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Filed Pursuant to Rule 424(b)(5)
Registration No. 333-13809
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 1, 1996)
1,076,000 SHARES
WALDEN RESIDENTIAL PROPERTIES, INC.
COMMON STOCK
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Walden Residential Properties, Inc. (the "Company") is a self-administered,
self-managed, fully integrated real estate investment trust ("REIT") focused on
middle income multifamily properties located primarily in selected Southwestern
and Southeastern markets. The Company currently owns and operates 68 multifamily
properties containing 21,407 apartment units.
All of the shares of common stock, $.01 par value per share ("Common
Stock"), offered hereby (the "Offering") are being sold by the Company. Upon the
closing of the offering, approximately 10.6% of the outstanding Common Stock
will be beneficially owned by executive officers and directors of the Company.
The Company has restricted the ownership of more than 9.0% of its capital stock
by most holders in order to maintain its qualification as a REIT. See
"Description of Common Stock -- Restrictions on Transfer" in the accompanying
Prospectus.
The Common Stock is listed on the New York Stock Exchange ("NYSE") under
the symbol "WDN". On December 19, 1996, the last reported sale price of the
Common Stock on the NYSE was $24.75 per share. The Company has paid regular
quarterly distributions to holders of its Common Stock and has increased its
annual distribution each year since the completion of the Company's initial
public offering in February 1994 (the "IPO"). See "Price Range of Common Stock
and Distributions."
SEE "RISK FACTORS" BEGINNING ON PAGE S-6 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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<S> <C> <C> <C>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
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PER SHARE......................... $24.25 $1.2125 $23.0375
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TOTAL(3).......................... $26,093,000 $1,304,650 $24,788,350
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(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $200,000 payable by the Company.
(3) The Company has granted the Underwriter a 30 day option to purchase up to
161,400 additional shares of Common Stock on the same terms and conditions
as the securities offered hereby solely to cover over-allotments, if any. If
the option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $30,006,950,
$1,500,348 and $28,506,602, respectively. See "Underwriting."
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The shares of Common Stock are offered by the Underwriter, subject to prior
sale, when as and if delivered to and accepted by the Underwriter, and subject
to certain other conditions, including the right of the Underwriter to withdraw,
cancel, modify or reject any order in whole or in part. It is expected that
delivery of the Common Stock will be made on or about December 24, 1996 at the
offices of Raymond James & Associates, Inc., St. Petersburg, Florida.
RAYMOND JAMES & ASSOCIATES, INC.
The date of this Prospectus Supplement is December 19, 1996.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
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AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") under the Securities Act, with the Securities and
Exchange Commission (the "Commission") covering the Common Stock offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus
Supplement and the accompanying Prospectus omit certain information, exhibits
and undertakings contained in the Registration Statement. For further
information pertaining to the Common Stock offered hereby, reference is made to
the Registration Statement, including the exhibits filed as part thereof.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Commission.
Reports, proxy statements and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at its
Regional Offices located at Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661; and 13th Floor, Seven World Trade Center, New York, New York
10048. Copies of such material can be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's Web site is:
http://www.sec.gov. The Common Stock is listed on the NYSE and such reports,
proxy statements and other information concerning the Company can be inspected
at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
All documents that are incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus but which are not delivered herewith
are available without charge (other than exhibits to such documents which are
not specifically incorporated by reference therein) upon request from Walden
Residential Properties, Inc., One Lincoln Centre, 5400 LBJ Freeway, Suite 400,
Dallas, Texas 75240.
INFORMATION INCORPORATED BY REFERENCE
The following documents filed with the Commission by the Company pursuant
to the Exchange Act are hereby incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 (the "Form 10-K").
(b) Amendment No. 1 on Form 10-K/A to the Form 10-K.
(c) Amendment No. 2 on Form 10-K/A to the Form 10-K.
(d) The portions of the Proxy Statement for the Company's Annual
Meeting of Stockholders held May 15, 1996 that have been incorporated by
reference in the Form 10-K.
(e) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996.
(f) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
(g) The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
(h) The Company's Current Report on Form 8-K dated April 23, 1996.
(i) The Company's Current Report on Form 8-K dated August 21, 1996.
(j) The Company's Current Report on Form 8-K dated October 1, 1996, as
amended.
(k) The Company's Current Report on Form 8-K dated December 16, 1996,
as amended.
(l) The Company's Current Report on Form 8-K dated December 19, 1996.
(m) Description of the Common Stock contained in the Company's
registration statement on Form 8-A filed November 19, 1993.
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All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Prospectus
Supplement and prior to the termination of the offering of the Common Stock
shall be deemed to be incorporated by reference in this Prospectus Supplement
and the accompanying Prospectus and to be a part hereof from the date of filing
such documents.
Any statements contained herein or in a document incorporated by reference
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus Supplement and the accompanying
Prospectus to the extent that a statement contained in this Prospectus
Supplement and the accompanying Prospectus or in any other subsequently filed
document that also is or is deemed to be incorporated by reference in this
Prospectus Supplement and the accompanying Prospectus modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus Supplement and the accompanying Prospectus.
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The following is qualified in its entirety by the more detailed information
appearing elsewhere in the accompanying Prospectus or incorporated herein by
reference. This Prospectus Supplement and the accompanying Prospectus, including
documents incorporated by reference, contain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Forward-looking statements are inherently subject to risks and
uncertainties, many of which cannot be predicted with accuracy and some of which
might not even be anticipated. Future events and actual results, financial and
otherwise, may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Management's Discussion and Analysis
of Results of Operations and Financial Condition" included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and the
Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31,
1996, June 30, 1996 and September 30, 1996, which are incorporated by reference
in this Prospectus Supplement and the accompanying Prospectus.
THE COMPANY
The Company is a self-administered, self-managed, fully integrated REIT
focused on middle income multifamily properties located primarily in selected
Southwestern and Southeastern markets. The Company, a Maryland corporation with
headquarters in Dallas, Texas, was formed in September 1993 to continue and
expand the multifamily property ownership, management, acquisition and marketing
operations and related business objectives and strategies of The Walden Group,
Inc. and its subsidiaries and affiliates (collectively, the "Walden
Predecessors"). The Company currently owns and operates 68 multifamily
properties (the "Properties") containing 21,407 apartment units. Approximately
93% of the apartment units are located in the Dallas/Fort Worth, Jacksonville,
Phoenix, Nashville, Austin, Oklahoma City, San Antonio, Tampa, Tulsa, Houston
and Salt Lake City areas, with the remaining Properties primarily located in
other areas in the Southwest and Southeast regions of the United States. The
Properties had a weighted average occupancy rate of approximately 93.9% at
December 15, 1996. Through WDN Management Company, a corporation formed by the
Company to manage multifamily properties for third parties, the Company manages
on a fee basis eight additional multifamily properties containing 2,298
apartment units.
Upon completion of the IPO in February 1994, the Company purchased the
multifamily operations of the Walden Predecessors, including 18 Properties
containing 5,895 apartment units (of which a 299-unit property was sold in April
1995, a 384-unit property was sold in April 1996 and a 144-unit property was
sold in September 1996), and concurrently purchased two additional Properties
containing 448 apartment units, one of which was owned by a third party and the
other of which was principally owned by the Walden Predecessors. Since the
consummation of the IPO, the Company has acquired 53 Properties (of which a 242-
unit property was sold in December 1995 and a 304-unit property was sold in
August 1996), containing an aggregate of 16,437 apartment units, for an
aggregate purchase price of approximately $548.8 million. Management believes
that these acquisitions are consistent with its core acquisition strategy of
acquiring well located garden apartment properties at prices less than
replacement costs, which serve middle income residents and can benefit from the
Company's comprehensive management programs.
The Company is operated under the direction of Don R. Daseke, Chairman of
the Board and Chief Executive Officer of the Company, and a management team
substantially all of whom were formerly employed by the Walden Predecessors. The
Company's 19 senior executives have an average tenure with the Company and the
Walden Predecessors of nine years and have an average of approximately 18 years
experience in the multifamily properties business. The Company is fully
integrated with operations that include multifamily property acquisitions,
property redevelopment, property management, financing, leasing and asset
management.
The Company's executive offices are located at One Lincoln Centre, 5400 LBJ
Freeway, Suite 400, Dallas, Texas 75240. The telephone number is (972) 788-0510.
The Company was incorporated in Maryland on September 29, 1993 and the duration
of its existence is perpetual.
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RISK FACTORS
An investment in shares of Common Stock involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained in this Prospectus Supplement and the
accompanying Prospectus before purchasing Units in the Offering.
DEPENDENCE ON TEXAS MARKET
Forty of the Properties, containing 11,257 apartment units (53% of all
apartment units comprising the Properties), are located in Texas with 26 of the
Properties, containing 7,402 apartment units (35% of all apartment units
comprising the Properties), being located in the Dallas/Fort Worth metropolitan
area. The Company's performance is, therefore, largely dependent upon economic
conditions in Texas generally and, specifically, in the Dallas/Fort Worth
metropolitan area. An economic decline in the Texas markets may adversely affect
the ability of the Company to make expected distributions to its stockholders.
BORROWING RISKS
Debt Financing and Existing Debt Maturities. The Company is subject to
risks normally associated with debt financing, including the risk that the
Company's net cash flow from operations will be insufficient to meet required
payments of principal and interest, the risk that existing indebtedness on the
Properties will not be able to be refinanced or the risk that the terms of such
refinancing will not be as favorable as the terms of the existing indebtedness.
At September 30, 1996, the Company had outstanding approximately $287.3
million of mortgage indebtedness secured by substantially all of the Properties.
As of September 30, 1996, the Company had approximately $112.0 million of
principal that becomes payable during the remainder of 1996 through 1999. It may
be necessary for the Company to refinance such debt either through additional
debt financing secured by individual properties or groups of properties or by
unsecured private or public debt offerings or repaid through additional equity
offerings. In the event that the Company is unable to refinance this
indebtedness on acceptable terms, the Company may be required to dispose of
encumbered properties upon unfavorable terms, which may result in losses to the
Company and may adversely affect its ability to make distributions to its
stockholders. Further, if a property or properties are mortgaged to secure
payment of indebtedness and the Company is unable to meet scheduled mortgage
payments, the mortgaged properties could be foreclosed upon by or otherwise
transferred to the lender resulting in a loss of income and asset value to the
Company.
Risk of Rising Interest Rates. As of the date hereof, the Company had
outstanding variable-rate indebtedness aggregating approximately $146.9 million,
including $95.8 million of outstanding borrowings under the Company's credit
facility with the First National Bank of Boston (the "Credit Facility"). In
addition, future indebtedness may bear interest at floating rates. Accordingly,
if prevailing interest rates or other factors at the time of refinancing result
in higher rates or if interest rates increase at the time the Company has
variable-rate debt outstanding, the Company's interest expense would increase
and the Company's ability to make distributions to its stockholders could be
adversely affected.
ACQUISITION RISKS
Since the consummation of the IPO, the Company has purchased 53 Properties
(and sold five properties) and increased the number of apartment units it owns
to 21,407, a net increase of approximately 237% from the 6,343 apartment units
owned at such time. Acquisitions entail risks that (i) acquired properties may
not perform in accordance with management's expectations, including projected
occupancy and rental rates, (ii) the Company may have overpaid for acquisitions
or (iii) the Company may have underestimated the cost of improvements required
to bring an acquired property up to standards established for the market
position intended for that property.
The Company's ability to acquire additional properties is dependent upon
its ability to obtain equity or debt financing. As of the date hereof based on
the Company's existing unencumbered Properties, the Company has additional
borrowing availability of approximately $25.1 million under the Credit Facility.
The
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issuance of additional shares of Common Stock or shares of preferred stock of
the Company, par value $.01 per share (the "Preferred Stock"), to obtain
financing for the acquisition of additional properties could result in a
dilution of ownership for the existing stockholders. See "Recent Developments."
In addition, if cash flows generated from the investment of such net proceeds in
properties or otherwise is less than the distribution payable to such new
stockholders, distributions to all stockholders may be adversely affected. When
the Company finances its operations with debt, the Company expects that its
properties will generate cash flow adequate to service the indebtedness.
However, if cash flow from the properties decreases or if any property owned by
the Company requires significant unanticipated capital improvements, the
Company's ability to pay dividends might be adversely affected.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various Federal, state and local environmental laws, ordinances and
regulations, an owner or operator of real estate may become liable for the costs
of removal or remediation of certain hazardous substances released on or in its
property. Such laws typically impose cleanup responsibility and liability
without regard as to whether the owner knew of or was responsible for the
presence of the contaminants. The costs of investigation, remediation or removal
of such substances may be substantial, and the presence of such substances, or
the failure to properly remediate such property, may adversely affect the
owner's ability to sell, use or rent such property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances also may be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility, whether or
not such facility is owned or operated by such person. Finally, the owner of a
site may be subject to common law claims by third parties based on damages and
costs resulting from environmental contamination emanating from a site.
Certain Federal, state and local laws, ordinances and regulations govern
the removal, encapsulation or disturbance of asbestos-containing materials
("ACMs") when such materials are in poor condition or in the event of building
remodeling, renovations or demolition. Such laws may impose liability for
release of ACMs and may provide for third parties to seek recovery from owners
or operators of real estate for personal injuries associated with ACMs.
Phase I environmental assessments, which have been performed on each of the
Properties, revealed elevated lead content in the drinking water at three of the
Properties and ACMs at 25 of the Properties (some of which is friable but in
good and manageable condition). The consulting firm that conducted most of the
Phase I studies has prepared an operations and maintenance program recommending
procedures to be followed in dealing with the ACMs if they are moved or
otherwise disturbed. The cost to the Company resulting from any future
disturbance of the ACMs will depend upon the magnitude of the disturbance and
the location of the ACMs. The consulting firm advised the Company that it is not
required by Federal law to take any action to address the lead levels in the
water; however, the Company is currently evaluating the most effective remedial
action it can take. The Company anticipates any such remedial action will cost
in the aggregate between $10,000 and $30,000.
The Phase I surveys are intended to identify potential environmental
contamination and regulatory compliance concerns. Phase I surveys generally
include historical reviews of the properties, review of certain public records,
preliminary investigations of the sites and surrounding properties and the
preparation and issuance of written reports. Phase I surveys generally do not
include invasive procedures, such as soil sampling or ground water analysis. If
the Phase I survey indicates that additional analysis or testing is appropriate,
the Company will either abandon the site or obtain a Phase II survey, which
generally involves invasive testing procedures. Based on the consultant's
recommendation, the Company performed a Phase II survey at the Plano, Texas
property to determine if a neighbor's underground storage tank had affected the
property. The Phase II Survey showed no such problem.
The Phase I surveys have not revealed any environmental liability or
compliance concern at the Properties that the Company believes would have a
material adverse effect on the Company's business, assets, results of operations
or liquidity, nor is the Company aware of any such liability or concern.
Nevertheless, it is possible that Phase I surveys will not reveal all
environmental liabilities or compliance concerns or that there
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will be material environmental liabilities or compliance concerns of which the
Company will not be aware. Moreover, no assurances can be given that (i) future
laws, ordinances or regulations will not impose any material environmental
liability or (ii) the current environmental condition of the Company's existing
and future properties will not be affected by the condition of neighboring
properties (such as the presence of leaking underground storage tanks) or by
third parties (whether neighbors such as dry cleaners or others) unrelated to
the Company.
Except as otherwise described above, management of the Company believes
that the Properties are in compliance in all material respects with all Federal,
state and local laws, ordinances and regulations regarding hazardous or toxic
substances or petroleum products. The Company has not been notified by any
governmental authority, and is not otherwise aware, of any material
noncompliance, liability or claim relating to hazardous or toxic substances in
connection with any of the Properties. Management does not believe that the
matters described above, or compliance with applicable environmental laws or
regulations, will have a material adverse effect on the Company or its financial
condition, results of operations and cash flows.
REAL ESTATE INVESTMENT CONSIDERATIONS
Effect of Economic and Real Estate Conditions. Real property investments
are subject to varying degrees of risk. The yields available from equity
investments in real estate depend on the income generated and expenses incurred.
If the Company's properties do not generate revenue sufficient to meet operating
expenses, including debt service and capital expenditures, the Company's cash
flow and ability to make distributions to its stockholders will be adversely
affected.
Market Illiquidity. Real estate investments are relatively illiquid. Such
illiquidity will tend to limit the ability of the Company to vary its portfolio
promptly in response to changes in economic or other conditions. In addition,
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
relating to REITs limit the Company's ability to sell properties held for fewer
than four years, which provisions may affect the Company's ability to sell
properties without adversely affecting returns to its stockholders.
Operating Risks. The Company's properties are subject to all operating
risks common to multifamily properties in general, any or all of which might
adversely affect occupancy or rental rates. Increases in unemployment in markets
in which the Company's properties are located may adversely affect occupancy
and/or rental rates. In addition, increases in operating costs due to inflation
and other factors may not necessarily be offset by increased rents. The Company
is also exposed to the inability or unwillingness of residents to pay rent
increases and future enactment of rent control laws or other laws regulating
multifamily properties. The local rental market may limit the extent to which
rents may be increased to meet increased operating expenses, if any, without
decreasing occupancy rates. If any of the above occurs, the Company's ability to
make expected distributions to its stockholders could be adversely affected.
Affordable Housing Restrictions. Fourteen of the Properties are subject to
restrictions requiring that a specified percentage of the apartment units in
such Properties be made available to persons with lower and moderate incomes
(currently, 67% of the total number of apartment units in the 14 affected
Properties and 16% of the total number of the Company's apartment units). In
addition, state and local authorities in some cases impose certain restrictions
on the amount of rent that can be charged.
UNINSURED LOSS
The Company intends to carry comprehensive liability, fire, extended
coverage and rental loss insurance with respect to all of the properties it
owns, including the Properties, with policy specifications, insured limits and
deductibles customarily carried for similar properties. There are, however,
certain types of losses (such as losses arising from wars or earthquakes) that
are not generally insured because they are either uninsurable or not
commercially insurable. Should an uninsured loss or a loss in excess of insured
limits occur, the Company could lose its capital invested in the affected
property, as well as the anticipated future revenues from such property, and
would continue to be obligated on any mortgage indebtedness or other obligations
related to the property. Any such loss could adversely affect the Company.
Management believes the Properties are currently adequately insured in
accordance with industry standards.
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COMPETITION
There are numerous real estate companies, including those which operate in
the markets in which the Properties are located, which compete with the Company
in seeking apartment properties for acquisition and residents to occupy such
properties. The Properties compete directly with other multifamily properties
and single family homes that are available for rent in which the Properties are
located. The Properties also compete with the new and existing home market for
residents. In addition, competitors for acquisition projects may have greater
resources than the Company.
CERTAIN ANTITAKEOVER PROVISIONS; OWNERSHIP LIMITS
Certain provisions of the Company's Articles of Incorporation, as amended
and restated (the "Articles"), discourage the acquisition of or the change in
control of the Company, including the general limitation on the ownership either
directly or indirectly of more than 9.0% of the shares of the Company's capital
stock (other than by Mr. Daseke), the staggered terms of the Company's Board of
Directors (the "Board of Directors") and the ability of the Board of Directors
to issue shares of Preferred Stock.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Qualification as a REIT involves the application of highly technical and
complex Code provisions for which there are only limited judicial or
administrative interpretations. If the Company were to fail to qualify as a
REIT, the Company would not be allowed a deduction for dividends to stockholders
in computing its taxable income and would be subject to Federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Unless entitled to relief under certain statutory
provisions, the Company would also be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification was lost.
As a result, the funds from operations would be reduced for each of the years
involved. In addition, dividends would no longer be required to be paid. To the
extent that dividends to stockholders would have been paid in anticipation of
the Company's qualifying as a REIT, the Company might be required to borrow
funds or to liquidate certain of its investments to pay the applicable tax.
COST OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND SIMILAR LAWS
Under the Americans with Disabilities Act of 1990 (the "ADA"), all places
of public accommodations are required to meet certain Federal requirements
related to access and use by disabled persons. These requirements became
effective in 1992. A number of additional Federal, state and local laws exist
which also may require modification to the properties to be acquired by the
Company, or may restrict certain further renovations thereof, with respect to
access by disabled persons. For example, the Fair Housing Amendments Act of 1988
(the "FHA") requires apartment communities first occupied after March 13, 1990
to be accessible to the handicapped. Noncompliance with the ADA or the FHA could
result in the imposition of fines or an award of damages to private litigants.
The Company has obtained structural reports from third-party consultants that
indicate certain modifications to certain of the Properties will need to be made
in order to bring such Properties into full compliance with the ADA. Management
estimates that the costs of making these modifications will be approximately
$15,000, which amount will be capitalized for financial reporting purposes.
Additional legislation may impose additional financial obligations or
restrictions on owners with respect to access by disabled persons. If required
changes involve greater expenditures than the Company currently anticipates, or
if the change must be made on a more accelerated basis than it anticipates, the
Company's ability to make expected distributions to its stockholders could be
adversely affected.
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RECENT DEVELOPMENTS
Since September 30, 1996, the Company has acquired a 170-unit apartment
property located in Dallas/Fort Worth, Texas for approximately $4.8 million, a
290-unit property located in Phoenix, Arizona for approximately $12.5 million
and a 994-unit community located in Nashville, Tennessee for approximately $49.0
million, which also included 83 acres of land held for development. The
acquisitions were funded by borrowings under the Credit Facility and the
assumption of approximately $7.1 million in indebtedness on the Phoenix
property. On October 31, 1996, the Company refinanced $14.4 million of existing
fixed-rate debt on three Properties. The new mortgage loans total $15.5 million,
bear interest at an average fixed rate per annum of 7.9% and mature in November
2003. The Company also has entered into a contract to acquire a 208-unit
apartment community in Dallas, Texas, for approximately $5.7 million. The
Company has completed its due diligence review of this property and expects to
acquire this property in January 1997. Because of certain closing conditions,
there can be no assurance that this property will ultimately be acquired.
On December 4, 1996, the Company entered into the new Credit Facility with
The First National Bank of Boston. The Credit Facility provides an unsecured
borrowing capacity of up to $150 million, with borrowings outstanding under the
Credit Facility initially bearing interest at 1.5% over LIBOR. The Credit
Facility expires in February 1999.
The Company has entered into an agreement with another underwriter to issue
up to a maximum of $100 million of units (the "Senior Preferred Units"),
consisting of shares of senior preferred stock and common stock warrants in a
separate public offering anticipated to be concluded on or about December 31,
1996. The senior preferred stock will rank senior to the Company's existing
shares of 9.16% Series A Convertible Redeemable Preferred Stock and 9.16% Series
B Convertible Redeemable Preferred Stock and the Common Stock with respect to
the payment of dividends and the distribution of assets upon the liquidation,
dissolution or winding up of the Company. While the terms of the securities will
not be finalized until the offering of the Senior Preferred Units is
consummated, it is anticipated that the senior preferred stock will not be
convertible into Common Stock and will be redeemable by the Company following
the tenth anniversary of the issuance thereof. The senior preferred stock will
have limited voting rights in the case of failure to pay dividends or certain
amendments to the Company's Articles of Incorporation. It is also anticipated
that the common stock warrants will entitle the holders thereof to acquire
one-third of a share of Common Stock. The shares of senior preferred stock and
the common stock warrants will be separately transferable at any time following
their issuance. The Company estimates that 4,000,000 Senior Preferred Units will
be sold and that the dividend rate on the senior preferred stock will be 9.10%.
However, there can be no assurance that the sale of the Senior Preferred Units
will be consummated or, if such sale is consummated, that fewer than 4,000,000
Senior Preferred Units will not be sold or that the senior preferred stock will
not have a dividend rate higher than 9.10%. See "Pro Forma Financial
Information."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are estimated to be approximately $24,588,350 million ($28,306,602
million if the Underwriter's over-allotment option is exercised in full). The
Company intends to use all of the net proceeds to repay outstanding indebtedness
under the Credit Facility. Such indebtedness bears interest at approximately
7.1% per annum, matures in February 1999 and was incurred by the Company to pay
a portion of the purchase price of certain property acquisitions. Pending
application of the net proceeds of the Offering, the Company intends to invest
such proceeds in interest-bearing accounts and short-term interest bearing
securities.
S-10
<PAGE> 11
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Common Stock has been traded on the NYSE under the symbol "WDN" since
the IPO. The following table sets forth the quarterly high and low sale prices
per share reported on the NYSE, as well as the quarterly distributions declared
per share.
<TABLE>
<CAPTION>
DISTRIBUTIONS
HIGH LOW PER SHARE
------- ------- -------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1994:
1st Quarter (since February 2, 1994)................ $21.750 $19.125 --
2nd Quarter......................................... 22.625 19.375 $.240(1)
3rd Quarter......................................... 22.500 19.250 .425
4th Quarter......................................... 20.375 16.250 .425
Year Ended December 31, 1995:
1st Quarter......................................... 20.500 17.875 .455
2nd Quarter......................................... 19.875 18.000 .455
3rd Quarter......................................... 19.500 18.125 .455
4th Quarter......................................... 21.000 17.375 .455
Year Ended December 31, 1996:
1st Quarter......................................... 22.125 20.000 .465
2nd Quarter......................................... 21.875 20.250 .465
3rd Quarter......................................... 21.875 19.750 .465
4th Quarter (through December 19, 1996)............. 24.750 20.875 .465(2)
</TABLE>
- ---------------
(1) On June 2, 1994, the Company paid a distribution of $.24 per share of Common
Stock, representing a pro rata distribution for the period from February 9,
1994 through March 31, 1994, based on a $.425 quarterly distribution.
(2) On December 4, 1996, the Company paid a distribution of $.465 per share of
Common Stock to stockholders of record on November 18, 1996.
As of November 30, 1996, the Company had 1,169 record holders of Common
Stock.
The Company intends to continue to pay regular quarterly distributions to
its stockholders. The Company reviews its distribution on a quarterly basis in
light of actual results of operations and other factors. Distributions by the
Company are determined by the Board of Directors and will depend on a number of
factors, including the amount of funds from operations, the financial condition
of its properties, any decision by the Board of Directors to reinvest cash
available for distribution rather than to distribute such funds, capital
requirements of the Company, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Board of Directors deems
relevant.
S-11
<PAGE> 12
UNDERWRITING
Under the terms and subject to the conditions set forth in the Underwriting
Agreement, dated the date hereof, by and between the Company and Raymond James &
Associates, Inc. (the "Underwriter"), the Underwriter has agreed to purchase
from the Company, and the Company has agreed to sell to the Underwriter, the
Common Stock offered hereby.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of the Common Stock is subject to approval of
certain legal matters by counsel and to certain other conditions. The
Underwriter is obligated to take and pay for all shares of Common Stock offered
hereby (other than those covered by the over-allotment option described below)
if any such shares are taken.
The Underwriter initially proposes to offer the Common Stock to the public
at the public offering price set forth on the cover page of this Prospectus
Supplement and to certain dealers at such price less a concession of $0.69 per
share. After the initial offering, the public offering price and concession to
dealers may be changed.
The Company has granted to the Underwriter an option, exercisable for 30
days from the date of this Prospectus Supplement, to purchase up to an
additional 161,400 shares of Common Stock at a purchase price of $23.0375 per
share. The Underwriter may exercise such option to purchase additional shares of
Common Stock solely for the purpose of covering over-allotments, if any,
incurred in connection with the distribution of the Common Stock offered hereby.
The Company and its officers have agreed that they will not, directly or
indirectly, offer, sell, contract to sell or otherwise dispose of any Common
Stock or any security convertible into or exchangeable for Common Stock prior to
the expiration of 45 days from the date hereof, without the prior written
consent of the Underwriter. In addition, the Company has agreed not to file a
registration statement relating to its capital stock for a period of 30 days
from the date hereof.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Winstead Sechrest & Minick P.C., Dallas, Texas. The
validity of the shares of Common Stock offered hereby will be passed upon for
the Underwriter by King & Spalding, Atlanta, Georgia. In rendering such
opinions, such firms will rely upon the opinion of Piper & Marbury L.L.P.,
Baltimore, Maryland, as to certain matters of Maryland law.
EXPERTS
The audited consolidated and combined financial statements and related
schedule for Walden Residential Properties, Inc. and Walden Predecessors,
respectively, included in the Form 10-K for the year ended December 31, 1995 and
the statement of revenues and certain expenses of Villas of St. Moritz,
Remington, Costa del Sol, Summer Oaks, Ashbury Parke, Cozumel, Princeton Meadows
II, Raintree, Quayle Walk, Timber Creek and Waterford (the "Audited Acquisition
Properties") for the year ended December 31, 1995 included in the Company's Form
8-K/A, Amendment No. 2, dated November 8, 1996 and the statement of revenues and
certain expenses of Deerfield, Doubletree, Village Green, Village Hills, Country
Court, Information Center and Tennis Center ("Nashboro Apartments") for the year
ended December 31, 1995 included in the Company's Form 8-K, dated December 16,
1996 referred to and incorporated by reference in this Prospectus Supplement and
the accompanying Prospectus have been audited by Deloitte & Touche LLP,
independent certified public accountants, as stated in their reports appearing
therein, and have been included in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
S-12
<PAGE> 13
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Condensed Consolidated Balance Sheet as of September 30, 1996....................... F-3
Condensed Consolidated Statement of Income for the Nine Months Ended September 30,
1996............................................................................. F-4
Condensed Consolidated Statement of Income for the Year Ended December 31, 1995..... F-5
</TABLE>
F-1
<PAGE> 14
PRO FORMA FINANCIAL INFORMATION
The following September 30, 1996 unaudited Pro Forma Condensed Consolidated
Balance Sheet of Walden Residential Properties, Inc. (the "Company") includes
five wholly-owned corporate subsidiaries and eight limited partnerships
wholly-owned by the Company, collectively owning 65 multifamily properties
containing 19,953 apartment units, and is adjusted on a pro forma basis to
reflect as of September 30, 1996: (a) the acquisition of three multifamily
properties since September 30, 1996, (b) the FNMA and Credit Facility debt
refinancings subsequent to September 30, 1996, (c) the issuance and sale by the
Company of 1,076,000 shares of Common Stock pursuant to the Offering and the
application of the net proceeds therefrom to repay $24,588,000 in borrowings
under the Credit Facility, and (d) the assumed issuance and sale by the Company
of 4,000,000 Senior Preferred Units, consisting of 4,000,000 shares of senior
preferred stock (assuming a 9.10% annual dividend rate thereon) and 4,000,000
common stock warrants (each of which is exercisable for one-third of a share of
Common Stock) for an aggregate purchase price of $100 million and the
application of a portion of the estimated net proceeds therefrom to repay
$69,696,000 of borrowings under the Credit Facility. It should be noted that the
sale of 4,000,000 Senior Preferred Units has not been consummated as of December
19, 1996, but is currently anticipated to be consummated on or about December
31, 1996. It is possible that the offering of Senior Preferred Units will not be
consummated or, if consummated, that fewer than 4,000,000 of the Senior
Preferred Units will not be sold and that the dividend rate on the senior
preferred stock will exceed 9.10%. The unaudited Pro Forma Condensed
Consolidated Balance Sheet is not necessarily indicative of what the actual
financial position of the Company would have been at September 30, 1996, nor
does it purport to represent the future financial position of the Company.
The unaudited Pro Forma Condensed Consolidated Statement of Income for the
nine months ended September 30, 1996 is presented as if the following had
occurred as of January 1, 1996: (a) the acquisition of 16 properties since
December 31, 1995 (the "1996 Acquisitions"), (b) the sale of three properties in
1996, (c) the debt refinancings and borrowings during 1996, (d) the net proceeds
of $76.3 million from the issuance of 1,680,250 shares of Common Stock issued in
August 1996 and the issuance of 1,800,000 shares of 9.16% Convertible Preferred
Stock in April and June of 1996 (the "1996 Offerings"), (e) the issuance and
sale by the Company of 1,076,000 shares of Common Stock pursuant to the Offering
and the application of the estimated net proceeds therefrom to repay $24,588,000
of borrowings under the Credit Facility, and (f) the assumed issuance and sale
by the Company of 4,000,000 Senior Preferred Units for an aggregate purchase
price of $100 million and the application of a portion of the estimated net
proceeds therefrom to repay $69,696,000 of borrowings under the Credit Facility.
The unaudited Pro Forma Condensed Consolidated Statement of Income for the year
ended December 31, 1995 is presented as if the following had occurred as of
January 1, 1995: (a) the acquisition of 17 properties since December 31, 1994
and before December 31, 1995 (the "1995 Acquisitions"), (b) the 1996
Acquisitions, (c) the two properties sold in 1995 and the three properties sold
in 1996, (d) the debt refinancings and borrowings in 1995 and 1996, (e) the
acquisition of eleven properties through the granting of rights to exchange
interest in a partnership for Common Stock, (f) the net proceeds of $136.5
million from the issuance of 3,500,000 shares of Common Stock issued in June
1995 and the 1996 Offerings, (g) the issuance and sale by the Company of
1,076,000 shares of Common Stock pursuant to the Offering and the application of
the estimated net proceeds therefrom to repay $24,588,000 in borrowings under
the Credit Facility, and (h) the assumed issuance and sale of the Senior
Preferred Units and the application of a portion of the net proceeds therefrom
to repay $69,696,000 of borrowings under the Credit Facility. It should be noted
that the sale of the 4,000,000 Senior Preferred Units has not been consummated
as of December 19, 1996, but is anticipated to be consummated on or about
December 31, 1996. It is possible that the offering of Senior Preferred Units
will not be consummated or, if consummated, that fewer than 4,000,000 Senior
Preferred Units will not be sold. The unaudited Pro Forma Condensed Consolidated
Statements of Income are not necessarily indicative of what the actual results
of operations of the Company would have been assuming the transactions described
above had been completed as of January 1, 1996 and 1995, respectively, nor do
they purport to represent the results of operations for future periods.
These pro forma financial statements should be read in conjunction with all
of the financial statements and the notes thereto contained elsewhere in this
Prospectus and incorporated by reference herein. In Management's opinion, all
adjustments necessary to reflect the above indicated transactions have been
made.
F-2
<PAGE> 15
WALDEN RESIDENTIAL PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 OFFERING
HISTORICAL REFINANCINGS ACQUISITIONS ADJUSTMENTS PRO FORMA
---------- ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Real estate assets -- net......... $575,879 $ $66,265(e) $ $642,144
Receivable from and investment in
WDN Management.................. 1,105 1,105
Other assets...................... 11,220 314(a) 282(f) 11,816
Cash and cash equivalents......... 4,870 (19)(b) 25,104(j) 29,955
Restricted cash................... 8,045 8,045
-------- ------ ------- -------- --------
Total assets............ $601,119 $ 295 $66,547 $ 25,104 $693,065
======== ====== ======= ======== ========
LIABILITIES
Mortgage notes payable............ $251,477 $1,072(c) $ 7,130(g) $ $259,679
Credit facility................... 35,800 58,484(h) (94,284)(k) --
Other liabilities................. 18,802 933(i) 19,735
-------- ------ ------- -------- --------
Total liabilities....... 306,079 1,072 66,547 (94,284) 279,414
-------- ------ ------- -------- --------
STOCKHOLDERS' EQUITY
Convertible equity securities... 14,886 14,886
Common stock.................... 157 11(l) 168
Preferred stock................. 18 40(m) 58
Additional paid in capital...... 312,140 119,337(n) 431,477
Notes receivable from Company
Officers..................... (5,263) (5,263)
Distributions in excess of net
income....................... (26,898) (777)(d) (27,675)
-------- ------ ------- -------- --------
Total stockholders'
equity................ 295,040 (777) -- 119,388 413,651
-------- ------ ------- -------- --------
Total liabilities and
stockholders'
equity................ $601,119 $ 295 $66,547 $ 25,104 $693,065
======== ====== ======= ======== ========
</TABLE>
- ---------------
(a) Represents new financing costs ($1,042), less a write off of old financing
costs on a refinanced loan ($777), plus new escrows required with a
refinancing ($49).
(b) Represents net cash required for refinancings.
(c) Represents the increase in mortgage balances due to refinancing.
(d) Represents write off of old financing costs on refinanced loans.
(e) Represents cost of properties acquired between October 1, 1996 and December
16, 1996.
(f) Represents security deposit escrows and real estate tax escrows required on
acquisition properties.
(g) Represents mortgage assumed by the Company on November 15, 1996 property
purchase.
(h) Represents estimated draws on Credit Facility to finance acquisitions
between October 1, 1996 and December 16, 1996.
(i) Represents real estate tax liabilities and security deposit liabilities
that would be assumed had the properties acquired between October 1, 1996
and December 16, 1996 been owned on September 30, 1996.
(j) Represents remainder of estimated proceeds from the Senior Preferred Units
offering currently in the process of being sold after repayment of
outstanding amounts under the Credit Facility. The actual amount and
proceeds from the sale of these securities may be less than currently
estimated.
(k) Represents Credit Facility pay down with estimated net proceeds of the
Offering and the offering of the Senior Preferred Units. (See Notes j, m
and n.)
(l) Represents par value on issuance of 1,076,000 shares of Common Stock being
sold in the Offering.
(m) Represents par value on issuance of 4,000,000 shares of senior preferred
stock which constitute a portion of the Senior Preferred Units currently in
the process of being sold. The actual number of shares sold may be less
than currently estimated.
(n) Represents paid in capital from the Common Stock issuance at $24.25 per
share and from the issuance of the Senior Preferred Units at $25 per unit,
which is currently in the process of being sold. The actual number of units
sold may be less than currently estimated.
F-3
<PAGE> 16
WALDEN RESIDENTIAL PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1996(A) PRO FORMA
HISTORICAL ACQUISITIONS SALES(B) ADJUSTMENTS PRO FORMA
---------- ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES
Rental income....................... $76,032 $18,776 $(2,466) $ $ 92,342
Other property income............... 2,810 627 (88) 3,349
Interest income..................... 1,048 1,048
Income from WDN Management.......... 246 246
------- ------- ------- ------- --------
Total revenues.............. 80,136 19,403 (2,554) -- 96,985
------- ------- ------- ------- --------
EXPENSES
Property operating and
maintenance...................... 27,319 6,916 (924) 33,311
Real estate taxes................... 7,249 1,750 (189) 8,810
General and administrative.......... 3,702 3,702
Interest............................ 14,810 (49)(c) 14,761
Financing costs and amortization.... 666 (76)(d) 590
Depreciation........................ 14,262 3,309(e) 17,571
------- ------- ------- ------- --------
Total expenses.............. 68,008 8,666 (1,113) 3,184 78,745
------- ------- ------- ------- --------
Net income before preferred
distribution........................ $12,128 $10,737 $(1,441) $(3,184) 18,240
======= ======= ======= =======
Preferred distributions(f)............ (11,227)
--------
Net income............................ $ 7,013
========
Net income per share.................. $ 0.42
========
Weighted average shares of common
stock outstanding(g)................ 16,891
========
</TABLE>
- ---------------
(a) Represents historical revenues and certain expenses, excluding third party
management fees, for properties acquired in 1996 from January 1, 1996,
through the earlier of September 30, 1996, or date of acquisition for which
a Form 8-K was filed on November 8, 1996.
(b) Represents historical revenues and expenses on properties sold in 1996, from
January 1, 1996, through the earlier of September 30, 1996, or date of sale
for which a Form 8-K was filed on November 8, 1996.
(c) Represents pro forma adjustment required to present interest expense as if
the debt reflected on the pro forma condensed consolidated balance sheet at
September 30, 1996, had been outstanding for the entire period at the then
applicable rates.
(d) Represents pro forma adjustment required to present financing costs and
amortization expense as if the amortizable assets on the pro forma condensed
consolidated balance sheet at September 30, 1996, had been in place for the
entire period.
(e) Represents pro forma adjustment required to present depreciation expense as
if the depreciable assets on the pro forma condensed consolidated balance
sheet at September 30, 1996, had been in place for the entire period.
(f) Assumes the issuance of 4,000,000 shares of senior preferred stock which
constitute a portion of the Senior Preferred Units currently in the process
of being sold. The actual number of shares issued may be less than currently
estimated and the annual dividend rate thereon (estimated at 9.10%) may be
more or less than currently estimated.
(g) Assumes the issuance of 1,076,000 shares of Common Stock in the Offering as
of the beginning of the period in addition to the shares of Common Stock
sold in other offerings during 1995 and 1996.
F-4
<PAGE> 17
WALDEN RESIDENTIAL PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1995(A) 1996(B) PRO FORMA
HISTORICAL ACQUISITIONS ACQUISITIONS SALES(C) ADJUSTMENTS PRO FORMA
---------- ------------ ------------ ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Rental income............ $78,469 $16,072 $28,814 $(5,613) $ $117,742
Other property income.... 3,090 621 1,191 (198) 4,704
Interest income.......... 856 856
Income from WDN
Management............ 409 409
------- ------- ------- ------- -------- --------
Total revenues... 82,824 16,693 30,005 (5,811) -- 123,711
------- ------- ------- ------- -------- --------
EXPENSES
Property operating and
maintenance........... 28,748 5,870 11,253 (1,928) 43,943
Real estate taxes........ 7,337 1,806 2,600 (455) 11,288
General and
administrative........ 3,811 56(d) 3,867
Interest................. 17,111 2,749(e) 19,860
Financing costs and
amortization.......... 900 (114)(f) 786
Depreciation............. 15,734 7,694(g) 23,428
------- ------- ------- ------- -------- --------
Total expenses... 73,651 7,676 13,853 (2,383) 10,385 103,172
------- ------- ------- ------- -------- --------
Net income before preferred
distribution............. $ 9,183 $ 9,017 $16,152 $(3,428) $(10,385) 20,539
======= ======= ======= ======= ========
Preferred
distributions(h)......... (15,106)
--------
Net income................. 5,433
========
Net income per share....... $ 0.33
========
Weighted average shares of
common stock
outstanding(i)........... 16,682
========
</TABLE>
- ---------------
(a) Represents historical revenues and certain expenses, excluding third party
management fees, for properties acquired in 1995, from January 1, 1995,
through the earlier of December 31, 1995, or date of acquisition.
(b) Represents historical revenues and certain expenses, excluding third party
management fees, for the year ended December 31, 1995, of properties
acquired in 1996.
(c) Represents historical revenues and expenses on properties sold in 1995 and
1996 from the later of January 1, 1995, or date of purchase through the
earlier of December 31, 1995, or date of sale.
(d) Represents pro forma adjustment for administrative fees on properties
purchased in 1995.
(e) Represents pro forma adjustment required to present interest expense as if
the debt reflected on the pro forma condensed consolidated balance sheet at
September 30, 1996, had been outstanding for the entire period at the then
applicable rates.
(f) Represents pro forma adjustment required to present financing costs and
amortization expense as if the amortizable assets on the pro forma condensed
consolidated balance sheet at September 30, 1996, had been in place for the
entire period.
(g) Represents pro forma adjustment required to present depreciation expense as
if the depreciable assets on the pro forma condensed consolidated balance
sheet at September 30, 1996, had been in place for the entire period.
(h) Assumes the issuance of 4,000,000 shares of senior preferred stock which
constitute a portion of the Senior Preferred Units currently in the process
of being sold. The actual number of shares issued may be less than currently
estimated and the annual dividend rate thereon (estimated at 9.10%) may be
more or less than currently estimated.
(i) Assumes the issuance of 1,076,000 shares of Common Stock in the Offering as
the beginning of the period in addition to the shares of Common Stock sold
in other offerings during 1995 and 1996.
F-5
<PAGE> 18
PROSPECTUS
WALDEN RESIDENTIAL PROPERTIES, INC.
$150,000,000
COMMON STOCK, PREFERRED STOCK AND SECURITIES WARRANTS
---------------------
Walden Residential Properties, Inc. (the "Company") may from time to time
offer and sell (i) shares of its common stock, par value $.01 per share (the
"Common Stock"), (ii) shares of its preferred stock, par value $.01 per share
(the "Preferred Stock,"), and (iii) warrants to purchase shares of Common Stock
(the "Common Stock Warrants") and warrants to purchase shares of Preferred Stock
(the "Preferred Stock Warrants" and, together with the Common Stock Warrants,
the "Securities Warrants"), with an aggregate public offering price not to
exceed $150,000,000. The Common Stock, Preferred Stock and Securities Warrants
(collectively, the "Offered Securities") may be offered separately or together,
in separate series, in amounts and at prices and terms to be set forth in a
supplement to this Prospectus (the "Prospectus Supplement").
The terms of the Preferred Stock, including the specific designation and
stated value per share, any dividend, liquidation, redemption, conversion,
voting and other rights, and all other specific terms of the Preferred Stock,
including the initial public offering price, will be set forth in the applicable
Prospectus Supplement. The specific number of shares of Common Stock and
issuance price per share thereof will be set forth in the applicable Prospectus
Supplement. In the case of the Securities Warrants, the duration, offering
price, exercise price and detachability thereof, if applicable will be set forth
in the applicable Prospectus Supplement. In addition, such specific terms may
include limitations on direct or beneficial ownership and restrictions on
transfer of the Offered Securities, in each case as may be appropriate to
preserve the status of the Company as a real estate investment trust ("REIT")
for Federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain Federal income tax considerations relating to, and any
listing on a securities exchange of, the Offered Securities covered by such
Prospectus Supplement.
The Offered Securities may be offered directly by the Company, through
agents designated from time to time by the Company or to or through underwriters
or dealers, or through a combination of the foregoing. If any agents or
underwriters are involved in the sale of any of the Offered Securities, their
names, and any applicable purchase price, fee, commission or discount
arrangement between or among them, will be set forth, or will be calculable from
the information set forth, in the applicable Prospectus Supplement. See "Plan of
Distribution." No Offered Securities may be sold without delivery of the
applicable Prospectus Supplement describing the method and terms of the offering
of such Offered Securities.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
---------------------
THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1996.
<PAGE> 19
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part) on
Form S-3 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the securities offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement, certain portions
of which have been omitted as permitted by the rules and regulations of the
Commission. Statements contained in this Prospectus as to the content of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of the contract or other document filed as an
exhibit to the Registration Statement, each statement being qualified in all
respects by that reference and the exhibits to the Registration Statement. For
further information regarding the Company and the securities offered hereby,
reference is hereby made to the Registration Statement and the exhibits to the
Registration Statement which may be obtained from the Commission at its
principal office in Washington, D.C., upon payment of fees prescribed by the
Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Commission.
Reports, proxy statements and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at its
Regional Offices located at Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661; and 13th Floor, Seven World Trade Center, New York, New York
10048. Copies of such material can be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's Web site is:
http://www.sec.gov. The Common Stock and the Company's 9.16% Series B
Convertible Redeemable Preferred Stock are listed on the New York Stock
Exchange, Inc. (the "NYSE") and such reports, proxy statements and other
information concerning the Company can be inspected at the offices of the NYSE,
20 Broad Street, New York, New York 10005.
The Company furnishes its stockholders with annual reports containing
financial statements audited by its independent auditors and with quarterly
reports containing unaudited summary financial information for each of the first
three quarters of each fiscal year.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company pursuant
to the Exchange Act are hereby incorporated by reference in this Prospectus:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 (the "Form 10-K").
(b) Amendment No. 1 on Form 10-K/A to the Form 10-K.
(c) Amendment No. 2 on Form 10-K/A to the Form 10-K.
(d) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996.
(e) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
(f) The Company's Current Report on Form 8-K dated April 23, 1996.
(g) The Company's Current Report on Form 8-K dated August 21, 1996.
(h) The Company's Current Report on Form 8-K dated October 1, 1996.
(i) Description of the Common Stock contained in the Company's
registration statement on Form 8-A filed November 19, 1993.
2
<PAGE> 20
(j) Description of the Company's 9.16% Series B Cumulative Redeemable
Preferred Stock contained in the Company's registration statement on Form
8-A filed June 3, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering made hereby shall be deemed to be incorporated
by reference into this Prospectus.
Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of the Registration Statement and this
Prospectus to the extent that a statement contained in the Registration
Statement, this Prospectus or any other subsequently filed document that is also
incorporated by reference herein modifies or supersedes that statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a Prospectus is delivered, upon written
or oral request of that person, a copy of any document incorporated herein by
reference (other than exhibits to those documents unless the exhibits are
specifically incorporated by reference into the documents that this Prospectus
incorporates by reference). Requests should be directed to Deborah B. Attner,
Stockholder Relations, Walden Residential Properties, Inc., One Lincoln Centre,
5400 LBJ Freeway, Suite 400, Dallas, Texas 75240.
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THE COMPANY
The Company is a self-administered, self-managed, fully integrated REIT
focused on middle income multifamily properties located primarily in selected
Southwestern and Southeastern markets. The Company, a Maryland corporation with
headquarters in Dallas, Texas, was formed in September 1993 to continue and
expand the multifamily property ownership, management, acquisition and marketing
operations and related business objectives and strategies of The Walden Group,
Inc. and its subsidiaries and affiliates (collectively, the "Walden
Predecessors"). The Company currently owns and operates 66 multifamily
properties (the "Properties") containing 20,123 apartment units. Approximately
89% of the apartment units are located in the Dallas/Fort Worth, Oklahoma City,
Tampa, Jacksonville, Tulsa, Phoenix, Houston, San Antonio, Austin and Salt Lake
City areas, with the remaining Properties primarily located in other areas in
the Southwest and Southeast regions of the United States. The Properties had a
weighted average occupancy rate of approximately 94.3% at October 14, 1996.
Through WDN Management Company, a corporation formed by the Company to manage
multifamily properties for third parties, the Company manages on a fee basis
eight additional multifamily properties containing 2,298 apartment units.
Upon completion of its initial public offering in February 1994, the
Company purchased the multifamily operations of the Walden Predecessors,
including 18 of the Properties containing 5,895 apartment units (of which a
299-unit property was sold in April 1995, a 384-unit property was sold in April
1996 and a 144-unit property was sold in September 1996), and concurrently
purchased two additional Properties containing 448 apartment units, one of which
was owned by a third party and the other of which was principally owned by the
Walden Predecessors. Since the consummation of its initial public offering, the
Company has acquired 51 of the Properties (of which a 242-unit property was sold
in December 1995 and a 304-unit property was sold in August 1996), containing an
aggregate of 15,153 apartment units, for an aggregate purchase price of
approximately $487.3 million. Management believes that these acquisitions are
consistent with its core acquisition strategy of acquiring well located garden
apartment properties at prices less than replacement costs, which serve middle
income residents and can benefit from the Company's comprehensive management
programs.
The Company is operated under the direction of Don R. Daseke, Chairman of
the Board and Chief Executive Officer of the Company, and a management team
substantially all of whom were formerly employed by the Walden Predecessors. The
Company's 19 officers have an average tenure with the Company and the Walden
Predecessors of nine years and have an average of approximately 18 years
experience in the multifamily properties business. The Company is fully
integrated with operations that include multifamily property acquisitions,
property redevelopment, property management, financing and leasing and asset
management.
The Company's executive offices are located at One Lincoln Centre, 5400 LBJ
Freeway, Suite 400, Dallas, Texas 75240. The telephone number is (972) 788-0510.
The Company was incorporated in Maryland on September 29, 1993 and the duration
of its existence is perpetual.
RECENT DEVELOPMENTS
On August 27, 1996, the Company completed a public offering of 1,525,000
shares of Common Stock, resulting in net proceeds to the Company of
approximately $29.8 million. On September 20, 1996, the Company sold an
additional 155,250 shares of Common Stock in connection with the exercise of the
underwriter's over-allotment option relating to such public offering, resulting
in net proceeds to the Company of approximately $3.0 million. Since June 30,
1996, the Company has acquired eight apartment communities, containing an
aggregate of 2,076 units, of which two are located in Jacksonville, Florida,
four are located in the Dallas/Fort Worth area, one is located in Melbourne,
Florida and one is located in Nashville, Tennessee. The aggregate acquisition
cost for these properties was approximately $67.4 million which was funded from
the Company's credit facility, the proceeds from the Company's recent public
offering and funds held in escrow under a tax-free exchange. One of these
properties was purchased for $9.1 million from an affiliate of the Company. All
of such proceeds received from the sale were used to retire all liabilities of
the property, and therefore, no proceeds from the sale of this property were
retained by such affiliate. In August 1996, the
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Company also sold the Christiwood Apartments, a 304-unit property located in
Corpus Christi, Texas, for $9.2 million, and in September 1996 the Company sold
the Chimney Trace Apartments, a 144-unit property located in Stone Mountain,
Georgia, for $5.8 million.
The Company has entered into contracts to acquire four additional apartment
communities, with an aggregate of 860 units, in Texas and Arizona, for
approximately $31.7 million, including the assumption of indebtedness existing
on one of the properties in the amount of $7.2 million (the "Acquisition
Properties"). The Company has completed its due diligence on one of the
Acquisition Properties (consisting of 290 apartment units) and expects to
acquire this property in November 1996. The Company anticipates the completion
of its due diligence review and closing of two of the Acquisition Properties
(with an aggregate of 362 units) in December 1996 and anticipates purchasing the
final Acquisition Property in January 1997. Because of the ongoing due diligence
review of certain of these Acquisition Properties, as well as other closing
conditions, there can be no assurance that any of such Acquisition Properties
will ultimately be acquired.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The Company's ratio of earnings to combined fixed charges and preferred
stock dividends for the six months ended June 30, 1996 and its fiscal year ended
December 31, 1995 and the year ended December 31, 1994 (which includes results
of operations of the Walden Predecessors for the period of January 1, 1994
through February 8, 1994) and for the years ended December 31, 1993, 1992 and
1991 (which are based on the results of the Walden Predecessors) was 1.65x,
1.52x, 1.68x, .63x, .57x and .49x, respectively. The Company had no preferred
dividend requirement in any of such years prior to 1995; therefore, the ratio of
earnings to combined fixed charges and preferred stock dividends are the same as
the ratio of earnings to fixed charges for such years. Earnings were calculated
by adding certain fixed charges (consisting of interest on indebtedness and
amortization and financing costs) to the Company's income before extraordinary
items. The Company's earnings (in thousands) were inadequate to cover fixed
charges by $45, $4,795, $5,209 and $6,352 for the period from January 1, 1994 to
February 8, 1994 and the years ended December 31, 1993, 1992 and 1991,
respectively, all of which were prior to the Company's initial public offering
in February of 1994.
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USE OF PROCEEDS
Unless otherwise described in the Prospectus Supplement which accompanies
this Prospectus, the Company intends to use the net proceeds from the sale of
the Offered Securities for general corporate purposes, which may include
acquiring additional multifamily residential garden apartment properties or
interests in entities owning multifamily residential garden apartment properties
as suitable opportunities arise, making improvements to properties, repaying
certain then-outstanding secured or unsecured indebtedness and for working
capital. Pending use for the foregoing purposes, such proceeds may be invested
in short-term, interest-bearing time or demand deposits with financial
institutions, cash items or qualified government securities.
DESCRIPTION OF COMMON STOCK
The summary of the terms of the Common Stock set forth below does not
purport to be complete and is subject to, and qualified in its entirety by,
reference to the Company's Articles of Incorporation, as amended and restated
(the "Articles"), and the Company's Bylaws.
The Articles authorize the Company to issue up to 50 million shares of
Common Stock, 10 million shares of Preferred Stock and 60 million shares of
excess stock, par value $.01 per share (the "Excess Stock"). At September 30,
1996, 15,753,781 shares of Common Stock were issued and outstanding, all of
which are fully paid and nonassessable. Under the Maryland General Corporation
Law (the "MGCL"), stockholders generally are not liable for the corporation's
debts or obligations.
GENERAL
All shares of Common Stock offered pursuant to a Prospectus Supplement will
be duly authorized, fully paid and nonassessable. Subject to the preferential
rights of shares of the Preferred Stock, including the Series A Preferred Stock
and the Series B Preferred Stock (as such terms are hereinafter defined), and
any other shares or series of stock hereinafter designated by the Board of
Directors of the Company (the "Board of Directors"), holders of shares of Common
Stock are entitled to receive dividends on the stock if, as and when authorized
and declared by the Board of Directors out of assets legally available therefor
and to share ratably in the assets of the Company legally available for
distribution to its stockholders in the event of its liquidation, dissolution or
winding-up after payment of, or adequate provision for payment of, all known
debts and liabilities of the Company. The Company has paid regular quarterly
dividends to date and intends to continue paying regular quarterly dividends.
Each outstanding share of Common Stock entitles the holder thereof to one
vote on all matters submitted to a vote of stockholders, including the election
of directors and, except as otherwise required by law or except as provided with
respect to any other class or series of stock, the holders of shares of Common
Stock will possess the exclusive voting power. There is no cumulative voting in
the election of directors, which means that the holders of a majority of the
outstanding shares of Common Stock can elect all of the directors then standing
for election and the holders of the remaining shares will not be able to elect
any directors. Holders of shares of Common Stock have no conversion, sinking
fund, redemption rights or preemptive rights to subscribe for any securities of
the Company.
Shares of Common Stock have equal dividend, distribution, liquidation and
other rights and will have no preference or exchange rights.
Pursuant to the MGCL, a corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions unless approved by the holders of at
least two-thirds of the shares of stock entitled to vote on the matter unless a
lesser percentage (but not less than a majority of all of the votes to be cast
on the matter) is set forth in the corporation's charter. The Articles provide
for the vote of the holders of a majority of the shares of stock outstanding and
entitled to vote on the matter to approve any of such actions, except for
amendments to the Articles relating to the number of directors and the
classification of the Board of Directors which require approval of holders of at
least two-thirds of the shares of stock entitled to vote on the matter.
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The transfer agent and registrar for the Common Stock is The First National
Bank of Boston.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), shares of Common Stock must be beneficially owned
by 100 or more persons during at least 335 days of a taxable year of twelve
months (other than the first year) or during a proportionate part of a shorter
taxable year. Further, not more than 50% of the value of the issued and
outstanding shares of capital stock of the Company may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include,
except in limited circumstances, certain entities such as qualified private
pension plans) during the last half of a taxable year (other than the first
year) or during a proportionate part of a shorter taxable year.
Since the Board of Directors believes it is essential for the Company to
maintain its status as a REIT under the Code, the Articles provide that no
person, except Mr. Daseke, may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 9.0% (the "Ownership Limit") of
the aggregate value of all outstanding shares of capital stock of the Company.
Mr. Daseke beneficially owns in the aggregate approximately 6.1% of the shares
of Common Stock and may acquire additional shares of Common Stock; provided,
however, that Mr. Daseke may not own, directly or indirectly, more than 13.0% of
the aggregate value of all outstanding shares of capital stock of the Company
(the "Existing Holder Limit"). The Board of Directors, upon receipt of evidence
and assurances satisfactory to the Board of Directors, may also exempt a
proposed transferee from the Ownership Limit or Existing Holder Limit. In
connection therewith, the Board of Directors may require opinions of counsel,
affidavits, undertakings or agreements as it may deem necessary or advisable in
order to determine or ensure the Company's status as a REIT. Any acquisition or
transfer of shares of Common Stock that would: (i) result in the shares of
Common Stock being owned by fewer than 100 persons or (ii) result in the Company
being "closely-held" within the meaning of Section 856(h) of the Code, shall be
null and void, and the intended transferee will acquire no rights to the shares
of Common Stock. The foregoing restrictions on transferability and ownership
will not apply if the Board of Directors determines that it is no longer in the
best interests of the Company to attempt to qualify, or to continue to qualify,
as a REIT and the Articles are amended accordingly.
Any purported transfer of shares of capital stock that would result in a
person owning shares of capital stock in excess of the Ownership Limit or
Existing Holder Limit will result in the shares subject to such purported
transfer being automatically exchanged for an equal number of shares of Excess
Stock. Under the Articles, Excess Stock shall be deemed to have been transferred
to the Company as trustee of a separate trust (the "Trust") for the exclusive
benefit of the person or persons to whom the interest in the Trust can
ultimately be transferred.
Excess Stock is not transferable. The purported transferee of any shares of
capital stock that are exchanged for Excess Stock may designate a transferee of
the interest in the Trust if the Excess Stock held in the Trust and represented
by such Trust interest to be transferred would not be Excess Stock in the hands
of the designated transferee at a price not to exceed the price paid by the
purported transferee (or, if no consideration was paid, the Market Price (as
hereinafter defined) measured on the date of the original attempted transfer) at
which point such Excess Stock will automatically be exchanged for the shares of
Common Stock or Preferred Stock to which the Excess Stock is attributable. In
addition, Excess Stock is subject to purchase by the Company at a purchase price
equal to the lesser of: (i) the price paid for the shares of capital stock by
the intended transferee (or, if no consideration was paid, the Market Price of
the shares of capital stock the attempted transfer of which resulted in Excess
Stock, measured on the date of the transfer); or (ii) the Market Price of the
shares of capital stock the attempted transfer of which resulted in Excess Stock
measured on the date on which the Company elects to purchase the Excess Stock.
"Market Price" means the average daily per share closing sales price of a share
of capital stock if such shares of capital stock are listed on a national
securities exchange or quoted on Nasdaq National Market or if not then traded on
any exchange or quotation system, the mean between the average per share closing
bid prices and the average per share closing asked prices, in each case, during
the 30 calendar day period ending on the business day prior to the measurement
date, or if there have been no sales on a national securities exchange or the
Nasdaq National Market and no published bid and asked quotations with respect to
shares of such stock during such
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30 calendar day period, then the market price of the shares of capital stock on
the relevant date shall be as determined in good faith by the Board of
Directors.
From and after the intended transfer to the purported transferee of the
shares of Excess Stock, the purported transferee shall cease to be entitled to
distributions (except upon liquidation), voting rights and other benefits with
respect to the Excess Stock except the right to payment of the purchase price
for the applicable shares of underlying capital stock. Any dividend or
distribution paid to a purported transferee on Excess Stock prior to the
discovery by the Company that the shares have been transferred in violation of
the Articles shall be repaid to the Company upon demand. If the foregoing
transfer restrictions are determined to be void or invalid by virtue of any
legal decision, statute, rule or regulation, then the intended transferee of any
Excess Stock may be deemed, at the option of the Company, to have acted as an
agent on behalf of the Company in acquiring the Excess Stock and to hold the
Excess Stock on behalf of the Company. All certificates representing shares of
capital stock will bear a legend referring to the restrictions described above.
In addition, each stockholder shall, upon demand, be required to disclose
to the Company in writing all information regarding the direct and indirect
beneficial ownership of shares of capital stock as the Board of Directors deems
reasonably necessary to comply with the provisions of the Code applicable to a
REIT, to comply with the requirements of any taxing authority or governmental
agency or to determine any such compliance.
These ownership limitations could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of shares
of capital stock might receive a premium for their shares over the
then-prevailing market price or which these holders might believe to be
otherwise in their best interest.
DESCRIPTION OF PREFERRED STOCK
The following description of terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock to which any
Prospectus Supplement may relate. Certain other terms of any series of the
Preferred Stock offered by any Prospectus Supplement will be described in such
Prospectus Supplement. The description of certain provisions of the Preferred
Stock set forth below and in any Prospectus Supplement does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Articles and the Board of Directors' resolution or resolutions relating to each
series of the Preferred Stock which will be filed with the Commission and
incorporated by reference as an exhibit to the Registration Statement of which
this Prospectus is a part at or prior to the time of the issuance of such series
of Preferred Stock.
GENERAL
Subject to limitations prescribed by the MGCL and the Articles, the Board
of Directors is authorized to issue shares of Preferred Stock in one or more
series, to establish from time to time the number of shares of Preferred Stock
to be included in any such series and to fix for any such series the designation
and any preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption. The Company is authorized to issue 10 million shares of Preferred
Stock. At September 30, 1996, 78,700 shares of the Company's 9.16% Series A
Convertible Redeemable Preferred Stock (the "Series A Preferred Stock") and
1,707,300 shares of the Company's 9.16% Series B Convertible Redeemable
Preferred Stock (the "Series B Preferred Stock") were outstanding. For purposes
of the following description of the Preferred Stock, the Series A Preferred
Stock and the Series B Preferred Stock will sometimes be collectively referred
to as the "Outstanding Preferred Stock."
The Preferred Stock shall have the dividend, liquidation, redemption and
voting rights set forth below unless otherwise provided in a Prospectus
Supplement relating to a particular series of the Preferred Stock. Reference is
made to the Prospectus Supplement relating to the particular series of the
Preferred Stock offered thereby for specific terms, including: (i) the
designation and stated value per share of such Preferred Stock and the number of
shares offered; (ii) the amount of liquidation preference per share; (iii) the
initial public offering price at which such Preferred Stock will be issued; (iv)
the dividend rate (or method of calculation), the dates on which dividends shall
be payable and the dates from which dividends shall
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commence to cumulate, if any; (v) any redemption or sinking fund provisions;
(vi) any conversion right; (vii) any listing of the Preferred Stock on any
securities exchange; (viii) any additional voting, dividend, liquidation,
redemption, sinking fund and other rights, preferences, privileges, limitations
and restrictions not in conflict with the Articles or the MGCL; (ix) a
discussion of Federal income tax considerations applicable to the Preferred
Stock; (x) the relative ranking and preferences of the Preferred Stock as to
dividends and rights upon liquidation; and (xi) any limitations on direct or
beneficial ownership and restrictions on transfer. The Preferred Stock will,
when issued for lawful consideration therefor, be fully paid and nonassessable
and will have no preemptive rights.
Unless otherwise indicated in a Prospectus Supplement relating thereto, The
First Bank of Boston will be the transfer agent and registrar for shares of each
series of Preferred Stock.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to dividend rights upon liquidation, dissolution or
winding up of the Company, rank (i) senior to all classes or series of Common
Stock and to all equity securities ranking junior to such Preferred Stock; (ii)
on a parity with all equity securities issued by the Company the terms of which
specifically provide that such equity securities rank on a parity with the
Preferred Stock; and (iii) junior to all equity securities issued by the Company
the terms of which specifically provide that such equity securities rank senior
to the Preferred Stock. The rights of the holders of each series of Preferred
Stock will be subordinate to those of the Company's general creditors.
DIVIDENDS
Holders of each series of Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors, out of assets of the Company
legally available for payment, cash dividends at such rates and on such dates as
will be set forth in the applicable Prospectus Supplement. Such rate may be
fixed or variable or both. Each such dividend shall be payable to holders of
record as they appear on the share transfer books of the Company on such record
dates as shall be fixed by the Board of Directors, as specified in the
Prospectus Supplement relating to such series of Preferred Stock.
Dividends on any series of Preferred Stock may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors fails to declare a
dividend payable on a dividend payment date on any series of Preferred Stock for
which dividends are noncumulative, then the holders of such series of Preferred
Stock will have no right to receive a dividend in respect of the dividend period
ending on such dividend payment date, and the Company will have no obligation to
pay the dividend accrued for such period, whether or not dividends on such
series are declared payable on any future dividend payment date. Dividends on
shares of each series of Preferred Stock for which dividends are cumulative will
accrue from the date on which the Company initially issues shares of such
series.
So long as any series of Preferred Stock shall be outstanding, unless (i)
full dividends (including, if such dividends are cumulative, dividends for prior
dividend periods) shall have been paid or declared and set apart for payment on
all outstanding shares of Preferred Stock of such series and all other classes
and series of Preferred Stock (other than Junior Stock, as hereinafter defined)
and (ii) the repurchase or other mandatory retirement of, or with respect to any
sinking or other analogous fund for, any shares of Preferred Stock of such
series or any other Preferred Stock of any class or series (other than Junior
Stock), the Company may not declare any dividends on any Common Stock or any
other equity securities of the Company ranking as to dividends or distributions
of assets junior to such series of Preferred Stock (the Common Stock and any
such other equity securities being herein referred to as "Junior Stock"), or
make any payment on account of, or set apart money for, the purchase, redemption
or other retirement of, or for a sinking or other analogous fund, for, any
Junior Stock or make any distribution in respect thereof, whether in cash or
property or in obligations or equity securities of the Company, other than
shares of Junior Stock which are neither convertible into, nor exchangeable or
exercisable for, any securities of the Company other than shares of Junior
Stock.
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Any dividend payment made on a series of Preferred Stock shall first be
credited against the earliest accrued but unpaid dividend due with respect to
shares of such series which remains payable.
REDEMPTION
A series of Preferred Stock may be redeemable, in whole or from time to
time in part, at the option of the Company, and may be subject to mandatory
redemption pursuant to a sinking fund or otherwise, in each case upon the terms,
at the times and at the redemption prices set forth in the Prospectus Supplement
relating to such series. Shares of Preferred Stock redeemed by the Company will
be restored to the status of authorized but unissued Preferred Stock of the
Company.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon (which
shall not, if such Preferred Stock does not have a cumulative dividend, include
any accumulation in respect of unpaid dividends for prior dividend periods) to
the date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of equity securities of the Company, the terms of such
series of Preferred Stock may provide that, if no such equity securities shall
have been issued or to the extent the net proceeds from any issuance are
insufficient to pay in full the aggregate redemption price then due, such
Preferred Stock shall automatically and mandatorily be converted into the
applicable equity securities of the Company pursuant to conversion provisions
specified in the applicable Prospectus Supplement.
So long as any dividends on shares of any series of Preferred Stock or any
other series of Preferred Stock of the Company ranking on a parity as to
dividends and distribution of assets which such series of Preferred Stock are in
arrears, no shares of any such series of Preferred Stock or such other series of
Preferred Stock of the Company will be redeemed (whether by mandatory or
optional redemption) unless all such shares are simultaneously redeemed, and the
Company will not purchase or otherwise acquire any such shares; provided,
however, that the foregoing will not prevent the purchase or acquisition of such
shares pursuant to a purchase or exchange offer made on the same terms to
holders of all such shares outstanding.
In the event that fewer than all of the outstanding shares of a series of
Preferred Stock are to be redeemed, whether by mandatory or optional redemption,
the number of shares to be redeemed will be determined by lot or pro rata
(subject to rounding to avoid fractional shares) as may be determined by the
Company or by any other method as may be determined by the Company in its sole
discretion to be equitable. From and after the redemption date (unless default
shall be made by the Company in providing for the payment of the redemption
price plus accumulated and unpaid dividends, if any), dividends shall cease to
accumulate on the shares of Preferred Stock called for redemption and all rights
of the holders thereof (except the right to receive the redemption price plus
accumulated and unpaid dividends, if any) shall cease.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Junior Stock, the holders of each series of Preferred
Stock shall be entitled to receive out of assets of the Company legally
available for distribution to stockholders, liquidating distributions in the
amount of the liquidation preference per share (set forth in the applicable
Prospectus Supplement), plus an amount equal to all dividends accrued and unpaid
thereon (which shall not include any accumulation in respect of unpaid dividends
for prior dividend periods if such Preferred Stock does not have a cumulative
dividend). After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Preferred Stock will have no right or
claim to any of the remaining assets of the Company. In the event that, upon any
such voluntary or involuntary liquidation, dissolution or winding up, the
available assets of the Company are insufficient to pay the amount of the
liquidating distributions on all outstanding Preferred Stock and the
corresponding amounts payable on all shares of other classes or series of equity
securities of the Company ranking on a parity with the Preferred
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Stock in the distribution of assets, then the holders of the Preferred Stock and
all other such classes or series of equity securities shall share ratably in any
such distribution of assets in proportion to the full liquidating distributions
to which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of shares of Junior Stock, according to their respective rights and
preferences and in each case according to their respective number of shares. For
such purposes, the consolidation or merger of the Company with or into any other
corporation, or the sale, lease or conveyance of all or substantially all of the
assets or business of the Company, shall not be deemed to constitute a
liquidation, dissolution or winding up of the Company.
VOTING RIGHTS
Except as indicated below or in a Prospectus Supplement relating to a
particular series of Preferred Stock, or except as required by applicable law,
holders of the Preferred Stock will not be entitled to vote for any purpose. The
following is a summary of the voting rights applicable to the Outstanding
Preferred Stock, which, unless provided otherwise in the applicable Prospectus
Supplement, will apply to each series of Preferred Stock.
Subject to the provisions in the Articles regarding Excess Stock, in any
matter in which the Outstanding Preferred Stock may vote, including any action
by written consent, each share of Outstanding Preferred Stock will be entitled
to one vote. The holders of each share of Outstanding Preferred Stock may
separately designate a proxy for the vote to which that share of Outstanding
Preferred Stock is entitled.
Whenever dividends on any shares of Series B Preferred Stock have been in
arrears for six or more quarterly periods (and, in the case of the Series A
Preferred Stock, for six or more consecutive quarterly periods), the holders of
such shares of Outstanding Preferred Stock (voting separately as a class with
all other series of Preferred Stock upon which rights to vote on such matter
with the Outstanding Preferred Stock have been conferred and are then
exercisable) will be entitled to vote for the election of two additional
directors of the Company at a special meeting called by the holders of record of
at least 10% of the Outstanding Preferred Stock and such other Preferred Stock,
if any (unless such request is received less than 90 days before the date fixed
for the next annual or special meeting of the stockholders), or at the next
annual meeting of stockholders, and at each subsequent annual meeting until all
dividends accumulated on such shares of Outstanding Preferred Stock for the past
dividend periods and the then current dividend period have been fully paid or
declared and a sum sufficient for the payment thereof set aside for payment. In
such event, the entire Board of Directors will be increased by two directors.
Each of such two directors will be elected to serve until the earlier of (i) the
election and qualification of such director's successor or (ii) payment of the
dividend arrearage for the Outstanding Preferred Stock.
So long as any shares of Outstanding Preferred Stock remain outstanding,
the Company will not (i) without the affirmative vote or consent of the holders
of at least a majority of the shares of Outstanding Preferred Stock outstanding
at the time, given in person or by proxy, either in writing or at a meeting
(such series voting separately as a class), authorize or create, or increase the
authorized or issued amount of, any
class or series of capital stock ranking senior to the Outstanding Preferred
Stock with respect to payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up, or create, authorize or issue any
obligation or security convertible into or evidencing the right to purchase any
such shares; or (ii) without the affirmative vote or consent of the holders of
at least two-thirds of the shares of Series B Preferred Stock outstanding at the
time (and, in the case of the Series A Preferred Stock, a majority of the shares
of Series A Preferred Stock then outstanding), given in person or by proxy,
either in writing or at a meeting (such series voting separately as a class),
amend, alter or repeal the provisions of the Articles, whether by merger,
consolidation or otherwise, so as to materially and adversely affect any right,
preference, privilege or voting power of the Outstanding Preferred Stock or the
holders thereof; provided, however, that any increase in the amount of the
authorized Preferred Stock or the creation or issuance of any other series of
Preferred Stock, or any increase in the amount of authorized shares of
Outstanding Preferred Stock or any other series of Preferred Stock, in each case
ranking on a parity with or junior to the Outstanding Preferred Stock with
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respect to payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up, will not be deemed to materially and adversely affect
such rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required is
effected, all outstanding shares of Outstanding Preferred Stock have been
redeemed or called for redemption upon proper notice and sufficient funds have
been deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series of
Preferred Stock are convertible into Common Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include the
number of shares of Common Stock into which the Preferred Stock is convertible,
the conversion price (or manner of calculation thereof), the conversion period,
the provisions as to whether conversion will be at the option of the holders of
the Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and the provisions affecting conversion.
RESTRICTIONS ON OWNERSHIP
See "Description of Common Stock -- Restrictions on Transfer" for a
discussion of the restrictions on transfer of shares of capital stock necessary
for the Company to qualify as a REIT under the Code.
DESCRIPTION OF SECURITIES WARRANTS
GENERAL
The Company may issue Securities Warrants for the purchase of shares of
Preferred Stock or shares of Common Stock. Securities Warrants may be issued
independently or together with any other Offered Securities offered by any
Prospectus Supplement or through a dividend or other distribution to the
Company's stockholders and may be attached to or separate from such Offered
Securities. Each series of Securities Warrants will be issued under a separate
warrant agreement (each, a "Warrant Agreement") to be entered into between the
Company and a warrant agent specified in the applicable Prospectus Supplement
(the "Warrant Agent"). The Warrant Agent will act solely as an agent of the
Company in connection with the Securities Warrants of such series and will not
assume any obligation or relationship of agency or trust for or with any holders
or beneficial owners of Securities Warrants. The following summary of certain
provisions of the Warrant Agreement and the Securities Warrants does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, all the provisions of the Warrant Agreement and the Securities Warrant
certificates relating to each series of Securities Warrants which will be filed
with the Commission and incorporated by reference as an exhibit to the
Registration Statement of which this Prospectus is a part at or prior to the
time of the issuance of such series of Securities Warrants.
If Securities Warrants for the purchase of shares of Preferred Stock or
shares of Common Stock are being offered, the applicable Prospectus Supplement
will describe the terms of such Securities Warrants, including the following
where applicable: (i) the title of such Securities Warrants; (ii) the aggregate
number of such Securities Warrants; (iii) the offering price; (iv) the aggregate
number of shares purchasable upon exercise of such Securities Warrants, the
exercise price and, in the case of Securities Warrants for shares of Preferred
Stock, the designation, aggregate number and terms of the series of Preferred
Stock purchasable upon exercise of such Securities Warrants; (v) the designation
and terms of any series of Preferred Stock with which such Securities Warrants
are being offered and the number of such Securities Warrants being offered with
such Preferred Shares; (vi) the date, if any, on and after which such Securities
Warrants and the related series of Preferred Stock or shares of Common Stock
will be transferable separately; (vii) the date on which the right to exercise
such Securities Warrants shall commence and the expiration date thereof; (viii)
any special Federal income tax consequences; and (ix) any other material terms
of such Securities Warrants.
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Securities Warrant certificates may be exchanged for new Securities Warrant
certificates of different denominations, may (if in registered form) be
presented for registration of transfer and may be exercised at the corporate
trust office of the Warrant Agent or any other office indicated in the
applicable Prospectus Supplement. Prior to the exercise of any Securities
Warrants to purchase shares of Preferred Stock or shares of Common Stock,
holders of such Securities Warrants will not have any rights of holders of such
Preferred Stock or Common Stock, including the right to receive payments of
dividends, if any, on such Preferred Stock or Common Stock, or to exercise any
applicable right to vote.
EXERCISE OF SECURITIES WARRANTS
Each Securities Warrant will entitle the holder thereof to purchase such
number of shares of Preferred Stock or Common Stock, as the case may be, at such
exercise price as shall in each case be set forth in, or calculable from, the
Prospectus Supplement relating to the offered Securities Warrants. After the
close of business on the expiration date of any Securities Warrant (or such
later date to which such expiration date may be extended by the Company),
unexercised Securities Warrants will become void.
Securities Warrants may be exercised by delivering to the Warrant Agent
payment as provided in the applicable Prospectus Supplement of the amount
required to purchase the shares of Preferred Stock or Common Stock, as the case
may be, purchasable upon such exercise together with certain information set
forth on the reverse side of the Securities Warrant certificate. Securities
Warrants will be deemed to have been exercised upon receipt of payment of the
exercise price, subject to the receipt within five (5) business days of the
Securities Warrant certificate evidencing such Securities Warrants. Upon receipt
of such payment and the Securities Warrant certificate properly completed and
duly executed at the corporate trust office of the Warrant Agent or any other
office indicated in the applicable Prospectus Supplement, the Company will, as
soon as practicable, issue and deliver the shares of Preferred Stock or Common
Stock, as the case may be, purchasable upon such exercise. If fewer than all of
the Securities Warrants represented by such Securities Warrant certificate are
exercised, a new Securities Warrant certificate will be issued for the remaining
amount of Securities Warrants.
AMENDMENTS AND SUPPLEMENTS TO WARRANT AGREEMENT
The Warrant Agreements may be amended or supplemented without the consent
of the holders of the Securities Warrants issued thereunder to effect changes
that are not inconsistent with the provisions of the Securities Warrants and
that do not adversely affect the interests of the holders of the Securities
Warrants.
ADJUSTMENTS
Unless otherwise indicated in the applicable Prospectus Supplement, the
exercise price of, and the number of shares of Common Stock covered by, a Common
Stock Warrant are subject to adjustment in certain events, including (i) payment
of a dividend on the Common Stock payable in shares of capital stock and stock
splits, combinations or reclassification of the Common Stock; (ii) issuance to
all holders of Common Stock of rights or warrants to subscribe for or purchase
shares of Common Stock at less than their current market price (as defined in
the Warrant Agreement for such series of Common Stock Warrants); and (iii)
certain distributions of evidences of indebtedness or assets (including
securities but excluding cash dividends or distributions paid out of
consolidated earnings or retained earnings or dividends payable in shares of
Common Stock) or of subscription rights and warrants (excluding those referred
to above).
No adjustment will be required unless such adjustment would require a
change of at least 1% in the exercise price then in effect. Except as stated
above, the exercise price of, and the number of shares of Common Stock covered
by, a Common Stock Warrant will not be adjusted for the issuance of shares of
Common Stock or any securities convertible into or exchangeable for Common
Stock, or carrying the right or option to purchase or otherwise acquire the
foregoing, in exchange for cash, other property or services. No adjustment in
the exercise price of, and the number of shares of Common Stock covered by, a
Common Stock Warrant will be made for regular quarterly or other periodic or
recurring cash dividends or distributions.
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In the event of any (i) consolidation or merger of the Company with or into
any entity (other than a consolidation or a merger that does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares of
Common Stock); (ii) sale, transfer, lease or conveyance of all or substantially
all of the assets of the Company; or (iii) reclassification, capital
reorganization or change of the Common Stock (other than solely a change in par
value or from par value to no par value), then any holder of a Common Stock
Warrant will be entitled, on or after the occurrence of any such event, to
receive on exercise of such Common Stock Warrant the kind and amount of shares
of beneficial interest or other securities, cash or other property (or any
combination thereof) that the holder would have received had such holder
exercised such holder's Common Stock Warrant immediately prior to the occurrence
of such event. If the consideration to be received upon exercise of the Common
Stock Warrant following any such event consists of common shares of the
surviving entity, then from and after the occurrence of such event, the exercise
price of such Common Stock Warrant will be subject to the same anti-dilution and
other adjustments described in the second preceding paragraph, applied as if
such shares were shares of Common Stock.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material Federal income tax
considerations affecting the Company and its stockholders. This discussion is
directed principally at investors who are United States citizens or residents or
domestic corporations, and does not address in all material respects
considerations that might adversely affect the treatment of investors who are
subject to special treatment under the tax laws (such as insurance companies,
cooperatives, financial institutions, broker-dealers, tax exempt organizations
or foreign investors). The discussion in this section is based on existing
provisions of the Code, existing and proposed Treasury regulations, existing
court decisions and existing rulings and other administrative interpretations.
There can be no assurance that future Code provisions or other legal authorities
will not alter significantly the tax consequences described below. No rulings
have been obtained from the Internal Revenue Service ("IRS") concerning any of
the matters discussed in this section. Because the following represents only a
summary, it is qualified in its entirety by the applicable provisions of the
Code, and regulations, court decisions and IRS rulings and other IRS
pronouncements.
Each prospective purchaser of shares of Common Stock and/or Preferred Stock
is advised to consult his or her own tax advisor about the Federal, state,
local, foreign and other tax consequences of buying, holding and selling shares
of Common Stock and/or Preferred Stock, and of the Company's election to be
taxed as a REIT, particularly in light of that purchaser's specific
circumstances.
REIT QUALIFICATION
Entities like the Company that invest principally in real estate and that
otherwise would be taxed as regular corporations may elect to be treated as
REITs when they satisfy certain detailed requirements imposed by the Code. If
the Company qualifies for taxation as a REIT, it generally will not be subject
to corporate income tax to the extent the Company currently distributes its REIT
taxable income to its stockholders. This treatment effectively eliminates the
"double taxation" (i.e., taxation at both the corporate and stockholder levels)
imposed on investments in most regular corporations. A qualifying REIT, however,
may be subject to certain excise and other taxes, as well as to normal corporate
tax on taxable income that is not currently distributed to its stockholders. See
"-- Taxation of the Company as a REIT." In addition, if the Company fails to
qualify as a REIT in any taxable year, it will be subject to Federal income tax
at regular corporate rates on all of its taxable income. The current maximum
Federal tax rate for corporations is 35%, but that rate may increase.
The Company has elected to be treated as a REIT for Federal income tax
purposes commencing with its taxable year ended December 31, 1994, and for each
subsequent taxable year. The Company believes that, commencing with such taxable
year, it has been organized and has operated in such a manner as to qualify for
taxation as a REIT under the Code, commencing with such taxable year, and the
Company intends to continue to operate in such a manner. Winstead Sechrest &
Minick P.C., counsel to the Company, is of the opinion that the Company is
organized in conformity with the requirements for qualification as a REIT, and
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its method of operation will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code. This opinion is based on
various assumptions and is conditioned upon such assumptions and certain
representations made by the Company as to factual matters. The rules governing
REITs are highly technical and require ongoing compliance with a variety of
tests that depend, among other things, on future operating results. Winstead
Sechrest & Minick P.C. will not monitor the Company's compliance with these
requirements. While the Company expects to satisfy these tests, and will use its
best efforts to do so, no assurance can be given that the Company will qualify
as a REIT for any particular year, or that the applicable law will not change
and adversely affect the Company and its stockholders. See "-- Failure to
Qualify as a REIT."
General Qualification Requirements. The Company must be organized as an
entity that would, if it does not maintain its REIT status, be taxable as a
regular corporation. It cannot be a financial institution or an insurance
company. The Company must be managed by one or more directors. The Company
currently meets and expects to continue to meet, each of these requirements. The
Company also expects to satisfy the requirements that are separately described
below concerning share ownership and reporting, the nature and amounts of the
Company's income and assets and the levels of required annual distributions.
Share Ownership; Reporting. Beneficial ownership of the Company must be and
is evidenced by transferable shares (or transferable certificates of beneficial
interest). The shares of Common Stock must be held by at least 100 persons for
approximately 92% of the days in each taxable year. Not more than 50% of the
value of the shares of capital stock may be held, directly or indirectly,
applying certain constructive ownership rules, by five or fewer individuals at
any time during the last half of each of the Company's taxable years. The
Company is not required to satisfy these 100 person and 50% tests until its
second taxable year for which an election is made to be taxed as a REIT. The
Company believes that its shares of Common Stock are owned by a sufficient
number of investors and in appropriate proportions to permit it to continue
satisfying these requirements. To protect against violations of these
requirements, the Articles provide that no person is permitted to own (applying
certain constructive ownership tests) more than the Ownership Limit. The
Ownership Limit does not apply to (i) acquisitions by any person that has made a
tender offer for all outstanding shares of Common Stock in conformity with
applicable securities laws; (ii) the acquisition of shares of Common Stock by an
underwriter in a public offering; (iii) the acquisition of shares of Common
Stock pursuant to the exercise of employee share options; or (iv) acquisitions
approved by the Board. In addition, the Articles contain restrictions on
transfers of the Company's shares of Common Stock, as well as provisions that
automatically convert shares of Common Stock into nonvoting, non-dividend paying
Excess Stock to the extent that the ownership otherwise might jeopardize the
Company's REIT status. See "Description of Common Stock -- Restrictions on
Transfer." Special rules for determining stock ownership apply to certain
qualified pension and profit sharing trusts. See "-- Taxation of Tax Exempt
Entities."
To monitor the Company's compliance with the share ownership requirements,
the Company is required to maintain records disclosing the actual ownership of
shares of Common Stock. To do so, the Company must demand written statements
each year from the record holders of certain percentages of shares of Common
Stock in which the record holders are to disclose the actual owners of the
shares (i.e., the persons required to include in gross income the REIT
dividends). (A REIT with 2,000 or more record stockholders must demand
statements from record holders of 5% or more of its shares, one with fewer than
2,000, but more than 200 record stockholders must demand statements from record
holders of 1% or more of the shares, while a REIT with 200 or fewer record
stockholders must demand statements from record holders of 0.5% or more of the
shares.) A list of those persons failing or refusing to comply with this demand
must be maintained as part of the Company's records. Stockholders who fail or
refuse to comply with the demand must submit a statement with their tax returns
disclosing the actual ownership of the shares of Common Stock and certain other
information.
Sources of Gross Income. In order to qualify as a REIT for a particular
year, the Company also must meet three tests governing the sources of its
income. These tests are designed to ensure that a REIT derives its income
principally from passive real estate investments. The Company satisfied these
three tests for its taxable year ended December 31, 1995. In evaluating a REIT's
income, the REIT will be treated as receiving its proportionate share of the
income produced by any partnership in which the REIT invests, and any such
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income will retain the character that it has in the hands of the partnership.
The Code allows the Company to own and operate a number of its properties
through wholly-owned subsidiaries which are "qualified REIT subsidiaries." The
Code provides that a qualified REIT subsidiary is not treated as a separate
corporation, and all of its assets, liabilities and items of income, deduction
and credit are treated as assets, liabilities and such items of the REIT.
75% Gross Income Test. At least 75% of a REIT's gross income for each
taxable year must be derived from specified classes of income that principally
are real estate related. The permitted categories of principal importance to the
Company are: (i) rents from real property; (ii) interest on loans secured by
real property; (iii) gain from the sale of real property or loans secured by
real property (excluding gain from the sale of property held primarily for sale
to customers in the ordinary course of the Company's trade or business, referred
to below as "dealer property"); (iv) income from the operation and gain from the
sale of certain property acquired in connection with the foreclosure of a
mortgage securing that property ("foreclosure property"); (v) distributions on,
or gain from the sale of, shares of other qualifying REITs; (vi) abatements and
refunds of real property taxes; and (vii) "qualified temporary investment
income" (described below). In evaluating the Company's compliance with the 75%
income test (as well as the 95% income test described below), gross income does
not include gross income from "prohibited transactions." A prohibited
transaction is one involving a sale of dealer property, not including
foreclosure property and certain dealer property held by the Company for at
least four years.
The Company expects that substantially all of its operating gross income
from the Properties will be considered rent from real property. Rent from real
property is qualifying income for purposes of the 75% income test only if
certain conditions are satisfied. Rent from real property includes charges for
services customarily rendered to residents, and rent attributable to personal
property leased together with the real property so long as the personal property
rent is less than 15% of the total rent. The Company does not expect to earn
material amounts in these categories. Rent from real property generally does not
include rent based on the income or profits derived from the property. Also
excluded is rent received from a person or corporation in which the Company (or
any of its 10% or greater owners) owns a 10% or greater interest. The Company
does not expect to earn income in these two excluded categories. A third
exclusion covers amounts received with respect to real property if the Company
furnishes services to the residents or manages or operates the property, other
than through an "independent contractor" from whom the Company does not derive
any income. The obligation to operate through an independent contractor
generally does not apply, however, if any services provided by the Company are
"usually or customarily rendered" in connection with the rental of space for
occupancy only and are not considered rendered primarily for the convenience of
the resident (applying standards that govern in evaluating whether rent from
real property would be unrelated business taxable income when received by a tax
exempt owner of the property).
The Company will, in most instances, directly operate and manage the
Properties without using an "independent contractor." The Company believes that
the only material services to be provided to the residents will be those usually
or customarily rendered in connection with the rental of space for occupancy
only. The Company will not provide services that might be considered rendered
primarily for the convenience of the residents, such as hotel, health care or
extensive recreational or social services. Consequently, the Company believes
that substantially all of its rental income from the Properties will be
qualifying income under the 75% income test, and that the Company's provision of
services will not cause the rental income to fail to be included under that
test.
Upon the Company's ultimate sale of its Properties, any gains realized also
are expected to constitute qualifying income, as gain from the sale of real
property (not involving a prohibited transaction).
95% Gross Income Test. In addition to earning 75% of its gross income from
the sources listed above, at least an additional 20% of the Company's gross
income for each taxable year must come either from those sources, or from
dividends, interest or gains from the sale or other disposition of stock or
other securities that do not constitute dealer property. This test permits a
REIT to earn a significant portion of its income from traditional "passive"
investment sources that are not necessarily real estate related. The term
"interest"
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(under both the 75% and 95% tests) does not include amounts that are based on
the income or profits of any person, unless the computation is based only on a
fixed percentage of receipts or sales.
Failing the 75% or 95% Tests; Reasonable Cause. As a result of the 75% and
95% tests, REITs generally are not permitted to earn more than 5% of their gross
income from active sources (such as brokerage commissions or other fees for
services rendered). This type of income will not qualify for the 75% test or 95%
test but is not expected to be significant and such income and other
nonqualifying income are expected to be at all times less than 5% of the
Company's annual gross income. While the Company does not anticipate that it
will earn substantial amounts of nonqualifying income, if nonqualifying income
exceeds 5% of the Company's gross income, the Company could lose its status as a
REIT. WDN Management, which provides management services with respect to certain
properties not owned by the Company, is not a qualified REIT subsidiary.
Therefore, WDN Management's gross income is not included in the Company's gross
income. However, dividends from WDN Management to the Company are included in
the Company's gross income and qualify for the 95% income test.
If the Company fails to meet either the 75% or 95% income tests during a
taxable year, it may still qualify as a REIT for that year if (i) it reports the
source and nature of each item of its gross income in its Federal income tax
return for that year; (ii) the inclusion of any incorrect information in its
return is not due to fraud with intent to evade tax; and (iii) the failure to
meet the tests is due to reasonable cause and not to willful neglect. However,
in that case the Company would be subject to a 100% tax based on the greater of
the amount by which it fails either the 75% or 95% income tests for such year.
See "-- Taxation of the Company as a REIT."
30% Income Test. The Company also must earn less than 30% of its gross
income from the sale or other disposition of: (i) real property and loans
secured by real property held for less than four years (other than foreclosure
property and involuntarily conversions), (ii) stock or securities held by the
Company for less than one year and (iii) property in a prohibited transaction.
The 30% income test does not have a reasonable cause exception as do the 75% and
95% income tests. Consequently, a failure to meet the 30% income test would
terminate the Company's status as a REIT automatically. Because the Company
expects to hold its Properties for long-term investment and does not anticipate
selling them within four years, the Company expects to comply with this
requirement.
Character of Assets Owned. On the last day of each calendar quarter, the
Company also must meet two tests concerning the nature of its investments.
First, at least 75% of the value of the total assets of the Company generally
must consist of real estate assets, cash, cash items (including receivables) and
government securities. For this purpose, "real estate assets" include interests
in real property, interests in loans secured by mortgages on real property or by
certain interests in real property, shares in other REITs and certain options,
but exclude mineral, oil or gas royalty interests. The temporary investment of
new capital in debt instruments also qualifies under this 75% asset test, but
only for the one-year period beginning on the date the Company receives the new
capital. Second, although the balance of the Company's assets generally may be
invested without restriction, the Company will not be permitted to own (i)
securities of any one non-governmental issuer that represent more than 5% of the
value of the Company's total assets or (ii) more than 10% of the outstanding
voting securities of any single issuer. A REIT, however, may own 100% of the
stock of a qualified REIT subsidiary, in which case the assets, liabilities and
items of income, deduction and credit of the subsidiary are treated as those of
the REIT. In evaluating a REIT's assets, if the REIT invests in a partnership,
it is deemed to own its proportionate share of the assets of the partnership.
The Company's non-voting common stock of WDN Management does not violate
the prohibition against a REIT's ownership of more than 10% of the voting
securities of any one issuer. If, however, the value of the Company's non-voting
common stock in WDN Management were to exceed 5% of the total value of all of
the Company's assets, then the asset test would be violated. The Company
believes that the value of the securities of WDN Management held by the Company
is substantially less than 5% of the total value of the Company's assets, and
the Company does not expect that it will exceed 5% in the future.
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The Company anticipates that it complies with these asset tests. While some
portion of its assets initially was invested in qualifying temporary debt
investments, substantially all of the Company's investments are in its
Properties, which should represent qualifying real estate assets.
Annual Distributions to Stockholders. To maintain REIT status, the Company
generally must distribute to its stockholders in each taxable year at least 95%
of its net ordinary income (capital gain is not required to be distributed).
More precisely, the Company must distribute an amount equal to (i) 95% of the
sum of (a) its "REIT Taxable Income" before deduction of dividends paid and
excluding any net capital gain and (b) any net income from foreclosure property
less the tax on such income, minus (ii) certain limited categories of "excess
noncash income." REIT Taxable Income is defined to be the taxable income of the
REIT, computed as if it were an ordinary corporation, with certain
modifications. For example, the deduction for dividends paid is allowed, but
neither net income from foreclosure property, nor net income from prohibited
transactions, is included. In addition, the REIT may carry over, but not carry
back, a net operating loss for 15 years following the year in which it was
incurred. REITs also are required to distribute at least 95% of any after-tax
built-in gain that is realized during the ten year recognition period applicable
to property transferred to the REIT in a corporate nonrecognition transaction.
The Company does not anticipate that any such property will be transferred to
it.
A REIT may satisfy the 95% distribution test with dividends paid during the
taxable year and with certain dividends paid after the end of the taxable year.
Dividends paid in January that were declared during the last calendar quarter of
the prior year and were payable to stockholders of record on a date during the
last calendar quarter of that prior year are treated as paid on December 31 of
the prior year (for both the Company and its stockholders). Other dividends
declared before the due date of the Company's tax return for the taxable year
(including extensions) also will be treated as paid in the prior year for the
Company if they are paid (i) within 12 months of the end of such taxable year
and (ii) no later than the Company's next regular distribution payment.
Dividends that are paid after the close of a taxable year and do not qualify
under the rule governing payments made in January that is described above will
be taxable to the stockholders in the year paid, even though they may be taken
into account by the Company for a prior year. A nondeductible excise tax equal
to 4% will be imposed on the Company for each calendar year to the extent that
dividends declared and distributed or deemed distributed before December 31 are
less than the sum of (a) 85% of the Company's "ordinary income" plus (b) 95% of
the Company's capital gain net income plus (c) income not distributed in earlier
years minus (d) distributions in excess of income in earlier years and (e) any
amount of REIT taxable income for such year.
The Company will be taxed at regular corporate rates to the extent that it
retains any portion of its taxable income (e.g., if the Company distributes only
the required 95% of its taxable income, it would be taxed on the retained 5%).
Under certain circumstances the Company may not have sufficient cash or other
liquid assets to meet the distribution requirement. This could arise because of
competing demands for the Company's funds, or due to timing differences between
tax reporting and cash receipts and disbursements (i.e., income may have to be
reported before cash is received, or expenses may have to be paid before a
deduction is allowed). Although the Company does not anticipate any difficulty
in meeting this requirement, no assurance can be given that necessary funds will
be available.
If the Company fails to meet the 95% distribution requirement because of an
adjustment to the Company's taxable income by the IRS, the Company may be able
to cure the failure retroactively by paying a "deficiency dividend" (as well as
applicable interest and penalties) within a specified period.
TAXATION OF THE COMPANY AS A REIT
The Company has adopted the calendar year for Federal income tax purposes,
and uses the accrual method of accounting. For each taxable year in which the
Company qualifies as a REIT, it generally will be taxed only on the portion of
its taxable income that it retains (which will include undistributed net capital
gain), because the Company will be entitled to a deduction for its dividends
paid to stockholders during the taxable year. A dividends paid deduction is not
available for dividends that are considered preferential within any given class
of shares or as between classes except to the extent such class is entitled to
such preference.
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The Company does not anticipate that it will pay any such preferential
dividends. The Articles provide for the automatic exchange of outstanding shares
of Common Stock or Preferred Stock for Excess Stock in circumstances in which
the Company's REIT status might otherwise be put into jeopardy (i.e., if a
person attempts to acquire a block of shares that would be sufficient to cause
the Company to fail the requirement that five or fewer individuals may not own
more than 50% of the value of the outstanding shares). Because Excess Stock will
represent a separate class of outstanding shares, the fact that those shares
will not be entitled to dividends should not adversely affect the Company's
ability to deduct its dividend payments.
The Company would be subject to tax on any income or gain from foreclosure
property at the highest corporate rate (currently 35%). A confiscatory tax of
100% applies to any net income from prohibited transactions. In addition, if the
Company fails to meet either the 75% or 95% source of income tests described
above, but still qualifies for REIT status under the reasonable cause exception
to those tests, a 100% tax would be imposed equal to the amount obtained by
multiplying (i) the greater of the amount, if any, by which it failed either the
75% income test or the 95% income test, times (ii) the ratio of the Company's
REIT Taxable Income to the Company's gross income (excluding capital gain and
certain other items). The Company also will be subject to the minimum tax on
items of tax preference (excluding items specifically allocable to the Company's
stockholders). Finally, under regulations that are to be promulgated, the
Company also may be taxed at the highest regular corporate tax rate on any
built-in gain (i.e., the excess of value over adjusted tax basis) attributable
to assets that the Company acquires in certain tax-free corporate transactions,
to the extent the gain is recognized during the first ten years after the
Company acquires such assets.
FAILURE TO QUALIFY AS A REIT
For any taxable year in which the Company fails to qualify as a REIT, it
would be taxed at the usual corporate rates on all of its taxable income.
Distributions to its stockholders would not be deductible in computing that
taxable income, and distributions would no longer be required. Any corporate
level taxes generally would reduce the amount of cash available to the Company
for distribution to its stockholders and, because the stockholders would
continue to be taxed on the distributions they receive, the net after tax yield
to the stockholders from their investment in the Company likely would be reduced
substantially. As a result, the Company's failure to qualify as a REIT during
any taxable year could have a material adverse effect upon the Company and its
stockholders. If the Company loses its REIT status, unless certain relief
provisions apply, the Company will not be eligible to elect REIT status again
until the fifth taxable year which begins after the first year for which the
Company's election was terminated.
If, after forfeiting its REIT status, the Company later qualifies and
elects to be taxed as a REIT again, the Company may face significant adverse tax
consequences. Prior to the end of the year in which the Company sought to
qualify again as a REIT, the Company would be required to make distributions
sufficient to eliminate any earnings and profits accumulated during its period
of non-REIT status. Moreover, immediately prior to the effectiveness of the
election to return to REIT status, the Company would be treated as having
disposed of all of its assets in a taxable transaction, triggering taxable gain
with respect to the Company's appreciated assets. In that event, however, the
Company would be permitted to elect an alternative treatment under which those
gains would be taken into account only as and when they actually are recognized
upon sales of the appreciated property occurring within a ten-year period. The
Company would be required to distribute at least 95% of any such recognized
gains, but it would not receive the benefit of a dividends paid deduction to
reduce those taxable gains. Thus, any such gains on appreciated assets would be
subject to double taxation (i.e., at the corporate level as well as the
stockholder level).
TAXATION OF STOCKHOLDERS
Distributions generally will be taxable to stockholders as ordinary income
to the extent of the Company's earning and profits. Dividends declared during
the last quarter of a calendar year and actually paid during January of the
immediately following calendar year are generally treated as if received by the
stockholders on December 31 of the calendar year during which they were
declared. Distributions paid to stockholders will not constitute passive
activity income, and as a result generally cannot be offset by losses from
passive activities of a stockholder who is subject to the passive activity
rules. Distributions designated by the Company as capital
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gains dividends generally will be taxed as long term capital gains to
stockholders to the extent that the distributions do not exceed the Company's
actual net capital gain for the taxable year. Corporate stockholders may be
required to treat up to 20% of any such capital gains dividends as ordinary
income. Distributions by the Company, whether characterized as ordinary income
or as capital gains, are not eligible for the 70% dividends received deduction
for corporations. Stockholders are not permitted to deduct losses or loss
carry-forwards of the Company. Future regulations may require that the
stockholders take into account, for purposes of computing their individual
alternative minimum tax liability, certain tax preference items of the Company.
The Company may generate cash in excess of its net earnings. If the Company
distributes cash to stockholders in excess of the Company's current and
accumulated earnings and profits (other than as a capital gain dividend), the
excess cash will be deemed to be a return of capital to each stockholder to the
extent of the adjusted tax basis of the stockholder's shares of Common Stock.
Distributions in excess of the adjusted tax basis will be treated as gain from
the sale or exchange of the shares of Common Stock. A stockholder who has
received a distribution in excess of current and accumulated earnings and
profits of the Company may, upon the sale of the shares of Common Stock, realize
a higher taxable gain or a smaller loss because the basis of the shares of
Common Stock as reduced will be used for purposes of computing the amount of the
gain or loss.
Generally, gain or loss realized by a stockholder upon the sale of shares
of Common Stock will be reportable as capital gain or loss. If a stockholder
receives a long-term capital gain dividend from the Company and has held the
shares of Common Stock for six months or less, any loss incurred on the sale or
exchange of the shares of Common Stock is treated as a long-term capital loss,
to the extent of the corresponding long-term capital gain dividend received.
In any year in which the Company fails to qualify as a REIT, the
stockholders generally will continue to be treated in the same fashion described
above, except that no Company dividends will be eligible for treatment as
capital gains dividends, corporate stockholders will qualify for the dividends
received deduction and the stockholders will not be required to report any share
of the Company's tax preference items.
BACKUP WITHHOLDING
The Company will report to its stockholders and the IRS the amount of
dividends paid during each calendar year and the amount of tax withheld, if any.
If a stockholder is subject to backup withholding, the Company will be required
to deduct and withhold from any dividends payable to that stockholder a tax of
31%. These rules may apply (i) when a stockholder fails to supply a correct
taxpayer identification number, (ii) when the IRS notifies the Company that the
stockholder is subject to the rules or has furnished an incorrect taxpayer
identification number or (iii) in the case of corporations or others within
certain exempt categories, when they fail to demonstrate that fact when
required. A stockholder that does not provide a correct taxpayer identification
number may also be subject to penalties imposed by the IRS. Any amount withheld
as backup withholding may be credited against the stockholder's Federal income
tax liability. The Company also may be required to withhold a portion of capital
gain distributions made to stockholders who fail to certify their non-foreign
status to the Company.
TAXATION OF TAX EXEMPT ENTITIES
In general, a tax exempt entity that is a stockholder of the Company will
not be subject to tax on distributions from the Company or gain realized on the
sale of shares of Common Stock. In Revenue Ruling 66-106, the IRS specifically
confirmed that a REIT's distributions to a tax exempt employees' pension trust
did not constitute unrelated business taxable income. A tax exempt entity may be
subject to tax, however, to the extent that it has financed the acquisition of
its shares of Common Stock with "acquisition indebtedness" within the meaning of
the Code. The Revenue Reconciliation Act of 1993 has modified the rules for tax
exempt employees' pension and profit sharing trusts which qualify under Code
Section 401(a) and are exempt from tax under Code Section 501(a) ("qualified
trusts") for tax years beginning after December 31, 1993. Under the new rules,
in determining the number of stockholders a REIT has for purposes of the "50%
test" described above under "-- REIT Qualification -- Share Ownership;
Reporting," generally, any stock held by a qualified trust will be treated as
held directly by its beneficiaries in proportion to their
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actuarial interests in such trust and will not be treated as held by such trust.
(This general rule will not apply if certain persons related to the qualified
trust ("disqualified persons") hold in the aggregate more than 5% of the value
of the REIT and the REIT has accumulated earnings and profits attributable to
any period for which it did not qualify as a REIT; this exception is not
expected to apply to the Company.)
A qualified trust owning more than 10% of a REIT must treat a percentage of
dividends from the REIT as unrelated business taxable income. The percentage is
determined by dividing the REIT's gross income (less direct expenses related
thereto) derived from an unrelated trade or business for the year by the gross
income of the REIT for the year in which the dividends are paid. However, if
this percentage is less than 5%, dividends are not treated as unrelated business
taxable income. These unrelated business taxable income rules apply only if the
REIT qualifies as a REIT because of the change in the 50% test discussed above
and if the trust is "predominantly held" by a qualified trust. A real estate
investment trust is predominantly held by qualified trusts if at least one
pension trust owns more than 25% of the value of the REIT or a group of pension
trusts individually holding more than 10% of the value of the REIT collectively
owns more than 50% of the value of the REIT.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt from
Federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of
the Code, respectively, income from an investment in the Company will constitute
unrelated business taxable income unless the organization is able to deduct an
amount properly set aside or placed in reserve for certain purposes so as to
offset the unrelated business taxable income generated by the investment in the
Company. These prospective investors should consult their own tax advisors
concerning the "set aside" and reserve requirements.
TAXATION OF FOREIGN INVESTORS
The rules governing Federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of Federal, state and local income tax laws with regard to an
investment in shares of Common Stock, including any reporting requirements, as
well as the tax treatment of such an investment under the laws of their home
country.
Dividends that are not attributable to gain from sales or exchanges by the
Company of United States real property interests and not designated by the
Company as capital gain dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Such dividends ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the dividend unless an
applicable tax treaty reduces or eliminates that tax. However, if income from
the investment in the shares of Common Stock is treated as effectively connected
with the Non-U.S. Stockholder's conduct of a United States trade or business,
the Non-U.S. Stockholder generally will be subject to a tax at graduated rates,
in the same manner as U.S. stockholders are taxed with respect to such dividends
(and may also be subject to the 30% branch profits tax in the case of a
stockholder that is a foreign corporation). The Company expects to withhold
United States income tax at the rate of 30% on the gross amount of any such
dividends paid to a Non-U.S. Stockholder unless (i) the Non-U.S. Stockholder
files on IRS Form 1001 claiming that a lower treaty rate applies or (ii) the
Non-U.S. Stockholder files an IRS Form 4224 with the Company claiming that the
dividend is effectively connected income. Dividends in excess of current and
accumulated earnings and profits of the Company will not be taxable to a
stockholder to the extent that they do not exceed the adjusted basis of the
stockholder's shares of Common Stock, but rather will reduce the adjusted basis
of such shares of Common Stock. To the extent that such dividends exceed the
adjusted basis of a Non-U.S. Stockholder's shares of Common Stock, they will
give rise to tax liability if the Non-U.S. Stockholder would otherwise be
subject to tax on any gain from the sale or disposition of his shares of Common
Stock, as described below. If it cannot be determined at the time a dividend is
paid whether or not such dividend will be in excess of current and accumulated
earnings and profits, the dividends will be subject to such withholding. The
Company does not intend to make quarterly estimates of that portion of the
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dividends that are in excess of earnings and profits, and as a result, all
dividends will be subject to such withholding. However, the Non-U.S. Stockholder
may seek a refund of such amounts from the IRS.
For any year in which the Company qualifies as a REIT, dividends that are
attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, those dividends are taxed to a Non-U.S. Stockholder as
if such gain were effectively connected with a United States business. Non-U.S.
Stockholders would thus be taxed at the normal capital gain rates applicable to
U.S. stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). Also,
dividends subject to FIRPTA may be subject to a 30% branch profits tax in the
hands of a foreign corporate stockholder not entitled to treaty exemption. The
Company is required by the Code and applicable Treasury Regulations to withhold
35% of any dividend that could be designated by the Company as a capital gain
dividend. This amount is creditable against the Non-U.S. Stockholder's FIRPTA
tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares of Common
Stock generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. It is currently anticipated that the Company
will be a "domestically controlled REIT," and therefore the sale of shares of
Common Stock will not be subject to taxation under FIRPTA. Because the Common
Stock is publicly traded, however, no assurance can be given that the Company
will remain a "domestically controlled REIT." However, gain not subject to
FIRPTA will be taxable to a Non-U.S. Stockholder if (i) investment in the shares
of Common Stock is effectively connected with the Non-U.S. Stockholder's United
States trade or business, in which case the Non-U.S. Stockholder will be subject
to the same treatment as U.S. stockholders with respect to such gain (and may
also be subject to the 30% branch profits tax in the case of a stockholder that
is a foreign corporation), or (ii) the Non-U.S. Stockholder is a nonresident
alien individual who was present in the United States for 183 days or more
during the taxable year and has a "tax home" in the United States, in which case
the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. If the gain on the sale of shares of Common Stock
were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder will be
subject to the same treatment as U.S. stockholders with respect to such gain
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals and may also be subject to the
30% branch profits tax in the case of a stockholder that is a foreign
corporation).
Upon the death of a foreign individual stockholder, the investor's shares
will be treated as part of the investor's U.S. estate for purposes of the U.S.
estate tax, except as may be otherwise provided in an applicable estate tax
treaty.
TAX ASPECTS OF TRANSFERRED INTERESTS
The following discussion summarizes certain Federal income tax
considerations applicable solely to the Company's interests in distributions
(assigned by Walden to the Company as part of the formation of the Company)
attributable to Walden's general partnership interests in three partnerships
which own multifamily residential properties which were not acquired by the
Company (the "Transferred Interests") and partnerships to which they relate (the
"Acquired Partnerships").
Classification as a Partnership. The Company includes in its income its
distributive share of the Acquired Partnerships' income and deducts its
distributive share of the Acquired Partnerships' losses only if the Acquired
Partnerships are classified, for Federal income tax purposes, (i) as
partnerships rather than as associations taxable as corporations and (ii) not as
"publicly traded partnerships." An organization formed as a partnership will be
treated as a partnership rather than as a corporation for Federal income tax
purposes only if it has no more than two of the following four corporate
characteristics: continuity of life, centralization of management, limited
liability and free transferability of interests.
If for any reason the Acquired Partnerships were taxable as corporations
rather than as partnerships for Federal income tax purposes, the Company may not
be able to satisfy the income and asset requirements for
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status as a REIT. Further, items of income and deduction of the Acquired
Partnerships would not pass through to their partners; their partners would be
treated as stockholders for tax purposes. The Acquired Partnerships would be
required to pay income tax at regular corporate tax rates on their net income
and distributions to partners would constitute dividends to the extent of the
Acquired Partnerships' earnings and profits. In addition, any change in the
Acquired Partnerships' status for tax purposes might be treated as a taxable
event, in which case the Company might incur taxable income without any related
cash distribution. The Company has not requested, and does not intend to
request, a ruling from the IRS that the Acquired Partnerships will be treated as
"partnerships" for Federal income tax purposes.
Partners, Not the Partnership, Subject to Tax. Partnerships are not taxable
entities for Federal income tax purposes. Rather, the Company is required to
take into account its allocable share of the Acquired Partnerships' income,
gains, losses, deductions and credits for any taxable year of the partnerships
ending within or with the taxable year of the Company without regard to whether
the Company has received or will receive any cash distributions from the
Acquired Partnerships. For purposes of income tests and asset tests which govern
classification of the Company as a REIT, the Company must include its
proportionate share (based upon capital interests) of the income and assets of
any partnership in which it has a direct or indirect interest.
Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and losses among partners, the allocations
provided in a partnership agreement will be disregarded for tax purposes under
Section 704(b) of the Code if they do not comply with the provisions of such
Section and the Treasury Regulations promulgated thereunder. If an allocation is
not recognized for Federal income tax purposes, the item subject to the
allocation will be reallocated in accordance with the partners' interests in the
partnership, which will be determined by taking into account all of the facts
and circumstances relating to the economic arrangement of the partners with
respect to such item. The Acquired Partnerships' allocations of taxable income
and loss are intended to comply with the requirements of Section 704(b) of the
Code and the Treasury Regulations promulgated thereunder.
Basis in Partnership Interests. The Company's adjusted tax basis in a
particular Transferred Interest generally (i) is equal to the fair market value
of the partnership interest as of the date acquired; (ii) is increased by (a)
its allocable share of the partnership's income and (b) its allocable share of
indebtedness of the partnership on the date acquired and its allocable share of
any increases in such indebtedness thereafter; and (iii) is reduced, but not
below zero, by the Company's allocable share of (a) the partnership's loss and
(b) the amount of cash distributed to the Company, the basis of property
distributed to the Company and by constructive distributions resulting from a
reduction in the Company's share of the indebtedness of the partnership
thereafter.
If the allocation of the Company's distributive share of a partnership's
loss would reduce the adjusted tax basis of the Company's partnership interest
in the partnership below zero, the recognition of such loss will be deferred
until such time as the recognition of such loss would not reduce the Company's
adjusted tax basis below zero. To the extent that a partnership distribution or
any decrease in the Company's share of the indebtedness of a partnership (each
such decrease being considered a constructive cash distribution to the partners)
would reduce the Company's adjusted tax basis in the partnership below zero,
such distributions (including such constructive distributions) would constitute
taxable income to the Company. Such distributions and constructive distributions
normally will be characterized as a capital gain, and if the Company's
partnership interest in such partnership has been held for longer than the
long-term capital gain holding period (currently one year), the distributions
and constructive distributions will constitute long-term capital gains.
STATE AND LOCAL TAXES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in the Company.
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ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") (a "Plan"), should consider the fiduciary standards under
ERISA in the context of the Plan's particular circumstances before authorizing
an investment of a portion of such Plan's assets in the shares of Common Stock.
In particular, such fiduciary should consider (i) whether the investment
satisfies the diversification requirements of Section 404(a)(1)(c) of ERISA,
(ii) whether the investment is in accordance with the documents and instruments
governing the Plan as required by Section 404(a)(1)(D) of ERISA, (iii) whether
the investment is for the exclusive purpose of providing benefits to
participants in the Plan and their beneficiaries or defraying reasonable
administrative expenses of the Plan, and (iv) whether the investment is prudent
under ERISA. In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA, and the corresponding provisions
of the Code, prohibit a wide range of transactions involving the assets of a
Plan or an individual retirement account ("IRA") and persons who have certain
specified relationships to the Plan or an IRA ("parties in interest" within the
meaning of ERISA, "disqualified persons" within the meaning of the Code). Thus,
a fiduciary of a Plan or an IRA considering an investment in the shares of
Common Stock also should consider whether the acquisition or the continued
holding of the shares of Common Stock might constitute or give rise to a direct
or indirect prohibited transaction.
The Department of Labor (the "DOL") has issued final regulations (the
"Regulations") as to what constitutes assets of an employee benefit plan under
ERISA. Under the Regulations, if a Plan or an IRA acquires an equity interest in
an entity, which interest is neither a "publicly offered security" nor a
security issued by an investment company registered under the Investment Company
Act of 1940, as amended, the Plan's and IRA's assets would include, for purposes
of the fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code, both the equity interest and an
undivided interest in each of the entity's underlying assets unless certain
specified exceptions apply. The Regulations define a publicly-offered security
as a security that is "widely held," "freely transferable," and either part of a
class of securities registered under the Exchange Act, or sold pursuant to an
effective registration statement under the Securities Act (provided the
securities are registered under the Exchange Act within 120 days after the end
of the fiscal year of the issuer during which the offering occurred). The
Offered Securities will be sold in an offering registered under the Securities
Act and are or will be registered under the Exchange Act.
The Regulations provide that a security is "widely held" only if it is part
of a class of securities that is owned by 100 or more investors independent of
the issuer and of one another. A security will not fail to be "widely held"
because the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control.
The Regulations provide that whether a security is "freely transferable" is
a factual question to be determined on the basis of all relevant facts and
circumstances. The DOL Regulations further provide that when a security is part
of an offering in which the minimum investment is $10,000 or less certain
restrictions ordinarily will not, alone or in combination, affect the finding
that such securities are freely transferable. The Company believes that the
restrictions imposed under the Articles on the transfer of the capital stock are
limited to the restrictions on transfer generally permitted under the
Regulations and are not likely to result in the failure of the capital stock to
be "freely transferable." The Company also believes that certain restrictions
that apply to the capital stock held by the Company or which may be derived from
contractual arrangements requested by the underwriters in connection with
Offered Securities offered pursuant to an underwritten agreement are unlikely to
result in the failure of the capital stock to be "freely transferable." The
Regulations only establish a presumption in favor of the finding of free
transferability, and, therefore, no assurance can be given that the DOL and the
U.S. Treasury Department will not reach a contrary conclusion.
Assuming that the Offered Securities will be "widely held," the Company
believes that the Offered Securities will be publicly offered securities for
purposes of the Regulations and that the assets of the Company will not be
deemed to be "plan assets" of any Plan or IRA that invests in the Offered
Securities.
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PLAN OF DISTRIBUTION
The Company may sell the Offered Securities to one or more underwriters for
public offering and sale by them or may sell the Offered Securities to investors
directly or through agents. Any such underwriter or agent involved in the offer
and sale of the Offered Securities will be named in the applicable Prospectus
Supplement.
Underwriters may offer and sell the Offered Securities at a fixed price or
prices which may be changed, at prices related to the prevailing market prices
at the time of sale or at negotiated prices. The Company also may, from time to
time, authorize underwriters acting as the Company's agents to offer and sell
the Offered Securities upon the terms and conditions as are set forth in the
applicable Prospectus Supplement. In connection with the sale of the Offered
Securities, underwriters may be deemed to have received compensation from the
Company in the form of underwriting discounts or commissions and may also
receive commissions from purchasers of the Offered Securities for whom they may
act as agent. Underwriters may sell the Offered Securities to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of the Offered Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters, dealers
and agents participating in the distribution of the Offered Securities may be
deemed to be underwriters, and any discounts and commissions received by them
and any profit realized by them on resale of the Offered Securities may be
deemed to be underwriting discounts and commissions, under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered into
with the Company, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the Securities Act. Underwriters,
dealers and agents may engage in transactions with, or perform services for, or
be customers of, the Company in the ordinary course of business.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase the Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to Delayed
Delivery Contracts ("Contracts") providing for payment and delivery on the date
or dates stated in such Prospectus Supplement. Each Contract will be for an
amount not less than, and the aggregate amount of the Offered Securities sold
pursuant to Contracts shall be not less nor more than, the respective amounts
stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions but will in all cases be subject
to the approval of the Company. Contracts will not be subject to any conditions
except (i) the purchase by an institution of the Offered Securities covered by
its Contracts shall not at the time of delivery be prohibited under the laws of
any jurisdiction in the United States to which such institution is subject; and
(ii) if the Offered Securities are being sold to underwriters, the Company shall
have sold to such underwriters the total amount of the Offered Securities less
the amount thereof covered by the Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
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LEGAL MATTERS
Certain legal matters in connection with the Offered Securities, including
the validity of the Offered Securities, will be passed upon for the Company by
Winstead Sechrest & Minick P.C., Dallas, Texas.
EXPERTS
The audited consolidated and combined financial statements for Walden
Residential Properties, Inc. and Walden Predecessors, respectively, included in
the Form 10-K referred to and incorporated by reference in this Prospectus have
been audited by Deloitte & Touche LLP, independent certified public accountants,
as stated in their reports appearing therein and have been so included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER.
NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS CONSTITUTES
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. S-3
Information Incorporated by
Reference........................... S-3
The Company........................... S-5
Risk Factors.......................... S-6
Recent Developments................... S-10
Use of Proceeds....................... S-10
Price Range of Common Stock and
Distributions....................... S-11
Underwriting.......................... S-12
Legal Matters......................... S-12
Experts............................... S-12
Index to Financial Statements......... F-1
PROSPECTUS
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
The Company........................... 4
Recent Developments................... 4
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends........................... 5
Use of Proceeds....................... 6
Description of Common Stock........... 6
Description of Preferred Stock........ 8
Description of Securities Warrants.... 12
Federal Income Tax Considerations..... 14
Erisa Considerations.................. 24
Plan of Distribution.................. 25
Legal Matters......................... 26
Experts............................... 26
</TABLE>
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1,076,000 SHARES
WALDEN RESIDENTIAL
PROPERTIES, INC.
COMMON STOCK
------------
PROSPECTUS SUPPLEMENT
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RAYMOND JAMES &
ASSOCIATES, INC.
DECEMBER 19, 1996
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