<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
Walden Residential Properties, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, 9.00% Redeemable Preferred Stock and Series B Warrants
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
18,989,247
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
$382,000,000 (value of cash and securities offered)
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$382,000,000
- --------------------------------------------------------------------------------
(5) Total fee paid:
$76,400
- --------------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
WALDEN RESIDENTIAL PROPERTIES, INC.
One Lincoln Centre
5400 LBJ Freeway
Suite 400
Dallas, Texas 75240
(972) 788-0510
August 15, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Walden Residential Properties, Inc. (the "Company") to be held at the Dallas
Parkway Hilton, 4801 LBJ Freeway, Dallas, Texas, on September 29, 1997, at 10:00
a.m.
The Special Meeting has been called to consider and approve (i) the
issuance of up to 12,544,802 shares of Common Stock of the Company to the
shareholders of Drever Partners, Inc. ("Drever") and certain of its affiliates
and the partners of its affiliated partnerships pursuant to agreements among the
Company, Drever and its affiliates, each dated May 21, 1997, under which
agreements the Drever organization and all 79 Drever apartment communities could
be acquired by the Company (the "Transaction Proposal"); and (ii) an amendment
to the Company's Amended and Restated 1994 Stock Option Plan (the "Option Plan")
to provide that the aggregate number of shares of the Company's common stock
reserved for issuance at any time thereunder shall be equal to 10% of the number
of shares of the Company's common stock outstanding at such time, which number
shall include the number of shares of the Company's common stock into which any
outstanding debt or equity securities of the Company or its affiliates are
exchangeable or convertible (the "Option Plan Proposal" and, together with the
Transaction Proposal, the "Proposals").
The Proposals to be considered and voted upon at the Special Meeting are of
great importance to your investment and the future of the Company. Your Board of
Directors believes that the proposed alliance between the Company and Drever,
which builds on the industry trend toward the consolidation of multifamily
REITs, will substantially increase the Company's ability to grow and improve
long-term returns and profitability. Drever and its management team have more
than 25 years of experience at successfully acquiring, improving and operating
apartment communities. Your management and Board of Directors believe that the
transaction with Drever by the Company will enable the Company to become a
dominant force in the apartment industry.
A critical element to the success of the combination of the Company and
Drever is the retention of senior management of Drever. In order to induce
senior management to enter into long-term employment agreements with the
Company, the Company intends to offer stock options to Drever's senior
management. The Company anticipates offering options to acquire up to 700,000
shares of Common Stock of the Company to the top 15 executives of Drever. The
Company currently only has approximately 221,000 shares available for issuance
under the Option Plan. The Board of Directors believes the ability to offer
options to senior management of Drever is essential to being able to consummate
the acquisition of the Drever portfolio and, therefore, strongly urges the
stockholders to approve the Option Proposal.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TRANSACTION WITH
DREVER AND HAS DETERMINED THAT IT IS FAIR AND IN THE BEST INTERESTS OF THE
COMPANY AND ITS STOCKHOLDERS. AFTER CAREFUL CONSIDERATION, YOUR BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE TRANSACTION
PROPOSAL. YOUR BOARD OF DIRECTORS ALSO UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS
VOTE FOR THE OPTION PLAN PROPOSAL.
Details of the proposed transaction and the amendment to the Option Plan
are set forth in the accompanying Proxy Statement. We urge you to read it
carefully. Your vote is important. Approval of the Proposals requires the
affirmative vote of at least a majority of the votes cast, in person or by
proxy, on the Proposals at the Special Meeting, provided that a quorum is
present.
<PAGE> 3
We urge you to attend and participate in the Special Meeting. If you do not
expect to attend personally, we urge you to complete, sign, date and return the
enclosed proxy card in the postage-paid envelope provided. You may, of course,
attend the Special Meeting and vote in person, even if you have previously
returned your proxy card. It is important that your shares be represented at the
Special Meeting.
Sincerely yours,
/s/ DON R. DASEKE
DON R. DASEKE
Chairman of the Board of Directors
and
Chief Executive Officer
<PAGE> 4
WALDEN RESIDENTIAL PROPERTIES, INC.
ONE LINCOLN CENTRE
5400 LBJ FREEWAY, SUITE 400
DALLAS, TEXAS 75240
(972) 788-0510
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 29, 1997
To the Stockholders of
Walden Residential Properties, Inc.:
Notice is hereby given that a Special Meeting of Stockholders (the "Special
Meeting") of Walden Residential Properties, Inc., a Maryland corporation (the
"Company"), will be held at the Dallas Parkway Hilton, 4801 LBJ Freeway, Dallas,
Texas, on September 29, 1997, at 10:00 a.m.
At the Special Meeting, or any adjournment thereof, holders of record of
common stock, par value $.01 per share, of the Company (the "Common Stock") at
the close of business on August 8, 1997 (the "Record Date") will be asked to
consider and approve:
(i) The issuance of up to 12,544,802 shares of Common Stock upon the
exchange of partnership units (the "Units") being issued by a newly-formed
partnership subsidiary of the Company, Walden/ Drever Operating
Partnership, L.P. ("WDOP"), to the shareholders of Drever Partners, Inc.
("Drever") and certain of its affiliates, and to the partners of its
affiliated partnerships (the "Transaction Proposal"). The Units are being
issued pursuant to an Exchange Agreement dated May 21, 1997 (the "Exchange
Agreement") among the Company, Drever, WDOP and certain affiliates of
Drever, and a Contribution Agreement (the "Contribution Agreement") dated
May 21, 1997 among the Company, WDOP, the shareholders of Drever and
certain affiliates of Drever. Upon consummation of the transactions
contemplated by the Exchange Agreement and the Contribution Agreement, the
Company could acquire the Drever organization and its 79 apartment
communities. The Exchange Agreement, the Contribution Agreement and related
matters are more fully described in the attached Proxy Statement.
(ii) An amendment to the Company's Amended and Restated 1994 Stock
Option Plan (the "Option Plan") to provide that the aggregate number of
shares of Common Stock reserved for issuance at any time thereunder shall
be equal to 10% of the number of shares of Common Stock outstanding at such
time, which number shall include the number of shares of Common Stock into
which any debt or equity securities of the Company or its affiliates
outstanding at the time of calculation are exchangeable or convertible (the
"Option Plan Proposal").
Your vote is important. Approval of the Transaction Proposal requires the
affirmative vote of at least a majority of votes cast on the Transaction
Proposal, and the total vote cast on the Transaction Proposal must represent
over 50% of the shares of Common Stock outstanding on the Record Date. Approval
of the Option Plan Proposal requires the affirmative vote of a majority of the
shares of Common Stock present, in person or by proxy, at the Special Meeting,
provided a quorum is present. Whether or not you plan to be present at the
Special Meeting, you are requested to sign and return the enclosed proxy in the
envelope provided so that your stock will be represented. The giving of such
proxy will not affect your right to vote in person should you later decide to
attend the Special Meeting. Please date and sign the enclosed proxy and return
it promptly in the enclosed envelope.
<PAGE> 5
Only holders of record of the Common Stock at the close of business on the
Record Date are entitled to notice of, and to vote at, the Special Meeting or
any adjournment thereof, notwithstanding any transfer of the Common Stock on the
books of the Company after such Record Date.
By Order of the Board of Directors,
/s/ EDWARD H. HATZENBUEHLER
EDWARD H. HATZENBUEHLER
Secretary
Dallas, Texas
August 15, 1997
<PAGE> 6
WALDEN RESIDENTIAL PROPERTIES, INC.
ONE LINCOLN CENTRE
5400 LBJ FREEWAY
SUITE 400
DALLAS, TEXAS 75240
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 29, 1997
THE SPECIAL MEETING
GENERAL
This Proxy Statement and the accompanying proxy card and Notice of Special
Meeting of Stockholders are first being mailed to holders of the common stock,
par value $.01 per share (the "Common Stock"), of Walden Residential Properties,
Inc., a Maryland corporation (the "Company"), on or about August 15, 1997, in
connection with the solicitation of proxies on behalf of the Board of Directors
of the Company (the "Board") to be exercised at the Special Meeting of
Stockholders (the "Special Meeting") of the Company to be held at the Dallas
Parkway Hilton, 4801 LBJ Freeway, Dallas, Texas, on September 29, 1997, at 10:00
a.m., and at any adjourned session thereof.
At the Special Meeting, holders of the Common Stock (the "Stockholders") at
the close of business on August 8, 1997 (the "Record Date") will be asked to
consider and approve the issuance of up to 12,544,802 shares of Common Stock
(the "Shares") upon the exchange of partnership units (the "Units") (and the
exercise of underlying warrants) being issued by a newly-formed partnership
subsidiary of the Company, Walden/Drever Operating Partnership, L.P. ("WDOP"),
to the shareholders of and equity participants in Drever Partners, Inc.
("Drever") and to certain of its affiliates and the partners of its affiliated
partnerships (the "Transaction Proposal"). The Units are being issued pursuant
to (i) an Exchange Agreement, dated May 21, 1997 (the "Exchange Agreement"),
among the Company, WDOP, Drever, AOF, Inc., an affiliate of Drever ("AOF"), and
AOF II, Inc., an affiliate of Drever ("AOFII"), and (ii) a Contribution
Agreement, dated May 21, 1997 (the "Contribution Agreement"), among the Company,
WDOP, the shareholders of each of Drever, AOF and AOFII and certain equity
participants in Drever. Upon consummation of the transactions contemplated by
the Exchange Agreement and the Contribution Agreement (together, the
"Agreements"), if the exchange offer contemplated by the Exchange Agreement is
fully accepted by the offerees, WDOP would acquire all of the limited partner
interests in certain limited partnerships of which Drever, AOF and AOFII are
general partners, and all of the shares of capital stock of each of the general
partners, for a total consideration (the "Consideration") consisting of
approximately $85 million in cash and $295 million of Units which are
exchangeable, on or after the first anniversary of their issuance, into
10,322,580 shares of Common Stock, 2,000,000 shares of the Company's 9.00%
Redeemable Preferred Stock and 6,666,667 Series B Warrants, each of which is
exercisable for one-third of one share of Common Stock at $26.875 per share (the
transactions contemplated by the Agreements, as more fully described in this
Proxy Statement, being hereinafter collectively referred to as the
"Transaction").
At the Special Meeting, Stockholders of record will also be asked to
consider and approve an amendment to the Company's Amended and Restated 1994
Stock Option Plan (the "Option Plan") to provide that the aggregate number of
shares of Common Stock reserved for issuance at any time thereunder shall be
equal to 10% of the number of shares of Common Stock outstanding at such time,
plus the number of shares of Common Stock into which any debt or equity
securities of the Company or its affiliates outstanding at the time of
calculation are exchangeable or convertible (the "Option Plan Proposal" and,
together with the Transaction Proposal, the "Proposals").
<PAGE> 7
SHARES VOTING
Only the Stockholders of record on the Record Date will be entitled to
notice of and to vote at the Special Meeting or any adjournments thereof. As of
the close of business on the Record Date, there were 17,604,525 shares of Common
Stock issued and outstanding and entitled to vote. The Common Stock constitutes
the only class of capital stock of the Company entitled to vote at the Special
Meeting. Each Stockholder of record on the Record Date is entitled to one vote
for each share of Common Stock held. A majority of the outstanding shares of
Common Stock, represented in person or by proxy, will constitute a quorum at the
Special Meeting; however, if a quorum is not present or represented at the
Special Meeting, the Stockholders entitled to vote thereat, present in person or
represented by proxy, have the power to adjourn the Special Meeting from time to
time, without notice, other than by announcement at the Special Meeting, until a
quorum is present or represented. At any such adjourned Special Meeting at which
a quorum is present or represented, any business may be transacted that might
have been transacted at the original Special Meeting.
VOTE REQUIRED
Under the rules of the New York Stock Exchange (the "NYSE"), upon which
shares of Common Stock are listed, the Company is required to obtain stockholder
approval for the issuance of new shares of Common Stock if the number of shares
of Common Stock to be issued will be equal to or in excess of 20% of the number
of shares of Common Stock outstanding before such issuance. If the Transaction
is fully consummated, the Company could issue up to 12,544,802 new shares of
Common Stock, upon the ultimate exchange of the Units and the exercise of the
Warrants, representing in excess of 20% of the Common Stock outstanding on the
Record Date. Under the rules of the NYSE, the affirmative vote of at least a
majority of the votes cast by the Stockholders on the Transaction Proposal is
required to approve the issuance of the Shares, and the total number of votes
cast on the Transaction Proposal must represent over 50% of the shares of Common
Stock outstanding on the Record Date. Approval of a majority of the shares of
Common Stock represented, in person or by proxy, at the Special Meeting will be
necessary for the approval of the Option Plan Proposal.
VOTE BY PROXY
A proxy card is enclosed for use at the Special Meeting. There are boxes on
the proxy card to vote for or against or to abstain on the Proposals. A proxy
may be revoked at any time before it is voted by delivering written notice of
revocation to the Secretary of the Company, by executing and delivering a proxy
card dated a later date or by voting in person at the Special Meeting. Unless
contrary instructions are indicated on the proxy card, all shares represented by
valid, executed proxy cards received pursuant to this solicitation (and not
revoked before they are voted) will be voted for the Proposals. If a choice is
specified on the proxy card, the shares will be voted as specified. In addition,
unless contrary instructions are indicated on the proxy card, the individuals
designated on the proxy card may, in their discretion, vote on any procedural
issues that may properly arise at the Special Meeting.
Votes cast by proxy or in person will be counted by the person(s) appointed
by the Company to act as inspector(s) for the Special Meeting. The election
inspector(s) will treat shares represented by proxies that reflect abstentions
as shares that are present and entitled to vote for the purpose of determining
the presence of a quorum. For purposes of the Proposals, abstentions will not be
counted as votes cast and will have no effect on the result of the vote on the
Proposals.
Broker non-votes occur where a broker holding stock in street name votes
the shares on some matters but not others. Brokers are permitted to vote on
routine, non-controversial proposals in instances where they have not received
voting instructions from the beneficial owner of the stock but are not permitted
to vote on non-routine matters. Proxies on non-routine matters, such as the
Proposals, which are returned by brokers unvoted are deemed to be "broker
non-votes." The election inspector(s) will treat broker non-votes as shares that
are present and entitled to vote for the purpose of determining the presence of
a quorum; however, for the purpose of determining the outcome of the Proposals,
as to which the broker or nominee does not have discretionary authority to vote,
those shares will be treated as not present and not entitled to vote with
respect to that matter
2
<PAGE> 8
(even though those shares are considered entitled to vote for quorum purposes
and may be entitled to vote on other matters).
COST AND METHOD OF SOLICITATION
The cost of soliciting proxies will be borne by the Company. Proxies may be
solicited by directors, officers or regular employees of the Company in person
or by telephone or telegram. The Company has retained D.F. King & Company to
assist in the solicitation of proxies for a fee not to exceed $20,000, plus
reimbursement of out-of-pocket expenses. No officer or director of the Company
has an interest in, or is related to any principal of, D.F. King & Company. The
Company will also reimburse brokerage houses and other custodians, nominees and
fiduciaries for their expenses in sending proxy materials to the beneficial
owners of the Common Stock.
ACCOUNTANTS
Representatives of Deloitte & Touche LLP, the Company's independent
accountants, will be present at the Special Meeting, where they will have the
opportunity to make a statement if they desire to do so. The representatives of
Deloitte & Touche present at the Special Meeting are expected to be available to
respond to appropriate questions.
RECOMMENDATION
For the reasons described herein, the Board unanimously approved the
issuance by the Company of the Shares. The Board believes the Transaction and
the amendment to the Option Plan are fair to and in the best interests of the
Company and its stockholders and unanimously recommends that the Stockholders
vote FOR the Proposals.
OTHER MATTERS
The Company is not aware of any matters to be presented at the Special
Meeting other than the Proposals.
3
<PAGE> 9
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table and the notes thereto set forth certain information
with respect to the beneficial ownership of shares of Common Stock, as of June
30, 1997 (except as noted in the footnotes to such table), by each person or
group within the meaning of Section 13(d)(3) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), who is known to the management of the
Company to be the beneficial owner of more than five percent of the outstanding
Common Stock of the Company:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT
BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
- ------------------- ------------------ --------
<S> <C> <C>
Don R. Daseke(1)......................................... 1,264,723(2) 7.0%
</TABLE>
- ---------------
(1) The business address of such person is c/o Walden Residential Properties,
Inc., One Lincoln Centre, 5400 LBJ Freeway, Suite 400, Dallas, Texas 75240.
(2) Includes 623,734 shares of Common Stock owned of record by The Walden Group,
Inc., of which Mr. Daseke is the holder of 90% of the common stock and the
sole director, 228,750 shares of Common Stock which Mr. Daseke has the right
to acquire through the exercise of options granted pursuant to the Company's
Stock Option Plan and 30,000 shares of restricted Common Stock granted under
the Company's Long-Term Incentive Plan, which shares may not be transferred
until February 12, 2001, at which time the transfer restrictions on 40% of
such shares lapse and the restriction on 10% of the remaining shares lapses
each year thereafter until February 12, 2007 (the "Officer Restricted
Shares").
SECURITY OWNERSHIP OF MANAGEMENT
The following table and the notes thereto set forth certain information
with respect to the beneficial ownership of shares of Common Stock of the
Company, as of June 30, 1997, by each director, each executive officer and by
all executive officers and directors as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT
BENEFICIAL OWNER(1)(2) BENEFICIALLY OWNED OF CLASS
---------------------- ------------------ --------
<S> <C> <C>
Don R. Daseke............................................... 1,264,723(3) 7.0%
Marshall B. Edwards......................................... 172,447(4) (5)
Mark S. Dillinger........................................... 122,379(6) (5)
Linda Walker Bynoe.......................................... 18,177(7) (5)
Francesco Galesi............................................ 722,940(8) 3.9%
Arch K. Jacobson............................................ 21,600(7) (5)
Louis G. Munin.............................................. 21,000(7) (5)
J. Otis Winters............................................. 16,000(9) (5)
All Directors and Executive Officers (8 persons)............ 2,359,266 13.0%
</TABLE>
- ---------------
(1) The business address of the persons named above is c/o Walden Residential
Properties, Inc., One Lincoln Centre, 5400 LBJ Freeway, Suite 400, Dallas,
Texas 75240.
(2) Except as otherwise indicated, (i) the persons named in this table have sole
voting and investment power with respect to all shares of Common Stock shown
as beneficially owned by them, and (ii) none of the shares shown in this
table or referred to in the footnotes hereto are shares of which the persons
named in this table have the right to acquire beneficial ownership as
specified in Rule 13d-3(d)(1) promulgated under the Exchange Act.
(3) Includes 623,734 shares of Common Stock owned of record by The Walden Group,
Inc., of which Mr. Daseke is the holder of 90% of the common stock and the
sole director, 228,750 shares which Mr. Daseke has the right to acquire
through the exercise of options granted pursuant to the Company's Stock
Option Plan and 30,000 Officer Restricted Shares.
4
<PAGE> 10
(4) Includes 123,750 shares of Common Stock which Mr. Edwards has the right to
acquire through the exercise of options granted pursuant to the Company's
Stock Option Plan and 20,000 Officer Restricted Shares.
(5) Less than 1%.
(6) Includes 77,500 shares which Mr. Dillinger has the right to acquire through
the exercise of options granted pursuant to the Company's Stock Option Plan
and 10,000 Officer Restricted Shares.
(7) Includes 15,000 shares of Common Stock which such person has the right to
acquire through the exercise of options granted pursuant to the Company's
Stock Option Plan and 1,000 shares of restricted Common Stock granted under
the Company's Long-Term Incentive Plan, which shares may not be transferred
until February 12, 1998, at which time the transfer restriction on one-third
of such shares lapses and the restriction on one-third of the remaining
shares lapses each of the next two years thereafter (the "Director
Restricted Shares").
(8) Consists of 711,940 shares of Common Stock which entities controlled by Mr.
Galesi have the right to acquire pursuant to the limited partner interests
held in Walden Residential Operating Partnership, L.P., a Georgia limited
partnership and an affiliate of the Company ("Walden Operating
Partnership"), 10,000 shares of Common Stock which Mr. Galesi has the right
to acquire through the exercise of options granted pursuant to the Company's
Stock Option Plan and 1,000 Director Restricted Shares. The Galesi entities
acquired such Interests in connection with the sale of controlling interest
in the predecessor to the Walden Operating Partnership to the Company in
June 1995.
(9) Includes 10,000 shares of Common Stock which Mr. Winters has the right to
acquire through the exercise of options granted pursuant to the Company's
Stock Option Plan and 1,000 Director Restricted Shares.
5
<PAGE> 11
THE TRANSACTION PROPOSAL
GENERAL
The Transaction is being implemented through an exchange offer (the
"Exchange Offer") to be extended by WDOP to each of the limited partners (each,
a "Limited Partner") of each of the Partnerships (as defined below) and the
contribution (the "Contribution") by the Drever Shareholders, the Equity
Participants and the Assignees of the Drever Shares, the Equity Rights and the
General Partner Rights (as each of such terms is defined below), respectively,
to WDOP. Upon consummation of the Transaction, assuming the Exchange Offer is
fully accepted by each Limited Partner, WDOP will be the sole limited partner of
each Partnership and a wholly-owned subsidiary of WDOP will be the sole general
partner of each Partnership.
The Exchange Offer
Pursuant to the terms of the Exchange Agreement, the Exchange Offer will
permit the Limited Partners to exchange their limited partner interests (the
"Limited Partner Interests") in the Partnerships for the Exchange Consideration.
The "Exchange Consideration" consists of cash and Units which are allocated
among the Partnerships in proportion to the values assigned to the Properties
(as defined below) owned by each Partnership and subsequently allocated among
the Limited Partners and general partners of each Partnership in accordance with
its respective partnership agreement as if such Properties had been sold for
cash. Each Limited Partner who is an "accredited investor" (as such term is
defined under the federal securities laws) will be entitled to elect the
portion, if any, of the Exchange Consideration such Limited Partner desires to
receive in Common Units, Preferred Units (as such terms are defined below) and
cash, subject to proration in the event the aggregate amount of a particular
form of Exchange Consideration selected by the Limited Partners, when aggregated
with the Contribution Consideration (as defined below), exceeds the maximum
amount of such consideration payable by WDOP pursuant to the Agreements. See
"-- Transaction Consideration." Each Limited Partner who is not an accredited
investor and who elects to accept the Exchange Offer will receive cash in
exchange for its Limited Partner Interests. The Exchange Offer, which will
expire on the date of the Special Meeting, subject to extension for up to 30
days thereafter at the request of Drever, is subject to certain conditions set
forth in the Exchange Agreement, including the approval of the Proposal by the
Stockholders. See "-- Certain Terms of the Exchange Agreement."
The Contribution
Pursuant to the terms of the Contribution Agreement, the shareholders of
each of Drever, AOF and AOFII (each, a "Drever Shareholder") have agreed to
transfer all of their ownership interests (the "Drever Shares") in each of
Drever, AOF and AOFII to WDOP for the Contribution Consideration, subject to
certain conditions set forth in the Contribution Agreement, including the
closing of the Exchange Offer. The "Contribution Consideration" consists of cash
and Units which will be allocated among the Drever Shareholders, Equity
Participants and Assignees (as such terms are defined below) in accordance with
their percentage interests in Drever, AOF and AOFII, respectively. Each of the
Drever Shareholders, Equity Participants and Assignees who is an accredited
investor will have the same election right as the accredited investor Limited
Partners described above, subject to the same proration mechanism. Each Drever
Shareholder, Equity Participant and Assignee who is not an accredited investor
will receive cash in exchange for its Drever Shares, Equity Rights and General
Partner Rights, respectively. In addition, Maxwell B. Drever, a Drever
Shareholder, has assigned to certain individuals (each, an "Equity
Participant"), a percentage of his right to receive dividends, distributions and
profits otherwise payable to him pursuant to his stock ownership of Drever (the
"Equity Rights"), and Drever has assigned to certain individuals (each, an
"Assignee") a percentage of its rights to distributions and profits otherwise
payable to it as general partner of certain of the Partnerships (the "General
Partner Rights"). Pursuant to the Contribution Agreement, the Equity
Participants and the Assignees have agreed to transfer the Equity Rights and the
General Partner Rights, respectively, to WDOP, subject to certain conditions set
forth in the Contribution Agreement, including the closing of the Exchange
Offer. See "-- Certain Terms of the Contribution Agreement."
6
<PAGE> 12
Transaction Consideration
The maximum amount of consideration which the Company has offered to
exchange for the Limited Partner Interests, the Drever Shares, the Equity Rights
and the General Partner Rights is an aggregate of 10,322,580 common units of
beneficial interest in WDOP (the "Common Units"), 2,000,000 preferred units of
beneficial interest in WDOP (the "Preferred Units") and approximately $85
million in cash. The Common Units are exchangeable on a one-for-one basis
(subject to adjustment upon the occurrence of certain dilutive events), pursuant
to the terms of the Amended and Restated Limited Partnership Agreement of WDOP
(the "WDOP Partnership Agreement"), for shares of Common Stock. Each Preferred
Unit is exchangeable, pursuant to the terms of the WDOP Partnership Agreement,
for one share of the Company's 9.00% Redeemable Preferred Stock (the "Redeemable
Preferred Stock") and 3 1/3 Series B Warrants (the "Warrants"), each of which is
exercisable for one-third of one share of Common Stock at $26.875 per share. See
"-- Further Description of the Consideration." The WDOP Partnership Agreement
provides that the Common Units and the Preferred Units may not be exchanged for
Common Stock, Redeemable Preferred Stock and Warrants prior to the first
anniversary of their issuance. See "-- The WDOP Partnership Agreement."
DESCRIPTION OF DREVER AND THE PROPERTIES
The Properties
Drever, a California corporation, is the general partner of each of the
limited partnerships shown in the footnotes to the table below (collectively,
the "Drever Partnerships"), other than Apartment Opportunity Fund, L.P. and
Apartment Opportunity Fund II, L.P. AOF, a California corporation, is the
general partner of AOF Newgen, L.P., which is, in turn, the general partner of
Apartment Opportunity Fund, L.P. AOFII, a California corporation, is the general
partner of Apartment Opportunity Fund II, L.P. (the Drever Partnerships, AOF
Newgen, L.P., Apartment Opportunity Fund, L.P. and Apartment Opportunity Fund
II, L.P. being referred to collectively herein as the "Partnerships"). Each of
the Partnerships owns the apartment properties indicated in the table below (the
"Properties"). The Company currently has the six Properties located in Austin
and one Property located in Phoenix under binding contract to purchase, the
closing of which has been delayed pending consummation of the Transaction. The
Properties contain an average of 229 apartment units, with the largest Property
containing 464 apartment units. The apartment units average 812 square feet. The
Properties have a weighted average age by number of apartment units of
approximately 15 years. The Company does not expect to spend any money for major
renovations to the Properties in connection with the acquisition of the
Properties.
7
<PAGE> 13
<TABLE>
<CAPTION>
TOTAL UNIT TYPE
NUMBER YEAR RENTABLE ---------------------
OF CONSTRUCTION AREA TOTAL 3 BR/
LOCATION PROPERTY NAME UNITS COMPLETED(1) (SQ. FT.) ACREAGE 1 BR 2 BR 4 BR
-------- ------------- ------ ------------ ---------- ------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Atlanta, GA.............. Saratoga Springs(3) 266 1985 223,402 20.0 128 138
Atlanta, GA.............. Shannon Chase(3) 156 1987 163,400 26.4 50 106
Villas at Indian
Atlanta, GA.............. Trails(2) 236 1986 242,044 39.7 60 176
------ ---- ---------- ----- ----- ----- ---
Atlanta Total/ Weighted
Average 658 1986 628,846 86.1 238 420 0
------ ---- ---------- ----- ----- ----- ---
Arbors of Wells
Austin, TX............... Branch(15) 212 1986 156,228 11.2 164 48
Austin, TX............... Audubon Square(2) 164 1985 139,476 6.5 36 128
Austin, TX............... Lakes of Renaissance(2) 308 1987 215,024 11.6 218 84 6
Austin, TX............... Oakridge(2) 253 1978 173,699 9.3 151 102
Austin, TX............... Polo Club(4) 304 1986 203,784 11.2 240 64
Austin, TX............... Shadow Creek(3) 420 1982 314,936 18.0 354 66
------ ---- ---------- ----- ----- ----- ---
Austin Total/ Weighted
Average 1,661 1984 1,203,147 67.8 1,163 492 6
------ ---- ---------- ----- ----- ----- ---
Corpus Christi, TX....... Rafters, The(3) 250 1984 216,496 12.0 74 132 44
Corpus Christi, TX....... Wharf, The(3) 250 1984 216,496 17.1 74 132 44
Corpus Christi, TX....... Willowick(3) 250 1984 216,496 12.0 74 132 44
------ ---- ---------- ----- ----- ----- ---
Corpus Christi Total/
Weighted Average 750 1984 649,488 41.1 222 396 132
------ ---- ---------- ----- ----- ----- ---
Dallas, TX............... Arbor Creek(2) 280 1984 216,676 12.2 136 144
Dallas, TX............... Bent Creek(3) 326 1980 234,082 11.7 284 42
Dallas, TX............... Brittany Park(2) 217 1978 193,556 8.7 149 68
Dallas, TX............... Canyon Ridge(3) 164 1983 120,812 7.3 76 88
Dallas, TX............... Casa Valley(2) 150 1986 130,926 5.5 120 30
Dallas, TX............... Creekwood Village(3) 362 1985 256,584 9.4 328 34
Dallas, TX............... La Prada(12) 273 1985 223,630 9.7 168 105
Dallas, TX............... Montfort Oaks(3) 276 1979 215,476 12.1 160 116
Dallas, TX............... Shadowridge Village(3) 144 1985 118,804 6.0 112 32
Dallas, TX............... Trinity Mills(3) 208 1982 162,960 10.5 128 80
Dallas, TX............... Trinity Oaks(2) 240 1983 150,318 4.9 189 51
------ ---- ---------- ----- ----- ----- ---
Dallas Total/ Weighted
Average 2,640 1983 2,023,824 98.0 1,850 790 0
------ ---- ---------- ----- ----- ----- ---
Houston, TX.............. Arbor Point(4) 65 1984 57,000 2.2 43 22
Houston, TX.............. Ashton Woods(2) 177 1978 151,142 6.9 76 74 27
Houston, TX.............. Aston Brook(11) 152 1982 119,376 5.3 88 64
Houston, TX.............. Bar Harbor(4) 316 1983 209,076 13.2 260 56
Houston, TX.............. Bayou Oaks(3) 210 1984 158,470 6.1 138 72
Houston, TX.............. Brandon Oaks(9) 196 1984 168,856 8.0 88 108
Houston, TX.............. Briarcrest(2) 376 1982 296,760 13.9 232 144
Houston, TX.............. Brookfield(2) 250 1984 188,974 10.9 190 60
Houston, TX.............. Camden Court(14) 136 1982 104,216 4.5 60 76
Houston, TX.............. Carriage Hill(8) 252 1980 242,008 11.2 96 120 36
Houston, TX.............. Central Park Condos(4) 93 1985 99,080 7.2 29 52 12
Houston, TX.............. Central Park Regency(9) 348 1983 318,968 13.4 132 216
Houston, TX.............. Charleston, The(4) 312 1981 226,499 5.7 228 84
Houston, TX.............. Cimarron Park(3) 162 1984 134,756 7.0 100 54 8
Houston, TX.............. Cimarron Parkway(2) 272 1983 238,264 9.3 216 56
Houston, TX.............. Colony Oaks(9) 162 1967 166,475 6.2 92 70
Houston, TX.............. Colorado Club(17) 300 1986 225,788 10.1 220 80
Houston, TX.............. Enclave, The(8) 384 1984 329,844 11.2 232 124 28
Houston, TX.............. Georgetown(8) 131 1968 215,915 28.9 23 29 79
Houston, TX.............. Georgetown II(9) 25 1968 20,258 5.5 19 4 2
Houston, TX.............. Harbor Pointe(2) 198 1968 178,700 4.8 90 104 4
<CAPTION>
AVERAGE MONTHLY
OCCUPANCY RENT PER UNIT
AVERAGE ------------------ ----------------
APT SIZE AS OF AS OF DECEMBER MARCH
LOCATION (SQ. FT.) 12/31/97 3/31/97 1996 1997
-------- --------- -------- ------- -------- -----
<S> <C> <C> <C> <C> <C>
Atlanta, GA.............. 840 98% 97% 605 610
Atlanta, GA.............. 1,047 97% 96% 641 646
Atlanta, GA.............. 1,026 90% 87% 663 678
----- ---- ---- --- ---
956 95% 93% 634 643
----- ---- ---- --- ---
Austin, TX............... 737 92% 91% 590 592
Austin, TX............... 850 91% 90% 609 611
Austin, TX............... 698 92% 93% 567 572
Austin, TX............... 687 96% 98% 551 550
Austin, TX............... 670 95% 91% 531 531
Austin, TX............... 750 93% 90% 530 532
----- ---- ---- --- ---
723 93% 92% 556 557
----- ---- ---- --- ---
Corpus Christi, TX....... 866 91% 95% 548 547
Corpus Christi, TX....... 866 97% 97% 564 569
Corpus Christi, TX....... 866 98% 96% 557 565
----- ---- ---- --- ---
866 95% 96% 556 560
----- ---- ---- --- ---
Dallas, TX............... 774 93% 96% 562 569
Dallas, TX............... 718 91% 93% 479 482
Dallas, TX............... 892 96% 97% 592 596
Dallas, TX............... 737 99% 93% 540 552
Dallas, TX............... 873 93% 94% 675 680
Dallas, TX............... 709 95% 92% 503 507
Dallas, TX............... 819 95% 97% 575 575
Dallas, TX............... 781 97% 97% 579 585
Dallas, TX............... 825 95% 94% 606 610
Dallas, TX............... 783 96% 94% 570 575
Dallas, TX............... 626 96% 95% 518 520
----- ---- ---- --- ---
767 95% 95% 553 558
----- ---- ---- --- ---
Houston, TX.............. 877 98% 98% 607 605
Houston, TX.............. 854 96% 95% 468 471
Houston, TX.............. 785 92% 98% 432 434
Houston, TX.............. 662 97% 97% 462 465
Houston, TX.............. 755 93% 99% 445 449
Houston, TX.............. 862 94% 98% 512 510
Houston, TX.............. 789 95% 95% 469 475
Houston, TX.............. 756 96% 97% 473 474
Houston, TX.............. 766 94% 95% 405 407
Houston, TX.............. 960 95% 97% 538 538
Houston, TX.............. 1,065 95% 97% 670 679
Houston, TX.............. 917 97% 96% 543 546
Houston, TX.............. 726 98% 93% 437 445
Houston, TX.............. 832 99% 98% 506 513
Houston, TX.............. 876 98% 97% 501 506
Houston, TX.............. 1,028 97% 97% 583 586
Houston, TX.............. 753 95% 99% 513 507
Houston, TX.............. 859 93% 97% 537 538
Houston, TX.............. 1,648 100% 98% 962 968
Houston, TX.............. 810 100% 100% 599 634
Houston, TX.............. 903 91% 89% 616 619
</TABLE>
8
<PAGE> 14
<TABLE>
<CAPTION>
TOTAL UNIT TYPE
NUMBER YEAR RENTABLE ---------------------
OF CONSTRUCTION AREA TOTAL 3 BR/
LOCATION PROPERTY NAME UNITS COMPLETED(1) (SQ. FT.) ACREAGE 1 BR 2 BR 4 BR
-------- ------------- ------ ------------ ---------- ------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Houston, TX.............. Harpers Mill(4) 180 1981 143,252 6.8 88 92
Houston, TX.............. Hidden Lake(2) 440 1986 318,748 32.6 288 152
Houston, TX.............. Holiday on Hayes(3) 312 1981 250,564 10.5 172 140
Houston, TX.............. Hunt Club, The(4) 204 1984 135,912 8.3 168 36
Houston, TX.............. Huntley, The(5) 214 1985 165,054 7.4 128 86
Houston, TX.............. Live Oak(7) 162 1978 121,558 5.5 136 26
Houston, TX.............. Meadows on Memorial(9) 96 1982 95,940 3.6 75 21
Houston, TX.............. Mill Creek(9) 174 1982 149,640 5.6 76 98
Houston, TX.............. Monticello(10) 244 1983 203,500 11.2 73 171
Houston, TX.............. Northwoods(3) 200 1978 237,636 17.4 100 100
Houston, TX.............. One Cypress Landing(6) 464 1979 358,156 15.3 396 68
Houston, TX.............. One Westfield Lake(16) 246 1984 269,454 20.0 72 126 48
Houston, TX.............. One Willow Park(14) 178 1984 140,165 6.0 131 47
Houston, TX.............. Pathway(2) 144 1978 139,498 6.0 136 8
Houston, TX.............. Pine Creek(2) 216 1980 170,184 8.1 128 88
Houston, TX.............. Polo Club I(4) 228 1981 161,456 9.3 156 72
Houston, TX.............. Polo Club II(4) 292 1982 215,080 7.0 176 116
Houston, TX.............. Richmond Green(4) 224 1980 214,494 8.8 74 150
Houston, TX.............. Riverwalk(9) 184 1984 140,560 7.6 128 56
Houston, TX.............. Silverado(3) 344 1979 248,960 11.3 272 72
Houston, TX.............. Stony Creek(9) 252 1980 194,240 9.3 164 88
Houston, TX.............. Timbers on Cranbrook(5) 274 1984 206,884 9.5 184 90
Houston, TX.............. Tranquility Lake(13) 90 1983 84,446 10.1 35 55
Houston, TX.............. Willow Chase(18) 136 1983 104,216 4.4 60 76
Houston, TX.............. Wimbledon(2) 161 1978 154,601 6.3 49 106 6
Houston, TX.............. Woodborough(2) 320 1983 222,640 10.3 240 80
Houston, TX.............. Woodchase(2) 270 1978 252,542 10.0 86 184
Houston, TX.............. Woodedge(4) 126 1982 113,631 6.7 21 104 1
Houston, TX.............. Woodlake(5) 315 1976 242,587 8.3 260 52 3
------ ---- ---------- ----- ----- ----- ---
Houston Total/ Weighted
Average 11,207 1981 9,306,023 474.7 6,549 4,283 375
------ ---- ---------- ----- ----- ----- ---
Texas Total/ Weighted
Average 16,258 1981 13,182,482 681.6 9,784 5,961 513
------ ---- ---------- ----- ----- ----- ---
Phoenix, AZ.............. Crestwood(2) 276 1984 149,433 8.3 255 21
Phoenix, AZ.............. Fairways(2) 160 1981 118,192 5.8 108 52
Phoenix, AZ.............. Garden Place(2) 286 1979 231,120 14.2 132 154
------ ---- ---------- ----- ----- ----- ---
Phoenix Total/ Weighted
Average 722 1981 498,745 28.3 495 227 0
------ ---- ---------- ----- ----- ----- ---
San Diego, CA............ Felicita Creek(3) 136 1987 104,440 6.2 36 100
San Diego, CA............ Park Bonita(3) 184 1984 154,256 11.1 36 148
San Diego, CA............ Sun Ridge(3) 160 1986 134,800 5.4 16 144
------ ---- ---------- ----- ----- ----- ---
San Diego Total/ Weighted
Average 480 1986 393,496 22.7 88 392 0
------ ---- ---------- ----- ----- ----- ---
Portfolio Total/ Weighted
Average.................. TOTAL/AVERAGE 18,118 1982 14,703,569 818.7 10,605 7,000 513
====== ==== ========== ===== ===== ===== ===
<CAPTION>
AVERAGE MONTHLY
OCCUPANCY RENT PER UNIT
AVERAGE ------------------ ----------------
APT SIZE AS OF AS OF DECEMBER MARCH
LOCATION (SQ. FT.) 12/31/97 3/31/97 1996 1997
-------- --------- -------- ------- -------- -----
<S> <C> <C> <C> <C> <C>
Houston, TX.............. 796 94% 96% 443 444
Houston, TX.............. 724 94% 96% 614 616
Houston, TX.............. 803 96% 97% 509 517
Houston, TX.............. 666 98% 99% 433 435
Houston, TX.............. 771 92% 93% 603 603
Houston, TX.............. 750 94% 96% 487 490
Houston, TX.............. 999 99% 97% 588 604
Houston, TX.............. 860 96% 98% 454 456
Houston, TX.............. 834 95% 97% 473 473
Houston, TX.............. 1,188 100% 97% 639 645
Houston, TX.............. 772 94% 94% 412 413
Houston, TX.............. 1,095 95% 98% 596 599
Houston, TX.............. 787 99% 97% 475 480
Houston, TX.............. 969 97% 98% 627 635
Houston, TX.............. 788 96% 95% 449 452
Houston, TX.............. 708 90% 94% 404 402
Houston, TX.............. 737 91% 96% 420 419
Houston, TX.............. 958 97% 98% 619 622
Houston, TX.............. 764 95% 96% 491 497
Houston, TX.............. 724 98% 99% 485 492
Houston, TX.............. 771 94% 92% 439 444
Houston, TX.............. 755 97% 96% 437 441
Houston, TX.............. 938 91% 87% 689 690
Houston, TX.............. 766 96% 98% 448 451
Houston, TX.............. 960 98% 98% 533 536
Houston, TX.............. 696 98% 97% 403 407
Houston, TX.............. 935 98% 96% 571 575
Houston, TX.............. 902 98% 98% 513 515
Houston, TX.............. 770 98% 96% 495 500
----- ---- ---- --- ---
830 96% 96% 508 511
----- ---- ---- --- ---
811 95% 96% 521 524
----- ---- ---- --- ---
Phoenix, AZ.............. 541 92% 97% 437 438
Phoenix, AZ.............. 739 97% 100% 517 521
Phoenix, AZ.............. 808 97% 99% 546 551
----- ---- ---- --- ---
691 95% 98% 498 501
----- ---- ---- --- ---
San Diego, CA............ 768 96% 99% 606 619
San Diego, CA............ 838 97% 97% 741 745
San Diego, CA............ 843 96% 94% 591 595
----- ---- ---- --- ---
820 96% 97% 653 659
----- ---- ---- --- ---
Portfolio Total/ Weighted
Average.................. 812 95% 96% 524 527
===== ==== ==== === ===
</TABLE>
9
<PAGE> 15
- ---------------
(1) Year construction completed indicates the year in which the final
certificate of occupancy for the Property was issued.
(2) Owned by Apartment Opportunity Fund, L.P.
(3) Owned by Apartment Opportunity Fund II, L.P.
(4) Owned by DMH90 Properties.
(5) Owned by Houston Portfolio Joint Venture, Village Portfolio Joint Venture
and Fullerton Portfolio Joint Venture.
(6) Owned by Houston Portfolio Joint Venture, Village Portfolio Joint Venture
and Tassajara Partners.
(7) Owned by Houston Portfolio Joint Venture.
(8) Owned by Fullerton Portfolio Joint Venture and Houston Portfolio Joint
Venture II.
(9) Owned by Houston Portfolio Joint Venture II.
(10) Owned by Drever/Monticello Investors, L.P.
(11) Owned by Cornerstone Associates, L.P.
(12) Owned by Dallas/La Prada Investors, L.P.
(13) Owned by Lake Tranquility Investors, L.P.
(14) Owned by Camden Oaks Joint Venture.
(15) Owned by Texas Portfolio Joint Venture.
(16) Owned by Westfield Partners, L.P.
(17) Owned by Colorado Club Partners, L.P.
(18) Owned by Houston Portfolio Joint Venture B.
Drever
Drever was formed in 1985 to syndicate and serve as the general partner to
limited partnerships engaged in the business of acquiring, rehabilitating and
operating multi-family real estate. Concierge Management Corporation, a
subsidiary of Drever, provides property management services for the Drever
apartment communities. Drever Construction Corporation, another subsidiary of
Drever, renders construction and rehabilitation services on behalf of the Drever
properties. Concierge Realty & Finance Corporation, a subsidiary of Drever,
provides brokerage and financing services on behalf of the Partnerships.
The principal executive offices of Drever are located at Four Embarcadero
Center, Suite 1810, San Francisco, California 94111. The telephone number of
Drever is (415) 433-1773.
BACKGROUND OF THE TRANSACTION
In its three years of operations as a public company, the Company has
pursued an aggressive strategy of growth through acquisitions. Management of the
Company believes that acquisitions of attractively priced, quality apartment
communities are critical to the success of the Company, and enable the Company
to maximize its operating efficiencies, while affording the potential for strong
revenue growth. To date, the Company's execution of its acquisition strategy has
lead to increased funds from operations ("FFO") per share, enabled the Company
to consistently raise dividends and increase its market capitalization and
afforded the Company greater access to attractively priced debt. Management of
the Company believes that the apartment REIT industry is undergoing a
consolidation phase and that in order to be able to continue its business
strategy the Company will need to significantly increase its property ownership.
The Company's growth strategy has focused on the acquisition of properties in
specifically identified markets in which the Company already has a presence or
as to which the Company has considerable familiarity.
In pursuit of its ongoing acquisitions strategy, the Company contacted
representatives of Drever in July 1996 to discuss the possibility of acquiring
certain of the Properties located in Austin, Texas. In November 1996, Marshall
Edwards, President and Chief Acquisitions Officer of the Company, initiated
discussions with senior management of Drever about the possible acquisition of
the entire Drever property portfolio. During the course of these discussions,
the Company and Drever began to explore the possibility of a strategic alliance
between the Company and Drever. Between November 1996 and early February, 1997,
Mr. Edwards and senior management of Drever had several discussions, in person
and by telephone, to evaluate the potential benefits and structure of a
strategic alliance between the two companies. In January 1997, the Company
entered into a definitive agreement to acquire seven of the Properties. On
February 4, 1997, the Company and Drever entered into a confidentiality
agreement pursuant to which each
10
<PAGE> 16
company agreed to maintain the mutual confidentiality of materials provided by
and its discussions with the other.
At its regularly scheduled meeting on February 6, 1997, the Board was
briefed by Mr. Edwards on the status of management's contacts and discussions
the Company had with Drever and the terms of the proposal then being discussed
with Drever. The Board authorized management of the Company to continue to
pursue negotiations with Drever.
Between February 6, 1997 and March 11, 1997, after discussing the broad
outlines of a potential alliance between the Company and Drever, the Company
began a preliminary financial and business due diligence of Drever and the
Properties. During this time period, senior management of the Company met on
several occasions with senior management of Drever to discuss the terms of a
potential transaction. On March 12, 1997, the Company and Drever entered into a
non-binding letter of intent outlining the general terms of the Company's
proposed acquisition of the Drever organization. Over the next several weeks,
management of the Company and Drever held numerous discussions regarding the
structure of the transaction and the form of the consideration to be paid by the
Company. On March 31, 1997, the Company engaged Merrill Lynch to render a
fairness opinion with respect to the consideration to be paid by the Company
pursuant to the Transaction.
On May 8, 1997, the Company and Drever entered into a non-binding letter of
intent pursuant to which the Company and Drever agreed upon certain terms of the
Transaction. On May 9, 1997, the Company made a public announcement of the
general terms of the Transaction. From May 9 through May 20, 1997, the Company's
management and legal counsel negotiated with Drever's management and legal
counsel and Houlihan Lokey Howard & Zukin, Drever's financial advisor, with
regard to the terms of the Agreements and related documents.
On May 21, 1997, the Board convened to consider in detail the Transaction
(the "May 21 Board Meeting"). At the May 21 Board Meeting, representatives of
Merrill Lynch reviewed the Transaction with the members of the Board and
delivered Merrill Lynch's opinion (the "Merrill Lynch Opinion") that, as of the
date thereof and based upon the assumptions made, matters considered and limits
of review set forth therein, the Consideration to be paid by the Company in the
Transaction is fair, from a financial point of view, to the Company. See
"-- Opinion of Merrill Lynch" below for a discussion of the Merrill Lynch
Opinion. After deliberating at length with respect to the Transaction, and
following a discussion of the structure of the Transaction and the terms of the
Agreements and the ancillary documents by the Company's legal counsel and
financial advisors, the Board, considering, among other things, the matters
discussed below, unanimously determined the Transaction to be advisable and in
the best interests of the Company and its stockholders, approved the Agreements
and the related documents and recommended that the Stockholders vote FOR the
Proposal.
REASONS FOR THE TRANSACTION
The Board believes that the terms of the Transaction are fair from a
financial point of view and are in the best interests of the Company and its
stockholders. Accordingly, the Board has unanimously approved the Transaction
and recommends approval of the Proposal and the issuance of the Shares by the
Stockholders. In reaching its decision, the Board considered several factors and
consulted with management, legal counsel and financial advisors. The principal
reasons, to which relative weights were not assigned, for the Board's approval
of the Transaction and its recommendation to the Stockholders are as follows:
(i) Analyses by management showed that the Transaction should be
accretive to the Company's FFO per share in 1998. FFO is a widely accepted
measure of an equity REIT's operating performance. FFO is defined as net
income (determined in accordance with generally accepted accounting
principles), excluding gains (or losses) from debt restructuring and sales
of property, plus depreciation of real estate assets. FFO does not
represent cash generated from operating activities in accordance with
generally accepted accounting principles and is not necessarily indicative
of cash available to fund cash needs and cash distributions. FFO should not
be considered as an alternative to net income (determined in accordance
with generally accepted accounting principles) as an indication of the
Company's performance or as an alternative cash flow (determined in
accordance with generally accepted accounting
11
<PAGE> 17
principles) as a measure of liquidity. In addition, the Company's FFO is
not necessarily comparable to similarly entitled items reported by other
REITs.
(ii) Upon the exchange of all the Units and the exercise of the
Warrants issued in the Transaction, the Company's total capitalization will
almost double. This ultimate increase in size should provide several
benefits to the Company and its stockholders, including, without
limitation, greater liquidity for holders of the Common Stock due to the
increased number of shares in the market and greater institutional investor
interest in the Company due to the larger capitalization, which allows such
investors greater liquidity to purchase and sell larger volumes of shares
without disrupting the market. The Company also believes credit rating
agencies generally favor companies with larger capitalizations and view
them as being more stable for unsecured debt holders. Following
consummation of the Transaction, the Company should be able to raise
capital, both debt and equity, on more favorable terms than are now
available.
(iii) The combined organization should provide certain synergies and
allow for the elimination of redundant positions and activities, including
the integration of certain office facilities, information systems and
support functions. Management believes that the Transaction will allow the
Company to realize additional economies of scale by allowing it to spread
costs over a larger number of apartment units, thereby potentially
improving the Company's profit margin.
(iv) Eighty-nine percent of the Properties, based on the number of
units, are located in the Company's existing markets, thereby enabling the
Company to take advantage of its existing knowledge in such markets as well
as reducing the costs associated with integrating the Properties into the
Company's existing systems.
(v) Both the Company and Drever have significant acquisition and
redevelopment experience. The Company should benefit from the extensive
experience of Drever management in enhancing its properties and the
resultant reduction in turnover and increased rental rates. The Company
believes that there is significant opportunity to realize improved
operating cash flow from the Company's existing properties through
implementation of certain renovation and repositioning systems currently
employed by Drever.
(vi) The financial presentation of Merrill Lynch and the Merrill Lynch
Opinion that, as of the date thereof and based upon the assumptions made,
matters considered and limits of review set forth therein, the
Consideration to be paid by the Company in the Transaction is fair, from a
financial point of view, to the Company.
(vii) Presentations from, and discussions with, executive officers of
the Company and outside legal counsel regarding the structure of the
Transaction, the business, assets, financial and legal due diligence
completed with respect to Drever and the Properties and the terms and
conditions of the Agreements and the ancillary agreements.
The Board and management also discussed certain potential negative factors
and risks that could arise or do arise from the Transaction. These included,
among others, the continued geographic concentration of the Company's properties
as a result of the acquisition of the Properties and the risks associated
therewith, the potential difficulties of integrating Drever's property
management employees into the Company's system, the increased debt to market
capitalization as a result of the debt existing on the Properties, the
significant costs involved in connection with consummating the Transaction, the
substantial time and effort of management of the Company required to consummate
the Transaction, integrate the Properties into the Company's system and manage
the resulting larger number of properties in the Company's portfolio and the
risk that the expected benefits of the Transaction might not be fully realized.
The Board believes, however, that the benefits and advantages of the Transaction
outweigh the negative factors and risks.
THE BOARD BELIEVES THAT THE TRANSACTION IS FAIR AND IN THE BEST INTERESTS
OF THE STOCKHOLDERS AND HAS UNANIMOUSLY APPROVED THE TRANSACTION AND RECOMMENDS
THAT THE STOCKHOLDERS VOTE FOR THE PROPOSAL AND THE ISSUANCE OF THE SHARES BY
THE COMPANY IN CONNECTION WITH THE TRANSACTION.
12
<PAGE> 18
In the event that the Transaction is not consummated for any reason, the
Company will continue to make acquisitions of property portfolios and, from time
to time, individual properties in its target markets.
OPINION OF MERRILL LYNCH
Merrill Lynch was engaged by the Company to deliver a fairness opinion to
assist the Company in evaluating a potential strategic alliance among the
Company and its affiliates and Drever, AOF, AOFII and the Partnerships
(collectively, the "Drever Combined Entity").
On May 21, 1997, Merrill Lynch delivered the Merrill Lynch Opinion to the
Board stating that, as of May 21, 1997, and based upon the assumptions made,
matters considered and limits of review set forth therein, the Consideration to
be paid by the Company in the Transaction is fair, from a financial point of
view, to the Company. The Merrill Lynch Opinion was reconfirmed in writing as of
the date of this Proxy Statement.
The full text of the Merrill Lynch Opinion, which sets forth assumptions
made, matters considered and limits on the review undertaken, is attached to
this Proxy Statement as Annex A and is incorporated herein by reference. The
description of the Merrill Lynch Opinion set forth herein is qualified in its
entirety by reference to the full text of the Merrill Lynch Opinion.
Stockholders are urged to read the opinion in its entirety. In the opinion of
the Company, no events or significant changes in information have occurred that
would alter the opinion of Merrill Lynch. However, if such an event or change
does occur, including, without limitation, an amendment to the WDOP Partnership
Agreement, Contribution Agreement or Exchange Agreement which materially affects
the financial terms of any of such agreements, a revised fairness opinion may be
requested.
THE MERRILL LYNCH OPINION IS ADDRESSED TO THE BOARD AND ADDRESSES ONLY THE
FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO BE PAID BY THE
COMPANY IN THE TRANSACTION AND DOES NOT ADDRESS THE MERITS OF THE UNDERLYING
DECISION BY THE COMPANY TO ENGAGE IN THE TRANSACTION AND DOES NOT CONSTITUTE,
NOR SHOULD IT BE CONSTRUED AS, A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW
SUCH STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE PROPOSED CONSIDERATION
TO BE PAID BY THE COMPANY PURSUANT TO THE TRANSACTION WAS DETERMINED ON THE
BASIS OF NEGOTIATIONS BETWEEN THE COMPANY AND DREVER AND WAS APPROVED BY THE
BOARD.
In connection with the preparation of the Merrill Lynch Opinion, Merrill
Lynch, among other things: (i) reviewed certain publicly available and
non-public business and financial information relating to the Company and the
Drever Combined Entity which Merrill Lynch deemed to be relevant; (ii) reviewed
certain information, including financial forecasts, relating to the business,
earnings, cash flow, assets, liabilities and prospects of the Drever Combined
Entity and the Company, as well as the amount and timing of the revenue
enhancements and cost savings and related expenses and synergies expected to
result from the Transaction (the "Expected Synergies") furnished to Merrill
Lynch by the Company; (iii) conducted discussions with members of senior
management and representatives of the Drever Combined Entity and the Company
concerning the matters described in clauses (i) and (ii) above, as well as their
respective businesses and prospects before and after giving effect to the
Transaction, and the Expected Synergies; (iv) reviewed the results of operations
of the Drever Combined Entity and the Company and compared them with those of
certain publicly traded companies that Merrill Lynch deemed to be relevant; (v)
reviewed the market prices and valuation multiples of the Common Stock and
compared them with certain publicly traded companies that Merrill Lynch deemed
to be relevant; (vi) compared the proposed financial terms of the Transaction
with the financial terms of certain other mergers and acquisitions which Merrill
Lynch deemed to be relevant; (vii) reviewed the potential pro forma impact of
the Transaction; (viii) reviewed a draft of the WDOP Partnership Agreement and
drafts of the Agreements; and (ix) reviewed such other financial studies and
analyses and took into account such other matters as Merrill Lynch deemed
necessary, including its assessment of general economic, market and monetary
conditions.
In preparing the Merrill Lynch Opinion, Merrill Lynch assumed and relied on
the accuracy and completeness of all information supplied or otherwise made
available to Merrill Lynch, discussed with or
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reviewed by or for Merrill Lynch, or publicly available, and Merrill Lynch did
not assume any responsibility for independently verifying such information or
undertake an independent evaluation or appraisal of any of the assets or
liabilities (contingent or otherwise) of the Drever Combined Entity or the
Company. In addition, Merrill Lynch did not assume any obligation to conduct any
physical inspection of the properties or facilities of the Drever Combined
Entity or the Company. With respect to the financial forecast information and
Expected Synergies furnished to or discussed with Merrill Lynch by the Drever
Combined Entity or the Company, Merrill Lynch assumed that they had been
reasonably prepared and reflected the best currently available estimates and
judgment of the Company's and Drever's management as to the expected future
financial performance of the Drever Combined Entity and the Company. Merrill
Lynch also assumed that the final forms of the WDOP Partnership Agreement and
the Agreements were substantially similar to the drafts reviewed by Merrill
Lynch.
The Merrill Lynch Opinion was necessarily based upon market, economic and
other conditions as they existed and could be evaluated on, and on the
information made available to Merrill Lynch as of, the date of the Merrill Lynch
Opinion. Merrill Lynch assumed that in the course of obtaining the necessary
regulatory or other consents or approvals (contractual or otherwise) for the
Transaction, no restrictions, including any divestiture requirements or
amendments or modifications, would be imposed that would have a material adverse
effect on the contemplated benefits of the Transaction. Merrill Lynch also
assumed that the Transaction would not change the real estate investment trust
("REIT") status of the pro forma entity.
At the meeting of the Board held on May 21, 1997, Merrill Lynch presented
certain financial analyses accompanied by written materials in connection with
the delivery of the Merrill Lynch Opinion. The following is a summary of the
material financial and comparative analyses performed by Merrill Lynch in
arriving at the Merrill Lynch Opinion.
Historical Trading Performance and Current Capitalization. Merrill Lynch
reviewed certain trading information for the Company and, on the basis thereof,
calculated its market value, market capitalization and trading multiples based
on its stock price as of May 16, 1997 of $24.00. For this purpose, Merrill Lynch
defined "total market capitalization" as market value of the Company's common
equity (including operating partnership units), plus preferred stock at
liquidation value plus total debt less cash. Merrill Lynch then calculated the
market value of the Company as a multiple of projected FFO (based on mean
estimates of FFO provided by First Call, an industry service provider of
earnings estimates based on an average of earnings estimates published by
various investment banking firms) and FFO less recurring capital expenditures
("AFFO") (based on estimates of AFFO from analysts' reports from Merrill Lynch
Equity Research). The Company's FFO multiples for 1997 and 1998 were 10.3x and
9.3x, respectively, and the AFFO multiples for 1997 and 1998 were 12.6x and
11.4x, respectively.
Merrill Lynch reviewed the Company's written offer for the Drever Combined
Entity and, on the basis thereof and using publicly available share price
information for the Common Stock as of May 16, 1997, calculated an aggregate
offer value (the "Offer Value") of $387.7 million. The Offer Value consisted of
$85.0 million of cash, $247.7 million of Common Stock, $50.0 million of
Redeemable Preferred Stock and $5.0 million of Warrants. Using an estimation of
the Drever Combined Entity's debt balances as of December 31, 1997 provided by
the Company's management, Merrill Lynch also calculated an aggregate transaction
value (the "Transaction Value") of $672.7 million which consisted of the Offer
Value plus debt existing on the Properties of $284.9 million. Merrill Lynch also
calculated Offer Value transaction multiples based on projections provided by
the Company's management of the Drever Combined Entity's FFO and AFFO of 12.1x
and 15.2x, respectively, for 1997 and 11.1x and 13.7x, respectively, for 1998.
Analysis of Selected Comparable Publicly Traded Companies. Using publicly
available information and estimates of future financial results published by
First Call and taken from Merrill Lynch Equity Research, Merrill Lynch compared
certain financial and operating information and ratios for both the Company and
the Drever Combined Entity with the corresponding financial and operating
information for a group of publicly traded companies engaged primarily in the
ownership, management, operation and acquisition of multifamily properties which
Merrill Lynch deemed to be reasonably comparable to the Company and the Drever
Combined Entity. For the purpose of its analyses, the following companies were
used as comparable
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<PAGE> 20
companies to both the Company and the Drever Combined Entity: Amli Residential
Properties Trust, Gables Residential Trust, Apartment Investment and Management
Company and Mid-America Apartment Communities, Inc. (collectively, the
"Comparable Companies").
Merrill Lynch's calculations resulted in the following relevant ranges for
the Comparable Companies and for the Company and the Drever Combined Entity as
of May 16, 1997: a range of debt to total market capitalization of 33.2% to
41.1%, with a mean of 38.5% (as compared to the Company at 30.6% and the Drever
Combined Entity at 42.4%); a range of market value as a multiple of projected
1997 FFO of 9.5x to 10.3x, with a mean of 10.1x (as compared to the Company at
10.3x and the Drever Combined Entity at 12.1x); a range of market value as a
multiple of projected 1998 FFO of 8.9x to 9.6x, with a mean of 9.2x (as compared
to the Company at 9.3x and the Drever Combined Entity at 11.1x); a range of
market value as a multiple of projected 1997 AFFO of 11.6x to 12.5x, with a mean
of 12.0x (as compared to the Company at 12.6x and the Drever Combined Entity at
15.2x); and a range of market value as a multiple of projected 1998 AFFO of
10.7x to 11.7x, with a mean of 11.1x (as compared to the Company at 11.4x and
the Drever Combined Entity at 13.7x).
None of the Comparable Companies is, of course, identical to the Company or
the Drever Combined Entity. Accordingly, a complete analysis of the results of
the foregoing calculation cannot be limited to a quantitative review of such
results and involves complex considerations and judgments concerning differences
in financial and operating characteristics of the Comparable Companies, and
other factors that could affect the public trading volume of the Comparable
Companies, as well as that of the Company or the Drever Combined Entity. In
addition, the multiples of market value to estimated 1997 and projected 1998 FFO
and AFFO for the Comparable Companies are based on projections prepared by
research analysts using only publicly available information. Accordingly, such
estimates may or may not prove to be accurate.
Comparable Transactions Analysis. Merrill Lynch also compared certain
financial ratios of the Transaction with those of other selected mergers and
strategic transactions involving REITs which Merrill Lynch deemed to be
relevant. These transactions were Equity Residential Property Trust's proposed
merger with Wellsford Residential Property Trust, Camden Property Trust's
proposed merger with Paragon Group, Inc., Chateau Properties, Inc.'s merger with
ROC Communities, Inc., United Dominion Realty, Inc.'s merger with South West
Property Trust Inc., Highwoods Properties Inc.'s merger with Crocker Realty
Trust, Inc., Simon Property Group, Inc.'s merger with DeBartolo Realty
Corporation, Bradley Real Estate Inc.'s merger with Tucker Properties Corp., BRE
Properties Inc.'s merger with REIT of California, Horizon Outlet Center Inc.'s
merger with McArthur Glen Realty Corp., Mid-America Apartment Communities Inc.'s
merger with America First REIT, Inc. and Wellsford Residential Property Trust's
merger with Holly Residential Properties, Inc.
Using publicly available information and estimates of financial results as
published by First Call, Merrill Lynch calculated the premium of the implied
offer value per share relative to the acquired company's stock price on the day
before announcement of the respective transaction and the implied offer value
per share for the acquired company, as of the day before the announcement of the
respective transaction, as a multiple of the estimated FFO per share for such
company for the current year, if the deal was announced in the first half of the
year, or for the next year if the deal was announced in the second half of the
year. This analysis yielded a range of premiums/(discounts) of (0.8%) to 38.0%
with a mean of 12.9% and a range of transaction FFO multiples of 6.6x to 15.5x
with a mean of 10.4x.
Discounted Cash Flow Analysis. Merrill Lynch performed discounted cash flow
analyses (i.e., analyses of the present value of the projected levered cash
flows for the periods using the discount rates indicated) of the Company based
upon projections provided by the Company's management of the Company's
dividends, FFO and AFFO for the years 1997 through 2002, inclusive, using
discount rates reflecting an equity cost of capital ranging from 16.5% to 20.5%
and terminal value multiples of calendar year 2002 AFFO ranging from 12.0x to
14.0x. Based upon the Company's projection of FFO per share and AFFO per share
for 1997, and assuming a compound annual growth rate of AFFO of 10.5% through
2002, the range of present values per share of Common Stock was $21.30 to $27.59
using the discounted dividend method and $22.22 to $28.60 based upon the
discounted AFFO method.
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<PAGE> 21
Merrill Lynch also performed discounted cash flow analyses of the Drever
Combined Entity based upon projections and assumptions provided by the Company's
management of the Drever Combined Entity's dividends, FFO and AFFO for the years
1997 through 2002, inclusive, using discount rates reflecting an equity cost of
capital ranging from 12.0% to 16.0% and terminal value multiples of calendar
year 2002 AFFO ranging from 12.0x to 14.0x. The range of present values for the
Drever Combined Entity was $593.9 million to $688.1 million for the stand-alone
case using the discounted dividend method and $604.5 million to $699.5 million
based upon the discounted AFFO method.
Merrill Lynch also performed discounted cash flow analyses of the Expected
Synergies provided by the Company's management for the years 1997 through 2002,
inclusive, using discount rates reflecting an equity cost of capital ranging
from 16.5% to 20.5% and terminal value multiples of calendar year 2002 Expected
Synergies, which include all pro forma synergies including employee benefit and
general and administrative eliminations, ranging from 12.0x to 14.0x. The range
of present values was $81.2 million to $104.9 million based upon the discounted
cash flow analyses of the Expected Synergies.
Merrill Lynch also performed discounted cash flow analyses of the Drever
Combined Entity including the Expected Synergies present value range of $81.2
million to $104.9 million, using the same discount rates and terminal value
multiples as in the stand-alone analyses. The range of present values for the
Drever Combined Entity, including the Expected Synergies, was $675.1 million to
$793.0 million using the discounted dividend method and $685.7 million to $804.4
million based upon the discounted AFFO method.
Relative Discounted Cash Flow Analysis. Merrill Lynch utilized the results
of the discounted cash flow analysis of the Company and the Drever Combined
Entity described above to calculate a range of comparative ratios of discounted
cash flow values based on a comparison of the relative ranges of discounted cash
flow value for the Company and the Drever Combined Entity at a 0.0%, 33.0% and
100.0% allocation to the Drever Combined Entity of Expected Synergies. When 0.0%
of the Expected Synergies were allocated to the Drever discounted cash flow
value and compared to the Company discounted cash flow value, the analysis
yielded a ratio range of 29.0% to 31.4%. An allocation of 33.0% of the Expected
Synergies to the Drever Combined Entity yielded a ratio range of 31.8% to 34.0%
and a 100.0% allocation yielded a range of 36.8% to 38.7%.
Net Asset Valuation Analysis. Merrill Lynch performed a net asset valuation
for the Company based on an asset-by-asset real estate valuation of the
Company's properties, an estimation of the current value for the Company's other
assets and liabilities, and an estimation of the Company's debt balances as of
December 31, 1996. The real estate valuation utilized property specific
projections prepared by the Company's management for the calendar year 1997. For
the operating portfolio of the Company, the valuation utilized the direct
capitalization method on 1997 property net operating income after capital
reserves and a range of capitalization rates of 9.00% to 9.50%. These
calculations indicated a per share net asset valuation range for the Company of
$23.18 to $25.37.
Merrill Lynch also performed a net asset valuation for the Drever Combined
Entity based on an asset-by-asset real estate valuation of the Drever Combined
Entity's properties, an estimation of the current values for the Drever Combined
Entity's other assets and liabilities, and the Drever Combined Entity's debt
balances as of December 31, 1996. The real estate valuation utilized property
specific projections prepared by the Company's management for the calendar year
1997. For the operating portfolio of the Drever Combined Entity, the valuation
utilized the direct capitalization method on 1997 property net operating income
after capital reserves and a range of capitalization rates of 8.75% to 9.25%.
These calculations indicated a total net asset valuation range for the Drever
Combined Entity of $320.0 million to $354.9 million.
Pro Forma Combination Analysis. Merrill Lynch analyzed the pro forma
effects resulting from the Transaction, including the potential impact on the
Company's projected stand-alone FFO per share and the anticipated accretion
(i.e., the incremental increase) to the Company's FFO per share resulting from
the Transaction. Merrill Lynch observed that, after giving effect to the
Expected Synergies, the Transaction would be accretive to the Company's
projected FFO per share in each of the years 1997 through 2002, inclusive.
Merrill Lynch also observed that the indicated annual dividend per share of
Common Stock pro forma for the Transaction would be $1.93 per share of Common
Stock, implying no reduction in the Company's current indicated dividend rate.
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<PAGE> 22
Capitalization. In addition, Merrill Lynch compared the Company's projected
book capitalization as of December 31, 1997 to (i) its pro forma projected book
capitalization as of December 31, 1997, after giving effect to the Transaction
and (ii) based on projections of the Company's management, the Company's pro
forma implied market capitalization as of December 31, 1998, after giving effect
to the Transaction. The projected total debt to implied market capitalization
was 35.2%, 41.9% and 40.5% as of December 31, 1997, as of December 31, 1997 on a
pro forma basis and as of December 31, 1998 on a pro forma basis, respectively.
EBITDA as a multiple of interest expense was 3.5x, 2.8x and 2.8x for such
respective cases, EBITDA as a multiple of fixed charges was 2.2x, 2.1x and 2.2x
for such respective cases, EBITDA less capital expenditures as a multiple of
interest expense was 3.1x, 2.5x and 2.6x for such respective cases and EBITDA
less capital expenditures as a multiple of fixed charges was 2.0x, 1.9x and 2.0x
for such respective cases.
The summary set forth above does not purport to be a complete description
of the analyses performed by Merrill Lynch in arriving at the Merrill Lynch
Opinion. The preparation of a fairness opinion is a complex process and not
necessarily susceptible to partial or summary description. Merrill Lynch
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all factors and analyses, could create a misleading view of the
process underlying the Merrill Lynch Opinion. In its analyses, Merrill Lynch
made numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond Drever's,
the Company's and Merrill Lynch's control. Any estimates contained in Merrill
Lynch's analyses are not necessarily indicative of actual values, which may be
significantly more or less favorable than as set forth therein. Estimated values
do not purport to be appraisals and do not necessarily reflect the prices at
which businesses or companies may be sold in the future, and such estimates are
inherently subject to uncertainty.
The Board selected Merrill Lynch to render a fairness opinion because
Merrill Lynch is an internationally recognized investment banking firm with
substantial experience in transactions similar to the Transaction and because it
is familiar with the Company and its business. Merrill Lynch is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, leveraged buyouts, negotiated underwritings, secondary
distributions of listed and unlisted securities and private placements.
Pursuant to a letter agreement dated March 31, 1997, the Company paid
Merrill Lynch fees as follows: (i) a fee of $75,000 on the date of such letter
agreement; and (ii) an additional fee of $1,265,000, plus reimbursable expenses,
on the delivery of the Merrill Lynch Opinion on May 21, 1997. The Company also
reimbursed Merrill Lynch for its reasonable out-of-pocket expenses incurred in
connection with its advisory work, including the reasonable fees and
disbursements of its legal counsel, subject to certain limitations, and to
indemnify Merrill Lynch and certain related persons against certain liabilities
arising out of or in conjunction with its rendering of services under such
letter agreement, including certain liabilities under the federal securities
law.
Merrill Lynch may provide financial advisory and financing services to the
Company and may receive fees for the rendering of such services. In the ordinary
course of its business, Merrill Lynch may actively trade in the securities of
the Company for its own account and the account of its customers and,
accordingly, may at any time hold a long or short position in such securities.
ACCOUNTING TREATMENT
For financial accounting purposes, the Transaction will be treated as a
purchase.
CERTAIN TERMS OF THE EXCHANGE AGREEMENT
The following description does not purport to be complete and is qualified
in its entirety by reference to the Exchange Agreement, copies of which may be
obtained from the Company at the address set forth under the caption
"Incorporation of Certain Documents by Reference."
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Cash Reserves
The Exchange Agreement provides that on the closing date of the Transaction
(the "Closing Date"), a cash reserve account in respect of each Partnership will
be established in such amounts as are set forth in the Exchange Agreement
(collectively, the "Cash Reserves") to provide for the payment of certain
liabilities of each Partnership existing as of the Closing Date and for other
customary real estate closing adjustments. The Exchange Agreement requires each
Partnership's cash on hand as of the Closing Date to be allocated to such
Partnership's Cash Reserve, and if any Partnership has insufficient cash
available to fund its Cash Reserve, the Exchange Consideration payable on the
Closing Date to the Limited Partners of such Partnership will be reduced by an
amount equal to such shortfall. If any expenses attributable to the Properties
allocable to the periods prior to the Closing Date are discovered or billed
after the Closing Date, the parties shall make any necessary adjustments to the
Cash Reserves so that the Limited Partners will have borne all expenses
allocable to the period prior to the Closing Date and the Company will have
borne all expenses allocable to the period after the Closing Date, provided that
no further adjustments will be made after 120 days following the Closing Date,
except for assessments relating to tax appeals and protests. On the 120th day
following the Closing Date, the remaining balance in the Cash Reserves shall be
distributed to the Limited Partners in accordance with the terms of the Exchange
Agreement.
Representations and Warranties
The Exchange Agreement contains various representations and warranties of
each of Drever, AOF and AOFII, on the one hand, and each of the Company and WDOP
on the other, relating to, among other things, (i) its existence, good standing,
authority to do business and compliance with law, (ii) the authorization,
validity and effect of the Exchange Agreement, (iii) the absence of conflicts
with, violations of and defaults under its charter and bylaws and certain other
agreements and documents, (iv) litigation, (v) the absence of certain changes
and events, (vi) taxes, (vii) its books and records, (viii) its brokers or
investments bankers involved in the Transaction, (ix) its properties, (x) its
compliance with applicable laws and regulations, (xi) encumbrances on its
properties, (xii) insurance, (xiii) its non-foreign status and (xiv) the
accuracy of certain information supplied in connection with the Transaction. In
addition, the Exchange Agreement contains representations and warranties by each
of Drever, AOF and AOFII relating to (A) its financial statements and
undisclosed liabilities, if any, and (B) partnership interests of the
Partnerships, and (ii) by each of the Company and WDOP relating to (A) the
capitalization of the Company, (B) the partnership interests of WDOP, (C) the
subsidiaries of the Company, (D) reports filed by the Company with the
Commission and (E) the issuance and delivery of the Units.
Acquisition Proposals
The Exchange Agreement contains the agreement of each of Drever, AOF and
AOFII that prior to the Closing Date (i) none of them nor any of their
affiliates will, and each of them will direct and use its best efforts to, cause
its respective officers, directors, employees, agents, affiliates and
representatives not to initiate, solicit or encourage, directly or indirectly,
any inquiries or the making or implementation of any proposal or offer with
respect to a merger, acquisition, tender offer, exchange offer, consolidation or
similar transaction involving, or any purchase of all or any significant portion
(which, for purposes of the Exchange Agreement, means Properties having an
aggregate Property Value (as defined in the Exchange Agreement) of 20% or more
of the aggregate Property Value of all Properties) of the assets or any equity
securities of, such entity, any Partnership or any of their affiliates, other
than the transactions contemplated by the Exchange Agreement (any such proposal
or offer being herein referred to as an "Acquisition Proposal") or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Acquisition Proposal, or
otherwise facilitate any effort or attempt to make or implement an Acquisition
Proposal; (ii) that it will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties with respect
to any of the foregoing and take the necessary steps to inform the individual or
entities referred to above of these obligations; and (iii) that it will notify
the Company if any such inquiries or proposals are received by, and such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with it; provided, however that nothing in
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<PAGE> 24
the Exchange Agreement prohibits Drever from furnishing information to or
entering into discussions or negotiations with it, any person that makes an
unsolicited bona fide Superior Acquisition Proposal (as defined below), if, and
only to the extent that, (i) the Boards of Directors of Drever, AOF and/or AOFII
determine in good faith that such action is required to comply with applicable
fiduciary duties as advised by counsel, (ii) prior to furnishing such
information to, or entering into discussions or negotiations with, such person,
Drever provides written notice to the Company to the effect that Drever, AOF
and/or AOFII are furnishing information to, or entering into discussions with,
such person except to the extent that the Boards of Directors of Drever, AOF
and/or AOFII determine in good faith that any such action would violate such
Boards' fiduciary duties, and (iii) subject to any confidentiality agreement
with such person, Drever keeps the Company reasonably informed of the status of
any negotiations or discussions except to the extent that the Boards of
Directors of Drever, AOF and/or AOFII determine in good faith that any such
action would violate such Boards' fiduciary duty or otherwise violate applicable
law. A "Superior Acquisition Proposal" is defined to mean a bona fide
acquisition proposal made by a third party which a majority of the members of
the Boards of Directors of Drever, AOF and/or AOFII, as applicable, determines
in good faith, (a) to be more favorable to the Limited Partners than the
Exchange Offer, and (b) is reasonably capable of being consummated.
Interim Conduct of Business
The Exchange Agreement contains a covenant which provides that, prior to
the Closing Date, WDOP, on the one hand and Drever, AOF and AOFII, on the other
hand (i) will use their reasonable efforts to preserve intact, in all material
respects, their business operations and goodwill and the business operation and
goodwill of the Partnerships; (ii) will confer on a regular basis with one or
more representatives of the other to report operational matters of materiality
and any proposals to engage in material transactions (except as provided above);
and (iii) will promptly notify the other of any material emergency or other
material change in the condition, business, properties, assets, liabilities,
prospects or the normal course of their businesses or in the operation of their
properties, any material governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or the breach in
any material respect of any representation, warranty, covenant or agreement
contained in the Exchange Agreement. The Exchange Agreement also provides that
prior to the Closing Date, each of Drever, AOF and AOFII as general partners of
the Partnerships, will cause each of the Partnerships to (i) conduct its
operations according to its usual common, regular and ordinary course; (ii) not
amend its partnership agreement or other charter documents; (iii) not issue any
additional partnership interests; (iv) not declare, set aside or pay any
distribution or payment with respect to, or directly or indirectly redeem,
purchase or otherwise acquire, any partnership interests except in the ordinary
course of business; (v) not sell or otherwise dispose of any Properties or any
other assets which are material; (vi) not make any loans or capital
contributions to, or investments in any other person other than in the ordinary
course of business; (vii) not pay, discharge or satisfy any claims, liabilities
or obligations, other than the payment, discharge or satisfaction in the
ordinary course of business consistent with practice; (viii) not enter into any
commitment which individually may result in total payments or liability by or to
it in excess of $25,000 in the case of any one commitment or in excess of
$100,000 for all commitments other than commitments entered into in the ordinary
course of business. The Exchange Agreement also contains the agreement of
Drever, AOF and AOFII that until the Closing, each of them will continue the
operation of the Properties in the normal and usual manner consistent with past
practice and in accordance with each Partnership's budget previously provided to
the Company, and maintain all rental units and each Property in "market ready"
rentable condition, and within 45 days following the end of any fiscal quarter
ending prior to the Closing Date, deliver to the Company the unaudited balance
sheet and related financial statements of each Partnership for such quarter. The
Exchange Agreement also contains the agreements of each of the Company and WDOP
that, prior to the Closing Date, each (i) will and will cause each of its
affiliates to, conduct its operations according to its usual, regular and
ordinary course; (ii) will not amend its articles of incorporation, bylaws,
partnership agreement or other charter documents; (iii) will not (a) except
pursuant to the exercise of options, warrants, conversion rights and other
contractual rights existing as of the date of the Exchange Agreement, issue any
shares of its capital stock, effect any stock split, reverse stock split, stock
dividend, recapitalization or other similar transaction, (b) amend any
employment agreement with any of its present or future officers or directors, or
(c) adopt any new employee benefit plan;
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<PAGE> 25
(iv) will not (a) declare, set aside or pay any dividend or make any other
distribution or payment with respect to any shares of its capital stock, except
that the Company may pay a dividend not to exceed $.4825 per share of Common
Stock, $.5725 per share of the Company's 9.16% Series B Cumulative Redeemable
Preferred Stock and $.575 per share of 9.20% Senior Preferred Stock for the
second and third calendar quarters of 1997 and any other dividend or
distribution necessary for the Company to maintain its ability to qualify to be
taxed as a REIT under the Internal Revenue Code or (b) except in connection with
the use of shares of capital stock to pay the exercise price with tax
withholding in connection with stock based employee benefit plans, purchase or
otherwise acquire any shares of the capital stock or partnership interests, or
capital stock or partnership interests of any of its affiliates or make any
commitment for any such actions; (v) will not, and will not permit any of its
affiliates to, sell or otherwise dispose of any of its assets which are material
individually or in the aggregate; (vi) will not and will not permit any of its
respective affiliates to make any loans or capital contributions to or
investments in any unaffiliated third party; (vii) will not, and will not permit
any of its affiliates to, pay, discharge or satisfy any claims, liabilities or
obligations other than the payment, discharge or satisfaction in the ordinary
course consistent with past practice; (viii) will not, and will not permit any
of its respective affiliates to, enter into any commitment which, individually
or in the aggregate, may result in total payments or liabilities by or to it in
excess of $1,000,000 other than in the ordinary course of business; and (ix)
will not, and will not permit any of its respective affiliates to, enter into
any commitment with any officer, director or affiliate of the Company, except in
the ordinary course.
Other Covenants
The Exchange Agreement also contains certain additional covenants regarding
such matters as (i) the actions to be taken by the Company and Drever to obtain
the consent of the Stockholders and the Limited Partners, respectively, to the
Transaction; (ii) actions to be taken by the Company and Drever in connection
with filings and consents required to consummate the Transaction; (iii)
inspections of records; (iv) publicity; (v) the preparation and dissemination of
this Proxy Statement; (vi) the conduct of business of WDOP and the Partnerships
after the Closing Date; (vii) expenses of the Transaction; (viii) third-party
consents; (ix) updating of representations and warranties; (x) cooperation of
the parties; and (xi) submission of a listing application to the New York Stock
Exchange covering the Shares and the Redeemable Preferred Stock.
Conditions to Closing
The respective obligation of each party to consummate the Exchange Offer is
subject to the fulfillment at or prior to the Closing Date of the following
conditions: (i) the Proposal shall have been approved by the Stockholders; (ii)
none of the parties thereto shall be subject to any order or injunction of a
court of competent jurisdiction which prohibits the consummation of the
Transaction; (iii) this Proxy Statement shall have been cleared by the
Commission and no stop order with respect hereto shall be in effect; and (iv)
all consents, authorizations, orders and approvals of any governmental
commission, board, other regulatory body or third parties required in connection
with the execution, delivery and performance of the Exchange Agreement shall
have been obtained or made, except for filings in connection with the Exchange
Offer and any other documents required to be filed after the Closing Date and
except where the failure to have obtained or made any such consent,
authorization, order, approval, filing or registration would not have a material
adverse effect on the business, results of operations or financial condition of
Walden and each of the Partnerships (and their respective affiliates), taken as
a whole, following the Closing Date.
The obligation of each Limited Partner to consummate the Exchange Offer is
subject to the fulfillment at or prior to the Closing Date of the following
conditions, unless waived by such Limited Partner: (i) WDOP and the Company
shall have performed their respective agreements contained in the Exchange
Agreement required to be performed on or prior to the Closing Date and the
representations and warranties of the Company and WDOP contained in the Exchange
Agreement shall be true and correct as of the Closing Date in all material
respects (except for those representations and warranties that address matters
only as of a particular date and time which need only be true and correct as of
such date or with respect to such period), and Drever shall have received a
certificate from an executive officer of the Company dated the Closing Date
certifying to such effect; (ii) the opinion of Houlihan Lokey Howard & Zukin
that the aggregate exchange
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consideration to be received by the Limited Partners is fair, from a financial
point of view, as of the Closing Date shall have been delivered to Drever; (iii)
Drever shall have received an opinion of counsel to the Company and WDOP dated
the Closing Date, in substantially the form required by the Exchange Agreement;
and (iv) the shares of Common Stock and Redeemable Preferred Stock issuable upon
the exchange of the Common Units and Preferred Units, respectively, and upon the
exercise of the Warrants shall have been approved for listing on the New York
Stock Exchange subject to official notice of issuance.
The obligation of WDOP to consummate the Exchange Offer is subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by WDOP: (i) Drever, AOF and AOFII shall have performed their respective
agreements contained in the Exchange Agreement required to be performed on or
prior to the Closing Date and the representations and warranties of Drever, AOF
and AOFII contained in the Exchange Agreement shall be true and correct in all
material respects as of the Closing Date (except for those representations and
warranties that address matters only as of a particular date and time which need
only be true and correct as of such date or with respect to such period), and
the Company shall have received a certificate of an executive officer of Drever
dated the Closing Date certifying to such effect; (ii) Limited Partners
representing 50.1% or more of the Limited Partner Interests of Apartment
Opportunity Fund, L.P. and Limited Partners representing 50.1% or more of the
Limited Partner Interests of Apartment Opportunity Fund II, L.P. shall have
accepted the Exchange Offer; (iii) Properties representing no more than 25% of
the aggregate Property Values (as defined in the Exchange Agreement) of the
Properties held by Apartment Opportunity Fund, L.P. and Properties representing
no more than 25% of the aggregate Property Values of the Properties held by
Apartment Opportunity Fund II, L.P. shall have been excluded, pursuant to
certain provisions of the Exchange Agreement, from the Properties held by the
Partnerships on the Closing Date; (iv) the opinion of Merrill Lynch & Co.
Incorporated addressed to the Board of Directors of the Company that the
aggregate consideration payable by WDOP and the Company under the Agreements is
fair, from a financial point of view, to the Stockholders, shall not have been
withdrawn or materially modified; and (v) the Company shall have received an
opinion of counsel to Drever, AOF, AOFII and the Limited Partners, dated the
Closing Date, in substantially the form required by the Exchange Agreement.
Termination
The Exchange Agreement may be terminated and the Exchange Offer may be
abandoned at any time prior to the Closing Date by the mutual written consent of
Drever and the Company, with the prior approval of the respective Boards of
Directors of Drever and the Company.
The Exchange Agreement may be terminated and the Exchange Offer may be
abandoned by either Drever or the Company if (i) the Exchange Offer is not
consummated by December 31, 1997, provided that a party that has willfully and
materially breached a representation, warranty or covenant of such party set
forth in the Exchange Agreement shall not be entitled to exercise its right to
terminate under this provision, (ii) generally, the Special Meeting shall have
been held and the Proposal shall not have been approved by the Stockholders,
(iii) a United States federal or state court of competent jurisdiction or United
States federal or state governmental, regulatory or administrative agency or
commission shall have issued an order, decree or ruling or taken any other
action permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by the Exchange Agreement and such order, decree,
ruling or other action shall have become final and non-appealable, provided that
the party seeking to terminate the Exchange Agreement pursuant to this clause
shall have used its best efforts to remove such order, decree, ruling or
injunction, or (iv) any of the conditions to closing shall not have been
satisfied; provided, in the case of a termination pursuant to clause (i) or (iv)
above, that the terminating party shall not have breached in any material
respect its obligations under the Exchange Agreement in any manner that shall
have proximately contributed to the occurrence of the failure referred to in
said clause.
The Exchange Agreement may be terminated and the Exchange Offer may be
abandoned at any time prior to the Closing Date by action of the Board of
Directors of Drever, AOF and AOFII if (i) in the exercise of their good faith
judgment as to their fiduciary duties to the Limited Partners imposed by law, as
advised by counsel, the Boards of Directors of Drever, AOF and AOFII determine
that such termination is required by reason of a Superior Acquisition Proposal
(as previously defined) being made, (ii) the Board of Directors of
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<PAGE> 27
the Company withdraws, materially modifies or changes in a manner materially
adverse to the Limited Partners its recommendation to the Stockholders to
approve the Proposal, (iii) except with the written consent of Drever, the Board
of Directors of the Company postpones the date scheduled for the Special Meeting
beyond December 31, 1997 or fails to set a date for such meeting by such date,
(iv) there has been a breach by the Company or WDOP of any representation or
warranty contained in the Exchange Agreement which would have or would be
reasonably likely to have a Walden Material Adverse Effect (as defined in the
Exchange Agreement) and which breach is not curable by December 31, 1997, or (v)
there has been a material breach of any of the covenants or agreements set forth
in the Exchange Agreement on the part of the Company or WDOP, which breach is
not curable or, if curable, is not cured within 30 days after written notice of
such breach is given by Drever to the Company.
The Exchange Agreement may be terminated and the Exchange Offer may be
abandoned at any time prior to the Closing Date by action of the Board of
Directors of the Company, if (i) the Boards of Directors of Drever, AOF and/or
AOFII withdraw, materially modify or change in a manner materially adverse to
WDOP their recommendation to the Limited Partners to accept the Exchange Offer,
other than as a result of the occurrence of an event that in the good faith
judgment of the Boards of Directors of Drever, AOF and/or AOFII has or is
reasonably likely to have a Walden Material Adverse Effect or (ii) there has
been a material breach of any of the covenants or agreements set forth in the
Exchange Agreement on the part of Drever, AOF or AOFII, which breach is not
curable or, if curable, is not cured within 30 days after written notice of such
breach is given by the Company to Drever, AOF or AOFII, as applicable.
In the event of termination of the Exchange Agreement and the abandonment
of the Exchange Offer, written notice thereof must be given to the other parties
specifying the provisions of the Exchange Agreement pursuant to which such
termination is made, and the Exchange Agreement will become null and void, and
there shall be no liability on the part of the parties, or their respective
directors, officers, employees, partners, shareholders, representatives, agents
or advisors, except the obligations of the parties set forth below and to pay
their expenses of the Transaction, and except for certain general provisions of
the Exchange Agreement. Nothing will relieve any of the parties from liability
for willful breach of the Exchange Agreement. If Drever, AOF and AOFII elect to
terminate the Exchange Agreement because of a Superior Acquisition Proposal and,
within one year from the date of such termination, Drever, AOF and/or AOFII
consummates a Superior Acquisition Proposal or enters into an agreement to
consummate a Superior Acquisition Proposal which is subsequently consummated,
Drever, AOF and/or AOFII must pay to the Company, provided that the Company
and/or WDOP was not in material breach of its obligations under the Exchange
Agreement at the time of such termination, as liquidated damages and not as a
penalty or forfeiture an amount equal to the least of (a) $10,000,000, (b) an
amount equal to 50% of the excess of the value of the consideration received by
the general partners of each Partnership and the Limited Partners pursuant to
the Superior Acquisition Proposal over $642,000,000 (the "Liquidated Damages
Amount"), and (c) the sum of (x) the maximum amount that can be paid to the
Company without causing the Company to fail to meet the requirements of Sections
856(c)(2) and (3) of the Internal Revenue Code determined as if the payment of
such amount did not constitute income described in Sections 856(c)(2)(A)-(H) and
856(c)(3)(A)-(I) of the Code ("Qualifying Income"), as determined by the
Company's certified public accountants, plus (y) an amount equal to the
Liquidated Damages Amount less the amount payable under clause (x) above in the
event the Company receives a letter from the Company's counsel indicating that
the Company has received a ruling from the Internal Revenue Service to the
effect that Liquidated Damages Amount payments constitute Qualifying Income. The
payments to which the Company is entitled under this provision are its sole
remedy with respect to termination of the Exchange Agreement under the
circumstances contemplated in this provision.
At any time prior to the Closing Date, either the Company or Drever may, to
the extent legally allowed, (i) extend the time for the performance of any of
the obligations or other acts of the other parties, (ii) waive any inaccuracies
in the representations and warranties made to such party in any document
delivered, and (iii) waive compliance with any of the agreements or conditions
for the benefit of such party.
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CERTAIN TERMS OF THE CONTRIBUTION AGREEMENT
The following description does not purport to be complete and is qualified
in its entirety by reference to the Contribution Agreement, copies of which may
be obtained from the Company at the address set forth under the caption
"Incorporation of Certain Documents by Reference."
Cash Reserves
The Contribution Agreement provides that, on the Closing Date, a cash
reserve account will be established in an amount equal to the amount of
liabilities set forth on a projected balance sheet of Drever as of October 1,
1997 (the "Cash Reserve") to provide for the payment of such liabilities.
Drever's cash on hand on the Closing Date will be allocated to the Cash Reserve,
and if Drever has insufficient cash available to fund the Cash Reserve, the
consideration payable pursuant to the Contribution Agreement on the Closing Date
to the Drever Shareholders and the applicable Equity Participants will be
reduced by the amount of the shortfall. The Drever Shareholders and the
applicable Equity Participants will be entitled to receive, on the 120th day
following the Closing Date, an amount of cash from WDOP equal to the amount they
would have received if the balances in the Cash Reserve (after paying or
accruing for the liabilities set forth on such projected balance sheet) were
added to the consideration payable pursuant to the Contribution Agreement.
Additionally, the Drever Shareholders and Assignees of a general partner of a
Partnership, as to which Partnership there is a balance in the cash reserve
established pursuant to the terms of the Exchange Agreement will be entitled to
receive, on the 120th day following the Closing Date, an amount of cash from
WDOP equal to the additional amount each of them would have received if such
balance were added to the consideration to be received by the Assignees
attributable to their General Partner Rights.
Representations and Warranties
The Contribution Agreement contains various representations and warranties
of the Drever Shareholders on the one hand, and WDOP and the Company on the
other. The representations and warranties of the Drever Shareholders relate to,
among other things (i) the existence, good standing and compliance with law of
Drever and each of its subsidiaries (collectively, the "Acquired Companies"),
(ii) the authorization, validity and effect of the Contribution Agreement, (iii)
the absence of conflicts with, violations of and defaults under the charter and
bylaws of each of the Acquired Companies and certain other agreements and
documents, (iv) the financial statements of the Acquired Companies, (v) the
capitalization of Drever, (vi) litigation, (vii) the absence of certain changes
and events, (viii) taxes, (ix) books and records, (x) brokers or investment
bankers involved in the Transaction, (xi) insurance, (xii) accounts receivable
of the Acquired Companies (xiii) employee benefits of the Acquired Companies,
(xiv) contracts of the Acquired Companies, (xv) employees of the Acquired
Companies, (xvi) labor unions, and (xvii) relationships with related persons.
The representations and warranties of the Company and WDOP in the Contribution
Agreement mirror the representations and warranties of each of them in the
Exchange Agreement.
Interim Conduct of Business
The Contribution Agreement contains covenants concerning the interim
conduct of business by the Acquired Companies, on the one hand, and the Company
and WDOP, on the other, during the period from the date of the Contribution
Agreement to the Closing Date, which are substantially similar to the comparable
covenants contained in the Exchange Agreement.
Certain Additional Covenants
The Contribution Agreement contains certain additional covenants which are
substantially similar to those set forth in the Exchange Agreement.
Conditions to Closing
The respective obligations of each party to consummate the transactions
contemplated by the Contribution Agreement are subject to substantially the same
conditions as those set forth in the Exchange Agreement,
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<PAGE> 29
and the additional condition that the Exchange Offer shall have been consummated
in accordance with the terms of the Exchange Agreement.
Termination
The Contribution Agreement may be terminated and the transactions
contemplated thereby may be abandoned on substantially the same terms and
conditions as set forth in the Exchange Agreement.
Indemnification
The Contribution Agreement provides that Maxwell B. Drever ("Mr. Drever")
will indemnify and hold harmless WDOP, the Company, the Acquired Companies, the
Partnerships and their respective representatives, stockholders, controlling
persons and affiliates (collectively, the "Indemnified Persons") for, and will
pay to the Indemnified Persons the amount of, any loss, liability, claim, damage
(including incidental and consequential damages), expense (including costs of
investigation and defense and reasonable attorneys' fees) or diminution of
value, whether or not involving a third party claim (collectively, "Damages"),
arising, directly or indirectly, from or in connection with certain outstanding
litigation of Drever, all liabilities of Drever set forth on a balance sheet of
Drever prepared as of the Closing Date (whether or not then payable) and the
transactions contemplated by the Contribution Agreement. The obligations of Mr.
Drever under this provision are secured by a pledge of the Common Units and
Preferred Units received by Mr. Drever and the Equity Participants as
consideration under the Contribution Agreement (and any and all shares of Common
Stock and Preferred Stock and Warrants acquired by Mr. Drever as a result of
exchanging the Units or exercising the Warrants), pursuant to the terms and
subject to the conditions of a Pledge Agreement (herein so called). The Pledge
Agreement, which by its terms will terminate and the liens granted thereby will
be released, on the second anniversary of the Closing Date, provides that in the
event Damages are incurred by an Indemnified Person for which such Indemnified
Person is entitled to be indemnified pursuant to the terms of the Contribution
Agreement ("Covered Damages"), Mr. Drever may provide the Company and WDOP with
written instructions to (i) release their lien on that number of Common Units
and shares of Common Stock held by Walden and WDOP as collateral which shall be
sufficient in amount to pay the Covered Damages (the "Released Collateral"), and
(ii) deliver the Released Collateral to the Indemnified Persons named in such
instructions. Upon receipt of such instructions, WDOP and the Company shall
release their lien on the Released Collateral and deliver the Released
Collateral to the Indemnified Persons named in such instructions (the date of
delivery of such Released Collateral being hereinafter referred to as the
"Release Date"). For purposes of this provision, the Common Units and the shares
of Common Stock shall be valued at the average of the closing sales prices of
the Common Stock on the New York Stock Exchange for the five business days
immediately preceding the Release Date. The Common Units and shares of Common
Stock released pursuant to this provision will be released on a pro rata basis
among Mr. Drever and the Equity Participants according to the percentages set
forth on a schedule attached to the Pledge Agreement. If the value of the
Released Collateral exceeds the amount of the Covered Damages, the excess shall
be returned to Mr. Drever and the Equity Participants pro rata in cash.
THE WDOP PARTNERSHIP AGREEMENT
Effective as of the Closing Date, each Limited Partner who has accepted the
Exchange Offer and will receive Units pursuant thereto (collectively, the "Class
B Limited Partners"), shall be admitted as a limited partner of WDOP and shall
enter into the WDOP Partnership Agreement. Prior to the exchange of the Common
Units for shares of Common Stock, the Class B Limited Partners holding Common
Units will be entitled to receive quarterly distributions per Common Unit in an
amount equal to (i) the number of shares of Common Stock for which such Common
Unit is then exchangeable (which, as of the Closing Date, shall be one, subject
to adjustment under certain circumstances) multiplied by (ii) the dividend then
payable by the Company on a share of Common Stock. Prior to the exchange of the
Preferred Units for shares of Redeemable Preferred Stock and Warrants, the Class
B Limited Partners holding Preferred Units will be entitled to receive quarterly
distributions per Preferred Unit equal to $0.5625, provided that following the
issuance of any shares of Redeemable Preferred Stock, holders of Preferred Units
will be entitled to receive
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distributions in an amount per Preferred Unit equal to the dividend then payable
on the shares of Redeemable Preferred Stock (currently expected to be no more
than $0.5625 per share). If WDOP does not make all or any portion of such
quarterly distributions to such holders of the Units, such unpaid amount shall
bear interest at a rate equal to the prime rate (as calculated pursuant to the
terms of the WDOP Partnership Agreement) plus 8% per annum. Pursuant to the
terms of the WDOP Partnership Agreement, WDOP, at the time of the exchange of
Units, must pay the accrued and unpaid distributions to the holders of such
Units in cash.
The Company, which is the sole general partner of WDOP, may not be removed
as general partner by the limited partners of WDOP with or without cause. As the
sole general partner, the Company will have full authority to conduct the
business of WDOP, provided that without the consent of Class B Limited Partners
holding two-thirds of the partnership interests in WDOP then held by such
partners, the general partner may not dissolve WDOP prior to the tenth
anniversary of the Closing Date, file for bankruptcy or sell or otherwise
transfer any of the Properties prior to the third anniversary of the Closing
Date. Pursuant to the provisions of the WDOP Partnership Agreement, WDOP shall
establish a special committee (the "Special Committee") on the Closing Date. The
Special Committee will continue in effect until such time as the Percentage
Interest (as defined in the WDOP Partnership Agreement) of the Class B Limited
Partners is reduced below 33.33%. The Special Committee will consist of four
individuals, not fewer than two of whom will consist of members appointed by the
Class B Limited Partners. The purpose of the Special Committee is to approve
transactions between WDOP and affiliated entities.
The WDOP Partnership Agreement provides that, at any time, and from time to
time, from and after the first anniversary of the Closing Date, each Class B
Limited Partner holding Common Units will have the right to exchange with the
Company each Common Unit for one share of Common Stock and each Class B Limited
Partner holding Preferred Units will have the right to exchange with the Company
each Preferred Unit for one share of Redeemable Preferred Stock and 3 1/3
Warrants. The number of shares of Common Stock and Redeemable Preferred Stock
issuable upon exchange of the Units is subject to adjustment to give effect to
certain events affecting the Common Stock and the Redeemable Preferred Stock,
including dividends or distributions on Common Stock or Redeemable Preferred
Stock payable in Common Stock or Redeemable Preferred Stock, respectively;
subdivisions, combinations or certain reclassifications of the Common Stock or
Redeemable Preferred Stock; and distributions to persons of evidences of
indebtedness or assets or options, subscription rights or warrants (excluding
those issued to employees, independent contractors or directors of the Company
or its affiliates pursuant to any existing or future employee stock benefit,
stock option, stock purchase or stock bonus plan or any existing stockholder
pursuant to the Company's dividend reinvestment and stock purchase plan). If the
Company is a party to a consolidation or merger, or transfers all or
substantially all of its assets, the right to exchange Units for shares of
Common Stock and Redeemable Preferred Stock will become a right to exchange such
Units for securities, cash or other assets of the Company or another person.
REGISTRATION RIGHTS AGREEMENT
The Exchange Agreement provides that, on the Closing Date, the Company and
the general partners of the Partnerships on behalf of the Limited Partners and
the Drever Shareholders, will enter into a registration rights agreement (the
"Registration Rights Agreement"), relating to the shares of Common Stock and
Redeemable Preferred Stock and the Warrants acquired upon the exchange of the
Units (collectively, the "Registrable Securities"). The Registration Rights
Agreement requires the Company to cause to be filed a registration statement
relating to the issuance of the Registrable Securities to the Class B Limited
Partners as soon as practicable during the period commencing two weeks prior to
the first date upon which the Units may be exchanged (or such other date as may
be required under the applicable provisions of the federal securities laws). In
addition, the Registration Rights Agreement permits the requisite percentage of
holders of such Registrable Securities at the time of demand, at any time after
one and one-half years after the Closing Date, until the earlier of (i) the
three and one-half year anniversary of the Closing Date or (ii) the date on
which all of the Registrable Securities have been eligible for resale pursuant
to Rule 144(k) promulgated under the Securities Act of 1933, as amended, to
require the Company to file with the Commission a registration statement to
register public resales of such Registrable Securities and, under certain
circumstances, to require
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the Company to include such Registrable Securities in a registration statement
otherwise filed by the Company.
FURTHER DESCRIPTION OF THE CONSIDERATION
The Agreements contemplate that the Company will issue up to 2,000,000
Preferred Units as part of the Consideration. Each Preferred Unit will be
exchangeable for one share of Redeemable Preferred Stock and 3 1/3 Warrants,
each of which is exercisable for one-third of one share of Common Stock at
$26.875 per share.
The Redeemable Preferred Stock
The Redeemable Preferred Stock will, with respect to dividend rights upon
liquidation, dissolution or winding up of the Company, rank (i) senior to the
Common Stock, all Excess Stock (as defined in the Company's Articles of
Incorporation), with certain limited exceptions, and to all other equity
securities of the Company, except those the terms of which specifically provide
that such securities rank senior to or on a parity with the Redeemable Preferred
Stock; (ii) on a parity with the Company's 9.16% Series B Convertible Redeemable
Preferred Stock (the "Series B Preferred Stock") and all other equity securities
issued by the Company the terms of which specifically provide that such equity
securities rank on a parity with the Redeemable Preferred Stock; and (iii)
junior to the Company's 9.20% Senior Preferred Stock and all other equity
securities issued by the Company the terms of which specifically provide that
such equity securities rank senior to the Redeemable Preferred Stock. The rights
of the holders of Redeemable Preferred Stock will be subordinate to those of the
Company's general creditors.
Holders of Redeemable Preferred Stock will be entitled to receive out of
assets of the Company legally available for payment, when and as declared by the
Board, cash dividends at the rate of $2.25 per annum per share. Dividends on
shares of Redeemable Preferred Stock will accrue and be cumulative from the date
of issuance of the Redeemable Preferred Stock. Dividends will be payable
quarterly in arrears in March, June, September and December of each year.
Shares of Redeemable Preferred Stock may be redeemed, in whole or from time
to time in part, at any time after January 1, 2008, at the option of the Company
at the price of $25.00 per share, plus all accrued and unpaid dividends thereon.
Shares of Redeemable Preferred Stock redeemed by the Company will be restored to
the status of authorized but unissued Preferred Stock of the Company. In the
event that fewer than all of the outstanding shares of Redeemable Preferred
Stock are redeemed, 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.
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, subject to the prior preferences and other rights of
any series of capital stock of the Company ranking senior to the Redeemable
Preferred Stock, but before any payment is made to the holders of any capital
stock of the Company ranking junior to the Redeemable Preferred Stock, the
holders of Redeemable Preferred Stock will be entitled to receive out of assets
of the Company legally available for distribution to stockholders, liquidating
distributions in the amount of $25.00 per share, plus an amount equal to all
dividends accrued and unpaid. After payment of the full amount of the
liquidating distributions to which they are entitled, the holders of Redeemable
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 Redeemable 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 Redeemable Preferred Stock, including the Series B
Convertible Redeemable Preferred Stock, in the distribution of assets, then the
holders of the Redeemable Preferred Stock and all other such classes or series
of equity securities will share ratably in any such distribution of assets in
proportion to the full liquidating distributions to which they would otherwise
be respectively entitled.
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Except in certain limited circumstances when dividends on the Redeemable
Preferred Stock have been in arrears for six or more quarterly periods, or
except as required by applicable law, holders of the Redeemable Preferred Stock
will not be entitled to vote for any purpose.
The Warrants
Each Warrant is exercisable, at any time beginning on the first anniversary
of the Closing Date and ending on December 31, 2007, for one-third of one share
of Common Stock at $26.875 per share, subject to adjustment in the event of
certain events such as stock dividends, stock splits, reverse stock splits,
reclassifications and the issuance by the Company of certain types of securities
or certain distributions by the Company. Although they will be initially issued
in conjunction with shares of Redeemable Preferred Stock, the Warrants will be
separately transferable upon receipt by the Class B Limited Partners. Prior to
the exercise of the Warrants to purchase shares of Common Stock, holders of
Warrants will not have any rights of holders of Common Stock, including the
right to receive payments of dividends, if any, on Common Stock, or to exercise
any applicable right to vote.
The Company will have the obligation to repurchase all outstanding Warrants
upon the occurrence of certain events, such as the consolidation or merger of
the Company with another entity (in certain circumstances) or the sale of all or
substantially all of the assets of the Company (in certain circumstances).
The foregoing descriptions of the Redeemable Preferred Stock and the
Warrants do not purport to be complete. Copies of the Articles Supplementary
relating to the Redeemable Preferred Stock and the Series B Warrant Agreement
relating to the Warrants may be obtained from the Company at the address set
forth herein under the caption "Incorporation of Certain Documents by
Reference."
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WALDEN RESIDENTIAL PROPERTIES, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements include (i)
the historical results of the Company, which should be read in conjunction with
the combined financial statements of the Company and its "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
incorporated by reference in this Proxy Statement (see "Incorporation of Certain
Documents by Reference"), and (ii) the combined financial statements of Drever
and its affiliates (collectively, the "Drever Group"), which consist of Drever,
four majority owned subsidiaries (including Drever McIntosh, Inc.), two
affiliated corporations (AOF and AOF II), one affiliated entity and the 18
Partnerships, which should be read in conjunction with the combined financial
statements of Drever and its affiliates included elsewhere in this Proxy
Statement. The acquisition of the Drever Group is being recorded in accordance
with the purchase method of accounting pursuant to Accounting Standards Board
Opinion No. 16. It is assumed the combined entity, consisting of the Company and
the Drever Group, qualifies as a REIT with a taxable management company
subsidiary. It is also assumed that the combined entities will have no federal
income tax liability for the periods presented. The unaudited pro forma
condensed combined financial statements are not necessarily indicative of what
the Company's financial position or results of operations would have been had
the Transaction occurred on the pro forma dates. Such financial statements also
do not purport to represent the future financial position or results of
operations of the Company.
The Company has, indirectly, offered to acquire 100% of the Drever Group
and 100% of the limited partners' interest in each of the Partnerships so that
it wholly owns the Drever Group and each of the Partnerships' properties.
However, in order to be obligated to consummate the Transaction, the Company
must, among other things, acquire, at a minimum, 100% of the Drever Group, which
will include its 1% general partner interest in each of the Partnerships, and a
50.01% interest in each of Apartment Opportunity Fund, L.P. and Apartment
Opportunity Fund II, L.P. (the "AOF Partnerships"). As a result, the
accompanying pro forma balance sheets and statements of income are being
presented to reflect the 100% and minimum alternatives. Because each of the
limited partners in the Partnerships will have the opportunity to exchange or
hold their interests, the percentage ownership, if any, the Company will acquire
from the limited partners in each of the Partnerships cannot be determined
precisely at this time. As a result, a third alternative has also been presented
as an example to reflect a pro forma balance sheet and statement of income as if
the Company acquires 100% of the Drever Group and 75% of the interests in the
Partnerships.
The total consideration for the Transaction, assuming 100% of the Drever
Group is acquired, will consist of approximately $85 million in cash and $295
million of Units which are exchangeable, on or after the first anniversary of
their issuance, into 10,322,580 shares of Common Stock, 2,000,000 shares of
Redeemable Preferred Stock and 6,666,667 Warrants, each of which is exercisable
for one-third of one share of Common Stock at $26.875 per share. The purchase is
being recorded based upon the cash and fair value of consideration to be given
in the Transaction. The estimated fair values assigned to the Units are based
upon the market price of the Common Stock ($23.75), the Company's 9.20% Senior
Preferred Stock ($25.00) and the Company's Series A Warrants ($1.25) for five
days prior and subsequent to the public announcement of the Transaction. No
assurance can be given that the market price of the Common Units, Preferred
Units and the Warrants is or will be equal to such assigned values. The combined
pro forma adjustments are based on certain estimates and currently available
information. Such adjustments could change as additional information becomes
available, as estimates are refined or as additional events occur. However,
management does not expect any changes in the purchase price or the allocation
of such purchase price to be significant except for adjustments related to the
limited partner interests acquired in the Partnerships.
The unaudited pro forma condensed combined statement of income of the
Company for the year ended December 31, 1996 is based upon the audited
statements of income of the Company and the Drever Group for the year ended
December 31, 1996, adjusted to reflect as of January 1, 1996: (i) the purchase
by the Company of 24 properties for $232.4 million, including the value of
44,379 convertible equity securities, (ii) the sale by the Company of three
properties, (iii) the issuance by the Company of 1.8 million shares of Series A
and Series B Convertible Redeemable Preferred Stock having net proceeds of $43.5
million, (iv) the issuance by the Company of 2,917,650 shares of Common Stock
having net proceeds of $61.1 million, (v) the issuance by
28
<PAGE> 34
the Company of 4.0 million shares of 9.20% Senior Preferred Stock, including the
Series A Warrants having net proceeds of $95.3 million, (vi) the additional
borrowings by the Company required to complete the purchase of 24 properties,
and (vii) the effects of accounting for the purchase of the Drever Group.
The unaudited pro forma condensed combined statement of income of the
Company for the six months ended June 30, 1997 is based upon the unaudited
statements of operations of the Company and the Drever Group for the six months
ended June 30, 1997, adjusted to reflect as of January 1, 1997: (i) the purchase
by the Company of eight properties for $53.4 million, including the value of
44,379 convertible equity securities, (ii) the additional borrowings by the
Company required to complete the purchase of eight properties, and (iii) the
effects of accounting for the purchase of the Drever Group.
29
<PAGE> 35
WALDEN RESIDENTIAL PROPERTIES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
ASSUMING PURCHASE OF 100% INTERESTS IN THE PARTNERSHIPS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THE COMPANY COMBINED
--------------------------------------- THE PRO FORMA ENTITY
PRO FORMA DREVER GROUP TRANSACTION PRO
HISTORICAL ADJUSTMENTS(A) PRO FORMA HISTORICAL(B) ADJUSTMENTS FORMA
---------- -------------- --------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Rental income............................... $64,587 $3,034 $67,621 $54,635 $ (90)(c) $122,166
Other property income....................... 2,605 109 2,714 1,633 (1)(c) 4,346
Interest income............................. 849 (311) 538 229 -- 767
Other income (expense)...................... -- -- -- (200) 538(g) 338
------- ------ ------- ------- ------- --------
Total revenues........................ 68,041 2,832 70,873 56,297 447 127,617
------- ------ ------- ------- ------- --------
EXPENSES(k)
Property operating and maintenance.......... 22,013 1,005 23,018 20,048 (55)(c) 43,011
Real estate taxes........................... 6,561 346 6,907 5,780 -- 12,687
General and administrative.................. 3,394 -- 3,394 4,209 -- 7,603
Interest.................................... 10,121 665 10,786 11,060 3,120(c,d) 24,966
Financing costs and amortization............ 411 -- 411 430 (430)(e) 411
Depreciation................................ 13,121 528 13,649 11,278 792(c,f) 25,719
------- ------ ------- ------- ------- --------
Total expenses........................ 55,621 2,544 58,165 52,805 3,427 114,397
------- ------ ------- ------- ------- --------
Operating income.............................. 12,420 288 12,708 3,492 (2,980) 13,220
Gain (loss) on disposition of real property... -- -- -- (170) 170(c) --
------- ------ ------- ------- ------- --------
Income before income taxes and preferred
distributions............................... 12,420 288 12,708 3,322 (2,810) 13,220
Income taxes.................................. -- -- -- (322) 322(h) --
Preferred distributions....................... (7,419) -- (7,419) -- (2,250)(i) (9,669)
------- ------ ------- ------- ------- --------
Net income available to common stockholders... $ 5,001 $ 288 $ 5,289 $ 3,000 $(4,738) $ 3,551
======= ====== ======= ======= ======= ========
Net income available to common stockholders
per share................................... $ 0.29 $ 0.30 $ 0.13
======= ======= ========
Distributions per share of common stock....... $ 0.965 $ 0.965 $ 0.965
======= ======= ========
Weighted average shares of common stock
outstanding................................. 17,346 45 17,391 10,323(j) 27,714
======= ====== ======= ======= ========
</TABLE>
See accompanying notes.
30
<PAGE> 36
WALDEN RESIDENTIAL PROPERTIES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
ASSUMING PURCHASE OF 100% INTERESTS IN THE PARTNERSHIPS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THE COMPANY
--------------------------------------- THE PRO FORMA COMBINED
PRO FORMA DREVER GROUP TRANSACTION ENTITY
HISTORICAL ADJUSTMENTS(A) PRO FORMA HISTORICAL(B) ADJUSTMENTS PRO FORMA
---------- -------------- --------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Rental income............................... $105,602 $ 27,974 $133,576 $107,344 $ (498)(c) $240,422
Other property income....................... 3,873 876 4,749 3,259 (16)(c) 7,992
Construction revenues....................... -- -- -- 919 -- 919
Interest income............................. 1,433 (349) 1,084 620 -- 1,704
Other income (expense)...................... 263 -- 263 (1,092) 2,628(g) 1,799
-------- -------- -------- -------- ------- --------
Total revenues........................ 111,171 28,501 139,672 111,050 2,114 252,836
-------- -------- -------- -------- ------- --------
EXPENSES (k)
Property operating and maintenance.......... 37,521 10,028 47,549 40,682 (310)(c) 87,921
Real estate taxes........................... 10,039 2,794 12,833 11,486 (33)(c) 24,286
Construction cost of sales.................. -- -- -- 891 -- 891
General and administrative.................. 5,124 -- 5,124 9,343 -- 14,467
Interest.................................... 20,573 857 21,430 22,909 6,050 (c,d 50,389
Financing costs and amortization............ 916 (94) 822 888 (888)(e) 822
Depreciation................................ 19,810 7,488 27,298 22,888 1,253 (c,f 51,439
-------- -------- -------- -------- ------- --------
Total expenses........................ 93,983 21,073 115,056 109,087 6,072 230,215
-------- -------- -------- -------- ------- --------
Operating income.............................. 17,188 7,428 24,616 1,963 (3,958) 22,621
Gain on disposition of real property.......... 1,934 -- 1,934 -- -- 1,934
-------- -------- -------- -------- ------- --------
Income before extraordinary items, income
taxes and preferred distributions........... 19,122 7,428 26,550 1,963 (3,958) 24,555
Income taxes.................................. -- -- -- (647) 647(h) --
Preferred distributions....................... (4,092) (10,909) (15,001) -- (4,500)(i) (19,501)
-------- -------- -------- -------- ------- --------
Net income available to common stockholders,
before extraordinary items.................. $ 15,030 $ (3,481) $ 11,549 $ 1,316 $(7,811) $ 5,054
======== ======== ======== ======== ======= ========
Net income available to common stockholders
per share, before extraordinary items....... $ 1.02 $ 0.68 $ 0.18
======== ======== ========
Distributions per share of common stock....... $ 1.86 $ 1.86 $ 1.86
======== ======== ========
Weighted average shares of common stock
outstanding................................. 14,720 2,365 17,085 10,323(j) 27,408
======== ======== ======== ======= ========
</TABLE>
See accompanying notes.
31
<PAGE> 37
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF INCOME
ASSUMING PURCHASE OF 100% INTERESTS IN THE PARTNERSHIPS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PROPERTY INFORMATION)
(a) The pro forma adjustments for the six months ended June 30, 1997,
reflect as of January 1, 1997: (i) the operations of eight apartment properties
acquired by the Company in 1997, and (ii) the reduction in interest income and
increase in interest expense related to the acquisitions by the Company.
The pro forma adjustments for the year ended December 31, 1996, reflect as
of January 1 1996: (i) the operations of 24 apartment properties acquired by the
Company in 1996 and 1997, (ii) the sale by the Company of three apartment
properties, (iii) the issuance by the Company of 1,800 shares of Series A and
Series B Convertible Redeemable Preferred Stock, (iv) the issuance by the
Company of 2,918 shares of Common Stock, (v) the issuance by the Company of
4,000 shares of Senior Preferred Stock, and (vi) the reduction in interest
income and increase in interest expense related to the acquisitions by the
Company.
(b) Represents the condensed combined statement of operations of the Drever
Group included elsewhere in this Proxy Statement.
(c) Represents the elimination of the operations of One Stanford Court, a
72 unit apartment property sold by Drever in April 1997.
(d) Represents interest expense on $90,500 to be borrowed under the
Company's variable rate credit facility to complete the Transaction. The
weighted average interest rate was 6.96% and 6.83% for the six months ended June
30, 1997 and the year ended December 31, 1996, respectively.
(e) Represents an adjustment to the amortization of deferred financing
costs associated with the Partnerships' mortgage indebtedness, which will be
eliminated in connection with the acquisition of the Drever Group.
(f) Represents an adjustment to depreciation of real estate owned as a
result of recording the real estate assets of the Drever Group at fair value
versus historical cost. Depreciation is computed on a straight-line basis over
the estimated useful lives of the related assets which have an estimated
weighted average useful life of approximately 24 years. Buildings acquired in
the Transaction are being depreciated over 25 years and other depreciable assets
over 5, 10 or 15 years depending on the useful life of the related asset.
Calculation of the fair value of depreciable real estate assets at June 30,
1997:
<TABLE>
<S> <C>
Purchase price (see pro forma condensed combined balance
sheet note (b))........................................ $ 681,260
Less: Purchase price allocated to land................... (102,189)
---------
Pro forma basis of the Drever Group's depreciable real
estate assets recorded at fair value................... $ 579,071
=========
</TABLE>
32
<PAGE> 38
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF INCOME -- (CONTINUED)
ASSUMING PURCHASE OF 100% INTERESTS IN THE PARTNERSHIPS
Calculation of depreciation of real estate owned for the six months ended
June 30, 1997 and the year ended December 31, 1996 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
Depreciation expense based upon an estimated
weighted average useful life of
approximately 24 years..................... $ 12,070 $ 24,141
Less: Historical depreciation of the Drever
Group...................................... (11,278) (22,888)
-------- --------
Pro forma adjustment......................... $ 792 $ 1,253
======== ========
</TABLE>
(g) Represents the elimination of Drever McIntosh, which will be sold prior
to closing the Transaction.
(h) Represents the elimination of the Drever Group's provision for income
taxes since the combined entity will operate as a REIT for Federal income tax
purposes and, therefore, will not be subject to Federal income taxes.
(i) Represents the preferred distributions on the Preferred Units which
will be issued in connection with the Transaction (see note (b) of the pro forma
condensed combined balance sheet).
(j) Represents the 10,323 Common Convertible Equity Securities which will
be issued in connection with the Transaction and which are exchangeable for one
share of Common Stock (see note (b) of the pro forma condensed combined balance
sheet).
(k) Although not presented as pro forma adjustments because they do not
meet the criteria for such presentation, management anticipates that the
combination of the Company and the Drever Group will create property operational
savings, as well as significant administrative cost savings, of approximately
$5,000 in the first full year of operations.
33
<PAGE> 39
WALDEN RESIDENTIAL PROPERTIES, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
ASSUMING THE PURCHASE OF 100% INTERESTS IN THE PARTNERSHIPS
JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE PRO FORMA COMBINED
THE COMPANY DREVER GROUP TRANSACTION ENTITY
HISTORICAL HISTORICAL(A) ADJUSTMENTS(B) PRO FORMA
----------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
ASSETS
Real estate assets -- net..................... $697,502 $426,872 $ 254,388(c) $1,378,762
Other assets.................................. 11,167 8,440 (3,317)(d) 16,290
Cash and cash equivalents..................... 5,818 11,318 (1,913)(d) 15,223
Restricted cash............................... 8,640 2,537 -- 11,177
-------- -------- --------- ----------
Total assets.......................... $723,127 $449,167 $ 249,158 $1,421,452
======== ======== ========= ==========
LIABILITIES
Mortgage notes payable........................ $257,252 $287,266 $ -- $ 544,518
Credit facility............................... 29,350 -- 90,500(e) 119,850
Other liabilities............................. 18,984 23,863 (6,798)(d) 36,049
-------- -------- --------- ----------
Total liabilities..................... 305,586 311,129 83,702 700,417
-------- -------- --------- ----------
STOCKHOLDERS' EQUITY
Common convertible equity securities.......... 1,049 -- 245,161(f) 246,210
Preferred convertible equity securities....... 14,887 -- 58,333(f) 73,220
Common stock.................................. 177 -- -- 177
Preferred stock............................... 58 -- -- 58
Additional paid in capital.................... 451,517 -- -- 451,517
Partners'/stockholders' equity................ -- 138,038 (138,038)(f) --
Notes receivable from Company officers........ (5,263) -- -- (5,263)
Deferred compensation on restricted stock..... (2,463) -- -- (2,463)
Distributions in excess of net income......... (42,421) -- -- (42,421)
-------- -------- --------- ----------
Total stockholders' equity............ 417,541 138,038 165,456 721,035
-------- -------- --------- ----------
Total liabilities and stockholders'
equity.............................. $723,127 $449,167 $ 249,158 $1,421,452
======== ======== ========= ==========
</TABLE>
See accompanying notes.
34
<PAGE> 40
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
ASSUMING THE PURCHASE OF 100% INTERESTS IN THE PARTNERSHIPS
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PROPERTY AND PER SHARE INFORMATION)
(a) Represents the condensed combined balance sheet of the Drever Group
included elsewhere in this Proxy Statement.
(b) Represents adjustments to record the acquisition of the Drever Group in
accordance with purchase accounting at the maximum price (100% acceptance by the
limited partners in the Partnerships) of $681,260, assuming a market value of
$23.75 per Common Unit, which is exchangeable for one share of Common Stock
("Common Convertible Equity Securities"), and a market value of $29.17 per
Preferred Unit exchangeable for one share of Redeemable Preferred Stock and
3 1/3 Warrants, each of which is exercisable for one-third of one share of
Common Stock at $26.875 per share ("Preferred Convertible Equity Securities"),
as follows:
<TABLE>
<S> <C>
Issuance of 10,323 Common Convertible Equity Securities..... $245,161
Issuance of 2,000 Preferred Convertible Equity Securities... 58,333
Cash consideration to the Drever Group...................... 85,000
Assumption of the Partnerships' mortgage indebtedness
(approximates fair value)................................. 287,266
Transaction costs........................................... 5,500
--------
Purchase price -- real estate assets........................ $681,260
========
</TABLE>
The following is a calculation of the estimated fees and other expenses
related to the Transaction:
<TABLE>
<S> <C>
Advisory fees (fairness opinion)............................ $1,400
Legal and accounting fees................................... 1,200
Loan transfer fees and costs................................ 2,000
Due diligence............................................... 600
Other....................................................... 300
------
Transaction costs........................................... $5,500
======
</TABLE>
(c) The increase of $254,388 in the book value of the Drever Group's real
estate assets is based upon the purchase price adjusted to eliminate the
historical basis and related accumulated depreciation as follows:
<TABLE>
<S> <C>
Purchase price (see note (b))............................... $681,260
Less: Historical basis of the Drever Group's real estate
assets.................................................... (536,521)
Plus: Historical accumulated depreciation of the Drever
Group's real estate assets................................ 109,649
--------
Pro forma real estate assets adjustment..................... $254,388
========
</TABLE>
35
<PAGE> 41
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET -- (CONTINUED)
ASSUMING THE PURCHASE OF 100% INTERESTS IN THE PARTNERSHIPS
(d) Represents the excess cash in the cash reserves necessary to provide
payment of certain liabilities of the Drever Group per the exchange and
contribution agreement.
<TABLE>
<CAPTION>
THE THE
DREVER DREVER
GROUP GROUP
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Other assets assumed............................... $ 8,440 $(3,317)(i) $ 5,123
Cash and cash equivalents.......................... 11,318 -- 11,318
Restricted cash.................................... 2,537 -- 2,537
Other liabilities assumed.......................... (23,863) 6,798(ii) (17,065)
--------
Pro forma cash adjustment.......................... $ 1,913
========
</TABLE>
- ---------------
(i) To adjust the historical basis of the Drever Group's other assets
to eliminate deferred financing costs, deferred tax asset and the
other assets of Drever McIntosh which will be eliminated in
connection with the acquisition of the Drever Group.
(ii) To adjust the federal income taxes and investor notes payable,
which will be eliminated in connection with the acquisition of
the Drever Group.
(e) Represents borrowings under Walden's unsecured credit facility as
follows:
<TABLE>
<S> <C>
Cash consideration to the Drever Group..................... $85,000
Transaction costs.......................................... 5,500
-------
Pro forma credit facility adjustment....................... $90,500
=======
</TABLE>
(f) To reflect the issuance of 10,323 Common Convertible Equity Securities
at a price of $23.75 per security and 2,000 Preferred Convertible Equity
Securities at a price of $29.17 per security (see note (b)), and to eliminate
partners'/stockholders' equity of the Drever Group.
36
<PAGE> 42
WALDEN RESIDENTIAL PROPERTIES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
ASSUMING PURCHASE OF 75% INTERESTS IN THE PARTNERSHIPS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THE COMPANY
--------------------------------------- THE PRO FORMA COMBINED
PRO FORMA DREVER GROUP TRANSACTION ENTITY
HISTORICAL ADJUSTMENTS(A) PRO FORMA HISTORICAL(B) ADJUSTMENTS PRO FORMA
---------- -------------- --------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Rental income................. $64,587 $3,034 $67,621 $54,635 $ (90)(c) $122,166
Other property income......... 2,605 109 2,714 1,633 (1)(c) 4,346
Interest income............... 849 (311) 538 229 -- 767
Other income (expense)........ -- -- -- (200) 1,706(g) 1,506
------- ------ ------- ------- ------- --------
Total revenues.......... 68,041 2,832 70,873 56,297 1,615 128,785
------- ------ ------- ------- ------- --------
EXPENSES(1)
Property operating and
maintenance................. 22,013 1,005 23,018 20,048 (55)(c) 43,011
Real estate taxes............. 6,561 346 6,907 5,780 -- 12,687
General and administrative.... 3,394 -- 3,394 4,209 -- 7,603
Interest...................... 10,121 665 10,786 11,060 2,394(c,d) 24,240
Financing costs and
amortization................ 411 -- 411 430 (11)(e) 830
Depreciation.................. 13,121 528 13,649 11,278 508(c,f) 25,435
------- ------ ------- ------- ------- --------
Total expenses.......... 55,621 2,544 58,165 52,805 2,836 113,806
------- ------ ------- ------- ------- --------
Operating income................ 12,420 288 12,708 3,492 (1,221) 14,979
Gain (loss) on disposition of
real property................. -- -- -- (170) 170(c) --
------- ------ ------- ------- ------- --------
Income before minority interest,
income taxes and preferred
distributions................. 12,420 288 12,708 3,322 (1,051) 14,979
Minority interest............... -- -- -- -- (1,923)(h) (1,923)
Income taxes.................... -- -- -- (322) 322(i) --
Preferred distributions......... (7,419) -- (7,419) -- (1,731)(j) (9,150)
------- ------ ------- ------- ------- --------
Net income available to common
stockholders.................. $ 5,001 $ 288 $ 5,289 $ 3,000 $(4,383) $ 3,906
======= ====== ======= ======= ======= ========
Net income available to common
stockholders per share........ $ 0.29 $ 0.30 $ 0.15
======= ======= ========
Distributions per share of
common stock.................. $ 0.965 $ 0.965 $ 0.965
======= ======= ========
Weighted average shares of
common stock outstanding...... 17,346 45 17,391 7,941(k) 25,332
======= ====== ======= ======= ========
</TABLE>
See accompanying notes.
37
<PAGE> 43
WALDEN RESIDENTIAL PROPERTIES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
ASSUMING PURCHASE OF 75% INTERESTS IN THE PARTNERSHIPS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THE COMPANY
--------------------------------------- THE PRO FORMA COMBINED
PRO FORMA DREVER GROUP TRANSACTION ENTITY
HISTORICAL ADJUSTMENTS(A) PRO FORMA HISTORICAL(B) ADJUSTMENTS PRO FORMA
---------- -------------- --------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Rental income.................... $105,602 $ 27,974 $133,576 $107,344 $ (498)(c) $240,422
Other property income............ 3,873 876 4,749 3,259 (16)(c) 7,992
Construction revenues............ -- -- -- 919 -- 919
Interest income.................. 1,433 (349) 1,084 620 -- 1,704
Other income (expense)........... 263 -- 263 (1,092) 4,800(g) 3,971
-------- -------- -------- -------- ------- --------
Total revenues............. 111,171 28,501 139,672 111,050 4,286 255,008
-------- -------- -------- -------- ------- --------
EXPENSES(l)
Property operating and
maintenance.................... 37,521 10,028 47,549 40,682 (310)(c) 87,921
Real estate taxes................ 10,039 2,794 12,833 11,486 (33)(c) 24,286
Construction cost of sales....... -- -- -- 891 -- 891
General and administrative....... 5,124 -- 5,124 9,343 -- 14,467
Interest......................... 20,573 857 21,430 22,909 4,624(c,d) 48,963
Financing costs and
amortization................... 916 (94) 822 888 (43)(e) 1,667
Depreciation..................... 19,810 7,488 27,298 22,888 753(c,f) 50,939
-------- -------- -------- -------- ------- --------
Total expenses............. 93,983 21,073 115,056 109,087 4,991 229,134
-------- -------- -------- -------- ------- --------
Operating income................... 17,188 7,428 24,616 1,963 (705) 25,874
Gain on disposition of real
property......................... 1,934 -- 1,934 -- -- 1,934
-------- -------- -------- -------- ------- --------
Income before extraordinary items,
minority interest, income taxes
and preferred distributions...... 19,122 7,428 26,550 1,963 (705) 27,808
Minority interest.................. -- -- -- -- (2,956)(h) (2,956)
Income taxes....................... -- -- -- (647) 647(i) --
Preferred distributions............ (4,092) (10,909) (15,001) -- (3,462)(j) (18,463)
-------- -------- -------- -------- ------- --------
Net income available to common
stockholders, before
extraordinary items.............. $ 15,030 $ (3,481) $ 11,549 $ 1,316 $(6,476) $ 6,389
======== ======== ======== ======== ======= ========
Net income available to common
stockholders per share, before
extraordinary items.............. $ 1.02 $ 0.68 $ 0.26
======== ======== ========
Distributions per share of common
stock............................ $ 1.86 $ 1.86 $ 1.86
======== ======== ========
Weighted average shares of common
stock outstanding................ 14,720 2,365 17,085 7,941(k) 25,026
======== ======== ======== ======= ========
</TABLE>
See accompanying notes.
38
<PAGE> 44
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF INCOME
ASSUMING PURCHASE OF 75% INTERESTS IN THE PARTNERSHIPS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PROPERTY INFORMATION)
(a) The pro forma adjustments for the six months ended June 30, 1997,
reflect as of January 1, 1997: (i) the operations of eight apartment properties
acquired by the Company in 1997, and (ii) the reduction in interest income and
increase in interest expense related to the acquisitions by the Company.
The pro forma adjustments for the year ended December 31, 1996, reflect as
of January 1 1996: (i) the operations of 24 apartment properties acquired by the
Company in 1996 and 1997, (ii) the sale by the Company of three apartment
properties, (iii) the issuance by the Company of 1,800 shares of Series A and
Series B Convertible Redeemable Preferred Stock, (iv) the issuance by the
Company of 2,918 shares of Common Stock, (v) the issuance by the Company of
4,000 shares of Senior Preferred Stock, and (vi) the reduction in interest
income and increase in interest expense related to the acquisitions by the
Company.
(b) Represents the condensed combined statement of operations of the Drever
Group included elsewhere in this Proxy Statement.
(c) Represents the elimination of the operations of One Stanford Court, a
72 unit apartment property sold by Drever in April 1997.
(d) Represents interest expense on $69,622 to be borrowed under the
Company's variable rate credit facility to complete the Transaction. The
weighted average interest rate was 6.96% and 6.83% for the six months ended June
30, 1997 and the year ended December 31, 1996, respectively.
(e) Represents a reduction of 75% to the amortization of deferred financing
costs associated with the Partnerships' mortgage indebtedness, which will be
eliminated in connection with the acquisition of the Drever Group. Adjustment
also includes amortization of the costs of management contracts capitalized as
part of the purchase (and amortized over a ten year period).
(f) Represents an adjustment to depreciation of real estate owned as a
result of recording of the real estate assets of the Drever Group at fair value
versus historical cost. Depreciation is computed on a straight-line basis over
the estimated useful lives of the related assets which have an estimated
weighted average useful life of approximately 22 years. Buildings acquired in
the Transaction are being depreciated over 25 years and other depreciable assets
over 5, 10 or 15 years depending on the useful life of the related asset.
Calculation of the fair value at June 30, 1997, of the 75% of depreciable
real estate assets acquired by the Company and the carryover historical cost
basis of the remaining 25% of depreciable real estate assets:
<TABLE>
<S> <C>
Purchase price (see pro forma condensed combined balance
sheet note (b))......................................... $619,039
Less: Purchase price allocated to land.................... (93,468)
--------
Pro forma basis of the 75% of depreciable real estate
assets acquired by the Company at fair value and the
remaining 25% at carryover historical cost basis........ $525,571
========
</TABLE>
39
<PAGE> 45
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF INCOME -- (CONTINUED)
ASSUMING PURCHASE OF 75% INTERESTS IN THE PARTNERSHIPS
Calculation of depreciation of real estate owned for the six months ended
June 30, 1997 and the year ended December 31, 1996 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
Depreciation expense based upon an estimated
weighted average useful life of
approximately 22 years.................... $ 11,786 $ 23,641
Less: Historical depreciation of the
Drever Group.............................. (11,278) (22,888)
-------- --------
Pro forma adjustment........................ $ 508 $ 753
======== ========
</TABLE>
(g) Represents adjustments for the following:
<TABLE>
<S> <C> <C>
Elimination of Drever McIntosh, which will
be sold prior to closing the
Transaction............................... $ 538 $ 2,628
Management fee income on the 25% interests
in the Partnerships not acquired.......... 1,168 2,172
------- -------
$ 1,706 $ 4,800
======= =======
</TABLE>
(h) Represents the net income for the 25% interests in the Partnerships not
acquired by the Company.
(i) Represents the elimination of the Drever Group's provision for income
taxes since the combined entity will operate as a REIT for Federal income tax
purposes and, therefore, will not be subject to Federal income taxes.
(j) Represents the preferred distributions on the Preferred Units which
will be issued in connection with the Transaction. (See note (b) of the pro
forma condensed combined balance sheet.)
(k) Represents the 7,941 Common Convertible Equity Securities which will be
issued in connection with the Transaction and which are exchangeable for one
share of Common Stock. (See note (b) of the pro forma condensed combined balance
sheet.)
(l) Although not presented as pro forma adjustments because they do not
meet the criteria for such presentation, management anticipates that the
combination of the Company and the Drever Group will create property operational
savings, as well as significant administrative cost savings, of approximately
$5,000 in the first full year of operations.
40
<PAGE> 46
WALDEN RESIDENTIAL PROPERTIES, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
ASSUMING THE PURCHASE OF 75% INTERESTS IN THE PARTNERSHIPS
JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE PRO FORMA COMBINED
THE COMPANY DREVER GROUP TRANSACTION ENTITY
HISTORICAL HISTORICAL(A) ADJUSTMENTS(B) PRO FORMA
----------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
ASSETS
Real estate assets -- net............... $697,502 $426,872 $ 192,167(c) $1,316,541
Other assets............................ 11,167 8,440 3,748(d) 23,355
Cash and cash equivalents............... 5,818 11,318 (1,913)(e) 15,223
Restricted cash......................... 8,640 2,537 -- 11,177
-------- -------- --------- ----------
Total assets.................... $723,127 $449,167 $ 194,002 $1,366,296
======== ======== ========= ==========
LIABILITIES
Mortgage notes payable.................. $257,252 $287,266 $ -- $ 544,518
Credit facility......................... 29,350 -- 69,622(f) 98,972
Other liabilities....................... 18,984 23,863 (6,798)(e) 36,049
-------- -------- --------- ----------
Total liabilities............... 305,586 311,129 62,824 679,539
-------- -------- --------- ----------
MINORITY INTEREST......................... -- -- 35,737(b) 35,737
-------- -------- --------- ----------
STOCKHOLDERS' EQUITY
Common convertible equity securities.... 1,049 -- 188,603(g) 189,652
Preferred convertible equity
securities........................... 14,887 -- 44,876(g) 59,763
Common stock............................ 177 -- -- 177
Preferred stock......................... 58 -- -- 58
Additional paid in capital.............. 451,517 -- -- 451,517
Partners'/stockholders' equity.......... -- 138,038 (138,038)(g) --
Notes receivable from Company
officers............................. (5,263) -- -- (5,263)
Deferred compensation on restricted
stock................................ (2,463) -- -- (2,463)
Distributions in excess of net income... (42,421) -- -- (42,421)
-------- -------- --------- ----------
Total stockholders' equity...... 417,541 138,038 95,441 651,020
-------- -------- --------- ----------
Total liabilities and
stockholders'
equity........................ $723,127 $449,167 $ 194,002 $1,366,296
======== ======== ========= ==========
</TABLE>
See accompanying notes.
41
<PAGE> 47
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
ASSUMING THE PURCHASE OF 75% INTERESTS IN THE PARTNERSHIPS
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PROPERTY AND PER SHARE INFORMATION)
(a) Represents the condensed combined balance sheet of the Drever Group
included elsewhere in this Proxy Statement.
(b) Represents adjustments to record the acquisition of the Drever Group in
accordance with purchase accounting assuming the purchase of 75% of the
interests in the Partnerships and 100% of Drever Partners, AOF and AOF II,
assuming a market value of $23.75 per Common Unit, which is exchangeable for one
share of Common Stock ("Common Convertible Equity Securities"), and a market
value of $29.17 per Preferred Unit exchangeable for one share of Redeemable
Preferred Stock and 3 1/3 Warrants, each of which is exercisable for one-third
of one share of Common Stock at $26.875 per share ("Preferred Convertible Equity
Securities"), as follows:
<TABLE>
<S> <C>
Issuance of 7,941 Common Convertible Equity Securities.... $188,603
Issuance of 1,539 Preferred Convertible Equity
Securities.............................................. 44,876
Cash consideration to the Drever Group.................... 64,122
Assumption of the Partnerships' mortgage indebtedness
(approximates fair value)............................... 287,266
Transaction costs......................................... 5,500
--------
Cost of acquisition....................................... 590,367
Minority interest in Partnerships -- carryover historical
cost basis.............................................. 35,737
--------
Total purchase price and carryover historical cost
basis................................................... 626,104
Less: Minority interest portion related to deferred
financing
costs................................................... (835)
Less: Fair value attributable to the Drever Group's
management contracts.................................... (6,230)*
--------
Purchase price and carryover historical cost basis -- real
estate assets........................................... $619,039
========
</TABLE>
- ---------------
* Represents fair value of management contracts on the 25% interests in the
Partnerships not acquired which are accounted for as other assets (see note
(d) below).
The following is a calculation of the estimated fees and other expenses
related to the Transaction:
<TABLE>
<S> <C>
Advisory fees (fairness opinion)............................ $1,400
Legal and accounting fees................................... 1,200
Loan transfer fees and costs................................ 2,000
Due diligence............................................... 600
Other....................................................... 300
------
$5,500
======
</TABLE>
(c) Increase of $192,167 in the book value of the Drever Group's real
estate assets is based upon the purchase price adjusted to eliminate the
historical basis and related historical accumulated depreciation as follows:
<TABLE>
<S> <C>
Purchase price and carryover historical basis (see note
(b)).................................................. $ 619,039
Less: Historical cost basis of the Drever Group's real
estate assets......................................... (536,521)
Plus: Historical accumulated depreciation of the Drever
Group's real estate assets............................ 109,649
---------
Pro forma real estate assets adjustment................. $ 192,167
=========
</TABLE>
42
<PAGE> 48
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET -- (CONTINUED)
ASSUMING THE PURCHASE OF 75% INTERESTS IN THE PARTNERSHIPS
(d) To adjust the historical cost basis of the Drever Group's other assets
to eliminate:
<TABLE>
<S> <C>
Deferred financing costs.................................. $(3,339)
Deferred tax asset........................................ (174)
Investment in Drever McIntosh............................. 196
-------
(3,317)
Add back 25% of deferred financing costs accounted for as
minority interest....................................... 835
To record the basis in management contracts for the 25%
interests in the Partnerships not acquired by the
Company................................................. 6,230
-------
Pro forma other assets adjustment......................... $ 3,748
=======
</TABLE>
(e) Represents the excess cash in the cash reserves necessary to provide
payment of certain liabilities of the Drever Group.
<TABLE>
<CAPTION>
THE THE
DREVER GROUP DREVER GROUP
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ----------- ------------
<S> <C> <C> <C>
Other assets assumed..................... $ 8,440 $(3,317)(i) $ 5,123
Cash and cash equivalents................ 11,318 -- 11,318
Restricted cash.......................... 2,537 -- 2,537
Other liabilities assumed................ (23,863) 6,798(ii) (17,065)
-------
Pro forma cash adjustment................ $ 1,913
=======
</TABLE>
- ---------------
(i) To adjust the historical basis of the Drever Group's other assets
to eliminate 75% of the deferred financing costs and 100% of the
deferred tax asset and the other assets of Drever McIntosh which
will be eliminated in connection with the acquisition of the
Drever Group.
(ii) To adjust the federal income taxes and investor notes payable
which will be eliminated in connection with the acquisition of
the Drever Group.
(f) Represents borrowings under the Company's unsecured credit facility as
follows:
<TABLE>
<S> <C>
Cash consideration to Drever partners...................... $64,122
Transaction costs.......................................... 5,500
-------
Pro forma credit facility adjustment....................... $69,622
=======
</TABLE>
(g) To reflect the issuance of 7,941 Common Convertible Equity Securities
at a price of $23.75 per security and 1,539 Preferred Convertible Equity
Securities at a price of $29.17 per security (see note (b)) and to eliminate
partners'/stockholders' equity of the Drever Group.
43
<PAGE> 49
WALDEN RESIDENTIAL PROPERTIES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
ASSUMING THE PURCHASE OF 50.1% INTERESTS IN THE AOF PARTNERSHIPS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THE DREVER GROUP
---------------------------
THE OPERATIONS DREVER PARTNERS PRO FORMA COMBINED
COMPANY NOT AND AOF TRANSACTION ENTITY
PRO FORMA(A) HISTORICAL(B) ACQUIRED(C) PARTNERSHIPS(D) ADJUSTMENTS PRO FORMA
------------ ------------- ----------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Rental income......................... $67,621 $54,635 $(23,164) $31,471 $ -- $99,092
Other property income................. 2,714 1,633 (674) 959 -- 3,673
Interest income....................... 538 229 (63) 166 -- 704
Other income (expense)................ -- (200) -- (200) 3,894(e) 3,694
------- ------- -------- ------- ----------- -------
Total revenues.................. 70,873 56,297 (23,901) 32,396 3,894 107,163
------- ------- -------- ------- ----------- -------
EXPENSES(m)
Property operating and maintenance.... 23,018 20,048 (9,011) 11,037 -- 34,055
Real estate taxes..................... 6,907 5,780 (2,585) 3,195 -- 10,102
General and administrative............ 3,394 4,209 -- 4,209 -- 7,603
Interest.............................. 10,786 11,060 (5,415) 5,645 1,237(f) 17,668
Financing costs and amortization...... 411 430 (222) 208 878(g) 1,497
Depreciation.......................... 13,649 11,278 (4,687) 6,591 315(h) 20,555
------- ------- -------- ------- ----------- -------
Total expenses.................. 58,165 52,805 (21,920) 30,885 2,430 91,480
------- ------- -------- ------- ----------- -------
Operating income........................ 12,708 3,492 (1,981) 1,511 1,464 15,683
Gain (loss) on disposition of real
property.............................. -- (170) 170 -- -- --
------- ------- -------- ------- ----------- -------
Income before minority interest, income
taxes and preferred distributions..... 12,708 3,322 (1,811) 1,511 1,464 15,683
Minority interest....................... -- -- -- -- (2,871)(i) (2,871)
Income taxes............................ -- (322) -- (322) 322(j) --
Preferred distributions................. (7,419) -- -- -- (884)(k) (8,303)
------- ------- -------- ------- ----------- -------
Net income available to common
stockholders.......................... $ 5,289 $ 3,000 $ (1,811) $ 1,189 $ (1,969) $ 4,509
======= ======= ======== ======= =========== =======
Net income available to common
stockholders
per share............................. $ 0.30 $ 0.21
======= =======
Distributions per share of common
stock................................. $ 0.965 $ 0.965
======= =======
Weighted average shares of common stock
outstanding........................... 17,391 4,054(l) 21,445
======= =========== =======
</TABLE>
See accompanying notes.
44
<PAGE> 50
WALDEN RESIDENTIAL PROPERTIES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
ASSUMING THE PURCHASE OF 50.1% INTERESTS IN THE AOF PARTNERSHIPS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THE DREVER GROUP
----------------------------
THE OPERATIONS DREVER PARTNERS PRO FORMA COMBINED
COMPANY NOT AND AOF TRANSACTION ENTITY
PRO FORMA(A) HISTORICAL(B) ACQUIRED(C) PARTNERSHIPS(D) ADJUSTMENTS PRO FORMA
------------ ------------- ------------ --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Rental income........................ $133,576 $107,344 $(45,614) $ 61,730 $ -- $195,306
Other property income................ 4,749 3,259 (1,363) 1,896 -- 6,645
Construction revenues................ -- 919 -- 919 -- 919
Interest income (expense)............ 1,084 620 (154) 466 -- 1,550
Other income......................... 263 (1,092) -- (1,092) 8,787(e) 7,958
-------- -------- -------- -------- ------- --------
Total revenues................. 139,672 111,050 (47,131) 63,919 8,787 212,378
-------- -------- -------- -------- ------- --------
EXPENSES (m)
Property operating and maintenance... 47,549 40,682 (18,182) 22,500 -- 70,049
Real estate taxes.................... 12,833 11,486 (5,142) 6,344 -- 19,177
Construction cost of sales........... -- 891 -- 891 -- 891
General and administrative........... 5,124 9,343 -- 9,343 -- 14,467
Interest............................. 21,430 22,909 (11,384) 11,525 2,427(f) 35,382
Financing costs and amortization..... 822 888 (401) 487 1,720(g) 3,029
Depreciation......................... 27,298 22,888 (9,388) 13,500 470(h) 41,268
-------- -------- -------- -------- ------- --------
Total expenses................. 115,056 109,087 (44,497) 64,590 4,617 184,263
-------- -------- -------- -------- ------- --------
Operating income (loss)................ 24,616 1,963 (2,634) (671) 4,170 28,115
Gain on disposition of real property... 1,934 -- -- -- -- 1,934
-------- -------- -------- -------- ------- --------
Income (loss) before extraordinary
items, minority interest, income
taxes and preferred distributions.... 26,550 1,963 (2,634) (671) 4,170 30,049
Minority interest...................... -- -- -- -- (4,626)(i) (4,626)
Income taxes........................... -- (647) -- (647) 647(j) --
Preferred distributions................ (15,001) -- -- -- (1,767)(k) (16,768)
-------- -------- -------- -------- ------- --------
Net income (loss) available to common
stockholders, before extraordinary
items................................ $ 11,549 $ 1,316 $ (2,634) $ (1,318) $(1,576) $ 8,655
======== ======== ======== ======== ======= ========
Net income available to common
stockholders per share, before
extraordinary items.................. $ 0.68 $ 0.41
-------- --------
Distributions per share of common
stock................................ $ 1.86 $ 1.86
======== ========
Weighted average shares of common stock
outstanding.......................... 17,085 4,054(l) 21,139
======== ======= ========
</TABLE>
See accompanying notes.
45
<PAGE> 51
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF INCOME
ASSUMING PURCHASE OF 50.1% INTERESTS IN THE AOF PARTNERSHIPS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PROPERTY INFORMATION)
(a) Represents the Company's pro forma statement of income (historical plus
pro forma adjustments) for the respective period. See note (a) of the notes to
the unaudited pro forma condensed combined statement of income assuming purchase
of 100% interests in the Partnerships for the respective period included in this
Proxy Statement for an explanation of the pro forma adjustments.
(b) Represents the condensed combined statement of operations of the Drever
Group included elsewhere in this Proxy Statement.
(c) Represents the elimination of the operations of 16 of the Partnerships
not acquired by the Company and the operations of One Stanford Court, a 72 unit
property sold by Drever in April 1997.
(d) Represents the remaining operations of the Drever Group acquired by the
Company, including the 49.9% minority interest in the AOF Partnerships.
(e) Represents an adjustment to record the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
Elimination of Drever McIntosh, which will
be sold prior to closing the
Transaction............................... $ 538 $2,628
Management fee income on the 16 Partnerships
and 49.9% interests in the AOF
Partnerships not acquired by the
Company................................... 3,357 6,169
General partners' 1% interest in the 16
Partnerships' operations not acquired by
the Company............................... (1) (10)
------- -------
Pro forma other income adjustment........... $3,894 $8,787
======= =======
</TABLE>
(f) Represents interest expense on $35,541 to be borrowed under the
Company's variable rate credit facility to complete the Transaction. The
weighted average interest rate was 6.96% and 6.83% for the six months ended June
30, 1997 and for the year ended December 31, 1996, respectively.
(g) Represents a reduction of 50.1% to the amortization of deferred
financing costs associated with the AOF Partnerships' mortgage indebtedness,
which will be eliminated in connection with the purchase ($(104) and $(244) for
the 1997 and 1996 periods, respectively). Adjustment also includes amortization
of the costs of management contracts capitalized as part of the purchase (and
amortized over a ten year period) ($982 and $1,964 for the 1997 and 1996
periods, respectively).
(h) Represents an adjustment to depreciation of real estate owned as a
result of recording 50.1% of the real estate assets of the AOF Partnerships at
fair value versus historical cost. Depreciation is computed on a straight-line
basis over the estimated useful lives of the related assets which have an
estimated weighted average useful life of approximately 21 years. Buildings
acquired in the Transaction are being depreciated over 25 years and other
depreciable assets over 5, 10 or 15 years depending on the useful life of the
related asset.
46
<PAGE> 52
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF INCOME -- (CONTINUED)
ASSUMING PURCHASE OF 50.1% INTERESTS IN THE AOF PARTNERSHIPS
Calculation of the fair value at June 30, 1997, of the 50.1% of depreciable
real estate assets acquired by the Company and the carryover historical cost
basis of the remaining 49.9% of depreciable real estate assets:
<TABLE>
<S> <C>
Purchase price (see pro forma condensed combined balance
sheet note(d)).......................................... $345,802
Less: Purchase price allocated to land.................... (53,191)
--------
Pro forma basis of the 50.1% of depreciable real estate
assets acquired by the Company at fair value and the
remaining 49.9% at carryover historical cost basis...... $292,611
========
</TABLE>
Calculation of depreciation of real estate owned for the six months ended
June 30, 1997 and the year ended December 31, 1996 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
Depreciation expense based upon an estimated
weighted average useful life of
approximately 21 years.................... $ 6,906 $ 13,970
Less: Historical depreciation of the Drever
Group..................................... (6,591) (13,500)
------- --------
Pro forma depreciation adjustment........... $ 315 $ 470
======= ========
</TABLE>
(i) Represents the 49.9% minority interest in the AOF Partnerships not
acquired by the Company.
(j) Represents the elimination of the Drever Group's provision for income
taxes since the combined entity will operate as a REIT for Federal income tax
purposes and, therefore, will not be subject to Federal income taxes.
(k) Represents the preferred distributions on the Preferred Units which
will be issued in connection with the Transaction (see note (d) of the pro forma
condensed combined balance sheet).
(l) Represents the 4,054 Common Convertible Equity Securities which will be
issued in connection with the Transaction and which are exchangeable for one
share of Common Stock (see note (d) of the pro forma condensed combined balance
sheet.)
(m) Although not presented as pro forma adjustments because they do not
meet the criteria for such presentation, management anticipates that the
combination of the Company and the Drever Group will create property operational
savings, as well as significant administrative cost savings, of approximately
$5,000 in the first full year of operations.
47
<PAGE> 53
WALDEN RESIDENTIAL PROPERTIES, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
ASSUMING PURCHASE OF 50.1% INTERESTS IN THE AOF PARTNERSHIPS
JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE DREVER GROUP
--------------------------- DREVER
THE OPERATIONS PARTNERS PRO FORMA COMBINED
COMPANY NOT AND AOF TRANSACTION ENTITY
HISTORICAL HISTORICAL(A) ACQUIRED(B) PARTNERSHIPS(C) ADJUSTMENTS(D) PRO FORMA
---------- ------------- ----------- --------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Real estate assets -- net............. $697,502 $426,872 $(154,780) $272,092 $ 73,710(e) $1,043,304
Other assets.......................... 11,167 8,440 (2,354) 6,086 20,146(f) 37,399
Cash and cash equivalents............. 5,818 11,318 (3,432) 7,886 (2,450)(g) 11,254
Restricted cash....................... 8,640 2,537 (2,481) 56 -- 8,696
-------- -------- --------- -------- --------- ----------
Total assets.................. $723,127 $449,167 $(163,047) $286,120 $ 91,406 $1,100,653
======== ======== ========= ======== ========= ==========
LIABILITIES
Mortgage notes payable................ $257,252 $287,266 $(135,335) $151,931 $ -- $ 409,183
Credit facility....................... 29,350 -- -- -- 35,541(h) 64,891
Other liabilities..................... 18,984 23,863 (13,191) 10,672 (461)(g) 29,195
-------- -------- --------- -------- --------- ----------
Total liabilities............. 305,586 311,129 (148,526) 162,603 35,080 503,269
-------- -------- --------- -------- --------- ----------
MINORITY INTEREST..................... -- -- -- -- 60,653(d) 60,653
-------- -------- --------- -------- --------- ----------
STOCKHOLDERS' EQUITY
Common convertible equity
securities........................ 1,049 -- -- -- 96,280(i) 97,329
Preferred convertible equity
securities........................ 14,887 -- -- -- 22,910(i) 37,797
Common stock........................ 177 -- -- -- -- 177
Preferred stock..................... 58 -- -- -- -- 58
Additional paid in capital.......... 451,517 -- -- -- -- 451,517
Partners'/stockholders' equity...... -- 138,038 (14,521) 123,517 (123,517)(i) --
Notes receivable from Company
officers.......................... (5,263) -- -- -- -- (5,263)
Deferred compensation on restricted
stock............................. (2,463) -- -- -- -- (2,463)
Distributions in excess of net
income............................ (42,421) -- -- -- -- (42,421)
-------- -------- --------- -------- --------- ----------
Total stockholders' equity.... 417,541 138,038 (14,521) 123,517 (4,327) 536,731
-------- -------- --------- -------- --------- ----------
Total liabilities and
stockholders' equity........ $723,127 $449,167 $(163,047) $286,120 $ 91,406 $1,100,653
======== ======== ========= ======== ========= ==========
</TABLE>
See accompanying notes.
48
<PAGE> 54
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
ASSUMING PURCHASE OF 50.1% INTERESTS IN THE AOF PARTNERSHIPS
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PROPERTY AND PER SHARE INFORMATION)
(a) Represents the condensed combined balance sheet of the Drever Group
included elsewhere in this Proxy Statement.
(b) Represents an elimination for the 16 Partnerships not acquired by the
Company.
(c) Represents the net assets of the Drever Partners acquired by the
Company and the 50.1% interests in the AOF Partnerships.
(d) Represents adjustments to record the acquisition in accordance with
purchase accounting assuming the purchase of 50.1% of the interests in the AOF
Partnerships and 100% of Drever Partners, assuming a market value of $23.75 per
Common Unit, which is exchangeable for one share of Common Stock ("Common
Convertible Equity Securities"), and assuming a market value of $29.17 per
Preferred Unit exchangeable for one share of Redeemable Preferred Stock and
3 1/3 Warrants, each of which is exercisable for one-third of one share of
Common Stock at $26.875 per share ("Preferred Convertible Equity Securities"),
as follows:
<TABLE>
<S> <C>
Issuance of 4,054 Common Convertible Equity Securities.... $ 96,280
Issuance of 785 Preferred Convertible Equity Securities... 22,910
Cash consideration to the Drever Partners and AOF
Partnerships............................................ 30,041
Assumption of the AOF Partnerships' mortgage indebtedness
(approximates fair value)............................... 151,931
Transaction costs......................................... 5,500
--------
Cost of acquisition....................................... 306,662
Minority interest in AOF Partnerships -- carryover
historical cost basis................................... 60,653
--------
Total purchase price and carryover historical cost
basis................................................... 367,315
Less: Fair value attributable to the Drever Group's
management contracts.................................... (19,642)*
Less: Fair value of general partner interests acquired by
the Company............................................. (1,178)
Less: Minority interest portion related to deferred
financing
costs................................................... (693)
--------
Purchase price and carryover historical cost basis -- real
estate assets........................................... $345,802
========
</TABLE>
- ---------------
* Represents fair value of management contracts on the 16 Partnerships and 49.9%
interests in the AOF Partnerships not acquired by the Company which are
accounted for as other assets (see note (f) below).
The following is a calculation of the estimated fees and other expenses
related to the Transaction:
<TABLE>
<S> <C>
Advisory fees (fairness opinion)............................ $1,400
Legal and accounting fees................................... 1,200
Loan transfer fees and costs................................ 2,000
Due diligence............................................... 600
Other....................................................... 300
------
Transaction costs........................................... $5,500
======
</TABLE>
49
<PAGE> 55
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET -- (CONTINUED)
ASSUMING PURCHASE OF 50.1% INTERESTS IN THE AOF PARTNERSHIPS
(e) Increase of $73,710 in the book value of the AOF Partnerships' real
estate based upon the Company's purchase price adjusted to eliminate the
historical basis and related historical accumulated depreciation as follows:
<TABLE>
<S> <C>
Purchase price and carryover historical cost basis
(see note (d))......................................... $ 345,802
Less: Historical cost basis of the AOF Partnerships' real
estate assets.......................................... (319,626)
Plus: Historical accumulated depreciation of the AOF
Partnerships' real estate assets....................... 47,534
---------
Pro forma real estate asset adjustment................... $ 73,710
=========
</TABLE>
(f) To adjust the historical cost basis of the AOF Partnerships' other
assets to eliminate:
<TABLE>
<S> <C>
Deferred financing costs................................... $(1,389)
Deferred tax asset......................................... (174)
Investment in Drever McIntosh.............................. 196
-------
(1,367)
Add back 49.9% of financing costs not acquired............. 693
To record the basis in management contracts for the 16
Partnerships and 49.9% interests in the AOF Partnerships
not acquired by the Company.............................. 19,642
To record the general partner interests acquired by the
Company.................................................. 1,178
-------
Pro forma other asset adjustment........................... $20,146
=======
</TABLE>
(g) Represents the excess cash in the cash reserves necessary to provide
payment of certain liabilities of Drever Partners and the AOF Partnerships.
<TABLE>
<CAPTION>
DREVER PARTNERS DREVER PARTNERS
AND AND
AOF PARTNERSHIPS AOF PARTNERSHIPS
HISTORICAL ADJUSTMENTS PRO FORMA
---------------- ----------- ----------------
<S> <C> <C> <C>
Other assets assumed...................... $ 6,086 $(1,367)(i) $ 4,719
Cash and cash equivalents................. 7,886 -- 7,886
Restricted cash........................... 56 -- 56
Other liabilities assumed................. (10,672) 461(ii) (10,211)
-------
Pro forma cash adjustment................. $ 2,450
=======
</TABLE>
- ---------------
(i) To adjust the historical basis of the Drever Partners' and the
AOF Partnerships' other assets to eliminate 50.1% of the deferred
financing costs and 100% of the deferred tax asset and other
assets of Drever McIntosh which will be eliminated in connection
with the Transaction.
(ii) To adjust the federal income taxes payable which will be
eliminated in connection with the purchase.
50
<PAGE> 56
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET -- (CONTINUED)
ASSUMING PURCHASE OF 50.1% INTERESTS IN THE AOF PARTNERSHIPS
(h) Represents borrowings under the Company's unsecured credit facility as
follows:
<TABLE>
<S> <C>
Cash consideration to the Drever Partners and the AOF
Partnerships............................................. $30,041
Transaction costs.......................................... 5,500
-------
Pro forma credit facility adjustment....................... $35,541
=======
</TABLE>
(i) To reflect the issuance of 4,054 Common Convertible Equity Securities
at a price of $23.75 per security and 785 Preferred Convertible Equity
Securities at a price of $29.17 per security (see note (d)) and to adjust
partners'/stockholders' equity of the Drever Partners and AOF Partnerships.
51
<PAGE> 57
THE OPTION PLAN PROPOSAL
GENERAL
The Company adopted the Option Plan in connection with its initial public
offering to retain and attract and provide incentives to directors, officers and
other key employees of the Company. Currently, the Option Plan authorizes the
issuance of a number of shares thereunder, as of any given time, equal to 10% of
the number of shares of Common Stock outstanding at such time. As of June 30,
1997, there were 17,714,017 shares of Common Stock issued and outstanding and,
therefore, as of such date, the Option Plan authorized the issuance of up to
shares of Common Stock. As of June 30, 1997, a total of 1,549,875 options were
outstanding under the Option Plan. Accordingly, as of such date, there remain
only 221,527 shares of Common Stock available for issuance under the Option
Plan. A critical element to the success of the combination of the Company and
Drever is the retention of senior management of Drever. In order to induce
senior management to enter into long-term employment agreements with the
Company, the Company needs to be able to offer stock options to Drever's senior
management. The Company anticipates offering options to acquire up to 700,000
shares of Common Stock of the Company to the top 15 members of Drever
management. The Board believes the ability to offer options of senior management
of Drever is essential to being able to consummate the acquisition of the Drever
portfolio and, therefore, strongly urges the stockholders to approve the Option
Proposal.
At a meeting on August 7, 1997, the Board unanimously voted to amend the
Option Plan (subject to the approval of the Stockholders) to provide that the
aggregate number of shares of Common Stock reserved for issuance at any time
thereunder shall be equal to 10% of the number of shares of Common Stock
outstanding at such time, plus the number of shares of Common Stock into which
any debt or equity securities of the Company or its affiliates outstanding at
the time of calculation (other than options issued under the Option Plan) are
exchangeable or convertible (the "Underlying Securities"). By adding the
Underlying Securities issuable pursuant to the Transaction, assuming full
acceptance of the Exchange Offer, to the number of shares of Common Stock
issuable under the Option Plan at any time, the Option Plan Proposal would
increase the number of shares of Common Stock issuable on June 30, 1997, on a
pro forma basis as if the Transaction were fully consummated as of such date, to
3,223,646 shares.
OVERVIEW OF OPTION PLAN
The Option Plan is administered by the Compensation Committee of the Board
of Directors (the "Plan Committee"). The Plan Committee generally has the
authority, within limitations set forth in the Option Plan, to establish rules
and regulations concerning the Option Plan, to determine the persons to whom
stock options ("Options") may be granted, the number of shares of Common Stock
to be covered by each Option and the terms and provisions of the Options to be
granted. The Plan Committee has the right to cancel any outstanding Options and
to issue new Options on such terms and upon such conditions as may be consented
to by the affected Option holders.
Pursuant to the Option Plan, executive officers, directors and key
employees of the Company may be offered the opportunity to acquire shares of
Common Stock through the grant of Options, including non-qualified options and
incentive stock options (the "ISOs") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). In connection with the
Option Plan Proposal, the number of shares of Common Stock issuable pursuant to
ISOs granted under the Option Plan will be increased from 1,000,000 shares to
1,500,000 shares.
The number of shares of Common Stock which may be granted under the Option
Plan or for which any outstanding Options are exercisable will be subject to
customary anti-dilution provisions. The maximum term of any Option granted
pursuant to the Option Plan is ten years. Shares of Common Stock subject to
Options granted under the Option Plan which expire, terminate or are canceled
without having been exercised in full become available again for Option grants.
In addition, the Plan Committee may include in any Option granted under the
Option Plan a "reload feature" pursuant to which, at the time the Option is
granted, the Option holder shall automatically be granted a new Option to
purchase a number of shares of Common Stock equal to
52
<PAGE> 58
the number of shares of Common Stock used by the Option holder to pay the Option
exercise price on the original Option.
The Option Plan provides that the exercise price of an Option (other than
Options granted to the independent directors) will be fixed by the Plan
Committee on the date of grant; however, the exercise price of an ISO must be
not less than the fair market value of a share of Common Stock on the date of
the grant. The exercise price of an ISO granted to any participant who owns
shares of Common Stock possessing more than 10% of the total combined voting
power and value of all classes of stock of the Company or any of its
subsidiaries shall not be less than 110% of the fair market value of the shares
of Common Stock on the date of grant. Any ISOs granted to such participants also
must expire within five years from the date of grant. Additionally, Options
granted under the Option Plan will not be ISOs to the extent that the aggregate
fair market value of the shares of Common Stock with respect to which ISOs under
the Option Plan (or under any other plan maintained by the Company or a
subsidiary thereof) first become exercisable in any year exceeds $100,000. No
Options shall be granted under the Option Plan on or after the tenth anniversary
of the Option Plan's effective date.
The Options become exercisable at such time as the Plan Committee shall
determine. Options are nontransferable and non-assignable; provided, however,
that the estate of a deceased holder can exercise Options. Options generally are
exercisable by the holder thereof subject to terms fixed by the Plan Committee.
Options are exercisable immediately upon the termination of the holder's
employment by the Company for any reason other than (i) disability (as defined
in the Option Plan), (ii) death or (iii) cause (as defined in the Option Plan),
to the extent otherwise exercisable on the date of such termination, for a
period of three months after the date of such termination. In the event of
termination resulting from death or disability, such Options shall be
exercisable for a period of six months after such termination. In the event of
termination for cause, all Options shall automatically terminate as of the
termination date.
The Option Plan may be terminated and may be modified or amended by the
Plan Committee or the Board at any time; however, (i) any modification or
amendment either increasing the aggregate number of shares which may be issued
under Options, (ii) changing the minimum Option price, (iii) increasing the
maximum terms of Options, (iv) increasing materially the benefits accruing to
participants under the Option Plan or materially modifying the requirements as
to eligibility to receive Options, (v) removing the administration of the Option
Plan from the designated Plan Committee or (vi) materially increasing the
benefits accruing to Option holders under the Option Plan, will in each case be
subject to stockholder approval. No such termination, modification or amendment
of the Option Plan will alter or affect the terms of any then-outstanding
Options without the consent of the holders thereof.
BENEFITS TO CERTAIN PERSONS UNDER THE OPTION PLAN
As described above, the employees of the Company and its subsidiaries who
will receive awards under the Option Plan and the size of the awards are
generally to be determined by the Committee in its discretion. Thus, it is not
possible either to predict the benefits or amounts that will be received by or
allocated to particular individuals or groups of employees or to determine the
benefits or amounts that would have been received or allocated to such persons
under the Option Plan, as amended, except that each independent director will
automatically receive an Option to purchase 5,000 shares of Common Stock
following each annual meeting of stockholders. Additionally, in conjunction with
the Transaction, the Company expects to enter into agreements with the top 15
members of Drever management pursuant to which the Company will issue up to
700,000 Options.
53
<PAGE> 59
MANAGEMENT
The executive officers of the Company serve at the discretion of the Board
and are chosen annually by the Board at its first meeting following the annual
meeting of stockholders. The following table sets forth the names and ages of
the current executive officers and directors of the Company and the positions
held with the Company by each individual.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
EXECUTIVE OFFICERS
Don R. Daseke................... 57 Chairman of the Board of Directors and Chief
Executive Officer
Marshall B. Edwards............. 52 President, Chief Acquisitions Officer and Director
Mark S. Dillinger............... 45 Executive Vice President, Chief Financial Officer and
Director
INDEPENDENT DIRECTORS
Linda Walker Bynoe.............. 44 Director
Francesco Galesi................ 66 Director
Arch K. Jacobson................ 69 Director
Louis G. Munin.................. 63 Director
J. Otis Winters................. 64 Director
</TABLE>
Don R. Daseke has been a Director of the Company since its formation in
September 1993 and Chairman of the Board of Directors and Chief Executive
Officer of the Company since October 1993. Mr. Daseke served as President of the
Company from its formation until June 8, 1995. He has been the Chairman of the
Board of Directors, President and Chief Executive Officer of The Walden Group,
Inc. ("Walden Group") and its predecessor since 1974. Prior to the formation of
Walden Group, Mr. Daseke was on the Arthur Andersen & Co. audit staff from 1962
to 1964 and in both marketing and financial management with IBM Corporation from
1964 to 1972. Mr. Daseke is a past director of the Exchange National Bank in
Tulsa and was previously a member of the Young Presidents' Organization and a
Vice President of the DePauw University Alumni Association. Mr. Daseke is a
Certified Public Accountant and a member of the American, Connecticut and New
York Institutes of Certified Public Accountants, a member of the National
Association of Real Estate Investment Trusts, a Director of the National
Multi-Housing Council and has served on the Board of Trustees of DePauw
University since 1984.
Marshall B. Edwards has been a Director and has served as the Chief
Acquisitions Officer of the Company since October 1993 and was elected President
of the Company on June 8, 1995. Prior thereto, Mr. Edwards served as President
of Westglen Realty Advisors, Inc. from 1992 to 1993. From 1988 to 1992, Mr.
Edwards was Executive Vice President of NHP Real Estate Corporation and
President of NHP Acquisition Corporation, both affiliates of NHP, Inc., one of
the largest owners and operators of multifamily rental housing in the United
States. His principal responsibilities at NHP included the acquisition,
financing, asset management and disposition of non-subsidized rental apartments.
Mr. Edwards was previously with Walden from 1983 to 1988 as Vice President of
Acquisitions and later as President of Walden's management subsidiary.
Mark S. Dillinger has been a Director, Executive Vice President and Chief
Financial Officer of the Company since October 1993. Mr. Dillinger joined Walden
Group in 1982 and has served as Executive Vice President and the Chief Financial
Officer of Walden Group since 1987. Mr. Dillinger was with Alexander Hamilton
Life Insurance Company from 1979 to 1982 where he served as Assistant Vice
President, Financial Planning and Analysis. He was also with Deloitte, Haskins &
Sells from 1974 to 1979 where he served as an Audit Manager. Mr. Dillinger is a
member of the American Institute of Certified Public Accountants, the National
Association of Real Estate Investment Trusts and the National Multi-Housing
Council.
Linda Walker Bynoe has been a Director of the Company since February 1994.
Ms. Bynoe is the President and Chief Operating Officer of Telemat Ltd., a
private investment and project management
54
<PAGE> 60
company located in Chicago, Illinois. She was previously with Morgan Stanley
from 1978 to 1989 where she served as Vice President -- Capital Markets. Ms.
Bynoe, a Certified Public Accountant, was on the audit staff of Arthur Andersen
& Co. from 1974 to 1976. She currently serves on the Boards of Directors of the
American Odyssey Funds, Inc. and The Executives' Club of Chicago. Ms. Bynoe is
also a Trustee of The Museum of Contemporary Art in Chicago and a member of The
Economic Club of Chicago and The Financial Research and Advisory Committee of
The Commercial Club.
Francesco Galesi has been the Chairman of the Board and sole equity holder
of each entity constituting the Galesi Group since 1969. The Galesi Group
consists of a group of privately owned entities that invest in real estate,
telecommunications and manufacturing. These entities own and develop numerous
townhome developments and apartment complexes located in Florida, Texas, Georgia
and Colorado, office buildings in New York and Texas, and 10 million square feet
of industrial parks. Mr. Galesi currently serves on the Board of Directors of
LDDS WORLDCOM, the fourth largest long distance telephone company. In 1978, Mr.
Galesi received the Award of Achievement from President Carter for his
contribution to economic development in the United States.
Arch K. Jacobson is currently President of Jacobson-Berger Capital Group,
Inc. Previously, Mr. Jacobson was Chairman and Chief Executive Officer of Union
Pacific Realty Corporation (a subsidiary of Union Pacific Corporation) from 1986
to 1993. He was with the Real Estate Department of The Prudential Insurance
Company from 1955 to 1980 and was President and Chief Executive Officer of the
Prudential Development Company (a subsidiary of the Prudential Insurance
Company) from 1982 to 1986. Mr. Jacobson is a member of the Urban Land
Institute, a director of Patriot American Hospitality, Inc. and Chairman of the
Board of Trustees of the University of Mary Hardin Baylor.
Louis G. Munin retired in 1989 as Executive Vice President and Chief
Financial Officer of Lafarge Corporation (North America's largest cement
manufacturer). Previously, he was with General Portland Cement from 1966 until
it was acquired by Lafarge in 1981 where he served as Senior Vice President and
Chief Financial Officer. Mr. Munin currently serves on the Boards of Directors
of Lafarge Canada, Inc., Chieftain International, Inc. and Catholic Charities of
Dallas and as a member of the Finance Council of the Catholic Diocese of Dallas.
He is a Certified Public Accountant and a member of the American Institute of
Certified Public Accountants and the Financial Executives Institute.
J. Otis Winters has been the Chairman of the Board of Pate, Winters &
Stone, Inc., a corporate consulting firm, since 1990. He previously served as
Executive Vice President and Director of The Williams Companies and Executive
Vice President and Director of the First National Bank and Trust Co. of Tulsa,
Oklahoma. Mr. Winters currently serves on the Boards of Directors of AMX
Corporation, Liberty Bancorp, Inc. and NGC Corporation. He is a registered
professional engineer (Oklahoma). Mr. Winters' term as a director of the Company
expires at the 1998 annual meeting of stockholders.
If the Transaction is consummated, Mr. Drever and Michael E. Masterson, the
President of Drever, have agreed to serve as directors of the Company, and will
propose a third person to also serve on the Board. The current members of the
Board intend to cause such persons to be elected to the Board immediately after
the
55
<PAGE> 61
completion of the Transaction. In addition, the following officers of Drever
will be elected by the Board effective as of the Closing Date to the following
positions with the Company:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Maxwell Bruce Drever 56 Co-Chairman of the Board
Michael E. Masterson 54 Vice Chairman of the Board
Michael L. Collier 54 Executive Vice President of Property
Management
Theodore M. Kerr, Jr. 38 Senior Vice President of Asset Management
Bryan A. Levy 36 Senior Vice President of Finance
Charlene D. Geiss 50 Senior Vice President of Acquisitions
David C. Glaser 47 Senior Vice President of Construction
</TABLE>
Maxwell Bruce Drever has been Chairman of Drever since 1985. In that
capacity he sets company policies and devises strategies relevant to the
acquisition, enhancement and management of Drever's 79 upscale garden apartment
properties in Texas, Georgia, Arizona and California. From 1970 to 1985, Mr.
Drever was President of Drever, McIntosh, Inc., acquiring, refurbishing and
managing 60 projects in Seattle, Memphis, Columbus, Tampa and other overbuilt
cities. In the period 1968 to 1970 he headed up Drever & Co., purchasing and
renovating California multi-family properties. Mr. Drever is a Director of the
National Multi Housing Council and a Full Member of the Urban Land Institute. He
graduated from the University of Illinois with a B.S. degree in finance.
Michael E. Masterson was Executive Vice President (1989-1992), and has been
President of Drever since 1992. Responsible for the overall administration of
Drever and its subsidiaries, he also coordinates institutional financing and
oversees the several joint ventures in which institutions are investors. He
serves as a member of the Board of Directors and Acting Chairman of Drever,
Concierge Management Corporation, Drever Construction Corporation and four other
subsidiary/affiliate entities. From 1986 to 1989 he was President of Asset
Development and Management, Inc. in San Francisco, a company charged with the
management of a major portion of the commercial REO portfolio of BA Properties
I, a subsidiary of Bank of America. Prior to that (1984-1988) Mr. Masterson held
the positions of Executive Vice President and President, respectively, of The
Innisfree Companies and IMG Financial of Sausalito, major San Francisco Bay Area
real estate development and marketing concerns. Before a 1979-1983 stint as a
principal of Real Estate Projects Company of San Francisco and Los Angeles, Mr.
Masterson spent seven years (1971-1978) as a Senior Associate with Economics
Research Associates, a major international consulting firm specializing in real
estate and land use. His projects have won numerous awards, including the U.S.
Department of Energy National Energy Award, awards from the City and County of
Honolulu and the Pacific Coast Builders Choice Grand Award. Mr. Masterson is a
graduate of the University of Notre Dame and holds an M.B.A. degree from
Stanford University.
Michael L. Collier is President of Concierge Management Corporation, the
management subsidiary of Drever. He was Founder of that company in 1987,
together with Maxwell Drever. From 1983 to 1987 Mr. Collier was President of
Midkiff Property Development Company, a management and development concern. From
1976 to 1983 he was in real estate management and development of new properties
with Lincoln Property Management. A member of the National Multi Housing
Council, Mr. Collier is also on the Board of Directors of the Houston Apartment
Association. His degree in management and economics is from Baylor University.
Theodore M. Kerr, Jr. has been Director of Asset Management of Drever from
1992 to the present. Primarily responsible for the oversight of all portfolio
properties' performance, he works closely with the Drever subsidiaries,
Concierge Management and Drever Construction, and also collaborates with the
Director of Finance to make sure yield objectives are met. In addition, he has
played a primary role in the
56
<PAGE> 62
implementation of enhancement programs at a number of Drever properties. From
1985 to 1992 Mr. Kerr was at Bank of America, during which time he was promoted
to the position of Vice President in charge of managing a diverse real estate
and loan portfolio valued in excess of $100 million. He is an Associate Member
of the Urban Land Institute and is a member of the Board of Directors of the
Houston Apartment Association, serving as Chair of its Property Tax Task Force
and as a member of its Legislative and Media Relations Committees. Mr. Kerr is
also on the Board of the Westchase District, a West Houston improvement
district. A graduate of Washington and Lee University, he was awarded his M.B.A.
degree by the University of Texas at Austin.
Bryan A. Levy has served as Vice President and Chief Financial Officer of
Drever since 1994. He is directly responsible for all accounting and income tax
matters related to the Company and its partnerships. He serves as a member of
the Board of Directors of Drever Partners and of the Boards of five of its
subsidiary/affiliate entities. Mr. Levy participates in the formation and
implementation of overall corporate policy, asset management, investor
communications, and general operations. From 1989 through 1993 he was the Tax
Manager for Drever Partners and was then promoted to Vice President. Prior to
his joining the Drever organization, Mr. Levy was a tax manager with Arthur
Andersen & Co., specializing in real estate and limited partnership taxation. He
is both a licensed real estate broker in the state of California and a member of
the California State Bar. After completing work for his B.A. degree at the
University of California at San Diego, Mr. Levy went on to obtain his law degree
from Hastings College of the Law in 1985.
Charlene D. Geiss, as Director of Finance for Drever since 1989, has been
responsible for the placement of acquisition financing, project refinancing, and
corporate lines of credit. She became Director of Acquisitions as well in 1996,
and has also served as President of Concierge Realty and Finance Corporation, a
Drever corporation that handled all finance, acquisitions, and dispositions.
Prior to her joining Drever, from 1983 to 1985, Ms. Geiss was Vice President,
and then, from 1985 to 1988, Senior Vice President, of the Capital Markets
division of Commonwealth Financial Group (a mortgage company and savings and
loan). There she was responsible for originating and creating multi-family,
tax-exempt bond financing and equity placement nationwide for apartment
developers. From 1981 to 1983 she brokered apartments at Fuller Commercial. In
1976 she started the Apartment Brokerage Division for Coldwell Banker Commercial
in Houston. From 1973 to 1976 Ms. Geiss was Apartment Acquisitions Agent for CBS
Realcorp in Woodland Hills, California. After her graduation from the University
of Texas in 1968, until 1973, she taught school in Dallas. Ms. Geiss holds a
Texas real estate broker's license and has served on the Board of Directors of
the Houston Housing Finance Authority.
David C. Glaser has served as Vice President and Chief Financial Officer of
Concierge Management Corporation from September 1990 to the present. His
responsibilities in that position include management of accounting and financial
reporting, internal audit, treasury, information systems, human resources, and
payroll, as well as the legal departments for Concierge and a sister company,
Drever Construction Corporation. He has also been a Director of CMC since 1994.
From 1982 to January 1990 Mr. Glaser was Controller with Gerald D. Hines
Interests. From 1978 to 1982 he worked with a private client in the
petrochemical industry, having previously been employed as an audit Senior with
Arthur Andersen & Co. In addition to being a member of the National Multi
Housing Council, he is a Certified Public Accountant, holding an M.B.A. degree
from Texas A&M University. Mr. Glaser is also a member of the American Institute
of Certified Public Accountants and the Houston Apartment Association.
STOCKHOLDER PROPOSALS
No business may be brought before the Special Meeting other than the
Proposals and procedural matters that may arise in connection therewith.
Any stockholder proposal to be presented at the 1998 Annual Meeting of
Stockholders of the Company must be received by the Secretary of the Company at
the Company's principal office no later than December 24, 1997, in order to be
included in the Proxy statement and form of Proxy for such meeting.
57
<PAGE> 63
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements, and other information filed by the Company can be inspected and
copied at the public reference facilities of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at certain Regional Offices of the Commission.
Copies of such material may also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission also maintains a Web site at
(http:\\www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including the Company. Certain securities of the Company are listed
on, and 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant
to the Exchange Act are incorporated in this Proxy Statement by reference: (i)
the Company's Annual Report on Form 10-K for the year ended December 31, 1996
(the "Form 10-K"), (ii) Amendment No. 1 on Form 10-K/A to the Form 10-K, (iii)
Amendment No. 2 on Form 10-K/A to the Form 10-K, and (iv) the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy
Statement and prior to the Special Meeting shall be deemed to be incorporated by
reference in, and to be made part of, this Proxy Statement from the date of
filing of such documents. 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 this Proxy Statement to
the extent that a statement contained herein or in any other subsequently filed
document that also is or is deemed to be incorporated by reference herein
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 Proxy Statement.
The Company will provide without charge to each person to whom a copy of
this Proxy Statement is delivered, on the written or oral request of such person
and by first class mail or other equally prompt means within one business day of
receipt of such request, a copy of any or all of the documents referred to above
which have been or may be incorporated by reference in the Proxy Statement,
other than exhibits to such documents. Such written or oral request should be
directed to Walden Residential Properties, Inc., One Lincoln Centre, 5400 LBJ
Freeway, Suite 400, Dallas, Texas 75240, Attention: Deborah B. Attner (972)
788-0510.
58
<PAGE> 64
DREVER PARTNERS, INC. AND AFFILIATES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT................................ F-2
FINANCIAL STATEMENTS FOR THE PERIODS ENDED JUNE 30, 1997 AND
1996, (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996,
1995 AND 1994:
Combined Balance Sheets................................... F-3
Combined Statements of Operations......................... F-4
Combined Statements of Partners'/Stockholders' Equity..... F-5
Combined Statements of Cash Flows......................... F-6
Notes to Combined Financial Statements.................... F-7
FINANCIAL STATEMENT SCHEDULE:
Schedule III -- Real Estate and Accumulated
Depreciation........................................... F-17
</TABLE>
F-1
<PAGE> 65
INDEPENDENT AUDITORS' REPORT
To the Directors, Stockholders and Partners of
Drever Partners, Inc. and Affiliates:
We have audited the accompanying combined balance sheets of Drever
Partners, Inc. and affiliates as of December 31, 1996 and 1995, and the related
combined statements of operations, partners'/stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. Our audits
also included the financial statement schedule. These financial statements and
financial statement schedule are the responsibility of the management of Drever
Partners, Inc. and affiliates. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of Drever Partners, Inc. and
affiliates at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic combined financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
June 27, 1997
F-2
<PAGE> 66
DREVER PARTNERS, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
REAL ESTATE ASSETS, AT COST:
Land...................................................... $ 70,108 $ 70,336 $ 70,336
Buildings and improvements................................ 466,413 464,432 452,852
Less accumulated depreciation............................. (109,649) (99,260) (76,812)
--------- -------- --------
Total real estate assets.......................... 426,872 435,508 446,376
Rent and Other Receivables.................................. 421 479 326
Receivables from Related Parties............................ 3,201 2,957 1,700
Prepaid and Other Assets.................................... 1,305 765 3,674
Deferred Financing Costs, Net............................... 3,339 3,741 4,417
Deferred Tax Asset.......................................... 174 174 268
Cash and Cash Equivalents................................... 11,318 10,866 11,828
Restricted Cash............................................. 2,537 4,402 6,549
--------- -------- --------
Total Assets................................................ $ 449,167 $458,892 $475,138
========= ======== ========
LIABILITIES AND PARTNERS'/STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................... $ 287,266 $290,854 $293,702
Other long-term debt...................................... 626 759 1,469
Investor notes payable.................................... 6,336 6,497 6,594
Accrued real estate taxes................................. 5,845 9,699 9,365
Accounts payable.......................................... 2,473 3,481 3,033
Payable to related parties................................ 318 301 538
Accrued expenses and other liabilities.................... 8,265 8,056 7,823
--------- -------- --------
Total liabilities................................. 311,129 319,647 322,524
Commitments and Contingencies (Note 11)
Partners'/Stockholders' Equity:
Partners' capital......................................... 182,806 179,559 182,213
Common stock.............................................. 25 25 25
Treasury stock............................................ (371) (371) (371)
Additional paid-in capital................................ 639 639 639
Accumulated deficit....................................... (45,061) (40,607) (29,892)
--------- -------- --------
Total partners'/stockholders' equity.............. 138,038 139,245 152,614
--------- -------- --------
Total Liabilities and Partners'/Stockholders' Equity........ $ 449,167 $458,892 $475,138
========= ======== ========
</TABLE>
See notes to combined financial statements.
F-3
<PAGE> 67
DREVER PARTNERS, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------- -----------------------------
1997 1996 1996 1995 1994
------- ------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental income................................ $54,635 $53,007 $107,344 $101,630 $84,935
Other property income........................ 1,633 1,584 3,259 3,025 2,463
Construction revenue......................... 647 919 308
Interest income.............................. 229 230 620 979 750
Other income (expense)....................... (200) (178) (1,092) 508 1,668
------- ------- -------- -------- -------
Total revenues....................... 56,297 55,290 111,050 106,450 89,816
EXPENSES:
Property operating and maintenance........... 20,048 19,697 40,682 40,060 33,585
Real estate taxes............................ 5,780 5,689 11,486 11,051 8,940
Construction cost of sales................... 652 891 240
General and administrative................... 4,209 4,729 9,343 9,654 10,485
Interest..................................... 11,060 11,445 22,909 23,412 19,531
Amortization................................. 430 440 888 953 794
Depreciation................................. 11,278 11,461 22,888 21,227 17,050
------- ------- -------- -------- -------
Total expenses....................... 52,805 54,113 109,087 106,597 90,385
------- ------- -------- -------- -------
OPERATING INCOME (LOSS)........................ 3,492 1,177 1,963 (147) (569)
Gain (loss) on disposition of property....... (170) -- -- (90) 156
Loss on debt forgiveness..................... (455)
------- ------- -------- -------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
INCOME TAXES................................. 3,322 1,177 1,963 (692) (413)
INCOME TAXES................................... (322) (243) (647) (487) (373)
------- ------- -------- -------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM........ 3,000 934 1,316 (1,179) (786)
Extraordinary gain (loss) on debt
extinguishment............................ -- 71 348 -- (735)
------- ------- -------- -------- -------
NET INCOME (LOSS).............................. $ 3,000 $ 1,005 $ 1,664 $ (1,179) $(1,521)
======= ======= ======== ======== =======
</TABLE>
See notes to combined financial statements.
F-4
<PAGE> 68
DREVER PARTNERS, INC. AND AFFILIATES
COMBINED STATEMENTS OF PARTNERS'/STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL PARTNERS'/
PARTNERS' --------------- TREASURY PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL SHARES AMOUNT STOCK CAPITAL DEFICIT EQUITY
--------- ------ ------ -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Partners'/stockholders' equity at
January 1, 1994....................... $ 102,232 15,000 $15 $ (41) $607 $(10,688) $ 92,125
Net income (loss)..................... 7,671 (9,192) (1,521)
Contributions......................... 80,323 80,323
Distributions......................... (14,646) (14,646)
Purchase of treasury stock............ (330) (330)
--------- ------ --- ----- ---- -------- --------
Partners'/stockholders' equity at
December 31, 1994..................... 175,580 15,000 15 (371) 607 (19,880) 155,951
Net income (loss)..................... 8,833 (10,012) (1,179)
Contributions......................... 12,304 12,304
Distributions......................... (14,504) (14,504)
Common stock issued................... 10,000 10 32 42
--------- ------ --- ----- ---- -------- --------
Partners'/stockholders' equity at
December 31, 1995..................... 182,213 25,000 25 (371) 639 (29,892) 152,614
Net income (loss)..................... 12,379 (10,715) 1,664
Distributions......................... (15,228) (15,228)
Contributions......................... 195 195
--------- ------ --- ----- ---- -------- --------
Partners'/stockholders' equity at
December 31, 1996..................... 179,559 25,000 25 (371) 639 (40,607) 139,245
Net income (loss) (unaudited)......... 7,454 (4,454) 3,000
Distributions (unaudited)............. (4,207) (4,207)
--------- ------ --- ----- ---- -------- --------
Partners'/stockholders' equity at ,
1997 (unaudited)...................... $(182,806) 25,000 $25 $(371) $639 $(45,061) $138,038
========= ====== === ===== ==== ======== ========
</TABLE>
See notes to combined financial statements.
F-5
<PAGE> 69
DREVER PARTNERS, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------ -------------------------------
1997 1996 1996 1995 1994
------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ 3,000 $ 1,005 $ 1,664 $ (1,179) $ (1,521)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization..................... 11,708 11,901 23,776 22,180 17,844
(Gain)/loss on disposition of real property....... 170 90 (156)
Extraordinary (gain) loss on debt
extinguishments................................. (71) (348) 455 735
Deferred income tax............................... 94 756 (423)
Net effect of changes in operating accounts:
Restricted cash................................. 1,865 3,230 2,147 1,366 (654)
Other assets.................................... (598) 1,090 2,469 (6,723) 702
Receivables..................................... 58 (303) (153) 118 632
Receivables from related parties................ (244) 219 (1,257) 1,445 214
Accrued real estate taxes....................... (3,854) (3,846) 334 1,620 3,372
Accounts payable................................ (1,008) (795) 448 (58) 340
Payables to related parties..................... 17 9 (237) (1,038) 4
Other liabilities............................... 209 1,498 233 (226) 1,204
------- -------- -------- -------- ---------
Net cash provided by operating activities.... 11,323 13,937 29,170 18,806 22,293
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate assets...................... (20,257) (113,056)
Real estate asset additions......................... (4,105) (6,264) (11,580) (21,851) (19,494)
Proceeds from disposition of real property.......... 110 1,485
------- -------- -------- -------- ---------
Net cash used in investing activities........ (4,105) (6,264) (11,580) (41,998) (131,065)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions received.............................. 195 195 12,304 80,323
Distributions paid to partners...................... (4,207) (6,108) (15,228) (14,504) (14,646)
Common stock issued................................. 42
Proceeds from mortgage notes payable................ 21,380 39,080 17,389 163,127
Payment of mortgage notes payable................... (20,700) (36,978) (98,181)
Principal reductions of debt........................ (2,237) (2,511) (4,380) (4,000) (2,713)
Payment of financing costs.......................... (28) (75) (434) (1,266) (3,179)
Payment of investor notes........................... (161) (97) (97) (120) (737)
Payment of other long-term debt..................... (133) (664) (710) (948) (160)
------- -------- -------- -------- ---------
Net cash (used in) provided by financing
activities................................. (6,766) (8,580) (18,552) 8,897 123,834
------- -------- -------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... 452 (907) (962) (14,295) 15,062
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........ 10,866 11,828 11,828 26,123 11,061
------- -------- -------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............. $11,318 $ 10,921 $ 10,866 $ 11,828 $ 26,123
======= ======== ======== ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.............................. $11,051 $ 11,414 $ 22,318 $ 22,861 $ 18,021
======= ======== ======== ======== =========
Income taxes paid................................... $ 325 $ 376 $ 391 $ 655 $ 165
======= ======== ======== ======== =========
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
Obligation incurred for treasury stock.............. $ -- $ -- $ -- $ -- $ 330
======= ======== ======== ======== =========
Debt assumed by purchaser of property............... $ 1,351 $ -- $ -- $ -- $ --
======= ======== ======== ======== =========
</TABLE>
See notes to combined financial statements.
F-6
<PAGE> 70
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
PERIODS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED), AND
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. BASIS OF PRESENTATION AND ORGANIZATION
Drever Partners, Inc. and affiliates (collectively "Drever") consists of
Drever Partners, Inc. and its majority owned subsidiaries Concierge Management
Corporation ("CMC"), Drever Construction Corporation, Inc. ("DCC"), Concierge
Realty & Finance Corporation ("CRFC"), Drever McIntosh & Co. ("DM & Co.")
(collectively "DPI"), two affiliated corporations, 18 limited partnerships
(collectively the "Partnerships" or individually the "Partnership") and an
affiliated entity, which collectively owned and operated 79 multifamily
apartment properties (the "Properties") as of June 30, 1997, 80 properties as of
December 31, 1996 and 1995, and 79 properties as of December 31, 1994. CMC
serves as the property management company for the Properties, DCC performs
construction and maintenance services, CRFC assists in real estate acquisitions
and financings and DM & Co. performs asset management services for certain of
the Partnerships.
Drever Partners, Inc. is the general partner in each of the Partnerships
except for Apartment Opportunity Fund, L.P. ("AOF") and Apartment Opportunity
Fund II, L.P. ("AOFII"). AOF, Inc. is an affiliate of DPI and the general
partner of AOF Newgen, L.P., which is, in turn, the general partner of AOF.
AOFII, Inc. is an affiliate of DPI and the general partner of AOFII.
Drever owns properties in Texas, Arizona, California and Georgia consisting
of 18,118 apartment units.
On May 21, 1997, Drever entered into a definitive agreement with Walden
Residential Properties, Inc. ("Walden") which, if consummated, will result in
the combination of Walden, DPI and the Partnerships. The transaction value is
approximately $670 million, consisting of $295 million in operating partnership
units to be issued by Walden Drever Operating Partnership ("WDOP") which are
convertible into $240 million in Walden Common Stock (10,322,580 shares) and $55
million in preferred stock (2,000,000 shares of 9% Redeemable Preferred Stock)
with detachable warrants (6,666,667 Series B Warrants, each of which is
exercisable for one-third of one share of Common Stock at $26.875 per share) and
$85 million in cash. The balance of the consideration consists of the assumption
of approximately $290 million of mortgage debt. Pursuant to the agreement,
Walden will offer to acquire the partnership interest of each limited partner in
exchange for that portion of the transaction consideration which would have been
allocable to such partner under the applicable partnership agreement assuming
that the transaction had been structured as a sale of the Partnerships'
underlying assets. The transaction is contingent upon limited partners owning
more than 50% of the total limited partner interests in AOF and AOF II accepting
their respective exchange offers. The transaction also requires the majority
consent of the Walden common shareholders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION -- The accompanying combined financial statements
include the consolidated accounts of DPI; AOF, Inc.; AOFII, Inc.; the accounts
of the Partnerships; and the affiliated entity, since DPI or one of its
affiliates is the general partner of the Partnerships and consequently controls
and manages their operations. All material inter-entity transactions and
balances are eliminated in the combination.
INCOME RECOGNITION -- Rental, interest and other income are recorded using
the accrual method of accounting as earned.
PROPERTY CONCENTRATION -- As of December 31, 1996, Drever owned 80
multifamily properties in four states, with 90% of its apartment units located
in Texas and 10% located in Arizona, Georgia and California. Of the total units
owned, 11,207 units, or 62%, are located in the Houston area. Apartment units
are leased to residents on terms of one year or less, with monthly rental
payments due in advance. In management's opinion, due to the number of residents
and the type of markets in which the properties operate and the collection
terms, there is not a significant concentration of credit risk.
F-7
<PAGE> 71
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS -- All cash and investments in money market
accounts, excluding restricted cash, that have a maturity of three months or
less at the time of purchase are considered to be cash and cash equivalents.
RESTRICTED CASH -- Restricted cash consists of security deposits and escrow
deposits held by lenders for the payment of property taxes, insurance and
replacement reserves. Restricted cash is invested primarily in short-term
securities.
Also included in restricted cash are amounts held in trust for noncombined
affiliated entities of Drever Partners, Inc. Such amounts represent cash of
affiliated entities of Drever Partners, Inc. which has been put under the care
and control of Drever Partners, Inc. A reserve has been established in an amount
equal to the cash balances held in trust and is included in accounts and notes
payable to related parties in the accompanying financial statements.
REAL ESTATE ASSETS AND DEPRECIATION -- Expenditures directly related to the
acquisitions and improvement of real estate assets are capitalized at cost as
land, buildings and improvements. Drever capitalizes the cost of appliances,
carpets, major exterior painting, roof replacement and expenditures for other
major property improvements, as well as rehabilitation costs incurred for
properties acquired.
Depreciation is computed on a straight-line basis over the estimated useful
lives of 30 years for buildings and five, ten or 15 years for personal property.
In March 1995, Statement of Financial Accounting Standard ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of," was issued. Drever adopted SFAS No. 121 in 1995. Drever's
management routinely reviews its investments for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Based on Drever's policy for reviewing impairment of long-lived
assets, there was no adjustment necessary for impairment of properties during
the three-year period ended December 31, 1996.
DEFERRED FINANCING COSTS AND AMORTIZATION -- Legal fees and other costs
associated with obtaining financing have been capitalized and are being
amortized over the terms of the related debt. Financing costs were reported net
of amortization of $2,998,000, $2,568,000, and $2,107,000 as of June 30, 1997,
and December 31, 1996 and 1995, respectively.
EARNINGS PER SHARE -- The accompanying combined financial statements do not
include disclosures of earnings per share as Drever Partners, Inc. and
affiliates represent privately held corporate entities and partnerships for
which this disclosure would be meaningless.
INCOME TAXES -- DPI, AOF, Inc. and AOFII, Inc. elected to be taxed as C
Corporations under the Internal Revenue Code and account for income taxes under
the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109
requires the use of the liability method of accounting for income taxes.
Deferred taxes are recorded based on the difference between the financial
statement and income tax bases of assets and liabilities. A valuation allowance
is recognized for deferred tax assets when it is more likely than not that some
or all of the deferred tax asset will not be realized.
No provision for income taxes has been made in the accompanying combined
financial statements for the combined operations of the Partnerships because
these taxes are the responsibility of the individual partners.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of certain assets,
liabilities, revenues and expenses during the reporting period. Actual results
may differ from such estimates.
ENVIRONMENTAL REMEDIATION COSTS -- Drever accrues for losses associated
with environmental remediation obligations when such losses are probable and
reasonably estimable. Accruals for estimated losses from
F-8
<PAGE> 72
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
environmental remediation obligations generally are recognized no later than
completion of the remedial feasibility study. Such accruals are adjusted as
further information develops or circumstances change. Recoveries of
environmental remediation costs from other parties are recorded as assets when
their receipt is deemed probable. Drever's management is not aware of any
environmental remediation obligations which would materially affect the
operations, financial position or cash flows of the combined entity.
INTERIM FINANCIAL DATA -- In the opinion of management, the accompanying
unaudited combined financial statements contain all the adjustments (consisting
of only normal recurring accruals) necessary to present fairly the financial
position of the combined entity as of June 30, 1997 and 1996, and the results of
their operations and changes in their financial position for the six months
ended June 30, 1997 and 1996.
3. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS -- During 1995, the Partnerships acquired two apartment
properties containing 484 units for a cost of $20,257,000 located in San Diego,
California and Houston, Texas. During 1994, the Partnerships acquired 18
apartment properties containing 4,492 units for a cost of $113,056,000. These
properties are located in Houston, Dallas, Austin and Corpus Christi, Texas; San
Diego, California; and Atlanta, Georgia. No properties were acquired during
1996.
The acquisitions were accounted for by the purchase method of accounting
and the accompanying combined financial statements reflect the results of
operations of the acquired properties since the date of purchase.
DISPOSITIONS -- During 1994, a Partnership disposed of one apartment
property containing 326 units for $1,536,000, less closing costs. In connection
with this disposition, the Partnership recorded a gain on the sale of property
of $156,000. During 1995, a Partnership sold land adjacent to one of its
apartment properties due to condemnation. In connection with this disposition,
the Partnership recorded a loss on sale of $90,000. No real estate asset
dispositions occurred during 1996.
In April 1997, a Partnership disposed of one apartment property having 72
units. In connection with this disposition, the buyer assumed the mortgage notes
on the property of $1,351,000 and the Partnership recorded a net loss on the
sale of property of $170,000.
F-9
<PAGE> 73
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. REAL ESTATE ASSETS
Changes in real estate assets and related accumulated depreciation for the
years ended December 31, 1996, 1995 and 1994, and the six-month period ended
June 30, 1997, are as follows:
<TABLE>
<S> <C>
Real estate assets:
Balance at January 1, 1994................................ $350,074,000
Purchase of real estate assets............................ 113,056,000
Sale of real estate assets................................ (1,344,000)
Fixed asset additions..................................... 19,494,000
------------
Balance at December 31, 1994.............................. 481,280,000
Purchase of real estate assets............................ 20,257,000
Sale of real estate assets................................ (200,000)
Fixed asset additions..................................... 21,851,000
------------
Balance at December 31, 1995.............................. 523,188,000
Fixed asset additions..................................... 11,580,000
------------
Balance at December 31, 1996.............................. 534,768,000
Fixed asset additions (unaudited)......................... 4,105,000
Sale of real estate assets (unaudited).................... (2,352,000)
------------
Balance at June 30, 1997 (unaudited)...................... $536,521,000
============
Accumulated depreciation:
Balance at January 1, 1994................................ $ 39,348,000
Depreciation expense...................................... 16,776,000
Write-off related to real estate assets sold.............. (15,000)
------------
Balance at December 31, 1994.............................. 56,109,000
Depreciation expense...................................... 20,703,000
------------
Balance at December 31, 1995.............................. 76,812,000
Depreciation expense...................................... 22,448,000
------------
Balance at December 31, 1996.............................. 99,260,000
Depreciation expense (unaudited).......................... 11,220,000
Write-off related to real estate assets sold
(unaudited)............................................ (831,000)
------------
Balance at June 30, 1997 (unaudited)...................... $109,649,000
============
</TABLE>
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Included in accrued expenses and other liabilities at June 30, 1997, and
December 31, 1996 and 1995, are the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------
1997 1996 1995
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Security deposits.................................. $3,804,000 $3,782,000 $3,649,000
Accrued interest................................... 1,694,000 1,685,000 1,915,000
Other accrued liabilities.......................... 2,306,000 1,657,000 1,526,000
Self-insurance reserve............................. -- 468,000 336,000
Federal income taxes payable....................... 461,000 464,000 397,000
---------- ---------- ----------
$8,265,000 $8,056,000 $7,823,000
========== ========== ==========
</TABLE>
F-10
<PAGE> 74
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Other accrued liabilities include construction advances, net overbillings
for construction services, and other miscellaneous operational accruals for DPI
and the Partnerships.
SELF INSURANCE RESERVE -- During 1996, 1995 and 1994, Drever maintained a
self-insurance program for that portion of employee health care and Texas
workers' compensation costs which are not covered by insurance contracts. The
self-insurance reserve represents Drever's estimated liability for workers'
compensation and health benefits claims, including those that have been incurred
but not yet reported. The amounts are based on actuarially determined estimates.
Beginning January 1, 1997, all of Drever's employees became covered under a
standard workers' compensation insurance contract. Any claims incurred after
January 1, 1997, will be covered under the new policy. Existing claims for
injuries prior to January 1, 1997, will be covered under the self-insurance
program.
6. MORTGAGE NOTES PAYABLE AND OTHER LONG TERM DEBT
Mortgage notes payable consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 PRINCIPAL BALANCE AS OF
----------------------------- ------------------------------------------
WEIGHTED WEIGHTED DECEMBER 31,
AVERAGE AVERAGE YEARS --------------------------- JUNE 30,
INTEREST RATE TO MATURITY 1996 1995 1997
------------- ------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Fixed rate conventional mortgage notes
payable, bearing interest at rates
ranging from 6.95% to 9.63% per annum,
maturing at various dates from August
1998 through February 2007............ 7.43% 4.2 years $242,580,000 $244,630,000 $240,513,000
Variable rate conventional mortgage
notes payable, bearing interest at
rates ranging from LIBOR plus 1.75% to
prime plus 1.50% per annum, maturing
at various dates from August 1997
through November 2026................. 8.08% 5.4 years 48,274,000 49,072,000 46,753,000
----- --------- ------------ ------------ ------------
Total/weighted average.................. 7.55% 4.3 years $290,854,000 $293,702,000 $287,266,000
===== ========= ============ ============ ============
</TABLE>
At June 30, 1997 and December 31, 1996 and 1995, all of Drever's real
estate assets were collateral for the various mortgage loans which are
nonrecourse to the partners.
Drever Partners, Inc. has guaranteed the payment of $17,750,000 of the
Partnerships' mortgage notes as of December 31, 1996 and June 30, 1997.
OTHER LONG-TERM DEBT -- In September 1994, CMC received $700,000 under a
promissory note which was principally used to finance computer conversions and
expansions. The note is secured by certain computer equipment and is guaranteed
by Drever Partners, Inc. The note bears interest at the lenders prime rate. At
June 30, 1997, and December 31, 1996 and 1995, the outstanding amount due under
the note was $81,000, $162,000 and $599,000, respectively. The balance of the
note is due December 1997.
At June 30, 1997, and December 31, 1996 and 1995, DPI has additional notes
due to other third parties. These notes are non-interest-bearing and are due on
various dates in 1997 ($140,000) and 1998 ($40,000). The balance of these notes
at June 30, 1997, and December 31, 1996 and 1995, were $130,000, $180,000 and
$12,000, respectively.
In February 1994, AOF II, Inc. entered into a $383,000 note agreement with
an investor in AOF II. The note bears interest at 9% with monthly payments of
interest only. The outstanding principal and unpaid interest is due in November
2003. The outstanding amount due under this note at June 30, 1997, and December
31, 1996 and 1995, was $295,000.
F-11
<PAGE> 75
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995, Drever Partners, Inc. had a $440,000 note with a
lending institution. Such note bears interest at the bank's prime rate and
matured in September 1996.
Drever Partners, Inc. has a note payable with a lending institution which
bears interest at 11.5% and matures in January 2010. The outstanding balance at
June 30, 1997, and December 31, 1996 and 1995, was $120,000, $122,000 and
$123,000, respectively.
PRINCIPAL DEBT MATURITIES -- Principal debt maturities, including balloon
payments, for the next five years are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997
(UNAUDITED) DECEMBER 31, 1996
--------------------------- ------------------------
MORTGAGE OTHER MORTGAGE OTHER
NOTES LONG-TERM NOTES LONG-TERM
PAYABLE DEBT PAYABLE DEBT
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
1997........................................ $ 6,279,000 $ 173,000 $ 8,516,000 $306,000
1998........................................ 23,149,000 45,000 24,500,000 45,000
1999........................................ 12,801,000 5,000 12,801,000 5,000
2000........................................ 76,428,000 6,000 76,428,000 6,000
2001........................................ 145,762,000 7,000 145,762,000 7,000
Thereafter.................................. 22,847,000 390,000 22,847,000 390,000
------------ ------------ ------------ --------
Total $287,266,000 $ 626,000 $290,854,000 $759,000
============ ============ ============ ========
</TABLE>
EXTRAORDINARY ITEMS -- During 1996, Drever refinanced approximately
$36,978,000 of mortgage loans prior to maturity, which resulted in an aggregate
extraordinary gain of $348,000. During 1994, Drever refinanced $98,181,000 of
mortgage loans prior to maturity which resulted in an aggregate extraordinary
loss of $735,000.
7. INVESTOR NOTES
Investor notes represent amounts due to investors by the Partnerships.
Investor notes bear interest at various rates ranging between 9.5% and 10% and
mature at various dates ranging from December 1997 ($304,000) through December
1998 ($2,141,000). Interest only payments are due monthly with the principal due
in full upon maturity. The balance of these notes at June 30, 1997, and December
31, 1996 and 1995, was $2,336,000, $2,445,000 and $2,366,000, respectively.
Also included in investor notes is the outstanding principal and accrued
interest due under a note between Houston Portfolio Joint Venture II ("HPJVII"),
a Partnership, and an investor, which was executed in February 1990. The note
bears base interest at 5% and will earn additional interest equal to
approximately 25% of the respective Partnership's profits realized upon sale of
its properties. All base interest, unpaid principal and additional interest is
due upon disposition of the Partnership's assets or in February 2002. The
outstanding amount due under this note at June 30, 1997, and December 31, 1996
and 1995, was $4,000,000, $4,052,000 and $4,131,000, respectively, including all
unpaid interest. The note is convertible into partners' capital at the option of
the investor or HPJVII upon the satisfaction of certain conditions precedent as
specified in the note agreement.
8. PARTNERS'/STOCKHOLDERS' EQUITY
PARTNERS' CAPITAL -- Each of the Partnerships were formed under the
provisions of a partnership agreement (collectively, the "Agreements"). Pursuant
to the Agreements, initial contributions were made by each of the partners. A
capital account is maintained for each partner in which their account is
increased with the initial and any subsequent contributions and income from
operations and decreased for any distributions and losses from operations.
During the years ended December 31, 1996, 1995 and 1994, distributions to
F-12
<PAGE> 76
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
limited partners were $15,168,000, $14,504,000 and $14,646,000, respectively.
Distributions to the general partner were $20,000 and $60,000 for the six month
period ended June 30, 1997 and year ended December 31, 1996, respectively. No
distributions were made to the general partner with respect to its carried
interest during the years ended December 31, 1995 and 1994. During the six-month
period ended June 30, 1997, distributions to limited partners were $4,187,000.
Contributions to the partnerships for the years ended December 31, 1996, 1995
and 1994, were $195,000, $12,304,000 and $80,323,000. No contributions were
received during the six-month period ended June 30, 1997.
Each partner's capital account is increased for their allocated share of
net income of the partnership and decreased for their allocated share of net
losses. Net income and losses are allocated to each partner based on their
ownership interest in the partnership. However, no losses are allocated to the
limited partners once their capital account is zero. Limited partners'
unallocated losses are allocated to the general partner.
STOCKHOLDERS' EQUITY -- Drever Partners, Inc. has 5,000 shares of no par
value stock authorized and issued and 4,050 shares outstanding at June 30, 1997,
and December 31, 1996 and 1995. CMC, DCC and CRFC each have 1,000 shares of $1
par value stock authorized, issued and outstanding at June 30, 1997, and
December 31, 1996 and 1995. DM & Co. has 2,500 shares of no class, no par value
stock authorized and 100 shares issued and outstanding at June 30, 1997, and
December 31, 1996 and 1995. Drever Partners, Inc. owns 100% of DCC and DM & Co.,
95% of CRFC and 90% of CMC outstanding stock. The remaining shares are held by
officers of the entities. During the six-month period ended June 30, 1997 and
the three-year period ended December 31, 1996, no dividends were declared or
paid by Drever Partners, Inc., DCC, CMC or CRFC. As of June 30, 1997, a sale of
Drever Partners, Inc.'s investment in DM & Co. to a third party is pending,
which is expected to be completed in the third quarter of 1997.
AOF, Inc. and AOFII, Inc. each have 10,000 shares of $1 par value stock
authorized, issued and outstanding at June 30, 1997, and December 31, 1996 and
1995. During the three-year period ended December 31, 1996, and the six-month
period ended June 30, 1997, no dividends were declared or paid by AOF, Inc. and
AOFII, Inc.
9. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value of financial instruments
was determined by Drever using available market information and appropriate
valuation methodologies. However, considerable judgment is necessary to
interpret market data and develop the related estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that could be realized upon disposition of the financial
instruments. The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair value amounts.
Cash and cash equivalents, receivables (including receivables from related
parties), accounts payable and accrued expenses and other liabilities are
carried at amounts which reasonably approximate their fair value.
The fixed rate mortgage notes payable of $242,580,000 and $244,630,000 as
of December 31, 1996 and 1995, respectively, have a fair value which
approximates the book value as estimated based upon interest rates available for
the issuance of debt with similar terms and remaining maturities as of the
respective year end.
The fair value estimates presented herein are based on information
available to management as of December 31, 1996 and 1995. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since those dates, and current estimates of fair
value may differ significantly from the amounts presented herein.
F-13
<PAGE> 77
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. PROVISION FOR INCOME TAXES
The provision for income taxes for DPI consists of the following for the
six-month periods ended June 30, 1997 and 1996, and the years ended December 31,
1996, 1995 and 1994:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------- --------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current........................... $322,000 $243,000 $553,000 $(269,000) $ 796,000
Deferred.......................... -- -- 94,000 756,000 (423,000)
-------- -------- -------- --------- ---------
$322,000 $243,000 $647,000 $ 487,000 $ 373,000
======== ======== ======== ========= =========
</TABLE>
DPI's effective tax rate differs from the federal statutory rate of 34% in
1997, 1996, 1995 and 1994 primarily due to nondeductible meals and
entertainment, penalties and state income taxes.
Deferred taxes result primarily from temporary differences in the
recognition of bad debt expense, self-insurance reserves, depreciation and
accrual versus cash accounting between reporting for income tax and financial
statement purposes.
The tax effects of items that gave rise to significant portions of the
deferred tax accounts are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------
1997 1996 1995
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Fixed asset depreciable basis adjustment..... $ 172,000 $ 172,000 $ 156,000
Accruals not deductible until paid........... 178,000 178,000 308,000
Bad debt allowance........................... 180,000 180,000 180,000
Other........................................ 79,000 79,000 59,000
--------- --------- ---------
609,000 609,000 703,000
Deferred tax liability -- Partnership tax basis
adjustment................................... (435,000) (435,000) (435,000)
--------- --------- ---------
$ 174,000 $ 174,000 $ 268,000
========= ========= =========
</TABLE>
Management believes that DPI has the ability to utilize its deferred tax
assets by applying them against taxable income to be generated in future years.
Accordingly, no valuation allowance for deferred tax assets has been recorded
for 1997, 1996 or 1995.
11. COMMITMENTS AND CONTINGENCIES
Drever is the lessee under various noncancelable operating leases for its
principal office facilities and other equipment leases. Minimum annual lease
payments required under these operating leases at December 31, 1996, are as
follows:
<TABLE>
<S> <C>
1997........................................................ $ 841,000
1998........................................................ 511,000
1999........................................................ 439,000
2000........................................................ 226,000
----------
Total....................................................... $2,017,000
==========
</TABLE>
F-14
<PAGE> 78
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense for the years ended December 31, 1996, 1995 and 1994, and the
six-month periods ended June 30, 1997 and 1996, was $954,000, $1,091,000,
$1,089,000, $529,000 and $501,000, respectively.
As part of a written Stock Purchase Agreement, Drever Partners, Inc. has
the obligation to acquire 500 shares of common stock held by a former officer of
Drever Partners, Inc. The purchase price is to be the fair market value of such
shares as of May 1, 1994, as determined by a court-appointed appraiser.
Contemporaneous to the May 1, 1994 valuation date, management ordered an
independent appraisal to provide management with an estimate of its obligation
to acquire such shares. The independent appraisal resulted in a $322,000 fair
market value for the shares as of May 1, 1994. Drever Partners, Inc. has
recorded this estimate for the obligation, which is included in accrued expenses
and other liabilities in the accompanying combined financial statements.
Drever is subject to various legal proceedings and claims that arise in the
ordinary course of business. These matters are generally covered by insurance.
While the resolution of such matters cannot be predicted with certainty,
management believes that the final outcome of such matters will not have a
material adverse effect on the financial position, results of operations or cash
flows of Drever.
12. RELATED PARTY TRANSACTIONS
PAYABLE TO RELATED PARTIES -- Payable to related parties represents amounts
held in trust at December 31, 1996 ($325,000), and June 30, 1997 ($56,000), for
noncombined affiliated entities of Drever Partners, Inc. Such amounts represent
cash of affiliated entities of Drever Partners, Inc. which has been put under
the care and control of the Company. The cash amounts are recorded in restricted
cash in the accompanying financial statements.
The remaining balance of payable to related parties represents
miscellaneous amounts due to noncombined affiliated entities.
RECEIVABLES FROM RELATED PARTIES -- Drever Partners, Inc. has notes
receivable from Tassajara Shopping Center Associates, a noncombined affiliate of
DPI, which bear interest at the lesser of 10% or prime plus 2%. The notes mature
in March 1998 ($170,000) and July 1998 ($625,000). The outstanding balance for
these notes at June 30, 1997, and December 31, 1996 and 1995, was $542,000,
$795,000 and $263,000, respectively. Included in receivables from related
parties is accrued interest on the notes of $15,000, $21,000 and $8,000 at June
30, 1997, and December 31, 1996 and 1995, respectively Also included in
receivables from related parties are notes from officers of Drever Partners,
Inc. and individual investors in affiliated partnerships. Officer notes bear
interest at the lesser of 8% or the prime rate and are due upon liquidation of
certain Partnerships. The balance of the officer notes at June 30, 1997, and
December 31, 1996 and 1995, were $474,000, $368,000 and $181,000, respectively,
including accrued interest. The individual investor notes bear interest at 9%,
are secured by limited partnership interests in Las Positas Land Partners, LP, a
noncombined affiliate, and mature upon the sale of the assets of Las Positas
Land Partners, LP. The balance of the individual investor notes at June 30,
1997, and December 31, 1996 and 1995, was $74,000 $73,000 and $66,000,
respectively, including accrued interest.
The remaining balance of receivables from related parties represents
miscellaneous receivables, including employee advances and receivables from
noncombined affiliated entities.
During 1995, Drever Partners, Inc. forgave certain debt due from officers
resulting in a loss of $455,000.
13. EMPLOYEE BENEFIT PLANS
401(k) PLAN -- Drever Partners, Inc. adopted a 401(k) Plan (the "Plan") for
its employees and the employees of DPI. The Plan is a voluntary defined
contribution plan. Employees are eligible to participate in the Plan following
the completion of six months of service and the attainment of 18 years of age.
Each
F-15
<PAGE> 79
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
participant may make contributions into the Plan in the form of a salary
deferral of up to 20% of their annual salary (not to exceed $9,500 and $9,240
for 1996 and 1995, respectively). DPI contributes up to 10% of the employee's
salary deferral up to a maximum of $120 per year in the form of a matching
contribution. DPI also has the option to make additional discretionary
contributions. A participant's salary deferral contribution is 100% vested at
all times. Prior to January 1, 1995, a participant vested immediately in the DPI
matching contribution. Subsequent to January 1, 1995, a participant vested in
the DPI matching contribution after five years of service. DPI matching
contributions for the years ended December 31, 1996, 1995 and 1994, were
$20,000, $19,000 and $12,000, respectively. Matching contributions for the
six-month periods ended June 30, 1997 and 1996, were $12,000 and $10,000,
respectively.
F-16
<PAGE> 80
DREVER PARTNERS, INC. AND AFFILIATES
SCHEDULE III -- REAL ESTATE AND
ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1996
F-17
<PAGE> 81
DREVER PARTNERS, INC. AND AFFILIATES
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITIONS
------------------------ -------------------
DESCRIPTION BUILDINGS CAPITAL BUILDINGS
- ---------------------------------------- AND IMPROVEMENTS AND
PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS 1996 LAND IMPROVEMENTS
------------- -------- ------------ -------- ------------- ------------ ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Arbor Creek (2)......... Dallas, TX $ 4,164 $ 1,065 $ 5,712 $ 196 $ -- $ 2,158
Arbor Point (4)......... Houston, TX 1,485 192 1,898 35 367
Arbors of Wells Branch Austin, TX 3,490 819 4,649 199 836
(15)..................
Ashton Brook (11)....... Houston, TX 1,685 384 2,174 108 958
Ashton Woods (2)........ Houston, TX 2,216 597 2,668 157 1,481
Audubon Square (2)...... Austin, TX 2,168 554 2,548 116 1,219
Bar Harbor (4).......... Houston, TX 5,299 1,052 5,964 183 1,916
Bayou Oaks (3).......... Houston, TX 2,813 530 4,022 79 1,237
Bent Creek (3).......... Dallas, TX 4,230 995 5,383 119 2,375
Brandon Oaks (9)........ Houston, TX 2,665 675 3,113 144 1,274
Briarcrest (2).......... Houston, TX 4,123 1,214 5,229 135 (200) 1,957
Brittany Park (2)....... Dallas, TX 2,488 755 4,325 210 1,963
Brookfield (2).......... Houston, TX 4,298 952 5,256 128 1,221
Canyon Ridge (3)........ Dallas, TX 2,425 639 3,211 88 1,179
Carriage Hill (8)....... Houston, TX 4,360 292 1,881 152 3,456
Casa Valley (2)......... Dallas, TX 2,689 476 4,188 78 1,029
Central Park Condos Houston, TX 2,115 401 2,275 54 704
(4)...................
Central Park Regency Houston, TX 6,063 944 5,347 264 2,085
(9)...................
Charleston, The (4)..... Houston, TX 4,437 874 4,952 135 2,124
Cimarron Park (3)....... Houston, TX 2,280 566 3,058 203 1,077
Cimarron Parkway (2).... Houston, TX 3,601 807 4,201 78 2,331
Colony Oaks (9)......... Houston, TX 2,570 655 3,713 109 1,780
Colorado Club (17)...... Houston, TX 7,200 1,055 8,265 112 113
Creekwood Village (3)... Dallas, TX 5,166 816 7,792 171 2,140
Crestwood (2)........... Phoenix, AZ 2,216 1,263 2,898 103 1,384
One Cypress Landing Houston, TX 5,565 621 3,541 175 4,415
(6)...................
Enclave, The (8) Houston, TX 8,991 1,694 9,597 226 1,555
Fairways (2)............ Phoenix, AZ 2,426 505 2,961 41 1,087
Felicita Creek (3)...... San Diego, CA 3,153 1,359 4,450 390 881
Garden Place (2)........ Phoenix, AZ 4,164 2,145 5,023 97 1,401
Georgetown (8).......... Houston, TX 4,423 865 4,902 93 889
Georgetown II (9)....... Houston, TX 205 99 361 15 316
Harbor Pointe (2)....... Houston, TX 2,374 401 5,024 167 2,004
Harpers Mill (4)........ Houston, TX 2,110 390 2,211 94 1,423
Hidden Lake (2)......... Houston, TX 7,377 2,843 11,078 200 2,209
Holiday on Hayes (3).... Houston, TX 4,851 912 7,289 118 2,179
Hunt Club, The (4)...... Houston, TX 2,873 363 2,056 75 1,398
Huntley, The (5)........ Houston, TX 5,380 1,035 5,872 143 989
La Prada (12)........... Dallas, TX 5,650 846 6,136 353 2,606
Lakes of Renaissance Austin, TX 4,093 1,607 6,526 230 1,377
(2)...................
Live Oak (7)............ Houston, TX 2,628 514 2,913 84 902
Meadows on Memorial Houston, TX 901 233 1,043 58 1,340
(9)...................
<CAPTION>
GROSS AMOUNT AT WHICH CARRIED AT
12/31/96
DESCRIPTIO --------------------------------- DEPRECIABLE
- ------------------------ BUILDING AND ACCUMULATED DATE LIFE
PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED (YEARS)(1)
------------- ------- ------------ -------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Arbor Creek (2)......... $ 1,065 $ 7,870 $ 8,935 $ 1,302 3/93
Arbor Point (4)......... 192 2,265 2,457 485 4/91
Arbors of Wells Branch 819 5,485 6,304 1,362 11/90
(15)..................
Ashton Brook (11)....... 384 3,132 3,516 951 6/90
Ashton Woods (2)........ 597 4,149 4,746 1,039 10/91
Audubon Square (2)...... 554 3,767 4,321 946 7/91
Bar Harbor (4).......... 1,052 7,880 8,932 2,032 7/90
Bayou Oaks (3).......... 530 5,259 5,789 637 1/94
Bent Creek (3).......... 995 7,758 8,753 862 4/94
Brandon Oaks (9)........ 675 4,387 5,062 1,412 7/89
Briarcrest (2).......... 1,014 7,186 8,200 1,522 5/92
Brittany Park (2)....... 755 6,288 7,043 1,265 6/92
Brookfield (2).......... 952 6,477 7,429 1,408 12/91
Canyon Ridge (3)........ 639 4,390 5,029 559 12/93
Carriage Hill (8)....... 292 5,337 5,629 2,215 11/88
Casa Valley (2)......... 476 5,217 5,693 741 6/93
Central Park Condos 401 2,979 3,380 715 12/90
(4)...................
Central Park Regency 944 7,432 8,376 2,374 9/89
(9)...................
Charleston, The (4)..... 874 7,076 7,950 1,810 12/90
Cimarron Park (3)....... 566 4,135 4,701 365 9/94
Cimarron Parkway (2).... 807 6,532 7,339 1,437 10/92
Colony Oaks (9)......... 655 5,493 6,148 1,770 7/89
Colorado Club (17)...... 1,055 8,378 9,433 408 5/88
Creekwood Village (3)... 816 9,932 10,748 912 8/94
Crestwood (2)........... 1,263 4,282 5,545 933 8/92
One Cypress Landing 621 7,956 8,577 3,228 3/88
(6)...................
Enclave, The (8) 1,694 11,152 12,846 3,555 8/88
Fairways (2)............ 505 4,048 4,553 657 5/93
Felicita Creek (3)...... 1,359 5,331 6,690 457 8/94
Garden Place (2)........ 2,145 6,424 8,569 1,519 7/91
Georgetown (8).......... 865 5,791 6,656 1,821 12/88
Georgetown II (9)....... 99 677 776 204 10/89
Harbor Pointe (2)....... 401 7,028 7,429 1,239 10/92
Harpers Mill (4)........ 390 3,634 4,024 1,044 7/90
Hidden Lake (2)......... 2,843 13,287 16,130 2,288 10/92
Holiday on Hayes (3).... 912 9,468 10,380 1,146 1/94
Hunt Club, The (4)...... 363 3,454 3,817 996 6/90
Huntley, The (5)........ 1,035 6,861 7,896 2,216 6/88
La Prada (12)........... 846 8,742 9,588 2,266 3/91
Lakes of Renaissance 1,607 7,903 9,510 1,404 9/92
(2)...................
Live Oak (7)............ 514 3,815 4,329 1,334 10/88
Meadows on Memorial 233 2,383 2,616 865 12/88
(9)...................
</TABLE>
F-18
<PAGE> 82
DREVER PARTNERS, INC. AND AFFILIATES
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITIONS
------------------------ --------------------
DESCRIPTION BUILDINGS CAPITAL BUILDINGS
- ---------------------------------------- AND IMPROVEMENTS AND
PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS 1996 LAND IMPROVEMENTS
------------- -------- ------------ -------- ------------- ------------ ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mill Creek(9)........... Houston, TX $ 1,666 $ 287 $ 1,628 $ 69 $ -- $ 1,251
Montfort Oaks(3)........ Dallas, TX 5,239 1,053 7,354 105 2,367
Monticello(10).......... Houston, TX 3,502 624 3,464 92 1,997
Northwoods(3)........... Houston, TX 2,891 1,544 2,464 176 2,024
Oakridge(2)............. Austin, TX 3,505 809 3,933 96 2,225
One Camden Court(14).... Houston, TX 1,298 278 1,457 46 834
One Stanford Court...... Houston, TX 1,351 228 1,314 119 783
One Westfield Houston, TX 5,600 699 4,054 130 1,582
Lake(16)..............
One Willow Park(14)..... Houston, TX 3,825 647 3,427 55 817
Pathway(2).............. Houston, TX 2,302 518 2,917 72 1,266
Park Bonita(3).......... San Diego, CA 5,854 2,421 8,191 685 1,248
Pine Creek Village(2)... Houston, TX 2,178 700 2,619 58 1,366
Polo Club(4)............ Austin, TX 6,465 1,507 5,149 211 1,245
Polo Club I(4).......... Houston, TX 2,905 619 3,508 105 1,428
Polo Club II(4)......... Houston, TX 3,982 997 5,650 148 1,779
Richmond Green(4)....... Houston, TX 5,200 763 5,451 303 1,804
Riverwalk(9)............ Houston, TX 2,951 469 2,716 144 998
Saratoga Springs(3)..... Atlanta, GA 4,463 1,756 5,864 122 1,871
Shadow Creek(3)......... Austin, TX 6,160 1,570 9,645 124 1,515
Shadowridge Dallas, TX 2,697 520 4,296 65 788
Village(3)............
Shannon Chase(3)........ Atlanta, GA 3,056 1,149 4,279 215 975
Silverado(3)............ Houston, TX 5,093 986 7,515 326 2,014
Stony Creek(7).......... Houston, TX 3,046 644 3,651 104 1,590
Sun Ridge(3)............ San Diego, CA 3,274 1,185 4,566 73 950
The Rafters(3).......... Corpus 3,978 1,045 5,569 271 1,414
Christi, TX
The Wharf(3)............ Corpus 3,934 1,492 5,122 341 1,503
Christi, TX
Timbers on Houston, TX 5,133 958 5,444 150 893
Cranbrook(5)..........
Tranquility Lake(13).... Houston, TX 1,775 742 1,807 53 814
Trinity Mills(3)........ Dallas, TX 3,577 916 5,069 367 1,502
Trinity Oaks(2)......... Dallas, TX 3,160 409 4,549 111 1,733
Villas at Indian Atlanta, GA 3,684 2,844 3,476 87 1,357
Trails(2).............
Willow Chase(18)........ Houston, TX 1,390 261 1,499 67 787
Willowick(3)............ Corpus 3,953 1,046 5,568 363 1,469
Christi, TX
Wimbledon(2)............ Houston, TX 2,426 549 1,245 92 2,609
Woodborough(2).......... Houston, TX 3,983 895 4,869 111 1,744
Woodchase(2)............ Houston, TX 4,568 870 6,090 131 3,035
Woodedge(4)............. Houston, TX 1,780 460 2,607 100 783
Woodlake(5)............. Houston, TX 5,600 1,072 6,087 264 2,804
-------- ------- -------- ------- ----- --------
Partnership total....... 290,854 70,536 349,818 12,066 (200) 122,499
Less: Elimination (486) (7,885)
Entries(19)...........
-------- ------- -------- ------- ----- --------
Combined total.......... $290,854 $70,536 $349,818 $11,580 $(200) $114,614
======== ======= ======== ======= ===== ========
<CAPTION>
GROSS AMOUNT AT WHICH CARRIED
AT 12/31/96
DESCRIPTIO --------------------------------- DEPRECIABLE
- ------------------------ BUILDING AND ACCUMULATED DATE LIFE
PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED (YEARS)(1)
------------- ------- ------------ -------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mill Creek(9)........... $ 287 $ 2,879 $ 3,166 $ 1,104 6/89
Montfort Oaks(3)........ 1,053 9,721 10,774 1,013 5/94
Monticello(10).......... 624 5,461 6,085 1,777 1/90
Northwoods(3)........... 1,544 4,488 6,032 536 4/94
Oakridge(2)............. 809 6,158 6,967 1,117 1/93
One Camden Court(14).... 278 2,291 2,569 1,020 7/87
One Stanford Court...... 228 2,097 2,325 803 3/88
One Westfield 699 5,636 6,335 2,152 12/87
Lake(16)..............
One Willow Park(14)..... 647 4,244 4,891 1,551 8/87
Pathway(2).............. 518 4,183 4,701 804 10/92
Park Bonita(3).......... 2,421 9,439 11,860 666 1/95
Pine Creek Village(2)... 700 3,985 4,685 945 4/92
Polo Club(4)............ 1,507 6,394 7,901 1,364 6/91
Polo Club I(4).......... 619 4,936 5,555 1,271 10/90
Polo Club II(4)......... 997 7,429 8,426 1,914 6/90
Richmond Green(4)....... 763 7,255 8,018 1,589 6/91
Riverwalk(9)............ 469 3,714 4,183 1,135 12/89
Saratoga Springs(3)..... 1,756 7,735 9,491 969 12/93
Shadow Creek(3)......... 1,570 11,160 12,730 1,136 4/94
Shadowridge 520 5,084 5,604 515 4/94
Village(3)............
Shannon Chase(3)........ 1,149 5,254 6,403 469 8/94
Silverado(3)............ 986 9,529 10,515 918 7/94
Stony Creek(7).......... 644 5,241 5,885 1,730 4/89
Sun Ridge(3)............ 1,185 5,516 6,701 527 6/94
The Rafters(3).......... 1,045 6,983 8,028 560 11/94
The Wharf(3)............ 1,492 6,625 8,117 545 11/94
Timbers on 958 6,337 7,295 2,103 7/88
Cranbrook(5)..........
Tranquility Lake(13).... 742 2,621 3,363 736 3/91
Trinity Mills(3)........ 916 6,571 7,487 525 11/94
Trinity Oaks(2)......... 409 6,282 6,691 1,452 9/91
Villas at Indian 2,844 4,833 7,677 894 12/92
Trails(2).............
Willow Chase(18)........ 261 2,286 2,547 930 4/88
Willowick(3)............ 1,046 7,037 8,083 568 11/94
Wimbledon(2)............ 549 3,854 4,403 674 9/92
Woodborough(2).......... 895 6,613 7,508 1,509 12/91
Woodchase(2)............ 870 9,125 9,995 2,023 3/92
Woodedge(4)............. 460 3,390 3,850 842 9/90
Woodlake(5)............. 1,072 8,891 9,963 3,173 4/88
------- -------- -------- -------
Partnership total....... 70,336 472,317 542,653 99,260
Less: Elimination (7,885) (7,885)
Entries(19)...........
------- -------- -------- -------
Combined total.......... $70,336 $464,432 $534,768 $99,260
======= ======== ======== =======
</TABLE>
F-19
<PAGE> 83
DREVER PARTNERS, INC. AND AFFILIATES
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(IN THOUSANDS)
(1) Depreciation is computed on a straight-line basis over the estimated useful
lives of the related assets which are 30 years for buildings and 5, 10 or
15 years for personal property
(2) Owned by Apartment Opportunity Fund, L.P.
(3) Owned by Apartment Opportunity Fund II, L.P.
(4) Owned by DMH 90 Properties
(5) Owned by Houston Portfolio Joint Venture, Village Portfolio Joint Venture
and Fullerton Portfolio Joint Venture
(6) Owned by Houston Portfolio Joint Venture, Village Portfolio Joint Venture,
Tassajara Partners, and M/J Drever
(7) Owned by Houston Portfolio Joint Venture
(8) Owned by Houston Portfolio Joint Venture and Houston Portfolio Joint
Venture II
(9) Owned by Houston Portfolio Joint Venture II
(10) Owned by Drever/Monticello Investors, L.P.
(11) Owned by Cornerstone Associates, L.P.
(12) Owned by Dallas/La Prada Investors, L.P.
(13) Owned by Lake Tranquility Investors, L.P.
(14) Owned by Camden Oaks Joint Venture
(15) Owned by Texas Portfolio Joint Venture
(16) Owned by Westfield Partners, L.P.
(17) Owned by Colorado Club Partners
(18) Owned by Houston Portfolio Joint Venture B
(19) Represents Drever Construction Corporation profit margin capitalized to
building
F-20
<PAGE> 84
APPENDIX
Investment Banking
Corporate and Institutional
Client Group
World Financial Center
North Tower
[MERRILL LYNCH LOGO] New York, New York 10281-1330
212 449 1000
May 21, 1997
Board of Directors
Walden Residential Properties
One Lincoln Centre
5400 LBJ Freeway
Suite 400, LB 45
Dallas, TX 75240
Members of the Board of Directors:
Walden Residential Properties, Inc. (together with its
subsidiaries, the "Company") and WDN Properties, Inc., a direct wholly owned
subsidiary of the Company ("WDN") are parties to the Limited Partnership
Agreement of Walden/Drever Operating Partnership, L.P. and propose to enter
into an Amended and Restated Limited Partnership Agreement of Walden/Drever
Operating Partnership, L.P. (the "Partnership Agreement"), with various other
persons specified therein pursuant to which, subject to the terms and
conditions thereof, (i) the Company and WDN will contribute approximately
$85,000,000 in cash to Walden/Drever Operating Partnership, L.P. ("WDOP") and
(ii) the Company will agree to exchange (A) one share of common stock, par
value $.0l per share, of the Company (each, a "Company Share") for each Class B
Common Unit of WDOP (each, a "Common Unit") and (B) one share of redeemable
preferred stock, liquidation preference $25.00 per share, of the Company (each,
a "Company Preferred Share") and 3 detachable warrants exercisable at $26.88
for one third of a Company Share (each, a "Company Warrant") for each Class B
Preferred Unit of WDOP.
The Company also proposes to enter into a Contribution
Agreement (the "Contribution Agreement"), among (i) the Company, (ii) WDOP,
(iii) each of the shareholders of Drever Partners, Inc., AOF, Inc. and AOF II,
Inc. (the "Drever Shareholders"), (iv) each of the equity participants in
Drever Partners, Inc. (the "Drever Equity Participants") and (v) each assignee
of an equity participation in a general partner interest in a Drever
Partnership (as defined below) (the "Drever Assignees"), pursuant to which the
Drever Shareholders, the Drever Equity Participants and the Drever Assignees
will contribute, transfer and assign all of the issued and outstanding shares
of capital stock in Drever Partners, Inc., AOF, Inc. and AOF II, Inc. and the
Equity Rights (as defined therein) in consideration for Common Units,
Preferred Units and/or cash (collectively, such consideration, the
"Contribution Consideration") and WDOP will thereby acquire general partnership
interests in AOF Newgen, L.P., Apartment Opportunity Fund, L.P., Apartment
Opportunity Fund II, L.P. and the various partnerships the general partner of
which is the Drever Partners, Inc., (all of the foregoing partnerships, the
"Drever Partnerships"), all as set forth in the Contribution Agreement.
Additionally, the Company, WDOP, Drever Partners, Inc., AOF
II, Inc. and AOF, Inc. propose to enter into an Exchange Agreement (the
"Exchange Agreement"), pursuant to which WDOP will acquire the limited
partnership interests in the Drever Partnerships in exchange for Common Units,
Preferred Units and/or cash (collectively, such consideration, the "Exchange
Consideration").
Collectively, the transactions contemplated by the Partnership
Agreement, the Contribution Agreement and the Exchange Agreement are referred
to herein as the "Transaction"; the Drever
<PAGE> 85
Partnerships together with each of their general partners are referred to
herein as "Drever"; and the sum of the aggregate Contribution Consideration and
the aggregate Exchange Consideration is referred to herein as the
"Consideration". The Exchange Agreement and the Contribution Agreement provide
that the maximum Consideration to be issued in the Transaction will be (A)
10,322,580 Company Shares, (B) 2,000,000 Company Preferred Shares and (C)
6,700,000 Company Warrants.
You have asked us whether, in our opinion, the Consideration
to be paid by the Company pursuant to the Transaction is fair from a financial
point of view to the Company.
In arriving at the opinion set forth below, we have, among
other things:
(1) Reviewed certain publicly available and non-public
business and financial information relating to the
Company and Drever which we deemed to be relevant;
(2) Reviewed certain information, including financial
forecasts, relating to the business, earnings, cash
flow, assets, liabilities and prospects of Drever and
the Company, as well as the amount and timing of the
revenue enhancements and cost savings and related
expenses and synergies expected to result from the
Transaction (the "Expected Synergies") furnished to
us by the Company;
(3) Conducted discussions with members of senior
management and representatives of Drever and the
Company concerning the matters described in clauses 1
and 2 above, as well as their respective businesses
and prospects before and after giving effect to the
Transaction, and the Expected Synergies;
(4) Reviewed the results of operations of Drever and the
Company and compared them with those of certain
publicly traded companies that we deemed to be
relevant;
(5) Reviewed the market prices and valuation multiples of
the Company Shares and compared them with certain
publicly traded companies that we deemed to be
relevant;
(6) Compared the proposed financial terms of the
Transaction with the financial terms of certain other
mergers and acquisitions which we deemed to be
relevant;
(7) Reviewed the potential pro forma impact of the
Transaction;
(8) Reviewed a draft of the Partnership Agreement,
Contribution Agreement and Exchange Agreement
(collectively, the "Agreements"); and
(9) Reviewed such other financial studies and analyses
and took into account such other matters as we deemed
necessary, including our assessment of general
economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the
accuracy and completeness of all information supplied or otherwise made
available to us, discussed with or reviewed by or for us, or publicly
available, and we have not assumed any responsibility for independently
verifying such information or undertaken an independent evaluation or appraisal
of any of the assets or liabilities (contingent or otherwise) of Drever or the
Company. In addition, we have not assumed any obligation to conduct any
physical inspection of the properties or facilities of Drever or the Company.
With respect to the financial forecast information and the Expected Synergies
furnished to or discussed with us by Drever or the Company, we have assumed
that they have been reasonably prepared and reflect the best currently
available estimates and judgment of the Company's and Drever's management as to
the expected future
<PAGE> 86
financial performance of Drever and the Company. We have also assumed that the
final forms of the Agreements will be substantially similar to the drafts
reviewed by us.
Our opinion is necessarily based upon market, economic and
other conditions as they exist and can be evaluated on, and on the information
made available to us as of, the date hereof. We have assumed that in the course
of obtaining the necessary regulatory or other consents or approvals
(contractual or otherwise) for the Transaction, no restrictions, including any
divestiture requirements or amendments or modifications, will be imposed that
will have a material adverse effect on the contemplated benefits of the
Transaction. We have also assumed that the Transaction will not change the Real
Estate Investment Trust ("REIT") status of the pro forma entity.
We are providing a fairness opinion to the Company in
connection with the Transaction and will receive a fee from the Company for our
services. In addition, the Company has agreed to indemnify us for certain
liabilities arising out of our engagement. We may provide financial advisory
and financing services to the Company, and may receive fees for the rendering
of such services. In addition, in the ordinary course of our business, we may
actively trade the securities of the Company for our own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
This opinion is for the use and benefit of the Board of
Directors of the Company. Our opinion does not address the merits of the
underlying decision by the Company to engage in the Transaction and does not
constitute a recommendation to any shareholders of the Company as to how such
shareholder should vote on the proposed Transaction. We are not expressing any
opinion herein as to the prices at which the Company Shares will trade
following the announcement or consummation of the Transaction.
On the basis of, and subject to the foregoing, we are of the
opinion that, as of the date hereof, the Consideration to be paid by the
Company pursuant to the Transaction is fair from a financial point of view to
the Company.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By /s/ [ILLEGIBLE]
----------------------------------
Director
Investment Banking Group
<PAGE> 87
1282-PS-SM97
<PAGE> 88
- --------------------------------------------------------------------------------
REVOCABLE PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
OF WALDEN RESIDENTIAL PROPERTIES, INC.
The undersigned hereby appoint(s) Don R. Daseke and Mark S. Dillinger, or
either of them, with full power of substitution and resubstitution, proxies of
the undersigned, with all of the powers that the undersigned would possess if
personally present, to cast all votes which the undersigned would be entitled to
cast at the Special Meeting of Stockholders (the "Special Meeting") of Walden
Residential Properties, Inc. (the "Company") to be held on [Monday], [September
29] 1997, commencing at [10:00] a.m., at [The Dallas Parkway Hilton, 4801 LBJ
Freeway, Dallas, Texas] and any and all adjournments thereof, including (without
limiting the generality of the foregoing) to vote and act as follows:
1. Proposal to issue up to 12,544,802 shares of Common Stock of the Company
pursuant to the Transaction.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Proposal to amend Walden Residential Properties, Inc. Amended and Restated
1994 Stock Option Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Special Meeting. THIS PROXY WILL BE
VOTED AT THE SPECIAL MEETING OR ANY ADJOURNMENT THEREOF IN ACCORDANCE WITH THE
INSTRUCTIONS SET FORTH ABOVE OR, IN THE EVENT NO INSTRUCTIONS ARE SET FORTH,
THIS PROXY WILL BE VOTED FOR EACH OF PROPOSAL 1 AND PROPOSAL 2. This proxy
hereby revokes all prior proxies given with respect to the shares of the
undersigned.
- --------------------------------------------------------------------------------
<PAGE> 89
- --------------------------------------------------------------------------------
Your Board of Directors unanimously recommends that you vote FOR each of
Proposal 1 and Proposal 2. Accordingly, please complete, sign, date this Proxy,
and return it in the enclosed return envelope. No postage is required for
mailing in the United States.
Date: , 1997
------------------------------
Signature(s)
------------------------------
Signature(s)
IMPORTANT: Please date this
proxy and sign exactly as your
name appears to the left. If
shares are held by joint
tenants, both should sign.
When signing as attorney,
executor, administrator,
trustee or guardian, please
give title as such. If a
corporation, please sign in
full corporate name by
president or other authorized
officer. If a partnership,
please sign in partnership
name by authorized person.
- --------------------------------------------------------------------------------
