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Registration No. 333-31424
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
TARRAGON REALTY INVESTORS, INC.
(Exact name of registrant as specified in governing instruments)
Nevada
...................................................
(State or other jurisdiction of incorporation or organization)
94-2432628
...................................................
(IRS Employer Identification No.)
280 Park Avenue, East Building, 20th Floor
New York, New York 10017
(212) 949-5000 (212) 949-8001 (Fax)
...................................................
(Address of principal executive offices)
William S. Friedman, Esq.
280 Park Avenue, East Building, 20th Floor
New York, New York 10017
(212) 949-5000 (212) 949-8001 (Fax)
(Name and address of agent for service)
With a Copy to:
Steven C. Metzger, Esq.
Prager, Metzger & Kroemer PLLC
2626 Cole Avenue, Suite 900
Dallas, Texas 75204
(214) 969-7600 (214) 523-3838 (Fax)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
452(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Title of Each Class of Amount to be Proposed maximum Proposed maximum Amount of
Securities to be registered offering price per unit aggregate offering registration
Registered price fee
- ------------------------ ------------ ----------------------- ------------------ -------------
<S> <C> <C> <C> <C>
Tarragon Realty
Investors, Inc. 10%
Cumulative Preferred 2,000,000 $10.56 (2) $21,120,000.00 (2) $5,575.68
Stock, par value $0.01
per share(1)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Tarragon 10% Cumulative Preferred Stock is being offered in
exchange for shares of common stock at an exchange ratio of one share of 10%
Cumulative Preferred Stock for each share of common stock.
(2) Pursuant to Rule 457(a), the proposed Maximum Offering Price Per
Unit and Proposed Maximum Aggregate Offering Price have been calculated as the
market value upon the basis of the average of the bid and asked price of the
common stock on February 24, 2000, which was $10.56.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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PROSPECTUS
OFFER TO EXCHANGE ONE SHARE OF 10% CUMULATIVE PREFERRED STOCK
FOR
EACH SHARE OF COMMON STOCK
OF
TARRAGON REALTY INVESTORS, INC.
Tarragon hereby offers, upon the terms and conditions described in this
Prospectus, to exchange one share of 10% Cumulative Preferred Stock (sometimes
referred to in this Prospectus as the "Preferred Stock") for each share of
common stock you hold. Tarragon's common stock is traded on the NASDAQ National
Market System under the symbol "TARR." On February 24, 2000, the closing price
of Tarragon's common stock on the NASDAQ was $10.50 per share.
Tarragon will accept for exchange up to 2,000,000 shares of common stock
tendered on or prior to 5:00 P.M. local New York City time on May 3, 2000. Such
date, as it may be extended from time to time, is referred to in this Prospectus
as the "Expiration Time." See "Exchange Offer - Expiration Time; Extensions;
Amendments."
o PLEASE CONSIDER THE FOLLOWING:
o You should carefully review the Risk Factors section, beginning on page 6
of this Prospectus.
o Our offer to exchange 10% Cumulative Preferred Stock for common stock will
be open until 5:00 p.m., New York City time, on May 3, 2000, unless we extend
the offer.
o You should also carefully review the procedures for tendering the common
stock beginning on page 19 of this Prospectus.
o If you do not tender your common stock, you will continue to hold your
shares and your ability to transfer will not be adversely affected.
o No public market currently exists for the 10% Cumulative Preferred Stock.
We would like to list the 10% Cumulative Preferred Stock on a securities
exchange but may not be able to do so, and therefore, no active public market
may develop.
INFORMATION ABOUT THE 10% CUMULATIVE PREFERRED STOCK:
o We will pay dividends on the 10% Cumulative Preferred Stock quarterly on
March 15, June 15, September 15 and December 15 of each year, beginning
September 15, 2000, at the rate of $1.20 per annum.
o We have the option to redeem all or a portion of the 10% Cumulative
Preferred Stock at any time after June 30, 2003, at certain rates set forth on
page 25 of this Prospectus.
o The 10% Cumulative Preferred Stock is a class of equity and is junior in
ranking in right of payment to our outstanding indebtedness, but is senior to
common stock.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS ______________, 2000.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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ABOUT THIS PROSPECTUS
This Prospectus is part of a registration statement on Form S-4 that we
have filed with the SEC. This Prospectus incorporates important business and
financial information about Tarragon that is not included or delivered to you
with this Prospectus. You may request a copy of any information incorporated by
reference in this Prospectus, free of charge, by writing or telephoning us at:
Tarragon Realty Investors, Inc.
Attn: Investor Relations
280 Park Avenue
20th Floor, East Building
New York, NY 10017
Telephone: (212) 949-5000
To ensure timely delivery of requested information, you must make your
request no later than April 26, 2000. Whenever we refer in this Prospectus to
"Tarragon," "the Company," "we," "us" or "our," we mean Tarragon Realty
Investors, Inc. and its predecessors and subsidiaries.
PROSPECTUS SUMMARY
The following summary highlights selected information from this Prospectus.
It does not contain all of the information that may be important to you. We urge
you to carefully review the entire Prospectus and the other documents to which
it refers to fully understand the terms of the Exchange Offer and the 10%
Cumulative Preferred Stock.
ABOUT THE COMPANY
Tarragon is a fully integrated real estate development, acquisition and
management company, operated as a real estate investment trust (or "REIT") for
federal income tax purposes through December 31, 1999. We control approximately
17,000 apartment units and almost 2.5 million square feet of commercial space
throughout the United States. Our primary business is investing in and
developing income-producing real estate directly and through partnerships and
joint ventures.
Our acquisition strategy is opportunistic, but focuses on acquiring
properties that add to the efficiency of our real estate portfolio. We often
acquire older or troubled properties that are not considered of institutional
quality. We have a policy of continuously improving and upgrading these
properties, in order to increase revenues and achieve value. Since 1997, we have
also invested increasing amounts in new construction and development projects,
either directly or in partnership with others.
We have financed acquisitions, development and capital improvements largely
through mortgages and internally generated funds, as well as through property
sales. We expect property sales and borrowings to provide the bulk of funds
available for investment in the future, so the availability and cost of
long-term mortgage funds are key factors in our ability to continue to make new
investments without additional equity offerings.
We were incorporated in Nevada on April 2, 1997. We are the ultimate
successor in interest to Vinland Property Trust, a California business trust
originally established in July, 1973, and National Income Realty Trust ("NIRT"),
also a California business trust, organized in October, 1978.
In November 1998, we merged with NIRT, with Tarragon as the surviving
entity. In the merger, NIRT stockholders received 1.97 shares of Tarragon common
stock for each share of beneficial interest of NIRT they held. Immediately
following the merger, we acquired Tarragon Realty Advisors, Inc., our advisor
since March, 1994 and NIRT's advisor since April, 1994, from William S. Friedman
and his wife, Lucy N. Friedman, for 100,000 shares of Tarragon common stock and
options to acquire 350,000 additional shares at prices ranging between $13 and
$16 per share. Mr. Friedman also received options to acquire an additional
450,000 shares at prices ranging between $12 and $15 per share in connection
with his employment agreement with Tarragon. Mr. Friedman is our President,
Chief Executive Officer, and a member of our Board of Directors, and Mr. and
Mrs. Friedman are our principal stockholders.
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Tarragon's common stock is traded on the NASDAQ National Market System
under the symbol "TARR." Our principal executive offices are located at 280 Park
Avenue, East Building, 20th Floor, New York, New York 10017, telephone number
212-949-5000.
RECENT DEVELOPMENTS
ACQUISITION OF JOINT VENTURE INTERESTS. On February 7, 2000, Tarragon
acquired the interests of Robert C. Rohdie and his affiliates in ten apartment
communities recently completed or currently under construction, as well as in
all joint venture development projects still in the planning stages, for a total
value of up to $10,000,000. Mr. Rohdie, Tarragon's joint venture partner in the
development of these projects, contributed his equity interests to an operating
partnership formed by Tarragon, in exchange for a preferred interest in the
operating partnership and a guaranteed fixed return of $200,000 for the first
two years, increasing by $40,000 per year for the next five years, plus an
annual amount equal to the dividends payable on 96,385 shares of Tarragon common
stock. In addition, upon completion and lease up of each of the five identified
apartment communities presently under construction or in advanced stages of
development planning, Mr. Rohdie will receive an increase in his guaranteed
fixed return based on the agreed value of his equity in the completed property.
After one year, Mr. Rohdie has the right to convert his preferred interest in
the operating partnership into 96,385 shares of our common stock and preferred
stock with a face value of up to $8,000,000 and a like dividend to his preferred
interest in the operating partnership. If we do not have available an issue of
preferred stock outstanding at the time of the conversion, or at our discretion,
we may pay the cash value of Mr. Rohdie's preferred interest over three years.
FORMATION OF DEVELOPMENT SUBSIDIARY. In connection with the acquisition
transaction discussed above, Tarragon formed a new development subsidiary to
expand our real estate development and renovation program. Robert C. Rohdie,
previously Tarragon's joint venture partner on new development projects, joined
Tarragon as President and Chief Executive Officer of Tarragon Development
Corporation, and as a member of our Board of Directors, effective February 7,
2000.
TERMINATION OF REIT STATUS. On February 29, 2000, Tarragon filed a
"Revocation of REIT Election" with the Internal Revenue Service, effectively
terminating our REIT status for the 2000 tax year. We first issued a press
release announcing that we were contemplating terminating our REIT status on
October 28, 1999. The primary consideration in the Board's decision to revoke
our REIT election was the "5 or 50" rule: in order to qualify as a REIT for
federal income tax purposes, no more than 50% in value of our outstanding common
stock could be owned, actually or constructively, by five or fewer individuals.
Because our 5 largest stockholders already own close to 50% of our outstanding
common stock, the "5 or 50" rule limited our ability to attract institutional
investors and to continue our stock repurchase program. Our Board of Directors
determined that these actions were important to enhance stockholder value.
Also, as a REIT, Tarragon could not engage in certain types of real
estate operations, such as condominium conversions, which the Board considered
to be attractive and potentially profitable lines of business. Because we have
substantial net operating loss carry forwards, the historical advantage of REIT
status, i.e. the ability to shield the company's taxable income from double
taxation at the corporate and stockholder levels, appeared to be outweighed, in
the Board's judgment, by the disadvantages associated with these restrictions on
operations and stock ownership.
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ABOUT THE EXCHANGE OFFER
Tarragon is offering you the opportunity to exchange your common stock for
a security with a fixed dividend yield more than twice the amount of the current
common stock dividend and a fixed liquidation preference in the event of
redemption or other disposition of the security.
EXCHANGE RATIO The 10% Cumulative Preferred Stock is offered for
exchange at the rate of one share for each
outstanding share of common stock tendered.
EXPIRATION TIME 5:00 P.M. local New York City time, on May 3,
2000, or such later date and time to which we
may extend the Exchange Offer.
NUMBER OF SHARES Subject to the terms and conditions of the
Exchange Offer, up to 2,000,000 shares of common
stock may be exchanged for an equal number of
shares of 10% Cumulative Preferred Stock, if they
are duly tendered and not withdrawn prior to the
Expiration Time. The Exchange Offer is not
conditioned on any minimum number of shares of
common stock being tendered for exchange.
WITHDRAWAL You may withdraw your tender of common stock
pursuant to the Exchange Offer at any time prior
to the Expiration Time.
CONDITIONS TO THE EXCHANGE The Exchange Offer is subject to certain customary
OFFER conditions, some of which may be waived by us. See
"The Exchange Offer - Conditions to the Exchange
Offer" beginning on page 23.
PROCEDURES FOR TENDERING If you wish to accept the Exchange Offer, you must
complete, sign and date the Letter of Transmittal,
or a copy of it, in accordance with the
instructions contained in this Prospectus and the
Letter of Transmittal, and mail or otherwise
deliver the Letter of Transmittal, together with
your common stock and any other required
documentation, to the Exchange Agent at the
address set forth below.
If you hold common stock through the Depository
Trust Company (or "DTC") and you wish to accept
the Exchange Offer, you must do so pursuant to
DTC's Automated Tender Offer Program, by which
each tendering participant will agree to be bound
by the Letter of Transmittal. See "The Exchange
Offer - Book-Entry Transfer" beginning on page 20.
In executing or agreeing to be bound by the Letter
of Transmittal, you must represent to us, among
other things, that
o the 10% Cumulative Preferred Stock acquired
pursuant to the Exchange Offer is being
obtained in the ordinary course of your
business,
o you are not engaging in and do not intend to
engage in a distribution of the 10%
Cumulative Preferred Stock,
o you do not have an arrangement or
understanding with any other person to
participate in the distribution of the 10%
Cumulative Preferred Stock, and
o you are not an "affiliate" of Tarragon, as
that term is defined under Rule 405
promulgated under the Securities Act.
We will accept for exchange any and all shares of
Tarragon common stock (up to a maximum of
2,000,000 shares) that are properly tendered in
the Exchange Offer and not withdrawn prior to the
Expiration Time. The 10% Cumulative Preferred
Stock issued pursuant to the Exchange Offer will
be delivered promptly following the Expiration
Time. Any common stock not accepted for exchange
for any reason will be returned to you as soon as
practicable after the Expiration Time. See "The
Exchange Offer - Terms of the Exchange Offer"
beginning on page 18.
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EXCHANGE AGENT American Stock Transfer & Trust Co. is serving as
the "Exchange Agent" in connection with the
Exchange Offer.
INFORMATION AGENT The Herman Group is serving as the "Information
Agent" in connection with the Exchange Offer. Any
questions or requests for assistance or additional
copies of materials may be directed to the
Information Agent.
FEDERAL INCOME TAX The exchange of Tarragon common stock for 10%
CONSIDERATIONS Cumulative Preferred Stock pursuant to the
Exchange Offer may constitute a sale or an
exchange for federal income tax purposes. See "The
Exchange Offer - Certain Federal Income Tax
Considerations" beginning on page 27.
EFFECT OF NOT TENDERING Common stock not tendered or that is tendered but
not accepted will, following the completion of the
Exchange Offer, continue unaffected. Any common
stock not accepted for exchange for any reason
will be returned to you as soon as practicable
after the Expiration Time.
ABOUT THE 10% CUMULATIVE PREFERRED STOCK
ISSUER Tarragon Realty Investors, Inc.
SECURITIES OFFERED 10% Cumulative Preferred Stock, par value $0.01
per share.
LIQUIDATION VALUE $12 per share.
DIVIDEND RATE $1.20 per annum on a cumulative basis,
non-convertible.
OPTIONAL REDEMPTION Shares of 10% Cumulative Preferred Stock may be
redeemed at the option of Tarragon at any time
after June 30, 2003 at the Liquidation Value, plus
a premium of $0.50 per share reducing by $0.10 per
share each year thereafter. No mandatory
redemption or "sinking fund" is required. Tarragon
may purchase "Odd Lots" and other shares in block
or negotiated purchases without those purchases
being deemed a "Redemption."
RANKING The 10% Cumulative Preferred Stock shall rank at
parity as to dividends and upon liquidation,
dissolution or winding up with any other shares of
preferred stock.
CHANGE OF CONTROL A change of control of Tarragon will have no
effect upon the shares of 10% Cumulative Preferred
Stock.
USE OF PROCEEDS Tarragon will not receive any cash proceeds from
the exchange of the 10% Cumulative Preferred Stock
for common stock.
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RISK FACTORS
In addition to the other information set forth in this Prospectus, you
should carefully consider the following risk factors before exchanging your
common stock for 10% Cumulative Preferred Stock. These or other unanticipated
circumstances could impair our business and financial condition, or otherwise
have a material adverse impact on our future operations and stock price.
OUR BOARD OF DIRECTORS MAY TAKE ACTIONS THAT, WHILE IN THE BEST INTERESTS OF
TARRAGON AS A WHOLE, HAVE AN UNEQUAL ADVERSE EFFECT ON ONE OR MORE SERIES OF OUR
STOCK.
There may be times when the interests of common stock holders and 10%
Cumulative Preferred Stock holders diverge or appear to diverge. Nevada law does
not define a Board of Directors' duties with respect to the interests of
preferred stockholders. However, based on the advice of counsel, we believe that
a Nevada court would conclude that a Board of Directors owes an equal duty to
all stockholders regardless of class or series and does not have separate or
additional duties to any group of stockholders. That duty is the fiduciary duty
to act in good faith and in a manner the Board reasonably believes to be in the
best interests of the corporation. Any such action by the Board, while in the
best interests of Tarragon as a whole, could have an unequal adverse effect on
different classes of stock.
MEMBERS OF OUR BOARD OF DIRECTORS MAY FAVOR ONE CLASS OF STOCK OVER ANOTHER IF
THEY OWN A DISPROPORTIONATE AMOUNT OF THAT CLASS.
A member of our Board may own a disproportionate amount of stock in a
particular class or the value of his or her stockholdings in a particular class
may be different from the value of his or her stockholdings in another class.
This disparate stock ownership may cause the Board member to favor one class of
stock over another. Nevertheless, we believe that a member of our Board could
properly discharge his or her fiduciary responsibilities even if his or her
interests and shares of different series were disproportionate or of unequal
values. Our Board members may from time to time create committees to review
matters that raise conflict-of-interest issues. Any such committee would report
to the full Board on these matters.
HOLDERS OF OUR 10% CUMULATIVE PREFERRED STOCK WILL HAVE LIMITED DECISION-MAKING
POWER DUE TO THE CLASS' LIMITED SEPARATE VOTING RIGHTS.
Holders of 10% Cumulative Preferred Stock will vote together as a single
class on all matters requiring their approval. Holders of the 10% Cumulative
Preferred Stock do not have the right to vote on matters separately or together
with common stockholders and may only vote in limited circumstances, which are
provided for under Nevada law or our Articles of Incorporation. Holders of 10%
Cumulative Preferred Stock generally cannot make a proposal that would require
approval of only holders of that class. Instead, they would have to obtain
approval from common stockholders. The current limited voting power of the class
of 10% Cumulative Preferred Stock is described under "Description of Tarragon
Capital Stock--10% Cumulative Preferred Stock-Voting Rights."
THERE IS NO PUBLIC MARKET FOR THE 10% CUMULATIVE PREFERRED STOCK.
There is currently no public market for the 10% Cumulative Preferred Stock.
We would like to list the 10% Cumulative Preferred Stock on a securities
exchange, but may not be able to do so. Accordingly, we cannot predict whether
an active market for the 10% Cumulative Preferred Stock will develop, the
liquidity of any such market, the ability of 10% Cumulative Preferred Stock
holders to sell their 10% Cumulative Preferred Stock, or the prices that they
might obtain for the 10% Cumulative Preferred Stock if sold. Furthermore, we
cannot predict how the distribution of the 10% Cumulative Preferred Stock will
affect the market price of our common stock.
WE ARE HIGHLY LEVERAGED AND MAY NOT BE ABLE TO MEET OUR DEBT SERVICE
OBLIGATIONS.
We had total indebtedness at December 31, 1999 of approximately $281.2
million. After giving effect to the February 2000 transaction with Robert C.
Rohdie, whereby we effectively acquired his interests in our new construction
and development joint venture projects with him, our total indebtedness at
December 31, 1999 would have been $365.8 million. Substantially all of our
assets have been pledged to secure debt. These borrowings increase our risk of
loss because they represent a prior claim on our assets and require fixed
payments regardless of
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profitability. To service this debt, we will have to use cash flow from
operations, which would otherwise be available for investment. Our highly
leveraged position makes us more vulnerable to changes in economic conditions
and may limit our ability to capitalize on significant business opportunities in
the future.
WE MAY REQUIRE SIGNIFICANT ADDITIONAL FINANCING WHICH MAY NOT BE AVAILABLE ON
FAVORABLE TERMS, IF AT ALL.
Although we currently have substantial cash resources and positive cash
flow, we intend to use substantial portions for:
o property acquisitions
o working capital
o new construction
In addition, we require substantial cash flow to meet interest payment
obligations on indebtedness and other borrowings. If we are unable to generate
sufficient cash flow from operations to satisfy these obligations, or if we are
required to make any substantial principal repayments, we may have to refinance
some or all of our debt or sell assets. We cannot predict whether additional
sources of financing for these purposes will be available in the future or the
cost of such financing. Nor can we predict whether there will be a market for
our assets in the time period we desire or need to sell them, or that we will be
able to sell them at a price that will allow us to fully recoup our investment.
If we default on secured indebtedness, the lender may foreclose and we could
lose our investment in the asset securing the loan.
WE MAY NOT BE ABLE TO OBTAIN CAPITAL TO MAKE NEW INVESTMENTS.
We currently depend primarily on external financing to fund the growth of
our business. Our access to debt or equity financing depends on banks'
willingness to lend and on conditions in the capital markets. Although we
believe that we will be able to finance any investments we wish to make in the
foreseeable future, we may not be able to secure additional sources of financing
on acceptable terms.
THE INTEREST RATES ON OUR VARIABLE RATE DEBT MAY INCREASE, WHICH WOULD RESULT IN
A REDUCTION OF FUNDS AVAILABLE TO PAY DIVIDENDS TO STOCKHOLDERS.
As of December 31, 1999, we had approximately $114 million of variable rate
debt. After giving effect to the transaction with Mr. Rohdie in February 2000,
our variable rate debt at December 31, 1999 would have been $123.5 million. We
may incur additional variable rate indebtedness in the future. Accordingly,
increases in interest rates could increase our interest expense, which could
adversely affect our results of operations, financial condition, and ability to
pay expected dividends to stockholders.
WE ACQUIRE NEW PROPERTIES FROM TIME TO TIME, AND THOSE ACQUISITIONS MAY REDUCE
THE VALUE OF YOUR INVESTMENT.
We regularly consider acquiring additional properties. Acquisitions involve
several risks, including the following:
o Acquired properties may not perform as well as we expected before
acquiring them.
o Improvements to the properties may cost more than we had estimated.
o The costs of evaluating properties that are not acquired cannot be
recovered.
WE DEVELOP NEW PROJECTS FROM TIME TO TIME, AND THESE ACTIVITIES MAY REDUCE THE
VALUE OF YOUR INVESTMENT.
We plan to continue developing new projects as opportunities arise in the
future. Development and construction activities entail a number of risks,
including the following:
o We may abandon a project after spending time and money determining its
feasibility.
o Construction costs may exceed the original estimates.
o The revenue from a new project may not be enough to make it
profitable.
o We may not be able to obtain financing on favorable terms for
development of a property.
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o We may not complete construction and lease up on schedule, resulting
in increased costs.
o We may not be able to obtain, or may be delayed in obtaining,
necessary governmental permits.
o Even successful projects require a substantial portion of management's
time and attention.
WE HAVE TERMINATED OUR STATUS AS A REIT, WHICH COULD RESULT IN A REDUCTION OF
FUNDS AVAILABLE TO DISTRIBUTE TO STOCKHOLDERS, AND WE MAY CHANGE OUR DIVIDEND
POLICY FOR COMMON STOCK.
To maintain our status as a REIT, we were historically required to
distribute annually to our common stockholders at least 95% of our taxable
income, excluding any net capital gains. Since we have terminated our REIT
status, we are no longer subject to this requirement, and we may choose to
reduce or discontinue our current policy of paying annual dividends on common
stock of an amount not greater than 50% of funds from operations. Further, we
will no longer be allowed a deduction for distributions to stockholders in
computing our taxable income and our income could be taxed at regular corporate
tax rates, so the funds available for distribution to you may be reduced
substantially.
WE HAVE TERMINATED OUR STATUS AS A REIT, WHICH MAY ALLOW US TO ENGAGE IN HIGHER
RISK INVESTMENTS.
To maintain our status as a REIT, we have historically complied with
certain operating restrictions relating to the nature and diversification of our
assets. We were required, among other things, to hold at least 75% of the value
of our assets in real estate, government securities, and cash and cash
equivalents at the close of each quarter of each taxable year. Since we have
terminated our REIT status, we are no longer subject to these restrictions, and
therefore could engage in real estate operations or invest in real estate assets
that may pose a greater risk to the value of your investment.
THE REGIONAL CONCENTRATION OF OUR ASSETS MAY INCREASE THE EFFECTS OF ADVERSE
TRENDS IN THOSE MARKETS.
A substantial portion of our assets are located in Florida, Texas,
Connecticut and California. Due to this geographic concentration, any
deterioration in economic conditions in these markets could adversely affect the
value of your investment.
WE HAVE A LIMITED OPERATING HISTORY AS A COMBINED ENTITY.
Our merger with NIRT was accounted for as a reverse acquisition of Tarragon
by NIRT using the purchase method of accounting. As a result, the pre-merger
historical balances and results of operations found in documents filed after
November 24, 1998 are those of NIRT. These historical financial statements are
not necessarily indicative of what the actual results of operations of the
combined entity would have been or what the future results of operations of the
combined entity will be.
OUR PRINCIPAL STOCKHOLDERS MAY CONTROL CORPORATE ACTIONS.
William S. Friedman, our President, Chief Executive Officer and a member of
our Board of Directors, and his wife, Lucy N. Friedman, our principal
stockholder, together control approximately 33.72% of our outstanding common
stock. Accordingly, Mr. and Mrs. Friedman and their family may elect a number of
the members of our Board of Directors and have substantial influence over our
management and affairs. In addition, they effectively have veto power over a
limited number of corporate actions requiring more than a simple majority vote
presently contained in our Articles of Incorporation.
THE SALE OR ISSUANCE OF A LARGE VOLUME OF SHARES OF OUR COMMON STOCK COULD
RESULT IN A DEPRESSION OF OUR STOCK PRICE.
Sales of a substantial number of shares of common stock in the public
market after this offering could adversely affect the market price of our stock.
Although contractual and statutory protections and prohibitions may apply, there
are a substantial number of shares of common stock eligible for sale in the
public market pursuant to Rule 144 under the Securities Act of 1933, or which
will become eligible in the near future. In addition, we have issued options for
a substantial number of shares to our employees, officers, directors and
principal stockholders.
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We may in the future register the resale of at least 310,374 shares of our
common stock issuable upon the exercise of options granted to our officers and
employees under our Incentive Share Option Plan and options granted to our
directors under our Independent Director Option Plan, under the Securities Act
of 1933. Options covering an additional 800,000 shares are presently exercisable
by William S. Friedman and his wife, Lucy N. Friedman.
We cannot predict the timing or amount of any sale of shares pursuant to
Rule 144, or any subsequently filed registration statements. However, the
simultaneous offering for public sale of a significant portion of these shares
could have a depressive effect on the market price of our common stock.
OUR GOVERNING DOCUMENTS CONTAIN ANTI-TAKEOVER PROVISIONS THAT MAY MAKE IT MORE
DIFFICULT FOR A THIRD PARTY TO ACQUIRE TARRAGON.
Our Articles of Incorporation contain provisions designed to discourage
attempts to acquire control of Tarragon by merger, tender offer, proxy contest,
or removal of incumbent management without the approval of our Board of
Directors. As a result, a transaction which otherwise might appear to be in your
best interests as a stockholder could be delayed, deferred or prevented
altogether, and you may be deprived of an opportunity to receive a premium for
your shares over prevailing market prices. The safeguards against acquisition of
Tarragon contained in our Articles of Incorporation include:
o the requirement of an 80% vote to make, adopt, alter, amend, change or
repeal Tarragon's Bylaws or certain key provisions of Tarragon's
Articles of Incorporation that embody, among other things, the
aforementioned acquisition-related safeguards;
o the requirement of a two-thirds super-majority vote for the removal of
a director from the Board of Directors, and certain extraordinary
transactions;
o and the inability generally of stockholders to call a meeting of
stockholders.
Our Board of Directors and management control approximately 35.29% of our
outstanding common stock. Giving effect to the proposed exchange of 2,000,000
shares of common stock for 2,000,000 shares of preferred stock, our Board of
Directors and management would control approximately 47% of our outstanding
common stock. In light of this, these acquisition-related safeguards could help
entrench the Board of Directors and may effectively give our management the
power to block any attempted change in control of Tarragon.
WE ARE IN A COMPETITIVE BUSINESS.
The real estate business is highly competitive, and we compete with
numerous entities engaged in real estate activities, with investment objectives
similar to ours, which have greater financial resources and are better known
than we are. This competition may result in increased prices for suitable
investments and may impair our ability to make acquisitions on favorable terms
in the future.
REAL ESTATE INVESTMENTS ARE ILLIQUID.
Tarragon is subject to all the risks incident to ownership of real estate,
many of which relate to the general lack of liquidity of real estate
investments, including:
o changes in general or local economic conditions;
o changes in interest rates and availability of permanent mortgage
financing that may render the sale or refinancing and the acquisition
of a property difficult or unattractive and that may make debt service
more burdensome;
o changes in real estate and zoning laws;
o increases in real estate taxes;
o federal or local economic or rent control; and
o floods, earthquakes and other similar acts.
9
<PAGE> 11
Because of the lack of liquidity of real estate investments generally, our
ability to respond quickly to changing circumstances may be impaired.
SOME OF OUR POTENTIAL LOSSES MAY NOT BE COVERED BY INSURANCE.
We believe that the real property we own is adequately covered by
insurance. However, certain types of losses, generally of a catastrophic nature,
may be uninsurable or not economically insurable. These excluded risks generally
include war, earthquakes, floods, environmental liabilities and punitive damage
judgments. If any of these kinds of losses occur and are not covered by
insurance, the value of your investment could be adversely affected.
OUR PROPERTIES MAY HAVE ENVIRONMENTAL CONTAMINATION, WHICH COULD REDUCE THE
VALUE OF YOUR INVESTMENT.
Various federal, state, and local environmental laws, ordinances, and
regulations subject property owners or operators to liability for the costs of
removal or remediation of hazardous or toxic substances on real property. These
laws often impose liability without regard to whether the owner or operator knew
of, or was responsible for, the presence of the hazardous or toxic substances.
The presence of, or the failure to properly remediate, such substances may
adversely affect our ability to sell or rent a property or to borrow using that
property as collateral.
CAPITALIZATION
The following table sets forth the actual capitalization of Tarragon at
September 30, 1999, and the pro forma capitalization of Tarragon as adjusted to
give effect as of that date to an assumed exchange of 2,000,000 shares of 10%
Cumulative Preferred Stock for a like number of shares of common stock and the
consummation of the transaction with Robert C. Rohdie. Please read this table
along with the Consolidated Financial Statements and Notes and the Unaudited Pro
Forma Financial Information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
As of September 30, 1999
-------------------------------------
Actual Adjustments Pro Forma
--------- ----------- ---------
(dollars in thousands, except per share data)
<S> <C> <C> <C>
Notes, debentures and interest payable $ 275,704 $ 84,548 $ 360,252
Other liabilities 19,066 481 19,547
--------- --------- ---------
294,770 85,029 379,799
--------- --------- ---------
Minority interest -- 5,000 5,000
Stockholders' equity
Common stock (8,087,354 shares at
September 30, 1999, after deducting
2,796,216 shares held in treasury) 81 (20) 61
Special stock -- -- --
Cumulative preferred stock (2,000,000
shares assumed issued) -- 20 20
Paid-in capital 300,674 -- 300,674
Accumulated dividends in excess
of accumulated earnings (226,711) -- (226,711)
Accumulated other comprehensive
income (loss) (91) -- (91)
--------- --------- ---------
Total stockholders' equity 73,953 -- 73,953
--------- --------- ---------
Total capitalization $ 368,723 $ 90,029 $ 458,752
========= ========= =========
</TABLE>
10
<PAGE> 12
MARKET PRICE INFORMATION
Our outstanding shares of common stock are listed on the NASDAQ National
Market System under the symbol "TARR." Prior to the merger of NIRT and Tarragon
on November 24, 1998, the NIRT shares of beneficial interest were listed on the
NASDAQ National Market. At that time, and for several years preceding that
event, our common stock was listed on the NASDAQ Small Cap Market under the
symbol "VIPT." Following the merger, we applied for and obtained the listing of
our common stock on the NASDAQ National Market effective May 3, 1999.
The following table sets forth the high and low bid quotations of our
common stock reported by the NASDAQ system for the periods indicated.
Over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, markdown or commissions, and may not necessarily represent actual
transactions. The following table also includes cash distributions paid to
stockholders, which have been restated to give effect to the November 1998
merger of NIRT into Tarragon and a September 1997 10% stock dividend of NIRT.
<TABLE>
<CAPTION>
PERIOD HIGH LOW DISTRIBUTIONS
PAID
<S> <C> <C> <C>
1997
First Quarter $7.04 $5.65 $0.092
Second Quarter 7.38 7.04 0.092
Third Quarter 7.93 7.15 0.092
Fourth Quarter 8.63 7.74 0.102
1998
First Quarter 9.14 7.99 0.102
Second Quarter 10.85 8.88 0.102
Third Quarter 14.02 10.66 0.102
Fourth Quarter 12.31 10.00 0.105
1999
First Quarter 12.050 11.000 0.105
Second Quarter 13.063 10.625 0.105
Third Quarter 14.000 9.875 0.105
Fourth Quarter 15.625 10.000 0.105
2000
First Quarter
(through February 24, 2000) 10.625 10.125 --
</TABLE>
On February 24, 2000, the closing bid price of Tarragon common stock on the
NASDAQ National Market was $10.50 per share.
Future distributions to stockholders are dependent upon Tarragon's income,
financial condition, capital requirements, cash flow, tax status and other
factors deemed relevant by our Board of Directors. The Board has announced its
intention to make annual cash dividends to common stockholders beginning in
2000, with total cash distributions, including dividends on common stock and the
10% Cumulative Preferred Stock, not to exceed one-half of funds from operations.
11
<PAGE> 13
SELECTED FINANCIAL DATA
Please read the following information along with the Consolidated Financial
Statements and Notes beginning on page 51 of this Prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 39 of this Prospectus. For accounting purposes, we treated the
November, 1998 merger of Tarragon and NIRT as a reverse acquisition of Tarragon
by NIRT using the purchase method of accounting. As a result, the historical
balances and operating information presented below for periods prior to the
merger are those of NIRT. Dollar amounts are in thousands, except per share
amounts.
The pro forma data presented below gives effect to the issuance of
preferred stock in connection with the Exchange Offer and the consummation of
the transaction with Robert C. Rohdie whereby Tarragon acquired Mr. Rohdie's
interests in Tarragon's joint venture projects with him. This information has
been prepared assuming 2,000,000 shares of common stock have been tendered and
exchanged for 2,000,000 shares of preferred stock pursuant to the Exchange
Offer. Please read this information along with the Unaudited Pro Forma Financial
Information included elsewhere in this Prospectus. The pro forma data set forth
below is not necessarily indicative of the actual number of shares of common
stock that will be exchanged for preferred stock pursuant to the Exchange Offer
or what the financial position or operating results would have been had the
transaction with Mr. Rohdie occurred at prior dates or what the financial
position or operating results will be following the consummation of the
transaction with Mr. Rohdie.
<TABLE>
<CAPTION> Nine
Months
Ended
Sept 30, Years Ended December 31,
----------- -----------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenue $ 55,378 $ 58,700 $ 52,017 $ 49,962 $ 45,240 $ 40,135
Expenses (59,302) (61,095) (51,749) (49,176) (46,214) (40,915)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before net
gain on sale of real estate,
gain on sale of investments,
gain on insurance settlement,
litigation settlement, and
extraordinary items (3,924) (2,395) 268 786 (974) (780)
Net gain on sale of real estate 8,571 2,108 4,350 3,700 533 385
Gain on sale of investments -- 123 913 -- 412 141
Gain on insurance settlement 231 -- -- 451 -- --
Litigation settlement (350) -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations 4,528 (164) 5,531 4,937 (29) (254)
Extraordinary items (248) (1,231) 61 -- 737 --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 4,280 $ (1,395) $ 5,592 $ 4,937 $ 708 $ (254)
=========== =========== =========== =========== =========== ===========
PER SHARE DATA(1)
EARNINGS PER SHARE
Income (loss) from continuing
operations $ .55 $ (.02) $ .72 $ .60 $ -- $ (.03)
Extraordinary items (.03) (.16) .01 -- .09
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ .52 $ (.18) $ .73 $ .60 $ .09 $ (.03)
=========== =========== =========== =========== =========== ===========
Weighted average shares(2) 8,276,338 7,619,604 7,693,031 8,161,197 8,222,799 8,539,220
</TABLE>
- ---------------------
(1) Share and per share data have been restated to give effect to the merger of
Tarragon with NIRT on the basis of 1.97 shares of Tarragon's common stock
for each share of beneficial interest of NIRT and 10% stock dividends paid
by NIRT in September of each of 1995 through 1997.
(2) Represents the weighted average shares of common stock used in the
computation of earnings per share.
12
<PAGE> 14
<TABLE>
<CAPTION> Nine
Months
Ended
Sept 30, Years Ended December 31,
----------- -----------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS PER SHARE -
ASSUMING DILUTION
Income (loss) from
continuing operations $ .54 $ (.02) $ .71 $ .60 $ -- $ (.03)
Extraordinary items (.03) (.16) .01 -- .09 --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ .51 $ (.18) $ .72 $ .60 $ .09 $ (.03)
=========== =========== =========== =========== =========== ===========
Weighted average shares -
assuming dilution(1) 8,381,739 7,619,604 7,769,296 8,197,049 8,223,800 8,539,220
Dividends(2) $ .32 $ .41 $ .38 $ .34 $ .31 $ .24
PRO FORMA OPERATING
DATA
Revenue $ 61,494 $ 63,052
Expenses 66,798 66,913
Income (loss) from continuing
operations 2,858 (2,017)
Dividends accumulated on
cumulative preferred stock 1,800 2,400
Income (loss) from continuing
operations available to
common shareholders 1,058 (4,417)
PRO FORMA PER
SHARE DATA
EARNINGS PER SHARE - BASIC AND
DILUTED
Income (loss) from continuing
operations available to
common shareholders $ 0.17 $ (0.79)
Weighted average shares 6,276,338 5,619,604
Weighted average shares - 6,381,739 5,619,604
assuming dilution
</TABLE>
- ---------------------
(1) Represents the weighted average shares of common stock used in the
computation of earnings per share - assuming dilution.
(2) Dividends in 1995 through 1998 represented return of capital. Dividends in
1994 were taxable to shareholders as ordinary income.
13
<PAGE> 15
<TABLE>
<CAPTION>
Sept 30, December 31,
-------- ----------------------------------------------------
1999 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Real estate $295,822 $293,975 $233,936 $193,722 $195,675 $184,658
Notes and interest
receivable(1) -- -- -- -- 6,388 9,997
Investments in and advances
to partnerships 44,444 37,356 13,839 4,739 10,780 11,026
Total assets 368,723 357,060 265,640 211,341 222,038 217,040
Notes, debentures, and
interest payable 275,704 263,361 184,126 134,270 144,497 138,316
Shareholders' equity 73,953 76,685 71,091 69,063 69,627 73,360
Book value per share $ 9.14 $ 9.06 $ 9.47 $ 9.95 $ 10.42 $ 11.58
PRO FORMA BALANCE
SHEET DATA
Real estate $399,332
Investments in and advances to
partnerships 29,127
Total assets 458,752
Notes, debentures, and interest 360,252
payable
Shareholders equity 73,953
Book value per common share $ 8.21
</TABLE>
- ---------------------
(1) Notes and interest receivable at September 30, 1999, and at December 31,
1998, 1997, and 1996, are classified with other assets.
14
<PAGE> 16
<TABLE>
<CAPTION> Nine
Months
Ended
Sept 30, Years Ended December 31,
--------- --------------------------------------------------------
1999 1998 1997 1996 1995 1994
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA
Cash flows provided by (used in):
Operating activities $ 5,297 $ 2,533 $ 3,261 $ 3,795 $ 2,030 $ 1,852
Investing activities (17,830) (43,828) (43,813) (436) (5,436) (1,409)
Financing activities 15,421 39,475 40,952 (1,171) 1,596 1,981
Calculation of funds from operations:
Net income (loss) $ 4,280 $ (1,395) $ 5,592 $ 4,937 $ 708 $ (254)
Extraordinary items 248 1,231 (61) -- (737) --
Litigation settlement(1) 350 -- -- -- -- --
Gain on insurance
settlement(2) (231) -- -- (451) -- --
Net gain on sale of
real estate (8,571) (2,108) (4,350) (3,700) (533) (385)
Gain on sale of
investments -- -- (215) -- -- --
Depreciation and
amortization of real
estate assets 8,131 7,602 7,225 5,374 5,959 4,992
Depreciation and
amortization of real
estate assets of partnerships 2,686 1,892 356 305 882 1,086
Distributions from
partnerships in excess of
Tarragon's investments
in the partnerships (9) (338) (41) (899) -- --
-------- -------- -------- -------- -------- --------
Funds from operations(3) $ 6,884 $ 6,884 $ 8,506 $ 5,566 $ 6,279 $ 5,439
======== ======== ======== ======== ======== ========
Ratio of earnings to combined
fixed charges and preferred
stock dividends 1.33 1.13 1.34 1.28 .99 1.00
Deficiency of earnings to
combined fixed charges and
preferred stock dividends -- -- -- -- $ 95 --
PRO FORMA OTHER DATA
Ratio of earnings to combined
fixed charges and preferred
stock dividends 1.12 .90
Deficiency of earnings to
combined fixed charges and
preferred stock dividends -- $ 2,232
</TABLE>
- ---------------------
(1) The litigation settlement represents an uninsured liability claim settled
after reversal of a favorable lower court decision.
(2) The gains on insurance settlement represent proceeds in excess of the basis
of properties destroyed by fire and not rebuilt. The gain in 1999 relates
to a directly-owned property, while the gain in 1996 is Tarragon's share of
gain realized by a partnership in which Tarragon held a 40% interest.
(3) Tarragon generally considers funds from operations (or FFO) to be an
appropriate measure of the performance of a real estate company. FFO, as
defined by the National Association of Real Estate Investment Trusts (or
NAREIT), equals net income (loss), computed in accordance with generally
accepted accounting principals (or GAAP), excluding gains (or losses) from
debt restructuring and sales of property, plus depreciation and
amortization of real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for
unconsolidated partnerships and joint ventures are calculated to reflect
FFO on the same basis. The amortization of deferred financing costs is not
added back to net income (loss) in our calculation, consistent with our
historical method of calculating FFO. In October 1999, NAREIT clarified the
definition of FFO. According to this clarification, nonrecurring items that
are not defined as extraordinary under GAAP
15
<PAGE> 17
will be reflected in the calculation of FFO. Extraordinary items and gains
and losses from sales of depreciable operating property will continue to be
excluded from FFO. The clarification of FFO was effective January 1, 2000.
We will report FFO using the clarification beginning in the first quarter
of 2000. We believe that FFO is useful to investors as a measure of the
performance of a real estate company because, along with cash flows from
operating activities, investing activities, and financing activities, it
provides investors an understanding of our ability to incur and service
debt and to make capital expenditures. We believe that in order to
facilitate a clear understanding of our operating results, FFO should be
examined in conjunction with net income (loss) as presented in the
financial statements included elsewhere in this report. FFO does not
represent cash generated from operating activities in accordance with GAAP
and therefore should not be considered an alternative to net income as a
indication of our operating performance or to cash flow as a measure of
liquidity and is not necessarily indicative of cash available to fund cash
needs and dividends. Our calculation of FFO may differ from the methodology
for calculating FFO utilized by other companies and, accordingly, may not
be comparable to such other companies.
Effective January 1, 1997, Tarragon modified its calculation of FFO to
include the add back of amortization of leasing commissions associated with
its commercial properties. We believe that this treatment is consistent
with a majority of other real estate companies. If we had calculated FFO in
the same manner for each of the years ended December 31, 1996, 1995, and
1994, FFO would have been higher by $262,000, $272,000, and $235,000,
respectively.
Included in FFO for the years ended December 31, 1998, 1997, 1995, and
1994, are gains totaling $123,000, $698,000, $412,000, and $141,000,
respectively, resulting from Tarragon's sale of investments in marketable
equity securities.
Included in FFO for the year ended December 31, 1996, is a provision for
loss of $300,000. This provision for loss was recorded in connection with
the write-down of the carrying value of Mariposa Manor to its estimated
fair value. Included in FFO for the year ended December 31, 1995, is a
provision for loss credit of $425,000. This amount was comprised of the
reversal of a $700,000 allowance provided in 1993 against Pepperkorn Office
Building and a provision of $275,000 to reduce the carrying value of K-Mart
Shopping Center in Kansas City, Missouri, to the net sale proceeds received
in July 1995.
16
<PAGE> 18
THE EXCHANGE OFFER
Tarragon invites you to tender your shares of common stock in exchange for
10% Cumulative Preferred Stock on a share-for-share basis. This offer is
directed to those holders of Tarragon common stock who would prefer to hold a
security with a fixed dividend yield and a fixed liquidation preference in the
event of redemption or other disposition of the security upon the terms and
subject to the conditions set forth in this Prospectus and the related Letter of
Transmittal (which together constitute the "Exchange Offer").
PURPOSE AND EFFECT
The Exchange Offer is part of our overall capitalization strategy to have
available a class of securities other than common stock that will provide
holders with an anticipated fixed dividend yield and liquidation preference. The
Exchange Offer, if accepted, could be beneficial to those of you willing to
trade potential future appreciation for a fixed dividend. Also, it may provide
Tarragon with an alternative form of security with which to acquire properties
in the future. The class of 10% Cumulative Preferred Stock is designated to
consist of 2,500,000 shares. The number of shares which may be issued pursuant
to the Exchange Offer is limited to 2,000,000 shares (subject to increase in
certain events), which would result in 500,000 shares being available in the
event that we elect to accept more than the maximum for exchange, for future
distribution in connection with the acquisition of assets, or for other uses, at
the discretion of our Board of Directors.
The Exchange Offer is not part of any plan to "go private" and not the
first in any series of transactions designed to have a resulting effect upon our
outstanding common stock. However, to the extent shares of common stock are
exchanged for shares of 10% Cumulative Preferred Stock pursuant to the Exchange
Offer, the number of shares of common stock outstanding in the hands of public
stockholders will initially decrease. Assuming the maximum of 2,000,000 shares
of common stock are tendered pursuant to the Exchange Offer, a minimum of
6,021,770 shares of common stock would continue to remain in the hands of public
stockholders. Therefore, the Exchange Offer should not have an adverse effect by
itself upon the listing of the common stock on the NASDAQ National Market.
As of February 15, 2000, there were 8,021,770 shares of common stock
outstanding and 1,110,374 shares reserved for issuance in connection with
unexercised stock options and Tarragon's Incentive Share Option Plan and
Independent Director Share Option Plan. The 2,000,000 shares of common stock
that Tarragon is offering to acquire in exchange for shares of 10% Cumulative
Preferred Stock represent approximately 25% of the shares of common stock
outstanding at February 15, 2000. On March _______________, 2000, the last full
trading day prior to the commencement of the Exchange Offer, the closing price
per share sales price of Tarragon common stock as reported on the NASDAQ
National Market was $_________. You are urged to obtain current market
quotations for Tarragon's common stock prior to tendering your shares for
exchange. See also "MARKET PRICE INFORMATION."
WE ARE NOT MAKING ANY RECOMMENDATION THAT YOU TENDER FOR EXCHANGE ANY OR
ALL OF YOUR SHARES OF COMMON STOCK. YOU MUST MAKE YOUR OWN DECISIONS AS TO
WHETHER TO TENDER YOUR COMMON STOCK FOR EXCHANGE AND IF YOU DO SO, HOW MANY
SHARES OF COMMON STOCK TO TENDER.
WE HAVE BEEN ADVISED THAT NONE OF THE EXECUTIVE OFFICERS OF TARRAGON INTEND
TO TENDER ANY SHARES FOR EXCHANGE PURSUANT TO THE EXCHANGE OFFER. HOWEVER, ONE
OR MORE DIRECTORS MAY TENDER A PORTION OF THEIR SHARES.
Common stock acquired by Tarragon pursuant to the Exchange Offer will
become treasury shares which will be available for issuance by Tarragon without
further stockholder action (except as required by applicable law or the rules of
any national securities exchange on which the shares of common stock are listed)
for general or other corporate purposes, including stock splits or dividends,
acquisitions, the raising of additional capital for use in Tarragon's business
and the implementation of employee benefit plans.
17
<PAGE> 19
TERMS OF EXCHANGE OFFER
Tarragon will accept up to a maximum of 2,000,000 shares of common stock
validly tendered in accordance with this Exchange Offer prior to 5:00 P.M.,
local New York City time, on May 3, 2000. We will issue one share of 10%
Cumulative Preferred Stock in exchange for each share of common stock we accept
in the Exchange Offer.
Tarragon will notify the Exchange Agent in writing of its acceptance of
validly tendered common stock. Upon its receipt of notice from Tarragon, the
Exchange Agent will deliver to the tendering holder an equal number of shares of
10% Cumulative Preferred Stock. If we do not accept your tendered common stock,
the Exchange Agent will return your original stock certificates to you, at our
expense, as promptly as practicable after the Expiration Time.
You may tender for exchange some or all of the common stock you hold. If
you tender any of the common stock you hold, you will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange. Tarragon will pay all
charges and expenses, other than certain applicable taxes, in connection with
the Exchange Offer. See " - Fees and Expenses" below.
As of February 15, 2000, an aggregate of 6,079,136 shares of common stock
were held by one registered holder, a nominee of DTC. This Prospectus, together
with the Letter of Transmittal, is being sent to such registered holder and to
others believed to have beneficial interests in the common stock. Tarragon
intends to conduct the Exchange Offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the SEC.
CONSEQUENCES OF FAILURE TO EXCHANGE
If you choose not to participate in the Exchange Offer, your right to
transfer your common stock will not be adversely affected.
EXPIRATION TIME; EXTENSIONS; AMENDMENTS
The Exchange Offer will expire at 5:00 P.M. local New York City time on
May 3, 2000, which is sometimes referred to in this Prospectus as the
"Expiration Time." However, Tarragon, in its sole discretion, may extend the
Exchange Offer, in which case the "Expiration Time" shall be the latest date and
time to which the Exchange Offer is extended. If we decide to extend the
Exchange Offer, we will notify the Exchange Agent and each registered common
stock holder of the extension prior to 9:00 A.M., local New York City time, on
the next business day after the previously scheduled Expiration Time.
We reserve the right, in our sole discretion, to delay acceptance of any
tendered common stock, to extend the Exchange Offer, to amend the terms of the
Exchange Offer, or, if any of the conditions set forth under "-Conditions to
Exchange Offer" are not satisfied, to terminate the Exchange Offer, by giving
oral or written notice of such delay, extension, amendment or termination to the
Exchange Agent.
PRORATION
The Exchange Offer is not conditioned upon any minimum number of shares of
common stock being tendered for exchange. All stockholders who have properly
tendered and not withdrawn their shares of common stock prior to the Expiration
Time will receive shares of 10% Cumulative Preferred Stock upon the terms and
conditions of the Exchange Offer.
If we receive more than 2,000,000 shares of common stock for exchange (or
such greater numbers as we may elect to accept) which are properly tendered and
not withdrawn, we will first accept shares from all "Odd Lot" holders, and then
accept shares on a pro rata basis from all other holders who properly tendered.
If you do not wish to have your shares of common stock exchanged subject to
proration, you may tender your shares of common stock subject to the condition
that a designated number or none of the shares be exchanged. We will return all
shares of common stock not accepted for exchange because of proration or
conditional tenders.
For purposes of the Exchange Offer, the term "Odd Lot" means all shares of
common stock properly tendered by any stockholder who beneficially holds, as of
the close of business on March 16, 2000, fewer than 100 shares (i.e., 99 or
less). In the event of proration, Odd Lots will be accepted for exchange before
any proration. In
18
<PAGE> 20
order to qualify for this preference, an Odd Lot holder must properly tender all
shares beneficially owned and must not make a conditional tender. Partial
tenders will not qualify for this preference. This preference is not available
to holders of 100 or more shares, even if holders have separate certificates for
fewer than 100 shares. Any Odd Lot holder wishing to tender all shares of common
stock beneficially owned free of proration must complete the box captioned "Odd
Lot" on the Letter of Transmittal and, if applicable, on the Notice of
Guaranteed Delivery.
Tarragon reserves the right, in its sole discretion, to accept for exchange
more than 2,000,000 shares of common stock pursuant to the Exchange Offer,
although it does not currently plan to do so. Tarragon may increase the total
number of shares accepted by up to 5% of the outstanding shares of common stock
without prior notice and without extending the Expiration Time.
Tarragon also reserves the right to exchange all shares owned beneficially
or of record by any stockholder who has tendered all of such shares, if as a
result of proration, that stockholder would otherwise be left with an aggregate
of fewer than 100 shares of common stock. If Tarragon exercises this right, it
will increase the number of shares it is offering to exchange by the number of
shares that are needed to exercise this right (i.e., the number of shares that
would be owned by all stockholders who would become Odd Lot holders as a result
of proration).
PROCEDURES FOR TENDERING
To participate in the Exchange Offer, you must be a holder of Tarragon
common stock. Except as set forth under "Book-Entry Transfer" or "Guaranteed
Delivery" below, to tender your common stock effectively in the Exchange Offer,
you must:
o complete, sign, and date the Letter of Transmittal, or a copy of the
Letter of Transmittal,
o have your signature(s) guaranteed (if required by the Letter of
Transmittal), and
o mail or otherwise deliver the Letter of Transmittal, together with
your original stock certificate(s), to the Exchange Agent prior to the
Expiration Time.
THE METHOD OF DELIVERY OF YOUR COMMON STOCK AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT YOUR DISCRETION,
AND AT YOUR RISK. HOWEVER, WE RECOMMEND THAT YOU USE AN OVERNIGHT OR HAND
DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION TIME.
NO LETTER OF TRANSMITTAL OR COMMON STOCK SHOULD BE SENT TO TARRAGON.
A tender of common stock that is not withdrawn before the Expiration Time
constitutes your agreement with Tarragon in accordance with the terms and
subject to the conditions set forth in this Prospectus and in the Letter of
Transmittal.
BENEFICIAL OWNERSHIP
If your stock certificates are registered in the name of a broker, dealer,
commercial bank, trust company, or other nominee and you wish to tender, you
should contact the registered holder promptly and instruct them to tender on
your behalf.
If you are a beneficial owner and you wish to tender on your own behalf,
you must make appropriate arrangements to register ownership of the common stock
in your name or obtain a properly completed stock power from the registered
holder, prior to completing and executing the Letter of Transmittal and
delivering it with your common stock to the Exchange Agent. Please note that the
transfer of registered ownership may take considerable time.
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ENDORSEMENTS AND SIGNATURES GUARANTEED
Signatures on a Letter of Transmittal or a notice of withdrawal must be
guaranteed by an Eligible Institution (as defined below) if you complete the box
entitled "Special Registration Instruction" or "Special Delivery Instructions"
on the Letter of Transmittal or notice. If signatures on a Letter of Transmittal
or a notice of withdrawal are required to be guaranteed, the guarantee may be by
any eligible guarantor institution that is a member of or participant in the
Securities Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Program or an "eligible guarantor institution" within the
meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of the common stock tendered, the common stock must be
endorsed or accompanied by a properly completed stock power, signed by the
registered holder as that registered holder's name appears on the common stock.
If the Letter of Transmittal or any common stock or stock powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations, or others acting in a fiduciary or representative capacity,
those persons should indicate their capacity when signing, and submit evidence
satisfactory to Tarragon of their authority to so act with the Letter of
Transmittal.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account with respect to the common
stock at the Depository Trust Company (or "DTC") for purposes of the Exchange
Offer, and any financial institution that is a participant in DTC's systems may
make book-entry delivery of common stock by causing DTC to transfer the common
stock into the Exchange Agent's account.
If delivery of common stock is effected through book-entry transfer, the
Letter of Transmittal, with any required signature guarantees and any other
required documents, must be separately delivered to the Exchange Agent at the
address set forth under "-Exchange Agent" on or prior to the Expiration Time or
you must comply with the guaranteed delivery procedures described below, unless
you accept the Exchange Offer pursuant to DTC's Automated Tender Offer Program.
DTC's Automated Tender Offer Program (or "ATOP") is the only method of
processing exchange offers through DTC. To accept the Exchange Offer through
ATOP, participants in DTC must send electronic instructions to DTC through DTC's
communication system in lieu of sending a signed, hard copy Letter of
Transmittal. DTC is obligated to communicate those electronic instructions to
the Exchange Agent. To tender common stock through ATOP, the electronic
instructions sent to DTC and transmitted by DTC to the Exchange Agent must
contain the character by which the participant acknowledges its receipt of and
agreement to be bound by the terms of the Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
If you desire to tender your common stock but your common stock is not
immediately available, or time will not permit your common stock or other
required documents to reach the Exchange Agent before the Expiration Time, or
you cannot complete the procedure for book-entry transfer on a timely basis, you
may still effect a tender through an Eligible Institution.
The Exchange Agent must receive a properly completed and duly executed
Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by Tarragon, from the Eligible
Institution prior to the Expiration Time. The Notice of Guaranteed Delivery must
set forth the name and address of the holder of common stock and the amount of
common stock being tendered, state that the tender is being made and guarantee
that within three New York Stock Exchange trading days after the date of
execution of the Notice, the certificates for all physically tendered common
stock, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal, will be
received by the Exchange Agent.
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WITHDRAWAL RIGHTS
You may withdraw your tender of common stock at any time prior to the
Expiration Time.
To effectively withdraw your tender of common stock, you must deliver a
written notice of withdrawal, or for DTC participants, an electronic ATOP
transmission notice of withdrawal, to the Exchange Agent at its address set
forth in this Prospectus under "Exchange Agent" prior to the Expiration Time.
Your notice of withdrawal must:
o specify the name of the person who deposited the common stock to be
withdrawn (the "Depositor"),
o identify the common stock to be withdrawn by certificate number(s) and
principal amount of the common stock,
o be signed by the holder in the same manner as the original signature
on the Letter of Transmittal by which the common stock was tendered
(including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Transfer Agent register
the transfer of the common stock into the name of the person
withdrawing the tender, and
o specify the name in which the common stock is to be registered, if
different from that of the Depositor.
Shares of common stock that are effectively withdrawn will be deemed not to
have been validly tendered for exchange for purposes of the Exchange Offer. Any
common stock which has been tendered for exchange but which is not exchanged for
any reason will be returned to you at our cost as soon as practicable after
withdrawal, rejection of tender, or termination of the Exchange Offer. Properly
withdrawn common stock may be tendered again by following one of the procedures
discussed under "Procedures for Tendering" at any time on or prior to the
Expiration Time.
EXCHANGE AGENT
American Stock Transfer & Trust Company has been appointed as Exchange
Agent for the Exchange Offer. All executed Letters of Transmittal should be
directed to the Exchange Agent at the following address and telephone numbers:
AMERICAN STOCK TRANSFER & TRUST COMPANY
By Registered or Certified Mail, Overnight or
Hand Delivery:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
By Facsimile (for Eligible Institutions):
(718) 921-8365
For Information or
Confirmation by Telephone:
(718) 921-8210
Originals of all documents sent via facsimile should also be sent promptly by
registered or certified mail, by hand or by overnight delivery service.
INFORMATION AGENT
The Herman Group has been appointed as Information Agent for the Exchange
Offer. Questions or requests for assistance or additional copies of this
Prospectus, the Letter of Transmittal or other material may be directed to the
Information Agent at the following address and telephone numbers:
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THE HERMAN GROUP
16633 North Dallas Parkway
Suite 600
Dallas, Texas 75001
(972) 312-1992 (Banks and Brokers call collect)
(888) 852-3365 (All others call toll free)
FEES AND EXPENSES
Except as set forth in this paragraph, Tarragon will not make any payments
to brokers, dealers or others soliciting acceptances of the Exchange Offer. The
principal solicitation is being made by mail; additional solicitations may be
made in person or by telephone by officers and employees of Tarragon or
representatives of The Herman Group, which was retained by Tarragon to act as
Information Agent in connection with the Exchange Offer. Tarragon has agreed to
pay The Herman Group reasonable and customary compensation in the amount of
$20,000 for its services, plus reimbursement for certain out-of-pocket
expenses.
Tarragon will pay all costs and expenses incurred in connection with the
Exchange Offer. Those costs and expenses are estimated in the aggregate to be
$140,000, which includes fees and expenses of the Exchange Agent, the
Information Agent, accounting, legal, printing, and related fees and expenses.
TRANSFER TAXES
If you tender your common stock for exchange, you will not be obligated to
pay any transfer taxes unless you instruct Tarragon to register the 10%
Cumulative Preferred Stock in the name of someone else, or request that common
stock not tendered or not accepted in the Exchange Offer be returned to someone
other than you. In such event you will be responsible for the payment of any
applicable transfer tax.
EFFECTIVENESS OF TENDER OR WITHDRAWAL
All questions as to the validity, form, eligibility, time of receipt,
acceptance, and/or withdrawal of tendered common stock will be determined by
Tarragon in its sole discretion, and Tarragon's determination will be final and
binding. Tarragon reserves the absolute right to reject any and all common stock
not properly tendered or any common stock which would, in the opinion of counsel
for Tarragon, be unlawful to accept.
Tarragon also reserves the right to waive any defects, irregularities or
conditions of tender as to particular common stock. Tarragon's interpretation of
the terms and conditions of the Exchange Offer (including the instructions in
the Letter of Transmittal) will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of common stock
must be cured within such time as Tarragon shall determine. Although Tarragon
intends to notify holders of defects or irregularities with respect to tenders
of common stock, neither Tarragon, the Exchange Agent, nor any other person
shall incur any liability for failure to give such notification. Tenders of
common stock will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any common stock received by the
Exchange Agent which is not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Time.
In addition, Tarragon reserves the right in its sole discretion to purchase
or make offers for any common stock that remains outstanding after the
Expiration Time or, as set forth under "-Conditions to the Exchange Offer," to
terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase common stock in the open market, in privately negotiated transactions,
or otherwise. The terms of any such purchases or offers could differ from the
terms of the Exchange Offer.
By tendering, you will represent to Tarragon that:
o the 10% Cumulative Preferred Stock you acquire pursuant to the
Exchange Offer is being obtained in the ordinary course of your
business, whether or not you are the registered holder,
o you are not engaged in or intend to engage in a distribution of 10%
Cumulative Preferred Stock,
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o you do not have an arrangement or understanding with any person to
participate in the distribution of 10% Cumulative Preferred Stock, and
o you are not an "affiliate" of Tarragon, as defined under Rule 405 of
the Securities Act.
In all cases, issuance of 10% Cumulative Preferred Stock for shares of
common stock that are accepted for exchange pursuant to the Exchange Offer will
be made only after timely receipt by the Exchange Agent of certificates for such
common stock or a timely Book-Entry Confirmation of receipt of such common stock
into the Exchange Agent's account at DTC, a properly completed and duly executed
Letter of Transmittal (or, with respect to the DTC and its participants,
electronic instructions in which the tendering holder acknowledges its receipt
of and agreement to be bound by the Letter of Transmittal), and all other
required documents. If any tendered common stock is not accepted for any reason
set forth in the terms and conditions of the Exchange Offer or if common stock
is submitted for a greater amount than the holder desires to exchange, the
unaccepted or non-exchanged common stock will be returned without expense to the
tendering holder (or, in the case of common stock tendered by book-entry
transfer, into the Exchange Agent's account at DTC pursuant to the book-entry
transfer procedures described above, the non-exchanged common stock will be
credited to an account maintained with DTC) as promptly as practicable after the
expiration or termination of the Exchange Offer.
Any broker-dealer that receives 10% Cumulative Preferred Stock for its own
account in exchange for common stock where such common stock was acquired by the
broker-dealer as a result of market-making activities or other trading
activities must acknowledge that it will deliver a prospectus in connection with
any resale of 10% Cumulative Preferred Stock. See "Plan of Distribution" below.
CONDITIONS TO THE EXCHANGE OFFER
Tarragon is not required to accept any common stock for exchange, or to
issue 10% Cumulative Preferred Stock in exchange for any common stock, and may
terminate or amend the Exchange Offer, if at any time before the acceptance of
such common stock for exchange, or the exchange of 10% Cumulative Preferred
Stock for such common stock, Tarragon determines that the Exchange Offer
violates applicable law, any applicable interpretation of the staff of the SEC
or any order of any governmental agency or court of competent jurisdiction.
The Exchange Offer is not being made to holders of common stock, nor will
Tarragon accept tenders for exchange from holders of common stock, in any
jurisdiction in which the Exchange Offer or the acceptance of the Exchange Offer
would not be in compliance with the securities or blue sky laws of such
jurisdiction. In addition, Tarragon will not accept for exchange any common
stock tendered, and no 10% Cumulative Preferred Stock will be issued in exchange
for any such common stock, if at such time any stop order shall be threatened or
in effect with respect to the registration statement of which this Prospectus
constitutes a part.
These conditions are for the sole benefit of Tarragon and may be asserted
by Tarragon regardless of the circumstances giving rise to any such condition or
may be waived by Tarragon in whole or in part at any time and from time to time
in its sole discretion. The failure by Tarragon to exercise any of these rights
shall not be deemed a waiver of any such right and each such right shall be
deemed an ongoing right which may be asserted at any time and from time to time.
PLAN OF DISTRIBUTION
Each broker-dealer that receives shares of 10% Cumulative Preferred Stock
for its own account in exchange for shares of common stock pursuant to the
Exchange Offer, where the shares of common stock were acquired by that
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a Prospectus in connection
with any resale of those shares. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of the shares of 10% Cumulative Preferred Stock received in
exchange for shares of common stock where such common stock was acquired as a
result of market-making activities or other trading activities. Tarragon has
agreed that, for a period of 180 days after the Expiration Time, it will make
this Prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until 180 days after the
Expiration Time, all dealers effecting transactions in the shares of 10%
Cumulative Preferred Stock may be required to deliver a Prospectus.
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Tarragon will not receive any proceeds from any sale of shares of 10%
Cumulative Preferred Stock by broker-dealers. Shares of 10% Cumulative Preferred
Stock received by broker-dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the shares of 10% Cumulative Preferred Stock or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such shares of 10% Cumulative Preferred
Stock. Any broker-dealer that resells shares of 10% Cumulative Preferred Stock
that were received by it for its own account pursuant to the Exchange Offer and
any broker or dealer that participates in a distribution of such shares of 10%
Cumulative Preferred Stock may be deemed to be an "underwriter" within the
meaning of the Securities Act, and any profit on any such resale of the shares
of 10% Cumulative Preferred Stock and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a Prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Time, Tarragon will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal or otherwise. Tarragon has agreed to pay all expenses incident to
the Exchange Offer other than commissions or concessions of any broker-dealers.
Based on interpretations by the staff of the SEC, as set forth in no-action
letters issued to certain third parties unrelated to us, we believe that 10%
Cumulative Preferred Stock issued pursuant to the Exchange Offer in exchange for
common stock may be offered for resale, resold or otherwise transferred by the
holders thereof (other than any holder which is an "affiliate" of Tarragon
within the meaning of Rule 405 promulgated under the Securities Act, or a
broker-dealer who purchased common stock directly from us to resell pursuant to
Rule 144A or any other available exemption promulgated under the Securities
Act), without compliance with registration and prospectus delivery requirements
of the Securities Act, provided that such 10% Cumulative Preferred Stock is
acquired in the ordinary course of such holders' business and such holders have
no arrangement with any person to engage in a distribution of 10% Cumulative
Preferred Stock.
The SEC has not considered the Exchange Offer in the context of a no-action
letter and we cannot be sure that the staff of the SEC would make a similar
determination with respect to the Exchange Offer as it has in other
circumstances. Furthermore, each holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of such 10% Cumulative Preferred Stock and has no arrangement or
understanding to participate in a distribution of 10% Cumulative Preferred
Stock. Each broker-dealer that receives 10% Cumulative Preferred Stock for its
own account pursuant to the Exchange Offer must acknowledge that it will comply
with the prospectus delivery requirements of the Securities Act in connection
with the resale of any 10% Cumulative Preferred Stock. Broker-dealers who
acquired common stock directly from us and not as a result of market-making
activities or other trading activities may not rely on the staff's
interpretations discussed above or participate in the Exchange Offer and must
comply with the prospectus delivery requirements of the Securities Act in order
to resell our common stock.
DESCRIPTION OF TARRAGON CAPITAL STOCK
Our authorized capital stock currently consists of 20,000,000 shares of
common stock, par value $0.01 per share, and 10,000,000 shares of special stock,
par value $0.01 per share, issuable in series. The Board of Directors has the
authority to fix or establish by resolution the voting power, dividend rate,
liquidation preference and rights and qualifications, limitations or
restrictions of any class or series of special stock. As of February 15, 2000,
8,021,770 shares of common stock were outstanding, and no series of special
stock has been formally designated.(1) The CUSIP number of the common stock is
876287-10-3.
- -------------------------
(1) Tarragon intends to file the form of Certificate of Designations,
Preferences and Relative Participating or Optional or Other Special Rights, and
Qualifications, Limitations or Restrictions Thereof of Special Stock approved by
resolution of the Board of Directors with the Secretary of State of Nevada as a
certificate amendatory to the Articles of Incorporation prior to the Expiration
Time of the Exchange Offer.
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10% CUMULATIVE PREFERRED STOCK
DIVIDEND RIGHTS
Holders of the 10% Cumulative Preferred Stock will be entitled to receive,
when and as declared by the Board of Directors out of the funds legally
available for such purpose, cumulative dividends at an annual rate of $1.20 per
share. Such dividends are payable on the fifteenth days of March, June,
September and December in each year on a cumulative basis commencing on
September 15, 2000. Accrued but unpaid dividends will not compound.
REDEMPTION
Tarragon may, at any time after June 30, 2003, and from time to time
thereafter, redeem any or all of the 10% Cumulative Preferred Stock then
outstanding upon payment of the applicable redemption price, plus all accrued
and unpaid dividends to the date of redemption. The redemption price is based
upon the Liquidation Value of $12 per share, plus a premium starting at $0.50
per share and reducing annually thereafter by $.10 per share per year. Tarragon
may purchase "Odd Lots" at any time and may purchase shares of 10% Cumulative
Preferred Stock in privately negotiated block transactions or open market
purchases. Tarragon may not, directly or indirectly, purchase or redeem shares
of the 10% Cumulative Preferred Stock while there is any arrearage in payment of
dividends or sinking funds on any other outstanding series of preferred stock.
SINKING FUND
Tarragon is not required to maintain any so-called "sinking fund" for the
retirement on any basis of the 10% Cumulative Preferred Stock.
RIGHTS ON LIQUIDATION
In the event of the liquidation, dissolution or winding up of Tarragon, the
holders of the 10% Cumulative Preferred Stock will be entitled to a preferential
payment in the amount of the Liquidation Value, plus all accrued and unpaid
dividends on a per share basis.
PREFERENCES AND SPECIAL PROVISIONS
The 10% Cumulative Preferred Stock will be preferred over common stock and
all other shares junior to the 10% Cumulative Preferred Stock with respect to
both dividends and distributions upon the liquidation, dissolution or winding up
of Tarragon. So long as any shares of 10% Cumulative Preferred Stock remain
outstanding, no dividend may be declared or paid and no distribution may be made
on the common stock or any other shares junior to the 10% Cumulative Preferred
Stock except in shares junior to the 10% Cumulative Preferred Stock unless all
accumulated dividends on the 10% Cumulative Preferred Stock have been paid and
the current dividend paid or declared.
RANKING
The 10% Cumulative Preferred Stock will rank at parity as to dividends and
upon liquidation, dissolution or winding up with all other shares of special
stock issued by Tarragon. Tarragon may not issue any shares of special stock of
any series which are superior to the 10% Cumulative Preferred Stock as to
dividends or rights upon liquidation, dissolution or winding up as long as any
shares of the 10% Cumulative Preferred Stock are issued and outstanding, without
the prior written consent of the holders of a majority of the shares of 10%
Cumulative Preferred Stock then outstanding, voting separately as a class.
VOTING RIGHTS
The holders of the shares of 10% Cumulative Preferred Stock shall only have
the voting rights specifically required by law under the Nevada General
Corporation Law. Whenever the 10% Cumulative Preferred Stock votes separately as
a class, the shares and title to vote carry one vote per share. If at any time
six quarterly dividends on
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the 10% Cumulative Preferred Stock are in arrears, in whole or in part, the
holders of that series of stock are entitled to vote separately as a class to
elect one director. Such director, if elected, will cease to serve when any
dividend arrearages are paid.
CONVERSION
Shares of 10% Cumulative Preferred Stock may not be converted into any
other securities of the Company at the option of the holder.
NUMBER OF SHARES AND SERIES
The number of shares designated to constitute the 10% Cumulative Preferred
Stock will be such number as may be actually issued by Tarragon not to exceed a
maximum of 2,500,000 shares, but the maximum number of shares issuable under the
Exchange Offer is limited to 2,000,000 shares. The remaining shares are
available in the event that we elect to accept more than the maximum for
exchange, for future distribution in connection with the acquisition of assets
or for other uses, at the discretion of our Board of Directors.
TRANSFER AGENT
The Transfer Agent and Registrar for the 10% Cumulative Preferred Stock
will be American Stock Transfer & Trust Company, 40 Wall Street, 46th Floor, New
York, New York 10005.
COMMON STOCK
Our common stock has no conversion, redemption, preemptive or subscription
rights. Holders of our common stock are entitled to share, pro rata, in
accordance with the number of shares held, any dividends that may be declared,
from time to time, by our Board of Directors, after all current and accrued
dividends have been paid, or declared and set apart for payment, in connection
with any then outstanding series of special or preferred stock. All shares of
our common stock presently issued and outstanding are fully paid and
non-assessable.
RIGHTS ON LIQUIDATION
Upon the liquidation, dissolution or winding up of Tarragon, holders of our
common stock are entitled to receive, after payment of all debts and liabilities
and the amounts or preference, if any, for each outstanding share of special
stock, all remaining assets, prorata, in proportion to the number of shares of
our common stock held by them.
VOTING RIGHTS
Each share of common stock is entitled to one vote for all purposes on all
matters submitted to the stockholders. Tarragon's Articles of Incorporation do
not authorize cumulative voting in the election of directors. Similarly, there
are no redemption rights, sinking fund provisions or rights of conversion with
respect to our common stock and holders of our common stock do not have any
preemptive rights to acquire additional shares of common stock.
TRANSFER AGENT
The Transfer Agent and Registrar for our common stock is American Stock
Transfer & Trust Company, 40 Wall Street, 46th Floor, New York, New York 10005.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summarizes the anticipated material U.S. federal income tax
consequences of the issuance of 10% Cumulative Preferred Stock to you pursuant
to the Exchange Offer contemplated by this Prospectus and represents the opinion
of Prager, Metzger & Kroemer PLLC of Dallas, Texas to the extent it describes
matters of law and legal conclusions. This discussion applies only to a "U.S.
Holder," which is a term explained below. It applies only to shares of Tarragon
common stock held as capital assets and does not address aspects of U.S. federal
income tax that may apply to holders that are subject to special tax rules
including:
o insurance companies
o tax exempt organizations
o financial institutions
o dealers in securities
o traders in securities who elect to apply a mark to market method of
accounting
o foreign persons
o persons who acquired shares of Tarragon common stock pursuant to an
exercise of employee stock options or rights or otherwise as
compensation
o persons who hold shares of Tarragon common stock as part of a straddle
conversion transaction, or constructive sale.
Also, this summary does not address state, local or foreign tax
consequences of the Exchange Offer. This summary is based on current law, and
future legislation, judicial or administrative changes or interpretations, which
may be retroactive, could affect the accuracy of this discussion.
For purposes of this discussion, a "U.S. Holder" means a holder of Tarragon
common stock that is:
o an individual citizen or resident of the United States;
o a corporation organized in or under the laws of the United States or
any political subdivision thereof or therein;
o a partnership, or other entity treated as a partnership under United
States federal income tax law, created or organized under the laws of
the United States or of any State or the District of Columbia except
to the extent that the partnership or other entity is not treated as a
domestic partnership under United States federal income tax law;
o an estate, the income of which is subject to U.S. federal income
taxation regardless of its source;
o a trust if a U.S. court can exercise primary supervision over the
administration of such trust and one or more U.S. persons has
authority to control all of the substantial decisions of such trust;
or
o a trust if the trust was in existence and qualified as a "United
States person," within the meaning of the Internal Revenue Code (the
"Code"), on August 20, 1996, under the law as then in effect and
elected to continue to be so treated.
WE STRONGLY ADVISE EACH U.S. HOLDER TO CONSULT HIS OR HER OWN TAX ADVISOR
AS TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER, INCLUDING
THE PARTICULAR FACTS AND CIRCUMSTANCES THAT MAY BE UNIQUE TO SUCH U.S. HOLDER,
AND AS TO ANY ESTATE, GIFT, STATE, LOCAL OR FOREIGN TAX CONSEQUENCES OF THE
EXCHANGE OFFER.
If you receive shares of 10% Cumulative Preferred Stock in exchange for
Tarragon common stock pursuant to this Exchange Offer, you will be treated as
having disposed of your shares of Tarragon common stock in a taxable sale or
exchange and will recognize gain or loss, in an amount equal to the positive or
negative difference, as the case may be, between:
o the fair market value in U.S. dollars of the shares of 10% Cumulative
Preferred Stock plus any cash payment received by you in the Exchange
Offer; and
o your adjusted tax basis, determined in U.S. dollars, in the shares of
Tarragon common stock surrendered by you in the Exchange Offer,
(generally, your cost of acquiring the shares of Tarragon common stock
surrendered in the Exchange Offer).
Generally, any gain or loss will be capital gain or loss, and will be
long-term capital gain or loss if your holding period for the shares of Tarragon
common stock exceeds one year. If you are an individual U.S. Holder, this gain
will be subject to United States federal income tax at a maximum rate of 20% if
your holding period for the
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shares of Tarragon common stock you surrendered in the Exchange Offer exceeds
one year. Because no cash will be received by you in the Exchange Offer (other
than cash in lieu of a fractional interest from prior transactions) any United
States federal income tax liability arising from the Exchange Offer will have to
be satisfied from your other resources to the extent required by applicable law.
In addition, if taxable gain or loss is recognized by you:
o the adjusted tax basis of the shares of 10% Cumulative Preferred Stock
received by you in the Exchange Offer on the date of the exchange will
be equal to the fair market value of those shares of 10% Cumulative
Preferred Stock on that date; and
o your holding period for those shares of 10% Cumulative Preferred Stock
will begin on the day immediately following such date.
CAPITAL GAINS
If you sell or otherwise dispose of your shares of Tarragon common stock
(instead of tendering pursuant to the Exchange Offer) or sell your shares of 10%
Cumulative Preferred Stock received in exchange, including a distribution
treated as gain from the disposition of those shares of Tarragon common
stock,you will recognize gain or loss for United States federal income tax
purposes in an amount equal to the difference between the U.S. dollar value of
the amount realized upon the sale or other disposition and your tax basis,
determined in U.S. dollars, in the shares of Tarragon common stock. Generally,
this gain or loss will be capital gain or loss, will be long-term capital gain
or loss if your holding period for the shares of Tarragon Common Stock exceeds
one year on the date of the sale or other disposition. If you are an individual
U.S. Holder, this long-term capital gain will be subject to United States
federal income tax at a maximum rate of 20%.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to dividend
payments, or other taxable distributions, on shares, including shares of 10%
Cumulative Preferred Stock if the payments are made within the United States and
you are a non-corporate U.S. Holder, and the "backup withholding" at the rate of
31% will apply to these payments if:
o you fail to provide an accurate taxpayer identification number in the
manner required by the Code and the applicable Treasury Regulations;
o the Internal Revenue Service ("IRS") has notified you that you have
failed to report all interest or dividends required to be shown on
your United States federal income tax returns; or
o you fail to comply with applicable certification requirements.
If you are a corporation or a person that is not a U.S. Holder, you may be
required to establish your exemption from information reporting and backup
withholding by certifying your status on Internal Revenue Service Forms W-8 or
W-9.
In general, payment of the proceeds from the sale of shares of Tarragon
common stock to or through a United States office of a broker is subject to both
backup withholding and information reporting unless you certify your non-United
States status under penalties of perjury or otherwise establish an exemption.
Information reporting and backup withholding generally will not apply to a
payment made outside the United States of the proceeds of a sale of shares of
Tarragon common stock through an office outside the United States of a
non-United States broker. However, information reporting requirements (but not
backup withholding) will apply to a payment made outside the United States of
the proceeds of a sale of shares of Tarragon common stock through an office
outside the United States of a broker that:
o is a U.S. Holder;
o derives 50% or more of its gross income for a specified three-year
period from the conduct of a trade or business in the United States;
or
28
<PAGE> 30
o is a "controlled foreign corporation" as to the United States,
unless the broker has documentary evidence in its files that you are not a U.S.
Holder or you otherwise establish an exemption.
Regulations making certain modifications to the backup withholding and
information reporting rules will take effect for payments made after December
31, 2000.
Amounts withheld under the backup withholding rules may be credited against
your United States federal income tax liability, and you may obtain a refund of
any excess amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the IRS.
TAX TREATMENT OF TARRAGON AND ITS STOCKHOLDERS
By filing a Revocation of REIT Election for the 2000 tax year, Tarragon
will be subject to federal income tax (including the alternative minimum tax) on
all of its taxable income at regular corporate rates, and will not receive a
deduction for dividends paid to its stockholders. Also, any distributions to
stockholders will still be taxable to the stockholders as ordinary income to the
extent of current and accumulated earnings and profits (although such dividends
will be eligible, subject to certain limitations, for the corporate
dividends-received deductions as to a corporate stockholder). Thus, Tarragon's
income will be subject to "double taxation" - at the corporate level and the
stockholder level - to the extent such income is distributed to stockholders.
Cessation of REIT status could force Tarragon to reduce distributions and to
incur substantial indebtedness or liquidate substantial investments in order to
pay the resulting corporate taxes. In addition, Tarragon will not be eligible to
elect REIT status for the four subsequent taxable years.
If Tarragon later qualifies and elects to be taxed as a REIT again,
Tarragon may face significant adverse tax consequences. Immediately prior to the
effectiveness of the election, Tarragon would be treated as having disposed of
all of its assets in a taxable transaction, triggering taxable gain as to
Tarragon's appreciated assets. However, if Tarragon elects, taxation of such
built-in gain will occur only for those assets sold within ten years of electing
REIT status. In addition, by the end of the first year for which the REIT
election is effective, all prior years' accumulated earnings and profits must be
distributed as a taxable dividend.
WITHHOLDING ON DIVIDENDS AND SALE PROCEEDS. Dividends from Tarragon will
ordinarily not be subject to withholding of federal income taxes. However,
Tarragon will be required to withhold at a rate of 31% from distributions paid
to those stockholders who (i) fail to furnish their taxpayer identification
number to Tarragon; (ii) have, according to the IRS, furnished an incorrect
taxpayer identification number to Tarragon; (iii) have, according to the IRS,
under-reported interest, dividend or patronage dividend income in the past; or
(iv) have failed to satisfy the payee-certification requirements of Code Section
3406. Each stockholder will be required to provide and certify his correct
taxpayer identification number and to certify that he is an exempt recipient. In
addition, proceeds from the sale of shares could be subject to backup
withholding if the broker through whom the sale is made does not have certain
certifications from the selling stockholder.
INVESTORS SHOULD SEEK THEIR OWN TAX ADVICE. The preceding is a brief
summary of the tax considerations potentially affecting Tarragon and its
stockholders. This discussion is based on the current state of the law, which is
subject to legislative, administrative or judicial actions. Moreover, the
discussion does not fully address considerations that may adversely affect the
treatment of certain prospective investors (such as corporations, foreign and
tax-exempt investors). In these circumstances, and particularly because the
ultimate tax impact may vary depending upon the personal circumstances of each
investor, ALL PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE TAX ASPECTS OF OWNING AND DISPOSING OF SHARES OF STOCK OF
TARRAGON.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION PURPOSES ONLY. STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX
29
<PAGE> 31
ADVISORS TO DETERMINE THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF
THE EXCHANGE OFFER AND ANY SALES MADE BY THEM.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information presents certain
condensed financial information for Tarragon giving effect to the issuance of
preferred stock in connection with the Exchange Offer and the consummation of
the transaction with Robert C. Rohdie whereby Tarragon acquired his interests in
joint venture projects with him. The pro forma financial information has been
prepared assuming 2,000,000 shares of common stock have been tendered and
exchanged for 2,000,000 shares of preferred stock and the transaction with Mr.
Rohdie has been consummated (i) as of September 30, 1999, in the case of the
balance sheet information presented and (ii) as of January 1, 1999 and 1998, in
the case of the income statement information presented. Please read the pro
forma financial information along with the Consolidated Financial Statements and
Notes beginning on Page 51 of this Prospectus. The pro forma financial
information is presented for informational purposes only and is not necessarily
indicative of the actual number of shares of common stock that will be tendered
and exchanged for preferred stock pursuant to the Exchange Offer or what the
financial position or operating results would have been had the transaction with
Mr. Rohdie occurred at prior dates or what the financial position or operating
results will be following the consummation of the transaction with Mr. Rohdie.
30
<PAGE> 32
Tarragon Realty Investors, Inc.
Pro Forma Consolidated Balance Sheet
September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Actual Adjustments Pro Forma
--------- ----------- ---------
Assets (dollars in thousands)
<S> <C> <C> <C>
Real estate held for sale (net of accumulated
depreciation of $25,878) $ 57,350 $ -- $ 57,350
Less-allowance for estimated losses (1,156) -- (1,156)
--------- --------- ---------
56,194 -- 56,194
Real estate held for investment (net of accumulated
depreciation of $33,073) 239,628 103,510 343,138
Investments in and advances to partnerships 44,444 (15,317) 29,127
Cash and cash equivalents 5,330 82 5,412
Restricted cash 8,857 277 9,134
Other assets, net 14,270 1,477 15,747
--------- --------- ---------
$ 368,723 $ 90,029 $ 458,752
========= ========= =========
Liabilities and Shareholders' Equity
Liabilities
Notes, debentures, and interest payable (including
$6,763 due to affiliates) $ 275,704 $ 84,548 $ 360,252
Other liabilities 19,066 481 19,547
--------- --------- ---------
294,770 85,029 379,799
Commitments and contingencies
Minority interest -- 5,000 5,000
Shareholders' equity
Common stock, $.01 par value; authorized shares, 20,000,000; actual shares
outstanding, 8,087,354 (after deducting 2,796,216 held in treasury); pro
forma shares outstanding,
6,087,354 (after deducting 4,796,216 held in treasury) 81 (20) 61
Special stock, $.01 par value; authorized shares, 10,000,000;
actual shares outstanding, none; after designation of cumulative preferred
stock, authorized shares, 7,500,000; pro forma shares outstanding, none -- -- --
Preferred stock, $.01 par value; liquidation preference, $24,000 or $ 12
per share; authorized shares, none; actual shares outstanding, none;
after designation and exchange of preferred stock, authorized
shares, 2,500,000; pro forma shares outstanding, 2,000,000 -- 20 20
Paid-in capital 300,674 -- 300,674
Accumulated dividends in excess of accumulated earnings (226,711) -- (226,711)
Accumulated other comprehensive income (loss) (91) -- (91)
--------- --------- ---------
73,953 -- 73,953
--------- --------- ---------
$ 368,723 $ 90,029 $ 458,752
========= ========= =========
</TABLE>
See Notes to Pro Forma Financial Information.
31
<PAGE> 33
Tarragon Realty Investors, Inc.
Pro Forma Consolidated Statement of Operations
Nine Months Ended September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Actual Adjustments Pro Forma
----------- ----------- -----------
(dollars in thousands, except per share data)
<S> <C> <C> <C>
Revenue
Rentals $ 54,672 $ 6,316 $ 60,988
Interest 896 (748) 148
Management fees 370 (119) 251
Equity in income (loss) of partnerships (560) 667 107
----------- ----------- -----------
55,378 6,116 61,494
Expenses
Property operations 28,158 2,890 31,048
Interest 15,992 3,377 19,369
Depreciation 8,010 1,229 9,239
General and administrative-
Corporate 4,317 -- 4,317
Property 2,825 -- 2,825
----------- ----------- -----------
59,302 7,496 66,798
----------- ----------- -----------
(Loss) before minority interest in income of consolidated
partnership, gain on sale of real estate, gain on insurance
settlement, litigation settlement, and extraordinary items (3,924) (1,380) (5,304)
Minority interest in income of consolidated partnership -- (290) (290)
Gain on sale of real estate 8,571 -- 8,571
Gain on insurance settlement 231 -- 231
Litigation settlement (350) -- (350)
----------- ----------- -----------
Income from continuing operations 4,528 (1,670) 2,858
Dividends accumulated on cumulative preferred stock -- (1,800) (1,800)
----------- ----------- -----------
Income from continuing operations
available to common shareholders $ 4,528 $ (3,470) $ 1,058
=========== =========== ===========
Earnings per share
Income from continuing operations
available to common shareholders $ 0.55 $ 0.17
=========== ===========
Weighted average shares of common stock
used in computing earnings per share 8,276,338 (2,000,000) 6,276,338
=========== =========== ===========
Earnings per share-assuming dilution
Income from continuing operations
available to common shareholders $ 0.54 $ 0.17
=========== ===========
Weighted average shares of common stock used in
computing earnings per share-assuming dilution 8,381,739 (2,000,000) 6,381,739
=========== =========== ===========
</TABLE>
See Notes to Pro Forma Financial Information.
32
<PAGE> 34
Tarragon Realty Investors, Inc.
Pro Forma Consolidated Statement of Operations
Year Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Actual Adjustments Pro Forma
----------- ----------- -----------
(dollars in thousands, except per share data)
<S> <C> <C> <C>
Revenue
Rentals $ 58,798 $ 2,845 $ 61,643
Interest 739 (566) 173
Management fees 52 -- 52
Equity in income (loss) of partnerships (889) 2,073 1,184
----------- ----------- -----------
58,700 4,352 63,052
Expenses
Property operations (including $1,895 to affiliates) 32,963 2,067 35,030
Interest 16,599 2,782 19,381
Depreciation 7,349 960 8,309
Amortization of goodwill 41 -- 41
Advisory fee to affiliate 1,048 -- 1,048
General and administrative- --
Corporate (including $1,562 to affiliates) 3,095 9 3,104
----------- ----------- -----------
61,095 5,818 66,913
----------- ----------- -----------
(Loss) before minority interest in income of consolidated
partnership, net gain on sale of real estate,
gain on sale of investments, and extraordinary items (2,395) (1,466) (3,861)
Minority interest in income of consolidated partnership -- (387) (387)
Net gain on sale of real estate 2,108 -- 2,108
Gain on sale of investments 123 -- 123
----------- ----------- -----------
(Loss) from continuing operations (164) (1,853) (2,017)
Dividends accumulated on cumulative preferred stock -- (2,400) (2,400)
----------- ----------- -----------
(Loss) from continuing operations
available to common shareholders $ (164) $ (4,253) $ (4,417)
=========== =========== ===========
Earnings per share - basic and diluted
(Loss) from continuing operations
available to common shareholders $ (0.02) $ (0.79)
=========== ===========
Weighted average shares of common stock
used in computing earnings per share 7,619,604 (2,000,000) 5,619,604
=========== =========== ===========
Weighted average shares of common stock used in
computing earnings per share-assuming dilution 7,619,604 (2,000,000) 5,619,604
=========== =========== ===========
</TABLE>
See Notes to Pro Forma Financial Information.
33
<PAGE> 35
Tarragon Realty Investors, Inc.
Notes to Pro Forma Financial Information
(Unaudited)
NOTE 1 BASIS OF PRESENTATION. On February 7, 2000, Tarragon effectively acquired
the interests of Robert C. Rohdie and his affiliates in ten apartment
communities recently completed or currently under construction, as well as in
all joint venture development projects still in the planning stages, for a total
value of up to $10,000,000. Mr. Rohdie, Tarragon's joint venture partner in the
development of these projects, contributed his equity interests to an operating
partnership formed by Tarragon, in exchange for a preferred interest in the
operating partnership and a guaranteed fixed return of $200,000 for the first
two years, increasing by $40,000 per year for the next five years, plus an
annual amount equal to the dividends payable on 96,385 shares of Tarragon common
stock. In addition, upon completion and lease up of each of the five identified
apartment communities presently under construction or in advanced stages of
development planning, Mr. Rohdie will receive an increase in his guaranteed
fixed return based on the agreed value of his equity in the completed property.
After one year, Mr. Rohdie has the right to convert his preferred interest in
the operating partnership into 96,385 shares of our common stock and preferred
stock with a face value of up to $8,000,000 and a like dividend to his preferred
interest in the operating partnership. If we do not have available an issue of
preferred stock outstanding at the time of the conversion, or at our discretion,
we may pay the cash value of Mr. Rohdie's preferred interest over three years.
Because Tarragon controls the new operating partnership, its operations will be
consolidated.
Mr. Rohdie's preferred interest in the operating partnership has been initially
valued at $5,000,000 (based on the value of five of the ten properties that have
been completed). Once the remaining five properties are completed and leased up,
Mr. Rohdie will receive an additional preferred interest in the operating
partnership to be valued at up to $5,000,000. Mr. Rohdie's interest in the
operating partnership will be presented as a minority interest in Tarragon's
Consolidated Balance Sheet.
This transaction will be recorded using purchase method accounting. The value of
Mr. Rohdie's preferred interest in the operating partnership will be allocated
to the completed assets of the operating partnership based on relative fair
values. The guaranteed fixed return payable to Mr. Rohdie will be recorded
based on an annual effective yield of 8.67%.
In connection with the Exchange Offer, 2,000,000 shares of preferred stock are
being offered in exchange for shares of common stock on a one for one basis. The
pro forma financial information has been prepared assuming issuance of 2,000,000
shares of preferred stock pursuant to the Exchange Offer.
The accompanying Pro Forma Consolidated Balance Sheet has been prepared assuming
the transaction with Mr. Rohdie was consummated and 2,000,000 shares of
preferred stock were issued and 2,000,000 shares of common stock were retired on
September 30, 1999. The accompanying Pro Forma Consolidated Statement of
Operations for the nine months ended September 30, 1999, has been prepared
assuming the transaction with Mr. Rohdie was consummated and 2,000,000 shares of
preferred stock were issued and 2,000,000 shares of common stock were retired on
January 1, 1999. The accompanying Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1998, has been prepared assuming the transaction
with Mr. Rohdie was consummated and 2,000,000 shares of preferred stock were
issued and 2,000,000 shares of common stock were retired on January 1, 1998.
NOTE 2 PRO FORMA ADJUSTMENTS - AS OF SEPTEMBER 30, 1999. The allocation of the
purchase price in the transaction with Mr. Rohdie included in the accompanying
Pro Forma Consolidated Balance Sheet as of September 30, 1999, is summarized as
follows (dollars in thousands):
<TABLE>
<S> <C>
Real estate held for investment $ 103,510
Investments in and advances to partnerships (15,317)
Cash and cash equivalents 82
Restricted cash 277
Other assets 1,477
Notes and interest payable (84,548)
Other liabilities (481)
---------
Minority interest $ 5,000
=========
</TABLE>
34
<PAGE> 36
Tarragon Realty Investors, Inc.
Notes to Pro Forma Financial Information
(Unaudited)
The pro forma adjustments that reflect the issuance of 2,000,000 shares of
preferred stock and the retirement of 2,000,000 shares of common stock into
treasury pursuant to the Exchange Offer are presented as a reduction of common
stock for its $0.01 par value per share and an increase in preferred stock for
its $0.01 par value per share.
NOTE 3 PRO FORMA ADJUSTMENTS - NINE MONTHS ENDED SEPTEMBER 30, 1999. Pro forma
adjustments reflected in the accompanying Pro Forma Consolidated Statement of
Operations for the nine months ended September 30, 1999, include the following:
o Consolidation of the operations of the partnerships for the nine months
ended September 30, 1999, including rental revenue, property operating
expenses, and interest expense.
o Elimination of Tarragon's equity in income (losses) of the partnerships
during this period as recorded using the equity method of accounting.
o Elimination of interest income on advances to the partnerships during this
period.
o Elimination of management fees received from the partnerships during this
period.
o Depreciation expense computed on Tarragon's cost basis of the real estate
consolidated in connection with the transaction with Mr. Rohdie.
o Minority interest in income of consolidated partnership for the preferred
return payable to Mr. Rohdie for the first nine months following
consummation of the transaction.
o Three quarterly dividends of $0.30 per share ($1.20 on an annual basis)
payable on 2,000,000 shares of preferred stock assumed to have been issued
pursuant to the Exchange Offer.
NOTE 4 PRO FORMA ADJUSTMENTS - YEAR ENDED DECEMBER 31, 1998. Pro forma
adjustments reflected in the accompanying Pro Forma Consolidated Statement of
Operations for the year ended December 31, 1998, include the following:
o Consolidation of the operations of the partnerships for the year ended
December 31, 1998, including rental revenue, property operating expenses,
and interest expense.
o Elimination of Tarragon's equity in income (losses) of the partnerships
during this period as recorded using the equity method of accounting.
o Elimination of interest income on advances to the partnerships during this
period.
o Depreciation expense computed on Tarragon's cost basis of the real estate
consolidated in connection with the transaction with Mr. Rohdie.
o Minority interest in income of consolidated partnership for the preferred
return payable to Mr. Rohdie for the first year following consummation of
the transaction.
o Annual dividends of $1.20 per share payable on 2,000,000 shares of
preferred stock assumed to have been issued pursuant to the Exchange Offer.
35
<PAGE> 37
THE COMPANY
Tarragon is a fully integrated real estate development, acquisition and
management company, historically operated as a real estate investment trust for
federal income tax purposes. We control approximately 17,000 apartment units and
almost 2.5 million square feet of commercial space located throughout the
continental United States, with concentrations in Florida, Texas, California and
Connecticut. Our primary business and only industry segment is investing in and
developing income-producing real estate directly and through partnerships and
joint ventures.
INVESTMENT OBJECTIVES
Our primary investment objective is to increase the market value of our
real estate holdings per common share and, secondarily, to maximize funds from
operations and distributions to stockholders.
Our real estate portfolio currently consists of multifamily and commercial
properties, including office buildings and shopping centers, having established
income-producing capabilities. Our policy is to continuously improve the
performance and value of our existing properties through intensive management
and consistent capital improvements, in order to increase revenues and enhance
value.
We also seek to improve the quality of our overall portfolio through
development of new projects and through selective and opportunistic
acquisitions. In selecting real estate for purchase, we consider the location,
age and type of property, gross rentals, lease terms, financial and business
standing of tenants, operating expenses, fixed charges, land values, and
physical condition of the property. Although we are not limited as to the type
of real estate we may acquire or the geographic area where we may invest, we
intend to concentrate on under-managed and under-performing multifamily projects
in areas in which we presently operate, to add to the efficiency of our existing
portfolio. The actual number and mix in type of income producing real estate and
real estate interests which we acquire will depend on the particular real
estate, market conditions and other circumstances existing at the time of
acquisition.
We finance acquisitions and capital improvements largely from operations
and through mortgages. Funds for investment have also come from property sales
and collection of mortgages receivable, although mortgages receivable are no
longer a significant source of cash. In the future, property sales and proceeds
from financing or refinancing of properties are expected to provide most of our
funds for investment. For this reason, the availability and cost of long term
mortgage funds in the financial markets are key factors in our ability to
continue to make investments without raising funds through sale of common or
other classes of stock.
There is no limitation on the amount we may invest in any single property,
or on the amount we can borrow for the purchase of any property. We may acquire
properties subject to, or assume, existing indebtedness. In general, however, we
seek to finance our acquisition of new properties at least in part through
mortgage loans, with our liability for the repayment of that indebtedness
limited to the value of the property and the rents and profits we expect to
derive from it. We use our best efforts to obtain financing on the most
favorable terms available to us. If we cannot obtain purchase money financing on
acceptable terms or such financing is otherwise unavailable, we may purchase a
property for cash with the intent of obtaining a mortgage loan for a portion of
the purchase price at a later time. By operating on a leveraged basis, we
maximize the funds we have available for additional investment. To the extent
that we cannot obtain mortgage loans on our properties, our ability to make
additional investments will be restricted.
Selective dispositions are also a part of our strategy to cultivate a high
quality and efficient portfolio. Properties that we believe have peaked in value
or can no longer operate efficiently within our portfolio have been placed on
the market for sale. While we have identified properties we want to sell, market
conditions will determine if any of them will actually be sold.
Although we have traditionally invested in a wide variety of developed,
income-producing real estate, in 1997 we also began to invest in the development
of new class A, luxury apartment communities. We intend to continue investing in
new construction or development projects either directly or in partnership with
others, relying on the
36
<PAGE> 38
experience of our partners in regions or property types where we have little or
no experience. To the extent that we invest in construction projects, we are
subject to the usual business risks associated with development activities, such
as cost overruns and delays.
In the past, we have held mortgages secured by real estate as investments.
Mortgage notes and interest receivable currently comprise less than 1% of our
assets. We have no present intention of investing in additional real estate
mortgages, except to the extent that we may acquire a mortgage for the purpose
of foreclosing on the asset securing it and holding that asset for investment.
We also may make mortgage loans in connection with the sale of our real estate.
We may invest in interests in other persons and securities of other issuers
engaged in real estate related activities. Although we do not currently have any
plans to invest in the securities of other issuers for the purpose of exercising
control, we may in the future acquire all or substantially all of the securities
or assets of other entities if that investment would be consistent with our
investment policies. We do not intend that our investment activity require us to
register as an "investment company" under the Investment Company Act of 1940 and
we would divest securities before any such registration would be required.
We do not intend to underwrite the securities of other issuers. We may
offer shares of our common or preferred stock to the public or in exchange for
property, although we do not have any present intent to issue any preferred
stock other than the 10% Cumulative Preferred Stock. We have in the past, and
may in the future, repurchase or otherwise acquire our own common stock on the
open market or through private transactions. We currently have Board
authorization to repurchase up to 1,054,803 shares of our common stock.
We do not presently intend to make investments other than as described
above, although we may do so in the future. Our investment policies may be
reviewed and modified from time to time by our officers and directors, without
the vote of stockholders.
PROPERTIES
At December 31, 1999, our real estate portfolio consisted of 107
properties, 33 of which were owned through partnerships, including 76 apartment
communities, 10 office buildings, 13 retail buildings, seven tracts of land, and
one single-family residence. Of these properties, 93 were held for investment.
The remaining 14 properties, some of which were obtained through foreclosure of
collateral securing mortgage loans receivable, were held for sale. We believe
our properties are adequately covered by insurance.
The following table summarizes certain information about our properties,
including those owned through partnerships, by state. The number of apartment
units includes 506 units under construction owned through partnerships and 320
units under construction owned directly.
37
<PAGE> 39
Tarragon Realty Investors, Inc.
Real Estate Summary
December 31, 1999
<TABLE>
<CAPTION>
Mortgage Loans on Real Estate
--------------------------------------------------------------
(dollars in thousands)
Number of Commercial Weighted Balance
Apartment Square Original 12/31/99 Average Due at
Units Footage Amount Balance Interest Maturity Maturity Dates
- -------------- ---------- ---------- ---------- --------- -------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
California 973 227,473 $ 41,790 $ 39,273 7.50% $ 36,975 Jan-00 - Nov-09
Colorado 760 -- 19,400 19,400 9.01% 19,400 Jun-00
Connecticut 2,581 163,986 89,006 88,674 7.63% 86,350 Jun-00 - Aug-08
Florida 5,601 463,151 223,649 194,608 8.53% 190,832 Jun-00 - Jan-19
Georgia 360 144,712 28,919 25,421 7.46% 26,036 Nov-99 - Jun-09 *
Illinois -- 105,363 2,450 1,850 8.48% 1,850 Jun-01
Kentucky 424 -- 8,825 8,589 7.47% 7,471 Jun-06 - Feb-09
Louisiana 320 -- 6,950 6,880 6.56% 5,907 Jan-09
Maryland 459 -- 16,790 16,421 7.88% 117 Jan-31
Michigan 163 30,650 5,500 5,399 6.96% 4,715 Mar-08
Mississippi -- 341,361 -- -- -- -- --
Nevada -- 39,600 2,250 2,188 7.91% 2,054 Dec-04
North Carolina -- 5,200 -- -- -- -- --
Ohio 504 -- 5,450 5,136 8.02% 4,396 Jan-06
Oklahoma 411 -- 7,579 7,408 7.51% 6,581 Feb-02 - Feb-10
Tennessee 840 -- 15,200 14,809 7.75% 13,965 Jun-00 - Dec-05
Texas 2,010 260,597 76,171 65,184 8.42% 64,863 Feb-00 - Dec-05
Washington DC -- 62,229 4,200 4,147 7.12% 3,959 Jun-03
Wisconsin -- 214,620 -- -- -- -- --
------- ---------- ---------- --------- ---- ---------
15,406 2,058,942 $ 554,129 $ 505,387 7.91% $ 475,471
======= ========== ========== ========= ==== =========
</TABLE>
Notes:
(1) This schedule includes information about number of apartment units,
commercial square footage, and mortgage loans on real estate owned both
directly and through unconsolidated joint ventures. It does not include
such information about properties in early stages of development or
properties we manage that are owned by affiliates.
(2) Weighted average interest is weighted based on the December 31, 1999,
balance for each mortgage loan and is computed using the stated interest
rates for fixed rate mortgages and the interest rates in effect as of
December 31, 1999, for variable rate mortgages.
* In February 2000, an extension was executed with the lender on the $6.9
million loan that matured in November 1999. The maturity date has been
extended to February 2003.
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<PAGE> 40
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Please read this discussion along with the Consolidated Financial
Statements and Notes beginning on Page 51 of this Prospectus.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of cash are property operations, borrowings, and the
sale of properties. We believe these sources will continue to meet our cash
requirements, including debt service payments, property maintenance and
improvements, development costs on construction properties, projected purchases
of operating properties, dividends, and planned repurchases of common stock.
Although we expect these sources of cash to be more than sufficient to fund
planned uses of cash, we make no assurance that the expected sales and
refinancings of properties will be completed as planned.
Net cash from property operations has provided over $96 million from the
beginning of 1996 through the third quarter of 1999. In 1996 and 1997,
operations of properties contributed approximately $20 million annually. In
1998, this source increased to $28 million. For the nine months ended September
30, 1999, this source contributed $28 million, and another $7 million is
expected from the fourth quarter of 1999. The addition of 13 properties to the
portfolio in connection with the merger between Tarragon and NIRT was the
primary factor in the 25% increase for 1999 over 1998. Therefore, net cash from
property operations is expected to increase at a much lower rate in 2000.
From the beginning of 1996 through the third quarter of 1999, proceeds from
borrowings generated $223 million from the refinancing of mortgages on directly
owned properties and borrowings under line of credit facilities ($6.1 million of
which was advanced by affiliates of William S. Friedman, President, Chief
Executive Officer, and a Director of Tarragon) and $8.6 million of repayment of
advances or capital distributions from partnerships in connection with
refinancing of partnership properties. Proceeds from refinancing of mortgages on
directly owned properties and borrowings under line of credit facilities
provided another $4.4 million in the fourth quarter of 1999. The following table
provides summary information about borrowings, which are expected to continue to
be a key source of cash for Tarragon.
<TABLE>
<CAPTION>
Nine Months
Ended Sept.
30, 1999 1998 1997 1996
----- ----- ----- -----
(in millions)
<S> <C> <C> <C> <C>
Proceeds from borrowings $27.8 $77.7 $77.3 $34.3
Advances (repayment of advances)
from affiliates .8 5.9 -- (.6)
Payoff of existing debt 10.8 40.2 32.9 24.4
Net cash proceeds 15.5 32.7 38.5 7.3
Repayment of advances/distributions
from partnerships' financing activities 4.8 3.8 -- --
</TABLE>
In 1998, the refinancing of 801 Pennsylvania Avenue provided $3.8 million
in cash. During the nine months ended September 30, 1999, repayment of advances
from partnerships' financing activities included $1.8 million from Tarragon
Savannah, $2.3 million from RI Windsor, and $900,000 from Danforth National
Apartments. We received $600,000 in the fourth quarter of 1999 from RI Panama
City. The source of the funds these four partnerships paid to Tarragon was the
placement of permanent financing on their recently constructed properties. We
expect to receive $15 million in 2000 from partnerships' financing activities.
Mortgage principal payments totaling $7.8 million are due in the fourth
quarter of 1999, including $7 million of balloon payments. We intend to either
pay off the loans as they come due or extend the due dates while seeking to
obtain long term refinancing. We estimate that refinancing of directly owned
properties will generate $20 million in net cash proceeds in 2000. We believe we
can arrange new financing as needed but cannot assure that we will be successful
in our efforts or that the timing of new financing will coincide with the due
dates of maturing loans.
39
<PAGE> 41
From the beginning of 1996 through the third quarter of 1999, proceeds from
the sale of real estate totaled $23.2 million. We sold 11 properties and
portions of two other properties with an aggregate net carrying amount of $48
million and paid off mortgages totaling $44 million in connection with these
transactions. In the fourth quarter of 1999, we sold one property with a net
carrying amount of $2.7 million, receiving net cash proceeds of $778,000 after
the payoff of a $2.2 million mortgage. Additionally in the fourth quarter of
1999, we received $2.9 million as our share of the net proceeds from the sale of
a partnership property. In the first quarter of 2000, we sold a portion of one
property with a net carrying amount of $9.3 million and received net cash
proceeds of $3.8 million after the payoff of a $2.5 million mortgage. We
estimate proceeds from the sale of real estate to provide an additional $18
million during 2000.
Since the beginning of 1996, we have paid $54.3 million in interest on
notes and debentures payable. In 1996 and 1997, interest paid was $11 million
annually. In 1998, interest paid increased to $16 million. For the nine months
ended September 30, 1999, interest paid was $15 million. Interest paid in the
fourth quarter of 1999 was $5 million, resulting in a 25% increase between 1998
and 1999. This increase is predominantly due to the addition of 13 properties
added to the portfolio in connection with the merger and to the increase in
mortgage debt related to refinancings. Based on expected refinancings and
acquisitions for 2000, interest payments are expected to increase 10% in 2000.
Since the beginning of 1996, Tarragon has purchased 14 operating properties
and two tracts of land (one on which construction is presently underway on a
320-unit apartment community) and acquired one property through a deed in lieu
of foreclosure of collateral securing a mortgage receivable. The aggregate cost
of these acquisitions was $69 million, $39 million of which was financed with
mortgage debt, and $25 million of which was paid in cash. We anticipate using
cash of $10 million in 2000 for the acquisition of real estate.
As discussed above, in connection with the November 1998 merger of Tarragon
and NIRT, the size of our portfolio increased by 13 operating properties. The
aggregate basis allocated to the real estate assets was $39 million, and
mortgages and debentures assumed total $29 million. The purchase consideration
was valued at $14 million, consisting of 1.2 million shares of common stock.
Since the beginning of 1996, Tarragon has made capital improvements to its
directly owned real estate of $71 million , $26 million of which was spent on
construction at our development properties. We expect to spend approximately $47
million on construction costs for eight apartment communities in various stages
of development in 2000, of which $34 million will be funded by construction
loans. We plan on spending approximately $10 million on capital improvements to
our directly owned operating properties in 2000.
Since the beginning of 1997, Tarragon and Robert C. Rohdie have formed nine
partnerships to build and own luxury apartment communities in Florida, Georgia,
and Alabama. Tarragon's aggregate contributions and advances through the third
quarter of 1999 of $21.7 million have provided substantially all of the
development costs not covered by construction loans. Tarragon advanced another
$641,000 during the fourth quarter of 1999. In February 2000, Tarragon
effectively acquired Mr. Rohdie's interests in these partnerships. The
properties owned by these partnerships were contributed to a new operating
partnership which Tarragon controls, and Mr. Rohdie received a preferred
interest in this partnership valued at up to $10 million. When certain
conditions are met, Mr. Rohdie may convert his preferred interest into preferred
and common stock of Tarragon.
In 1997, Tarragon formed Ansonia Apartments, L.P., with Richard Frary, Joel
Mael, Robert Rothenberg, and Saul Spitz. Since then, Ansonia has purchased 16
apartment properties with an aggregate 2,581 units, and a 160,000 square foot
industrial warehouse for conversion to residential lofts, all located in
Connecticut. The cash required to purchase the properties was provided by
Tarragon in the form of capital contributions that earn a preferred return and
have priority over distributions to the partners. We have also made
interest-bearing advances to Ansonia for major renovations to four of its
properties. Our contributions and advances total $16.2 million. We expect to
fund an additional $5 million in 2000.
In 1997, Tarragon formed National Omni Associates, L.P., which purchased a
289-unit high rise apartment building in Miami Beach, Florida, for $32 million
in February 1998. We have invested $5.1 million in this partnership. In the
fourth quarter of 1999, we implemented a condominium conversion program for this
property. We plan to spend $2 million in 2000 on improvements to this property.
Although we have begun to offer the condominium units for sale, we do not expect
to receive net cash proceeds from sales in 2000 since any cash received from
sales during 2000 will be used to pay down the mortgage debt.
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<PAGE> 42
We have paid regular quarterly dividends since 1993. From the beginning of
1996 through the third quarter of 1999, cash dividends totaling $11 million (or
$1.45 per share) have been paid to stockholders. We expect to continue to pay
regular dividends, but the Board has decided to pay dividends annually rather
than quarterly in the future to reduce the administrative costs of paying the
dividends.
The Board of Directors has authorized a share repurchase program. We will
continue to repurchase shares of our common stock as long as we believe the fair
market value of our net assets per share is substantially greater than the
market price of our stock. Since the beginning of 1996, Tarragon has repurchased
over 1.5 million shares of its common stock in open market and negotiated
transactions at an aggregate cost of $15 million. As of December 31, 1999, there
were 1,054,803 shares authorized for repurchase, and we plan to spend $5 million
in 2000 on share repurchases.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998.
Following is a discussion of the significant components of the increase in
net operating results of $4.2 million for the nine months ended September 30,
1999, compared to the corresponding period in 1998.
The properties acquired directly (not through joint ventures) in 1998 and
1999 contributed $1.3 million to net income. This amount is comprised of
increases in net rental income (rental revenue less property operating expenses)
of $4.3 million, interest expense of $2.2 million, and depreciation of $810,000.
An increases in net rental income of $2.8 million came from multifamily
properties acquired in 1998. At September 30, 1999, Tarragon's directly owned
multifamily properties accounted for 78% of its real estate and included 9,206
operating apartment units. Commercial properties acquired in 1998 and 1999
accounted for a $1.5 million increase in net rental income. At September 30,
1999, Tarragon owned commercial properties with an aggregate 1.9 million square
feet.
The 58 same store properties held in both years experienced an increase in
rental revenue of $1.6 million from increased rental rates at certain
properties. These properties also achieved a decrease in vacancy losses of $1
million due to slightly improved occupancy rates. Additionally, these properties
realized a decrease in management fees of $1.7 million because, since Tarragon
acquired Tarragon Realty Advisors in November 1998, we no longer pay management
fees on our in-house managed properties.
An increase in interest expense of $1.1 million was due to long term and
interim mortgage financing, including advances under line of credit facilities.
Such financings have resulted in an increase in debt of $46.4 million since
December 31, 1997.
Adjustments to depreciation expense were recorded in connection with the
reclassification of properties from held for sale to held for investment during
1999. The reclassification of one property from held for sale to held for
investment effective September 30, 1999, resulted in a $358,000 increase. The
reclassification of four properties from held for sale to held for investment
effective June 30, 1999, resulted in a $510,000 increase.
Equity in earnings of partnerships decreased by $376,000 due to the
following factors. We recorded income of $873,000 in 1998 from the refinancing
of 801 Pennsylvania Avenue, representing interest on our advances and 50%
participation in excess financing proceeds. Conversely, the operations of the
properties in development or lease-up in 1998 have improved in 1999 as they have
approached stabilization.
Because Tarragon acquired Tarragon Realty Advisors in 1998, we no longer
pay advisory fees. The advisory fee was an incentive fee of 16% of adjusted
funds from operations, as defined in the advisory agreement. Tarragon now pays
costs previously borne by its advisor instead of paying advisory fees, property
management fees, and acquisition and refinancing fees that were paid under the
advisory agreement. This accounts for the bulk of the $5.5 million increase in
general and administrative expenses.
During the first nine months of 1999, Tarragon had gains of $8.6 million
from sale of four properties and portions of two other properties. Tarragon also
had a gain of $231,000 from an insurance settlement and paid a $350,000
litigation settlement.
During the first nine months of 1998, Tarragon had gains of $1.3 million
from sale of one property and $123,000 from sale of marketable equity
securities.
41
<PAGE> 43
Extraordinary expenses of $248,000 during the nine months through September
30, 1999, and $919,000 in the same period in 1998 were incurred because of
prepayment penalties and write-off of deferred financing expenses related to
refinancings of mortgage debt.
1998 COMPARED TO 1997.
The significant components of the $7 million decrease in net operating
results between 1997 and 1998 are discussed in the following paragraphs.
The properties acquired directly in 1997 and 1998 caused a $108,000
decrease in net operating results. This amount is comprised of increases in net
rental income of $2 million, interest expense of $1.4 million, and depreciation
of $708,000. An increase in net rental income of $1.7 million came from
multifamily properties acquired in 1997 and 1998. Courtyard at the Park,
acquired in July 1997, accounted for $400,000 of the decrease in net operating
results. This property was substantially renovated during 1998 and incurred
significant vacancy losses during this time. For 1999, net operating results of
this property are expected to improve by $300,000 over 1998 net operating
results. At December 31, 1998, Tarragon's directly owned multifamily properties
represented 76% of its real estate and included 9,588 operating apartment units.
Commercial properties acquired in 1997 and 1998 contributed a $337,000 increase
in net rental income. At December 31, 1998, Tarragon owned commercial properties
with an aggregate 1.9 million square feet.
The portfolio of 32 apartment properties with 6,581 units owned for all of
1998 and 1997 had an increase in net rental income of $1.9 million or 12%. Net
rental income as a percentage of rental revenue for the 6,581 units increased to
45% from 43%. Rental revenue for the same store multifamily properties increased
$2.5 million, or 7%, chiefly due to higher rental rates at some of the
properties. Average monthly rental revenue per unit for the same store
properties increased 7% to $506 from $475. Property operating expenses on a same
store basis increased $617,000, or 3%. Overall occupancy levels for multifamily
properties held in both years increased slightly in 1998 compared to 1997.
Commercial properties held in both years reported an overall increase in
net rental income of $339,000 principally due to higher rents at certain
properties. Overall occupancy levels for commercial properties held in both
years remained relatively stable in 1998 compared to 1997.
For properties held in both years, interest expense increased $2.3 million
due to long term and interim mortgage financing, including advances under
revolving credit facilities, which increased mortgage loans by $37 million
during 1998.
Equity in income (losses) of partnerships was $1.5 million lower in 1998
compared to 1997 because of the following. Start-up losses at five partnership
properties with a total of 1,390 units caused a $2 million decrease. Tarragon
experienced a $1.1 million increase in equity in income (losses) of partnerships
from these same five partnerships in 1999 compared to 1998 as lease-up at their
properties has approached stabilization. A decrease of $600,000 resulted from
the operations of 5600 Collins Avenue, the sole property of National Omni
Associates. These decreases were partially offset by an increase of $873,000
resulting from the refinancing of 801 Pennsylvania Avenue, of which $606,000 was
accrued interest on Tarragon's original investment and additional advances, and
$267,000 was our 50% participation in the excess financing proceeds. The
properties owned by Ansonia Apartments, L.P., contributed $400,000 to operations
in 1998 even though four of the properties were undergoing substantial
renovation.
During 1998, Tarragon recognized gains totaling $2.1 million on the sale of
two properties. In 1997, Tarragon recognized gains totaling $4.4 million on the
sale of three properties and a $54,000 loss related to the sale of a property
owned through a partnership.
During 1998, a gain of $123,000 was recognized from sale of investments in
securities. In 1997, Tarragon recognized gains of $698,000 from sale of
investments in securities and $215,000 on the sale of an investment in a
partnership.
42
<PAGE> 44
Extraordinary expenses in 1998 of $1.2 million were incurred from
prepayment penalties and write-off of deferred financing expenses in connection
with 1998 refinancings. Extraordinary items in 1997 included a gain on debt
forgiveness of $431,000 in connection with the discounted payoff of the mortgage
loan on University Center and expenses of $370,000 from prepayment penalties and
deferred financing expenses written off in connection with 1997 refinancings.
1997 COMPARED TO 1996.
The significant components of the $650,000 increase in net operating
results between 1996 and 1997 are discussed in the following paragraphs.
The properties acquired directly in 1996 and 1997 caused a $550,000
decrease in net operating results. This amount is comprised of increases in net
rental income of $1.4 million, interest expense of $1.1 million, and
depreciation of $850,000. $500,000 of the decrease in net operating results was
from River City Landing, which was purchased in June 1996 and was substantially
renovated during 1996 and 1997. Net rental income for this property increased
approximately $300,000 in 1998 and another $200,000 in 1999. Once the property
had stabilized, interim financing was placed on the property in 1997, resulting
in increases in interest expense of $250,000 in 1998 and an additional $62,000
in 1999. Also, depreciation of the improvements to the property resulted in
increases in depreciation expense of $77,000 in 1998 and an additional $200,000
in 1999. An increase in net rental income of $1.3 million came from multifamily
properties acquired in 1996 and 1997. At December 31, 1997, Tarragon's directly
owned multifamily properties accounted for 79% of its real estate and included
7,987 operating apartment units. Commercial properties acquired in 1997 and 1998
contributed a $112,000 increase in net rental income. At December 31, 1997,
Tarragon owned commercial properties with an aggregate 1.6 million square feet.
A $100,000 decrease in net operating results was brought about by the sale
of Century Centre II Office Building in September 1996. This amount is comprised
of decreases in net rental income of $1.2 million and interest expense of $1.1
million.
Net rental income for the 30 apartment properties with 5,935 units that
were owned for all of 1996 and 1997 increased by $2.7 million, or 21%. As a
percentage of rental revenue, net rental income for those 5,935 units increased
to 44% from 38%. Rental revenue for the same store multifamily properties
increased $1.6 million, or 5%, chiefly because of higher rental rates at some of
the properties. Average monthly rental revenue per unit for the same store
properties increased 5% to $496 from $474. Property operating expenses on a same
store basis decreased $1.1 million, or 5%, of which $957,000 resulted from a
decrease in replacements expense because of a change in accounting estimate. In
1997, we began capitalizing carpet, appliances, and heating, ventilation, and
air conditioning replacements instead of charging them to operating expense.
This change is discussed below under "Implementation of Change in Accounting
Estimate." Overall occupancy levels for multifamily properties held in both
years increased slightly in 1997 over 1996.
Net rental income of commercial properties held in both years was up
$598,000, because of higher rents and lower economic vacancies resulting from
improved overall occupancy levels.
Long term and interim mortgage financing, including advances under
revolving credit facilities, obtained during 1997 on existing properties owned
in both years increased mortgage loans by $35.8 million and the related interest
expense by $1.7 million.
Equity in income of partnerships was $900,000 higher in 1996 than in 1997
and included financing proceeds distributed by Sacramento Nine and English
Village in excess of Tarragon's investments in those partnerships.
An increase in depreciation expense of approximately 1 million resulted
from capital improvements between 1995 and 1997 to our properties held in both
years.
During 1997, Tarragon recognized gains totaling $4.4 million on the sale of
three properties and a $54,000 loss related to the sale of a property owned
through partnership. During 1996, Tarragon recognized a gain of $3.7 million on
the sale of one property.
In 1997, Tarragon recognized gains of $698,000 from sale of investments in
marketable equity securities and a gain of $215,000 on the sale of our
investment in a partnership.
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<PAGE> 45
In 1996, Tarragon recognized a $451,000 gain on insurance settlement. This
gain was our share of a gain realized by a partnership in which we held a 40%
interest. A partnership property was destroyed by fire and not rebuilt, and
insurance proceeds exceeded the basis of the property.
Extraordinary items in 1997 included a gain on debt forgiveness of $431,000
from the discounted payoff of the mortgage loan on University Center and losses
from prepayment penalties and the write-off of deferred financing expenses of
$370,000 in connection with refinancings in 1997.
IMPLEMENTATION OF CHANGE IN ACCOUNTING ESTIMATE
Effective as of January 1, 1997, and forward, Tarragon changed the method
of accounting for expenditures for carpet, appliances, and heating, ventilation,
and air conditioning (HVAC) replacements. Instead of charging them as operating
expense when incurred, we are capitalizing the costs and depreciating them over
three to five years. We believe this change in accounting estimate results in
matching the costs to the time periods receiving benefit from the replacements.
We also believe this treatment is consistent with policies used by most other
real estate companies. However, differing methods of accounting for these items
will affect comparison of funds from operations among real estate companies. For
the years ended December 31, 1998 and 1997, this change in accounting estimate
decreased our property operating expenses and increased net income by $1.5
million and $957,000, respectively. If we had implemented this change on January
1, 1996, our property operating expenses for the year ended December 31, 1996,
would have been $1.1 million less. There was no effect on advisory fee expense,
which was computed based on 16% of adjusted funds from operations until Tarragon
purchased Tarragon Realty Advisors in November 1998, because the advisor waived
any fee on increased funds from operations resulting from this change.
As a result of this change, during the years ended December 31, 1998 and
1997, we capitalized expenditures for these items as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Carpet $ 852 $ 561
Appliances 418 143
HVAC 267 253
------ ------
$1,537 $ 957
====== ======
</TABLE>
ALLOWANCE FOR ESTIMATED LOSSES AND PROVISIONS FOR LOSSES
Tarragon periodically reviews the carrying values of properties held for
sale. Generally accepted accounting principles require the carrying value of a
property held for sale not to exceed the lower of its cost or its estimated fair
value less costs to sell. In instances where a property's estimated fair value
less costs to sell is less than its carrying value at the time of evaluation, we
provide an allowance for loss by making a charge against operations. Our review
of properties held for sale generally includes selective site inspections,
comparing the property's current rents to market rents, reviewing the property's
expenses and maintenance requirements, discussions with the property manager,
and a review of the surrounding area. We may make adjustments to estimated fair
value based on future reviews.
Tarragon also evaluates its properties held for investment for impairment
whenever events or changes in circumstances indicate that a property's carrying
value may not be recoverable. This evaluation generally consists of reviewing
the property's cash flow and current and projected market conditions, as well as
changes in general and local economic conditions. If we conclude that a property
has been impaired, we reduce its carrying value by making a charge against
current earnings in the amount by which the carrying value of the property
exceeds its estimated fair value.
ENVIRONMENTAL MATTERS
Under federal, state, and local environmental laws, ordinances, and
regulations, Tarragon may be liable for
44
<PAGE> 46
removal or remediation costs, as well as other costs (such as fines or injuries
to persons and property) where our employees may have arranged for removal,
disposal, or treatment of hazardous or toxic substances. In addition,
environmental laws impose liability for release of asbestos-containing materials
into the air, and third parties can seek recovery from Tarragon for personal
injury associated with those materials. We are not aware of any liability
relating to these matters that would have a material adverse effect on our
business, financial position, or results of operations.
TAX MATTERS
For the nine months ended September 30, 1999, and the years ended December
31, 1998, 1997, and 1996, we have elected and, in our opinion, qualified to be
taxed as a Real Estate Investment Trust, as that term is defined in Sections 856
through 860 of the Internal Revenue Code of 1986. A REIT is required to
distribute at least 95% of its REIT taxable income, plus 95% of its net income
from foreclosure property, as defined in Section 857 of the Internal Revenue
Code of 1986, on an annual basis to stockholders. We have terminated our status
as a REIT effective in 2000, but we do not expect this to impact our current
policy of paying annual dividends to common stockholders of an amount not
greater than 50% of funds from operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Tarragon is exposed to market risk from changes in interest rates which may
adversely affect our financial position, results of operations, and cash flows.
In seeking to minimize the risks from interest rate fluctuations, we manage
exposures through our regular operating and financing activities. We do not use
financial instruments for trading or other speculative purposes.
At December 31, 1999, Tarragon had about $114 million of variable rate
debt. The primary base rate is the 30-day LIBOR. Using this balance of debt, if
LIBOR or any other indexes on which the rates are based increased by 100 basis
points (1%), our earnings and cash flows would decrease by $1.1 million. On the
other hand, if interest rates decreased by 100 basis points, our earnings and
cash flows would increase by $1.1 million.
At December 31, 1999, unconsolidated partnerships had approximately $57
million of variable rate debt. A 100 basis point increase in the index on which
the rates are based would reduce our earnings by approximately $400,000 (based
on our interests in the partnerships). A 100 basis point decrease in the index
on which the rates are based would increase our earnings by approximately
$400,000. Assuming these partnerships distribute all of their available cash to
the partners, our cash flow would be changed by these same amounts.
Tarragon has entered into reverse repurchase agreements with an investment
bank for three mortgage-backed securities, or MBSs, secured separately by
mortgages on three of our properties. If market interest rates increase, the
value of the MBSs generally decreases, which would require us to deposit more
funds with the investment bank (assuming no change in margin requirements).
Decreases in market interest rates generally increase the value of the MBSs and
allow the release to us of margin funds held by the investment bank (again
assuming no change in margin requirements). The repurchase price of the MBSs
bears interest at a variable rate based on LIBOR. An increase in interest rates
of 100 basis points would result in a decrease of $202,000 in our earnings and a
decrease of $1.2 million in our cash flow. A 100 basis point decrease in
interest rates would result in an increase of $203,000 in our earnings and an
increase of $1.1 million in our cash flow.
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<PAGE> 47
MANAGEMENT
Tarragon's Board of Directors currently consists of ten members, eight of
whom are independent. With the exception of Robert C. Rohdie, each of the
current members of the Board were elected at the last annual meeting of
stockholders held on August 18, 1999, to serve until the next annual meeting of
stockholders or until a successor has been elected or approved. Mr. Rohdie was
appointed to the Board effective February 7, 2000, following Tarragon's
acquisition of his interests in Tarragon's joint venture projects with him.
Tarragon's directors are listed below, together with their ages, terms of
service, all positions held with Tarragon (and its subsidiaries and
predecessors), their principal occupations, business experience, and all other
directorships they have held with other companies over the last five years or
more. No family relationships exist between any director or executive officer.
THE BOARD OF DIRECTORS
CARL B. WEISBROD (55) (Independent) has served as Chairman of the Board of
Directors since December 1998. He served as Chairman of the Board of Trustees of
NIRT from February 1994 to November 1998. He was a member of the Board of
Trustees of Vinland Property Trust from February 1994 to May 1995. He has served
as a trustee (since 1996) of the Ford Foundation; is President (since 1994) of
Alliance for Downtown New York, Inc., and was President and Chief Executive
Officer (April 1990 to 1994) of the New York City Economic Development
Corporation.
WILLIAM S. FRIEDMAN (56) (Affiliated) has served as President, Chief
Executive Officer and a Director of Tarragon since April 1997, and served as a
Trustee (from March 1988), Chief Executive Officer (from December 1993),
President (from December 1988), acting Chief Financial Officer (May 1990 to
February 1991), Treasurer (August to September 1989), and acting Principal
Financial and Accounting Officer (December 1988 to August 1989) of Vinland
Property Trust (until July 1997) and NIRT (until November 1998). He has been an
attorney at law since 1971.
CHESTER BECK (70) (Independent) has been a Director of Tarragon since April
1997. He was a Trustee of Vinland Property Trust from May 1995 to July 1997.
Since March 1995, Mr. Beck has been President of Highland Funding Corp., a
mortgage brokerage firm. Prior thereto, from January 1994 to March 1995, he was
National Sales Manager of Columbia Equities Limited, a real estate financing
entity. From April 1992 to January 1994, he was Senior Vice President of
Peregine Mortgage Company, Inc., an FHA approved mortgagee specializing in
multi-family and health care project financing.
WILLIE K. DAVIS (67) (Independent) has been a Director of Tarragon since
April 1997. Mr. Davis was a Trustee of Vinland Property Trust from October 1988
to July 1997, and a Trustee of NIRT from October 1988 to March 1995. Since 1985,
Mr. Davis has been Chairman and 50% stockholder of Mid-South Financial
Corporation, a holding company for Mid-South Mortgage Company and Gibbs Mortgage
Company. Mr. Davis has been Chairman and Sole stockholder of FMS, Inc., a
property management and real estate development firm since December 1995, and
served as President of FMS from 1978 to 1995. Mr. Davis has been a Director of
SouthTrust Bank of Middle Tennessee since 1987 and a Trustee and Treasurer of
Baptist Hospital, Inc., a Tennessee general welfare not-for-profit corporation
since 1986. He was also a Trustee or a Director (October 1988 to March 1995) of
Continental Mortgage and Equity Trust, Income Opportunity Realty Trust and
Transcontinental Realty Investors, Inc., each of which are publicly-held real
estate investment trusts.
SALLY HERNANDEZ-PINERO (46) (Independent) has been a Director of Tarragon
since December 1998. She served as a Trustee of NIRT from May 1994 to November
1998. Since April 1999, she has been Senior Vice President of The Related
Companies. From July 1998 to April 1999, she served as Managing Director of
Fannie Mae American Communities Fund. From October 1994 to June 1998, she was Of
Counsel at Kalkines, Arky, Zall and Bernstein, New York, New York. She was
Chairwoman of the New York City Housing Authority from February 1992 to April
1994. She has been a Director of Consolidated Edison and of Dime Savings Bank
since April 1994, and she has been an attorney at law since 1978.
LANCE LIEBMAN (58) (Independent) has been a Director of Tarragon since
December 1998. He also served as a Trustee of NIRT from March 1994 to November
1998. Mr. Liebman is the William S. Beinecke Professor of Law at Columbia Law
School and the Director of Parker School of Foreign and Comparative Law. He also
serves as a Director Designate, American Law Institute. He was the Dean of
Columbia Law School from 1991 to 1996. From 1970 to 1991, he was Assistant
Professor, Professor and Associate Dean of Harvard Law School. Since 1991, he
has been a Director of the Greater New York Insurance Co. (both mutual and stock
companies); a Director of M&F
46
<PAGE> 48
Worldwide since 1995; and a Director of Brookfield Financial Properties, Inc.
since 1996. He has been an attorney at law since 1968.
ROBERT C. ROHDIE (59) (Affiliated) was appointed to the Board of Tarragon
and began serving as President and Chief Executive Officer of Tarragon
Development Corporation, a wholly owned subsidiary of Tarragon responsible for
real estate development and renovation projects, in February 2000. From 1988
through February 2000, Mr. Rohdie was the President of Rohdhouse Investments,
Inc., his wholly owned real estate development company, which acted as
Tarragon's joint venture partner in new construction and development projects
since 1997. Mr. Rohdie has been an attorney at law since 1965.
LAWRENCE G. SCHAFRAN (61) (Independent) has been a Director of Tarragon
since December 1998. He was a Trustee of NIRT from March 1995 to November 1998.
Mr. Schafran has been Managing General Partner of L.G. Schafran & Associates, a
real estate investment and development firm in New York City, since 1984. He has
been a Director of Publicards, an Old Greenwich, Connecticut NYSE listed holding
company that operates through subsidiaries and manufacturing services since
1984. From 1986 to December 1997, Mr. Schafran was a Director of Capsure
Holdings Corp., a Chicago, Illinois NYSE listed property and casualty insurer;
from March 1993 to 1996, he was a Director of Oxigene, Inc., a U.S. and Swedish
pharmaceutical developer; from January 1995 to July 1997, he was a Director of
Glasstech, Inc., a Perrysberg, Ohio manufacturer of glass bending and tempering
equipment; and from December 1993 to October 1997, he was a Director, Member
(from September 1994 to October 1997) and Chairman (from December 1994 to
October 1997) of the Executive Committee of The Dart Group Corporation, a
Landover, Maryland NASDAQ listed holding company engaged with other
publicly-traded subsidiaries in discount automotive parts and accessories (Trak
Auto Corporation), discount book stores (Crown Books Corporation), discount
supermarkets, beverages and real estate. Since January 1996, Mr. Schafran has
been Chairman of the Board of Delta-Omega Technologies, Inc., a Broussard,
Louisiana manufacturer and distributor of environmentally safe fire foams,
industrial cleaners and degreasers. He has been a Director of Discovery Zone,
Inc. since December 1997; a Director of Kasper A.S.L., Ltd. since 1997; and a
Director of Comsat Corporation since 1997.
RAYMOND V.J. SCHRAG (54) (Independent) has been a Director of Tarragon
since December 1998. He was a Trustee of Vinland Property Trust from October
1988 to May 1995, and of NIRT from October 1988 to November 1998. Mr. Schrag has
been an attorney with the Law Offices of Raymond V.J. Schrag in New York, New
York since January 1995. He has been an attorney at law since 1973.
MICHAEL E. SMITH (57) (Independent) has been a Director of Tarragon since
April 1997. Mr. Smith was a Trustee of Vinland Property Trust from October 1988
to August 1991 and from May 1995 to July 1997. He has been Assistant Professor
of Law since August 1995 at the University of Wisconsin in Madison, Wisconsin.
He has also served as Research Director of the Remington Center at the
University of Wisconsin Law School since 1997. He served as President (1988 to
1995) and a Director (from 1978 to 1994) of the Vera Institute of Justice, a New
York not-for-profit corporation concerned with the administration of justice.
From 1987 to 1995, he was a Trustee of Prosecuting Attorneys Research Counsel,
Inc.; from 1986 to 1990, he was a Trustee of New York Lawyers for the Public
Interest; from 1986 to 1993, he was a Trustee of Housing Services, Inc.; from
1978 to 1995, he was a Trustee of Manhattan Bowrey Corporation, Inc.; and from
1978 to 1995, he was a Director of the Center for Alternative Sentencing and
Employment Services, Inc., formerly Court Employment Project, Inc. Mr. Smith has
been a Trustee of New York City Criminal Justice Agency, Inc. since 1978, and an
attorney at law since 1971.
EXECUTIVE OFFICERS OF THE COMPANY
Mr. Friedman, Mr. Rohdie, and the individuals listed below currently serve
as the executive officers of Tarragon. Their positions with Tarragon are not
subject to a vote of stockholders. Tarragon entered into an employment agreement
with Mr. Rohdie effective February 1, 2000, for a term of three years, at a
salary of $200,000 per year. Mr. Rohdie's employment agreement includes a broad
covenant not to compete with Tarragon and a right of first refusal in favor of
Tarragon with regard to any real estate investment opportunity that comes to his
attention. Mr. Friedman entered into a similar employment agreement with
Tarragon effective November 24, 1998, for a term of four years, at a salary of
$300,000 per year. All other executive officers serve until the first meeting of
the Board of Directors following the next succeeding annual meeting of
stockholders or until their successors have been duly chosen and qualified.
PENNY D. BARBER (35) was appointed the Chief Operating Officer of Tarragon
and the President of Tarragon Management Inc., a wholly owned subsidiary of
Tarragon, in December 1999. Ms. Barber served as Senior Vice President and
Director of Property Management for Tarragon from December 1998 to December
1999, as well as Executive Vice President of Tarragon Management from November
1998 to December 1999. She was previously Vice President and Director of
Marketing (from May 1998 to December 1999) of Tarragon Realty Advisors, Inc.
47
<PAGE> 49
She was the National Director of Marketing & Education for Galesi Management
Corporation from October 1996 to May 1998; National Marketing Director for Anne
Sadovsky & Co. from February 1995 to September 1996; and Regional Marketing and
Training Director for Lincoln Property Company from February 1990 to January
1995.
CHRIS CLINTON (53) has been Senior Vice President - Commercial Asset
Management of Tarragon since March 1994. He also served as Senior Vice President
- - Commercial Asset Management for Vinland Property Trust from March 1994 to July
1997, and for NIRT and Tarragon Realty Advisors from March 1994 to November
1998. He was Vice President of Vinland Property Trust and of NIRT from October
1988 to March 1994.
ERIN D. DAVIS (38) has been Executive Vice President and Chief Financial
Officer of Tarragon since December 1998. She previously served as Vice President
and Chief Accounting Officer for Tarragon from April 1997 to November 1998, of
Vinland Property Trust from September 1996 to July 1997 and of NIRT from
September 1996 to November 1998, and Accounting Manager of Vinland, NIRT and
Tarragon Realty Advisors, Inc. from June 1995 to August 1996. She was a Senior
Associate at the public accounting firm of BDO Seidman from January 1993 to June
1995 and has been a Certified Public Accountant since 1990.
PETER LARSEN (58) has served as Senior Vice President - Acquisitions of
Tarragon since July 1997. From July 1997 to November 1998, he was Senior Vice
President and from April 1996 through June 1997, he was Vice President of NIRT
and Tarragon Realty Advisors. He previously worked as an Independent Consultant
from January 1995 to June 1996.
KATHRYN MANSFIELD (39) has been Executive Vice President of Tarragon since
December 1998, and Secretary and Corporate Counsel of Tarragon since May 1998.
She previously served as Vice President for Tarragon, NIRT and Tarragon Realty
Advisors from May 1998 to December 1998. Prior to joining Tarragon, she was Vice
President and Senior Counsel for C.B. Richard Ellis, Inc., formerly CB
Commercial Real Estate Group, Inc., from October 1994 through May 1998. Ms.
Mansfield has been an attorney at law since 1984.
LORI D. MEYER (38) has served as Senior Vice President - Deputy Director of
Property Management of Tarragon since December 1998. She is also Senior Vice
President (since November 1998) and Controller (since February 1996) of Tarragon
Management, Inc., a wholly owned subsidiary of Tarragon. From February 1996 to
November 1998, she served as Vice President of Tarragon Management. From
February 1990 to January 1995, she was the Assistant Controller of South West
Property Trust, Inc. in Dallas, Texas. Ms. Meyer has been a Certified Public
Accountant since 1996.
TODD C. MINOR (41) has been Senior Vice President (since December 1998) and
Treasurer (since April 1997) of Tarragon. Mr. Minor was also the Treasurer of
Vinland Property Trust from December 1996 through July 1997 and of NIRT from
December 1996 through November 1998. He served as Senior Vice President -
Mortgage Servicing and Financing from May 1995 to November 1996, Senior Vice
President-Finance from March 1994 to April 1995, and Vice President from April
1991 to July 1993 of Vinland Property Trust and NIRT, and Senior Vice President
of Tarragon Realty Advisors from March 1994 through November 1998.
CHARLES RUBENSTEIN (41) has been Executive Vice President of Tarragon since
December 1998 and General Counsel since September 1998. He was also Senior Vice
President for Tarragon, NIRT and Tarragon Realty Advisors from September 1998 to
December 1998. Prior to joining Tarragon, Mr. Rubenstein was employed as General
Counsel for Simpson Housing Limited Partnership in Denver, Colorado from January
1996 to February 1998, and as a Real Estate Associate with the law firm of
Andrews & Kurth, L.L.P in New York, New York from October 1987 to November 1995.
He has been an attorney at law since 1984.
JOHN C. STRICKLIN (53) has served as Managing Director - Real Estate
Transactions for Tarragon since November 1998. He previously served as Executive
Vice President of NIRT from May 1995 to April 1996, as Senior Vice President -
Real Estate, from May 1994 to April 1995, and Vice President - Real Estate from
February 1994 to April 1995 of Vinland Property Trust. Mr. Stricklin acted as
Special Assistant to the President of Basic Capital Management, Inc. from April
1996 to November 1998.
For more information on our Management, please refer to Items 10, 11, 12
and 13 (Pages 82 through 95) of Tarragon's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, which are specifically incorporated by
reference into this Prospectus. See "WHERE YOU CAN FIND MORE INFORMATION" and
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" below.
48
<PAGE> 50
WHERE YOU CAN FIND MORE INFORMATION
We have filed a Form S-4 registration statement with the SEC. This
Prospectus does not contain all of the information set forth in the registration
statement. You will find additional information about us and our common stock in
the registration statement, so we strongly urge you to read the registration
statement in its entirety. In addition, we may summarize or refer in this
Prospectus to contracts, agreements, and other documents that have been filed as
exhibits to the registration statement. Where we have filed a contract,
agreement or other document as an exhibit to the registration statement, we
refer you to that exhibit for a more complete description of the matter
involved, and each statement in this Prospectus which relates to that contract,
agreement or document is qualified in its entirety by such reference.
Tarragon also files annual, quarterly and special reports, proxy
statements, and other information with the SEC. You may obtain a copy of the
registration statement or any other information we file with the SEC at the
SEC's public reference facilities at 450 Fifth Street, N.W., Washington, D.C.
20549, or at its regional offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and 7 World Trade Center, Suite 1300, New York, New
York 10048, at prescribed rates. You may also obtain copies of these materials
by writing to the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the general operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330 or by contacting
the SEC over the internet at www.sec.gov. Additional information about us is
also available on our website at http://www.tarragonrealty.com.
Our common stock is listed and quoted on the NASDAQ National Market under
the symbol "TARR" and the information we file with the SEC may also be inspected
at the offices of the National Association of Securities Dealers, Inc., Reports
Section, 1735 K Street, Washington, D.C. 20006.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS, THE
REGISTRATION STATEMENT, AND THE OTHER DOCUMENTS WE HAVE INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
ANY ADDITIONAL OR DIFFERENT INFORMATION. THE INFORMATION CONTAINED IN THIS
PROSPECTUS, AND THE OTHER DOCUMENTS THAT WE HAVE REFERRED YOU TO, IS FULL,
COMPLETE AND ACCURATE AS OF THE DATE OF THIS PROSPECTUS. HOWEVER, BECAUSE
CHANGES IN OUR AFFAIRS MAY OCCUR AFTER THIS DATE, WE CANNOT REPRESENT THAT THIS
INFORMATION REMAINS ACCURATE AS OF ANY SUBSEQUENT DATE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the documents we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be a part of this Prospectus. Information in this Prospectus updates and
supersedes information contained in documents incorporated by reference that we
filed with the SEC before the date of this Prospectus, while information that we
file later with the SEC will automatically update and supercede this
information.
We incorporate by reference the following documents, which we previously
filed with the SEC (File No. 0-8003):
1. Tarragon's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
2. Tarragon's Quarterly Reports on Form 10-Q for the quarters ended March
31, 1999, June 30, 1999 and September 30, 1999.
We also incorporate by reference all documents which we file with the SEC
after the date of this Prospectus and prior to the termination of the offering
described in this Prospectus, under Sections 13(a), 13(c), 14 and 15(d) of the
Securities and Exchange Act of 1934.
49
<PAGE> 51
You may request a copy of these filings, at no cost to you, by writing or
telephoning us at:
Tarragon Realty Investors, Inc.
Attn: Investor Relations
280 Park Avenue
20th Floor, East Building
New York, NY 10017
Telephone: (212) 949-5000
You are urged to review the information and financial statements (including
notes to financial statements) for Tarragon beginning on page 51 of this
Prospectus and in the documents incorporated by reference in this Prospectus.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this Prospectus, and in the
documents incorporated by reference in this Prospectus. We may also make
forward-looking statements in our periodic reports to the SEC, and in our press
releases. Forward-looking statements are expressions of our current beliefs and
expectations, based on information currently available to us, estimates and
projections about our industry, and certain assumptions made by our management.
These statements are not historical facts. We use words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions to identify our forward-looking statements.
Because we are unable to control or predict many of the factors that will
determine our future performance and financial results, our forward-looking
statements are not guarantees of future performance. They involve risks,
uncertainties, and assumptions. Our future results could differ materially from
those expressed in the forward-looking statements contained in this Prospectus
and in the documents incorporated by reference in this Prospectus. Many of these
risks and uncertainties are described in this Prospectus under "Risk Factors"
and in the documents incorporated by reference in this Prospectus.
We believe that our forward-looking statements are reasonable. However, you
should not place undue reliance on these forward-looking statements. They only
reflect our view and expectations as of the date of this Prospectus. We
undertake no obligation to publicly update or revise any forward-looking
statement in light of new information, future events or otherwise.
LEGAL MATTERS
We are being advised on the legality of the issuance of the shares of 10%
Cumulative Preferred Stock offered by this Prospectus by Prager, Metzger &
Kroemer PLLC, Dallas, Texas. Prager, Metzger & Kroemer PLLC will rely as to all
matters of Nevada law on Lewis and Roca LLP, Las Vegas, Nevada.
EXPERTS
The consolidated balance sheets as of December 31, 1998 and 1997 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1998,
included in this Prospectus and elsewhere in the registration statement, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
50
<PAGE> 52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets (Unaudited) -
September 30, 1999, and December 31, 1998..................................................................52
Consolidated Statements of Operations (Unaudited) -
Nine Months Ended September 30, 1999 and 1998..............................................................53
Consolidated Statement of Shareholders' Equity (Unaudited) -
Nine Months Ended September 30, 1999.......................................................................55
Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1999 and 1998..............................................................56
Notes to Consolidated Financial Statements (Unaudited).......................................................58
Reports of Independent Public Accountants....................................................................63
Consolidated Balance Sheets -
December 31, 1998 and 1997.................................................................................64
Consolidated Statements of Operations -
Years Ended December 31, 1998, 1997, and 1996..............................................................65
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1998, 1997, and 1996..............................................................66
Consolidated Statements of Cash Flows -
Years Ended December 31, 1998, 1997, and 1996..............................................................67
Notes to Consolidated Financial Statements...................................................................70
Schedule III - Real Estate and Accumulated Depreciation.....................................................92
</TABLE>
All other schedules are omitted because they are not required or are not
applicable or because the information required is included in the
Consolidated Financial Statements or the notes thereto.
51
<PAGE> 53
The Consolidated Financial Statements for the period ended September 30, 1999,
have not been audited by independent certified public accountants, but, in our
opinion, all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of consolidated financial position, consolidated results of
operations, and consolidated cash flows at the dates and for the periods
indicated have been included.
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1999 1998
------------- ------------
<S> <C> <C>
Assets
Real estate held for sale (net of accumulated depreciation
of $25,878 in 1999 and $20,884 in 1998) ........................................ $ 57,350 $ 79,801
Less - allowance for estimated losses ............................................. (1,156) (1,194)
------------ ------------
56,194 78,607
Real estate held for investment (net of accumulated
depreciation of $33,073 in 1999 and $31,718 in 1998) ........................... 239,628 215,368
Investments in and advances to partnerships ....................................... 44,444 37,356
Cash and cash equivalents ......................................................... 5,330 2,442
Restricted cash ................................................................... 8,857 7,368
Other assets, net ................................................................. 14,270 15,919
------------ ------------
$ 368,723 $ 357,060
============ ============
Liabilities and Shareholders' Equity
Liabilities
Notes, debentures, and interest payable (including $6,763
in 1999 and $5,891 in 1998 due to affiliates) .................................. $ 275,704 $ 263,361
Other liabilities ................................................................. 19,066 17,014
------------ ------------
294,770 280,375
Commitments and contingencies......................................................
Shareholders' equity
Common stock, $.01 par value; authorized shares, 20,000,000; shares outstanding,
8,087,354 in 1999 and 8,467,260 in 1998 (after deducting 2,796,216 in 1999
and 2,418,384 in 1998
held in treasury) .............................................................. 81 85
Special stock, $.01 par value; authorized shares, 10,000,000;
shares outstanding, none ....................................................... -- --
Paid-in capital ................................................................... 300,674 305,098
Accumulated dividends in excess of accumulated earnings ........................... (226,711) (228,408)
Accumulated other comprehensive income (loss) ..................................... (91) (90)
------------ ------------
73,953 76,685
------------ ------------
$ 368,723 $ 357,060
============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
52
<PAGE> 54
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue
Rentals ................................................................ $ 54,672 $ 42,525
Interest ............................................................... 896 714
Management fees ........................................................ 370 --
Equity in (loss) of partnerships ....................................... (560) (184)
------------ ------------
55,378 43,055
Expenses
Property operations .................................................... 28,158 23,545
Interest ............................................................... 15,992 11,901
Depreciation ........................................................... 8,010 5,362
Advisory fee to affiliate .............................................. -- 948
General and administrative
Corporate ............................................................ 4,317 1,684
Property ............................................................. 2,825 --
------------ ------------
59,302 43,440
------------ ------------
(Loss) before gain on sale of real estate, gain on sale of investments,
gain on insurance settlement, litigation
settlement, and extraordinary items .................................... (3,924) (385)
Gain on sale of real estate ............................................... 8,571 1,275
Gain on sale of investments ............................................... -- 123
Gain on insurance settlement .............................................. 231 --
Litigation settlement ..................................................... (350) --
------------ ------------
Income from continuing
operations .............................................................. 4,528 1,013
Extraordinary items ....................................................... (248) (919)
------------ ------------
Net income ................................................................ $ 4,280 $ 94
============ ============
Other comprehensive income (loss):
Unrealized (losses) on
marketable equity securities ......................................... (1) (88)
Realized gains on marketable
equity securities .................................................... -- (123)
------------ ------------
Net (loss) recognized in other
comprehensive income (loss) ............................................ (1) (211)
------------ ------------
Comprehensive income (loss) ............................................... $ 4,279 $ (117)
============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
53
<PAGE> 55
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Earnings per share
Income from continuing
operations .......................... $ .55 $ .13
Extraordinary items .................... (.03) (.12)
------------- -------------
Net income ............................. $ .52 $ .01
============= =============
Weighted average shares of
common stock used in
computing earnings per share ........ 8,276,338 7,575,931
============= =============
Earnings per share - assuming dilution
Income from continuing
operations .......................... $ .54 $ .13
Extraordinary items .................... (.03) (.12)
------------- -------------
Net income ............................. $ .51 $ .01
============= =============
Weighted average shares of common
stock used in computing earnings
per share - assuming dilution ....... 8,381,739 7,699,468
============= =============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
54
<PAGE> 56
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Dividends Accumulated
Common Stock in Excess of Other
---------------------------- Paid-in Accumulated Comprehensive Shareholders'
Shares Amount Capital Earnings Income (Loss) Equity
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 ...... 8,467,260 $ 85 $ 305,098 $ (228,408) $ (90) $ 76,685
Repurchase of shares
of common stock ............... (395,132) (4) (4,533) -- -- (4,537)
Cash dividends
($.315 per share) ............. -- -- -- (2,583) -- (2,583)
Stock options exercised ......... 15,226 -- 109 -- -- 109
Net (loss) recognized in
other comprehensive
income (loss) .................. -- -- -- -- (1) (1)
Net income ...................... -- -- -- 4,280 -- 4,280
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30,
1999 ........................... 8,087,354 $ 81 $ 300,674 $ (226,711) $ (91) $ 73,953
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
55
<PAGE> 57
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities
Rentals collected ....................................... $ 54,732 $ 42,202
Interest collected ...................................... 141 151
Interest paid ........................................... (14,796) (11,638)
Payments for property operations ........................ (26,731) (23,635)
General and administrative expenses paid ................ (7,352) (1,973)
Advisory fee paid to affiliate .......................... -- (954)
Organizational costs paid ............................... -- (237)
Deferred financing costs paid ........................... (697) (1,955)
------------ ------------
Net cash provided by operating activities ............. 5,297 1,961
Cash Flows from Investing Activities
Acquisition of real estate .............................. (1,674) (4,145)
Proceeds from the sale of real estate ................... 8,577 968
Real estate improvements ................................ (13,149) (11,312)
Earnest money deposits paid ............................. (65) (1,001)
Note receivable collections ............................. 129 203
Investments in marketable equity securities ............. -- (81)
Proceeds from sale of marketable equity securities ...... -- 580
Net contributions and advances to partnerships .......... (11,648) (22,651)
------------ ------------
Net cash (used in) investing activities ............... (17,830) (37,439)
Cash Flows from Financing Activities
Proceeds from borrowings ................................ 32,188 50,176
Payments of mortgage notes payable ...................... (14,197) (21,806)
Advances from affiliates, net ........................... 816 3,937
Margin account borrowings (repayments), net ............. (1,473) 2,419
Replacement escrow deposits, net ........................ 338 168
Distribution from partnerships' financing activities .... 4,843 3,803
Repurchase of shares of common stock .................... (4,537) (3,661)
Proceeds from the exercise of stock options ............. 109 42
Dividends to shareholders ............................... (2,666) (2,667)
------------ ------------
Net cash provided by financing activities ............. 15,421 32,411
------------ ------------
Net increase (decrease) in cash and cash equivalents ....... 2,888 (3,067)
Cash and cash equivalents, beginning of period ............. 2,442 4,262
------------ ------------
Cash and cash equivalents, end of period ................... $ 5,330 $ 1,195
============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
56
<PAGE> 58
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Reconciliation of net income to net cash provided by operating activities:
Net income ................................................................. $ 4,280 $ 94
Extraordinary items ........................................................ 248 919
Litigation settlement ...................................................... 350 --
Gain on insurance settlement ............................................... (231) --
Gain on sale of investments ................................................ -- (123)
Gain on sale of real estate ................................................ (8,571) (1,275)
Depreciation and amortization .............................................. 9,919 6,163
Equity in loss of partnerships ............................................. 560 184
Interest on advances to partnerships ....................................... (755) (566)
Noncash compensation related to stock options exercised .................... 37 --
Changes in other assets and liabilities, net of effects
of noncash investing and financing activities:
Decrease in interest receivable ........................................ 1 3
(Increase) in other assets ............................................. (4,618) (5,214)
Increase in other liabilities .......................................... 4,103 2,138
(Decrease) in interest payable ......................................... (26) (362)
------------ ------------
Net cash provided by operating activities ..................................... $ 5,297 $ 1,961
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection with the purchase of real
estate:
Real estate ................................................................ $ 9,493 $ 10,971
Other assets ............................................................... 302 764
Notes and interest payable ................................................. (7,973) (7,062)
Other liabilities .......................................................... (148) (528)
------------ ------------
Cash paid ................................................................ $ 1,674 $ 4,145
============ ============
Assets disposed of and liabilities released in connection with the sale of real
estate:
Real estate ................................................................ $ 12,973 $ 676
Allowance for estimated losses ............................................. (38) --
Other assets ............................................................... 309 67
Notes and interest payable ................................................. (12,872) (1,046)
Other liabilities .......................................................... (359) (4)
Gain on sale ............................................................... 8,571 1,275
Extraordinary loss on early extinguishment of debt ......................... (7) --
------------ ------------
Cash received ............................................................ $ 8,577 $ 968
============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
57
<PAGE> 59
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. BASIS OF PRESENTATION
The Consolidated Financial Statements of Tarragon Realty Investors, Inc., are
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Thus, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Operating results for the nine months ended September 30, 1999, do
not necessarily indicate the results to be expected for the full year of 1999.
For further information, refer to the Consolidated Financial Statements and
Notes included in Tarragon's Annual Report on Form 10-K for the year ended
December 31, 1998. Dollar amounts in tables are in thousands.
In November 1998, Tarragon merged with National Income Realty Trust, or NIRT,
and acquired Tarragon Realty Advisors, Inc., or TRA, its former advisor. Because
the merger was treated as a reverse acquisition of Tarragon by NIRT, results of
operations and cash flows for periods before the merger in this Form 10-Q are
those of NIRT. Per share information has been restated retroactively to give
effect to the 1.97 to 1 exchange ratio in the merger. When we refer to Tarragon
in this Form 10-Q in relation to dates before the merger, we are referring to
NIRT.
NOTE 2. REAL ESTATE
In January 1999, Tarragon sold part of the University Center parking lot for
$575,000 receiving cash of $557,000 and recognizing a gain of $338,000.
In April 1999, Tarragon sold the K-Mart Shopping Center in Thomasville, Georgia,
for $1.6 million and the Phoenix Apartments for $2.7 million, recognizing gains
totaling $440,000. We received cash of $2.9 million after paying closing costs
and the mortgage on K-Mart.
In May 1999, we sold One Turtle Creek Office Complex for $9.7 million,
recognizing a gain of $3.2 million based on a post-merger carrying value of $5.9
million. This property had been purchased in March 1992 by Vinland Property
Trust, which merged with Tarragon in July 1997. The carrying value of the
property was $4.1 million before the November 1998 merger of Tarragon with NIRT.
We received cash of $3.2 million after paying closing costs and the mortgage.
Also in May 1999, Tarragon sold about 40% of its K-Mart Shopping Center in
Charlotte, North Carolina, for $1.1 million, recognizing a gain of $326,000. As
part of this sale, the $1.2 million mortgage on the entire property was paid
off, which required $156,000 in addition to the proceeds of the sale.
In August 1999, we sold Woodcreek Apartments in Denver, Colorado, for $7
million, receiving cash of $2 million and recognizing a gain of $4.3 million.
In September 1999, we sold a parcel of land in Orangeburg, South Carolina, for
$93,000, receiving cash of $85,000. In connection with this sale, no loss was
recognized in excess of amounts previously recognized.
Tarragon purchased Orlando Central Park, a 138,574 square foot office building
in Orlando, Florida, in May 1999 for $9.5 million, $8 million of which was
financed with a mortgage.
In March 1999, we removed from consideration for sale four apartment properties
with a total of 740 units and net carrying value of $13.3 million. In June 1999,
we removed from consideration for sale three apartment properties with a total
of 424 units and net carrying value of $7.3 million and one commercial property
with square footage of 72,065 and net carrying value of $3 million. In September
1999, we removed from consideration for sale one apartment property with 299
units with a net carrying value of $4.5 million. These properties are included
in "Real estate held for investment" in the accompanying September 30, 1999,
Consolidated Balance Sheet. Tarragon made the decision not to pursue selling
these properties due to the availability of favorable long term fixed rate
financing. In June 1999, we decided to market for sale two commercial properties
with total square footage of 253,336 and net
58
<PAGE> 60
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 2. REAL ESTATE (Continued)
carrying value of $13.4 million. We ceased depreciating these properties in July
1999. In September 1999, we decided to market for sale one apartment property
with 128 units and a net carrying value of $2.6 million. We ceased depreciating
this property in October 1999. These properties are classified as held for sale
at September 30, 1999. The estimated fair values of these properties exceeded
their net carrying values when we decided to remove them from consideration for
sale or to market them for sale, so no losses were recognized at that time.
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
Investments in and advances to partnerships, accounted for using the equity
method, consisted of the following at September 30, 1999:
<TABLE>
<S> <C>
801 Pennsylvania Avenue.................................................. $ 20
Ansonia Apartments, L.P.................................................. 16,737
Antelope Pines Estates, L.P.............................................. 351
Danforth National Apartments, Ltd........................................ 1,199
Lake Lotta Apartments, L.L.C............................................... 437
Larchmont Associates, L.P................................................ 1,951
Merritt 8 Acquisitions, L.L.C............................................ 2,764
National Omni Associates, L.P............................................ 5,505
Orange National Partners, Ltd............................................ 4,185
RI Panama City, Ltd...................................................... 1,389
RI Windsor, Ltd.......................................................... 441
Sacramento Nine.......................................................... 717
Tarragon Huntsville Apartments, L.L.C.................................... 710
Tarragon Savannah, L.P................................................... 104
Tarragon Savannah Limited Partnership II................................. 1,058
Tarragon Stoneybrook Apartments, L.L.C................................... 5,795
Woodcreek Garden Apartments, L.P......................................... 1,081
------------
$ 44,444
============
</TABLE>
In August 1999, Tarragon acquired an 80% interest in Merritt 8 with an
investment of $2.6 million. The partnership purchased Merritt 8 Corporate Park,
a 160,000 square foot office building in Stratford, Connecticut, at a cost of
$20 million of which $18 million was paid from a mortgage on the property. The
partnership also has a contract to acquire for $500,000 an adjacent 19 acre
parcel for future development. Tarragon shares ownership of the managing member
interest of Merritt 8 with an outside partner equally. As Tarragon does not
control Merritt 8, this investment is accounted for using the equity method.
At September 30, 1999, Tarragon has advanced $437,000 in costs to purchase land
in Ocoee, Florida, that will be used to construct an apartment community of
approximately 199 units. Tarragon has a 50% interest in Lake Lotta, the owning
partnership, that was formed in October 1999.
59
<PAGE> 61
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS (Continued)
Below are summarized financial data for these partnerships as of and for the
nine months ended September 30, 1999 (unaudited):
<TABLE>
<CAPTION>
September 30, 1999 Other Construction/
Ansonia Danforth Omni Windsor Operating Lease-Up Total
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate ............................. $ 75,065 $ 16,183 $ 32,879 $ 18,709 $ 75,319 $ 58,216 $ 276,371
Accumulated depreciation ................ (1,892) (438) (1,177) (688) (4,322) (772) (9,289)
Other assets ............................ 2,146 514 1,268 582 2,692 1,233 8,435
Notes and interest payable .............. (56,261) (15,047) (26,050) (18,854) (57,169) (44,329) (217,710)
Other liabilities ....................... (4,723) (3,124) (1,720) (1,651) (3,812) (15,420) (30,450)
--------- --------- --------- --------- --------- --------- ---------
Partners' capital (deficit) ............. $ 14,335 $ (1,912) $ 5,200 $ (1,902) $ 12,708 $ (1,072) $ 27,357
========= ========= ========= ========= ========= ========= =========
Tarragon's proportionate
share of capital (deficit) ........... $ 14,335 $ (1,537) $ 5,200 $ (951) $ 3,778 $ (331) $ 20,494
Advances ................................ 2,402 2,736 305 1,392 3,106 14,009 23,950
--------- --------- --------- --------- --------- --------- ---------
Investments in and advances to
partnerships ......................... $ 16,737 $ 1,199 $ 5,505 $ 441 $ 6,884 $ 13,678 $ 44,444
========= ========= ========= ========= ========= ========= =========
Nine months ended September 30, 1999
Rental revenue .......................... $ 9,055 $ 1,469 $ 3,362 $ 1,780 $ 7,584 $ 3,071 $ 26,321
Property operating expenses ............. (4,886) (939) (1,897) (888) (3,613) (1,628) (13,851)
Interest expense ........................ (2,952) (1,279) (1,531) (1,271) (2,639) (2,012) (11,684)
Depreciation expense .................... (1,218) (242) (563) (302) (1,207) (544) (4,076)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) ....................... $ (1) $ (991) $ (629) $ (681) $ 125 $ (1,113) $ (3,290)
========= ========= ========= ========= ========= ========= =========
Equity in income (loss) of
partnerships ......................... $ 138 $ (195) $ (514) $ (192) $ 482 $ (279) $ (560)
========= ========= ========= ========= ========= ========= =========
</TABLE>
"Other Operating" includes 801 Pennsylvania Avenue, Antelope Pines, Larchmont,
Merritt 8, Sacramento Nine, and Woodcreek Garden. "Construction/Lease-Up"
includes the following partnerships which own properties that were either under
construction or in initial lease-up at any time during the nine months ended
September 30, 1999: Lake Lotta, Orange National, RI Panama City, Tarragon
Huntsville, Tarragon Savannah, Tarragon Savannah II, and Tarragon Stoneybrook.
NOTE 4. INVESTMENTS IN MARKETABLE EQUITY SECURITIES
Investments in marketable equity securities are carried at fair value, and are
included in "Other assets" in the Consolidated Balance Sheets. The investments
are available for sale, and unrealized holding gains and losses are included in
other comprehensive income (loss). During the first nine months of 1999,
unrealized losses were $1,000.
NOTE 5. NOTES AND INTEREST PAYABLE
During the first nine months of 1999, Tarragon closed separate mortgage loans
secured by nine properties totaling $21.1 million. After paying off $7.1 million
in existing debt, establishing escrows for taxes, insurance, and repairs, and
paying closing costs, we received cash of $12.7 million.
In April 1999, Tarragon obtained a $6 million line of credit, secured by shares
of Tarragon's common stock valued at no less than two times the outstanding
balance of the line of credit. Some of the shares of common stock were pledged
by the family of William S. Friedman, President, Chief Executive Officer, and a
Director of Tarragon, as an accomodation to Tarragon, and the remaining were
treasury shares. We are currently replacing the shares pledged by the Friedman
family with treasury shares purchased under our share repurchase program.
Advances under the line of credit bear interest at the 30-day LIBOR plus 1.75%
per annum. Terms of the line of credit require monthly
60
<PAGE> 62
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 5. NOTES AND INTEREST PAYABLE (Continued)
payments of interest only, with the principal due in April 2001. We received
$2.2 million in cash from this transaction, after paying off two loans with the
same lender which were also secured by shares of our common stock. These loans
included a $1.5 million note due in July 1999 and a $2.2 million note due in
January 2000.
In May 1999, Tarragon obtained a $650,000 line of credit facility secured by
2.474 acres of land in Dallas, Texas, known as Lake Highlands land and treasury
stock valued at no less than $650,000. Advances under the line of credit bear
interest at prime. Terms of the line of credit require monthly payments of
interest only, with the principal due in May 2000. Tarragon received $614,000
cash from this transaction. The line of credit is guaranteed by Mr. Friedman.
Also during 1999, Tarragon received net advances of $816,000 from its line of
credit from affiliates of Mr. Friedman. Advances under the two year arrangement,
totaling $6.8 million at September 30, 1999, bear interest at LIBOR plus 1% per
annum and are due January 2001.
Extraordinary items in the Consolidated Statements of Operations for 1999 are
expenses related to early extinguishment of debt of $248,000 from prepayment
penalties and deferred financing expenses written off in connection with the
1999 refinancings.
NOTE 6. EARNINGS PER SHARE
Earnings per share are computed based on the weighted average number of shares
of common stock outstanding for the three and nine month periods ended September
30, 1999 and 1998.
The following table reconciles weighted average shares of common stock
outstanding used in the computation of earnings per share and earnings per share
- - assuming dilution. The effect of stock options on weighted average shares of
common stock outstanding - assuming dilution for the three months ended
September 30, 1998, is not reflected below because their effect is
anti-dilutive.
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Weighted average shares of
common stock outstanding .... 8,276,338 7,575,931
Stock options .................. 105,401 123,537
------------ ------------
Weighted average shares of
common stock outstanding -
assuming dilution ........... 8,381,739 7,699,468
============ ============
</TABLE>
NOTE 7. GAIN ON INSURANCE SETTLEMENT
In December 1998, fire destroyed one building with eight units at Lake Point
Apartments, a 540-unit property in Memphis, Tennessee. Tarragon reached a
settlement with the insurance company for $458,000 and decided not to rebuild
the eight-unit building. After demolition costs, adjuster fees, and other costs,
as well as writing off a portion of the property's carrying value, Tarragon
recognized a gain of $231,000 on the insurance settlement.
61
<PAGE> 63
TARRAGON REALTY ADVISORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 8. LITIGATION SETTLEMENT
In July 1999, after reversal of a favorable lower court decision, Tarragon
settled an uninsured liability claim for $350,000.
NOTE 9. INCOME TAXES
Tarragon has made no provision for federal income taxes because we believe we
qualify as a Real Estate Investment Trust, as defined under Sections 856 through
860 of the Internal Revenue Code of 1986. We are considering terminating our
status as a REIT in the future. We have over $40 million in net operating loss
carry forwards expiring through 2016. If we terminate our status as a REIT,
appropriate provisions for income taxes will be made.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Tarragon is a party to claims and litigation arising in the ordinary course of
business. We believe the results of these claims and litigation, either
individually or in total, will not have a material adverse effect on our
business, financial position, or results of operations.
NOTE 11. SUBSEQUENT EVENTS
In October 1999, Tarragon sold Woodbrier Apartments for $3 million, recognizing
a gain of $233,000. We received net cash proceeds of $778,000 after the mortgage
payoff and closing costs.
[This space intentionally left blank.]
62
<PAGE> 64
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Tarragon Realty Investors, Inc.
We have audited the accompanying consolidated balance sheets of Tarragon Realty
Investors, Inc., and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tarragon Realty Investors,
Inc., and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Supplemental Schedule III is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Dallas, Texas
April 12, 1999
63
<PAGE> 65
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
------------ ------------
(dollars in thousands)
<S> <C> <C>
Assets
Real estate held for sale (net of accumulated depreciation
of $20,884 in 1998 and $593 in 1997) .................................... $ 79,801 $ 5,123
Less - allowance for estimated losses ..................................... (1,194) (1,194)
------------ ------------
78,607 3,929
Real estate held for investment (net of accumulated
depreciation of $31,718 in 1998 and $45,440 in 1997) .................... 215,368 230,007
Investments in and advances to partnerships ............................... 37,356 13,839
Cash and cash equivalents ................................................. 2,442 4,262
Restricted cash ........................................................... 7,368 4,300
Other assets, net (including $42 in 1997 due from affiliates) ............. 15,919 9,303
------------ ------------
$ 357,060 $ 265,640
============ ============
Liabilities and Shareholders' Equity
Liabilities
Notes, debentures, and interest payable (including $5,891 in
1998 due to affiliates) ................................................. $ 263,361 $ 184,126
Other liabilities (including $67 in 1997 due to affiliates) ............... 17,014 10,423
------------ ------------
280,375 194,549
Commitments and contingencies .............................................
Shareholders' equity
Common stock, $0.01 par value; authorized shares, 20,000,000; shares
outstanding, 8,467,260 in 1998 and 7,510,436 in 1997 (after deducting
2,418,384 shares in 1998 and 1,767,015 shares in 1997 held in treasury) 85 11,446
Special stock, $0.01 par value; authorized shares,
10,000,000; shares outstanding, none .................................... -- --
Paid-in capital ........................................................... 305,098 281,638
Accumulated dividends in excess of
accumulated earnings .................................................... (228,408) (222,126)
Accumulated other comprehensive income (loss) ............................. (90) 133
------------ ------------
76,685 71,091
------------ ------------
$ 357,060 $ 265,640
============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
64
<PAGE> 66
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
(dollars in thousands, except per share data)
<S> <C> <C> <C>
Revenue
Rentals .............................................................. $ 58,798 $ 50,745 $ 47,831
Interest ............................................................. 739 629 631
Management fees ...................................................... 52 -- --
Equity in income (loss) of partnerships .............................. (889) 643 1,500
------------ ------------ ------------
58,700 52,017 49,962
Expenses
Property operations (including $1,895 in 1998,
$1,648 in 1997, and $1,014 in 1996 to affiliates) ................. 32,963 28,596 28,411
Interest ............................................................. 16,599 12,602 12,042
Depreciation ......................................................... 7,349 7,022 5,374
Amortization of goodwill ............................................. 41 -- --
Advisory fee to affiliate ............................................ 1,048 1,438 1,117
General and administrative (including $1,562 in 1998,
$1,411 in 1997, and $1,176 in 1996 to affiliates) ................ 3,095 2,091 1,932
Provision for losses ................................................. -- -- 300
------------ ------------ ------------
61,095 51,749 49,176
------------ ------------ ------------
Income (loss) before net gain on sale of real estate, gain on sale of
investments, gain on insurance settlement,
and extraordinary items .............................................. (2,395) 268 786
Net gain on sale of real estate ........................................ 2,108 4,350 3,700
Gain on sale of investments ............................................ 123 913 --
Gain on insurance settlement ........................................... -- -- 451
------------ ------------ ------------
Income (loss) from continuing operations ............................... (164) 5,531 4,937
Extraordinary items .................................................... (1,231) 61 --
------------ ------------ ------------
Net income (loss) ...................................................... $ (1,395) $ 5,592 $ 4,937
============ ============ ============
Other comprehensive income (loss):
Unrealized gains (losses) on
marketable equity securities ....................................... (100) 831 --
Realized gains on marketable equity securities ....................... (123) (698) --
------------ ------------ ------------
Net income (loss) recognized in
other comprehensive income (loss) .................................... (223) 133 --
------------ ------------ ------------
Comprehensive income (loss) ............................................ $ (1,618) $ 5,725 $ 4,937
============ ============ ============
Earnings per share
Income (loss) from continuing operations ............................... $ (.02) $ .72 $ .60
Extraordinary items .................................................... (.16) .01 --
------------ ------------ ------------
Net income (loss) ...................................................... $ (.18) $ .73 $ .60
============ ============ ============
Weighted average shares of common stock
used in computing earnings per share ................................. 7,619,604 7,693,031 8,161,197
============ ============ ============
Earnings per share - assuming dilution
Income (loss) from continuing operations ............................... $ (.02) $ .71 $ .60
Extraordinary items .................................................... (.16) .01 --
------------ ------------ ------------
Net income (loss) ...................................................... $ (.18) $ .72 $ .60
============ ============ ============
Weighted average shares of common stock used
in computing earnings per share - assuming dilution .................. 7,619,604 7,769,296 8,197,049
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
65
<PAGE> 67
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Dividends Accumulated
Common Stock in Excess of Other
----------------------- Paid-in Accumulated Comprehensive Shareholders'
Shares Amount Capital Earnings Income (Loss) Equity
---------- ---------- ---------- ----------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ...................... 6,679,732 $ 10,181 $ 276,716 $ (217,270) $ -- $ 69,627
Repurchase of common stock ...................... (561,822) (856) (2,812) -- -- (3,668)
Conversion of convertible subordinated debenture 183,360 279 721 -- -- 1,000
Cash dividends ($0.34 per share) ................ -- -- -- (2,833) -- (2,833)
Stock dividends ................................. 640,476 975 3,170 (4,145) -- --
Net income ...................................... -- -- -- 4,937 -- 4,937
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 ...................... 6,941,746 10,579 277,795 (219,311) -- 69,063
Repurchase of common stock ...................... (95,490) (145) (603) -- -- (748)
Cash dividends ($0.38 per share) ................ -- -- -- (2,949) -- (2,949)
Stock dividends ................................. 664,179 1,012 4,446 (5,458) -- --
Unrealized gains on marketable equity securities -- -- -- -- 831 831
Realized gains on marketable equity securities .. -- -- -- -- (698) (698)
Net income ...................................... -- -- -- 5,592 -- 5,592
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 ...................... 7,510,435 11,446 281,638 (222,126) 133 71,091
Repurchase of common stock ...................... (504,059) (685) (5,223) -- -- (5,908)
Adjustment for change in par value .............. -- (10,828) 10,828 -- -- --
Cash dividends ($0.41 per share) ................ -- -- -- (3,198) -- (3,198)
Stock dividends ................................. 142,937 108 1,581 (1,689) -- --
Common stock issued in connection with merger ... 1,196,556 12 14,048 -- -- 14,060
Common stock issued in connection with
acquisition of TRA ........................... 100,000 1 2,116 -- -- 2,117
Stock options exercised ......................... 21,391 31 110 -- -- 141
Unrealized losses on marketable equity securities -- -- -- -- (100) (100)
Realized gains on marketable equity securities .. -- -- -- -- (123) (123)
Net (loss) ...................................... -- -- -- (1,395) -- (1,395)
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 ...................... 8,467,260 $ 85 $ 305,098 $ (228,408) $ (90) $ 76,685
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
66
<PAGE> 68
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31
------------------------------------------
1998 1997 1996
------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Rentals collected ....................................... $ 59,108 $ 50,578 $ 48,054
Interest collected ...................................... 175 634 553
Interest paid ........................................... (16,610) (11,564) (11,336)
Payments for property operations (including
$1,895 in 1998, $1,648 in 1997, and $1,014
in 1996 to affiliates) ............................... (31,277) (29,886) (28,752)
General and administrative expenses paid
(including $2,215 in 1998, $1,914 in 1997, and
$1,176 in 1996 to affiliates) ......................... (4,441) (2,134) (2,117)
Advisory fee paid to affiliate .......................... (1,154) (1,452) (1,168)
Organizational costs paid ............................... (286) -- --
Deferred borrowing costs paid ........................... (2,982) (2,915) (1,439)
------------ ------------ ------------
Net cash provided by operating activities ............. 2,533 3,261 3,795
------------ ------------ ------------
Cash Flows from Investing Activities
Acquisition of real estate .............................. (5,495) (14,656) (3,199)
Proceeds from sale of real estate ....................... 2,099 6,378 6,156
Earnest money deposits paid ............................. (307) (245) --
Real estate improvements ................................ (17,343) (27,349) (13,547)
Collections of notes receivable ......................... 352 187 2,140
Investments in marketable equity securities ............. (81) (2,462) --
Proceeds from sale of marketable equity securities ...... 580 2,606 --
Distributions from partnership's investing
activities ............................................ -- -- 6,817
Distribution of partnership's insurance settlement
proceeds .............................................. -- -- 760
Proceeds from sale of partnership interest .............. -- 1,600 --
Cash and cash equivalents acquired in connection
with merger of the Company and NIRT
and acquisition of TRA ................................ 658 -- --
Net (contributions and advances to) distributions
and repayment of advances from partnerships ........... (24,291) (9,872) 437
------------ ------------ ------------
Net cash (used in) investing activities ............... (43,828) (43,813) (436)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
67
<PAGE> 69
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31
------------------------------------------
1998 1997 1996
------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities
Proceeds from borrowings ..................................... $ 79,586 $ 79,477 $ 34,323
Payments on notes payable .................................... (41,977) (36,034) (28,500)
Repair escrow deposits, net .................................. (784) (847) (292)
Dividends to shareholders .................................... (3,388) (2,105) (2,731)
Distribution from partnership's financing activities ......... 3,758 -- --
Repurchase of common stock ................................... (5,893) (748) (3,668)
Proceeds from the exercise of stock options .................. 28 -- --
Borrowings on margin account ................................. 2,254 1,209 280
Advances (repayment of advances) from
affiliates ................................................. 5,891 -- (583)
------------ ------------ ------------
Net cash provided by (used in) financing activities ........ 39,475 40,952 (1,171)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ............ (1,820) 400 2,188
Cash and cash equivalents, beginning of year .................... 4,262 3,862 1,674
------------ ------------ ------------
Cash and cash equivalents, end of year .......................... $ 2,442 $ 4,262 $ 3,862
============ ============ ============
Reconciliation of net income (loss) to net cash
provided by operating activities
Net income (loss) .......................................... $ (1,395) $ 5,592 $ 4,937
Net gain on sale of real estate ............................ (2,108) (4,350) (3,700)
Gain on sale of investments ................................ (123) (913) --
Gain on insurance settlement ............................... -- -- (451)
Write-off of deferred borrowing costs in connection
with refinancings ....................................... 431 299 --
Extraordinary gain on debt forgiveness ..................... -- (431) --
Depreciation and amortization .............................. 8,587 7,938 6,333
Provision for losses ....................................... -- -- 300
Equity in (income) loss of partnerships .................... 889 (643) (1,500)
Interest on advances to partnerships ....................... (566) -- --
Non-cash compensation related to stock
options exercised ....................................... 107 -- --
Changes in other assets and other liabilities, net of
effects of noncash investing and financing activities:
(Increase) decrease in interest receivable .............. 3 5 (55)
(Increase) in other assets .............................. (4,802) (6,608) (2,665)
Increase in other liabilities ........................... 1,673 1,962 543
Increase (decrease) in interest payable ................. (163) 410 53
------------ ------------ ------------
Net cash provided by operating activities ....................... $ 2,533 $ 3,261 $ 3,795
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
68
<PAGE> 70
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection with the purchase or foreclosure
of real estate:
Real estate ................................................................... $ 13,751 $ 30,762 $ 14,954
Notes and interest receivable ................................................. -- -- (8,568)
Allowance for estimated losses ................................................ -- -- 3,000
Other assets .................................................................. 1,157 416 44
Notes and interest payable .................................................... (9,030) (15,756) (6,157)
Other liabilities ............................................................. (383) (766) (74)
---------- ---------- ----------
Cash paid ................................................................... $ 5,495 $ 14,656 $ 3,199
========== ========== ==========
Assets disposed of and liabilities released in connection with the sale of real
estate:
Real estate ................................................................... $ 2,283 $ 9,572 $ 23,221
Other assets .................................................................. 111 29 596
Notes and interest payable .................................................... (2,356) (7,493) (21,127)
Other liabilities ............................................................. (47) (134) (212)
Net gain on sale .............................................................. 2,108 4,404 3,678
---------- ---------- ----------
Cash received ............................................................... $ 2,099 $ 6,378 $ 6,156
========== ========== ==========
Assets acquired and liabilities assumed in connection
with the merger of the Company and NIRT and
the acquisition of TRA
Real estate ................................................................... $ 38,988 $ -- $ --
Cash .......................................................................... 658 -- --
Other assets .................................................................. 9,598 -- --
Notes, debentures, and interest payable ....................................... (29,260) -- --
Other liabilities ............................................................. (3,807) -- --
---------- ---------- ----------
Purchase consideration ...................................................... $ 16,177 $ -- $ --
========== ========== ==========
Real estate written off pursuant to
condemnation ................................................................ $ -- $ 2,210 $ --
Note payable written off pursuant to the
condemnation of the collateral property ..................................... $ -- $ 1,725 $ --
Allowance for estimated losses charged off
in connection with the write-off of real estate ............................. $ -- $ 485 $ --
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
69
<PAGE> 71
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of Tarragon Realty Investors,
Inc., its subsidiaries, and consolidated partnerships have been prepared in
conformity with generally accepted accounting principles ("GAAP"), the most
significant of which are described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES." The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The Notes to Consolidated Financial Statements are an
integral part of the Consolidated Financial Statements. The data presented in
the Notes to Consolidated Financial Statements are as of December 31 of each
year and for the year then ended unless otherwise indicated. Dollar amounts in
tables are in thousands, except per share amounts. Certain balances for 1997 and
1996 have been reclassified to conform to the 1998 presentation.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Company business. Tarragon Realty Investors, Inc., (the
"Company") is a Nevada corporation incorporated April 2, 1997, and the successor
in interest to National Income Realty Trust ("NIRT") and Vinland Property Trust
("Vinland"). NIRT, a California business trust, was organized on October 31,
1978, and commenced operations on March 27, 1979, investing in income-producing
real estate through acquisitions, leases, and partnerships. Vinland was a
California business trust established July 18, 1973, and commenced operations
April 2, 1974. Vinland was formed to invest in commercial and multifamily real
estate. In July 1997, Vinland merged with the Company, its wholly-owned
subsidiary.
Effective November 23, 1998, NIRT incorporated as a California corporation and
on November 24, 1998, merged with and into the Company, with the Company as the
survivor. Pursuant to the terms of the Agreement and Plan of Merger entered into
by the Company and NIRT, each share of beneficial interest of NIRT was converted
into 1.97 shares of the Company's common stock. As a result, the shareholders of
NIRT became the owners of 85% of the Company's common stock.
FOR ACCOUNTING PURPOSES, THE MERGER IS TREATED AS A REVERSE ACQUISITION OF THE
COMPANY BY NIRT USING THE PURCHASE METHOD OF ACCOUNTING, AND HISTORICAL BALANCES
AND OPERATIONS OF THE COMPANY FOUND IN THIS FORM 10-K ARE THOSE OF NIRT. SHARE
AND PER SHARE INFORMATION HAS BEEN RESTATED RETROACTIVELY TO GIVE EFFECT TO THE
1.97 TO 1 EXCHANGE RATIO IN THE MERGER. REFERENCES TO THE COMPANY IN RELATION TO
DATES PRIOR TO NOVEMBER 24, 1998, ARE INTENDED TO INCLUDE BOTH OF THE COMPANY'S
PREDECESSORS, NIRT AND VINLAND.
Immediately following the merger, the Company acquired Tarragon Realty Advisors,
Inc. ("TRA"), the Company's advisor since March 1, 1994, and NIRT's advisor
since April 1, 1994, from William S. Friedman and his wife, Lucy N. Friedman,
for 100,000 shares of the Company's common stock and options to acquire 350,000
additional shares of the Company's common stock at prices ranging between $13
and $16 per share. William S. Friedman is the President, Chief Executive
Officer, and a Director of the Company and also served as President, Chief
Executive Officer, and a Trustee of NIRT and as Director and Chief Executive
Officer of TRA. The Friedman family owns approximately 34% of the outstanding
shares of common stock of the Company. In addition to the options to acquire
350,000 additional shares received in connection with the Company's purchase of
TRA discussed above, Mr. Friedman also holds options to acquire 450,000
additional shares of the Company's common stock at prices ranging between $12
and $15 per share.
Basis of consolidation. The Consolidated Financial Statements include the
accounts of the Company, its subsidiaries, and partnerships it controls. All
significant intercompany transactions and balances have been eliminated.
Real estate and depreciation. Real estate held for sale is carried at the lower
of cost or estimated fair value less estimated costs to sell. Real estate held
for investment is carried at cost unless an impairment is determined to exist,
as discussed below. Impaired properties are written down to their estimated fair
values. Foreclosed real estate is initially recorded at new cost, defined as the
lower of the Company's note receivable carrying amount or the fair value of the
collateral property less estimated costs of sale. The Company capitalizes
property improvements and
70
<PAGE> 72
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
major rehabilitation projects that increase the value of the respective property
and have useful lives greater than one year, except for individual expenditures
less than $10,000 that are not part of a planned renovation project. Und3er this
policy, during 1998, expenditures of $16.9 million were capitalizes, including
$3.4 million related to development properties, and property replacements of
$2.3 million were expensed. Property replacements include, but are not limited
to, such items as landscaping, exterior painting, and parking lot improvements.
Depreciation is provided against real estate held for investment by the
straight-line method over the estimated useful lives of the assets, ranging from
three to 40 years.
The Company capitalizes interest on funds used in constructing property from the
date of initiation of construction activities through the time the property is
ready for leasing. The Company also capitalizes property taxes and insurance
costs during the construction period. Interest, property taxes, and insurance
expenditures of $662,000 and $945,000 were capitalized during 1998 and 1997,
respectfully.
Effective January 1, 1997, the Company implemented prospectively a change in
accounting estimate whereby capital expenditures for carpet, appliances, and
heating, ventilation, and air conditioning (HVAC) replacements are capitalized
rather than expensed. The Company believes that capitalizing these expenditures
and depreciating them over lives ranging from three to five years more
appropriately reflects the timing of the economic benefits to be received from
these expenditures. Additionally, the Company believes this treatment is
consistent with policies currently being used by other real estate investment
trusts. This change had no effect on the advisory fee as TRA waived any fee
resulting from this change in accounting estimate.
The Company's management evaluates whether events or changes in circumstances
indicate that the carrying value of any of the Company's properties held for
investment may not be recoverable. This evaluation generally consists of a
review of the property's cash flow and current and projected market conditions,
as well as any changes in general and local economic conditions. If an
impairment loss exists based on the results of this review, a loss is recognized
by a charge against current earnings and a corresponding reduction in the
respective asset's carrying value. The amount of this impairment loss is equal
to the amount by which the carrying value of the property exceeds the estimated
fair value.
At least annually, all properties held for sale are reviewed by the Company's
management, and a determination is made if the held for sale classification
remains appropriate. Following are among the factors considered in determining
that a change in classification to held for investment is appropriate: (i) the
property has not been held for at least one year; (ii) Company management has no
intent to dispose of the property within the next twelve months; (iii) the
property is a "qualifying asset" as defined in the Internal Revenue Code of
1986; (iv) property improvements have been funded; and (v) the Company's
financial resources are such that the property can be held long-term.
Allowance for estimated losses. Valuation allowances are provided for estimated
losses on notes receivable and properties held for sale to the extent that the
investment in the notes or properties exceeds the Company's estimate of fair
value less estimated selling costs of the collateral securing the notes or the
properties. The provisions for losses are based on estimates, and actual losses
may vary from current estimates. Such estimates are reviewed periodically. Any
additional provision determined to be necessary or the reversal of any existing
allowance no longer required is recorded by a charge or credit to current
earnings.
Cash equivalents. The Company considers all highly liquid debt instruments
purchased with maturities of three months or less to be cash equivalents.
Restricted cash. Restricted cash represents escrow accounts, generally held by
the lenders of certain of the Company's mortgage notes payable, for taxes,
insurance, property repairs and replacements.
71
<PAGE> 73
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other assets. Other assets consist primarily of notes and interest receivable,
marketable equity securities, tenant accounts receivable, deferred borrowing
costs, prepaid leasing commissions, and goodwill. Marketable equity securities
are considered to be available-for-sale and are carried at fair value, defined
as year end closing market value. Net unrealized holding gains and losses are
included in other comprehensive income (loss). Deferred borrowing costs are
amortized on the straight-line method (which approximates the effective interest
method) over the related loan terms, and such amortization is included in
interest expense. Prepaid leasing commissions are amortized to leasing
commission expense, included in property operating expenses, on the
straight-line method over the related lease terms. Goodwill was recorded in
connection with the Company's acquisition of TRA and is being amortized on the
straight-line method over five years. For a more detailed discussion of
goodwill, see NOTE 2. "MERGER TRANSACTION."
Revenue recognition on the sale of real estate. Gains on sales of real estate
are recognized when and to the extent permitted by Statement of Financial
Accounting Standards ("SFAS") No. 66. - "Accounting for Sales of Real Estate."
Until the requirements of SFAS No. 66 for full profit recognition have been met,
transactions are accounted for using the deposit, installment, cost recovery, or
financing method, whichever is appropriate.
Investments in noncontrolled partnerships. The Company uses the equity method to
account for investments in partnerships it does not control. Under the equity
method, the Company's initial investments are increased by its proportionate
share of the partnerships' operating income and additional advances and
decreased by the Company's proportionate share of the partnerships' operating
losses and distributions received.
Earnings per share. Net income (loss) per share of common stock is computed
based upon the weighted average number of shares outstanding during each year.
All share and per share data have been restated to give effect to the merger of
the Company with NIRT on the basis of 1.97 shares of the Company's common stock
for each share of beneficial interest of NIRT and a 10% stock dividend paid in
September 1997 by NIRT.
On December 31, 1997, the Company adopted SFAS No. 128 - "Reporting Earnings Per
Share," which superseded the Accounting Principles Board's Opinion No. 15 ("APB
No. 15") - "Earnings Per Share." This statement requires business enterprises
with other than simple capital structures to report both basic and diluted
earnings per share for each period for which a statement of operations is
presented. There was no cumulative effect nor any impact on the Company's
financial position as a result of the adoption.
Fair value of financial instruments. SFAS No. 107 - "Disclosures About Fair
Value of Financial Instruments" requires the Company to disclose the estimated
fair values of its financial instrument assets and liabilities.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1998 and 1997.
Considerable judgment is necessary to interpret market data and develop
estimated fair values. Accordingly, the estimated fair values presented do not
purport to present amounts to be ultimately realized or paid by the Company,
which may vary significantly from the estimated fair values presented. The use
of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair values.
As of December 31, 1998 and 1997, the Company's management estimates that the
carrying amounts for cash and cash equivalents and restricted cash approximate
fair value because of the short maturities of those instruments. In addition,
the carrying amounts of notes receivable and other liabilities approximate fair
value. The fair values of the Company's notes payable are estimated by
discounting future expected cash flows using current rates for loans with
similar terms and maturities.
72
<PAGE> 74
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock option plans. The Company measures any compensation costs associated with
the issue of stock options using the guidance provided by APB No. 25. Under APB
No. 25, compensation costs related to stock options issued pursuant to
compensatory plans are measured based on the difference between the quoted
market price of the stock at the measurement date (ordinarily the date of grant)
and the exercise price and should be charged to expense over the periods during
which the grantee performs the related services. All stock options issued to
date by the Company have exercise prices equal to the market price of the stock
at the dates of grant. See NOTE 10. "STOCK OPTIONS."
Recent Accounting Pronouncements. On January 1, 1998, the Company adopted SFAS
No. 130 - "Reporting Comprehensive Income." SFAS No. 130 requires the reporting
of comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income. Accumulated other comprehensive
income (loss) presented in the accompanying Consolidated Balance Sheets and
Consolidated Statements of Shareholders' Equity represents unrealized holding
gains and losses on marketable equity securities.
On December 31, 1998, the Company adopted SFAS No. 131 - " Disclosures about
Segments of an Enterprise and Related Information." The provisions of this
pronouncement had no effect on the Company's financial statements as the Company
considers rental real estate to be its only operating segment and manages its
business as such.
NOTE 2. MERGER TRANSACTION
As described in NOTE 1. "SIGNIFICANT ACCOUNTING POLICIES," the Company and NIRT
merged in November 1998 with the Company as the survivor. Immediately following
the merger, the Company acquired TRA. TRA is the sole owner of Tarragon
Management, Inc., ("TMI") that provides property management services for most of
the Company's properties. The merger was accounted for as a reverse acquisition
by NIRT of the Company using the purchase method of accounting.
The consideration given by NIRT, the accounting acquirer, in the acquisition of
the Company was the market value of the 1,196,556 shares of outstanding common
stock of the Company on November 24, 1998, or $14.1 million. The excess of the
market value of the Company's common stock over its book value on the date of
merger of approximately $5.6 million was allocated to the Company's real estate
properties on the basis of their relative fair values.
The consideration given in the acquisition of TRA was the market value of the
100,000 shares of the Company's common stock issued, or $1.2 million, plus the
fair value of the options to purchase 800,000 additional shares of the Company's
common stock over a period of ten years at prices ranging between $12 and $16
per share, or $942,000. The fair value of the options was estimated using the
Black Scholes pricing model. See NOTE 10. "STOCK OPTIONS" for assumptions used
in the calculation of fair value. The excess of the consideration over the net
assets of TRA of $2.5 million was recorded as goodwill. Goodwill is included in
other assets in the accompanying December 31, 1998, Balance Sheet and is being
amortized using the straight-line method over five years.
73
<PAGE> 75
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. MERGER TRANSACTION (Continued)
Pro forma results of operations for the combined entities for 1998 and 1997 are
presented as if the merger of the Company and NIRT and the acquisition of TRA
had occurred as of January 1, 1997. For purposes of the pro forma presentation,
depreciation and amortization, including amortization of goodwill, have been
adjusted to their accounting bases recognized in recording the merger and the
acquisition of TRA.
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1998 1997
--------------- ---------------
(Unaudited)
<S> <C> <C>
Revenue ........................................... $ 68,673 $ 62,197
Income (loss) from continuing operations .......... (2,119) 3,776
Net income (loss) ................................. (3,087) 3,837
Earnings per share
Income (loss) from continuing operations .......... $ (0.28) $ 0.49
Net income (loss) ................................. (0.41) 0.50
Earnings per share - assuming dilution
Income (loss) from continuing operations .......... $ (0.28) $ 0.49
Net income (loss) ................................. (0.41) 0.49
</TABLE>
NOTE 3. ALLOWANCE FOR ESTIMATED LOSSES AND PROVISIONS FOR LOSSES
Activity in the allowance for estimated losses was as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Balance January 1.................................. $ 1,194 $ 1,529
Reclassified from other assets..................... -- 150
Amounts charged off................................ -- (485)
--------------- ---------------
Balance December 31................................ $ 1,194 $ 1,194
=============== ===============
</TABLE>
Amounts charged off in 1997 relate to the write-off of K-Mart Shopping Center in
Indianapolis, Indiana, in March 1997 due to its condemnation.
During 1996, the Company recorded a provision for loss of $300,000 to write down
Mariposa Manor Apartments to its then estimated fair value.
[This space intentionally left blank.]
74
<PAGE> 76
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION
Since the merger, the Company has consolidated 13 properties comprised of nine
apartment complexes with 1,293 units and four commercial properties with 234,407
square feet. Except for two, all properties are held for investment. The bases
of the properties were determined by allocating the purchase consideration based
on the properties' relative fair values. See NOTE 2. "MERGER TRANSACTION." The
following table depicts the 13 properties consolidated since the merger.
<TABLE>
<CAPTION>
Acquisition Costs
Square -----------------------
Property Location Units Footage Basis Debt
- --------------------- ---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Apartments
Aspentree .................... Dallas, TX 296 212,864 $ 4,382 $ 3,839
The Brooks ................... Addison, TX 104 94,176 2,788 1,282
Collegewood .................. Tallahassee, FL 162 83,700 2,779 2,020
French Villa ................. Tulsa, OK 101 104,720 2,233 1,882
Holly House .................. North Miami, FL 57 45,417 1,987 1,760
Mission Trace ................ Tallahassee, FL 96 104,400 2,815 2,060
Riverside .................... Austin, TX 145 110,868 3,950 4,163
Southern Elms ................ Tulsa, OK 78 65,159 1,520 1,311
---------- ---------- ---------- ----------
1,039 821,304 22,454 18,317
---------- ---------- ---------- ----------
Commercial
Briarwest .................... Houston, TX -- 25,323 1,874 1,679
Park 20 West ................. Tallahassee, FL -- 69,065 3,442 1,884
Tarzana Towne Plaza .......... Tarzana, CA -- 37,208 3,355 2,924
---------- ---------- ---------- ----------
-- 131,596 8,671 6,487
---------- ---------- ---------- ----------
PROPERTIES HELD FOR SALE
Apartments
Phoenix ...................... Tulsa, OK 254 208,726 1,966 --
Commercial
One Turtle Creek ............. Dallas, TX -- 102,811 5,897 1,820
---------- ---------- ---------- ----------
254 311,537 7,863 1,820
---------- ---------- ---------- ----------
1,293 1,264,437 $ 38,988 $ 26,624
========== ========== ========== ==========
</TABLE>
During 1998 (prior to the merger), 1997, and 1996, the Company purchased ten
multifamily properties comprising 1,629 units and two commercial properties with
115,222 square feet as presented below. In connection with these acquisitions,
the Company paid TRA real estate acquisition fees totaling $393,000 and a
financing fee of $20,000 prior to the Company's acquisition of TRA. These
properties are located in the same geographic areas where the Company currently
operates and were acquired in separate transactions from unaffiliated sellers.
<TABLE>
<CAPTION>
Cost of Acquisition
Date Square -----------------------
Property Location Acquired Units Footage Cash Debt
------------------ ---------------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1998 Acquisitions:
Desert Winds Jacksonville, FL Jun-98 152 121,056 $ 603 $ 1,375
Palm Grove Orlando, FL Jun-98 142 99,684 447 1,333
Silver Creek Jacksonville, FL Jun-98 152 144,240 490 1,312
1505 Hwy 6 Houston, TX Oct-98 -- 62,934 1,695 2,000
---------- ---------- ---------- ----------
446 427,914 3,235 6,020
---------- ---------- ---------- ----------
1997 Acquisitions:
Morningside Jacksonville, FL Feb-97 112 89,200 521 1,641
Newport Plantation, FL Jun-97 152 139,364 1,526 5,058
Fountainhead Kissimmee, FL Jun-97 184 172,578 7,690 --
Courtyard at the Park Miami, FL Jul-97 127 117,250 728 2,973
Mariner Plaza Tallahassee, FL Aug-97 -- 52,288 1,458 --
Landmark Tallahassee, FL Oct-97 128 113,720 1,822 --
---------- ---------- ---------- ----------
703 684,400 13,745 9,672
---------- ---------- ---------- ----------
1996 Acquisitions:
Woodbrier Oklahoma City, OK Apr- 96 128 114,900 1,277 1,230
River City Landing Jacksonville, FL Jun- 96 352 356,800 1,922 4,930
---------- ---------- ---------- ----------
480 471,700 3,199 6,160
---------- ---------- ---------- ----------
1,629 1,584,014 $ 20,179 $ 21,852
========== ========== ========== ==========
</TABLE>
75
<PAGE> 77
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
In March 1998, the Company completed reconstruction and expansion of The Vistas
at Lake Worth in Fort Worth, Texas, to 265 apartment units at a cost of $16.5
million, $13.9 million of which had been expended at December 31, 1997. Initial
operations at the property began in December 1997.
In April 1998, the Company purchased a 43-acre tract of land adjacent to The
Vistas at Lake Worth in Fort Worth, Texas, for $707,000, including an
acquisition fee to TRA of $7,000. The Company plans to build a luxury apartment
community known as The Observatory on a portion of this tract and sell the
balance to a single family home builder. In May 1998, the Company purchased a
33-acre tract of land in Frisco, Texas, for $4.5 million, paying $1.6 million in
cash and financing the remainder with a short-term mortgage. In connection with
this transaction, the Company paid TRA an acquisition fee of $45,000 and a
financing fee of $30,000. Construction is presently underway on a portion of the
site for a 320-unit luxury apartment community known as The Vintage at Legacy
Lakes.
The Company added 300 units to its multifamily portfolio in July 1997 when it
acquired an additional 40% interest in English Village Partners, L.P., for $1
million. As the Company now holds a 90% interest in the partnership, the
operations of English Village Apartments, located in Memphis, Tennessee, and
subject to a mortgage with a present balance of $5.9 million, have been
consolidated since July 1997.
In connection with the acquisition of River City Landing in 1996, the seller
paid Bruce A. Schnitz, former Chief Operating Officer of the Company and TRA, a
commission of $82,563 pursuant to a brokerage agreement entered into prior to
Mr. Schnitz's affiliation with TRA and the Company.
The Company sold Mountain View Shopping Center in Las Vegas, Nevada, and Spring
Pines Apartments in Houston, Texas, during 1998 for an aggregate sale price of
$4.7 million, receiving net cash proceeds of $2.1 million and recognizing gains
on the sales totaling $2.1 million.
The Company sold Plaza Hills Apartments in Kansas City, Missouri, Huntington
Green Apartments in Philadelphia, Pennsylvania, and Pheasant Pointe Apartments
in Sacramento, California, during 1997 for an aggregate sale price of $14
million, receiving net cash proceeds of $6.4 million and recognizing gains on
the sales totaling $4.4 million.
In September 1996, the Company sold Century Centre II Office Building in San
Mateo, California, for $28.2 million in cash. After closing costs, prorations,
and the payoff of the $21 million mortgage secured by the property, the Company
received net cash proceeds of $6.2 million and recognized a gain of $3.7
million.
In November 1995, the city of Indianapolis, Indiana, initiated condemnation
proceedings against the Company's K-Mart Shopping Center acquired through a deed
in lieu of foreclosure in December 1994. The shopping center was vacant at the
time the Company acquired it, although leased to K-Mart under a net lease
expiring in 1999. The lease was assigned by K-Mart to the city of Indianapolis
in September 1995. In March 1996, the Company ceased payments on the $1.7
million non-recourse mortgage loan secured by the shopping center. In March
1997, the Company wrote off the property and related debt. No loss was
recognized in excess of amounts previously provided.
In October 1995, the Company and the borrower on an $8.6 million first mortgage
receivable that matured in December 1995 negotiated a settlement of the
outstanding balance whereby the borrower agreed to relinquish the collateral
property, Jackson Square Shopping Center, a 342,000 square foot property in
Jackson, Mississippi, through a deed in lieu of foreclosure. The Company took
possession of the property in January 1996. As the estimated fair value of the
property exceeded the Company's net carrying value of the mortgage loan, the
Company recognized no loss in excess of amounts previously provided.
76
<PAGE> 78
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
In the second quarter of 1998, the Company identified 12 multifamily properties
with an aggregate 3,406 units and aggregate net carrying value of $56.8 million
that it would pursue marketing for a possible bulk sale and, accordingly,
reclassified these properties to real estate held for sale. The Company ceased
depreciating these properties in April 1998. In September 1998, the Company
removed from consideration for sale two of the properties identified in April
1998 with an aggregate 320 units and aggregate net carrying value of $5.7
million, and reclassified them to held for investment; depreciation resumed in
October 1998. Also in September 1998, the Company identified four other
properties that it would pursue marketing for sale, three commercial properties
with total square footage of 216,777 and aggregate net carrying value of $7.7
million and one multifamily property with 136 units and a net carrying value of
$1.6 million. These four properties were reclassified to held for sale, and
depreciation ceased as of October 1, 1998. In December 1998, the Company added
three properties to its held for sale portfolio (one commercial property with
39,600 square feet and a net carrying value of $1.6 million and two apartment
properties with 360 units and an aggregate net carrying value of $5.1 million).
Depreciation on these properties will cease in January 1999.
As the estimated fair values of these properties exceeded their carrying values
at the time of determination to reclassify, no losses were recognized upon their
reclassification. Results of operations for real estate held for sale for the
years ended December 31, 1998, 1997, and 1996, were $2.4 million, $1.5 million,
and $675,000, respectively. Operations for these properties include rental
revenue, property operating expenses, interest expense, and depreciation expense
(prior to their reclassification to held for sale). For a listing of properties
held for sale, see Schedule III.
NOTE 5. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
Investments in and advances to partnerships consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
801 Pennsylvania Avenue .................. $ 10 $ 2,936
Ansonia Apartments, L.P. ................. 13,383 970
Antelope Pines Estates, L.P. ............. 109 --
Danforth National Apartments, Ltd. ....... 2,695 2,892
Larchmont Associates, L.P. ............... 1,837 --
National Omni Associates, L.P. ........... 5,902 721
Orange National Partners, Ltd. ........... 4,203 --
RI Panama City, Ltd. ..................... 1,460 1,677
RI Windsor, Ltd. ......................... 2,898 2,697
Sacramento Nine .......................... 555 557
Tarragon Huntsville Apartments, L.L.C .... 677 --
Tarragon Savannah, L.P. .................. 2,511 1,389
Tarragon Stoneybrook Apartments, L.L.C ... 209 --
Woodcreek Garden Apartments, L.P. ........ 907 --
------------ ------------
$ 37,356 $ 13,839
============ ============
</TABLE>
The Company holds noncontrolling interests in each of the above partnerships as
the outside partners participate in the decision-making activities of the
partnerships. Therefore, the Company accounts for its investments in these
partnerships using the equity method.
Partnerships with affiliates of Robert C. Rohdie
In 1997 and 1998, the Company formed seven partnerships with affiliates of
Robert C. Rohdie. These partnerships include Danforth National Apartments, Ltd.,
Orange National Partners, Ltd., RI Panama City, Ltd., RI Windsor, Ltd., Tarragon
Huntsville Apartments, L.L.C., Tarragon Savannah, L.P., and Tarragon Stoneybrook
Apartments, L.L.C. Except for Danforth, the Company holds 50% interests in each
of these partnerships. The Company holds
77
<PAGE> 79
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS (Continued)
an 80% interest in Danforth. Each of these partnerships was formed to construct,
own, and operate a luxury apartment community in Florida, Georgia, or Alabama.
These properties, with an aggregate 2,066 units, are in various stages of
construction and/or lease-up. Generally, the partnerships have obtained
construction loans (guaranteed by Mr. Rohdie) to finance the construction. The
remaining costs were primarily funded by interest-bearing priority loans from
the Company. Such loans together with interest thereon will be repaid from the
operation, refinancing, sale, or other disposition of the property. Mr. Rohdie
has provided extensive development experience to the partnerships and, in
return, has received interests in the partnerships that are subordinate to
repayment of the Company's priority loans and interest thereon. The Company has
made capital contributions to these partnerships of $830,000, and the aggregate
balance of interest-bearing priority loans at December 31, 1998, is $15.3
million. In 1997, in connection with the acquisition of the land on which The
Club at Danforth was constructed, Danforth paid an acquisition fee of $30,000 to
TRA.
Ansonia Apartments, L.P.
In December 1997, the Company formed Ansonia Apartments, L.P., with two
unrelated entities to invest in the renovation and repositioning of older,
suburban apartment properties in central and eastern Connecticut. The Company
formed this partnership to take advantage of the acquisition and management
skills of Robert Rothenberg, Saul Spitz, Richard Frary, and Joel Mael,
affiliates of the outside partners. The Company has a 70% interest in this
partnership. The outside partners have a 30% interest in the partnership,
subject to their obligation to pay the Company 30% of the amounts contributed to
the partnership by the Company plus interest. Between December 1997 and August
1998, Ansonia purchased ten operating properties with 1,950 apartment units at
an aggregate cost of $64.6 million, $53.8 million of which was financed through
mortgages on each property. The remainder of the aggregate purchase price was
paid with funds contributed by the Company to Ansonia. The Company's
contributions, with a balance of $12.6 million at December 31, 1998, earn a
preferred return and are to be repaid through preferential returns from
operation, refinancing, sale or other disposition of the properties. In
connection with the acquisition and financing of these properties, Ansonia paid
TRA fees of $38,000 in 1997 and $54,000 in 1998.
Antelope Pines Estates, L.P., and Woodcreek Garden Apartments, L.P.
In December 1998, the Company purchased a 49% general partner interest in
Antelope Pines Estates, L.P., which owns a 314-unit operating apartment property
and in Woodcreek Garden Apartments, L.P., which owns a 416-unit operating
apartment property, both located in Lancaster, California. The Company has made
investments in and advances to the partnerships of $1 million, which are
expected to be repaid from operation, refinancing, sale, or other disposition of
the properties, subject to preferential returns to the other partners.
801 Pennsylvania Avenue
In June 1995, the Company acquired a 50% economic interest in an office building
located at 801 Pennsylvania Avenue, Washington, D.C. This interest was acquired
through purchase of a first lien mortgage note with a face value of $8.5 million
for $3 million. In accordance with the terms of the note, the Company's $3
million investment, as well as any additional advances made to the property,
were to be repaid from property cash flow after operating expenses, with
interest at a rate of 11% per annum. The $5.5 million remaining balance of the
note plus accrued interest was to be satisfied by payment of 50% of all funds
available after property operating expenses plus 50% of the proceeds from any
sale or refinancing. In June 1998, new first mortgage financing in the amount of
$4.2 million secured by the property was obtained. The Company received $3.8
million of the financing proceeds, $2.9 million of which represented the balance
of its original investment, $606,000 of which was accrued interest, and $267,000
was the Company's 50% participation in excess financing proceeds.
Larchmont Associates, L.P.
The Company holds a 57% interest in Larchmont Associates, L.P., which owns a
504-unit apartment complex in Toledo, Ohio. The Larchmont interest was initially
acquired by Vinland in December 1995 in return for a cash investment of
$418,000. In 1997 and in 1998 prior to the merger of the Company and NIRT,
additional advances
78
<PAGE> 80
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS (Continued)
were made to Larchmont, largely to fund capital improvements. The $1.8 million
aggregate balance is expected to be repaid with interest at 18% from the
operation, refinancing, sale, or other disposition of the property.
National Omni Associates, L.P.
In December 1997, the Company formed Omni in which it held a 55% interest. Omni
purchased 5600 Collins Avenue, a 289-unit high rise waterfront apartment
building in Miami Beach, Florida, in February 1998. The purchase price of $32
million was partially funded through $26 million of first and second lien loans.
The remainder of the purchase price was paid with funds contributed by the
Company. In connection with the merger of the Company with NIRT, the Company's
interest increased to 70%. The Company's investment balance of $5.9 million at
December 31, 1998, is to be repaid with interest at rates between 10% and 18%
through preferential returns from operation, refinancing, sale, or other
disposition of the property.
Sacramento Nine ("SAC 9")
The Company and Continental Mortgage and Equity Trust are partners in SAC 9, a
tenancy-in-common that currently owns two office buildings in the vicinity of
Sacramento, California. The Company has a 70% undivided interest in SAC 9.
In August 1995, SAC 9 obtained first mortgage financing in the amount of $3.5
million secured by a previously unencumbered office building. Net financing
proceeds of $3.4 million were distributed, of which the Company's proportionate
share was $2.4 million. In connection with the financing, SAC 9 paid a mortgage
brokerage fee of $35,000 to TRA. Distribution of the financing proceeds to the
Company resulted in cumulative distributions exceeding the Company's investment
in SAC 9. Accordingly, during 1996, the Company recorded income of $129,000
representing the excess of cumulative distributions over the Company's
investment in SAC 9.
Other partnerships
Until July 1997, the Company held a 50% interest in English Village Partners,
L.P. In November 1995, this partnership refinanced the mortgage debt secured by
English Village Apartments, its sole property, increasing the first mortgage
loan balance to $6.2 million. Net refinancing proceeds were $1.3 million, of
which the Company's portion was $619,000. Distribution of the refinancing
proceeds resulted in cumulative distributions exceeding the Company's investment
in this partnership. Also, during 1996, distributions to the Company from the
operations of English Village Apartments exceeded the Company's share of the
partnership's net income. Accordingly, during 1996, the Company recorded income
of $771,000 representing the excess of cumulative distributions over the
Company's investment in English Village.
In July 1997, the Company acquired an additional 40% interest in English
Village, increasing its total interest to 90%, in exchange for a capital
contribution of $1 million. As the Company now holds a controlling interest, the
operations of English Village, have been consolidated since July 1997. See NOTE
3. "REAL ESTATE AND DEPRECIATION."
Until November 1997, the Company had a 40% interest in Indcon, L.P., which owned
industrial warehouses. In August 1997, Indcon sold a warehouse for $60,000
receiving net cash proceeds of $54,000 of which the Company's proportionate
share was $22,000. In connection with the sale, Indcon recorded a loss on the
sale totaling $134,000, and the Company recorded a $54,000 loss representing its
proportionate share of the loss on sale. In November 1997, the Company sold its
interest in the partnership for $1.6 million cash. In connection with this sale,
the Company recognized a gain of $215,000.
During the first half of 1996, Indcon sold 27 warehouses for $41.2 million,
receiving net cash proceeds of $16.8 million after the payoff of the existing
$23.5 million mortgage loan and closing costs. The Company's share of the sale
proceeds was $6.7 million plus $130,000 representing an allowance for brokerage
commissions that the Company retained and that offset the Company's share of
Indcon's loss on the sale, resulting in a net gain on sale of $22,000.
79
<PAGE> 81
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS (Continued)
In September 1995, one of Indcon's warehouses was destroyed in a fire. An
insurance settlement totaling $2.2 million was reached by the partnership in
March 1996 resulting in a $1.1 million gain, of which the Company's
proportionate share was $451,000. The Company received cash proceeds of $760,000
representing its proportionate share of the insurance settlement proceeds.
Set forth below are summarized financial data for the partnerships accounted for
using the equity method as of and for the periods indicated (unaudited):
<TABLE>
<CAPTION>
Other
December 31, 1998 Other Construction/
Ansonia Danforth Omni Windsor Operating Lease-Up Other Total
--------- --------- --------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate ................... $ 69,271 $ 15,949 $ 32,576 $ 18,688 $ 18,420 $ 35,280 $ 35,874 $ 226,058
Accumulated depreciation ...... (675) (196) (614) (387) (3,721) (227) -- (5,820)
Other assets .................. 1,472 430 853 205 864 698 833 5,355
Notes and interest payable .... (54,530) (13,295) (26,050) (15,962) (13,102) (27,030) (26,500) (176,469)
Other liabilities ............. (2,163) (3,809) (935) (3,765) (2,597) (8,676) (2,099) (24,044)
--------- --------- --------- --------- --------- --------- -------- ---------
Partners' capital (deficit) ... $ 13,375 $ (921) $ 5,830 $ (1,221) $ (136) $ 45 $ 8,108 $ 25,080
========= ========= ========= ========= ========= ========= ======== =========
The Company's proportionate
share of capital (deficit) $ 13,375 $ (744) $ 5,830 $ (611) $ 945 $ 221 $ 119 $ 19,135
Advances ...................... 8 3,439 72 3,509 1,457 7,953 1,783 18,221
--------- --------- --------- --------- --------- --------- -------- ---------
Investments in and advances to
partnerships ............... $ 13,383 $ 2,695 $ 5,902 $ 2,898 $ 2,402 $ 8,174 $ 1,902 $ 37,356
========= ========= ========= ========= ========= ========= ======== =========
Year ended December 31, 1998
Rental revenue ................ $ 5,558 $ 419 $ 3,945 $ 1,338 $ 2,496 $ 1,088 $ -- $ 14,844
Property operating expenses ... (2,762) (384) (2,163) (1,071) (751) (621) -- (7,752)
Interest expense .............. (1,788) (776) (1,931) (1,496) (562) (898) -- (7,451)
Depreciation expense .......... (668) (196) (614) (348) (449) (228) -- (2,503)
--------- --------- --------- --------- --------- --------- -------- ---------
Net income (loss) ............. $ 340 $ (937) $ (763) $ (1,577) $ 734 $ (659) $ -- $ (2,862)
========= ========= ========= ========= ========= ========= ======== =========
Equity in income (loss) of
partnerships ............... $ 340 $ (750) $ (648) $ (789) $ 1,362 $ (404) $ -- $ (889)
========= ========= ========= ========= ========= ========= ======== =========
December 31, 1997
Real estate ................... $ 3,829 $ 2,892 $ -- $ 15,933 $ 10,090 $ 7,123 $ -- $ 39,867
Accumulated depreciation ...... (6) -- -- (38) (2,854) -- -- (2,898)
Other assets .................. 214 -- 721 474 675 505 -- 2,589
Notes and interest payable .... (2,925) -- -- (13,402) (4,131) (4,301) -- (24,759)
Other liabilities ............. (142) (2,886) -- (2,661) (137) (2,823) -- (8,649)
--------- --------- --------- --------- --------- --------- -------- ---------
Partners' capital ............. $ 970 $ 6 $ 721 $ 306 $ 3,643 $ 504 $ -- $ 6,150
========= ========= ========= ========= ========= ========= ======== =========
The Company's proportionate
share of capital ........... $ 970 $ 6 $ 721 $ 153 $ 3,126 $ 400 $ -- $ 5,376
Advances ...................... -- 2,886 -- 2,544 367 2,666 -- 8,463
--------- --------- --------- --------- --------- --------- -------- ---------
Investments in and advances to
partnerships ............... $ 970 $ 2,892 $ 721 $ 2,697 $ 3,493 $ 3,066 $ -- $ 13,839
========= ========= ========= ========= ========= ========= ======== =========
</TABLE>
80
<PAGE> 82
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS (Continued)
<TABLE>
<CAPTION>
Year ended December 31, 1997 Other
Windsor Operating Total
---------- ---------- ----------
<S> <C> <C> <C>
Rental revenue .............................. $ 225 $ 3,598 $ 3,823
Property operating expenses ................. (79) (1,340) (1,419)
Interest expense ............................ (180) (649) (829)
Depreciation expense ........................ (38) (481) (519)
---------- ---------- ----------
Income (loss) before loss on sale
of real estate ........................... (72) 1,128 1,056
Loss on sale of real estate ................. -- (134) (134)
---------- ---------- ----------
Net income (loss) ........................... $ (72) $ 994 $ 922
========== ========== ==========
Equity in income (loss) of
partnerships ............................. $ (36) $ 679 $ 643
========== ========== ==========
Year ended December 31, 1996
Rental revenue .............................. $ -- $ 5,090 $ 5,090
Property operating expenses ................. -- (2,179) (2,179)
Interest expense ............................ -- (1,421) (1,421)
Depreciation expense ........................ -- (535) (535)
---------- ---------- ----------
Income before loss on sale of
real estate and gain on insurance
settlement ............................... -- 955 955
Loss on sale of real estate ................. -- (270) (270)
Gain on insurance settlement ................ -- 1,126 1,126
---------- ---------- ----------
Net income .................................. $ -- $ 1,811 $ 1,811
========== ========== ==========
Equity in income of partnerships ............ $ -- $ 1,500 $ 1,500
========== ========== ==========
</TABLE>
"Other Operating" partnerships include those with fully operational properties.
"Construction/lease-up" partnerships include those with properties under
construction or recently completed. "Other" in 1998 includes two partnerships
with construction of one property each beginning in 1999 and two partnerships
with one property each that had no operations in 1998. The Company's equity in
income of "Other Operating" partnerships for the year ended December 31, 1998,
includes $873,000 received from the refinancing of 801 Pennsylvania Avenue, as
described above, representing accrued interest on the Company's original
investment and additional advances plus a 50% participation in the excess
financing proceeds. The Company's equity in income of partnerships for the year
ended December 31, 1996, included $900,000 from SAC 9 and English Village
representing distributions in excess of the Company's investment in the
partnerships. The source of these distributions was primarily financing
proceeds. Interest, property taxes, and insurance expenditures of $1.7 million
and $631,000 in 1998 and 1997, respectively, were capitalized on properties
constructed by partnerships the Company accounts for on the equity method.
81
<PAGE> 83
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. INVESTMENTS IN MARKETABLE EQUITY SECURITIES
Investments in marketable equity securities consist of securities of
unaffiliated real estate companies and are available for sale. The investments
carried at fair value are included in "Other assets" in the accompanying
Consolidated Balance Sheets. Unrealized holding gains and losses are included in
other comprehensive income (loss).
Carrying value and cost basis of investments in marketable equity securities
were as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
---------- ---------
<S> <C> <C>
Carrying value............................................................... $ 88 $ 687
Cost basis................................................................... 178 554
</TABLE>
Unrealized holding gains and losses, securities sold, and realized gains on the
sale of marketable equity securities were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Unrealized holding gains.......................................... $ -- $ 831 $ --
Unrealized holding losses......................................... (100) -- --
Marketable equity securities sold................................. 580 2,606 --
Cost basis of marketable equity securities sold................... 457 1,908 --
Realized gains on sale marketable equity securities............... 123 698 --
</TABLE>
NOTE 7. NOTES, DEBENTURES, AND INTEREST PAYABLE
Notes, debentures, and interest payable consisted of the following at December
31:
<TABLE>
<CAPTION>
1998 1997
---------------------------- -----------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Mortgage notes payable ................. $ 249,381 $ 251,141 $ 180,461 $ 182,498
Other notes payable..................... 9,399 9,590 -- --
Debentures payable...................... 873 928 -- --
Accrued interest ....................... -- 1,702 -- 1,628
---------- ---------- --------- ---------
$ 259,653 $ 263,361 $ 180,461 $ 184,126
========== ========== ========= =========
</TABLE>
Notes payable at December 31, 1998, bear interest at fixed rates from 5.99% to
9.81% per annum and variable rates currently ranging from 5.27% to 10% and
mature from 1999 through 2031. The mortgage notes are generally nonrecourse and
are collateralized by deeds of trust on real estate with an aggregate carrying
value of $280.2 million.
Debentures are unsecured, bear interest at 9% per annum, mature June 30, 2003,
and are redeemable by the Company at any time at 100% of the principal amount
together with accrued but unpaid interest. Interest is payable semiannually in
June and December. Debentures were issued in 1993 by Vinland in connection with
a dividend to shareholders.
82
<PAGE> 84
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES, DEBENTURES, AND INTEREST PAYABLE (Continued)
Other notes payable at December 31, 1998, include $5.9 million due to affiliates
of William S. Friedman, President, Chief Executive Officer, and a Director of
the Company. See NOTE 13. "RELATED PARTY TRANSACTIONS."
In connection with its acquisition of TRA, the Company assumed a $1.5 million
note payable to a bank. This loan bears interest at the London Interbank Offered
Rate ("LIBOR") plus 2% per annum, is secured by common stock of the Company
owned by the Friedman family, and matures in July 1999.
At December 31, 1998, scheduled principal payments on notes and debentures
payable are due as follows:
<TABLE>
<S> <C>
1999................................................................................. $ 18,293
2000................................................................................. 61,707
2001................................................................................. 23,618
2002................................................................................. 5,350
2003................................................................................. 6,049
Thereafter........................................................................... 146,642
---------
$ 261,659
=========
</TABLE>
During 1998, 1997, and 1996, the Company obtained permanent mortgage financing
on 26 properties totaling $113.9 million, receiving net cash proceeds of $29.7
million after the payoff of $73.2 million in existing debt. The remainder of the
financing proceeds was used to fund escrows for replacements and repairs and to
pay the associated closing costs. In connection with these financings, the
Company paid fees of $786,000 to TRA.
During 1998, 1997, and 1996, the Company obtained interim financing secured by
five properties totaling $18.5 million (excluding fundings under the $50 million
and $35 million revolving credit facilities discussed below), receiving net cash
proceeds of $13.3 million after the payoff of $4.4 million in existing debt. The
remainder of the proceeds was used to fund escrows for replacements and to pay
the associated closing cost. In connection with these financings, the Company
paid fees of $177,000 to TRA. Two of these properties were refinanced in 1998
with fundings under the $35 million revolving credit facility discussed below.
Permanent financing was obtained on another two of these properties in 1998 (see
discussion above).
In June 1996, the Company purchased the $3.1 million Fannie Mae mortgage backed
security ("Fannie Mae MBS") issued by the lender in connection with the
financing of Forest Oaks Apartments at a 1/2% discount and simultaneously
entered into a reverse repurchase agreement with an investment bank. The
investment bank purchased the Fannie Mae MBS from the Company for 92% of its
value, and the Company agreed to repurchase the MBS from the investment bank one
month later at the same price plus interest at LIBOR plus 1/2% per annum. In
July 1996, the Company purchased the $16.8 million Government National Mortgage
Association mortgage backed security ("GNMA MBS") issued by the lender in
connection with the financing of Heather Hills Apartments at a 2.7% discount and
added this MBS to the reverse repurchase transaction with the investment bank.
As provided for in the agreement, the Company and the investment bank extended
the repurchase date monthly, and the repurchase price fluctuated with changes in
the values of the MBSs. In January 1997, the Company entered into a similar
repurchase transaction with a government sponsored enterprise which purchased
the MBSs for 97% of their aggregate value, and the Company agreed to repurchase
them one month later at the same price plus interest at 5.4% per annum. The
Company and the government sponsored enterprise extended the repurchase date
monthly, establishing a new repurchase price each month. In November 1997, the
Company purchased the $2.7 million Fannie Mae MBS issued by the lender in
connection with the financing of Cross Creek Apartments at face value and added
this MBS to the reverse repurchase transaction. In July 1998, the Company
renewed the reverse repurchase agreement with the investment bank. Currently,
the repurchase date is April 1999, the repurchase price is $22.6 million, and
the interest rate is 5.05%. The reverse repurchase transaction has resulted in
effective interest rates as of December 31, 1998, on the Forest Oaks, Heather
Hills, and Cross Creek financings of 6.73%, 6.07%, and 6.63%, respectively.
83
<PAGE> 85
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES, DEBENTURES, AND INTEREST PAYABLE (Continued)
The Company is exposed to a demand for additional collateral or, in the
alternative, credit loss in the event the interest rate associated with the
repurchase transaction fluctuates in a manner that is unfavorable to the
Company's interest in the MBSs. However, the Company intends to either pay off
the mortgages or modify the mortgages to increase the interest rate prior to any
significant credit loss.
During 1997, the Company obtained a $2.2 million loan secured initially by
352,000 treasury shares of beneficial interest of NIRT. After a 10% stock
dividend paid in September 1997 and the merger, this loan is now secured by
762,784 shares of the Company's common stock. The proceeds of this loan were
advanced to RI Windsor, Ltd., a partnership in which the Company holds a 50%
interest. See NOTE 5. "INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS." This loan
matures in January 2000; however, the Company expects to repay the loan prior to
that date with funds to be provided by permanent financing on Mayfaire at
Windsor Parke, RI Windsor's sole property.
In May 1997, the Company accepted a commitment from GMAC Commercial Mortgage
Corporation ("GMAC") for a $50 million revolving credit facility. Advances under
the facility are available to finance properties currently owned by the Company
as well as new acquisitions. The outstanding balance is limited to the lesser of
75% of the value of the collateral properties or an amount supported by a debt
service coverage ratio of 1.25. The borrowing base may be increased by adding
new or existing properties to the collateral pool. Advances are limited to the
lesser of 75% of the appraised value of the property as stabilized or 80% of
total acquisition costs which include the purchase price of a newly acquired
property and the cost of improvements incurred between the date of acquisition
and the date that any mortgage secured by that property is recorded. A newly
acquired property is defined as a property owned by the Company for less than
one year. The outstanding balance under the facility bears interest at the 30
day LIBOR plus a variable spread of between 2% and 2.5% which is determined
based on the loan-to-value and debt service coverage maintained. Payment terms
include interest only monthly with the outstanding balance due at maturity,
which is 36 months from the date of the first advance. The Company may extend
the maturity by two six-month terms, but no new fundings may occur under the
facility during any extension period. The Company has obtained fundings under
this revolving credit facility totaling $47.5 million, $42 million of which were
obtained in 1997, secured by first mortgages against nine properties. The
Company received net cash proceeds of $31.7 million ($26.3 million in 1997) from
these fundings after the payoff of existing mortgages of $13.5 million in 1997,
establishing escrows for taxes, insurance, and repairs, and paying the
associated closing costs. In connection with these fundings, the Company paid
TRA financing fees totaling $475,425 ($420,000 in 1997).
In June 1998, the Company obtained a $35 million revolving credit facility from
GMAC with substantially the same terms as the $50 million revolving credit
facility obtained in 1997. The outstanding balance under the facility bears
interest at the 30-day LIBOR plus 2%. Payment terms include interest only
monthly with the outstanding balance due at maturity, which is June 2001.
Similar to the $50 million facility, the maturity of the $35 million facility
may be extended by two six-month terms, but no new fundings may occur under the
facility during any extension period. In June 1998, the Company obtained
fundings under this revolving credit facility of $9.5 million secured by first
mortgages on two properties. The Company received net cash proceeds of $4
million from these fundings after the payoff of existing mortgages totaling $5.1
million, establishing escrows for taxes, insurance, and repairs, and paying the
associated closing costs. In connection with these fundings, the Company paid
TRA financing fees totaling $95,000.
During 1998, the Company recognized $1.2 million of extraordinary expenses
resulting from prepayment penalties and the write-off of deferred financing
expenses associated with certain 1998 refinancings.
In December 1993, the Company issued a $1 million convertible subordinated
debenture to John A. Doyle, Chief Financial Officer of the Company until
September 1996, in exchange for his participation interest in the profits of the
Consolidated Capital Properties II assets, which the Company acquired in
November 1992. In February 1996, Mr. Doyle converted the debenture into 183,360
shares of the Company's common stock (restated to give effect to the merger). In
September 1996, the Company repurchased 98,500 of these shares from Mr. Doyle
for $700,000.
84
<PAGE> 86
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. DIVIDENDS TO SHAREHOLDERS
The Company paid cash dividends in 1998, 1997, and 1996 of $3.2 million, $2.9
million, and $2.8 million, respectively, all of which were reported to the
Internal Revenue Service as return of capital. Additionally, in September 1997
and 1996, the Company paid 10% stock dividends, resulting in the issuance of
1,447,592 shares (restated to give effect to the merger).
NOTE 9. EARNINGS PER SHARE
Following is a reconciliation of the weighted average shares of common stock
outstanding used in the computation of earnings per share and earnings per share
- - assuming dilution. The effect of stock options on weighted average shares of
common stock outstanding - assuming dilution for the year ended December 31,
1998, is not reflected below because their effect is anti-dilutive.
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Weighted average shares of
common stock outstanding............. 7,619,604 7,693,031 8,161,197
Stock options........................... -- 76,265 35,852
------------- -------------- --------------
Weighted average shares of
common stock outstanding -
assuming dilution.................... 7,619,604 7,769,296 8,197,049
============= ============== ==============
</TABLE>
NOTE 10. STOCK OPTIONS
With the approval of its shareholders, the Company adopted an Independent
Director Stock Option Plan and a Stock Option and Incentive Plan (collectively,
the "Company's Plans") in November 1995. The Company's predecessor, NIRT, also
adopted similar Independent Trustee Share Option and Stock Option and Incentive
Plans (the "NIRT Plans") in November 1995.
Pursuant to the terms of the Merger Agreement by and between the Company and
NIRT, the NIRT Plans were consolidated with and into the Company's Plans, with
the shares of common stock available under the consolidated plans for option
awards being increased by the number of NIRT shares of beneficial interest
available under the NIRT Plans multiplied by the exchange ratio of 1.97 to 1,
and the option awards authorized by the Company's Independent Director Stock
Option Plan (the "Director Plan") increased by the option awards authorized by
the NIRT Independent Trustee Share Option Plan multiplied by the exchange ratio.
Under the Company's consolidated Director Plan, Independent Directors receive
annual awards of options to purchase up to 2,000 shares of Company common stock
on January 1 of each year. The options are immediately exercisable and expire on
the earlier of the first anniversary of the date on which the director ceases to
serve as a director of the Company, or ten years from the date of grant.
Under the Company's consolidated Stock Option and Incentive Plan, incentive
stock options have been awarded to officers and employees of the Company and its
subsidiaries. These stock options vest between one and five years from the date
of grant and expire between five and ten years thereafter, unless the optionee's
relationship with the Company terminates earlier. Incentive stock options are
awarded by the Option Committee of the Board of Directors, which is currently
comprised of Michael E. Smith, Carl B. Weisbrod, and Lawrence G. Schafran.
85
<PAGE> 87
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. STOCK OPTIONS (Continued)
The Company's Director Plan now provides for grants covering a total of 203,022
shares of common stock, and the Company's Stock Option and Incentive Plan now
provides for grants covering a total of 815,110 shares of common stock.
As discussed in NOTE 2. "MERGER TRANSACTION," the Company granted options to
purchase 350,000 shares of the Company's common stock over a period of ten years
at prices ranging between $13 and $16 per share to William S. Friedman and Lucy
N. Friedman in connection with the acquisition of TRA. Additionally, the Company
granted Mr. Friedman options to purchase 450,000 shares of the Company's common
stock over a period of ten years at prices ranging between $12 and $15 per share
in connection with a three year employment contract the Company entered into
with Mr. Friedman. The fair value of these options of $942,000 was estimated
using the Black Scholes pricing model and represented a portion of the purchase
consideration in the acquisition of TRA.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Exercise Price Outstanding Exercisable
-------------- ----------- -----------
<S> <C> <C> <C>
December 31, 1995, balance................. $ 4.61 50,058 50,058
Options granted............................ 4.61 - 5.88 206,515 169,242
Options forfeited.......................... 4.61 (37,273) --
-------------- ----------- -----------
December 31, 1996, balance................. 4.61 - 5.88 219,300 219,300
Options granted............................ 5.54 - 7.74 108,488 102,972
Options forfeited.......................... 7.74 (788) --
-------------- ----------- -----------
December 31, 1997, balance................. 4.61 - 7.74 327,000 322,272
Options granted............................ 7.11 - 10.85 66,740 13,790
Options consolidated in merger............. 5.00 - 12.00 74,172 40,305
Options exercised.......................... 4.61 - 7.74 (40,785) (40,785)
Options forfeited.......................... 4.61 - 10.85 (76,249) (61,671)
Options granted in acquisition of TRA...... 12.00 - 16.00 800,000 800,000
-------------- ----------- -----------
December 31, 1998, balance................. $ 4.61 - 16.00 1,150,878 1,073,911
============== =========== ===========
</TABLE>
The following table summarizes information about the options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
Range of ---------------------------------------------- -----------------------------
Exercise Prices Options Contractual Life Exercise Price Options Exercise Price
- ---------------- ---------- ---------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ 4.61 - 5.87 195,056 3.96 years $ 4.94 195,056 $ 4.94
7.00 - 10.00 97,722 5.43 years 8.32 78,855 7.95
10.80 - 15.00 758,100 9.91 years 13.32 700,000 13.50
16.00 100,000 9.91 years 16.00 100,000 16.00
- ---------------- ---------- ---------------- -------------- ------------ --------------
$ 4.61 - 16.00 1,150,878 8.52 years $ 11.71 1,073,911 $ 11.77
================ ========== ================ ============== ============ ==============
</TABLE>
Subsequent to year end, in January 1999, the Company granted options covering
16,000 shares, all of which were immediately exercisable, pursuant to the
Director Plan. Also, an additional 3,200 of the December 31, 1998, outstanding
options became exercisable in the first quarter 1999, and 35,421 of the December
31, 1998, outstanding options were forfeited in the first quarter of 1999.
The Company applies APB No. 25 and related Interpretations in accounting for its
plans. All stock options issued to date by the Company have exercise prices
equal to the market price at the dates of grant. Accordingly, no compensation
cost has been recognized for its stock option plans. Had compensation cost for
the Company's stock option plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the pro
86
<PAGE> 88
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. STOCK OPTIONS (Continued)
forma amounts indicated below:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------
1998 1997
------------------------ ----------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net income (loss)................................. $ (1,395) $ (1,458) $ 5,592 $ 5,554
Earnings per share
Net income (loss)................................. $ (.18) $ (.19) $ .73 $ .72
Earnings per share - assuming dilution
Net income (loss)................................. $ (.18) $ (.19) $ .72 $ .71
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1998 1997
---------------------------------- -------------
Granted to Granted in Granted to
Employees connection with Employees
and Directors acquisition of TRA and Directors
------------- ------------------ -------------
<S> <C> <C> <C>
Dividend yield................... 4% 4% 6%
Expected volatility.............. 14% 13% 20%
Risk-free interest rate.......... 5.60% 5.60% 6.21%
Expected lives (in years)........ 8 8 3
Forfeitures...................... 10% -- 10%
</TABLE>
The weighted average fair value per share of options granted to employees and
directors in both 1998 and 1997 was $1.53. The weighted average fair value per
share of options granted in 1998 in connection with the Company's acquisition of
TRA was $1.18.
NOTE 11. ADVISORY AGREEMENT
Although the Company's Board of Directors is directly responsible for managing
the affairs of the Company and setting the policies that guide it, prior to the
merger, the day-to-day operations of the Company were performed by TRA,
operating under the supervision of the Board pursuant to a written advisory
agreement approved by shareholders. Effective with the merger of the Company and
NIRT and the Company's acquisition of TRA, the advisory agreement was
terminated.
Prior to the merger, the duties of the advisor included, among other things,
locating, investigating, evaluating, and recommending real estate investment and
sale opportunities and financing and refinancing sources for the Company. The
advisor also served as a consultant in connection with the business plan and
investment policy decisions made by the Board.
Under the advisory agreement, the Company paid an incentive advisory fee equal
to 16% of the Company's adjusted funds from operations before deduction of the
advisory fee. Adjusted funds from operations is defined as funds from operations
("FFO"), as defined by the National Association of Real Estate Investment
Trusts, plus any loss due to the write-down or sale of any real property or
mortgage loan acquired prior to January 1, 1989. FFO represents net income
(loss), computed in accordance with GAAP, excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization of real
estate assets, and after adjustments for unconsolidated partnerships and joint
ventures. Additionally, TRA received commissions of 1% based upon (i)
acquisition cost of real estate and (ii) mortgage loans obtained or refinanced.
87
<PAGE> 89
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. ADVISORY AGREEMENT (Continued)
Prior to the Company's acquisition of TRA, employees of TRA rendered services to
the Company, as the Company had no employees. In accordance with the terms of
the advisory agreements, certain services provided by the advisor, including,
but not limited to, accounting, legal, investor relations, data processing, and
the related departmental overhead, were reimbursed directly by the Company.
For additional information regarding compensation paid to the advisor, see NOTE
13. "RELATED PARTY TRANSACTIONS."
NOTE 12. PROPERTY MANAGEMENT
From April 1994 through November 1998, the Company paid property management fees
of 4.5% of the monthly gross rents collected on multifamily properties and 1.5%
to 5% of the monthly gross rents collected on commercial properties to TRA
and/or TMI, a wholly-owned subsidiary of TRA. TRA subcontracted with third
parties to provide property level management services to most of the retail and
office properties and the apartment properties located in California,
Connecticut, and Colorado. Since the Company acquired TRA in November 1998, the
Company is no longer required to pay management fees on the properties managed
in-house, although it continues to pay management fees on those properties under
contract with outside management companies. Since the Company's acquisition of
TRA, the Company earns management fee income from properties owned through
partnerships that are managed in-house and from five multifamily projects and
two shopping centers owned by entities affiliated with Mr. Friedman. Fees for
these services are comparable to the fees charged by TRA.
NOTE 13. RELATED PARTY TRANSACTIONS
Fees and expense reimbursements to TRA and affiliates for 1998, 1997, and 1996
were as follows:
<TABLE>
<CAPTION>
1998* 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
Fees
Advisory.......................................... $ 1,048 $ 1,438 $ 1,117
Real estate acquisition........................... 105 234 106
Equity refinancing................................ 643 773 167
Property management**............................. 1,884 1,610 1,014
Commercial lease commissions...................... 12 39 --
------------- ------------- -------------
$ 3,692 $ 4,094 $ 2,404
============= ============= =============
Expense reimbursements............................... $ 2,215 $ 1,914 $ 1,176
============= ============= =============
</TABLE>
Notes payable at December 31, 1998, included $5.9 million advanced by parties
related to William S. Friedman, President, Chief Executive Officer, and Director
of the Company, or affiliates of his under a two year $6 million line of credit
arrangement approved by the Board of Directors. The funds were used to
facilitate investments by the Company and the partnerships in which it holds
interests. Advances under the line of credit bear interest at LIBOR plus 1% per
annum and are payable in January 2001.
- -------------------
* Through the date of the Company's acquisition of TRA.
** Net of property management fees paid to subcontractors.
88
<PAGE> 90
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. INCOME TAXES
For 1998, 1997, and 1996, the Company has elected and qualified to be treated as
a Real Estate Investment Trust ("REIT"), as defined in Sections 856 through 860
of the Internal Revenue Code of 1986 (the "Code"), and, as such, will not be
taxed for federal income tax purposes on that portion of its taxable income that
is distributed to shareholders, provided that at least 95% of its REIT taxable
income, plus 95% of its taxable income from foreclosure property as defined in
Section 857 of the Code, is distributed. See NOTE 8. "DIVIDENDS TO
SHAREHOLDERS." As a result of the Company's election to be treated as a REIT for
income tax purposes and of its intention to distribute its taxable income, no
deferred tax asset or liability or related valuation allowance was recorded.
No provision has been made for federal income taxes because the Company believes
it has qualified as a REIT and expects that it will continue to do so. The
Company's basis in its net assets for tax purposes differs from that for
financial statement purposes, principally due to the accounting for gains and
losses on property sales, the difference in the allowance for estimated losses,
depreciation on owned properties, and investments in partnerships. At December
31, 1998 and 1997, the Company's tax basis in its net real estate exceeded its
basis for financial statement purposes by $13.3 million and $22.8 million,
respectively. As a result, aggregate future income for income tax purposes will
be less than such amount for financial statement purposes, and the Company will
be able to maintain its REIT status without distributing 95% of its financial
statement income. Additionally, at December 31, 1998, the Company had a tax net
operating loss carry forward of $45 million expiring through 2016.
NOTE 15. RENTALS UNDER OPERATING LEASES
The Company's rental operations include the leasing of office buildings and
shopping centers subject to leases with terms greater than one year. The leases
thereon expire at various dates through 2009. The following is a schedule of
future minimum rentals on non-cancelable operating leases as of December 31,
1998:
<TABLE>
<S> <C>
1999..................................................................................... $ 10,460
2000..................................................................................... 8,260
2001..................................................................................... 6,509
2002..................................................................................... 4,396
2003..................................................................................... 2,560
Thereafter............................................................................... 3,410
--------
$ 35,595
========
</TABLE>
NOTE 16. COMMITMENTS AND CONTINGENCIES
The Company is a party to various claims and routine litigation arising in the
ordinary course of business. Management of the Company does not believe that the
results of such claims and litigation, individually or in the aggregate, will
have a material adverse effect on its business, financial position, or results
of operations.
NOTE 17. SUBSEQUENT EVENTS
In January and February 1999, the Company obtained mortgage financing of $10.1
million on three properties. After the payoff of existing mortgages totaling
$4.2 million, establishing required escrows, and paying the associated closing
costs, the Company received net cash proceeds of $5.6 million.
89
<PAGE> 91
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 18. QUARTERLY RESULTS OF OPERATIONS
The following is a tabulation of the quarterly results of operations for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1998
Revenue .......................................... $ 14,256 $ 14,340 $ 14,459 $ 15,645
Expenses ......................................... (14,242) (14,123) (15,075) (17,655)
------------ ------------ ------------ ------------
Income (loss) before net gain on sale
of real estate, gain on sale of investments,
and extraordinary items ........................ 14 217 (616) (2,010)
Net gain on sale of real estate .................. -- 1,275 -- 833
Gain on sale of investments ...................... 117 -- 6 --
------------ ------------ ------------ ------------
Income (loss) from continuing operations ......... 131 1,492 (610) (1,177)
Extraordinary items .............................. (262) (68) (589) (312)
------------ ------------ ------------ ------------
Net income (loss) ................................ $ (131) $ 1,424 $ (1,199) $ (1,489)
============ ============ ============ ============
Earnings per share
Income (loss) from continuing operations ......... $ 0.02 $ 0.20 $ (0.08) $ (0.15)
Extraordinary items .............................. (0.04) (0.01) (0.08) (0.04)
------------ ------------ ------------ ------------
Net income (loss) ................................ $ (0.02) $ 0.19 $ (0.16) $ (0.19)
============ ============ ============ ============
Weighted average shares (1) ...................... 7,651,094 7,584,878 7,493,565 7,749,200
============ ============ ============ ============
Earnings per share - assuming dilution
Income (loss) from continuing operations ......... $ 0.02 $ 0.19 $ (0.08) $ (0.15)
Extraordinary items .............................. (0.04) (0.01) (0.08) (0.04)
------------ ------------ ------------ ------------
Net income (loss) ................................ $ (0.02) $ 0.18 $ (0.16) $ (0.19)
============ ============ ============ ============
Weighted average shares - assuming dilution (2) .. 7,651,094 7,710,905 7,493,565 7,749,200
============ ============ ============ ============
</TABLE>
- --------------------------
(1) Represents weighted average shares of common stock used in computing
earnings per share and has been restated to give effect to the merger of
the Company and NIRT on the basis of 1.97 shares of the Company's common
stock for each share of beneficial interest of NIRT.
(2) Represents weighted average shares of common stock used in computing
earnings per share - assuming dilution and has been restated to give effect
to the merger of the Company and NIRT on the basis of 1.97 shares of the
Company's common stock for each share of beneficial interest of NIRT
90
<PAGE> 92
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 18. QUARTERLY RESULTS OF OPERATIONS (Continued)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
1997
<S> <C> <C> <C> <C>
Revenue .......................................... $ 12,180 $ 12,506 $ 13,399 $ 13,932
Expenses ......................................... (11,839) (12,141) (13,593) (14,176)
------------ ------------ ------------ ------------
Income (loss) before net gain on sale
of real estate, gain on sale of investments,
and extraordinary items ........................ 341 365 (194) (244)
Net gain on sale of real estate .................. -- 1,576 2,774 --
Gain on sale of investments ...................... -- -- 686 227
------------ ------------ ------------ ------------
Income (loss) from continuing operations ......... 341 1,941 3,266 (17)
Extraordinary items .............................. -- -- 353 (292)
------------ ------------ ------------ ------------
Net income (loss) ................................ $ 341 $ 1,941 $ 3,619 $ (309)
============ ============ ============ ============
Earnings per share
Income (loss) from continuing operations ......... $ .04 $ .25 $ .42 $ --
Extraordinary items .............................. -- -- .05 (.04)
------------ ------------ ------------ ------------
Net income (loss) ................................ $ .04 $ .25 $ .47 $ (.04)
============ ============ ============ ============
Weighted average shares (1) ...................... 7,745,202 7,708,430 7,666,420 7,653,373
============ ============ ============ ============
Earnings per share - assuming dilution
Income (loss) from continuing operations ......... $ .04 $ .25 $ .42 $ --
Extraordinary items .............................. -- -- .05 (.04)
------------ ------------ ------------ ------------
Net income (loss) ................................ $ .04 $ .25 $ .47 $ (.04)
============ ============ ============ ============
Weighted average shares -
assuming dilution (2) .......................... 7,758,260 7,727,660 7,687,474 7,653,373
============ ============ ============ ============
</TABLE>
- -----------------
(1) Represents weighted average shares of common stock used in computing
earnings per share and has been restated to give effect to the merger of
the Company and NIRT on the basis of 1.97 shares of the Company's common
stock for each share of beneficial interest of NIRT and the September 1997
10% stock dividend.
(2) Represents weighted average share of common stock used in computing
earnings per share - assuming dilution and has been restated to give effect
to the merger of the Company and NIRT on the basis of 1.97 shares of the
Company's common stock for each share of beneficial interest of NIRT and
the September 1997 10% stock dividend.
91
<PAGE> 93
SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO COMPANY SUBSEQUENT AT END OF YEAR
------------------- TO ACQUISITION ---------------------------
BUILDINGS AND -------------- BUILDINGS AND ACCUMULATED DATE OF
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION
----------- ------------ ------ ------------ ------------ ------ ------------ ----- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Apartments
- ----------
Acadian Place ......... $ 3,250 $ 897 $ 2,608 $ 1,947 $ 897 $ 4,555 $ 5,452 $ 1,382 1922
Baton Rouge, LA
Aspentree ............. 3,835 876 3,506 104 876 3,610 4,486 11 1974
Dallas, TX
Bayfront .............. 4,296 457 2,052 1,831 457 3,883 4,340 1,083 1971
Houston, TX
The Brooks ............ 1,279 558 2,230 24 558 2,254 2,812 5 1969
Addison, TX
Carlyle Towers ........ 5,464 559 5,939 1,676 559 7,615 8,174 1,909 1970
Southfield, MI
Collegewood ........... 2,018 556 2,223 4 556 2,227 2,783 5 1967
Tallahassee, FL
Cornell ............... 2,398 822 1,183 168 822 1,351 2,173 306 1929
Los Angeles, CA
Courtyard at the Park . 2,903 771 3,086 1,445 768 4,534 5,302 214 1972
Miami, FL
Creekwood North ....... 2,980 532 2,127 941 532 3,068 3,600 453 1973
Altamonte Springs, FL
Desert Winds .......... 1,355 351 1,399 166 351 1,565 1,916 23 1972
Jacksonville, FL
Diamond Loch .......... 3,484 380 2,791 1,206 380 3,997 4,377 1,336 1978
Fort Worth, TX
English Village ....... 5,918 1,382 5,525 2,266 1,372 7,801 9,173 244 1973
Memphis, TN
Fenway Hall ........... 1,286 461 1,460 43 461 1,503 1,964 323 1929
Los Angeles, CA
Fountainhead ..........(D) 5,650 1,573 6,291 311 1,573 6,602 8,175 276 1988
Kissimmee, FL
French Villa .......... 1,925 447 1,786 21 447 1,807 2,254 5 1971
Tulsa, OK
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
DATE OPERATIONS
DESCRIPTION ACQUIRED IS COMPUTED
----------- -------- -----------
<S> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Apartments
- ----------
Acadian Place ......... Mar-84 5 - 40 years
Baton Rouge, LA
Aspentree ............. Nov-98 5 - 40 years
Dallas, TX
Bayfront .............. Feb-87 5 - 40 years
Houston, TX
The Brooks ............ Nov-98 5 - 40 years
Addison, TX
Carlyle Towers ........ Nov-88 5 - 40 years
Southfield, MI
Collegewood ........... Nov-98 5 - 40 years
Tallahassee, FL
Cornell ............... Apr-90 5 - 40 years
Los Angeles, CA
Courtyard at the Park . Jul-97 5 - 40 years
Miami, FL
Creekwood North ....... Nov-92 5 - 40 years
Altamonte Springs, FL
Desert Winds .......... Jun-98 5 - 40 years
Jacksonville, FL
Diamond Loch .......... Oct-85 5 - 40 years
Fort Worth, TX
English Village ....... Jul-97 5 - 40 years
Memphis, TN
Fenway Hall ........... Apr-90 5 - 40 years
Los Angeles, CA
Fountainhead .......... (D) Jun-97 5 - 40 years
Kissimmee, FL
French Villa .......... Nov-98 5 - 40 years
Tulsa, OK
</TABLE>
92
<PAGE> 94
SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS (A) GROSS CARRYING AMOUNTS
INITIAL COST TO COMPANY CAPITALIZED AT END OF YEAR
------------------- SUBSEQUENT ---------------------------
BUILDINGS AND TO ACQUISITION BUILDINGS AND ACCUMULATED DATE OF
--------------
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION
----------- ------------ ------ ------------ ------------ ------ ------------ ----- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Apartments (Continued)
- ----------
Holly House............ $ 1,758 $ 397 $ 1,590 $ 6 $ 397 $ 1,596 $ 1,993 $ 4 1968
North Miami, FL
Landmark............... 1,500 376 1,504 378 373 1,885 2,258 53 1967
Tallahassee, FL
Marina Park............ 3,731 657 2,625 1,211 671 3,822 4,493 471 1974
Miami, FL
Mariposa Manor......... 747 225 901 (292) 225 609 834 87 1924
Los Angeles, CA
Meadowbrook............ 3,700 307 1,230 170 306 1,401 1,707 114 1968
Baton Rouge, LA
Mission Trace.......... 2,043 563 2,252 7 563 2,259 2,822 5 1989
Tallahassee, FL
Morningside............ 1,599 420 1,678 430 426 2,102 2,528 133 1973
Jacksonville, FL
Mustang Creek.......... (B) 4,600 718 2,872 2,093 720 4,963 5,683 541 1974
Arlington, TX
Newport................ 4,983 1,334 5,338 1,080 1,335 6,417 7,752 289 1973
Plantation, FL
Palm Grove............. 1,307 322 1,316 6 322 1,322 1,644 21 1971
Orlando, FL
Park Norton............ 536 144 576 461 142 1,039 1,181 52 1924
Los Angeles, CA
Park Place............. -- 76 304 152 82 450 532 34 1929
Los Angeles, CA
Pinecrest.............. 14,291 3,612 8,427 6,036 3,612 14,463 18,075 2,954 1965
Ft. Lauderdale, FL
Prado Bay.............. 4,756 614 3,482 1,286 614 4,768 5,382 1,161 1966
North Bay Village, FL
The Regent............. (B) 4,900 303 1,212 4,714 303 5,926 6,229 429 1972
Jacksonville, FL
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
DATE OPERATIONS
DESCRIPTION ACQUIRED IS COMPUTED
----------- -------- -----------
<S> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Apartments (Continued)
- ----------
Holly House............ Nov-98 5 - 40 years
North Miami, FL
Landmark............... Oct-97 5 - 40 years
Tallahassee, FL
Marina Park............ Apr-95 5 - 40 years
Miami, FL
Mariposa Manor......... Sep-94 5 - 40 years
Los Angeles, CA
Meadowbrook............ Oct-95 5 - 40 years
Baton Rouge, LA
Mission Trace.......... Nov-98 5 - 40 years
Tallahassee, FL
Morningside............ Feb-97 5 - 40 years
Jacksonville, FL
Mustang Creek.......... (B) May-95 5 - 40 years
Arlington, TX
Newport................ Jun-97 5 - 40 years
Plantation, FL
Palm Grove............. Jun-98 5 - 40 years
Orlando, FL
Park Norton............ Jun-95 5 - 40 years
Los Angeles, CA
Park Place............. Sep-95 5 - 40 years
Los Angeles, CA
Pinecrest.............. Jul-90 5 - 40 years
Ft. Lauderdale, FL
Prado Bay.............. Oct-90 5 - 40 years
North Bay Village, FL
The Regent............. (B) Sep-95 5 - 40 years
Jacksonville, FL
</TABLE>
93
<PAGE> 95
SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO COMPANY SUBSEQUENT AT END OF YEAR
------------------- TO ACQUISITION ---------------------------
BUILDINGS AND -------------- BUILDINGS AND ACCUMULATED DATE OF
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION
----------- ------------ ------ ------------ ------------ ------ ------------ ----- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Apartments (Continued)
- ----------
River City Landing.... (D) $ 7,743 $1,236 $ 5,602 $ 6,577 $1,237 $ 12,178 $13,415 $ 519 1965
Jacksonville, FL
Riverside............. 4,159 790 3,160 23 790 3,183 3,973 7 1991
Austin, TX
Silver Creek.......... 1,283 301 1,206 63 302 1,268 1,570 20 1972
Jacksonville, FL
Southern Elms......... 1,310 304 1,216 5 304 1,221 1,525 4 1968
Tulsa, OK
Summit on the Lake.... 4,726 895 3,582 703 907 4,273 5,180 545 1986
Fort Worth, TX
Vistas at Lake Worth.. 9,500 752 92 15,677 752 15,769 16,521 250 1970
Fort Worth, TX
Woodcreek............. 4,708 913 3,193 (454) 690 2,962 3,652 1,276 1980
Denver, CO
Woodcreek............. 7,062 472 4,977 1,458 451 6,456 6,907 2,556 1975
Jacksonville, FL
Office Buildings
- ----------------
1505 Highway 6........ 2,000 719 2,877 2 719 2,879 3,598 22 1983
Houston, TX
Northwest O'Hare...... 1,850 1,990 7,965 (2,170) 1,104 6,681 7,785 3,610 1972
Des Plaines, IL
Park 20 West.......... 1,880 688 2,754 -- 688 2,754 3,442 5 1972
Tallahassee, FL
Rancho Sorrento....... 5,188 1,251 12,901 861 2,231 12,782 15,013 5,509 1980
San Diego, CA
Tarzana Towne Plaza... 2,922 671 2,684 5 671 2,689 3,360 6 1985
Tarzana, CA
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
DATE OPERATIONS
DESCRIPTION ACQUIRED IS COMPUTED
----------- -------- -----------
<S> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Apartments (Continued)
- ----------
River City Landing.... (D) Jun-96 5 - 40 years
Jacksonville, FL
Riverside............. Nov-98 5 - 40 years
Austin, TX
Silver Creek.......... Jun-98 5 - 40 years
Jacksonville, FL
Southern Elms......... Nov-98 5 - 40 years
Tulsa, OK
Summit on the Lake.... Mar-94 5 - 40 years
Fort Worth, TX
Vistas at Lake Worth.. Dec-94 5 - 40 years
Fort Worth, TX
Woodcreek............. Aug-86 5 - 40 years
Denver, CO
Woodcreek............. Nov-86 5 - 40 years
Jacksonville, FL
Office Buildings
- ----------------
1505 Highway 6........ Oct-98 5 - 40 years
Houston, TX
Northwest O'Hare...... Apr-86 5 - 40 years
Des Plaines, IL
Park 20 West.......... Nov-98 40 years
Tallahassee, FL
Rancho Sorrento....... May-86 5 - 40 years
San Diego, CA
Tarzana Towne Plaza... Nov-98 5 - 40 years
Tarzana, CA
</TABLE>
94
<PAGE> 96
SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO COMPANY SUBSEQUENT AT END OF YEAR
------------------- TO ACQUISITION ---------------------------
BUILDINGS AND -------------- BUILDINGS AND ACCUMULATED DATE OF
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION
----------- ------------ ------ ------------ ------------ ------ ------------ ----- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Shopping Centers
- ----------------
Briarwest................ $ 1,677 $ 375 $ 1,499 $ -- $ 375 $ 1,499 $ 1,874 $ 4 1971
Houston, TX
Jackson Square........... -- 1,115 4,451 21 1,113 4,474 5,587 231 1970
Jackson, MS
K-Mart Plaza,............ 1,179 689 1,608 -- 689 1,608 2,297 283 1979
Temple Terrace, FL
Lakeview Mall............ -- 513 2,050 612 341 2,834 3,175 1,347 1968
Manitowoc, WI
Mariner Plaza............(D) 1,725 295 1,180 58 295 1,238 1,533 45 1968
Panama City, FL
Midland Plaza............ 278 321 748 59 321 807 1,128 144 1976
Midland, MI
Northside Center......... 1,554 1,591 3,712 243 1,611 3,935 5,546 783 1977
Gainesville, FL
University Center........ -- 578 2,430 867 602 3,273 3,875 629 1959
Waco, TX
Land
- ----
Vintage at Legacy Lakes.. 3,521 4,545 -- 736 4,986 295 5,281 --
Frisco, TX
Vistas Observatory....... -- 707 -- 48 734 21 755 --
------- -------- ------- ------- ------- -------- -------- ------
Fort Worth, TX
162,757 42,401 149,400 55,285 42,613 204,473 247,086 31,718
------- -------- ------- ------- ------- -------- -------- ------
PROPERTIES HELD FOR SALE
Apartments
- ----------
Bay West................. 4,759 891 3,566 964 891 4,530 5,421 736 1974
Bradenton, FL
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
DATE OPERATIONS
DESCRIPTION ACQUIRED IS COMPUTED
----------- -------- -----------
<S> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Shopping Centers
- ----------------
Briarwest................ Nov-98 5 - 40 years
Houston, TX
Jackson Square........... Jan-96 5 - 40 years
Jackson, MS
K-Mart Plaza,............ Dec-91 5 - 40 years
Temple Terrace, FL
Lakeview Mall............ Apr-87 5 - 40 years
Manitowoc, WI
Mariner Plaza............(D) Aug-97 5 - 40 years
Panama City, FL
Midland Plaza............ Dec-91 5 - 40 years
Midland, MI
Northside Center......... Dec-91 5 - 40 years
Gainesville, FL
University Center........ Jul-91 5 - 40 years
Waco, TX
Land
- ----
Vintage at Legacy Lakes.. May-98 5 - 40 years
Frisco, TX
Vistas Observatory....... Apr-98 5 - 40 years
Fort Worth, TX
PROPERTIES HELD FOR SALE
Apartments
- ----------
Bay West................. Nov-92 5 - 40 years
Bradenton, FL
</TABLE>
95
<PAGE> 97
SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO COMPANY SUBSEQUENT AT END OF YEAR
------------------- TO ACQUISITION ---------------------------
BUILDINGS AND -------------- BUILDINGS AND ACCUMULATED DATE OF
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION
----------- ------------ ------ ------------ ------------ ------ ------------ ----- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR SALE
Apartments (Continued)
- ----------
Bryan Hill............ $ 3,467 $447 $ 1,803 $ 504 $ 496 $ 2,258 $ 2,754 $ 313 1970
Bethany, OK
Cross Creek........... 2,691 221 883 361 225 1,240 1,465 170 1966
Lexington, KY
Devonshire............(D) 15,900 1,048 3,162 2,931 827 6,314 7,141 1,440 1969
Denver, CO
Forest Oaks........... 2,971 691 2,685 535 691 3,220 3,911 263 1971
Lexington, KY
Heather Hills......... 17,254 643 14,562 7,066 766 21,505 22,271 7,701 1976
Temple Hills, MD
Kirklevington......... 2,388 490 1,961 656 490 2,617 3,107 404 1975
Lexington, KY
Lake Point............(D) 9,000 2,075 6,225 2,487 2,075 8,712 10,787 1,163 1974
Memphis, TN
Martins Landing....... 4,776 1,038 4,201 533 1,041 4,731 5,772 430 1973
Lakeland, FL
Palm Court............ 2,861 599 2,393 904 599 3,297 3,896 690 1971
Miami, FL
Park Dale Gardens..... 2,858 354 1,416 755 531 1,994 2,525 335 1975
Dallas, TX
Phoenix............... -- 393 1,573 151 393 1,724 2,117 6 1971
Tulsa, OK
Woodbrier............. 2,198 508 2,034 308 507 2,343 2,850 184 1970
Oklahoma City, OK
Office Buildings
- ----------------
Emerson Center........(E) 7,000 131 8,781 (185) 1,048 7,679 8,727 4,469 1974
Atlanta, GA
One Turtle Creek...... 1,817 1,179 4,718 -- 1,179 4,718 5,897 -- 1969
Dallas, TX
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
DATE OPERATIONS
DESCRIPTION ACQUIRED IS COMPUTED
----------- -------- -----------
<S> <C> <C>
PROPERTIES HELD FOR SALE
Apartments (Continued)
- ----------
Bryan Hill............ Nov-94 5 - 40 years
Bethany, OK
Cross Creek........... Nov-92 5 - 40 years
Lexington, KY
Devonshire............(D) Mar-89 5 - 40 years
Denver, CO
Forest Oaks........... Nov-94 5 - 40 years
Lexington, KY
Heather Hills......... May-86 5 - 40 years
Temple Hills, MD
Kirklevington......... Nov-92 5 - 40 years
Lexington, KY
Lake Point............(D) May-93 5 - 40 years
Memphis, TN
Martins Landing....... Nov-94 5 - 40 years
Lakeland, FL
Palm Court............ Oct-89 5 - 40 years
Miami, FL
Park Dale Gardens..... Dec-91 5 - 40 years
Dallas, TX
Phoenix............... Nov-98 5 - 40 years
Tulsa, OK
Woodbrier............. Apr-96 5 - 40 years
Oklahoma City, OK
Office Buildings
- ----------------
Emerson Center........(E) Jul-86 5 - 40 years
Atlanta, GA
One Turtle Creek...... Nov-98 5 - 40 years
Dallas, TX
</TABLE>
96
<PAGE> 98
SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO COMPANY SUBSEQUENT AT END OF YEAR
------------------- TO ACQUISITION ------------------------
BUILDINGS AND --------------- BUILDINGS AND ACCUMULATED DATE OF
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION
----------- ------------ ------ ------------ ------------ ------ ------------ ----- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR SALE
Shopping Centers
- ----------------
Emerson Center........ (E) $ -- $ 363 $ 18 $ -- $ 381 $ 381 $ 34 1974
Atlanta, GA
K-Mart Plaza.......... 1,236 571 1,333 12 571 1,345 1,916 135 1977
Charlotte, NC
K-Mart Plaza.......... 944 497 1,159 -- 497 1,159 1,656 117 1974
Thomasville, G A
Midway Mills.......... 4,043 588 2,365 1,489 1,227 3,215 4,442 1,361 1986
Carrollton, TX
Stewart Square........ 2,221 294 1,460 651 294 2,111 2,405 839 1971
Las Vegas, NV
Times Square.......... -- 125 499 47 125 546 671 93 1985
Lubbock, TX
Other
- -----
Snyder Residence...... -- -- 39 -- 12 27 39 1 --
Gilbert, AZ
Land
- ----
Dallas, TX............ -- 737 3,782 (4,420)(C) 99 -- 99 -- --
Kansas City, MO....... -- 802 1,871 (2,360) 313 -- 313 -- --
Orangeburg, SC........ -- 122 -- -- 122 -- 122 -- --
-------- ------- -------- ------- ------- -------- -------- -------
88,384 14,444 72,834 13,407 15,019 85,666 100,685 20,884
-------- ------- -------- ------- ------- -------- -------- -------
$251,141 $56,845 $222,234 $68,692 $57,632 $290,139 $347,771 $52,602
======== ======= ======== ======= ======= ======== =======
Allowance for estimated losses (1,194)
--------
$346,577
========
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
DATE OPERATIONS
DESCRIPTION ACQUIRED IS COMPUTED
----------- -------- -----------
<S> <C> <C>
PROPERTIES HELD FOR SALE
Shopping Centers
- ----------------
Emerson Center........(E) Jul-86 5 - 40 years
Atlanta, GA
K-Mart Plaza.......... Dec-91 5 - 40 years
Charlotte, NC
K-Mart Plaza.......... Dec-91 5 - 40 years
Thomasville, G A
Midway Mills.......... Oct-91 5 - 40 years
Carrollton, TX
Stewart Square........ Oct-87 5 - 40 years
Las Vegas, NV
Times Square.......... Jul-89 5 - 40 years
Lubbock, TX
Other
- -----
Snyder Residence...... -- --
Gilbert, AZ
Land
- ----
Dallas, TX............ Jun-86
Kansas City, MO....... Dec-91
Orangeburg, SC........ Jun-89
</TABLE>
(A) Represents property improvements and write-down of properties due to
permanent impairment.
(B) Represents an advance under the $35 million revolving credit facility with
GMAC Commercial Mortgage.
(C) Basis charged against allowance previously provided.
(D) Represents an advance under the $50 million revolving credit facility with
GMAC Commercial Mortgage.
(E) Both the office and retail portions of and Emerson Center secure one
mortgage with a December 31, 1998, balance of $7 million.
97
<PAGE> 99
SCHEDULE III
(Continued)
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of real estate
Balance at January 1, ...................... $ 281,163 $ 237,502 $ 240,822
Additions
Acquired through merger ............... 46,312 -- --
Acquisitions and improvements ......... 23,349 58,683 22,896
Foreclosures .......................... -- -- 5,575
Deductions
Sales ................................. (3,053) (12,762) (31,491)
Write-offs ............................ -- (2,260) --
Write-downs due to permanent impairment -- -- (300)
---------- ---------- ----------
Balance at December 31, .................... $ 347,771 $ 281,163 $ 237,502
========== ========== ==========
Reconciliation of accumulated depreciation
Balance at January 1, ...................... $ 46,033 $ 42,251 $ 45,147
Additions
Depreciation .......................... 7,339 7,022 5,374
Deductions
Sale of real estate ................... (770) (3,190) (8,270)
Write-offs ............................ -- (50) --
---------- ---------- ----------
Balance at December 31, .................... $ 52,602 $ 46,033 $ 42,251
========== ========== ==========
</TABLE>
98
<PAGE> 100
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY TARRAGON. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE
SECURITIES TO WHICH IT RELATES, OR ANY OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF TARRAGON SINCE THE DATE OF THIS PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................................2
Risk Factors.......................................6
Capitalization....................................10
Market Price Information..........................11
Selected Financial Data...........................12
The Exchange Offer................................17
Plan of Distribution..............................23
Description of Tarragon Capital Stock.............24
Unaudited Pro Forma Consolidated
Financial Information..........................30
The Company.......................................36
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................................39
Qualitative and Quantitative Disclosures
About Market Risk..............................45
Management........................................46
Where You Can Find More Information...............49
Incorporation of Certain Documents
By Reference...................................49
Special Note on Forward-Looking Statements........50
Legal Matters.....................................50
Experts...........................................50
Consolidated Financial Statements.................51
</TABLE>
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL OCTOBER 30, 2000, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
TARRAGON REALTY
INVESTORS, INC.
OFFER TO EXCHANGE
ONE SHARE OF 10% CUMULATIVE
PREFERRED STOCK
FOR
EACH SHARE OF COMMON STOCK
PROSPECTUS
_____________, 2000
<PAGE> 101
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Tarragon's Articles of Incorporation provide that it "shall indemnify to
the fullest extent authorized or permitted by law. . . any person made or
threatened to be made a party or witness to any action, suit or proceeding
(whether civil, criminal or otherwise) by reason of the fact that such person is
or was a director, officer, employee or agent" of Tarragon. Further, Tarragon's
Bylaws provide that "[e]ach officer, director or employee . . . shall be
indemnified . . . to the full extent permitted under Chapter 78 of the Nevada
Revised Statutes . . . and other applicable law."
Pursuant to the NRS, a corporation may indemnify persons for expenses
related to an action, suit or proceeding, except an action by or in the right of
the corporation, by reason of the fact that such person is or was a director,
officer, employee or agent, if such person acted in good faith and in a manner
which he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, if such
person had no reasonable cause to believe his conduct was unlawful. The expenses
indemnified against in this provision include attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred in connection
with the action, suit or proceeding. The NRS further provides that a corporation
may indemnify persons for attorneys' fees related to an action, suit or
proceeding by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that such person is or was a director, officer,
employee or agent, if such person acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation. A corporation may also indemnify directors for amounts paid in
judgments and settlements in such a suit, but only if ordered by a court after
determining that the person is "fairly and reasonably" entitled to indemnity.
Under the Management Liability Provision of Tarragon's Articles of
Incorporation, directors do not have personal liability to Tarragon or to its
stockholders for monetary damages for any breach of their fiduciary duties as
directors (including, without limitation, any liability for gross negligence in
the performance of their duties), except
o for acts or omissions which involve intentional misconduct, fraud or a
knowing violation of law or
o for the payment of dividends in violation of NRS 78.300.
By precluding personal liability for certain breaches of fiduciary duty,
including grossly negligent business decisions made in connection with
evaluating takeover proposals to acquire Tarragon, the Management Liability
Provision supplements indemnification rights afforded under Tarragon's Articles
of Incorporation and Bylaws which provide, in substance, that Tarragon shall
indemnify its directors, officers, employees and agents to the fullest extent
permitted by the NRS and other applicable laws.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling Tarragon
under the foregoing provisions, we have been advised that in the opinion of the
SEC such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than for the payment by Tarragon
of expenses incurred or paid by a director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted against
Tarragon by any director, officer or controlling person in connection with the
securities being registered, Tarragon will, unless in the opinion of counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
i
<PAGE> 102
ITEM 21. EXHIBITS.
(i) The following exhibits are filed as a part of this Registration
Statement:
EXHIBIT
DESIGNATION DESCRIPTION
----------- -----------
4.1 Articles of Incorporation of Tarragon Realty Investors, Inc.
filed with and approved by the Secretary of State of Nevada
on April 2, 1997 (incorporation by reference is made to
Exhibit 3.2 to Form 8-K of Tarragon Realty Investors, Inc.
for event reported July 10, 1997).
4.2 Bylaws of Tarragon Realty Investors, Inc. as adopted April
3, 1997 (incorporation by reference is made to Exhibit 3.3
to Form 8-K of Tarragon Realty Investors, Inc. for event
reported July 10, 1997).
4.3 Indenture Agreement dated September 15, 1993 between Vinland
Property Trust and American Stock Transfer and Trust Company
(incorporation by reference is made to Exhibit 4.7 to
Registration Statement No. 33-66294 on Form S-11).
4.4 Form of Certificate of Designation of Preferences and
Relative Participating or Optional or Other Special Rights
and Qualification, Limitations or Restrictions thereof of
10% Cumulative Preferred Stock of Tarragon Realty Investors,
Inc.
5.1 Form of opinion of Prager, Metzger & Kroemer PLLC as to the
legality of the securities.
5.2 Form of opinion of Lewis and Roca LLP as to the legality of
the securities.
8.1 Form of opinion of Prager, Metzger & Kroemer PLLC as to tax
matters.
20.1 Subsidiaries of the Registrant.
23.1 Consent of Prager, Metzger & Kroemer PLLC (included in
Exhibit 5.1).
23.2 Consent of Lewis and Roca LLP (included in Exhibit 5.2).
23.3 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (set forth on the signature page II-4).
99.1 Form Letter of Transmittal (including Guidelines for
Certification of Taxpayer Identification Number).
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
99.4 Form of Letter to Clients for use by Brokers, Dealers,
Commercial Banks, Trust Companies and Other Nominees.
+*99.5 Form of Letter to Stockholders.
- ---------------------------
* Filed herewith.
+ Amended, and submitted in place of prior exhibit 99.5.
ii
<PAGE> 103
ITEM 22. UNDERTAKINGS.
Tarragon hereby undertakes that, for purposes of determining any liability
under the Securities Act of 1933, each filing of our annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Tarragon hereby undertakes to deliver or cause to be delivered with the
Prospectus to each person to whom the Prospectus is sent or given, the latest
annual report to security holders that is incorporated by reference in the
Prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3
or rule 14c-3 under the Securities Exchange Act of 1934; and, where interim
financial information required to be presented by Article 3 of Regulation S-X is
not set forth in the Prospectus, to deliver, or cause to be delivered to each
person to whom the Prospectus is sent or given, the latest quarterly report that
is specifically incorporated by reference in the Prospectus to provide such
interim financial information.
Tarragon hereby undertakes that prior to any public re-offering of the
securities registered hereunder through use of a Prospectus which is a part of
this registration statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), such re-offering prospectus will
contain the information called for by the applicable registration form with
respect to re-offerings by persons who may be deemed underwriters, in addition
to the information called for by other items of the applicable form.
Tarragon undertakes that every Prospectus (i) that is filed pursuant to
paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415 will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Tarragon hereby undertakes to respond to requests for information that is
incorporated by reference into the Prospectus pursuant to Items 4, 10(b), 11 or
13 of this Form, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding to
the request.
iii
<PAGE> 104
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing a Form S-4 and has duly caused this Registration
Statement or amendment thereto to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on
March 16, 2000.
TARRAGON REALTY INVESTORS, INC.
By: /s/ William S. Friedman
------------------------------------
William S. Friedman, President,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment thereto has been signed below by the
following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
Chairman of the Board of Directors
*/s/ Carl B. Weisbrod and Director March 16, 2000
- ----------------------------
Carl B. Weisbrod
President, Chief Executive Officer and
/s/ William S. Friedman Director (Principal Executive Officer) March 16, 2000
- ----------------------------
William S. Friedman
Executive Vice President and Chief
/s/ Erin D. Davis Financial Officer (Principal Financial March 16, 2000
- ---------------------------- and Accounting Officer)
Erin D. Davis
*/s/ Chester Beck Director March 16, 2000
- ----------------------------
Chester Beck
*/s/ Willie K. Davis Director March 16, 2000
- ----------------------------
Willie K. Davis
*/s/ Sally Hernandez-Pinero Director March 16, 2000
- ----------------------------
Sally Hernandez-Pinero
*/s/ Lance Liebman Director March 16, 2000
- ----------------------------
Lance Liebman
*/s/ Robert C. Rohdie Director March 16, 2000
- ----------------------------
Robert C. Rohdie
*/s/ Lawrence G. Schafran Director March 16, 2000
- ----------------------------
Lawrence G. Schafran
*/s/ Raymond V.J. Schrag Director March 16, 2000
- ----------------------------
Raymond V. J. Schrag
*/s/ Michael E. Smith Director March 16, 2000
- ----------------------------
Michael E. Smith
*By: /s/ Erin D. Davis
------------------------
Erin D. Davis
Attorney-in-fact
</TABLE>
<PAGE> 105
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
4.1 Articles of Incorporation of Tarragon Realty Investors, Inc.
filed with and approved by the Secretary of State of Nevada
on April 2, 1997 (incorporation by reference is made to
Exhibit 3.2 to Form 8-K of Tarragon Realty Investors, Inc.
for event reported July 10, 1997).
4.2 Bylaws of Tarragon Realty Investors, Inc. as adopted April
3, 1997 (incorporation by reference is made to Exhibit 3.3
to Form 8-K of Tarragon Realty Investors, Inc. for event
reported July 10, 1997).
4.3 Indenture Agreement dated September 15, 1993 between Vinland
Property Trust and American Stock Transfer and Trust Company
(incorporation by reference is made to Exhibit 4.7 to
Registration Statement No. 33-66294 on Form S-11).
4.4 Form of Certificate of Designation of Preferences and
Relative Participating or Optional or Other Special Rights
and Qualification, Limitations or Restrictions thereof of
10% Cumulative Preferred Stock of Tarragon Realty Investors,
Inc.
5.1 Form of opinion of Prager, Metzger & Kroemer PLLC as to the
legality of the securities.
5.2 Form of opinion of Lewis and Roca LLP as to the legality of
the securities.
8.1 Form of opinion of Prager, Metzger & Kroemer PLLC as to tax
matters.
20.1 Subsidiaries of the Registrant
23.1 Consent of Prager, Metzger & Kroemer PLLC (included in
Exhibit 5.1)
23.2 Consent of Lewis and Roca LLP (included in Exhibit 5.2)
23.3 Consent of Arthur Andersen LLP
24.1 Power of Attorney (set forth on the signature page II-4)
99.1 Form Letter of Transmittal (including Guidelines for
Certification of Taxpayer Identification Number)
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees
99.4 Form of Letter to Clients for use by Brokers, Dealers,
Commercial Banks, Trust Companies and Other Nominees
+*99.5 Form of Letter to Stockholders
</TABLE>
- ---------------------------
* Filed herewith.
+ Amended, and submitted in place of prior exhibit 99.5.
<PAGE> 1
EXHIBIT 99.5
[TARRAGON LETTERHEAD]
[_____________, 2000]
Dear Tarragon Stockholder:
Tarragon has announced an offer to exchange one share of 10% Cumulative
Preferred Stock for each share of common stock you hold. This Exchange Offer,
which is scheduled to expire on May 3, 2000, unless extended, is intended to
provide you an opportunity to acquire a security with an anticipated fixed
dividend yield and liquidation preference. Over the past several months, we have
received inquiries from stockholders seeking this type of security, and we are
now able to offer it to you.
We encourage you to review the Prospectus describing the Exchange
Offer. The Exchange Offer is voluntary on your part. There is no requirement
that you deliver your shares of common stock for exchange. If you do not tender
your common stock in the Exchange Offer, you will continue to hold your shares
and your ability to transfer them will not be adversely affected.
We will accept for exchange any and all shares of Tarragon common stock
(up to a maximum of 2,000,000 shares) that are tendered in the Exchange Offer
and not withdrawn prior to its expiration. The 10% Cumulative Preferred Stock
issued pursuant to the Exchange Offer will be delivered to you promptly
following its expiration. Any common stock not accepted for exchange for any
reason will be returned to you as soon as practicable. Please carefully review
the procedures for tendering your common stock which are set forth in the
Prospectus and the Letter of Transmittal included with it.
The Herman Group is serving as our "Information Agent" in connection
with the Exchange Offer. Questions or requests for assistance or additional
copies of the Prospectus, the Letter of Transmittal or other material may be
directed to our Information Agent at the following address:
THE HERMAN GROUP
16633 North Dallas Parkway
Suite 600
Dallas, Texas 75001
(888) 852-3365
We appreciate your past support and are pleased to continue to have you as
a stockholder regardless of which class of securities you wish to hold. Thank
you for your consideration.
Sincerely,
William S. Friedman
President and Chief Executive Officer
