<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 24, 1998
REGISTRATION NO. 333-65341
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
WALDEN RESIDENTIAL PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
5080 SPECTRUM DRIVE
SUITE 1000 EAST
ADDISON, TEXAS 75001-6410
(972) 788-0510
MARYLAND (Address, including zip code, and telephone number, 75-2506197
(State or other jurisdiction of including area code, of Registrant's Principal Executive (I.R.S. Employer
incorporation or organization) Offices) Identification No.)
</TABLE>
------------------------
MICHAEL E. MASTERSON
CHAIRMAN OF THE BOARD OF DIRECTORS
WALDEN RESIDENTIAL PROPERTIES, INC.
5080 SPECTRUM DRIVE
SUITE 1000 EAST
ADDISON, TEXAS 75001-6410
(972) 788-0510
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
KENNETH L. BETTS, ESQ.
WINSTEAD SECHREST & MINICK P.C.
1201 ELM STREET, SUITE 5400
DALLAS, TEXAS 75270
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to time
following the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share............................... 13,409,750(1) Not Applicable $319,831,876(2) $ 94,016
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9.00% Redeemable Preferred Stock, par
value $.01 per share.................. 1,999,909 Not Applicable $ 54,997,498(3) $ 16,224
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Series B Warrants..................... 6,666,363 Not Applicable (4) (4)
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Total....................... Not Applicable $355,090,031 $110,240(5)
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</TABLE>
(1) Includes 2,222,121 shares of Common Stock, par value $.01 per share,
issuable upon exercise of the Series B Warrants.
(2) Estimated pursuant to Rule 457(f) under the Securities Act based upon (i)
the book value of the Common OP Units to be received by the Company in
exchange for the issuance of 11,187,629 shares of Common Stock, and (ii) the
exercise price for each share of Common Stock issuable upon exercise of the
Series B Warrants.
(3) Estimated pursuant to Rule 457(f) under the Securities Act based upon the
book value of the Preferred OP Units to be received by the Company in
exchange for the issuance of 1,999,909 shares of 9.00% Redeemable Preferred
Stock and 6,666,363 Series B Warrants.
(4) Included as part of the value of the 9.00% Redeemable Preferred Stock;
issuable in conjunction with the 9.00% Redeemable Preferred Stock upon
exchange of Preferred OP Units.
(5) $104,752 previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED NOVEMBER 24, 1998
PROSPECTUS
WALDEN RESIDENTIAL PROPERTIES, INC.
COMMON STOCK, 9.00% REDEEMABLE PREFERRED STOCK AND SERIES B WARRANTS
------------------------
We are a Dallas, Texas-based real estate investment trust focused on middle
income multifamily properties located primarily in selected Southwestern and
Southeastern metropolitan areas.
This prospectus relates to the possible exchange by you of your common and
preferred units of Walden/Drever Operating Partnership, L.P. for up to an
aggregate of:
- 13,409,750 shares of our common stock
- 1,999,909 shares of our 9.00% redeemable preferred stock, and
- 6,666,363 of our series B warrants which are each exercisable for
one-third of one share of our common stock.
We will not receive any proceeds from the issuance of any of our securities in
connection with the exchange of your common or preferred units.
Our common stock is listed on the New York Stock Exchange under the symbol "WDN"
and our redeemable preferred stock has been approved for listing on the NYSE
subject to official notice of issuance. On November 23, 1998, the closing sales
price of our common stock was $21.375 per share.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE SECURITIES OFFERED HEREBY OR
DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS NOVEMBER 24, 1998.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY................... 4
The Company........................ 4
Exchange of Units.................. 4
Risk Factors....................... 4
Distributions Policy............... 5
Ratio of Earnings to Combined Fixed
Charges and Preferred
Distributions................... 5
Summary Consolidated Financial and
Operating Information........... 6
RISK FACTORS......................... 8
Exchange of Units is Taxable....... 8
Concentration of Properties in
Texas........................... 8
Borrowing Risks.................... 8
Development Risks.................. 11
Real Estate Investment
Considerations.................. 11
No Restriction on Changes in
Investment and Financing
Policies........................ 12
Certain Antitakeover Provisions;
Ownership Limits................ 12
Adverse Consequences of Failure to
Qualify as a REIT............... 13
Possible Environmental
Liabilities..................... 14
Costs of Compliance with Americans
with Disabilities Act and
Similar Laws.................... 15
Year 2000.......................... 15
Risks Associated with
Forward-Looking Statements
Included in this Prospectus..... 15
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED
DISTRIBUTIONS...................... 16
THE COMPANY.......................... 17
General............................ 17
Business Strategies................ 18
Property Management................ 19
PRICE RANGE OF COMMON STOCK.......... 20
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DISTRIBUTIONS POLICY................. 21
SELECTED FINANCIAL DATA.............. 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...................... 27
Overview........................... 27
Results of Operations.............. 27
Liquidity and Capital Resources.... 33
Funds from Operations.............. 39
Inflation.......................... 41
New Accounting Standards........... 41
Year 2000 Conversion............... 42
BUSINESS AND PROPERTIES.............. 44
The Properties..................... 44
Employees.......................... 58
Legal Proceedings.................. 58
Regulation......................... 58
Environmental Matters.............. 59
Insurance.......................... 61
Available Information.............. 62
POLICIES WITH RESPECT TO CERTAIN
ACTIVITIES......................... 62
MANAGEMENT........................... 65
Executive Officers................. 65
Independent Directors.............. 67
Classification of the Board........ 68
Committees of the Board............ 68
Compensation of Directors.......... 69
Compensation Committee Interlocks
and Insider Participation....... 69
Executive Compensation............. 70
Option Grants...................... 71
Option Exercises and Year-End
Option Values................... 72
Employment Agreements.............. 72
</TABLE>
2
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PRINCIPAL STOCKHOLDERS............... 74
Security Ownership of Certain
Beneficial Owners............... 74
Security Ownership of Management... 75
DESCRIPTION OF COMMON STOCK.......... 77
Dividend and Distribution Rights... 77
Voting Rights...................... 77
Restrictions on Transfer........... 78
DESCRIPTION OF REDEEMABLE PREFERRED
STOCK.............................. 80
General Rights and Restrictions.... 80
Relative Rank in Liquidation or
Distribution.................... 80
Dividends.......................... 81
Redemption......................... 81
Liquidation Preference............. 81
Voting Rights...................... 81
Restrictions on Ownership.......... 82
DESCRIPTION OF SERIES B WARRANTS..... 82
General............................ 82
Exercise of Series B Warrants...... 82
Amendments and Supplements to
Series B Warrant Agreement...... 83
Adjustments........................ 83
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE COMPANY'S ARTICLES AND
BYLAWS............................. 85
Classification of the Board of
Directors....................... 85
Limitation of Liability and
Indemnification................. 85
Business Combinations.............. 86
Control Share Acquisitions......... 87
Amendment to the Articles.......... 88
Dissolution........................ 88
Advance Notice of Director
Nominations and New Business.... 88
Meetings of Stockholders........... 88
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
FEDERAL INCOME TAX CONSIDERATIONS.... 89
General............................ 89
REIT Qualification................. 90
Taxation as a REIT................. 94
Failure to Qualify as a REIT....... 95
Taxation of Stockholders........... 95
Backup Withholding................. 96
Taxation of Tax Exempt Entities.... 97
Taxation of Foreign Investors...... 98
State and Local Taxes.............. 100
ERISA CONSIDERATIONS................. 100
INFORMATION REGARDING WALDEN/DREVER
OPERATING PARTNERSHIP, L.P......... 102
General............................ 102
The WDOP Partnership Agreement..... 102
Tax Allocations.................... 103
Policies of WDOP................... 107
Real Estate........................ 107
Tax Treatment of WDOP.............. 107
Special Allocations of Partnership
Tax Items....................... 108
Loss Limitations................... 108
WDOP Partnership Interests......... 110
EXCHANGE OF UNITS.................... 111
Procedure to Exchange Units........ 111
General............................ 111
Delivery of Exchange Notice and
Certificates.................... 112
Lost or Missing Certificates....... 113
TAX CONSEQUENCES OF EXCHANGING
UNITS.............................. 113
General............................ 113
Tax Consequences of Exchange....... 113
LEGAL MATTERS........................ 115
EXPERTS.............................. 115
</TABLE>
3
<PAGE> 5
SUMMARY
The following information supplements, and should be read in conjunction with,
the information contained in this prospectus.
THE COMPANY
We are a Dallas, Texas-based real estate investment trust. As a real estate
investment trust, we are generally not subject to federal income tax. We are,
however, subject to a number of organizational and operational requirements and
limitations.
We focus on middle income multifamily properties located primarily in selected
Southwestern and Southeastern metropolitan areas. As of October 31, 1998, we
owned and operated 155 multifamily properties containing 42,432 apartment units.
Approximately 92% of our properties are located in Texas, Florida, Arizona,
Oklahoma, Tennessee, Georgia, Utah and California markets. The geographic
distribution of our properties reflects our belief that diversification will
lessen the impact of local and regional economic fluctuations on our business.
At the same time, we also seek to create concentrations of properties to allow
us to achieve economies of scale in our property management operations.
Our properties were built between 1967 and 1998 and are generally comprised of
two- and three-story buildings in landscaped settings. Our properties generally
include such attractive amenities as a clubhouse, swimming pools, laundry
facilities and cable television access. We do not utilize any third parties to
perform management functions related to our properties.
We are located at 5080 Spectrum Drive, Suite 1000 East, Addison, Texas
75001-6410 and our telephone number is (972) 788-0510.
EXCHANGE OF UNITS
This prospectus relates to the issuance of our common stock, preferred stock and
warrants from time to time when the holders of partnership units in Walden/
Drever Operating Partnership elect to exchange such units. Each common unit may
be exchanged for one share of our common stock. Each preferred unit may be
exchanged for one share of our redeemable preferred stock and three and one-
third series B warrants.
For a more complete description of the securities for which you may exchange
your partnership units see "Description of Common Stock," "Description of
Redeemable Preferred Stock" and "Description of Series B Warrants."
We will not receive any cash proceeds from the exchange. For a more detailed
description of how to exchange your partnership units, see "Procedures to
Exchange Units." We will pay all expenses incident to the issuance of our common
stock, preferred stock and warrants. See "Plan of Distribution," "Procedure to
Exchange Units," "Tax Consequences of Exchanging Units" and "Federal Income Tax
Considerations."
RISK FACTORS
An investment in our securities involves a number of risks. We urge you to
carefully consider the matters discussed under "Risk Factors" beginning on page
8 before exchanging your Units. Such risks include, among others:
- - Tax Consequences of Exchange. In general, if you exchange your Units, the
exchange will be treated as a sale of the
4
<PAGE> 6
Unit. As such, you will be attributed gain or loss from the "sale" of your
Units.
- - Concentration of Properties in Texas. Approximately 68% of our apartment units
are located in Texas, with 30% located in the Houston metropolitan area and
26% in the Dallas/Fort Worth metropolitan area. An economic decline in the
Texas markets, and specifically in Houston and Dallas/Fort Worth, could
adversely affect our financial condition.
- - Current Inability to Borrow Additional Funds. Existing covenants in our loan
documents currently severely restrict our ability to borrow additional funds
for working capital purposes and, if necessary, to make distributions to our
stockholders.
- - Leverage. As our leverage increases, or as interest rates rise, income
available for distributions will be reduced.
- - Development Risks. We have recently entered into agreements with developers to
construct apartment communities. As a result we will now be subject to risks
associated with real estate development.
- - Adverse Consequences of Failure to Qualify as a REIT. If we were to fail to
qualify as a real estate investment trust, we would be subject to taxation as
a corporation at regular corporate rates.
- - Possible Environmental Liabilities. As an owner and operator of real property,
we may be liable for the costs of removal or remediation of certain hazardous
substances released on or in our properties and we may be subject to
third-party lawsuits related to environmental contamination.
DISTRIBUTIONS POLICY
We have made distributions in accordance with federal income tax rules
applicable to real estate investment trusts. We intend to continue to pay
regular quarterly distributions to our stockholders.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DISTRIBUTIONS
Our ratio of combined fixed charges and preferred distributions to earnings were
as indicated below for the specified periods:
<TABLE>
<CAPTION>
PERIOD ENDED RATIO
- ------------ -----
<S> <C>
September 30, 1998............ 1.33x
December 31, 1997............. 1.25x
December 31, 1996............. 1.59x
December 31, 1995............. 1.52x
December 31, 1994............. 1.68x
December 31, 1993............. 0.63x
</TABLE>
The ratios for the period January 1, 1994 through February 8, 1994 and the year
ended December 31, 1993 are based on the results of our predecessors.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL
AND OPERATING INFORMATION
The following table sets forth our selected financial data and should be read in
conjunction with our financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus. The summary financial data
below provides information about our financial history and may not be indicative
of future operating results. The data for the years ended December 31, 1997,
1996 and 1995 has been derived from audited financial statements. The data for
the nine months ended September 30, 1998 and 1997 has been derived from
unaudited financial statements. In the opinion of management, the operating data
for the nine months ended September 30, 1998 and 1997 include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the information set forth herein. The results of interim periods are not
necessarily indicative of results for the full year and our consolidated
historical operating results may not be indicative of future operating results.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------- --------------------------------
1998 1997 1997 1996 1995
---------- -------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND PROPERTY DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues
Rental and other property income........... $ 208,500 $103,267 $ 169,537 $109,475 $ 81,559
Other revenue.............................. 1,227 1,273 1,598 1,696 1,265
---------- -------- ---------- -------- --------
Total revenues....................... 209,727 104,540 171,135 111,171 82,824
---------- -------- ---------- -------- --------
Expenses
Operating expenses......................... 90,121 44,264 73,288 47,560 36,085
General and administrative................. 8,760 5,117 7,734 5,124 3,811
Interest................................... 40,536 15,764 28,447 20,573 17,111
Depreciation............................... 43,599 20,192 33,841 19,810 15,734
Amortization............................... 768 612 827 916 900
Unusual charge............................. -- -- 1,940 -- --
---------- -------- ---------- -------- --------
Total expenses....................... 183,784 85,949 146,077 93,983 73,641
---------- -------- ---------- -------- --------
Operating income............................. 25,943 18,591 25,058 17,188 9,183
Gain on disposition of real property......... 6,696 -- 2,055 1,934 1,502
Extraordinary loss on debt extinguishment.... (104) -- (422) (1,848) (1,352)
Income allocated to minority interests....... (11,137) (1,197) (4,109) (1,705) (922)
Preferred distributions...................... (9,841) (9,906) (13,186) (2,387) --
---------- -------- ---------- -------- --------
Net income available to common
stockholders............................... $ 11,557 $ 7,488 $ 9,396 $ 13,182 $ 8,411
========== ======== ========== ======== ========
Net income per share: Basic.................. $ 0.63 $ 0.43 $ 0.53 $ 0.90 $ 0.69
Distributions per share...................... $ 1.4475 $ 1.4475 $ 1.93 $ 1.86 $ 1.82
Weighted average shares outstanding: Basic... 18,281 17,468 17,590 14,720 12,155
OTHER DATA
Net operating income(1)...................... $ 118,379 $ 59,003 $ 96,249 $ 61,915 $ 45,474
</TABLE>
6
<PAGE> 8
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------- --------------------------------
1998 1997 1997 1996 1995
---------- -------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND PROPERTY DATA)
<S> <C> <C> <C> <C> <C>
PROPERTY DATA
Total properties (at period end)............. 155 75 154 68 55
Total units (at period end).................. 42,432 23,420 42,482 21,407 17,205
Total units (weighted average)............... 42,742 22,527 27,346 18,430 14,601
BALANCE SHEET DATA
Real estate assets (at cost)................. $1,532,085 N/A $1,507,613 $683,515 $513,341
Total assets................................. $1,497,791 N/A $1,469,472 $689,714 $510,548
Mortgages notes payable...................... $ 468,131 N/A $ 428,354 $258,908 $252,515
Unsecured credit facility and term loan...... $ 291,500 N/A $ 274,000 -- $ 6,500
Total stockholders' equity including minority
interests.................................. $ 690,633 N/A $ 717,131 $411,421 $235,127
</TABLE>
- -------------------------
(1) Rental and other property income less operating expenses.
7
<PAGE> 9
RISK FACTORS
An investment in our securities involves various risks. You should carefully
consider the following information, in conjunction with the other information
contained in this Prospectus, before making a decision to exchange your units.
EXCHANGE OF UNITS IS TAXABLE
If you decide to exchange your units, the exchange will be treated as a sale of
your units for Federal tax purposes. As a result, you will realize, for Federal
tax purposes, an amount equal to the fair market value of the securities you
receive, plus the amount of any Walden/Drever Operating Partnership L.P.
liabilities allocable to your units. You will recognize gain or loss equal to
the difference between the amount realized for Federal income tax purposes and
the sum of (1) your adjusted tax basis in your exchanged units and (2) the tax
basis of your right to exchange. It is possible that the amount of gain you
recognize or your resulting tax liability could exceed the value of our
securities you receive. See "Tax Consequences of Exchanging Units."
CONCENTRATION OF PROPERTIES IN TEXAS
As of October 31, 1998, 112 of our 155 apartment properties, containing
approximately 68.40% of our apartment units, were located in Texas.
Approximately 29.60% of our apartment units were located in the Houston
metropolitan area and approximately 25.65% of our apartment units were located
in the Dallas/Fort Worth metropolitan area. Our performance is, therefore,
largely dependent upon economic conditions in Texas generally and, specifically,
in the Houston and Dallas/Fort Worth metropolitan areas. An economic decline in
these areas may adversely affect our ability to make expected distributions to
our stockholders.
BORROWING RISKS
NO CHARTER LIMITATION ON BORROWINGS
Our organizational documents do not limit the amount of indebtedness we may
incur. However, we have established a 50% debt-to-total-market capitalization
policy which limits our ability to obtain additional debt. Nevertheless, our
Board of Directors could revise this policy, without the prior approval of the
stockholders, and permit us to substantially increase our leverage.
As of October 31, 1998, our debt-to-total-market capitalization ratio was
approximately 46.8%, leaving us the ability to borrow approximately $104.6
million and still maintain our 50% debt-to-total-market capitalization policy.
8
<PAGE> 10
CURRENT INABILITY TO BORROW ADDITIONAL FUNDS
Our unsecured credit facility and term loan agreements require us to maintain
the following financial ratios, which limit our ability to obtain additional
debt:
<TABLE>
<CAPTION>
OUR RATIO AS OF
FINANCIAL RATIO COVENANTS SEPTEMBER 30, 1998
------------------------- ------------------
<S> <C>
- - a ratio not to exceed 0.55 to 1 of our total
liabilities (including contingent liabilities) to
total undepreciated assets........................... 0.53
- - a ratio of operating income plus depreciation,
amortization and interest expense to interest expense
and principal payments of not less than 2.0 to 1.0... 2.0
- - a ratio of operating income plus depreciation,
amortization, interest expense and senior preferred
dividends to interest expense plus principal
payments, a capital improvement reserve and preferred
dividends of not less than 1.25 to 1.0............... 1.61
</TABLE>
As a result, we are limited in our ability to borrow additional funds for
working capital purposes and to pay distributions to our stockholders. However,
as of September 30, 1998 we could borrow up to approximately $44 million under
our credit facility to buy additional properties.
Additionally, as of September 30, 1998, we had approximately $306 million of
balloon payments becoming due during the remainder of 1998 and 1999. We are in
the process of refinancing this debt and may incur additional debt secured by
individual properties or groups of properties or conduct unsecured public or
private debt offerings. We may not be able to refinance our debt or refinance
such debt on acceptable terms. If we are not able to refinance our debt on
acceptable terms, we could be required to dispose of certain properties on
unfavorable terms. This could result in losses and could adversely affect our
ability to make distributions to our stockholders.
EFFECT OF LEVERAGE ON PAYMENT OF DISTRIBUTIONS
For the nine months ended September 30, 1998, we had a ratio of earnings to
fixed charges and preferred stock distributions of 1.33 to one with $73.9
million of earnings and $55.7 million of fixed charges and preferred
distributions. As we increase our leverage, or interest rates increase, the
interest component of our fixed charges ratio will increase, thereby reducing
the income available for making distributions.
RESTRICTIVE DEBT COVENANTS
The agreements which govern our debt, including our unsecured credit facility
and term loan, contain covenants which restrict our ability, and the ability of
our subsidiaries to engage in the following activities:
- incurring additional debt;
- making investments in or engaging in transactions with stockholders and
affiliates;
- incurring liens;
- creating restrictions on the ability of certain subsidiaries to pay
dividends or make certain payments to us;
- merging or consolidating with any other entity; or
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<PAGE> 11
- selling, assigning, transferring, leasing or otherwise disposing of all
or substantially all of our assets.
Our credit facility and term loan agreements require us to maintain financial
ratios as previously discussed. We may not be able to maintain these ratios and
cannot assure that the covenants described above will not adversely affect our
ability to finance our future operations or capital needs.
In addition, the terms of our debt instruments may limit our ability to engage
in other business activities that may be of interest. The breach of any of the
covenants described above or the inability to maintain the required financial
ratios could result in a default under the credit facility or term loan.
In addition, certain of our debt instruments contain cross-default and/or
cross-acceleration provisions. Therefore, an inability to meet our obligations
with respect to the provisions of one debt agreement could result in a default
under other debt agreements. If we default on our debt, any amounts borrowed,
together with accrued interest, could be declared due and payable. If our
indebtedness were accelerated, we cannot guarantee that our assets would be
sufficient to repay such indebtedness in full.
FORWARD TREASURY RATE LOCK AGREEMENTS
In order to hedge our exposure to interest rate fluctuations on our debt
refinancing, we have entered into three forward treasury rate lock agreements.
Under these agreements, we pay or receive an amount equal to the difference
between the reference yield and the market yield on the date of exercise. The
exercise date may be any date up to the settlement date. Any proceeds or cost
associated with these agreements will be amortized to interest expense over the
terms of the related financing. If, however, we do not obtain new debt
financing, proceeds or cost will be recorded as income or expense in the period
incurred.
As of November 18, 1998, we had a loss position on these forward treasury rate
lock agreements of approximately $26.4 million. Our exposure to additional gains
or losses on these forward treasury rate locks is approximately $1.7 million for
each 10 basis point movement, upward or downward, in the treasury market. Our
current forward treasury rate lock agreements are as follows:
<TABLE>
<CAPTION>
NOTIONAL SETTLEMENT REFERENCE REFERENCE
AMOUNT DATE COUNTERPARTY YIELD TREASURY
-------- ---------- ------------ --------- ---------
(IN THOUSANDS)
<C> <C> <S> <C> <C>
$ 75,000 December 15, 1998 BankBoston 5.64% 4.250% due 11/15/03
25,000 December 15, 1998 BankBoston 5.94% 4.750% due 11/15/08
175,000 December 21, 1998 Salomon Smith Barney 6.54% 4.750% due 11/15/08
--------
$275,000
========
</TABLE>
We anticipate utilizing these forward treasury rate lock agreements in
connection with a $250 million secured financing in December 1998. We anticipate
extending the remaining $25 million forward treasury rate lock and utilizing it
in the first quarter of 1999.
If the interest characteristics of the funding mechanism we use do not match the
interest characteristics of the assets being funded, we sometimes enter into
interest rate swap
10
<PAGE> 12
agreements to offset the interest rate risk associated with these funding
mechanisms. These swap agreements are intended to match the terms of the assets
to the maturity and rollover of the debt by effectively matching a fixed or
floating interest rate with the related revenue stream. In the event we are not
able to match interest characteristics, our interest expense could rise.
We may in the future use derivative financial instruments in furtherance of our
investment objectives. Derivatives are financial contracts whose value depends
on, or is derived from, the underlying asset, reference rate or index.
Derivatives are generally used to earn income or protect against risk, or both.
For example, one party with unwanted risk may agree to pass the risk to another
party who is willing to accept the risk for the opportunity to earn a fee or
premium.
Derivatives are subject to the risk that we may sustain a loss as a result of
the failure of the counterparty to a derivative to comply with the terms of the
derivative contract. Many derivatives have a leverage component. Therefore,
adverse changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. Other risks in using derivatives include the risk of
mispricing or improper valuation of derivatives and the inability of derivatives
to correlate perfectly with underlying assets, rates and indices.
DEVELOPMENT RISKS
We have recently begun establishing joint venture relationships to develop
apartment communities. As of October 31, 1998, we had entered into four
development agreements to construct apartment communities, which we will
purchase upon completion of construction and lease up. As a result, we are now
subject to development risks, including risks of lack of financing, construction
delays, quality of construction, budget overruns and leasing with respect to
these four properties. We will also be subject to similar risks in connection
with any future development property.
REAL ESTATE INVESTMENT CONSIDERATIONS
MARKET ILLIQUIDITY
Real estate investments are relatively illiquid. Such illiquidity will tend to
limit our ability to promptly vary our portfolio in response to changes in
economic or other conditions. In addition, provisions of the Internal Revenue
Code relating to REITs limit our ability to sell properties held for fewer than
four years. This limitation may affect our ability to sell properties without
adversely affecting returns to our stockholders.
OPERATING RISKS
Our apartment properties are subject to all operating risks common to
multifamily properties in general, such as the risk of increased unemployment in
markets where our properties are located, any or all of which might adversely
affect occupancy or rental rates. In addition, increases in operating costs due
to inflation and other factors may not necessarily be offset by increased rents.
Operating apartment properties is also subject to the risk that residents will
be unable or unwilling to pay rent increases. The local rental market may limit
the extent to which rents may be increased to meet increased operating
11
<PAGE> 13
expenses, if any, without decreasing occupancy rates. If our apartment
properties do not generate sufficient revenue to meet operating expenses,
including debt service and capital expenditures, our cash flow and our ability
to make distributions to stockholders may be adversely affected.
AFFORDABLE HOUSING RESTRICTIONS
Fifteen of our apartment properties are subject to restrictions requiring that a
specified percentage of the apartment units in such properties be made available
to persons with lower and moderate incomes. Approximately 70% of the total
number of apartment units in the fifteen affected properties and 9% of the total
number of our apartment units are affected by these restrictions. In addition,
state and local authorities in some cases impose restrictions on the amount of
rent that can be charged. Future enactment of rent control laws or other laws
regulating multifamily properties could adversely impact our operations.
COMPETITION
Our properties compete directly with other multifamily properties and single
family homes that are available for rent in markets in which our properties are
located. Our properties also compete with the new and existing home market for
residents. We generally compete on the basis of location, apartment quality and
rental rates. Such competition could reduce our occupancy levels and rental
revenues, which could adversely affect our operations.
NO RESTRICTION ON CHANGES IN INVESTMENT AND FINANCING POLICIES
Our Board approves our investment and financing policies, including our policies
with respect to growth, debt, capitalization and payment of distributions.
Although the Board has no present intention to amend or waive its current
policies, it could do so at any time, or from time to time, at its discretion
without a vote of our stockholders. A change in these policies could adversely
affect our financial condition or results of operations and could adversely
affect the market price of our securities. See "Policies with Respect to Certain
Activities."
CERTAIN ANTITAKEOVER PROVISIONS; OWNERSHIP LIMITS
OWNERSHIP LIMITS. Our amended and restated Articles of Incorporation contain
restrictions on stock ownership which may discourage third parties from making
acquisition proposals. These same antitakeover provisions may also impede our
stockholders' ability to change our management.
In order to maintain our qualification as a REIT, no more than 50% in value of
our outstanding shares of capital stock may be owned, directly or indirectly, by
five or fewer individuals or entities. As a result, our Articles prohibit
ownership, either directly or indirectly, of more than 9.0% of the shares of
capital stock by any stockholder. This restriction does not apply to Don R.
Daseke, our former Chairman. Our Board may waive this ownership limitation on a
case-by-case basis. As a result, without our Board's approval, no person may
acquire more than 9.0% of our outstanding stock thereby limiting a third-party's
ability to acquire control of us. See "Certain Provisions of Maryland Law and of
the Company's Articles and Bylaws" and "Federal Income Tax Considerations."
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<PAGE> 14
STAGGERED BOARD. Our Board is divided into three classes. The terms of the
first, second and third classes will expire at our annual meeting of
stockholders in 1999, 2000 and 2001, respectively. Directors of each class will
be elected for a three-year term upon the expiration of the current class' term.
The staggered terms for directors may affect our stockholders' ability to effect
a change in control, even if such a change were in their best interest, because
the stockholders will not be able to elect a new majority of the Board in any
single year. See "Certain Provisions of Maryland Law and of the Company's
Articles and Bylaws."
PREFERRED STOCK. Our Articles authorize the Board to issue up to 10 million
shares of preferred stock and to establish the preference and rights of any such
shares. See "Description of Redeemable Preferred Stock." Thus, our Board could
create a new class of preferred stock with voting or other rights senior to any
existing class of stock. These rights could delay or prevent a change in control
even if such a change were in our stockholders' best interest.
RIGHTS PLAN. In March 1998, our Board adopted a Rights Plan providing for the
issuance to all holders of our common stock of rights to acquire one
one-hundredth of a share of preferred stock at a price per share of $70. If
someone acquires more than 15% of our outstanding common stock or attempts to
acquire us without our Board's approval, those rights become exercisable to
acquire shares of our common stock at a 50% discount. The effect of the Rights
Plan is to require all persons interested in acquiring control of us to first
negotiate with our Board before approaching our stockholders.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Qualification as a real estate investment trust, or REIT, involves the
application of highly technical and complex Internal Revenue Code provisions for
which there are limited judicial or administrative interpretations.
Qualification is also subject to various factual matters and circumstances not
entirely within our control. For example, in order to qualify as a REIT, at
least 95% of our gross income in any year must be derived from qualifying
sources and we must make distributions to our stockholders annually aggregating
at least 95% of our taxable income, excluding net capital gains. New
legislation, regulations, administrative interpretations or court decisions
could change the tax laws with respect to qualification as a REIT or the federal
income tax consequences of such qualification.
If we fail to qualify as a REIT for any taxable year, we would be subject to
federal income tax on our taxable income at corporate rates. In addition, we
would generally be disqualified from treatment as a REIT for the four taxable
years following the year of losing our REIT status. Losing our REIT status would
reduce our net earnings available for investment or distribution to our
stockholders because of the additional tax liability. In addition, distributions
to our stockholders would no longer qualify for the dividends paid deduction and
we would no longer be required to make such distributions. To the extent we
would have made distributions in anticipation of qualifying as a REIT, we might
be required to borrow funds or liquidate certain investments in order to pay the
applicable tax.
13
<PAGE> 15
POSSIBLE ENVIRONMENTAL LIABILITIES
LIABILITY FOR HAZARDOUS SUBSTANCES
Various Federal, state and local environmental laws impose responsibilities on
an owner or operator of real estate and subjects such persons to potential
liabilities. Typical provisions of such laws include:
- Responsibility and liability for the costs of removal or remediation of
hazardous substances released on or in real property, generally without
regard to knowledge or responsibility of the presence of the
contaminants.
- Liability for the costs of removal or remediation of hazardous substances
at disposal facilities for persons who arrange for the disposal or
treatment of such substances.
- Potential liability for common law claims by third parties based on
damages and costs of environmental contaminants.
The costs of investigation, remediation or removal of hazardous substances may
be substantial. In addition, the presence of hazardous substances on one of our
apartment properties, or the failure to properly remediate a contaminated
property, could adversely affect our ability to sell or rent the property or to
borrow using the property as collateral.
ASBESTOS-CONTAINING MATERIALS
In addition to general environmental laws, laws and regulations govern the
removal, encapsulation or disturbance of asbestos-containing materials when such
materials are in poor condition or in the event of building remodeling,
renovations or demolition. These laws potentially impose liability for release
of asbestos-containing materials and may permit third parties to sue for
personal injuries associated with such materials.
ENVIRONMENTAL ASSESSMENTS
We have performed "Phase I" environmental assessments on each of our apartment
properties. These assessments revealed elevated lead content in the drinking
water of three of our properties and asbestos-containing materials at 75 of our
properties, some of which is friable, or "easily crumbled," but in good and
manageable condition. We have implemented an operations and maintenance program
which establishes procedures for dealing with the asbestos-containing materials.
The cost from any future disturbance of asbestos-containing materials will
depend on the magnitude of the disturbance and the location of the materials.
Although we do not believe we are required to take action, we are currently
either taking action, or determining the most effective remedial action we can
take, with respect to the elevated lead levels in the water of the three
properties. We anticipate any remedial action will cost, in the aggregate,
between $760,000 and $780,000 and the amount will be capitalized when incurred.
We expect to fund this amount through cash flow from operations.
Except as otherwise described above, we believe our apartment properties are in
compliance in all material respects with the laws regarding hazardous or toxic
substances. We have not been notified, and are not otherwise aware, of any
material noncompliance,
14
<PAGE> 16
liability or claim relating to hazardous or toxic substances on our apartment
properties. We do not believe the matters described above, or compliance with
applicable environmental laws or regulations in general, will have a material
adverse effect on our financial condition, results of operations and cash flows.
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND SIMILAR LAWS
Our apartment properties are required to meet Federal requirements related to
access and use by disabled persons as a result of the Americans with
Disabilities Act of 1990. In addition, a number of additional Federal, state and
local laws may require modifications to our apartment properties, or may
restrict further renovations thereof, with respect to access by disabled
persons. For example, the Fair Housing Amendments Act of 1988 requires apartment
communities first occupied after March 13, 1990 to be accessible to the
handicapped. Noncompliance with any such laws or regulations could result in the
imposition of fines or an award of damages to private litigants.
We have obtained structural reports from outside consultants which indicate
certain modifications need to be made to some of our apartment properties to
bring those properties into full compliance with the Americans with Disabilities
Act. We do not believe the costs of these modifications will have a material
adverse effect on our financial condition, results of operations and cash flows.
However, additional legislation could impose additional financial obligations or
restrictions with respect to access by disabled persons. If required changes
involve greater expenditures than we currently anticipate, or if the changes
must be made on a more accelerated basis, our ability to make expected
distributions could be adversely affected.
YEAR 2000
Many of the world's computer systems currently record years in a two-digit
format. Such computer systems will be unable to properly interpret dates beyond
the year 1999, which could lead to disruptions in our operations (commonly
referred to as the "Year 2000" issue). We have identified three primary
information technology systems which are vulnerable to the Year 2000 issue,
including our general ledger/accounts payable system, our payroll system, and
our on-site accounting system (rent roll activities). We are also currently
examining non-information technology systems which could be affected by the Year
2000.
Although we are currently utilizing internal and external resources to
reprogram, replace and test our systems for Year 2000 compliance, we cannot
guarantee that all of our systems will be Year 2000 compliant or that other
companies on which we rely will be timely converted. As a result, our operations
could be adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000 Conversion."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS
This prospectus contains certain forward-looking statements within the meaning
of federal securities laws which are intended to be covered by the safe harbors
created thereby. These statements include our plans and objectives for future
operations, including plans and objectives relating to future growth and
availability of funds. These forward-looking
15
<PAGE> 17
statements are based on current expectations that involve numerous risks and
uncertainties. Assumptions relating to these statements involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to accurately predict and many of which are beyond our control.
Although we believe the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could be inaccurate and, therefore, there
can be no assurance that these forward-looking statements will prove to be
accurate. In light of the significant uncertainties inherent in these
forward-looking statements, the inclusion of such information should not be
regarded as a representation by us or any other person that our objectives and
plans will be achieved.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED DISTRIBUTIONS(1)
Our ratio of earnings to combined fixed charges and preferred distributions were
as indicated below for the specified periods:
<TABLE>
<CAPTION>
PERIOD ENDED RATIO
- ------------ -----
<S> <C>
September 30, 1998.......................................... 1.33x
December 31, 1997........................................... 1.25x
December 31, 1996........................................... 1.59x
December 31, 1995........................................... 1.52x
December 31, 1994........................................... 1.68x
December 31, 1993........................................... 0.63x
</TABLE>
- ---------------
(1) Includes preferred stock dividends and preferred distributions to minority
interest holders.
The period January 1, 1994 through February 8, 1994 and the year ended December
31, 1993 are based on the results of our predecessor entities.
We had no preferred distribution requirement prior to 1995; therefore, the ratio
of earnings to combined fixed charges and preferred distributions are the same
as the ratio of earnings to fixed charges for such years. Earnings were
calculated by adding fixed charges, consisting of interest on indebtedness and
amortization of financing costs, to our income before extraordinary items. Our
earnings (in thousands) were inadequate to cover fixed charges by $45 and $4,795
for the period from January 1, 1994 to February 8, 1994 and the year ended
December 31, 1993, respectively, all of which were prior to our initial public
offering in February of 1994.
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<PAGE> 18
THE COMPANY
GENERAL
We are a Dallas, Texas-based REIT focused on middle income multifamily
properties located primarily in selected Southwestern and Southeastern
metropolitan areas. We are a Maryland corporation which was formed on September
19, 1993 to continue and expand the multifamily property ownership, management,
acquisition and marketing operations and related business objectives and
strategies of The Walden Group, Inc. and its subsidiaries and affiliates
(collectively, the "Walden Predecessors"). Our duration is perpetual.
We owned and operated 155 multifamily properties as of October 31, 1998,
containing 42,432 apartment units. Our properties had a weighted average
physical occupancy rate of approximately 93.3% for both 1997 and the month of
October 1998.
Since our initial public offering in February 1994, we have acquired 151
properties, containing an aggregate of 39,005 apartment units, for an aggregate
acquisition cost of $1.4 billion. We have sold ten properties containing 2,916
apartment units. In addition, we combined six properties with other properties
we owned in 1997 in order to achieve operating efficiencies. We also acquired
approximately 81 acres of undeveloped land in Nashville, Tennessee which is
adjacent to a property we acquired in December 1996. This undeveloped land is
zoned for an additional 900 apartment units, which affords us the opportunity to
develop future apartment communities.
On October 1, 1997, we acquired the assets and business of Drever Partners, Inc.
and its affiliates, including 18 partnerships of which Drever Partners, Inc. and
certain of its affiliates were the general partners (collectively, "Drever"). In
this transaction we acquired 79 apartment properties consisting of 18,118 units
(the "Drever Properties"), which are included in the 151 properties described
above. As consideration for this acquisition, we paid approximately $95.0
million cash, assumed approximately $286.0 million of mortgage debt, and issued
approximately $303.9 million of operating partnership units of Walden/ Drever
Operating Partnership, L.P. ("WDOP"), a newly formed partnership subsidiary of
ours. We have repaid approximately $119.0 million of the $286.0 million mortgage
debt we assumed with proceeds from an unsecured term loan and our unsecured
credit facility.
The operating partnership units (the "Units") consist of common operating
partnership units ("Common OP Units") and preferred operating partnership units
("Preferred OP Units"). The Units are exchangeable on or after October 1, 1998
into an aggregate of:
- - 11,187,629 shares of our common stock, par value $.01 per share (the "Common
Stock"),
- - 1,999,909 shares of our 9.00% Redeemable Preferred Stock, par value $.01 per
share (the "Redeemable Preferred Stock"), and
- - 6,666,363 Series B Warrants, each of which is exercisable for one-third of one
share of Common Stock at $26.785 per share (the "Series B Warrants" and,
collectively with the Common Stock and Redeemable Preferred Stock, the "Walden
Securities").
The Redeemable Preferred Stock and the Preferred OP Units are redeemable at our
option in ten years at a redemption price of $25 per share or unit.
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<PAGE> 19
BUSINESS STRATEGIES
Our primary business objective is to maximize stockholder value by maintaining
long-term growth in funds from operations for distributions to our stockholders.
To achieve this objective, we focus on maximizing the internal growth of our
expanded portfolio through property management and resident services,
implementation of a property enhancement program and acquisition of garden
apartment properties that have strong cash flow growth potential and are located
in our target markets. With the completion of the Drever combination we have
increased our management depth and expertise in property and asset management
and property redevelopment. Specifically, we intend to implement the following
business strategies:
INCREASED PROPERTY CASH FLOW. We expect the continuing integration of our
operations and Drever's property management operations to produce a level of
service that is successful at resident retention and focused on increasing
occupancy and rental rates. We also anticipate increasing our cash flow by
controlling operating expenses and implementing programs to generate ancillary
income, such as cable, telephone and laundry.
PROPERTY ENHANCEMENT PROGRAM. We have initiated a property enhancement program
to upgrade the physical appearance of substantially all of our properties. This
program generally consists of one of two components. The first component is
limited to unit interior upgrades, such as: replacement of appliances, lighting
and bathroom fixtures and doors, replacement or resurfacing of cabinets and
counter tops, installation of mirrors, ceiling fans, mantels and trim. The
second component is a complete property enhancement, both interior and exterior,
which we refer to as a repositioning. Repositioning programs include unit
interior upgrades, the first component discussed above, as well as interior and
exterior clubhouse renovation, installation of access gates, new exterior
lighting fixtures and signs, landscaping, and building exterior work including
facades and shutters.
We targeted 24 properties for repositioning in 1998, at an estimated cost of
$21.6 million, of which approximately $10.6 million had been spent as of
September 30, 1998. We spent an additional $4.6 million on unit interior
upgrades as of September 30, 1998.
By reinvesting in our properties, we expect to set them apart from
deteriorating, similar aged properties and increase their competitiveness with
newly constructed units that are generally available at considerably higher
rates. These upgrades are expected to yield substantially increased revenue
streams through increased rental rates and resident retention.
ACQUISITIONS. We also seek to increase funds from operations by acquiring
multifamily properties that have prospects for long-term growth and can be
purchased at prices substantially below replacement cost. Following our initial
public offering, we have engaged in an active acquisition program. We currently
focus our acquisition efforts in Southwestern and Southeastern Markets due to
the attractive demographics of these markets and the availability of properties
for sale.
SALE OF PROPERTIES. Through our asset management function, we routinely evaluate
properties to determine that optimal operating results are achieved. In
connection with this evaluation, properties may be targeted for sale once a
determination is made that such properties have achieved their maximum
investment return. In addition, certain properties not located in our core
markets may be targeted for sale.
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<PAGE> 20
NEW DEVELOPMENT. Selective development of new apartment properties in our Target
Markets will become increasingly important to the growth of our portfolio over
the next several years. We will select properties for development that meet an
identified market demand, are well-located in their markets and have an
anticipated total return in excess of that projected for acquisition properties.
PROPERTY MANAGEMENT
We conduct our property management operations with an experienced staff of
professionals and support personnel, including property directors and sales
directors. At October 23, 1998, we employed 1,206 persons, 1,012 of whom are
located at the properties. The depth of the organization is intended to enable
us to deliver quality services on an uninterrupted basis, thereby promoting
resident satisfaction and improving resident retention. Each of our owned or
managed properties is operated by a staff specifically selected based on the
size, location, age, management plan and marketing plan of the individual
property. Personnel are carefully trained in their areas of responsibility by
Senior Vice Presidents and Regional Vice Presidents for management functions and
by senior marketing and construction personnel for property leasing, resident
relations and maintenance.
Our standardized policies and procedures specify reporting requirements and
management guidelines which are to be applied at each property. These policies
and procedures facilitate management consistency in all markets. We use
customized software programs, including an on-site computerized rent roll
system, to provide site, regional and executive management with rapid access to
all marketing and accounting information. Weekly marketing reports are prepared
by on-site property directors which track each property's:
- leasing status,
- occupancy rate,
- prospective resident traffic,
- unit availability,
- lease renewals,
- residents moving in and out of apartments,
- notices by residents to vacate their apartments and delinquent rental
charges or other fees.
Accounting elements such as receivables, payables, rent roll status and budget
compliance are regularly monitored through this system.
Our marketing and leasing activities and procedures are designed to comply with
all established Federal, state and local laws and regulations. We generally
offer leases having six to 12 month terms, with individual property marketing
plans structured to respond to local market conditions. Qualifying standards for
prospective residents are established to comply with the affordable housing
restrictions placed on the properties listed below, the Fair Housing Amendments
Act of 1988 (the "FHA") and the regulations thereunder and are designed to
stabilize service levels and income streams. We have fifteen properties
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<PAGE> 21
which are currently subject to restrictions that require a specified number of
apartments be offered to households with lower or moderate incomes.
We utilize standard lease contracts promulgated by local apartment associations
to ensure compliance with the most recent legislative and judicial activities
related to multifamily properties, as well as to permit uniform lease
administration relating to rent collections, security deposit dispositions,
evictions, repairs and renewals.
PRICE RANGE OF COMMON STOCK
Our Common Stock has traded on the New York Stock Exchange ("NYSE") under the
symbol "WDN" since February 2, 1994, the date on which the Common Stock began
trading. The following table sets forth for the periods indicated the high and
low sales prices per common share as reported on the NYSE and the distributions
we have declared per common share for each such period in 1998, 1997 and 1996:
<TABLE>
<CAPTION>
DISTRIBUTIONS
QUARTER ENDED HIGH LOW PER SHARE
------------- ------- ------- -------------
<S> <C> <C> <C>
March 31, 1998.................................... $27.125 $23.750 $0.4825
June 30, 1998..................................... 26.000 23.813 0.4825
September 30, 1998................................ 23.063 22.750 0.4825
December 31, 1998 (through November 20, 1998)..... 23.938 19.250
March 31, 1997.................................... $26.875 $24.000 $0.4825
June 30, 1997..................................... 25.688 21.250 0.4825
September 30, 1997................................ 25.750 22.750 0.4825
December 31, 1997................................. 26.000 23.500 0.4825
March 31, 1996.................................... $22.125 $20.000 $0.465
June 30, 1996..................................... 21.875 20.250 0.465
September 30, 1996................................ 21.875 19.750 0.465
December 31, 1996................................. 26.000 20.875 0.465
</TABLE>
The closing price of the Common Stock on November 23, 1998 was $21.375. As of
November 23, 1998, the Common Stock was held by 1,576 stockholders of record,
including shares held in nominee or street name by brokers.
The Redeemable Preferred Stock is approved for listing on the NYSE under the
symbol "WDN pd" subject to official notice of issuance. We expect the Series B
Warrants will trade on the NASDAQ OTC system.
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<PAGE> 22
DISTRIBUTIONS POLICY
In accordance with applicable REIT requirements, we have made distributions in
accordance with the Internal Revenue Code. We have paid distributions per share
of Common Stock in the aggregate of $1.86, $1.93, and $1.4475 for the years
ended December 31, 1996 and 1997 and the nine months ended September 30, 1998,
respectively. See "Price Range of Common Stock." We intend to continue to pay
regular quarterly distributions to our stockholders.
Pursuant to a provision of our credit facility, distributions to stockholders
may not exceed 90% of funds from operations. We do not anticipate distributions
to be restricted by this provision.
Future distributions will be at the discretion of our Board of Directors (the
"Board") and will depend upon factors including:
- the gross revenues we receive from our properties,
- our operating expenses,
- our interest expense incurred in borrowing, and
- capital expenditures.
We anticipate distributions will exceed net income determined in accordance with
generally accepted accounting principles due to non-cash expenses, primarily
depreciation and amortization.
Distributions to the extent of our current and accumulated earnings and profits
for federal income tax purposes generally will be taxable to stockholders as
ordinary dividend income, ordinary gain or capital gain. Distributions in excess
of such earnings and profits generally will be treated as a non-taxable
deduction of the stockholder's basis in the shares of Common Stock to the extent
thereof (which may have the effect of deferring taxation until such
stockholder's sale of the shares of Common Stock), and thereafter as taxable
gain.
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<PAGE> 23
SELECTED FINANCIAL DATA
The following tables set forth our selected consolidated financial data and the
combined financial data for 18 of our original properties acquired concurrently
with the closing of our initial public offering and the assets, liabilities and
operations of the Walden Predecessors' operating companies. Our historical
consolidated operating data for the years ended December 31, 1997, 1996 and 1995
and the period from February 9, 1994 (date of commencement of operations) to
December 31, 1994 and the balance sheet data as of December 31, 1997, 1996, 1995
and 1994 and the combined operating data of the Walden Predecessors for the
period January 1, 1994 to February 8, 1994 and the year ended December 31, 1993
and the balance sheet data as of December 31, 1993 have been derived from our
consolidated financial statements and accounting records and the combined
financial statements and accounting records of the Walden Predecessors,
respectively. These financial statements have been audited by independent
auditors.
The data for the nine months ended September 30, 1998 and 1997 has been derived
from unaudited financial statements. In the opinion of management, the operating
data for the nine months ended September 30, 1998 and 1997 include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein. The results of interim periods
are not necessarily indicative of our results for the full year and our
consolidated and combined historical operating results and those of the Walden
Predecessors may not be indicative of future operating results.
You should read the following selected financial information in conjunction with
the discussion set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and all of the financial
statements included elsewhere in this Prospectus. All amounts are in thousands
except per share and property data.
<TABLE>
<CAPTION>
WALDEN RESIDENTIAL PROPERTIES, INC.
---------------------------------------------------------------------
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31, FEBRUARY 9 TO
------------------- ------------------------------- DECEMBER 31,
1998(a) 1997 1997(a) 1996 1995 1994
-------- -------- -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues
Rental income................................ $200,288 $ 99,288 $163,224 $ 105,602 $ 78,469 $ 39,602
Other property income........................ 8,212 3,979 6,313 3,873 3,090 1,493
Interest income.............................. 1,227 1,273 1,598 1,433 856 365
Other income................................. -- -- -- 263 409 533
-------- -------- -------- --------- -------- ---------
Total revenues........................... 209,727 104,540 171,135 111,171 82,824 41,993
Expenses
Property operating and maintenance........... 69,176 34,187 56,483 37,521 28,748 15,607
Real estate taxes............................ 20,945 10,077 16,805 10,039 7,337 3,275
General and administrative................... 8,760 5,117 7,734 5,124 3,811 2,507
Unusual charge -- officer settlement
agreement.................................. -- -- 1,940 -- -- --
Interest expense............................. 40,536 15,764 28,447 20,573 17,111 6,288
Depreciation and amortization................ 44,367 20,804 34,668 20,726 16,634 8,960
-------- -------- -------- --------- -------- ---------
Total expenses........................... 183,784 85,949 146,077 93,983 73,641 36,637
-------- -------- -------- --------- -------- ---------
Operating income............................... 25,943 18,591 25,058 17,188 9,183 5,356
Gain on disposition of real property........... 6,696 -- 2,055 1,934 1,502 --
Extraordinary loss on debt extinguishment...... (104) -- (422) (1,848) (1,352) --
-------- -------- -------- --------- -------- ---------
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
WALDEN RESIDENTIAL PROPERTIES, INC.
---------------------------------------------------------------------
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31, FEBRUARY 9 TO
------------------- ------------------------------- DECEMBER 31,
1998(a) 1997 1997(a) 1996 1995 1994
-------- -------- -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income before income allocated to minority
interests.................................... 32,535 18,591 26,691 17,274 9,333 5,356
Income allocated to minority interests......... (11,137) (1,197) (4,109) (1,705) (922) --
-------- -------- -------- --------- -------- ---------
Net income..................................... 21,398 17,394 22,582 15,569 8,411 5,356
Preferred distributions........................ (9,841) (9,906) (13,186) (2,387) -- --
-------- -------- -------- --------- -------- ---------
Net income available to common stockholders.... $ 11,557 $ 7,488 $ 9,396 $ 13,182 $ 8,411 $ 5,356
======== ======== ======== ========= ======== =========
Basic net income per share..................... $ 0.63 $ 0.43 $ 0.53 $ 0.90 $ 0.69 $ 0.62
======== ======== ======== ========= ======== =========
Diluted net income per share................... $ 0.63 $ 0.43 $ 0.53 $ 0.89 $ 0.69 $ 0.62
======== ======== ======== ========= ======== =========
Distributions per share of common stock........ $ 1.4475 $ 1.4475 $ 1.93 $ 1.86 $ 1.82 $ 1.09
======== ======== ======== ========= ======== =========
Basic weighted average number of common shares
outstanding.................................. 18,281 17,468 17,590 14,720 12,155 8,689
======== ======== ======== ========= ======== =========
PROPERTY DATA
Total properties (at end of period)(b)... 155 75 154 68 55 40
Total units (at end of period)........... 42,432 23,420 42,482 21,407 17,205 12,319
Total units (weighted average)........... 42,742 22,527 27,346 18,430 14,601 9,140
Weighted average monthly property revenue per
unit(c)...................................... $ 542 $ 509 $ 517 $ 495 $ 465 $ 420
OTHER DATA
Funds from operations(d)....................... $ 58,833 $ 31,702 $ 50,233 $ 36,998 $ 24,917 $ 13,945
Cash flows provided by (used in):
Operating activities....................... $ 59,209 $ 32,420 $ 70,822 $ 38,281 $ 31,317 $ 16,420
Investing activities....................... $(35,973) $(78,195) $327,814 $(158,668) $(86,926) $(256,114)
Financing activities....................... $(25,352) $ 20,815 $237,029 $ 143,306 $ 58,121 $ 243,982
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------------------------
1998 1997 1996 1995 1994
------------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Real estate assets (at cost)............................ $1,532,085 $1,507,613 $683,515 $513,341 $329,206
Total assets............................................ 1,497,791 1,469,472 689,714 510,548 334,937
Mortgage notes payable, credit facility and term loan... 759,631 702,354 258,908 259,015 165,439
Minority interests...................................... 313,660 321,916 14,886 18,608 --
Stockholders' equity.................................... 376,973 395,215 396,535 216,519 160,267
</TABLE>
- -------------------------
(a) On October 1, 1997, we acquired Drever. For a discussion of the Drever
transaction, see "The Company."
(b) The number of properties was reduced to 154 as of December 31, 1997, upon
the combination of six properties during 1997 with other properties we
owned to achieve operating efficiencies.
(c) Represents rental income and other property income, divided by weighted
average units, divided by the number of months.
23
<PAGE> 25
(d) The guidelines promulgated by the National Association of Real Estate
Investment Trusts ("NAREIT") and REIT industry standards generally consider
funds from operations ("FFO") to be an appropriate measure of the
performance of an equity REIT. NAREIT currently defines FFO as net income
(loss) (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 and amortization. In
addition, extraordinary or unusual items that are non-recurring events
which would materially distort the comparative measure of FFO are typically
excluded. 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
as an indication of our performance or as an alternative to cash flow as a
measure of liquidity. Our FFO is not necessarily comparable to similar
entitled items reported by other REITs. Our computation of FFO includes
income allocated to minority interests and assumes the conversion of all
convertible securities, including minority interest securities. We believe
our definition of FFO is consistent with the current NAREIT definition of
FFO. We have restated our FFO for the 1995 and 1994 periods to comply with
NAREIT's revised definition of FFO.
24
<PAGE> 26
<TABLE>
<CAPTION>
WALDEN PREDECESSORS
---------------------------
JANUARY 1 TO YEAR ENDED
FEBRUARY 8, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
OPERATING DATA
Revenues
Rental income......................................... $3,047 $27,336
Other property income................................. 134 1,286
Interest income....................................... 37 124
Property management fees.............................. 150 1,266
------ -------
Total revenues................................ 3,368 30,012
Expenses
Property operating and maintenance.................... 1,242 11,398
Real estate taxes..................................... 226 2,159
General and administrative............................ 217 2,263
Interest expense...................................... 1,075 11,456
Amortization and financing costs...................... 20 1,417
Depreciation.......................................... 633 6,114
------ -------
Total expenses................................ 3,413 34,807
------ -------
Net loss(a)............................................. $ (45) $(4,795)
====== =======
PROPERTY DATA
Total properties (at end of period)..................... 18 18
Total units (at end of period).......................... 5,895 5,895
Total units (weighted average).......................... 5,895 5,895
Weighted average monthly property revenue per unit(b)... $ 421 $ 405
OTHER DATA
Funds from operations(c)................................ $ 588 $ 1,370
Cash flows provided by (used in):
Operating activities.................................. $1,858 $ 1,698
Investing activities.................................. $ -- $ (23)
Financing activities.................................. $ (311) $(1,476)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1993
------------
<S> <C> <C>
BALANCE SHEET DATA
Real estate assets..................................... $195,421
Accumulated depreciation and impairment allowance...... (83,026)
Total assets........................................... 121,889
Mortgage notes payable................................. 147,322
Partners' deficit...................................... (33,610)
</TABLE>
25
<PAGE> 27
- -------------------------
(a) Net loss of Walden Predecessors is before income tax benefits and
extraordinary gains.
(b) Represents rental income and other property income, divided by weighted
average units, divided by the number of months.
(c) The guidelines promulgated by NAREIT and REIT industry standards generally
consider FFO to be an appropriate measure of the performance of an equity
REIT. NAREIT currently defines FFO as net income (loss) (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 and amortization. In addition,
extraordinary or unusual items that are non-recurring events which would
materially distort the comparative measure of FFO are typically excluded.
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
as an indication of our performance or as an alternative to cash flow as a
measure of liquidity. Our FFO is not necessarily comparable to similar
entitled items reported by other REITs. Our computation of FFO includes
income allocated to minority interests and assumes the conversion of all
convertible securities, including minority interest securities. We believe
our definition of FFO is consistent with the current NAREIT definition of
FFO. We have restated our FFO for the 1994 and 1993 periods to comply with
NAREIT's revised definition of FFO.
26
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the "Selected
Financial Data" and all of the financial statements and notes thereto included
elsewhere in this Prospectus. Such financial statements and information have
been prepared to reflect our consolidated statements of income for the nine
months ended September 30, 1998 and 1997 and the three years ended December 31,
1997 and our balance sheets as of December 31, 1997 and 1996.
Changes in revenues and expenses related to our properties during 1998, 1997,
1996 and 1995 are primarily the result of property acquisitions. Where
appropriate, comparisons are made on a dollars-per-weighted-average-unit basis
in order to adjust for changes in the number of units owned during each period.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997
The weighted average number of units owned for the nine months ended September
30, 1998, increased by 20,215 units, or 89.7% from 22,527 units for the first
nine months of 1997 to 42,742 units for the first nine months of 1998 as a
result of the acquisition of additional properties. Total units owned at
September 30, 1997 and 1998 were 23,420 and 42,432, respectively. The portfolio
had an average physical occupancy of 92.9% and 93.4% for the first nine months
of 1997 and 1998, respectively.
We owned 62 properties with 20,400 units throughout both periods in 1998 and
1997 ("same store"). A summary of the historical operating performance for "same
store" properties is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997 % CHANGE
------- ------- --------
<S> <C> <C> <C>
Rental and other property revenue (in
thousands).................................... $97,135 $94,298 3.0%
Property operating expenses (in thousands)(1)... 41,555 40,030 3.8%
------- -------
Property operating income (in thousands)........ $55,580 $54,268 2.4%
======= =======
Average physical occupancy...................... 92.3% 92.8% N/A
======= =======
Average monthly revenue per unit................ $ 529 $ 514 3.0%
======= =======
Average annualized property operating and
maintenance expenses per unit................. $ 2,084 $ 2,021 3.1%
======= =======
Average annualized real estate taxes per unit... $ 632 $ 596 6.0%
======= =======
Operating expense ratio......................... 42.8% 42.5% N/A
======= =======
</TABLE>
27
<PAGE> 29
- -------------------------
(1) Consists of property operating and maintenance and real estate tax expenses.
The operating performance of properties not owned throughout periods ended
September 30, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997
-------- ------
<S> <C> <C>
Rental and other property revenue (in thousands)........... $111,365 $8,969
Property operating expenses (in thousands)(1).............. 48,566 4,234
-------- ------
Property operating income (in thousands)................... $ 62,799 $4,735
======== ======
Weighted average number of units........................... 22,342 2,127
======== ======
Average physical occupancy................................. 94.5% 93.0%
======== ======
Average monthly revenue per unit........................... $ 554 $ 469
======== ======
Average annualized property operating and maintenance
expenses per unit........................................ $ 2,225 $2,050
======== ======
Average annualized real estate taxes per unit.............. $ 673 $ 604
======== ======
Operating expense ratio.................................... 43.6% 47.2%
======== ======
</TABLE>
- -------------------------
(1) Consists of property operating and maintenance and real estate tax expenses.
General and administrative expenses increased $3.7 million for the first nine
months of 1998, or 71.2%, from $5.1 million for the first nine months of 1997 to
$8.8 million for the first nine months of 1998. This represents a per unit
decrease of $30, or 9.8%, on an annualized basis. This per unit decrease is
primarily due to increased operating efficiencies. The increase in general and
administrative expenses was primarily due to increased properties owned which
resulted in increased salary costs and occupancy costs for additional corporate
and regional office space.
Interest expense increased $24.7 million for the first nine months of 1998, or
157.1%, from $15.8 million for the first nine months of 1997 to $40.5 million
for the first nine months of 1998. The increase was primarily due to
indebtedness incurred on properties acquired during 1997 and 1998.
Depreciation increased $23.4 million for the first nine months of 1998, or
115.9%, from $20.2 million for the first nine months of 1997 to $43.6 million
for the first nine months of 1998. The increase was due to depreciation on
additional properties acquired and capital improvements on existing properties.
The $104,000 extraordinary loss on debt extinguishment in 1998 was due to
prepayment penalties incurred in connection with our payoff of a $7.2 million
mortgage loan in April 1998, and the write off of unamortized deferred financing
costs related to the refinancing of certain of our indebtedness during the first
and second quarter of 1998.
28
<PAGE> 30
In August 1998 we sold four apartment properties at an aggregate sales price of
approximately $37.6 million, resulting in a gain on sale of approximately $6.7
million.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
The weighted average number of units owned increased by 8,916 in 1997, or 48.4%,
from 18,430 units in 1996 to 27,346 in 1997 as a result of the acquisition of
additional properties. Total units owned at December 31, 1996 and 1997 were
21,407 and 42,482, respectively. The portfolio had a weighted average physical
occupancy of 93.5% for 1996 and 93.3% for 1997.
We owned 51 properties with 15,981 apartment units throughout both calendar
years 1997 and 1996 ("same store"). The operating performance of these "same
store" properties is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1997 1996 % CHANGE
------- ------- --------
<S> <C> <C> <C>
Rental and other property revenue (in
thousands).................................... $97,520 $95,294 2.3%
Property operating expenses (in thousands)(1)... 41,412 41,437 (0.1%)
------- -------
Property operating income (in thousands)........ $56,108 $53,857 4.2%
======= =======
Weighted average physical occupancy............. 92.7% 93.6% N/A
======= =======
Average monthly revenue per unit................ $ 509 $ 497 2.3%
======= =======
Average annual operating and maintenance
expenses per unit............................. $ 2,005 $ 2,041 (1.8%)
======= =======
Average annual real estate taxes per unit....... $ 586 $ 552 6.2%
======= =======
Operating expense ratio......................... 42.5% 43.5% N/A
======= =======
</TABLE>
- -------------------------
(1) Consists of property operating and maintenance and real estate tax expenses.
29
<PAGE> 31
The operating performance of properties not owned throughout both calendar years
1997 (103 properties) and 1996 (17 properties) is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Rental and other property revenue (in thousands)........... $72,017 $14,181
Property operating expenses (in thousands)(1).............. 31,876 6,123
------- -------
Property operating income (in thousands)................... $40,141 $ 8,058
======= =======
Weighted average number of units........................... 11,365 2,449
======= =======
Weighted average physical occupancy........................ 94.1% 92.9%
======= =======
Average monthly revenue per unit........................... $ 528 $ 483
======= =======
Average annual operating and maintenance expenses per
unit..................................................... $ 2,151 $ 2,005
======= =======
Average annual real estate taxes per unit.................. $ 654 $ 495
======= =======
Operating expense ratio.................................... 44.3% 43.2%
======= =======
</TABLE>
- -------------------------
(1) Consists of property operating and maintenance and real estate tax expenses.
Interest income increased $165,000 in 1997, or 11.5%, from $1,433,000 in 1996 to
$1,598,000 in 1997, primarily as the result of increased cash balances during
1997.
The other income of $263,000 in 1996 was primarily attributable to the net
income from WDN Management Company allocated to us. WDN Management Company was
merged into us effective December 31, 1996.
General and administrative expenses increased $2.6 million in 1997, or 51.0%,
from $5.1 million in 1996 to $7.7 million in 1997. This represented a weighted
average increase of $5 per unit, or 1.8%. The increases in general and
administrative expenses were primarily the result of adding corporate personnel,
due to the acquisition of properties during 1997, increased salary costs, higher
professional fees, higher costs related to stockholders (quarterly mailings to
stockholders, transfer services, etc.) and a one-time severance charge relating
to the departure of an executive during the second quarter of 1997.
The $1.9 million unusual charge resulted from a settlement agreement relating to
the resignation of our former Chairman of the Board and Chief Executive Officer
in October 1997.
Interest expense increased $7.8 million in 1997, or 37.9%, from $20.6 million in
1996 to $28.4 million in 1997, due to an increase in weighted average
indebtedness outstanding of approximately $99.3 million associated with the
acquisition of properties and a slight increase in the weighted average interest
rate in 1997 of approximately 0.1%.
Depreciation expense increased $14.0 million in 1997, or 70.7%, from $19.8
million in 1996 to $33.8 million in 1997, due to depreciation on additional
properties acquired and capital
30
<PAGE> 32
improvements on existing properties. This represented a weighted average
increase of $162 per unit, or 15.1%.
The $2.1 million gain on disposition of real property in 1997 related to the
sale of a 392-unit property located in Dallas, Texas on October 2, 1997. We
received total net sales proceeds from the disposition of approximately $4.1
million ($8.7 million sale proceeds less $4.6 million repayment of related
debt), which was used to purchase additional properties.
The $0.4 million extraordinary loss on debt extinguishment in 1997 resulted from
the write-off of unamortized deferred financing costs and prepayment penalties
incurred in connection with the repayment of debt on the property sold in
October 1997.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
The weighted average number of units owned increased by 3,829 units in 1996, or
26.2%, from 14,601 units in 1995 to 18,430 units in 1996 as a result of the
acquisition of additional properties. Total units owned at December 31, 1995 and
1996 were 17,205 and 21,407, respectively. The portfolio had a weighted average
occupancy of 94.5% for both 1995 and 1996.
We owned 36 properties with 11,188 apartment units throughout both calendar
years 1996 and 1995. The operating performance of these properties is summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1995 % CHANGE
------- ------- --------
<S> <C> <C> <C>
Rental and other property revenue (in
thousands).................................... $63,623 $60,684 4.8%
Property operating expenses (in thousands)(1)... 27,675 27,239 1.6%
------- -------
Property operating income (in thousands)........ $35,948 $33,445 7.5%
======= =======
Weighted average physical occupancy............. 94.4% 94.7% N/A
======= =======
Average monthly revenue per unit................ $ 474 $ 452 4.8%
======= =======
Average annual operating and maintenance
expenses per unit............................. $ 2,007 $ 1,975 1.6%
======= =======
Average annual real estate taxes per unit....... $ 467 $ 460 1.5%
======= =======
Operating expense ratio......................... 43.5% 44.9% N/A
======= =======
</TABLE>
- -------------------------
(1) Consists of property operating and maintenance and real estate tax expenses.
31
<PAGE> 33
The operating performance of properties not owned throughout both calendar years
1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995 % CHANGE
------- ------- --------
<S> <C> <C> <C>
Rental and other property revenue (in
thousands)...................................... $45,852 $20,875 119.7%
Property operating expenses (in thousands)(1)..... 19,885 8,846 124.8%
------- -------
Property operating income (in thousands).......... $25,967 $12,029 115.9%
======= =======
Weighted average number of units.................. 7,242 3,413 112.2%
======= =======
Weighted average physical occupancy............... 94.7% 93.8% N/A
======= =======
Average monthly revenue per unit.................. $ 528 $ 510 3.5%
======= =======
Average annual operating and maintenance expenses
per unit........................................ $ 2,081 $ 1,948 6.8%
======= =======
Average annual real estate taxes per unit......... $ 665 $ 644 3.3%
======= =======
Operating expense ratio........................... 43.4% 42.4% N/A
======= =======
</TABLE>
- -------------------------
(1) Consists of property operating and maintenance and real estate tax expenses.
Interest income increased $577,000 in 1996, or 67.4%, from $856,000 in 1995 to
$1,433,000 in 1996, primarily as the result of increased cash balances and
interest earned on recourse notes entered into by certain of our officers and
directors in December 1995 and January 1996 in connection with the acquisition
of shares of Common Stock by such persons.
Other income decreased $146,000 in 1996, or 35.7%, from $409,000 in 1995 to
$263,000 in 1996, primarily due to the reduction in third-party management
contracts and an increase in operating expenses of WDN Management unrelated to
third-party management contracts. The number of third-party management contracts
decreased from ten at December 31, 1995 to eight at the end of 1996.
General and administrative expenses increased $1.3 million in 1996, or 34.5%,
from $3.8 million in 1995 to $5.1 million in 1996. This represented a weighted
average increase of $17 per unit, or 6.5%. The increase in general and
administrative expenses was primarily due to increased occupancy cost due to the
relocation of our corporate office, increased salary expense and increased costs
associated with the increased number of stockholders (quarterly mailings to
stockholders, transfer services, NYSE listing fees, etc.).
Interest expense increased $3.5 million in 1996, or 20.2%, from $17.1 million in
1995 to $20.6 million in 1996, due to an increase in weighted average
indebtedness outstanding of approximately $60.9 million associated with the
acquisition of properties, offset by a decrease in the weighted average interest
rate in 1996 of approximately 0.5%.
Depreciation expense increased $4.1 million in 1996, or 25.9%, from $15.7
million in 1995 to $19.8 million in 1996, due to depreciation on additional
properties acquired and capital
32
<PAGE> 34
improvements on existing properties. This represented a weighted average
decrease of $1 per unit, or 0.1%.
The $1.9 million gain on disposition of real property in 1996 related to the
sale of three properties: a 384-unit property located in Wichita, Kansas on
April 24, 1996, a 304-unit property located in Corpus Christi, Texas on August
30, 1996 and a 144-unit property located in Stone Mountain, Georgia on September
27, 1996. We received total net sales proceeds from these dispositions of
approximately $22.9 million, which were used to purchase additional properties.
The $1.8 million extraordinary loss on debt extinguishment in 1996 resulted from
the write-off of unamortized deferred financing costs and prepayment penalties
incurred in connection with the refinancings of our credit facility in February
1996 ($488,000) and December 1996 ($767,000), the refinancing of $22 million of
variable rate tax-exempt debt in May 1996 ($96,000), the repayment of debt on a
property sold in September 1996 ($488,000) and the refinancing of $14.4 million
of fixed rate debt on three properties in October 1996 ($9,000).
As of July 1, 1996, we revised our method of accounting to capitalize the cost
of replacement carpets, on a prospective basis ($864,000 was capitalized in 1996
which would have been expended under the old policy). We believe this accounting
policy change is preferable because it is consistent with policies currently
being used by the majority of the largest publicly traded apartment REITs and
provides a better matching of expenses with the related benefit of the
expenditures.
LIQUIDITY AND CAPITAL RESOURCES
We intend to maintain what we believe is a conservative capital structure by:
- maintaining a debt-to-total-market capitalization of 50% or less,
- managing interest exposure by obtaining fixed rate debt or hedging
interest rates,
- obtaining unsecured indebtedness when possible,
- staggering principal maturities when possible, and
- maintaining an interest coverage ratio (operating income before interest
expense, depreciation and amortization to interest expense) of 2.5 times
or greater.
Our principal demands for liquidity are distributions to our stockholders,
ongoing maintenance and repair of our properties, capital improvements to our
properties, acquisitions of properties, development of properties, interest on
indebtedness and debt repayments.
During the first nine months of 1998, we had cash flows from operating
activities of $59.2 million, proceeds from the sale of four properties of $36.7
million, and proceeds from stock offerings of $14.2 million, including $4.9
million from our dividend reinvestment plan. These funds, in addition to $42.2
million of net proceeds from mortgage notes and our credit facility, were used
during the period primarily to pay for $27.5 million of the total acquisition
cost of five apartment properties (containing 1,098 units), distributions to
stockholders and unit holders of $55.8 million, capital improvements to
properties of
33
<PAGE> 35
$45.1 million, financing costs of $3.4 million, principal payments of $4.1
million, and the purchase of 731,500 shares of Common Stock for $17.8 million.
As a result, we had a net decrease in cash of $2.1 million.
In 1997, we received a total of $28.2 million in net equity proceeds from the
exercise of the over allotment option on a public offering closed in December
1996 and from our dividend reinvestment plan. We also received $274.0 million
from net borrowings under our credit facility and term loan. In addition, we
received net cash proceeds of approximately $4.1 million from the sale of a
property in October 1997. These funds were primarily used to purchase 93
properties (21,467 units) with an aggregate net cash purchase price of
approximately $304.1 million.
As more fully described below, cash and cash equivalents decreased $19.9
million, from $29.7 million as of December 31, 1996 to $9.8 million as of
December 31, 1997.
Net cash provided by operating activities increased $26.8 million for the first
nine months of 1998 compared to the same period in 1997. Cash flow from
operating activities before changes in operating accounts increased $31.8
million, primarily due to an increased number of units owned, which was offset
by a $5.0 million decrease in the net effect of changes in operating accounts.
The net decrease in operating accounts resulted primarily from an increase in
the funding of escrow deposits, a decrease in accounts payable, and an increase
in the payment of real estate taxes. Net cash provided by operating activities
increased by $32.5 million in 1997, from $38.3 million in 1996 to $70.8 million
in 1997, primarily due to an increase in property operating income from
properties owned throughout both years, as well as property operating income
from properties acquired in 1997.
Net cash used in investing activities decreased $42.2 million for the first nine
months of 1998 compared to the same period in 1997, primarily due to proceeds
received from the disposition of properties. During the first nine months of
1998, we received net proceeds of approximately $36.7 million from the
disposition of four properties, containing an aggregate of 1,151 units. We
purchased 1,098 units and assumed $19.1 million in mortgage indebtedness in the
first nine months of 1998 compared to purchasing 2,013 units and assuming $6.9
million in mortgage indebtedness during the same period in 1997 resulting in a
decrease in cash paid for the purchase of real estate assets of $27.5 million.
The net decrease in cash used was partially offset by a $21.9 million increase
in cash paid for real estate asset additions. Net cash used in investing
activities for the year ended December 31, 1997 was $327.8 million, primarily
due to $304.1 million of property acquisitions and $32.4 million of capital
improvements on the properties, offset by $8.7 million of cash proceeds from the
sale of a property in October 1997.
During the first nine months of 1998, our capital expenditures were $45.1
million, compared to $23.2 million during the same period in 1997. The capital
expenditure increase in 1998 is a result of non-recurring interior upgrades and
exterior enhancements, non-recurring rehabilitation costs on acquisition
properties, and increased recurring capital expenditures, including carpet and
appliances, resulting from an increased number of properties.
Net cash provided by financing activities decreased by $46.2 million for the
first nine months of 1998 compared to the same period in 1997. The decrease is
primarily due to increased distributions to stockholders and minority interest
holders, the repurchase of
34
<PAGE> 36
731,500 shares of Common Stock for an aggregate price of $17.8 million in 1998
and an $11.5 million decrease in proceeds received from the issuance of Common
Stock. Net cash provided from financing activities was $237.0 million for the
year ended December 31, 1997, primarily due to $28.2 million of net proceeds
from the issuance of stock and $393.1 million of fundings received under our
term loan and our credit facility, less repayments and principal amortization of
mortgage financings and the credit facility of $127.5 million, distributions to
stockholders and minority interest holders of $48.0 million and $6.7 million of
purchases of Common Stock.
We intend to meet our short-term liquidity requirements, including capital
expenditures related to maintaining and improving our properties, through cash
flow provided by operations and when necessary we will utilize unused portions
of our unsecured credit facility, which expires in February 1999, to meet
working capital needs. Our credit facility has been used to finance property
acquisitions, including capital improvements, and to meet short-term liquidity
requirements. As of September 30, 1998, funds available to borrow under the
credit facility were $43.6 million. The availability of funds under the credit
facility is subject, however, to certain borrowing base and other customary
covenants.
Historically, the cash provided by operations has been adequate to meet our
operating requirements and distribution payments; however, our current
repositioning program will require borrowings under the credit facility to fund
capital improvements. We have certain loans which require principal payments on
a monthly basis for which cash provided by operating activities may or may not
be sufficient. Accordingly, we anticipate borrowing under our credit facility,
as described below, to fund such payments, if necessary.
During the first nine months of 1998, we have spent $19.6 million for recurring
and non-recurring capital items, and $20.5 million for repositioning and
acquisition rehabilitation costs. During the year ended December 31, 1997, we
spent approximately $32.4 million in capital expenditures and rehabilitation
expenditures on acquisition properties. Rehabilitation costs of $13.9 million
and capital expenditures on properties of $8.5 million were funded from net cash
provided by operating activities. Non-recurring capital expenditures of $9.2
million and capital expenditures under our repositioning program of $0.8 million
were funded from borrowings under our credit facility. We have budgeted capital
improvements of $23.8 million for 1998 on our matured properties (of which $9.5
million represents non-recurring costs for the construction of covered carports,
the installation of access gates with perimeter fencing, retaining walls and the
reconstruction of balconies and exterior stairwells)and $30.8 million to
complete necessary renovations to properties acquired in 1997 and to reposition
certain properties. Both acquisition renovation and repositioning capital
expenditures are anticipated to be funded from borrowings under the credit
facility.
For the year ended December 31, 1997, we paid distributions of $33.9 million to
common stockholders, $12.5 million to preferred stockholders and $1.6 million to
minority interest holders. For the nine months ended September 30, 1998, we paid
distributions of $26.4 million to common stockholders, $9.8 million to preferred
stockholders and $19.6 million to minority interest holders. The quarterly
distributions paid to common stockholders and minority interest holders of
common units were $0.4825 per share or unit, which equates to an annualized
distribution of $1.93 per share or unit. Distributions on our
35
<PAGE> 37
preferred stock, Preferred OP Units and certain of the minority interests of
common stock have a priority over other distributions.
Our Board has authorized the repurchase of up to 3.5 million shares of
outstanding Common Stock. As of September 30, 1998, we had purchased
approximately 1.0 million shares of Common Stock, leaving approximately 2.5
million shares authorized for repurchase. Future purchases of Common Stock will
be funded with borrowings under our credit facility. However, we will not
repurchase additional shares under this program if the purchase would cause our
total debt-to-total-market capitalization to exceed 46%.
We have entered into four development agreements to construct apartment
communities which we will purchase upon completion of the construction and
lease-up. We have committed to purchase $80.0 million in four development
properties (containing 1,080 units) in 1999 and 2000. The commitments will be
funded by additional mortgage debt and borrowings under our credit facility.
As of September 30, 1998, we had outstanding indebtedness in the aggregate
principal amount of $759.6 million, consisting of fixed rate debt of $404.6
million and variable rate debt of $355.0 million. The weighted average interest
rate and weighted average years to maturity on our outstanding indebtedness at
September 30, 1998 were approximately 7.3% and 7 years, respectively. As of
December 31, 1997, we had outstanding indebtedness in the aggregate principal
amount of $702.4 million, consisting of $370.1 million of conventional and
tax-exempt fixed rate debt and $332.3 million of variable rate debt, including
$274.0 million outstanding under our unsecured term loan and unsecured credit
facility.
During the year ended December 31, 1997 and the nine months ended September 30,
1998, we refinanced, repaid or assumed debt as summarized below (in thousands):
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING
INDEBTEDNESS INDEBTEDNESS
AS OF DEBT DEBT DEBT PRINCIPAL AS OF
12/31/96 PROCEEDS ASSUMED REPAID AMORTIZATION 12/31/97
------------ -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate
indebtedness......... $207,823 $ -- $170,611 $ 4,649 $3,716 $370,069
Unsecured Term Loan.... -- 200,000 -- -- -- 200,000
Unsecured Credit
Facility............. -- 193,098 -- 119,098 -- 74,000
Other variable rate
debt................. 51,085 -- 7,200 -- -- 58,285
-------- -------- -------- -------- ------ --------
Total......... $258,908 $393,098 $177,811 $123,747 $3,716 $702,354
======== ======== ======== ======== ====== ========
</TABLE>
36
<PAGE> 38
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING
INDEBTEDNESS INDEBTEDNESS
AS OF DEBT DEBT DEBT PRINCIPAL AS OF
12/31/97 PROCEEDS ASSUMED REPAID AMORTIZATION 9/30/98
------------ -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate
indebtedness......... $370,069 $ 31,948 $ 13,391 $ 6,870 $3,889 $404,649
Unsecured Term Loan.... 200,000 -- -- -- -- 200,000
Unsecured Credit
Facility............. 74,000 140,500 -- 123,000 -- 91,500
Other variable rate
debt................. 58,285 57,955 5,750 58,285 223 63,482
-------- -------- -------- -------- ------ --------
Total......... $702,354 $230,403 $ 19,141 $188,155 $4,112 $759,631
======== ======== ======== ======== ====== ========
</TABLE>
The following table sets forth certain information regarding our outstanding
indebtedness as of September 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
------------------- OUTSTANDING PERCENTAGE
INTEREST YEARS TO PRINCIPAL OF
RATE MATURITY BALANCE(1) TOTAL
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Conventional fixed rate................. 7.68% 6.9 $328,345 43.2%
Tax-exempt fixed rate................... 6.41% 18.2 76,304 10.1%
---- ---- -------- -----
Average/Total fixed rate.............. 7.44% 9.1 404,649 53.3%
---- ---- -------- -----
Tax-exempt variable rate................ 4.73% 25.7 63,482 8.4%
Unsecured Term Loan..................... 7.71% 0.2 200,000 26.3%
Unsecured Credit Facility............... 7.35% 0.3 91,500 12.0%
---- ---- -------- -----
Average/Total variable rate........... 7.08% 4.8 354,982 46.7%
---- ---- -------- -----
Average/Total................. 7.28% 7.1 $759,631 100.0%
==== ==== ======== =====
</TABLE>
- -------------------------
(1) In thousands.
As of September 30, 1998, our total indebtedness becomes due as follows (in
thousands):
<TABLE>
<CAPTION>
BALLOON
PRINCIPAL PAYMENTS TOTAL
--------- -------- --------
<S> <C> <C> <C>
1998............................................ $ 1,535 $205,750 $207,285
1999............................................ 6,336 99,835 106,171
2000............................................ 6,779 7,067 13,846
2001............................................ 5,770 67,952 73,722
2002............................................ 5,879 -- 5,879
Thereafter...................................... 105,320 247,408 352,728
-------- -------- --------
Total................................. $131,619 $628,012 $759,631
======== ======== ========
</TABLE>
Our credit facility is with a group of financial institutions, led by BankBoston
as agent, and provides an unsecured borrowing capacity of up to $150 million,
with borrowings outstanding under the credit facility generally bearing interest
at LIBOR (5.7% at
37
<PAGE> 39
December 31, 1997) plus 1.375%. The credit facility expires in February 1999. As
of September 30, 1998, $91.5 million was outstanding under the credit facility.
In December 1997, we entered into a term loan agreement with BankBoston, as
agent for a group of financial institutions. The term loan provides unsecured
borrowings of $200 million, bears interest at 1.375% over LIBOR and matures
December 15, 1998.
The credit facility and term loan agreements contain covenants which restrict
our ability, and the ability of our subsidiaries, to engage in the following
activities:
- make distributions to our stockholders in excess of 90% of funds from
operations;
- increase secured mortgage indebtedness in excess of 40% of our total
assets before depreciation;
- decrease our fixed charge coverage ratio below a ratio of 1.25 to one;
and
- decrease our debt service coverage ratio below a ratio of 2.0. to one
As of October 31, 1998, we were in compliance with all covenants of the credit
facility and term loan agreements.
Balloon payments of $205.8 million and $99.8 million are due in 1998 and 1999,
respectively. The 1998 balloon payment is primarily due to our $200 million term
loan, which we expect to repay from the proceeds of a $250 million secured
financing. In connection with obtaining the secured financing, we anticipate
unwinding our forward treasury rate lock agreements (see below). The remaining
$5.8 million is variable rate, tax exempt debt which was refinanced in October
1998. The new maturity date is February 2028. The 1999 balloon payment is
primarily due to our $150 million credit facility ($91.5 million outstanding
balance at September 30, 1998), for which we are currently negotiating an
extended maturity date of February 2001.
We entered into three forward treasury rate lock agreements in 1997 to reduce
exposure to interest rate fluctuations on debt refinancings. Under these
agreements, we pay or receive an amount equal to the difference between the
reference yield and the market yield (as defined in each of the agreements) on
the date of exercise. The exercise date may be any date up to the settlement
date. Any proceeds or costs associated with these agreements will be amortized
to interest expense over the term of the refinancing; however, if such debt
refinancing is not obtained, any proceeds or costs will be recorded in current
operations. As of November 18, 1998, we had a loss position on these forward
treasury lock agreements of approximately $26.4 million. The following forward
treasury rate lock agreements are currently in place:
<TABLE>
<CAPTION>
REFERENCE
NOTIONAL AMOUNT SETTLEMENT DATE COUNTERPARTY YIELD REFERENCE TREASURY
- --------------- --------------- ------------ --------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
$ 75,000 December 15, 1998 BankBoston 5.64% 4.250% due 11/15/03
25,000 December 15, 1998 BankBoston 5.94% 4.750% due 11/15/08
175,000 December 21, 1998 Salomon Smith Barney 6.54% 4.750% due 11/15/08
--------
$275,000
========
</TABLE>
38
<PAGE> 40
We anticipate utilizing these forward treasury rate lock agreements in
connection with a $250 million secured financing in December 1998. We anticipate
extending the remaining $25 million forward treasury rate lock and utilizing it
in the first quarter of 1998.
In addition to our credit facility and term loan, in March 1998 we entered into
a $110 million fixed rate loan arrangement with Commingled Pension Trust Fund
(Fixed Income-Mortgage Private Placements). Eighty million dollars of this debt
bears interest at 6.62% per annum and is due on March 31, 2007 and $30 million
of this debt bears interest at 7.22% per annum and is due on June 30, 2016.
Payments on this loan are interest only; therefore the entire loan balance is
outstanding until maturity.
As of November 18, 1998, we had 91 real estate assets collateralized under
various secured debt agreements.
Our long-term liquidity requirements primarily include:
- developing properties,
- acquiring properties,
- capital expenditures, including property enhancements, and
- distributions to stockholders.
We intend to meet these long-term liquidity requirements through a variety of
means. We anticipate funding acquisitions and development of properties through
the issuance of equity securities or from the proceeds of asset sales. Our
ability to successfully fund these requirements will depend on the nature of the
equity markets at any time in which we attempt to access them and our ability to
find purchasers for assets at acceptable prices. If our cash flow from
operations is not sufficient to fund capital expenditures and distributions to
stockholders, we may incur additional indebtedness.
Our ability to acquire additional properties is dependent upon our ability to
obtain equity or debt financing. During 1997 and 1998, we were able to raise
additional equity and incur indebtedness to acquire 96 properties. As of October
31, 1998, our debt-to-total-market capitalization ratio was approximately 46.8%,
based on outstanding debt of $758.9 million, leaving the ability to borrow funds
to acquire additional properties in the amount of approximately $104.6 million
and still maintain our 50% debt-to-total-market capitalization policy. When we
finance acquisitions with debt, we expect that such acquired properties will
generate cash flow adequate to service the associated indebtedness.
FUNDS FROM OPERATIONS
The guidelines promulgated by NAREIT and REIT industry standards generally
consider FFO to be an appropriate measure of the performance of an equity REIT.
NAREIT currently defines FFO as net income (loss) (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 and
amortization. In addition, extraordinary or unusual items that are non-recurring
events which would materially distort the comparative measure of FFO are
typically excluded. 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 as
an
39
<PAGE> 41
indication of our performance or as an alternative to cash flow as a measure of
liquidity. Our FFO is not necessarily comparable to similar entitled items
reported by other REITs. Our computation of FFO includes income allocated to
minority interests and assumes the conversion of all convertible securities,
including minority interest securities. We believe our definition of FFO is
consistent with the current NAREIT definition of FFO.
During 1995, NAREIT adopted certain changes to the calculation of FFO. We
adopted these changes effective January 1, 1996, and have restated our 1995
calculation of FFO for comparative purposes. Under NAREIT's new definition of
FFO, we (as well as other REITs who used the old definition) will no longer add
back amortization of financing costs. The following is a calculation of FFO
under the new definition (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- --------------------------------
1998 1997 1997 1996 1995
-------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Net income available to common
stockholders................ $ 11,557 $ 7,488 $ 9,396 $ 13,182 $ 8,411
Preferred distributions(1).... 2,940 3,006 2,861 2,387 --
Income allocated to minority
interests(2)................ 7,762 1,197 4,109 1,705 922
Extraordinary loss on debt
extinguishment.............. 104 -- 422 1,848 1,352
Gain on disposition of real
property.................... (6,696) -- (2,055) (1,934) (1,502)
Depreciation of real estate
assets...................... 43,166 20,011 33,560 19,810 15,734
Unusual charge -- officer
settlement agreement........ -- -- 1,940 -- --
-------- -------- --------- --------- --------
Funds from operations....... $ 58,833 $ 31,702 $ 50,233 $ 36,998 $ 24,917
======== ======== ========= ========= ========
Cash flows provided by (used
in):
Operating Activities........ $ 59,209 $ 32,420 $ 70,822 $ 38,281 $ 31,317
Investing Activities........ (35,973) (78,195) (327,814) (158,668) (86,926)
Financing Activities........ (25,352) 20,815 237,029 143,306 58,121
</TABLE>
- -------------------------
(1) Distributions on convertible preferred stock were added back in computing
FFO since the conversion to common shares has been assumed.
(2) Excludes distributions on the preferred operating partnership units, which
are not added back in computing funds from operations ($1,125 per quarter
for 1998).
FFO increased $27.1 million, or 85.5%, from $31.7 million for the nine months
ended September 30, 1997 to $58.8 million for the nine months ended September
30, 1998. The increase in FFO was primarily attributable to additional operating
income resulting from an increase in the number of apartment units owned.
FFO increased $13.2 million, or 35.7%, from $37.0 million for the year ended
December 31, 1996 to $50.2 million for the year ended December 31, 1997. The
increase in FFO was primarily attributable to additional operating income, which
resulted from an
40
<PAGE> 42
increase in the number of units owned as a result of property acquisitions and
increased operating income from properties owned throughout both periods.
As discussed in Note (3) to the consolidated financial statements, effective
July 1, 1996, we revised its method of accounting to capitalize the cost of
replacement carpets on a prospective basis. Following is the effect on
depreciation, net income and FFO of this change in accounting policy for the
year ended December 31, 1996:
<TABLE>
<S> <C>
Adjustment for change in accounting policy to capitalize $864
carpet replacement costs (and effect on FFO)..............
Adjustment for effect of depreciation on capitalized carpet (43)
replacement costs.........................................
----
Net effect on net income.................................... $821
====
</TABLE>
INFLATION
We lease apartments under lease terms generally ranging from six to 12 months.
We believe such short-term lease contracts lessen the impact of inflation due to
the ability to adjust rental rates to market levels as leases expire.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share. SFAS No. 128, which is effective for periods ending after December 15,
1997, specifies the computation, presentation and disclosure requirements of
earnings per share and supersedes Accounting Principles Board Opinion No. 15.
SFAS No. 128 requires a dual presentation of basic and diluted earnings per
share. Basic earnings per share, which excludes the impact of common share
equivalents, replaces primary earnings per share. Diluted earnings per share,
which utilizes the average market price per share as opposed to the greater of
the average or ending market price per share when applying the treasury stock
method in determining common share equivalents, replaces fully diluted earnings
per share. We adopted the provisions of SFAS No. 128 in 1997 and retroactively
restated prior year amounts to be comparable.
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information about
Capital Structure, which establishes standards for disclosing information about
an entity's capital structure. SFAS No. 129 is effective for periods ending
after December 15, 1997. The adoption of SFAS No. 129 did not impact our capital
structure disclosures as we were already in compliance with this accounting
standard.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments and related information in interim and annual financial statements.
SFAS Nos. 130 and 131 are effective for periods beginning after December 15,
1997. SFAS No. 130 could impact our reporting as it relates to our outstanding
derivatives and we will implement SFAS No. 131 for the year ending December 31,
1998 by reporting its operating segments by geographic location.
41
<PAGE> 43
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes standards for accounting
and reporting for derivative instruments. SFAS No. 133 is effective for periods
beginning after June 15, 1999; however, earlier application is permitted. We are
currently not planning an early adoption of SFAS No. 133 and have not had an
opportunity to evaluate the impact of the provisions of SFAS No. 133 on our
consolidated financial statements relating to future adoption.
YEAR 2000 CONVERSION
Many of the world's computer systems currently record years in a two-digit
format. Such computer systems will be unable to properly interpret dates beyond
the year 1999, which could lead to disruptions in our operations (commonly
referred to as the "Year 2000" issue). We have identified three primary
information technology systems which are vulnerable to the Year 2000 issue:
(1) General Ledger/Accounts Payable System. We installed a new general
ledger/accounts payable system in October 1998 which has been warranted to
be Year 2000 compliant. The cost of the new system is expected to be
approximately $900,000, of which $675,000 has been incurred through
September 30, 1998.
(2) Payroll. We process our payroll through ADP, an outside payroll vendor.
ADP's current payroll processing system is not Year 2000 compliant. We are
currently evaluating other payroll vendors and expect to have selected a
vendor which is Year 2000 compliant and have the system converted and
tested by the end of the first quarter of 1999. The cost to complete the
payroll conversion is anticipated to be $100,000. In the event a new
payroll system cannot be implemented, we will continue to use an upgraded,
Year 2000 compliant ADP system.
(3) On-Site Accounting. We process our on-site accounting (rent roll
activities) on AMSI. The AMSI version which we currently use is Year 2000
compliant.
We are also in the process of identifying certain on-site, non-information
technology systems that may be Year 2000 sensitive. Once these systems have been
fully identified, we will determine, with the help of outside vendors, whether
these systems are vulnerable to the Year 2000 issue. Potential non-information
technology systems include:
- access gates
- alarms
- irrigation systems
- thermostats
- utility meters and switches
We plan to complete the identification phase and begin repairing or replacing
any vulnerable systems by the end of the fourth quarter of 1998. We believe the
cost to repair or replace any Year 2000 vulnerable non-information technology
systems will not exceed $500,000.
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<PAGE> 44
We have additionally identified those vendors we believe could have an impact on
our day-to-day operations and have developed a short questionnaire regarding the
vendor's Year 2000 status. These vendors, consisting primarily of financial
institutions, will be contacted before January 1, 1999 to determine their Year
2000 status. In the event a vendor's systems will not be Year 2000 compliant, we
will assess the potential risk and, to the extent it is feasible, transfer our
business to alternate vendors.
We will utilize both internal and external resources to reprogram, replace and
test our systems for Year 2000 modifications. We anticipate completing the Year
2000 project by the first quarter of 1999. However, there can be no guarantee
that the systems of other companies on which we rely will be timely converted
and would not have an adverse effect on our operations.
In the event of a complete failure of our information technology systems, we
would be able to continue the affected functions either manually or through the
use of non-Year 2000 compliant systems. The primary costs associated with such a
necessity would be (1) increased time delays associated with posting of
information, and (2) increased personnel to manually process the information. We
do not believe the increased costs associated with such personnel would exceed
$1 million.
We do not currently have a contingency plan in place. We will evaluate the need
for a plan in 1999 as we progress through our Year 2000 conversion.
The cost of Year 2000 compliance and the estimated date of completion of
necessary modifications are based on our best estimates, which were derived from
various assumptions of future events, including the continued availability of
resources, third party modification plans and other factors. However, we cannot
guarantee these estimates will be achieved and actual results could differ
materially from those anticipated.
43
<PAGE> 45
BUSINESS AND PROPERTIES
THE PROPERTIES
OUR PORTFOLIO. As of October 31, 1998, our portfolio consisted of 155
multifamily properties containing 42,432 apartment units located in 11 states.
These properties are generally comprised of two and three-story buildings in
landscaped settings and generally include such amenities as a clubhouse,
swimming pools, laundry facilities and cable television access. Certain of our
properties offer additional amenities such as saunas, whirlpools, exercise
facilities, tennis courts and covered parking. The properties contain an average
of 274 apartment units, with the largest property containing 994 apartment
units. The apartment units have an average size of 788 square feet. Our
properties were built between 1967 and 1998 and have a weighted average age by
number of apartment units of approximately 15 years.
Our properties (as owned effective October 31, 1998) are concentrated in the
following markets:
<TABLE>
<CAPTION>
NUMBER NUMBER PERCENT
OF OF OF TOTAL
LOCATION PROPERTIES UNITS UNITS
- -------- ------------- -------- --------------
<S> <C> <C> <C>
Houston...................................... 54 12,561 29.60%
Dallas/Fort Worth............................ 37 10,887 25.65%
Austin....................................... 11 3,216 7.58%
Phoenix...................................... 7 2,360 5.56%
Tampa........................................ 7 1,904 4.49%
Nashville.................................... 4 1,858 4.38%
Jacksonville................................. 5 1,748 4.12%
Oklahoma City................................ 4 1,196 2.82%
San Antonio.................................. 5 1,146 2.70%
Atlanta...................................... 4 1,002 2.36%
Salt Lake City............................... 2 768 1.81%
San Diego.................................... 3 480 1.13%
--- ------ ------
Subtotal................................ 143 39,126 92.20%
Other Markets(a)............................. 12 3,306 7.80%
--- ------ ------
Total.............................. 155 42,432 100.00%
=== ====== ======
</TABLE>
- -------------------------
(a) Represents properties in five different states.
No single property accounts for greater than 10% of our total revenues. Our
properties had a weighted average physical occupancy of 93.3% for both 1997 and
the month of October 1998. Resident leases are generally for six to 12 month
terms and often require security deposits. The properties are located in mature,
developed neighborhoods. We believe our properties are well built and have been
well maintained.
44
<PAGE> 46
CAPITAL EXPENDITURES. We have adopted a policy of expensing all maintenance and
non-major, recurring repair and replacement items, with the exception of carpet
replacement which, as of July 1, 1996, is capitalized on a prospective basis.
Such maintenance expense items include, but are not limited to:
- landscaping
- pest control
- electrical
- plumbing
- cleaning units
- interior painting of the units
- window blinds, and
- pool and recreation facility maintenance.
Non-major expense items include but are not limited to roofing, exterior
painting and asphalt resurfacing under approximately $10,000. Repair and
maintenance expenses for 1997 were approximately $13.0 million, or $477 per
weighted average unit and for the nine months ended September 30, 1998 were
approximately $16.6 million, or $516 per weighted average unit on an annualized
basis.
We capitalize all major repairs and replacements which are not considered part
of the normal maintenance of our properties or turnover of an apartment unit. As
of July 1, 1996, we revised our method of accounting to capitalize the cost of
replacement carpets, on a prospective basis ($864,000 was capitalized in 1996
which would have been expended under the old policy). We believe that this
accounting policy change is preferable because it is consistent with policies
currently being used by the majority of the largest publicly traded apartment
REITs and provides a better matching of expenses with the related benefit of the
expenditures. In addition, we capitalize non-recurring items such as access
gates and carports initially installed on the property. We also capitalize all
deferred maintenance items of an acquisition property which are planned at the
time of acquisition to bring the property to satisfactory operating condition.
Such a renovation of an acquisition property generally takes six to 18 months to
complete, depending on the magnitude of the renovations.
We believe that asset quality is one of the most important characteristics of an
apartment property. Asset quality can be significantly improved by repositioning
the asset through capital improvements that create an attractive, upscale
residential appearance, like building facades or enhancements that improve with
age, such as landscaping enhancements. Our repositioning program includes
professional design of exterior buildings and clubhouse interiors. This program
also includes interior upgrades such as modern lighting, wall mirrors and crown
molding. All of these capital improvements help distinguish our properties from
their aging contemporaries. The economic justification for our repositioning
program is the anticipated higher yield on the total cost of a property, which
is achieved through sustained high occupancy rates and rental rate increases.
45
<PAGE> 47
For the year ended December 31, 1997, we spent approximately $32.4 million of
capital expenditures on our properties, of which $13.9 million related to
acquisition renovation costs for properties acquired in 1997 and 1996. An
additional $9.2 million was expended on non-recurring items, $0.8 million was
expended for repositioning programs and $8.5 million was expended for normal
recurring capital expenditures to properties not under renovation (the "Matured
Properties") (of which $6.1 million related to our 15,981 same store units,
resulting in an average cost of $384 per unit).
During the first nine months of 1998, we have spent $19.6 million for recurring
and non-recurring capital items, and $20.5 million for repositioning and
acquisition rehabilitation costs. We anticipate incurring $4.2 million for
recurring capital expenditures and $10.3 million for repositioning and
acquisition rehabilitation during the remainder of 1998.
46
<PAGE> 48
WALDEN RESIDENTIAL PROPERTIES, INC.
APARTMENTS OWNED
<TABLE>
<CAPTION>
TOTAL
NUMBER YEAR RENTABLE
OF CONSTRUCTION AREA TOTAL
METROPOLITAN AREA/PROPERTY LOCATION UNITS COMPLETED(1) (SQ. FT.)(2) ACREAGE
- -------------------------- -------- ------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
AUSTIN
Arbors of Austin* Austin, TX 226 1985 154,920 9.68
Arbors of Wells Branch* Austin, TX 212 1986 156,228 11.20
Ashbury Parke* Austin, TX 416 1983 278,936 13.20
Audubon Square* Austin, TX 164 1985 139,476 6.50
Harper's Creek Austin, TX 268 1982 201,838 8.00
Lakes of Renaissance* Austin, TX 308 1987 215,024 11.60
Oak Ridge* Austin, TX 253 1978 173,699 9.29
Pinto Creek Austin, TX 249 1985 199,146 22.60
Polo Club Austin, TX 304 1986 203,784 11.20
Shadow Creek* Austin, TX 420 1982 314,936 18.02
Trestles of Austin Austin, TX 396 1984 275,904 10.66
------ ---- ---------- --------
Austin Total/ Weighted
Average 3,216 1984 2,313,891 131.95
------ ---- ---------- --------
CORPUS CHRISTI
Rafters, The* Corpus Christi, TX 250 1984 216,496 12.00
Wharf, The* Corpus Christi, TX 250 1984 216,496 17.13
Willowick* Corpus Christi, TX 250 1984 216,496 12.00
------ ---- ---------- --------
Corpus Christi Total/
Weighted Average 750 1984 649,488 41.13
------ ---- ---------- --------
DALLAS/FT. WORTH
Arbor Creek* Dallas, TX 280 1984 216,676 12.22
Arbors of Bedford* Bedford, TX 204 1983 161,332 8.56
Arbors of Carrollton* Carrollton, TX 131 1984 112,418 8.56
Arbors of Euless* Euless, TX 272 1984 213,794 12.82
Bent Creek* Dallas, TX 326 1980 234,082 11.72
Woods of Bedford* Bedford, TX 706 1983 514,220 32.79
Brittany Park* Dallas, TX 217 1978 193,556 8.67
Canyon Ridge* Dallas, TX 164 1983 120,812 7.33
Casa Valley* Dallas, TX 150 1986 130,926 5.46
Cinnamon Park* Arlington, TX 272 1985 213,192 13.00
Clover Hill* Arlington, TX 216 1984 178,928 8.87
Creekwood Village* Dallas, TX 362 1985 256,584 9.40
Fielder's Glen Arlington, TX 220 1985 165,752 10.00
Gables of McKinney, The McKinney, TX 220 1986 169,880 10.00
Greens Crossing Dallas, TX 364 1984 262,761 10.50
Hillcrest* Grand Prairie, TX 310 1984 204,146 12.94
Hilltop* North Richland Hills, TX 238 1984 179,256 12.20
Montfort Oaks* Dallas, TX 276 1979 215,476 12.07
</TABLE>
47
<PAGE> 49
<TABLE>
<CAPTION>
TOTAL
NUMBER YEAR RENTABLE
OF CONSTRUCTION AREA TOTAL
METROPOLITAN AREA/PROPERTY LOCATION UNITS COMPLETED(1) (SQ. FT.)(2) ACREAGE
- -------------------------- -------- ------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Newport Irving, TX 308 1982 238,768 12.40
Parks at Treepoint* Arlington, TX 586 1985 471,968 29.52
Pinnacle* Lewisville, TX 150 1985 119,774 6.30
Post Oak Place* Euless, TX 354 1983 255,798 11.08
Preston Greens* Dallas, TX 257 1980 246,340 11.21
Reflections of Highpoint Dallas, TX 373 1986 281,940 11.10
Remington Hill Fort Worth, TX 440 1986 339,008 15.00
Rivercrest Arlington, TX 420 1979 337,056 19.30
Shadow Creek* North Richland Hills, TX 240 1986 181,896 12.20
Shadowridge Village* Dallas, TX 144 1985 118,804 5.97
Sierra Springs Bedford, TX 286 1985 211,006 15.96
Springfield Mesquite, TX 264 1985 193,212 9.00
Summer Meadows Plano, TX 389 1986 323,434 21.60
Summer Villas Dallas, TX 460 1984 328,020 15.80
Summers Crossing Plano, TX 294 1986 238,697 15.70
Summers Landing* Fort Worth, TX 196 1985 139,300 7.80
Trinity Mills* Dallas, TX 208 1982 162,960 10.53
Trinity Oaks* Dallas, TX 240 1983 150,318 4.90
Waterford on the Meadow* Plano, TX 350 1985 310,746 21.98
------ ---- ---------- --------
Dallas/Ft. Worth Total/
Weighted Average 10,887 1984 8,392,836 464.46
------ ---- ---------- --------
HOUSTON
Arbor Point* Houston, TX 65 1984 57,000 2.20
Ashton Woods* Houston, TX 177 1978 151,142 6.85
Aston Brook* Houston, TX 152 1982 119,376 5.29
Bar Harbor* Houston, TX 316 1983 209,076 13.19
Bayou Oaks* Houston, TX 210 1984 158,470 6.08
Brandon Oaks* Houston, TX 196 1984 168,856 8.00
Briarcrest* Houston, TX 376 1982 296,760 13.90
Brookfield* Houston, TX 250 1984 188,974 10.93
Carriage Hill* Houston, TX 252 1980 242,088 11.20
Central Park Condos* Houston, TX 93 1985 99,080 7.20
Central Park Regency* Houston, TX 348 1983 318,968 13.38
Charleston, The* Houston, TX 312 1981 226,499 5.69
Cimarron Park Houston, TX 162 1984 134,756 6.50
Cimarron Parkway* Houston, TX 272 1983 238,264 9.26
Colony Oaks* Houston, TX 162 1967 166,830 6.20
Colorado Club* Houston, TX 300 1986 225,788 10.13
Copper Cove* Houston, TX 270 1983 204,240 7.00
Enclave at Cypress Park* Houston, TX 384 1984 329,844 11.20
Foxboro Houston, TX 220 1982 162,712 6.30
</TABLE>
48
<PAGE> 50
<TABLE>
<CAPTION>
TOTAL
NUMBER YEAR RENTABLE
OF CONSTRUCTION AREA TOTAL
METROPOLITAN AREA/PROPERTY LOCATION UNITS COMPLETED(1) (SQ. FT.)(2) ACREAGE
- -------------------------- -------- ------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Georgetown* Houston, TX 156 1968 237,328 34.40
Harbor Pointe* Houston, TX 198 1968 178,700 4.80
Harpers Mill* Houston, TX 180 1981 143,252 6.79
Hidden Lake* Houston, TX 440 1986 318,748 32.63
Holiday on Hayes* Houston, TX 312 1981 250,564 10.47
Hunt Club, The* Houston, TX 204 1984 135,948 8.25
Huntley, The* Houston, TX 214 1985 165,054 7.35
Laurel Creek Houston, TX 428 1985 323,568 15.80
Live Oak* Houston, TX 162 1978 121,558 5.49
Meadows on Memorial* Houston, TX 96 1982 94,940 3.56
Mill Creek* Houston, TX 174 1982 149,640 5.59
Monticello on Cranbrook* Houston, TX 244 1983 203,500 11.20
Northwoods* Houston, TX 200 1978 237,636 17.44
One Camden Court* Houston, TX 136 1982 104,216 4.47
One Cypress Landing* Houston, TX 464 1979 358,156 15.27
One Westfield Lake* Houston, TX 246 1984 269,454 19.98
One Willow Chase* Houston, TX 136 1983 104,216 4.36
One Willow Park* Houston, TX 178 1984 140,165 6.00
Pathway, The* Houston, TX 144 1978 139,498 5.95
Pine Creek* Houston, TX 216 1980 170,184 8.06
Polo Club on Cranbrook I* Houston, TX 228 1981 161,456 9.30
Polo Club on Cranbrook II* Houston, TX 292 1982 215,080 7.00
Retreat at Eldridge Houston, TX 168 1998 158,304 12.54
Richmond Green* Houston, TX 224 1980 214,494 8.76
Riverwalk* Houston, TX 184 1984 140,560 7.58
Silverado* Houston, TX 344 1979 248,960 11.31
South Green Houston, TX 268 1982 219,948 8.9
Stony Creek* Houston, TX 252 1980 194,240 9.30
Timbers of Cranbrook* Houston, TX 274 1984 206,884 9.50
Tranquility Lake* Houston, TX 90 1983 84,446 10.10
Wimbledon* Houston, TX 161 1978 154,601 6.30
Woodborough* Houston, TX 320 1983 222,640 10.30
Woodchase* Houston, TX 270 1978 252,542 9.98
Woodedge* Houston, TX 126 1982 113,850 6.65
Woodlake* Houston, TX 315 1976 242,587 8.28
------ ---- ---------- --------
Houston Total/ Weighted
Average 12,561 1982 10,375,640 524.16
------ ---- ---------- --------
SAN ANTONIO
Costa del Sol* San Antonio, TX 244 1985 180,798 10.00
Country View San Antonio, TX 272 1981 213,120 11.00
Remington* San Antonio, TX 158 1986 112,018 4.90
</TABLE>
49
<PAGE> 51
<TABLE>
<CAPTION>
TOTAL
NUMBER YEAR RENTABLE
OF CONSTRUCTION AREA TOTAL
METROPOLITAN AREA/PROPERTY LOCATION UNITS COMPLETED(1) (SQ. FT.)(2) ACREAGE
- -------------------------- -------- ------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Summer Oaks* San Antonio, TX 256 1983 171,464 9.50
Villas of St. Moritz* San Antonio, TX 216 1986 149,040 7.50
------ ---- ---------- --------
San Antonio Total/ Weighted
Average 1,146 1984 826,440 42.90
------ ---- ---------- --------
OTHER TEXAS
Fountaingate* Wichita Falls, TX 280 1980 252,040 17.79
Settler's Cove Beaumont, TX 182 1982 133,654 6.24
------ ---- ---------- --------
Other Texas Total/ Weighted
Average 462 1981 385,694 24.03
------ ---- ---------- --------
Texas Total/ Weighted
Average 29,022 1983 22,943,989 1,228.63
------ ---- ---------- --------
JACKSONVILLE
Bentley Green Jacksonville, FL 444 1986 308,096 25.69
Brookwood Club Jacksonville, FL 360 1987 287,480 15.00
Huntington at Hidden Hills Jacksonville, FL 224 1986 183,200 14.97
Remington at Ponte Vedra Ponte Vedra Beach, FL 344 1986 302,904 28.60
Sandpiper Jacksonville, FL 376 1985 289,112 17.00
------ ---- ---------- --------
Jacksonville Total/
Weighted Average 1,748 1986 1,370,792 101.26
------ ---- ---------- --------
TAMPA
Ashton Park* Tampa, FL 192 1988 152,072 10.93
Bel Shores Largo, FL 250 1985 189,874 22.30
Carlyle at Waters Tampa, FL 392 1986 281,893 13.00
Oak Ramble Tampa, FL 256 1985 229,384 20.56
South Pointe Tampa, FL 112 1986 97,232 5.0
St. James Crossing* Tampa, FL 264 1986 198,424 21.46
Three Palms Tampa, FL 438 1986 369,362 34.70
------ ---- ---------- --------
Tampa Total/ Weighted
Average 1,904 1986 1,518,241 127.60
------ ---- ---------- --------
OTHER FLORIDA
Saratoga Melbourne, FL 210 1986 146,732 14.00
------ ---- ---------- --------
Florida Total/ Weighted
Average 3,862 1986 3,035,765 243.21
------ ---- ---------- --------
PHOENIX
Casa Verde Phoenix, AZ 268 1983 178,140 8.23
Crestwood* Phoenix, AZ 276 1984 149,433 8.29
Fairways, The* Phoenix, AZ 160 1981 118,192 5.80
Garden Place* Phoenix, AZ 286 1979 231,120 14.20
Meadow Glen Glendale, AZ 290 1987 242,020 11.20
Terra Vida Mesa, AZ 384 1988 305,600 15.40
</TABLE>
50
<PAGE> 52
<TABLE>
<CAPTION>
TOTAL
NUMBER YEAR RENTABLE
OF CONSTRUCTION AREA TOTAL
METROPOLITAN AREA/PROPERTY LOCATION UNITS COMPLETED(1) (SQ. FT.)(2) ACREAGE
- -------------------------- -------- ------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Woodstone Phoenix, AZ 696 1986 573,564 19.70
------ ---- ---------- --------
Phoenix Total/ Weighted
Average 2,360 1985 1,798,069 82.82
------ ---- ---------- --------
OKLAHOMA CITY
Copperfield Oklahoma City, OK 262 1983 187,080 7.70
Hunter's Ridge Oklahoma City, OK 212 1984 155,587 6.00
Summerfield Place Oklahoma City, OK 224 1981 154,528 9.00
Woodscape Oklahoma City, OK 498 1985 363,073 15.60
------ ---- ---------- --------
Oklahoma City Total/
Weighted Average 1,196 1984 860,268 38.30
------ ---- ---------- --------
TULSA
Burning Tree Tulsa, OK 256 1978 156,848 11.32
Cinnamon Stick Tulsa, OK 424 1978 256,672 14.57
Lift, The Tulsa, OK 328 1979 194,168 14.23
------ ---- ---------- --------
Tulsa Total/Weighted
Average 1,008 1978 607,688 40.12
------ ---- ---------- --------
Oklahoma Total/ Weighted
Average 2,204 1981 1,467,956 78.42
------ ---- ---------- --------
NASHVILLE
Brandywine* Nashville, TN 300 1985 203,418 21.00
Nashboro Village* Nashville, TN 994 1982 959,153 60.73
Raintree Nashville, TN 332 1985 216,930 24.90
Windsor Park Hendersonville, TN 232 1985 151,954 13.35
------ ---- ---------- --------
Nashville Total/ Weighted
Average 1,858 1984 1,531,455 119.98
------ ---- ---------- --------
SALT LAKE CITY
James Pointe Murray, UT 312 1985 236,928 11.60
Stillwater Murray, UT 456 1986 343,216 15.34
------ ---- ---------- --------
Salt Lake City Total/
Weighted Average 768 1986 580,144 26.94
------ ---- ---------- --------
ATLANTA
Parkway Station* Atlanta, GA 344 1986 369,960 28.63
Saratoga Springs* Atlanta, GA 266 1985 223,402 20.00
Shannon Chase* Atlanta, GA 156 1987 163,400 26.00
Villas at Indian Trails* Atlanta, GA 236 1986 242,044 39.70
------ ---- ---------- --------
Atlanta Total/ Weighted
Average 1,002 1986 998,806 114.33
------ ---- ---------- --------
</TABLE>
51
<PAGE> 53
<TABLE>
<CAPTION>
TOTAL
NUMBER YEAR RENTABLE
OF CONSTRUCTION AREA TOTAL
METROPOLITAN AREA/PROPERTY LOCATION UNITS COMPLETED(1) (SQ. FT.)(2) ACREAGE
- -------------------------- -------- ------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
SAN DIEGO
Felicita Creek* San Diego, CA 136 1987 104,440 6.20
Park Bonita* San Diego, CA 184 1984 154,256 11.12
Sun Ridge* San Diego, CA 160 1986 134,800 5.44
------ ---- ---------- --------
San Diego Total/ Weighted
Average 480 1986 393,496 22.76
------ ---- ---------- --------
OTHER MARKETS
Eagle Pointe Indianapolis, IN 256 1988 202,000 19.77
Silverado* Albuquerque, NM 256 1985 183,656 8.10
Winridge Aurora, CO (Denver) 364 1986 303,438 15.80
------ ---- ---------- --------
Other Markets Total/
Weighted Average 876 1986 689,094 43.67
------ ---- ---------- --------
Total/Weighted Average 42,432 1983 33,438,774 1,960.76
====== ==== ========== ========
</TABLE>
- -------------------------
(1) Year construction completed indicates the year in which the final
certificate of occupancy for the property was issued.
(2) Total rentable area is calculated by adding the square footage for each
individual apartment in the property. Total rentable area does not include
office or maintenance areas.
* Represents properties owned by WDOP.
52
<PAGE> 54
<TABLE>
<CAPTION>
AVERAGE
MONTHLY RENTAL
UNIT TYPE OCCUPANCY RATE PER UNIT
---------------------- AVERAGE ------------------ ------------------
3BR/ APT SIZE OCTOBER DECEMBER OCTOBER DECEMBER
1BR 2BR 4BR (SQ. FT.) 1998 1997 1998 1997
------ ------ ---- --------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AUSTIN
Arbors of Austin 182 44 -- 685 95.9% 96.0% $565 $551
Arbors of Wells Branch 164 48 -- 737 97.5% 97.1% 608 595
Ashbury Parke 304 112 -- 671 97.5% 95.2% 559 549
Audubon Square 36 128 -- 850 97.3% 94.8% 632 611
Harper's Creek 228 40 -- 753 98.0% 95.8% 579 570
Lakes of Renaissance Park 218 84 6 698 96.8% 97.1% 595 579
Oakridge 151 102 -- 687 97.4% 97.5% 598 563
Pinto Creek 162 87 -- 800 94.8% 95.4% 647 636
Polo Club 240 64 -- 670 97.9% 95.2% 553 534
Shadow Creek 354 66 -- 750 97.1% 94.6% 547 531
Trestles of Austin 252 144 -- 697 93.0% 93.6% 603 613
------ ------ --- ----- ---- ---- ---- ----
Austin Total/Weighted Average 2,291 919 6 719 96.6% 95.5% 603 572
------ ------ --- ----- ---- ---- ---- ----
CORPUS CHRISTI
Rafters, The 74 132 44 866 95.1% 92.8% 589 573
Wharf, The 74 132 44 866 94.4% 94.1% 593 599
Willowick 74 132 44 866 94.4% 94.9% 610 595
------ ------ --- ----- ---- ---- ---- ----
Corpus Christi Total/Weighted
Average 222 396 132 866 94.6% 93.9% 597 589
------ ------ --- ----- ---- ---- ---- ----
DALLAS/FT. WORTH
Arbor Creek 136 144 -- 774 97.4% 92.8% 608 593
Arbors of Bedford 128 76 -- 791 93.8% 89.7% 585 569
Arbors of Carrollton 55 76 -- 858 98.6% 95.7% 632 624
Arbors of Euless 136 136 -- 786 91.2% 91.7% 578 556
Bent Creek 284 42 -- 718 94.1% 93.9% 506 495
Woods of Bedford(1) 468 238 -- 728 91.8% N/A 520 N/A
Brittany Park 149 68 -- 892 93.5% 91.8% 637 625
Canyon Ridge 76 88 -- 737 96.8% 97.2% 591 573
Casa Valley 120 30 -- 873 99.1% 94.2% 713 704
Cinnamon Park 144 112 16 784 96.4% 90.6% 567 563
Clover Hill 104 112 -- 828 95.6% 92.6% 543 530
Creekwood Village 328 34 -- 709 93.5% 95.9% 536 519
Fielder's Glen 140 80 -- 753 95.9% 93.4% 540 513
Gables of McKinney, The 160 60 -- 772 92.5% 94.8% 627 617
Greens Crossing 292 72 -- 722 88.3% 89.9% 506 495
Hillcrest 264 46 -- 659 94.4% 94.3% 485 472
Hilltop 150 88 -- 753 96.3% 95.6% 531 528
Montfort Oaks 160 116 -- 781 96.8% 98.1% 624 605
Newport 208 100 -- 775 96.2% 94.4% 579 575
Parks at Treepoint 276 294 16 805 94.7% 92.7% 558 543
</TABLE>
53
<PAGE> 55
<TABLE>
<CAPTION>
AVERAGE
MONTHLY RENTAL
UNIT TYPE OCCUPANCY RATE PER UNIT
---------------------- AVERAGE ------------------ ------------------
3BR/ APT SIZE OCTOBER DECEMBER OCTOBER DECEMBER
1BR 2BR 4BR (SQ. FT.) 1998 1997 1998 1997
------ ------ ---- --------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pinnacle, The 86 64 -- 798 93.1% 95.5% 635 610
Post Oak Place 270 84 -- 723 93.4% 91.3% 552 541
Preston Greens 165 92 -- 962 79.7% 91.4% 743 693
Reflections of Highpoint 276 97 -- 758 84.3% 92.6% 661 613
Remington Hill 300 140 -- 770 96.3% 93.3% 583 563
Rivercrest 320 100 -- 803 94.9% 89.3% 530 535
Shadow Creek 120 120 -- 758 93.0% 93.6% 551 545
Shadowridge Village 112 32 -- 825 95.5% 87.7% 629 614
Sierra Springs(1) 160 126 -- N/A 89.6% N/A 546 N/A
Springfield 192 72 -- 732 98.1% 95.4% 549 534
Summer Meadows 236 153 -- 831 89.1% 92.0% 688 667
Summer Villas 380 80 -- 713 93.0% 91.9% 578 565
Summers Crossing 216 78 -- 815 94.3% 94.7% 662 652
Summers Landing 172 24 -- 711 97.0% 97.0% 592 563
Trinity Mills 128 80 -- 783 96.4% 91.3% 641 612
Trinity Oaks 189 51 -- 626 98.1% 96.9% 549 538
Waterford on the Meadow 102 248 -- 888 97.1% 93.0% 673 654
------ ------ --- ----- ---- ---- ---- ----
Dallas/Ft. Worth
Total/Weighted Average 7,202 3,653 32 771 91.3% 92.6% 582 569
------ ------ --- ----- ---- ---- ---- ----
HOUSTON
Arbor Point 43 22 -- 877 90.2% 97.0% 663 631
Ashton Woods 76 74 27 854 97.1% 93.2% 526 496
Aston Brook 88 64 -- 785 96.0% 95.5% 502 463
Bar Harbor 260 56 -- 662 96.3% 92.8% 517 487
Bayou Oaks 138 72 -- 755 98.3% 96.9% 501 480
Brandon Oaks 88 108 -- 862 98.1% 90.2% 570 540
Briarcrest 232 144 -- 789 97.4% 90.5% 532 511
Brookfield 190 60 -- 756 97.9% 95.8% 536 505
Carriage Hill 96 120 36 961 97.4% 95.5% 595 568
Central Park Condos 29 52 12 1,065 93.1% 97.2% 748 715
Central Park Regency 132 216 -- 917 95.1% 95.6% 600 570
Charleston, The 228 84 -- 726 96.0% 96.1% 493 452
Cimarron Park 100 54 8 832 91.3% 95.2% 575 546
Cimarron Parkway 216 56 -- 876 96.6% 97.1% 557 536
Colony Oaks 92 70 -- 1,030 95.0% 97.6% 627 604
Colorado Club 220 80 -- 753 99.3% 96.4% 535 523
Copper Cove 192 78 -- 756 93.0% 88.8% 508 496
Enclave at Cypress Park 232 124 28 859 94.2% 93.7% 582 563
Foxboro 160 60 -- 740 92.6% 93.0% 505 487
Georgetown Townhomes 42 33 81 1,521 99.5% 97.9% 978 941
</TABLE>
54
<PAGE> 56
<TABLE>
<CAPTION>
AVERAGE
MONTHLY RENTAL
UNIT TYPE OCCUPANCY RATE PER UNIT
---------------------- AVERAGE ------------------ ------------------
3BR/ APT SIZE OCTOBER DECEMBER OCTOBER DECEMBER
1BR 2BR 4BR (SQ. FT.) 1998 1997 1998 1997
------ ------ ---- --------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Harbor Pointe 90 104 4 903 88.1% 91.4% 657 636
Harpers Mill 88 92 -- 796 96.6% 90.7% 484 462
Hidden Lake 288 152 -- 724 96.8% 96.4% 670 639
Holiday on Hayes 172 140 -- 803 97.6% 96.2% 561 536
Hunt Club at Pin Oak, The 168 36 -- 666 99.0% 97.7% 474 456
Huntley, The 128 86 -- 771 96.6% 95.8% 653 617
Laurel Creek 304 100 24 756 93.1% 93.2% 603 578
Live Oak 136 26 -- 750 94.9% 95.5% 540 515
Meadows on Memorial -- 75 21 989 98.3% 97.6% 645 612
Mill Creek 76 98 -- 860 97.7% 97.4% 511 484
Monticello on Cranbrook 73 171 -- 834 97.1% 96.8% 531 502
Northwoods -- 100 100 1,188 95.8% 96.2% 716 675
One Camden Court 60 76 -- 766 96.3% 95.6% 447 422
One Cypress Landing 396 68 -- 772 97.0% 90.9% 469 442
One Westfield Lake 72 126 48 1,095 94.5% 95.5% 682 637
One Willow Chase 60 76 -- 766 96.2% 97.5% 520 482
One Willow Park 131 47 -- 787 97.0% 96.9% 535 509
Pathway, The 136 8 -- 969 95.8% 96.4% 682 655
Pine Creek Village 128 88 -- 788 94.8% 91.9% 499 475
Polo Club on Cranbrook I 156 72 -- 708 96.8% 94.3% 457 429
Polo Club on Cranbrook II 176 116 -- 737 94.4% 91.4% 472 443
Retreat at Eldridge(1) 108 60 -- 942 90.1% N/A 766 N/A
Richmond Green 74 150 -- 958 93.7% 97.7% 673 644
Riverwalk 128 56 -- 764 95.9% 94.9% 543 527
Silverado 272 72 -- 724 96.0% 97.3% 550 526
South Greene(1) 172 96 -- 821 89.9% N/A 574 N/A
Stoney Creek 164 88 -- 771 96.2% 96.7% 487 464
Timbers on Cranbrook 184 90 -- 755 95.9% 95.5% 506 470
Tranquility Lake 35 55 -- 938 97.4% 98.0% 738 699
Wimbledon 49 106 6 960 95.5% 96.8% 607 567
Woodborough 240 80 -- 696 97.6% 95.4% 459 428
Woodchase 86 184 -- 935 98.0% 94.5% 618 601
Woodedge 21 104 1 904 93.1% 95.4% 575 541
Woodlake Townhomes 260 52 3 770 96.6% 95.8% 549 517
------ ------ --- ----- ---- ---- ---- ----
Houston Total/Weighted
Average 7,485 4,677 399 826 92.6% 94.9% 565 535
------ ------ --- ----- ---- ---- ---- ----
SAN ANTONIO
Costa del Sol 170 74 -- 741 95.3% 89.6% 507 522
Country View 176 96 -- 784 96.4% 96.3% 488 486
Remington 108 50 -- 709 98.7% 91.6% 493 504
</TABLE>
55
<PAGE> 57
<TABLE>
<CAPTION>
AVERAGE
MONTHLY RENTAL
UNIT TYPE OCCUPANCY RATE PER UNIT
---------------------- AVERAGE ------------------ ------------------
3BR/ APT SIZE OCTOBER DECEMBER OCTOBER DECEMBER
1BR 2BR 4BR (SQ. FT.) 1998 1997 1998 1997
------ ------ ---- --------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Summer Oaks 184 72 -- 670 96.7% 91.0% 449 464
Villas of St. Moritz 136 80 -- 690 98.7% 98.5% 476 483
------ ------ --- ----- ---- ---- ---- ----
San Antonio Total/Weighted
Average 774 372 -- 721 97.0% 93.5% 482 491
------ ------ --- ----- ---- ---- ---- ----
OTHER TEXAS
Fountaingate 160 104 16 900 96.0% 89.6% 523 526
Settler's Cove 138 44 -- 734 94.4% 94.8% 518 501
------ ------ --- ----- ---- ---- ---- ----
Other Texas Total/Weighted
Average 298 148 16 835 95.4% 91.6% 520 516
------ ------ --- ----- ---- ---- ---- ----
Texas Total/Weighted Average 18,272 10,165 585 789 92.8% 93.9% 567 551
------ ------ --- ----- ---- ---- ---- ----
JACKSONVILLE
Bentley Green 336 108 -- 694 95.7% 94.0% 556 559
Brookwood Club 200 160 -- 799 92.0% 87.0% 560 547
Huntington at Hidden Hills 64 160 -- 818 94.8% 95.6% 569 541
Remington at Ponte Vedra
Lakes 136 208 -- 881 95.2% 93.1% 664 651
Sandpiper 200 144 32 769 96.8% 89.7% 562 548
------ ------ --- ----- ---- ---- ---- ----
Jacksonville Total/Weighted
Average 936 780 32 784 95.0% 91.6% 581 570
------ ------ --- ----- ---- ---- ---- ----
TAMPA
Ashton Park(1) 122 70 -- 792 90.7% N/A 579 N/A
Bel Shores 138 112 -- 759 93.4% 93.9% 613 608
Carlyle at Waters 310 82 -- 719 93.2% 90.6% 527 511
Oak Ramble 128 128 -- 896 93.9% 94.3% 625 621
South Pointe(1) 72 40 -- 868 91.6% N/A 655 N/A
St. James Crossing(1) 176 88 -- 752 95.7% N/A 532 N/A
Three Palms 254 184 -- 843 97.0% 86.0% 634 623
------ ------ --- ----- ---- ---- ---- ----
Tampa Total/Weighted Average 1,200 704 -- 786 94.2% 90.4% 590 587
------ ------ --- ----- ---- ---- ---- ----
OTHER FLORIDA
Saratoga 160 50 -- 699 95.7% 93.4% 568 514
------ ------ --- ----- ---- ---- ---- ----
Florida Total/Weighted
Average 2,296 1,534 32 786 94.6% 91.3% 603 573
------ ------ --- ----- ---- ---- ---- ----
PHOENIX
Casa Verde 184 84 -- 665 96.8% 93.3% 427 408
Crestwood 255 21 -- 541 98.1% 95.5% 480 450
Fairways, The 108 52 -- 739 92.7% 92.8% 561 546
Garden Place 132 154 -- 808 91.2% 94.8% 612 580
Meadow Glen 90 200 -- 835 96.9% 96.3% 636 610
Terra Vida 128 224 32 796 86.3% 96.5% 635 613
Woodstone 432 240 24 824 94.7% 89.5% 605 589
------ ------ --- ----- ---- ---- ---- ----
Phoenix Total/Weighted
Average 1,329 975 56 762 93.7% 93.5% 577 554
------ ------ --- ----- ---- ---- ---- ----
</TABLE>
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<PAGE> 58
<TABLE>
<CAPTION>
AVERAGE
MONTHLY RENTAL
UNIT TYPE OCCUPANCY RATE PER UNIT
---------------------- AVERAGE ------------------ ------------------
3BR/ APT SIZE OCTOBER DECEMBER OCTOBER DECEMBER
1BR 2BR 4BR (SQ. FT.) 1998 1997 1998 1997
------ ------ ---- --------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OKLAHOMA CITY
Copperfield 196 66 -- 714 94.4% 94.7% 471 473
Hunter's Ridge 148 64 -- 734 92.8% 90.7% 453 455
Summerfield Place 176 48 -- 690 90.9% 89.9% 449 445
Woodscape 348 150 -- 729 94.5% 88.8% 472 475
------ ------ --- ----- ---- ---- ---- ----
Oklahoma City Total/Weighted
Average 868 328 -- 719 93.5% 90.6% 464 465
------ ------ --- ----- ---- ---- ---- ----
TULSA
Burning Tree 208 48 -- 613 95.5% 97.0% 378 359
Cinnamon Stick 360 64 -- 605 95.1% 92.5% 359 352
Lift, The 280 48 -- 592 93.6% 90.9% 361 348
------ ------ --- ----- ---- ---- ---- ----
Tulsa Total/Weighted Average 848 160 -- 603 94.7% 93.1% 364 352
------ ------ --- ----- ---- ---- ---- ----
Oklahoma Total/Weighted
Average 1,716 488 -- 666 94.1% 91.8% 418 414
------ ------ --- ----- ---- ---- ---- ----
NASHVILLE
Brandywine 240 60 -- 678 97.3% 88.0% 534 543
Nashboro Village 456 426 112 965 90.1% 91.0% 639 632
Raintree 252 80 -- 653 97.5% 84.9% 533 545
Windsor Park 186 46 -- 655 97.7% 92.8% 527 534
------ ------ --- ----- ---- ---- ---- ----
Nashville Total/Weighted
Average 1,134 612 112 824 93.5% 89.7% 589 590
------ ------ --- ----- ---- ---- ---- ----
SALT LAKE CITY
James Pointe 144 168 -- 759 99.4% 90.4% 585 588
Stillwater 152 304 -- 753 98.0% 94.5% 605 597
------ ------ --- ----- ---- ---- ---- ----
Salt Lake City Total/Weighted
Average 296 472 -- 755 98.6% 92.9% 597 593
------ ------ --- ----- ---- ---- ---- ----
ATLANTA
Parkway Station(1) 72 164 108 1,075 84.8% N/A 706 N/A
Saratoga Springs 128 138 -- 840 94.7% 94.8% 659 635
Shannon Chase 50 106 -- 1,047 97.5% 90.6% 691 674
Villas at Indian Trails 60 176 -- 1,026 93.9% 84.5% 692 684
------ ------ --- ----- ---- ---- ---- ----
Atlanta Total/Weighted
Average 310 584 108 997 91.5% 90.1% 688 662
------ ------ --- ----- ---- ---- ---- ----
SAN DIEGO
Felicita Creek 36 100 -- 768 99.6% 97.9% 695 649
Park Bonita 36 148 -- 838 99.7% 94.0% 829 789
Sun Ridge 16 144 -- 843 96.8% 93.6% 659 629
------ ------ --- ----- ---- ---- ---- ----
San Diego Total/Weighted
Average 88 392 -- 820 98.7% 95.0% 734 696
------ ------ --- ----- ---- ---- ---- ----
</TABLE>
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<PAGE> 59
<TABLE>
<CAPTION>
AVERAGE
MONTHLY RENTAL
UNIT TYPE OCCUPANCY RATE PER UNIT
---------------------- AVERAGE ------------------ ------------------
3BR/ APT SIZE OCTOBER DECEMBER OCTOBER DECEMBER
1BR 2BR 4BR (SQ. FT.) 1998 1997 1998 1997
------ ------ ---- --------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER MARKETS
Eagle Pointe 152 104 -- 789 92.1% 90.1% 583 576
Silverado, The 180 76 -- 717 89.5% 88.6% 551 560
Winridge 262 102 -- 834 94.1% 93.7% 648 627
------ ------ --- ----- ---- ---- ---- ----
Other Markets Total/Weighted
Average 594 282 -- 787 92.2% 91.1% 603 593
------ ------ --- ----- ---- ---- ---- ----
Total/Weighted Average 26,035 15,504 893 788 93.3% 93.3% $571 $553
====== ====== === ===== ==== ==== ==== ====
</TABLE>
- -------------------------
(1) Represents recently acquired property for which historical information is
not available.
EMPLOYEES
As of October 23, 1998, we had 1,206 employees, of which 194 are located at our
headquarters in Dallas, Texas and our regional offices located in Atlanta,
Austin, Dallas, Fort Worth, Houston, Jacksonville, Phoenix, San Antonio, Tampa
and Tulsa. The remaining 1,012 employees are located at the properties we own
and manage. None of our employees are currently represented by a union. We
believe that relations with our employees are good.
LEGAL PROCEEDINGS
We are not presently subject to, nor are any of our properties subject to, any
material litigation. To our knowledge, there is no material litigation
threatened against us or our properties. We, and our properties, are
occasionally subjected to routine litigation arising in the ordinary course of
business, which has been and is expected to be covered by liability insurance
and none of which has had or is expected to have a material adverse effect on
our business, financial condition, results of operations or cash flows.
REGULATION
GENERAL. Apartment community properties are subject to various laws, ordinances
and regulations, including regulations relating to recreational facilities such
as swimming pools, activity centers and other common areas. We believe we have
the necessary permits and approvals under present laws, ordinances and
regulations to operate our business in the manner described herein.
AMERICANS WITH DISABILITIES ACT. Our properties and any newly acquired or
developed multifamily properties must comply with Title III of the Americans
with Disabilities Act of 1990 (the "ADA") to the extent they are "public
accommodations" and/or "commercial facilities" under the ADA. Compliance with
ADA requirements could require removal of structural barriers to handicapped
access in certain public areas of the properties where such removal is readily
achievable. The ADA does not, however, consider residential properties, such as
multifamily properties, to be public accommodations or
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commercial facilities, except to the extent that portions of such facilities,
such as leasing offices, are open to the public. We have obtained structural
reports from third-party consultants specifying modifications to certain of the
properties that were required in order to bring such properties into full
compliance with the ADA. We have substantially completed these modifications.
FAIR HOUSING AMENDMENTS ACT OF 1988. The FHA requires multifamily properties
first occupied after March 13, 1990 to be accessible to the handicapped.
Noncompliance with the FHA could result in the imposition of fines or an award
of damages to private litigants. All of our current properties were occupied
prior to March 13, 1990. Any properties which we are currently developing or
anticipate developing will comply with the FHA.
AFFORDABLE HOUSING RESTRICTIONS. We have 15 properties which are subject to
restrictions requiring that a specified percentage of the apartment units be
offered to households with lower or moderate incomes (currently, 70% of the
total number of apartment units in the 15 affected properties and 9% of the
total number of our apartment units). Generally, these provisions originated
from the use of tax exempt financing in those instances where it was determined
that the benefits of the lower interest rate associated with such financing
offset the potential reduction of rental income resulting from such rental
restrictions.
The regulated properties are:
- - Colorado Club
- - Reflections of Highpoint
- - Sierra Springs
- - Summer Meadows
- - Winridge
- - James Pointe
- - Remington Hill
- - South Pointe
- - Summers Crossing
- - Woodstone
- - Meadow Glen
- - Remington at Ponte Vedra
- - Stillwater
- - Windsor Park
- - Terra Vida
In addition, three of these properties are subject to limits on the amount of
rent that can be charged for certain of the apartment units. We believe we are
in compliance with these restrictions. These restrictions have not had a
material adverse effect on our operations or ability to rent the units. We do
not anticipate these restrictions will have a material adverse effect on future
operations or possible sales of the 15 properties in the future.
RENT CONTROL LEGISLATION. State and local rent control laws in certain
jurisdictions limit a property owner's ability to increase rents and to recover
from residents increases in operating expenses and the costs of capital
improvements. Enactment of such laws has been considered from time to time in
other jurisdictions, although none of the jurisdictions in which we presently
operate has adopted such laws. We do not presently own, or intend to acquire,
multifamily properties in markets that are either subject to rent control or in
which rent limiting legislation exists.
ENVIRONMENTAL MATTERS
Under federal, state and local environmental laws, ordinances and regulations, a
current or previous owner or operator of real estate may be required to
investigate and remediate hazardous or toxic substances or petroleum product
releases at such property and may be held liable to a government entity or third
party for property damage, investigation and remediation costs incurred by such
parties in connection with such contamination. These laws typically impose
cleanup responsibility and liability without regard to whether the owner or
operator knew of, or caused the presence of, the contaminants. The costs of
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<PAGE> 61
investigation, remediation or removal of such substances may be substantial, and
the presence of such substances, or the failure to properly remediate such
substances, may adversely affect the owner's ability to sell or rent such real
estate or to borrow using such real estate as collateral.
In addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs incurred in connection with the
contamination. Individuals who arrange for the disposal or treatment of
hazardous or toxic substances may be held liable for the costs of investigation,
remediation or removal of such hazardous or toxic substances at or from the
disposal or treatment facility regardless of whether such facility is owned or
operated by such person. Finally, the owner of a site may be subject to common
law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site.
Federal, state and local laws, ordinances and regulations also govern the
removal, encapsulation or disturbance of asbestos-containing materials ("ACMs")
when such materials are in poor condition or in the event of the remodeling,
renovation or demolition of a building. These laws may impose liability for the
release of ACMs and may provide for third parties to seek recovery from owners
or operators of real estate for personal injury associated with ACMs. In
connection with the ownership and operation of its properties, we may be
potentially liable for costs in connection with ACMs or other hazardous or toxic
substances.
All of our properties have been the subject of environmental assessments, which
are intended to reveal information regarding, and to evaluate the environmental
condition of, the surveyed properties and surrounding properties. These
assessments generally include:
- a historical review,
- a public records review,
- a preliminary site investigation of the site and surrounding properties,
- screening for the presence of asbestos,
- screening for equipment containing polychlorinated biphenyls,
- screening for underground storage tanks, and
- the preparation of a written report.
These assessments generally do not include soil sampling or subsurface
investigations.
The environmental assessments on each of our properties have revealed elevated
lead content in the drinking water at three of the properties and ACMs at 75 of
the properties, some of which is "friable" (or easily crumbled), but in good and
manageable condition. We have implemented an operations and maintenance program
which establishes procedures for dealing with ACMs if they are moved or
otherwise disturbed. Our cost resulting from any future disturbance of the ACMs
will depend upon the magnitude of the disturbance and the location of the ACMs.
Although we do not believe we are required to take action to address the
elevated lead levels in the water of the three properties, we are currently
either taking action, or determining the most effective remedial actions and
notification options. We anticipate any such remedial actions and notifications
for these matters will cost between $760,000 and $780,000 in the aggregate,
which will be
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<PAGE> 62
capitalized when incurred and is expected to be funded through our cash flow
from operations.
Environmental assessments have not revealed any environmental liability we
believe would have a material adverse effect on our business, assets, or results
of operations, nor are we aware of any such environmental liability.
Nevertheless, it is possible that these assessments did not reveal all
environmental liabilities or that there are unknown material environmental
liabilities. Moreover, we cannot guarantee that
- future laws, ordinances or regulations will not require any material
expenditures by or impose any material liabilities in connection with
environmental conditions by or on us or our properties,
- the current environmental condition of a property will not be adversely
affected by residents and occupants of the property, by the condition of
properties in the vicinity, such as the presence of underground storage
tanks, or by unrelated third parties, or
- prior owners of the properties did not create unknown environmental
problems.
We believe our properties are in compliance in all material respects with all
Federal, state and local laws, ordinances and regulations regarding hazardous or
toxic substances or petroleum products. Except as otherwise described above, we
have not been notified by any governmental authority, and we are not otherwise
aware, of any material noncompliance, liability or claim relating to hazardous
or toxic substances or petroleum products with respect to any of our properties.
We accrue for losses associated with environmental remediation obligations when
such losses are probable and reasonably estimatable. Accruals for estimated
losses from environmental remediation obligations generally are recognized no
later than completion of the remediation 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. We are not aware of any environmental
remediation obligations which would materially affect our operations, financial
position or cash flows.
INSURANCE
We carry comprehensive liability, fire, extended coverage and rental loss
insurance with respect to all of our properties, with policy specifications,
insured limits and deductibles customarily carried for similar properties. There
are, however, certain types of losses (such as losses arising from earthquakes
or wars) that are not generally insured because they are either uninsurable or
not economically insurable. Should an uninsured loss or a loss in excess of
insured limits occur, we could lose our capital invested in the affected
property, as well as the anticipated future revenues from such property and
would continue to be obligated on any mortgage indebtedness or other obligations
related to the property. We could be adversely affected by any such loss. We
believe our properties are currently adequately insured.
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AVAILABLE INFORMATION
We have filed a registration statement, of which this prospectus is a part, on
Form S-11 with the Securities and Exchange Commission (the "Commission")
relating to the Walden Securities. This Prospectus does not contain all of the
information in the registration statement and the exhibits and financial
statements included with the registration statement. If we describe the contents
of any contract or other document in this Prospectus, the description may not
necessarily be a complete description. You should refer to the copy of the
document filed as an exhibit to the registration statement or incorporated by
reference for a complete description. You can obtain copies of the registration
statement and the exhibits for a fee from the Commission at its principal office
in Washington, D.C.
We also file periodic reports, proxy statements and other information with the
Commission. You can review and copy these documents at the offices of the
Commission in Washington, D.C. and at the Commission's regional offices in
Chicago, Illinois and New York, New York. The Commission also maintains an
internet web site that contains these documents and other information regarding
registrants that file electronically. The internet address of the Commission's
web site is: http://www.sec.gov.
Our Common Stock is listed on, and the 9.00% Redeemable Preferred Stock is
approved for listing on, the NYSE and reports, proxy statements and other
information concerning us can be inspected at the NYSE offices in New York, New
York.
We furnish our stockholders with annual reports containing financial statements
audited by our independent auditors.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of our current policies with respect to
investments, financing, affiliate transactions and certain other activities.
These policies have been established by our management. These policies may be
amended or waived from time to time at the discretion of our Board of Directors
without a vote of our stockholders. No assurance can be given that our
investment objectives will be attained or that our value will not decrease.
INVESTMENT POLICIES
INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE. Our primary business
objective is to maximize stockholder value by maintaining long-term growth in
cash available for distribution to its stockholders. We intend to pursue this
objective by continuing to acquire and develop garden apartment properties for
long-term ownership and to manage its properties, and thereby seek to maximize
current and long-term net income and the value of its assets. Our policy is to
acquire and develop assets where we believe opportunities exist for acceptable
investment returns. See "The Company -- Business Strategies."
We expect to pursue our investment objectives primarily through the direct
ownership of properties. We currently invest in developed garden apartment
communities primarily located in our target markets. However, future investment
activities will not be limited to any geographic area or product type or to a
specified percentage of our assets.
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Although we are not currently doing so, we may also participate with other
entities in property ownership, through joint ventures or other types of common
ownership. Equity investments may be subject to existing mortgage financing and
other indebtedness which have priority over our equity interests.
INVESTMENTS IN REAL ESTATE MORTGAGES. While we intend to emphasize equity real
estate investments, we may invest in mortgages or other real estate interests
consistent with our qualification as a REIT. We may also invest in participating
or convertible mortgages if our Board concludes we and our stockholders, may
benefit from the cash flow or any appreciation in the value of the subject
property. Such mortgages are similar to equity participation. The mortgages in
which we may invest may be either first mortgages or junior mortgages and may or
may not be insured by a governmental agency.
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES AND OTHER ISSUERS. Subject to the percentage of ownership limitations
and gross income tests necessary for REIT qualification, we also may invest in
securities of entities engaged in real estate activities or securities of other
issuers, including for the purpose of exercising control over such entities,
although we do not currently intend to do so. See "Federal Income Tax
Considerations -- Taxation of the Company as a REIT."
PERIODIC REVIEW OF ASSETS. We intend to dispose of certain properties. We
reserve the right to dispose of any property if we determine the disposition of
such property is in our best interests and the best interests of our
stockholders.
FINANCING POLICIES
As a general policy, we intend to maintain a ratio of total indebtedness to
market capitalization (i.e., the market value of issued and outstanding shares
of capital stock plus total debt) of less than 50%. However, we may not be able
to accomplish this objective. The debt-to-total market capitalization ratio is
based upon the stock market value of equity, and accordingly fluctuates with
changes in the price of the shares and differs from a debt-to-tangible net worth
ratio which is based on the net tangible book value of assets because we believe
that market capitalization is a more appropriate measure of the market value of
our assets than the net tangible book value of its assets and more indicative of
its ability to repay debt.
We may from time to time reevaluate our debt policy in light of factors which
include, but are not limited to:
- current economic conditions,
- relative costs of debt and equity capital,
- change in our market capitalization, and
- acquisition opportunities.
We may also modify our debt financing policy and may increase or decrease our
ratio of debt-to-total market capitalization without a vote of our stockholders.
Our Articles and our Bylaws do not contain any limitations on the amount or
percentage of indebtedness which we may incur.
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Our future indebtedness, which may be unsecured or may be secured by mortgages
on or other interests in our properties, may take several forms, including:
- bank borrowings,
- purchase money obligations to the sellers of properties,
- assumed indebtedness,
- publicly or privately placed debt instruments, or
- financing from institutional investors or other lenders.
The recourse of the holders of our debt may be to all or any part of our
properties or may be limited to the particular property to which the debt
relates. Subject to any contractual restrictions, the proceeds from any of our
borrowings may be used for the payment of distributions, for working capital, to
refinance existing indebtedness or to finance acquisitions of new properties.
In the event our Board determines to raise additional equity capital, our Board
has the authority, without stockholder approval, to issue additional shares of
Common Stock or shares of preferred stock in any manner, and on such terms and
for such consideration, it deems appropriate, including in exchange for
property. Any such issuance will be subject to the provisions of Maryland
General Corporation Law. Existing stockholders would have no preemptive right to
purchase such shares in any offering, and any such offering might cause a
dilution of a stockholder's investment. See "Description of Common Stock" and
"Description of Redeemable Preferred Stock."
STOCK REPURCHASE PROGRAM
We adopted a new Stock Repurchase Program on June 4, 1998, authorizing the
purchase of up to 2.5 million shares of our Common Stock. This program is in
addition to our prior repurchase program, announced July 11, 1997, authorizing
us to purchase up to 1.0 million shares of our Common Stock by December 31,
1998. As of September 30, 1998, we have repurchased approximately 1.0 million
shares of our outstanding Common Stock, leaving 2.5 million shares authorized
for repurchase under both programs combined. However, we will not repurchase
additional shares under this program if the purchase would cause our debt to
total market capitalization to exceed 46%.
SALE OF INVESTMENTS
We occasionally dispose of properties that are not located within our target
markets or not performing up to our standards.
OFFERING OF SECURITIES IN EXCHANGE FOR PROPERTY
From time to time we exchange WDOP partnership units for property, and will
continue to do so as conditions warrant.
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MANAGEMENT
We are managed by our Board of Directors, a portion of which is elected annually
by our stockholders. The directors are responsible for appointing our executive
officers and for determining our strategic direction. The executive officers
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 our executive officers and directors and the
positions held by each individual.
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
EXECUTIVE OFFICERS
Michael E. Masterson.......... 55 Chairman of the Board of Directors
Marshall B. Edwards........... 53 Chief Executive Officer, President, Chief
Operating Officer and Director
Mark S. Dillinger............. 46 Executive Vice President, Chief Financial Officer
and Director
Michael L. Collier............ 55 Executive Vice President of Property Management
Don R. Daseke................. 58 Chairman Emeritus
Maxwell B. Drever............. 57 Chairman Emeritus
INDEPENDENT DIRECTORS
Linda Walker Bynoe............ 45 Director
Francesco Galesi.............. 67 Director
Robert L. Honstein............ 42 Director
Arch K. Jacobson.............. 70 Director
Louis G. Munin................ 64 Director
J. Otis Winters............... 65 Director
</TABLE>
EXECUTIVE OFFICERS
Michael E. Masterson has been Chairman of the Board and a Director since October
1997. Prior thereto, Mr. Masterson was Executive Vice President of Drever from
1989 to 1992 and President of Drever from 1992 to October 1997. As President of
Drever, Mr. Masterson was responsible for the overall administration of Drever
and its subsidiaries, he coordinated institutional financing and oversaw the
several joint ventures in which institutions are investors. 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. 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.
Marshall B. Edwards has been a Director and the Chief Acquisitions Officer since
October 1993 and was elected President on June 8, 1995. On October 20, 1997,
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Mr. Edwards was elected as Chief Executive Officer. Prior to joining us, 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 the Executive Vice President and Chief Financial
Officer since October 1993. Mr. Dillinger joined The Walden Group, Inc. ("Walden
Group"), one of our predecessor entities, in 1982 and has served as Executive
Vice President and the Chief Financial Officer of Walden Group since 1987. 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.
Michael L. Collier has been the Executive Vice President of Property Management
since October 1997. He has also been President of Concierge Management
Corporation, the management subsidiary of Drever since its formation in 1987. He
was founder of that company in 1987, together with Mr. Drever. From 1983 to
1987, Mr. Collier was President of Midkiff Property Development Company, a
management and development concern. A member of the National Multi Housing
Council, Mr. Collier is also on the Board of Directors of the Houston Apartment
Association.
Don R. Daseke has been a Director since our formation in September 1993 and
Chairman of the Board of Directors and Chief Executive Officer from October 1993
to October 1997. In October 1997, Mr. Daseke resigned as Chairman of the Board
and Chief Executive Officer and was elected as Chairman Emeritus. He has been
the Chairman of the Board of Directors, President and Chief Executive Officer of
Walden Group and its predecessor since 1974. Mr. Daseke is a Certified Public
Accountant and a member of the American, Connecticut and New York Institutes of
Certified Public Accountants, Chairman of the Board of Galapagos Studios, Inc.,
Chairman of the Board of Netier Technologies, Inc., Chairman of the Board of
U.S. Telephone Holding, Inc., Director of Promise House and has served on the
Board of Trustees of DePauw University since 1984.
Maxwell B. Drever has been Chairman Emeritus and a Director since October 1997.
From 1985 until October 1997, Mr. Drever was Chairman of Drever Properties, Inc.
("Drever"), which along with certain of its affiliates, was the general partner
of the partnerships from which the Company acquired a 79 property portfolio
consisting of approximately 18,100 apartment units. In his capacity as Chairman
of Drever, he set company policies and devised strategies relevant to the
acquisition, enhancement and management of Drever's 79 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 comparable cities. Mr.
Drever is a Director of the National Multi Housing council and a Full Member of
the Urban Land Institute.
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INDEPENDENT DIRECTORS
Linda Walker Bynoe has been a Director since February 1994. Ms. Bynoe is the
President and Chief Operating Officer of Telemat Ltd., a private investment and
project management 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 town home
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 Director of LDDS
WORLDCOM, one of the largest long distance telephone companies. In 1978, Mr.
Galesi received the Award of Achievement from President Carter for his
contribution to economic development in the United States.
Robert L. Honstein has been a Director since October 1997. Mr. Honstein has been
a member of Nassau Capital L.L.C., the investment manager for private
investments of Princeton University's endowment, since 1995. Prior thereto, Mr.
Honstein was a Vice President at Princeton University Investment Company where
he focused on the real estate investing nationwide for Princeton University's
endowment from 1991 to 1995. Before Princeton, he was partner at Matrix
Development Group, a commercial and industrial real estate development firm in
New Jersey. Mr. Honstein serves as a Director of Corporate Realty Investment
Company and Affordable Residential Communities.
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. and Chieftain International, Inc. 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 PWS Group, Inc. (formerly
Pate, Winters & Stone, Inc.), a corporate consulting firm, since 1990. He
previously served as
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<PAGE> 69
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 and NGC Corporation. He is a registered professional engineer
(Oklahoma).
CLASSIFICATION OF THE BOARD
The Board is divided into three classes. The terms of the first, second and
third classes expire in 1999, 2000, and 2001, respectively. Directors of each
class are elected for three year terms upon the expiration of the current class'
term. The staggered terms for directors may affect our stockholders' ability to
effect a change in control even if a change in control were in our stockholders'
best interest.
COMMITTEES OF THE BOARD
The Board has an Executive Committee, an Audit Committee, a Compensation
Committee and a Nominating and Corporate Governance Committee.
The Executive Committee currently consists of Linda Walker Bynoe, Francesco
Galesi, Robert L. Honstein, Arch K. Jacobson, Louis G. Munin and J. Otis
Winters. The Executive Committee has all powers of the Board except for those
which require action by all directors under our Articles or bylaws or under
applicable law. The Executive Committee met three times during the fiscal year
ended December 31, 1997.
The Audit Committee is an advisory committee whose current members are Messrs.
Munin, Honstein and Jacobson. The Audit Committee met four times during the
fiscal year ended December 31, 1997. The Audit Committee's function is to make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and nonaudit fees and review the
adequacy of our internal accounting controls.
The Compensation Committee currently consists of Ms. Bynoe, Mr. Galesi and Mr.
Winters. The Compensation Committee recommends compensation for our executive
officers to the Board and administers our Amended and Restated 1994 Stock Option
Plan (the "Stock Option Plan"). The Compensation Committee met four times during
the fiscal year ended December 31, 1997.
The Nominating and Corporate Governance Committee currently consists of Ms.
Bynoe and Messrs. Galesi, Honstein, Jacobson, Munin and Winters. The Nominating
and Corporate Governance Committee selects the candidates for election as
directors to be recommended to the Board for either filling vacancies that arise
from time to time on the Board or for presenting to the stockholders at each
annual meeting of stockholders. The committee also assists the Board in carrying
out its responsibilities by reviewing corporate governance issues. The
Nominating and Corporate Governance Committee met three times during the fiscal
year ended December 31, 1997.
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<PAGE> 70
COMPENSATION OF DIRECTORS
Directors who are not our employees are paid a $15,000 annual retainer, with an
additional $5,000 annual retainer, payable in shares of restricted stock, being
paid to each member of the Executive Committee and an additional $5,000 annual
retainer payable to each committee chairperson. In addition, each non-employee
director receives a fee of $1,500 for attending each meeting of the Board and an
additional fee of $1,000 for attending each committee meeting. Directors who are
our employees are not paid any director's fees. We may reimburse all directors
for their travel expenses incurred in connection with attending meetings and
their activities on our behalf.
The Stock Option Plan provides each director who is not an employee and who is
serving as a director on such date with automatic annual grants of options to
purchase 5,000 shares of Common Stock, within five days following each annual
meeting of stockholders. Each of the current non-employee directors was granted
an option to acquire 5,000 shares of Common Stock in 1997.
These options are characterized by the following attributes:
- exercisable on the first anniversary of the date of grant,
- exercise price is the greater of the fair market value of the Common
Stock on the date of grant or the average of the closing prices of the
Common Stock for the 20 business days preceding the date of grant, and
- expires on the tenth anniversary of the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Ms. Bynoe and Messrs. Galesi and Winters,
none of whom is a former or current officer or employee. None of our executive
officers serves as an officer, director or member of any entity which has an
executive officer or director who is a member of the Compensation Committee.
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<PAGE> 71
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to annual and
long-term compensation for the periods ended December 31, 1997, 1996 and 1995,
paid, or accrued with respect to, certain of our executive officers (the
"Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION ------------
--------------------------------- SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
------------------ ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Don R. Daseke(1)........... 1997 $304,500 $ -0- -- 260,000 $ 4,750(2)
1996 $290,000 $150,000 -- 170,000 $26,149(2)
1995 $239,885 $106,650 $13,000(4) 90,000 $ 9,368(2)
Marshall B. Edwards(3)..... 1997 $260,900 $ -0- -- 190,000 $ 4,750(5)
1996 $240,000 $110,000 -- 125,000 $ 7,220(5)
1995 $186,808 $ 83,050 $ 188(4) 70,000 $ 2,583(5)
Mark S. Dillinger(6)....... 1997 $172,000 $ -0- -- 125,000 $ 4,208(5)
1996 $165,000 $ 59,000 -- 75,000 $ 6,882(5)
1995 $134,923 $ 60,000 $ 163(4) 50,000 $ 2,319(5)
</TABLE>
- -------------------------
(1) Mr. Daseke was Chairman of the Board and Chief Executive Officer during the
years ended December 31, 1996 and 1995 and for the period from January 1,
1997 to October 20, 1997.
(2) Amount includes 50% of the annual premium ($6,931 in 1995 and $19,095 in
1996) on a $5,000,000 life insurance policy insuring Mr. Daseke, with 50% of
the death benefit being payable to Mr. Daseke's estate and the other 50%
payable to us (the policy was canceled July 1, 1997 and no premium was paid
for 1997), and our matching contribution ($2,437 in 1995, $7,054 in 1996 and
$4,750 in 1997) under its 401(k) Plan.
(3) Mr. Edwards was our President (from June 8, 1995 to present) and Chief
Acquisitions Officer during the years ended December 31, 1995, 1996 and
1997. On October 20, 1997, Mr. Edwards was also elected as Chief Executive
Officer.
(4) Represents the amount equal to the difference between the fair market value
of the Common Stock and the purchase price of the Common Stock acquired by
each of the Executive Officers pursuant to loans made by us in December
1995.
(5) Represents our matching contribution under our 401(k) Plan.
(6) Mr. Dillinger was our Executive Vice President and Chief Financial Officer
for the years ended December 31, 1995, 1996 and 1997.
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<PAGE> 72
OPTION GRANTS
The following table sets forth certain information with respect to the issuance
of options granted to the Executive Officers during the fiscal year ended
December 31, 1997 under the Stock Option Plan.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL EXERCISE STOCK PRICE APPRECIATION FOR
UNDERLYING OPTIONS PRICE OPTION TERM(1)
OPTIONS GRANTED TO PER EXPIRATION ------------------------------
NAME GRANTED EMPLOYEES SHARE DATE 5% 10%
- ---- ---------- ---------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Don R. Daseke(2).......... 60,000 25.1 $26.00 10/02 $ 431,000 $ 952,400
200,000 13.3 $25.25 10/02 $1,395,200 $3,083,100
Marshall B. Edwards(3).... 40,000 16.7 $26.00 2/07 $ 654,100 $1,657,500
150,000 10.0 $25.25 10/07 $2,381,900 $6,036,300
Mark S. Dillinger(3)...... 25,000 10.4 $26.00 2/07 $ 408,800 $1,035,900
100,000 6.6 $25.25 10/07 $1,588,000 $4,024,200
</TABLE>
- -------------------------
(1) "Potential Realizable Value" is disclosed in response to Securities and
Exchange Commission rules, which require such disclosure for illustrative
purposes only, and is based on the difference between the potential market
value of shares issuable (based upon assumed appreciation rates) upon
exercise of such Options and the exercise price of such Options. The values
disclosed are not intended to be, and should not be interpreted by investors
as, representations or projections of future value of our stock or of the
stock price.
(2) The options were granted on February 5, 1997 and October 1, 1997 and became
fully vested on October 20, 1997.
(3) The options were granted on February 5, 1997 and October 1, 1997 and vest in
equal increments on each of the first four anniversaries of their date of
grant.
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<PAGE> 73
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth certain information concerning the value of the
unexercised options as of December 31, 1997 held by the Executive Officers. No
options were exercised by the Executive Officers during the fiscal year ended
December 31, 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTION/SARS AT FISCAL OPTIONS/SARS AT FISCAL
YEAR-END YEAR END(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Don R. Daseke............. 720,000 -0- $2,598,125 $ -0-
Marshall B. Edwards....... 130,000 340,000 $ 752,340 $794,530
Mark S. Dillinger......... 81,250 218,750 $ 471,720 $502,650
</TABLE>
- -------------------------
(1) The fair market value on December 31, 1997 of the Common Stock underlying
the options was $25.50 per share.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements (the "Employment Agreements"), which
expire on the dates indicated, with the following individuals:
<TABLE>
<S> <C>
Michael L. Collier.................................... October 1, 2002
Mark S. Dillinger..................................... February 5, 2002
Maxwell B. Drever..................................... October 1, 2002
Marshall B. Edwards................................... October 20, 2002
Michael E. Masterson.................................. October 1, 2002
</TABLE>
The Employment Agreements provide annual salaries for each of such executives,
subject to increase at the discretion of the Board. The Employment Agreements
for Mr. Masterson and Mr. Collier grant them the right, on October 1, 2000 and
October 1, 2001, respectively, to resign as an officer and to be engaged as a
consultant for the remainder of the term of the Employment Agreement.
Pursuant to the terms of the Settlement and Employment Agreement entered into
with Mr. Daseke in connection with his resignation as Chairman of the Board and
Chief Executive Officer, Mr. Daseke is to serve as Chairman Emeritus until
October 2000. Mr. Daseke's agreement grants him the option, exercisable for a
sixty-day period commencing on January 1, 1999, to resign as an officer and to
be engaged as a consultant for the remainder of the term of the agreement.
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<PAGE> 74
Each of the Employment Agreements, other than Mr. Daseke's, provides for the
following terms:
- If the executive is terminated as a result of (1) any intentional act of
fraud, embezzlement or theft constituting a felony or the continued
willful refusal to perform his duties, or (2) any reduction in his salary
or job function or required relocation, the executive will be entitled to
receive an amount equal to the highest annualized rate of salary prior to
the termination date.
- The payment of severance compensation of up 2.99 times the executive's
compensation, including both salary and cash bonus, in the event the
executive is terminated without cause or by constructive discharge within
three years following our merger or consolidation with another entity.
Each Employment Agreement also prohibits the executive from competing against us
during the term of employment.
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<PAGE> 75
PRINCIPAL STOCKHOLDERS
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 October 31,
1998 (except as noted in the footnotes to such table), by each person or group
within the meaning of Section 13(d)(3) of the Exchange Act who is known to us to
be the beneficial owner of more than five percent of our outstanding Common
Stock:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
NAME AND ADDRESS BENEFICIALLY PERCENT
OF BENEFICIAL OWNER OWNED OF CLASS
- ------------------- ------------ --------
<S> <C> <C>
Don R. Daseke(1)........................................ 1,617,172(2) 8.49%
</TABLE>
- -------------------------
(1) The business address of Mr. Daseke is 5430 LBJ Freeway, Suite 1600, Dallas,
Texas 75240.
(2) Includes 537,890 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, 720,000 shares of Common Stock which Mr. Daseke has the right
to acquire through the exercise of options granted pursuant to the Stock
Option Plan and 30,000 shares of restricted Common Stock issued under the
Company's Long-Term Investment Plan, which shares may not be transferred
until October 20, 2000.
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<PAGE> 76
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, as of October 31,
1998, by each director, each nominee for director, each executive officer of the
Company 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>
Marshall B. Edwards................................. 354,854(3) 1.93%
Michael S. Masterson................................ 381,427(11) 2.07%
Mark S. Dillinger................................... 196,450(4) 1.08%
Michael L. Collier.................................. 202,295(10) 1.11%
Maxwell B. Drever................................... 1,530,058(9) 7.80%
Don R. Daseke....................................... 1,617,172(5) 8.49%
Linda Walker Bynoe.................................. 23,479(6) *
Francesco Galesi.................................... 728,141(7) 3.87%
Robert L. Honstein.................................. 201(12) *
Arch K. Jacobson.................................... 26,801(6) *
Louis G. Munin...................................... 26,201(6) *
J. Otis Winters..................................... 21,201(8) *
All Directors and Executive Officers (12 persons)... 5,108,280 26.87%
</TABLE>
- -------------------------
(1) The business address of the persons named above is c/o Walden Residential
Properties, Inc., 5080 Spectrum Drive, Suite 1000 East, Addison, Texas
75001-6410.
(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 242,500 shares of Common Stock which Mr. Edwards has the right to
acquire through the exercise of options granted pursuant to the Stock
Option Plan, 20,000 shares of restricted Common Stock granted under our
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")
and 3,000 shares of restricted Common Stock granted under our Long-Term
Incentive Plan, which shares may not be transferred until February 4, 1999,
at which time the transfer restriction on one-third of such shares lapses
and the restriction on half of the remaining shares lapses in each of the
two years thereafter (the "Bonus Shares").
(4) Includes 139,075 shares which Mr. Dillinger has the right to acquire
through the exercise of options granted pursuant to the Stock Option Plan,
10,000 Officer Restricted Shares and 1,000 Bonus Shares.
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<PAGE> 77
(5) Includes 537,890 shares of Common Stock owned of record by Walden Group, of
which Mr. Daseke is the holder of 90% the common stock and the sole
director, 720,000 shares which Mr. Daseke has the right to acquire through
the exercise of options granted pursuant to the Stock Option Plan and
30,000 shares of restricted Common Stock issued under our Long-Term
Incentive Plan, which shares may not be transferred until October 30, 2000.
(6) Includes 20,000 shares of Common Stock which such person has the right to
acquire through the exercise of options granted pursuant to the Stock
Option Plan, 1,000 shares of restricted Common Stock granted under our
Long-Term Incentive Plan, one-third of which are currently transferable and
the transfer restrictions lapse on half of the remaining shares on February
12, 1999 and the other half on February 12, 2000 (the "Director Restricted
Shares") and 201 restricted shares as to which the transfer restrictions
lapse quarterly ending December 31, 1998.
(7) Consists of 711,940 shares of Common Stock which entities controlled by Mr.
Galesi have the right to acquire pursuant to the conversion of partnership
interests held in Walden Residential Operating Partnership, L.P., a Georgia
limited partnership and an affiliate of ours ("Walden Operating
Partnership"), 15,000 shares of Common Stock which Mr. Galesi has the right
to acquire through the exercise of options granted pursuant to the Stock
Option Plan, 1,000 Director Restricted Shares and 201 restricted shares as
to which the transfer restrictions lapse quarterly ending December 31,
1998. The Galesi entities acquired such partnership interests in connection
with the sale of the controlling interest in the predecessor to the Walden
Residential Operating Partnership to us in June 1995.
(8) Includes 20,000 shares of Common Stock which Mr. Winters has the right to
acquire through the exercise of options granted pursuant to the Stock
Option Plan, 1,000 Director Restricted Shares and 201 restricted shares as
to which the transfer restrictions lapse quarterly ending December 31,
1998.
(9) Includes 1,430,437 shares of Common Stock which Mr. Drever has the right to
acquire pursuant to the conversion of Units and 87,500 shares of Common
Stock which Mr. Drever has the right to acquire through the exercise of
options granted under the Stock Option Plan.
(10) Includes 149,795 shares of Common Stock which Mr. Collier has the right to
acquire pursuant to the conversion of Units and 37,500 shares of Common
Stock which Mr. Collier has the right to acquire through the exercise of
options granted under the Stock Option Plan.
(11) Includes 300,556 shares of Common Stock which Mr. Masterson has the right
to acquire pursuant to the conversion of Units and 56,250 shares of Common
Stock which Mr. Masterson has the right to acquire through the exercise of
options granted under the Stock Option Plan.
(12) Consists of 201 restricted shares as to which the transfer restrictions
lapse quarterly ending December 31, 1998.
* Less than one percent.
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<PAGE> 78
DESCRIPTION OF COMMON STOCK
The information set forth below is only a summary of our terms of our Common
Stock. You should refer to our Articles of Incorporation, as amended and
restated (the "Articles"), and Bylaws for a complete description of the Common
Stock.
The Articles authorize us to issue up to 50 million shares of Common Stock, 10
million shares of Preferred Stock and 60 million shares of excess stock, par
value $.01 per share (the "Excess Stock"). At October 31, 1998, 18,108,939
shares of Common Stock were issued and outstanding, all of which are fully paid
and nonassessable. Under the Maryland General Corporation Law (the "MGCL"),
stockholders generally are not liable for the corporation's debts or
obligations.
DIVIDEND AND DISTRIBUTION RIGHTS
All shares of Common Stock issued upon exchange of the Common OP Units will be
duly authorized, fully paid and nonassessable.
All shares of Common Stock issued upon exchange of the Common OP Units will be
duly authorized, fully paid and nonassessable. Shares of our Common Stock have
equal rights in connection with:
- dividends
- distributions, and
- liquidations.
If our Board determines, in its sole discretion, to declare a dividend, the
right to such dividend is subject to the following restrictions:
- the dividend rights of the Common Stock is subordinate to the rights of
all Preferred Stock,
- the dividend rights of the Common Stock may be subordinate to any other
shares or new series of stock our Board may authorize in the future, and
- the amount of the dividend is limited by law.
If we liquidate our assets or dissolve entirely, the holders of the Common Stock
will share on a pro rata basis in the assets we are legally allowed to
distribute. We must pay all of our known debts and liabilities or have made
adequate provision for payment of these debts and liabilities before holders of
Common Stock can share in our assets.
Holders of Common Stock do not have the right to convert or redeem their stock.
In addition, they do not have rights to a sinking fund or to subscribe for any
of our securities.
VOTING RIGHTS
Each outstanding share of Common Stock entitles the holder to one vote on all
matters submitted to a vote of stockholders. The holders of Common Stock have
exclusive voting power with respect to the election of directors, except as
otherwise required by law or except as provided with respect to any other class
or series of stock. There is no cumulative voting in the election of directors.
Therefore the holders of a majority of the
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<PAGE> 79
outstanding shares of Common Stock can elect all of the directors then standing
for election and the holders of the remaining shares will not be able to elect
any directors.
The MGCL generally does not allow a corporation to take the following actions,
unless at least two-thirds of the shares of stock entitled to vote on the matter
approve:
- dissolve,
- amend its charter or articles of incorporation,
- merge,
- sell all or substantially all of its assets, or
- engage in share exchange or similar transactions.
However, a company may state in its charter or articles of incorporation that a
lesser percentage may approve these actions, as long as at least a majority of
all shares entitled to vote on the matter approve. Our Articles state that a
majority of shares of stock outstanding and entitled to vote on the matter may
approve any of the actions listed above, except for amendments to our Articles
relating to the number of directors, and the classification of the board of
directors. These two matters require the approval of at least two-thirds of the
shares entitled to vote.
The transfer agent and registrar for the Common Stock is Boston Equiserve L.P.
RESTRICTIONS ON TRANSFER
To qualify as a REIT under the Internal Revenue Code, our Common Stock must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of twelve months or during a proportionate part of a shorter taxable year.
Further, not more than 50% of the value of our issued and outstanding shares of
capital stock may be owned, directly or indirectly, by five or fewer individuals
or, in limited circumstances, entities such as qualified private pension plans,
during the last half of a taxable year or during a proportionate part of a
shorter taxable year.
Since the Board believes it is essential that we maintain our REIT status, our
Articles provide that no person, except Mr. Don R. Daseke, may own or be deemed
to own more than 9.0% (the "Ownership Limit") of the aggregate value of all of
our outstanding shares of capital stock. Mr. Daseke beneficially owns in the
aggregate approximately 8.49% of the shares of Common Stock and may acquire
additional shares of Common Stock. Mr. Daseke may not own, directly or
indirectly, more than 13.0% of the aggregate value of all of our outstanding
shares of capital stock (the "Existing Holder Limit").
The Board may exempt a proposed transferee from the Ownership Limit or Existing
Holder Limit. In connection therewith, the Board may require opinions of
counsel, affidavits, undertakings or agreements as it may deem necessary or
advisable in order to determine or ensure our status as a REIT.
Any acquisition or transfer of shares of Common Stock that would: (1) result in
the shares of Common Stock being owned by fewer than 100 persons or (2) result
in our being "closely-held" within the meaning of Section 856(h) of the Code,
will be null and void, and the intended transferee will acquire no rights to the
shares of Common Stock. The foregoing restrictions on transferability and
ownership will not apply if the Board determines it is no longer in our best
interests to attempt to qualify, or to continue to qualify, as a REIT and our
Articles are amended accordingly.
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<PAGE> 80
Any purported transfer of shares of stock that would result in a person owning
shares of capital stock in excess of the Ownership Limit or Existing Holder
Limit will result in the shares subject to such purported transfer being
automatically exchanged for an equal number of shares of Excess Stock. Under our
Articles, Excess Stock will be deemed to have been transferred to us as trustee
of a separate trust (the "Trust") for the exclusive benefit of the person or
persons to whom the interest in the Trust can ultimately be transferred.
Excess Stock is not transferable, but the interest in the Trust representing the
Excess Stock may be transferable. A holder of an interest in the Trust
representing Excess Stock may transfer such interest if the proposed transferee
could hold our stock without triggering the Excess Stock provisions. The
transfer must also be made at a price not to exceed the price paid by the
purported transferee or, if no consideration was paid, the Market Price measured
on the date of the original attempted transfer. If these conditions are met, any
Excess Stock involved will automatically be exchanged for the shares of Common
Stock or Preferred Stock to which the Excess Stock is attributable.
We may also purchase Excess Stock at a price equal to the lesser of:
- the price paid for the shares of capital stock by the intended transferee
or, if no consideration was paid, the Market Price of the shares of
capital stock resulting in Excess Stock, measured on the date of the
transfer, or
- the Market Price of the shares of capital stock resulting in Excess Stock
measured on the date on which we elect to purchase the Excess Stock.
"Market Price" means the average daily closing price of a share of capital stock
if listed on a national securities exchange or quoted on Nasdaq National Market.
If the stock is not then traded on any exchange or quotation system, Market
Price will be the mean between the average closing bid prices and the average
closing asked prices. In each case, Market Price is measured during the 30
calendar day period ending on the business day prior to the measurement date. If
there have been no sales or published bid and asked quotations with respect to
shares of such stock during this 30 day period, the Market Price will be as
determined in good faith by our Board.
From and after the intended transfer to the purported transferee of the shares
of Excess Stock, the purported transferee will cease to be entitled to
distributions, except upon liquidation, voting rights and other benefits with
respect to the Excess Stock. The purported transferee will retain the right to
payment of the purchase price for the applicable shares of underlying capital
stock. Any dividend or distribution paid to a purported transferee on Excess
Stock prior to our discovery that the shares have been transferred in violation
of our Article must be repaid upon demand.
If the foregoing transfer restrictions are determined to be void or invalid by
virtue of any legal decision, statute, rule or regulation, then the intended
transferee of any Excess Stock may be deemed, at our option, to have acted as an
agent on our behalf in acquiring the Excess Stock and to hold the Excess Stock
on our behalf. All certificates representing shares of capital stock will bear a
legend referring to the restrictions described above.
In addition, each stockholder shall, upon demand, be required to disclose in
writing all information regarding the direct and indirect beneficial ownership
of shares of capital stock as our Board deems reasonably necessary to comply
with the provisions of the Code
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<PAGE> 81
applicable to a REIT, to comply with the requirements of any taxing authority or
governmental agency or to determine any such compliance.
These ownership limitations could have the effect of discouraging a takeover or
other transaction in which holders of some, or a majority, of shares of capital
stock might receive a premium for their shares over the then-prevailing market
price or which these holders might believe to be otherwise in their best
interest.
DESCRIPTION OF REDEEMABLE PREFERRED STOCK
The information set forth below is only a summary of terms of our Redeemable
Preferred Stock. You should refer to our Articles and the Board resolution or
resolutions relating to the Preferred Stock for a complete description.
GENERAL RIGHTS AND RESTRICTIONS
Subject to the limitations of the MGCL and our Articles, the Board has authority
to issue shares of Preferred Stock in one or more series, establish from time to
time the number of shares of Preferred Stock in any such series, and to
determine the following rights and restrictions of the Preferred Stock:
- dividend preferences or limitations
- voting powers
- liquidation preferences or limitations
- conversion rights, and
- redemption rights.
We are authorized to issue 10 million shares of Preferred Stock. At October 31,
1998, no shares of our 9.16% Series A Convertible Redeemable Preferred Stock
(the "Series A Preferred Stock") and 1,706,082 shares of our 9.16% Series B
Convertible Redeemable Preferred Stock (the "Series B Preferred Stock") were
outstanding.
Boston Equiserve L.P. is the transfer agent and registrar for shares of each
series of Preferred Stock.
RELATIVE RANK IN LIQUIDATION OR DISTRIBUTION
If we liquidate our assets, dissolve entirely or wind up corporate affairs, the
right of the holders of Redeemable Preferred Stock to receive dividends will
generally rank senior to the Common Stock, the Excess Stock and to all of our
other equity securities, except those with terms which specifically provide for
an equal or senior rank.
The Redeemable Preferred Stock will rank on a parity with the Series B Preferred
Stock and all other equity securities issued by us if the terms of such
securities specifically provide for a parity ranking with the Redeemable
Preferred Stock.
In addition, the Redeemable Preferred Stock will rank junior to our 9.20% Senior
Preferred Stock and all other equity securities issued by us if the terms of
such securities specifically provide for a senior ranking to the Redeemable
Preferred Stock. The rights of
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the holders of Redeemable Preferred Stock will be subordinate to those of our
general creditors.
DIVIDENDS
Holders of Redeemable Preferred Stock will be entitled to receive cash dividends
when and as declared by the Board at the rate of $2.25 per annum per share. Such
dividends 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.
REDEMPTION
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 our option. The redemption
price will be $25.00 per share, plus all accrued and unpaid dividends thereon.
Once redeemed, shares of Redeemable Preferred Stock will be restored to the
status of authorized but unissued preferred stock. 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 we may determine or by any other method
we determine to be equitable.
LIQUIDATION PREFERENCE
If we liquidate, dissolve, or wind up corporate affairs, then before the holders
of any junior stock receive any distribution or payment, the holders of each
series of Preferred Stock will be entitled to liquidating distributions in the
amount of the liquidation preference per share, plus an amount equal to all
dividends accrued and unpaid on such stock out of our legally available assets
for distribution to stockholders. However, if such Preferred Stock does not have
a cumulative dividend, the holder is not entitled to accumulations of unpaid
dividends for prior dividend periods.
After we pay the full amount of the liquidating distributions to which they are
entitled, the holders of Preferred Stock will have no right or claim to any of
our remaining assets. If we liquidate, dissolve, or wind up our affairs and our
available assets are insufficient to pay the amount of the liquidating
distributions on all outstanding Preferred Stock and the corresponding amounts
payable on all shares of our other classes or series of equity securities
ranking on a parity with the Preferred Stock, then the holders of the Preferred
Stock and all other parity classes or series of equity securities shall share
ratably in any such distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled.
VOTING RIGHTS
Except 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.
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RESTRICTIONS ON OWNERSHIP
See "Description of Common Stock -- Restrictions on Transfer" for a discussion
of the restrictions on transfer of shares of capital stock necessary to qualify
as a REIT under the Code.
DESCRIPTION OF SERIES B WARRANTS
GENERAL
Each Series B Warrant is exercisable, at any time beginning on October 1, 1998
and ending on December 31, 2007, for one-third of one share of Common Stock at
$26.875 per share, subject to adjustment. No fractional share of Common Stock
will be issued in connection with the exercise of the Series B Warrants and the
holder of a Series B Warrant will be paid cash in lieu of such fractional
shares, in an amount equal to the current market value of a share of Common
Stock multiplied by such fraction. Although they will be initially issued in
conjunction with shares of Redeemable Preferred Stock, the Series B Warrants
will be separately transferable upon receipt. Prior to the exercise of the
Series B Warrants, holders of Series B 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.
We will have the obligation to repurchase all outstanding Series B Warrants upon
the occurrence of certain events, such as consolidation or merger with another
entity or the sale of all or substantially all of our assets.
Warrant certificates may be exchanged for new Warrant certificates of different
denominations, may (if in registered form) be presented for registration of
transfer and may be exercised at the corporate trust office of the Warrant
Agent.
EXERCISE OF SERIES B WARRANTS
Each Series B Warrant will entitle the holder thereof to purchase Common Stock,
at $26.875 per share. Unless we extend the expiration date, after the close of
business on December 31, 2007, unexercised Series B Warrants will become void.
Series B Warrants may be exercised by delivering to the Warrant Agent payment of
the amount required to purchase the corresponding shares of Common Stock,
together with the information set forth on the reverse side of the Warrant
certificate. Series B Warrants will be deemed to have been exercised upon
receipt of payment of the exercise price, subject to the receipt within five (5)
business days of the Warrant certificate evidencing the Series B Warrants. Upon
receipt of such payment and the properly completed and duly executed Warrant
certificate at the corporate trust office of the Warrant Agent, we will, as soon
as practicable, issue and deliver the shares of Common Stock purchasable upon
such exercise. If fewer than all of the Series B Warrants represented by such
Warrant certificate are exercised, a new Warrant certificate will be issued for
the remaining amount of Warrants.
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AMENDMENTS AND SUPPLEMENTS TO SERIES B WARRANT AGREEMENT
The Series B Warrant Agreement may be amended or supplemented without the
consent of the holders of the Series B Warrants issued thereunder to effect
changes that are not inconsistent with the provisions of the Series B Warrants
and that do not adversely affect the interests of the holders of the Series B
Warrants.
ADJUSTMENTS
Both the exercise price and the number of shares of Common Stock issuable under
the Series B Warrants are subject to adjustment in the event of:
- payment of a dividend on Common Stock payable in shares of capital stock,
- stock splits or reverse stock splits of Common Stock,
- combinations or reclassification of Common Stock,
- issuance to all holders of Common Stock of rights or warrants to
subscribe for or purchase shares of Common Stock at less than their
current market price,
- certain distributions of evidences of indebtedness,
- certain distributions of assets, including securities but excluding (1)
cash dividends or distributions paid out of consolidated earnings or
retained earnings, and (2) dividends payable in shares of Common Stock,
and
- distributions of subscription rights and warrants, excluding those
referred to above.
We are not required to make an adjustment unless it would require a change of at
least 1% in the exercise price then in effect. Except as stated above, we will
not adjust the exercise price and the number of shares of Common Stock covered
by a Series B Warrant for the issuance of shares of Common Stock or any
securities convertible into or exchangeable for Common Stock, or carrying the
right or option to purchase or otherwise acquire such securities, in exchange
for cash, other property or services. In addition, we will not make an
adjustment for any of the following:
- regular quarterly cash dividends
- other periodic or recurring cash dividends or distributions, or
- cash dividends or distributions to the extent paid from consolidated
earnings or retained earnings.
Holders of Series B Warrants are protected from dilution of their interests in
purchasing Common Stock in the event we:
- consolidate or merge with or into any entity, unless the consolidation or
merger does not result in any reclassification, conversion, exchange or
cancellation of outstanding shares of Common Stock
- sale, transfer, lease or conveyance of all or substantially all of our
assets, or
- reclassify, reorganize or change our Common Stock, other than solely a
change in par value or from par value to no par value.
On or after the occurrence of any of the events listed above, a holder of a
Series B Warrant will be entitled to receive on exercise of his Warrant the kind
and amount of shares of beneficial interest or other securities, cash or other
property (or any combination
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thereof) that the holder would have received had such holder exercised such
holder's Series B Warrant immediately prior to the occurrence of such event.
Additionally, following any such event, if the holder of a Series B Warrant is
to receive common shares of the surviving entity as consideration upon exercise
of such Warrant, then from and after the occurrence of such event, the exercise
price of such Series B Warrant will be subject to the same anti-dilution and
other adjustments described in this section, applied as if such shares were
shares of Common Stock.
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CERTAIN PROVISIONS OF MARYLAND LAW
AND OF OUR ARTICLES AND BYLAWS
The following discussion summarizes certain provisions of the MGCL and our
Articles and Bylaws. This summary does not purport to be complete and is subject
to and qualified in its entirety by reference to our Articles and Bylaws.
CLASSIFICATION OF THE BOARD OF DIRECTORS
Our Bylaws provide that the number of directors on the Board will equal (1) the
number set in our Articles, or (2) the number established by the Board. Our
Board may not be smaller than one director nor larger than 15 directors. Any
vacancy will be filled, at any regular meeting or at any special meeting called
for that purpose, by a majority of the remaining directors, except that a
vacancy resulting from an increase in the number of directors will be filled by
a majority of the entire Board. Our stockholders may elect a director to fill a
vacancy on the Board which results from the removal of a director.
Pursuant to the terms of our Articles, the directors are divided into three
classes. As the term of each class expires, directors in that call are elected
for a term of three years. We believe that classification of the Board helps to
assure the continuity and stability of our business strategies and policies as
determined by the Board.
The classified director provision could have the effect of making the removal of
incumbent directors more time-consuming and difficult. This could discourage a
third party from making a tender offer or otherwise attempting to obtain control
of us, even though such an attempt might be beneficial to stockholders. At least
two annual meetings of stockholders, instead of one, will generally be required
to effect a change in a majority of the Board. Thus, the classified board
provision could increase the likelihood that incumbent directors will retain
their positions.
Further, holders of shares of Common Stock have no right to cumulative voting
for the election of directors. Consequently, at each annual meeting of
stockholders, the holders of a majority of shares of Common Stock will be able
to elect all of the successors of the class of directors whose term expires at
that meeting.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our Articles limit the liability of our directors and officers to the
corporation and our stockholders to the fullest extent permitted from time to
time by the MGCL. The MGCL presently permits the liability of directors and
officers to a corporation or its stockholders for money damages to be limited,
except (1) to the extent that it is proved the director or officer actually
received an improper benefit or profit or (2) to the extent that a judgment or
other final adjudication is entered adverse to the director or officer in a
proceeding based on a finding that the director's or officer's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. This provision
does not limit our ability or the ability of our stockholders to obtain other
relief, such as an injunction or rescission.
Our Articles require us to indemnify our directors, officers and certain other
parties to the fullest extent permitted from time to time by the MGCL.
Currently, we are generally
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permitted to indemnify against the following types of costs which are actually
incurred by an indemnified party by reason of their service to us or their
service at our request:
- judgments,
- penalties,
- fines,
- settlements,
- and reasonable expenses, including attorneys' fees.
We may not indemnify a party if it is established that:
- the act or omission of the indemnified party was material to the matter
giving rise to the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty,
- the indemnified party actually received an improper personal benefit, or
- in the case of any criminal proceeding, the indemnified party had
reasonable cause to believe that the act or omission was unlawful.
If we win the proceeding, we may not indemnify a director or officer who has
been adjudged liable to the corporation. The termination of any proceeding by
conviction, or upon a plea of nolo contenders or its equivalent, of an entry of
any order of probation prior to judgment, creates a rebuttable presumption that
the director or officer did not meet the requisite standard of conduct required
for indemnification to be permitted.
It is the position of the Securities and Exchange Commission that
indemnification of directors and officers for liabilities arising under the
Securities Act is against public policy and is unenforceable pursuant to Section
14 of the Securities Act.
BUSINESS COMBINATIONS
The MGCL was amended effective October 1, 1994 to address "business
combinations" between a Maryland corporation and an "interested stockholder."
For purposes of the MGCL, a "business combination includes a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities. An "interested stockholder"
is any person or affiliate thereof who:
- beneficially owns 10% or more of the voting power of the corporation's
shares after the date on which the corporation had 100 or more beneficial
owners of its stock, or
- is an affiliate or associate of the corporation and was the beneficial
owner, directly or indirectly, of 10% or more of the voting power of the
then outstanding stock of the corporation who, at any time within the
two-year period prior to the date in question and after the date on which
the corporation had 100 or more beneficial owners of its stock
Under the MGCL, a Maryland corporation may not enter into a business combination
with an Interested Stockholder for a period of five years after the most recent
date on which the Interested Stockholder became an Interested Stockholder.
Following the expiration of such five year period, any business combination with
an Interested Stockholder must generally be recommended by the corporation's
board of
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directors and approved by the affirmative vote of at least (1) 80% of the votes
entitled to be cast by holders of outstanding voting shares of the corporation
voting together as a single voting group, and (2) two-thirds of the votes of the
non-interested stockholders, unless, among other things, the corporation's
stockholders receive a minimum price for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares.
These provisions of the MGCL do not apply, however, to business combinations
that are approved or exempted by the board of directors of the corporation prior
to the time that the Interested Stockholder becomes an Interested Stockholder.
Our Articles contain a provision exempting any business combination involving
Mr. Daseke or his affiliates, or other persons acting in concert with Mr. Daseke
or his affiliates, from these provisions of the MGCL.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired in a
"control share acquisition" have no voting rights except to the extent approved
by two-thirds of the votes entitled to be cast on the matter, excluding shares
of stock owned by the acquiror, by officers or by directors who are employees of
the corporation. "Control shares" are voting shares of stock which, if
aggregated with all other such shares of stock previously acquired or controlled
by such person would entitle the acquiror to exercise voting power in electing
directors within one of the following ranges of voting power:
- one-fifth or more but less than one-third,
- one-third or more but less than a majority, or
- a majority.
Control shares do not include shares the acquiring person is then entitled to
vote as a result of having previously obtained stockholder approval. A "control
share acquisition" means the acquisition of control shares, subject to certain
exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares. If
no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person does
not deliver an acquiring person statement as required by the MGCL, then, subject
to certain conditions and limitations, the corporation may redeem any or all of
the control shares (except those for which voting rights for control shares, as
of the date of the last control share acquisition or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved.
If voting rights for control shares are approved at a stockholders meeting and
the acquiring person becomes entitled to vote a majority of the shares entitled
to vote, all other stockholders may exercise appraisal rights. The fair value of
the shares as determined for purposes of such appraisal rights may not be less
than the highest price per share paid by the acquiring person in the control
share acquisition, and certain limitations and restrictions otherwise applicable
to the exercise of dissenters' rights do not apply in the context of a control
share acquisition.
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The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws of
the corporation.
Our Articles contain a provision exempting from the control share acquisition
statute any and all acquisitions by Mr. Daseke or his affiliates, or any other
person acting in concert with Mr. Daseke or his affiliates of shares of our
capital stock. There can be no assurance that such provision will not be amended
or eliminated at any point in the future.
AMENDMENT TO THE ARTICLES
Our Articles may be amended by the affirmative vote of the holders of a majority
of all shares entitled to be voted on the matter, except for the provision
relating to the classification of the Board which may be amended only by the
affirmative vote of the holders of not less than two-thirds of all shares
entitled to be voted on the matter.
DISSOLUTION
Our Articles permit dissolution by (1) the affirmation or vote of a majority of
the entire Board declaring such dissolution to be advisable and directing that
the proposed dissolution be submitted for consideration at an annual or special
meeting of stockholders, and (2) upon proper notice, stockholder approval by the
affirmative vote of the holders of not less than a majority of all of the votes
entitled to be cast on the matter or the written consent of all the votes
entitled to be cast on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
Our Bylaws provide that with respect to an annual meeting of stockholders,
nominations of persons for election to the Board and the proposal of business to
be considered by stockholders may be made only (1) by, or at the direction of, a
majority of the Board or (2) by a stockholder who is entitled to vote at the
meeting and has complied with the advance notice procedures set forth in the
Bylaws.
The provisions in our Articles on classification of the Board, the business
combination and control share acquisition provisions of the MGCL and the advance
notice provisions of the Bylaws could have the effect of discouraging a takeover
or other transaction in which holders of some, or a majority, of the shares of
Common Stock might receive a premium for their shares of Common Stock over the
then prevailing market price or which such holders might believe to be otherwise
in their best interests.
MEETINGS OF STOCKHOLDERS
An annual meeting of the stockholders for the election of directors and the
transaction of any other proper business will be held on the second Wednesday in
May or at such other time as set by the Board.
Subject to the rights, if any, of the holders of any series of Preferred Stock
to elect additional directors under specified circumstances, special meetings of
the stockholders may be called by the Chairman of the Board, by the President or
by a resolution adopted by a majority of the directors and by our Secretary
shall upon the written request of the holders of 25% or more of the outstanding
voting stock. Such request must state the purpose or purposes of such meeting
and the matters proposed to be acted upon at such meeting.
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FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary of material federal income tax considerations that may be
relevant to a holder of Common Stock or Preferred Stock is based on current law
and is not intended as tax advice. The following discussion, which is not
exhaustive of all possible tax considerations, does not include a detailed
discussion of any state, local or foreign tax considerations. Nor does it
discuss all of the aspects of federal income taxation that may be relevant to a
prospective stockholder in light of his or her particular circumstances or to
certain types of stockholders (including insurance companies, tax-exempt
entities, financial institutions or broker-dealers, foreign corporations and
persons who are not citizens or residents of the United States) who are subject
to special treatment under the federal income tax laws.
The statements in this discussion are based on current provisions of the Code,
existing, temporary and currently proposed Treasury Regulations under the Code,
the legislative history of the Code, existing administrative rulings and
practices of the IRS and judicial decisions. No assurance can be given that
legislative, judicial or administrative changes will not affect the accuracy of
any statements in this Prospectus with respect to transactions entered into or
contemplated prior to the effective date of such changes.
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING. EACH
PROSPECTIVE PURCHASER OF COMMON STOCK OR PREFERRED STOCK IS ADVISED TO CONSULT
WITH HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM
OR HER OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF COMMON STOCK OR PREFERRED
STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP,
DISPOSITION AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
We have elected to be treated as a REIT for federal income tax purposes
commencing with our taxable year ended December 31, 1994. Based on assumptions
and representations summarized below, Winstead Sechrest & Minick P.C., our legal
counsel, is of the opinion that beginning with our taxable year ended December
31, 1994:
- we have been organized and have operated in conformity with the
requirements for qualification and taxation as a REIT under the Code, and
- our proposed method of operations described in this Prospectus will
enable us to continue to satisfy the requirements for qualification as a
REIT.
The rules governing REITs are highly technical and require ongoing compliance
with a variety of tests that depend, among other things, on future operating
results. Winstead Sechrest & Minick P.C. will not monitor our compliance with
these requirements. While we expect to satisfy these tests, and will use our
best efforts to do so, we cannot ensure we will qualify as a REIT for any
particular year, or that the applicable law will not change and adversely affect
us and our stockholders. See "-- Failure to Qualify as a REIT." The
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following is a summary of the material federal income tax considerations
affecting us as a REIT and our stockholders:
REIT QUALIFICATION
In order to maintain our REIT qualification, we must meet the following
criteria:
- We must be organized as an entity that would, if we do not maintain our
REIT status, be taxable as a regular corporation.
- We must be managed by one or more directors.
- Our taxable year must be the calendar year.
- Our beneficial ownership must be evidenced by transferable shares.
- Our capital stock must be held by at least 100 persons during at least
335 days of a taxable year of 12 months or during a proportionate part of
a taxable year of less than 12 months, and
- Not more than 50% of the value of our shares of capital stock may be
held, directly or indirectly, applying certain constructive ownership
rules, by five or fewer individuals at any time during the last half of
each our taxable years.
Our outstanding Common Stock is owned by a sufficient number of investors and in
appropriate proportions to permit it to satisfy these requirements. To protect
against violations of these requirements, our Articles provide restrictions on
transfers of our Common Stock, as well as provisions that automatically convert
shares of stock into nonvoting, non-dividend paying Excess Stock to the extent
that the ownership otherwise might jeopardize the our REIT status.
To monitor our compliance with the share ownership requirements, we are required
to and maintain records disclosing the actual ownership of common shares. To do
so, we will demand written statements each year from the record holders of
certain percentages of shares in which the record holders are to disclose the
actual owners of the shares (i.e., the persons required to include in gross
income the REIT dividends). A list of those persons failing or refusing to
comply with this demand will be maintained as part of our records. Stockholders
who fail or refuse to comply with the demand must submit a statement with their
tax returns disclosing the actual ownership of the shares and certain other
information.
We currently satisfy, and expect to continue to satisfy, each of these
requirements discussed above. We also currently satisfy, and expect to continue
to satisfy, the requirements that are separately described below concerning the
nature and amounts of our income and assets and the levels of required annual
distributions.
SOURCES OF GROSS INCOME. In order to qualify as a REIT for a particular year, we
also must meet two tests governing the sources of its income. These tests are
designed to ensure that a REIT derives its income principally from passive real
estate investments. In evaluating a REIT's income, the REIT will be treated as
receiving its proportionate share of the income produced by any partnership in
which the REIT holds an interest as a partner, and any such income will retain
the character that it has in the hands of the partnership. The Code allows us to
own and operate a number of our properties through wholly-owned subsidiaries
which are "qualified REIT subsidiaries." The Code provides
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that a qualified REIT subsidiary is not treated as a separate corporation, and
all of its assets, liabilities and items of income, deduction and credit are
treated as assets, liabilities and such items of the REIT.
75% GROSS INCOME TEST. At least 75% of a REIT's gross income for each taxable
year must be derived from specified classes of income that principally are real
estate related. The permitted categories of principal importance to us are:
- rents from real property;
- interest on loans secured by real property;
- gain from the sale of real property or loans secured by real property
(excluding gain from the sale of property held primarily for sale to
customers in the ordinary course of the Company's trade or business,
referred to below as "dealer property");
- income from the operation and gain from the sale of certain property
acquired in connection with the foreclosure of a mortgage securing that
property ("foreclosure property");
- distributions on, or gain from the sale of, shares of other qualifying
REITs;
- abatements and refunds of real property taxes; and
- "qualified temporary investment income" (described below).
In evaluating our compliance with the 75% gross income test, as well as the 95%
gross income test described below, gross income does not include gross income
from "prohibited transactions." In general, a prohibited transaction is one
involving a sale of dealer property, not including foreclosure property and
certain dealer property held by us for at least four years.
We expect that substantially all of our operating gross income will be
considered rent from real property. Rent from real property is qualifying income
for purposes of the gross income tests only if certain conditions are satisfied.
Rent from real property includes charges for services customarily rendered to
tenants, and rent attributable to personal property leased together with the
real property so long as the personal property rent is less than 15% of the
total rent. We do not expect to earn material amounts in these categories. Rent
from real property generally does not include rent based on the income or
profits derived from the property. We do not intend to lease property and
receive rentals based on the tenant's net income or profit. However, rent based
on a percentage of gross income is permitted as rent from real property and we
will have leases where rent is based on a percentage of gross income.
Also excluded from "rents from real property" is rent received from a person or
corporation in which we (or any of its 10% or greater owners) directly or
indirectly through the constructive ownership rules contained in Section 318 of
the Code, owns a 10% or greater interest ("Related Party Tenant Rent"). A third
exclusion covers amounts received with respect to real property if we furnish
services to the tenants or manage or operate the property, other than through an
"independent contractor" from whom we do not derive any income. The obligation
to operate through an independent contractor generally does not apply, however,
if the services provided by us are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not considered
rendered primarily for the convenience of the tenant (applying standards that
govern in evaluating whether rent from real property would be unrelated business
taxable income when received by a tax exempt owner of the property). Further, if
the
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value of the non-customary service income with respect to a property (valued at
no less than 150% of our direct cost of performing such services) is 1% or less
of the total income derived from the property, then all rental income from that
property except the non-customary service income will qualify as "rents from
real property."
We will, in most instances, directly operate and manage its assets without using
an "independent contractor." We believe that the only material services to be
provided to tenants will be those usually or customarily rendered in connection
with the rental of space for occupancy only. We will not provide services that
might be considered rendered primarily for the convenience of the tenants, such
as hotel, health care or extensive recreational or social services.
Consequently, we believe that substantially all of our rental income will be
qualifying income under the gross income tests, and that our provision of
services will not cause the rental income to fail to be included under that
test.
Upon the ultimate sale of any of our properties, any gains realized also are
expected to constitute qualifying income, as gain from the sale of real property
(not involving a prohibited transaction).
95% GROSS INCOME TEST. In addition to earning 75% of its gross income from the
sources listed above, at least an additional 20% of our gross income for each
taxable year must come either from those sources, or from dividends, interest or
gains from the sale or other disposition of stock or other securities that do
not constitute dealer property. This test permits a REIT to earn a significant
portion of its income from traditional "passive" investment sources that are not
necessarily real estate related. The term "interest" (under both the 75% and 95%
tests) does not include amounts that are based on the income or profits of any
person, unless the computation is based only on a fixed percentage of receipts
or sales.
FAILING THE 75% OR 95% TESTS; REASONABLE CAUSE. As a result of the 75% and 95%
tests, REITs generally are not permitted to earn more than 5% of their gross
income from active sources (such as brokerage commissions or other fees for
services rendered). We may receive certain types of such income. This type of
income will not qualify for the 75% test or 95% test but is not expected to be
significant and such income, together with other nonqualifying income (including
related party tenant rent), is expected to be at all times less than 5% of our
annual gross income. While we do not anticipate we will earn substantial amounts
of nonqualifying income, if nonqualifying income exceeds 5% of our gross income,
we could lose our status as a REIT. We have one subsidiary of which we hold less
than 10% of the voting stock. This subsidiary holds assets generating non-
qualifying income. The income generated by this subsidiary is substantially less
than 5% of our annual gross income. We may establish other such subsidiaries in
the future. The gross income generated by these subsidiaries would not be
included in our gross income. However, dividends from such subsidiaries to us
would be included in our gross income and qualify for the 95% income test.
If we fail to meet either the 75% or 95% income tests during a taxable year, we
may still qualify as a REIT for that year if
- we report the source and nature of each item of our gross income in our
federal income tax return for that year;
- the inclusion of any incorrect information in our return is not due to
fraud with intent to evade tax; and
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- the failure to meet the tests is due to reasonable cause and not to
willful neglect.
However, in that case we would be subject to a 100% tax based on the greater of
the amount by which we fail either the 75% or 95% income tests for such year,
multiplied by a fraction intended to reflect our profitability. See "-- Taxation
as a REIT."
CHARACTER OF ASSETS OWNED. On the last day of each calendar quarter, we also
must meet two tests concerning the nature of our investments. First, at least
75% of the value of our total assets generally must consist of real estate
assets, cash, cash items (including receivables) and government securities. For
this purpose, "real estate assets" include interests in real property, interests
in loans secured by mortgages on real property or by certain interests in real
property, shares in other REITs and certain options, but excluding mineral, oil
or gas royalty interests. The temporary investment of new capital in debt
instruments also qualifies under this 75% asset test, but only for the one-year
period beginning on the date we receive the new capital.
Second, although the balance of our assets generally may be invested without
restriction, we will not be permitted to own (1) securities of any one
non-governmental issuer that represent more than 5% of the value of our total
assets or (2) more than 10% of the outstanding voting securities of any single
issuer. A REIT, however, may own 100% of the stock of a qualified REIT
subsidiary, in which case the assets, liabilities and items of income, deduction
and credit of the subsidiary are treated as those of the REIT. In evaluating a
REIT's assets, if the REIT invests in a partnership, it is deemed to own its
proportionate share of the assets of the partnership. We currently comply with,
and expect to continue to satisfy, these asset tests.
ANNUAL DISTRIBUTIONS TO STOCKHOLDERS. To maintain REIT status, we generally must
distribute to our stockholders in each taxable year at least 95% of our net
ordinary income (capital gain is not required to be distributed). More
precisely, we must distribute an amount equal to (1) 95% of the sum of (a) our
"REIT Taxable Income" before deduction of dividends paid and excluding any net
capital gain and (b) any net income from foreclosure property less the tax on
such income, minus (2) limited categories of "excess noncash income" (including,
cancellation of indebtedness and original issue discount income).
REIT Taxable Income is defined to be the taxable income of the REIT, computed as
if it were an ordinary corporation, with certain modifications. For example, the
deduction for dividends paid is allowed, but neither net income from foreclosure
property, nor net income from prohibited transactions, is included. In addition,
the REIT may carry over, but not carry back, a net operating loss for 20 years
following the year in which it was incurred.
A REIT may satisfy the 95% distribution test with dividends paid during the
taxable year and with dividends paid after the end of the taxable year if the
dividends fall within one of the following categories:
- Dividends paid in January that were declared during the last calendar
quarter of the prior year and were payable to stockholders of record on a
date during the last calendar quarter of that prior year are treated as
paid in the prior year for ourselves and our stockholders.
- Dividends declared before the due date of our tax return for the taxable
year (including extensions) also will be treated as paid in the prior
year for ourselves if
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they are paid (1) within 12 months of the end of such taxable year and
(2) no later than our next regular distribution payment.
Dividends that are paid after the close of a taxable year that do not qualify
under the rule governing payments made in January (described above) will be
taxable to the shareholders in the year paid, even though we may take them into
account for a prior year. A nondeductible excise tax equal to 4% will be imposed
on the Company for each calendar year to the extent that dividends declared and
distributed or deemed distributed before December 31 are less than the sum of
(a) 85% of the Company's "ordinary income" plus (b) 95% of the Company's capital
gain net income plus (c) any undistributed income from prior periods.
Dividends that are paid after the close of a taxable year that do not qualify
under the rule governing payments made in January described above will be
taxable to our shareholders in the year paid, even though we may be take them
into account for a prior year. We will incur a nondeductible excise tax equal to
4% will for each calendar year to the extent that dividends declared and
distributed or deemed distributed before December 31 are less than the sum of
(a) 85% of our "ordinary income" plus (b) 95% of our capital gain net income
plus (c) any undistributed income from prior periods.
We will be taxed at regular corporate rates to the extent we retain any portion
of our taxable income. It is possible that we may not have sufficient cash or
other liquid assets to meet the distribution requirement. This could arise
because of competing demands for our funds, or because of timing differences
between tax reporting and cash receipts and disbursements. Although we do not
anticipate any difficulty in meeting this requirement, no assurance can be given
that necessary funds will be available. In the event this occurs, we may cause
WDOP to arrange for short-term, or possibly long-term, borrowings to permit the
payment of required dividends and meet the 95% distribution requirement.
If we fail to meet the 95% distribution requirement because of an adjustment to
our taxable income by the IRS, we may be able to retroactively cure the failure
by paying a "deficiency dividend," as well as applicable interest and penalties,
within a specified period.
TAXATION AS A REIT
As a REIT, we generally will not be subject to corporate income tax to the
extent we currently distributes our REIT taxable income to our stockholders.
This treatment effectively eliminates the "double taxation" (i.e., taxation at
both the corporate and stockholder levels) imposed on investments in most
corporations. We generally will be taxed only on the portion of our taxable
income which we retain, including any undistributed net capital gain, because we
will be entitled to a deduction for dividends paid to stockholders during the
taxable year. A dividends paid deduction is not available for dividends that are
considered preferential within any given class of shares or as between classes
except to the extent such class is entitled to such preference. We do not
anticipate we will pay any such preferential dividends. Because Excess Stock
will represent a separate class of outstanding shares, the fact that those
shares will not be entitled to dividends should not adversely affect our ability
to deduct dividend payments.
Even as a REIT, we will be subject to tax in the following circumstances:
- any income or gain from foreclosure property will be taxed at the highest
corporate rate (currently 35%);
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- a confiscatory tax of 100% applies to any net income from prohibited
transactions, which are, in general, certain sales or other dispositions
of property held primarily for sale to customers in the ordinary course
of business;
- if we fail to meet either the 75% or 95% source of income tests
previously described, but still qualify for REIT status under the
reasonable cause exception to those tests, a 100% tax would be imposed
equal to the amount obtained by multiplying (1) the greater of the
amount, if any, by which we failed either the 75% income test or the 95%
income test, times (2) the ratio of our REIT Taxable Income to our gross
income (excluding capital gain and certain other items);
- items of tax preference, excluding items specifically allocable to our
stockholders, will be subject to the alternative minimum tax;
- if we fail to distribute with respect to each calendar year at least the
sum of (1) 85% of our REIT ordinary income for such year, (2) 95% of our
REIT capital gain net income for such year, and (3) any undistributed
taxable income from prior years, we would be subject to a 4% excise tax
on the excess of such required distribution over the amounts actually
distributed; and
- under regulations that are to be promulgated, we also may be taxed at the
highest regular corporate tax rate on any built-in gain attributable to
assets we acquire in tax-free corporate transactions, to the extent the
gain is recognized during the first ten years after we acquire such
assets.
FAILURE TO QUALIFY AS A REIT
If we fail to qualify as a REIT and are not successful in seeking relief, we
will be taxed at regular corporate rates on all of our taxable income.
Distributions to our stockholders would not be deductible in computing that
taxable income, and we would no longer be required to make distributions. Any
corporate level taxes generally would reduce the amount of cash available for
distribution to our stockholders and, because our stockholders would continue to
be taxed on any distributions they receive, the net after tax yield to our
stockholders likely would be substantially reduced.
As a result, our failure to qualify as a REIT during any taxable year could have
a material adverse effect upon the company and our stockholders. If we lose our
REIT status, unless we are able to obtain relief, we will not be eligible to
elect REIT status again until the fifth taxable year which begins after the
taxable year during which our election was terminated.
TAXATION OF STOCKHOLDERS
In general, distributions will be taxable to stockholders as ordinary income to
the extent of our earnings and profits. Specifically, dividends and
distributions will be treated as follows:
- Dividends declared during the last quarter of a calendar year and
actually paid during January of the immediately following calendar year
are generally treated as if received by the stockholders on December 31
of the calendar year during which they were declared.
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- Distributions paid to stockholders will not constitute passive activity
income, and as a result generally cannot be offset by losses from passive
activities of a stockholder who is subject to the passive activity rules.
- Distributions we designate as capital gains dividends generally will be
taxed as long term capital gains to stockholders to the extent that the
distributions do not exceed our actual net capital gain for the taxable
year. Corporate stockholders may be required to treat up to 20% of any
such capital gains dividends as ordinary income.
- If we elect to retain and pay income tax on any net long-term capital
gain, our stockholders would include in their income as long-term capital
gain their proportionate share of such net long-term capital gain. Our
stockholders would receive a credit for such stockholder's proportionate
share of the tax paid by us on such retained capital gains and an
increase in basis in their stock in an amount equal to the difference
between the undistributed long-term capital gains and the amount of tax
we paid.
- Any distributions we make, whether characterized as ordinary income or as
capital gains, are not eligible for the dividends received deduction for
corporations.
- Stockholders are not permitted to deduct our losses or loss
carry-forwards.
Future regulations may require that the stockholders take into account, for
purposes of computing their individual alternative minimum tax liability,
certain of our tax preference items.
We may generate cash in excess of our net earnings. If we distribute cash to our
stockholders in excess of our current and accumulated earnings and profits,
other than as a capital gain dividend, the excess cash will be deemed to be a
return of capital to each stockholder to the extent of the adjusted tax basis of
the stockholder's shares. Distributions in excess of the adjusted tax basis will
be treated as gain from the sale or exchange of the shares of stock. A
stockholder who has received a distribution in excess of our current and
accumulated earnings and profits may, upon the sale of the shares, realize a
higher taxable gain or a smaller loss because the basis of the shares as reduced
will be used for purposes of computing the amount of the gain or loss.
Generally, gain or loss realized by a stockholder upon the sale of Common Stock
or Preferred Stock will be reportable as capital gain or loss. If a stockholder
receives a long-term capital gain dividend and has held the shares of stock for
six months or less, any loss incurred on the sale or exchange of the shares is
treated as a long-term capital loss to the extent of the corresponding long-term
capital gain dividend received.
In any year in which we fail to qualify as a REIT, our stockholders generally
will continue to be treated in the same fashion described above, except that
none of our dividends will be eligible for treatment as capital gains dividends,
corporate stockholders will qualify for the dividends received deduction and the
stockholders will not be required to report any share of the Company's tax
preference items.
BACKUP WITHHOLDING
We will report to our stockholders and the IRS the amount of dividends paid
during each calendar year and the amount of tax withheld, if any. If a
stockholder is subject to backup
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withholding, we will be required to deduct and withhold from any dividends
payable to that stockholder a tax of 31%. These rules may apply in the following
circumstances:
- when a stockholder fails to supply a correct taxpayer identification
number,
- when the IRS notifies us that the stockholder is subject to the rules or
has furnished an incorrect taxpayer identification number, or
- in the case of corporations or others within certain exempt categories,
when they fail to demonstrate that fact when required.
A stockholder that does not provide a correct taxpayer identification number may
also be subject to penalties imposed by the IRS. Any amount withheld as backup
withholding may be credited against the stockholder's federal income tax
liability. We also may be required to withhold a portion of capital gain
distributions made to stockholders who fail to certify their non-foreign status.
The United States Treasury has recently issued final regulations (the "Final
Regulations") regarding the withholding and information reporting rules
discussed above. In general, the Final Regulations do not alter the substantive
withholding and information reporting requirements but unify current
certification procedures and clarify reliance standards. The Final Regulations
are generally effective for payments made on or after January 1, 2000, subject
to certain transition rules. Prospective investors should consult their own tax
advisors concerning the adoption of the Final Regulations and the potential
effect on their ownership of Common Stock or Preferred Stock.
TAXATION OF TAX EXEMPT ENTITIES
In general, a tax exempt entity that is a stockholder will not be subject to tax
on distributions with respect to our shares or gain realized on the sale of our
shares. In Revenue Ruling 66-106, the IRS confirmed that a REIT's distributions
to a tax exempt employees' pension trust did not constitute unrelated business
taxable income ("UBTI"). A tax exempt entity may be subject to UBTI, however, to
the extent that it has financed the acquisition of its shares with "acquisition
indebtedness" within the meaning of the Code. The Revenue Reconciliation Act of
1993 has modified the rules for tax exempt employees' pension and profit sharing
trusts which qualify under Section 401(a) of the Code and are exempt from tax
under Section 501(a) of the Code ("qualified trusts") for tax years beginning
after December 31, 1993. In determining the number of stockholders a REIT has
for purposes of the "50% test" described above under "-- REIT Qualification --,"
generally, any stock held by a qualified trust will be treated as held directly
by its beneficiaries in proportion to their actuarial interests in such trust
and will not be treated as held by such trust.
A qualified trust owning more than 10% of a REIT may be required to treat a
percentage of dividends from the REIT as UBTI. The percentage is determined by
dividing the REIT's gross income, less direct expenses related thereto, derived
from an unrelated trade or business for the year (determined as if the REIT were
a qualified trust) by the gross income of the REIT for the year in which the
dividends are paid. However, if this percentage is less than 5%, dividends are
not treated as UBTI. These UBTI rules apply only if the REIT qualifies as a REIT
because of the change in the 50% test discussed above and if the trust is
"predominantly held" by qualified trusts. A REIT is predominantly held by
qualified trusts if at least one pension trust owns more than 25% of
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the value of the REIT or a group of pension trusts each owning more than 10% of
the value of the REIT collectively own more than 50% of the value of the REIT.
The Company does not currently meet either of these requirements.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt from
federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of
the Code, respectively, income from an investment our securities will constitute
UBTI unless the organization is able to deduct an amount properly set aside or
placed in reserve for certain purposes so as to offset the unrelated business
taxable income generated by the investment our securities. These prospective
investors should consult their own tax advisors concerning the "set aside" and
reserve requirements.
TAXATION OF FOREIGN INVESTORS
The rules governing federal income taxation of nonresident alien individuals,
foreign corporations, foreign partnerships and other foreign stockholders
(collectively, "Non-U.S. Stockholders") are complex and no attempt will be made
herein to provide more than a summary of such rules. Prospective Non-U.S.
Stockholders should consult with their own tax advisors to determine the impact
of federal, state and local income tax laws with regard to an investment in
shares of Common Stock or Preferred Stock, including any reporting requirements,
as well as the tax treatment of such an investment under the laws of their home
country.
Dividends that are not attributable to gain from our sales or exchanges of
United States real property interests and not designated us as capital gain
dividends will be treated as dividends of ordinary income to the extent that
they are made out of our current or accumulated earnings and profits. Such
dividends ordinarily will be subject to a withholding tax equal to 30% of the
gross amount of the dividend unless an applicable tax treaty reduces or
eliminates that tax. However, if income from the investment in the Common Stock
or Preferred Stock is treated as effectively connected with the Non-U.S.
Stockholder's conduct of a United States trade or business, the Non-U.S.
Stockholder generally will be subject to a tax at graduated rates, in the same
manner as U.S. stockholders are taxed with respect to such dividends (and may
also be subject to the 30% branch profits tax in the case of a stockholder that
is a foreign corporation).
For withholding tax purposes, we are currently required to treat all
distributions as if made out of current and accumulated earnings and profits.
Therefore we withhold at the rate of 30%, or a reduced treaty rate if
applicable, on the amount of any distribution (other than distributions
designated as capital gain dividends) made to a Non-U.S. Stockholder unless (1)
the Non-U.S. Stockholder files on IRS Form 1001 claiming that a lower treaty
rate applies or (2) the Non-U.S. Stockholder files an IRS Form 4224 with the
Company claiming that the dividend is effectively connected income.
Under the Final Regulations, generally effective for distributions on or after
January 1, 2000, we would not be required to withhold at the 30% rate on
distributions we reasonably estimate to be in excess of our current and
accumulated earnings and profits. Dividends in excess of our current and
accumulated earnings and profits will not be taxable to a stockholder to the
extent they do not exceed the adjusted basis of the stockholder's shares.
Instead, they will reduce the adjusted basis of such shares. To the extent that
such dividends exceed the adjusted basis of a Non-U.S. Stockholder's shares of
stock, they will
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give rise to tax liability if the Non-U.S. Stockholder would otherwise be
subject to tax on any gain from the sale or disposition of his shares, as
described below. If it cannot be determined at the time a dividend is paid
whether or not such dividend will be in excess of current and accumulated
earnings and profits, the dividends will be subject to withholding.
We do not intend to make quarterly estimates of that portion of dividends that
are in excess of earnings and profits, and, as a result, all dividends will be
subject to such withholding. However, the Non-U.S. Stockholder may seek a refund
of such amounts from the IRS.
For any year in which we qualify as a REIT, distributions that are attributable
to gain from our sales or exchanges of United States real property interests
will be taxed to a Non-U.S. Stockholder under the provisions of the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA, those
dividends are taxed to a Non-U.S. Stockholder as if such gain were effectively
connected with a United States business. Non-U.S. Stockholders would thus be
taxed at the normal capital gain rates applicable to U.S. stockholders, subject
to applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals. Also, dividends subject to FIRPTA may
be subject to a 30% branch profits tax in the hands of a corporate Non-U.S.
Stockholder not entitled to treaty exemption. We are required by the Code and
applicable Treasury Regulations to withhold 35% of any dividend that we could
designate as a capital gain dividend. This amount is creditable against the
Non-U.S. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares generally will
not be taxed under FIRPTA if we are a "domestically controlled REIT," defined
generally as a REIT in which at all times during a specified testing period,
less than 50% in value of the shares was held directly or indirectly by foreign
persons. We believe we are a "domestically controlled REIT," and therefore the
sale of shares is not be subject to taxation under FIRPTA. Because the shares of
Common Stock are publicly traded, however, no assurance can be given that we
will remain a "domestically controlled REIT." However, gain not subject to
FIRPTA will be taxable to a Non-U.S. Stockholder if:
- investment in the shares of Common Stock or Preferred Stock is
effectively connected with the Non-U.S. Stockholder's United States trade
or business, in which case the Non-U.S. Stockholder will be subject to
the same treatment as U.S. stockholders with respect to such gain (and
may also be subject to the 30% branch profits tax in the case of a
corporate Non-U.S. Stockholder, or
- the Non-U.S. Stockholder is a nonresident alien individual who was
present in the United States for 183 days or more during the taxable year
and has a "tax home" in the United States, in which case the nonresident
alien individual will be subject to a 30% withholding tax on the
individual's capital gains.
If we were not a domestically controlled REIT, whether or not a Non-U.S.
Stockholder's sale of shares of Common Stock or Preferred Stock would be subject
to tax under FIRPTA would depend on whether or not the shares of Common Stock or
Preferred Stock were regularly traded on an established securities market (such
as the NYSE) and on the size of selling Non-U.S. Stockholder's interest in our
securities. If the gain on the sale of shares were to be subject to taxation
under FIRPTA, the Non-U.S. Stockholder will be subject to the same treatment as
U.S. stockholders with respect to such gain and the purchaser of such shares of
Common Stock or Preferred Stock may be required to
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withhold 10% of the gross purchase price. Any FIRPTA taxation would be subject
to applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals.
STATE AND LOCAL TAXES
We may be subject to state or local taxation in various state or local
jurisdictions, including those in which we transact business. In addition, our
stockholders may also be subject to state or local taxation. Consequently,
prospective stockholders should consult their own tax advisors regarding the
effect of state and local tax laws on an investment in our securities.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (a "Plan"), should consider the fiduciary standards under ERISA in the
context of the Plan's particular circumstances before authorizing an investment
of a portion of such Plan's assets in our shares of Common Stock. In particular,
such fiduciary should consider:
- whether the investment satisfies the diversification requirements of
Section 404(a)(1)(c) of ERISA
- whether the investment is in accordance with the documents and
instruments governing the Plan as required by Section 404(a)(1)(D) of
ERISA
- whether the investment is for the exclusive purpose of providing benefits
to participants in the Plan and their beneficiaries, or defraying
reasonable administrative expenses of the Plan, and
- whether the investment is prudent under ERISA.
In addition to general fiduciary standards of investment prudence and
diversification, specific provisions of ERISA and the Code prohibit a wide range
of transactions involving the assets of a Plan or an individual retirement
account ("IRA"), and transactions with persons who have specified relationships
to the Plan or an IRA. Such persons are referred to as "parties in interest" in
ERISA, and as "disqualified persons" in the Code. Thus, a fiduciary of a Plan or
an IRA considering an investment in our shares of Common Stock should also
consider whether acquiring or continuing to hold shares of Common Stock might
constitute a prohibited transaction, either directly or indirectly.
The Department of Labor (the "DOL") has issued final regulations (the
"Regulations") as to what constitutes assets of an employee benefit plan under
ERISA. Under these Regulations, if a Plan or an IRA acquires an equity interest
that is neither a "publicly offered security" nor a security issued by an
investment company registered under the Investment Company Act of 1940, as
amended, then for purposes of fiduciary and prohibited transaction provisions
under ERISA and the Code, the assets of the Plan and the IRA would include both
the equity interest and an undivided interest in each of the entity's underlying
assets, unless an exemption applies.
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The DOL Regulations define a publicly-offered security as a security that is:
- "widely held"
- "freely transferable," and
- either part of a class of securities registered under the Exchange Act,
or sold pursuant to an effective registration statement under the
Securities Act, provided the securities are registered under the Exchange
Act within 120 days after the end of the fiscal year of the issuer during
which the offering occurred.
Our securities offered hereby will be registered under the Securities Act and
are or will be registered under the Exchange Act.
The Regulations provide that a security is "widely held" only if it is part of a
class of securities that is owned by 100 or more investors independent of the
issuer and of one another. However, a security will not fail to be "widely held"
if, the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control.
The DOL Regulations provide that whether a security is "freely transferable" is
a factual question to be determined on the basis of all relevant facts and
circumstances. The Regulations further provide that when a security is part of
an offering in which the minimum investment is $10,000 or less, the existence of
certain restrictions ordinarily will not, alone or in combination, affect the
finding that such securities are freely transferable.
We believe that the restrictions imposed under our Articles on the transfer of
capital stock are limited to the restrictions on transfer generally permitted
under the Regulations, and are not likely to result in the failure of the
capital stock to be "freely transferable." We also believe that the restrictions
that apply to the capital stock held by us, or which may be derived from
contractual arrangements requested by the underwriters in connection with our
Offered Securities are unlikely to result in the failure of the capital stock to
be "freely transferable." The DOL Regulations establish only a presumption in
favor of the finding of free transferability; therefore, no assurance can be
given that the DOL and the U.S. Treasury Department will not reach a contrary
conclusion.
Assuming that our securities will be "widely held," we believe that our
securities will also be publicly held for purposes of the Regulations. Thus, we
believe that our assets will not be deemed to be "plan assets" of any Plan or
IRA that invests in the securities offered hereby.
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INFORMATION REGARDING WALDEN/DREVER OPERATING PARTNERSHIP, L.P.
GENERAL
Walden/Drever Operating Partnership, L.P. ("WDOP") is a Delaware limited
partnership of which we are the sole general partner. General information
concerning WDOP is as follows:
- WDOP was originally formed for the purpose of acquiring the partnership
interests of the Drever Partnerships
- The stated purpose of WDOP is to invest in, purchase, develop, own,
manage, lease, finance and dispose of multifamily real estate properties,
enter into partnership, joint venture or similar arrangements to engage
in the foregoing, or any other activity which all of the partners
approve.
- We consolidate WDOP for accounting purposes.
- The term of WDOP is until the first to occur of (1) December 31, 2017 or
(2) the dissolution of WDOP pursuant to the express provisions of the
WDOP Partnership Agreement or by law.
- The principal place of business of WDOP is 5080 Spectrum Drive, Suite
1000 East, Addison, Texas 75001-6410
THE WDOP PARTNERSHIP AGREEMENT
The summary of the terms of the WDOP Partnership Agreement set forth below does
not purport to be complete and is subject to, and qualified in its entirety by,
reference to the WDOP Partnership Agreement, a copy of which is available
without charge. See "Available Information." Capitalized terms used in this
section but not otherwise defined herein shall have the respective meanings
ascribed to such terms in the WDOP Partnership Agreement.
DISTRIBUTIONS. Within 60 days after the end of each fiscal quarter, WDOP will
distribute 100% of cash funds derived from the operation of its business, after
deduction of operating expenses, all scheduled payments on indebtedness,
expenditures for capital improvements, all current liabilities and a working
capital reserve in an amount we, as general partner, deem reasonably necessary
or advisable. The priority of distributions for each record date will be as
follows:
- first, to the Class B Limited Partners holding Preferred OP Units, in an
amount equal to (1) the product of the number of Preferred OP Units owned
and $.5625, plus (2) the amount of distributions previously unpaid to the
Class B Limited Partners in respect of their Preferred OP Units together
with all accrued and unpaid interest,
- second, to the Class B Limited Partners holding Common OP Units, in an
amount equal to (1) the number of shares of Common Stock for which each
such Common Unit is then exchangeable multiplied by the dividend then
payable on a share of Common Stock plus (2) the amount of distributions
due but previously unpaid to the Class B Limited Partners in respect to
their Common OP Units together with all accrued and unpaid interest, and
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- of the remainder, we will receive 1% as the general partner and 99% will
be distributed to WDN Properties, Inc. or any other person admitted
pursuant to the WDOP Partnership Agreement as a Class A Limited Partner.
If WDOP does not make all or any portion of such quarterly distributions to the
holders of the Units, the unpaid amount will 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.
Upon exchange of Common OP Units or Preferred OP Units, WDOP will distribute to
the exchanging Unitholder, in cash or shares, an amount equal to the amount of
distributions due but unpaid in respect of the Common OP Units and Preferred OP
Units being exchanged, together with all accrued and unpaid interest.
TAX ALLOCATIONS
The WDOP Partnership Agreement provides that any profits of WDOP will be
allocated in the following order and priority:
- first, proportionately to the Class B Preferred Limited Partners until
the profits allocated to the Class B Preferred Limited Partners equal the
difference between the sum of all distributions previously paid and the
cumulative amount of profits previously allocated to the Class B
Preferred Limited Partners;
- second, proportionately to the Class B Common Limited Partners until the
profits allocated to the Class B Common Limited Partners equal the
difference between the sum of all distributions previously paid and the
cumulative amount of profits previously allocated to the Class B Common
Limited Partners;
- third, to us, as general partner of WDOP;
- fourth, to the partners (other than the Class B Limited Partners);
- fifth, proportionately to the Class B Preferred Limited Partners in an
amount equal to difference between the cumulative losses previously
allocated to each such partner and the cumulative profits previously
allocated to such partner;
- sixth, proportionately to the Class B Common Limited Partners in an
amount equal to difference between the cumulative losses previously
allocated to each such partner and the cumulative profits previously
allocated to such partner; and
- thereafter, to us, as general partner of WDOP, and the Class A Limited
Partners in accordance with their respective percentage interests.
The WDOP Partnership Agreement provides that any losses of WDOP will be
allocated in the following order:
- first, to us, as general partner of WDOP, and proportionately to the
Class A Limited Partners;
- second, proportionately to the Class B Common Limited Partners until the
amount of losses allocated for the current fiscal year equals the
difference between (A) the sum of (I) the aggregate amount of the portion
of the capital account balances attributable to Class B Common OP Units,
(II) the aggregate capital contributions made by such partners, and (III)
the cumulative amount of profits allocated to them and (B) the sum of (I)
cumulative amount of losses previously allocated to such partners and
(II) the cumulative amount of distributions made to them;
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- third, proportionately to the Class B Preferred Limited Partners until
the amount of losses allocated for the current fiscal year equals the
difference between (A) the sum of (I) the aggregate amount of the portion
of the capital account balances attributable to Class B Preferred OP
Units, (II) the aggregate capital contributions made by such partners,
and (III) the cumulative amount of profits allocated to them and the sum
of (I) the cumulative amount of losses previously allocated to such
partners and (II) the cumulative amount of distributions made to them;
and
- thereafter, 1% to us, as general partner of WDOP, and 99% to the limited
partners (other than the Class B Limited Partners) in accordance with
their percentage interests.
In addition to the allocations described above, commencing on the first day of
the month following the first anniversary of the Effective Date, the WDOP
Partnership Agreement provides for a special allocation of depreciation to the
Class B Common Limited Partners who continue to be Class B Common Limited
Partners on December 31 of the taxable year in respect of which such special
allocation is to be made.
STATUS OF LIMITED PARTNERS. As the general partner of WDOP, we have sole control
of the management and control of WDOP's business, the power to transact WDOP
business and the power to act for and bind WDOP. No limited partner of WDOP will
be bound by or personally liable for the expenses, liabilities or obligations of
WDOP other than those required by statute. We may not be removed as general
partner with or without cause. We possess all management powers including,
without limitation:
(1) The making of any expenditures, the lending or borrowing of money, the
assumption or guarantee of, or other contracting for, indebtedness and
other liabilities, the issuance of evidences of indebtedness and the
incurring of any obligations it deems necessary for the conduct of the
activities of WDOP;
(2) The acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any properties of WDOP;
(3) The use of the assets of WDOP and affiliates of WDOP controlled by
WDOP for any purpose consistent with the terms of the WDOP Partnership
Agreement;
(4) The management, operation, leasing, landscaping, repair, alteration,
demolition or improvement of any real property or improvements owned
by WDOP either directly or through one or more contractors;
(5) The distribution of WDOP cash or property in accordance with the WDOP
Partnership Agreement;
(6) Holding, managing, investing and reinvesting cash and other assets of
WDOP;
(7) The formation of, or acquisition of an interest in, and the
contribution of property to, any other limited or general
partnerships, joint venture or other relationship that it deems
desirable;
(8) The exercise of any of the powers of the general partner enumerated in
the WDOP Partnership Agreement on behalf of or in connection with any
other person in which WDOP has a direct or indirect interest, or
jointly with any other persons;
(9) The making, execution and delivery of any and all deeds, leases,
notes, deeds to secure debt, mortgages, deeds of trust, security
agreements, conveyances,
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contracts, guarantees, warranties, indemnities, waivers, releases or legal
instruments or agreements in writing necessary or appropriate in our judgment
for the accomplishment of any of the powers enumerated in the WDOP Partnership
Agreement;
(10) The merger, consolidation or other combination of WDOP with any other
person; and
(11) The undertaking of any action necessary to admit any person as an
additional or substitute limited partner pursuant to the terms of the
WDOP Partnership Agreement.
As general partner, we may file amendments to and restatements of the WDOP
Partnership Agreement to the extent we determine such action to be reasonable
and necessary or appropriate, provided that it is not inconsistent with any
provision of the WDOP Partnership Agreement. We can also prevent acts which we
believe, in our sole and absolute discretion, (1) could adversely affect our
ability to continue to qualify as a REIT, (2) could subject us to any taxes
under Section 857 or Section 4981 of the Code, or (3) could violate any law or
regulation.
We may not, without the consent of Class B Limited Partners holding a majority
of the partnership interests in WDOP then held by such partners, execute "Major
Actions" which include:
1. The sale, exchange, transfer or other disposition of certain properties
prior to the third anniversary of the effective date of WDOP Partnership
Agreement;
2. The commencement by WDOP of a voluntary case under any applicable
bankruptcy law;
3. The taking of any action that makes it impossible for WDOP to fulfill
its stated purpose;
4. Withdrawal as general partner of WDOP; and
5. Effecting a dissolution of WDOP prior to the tenth anniversary of the
effective date of the WDOP Partnership Agreement.
WDOP has established a special committee (the "Special Committee") consisting of
two members we have appointed, and two members appointed by the Class B Limited
Partners. The purpose of the Special Committee is to approve transactions
between WDOP and affiliated entities and other decisions that could affect the
Class B Limited Partners. The WDOP Partnership Agreement requires the Special
Committee's approval of the following matters:
1. Determination of the fair market value of certain in-kind contributions
and distributions of property;
2. Lending or contributing funds or other assets of WDOP to persons in
which WDOP has an equity investment; and
3. Transfers of WDOP assets to joint ventures, other partnerships,
corporations or other business entities in which WDOP is or thereby
becomes a participant.
Members of the Special Committee do not receive compensation for their service
on such committee. The Special Committee will terminate on the first date on
which the
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percentage of interest in WDOP owned by the Class B Limited Partners is reduced
below 33.33%.
CAPITAL CONTRIBUTIONS. As general partner, we are generally authorized to issue
additional partnership interests, in our sole and absolute discretion so long as
the additional interests do not have rights, powers and duties senior to the
Common OP Units or Preferred OP Units.
No partner has the right to demand the return of its capital contribution or
that interest be paid on its capital contribution. Preemptive, preferential or
similar rights with respect to additional capital contributions or the issuance
or sale of WDOP interests are expressly denied.
TRANSFERS OF PARTNERSHIP INTERESTS; WITHDRAWAL FROM WDOP. As general partner, we
must have approval of a majority in interest of the limited partners of WDOP to
transfer our interest, except for transfers to affiliates, transfers by
consolidation or merger or acquisition. Our consent is required for any limited
partner of WDOP to transfer its interest in WDOP other than transfers to
affiliates of such transferee, which require no consent. The term "transfer"
includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage,
exchange or any other disposition by law or otherwise.
Limited partners of WDOP may withdraw from WDOP only by transfer of their
interest in WDOP. Upon transfer of a limited partner's interest in WDOP and upon
the admission of all assignees to WDOP, such limited partner immediately ceases
to be a limited partner of WDOP.
WDOP has the right to redeem each Preferred OP Unit, on or after the tenth
anniversary of the effective date of the WDOP Partnership Agreement, for cash
equal to the sum of (1) $25.00 and (2) the portion of any unpaid distributions
relating to the redeemed Preferred OP Unit.
DISSOLUTION. WDOP will dissolve and its affairs will be wound-up upon the first
to occur of the following:
1. The expiration of WDOP's stated term on December 31, 2017;
2. An event of withdrawal of the general partner;
3. An election to dissolve (prior to the tenth anniversary of the effective
date of the WDOP Partnership Agreement) WDOP made by the general partner
with the approval of all of the limited partners;
4. An election to dissolve made by the general partner after the tenth
anniversary of the effective date of the WDOP Partnership Agreement and
following 20 days after notice is given to the limited partners;
5. The entry of a decree of judicial dissolution of WDOP;
6. The sale or disposition of all or substantially all of the assets and
properties of WDOP pursuant to the terms of the WDOP Partnership
Agreement;
7. Our bankruptcy; and
8. A change in the Code, regulations and/or administrative rulings of the
Internal Revenue Service to the effect that our ownership of WDOP
interests, or ownership
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of such interests by WDN Properties, Inc. or our affiliates will likely cause us
to fail to qualify as a REIT.
The proceeds from winding-up the operations of WDOP will be applied and
distributed in the following order:
1. First, to the payment and discharge of all of WDOP's debts and
liabilities to creditors other than partners;
2. Second, to the payment and discharge of all of WDOP's debts and
liabilities to partners; and
3. The balance, if any, to and among the partners of WDOP pro rata in
accordance with the positive balances of their capital accounts, after
giving effect to all contributions, distributions, and allocations for
all periods.
POLICIES OF WDOP
As the general partner of WDOP, we control the operations and policies of WDOP,
except as otherwise provided by law or the WDOP Partnership Agreement. We
operate WDOP in a manner consistent with our operations and policies. See "The
Company" and "Policies with Respect to Certain Activities."
REAL ESTATE
WDOP, directly or indirectly through its affiliates, holds title to 104 of our
apartment properties. These properties are indicated with an asterisk on the
property information table entitled "Apartments Owned" on pages through of
this prospectus.
TAX TREATMENT OF WDOP
GENERAL. In general, a partnership is treated as a "pass-through" entity for
Federal income tax purposes and thus is not subject to Federal income taxation.
Each partner of a partnership, however, is subject to tax on his allocable share
of partnership tax items, including partnership income, gains, losses,
deductions, and credits ("Partnership Tax Items") for each taxable year during
which he continues to be a partner, regardless of whether such partner receives
any actual distributions from the partnership during the taxable year.
Generally, the characterization of any particular Partnership Tax Item is
determined at the partnership, rather than at the partner level, and the amount
of a partner's allocable share of such item is governed by the terms of the
partnership agreement.
Accordingly, for each taxable year during which a WDOP limited partner continues
to hold Units, such partner will be required to include in income his allocable
share of any WDOP income or gain and will be entitled to deduct his allocable
share of any WDOP deductions or losses, subject to the limitations discussed
below under the heading "Loss Limitations."
CASH DISTRIBUTIONS. Cash distributions received from a partnership do not
necessarily correlate with income, if any, earned by the partnership as
determined for Federal income tax purposes. Thus, a partner's Federal income tax
liability in respect of his allocable share of partnership taxable income for a
particular taxable year may exceed the amount of cash, if any, distributed by
the partnership to the partner during such year.
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If cash distributions, including a "deemed" cash distribution resulting from a
reduction of WDOP liabilities as discussed below, received by you in any taxable
year exceed your allocable share of WDOP's taxable income for the year, the
excess will constitute a return of capital for Federal income tax purposes, to
the extent of such partner's Adjusted Tax Basis in his Units, which will not be
subject to tax. If your Adjusted Tax Basis in your Units is reduced to zero, a
subsequent cash distribution or "deemed" cash distribution will be subject to
tax generally as capital gain, but only if, and to the extent that, such
distribution exceeds the subsequent positive adjustments, if any, to the
Adjusted Tax Basis of your Units as determined generally at the end of the
taxable year during which such distribution is received.
A decrease in your share of WDOP liabilities resulting from the payment or other
settlement of such liabilities is generally treated, for Federal income tax
purposes, as a deemed cash distribution. WDOP may determine to pay down certain
direct obligations of WDOP or obligations of its lower tier partnerships.
Accordingly, as a result of such liability reduction, it is possible that you
may be treated as receiving a hypothetical distribution of cash resulting from a
decrease in your share of WDOP liabilities.
SPECIAL ALLOCATIONS OF PARTNERSHIP TAX ITEMS
SECTION 704(C) GAIN. Generally, under section 704(c) of the Code, when a partner
contributes appreciated property to a partnership and the partnership
subsequently disposes of the contributed property in a taxable transaction, the
gain recognized as a result of such disposition will be specially allocated to
the contributing partner in an amount equal to the lesser of (1) the excess of
the fair market value of such property at the time of contribution over the
contributing partner's adjusted tax basis in the property at such time (i.e.,
"built-in gain") or (2) the gain recognized by the partnership upon the
disposition of the property. Accordingly, if WDOP determines to cause the
Partnership to dispose of Partnership property in a taxable transaction, which
property constitutes built-in gain property held by the Partnership on the
Effective Date, gain from such taxable disposition will be specially allocated
to the limited partner to the extent of his allocable share of the built-in gain
in respect of such property. Although the WDOP Partnership Agreement generally
prohibits WDOP from causing the Partnership to dispose of built-in gain property
during the three-year period commencing with the Effective Date, WDOP will
thereafter be free to dispose of any such property in a taxable disposition,
thereby triggering a special allocation of built-in gain to the contributing
limited partners. See "The WDOP Partnership Agreement -- Status of Limited
Partners" above.
OTHER SPECIAL ALLOCATIONS. Commencing on the first day of the month following
the first anniversary of the Effective Date, the WDOP Partnership Agreement
provides for a special allocation of depreciation to the Class B Common Limited
Partners who continue to be Class B Common Limited Partners on December 31 of
the taxable year in respect of which such special allocation is to be made. See
"The WDOP Partnership Agreement -- Tax Allocations" above. No assurance can be
given that the IRS would not challenge such special allocations. Accordingly,
you are urged to consult with your tax advisors with respect to this issue.
LOSS LIMITATIONS
BASIS LIMITATION. To the extent that your allocable share of deductions and
losses exceeds your Adjusted Tax Basis in your Units at the end of the taxable
year in which such losses
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flow through, the excess losses cannot be used, for Federal income tax purposes,
by you in such year. You may use such excess losses, however, in the first
succeeding taxable year in which, and to the extent that, there is an increase
in your Adjusted Tax Basis in your Units, but only to the extent permitted under
the "at risk" and passive activity loss rules discussed below.
PASSIVE ACTIVITY LOSS LIMITATION RULES. Under the passive activity loss rules, a
WDOP limited partner who is an individual investor, as well as certain other
types of investors, will not be able to use losses from WDOP to offset
nonpassive activity income, including salary, business income, and portfolio
income (e.g., dividends, interest, royalties, and gain on the disposition of
portfolio investments) received during the taxable year. Passive activity losses
that are disallowed for a particular taxable year may, however, be carried
forward to offset passive activity income earned in future taxable years. In
addition, such disallowed losses may be claimed as a deduction, subject to the
application of the at risk limitation rules discussed below, upon a taxable
disposition of all of your Units.
If WDOP were to be treated as a "publicly traded partnership," as discussed
below under the heading "Publicly Traded Partnership Considerations," the
passive activity loss rules would be applied separately to your investment in
Units. Accordingly, passive activity losses generated by other passive activity
investments held by you could not be used to offset your allocable share of
income generated by WDOP. In addition, passive activity losses generated by WDOP
and allocated to you could not be used to offset any passive activity income
generated by other passive activity investments held by you.
"AT RISK" LIMITATION RULES. Under the "at risk" limitation rules of section 465
of the Code, a noncorporate taxpayer and a closely held corporate taxpayer are
generally not permitted to claim a Federal income tax deduction, in respect of a
loss from an activity, to the extent that the loss exceeds the aggregate dollar
amount that the taxpayer has "at risk" in respect of such activity at the close
of the taxable year. The at risk limitation rules do not apply to losses arising
from any activity which constitutes "the holding of real property" with respect
to qualified non-recourse financing, the holding of a Unit should constitute.
Accordingly, WDOP does not expect that WDOP limited partners will be subject to
the at risk limitation rules.
PUBLICLY TRADED PARTNERSHIP CONSIDERATIONS. Under the publicly traded
partnership Treasury Regulations, a partnership will be treated as a "publicly
traded partnership" if partners are "readily able" to sell or exchange their
partnership interests in a "manner that is comparable" to trading on an
established securities market. Subject to certain exceptions, a partnership that
is treated as a publicly traded partnership will not be treated as a
"pass-through" entity for Federal income tax purposes and will be subject to tax
as if it were a regular corporation.
Although it is unclear whether the right of a WDOP limited partner to exchange
Units for Walden Securities would cause WDOP to be classified as a publicly
traded partnership, WDOP presently takes the position that the right to exchange
does not cause WDOP to be classified as a publicly traded partnership. If WDOP
were to be classified as a publicly traded partnership, WDOP believes it would
still continue to be subject to treatment as a "pass-through" entity for Federal
income tax purposes, and not subject to tax as if it were a corporation, under
an exception that is available to partnerships that engage principally in real
estate activities. Accordingly, in order to preserve its status as a
"pass-through" entity for Federal income tax purposes, WDOP has adopted a method
of operation that will
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enable it to qualify, on an ongoing basis, for the real property exception
available to publicly traded partnerships.
WDOP PARTNERSHIP INTERESTS
CLASS A LIMITED PARTNERS. The sole Class A Limited Partner is WDN Properties,
Inc., a New York corporation and direct, wholly-owned subsidiary of the Company.
After payment of the Class B Common Distribution and the Class B Preferred
Distribution described below, the Class A Limited Partners are entitled to
receive a distribution of 99% of the cash available for distribution under the
Partnership Agreement.
CLASS B LIMITED PARTNERS. The Class B Limited Partners consist of the former
partners of the Drever Partnerships who received either Class B Common Units
("Common OP Units") or Class B Preferred Units ("Preferred OP Units"), or a
combination thereof, in exchange for their interests in the Drever Partnerships.
COMMON OP UNITS. Holders of Common OP Units are entitled to receive the "Class B
Common Distribution." The Class B Common Distribution is equal to the product of
the following:
- the aggregate number of outstanding Common OP Units,
- the "conversion factor" (currently equal to 1.0), and
- the dividend associated with the Common Stock of the Company which has a
record date which is the same as WDOP's record date.
The "conversion factor" may be adjusted in the event we (a) declare a dividend
or other distribution on the Common Stock payable in Common Stock, (b) subdivide
(by reclassification or otherwise) the outstanding shares of Common Stock, or
(c) combine, by reclassification or otherwise, the outstanding shares of Common
Stock into a smaller number of shares. See "The WDOP Partnership
Agreement -- Distributions" above.
PREFERRED OP UNITS. Holders of Preferred OP Units are entitled to receive the
"Class B Preferred Distribution." The Class B Preferred Distribution is equal
to:
- with respect to each fiscal quarter during which there was not at least
one share of 9.00% Redeemable Preferred Stock issued and outstanding on
each day of such fiscal quarter, the product of (1) the aggregate number
of outstanding Preferred OP Units, and (2) $0.5625; or
- with respect to each fiscal quarter during which there was at least one
share of 9.00% Redeemable Preferred Stock issued and outstanding on each
day of such fiscal quarter, the product of (1) the aggregate number of
outstanding Preferred OP Units, and (2) the preferred dividend associated
with the 9.00% Redeemable Preferred Stock which has a record date which
is the same as the record date for the Preferred OP Units.
See "The WDOP Partnership Agreement -- Distributions" above.
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EXCHANGE OF UNITS
On October 1, 1997, we completed the acquisition of 79 apartment properties,
previously owned by partnerships of which Drever Partners, Inc. and its
affiliates were the general partners. In connection with this acquisition we
formed a new partnership subsidiary, Walden/Drever Operating Partnership, L.P.
("WDOP"), and issued to the partners of the Drever partnerships approximately
$94.7 million in cash, 10,322,397 common units of beneficial ownership in WDOP
(the "Common OP Units") and 1,999,909 preferred units of beneficial interest in
WDOP (the "Preferred OP Units" and, collectively with the Common OP Units, the
"Units").
Each Common OP Unit is exchangeable on or after October 1, 1998 for one share of
Common Stock, plus any distributions currently due or not previously paid on
account of the exchanged Common OP Unit. Each Preferred OP Unit is exchangeable,
subject to certain conditions, on or after October 1, 1998 for one share of
Redeemable Preferred Stock (plus any distributions currently due or not
previously paid on account of the exchanged Preferred OP Unit) and three and
one-third Series B Warrants. Each Series B Warrant is exercisable for one-third
of a share of Common Stock at an exercise price of $26.875 per share. The number
of shares of Common Stock, Redeemable Preferred Stock issuable upon exchange of
Units is subject to adjustment to give effect to the following events affecting
our equity securities:
- Payment of dividends, subdividing of outstanding shares, combination of
outstanding shares into a smaller number of shares or issuance of shares
in a reclassification;
- A distribution by the Company of evidences of indebtedness or assets,
options, subscription rights or warrants to holders of Common Stock or
Redeemable Preferred Stock; and
- Any capital reorganization, any reclassification of the Common Stock or
the Redeemable Preferred Stock, a consolidation or merger with another
entity or the sale of substantially all of our properties and assets.
If we consolidate or merge with another entity, or sell substantially all of our
properties and assets, the right to exchange Units for shares of Common Stock or
Redeemable Preferred Stock and Series B Warrants will become a right to exchange
such Units for securities, cash or other assets of us or such other entity.
PROCEDURE TO EXCHANGE UNITS
GENERAL
If you tender your Units pursuant to the procedure set forth below, this will
constitute an agreement between you and us in accordance with the terms and
subject to the conditions set forth herein and in the notice of exchange (the
"Exchange Notice") delivered to you. We will determine, in our sole discretion
all questions as to the form of all documents and the validity, eligibility, and
acceptance of tendered Units, which determination shall be final and binding.
Alternative, conditional or contingent exchanges of Units will not be considered
valid. We expressly reserve the absolute right to reject any and all proposed
exchanges not in proper form and to determine whether the proposed exchange
would be unlawful. We also reserve the absolute right, subject to applicable
law, to waive any defect or irregularity of a proposed exchange as to particular
Units.
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We are not, nor is BankBoston, NA, the exchange agent for this transaction, or
any other person, under any duty to give notification of any defects or
irregularities in proposed exchanges and we will not incur any liability for
failure to give any such notification. No proposed exchange will be deemed to
have been validly made until all defects and irregularities with respect to such
tendered Units have been cured or waived. Any Units received by the exchange
agent that are not properly tendered and as to which irregularities have not
been cured or waived will be returned by the exchange agent to the appropriate
Unitholder as soon as practicable.
You may not tender Units for exchange unless you tender at least (i) 100 Units,
or (ii) if you hold less than 100 Units, the total number of Units you hold. We
will not issue fractional shares of Common Stock or Redeemable Preferred Stock
in connection with any exchange. The portion of any exchange that would
constitute a fractional share will be paid in cash based upon the then current
market price of the Common Stock or the Redeemable Preferred Stock, whichever is
applicable.
To validly tender Units for exchange, you must deliver a properly completed and
duly executed Exchange Notice (or a facsimile thereof), and all other documents
required by the Exchange Notice, including any certificates representing Units,
to Bank Boston, NA, the exchange agent, at one of the following addresses:
<TABLE>
<S> <C>
BankBoston, NA BankBoston, NA
Attn: Corporate Reorganization Attn: Corporate Reorganization
P.O. Box 8029 150 Royall Street
Boston, MA 02266-8029 Canton, MA 02021
Securities Transfer & Reporting Services, Inc
c/o BankBoston, NA
100 William St./Galleria
New York, NY 10038
</TABLE>
The method of delivery of the Exchange Notice and Unit certificates is at the
option and risk of the exchanging Unitholder. Once submitted for exchange, you
may not withdraw an Exchange Notice. The determination to exchange Units is
solely at your option, except if you are a "Class B-TE Limited Partner"
(tax-exempt entities) in the WDOP Partnership Agreement.
DELIVERY OF EXCHANGE NOTICE AND CERTIFICATES
If the certificates representing Units are registered in the name of a person
other than the person who signs the related Exchange Notice, then, in order to
tender such Units for exchange, the certificates representing such Units must be
endorsed exactly as the name or names of the registered owner or owners appear
on the certificates. If the Exchange Notice is signed by a beneficial owner who
is not either (a) the registered owner of such Units, or (b) the agent thereof
duly appointed by written proxy delivered to the Exchange Agent, the registered
owner must instead complete and sign the Exchange Notice.
Any beneficial owner whose Units are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and who wishes to tender Units
for exchange should contact such registered holder and instruct such registered
holder to tender Units for exchange on such beneficial owner's behalf. If such
beneficial owner
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wishes to tender such Units himself, such beneficial owner must, prior to
completing and executing the Exchange Notice and delivering the Units, make
appropriate arrangements to register ownership of the Units in such beneficial
owner's name. The transfer of record ownership may take a considerable amount of
time.
EXCHANGE NOTICES, CERTIFICATES REPRESENTING UNITS, AND ANY OTHER REQUIRED
DOCUMENTS, SHOULD BE SENT TO THE EXCHANGE AGENT ONLY.
THE METHOD OF DELIVERY OF THE EXCHANGE NOTICE, CERTIFICATES REPRESENTING UNITS,
AND ANY OTHER REQUIRED DOCUMENTS IS AT YOUR ELECTION AND RISK AND DELIVERY WILL
BE DEEMED MADE WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. INSTEAD OF
EFFECTING DELIVERY BY MAIL IT IS RECOMMENDED YOU USE AN OVERNIGHT OR HAND
DELIVERY SERVICE. IF SUCH DELIVERY IS BY MAIL, IT IS SUGGESTED THAT THE HOLDER
USE PROPERLY INSURED, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED.
LOST OR MISSING CERTIFICATES
If you desire to tender Units for exchange, but the certificate(s) evidencing
such Units have been mutilated, lost, stolen or destroyed, you should write to
or telephone us concerning the procedures for obtaining replacement certificates
for such Units or arranging for indemnification or any other matter that
requires handling by our Transfer Agent.
TAX CONSEQUENCES OF EXCHANGING UNITS
GENERAL
The following discussion summarizes certain federal income tax considerations
that may be relevant to you should you exercise your right to exchange your
units. This summary is based on current law, is for general information only,
and is not tax advice. This discussion does not purport to address all aspects
of taxation which may be relevant to you in light of your personal investment or
tax circumstances, or if you are subject to special treatment under the federal
income tax laws. In addition, the discussion below does not address state,
local, foreign or other tax considerations. You should consult your personal tax
advisor.
TAX CONSEQUENCES OF EXCHANGE
TAX TREATMENT OF EXCHANGE OF UNITS. If you exchange your Units for Walden
Securities pursuant to the "Procedure to Exchange Units", such exchange will be
treated as a sale of the Units. The gain or loss from such sale will be equal to
the difference between the amount realized for tax purposes and the adjusted tax
basis in the Unit. See "-- Basis of Units." Upon the sale of a Unit, the amount
realized will be equal to the sum of the fair market value of the Walden
Securities at the time received, plus the amount of any WDOP liabilities
allocable to the Unit immediately prior to its sale. To the extent that the
amount realized exceeds your adjusted tax basis in the Unit exchanged, you will
recognize gain. It is possible that the amount of gain recognized or the tax
liability resulting from such gain could exceed the value of the Walden
Securities you receive.
Except as described below, any gain recognized upon a sale or other disposition
of Units will be treated as gain attributable to the sale or disposition of a
capital asset. Such gain will generally be considered a capital gain. Except as
provided below, if you have held the
113
<PAGE> 115
Units for more than one year, such gain will be subject to a tax rate of 20%,
except that the portion of the gain attributable to real estate depreciation
deductions will be subject to a 25% tax rate. However, to the extent the amount
realized upon the sale of a Unit attributable to your share of "unrealized
receivables" of WDOP, as defined in Section 751 of the Code, exceeds the basis
attributed to those assets, such excess will be treated as ordinary income.
Unrealized receivables include, to the extent not previously included in WDOP
income, any rights to payment for services rendered or to be rendered.
Unrealized receivables also include amounts that would be subject to recapture
as ordinary income if WDOP had sold its assets at their fair market value at the
time of the transfer of a Unit. We do not presently anticipate any portion of
the amount realized by you in an exchange of Units will be attributable to such
unrealized receivables.
BASIS OF UNITS. The basis used to determine a gain or loss on the exchange of
the Unit(s) should include the sum of (1) your adjusted tax basis (apportioned
to such Unit if not all Units are being exchanged) plus (2) the tax basis of
your right to exchange. In general, if you acquired your Units by contribution
of a partnership interest to WDOP had an initial tax basis in your Units
("Initial Basis") equal to (1) the sum of your adjusted tax basis in such
transferred interest plus any gain recognized in the exchange, (b) reduced by
cash, if any, received in the exchange and the fair market value of your right
to exchange. You should consult your own tax advisor regarding your Initial
Basis.
Your Initial Basis in your Units is generally increased by:
- your share of WDOP taxable and tax exempt income, and
- increases in your allocable share of liabilities of WDOP, including any
increase in our share of liabilities occurring in connection with the
acquisition of your Units.
Your Initial Basis in your Units is generally decreased by:
- your share of WDOP distributions,
- decreases in your allocable share of liabilities of WDOP, including any
decrease in your share of liabilities of the WDOP occurring in connection
with the acquisition of your Units,
- your share of losses and deductible expenses of WDOP, and
- your share of nondeductible expenditures of WDOP that are not chargeable
to your capital account.
Your Initial Basis may not be decreased below zero. For purposes of determining
your adjusted tax basis in your Units immediately prior to exchanging your
Units, your adjusted tax basis will include your allocable share of WDOP gain or
loss for the taxable year.
In the event you dispose of less than all of your Units, your Adjusted Tax Basis
will be allocated between that portion of the Units which are sold and the
portion of the Units you continue to hold on the basis of each Unit's respective
fair market value.
If you exchange Units for our securities you will have an initial basis in our
securities equal to their fair market value on the date received.
Differences between Units and our securities. If you exchange your Units for our
securities pursuant to the "Procedure to Exchange Units," you will become one of
our stockholders rather than a holder of Units in WDOP. The nature of an
investment in our securities is
114
<PAGE> 116
generally economically equivalent to an investment in Units of WDOP. There are,
however, differences between ownership of Units and our securities.
WDOP is taxed as a partnership. Generally you include on your individual income
tax return as income, gain, deduction or loss your distributive share of WDOP's
items. Distributions to you by WDOP are generally not taxable to you except to
the extent such distributions exceed your basis in your Units.
In contrast we are a corporation taxed as a REIT. Our stockholders do not
include on their returns a portion of our income or gain. Our stockholders also
may not include in their individual income tax returns either their distributive
share or any amount of our net operating losses or capital losses. As long as we
qualify as a REIT, distributions made to our taxable U.S. stockholders out of
current or accumulated earnings and profits will be taken into account by such
stockholder as ordinary income.
LEGAL MATTERS
Certain legal matters in connection with the Walden Securities, including the
validity of the Walden Securities, will be passed upon for the Company by
Winstead Sechrest & Minick P.C., Dallas, Texas.
EXPERTS
Our consolidated financial statements as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997 and the related
financial statement schedule as of December 31, 1997 and the combined financial
statements of Drever Partners, Inc. and affiliates as of December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996
included herein have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein and have been so included
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
The combined statement of revenues and certain expenses of the Arbors Apartments
for the year ended December 31, 1996; the statement of revenues and certain
expenses of Windsor Park Apartments for the year ended December 31, 1996; the
statement of revenues and certain expenses of Oak Ramble Apartments for the year
ended December 31, 1996; the combined statement of revenues and certain expenses
of Parkway Station and Ashton Park Apartments for the year ended December 31,
1996; and the statement of revenues and certain expenses of Woods of Bedford
Apartments for the year ended December 31, 1996 which are included herein have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and have been so included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
115
<PAGE> 117
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
WALDEN RESIDENTIAL PROPERTIES, INC.
Financial Statements for the nine months ended September 30,
1998 and 1997:
Condensed Consolidated Balance Sheets as of September 30,
1998 (Unaudited) and December 31, 1997................. F-3
Condensed Consolidated Statements of Income for the three
months and nine months ended September 30, 1998 and
1997 (Unaudited)....................................... F-4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997
(Unaudited)............................................ F-5
Notes to the Condensed Consolidated Financial Statements
(Unaudited)............................................ F-7
Financial Statements for the years ended December 31, 1997,
1996 and 1995:
Independent Auditors' Report.............................. F-16
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-17
Consolidated Statements of Income for each of the three
years ended December 31, 1997.......................... F-18
Consolidated Statements of Stockholders' Equity for each
of the three years ended December 31, 1997............. F-19
Consolidated Statements of Cash Flows for each of the
three years ended December 31, 1997.................... F-20
Notes to Consolidated Financial Statements................ F-22
Pro Forma Financial Statements (Unaudited):
Pro Forma Condensed Consolidated Statement of Income for
the year ended December 31, 1997 (Unaudited)........... F-47
Notes to Pro Forma Condensed Consolidated Statement of
Income (Unaudited)..................................... F-48
DREVER PARTNERS, INC. AND AFFILIATES
Financial Statements for the nine months ended September 30,
1997 and 1996:
Condensed Combined Balance Sheets as of September 30, 1997
(Unaudited) and December 31, 1996...................... F-49
Condensed Combined Statements of Operations for the nine
months ended September 30, 1997 and 1996 (Unaudited)... F-50
Condensed Combined Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 (Unaudited)... F-51
Notes to Condensed Combined Financial Statements
(Unaudited)............................................ F-52
Financial Statements for the years ended December 31, 1996,
1995 and 1994:
Independent Auditors' Report.............................. F-55
Combined Balance Sheets as of December 31, 1996 and
1995................................................... F-56
Combined Statements of Operations for each of the three
years ended December 31, 1996.......................... F-57
Combined Statements of Partners'/Stockholders' Equity for
each of the three years ended December 31, 1996........ F-58
Combined Statements of Cash Flows for each of the three
years ended December 31, 1996.......................... F-59
</TABLE>
F-1
<PAGE> 118
<TABLE>
<S> <C>
Notes to Combined Financial Statements.................... F-60
ARBORS APARTMENTS
Independent Auditors' Report.............................. F-71
Combined Statements of Revenues and Certain Expenses of
Arbors Apartments for the three months ended March 31,
1997 (Unaudited) and the year ended December 31,
1996................................................... F-72
Notes to Combined Statements of Revenues and Certain
Expenses............................................... F-73
WINDSOR APARTMENTS
Independent Auditors' Report.............................. F-75
Statements of Revenues and Certain Expenses of Windsor
Park Apartments for the nine months ended September 30,
1997 (Unaudited) and the year ended December 31,
1996................................................... F-76
Notes to Statements of Revenues and Certain Expenses...... F-77
OAK RAMBLE APARTMENTS
Independent Auditors' Report.............................. F-78
Statements of Revenues and Certain Expenses of Oak Ramble
Apartments for the nine months ended September 30, 1997
(Unaudited) and the year ended December 31, 1996....... F-79
Notes to Statements of Revenues and Certain Expenses...... F-80
PARKWAY STATION AND ASHTON PARK APARTMENTS
Independent Auditors' Report.............................. F-81
Combined Statements of Revenues and Certain Expenses of
Parkway Station and Ashton Park Apartments for the nine
months ended September 30, 1997 (Unaudited) and the
year ended December 31, 1996........................... F-82
Notes to Combined Statements of Revenues and Certain
Expenses............................................... F-83
WOODS OF BEDFORD APARTMENTS
Independent Auditors' Report.............................. F-84
Statements of Revenues and Certain Expenses of Woods of
Bedford Apartments for the nine months ended September
30, 1997 (Unaudited) and the year ended December 31,
1996................................................... F-85
Notes to Statements of Revenues and Certain Expenses...... F-86
FINANCIAL STATEMENT SCHEDULE AS OF DECEMBER 31, 1997
The following financial statement supplementary schedule
of the Registrant and its subsidiaries required to be
included in Item 27 is listed below:
Schedule III -- Real Estate and Accumulated Depreciation.... S-1
</TABLE>
F-2
<PAGE> 119
WALDEN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
Real estate assets, at cost
Land............................................... $ 170,346 $ 173,635
Buildings.......................................... 1,361,739 1,333,978
---------- ----------
1,532,085 1,507,613
Less: Accumulated depreciation............. (113,558) (74,584)
---------- ----------
1,418,527 1,433,029
Real estate assets held for sale..................... 34,105 --
Rent and other receivables ($1.5 million related
party)............................................. 4,567 1,613
Prepaid and other assets............................. 8,530 6,903
Deferred financing costs, net........................ 8,254 6,603
Cash and cash equivalents............................ 7,641 9,757
Restricted cash:
Escrow deposits.................................... 13,317 9,047
Additional collateral on loans..................... 2,850 2,520
---------- ----------
Total assets............................... $1,497,791 $1,469,472
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable............................. $ 468,131 $ 428,354
Unsecured term loan................................ 200,000 200,000
Unsecured credit facility.......................... 91,500 74,000
Accrued real estate taxes.......................... 20,614 22,571
Accounts payable................................... 10,924 13,648
Accrued expenses and other liabilities............. 15,598 13,377
Preferred distribution payable to minority
interests....................................... 391 391
---------- ----------
Total liabilities.......................... 807,158 752,341
Commitments and contingencies (Note 8)
Minority interests................................... 313,660 321,916
Stockholders' equity:
Preferred stock.................................... 57 57
Common stock....................................... 181 180
Additional paid in capital......................... 457,801 456,842
Notes receivable for employee and director stock
purchases....................................... (9,676) (5,263)
Deferred compensation on Restricted Stock.......... (1,354) (1,404)
Distributions in excess of net income.............. (70,036) (55,197)
---------- ----------
Total stockholders' equity................. 376,973 395,215
---------- ----------
Total liabilities and stockholders'
equity.................................. $1,497,791 $1,469,472
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-3
<PAGE> 120
WALDEN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Rental income........................ $67,731 $34,701 $200,288 $ 99,288
Other property income................ 2,924 1,374 8,212 3,979
Interest income...................... 503 424 1,227 1,273
------- ------- -------- --------
Total revenues............... 71,158 36,499 209,727 104,540
------- ------- -------- --------
EXPENSES
Property operating and maintenance... 23,415 12,174 69,176 34,187
Real estate taxes.................... 7,047 3,516 20,945 10,077
General and administrative........... 3,059 1,723 8,760 5,117
Interest............................. 13,848 5,643 40,536 15,764
Amortization......................... 283 201 768 612
Depreciation......................... 14,564 7,071 43,599 20,192
------- ------- -------- --------
Total expenses............... 62,216 30,328 183,784 85,949
------- ------- -------- --------
Operating income....................... 8,942 6,171 25,943 18,591
Gain on disposition of real property... 6,696 -- 6,696 --
------- ------- -------- --------
Income before extraordinary item and
income allocated to minority
interests............................ 15,638 6,171 32,639 18,591
Extraordinary loss on debt
extinguishment....................... -- -- (104) --
------- ------- -------- --------
Income before income allocated to
minority interests................... 15,638 6,171 32,535 18,591
Income allocated to minority
interests............................ (5,470) (397) (11,137) (1,197)
------- ------- -------- --------
Net income........................... 10,168 5,774 21,398 17,394
Preferred distributions................ (3,281) (3,282) (9,841) (9,906)
------- ------- -------- --------
Net income available to common
stockholders......................... $ 6,887 $ 2,492 $ 11,557 $ 7,488
======= ======= ======== ========
Basic net income per share............. $ 0.38 $ 0.14 $ 0.63 $ 0.43
======= ======= ======== ========
Diluted net income per share........... $ 0.38 $ 0.14 $ 0.63 $ 0.43
======= ======= ======== ========
Basic weighted average number of common
shares outstanding................... 18,077 17,741 18,281 17,468
======= ======= ======== ========
Diluted weighted average number of
common shares and common share
equivalents outstanding.............. 18,170 17,870 18,425 17,616
======= ======= ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-4
<PAGE> 121
WALDEN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 21,398 $ 17,394
Adjustments to reconcile net income to net cash provided by
operating activities:
Income allocated to minority interests................... 11,137 1,197
Depreciation and amortization............................ 44,367 20,804
Gain on disposition of real property..................... (6,696) --
Extraordinary loss on debt extinguishment................ 104 --
Amortization of deferred compensation on restricted
stock................................................. 186 180
Amortization of prepaid interest expense................. 912 --
Net effect of changes in operating accounts:
Escrow deposits....................................... (4,270) (1,150)
Other assets.......................................... (4,976) (8,774)
Accrued real estate taxes............................. (1,957) 2,618
Accounts payable...................................... (3,217) (390)
Other liabilities..................................... 2,221 541
--------- --------
Net cash provided by operating activities........ 59,209 32,420
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate assets, net of non-cash items
below................................................. (27,512) (55,013)
Real estate asset additions.............................. (45,128) (23,182)
Proceeds from disposition of real property............... 36,667 --
--------- --------
Net cash used in investing activities............ (35,973) (78,195)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance, net of issuance costs...... 14,176 25,696
Purchase of the Company's common stock................... (17,773) (6,666)
Purchase of minority interest securities................. (335) --
Distributions paid....................................... (55,791) (35,637)
Proceeds from mortgage notes payable and credit
facility.............................................. 230,403 53,300
Payment of mortgage notes payable and credit facility.... (188,155) (13,300)
Payment of financing costs............................... (3,435) (97)
Additional collateral on loans........................... (330) --
Principal reductions of debt............................. (4,112) (2,481)
--------- --------
Net cash provided by (used in) financing
activities.................................... (25,352) 20,815
--------- --------
</TABLE>
F-5
<PAGE> 122
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- --------
<S> <C> <C>
NET DECREASE IN CASH AND CASH EQUIVALENTS.................. (2,116) (24,960)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............. 9,757 29,720
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD................... $ 7,641 $ 4,760
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest................................... $ 37,495 $ 15,360
========= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Real estate asset additions.............................. $ 960 $ 906
========= ========
Mortgages assumed........................................ $ 19,141 $ 6,870
========= ========
Notes receivable for stock purchases..................... $ 4,413 $ --
========= ========
Deferred compensation on restricted stock................ $ 136 $ 2,571
========= ========
Distribution payable to minority interest holders........ $ 391 $ 391
========= ========
Minority interest securities issued...................... $ 505 $ --
========= ========
Securities issued for purchase of assets................. $ -- $ 1,050
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-6
<PAGE> 123
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM UNAUDITED FINANCIAL INFORMATION
Walden Residential Properties, Inc. (the "Company") is a self-administered and
self-managed real estate company operated as a real estate investment trust, as
defined under the Internal Revenue Code of 1986, as amended. As of September 30,
1998, the Company owned 155 multifamily properties, containing 42,432 apartment
units, located primarily in the Southwest and Southeast regions of the United
States.
The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 1997, and
Form 10-Q for the three months ended March 31, 1998, and the six months ended
June 30, 1998, which were filed with the Securities and Exchange Commission
("SEC"). The accompanying interim unaudited condensed consolidated financial
information has been prepared pursuant to the rules and regulations of the SEC.
Certain information and footnote disclosures normally included in the annual
financial statements have been condensed or omitted pursuant to rules and
regulations of the SEC. Management believes that the disclosures contained in
this Form 10-Q are adequate to make the information presented not misleading. In
the opinion of management, all adjustments and eliminations, consisting only of
normal recurring adjustments, necessary to present fairly the consolidated
financial position of the Company and its subsidiaries as of September 30, 1998
and the consolidated results of their operations for the three and nine months
ended September 30, 1998 and 1997 and consolidated cash flows for the nine
months ended September 30, 1998 and 1997, have been included. The consolidated
results of operations for the three and nine months ended September 30, 1998 are
not necessarily indicative of the results for the full year.
As of September 30, 1998, the Company had six apartment properties held for
sale. Management has determined that such properties do not match the Company's
long-term investment strategies (see Note 8).
Comprehensive income is equivalent to net income for the three and nine months
ended September 30, 1998 and 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (the "Statement"), which establishes
standards for accounting and reporting for derivative instruments. The Statement
is effective for periods beginning after June 15, 1999; however, earlier
application is permitted. Management is currently not planning on early adoption
of this Statement. See Note 4 for a discussion about the current evaluation of
the impact on the financial statements of the Company.
2. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
On February 18, 1998, the Company acquired two apartment properties with a total
of 376 units located in Tampa, Florida for approximately $15.9 million. The
Company funded
F-7
<PAGE> 124
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
these acquisitions by assuming $5.7 million of variable rate, tax-exempt debt
maturing in the year 2007, assuming $5.1 million of 7.35% fixed rate debt
maturing in the year 2005, and borrowing the remaining amount under the
Company's unsecured credit facility. The credit enhancement on the $5.7 million
variable rate debt expires in November 1998 and is guaranteed by the Company.
On August 11, 1998, the Company acquired a 168-unit apartment property in
Houston, Texas for approximately $9.9 million. The purchase was funded from cash
flows from operations.
On August 21, 1998, the Company purchased a 286-unit apartment property in
Bedford, Texas for approximately $11.0 million. The purchase price was partially
funded by assuming $8.3 million in variable rate, tax-exempt bond financing. The
remaining purchase price was funded from cash flows from operations.
On August 28, 1998, the Company acquired a 268-unit apartment property in
Houston, Texas. The $9.5 million purchase price was funded through proceeds from
the property dispositions and cash flows from operations.
DISPOSITIONS
On August 26, 1998, the Company disposed of four Dallas/Fort Worth properties.
The four properties, totaling 1,151 units, were sold for approximately $37.6
million, resulting in a net gain of approximately $6.7 million.
3. TRANSACTIONS WITH AFFILIATES
On June 22, 1998, the Company acquired the 1% general partner interest in a
limited partnership which owns a 504-unit apartment property in Austin, Texas.
At that time, the Company loaned $1.5 million to the partnership which was used
to refinance the first mortgage indebtedness on the property. The note requires
monthly payments of excess cash flow from the property and matures on January 1,
2009.
4. MORTGAGE NOTES PAYABLE
During the first nine months of 1998, the Company refinanced $45.5 million and
$12.5 million of the Company's variable rate, tax-exempt mortgage indebtedness
and extended the related mortgage loan and credit enhancement maturity to
February 15, 2028 and January 15, 2023, respectively.
On March 25, 1998, $78.1 million of conventional fixed-rate mortgage notes were
refinanced with $110.0 million of fixed-rate debt, of which $80.0 million of
such debt bears interest at 6.62% and matures in March 2007 and the remaining
$30.0 million bears interest at 7.22% and matures in September 2016. Of the
excess financing proceeds, $20 million was used to repay a portion of the
Company's credit facility.
On April 14, 1998, the Company repaid $7.2 million of variable rate indebtedness
related to one property.
F-8
<PAGE> 125
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
In 1997, the Company entered into forward treasury rate lock agreements in
anticipation of an unsecured long-term debt financing, expected to occur in the
fourth quarter of 1997, related to the debt incurred in connection with the
acquisition of assets and business of Drever Partners, Inc. and its affiliates
on October 1, 1997.
Since the Company was not able to issue unsecured long-term debt, it entered
into a one-year, $200 million, unsecured term loan and extended the forward
treasury rate lock agreements as follows:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT SETTLEMENT DATE REFERENCE YIELD REFERENCE TREASURY
--------------- --------------- --------------- ------------------
(In thousands)
<C> <S> <C> <C>
$75,000 November 23, 1998 5.8950% 5.750% due 11/30/02
25,000 November 23, 1998 5.9600% 6.125% due 08/15/07
175,000 November 20, 1998 6.5010% 5.625% due 05/15/08
--------
$275,000
========
</TABLE>
The Company extended these forward treasury rate locks in November 1998 and
anticipates utilizing them in a $250 million debt financing in December 1998 and
a $25 million debt financing in the first quarter of 1999. Any costs under these
agreements related to refinancing debt will be amortized to interest expense
over the terms of the related financing; however, if new debt financing is not
obtained upon the extended settlement date, a loss will be recorded to
operations at that time. As of November 3, 1998, the Company had a cost in
unwinding these agreements of approximately $32.4 million.
5. STOCKHOLDERS' EQUITY AND MINORITY INTERESTS
MINORITY INTERESTS
In connection with certain apartment property acquisitions, certain partnership
subsidiaries of the Company have issued Common Operating Partnership ("OP")
Units and Preferred OP Units which are exchangeable into the Company's common
stock and 9.00% redeemable preferred stock, with detachable warrants,
respectively. The holders of the Preferred OP Units are entitled to receive
quarterly distributions of $0.5625 per unit and the holders of the Common OP
Units are entitled to receive quarterly distributions equal to those paid on the
Company's common stock. A portion of the Common OP Units that are exchangeable
into 810,128 shares of the Company's common stock are entitled to receive
quarterly distributions of a minimum of $369,000 in the aggregate. All OP Unit
securities have been recorded as minority interests in the accompanying balance
sheets. On June 15, 1998, an additional 20,621 Common OP Units were issued at a
per unit price equal to the market price of the Company's common stock on such
date ($24.50) to adjust the purchase price of the October 1, 1997 acquisition of
the assets and business of Drever Partners, Inc. and its affiliates. As of
September 30, 1998, the Company has purchased 12,237 Common OP Units and 1,696
Preferred OP Units, leaving 11,185,288 Common OP Units and 1,998,213 Preferred
OP Units outstanding.
F-9
<PAGE> 126
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
PUBLIC OFFERING
On February 19, 1998, the Company issued 323,232 shares of its common stock at
$23.515 per share for net proceeds of approximately $7.6 million.
RESTRICTED STOCK
In February 1997, the Company adopted a Long-Term Incentive Plan to attract and
retain individuals to serve as directors, officers and employees of the Company.
Pursuant to this plan, the Company has issued 5,206 restricted shares of common
stock ("Restricted Stock") during the nine months ended September 30, 1998, for
$0.01 per share to two of its executive officers and its six outside directors.
The shares issued vest ratably over a three-year and one-year period,
respectively. Deferred compensation on the Restricted Stock was computed based
upon the market value of the shares at the date of issuance. This deferred
compensation is being amortized over the respective vesting periods.
NOTES RECEIVABLE FOR STOCK PURCHASES
On February 17, 1998, the Company implemented a new stock purchase loan program
allowing officers and key employees to purchase the Company's common stock at
current market prices and to exercise vested stock options with the assistance
of loans from the Company. Under this program, officers and key employees are
eligible to purchase stock on March 1 and September 1 of each year in an
aggregate amount of up to three times their annual salary. A cash payment of 5%
to 15% of the purchase price is required by the officer or key employee,
depending upon the amount of the purchase, with the remainder loaned on a full
recourse basis. Each loan is evidenced by a note with a five-year term,
requiring quarterly payments of interest only at a fixed interest rate equal to
the Company's current interest rate under its credit facility at the time the
loan is executed. The loan is secured by a pledge of the shares of common stock
purchased by each officer or key employee pursuant to such loan.
On March 2, 1998, the Company issued loans to 25 officers and key employees
under the stock purchase loan program in the amount of approximately $3.6
million, bearing interest at 7.0%. Such loans related to the purchase of 138,692
shares of the Company's common stock at $24.75 per share (the closing price of
the common stock on the New York Stock Exchange for the previous trading day)
and the exercise of 26,192 common stock options at a stock option grant price of
$19.25 per share.
On September 1, 1998, the Company issued loans to three officers and seven key
employees under the stock purchase loan program in the amount of approximately
$0.9 million, bearing interest at 7.0%. Such loans related to the purchase of
40,818 shares of common stock at $22.625 (the closing price of the Company's
common stock on the New York Stock Exchange for the previous trading day).
F-10
<PAGE> 127
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
SHAREHOLDER RIGHTS PLAN
On March 26, 1998, the Company adopted a shareholder rights plan (the "Plan")
designed to assure that all stockholders receive fair treatment in the event of
a proposed acquisition. The key provision of the Plan is a mechanism that will
distribute, for each outstanding share of the Company's Common Stock, one right
that becomes exercisable upon the occurrence of certain events.
The Plan entails a dividend of one right for each outstanding share of the
Company's common stock. Each right will entitle the holder to buy one
one-hundredth of a share of a new Series A Junior Participating Preferred Stock,
at an exercise price of $70.00 per share. The rights will trade with the
Company's common stock until exercisable and will expire on April 20, 2008. The
rights will not be exercisable until ten days following a public announcement
that a person or group has acquired 15% or more of the Company's common stock or
until ten business days after a person or group begins a tender offer that would
result in ownership of 15% or more of the Company's common stock, subject to
certain extensions by the Board. If either of these events occur, the holder
will be eligible to purchase shares of the Company's common stock at a 50
percent discount. On April 20, 1998, the Company issued a dividend of one right
for each share of common stock owned by stockholders of record as of April 7,
1998. Effective April 8, 1998, each share of the Company's common stock has one
right attached to it.
ASSOCIATE STOCK PURCHASE PLAN
Effective April 1, 1998, the Company adopted an Associate Stock Purchase Plan.
This plan allows Company employees to purchase on a quarterly basis shares of
the Company's common stock at a 15% discount.
Stock Repurchase Program
On June 4, 1998, the Company adopted a new Stock Repurchase Program. This new
program authorizes the Company to purchase up to 2.5 million shares of the
Company's common stock. This is in addition to the prior stock repurchase
program, announced July 11, 1997, authorizing the Company to purchase up to 1.0
million shares of its common stock by December 31, 1998. As of September 30,
1998, the Company has repurchased approximately 1.0 million shares of its
outstanding common stock (0.7 million shares in 1998), leaving 2.5 million
shares authorized for repurchase under both programs. However, the Company will
not repurchase additional shares under this program if the purchase would cause
the total debt to total market capitalization of the Company to exceed 46%.
Distributions
In March, June, and September 1998, the Company paid distributions of $12.0
million, $12.3 million, and $12.0 million, respectively, to stockholders of
record on February 18, 1998, May 18, 1998, and August 17, 1998, respectively.
The common stockholders were paid quarterly distributions of $0.4825 per share;
the 9.16% Convertible Redeemable
F-11
<PAGE> 128
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
Preferred Stockholders were paid quarterly distributions of $0.5725 per share
and the 9.20% Senior Preferred Stockholders were paid quarterly distributions of
$0.575 per share.
The Company paid distributions of $5.4 million on the Common OP Units (which
represented $0.4825 per unit) and $1.1 million on the Preferred OP Units (which
represented $0.5625 per unit) in March, June, and September, 1998.
6. NET INCOME PER SHARE OF COMMON STOCK
Basic net income per share has been computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding.
Diluted net income per share has been computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding plus potential dilutive common share equivalents.
F-12
<PAGE> 129
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
The following table presents information necessary to calculate basic and
diluted net income per share for the three months and nine months ended
September 30, 1998 and 1997 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net Income for Basic and Diluted
Computation:
Income before extraordinary item and
income allocated to minority
interests............................. $15,638 $ 6,171 $32,639 $18,591
Extraordinary loss on debt
extinguishment........................ -- -- (104) --
------- ------- ------- -------
Income before income allocated to
minority interests.................... 15,638 6,171 32,535 18,591
Income allocated to minority interests... (5,470) (397) (11,137) (1,197)
------- ------- ------- -------
Net income............................... 10,168 5,774 21,398 17,394
Preferred distributions.................. (3,281) (3,282) (9,841) (9,906)
------- ------- ------- -------
Net income available to common
stockholders (basic and diluted net
income per share computation)......... $ 6,887 $ 2,492 $11,557 $ 7,488
======= ======= ======= =======
Basic Net Income per Share:
Before extraordinary item, less preferred
distributions......................... $ 0.38 $ 0.14 $ 0.64 $ 0.43
Extraordinary loss on debt
extinguishment........................ -- -- (0.01) --
------- ------- ------- -------
Net income available to common
stockholders.......................... $ 0.38 $ 0.14 $ 0.63 $ 0.43
======= ======= ======= =======
Diluted Net Income per Share:
Before extraordinary item, less preferred
distributions......................... $ 0.38 $ 0.14 $ 0.64 $ 0.43
Extraordinary loss on debt
extinguishment........................ -- -- (0.01) --
------- ------- ------- -------
Net income available to common
stockholders.......................... $ 0.38 $ 0.14 $ 0.63 $ 0.43
======= ======= ======= =======
Weighted Average Number of Shares
Outstanding(a):
Basic.................................... 18,077 17,741 18,281 17,468
Dilutive effect of outstanding options... 93 129 144 148
------- ------- ------- -------
Diluted.................................. 18,170 17,870 18,425 17,616
======= ======= ======= =======
</TABLE>
- ---------------
(a) Excludes the convertible preferred shares, warrants, Common OP Units (see
Note 5) and 1,698,750 stock options, which are not dilutive at September
30, 1998.
F-13
<PAGE> 130
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
7. PRO FORMA STATEMENTS OF INCOME
The following unaudited condensed pro forma information for the nine months
ended September 30, 1998 and 1997 was prepared from the condensed consolidated
financial statements of the Company by adjusting for the effect of the 1997
acquisitions of 21,467 apartment units at a cost of $799.2 million, the 1998
property acquisitions and dispositions described in Note 2 herein, and debt
incurred in connection with these property acquisitions as if all of these
transactions had occurred on January 1, 1997.
The following information is not necessarily indicative of what the performance
would have been had the Company owned these properties for the entire period,
nor does it purport to represent future results of operations of the Company.
(In thousands, except per share information.)
<TABLE>
<CAPTION>
PRO FORMA
-------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues................................................. $207,720 $199,425
Expenses................................................. 183,205 183,457
-------- --------
Income before extraordinary items and income allocated to
minority interests..................................... 24,515 15,968
-------- --------
Extraordinary loss on debt extinguishment................ (104) --
-------- --------
Income before income allocated to minority interests..... 24,411 15,968
Income allocated to minority interests................... (8,176) (5,120)
-------- --------
Net income............................................... 16,235 10,848
Preferred distributions.................................. (9,841) (9,906)
-------- --------
Net income available to common stockholders.............. $ 6,394 $ 942
======== ========
Basic net income per share............................... $ 0.35 $ 0.05
======== ========
Diluted net income per share............................. $ 0.35 $ 0.05
======== ========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
On February 27, 1998, the Company entered into a joint venture agreement with
The Grupe Company whereby The Grupe Company will construct, and the Company will
later purchase, two Sacramento, California area properties with a combined total
of 616 apartment units. The Company is committed to purchase 100% of the
properties for approximately $47 million upon the completion of construction and
the achievement of certain targeted net operating income amounts. This purchase
is anticipated to occur sometime in late 1999.
On July 29, 1998, the Company entered into an agreement to loan $5.0 million to
The Greystone Group, Inc., an unrelated third-party, to purchase and develop a
parcel of land
F-14
<PAGE> 131
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
in Chandler, Arizona. The loan bears an interest rate of LIBOR plus 1.50%, is
secured by a mortgage loan on the property and a guarantee by The Greystone
Group, Inc., and is generally due upon the earlier of completion of construction
of the related apartment project and subsequent purchase by the Company or
substitution of a third-party lender. The Company anticipates entering into a
purchase agreement with The Greystone Group, Inc. in November 1998, whereby The
Greystone Group, Inc. will construct a 272-unit apartment community on the
respective land. The Company will be committed to purchase the property for
approximately $21.3 million upon completion of construction and the achievement
of certain targeted occupancy levels, anticipated to occur sometime in late
1999.
On August 11, 1998, the Company entered into an agreement with Allied Realty
Services, Inc. (Allied) whereby Allied will construct and the Company will later
purchase a 168-unit apartment property located in Houston, Texas, adjacent to
the 168-unit apartment property purchased by the Company in August 1998. The
Company is committed to purchase 100% of the property for approximately $10.5
million upon completion of construction and achievement of targeted occupancy
levels, anticipated to occur sometime in early 1999.
As of September 30, 1998, the Company had executed contracts to sell five of its
properties held for sale, containing an aggregate of 838 units, for an aggregate
sales price of $28.3 million. The closings are anticipated to occur in November
1998.
9. SUBSEQUENT EVENTS
On October 28, 1998, the Company refinanced $5.8 million of variable rate,
tax-exempt mortgage indebtedness related to one of its properties. In connection
with this refinancing, the Company paid down approximately $0.3 million of the
outstanding loan amount and entered into a five year interest rate swap
agreement with Morgan Guaranty Trust Company on the remaining $5.5 million. This
agreement establishes a fixed interest rate of 3.74% on the $5.5 million
indebtedness, thereby decreasing the impact of changes in interest rates on this
debt.
F-15
<PAGE> 132
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholders of
Walden Residential Properties, Inc.
We have audited the accompanying consolidated balance sheets of Walden
Residential Properties, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. Our
audit for the year ended December 31, 1997 also included the financial statement
schedule III -- Real Estate and Accumulated Depreciation as of December 31,
1997. These financial statements and financial statement schedule are the
responsibility of the management of Walden Residential Properties, Inc. 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 consolidated financial statements present fairly, in all
material respects, the financial position of Walden Residential Properties, Inc.
and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for the cost of replacement carpets effective
July 1, 1996.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Dallas, Texas
March 25, 1998
F-16
<PAGE> 133
WALDEN RESIDENTIAL PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- --------
<S> <C> <C>
ASSETS
Real estate assets, at cost
Land.................................................... $ 173,635 $ 80,914
Buildings and improvements.............................. 1,333,978 602,601
---------- --------
1,507,613 683,515
Less: Accumulated depreciation..................... (74,584) (41,707)
---------- --------
1,433,029 641,808
Rent and other receivables................................ 1,613 1,324
Prepaid and other assets.................................. 6,903 3,146
Deferred financing costs, net............................. 6,603 5,827
Cash and cash equivalents................................. 9,757 29,720
Restricted cash:
Escrow deposits......................................... 9,047 5,369
Additional collateral on loans.......................... 2,520 2,520
---------- --------
Total assets....................................... $1,469,472 $689,714
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................. $ 428,354 $258,908
Unsecured term loan..................................... 200,000 --
Unsecured credit facility............................... 74,000 --
Accrued real estate taxes............................... 22,571 7,960
Accounts payable........................................ 13,648 5,653
Accrued expenses and other liabilities.................. 13,377 5,395
Preferred distribution payable to minority interests.... 391 377
---------- --------
Total liabilities.................................... 752,341 278,293
Commitments and contingencies (Note 13)
Minority interests........................................ 321,916 14,886
Stockholders' equity:
Preferred stock, $.01 par value per share, 10,000 shares
authorized, 5,712 and 5,786 shares issued and
outstanding as of December 31, 1997 and 1996,
respectively (aggregate liquidation value of
$142,805)............................................ 57 58
Common stock, $.01 par value per share, 50,000 shares
authorized, 18,030 and 16,880 shares issued and
outstanding as of December 31, 1997 and 1996,
respectively......................................... 180 169
Excess stock, $.01 par value per share, 60,000 shares
authorized,
no shares issued..................................... -- --
Additional paid in capital.............................. 456,842 432,974
Officer and director notes for stock purchases.......... (5,263) (5,263)
Deferred compensation on Restricted Stock............... (1,404) --
Distributions in excess of net income................... (55,197) (31,403)
---------- --------
Total stockholders' equity........................... 395,215 396,535
---------- --------
Total liabilities and stockholders' equity......... $1,469,472 $689,714
========== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-17
<PAGE> 134
WALDEN RESIDENTIAL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
REVENUES
Rental income................................. $163,224 $105,602 $78,469
Other property income......................... 6,313 3,873 3,090
Interest income............................... 1,598 1,433 856
Other income.................................. -- 263 409
-------- -------- -------
Total revenues............................. 171,135 111,171 82,824
EXPENSES
Property operating and maintenance............ 56,483 37,521 28,748
Real estate taxes............................. 16,805 10,039 7,337
General and administrative.................... 7,734 5,124 3,811
Unusual charge -- officer settlement
agreement.................................. 1,940 -- --
Interest...................................... 28,447 20,573 17,111
Amortization.................................. 827 916 900
Depreciation.................................. 33,841 19,810 15,734
-------- -------- -------
Total expenses............................. 146,077 93,983 73,641
-------- -------- -------
Operating income................................ 25,058 17,188 9,183
Gain on disposition of real property.......... 2,055 1,934 1,502
-------- -------- -------
Income before extraordinary item and income
allocated to minority interests............... 27,113 19,122 10,685
Extraordinary loss on debt extinguishment..... (422) (1,848) (1,352)
-------- -------- -------
Income before income allocated to minority
interests..................................... 26,691 17,274 9,333
Income allocated to minority interests........ (4,109) (1,705) (922)
-------- -------- -------
Net income...................................... 22,582 15,569 8,411
Preferred distributions....................... (13,186) (2,387) --
-------- -------- -------
Net income available to common stockholders..... $ 9,396 $ 13,182 $ 8,411
======== ======== =======
Basic net income per share...................... $ 0.53 $ 0.90 $ 0.69
======== ======== =======
Diluted net income per share.................... $ 0.53 $ 0.89 $ 0.69
======== ======== =======
Basic weighted average number of common shares
outstanding................................... 17,590 14,720 12,155
======== ======== =======
Diluted weighted average number of common shares
and common share equivalents outstanding...... 17,747 14,792 12,155
======== ======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-18
<PAGE> 135
WALDEN RESIDENTIAL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
OFFICER/DIRECTOR
PREFERRED STOCK COMMON STOCK ADDITIONAL NOTES FOR
------------------ ------------------- PAID IN STOCK DEFERRED
SHARES PAR VALUE SHARES PAR VALUE CAPITAL PURCHASES COMPENSATION
------ --------- ------- --------- ---------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995........... -- $ -- 10,070 $101 $167,546 $(3,438) $ --
Stock issued to purchase real
estate assets.................. 216 2 4,205
Public offering, net of offering
costs.......................... 3,500 35 60,138
Stock issued under the dividend
reinvestment plan.............. 404 4 7,037
Repurchases of the Company's
common stock...................
Officers'/Directors' stock
purchase....................... (27) (1,533)
Distributions....................
Net income.......................
----- ---- ------ ---- -------- ------- -------
Balance, December 31, 1995......... -- -- 14,190 142 238,899 (4,971) --
Repurchases of the Company's
common stock...................
Officers'/Directors' stock
purchase....................... 19 -- (22) (292)
Retirement of common stock
repurchased.................... (318) (3) (6,075)
Public offerings, net of offering
costs.......................... 5,800 58 2,756 28 196,094
Conversion of preferred stock to
common stock................... (14) -- 16 --
Stock issued under the dividend
reinvestment plan.............. 217 2 4,331
Purchase and cancellation of
minority interest securities... (253)
Distributions....................
Net income.......................
----- ---- ------ ---- -------- ------- -------
Balance, December 31, 1996......... 5,786 58 16,880 169 432,974 (5,263) --
Repurchases of the Company's
common stock
Retirement of common stock
purchased...................... (278) (3) (6,663)
Public offerings, net of offering
costs.......................... 161 2 3,522
Conversion of preferred stock to
common stock................... (74) (1) 84 1
Stock issued under the dividend
reinvestment plan.............. 955 9 21,950
Stock issued through exercise of
options........................ 138 1 2,700
Restricted stock issuance........ 108 1 2,833 (2,834)
Restricted stock cancellation.... (18) -- (474) 474
Amortization of deferred
compensation................... 956
Distributions....................
Net income.......................
----- ---- ------ ---- -------- ------- -------
Balance, December 31, 1997......... 5,712 $ 57 18,030 $180 $456,842 $(5,263) $(1,404)
===== ==== ====== ==== ======== ======= =======
<CAPTION>
DISTRIBUTIONS
STOCK IN EXCESS OF
REPURCHASES NET INCOME
----------- -------------
<S> <C> <C>
Balance, January 1, 1995........... $ -- $ (3,942)
Stock issued to purchase real
estate assets..................
Public offering, net of offering
costs..........................
Stock issued under the dividend
reinvestment plan..............
Repurchases of the Company's
common stock................... (2,038)
Officers'/Directors' stock
purchase....................... 2,038
Distributions.................... (22,020)
Net income....................... 8,411
------- --------
Balance, December 31, 1995......... -- (17,551)
Repurchases of the Company's
common stock................... (6,462)
Officers'/Directors' stock
purchase....................... 387
Retirement of common stock
repurchased.................... 6,075
Public offerings, net of offering
costs..........................
Conversion of preferred stock to
common stock...................
Stock issued under the dividend
reinvestment plan..............
Purchase and cancellation of
minority interest securities...
Distributions.................... (29,421)
Net income....................... 15,569
------- --------
Balance, December 31, 1996......... -- (31,403)
Repurchases of the Company's
common stock (6,666)
Retirement of common stock
purchased...................... 6,666
Public offerings, net of offering
costs..........................
Conversion of preferred stock to
common stock...................
Stock issued under the dividend
reinvestment plan..............
Stock issued through exercise of
options........................
Restricted stock issuance........
Restricted stock cancellation....
Amortization of deferred
compensation...................
Distributions.................... (46,376)
Net income....................... 22,582
------- --------
Balance, December 31, 1997......... $ -- $(55,197)
======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-19
<PAGE> 136
WALDEN RESIDENTIAL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 22,582 $ 15,569 $ 8,411
Adjustments to reconcile net income to net cash provided
by operating activities:
Income allocated to minority interests................ 4,109 1,705 922
Depreciation and amortization......................... 34,668 20,726 16,634
Amortization of deferred compensation on restricted
stock............................................... 956 -- --
Amortization of prepaid interest expense.............. 121 -- --
Gain on disposition of real property.................. (2,055) (1,934) (1,502)
Extraordinary loss on debt extinguishment............. 422 1,848 1,352
Net effect of changes in operating accounts:
Escrow deposits..................................... (1,099) (1,299) (850)
Other assets........................................ 622 (784) 203
Accrued real estate taxes........................... 6,172 1,438 3,521
Accounts payable.................................... 294 492 1,352
Other liabilities................................... 4,030 520 1,274
--------- --------- ---------
Net cash provided by operating activities........ 70,822 38,281 31,317
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of net assets of Drever Partners, Inc. and its
affiliates, net of noncash items shown below.......... (201,032) -- --
Purchase of real estate assets, net of noncash items
shown below........................................... (103,114) (168,219) (103,631)
Real estate asset additions.............................. (32,363) (9,455) (6,451)
Proceeds from disposition of real property, net of
noncash items shown below............................. 8,695 18,667 23,156
Purchase of WDN Management net assets, net of noncash
item shown below...................................... -- 339 --
--------- --------- ---------
Net cash used in investing activities................. (327,814) (158,668) (86,926)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance, net of issuance costs...... 28,185 200,614 67,723
Purchase of the Company's common stock................... (6,666) (6,573) (1,928)
Purchase of minority interest securities................. -- (3,975) --
Distributions paid on common and preferred stock and
minority interests.................................... (47,979) (31,210) (22,481)
Proceeds from term loan and credit facility.............. 393,098 166,770 152,471
Payment of mortgage notes payable and credit facility.... (123,747) (172,188) (130,753)
Principal reductions of mortgage notes payable........... (3,716) (5,242) (1,197)
Payment of financing costs............................... (1,798) (4,143) (3,751)
Prepayment penalties on debt extinguishment.............. (348) (97) (914)
Additional collateral on loans........................... -- (650) (1,049)
--------- --------- ---------
Net cash provided by financing activities............. 237,029 143,306 58,121
--------- --------- ---------
</TABLE>
F-20
<PAGE> 137
WALDEN RESIDENTIAL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... $ (19,963) $ 22,919 $ 2,512
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............. 29,720 6,801 4,289
========= ========= =========
CASH AND CASH EQUIVALENTS, END OF PERIOD................... $ 9,757 $ 29,720 $ 6,801
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest................................... $ 26,342 $ 20,706 $ 16,916
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Purchase of net assets of Drever Partners, Inc. and its
affiliates:
Rent and other receivables............................ $ 4,635 $ -- $ --
Prepaid and other assets.............................. 315 -- --
Escrow deposits....................................... 2,579 -- --
Mortgage notes payable................................ (166,995) -- --
Accrued real estate taxes............................. (8,433) -- --
Accounts payable...................................... (7,765) -- --
Accrued expenses and other liabilities................ (3,998) -- --
Minority interest securities.......................... (303,488) -- --
--------- --------- ---------
$(483,150) $ -- $ --
========= ========= =========
Items related to purchase of assets:
Mortgage notes assumed................................ $ 10,816 $ 14,748 $ 73,055
========= ========= =========
Securities issued for purchase of assets.............. $ 1,050 $ -- $ 22,825
========= ========= =========
Accrued real estate asset additions...................... $ 104 $ 517 $ 416
========= ========= =========
Mortgage notes assumed by buyer upon disposition of
property.............................................. $ -- $ 4,195 $ --
========= ========= =========
Purchase of WDN Management net assets:
Rent and other receivables............................ $ -- $ 48 $ --
Prepaid and other assets.............................. -- 1,022 --
Amortizable assets.................................... -- 8 --
Accounts payable...................................... -- 58 --
Accrued expenses and other liabilities................ -- (267) --
Notes payable to the Company.......................... -- (923) --
Stockholders' equity.................................. -- (300) --
--------- --------- ---------
$ -- $ (354) $ --
========= ========= =========
Notes receivable for officers' and directors' stock
purchases............................................. $ -- $ 292 $ 1,533
========= ========= =========
Deferred compensation on restricted stock, net of
cancellations......................................... $ 2,359 $ -- $ --
========= ========= =========
Distribution payable to minority interest holders........ $ 391 $ 377 $ 461
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-21
<PAGE> 138
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
Walden Residential Properties, Inc. (the "Company") was formed on September 29,
1993 as a Maryland corporation. The Company is a self-administered and
self-managed equity real estate investment trust ("REIT") as defined under the
Internal Revenue Code of 1986, as amended. On February 9, 1994, the Company
completed an initial public offering ("IPO") of its common stock, which is
listed on the New York Stock Exchange. As of December 31, 1997, the Company
owned 154 multifamily properties, containing 42,482 apartment units, primarily
in the Southwest and Southeast regions of the United States.
(2) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Company consolidates investments in partnerships in which they have a
controlling general partner interest through their right to make major decisions
such as the acquisition, sale, financing or refinancing of principal partnership
assets, issuance of debt or equity securities, declaration and payment of
dividends or distributions and all other business matters.
The accompanying consolidated financial statements include the accounts of the
Company, its wholly-owned corporation and partnership subsidiaries and two
limited partnerships in which the Company is the sole general partner and has a
controlling interest. The limited partnership interests not owned by the Company
are accounted for as minority interests (see Note 11). All material intercompany
transactions and account balances have been eliminated in consolidation.
INCOME RECOGNITION
Rental, interest and other income are recorded on the accrual method of
accounting as earned.
RENTAL OPERATIONS
As of December 31, 1997, the Company owned 154 multifamily properties in eleven
states; with 69% of its apartment units located in Texas and 25% located in
Florida, Oklahoma, Arizona, Tennessee and Utah. Of the total units owned, 12,125
or 29% are located in the Houston area and 11,749 or 28% are located in the
Dallas/Fort Worth area. Apartment units are leased to residents on terms of one
year or less, with monthly payments due in advance. Certain of the properties
are subject to Federal, state and local statutes or other restrictions requiring
that a percentage of apartments be made available to lower or moderate income
families. In management's opinion, due to the number of residents, the type and
diversity of markets in which the properties operate and the collection terms,
there is no concentration of credit risk.
UNUSUAL CHARGE -- OFFICER SETTLEMENT AGREEMENT
In October 1997, the Company entered into a settlement agreement in connection
with the resignation of its former Chief Executive Officer ("CEO") and Chairman
of the Board.
F-22
<PAGE> 139
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company has recorded the total cost of this settlement ($1.9 million) as an
unusual charge in the statement of income. The vesting of the restricted stock
that was issued to this individual was accelerated and these shares now vest in
October 2000. The vesting of all stock options held by this individual was
accelerated such that they vested immediately and expire in October 2002.
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 two major components: (1) security deposits and
escrow deposits held by lenders for the payment of property taxes, insurance and
replacement reserves and (2) additional collateral on mortgage notes payable.
Restricted cash related to security and escrow deposits is invested primarily in
short-term securities. Restricted cash related to additional collateral on
mortgage notes is invested in long-term government securities. The additional
collateral is not available for general operating purposes.
REAL ESTATE ASSETS AND DEPRECIATION
Expenditures directly related to the acquisition and improvement of real estate
assets are capitalized at cost as land, buildings and improvements. The Company
capitalizes the cost of appliances, exterior painting, roof replacement and
expenditures for other major property improvements, as well as rehabilitation
costs incurred for properties acquired. Effective July 1, 1996, the Company
revised its method of accounting to capitalize the cost of replacement carpets
on a prospective basis (see Note 3).
Depreciation is computed on a straight-line basis over the estimated useful
lives of the related assets which range from 14 to 30 years for buildings and
five, ten or 15 years for personal property.
The Company'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 the Company's policy of reviewing for
impairment of long-lived assets by reviewing expected future cash flows of its
properties, there were no adjustments necessary for impairment of properties
during the three year period ended December 31, 1997.
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 accumulated amortization of $1,625,000 and
$632,000 as of December 31, 1997 and 1996, respectively.
F-23
<PAGE> 140
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FORWARD TREASURY LOCK AGREEMENTS
During 1997, the Company entered into forward treasury lock agreements in order
to hedge its exposure to interest rate fluctuations. Any gains or losses under
the forward treasury lock agreements will be amortized as interest expense over
the term of the financing.
INCOME TAXES
The Company elected to be taxed as a REIT for Federal income tax purposes as
provided under the Internal Revenue Code of 1986, as amended, effective with its
taxable year ended December 31, 1994. As a result, the Company generally will
not be subject to Federal income taxation if it distributes 95% of its REIT
taxable income to its stockholders and satisfies certain other requirements. The
Company qualified as a REIT for its taxable years ended December 31, 1996 and
1995 and anticipates that its method of operations will enable it to continue to
satisfy the requirements for such qualification.
MINORITY INTERESTS
Minority interests represent limited partnership interests not owned by the
Company. Amounts are recorded based on the fair value of the cash and securities
issued in exchange for the net assets acquired (see Note 11). Partnership units
are convertible into common stock (11,176,904 units at December 31, 1997)
("Common OP Units") and preferred stock (1,999,909 units at December 31, 1997)
("Preferred OP Units") (collectively, the "OP Units") in accordance with the
partnership agreements. Minority interest holders are entitled to cash
distributions at rates equivalent to common or preferred stockholders as defined
in the partnership agreements. Certain Common OP Units have guaranteed
distributions. Income allocated to minority interests is equal to either (i) the
preferred or guaranteed distributions paid or accrued or (ii) an amount equal to
income before income allocated to minority interests divided by the number of
common shares and Common OP Units.
The Company revised its prior financial statements by reclassifying the
convertible equity securities formerly reported as a component of stockholders'
equity in its consolidated balance sheets to minority interests and by restating
its statements of income to reflect distributions or income on such convertible
equity securities as income allocated to minority interests which is deducted in
arriving at net income. The Company believes these changes were necessary to
conform the Company's prior financial statements to generally accepted
accounting principles. These changes had no impact on the financial condition,
business or assets of the Company and did not change the Company's net income
available to common stockholders per share.
STOCK-BASED COMPENSATION
The Company has elected not to recognize compensation expense for stock options
issued as calculated under Statement of Financial Accounting Standards ("SFAS")
No. 123, but rather will continue recognizing expense as prescribed by APB
Opinion No. 25. Disclosure of amounts required by SFAS No. 123 for stock options
issued are included in Note 10.
F-24
<PAGE> 141
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company also accounts for restricted stock issued as prescribed by APB
Opinion No. 25 (see Note 11).
NET INCOME PER SHARE OF COMMON STOCK
Basic net income per share has been computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding.
Diluted net income per share has been computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding plus potential dilutive common share equivalents.
The following table presents information necessary to calculate basic and
diluted net income per share for the periods indicated, with 1996 and 1995 being
restated to conform with the requirements of the SFAS No. 128, Earnings per
Share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Net Income for Basic and Diluted Computation:
Income before extraordinary item and income
allocated to minority interests............... $ 27,113 $19,122 $10,685
Extraordinary loss on debt extinguishment........ (422) (1,848) (1,352)
-------- ------- -------
Income before minority interests................. 26,691 17,274 9,333
Income allocated to minority interests........... (4,109) (1,705) (922)
-------- ------- -------
Net income....................................... 22,582 15,569 8,411
Preferred distributions.......................... (13,186) (2,387) --
-------- ------- -------
Net income available to common stockholders
(basic and diluted net income per share
computation).................................. $ 9,396 $13,182 $ 8,411
======== ======= =======
Basic Net Income per Share:
Before extraordinary item, less preferred
distributions................................. $ 0.55 $ 1.02 $ 0.80
Extraordinary loss on debt extinguishment........ (0.02) (0.12) (0.11)
-------- ------- -------
Net income available to common stockholders...... $ 0.53 $ 0.90 $ 0.69
======== ======= =======
Diluted Net Income per Share:
Before extraordinary item, less preferred
distributions................................. $ 0.55 $ 1.02 $ 0.80
Extraordinary loss on debt extinguishment........ (0.02) (0.13) (0.11)
-------- ------- -------
Net income available to common stockholders...... $ 0.53 $ 0.89 $ 0.69
======== ======= =======
Weighted Average Number of Shares Outstanding (a):
Basic............................................ 17,590 14,720 12,155
Dilutive effect of outstanding options........... 157 72 --
-------- ------- -------
Diluted.......................................... 17,747 14,792 12,155
======== ======= =======
</TABLE>
F-25
<PAGE> 142
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------
(a) Excludes the convertible preferred shares, warrants and Common OP Units
(see Note 11) and 1,696,750 stock options, which are anti-dilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of certain assets, liabilities, revenues and expenses as
of and for the reporting periods. Actual results may differ from such estimates.
ENVIRONMENTAL REMEDIATION COSTS
The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remediation 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. The Company's management is not
aware of any environmental remediation obligations which would materially affect
the operations, financial position or cash flows of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1997, the Company adopted the provisions of Financial Accounting
Standards Board ("FASB") SFAS No. 128, Earnings Per Share. SFAS No. 128
specifies the computation, presentation and disclosure requirements of earnings
per share and supersedes Accounting Principles Board Opinion No. 15. SFAS No.
128 requires a dual presentation of basic and diluted earnings per share. Basic
earnings per share, which excludes the impact of common share equivalents,
replaces primary earnings per share. Diluted earnings per share, which utilizes
the average market price per share as opposed to the greater of the average or
ending market price per share when applying the treasury stock method in
determining common share equivalents, replaces fully diluted earnings per share.
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information about
Capital Structure, which establishes standards for disclosing information about
an entity's capital structure. SFAS No. 129 is effective for periods ending
after December 15, 1997. The adoption of SFAS No. 129 did not impact the
Company's capital structure disclosures, as the Company was already in
compliance with this accounting standard.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments and related information in interim and annual financial statements.
SFAS No. 130 and 131 are effective for periods beginning after December 15,
1997. SFAS No. 130 could impact the Company's reporting as it
F-26
<PAGE> 143
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
relates to its outstanding derivatives and management will implement SFAS No.
131 for the year ending December 31, 1998 by reporting its operating segments by
geographic location.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to current
financial statement presentation.
(3) CHANGE IN ACCOUNTING POLICY
Effective July 1, 1996, the Company revised its method of accounting to
capitalize the cost of replacement carpets on a prospective basis ($864,000
capitalized in 1996 which would have been expensed under the old policy, which
represents $0.06 for basic and diluted net income per share). The Company
believes that this accounting policy change is preferable because it is
consistent with policies currently being used by the majority of the largest
publicly traded apartment REITs and provides a better matching of expenses with
the related benefit of the expenditures.
F-27
<PAGE> 144
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Following is pro forma information as if the revised capitalization policy was
in effect as of January 1, 1995 (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Income before extraordinary item and income allocated to
minority interests as reported......................... $19,122 $10,685
Add: Adjustment for change in accounting policy to
capitalize carpet replacement costs.................... 264 875
------- -------
Income before extraordinary item and income allocated to
minority interests as adjusted......................... $19,386 $11,560
======= =======
Net income as adjusted................................... $15,833 $ 9,286
======= =======
Net income available to common stockholders as
adjusted............................................... $13,446 $ 9,286
======= =======
Basic net income per share:
Before extraordinary item, less preferred distributions
and income allocated to minority interests as
reported............................................ $ 1.02 $ 0.80
Adjustment for effect of change in accounting policy... 0.02 0.08
------- -------
Income before extraordinary item, less preferred
distributions and income allocated to minority
interests as adjusted............................... $ 1.04 $ 0.88
======= =======
Net income available to common stockholders as
reported............................................ $ 0.90 $ 0.69
Adjustment for effect of change in accounting policy... 0.02 0.08
------- -------
Net income available to common stockholders as
adjusted............................................ $ 0.92 $ 0.77
======= =======
Diluted net income per share:
Before extraordinary item, less preferred distributions
and income allocated to minority interests as
reported............................................ $ 1.02 $ 0.80
Adjustment for effect of change in accounting policy... 0.02 0.07
------- -------
Income before extraordinary item, less preferred
distributions and income allocated to minority
interests as adjusted............................... $ 1.04 $ 0.87
======= =======
Net income available to common stockholders as
reported............................................ $ 0.89 $ 0.69
Adjustment for effect of change in accounting policy... 0.02 0.07
------- -------
Net income available to common stockholders as
adjusted............................................ $ 0.91 $ 0.76
======= =======
</TABLE>
(4) ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
During 1997 the Company acquired 93 apartment properties containing 21,467 units
(or 6,037 weighted average units) for a cost of $799.2 million. During 1996 the
Company acquired 16 apartment properties containing 5,034 units (or 1,631
weighted average units)
F-28
<PAGE> 145
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for a cost of $179.0 million. In addition, in connection with one property
acquired in December 1996, the Company acquired approximately 81 acres of
adjacent undeveloped land for $4 million. The properties acquired in 1997 and
1996 are located in the states of Texas, Florida, California, Georgia, Arizona
and Tennessee.
The acquisitions are accounted for by the purchase method of accounting, and the
accompanying consolidated financial statements reflect the results of operations
of the acquired properties since the date of purchase.
On October 1, 1997, the Company acquired the assets and business of Drever
Partners, Inc. and its affiliates, including 18 partnerships of which Drever
Partners, Inc. and certain of its affiliates were the general partners,
(collectively, "Drever"), a private real estate management company based in San
Francisco and Houston. This transaction included the acquisition by the Company
of 79 apartment properties (consisting of 18,118 units), which are included in
the 93 properties acquired by the Company during 1997. Pursuant to an Exchange
Agreement with Drever, the consideration exchanged by the Company consisted of
approximately $94.7 million of cash, the assumption of $286.0 million of
mortgage debt (of which the Company repaid $119.0 million with proceeds from an
unsecured term loan and its unsecured credit facility) and $303.5 million (based
upon the price of the Company's stock at the time of the announcement of the
acquisition) of Common OP Units and Preferred OP Units, issued by a newly-formed
operating partnership subsidiary of the Company, Walden/Drever Operating
Partnership, L.P. ("WDOP"), to the shareholders and partners of and equity
participants in Drever. The Units are exchangeable on or after October 1, 1998
into an aggregate of 10,322,397 shares of the Company's common stock, 1,999,909
shares of the Company's 9.00% Redeemable Preferred Stock and 6,666,363 Series B
Warrants (each of which is exercisable for one-third of one share of the
Company's common stock at $26.875 per share). The 9.00% Redeemable Preferred
Stock and the Preferred OP Units are redeemable at the option of the Company in
ten years at a redemption price of $25 per share or unit.
On February 18, 1998, the Company acquired two apartment properties with a total
of 376 units located in Tampa, Florida for approximately $16.2 million. The
Company funded these acquisitions by assuming $5.8 million of variable rate
tax-exempt debt maturing in the year 2007, assuming $5.1 million of 7.35% fixed
rate debt maturing in the year 2005, and borrowing the remaining amount under
the Company's unsecured credit facility. The credit enhancement on the $5.8
million variable rate debt expires in November 1998 and is guaranteed by the
Company.
DISPOSITIONS
On October 2, 1997, the Company disposed of one 392-unit property located in
Dallas, Texas. During 1996 the Company disposed of three properties: a 384-unit
property located in Wichita, Kansas, on April 24, 1996; a 304-unit property
located in Corpus Christi, Texas, on August 30, 1996; and a 144-unit property
located in Stone Mountain, Georgia, on September 27, 1996. In connection with
these dispositions, the Company reported gains in the amount of $2,055,000 and
$1,934,000 for the year ended December 31, 1997 and 1996, respectively.
F-29
<PAGE> 146
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
PRO FORMA INFORMATION (UNAUDITED)
The following unaudited condensed pro forma information for the two years ended
December 31, 1997 was prepared from the financial statements of the Company by
adjusting for the effect of all public offerings and all property dispositions
and acquisitions in 1997 and 1996, including debt used to finance acquisitions
or repaid from proceeds of dispositions, as if all of these transactions had
occurred on January 1, 1996. The pro forma results do not include gains on
property dispositions or extraordinary losses on early extinguishment of debt.
The following information is not necessarily indicative of what the performance
would have been had the Company owned these properties for the entire period,
nor does it purport to represent future results of operations of the Company.
(In thousands, except per share information.)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues................................................. $268,113 $261,070
Expenses................................................. 245,361 237,814
-------- --------
Income before income allocated to minority interests..... 22,752 23,256
Income allocated to minority interests................... (7,362) (7,619)
-------- --------
Net income............................................... 15,390 15,637
Preferred distributions.................................. (13,186) (13,296)
-------- --------
Net income available to common stockholders.............. $ 2,204 $ 2,341
======== ========
Basic net income per share............................... $ 0.13 $ 0.14
======== ========
Diluted net income per share............................. $ 0.12 $ 0.14
======== ========
</TABLE>
(5) REAL ESTATE ASSETS
Changes in real estate assets and related accumulated depreciation for the years
ended December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<S> <C>
Real estate assets:
Balance at January 1, 1996................................ $ 513,341
Purchase of real estate assets............................ 182,967
Sale of real estate assets................................ (22,765)
Fixed asset additions..................................... 9,972
----------
Balance at December 31, 1996.............................. 683,515
Purchase of real estate assets............................ 799,162
Sale of real estate assets................................ (7,323)
Fixed asset additions..................................... 32,259
----------
Balance at December 31, 1997.............................. $1,507,613
==========
</TABLE>
F-30
<PAGE> 147
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<S> <C>
Accumulated depreciation:
Balance at January 1, 1996................................ $ 23,734
Depreciation expense...................................... 19,810
Write off related to real estate assets sold.............. (1,837)
----------
Balance at December 31, 1996.............................. 41,707
Depreciation expense...................................... 33,560
Write off related to real estate assets sold.............. (683)
----------
Balance at December 31, 1997.............................. $ 74,584
==========
</TABLE>
(6) WDN MANAGEMENT COMPANY
For the period February 9, 1994 through December 31, 1996, the Company owned 5%
of the voting common stock and 100% of the non-voting common stock (which
represented 95% of the economic interest) of WDN Management Company ("WDN
Management"). The remaining 95% of the voting common stock (which represented a
5% economic interest) was owned by the Company's four executive officers. For
this period, the results of operations of WDN Management were accounted for on
the equity method. On December 31, 1996, the Company purchased the additional 5%
economic interest in WDN Management from the four executive officers for $15,000
which represents the four executive officers' original cost of the shares. At
such time, WDN Management and its wholly-owned subsidiary were merged into the
Company and WDN Management was dissolved.
(7) MORTGAGE NOTES PAYABLE, UNSECURED TERM LOAN AND UNSECURED CREDIT FACILITY
Mortgage notes payable and the Company's unsecured term loan (the "Term Loan")
and unsecured credit facility (the "Credit Facility") consist of the following
(in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 PRINCIPAL BALANCE
------------------------------------ AS OF DECEMBER 31,
WEIGHTED AVERAGE WEIGHTED AVERAGE -------------------
INTEREST RATE YEARS TO MATURITY 1997 1996
---------------- ----------------- -------- --------
<S> <C> <C> <C> <C>
Conventional Fixed Rate
Mortgage Notes:
Mortgage notes payable to
the Federal National
Mortgage Association........ 8.81% 6.1 $ 43,101 $ 48,343
Mortgage notes payable to
insurance companies...... 7.83% 3.8 248,155 86,452
Mortgage notes - other...... 8.50% 2.6 3,175 3,208
---- ---- -------- --------
7.98% 4.1 294,431 138,003
</TABLE>
F-31
<PAGE> 148
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 PRINCIPAL BALANCE
------------------------------------ AS OF DECEMBER 31,
WEIGHTED AVERAGE WEIGHTED AVERAGE -------------------
INTEREST RATE YEARS TO MATURITY 1997 1996
---------------- ----------------- -------- --------
<S> <C> <C> <C> <C>
Tax-exempt Mortgage Notes:
Fixed rate.................. 6.51% 19.3 75,638 69,820
Variable rate............... 5.53% 0.5 51,085 51,085
---- ---- -------- --------
6.11% 11.7 126,723 120,905
Variable Rate Notes:
Unsecured Term Loan......... 7.98% 0.9 200,000 --
Unsecured Credit Facility... 7.72% 1.1 74,000 --
Other....................... 8.63% 2.9 7,200 --
---- ---- -------- --------
7.93% 1.0 281,200 --
---- ---- -------- --------
Total/Weighted Average...... 7.62% 4.2 $702,354 $258,908
==== ==== ======== ========
</TABLE>
As of December 31, 1997, the Company had collateralized 88 of its 154 properties
under various mortgage loans.
CONVENTIONAL MORTGAGE NOTES PAYABLE
Conventional mortgage notes payable include 60 loans encumbering 75 properties
at December 31, 1997. Mortgage notes for $294.4 million are payable in monthly
installments aggregating approximately $2.3 million, including principal and
interest at various fixed rates ranging from 6.95% to 9.22% per annum. One
mortgage loan for $7.2 million is a variable rate loan requiring monthly
payments of interest only (8.63% interest rate at December 31, 1997). Scheduled
maturities are at various dates ranging from March 31, 1998 through December 1,
2005.
TAX-EXEMPT MORTGAGE NOTES PAYABLE
At December 31, 1997, 13 of the Company's properties are encumbered by 12
mortgage notes which were financed from the proceeds of tax-exempt bonds and
which have credit enhancements. Mortgage notes of approximately $75.7 million
are payable in monthly installments of approximately $0.5 million, including
principal and interest at fixed rates ranging from 6.13% to 6.75% per annum.
Mortgage notes in the amount of $68.8 million have scheduled maturities ranging
from October 1, 2005 through September 1, 2028. The remaining mortgage note of
$6.9 million was refinanced in February 1998 (see below). The remaining
tax-exempt mortgage notes in the amount of $51.1 million have variable interest
rates, are payable in monthly installments of interest only and have a weighted
average interest rate of 5.53% as of December 31, 1997. The bonds underlying
these mortgage notes are scheduled to mature on May 1, 2024, while the credit
enhancements mature on June 30, 1998. The Company has guaranteed $6.4 million of
the tax-exempt mortgage notes as of December 31, 1997 and 1996.
On January 29, 1998 and February 12, 1998, the Company refinanced $12.7 million
and $6.9 million, respectively, of the variable rate tax-exempt mortgage loans
and extended the mortgage loan and credit enhancement maturity to February 15,
2028. The Company has
F-32
<PAGE> 149
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
also received a commitment to refinance the remaining variable rate tax-exempt
mortgage loans to provide a 30-year credit enhancement.
In March 1998, $78.1 million of conventional fixed-rate mortgage notes were
refinanced with $110.0 million of fixed-rate debt, of which 80.0 million of such
debt bears interest at 6.62% and matures in December 2007 and the remaining
$30.0 million bears interest at 7.06% and matures in December 2017.
UNSECURED TERM LOAN AND UNSECURED CREDIT FACILITY
On December 15, 1997, the Company entered into an unsecured $200 million one
year term loan agreement (the "Term Loan") with BankBoston, as agent for a group
of financial institutions. The interest rate on the borrowing is identical to
that of the Credit Facility (see below). This borrowing was utilized to repay a
$110 million term loan obtained on October 1, 1997 in connection with the
acquisition of the apartment properties owned by Drever. The balance of the
proceeds of the Term Loan were used to reduce the Credit Facility borrowings.
The Company paid a loan fee of $1.2 million dollars for the Term Loan which is
being amortized over the life of the loan.
The Company has a $150 million unsecured Credit Facility with BankBoston, as
agent for a group of financial institutions, which matures February 1999. At the
Company's election, the interest rate on any borrowings under its Credit
Facility is at a floating rate equal to either (i) BankBoston's base rate (8.5%
at December 31, 1997) plus 0.5%, or (ii) LIBOR (5.7% at December 31, 1997) plus
1.375%.
The Term Loan and Credit Facility contain customary representations, warranties
and events of default which require the Company to comply with certain
affirmative and negative covenants. The primary restrictive covenants provide
that: (i) distributions to stockholders may not exceed 90% of funds from
operations, as defined in the Term Loan and Credit Facility; (ii) secured
mortgage indebtedness may not exceed 40% of the Company's total assets before
depreciation; (iii) the Company's fixed charge coverage ratio, as defined, must
exceed 1.25; and (iv) the Company's debt service coverage ratio, as defined,
must exceed 2.0. As of December 31, 1997, the Company is in compliance with all
covenants of the Term Loan and Credit Facility.
PRINCIPAL DEBT MATURITIES
Principal debt maturities, including balloon payments, for the next five years
are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $341,206
1999........................................................ 79,612
2000........................................................ 20,270
2001........................................................ 72,890
2002........................................................ 4,986
Thereafter.................................................. 183,390
--------
Total..................................................... $702,354
========
</TABLE>
F-33
<PAGE> 150
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
EXTRAORDINARY ITEMS
As a result of the sale of a property during 1997, the Company recorded an
extraordinary loss in the amount of $0.4 million, which represented the
write-off of unamortized deferred financing costs and prepayment penalties from
the early retirement of debt. During 1996, the Company refinanced approximately
$36.4 million of mortgage loans and the Credit Facility prior to maturity, which
resulted in an aggregate extraordinary loss of $1.8 million. These losses
represented prepayment fees and unamortized financing costs related to the debt
retired.
FORWARD TREASURY LOCK AGREEMENTS
The Company has entered into five forward treasury lock agreements in order to
hedge its exposure to interest rate fluctuations on anticipated debt financing
expected to close in 1998. Under these agreements, the Company will pay or
receive an amount equal to the difference between the Reference Yield and the
Market Yield, as defined, on the date of exercise. The exercise date may be any
date up to the settlement date. Any gain or loss under these agreements will be
amortized to interest expense over the term of the financing. The following
forward treasury lock agreements were in place as of December 31, 1997:
<TABLE>
<CAPTION>
NATIONAL AMOUNT SETTLEMENT DATE REFERENCE YIELD REFERENCE TREASURY
--------------- --------------- --------------- ------------------
(In thousands)
<C> <S> <C> <C>
$75,000 November 23, 1998 5.8950% 5.750% due 11/30/02
25,000 November 23, 1998 5.9600% 6.125% due 08/15/07
100,000 May 22, 1998 6.3205% 6.125% due 08/15/07
75,000 May 21, 1998 6.4745% 6.125% due 08/15/07
20,000 May 22, 1998 6.2594% 6.625% due 02/15/27
--------
$295,000
========
</TABLE>
(8) EMPLOYEE BENEFIT PLAN
Effective October 1, 1995, WDN Management adopted a 401(k) Plan for its
employees and the employees of the Company. The 401(k) plan is a voluntary
defined contribution plan. Qualified employees may participate in the plan by
contributing up to 15% (20% effective October 1, 1997) of the participant's
annual compensation (not to exceed $9,500, $9,500 and $9,240 per annum for 1997,
1996 and 1995, respectively). In 1997, the Company made an annual matching
contribution on the participants' behalf of $136,000, representing up to 3% of
the participant's annual compensation for the periods from October 1, 1996
through September 30, 1997 and from October 1, 1997 through December 31, 1997.
In 1996, WDN Management made an annual matching contribution on the
participant's behalf of $217,000. This represented up to 6% and 3% of the
participant's annual compensation for the periods from October 1, 1995 through
March 31, 1996 and from April 1, 1996 through September 30, 1996, respectively.
The amount relating to the Company's employees was reimbursed to WDN Management
by the
F-34
<PAGE> 151
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Company in 1996. A participant's salary deferral contribution is 100% vested and
nonforfeitable. A participant will become vested in the Company's matching
contributions after five years.
(9) OFFICER AND DIRECTOR NOTES FOR STOCK PURCHASES
On July 19, 1994, the Company issued 183,000 shares of its common stock, at
$20.875 per share (the closing sales price of the common stock on the New York
Stock Exchange for that date), to four executive officers and to seven other
officers of the Company. Each officer acquiring stock paid 10% of the purchase
price in cash, with the remaining 90% loaned by the Company. Each such loan is
evidenced by a note with a five year term, bearing interest at a fixed rate of
7.25% per annum, payable quarterly, and is secured by a pledge of the shares of
common stock purchased by each officer pursuant to such loans. One officer is
personally liable for the indebtedness evidenced by his note, while the loans to
each of the other officers are non-recourse.
On December 14, 1995, the Company authorized the issuance of shares of its
common stock at $19.375 per share, the closing sales price of the common stock
on the New York Stock Exchange for that date, to four executive officers, three
other officers and four directors. On December 20, 1995, the Company agreed to
issue 122,600 shares of its common stock to such officers and directors. On such
date, the closing sales price of the Company's common stock on the New York
Stock Exchange was $19.50 per share. Of such shares of common stock, the Company
issued 103,800 on December 28, 1995 and 18,800 on January 18, 1996. Such shares
were issued from common stock repurchased pursuant to the Company's stock
repurchase program (see Note 11). Each officer and director acquiring stock paid
20% and 50%, respectively, of the purchase price in cash with the remaining
amount loaned by the Company. Each loan is evidenced by a note with a five year
term, bearing interest at a fixed rate of 8% per annum, payable quarterly, and
is secured by a pledge of the shares of common stock purchased. In addition,
each officer and director is personally liable for the indebtedness evidenced by
the respective note.
On February 17, 1998, the Company implemented a new officer loan program
allowing officers to purchase the Company's common stock at current market
prices and to exercise vested stock options with the assistance of a loan from
the Company. Under this program, officers are eligible to purchase stock on
March 1 and September 1 of each year in an aggregate amount of up to three times
the officer's annual salary. A cash payment of 5% to 15% of the purchase price
is required by the officer, depending upon the amount of the purchase, with the
remainder loaned on a full recourse basis to the officer. Each loan is evidenced
by a note with a five-year term, requiring quarterly payments of interest only
at a fixed interest rate equal to the Company's then current interest rate under
its Credit Facility. The loan is secured by a pledge of the shares of common
stock purchased by each officer pursuant to such loan.
On March 2, 1998, the Company issued 138,692 shares of its common stock, at
$24.75 per share (the closing price of the common stock on the New York Stock
Exchange for the previous trading day) and 26,192 shares of its common stock at
a stock option grant price of $19.25 per share, to 25 officers under the officer
loan program. The
F-35
<PAGE> 152
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Company issued loans to officers in the amount of approximately $3.6 million,
bearing interest at 7%.
(10) STOCK OPTION PLAN
The Company adopted a stock option plan (the "Option Plan") in 1994 to provide
incentives to officers, key employees and directors. Stock options granted under
the Option Plan include non-qualified options and incentive stock options
("ISOs"). Options granted to non-employee directors vest over a one-year period.
Options granted to officers and other employees vest ratably over a four-year
period. All options expire ten years from the date of grant. Shares of common
stock reserved for issuance under the Option Plan are in an amount equal to 10%
of the Company's outstanding shares including exchangeable or convertible
securities. As of December 31, 1997, 3,115,953 shares of common stock were
reserved for issuance under the Option Plan. The Option Plan limits the number
of shares of common stock issuable pursuant to ISOs to 1,500,000. Following is a
summary of stock option activity for the three years ended December 31, 1997:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS
-------- --------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year..... $20.07 1,392,750 $19.23 792,500 $19.25 521,350
Granted............... 25.34 1,778,250 21.16 603,250 19.21 286,150
Exercised............. 19.56 (138,813) 19.25 (125) 19.25 (1,875)
Canceled.............. 22.83 (148,562) 20.64 (2,875) 19.25 (13,125)
------ --------- ------ --------- ------ -------
Options outstanding, end
of year............... $23.20 2,883,625 $20.07 1,392,750 $19.23 792,500
====== ========= ====== ========= ====== =======
Exercisable options, end
of year............... $21.21 1,076,619 $19.22 356,900 $19.25 141,713
====== ========= ====== ========= ====== =======
</TABLE>
As of December 31, 1997, options for 1,076,619 shares of common stock were
exercisable at prices ranging from $18.47 to $26.00 per share and had a weighted
average remaining contractual life of 5.5 years. Outstanding options as of
December 31, 1997 had a weighted average contractual life of 7.9 years.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires companies to
use recognized option pricing models to estimate the fair value of stock based
compensation, including stock options. The Company has elected not to recognize
compensation expense as calculated under SFAS No. 123, but rather will continue
recognizing expense as prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees," as allowed under SFAS No. 123.
Had compensation expense been determined based on the fair value of the stock
option grants at the grant dates consistent with the method of SFAS No. 123, the
Company's net
F-36
<PAGE> 153
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
income and net income per common share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Net income available to common stockholders:
As reported (in thousands)............................ $9,396 $13,182 $8,411
Pro forma (in thousands).............................. $8,180 $12,806 $8,184
Basic net income per share:
As reported........................................... $ 0.53 $ 0.90 $ 0.69
Pro forma............................................. $ 0.47 $ 0.87 $ 0.67
Diluted net income per share:
As reported........................................... $ 0.53 $ 0.89 $ 0.69
Pro forma............................................. $ 0.46 $ 0.87 $ 0.67
Stock options issued (in thousands)..................... 1,778 603 286
Weighted average exercise price......................... $25.34 $ 21.16 $19.21
Weighted average compensation value of options granted
per option(1)......................................... $ 2.38 $ 1.14 $ 1.20
Compensation cost (in thousands)........................ $1,397 $ 376 $ 227
</TABLE>
- -------------------------
(1) Calculated in accordance with the binomial model, using the following
assumptions; (i) expected volatility computed using the monthly average of
the Company's common stock market price as listed on the New York Stock
Exchange for the period April 1995 through September 1997 for the year ended
December 31, 1997, with an average market price volatility of 13.4% and the
period February 1994 through July 1996 for the periods ended December 31,
1996 and 1995, with an average market price volatility of 11.92%; (ii)
expected dividend yield ranging from 7.42% to 9.90%; (iii) expected option
term of six years; (iv) risk-free rate of return as of the date of grant,
which ranged from 5.39% to 7.61%, based on extrapolated yield of six year
U.S. Treasury securities and (v) forfeiture rate of 4.0%.
(11) STOCKHOLDERS' EQUITY AND MINORITY INTERESTS
MINORITY INTERESTS
In connection with apartment acquisitions in June 1995, the Company issued
Common OP Units that are exchangeable for an aggregate of 810,128 shares of the
Company's common stock at the option of the unit holders. Prior to exchange, the
holders of these Common OP Units will be entitled to receive quarterly
distributions equal to the greater of the Company's actual distributions on
810,128 shares of common stock, or $369,000 in the aggregate ($391,000 was
accrued as of December 31, 1997). Distributions of $1,564,000, $1,789,000 and
$461,000 were paid to these unit holders for the years ended December 31, 1997,
1996 and 1995, respectively. These securities have been recorded as minority
interests in the accompanying balance sheets.
F-37
<PAGE> 154
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In connection with an apartment acquisition in April 1997, the Company issued
$1.1 million of Common OP Units which are convertible into 44,379 shares of the
Company's common stock. Prior to conversion, the holders of these Common OP
Units will be entitled to receive quarterly distributions on the equivalent of
44,379 shares of common stock if and when declared and paid ($38,000 was
declared and paid during the year ended December 31, 1997). These securities
have been recorded as minority interests in the accompanying balance sheets.
In connection with the properties acquired from Drever in October 1997 (see Note
4), the Company issued $303.5 million of Common OP Units and Preferred OP Units
which are exchangeable on or after October 1, 1998, into common stock and 9.00%
redeemable preferred stock with detachable warrants, respectively. Approximately
half of these Common OP Units and Preferred OP Units must convert to common and
preferred shares, respectively, on October 1, 1998. Beginning in 1998, the
holders of the Preferred OP Units will be entitled to receive quarterly
distributions of $0.5625 per unit and the holders of the Common OP Units will be
entitled to receive quarterly distributions equal to those on the Company's
common stock. These securities have been recorded as minority interests in the
accompanying balance sheets.
On March 4, 1998, the Company paid distributions of $5.4 million on the Common
OP Units (which represented $0.4825 per unit) and $1.1 million on the Preferred
OP Units (which represented $0.5625 per unit).
DIVIDEND REINVESTMENT PROGRAM
The Company has a Dividend Reinvestment and Stock Purchase Program ("DRP") which
allows stockholders to reinvest their common or preferred distributions
quarterly into shares of the Company's common stock, in lieu of receiving cash
distributions. The current DRP provides that the issue price of dividend
reinvestment purchases are at 95% of the average closing market price of the
Company's common stock for the five days preceding such purchase. The Company
has filed various shelf registration statements for an aggregate of 2,500,000
shares of common stock to be issued pursuant to the DRP, of which 923,726 shares
were available for issuance as of December 31, 1997. Pursuant to the DRP, the
Company issued 216,867 and 955,434 shares of its common stock during 1996 and
1997, respectively.
OTHER SHELF REGISTRATIONS
On June 2, 1995, the Company filed a shelf registration statement for
$150,000,000 in shares of common or preferred stock. On October 9, 1996, the
Company filed another registration statement for $150,000,000 in shares of
common or preferred stock or stock warrants. The amount of securities available
for issuance under these registration statements at December 31, 1997 were
$6,032,000 and $19,993,000, respectively.
F-38
<PAGE> 155
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
PUBLIC OFFERINGS
Following is a summary of the Company's public offerings through December 31,
1997:
<TABLE>
<CAPTION>
DESCRIPTION DATE ISSUED ISSUE PRICE SHARES NET PROCEEDS
- ----------- ----------------- ----------- -------------- --------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Common Stock:
IPO................... February 9, 1994 $19.250 8,386(1) $143,680(2)
Follow-on offerings: November 7, 1994 $19.250 1,500 26,706
June 23, 1995 $18.375 3,500 60,173
August 27, 1996 $20.625 1,680 32,626(2)
December 24, 1996 $24.250 1,237 28,233(3)
------ --------
16,303 $291,418
====== ========
Preferred
Stock/Warrants:
9.16% Series A
Convertible
Redeemable
Preferred Stock.... April 26, 1996 $25.000 1,800 43,500
9.20% Senior Preferred
Stock and
Warrants........... December 27, 1996 $25.000 4,000 95,344
------ --------
5,800 138,844
------ --------
Total public
offerings............. 22,103 $430,262
====== ========
</TABLE>
- -------------------------
(1) Includes 645,000 shares issued to Walden and certain officers of Walden (the
"Restricted Shares").
(2) Includes overallotment option exercised.
(3) Includes 161,000 shares issued in January 1997 pursuant to an overallotment
option. Net proceeds were $3,524,000.
On February 19, 1998, the Company issued 323,232 shares of its common stock at a
price of $23.515 per share, resulting in net equity proceeds of $7.6 million.
PREFERRED STOCK AND WARRANTS
On April 26, 1996, the Company sold 1,800,000 shares of a 9.16% Series A
Convertible Redeemable Preferred Stock ("Series A") at $25.00 per share. On
August 14, 1996, 1,707,300 shares of Series A were exchanged for the same number
of shares of a 9.16% Series B Convertible Redeemable Preferred Stock ("Series
B"). On July 1, 1996, 14,000 shares of Series A were converted into 15,968
shares of common stock. During 1997, 73,818 shares of Series B were converted
into 84,194 shares of common stock. On July 2, 1997, the remaining Series A
shares which had not converted to shares of the Company's common stock, were
automatically exchanged for Series B shares pursuant to the terms of
F-39
<PAGE> 156
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
the Series A shares. Distributions on Series B shares are cumulative and are
equal to the greater of (i) $2.29 per annum or (ii) the distribution on the
number of shares of common stock into which a share of Series B is convertible.
Series B shares are convertible into 1.1406 shares of common stock and are
redeemable at the option of the Company on or after April 30, 2006 at $25.00 per
share.
On December 27, 1996, the Company sold 4,000,000 units at $25.00 per unit. Each
unit represented one share of 9.20% Senior Preferred Stock and one detachable
warrant. The preferred stock is not convertible into common stock and is
redeemable by the Company on or after December 31, 2006 at $25.00 per share.
Distributions on the preferred stock are cumulative. A warrant may be exchanged
for one-third share of common stock at an exercise price of $26.875 per share.
The warrants expire on January 1, 2002.
The aggregate liquidation preference of the Company's preferred stock was
$142,805,000 as of December 31, 1997.
RESTRICTED STOCK
On February 6, 1997, the Company adopted a Long-Term Incentive Plan to attract
and retain individuals to serve as directors, officers and employees of the
Company. The recipients of the Company's restricted shares of common stock (the
"Restricted Stock") are required to pay the $0.01 par value of the common stock.
On February 12, 1997, the Company issued 107,500 shares of Restricted Stock
under this plan to four executive officers, its non-employee directors and
certain other employees of the Company (of which 18,000 shares of Restricted
Stock were canceled upon departures of certain individuals). The shares issued
to the non-employee directors vest ratably over a three-year period; while the
shares issued to the executive officers and other employees vest over a ten-year
period, with an initial vesting of 40% after the fourth anniversary and a 10%
annual vesting thereafter. Deferred compensation related to the Restricted Stock
was computed based upon the market value of the shares at the date of issuance
less the amount paid for the shares. This deferred compensation is being
amortized over the respective vesting periods. The unamortized amount as of
December 31, 1997 was $1,404,000.
The vesting period of the Restricted Stock issued to the Company's former CEO
and Chairman of the Board was accelerated to October 2000, pursuant to a
settlement agreement. In addition, the balance of the deferred compensation on
such Restricted Stock ($739,000) was fully amortized in 1997, and is included in
the unusual charge -- officer settlement agreement in the statement of income.
On February 4, 1998, the Company issued 4,000 restricted shares of common stock
to two executive officers which shares vest ratably over a three year period.
OTHER STOCK ISSUANCES
On April 19, 1995, the Company acquired a multifamily property for $14 million.
The acquisition was funded by $9.8 million in financing and the issuance of
215,700 shares of the Company's common stock at a price of $19.55 per share.
F-40
<PAGE> 157
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
As discussed in Note 9, 183,000 shares of common stock were sold to 11 officers
of the Company on July 19, 1994; 103,800 shares of common stock were sold to
seven officers and four directors on December 28, 1995 and 18,800 shares were
sold to one officer on January 18, 1996. All of the stock sold was pursuant to
an officer/director stock purchase plan at the then current market price.
STOCK REPURCHASES
In December 1995, the Company announced its intention to repurchase shares of
its common stock. During 1995, the Company repurchased 103,800 shares of its
common stock at a cost of $2,038,000, of which $110,000 was not paid until
January 1996. All 103,800 shares were reissued to officers and directors on
December 28, 1995 pursuant to an officer and director stock purchase agreement
(see Note 9). During 1996, the Company repurchased 318,300 shares of its common
stock at a cost of $6,462,000; of which 18,800 shares were reissued on January
18, 1996 pursuant to an officer and director stock purchase agreement (see Note
9). The remaining 299,500 shares were retired in 1996.
In July 1997, the Company announced its intention to repurchase additional
shares of its common stock. During 1997 the Company repurchased and retired
278,500 shares of its common stock at a cost of $6,666,000.
DISTRIBUTIONS TO COMMON AND PREFERRED STOCKHOLDERS
For the year ended December 31, 1995, the Company paid distributions of
$22,020,000 (or $1.82 per share of common stock), of which 45.75% represented a
return of capital, 3.84% represented a long-term capital gain and 50.41%
represented ordinary taxable dividend income.
For the year ended December 31, 1996, the Company paid distributions of $27.0
million to its common stockholders (or $1.86 per share of common stock), of
which 43.3% represented a return of capital, 3.7% represented a long-term
capital gain and 53.0% represented ordinary taxable dividend income. In
addition, the Company paid distributions of $2.4 million on its 9.16%
Convertible Redeemable Preferred Stock (or $1.335 per share), of which 6.53%
represented a long-term capital gain and 93.47% represented ordinary taxable
dividend income.
For the year ended December 31, 1997, the Company paid distributions of
$33,852,000 (or $1.93 per share of common stock), of which 44.06% represented a
return of capital, 2.23% represented a 20% long-term capital gain and 53.71%
represented ordinary taxable dividend income. In addition, the Company paid
distributions of $3,986,000 on its 9.16% Convertible Redeemable Preferred Stock
(or $2.29 per share) and $8,538,000 on its 9.2% Senior Preferred Stock (or $2.30
per share), of which 3.99% represented a long-term capital gain and 96.01%
represented ordinary taxable dividend income.
On March 4, 1998, the Company paid distributions of $12.0 million to
stockholders of record on February 18, 1998. The common stockholders were paid
$0.4825 per share; the 9.16% Convertible Redeemable Preferred Stockholders were
paid $0.5725 per share and the 9.20% Senior Preferred Stockholders were paid
$0.575 per share.
F-41
<PAGE> 158
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DISTRIBUTION PREFERENCES
Distributions on the Company's preferred stock and certain of its minority
interest securities have priority over other distributions. Following are the
Company's distribution preferences:
(a) First, to holders of the 9.20% Senior Preferred Stock (4,000,000 shares
at December 31, 1997, with an annual dividend rate of $2.30 per share);
then
(b) to holders of the 9.16% Series B Convertible Redeemable Preferred Stock
(1,712,182 shares at December 31, 1997, with an annual dividend rate of
$2.29 per share) and the holders of 1,999,909 Preferred OP Units (with an
annual distribution of $2.25 per unit); then
(c) to holders of 810,128 Common OP Units (at a minimum cumulative annual
distribution equal to $1.82 per unit); and
(d) finally, to all remaining holders of Common OP Units and common stock.
(12) FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value of financial instruments was
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgement 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 may have a material effect on the estimated fair value amounts.
Cash and cash equivalents, receivables (including notes receivable from officers
and directors), accounts payable and accrued expenses and other liabilities are
carried at amounts which reasonably approximate their fair value.
As of December 31, 1997, the outstanding balance of fixed rate mortgage notes
payable of $370.1 million had a fair value of $379.1 million (excluding
prepayment penalties) as estimated based upon interest rates available for the
issuance of debt with similar terms and remaining maturities as of December 31,
1997. Of these mortgages, $179.0 million were not prepayable at December 31,
1997. The remaining notes were subject to prepayment penalties of $5.6 million
at December 31, 1997, which would be required to retire these notes prior to
maturity. The floating rate mortgage notes payable balance at December 31, 1997
reasonably approximates fair value.
As of December 31, 1996, the outstanding balance of fixed rate mortgage notes
payable of $207.8 million had a fair value of $211.7 million (excluding
prepayment penalties) as estimated based upon interest rates available for the
issuance of debt with similar terms and remaining maturities as of December 31,
1996. Of these mortgage notes, $178.0 million were not prepayable at December
31, 1996. The remaining notes were subject to prepayment penalties of $1.9
million at December 31, 1996, which would be required to retire these notes
prior to maturity. The floating rate mortgage notes payable balance of $51.1
million at December 31, 1996 reasonably approximates fair value.
F-42
<PAGE> 159
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The fair value of the Company's forward treasury lock agreements (used to hedge
against exposure to interest rate fluctuations) is $9.3 million, the estimated
amount that the Company would pay to terminate the agreements as of December 31,
1997. The amount was determined based on a quote received from a financial
institution which transacts these type of settlements.
The fair value estimates presented herein are based on information available to
management as of December 31, 1997 and 1996. 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 that date, and current estimates of fair value may
differ significantly from the amounts presented herein.
(13) COMMITMENTS AND CONTINGENCIES
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. These matters are generally covered by insurance.
While the resolution of these matters cannot be predicted with certainty,
management believes that the final outcome of such matters will not have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.
Effective October 1, 1995, the Company entered into a lease agreement for its
corporate office space. The lease requires monthly lease payments of $25,000 for
a period of sixty months.
In January 1998, the Company executed a lease agreement for additional office
space. The lease requires monthly lease payments commencing at $66,000 up to
$78,000 for a period of 120 months, beginning May 1998.
As of December 31, 1997, the Company had employment agreements with five
executive officers for five-year periods ending in February or October 2002. The
aggregate remaining compensation due under these agreements was approximately
$4.9 million as of December 31, 1997. Under such agreements, the Company is
liable for the compensation benefits for one year if an executive officer were
to be terminated without cause, as defined.
On various dates in 1996 and 1997, the Company entered into contractual
obligations with a third party to construct carports on 59 of the Company's
properties. The total cost of the carports was estimated to be approximately
$13.6 million, of which $9.3 million had been incurred as of December 31, 1997.
The remaining $4.3 million is expected to be paid during 1998.
On February 27, 1998, the Company signed a joint venture agreement with The
Grupe Company ("Grupe") to purchase, for approximately $47 million, two
Sacramento area properties which will consist of 616 apartment units. Under the
terms of the joint venture, Grupe will build and lease-up the two properties
before the Company would purchase 100% of both properties from the joint
venture. The purchase is anticipated to occur sometime in late 1999.
F-43
<PAGE> 160
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial information for the two year period ended
December 31, 1997 is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 QUARTERS ENDED
-------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31(a) TOTAL
-------- ------- ------------ -------------- --------
<S> <C> <C> <C> <C> <C>
Revenues.................. $33,291 $34,750 $36,499 $66,595 $171,135
Expenses.................. 26,556 29,065 30,328 60,128 146,077
------- ------- ------- ------- --------
Operating income.......... 6,735 5,685 6,171 6,467 25,058
Gain on disposition of
real property........... -- -- -- 2,055 2,055
Extraordinary loss on debt
extinguishment.......... -- -- -- (422) (422)
Income allocated to
minority interests...... (405) (395) (397) (2,912) (4,109)
------- ------- ------- ------- --------
Net income................ 6,330 5,290 5,774 5,188 22,582
Preferred distributions... (3,312) (3,311) (3,282) (3,281) (13,186)
------- ------- ------- ------- --------
Net income available to
common stockholders..... $ 3,018 $ 1,979 $ 2,492 $ 1,907 $ 9,396
======= ======= ======= ======= ========
Basic net income per
share:
Before extraordinary item,
less preferred
distributions and income
allocated to minority
interests............... $ 0.18 $ 0.11 $ 0.14 $ 0.13 $ 0.55
Extraordinary loss on debt
extinguishment.......... -- -- -- (0.02) (0.02)
------- ------- ------- ------- --------
Net income available to
common stockholders..... $ 0.18 $ 0.11 $ 0.14 $ 0.11 $ 0.53
======= ======= ======= ======= ========
Diluted net income per
share:
Before extraordinary item,
less preferred
distributions and income
allocated to minority
interests............... $ 0.17 $ 0.11 $ 0.14 $ 0.13 $ 0.55
Extraordinary loss on debt
extinguishment.......... -- -- -- (0.02) (0.02)
------- ------- ------- ------- --------
Net income available to
common stockholders..... $ 0.17 $ 0.11 $ 0.14 $ 0.11 $ 0.53
======= ======= ======= ======= ========
</TABLE>
- -------------------------
(a) Operations for the fourth quarter of 1997 include Drever, which was
acquired on October 1, 1997 (see Note 11).
F-44
<PAGE> 161
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
1996 QUARTERS ENDED
----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues.................... $25,275 $25,962 $28,899 $31,035 $111,171
Expenses.................... 21,755 22,117 24,136 25,975 93,983
------- ------- ------- ------- --------
Operating income............ 3,520 3,845 4,763 5,060 17,188
Gain on disposition of real
property.................. -- 1,272 724 (62) 1,934
Extraordinary loss on debt
extinguishment............ (488) (96) (488) (776) (1,848)
Income allocated to minority
interests................. (471) (471) (387) (376) (1,705)
------- ------- ------- ------- --------
Net income.................. 2,561 4,550 4,612 3,846 15,569
Preferred distributions..... -- (342) (1,022) (1,023) (2,387)
------- ------- ------- ------- --------
Net income available to
common stockholders....... $ 2,561 $ 4,208 $ 3,590 $ 2,823 $ 13,182
======= ======= ======= ======= ========
Basic net income per share:
Before extraordinary item,
less preferred
distributions and income
allocated to minority
interests................. $ 0.21 $ 0.31 $ 0.28 $ 0.23 $ 1.02
Extraordinary loss on debt
extinguishment............ (0.03) (0.01) (0.03) (0.05) (0.12)
------- ------- ------- ------- --------
Net income available to
common stockholders....... $ 0.18 $ 0.30 $ 0.25 $ 0.18 $ 0.90
======= ======= ======= ======= ========
Diluted net income per
share:
Before extraordinary item,
less preferred
distributions and income
allocated to minority
interests................. $ 0.21 $ 0.31 $ 0.28 $ 0.23 $ 1.01
Extraordinary loss on debt
extinguishment............ (0.03) (0.01) (0.03) (0.05) (0.12)
------- ------- ------- ------- --------
Net income available to
common stockholders....... $ 0.18 $ 0.30 $ 0.25 $ 0.18 $ 0.90
======= ======= ======= ======= ========
</TABLE>
F-45
<PAGE> 162
WALDEN RESIDENTIAL PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
The following unaudited pro forma condensed consolidated statement of income
includes (i) the historical results of the Company, which should be read in
conjunction with the consolidated financial statements of the Company and its
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein, (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 herein, (iii) the acquisitions
of fourteen properties and the sale of one property, and (iv) the interest on
the additional debt incurred to consummate these transactions. The acquisition
of the Drever Group and other properties are being recorded in accordance with
the purchase method of accounting pursuant to Accounting Standards Board Opinion
No. 16. The unaudited pro forma condensed consolidated statement of income is
not necessarily indicative of what the Company's results of operations would
have been had all of these transactions occurred on January 1, 1997 and such
condensed income statement does not purport to represent the future results of
operations of the Company.
F-46
<PAGE> 163
WALDEN RESIDENTIAL PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
COMBINED
WALDEN ACQUISITIONS/ DREVER PRO FORMA ENTITY
HISTORICAL SALES(a) HISTORICAL(b) ADJUSTMENTS PRO FORMA
---------- ------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES
Rental income....................... $163,224 $10,234 $82,656 $ (90)(c) $256,024
Other property income............... 6,313 537 2,786 (1)(c) 9,635
Interest income..................... 1,598 -- 493 (290)(d) 1,801
Other income........................ -- -- 449 204(e) 653
-------- ------- ------- -------- --------
Total revenues.............. 171,135 10,771 86,384 (177) 268,113
-------- ------- ------- -------- --------
EXPENSES
Property operating and
maintenance...................... 56,483 3,723 31,972 (55)(c) 92,123
Real estate taxes................... 16,805 943 8,670 -- 26,418
General and administrative.......... 7,734 -- 8,069 -- 15,803
Unusual charge...................... 1,940 -- -- -- 1,940
Interest............................ 28,447 -- 16,564 8,250(f) 53,261
Amortization........................ 827 -- 633 (640)(g) 820
Depreciation........................ 33,841 -- 17,140 4,015(h) 54,996
-------- ------- ------- -------- --------
Total expenses.............. 146,077 4,666 83,048 11,570 245,361
-------- ------- ------- -------- --------
Operating income...................... 25,058 6,105 3,336 (11,747) 22,752
Gain (loss) on disposition of real
property............................ 2,055 -- (170) (1,885)(i) --
Loss on disposition of subsidiary..... -- -- (2,480) 2,480(e) --
-------- ------- ------- -------- --------
Income before extraordinary item,
income taxes and income allocated to
minority interests.................. 27,113 6,105 686 (11,152) 22,752
Income tax benefit.................... -- -- 171 (171)(j) 0
-------- ------- ------- -------- --------
Income before extraordinary item and
income allocated to minority
interests........................... 27,113 6,105 857 (11,323) 22,752
Extraordinary loss on debt
extinguishment...................... (422) -- -- 422(g) --
-------- ------- ------- -------- --------
Income before income allocated to
minority interests.................. 26,691 6,105 857 (10,901) 22,752
Income allocated to minority
interests........................... (4,109) -- -- (3,253)(k) (7,362)
-------- ------- ------- -------- --------
Net income............................ 22,582 6,105 857 (14,154) 15,390
Preferred distributions............... (13,186) -- -- -- (13,186)
-------- ------- ------- -------- --------
Net income available to common
stockholders........................ $ 9,396 $ 6,105 $ 857 $(14,154) $ 2,204
======== ======= ======= ======== ========
Basic net income per share............ $ .53 $ .13
======== ========
Diluted net income per share.......... $ .53 $ .12
======== ========
Basic weighted average number of
common shares outstanding........... 17,590 17,599
======== ========
Diluted weighted average number of
common shares and common share
equivalents outstanding............. 17,747 17,756
======== ========
</TABLE>
See Note 4 of Notes to Consolidated Financial Statements to the Company's
Consolidated Financial Statements for the year ended December 31, 1997 for an
explanation of 1997 acquisitions and dispositions.
F-47
<PAGE> 164
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(a) Represents historical revenues and certain expenses from January 1, 1997 to
the respective acquisition or disposition date of the fourteen apartment
properties acquired and one apartment property disposed of by the Company in
1997.
(b) Represents historical results of operations of Drever Partners, Inc.
("Drever") for the nine months ended September 30, 1997.
(c) Represents the elimination of the operations of One Stanford Court, a
72-unit apartment property sold by Drever in April 1997.
(d) Represents the elimination of interest earned on escrowed funds which were
used for acquiring six apartment properties by the Company in 1997.
(e) Represents the elimination of Drever McIntosh, which was sold prior to the
closing of the Drever acquisition.
(f) Represents the pro forma adjustment for interest expense related to the
indebtedness incurred in connection with the purchase of fourteen apartment
properties and the acquisition of Drever and the reduction of indebtedness
related to one apartment property disposed of by the Company in 1997, including
the amounts borrowed under the Company's variable rate credit facility and term
loan and the mortgages assumed. The pro forma weighted average combined interest
rate was 7.53% for the year ended December 31, 1997.
(g) Represents the elimination of the amortization of deferred financing costs
associated with the Drever mortgage indebtedness, which was eliminated in
connection with the acquisition, and the write-off of deferred financing costs
related to the debt on one apartment property disposed of by the Company in
1997.
(h) Represents the pro forma adjustment to depreciation of real estate owned as
a result of acquiring the real estate assets of fourteen apartment properties
and Drever and disposing of the one apartment property by the Company in 1997.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the related assets. Buildings are being depreciated over 30 years other
than buildings acquired in the Drever transaction which are being depreciated
over 25 years. All other assets are being depreciated over 5, 10, or 15 years
depending on the useful life of the related asset.
(i) Represents the elimination of the gain (loss) on disposition of real
property related to one apartment property disposed of by the Company and
another apartment property sold by Drever.
(j) Represents the elimination of Drever'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 an adjustment for partnership common and preferred OP Units
issued in connection with the Drever transaction.
F-48
<PAGE> 165
DREVER PARTNERS, INC. AND AFFILIATES
CONDENSED COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
Real estate assets, at cost:
Land....................................... $ 70,108 $ 70,336
Buildings and improvements................. 469,576 464,432
Less accumulated depreciation.............. (115,487) (99,260)
--------- --------
Total real estate assets........... 424,197 435,508
Rent and other receivables................... 330 479
Receivables from related parties............. 569 2,957
Prepaid and other assets..................... 1,636 765
Deferred financing costs, net................ 3,136 3,741
Deferred tax asset........................... 1,303 174
Cash and cash equivalents.................... 15,621 10,866
Restricted cash.............................. 3,506 4,402
--------- --------
Total assets....................... $ 450,298 $458,892
========= ========
Liabilities:
Mortgage notes payable..................... $ 286,061 $290,854
Other long-term debt....................... 406 759
Investor notes payable..................... 6,336 6,497
Accrued real estate taxes.................. 8,579 9,699
Accounts payable........................... 4,177 3,481
Payable to related parties................. 901 301
Accrued expenses and other liabilities..... 10,444 8,056
--------- --------
Total liabilities.................. 316,904 319,647
Commitments and contingencies
Partners'/Stockholders' equity:
Partners' capital.......................... 182,199 179,559
Common stock............................... 25 25
Treasury stock............................. (371) (371)
Additional paid-in capital................. 639 639
Accumulated deficit........................ (49,098) (40,607)
--------- --------
Total partners'/stockholders'
equity.......................... 133,394 139,245
--------- --------
Total liabilities and
partners'/stockholders'
equity.......................... $ 450,298 $458,892
========= ========
</TABLE>
See notes to the condensed combined financial statements.
F-49
<PAGE> 166
DREVER PARTNERS, INC. AND AFFILIATES
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1997 1996
------- -------
<S> <C> <C>
Revenues
Rental income............................................. $82,656 $80,025
Other property revenue.................................... 2,786 2,449
Construction revenue...................................... -- 897
Interest income........................................... 493 382
Other income (expense).................................... 449 (316)
------- -------
Total revenues.................................... 86,384 83,437
------- -------
Expenses
Property operating and maintenance........................ 31,972 30,249
Real estate taxes......................................... 8,670 8,532
Construction cost of sales................................ -- 795
General and administrative................................ 8,069 6,818
Interest.................................................. 16,564 17,099
Amortization.............................................. 633 658
Depreciation.............................................. 17,140 17,211
------- -------
Total expenses.................................... 83,048 81,362
------- -------
Operating income............................................ 3,336 2,075
Loss on disposition of real property........................ (170) --
Loss on disposition of subsidiary........................... (2,480) --
------- -------
Income before extraordinary item and income taxes........... 686 2,075
Income (expense) benefit.................................... 171 (484)
------- -------
Income before extraordinary item............................ 857 1,591
Extraordinary gain on debt extinguishment................... -- 71
------- -------
Net income.................................................. $ 857 $ 1,662
======= =======
</TABLE>
See notes to the condensed combined financial statements.
F-50
<PAGE> 167
DREVER PARTNERS, INC. AND AFFILIATES
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 857 $ 1,662
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 17,773 17,869
Loss on disposition of real property.................... 170 --
Loss on disposition of subsidiary....................... 2,480 --
Extraordinary gain on debt extinguishment............... -- (71)
Deferred income tax..................................... (1,129) 94
Net effect of changes in operating accounts:
Restricted cash....................................... 896 2,352
Other assets.......................................... (935) 1,660
Receivables........................................... 5 (411)
Receivables from related parties...................... (682) (49)
Accrued real estate taxes............................. (1,120) (1,132)
Accounts payable...................................... 696 (738)
Payable to related parties............................ 600 (49)
Other liabilities..................................... 2,388 532
------- --------
Net cash provided by operating activities........... 21,999 21,719
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate asset additions............................... (7,268) (8,712)
Proceeds from disposition of subsidiary................... 225 --
------- --------
Net cash used in investing activities............... (7,043) (8,712)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions received.................................... -- 195
Distributions paid to partners............................ (6,336) (7,944)
Proceeds from mortgage notes payable...................... -- 21,380
Payment of mortgage notes payable......................... -- (20,700)
Principal reductions of debt.............................. (3,442) (3,568)
Payment of financing costs................................ (28) (73)
Payment of investor notes (161) (96)
Payment of other long-term debt........................... (234) (849)
------- --------
Net cash used in financing activities............... (10,201) (11,655)
------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 4,755 1,352
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 10,866 11,828
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $15,621 $ 13,180
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $16,555 $ 17,184
======= ========
Income taxes paid......................................... $ 325 $ 391
======= ========
SUPPLEMENTAL NON CASH INVESTING AND FINANCING ACTIVITIES:
Contributions resulting from reduction of liability....... $ 119 $ --
======= ========
Distribution of receivables............................... $ 491 $ --
======= ========
Debt assumed by purchaser of property..................... $ 1,351 $ --
======= ========
Receivables from related parties acquired by purchaser of
subsidiary.............................................. $ 2,724 $ --
======= ========
</TABLE>
See notes to the condensed combined financial statements.
F-51
<PAGE> 168
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
1. INTERIM UNAUDITED FINANCIAL INFORMATION
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, 19 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 September 30, 1997. 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 a 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 apartment properties in Texas, Arizona, California and Georgia
consisting of 18,118 apartment units as of September 30, 1997.
On May 21, 1997, Drever entered into a definitive agreement with Walden
Residential Properties, Inc. ("Walden") which resulted in the combination of
Walden, DPI and the Partnerships (See Note 5). Pursuant to the agreement, Walden
acquired 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 accompanying unaudited condensed combined financial statements should be
read in conjunction with the combined financial statements and notes thereto
included elsewhere herein for the year ended December 31, 1996. The accompanying
interim unaudited condensed combined financial information has been prepared
pursuant to the rules and regulations of the SEC. Certain information and
footnote disclosures normally included in the annual financial statements have
been condensed or omitted pursuant to rules and regulations of the SEC.
Management believes that the disclosures contained herein are adequate to make
the information presented not misleading. In the opinion of management, all
adjustments necessary to present fairly the combined financial position of the
Company and its subsidiaries as of September 30, 1997 and the combined results
of their operations and combined cash flows for the nine months ended September
30, 1997 and 1996, have been included. The combined results of operations for
the nine months ended September 30, 1997 are not necessarily indicative of the
results for the full year.
F-52
<PAGE> 169
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS, CONTINUED
2. DISPOSITIONS
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.
3. ACCRUED EXPENSES AND OTHER LIABILITIES
Included in accrued expenses and other liabilities at September 30, 1997 and
December 31, 1996 are the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Security deposits.................................... $ 3,793,000 $3,782,000
Accrued interest..................................... 1,694,000 1,685,000
Other accrued liabilities............................ 3,860,000 1,657,000
Self-insurance reserve............................... -- 468,000
Federal income taxes payable......................... 1,097,000 464,000
----------- ----------
$10,444,000 $8,056,000
=========== ==========
</TABLE>
Other accrued liabilities include construction advances, net over billings for
construction services, and other miscellaneous operational accruals of DPI and
the Partnerships.
SELF-INSURANCE RESERVE -- During 1996, 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
represented Drever's estimated liability for workers' compensation and health
benefit claims, including those that have been incurred but not yet reported.
The amounts were based on actuarially determined estimates.
Beginning in January 1, 1997, all of Drever's employees became covered under a
standard workers' compensation insurance contract. Any claims incurred after
January 1, 1997 are covered under the new policy. Existing claims for injuries
prior to January 1, 1997 are covered under the self-insurance program.
4. PARTNERS'/STOCKHOLDERS' EQUITY
PARTNERS' CAPITAL -- Distributions to the general partner were $20,000 for the
nine months ended September 30, 1997. During the nine-month period ended
September 30, 1997, distributions to limited partners were $6,316,000.
STOCKHOLDERS' EQUITY -- Drever Partners, Inc. has 5,000 shares of no par value
stock authorized and issued and 4,050 shares outstanding at September 30, 1997
and December 31, 1996. CMC, DCC and CRFC each have 1,000 shares of $1 par value
stock authorized, issued and outstanding at September 30, 1997 and December 31,
1996. DM & Co. has 2,500 shares of no class, no par value stock authorized and
100 shares issued and outstanding at December 31, 1996. Drever Partners, Inc.
owns 100% of DCC
F-53
<PAGE> 170
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS, CONTINUED
and DM & Co., 95% of CRFC and 90% of CMC outstanding stock. The remaining shares
are held by officers of the entities.
AOF, Inc. and AOFII, Inc. each have 10,000 shares of $1 par value stock
authorized, issued and outstanding at September 30, 1997 and December 31, 1996.
On September 30, 1997, Drever Partners, Inc. sold its investment in DM & Co. for
$225,000 resulting in a loss of $2,480,000. Prior to the sale, receivables from
related parties totaling $2,724,000 were transferred to DM & Co.
During the nine month period ended September 30, 1997, receivables totaling
$491,000 were transferred to stockholders of Drever Partners, Inc. and AOFII,
Inc. in the form of distributions. In addition, other long-term debt of $119,000
was assumed by a stockholder of Drever Partners, Inc. and has been recorded as a
non-cash contribution.
5. SUBSEQUENT EVENTS
On October 1, 1997, the assets and business of Drever Partners, Inc. and
affiliates ("DPI"), were acquired by Walden through an acquisition pursuant to
an Exchange Agreement and a Contribution agreement each dated as of May 21, 1997
by and between Walden and DPI as described in Note 1. Certain aspects of the
Acquisition were approved by the stockholders of Walden at a special meeting
held September 29, 1997 and the limited partners of each of the 18 limited
partnerships of DPI and DPI's shareholders agreed to the exchange of their
partnership interests and shares of Units (as defined below) and cash.
The transaction value was $685 million, consisting of $304 million in operating
partnership units ("Units") issued by Walden/Drever Operating partnership
("WDOP") which are convertible, on or after the first anniversary of issuance,
into $246 million of Walden Common Stock (10,343,018 shares) and $58 million of
preferred stock (1,999,909 shares of 9% Redeemable Preferred Stock) with
detachable warrants (6,666,363 Series B Warrants, each of which is exercisable
for one-third of one share of Common Stock at $26.875 per share) and $95 million
in cash. The balance of the consideration consisted of the assumption of $286
million of mortgage debt. The Redeemable Preferred Stock and the Preferred OP
Units are redeemable at Walden's option in ten years at a redemption price of
$25 per share or unit.
F-54
<PAGE> 171
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. These financial
statements are the responsibility of the management of Drever Partners, Inc. and
affiliates. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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.
/s/ Deloitte & Touche LLP
- -----------------------------------
DELOITTE & TOUCHE LLP
Dallas, Texas
June 27, 1997
October 1, 1997 as to Note 14
F-55
<PAGE> 172
DREVER PARTNERS, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Real estate assets, at cost:
Land.................................................... $ 70,336 $ 70,336
Buildings and improvements.............................. 464,432 452,852
Less accumulated depreciation........................... (99,260) (76,812)
-------- --------
Total real estate assets................................ 435,508 446,376
Rent and other receivables................................ 479 326
Receivables from related parties.......................... 2,957 1,700
Prepaid and other assets.................................. 765 3,674
Deferred financing costs, net............................. 3,741 4,417
Deferred tax asset........................................ 174 268
Cash and cash equivalents................................. 10,866 11,828
Restricted cash........................................... 4,402 6,549
-------- --------
Total assets............................................ $458,892 $475,138
======== ========
LIABILITIES AND PARTNERS'/STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................. $290,854 $293,702
Other long-term debt.................................... 759 1,469
Investor notes payable.................................. 6,497 6,594
Accrued real estate taxes............................... 9,699 9,365
Accounts payable........................................ 3,481 3,033
Payable to related parties.............................. 301 538
Accrued expenses and other liabilities.................. 8,056 7,823
-------- --------
Total liabilities.................................... 319,647 322,524
Commitments and contingencies (Note 11)
Partners'/Stockholders' equity:
Partners' capital....................................... 179,559 182,213
Common stock............................................ 25 25
Treasury stock.......................................... (371) (371)
Additional paid-in capital.............................. 639 639
Accumulated deficit..................................... (40,607) (29,892)
-------- --------
Total partners'/stockholders' equity................. 139,245 152,614
-------- --------
Total liabilities and partners'/stockholders' equity...... $458,892 $475,138
======== ========
</TABLE>
See notes to combined financial statements.
F-56
<PAGE> 173
DREVER PARTNERS, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Rental income................................... $107,344 $101,630 $ 84,935
Other property income........................... 3,259 3,025 2,463
Construction revenue............................ 919 308 --
Interest income................................. 620 979 750
Other income (expense).......................... (1,092) 508 1,668
-------- -------- --------
Total revenues.......................... 111,050 106,450 89,816
-------- -------- --------
EXPENSES:
Property operating and maintenance.............. 40,682 40,060 33,585
Real estate taxes............................... 11,486 11,051 8,940
Construction cost of sales...................... 891 240 --
General and administrative...................... 9,343 9,654 10,485
Interest........................................ 22,909 23,412 19,531
Amortization.................................... 888 953 794
Depreciation.................................... 22,888 21,227 17,050
-------- -------- --------
Total expenses.......................... 109,087 106,597 90,385
-------- -------- --------
OPERATING INCOME (LOSS)........................... 1,963 (147) (569)
Gain (loss) on disposition of property.......... -- (90) 156
Loss on debt forgiveness........................ -- (455) --
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND INCOME
TAXES........................................... 1,963 (692) (413)
INCOME TAXES...................................... (647) (487) (373)
-------- -------- --------
INCOME(LOSS) BEFORE EXTRAORDINARY ITEM............ 1,316 (1,179) (786)
Extraordinary gain (loss) on debt
extinguishment............................... 348 -- (735)
-------- -------- --------
NET INCOME (LOSS)................................. $ 1,664 $ (1,179) $ (1,521)
======== ======== ========
</TABLE>
See notes to combined financial statements.
F-57
<PAGE> 174
DREVER PARTNERS, INC. AND AFFILIATES
COMBINED STATEMENTS OF PARTNERS'/STOCKHOLDERS' EQUITY
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
Contributions............... 195 195
Distributions............... (15,228) (15,228)
-------- ------- --- ----- ---- -------- --------
Partners'/stockholders' equity
at December 31, 1996........ $179,559 $25,000 $25 $(371) $639 $(40,607) $139,245
======== ======= === ===== ==== ======== ========
</TABLE>
See notes to combined financial statements.
F-58
<PAGE> 175
DREVER PARTNERS, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,664 $ (1,179) $ (1,521)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 23,776 22,180 17,844
(Gain)/loss on disposition of real property............. -- 90 (156)
Extraordinary (gain) loss on debt extinguishments....... (348) 455 735
Deferred income tax..................................... 94 756 (423)
Net effect of changes in operating accounts:
Restricted cash....................................... 2,147 1,366 (654)
Other assets.......................................... 2,469 (6,723) 702
Receivables........................................... (153) 118 632
Receivables from related parties...................... (1,257) 1,445 214
Accrued real estate taxes............................. 334 1,620 3,372
Accounts payable...................................... 448 (58) 340
Payables to related parties........................... (237) (1,038) 4
Other liabilities..................................... 233 (226) 1,204
-------- -------- ---------
Net cash provided by operating activities........... 29,170 18,806 22,293
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate assets............................ -- (20,257) (113,056)
Real estate asset additions............................... (11,580) (21,851) (19,494)
Proceeds from disposition of real property................ -- 110 1,485
-------- -------- ---------
Net cash used in investing activities................... (11,580) (41,998) (131,065)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions received.................................... 195 12,304 80,323
Distributions paid to partners............................ (15,228) (14,504) (14,646)
Common stock issued....................................... -- 42 --
Proceeds from mortgage notes payable...................... 39,080 17,389 163,127
Payment of mortgage notes payable......................... (36,978) -- (98,181)
Principal reductions of debt.............................. (4,380) (4,000) (2,713)
Payment of financing costs................................ (434) (1,266) (3,179)
Payment of investor notes................................. (97) (120) (737)
Payment of other long-term debt........................... (710) (948) (160)
-------- -------- ---------
Net cash (used in) provided by financing activities..... (18,552) 8,897 123,834
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (962) (14,295) 15,062
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 11,828 26,123 11,061
-------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 10,866 $ 11,828 $ 26,123
======== ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 22,318 $ 22,861 $ 18,021
======== ======== =========
Income taxes paid......................................... $ 391 $ 655 $ 165
======== ======== =========
SUPPLEMENTAL NON CASH FINANCING ACTIVITIES:
Obligation incurred for treasury stock.................... $ -- $ -- $ 330
======== ======== =========
</TABLE>
See notes to combined financial statements.
F-59
<PAGE> 176
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
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 80 multifamily
apartment properties (the "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 resulted in the combination of
Walden, DPI and the Partnerships (See Note 14). Pursuant to the agreement,
Walden acquired 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.
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
F-60
<PAGE> 177
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
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.
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 non-combined
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 $2,568,000 and $2,107,000 as of 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.
F-61
<PAGE> 178
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
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 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.
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-62
<PAGE> 179
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 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
============
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
============
</TABLE>
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Included in accrued expenses and other liabilities at December 31, 1996 and
1995, are the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Security deposits...................................... $3,782,000 $3,649,000
Accrued interest....................................... 1,685,000 1,915,000
Other accrued liabilities.............................. 1,657,000 1,526,000
Self-insurance reserve................................. 468,000 336,000
Federal income taxes payable........................... 464,000 397,000
---------- ----------
$8,056,000 $7,823,000
========== ==========
</TABLE>
F-63
<PAGE> 180
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
Other accrued liabilities include construction advances, net over billings 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 ---------------------------
INTEREST RATE TO MATURITY 1996 1995
------------- ------------- ------------ ------------
<S> <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
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
----- --------- ------------ ------------
Total/weighted average... 7.55% 4.3 years $290,854,000 $293,702,000
===== ========= ============ ============
</TABLE>
At 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.
F-64
<PAGE> 181
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
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
December 31, 1996 and 1995, the outstanding amount due under the note was
$162,000 and $599,000, respectively. The balance of the note is due December
1997.
At 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 December 31,
1996 and 1995, were $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 December 31, 1996 and 1995, was
$295,000.
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
December 31, 1996 and 1995, was $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>
DECEMBER 31, 1996
---------------------------
MORTGAGE OTHER LONG-
NOTES PAYABLE TERM DEBT
------------- -----------
<S> <C> <C>
1997................................................. $ 8,516,000 $306,000
1998................................................. 24,500,000 45,000
1999................................................. 12,801,000 5,000
2000................................................. 76,428,000 6,000
2001................................................. 145,762,000 7,000
Thereafter........................................... 290,854,000 390,000
------------ --------
Total...................................... $558,861,000 $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
F-65
<PAGE> 182
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
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 December 31, 1996 and 1995, was
$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 December 31, 1996 and 1995, was
$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 limited partners were
$15,168,000, $14,504,000 and $14,646,000, respectively. Distributions to the
general partner were $60,000 for the year ended December 31, 1996. No
distributions were made to the general partner with respect to its carried
interest during the years ended December 31, 1995 and 1994. Contributions to the
partnerships for the years ended December 31, 1996, 1995 and 1994, were
$195,000, $12,304,000 and $80,323,000, respectively.
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 December 31, 1996
and 1995. CMC, DCC and CRFC each have 1,000 shares of $1 par value stock
authorized, issued and outstanding at 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 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 three-year period ended
December 31, 1996, no dividends were declared or paid by Drever Partners, Inc.,
DCC, CMC or CRFC.
F-66
<PAGE> 183
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
AOF, Inc. and AOFII, Inc. each have 10,000 shares of $1 par value stock
authorized, issued and outstanding at December 31, 1996 and 1995. During the
three-year period ended December 31, 1996, 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.
10. PROVISION FOR INCOME TAXES
The provision for income taxes for DPI consists of the following for the years
ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Current.................................... $553,000 $(269,000) $796,000
Deferred................................... 94,000 756,000 (423,000)
-------- --------- --------
$647,000 $ 487,000 $373,000
======== ========= ========
</TABLE>
DPI's effective tax rate differs from the federal statutory rate of 34% in 1996,
1995 and 1994 primarily due to nondeductible meals and entertainment, penalties
and state income taxes.
F-67
<PAGE> 184
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
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,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Fixed asset depreciable basis adjustment............. $ 172,000 $ 156,000
Accruals not deductible until paid................... 178,000 308,000
Bad debt allowance................................... 180,000 180,000
Other................................................ 79,000 59,000
--------- ---------
609,000 703,000
Deferred tax liability -- Partnership tax basis
adjustment........................................... (435,000) (435,000)
--------- ---------
Net deferred tax asset................................. $ 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.
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>
Rent expense for the years ended December 31, 1996, 1995 and 1994, was $954,000,
$1,091,000, and $1,089,000, 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
F-68
<PAGE> 185
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
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
PAYABLES TO RELATED PARTIES -- Payable to related parties represents amounts
held in trust at December 31, 1996 ($325,000), for non-combined 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 non-combined affiliated entities.
RECEIVABLES FROM RELATED PARTIES -- Drever Partners, Inc. has notes receivable
from Tassajara Shopping Center Associates, a non-combined 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 December 31, 1996 and 1995, was $795,000 and $263,000,
respectively. Included in receivables from related parties is accrued interest
on the notes of $21,000 and $8,000 at 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
December 31, 1996 and 1995, were $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
non-combined affiliate, and mature upon the sale of the assets of Las Positas
Land Partners, LP. The balance of the individual investor notes at December 31,
1996 and 1995, was $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
non-combined 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
F-69
<PAGE> 186
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
service and the attainment of 18 years of age. Each 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.
14. SUBSEQUENT EVENTS
On October 1, 1997, the assets and business of Drever Partners, Inc. and
Affiliates ("DPI"), were acquired by Walden through an acquisition pursuant to
an Exchange Agreement and a Contribution agreement each dated as of May 21, 1997
by and between Walden and DPI as described in Note 1. Certain aspects of the
Acquisition were approved by the stockholders of Walden at a special meeting
held September 29, 1997 and the limited partners of each of the 18 limited
partnerships of DPI and DPI's shareholders agreed to the exchange of their
partnership interests and shares for Units (as defined below) and cash.
The transaction value was $685 million, consisting of $304 million in operating
partnership units ("Units") issued by Walden/Drever Operating Partnership
("WDOP") which are convertible, on or after the first anniversary of issuance,
into $246 million of Walden Common Stock (10,343,018 shares) and $58 million of
preferred stock (1,999,909 shares of 9% Redeemable Preferred Stock) with
detachable warrants (6,666,363 Series B Warrants, each of which is exercisable
for one-third of one share of Common Stock at $26.875 per share) and $95 million
in cash. The balance of the consideration consisted of the assumption of $286
million of mortgage debt. The Redeemable Preferred Stock and the Preferred OP
Units are redeemable at Walden's option in ten years at a redemption price of
$25 per share or unit.
F-70
<PAGE> 187
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of Walden Residential Properties, Inc.
We have audited the accompanying combined statement of revenues and certain
expenses (defined as being operating revenues less direct operating expenses) of
Arbor Park, Arbors of Bedford, Arbors of Carrollton, Arbors of Euless, Arbors of
Forest Lane and Arbors of Austin ("Arbors Apartments") for the year ended
December 31, 1996. This financial statement is the responsibility of the
management of Walden Residential Properties, Inc. Our responsibility is to
express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined statement of revenues and certain expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis
for our opinion
The accompanying combined statement of revenues and certain expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the Form 8-K of Walden
Residential Properties, Inc. Material amounts, described in Note 1 to the
combined statement of revenues and certain expenses, that would not be
comparable to those resulting from the proposed future operations of the Arbors
Apartments are excluded and the statement is not intended to be a complete
presentation of the revenues and expenses of these apartments.
In our opinion, such combined statement of revenues and certain expenses
presents fairly, in all material respects, the revenues and certain expenses, as
defined above, of the Arbors Apartments for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Dallas, Texas
April 18, 1997
F-71
<PAGE> 188
ARBORS APARTMENTS
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
Revenues
Rental income......................... $1,856 $7,317
Other property income, net............ 58 227
------ ------
Total revenues................ 1,914 7,544
------ ------
Certain Expenses
Property operating and maintenance.... 552 2,394
Real estate taxes..................... 223 895
Management fees....................... 77 298
------ ------
Total expenses................ 852 3,587
------ ------
Revenues in excess of certain
expenses........................... $1,062 $3,957
====== ======
</TABLE>
See Notes to Combined Statements of Revenues and Certain Expenses.
F-72
<PAGE> 189
ARBORS APARTMENTS
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
NOTE 1 -- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Arbors Apartments were purchased by Walden Residential Properties, Inc. on
April 21, 1997.
BASIS OF PRESENTATION. The combined operating revenues and direct operating
expenses of Arbor Park, Arbors of Bedford, Arbors of Carrollton, Arbors of
Euless, Arbors of Forest Lane and Arbors of Austin ("Arbors Apartments")
described in Note 2 are presented on the accrual basis of accounting. The
accompanying financial statements are not representative of the actual
operations for the periods presented as certain expenses, which may not be
comparable to the expenses expected to be incurred by Walden Residential
Properties, Inc., in the proposed future operations of the Arbors Apartments,
have been excluded. In accordance with the Securities and Exchange Commission
Regulation S-X Rule 3-14, expenses excluded consist of interest, depreciation
and amortization, professional fees, and other costs not directly related to the
future operations of the Arbors Apartments. Costs incurred for carpet are
capitalized which is consistent with the Company's current capitalization
policy.
INCOME RECOGNITION. Rental income is recorded when it is earned and due from
tenants. Apartment units are rented under lease agreements with terms of one
year or less.
MANAGEMENT FEES. The Arbors Apartments have management agreements with
affiliated management companies to maintain and manage the operations of the
apartment complexes. Management fees are based on 4% of total revenue collected.
Upon acquisition of the Arbors Apartments by the Company, such management
contract was canceled, at which time the Company began to manage the Arbors
Apartments.
INTERIM FINANCIAL DATA. In the opinion of management, all adjustments and
eliminations, consisting only of normal recurring adjustments, necessary to
present fairly the combined statement of revenues and certain expenses of Arbors
Apartments for the three months ended March 31, 1997 have been included. The
combined results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results for the full year.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of certain revenues and expenses as
of and for the reporting periods. Actual results may differ from such estimates.
F-73
<PAGE> 190
NOTE 2 -- DESCRIPTION OF THE AUDITED ACQUISITION PROPERTIES
<TABLE>
<CAPTION>
NUMBER
PROPERTY LOCATION OF UNITS
- -------- ----------------- --------
<S> <C> <C>
Arbor Park Dallas, Texas 276
Arbors of Bedford Bedford, Texas 204
Arbors of Carrollton Carrollton, Texas 131
Arbors of Euless Euless, Texas 272
Arbors of Forest Lane Dallas, Texas 154
Arbors of Austin Austin, Texas 226
-----
1,263
=====
</TABLE>
F-74
<PAGE> 191
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of Walden Residential Properties, Inc.
We have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of Windsor
Park Apartments for the year ended December 31, 1996. This financial statement
is the responsibility of the management of Walden Residential Properties, Inc.
Our responsibility is to express an opinion on this statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our
opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Form 8-K of Walden Residential
Properties, Inc. Material amounts, described in Note 1 to the statement of
revenues and certain expenses, that would not be comparable to those resulting
from the proposed future operations of the Windsor Park Apartments are excluded
and the statement is not intended to be a complete presentation of the revenues
and expenses of these apartments.
In our opinion, such statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Windsor Park Apartments for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Dallas, Texas
July 31, 1997
F-75
<PAGE> 192
WINDSOR PARK APARTMENTS
STATEMENT OF REVENUES AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
Revenues
Rental income............................ $1,015 $1,329
Other property income, net............... 74 105
------ ------
Total revenues................... 1,089 1,434
------ ------
Certain Expenses
Property operating and maintenance....... 355 487
Real estate taxes........................ 67 80
Management fees.......................... 43 43
------ ------
Total expenses................... 465 610
------ ------
Revenues in excess of certain expenses..... $ 624 $ 824
====== ======
</TABLE>
See Notes to Statement of Revenues and Certain Expenses
F-76
<PAGE> 193
WINDSOR PARK APARTMENTS
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
NOTE 1 -- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Windsor Park Apartments were purchased by Walden Residential Properties,
Inc. on July 31, 1997.
BASIS OF PRESENTATION. The operating revenues and direct operating expenses of
the Windsor Park Apartments described in Note 2 is presented on the accrual
basis of accounting. The accompanying financial statements are not
representative of the actual operations for the periods presented as certain
expenses, which may not be comparable to the expenses expected to be incurred by
Walden Residential Properties, Inc. (the "Company"), in the proposed future
operations of the Windsor Park Apartments, have been excluded. In accordance
with the Securities and Exchange Commission Regulation S-X Rule 3-14, expenses
excluded consist of interest, depreciation and amortization, professional fees,
and other costs not directly related to the future operations of the Windsor
Park Apartments. Costs incurred for carpet are capitalized which is consistent
with the Company's current capitalization policy.
INCOME RECOGNITION. Rental income is recorded when it is earned and due from
tenants. Apartment units are rented under lease agreements with terms of one
year or less.
INTERIM FINANCIAL DATA. In the opinion of management, all adjustments and
eliminations, consisting only of normal recurring adjustments, necessary to
present fairly the statement of revenues and certain expenses of the Windsor
Park Apartments for the nine months ended September 30, 1997 have been included.
The results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of the results for the full year.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of certain revenues and expenses as
of and for the reporting periods. Actual results may differ from such estimates.
MANAGEMENT FEES. The Windsor Park Apartments had a management agreement with an
affiliated management company to maintain and manage the operations of the
apartment complex. Management fees are based on 3% of total revenue collected.
Upon acquisition of the Windsor Park Apartments by the Company, such management
contract was canceled, at which time the Company began to manage the Windsor
Park Apartments.
NOTE 2 -- DESCRIPTION OF THE AUDITED ACQUISITION PROPERTIES
The following property is included in the statement of revenues and certain
expenses:
<TABLE>
<CAPTION>
PROPERTY LOCATION NUMBER OF UNITS
- -------- -------- ---------------
<S> <C> <C>
Windsor Park Hendersonville, Tennessee 232
===
</TABLE>
F-77
<PAGE> 194
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of Walden Residential Properties, Inc.
We have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of Oak
Ramble Apartments for the year ended December 31, 1996. This financial statement
is the responsibility of the management of Walden Residential Properties, Inc.
Our responsibility is to express an opinion on this statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our
opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Form 8-K of Walden Residential
Properties, Inc. Material amounts, described in Note 1 to the statement of
revenues and certain expenses, that would not be comparable to those resulting
from the proposed future operations of the Oak Ramble Apartments are excluded
and the statement is not intended to be a complete presentation of the revenues
and expenses of these apartments.
In our opinion, such statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Oak Ramble Apartments for the year ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Dallas, Texas
October 29, 1997
F-78
<PAGE> 195
OAK RAMBLE APARTMENTS
STATEMENT OF REVENUES AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
Revenues
Rental income............................. $1,308 $1,624
Other property income, net................ 62 76
------ ------
Total revenues.................... 1,370 1,700
------ ------
Certain Expenses
Property operating and maintenance........ 533 670
Real estate taxes......................... 122 167
Management fees........................... 55 67
------ ------
Total expenses.................... 710 904
------ ------
Revenues in excess of certain expenses...... $ 660 $ 796
====== ======
</TABLE>
See Notes to Statement of Revenues and Certain Expenses
F-79
<PAGE> 196
OAK RAMBLE APARTMENTS
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
NOTE 1 -- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Oak Ramble Apartments were purchased by Walden Residential Properties, Inc.
on November 3, 1997.
BASIS OF PRESENTATION. The operating revenues and direct operating expenses of
the Oak Ramble Apartments described in Note 2 is presented on the accrual basis
of accounting. The accompanying financial statements are not representative of
the actual operations for the periods presented as certain expenses, which may
not be comparable to the expenses expected to be incurred by Walden Residential
Properties, Inc. (the "Company"), in the proposed future operations of the Oak
Ramble Apartments, have been excluded. In accordance with the Securities and
Exchange Commission Regulation S-X Rule 3-14, expenses excluded consist of
interest, depreciation and amortization, professional fees, and other costs not
directly related to the future operations of the Oak Ramble Apartments. Costs
incurred for carpet are capitalized which is consistent with the Company's
current capitalization policy.
INCOME RECOGNITION. Rental income is recorded when it is earned and due from
tenants. Apartment units are rented under lease agreements with terms of one
year or less.
INTERIM FINANCIAL DATA. In the opinion of management, all adjustments and
eliminations, consisting only of normal recurring adjustments, necessary to
present fairly the statement of revenues and certain expenses of the Oak Ramble
Apartments for the nine months ended September 30, 1997 have been included. The
results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of the results for the full year.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of certain revenues and expenses as
of and for the reporting periods. Actual results may differ from such estimates.
MANAGEMENT FEES. The Oak Ramble Apartments had a management agreement with an
affiliated management company to maintain and manage the operations of the
apartment complex. Management fees are based on 4% of total revenue collected.
Upon acquisition of the Oak Ramble Apartments by the Company, such management
contract was canceled, at which time the Company began to manage the Oak Ramble
Apartments.
NOTE 2 -- DESCRIPTION OF THE AUDITED ACQUISITION PROPERTIES
The following property is included in the statement of revenues and certain
expenses:
<TABLE>
<CAPTION>
PROPERTY LOCATION NUMBER OF UNITS
- -------- -------- ---------------
<S> <C> <C>
Oak Ramble Tampa, Florida 256
---
</TABLE>
F-80
<PAGE> 197
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of Walden Residential Properties, Inc.
We have audited the accompanying combined statement of revenues and certain
expenses (defined as being operating revenues less direct operating expenses) of
Parkway Station and Ashton Park Apartments for the year ended December 31, 1996.
This financial statement is the responsibility of the management of Walden
Residential Properties, Inc. Our responsibility is to express an opinion on this
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined statement of revenues and certain expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis
for our opinion.
The accompanying combined statement of revenues and certain expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the Form 8-K of Walden
Residential Properties, Inc. Material amounts, described in Note 1 to the
combined statement of revenues and certain expenses, that would not be
comparable to those resulting from the proposed future operations of the Parkway
Station and Ashton Park Apartments are excluded and the statement is not
intended to be a complete presentation of the revenues and expenses of these
apartments.
In our opinion, such combined statement of revenues and certain expenses
presents fairly, in all material respects, the revenues and certain expenses, as
defined above, of the Parkway Station and Ashton Park Apartments for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Dallas, Texas
December 11, 1997
F-81
<PAGE> 198
PARKWAY STATION AND ASHTON PARK APARTMENTS
COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
Revenues
Rental income............................. $2,831 $3,740
Other property income, net................ 158 172
------ ------
Total revenues.................... 2,989 3,912
------ ------
Certain Expenses
Property operating and maintenance........ 938 1,371
Real estate taxes......................... 219 277
Management fees........................... 118 154
------ ------
Total expenses.................... 1,275 1,802
------ ------
Revenues in excess of certain expenses...... $1,714 $2,110
====== ======
</TABLE>
See Notes to Combined Statements of Revenues and Certain Expenses
F-82
<PAGE> 199
PARKWAY STATION AND ASHTON PARK APARTMENTS
NOTES TO COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
NOTE 1 -- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Parkway Station and Ashton Park Apartments were purchased by Walden
Residential Properties, Inc. on December 16, 1997 and December 19, 1997,
respectively.
BASIS OF PRESENTATION. The combined operating revenues and direct operating
expenses of the Parkway Station and Ashton Park Apartments described in Note 2
is presented on the accrual basis of accounting. The accompanying financial
statements are not representative of the actual operations for the periods
presented as certain expenses, which may not be comparable to the expenses
expected to be incurred by Walden Residential Properties, Inc. (the "Company"),
in the proposed future operations of the Parkway Station and Ashton Park
Apartments, have been excluded. In accordance with the Securities and Exchange
Commission Regulation S-X Rule 3-14, expenses excluded consist of interest,
depreciation and amortization, professional fees, and other costs not directly
related to the future operations of the Parkway Station and Ashton Park
Apartments. Costs incurred for carpet are capitalized which is consistent with
the Company's current capitalization policy.
INCOME RECOGNITION. Rental income is recorded when it is earned and due from
tenants. Apartment units are rented under lease agreements with terms of one
year or less.
INTERIM FINANCIAL DATA. In the opinion of management, all-adjustments and
eliminations, consisting only of normal recurring adjustments, necessary to
present fairly the statement of revenues and certain expenses of the Parkway
Station and Ashton Park Apartments for the nine months ended September 30, 1997
have been included. The combined results of operations for the nine months ended
September 30, 1997 are not necessarily indicative of the results for the full
year.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of certain revenues and expenses as
of and for the reporting periods. Actual results may differ from such estimates.
MANAGEMENT FEES. The Parkway Station and Ashton Park Apartments had a management
agreement with an affiliated management company to maintain and manage the
operations of the apartment complexes. Management fees are based on 4% of total
revenue collected. Upon acquisition of the Parkway Station and Ashton Park
Apartments by the Company, such management contract was canceled, at which time
the Company began to manage the Parkway Station and Ashton Park Apartments.
NOTE 2 -- DESCRIPTION OF THE AUDITED ACQUISITION PROPERTIES
The following properties are included in the combined statement of revenues and
certain expenses:
<TABLE>
<CAPTION>
NUMBER
PROPERTY LOCATION OF UNITS
- -------- ----------------- --------
<S> <C> <C>
Parkway Station Marietta, Georgia 344
Ashton Park Tampa, Florida 192
---
536
===
</TABLE>
F-83
<PAGE> 200
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of Walden Residential Properties, Inc.
We have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of Woods of
Bedford Apartments for the year ended December 31, 1996. This financial
statement is the responsibility of the management of Walden Residential
Properties, Inc. Our responsibility is to express an opinion on this statement
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our
opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Form 8-K of Walden Residential
Properties, Inc. Material amounts, described in Note 1 to the statement of
revenues and certain expenses, that would not be comparable to those resulting
from the proposed future operations of the Woods of Bedford Apartments are
excluded and the statement is not intended to be a complete presentation of the
revenues and expenses of these apartments.
In our opinion, such statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Woods of Bedford Apartments for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Dallas, Texas
December 12, 1997
F-84
<PAGE> 201
WOODS OF BEDFORD APARTMENTS
STATEMENT OF REVENUES AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
Revenues
Rental income............................. $1,278 $1,714
Other property income, net................ 97 70
------ ------
Total revenues.................... 1,375 1,784
------ ------
Certain Expenses
Property operating and maintenance........ 548 758
Real estate taxes......................... 152 204
Management fees........................... 55 71
------ ------
Total expenses.................... 755 1,033
------ ------
Revenues in excess of certain expenses...... $ 620 $ 751
====== ======
</TABLE>
See Notes to Statement of Revenues and Certain Expenses
F-85
<PAGE> 202
WOODS OF BEDFORD APARTMENTS
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
NOTE 1 -- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Woods of Bedford Apartments were purchased by Walden Residential Properties,
Inc. on December 22, 1997.
BASIS OF PRESENTATION. The operating revenues and direct operating expenses of
the Woods of Bedford Apartments described in Note 2 is presented on the accrual
basis of accounting. The accompanying financial statements are not
representative of the actual operations for the periods presented as certain
expenses, which may not be comparable to the expenses expected to be incurred by
Walden Residential Properties, Inc. (the "Company"), in the proposed future
operations of the Woods of Bedford Apartments, have been excluded. In accordance
with the Securities and Exchange Commission Regulation S-X Rule 3-14, expenses
excluded consist of interest, depreciation and amortization, professional fees,
and other costs not directly related to the future operations of the Woods of
Bedford Park Apartments. Costs incurred for carpet are capitalized which is
consistent with the Company's current capitalization policy.
INCOME RECOGNITION. Rental income is recorded when it is earned and due from
tenants. Apartment units are rented under lease agreements with terms of one
year or less.
INTERIM FINANCIAL DATA. In the opinion of management, all adjustments and
eliminations, consisting only of normal recurring adjustments, necessary to
present fairly the statement of revenues and certain expenses of the Woods of
Bedford Apartments for the nine months ended September 30, 1997 have been
included. The results of operations for the nine months ended September 30, 1997
are not necessarily indicative of the results for the full year.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of certain revenues and expenses as
of and for the reporting periods. Actual results may differ from such estimates.
MANAGEMENT FEES. The Woods of Bedford Apartments had a management agreement with
an affiliated management company to maintain and manage the operations of the
apartment complex. Management fees are based on 4% of total revenue collected.
Upon acquisition of the Woods of Bedford Apartments by the Company, such
management contract was canceled, at which time the Company began to manage the
Woods of Bedford Apartments.
NOTE 2 -- DESCRIPTION OF THE AUDITED ACQUISITION PROPERTIES
The following property is included in the statement of revenues and certain
expenses:
<TABLE>
<CAPTION>
PROPERTY LOCATION NUMBER OF UNITS
-------- -------- ---------------
<S> <C> <C>
Woods of Bedford Bedford, Texas 328
===
</TABLE>
F-86
<PAGE> 203
WALDEN RESIDENTIAL PROPERTIES, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COST CAPITALIZED
INITIAL COST TO SUBSEQUENT TO
COMPANY ACQUISITION
----------------------- -------------------
BUILDING & BUILDINGS &
PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
------------- -------- ------------ -------- ------------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
ORIGINAL PROPERTIES
Burning Tree Tulsa, OK $ 2,379 $ 635 $ 3,475 $-- $ 638
Casa Verde Phoenix, AZ 1,997 1,027 3,586 -- 379
Cinnamon Stick Tulsa, OK 3,177 962 5,565 -- 670
Club at Springlake Haltom City, TX -- 613 2,648 -- 334
Country View San Antonio, TX (A) 719 5,302 -- 689
Eagle Pointe Indianapolis, IN (A) 494 7,993 (4) 377
Fountaingate Wichita Falls, TX -- 751 6,498 -- 592
James Pointe Murray, UT 8,234 1,040 10,937 (28) 397
Lift, The Tulsa, OK 2,743 804 4,164 -- 525
Post Oak Place Euless, TX -- 1,570 6,582 -- 859
Preston Greens Dallas, TX -- 1,468 6,687 -- 573
Raintree Nashville, TN 5,245 715 6,457 -- 1,200
Settler's Cove Beaumont, TX 3,175 159 5,056 -- 591
Stillwater Murray, UT 11,994 2,019 16,839 3 647
Trestles of Austin Austin, TX (A) 1,100 9,977 -- 1,070
Woodridge Fort Worth, TX -- 340 2,586 -- 505
Woodstone Phoenix, AZ 12,636 4,325 14,210 -- 664
-------- -------- ---------- ---- -------
Subtotal 51,580 18,741 118,562 (29) 10,710
-------- -------- ---------- ---- -------
1994 ACQUISITIONS
Bel Shores Largo, FL 4,653 1,847 6,072 -- 812
Brookwood Club Jacksonville, FL 6,872 952 8,647 -- 1,104
Carlyle at Waters Tampa, FL (B) 1,678 11,154 -- 1,368
Cinnamon Park Arlington, TX (A) 855 7,723 (4) 499
Copper Cove Houston, TX -- 935 6,194 -- 639
Copperfield Oklahoma City, OK 4,150 357 6,473 -- 252
Fielder's Glen Arlington, TX (A) 556 5,031 -- 443
Foxboro Houston, TX (A) 800 3,882 -- 656
Gables, The McKinney, TX (A) 544 6,885 -- 553
Greens Crossing Dallas, TX (B) 1,368 6,795 -- 918
Harper's Creek Austin, TX (A) 868 8,871 -- 653
Hunter's Ridge Oklahoma City, OK 3,547 300 4,927 -- 246
<CAPTION>
GROSS AMOUNT
AT WHICH CARRIED
AT DECEMBER 31, 1997
------------------------------------
BUILDINGS & ACCUMULATED DATE DEPRECIABLE
PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE (YEARS)(D)
------------- -------- ------------ ---------- ------------ -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
ORIGINAL PROPERTIES
Burning Tree $ 635 $ 4,113 $ 4,748 $ (1,066) 02/94
Casa Verde 1,027 3,965 4,992 (812) 02/94
Cinnamon Stick 962 6,235 7,197 (1,695) 02/94
Club at Springlake 613 2,982 3,595 (557) 02/94
Country View 719 5,991 6,710 (1,284) 02/94
Eagle Pointe 490 8,370 8,860 (1,421) 02/94
Fountaingate 751 7,090 7,841 (1,429) 02/94
James Pointe 1,012 11,334 12,346 (2,060) 02/94
Lift, The 804 4,689 5,493 (1,083) 02/94
Post Oak Place 1,570 7,441 9,011 (1,449) 02/94
Preston Greens 1,468 7,260 8,728 (1,621) 02/94
Raintree 715 7,657 8,372 (1,420) 02/94
Settler's Cove 159 5,647 5,806 (1,193) 02/94
Stillwater 2,022 17,486 19,508 (3,132) 02/94
Trestles of Austin 1,100 11,047 12,147 (2,094) 02/94
Woodridge 340 3,091 3,431 (602) 02/94
Woodstone 4,325 14,874 19,199 (2,620) 02/94
-------- ---------- ---------- --------
Subtotal 18,712 129,272 147,984 (25,538)
-------- ---------- ---------- --------
1994 ACQUISITIONS
Bel Shores 1,847 6,884 8,731 (986) 03/94
Brookwood Club 952 9,751 10,703 (1,204) 11/94
Carlyle at Waters 1,678 12,522 14,200 (1,349) 12/94
Cinnamon Park 851 8,222 9,073 (940) 09/94
Copper Cove 935 6,833 7,768 (859) 06/94
Copperfield 357 6,725 7,082 (850) 06/94
Fielder's Glen 556 5,474 6,030 (726) 05/94
Foxboro 800 4,538 5,338 (619) 06/94
Gables, The 544 7,438 7,982 (965) 05/94
Greens Crossing 1,368 7,713 9,081 (836) 12/94
Harper's Creek 868 9,525 10,393 (1,138) 06/94
Hunter's Ridge 300 5,173 5,473 (669) 06/94
</TABLE>
S-1
<PAGE> 204
<TABLE>
<CAPTION>
COST CAPITALIZED
INITIAL COST TO SUBSEQUENT TO
COMPANY ACQUISITION
----------------------- -------------------
BUILDING & BUILDINGS &
PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
------------- -------- ------------ -------- ------------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Newport Irving, TX $ 7,097 $ 1,200 $ 8,878 $-- $ 338
Rivercrest Arlington, TX 5,390 1,650 7,877 -- 866
Silverado Albuquerque, NM (B) 1,194 8,082 -- 245
Springfield Mesquite, TX (A) 1,042 6,507 -- 494
Summerfield Place Oklahoma City, OK (A) 619 5,586 -- 392
Woodscape Oklahoma City, OK (A) 1,077 13,280 -- 486
-------- -------- ---------- ---- -------
Subtotal 31,709 17,842 132,864 (4) 10,964
-------- -------- ---------- ---- -------
1995 ACQUISITIONS
Braden's Walk (E) Bedford, TX -- 1,839 18,495 -- 1,136
North Richland
Hilltop Hills, TX -- 801 5,314 -- 464
Laurel Creek Houston, TX (A) 2,067 12,011 -- 1,023
Pinnacle Lewisville, TX -- 672 4,190 -- 353
Pinto Creek Austin, TX (A) 487 8,403 -- 762
Reflections of Highpoint Dallas, TX 12,490 1,984 12,358 -- 677
Ponte Vedra Beach,
Remington at Ponte Vedra FL 12,000 1,425 13,468 -- 853
Remington Hill Fort Worth, TX 13,880 1,846 11,847 -- 418
Sandpiper Jacksonville, FL (B) 1,102 10,377 -- 934
North Richland
Shadow Creek Hills, TX -- 666 5,899 -- 563
Summer Meadows Plano, TX 12,296 2,393 14,908 -- 462
Summer Villas Dallas, TX -- 2,270 14,140 -- 1,059
Summers Crossing Plano, TX 9,176 1,730 10,774 -- 771
Summers Landing Fort Worth, TX -- 819 5,259 -- 571
Three Palms Tampa, FL (C) 1,735 14,017 -- 925
Winridge Aurora, CO 12,715 790 15,939 -- 523
-------- -------- ---------- ---- -------
Subtotal 72,557 22,626 177,399 -- 11,494
-------- -------- ---------- ---- -------
1996 ACQUISITIONS
Ashbury Parke Austin, TX -- 2,007 11,591 -- 928
Bentley Green Jacksonville, FL -- 1,430 14,095 -- 1,344
Brandywine Nashville, TN -- 646 8,479 -- 1,052
<CAPTION>
GROSS AMOUNT
AT WHICH CARRIED
AT DECEMBER 31, 1997
------------------------------------
BUILDINGS & ACCUMULATED DATE DEPRECIABLE
PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE (YEARS)(D)
------------- -------- ------------ ---------- ------------ -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Newport $ 1,200 $ 9,215 $ 10,415 $ (1,134) 06/94
Rivercrest 1,650 8,743 10,393 (1,221) 04/94
Silverado 1,194 8,327 9,521 (898) 12/94
Springfield 1,042 7,001 8,043 (851) 06/94
Summerfield Place 619 5,978 6,597 (657) 11/94
Woodscape 1,077 13,766 14,843 (1,717) 06/94
-------- ---------- ---------- --------
Subtotal 17,838 143,828 161,666 (17,619)
-------- ---------- ---------- --------
1995 ACQUISITIONS
12/95,
010/96 &
Braden's Walk (E) 1,839 1,963 121,470 (708) 2/97
Hilltop 801 5,778 6,579 (427) 12/95
Laurel Creek 2,067 1,303 415,101 (1,282) 04/95
Pinnacle 672 4,543 5,215 (400) 06/95
Pinto Creek 487 9,165 9,652 (949) 01/95
Reflections of Highpoint 1,984 13,035 15,019 (1,122) 06/95
Remington at Ponte Vedra 1,425 14,321 15,746 (1,263) 06/95
Remington Hill 1,846 12,265 14,111 (1,094) 06/95
Sandpiper 1,102 11,311 12,413 (943) 10/95
Shadow Creek 666 6,462 7,128 (476) 12/95
Summer Meadows 2,393 15,370 17,763 (1,367) 06/95
Summer Villas 2,270 15,199 17,469 (1,291) 06/95
Summers Crossing 1,730 11,545 13,275 (1,010) 06/95
Summers Landing 819 5,830 6,649 (538) 06/95
Three Palms 1,735 14,942 16,677 (1,325) 06/95
Winridge 790 16,462 17,252 (1,453) 06/95
-------- ---------- ---------- --------
Subtotal 22,626 188,893 211,519 (15,648)
-------- ---------- ---------- --------
1996 ACQUISITIONS
Ashbury Parke 2,007 12,519 14,526 (658) 06/96
08/96 &
Bentley Green 1,430 15,439 16,869 (767) 09/96
Brandywine 646 9,531 10,177 (499) 08/96
</TABLE>
S-2
<PAGE> 205
<TABLE>
<CAPTION>
COST CAPITALIZED
INITIAL COST TO SUBSEQUENT TO
COMPANY ACQUISITION
----------------------- -------------------
BUILDING & BUILDINGS &
PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
------------- -------- ------------ -------- ------------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Costa del Sol San Antonio, TX $ -- $ 871 $ 6,432 $-- $ 557
Huntington at Hidden Hills Jacksonville, FL -- 722 6,165 -- 1,393
Meadow Glen Mesa, AZ 7,049 1,802 10,754 -- 353
Nashboro Village Nashville, TN -- 6,186 42,869 -- 2,451
Parks at Treepoint (F) Arlington, TX -- 1,966 15,036 -- 1,634
Remington San Antonio, TX -- 427 4,411 -- 485
Saratoga Melbourne, FL -- 676 5,788 -- 589
Summer Oaks San Antonio, TX -- 826 5,624 -- 598
Terra Vida Mesa, AZ 7,383 1,929 13,383 -- 909
Villas of St. Moritz San Antonio, TX -- 653 5,544 -- 613
Waterford Plano, TX -- 2,156 11,423 -- 965
-------- -------- ---------- ---- -------
Subtotal 14,432 22,297 161,594 -- 13,871
-------- -------- ---------- ---- -------
1997 ACQUISITIONS
Arbor Park Dallas, TX -- 916 12,104 -- 399
Arbors of Austin Austin, TX -- 670 7,306 -- 395
Arbors of Bedford Bedford, TX -- 531 5,623 -- 385
Arbors of Carrollton Carrollton, TX -- 684 4,019 -- 257
Arbors of Euless Euless, TX -- 1,206 6,733 -- 830
Ashton Park Tampa, FL 3,946 935 6,094 -- --
Clover Hill Arlington, TX -- 725 5,944 -- 101
Hillcrest Grand Prairie, TX -- 1,040 6,823 -- 133
Oak Ramble Tampa, FL -- 1,247 8,797 -- 87
Parkway Station Atlanta, GA -- 666 17,761 -- 2
Windsor Park Hendersonville, TN 6,870 500 9,012 -- 181
-------- -------- ---------- ---- -------
Subtotal 10,816 9,120 90,216 -- 2,770
-------- -------- ---------- ---- -------
DREVER TRANSACTION
Arbor Creek Dallas, TX -- 2,284 9,841 -- 22
Arbor Point Houston, TX 1,457 313 2,568 -- 8
Arbors of Wells Branch Austin, TX -- 912 7,522 -- 20
Ashton Woods Houston, TX -- 251 4,423 -- 19
Aston Brook Houston, TX 1,653 194 3,676 -- 15
Audubon Square Austin, TX -- 529 6,284 -- 26
Bar Harbor Houston, TX 5,202 1,149 9,326 -- 42
Bayou Oaks Houston, TX 2,777 222 6,120 -- 16
Bent Creek Dallas, TX 4,174 1,802 8,155 -- 19
<CAPTION>
GROSS AMOUNT
AT WHICH CARRIED
AT DECEMBER 31, 1997
------------------------------------
BUILDINGS & ACCUMULATED DATE DEPRECIABLE
PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE (YEARS)(D)
------------- -------- ------------ ---------- ------------ -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Costa del Sol $ 871 $ 6,989 $ 7,860 $ (377) 06/96
Huntington at Hidden Hills 722 7,558 8,280 (409) 08/96
Meadow Glen 1,802 11,107 12,909 (426) 11/96
Nashboro Village 6,186 45,320 51,506 (1,595) 12/96
09/96 &
Parks at Treepoint (F) 1,966 16,670 18,636 (728) 01/97
Remington 427 4,896 5,323 (263) 06/96
Saratoga 676 6,377 7,053 (303) 09/96
Summer Oaks 826 6,222 7,048 (335) 06/96
Terra Vida 1,929 14,292 16,221 (802) 06/96
Villas of St. Moritz 653 6,157 6,810 (347) 06/96
Waterford 2,156 12,388 14,544 (574) 09/96
-------- ---------- ---------- --------
Subtotal 22,297 175,465 197,762 (8,083)
-------- ---------- ---------- --------
1997 ACQUISITIONS
Arbor Park 916 12,503 13,419 (302) 04/97
Arbors of Austin 670 7,701 8,371 (180) 04/97
Arbors of Bedford 531 6,008 6,539 (152) 04/97
Arbors of Carrollton 684 4,276 4,960 (105) 04/97
Arbors of Euless 1,206 7,563 8,769 (184) 04/97
Ashton Park 935 6,094 7,029 (35) 12/97
Clover Hill 725 6,045 6,770 (35) 10/97
Hillcrest 1,040 6,956 7,996 (125) 06/97
Oak Ramble 1,247 8,884 10,131 (51) 11/97
Parkway Station 666 17,763 18,429 (100) 12/97
Windsor Park 500 9,193 9,693 (132) 07/97
-------- ---------- ---------- --------
Subtotal 9,120 92,986 102,106 (1,401)
-------- ---------- ---------- --------
DREVER TRANSACTION
Arbor Creek 2,284 9,863 12,147 (103) 10/97
Arbor Point 313 2,576 2,889 (27) 10/97
Arbors of Wells Branch 912 7,542 8,454 (79) 10/97
Ashton Woods 251 4,442 4,693 (47) 10/97
Aston Brook 194 3,691 3,885 (39) 10/97
Audubon Square 529 6,310 6,839 (66) 10/97
Bar Harbor 1,149 9,368 10,517 (99) 10/97
Bayou Oaks 222 6,136 6,358 (65) 10/97
Bent Creek 1,802 8,174 9,976 (86) 10/97
</TABLE>
S-3
<PAGE> 206
<TABLE>
<CAPTION>
COST CAPITALIZED
INITIAL COST TO SUBSEQUENT TO
COMPANY ACQUISITION
----------------------- -------------------
BUILDING & BUILDINGS &
PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
------------- -------- ------------ -------- ------------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Brandon Oaks Houston, TX $ 2,612 $ 293 $ 6,454 $-- $ 19
Briarcrest Houston, TX 4,057 714 11,199 -- 40
Brittany Park Dallas, TX -- 1,620 7,892 -- 28
Brookfield Houston, TX -- 400 8,422 -- 23
Canyon Ridge Dallas, TX 2,394 1,127 5,620 -- 28
Carriage Hill Houston, TX 4,273 410 8,474 -- 21
Casa Valley Dallas, TX -- 1,020 6,010 -- 19
Central Park Condos Houston, TX 2,076 370 3,945 -- 9
Central Park Regency Houston, TX 5,943 490 12,636 -- 31
Charleston, The Houston, TX 4,356 810 8,469 -- 20
Cimarron Park Houston, TX 2,250 334 4,888 -- 15
Cimarron Parkway Houston, TX -- 1,319 9,527 -- 18
Colony Oaks Houston, TX 2,519 540 6,044 -- 29
Colorado Club Houston, TX 7,200 883 9,780 -- 27
Creekwood Village Dallas, TX 5,098 1,433 11,173 -- 36
Crestwood Phoenix, AZ -- 932 9,151 -- 21
Enclave at Cypress Park Houston, TX -- 1,595 12,455 -- 62
Fairways, The Phoenix, AZ -- 766 5,747 -- 19
Felicita Creek San Diego, CA 3,112 1,594 5,550 -- 15
Garden Place Phoenix, AZ -- 1,596 12,480 -- 22
Georgetown Houston, TX -- 1,565 7,826 -- 16
Harbor Pointe Houston, TX -- 413 7,506 -- 23
Harpers Mill Houston, TX 2,071 967 3,657 -- 13
Hidden Lake Houston, TX -- 2,843 19,840 -- 40
Holiday on Hayes Houston, TX 4,787 1,491 10,600 -- 15
Hunt Club, The Houston, TX 2,820 1,175 5,184 -- 14
Huntley, The Houston, TX 5,285 640 8,974 -- 21
La Prada Club Dallas, TX -- 1,493 9,485 -- 26
Lakes of Renaissance Austin, TX -- 945 10,463 -- 26
Live Oak Houston, TX -- 782 4,475 -- 29
Meadows on Memorial Houston, TX -- 609 2,348 -- 20
Mill Creek Houston, TX 1,633 205 4,595 -- 18
Montfort Oaks Dallas, TX 5,170 2,256 11,177 -- 26
Monticello on Cranbrook Houston, TX 3,434 410 7,522 -- 22
Northwoods Houston, TX 2,853 638 8,176 -- 24
Oak Ridge Austin, TX -- 834 10,389 -- 28
One Camden Court Houston, TX -- 164 2,479 -- 15
One Cypress Landing Houston, TX -- 559 11,830 -- 33
<CAPTION>
GROSS AMOUNT
AT WHICH CARRIED
AT DECEMBER 31, 1997
------------------------------------
BUILDINGS & ACCUMULATED DATE DEPRECIABLE
PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE (YEARS)(D)
------------- -------- ------------ ---------- ------------ -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Brandon Oaks $ 293 $ 6,473 $ 6,766 $ (68) 10/97
Briarcrest 714 11,239 11,953 (118) 10/97
Brittany Park 1,620 7,920 9,540 (83) 10/97
Brookfield 400 8,445 8,845 (88) 10/97
Canyon Ridge 1,127 5,648 6,775 (59) 10/97
Carriage Hill 410 8,495 8,905 (89) 10/97
Casa Valley 1,020 6,029 7,049 (63) 10/97
Central Park Condos 370 3,954 4,324 (41) 10/97
Central Park Regency 490 12,667 13,157 (133) 10/97
Charleston, The 810 8,489 9,299 (89) 10/97
Cimarron Park 334 4,903 5,237 (52) 10/97
Cimarron Parkway 1,319 9,545 10,864 (100) 10/97
Colony Oaks 540 6,073 6,613 (64) 10/97
Colorado Club 883 9,807 10,690 (103) 10/97
Creekwood Village 1,433 11,209 12,642 (118) 10/97
Crestwood 932 9,172 10,104 (96) 10/97
Enclave at Cypress Park 1,595 12,517 14,112 (132) 10/97
Fairways, The 766 5,766 6,532 (60) 10/97
Felicita Creek 1,594 5,565 7,159 (59) 10/97
Garden Place 1,596 12,502 14,098 (131) 10/97
Georgetown 1,565 7,842 9,407 (51) 10/97
Harbor Pointe 413 7,529 7,942 (79) 10/97
Harpers Mill 967 3,670 4,637 (39) 10/97
Hidden Lake 2,843 19,880 22,723 (208) 10/97
Holiday on Hayes 1,491 10,615 12,106 (111) 10/97
Hunt Club, The 1,175 5,198 6,373 (55) 10/97
Huntley, The 640 8,995 9,635 (94) 10/97
La Prada Club 1,493 9,511 11,004 (100) 10/97
Lakes of Renaissance 945 10,489 11,434 (110) 10/97
Live Oak 782 4,504 5,286 (47) 10/97
Meadows on Memorial 609 2,368 2,977 (26) 10/97
Mill Creek 205 4,613 4,818 (49) 10/97
Montfort Oaks 2,256 11,203 13,459 (117) 10/97
Monticello on Cranbrook 410 7,544 7,954 (79) 10/97
Northwoods 638 8,200 8,838 (86) 10/97
Oak Ridge 834 10,417 11,251 (109) 10/97
One Camden Court 164 2,494 2,658 (26) 10/97
One Cypress Landing 559 11,863 12,422 (125) 10/97
</TABLE>
S-4
<PAGE> 207
<TABLE>
<CAPTION>
COST CAPITALIZED
INITIAL COST TO SUBSEQUENT TO
COMPANY ACQUISITION
----------------------- -------------------
BUILDING & BUILDINGS &
PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
------------- -------- ------------ -------- ------------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
One Westfield Lake Houston, TX $ -- $ 731 $ 9,692 $-- $ 30
One Willow Chase Houston, TX -- 160 3,425 -- 7
One Willow Park Houston, TX -- 219 5,880 -- 13
Park Bonita San Diego, CA 5,777 6,951 5,647 -- 10
Pathway, The Houston, TX -- 848 5,855 -- 11
Pine Creek Houston, TX -- 414 5,697 -- 16
Polo Club Austin, TX 6,346 912 10,586 -- 24
Polo Club on Cranbrook I Houston, TX 2,851 340 5,693 -- 22
Polo Club on Cranbrook II Houston, TX 3,909 256 7,362 -- 26
Rafters, The Corpus Christi, TX 3,926 899 8,304 -- 13
Richmond Green Houston, TX -- 1,248 10,049 -- 26
Riverwalk Houston, TX 2,892 390 6,497 -- 14
Saratoga Springs Atlanta, GA 4,404 1,568 12,041 -- 23
Shadow Creek Austin, TX 6,080 1,617 13,250 -- 38
Shadowridge Village Dallas, TX 2,662 918 5,055 -- 20
Shannon Chase Atlanta, GA 3,016 3,465 4,564 -- 15
Silverado Houston, TX 5,027 1,611 12,003 -- 29
Stony Creek Houston, TX 2,986 478 6,540 -- 18
Sun Ridge San Diego, CA 3,231 3,400 3,316 -- 15
Timbers of Cranbrook Houston, TX -- 348 8,273 -- 28
Tranquility Lake Houston, TX -- 742 3,231 -- 13
Trinity Mills Dallas, TX 3,531 1,968 6,372 -- 18
Trinity Oaks Dallas, TX 3,110 916 8,688 -- 31
Villas at Indian Trails Atlanta, GA 3,625 3,119 6,138 -- 21
Wharf, The Corpus Christi, TX 3,882 1,283 8,928 -- 37
Willowick Corpus Christi, TX 3,902 899 9,161 -- 24
Wimbledon Houston, TX -- 231 5,667 -- 15
Woodborough Houston, TX -- 376 8,731 -- 31
Woodchase Houston, TX 4,495 1,422 10,826 -- 47
Woodedge Houston, TX 1,747 243 3,606 -- 11
Woodlake Houston, TX -- 1,179 10,338 -- 18
-------- -------- ---------- ---- -------
Subtotal 166,605 83,042 601,772 -- 1,762
-------- -------- ---------- ---- -------
Subtotal -- 1997 177,421 92,162 691,988 -- 4,532
-------- -------- ---------- ---- -------
Total(G) $347,699 $173,668 $1,282,407 $(33) $51,571
======== ======== ========== ==== =======
<CAPTION>
GROSS AMOUNT
AT WHICH CARRIED
AT DECEMBER 31, 1997
------------------------------------
BUILDINGS & ACCUMULATED DATE DEPRECIABLE
PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE (YEARS)(D)
------------- -------- ------------ ---------- ------------ -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
One Westfield Lake $ 731 $ 9,722 $ 10,453 $ (102) 10/97
One Willow Chase 160 3,432 3,592 (36) 10/97
One Willow Park 219 5,893 6,112 (62) 10/97
Park Bonita 6,951 5,657 12,608 (59) 10/97
Pathway, The 848 5,866 6,714 (62) 10/97
Pine Creek 414 5,713 6,127 (60) 10/97
Polo Club 912 10,610 11,522 (111) 10/97
Polo Club on Cranbrook I 340 5,715 6,055 (62) 10/97
Polo Club on Cranbrook II 256 7,388 7,644 (76) 10/97
Rafters, The 899 8,317 9,216 (87) 10/97
Richmond Green 1,248 10,075 11,323 (106) 10/97
Riverwalk 390 6,511 6,901 (68) 10/97
Saratoga Springs 1,568 12,064 13,632 (126) 10/97
Shadow Creek 1,617 13,288 14,905 (140) 10/97
Shadowridge Village 918 5,075 5,993 (53) 10/97
Shannon Chase 3,465 4,579 8,044 (12) 10/97
Silverado 1,611 12,032 13,643 (126) 10/97
Stony Creek 478 6,558 7,036 (69) 10/97
Sun Ridge 3,400 3,331 6,731 (35) 10/97
Timbers of Cranbrook 348 8,301 8,649 (87) 10/97
Tranquility Lake 742 3,244 3,986 (33) 10/97
Trinity Mills 1,968 6,390 8,358 (67) 10/97
Trinity Oaks 916 8,719 9,635 (92) 10/97
Villas at Indian Trails 3,119 6,159 9,278 (93) 10/97
Wharf, The 1,283 8,965 10,248 (94) 10/97
Willowick 899 9,185 10,084 (96) 10/97
Wimbledon 231 5,682 5,913 (60) 10/97
Woodborough 376 8,762 9,138 (92) 10/97
Woodchase 1,422 10,873 12,295 (114) 10/97
Woodedge 243 3,617 3,860 (38) 10/97
Woodlake 1,179 10,356 11,535 (109) 10/97
-------- ---------- ---------- --------
Subtotal 83,042 603,534 686,576 (6,295)
-------- ---------- ---------- --------
Subtotal -- 1997 92,162 696,520 788,682 (7,696)
-------- ---------- ----------
Total(G) $173,635 $1,333,978 $1,507,613 $(74,584)
======== ========== ========== ========
</TABLE>
- -------------------------
(A) Property is pledged as collateral under a $57.417 million mortgage note
payable to an insurance company.
S-5
<PAGE> 208
(B) Property is pledged as collateral under a $23.238 million mortgage note
payable to an insurance company.
(C) Property is pledged as collateral under the mortgage notes secured by
Reflections of Highpoint, Remington at Ponte Vedra, Remington Hill and
Winridge.
(D) Depreciation is computed on a straight-line basis over the estimated useful
lives of the related assets which range from 14 to 30 years for buildings
and 5, 10 or 15 years for personal property.
(E) Braden's Walk, Oak Forest and Woods of Bedford were combined on December
31, 1997 to be operated as one property.
(F) Timber Creek and Treepoint were combined on January 8, 1997 and Quayle Walk
was combined on December 31, 1997, to be operated as one property -- Parks
at Treepoint.
(G) The aggregate cost for Federal income tax purposes at December 31, 1997 is
approximately $1.3 billion.
S-6
<PAGE> 209
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses expected to be paid by the Company in connection with the
issuance and distribution of the securities being registered are as follows:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $110,240
NYSE Filing Fee............................................. 30,000
Printing and engraving expenses............................. 70,000
Legal Fees and Expenses..................................... 75,000
Accounting Fees and Expenses................................ 75,000
Exchange Agent Fees and Custodian Fees...................... 15,000
Miscellaneous Expenses...................................... 24,760
--------
Total..................................................... 400,000
========
</TABLE>
- -------------------------
* To be completed by amendment.
ITEM 32. SALES TO SPECIAL PARTIES.
None.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation, as amended and restated (the "Articles
of Incorporation"), provide certain limitations on the liability of the
Company's directors and officers for monetary damages to the Company. The
Articles of Incorporation obligate the Company to indemnify its directors and
officers, and permit the Company to indemnify its employees and other agents,
against certain liabilities incurred in connection with their service in such
capacities. These provisions could reduce the legal remedies available to the
Company and the stockholders against these individuals. See "Certain Provisions
of Maryland Law and of the Company's Articles and Bylaws -- Limitation of
Liability and Indemnification."
The Articles of Incorporation require it to indemnify (a) the Company's
directors and officers whether serving the Company or at its request any other
entity who have been successful, on the merits or otherwise, in the defense of a
proceeding to which he was made a party by reason of his service in that
capacity against reasonable expenses incurred by him in connection with the
proceeding unless it is established that (i) his act or omission was material to
the matter giving rise to the proceeding and was committed in bad faith or was
the result of active and deliberate dishonesty, (ii) he actually received an
improper personal benefit in money, property or services, or (iii) in the case
of a criminal
II-1
<PAGE> 210
proceeding, he had reasonable cause to believe that his act or omission was
unlawful and (b) other employees and agents of the Company to such extent as
shall be authorized by the Board of Directors or the Company's Bylaws and be
permitted by law. In addition, the Articles of Incorporation require the Company
to pay or reimburse, in advance of the final disposition of a proceeding,
reasonable expenses incurred by a director or officer who is a party to a
proceeding under procedures provided for under the Maryland General Corporation
Law (the "MGCL"). The Company's Bylaws also permit the Company to provide such
other and further indemnification or payment or reimbursement of expenses as the
Board of Directors deems to be in the interest of the Company and as may be
permitted by the MGCL for directors, officers and employees of Maryland
corporations.
The Company has entered into indemnification agreements with each of the
Company's officers and directors. The indemnification agreements require, among
other things, that the Company indemnify its officers and directors to the
fullest extent permitted by law and advance to the officers and directors all
related expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. The Company must also indemnify and advance
all expenses incurred by officers and directors seeking to enforce their rights
under the indemnification agreements and cover officers and directors under the
Company's directors' and officers' liability insurance. Although the
indemnification agreements offer substantially the same scope of coverage
afforded by law, they provide assurance to directors and officers that
indemnification will be available because such contracts cannot be modified
unilaterally in the future by the Board of Directors or the stockholders to
eliminate the rights they provide.
ITEM 35. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED.
Not applicable
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements included in this Registration Statement are:
(1) Financial Statements of the Company for the nine months ended September 30,
1998 and 1997:
Condensed Consolidated Balance Sheets as of September 30, 1998
(Unaudited) and December 31, 1997
Condensed Consolidated Statements of Income for the three months and nine
months ended September 30, 1998 and 1997 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(2) Financial Statements of the Company for the years ended December 31,
1997, 1996 and 1995:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for each of the three years ended
December 31, 1997
Consolidated Statements of Stockholders' Equity for each of the three
years ended December 31, 1997
II-2
<PAGE> 211
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1997
Notes to Consolidated Financial Statements
(3) Pro Forma Financial Statements (Unaudited):
Pro Forma Condensed Consolidated Statement of Income for the year ended
December 31, 1997
Notes to Pro Forma Condensed Consolidated Statement of Income (Unaudited)
(4) Financial Statements of Drever Partners, Inc. and affiliates for the nine
months ended September 30, 1997 and 1996:
Condensed Combined Balance Sheets as of September 30, 1997 (Unaudited)
and December 31, 1996
Condensed Combined Statements of Operations for the nine months ended
September 30, 1997 and 1996 (Unaudited)
Condensed Combined Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 (Unaudited)
Notes to Condensed Combined Financial Statements
(5) Financial Statements of Drever Partners, Inc. and affiliates for the years
ended December 31, 1996, 1995 and 1994:
Independent Auditors' Report
Combined Balance Sheets as of December 31, 1996 and 1995
Combined Statements of Operations for each of the three years ended
December 31, 1996
Combined Statements of Stockholders' Equity for each of the three years
ended December 31, 1996
Combined Statements of Cash Flows for each of the three years ended
December 31, 1996
Notes to Combined Financial Statements
(6) Financial Statements of the Arbors Apartments:
Independent Auditors' Report
Combined Statements of Revenues and Certain Expenses for the three months
ended March 31, 1997 (Unaudited) and the year ended December 31, 1996
Notes to Combined Statements of Revenues and Certain Expenses
(7) Financial Statements of the Windsor Apartments:
Independent Auditors' Report
Statements of Revenues and Certain Expenses for the nine months ended
September 30, 1997 (Unaudited) and the year ended December 31, 1996
Notes to Statements of Revenues and Certain Expenses
(8) Financial Statements of the Oak Ramble Apartments:
Independent Auditors' Report
Statements of Revenues and Certain Expenses for the nine months ended
September 30, 1997 (Unaudited) and the year ended December 31, 1996
Notes to Statements of Revenues and Certain Expenses
(9) Financial Statements of the Parkway Station and Ashton Park Apartments:
Independent Auditors' Report
II-3
<PAGE> 212
Combined Statements of Revenues and Certain Expenses for the nine months
ended September 30, 1997 (Unaudited) and the year ended December 31,
1996
Notes to Combined Statements of Revenues and Certain Expenses
(10) Financial Statements of the Woods of Bedford Apartments:
Independent Auditors' Report
Statements of Revenues and Certain Expenses for the nine months ended
September 30, 1997 (Unaudited) and the year ended December 31, 1996
Notes to Statements of Revenues and Certain Expenses
(11) Financial Statement Schedule
Schedule III--Real Estate and Accumulated Depreciation as of December 31,
1997
(b) Exhibits
<TABLE>
<C> <S>
2.1 Contribution Agreement by and among Walden/Drever Operating
Partnership, L.P., Walden Residential Properties, Inc., the
Shareholders of Drever Partners, Inc., AOF, Inc., and AOF
II, Inc. (1)
2.2 Exchange Agreement among Walden Residential Properties,
Inc., Walden/Drever Operating Partnership, L.P., Drever
Partners, Inc., AOF, Inc. and AOF II, Inc. (1)
3.1 Articles of Amendment and Restatement of the Company. (2)
3.2 Restated Bylaws of the Company. (2)
4.1 Specimen of certificate representing shares of Common Stock.
(3)
4.2 Form of certificate representing shares of 9.16% Series B
Convertible Redeemable Preferred Stock. (4)
4.3 Form of certificate representing shares of 9.20% Senior
Preferred Stock. (5)
4.4 Form of certificate representing shares of 9.00% Redeemable
Preferred Stock*
4.5 Form of Articles Supplementary relating to 9.16% Series B
Convertible Redeemable Preferred Stock (4)
4.6 Form of Articles Supplementary relating to 9.20% Senior
Preferred Stock. (5)
4.7 Form of Articles Supplementary relating to 9.00% Redeemable
Preferred Stock (9)
4.8 Form of Series B Warrant Certificate*
5.1 Opinion of Winstead Sechrest & Minick P.C. regarding
legality of the securities**
8.1 Opinion of Winstead Sechrest & Minick P.C. regarding certain
tax matters**
10.1 Dividend Reinvestment and Stock Purchase Plan. (6)
10.2 Transfer and Assignment Agreement between The Arbors of
Austin and Walden Residential Operating Partnership, L.P.
(Arbors of Austin Apartments) (1)
10.3 Transfer and Assignment Agreement between Arbors of Bedford
Limited and Walden Residential Operating Partnership, L.P.
(Arbors of Bedford Apartments) (1)
</TABLE>
II-4
<PAGE> 213
<TABLE>
<C> <S>
10.4 Transfer and Assignment Agreement between Euless II Limited
and Walden Residential Operating Partnership, L.P. (Arbors
of Euless Apartments) (1)
10.5 Transfer and Assignment Agreement between The Arbors on
Forest Lane Limited and Walden Residential Operating
Partnership, L.P. (Arbors on Forest Lane Apartments) (1)
10.6 Transfer and Assignment Agreement between Arbor Park Limited
and Walden Residential Operating Partnership, L.P. (Arbor
Park Apartments) (1)
10.7 Transfer and Assignment Agreement between Arbor Mill Limited
and Walden Residential Operating Partnership, L.P. (Arbors
of Carrollton Apartments) (1)
10.8 Real Estate Sales Contract by and between Village/Hillcrest
Limited Partnership and Walden Residential Properties, Inc.
(Hillcrest Apartments) (1)
10.9 Purchase and Sale Agreement by and between Windsor Park
Apartments, Inc. and Walden Residential Operating
Partnership, L.P. (Windsor Park Apartments) (7)
10.10 Real Estate Sales Contract by and between 1990 Clover Hill
Limited Partnership and Walden Residential Properties, Inc.
(Clover Hill Apartments) (7)
10.11 Third Amendment to the Revolving Credit Agreement by and
among WDN Properties, Ltd., Walden Residential Properties,
Inc., Walden Residential Operating Partnership, L.P., WDN
Properties, Inc., Walden/Drever Operating Partnership, L.P.,
BankBoston, N.A., individually, Bank of Montreal, Chicago
Branch, Corestates Bank, N.A., Dresdner Bank AG New York and
Grand Cayman Branches, Keybank National Association, Signet
Bank, and BankBoston, N.A. as Agent, dated October 1, 1997.
(8)
10.12 Agreement to Sell Real Estate between MIG-Oak Ramble
Associates Limited Partnership and Walden Residential
Properties, Inc., dated as of September 16, 1997. (Oak
Ramble Apartments) (8)
10.13 Purchase and Sale Agreement and Joint Escrow Instructions
between Pacific Life Insurance Company and Walden
Residential Properties, Inc., dated as of November 10, 1997.
(Woods of Bedford Apartments) (8)
10.14 First Amendment to the Purchase and Sale Agreement and Joint
Escrow Instructions between Pacific Life Insurance Company
and Walden Residential Properties, Inc., dated as of
December 15, 1997. (Woods of Bedford Apartments) (8)
10.15 Contract of Sales between MGI Properties and Walden
Residential Operating Partnership, L.P. dated as of November
7, 1997. (St. James Crossing and South Pointe Apartments)
(8)
10.16 Purchase and Sale Agreement by and between Windsor at Ashton
Park Limited Partnership and Walden Residential Properties,
Inc., dated as of November 14, 1997. (Ashton Park
Apartments) (8)
10.17 Agreement of Sale and Purchase by and between Windsor at
Parkway Station Limited Partnership and Walden Residential
Properties, Inc., dated as of November 14, 1997. (Parkway
Station Apartments) (8)
</TABLE>
II-5
<PAGE> 214
<TABLE>
<C> <S>
10.18 Revolving Credit Agreement dated December 15, 1997, by and
among Walden Residential Properties, Inc., Walden/Drever
Operating Partnership, L.P., BankBoston, N.A. and
BankBoston, N.A., as Managing Agent for the Banks. (8)
10.19 Term Loan Agreement dated December 15, 1997, by and among
Walden Residential Properties, Inc., Walden/Drever Operating
Partnership, L.P., BankBoston, N.A. and BankBoston, N.A., as
Managing Agent for the Banks. (8)
10.20 Settlement and Employment Agreement, dated as of October 20,
1997, between Walden Residential Properties, Inc. and Don R.
Daseke. (8)
10.21 Employment Agreement, dated as of October 1, 1997, between
Walden Residential Properties, Inc. and Maxwell B. Drever.
(8)
10.22 Employment Agreement, dated as of October 1, 1997, between
Walden Residential Properties, Inc. and Michael E.
Masterson. (8)
10.23 Employment Agreement, dated as of October 1, 1997, between
Walden Residential Properties, Inc. and Michael L. Collier.
(8)
10.24 Employment Agreement, dated as of October 20, 1997, between
Walden Residential Properties, Inc. and Marshall B. Edwards.
(8)
10.25 Construction Loan Agreement by and among Walden/Grupe Elk
Grove, L.P., BankBoston, N.A. and BankBoston, N.A. as Agent
for Other Banks, dated as of February 27, 1998. (8)
10.26 Construction Loan Agreement by and among Walden/Grupe
Roseville, L.P., BankBoston, N.A. and BankBoston, N.A. as
Agent for Other Banks, dated as of February 27, 1998. (8)
10.27 Treasury Lock Agreement by and between Walden Residential
Properties, Inc. and Smith Barney Capital Services, Inc.,
dated as of August 29, 1997. (8)
10.28 Treasury Lock Agreement by and between BankBoston, N.A. and
Walden Residential Properties, Inc., dated as of December
17, 1997. (8)
10.29 Treasury Lock Agreement by and between BankBoston, N.A. and
Walden Residential Properties, Inc., dated as of December
17, 1997. (8)
12.1 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends.**
21.1 Subsidiaries of the Company.**
23.1 Independent Auditors' Consent.**
23.2 Consent of Winstead Sechrest & Minick P.C. (included in
Exhibits 5.1 and 8.1)
24.2 Power of Attorney*
99.1 Form of Notice of Exchange**
</TABLE>
- -------------------------
* Previously filed.
** Filed herewith.
(1) Previously filed with the Company's Form 10-Q filed with the Securities and
Exchange Commission on August 12, 1997 and incorporated herein by reference.
(2) Previously filed with the Amendment No. 3 to the Company's Registration
Statement on Form S-11 (Registration No. 33-70132) filed with the Securities
and Exchange Commission on December 23, 1993 and incorporated herein by
reference.
II-6
<PAGE> 215
(3) Previously filed with the Company's Registration Statement on Form S-3
(Registration No. 33-90438) filed with the Securities and Exchange
Commission on March 8, 1995 and incorporated herein by reference.
(4) Previously filed with the Company's Registration Statement on Form S-3
(Registration No. 33-13809) filed with the Securities and Exchange
Commission on October 9, 1996 and herein incorporated by reference.
(5) Previously filed with the Company's Form 8-A filed with the Securities and
Exchange Commission on December 20, 1996 and incorporated herein by
reference. (Previously numbered Exhibit 1.1 and 2.3)
(6) Previously filed with the Company's Registration Statement on Form S-3D
(Registration No. 333-34507) filed with the Securities and Exchange
Commission on August 28, 1997 and incorporated herein by reference.
(7) Previously filed with the Company's Form 10-Q filed with the Securities and
Exchange Commission on November 14, 1997 and herein incorporated by
reference. (Previously numbered Exhibits 10.1 through 10.2)
(8) Previously filed with the Company's Form 10-K filed with the Securities and
Exchange Commission on March 30, 1998 and herein incorporated by reference.
(9) Previously filed with the Company's Form 8-A filed with the Securities and
Exchange Commission on September 22, 1997 and incorporated herein by
reference.
ITEM 37. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) to file during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Company pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934, that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-7
<PAGE> 216
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
That for purposes of determining any liability under the Securities Act, the
information omitted from the Prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of prospectus filed
by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-8
<PAGE> 217
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-11 and has duly caused this Amendment No. 1 to the
Registration Statement on Form S-11 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on November 24, 1998.
WALDEN RESIDENTIAL PROPERTIES, INC.,
a Maryland Corporation
By: MARSHALL B. EDWARDS
------------------------------------------
Marshall B. Edwards
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Registration Statement
on Form S-11 has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MARSHALL B. EDWARDS Chief Executive November 24, 1998
- ------------------------------------------------ Officer, President
Marshall B. Edwards and Director
(Principal Executive
Offer)
/s/ MARK S. DILLINGER Executive Vice November 24, 1998
- ------------------------------------------------ President, Chief
Mark S. Dillinger Financial Officer and
Director (Principal
Financial and
Accounting Officer)
/s/ MICHAEL E. MASTERSON Chairman of the Board November 24, 1998
- ------------------------------------------------ of Directors
Michael E. Masterson
* Chairman Emeritus November 24, 1998
- ------------------------------------------------
Maxwell B. Drever
* Director November 24, 1998
- ------------------------------------------------
Francesco Galesi
* Director November 24, 1998
- ------------------------------------------------
Arch K. Jacobson
* Director November 24, 1998
- ------------------------------------------------
Louis G. Munin
</TABLE>
*By: /s/ MARK S. DILLINGER
-------------------------------
Mark S. Dillinger,
Attorney-in-Fact
II-9
<PAGE> 218
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
----------- ----------- -------------
<C> <S> <C>
2.1 Contribution Agreement by and among Walden/Drever
Operating Partnership, L.P., Walden Residential
Properties, Inc., the Shareholders of Drever
Partners, Inc., AOF, Inc., and AOF II, Inc. (1)
2.2 Exchange Agreement among Walden Residential
Properties, Inc., Walden/Drever Operating
Partnership, L.P., Drever Partners, Inc., AOF,
Inc. and AOF II, Inc. (1)
3.1 Articles of Amendment and Restatement of the
Company. (2)
3.2 Restated Bylaws of the Company. (2)
4.1 Specimen of certificate representing shares of
Common Stock. (3)
4.2 Form of certificate representing shares of 9.16%
Series B Convertible Redeemable Preferred Stock.
(4)
4.3 Form of certificate representing shares of 9.20%
Senior Preferred Stock. (5)
4.4 Form of certificate representing shares of 9.00%
Redeemable Preferred Stock*
4.5 Form of Articles Supplementary relating to 9.16%
Series B Convertible Redeemable Preferred Stock
(4)
4.6 Form of Articles Supplementary relating to 9.20%
Senior Preferred Stock. (5)
4.7 Form of Articles Supplementary relating to 9.00%
Redeemable Preferred Stock (9)
4.8 Form of Series B Warrant Certificate*
5.1 Opinion of Winstead Sechrest & Minick P.C.
regarding legality of the securities**
8.1 Opinion of Winstead Sechrest & Minick P.C.
regarding certain tax matters**
10.1 Dividend Reinvestment and Stock Purchase Plan. (6)
10.2 Transfer and Assignment Agreement between The
Arbors of Austin and Walden Residential Operating
Partnership, L.P. (Arbors of Austin Apartments)
(1)
10.3 Transfer and Assignment Agreement between Arbors
of Bedford Limited and Walden Residential
Operating Partnership, L.P. (Arbors of Bedford
Apartments) (1)
10.4 Transfer and Assignment Agreement between Euless
II Limited and Walden Residential Operating
Partnership, L.P. (Arbors of Euless Apartments)
(1)
10.5 Transfer and Assignment Agreement between The
Arbors on Forest Lane Limited and Walden
Residential Operating Partnership, L.P. (Arbors on
Forest Lane Apartments) (1)
</TABLE>
<PAGE> 219
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
----------- ----------- -------------
<C> <S> <C>
10.6 Transfer and Assignment Agreement between Arbor
Park Limited and Walden Residential Operating
Partnership, L.P. (Arbor Park Apartments) (1)
10.7 Transfer and Assignment Agreement between Arbor
Mill Limited and Walden Residential Operating
Partnership, L.P. (Arbors of Carrollton
Apartments) (1)
10.8 Real Estate Sales Contract by and between
Village/Hillcrest Limited Partnership and Walden
Residential Properties, Inc. (Hillcrest
Apartments) (1)
10.9 Purchase and Sale Agreement by and between Windsor
Park Apartments, Inc. and Walden Residential
Operating Partnership, L.P. (Windsor Park
Apartments) (7)
10.10 Real Estate Sales Contract by and between 1990
Clover Hill Limited Partnership and Walden
Residential Properties, Inc. (Clover Hill
Apartments) (7)
10.11 Third Amendment to the Revolving Credit Agreement
by and among WDN Properties, Ltd., Walden
Residential Properties, Inc., Walden Residential
Operating Partnership, L.P., WDN Properties, Inc.,
Walden/Drever Operating Partnership, L.P.,
BankBoston, N.A., individually, Bank of Montreal,
Chicago Branch, Corestates Bank, N.A., Dresdner
Bank AG New York and Grand Cayman Branches,
Keybank National Association, Signet Bank, and
BankBoston, N.A. as Agent, dated October 1, 1997.
(8)
10.12 Agreement to Sell Real Estate between MIG-Oak
Ramble Associates Limited Partnership and Walden
Residential Properties, Inc., dated as of
September 16, 1997. (Oak Ramble Apartments) (8)
10.13 Purchase and Sale Agreement and Joint Escrow
Instructions between Pacific Life Insurance
Company and Walden Residential Properties, Inc.,
dated as of November 10, 1997. (Woods of Bedford
Apartments) (8)
10.14 First Amendment to the Purchase and Sale Agreement
and Joint Escrow Instructions between Pacific Life
Insurance Company and Walden Residential
Properties, Inc., dated as of December 15, 1997.
(Woods of Bedford Apartments) (8)
10.15 Contract of Sales between MGI Properties and
Walden Residential Operating Partnership, L.P.
dated as of November 7, 1997. (St. James Crossing
and South Pointe Apartments) (8)
10.16 Purchase and Sale Agreement by and between Windsor
at Ashton Park Limited Partnership and Walden
Residential Properties, Inc., dated as of November
14, 1997. (Ashton Park Apartments) (8)
</TABLE>
<PAGE> 220
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
----------- ----------- -------------
<C> <S> <C>
10.17 Agreement of Sale and Purchase by and between
Windsor at Parkway Station Limited Partnership and
Walden Residential Properties, Inc., dated as of
November 14, 1997. (Parkway Station Apartments)
(8)
10.18 Revolving Credit Agreement dated December 15,
1997, by and among Walden Residential Properties,
Inc., Walden/Drever Operating Partnership, L.P.,
BankBoston, N.A. and BankBoston, N.A., as Managing
Agent for the Banks. (8)
10.19 Term Loan Agreement dated December 15, 1997, by
and among Walden Residential Properties, Inc.,
Walden/Drever Operating Partnership, L.P.,
BankBoston, N.A. and BankBoston, N.A., as Managing
Agent for the Banks. (8)
10.20 Settlement and Employment Agreement, dated as of
October 20, 1997, between Walden Residential
Properties, Inc. and Don R. Daseke. (8)
10.21 Employment Agreement, dated as of October 1, 1997,
between Walden Residential Properties, Inc. and
Maxwell B. Drever. (8)
10.22 Employment Agreement, dated as of October 1, 1997,
between Walden Residential Properties, Inc. and
Michael E. Masterson. (8)
10.23 Employment Agreement, dated as of October 1, 1997,
between Walden Residential Properties, Inc. and
Michael L. Collier. (8)
10.24 Employment Agreement, dated as of October 20,
1997, between Walden Residential Properties, Inc.
and Marshall B. Edwards. (8)
10.25 Construction Loan Agreement by and among
Walden/Grupe Elk Grove, L.P., BankBoston, N.A. and
BankBoston, N.A. as Agent for Other Banks, dated
as of February 27, 1998. (8)
10.26 Construction Loan Agreement by and among
Walden/Grupe Roseville, L.P., BankBoston, N.A. and
BankBoston, N.A. as Agent for Other Banks, dated
as of February 27, 1998. (8)
10.27 Treasury Lock Agreement by and between Walden
Residential Properties, Inc. and Smith Barney
Capital Services, Inc., dated as of August 29,
1997. (8)
10.28 Treasury Lock Agreement by and between BankBoston,
N.A. and Walden Residential Properties, Inc.,
dated as of December 17, 1997. (8)
10.29 Treasury Lock Agreement by and between BankBoston,
N.A. and Walden Residential Properties, Inc.,
dated as of December 17, 1997. (8)
</TABLE>
<PAGE> 221
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
----------- ----------- -------------
<C> <S> <C>
12.1 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.**
21.1 Subsidiaries of the Company.**
23.1 Independent Auditors' Consent.**
23.2 Consent of Winstead Sechrest & Minick P.C.
(included in Exhibits 5.1 and 8.1)
24.2 Power of Attorney*
99.1 Form of Notice of Exchange**
</TABLE>
- -------------------------
* Previously filed.
** Filed herewith.
(1) Previously filed with the Company's Form 10-Q filed with the Securities and
Exchange Commission on August 12, 1997 and incorporated herein by reference.
(2) Previously filed with the Amendment No. 3 to the Company's Registration
Statement on Form S-11 (Registration No. 33-70132) filed with the Securities
and Exchange Commission on December 23, 1993 and incorporated herein by
reference.
(3) Previously filed with the Company's Registration Statement on Form S-3
(Registration No. 33-90438) filed with the Securities and Exchange
Commission on March 8, 1995 and incorporated herein by reference.
(4) Previously filed with the Company's Registration Statement on Form S-3
(Registration No. 33-13809) filed with the Securities and Exchange
Commission on October 9, 1996 and herein incorporated by reference.
(5) Previously filed with the Company's Form 8-A filed with the Securities and
Exchange Commission on December 20, 1996 and incorporated herein by
reference.
(6) Previously filed with the Company's Registration Statement on Form S-3D
(Registration No. 333-34507) filed with the Securities and Exchange
Commission on August 28, 1997 and incorporated herein by reference.
(7) Previously filed with the Company's Form 10-Q filed with the Securities and
Exchange Commission on November 14, 1997 and herein incorporated by
reference. (Previously numbered Exhibits 10.1 through 10.2)
(8) Previously filed with the Company's Form 10-K filed with the Securities and
Exchange Commission on March 30, 1998 and herein incorporated by reference.
(9) Previously filed with the Company's Form 8-A filed with the Securities and
Exchange Commission on September 22, 1997 and incorporated herein by
reference.
<PAGE> 1
EXHIBIT 5.1
WINSTEAD SECHREST & MINICK P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75240
Direct Dial: 214-745-5724
[email protected]
November 24, 1998
Walden Residential Properties, Inc.
5080 Spectrum Drive
Suite 1000 East
Addison, Texas 75001-6410
Dear Ladies and Gentlemen:
We have acted as counsel to Walden Residential Properties, Inc., a
Maryland corporation (the "Company"), in connection with the Company's
registration statement on Form S-11 (as the same may be amended or supplemented
from time to time, the "Registration Statement"), including the prospectus
included therein at the time the Registration Statement is declared effective
(the "Prospectus"), filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), for
offering by the Company from time to time of up to (i) 13,409,750 shares of
common stock, par value $0.01 per share (the "Common Stock"), (ii) 1,999,909
shares of 9.00% redeemable preferred stock, par value $0.01 per share (the
"Preferred Stock"), and (iii) 6,666,363 Series B Warrants (the "Warrants"). The
Common Stock, the Preferred Stock and the Warrants are collectively referred to
as the "Securities." This opinion is being provided at your request in
connection with the filing of the Registration Statement.
In rendering the opinions expressed herein, we have examined the
Registration Statement, the Company's Amended and Restated Articles of
Incorporation (the "Charter") and Bylaws and certain minutes of corporate
proceedings and/or written consents of the Company's Board of Directors. We have
also examined and relied as to factual matters upon the representations,
warranties and other statements contained in originals or copies, certified or
otherwise identified to our satisfaction, of such records, documents,
certificates and other instruments as in our judgment are necessary or
appropriate to enable us to render the opinions expressed below.
In our examination of the aforesaid documents, we have assumed the
genuineness of all signatures, the authenticity of all documents, certificates
and instruments submitted to us as originals and the conformity with originals
of all documents submitted to us as copies.
We assume that (i) prior to the issuance of any shares of Common Stock
or Preferred Stock (or Securities convertible into shares of Common Stock),
there will exist, under the Charter, the requisite number of authorized but
unissued shares of Common Stock or Preferred Stock, as the case may be, and (ii)
appropriate certificates representing shares of Common Stock or Preferred Stock,
<PAGE> 2
Walden Residential Properties, Inc.
November 24, 1998
Page 2
as the case may be, will be executed and delivered upon issuance and sale of any
such shares, and will comply with all applicable requirements of Maryland law.
Based on the foregoing, and such examination of law as we have deemed
necessary, we are of the opinion that:
1. When the Registration Statement has become effective under the
Act, and upon receipt of the duly executed transfer
documentation described in the Registration Statement from an
exchanging unitholder, such shares of Preferred Stock issued
thereby will be duly authorized, validly issued, fully paid
and non-assessable.
2. When the Registration Statement has become effective under the
Act and (a) upon receipt of the duly executed transfer
documentation described in the Registration Statement from an
exchanging unitholder, or (b) pursuant to the conversion of
validly issued and fully paid and non-assessable Warrants in
accordance with the established terms of such Warrants, such
shares of Common Stock issued thereby will be duly authorized,
validly issued, fully paid and non-assessable by the Company.
3. When the Registration Statement has been effective under the
Act, and upon receipt of the duly executed transfer
documentation described in the Registration Statement, such
Warrants issued thereby will be duly authorized, validly
issued, fully paid and non-assessable.
The opinions stated herein relating to the validity and binding nature
of obligations of the Company are subject to (i) the effect of any applicable
bankruptcy, insolvency (including, without limitation, all laws relating to
fraudulent transfers), reorganization, moratorium or similar laws affecting
creditors' rights generally and (ii) the effect of general principles of equity
(regardless of whether considered in a proceeding in equity or at law).
The opinions expressed herein are as of the date hereof and are based
on the assumptions set forth herein and the laws and regulations currently in
effect, and we do not undertake and hereby disclaim any obligations to advise
you of any change with respect to any matter set forth herein. To the extent
that the opinion set forth herein is governed by laws other than the federal
laws of the United States, our opinion is based solely upon our review of the
General Corporation Law of the State of Maryland and upon certificates from
public officials or governmental offices of such state. We express no opinion as
to any matter other than as expressly set forth herein, and no opinion is to, or
may, be inferred or implied herefrom.
<PAGE> 3
Walden Residential Properties, Inc.
November 24, 1998
Page 3
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference to us under the heading "Legal Matters"
in the Prospectus contained therein. In giving our consent, we do not hereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act or the rules and regulations of the Commission
thereunder.
Very truly yours,
WINSTEAD SECHREST & MINICK P.C.
By: /s/ Kenneth L. Betts
----------------------------------
Kenneth L. Betts
KLB:ddc
<PAGE> 1
EXHIBIT 8.1
WINSTEAD SECHREST & MINICK P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75240
November 24, 1998
Walden Residential Properties, Inc.
One Lincoln Centre
5400 LBJ Freeway
Suite 400
Dallas, Texas 75240
Re: Registration Statement on Form S-11 - Walden Residential
Properties, Inc.
Ladies and Gentlemen:
We have acted as counsel to Walden Residential Properties, Inc., a
Maryland corporation (the "Company"), in connection with its Registration
Statement on Form S-11 (the "Registration Statement") filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act").
For the purpose of rendering our opinion, we have examined and are
relying upon the truth, accuracy and completeness, at all relevant times, of the
statements and representations contained in the Registration Statement and
certificates from the Company.
In connection with rendering this opinion, we have assumed to be true
and are relying upon, without any independent investigation or review thereof,
the following:
1. The authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as copies, and
authenticity of the originals of such documents.
2. The genuineness of all signatures, the due authorization, execution
and delivery of all documents by all parties thereto and the due authority of
all persons executing such documents.
3. The truth, accuracy, and completeness of all responses made to our
requests to disclose any material information that has a bearing on the
Company's ability to qualify as a real estate investment trust (a "REIT").
<PAGE> 2
Walden Residential Properties, Inc.
November 24, 1998
Page 2
4. That the Company filed a proper election to be taxed as a REIT with
its timely filed federal income tax return for the taxable year ending December
31, 1994, and that the Company has not caused such election to be terminated or
revoked.
Based on our examination of the foregoing items and our review of such
other documents and information pertaining to the Company as we have deemed
appropriate, subject to the assumptions, limitations and qualifications set
forth herein, we are of the opinion that the Company qualified as a REIT for its
taxable years ended December 31, 1994 through December 31, 1997, and its
organization and method of operation described in the Registration Statement
will enable the Company to continue to so qualify under the Internal Revenue
Code of 1986, as amended (the "Code").
In addition to the matters set forth above, this opinion is subject to
the following exceptions, limitations and qualifications:
1. Our opinion expressed herein is based upon our interpretation of the
existing provisions of the Code and existing judicial decisions, administrative
regulations and published revenue rulings (including private letter rulings) and
revenues procedures. Our opinion is not binding upon the Internal Revenue
Service or courts and there is no assurance that the Internal Revenue Service
will not challenge the conclusions set forth herein. No assurance can be given
that future legislative, judicial or administrative changes, on either a
prospective or retroactive basis, would not adversely affect the accuracy of the
conclusions stated herein. We undertake no obligation to advise you of changes
in law which may occur after the date hereof.
2. Our opinion is limited to the United States federal income tax
matters addressed herein, and no other opinions are rendered with respect to any
other matter not specifically set forth in the foregoing opinion.
In the event any one of the statements, representations, or assumptions
we have relied upon to issue this opinion is incorrect in a material respect,
our opinion might be adversely affected and may not be relied upon.
<PAGE> 3
Walden Residential Properties, Inc.
November 24, 1998
Page 3
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference to us under the headings "Federal
Income Tax Considerations" and "Legal Matters" in the Prospectus contained
therein. In giving our consent, we do not hereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act or the rules and regulations of the Commission thereunder.
Very truly yours,
WINSTEAD SECHREST & MINICK P.C.
By: /s/ Thomas R. Helfand
---------------------------------
Thomas R. Helfand
TRH/wpc
<PAGE> 1
Exhibit 12.1
WALDEN RESIDENTIAL PROPERTIES, INC.
COMPUTATION OF NET RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED DISTRIBUTIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the period
February 9, 1994
(Commencement
Nine Months Ended of Operations) to
September 30, Year Ended December 31, December 31,
------------------- ----------------------------------- -----------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Income before extraordinary item
and income allocated to minority
interests .................................. $32,639 $27,113 $19,122 $10,685 $ 5,356
Add:
Interest on indebtedness ................... 40,536 28,447 20,573 17,111 6,288
Amortization of deferred financing costs.... 768 827 916 900 371
------- ------- ------- ------- -------
Earnings ................................ $73,943 $56,387 $40,611 $28,696 $12,015
======= ======= ======= ======= =======
Fixed charges and preferred distributions:
Interest on indebtedness ................... $40,536 $28,447 $20,573 $17,111 6,288
Amortization of deferred financing costs.... 768 827 916 900 371
------- ------- ------- ------- -------
Fixed charges ........................... 41,304 29,274 21,489 18,011 6,659
Add:
Preferred stock distributions (1)........ 14,388 15,889 4,092 922 --
Combined fixed charges and ------- ------- ------- ------- -------
preferred stock distributions......... $55,692 $45,163 $25,581 $18,933 $ 6,659
======= ======= ======= ======= =======
Ratio of earnings to fixed charges .............. 1.79x 1.93x 1.89x 1.59x 1.80X
Ratio of earnings to fixed charges
and preferred distributions................. 1.33x 1.25x 1.59x 1.52x 1.80X
</TABLE>
(1) Includes distributions on preferred stock and preferred distributions to
minority interest holders.
<PAGE> 1
EXHIBIT 21.1
WALDEN RESIDENTIAL PROPERTIES, INC.
SCHEDULE OF SUBSIDIARIES OF THE COMPANY
AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
Percentage
Equity
Subsidiaries Ownership
------------ ---------
<S> <C> <C>
Apartment Opportunity Fund, L.P. .................................. 100%
(California)
Colorado Club Partners, L.P. ...................................... 100%
(California)
Concierge Management Corporation................................... 100%
(Texas)
Concierge Realty and Finance Corporation........................... 100%
(Texas)
Cornerstone Associates............................................. 100%
(California)
Crossing & Meadows Corporation..................................... 100%
(Texas)
Crossing & Meadows Partnership, Ltd. .............................. 100%
(Texas)
DMH 90............................................................. 100%
(California)
Drever Construction Corporation, Inc. ............................. 100%
(California)
Drever/Monticello Investors, L.P. ................................. 100%
(California)
Drever Partners, Inc. ............................................. 100%
(California)
Fullerton Portfolio Joint Venture.................................. 100%
(California)
Houston Portfolio Joint Venture II................................. 100%
(California)
Hunter's Ridge Partnership, Ltd. .................................. 100%
(Texas)
Newport Partnership, Ltd. ......................................... 100%
(Texas)
Peppertree Associates, Ltd. ....................................... 1%
(Texas)
Resident Profiles, Inc. ........................................... 100%
(Texas)
Walden AZ Corporation.............................................. 100%
(Delaware)
Walden Development Corporation..................................... 100%
(Delaware)
Walden/Drever Operating Partnership, L.P. ......................... 45%
(Delaware)
Walden Glen Corporation............................................ 100%
(Delaware)
Walden/Grupe Elk Grove, L.P. ...................................... 49%
(Delaware)
Walden/Grupe Roseville, L.P. ...................................... 49%
(Delaware)
Walden Operating, Inc. ............................................ 100%
(Delaware)
Walden Residential Operating Partnership, L.P. .................... 84%
(Georgia)
Walden Residential Operating Partnership, L.P. .................... 100%
(Delaware)
</TABLE>
<PAGE> 2
Walden South Pointe GP, Inc. ...................................... 100%
(Delaware)
Walden South Pointe, L.P. ......................................... 100%
(Delaware)
Walden Special Corp. .............................................. 10%
(Texas)
Walden Special Partners, Ltd. ..................................... 100%
(Texas)
Walden "Utah" Properties, Ltd. .................................... 100%
(Texas)
WDN Properties, Inc. .............................................. 100%
(New York)
WDN Properties, Ltd. .............................................. 100%
(Texas)
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Walden Residential
Properties, Inc. on Form S-11 of our report dated March 25, 1998 with respect to
the consolidated financial statements and financial statement schedule of Walden
Residential Properties, Inc. for the years ended December 31, 1997 and 1996 and
each of the three years in the period ended December 31, 1997; our report dated
June 27, 1997 (October 1, 1997 as to Note 14) with respect to the combined
financial statements of Drever Partners, Inc. and affiliates for the years ended
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996; our report dated April 18, 1997 with respect to the combined
statement of revenues and certain expenses of the Arbors Apartments for the year
ended December 31, 1996; our report dated July 31, 1997 with respect to the
statement of revenues and certain expenses of Windsor Park Apartments for the
year ended December 31, 1996; our report dated October 29, 1997 with respect to
the statement of revenues and certain expenses of Oak Ramble Apartments for the
year ended December 31, 1996; our report dated December 11, 1997 with respect to
the combined statement of revenues and certain expenses of Parkway Station and
Ashton Park Apartments for the year ended December 31, 1996; and our report
dated December 12, 1997 with respect to the statement of revenues and certain
expenses of Woods of Bedford Apartments for the year ended December 31, 1996,
each appearing in the Prospectus, which is part of this Registration Statement,
and to the references to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Dallas, Texas
November 24, 1998
<PAGE> 1
NOTICE OF EXCHANGE
TO TENDER FOR EXCHANGE COMMON AND/OR PREFERRED UNITS
OF
WALDEN/DREVER OPERATING PARTNERSHIP
PURSUANT TO THE PROSPECTUS
BY
WALDEN RESIDENTIAL PROPERTIES, INC.
UNITS TENDERED FOR EXCHANGE MAY NOT BE WITHDRAWN AT ANY TIME
AFTER SUCH UNITS ARE TENDERED FOR EXCHANGE.
To the Exchange Agent:
BANK BOSTON, NA
<TABLE>
<S> <C> <C>
By Mail: By Overnight Mail or Courier: By Hand:
Bank Boston, NA Bank Boston, NA Securities Transfer and
Attention: Corporate Attention: Corporate Reporting Services, Inc.
Reorganization Reorganization 100 William Street, Galleria
P.O. Box 8029 150 Rexall Street New York, NY 10038
Boston, MA 02266-8029 Canton, MA 02021
Telephone:
(781) 575-3210
</TABLE>
THE DOCUMENTS ACCOMPANYING THIS NOTICE OF EXCHANGE AND THE INSTRUCTIONS
INCLUDED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS NOTICE OF EXCHANGE IS
COMPLETED.
DELIVERY OF THIS NOTICE OF EXCHANGE TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. YOU MUST SIGN THIS NOTICE OF
EXCHANGE WHERE INDICATED BELOW AND COMPLETE THE SUBSTITUTE FORM W-9 AND
NON-FOREIGN TAX AFFIDAVIT PROVIDED BELOW.
<PAGE> 2
The undersigned acknowledges that he has received and reviewed the
Prospectus (the "Prospectus") of Walden Residential Properties, Inc., a Maryland
corporation (the "Company"), and this Notice of Exchange (the "Notice of
Exchange"). The Prospectus and Notice of Exchange together describe the terms
and conditions of the right of the holders of certain units (each a "Holder") of
Walden/Drever Operating Partnership (the "Partnership"), pursuant to Article 11
of the Amended and Restated Limited Partnership Agreement (the "Partnership
Agreement") of the Partnership to exchange (i) Class B Common Units (a "Common
Unit") of the Partnership for one share of common stock, par value $.01 per
share (the "Common Stock"), of the Company and (ii) Class B Preferred Units (a
"Preferred Unit") of the Partnership for one share of 9% Redeemable Preferred
Stock, par value $.01 per share (the "Redeemable Preferred Stock"), of the
Company and three and one-third Series B Warrants (the "Warrants") of the
Company, respectively (the "Exchange"). The Class B Common Units and the Class B
Preferred Units are collectively referred to herein as the "Units." The Common
Stock, Redeemable Preferred Stock and the Warrants are collectively referred to
herein as the "Walden Securities."
Any Units not exchanged will remain restricted securities and may be resold
only (i) pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and (ii) in accordance with the terms of the Partnership
Agreement.
Upon the terms and subject to the conditions set forth in the Partnership
Agreement, the Prospectus and this Notice of Exchange, the Company will exchange
(i) one share of Common Stock registered under the Securities Act pursuant to a
registration statement on Form S-11 filed by the Company (the "Registration
Statement"), plus, at the election of the Company, cash and/or whole shares of
Common Stock in an amount equal to such Holder's Proportionate Prior Unpaid
Class B Common Distributions (as defined in the Partnership Agreement), if any,
for each Common Unit properly tendered for exchange; and (ii) one share of
Redeemable Preferred Stock and three and one-third Warrants registered under the
Securities Act pursuant to the Registration Statement plus, at the election of
the Company, cash and/or whole shares of Redeemable Preferred Stock in an amount
equal to such Holder's Proportionate Current Unpaid Preferred Distributions (as
defined in the Partnership Agreement), if any, for each Preferred Unit properly
tendered for exchange. In order to exchange Units, a Holder must deliver to Bank
Boston, NA, as Exchange Agent (the "Exchange Agent"), (a) a properly completed
Notice of Exchange, and (b) any certificates representing Units. A Holder may
only tender for exchange a minimum of the lesser of (x) 100 Common or Preferred
Units or (y) the total number of Units held by such Holder. If a Holders' Units
are not properly tendered for exchange, such Holder will not receive Walden
Securities.
No alternative, conditional or contingent tenders for exchange will be
accepted. A tendering Holder, by execution of this Notice of Exchange, waives
all rights to receive notice of acceptance of such Holder's Units for exchange.
Capitalized terms used but not defined herein have the meanings given to them in
the Prospectus.
2
<PAGE> 3
PLEASE READ THIS ENTIRE NOTICE OF EXCHANGE
CAREFULLY BEFORE COMPLETING ANY INFORMATION
List below the Units that are to be tendered for exchange pursuant to this
Notice of Exchange. If the space below is inadequate, list the information
requested below on a separate signed schedule and affix the list to this Notice
of Exchange.
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF UNITS TENDERED
- -----------------------------------------------------------------------------------------------------------------------
Number of Units Number of Units
Name(s) and Address(es) of Holder(s) Certificate Represented Tendered for
(Please fill in, if blank) Number(s) by Certificate(s) Exchange(1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Total Number of Units Tendered for Exchange
- -----------------------------------------------------------------------------------------------------------------------
(1) Unless otherwise indicated in this column, any Holder tendering Units for exchange will be deemed to have
tendered the entire number of Units indicated in the column labeled "Number of Units Represented by
Certificate(s)". See Instruction 5.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Only registered Holders are entitled to tender their Units. Persons who are
beneficial owners of Units but are not registered Holders and who seek to tender
Units for exchange should (i) contact the registered Holder of such Units and
instruct such registered Holder to tender for exchange on his behalf, (ii)
obtain and include with this Notice of Exchange certificates representing the
Units to be exchanged properly endorsed for transfer by the registered Holder or
(iii) effect a record transfer of such Units from the registered Holder to such
beneficial owner and comply with the requirements applicable to registered
Holders for tendering Units for exchange. See "Procedure to Exchange Units" in
the Prospectus.
3
<PAGE> 4
To: Walden Residential Properties, Inc. (the "Company")
Upon the terms and subject to the conditions of the Partnership Agreement,
the Prospectus and this Notice of Exchange (collectively, the "Exchange"), the
undersigned hereby tenders to the Company for exchange, the Units indicated
above. Subject to, and effective upon, acceptance for exchange of the Units
tendered herewith, the undersigned hereby sells, assigns and transfers to or
upon the order of the Company, all right, title and interest in and to all such
Units tendered for exchange hereby. The undersigned hereby irrevocably
constitutes and appoints the Exchange Agent the true and lawful agent and
attorney-in-fact of the undersigned (with full knowledge that the Exchange Agent
also acts as agent of the Company) with respect to such Units, with full power
of substitution and resubstitution (such power of attorney being deemed to be an
irrevocable power coupled with an interest) to (a) deliver certificates
representing such Units, together, in each such case, with all accompanying
evidences of transfer and authenticity to or upon the order of the Company, (b)
present such Units for transfer on the relevant register and (c) receive all
benefits or otherwise exercise all rights of beneficial ownership of such Units
(except that the Exchange Agent will have no rights to, or control of, except as
agent for the Company, the Walden Securities delivered in connection with the
Exchange) all in accordance with the terms of the Exchange.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS
FULL POWER AND AUTHORITY TO TENDER FOR EXCHANGE, SELL, ASSIGN AND TRANSFER THE
UNITS TENDERED FOR EXCHANGE HEREBY AND, THAT WHEN THE SAME ARE ACCEPTED FOR
EXCHANGE, THE COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE
THERETO, FREE AND CLEAR OF ALL SECURITY INTERESTS, LIENS, RESTRICTIONS, CLAIMS,
CHARGES, ENCUMBRANCES, CONDITIONAL SALES AGREEMENTS OR OTHER OBLIGATIONS
RELATING TO THE SALE OR TRANSFER THEREOF, AND NOT BE SUBJECT TO ANY ADVERSE
CLAIM. THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL
DOCUMENTS DEEMED BY THE EXCHANGE AGENT OR THE COMPANY TO BE NECESSARY OR
DESIRABLE TO COMPLETE THE ASSIGNMENT, TRANSFER AND PURCHASE OF THE UNITS
TENDERED FOR EXCHANGE HEREBY. THE UNDERSIGNED HAS READ THE PROSPECTUS AND THIS
NOTICE OF EXCHANGE AND AGREES TO ALL OF THE TERMS AND CONDITIONS OF THE
EXCHANGE. DELIVERY OF ENCLOSED UNITS SHALL BE EFFECTED, AND RISK OF LOSS AND
TITLE TO SUCH UNITS SHALL PASS, ONLY UPON PROPER DELIVERY THEREOF TO THE
EXCHANGE AGENT.
All authority conferred or agreed to be conferred pursuant to this Notice
of Exchange and every obligation of the undersigned hereunder shall be binding
upon the successors, assigns, heirs, executors, administrators, trustees in
bankruptcy, and personal and legal representatives of the undersigned and shall
not be affected by, and shall survive, the death or incapacity of the
undersigned. Units properly tendered may not be withdrawn at any time subsequent
to their tender for exchange.
In the event a Holder submits a nonconforming tender of Units for exchange,
all such Units will be returned to the undersigned without cost to the
undersigned as soon as practicable following the discovery of such
nonconformity, at the address shown below the undersigned's signature(s) unless
otherwise indicated under "Special Issuance Instructions" below.
Unless otherwise indicated under "Special Issuance Instructions" below, the
Exchange Agent will issue the Walden Securities for Units properly tendered
hereby for exchange and/or return any certificates representing Units not
properly tendered for exchange in the name(s) of the Holder(s) appearing under
"Description of Units Tendered." Similarly, unless otherwise indicated under
"Special Delivery Instructions," the Walden Securities, and/or any certificates
representing Units not tendered for exchanged or not accepted for exchange (and
accompanying documents, as appropriate) to be returned will be sent to the
address(es) of the Holder(s) appearing under "Description of Units Tendered." In
the event that both the Special Issuance Instructions and the Special Delivery
Instructions are completed, the Walden Securities will be issued, if applicable,
and the certificates representing any Units not tendered for exchange (and any
accompanying documents, as appropriate) will be returned in the name of, and
delivered to, the person or persons so indicated. The undersigned recognizes
that neither the Exchange Agent nor the Company has any obligation pursuant to
the Special Issuance Instructions to transfer any Units from the name of the
Holder thereof if the Company does not accept for exchange any of the Units so
tendered due to a failure to properly tender such Units for exchange.
4
<PAGE> 5
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if the certificates representing the Walden Securities
and/or certificates representing Units not tendered for exchange are to be
issued in the name of someone other than the undersigned.
Issue Certificate(s) to:
Name:
(Please Print)
Address:
(Include Zip Code)
(Taxpayer Identification or Social Security Number)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if the Walden Securities and/or certificates
representing the Units not tendered for exchange are to be sent to someone other
than the undersigned or to the undersigned at an address other than that shown
above.
Mail Certificate(s) to:
Name:
(Please Print)
Address:
(Include Zip Code)
(Taxpayer Identification or Social Security Number)
5
<PAGE> 6
SIGNATURES
HOLDERS OF UNITS
SIGN HERE
IMPORTANT: COMPLETE AND SIGN THE SUBSTITUTE FORM W-9 IN
THIS NOTICE OF EXCHANGE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Signature(s) of Holder(s) of Units)
Date: ________________, ____
(Must be signed by the Holder(s) exactly as name(s) appear(s) on certificate(s)
representing the Units or by person(s) authorized to become Holder(s) by
certificates and documents transmitted herewith. If signature is by
attorney-in-fact, executor, administrator, trustee, guardian, officer of a
corporation or other person acting in a fiduciary or representative capacity,
please provide the following information and see Instruction 6.)
Capacity (Full Title):
Name(s):
(Please Type or Print)
Address:
(Include Zip Code)
Area Code and Telephone Number
Tax Identification or Social Security No.
6
<PAGE> 7
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE
1. BENEFICIAL OWNERS. Persons who are beneficial owners of Units but are
not Holders and who seek to tender Units for exchange should (i) contact the
Holder of such Units and instruct such Holder to tender on his behalf, (ii)
obtain and include with this Notice of Exchange Units properly endorsed for
transfer by the Holder, or (iii) effect a record transfer of such Units from the
Holder to such beneficial owner and comply with the requirements applicable to
Holders for tendering Units. See Instruction 6.
2. REQUIREMENTS OF TENDER FOR EXCHANGE. For a Holder to properly tender
Units for exchange, a properly completed and duly executed Notice of Exchange
(or a facsimile thereof), together with any other documents required by these
Instructions, must be received by the Exchange Agent at one of the addresses set
forth on the cover hereof and certificates representing such Units must also be
received by the Exchange Agent at such address.
THE METHOD OF DELIVERY OF CERTIFICATES REPRESENTING UNITS, THIS NOTICE OF
EXCHANGE AND ANY OTHER REQUIRED DOCUMENTS, IS AT THE OPTION AND RISK OF THE
TENDERING HOLDER AND DELIVERY WILL BE DEEMED MADE WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT.
3. WITHDRAWAL OF TENDERS AND REVOCATION OF CONSENTS. Tenders of Units for
exchange may not be withdrawn once submitted to the Exchange Agent.
4. PARTIAL EXCHANGES. If fewer than the entire number of Units evidenced
by a submitted certificate are tendered for exchange, the tendering Holder
should fill in the applicable amount of the Units that are to be tendered in the
box entitled "Description of Units Tendered." The entire number of Units
represented by the certificates for all Units delivered to the Exchange Agent
will be deemed to have been tendered for exchange unless otherwise indicated. If
the entire number of Units is not tendered for exchange, new certificate(s)
representing the remainder of the number of Units that were evidenced by the old
certificate(s) will be sent to the Holder, unless otherwise provided in the
boxes entitled "Special Payment Instructions" or "Special Delivery Instructions"
above, as soon as practicable.
5. SIGNATURES ON THIS NOTICE OF EXCHANGE. If this Notice of Exchange is
signed by the Holder(s) of the Units tendered for exchange hereby, the
signature(s) must correspond exactly with the name(s) as written on the face of
the certificate(s) without alteration or any change whatsoever.
If any of the Units tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Notice of Exchange. If any tendered
Units are registered in different names on several certificates, it will be
necessary to complete, sign and submit as many separate Notices of Exchange as
there are names in which certificates are held.
If this Notice of Exchange or any certificates are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and proper evidence satisfactory to the
Company of their authority so to act must be submitted, unless waived by the
Company.
If this Notice of Exchange is signed by the Holder(s) of the Units listed
and transmitted hereby, no endorsements of certificates are required unless
certificates for Units not tendered for exchange are to be issued to, a person
other than the Holder(s).
6. TRANSFER TAXES. The Company will pay or cause to be paid any transfer
taxes with respect to the transfer and sale of Units to it or its order pursuant
to the Exchange. If, however, the Walden Securities are to be registered in the
name of any person other than the Holder(s), or if certificates tendered for
exchange are registered in the name of any person other than the person(s)
signing this Notice of Exchange, the amount of any transfer taxes (whether
imposed on the Holder(s) or such other person) payable on account of the
transfer to such person will be due from the Holder prior to completion of the
exchange unless satisfactory evidence of the payment of such taxes or exemption
therefrom is submitted.
7
<PAGE> 8
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the certificates listed in this Notice of
Exchange.
7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If Walden Securities are to
be issued in the name of, and/or certificates representing Units not exchanged
are to be returned to, a person other than the person(s) signing this Notice of
Exchange or if Walden Securities are to be sent and/or such certificates are to
be returned to a person other than the person(s) signing this Notice of Exchange
or to an address other than that shown above, the appropriate boxes on this
Notice of Exchange should be completed.
8. WAIVER OF CONDITIONS. To the extent permitted by applicable law, the
Company reserves the right to waive any and all conditions to the Exchange and
accept for exchange any Units tendered for exchange
9. TAX IDENTIFICATION NUMBER AND BACKUP WITHHOLDING. Federal income tax
law generally requires that a Holder whose tendered Units are accepted for
exchange, or such Holder's assignee (in either case, the "Payee"), provide the
Company (the "Payor"), with his or her correct Taxpayer Identification Number
("TIN"), which, in the case of a Payee who is an individual, is his or her
social security number. If the Payor is not provided with the correct TIN or an
adequate basis for an exemption, such Payee may be subject to a $50 penalty
imposed by the Internal Revenue Service and backup withholding in an amount
equal to 31% of the interest paid on the Exchange. If withholding results in an
overpayment of taxes, a refund may be obtained.
To prevent backup withholding, each Payee must provide his correct TIN by
completing the "Substitute Form W-9" set forth herein, certifying that the TIN
provided is correct (or that such Payee is awaiting a TIN) and that (i) the
Payee is exempt from backup withholding, (ii) the Payee has not been notified by
the Internal Revenue Service that he is subject to backup withholding as a
result of a failure to report all interest or dividends, or (iii) the Internal
Revenue Service has notified the Payee that he is no longer subject to backup
withholding.
If the Payee does not have a TIN, such Payee should consult the enclosed
Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9 (the "W-9 Guidelines") for instructions on applying for a TIN, write
"Applied For" in the space for the TIN in Part 1 of the Substitute Form W-9, and
sign and date the Substitute Form W-9 and the Certificate of Awaiting Taxpayer
Identification Number set forth herein. Note: Writing "Applied For" on the form
means that the Payee has already applied for a TIN or that such Payee intends to
apply for one in the near future.
If the Units are held in more than one name or are not in the name of the
actual owner, consult the W-9 Guidelines for information on which TIN to report.
Exempt Payees (including, among others, all corporations and certain
foreign individuals) are not subject to these backup withholding and reporting
requirements. To prevent possible erroneous backup withholding, an exempt Payee
should write "Exempt" in Part 2 of Substitute Form W-9. See the W-9 Guidelines
for additional instructions. In order for a nonresident alien or foreign entity
to qualify as exempt, such person must submit a completed Form W-8, "Certificate
of Foreign Status." Such form may be obtained from the Payor.
10. MUTILATED, LOST, STOLEN OR DESTROYED SECURITIES. Any Holder whose
certificates representing Units have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at one of the addresses indicated above for
further instructions.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance
may be directed to the Company at (972) 788-0510. Additional copies of the
Prospectus, this Notice of Exchange and the Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9 may be obtained from the
Exchange Agent.
8
<PAGE> 9
TO BE COMPLETED BY ALL PAYEES
(SEE INSTRUCTION 9)
<TABLE>
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
PAYOR'S NAME:
- -----------------------------------------------------------------------------------------------------------------------
Name
SUBSTITUTE
FORM W-9 Address
(Number and Street)
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE (City) (State) (Zip Code)
PAYOR'S REQUEST FOR
TAXPAYER
IDENTIFICATION NUMBER (TIN)
AND CERTIFICATION
------------------------------------------------------------------------------------
PART 1 -- PLEASE PROVIDE YOUR TIN
IN THE BOX AT RIGHT AND CERTIFY BY TIN
SIGNING AND DATING BELOW (Social Security Number or
Employer Identification Number
------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
PART 2 -- FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING PLEASE WRITE "EXEMPT" HERE
(SEE INSTRUCTIONS)
------------------------------------------------------------------------------------
</TABLE>
PART 3 -- CERTIFICATION UNDER PENALTIES OF PERJURY, I
CERTIFY THAT
(1) The number shown on this form is my correct TIN
(or I am waiting for a number to be issued to
me), and
(2) I am not subject to backup withholding because:
(a) I am exempt from backup withholding, or (b) I
have not been notified by the Internal Revenue
Service (the "IRS") that I am subject to backup
withholding as a result of a failure to report
all interest or dividends or (c) the IRS has
notified me that I am no longer subject to backup
withholding.
SIGNATURE DATE ________________________
- --------------------------------------------------------------------------------
You must cross out Part 2 above if you have been notified by the IRS that you
are currently subject to backup withholding because of underreporting interest
or dividends on your tax return.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU WROTE "APPLIED FOR"
IN PART 1 OF THE SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and that I have mailed or delivered an application to
receive a taxpayer identification number of the appropriate Internal Revenue
Service Center or Social Security Administration Office (or I intend to mail or
deliver an application in the near future). I understand that if I do not
provide a taxpayer identification number to the Payor, the Payor is required to
withhold 31 percent of all cash payments made to me until I provide a number.
SIGNATURE DATE ________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31 PERCENT OF ANY CASH PAYMENTS. PLEASE REVIEW THE ENCLOSED GUIDELINES
FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9
FOR ADDITIONAL DETAILS.
9
<PAGE> 10
TO THE EXCHANGE AGENT:
BANK BOSTON, NA
<TABLE>
<S> <C> <C>
By Mail: By Overnight Mail or Courier: By Hand:
Bank Boston, NA Bank Boston, NA Securities Transfer and
Attention: Corporate Attention: Corporate Reporting Services, Inc.
Reorganization Reorganization 100 William Street, Galleria
P.O. Box 8029 150 Rexall Street New York, NY 10038
Boston, MA 02266-8029 Canton, MA 02021
Telephone:
(781) 575-3120
</TABLE>
10
