UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 1-12762 MID-AMERICA APARTMENT COMMUNITIES, INC. (Exact Name of Registrant as Specified in Charter) TENNESSEE 62-1543819 (State of Incorporation) (I.R.S. Employer Identification Number) 6584 POPLAR AVENUE, SUITE 300 MEMPHIS, TENNESSEE 38138 (Address of principal executive offices) (901) 682-6600 Registrant's telephone number, including area code (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Number of Shares Outstanding Class at April 15, 2002 Common Stock, $.01 par value 17,499,745
TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2002 (Unaudited) and December 31, 2001 Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 (Unaudited) Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 (Unaudited) Notes to Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk PART II - OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures
<TABLE> Mid-America Apartment Communities, Inc. Consolidated Balance Sheets March 31, 2002 (Unaudited) and December 31, 2001 (Dollars in thousands) <CAPTION> 2002 2001 ------------ ------------- <S> <C> <C> Assets: Real estate assets: Land $ 124,993 $ 124,993 Buildings and improvements 1,265,796 1,265,327 Furniture, fixtures and equipment 33,869 32,290 Construction in progress 13,284 10,915 - --------------------------------------------------------------------------------------------------------- 1,437,942 1,433,525 Less accumulated depreciation (243,227) (229,913) - --------------------------------------------------------------------------------------------------------- 1,194,715 1,203,612 Land held for future development 1,366 1,366 Commercial properties, net 3,593 4,910 Investment in and advances to real estate joint venture 7,056 7,045 - --------------------------------------------------------------------------------------------------------- Real estate assets, net 1,206,730 1,216,933 Cash and cash equivalents 12,521 12,192 Restricted cash 8,489 11,240 Deferred financing costs, net 9,901 10,415 Other assets 14,955 12,708 - --------------------------------------------------------------------------------------------------------- Total assets $ 1,252,596 $ 1,263,488 ========================================================================================================= Liabilities and Shareholders' Equity: Liabilities: Notes payable $ 783,607 $ 779,664 Accounts payable 1,356 1,219 Accrued expenses and other liabilities 23,767 31,691 Security deposits 4,589 4,514 Deferred gain on disposition of properties 4,091 4,140 - --------------------------------------------------------------------------------------------------------- Total liabilities and deferred gain 817,410 821,228 Minority interest 44,760 46,431 Shareholders' equity: Preferred stock, $.01 par value, 20,000,000 shares authorized, $173,470,750 or $25 per share liquidation preference: 2,000,000 shares at 9.5% Series A Cumulative 20 20 1,938,830 shares at 8.875% Series B Cumulative 19 19 2,000,000 shares at 9.375% Series C Cumulative 20 20 1,000,000 shares at 9.5% Series E Cumulative 10 10 Common stock, $.01 par value (authorized 50,000,000 shares; issued 17,483,893 and 17,452,678 shares at March 31, 2002 and December 31, 2001, respectively) 175 175 Additional paid-in capital 550,908 550,176 Other (764) (774) Accumulated distributions in excess of net income (154,994) (145,061) Accumulated other comprehensive loss (4,968) (8,756) - --------------------------------------------------------------------------------------------------------- Total shareholders' equity 390,426 395,829 - --------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,252,596 $ 1,263,488 ========================================================================================================= See accompanying notes to consolidated financial statements. </TABLE>
<TABLE> Mid-America Apartment Communities, Inc. Consolidated Statements of Operations Three months ended March 31, 2002 and 2001 (Dollars in thousands, except per share data) (Unaudited) <CAPTION> Three months ended March 31, ------------------------- 2002 2001 ------------ ----------- <S> <C> <C> Revenues: Rental revenues $ 55,024 $ 55,535 Other property revenues 635 746 - ------------------------------------------------------------------------------------------- Total property revenues 55,659 56,281 Interest and other non-property income 134 287 Management and fee income, net 186 188 Equity in loss of real estate joint venture (23) (145) - ------------------------------------------------------------------------------------------- Total revenues 55,956 56,611 - ------------------------------------------------------------------------------------------- Expenses: Property operating expenses: Personnel 6,485 6,042 Building repairs and maintenance 2,175 2,035 Real estate taxes and insurance 7,002 6,650 Utilities 1,572 2,008 Landscaping 1,543 1,526 Other operating 2,410 2,541 Depreciation and amortization 13,509 12,997 - ------------------------------------------------------------------------------------------- 34,696 33,799 Property management expenses 2,472 2,589 General and administrative expenses 1,446 1,441 Interest expense 12,362 13,459 Amortization of deferred financing costs 657 529 - ------------------------------------------------------------------------------------------- Total expenses 51,633 51,817 - ------------------------------------------------------------------------------------------- Income before gain on dispositions and minority interest in operating partnership income 4,323 4,794 Gain on dispositions, net 64 169 - ------------------------------------------------------------------------------------------- Income before minority interest in operating partnership income 4,387 4,963 Minority interest in operating partnership income 87 102 - ------------------------------------------------------------------------------------------- Net income 4,300 4,861 Preferred dividend distribution 4,028 4,028 - ------------------------------------------------------------------------------------------- Net income available for common shareholders $ 272 $ 833 =========================================================================================== (Continued) </TABLE>
<TABLE> Mid-America Apartment Communities, Inc. Consolidated Statements of Operations (Continued) Three months ended March 31, 2002 and 2001 (Dollars in thousands, except per share data) (Unaudited) <CAPTION> Three months ended March 31, ------------------------ 2002 2001 ----------- ----------- <S> <C> <C> Net income available per common share: Basic (in thousands): Average common shares outstanding 17,455 17,479 =========================================================================================== Basic earnings per share: Net income available per common share $ 0.02 $ 0.05 =========================================================================================== Diluted (in thousands): Average common shares outstanding 17,455 17,479 Effect of dilutive stock options 141 31 - ------------------------------------------------------------------------------------------- Average dilutive common shares outstanding 17,596 17,510 =========================================================================================== Diluted earnings per share: Net income available per common share $ 0.02 $ 0.05 =========================================================================================== See accompanying notes to consolidated financial statements. </TABLE>
<TABLE> Mid-America Apartment Communities, Inc. Consolidated Statements of Cash Flows Three months ended March 31, 2002 and 2001 (Dollars in thousands) <CAPTION> 2002 2001 ---------- ----------- <S> <C> <C> Cash flows from operating activities: Net income $ 4,300 $ 4,861 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,166 13,526 Amortization of unearned stock compensation 124 131 Equity in loss of real estate joint venture 23 145 Minority interest in operating partnership income 87 102 Gain on dispositions, net (64) (169) Changes in assets and liabilities: Restricted cash 2,751 4,529 Other assets (2,247) 2,228 Accounts payable 137 (691) Accrued expenses and other (4,006) (5,694) Security deposits 75 10 - ---------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 15,346 18,978 - ---------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Improvements to properties (2,865) (4,163) Construction of units in progress and future development (545) (4,949) Proceeds from disposition of real estate assets - 600 Distributions from real estate joint venture (34) 166 - ---------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (3,444) (8,346) - ---------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net change in credit lines 5,000 11,417 Principal payments on notes payable (1,057) (1,261) Payment of deferred financing costs (143) (28) Repurchase of common stock - (2,418) Proceeds from issuances of common shares and units 565 420 Distributions to unitholders (1,705) (1,718) Dividends paid on common shares (10,205) (10,248) Dividends paid on preferred shares (4,028) (4,028) - ---------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (11,573) (7,864) - ---------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 329 2,768 - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, beginning of period 12,192 16,095 - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 12,521 $ 18,863 ================================================================================================================ Supplemental disclosure of cash flow information: Interest paid $ 12,222 $ 13,478 Supplemental disclosure of noncash investing and financing activities: Conversion of units for common shares $ 53 $ 149 Issuance of restricted common shares $ 114 $ 120 Interest capitalized $ 127 $ 476 See accompanying notes to consolidated financial statements. </TABLE>
MID-AMERICA APARTMENT COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 and 2001 (Unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with the accounting policies in effect as of December 31, 2001, as set forth in the annual consolidated financial statements of Mid-America Apartment Communities, Inc. ("MAAC" or the "Company"), as of such date. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements have been included and all such adjustments were of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three month period ended March 31, 2002 is not necessarily indicative of the results to be expected for the full year. 2. Share and Unit Information At March 31, 2002, 17,483,893 common shares and 2,914,837 operating partnership units were outstanding, a total of 20,398,730 shares and units. Additionally, MAAC had outstanding options for 1,463,744 shares of common stock at March 31, 2002. 3. Segment Information At March 31, 2002, the Company owned or had ownership interest in, and operated 122 apartment communities in 12 different states from which it derives all significant sources of earnings and operating cash flows. The Company's operational structure is organized on a decentralized basis, with individual property managers having overall responsibility and authority regarding the operations of their respective properties. Each property manager individually monitors local and area trends in rental rates, occupancy percentages, and operating costs. Property managers are given the on-site responsibility and discretion to react to such trends in the best interest of the Company. Management evaluates the performance of each individual property based on its contribution of revenues and net operating income ("NOI"), which is composed of property revenues less all operating costs including insurance and real estate taxes. The Company's reportable segments are its individual properties because each is managed separately and requires different operating strategy and expertise based on the geographic location, community structure and quality, population mix, and numerous other factors unique to each community. The revenues, profits and assets for the aggregated communities are summarized as follows (Dollars in thousands): <TABLE> <CAPTION> Three months ended March 31, ------------------------- 2002 2001 ------------ ------------ <S> <C> <C> Multifamily rental revenues $ 59,641 $ 60,245 Other multifamily revenues 671 784 ----------- ------------ Segment revenues 60,312 61,029 Reconciling items to consolidated revenues: Joint venture revenues (4,653) (4,748) Interest and other non-property income 134 188 Management fee income, net 186 (145) Equity in loss of real estate joint venture (23) 287 ----------- ------------ Total revenues $ 55,956 $ 56,611 =========== ============ Multifamily net operating income $ 37,117 $ 38,167 Reconciling items to net income available for common shareholders: Joint venture net operating income (2,645) (2,688) Interest and other non-property income 134 287 Management and fee income, net 186 188 Equity in loss of real estate joint venture (23) (145) Property management expenses (2,472) (2,589) General and administrative expenses (1,446) (1,441) Depreciation and amortization (13,509) (12,997) Interest expense (12,362) (13,459) Amortization of deferred financing costs (657) (529) Gain on dispositions, net 64 169 Minority interest in operating partnership (87) (102) Dividends on preferred shares (4,028) (4,028) ----------- ------------ Net income available for common shareholders $ 272 $ 833 =========== ============ </TABLE> <TABLE> <CAPTION> March 31, 2002 December 31, 2001 ----------------------- ----------------------- <S> <C> <C> Assets: Multifamily real estate assets $ 1,542,352 $ 1,537,625 Accumulated depreciation - multifamily assets (253,930) (239,586) ----------------------- ----------------------- Segment assets 1,288,422 1,298,039 ----------------------- ----------------------- Reconciling items to total assets: Joint venture multifamily real estate assets, net (93,707) (94,427) Land held for future development 1,366 1,366 Commercial properties, net 3,593 4,910 Investment in and advances to real estate joint venture 7,056 7,045 Cash and restricted cash 21,010 23,432 Other assets 24,856 23,123 ----------------------- ----------------------- Total assets $ 1,252,596 $ 1,263,488 ======================= ======================= </TABLE> 4. Derivative Financial Instruments In the normal course of business, the Company uses certain derivative financial instruments to manage, or hedge, the interest rate risk associated with the Company's variable rate debt or as hedges in anticipation of future debt transactions to manage well-defined interest rate risk associated with the transaction. The Company does not use derivative financial instruments for speculative or trading purposes. Further, the Company has a policy of entering into contracts with major financial institutions based upon their credit rating and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designated to hedge, the Company has not sustained any material loss from those instruments nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives. The Company requires that hedging derivatives instruments are effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking the hedge transaction. This process includes linking all derivatives that are designated as fair-value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedges inception and on an ongoing basis, whether the derivatives used are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively. All of the Company's derivative financial instruments that are reported at fair value and are represented on the balance sheet were characterized as cash flow hedges. These transactions hedge the future cash flows of debt transactions through interest rate swaps that convert variable payments to fixed payments. The unrealized gains/losses in the fair value of these hedges are reported on the balance sheet with a corresponding adjustment to accumulated other comprehensive income, with any ineffective portion of the hedging transaction reclassified to earnings. During the three months ended March 31, 2002, the ineffective portion of the hedging transaction was not significant. Within the next twelve months, the Company expects to reclassify to earnings an estimated $100,000 of the current balance held in accumulated other comprehensive income. 5. Goodwill and Intangible Asset - Adoption of Statement 142 Statement 142 requires disclosure of what net income would have been in all periods presented exclusive of amortization expense recognized in those periods related to goodwill. Below is a reconciliation of reported net income to adjusted net income and earnings per share (Dollars in thousands, except earnings per share): <TABLE> <CAPTION> Three months ended March 31, --------------------------------------------------------- 2001 ------------------------------------------- 2002 Adjusted Adjustment Reported ------------ ------------- -------------- ------------ <S> <C> <C> <C> <C> Net income $ 4,300 $ 4,927 $ 66 $ 4,861 Preferred dividend distribution 4,028 4,028 - 4,028 ------------ ------------- -------------- ------------ Net income available for common shareholders $ 272 $ 899 $ 66 $ 833 ============ ============= ============== ============ Basic earnings per share ------------ ------------- -------------- ------------ Net income available per common share $ 0.02 $ 0.05 $ 0.00 $ 0.05 ============ ============= ============== ============ Diluted earnings per share ------------ ------------- -------------- ------------ Net income available per common share $ 0.02 $ 0.05 $ 0.00 $ 0.05 ============ ============= ============== ============ </TABLE> At March 31, 2002, the amount of unamortized goodwill was $5.8 million. PART I. Financial Information ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following is a discussion of the consolidated financial condition and results of operations of the Company for the three months ended March 31, 2002 and 2001. This discussion should be read in conjunction with the financial statements appearing elsewhere in this report. These financial statements include all adjustments, which are, in the opinion of management, necessary to reflect a fair statement of the results for the interim periods presented, and all such adjustments are of a normal recurring nature. The total number of apartment units the Company owned or had an ownership interest in, including the 10 properties containing 2,793 apartment units owned by its 33.3% unconsolidated joint venture, at March 31, 2002 was 33,434 in 122 communities compared to 33,778 units in 124 communities owned at March 31, 2001. The average monthly rental per apartment unit for the Company's non-development, 100% owned apartment units increased to $660 at March 31, 2002 from $646 at March 31, 2001. Occupancy for these same apartment units at March 31, 2002 and 2001 was 94.1% and 94.9%, respectively. FUNDS FROM OPERATIONS Funds from operations ("FFO') represents net income (computed in accordance with accounting principles generally accepted in the United States of America, or "GAAP") excluding extraordinary items, minority interest in Operating Partnership income, gain or loss on disposition of real estate assets, plus depreciation related to real estate, and adjustments for the Joint Venture to reflect FFO on the same basis. This definition of FFO is in accordance with the National Association of Real Estate Investment Trust's ("NAREIT") recommended definition. The Company's policy is to expense the cost of interior painting, vinyl flooring, and blinds as incurred for stabilized properties. During the stabilization period for acquisition properties, these items are capitalized as part of the total repositioning program of newly acquired properties, and, thus are not deducted in calculating FFO. FFO should not be considered as an alternative to net income or any other GAAP measurement of performance, as an indicator of operating performance or as an alternative to cash flow from operating, investing, and financing activities as a measure of liquidity. The Company believes that FFO is helpful in understanding the Company's results of operations in that such calculation reflects the Company's ability to support interest payments and general operating expenses before the impact of certain activities such as changes in other assets and accounts payable. The Company's calculation of FFO may differ from the methodology for calculating FFO utilized by other REITs and, accordingly, may not be comparable to such other REITs. Depreciation expense includes approximately $270,000 and $167,000 for the three months ended March 31, 2002 and 2001, respectively, which relates to computer software, office furniture and fixtures and other assets found in other industries and which is required to be recognized, for purposes of computing funds from operations. Funds from operations for the three months ended March 31, 2002 and 2001 is calculated as follows (in thousands): <TABLE> <CAPTION> Three months ended March 31, --------------------------- 2002 2001 ------------- ------------- <S> <C> <C> Net income available for common shareholders $ 272 $ 833 Depreciation and amortization - real property 13,239 12,830 Adjustment for joint venture depreciation 343 313 Minority interest in operating partnership 87 102 Gain (loss) on dispositions of real property 64 (65) --------------------------- Funds from operations $ 13,877 $ 14,143 =========================== Weighted average shares and units: Basic 20,371 20,416 Diluted 20,512 20,446 </TABLE> RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MARCH 31, 2002 TO THE THREE MONTHS ENDED MARCH 31, 2001 Property revenues for 2002 decreased by approximately $622,000 due to decreases of (i) $921,000 from the sale of the Advantages and Canyon Creek apartments in 2001 (the "2001 Dispositions"), and (ii) $510,000 from the communities held throughout both periods. These decreases were partially offset by an increase in property revenues of $809,000 from the communities in development that were in lease-up (the "Development Communities"). Property operating expenses include costs for property personnel, building repairs and maintenance, real estate taxes and insurance, utilities, landscaping and other property related costs. Property operating expenses for 2002 increased by approximately $385,000 due primarily to increases of (i) $183,000 from the Development Communities, and (ii) $513,000 from the communities held throughout both periods. These increases were partially offset by a decrease in operating expense of $311,000 from the 2001 Dispositions. Property management expenses decreased approximately $117,000 over the same period last year mainly related to decreases in certain health benefits and incentives. General and administrative expenses remained relatively flat over the first quarter of last year. Depreciation and amortization expense increased by approximately $512,000 primarily due to the increases of (i) $300,000 from the Development Communities, and (ii) $367,000 from the communities held throughout both periods. These increases were partially offset by the depreciation and amortization expense decrease of $155,000 from the 2001 Dispositions. Interest expense over the three months ended March 31, 2001, decreased by approximately $1,097,000 as refinancings of debt in 2001 and the drop in variable rates decreased the Company's average interest rate from 7.1% at March 31, 2001 to 6.3% at March 31, 2002. LIQUIDITY AND CAPITAL RESOURCES Net cash flow provided by operating activities decreased to $15,346,000 for the first quarter of 2002 from $18,978,000 for the first quarter of 2001 mainly due to changes in operating assets and liabilities related to the release of certain cash escrow amounts due to debt refinancings and the timing of cash payments for certain prepaid items. During the first three months of 2002, the Company invested $545,000 in construction of new assets, reduced from $4,949,000 during the same period in 2001. The Company expects to fund an additional $128,000 during 2002 to finish the construction of Reserve at Dexter Lake III to complete the entire $300 million development program begun in 1997. The following table summarizes the Company's remaining communities in various stages of lease-up and construction, as of March 31, 2002 (Dollars in thousands): <TABLE> <CAPTION> Anticipated Total Costs to Finish Initial Stabil- Location Units Date Date Occupancy ization ------------- ----- -------- -------- --------- ----------- Completed Communities In Lease-up: <S> <C> <C> <C> <C> <C> <C> Grand Reserve Lexington Lexington, KY 370 $ 31,024 3Q 2000 4Q 1999 2Q 2002 Reserve at Dexter Lake II Memphis, TN 244 16,032 2Q 2001 1Q 2000 3Q 2002 Grand View Nashville Nashville, TN 433 35,998 2Q 2001 3Q 2000 2Q 2002 </TABLE> <TABLE> <CAPTION> Anticipated Anticipated Total Forecasted Costs to Finish Initial Stabil- Location Units Cost Date Date Occupancy ization ------------ ----- ---------- -------- ----------- --------- ----------- Development Communities Under Construction: <S> <C> <C> <C> <C> <C> <C> <C> Reserve at Dexter Lake III Memphis, TN 244 $ 15,677 $ 15,549 2Q 2002 2Q 2001 4Q 2002 </TABLE> The Company's projections assume that the three properties completed but still under lease-up will substantially stabilize during 2002. At March 31, 2002, 903 of the 1,047 apartments were leased, and the Company believes that the completion of stabilization of these properties in 2002 is highly likely. The Company does not anticipate that its liquidity will be impacted should these properties fail to stabilize in 2002. The one remaining property that was still under construction at March 31, 2002 had 68 of 244 units leased. The Company has forecast that this property will stabilize late in 2002. Again, the Company does not anticipate any material lack of liquidity should the property fail to stabilize in 2002. Capital improvements to existing properties during the first quarter of 2002 and 2001 totaled $2,865,000 and $4,163,000, respectively. Actual capital expenditures are summarized below (Dollars in thousands): <TABLE> <CAPTION> March 31, 2002 March 31, 2001 -------------- -------------- <S> <C> <C> Recurring capital expenditures at stabilized properties $ 1,800 $ 2,948 Revenue enhancing capital expenditures at stabilized properties 649 801 Capital improvements to pre-stabilized properties 405 - Corporate/commercial capital improvements 11 414 -------------- -------------- $ 2,865 $ 4,163 </TABLE> Net cash used in financing activities increased from $7,864,000 for the first three months ended March 31, 2001 to $11,573,000 during the same period in 2002. During the first quarter of 2002 the Company increased its credit lines by $5,000,000 as compared to $11,417,000 in the first quarter of 2001. During the first quarter of 2001, the Company used a net of $2,418,000 to repurchase shares of its common stock. No shares were repurchased during the first quarter of 2002. At March 31, 2002, the Company had $291,719,000 outstanding of a $295,000,000 secured credit facility with Prudential Mortgage Capital, credit-enhanced by FNMA ("FNMA Facility"), which matures in 2009. The FNMA facility provides for both fixed and variable rate borrowings, and at March 31, 2002 was fully drawn under the terms of the borrowing base calculations in effect. The interest rate on the variable portion renews every 90 days and is based on the FNMA Discount Mortgage Backed Security ("DMBS") rate on the date of renewal, which has typically approximated three-month Libor less an average spread of 0.09%, plus a credit enhancement fee of 0.67% based on the outstanding borrowings. The variable interest rate at March 31, 2002 was 2.49%. Fixed rate borrowings under the facility totaled $110 million at March 31, 2002, at interest rates (inclusive of credit-enhancement fees) from 5.77% to 7.71%, and maturities from 2006 to 2009. Compass Bank provides an unsecured credit facility to the Company. There was $10 million outstanding under this facility at March 31, 2002. The Company uses interest rate swaps to manage its current and future interest rate risk. The Company has $100 million of interest rate swaps outstanding of three-month Libor fixed leg and $25 million of interest rate swaps outstanding of one-month Libor fixed leg, with expirations between 2003 and 2007, and which have to date proven to be highly effective hedges of the Company's variable rate debt. Through the use of these swaps the Company believes it has effectively fixed the rate during these periods of $125 million of variable rate borrowings issued through the FNMA Facility and Compass Bank, leaving only $66,719,000 of the FNMA Facility of which the interest rate has not been hedged. The Company has also issued a $16,990,000 swap of the BMA Municipal index, expiring in June, 2008, effectively fixing the rate of the Tax-Free Bond Facility at 5.15% through this period, which is a highly effective hedge. In 2001, the Company executed two $25 million forward interest rate swaps of three-month Libor fixed leg: a two-year swap effective March 2003, and a four-year swap effective September, 2003. These are intended to reduce the interest rate risk of future planned refinancings. The weighted average interest rate and the weighted average maturity at March 31, 2002, for the $783.6 million of debt outstanding were 6.3% and 9.7 years, compared to 7.1% and 10.5 years at March 31, 2001. In 2002, the Company has two individual mortgages that mature totaling $11.6 million. The Company plans to refinance these mortgages, and in the event of a sudden lack of liquidity in the debt markets, would pay off the mortgages using its bank credit facility. In 2003, the Company has debt maturities approximating $151 million, which it anticipates will be funded by replacement debt issued at comparable interest rates. There is both interest rate and financing risk associated with these refinancings; however, the Company believes it to be extremely unlikely that there will be a refinancing problem due to the large amount of collateral available to support the amount of debt. In the highly unlikely event of a complete collapse of the debt markets, the Company could be faced with liquidity concerns. Beginning in December 2003, with six months' notice, the holder of the Series E Preferred, (totaling $25 million), has the option of redeeming all or part of the shares for cash or an equivalent value in the Company's common stock (at the Company's choice). The Company anticipates that the Series "E" Preferred will not be redeemed for common stock, and plans to maintain credit facilities and balance sheet capacity sufficient to redeem the entire series for cash should the opportunity for repurchase be presented. The Company believes that it has adequate resources to fund both its current operations, regular annual refurbishment of its properties, and incremental investment in new apartment properties. The Company believes that the income from the full lease-up and stabilization of its development properties and its growth of same-store NOI will create greater asset values, which enables it to increase its borrowing capacity while lowering or maintaining its loan to value ratio. The Company is relying on the efficient operation of the financial markets to finance debt maturities, and also is heavily reliant on the creditworthiness of FNMA, which provides credit enhancement for over $300 million of its debt. The market for FNMA DMBS, which in the Company's experience is highly effective with three-month Libor fixed leg, is also an important component of the Company's liquidity and swap effectiveness. In the event that these markets became less efficient, or the credit of FNMA became impaired, the Company would seek alternative sources of debt financing. The Company believes that cash provided by operations is adequate and anticipates that it will continue to be adequate in both the short and long-term to meet operating requirements (including recurring capital expenditures at the communities) and payment of distributions by the Company in accordance with REIT requirements under the Internal Revenue Code. The Company has loan covenants that limit the total amount of distributions, but believes that it is unlikely that these will be a limiting factor on the Company's future levels of distributions. The Company expects to meet its long-term liquidity requirements, such as scheduled mortgage debt maturities, property acquisitions, preferred stock redemptions, expansions, and non-recurring capital expenditures, through long and medium term collateralized fixed rate borrowings, issuance of debt, potential joint venture transactions and the Company's credit facilities. At March 31, 2002 and 2001, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. The Company's joint venture with Blackstone was established in order to sell assets to fund development while acquiring management fees to help offset the reduction in revenues from the sale. In addition, the Company does not engage in trading activities involving non-exchange traded contracts. As such, the Company is not materially exposed to any financing, liquidity, market, or credit risk that could arise if it had engaged in such relationships. The Company does not have any relationships or transactions with persons or entities that derive benefits from their non-independent relationships with the Company or its related parties other than what is disclosed in Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements Note 11 in the Company's 2001 Annual Report on Form 10-K. INSURANCE In the opinion of management, property and casualty insurance is in place which provides adequate coverage to provide financial protection against normal insurable risks such that it believes that any loss experienced would not have a significant impact on the Company's liquidity, financial position, or results of operations. INFLATION Substantially all of the resident leases at the communities allow, at the time of renewal, for adjustments in the rent payable thereunder, and thus may enable the Company to seek rent increases. The substantial majority of these leases are for one year or less. The short-term nature of these leases generally serves to reduce the risk to the Company of the adverse effects of inflation. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FAS Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company adopted the provisions of Statement 141 as of July 1, 2001, except with regard to business combinations initiated prior to July 1, 2001. The Company adopted the provisions of Statement 142 effective January 1, 2002. Furthermore, goodwill and intangible assets determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001, but before Statement 142 is adopted in full will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized and tested for impairment in accordance with the appropriate pre-Statement 142 accounting requirements prior to the adoption of Statement 142. Statement 141 requires upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. As of the date of adoption, the Company had unamortized goodwill of approximately $5,800,000, which will be subject to the transition provisions of Statements 141 and 142. The Company ceased amortizing goodwill as of January 1, 2002. The amortization expense related to goodwill for the three months ended March 31, 2001 was $66,000. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether it will be required to recognize any transitional impairment losses as the cumulative effect of a change in accounting principle. In August 2001, FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144), which supersedes both FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (Statement 121) and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 retains the fundamental provisions in Statement 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. For example, Statement 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike Statement 121, an impairment assessment under Statement 144 will not result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under Statement No. 142, Goodwill and Other Intangible Assets. RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. These statements include, but are not limited to, statements about anticipated growth rate of revenues and expenses, anticipated lease-up (and rental concessions) at development properties, costs remaining to complete development properties, planned asset dispositions, disposition pricing, and planned acquisition and developments. Actual results and the timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including a continued downturn in general economic conditions or the capital markets, competitive factors including overbuilding or other supply/demand imbalances in some or all of our markets, changes in interest rates, and other items that are difficult to control such as insurance rates, increases in real estate taxes, and other general risks inherent in the apartment business. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk This information has been omitted as there have been no material changes in the Company's market risk as disclosed in the 2001 Annual Report on Form 10-K.
PART II - OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this report. None. (b) Reports on Form 8-K Date of Form Event Reported Report Date Filed 8-K Taxable composition of 1-22-2002 1-23-2002 2001 distributions 8-K 4Q01 conference call 2-15-2002 2-15-2002 transcript and press release 8-K 4Q01 press release 2-14-2002 2-26-2002
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MID-AMERICA APARTMENT COMMUNITIES, INC. Date: May 14, 2002 /s/ Simon R.C. Wadsworth Simon R.C. Wadsworth Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)