SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO.1 TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): April 15, 1997
CAMDEN PROPERTY TRUST
(Exact name of Registrant as Specified in Charter)
TEXAS 1-12110 76-6088377
(State or Other (Commission File Number) (I.R.S. Employer
Jurisdiction Identification Number)
of Incorporation)
3200 Southwest Freeway, Suite 1500, Houston, Texas 77027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 964-3555
Not applicable
(Former name or former address, if changed since last report)
<PAGE>
<PAGE>
The undersigned registrant hereby amends Item 7 of its Current Report on
Form 8-K dated April 15, 1997 to read in its entirety as follows:
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Businesses Acquired.
Filed with this Report as Attachment A are the following audited
financial statements of Paragon Group, Inc. ("Paragon"):
(1) Independent Auditors' Report
(2) Consolidated Balance Sheets as of December 31, 1996 and 1995
(3) Consolidated and Combined Statements of Operations for the
years ended December 31, 1996 and 1995, the period July 27
to December 31, 1994, as restated, and the period January 1
to July 26, 1994
(4) Consolidated and Combined Statements of Stockholders' Equity
(Partners' and Owners' Deficit) for the years ended December
31, 1996 and 1995, the period ended December 31, 1994, as
restated, and the period ended July 26, 1994
(5) Consolidated and Combined Statements of Cash Flows for the
years ended December 31, 1996 and 1995, the period July 27
to December 31, 1994, as restated, and the period January 1
to July 26, 1994
(6) Notes to Consolidated and Combined Financial Statements
(b) Pro Forma Financial Information.
Pro forma financial information for the registrant is set forth
as Attachment B.
(c) Exhibits.
23.1 Consent of Ernst & Young L.L.P.
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Date: June 13, 1997
CAMDEN PROPERTY TRUST
By: /s/ G. Steven Dawson
----------------------
G. Steven Dawson
Senior Vice President - Finance,
Chief Financial Officer
and Treasurer
<PAGE>
<PAGE>
ATTACHMENT A
INDEPENDENT AUDITORS' REPORT
- ---------------------------------------------------------------------------
To the Board of Directors and
Stockholders of Paragon Group, Inc.
We have audited the accompanying consolidated balance sheets of
Paragon Group, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated and combined statements of operations,
stockholders' equity (partners' and owners' deficit), and cash flows of
Paragon Group, Inc. and Predecessors for the years ended December 31,
1996 and 1995, the period from July 27, 1994 through December 31,
1994, as restated, and the period from January 1, 1994 through July 26,
1994. Our audits also included the financial statement schedule listed
in the index at Item 14(a)1 and 2. These consolidated and combined
financial statements and schedule are the responsibility of the
management of Paragon Group, Inc. and Predecessors. Our responsibility
is to express an opinion on these consolidated and combined financial
statements and schedule 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 and schedule are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and schedule. 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 consolidated and combined financial statements
referred to above present fairly, in all material respects, the
financial position of Paragon Group, Inc. and subsidiaries as of
December 31, 1996 and 1995, and the results of Paragon Group, Inc. and
Predecessors' operations and cash flows for the years ended December
31, 1996 and 1995, the period from July 27, 1994 through December 31,
1994, as restated, and the period from January 1, 1994 through July
26, 1994, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule
when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
As discussed in Note 2, the Company, since its initial public
offering on July 27, 1994, accounted for the investment in its property
services subsidiary, Paragon Group Property Services, Inc. ("PGPSI"),
under the cost method consistent with prior regulatory direction.
However, in September 1995, the Emerging Issues Task Force of the
Financial Accounting Standards Board (EITF) reached a consensus in EITF
95-6 that the cost method of accounting for such investments was not
appropriate. Accordingly, in 1995, the Company changed its method of
accounting for PGPSI from the cost method to consolidation of the
financial position and results of operations of PGPSI with the
Company. Furthermore, as required by EITF 95-6, the 1994
financial statements (specifically, the period from July 27, 1994
through December 31, 1994) have been restated to consolidate PGPSI.
The effect of the restatement was to decrease stockholders' equity at
December 31, 1994 by approximately $20,456,000 and to decrease net income
for the period from July 27 through December 31, 1994 by approximately
$120,000. The effect on earnings per share was nominal.
Ernst & Young LLP
Dallas, Texas
March 21, 1997
52
<PAGE>
<PAGE>
PARAGON GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real estate assets:
Land $ 81,214 $ 86,602
Buildings and improvements 441,921 459,129
Furniture, fixtures and equipment 60,657 57,796
--------- ---------
583,792 603,527
Less: Accumulated depreciation (127,829) (126,437)
--------- ---------
Operating real estate assets 455,963 477,090
Construction in process 13,339 27,944
Real estate held for sale 20,604 -
--------- ---------
Net real estate assets 489,906 505,034
Cash and cash equivalents 7,087 6,583
Restricted cash 4,241 3,909
Accounts receivable, including amounts
due from affiliates of $212 and $1,424,
respectively in 1996 and 1995 1,437 4,716
Advances to affiliates 1,532 186
Investment in ventures 15,164
7,401
Notes receivable from venture 9,839 -
Deferred charges, net 5,774 9,254
Deferred rent receivable - 260
Deferred tax asset 93 863
Other assets 1,794 1,405
--------- ---------
Total assets $ 536,867 $ 539,611
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 297,292 $ 293,780
Accrued interest payable 1,363 1,106
Accrued real estate taxes payable 1,741 2,030
Accounts payable and accrued liabilities,
including amounts due to affiliates of
$10 in 1996 10,019 10,883
Tenant security deposits 2,205 2,273
Deferred tax liability 93 863
Deferred gain on sale of commercial property
services business 1,100 -
--------- ---------
Total liabilities 313,813 310,935
--------- ---------
Minority interests 48,548 50,210
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock $.01 par value,
authorized 100,000,000 shares,
issued 14,791,165 shares 148 148
Additional paid-in capital 204,617 204,537
Unamortized employee restricted stock
compensation (1,053) (4,085)
Accumulated deficit (27,411) (21,236)
--------- ---------
176,301 179,364
Less: Cost of 84,486 treasury shares
(42,266 in 1995) (1,795) (898)
--------- ---------
Total stockholders' equity 174,506 178,466
--------- ---------
Total liabilities and stockholders'
equity $ 536,867 $ 539,611
========= =========
</TABLE>
See accompanying notes.
53
<PAGE>
<PAGE>
PARAGON GROUP, INC. AND PREDECESSORS
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Company
Predecessors
---------------------------------------------------
- --------------
For the Year For the Year For the
Period For the Period
Ended Ended July 27 to
January 1 to
December 31, December 31, December
31, July 26,
1996 1995 1994, as
Restated 1994
- ---------------------------------------------------------------------------
- ---------------
<S> <C> <C> <C>
<C>
Revenue
Rental $ 91,037 $ 80,437 $32,099
$39,018
Property management
services - third party 2,406 6,859 3,729
4,693
Property management
services - affiliates 2,573 4,454 1,688
2,751
Leasing and other property
services - third party 2,646 8,847 3,437
4,445
Leasing and other property
services - affiliates 1,226 2,136 967
1,986
Interest - third party 559 537 445
156
Interest - affiliates 161 - -
-
Other - properties 3,285 3,023 1,222
2,225
Other - property services 836 1,275 1,125
1,668
-------- -------- -------
-------
Total revenue 104,729 107,568 44,712
56,942
-------- -------- -------
-------
Expenses
Property operating and
maintenance:
Personnel 10,685 9,385 3,767
4,748
Advertising and promotion 1,924 1,621 625
860
Utilities 5,694 4,911 1,927
2,649
Building repair and
maintenance 7,648 6,463 2,259
3,510
Real estate taxes and
insurance 9,951 8,932 3,759
4,923
Other operating expenses 3,555 2,950 909
2,092
-------- -------- -------
-------
39,457 34,262 13,246
18,782
Depreciation and amortization 19,552 18,561 7,019
6,499
Property management, net of
amounts reimbursed by
affiliates of $92, $114,
$235 and $316 for 1996,
1995, the period July 27 to
December 31, 1994, and the
period January 1 to
July 26, 1994, respectively 12,336 18,141 8,705
12,587
Interest - third party 22,066 17,011 6,448
14,057
Interest - affiliates - - -
801
General and administrative -
property services, net of
amounts reimbursed by
affiliates of $179, $216,
$182 and $945 for 1996, 1995,
the period July 27 to
December 31, 1994, and the
period January 1 to July 26,
1994, respectively 4,997 5,693 2,052
2,006
General and administrative -
corporate 1,919 1,979 795
-
Reorganization costs - - 7,796
-
-------- -------- -------
-------
Total expenses 100,327 95,647 46,061
54,732
-------- -------- -------
-------
Income (loss) before equity in
income of ventures, gain (loss)
on sale of properties, income
taxes, minority interests and
extraordinary items 4,402 11,921 (1,349)
2,210
Equity in income of ventures 1,012 775 317
429
Gain (loss) on sale of properties 9,209 (21) -
-
Gain on sale of commercial
property services business 11,930 - -
-
-------- -------- -------
-------
Income (loss) before income
taxes, minority interests and
extraordinary items 26,553 12,675 (1,032)
2,639
Income taxes - - -
-
-------- -------- -------
-------
Income (loss) before minority
interests and extraordinary
items 26,553 12,675 (1,032)
2,639
Minority interests (5,338) (2,612) 207
-
-------- -------- -------
-------
Income (loss) before
extraordinary items 21,215 10,063 (825)
2,639
Extraordinary gain from
forgiveness of debt, net of
minority interests - - 6,832
1,776
Extraordinary loss from early
extinguishment of debt, net
of minority interests - - (5,196)
-
-------- -------- -------
-------
Net income $ 21,215 $ 10,063 $ 811
$ 4,415
======== ======== =======
=======
Per share data:
Income (loss) before
extraordinary items $ 1.43 $ 0.68 $ (0.06)
======== ======== ========
$ 1.43 $ 0.68 $ 0.06
======== ======== ========
</TABLE>
See accompanying notes.
54
<PAGE>
<PAGE>
PARAGON GROUP, INC. AND PREDECESSORS
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(PARTNERS' AND OWNERS' DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995, THE PERIOD
ENDED DECEMBER 31, 1994, AS RESTATED, AND THE PERIOD ENDED JULY 26, 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Unamortized
Employee
Less:
Additional Restricted Cost
of
Common Paid-in Stock Accumulated
Treasury
Stock Capital Compensation Deficit
Shares Total
- ---------------------------------------------------------------------------
- ---------------
/<S> <C> <C> <C> <C> <C>
<C>
PARTNERS' AND OWNERS'
DEFICIT AT DECEMBER
31, 1993 $ - $ - $ - $(40,031) $
- - $(40,031)
Contributions - - - 3,202
- - 3,202
Distributions - - - (7,912)
- - (7,912)
Net Income - - - 4,415
- - 4,415
---- -------- ------- --------
- ------- --------
PARTNERS' AND OWNERS'
DEFICIT AT JULY 26,
1994 - - - (40,326)
- - (40,326)
Paragon Group, Inc.
formation transactions - - - 13,391
- - 13,391
Reclassification of
accumulated deficit
at date of initial
offering - (26,935) - 26,935
- - -
Proceeds of initial
offering, net of
underwriting discount
and offering costs
of $24,813 137 266,069 - -
- - 266,206
Shares issued in
exchange for note
receivable from
property services
corporation 7 14,393 - -
- - 14,400
Shares issued pursuant
to employee restricted
stock plan 3 6,890 (6,136) -
(757) -
Adjustment for minority
interests at date
of initial offering - (56,786) - -
- - (56,786)
Net income - - - 811
- - 811
Amortization of employee
restricted stock
compensation - - 577 -
- - 577
Dividends paid - - - (4,839)
- - (4,839)
---- -------- ------- --------
- ------- --------
STOCKHOLDERS' EQUITY AT
DECEMBER 31, 1994,
AS RESTATED 147 203,631 (5,559) (4,028)
(757) 193,434
Acquisition of land
for Units - 1,251 - -
- - 1,251
Acquisition of partner-
ship interest for
Units - (1,559) - -
- - (1,559)
Conversion of Units
to common stock 1 1,214 - -
- - 1,215
Net income - - - 10,063
- - 10,063
Amortization of employee
restricted stock
compensation - - 1,333 -
- - 1,333
Redemption of employee
restricted stock, net
of additional grants - - 141 -
(141) -
Dividends paid - - - (27,271)
- - (27,271)
---- -------- ------- --------
- ------- --------
STOCKHOLDERS' EQUITY AT
DECEMBER 31, 1995 148 204,537 (4,085) (21,236)
(898) 178,466
Partial repayment of
note payable to
affiliates with Units - 80 - -
- - 80
Net income - - - 21,215
- - 21,215
Amortization of employee
restricted stock
compensation - - 2,135 -
- - 2,135
Redemption of employee
restricted stock, net
of additional grants - - 897 -
(897) -
Dividends paid - - - (27,390)
- - (27,390)
---- -------- ------- --------
- ------- --------
STOCKHOLDERS' EQUITY AT
DECEMBER 31, 1996 $148 $204,617 $(1,053) $(27,411)
$(1,795) $174,506
==== ======== ======= ========
======= ========
</TABLE>
See accompanying notes.
55
<PAGE>
<PAGE>
PARAGON GROUP, INC. AND PREDECESSORS
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Company
Predecessors
- --------------------------------------------------------
For the Year For the Year For the Period
For the Period
Ended Ended July 27 to
January 1 to
December 31, December 31, December 31,
July 26,
1996 1995 1994, as
Restated 1994
- ---------------------------------------------------------------------------
- ---------------
<S> <C> <C> <C>
<C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 21,215 $ 10,063 $ 811
$ 4,415
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation 18,859 16,182 6,471
6,455
Amortization 693 2,379 548
44
Amortization of
deferred financing
costs 1,473 1,559 602
472
Amortization of employee
restricted stock
compensation 1,368 1,333 577
-
Equity in income of
ventures - - (122)
(171)
Loss (gain) on sale of
properties (9,209) 21 -
-
Gain on sale of commercial
property services
business (11,930) - -
-
Post-Measurement Date
cash flow of commercial
property services
business 167 - -
-
Minority interests in
income (loss) 5,338 2,612 (207)
-
Gain on forgiveness of
debt, net of minority
interests - - (6,832)
(1,776)
Loss on early extinguish-
ment of debt, net of
minority interests - - 5,196
-
Changes in assets and liabilities:
Decrease (increase) in
restricted cash (383) 367 3,019
(695)
Decrease (increase) in
accounts receivable 3,261 (1,860) (2,415)
345
Decrease (increase) in
deferred rent receivable 7 (18) 25
19
Increase in prepaid leasing
costs (62) (136) (55)
-
Decrease (increase) in other
assets (523) (1,614) (472)
63
Increase (decrease) in
accrued interest payable 386 463 (619)
898
Increase (decrease) in
accrued real estate taxes (90) 861 (930)
2,572
Increase (decrease) in
accounts payable and
accrued liabilities (1,707) 4,052 4,089
(678)
Increase in tenant
security deposits 73 258 1,412
32
-------- -------- -------
- -------
Net cash provided by
operating activities 28,936 36,522 11,098
11,995
-------- -------- -------
- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to operating
real estate assets (29,018) (56,082) (183,554)
(3,229)
Additions to construction
in process, net of
payables (36,740) (43,560) (3,217)
-
Additions to investment in
ventures (95) (3,624) (60)
-
Purchase of working capital
assets, net - (553) -
-
Purchase of management and
leasing contracts - - (5,600)
-
Payments of organization
costs - (22) (82)
-
Distributions received from
ventures 6,835 462 36
89
Increase in note receivable
from venture (9,723) - -
-
Proceeds from sale of
properties, net of selling 37,018 13 -
-
costs of $782 in 1996
Proceeds from sale of
commercial property
services business, net
of selling costs paid
of $947 17,289 - -
-
-------- -------- -------
- -------
Net cash used in
investing activities (14,434) (103,366) (192,477)
(3,140)
-------- -------- -------
- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of
common stock - - 266,206
-
Dividends (27,390) (27,271) (4,839)
-
Contributions from minority
interests - - 100
-
Distributions to minority
interests (7,020) (7,063) (1,235)
-
Capital contributions - - -
3,202
Capital distributions - - -
(7,912)
Deemed distributions at
formation - - (11,442)
-
Payments of deferred financing
costs (777) (1,139) (4,336)
(115)
Proceeds from notes payable 81,100 174,080 129,248
8,300
Payments on notes payable (58,162) (72,512) (182,902)
(9,507)
Payment of participation fees
and prepayment penalties - - (5,778)
-
Distributions to repay
off-balance sheet debt - - (2,600)
-
Decrease (increase) in
advances to affiliates (1,749) 1,419 (1,450)
-
Proceeds from partner loans - - -
283
Payments on partner loans - - (1,463)
(178)
-------- -------- -------
- -------
Net cash provided by
(used in) financing
activities (13,998) 67,514 179,509
(5,927)
-------- -------- -------
- -------
Net increase (decrease) in
cash and cash equivalents 504 670 (1,870)
2,928
Cash and cash equivalents,
beginning of period 6,583 5,913 7,783
4,855
-------- -------- -------
- -------
Cash and cash equivalents,
end of period $ 7,087 $ 6,583 $ 5,913
$ 7,783
======== ======== =======
=======
Cash paid for interest $ 22,023 $ 16,556 $ 6,475
$13,305
======== ======== =======
=======
</TABLE>
See supplemental non-cash disclosures at Note 15.
See accompanying notes.
56
<PAGE>
<PAGE>
PARAGON GROUP, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
December 31, 1996
(Dollars in thousands, except per share or share/unit data)
1. ORGANIZATION AND FORMATION OF THE COMPANY
Paragon Group, Inc. (together with its subsidiaries, the
"Company"), qualifies as a real estate investment trust ("REIT") for
Federal income tax purposes and was incorporated in the state of
Maryland on March 23, 1994 to continue the operations of certain entities
involved in management, leasing, construction, development and ownership
of real estate assets (collectively the "Predecessors"). On July 27,
1994, the Company completed an initial public offering (the "Initial
Offering") of 13,000,000 shares of common stock (including
1,000,000 shares issued upon exercise of the underwriters'
over-allotment option), a sale of 695,000 shares of common stock to the
sponsors (the "Private Placement") and a business combination with the
Predecessors. The offering price of all shares sold was $21.25 per
share, resulting in net proceeds (less the underwriters' discount and
offering costs) of approximately $266,206. Additionally, in August 1994,
the Company issued 324,400 shares of common stock for use in the Employee
Restricted Stock Plan.
Upon completion of the Initial Offering, the Company, through
its wholly-owned subsidiary, Paragon Group LP Holdings, Inc.,
acquired a 79.1% limited partner interest in Paragon Group L.P. (the
"Operating Partnership"). The Operating Partnership succeeded to
substantially all of the interests of the Predecessors and certain others
in certain properties. The Company, through its wholly-owned subsidiary,
Paragon Group GP Holdings, Inc., is the sole general partner and the
holder of a 1% interest in the Operating Partnership. In
consideration for the sale of certain properties and partnership
interests, certain owners of the Predecessors, including affiliates of the
Company, elected to receive limited partnership units ("Units") in the
Operating Partnership. The 3,648,546 Units received by such owners at
formation represented an approximate 19.9% equity interest in the
Operating Partnership.
Proceeds from the Initial Offering, the Private Placement and
new borrowings totaled $408.5 million. The Company and the Operating
Partnership used these proceeds to (i) purchase certain properties and
interests in certain other properties, (ii) retire existing debt
associated with certain properties, (iii) pay expenses of the offering
including underwriting discounts, accounting, legal, and other formation
costs, (iv) pay prepayment penalties, purchase lender participation
interests, buy down interest rates on certain mortgage loans and pay loan
costs on new indebtedness, (v) make distributions to certain owners of the
Predecessors to repay off-balance sheet debt associated with one of the
properties, (vi) purchase the property services businesses from
affiliates, (vii) pay real estate taxes and fund interest and tax
escrows, and (viii) establish working capital reserves.
During 1995, the Operating Partnership issued 116,136 Units to
acquire additional property and partnership interests from affiliates of
the Company and 94,118 Units were redeemed for shares of common stock in
the Company (with the Company acquiring such Units in exchange for a
like number of shares). On January 3, 1996, the Operating
Partnership issued 4,694 Units in partial settlement of debt assumed
on the purchase of the Overlook Apartments. At December 31, 1996, the
Company's ownership interest in the Operating Partnership was 80.1%.
Subsequent to the business combination and prior to June 30, 1996,
the Company's management, leasing, construction and development
businesses were conducted through Paragon Group Property Services, Inc.
("PGPSI"). The Company, through the Operating Partnership, owned 100% of
the non-voting stock and 1% of the voting stock of PGPSI (collectively
representing 99% of the total equity). As discussed in Note 4, effective
June 30, 1996, the Company sold its interest in PGPSI (after spin-off of
the residential property services business) and formed Paragon
Residential Services, Inc. ("PRSI") to continue the Company's
residential property services business previously conducted through
PGPSI. The Company has a 95% economic interest in PRSI through
ownership of 100% of the nonvoting common stock and 1% of the voting
stock. The remaining 99% of the voting stock, which represents a 5%
economic interest, is owned by a partnership controlled by certain current
and former executive officers of the Company.
57
<PAGE>
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation for Periods after the Initial Offering
For the periods after the Initial Offering, the accompanying
consolidated financial statements include the accounts of the Company,
Paragon Group GP Holdings, Inc., Paragon Group LP Holdings, Inc.,
Paragon Group L.P., PGPSI (through the date of sale), Paragon Residential
Services, Inc., 8 wholly-owned partnerships and one limited liability
company, and partnerships owning 13 properties where the Company,
through the Operating Partnership, has a controlling interest. All
significant intercompany accounts and transactions have been eliminated
in consolidation.
The Company, subsequent to the Initial Offering on July 27,
1994 and through the third quarter of 1995, accounted for its investment
in PGPSI under the cost method consistent with prior regulatory
direction. However, in September 1995, the Emerging Issues Task Force
of the Financial Accounting Standards Board ("EITF") reached a consensus
in EITF 95-6 "Accounting by a Real Estate Investment Trust for an
investment in a Service Corporation" that the cost method of accounting
for such investments was not appropriate and, based upon the specific
facts and circumstances, either the equity method or consolidation
accounting should be used. While the Company only held 1% of the voting
stock of PGPSI, due to its 99% economic interest and other factors the
Company believes that the consolidation method should be used and
provides for the most meaningful financial statement presentation.
Accordingly, in the fourth quarter of 1995, the Company changed its method
of accounting for PGPSI from the cost method to consolidation of the
financial position and results of operations of PGPSI in the Company's
consolidated financial statements. Furthermore, as required by EITF
95-6, the 1994 financial statements (specifically, the period from July
27, 1994 through December 31, 1994) have been restated to consolidate
PGPSI. The effect of the restatement was to decrease stockholders'
equity at December 31, 1994 by $20,456 and to decrease income before
extraordinary items and net income by $120. The effect on net income per
share was nominal.
The business combination was structured to allow the partners and
owners of the entities in the Predecessors to receive either cash or
Units in the Operating Partnership. (Units can be exchanged, with certain
restrictions, for cash or common stock in the Company, at the Company's
election, on a one-for-one basis.) Purchase accounting was applied to the
acquisition of all non-controlled interests from persons who received
either cash or Units in the Operating Partnership as consideration as
well as controlled interests from persons who received cash. The
acquisition of all other interests was accounted for as a reorganization
of entities under common control and, accordingly, was reflected at
historical cost in a manner similar to that of pooling of
interests accounting. Acquisitions subsequent to the Initial Offering have
been accounted for in a similar manner.
Basis of Presentation for Periods prior to the Initial Offering
For periods prior to the Initial Offering, the accompanying
combined financial statements of the Predecessors include the accounts of
45 partnerships owning multifamily apartment communities, two
partnerships owning retail properties, one partnership owning an
office property and various entities engaged in property management,
leasing, construction and development on a contractual basis.
Additionally included are the accounts of a partnership which owns a 20%
interest in an office property and is therefore accounted for using the
equity method. The Predecessors is not a legal entity but rather a
combination for financial reporting purposes. The accompanying
combined financial statements are presented on a combined basis
because of common ownership and management. All significant inter-entity
accounts and transactions have been eliminated in combination. The
accompanying combined financial statements prior to the business
combination exclude or carve out certain assets and liabilities that were
not contributed to the Operating Partnership or transferred to PGPSI.
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Real Estate Assets and Depreciation
Real estate assets are stated at cost. Ordinary repairs and
maintenance are expensed as incurred; major replacements and
betterments are capitalized and depreciated on a straight-line basis
over the estimated useful lives of the properties (buildings and related
land improvements - 10 to 40 years; furniture, fixtures, and equipment - 3
to 10 years; and tenant improvements - over the life of the related
tenant lease). With respect to the operating apartment properties,
the Company capitalizes floor and window coverings and depreciates such
items over 5 years; appliances and heating, ventilating and air
conditioning equipment are capitalized and depreciated over 10 years.
With respect to construction in process, the Company capitalizes all costs
associated with development activities, including interest and taxes, until
each project is complete. Capitalized interest for the years ended
December 31, 1996, 1995 and 1994 aggregated to $1,687, $1,608 and $47,
respectively.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long Lived Assets" ("FAS 121"). FAS 121 establishes
accounting standards for the impairment of long lived assets and is
effective for fiscal years beginning after December 15, 1995, with early
adoption encouraged. The Company adopted FAS 121 in 1995. Accordingly,
the Company records impairment losses on long lived assets used in
operations when events and circumstances indicate that the assets may be
impaired and the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amount of those assets. No
such impairment losses with respect to real estate assets used in
operations have been recognized to date. Real estate assets to be disposed
of are carried at the lower of the carrying amount or estimated fair value
less selling costs and are classified as real estate held for sale in the
accompanying consolidated balance sheets.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company
considers all investments purchased with an original maturity of three
months or less to be cash equivalents.
Restricted Cash
Restricted cash is comprised of tenant security deposits, real
estate tax and insurance escrows, required reserves for property
replacements, and other cash restricted pursuant to loan or other
agreements.
Investment in Ventures
The Company's 20% interest in Gateway One Office Venture ("Gateway"),
its 10% interest in Fair Grove Properties, L.L.C. ("Fair Grove") and its
approximate 44% interest in Paradim, Inc. and it's subsidiaries
(collectively, "Paradim") are accounted for using the equity method of
accounting.
Deferred Charges
Deferred charges include costs incurred in connection with the
formation of each entity which are generally amortized on a
straight-line basis over five years; deferred financing costs which are
amortized on a straight-line basis over the life of the related loan;
prepaid leasing costs on the office and retail properties which are
amortized on a straight-line basis over the life of the related tenant
lease; and management and leasing contracts purchased at formation
which are amortized on a straight-line basis over five years.
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Revenue Recognition
Rental income attributable to residential leases is recognized when
earned. Minimum rental income related to retail and office leases is
recognized on a straight-line basis over the terms of the leases. Certain
of the leases include scheduled rent increases and provisions whereby the
tenant is not responsible for rental payments during specified initial
occupancy periods. Rental income recognized in excess of payments due is
reflected as a deferred rent receivable in the accompanying balance
sheets. The retail and office leases also provide for reimbursement of
actual operating expenses in excess of base amounts.
Management fees are based on a percentage of the rental
receipts of properties managed and are recognized when earned. Leasing
fees are based on the gross value of leases signed and are recognized as
earned under the terms of the various contracts. Construction and
development fees are generally based on a fixed percentage of costs and are
recognized as the project costs are incurred.
Stock Compensation
In October 1995, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" ("FAS 123") which establishes financial
accounting and disclosure standards for stock based employee
compensation plans and is effective for fiscal years beginning after
December 15, 1995. FAS 123 provides an alternative of adopting the new
accounting standards of the statement or remaining under the existing
requirements of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). The Company has decided to
continue accounting for its stock compensation arrangements under the
provisions of APB 25.
Per Share Data and Dividends
Earnings per share with respect to the Company for the periods
following the Initial Offering are computed based upon the weighted
average number of shares outstanding during the respective period.
Historical per share data with respect to the periods prior to the Initial
Offering is not relevant since the Predecessors' financial statements are
a presentation of the combined operations of partnerships and S
corporations.
For the years ended December 31, 1996 and 1995 and the period from
July 27, 1994 through December 31, 1994, the Company paid dividends of
$27,390, $27,271 and $4,839, respectively. For income tax
purposes, dividends paid to stockholders consist of ordinary income,
short-term capital gains, long-term capital gains or return of capital.
The following is a summary of the income tax treatment of the dividends
paid by the Company:
Period
Year Ended December 31, July 27 to
----------------------- December 31,
1996 1995 1994
------------------------------------
Ordinary income............... 53.24% 47.41% -
Short-term capital gain....... 0.89% - -
Long-term capital gain........ 16.51% - -
Return of capital............. 29.36% 52.59% 100.00%
------ ------ ------
Total 100.00% 100.00% 100.00%
====== ====== ======
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Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
Concentrations
At December 31, 1996 and 1995, there were cash and restricted cash
balances with banks in excess of the FDIC insured limits by $5,188,
and $3,376, respectively. The Company has not experienced any losses in
its cash accounts, and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
As of December 31, 1996, certain apartment units are leased to tenants
that have common employers and may be dependent on one related source
of income. Management believes that any possible loss resulting from the
above-mentioned concentrations would not be material as the apartment
units could be re-leased if the current tenants fail to perform under their
obligations.
3. REAL ESTATE INVESTMENTS
Real Estate
As of December 31, 1996, the Company, through the Operating
Partnership, controls, either through direct ownership or in some
instances through an investment in a partnership or a limited liability
company, 58 multifamily residential properties in Florida, Kentucky,
Missouri, North Carolina, South Carolina and Texas. The Company, through
the Operating Partnership, also owns an interest in Paradim which owns 3
multifamily residential properties that were previously wholly-owned by
the Company, and has a minority interest in Gateway and Fair Grove which
own three office properties; one in Missouri and two in suburban
Washington, D.C. In addition, the Company has entered into a
non-recourse ground lease, which commenced on October 24, 1996,
related to approximately 27.47 acres in Louisville, Kentucky for potential
development of a multifamily residential community in 1997.
At December 31, 1996, the 58 multifamily residential properties
controlled by the Company include 55 operating properties containing
15,026 apartment units, two properties under development for which 520
units are planned and a 12.6 acre tract of land for which 320 units are
planned which the Company acquired in December 1996 for future
development. Two of the operating properties containing 548 units are
in the initial lease-up phase. The three multifamily residential
properties owned by Paradim include two operating properties
containing 928 apartment units and one property under development for which
336 units are planned.
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The following is a summary of the Company's real estate investments at
December 31, 1996:
Number of Properties Number of Apartment Units
-------------------- -------------------------
Under Under
Location Operating Development Total Operating Development Total
- -------- --------- ----------- ----- --------- ----------- -----
Multifamily Properties
FLORIDA
Tampa/St.
Petersburg 13 - 13 4,013 - 4,013
Orlando (1) 7 1 8 1,802 320 2,122
Winterhaven. 1 - 1 192 - 192
-- -- -- ------- ----- -------
21 1 22 6,007 320 6,327
-- -- -- ------- ----- -------
KENTUCKY
Louisville 5 - 5 1,142 - 1,142
-- -- -- ------- ----- -------
MISSOURI
St. Louis 12 - 12 3,142 - 3,142
Kansas City 1 1 2 308 288 596
-- -- -- ------- ----- -------
13 1 14 3,450 288 3,738
-- -- -- ------- ----- -------
NORTH CAROLINA
Charlotte (2) 6 1 7 1,647 232 1,879
Greensboro (3) 2 1 3 520 336 856
-- -- -- ------- ----- -------
8 2 10 2,167 568 2,735
-- -- -- ------- ----- -------
SOUTH CAROLINA
Charleston 1 - 1 352 - 352
-- -- -- ------- ----- -------
TEXAS
Dallas (4) 9 - 9 2,836 - 2,836
-- -- -- ------- ----- -------
Total Residential 57 4 61 15,954 1,176 17,130
== == == ======= ===== =======
Number of Properties Number of Square Feet
-------------------- -------------------------
Under Under
Location Operating Development Total Operating Development Total
- -------- --------- ----------- ----- --------- ----------- -----
Office Properties
MISSOURI
St. Louis (5) 1 - 1 401,625 - 401,625
Washington, D.C.(6) 2 - 2 322,845 - 322,845
-- -- -- ------- ----- -------
Total Office 3 - 3 724,470 - 724,470
== == == ======= ===== =======
(1) Operating information includes a 272 unit project that is in the
initial lease-up phase. Development information includes 320 units related
to land purchased in December 1996 for future development.
(2) Operating information includes a 220 unit project owned by Paradim in
which the Company holds an approximate 44% interest.
(3) Development information includes a 336 unit project owned by
Paradim in which the Company holds an approximate 44% interest.
(4) Operating information includes a 276 unit project that is in the
initial lease-up phase and a 708 unit project owned by Paradim in which the
Company holds an approximate 44% interest.
(5) Represents an office building owned by Gateway in which the Company
holds a 20% interest.
(6) Represents two office buildings owned by Fair Grove in which the
Company holds a 10% interest.
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Development
On January 29, 1996, the Company, through PGPSI, acquired a 5.15 acre
tract of land in suburban Dallas, Texas and commenced construction on
the 108,600 square feet Post and Paddock office/warehouse development.
Construction was completed in November 1996 and the property was sold
on December 4, 1996 for $3,700.
The Company has entered into a non-recourse ground lease, which
commenced on October 24, 1996, related to approximately 27.47 acres
in Louisville, Kentucky for potential development in 1997. The ground
lease allows the Company to develop, at its' discretion, a one or two
phase multifamily residential community on the leased acreage. The
lease has a term of 40 years and under certain conditions, the Company
has the option to acquire the land. Monthly lease payments which are
estimated to range from $7 to $14 have been deferred until July 1, 1997.
On December 13, 1996, the Company acquired a 12.6 acre tract of
land in Orlando, Florida for $2,007. A 320 unit multifamily residential
community is planned for the site which, when developed, will be the
second phase of the completed 272 unit Renaissance Pointe apartments.
During 1996, the Company completed construction of three
multifamily residential properties containing a total of 824 apartment
units. At December 31, 1996, an additional 856 apartment units were under
construction which are scheduled for completion in the first and second
quarters of 1997, including 336 units owned by Paradim. The three
multifamily residential properties completed in 1996 include the 276 unit
Heron Pointe apartments in Tampa, Florida completed in February 1996, the
272 unit Renaissance Pointe apartments in Orlando, Florida completed in
July 1996 and the 276 unit Stone Gate apartments completed in August
1996. At December 31, 1996, the Renaissance Pointe apartments and the
Stone Gate apartments were in the initial lease-up phase.
Acquisitions
On November 8, 1996, the Company purchased two North Carolina
multifamily residential communities (the 240 unit Habersham Pointe
apartments in Charlotte, North Carolina and the 216 unit River Oaks
apartments in Greensboro, North Carolina) from a single seller for a
total purchase price of $20,900, including the assumption of mortgage
indebtedness in the amount of $6,357 collateralized by the River Oaks
apartments.
Dispositions
As a result of the sale of its commercial property services
business discussed in Note 4, the Company disposed of its three
wholly-owned operating commercial properties in the fourth quarter of
1996. The Company also sold the Turtle Creek I and the Turtle Creek II
apartments in Asheville, North Carolina in the fourth quarter of 1996.
The 1996 property sales are summarized in the following table:
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SF/# of Sales
Date Sold Property Location Units Price
--------- -------- -------- ----- --------
Commercial Properties
- ---------------------
October 1, 1996 Southwood Mall Bradenton, FL 113,949 $ 3,170
October 31, 1996 Westgate Centre St. Louis, MO 58,935 7,130
December 19, 1996 The Paragon St. Louis, MO 102,486 10,000
Multifamily Properties
- ----------------------
December 12, 1996 Turtle Creek I Asheville, NC 208 7,075
December 12, 1996 Turtle Creek II Asheville, NC 176 6,725
-------
Total $34,100
=======
In accordance with FAS 121, properties held for sale are to be
carried at the lower of the carrying amount or estimated fair value less
selling costs. Accordingly, at June 30, 1996, the Company recognized an
impairment adjustment of $1,143, all of which related to Southwood Mall,
which is included in gain (loss) on sale of properties in the accompanying
statements of operations.
In addition, in an effort to maximize the long term growth potential
of the portfolio, management intends to regularly evaluate the possible
disposition of targeted multifamily residential assets where a
redeployment of capital can increase geographic efficiencies or improve
operating results. At December 31, 1996, three multifamily properties
(the 232 unit Brookfield apartments in Dallas, Texas; the 352 unit
Westchase Apartments in Charleston, South Carolina; and the 251 unit San
Miguel Apartments in St. Louis, Missouri) are classified as held for sale.
The Company expects to sell these properties at prices in excess of
carrying amounts.
Joint Venture
On April 1, 1996, the Company entered into a joint venture (Paradim)
with Careit Investments Limited Partnership ("Careit"), an affiliate of
Caisse de depot et placement du Quebec, to acquire, develop and
operate selected multifamily residential properties in markets in which
the Company operates. The Company and Careit each have committed to
invest up to $22,500, primarily through a newly formed Maryland
corporation, Paradim, Inc., which intends to qualify as a REIT for
Federal income tax purposes. Each investment by Paradim, Inc. is to be
made through separate limited liability companies or limited
partnerships in which Paradim, Inc. will own an 89%interest as the
managing member or general partner, the Company will own a 1% interest
and a number of private investors will own the remaining interests. In
connection with Paradim, Inc.'s initial capitalization, the Company
effectively contributed its interest in three properties (Overlook,
formerly known as The Phoenix, a 220-unit multifamily residential
complex in Charlotte, North Carolina; Highpoint, a 708-unit multifamily
residential complex in Dallas, Texas; and Brassfield Park, a 336-unit
multifamily residential complex under development in Greensboro, North
Carolina) and Careit contributed $7,926 in cash. At formation, the Company
also received a distribution of approximately $6,618, which was used to
repay existing indebtedness under the line of credit. The Company recorded
the initial contribution of these properties at their net carrying value
on April 1, 1996, which was approximately $14,726 (net book value
of$41,842 subject to existing indebtedness of $27,116). The Company's
investment, which includes a direct 1% interest in two limited liability
companies and one limited partnership and an approximate 43% indirect
interest in such entities through its ownership in Paradim, Inc.
(collectively, approximately 44%), is being accounted for under the equity
method. As of December 31, 1996, the Company's aggregate investment in
Paradim was approximately $7,954.
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<PAGE>
4. PROPERTY SERVICES
Subsequent to the business combination on July 27, 1994 and through
June 30, 1996, the Company's management, leasing, construction and
development businesses were conducted through PGPSI. PGPSI provided
residential and commercial property services to the Company,
affiliates of the Company and unrelated third parties. PGPSI was
originally capitalized with $3,000 of cash and the issuance of a $17,000
note.
During 1995, PGPSI was realigned from a regional multi-product
organization to two national product groups - one for residential
operations and one for commercial operations. As a result of the
realignment, PGPSI incurred non-recurring charges totaling $748
related to employee severance and other costs, including $195 of
non-cash charges associated with the accelerated vesting of outstanding
restricted stock made available to certain employees (See Note 9). At
December 31, 1995, PGPSI managed over 26.4 million square feet of
commercial space and 22,085 apartment units.
In May 1996, the Company executed an agreement to sell its
commercial property services business to an affiliate of Insignia
Financial Group, Inc. ("Insignia"). In order to accomplish the sale,
PGPSI's residential property services business was transferred to PRSI.
Immediately following the transfer, as of June 30, 1996, Insignia acquired
all of the outstanding stock of PGPSI and a $12,432 note receivable from
PGPSI held by the Company. The acquisition price included initial cash
consideration of$18,200 and two potential earn-out payments totaling
up to $4,000 which are contingent upon PGPSI revenue meeting certain
specified targets over the next three years. The earn-out payments may be
reduced by as much as $2,900 in the event certain management contracts
are terminated within a two-year period after closing. In addition,
the initial acquisition price may be reduced by up to $1,100 in the event
the employment of certain employees of PGPSI is terminated within one
year after closing or certain existing management contracts are
terminated within a five-year period after closing.
In connection with the sale, the Company received warrants to
purchase up to 50,000 shares of Insignia Financial Group, Inc. stock at
a price of $28.96 per share and Insignia received warrants to purchase
50,000 shares of the Company's stock at$18.25 per share and may receive
warrants to purchase an additional 238,000 shares at$18.25 per share,
depending on the termination of certain management contracts during the
two-year period after closing.
As a result of the sale, the Company recognized a gain of $11,930
which does not consider potential earn-out payments, the value of
warrants issued or received, or$1,100 of the initial acquisition price
which is contingent on future events. The contingent portion of the
initial acquisition price and the earn-out payments, if any, will be
recognized when earned. The gain on sale was determined in accordance
with Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations", whereby the commercial property service business net loss
of $843 from the date (May 7,1996) management committed to the disposal
of the commercial property services business (the "Measurement Date")
through the date of sale (June 30, 1996) was treated as a reduction of
the gain on sale. The post-Measurement Date net loss is summarized as
follows:
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<PAGE>
Revenue
Property management services - third party........... $ 724
Property management services -affiliates............. 471
Leasing and other property services - third party.... 1,318
Leasing and other property services - affiliates..... 376
Other................................................ 430
------
3,319
------
Expenses
Property management.................................. 3,348
General and administrative........................... 570
Interest............................................. 1
Depreciation and amortization........................ 243
------
4,162
------
Net Loss.................................................. $ (843)
======
Included in property management expenses is $767 of amortization
primarily related to the June 30, 1996 accelerated vesting of employee
restricted stock granted to certain employees of the commercial property
services business.
The closing of the sale occurred on July 2, 1996, at which time the
Company received net proceeds from the sale of $18,072 (net of
prorations of $165). Proceeds from the sale were used to reduce borrowings
outstanding under the line of credit.
PRSI will continue the Company's residential property services
business and will provide all residential property service functions
previously provided by PGPSI, including property management, leasing,
development, acquisition and disposition for its owned residential
communities as well as for affiliated and third party residential owners.
As of December 31, 1996, the Company, through PRSI, managed 77 multifamily
residential communities located across the United States, totaling
approximately 21,696 apartment units (of which 57 communities and 15,954
apartment units were for the Company, including two communities and 928
apartment units for Paradim).
5. DEFERRED CHARGES
Deferred charges consist of the following:
December 31, December 31,
1996 1995
----------- -----------
Deferred financing costs............ $7,229 $ 8,378
Organization costs.................. 249 249
Prepaid leasing costs............... - 421
Management and leasing contracts.... 1,356 4,044
------- -------
8,834 13,092
Less: Accumulated amortization...... (3,060) (3,838)
------- -------
$ 5,774 $ 9,254
======= =======
Amortization of organization costs and prepaid leasing costs was $94,
$148 and $110 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Amortization of deferred financing costs, which is included in
interest expense in the accompanying statements of operations, was
$1,473, $1,559 and $1,074 for the years ended December 31, 1996, 1995
and 1994, respectively. During 1996, an additional $204 of construction
period amortization of deferred financing costs related to multifamily
residential developments under construction was capitalized.
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<PAGE>
Amortization of management and leasing contracts purchased at
formation was $797, $2,231 and $482 for the years ended December 31,
1996 and 1995 and the period from July 27, 1994 through December 31, 1994,
respectively. Management has estimated the useful life of the contracts
initially acquired to be five years, based upon historical experience with
other contracts with similar terms. During 1996 and 1995, certain of the
contracts were terminated, and as a result, the Company recognized
impairment adjustments of $258 and $1,111, respectively, which are
included in amortization expense in the accompanying statements of
operations. The impairment adjustments, determined on a prorata basis,
were based upon the percentage of contracts terminated during 1996 and
1995. The contracts terminated in 1996 and 1995 were allocated gross
values of $359 and $1,556 and related accumulated amortization of $101
and $445, respectively. Management intends to periodically evaluate
the carrying amount of the management and leasing contracts in the
future and, if necessary, record additional impairment adjustments.
In 1996, the Company wrote-off $2,329 of management and leasing
contracts (and $941 of related accumulated amortization) which related to
the commercial property services business sold in 1996 which is
included in gain on sale of commercial property services business in
the accompanying statements of operations. In addition, $462 of
prepaid leasing costs (and $185 of related accumulated amortization)
which related to the commercial properties sold in 1996 was written-off
in 1996 and is included in the gain (loss) on sale of properties in the
accompanying statements of operations. In 1996 and 1995, the Company also
wrote-off certain fully amortized deferred charges including $1,841 of
deferred financing costs in 1996 and $206 of organization costs, $86
of prepaid leasing costs and $730 of deferred financing costs in 1995. As
a result of loan repayments in 1994, $970 of deferred financing costs
were written-off and are reflected as an extraordinary loss in the
accompanying statements of operations.
6. INCOME TAXES
Periods after the Initial Offering
The Company has elected to be taxed as a real estate investment trust
under the Internal Revenue Code of 1986, as amended, commencing with its
taxable year ended December 31, 1994. As a result, the Company will
generally not be subject to Federal income tax on its taxable income
to the extent it distributes annually at least 95% of its taxable
income to its shareholders and complies with certain other
requirements. Accordingly, no provision for Federal income taxes has been
made for the Company and certain of its subsidiaries in the
accompanying consolidated financial statements. State, local and other
taxes are not significant for the Company or its subsidiaries.
As of December 31, 1996 and 1995, the net assets reported in
the consolidated financial statements for the Company exceed the tax
basis in net assets by approximately $39,000 and $44,000, respectively.
PGPSI and PRSI file separate tax returns and are subject to income
tax. Accordingly, the provision for income taxes for PGPSI through the
date of sale on June 30, 1996 and for PRSI for the period from July 1, 1996
through December 31, 1996 has been calculated in accordance with the
Statement of Financial Accounting Standards 109, "Accounting for Income
Taxes" ("FAS 109"). Under the provisions of FAS 109, deferred tax assets
and liabilities are provided for certain temporary differences between
the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes, computed
based on provisions of the enacted tax law. Significant components of
deferred tax assets and liabilities for PGPSI as of December 31, 1995 and
PRSI as of December 31, 1996 are as follows:
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<PAGE>
PRSI PGPSI
December 31, December 31,
1996 1995
------------ ------------
Deferred tax assets:
Intangible assets....................... $1,266 $4,189
Net operating loss...................... 819 1,284
Employee restricted stock compensation.. 388 561
Other ................................ 225 133
------ ------
2,698 6,167
Valuation allowance..................... (2,605) (5,304)
------ ------
$ 93 $ 863
====== ======
Deferred tax liabilities:
Depreciable assets...................... $ 87 $ 858
Other ................................ 6 5
------ ------
$ 93 $ 863
====== ======
Deferred tax assets relate primarily to (i) the difference in the
carrying amount of intangible assets recognized at formation of each entity
for financial reporting purposes and the amount recognized for tax
purposes; (ii) the amortization of employee restricted stock
compensation for financial reporting purposes; and (iii) tax net
operating losses, which for PRSI expires in 2011. Deferred tax
liabilities relate primarily to the difference in the carrying amount
of certain depreciable assets for financial reporting purposes which are
deducted for tax purposes. A valuation allowance has been recognized to
offset the net deferred tax assets, due to the uncertainty of the ultimate
realization of those deferred tax assets in future years.
Periods prior to the Initial Offering
The entities included in the combined financial statements of
the Predecessors were either limited partnerships or S corporations and
were not subject to Federal and state income taxes. Accordingly, no
recognition has been given to income taxes in the combined financial
statements of the Predecessors since the income or loss of the entities
are to be included in the tax returns of the individual owners.
7. NOTES PAYABLE
Debt Restructuring
During 1994, net proceeds from the Initial Offering, the Private
Placement and new borrowings were utilized to retire 28 loans (26 of
which were retired prior to maturity) with outstanding balances of
$174,449, including seven loans which were repaid at a discount. In order
to retire certain loans, the Company was required to pay lender
participation interests of $2,577 and prepayment penalties of $3,201.
In connection with the Initial Offering, the Company paid $680 and
entered into an interest rate swap agreement in the notional amount of
$6,760. The agreement, which expires on January 27, 2000, effectively
reduces the fixed interest rate on one mortgage note from 9.5% to 7.5%.
Additionally, the Company reduced the outstanding principal balances of
seven loans by $4,229 and utilized $755 to reduce the interest rates on
four loans.
During 1994, debt restructuring resulted in an extraordinary gain
from the forgiveness of debt (before minority interests) of $10,675 and an
extraordinary loss from early extinguishment of debt (before minority
interests) of $6,748.
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Mortgages Payable
Concurrent with the Initial Offering, the Company obtained new debt
in the amount of $108,540 which is collateralized by certain properties.
The new debt is structured in two pools; Pool A, in the amount of $61,710,
requires monthly payments of interest only at 8.36% per annum and matures
in July 2001; and Pool B, in the amount of $46,830, requires monthly
payments of interest only at 8.52% per annum and matures in July 1999.
Effective October 1, 1995, the Company assumed debt in the amount of
$9,856 associated with the acquisition of partnership interests related to
the 372 unit Spanish Trace apartments in St. Louis, Missouri. The loan
requires monthly payments of principal and interest, bears interest at
7.35% per annum, matures in September 2028 and is insured by the United
States Department of Housing and Urban Development ("HUD"). There are no
restrictions on the use or operation of this property.
In December 1995, the Company obtained new debt in the amount of
$69,000 collateralized by various properties. The new debt requires
monthly interest only payments at 7.29% per annum for three years and
monthly principal and interest payments for years four through ten
based on a 25 year amortization schedule and matures December 2005. Net
proceeds of the new debt were used to repay existing borrowings under the
Company's line of credit.
Additionally, in December 1995, in conjunction with the purchase of
the 220 unit Overlook apartments in Charlotte, North Carolina, the Company
obtained new debt in the amount of $5,400 which is collateralized by the
property. The loan requires monthly payments and bears interest at 7.5%
fixed throughout the term with interest only payments for the first two
years and principal and interest payments for the last 5 years based on a
25 year amortization schedule. The note matures in January 2003. On April
1, 1996, the loan was assumed by Paradim.
Also in December 1995, concurrent with the acquisition of two
properties, the Company borrowed $20,250 and $7,930. The notes required
monthly payments of interest only at interest rates of 7.66% and 7.63%
respectively. The notes were collateralized by various properties and
had maturity dates of June and March 1996, respectively. The $7,930 loan
was repaid at maturity on March 28, 1996 and on April 1, 1996, the $20,250
loan was assumed by Paradim.
On November 6, 1996, the Company obtained new debt in the amount of
$7,400 collateralized by the 278 unit Schooner Bay apartments in Tampa,
Florida. The new debt requires monthly payments of principal and
interest at 7.7% per annum for seven years and matures in November 2003.
Net proceeds of the new debt were used to fund a portion of the
purchase of the 240 unit Habersham Pointe apartments in Charlotte,
North Carolina and the 216 unit River Oaks apartments in Greensboro, North
Carolina on November 8, 1996.
On November 8, 1996, in conjunction with the purchase of the 216 unit
River Oaks apartments in Greensboro, North Carolina, the Company
assumed mortgage indebtedness in the amount of $6,357 collateralized by
the property. The loan requires monthly payments of principal and
interest at 8.44% per annum and matures on October 15, 1999.
Mortgages payable consist of 30 loans ($254,592 principal
amount) at December 31, 1996 and 33 loans ($279,280 principal amount) at
December 31, 1995, each of which is collateralized by properties included
in real estate assets. At December 31, 1996, 22 of the loans ($219,134
principal amount) carry a fixed interest rate and provide for the monthly
payment of interest only, and 8 loans ($35,458 principal amount) provide
for monthly payments of principal and interest at a fixed rate.
Interest rates on the fixed rate mortgages range from 5.75% to 8.52% at
December 31, 1996 with a weighted average interest rate of 7.75%. At
December 31, 1995, 27 of the loans carry a fixed interest rate and
provide for the monthly payment of interest only, and 6 loans
provide for monthly payments of principal and interest at a fixed rate.
Interest rates on the fixed rate mortgages range from 5.75% to 10% at
December 31, 1995 with a weighted average interest rate of 7.71%. During
1996, $12,762 of principal was repaid on mortgage loans.
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At December 31, 1996 and 1995, two of the mortgage loans
collateralize tax exempt housing revenue bonds and two related
mortgage loans collateralize taxable housing revenue bonds. The
Predecessors obtained these mortgages during 1993. As additional
security for these loans, the Predecessors entered into reimbursement
agreements, paid premiums of $1,587, and agreed to pay an annual servicing
fee of .1% of the original loan balances. The underlying collateral for
the bonds is subject to land use restrictions which provide, among
other things, that at least 20% of the multifamily housing units be
leased to low or moderate income families as established by HUD. On July
27, 1994, the Operating Partnership assumed the aforementioned mortgage
loans and succeeded to the agreements and restrictions thereto.
At December 31, 1996, the Company owned one other multifamily
property which was previously financed with the proceeds of multifamily
revenue bonds and remains subject to similar HUD restrictions which
expire under certain conditions in 1997.
Line of Credit
Concurrent with the Initial Offering, the Company obtained a line of
credit facility in the amount of $75,000. The commitment was subsequently
increased to $115,000 and in December 1995 was reduced by the Company to
$90,000 and under certain conditions could be increased to $150,000. On
July 27, 1996, the Company executed a renewal and modification of the line
of credit facility. Under the terms of the new agreement, the Company may
borrow up to $85,000 including up to $50,000 related to development
activities. The line of credit matures in July 1998, but may be extended
through July 1999 at the Company's option. Borrowings under the line of
credit are collateralized by specified operating properties and
properties under development. The interest rate on the amounts
outstanding under the line are based on, at the Company's election,
either (i) the greater of the prime rate or the Federal Funds rate plus
.50% or, (ii) the London Interbank Offer Rate ("LIBOR") plus 2.0% -
2.25%, depending on certain financial ratios concerning leverage and
debt service coverage. The line of credit reprices, at the Company's
discretion, in defined intervals ranging from 1 to 360 days. As the line
of credit is drawn or reprices, the Company enters into a contract and
selects the term and the interest rate option it desires. If the Company
selects a contract based upon LIBOR plus 2.0% - 2.25%, then the interest
rate becomes fixed for the term selected. Otherwise, the contract rate
varies based upon the appropriate index.
At December 31, 1996, $42,700 is outstanding under the line of
credit in two separate contracts. One contract in the amount of $30,700 is
priced at 7.63% and the second contract in the amount of $12,000 is priced
at 7.69%. At December 31, 1996 the prime rate, Federal Funds rate and
three month LIBOR were 8.25%, 5.02%, and 5.56%, respectively. During
1996, $73,700 of new borrowings were drawn under the line of credit and
$45,500 of principal was repaid.
The scheduled principal payments related to all debt outstanding
as of December 31, 1996 are as follows:
Year Amount
-----------------------------
1997 .......... $ 623
1998 .......... 47,081
1999 .......... 68,380
2000 .......... 8,068
2001 .......... 63,540
Thereafter......... 109,600
--------
Total .......... $297,292
========
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The maturities reflected above for 1998 include $42,700 of amounts
outstanding under the line of credit which reprice in 1997.
Pledged Assets
The aggregate net book value at December 31, 1996 and 1995 of
property pledged as collateral for indebtedness amounted to approximately
$470,126 and $441,564, respectively.
8. MINORITY INTERESTS
In connection with the formation of the Company and the
Operating Partnership, certain persons received either common stock of
the Company or Units in the Operating Partnership. A Unit in the
Operating Partnership and a share of common stock of the Company have the
same economic characteristics in as much as they effectively share
equally in the net income or loss of the Operating Partnership and any
distributions from the Operating Partnership. Beginning one year after
the closing of the Initial Offering, which occurred on July 27, 1994,
each Unit may be redeemed by holders of the Units for either one share of
common stock or, at the option of the Company, cash equal to the fair
market value of a share at the time of the redemption. When a unitholder
redeems a Unit for a share, minority interests will be reduced and
the Company's investment in the Operating Partnership will be increased.
During 1995, 94,118 Units were exchanged for shares of common stock of
the Company. The number of Units held by minority interest unitholders
were 3,675,258 and 3,670,564 at December 31, 1996 and 1995, respectively.
At December 31, 1996, the unitholders' minority interest ownership
percentage in the Operating Partnership was 19.9%.
Minority interests in the accompanying consolidated financial
statements relate to holders of Units in the Operating Partnership, the
minority interest in PRSI and the ownership of certain partnership
interests in various properties where the Operating Partnership holds a
controlling interest. The Operating Partnership acquired its controlling
partnership interests by contributing cash for, in most instances, an
agreed upon cumulative preferred return in the existing property
partnerships.
9. STOCKHOLDERS' EQUITY
Capital Stock
The Company is authorized to issue up to 100,000,000 shares of
$.01 par value common stock. On July 27, 1994, the Company completed the
Initial Offering of 13,000,000 shares of common stock and the Private
Placement of 695,000 shares of common stock at the offering price for all
shares of $21.25. In addition, on July 27, 1994, the Company issued
677,047 shares of common stock and paid $2,600 in cash in exchange for the
$17,000 note receivable from PGPSI which was issued as part of the initial
capitalization of PGPSI.
Effective July 27, 1994, the Company also issued 324,400 shares of
common stock pursuant to the Employee Restricted Stock Plan discussed
below. The value of the employee restricted stock ($6,893, representing
324,400 shares valued at the Initial Offering price of $21.25 per
share) is being amortized and recognized as compensation expense
ratably over a three to five year vesting period. Amortization of employee
restricted stock compensation for 1996, 1995 and 1994 was $2,135, $1,333
and $577, respectively, and is included in property management expense in
the accompanying consolidated statements of operations, except for $767
in 1996 of post-Measurement Date amortization primarily related to the
June 30, 1996 accelerated vesting of employee restricted stock granted to
certain employees of the commercial property services business which is
included in gain on sale of commercial property services business.
The unamortized portion of the employee restricted stock has been
classified for financial reporting purposes as a reduction to
stockholders' equity. At December 31, 1996 and 1995, 84,486 and 42,266
shares, respectively, of employee restricted stock were held by the
Company and had not been granted to employees. Accordingly, such shares
are classified as treasury shares for financial reporting purposes in the
accompanying consolidated balance sheets.
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<PAGE>
During 1996 and 1995, the Company paid quarterly dividends, with
respect to the fourth quarter of 1994 through the third quarter of 1996, of
$.465 per share of common stock. Concurrent with the quarterly dividend
payments, the Operating Partnership distributed $.465 per Unit.
Stock Plans
In connection with the Initial Offering, the Company adopted an
Employee Restricted Stock Plan (the "Initial Plan") which was designed
to retain and motivate officers and other employees. In August 1994, a
total of 324,400 shares of the Company's common stock were issued for
use in the Initial Plan. Initially, 288,800 shares of restricted stock
issued under the Initial Plan were granted to 81 employees at no cost to
the employees. The restricted shares pursuant to the Initial Plan were
treated as outstanding shares in connection with the Initial Offering.
As such, the issuance of the restricted stock had no dilutive effect on the
Company's stockholders. Generally, the Initial Plan calls for vesting in
three annual installments beginning on the third anniversary date and
ending on the fifth anniversary date. During the vesting period the
restricted shares are non-transferable but entitle the participants to all
other rights of a stockholder, including the right to vote and receive
dividends. During 1995, 10,000 shares originally issued under the Initial
Plan were granted to certain employees. Additionally, management
redeemed 16,666 shares and eliminated the vesting requirements for
10,134 shares granted to employees terminated in connection with the
realignment of PGPSI. In 1996, 9,525 additional shares were granted to
employees and 51,745 shares were redeemed. The vesting was accelerated
and eliminated on 129,380 shares in 1996 including 90,643 shares on
which the vesting was accelerated in connection with the sale of the
commercial property services business on June 30, 1996. The related
amortization of compensation expense in 1996 and 1995 was adjusted
accordingly. At December 31, 1996, 100,400 shares of restricted stock
issued to 18 employees under the Initial Plan were outstanding.
The Company has established the 1994 Employee Stock Option, Unit
Option, Restricted Stock, Restricted Unit and Restricted Stock Right
Plan, as amended and restated, (the "Employee Plan") for the purpose of
attracting, retaining, and motivating officers and other employees. The
Employee Plan authorizes the issuance of up to 1,460,000 shares of common
stock and/or Units pursuant to options or restricted shares or Units
granted or issued under the plan. The Employee Plan limits the number of
shares of restricted stock, stock rights and/or Units, which are
eligible for grant at no cost, to 485,000 shares/Units. Options granted
under the Employee Plan have a ten year term and will have such pricing,
vesting and other terms as the committee approving the grant will
determine. Effective August 23, 1994, options to purchase 80,000
shares of common stock were granted to eight officers under the
Employee Plan. These options are at a price of $21.25 per share and are
fully vested. Effective April 4, 1995, options to purchase an additional
283,000 shares were granted to 64 officers and employees under the
Employee plan. These options are at a price of $17.25 and vest over
periods ranging from three to five years. Effective August 22, 1995,
options to purchase an additional 4,000 shares were granted to four
officers and employees under the Employee Plan at a price of $17.50
under the same vesting provisions. During 1996, no additional options
were granted. On September 11, 1996, restricted stock rights to
receive 79,500 shares of restricted stock upon the occurrence of certain
triggering events including the merger, consolidation or reorganization
of the Company were issued to five officers of the Company. The
proposed merger with Camden Property Trust discussed in Note 17 will
constitute a triggering event. At December 31, 1996, no shares of
restricted stock and/or Units had been granted under the Employee Plan.
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<PAGE>
The Company has adopted a Non-Employee Director Stock Option Plan
(the "Director Plan"). Under the Director Plan, each non-employee
director, in connection with the Initial Offering, was granted options
to purchase 5,000 shares of common stock. The Director Plan also
provides for automatic annual grants of 2,500 shares of common stock
following the annual election of directors. The exercise price of all
options granted under the Director Plan is the fair market value of the
common stock on the date of grant. Each option granted has a term of ten
years and vests six months after the date of grant. At December 31, 1996,
options to purchase 60,000 shares of common stock had been granted under
the Director Plan.
The Company has elected to follow APB 25 and related
Interpretations in accounting for its employee stock options because,
as discussed below, the alternative fair value accounting provided
for under FAS 123 requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per
share is required by FAS 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of
that Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1995, respectively: risk-free
interest rates of 6.22% and 5.39%; a dividend yield of approximately 10.5%;
volatility factor of the expected market price of the Company's common
stock of .171; and a weighted-average expected life of the options of 5
years.
The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period.
The Company's pro forma net income for 1996 and 1995 was $21,201 and
$10,034, respectively, with no impact on reported earnings per share.
Because FAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
1997.
A summary of the Company's stock option activity, and related
information for the years ended December 31 follows:
1996 1995 1994
---------------- --------------- ----------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
------- -------- ------- -------- ------- --------
Outstanding-beginning
of year 396 $18.38 110 $21.25 - $ -
Granted 15 17.75 302 17.27 110 21.25
Exercised - - - - - -
Forfeited (134) 17.26 (16) 17.25 - -
--- ------ --- ------ --- ------
Outstanding-end of year 277 $18.89 396 $18.38 110 $21.25
=== ====== === ====== === ======
Exercisable at end
of year 140 $20.49 125 $20.82 110 $21.25
Weighted-average fair
value of options
granted during the
year $ .67 $ .51
Exercise prices for options outstanding as of December 31, 1996 ranged
from $17.25 to $21.25. The weighted-average remaining contractual
life of those options is 8.06 years.
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<PAGE>
10. EARNINGS PER SHARE
Per share amounts are computed based on the weighted average
number of shares outstanding during the period (14,791,165 in 1996,
14,698,336 in 1995 and 14,513,503 in 1994). Earnings per share will be
unaffected by partners who elect to convert Units in the Operating
Partnership to shares of common stock in the Company as unitholders and
stockholders effectively share equally in the net income of the Operating
Partnership. The assumed exercise of outstanding stock options, using the
treasury stock method, is not dilutive and therefore, is not considered in
determining shares outstanding.
For the years ended December 31, 1996 and 1995, the Company had
earnings of $1.43 and $.68 per share, respectively.
For the period July 27, 1994 through December 31, 1994, the
Company incurred a loss before extraordinary items of $(.06) per share.
The effect of the extraordinary gain from the forgiveness of debt, net of
minority interests, increased earnings per share by $.47, while the
extraordinary loss from the early extinguishment of debt, net of minority
interests, decreased earnings per share by $(.36), resulting in net
income per share of $.06. During the period, the Company incurred $7,796
in non-recurring reorganization costs, principally legal, accounting,
and other costs incurred in connection with the formation of the Company.
The effect of these costs, net of minority interests of $1,668, was to
reduce the income (loss) before the extraordinary items by $(.42) per
share.
11. RELATED PARTY TRANSACTIONS
On August 8, 1994, the Company exercised an option to purchase a 19.05
acre tract of partially developed land from a corporation whose sole
shareholders were three executive officers (including two who are also
directors) of the Company. The option agreement required consideration of
$128 in cash, and Units with a value of $1,568, as well as reimbursement
of all pre-development costs totaling $367. The Unit portion of the
purchase price was paid one year from the date of purchase, based on the
value of Units at the election date of the option (August 8, 1994) and
totaled 73,783 Units.
Effective October 1, 1995, the Company issued 42,353 Units with a
value of $900 (based on the price of the Company's stock at the Initial
Offering date) to an entity whose sole shareholders were two executive
officers and directors of the Company. The Units represented partial
consideration for the purchase of partnership interests.
In December 1995, the Company purchased the Overlook Apartments,
formerly known as The Phoenix, from a partnership which was owned by
affiliates of the Company and outside investors. As consideration for the
purchase, the Company paid cash of $8,500 and assumed $300 of debt payable
to affiliates. Affiliates of the Company did not receive any of the cash
portion of the purchase price. However, on January 3, 1996, the $300
of affiliated debt was repaid by the Company with cash of $200 and the
issuance of 4,694 Units.
The Company, through PRSI (and previously PGPSI), uses a
centralized disbursement and receipt system whereby, for certain
properties owned by the Company and other affiliated properties, all
project deposits are transferred to a central operating account and all
expenses and other disbursements are paid therefrom. In other cases,
certain properties maintain a separate cash account for recording project
receipts and disbursements; however, certain common operating expenses
are paid through the centralized account and are subsequently reimbursed
by the appropriate properties. Additionally, cash of PRSI (and
previously PGPSI) is periodically transferred to the Operating
Partnership for short term investment purposes.
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<PAGE>
PRSI (and previously PGPSI) provides services to affiliated
partnerships on a contractual basis. The related party fees and expenses
for such services are reflected in the accompanying consolidated financial
statements.
At December 31, 1996, the Company has three notes receivable from
Paradim in the total outstanding amount of $9,839. One note, in the
outstanding amount of $9,723 at December 31, 1996, represents amounts
advanced to Paradim to fund construction of Brassfield Park, a planned
336-unit multifamily residential complex under development in Greensboro,
North Carolina. Under the terms of the loan agreement effective April 1,
1996, Paradim may borrow up to $11,500 from the Company. The loan bears
interest at a variable rate based on the non-default rate of interest
charged to the Company under its line of credit. For the period April 1
through December 31, 1996, the interest rate averaged approximately
7.41% per annum. Monthly payments of interest only are due until
maturity on September 30, 1997 at which time the outstanding principal and
accrued interest will be due and payable. The loan is collateralized by
Brassfield Park. The other two notes, in the total amount of $116, were
executed in connection with the formation of Paradim and relate to the
redemption of certain of the Company's interests in the properties
contributed to Paradim. These two notes bear interest at 8% per annum and
mature on June 30, 1997.
12. COMMITMENTS AND CONTINGENCIES
Commitments
PRSI is a party to office and equipment leases with varying terms
which expire over the next eight years. Future minimum lease
payments for noncancelable office and equipment leases for the
next five years and thereafter, as of December 31, 1996, are as follows:
Year Capital Operating
---- ------- ---------
1997 ........................... $35 $ 793
1998 ........................... 10 459
1999 ........................... 5 458
2000 ........................... - 473
2001 ........................... - 391
Thereafter .......................... - 1,135
--- ------
Total minimum lease payments........ 50 $3,709
======
Amounts representing interest....... (3)
---
Present value of net minimum
lease payments.................... $47
===
In addition, the Company has entered into a non-recourse ground
lease, which commenced on October 24, 1996, related to approximately
27.47 acres in Louisville, Kentucky for potential development in 1997. The
ground lease allows the Company to develop, at its' discretion, a one
or two phase multifamily residential community on the leased acreage.
The lease has a term of 40 years and under certain conditions, the
Company has the option to purchase the land. Monthly lease payments are
required based upon the number of apartment units developed and include
certain scheduled payment increases, some of which are tied to the
Consumer Price Index ("CPI"). The Company believes that the monthly lease
payments will range between $7 and $14 over the lease term, subject to CPI
adjustments. The monthly lease payments have been deferred until July 1,
1997.
The eligible employees of PRSI (and previously PGPSI) and the
Predecessors participate in a contributory employee savings plan. Under
the plan, PRSI may make matching contributions with respect to
contributions made by eligible employees. Expenses under the plan for the
years ended December 31, 1996, 1995 and 1994 were not material.
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Contingencies
The Company is subject to various legal proceedings and claims that
arise in the ordinary course of business. These matters are generally
covered by insurance. While the resolution of these matters cannot be
predicted with certainty, management believes that the final outcome of
such matters will not have a material adverse effect on the financial
position or results of operations of the Company.
In connection with the Initial Offering, environmental consultants
were engaged to perform environmental assessments on each of the
properties. The environmental assessments identified certain
properties with underground or above ground storage tanks, pipelines,
asbestos containing materials or radon levels in excess of the
Environmental Protection Agency standards and noted that one property is
located within one-half mile of a site included on the National Priorities
List issued pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act, as amended. The environmental
assessments revealed only one property, Knollwood I, that had
contamination in significant amounts requiring remediation. Remediation was
successfully completed in 1994 at a cost of $70. Management intends to
monitor all properties for possible environmental impact. As of
December 31, 1996 no remedial actions are currently considered necessary.
13. SEGMENT OPERATIONS
The Operating Partnership is engaged in the ownership and
rental of residential apartment communities, office buildings and retail
properties and PRSI (and previously PGPSI) provides property
management, construction, development and other services to both
related and unrelated parties. As discussed in Note 3, the Company
sold its wholly-owned office building and retail properties in the
fourth quarter of 1996. Revenue from property management and other
services provided to affiliated partnerships, which collectively
represent a major customer of PRSI (and previously PGPSI), was
approximately 39%, 28%, 24% and 30% of total property services revenue
for the years ended December 31, 1996 and 1995, the period July 27 to
December 31, 1994 and the period January 1 to July 26, 1994, respectively.
Revenue from property management and other services provided to the
consolidated group are recognized in the period in which the services
are provided and are eliminated in consolidation. The following table
presents operating and other information divided among the two primary
lines of the Company's and Predecessors' business.
Property
Management
and Other
Rental Services Combined
Operations Operations Elimination Total
---------- ---------- ----------- --------
YEAR ENDED DECEMBER 31, 1996:
Revenue - third party........ $ 94,792 $ 5,977 $ - $100,769
Revenue - affiliates......... 161 3,799 - 3,960
Intersegment revenue......... 2,074 3,150 (5,224) -
-------- ------- ------- --------
Total revenue............. 97,027 12,926 (5,225) 104,729
Operating expenses........... (44,430) (17,183) 2,904 (58,709)
------- ------- -------- -------
Operating profit........... $ 52,597 $(4,257) $(2,320) $ 46,020
======== ======= ======== =======
Depreciation and amortization $ 17,826 $ 1,726 $ - $ 19,552
======== ======= ======== =======
Identifiable assets at
December 31, 1996.......... $561,473 $ 9,866 $(34,472) $536,867
======== ======= ======== ========
Capital expenditures and
investments................ $ 70,039 $ 3,664 $ - $ 73,703
======== ======= ======== ========
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Property
Management
and Other
Rental Services Combined
Operations Operations Elimination Total
---------- ---------- ----------- --------
YEAR ENDED DECEMBER 31, 1995:
Revenue - third party........ $ 83,902 $17,076 $ - $100,978
Revenue - affiliates......... - 6,590 - 6,590
Intersegment revenue......... 2,342 2,840 (5,182) -
-------- ------- -------- --------
Total revenue.............. 86,244 26,506 (5,182) 107,568
Operating expenses........... (39,092) (23,684) 2,701 (60,075)
-------- ------- -------- --------
Operating profit........... $ 47,152 $ 2,822 $ (2,481) $ 47,493
======== ======= ======== ========
Depreciation and amortization $ 15,447 $ 3,114 $ - $ 18,561
======== ======= ======== ========
Identifiable assets at
December 31, 1995.......... $552,186 $20,422 $(32,997) $539,611
======== ======= ======== ========
Capital expenditures and
investments................ $115,495 $ 2,258 $ - $117,753
======== ======= ======== ========
PERIOD JULY 27 TO DECEMBER 31, 1994:
Revenue - third party........ $ 33,731 $ 8,326 $ - $ 42,057
Revenue - affiliates......... - 2,655 - 2,655
Intersegment revenue......... 877 1,057 (1,934) -
-------- ------- -------- --------
Total revenue.............. 34,608 12,038 (1,934) 44,712
Operating expenses........... (15,146) (10,671) 1,019 (24,798)
-------- ------- -------- --------
Operating profit .......... $ 19,462 $ 1,367 $ (915) $ 19,914
======== ======= ======== ========
Depreciation and amortization $ 6,393 $ 626 $ - $ 7,019
======== ======= ======== ========
Identifiable assets at
December 31, 1994.......... $455,461 $21,437 $(34,350) $442,548
======== ======= ======== ========
Capital expenditures and
investments................ $197,577 $ 3,505 $ - $201,082
======== ======= ======== ========
PERIOD JANUARY 1 TO JULY 26, 1994:
Revenue - third party........ $ 41,359 $10,846 $ - $ 52,205
Revenue - affiliates......... - 4,737 - 4,737
Intersegment revenue......... - 2,185 (2,185) -
-------- ------- -------- --------
Total revenue.............. 41,359 17,768 (2,185) 56,942
Operating expenses........... (20,811) (14,593) 2,029 (33,375)
-------- ------- -------- --------
Operating profit .......... $ 20,548 $ 3,175 $ (156) $ 23,567
======== ======= ======== ========
Depreciation and amortization $ 6,448 $ 258 $ (207) $ 6,499
======== ======= ======== ========
Identifiable assets at
July 26, 1994.............. $264,538 $ 3,717 $ (5,579) $262,676
======== ======= ======== ========
Capital expenditures and
investments................ $ 3,029 $ 314 $ (114) $ 3,229
======== ======= ======== ========
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14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires
disclosure about fair value for all financial instruments, whether or not
recognized, for financial statement purposes. Disclosure about fair
value of financial instruments is based on pertinent information
available to management as of December 31, 1996 and December 31, 1995.
Considerable judgment is necessary to interpret market data and develop
estimated fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize on
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
Management estimates that the fair value of (i) cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximate carrying value due to the relatively short maturity of
these instruments; (ii) the interest rate swap agreement approximates
carrying value based upon the terms of the agreement relative to current
interest rates; and (iii) notes payable approximate carrying value
based upon the Company's effective borrowing rate for issuance of debt with
similar terms and remaining maturities.
15. SUPPLEMENTAL CASH FLOW INFORMATION
In connection with the business combination on July 27, 1994,
certain non-cash transactions were recorded by the Company,
including: (i) basis adjustments for the purchase of partnership
interests for cash or Units, or assumption of debt, (ii) elimination
of historical basis of certain assets purchased for cash, (iii)
adjustments resulting from the transfer of the property management,
leasing, construction and development businesses of the Predecessors to
PGPSI, (iv) elimination of net working capital due to/from prior owners at
closing, (v) issuance of stock in exchange for note receivable from
PGPSI, (vi) issuance of stock pursuant to the Employee Restricted Stock
Plan, (vii) recognition of mortgage principal and accrued interest
concessions by lenders, (viii) write-off of deferred financing costs
associated with debt repaid at closing, (ix) write-off of fully
amortized deferred charges, (x) elimination of partner loans, and
(xi) allocation of capital to minority interests. These
transactions, with respect to the elimination of historical basis on
assets purchased for cash, the adjustments resulting from transfer of the
property management, leasing, construction and development businesses
to PGPSI and the net working capital adjustments, also include
certain cash components. These cash adjustments are presented as deemed
distributions at formation in the accompanying consolidated statements of
cash flows.
Certain non-cash transactions were also recorded effective October 1,
1995 in connection with the acquisition of partnership interests related
to Spanish Trace for a combination of cash and Units and on April 1,
1996 in connection with the formation of Paradim and the Company's
corresponding contribution of certain properties that were previously
wholly-owned. The aggregate effect of the non-cash transactions recorded
in connection with the business combination in 1994, the acquisition of
partnership interest related to Spanish Trace in 1995 and the formation
of Paradim in 1996 are summarized as follows:
78
<PAGE>
Period
Year Ended December 31, July 27 to
------------------------- December 31,
1996 1995 1994, as Restated
--------------------------------------------
Operating real estate assets $(35,461) $15,968 $(39,575)
Accumulated depreciation - (8,280) 26,973
Construction in process (6,293) - -
Accounts receivable (18) - (171)
Advances to affiliates (403) - 155
Investment in ventures 14,452 - 7,289
Notes receivables from venture 116 - -
Deferred charges, net (85) 222 (1,342)
Other assets (36) - (749)
--------- ------- --------
$(27,728) $ 7,910 $ (7,420)
========= ======= ========
Notes payable $(25,650) $ 9,856 $(28,956)
Accrued interest payable (166) - (10,822)
Accrued real estate taxes (205) - (2,875)
Accounts payable and accrued
liabilities (1,566) 13 (2,647)
Partners loans - - (10,650)
Tenant security deposits (141) - (1,231)
Minority interests - - 56,886
Stockholders' equity - (1,959) (7,125)
--------- ------- --------
$(27,728) $ 7,910 $ (7,420)
========= ======= ========
Other non-cash investing and financing activities during 1996,
1995 and 1994 are as follows:
Company Predecessor
--------------------------- -----------
Period
July 27 to Period
Year Ended December January 1
December 31, 31, 1994, to
----------------- as July 26,
1996 1995 Restated 1994
------- ------- -------- --------
Construction in process payables $ 3,537 $ 2,053 $ 214 $ -
Additions to operating real
estate assets transferred from
construction 43,656 22,546 - -
Accrual of distributions from
unconsolidated ventures - - 242 -
Accrual of liability associated
with the acquisitions of land
for Units - (1,568) 1,568 -
Mortgage principal concessions
recognized prior to the business
combination - - - 1,776
Debt assumed in connection with the
acquisition of property 6,357 300 - -
Conversion of Units to common stock - 1,215 - -
Partial repayment of note payable to
affiliates with Units 100 - - -
Accrued net selling costs related to
sale of commercial property services
business 1,216 - - -
Deferred gain on sale of commercial
property services business 1,100 - - -
79
<PAGE>
16. QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following is a summary of quarterly results of operations for the
years ended December 31, 1996 and 1995:
First Second Third
Quarter, Quarter, Quarter,
as as as
Restated Restated Restated Fourth
for 1995 for 1995 for 1995 Quarter Total
-------- -------- -------- ------- -------
Year Ended December 31, 1996:
Revenues $28,538 $26,145 $25,202 $24,844 $104,729
Net income 1,378 9,203 1,137 9,497 21,215
Per share data:
Net income 0.09 0.62 0.08 0.64 1.43
Year Ended December 31, 1995:
Revenues $25,303 $26,266 $26,897 $29,102 $107,568
Net income 2,054 2,677 3,091 2,241 10,063
Per share data:
Net income 0.14 0.18 0.21 0.15 0.68
As described in Note 2, the Company, in the fourth quarter of 1995,
changed its method of accounting for its investment in PGPSI from the
cost method to consolidation. Accordingly, all previously reported
periods have been restated to reflect this change in accounting method.
The effect of this change on the reported results of operations for the
first quarter, second quarter and third quarter of 1995 was an increase
in revenue of $5,056, $5,089, and $5,069, a decrease in net income of
$(889), $(229), and $(163), and a corresponding decrease in net income
per share of $(.06), $(.02), and $(.01), respectively.
17. PROPOSED MERGER
On December 16, 1996 the Company executed an Agreement and Plan of
Merger (the "Agreement") with Camden Property Trust ("Camden") which
provides for, among other things, the merger of the Company into a
wholly-owned subsidiary of Camden through a tax-free exchange of each
share of the Company's common stock for .64 common shares of beneficial
interest of Camden, whereby stockholders of the Company will become
shareholders of Camden.
The Company has the option to terminate the Agreement in the
event the average closing price of Camden common shares ("Average
Closing Price") falls below $25.67 during a specified pricing period prior
to a special meeting of the stockholders of the Company. In the event the
Company elects to terminate the Agreement, Camden has the option of
adjusting the exchange ratio of .64 to equal a number obtained by dividing
$16.43 by the Average Closing Price.
An affirmative vote of holders of two-thirds of the outstanding
shares of the Company's common stock is required to approve the
Agreement. A special meeting of the Company's stockholders is scheduled
for April 15, 1997 to vote on the Agreement.
80
<PAGE>
18. SUBSEQUENT EVENTS (Unaudited)
On January 2, 1997, the Company declared a dividend, with respect
to the fourth quarter of 1996, of $.465 per share of common stock which
was paid on January 23, 1997 to holders of record on January 13, 1997.
Concurrent with the dividend announcement, the Operating Partnership
authorized a distribution of $.465 per Unit which was paid on January
23, 1997 to holders of record on January 13, 1997.
In January 1997, the Company sold the 232 unit Brookfield
apartments in Dallas, Texas for $5,459, the 352 unit Westchase apartments
in Charleston, South Carolina for $11,130 and the 251 unit San Miguel
apartments in St. Louis, Missouri for $6,875. Net proceeds from the sale
of these properties were used to repay borrowings under the Company's
line of credit, fund multifamily development expenditures and for
general working capital purposes.
On March 18, 1997, the Company declared a dividend, with respect
to the first quarter of 1997, of $.3136 per share of common stock,
payable April 15, 1997 to holders of record on March 31, 1997.
Concurrent with the dividend announcement, the Operating Partnership
authorized a distribution of $.3136 per Unit, payable April 15, 1997 to
holders of record on March 31, 1997.
81
PAGE
<PAGE>
<TABLE>
<CAPTION> Schedule III
PARAGON GROUP, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(Dollars in thousands)
Gross Amount at which
Initial Costs Carried at December 31, 1996
------------------ Costs -------------------------------------
Buildings Capitalized Buildings
and Subsequent and Construc-
Notes Improve- to Acqui- Improve- tion in
Property Name Payable Land ments sition Land ments Process Total
- ------------------ ----------- ------- --------- -------- ------ --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FLORIDA
4th St. Station I $ 5,120( 3) $ 800 $ - $ 12,989 $ 1,499 $ 12,290 $ - $ 13,789
4th St. Station II 5,070( 3) 656 - 11,706 1,643 10,719 - 12,362
Broadmoor 4,660( 2) 1,536 5,265 4,118 2,080 8,839 - 10,919
Chasewood 2,850( 2) 992 4,534 1,739 1,182 6,083 - 7,265
Citrus Lakes I - 208 2,942 276 208 3,218 - 3,426
Coco West I 2,670( 3) 68 - 8,450 630 7,888 - 8,518
Coco West II 3,780( 3) 111 - 11,766 589 11,288 - 11,877
Dolphin Pointe 7,250( 2) 1,456 25 15,416 1,919 14,978 - 16,897
Greenhouse 3,580( 3) 808 - 9,797 1,146 9,459 - 10,605
Grove 2,700( 2) 1,431 4,269 355 1,431 4,624 - 6,055
Heron Pointe -(11) 990 - 12,412 990 12,412 - 13,402
Landtree 3,780( 3) 624 - 8,261 1,277 7,608 - 8,885
Lookout Pointe 6,700( 2) 1,563 - 13,906 1,823 13,646 - 15,469
Parsons Run 3,840( 3) 902 - 9,325 1,424 8,803 - 10,227
Renaissance Pointe -(11) 1,564 - 13,209 1,564 13,209 - 14,773
Renaissance Pointe II - 2,067 - 8 - - 2,075 2,075
The Reserve 3,100( 2) 1,060 - 6,374 1,093 6,341 - 7,434
Schooner Bay 7,392( 7) 1,518 8,966 393 1,518 9,359 - 10,877
Summerplace I & II 6,330( 3) 1,016 - 13,140 1,729 12,427 - 14,156
Summerplace III 3,720( 3) 753 - 7,489 1,117 7,125 - 8,242
Summerset Bend 4,500( 3) 779 - 9,499 1,141 9,137 - 10,278
The Vineyard 10,500( 9) 2,602 - 15,211 3,118 14,695 - 17,813
KENTUCKY
Copper Creek 9,130( 8) 649 - 6,760 649 6,760 - 7,409
Deerfield 9,886( 8) 1,610 - 18,981 2,421 18,170 - 20,591
Glenridge 3,695( 9) 970 - 6,634 1,119 6,485 - 7,604
Post Oak 2,450( 2) - - 3,806 339 3,467 - 3,806
Sundance 2,800( 2) 447 - 6,027 738 5,736 - 6,474
MISSOURI
Camden Passage 7,350( 9) 1,345 9,455 2,658 1,817 11,641 - 13,458
Camden Passage II -(11) 1,169 - 10,748 1,169 6,817 3,931 11,917
The Cove 12,480( 5) 2,308 10,418 6,564 3,505 15,785 - 19,290
Knolls -(11) 978 3,778 363 980 4,139 - 5,119
Knollwood I 7,215( 5) 1,764 7,928 407 1,764 8,335 - 10,099
Knollwood II 7,027( 5) 1,272 9,328 148 1,272 9,476 - 10,748
Pear Tree -(11) 366 2,684 212 366 2,896 - 3,262
Spanish Trace 9,764( 4) 2,445 15,508 785 2,445 16,293 - 18,738
Sunswept -(11) 1,813 5,496 375 1,813 5,871 - 7,684
Tempo 6,205( 5) 2,168 5,982 814 2,168 6,796 - 8,964
Westchase Park 4,900( 2) - - 11,763 1,024 10,739 - 11,763
Westgate I 4,500( 2) 380 3,165 3,561 615 6,491 - 7,106
Westgate II 8,200( 2) 790 - 17,115 2,131 15,774 - 17,905
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Schedule III
Net Date of
Accumulated Real Estate Construction/ Depreciable
Property Name Depreciation Assets Acquisition Lives-Years
- ------------------ ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
FLORIDA
4th St. Station I 4,896 8,893 1982 5-40 Years
4th St. Station II 3,555 8,807 1983 5-40 Years
Broadmoor 2,650 8,269 1986/1987 5-40 Years
Chasewood 2,052 5,213 1985/1987 5-40 Years
Citrus Lakes I 234 3,192 1976 5-40 Years
Coco West I 2,615 5,903 1983 5-40 Years
Coco West II 4,108 7,769 1985 5-40 Years
Dolphin Pointe 3,956 12,941 1989 5-40 Years
Greenhouse 4,180 6,425 1982 5-40 Years
Grove 354 5,701 1973 5-40 Years
Heron Pointe 999 12,403 1996 5-40 Years
Landtree 2,948 5,937 1983 5-40 Years
Lookout Pointe 5,770 9,699 1987 5-40 Years
Parsons Run 3,175 7,052 1986 5-40 Years
Renaissance Pointe 278 14,495 1996(1) 5-40 Years
Renaissance Pointe II - 2,075 (1) -
The Reserve 1,528 5,906 1991 5-40 Years
Schooner Bay 274 10,603 1995 5-40 Years
Summerplace I & II 4,992 9,164 1984 5-40 Years
Summerplace III 2,714 5,528 1986 5-40 Years
Summerset Bend 3,756 6,522 1984 5-40 Years
The Vineyard 3,655 14,158 1990 5-40 Years
KENTUCKY
Copper Creek 3,126 4,283 1987 5-40 Years
Deerfield 4,901 15,690 1987 5-40 Years
Glenridge 1,786 5,818 1990 5-40 Years
Post Oak 1,940 1,866 1981 5-30 Years
Sundance 2,671 3,803 1975 5-40 Years
MISSOURI
Camden Passage 2,251 11,207 1989 5-40 Years
Camden Passage II 32 11,885 (1) 5-40 Years
The Cove 2,950 16,340 1990 5-40 Years
Knolls 329 4,790 1973/1974 5-40 Years
Knollwood I 586 9,513 1981 5-40 Years
Knollwood II 673 10,075 1985 5-40 Years
Pear Tree 221 3,041 1967 5-40 Years
Spanish Trace 9,175 9,563 1972/1995 5-40 Years
Sunswept 469 7,215 1971/1994 5-40 Years
Tempo 592 8,372 1975 5-40 Years
Westchase Park 3,288 8,475 1986 5-40 Years
Westgate I 2,675 4,431 1973 5-40 Years
Westgate II 6,561 11,344 1980 5-40 Years
</TABLE>
82
PAGE
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE III
PARAGON GROUP, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(Dollars in thousands)
Gross Amount at which
Initial Costs Carried at December 31, 1996
------------------ Costs -------------------------------------
Buildings Capitalized Buildings
and Subsequent and Construc-
Notes Improve- to Acqui- Improve- tion in
Property Name Payable Land ments sition Land ments Process Total
- ------------------ ----------- ------- --------- -------- ------ --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NORTH CAROLINA
Copper Creek $ 2,600( 2) $ 930 $ - $ 6,628 $ 928 $ 6,630 $ - $ 7,558
Eastchase 2,949( 9) 1,265 - 6,116 1,352 6,029 - 7,381
Falls 5,700( 2) 1,010 - 11,308 1,475 10,843 - 12,318
Glen 6,572( 9) 1,713 6,808 196 1,713 7,004 - 8,717
Habersham Pointe - 1,124 10,273 3 1,124 10,276 - 11,400
Pinehurst 14,000( 5) 3,591 15,213 356 3,591 15,569 - 19,160
The Park -(11) 906 - 8,568 1,110 1,031 7,333 9,474
River Oaks 6,350( 6) 1,056 8,635 5 1,056 8,640 - 9,696
TEXAS
Chesapeake 3,300( 2) 1,061 4,939 3,633 1,471 8,162 - 9,633
Fairlane 3,461( 9) 710 - 9,149 1,449 8,410 - 9,859
Highland Trace -(11) 1,450 2,871 835 1,539 3,617 - 5,156
Los Rios 9,000( 5) 1,494 - 9,572 1,517 9,549 - 11,066
Nob Hill 9,050( 5) 2,944 5,714 6,787 3,462 11,983 - 15,445
Stone Creek -(11) 1,696 367 10,182 1,696 10,549 - 12,245
Stone Gate -(11) 2,275 - 13,521 2,275 13,521 - 15,796
Miscellaneous Assets 3(10) - - 4,946 - 4,946 - 4,946
-------- ------- -------- -------- ------- -------- ------- --------
246,129 67,203 154,563 375,365 81,214 502,578 13,339 597,131
-------- ------- -------- -------- ------- -------- ------- --------
Real estate held for sale:
San Miguel
(Missouri) -(11) 1,321 5,487 390 1,321 5,877 - 7,198
Westchase
(South Carolina) 4,440( 3) 1,496 - 11,631 1,895 11,232 - 13,127
Brookfield
(Texas) 4,023( 5) 1,481 2,643 1,904 1,578 4,450 - 6,028
-------- ------- -------- -------- ------- -------- ------- --------
8,463 4,298 8,130 13,925 4,794 21,559 - 26,353
-------- ------- -------- -------- ------- -------- ------- --------
Total $254,592 $71,501 $162,693 $389,290 $86,008 $524,137 $13,339 $623,484
======== ======= ======== ======== ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Net Date of
Accumulated Real Estate Construction/ Depreciable
Property Name Depreciation Assets Acquisition Lives-Years
- --------------------- ------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
NORTH CAROLINA
Copper Creek $ 1,637 5,921 1989 5-40 Years
Eastchase 2,675 4,706 1986 5-40 Years
Falls 4,338 7,980 1984 5-40 Years
Glen 488 8,229 1980 5-40 Years
Habersham Pointe 146 11,254 1986 5-40 Years
Pinehurst 843 18,317 1967/1994 5-40 Years
The Park 3 9,471 (1) 5-40 Years
River Oaks 43 9,653 1985 5-40 Years
TEXAS
Chesapeake 2,925 6,708 1982 5-40 Years
Fairlane 3,847 6,012 1980 5-40 Years
Highland Trace 1,142 4,014 1985/1987 5-40 Years
Los Rios 1,744 9,322 1992 5-40 Years
Nob Hill 2,676 12,769 1986/1987 5-40 Years
Stone Creek 484 11,761 1995 5-40 Years
Stone Gate 241 15,555 1996(1) 5-40 Years
Miscellaneous Assets 1,682 3,264 1994/1995 5 Years
------- -------
127,829 469,302
------- -------
Real estate held for sale:
San Miguel
(Missouri) 433 6,765 1970/1994 5-40 Years
Westchase
(South Carolina) 4,162 8,965 1986 5-40 Years
Brookfield
(Texas) 1,154 4,874 1986/1987 5-40 Years
------- ------
5,749 20,604
------- ------
Total $133,578 489,906
======== =======
</TABLE>
<TABLE>
<S> <C>
(1) Construction still in process and/or property still in initial lease-up phase at December
31, 1996.
(2) These properties serve as collateral for the "Pool A" mortgage note payable obtained
concurrent with the Initial Offering in the amount of $61,710.
(3) These properties serve as collateral for the "Pool B" mortgage notes payable obtained
concurrent with the Initial Offering in the amount of $46,830.
(4) This property serves as collateral for the mortgage note payable insured by HUD assumed
effective October 1, 1995 in the outstanding amount of $9,764 at December 31, 1996.
(5) These properties serve as collateral for mortgage notes payable obtained in December 1995
in the amount of $69,000.
(6) This property serves as collateral for the mortgage note payable assumed effective
November 8, 1996 in the outstanding amount of $6,350 at December 31, 1996.
(7) This property serves as collateral for mortgage notes payable obtained in November 6, 1996
in the outstanding amount of $7,392 at December 31, 1996.
(8) These properties serve as collateral for housing revenue bonds assumed at the Initial
Offering in the outstanding amount of $19,016 at December 31, 1996.
(9) These properties serve as collateral for mortgage notes payable assumed at the Initial
Offering in the outstanding amount of $34,527 at December 31, 1996.
(10) A portion of these assets with a net book value at December 31, 1996 of $5 serve as
collateral for a vehicle loan in the outstanding amount of $3 at December 31, 1996.
(11) These properties serve as collateral for the line of credit facility in the outstanding
amount of $42,700 at December 31, 1996.
</TABLE>
83
PAGE
<PAGE>
PARAGON GROUP INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
- ---------------------------------------------------------------------------
December 31, 1996
(Dollars in thousands)
A summary of activity for real estate and accumulated depreciation
is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1994,
1996 1995 as Restated
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate:
Balance at beginning of year $631,471 $513,761 $361,554
Additions and basis adjustments 73,703 117,753 204,311
Dispositions and other (81,690)(3) (43) (52,104)(1)
-------- -------- --------
Balance at end of year $623,484 $631,471 $513,761
======== ======== ========
Accumulated Depreciation:
Balance at beginning of year $126,437 $101,984 $116,031
Depreciation and basis
adjustments 18,904 (4) 24,462 (2) 12,926
Dispositions and other (11,763) (9) 26,973(1)
-------- -------- --------
Balance at end of year $133,578 $126,437 $101,984
======== ======== ========
</TABLE>
(1) Represents the non-cash effect of the elimination of the
historical basis of certain assets purchased for cash and
adjustments resulting from the transfer of the property
management, leasing, construction and development businesses of
the Predecessors to PGPSI pursuant to the formation of the
Company on July 27, 1994.
(2) Includes an $8,280 adjustment to accumulated depreciation related
to the acquisition of a partnership interest (Spanish Trace) for
Units.
(3) Includes a $41,754 adjustment related to the contribution of
property to Paradim.
(4) Includes $45 of Post-Measurement Date depreciation related to the
commercial property services business.
Depreciation and amortization in buildings and improvements reflected
in the statements of operations are calculated on a straight-line basis
over the estimated useful lives of the properties (buildings and related
land improvements - 10 to 40 years; furniture, fixtures and equipment -
three to 10 years; and tenant improvements - over the life of the related
tenant lease).With respect to the apartment properties, the Company
capitalizes floor and window coverings and depreciates such items over five
years; appliances and heating, ventilating and air conditioning equipment
are capitalized and depreciated over ten years.
As of December 31, 1996, 1995 and 1994, the aggregate cost for federal
income tax purposes was approximately $525,000, $532,000 and $414,000,
respectively.
84
PAGE
<PAGE>
ATTACHMENT B
CAMDEN PROPERTY TRUST
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
Basis of Presentation
The Unaudited Pro Forma Combined Statement of Operations for the year
ended December 31, 1996 is presented as if Paragon's merger into Camden
Property Trust ("Camden" or the "Company") had occurred on January 1, 1996.
The Unaudited Pro Forma Combined Statement of Operations gives effect to
the merger under the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16, and as if the combined entity
qualifying as a REIT, distributed at least 95% of its taxable income, and
therefore, incurred no federal income tax liability for the period
presented. In addition to the merger, the Unaudited Pro Forma Combined
Statement of Operations gives effect to the sale of Paragon's interest in
Paragon Group Property Services, Inc. ("PGPSI") (after spin-off of the
residential property services business) as if the sale had occurred on
January 1, 1996 (see Note B to the Unaudited Pro Forma Combined Statement
of Operations). The merger adjustments are based on certain estimates and
currently available information. Such adjustments could change as
additional information becomes available, as estimates are refined or as
additional events occur, however, management does not expect any changes in
the allocation of the purchase price to be significant. The Unaudited Pro
Forma Combined Statement of Operations is further adjusted to reflect the
effects of the conversion of $20.2 million principal amount of Camden's
7.33% Convertible Subordinated Debentures into $20.2 million of common
equity, net of costs, subsequent to December 31, 1996 and through May 25,
1997. In the opinion of management, all adjustments necessary to reflect
the effects of these transactions have been made.
The Unaudited Pro Forma Combined Statement of Operations is presented
for comparative purposes only and is not necessarily indicative of what the
actual combined results of Camden and Paragon would have been for the year
ended December 31, 1996 if the merger and the debenture conversion
adjustments had occurred on January 1, 1996, nor does it purport to be
indicative of the results of operations in future periods. The Unaudited
Pro Forma Combined Statement of Operations should be read in conjunction
with, and are qualified in their entirety by, the respective consolidated
financial statements and notes thereto of Camden and Paragon for the year
ended December 31, 1996 included in their respective Annual Reports on Form
10-K.
-1-
<PAGE>
<PAGE>
CAMDEN PROPERTY TRUST
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For The Year Ended December 31, 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------- ------------------------------
As
Sale of Merger Camden Further Further
Camden(A) Paragon(A) PGPSI(B) Adjustments Combined Adjustments(H) Adjusted
--------- ---------- -------- ----------- -------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Rental income $105,785 $ 91,037 $ $ $196,822 $ $196,822
Other property income 4,453 3,285 7,738 7,738
-------- -------- ------- ------- -------- ------- --------
Total property
income 110,238 94,322 204,560 204,560
Equity in income of
joint ventures 1,012 59(C) 1,071 1,071
Fee and asset
management 949 9,687 (5,824) 4,812 4,812
Other income 419 720 (2) 1,137 1,137
-------- -------- ------- ------- -------- ------- --------
Total revenues 111,606 105,741 (5,826) 59 211,580 211,580
Expenses (I)
Property operating
and maintenance 40,604 43,437 (4,060) 79,981 79,981
Real estate taxes 13,192 8,356 21,548 21,548
General and adminis-
trative 2,631 6,916 (1,081) 8,466 8,466
Interest 17,336 22,066 (3) (1,351)(D) 38,048 (1,478) 36,570
Depreciation and
amortization 23,894 19,552 (385) 2,849 (E) 45,910 45,910
Minority interest in
consolidated
partnerships 106 106 106
-------- -------- ------- ------- -------- ------- --------
Total expenses 97,657 100,433 (5,529) 1,498 194,059 (1,478) 192,581
-------- -------- ------- ------- -------- ------- --------
Income before gain
on sales of properties
and business, extin-
guishment of hedges
upon debt refinancing
and minority interest 13,949 5,308 (297) (1,439) 17,521 1,478 18,999
Gain on sales of
properties and
business 115 21,139 843 22,097 22,097
Extinguishment of hedges
upon debt refinancing (5,351) (5,351) (5,351)
-------- -------- ------- ------- -------- ------- --------
Income before minority
interest 8,713 26,447 546 (1,439) 34,267 1,478 35,745
Minority interest of
unitholders in
Operating Partnership (5,232) (109) (510)(F) (5,851) (5,851)
-------- -------- ------- ------- -------- ------- --------
Net income 8,713 21,215 437 (1,949) 28,416 1,478 29,894
Preferred share
dividends (4) (4) (4)
-------- -------- ------- ------- -------- ------- --------
Net income to common
shareholders $ 8,709 $ 21,215 $ 437 $(1,949) $28,412 $ 1,478 $ 29,890
======== ======== ======= ======= ======== ======= ========
Net income per common
and common equivalent
share $ 0.58 $ 1.16 $ 1.18
Distributions declared
per common share $ 1.90 $ 1.90 $ 1.90
Weighted average number
of common and common
equivalent shares
outstanding 14,940 9,466 24,406(G) 840 25,246
The accompanying notes are an integral part of this pro forma financial statement.
</TABLE>
-2-
PAGE
<PAGE>
CAMDEN PROPERTY TRUST
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
(In thousands, except per share amounts)
(A) Certain reclassifications have been made to Camden's and Paragon's
historical statements of operations to conform to the combined
financial statement presentation.
(B) Represents the elimination of the non-residential operations of PGPSI.
Prior to June 30, 1996, Paragon's management, leasing, construction
and development businesses were conducted through PGPSI. Effective
June 30, 1996, Paragon sold its interest in PGPSI (after the spin-off
of the residential property services business) and formed Paragon
Residential Services, Inc. ("PRSI") to continue Paragon's residential
property services business previously conducted through PGPSI.
(C) Represents the amortization of the premium required to record
Paragon's share of the debt of the joint ventures at fair value based
on current interest rates.
(D) Represents the net adjustment to interest expense, as follows:
To reverse the amortization of Paragon's deferred
financing costs which will have a zero fair value
in connection with the merger $(1,473)
To record the amortization of the premium required
to record Paragon's mortgages and other notes payable
at fair value based on current interest rates. (211)
To reflect the additional borrowings of $11,685 to
fund the merger and registration costs (See Notes
(B) and (I) of the Pro Forma Combined Balance Sheet)
at average market interest rates of 7.04% available to
Camden under its unsecured credit facility 835
To record the net reduction in interest expense due
to the retirement of Paragon debt and to finance
the retirement of this debt with Camden's unsecured
credit facility (502)
-------
$(1,351)
=======
(E) Represents the net increase in depreciation of real estate owned as a
result of recording the Paragon real estate assets at fair value
versus historical cost. Depreciation is computed on a straight-line
basis over the estimated useful lives of the related assets which have
an estimated weighted average useful life of approximately 23 years.
Buildings have been depreciated over 35 years and other assets over 3
to 15 years depending on the useful life of the related asset.
-3-
Calculation of the fair value of depreciable real estate assets at
December 31, 1996:
Purchase price (See Pro Forma Combined Balance Sheet
Note (B)) $664,653
Less:
Purchase price allocated to projects under
development, including land 13,339
Purchase price allocated to investment in real
estate joint ventures 21,128
Purchase price allocated to real estate held for sale 22,904
Purchase price allocated to cash and other assets 19,706
Purchase price allocated to land 81,214
--------
Pro forma basis of Paragon's depreciable real estate
held for investment at fair value $506,362
========
Calculation of depreciation of real estate owned for the year ended
December 31, 1996 is as follows:
Depreciation expense based upon an estimated
weighted average useful life of approximately
23 years. $22,016
Less historical Paragon depreciation of real
estate owned (19,167)
-------
Pro forma adjustment $ 2,849
=======
(F) Represents an adjustment in the Unitholders' minority interest
ownership to 19.9% of the earnings of Camden Subsidiary, Inc. ("Sub").
Such Unitholders' interest is in the earnings of assets owned by the
Sub only, and not the combined entity.
(G) The pro forma weighted average shares outstanding for the year ended
December 31, 1996 is computed as follows:
Camden's historical weighted average number of common
and common equivalent shares outstanding 14,940
Issuance of Camden's common shares at an exchange
ratio of 0.64 for all of Paragon's common stock in
connection with the merger* 9,466
------
Pro forma shares 24,406
======
* Paragon's December 31, 1996 common shares outstanding multiplied by
the exchange ratio.
(H) Represents further adjustments to reflect the reduction of interest
expense resulting from the conversion of $20.2 million principal
amount of Camden's 7.33% Convertible Subordinated Debentures into
$20.2 million of common equity, net of costs, subsequent to December
31, 1996 and through May 25, 1997.
-4-
(I) Although not presented as pro forma adjustments because they do not
meet the criteria for such presentation, management anticipates that
the merger will create significant administrative cost savings of
approximately $6 million in the first full year of operations.
-5-
<PAGE>
<PAGE>
CAMDEN PROPERTY TRUST
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
December 31, 1996
Basis of Presentation
The Unaudited Pro Forma Combined Balance Sheet is presented as if
Paragon's merger into Camden had occurred on December 31, 1996. The
Unaudited Pro Forma Combined Balance Sheet gives effect to the merger under
the purchase method of accounting in accordance with Accounting Principles
Board Opinion No. 16. In the opinion of management, all significant
adjustments necessary to reflect the effects of the merger have been made.
The merger adjustments are based on certain estimates and currently
available information. Such adjustments could change as additional
information becomes available, as estimates are refined or as additional
events occur, however, management does not expect any changes in the
allocation of the purchase price to be significant. The Unaudited Pro Forma
Combined Balance Sheet is further adjusted to reflect the effects of the
conversion of $20.2 million principal amount of Camden's 7.33% Convertible
Subordinated Debentures into $20.2 million of common equity, net of costs,
subsequent to December 31, 1996 and through May 25, 1997. In the opinion of
management, all adjustments necessary to reflect the effects of these
transactions have been made.
The Unaudited Pro Forma Combined Balance Sheet is presented for
comparative purposes only and is not necessarily indicative of what the
actual combined financial position of Camden and Paragon would have been at
December 31, 1996, nor does it purport to represent the future combined
financial position of Camden and Paragon. This Unaudited Pro Forma Combined
Balance Sheet should be read in conjunction with, and is qualified in its
entirety by, the respective consolidated financial statements and notes
thereto of Camden and Paragon for the year ended December 31, 1996 included
in their respective Annual Reports on Form 10-K.
-6-
<PAGE>
<PAGE>
CAMDEN PROPERTY TRUST
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Historical Pro Forma
--------------------- ---------------------
Merger Further As
Adjustments Camden Adjustments Further
Camden Paragon(A) (B) Combined (J) Adjusted
-------- ---------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Real estate assets:
Real estate held for
investment, net $553,629 $455,963 $131,613 (C)$1,141,205 $ $1,141,205
Projects under development,
including land 36,547 13,339 49,886 49,886
Investment in real estate
joint ventures 19,831 1,297 (D) 21,128 21,128
Real estate held for sale 20,604 2,300 (D) 22,904 22,904
-------- -------- -------- ---------- --------- ----------
590,176 509,737 135,210 1,235,123 1,235,123
Cash and cash equivalents 2,366 7,087 9,453 9,453
Other assets 10,968 20,043 (7,424)(E) 23,587 (586) 23,001
-------- -------- -------- ---------- --------- ----------
Total assets $603,510 $536,867 $127,786 $1,268,163 $ (586) $1,267,577
======== ======== ======== ========== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Liabilities:
Notes payable:
Unsecured $185,800 $ $115,612 (F) $ 301,412 $ $ 301,412
Secured 58,382 297,292 (94,882)(F) 260,792 260,792
-------- -------- -------- ---------- --------- ----------
244,182 297,292 20,730 562,204 562,204
Distributions payable 7,765 5,614 (G) 13,379 13,379
Accounts payable, accrued
expenses and other 28,433 19,209 (135)(H) 47,507 47,507
-------- -------- -------- ---------- --------- ----------
Total liabilities 280,380 316,501 26,209 623,090 623,090
-------- -------- -------- ---------- --------- ----------
Minority interest of
unitholders in
Operating Partnership 45,860 19,408 (B) 64,151 64,151
(1,117)(G)
7.33% Convertible Subordinated
Debentures 27,702 27,702 (20,163) 7,539
Shareholders' Equity:
Common shares of beneficial
interest 165 148 (53)(I) 260 8 268
Additional paid-in capital 348,339 204,617 57,576 (I) 610,532 19,569 630,101
Distributions in excess of
net income (49,515) (27,411) 22,915 (I) (54,011) (54,011)
Unearned restricted share
awards (3,561) (2,848) 2,848 (I) (3,561) (3,561)
-------- -------- -------- ---------- -------- ----------
Total shareholders'
equity 295,428 174,506 83,286 553,220 19,577 572,797
-------- -------- -------- ---------- -------- ----------
Total liabilities and
shareholders' equity $603,510 $536,867 $127,786 $1,268,163 $ (586) $1,267,577
======== ======== ======== ========== ======== ==========
The accompanying notes are an integral part of this pro forma financial statement.
</TABLE>
-7-
PAGE
<PAGE>
\
CAMDEN PROPERTY TRUST
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
December 31, 1996
(In thousands, except per share amounts)
(A) Certain reclassifications have been made to Paragon's historical
balance sheet to conform to Camden's balance sheet presentation.
(B) Represents adjustments to record the merger in accordance with the
purchase method of accounting, based upon the assumed purchase price
of $664,653 assuming a market value of $27.75 per share of Camden
common shares, as follows:
Issuance of 9,466 shares of Camden common shares
based on a 0.64 exchange ratio in exchange for
14,791 shares of Paragon common stock $262,688
Issuance of 2,352 operating partnership units to
unitholders based on a 0.64 exchange ratio for
3,675 units in Paragon Operating Partnership 65,269
Assumption of Paragon liabilities 316,501
Adjustment to record Paragon mortgages, other notes
payable and other liabilities at fair value 8,910
Merger costs (See calculation below) 11,285
--------
$664,653
========
The following is a calculation of the estimated fees and other expenses
related to the merger:
Advisory fees $ 7,000
Legal and accounting fees 1,700
Termination, severance and relocations costs 2,000
Payment of options 85
Due diligence 250
Other 250
-------
$11,285
=======
(C) Fair value adjustments of Paragon's real estate assets held for
investment based upon Camden's purchase price and the adjustment to
eliminate Paragon's historical accumulated depreciation of $127,829.
(D) To fair value the historical cost in Paragon's other real estate
assets based on subsequent sales, contracts and fair values.
(E) To fair value Paragon's other assets by $2,452 and to reverse deferred
financing costs and similar costs of $4,972, which have a zero fair
value in connection with the merger.
-8-
(F) Represents the net adjustment to notes payable as follows:
Unsecured Secured
Notes Payable Notes Payable
------------- -------------
To record the premium required to
adjust Paragon mortgages and
other notes payable to estimated
fair value using current market
quotations. $ $ 9,045
Additional borrowings of $11,685 of
unsecured debt incurred by Camden
to fund merger costs of $11,285
See Note (B) and registration
costs of $400 (See Note (I)). 11,685
To record the retirement of Paragon
debt and related prepayment penalties
with Camden's unsecured credit
facility. 103,927 (103,927)
-------- --------
Pro forma adjustment $115,612 $(94,882)
======== ========
(G) To adjust historical distributions declared on December 31, 1996 at
$0.475 per common share or unit based on the issuance by Camden of
9,466 common shares and 2,352 Units to Unitholders as if the shares
had been issued at that date.
(H) Adjustment to record Paragon's accrued expenses and other liabilities
at fair value.
(I) To adjust Camden's and Paragon's shareholders' equity to reflect the
issuance of 9,466 (at an exchange ratio of 0.64) shares of Camden
common stock at an assumed price of $27.75 per share, in exchange for
all of the 14,791 outstanding shares of Paragon's common stock and to
record the estimated registration costs in connection with the merger
of $400, as follows:
Additional Distributions Unearned
Common Paid-in in Excess Restricted
Shares Capital of Net Income Share Awards
------ ---------- ------------- ------------
Issuance of Camden
common shares $ 95 $ 262,593 $ $
Registration costs
incurred in connection
with the merger (400)
Distributions on issued
common shares (4,496)
Paragon's historical
shareholders' equity (148) (204,617) 27,411 2,848
----- --------- ------- ------
Pro forma adjustments $ (53) $ 57,576 $22,915 $2,848
===== ========= ======= ======
-9-
(J) Represents further adjustments to reflect the net effect of the
conversion of $20.2 million principal amount of Camden's 7.33%
Convertible Subordinated Debentures into $20.2 million of common
equity, net of costs, subsequent to December 31, 1996 and through
May 25, 1997.
-10-
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-80230, Form S-3 No. 33-84536, Form S-3 No. 33-83362, Form
S-3 No. 33-84658, and Form S-3 No. 333-24637) of Camden Property Trust of
our report dated March 21, 1997, with respect to the consolidated and
combined financial statements and financial statement schedule of Paragon
Group, Inc. for the years ended December 31, 1996, 1995, and 1994 as
restated, included in the Annual Report (Form 10-K) for 1996 filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
/S/ Ernst & Young LLP
Dallas, Texas
June 13, 1997
