<PAGE> 1
FILE PURSUANT TO
RULE 424(b)(5)
RS No. 333-13809
PROSPECTUS SUPPLEMENT
(To Prospectus dated November 1, 1996)
323,232 Shares
WALDEN RESIDENTIAL PROPERTIES, INC.
Common Stock
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The Company is a self-administered, self-managed, fully integrated
real estate investment trust ("REIT") focused on middle income multifamily
properties located primarily in selected Southwestern and Southeastern markets.
The Company currently owns and operates 154 multifamily properties containing
42,482 apartment units, primarily in the Southwest and Southeast regions of the
United States.
The 323,232 shares of common stock of the Company (the "Common Stock")
offered hereby (the "Offering") are being sold by the Company. The Common
Stock is listed on the New York Stock Exchange ("NYSE") under the symbol "WDN".
On February 18, 1998, the last reported sale price of the Common Stock on the
NYSE was $24.75 per share. See "Price Range of Common Stock and
Distributions."
SEE "RISK FACTORS" COMMENCING ON PAGE S-5 OF THIS PROSPECTUS
SUPPLEMENT FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
A.G. Edwards & Sons, Inc. (the "Underwriter") has agreed to purchase
the Common Stock from the Company at a price of $23.5150 per share, resulting
in aggregate proceeds to the Company of $7,600,800 before payment of expenses
by the Company estimated at $75,000, subject to the terms and conditions of an
Underwriting Agreement. The Underwriter intends to sell the shares of Common
Stock to the sponsor of a newly-formed unit investment trust at an aggregate
purchase price of $7,680,800, resulting in an aggregate underwriting discount
of $80,000. The Company has agreed to indemnify the Underwriter against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
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The shares of Common Stock are offered by the Underwriter named
herein, subject to prior sale, when, as and if issued by the Company and
delivered to and accepted by the Underwriter, subject to certain conditions.
It is expected that delivery of the shares of Common Stock will be made on or
about February 23, 1998 at the offices of A.G. Edwards & Sons, Inc., New York,
New York.
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A.G. EDWARDS & SONS, INC.
The date of this Prospectus Supplement is February 18, 1998.
<PAGE> 2
The following summary is qualified in its entirety by the more
detailed information and financial information appearing elsewhere in this
Prospectus Supplement and in the accompanying Prospectus or incorporated herein
or therein by reference. This Prospectus Supplement and the accompanying
Prospectus, including documents incorporated by reference, contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
Forward-looking statements are inherently subject to risks and uncertainties,
many of which cannot be predicted with accuracy and some of which might not
even be anticipated. Future events and actual results, financial and
otherwise, may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "Management's Discussion
and Analysis of Results of Operations and Financial Condition" included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996, and the Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, 1997, June 30, 1997 and September 30, 1997, which are
incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus.
THE COMPANY
The Company is a self-administered, self-managed, fully integrated
REIT focused on middle income multifamily properties located primarily in
selected Southwestern and Southeastern markets. The Company, a Maryland
corporation with headquarters in Dallas, Texas, was formed in September 1993 to
continue and expand the multifamily property ownership, management, acquisition
and marketing operations and related business objectives and strategies of The
Walden Group, Inc. and its subsidiaries and affiliates (collectively, the
"Walden Predecessors"). As of January 31, 1998 the Company owned and operated
154 multifamily properties (the "Properties") containing 42,482 apartment
units. Approximately 94.6% of the apartment units are located in the Houston,
Dallas/Fort Worth, Austin, Phoenix, Nashville, Jacksonville, Tampa, Oklahoma
City, San Antonio, Tulsa, San Diego, Salt Lake City and Atlanta areas, with the
remaining Properties primarily located in other areas in the Southwest and
Southeast regions of the United States. The Properties had a weighted average
physical occupancy rate of approximately 93.3% for the month of January 1998.
The Company also manages on a fee basis two additional multifamily properties
containing 772 apartment units.
Upon completion of its initial public offering in February 1994 (the
"IPO"), the Company purchased the multifamily operations of the Walden
Predecessors, including 18 Properties containing 5,895 apartment units (of
which a 299-unit property was sold in April 1995, a 384-unit property was sold
in April 1996 and a 144-unit property was sold in September 1996), and
concurrently purchased the two additional Properties containing 448 apartment
units, one of which was owned by a third party and the other of which was
principally owned by the Walden Predecessors. Since the consummation of the
IPO through January 31, 1998, the Company has acquired 140 Properties (of which
three properties, containing an aggregate of 938 units, were sold in 1995, 1996
and 1997), containing an aggregate of 37,903 apartment units, for an aggregate
purchase price of approximately $1.35 billion. Management believes that these
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activities are consistent with its core acquisition strategy of acquiring well
located garden apartment properties at prices less than replacement costs,
which serve middle income residents and can benefit from the Company's
comprehensive management programs.
RECENT DEVELOPMENTS
1997 EARNINGS
On February 2, 1998, the Company reported funds from operations for
the year ended December 31, 1997 were $50.2 million, or $2.18 per diluted share
of Common Stock, compared to $37.0 million, or $2.17 per diluted share, for the
fiscal year ended December 31, 1996. Total revenues for the 1997 fiscal year
increased approximately 54% from $111.2 million in 1996 to $171.1 million for
the 12 months ended December 31, 1997. Net income available to common
stockholders for the year ended December 31, 1997 was $9.4 million, or $0.53
per share, which included an extraordinary loss on debt extinguishment of $0.4
million, or $0.02 per share, while net income available to common stockholders
during 1996 was $13.2 million, or $0.90 per share, which included an
extraordinary loss on debt extinguishment of $1.8 million, or $0.12 per share.
DREVER TRANSACTION
On October 1, 1997, the Company completed the acquisition (the "Drever
Transaction") of the 79 apartment properties (the "Drever Properties")
consisting of 18,118 multifamily units, previously owned by partnerships (the
"Drever Partnerships") of which Drever Partners, Inc. ("Drever") and certain of
its affiliates were the general partners (the "General Partners"). Pursuant to
the acquisition of the Drever Properties and the operations of the General
Partners, a newly-formed, wholly-owned partnership subsidiary of the Company,
Walden/Drever Operating Partnership, L.P. ("WDOP"), issued to the partners of
the Drever Partnerships approximately $85 million in cash, 10,322,397 common
units of beneficial ownership in WDOP (the "WDOP Units") and 1,999,909
preferred units of beneficial interest in WDOP (the "Preferred Units"). Each
WDOP Unit is exchangeable on or after October 1, 1998 for one share of the
Company's common stock, par value $.01 per share (the "Common Stock"). The
Preferred Units are each exchangeable on or after October 1, 1998 for one share
of the Company's 9.00% Redeemable Preferred Stock and 3-1/3 Series B Warrants,
each of which Warrants is exercisable for 1/3 of a share of Common Stock at an
exercise price of $26.875 per share. In addition, the Company assumed
approximately $286 million of debt existing on the Drever Properties of which
approximately $119 million was repaid from borrowings under the Company's
unsecured $200 million term loan facility with BankBoston (the "Term Loan") and
the Company's unsecured credit facility with BankBoston (the "Credit
Facility").
The Company's executive offices are located at One Lincoln Centre,
5400 LBJ Freeway, Suite 400, Dallas, Texas 75240. The telephone number is
(972) 788-0510. The Company was incorporated in Maryland on September 29, 1993
and the duration of its existence is perpetual.
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THE PROPERTIES
As of January 31, 1998, the Company's portfolio consisted of 154
multifamily properties containing 42,482 apartment units located in 11 states.
The 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 the
Properties offer additional amenities such as saunas, whirlpools, exercise
facilities, tennis courts and covered parking. The Properties contain an
average of 276 apartment units, with the largest property containing 994
apartment units. The apartment units have an average size of 783 square feet.
The Properties were built between 1967 and 1988 and have a weighted average age
by number of apartment units of approximately 15 years.
The Properties are located in the following markets:
<TABLE>
<CAPTION>
Number Number Percent
Location of Properties of Units of Total Units
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Houston 52 12,125 28.54%
Dallas/Fort Worth 40 11,749 27.66%
Austin 11 3,216 7.57%
Phoenix 7 2,360 5.56%
Nashville 4 1,858 4.37%
Jacksonville 5 1,748 4.11%
Tampa 5 1,528 3.60%
Oklahoma City 4 1,196 2.82%
San Antonio 5 1,146 2.70%
Tulsa 3 1,008 2.37%
Atlanta 4 1,002 2.36%
Salt Lake City 2 768 1.81%
San Diego 3 480 1.13%
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Subtotal 145 40,184 94.60%
Other Markets (a) 9 2,298 5.40%
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Total 154 42,482 100.00%
=== ====== =======
</TABLE>
(a) Represents properties in five different states.
No single property accounts for greater than 10% of the Company's
total revenues. The Properties had a weighted average physical occupancy of
93.3% for 1997 and 93.3% for the month of January 1998. Resident leases are
generally for six- to 12-month terms and often require security deposits. The
Properties are located in mature, developed neighborhoods. Management believes
the Properties are well built and have been well maintained.
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RISK FACTORS
An investment in the Common Stock involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained in this Prospectus Supplement and the
accompanying Prospectus before purchasing the Common Stock in the Offering.
DEPENDENCE ON TEXAS MARKET
As of January 31, 1998, 113 of the Properties, containing 29,448
apartment units (69.32% of all apartment units comprising the Properties), are
located in Texas, with 52 of the Properties, containing 12,125 apartment units
(28.54% of all apartment units comprising the Properties) being located in the
Houston metropolitan area and 40 of the Properties, containing 11,749 apartment
units (27.66% of all apartment units comprising the Properties) located in the
Dallas/Fort Worth metropolitan area. The Company's performance is, therefore,
largely dependent upon economic conditions in Texas generally and,
specifically, in the Houston and Dallas/Fort Worth metropolitan areas. An
economic decline in the Texas markets may adversely affect the ability of the
Company to make expected distributions to its stockholders.
ABILITY OF THE COMPANY TO INCUR ADDITIONAL INDEBTEDNESS; RESTRICTIVE COVENANTS
The amount of indebtedness that the Company may incur is not limited
by its organizational documents and, subject to restrictions contained in the
instruments governing certain of the Company's indebtedness, including the
Credit Facility and the Indenture, is solely within the discretion of the Board
of Directors of the Company. There can be no assurance that the Company will
not become more highly leveraged and have a related increase in the amount of
required debt service payments, resulting in an increased risk of default on
its obligations. Such increase in leverage could adversely affect the
financial condition and results of operations of the Company or the Company's
ability to satisfy its obligations with respect to its indebtedness.
Required payments on mortgages and other indebtedness generally are
not reduced if the economic performance of any property declines. If such a
decline occurs, the Company's income, Funds from Operations and cash available
to satisfy indebtedness, will be adversely affected. As of January 31, 1998,
the Company had outstanding indebtedness in the aggregate principal amount of
$702 million, including $74 million principal amount of unsecured indebtedness
under the Credit Facility and $200 million outstanding under the Term Loan. If
the Company should be unable to pay its indebtedness as it becomes due, it
could sustain a loss, which may include foreclosures by or judgments against
the Company in favor of mortgagees. Instruments evidencing certain of the
Company's indebtedness, including, the Credit Facility and the Term Loan,
contain cross-default and/or cross-acceleration provisions. There can be no
assurance that the Company will be able to refinance this or any other
indebtedness. Additionally, certain of the Company's indebtedness, including
indebtedness under the Credit Facility and the Term Loan, bears interest at
variable rates and, therefore, exposes the Company to the risk of increasing
interest rates.
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<PAGE> 6
The agreements governing the debt of the Company and its subsidiaries,
including the Credit Facility and the Term Loan, contain, among other
covenants, restrictions on the ability of the Company and its subsidiaries to
incur indebtedness, make investments, engage in transactions with stockholders
and affiliates, incur liens, create restrictions on the ability of certain
subsidiaries to pay dividends or make certain payments to the Company, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of such entities.
In addition, under the Credit Agreement and the Term Loan, the Company is
required to maintain certain specific ratios. There can be no assurance that
the Company will be able to maintain such ratios or that such covenants will
not adversely affect the Company's ability to finance its future operations or
capital needs or to engage in other business activities that may be in the
interest of the Company. The breach of any of these covenants or the inability
of the Company to comply with the required financial ratios could result in a
default under the Credit Facility or the Term Loan. In the event of any such
default, all amounts borrowed under the Credit Facility or the Term Loan,
together with accrued interest, could be declared to be due and payable. If
the Indebtedness under the Credit Facility or the Term Loan were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay such indebtedness in full. See "Description of Certain
Indebtedness" and "Description of the Notes and Guarantees."
BORROWING RISKS
Debt Financing and Existing Debt Maturities. The Company is subject
to risks normally associated with debt financing, including the risk that the
Company's net cash flow from operations will be insufficient to meet required
payments of principal and interest, the risk that existing indebtedness on the
Properties will not be able to be refinanced or the risk that the terms of such
refinancing will not be as favorable as the terms of the existing indebtedness.
At January 31, 1998, the Company had outstanding approximately $428
million of mortgage indebtedness secured by 89 of the Properties and $274
million of nonsecured indebtedness. As of January 31, 1998, the Company had
approximately $401 million of principal that becomes payable during the
remainder of 1998 through 1999. It may be necessary for the Company to
refinance such debt either through additional debt financing secured by
individual properties or groups of properties or by unsecured private or public
debt offerings or repaid through additional equity offerings. In the event
that the Company is unable to refinance this indebtedness on acceptable terms,
the Company may be required to dispose of the encumbered properties upon
unfavorable terms, which may result in losses to the Company and may adversely
affect its ability to make distributions to its stockholders. Further, if a
property or properties are mortgaged to secure payment of indebtedness and the
Company is unable to meet scheduled mortgage payments, the mortgaged properties
could be foreclosed upon by or otherwise transferred to the lender resulting in
a loss of income and asset value to the Company.
Risk of Rising Interest Rates. At January 31, 1998, the Company had
outstanding variable-rate indebtedness aggregating approximately $332 million,
including $74 million of outstanding borrowings under the Credit Facility and
$200 million outstanding under the Term Loan. In addition, future indebtedness
may bear interest at floating rates. Accordingly, if prevailing interest rates
or other factors at the time of refinancing result in higher rates or if
interest rates increase at the time the Company has variable-rate debt
outstanding, the Company's
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interest expense would increase and the Company's ability to make distributions
to its stockholders could be adversely affected.
ACQUISITION RISKS; INTEGRATION OF THE DREVER TRANSACTION
Since the consummation of the IPO through January 31, 1998, the
Company has purchased 140 Properties (and sold six properties) and increased
the number of apartment units it owns to 42,482, an increase of approximately
570% from the 6,343 apartment units owned at such time. Acquisitions entail
risks that (i) acquired properties may not perform in accordance with
management's expectations, including projected occupancy and rental rates, (ii)
the Company may have overpaid for acquisitions or (iii) the Company may have
underestimated the cost of improvements required to bring an acquired property
up to standards established for the market position intended for that property.
The Drever Transaction was substantially larger than any of the
Company's previous acquisitions and the combination and integration of the
respective operations of the Company and Drever are of a substantially greater
scale than previously undertaken by either company. After giving effect to the
Drever Transaction, the Company's portfolio of apartment units increased from
23,420 to 41,538, an increase of 77%. The difficulties of managing such
combination and integration are increased by the necessity of coordinating the
operations of geographically diverse organizations, of integrating different
strategies and operating systems, of managing it portfolio and properties at
the same level of efficiency after the Drever Transaction, which could
adversely affect operations, and of integrating management and operating
personnel from both companies. An inability to successfully manage the
combined operations of the Company and Drever would have a material adverse
effect on the Company's results of operations and financial condition.
Additionally, one of the anticipated benefits of the Drever Transaction is the
elimination of redundant activities in the combined organization and the
resulting savings in costs and expenses. An inability to achieve these savings
could adversely affect the operating results and financial performance of the
Company after the Drever Transaction.
The Company's ability to acquire additional properties is dependent
upon its ability to obtain equity or debt financing. As of the date hereof,
the Company had additional borrowing availability of approximately $76 million
under the Credit Facility. The issuance of additional equity by the Company to
obtain financing for the acquisitions of additional properties could result in
a dilution of ownership for the existing stockholders. In addition, if cash
flows generated from the investment of such net proceeds in the Properties or
otherwise is less than the distributions payable to such new stockholders,
distributions to all stockholders may be adversely affected. When the Company
finances its operations with debt, the Company expects that its Properties will
generate cash flow adequate to service the indebtedness. However, if cash flow
from the Properties decreases or if any property owned by the Company requires
significant unanticipated capital improvements, funds from operations would be
adversely affected.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various Federal, state and local environmental laws, ordinances
and regulations, an owner or operator of real estate may become liable for the
costs of removal or remediation of certain hazardous substances released on or
in its property. Such laws typically impose cleanup
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responsibility and liability without regard to whether the owner knew of or was
responsible for the presence of the contaminants. The costs of investigation,
remediation or removal of such substances may be substantial, and the presence
of such substances, or the failure to properly remediate such property, may
adversely affect the owner's ability to sell or rent such property or to borrow
using such property as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic substances also may be liable for the costs of
removal or remediation of such substances at the disposal or treatment
facility, whether or not such facility is owned or operated by such person.
Finally, the owner of a site may be subject to common law claims by third
parties based on damages and costs resulting from environmental contaminations
emanating from a site.
Certain Federal, state and local laws, ordinances and regulations
govern the removal, encapsulation or disturbance of asbestos-containing
materials ("ACMs") when such materials are in poor condition or in the event of
building remodeling, renovations or demolition. Such laws may impose liability
for release of ACMs and may provide for third parties to seek recovery from
owners or operators of real estate for personal injuries associated with ACMs.
Phase I environmental assessments, which have been performed on each
of the Properties, revealed elevated lead content in the drinking water at
three of the Properties and ACMs at 78 of the Properties (some of which is
friable but in good and manageable condition). The consulting firm that
conducted most of the Phase I studies has prepared an operations and
maintenance program recommending procedures to be followed in dealing with the
ACMs if they are moved or otherwise disturbed. The cost to the Company
resulting from any future disturbance of the ACMs will depend upon the
magnitude of the disturbance and the location of the ACMs. The consulting firm
advised the Company that it is not required by Federal law to take any action
to address the lead levels in the water, however, the Company is currently
evaluating the most effective remedial action it can take. The Company
anticipates any such remedial action will cost in the aggregate between $10,000
and $30,000.
Except as otherwise described above, management of the Company
believes that the Properties are in compliance in all material respects with
all Federal, state and local laws, ordinances and regulations regarding
hazardous or toxic substances or petroleum products. The Company has not been
notified by any governmental authority, and is not otherwise aware, of any
material noncompliance, liability or claim relating to hazardous or toxic
substances in connection with any of the Properties. Management does not
believe that the matters described above, or compliance with applicable
environmental laws or regulations, will have a material adverse effect on the
Company or its financial condition, results of operations and cash flows.
REAL ESTATE INVESTMENT CONSIDERATIONS
Effect of Economic and Real Estate Conditions. Real property
investments are subject to varying degrees of risk. The yields available from
equity investments in real estate depend on the income generated and expenses
incurred. If the Properties do not generate revenue sufficient to meet
operating expenses, including debt service and capital expenditures, the
Company's cash flow and ability to make distributions to its stockholders will
be adversely affected.
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<PAGE> 9
Market Illiquidity. Real estate investments are relatively illiquid.
Such illiquidity will tend to limit the ability of the Company to vary its
portfolio promptly in response to changes in economic or other conditions. In
addition, provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), relating to REITs limit the Company's ability to sell properties held
for fewer than four years, which provisions may affect the Company's ability to
sell properties without adversely affecting returns to its stockholders.
Operating Risks. The Properties are subject to all operating risks
common to multifamily properties in general, any or all of which might
adversely affect occupancy or rental rates. Increases in unemployment in
markets in which the Properties are located may adversely affect occupancy
and/or rental rates. In addition, increases in operating costs due to
inflation and other factors may not necessarily be offset by increased rents.
The Company is also exposed to the inability or unwillingness of residents to
pay rent increases and future enactment of rent control laws or other laws
regulating multifamily properties. The local rental market may limit the
extent to which rents may be increased to meet increased operating expenses, if
any, without decreasing occupancy rates. If any of the above occurs, the
Company's ability to make expected distributions to its stockholders could be
adversely affected.
Affordable Housing Restrictions. Fourteen of the Properties are
subject to restrictions requiring that a specified percentage of the apartment
units in such Properties be made available to persons with lower and moderate
incomes (currently, approximately 68% of the total number of apartment units in
the 14 affected Properties and 8% of the total number of the Company's
apartment units). In addition, state and local authorities in some cases
impose certain restrictions on the amount of rent that can be charged.
UNINSURED LOSS
The Company carries comprehensive liability, fire, extended coverage
and rental loss insurance with respect to all of the Properties with policy
specification, insured limits and deductibles customarily carried for similar
properties. There are, however, certain types of losses (such as losses
arising from wars or earthquakes) that are not generally insured because they
are either uninsurable or not economically insurable. Should an uninsured loss
or a loss in excess of insured limits occur, the Company could lose its capital
invested in the affected property, as well as the anticipated future revenues
from such property, and would continue to be obligated on any mortgage
indebtedness or other obligations related to the property. Any such loss could
adversely affect the Company. Management believes the Properties are currently
adequately insured in accordance with industry standards.
COMPETITION
There are numerous real estate companies, including those which
operate in the market in which the Properties are located, which compete with
the Company in seeking apartment properties for acquisition and residents to
occupy such properties. The Properties compete directly with other multifamily
properties and single family homes that are available for rent in which the
Properties are located. The Properties also compete with the new and existing
home market for residents. In addition, competitors for acquisition projects
may have greater resources than the Company.
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CERTAIN ANTITAKEOVER PROVISIONS; OWNERSHIP LIMITS
Certain provisions of the Company's Articles of Incorporation, as
amended and restated, discourage the acquisition of or the change in control of
the Company, including the general limitation on the ownership either directly
or indirectly of more than 9.0% of the shares of the Company's capital stock
(other than by Don R. Daseke), the staggered terms of the Board of Directors
and the ability of the Board of Directors to issue shares of preferred stock.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Qualification as a REIT involves the application of highly technical
and complex Code provisions for which there are only limited judicial or
administrative interpretations. If the Company were to fail to qualify as a
REIT, the Company would not be allowed a deduction for dividends to
stockholders in computing its taxable income and would be subject to Federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Unless entitled to relief under certain
statutory provisions, the Company would also be disqualified from treatment as
a REIT for the four taxable years following the year during which qualification
was lost. As a result, the funds from operations would be reduced for each of
the years involved. In addition, dividends would no longer be required to be
paid. To the extent that dividends to stockholders would have been paid in
anticipation of the Company's qualifying as a REIT, the Company might be
required to borrow funds or to liquidate certain of its investments to pay the
applicable tax.
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND SIMILAR LAWS
Under the Americans with Disabilities Act of 1990 (the "ADA"), all
places of public accommodation are required to meet certain Federal
requirements related to access and use by disabled persons. These requirements
became effective in 1992. A number of additional Federal, state and local laws
exist which also may require modifications to the properties to be acquired by
the Company, or may restrict certain further renovations thereof, with respect
to access by disabled persons. For example, the Fair Housing Amendments Act of
1988 (the "FHA") requires apartment communities first occupied after March 13,
1990 to be accessible to the handicapped. Noncompliance with the ADA or the
FHA could result in the imposition of fines or an award of damages to private
litigants. The Company has obtained structural reports from third-party
consultants that indicate certain modifications to certain of the Properties
will need to be made in order to bring such Properties into full compliance
with the ADA. Management estimates that the costs of making these
modifications will be approximately $15,000, which amount will be capitalized
for financial reporting purposes.
Additional legislation may impose additional financial obligations or
restrictions on owners with respect to access by disabled persons. If required
changes involve greater expenditures than the Company currently anticipates, or
if the changes must be made on a more accelerated basis than it anticipates,
the Company's ability to make expected distributions to its stockholders could
be adversely affected.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered hereby are estimated to be approximately $7.6 million. The
Company intends to use the net Offering proceeds to repay outstanding
indebtedness under the Credit Facility. At January 31, 1998, the Company had
outstanding borrowings under the Credit Facility of $74. Such indebtedness
bears interest at approximately 7% per annum, matures in February 1999 and was
incurred by the Company to pay a portion of the purchase price of certain
property acquisitions.
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Common Stock has been traded on the NYSE under the symbol "WDN"
since the IPO. The following table sets forth the quarterly high and low sale
prices per share reported on the NYSE, as well as the quarterly distributions
declared per share.
<TABLE>
Distributions
High Low Per Share
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<S> <C> <C> <C>
Year Ended December 31, 1995:
1st Quarter . . . . . . . . . . . . . . . . . $ 20.500 $ 17.875 $ .455
2nd Quarter . . . . . . . . . . . . . . . . . 19.875 18.000 .455
3rd Quarter . . . . . . . . . . . . . . . . . 19.500 18.125 .455
4th Quarter . . . . . . . . . . . . . . . . . 21.000 17.375 .455
Year Ended December 31, 1996:
1st Quarter . . . . . . . . . . . . . . . . . $ 22.125 $ 20.000 $ .465
2nd Quarter . . . . . . . . . . . . . . . . . 21.875 20.250 .465
3rd Quarter . . . . . . . . . . . . . . . . . 21.875 19.750 .465
4th Quarter . . . . . . . . . . . . . . . . . 26.000 20.875 .465
Year Ended December 31, 1997:
1st Quarter . . . . . . . . . . . . . . . . . $ 26.875 $ 24.000 $ .4825
2nd Quarter . . . . . . . . . . . . . . . . . 25.688 21.250 .4825
3rd Quarter . . . . . . . . . . . . . . . . . 25.750 22.750 .4825
4th Quarter . . . . . . . . . . . . . . . . . 26.000 23.500 .4825
Year Ended December 31, 1998:
1st Quarter (through February 17, 1998) . . . $ 27.125 $ 24.875 $ .4825(1)
</TABLE>
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(1) Payable to stockholders of record as of February 18, 1998.
As of January 31, 1998, the Company had 1,588 record holders of Common
Stock.
On February 4, 1998, the Company announced a dividend of $.4825 per
share of Common Stock payable to stockholders of record as of February 18,
1998. PURCHASERS OF COMMON STOCK IN THE OFFERING WILL NOT BE ENTITLED TO
RECEIVE SUCH DIVIDEND. Pursuant to Statement of Financial Accounting Standards
No. 128, the Company's diluted earnings per share are equal to its basic
earnings per share, which amount was no different from the earnings per share
numbers previously reported for the period from inception (February 9, 1994)
through December 31, 1996 and for the fiscal quarters ended March 31, 1997,
June 30, 1997 and September 30, 1997.
The Company intends to continue to pay regular quarterly distributions
to its stockholders. The Company reviews its distribution on a quarterly basis
in light of actual results of operations
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<PAGE> 12
and other factors. Distributions by the Company are determined by the Board of
Directors and will depend on a number of factors, including the amount of funds
from operations, the financial condition of its properties, any decision by the
Board of Directors to reinvest cash available for distribution rather than to
distribute such funds, capital requirements of the Company, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Board of Directors deems relevant.
UNDERWRITING
Pursuant to the terms and subject to the conditions of the
Underwriting Agreement (the "Underwriting Agreement") between the Company and
A.G. Edwards & Sons, Inc. (the "Underwriter"), the Underwriter has agreed to
purchase from the Company, and the Company has agreed to sell to the
Underwriter, 323,232 shares of Common Stock.
The Underwriter intends to sell the shares of Common Stock to Nike
Securities L.P., which intends to deposit such shares, together with shares of
common stock of other entities also acquired from the Underwriter, into a
newly-formed unit investment trust (the "Trust") registered under the
Investment Company Act of 1940, as amended, in exchange for units in the Trust.
The Underwriter is not an affiliate of Nike Securities L.P. or the Trust. The
Underwriter intends to sell the shares of Common Stock to Nike Securities L.P.
at an aggregate purchase price of $7,680,800. It is anticipated that the
Underwriter will also participate in the distribution of units of the Trust and
will receive compensation therefor.
Pursuant to the Underwriting Agreement, the Company has agreed to
indemnify the Underwriter against certain liabilities, including liabilities
under the Securities Act or to contribute to payments the Underwriter may be
required to make in respect thereof.
Until the distribution of the shares of Common Stock is completed,
rules of the Securities and Exchange Commission may limit the ability of the
Underwriter to bid for and purchase shares of Common Stock. As an execution to
these rules, the Underwriter is permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price
of the Common Stock. It is not currently anticipated that the Underwriter will
engage in any such transactions in connection with this Offering.
If the Underwriter creases a short position in the Common Stock in
connection with this Offering, i.e., if it sells more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement, the
Underwriter may reduce that short position by purchasing shares in the open
market.
In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be
higher than it might be in the absence of such purchases.
Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above might have on the
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<PAGE> 13
price of the shares. In addition, neither the Company nor the Underwriter
makes any representation that the Underwriter will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for
the Company by Winstead Sechrest & Minick P.C., Dallas, Texas. The validity of
the Securities offered hereby will be passed upon for the Underwriter by
Chapman and Cutler, Chicago, Illinois. Chapman and Cutler will rely on the
opinion of Winstead Sechrest & Minick P.C. as to certain matters of Maryland
law.
EXPERTS
The consolidated balance sheets as restated of Walden Residential
Properties, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of income and cash flows as restated for the
years ended December 31, 1996 and 1995 and the period ending February 9, 1994
(date of commencement of operations) through December 31, 1994 and the related
financial statement schedule as of December 31, 1996 and the combined
statements of operations and cash flows of Walden Predecessors for the period
January 1, 1994 through February 8, 1994 which are incorporated in this
prospectus by reference from the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, 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 which are incorporated in
this prospectus by reference from the Company's Current Report on Form 8-K
dated October 16, 1997; the combined statement of revenues and certain expenses
of Arbor Park, Arbors of Bedford, Arbors of Carrollton, Arbors of Euless,
Arbors of Forest Lane and Arbors of Austin for the year ended December 31, 1996
which is incorporated in this prospectus by reference from the Company's
Current Report on Form 8-K dated August 7, 1997; 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 Stanton 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 is
incorporated in this prospectus by reference from the Company's Current Report
on Form 8-K dated February 17, 1998, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports which are incorporated by
reference herein, and have been so incorporated in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
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<PAGE> 14
PROSPECTUS
WALDEN RESIDENTIAL PROPERTIES, INC.
$150,000,000
COMMON STOCK AND PREFERRED STOCK
---------------
Walden Residential Properties, Inc. (the "Company") may from time to
time offer and sell shares of its common stock, par value $.01 per share (the
"Common Stock"), and shares of its preferred stock, par value $.01 per share
(the "Preferred Stock," and together with the Common Stock, the "Offered
Securities"), with an aggregate public offering price not to exceed
$150,000,000. The Offered Securities may be offered separately or together, in
separate series, in amounts and at prices and terms to be set forth in a
supplement to this Prospectus (the "Prospectus Supplement").
The terms of the Preferred Stock, including the specific designation
and stated value per share, any dividend, liquidation, redemption, conversion,
voting and other rights, and all other specific terms of the Preferred Stock,
including the initial public offering price, will be set forth in the
applicable Prospectus Supplement. The specific number of shares of Common
Stock and issuance price per share thereof will be set forth in the applicable
Prospectus Supplement. In addition, such specific terms may include
limitations on direct or beneficial ownership and restrictions on transfer of
the Offered Securities, in each case as may be appropriate to preserve the
status of the Company as a real estate investment trust ("REIT") for Federal
income tax purposes.
The applicable Prospectus Supplement will also contain information,
where applicable, about certain Federal income tax considerations relating to,
and any listing on a securities exchange of, the Offered Securities covered by
such Prospectus Supplement.
The Offered Securities may be offered directly by the Company, through
agents designated from time to time by the Company or to or through
underwriters or dealers, or through a combination of the foregoing. If any
agents or underwriters are involved in the sale of any of the Offered
Securities, their names, and any applicable purchase price, fee, commission or
discount arrangement between or among them, will be set forth, or will be
calculable from the information set forth, in the applicable Prospectus
Supplement. See "Plan of Distribution." No Offered Securities may be sold
without delivery of the applicable Prospectus Supplement describing the method
and terms of the offering of such Offered Securities.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT
PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
---------------
THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1996.
<PAGE> 15
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part) on
Form S-3 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the securities offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
portions of which have been omitted as permitted by the rules and regulations
of the Commission. Statements contained in this Prospectus as to the content
of any contract or other document are not necessarily complete, and in each
instance reference is made to the copy of the contract or other document filed
as an exhibit to the Registration Statement, each statement being qualified in
all respects by that reference and the exhibits to the Registration Statement.
For further information regarding the Company and the securities offered
hereby, reference is hereby made to the Registration Statement and the exhibits
to the Registration Statement which may be obtained from the Commission at its
principal office in Washington, D.C., upon payment of fees prescribed by the
Commission.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information
with the Commission. Reports, proxy statements and other information filed by
the Company can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
and at its Regional Offices located at Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661; and 13th Floor, Seven World Trade Center, New York,
New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
Commission's Web site is: http://www.sec.gov. The Common Stock and the
Company's 9.16% Series B Convertible Redeemable Preferred Stock are listed on
the New York Stock Exchange, Inc. (the "NYSE") and such reports, proxy
statements and other information concerning the Company can be inspected at the
offices of the NYSE, 20 Broad Street, New York, New York 10005.
The Company furnishes its stockholders with annual reports containing
financial statements audited by its independent auditors and with quarterly
reports containing unaudited summary financial information for each of the
first three quarters of each fiscal year.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company
pursuant to the Exchange Act are hereby incorporated by reference in this
Prospectus:
(a) The Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995 (the "Form 10-K").
(b) Amendment No. 1 on Form 10-K/A to the Form 10-K.
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<PAGE> 16
<TABLE>
<S> <C>
(c) Amendment No. 2 on Form 10-K/A to the Form 10-K.
(d) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996.
(e) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
(f) The Company's Current Report on Form 8-K dated April 23, 1996.
(g) The Company's Current Report on Form 8-K dated August 21, 1996.
(h) The Company's Current Report on Form 8-K dated October 1, 1996.
(i) Description of the Common Stock contained in the Company's
registration statement on Form 8-A filed November 19, 1993.
(j) Description of the Company's 9.16% Series B Cumulative Redeemable
Preferred Stock contained in the Company's registration statement on Form 8-A
filed June 3, 1996.
</TABLE>
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering made hereby shall be deemed to be
incorporated by reference into this Prospectus.
Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of the Registration Statement and
this Prospectus to the extent that a statement contained in the Registration
Statement, this Prospectus or any other subsequently filed document that is
also incorporated by reference herein modifies or supersedes that statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each
person, including any beneficial owner, to whom a Prospectus is delivered, upon
written or oral request of that person, a copy of any document incorporated
herein by reference (other than exhibits to those documents unless the exhibits
are specifically incorporated by reference into the documents that this
Prospectus incorporates by reference). Requests should be directed to Deborah
B. Attner, Stockholder Relations, Walden Residential Properties, Inc., One
Lincoln Centre, 5400 LBJ Freeway, Suite 400, Dallas, Texas 75240.
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<PAGE> 17
THE COMPANY
The Company is a self-administered, self-managed, fully integrated
REIT focused on middle income multifamily properties located primarily in
selected Southwestern and Southeastern markets. The Company, a Maryland
corporation with headquarters in Dallas, Texas, was formed in September 1993 to
continue and expand the multifamily property ownership, management, acquisition
and marketing operations and related business objectives and strategies of The
Walden Group, Inc. and its subsidiaries and affiliates (collectively, the
"Walden Predecessors"). The Company currently owns and operates 66 multifamily
properties (the "Properties") containing 20,123 apartment units. Approximately
89% of the apartment units are located in the Dallas/Fort Worth, Oklahoma City,
Tampa, Jacksonville, Tulsa, Phoenix, Houston, San Antonio, Austin and Salt Lake
City areas, with the remaining Properties primarily located in other areas in
the Southwest and Southeast regions of the United States. The Properties had a
weighted average occupancy rate of approximately 95.4% at September 30, 1996.
Through WDN Management Company, a corporation formed by the Company to manage
multifamily properties for third parties, the Company manages on a fee basis
eight additional multifamily properties containing 2,298 apartment units.
Upon completion of its initial public offering in February 1994, the
Company purchased the multifamily operations of the Walden Predecessors,
including 18 of the Properties containing 5,895 apartment units (of which a
299-unit property was sold in April 1995, a 384-unit property was sold in April
1996 and a 144-unit property was sold in September 1996), and concurrently
purchased two additional Properties containing 448 apartment units, one of
which was owned by a third party and the other of which was principally owned
by the Walden Predecessors. Since the consummation of its initial public
offering, the Company has acquired 51 of the Properties (of which a 242-unit
property was sold in December 1995 and a 304-unit property was sold in August
1996), containing an aggregate of 15,153 apartment units, for an aggregate
purchase price of approximately $487.3 million. Management believes that these
acquisitions are consistent with its core acquisition strategy of acquiring
well located garden apartment properties at prices less than replacement costs,
which serve middle income residents and can benefit from the Company's
comprehensive management programs.
The Company is operated under the direction of Don R. Daseke, Chairman
of the Board and Chief Executive Officer of the Company, and a management team
substantially all of whom were formerly employed by the Walden Predecessors.
The Company's 19 officers have an average tenure with the Company and the
Walden Predecessors of nine years and have an average of approximately 18 years
experience in the multifamily properties business. The Company is fully
integrated with operations that include multifamily property acquisitions,
property redevelopment, property management, financing and leasing and asset
management.
The Company's executive offices are located at One Lincoln Centre,
5400 LBJ Freeway, Suite 400, Dallas, Texas 75240. The telephone number is
(972) 788-0510. The Company was incorporated in Maryland on September 29, 1993
and the duration of its existence is perpetual.
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<PAGE> 18
RECENT DEVELOPMENTS
On August 27, 1996, the Company completed a public offering of
1,525,000 shares of Common Stock, resulting in net proceeds to the Company of
approximately $29.8 million. On September 20, 1996, the Company sold an
additional 155,250 shares of Common Stock in connection with the exercise of
the underwriter's over-allotment option relating to such public offering,
resulting in net proceeds to the Company of approximately $3.0 million. Since
June 30, 1996, the Company has acquired eight apartment communities, containing
an aggregate of 2,076 units, of which two are located in Jacksonville, Florida,
four are located in the Dallas/Fort Worth area, one is located in Melbourne,
Florida and one is located in Nashville, Tennessee. The aggregate acquisition
cost for these properties was approximately $67.4 million which was funded from
the Company's credit facility, the proceeds from the Company's recent public
offering and funds held in escrow under a tax-free exchange. One of these
properties was purchased for $9.1 million from an affiliate of the Company.
All of such proceeds received from the sale were used to retire all liabilities
of the property, and therefore, no proceeds from the sale of this property were
retained by such affiliate. In August 1996, the Company also sold the
Christiwood Apartments, a 304-unit property located in Corpus Christi, Texas,
for $9.2 million, and in September 1996 the Company sold the Chimney Trace
Apartments, a 144-unit property located in Stone Mountain, Georgia, for $5.8
million.
The Company has entered into contracts to acquire four additional
apartment communities, with an aggregate of 860 units, in Texas and Arizona,
for approximately $31.7 million, including the assumption of indebtedness
existing on one of the properties in the amount of $7.2 million (the
"Acquisition Properties"). The Company has completed its due diligence on one
of the Acquisition Properties (consisting of 290 apartment units) and expects
to acquire this property in November 1996. The Company anticipates the
completion of its due diligence review and closing of two of the Acquisition
Properties (with an aggregate of 362 units) in December 1996 and anticipates
purchasing the final Acquisition Property in January 1997. Because of the
ongoing due diligence review of certain of these Acquisition Properties, as
well as other closing conditions, there can be no assurance that any of such
Acquisition Properties will ultimately be acquired.
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<PAGE> 19
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The Company's ratio of earnings to combined fixed charges and
preferred stock dividends for the six months ended June 30, 1996 and its fiscal
year ended December 31, 1995 and the year ended December 31, 1994 (which
includes results of operations of the Walden Predecessors for the period of
January 1, 1994 through February 8, 1994) and for the years ended December 31,
1993, 1992 and 1991 (which are based on the results of the Walden Predecessors)
was 1.65x, 1.52x, 1.68x, .63x, .57x and .49x, respectively. The Company had no
preferred dividend requirement in any of such years prior to 1995; therefore,
the ratio of earnings to combined fixed charges and preferred stock dividends
are the same as the ratio of earnings to fixed charges for such years.
Earnings were calculated by adding certain fixed charges (consisting of
interest on indebtedness and amortization and financing costs) to the Company's
income before extraordinary items. The Company's earnings (in thousands) were
inadequate to cover fixed charges by $45, $4,795, $5,209 and $6,352 for the
period from January 1, 1994 to February 8, 1994 and the years ended December
31, 1993, 1992 and 1991, respectively, all of which were prior to the Company's
initial public offering in February of 1994.
USE OF PROCEEDS
Unless otherwise described in the Prospectus Supplement which
accompanies this Prospectus, the Company intends to use the net proceeds from
the sale of the Offered Securities for general corporate purposes, which may
include acquiring additional multifamily residential garden apartment
properties or interests in entities owning multifamily residential garden
apartment properties as suitable opportunities arise, making improvements to
properties, repaying certain then-outstanding secured or unsecured indebtedness
and for working capital. Pending use for the foregoing purposes, such proceeds
may be invested in short-term, interest-bearing time or demand deposits with
financial institutions, cash items or qualified government securities.
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<PAGE> 20
DESCRIPTION OF COMMON STOCK
The summary of the terms of the Common Stock set forth below does not
purport to be complete and is subject to, and qualified in its entirety by,
reference to the Company's Articles of Incorporation, as amended and restated
(the "Articles"), and the Company's Bylaws.
The Articles authorize the Company to issue up to 50 million shares of
Common Stock, 10 million shares of Preferred Stock and 60 million shares of
excess stock, par value $.01 per share (the "Excess Stock"). At September 30,
1996, 15,753,781 shares of Common Stock were issued and outstanding, all of
which are fully paid and nonassessable. Under the Maryland General Corporation
Law (the "MGCL"), stockholders generally are not liable for the corporation's
debts or obligations.
GENERAL
All shares of Common Stock offered pursuant to a Prospectus Supplement
will be duly authorized, fully paid and nonassessable. Subject to the
preferential rights of shares of the Preferred Stock, including the Series A
Preferred Stock and the Series B Preferred Stock (as such terms are hereinafter
defined), and any other shares or series of stock hereinafter designated by the
Board of Directors of the Company (the "Board of Directors"), holders of shares
of Common Stock are entitled to receive dividends on the stock if, as and when
authorized and declared by the Board of Directors out of assets legally
available therefor and to share ratably in the assets of the Company legally
available for distribution to its stockholders in the event of its liquidation,
dissolution or winding-up after payment of, or adequate provision for payment
of, all known debts and liabilities of the Company. The Company has paid
regular quarterly dividends to date and intends to continue paying regular
quarterly dividends.
Each outstanding share of Common Stock entitles the holder thereof to
one vote on all matters submitted to a vote of stockholders, including the
election of directors and, except as otherwise required by law or except as
provided with respect to any other class or series of stock, the holders of
shares of Common Stock will possess the exclusive voting power. There is no
cumulative voting in the election of directors, which means that the holders of
a majority of the outstanding shares of Common Stock can elect all of the
directors then standing for election and the holders of the remaining shares
will not be able to elect any directors. Holders of shares of Common Stock
have no conversion, sinking fund, redemption rights or preemptive rights to
subscribe for any securities of the Company.
Shares of Common Stock have equal dividend, distribution, liquidation
and other rights and will have no preference or exchange rights.
Pursuant to the MGCL, a corporation generally cannot dissolve, amend
its charter, merge, sell all or substantially all of its assets, engage in a
share exchange or engage in similar transactions unless approved by the holders
of at least two-thirds of the shares of stock entitled to vote on the matter
unless a lesser percentage (but not less than a majority of all of the votes to
be cast on the matter) is set forth in the corporation's charter. The Articles
provide for the
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<PAGE> 21
vote of the holders of a majority of the shares of stock outstanding and
entitled to vote on the matter to approve any of such actions, except for
amendments to the Articles relating to the number of directors and the
classification of the Board of Directors which require approval of holders of
at least two-thirds of the shares of stock entitled to vote on the matter.
The transfer agent and registrar for the Common Stock is The First
National Bank of Boston.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Internal Revenue Code
of 1986, as amended (the "Code"), shares of Common Stock must be beneficially
owned by 100 or more persons during at least 335 days of a taxable year of
twelve months (other than the first year) or during a proportionate part of a
shorter taxable year. Further, not more than 50% of the value of the issued
and outstanding shares of capital stock of the Company may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Code to include,
except in limited circumstances, certain entities such as qualified private
pension plans) during the last half of a taxable year (other than the first
year) or during a proportionate part of a shorter taxable year.
Since the Board of Directors believes it is essential for the Company
to maintain its status as a REIT under the Code, the Articles provide that no
person, except Mr. Daseke, may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 9.0% (the "Ownership Limit") of
the aggregate value of all outstanding shares of capital stock of the Company.
Mr. Daseke beneficially owns in the aggregate approximately 6.1% of the shares
of Common Stock and may acquire additional shares of Common Stock; provided,
however, that Mr. Daseke may not own, directly or indirectly, more than 13.0%
of the aggregate value of all outstanding shares of capital stock of the
Company (the "Existing Holder Limit"). The Board of Directors, upon receipt of
evidence and assurances satisfactory to the Board of Directors, may also exempt
a proposed transferee from the Ownership Limit or Existing Holder Limit. In
connection therewith, the Board of Directors may require opinions of counsel,
affidavits, undertakings or agreements as it may deem necessary or advisable in
order to determine or ensure the Company's status as a REIT. Any acquisition
or transfer of shares of Common Stock that would: (i) result in the shares of
Common Stock being owned by fewer than 100 persons or (ii) result in the
Company being "closely-held" within the meaning of Section 856(h) of the Code,
shall be null and void, and the intended transferee will acquire no rights to
the shares of Common Stock. The foregoing restrictions on transferability and
ownership will not apply if the Board of Directors determines that it is no
longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT and the Articles are amended accordingly.
Any purported transfer of shares of capital stock that would result in
a person owning shares of capital stock in excess of the Ownership Limit or
Existing Holder Limit will result in the shares subject to such purported
transfer being automatically exchanged for an equal number of shares of Excess
Stock. Under the Articles, Excess Stock shall be deemed to have been
transferred to the Company as trustee of a separate trust (the "Trust") for the
exclusive benefit of the person or persons to whom the interest in the Trust
can ultimately be transferred.
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<PAGE> 22
Excess Stock is not transferable. The purported transferee of any
shares of capital stock that are exchanged for Excess Stock may designate a
transferee of the interest in the Trust if the Excess Stock held in the Trust
and represented by such Trust interest to be transferred would not be Excess
Stock in the hands of the designated transferee at a price not to exceed the
price paid by the purported transferee (or, if no consideration was paid, the
Market Price (as hereinafter defined) measured on the date of the original
attempted transfer) at which point such Excess Stock will automatically be
exchanged for the shares of Common Stock or Preferred Stock to which the Excess
Stock is attributable. In addition, Excess Stock is subject to purchase by the
Company at a purchase price equal to the lesser of: (i) the price paid for the
shares of capital stock by the intended transferee (or, if no consideration was
paid, the Market Price of the shares of capital stock the attempted transfer of
which resulted in Excess Stock, measured on the date of the transfer); or (ii)
the Market Price of the shares of capital stock the attempted transfer of which
resulted in Excess Stock measured on the date on which the Company elects to
purchase the Excess Stock. "Market Price" means the average daily per share
closing sales price of a share of capital stock if such shares of capital stock
are listed on a national securities exchange or quoted on Nasdaq National
Market or if not then traded on any exchange or quotation system, the mean
between the average per share closing bid prices and the average per share
closing asked prices, in each case, during the 30 calendar day period ending on
the business day prior to the measurement date, or if there have been no sales
on a national securities exchange or the Nasdaq National Market and no
published bid and asked quotations with respect to shares of such stock during
such 30 calendar day period, then the market price of the shares of capital
stock on the relevant date shall be as determined in good faith by the Board of
Directors.
From and after the intended transfer to the purported transferee of
the shares of Excess Stock, the purported transferee shall cease to be entitled
to distributions (except upon liquidation), voting rights and other benefits
with respect to the Excess Stock except the right to payment of the purchase
price for the applicable shares of underlying capital stock. Any dividend or
distribution paid to a purported transferee on Excess Stock prior to the
discovery by the Company that the shares have been transferred in violation of
the Articles shall be repaid to the Company upon demand. If the foregoing
transfer restrictions are determined to be void or invalid by virtue of any
legal decision, statute, rule or regulation, then the intended transferee of
any Excess Stock may be deemed, at the option of the Company, to have acted as
an agent on behalf of the Company in acquiring the Excess Stock and to hold the
Excess Stock on behalf of the Company. All certificates representing shares of
capital stock will bear a legend referring to the restrictions described above.
In addition, each stockholder shall, upon demand, be required to
disclose to the Company in writing all information regarding the direct and
indirect beneficial ownership of shares of capital stock as the Board of
Directors deems reasonably necessary to comply with the provisions of the Code
applicable to a REIT, to comply with the requirements of any taxing authority
or governmental agency or to determine any such compliance.
These ownership limitations could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of
shares of capital stock might receive a premium for their shares over the
then-prevailing market price or which these holders might believe to be
otherwise in their best interest.
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DESCRIPTION OF PREFERRED STOCK
The following description of terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock to which any
Prospectus Supplement may relate. Certain other terms of any series of the
Preferred Stock offered by any Prospectus Supplement will be described in such
Prospectus Supplement. The description of certain provisions of the Preferred
Stock set forth below and in any Prospectus Supplement does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Articles and the Board of Directors' resolution or resolutions relating to each
series of the Preferred Stock which will be filed with the Commission and
incorporated by reference as an exhibit to the Registration Statement of which
this Prospectus is a part at or prior to the time of the issuance of such
series of Preferred Stock.
GENERAL
Subject to limitations prescribed by the MGCL and the Articles, the
Board of Directors is authorized to issue shares of Preferred Stock in one or
more series, to establish from time to time the number of shares of Preferred
Stock to be included in any such series and to fix for any such series the
designation and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption. The Company is authorized to issue 10 million shares
of Preferred Stock. At September 30, 1996, 78,700 shares of the Company's
9.16% Series A Convertible Redeemable Preferred Stock (the "Series A Preferred
Stock") and 1,707,300 shares of the Company's 9.16% Series B Convertible
Redeemable Preferred Stock (the "Series B Preferred Stock") were outstanding.
For purposes of the following description of the Preferred Stock, the Series A
Preferred Stock and the Series B Preferred Stock will sometimes be collectively
referred to as the "Outstanding Preferred Stock."
The Preferred Stock shall have the dividend, liquidation, redemption
and voting rights set forth below unless otherwise provided in a Prospectus
Supplement relating to a particular series of the Preferred Stock. Reference
is made to the Prospectus Supplement relating to the particular series of the
Preferred Stock offered thereby for specific terms, including: (i) the
designation and stated value per share of such Preferred Stock and the number
of shares offered; (ii) the amount of liquidation preference per share; (iii)
the initial public offering price at which such Preferred Stock will be issued;
(iv) the dividend rate (or method of calculation), the dates on which dividends
shall be payable and the dates from which dividends shall commence to cumulate,
if any; (v) any redemption or sinking fund provisions; (vi) any conversion
right; (vii) any listing of the Preferred Stock on any securities exchange;
(viii) any additional voting, dividend, liquidation, redemption, sinking fund
and other rights, preferences, privileges, limitations and restrictions not in
conflict with the Articles or the MGCL; (ix) a discussion of Federal income tax
considerations applicable to the Preferred Stock; (x) the relative ranking and
preferences of the Preferred Stock as to dividends and rights upon liquidation;
and (xi) any limitations on direct or beneficial ownership and restrictions on
transfer. The Preferred Stock will, when issued for lawful consideration
therefor, be fully paid and nonassessable and will have no preemptive rights.
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Unless otherwise indicated in a Prospectus Supplement relating
thereto, The First Bank of Boston will be the transfer agent and registrar for
shares of each series of Preferred Stock.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to dividend rights upon liquidation, dissolution or
winding up of the Company, rank (i) senior to all classes or series of Common
Stock and to all equity securities ranking junior to such Preferred Stock; (ii)
on a parity with all equity securities issued by the Company the terms of which
specifically provide that such equity securities rank on a parity with the
Preferred Stock; and (iii) junior to all equity securities issued by the
Company the terms of which specifically provide that such equity securities
rank senior to the Preferred Stock. The rights of the holders of each series
of Preferred Stock will be subordinate to those of the Company's general
creditors.
DIVIDENDS
Holders of each series of Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors, out of assets of
the Company legally available for payment, cash dividends at such rates and on
such dates as will be set forth in the applicable Prospectus Supplement. Such
rate may be fixed or variable or both. Each such dividend shall be payable to
holders of record as they appear on the share transfer books of the Company on
such record dates as shall be fixed by the Board of Directors, as specified in
the Prospectus Supplement relating to such series of Preferred Stock.
Dividends on any series of Preferred Stock may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement.
Dividends, if cumulative, will be cumulative from and after the date set forth
in the applicable Prospectus Supplement. If the Board of Directors fails to
declare a dividend payable on a dividend payment date on any series of
Preferred Stock for which dividends are noncumulative, then the holders of such
series of Preferred Stock will have no right to receive a dividend in respect
of the dividend period ending on such dividend payment date, and the Company
will have no obligation to pay the dividend accrued for such period, whether or
not dividends on such series are declared payable on any future dividend
payment date. Dividends on shares of each series of Preferred Stock for which
dividends are cumulative will accrue from the date on which the Company
initially issues shares of such series.
So long as any series of Preferred Stock shall be outstanding, unless
(i) full dividends (including, if such dividends are cumulative, dividends for
prior dividend periods) shall have been paid or declared and set apart for
payment on all outstanding shares of Preferred Stock of such series and all
other classes and series of Preferred Stock (other than Junior Stock, as
hereinafter defined) and (ii) the repurchase or other mandatory retirement of,
or with respect to any sinking or other analogous fund for, any shares of
Preferred Stock of such series or any other Preferred Stock of any class or
series (other than Junior Stock), the Company may not declare any dividends on
any Common Stock or any other equity securities of the Company ranking as to
dividends or distributions of assets junior to such series of Preferred Stock
(the Common Stock
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and any such other equity securities being herein referred to as "Junior
Stock"), or make any payment on account of, or set apart money for, the
purchase, redemption or other retirement of, or for a sinking or other
analogous fund, for, any Junior Stock or make any distribution in respect
thereof, whether in cash or property or in obligations or equity securities of
the Company, other than shares of Junior Stock which are neither convertible
into, nor exchangeable or exercisable for, any securities of the Company other
than shares of Junior Stock.
Any dividend payment made on a series of Preferred Stock shall first
be credited against the earliest accrued but unpaid dividend due with respect
to shares of such series which remains payable.
REDEMPTION
A series of Preferred Stock may be redeemable, in whole or from time
to time in part, at the option of the Company, and may be subject to mandatory
redemption pursuant to a sinking fund or otherwise, in each case upon the
terms, at the times and at the redemption prices set forth in the Prospectus
Supplement relating to such series. Shares of Preferred Stock redeemed by the
Company will be restored to the status of authorized but unissued Preferred
Stock of the Company.
The Prospectus Supplement relating to a series of Preferred Stock that
is subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon
(which shall not, if such Preferred Stock does not have a cumulative dividend,
include any accumulation in respect of unpaid dividends for prior dividend
periods) to the date of redemption. The redemption price may be payable in
cash or other property, as specified in the applicable Prospectus Supplement.
If the redemption price for Preferred Stock of any series is payable only from
the net proceeds of the issuance of equity securities of the Company, the terms
of such series of Preferred Stock may provide that, if no such equity
securities shall have been issued or to the extent the net proceeds from any
issuance are insufficient to pay in full the aggregate redemption price then
due, such Preferred Stock shall automatically and mandatorily be converted into
the applicable equity securities of the Company pursuant to conversion
provisions specified in the applicable Prospectus Supplement.
So long as any dividends on shares of any series of Preferred Stock or
any other series of Preferred Stock of the Company ranking on a parity as to
dividends and distribution of assets which such series of Preferred Stock are
in arrears, no shares of any such series of Preferred Stock or such other
series of Preferred Stock of the Company will be redeemed (whether by mandatory
or optional redemption) unless all such shares are simultaneously redeemed, and
the Company will not purchase or otherwise acquire any such shares; provided,
however, that the foregoing will not prevent the purchase or acquisition of
such shares pursuant to a purchase or exchange offer made on the same terms to
holders of all such shares outstanding.
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In the event that fewer than all of the outstanding shares of a series
of Preferred Stock are to be redeemed, whether by mandatory or optional
redemption, the number of shares to be redeemed will be determined by lot or
pro rata (subject to rounding to avoid fractional shares) as may be determined
by the Company or by any other method as may be determined by the Company in
its sole discretion to be equitable. From and after the redemption date
(unless default shall be made by the Company in providing for the payment of
the redemption price plus accumulated and unpaid dividends, if any), dividends
shall cease to accumulate on the shares of Preferred Stock called for
redemption and all rights of the holders thereof (except the right to receive
the redemption price plus accumulated and unpaid dividends, if any) shall
cease.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Company, then, before any distribution or payment
shall be made to the holders of any Junior Stock, the holders of each series of
Preferred Stock shall be entitled to receive out of assets of the Company
legally available for distribution to stockholders, liquidating distributions
in the amount of the liquidation preference per share (set forth in the
applicable Prospectus Supplement), plus an amount equal to all dividends
accrued and unpaid thereon (which shall not include any accumulation in respect
of unpaid dividends for prior dividend periods if such Preferred Stock does not
have a cumulative dividend). After payment of the full amount of the
liquidating distributions to which they are entitled, the holders of Preferred
Stock will have no right or claim to any of the remaining assets of the
Company. In the event that, upon any such voluntary or involuntary
liquidation, dissolution or winding up, the available assets of the Company are
insufficient to pay the amount of the liquidating distributions on all
outstanding Preferred Stock and the corresponding amounts payable on all shares
of other classes or series of equity securities of the Company ranking on a
parity with the Preferred Stock in the distribution of assets, then the holders
of the Preferred Stock and all other such classes or series of equity
securities shall share ratably in any such distribution of assets in proportion
to the full liquidating distributions to which they would otherwise be
respectively entitled.
If liquidating distributions shall have been made in full to all
holders of Preferred Stock, the remaining assets of the Company shall be
distributed among the holders of shares of Junior Stock, according to their
respective rights and preferences and in each case according to their
respective number of shares. For such purposes, the consolidation or merger of
the Company with or into any other corporation, or the sale, lease or
conveyance of all or substantially all of the assets or business of the
Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
VOTING RIGHTS
Except as indicated below or in a Prospectus Supplement relating to a
particular series of Preferred Stock, or except as required by applicable law,
holders of the Preferred Stock will not be entitled to vote for any purpose.
The following is a summary of the voting rights applicable to the Outstanding
Preferred Stock, which, unless provided otherwise in the applicable Prospectus
Supplement, will apply to each series of Preferred Stock.
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Subject to the provisions in the Articles regarding Excess Stock, in
any matter in which the Outstanding Preferred Stock may vote, including any
action by written consent, each share of Outstanding Preferred Stock will be
entitled to one vote. The holders of each share of Outstanding Preferred Stock
may separately designate a proxy for the vote to which that share of
Outstanding Preferred Stock is entitled.
Whenever dividends on any shares of Series B Preferred Stock have been
in arrears for six or more quarterly periods (and, in the case of the Series A
Preferred Stock, for six or more consecutive quarterly periods), the holders of
such shares of Outstanding Preferred Stock (voting separately as a class with
all other series of Preferred Stock upon which rights to vote on such matter
with the Outstanding Preferred Stock have been conferred and are then
exercisable) will be entitled to vote for the election of two additional
directors of the Company at a special meeting called by the holders of record
of at least 10% of the Outstanding Preferred Stock and such other Preferred
Stock, if any (unless such request is received less than 90 days before the
date fixed for the next annual or special meeting of the stockholders), or at
the next annual meeting of stockholders, and at each subsequent annual meeting
until all dividends accumulated on such shares of Outstanding Preferred Stock
for the past dividend periods and the then current dividend period have been
fully paid or declared and a sum sufficient for the payment thereof set aside
for payment. In such event, the entire Board of Directors will be increased by
two directors. Each of such two directors will be elected to serve until the
earlier of (i) the election and qualification of such director's successor or
(ii) payment of the dividend arrearage for the Outstanding Preferred Stock.
So long as any shares of Outstanding Preferred Stock remain
outstanding, the Company will not (i) without the affirmative vote or consent
of the holders of at least a majority of the shares of Outstanding Preferred
Stock outstanding at the time, given in person or by proxy, either in writing
or at a meeting (such series voting separately as a class), authorize or
create, or increase the authorized or issued amount of, any class or series of
capital stock ranking senior to the Outstanding Preferred Stock with respect to
payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up, or create, authorize or issue any obligation or
security convertible into or evidencing the right to purchase any such shares;
or (ii) without the affirmative vote or consent of the holders of at least
two-thirds of the shares of Series B Preferred Stock outstanding at the time
(and, in the case of the Series A Preferred Stock, a majority of the shares of
Series A Preferred Stock then outstanding), given in person or by proxy, either
in writing or at a meeting (such series voting separately as a class), amend,
alter or repeal the provisions of the Articles, whether by merger,
consolidation or otherwise, so as to materially and adversely affect any right,
preference, privilege or voting power of the Outstanding Preferred Stock or the
holders thereof; provided, however, that any increase in the amount of the
authorized Preferred Stock or the creation or issuance of any other series of
Preferred Stock, or any increase in the amount of authorized shares of
Outstanding Preferred Stock or any other series of Preferred Stock, in each
case ranking on a parity with or junior to the Outstanding Preferred Stock with
respect to payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up, will not be deemed to materially and adversely
affect such rights, preferences, privileges or voting powers.
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The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
is effected, all outstanding shares of Outstanding Preferred Stock have been
redeemed or called for redemption upon proper notice and sufficient funds have
been deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series of
Preferred Stock are convertible into Common Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include the
number of shares of Common Stock into which the Preferred Stock is convertible,
the conversion price (or manner of calculation thereof), the conversion period,
the provisions as to whether conversion will be at the option of the holders of
the Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and the provisions affecting conversion.
RESTRICTIONS ON OWNERSHIP
See "Description of Common Stock--Restrictions on Transfer" for a
discussion of the restrictions on transfer of shares of capital stock necessary
for the Company to qualify as a REIT under the Code.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material Federal income tax
considerations affecting the Company and its stockholders. This discussion is
directed principally at investors who are United States citizens or residents
or domestic corporations, and does not address in all material respects
considerations that might adversely affect the treatment of investors who are
subject to special treatment under the tax laws (such as insurance companies,
cooperatives, financial institutions, broker-dealers, tax exempt organizations
or foreign investors). The discussion in this section is based on existing
provisions of the Code, existing and proposed Treasury regulations, existing
court decisions and existing rulings and other administrative interpretations.
There can be no assurance that future Code provisions or other legal
authorities will not alter significantly the tax consequences described below.
No rulings have been obtained from the Internal Revenue Service ("IRS")
concerning any of the matters discussed in this section. Because the following
represents only a summary, it is qualified in its entirety by the applicable
provisions of the Code, and regulations, court decisions and IRS rulings and
other IRS pronouncements.
Each prospective purchaser of shares of Common Stock and/or Preferred
Stock is advised to consult his or her own tax advisor about the Federal,
state, local, foreign and other tax consequences of buying, holding and selling
shares of Common Stock and/or Preferred Stock, and of the Company's election to
be taxed as a REIT, particularly in light of that purchaser's specific
circumstances.
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REIT QUALIFICATION
Entities like the Company that invest principally in real estate and
that otherwise would be taxed as regular corporations may elect to be treated
as REITs when they satisfy certain detailed requirements imposed by the Code.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to corporate income tax to the extent the Company currently distributes
its REIT taxable income to its stockholders. This treatment effectively
eliminates the "double taxation" (i.e., taxation at both the corporate and
stockholder levels) imposed on investments in most regular corporations. A
qualifying REIT, however, may be subject to certain excise and other taxes, as
well as to normal corporate tax on taxable income that is not currently
distributed to its stockholders. See "-- Taxation of the Company as a REIT."
In addition, if the Company fails to qualify as a REIT in any taxable year, it
will be subject to Federal income tax at regular corporate rates on all of its
taxable income. The current maximum Federal tax rate for corporations is 35%,
but that rate may increase.
The Company has elected to be treated as a REIT for Federal income tax
purposes commencing with its taxable year ended December 31, 1994, and for each
subsequent taxable year. The Company believes that, commencing with such
taxable year, it has been organized and has operated in such a manner as to
qualify for taxation as a REIT under the Code, commencing with such taxable
year, and the Company intends to continue to operate in such a manner.
Winstead Sechrest & Minick P.C., counsel to the Company, is of the opinion that
the Company is organized in conformity with the requirements for qualification
as a REIT, and its method of operation will enable it to continue to meet the
requirements for qualification and taxation as a REIT under the Code. This
opinion is based on various assumptions and is conditioned upon such
assumptions and certain representations made by the Company as to factual
matters. The rules governing REITs are highly technical and require ongoing
compliance with a variety of tests that depend, among other things, on future
operating results. Winstead Sechrest & Minick P.C. will not monitor the
Company's compliance with these requirements. While the Company expects to
satisfy these tests, and will use its best efforts to do so, no assurance can
be given that the Company will qualify as a REIT for any particular year, or
that the applicable law will not change and adversely affect the Company and
its stockholders. See " -- Failure to Qualify as a REIT."
General Qualification Requirements. The Company must be organized as
an entity that would, if it does not maintain its REIT status, be taxable as a
regular corporation. It cannot be a financial institution or an insurance
company. The Company must be managed by one or more directors. The Company
currently meets and expects to continue to meet, each of these requirements.
The Company also expects to satisfy the requirements that are separately
described below concerning share ownership and reporting, the nature and
amounts of the Company's income and assets and the levels of required annual
distributions.
Share Ownership; Reporting. Beneficial ownership of the Company must
be and is evidenced by transferable shares (or transferable certificates of
beneficial interest). The shares of Common Stock must be held by at least 100
persons for approximately 92% of the days in each taxable year. Not more than
50% of the value of the shares of capital stock may be held,
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directly or indirectly, applying certain constructive ownership rules, by five
or fewer individuals at any time during the last half of each of the Company's
taxable years. The Company is not required to satisfy these 100 person and 50%
tests until its second taxable year for which an election is made to be taxed
as a REIT. The Company believes that its shares of Common Stock are owned by a
sufficient number of investors and in appropriate proportions to permit it to
continue satisfying these requirements. To protect against violations of these
requirements, the Articles provide that no person is permitted to own (applying
certain constructive ownership tests) more than the Ownership Limit. The
Ownership Limit does not apply to (i) acquisitions by any person that has made
a tender offer for all outstanding shares of Common Stock in conformity with
applicable securities laws; (ii) the acquisition of shares of Common Stock by
an underwriter in a public offering; (iii) the acquisition of shares of Common
Stock pursuant to the exercise of employee share options; or (iv) acquisitions
approved by the Board. In addition, the Articles contain restrictions on
transfers of the Company's shares of Common Stock, as well as provisions that
automatically convert shares of Common Stock into nonvoting, non-dividend
paying Excess Stock to the extent that the ownership otherwise might jeopardize
the Company's REIT status. See "Description of Common Stock -- Restrictions on
Transfer." Special rules for determining stock ownership apply to certain
qualified pension and profit sharing trusts. See " -- Taxation of Tax Exempt
Entities."
To monitor the Company's compliance with the share ownership
requirements, the Company is required to maintain records disclosing the actual
ownership of shares of Common Stock. To do so, the Company must demand written
statements each year from the record holders of certain percentages of shares
of Common Stock in which the record holders are to disclose the actual owners
of the shares (i.e., the persons required to include in gross income the REIT
dividends). (A REIT with 2,000 or more record stockholders must demand
statements from record holders of 5% or more of its shares, one with fewer than
2,000, but more than 200 record stockholders must demand statements from record
holders of 1% or more of the shares, while a REIT with 200 or fewer record
stockholders must demand statements from record holders of 0.5% or more of the
shares.) A list of those persons failing or refusing to comply with this
demand must be maintained as part of the Company's records. Stockholders who
fail or refuse to comply with the demand must submit a statement with their tax
returns disclosing the actual ownership of the shares of Common Stock and
certain other information.
Sources of Gross Income. In order to qualify as a REIT for a
particular year, the Company also must meet three tests governing the sources
of its income. These tests are designed to ensure that a REIT derives its
income principally from passive real estate investments. The Company satisfied
these three tests for its taxable year ended December 31, 1995. In evaluating
a REIT's income, the REIT will be treated as receiving its proportionate share
of the income produced by any partnership in which the REIT invests, and any
such income will retain the character that it has in the hands of the
partnership. The Code allows the Company to own and operate a number of its
properties through wholly-owned subsidiaries which are "qualified REIT
subsidiaries." The Code provides that a qualified REIT subsidiary is not
treated as a separate corporation, and all of its assets, liabilities and items
of income, deduction and credit are treated as assets, liabilities and such
items of the REIT.
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75% Gross Income Test. At least 75% of a REIT's gross income for each
taxable year must be derived from specified classes of income that principally
are real estate related. The permitted categories of principal importance to
the Company are: (a) rents from real property; (b) interest on loans secured by
real property; (c) gain from the sale of real property or loans secured by real
property (excluding gain from the sale of property held primarily for sale to
customers in the ordinary course of the Company's trade or business, referred
to below as "dealer property"); (d) income from the operation and gain from the
sale of certain property acquired in connection with the foreclosure of a
mortgage securing that property ("foreclosure property"); (e) distributions on,
or gain from the sale of, shares of other qualifying REITs; (f) abatements and
refunds of real property taxes; and (g) "qualified temporary investment income"
(described below). In evaluating the Company's compliance with the 75% income
test (as well as the 95% income test described below), gross income does not
include gross income from "prohibited transactions." A prohibited transaction
is one involving a sale of dealer property, not including foreclosure property
and certain dealer property held by the Company for at least four years.
The Company expects that substantially all of its operating gross
income from the Properties will be considered rent from real property. Rent
from real property is qualifying income for purposes of the 75% income test
only if certain conditions are satisfied. Rent from real property includes
charges for services customarily rendered to residents, and rent attributable
to personal property leased together with the real property so long as the
personal property rent is less than 15% of the total rent. The Company does
not expect to earn material amounts in these categories. Rent from real
property generally does not include rent based on the income or profits derived
from the property. Also excluded is rent received from a person or corporation
in which the Company (or any of its 10% or greater owners) owns a 10% or
greater interest. The Company does not expect to earn income in these two
excluded categories. A third exclusion covers amounts received with respect to
real property if the Company furnishes services to the residents or manages or
operates the property, other than through an "independent contractor" from whom
the Company does not derive any income. The obligation to operate through an
independent contractor generally does not apply, however, if any services
provided by the Company are "usually or customarily rendered" in connection
with the rental of space for occupancy only and are not considered rendered
primarily for the convenience of the resident (applying standards that govern
in evaluating whether rent from real property would be unrelated business
taxable income when received by a tax exempt owner of the property).
The Company will, in most instances, directly operate and manage the
Properties without using an "independent contractor." The Company believes
that the only material services to be provided to the residents will be those
usually or customarily rendered in connection with the rental of space for
occupancy only. The Company will not provide services that might be considered
rendered primarily for the convenience of the residents, such as hotel, health
care or extensive recreational or social services. Consequently, the Company
believes that substantially all of its rental income from the Properties will
be qualifying income under the 75% income test, and that the Company's
provision of services will not cause the rental income to fail to be included
under that test.
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Upon the Company's ultimate sale of its Properties, any gains realized
also are expected to constitute qualifying income, as gain from the sale of
real property (not involving a prohibited transaction).
95% Gross Income Test. In addition to earning 75% of its gross income
from the sources listed above, at least an additional 20% of the Company's
gross income for each taxable year must come either from those sources, or from
dividends, interest or gains from the sale or other disposition of stock or
other securities that do not constitute dealer property. This test permits a
REIT to earn a significant portion of its income from traditional "passive"
investment sources that are not necessarily real estate related. The term
"interest" (under both the 75% and 95% tests) does not include amounts that are
based on the income or profits of any person, unless the computation is based
only on a fixed percentage of receipts or sales.
Failing the 75% or 95% Tests; Reasonable Cause. As a result of the
75% and 95% tests, REITs generally are not permitted to earn more than 5% of
their gross income from active sources (such as brokerage commissions or other
fees for services rendered). This type of income will not qualify for the 75%
test or 95% test but is not expected to be significant and such income and
other nonqualifying income are expected to be at all times less than 5% of the
Company's annual gross income. While the Company does not anticipate that it
will earn substantial amounts of nonqualifying income, if nonqualifying income
exceeds 5% of the Company's gross income, the Company could lose its status as
a REIT. WDN Management, which provides management services with respect to
certain properties not owned by the Company, is not a qualified REIT
subsidiary. Therefore, WDN Management's gross income is not included in the
Company's gross income. However, dividends from WDN Management to the Company
are included in the Company's gross income and qualify for the 95% income test.
If the Company fails to meet either the 75% or 95% income tests during
a taxable year, it may still qualify as a REIT for that year if (a) it reports
the source and nature of each item of its gross income in its Federal income
tax return for that year; (b) the inclusion of any incorrect information in its
return is not due to fraud with intent to evade tax; and (c) the failure to
meet the tests is due to reasonable cause and not to willful neglect. However,
in that case the Company would be subject to a 100% tax based on the greater of
the amount by which it fails either the 75% or 95% income tests for such year.
See "-- Taxation of the Company as a REIT."
30% Income Test. The Company also must earn less than 30% of its
gross income from the sale or other disposition of: (a) real property and
loans secured by real property held for less than four years (other than
foreclosure property and involuntarily conversions), (b) stock or securities
held by the Company for less than one year and (c) property in a prohibited
transaction. The 30% income test does not have a reasonable cause exception as
do the 75% and 95% income tests. Consequently, a failure to meet the 30%
income test would terminate the Company's status as a REIT automatically.
Because the Company expects to hold its Properties for long-term investment and
does not anticipate selling them within four years, the Company expects to
comply with this requirement.
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Character of Assets Owned. On the last day of each calendar quarter,
the Company also must meet two tests concerning the nature of its investments.
First, at least 75% of the value of the total assets of the Company generally
must consist of real estate assets, cash, cash items (including receivables)
and government securities. For this purpose, "real estate assets" include
interests in real property, interests in loans secured by mortgages on real
property or by certain interests in real property, shares in other REITs and
certain options, but exclude mineral, oil or gas royalty interests. The
temporary investment of new capital in debt instruments also qualifies under
this 75% asset test, but only for the one-year period beginning on the date the
Company receives the new capital. Second, although the balance of the
Company's assets generally may be invested without restriction, the Company
will not be permitted to own (a) securities of any one non-governmental issuer
that represent more than 5% of the value of the Company's total assets or (b)
more than 10% of the outstanding voting securities of any single issuer. A
REIT, however, may own 100% of the stock of a qualified REIT subsidiary, in
which case the assets, liabilities and items of income, deduction and credit of
the subsidiary are treated as those of the REIT. In evaluating a REIT's
assets, if the REIT invests in a partnership, it is deemed to own its
proportionate share of the assets of the partnership.
The Company's non-voting common stock of WDN Management does not
violate the prohibition against a REIT's ownership of more than 10% of the
voting securities of any one issuer. If, however, the value of the Company's
non-voting common stock in WDN Management were to exceed 5% of the total value
of all of the Company's assets, then the asset test would be violated. The
Company believes that the value of the securities of WDN Management held by the
Company is substantially less than 5% of the total value of the Company's
assets, and the Company does not expect that it will exceed 5% in the future.
The Company anticipates that it complies with these asset tests.
While some portion of its assets initially was invested in qualifying temporary
debt investments, substantially all of the Company's investments are in its
Properties, which should represent qualifying real estate assets.
Annual Distributions to Stockholders. To maintain REIT status, the
Company generally must distribute to its stockholders in each taxable year at
least 95% of its net ordinary income (capital gain is not required to be
distributed). More precisely, the Company must distribute an amount equal to
(a) 95% of the sum of (i) its "REIT Taxable Income" before deduction of
dividends paid and excluding any net capital gain and (ii) any net income from
foreclosure property less the tax on such income, minus (b) certain limited
categories of "excess noncash income." REIT Taxable Income is defined to be
the taxable income of the REIT, computed as if it were an ordinary corporation,
with certain modifications. For example, the deduction for dividends paid is
allowed, but neither net income from foreclosure property, nor net income from
prohibited transactions, is included. In addition, the REIT may carry over,
but not carry back, a net operating loss for 15 years following the year in
which it was incurred. REITs also are required to distribute at least 95% of
any after-tax built-in gain that is realized during the ten year recognition
period applicable to property transferred to the REIT in a corporate
nonrecognition transaction. The Company does not anticipate that any such
property will be transferred to it.
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A REIT may satisfy the 95% distribution test with dividends paid
during the taxable year and with certain dividends paid after the end of the
taxable year. Dividends paid in January that were declared during the last
calendar quarter of the prior year and were payable to stockholders of record
on a date during the last calendar quarter of that prior year are treated as
paid on December 31 of the prior year (for both the Company and its
stockholders). Other dividends declared before the due date of the Company's
tax return for the taxable year (including extensions) also will be treated as
paid in the prior year for the Company if they are paid (a) within 12 months of
the end of such taxable year and (b) no later than the Company's next regular
distribution payment. Dividends that are paid after the close of a taxable
year and do not qualify under the rule governing payments made in January that
is described above will be taxable to the stockholders in the year paid, even
though they may be taken into account by the Company for a prior year. A
nondeductible excise tax equal to 4% will be imposed on the Company for each
calendar year to the extent that dividends declared and distributed or deemed
distributed before December 31 are less than the sum of (i) 85% of the
Company's "ordinary income" plus (ii) 95% of the Company's capital gain net
income plus (iii) income not distributed in earlier years minus (iv)
distributions in excess of income in earlier years and (v) any amount of REIT
taxable income for such year.
The Company will be taxed at regular corporate rates to the extent
that it retains any portion of its taxable income (e.g., if the Company
distributes only the required 95% of its taxable income, it would be taxed on
the retained 5%). Under certain circumstances the Company may not have
sufficient cash or other liquid assets to meet the distribution requirement.
This could arise because of competing demands for the Company's funds, or due
to timing differences between tax reporting and cash receipts and disbursements
(i.e., income may have to be reported before cash is received, or expenses may
have to be paid before a deduction is allowed). Although the Company does not
anticipate any difficulty in meeting this requirement, no assurance can be
given that necessary funds will be available.
If the Company fails to meet the 95% distribution requirement because
of an adjustment to the Company's taxable income by the IRS, the Company may be
able to cure the failure retroactively by paying a "deficiency dividend" (as
well as applicable interest and penalties) within a specified period.
TAXATION OF THE COMPANY AS A REIT
The Company has adopted the calendar year for Federal income tax
purposes, and uses the accrual method of accounting. For each taxable year in
which the Company qualifies as a REIT, it generally will be taxed only on the
portion of its taxable income that it retains (which will include undistributed
net capital gain), because the Company will be entitled to a deduction for its
dividends paid to stockholders during the taxable year. A dividends paid
deduction is not available for dividends that are considered preferential
within any given class of shares or as between classes except to the extent
such class is entitled to such preference. The Company does not anticipate
that it will pay any such preferential dividends. The Articles provide for the
automatic exchange of outstanding shares of Common Stock or Preferred Stock for
Excess Stock in circumstances in which the Company's REIT status might
otherwise be put into jeopardy (i.e.,
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if a person attempts to acquire a block of shares that would be sufficient to
cause the Company to fail the requirement that five or fewer individuals may
not own more than 50% of the value of the outstanding shares). Because Excess
Stock will represent a separate class of outstanding shares, the fact that
those shares will not be entitled to dividends should not adversely affect the
Company's ability to deduct its dividend payments.
The Company would be subject to tax on any income or gain from
foreclosure property at the highest corporate rate (currently 35%). A
confiscatory tax of 100% applies to any net income from prohibited
transactions. In addition, if the Company fails to meet either the 75% or 95%
source of income tests described above, but still qualifies for REIT status
under the reasonable cause exception to those tests, a 100% tax would be
imposed equal to the amount obtained by multiplying (a) the greater of the
amount, if any, by which it failed either the 75% income test or the 95% income
test, times (b) the ratio of the Company's REIT Taxable Income to the Company's
gross income (excluding capital gain and certain other items). The Company
also will be subject to the minimum tax on items of tax preference (excluding
items specifically allocable to the Company's stockholders). Finally, under
regulations that are to be promulgated, the Company also may be taxed at the
highest regular corporate tax rate on any built-in gain (i.e., the excess of
value over adjusted tax basis) attributable to assets that the Company acquires
in certain tax-free corporate transactions, to the extent the gain is
recognized during the first ten years after the Company acquires such assets.
FAILURE TO QUALIFY AS A REIT
For any taxable year in which the Company fails to qualify as a REIT,
it would be taxed at the usual corporate rates on all of its taxable income.
Distributions to its stockholders would not be deductible in computing that
taxable income, and distributions would no longer be required. Any corporate
level taxes generally would reduce the amount of cash available to the Company
for distribution to its stockholders and, because the stockholders would
continue to be taxed on the distributions they receive, the net after tax yield
to the stockholders from their investment in the Company likely would be
reduced substantially. As a result, the Company's failure to qualify as a REIT
during any taxable year could have a material adverse effect upon the Company
and its stockholders. If the Company loses its REIT status, unless certain
relief provisions apply, the Company will not be eligible to elect REIT status
again until the fifth taxable year which begins after the first year for which
the Company's election was terminated.
If, after forfeiting its REIT status, the Company later qualifies and
elects to be taxed as a REIT again, the Company may face significant adverse
tax consequences. Prior to the end of the year in which the Company sought to
qualify again as a REIT, the Company would be required to make distributions
sufficient to eliminate any earnings and profits accumulated during its period
of non-REIT status. Moreover, immediately prior to the effectiveness of the
election to return to REIT status, the Company would be treated as having
disposed of all of its assets in a taxable transaction, triggering taxable gain
with respect to the Company's appreciated assets. In that event, however, the
Company would be permitted to elect an alternative treatment under which those
gains would be taken into account only as and when they actually are recognized
upon sales of the appreciated property occurring within a ten-year period. The
Company would
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be required to distribute at least 95% of any such recognized gains, but it
would not receive the benefit of a dividends paid deduction to reduce those
taxable gains. Thus, any such gains on appreciated assets would be subject to
double taxation (i.e., at the corporate level as well as the stockholder
level).
TAXATION OF STOCKHOLDERS
Distributions generally will be taxable to stockholders as ordinary
income to the extent of the Company's earning and profits. Dividends declared
during the last quarter of a calendar year and actually paid during January of
the immediately following calendar year are generally treated as if received by
the stockholders on December 31 of the calendar year during which they were
declared. Distributions paid to stockholders will not constitute passive
activity income, and as a result generally cannot be offset by losses from
passive activities of a stockholder who is subject to the passive activity
rules. Distributions designated by the Company as capital gains dividends
generally will be taxed as long term capital gains to stockholders to the
extent that the distributions do not exceed the Company's actual net capital
gain for the taxable year. Corporate stockholders may be required to treat up
to 20% of any such capital gains dividends as ordinary income. Distributions
by the Company, whether characterized as ordinary income or as capital gains,
are not eligible for the 70% dividends received deduction for corporations.
Stockholders are not permitted to deduct losses or loss carry-forwards of the
Company. Future regulations may require that the stockholders take into
account, for purposes of computing their individual alternative minimum tax
liability, certain tax preference items of the Company.
The Company may generate cash in excess of its net earnings. If the
Company distributes cash to stockholders in excess of the Company's current and
accumulated earnings and profits (other than as a capital gain dividend), the
excess cash will be deemed to be a return of capital to each stockholder to the
extent of the adjusted tax basis of the stockholder's shares of Common Stock.
Distributions in excess of the adjusted tax basis will be treated as gain from
the sale or exchange of the shares of Common Stock. A stockholder who has
received a distribution in excess of current and accumulated earnings and
profits of the Company may, upon the sale of the shares of Common Stock,
realize a higher taxable gain or a smaller loss because the basis of the shares
of Common Stock as reduced will be used for purposes of computing the amount of
the gain or loss.
Generally, gain or loss realized by a stockholder upon the sale of
shares of Common Stock will be reportable as capital gain or loss. If a
stockholder receives a long-term capital gain dividend from the Company and has
held the shares of Common Stock for six months or less, any loss incurred on
the sale or exchange of the shares of Common Stock is treated as a long-term
capital loss, to the extent of the corresponding long-term capital gain
dividend received.
In any year in which the Company fails to qualify as a REIT, the
stockholders generally will continue to be treated in the same fashion
described above, except that no Company dividends will be eligible for
treatment as capital gains dividends, corporate stockholders will
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qualify for the dividends received deduction and the stockholders will not be
required to report any share of the Company's tax preference items.
BACKUP WITHHOLDING
The Company will report to its stockholders and the IRS the amount of
dividends paid during each calendar year and the amount of tax withheld, if
any. If a stockholder is subject to backup withholding, the Company will be
required to deduct and withhold from any dividends payable to that stockholder
a tax of 31%. These rules may apply (a) when a stockholder fails to supply a
correct taxpayer identification number, (b) when the IRS notifies the Company
that the stockholder is subject to the rules or has furnished an incorrect
taxpayer identification number or (c) in the case of corporations or others
within certain exempt categories, when they fail to demonstrate that fact when
required. A stockholder that does not provide a correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount withheld as backup withholding may be credited against the stockholder's
Federal income tax liability. The Company also may be required to withhold a
portion of capital gain distributions made to stockholders who fail to certify
their non-foreign status to the Company.
TAXATION OF TAX EXEMPT ENTITIES
In general, a tax exempt entity that is a stockholder of the Company
will not be subject to tax on distributions from the Company or gain realized
on the sale of shares of Common Stock. In Revenue Ruling 66-106, the IRS
specifically confirmed that a REIT's distributions to a tax exempt employees'
pension trust did not constitute unrelated business taxable income. A tax
exempt entity may be subject to tax, however, to the extent that it has
financed the acquisition of its shares of Common Stock with "acquisition
indebtedness" within the meaning of the Code. The Revenue Reconciliation Act
of 1993 has modified the rules for tax exempt employees' pension and profit
sharing trusts which qualify under Code Section 401(a) and are exempt from tax
under Code Section 501(a) ("qualified trusts") for tax years beginning after
December 31, 1993. Under the new rules, in determining the number of
stockholders a REIT has for purposes of the "50% test" described above under
"-- REIT Qualification -- Share Ownership; Reporting," generally, any stock
held by a qualified trust will be treated as held directly by its beneficiaries
in proportion to their actuarial interests in such trust and will not be
treated as held by such trust. (This general rule will not apply if certain
persons related to the qualified trust ("disqualified persons") hold in the
aggregate more than 5% of the value of the REIT and the REIT has accumulated
earnings and profits attributable to any period for which it did not qualify as
a REIT; this exception is not expected to apply to the Company.)
A qualified trust owning more than 10% of a REIT must treat a
percentage of dividends from the REIT as unrelated business taxable income.
The percentage is determined by dividing the REIT's gross income (less direct
expenses related thereto) derived from an unrelated trade or business for the
year by the gross income of the REIT for the year in which the dividends are
paid. However, if this percentage is less than 5%, dividends are not treated
as unrelated business taxable income. These unrelated business taxable income
rules apply only if the REIT qualifies as a REIT because of the change in the
50% test discussed above and if the trust is
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"predominantly held" by a qualified trust. A real estate investment trust is
predominantly held by qualified trusts if at least one pension trust owns more
than 25% of the value of the REIT or a group of pension trusts individually
holding more than 10% of the value of the REIT collectively owns more than 50%
of the value of the REIT.
For social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts and qualified group legal services
plans exempt from Federal income taxation under Sections 501(c)(7), (c)(9),
(c)(17) and (c)(20) of the Code, respectively, income from an investment in the
Company will constitute unrelated business taxable income unless the
organization is able to deduct an amount properly set aside or placed in
reserve for certain purposes so as to offset the unrelated business taxable
income generated by the investment in the Company. These prospective investors
should consult their own tax advisors concerning the "set aside" and reserve
requirements.
TAXATION OF FOREIGN INVESTORS
The rules governing Federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of Federal, state and local income tax laws with regard to an
investment in shares of Common Stock, including any reporting requirements, as
well as the tax treatment of such an investment under the laws of their home
country.
Dividends that are not attributable to gain from sales or exchanges by
the Company of United States real property interests and not designated by the
Company as capital gain dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Such dividends ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the dividend unless an
applicable tax treaty reduces or eliminates that tax. However, if income from
the investment in the shares of Common Stock is treated as effectively
connected with the Non-U.S. Stockholder's conduct of a United States trade or
business, the Non-U.S. Stockholder generally will be subject to a tax at
graduated rates, in the same manner as U.S. stockholders are taxed with respect
to such dividends (and may also be subject to the 30% branch profits tax in the
case of a stockholder that is a foreign corporation). The Company expects to
withhold United States income tax at the rate of 30% on the gross amount of any
such dividends paid to a Non-U.S. Stockholder unless (i) the Non-U.S.
Stockholder files on IRS Form 1001 claiming that a lower treaty rate applies or
(ii) the Non-U.S. Stockholder files an IRS Form 4224 with the Company claiming
that the dividend is effectively connected income. Dividends in excess of
current and accumulated earnings and profits of the Company will not be taxable
to a stockholder to the extent that they do not exceed the adjusted basis of
the stockholder's shares of Common Stock, but rather will reduce the adjusted
basis of such shares of Common Stock. To the extent that such dividends exceed
the adjusted basis of a Non-U.S. Stockholder's shares of Common Stock, they
will give rise to tax liability if the Non-U.S. Stockholder would otherwise be
subject to tax on any gain from the sale or disposition of his shares of Common
Stock, as described below. If it cannot be determined
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at the time a dividend is paid whether or not such dividend will be in excess
of current and accumulated earnings and profits, the dividends will be subject
to such withholding. The Company does not intend to make quarterly estimates
of that portion of the dividends that are in excess of earnings and profits,
and as a result, all dividends will be subject to such withholding. However,
the Non-U.S. Stockholder may seek a refund of such amounts from the IRS.
For any year in which the Company qualifies as a REIT, dividends that
are attributable to gain from sales or exchanges by the Company of United
States real property interests will be taxed to a Non-U.S. Stockholder under
the provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, those dividends are taxed to a Non-U.S. Stockholder
as if such gain were effectively connected with a United States business.
Non-U.S. Stockholders would thus be taxed at the normal capital gain rates
applicable to U.S. stockholders (subject to applicable alternative minimum tax
and a special alternative minimum tax in the case of nonresident alien
individuals). Also, dividends subject to FIRPTA may be subject to a 30% branch
profits tax in the hands of a foreign corporate stockholder not entitled to
treaty exemption. The Company is required by the Code and applicable Treasury
Regulations to withhold 35% of any dividend that could be designated by the
Company as a capital gain dividend. This amount is creditable against the
Non-U.S. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares of
Common Stock generally will not be taxed under FIRPTA if the Company is a
"domestically controlled REIT," defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by foreign persons. It is currently anticipated
that the Company will be a "domestically controlled REIT," and therefore the
sale of shares of Common Stock will not be subject to taxation under FIRPTA.
Because the Common Stock is publicly traded, however, no assurance can be given
that the Company will remain a "domestically controlled REIT." However, gain
not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i)
investment in the shares of Common Stock is effectively connected with the
Non-U.S. Stockholder's United States trade or business, in which case the
Non-U.S. Stockholder will be subject to the same treatment as U.S.
stockholders with respect to such gain (and may also be subject to the 30%
branch profits tax in the case of a stockholder that is a foreign corporation),
or (ii) the Non-U.S. Stockholder is a nonresident alien individual who was
present in the United States for 183 days or more during the taxable year and
has a "tax home" in the United States, in which case the nonresident alien
individual will be subject to a 30% tax on the individual's capital gains. If
the gain on the sale of shares of Common Stock were to be subject to taxation
under FIRPTA, the Non-U.S. Stockholder will be subject to the same treatment as
U.S. stockholders with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals and may also be subject to the 30% branch profits tax in the
case of a stockholder that is a foreign corporation).
Upon the death of a foreign individual stockholder, the investor's
shares will be treated as part of the investor's U.S. estate for purposes of
the U.S. estate tax, except as may be otherwise provided in an applicable
estate tax treaty.
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TAX ASPECTS OF TRANSFERRED INTERESTS
The following discussion summarizes certain Federal income tax
considerations applicable solely to the Company's interests in distributions
(assigned by Walden to the Company as part of the formation of the Company)
attributable to Walden's general partnership interests in three partnerships
which own multifamily residential properties which were not acquired by the
Company (the "Transferred Interests") and partnerships to which they relate
(the "Acquired Partnerships").
Classification as a Partnership. The Company includes in its income
its distributive share of the Acquired Partnerships' income and deducts its
distributive share of the Acquired Partnerships' losses only if the Acquired
Partnerships are classified, for Federal income tax purposes, (i) as
partnerships rather than as associations taxable as corporations and (ii) not
as "publicly traded partnerships." An organization formed as a partnership
will be treated as a partnership rather than as a corporation for Federal
income tax purposes only if it has no more than two of the following four
corporate characteristics: continuity of life, centralization of management,
limited liability and free transferability of interests.
If for any reason the Acquired Partnerships were taxable as
corporations rather than as partnerships for Federal income tax purposes, the
Company may not be able to satisfy the income and asset requirements for status
as a REIT. Further, items of income and deduction of the Acquired Partnerships
would not pass through to their partners; their partners would be treated as
stockholders for tax purposes. The Acquired Partnerships would be required to
pay income tax at regular corporate tax rates on their net income and
distributions to partners would constitute dividends to the extent of the
Acquired Partnerships' earnings and profits. In addition, any change in the
Acquired Partnerships' status for tax purposes might be treated as a taxable
event, in which case the Company might incur taxable income without any related
cash distribution. The Company has not requested, and does not intend to
request, a ruling from the IRS that the Acquired Partnerships will be treated
as "partnerships" for Federal income tax purposes.
Partners, Not the Partnership, Subject to Tax. Partnerships are not
taxable entities for Federal income tax purposes. Rather, the Company is
required to take into account its allocable share of the Acquired Partnerships'
income, gains, losses, deductions and credits for any taxable year of the
partnerships ending within or with the taxable year of the Company without
regard to whether the Company has received or will receive any cash
distributions from the Acquired Partnerships. For purposes of income tests and
asset tests which govern classification of the Company as a REIT, the Company
must include its proportionate share (based upon capital interests) of the
income and assets of any partnership in which it has a direct or indirect
interest.
Partnership Allocations. Although a partnership agreement will
generally determine the allocation of income and losses among partners, the
allocations provided in a partnership agreement will be disregarded for tax
purposes under Section 704(b) of the Code if they do not comply with the
provisions of such Section and the Treasury Regulations promulgated thereunder.
If an allocation is not recognized for Federal income tax purposes, the item
subject to the
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allocation will be reallocated in accordance with the partners' interests in
the partnership, which will be determined by taking into account all of the
facts and circumstances relating to the economic arrangement of the partners
with respect to such item. The Acquired Partnerships' allocations of taxable
income and loss are intended to comply with the requirements of Section 704(b)
of the Code and the Treasury Regulations promulgated thereunder.
Basis in Partnership Interests. The Company's adjusted tax basis in a
particular Transferred Interest generally (a) is equal to the fair market value
of the partnership interest as of the date acquired; (b) is increased by (i)
its allocable share of the partnership's income and (ii) its allocable share of
indebtedness of the partnership on the date acquired and its allocable share of
any increases in such indebtedness thereafter; and (c) is reduced, but not
below zero, by the Company's allocable share of (i) the partnership's loss and
(ii) the amount of cash distributed to the Company, the basis of property
distributed to the Company and by constructive distributions resulting from a
reduction in the Company's share of the indebtedness of the partnership
thereafter.
If the allocation of the Company's distributive share of a
partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the partnership below zero, the recognition of such
loss will be deferred until such time as the recognition of such loss would not
reduce the Company's adjusted tax basis below zero. To the extent that a
partnership distribution or any decrease in the Company's share of the
indebtedness of a partnership (each such decrease being considered a
constructive cash distribution to the partners) would reduce the Company's
adjusted tax basis in the partnership below zero, such distributions (including
such constructive distributions) would constitute taxable income to the
Company. Such distributions and constructive distributions normally will be
characterized as a capital gain, and if the Company's partnership interest in
such partnership has been held for longer than the long-term capital gain
holding period (currently one year), the distributions and constructive
distributions will constitute long-term capital gains.
STATE AND LOCAL TAXES
The Company and its stockholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it
or they transact business or reside. Consequently, prospective stockholders
should consult their own tax advisors regarding the effect of state and local
tax laws on an investment in the Company.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") (a "Plan"), should consider the fiduciary standards under
ERISA in the context of the Plan's particular circumstances before authorizing
an investment of a portion of such Plan's assets in the shares of Common Stock.
In particular, such fiduciary should consider (i) whether the investment
satisfies the diversification requirements of Section 404(a)(1)(c) of ERISA,
(ii) whether the investment is in accordance with the documents and instruments
governing the Plan as required
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by Section 404(a)(1)(D) of ERISA, (iii) whether the investment is for the
exclusive purpose of providing benefits to participants in the Plan and their
beneficiaries or defraying reasonable administrative expenses of the Plan, and
(iv) whether the investment is prudent under ERISA. In addition to the
imposition of general fiduciary standards of investment prudence and
diversification, ERISA, and the corresponding provisions of the Code, prohibit
a wide range of transactions involving the assets of a Plan or an individual
retirement account ("IRA") and persons who have certain specified relationships
to the Plan or an IRA ("parties in interest" within the meaning of ERISA,
"disqualified persons" within the meaning of the Code). Thus, a fiduciary of a
Plan or an IRA considering an investment in the shares of Common Stock also
should consider whether the acquisition or the continued holding of the shares
of Common Stock might constitute or give rise to a direct or indirect
prohibited transaction.
The Department of Labor (the "DOL") has issued final regulations (the
"Regulations") as to what constitutes assets of an employee benefit plan under
ERISA. Under the Regulations, if a Plan or an IRA acquires an equity interest
in an entity, which interest is neither a "publicly offered security" nor a
security issued by an investment company registered under the Investment
Company Act of 1940, as amended, the Plan's and IRA's assets would include, for
purposes of the fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code, both the equity interest and an
undivided interest in each of the entity's underlying assets unless certain
specified exceptions apply. The Regulations define a publicly-offered security
as a security that is "widely held," "freely transferable," and either part of
a class of securities registered under the Exchange Act, or sold pursuant to an
effective registration statement under the Securities Act (provided the
securities are registered under the Exchange Act within 120 days after the end
of the fiscal year of the issuer during which the offering occurred). The
Offered Securities will be sold in an offering registered under the Securities
Act and are or will be registered under the Exchange Act.
The Regulations provide that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the initial public offering as a result of events beyond the
issuer's control.
The Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulations further provide that when
a security is part of an offering in which the minimum investment is $10,000 or
less certain restrictions ordinarily will not, alone or in combination, affect
the finding that such securities are freely transferable. The Company believes
that the restrictions imposed under the Articles on the transfer of the capital
stock are limited to the restrictions on transfer generally permitted under the
Regulations and are not likely to result in the failure of the capital stock to
be "freely transferable." The Company also believes that certain restrictions
that apply to the capital stock held by the Company or which may be derived
from contractual arrangements requested by the underwriters in connection with
Offered Securities offered pursuant to an underwritten agreement are unlikely
to result in the failure of the capital stock to be "freely transferable." The
Regulations only establish a presumption in favor of the
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<PAGE> 43
finding of free transferability, and, therefore, no assurance can be given that
the DOL and the U.S. Treasury Department will not reach a contrary conclusion.
Assuming that the Offered Securities will be "widely held," the
Company believes that the Offered Securities will be publicly offered
securities for purposes of the Regulations and that the assets of the Company
will not be deemed to be "plan assets" of any Plan or IRA that invests in the
Offered Securities.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities to one or more
underwriters for public offering and sale by them or may sell the Offered
Securities to investors directly or through agents. Any such underwriter or
agent involved in the offer and sale of the Offered Securities will be named in
the applicable Prospectus Supplement.
Underwriters may offer and sell the Offered Securities at a fixed
price or prices which may be changed, at prices related to the prevailing
market prices at the time of sale or at negotiated prices. The Company also
may, from time to time, authorize underwriters acting as the Company's agents
to offer and sell the Offered Securities upon the terms and conditions as are
set forth in the applicable Prospectus Supplement. In connection with the sale
of the Offered Securities, underwriters may be deemed to have received
compensation from the Company in the form of underwriting discounts or
commissions and may also receive commissions from purchasers of the Offered
Securities for whom they may act as agent. Underwriters may sell the Offered
Securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or
agents in connection with the offering of the Offered Securities, and any
discounts, concessions or commissions allowed by underwriters to participating
dealers, will be set forth in the applicable Prospectus Supplement.
Underwriters, dealers and agents participating in the distribution of the
Offered Securities may be deemed to be underwriters, and any discounts and
commissions received by them and any profit realized by them on resale of the
Offered Securities may be deemed to be underwriting discounts and commissions,
under the Securities Act. Underwriters, dealers and agents may be entitled,
under agreements entered into with the Company, to indemnification against and
contribution toward certain civil liabilities, including liabilities under the
Securities Act. Underwriters, dealers and agents may engage in transactions
with, or perform services for, or be customers of, the Company in the ordinary
course of business.
If so indicated in the applicable Prospectus Supplement, the Company
will authorize dealers acting as the Company's agents to solicit offers by
certain institutions to purchase the Offered Securities from the Company at the
public offering price set forth in such Prospectus Supplement pursuant to
Delayed Delivery Contracts ("Contracts") providing for payment and delivery on
the date or dates stated in such Prospectus Supplement. Each Contract will be
for an amount not less than, and the aggregate amount of the Offered Securities
sold pursuant to
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<PAGE> 44
Contracts shall be not less nor more than, the respective amounts stated in the
applicable Prospectus Supplement. Institutions with whom Contracts, when
authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions, and other institutions but will in all cases be subject to the
approval of the Company. Contracts will not be subject to any conditions
except (i) the purchase by an institution of the Offered Securities covered by
its Contracts shall not at the time of delivery be prohibited under the laws of
any jurisdiction in the United States to which such institution is subject; and
(ii) if the Offered Securities are being sold to underwriters, the Company
shall have sold to such underwriters the total amount of the Offered Securities
less the amount thereof covered by the Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
LEGAL MATTERS
Certain legal matters in connection with the Offered Securities,
including the validity of the Offered Securities, will be passed upon for the
Company by Winstead Sechrest & Minick P.C., Dallas, Texas.
EXPERTS
The audited consolidated and combined financial statements for Walden
Residential Properties, Inc. and Walden Predecessors, respectively, included in
the Form 10-K referred to and incorporated by reference in this Prospectus have
been audited by Deloitte & Touche LLP, independent certified public
accountants, as stated in their reports appearing therein and have been so
included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
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<PAGE> 45
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER.
NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS CONSTITUTES
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Company ............................................................... S - 2
Recent Developments ....................................................... S - 3
Risk Factors .............................................................. S - 5
Use of Proceeds ........................................................... S - 11
Price Range of Common Stock and
Distributions ........................................................ S - 11
Underwriting .............................................................. S - 12
Legal Matters ............................................................. S - 13
Experts ................................................................... S - 13
Prospectus
Available Information ..................................................... 2
Incorporation of Certain
Documents by Reference ............................................... 2
The Company ............................................................... 4
Recent Developments ....................................................... 5
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends ................................ 6
Use of Proceeds ........................................................... 6
Description of Common Stock ............................................... 7
Description of Preferred Stock ............................................ 10
Federal Income Tax Considerations ......................................... 15
ERISA Considerations ...................................................... 28
Plan of Distribution ...................................................... 30
Legal Matters ............................................................. 31
Experts ................................................................... 31
</TABLE>
323,232 Shares
WALDEN RESIDENTIAL
PROPERTIES, INC.
Common Stock
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PROSPECTUS SUPPLEMENT
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A.G. EDWARDS & SONS, INC.
FEBRUARY 18, 1998
