEBT SECURITIES THE "DEBT SECURITIES"); (II) SHARES OF ITS PREFERRED STOCK, PAR VALUE $.01 PER SHARE (THE "PREFERRED STOCK"); (III) SHARES OF ITS COMMON STOCK, PAR VALUE $.01 PER SHARE ("COMMON STOCK"); OR (IV) WARRANTS TO PURCHASE DEBT SECURITIES THE "DEBT SECURITIES WARRANTS"), WARRANTS TO PURCHASE PREFERRED STOCK (THE "PREFERRED STOCK WARRANTS") AND WARRANTS TO PURCHASE COMMON STOCK (THE "COMMON STOCK WARRANTS") (THE DEBT SECURITIES WARRANTS, PREFERRED STOCK WARRANTS AND COMMON STOCK WARRANTS, COLLECTIVELY, THE "SECURITIES WARRANTS"), WITH AN AGGREGATE PUBLIC OFFERING PRICE OF UP TO $233,875,000. THE DEBT SECURITIES, PREFERRED STOCK, COMMON STOCK AND SECURITIES WARRANTS OFFERED PURSUANT HERETO (COLLECTIVELY, THE "OFFERED SECURITIES") MAY BE OFFERED SEPARATELY OR TOGETHER, IN SEPARATE SERIES, IN AMOUNTS AND AT PRICES AND TERMS TO BE SET FORTH IN AN ACCOMPANYING SUPPLEMENT TO THIS PROSPECTUS (A "PROSPECTUS SUPPLEMENT"). THE AGGREGATE PUBLIC OFFERING PRICE AND TERMS OF THE OFFERED SECURITIES WILL BE DETERMINED BY MARKET CONDITIONS AT THE TIME SUCH SECURITIES ARE OFFERED. UNLESS OTHERWISE SPECIFIED IN A PROSPECTUS SUPPLEMENT, THE PROCEEDS FROM THE SALE OF THE OFFERED SECURITIES WILL BE RECEIVED BY THE COMPANY AND USED FOR GENERAL CORPORATE PURPOSES. THE APPLICABLE PROSPECTUS SUPPLEMENT SHALL SET FORTH (I) WITH RESPECT TO THE DEBT SECURITIES, THE SPECIFIC TITLE, AGGREGATE PRINCIPAL AMOUNT, CURRENCY, FORM (WHICH MAY BE REGISTERED OR BEARER, OR CERTIFICATED OR GLOBAL), AUTHORIZED DENOMINATIONS, MATURITY, RATE (OR MANNER OF CALCULATION THEREOF) AND TIME OF PAYMENT OF INTEREST, TERMS FOR REDEMPTION AT THE OPTION OF THE COMPANY OR REPAYMENT AT THE OPTION OF THE HOLDER, ANY SINKING FUND PROVISIONS AND ANY CONVERSION PROVISIONS, (II) WITH RESPECT TO PREFERRED STOCK, THE SPECIFIC DESIGNATION AND STATED VALUE PER SHARE, ANY DIVIDEND, LIQUIDATION, REDEMPTION, CONVERSION, VOTING AND OTHER RIGHT, AND ALL OTHER SPECIFIC TERMS OF THE PREFERRED STOCK, (III) WITH RESPECT TO THE COMMON STOCK, THE SPECIFIC NUMBER OF SHARES AND ISSUANCE PRICE PER SHARE, AND (IV) WITH RESPECT TO THE SECURITIES WARRANTS, THE DURATION, OFFERING PRICE, EXERCISE PRICE AND DETACHABILITY. THE APPLICABLE PROSPECTUS SUPPLEMENT WILL ALSO CONTAIN INFORMATION, WHERE APPLICABLE, ABOUT ALL MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS RELATING TO, AND ANY LISTING ON A SECURITIES EXCHANGE OF, THE OFFERED SECURITIES COVERED BY SUCH PROSPECTUS SUPPLEMENT. THE OFFERED SECURITIES MAY BE SOLD: (I) DIRECTLY BY THE COMPANY; (II) THROUGH UNDERWRITING SYNDICATES REPRESENTED BY ONE OR MORE MANAGING UNDERWRITERS, OR THROUGH ONE OR MORE UNDERWRITERS WITHOUT A SYNDICATE; AND (III) THROUGH AGENTS DESIGNATED FROM TIME TO TIME. CERTAIN TERMS OF ANY OFFERING AND SALE OF OFFERED SECURITIES, INCLUDING, WHERE APPLICABLE, THE NAMES OF THE UNDERWRITERS, DEALERS OR AGENTS, IF ANY, THE PRINCIPAL AMOUNT OR NUMBER OF SHARES OR SECURITIES WARRANTS TO BE PURCHASED, THE PURCHASE PRICE OF THE OFFERED SECURITIES, ANY APPLICABLE COMMISSIONS, DISCOUNTS AND OTHER COMPENSATION TO UNDERWRITERS, DEALERS AND AGENTS, AND THE PROCEEDS TO THE COMPANY FROM SUCH SALE, WILL BE SET FORTH IN, OR CALCULABLE FROM INFORMATION CONTAINED IN, A PROSPECTUS SUPPLEMENT. SEE "PLAN OF DISTRIBUTION." THE COMMON STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL "MAA." TO ENSURE THAT THE COMPANY MAINTAINS ITS QUALIFICATION AS A REIT, OWNERSHIP BY ANY PERSON IS LIMITED TO 9.9% OF THE TOTAL VALUE OF OUTSTANDING CAPITAL STOCK OF THE COMPANY, WITH CERTAIN EXCEPTIONS. SEE "DESCRIPTION OF CAPITAL STOCK -- OWNERSHIP LIMITATIONS." SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF THE OFFERED SECURITIES UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is September 9, 1997. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"), pursuant to the Exchange Act. Such reports, proxy statements and other information filed by the Company may be examined without charge at, or copies obtained upon payment of prescribed fees from, the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and are also available for inspection and copying at the regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Electronic filings made through the Electronic Data Gathering, Analysis and Retrieval System are publicly available through the Securities and Exchange Commission's web site (http://www.sec.gov). The Common Stock of the Company is listed on the New York Stock Exchange, and such material can also be inspected and copied at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. The Company has filed with the Commission a Registration Statement on Form S-3 under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities offered hereby. The Prospectus and any accompanying Prospectus Supplement do not contain all of the information included in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Offered Securities, reference is hereby made to the Registration Statement, including the exhibits and schedules thereto. Statements contained in this Prospectus and any accompanying Prospectus Supplement concerning the provisions or contents of any contract, agreement or other document referred to herein or therein are not necessarily complete. With respect to each such contract, agreement or document filed as an exhibit to the Registration Statement, reference is made to such exhibit for a more complete description of the matters involved, and each such statement shall be deemed qualified in its entirety by such reference to the copy of the applicable document filed with the Commission. The Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. and copies of it or any part thereof may be obtained from such office, upon payment of the fees prescribed by the Commission. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents heretofore filed by the Company with the Commission (File No. 1-12762) are incorporated herein by reference: (a) Annual Report on Form 10-K for the year ended December 31, 1996; (b) Quarterly Reports on Form 10-Q for the periods ended March 31, 1997 and June 30, 1997, respectively; (c) Current Reports on Form 8-K dated August 19, 1997, June 5, 1997, April 25, 1997, April 11, 1997, March 19, 1997, and February 21, 1997 and Current Reports of Form 8-K/A dated July 29, 1997, April 11, 1997, June 10, 1997, May 19, 1997, March 17, 1997 and February 21, 1997; (d) pages 2 through 10 of the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders; (e) the description of the Company's Common Stock contained in the Company's Registration Statement on Form 8-A filed with the Commission on December 14, 1993; and (f) the description of the Company's 9.5% Series A Cumulative Preferred Stock contained in the Company's Registration Statement on Form 8-A/A filed with the Commission on October 11, 1996. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the filing of a post-effective amendment which indicates that all Offered Securities offered hereby have been sold or which deregisters all Offered 2 Securities then remaining unsold shall be incorporated by reference in this Prospectus and made a part hereof from the date of the filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other document subsequently filed with the Commission which also is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom this Prospectus is delivered, upon the written or oral request of such person, a copy of any or all of the documents incorporated by reference herein (not including the exhibits to such documents, unless such exhibits are specifically incorporated by reference in such documents). Request for such copies should be directed to: Mid-America Apartment Communities, Inc., 6584 Poplar Avenue, Suite 340, Memphis, Tennessee, 38138, Attention: Lynn A. Johnson, Secretary, telephone (901) 682-6600. 3 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS OR INCORPORATED HEREIN BY REFERENCE. UNLESS OTHERWISE INDICATED, AS USED HEREIN, THE TERM "COMPANY" INCLUDES MID-AMERICA APARTMENT COMMUNITIES, INC., ITS PREDECESSOR AND THOSE ENTITIES OWNED OR CONTROLLED THEREBY, INCLUDING MID-AMERICA APARTMENTS, L.P., A TENNESSEE LIMITED PARTNERSHIP (THE "OPERATING PARTNERSHIP"), ALL SUBSIDIARY LIMITED PARTNERSHIPS AND ALL QUALIFIED REIT SUBSIDIARIES OF THE COMPANY. WHERE USED HEREIN, THE TERM "FUNDS FROM OPERATIONS" ("FFO") SHALL MEAN NET INCOME (COMPUTED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES), EXCLUDING EXTRAORDINARY ITEMS, MINORITY INTEREST IN OPERATING PARTNERSHIP INCOME, GAIN OR LOSS ON DISPOSITION OF REAL ESTATE ASSETS, AND CERTAIN NON-CASH ITEMS, PRIMARILY DEPRECIATION AND AMORTIZATION, LESS PREFERRED STOCK DISTRIBUTIONS. FFO IS COMPUTED IN ACCORDANCE WITH THE CURRENT NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT TRUSTS, INC. ("NAREIT") DEFINITION, WHICH ELIMINATES AMORTIZATION OF DEFERRED FINANCING COSTS AND DEPRECIATION OF NON-REAL ESTATE ASSETS AS ITEMS ADDED BACK TO NET INCOME WHEN COMPUTING FFO. THE COMPANY ADOPTED THIS METHOD OF CALCULATING FFO EFFECTIVE AS OF THE NAREIT-SUGGESTED ADOPTION DATE OF JANUARY 1, 1996. THE COMPANY GENERAL The Company is a Memphis, Tennessee-based self-administered and self-managed umbrella partnership REIT ("UPREIT") which, as of June 30, 1997, owned and operated 80 apartment communities containing 21,482 apartment units in 12 states (the "Communities"). At June 30, 1997, the Communities had an average occupancy of 94.1% and an average rental rate per unit of $540. Founded in 1977 by George E. Cates, the Company's Chairman of the Board of Directors and Chief Executive Officer, the Company's predecessor grew from an operator of a single 252-unit apartment community in Memphis, Tennessee into a fully-integrated owner and operator of 5,580 apartment units in 22 apartment communities in four southeastern states immediately prior to the Company's initial public offering in February 1994 (the "Initial Offering"). Since the Initial Offering, the Company has increased in size by 58 apartment communities containing 15,902 apartment units, including 12 apartment communities containing 3,212 apartment units acquired in the Company's merger with America First REIT, Inc. ("AFR") in June 1995 (the "AFR Merger") for an aggregate value of approximately $111 million (as measured by Common Stock issued and AFR debt assumed). The Company's internal growth strategy is to increase operating cash flow by (i) increasing rental rates through physical and marketing improvements, (ii) controlling expenses through its system of detailed management reporting and accountability, and (iii) maintaining high occupancy levels. The Company's external growth strategy is to acquire and selectively develop additional apartment units and, when apartment communities no longer meet the Company's long-term strategic objectives or investment return goals, to dispose of those communities. Through the UPREIT structure, the Company has the ability to acquire apartment communities by issuing units of limited partnership interest in the Operating Partnership ("Units") in tax-deferred exchanges with owners of such communities. The Company seeks to acquire apartment communities appealing to middle and upper income residents in mid-size cities primarily in the southeastern United States and Texas. Approximately 65% of the Company's apartment units are located in Tennessee, Florida and Texas markets. The Company's strategic focus is to provide its residents high quality apartment units in attractive community settings, characterized by extensive landscaping and attention to aesthetic detail. The Company's utilizes its experience and expertise in maintenance, landscaping, marketing and management to effectively "reposition" many of the apartment communities it acquires to raise occupancy levels and per unit average rentals. 4 As of July 31, 1997, the executive officers and directors of the Company owned approximately 12% of the combined outstanding Common Stock and Class A Common Units of Limited Partnership Interest in the Operating Partnership ("Class A Common Units"). Class A Common Units are redeemable by the holders thereof for Common Stock on a one-for-one basis, or, at the Company's sole election, for cash. Stock and other incentive compensation are used to motivate employees to meet long-term management goals that are consistent with creating value for the Company's shareholders. The Company's principal executive offices are located at 6584 Poplar Avenue, Suite 340, Memphis, Tennessee 38138 and its telephone number is (901) 682-6600. THE OPERATING STRUCTURE OF THE COMPANY The Company is formed and operates in an UPREIT structure primarily through the Operating Partnership and certain subsidiary operating partnerships. In addition, the Company owns four Communities directly and 9 Communities through wholly owned qualified REIT subsidiaries (each, a "QRS" and, collectively, "QRSs") as defined in Section 856(i) of the Code. THE OPERATING PARTNERSHIP The Operating Partnership is the principal operating unit of the Company and currently owns and operates 48 Communities and an approximately 42,000 square foot office building in Memphis, Tennessee in which the Company's principal offices are located (the "Office Building"). In addition, the Operating Partnership has entered into definitive agreements to acquire 3 apartment communities and to acquire approximately 64 acres of land on which it intends to develop an apartment community (the "Proposed Acquisitions"). The Operating Partnership conducts the Company's multifamily property management, marketing, landscaping and acquisition business. The Company currently owns directly a 1% general partnership interest in the Operating Partnership, and, through its QRS, MAC II of Delaware, Inc., owns a 80.4% limited partnership interest in the Partnership. The remaining 18.6% limited partnership interest in the Partnership is owned by the holders of Class A Common Units. The Amended and Restated Agreement of Limited Partnership of the Operating Partnership, as further amended (the "Partnership Agreement") provides for a special allocation of net income or loss of the Operating Partnership to holders of the Class A Common Units to provide such holders with the economic and tax attributes that they would enjoy if the Operating Partnership owned all assets currently owned outright by the Company or by the AFRI QRSs (hereinbelow defined). THE TEXAS OPERATING PARTNERSHIP Nine Communities are owned and operated through Mid-America Apartments of Texas, L.P. (the "Texas Operating Partnership") in which the Operating Partnership is the sole 99% limited partner and MAC of Delaware, Inc., a QRS of the Company is the sole 1% general partner. The Texas Operating Partnership is the primary operating unit of the Company in the state of Texas. SUBSIDIARY PARTNERSHIPS Nine Communities are owned and operated through subsidiary limited partnerships (the "Subsidiary Partnerships"). The Company is the sole general partner of all Subsidiary Partnerships except one, owning between a 1% and 10% general partnership interest therein, and the Operating Partnership is the sole limited partner thereof, owning between a 90% and 99% limited partnership interest therein. One Community is owned in a single purpose Subsidiary Partnership of which a QRS is the sole general partner owning a 1% general partnership interest therein, and the Operating Partnership is the sole limited partner thereof, owning a 99% limited partnership interest therein. PROPERTIES OWNED BY QRSS Nine Communities are owned through five QRSs, namely America First Austin REIT, Inc., America First Florida REIT, Inc., America First South Carolina REIT, Inc., America First Tennessee REIT, Inc., and 5 America First Texas REIT, Inc. (collectively, the "AFRI QRSs"). The AFRI QRSs became wholly owned subsidiaries of the Company in connection with the AFR Merger. TAX STATUS OF THE COMPANY The Company elected to be taxed as a REIT for federal income tax purposes for its taxable year ended December 31, 1994, and expects to continue to be taxed as a REIT. Although the Company believes that it was organized and has been operating in conformity with the requirements for qualification as a REIT ("REIT Qualification") under the Internal Revenue Code of 1986, as amended (the "Code"), no assurance can be given that the Company will continue to qualify as a REIT. REIT Qualification involves application of highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations. If in any taxable year the Company should fail to qualify as a REIT, the Company would not be allowed a deduction for distributions to shareholders for computing taxable income and would be subject to federal taxation at regular corporate rates. Unless entitled to relief under certain statutory provisions, the Company would also be disqualified from treatment as a REIT for the four taxable years following the year during which REIT Qualification was lost. As a result, the Company's ability to make distributions to its shareholders would be adversely affected. See "Federal Income Tax Considerations." To ensure that the Company qualifies as a REIT, transfer of the Company's capital stock is subject to certain restrictions and ownership of the capital stock by any single person is limited to 9.9% of the total value of outstanding capital stock, subject to certain exceptions. See "Description of Capital Stock -- Ownership Limitations." 6 RISK FACTORS AN INVESTMENT IN THE OFFERED SECURITIES INVOLVES VARIOUS RISKS, INCLUDING THOSE DESCRIBED BELOW. INVESTORS SHOULD CAREFULLY CONSIDER THESE RISK FACTORS TOGETHER WITH ALL OF THE INFORMATION SET FORTH OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND IN ANY PROSPECTUS SUPPLEMENT IN DETERMINING WHETHER TO PURCHASE THE OFFERED SECURITIES. INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND IN ANY PROSPECTUS SUPPLEMENT MAY CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WHICH STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER COMPARABLE TERMINOLOGY. THE FOLLOWING MATTERS AND CERTAIN OTHER FACTORS NOTED THROUGHOUT THIS PROSPECTUS, AND ANY DOCUMENT INCORPORATED BY REFERENCE HEREIN OR THEREIN AND EXHIBITS HERETO AND THERETO, CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO ANY SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY SUCH FORWARD-LOOKING STATEMENTS. REAL ESTATE INVESTMENT RISKS GENERAL RISKS The Company's ability to make distributions to its shareholders is dependent on the ability of the Company to generate FFO in excess of scheduled principal payments on indebtedness and capital expenditure requirements. FFO and the value of the Communities may be adversely affected by events or conditions which are beyond the Company's control, including an oversupply of apartments or a reduction in demand for apartments in the Company's markets, the cost of regulation, changes in tax laws, housing laws, increasing interest rate levels, and the unavailability of financing. FFO would be adversely affected if a significant number of residents were unable to pay rent or if apartments could not be rented on favorable terms. Significant expenditures associated with each equity investment in a Community (such as mortgage payments, if any, real estate taxes and maintenance costs) generally are not reduced when circumstances cause a reduction in a Community's rent revenue. OPERATING RISKS The Communities are subject to all operating risks common to apartment communities in general. Such risks include: (i) competition from other apartment communities and alternative housing, (ii) new construction of comparable properties or adverse economic conditions in the areas in which the Communities are located, either of which might adversely affect apartment occupancy or rental rates, (iii) increases in operating costs (including real estate taxes) due to inflation and other factors, which increases may not necessarily be offset by increased rents; (iv) inability or unwillingness of residents to pay rent increases, (v) future enactment of rent control laws or other laws regulating multifamily housing, including present and possible future laws relating to access by disabled persons; and (vi) disagreements with joint venture partners or real estate co-investors, if any. The local rental market may limit the extent to which rents may be increased in response to operating expense increases without decreasing occupancy rates. Historically, the Company has incurred increased operating expenses in the third calendar quarter due to planned increases in apartment unit turnover during such quarter. The Company's ability to make expected distributions to shareholders could be adversely affected by any of the above-described events. DEPENDENCE ON MEMPHIS, TENNESSEE MARKET As of July 31, 1997, approximately 21% of the apartment units in the Communities were located in the Memphis, Tennessee market. The Company's performance, therefore, may be linked to economic conditions in that market. Adverse developments in that market, including the risk factors described above, could adversely affect the Company's operating results. 7 ILLIQUIDITY OF REAL ESTATE COULD ADVERSELY AFFECT THE PRICE AND TIMING OF SALES OF COMMUNITIES Real estate investments are relatively illiquid and, therefore, the Company's ability to vary its portfolio promptly in response to changes in economic or other conditions may be limited. The Operating Partnership has agreed that it will not sell or refinance Greenbrook Apartments, a 1,031-unit apartment community transferred to the Company by Robert F. Fogelman, a member of the Company's Board of Directors, in connection with the Company's formation, without the advance written consent of Mr. Fogelman, so long as he continues to own at least 217,500 Common Units. The Company also has agreed not to sell or refinance four other Communities without the advance written consent of certain limited partners of the Operating Partnership (including, with respect to one Community in addition to Greenbrook, Mr. Fogelman; all such limited partners being collectively referred to hereinafter as the "Taxable Partners") who continue to own in the aggregate at least 50% of the Common Units received on account of the transfer of the applicable Community in connection with the Company's formation. The Taxable Partners may withhold such consent in their sole discretion, precluding the sale or refinancing of such Communities, which could adversely affect the Company's liquidity or ability to take advantage of particular opportunities. BOND COMPLIANCE REQUIREMENTS MAY LIMIT INCOME FROM CERTAIN COMMUNITIES Nineteen of the Company's Communities have been financed with the proceeds of the issuance of tax-exempt bonds or HUD guaranteed loans and are subject to restrictive covenants or deed restrictions. The aggregate outstanding principal amount of such financing as of July 31, 1997 was approximately $97.1 million. Communities financed with the proceeds of tax-exempt bonds are subject to various restrictions and requirements, including a requirement that not less than 20% of the apartment units in each such Community be occupied by residents whose income does not exceed 80% of the median income for the area at all times during the period specified in the bond documents. The bond compliance requirements may have the effect of limiting the Company's income from affected Communities in the event the Company is required to lower its rental rates to attract residents meeting the qualification requirements. In the event that tax law requirements are not met, interest on the bonds could become subject to federal and state income tax, which would result in either an increase in the interest rate on such bonds or an early redemption of the bonds (which redemption could be at a premium). POSSIBLE LIABILITY RELATING TO ENVIRONMENTAL MATTERS Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The presence of such substances, or the failure to properly remediate such substances, when released, may adversely affect occupancy of the Properties affected and the owner's ability to sell such real estate or to borrow using such real estate as collateral. In addition to investigation and clean-up actions brought by federal, state and local agencies, the presence of hazardous wastes on a property could result in personal injury or similar claims by private plaintiffs. The Company has not been notified by any governmental authority of any noncompliance, liability or other claim in connection with any of its Communities or developments, nor is the Company aware of any other material environmental condition with respect to any of the Communities. Each of the Communities has been subjected to a Phase I environmental site assessment ("ESA") (which does not involve invasive procedures, such as soil sampling or ground water analysis) by independent environmental consultants. Phase II testing (which involves invasive procedures) has been performed on two of the Company's Communities. These ESAs have not revealed any significant environmental liability that would have a material adverse effect on the Company's business. However, in connection with the ownership and operation of the Communities, the Company, the Operating Partnership, the Texas Operating Partnership or the Operating Subsidiaries, as the case may be, potentially may be liable for damages or cleanup, investigation or remediation costs. With the exception of two Communities, the ESAs completed prior to 1994 have been updated in connection with additional financings. Several of the ESAs indicated the presence of radon levels exceeding 8 Environmental Protection Agency ("EPA") approved levels. In each instance where sampling disclosed elevated radon levels, the owners of the affected Communities have taken the recommended remedial actions, and subsequent testing was done to confirm that the levels were brought to acceptable EPA levels. Unknown and unremediated radon levels at any Community could give rise to personal injury claims by residents and others. No assurances can be given that existing ESAs with respect to any of the Communities have revealed all environmental liabilities, that any prior owner of a Community did not create any material environmental condition not known to the Company, or that a material environmental condition does not otherwise exist as to any one or more of the Communities. Twenty of the Communities have asbestos-containing materials ("ACM") on or in insulation, floor and ceiling coverings. While the precise amounts of ACM contained in the Communities cannot be determined without incurring substantial expense, the Company believes, based on its review of the Phase I and Phase II environmental reports, that overall levels are low and that ACM at 12 of the Communities are non-friable. Friable ACM are contained in eight Communities and the Company believes that such ACM are subject to adequate maintenance programs. The ESAs do not recommend any remediation of ACM at any Community. However, there can be no assurance that the Company will not be required to remediate ACM in the future at significant expense, which could have a material adverse affect on the Company's ability to make distributions to shareholders. COMPLIANCE WITH OTHER LAWS. The Communities and any apartment community acquired or developed by the Company in the future must comply with Title III of the Americans with Disabilities Act (the "ADA") to the extent that such Communities are "public accommodations" and/or "commercial facilities" as defined by the ADA. Compliance with the ADA requirements could require removal of structural barriers to handicapped access in certain public areas of the Communities, where such removal is readily achievable. The ADA does not, however, consider residential properties such as apartment communities to be public accommodations or commercial facilities, except to the extent portions of such facilities, such as a leasing office, are open to the public. The Company believes that the Communities comply with all present requirements under the ADA and applicable state laws. Noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The Fair Housing Amendments Act of 1988 (the "FHA") requires apartment communities first occupied after March 13, 1990 to be accessible to the handicapped. Noncompliance with the FHA could result in the imposition of fines or an award of damages to private litigants. The Company believes that the Communities that are subject to the FHA are in compliance with such law. RISKS ASSOCIATED WITH DEBT FINANCING The Company currently uses and intends to continue using debt financing for acquisitions and development. Such debt financing may include permanent mortgage financing and the use of the Company's unsecured bank line of credit (the "Credit Line"). Payments of principal and interest on borrowings may leave the Company with insufficient cash resources to operate the Communities or pay distributions required to be paid in respect of the Series A Preferred Stock or in order for the Company to maintain its qualification as a REIT. The Board of Directors has adopted a policy limiting the Company's indebtedness to 60% of adjusted gross assets (defined as the gross tangible book value of the Company's assets, plus $10 million), but the organizational documents of the Company do not contain any limitation on the amount or percentage of indebtedness, funded or otherwise, that the Company may incur. The Company's ratio of debt to adjusted gross assets was approximately 46% at July 31, 1997. The Board of Directors, without shareholder approval, can amend or modify its current policy on borrowing. If this policy were changed, the Company could become more highly leveraged, resulting in an increase in debt service that could adversely affect the Company's FFO, cash flow and ability to make distributions to its shareholders; increase the risk of default on the Company's obligations and increase the risk of foreclosure on property securing debt. As of July 31, 1997, approximately $131.7 million of long-term fixed rate debt was recourse to the Operating Partnership. The Company has agreed to maintain $8.9 million of recourse debt in order to 9 preserve the tax bases of the Taxable Partners (except Mr. Fogelman) in their Common Units. Upon the liquidation and dissolution of the Operating Partnership, the Taxable Partners (except Mr. Fogelman) have agreed to indemnify the Company for any deficiency in the repayment of such debt and contribute the amount of any such deficiency to the Operating Partnership as additional capital. Mr. Fogelman has personally guaranteed $12.6 million of long-term fixed rate non-recourse indebtedness in order to preserve his tax basis in his Common Units. The Company has agreed to maintain at least $12.6 million of such guaranteed non-recourse indebtedness for so long as Mr. Fogelman owns at least 285,250 Common Units. The Company has agreed to indemnify Mr. Fogelman and the other Taxable Partners for taxes, penalties and interest that may be incurred due to inadvertent prepayment of debt by the Company. The foregoing agreements require that the Company to maintain at least $21.5 million of indebtedness unless the appropriate Taxable Partners consent to the prepayment of such indebtedness or dispose of their Common Units, which could limit the Company's ability to control the terms of its mortgage financing or the Credit Line. The Company could be forced to dispose of certain Communities upon disadvantageous terms, which could result in losses to the Company and could adversely affect cash flow available for distribution to shareholders. Moreover, if a Community is mortgaged to secure payment of indebtedness and the Company is unable to meet mortgage payments, the Community could be foreclosed upon by or otherwise transferred to the mortgagee with a consequent loss of income and asset value to the Company. TAX RISKS TAX LIABILITIES AS A CONSEQUENCE OF THE FAILURE TO QUALIFY AS A REIT The Company operates and intends to continue to operate so as to qualify as a REIT for federal income tax purposes. The Company has not requested, and does not expect to request, a ruling from the Internal Revenue Service (the "Service") that it qualifies as a REIT. The continued qualification of the Company as a REIT will depend on the Company's continuing ability to meet various requirements concerning, among other things, the ownership of its outstanding capital stock, the nature of its assets, the sources of its income and the amount of its distributions to its shareholders. See "Federal Income Tax Considerations." If the Company were to fail to qualify as a REIT in any taxable year, the Company would not be allowed a deduction for distributions to shareholders in computing its taxable income and would be subject to Federal income tax (including any applicable alternative minimum tax) on its resulting taxable income at regular corporate rates. Unless entitled to relief under certain provisions of the Code, the Company would be disqualified from treatment as a REIT for the four taxable years following the year during which the qualification was lost. As a result, the funds available for distribution to shareholders would be reduced substantially for each of the years involved. Although the Company currently intends to continue to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause the Company's Board of Directors, with the affirmative vote of two-thirds of the outstanding shares of the Company's Common Stock, to revoke the Company's REIT election. See "Federal Income Tax Considerations". REIT MINIMUM DISTRIBUTION REQUIREMENTS In order to avoid corporate income taxation of the earnings it distributes, the Company generally is required each year to distribute to its shareholders at least 95% of its net taxable income (excluding any net capital gain). In addition, the Company will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by it with respect to any calendar year are less than the sum of (i) 85% of its ordinary income for that year, (ii) 95% of its capital gain net income for that year and (iii) 100% of its undistributed income from prior years. The Company has made and intends to continue to make distributions to its shareholders to comply with the 95% distribution requirement and to avoid the nondeductible excise tax. The Company's income will consist primarily of the Company's share of the income of the Operating Partnership, and the Company's cash available for distribution will consist primarily of the Company's share of cash distributions from the Operating Partnership. Differences in timing between the recognition of taxable income and the receipt of cash available for distribution due to the seasonality of the multi-family residential industry 10 could require the Company, through the Operating Partnership, to borrow funds on a short-term basis to meet the 95% distribution requirement and to avoid the nondeductible excise tax. Distributions by the Operating Partnership will be determined by the Board of Directors of the Company, as the sole general partner of the Operating Partnership, and will be dependent on a number of factors, including the aggregate amount of the Operating Partnership's cash available for distribution, the Operating Partnership's financial condition, any decision by the Board of Directors to reinvest funds rather than to distribute such funds, the aggregate amount of capital expenditures, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors deems relevant. See "Federal Income Tax Considerations -- Requirements for Qualification -- Distribution Requirements." CLASSIFICATION OF THE OPERATING PARTNERSHIP, THE TEXAS OPERATING PARTNERSHIP AND THE SUBSIDIARY PARTNERSHIPS FOR FEDERAL INCOME TAX PURPOSES; IMPACT ON REAL ESTATE INVESTMENT TRUST STATUS The Company has not requested, and does not expect to request, a ruling from the Service that the Operating Partnership, the Texas Operating Partnership or any Subsidiary Partnership (collectively, the "Property Partnerships") will be classified as partnerships for federal income tax purposes. If the Service were to challenge successfully the tax status of any Property Partnership as a partnership for federal income tax purposes, such Property Partnership would be taxable as a corporation. In such event, the Company would cease to qualify as a REIT for a variety of reasons. Furthermore, imposition of a corporate income tax on any Property Partnership would substantially reduce the amount of cash available for distribution to the Company and its shareholders. See "Federal Income Tax Considerations." OTHER TAX LIABILITIES Even if the Company qualifies as a REIT, the Company, any QRS, or any Property Partnership may be subject to certain federal, state, and local taxes on their income and property which could reduce operating cash flow. POTENTIAL CONFLICTS OF INTEREST Holders of Class A Common Units may suffer different and more adverse tax consequences than the Company upon the sale of any of the Communities acquired upon formation of the Company or refinancing or prepayment of indebtedness associated with or secured by any of such Communities. Therefore, such holders, including Mr. Cates, Mr. Fogelman, and O. Mason Hawkins, who is also a member of the Board of Directors, may have different objectives from the Company regarding the appropriate pricing and timing of any refinancing or prepayment of indebtedness associated with such Communities or any sale of such Communities. The Company has exclusive authority as to whether and on what terms to sell or refinance or repay indebtedness related to an individual Community (except certain Communities described below), and the Company's bylaws provide that a majority of the Board of Directors, including a majority of the independent directors, may approve the sale or other disposition of a Community. However, Messrs. Cates, Fogelman and Hawkins may influence the remaining directors not to approve the sale of or refinancing of the indebtedness associated with a particular Community, even though such sale or refinancing might otherwise be financially advantageous to the Company, or may influence the Company to refinance the indebtedness associated with a particular Community and increase the level of debt. Moreover, as to five of the Communities acquired upon formation of the Company, the Operating Partnership has agreed that it will not sell such Communities or refinance the indebtedness associated with such Communities without the advance written consent of certain former owners thereof. Mr. Fogelman is one of those former owners. Such owners are likely to be motivated by tax reasons to withhold such consent, which would adversely affect the Operating Partnership's ability to take advantage of particular opportunities. Further, the Company is obligated to (i) maintain at least $12.6 million of non-recourse debt guaranteed by Mr. Fogelman so long as he continues to own 285,250 Common Units and (ii) maintain approximately $8.9 million of recourse debt in order to preserve the Taxable Partners' tax bases in their Common Units. 11 POSSIBLE ADVERSE CONSEQUENCES OF LIMITS ON OWNERSHIP OF SHARES The Company's charter limits ownership of the Company's capital stock by any single shareholder to 9.9% of the aggregate value of the outstanding capital stock (the "Ownership Limit"). Shares acquired or transferred in breach of the Ownership Limit shall be deemed "Excess Shares" and shall be (i) held in trust for the exclusive benefit of the person(s) to whom such Excess Shares may later be transferred, (ii) subject to transfer at the direction of the Board of Directors, and (iii) subject to redemption at a price equal to the lesser of (a) the price paid by the holder of such Excess Shares or (b) the closing price per share of such shares on the New York Stock Exchange (the "NYSE") (which redemption price may be paid in Common Units). An individual who acquires Excess Shares bears the risk that, among other things, (i) he may lose control over the power to dispose of such Excess Shares, (ii) he may not be able to recognize the profit from the sale of such Excess Shares upon an increase in the market price thereof, and (iii) he may be required to recognize a loss from the sale of such Excess Shares upon a decrease in the market price thereof. LIMITATIONS ON ACQUISITION AND CHANGE IN CONTROL OWNERSHIP LIMIT The Ownership Limit may have the effect of precluding acquisition of control of the Company by a third party without consent of the Board of Directors. See "Description of Capital Stock of the Company -- Ownership Limitations." STAGGERED BOARD OF DIRECTORS The Board of Directors has three classes of directors. The terms of the first, second and third classes will expire in 1998, 1999, and 2000, respectively. Directors in each class are elected for a three-year term. The staggered terms for directors may affect the shareholders' ability to change control of the Company even if a change in control were in the shareholders' interest. See "Description of Capital Stock of the Company -- Charter and Bylaw Provisions." PREFERRED STOCK The Company's Charter authorizes the Board of Directors to issue up to 5,000,000 shares of preferred stock and to establish the preferences and rights of any shares issued. The issuance of preferred stock could have the effect of delaying or preventing a change in control of the Company even if a change in control were in the shareholders' interest. Currently, 2,000,000 shares of the Company's 9.5% Series A Cumulative Preferred Stock (the "Series A Preferred Stock") are issued and outstanding. See "Description of Capital Stock of the Company -- Preferred Stock" and "-- Series A Preferred Stock." TENNESSEE ANTI-TAKEOVER STATUTES As a Tennessee corporation, the Company is subject to various legislative acts set forth in Chapter 35 of Title 48 of the Tennessee Business Corporation Act (the "TBCA"), which impose certain restrictions and require certain procedures with respect to certain takeover offers and business combinations, including, but not limited to, combinations with interested shareholders and share repurchases from certain shareholders. These provisions may have the effect of delaying or preventing a change in control of the Company even if a change in control were in the shareholders' interest. See "Description of Capital Stock of the Company -- Tennessee Anti-Takeover Statutes." USE OF PROCEEDS The Company will contribute the net proceeds of any sale of the Offered Securities by the Company to the Operating Partnership in exchange for units of limited partnership interests having characteristics similar to those of the Offered Securities. Unless otherwise set forth in the applicable Prospectus Supplement, the net proceeds from the sale of any Offered Securities will be used by the Company for general corporate purposes, which may include the acquisition and development of multifamily properties as suitable opportunities arise, the improvement of certain properties in the Company's portfolio and the repayment of certain then-outstanding secured or unsecured indebtedness. 12 CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DISTRIBUTIONS AND CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth the consolidated ratio of earnings to combined fixed charges and preferred stock distributions of the Company and for the predecessor to the Company prior to February 4, 1994:
PERIOD ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------ ------------ 1992 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- ------------ Ratio of Earnings to Combined Fixed Charges and Preferred Stock Distributions......................... 1.07x 1.32x 1.82x 1.50x 1.52x 1.48x Ratio of Earnings to Fixed Charges...... 1.07x 1.32x 1.82x 1.50x 1.57x 1.73x
For the purpose of calculating the consolidated ratio of earnings to combined fixed charges and preferred stock distributions and the consolidated ratio of earnings to fixed charges, earnings consist of net income (loss) before gain on disposition of properties, extraordinary items and allocation to minority interests, plus fixed charges less capitalized interest. Fixed charges consist of interest expense, capitalized interest and amortization of deferred financing costs. Prior to 1996, the Company had not issued any Preferred Stock; therefore, for the years prior to 1996 the ratios of earnings to combined fixed charges and preferred stock distributions and the ratios of earnings to fixed charges are the same. 13 DESCRIPTION OF CAPITAL STOCK THE SUMMARY OF THE TERMS OF THE SHARES OF THE COMPANY'S CAPITAL STOCK SET FORTH BELOW DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE AMENDED AND RESTATED CHARTER OF THE COMPANY AS FURTHER AMENDED, AND THE AMENDED AND RESTATED BYLAWS OF THE COMPANY, BOTH OF WHICH MAY BE FURTHER AMENDED FROM TIME TO TIME AND BOTH OF WHICH ARE INCORPORATED HEREIN BY REFERENCE. GENERAL The authorized capital stock of the Company consists of 20,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. Each outstanding share of Common Stock entitles the holder to one vote on all matters presented to shareholders for a vote. COMMON STOCK Subject to such preferential rights granted by the Board of Directors in connection with the issuance of the Series A Preferred Stock and preferential rights as may be granted by the Board of Directors in connection with the future issuances of Preferred Stock, holders of shares of Common Stock are entitled to one vote per share on all matters to be voted on by shareholders and are entitled to receive ratably such dividends as may be declared in respect of the Common Stock by the Board of Directors in its discretion from funds legally available therefor. In the event of the liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of all debts and other liabilities and any liquidation preference of the holders of the Series A Preferred Stock and other shares of Preferred Stock which may be issued in the future. Holders of Common Stock have no subscription, redemption, conversion or preemptive rights. Matters submitted for shareholder approval generally require a majority vote of the shares present and voting thereon. The outstanding shares of Common Stock are fully paid and nonassessable. PREFERRED STOCK The Company is authorized to issue up to 5,000,000 shares of Preferred Stock in one or more series, with such designations, powers, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption, in each case, if any, as are permitted by Tennessee law and as the Board of Directors may determine by adoption of an amendment to the Company's Charter without any further vote or action by the Company's shareholders. As of the date of this Prospectus, 2,000,000 shares of the Series A Preferred Stock were issued and outstanding, having the following rights, restrictions, limitations, preferences, and other attributes: THE SERIES A PREFERRED STOCK MATURITY. The Series A Preferred Stock has no stated maturity and is not be subject to any sinking fund or mandatory redemption. RANK. The Series A Preferred Stock, with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company, ranks (i) senior to all classes or series of Common Stock, and to all equity securities ranking junior to the Series A Preferred Stock, (ii) on parity with all equity securities issued by the Company the terms of which specifically provide that such equity securities rank on a parity with the Series A Preferred Stock with respect to dividend rights or rights upon liquidation, dissolution or winding up of the Company, and (iii) junior to all existing and future indebtedness of the Company. The term "equity securities" does not include convertible debt securities, which will rank senior to the Series A Preferred Stock. DIVIDENDS. Holders of the Series A Preferred Stock are entitled to receive, when and as declared by the Board of Directors (or a duly authorized committee thereof), out of funds legally available for the payment of dividends, preferential cumulative cash distributions at the rate of 9.5% per annum of the $25 liquidation preference per share (equivalent to a fixed annual amount of $2.375 per share). 14 LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the holders of shares of Series A Preferred stock are entitled to be paid out of the assets of the Company legally available for distribution to its shareholders a liquidation preference of $25 per share, plus an amount equal to any accrued and unpaid distributions to the date of payment, but without interest, before any distribution of assets is made to holders of Common Stock or any other class or series of capital stock of the Company that ranks junior to the Series A Preferred Stock as to liquidation rights. REDEMPTION. Except in certain circumstances relating to the preservation of the Company's status as a REIT, the Series A Preferred Stock is not redeemable prior to November 1, 2001. On and after such date, the Series A Preferred Stock will be redeemable for cash at the option of the Company, in whole or in part, at a redemption price of $25 per share, plus distributions accrued and unpaid to the redemption date (whether or not declared) without interest. VOTING RIGHTS. Holders of Series A Preferred Stock generally will have no voting rights except as required by law. However, whenever distributions on any shares of Series A Preferred Stock shall be in arrears for 18 or more months, the holders of such shares (voting separately as a class with all other series of parity preferred stock upon which like voting rights have been conferred and are exercisable) will be entitled to vote for the election of two additional directors of the Company until all distributions accumulated on such shares of Series A Preferred Stock have been fully paid or declared and a sum sufficient for the payment thereof set aside for payment. In addition, certain changes to the terms of the Series A Preferred Stock that would be materially adverse to the rights of holders of the Series A Preferred Stock cannot be made without the affirmative vote of the holders of at least two-thirds of the outstanding Series A Preferred Stock. CONVERSION. The Series A Preferred Stock is not convertible into or exchangeable for any other property or securities of the Company. CHARTER AND BYLAW PROVISIONS Shareholders' rights and related matters are governed by the TBCA, the Company's Charter and its Bylaws. Certain provisions of the Charter and Bylaws of the Company, which are summarized below, may make it more difficult to change the composition of the Board of Directors and may discourage or make more difficult any attempt by a person or group to obtain control of the Company. VOTING REQUIREMENT. The Company's Charter may not be amended without the affirmative vote of at least a majority of the shares entitled to vote generally in the election of directors, voting as a single voting group. The Company's Bylaws may be amended by either the affirmative vote of a majority of all shares outstanding and entitled to vote generally in the election of directors, voting as a single group, or by an affirmative vote of a majority of the Board of Directors then holding office, unless the shareholders prescribe that any such bylaw may not be amended or repealed by the Board of Directors. Notwithstanding the foregoing, the Company cannot take any action intended to terminate its qualification as a REIT without the affirmative vote of at least two-thirds of the outstanding shares of Common Stock. SPECIAL MEETINGS. Under the Company's Bylaws, special meetings of the shareholders may be called by shareholders only if such shareholders hold outstanding shares representing more than 50% of all votes entitled to be cast on any issue proposed to be considered at any such special meeting. STAGGERED BOARD OF DIRECTORS. The Company's Board of Directors is divided into three classes of directors serving staggered three year terms. A majority of the directors must be persons who are not officers of the Company. The requirements for a majority of independent directors and the provisions for staggered terms of directors may not be changed without approval of a majority of the shareholders or by 80% of the members of the Board of Directors. Certain provisions of the Company's Charter, including the use of a staggered board, may render more difficult a change in control of the Company or removal of incumbent management. 15 ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS. The Bylaws of the Company provide that with respect to an annual meeting of shareholders, the proposal of business to be considered by shareholders may be made only (i) by or at the direction of the Board of Directors, or (ii) by a shareholder who has complied with the advance notice procedures set forth in the Bylaws. In addition, with respect to any meeting of shareholders, nominations of persons for election to the Board of Directors may be made only (x) by or at the direction of the Board of Directors or (y) by any shareholder of the Company who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in the Bylaws. The advance notice provisions of the Bylaws could have the effect of discouraging a takeover or other transaction in which holders of some, or a majority, of the shares of Common Stock might receive a premium for their shares over the then prevailing market price or which such holders might believe to be otherwise in their best interests. LIMITATION OF DIRECTORS' LIABILITY The Company's Charter eliminates, subject to certain exceptions, the personal liability of a director to the Company or its shareholders for monetary damages for breaches of such director's duty of care or other duties as a director. The Charter does not provide for the elimination of or any limitation on the personal liability of a director for (i) any breach of a director's duty of loyalty to the Company, (ii) acts or omissions which involve intentional misconduct or knowing violations of law, (iii) unlawful corporate distributions, or (iv) acts or omissions which involve transactions from which the director derived an improper personal benefit. The Charter of the Company further provides that if the TBCA is amended to authorize corporate action further eliminating or limiting the personal liability of a director of the Company shall be eliminated or limited to the fullest extent permitted by the TBCA, as amended. These provisions of the Charter will limit the remedies available to a shareholder in the event of breaches of any director's duties to such shareholder of the Company. TENNESSEE ANTI-TAKEOVER STATUTES In addition to certain of the Company's Charter provisions discussed above, Tennessee has adopted a series of statutes which can have an anti-takeover effect and may delay or prevent a tender offer or takeover attempt that a shareholder might consider in its best interest, including those attempts that might result in a premium over the market price for the Common Stock. Under the Tennessee Investor Protection Act, unless a company's board of directors has recommended a takeover offer to shareholders no offeror beneficially owning 5% or more of any class of equity securities of the offeree company, any of which was purchased within one year prior to the proposed takeover offer (unless the offeror, before making such purchase, has made a public announcement of his intention with respect to changing or influencing the management or control of the offeree company, has made a full, fair and effective disclosure of such intention to the person from whom he intends to acquire such securities and has filed with the Tennessee Commissioner of Commerce and Insurance (the "Commissioner") and the offeree company a statement signifying such intentions and containing such additional information as the Commissioner by rule prescribes), may offer to acquire any class of equity security of an offeree company pursuant to a tender offer if after the acquisition thereof the offeror would be directly or indirectly a beneficial owner of more than 10% of any class of outstanding equity securities of the company (a "Takeover Offer"). Such an offeror must provide that any equity securities of an offeree company deposited or tendered pursuant to a Takeover Offer may be withdrawn by an offeree at any time within seven days from the date the offer has become effective following filing with the Commissioner and the offeree company and public announcement of the terms or after 60 days from the date the offer has become effective. If an offeror makes a Takeover Offer for less than all the outstanding equity securities of any class, and if the number of securities tendered is greater than the number the offeror has offered to accept and make for, the securities shall be accepted pro rata. If an offeror varies the terms of a Takeover Offer before its expiration date by increasing the consideration offered to offeree, the offeror shall make the increased consideration for all equity securities accepted, whether accepted before or after the variation in the terms of the offer. 16 Under the Tennessee Business Combination Act, subject to certain exceptions, no Tennessee corporation may engage in any "business combination" with an "interested shareholder" for a period of five years following the date that such shareholder became an interested shareholder unless prior to such date the Board of Directors of the corporation approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder. "Business combination" is defined by the Tennessee Business Combination Act as any (i) merger or consolidation; (ii) share exchange; (iii) sale, lease, exchange, mortgage, pledge or other transfer of assets representing 10% of more of (A) the aggregate market value of the corporation's consolidated assets, (B) the aggregate market value of the corporation's shares, or (C) the corporation's consolidated net income; (iv) issuance or transfer of shares from the corporation to the interested shareholder, (v) plan of liquidation of dissolution proposed by the interested shareholder, (vi) transaction or recapitalization which increases the proportionate share of any outstanding voting securities owned or controlled by the interested shareholder, or (vii) financing arrangement whereby any interested shareholder receives, directly or indirectly, a benefit except proportionately as a shareholder. "Interested shareholder" is defined as (i) any person that is the beneficial owner of 10% or more of the voting power of any class or series of outstanding voting stock of the corporation or (ii) an affiliate or associate of the corporation who at any time within the five-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of any class or series of the outstanding stock of the corporation. Consummation of a business combination that is subject to the five-year moratorium is permitted after such period when the transaction (a) (i) complies with all applicable charter and bylaw requirements and (ii) is approved by the holders of two-thirds of the voting stock not beneficially owned by the interested shareholder, and (b) meets certain fair price criteria. The Tennessee Greenmail Act prohibits a Tennessee corporation from purchasing, directly or indirectly, any of its shares at a price above the market value of such shares (defined as the average of the highest and lowest closing market price for such shares during the 30 trading days preceding the purchase and sale or preceding the commencement or announcement of a tender offer if the seller of such shares has commenced a tender offer or announced an intention to seek control of the corporation) from any person who holds more than 3% of the class of securities to be purchased if such person has held such shares for less than two years, unless the purchase has been approved by the affirmative vote of a majority of the outstanding shares of each class of voting stock issued by such corporation or the corporation makes an offer, of at least equal value per share, to all holders of shares of such class. OWNERSHIP LIMITATIONS For the Company to qualify as a REIT under the Code, among other things, no more than 50% in value of its outstanding shares of capital stock may be owned, directly or indirectly, by five or fewer shareholders (as defined in the Code to include certain entities) during the last half of a taxable year, and such capital stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. To ensure that the Company continues to meet the requirements for qualification as a REIT, the Company's Charter, subject to certain exceptions, provides that no holder may own, or be deemed to own by virtue of the attribution provisions of the Code, shares of the Company's capital stock in excess of the Ownership Limit. The Board of Directors may waive the Ownership Limit with respect to a shareholder if evidence satisfactory to the Board of Directors and the Company's tax counsel is presented that the changes in ownership will not then or in the future jeopardize the Company's status as a REIT. Any transfer of capital stock or any security convertible into capital stock that would result in a direct or indirect ownership of capital stock by a shareholder in excess of the Ownership Limit or that would result in the failure of the Company to meet the requirements for qualification as a REIT, including any transfer that results in the capital stock being owned by fewer than 100 persons or results in the Company being "closely held" within the meaning of section 856(h) of the Code, shall be null and void, and the intended transferee will acquire no rights to the capital stock. The foregoing restrictions on transferability and ownership will not apply if the Board of Directors determines 17 that it is no longer in the best interests of the Company to attempt to qualify, or to continue to qualify as a REIT. Capital stock owned, or deemed to be owned, or transferred to a shareholder in excess of the Ownership Limit shall be deemed Excess Shares held by such holder as agent on behalf of, and in trust for the exclusive benefit of the transferees (which may include the Company) to whom such capital stock may be ultimately transferred without violating the Ownership Limit. While the Excess Shares are held in trust, the holder thereof will not be entitled to vote, the Excess Shares will not be considered issued and outstanding for purposes of any shareholder vote or the determination of a quorum for such vote and, except upon liquidation, will not be entitled to participate in dividends or other distributions. Any dividend or distribution paid to a proposed transferee of Excess Shares prior to the discovery by the Company that capital stock has been transferred in violation of the Ownership Limitation shall be repaid to the Company upon demand. Excess Shares are further subject to transfer at the direction of the Board of Directors. If the Board of Directors directs a holder of Excess Shares to sell such Excess Shares, such holder shall pay the Company out of the proceeds of such sale all expenses incurred by the Company in connection with such sale plus any remaining amount of such proceeds that exceeds that amount paid by such holder for the Excess Shares. In addition, the Company will have the right, for a period of six months during the time any Excess Shares are held by the holder in trust, to redeem all or any portion of the Excess Shares from the holder for the lesser of the price paid for the capital stock by the holder or the market price (as determined in the manner set forth in the Company's charter) of the capital stock on the date the Company give notice of its intent to redeem such Excess Shares. The six month period begins on the date on which the Company receives written notice of the transfer or other event resulting in the classification of capital stock as Excess Shares. Each shareholder shall upon demand be required to disclose to the Company in writing any information with respect to the direct, indirect and constructive ownership of beneficial interests in the Company as the Board of Directors deems necessary to comply with the provisions of the Code applicable to REITs, to comply with the requirements of any taxing authority or governmental agency or to determine any such compliance. The Ownership Limitation may have the effect of precluding acquisition of control of the Company unless the Board of Directors determines that maintenance of REIT status is no longer in the best interests of the Company. OTHER MATTERS The transfer agent and registrar for the Company's Common Stock is AmSouth Bank of Alabama, Birmingham, Alabama. Pursuant to the TBCA, the Company cannot merge with or sell all or substantially all of the assets of the Company, except pursuant to a resolution approved by the affirmative vote of a majority of the outstanding shares of Common Stock entitled to vote on the resolution. In addition, the Partnership Agreement requires that any merger or sale of all or substantially all of the assets of or dissolution of the Operating Partnership be approved by the affirmative vote of a majority of the outstanding units. DESCRIPTION OF DEBT SECURITIES CAPITALIZED TERMS NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THE INDENTURE. The Debt Securities are to be issued under an Indenture, a copy of the form of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part and incorporated herein by reference, subject to such supplements and amendments as may be adopted from time to time (each an "Indenture" and collectively, the "Indentures"). The Indentures will be executed by the Company and one or more trustees (each a "Trustee"). The Indenture is subject to, and governed by, the Trust Indenture Act of 1939, as amended (the "TIA"). The statements made hereunder relating to the Indenture and the Debt 18 Securities to be issued thereunder are summaries of certain provisions thereof and do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all provisions of the Indenture and such Debt Securities. All section references appearing herein are to sections of the Indenture, and capitalized terms used but not defined herein shall have the respective meanings set forth in the Indenture. GENERAL The Debt Securities will be direct and unsecured general obligations of the Company, unless otherwise provided in the Prospectus Supplement. As indicated in the applicable Prospectus Supplement, the Debt Securities may be either senior debt, senior to all future subordinated indebtedness of the Company and pari passu with other current and future unsecured, unsubordinated indebtedness of the Company, or, in the alternative, subordinated debt, subordinate in right of payment to current and future senior debt and pari passu with other future subordinated indebtedness of the Company. The Indenture provides that the Debt Securities may be issued without limit as to aggregate principal amount, in one or more series, in each case as established from time to time in or pursuant to authority granted by a resolution of the Board of Directors of the Company or as established in one or more Indentures supplemental to the Indenture. All Debt Securities of one series need not be issued at the same time and, unless otherwise provided, a series may be reopened, without the consent of the Holders of the Debt Securities of such series, for issuances of additional Debt Securities of such series (Section 3.1). The Indenture provides that there may be more than one Trustee thereunder, each with respect to one or more series of Debt Securities. Any Trustee under the Indenture may resign or be removed with respect to one or more series of Debt Securities, and a successor Trustee may be appointed to act with respect to such series (Section 6.9). In the event that two or more persons are acting as Trustee with respect to different series of Debt Securities, each such Trustee shall be a Trustee of a trust under the Indenture separate and apart from the trust administered by any other Trustee (Section 6.10), and, except as otherwise indicated herein, any action described herein to be taken by the Trustee may be taken by each such Trustee with respect to, and only with respect to, the one or more series of Debt Securities for which it is Trustee under the Indenture. Reference is made to the Prospectus Supplement relating to the series of Debt Securities being offered for the specific terms thereof, including: 1. the title of such Debt Securities (including whether they are senior debt or subordinated debt and whether they are convertible); 2. the aggregate principal amount of such Debt Securities and any limit on such aggregate principal amount; 3. the date or dates, or the method for determining such date or dates, on which the principal of such Debt Securities will be payable; 4. the rate or rates (which may be fixed or variable), or the method by which such rate or rates shall be determined, at which such Debt Securities will bear interest, if any; 5. the date or dates, or the method for determining such date or dates, from which any such interest will accrue, the dates on which any such interest will be payable, the record dates for determining to whom interest payments will be made, or the method by which such dates shall be determined, the persons to whom such interest shall be payable, and the basis upon which interest shall be calculated if other than that of a 360-day year of twelve 30-day months; 6. the place or places where the principal of (and premium, if any) and interest, if any, on such Debt Securities will be payable, where such Debt Securities may be surrendered for conversion or registration of transfer or exchange, and where notices or demands to or upon the Company in respect of such Debt Securities and the Indenture may be served; 7. the period or periods within which, the price or prices at which, and the terms and conditions upon which such Debt Securities may be redeemed, in whole or in part, at the option of the Company, if the Company is to have such an option; 19 8. the obligation, if any, of the Company to redeem, repay, or purchase such Debt Securities pursuant to any sinking fund or analogous provision or at the option of a Holder thereof, and the period or periods within which, the price or prices at which, and the terms and conditions upon which such Debt Securities will be redeemed, repaid or purchased, in whole or in part, pursuant to such obligation; 9. the price (stated as a percentage of par or the stated principal amount of the Debt Securities) at which such Debt Securities will be issued and, if other than 100% of the stated principal amount thereof, the portion of the stated principal amount thereof payable upon declaration of acceleration of the maturity thereof, or (if applicable) the portion of the stated principal amount of such Debt Securities which is convertible into shares of Common Stock, Preferred Stock or Debt Securities of another series, or the method by which any such portion shall be determined; 10. if other than U.S. dollars, the currency or currencies in which such Debt Securities are denominated and payable, which may be a foreign currency or units of two or more foreign currencies or a composite currency or currencies, and the terms and conditions relating thereto; 11. whether the amount of payments of principal of (and premium, if any) or interest, if any, on such Debt Securities may be determined with reference to an index, formula or other method (which index, formula or method may, but need not be, based on a currency, currencies, currency unit or units or composite currency or currencies) and the manner in which such amounts shall be determined; 12. any additions to, modifications of or deletions from the terms of such Debt Securities with respect to the Events of Default or covenants set forth in the Indenture; 13. whether such Debt Securities will be issued in certificated or book-entry form; 14. whether such Debt Securities will be in registered or bearer form and, if in registered form, the denominations thereof if other than $1,000 and any integral multiple thereof and, if in bearer form, the denominations thereof and terms and conditions relating thereto; 15. the applicability, if any, of the defeasance and covenant defeasance provisions of Article XIV of the Indenture; 16. if such Debt Securities are to be issued upon the exercise of Debt Securities Warrants, the time, manner and place for such Debt Securities to be authenticated and delivered; 17. the terms, if any, upon which Debt Securities may be convertible into Common Stock, Preferred Stock or Debt Securities of another series of the Company, and the terms and conditions upon which such conversion will be effected, including, without limitation, the initial conversion price or rate and the conversion period; 18. if convertible, in connection with the preservation of the Company's status as a REIT, any applicable limitations on the ownership or transferability of the Common Stock, Preferred Stock or other capital stock of the Company into which such Debt Securities are convertible; 19. whether and under what circumstances the Company will pay additional amounts as contemplated in the Indenture on such Debt Securities in respect of any tax, assessment or governmental charge and, if so, whether the Company will have the option to redeem such Debt Securities in lieu of making such payment; 20. the terms, if any, upon which such Debt Securities will be subordinate to other debt of the Company; and 21. any other terms of such Debt Securities not inconsistent with the provisions of the Indenture (Section 3.1) The Debt Securities may provide for less than the entire principal amount thereof to be payable upon declaration of acceleration of the maturity thereof or may bear no interest or may bear interest at a rate which at the time of issuance is below market rates ("Original Issue Discount Securities"). Special U.S. federal income tax, accounting and other considerations applicable to Original Issue Discount Securities will be described in the applicable Prospectus Supplement. 20 The Indenture does not contain any other provision that would limit the ability of the Company to incur indebtedness or that would afford holders of Debt Securities protection in the event of a highly leveraged or similar transaction involving the Company or in the event of a change of control. However, restrictions on ownership and transfers of the Company's Common Stock are designed to preserve its status as a REIT and, therefore, may act to prevent or hinder a change of control. See "Description of the Capital Stock of the Company." Reference is made to the applicable Prospectus Supplement for information with respect to any deletion from, modification of or addition to the Events of Default or covenants of the Company that are described below, including any addition of a covenant or other provision providing event risk or similar protection. DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER Unless otherwise described in the applicable Prospectus Supplement, the Debt Securities of any series will be issuable in denominations of $1,000 and integral multiples thereof (Section 3.2). Unless otherwise described in the applicable Prospectus Supplement, the principal of (and premium, if any) and interest on any series of Debt Securities will be payable at the corporate trust office of the Trustee, provided that, at the option of the Company, payment of interest may be made by check mailed to the address of the person entitled thereto as it appears in the transfer record maintained in respect of such series of Debt Securities or by wire transfer of funds to such person at an account maintained within the United States (Sections 3.5 and 3.7). Any interest not punctually paid or duly provided for on any interest payment date with respect to a Debt Security ("Defaulted Interest") will forthwith cease to be payable to the holder on the applicable record date and may either be paid to the person in whose name such Debt Security is registered at the close of business on a special record date (the "Special Record Date") for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to the holder of such Debt Security not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner, all as more completely described in the Indenture. Subject to certain limitations imposed upon Debt Securities issued in book-entry form, the Debt Securities of any series will be exchangeable for other Debt Securities of the same series and of a like aggregate principal amount and tenor of different authorized denominations upon surrender of such Debt Securities at the corporate trust office of the Trustee. In addition, subject to certain limitations imposed upon Debt Securities issued in book-entry form, the Debt Securities of any series shall be surrendered for conversion (if applicable) or registration of transfer thereof at the corporate trust office of the Trustee. Every Debt Security surrendered for conversion, registration of transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer. No service charge will be made for any registration of transfer or exchange of Debt Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith (Section 3.5). If the applicable Prospectus Supplement refers to any transfer agent (in addition to the Trustee) initially designated by the Company with respect to any series of Debt Securities, the Company may at any time rescind the designation of any such transfer agent or approve a change in the location through which any such transfer agent acts, except that the Company will be required to maintain a transfer agent in each place of payment for such series. The Company may at any time designate additional transfer agents with respect to any series of Debt Securities (Section 10.2). Neither the Company nor the Trustee shall be required to (i) issue, register the transfer of or exchange Debt Securities of any series during a period beginning at the opening of business 15 days before any selection of Debt Securities of that series to be redeemed and ending at the close of business on the day of mailing of the relevant notice of redemption; (ii) register the transfer of or exchange any Debt Security, or portion thereof, called for redemption, except the unredeemed portion of any Debt Security being redeemed in part; or (iii) issue, register the transfer of or exchange any Debt Security which has been surrendered for repayment at the option of the holder, except the portion, if any, of such Debt Security not to be so repaid (Section 3.5). 21 MERGER, CONSOLIDATION OR SALE The Company, without the consent of the Holders of any of the Debt Securities, may consolidate with, or sell, lease or convey all or substantially all of its assets to, or merge with or into, any other corporation, provided that (a) either the Company shall be the continuing corporation or, the successor corporation (if other than the Company) formed by or resulting from any such consolidation or merger or which shall have received the transfer of such assets shall expressly assume payment of the principal of (and premium, if any) and interest on all of the Debt Securities and the due and punctual performance and observance of all of the covenants and conditions contained in the Indenture; (b) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or any Subsidiary as a result thereof as having been incurred and be continuing; and (c) an officer's certificate and legal opinion covering such conditions shall be delivered to the Trustee (Sections 8.1 and 8.3). CERTAIN COVENANTS EXISTENCE. Except as permitted under "Merger, Consolidation or Sale," the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises; PROVIDED, HOWEVER, that the Company shall not be required to preserve any right or franchise if it determines that the preservation thereof is no longer desirable in the conduct of its business and that the loss thereof is not disadvantageous in any material respect to the holders of the Debt Securities (Section 10.6). MAINTENANCE OF PROPERTIES. The Company will cause all of its properties used or useful in the conduct of its business or the business of any subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; PROVIDED, HOWEVER, that the Company and its subsidiaries shall not be prevented from selling or otherwise disposing for value its properties in the ordinary course of business (Section 10.7). INSURANCE. The Company will, and will cause each of its subsidiaries to, keep all of its insurable properties insured against loss or damage in accordance with industry practices and with insurers of recognized responsibility and of suitable financial stability (Section 10.8). PAYMENT OF TAXES AND OTHER CLAIMS. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all taxes, assessments and governmental charges levied or imposed upon it or any subsidiary or upon the income, profits or property of the Company or any subsidiary; and (ii) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Company or any subsidiary; PROVIDED, HOWEVER, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings (Section 10.9). PROVISION OF FINANCIAL INFORMATION. Whether or not the Company is subject to Section 13 or 15(d) of the Exchange Act, the Company will, to the extent permitted under the Exchange Act, file with the Commission the annual reports, quarterly reports and other documents which the Company would have been required to file with the Commission pursuant to such Section 13 or 15(d) (the "Financial Statements") if the Company were so subject, such documents to be filed with the Commission on or prior to the respective dates (the "Required Filing Dates") by which the Company would have been required to file such documents if the Company were so subject. The Company will also in any event (x) within 15 days of each Required Filing Date file with the Trustee copies of the annual reports, quarterly reports and other documents which the Company would have been required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act if the Company were subject to such section; and (y) if filing such documents by the Company with the Commission is not permitted under the Exchange Act, promptly upon written request and payment of the reasonable cost of duplication and delivery, supply copies of such documents to any holder of Debt Securities (Section 10.10). 22 ADDITIONAL COVENANTS. Any additional covenant of the Company with respect to any series of Debt Securities will be set forth in the Prospectus Supplement relating thereto. EVENTS OF DEFAULT, NOTICE AND WAIVER The Indenture provides that the following events are "Events of Default" with respect to any series of Debt Securities issued thereunder: (a) default for 30 days in the payment of any installment of interest on any Debt Security of such series; (b) default in the payment of the principal of (or premium, if any, on) any Debt Security of such series at its Maturity or in the deposit of any sinking fund payment when and as due by the terms of any Debt Security; (c) default in the performance of any other covenant of the Company contained in the Indenture (other than a covenant added to the Indenture solely for the benefit of a series of Debt Securities issued thereunder other than such series), continued for 60 days after written notice as provided in the Indenture; (d) default in the payment of an aggregate principal amount not less than $10,000,000 of any evidence of indebtedness of the Company or any mortgage, indenture or other instrument under which such indebtedness is issued or by which such indebtedness is secured, such default having occurred after the expiration of any applicable grace period and having resulted in the acceleration of the maturity of such indebtedness, but only if such indebtedness is not discharged or such acceleration is not rescinded or annulled; (e) certain events of bankruptcy, insolvency or reorganization, or court appointment of a receiver, liquidator or trustee of the Company or for substantially all of its properties; and (f) any other Event of Default provided with respect to a particular series of Debt Securities (Section 5.1). If an Event of Default under the Indenture with respect to Debt Securities of any series at the time outstanding occurs and is continuing, then in every such case the Trustee or the holders of not less than 25% in principal amount of the outstanding Debt Securities of that series may declare the principal amount (or, if the Debt Securities of the series are Original Issue Discount Securities or Indexed Securities, such portion of the principal amount as may be specified in the terms thereof) of all of the Debt Securities of that series to be due and payable immediately by written notice thereof to the Company (and to the Trustee if given by the holders). However, at any time after such a declaration of acceleration with respect to Debt Securities of such series (or of all Debt Securities then outstanding under the Indenture, as the case may be) has been made, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the holders of not less than 25% in principal amount of outstanding Debt Securities of such series (or of all Debt Securities then outstanding under the Indenture, as the case may be) may rescind and annul such declaration and its consequences if (a) the Company shall have deposited with the Trustee all required payments of the principal of (and premium, if any) and interest on the Debt Securities of such series (or of all Debt Securities then outstanding under the Indenture, as the case may be), plus certain fees, expenses, disbursements and advances of the Trustee and (b) all Events of Default, other than the non-payment of accelerated principal (or specified portion thereof), with respect to Debt Securities of such series (or of all Debt Securities then outstanding under the Indenture, as the case may be) have been cured or waived as provided in the Indenture (Section 5.2). The Indenture also provides that the holders of not less than a majority in principal amount of the outstanding Debt Securities of any series (or of all Debt Securities then outstanding under the Indenture, as the case may be) may waive any past default with respect to such series and its consequences, except a default (x) in the payment of the principal of (or premium, if any) or interest on any Debt Security of such series or (y) in respect of a covenant or provisions contained in the Indenture that cannot be modified or amended without the consent of the holder of each outstanding Debt Security affected thereby (Section 5.13). The Trustee is required to give notice to the holders of Debt Securities within 60 days of a default under the Indenture; PROVIDED, HOWEVER, that the Trustee may withhold notice to the holders of any series of Debt Securities of any default with respect to such series (except a default in the payment of the principal of (or premium, if any) or interest on any Debt Security of such series or in the payment of any sinking fund installment in respect of any Debt Security of such series) if the Responsible Officers of the Trustee consider such withholding to be in the interest of such Holders (Section 6.2). The Indenture provides that no holder of Debt Securities of any series may institute any proceeding, judicial or otherwise, with respect to the Indenture or for any remedy thereunder, except in the case of 23 failure of the Trustee, for 60 days, to act after it has received a written request to institute proceedings in respect of an Event of Default from the holders of not less than 25% in principal amount of the outstanding Debt Securities of such series as well as an offer of reasonable indemnity (Section 5.7). This provision will not prevent, however, any holder of Debt Securities from instituting suit for the enforcement of payment of the principal of (and premium, if any) and interest on such Debt Securities at the respective due dates thereof (Section 5.8). Subject to provisions in the Indenture relating to its duties in case of default, the Trustee is under no obligation to exercise any of its rights or powers under the Indenture at the request or direction of any holder of any series of Debt Securities then outstanding under the Indenture, unless such holder shall have offered to the Trustee reasonable security or indemnity (Section 6.3). The holders of not less than a majority in principal amount of the Outstanding Debt Securities of any series (or of all Debt Securities then outstanding under the Indenture, as the case may be) shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or of exercising any trust or power conferred upon the Trustee. However, the Trustee may refuse to follow any direction which is in conflict with any law or the Indenture, which may involve the Trustee in personal liability or which may be unduly prejudicial to the holders of Debt Securities of such series not joining therein (Section 5.12). Within 120 days after the close of each fiscal year, the Company must deliver to the Trustee a certificate, signed by one of several specified officers, stating whether or not such officer has knowledge of any default under the Indenture and, if so, specifying each such default and the nature and status thereof (Section 10.11). MODIFICATION OF THE INDENTURE Modifications of and amendments to the Indenture may be made only with the consent of the holders of not less than a majority in principal amount of all outstanding Debt Securities which are affected by such modification or amendment; PROVIDED, HOWEVER, that no such modification or amendment may, without the consent of the holder of each such Debt Security affected thereby, (a) change the stated maturity of the principal of, or any installment of interest (or premium, if any) on, any such Debt Security; (b) reduce the principal amount of, or the rate or amount of interest on, or any premium on redemption of, any such Debt Security, or reduce the amount of principal of an Original Issue Discount Security that would be due and payable upon declaration of acceleration of the majority thereof or would be provable in bankruptcy, or adversely affect any right of repayment of the holder of any such Debt Security; (c) change the place of payment, or the coin or currency, for payment of principal of, premium, if any, or interest on any such Debt Security; (d) impair the right to institute suit for the enforcement of any payment on or with respect to any such Debt Security; (e) reduce the above-stated percentage of outstanding Debt Securities of any series necessary to modify or amend the Indenture, to waive compliance with certain provisions thereof or certain defaults and consequences thereunder, or to reduce the quorum or voting requirements set forth in the Indenture; or (f) modify any of the foregoing provisions or any of the provisions relating to the waiver of certain past defaults or certain covenants, except to increase the required percentage to effect such action or to provide that certain other provisions may not be modified or waived without the consent of the holder of such Debt Security (Section 9.2). The Holders of not less than a majority in principal amount of each series of Outstanding Debt Securities have the right to waive compliance by the Company with certain covenants in the Indenture (Section 10.13). Modifications and amendments of the Indenture may be made by the Company and the Trustee without the consent of any holder of Debt Securities for any of the following purposes: (i) to evidence the succession of another person to the Company as obligor under the Indenture; (ii) to add to the covenants of the Company for the benefit of the holders of all or any series of Debt Securities or to surrender any right or power conferred upon the Company in the Indenture; (iii) to add Events of Default for the benefit of the holders of all or any series of Securities; (iv) to add or change any provision of the Indenture to facilitate the issuance of, or to liberalize certain terms of, Debt Securities in bearer form, or to permit or facilitate the 24 issuance of Debt Securities in uncertificated form, PROVIDED that such action shall not adversely affect the interests of the holders of the Debt Securities of any series in any material respect; (v) to change or eliminate any provision of the Indenture, PROVIDED that any such change or elimination shall become effective only when there are no Debt Securities outstanding of any series created prior thereto which are entitled to the benefit of such provision; (vi) to secure the Debt Securities; (vii) to establish the form or terms of Debt Securities of any series, including the provisions and procedures, if applicable, for the conversion of such Debt Securities into Common Stock or Preferred Stock of the Company; (viii) to provide for the acceptance of appointment by a successor Trustee or facilitate the administration of the trusts under the Indenture, by more than one Trustee; (ix) to cure any ambiguity, correct or supplement any provision which may be defective or inconsistent or make any other provisions with respect to matters or questions arising under the Indenture, PROVIDED that such action shall not adversely affect the interests of Holders of Debt Securities of any series in any material respect; or (x) to supplement any of the provisions of the Indenture to the extent necessary to permit or facilitate defeasance and discharge of any series of such Debt Securities, PROVIDED that such action shall not adversely affect the interests of the holders of the Debt Securities of any series in any material respect (Section 9.1). The Indenture provides that in determining whether the holders of the requisite principal amount of outstanding Debt Securities of a series have given any request, demand, authorization, direction, notice, consent or waiver thereunder or whether a quorum is present at a meeting of holders of Debt Securities, (i) the principal amount of an Original Issue Discount Security that shall be deemed to be outstanding shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon declaration of acceleration of the maturity thereof; (ii) the principal amount of a Debt Security denominated in a foreign currency that shall be deemed outstanding shall be the U.S. dollar equivalent, determined on the issue date for such Debt Security, of the principal amount (or, in the case of an Original Issue Discount Security, the U.S. dollar equivalent on the issue date of such Debt Security of the amount determined as provided in (i) above); (iii) the principal amount of an Indexed Security that shall be deemed outstanding shall be the principal face amount of such Indexed Security at original issuance, unless otherwise provided with respect to such Indexed Security pursuant to Section 3.1 of the Indenture; and (iv) Debt Securities owned by the Company or any other obligor upon the Debt Securities or any affiliate of the Company or of such other obligor shall be disregarded (Section 3.1). The Indenture contains provisions for convening meetings of the holders of Debt Securities of a series (Section 15.1). A meeting may be called at any time by the Trustee, and also, upon request, by the Company or the holders of at least 10% in principal amount of the outstanding Debt Securities of such series, in any such case upon notice given as provided in the Indenture (Section 15.2). Except for any consent that must be given by the holder of each Debt Security affected by certain modifications and amendments of the Indenture, any resolution presented at a meeting or adjourned meeting duly reconvened at which a quorum is present may be adopted by the affirmative vote of the Holders of a majority in principal amount of the outstanding Debt Securities of that series; PROVIDED, HOWEVER, that, except as referred to above, any resolution with respect to any request, demand, authorization, direction, notice, consent, waiver or other action that may be made, given or taken by the holders of a specified percentage, which is less than a majority, in principal amount of the outstanding Debt Securities of a series may be adopted at a meeting or adjourned meeting duly reconvened at which a quorum is present by the affirmative vote of the holders of such specified percentage in principal amount of the outstanding Debt Securities of that series. Any resolution passed or decision taken at any meeting of holders of Debt Securities of any series duly held in accordance with the Indenture will be binding on all holders of Debt Securities of that series. The quorum at any meeting called to adopt a resolution, and at any reconvened meeting, will be Persons holding or representing a majority in principal amount of the outstanding Debt Securities of a series; PROVIDED, HOWEVER, that if any action is to be taken at such meeting with respect to a consent or waiver which may be given by the Holders of not less than a specified percentage in principal amount of the outstanding Debt Securities of a series, the persons holding or representing such specified percentage in principal amount of the outstanding Debt Securities of such series will constitute a quorum (Section 15.4). 25 Notwithstanding the foregoing provisions, if any action is to be taken at a meeting of holders of Debt Securities of any series with respect to any request, demand, authorization, direction, notice, consent, waiver or other action that the Indenture expressly provides may be made, given or taken by the holders of a specified percentage in principal amount of all outstanding Debt Securities affected thereby, or of the holders of such series and one or more additional series: (i) there shall be no minimum quorum requirement for such meeting; and (ii) the principal amount of the outstanding Debt Securities of such series that vote in favor of such request, demand, authorization, direction, notice, consent, waiver or other action shall be taken into account in determining whether such request, demand, authorization, direction, notice, consent, waiver or other action has been made, given or taken under the Indenture (Section 15.4). DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE The Company may discharge certain obligations to holders of any series of Debt Securities that have not already been delivered to the Trustee for cancellation and that either have become due and payable or will become due and payable within one year (or scheduled for redemption within one year) by irrevocably depositing with the Trustee, in trust, funds in such currency or currencies, currency unit or units or composite currency or currencies in which such Debt Securities are payable in an amount sufficient to pay the entire indebtedness on such Debt Securities in respect of principal (and premium, if any) and interest to the date of such deposit (if such Debt Securities have become due and payable) or to the stated maturity or redemption date, as the case may be (Section 4.1). The Indenture provides that, if the provisions of Article Fourteen thereof are made applicable to the Debt Securities of or within any series pursuant to Section 14.4 of the Indenture, the Company may elect either (a) to defease and be discharged from any and all obligations with respect to such Debt Securities (except for the obligation to pay additional amounts, if any, upon the occurrence of certain events of tax, assessment or governmental charge with respect to payments on such Debt Securities and the obligations to register the transfer or exchange of such Debt Securities, to replace temporary or mutilated, destroyed, lost or stolen Debt Securities, to maintain an office or agency in respect of such Debt Securities and to hold moneys for payment in trust) ("defeasance") (Section 14.2) or (b) to be released from its obligations with respect to such Debt Securities under Section 10.4 to 10.10, inclusive, of the Indenture (being the restrictions described under "Certain Covenants") or, if provided pursuant to Section 3.1 of the Indenture, its obligations with respect to any other covenant, and any omission to comply with such obligations shall not constitute a default or an Event of Default with respect to such Debt Securities ("Covenant Defeasance") (Section 14.3), in either case upon the irrevocable deposit by the Company with the Trustee, in trust, of an amount, in such currency or currencies, currency unit or units or composite currency or currencies in which such Debt Securities are payable at stated maturity, or Governmental Obligations (as defined below), or both, applicable to such Debt Securities which through the scheduled payment of principal and interest in accordance with their terms will provide money in an amount sufficient to pay the principal of (and premium, if any) and interest on such Debt Securities, and any mandatory sinking fund or analogous payments thereon, on the scheduled due dates therefor. Such a trust may only be established if, among other things, the Company has delivered to the Trustee an opinion of counsel (as specified in the Indenture) to the effect that the Holders of such Debt Securities will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such defeasance or covenant defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance or covenant defeasance had not occurred, and such opinion of counsel, in the case of defeasance, must refer to and be based upon a ruling of the Internal Revenue Service or a change in applicable United States federal income tax law occurring after the date of the Indenture (Section 14.4). "Government Obligations" means securities which are (i) direct obligations of the United States of America or the government which issued the foreign currency in which the Debt Securities of a particular series are payable, for the payment of which its full faith and credit is pledged or (ii) obligations of a person controlled or supervised by and acting as an agency or instrumentality of the United States of America or such government which issued the foreign currency in which the Debt Securities of such series are payable, 26 the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, or such other government, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by the bank or trust company as custodian with respect to any such Government Obligation or a specific payment of interest on or principal of any such Government Obligation held by such custodian for the account of the holder of a depository receipt, PROVIDED that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of interest on or principal of the Government Obligation evidenced by such depository receipt (Section 1.1). Unless otherwise provided in the applicable Prospectus Supplement, if after the Company has deposited funds and/or Government Obligations to effect defeasance or covenant defeasance with respect to Debt Securities of any series, (a) the holder of a Debt Security of such series is entitled to, and does, elect pursuant to Section 14.5 of the Indenture or the terms of such Debt Security to receive payment in a currency, currency unit or composite currency other than that in which such deposit has been made in respect of such Debt Security, or (b) a Conversion Event (as defined below) occurs in respect of the currency, currency unit or composite currency in which such deposit has been made, the indebtedness represented by such Debt Security shall be deemed to have been and will be, fully discharged and satisfied through the payment of the principal of (and premium, if any) and interest on such Debt Security as they become due out of the proceeds yielded by converting the amount so deposited in respect of such Debt Security into the currency, currency unit or composite currency in which such Debt Security becomes payable as a result of such election or such cessation of usage based on the applicable market exchange rate (Section 14.5). "Conversion Event" means the cessation of use of (i) a currency, currency unit or composite currency both by the government of the country which issued such currency and for the settlement of transactions by a central bank or other public institutions of or within the international banking community, (ii) the ECU both within the European Monetary System and for the settlement of transactions by public institutions of or within the European Communities or (iii) any currency unit or composite currency other than the ECU for the purposes for which it was established. Unless otherwise provided in the applicable Prospectus Supplement, all payments of principal of (and premium if any) and interest on any Debt Security that is payable in foreign currency that ceases to be used by its government of issuance shall be made in U. S. dollars (Section 1.1). In the event the Company effects covenant defeasance with respect to any Debt Securities and such Debt Securities are declared due and payable because of the occurrence of any Event of Default other than the Event of Default described in clause (d) under "Events of Default, Notice and Waiver" with respect to Sections 10.4 to 10.10, inclusive, of the Indenture (which Sections would no longer be applicable to such Debt Securities) or described in clause (g) under "Events of Default, Notice and Waiver" with respect to any other covenant as to which there has been covenant defeasance, the amount in such currency, currency unit or composite currency in which such Debt Securities are payable, and Government Obligations on deposit with the Trustee, will be sufficient to pay amounts due on such Debt Securities at the time of their stated maturity but may not be sufficient to pay amounts due on such Debt Securities at the time of the acceleration resulting from such Event of Default. However, the Company would remain liable to make payment of such amounts due at the time of acceleration. The applicable Prospectus Supplement may further describe the provisions, if any, permitting such defeasance or covenant defeasance, including any modifications to the provision described above, with respect to the Debt Securities of or within a particular series. CONVERSION RIGHTS The terms and conditions, if any, upon which the Debt Securities are convertible into Common Stock, Preferred Stock or Debt Securities of another series will be set forth in the applicable Prospectus Supplement relating thereto. Such terms will include whether such Debt Securities are convertible into Common Stock, Preferred Stock or Debt Securities of another series, the conversion price (or manner of calculation thereof), the conversion period, provisions as to whether conversion will be at the option of the 27 holders or the Company, the events requiring an adjustment of the conversion price and provisions affecting conversion in the event of the redemption of such Debt Securities. To protect the Company's status as a REIT, a Holder may not convert any Debt Security, and such Debt Security shall not be convertible by any holder, if as a result of such conversion any person would then be deemed to own, directly or indirectly, more than 9.9% in value Company's outstanding capital stock. GLOBAL SECURITIES The Debt Securities of a series may be issued in whole or in part in the form of one or more global securities (the "Global Securities") that will be deposited with, or on behalf of, a depository (the "Depository") identified in the applicable Prospectus Supplement relating to such series. Global Securities may be issued in either registered or bearer form and in either temporary or permanent form. The specific terms of the depository arrangement with respect to a series of Debt Securities will be described in the applicable Prospectus Supplement relating to such series. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Such laws may impair the ability to transfer beneficial interests in Debt Securities represented by Global Securities. DESCRIPTION OF SECURITIES WARRANTS The Company may issue Securities Warrants for the purchase of Debt Securities, Preferred Stock or Common Stock. Securities Warrants may be issued independently or together with any other Offered Securities offered by any Prospectus Supplement and may be attached to or separate from such Offered Securities. Each series of Securities Warrants will be issued under a separate warrant agreement (each, a "Warrant Agreement") to be entered into between the Company and a warrant agent specified in the applicable Prospectus Supplement (the "Warrant Agent"). The Warrant Agent will act solely as an agent of the Company in connection with the Securities Warrants of such series and will not assume any obligations or relationship of agency or trust for or with any holders of beneficial owners of Securities Warrants. The following summaries of certain provisions of the Securities Warrant Agreement and the Securities Warrants do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all the provisions of the Securities Warrant Agreement and the Securities Warrant certificates relating to each series of Securities Warrants which will be filed with the Commission and incorporated by reference as an exhibit to the Registration Statement of which this Prospectus is a part at or prior to the time of the issuance of such series of Securities Warrants. If Securities Warrants are offered, the applicable Prospectus Supplement will describe the terms of Securities Warrants, including, in the case of Securities Warrants for the purchase of Debt Securities, the following where applicable: (1) the offering price; (2) the denominations and terms of the series of Debt Securities purchasable upon exercise of such Securities Warrants; (3) the designation and terms of any series of Debt Securities with which such Securities Warrants are being offered and the number of such Securities Warrants being offered with such Debt Securities; (4) the date, if any, on and after which such Securities Warrants and the related series of Debt Securities will be transferable separately; (5) the principal amount of the series of Debt Securities purchasable upon exercise of each such Securities Warrant and the price at which such principal amount of Debt Securities shall commence and the date on which such right shall expire (the "Expiration Date"); (6) the date on which the right to exercise such Securities Warrants shall commence and the date on which such right shall expires (the "Expiration Date"); (7) whether the Securities Warrants will be issued in registered or bearer form; (8) all material United States federal income tax consequences; (9) the terms, if any, on which the Company may accelerate the date by which the Securities Warrants must be exercise; and (10) any other material terms of such Securities Warrants. In the case of Securities Warrants for the purchase of Preferred Stock of Common Stock, the applicable Prospectus Supplement will describe the terms of such Securities Warrants, including the following where applicable: (1) the offering price; (2) the aggregate number of shares purchasable upon exercise of such Securities Warrants, the exercise price, and in the case of Securities Warrants for Preferred Stock, the designation, aggregate number and terms of the series of Preferred Stock purchasable upon exercise of such Securities Warrants; (3) the designation and terms of any series of Preferred Stock with which such 28 Securities Warrants are being offered and the number of such Securities Warrants being offered with such Preferred Stock; (4) the date, if any, on and after which such Securities Warrants and the related series of Preferred Stock or Common Stock will be transferable separately; (5) the date on which the right to exercise such Securities Warrants shall commence and the Expiration Date; (6) any special United States federal income tax consequences; and (7) any other material terms of such Securities Warrants. Securities Warrant certificates may be exchanged for new Securities Warrant certificates of different denominations, may (if in registered form) be presented for registration of transfer, and may be exercised at the corporate trust office of the Securities Warrant Agent or any other office indicted in the applicable Prospectus Supplement. Prior to the exercise of any Securities Warrant to purchase debt Securities, holders of such Securities Warrants will not have any of the rights of holders of the Debt Securities purchasable upon such exercise, including the right to receive payments of principal, premium, if any, or interest, if any, on such Debt Securities or to enforce covenants in the applicable indenture. Prior to the exercise of any Securities Warrants to purchase Preferred Stock or Common Stock, including the right to receive payments of dividends, if any, on such Preferred Stock or Common Stock, or to exercise any applicable right to vote. EXERCISE OF SECURITIES WARRANTS Each Securities Warrant will entitle the holder thereof to purchase such principal amount of Debt Securities or number of shares of Preferred Stock or Common Stock, as the case may be, at such exercise price as shall in each case be set forth in, or calculable from, the Prospectus Supplement relating to the offered Securities Warrants. After the close of business on the Expiration Date (or such later date to which such Expiration Date may be extended by the Company), unexercised Securities Warrants will become void. Securities Warrants may be exercised by delivering to the Securities Warrant Agent payment as provided in the applicable Prospectus Supplement of the amount required to purchase the Debt Securities, Preferred Stock or Common Stock, as the case may be, purchasable upon such exercise together with certain information set forth on the reverse side of the Securities Warrant certificate. Securities Warrants will be deemed to have been exercised upon receipt of payment of the exercise price, subject to the receipt within five (5) business days, of the Securities Warrant certificate evidencing such Securities Warrants. Upon receipt of such payment and the Securities Warrant certificate properly completed and duly executed at the corporate trust office of the Securities Warrant Agent or any other office indicated in the applicable Prospectus Supplement, the Company will, as soon as practicable, issue and deliver the Debt Securities, Preferred Stock or Common Stock, as the case may be, purchasable upon such exercise. If fewer than all of the Securities Warrants represented by such Securities Warrant certificate as exercised, a new Securities Warrant certificate will be issued for the remaining amount of Securities Warrants. AMENDMENTS AND SUPPLEMENTS TO WARRANT AGREEMENT The Warrant Agreements may be amended or supplemented without consent of the holders of the Securities Warrants issued thereunder to effect changes that are not inconsistent with the provisions of the Securities Warrants and that do not adversely affect the interests of the holders of the Securities Warrants. ADJUSTMENTS Unless otherwise indicated in the applicable Prospectus Supplement, the exercise price of, and the number of shares of Common Stock covered by, a Common Stock Warrant are subject to adjustment in certain events, including, (i) payment of a dividend on the Common Stock payable in shares of Common Stock and stock splits, combinations or reclassification of Common Stock; (ii) issuance to all holders of Common Stock of rights or warrants to subscribe for or purchase shares of Common Stock at less than their current market price (as defined in the Warrant Agreement for such series of Common Stock Warrants); and (iii) certain distributions of evidences of indebtedness or assets (including securities but excluding cash dividends or distributions paid out of consolidated earnings or retained earnings or dividends payable in Common Stock) or of subscription rights and warrants (excluding those referred to above). 29 No adjustment in the exercise price of, and the number of shares of Common Stock covered by, a Common Stock Warrant will be made for regular or quarterly or other periodic or recurring cash dividends or distributions or for cash dividends or distributions to the extent paid from consolidated earnings or retained earnings. No adjustment will be required unless such adjustment would require a change of at least 1% in the exercise price then in effect. Except as stated above, the exercise price of, and the number of shares of Common Stock covered by, a Common Stock Warrant will not be adjusted for the issuance of shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock, or carrying the right or option to purchase or otherwise acquire the foregoing, in exchange for cash, other property or services. In the event of any (i) consolidation or merger of the Company with or into any entity (other than a consolidation or merger that does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock); (ii) sale, transfer, lease or conveyance of all or substantially all of the assets of the Company; or (iii) reclassification, capital reorganization or change of the Common Stock (other than solely a change in par value or from par value to no par value), then any holder of a Common Stock Warrant will be entitled, on or after the occurrence of any such event, to receive on exercise of such Common Stock Warrant the kind and amount of shares of stock or other securities, cash or other property (or any combination thereof) that the holder would have received had such holder exercised such holder's Common Stock Warrant immediately prior to the occurrence of such event. If the consideration to be received upon exercise of the Common Stock Warrant following any such event consists of common stock of the surviving entity, then from and after the occurrence of such event, the exercise price of such Common Stock Warrant will be subject to the same anti-dilution and other adjustments described in the second preceding paragraph, applied as if such common stock were Common Stock. FEDERAL INCOME TAX CONSIDERATIONS INTRODUCTORY NOTES The following summary of material federal income tax considerations that may be relevant to a prospective holder of the Offered Securities is based on current law, is for general information only and is not tax advice. The discussion contained herein does not purport to deal with all aspects of taxation that may be relevant to particular security holders in light of their personal investment or tax circumstances, or to certain types of shareholders (including insurance companies, tax-exempt organizations, financial institutions or broker-dealers, foreign corporations and persons who are not citizens or residents of the United States) subject to special treatment under the federal income tax laws. The statements in this discussion are based on current provisions of the Code, existing, temporary and currently proposed Treasury regulations promulgated under the Code ("Treasury Regulations"), the legislative history of the Code, existing administrative rulings and practices of the Service and judicial decisions. No assurance can be given that future legislative, judicial, or administrative actions or decisions, which may be retroactive in effect, will not affect the accuracy of any statements in this Prospectus with respect to the transactions entered into or contemplated prior to the effective date of such changes. As used in this section, the term "Company" refers solely to Mid-America Apartment Communities, Inc. EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND SALE OF THE OFFERED SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. 30 TAXATION OF THE COMPANY GENERAL. The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code effective for its short taxable year ending on December 31, 1994. The Company believes that, commencing with its 1994 taxable year, it has been organized and has operated in such a manner as to qualify for taxation as a REIT under the Code, and the Company intends to continue to operate in such a manner, but no assurance can be given that the Company will operate in a manner so as to qualify or remain qualified as a REIT. See "Failure to Qualify" below. Baker, Donelson, Bearman & Caldwell has acted as tax counsel to the Company. The Company has obtained an opinion of Baker, Donelson, Bearman & Caldwell as to its REIT qualification. Continued qualification and taxation as a REIT will depend on the Company's ability to meet on a continuing basis, through actual annual operating results, distribution levels, and stock ownership, the various qualification tests imposed under the Code discussed below. No assurance can be given that the actual results of the Company's operation for any particular taxable year will satisfy such requirements. For a discussion of the tax consequences of failure to qualify as a REIT, see "Federal Income Tax Considerations -- Failure to Qualify". The sections of the Code relating to qualification and operation as a REIT are highly technical and complex. The following discussion sets forth the material aspects of the Code sections that govern the federal income tax treatment of a REIT and its shareholders. The discussion is qualified in its entirety by the applicable Code provisions, Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof, all of which are subject to change prospectively or retrospectively. If the Company qualifies for taxation as a REIT, it generally will not be subject to federal corporate income taxes on net income that it currently distributes to shareholders. This treatment substantially eliminates the "double taxation" (i.e., taxation at both the corporate and shareholder levels) that generally results from investment in a corporation. Notwithstanding its REIT election, however, the Company will be subject to federal income tax in the following circumstances. First, the Company will be taxed at regular corporate rates on any undistributed taxable income, including undistributed net capital gains. Second, under certain circumstances, the Company may be subject to the "alternative minimum tax" on its undistributed items of tax preference. Third, if the Company has (i) net income from the sale or other disposition of "foreclosure property" (which is, in general, property acquired by foreclosure or otherwise on default of a loan secured by the property) that is held primarily for sale to customers in the ordinary course of business or (ii) other non-qualifying income from foreclosure property, it will be subject to tax at the highest corporate rate on such income. Fourth, if the Company has net income from prohibited transactions (which are, in general, certain sales or other dispositions of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of business), such income will be subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below), and has nonetheless maintained its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on the net income attributable to the greater of the amount by which the Company fails the 75% or 95% test. Sixth, if the Company should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior years, the Company would be subject to a non-deductible 4% excise tax on the excess of such required distribution over the amounts actually distributed. Seventh, if the Company acquires any asset from a C corporation (i.e., a corporation generally subject to full corporate level tax) in a transaction in which the basis of the asset in the Company's hands is determined by reference to the basis of the asset (or any other asset) in the hands of the C corporation, and the Company recognizes gain on the disposition of such asset during the 10-year period beginning on the date on which such asset was acquired by the Company, then, to the extent of such asset's "built-in" gain (i.e. the excess of the fair market value of such property at the time of acquisition by the Company over the adjusted basis of such asset at such time), such gain will be subject to tax at the highest regular corporate rate applicable (as provided in Treasury Regulations that have not yet been promulgated). The results described above with respect to the recognition of "built-in" gain 31 assume that the Company would have an election pursuant to IRS Notice 88-19 if it were to make any such acquisition. REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a corporation, trust or association (i) that is managed by one or more directors or trustees; (ii) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest; (iii) that would be taxable as a domestic corporation, but for Sections 856 through 859 of the Code; (iv) that is neither a financial institution nor an insurance company subject to certain provisions of the Code; (v) the beneficial ownership of which is held by 100 or more persons; (vi) not more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of each taxable year (the "5/50 Rule"); and (vii) that makes an election to be a REIT (or has made such election for a previous taxable year) and satisfies all relevant filing and other administrative requirements established by the Service that must be met in order to elect and to maintain REIT status; (viii) that uses a calendar year for federal income tax purposes and complies with the recordkeeping requirements of the Code and Treasury Regulations promulgated thereunder; and (ix) that meets certain other tests, described below, regarding the nature of its income and assets. The Code provides that conditions (i) through (iv), inclusive, must be met during the entire taxable year and that condition (v) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. The Company has issued sufficient shares of Common Stock and Preferred Stock with sufficient diversity of ownership to allow the Company to satisfy requirements (v) and (vi). In addition, the Company's Charter contains restrictions regarding the transfer of its shares that are intended to assist the Company in continuing to satisfy the share ownership requirements described in (v) and (vi) above. See "Description of the Capital Stock of the Company -- Ownership Limitations." For purposes of determining Share Ownership under the 5/50 Rule, a supplemental unemployment compensation benefits plan, a private foundation or a portion of a trust permanently set aside or used exclusively for charitable purposes generally is considered an individual. A trust that is a qualified trust under Code Section 401(a), however, generally is not considered an individual and the beneficiaries of such trust are treated as holding shares of a REIT in proportion to their actuarial interests in such trust for purposes of the 5/50 Rule. The Company currently has eight corporate subsidiaries and may have additional corporate subsidiaries in the future. Code Section 856(i) provides that a corporation that is a "qualified REIT subsidiary" shall not be treated as a separate corporation, and all assets, liabilities and items of income, deduction and credit of a "qualified REIT subsidiary" shall be treated as assets, liabilities and items of income, deduction and credit of the REIT. A "qualified REIT subsidiary" is a corporation, all of the capital stock of which has been owned by the REIT from the commencement of such corporation's existence. Thus, in applying the requirements described herein, the Company's "qualified REIT subsidiaries" will be ignored, and all assets, liabilities and items of income, deduction and credit of such subsidiaries will be treated as assets, liabilities and items of income, deduction and credit of the Company. The Company's corporate subsidiaries are "qualified REIT subsidiaries". In the case of a REIT which is a partner in a partnership, Treasury Regulations provide that the REIT will be deemed to own its proportionate share of the assets of the partnership and will be deemed to be entitled to the gross income of the partnership attributable to such share. In addition, the character of the assets and gross income of the partnership will retain the same character in the hands of the REIT for purposes of Section 856 of the Code, including satisfying the gross income and asset tests (as discussed below). Thus, the Company's proportionate share of the assets, liabilities and items of income of the Operating Partnership, the Texas Operating Partnership and the Subsidiary Partnerships shall be treated as assets, liabilities and items of the Company for purposes of applying the requirements described herein. INCOME TESTS. In order to maintain qualification as a REIT, there are requirements relating to the Company's gross income that must be satisfied annually. First, at least 75% of the Company's gross income (excluding gross income from prohibited transactions) for each taxable year must consist of defined types of income derived directly or indirectly from investments relating to real property or mortgages on real 32 property (including "rents from real property" and, in certain circumstances, interest) or temporary investment income. Second, at least 95% of the Company's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property or temporary investments, and from dividends, interest and gain from the sale or disposition of stock or securities, or from any combination of the foregoing. Third, not more than 30% of the Company's gross income (including gross income from prohibited transactions) for each taxable year may be gain from the sale or other disposition of (i) stock or securities held for less than one year, (ii) dealer property that is not foreclosure property and (iii) certain real property held for less than four years (apart from involuntary conversions and sales of foreclosure property). For purposes of applying the 30% gross income test the holding period of Communities held by Operating Partnership on the date of the Initial Offering will be deemed to have commenced on such date. Rents received by the Company will qualify as "rents from real property" in satisfying the gross income requirements for a REIT described above only if several conditions are met. First, the amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales. Second, the Code provides that rents received from a resident will not qualify as "rents from real property" if the Company, or an owner of 10% or more of the Company, directly or constructively owns 10% or more of such resident (a "Related Party Tenant"). Third, if rent attributable to personal property, leased in connection with a lease of real property, is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as "rents from real property." Finally, for rents received to qualify as "rents from real property", the Company generally must not operate or manage the property or furnish or render services to the tenants of such property, other than through an "independent contractor" who is adequately compensated and from whom the Company derives no revenue. The "independent contractor" requirement, however, does not apply to the extent that the services provided by the Company are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered "rendered to the occupant". The Company does not charge, and does not anticipate charging, rent for any portion of any Property that is based in whole or in part on the income or profits of any person, and the Company does not receive, and does not anticipate receiving, any rents from Related Party Tenants. The Company does not anticipate that rent attributable to personal property leased in connection with any lease of real property will exceed 15% of total rent received under such lease. The Operating Partnership provides certain services with respect to the Communities and with respect to the Communities of the Subsidiary Partnerships. The Operating Partnership receives fees in consideration of the performance of management, landscaping and administrative services with respect to properties that are not wholly owned, directly or indirectly, by the Operating Partnership. A portion of such fees generally will not qualify under the 75% or 95% gross income tests. The Company will also receive certain other types of non-qualifying income, such as income from coin-operated laundry machines and income from corporate and guests apartments. The Company believes, however, that the aggregate amount of such fees and other non-qualifying income in any taxable year will not cause the Company to exceed the limits on non-qualifying income under the 75% and 95% gross income tests. It is possible that, from time to time, the Company or a Property Partnership will enter into hedging transaction with respect to one or more of its assets or liabilities. Any such hedging transactions could take a variety of forms, including interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, and options. To the extent that the Company or a Property Partnership enters into an interest rate swap or cap contract to hedge any variable rate indebtedness incurred to acquire or carry real estate assets, any periodic income or gain from the disposition of such contract should be qualifying income for purposes of the 95% gross income test. Furthermore, any such contract would be considered a "security" for purposes of applying the 30% gross income test. To the extent that the Company or a Property Partnership hedges with other types of financial instruments or in other situations, it may not be entirely clear how the income from those transactions will be treated for purposes of the various income 33 tests that apply to REITs under the Code. The Company intends to structure any hedging transactions in a manner that does not jeopardize its status as a REIT. If the Company fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. These relief provisions generally will be available if the Company's failure to meet such tests was due to reasonable cause and not due to willful neglect, the Company attaches a schedule of the sources of its income to its return and any income information on the schedules was not due to fraud with intent to evade tax. It is not possible, however, to state whether in all circumstances the Company would be entitled to the benefit of these relief provisions. As discussed above in "General," even if these relief provisions were to apply, a tax would be imposed with respect to the excess net income. ASSET TESTS. At the close of each quarter of its taxable year, the Company must also satisfy two tests relating to the nature of its assets. First, at least 75% of the value of the Company's total assets must be represented by cash or cash items (including certain receivables), government securities, "real estate assets" or, in cases where the Company raises new capital through shares or long-term (at least five years) debt offerings, temporary investments in shares or debt instruments during the one-year period following the Company's receipt of such capital. The term "real estate asset" includes interests in real property, interests in mortgages on real property to the extent the mortgage balance does not exceed the value of the associated real property and shares of other REITS. For purposes of the 75% asset test, the term "interest in real property" includes an interest in land and improvements thereon, such as buildings or other inherently permanent structures (including items that are structural components of such buildings or structures), a leasehold in real property and an option to acquire real property (or a leasehold in real property). Second, of the investments not included in the 75% asset class, the value of any one issuer's securities owned by the Company may not exceed 5% of the value of the Company's total assets and the Company may not own more than 10% of any one issuer's outstanding voting securities (except for its ownership interest in the Operating Partnership any Subsidiary Partnership or the stock of a qualified REIT subsidiary as defined by Section 856(i) of the Code). The Company believes that, at all relevant times (i) at least 75% of the value of its total assets has been and will continue to be represented by real estate assets, cash and cash items (including receivables) and government securities and (ii) it has not owned and will not own any securities that do not satisfy the 75% asset test. In addition, the Company does not intend to acquire or to dispose of, or cause any Property Partnership to acquire or to dispose of, assets in the future in a way that would cause it to violate either asset test. If the Company should fail to satisfy the asset tests at the end of a calendar quarter, such a failure would not cause it to lose its REIT status if (i) it satisfied all of the asset tests at the close of the preceding calendar quarter and (ii) the discrepancy between the value of the Company's assets and the asset test requirements arose from changes in the market values of its assets and was not wholly or partly caused by an acquisition of nonqualifying assets. If the condition described in clause (ii) of the preceding sentence were not satisfied, the Company still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose. ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a REIT and avoid corporate income taxation of the earnings that it distributes, is required to distribute distributions (other than capital gain distributions) to its shareholders in an amount at least equal to (i) the sum of (A) 95% of the Company's "REIT taxable income" (computed without regard to the distributions paid deduction and its net capital gain) and (B) 95% of the net income (after tax), if any, from foreclosure property, minus (ii) the sum of certain items of noncash income. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before the Company timely files its tax return for such year and if paid on or before the first regular distribution payment after such declaration. To the extent that the Company does not distribute all of its net capital gain or distributes at least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be subject to tax on the undistributed amount at regular capital gains and ordinary corporate tax rates. Furthermore, if the Company should fail to distribute during 34 each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any undistributed taxable income from prior periods, the Company will be subject to a 4% nondeductible excise tax on the excess of such required distribution over the amounts actually distributed. The Company has made and intends to continue to make timely distributions sufficient to satisfy the annual distribution requirements. In this regard, the Partnership Agreement authorizes the Company, as general partner, to take such steps as may be necessary to cause the Operating Partnership to distribute to its partners an amount sufficient to permit the Company to meet these distribution requirements. It is possible, however, that the Company, from time to time, may not have sufficient cash or other liquid assets to meet the distribution requirements due to timing differences between the actual receipt of income and actual payment of deductible expenses and the inclusion of such income and deduction of such expenses in arriving at taxable income of the Company, or if the amount of nondeductible expenses such as principal amortization or capital expenditures exceed the amount of noncash deductions. In the event that such timing differences occur, in order to meet the distribution requirements, the Company may cause the Operating Partnership to arrange for short-term, or possibly long-term, borrowing to permit the payment of required dividends. If the amount of nondeductible expenses exceeds noncash deductions, the Operating Partnership may refinance its indebtedness to reduce principal payments and borrow funds for capital expenditures. Under certain circumstances, the Company may be able to rectify a failure to meet the distribution requirement for a year by paying "deficiency dividends" to shareholders in a later year, which may be included in the Company' deduction for dividends paid for the earlier year. Although the Company may be able to avoid being taxed on amounts distributed as deficiency dividends, it will be required to pay interest to the Service based upon the amount of any deduction taken for deficiency dividends. SPECIAL DISTRIBUTION REQUIREMENT. Applicable Treasury Regulations generally provide that, in the case of a corporation, such as the Company, that succeeds to earnings and profits accumulated during a non-REIT taxable year, such a corporation is eligible to elect to be taxed as a REIT for a taxable year only if, as of the close of that taxable year, it has distributed such non-REIT earnings and profits. Accordingly, to elect to be taxed as a REIT it was necessary for the Company to distribute, on or before December 31, 1994, the full amount of its current and accumulated earnings and profits attributable to the operations of The Cates Company prior to its merger with and into the Company. The Cates Company satisfied this requirement by distributing all current and accumulated earnings and profits up to and including the date of its merger with and into the Company to its shareholders immediately prior to the consummation of such merger. ANNUAL RECORD KEEPING REQUIREMENT. Pursuant to applicable Treasury Regulations, in order to be able to elect to be taxed as a REIT, the Company must maintain certain records and request on an annual basis certain information from its shareholders designed to disclose the actual ownership of its outstanding shares. The Company has complied and will continue to comply with such requirements. FAILURE TO QUALIFY. If the Company fails to qualify for taxation as a REIT in any taxable year and the relief provisions do not apply, the Company will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to shareholders in any year in which the Company fails to qualify will not be deductible by the Company, nor will they be required to be made. In such event, to the extent of current and accumulated earnings and profits, all distributions to shareholders will be taxable as ordinary income, and, subject to certain limitations in the Code, corporate distributees may be eligible for the distributions received deduction. Unless entitled to relief under specific statutory provisions, the Company also will be disqualified from taxation as a REIT for the four taxable years following the year during which the Company ceased to qualify as a REIT. It is not possible to state whether in all circumstances the Company would be entitled to such statutory relief. REAL ESTATE INVESTMENT TRUST SIMPLIFICATION ACT. On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act of 1997 (the "TRA"). Included as part of that legislation was the Real Estate Investment Trust Simplification Act ("REITSA"), comprising Sections 1251 through 1263 of the TRA. The provisions of REITSA are effective for taxable years beginning after the date of enactment. Therefore the provisions shall apply to the Company beginning with its 1998 taxable year. 35 Under REITSA, a REIT may now receive income from impermissible services at a given property in an amount of up to one percent of the total income of such property, provided that the amount of any such impermissible service shall be not less that 150% of the cost to the REIT in rendering or furnishing such service. This provision is intended to permit a REIT to receive a de minimus amount of impermissible income from each of its properties. Moreover, REITSA repeals the prior requirement that no more than 30% of a REIT's gross income be derived from gain on the sale of stock or securities held for less than one year, dealer property that is not foreclosure property, and certain property held for less than four years. Subject to limited exceptions, distributions of a REIT are now treated as being made first out of the earliest accumulated earnings and profits of the REIT and any C corporation predecessor, rather than out of the the most recently accumulated earnings and profits. Other provisions of REITSA benefiting REITs generally are (i) the inclusion of payments under certain interest rate swaps, futures contracts and other hedging instruments as qualifying income, (ii) the treatment of any wholly owned subsidiary as a qualified REIT subsidiary, notwithstanding the fact that it might not have always been owned by the REIT, (iii) the imposition of a $25,000 fine ($50,000 in the event of intentional disregard) for failure to issue a shareholder demand letter, rather than loss of REIT status, and (iv) the granting of a tax credit to REIT shareholders for taxes by the REIT on undistributed capital gains. TAXATION OF SHAREHOLDERS TAXATION OF TAXABLE U.S. SHAREHOLDERS. As long as the Company qualifies as a REIT, distributions made to the Company's taxable U.S. shareholders out of current or accumulated earnings and profits (and not designated as capital gain dividends) will be taken into account by such U.S. shareholders as ordinary income and will not be eligible for the dividends received deduction generally available to corporations. As used herein, the term "U.S. shareholder" means a holder of Common Stock or Preferred Stock that for U.S. federal income tax purposes is (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, (iii) an estate whose income from sources without the United States is includible in gross income for U.S. federal income tax purposes regardless of its connection with the conduct of a trade or business within the United States or (iv) any trust with respect to which (A) a U.S. court is able to exercise primary supervision over the administration of such trust and (B) one or more U.S. fiduciaries have the authority to control all substantial decisions of the trust. Distributions that are designated as capital gain dividends will be taxed as long-term capital gains (to the extent they do not exceed the Company's actual net capital gain for the taxable year) without regard to the period for which the shareholder has held his stock. However, corporate shareholders may be required to treat up to 20% of certain capital gain dividends as ordinary income. Distributions in excess of current and accumulated earnings and profits will not be taxable to a shareholder to the extent that they do not exceed the adjusted basis of the shareholder's stock, but rather will reduce the adjusted basis of such stock. To the extent that distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a shareholder's stock, such distributions will be included in income as long-term capital gain (or short-term capital gain if the shares of stock have been held for one year or less) assuming the shares of stock are capital assets in the hands of the shareholder. In addition, any distribution declared by the Company in October, November or December of any year and payable to a shareholder of record on a specified date in any such month shall be treated as both paid by the Company and received by the shareholder on December 31 of such year, provided that the distribution is actually paid by the Company during January of the following calendar year. Shareholders may not include in their individual income tax returns any net operating losses or capital losses of the Company. Instead, such losses would be carried over by the Company for potential offset against its future income (subject to certain limitations). Taxable distributions from the Company and gain from the disposition of the stock will not be treated as passive activity income and, therefore, shareholders generally will not be able to apply any "passive activity losses" (such as losses from certain types of 36 limited partnerships in which the shareholder is a limited partner) against such income. In addition, taxable distributions from the Company generally will be treated as investment income for purposes of the investment interest limitations. Capital gains from the disposition of stock (or distributions treated as such) will be treated as investment income only if the shareholder so elects, in which case such capital gains will be taxed at ordinary income rates. The Company will notify shareholders after the close of the Company's taxable year as to the portions of the distributions attributable to that year that constitute ordinary income, return of capital and capital gain. TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON OR PREFERRED STOCK. In general, any gain or loss realized upon a taxable disposition of the stock by a shareholder who is not a dealer in securities will be treated as long-term capital gain or loss if the shares of stock have been held for more than one year and otherwise as short-term capital gain or loss. However, any loss upon a sale or exchange of shares of stock by a shareholder who has held such shares for six months or less (after applying certain holding period rules), will be treated as a long-term capital loss to the extent of distributions from the Company required to be treated by such shareholder as long-term capital gain. All or a portion of any loss realized upon a taxable disposition of shares of stock may be disallowed if other shares of stock are purchased within 30 days before or after the disposition. CAPITAL GAINS AND LOSSES. A capital asset generally must be held for more than one year in order for gain or loss derived from its sale or exchange to be treated as long-term capital gain or loss. The highest marginal individual income tax rate is 39.6%, and the tax rate on net capital gains applicable to individuals is 28% for capital assets held for less than 18 months and 20% for capital assets held for at least 18 months. Thus, the tax rate differential between capital gain and ordinary income for individuals may be significant. In addition, the characterization of income as capital or ordinary may affect the deductibility of capital losses. Capital losses not offset by capital gains may be deducted against an individual's ordinary income only up to a maximum annual amount of $3,000. Unused capital losses may be carried forward. All net capital gain of a corporate taxpayer is subject to tax at ordinary corporate rates. A corporate taxpayer can deduct capital losses only to the extent of capital gains, with unused losses being carried back three years and forward five years. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING. The Company will report to its U.S. shareholders and to the Service the amount of distributions paid during each calendar year, and the amount of tax withheld, if any. Under the backup withholding rules, a shareholder may be subject to backup withholding at the rate of 31% with respect to distributions paid unless such holder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with the applicable requirements of the backup withholding rules. A shareholder who does not provide the Company with his correct taxpayer identification number also may be subject to penalties imposed by the Service. Any amount paid as backup withholding will be creditable against the shareholder's income tax liability. In addition, the Company may be required to withhold a portion of capital gain distributions to any shareholders who fail to certify their non-foreign status to the Company. The Service issued proposed regulations in April 1996 regarding the backup withholding rules as applied to Non-U.S. Shareholders. These proposed regulations would alter the current system of backup withholding compliance and are proposed to be effective for distributions made after December 31, 1997. See "Federal Income Tax Considerations -- Taxation of Non-U.S. Shareholders." TAXATION OF TAX-EXEMPT SHAREHOLDERS. Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts ("Exempt Organizations"), generally are exempt from federal income taxation. However, they are subject to taxation on their unrelated business taxable income ("UBTI"). While many investments in real estate generate UBTI, the Service has issued a published ruling that dividend distributions by a REIT to an exempt employee pension trust do not constitute UBTI, provided that the 37 shares of the REIT are not otherwise used in an unrelated trade or business of the exempt employee pension trust. Based on that ruling, amounts distributed by the Company to Exempt Organizations generally should not constitute UBTI. However, if an Exempt Organization finances its acquisition of stock with debt, a portion of its income from the Company will constitute UBTI pursuant to the "debt-financed property" rules. Furthermore, social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans that are exempt from taxation under paragraphs (7), (9), (17) and (20), respectively, of Code Section 501(c) are subject to different UBTI rules, which generally will require them to characterize distributions from the Company as UBTI. In addition, in certain circumstances, a pension trust that owns more than 10% of the Company's stock is required to treat a percentage of the dividends from the Company as UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross income derived by the Company from an unrelated trade or business (determined as if the Company were a pension trust) divided by the gross income of the Company for the year in which the dividends are paid. The UBTI rule applies to a pension trust holding more than 10% of the Company's stock only if (i) the UBTI Percentage is at least 5%, (ii) the Company qualifies as a REIT by reason of the modification of the 5/50 Rule that allows the beneficiaries of the pension trust to be treated as holding shares of the Company in proportion to their actuarial interests in the pension trust and (iii) either (A) one pension trust owns more than 25% of the value of the Company's shares or (B) a group of pension trusts individually holding more than 10% of the value of the Company's shares collectively own more than 50% of the value of the Company's shares. TAXATION OF NON-U.S. SHAREHOLDERS. The rules governing U.S. federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships and other foreign shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt will be made herein to provide more than a summary of such rules. PROSPECTIVE NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE AND LOCAL INCOME TAX LAWS WITH REGARD TO AN INVESTMENT IN THE COMMON OR PREFERRED STOCK, INCLUDING ANY REPORTING REQUIREMENTS. Distributions to Non-U.S. Shareholders that are not attributable to gain from sales or exchanges by the Company of U.S. real property interests and are not designated by the Company as capital gains dividends will be treated as dividends of ordinary income to the extent that they are made out of current or accumulated earnings and profits of the Company. Such distributions ordinarily will be subject to a withholding tax equal to 30% of the gross amount of the distribution unless an applicable tax treaty reduces or eliminates that tax. However, if income from the investment in the stock is treated as effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade or business, the Non-U.S. Shareholder generally will be subject to federal income tax at graduated rates, in the same manner as U.S. shareholders are taxed with respect to such distributions (and also may be subject to the 30% branch profits tax in the case of a Non-U.S. Shareholder that is a non-U.S. corporation). The Company expects to withhold U.S. income tax at the rate of 30% on the gross amount of any such distributions made to a Non-U.S. Shareholder unless (i) a lower treaty rate applies and any required form evidencing eligibility for that reduced rate is filed with the Company or (ii) the Non-U.S. Shareholder files an IRS Form 4224 with the Company claiming that the distribution is effectively connected income. The Service issued proposed regulations is April 1996 that would modify the manner in which the Company complies with the withholding requirements. Distributions in excess of current and accumulated earnings and profits of the Company will not be taxable to a shareholder to the extent that such distributions do not exceed the adjusted basis of the shareholder's shares of stock, but rather will reduce the adjusted basis of such shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a Non-U.S. Shareholder's stock, such distributions will give rise to tax liability if the Non-U.S. Shareholder would otherwise be subject to tax on any gain from the sale or disposition of his shares of stock, as described below. Because it generally cannot be determined at the time a distribution is made whether or not such distribution will be in excess of current and accumulated earnings and profits, the entire 38 amount of any distribution normally will be subject to withholding at the same rate as a dividend. However, a Non-U.S. Shareholder can file a claim for refund with the Service for the overwithheld amount to the extent it is determined subsequently that such distribution was, in fact, in excess of the current and accumulated earnings and profits of the Company. In August 1996, the U.S. Congress passed the Small Business Job Protection Act of 1996, which requires the Company to withhold 10% of any distribution in excess of its current and accumulated earnings and profits. Consequently, although the Company intends to withhold at a rate of 30% on the entire amount of any distribution, to the extent that the Company does not do so, any portion of a distribution not subject to withholding at a rate of 30% will be subject to withholding at a rate of 10%. For any year in which the Company qualifies as a REIT, distributions that are attributable to gain from sales or exchanges by the Company of U.S. real property interests will be taxed to a Non-U.S. Shareholder under the provisions of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of U.S. real property interests are taxed to a Non-U.S. Shareholder as if such gain were effectively connected with a U.S. business. Non-U.S. Shareholders thus would be taxed at the normal capital gain rates applicable to U.S. shareholders (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). Distributions subject to FIRPTA also may be subject to a 30% branch profits tax in the hands of a foreign corporate shareholder not entitled to treaty relief or exemption. The Company is required to withhold 35% of any distribution that is designated by the Company as a capital gains dividend. The amount withheld is creditable against the Non-U.S. Shareholder's FIRPTA tax liability. Gain recognized by a Non-U.S. Shareholder upon a sale of his shares of stock generally will not be taxed under FIRPTA if the Company is a "domestically controlled REIT," defined generally as a REIT in which at all times during a specified testing period less than 50% in value of the stock was held directly or indirectly by foreign persons. Because the stock is publicly traded, no assurance can be given that the Company is or will be a "domestically controlled REIT." In addition, a Non-U.S. Shareholder that owns, actually and constructively, 5% or less of the Company's shares throughout a specified "look-back" period will not recognize gain on the sale of his shares taxable under FIRPTA if the shares are traded on an established securities market. Finally, gain not subject to FIRPTA will be taxable to a Non-U.S. Shareholder if (i) investment in the stock is effectively connected with the Non-U.S. Shareholder's U.S. trade or business, in which case the Non-U.S. Shareholder will be subject to the same treatment as U.S. shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and certain other conditions apply, in which case the nonresident alien individual will be subject to a 30% tax on the individual's capital gains. If the gain on the sale of the stock were to be subject to taxation under FIRPTA, the Non-U.S. Shareholder will be subject to the same treatment as U.S. shareholders with respect to such gain (subject to applicable alternative minimum tax, a special alternative minimum tax in the case of nonresident alien individuals, and the possible application of the 30% branch profits tax in the case of non-U.S. corporations). OTHER TAX CONSIDERATIONS The Company, the QRSs, the Property Partnerships and the Company's shareholders may be subject to state or local taxation in various state or local jurisdictions, including those in which it or they own property, transact business or reside. The state and local tax treatment of the Company and its shareholders may not conform to the Federal income tax consequences discussed above. Consequently, prospective investors should consult their own tax advisors regarding the effect of state and local tax laws on an investment in the Common Stock of the Company. TAX ASPECTS OF THE PROPERTY PARTNERSHIPS The following discussion summarizes certain federal income tax considerations applicable to the Company's direct or indirect investment in the Property Partnerships. The discussion does not cover state or local tax laws or any Federal tax laws other than income tax laws. 39 CLASSIFICATION AS A PARTNERSHIP The Company is entitled to include in its income its distributive share of the Property Partnerships' income and to deduct its distributive share of the Property Partnerships' losses only if the Property Partnerships are classified for Federal income tax purposes as partnerships rather than as associations taxable as corporations. An entity will be classified as a partnership, rather than as a corporation or an association taxable as a corporation for federal income tax purposes if the entity (i) is treated as a partnership under Treasury Regulations, effective January 1, 1997, relating to entity classification (the "Check-the-Box Regulations") and (ii) is not a "publicly traded" partnership. In general, under the Check-the-Box Regulations, an unincorporated entity with at least two members may elect to be classified either as an association taxable as a corporation or as a partnership. If such an entity fails to make an election, it generally will be treated as a partnership for federal income tax purposes. The federal income tax classification of an entity that was in existence prior to January 1, 1997, such as the Operating Partnership, the Texas Operating Partnership and all but one of the Subsidiary Partnerships, will be respected for all periods prior to January 1, 1997 if (i) the entity had a reasonable basis for its claimed classification, (ii) the entity and all members of the entity recognized the federal tax consequences of any changes in the entity's classification within the 60 months prior to January 1, 1997, and (iii) neither the entity nor any member of the entity was notified in writing by a taxing authority on or before May 8, 1996 that the classification of the entity was under examination. The Property Partnerships in existence prior to January 1, 1997 reasonably claimed partnership classification under the Treasury regulations relating to entity classification in effect prior to January 1, 1997 and such classification should be respected for federal income tax purposes. The Property Partnerships intend to continue to be classified as partnerships for federal income tax purposes and no Property Partnership will elect to be treated as an association taxable as a corporation under the Check-the-Box Regulations. Notwithstanding the Operating Partnership's classification as a partnership, the Operating Partnership could be treated as a corporation for federal income tax purposes if it were a "publicly traded partnership" ("PTP") within the meaning of Section 7704 of the Code. Under Section 7704 of the Code, a partnership is classified as a PTP if interests in the partnership are traded on an established securities market or are readily tradable on a secondary market or the substantial equivalent thereof. If so classified, the PTP is taxable as a corporation unless it qualifies for a special "90% qualifying income exception" in Section 7704(c) of the Code. Under that exception, a PTP is not subject to corporate-level tax if 90% or more of its gross income consists of dividends, interest, "rents from real property" (as that term is defined for purposes of the REIT rules, with certain modifications), gain from the sale or other disposition of real property, and certain other types of income. If the PTP fails to meet the 90% qualifying income exception for a taxable year, and (i) the IRS determines that the failure was inadvertent, (ii) the partnership takes steps to once again comply with the 90% qualifying income exception, and (iii) the partnership makes sure adjustments or payments (including with respect to the partners) as may be required by the IRS, then the partnership will be treated as continuing to satisfy the 90% qualifying income exception. The Regulations under Section 7704 (the "PTP Regulations") provide rules for determining whether a partnership is a PTP and provide certain safe harbors which, if satisfied, preclude a partnership from being so classified. However, under a special transitional rule in the PTP Regulations, a partnership that was actively engaged in an activity before December 4, 1995 is not subject to the PTP Regulations, but rather may comply with the requirements of IRS Notice 88-75, for all taxable years beginning on or before December 31, 2005, provided that the partnership does not add a substantial new line of business that does not give rise to qualifying income. Under a "private placement" safe harbor contained in IRS Notice 88-75, a partnership is not classified as a PTP if none of he interests therein was issued in a transaction registered under the Securities Act of 1933 and the partnership at all times does not have more than 500 partners (taking into account for this purpose the beneficial owners of interests in any upper-tier partnerships, S corporations or grantor trust that own an interest in the subject partnership). The Operating Partnership has been, and will be, in the business of owning and leasing real property before December 4, 1995 and thereafter through the date of the closing of the Offering. Thus, it should 40 qualify for transitional relief, and be subject to IRS Notice 88-75, provided it is not deemed to have added a "substantial new line of business" that gives rise to nonqualifying income. Assuming the Operating Partnership is not considered to have added a substantial new line of business in connection with the Transaction, it will satisfy the private placement safe harbor of IRS Notice 88-75 because it will have fewer than 500 partners (determined after looking through upper-tier pass-through entities). If the Operating Partnership is or becomes subject to the PTP Regulations by reason of adding a substantial new line of business, it will not satisfy the private placement safe harbor of such regulations because such safe harbor requires, among other things, that the partnership have no more than 100 partners. The Operating Partnership presently has, and is expected to have in the future, more than 100 partners. Moreover, the Operating Partnership may not be able to satisfy any other safe harbor of the PTP Regulations. Consequently, there is a risk that the ability of holders of Class A Common Units to exchange their Class A Common Units for shares of Common Stock could cause the interests in Operating Partnership to be viewed as readily tradable on a secondary market or the substantial equivalent thereof. In the event, although the Operating Partnership would be classified as a PTP, Counsel is of the opinion that the Operating Partnership would satisfy the 90% qualifying income exception and therefore be exempt from corporate-level tax. However, under Section 469(k) of the Code, the partners of Operating Partnership would be required to apply the passive loss limitations of Section 469 separately to the income and loss from the Operating Partnership, even though it satisfies the 90% qualifying income exception. In rendering its opinion that the Operating Partnership will be treated for federal income tax purposes as a partnership and not as a corporation or an association taxable as a corporation, and that the Operating Partnership, if it were classified as a publicly traded partnership, would satisfy the 90% qualifying income exception of Section 7704(c) of the Code, Counsel has relied on the following factual representations made by the Operating Partnership: 1. The Operating Partnership operate in accordance with Tennessee law, the Partnership Agreement, and the statements and representations made in this Prospectus. 2. No Units will be traded on an established securities market or issued in a transaction registered under the Securities Act of 1933, and the Operating Partnership will at no time have more than 500 Partners (determined by treating as a Partner each person indirectly owning an interest through a partnership, a grantor trust, or an S corporation). 3. Certain representations regarding the nature and type of the Operating Partnership's expected sources of income. The Company has obtained an opinion of Baker, Donelson, Bearman & Caldwell that each Property Partnership will be classified as a partnership for federal income tax purposes and not as a corporation or an association taxable as a corporation or as a publicly traded partnership. If for any reason the Operating Partnership were to be taxable as a corporation, rather than as a partnership, for Federal income tax purposes, the Company would not be able to satisfy the income and asset requirements for REIT status. See "Requirements for Qualification (Income Test)" and "Requirements for Qualification (Asset Tests)." If the Texas Operating Partnership or a Subsidiary Partnership were to be taxable as a corporation for tax purposes, the Company may cease to qualify as a REIT because the value of the Company's ownership interest in such partnership would exceed 10% of the partnership's voting interests. See "Requirements for Qualification Asset Tests." In addition, any change in a Property Partnership's status for tax purposes might be treated as a taxable event, in which case the Company might incur a tax liability without any related cash distribution. See "Requirements for Qualification -- Annual Distribution Requirements." Further, items of income and deduction of such Property Partnership would not pass through to its partners, and its partners would be treated as stockholders for tax purposes. Consequently, the Property Partnership would be required to pay income tax at corporate tax rates on its net income, and distributions to its partners would constitute dividends that would not be deductible in computing the partnership's taxable income. 41 INCOME TAXATION OF THE PROPERTY PARTNERSHIPS AND THEIR PARTNERS PARTNERS, NOT THE PARTNERSHIP, SUBJECT TO TAX A partnership is not a taxable entity for federal income tax purposes. Rather, the Company will be required to take into account its allocable share of a Property Partnership's income, gains, losses, deductions, and credits for any taxable year of the Property Partnership ending within or with the taxable year of the Company, without regard to whether the Company has received or will receive any distribution from the Property Partnership. PARTNERSHIP ALLOCATIONS Although a partnership agreement generally will determine the allocation of income and losses among partners, such allocations will be disregarded for tax purposes under Section 704(b) of the Code if they do not comply with the provisions of Section 704(b) of the Code and the Treasury Regulations promulgated thereunder. If an allocation is not recognized for federal income tax purposes, the item subject to the allocation will be reallocated in accordance with the partners' interest in the partnership, which will be determined by taking into account all of the facts and circumstances relating to the economic arrangement of the partners with respect to such item. TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTIES Pursuant to Section 704(c) of the Code, income, gain loss, and deduction attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership must be allocated for federal income tax purposes in a manner such that the contributor is charged with, or benefits from, the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of such unrealized gain or unrealized loss is generally equal to the difference between the fair market value of the contributed property at the time of contribution and the adjusted tax basis of such property at the time of contribution. The Treasury Department has issued regulations requiring partnerships to use a "reasonable method" for allocating items affected by Section 704(c) of the Code and outlining two reasonable allocation methods. Under the Partnership Agreement, the Company, as general partner of the Operating Partnership, in its sole discretion may select a method of making Code Section 704(c) allocations. The application of Section 704(c) to the Operating Partnership is not entirely clear and may be affected by Treasury Regulations promulgated in the future. BASIS IN PARTNERSHIP INTEREST The Company's adjusted tax basis in its partnership interest in a Property Partnership generally is equal to (i) the amount of cash and the basis of any other property contributed to the partnership by the Company; (ii) increased by (A) its allocable share of the partnership's income and (B) its allocable share of indebtedness of the partnership and (iii) reduced, but not below zero, by (I) the Company's allocable share of the Property Partnership's loss and (II) the amount of cash distributed to the Company and by constructive distributions resulting from a reduction in the Company's share of indebtedness of the Property Partnership. If the allocation of the Company's distributive share of a Property Partnership's loss would reduce the adjusted tax basis of the Company's partnership interest in the Property Partnership below zero, the recognition of such loss will be deferred until such time as the recognition of such loss would not reduce the Company's adjusted tax basis before zero. To the extent that a Property Partnership's distributions, or any decrease in the Company's share of the indebtedness of the Property Partnership (such decrease being considered a constructive cash distribution to the partners), would reduce the Company's adjusted tax basis below zero, such distributions (including such construction distributions) constitute taxable income to the Company. Such distributions and constructive distributions normally will be characterized as capital gain, and, if the Company's partnership interest in a Property Partnership has been held for longer than the long-term capital gain holding period (currently one year), the distributions and constructive distribution will constitute long-term capital gain. 42 DEPRECIATION DEDUCTIONS. To the extent that Communities have been or will be acquired in exchange for cash, the initial basis in the Communities for federal income tax purposes generally was or will be equal to the price paid to acquire the Communities. The Property Partnerships depreciate such depreciable property for federal income tax purposes under either the modified accelerated cost recovery system of depreciation ("MACRS") or the alternative depreciation system of depreciation ("ADS"). The Property Partnerships use MACRS for the furnishings and equipment in the Communities. Under MACRS, the Property Partnerships generally depreciate furnishings and equipment in service during the last three months of a taxable year. A mid-quarter depreciation convention must be used for the furnishings and equipment placed in service during that year. The Property Partnerships use ADS for the buildings and improvements comprising the Communities. Under ADS, the Property Partnerships generally depreciate such buildings and improvements over a 40-year recovery period using a straight line method and a mid-month convention. However, to the extent that the Operating Partnership acquired the Initial Properties in exchange for units of limited partnership interest, the Operating Partnership's initial basis in the Initial Properties for federal income tax purposes is the same as the selling partnership's basis in the Initial Properties on the date of acquisition. The Operating Partnership depreciates such depreciable property for Federal income tax purposes under the same methods previously used by the selling partnerships. PLAN OF DISTRIBUTION The Company may sell the Offered Securities to one or more underwriters or dealers for public offering and sale by them in syndicated or non-syndicated public offerings or distributions, block trades, or otherwise, or may sell the Offered Securities to investors directly or through designated agents. Any such underwriter, dealer or agent involved in the offer and sale of the Offered Securities will be named in the applicable Prospectus Supplement. Underwriters may offer and sell the Offered Securities at a fixed price or prices, which may be changed, or from time to time at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. The Company also may, from time to time, authorize underwriters acting as agents to offer and sell the Offered Securities upon the terms and conditions set forth in any Prospectus Supplement. Underwriters may sell the Offered Securities to or through dealers, and such dealers may receive compensation in the form of discounts, concessions or commissions (which may be changed from time to time) from the underwriters and/or from the purchasers for whom they may act as agent. The Company may, from time to time, offer and sell the Offered Securities directly to dealers, for their own account, utilizing any of the pricing mechanisms described in the first sentence of this paragraph. Any underwriting compensation paid by the Company to underwriters or agents in connection with the offering of the Offered Securities and any discounts, concessions or commissions allowed by underwriters to participating dealers will be set forth in the applicable Prospectus Supplement. Underwriters, dealers and agents participating in the distribution of the Offered Securities may be deemed to be underwriters, and any discounts and commissions received by them from the Company or from purchasers of the Offered Securities and any profit realized by them on resale of the Offered Securities may be deemed to be underwriting discounts and commissions under the Securities Act. Underwriters, dealers and agents may be entitled, under agreements entered into with the Company, to indemnification against and contribution toward certain civil liabilities, including liabilities under the Securities Act. Offers to purchase the Securities may be solicited by agents designated by the Company from time to time. Any such agent involved in the offer or sale of the Securities will be named, and any commissions payable by the company to such agent will be set forth in the Prospectus Supplement. Unless otherwise indicated in the Prospectus Supplement, any such agent will be acting on a best efforts basis for the period of its appointment. Any such agent may be deemed to be an underwriter, as that term is defined in the Securities Act, of the Securities so offered and sold. If an underwriter or underwriters are utilized in the sale of Offered Securities, the Company will execute an underwriting agreement with such underwriter or underwriters at the time an agreement for such 43 sale is reached, and the names of the specific managing underwriter or underwriters, as well as any other underwriters, and the terms of the transactions, including compensation of the underwriters and dealers, in any, will be set forth in the Prospectus Supplement, which will be used by the underwriters to make resales of the Offered Securities. If a dealer is utilized in the sale of the Offered Securities, the Company will sell such Offered Securities to the dealer, as principal. The dealer may then resell such Offered Securities to the public at varying prices to be determined by such dealer at the time of resale. The name of the dealer and the terms of the transactions will be set forth in the Prospectus Supplement relating thereto. Offers to purchase the securities may be solicited directly by the Company and sales thereof may be made by the Company directly to institutional investors or others. The terms of any such sales, including the terms of any bidding or auction prices, if utilized, will be described in the Prospectus Supplement relating thereto. Agents, underwriters and dealers may be entitled under agreements which may be entered into with the Company to indemnification by the Company against certain liabilities, including liabilities under the Securities Act, and any such agents, underwriters or dealers, or their affiliates may be customers of, engage in transactions with or perform services for the Company in the ordinary course of business. If so indicated in the Prospectus Supplement, the Company will authorize agents and underwriters to solicit offers by certain institutions to purchase Debt Securities from the Company at the public offering price set forth in the Prospectus Supplement pursuant to Delayed Delivery Contracts ("Contracts") providing for payment and delivery on the date stated in the Prospectus Supplement. Such Contracts will be subject to only those conditions set forth in the Prospectus Supplement. Each Contract will be for an amount not less than, and the principal amount of Offered Securities sold pursuant to Contracts shall not be less nor more than, the respective amounts stated in such Prospectus Supplement. Institutions with which Contracts, when authorized, may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions and other institutions, but will in all cases be subject to approval of the Company. Contracts will not be subject to any conditions except (i) the purchase by an institution of the Offered Securities covered by its Contract shall not at the time of delivery be prohibited under the laws of any jurisdiction in the United States to which such institution is subject and (ii) the Company shall have sold to such underwriters the total principal amount of the Offered Securities less the principal amount thereof covered by Contracts. A commission indicated in the Prospectus Supplement will be paid to underwriters and agents soliciting purchases of Debt Securities pursuant to Contracts accepted by the Company. EXPERTS The Consolidated Financial Statements incorporated in this Prospectus by reference to the Annual Report on Form 10-K for the year ended December 31, 1996, have been so incorporated in reliance on the report of KPMG Peat Marwick LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. LEGAL MATTERS The validity of the issuance of the Offered Securities offered pursuant to this Prospectus or any Prospectus Supplement will be passed upon for the Company by Baker, Donelson, Bearman & Caldwell, Memphis, Tennessee. In addition, the description of federal income tax consequences contained in the section of the Prospectus entitled "Federal Income Tax Considerations" is based on the opinion of Baker, Donelson, Bearman & Caldwell. 44 [LOGO] MID-AMERICA APARTMENT COMMUNITIES -----END PRIVACY-ENHANCED MESSAGE-----