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Filed Pursuant to Rule 424(b)(2)
Registration No. 33-92328
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 2, 1995)
1,525,000 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 62 multifamily
properties containing 18,937 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 10.8% 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 August 21, 1996, the last reported sale price of the Common
Stock on the NYSE was $20.875 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-5 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.
<TABLE>
<CAPTION>
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UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share......................... $20.625 $1.08 $19.545
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Total(3).......................... $31,453,125 $1,647,000 $29,806,125
=================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of $200,000 payable by the Company.
(3) The Company has granted the Underwriter an option to purchase up to an
additional 228,750 shares of Common Stock on the same terms set forth above
to cover over-allotments, if any. If all such shares are purchased, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $36,171,094, $1,894,050 and $34,277,044, respectively.
See "Underwriting."
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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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The shares of Common Stock are offered by the Underwriter, subject to prior
sale, when, as and if accepted by the Underwriter and subject to certain
conditions. It is expected that certificates for the shares of Common Stock
offered hereby will be available for delivery on or about August 27, 1996, at
the offices of Smith Barney Inc., 333 West 34th Street, New York, New York
10001.
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SMITH BARNEY INC.
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The date of this Prospectus Supplement is August 21, 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 securities 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 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 Current Report on Form 8-K dated April 23, 1996.
(h) The Company's Current Report on Form 8-K dated August 21, 1996.
(i) Description of the Common Stock contained in the Company's
registration statement on Form 8-A filed November 19, 1993.
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 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" incorporated by reference 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 and June 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, "Walden"). The Company
currently owns and operates 62 multifamily properties (the "Properties")
containing 18,937 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 94.4% at August 11, 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 nine additional
multifamily properties containing 2,598 apartment units.
Upon completion of the IPO in February 1994, the Company purchased the
multifamily operations of Walden, including 18 Properties containing 5,895
apartment units (of which a 299-unit property was sold in April 1995 and a
384-unit property was sold in April 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 Walden. Since the
consummation of the IPO, the Company has acquired 45 Properties (of which one
242-unit property was sold in December 1995), containing an aggregate of 13,519
apartment units, for an aggregate purchase price of approximately $434.3
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 Walden. The Company's 19
senior executives have an average tenure with the Company and Walden of nine
years and have an average of approximately 18 years experience in the
multifamily property 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 (214)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 shares of Common Stock in the
Offering.
DEPENDENCE ON TEXAS MARKET
Thirty-seven of the Properties, containing 10,663 apartment units (56% of
all apartment units comprising the Properties), are located in Texas with 22 of
the Properties, containing 6,504 apartment units (34% 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 June 30, 1996, the Company had outstanding approximately $272.4 million
of mortgage indebtedness secured by substantially all of the Properties. As of
June 30, 1996, the Company had approximately $93.1 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 the 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. At June 30, 1996, the Company had
outstanding variable-rate indebtedness aggregating approximately $67.1 million,
including $16.0 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 45 Properties
(and sold three properties) and increased the number of apartment units it owns
to 18,937, an increase of approximately 200% 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, the
Company had additional borrowing availability of approximately $41.0 million
under the Credit Facility. The issuance of additional Common Stock or Preferred
Stock to
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obtain financing for the acquisition of additional properties could result in a
dilution of ownership for the existing stockholders. In addition, if cash flows
generated from the investment of such net proceeds in properties or otherwise is
less than the distributions 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, funds from operations would 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 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 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 contaminations 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.
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.
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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, 68% of the total number of apartment units in the 14 affected
Properties and 18% 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
economically 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.
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, 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 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
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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.
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND SIMILAR LAWS
Under the Americans with Disabilities Act of 1990 (the "ADA"), all places
of public accommodation 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 modifications 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 changes 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.
RECENT DEVELOPMENTS
Since June 30, 1996, the Company has acquired two apartment communities,
containing an aggregate of 442 units, both of which are located in Jacksonville,
Florida. The aggregate acquisition cost for these properties was approximately
$14.5 million which was funded from the Credit Facility and funds held in escrow
under a tax-free exchange. In addition, the Company has entered into contracts
to acquire three additional properties, with an aggregate of 736 units, one of
which is located in Jacksonville, Florida, one in Melbourne, Florida and one in
Nashville, Tennessee (the "Purchased Properties"). One of these properties is
being purchased for $9.0 million from an affiliate of the Company. All of such
proceeds received from the sale will be utilized to retire all liabilities of
the property. Therefore, no proceeds from the sale of this property will be
retained by such affiliate. The aggregate acquisition cost for the Purchased
Properties is $23.4 million. While the Company expects to close the acquisition
of the Purchased Properties prior to August 31, 1996, the Company is continuing
its due diligence review of these properties and there can be no assurance that
any of these Purchased Properties will be acquired.
The Company also has entered into contracts to acquire six additional
apartment communities, with an aggregate of 1,396 units, in Texas and Arizona,
for approximately $48.1 million, including the assumption of indebtedness
existing on two of the properties in the amount of $10.0 million (the
"Acquisition Properties"). The Company has completed its due diligence on one of
the Acquisition Properties (with 290 apartment units) and expects to acquire
this property in September 1996. The Company anticipates that its due diligence
review of the remaining five Acquisition Properties will be completed within the
next 30 days. If such properties meet the Company's requirements, the Company
expects to acquire four of the Acquisition Properties in September 1996 and one
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 the Acquisition Properties will ultimately be acquired.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby will be approximately $29.6 million ($34.1 million if the Underwriter's
over-allotment option is exercised in full). The Company intends to use: (i)
$23.4 million of the net proceeds to fund the acquisition of the Purchased
Properties, and (ii) $6.2 million of the net proceeds to repay a portion of the
outstanding indebtedness under the Credit Facility. Such indebtedness bears
interest at approximately 7.1% per annum, matures in February 1998 and was
incurred by the Company to pay a portion of the purchase price of certain
property acquisitions. In the event that any of the Purchased Properties is not
ultimately acquired, the excess net proceeds of the Offering will be used to
repay a portion of the outstanding indebtedness under the Credit Facility.
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.
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>
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DISTRIBUTIONS
HIGH LOW PER SHARE
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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 (through August 21, 1996)....................... 21.500 19.750 .465(2)
</TABLE>
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(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 August 7, 1996, the Company declared a distribution of $.465 per share
of Common Stock to stockholders of record on August 15, 1996, payable
September 3, 1996. Purchasers of Common Stock in this Offering will not
receive such distribution.
As of July 31, 1996, the Company had 1,100 record holders of Common Stock.
The Company intends to continue to pay regular quarterly distributions to
its shareholders. 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 of the
Company deems relevant.
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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 Smith Barney
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 $0.65 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 aggregate
of 228,750 additional shares of Common Stock at the public offering price set
forth on the cover page of this Prospectus Supplement, minus the underwriting
discounts and commissions. The Underwriter may exercise such option to purchase
additional shares solely for the purpose of covering over-allotments, if any,
incurred in connection with the sale of the shares 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, Baltimore,
Maryland as to certain matters of Maryland law.
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
Supplement and the accompanying Prospectus have been audited by Deloitte &
Touche LLP, independent certified public accountants, as stated in their report
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.
S-10
<PAGE> 11
PROSPECTUS
$150,000,000
WALDEN RESIDENTIAL PROPERTIES, INC.
COMMON STOCK AND PREFERRED STOCK
Walden Residential Properties, Inc. (the "Company") may from time to time
offer and sell shares of its common stock, par value $.01 per share (the "Common
Stock"), and shares of its preferred stock, par value $.01 per share (the
"Preferred Stock," and together with the Common Stock, the "Offered
Securities"), with an aggregate public offering price not to exceed
$150,000,000. The Offered Securities may be offered separately or together, in
separate series, in amounts and at prices and terms to be set forth in an
accompanying 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
will be set forth in the applicable Prospectus Supplement. The specific number
of shares of Common Stock and issuance price per share 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, through agents designated
from time to time by the Company, or to or through underwriters or dealers. 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 JUNE 2, 1995.
<PAGE> 12
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 information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy and information statements and other information
with the Commission. The reports, proxy and information statements, the
Registration Statement and exhibits thereto, and other information filed by the
Company with the Commission can be inspected and copied at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
13th Floor, 7 World Trade Center, New York, New York 10048, and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of the material
can be obtained from the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Common Stock is traded on the New York Stock Exchange,
Inc. ("NYSE"). The reports, proxy and information statements and other
information can also 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.
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<PAGE> 13
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference the following documents
heretofore filed by the Company with the Commission:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994;
(b) The Company's Quarterly Report Form 10-Q for the fiscal quarter
ended March 31, 1995;
(c) The Company's current Report on Form 8-K/A-1 dated January 10,
1995; and
(d) The Company's Registration Statement on Form 8-A filed November
19, 1993.
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 Nancy Bisgaier,
Shareholder Relations, Walden Residential Properties, Inc., 13601 Preston Road,
Suite 800 West, Dallas, Texas 75240.
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<PAGE> 14
THE COMPANY
The Company is a self-administered, self-managed, fully integrated real
estate investment trust focused on middle income multifamily residential
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 Company's predecessors, The Walden Group, Inc.
and its subsidiaries and affiliates (collectively, "Walden"). The Company
currently owns and operates 41 multifamily residential properties containing
12,697 apartment units (the "Properties"). Approximately 78% of the Properties
are located in the Dallas/Fort Worth, Salt Lake City, Phoenix, Tulsa, Oklahoma
City, Austin, Tampa and Houston areas, with the remaining Properties primarily
located in other areas in the Southwest and Southeast regions of the United
States. The Properties had an occupancy rate of approximately 94.9% at March 31,
1995. Through WDN Management, Inc., a Delaware corporation formed by the Company
to perform certain third-party property contracts ("WDN Management"), the
Company manages on a fee basis 12 additional multifamily residential properties
containing 3,534 apartment units.
Upon completion of its initial public offering in February 1994, the
Company purchased the multifamily operations of Walden, including 18 Properties
containing 5,895 apartment units, 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 Walden. Since the
consummation of the initial public offering in February 1994, the Company has
acquired 22 Properties, containing an aggregate 6,653 apartment units, for an
aggregate purchase price of approximately $189.5 million and sold one property
(containing 299 units) for approximately $8.8 million. See "Recent
Developments." Management believes that these activities are consistent with its
core acquisition strategy of acquiring well located garden apartment properties
at costs 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 Mr. Don R. Daseke and a
management team consisting of substantially all of the former personnel of
Walden. The Company's 17 senior executives have an average tenure with the
Company and its predecessors of eight years and have an average of 16 years
experience in the multifamily residential property business. The Company is
fully integrated with operations that include multifamily property acquisitions,
redevelopment services, management, marketing, finance, leasing and asset
management.
The Company's executive offices are located at 13601 Preston Road, Suite
800W, Dallas, Texas 75240. The telephone number is (214) 788-0510. The Company
was incorporated in Maryland on September 29, 1993 and the duration of its
existence is perpetual.
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.
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.
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<PAGE> 15
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.
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, par value $.01 per share, 10 million shares of Preferred Stock and
60 million shares of excess stock, par value $.01 per share (the "Excess
Stock"). At April 30, 1995, 10,286,000 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.
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<PAGE> 16
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, if any, and any other shares or series
of stock hereinafter designated by 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.
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 owns in the aggregate approximately 8.1% 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
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<PAGE> 17
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 Common Stock that would result in a
person owning shares of Common 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
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 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 Common Stock by the intended transferee (or, if no
consideration was paid, the Market Price of the shares of Common 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 Common 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 Common Stock if shares
of Common 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 30
calendar day period, then the market price of the shares of Common 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
Excess Shares, 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 shares of Common 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 Common 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 Common 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 Common 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.
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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
Company's 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, of which no shares are currently outstanding.
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 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
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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 defined below) 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.
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
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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 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.
So long as any series of Preferred Stock remains outstanding, the consent
or the affirmative vote of the holders of at least a majority of the votes
entitled to be cast with respect to the then outstanding shares of such series
of Preferred Stock together with any Other Preferred Stock (as defined below),
voting as one class, either expressed in writing or at a meeting called for that
purpose, will be necessary (i) to permit, effect or validate the authorization,
or any increase in the authorized amount, of any class or series of equity
securities of the Company ranking prior to Preferred Stock of such series as to
dividends, voting or upon distribution of assets; and (ii) to repeal, amend or
otherwise change any of the provisions applicable to the Preferred Stock of such
series in any manner which adversely affects the powers, preferences, voting
power or other rights or privileges of such series of Preferred Stock. In case
any series of Preferred Stock would be so affected by any such action referred
to in clause (ii) above in a different manner than one or more series of Other
Preferred
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Stock which will be similarly affected, the holders of the Preferred Stock of
such series, together with any series of Other Preferred Stock which will be
similarly affected, will be entitled to vote as a class, and the Company will
not take such action without the consent or affirmative vote, as provided above,
of at least a majority of the total number of votes entitled to be cast with
respect to each such series of Preferred Stock and Other Preferred Stock, then
outstanding, in lieu of the consent or affirmative vote hereinafter otherwise
required.
With respect to any matter as to which the Preferred Stock of any series is
entitled to vote, holders of the Preferred Stock of such series and any other
series of Preferred Stock ranking on a parity with such series of Preferred
Stock as to dividends and distributions of assets and which by its terms
provides for similar voting rights (the "Other Preferred Stock") will be
entitled to cast the number of votes set forth in the Prospectus Supplement with
respect to that series of Preferred Stock. As a result of the provisions
described in the preceding paragraph requiring the holders of shares of a series
of Preferred Stock to vote together as a class with the holders of shares of one
or more series of Other Preferred Stock, it is possible that the holders of such
shares of Other Preferred Stock could approve action that would adversely affect
such series of Preferred Stock, including the creation of a class of shares of
beneficial interest ranking prior to such shares of Preferred Stock as to
dividends, voting or distributions of assets.
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.
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE COMPANY'S ARTICLES AND BYLAWS
The following discussion summarizes certain provisions of MGCL and the
Articles and the Company's Bylaws. This summary does not purport to be complete
and is subject to and qualified in its entirety by reference to the Articles and
the Company's Bylaws.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Bylaws provide that the number of directors of the Company shall be as
set in the Articles or as may be established by the Board of Directors but may
not be fewer than the number required under the MGCL nor more than 15. Any
vacancy will be filled, at any regular meeting or at any special meeting called
for that purpose, by a majority of the remaining directors, except that a
vacancy resulting from an increase in the number of directors will be filled by
a majority of the entire Board of Directors. The stockholders may elect a
director to fill a vacancy on the Board of Directors which results from the
removal of a director. Pursuant to the terms of the Articles, the directors are
divided into three classes. One class holds office initially for a term expiring
at the annual meeting of stockholders to be held in 1995, another class holds
office initially for a term expiring at the annual meeting of stockholders to be
held in 1996 and another class holds office initially for a term expiring at the
annual meeting of stockholders to be held in 1997. As the term of each class
expires, directors in that class will be elected for a term of three years. The
Company believes that classification of the Board of Directors will help to
assure the continuity and stability of the Company's business strategies and
policies as determined by the Board of Directors.
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The classified director provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its stockholders. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in a
majority of the Board of Directors. Thus, the classified board provision could
increase the likelihood that incumbent directors will retain their positions.
Further, holders of shares of Common Stock have no right to cumulative voting
for the election of directors. Consequently, at each annual meeting of
stockholders, the holders of a majority of shares of Common Stock will be able
to elect all of the successors of the class of directors whose term expires at
that meeting.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Articles limit the liability of the Company's directors and officers to
the Company and its stockholders to the fullest extent permitted from time to
time by the MGCL. The MGCL presently permits the liability of directors and
officers to a corporation or its stockholders for money damages to be limited,
except (i) to the extent that it is proved that the director or officer actually
received an improper benefit or profit or (ii) to the extent that a judgment or
other final adjudication is entered adverse to the director or officer in a
proceeding based on a finding that the director's or officer's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. This provision
does not limit the ability of the Company or its stockholders to obtain other
relief, such as an injunction or rescission.
The Articles require the Company to indemnify its directors, officers and
certain other parties to the fullest extent permitted from time to time by the
MGCL. The MGCL permits a corporation, subject to certain exceptions, to
indemnify its directors, officers and certain other parties against judgments,
penalties, fines, settlements and reasonable expenses, including attorneys'
fees, actually incurred by them in connection with any proceeding to which they
may be made a party by reason of their service to or at the request of the
corporation, unless it is established that (i) the act or omission of the
indemnified party was material to the matter giving rise to the proceeding and
was committed in bad faith or was the result of active and deliberate
dishonesty, (ii) the indemnified party actually received an improper personal
benefit, or (iii) in the case of any criminal proceeding, the indemnified party
had reasonable cause to believe that the act or omission was unlawful.
Indemnification may be made against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by the director or officer in connection
with the proceeding; provided, however, that if the proceeding is one by or in
the right of the corporation, indemnification may not be made with respect to
any proceeding in which the director or officer has been adjudged to be liable
to the corporation. In addition, a director or officer may not be indemnified
with respect to any proceeding charging improper personal benefit to the
director or officer in which the director or officer was adjudged to be liable
on the basis that personal benefit was improperly received. The termination of
any proceeding by conviction, or upon a plea of nolo contendere or its
equivalent, or an entry of any order of probation prior to judgment, creates a
rebuttable presumption that the director or officer did not meet the requisite
standard of conduct required for indemnification to be permitted. It is the
position of the Commission that indemnification of directors and officers for
liabilities arising under the Securities Act is against public policy and is
unenforceable pursuant to Section 14 of the Securities Act.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting power
of the corporation's shares after the date on which the corporation had 100 or
more beneficial owners of its stock or an affiliate or associate of the
corporation and was the beneficial owner, directly or indirectly, of 10% or more
of the voting power of the then outstanding stock of the corporation who, at any
time within the two-year period prior to the date in question and after the date
on which the corporation had 100 or more beneficial owners of its stock (an
"Interested Stockholder") or an affiliate thereof, are prohibited for five years
after the
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most recent date on which the Interested Stockholder became an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative vote
of at least (i) 80% of the votes entitled to be cast by holders of outstanding
voting shares of the corporation voting together as a single voting group and
(ii) two-thirds of the votes entitled to be cast by holders of outstanding
voting shares of the corporation other than shares held by the Interested
Stockholder with whom the business combination is to be effected, unless, among
other things, the corporation's stockholders receive a minimum price (as defined
in the MGCL) for their shares and the consideration is received in cash or in
the same form as previously paid by the Interested Stockholder for its shares.
These provisions of the MGCL do not apply, however, to business combinations
that are approved or exempted by the board of directors of the corporation prior
to the time that the Interested Stockholder becomes an Interested Stockholder.
The Articles contain a provision exempting from these provisions of the MGCL any
business combination involving Mr. Daseke (or his affiliates) or any other
person acting in concert or as a group with any of the foregoing persons.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquirer, by officers or by directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
such person, or in respect of which such person is able to exercise or direct
the exercise of voting power, would entitle the acquirer to exercise voting
power in electing directors within one of the following ranges of voting power:
(i) one-fifth or more but less than one-third, (ii) one-third or more but less
than a majority, or (iii) a majority. Control shares do not include shares the
acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares. If
no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the MGCL, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for control shares, as of the date of the last control share
acquisition or of any meeting of stockholders at which the voting rights of such
shares are considered and not approved. If voting rights for control shares are
approved at a stockholders meeting and the acquirer becomes entitled to vote a
majority of the shares entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the shares as determined for purposes of
such appraisal rights may not be less than the highest price per share paid by
the acquiring person in the control share acquisition, and certain limitations
and restrictions otherwise applicable to the exercise of dissenters' rights do
not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws of
the corporation.
The Articles contain a provision exempting from the control share
acquisition statute any and all acquisitions by Mr. Daseke (or his affiliates)
or any other person acting in concert or as a group with any of the foregoing
persons of shares of the Company's capital stock. There can be no assurance that
such provision will not be amended or eliminated at any point in the future.
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AMENDMENT TO THE ARTICLES
The Articles may be amended by the affirmative vote of the holders of a
majority of all shares entitled to be voted on the matter, except for the
provision relating to the classification of the Board of Directors which may be
amended only by the affirmative vote of the holders of not less than two-thirds
of all shares entitled to be voted on the matter.
DISSOLUTION OF THE COMPANY
The Articles permit the dissolution of the Company by (i) the affirmation
or vote of a majority of the entire Board of Directors declaring such
dissolution to be advisable and directing that the proposed dissolution be
submitted for consideration at an annual or special meeting of stockholders and
(ii) upon proper notice, stockholder approval by the affirmative vote of the
holders of not less than a majority of all of the votes entitled to be cast on
the matter or the written consent of all the votes entitled to be cast on this
matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws provide that with respect to an annual meeting of stockholders,
nominations of persons for election to the Board of Directors and the proposal
of business to be considered by stockholders may be made only (i) by, or at the
direction of, a majority of the Board of Directors or (ii) by a stockholder who
is entitled to vote at the meeting and has complied with the advance notice
procedures set forth in the Bylaws.
The provisions in the Articles on classification of the Board of Directors,
the business combination and control share acquisition provisions of the MGCL
and the advance notice provisions of the Bylaws could have the effect of
discouraging a takeover or other transaction in which holders of some, or a
majority, of the shares of Common Stock might receive a premium for their shares
of Common Stock over the then prevailing market price or which such holders
might believe to be otherwise in their best interests.
MEETINGS OF STOCKHOLDERS
Beginning in 1995, an annual meeting of the stockholders for the election
of directors and the transaction of any business within the powers of the
Company shall be held on the second Wednesday in May or at such other time as
set by the Board of Directors.
Subject to the rights, if any, of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, special
meetings of the stockholders may be called by the Chairman of the Board of
Directors, by the President or by a resolution adopted by a majority of the
directors and by the Secretary of the Company upon the written request of the
holders of 25% or more of the outstanding voting stock. Such request shall state
the purpose or purposes of such meeting and the matters proposed to be acted
upon at such meeting.
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.
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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 for its taxable year ended December 31, 1994, and for each subsequent
taxable year. Based on certain assumptions and representations that are
summarized below, Winstead Sechrest & Minick P.C., counsel to the Company, is of
the opinion that the Company qualified as a REIT for its taxable year ended
December 31, 1994 and its organization and its method of operations described in
this Prospectus will enable it to continue to satisfy the requirements for such
qualification. 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 filed an election to be a
REIT with its Federal income tax return for the taxable year ended December 31,
1994. 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
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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, 1994. 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
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: (a) rents from real property; (b) interest on loans secured by real
property; (c) 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"); (d) 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"); (e) distributions on,
or gain from the sale of, shares of other qualifying REITs; (f) abatements and
refunds of real property taxes; and (g) "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
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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" (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 (a) it reports the
source and nature of each item of its gross income in its Federal income tax
return for that year; (b) the inclusion of any incorrect information in its
return is not due to fraud with intent to evade tax; and (c) 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: (a) real property and loans
secured by real property held for less than four years (other than foreclosure
property and involuntarily conversions), (b) stock or securities held by the
Company for less than one year and (c) 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
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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 (a) securities of any one non-governmental
issuer that represent more than 5% of the value of the Company's total assets or
(b) 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.
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 (a) 95% of the
sum of (i) its "REIT Taxable Income" before deduction of dividends paid and
excluding any net capital gain and (ii) any net income from foreclosure property
less the tax on such income, minus (b) 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 (a) within 12 months of the end of such taxable year
and (b) 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 (i) 85% of the Company's "ordinary income" plus (ii) 95% of the
Company's capital gain net income plus (iii) income not distributed in earlier
years minus (iv) distributions in excess of income in earlier years and (v) any
amount of REIT taxable income for such year.
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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. 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 (a) the greater of the amount, if any, by which it failed either the
75% income test or the 95% income test, times (b) 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.
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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 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 (a) when a stockholder fails to supply a correct
taxpayer identification number,
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(b) when the IRS notifies the Company that the stockholder is subject to the
rules or has furnished an incorrect taxpayer identification number or (c) 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 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.
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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.
However, the Non-U.S. Stockholder may seek a return 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).
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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 AND PARTNERSHIP INTEREST IN CHIMNEY TRACE
ASSOCIATES
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 four partnerships
which own multifamily residential properties which were not acquired by the
Company and Walden's limited partnership interests in three of such partnerships
(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 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. Winstead Sechrest & Minick P.C. has previously
rendered an opinion to the Company that the Company will be treated as a partner
for Federal income tax purposes in the Acquired Partnerships and that the
Acquired Partnerships will be classified as partnerships for Federal income tax
purposes and not as associations taxable as corporations. An opinion of counsel
is not binding on the IRS.
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.
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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.
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
24
<PAGE> 35
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.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Winstead
Sechrest & Minick P.C., Dallas, Texas, and the validity of the Offered
Securities will be passed upon for the Company by Piper & Marbury, Baltimore,
Maryland.
EXPERTS
The financial statements for Walden Residential Properties, Inc. and Walden
Predecessors included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1994 and the statement of revenue and certain expenses of
Pinto Creek Apartments for the year ended December 31, 1993 included in the
Company's Form 8-K/A-1 dated January 10, 1995 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.
25
<PAGE> 36
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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-4
Risk Factors.......................... S-5
Recent Developments................... S-8
Use of Proceeds....................... S-9
Price Range of Common Stock and
Distributions....................... S-9
Underwriting.......................... S-10
Legal Matters......................... S-10
Experts............................... S-10
PROSPECTUS
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 3
The Company........................... 4
Use of Proceeds....................... 4
Plan of Distribution.................. 4
Description of Common Stock........... 5
Description of Preferred Stock........ 8
Certain Provisions of Maryland Law and
of the Company's Articles and
Bylaws.............................. 11
Federal Income Tax Considerations..... 14
Erisa Considerations.................. 24
Legal Matters......................... 25
Experts............................... 25
</TABLE>
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1,525,000 SHARES
WALDEN RESIDENTIAL
PROPERTIES, INC.
COMMON STOCK
------------
PROSPECTUS SUPPLEMENT
------------
SMITH BARNEY INC.
AUGUST 21, 1996
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