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 September 30, 1998 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:333-42441 MID-AMERICA CAPITAL PARTNERS, L.P. (Exact Name of Registrant as Specified in Charter) TENNESSEE 62-1717980 (State of Incorporation) (I.R.S. Employer Identification Number) 6584 POPLAR AVENUE, SUITE 340 MEMPHIS, TENNESSEE 38138 (Address of principal executive offices) (901) 682-6600 Registrant's telephone number, including area code N/A (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 October 31, 1998 none TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets of Mid-America Capital Partners, L.P. (the "Partnership") as of September 30, 1998 and December 31, 1997 Statement of Operations of the Partnership for the three and nine months ended September 30, 1998 and Combined Statement of Operations of Capital Properties Group ("Predecessor" to Mid-America Capital Partners, L.P.) for the three and nine months ended September 30, 1997 Statement of Cash Flows of the Partnership for the nine months ended September 30, 1998 and Combined Statement of Cash Flows of the Predecessor for the nine months ended September, 30, 1997 Notes to Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 PART I. Financial Information ITEM 1. Mid-America Capital Partners, L.P. (a limited partnership) Balance Sheets September 30, 1998 (Unaudited) and December 31, 1997 (Dollars in thousands) 1998 1997 Assets: Real estate assets: Land $ 21,016 $ 21,016 Buildings and improvements 203,356 201,499 Furniture, fixtures and equipment 4,389 3,354 Construction in progress 1,815 1,739 - -------------------------------------------------------------------- 230,576 227,608 Less accumulated depreciation (20,196) (13,985) - -------------------------------------------------------------------- Real estate assets, net 210,380 213,623 Cash 387 1,570 Restricted cash 402 932 Deferred financing costs, net 4,491 1,743 Due from limited partner 9,251 1,264 Other assets 202 231 - --------------------------------------------------------------------- Total assets $225,113 $219,363 ===================================================================== Liabilities and Partner's Capital Liabilities: Bonds payable $ 142,000 $ 0 Bridge notes payable - 140,000 Accounts payable 340 390 Accrued expenses and other liabilities 3,609 2,875 Due to affiliate 1,278 1,596 Security deposits 713 713 - -------------------------------------------------------------------- Total liabilities 147,940 145,574 Partner's Capital: General Partner 2,397 2,363 Limited Partner 74,776 71,426 - -------------------------------------------------------------------- Total partner's capital 77,173 73,789 - -------------------------------------------------------------------- Total liabilities and partner's capital $225,113 $219,363 =================================================================== See accompanying notes to financial statements. Mid-America Capital Partners, L.P. (a limited partnership) Statement of Operations of the Partnership and Combined Statement of Operations of the Predecessor Three and nine months ended September 30, 1998 and 1997 (Dollars in thousands) (Unaudited) Three months ended Nine months ended September 30, September 30, ------------------ ------------------ Predecessor Predecessor 1998 1997 1998 1997 -------- ------- -------- -------- Revenues: Rental $ 9,715 $ 7,683 $ 28,757 $ 22,233 Other 104 66 335 187 - -------------------------------------------------------- -------------------- Total revenues 9,819 7,749 29,092 22,420 - -------------------------------------------------------- -------------------- Expenses: Personnel 1,106 745 3,244 2,283 Building repairs and maintenance 610 464 1,521 1,110 Real estate taxes and insurance 921 741 2,788 2,125 Utilities 425 306 1,177 859 Landscaping 239 198 728 617 Other operating 414 337 1,150 940 Depreciation and amortization real estate assets 2,080 1,566 6,179 4,586 Depreciation and amortization non-real estate assets 17 8 32 21 General and administrative 392 310 1,130 897 Interest 2,268 0 6,894 724 Amortization of deferred financing costs 247 14 779 35 - -------------------------------------------------------- -------------------- Total expenses 8,719 4,689 25,622 14,197 - -------------------------------------------------------- -------------------- Income before extraordinary item 1,100 3,060 3,470 8,223 - -------------------------------------------------------- -------------------- Extraordinary item: Loss on debt extinguishment - - 86 - - -------------------------------------------------------- -------------------- Net income $ 1,100 $ 3,060 $ 3,384 $ 8,223 ======================================================== ==================== See accompanying notes to financial statements. Mid-America Capital Partners, L.P. (a limited partnership) Statement of Cash Flows of the Partnership and Combined Statement of Cash Flows of the Predecessor Nine months ended September 30, 1998 and 1997 (Dollars in thousands) (Unaudited) Predecessor 1998 1997 ------ ------ Cash flows from operating activities: Net income $3,384 $8,223 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,990 4,642 Extraordinary item 86 - Changes in assets and liabilities: Restricted cash 530 278 Due to affiliate (318) - Other assets 29 (8) Accounts payable (50) (160) Accrued expenses and other liabilities 734 516 Security deposits - 8 - ----------------------------------------------------------------------------- Net cash provided by operating activities 11,385 13,499 - ----------------------------------------------------------------------------- Cash flows from investing activities: Purchases of real estate assets (2,968) (19,211) Improvements to properties - (3,544) - ----------------------------------------------------------------------------- Net cash used in investing activities (2,968) (22,755) - ----------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from notes payable 142,000 - Principal payments on bridge notes payable (140,000) - Principal payments on notes payable - (16,460) Deferred financing costs (3,613) - Due from limited partner (7,987) - Capital contributions, net (Predecessor) - 25,674 - ----------------------------------------------------------------------------- Net cash provided by (used in) financing activities (9,600) 9,214 - ----------------------------------------------------------------------------- Net increase in cash and cash equivalents (1,183) (42) - ----------------------------------------------------------------------------- Cash, beginning of period 1,570 134 - ----------------------------------------------------------------------------- Cash, end of period $ 387 $ 92 - ----------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Interest paid $ 6,978 $ 658 - ----------------------------------------------------------------------------- See accompanying notes to financial statements. MID-AMERICA CAPITAL PARTNERS, L.P. (a limited partnership) NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with the accounting policies in effect as of December 31, 1997, as set forth in the annual financial statements of Mid-America Capital Partners, L.P. (the "Partnership"), as of such date. In the opinion of management, all adjustments necessary for a fair presentation of the financial statements have been included and all such adjustments were of a normal recurring nature. The results of operations for the nine-month period ended September 30, 1998 are not necessarily indicative of the results to be expected for the full year. The Partnership is a special purpose Delaware limited partnership. The Partnership was formed on November 24, 1997 for the sole purpose to own and operate 26 apartment communities (the Mortgaged Properties) and manage, renovate, improve, lease, sell, transfer, exchange, mortgage and otherwise deal with the Mortgaged Properties. The sole limited partner of the Partnership is Mid-America Apartments, L.P., a Tennessee limited partnership (MAALP), which is a majority owned subsidiary of Mid-America Apartment Communities, Inc. (MAAC). MAAC owns, directly or through its subsidiaries, all of the outstanding units of Partnership interest. MAAC is a self-administered and self-managed umbrella partnership real estate investment trust (REIT). MAAC conducts a substantial portion of its operation through MAALP and subsidiaries of MAALP. The sole general partner of the Partnership is MAACP, Inc., a Tennessee corporation (MAACP), a wholly-owned subsidiary of MAAC. The term of the Partnership shall be to December 31, 2020, unless terminated earlier as provided in the Partnership Agreement or as otherwise provided by law. 2. Financing Transactions On March 6, 1998 the Partnership issued $142 million aggregate principal amount of 6.376% Bonds due 2003 (the Bonds). The Bonds are secured by a first priority deed of trust, security agreement and assignment of rents and leases in respect of the Mortgaged Properties. The net proceeds from the sale of the Bonds were applied to the bridge notes payable and utilized to fund costs of the offering. The Partnership has only limited involvement with derivative financial instruments and does not use them for trading purposes. The Partnership occasionally utilizes derivative financial instruments as hedges in anticipation of future debt transactions to manage well-defined interest rate risk. In anticipation of the March 6, 1998 Bonds issuance discussed above, the Partnership entered into four separate interest rate contracts in 1997 with notional amounts aggregating $140 million, the effect of which was to lock the interest rate on $140 million of the Bonds at an average interest rate of 6.62%. On March 6, 1998 the Partnership realized a $1.4 million realized loss on the interest rate contracts. The realized loss resulting from the change in the market value of these contracts is being amortized into interest expense over the life of the related debt issuance. 6. Recent Accounting Pronouncements In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activity," was issued effective for years beginning after June 15, 1999. This new accounting statement is not expected to have a material impact on the Company's consolidated financial statements. The Company will adopt this accounting standard in 2000. 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 financial condition and results of operations of the Partnership for the three and nine months ended September 30, 1998 and the combined financial condition and results of operations of the Partnership for the three and nine months ended September 30, 1997. This discussion should be read in conjunction with the financial statements included 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 owned at September 30, 1998 was 5,949 in 26 apartment communities, compared to 4,804 in 20 communities at September 30, 1997. Average monthly rental per apartment unit increased to $569 at September 30, 1998 from $546 at September 30, 1997. Overall occupancy was 94.6% at September 30, 1998 and 96.4% at September 30, 1997. RESULTS OF OPERATIONS COMPARISON OF THE PARTNERSHIP'S THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THE PREDECESSOR'S THREE MONTHS ENDED SEPTEMBER 30, 1997 Total revenues for the three months ended September 30, 1998 increased by approximately $2,070,000 due primarily to (i) approximately $1,655,000 from the communities acquired in 1997and (ii) approximately $415,000 from the communities owned throughout both periods. Property operating expenses for the three months ended September 30, 1998 increased by approximately $924,000 due primarily to (i) approximately $670,000 from the communities acquired in 1997 and (ii) approximately $254,000 from the communities owned throughout both periods. Depreciation and amortization expense increased approximately $756,000 for the three months ended September 30, 1998 compared to the same period a year earlier primarily due to (i) depreciation expense of approximately $340,000 from the communities acquired in 1997, (ii) depreciation expense of approximately $183,000 from the communities owned throughout both periods, and (iii) approximately $233,000 of additional amortization expense for the deferred financing costs incurred on the March 6, 1998 offering of $142,000,000 bonds payable (the "First Mortgage Bonds"). Interest expense increased approximately $2,268,000 during the three months ended September, 1998 compared to the same period a year earlier primarily due to the issuance of the First Mortgage Bonds. No debt was carried on the properties during the quarter ended September 30, 1997. The borrowing cost of the Partnership First Mortgage Bonds was 6.62% at September 30, 1998. COMPARISON OF THE PARTNERSHIP'S NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE PREDECESSOR'S NINE MONTHS ENDED SEPTEMBER 30, 1997 Total revenues for the nine months ended September 30, 1998 increased by approximately $6,672,000 due primarily to (i) approximately $5,289,000 from the communities acquired in 1997 and (ii) approximately $1,383,000 from the communities owned throughout both periods. Property operating expenses for the nine months ended September 30, 1998 increased by approximately $2,674,000 due primarily to (i) approximately $1,991,000 from the communities acquired in 1997 and (ii) approximately $683,000 from the communities owned throughout both periods. Depreciation and amortization expense increased approximately $2,348,000 for the nine months ended September 30, 1998 compared to the same period a year earlier primarily due to (i) depreciation expense of approximately $979,000 from the communities acquired in 1997, (ii) approximately $625,000 from the communities owned throughout both periods, and (iii) approximately $744,000 of additional amortization expense for the deferred financing costs incurred on the March 6, 1998 offering of $142,000,000 bonds payable (the "First Mortgage Bonds"). Interest expense increased approximately $6,170,000 during the nine months ended September, 1998 compared to the same period a year earlier primarily due to the issuance of the First Mortgage Bonds. The borrowing cost of the Partnership First Mortgage Bonds was 6.62% at September 30, 1998. LIQUIDITY AND CAPITAL RESOURCES Net cash flow provided by operating activities decreased by approximately $2,114,000 for the nine months ended September 30, 1998. The decrease in net cash flow was primarily due to a decrease in net income, mainly related to the additional interest costs of the First Mortgage Bonds, which was partially offset by an increase in depreciation and amortization. Net cash flow used in investing activities decreased by approximately $19,787,000 for the nine months ended September 30, 1998 from approximately $22,755,000 for the nine months ended September 30, 1997. This decrease is mainly due to the purchase of two properties by the Predecessor during the first quarter of 1997, Howell Commons and Westside Creek I, for approximately $19,064,000. There were no property acquisitions during the nine months ended September 30, 1998. Net cash flow used in financing activities increased by approximately $18,814,000 during the nine months ended September 30, 1998. The principal uses of cash from financing activities were approximately $140,000,000 for repayment of the bridge notes payable, approximately $7,987,000 in advances to the limited partner, and approximately $3,613,000 for additional deferred financing costs related to the issuance of $142,000,000 Bonds payable. During the nine months ended September 30, 1997 the Predecessor received capital contributions totaling $25,674,000 used primarily to acquire the properties mentioned above and to settle the outstanding mortgages relating to the two properties. There were no capital contributions or property acquisitions during the nine months ended September 30, 1998. The Partnership 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). 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 Partnership'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 Partnership 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 Partnership of the adverse effects of inflation. YEAR 2000 The Company has conducted a review of its computer operating systems and has identified those areas that could be affected by the "Year 2000" issue and has developed a plan to resolve this issue. The Company believes that by modifying certain existing hardware and software and, in other cases, converting to new application systems, the Year 2000 problem can be resolved without significant operational difficulties. The Company has initiated formal communications with all of its significant suppliers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. Management has assessed the Year 2000 compliance expense and believe that the related potential effect on the Company's business, financial condition and results of operations should be immaterial. The Company is expensing all costs associated with the Year 2000 issue as the costs are incurred. RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS The 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 the plans and objectives of management for future operations, including plans and objectives relating to capital expenditures and rehabilitation costs on the apartment communities. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties which are discussed in "Risk Factors" in this report. Although the Partnership 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 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 Partnership or any other person that the objectives and plans of the Partnership will be achieved. 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 exhibit is filed as part of this form: (27) Financial Data Schedule (b) Reports on Form 8-K None. 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 CAPITAL PARTNERS, L.P. /s/Simon R.C. Wadsworth Date: November 14, 1998 --------------------------------- Simon R.C. Wadsworth President and Director (Principal Executive Officer) /s/Mark S. Martini Date: November 14, 1998 --------------------------------- Mark S. Martini Director (Principal Financial and Accounting Officer)