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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 5, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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WALDEN RESIDENTIAL PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
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5080 SPECTRUM DRIVE
SUITE 1000 EAST
ADDISON, TEXAS 75001-6410
(972) 788-0510
MARYLAND (Address, including zip code, and telephone number, 75-2506197
(State or other jurisdiction of including area code, of Registrant's Principal Executive (I.R.S. Employer
incorporation or organization) Offices) Identification No.)
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MICHAEL E. MASTERSON
CHAIRMAN OF THE BOARD OF DIRECTORS
WALDEN RESIDENTIAL PROPERTIES, INC.
5080 SPECTRUM DRIVE
SUITE 1000 EAST
ADDISON, TEXAS 75001-6410
(972) 788-0510
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
KENNETH L. BETTS, ESQ.
WINSTEAD SECHREST & MINICK P.C.
1201 ELM STREET, SUITE 5400
DALLAS, TEXAS 75270
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to
time following the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE REGISTRATION FEE
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Common Stock, par value $.01 per
share............................... 12,560,746(1) Not Applicable $300,092,533(2) $ 88,528
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9.00% Redeemable Preferred Stock, par
value $.01 per share.................. 1,999,909 Not Applicable $ 54,997,498(3) $ 16,224
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Series B Warrants..................... 6,666,363 Not Applicable (4) (4)
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Total....................... Not Applicable $355,090,031 $104,752
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(1) Includes 2,222,121 shares of Common Stock, par value $.01 per share,
issuable upon exercise of the Series B Warrants.
(2) Estimated pursuant to Rule 457(f) under the Securities Act based upon (i)
the book value of the Common OP Units to be received by the Company in
exchange for the issuance of 10,338,625 shares of Common Stock, and (ii) the
exercise price for each share of Common Stock issuable upon exercise of the
Series B Warrants.
(3) Estimated pursuant to Rule 457(f) under the Securities Act based upon the
book value of the Preferred OP Units to be received by the Company in
exchange for the issuance of 1,999,909 shares of 9.00% Redeemable Preferred
Stock and 6,666,363 Series B Warrants.
(4) Included as part of the value of the 9.00% Redeemable Preferred Stock;
issuable in conjunction with the 9.00% Redeemable Preferred Stock upon
exchange of Preferred OP Units.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED OCTOBER 5, 1998
PROSPECTUS
WALDEN RESIDENTIAL PROPERTIES, INC.
COMMON STOCK, 9.00% REDEEMABLE PREFERRED STOCK AND SERIES B WARRANTS
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Walden Residential Properties, Inc. is a self-administered, self-managed,
fully integrated real estate investment trust focused on middle income
multifamily properties located primarily in selected Southwestern and
Southeastern metropolitan areas. We currently own and operate 155 properties
containing 42,429 apartment units.
This prospectus relates to the possible issuance by us from time to time of
up to (i) 12,560,746 shares of our common stock, (ii) 1,999,909 shares of our
9.00% redeemable preferred stock, and (iii) 6,666,363 series B warrants (each of
which is exercisable for one-third of one share of common stock at $26.875 per
share), if and to the extent that common and preferred unitholders of
Walden/Drever Operating Partnership, L.P. elect to receive such securities in
exchange for their common and preferred units. These units were issued in
connection with our acquisition of 79 apartment properties in October 1997 from
partnerships of which Drever Partners, Inc. and certain of its affiliates were
the general partners. A description of the procedures to exchange your
partnership interests can be found under "Procedure to Exchange Units" in this
prospectus.
We will not receive any proceeds from the issuance of any of our securities
in connection with the exchange of WDOP units. We will, however, acquire
additional partnership units in exchange for any common stock, redeemable
preferred stock or series B warrants that we may issue pursuant to this
prospectus, which will increase our ownership of the operating partnership.
The common stock is listed on the New York Stock Exchange under the symbol
"WDN" and the preferred stock has been approved for listing on the NYSE subject
to official notice of issuance. On October 2, 1998, the closing sales price of
the common stock as reported on the NYSE was $22.6875 per share.
POTENTIAL INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION
SET FORTH IN "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMPANY'S SECURITIES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE SECURITIES OFFERED HEREBY OR
DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS OCTOBER 5, 1998.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY.......................................... 6
The Company............................................... 6
Risk Factors.............................................. 7
The Properties............................................ 8
Summary Consolidated and Combined Financial and Operating
Information............................................ 10
Plan of Distribution...................................... 11
Dividends and Distributions Policy........................ 11
Tax Status of the Company................................. 11
RISK FACTORS................................................ 12
Tax Consequences to Unitholders of Exchange of Units...... 12
Geographic Concentration of Properties.................... 12
Ability of the Company to Incur Additional Indebtedness;
Restrictive Covenants.................................. 12
Borrowing Risks........................................... 13
Acquisition Risks......................................... 14
Real Estate Investment Considerations..................... 14
No Restriction on Changes in Investment, Financing and
Other Policies......................................... 15
Certain Antitakeover Provisions; Ownership Limits......... 15
Shares Available for Future Sale.......................... 16
Adverse Consequences of Failure to Qualify as a REIT...... 16
Possible Environmental Liabilities........................ 16
Costs of Compliance with Americans with Disabilities Act
and Similar Laws....................................... 17
Uninsured Loss............................................ 17
Year 2000................................................. 18
Risks Associated with Forward-Looking Statements Included
in this Prospectus..................................... 18
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS........................................... 19
THE COMPANY................................................. 20
General................................................... 20
Business Strategies....................................... 21
Property Management....................................... 21
PRICE RANGE OF COMMON STOCK................................. 22
DIVIDENDS AND DISTRIBUTIONS POLICY.......................... 23
SELECTED FINANCIAL DATA..................................... 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 27
Overview.................................................. 27
Results of Operations..................................... 27
Liquidity and Capital Resources........................... 32
Funds from Operations..................................... 36
Inflation................................................. 37
New Accounting Standards.................................. 37
Year 2000 Conversion...................................... 38
BUSINESS AND PROPERTIES..................................... 39
The Properties............................................ 39
Property Management....................................... 50
Employees................................................. 51
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Competition............................................... 51
Legal Proceedings......................................... 51
Regulation................................................ 51
Environmental Matters..................................... 52
Insurance................................................. 53
Available Information.....................................
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES................. 54
MANAGEMENT.................................................. 56
Executive Officers........................................ 56
Independent Directors..................................... 57
Board of Directors........................................ 58
Committees of the Board of Directors...................... 58
Compensation of Directors................................. 59
Compensation Committee Interlocks and Insider
Participation.......................................... 59
Executive Compensation.................................... 60
Option Grants............................................. 61
Option Exercises and Year-End Option Values............... 61
Employment Agreements..................................... 61
PRINCIPAL STOCKHOLDERS...................................... 63
Security Ownership of Certain Beneficial Owners........... 63
Security Ownership of Management.......................... 63
DESCRIPTION OF COMMON STOCK................................. 65
General................................................... 65
Restrictions on Transfer.................................. 65
DESCRIPTION OF REDEEMABLE PREFERRED STOCK................... 67
General................................................... 67
Rank...................................................... 67
Dividends................................................. 67
Redemption................................................ 68
Liquidation Preference.................................... 68
Voting Rights............................................. 68
Restrictions on Ownership................................. 68
DESCRIPTION OF SERIES B WARRANTS............................ 68
General................................................... 68
Exercise of Series B Warrants............................. 69
Amendments and Supplements to Warrant Agreement........... 69
Adjustments............................................... 69
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S
ARTICLES AND BYLAWS....................................... 71
Classification of the Board of Directors.................. 71
Limitation of Liability and Indemnification............... 71
Business Combinations..................................... 72
Control Share Acquisitions................................ 72
Amendment to the Articles................................. 73
Dissolution of the Company................................ 73
Advance Notice of Director Nominations and New Business... 73
Meetings of Stockholders.................................. 73
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FEDERAL INCOME TAX CONSIDERATIONS........................... 74
General................................................... 74
REIT Qualification........................................ 74
Taxation of the Company as a REIT......................... 78
Failure to Qualify as a REIT.............................. 78
Taxation of Stockholders.................................. 79
Backup Withholding........................................ 79
Taxation of Tax Exempt Entities........................... 80
Taxation of Foreign Investors............................. 80
State and Local Taxes..................................... 82
ERISA CONSIDERATIONS........................................ 82
INFORMATION REGARDING WALDEN/DREVER OPERATING PARTNERSHIP,
L.P....................................................... 84
General................................................... 84
The WDOP Partnership Agreement............................ 84
Policies of WDOP.......................................... 89
Real Estate............................................... 89
Tax Treatment of WDOP..................................... 89
WDOP Partnership Interests................................ 91
PLAN OF DISTRIBUTION........................................ 92
PROCEDURE TO EXCHANGE UNITS................................. 92
General................................................... 92
Delivery of Exchange Notice and Certificates.............. 93
Lost or Missing Certificates.............................. 94
TAX CONSEQUENCES OF EXCHANGING UNITS........................ 94
General................................................... 94
Tax Consequences of Exchange.............................. 94
LEGAL MATTERS............................................... 95
EXPERTS..................................................... 95
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SUMMARY
The following information supplements, and should be read in conjunction
with, the information contained in this prospectus.
THE COMPANY
The Company is a self-administered, self-managed, fully integrated real
estate investment trust. We focus on middle income multifamily properties
located primarily in selected Southwestern and Southeastern metropolitan areas.
As of August 31, 1998, we owned and operated 155 multifamily properties
containing 42,429 apartment units. Approximately 92% of our properties are
located in the Houston, Dallas/Fort Worth, Austin, Phoenix, Tampa, Nashville,
Jacksonville, Oklahoma City, San Antonio, Atlanta, Salt Lake City and San Diego
areas, with the remaining properties primarily located in other areas in the
Southwest and Southeast regions of the United States. Of all our apartment
units, approximately 30% are located in the Houston metropolitan area, and
approximately 26% are located in the Dallas/Fort Worth metropolitan area.
On October 1, 1997, we acquired the assets and business of Drever Partners,
Inc. and its affiliates, including 18 partnerships of which Drever Partners,
Inc. and certain of its affiliates were the general partners. In this
transaction we acquired 79 apartment properties (consisting of 18,118 units) and
paid approximately $95.0 million in cash, assumed $286.0 million of mortgage
debt and issued $303.9 million of operating partnership units of a newly-formed
partnership subsidiary of the Company, Walden/Drever Operating Partnership, L.P.
These partnership units are exchangeable, subject to certain conditions, on or
after October 1, 1998, into shares of common stock, shares of redeemable
preferred stock and warrants.
For a more complete description of the securities for which the partnership
units are exchangeable see "Description of Common Stock," "Description of
Redeemable Preferred Stock" and "Description of Series B Warrants."
PLAN OF DISTRIBUTION
This prospectus relates to the issuance by us of our common stock,
preferred stock and warrants when the holders of partnership units exchange such
units. Each common unit is exchangeable for one share of our common stock. Each
preferred unit is exchangeable for one share of our redeemable preferred stock
and three and one-third series B warrants. With each exchange, our interest in
the operating partnership will increase, but we will not receive any cash
proceeds from the exchange. For a more detailed description of the exchange
procedures, see "Procedures to Exchange Units." All expenses incident to the
offering and sale of the Walden Securities incurred by the Company shall be paid
by the Company. See "Plan of Distribution," "Procedure to Exchange Units," "Tax
Consequences of Exchanging Units" and "Federal Income Tax Considerations."
RISK FACTORS
An investment in our securities involves a number of risks. We urge you to
carefully consider the matters discussed under "Risk Factors" beginning on page
12 before investing in the company. Such risks include, among others:
- Tax Consequences to Unitholders of Exchange of Units. In general, the
exchange of Units will be treated as a sale of the unit. As such, you
will be attributed gain or loss from the "sale" of the unit based on the
difference between the amount considered realized for tax purposes and
your adjusted tax basis in the unit.
- Geographic Concentration of Properties. As of August 31, 1998,
approximately 68.39% of our apartment units were located in Texas, with
30% located in the Houston metropolitan area and 26% in the Dallas/ Fort
Worth metropolitan area. An economic decline in the Texas markets, and
specifically in Houston and Dallas/Fort Worth, could adversely affect our
financial condition.
- Ability of the Company to Incur Additional Indebtedness; Restrictive
Covenants. We are not limited in the amount of indebtedness we may
incur, other than certain contractual restrictions. We can offer you no
assurance that we will not become more highly leveraged in the future.
5
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- Acquisition Risks. We continuously acquire properties and are subject to
risks associated with these and future acquisitions, including properties
failing to perform to expectations, overpaying for acquisitions, or
underestimating the costs of improvements to bring the properties up to
established standards.
- Development Risks. We have entered into certain agreements to construct
apartment communities. As a result we will be subject to risks of real
estate development, including risks of lack of financing, construction
delays, budget overruns and leasing.
- Shares Available for Future Sale. We cannot predict the effect that
future sales of our common stock will have on the market price of our
common stock.
- Adverse Consequences of Failure to Qualify as a REIT. If we were to fail
to qualify as a real estate investment trust, we would be subject to
taxation as a corporation at regular corporate rates.
- Possible Environmental Liabilities. As an owner or operator of real
property, we may be liable for the costs of removal or remediation of
certain hazardous substances released on or in our properties. The costs
of investigation, remediation or removal of such substances may be
substantial. In addition, we may be subject to third-party lawsuits
related to environmental contamination.
- Uninsured Loss. Certain types of property losses (such as those from
wars or earthquakes) are not generally insured due to economic
considerations or the lack of available insurance. Should an uninsured
loss or a loss in excess of insured limits occur, we could suffer
substantial losses.
THE PROPERTIES
Our properties contain 42,429 apartment units and are primarily located in
metropolitan areas in the Southwest and Southeast regions of the United States.
The geographic distribution of our properties reflects our belief that
geographic diversification will lessen the impact of local and regional economic
fluctuations on our business. At the same time, we also seek to create
concentrations of properties to allow us to achieve economies of scale in our
property management operations. Our properties were built between 1967 and 1998
and are generally comprised of two- and three-story buildings in landscaped
settings and generally include such attractive amenities as a clubhouse,
swimming pools, laundry facilities and cable television access.
DIVIDENDS AND DISTRIBUTIONS POLICY
In accordance with federal income tax rules we paid dividends per share in
the aggregate of $1.86, $1.93, and $.965 for the years ended December 31, 1996
and 1997 and the six months ended June 30, 1998, respectively. We intend to
continue to pay regular quarterly dividends to our stockholders.
TAX STATUS OF THE COMPANY
We have elected to be taxed as a real estate investment trust. As a result,
we are generally not subject to federal income tax. We are, however subject to a
number of organizational and operational requirements. If we fail to qualify as
a real estate investment trust in any taxable year, the Company will be subject
to Federal income tax on its taxable income at regular corporate rates.
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SUMMARY CONSOLIDATED AND COMBINED FINANCIAL AND OPERATING INFORMATION
The following table sets forth selected financial data of the Company and
should be read in conjunction with the financial statements of the Company and
the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Prospectus. The
summary financial data below provides information about the Company's financial
history and may not be indicative of future operating results. The data for the
years ended December 31, 1997, 1996 and 1995 has been derived from audited
financial statements. The data for the six months ended June 30, 1998 and 1997
has been derived from unaudited financial statements. In the opinion of
management, the operating data for the six months ended June 30, 1998 and 1997
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth herein. The results of
interim periods are not necessarily indicative of results for the full year and
the consolidated historical operating results of the Company may not be
indicative of future operating results of the Company.
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SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
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1998 1997 1997 1996 1995
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(IN THOUSANDS, EXCEPT PER SHARE AND PROPERTY DATA)
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OPERATING DATA
Revenues
Rental and other property income...................... $ 137,845 $ 67,192 $ 169,537 $109,475 $ 81,559
Other revenue......................................... 724 849 1,598 1,696 1,265
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Total revenues.................................. 138,569 68,041 171,135 111,171 82,824
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Expenses
Operating expenses.................................... 59,659 28,574 73,288 47,560 36,085
General and administrative............................ 5,701 3,394 7,734 5,124 3,811
Interest.............................................. 26,688 10,121 28,447 20,573 17,111
Depreciation.......................................... 29,035 13,121 33,841 19,810 15,734
Amortization.......................................... 485 411 827 916 900
Unusual charge........................................ -- -- 1,940 -- --
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Total expenses.................................. 121,568 55,621 146,077 93,983 73,641
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Operating income........................................ 17,001 12,420 25,058 17,188 9,183
Gain on disposition of real property.................... -- -- 2,055 1,934 1,502
Extraordinary loss on debt extinguishment............... (104) -- (422) (1,848) (1,352)
Income allocated to minority interests.................. (5,667) (800) (4,109) (1,705) (922)
Preferred distributions................................. (6,560) (6,623) (13,186) (2,387) --
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Net income available to common stockholders............. $ 4,670 $ 4,997 $ 9,396 $ 13,182 $ 8,411
========== ======== ========== ======== ========
Net income per share: Basic............................. $ 0.25 $ 0.29 $ 0.53 $ 0.90 $ 0.69
Distributions per share................................. $ 0.965 $ 0.965 $ 1.93 $ 1.86 $ 1.82
Weighted average shares outstanding: Basic.............. 18,384 17,329 17,590 14,720 12,155
OTHER DATA
Net operating income(1)................................. $ 78,186 $ 38,618 $ 96,249 $ 61,915 $ 45,474
PROPERTY DATA
Total properties (at period end)........................ 156 75 154 68 55
Total units (at period end)............................. 42,858 23,188 42,482 21,407 17,205
Total units (weighted average).......................... 42,758 22,111 27,346 18,430 14,601
BALANCE SHEET DATA
Real estate assets (at cost)............................ $1,496,973 N/A $1,507,613 $683,515 $513,341
Total assets............................................ $1,487,653 N/A $1,469,472 $689,714 $510,548
Mortgages notes payable................................. $ 461,261 N/A $ 428,354 $258,908 $252,515
Unsecured credit facility and term loan................. $ 285,000 N/A $ 274,000 -- $ 6,500
Total stockholders' equity including minority
interests............................................. $ 695,620 N/A $ 717,131 $411,421 $235,127
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(1) Rental and other property income less operating expenses.
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RISK FACTORS
An investment in Walden Residential Properties, Inc. involves various
risks. You should carefully consider the following information, in conjunction
with the other information contained in this Prospectus, before making a
decision to exchange your units for our securities.
TAX CONSEQUENCES OF EXCHANGE OF UNITS
If you decide to exercise your right to exchange your units for our
securities, the exchange will be treated as a sale of your units for Federal tax
purposes. As a result of the exchange, you will realize, for Federal tax
purposes, an amount equal to the fair market value of the securities you
receive, plus the amount of any Walden/Drever Operating Partnership L.P.
liabilities allocable to your units. You will recognize gain or loss equal to
the difference between the amount realized for Federal income tax purposes and
the sum of your adjusted tax basis in your exchanged units and the tax basis of
your right to exchange. It is possible that the amount of gain you recognize or
your resulting tax liability could exceed the value of our securities you
receive. See "Tax Consequences of Exchanging Units."
GEOGRAPHIC CONCENTRATION OF PROPERTIES
As of August 31, 1998, 112 of our 155 apartment properties, containing
29,019 apartment units (68.39% of our apartment units), were located in Texas.
Of these 112 apartment properties, 54 apartment properties, containing 12,561
apartment units (29.60% of our apartment units) were located in the Houston
metropolitan area and 37 apartment properties, containing 10,884 apartment units
(25.65% of our apartment units) were located in the Dallas/Fort Worth
metropolitan area. Our performance is, therefore, largely dependent upon
economic conditions in Texas generally and, specifically, in the Houston and
Dallas/Fort Worth metropolitan areas. An economic decline in the Texas markets
may adversely affect our ability to make expected distributions to its
stockholders.
BORROWING RISKS
Debt Financing and Existing Debt Maturities
Our organizational documents do not limit the amount of indebtedness we may
incur. Subject to certain restrictions contained in the instruments governing
our current indebtedness, the amount of debt we may incur is solely within the
discretion of our Board of Directors. We could incur additional debt which could
increase the amount of our debt service payments and increase the risk of
default on our obligations. Any increase in leverage could potentially adversely
affect our financial condition and results of operations. As of June 30, 1998,
we had approximately $746 million aggregate principal amount of debt
outstanding. Approximately $85 million of that amount is unsecured debt under
our credit facility and approximately $200 million of that amount was borrowed
under our unsecured term loan. The remaining amounts are mortgage indebtedness
secured by 109 of our apartment properties. General risks associated with our
debt include:
- Declining economic performance of our apartment properties could
adversely affect our funds from operations which could adversely affect
cash available to pay our debts.
- As of June 30, 1998, we had approximately $300 million of debt which
becomes payable during the remainder of 1998 and 1999. We may need to
refinance portions of this debt or incur additional debt secured by
individual properties or groups of properties or conduct unsecured public
or private debt offerings. There are no guarantees we will be able to
refinance our debt or refinance such debt on acceptable terms. If we are
not able to refinance our debt on acceptable terms, we could be required
to dispose of certain properties on unfavorable terms. This could result
in losses and could adversely affect our ability to make distributions to
our stockholders.
- If we are unable to meet scheduled mortgage payments, the apartment
properties securing such debt could be foreclosed upon or otherwise be
transferred to the lender. This would result in a loss of both income and
asset value.
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- Certain of our debt (approximately $349 million) bears interest at
variable rates. If prevailing interest rates or other factors at the time
of refinancing of any debt result in higher interest rates or if interest
rates increase generally over time, our interest expense would increase
and our ability to make distributions to our stockholders could be
adversely affected.
Debt Instruments
The agreements which govern our debt, including our unsecured credit
facility and term loan, contain certain covenants which restrict our ability
(and the ability of our subsidiaries) to engage in certain activities. These
activities include:
- incurring additional debt;
- making investments in or engaging in transactions with stockholders and
affiliates;
- incurring liens;
- creating restrictions on the ability of certain subsidiaries to pay
dividends or make certain payments to us;
- merging or consolidating with any other entity; or
- selling, assigning, transferring, leasing or otherwise disposing of all
or substantially all of our assets.
The credit facility and term loan also require us to maintain certain
financial ratios. There can be no assurance that we will be able to maintain
these ratios or that the covenants described above will not adversely affect our
ability to finance our future operations or capital needs. In addition, the
terms of our debt instruments may limit our ability to engage in other business
activities that may be of interest. The breach of any of these covenants
described above or the inability to maintain the required financial ratios could
result in a default under the credit facility or term loan. In addition, certain
of our debt instruments contain cross-default and/or cross-acceleration
provisions. Therefore, an inability to meet our obligations with respect to the
provisions of one debt agreement could result in a default under other debt
agreements. If we default on our debt, any amounts borrowed, together with
accrued interest, could be declared due and payable. If our indebtedness were
accelerated, there can be no assurance that our assets would be sufficient to
repay such indebtedness in full.
Forward Treasury Lock Agreements.
In order to hedge our exposure to interest rate fluctuations on our debt
refinancing, we have entered into three forward treasury lock agreements. Under
these agreements, we pay or receive an amount equal to the difference between
the reference yield and the market yield on the date of exercise. The exercise
date may be any date up to the settlement date. Any gain or loss under these
agreements will be amortized to interest expense over the terms of the
financing. If, however, new debt financing is not obtained, any gain or loss
will be recorded as an expense. As of September 18, 1998, we had a loss position
on these forward treasury lock agreements of approximately $29.8 million.
ACQUISITION RISKS
Since the consummation of our initial public offering through August 31,
1998, we have purchased 151 apartment properties (and sold certain properties)
and increased the number of apartment units we own to 42,429, an increase of
over 500% from the 6,343 apartment units we initially owned. We intend to
continue to grow by acquiring additional apartment properties. Risks associated
with past and continuing acquisitions include, but are not limited to:
- the risk that acquired apartment properties may not perform in accordance
with expectations, including projected occupancy and rental rates;
- the risk that we may have overpaid for acquired apartment properties; and
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- the risk that we may have underestimated the cost of improvements
required to bring an acquired apartment property up to standards
established for the market position intended for that property.
Our ability to acquire additional apartment properties is dependent upon
our ability to obtain equity or debt financing. As of June 30, 1998, we had
additional borrowing availability of approximately $52 million under our credit
facility. The issuance of additional equity to obtain financing for the
acquisitions of additional properties could result in a dilution of ownership
for our existing stockholders. In addition, if cash flows generated from the
investment of the net proceeds from equity offerings in our properties or
otherwise is less than the distributions payable to such new stockholders,
distributions to all stockholders may be adversely affected. When we finance our
operations with debt, we expect that the apartment properties will generate cash
flow adequate to service the indebtedness. However, if cash flow from the
properties decreases, funds from operations would be adversely affected.
DEVELOPMENT RISKS
As of August 31, 1998, we had entered into four development agreements to
construct apartment communities, which we will purchase upon completion of
construction and lease up. We will be subject to some risks of real estate
development with respect to these four properties, including risks of lack of
financing, construction delays, budget overruns and leasing. We will also be
subject to similar risks in connection with any future development property.
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 income
generated and expenses incurred. If our apartment properties do not generate
sufficient revenue to meet operating expenses, including debt service and
capital expenditures, our cash flow and our ability to make distributions to
stockholders may be adversely affected.
Market Illiquidity.
Real estate investments are relatively illiquid. Such illiquidity will tend
to limit our ability to promptly vary our portfolio in response to changes in
economic or other conditions. In addition, provisions of the Internal Revenue
Code relating to REITs limit our ability to sell properties held for fewer than
four years. This limitation may affect our ability to sell properties without
adversely affecting returns to our stockholders.
Operating Risks.
Our apartment properties are subject to all operating risks common to
multifamily properties in general, such as the risk of increased unemployment in
markets where our properties are located, any or all of which might adversely
affect occupancy or rental rates. In addition, increases in operating costs due
to inflation and other factors may not necessarily be offset by increased rents.
Operating apartment properties is also subject to the risk that residents will
be unable or unwilling to pay rent increases. The local rental market may limit
the extent to which rents may be increased to meet increased operating expenses,
if any, without decreasing occupancy rates. If any of the above occurs, our
ability to make expected distributions to our stockholders could be adversely
affected.
Affordable Housing Restrictions.
Fifteen of our apartment properties are subject to restrictions requiring
that a specified percentage of the apartment units in such properties be made
available to persons with lower and moderate incomes (currently, approximately
70% of the total number of apartment units in the fifteen affected properties
and 9% of the total number of our apartment units). In addition, state and local
authorities in some cases impose certain restrictions on the amount of rent that
can be charged. Future enactment of rent control laws or other laws regulating
multifamily properties could adversely impact our operations.
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Competition.
There are numerous real estate companies, including those which operate in
the markets in which our properties are located, which compete with us for
apartment properties to acquire and residents to occupy such properties. Our
properties compete directly with other multifamily properties and single family
homes that are available for rent in markets in which the properties are
located. Our properties also compete with the new and existing home market for
residents. In addition, competitors for acquisition projects may have greater
resources than we do.
NO RESTRICTION ON CHANGES IN INVESTMENT, FINANCING AND OTHER POLICIES
Our Board of Directors determines our investment and financing policies,
including our policies with respect to growth, debt, capitalization, dividends
and operating policies. Although the Board of Directors has no present intention
to amend or waive its current policies, it could do so at any time, or from time
to time, in its discretion without a vote of our stockholders. A change in these
policies could adversely affect our financial condition or results of operations
and could adversely affect the market price of our securities. See "Policies
with Respect to Certain Activities."
CERTAIN ANTITAKEOVER PROVISIONS; OWNERSHIP LIMITS
Charter Provisions. Certain provisions of our articles of incorporation
may discourage third parties from making acquisition proposals and could inhibit
a change in control, which could give our stockholders the opportunity to
realize a premium over the then-prevailing market prices for their interests.
These same antitakeover provisions may also impede our stockholders' ability to
effect a change in management.
In order to maintain our qualification as a real estate investment trust,
no more than 50% in value of our outstanding shares of capital stock may be
owned, directly or indirectly, by five or fewer individuals or entities. As a
result, our articles of incorporation prohibit ownership, either directly or
under the applicable attribution rules of the Internal Revenue Code, of more
than 9% of the shares of our capital stock by any stockholder (other than Don R.
Daseke, the former Chairman of the Company) . This prohibition is subject to
certain exceptions, including the potential waiver of this limitation on a
case-by-case basis by the board of directors. As a result of this ownership
prohibition, the board of directors could be able to prevent an acquisition of
control. See "Certain Provisions of Maryland Law and of the Company's Articles
and Bylaws" and "Federal Income Tax Considerations."
Staggered Board. Our board of directors is divided into three classes. The
terms of the first, second and third classes will expire at the annual meeting
of stockholders in 1999, 2000 and 2001, respectively. Directors of each class
will be elected for a three-year term upon the expiration of the current class'
term. The staggered terms for directors may affect the stockholders' ability to
effect a change in control even if a change in control were in our stockholders'
best interest. See "Certain Provisions of Maryland Law and of the Company's
Articles and Bylaws."
Preferred Stock. Our articles of incorporation authorize the board of
directors to issue up to 10 million shares of preferred stock and to establish
the preference and rights of any such shares. See "Capital Stock of the
Company -- Preferred Stock." The issuance of additional preferred stock could
have the effect of delaying or preventing a change in control even if a change
in control were in our stockholders' best interest.
SHARES AVAILABLE FOR FUTURE SALE
Future sales of shares of our common stock, or the availability of such
shares for future sale, could impact the prevailing market price of our common
stock from time to time. Sales of substantial amounts of our common stock
(including shares issued upon the exercise of employee stock options), or the
perception that such sales could occur, could adversely affect prevailing market
prices for our common stock. Upon consummation of the exchange of all common
units and the exercise of all series B warrants, we will have 30,631,666 shares
of common stock outstanding, all of which will be freely transferable without
further registration under Federal securities laws.
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ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Qualification as a real estate investment trust, or REIT, involves the
application of highly technical and complex Code provisions for which there are
limited judicial or administrative interpretations. Such qualification is also
subject to various factual matters and circumstances not entirely within our
control. For example, in order to qualify as a REIT, at least 95% of our gross
income in any year must be derived from qualifying sources and we must make
distributions to our stockholders aggregating annually at least 95% of our
taxable income (excluding net capital gains). No assurance can be given that new
legislation, regulations, administrative interpretations or court decisions will
not change the tax laws with respect to qualification as a REIT or the federal
income tax consequences of such qualification. We are not aware, however, of any
currently pending tax legislation that would adversely affect our ability to
continue to qualify as a REIT.
If we fail to qualify as a REIT for any taxable year, we would be subject
to federal income tax on our taxable income at corporate rates. In addition, we
would generally be disqualified from treatment as a REIT for the four taxable
years following the year of losing our REIT status. Losing our REIT status would
reduce our net earnings available for investment or distribution to our
stockholders because of the additional tax liability. In addition, distributions
to our stockholders would no longer qualify for the dividends paid deduction and
such distributions would no longer be required to be made. To the extent we
would have made distributions in anticipation of qualifying as a REIT, we might
be required to borrow funds or liquidate certain investments in order to pay the
applicable tax.
POSSIBLE ENVIRONMENTAL LIABILITIES
Hazardous Substances.
Various Federal, state and local environmental laws impose certain
responsibilities on an owner or operator of real estate and subjects such
persons to potential liabilities. Typical provisions of such laws include:
- Responsibility and liability for the costs of removal or remediation of
certain hazardous substances released on or in real property, generally
without regard to knowledge or responsibility of the presence of the
contaminants.
- Liability for the costs of removal or remediation of hazardous substances
at disposal facilities for persons who arrange for the disposal or
treatment of such substances.
- Potential liability for common law claims by third parties based on
damages and costs of environmental contaminants.
The costs of investigation, remediation or removal of hazardous substances
may be substantial. In addition, the presence of hazardous substances on one of
our apartment properties, or the failure to properly remediate a contaminated
property, could adversely affect our ability to sell or rent the property or to
borrow using the property as collateral.
Asbestos-Containing Materials.
In addition to general environmental laws, certain laws and regulations
govern the removal, encapsulation or disturbance of asbestos-containing
materials when such materials are in poor condition or in the event of building
remodeling, renovations or demolition. These laws potentially impose liability
for release of asbestos-containing materials and may permit third parties to sue
for personal injuries associated with such materials.
Environmental Assessments.
We have performed "Phase I" environmental assessments on each of our
apartment properties. These assessments revealed elevated lead content in the
drinking water of three of our properties and asbestos-containing materials at
75 of our properties (some of which is friable but in good and manageable
condition). The consulting firm which conducted these assessments has prepared
an operations and maintenance program recommending certain procedures in dealing
with the asbestos-containing materials. The cost from any future
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disturbance of asbestos-containing materials will depend on the magnitude of the
disturbance and the location of the materials. Our environmental consulting firm
has advised that we are not required by Federal law to take any action with
regard to the elevated lead levels in the water of the three properties.
However, we are currently attempting to determine the most effective remedial
action we can take. We anticipate any remedial action will cost, in the
aggregate, between $760,000 and $780,000 and the amount will be capitalized when
incurred. We expect to fund this amount through cash flow from operations.
Except as otherwise described above, we believe our apartment properties
are in compliance in all material respects with the laws regarding hazardous or
toxic substances. We have not been notified, and are not otherwise aware, of any
material noncompliance, liability or claim relating to hazardous or toxic
substances on our apartment properties. We do not believe the matters described
above, or compliance with applicable environmental laws or regulations in
general, will have a material adverse effect on our financial condition, results
of operations and cash flows.
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND SIMILAR LAWS
Our apartment properties are required to meet certain Federal requirements
related to access and use by disabled persons as a result of the Americans with
Disabilities Act of 1990. In addition, a number of additional Federal, state and
local laws may require modifications to our apartment properties, or may
restrict certain further renovations thereof, with respect to access by disabled
persons. For example, the Fair Housing Amendments Act of 1988 requires apartment
communities first occupied after March 13, 1990 to be accessible to the
handicapped. Noncompliance with any such laws or regulations could result in the
imposition of fines or an award of damages to private litigants.
We have obtained structural reports from outside consultants which indicate
certain modifications need to be made to some of our apartment properties to
bring those properties into full compliance with the Americans with Disabilities
Act. We do no believe the costs of these modifications will have a material
adverse effect on our financial condition, results of operations and cash flows.
However, additional legislation could impose additional financial obligations or
restrictions with respect to access by disabled persons. If required changes
involve greater expenditures than we currently anticipate, or if the changes
must be made on a more accelerated basis, our ability to make expected
distributions could be adversely affected.
UNINSURED LOSS
We carry comprehensive liability, fire, extended coverage and rental loss
insurance with respect to all of our apartment properties with policy
specifications, insured limits and deductibles customary for similar properties.
There are, however, certain types of losses (such as losses arising from wars or
earthquakes) we do not generally insure because they are either uninsurable or
not economically insurable. Should an uninsured loss or a loss in excess of
insured limits occur, we could lose our capital invested in the affected
property, as well as the anticipated future revenues from such property. In
addition, we would continue to be obligated on any mortgage indebtedness or
other obligations related to the property. Although we believe the properties
are currently adequately insured in accordance with industry standards, any such
loss could adversely affect our operations.
YEAR 2000
Many of the world's computer systems currently record years in a two-digit
format. Such computer systems will be unable to properly interpret dates beyond
the year 1999, which could lead to disruptions in our operations (commonly
referred to as the "Year 2000" issue). We have identified three systems which
are vulnerable to the Year 2000 issue, including our general ledger/accounts
payable system, our payroll system, and our on-site accounting system (rent roll
activities). Although we are currently utilizing internal and external resources
to reprogram, replace and test our systems for Year 2000 compliance, there can
be no guarantees that all of our systems will be Year 2000 compliant or that
other companies on which we rely will be timely converted. As a result, our
operations could be adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000."
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RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS
This prospectus contains certain forward-looking statements within the
meaning of Federal securities laws which are intended to be covered by the safe
harbors created thereby. These statements include our plans and objectives for
future operations, including plans and objectives relating to future growth and
availability of funds. These forward-looking statements are based on current
expectations that involve numerous risks and uncertainties. Assumptions relating
to these statements involve judgments with respect to, among other things,
future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to accurately predict and
many of which are beyond our control. Although we believe the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could be inaccurate and, therefore, there can be no assurance that these
forward-looking statements will prove to be accurate. In light of the
significant uncertainties inherent in these forward-looking statements, the
inclusion of such information should not be regarded as a representation by us
or any other person that our objectives and plans will be achieved.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The Company's ratio of earnings to combined fixed charges and preferred
stock dividends for the six months ended June 30, 1998 and the five year period
ended December 31, 1997 (of which the period January 1, 1994 through February 8,
1994 and the year ended December 31, 1993 are based on the results of the Walden
Predecessors) was 1.20, 1.25, 1.59, 1.52, 1.68 and .63, 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 of financing costs) to the Company's
income before extraordinary items. The Company's earnings (in thousands) were
inadequate to cover fixed charges by $45 and $4,795 for the period from January
1, 1994 to February 8, 1994 and the year ended December 31, 1993, respectively,
all of which were prior to the Company's initial public offering in February of
1994.
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THE COMPANY
GENERAL
The Company is a self-administered, self-managed, fully integrated REIT
focused on middle income multifamily properties located primarily in selected
Southwestern and Southeastern metropolitan areas. The Company, a Maryland
corporation headquartered 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 owned and operated 155 multifamily
properties as of August 31, 1998, containing 42,429 apartment units.
Approximately 92% of the Properties are located in the Houston, Dallas/Fort
Worth, Austin, Phoenix, Tampa, Nashville, Jacksonville, Oklahoma City, San
Antonio, Atlanta, Salt Lake City and San Diego areas (the "Target Markets"),
with the remaining Properties primarily located in other areas in the Southwest
and Southeast regions of the United States. Of the total units owned,
approximately 30% are located in Houston (in eight different submarkets), and
approximately 26% are located in Dallas/Fort Worth (in 15 different submarkets).
The Properties had a weighted average physical occupancy rate of approximately
93.3% for 1997 and 95.3% for the month of August 1998.
Upon completion of the Company's initial public offering on February 9,
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, a 144-unit property was sold in September 1996, and a 200-unit
property and a 248-unit property were sold in August 1998), 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 (collectively, the "Original Properties"). Since the
consummation of the IPO, the Company has acquired 151 properties (the
"Acquisition Properties") (of which a 242-unit property was sold in December
1995, a 304-unit property was sold in August 1996, a 392-unit property was sold
in October 1997, a 273-unit property and a 430-unit property were sold in August
1998 and six properties were combined in 1997 with certain other properties
owned to achieve operating efficiencies), containing an aggregate of 39,002
apartments units, for an aggregate acquisition cost of $1.4 billion. In
connection with one property acquired in December 1996, the Company acquired
approximately 81 acres of adjacent undeveloped land for $4 million. The land is
zoned for an additional 900 apartment units, which offers the Company the
opportunity to develop apartment communities in the future. 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 and enhancement programs.
On October 1, 1997, the Company acquired the assets and business of Drever
Partners, Inc. and its affiliates, including 18 partnerships of which Drever
Partners, Inc. and certain of its affiliates were the general partners,
(collectively, "Drever"), a private real estate management company based in San
Francisco and Houston. This transaction included the acquisition by the Company
of 79 apartment properties (consisting of 18,118 units) (the "Drever
Properties"), which are included in the 151 properties acquired by the Company
since its IPO. Pursuant to the Exchange Agreement with Drever, the consideration
exchanged by the Company consisted of approximately $95.0 million of cash, the
assumption of $286.0 million of mortgage debt (of which the Company repaid
$119.0 million with proceeds from an unsecured term loan and its unsecured
credit facility) and $303.9 million of operating partnership units (the "Common
OP Units" and "Preferred OP Units", collectively the "Units") issued by a
newly-formed partnership subsidiary of the Company, Walden/Drever Operating
Partnership, L.P. ("WDOP"), to the shareholders and partners of and equity
participants in Drever. The Units are exchangeable on or after October 1, 1998,
into an aggregate of 10,338,625 shares of the Company's common stock, par value
$.01 per share (the "Common Stock"), 1,999,909 shares of the Company's 9.00%
Redeemable Preferred Stock, par value $.01 per share (the "Redeemable Preferred
Stock") and 6,666,363 Series B Warrants (each of which is exercisable for
one-third of one share of the Company's common stock at $26.875 per share) (the
"Series B Warrants" and, collectively with the Common Stock and Redeemable
Preferred Stock, the "Walden Securities"). The
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Redeemable Preferred Stock and the Preferred OP Units are redeemable at the
option of the Company in 10 years at a redemption price of $25 per share or
unit.
The Company's executive offices are located at 5080 Spectrum Drive, Suite
1000, Addison, Texas 75001-6401. 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.
BUSINESS STRATEGIES
The Company's primary business objective is to maximize stockholder value
by maintaining long-term growth in funds from operations for distributions to
its stockholders. To achieve this objective, the Company will focus on
maximizing the internal growth of its expanded portfolio through property
management and resident services, implementation of a property enhancement
program and acquisition of garden apartment properties that have strong cash
flow growth potential and are located in the Company's Target Markets. The
completion of the Drever combination has provided the Company with increased
management depth and expertise in property and asset management and property
redevelopment. Specifically, the Company intends to implement the following
business strategies:
Increased Property Cash Flow. The continuing integration of the Company's
and Drever's property management operations is expected to produce a level of
service that is successful at resident retention and focused on increasing
occupancy and rental rates. The Company also anticipates increasing its cash
flow by controlling operating expenses and implementing programs to generate
ancillary income (such as cable, telephone and laundry).
Property Enhancement/Repositioning Program. The Company has initiated a
property enhancement program to upgrade the physical appearance (both exterior
and interior) of certain properties. These property enhancements are expected to
generate high yields through increased rental rates and resident retention. In
addition, certain of the Company's properties have been targeted for
repositioning. By reinvesting in its properties, the Company expects to set them
apart from deteriorating, similar aged properties and increase their
competitiveness with newly constructed units that are generally available at
considerably higher rates. These upgrades are expected to yield substantially
increased revenue streams.
Acquisitions. The Company also seeks to increase its funds from operations
by acquiring multifamily properties that have prospects for long-term growth and
can be purchased at prices substantially below replacement cost. Following the
IPO, the Company has engaged in an active acquisition program, acquiring 151
multifamily properties, containing an aggregate of 39,002 apartment units
(including the Drever transaction of 79 properties consisting of 18,118 units).
The Company is currently focusing its acquisition efforts in the Target Markets
due to the attractive demographics of these markets and the availability of
properties for sale.
Dispositions. Through the Company's asset management function, properties
are routinely evaluated to determine that optimal operating results are
achieved. In connection with this evaluation, properties may be targeted for
disposition once a determination is made that such properties have achieved
their maximum investment return. In addition, certain properties not located in
the Company's core markets may be targeted for disposition.
New Development. Selective development of new apartment properties in the
Target Markets will become increasingly important to the growth of the Company's
portfolio over the next several years. Management will select properties for
development that meet an identified market demand, are well-located in their
markets and have an anticipated total return in excess of that projected for
acquisition properties.
PROPERTY MANAGEMENT
The Company conducts its property management operations with an experienced
staff of professionals and support personnel, including property directors and
sales directors. The depth of the organization is intended to enable the Company
to deliver quality services on an uninterrupted basis, thereby promoting
resident satisfaction and improving resident retention. Each of the Company's
owned or managed properties is
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operated by a staff specifically selected based on the size, location, age,
management plan and marketing plan of the individual property. Personnel are
carefully trained in their areas of expertise, such as property management,
marketing and leasing, resident relations and maintenance.
The Company's standardized policies and procedures specify reporting
requirements and management guidelines which are to be applied at each property.
Such policies and procedures facilitate management consistency in all markets.
The Company uses customized software programs, including an on-site computerized
rent roll system, to provide site, regional and executive management with rapid
access to all marketing and accounting information. Weekly marketing reports are
prepared by on-site property directors which track each property's leasing
status, occupancy rate, prospective resident traffic, unit availability, lease
renewals, residents moving in and out of apartments, notices by residents to
vacate their apartments and delinquent rental charges or other fees. Accounting
elements such as receivables, payables, rent roll status and budget compliance
are regularly monitored through this system.
Marketing and leasing activities and procedures are designed to comply with
all established Federal, state and local laws and regulations. The Company
generally offers leases having six to 12 month terms, with individual property
marketing plans structured to respond to local market conditions. Qualifying
standards for prospective residents are established to comply with the
affordable housing restrictions placed on certain of the Properties, the Fair
Housing Amendments Act of 1988 (the "FHA") and the regulations thereunder and
are designed to stabilize service levels and income streams. The Company has
fifteen properties which are currently subject to restrictions that require a
specified number of apartments be offered to households with lower or moderate
incomes. The Company utilizes standard lease contracts promulgated by local
apartment associations to ensure compliance with the most recent legislative and
judicial activities related to multifamily properties, as well as to permit
uniform lease administration relating to rent collections, security deposit
dispositions, evictions, repairs and renewals.
PRICE RANGE OF COMMON STOCK
The Common Stock has traded on the New York Stock Exchange ("NYSE") under
the symbol "WDN" since February 2, 1994, the date on which the Common Stock
began trading. The following table sets forth for the periods indicated the high
and low sales prices per common share as reported on the NYSE and the
distributions declared by the Company per common share for each such period in
1998, 1997 and 1996:
<TABLE>
<CAPTION>
DISTRIBUTIONS
QUARTER ENDED HIGH LOW PER SHARE
------------- ------- ------- -------------
<S> <C> <C> <C>
March 31, 1998...................................... $27.125 $23.750 $0.4825
June 30, 1998....................................... 26.000 23.813 0.4825
September 30, 1998.................................. 23.063 22.750 0.4825
March 31, 1997...................................... $26.875 $24.000 $0.4825
June 30, 1997....................................... 25.688 21.250 0.4825
September 30, 1997.................................. 25.750 22.750 0.4825
December 31, 1997................................... 26.000 23.500 0.4825
March 31, 1996...................................... $22.125 $20.000 $0.465
June 30, 1996....................................... 21.875 20.250 0.465
September 30, 1996.................................. 21.875 19.750 0.465
December 31, 1996................................... 26.000 20.875 0.465
</TABLE>
The closing price of the Common Stock on October 2, 1998 was $22.6875. As
of August 31, 1998, the Common Stock was held by 1,590 stockholders of record,
including shares held in nominee or street name by brokers.
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The Redeemable Preferred Stock is approved for listing on the NYSE under
the symbol "WDN pd" subject to official notice of issuance. It is expected that
the Series B Warrants will trade on the NASDAQ OTC system.
DIVIDENDS AND DISTRIBUTIONS POLICY
In accordance with applicable REIT requirements, the Company has made
distributions in accordance with the Code. The Company paid dividends per share
in the aggregate of $1.86, $1.93, and $1.4475 for the years ended December 31,
1996 and 1997 and the nine months ended September 30, 1998, respectively. See
"Price Range of Common Stock." The Company intends to continue to pay regular
quarterly dividends to its stockholders.
Pursuant to a provision of the Company's credit facility, distributions to
stockholders may not exceed 90% of funds from operations, as defined in the
credit facility. The Company does not anticipate its distributions to be
restricted by this provision.
Future distributions made by the Company will be at the discretion of the
Board of Directors and will depend upon numerous factors, including the gross
revenues received from its properties, the operating expenses of the Company,
the interest expense incurred in borrowing and capital expenditures. The Company
anticipates that distributions will exceed net income determined in accordance
with generally accepted accounting principles due to non-cash expenses,
primarily depreciation and amortization.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes generally will be taxable
to stockholders as ordinary dividend income, ordinary gain or capital gain.
Distributions in excess of such earnings and profits generally will be treated
as a non-taxable deduction of the stockholder's basis in the shares of Common
Stock to the extent thereof (which may have the effect of deferring taxation
until such stockholder's sale of the shares of Common Stock), and thereafter as
taxable gain.
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SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial data for the
Company and the combined financial data for 18 of the Original Properties
(certain of which have been sold) acquired concurrently with the closing of the
IPO and the assets, liabilities and operations of the Walden Predecessors'
operating companies. The historical consolidated operating data for the Company
for the years ended December 31, 1997, 1996 and 1995 and the period from
February 9, 1994 (date of commencement of operations) to December 31, 1994 and
the balance sheet data as of December 31, 1997, 1996, 1995 and 1994 and the
combined operating data of the Walden Predecessors for the period January 1,
1994 to February 8, 1994 and the year ended December 31, 1993 and the balance
sheet data as of December 31, 1993 have been derived from the consolidated
financial statements and accounting records of the Company and the combined
financial statements and accounting records of the Walden Predecessors,
respectively. These financial statements have been audited by independent
auditors. The data for the six months ended June 30, 1998 and 1997 has been
derived from unaudited financial statements. In the opinion of management, the
operating data for the six months ended June 30, 1998 and 1997 include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein. The results of interim periods
are not necessarily indicative of results for the full year and the consolidated
and combined historical operating results of the Company and the Walden
Predecessors may not be indicative of future operating results of the Company.
The following selected financial information should be read in conjunction with
the discussion set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and all of the financial
statements included elsewhere in this report. All amounts are in thousands
except per share and property data.
<TABLE>
<CAPTION>
THE COMPANY
--------------------------------------------------------------------
SIX MONTHS ENDED YEARS ENDED FEBRUARY 9
JUNE 30, DECEMBER 31, TO
------------------- ------------------------------- DECEMBER 31,
1998(A) 1997 1997(A) 1996 1995 1994
-------- -------- -------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues
Rental income............................... $132,557 $ 64,587 $163,224 $ 105,602 $ 78,469 $ 39,602
Other property income....................... 5,288 2,605 6,313 3,873 3,090 1,493
Interest income............................. 724 849 1,598 1,433 856 365
Other income................................ -- -- -- 263 409 533
-------- -------- -------- --------- -------- ---------
Total revenues......................... 138,569 68,041 171,135 111,171 82,824 41,993
Expenses
Property operating and maintenance.......... 45,761 22,013 56,483 37,521 28,748 15,607
Real estate taxes........................... 13,898 6,561 16,805 10,039 7,337 3,275
General and administrative.................. 5,701 3,394 7,734 5,124 3,811 2,507
Unusual charge -- officer settlement
agreement................................. -- -- 1,940 -- -- --
Interest expense............................ 26,688 10,121 28,447 20,573 17,111 6,288
Depreciation and amortization............... 29,520 13,532 34,668 20,726 16,634 8,960
-------- -------- -------- --------- -------- ---------
Total expenses......................... 121,568 55,621 146,077 93,983 73,641 36,637
-------- -------- -------- --------- -------- ---------
Operating income.............................. 17,001 12,420 25,058 17,188 9,183 5,356
Gain on disposition of real property.......... -- -- 2,055 1,934 1,502 --
Extraordinary loss on debt extinguishment..... (104) -- (422) (1,848) (1,352) --
-------- -------- -------- --------- -------- ---------
Income before income allocated to minority
interests................................... 16,897 12,420 26,691 17,274 9,333 5,356
Income allocated to minority interests........ (5,667) (800) (4,109) (1,705) (922) --
-------- -------- -------- --------- -------- ---------
Net income.................................... 11,230 11,620 22,582 15,569 8,411 5,356
Preferred distributions....................... (6,560) (6,623) (13,186) (2,387) -- --
-------- -------- -------- --------- -------- ---------
Net income available to common stockholders... $ 4,670 $ 4,997 $ 9,396 $ 13,182 $ 8,411 $ 5,356
======== ======== ======== ========= ======== =========
Basic net income per share.................... $ 0.25 $ 0.29 $ 0.53 $ 0.90 $ 0.69 $ 0.62
======== ======== ======== ========= ======== =========
Diluted net income per share.................. $ 0.25 $ 0.29 $ 0.53 $ 0.89 $ 0.69 $ 0.62
======== ======== ======== ========= ======== =========
Distributions per share of common stock....... $ 0.965 $ 0.965 $ 1.93 $ 1.86 $ 1.82 $ 1.09
======== ======== ======== ========= ======== =========
Basic weighted average number of common shares
outstanding................................. 18,384 17,329 17,590 14,720 12,155 8,689
======== ======== ======== ========= ======== =========
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
THE COMPANY
--------------------------------------------------------------------
SIX MONTHS ENDED YEARS ENDED FEBRUARY 9
JUNE 30, DECEMBER 31, TO
------------------- ------------------------------- DECEMBER 31,
1998(A) 1997 1997(A) 1996 1995 1994
-------- -------- -------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
PROPERTY DATA
Total properties (at end of
period)(b)........................... 156 75 154 68 55 40
Total units (at end of period)......... 42,858 23,188 42,482 21,407 17,205 12,319
Total units (weighted average)......... 42,758 22,111 27,346 18,430 14,601 9,140
Weighted average monthly property revenue per
unit(c)..................................... $ 537 $ 506 $ 517 $ 495 $ 465 $ 420
OTHER DATA
Funds from operations(d)...................... $ 38,930 $ 20,829 $ 50,233 $ 36,998 $ 24,917 $ 13,945
Cash flows provided by (used in):
Operating activities...................... $ 31,561 $ 23,248 $ 70,822 $ 38,281 $ 31,317 $ 16,420
Investing activities...................... $(25,289) $(67,297) $327,814 $(158,668) $(86,926) $(256,114)
Financing activities...................... $ (9,505) $ 20,147 $237,029 $ 143,306 $ 58,121 $ 243,982
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------------------------
1998 1997 1996 1995 1994
------------ ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Real estate assets (at cost).................. $1,496,973 $1,507,613 $683,515 $513,341 $329,206
Total assets.................................. 1,487,653 1,469,472 689,714 510,548 334,937
Mortgage notes payable, credit facility and
term loan................................... 746,261 702,354 258,908 259,015 165,439
Minority interests............................ 314,922 321,916 14,886 18,608 --
Stockholders' equity.......................... 380,968 395,215 396,535 216,519 160,267
</TABLE>
- ---------------
(a) On October 1, 1997, the Company acquired Drever. For a discussion of the
Drever transaction, see "The Company."
(b) The number of properties was reduced to 154 as of December 31, 1997, upon
the combination of six properties during 1997 with certain other properties
owned by the Company to achieve operating efficiencies.
(c) Represents rental income and other property income, divided by weighted
average units, divided by the number of months.
(d) Management generally considers funds from operations ("FFO") to be an
appropriate measure of the performance of an equity REIT. The National
Association of Real Estate Investment Trusts ("NAREIT") currently defines
FFO as net income (loss) (determined in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt restructuring
and sales of property, plus depreciation of real estate assets, amortization
and income allocated to minority interests. In addition, extraordinary or
unusual items that are non-recurring events which would materially distort
the comparative measure of FFO are typically excluded. FFO does not
represent cash generated from operating activities in accordance with
generally accepted accounting principles and is not necessarily indicative
of cash available to fund cash needs and cash distributions. FFO should not
be considered as an alternative to net income as an indication of the
Company's performance or as an alternative to cash flow as a measure of
liquidity. The Company's FFO is not necessarily comparable to similar
entitled items reported by other REITs. The Company's computation of FFO
assumes the conversion of all convertible securities, including minority
interest securities. FFO for the 1995 and 1994 periods have been restated to
reflect NAREIT's revised definition of FFO.
20
<PAGE> 22
<TABLE>
<CAPTION>
WALDEN PREDECESSORS
---------------------------
JANUARY 1 TO YEAR ENDED
FEBRUARY 8, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
OPERATING DATA
Revenues
Rental income............................................. $3,047 $27,336
Other property income..................................... 134 1,286
Interest income........................................... 37 124
Property management fees.................................. 150 1,266
------ -------
Total revenues..................................... 3,368 30,012
Expenses
Property operating and maintenance........................ 1,242 11,398
Real estate taxes......................................... 226 2,159
General and administrative................................ 217 2,263
Interest expense.......................................... 1,075 11,456
Amortization and financing costs.......................... 20 1,417
Depreciation.............................................. 633 6,114
------ -------
Total expenses..................................... 3,413 34,807
------ -------
Net loss(a)................................................. $ (45) $(4,795)
====== =======
PROPERTY DATA
Total properties (at end of period)......................... 18 18
Total units (at end of period).............................. 5,895 5,895
Total units (weighted average).............................. 5,895 5,895
Weighted average monthly property revenue per unit(b)....... $ 421 $ 405
OTHER DATA
Funds from operations(c).................................... $ 588 $ 1,370
Cash flows provided by (used in):
Operating activities...................................... $1,858 $ 1,698
Investing activities...................................... $ -- $ (23)
Financing activities...................................... $ (311) $(1,476)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1993
------------
<S> <C> <C>
BALANCE SHEET DATA
Real estate assets.......................................... $195,421
Accumulated depreciation and impairment allowance........... (83,026)
Total assets................................................ 121,889
Mortgage notes payable...................................... 147,322
Partners' deficit........................................... (33,610)
</TABLE>
- ---------------
(a) Net loss of Walden Predecessors is before income tax benefits and
extraordinary gains.
(b) Represents rental income and other property income, divided by weighted
average units, divided by the number of months.
(c) Management generally considers funds from operations ("FFO") to be an
appropriate measure of the performance of an equity REIT. The National
Association of Real Estate Investment Trusts ("NAREIT") currently defines
FFO as net income (loss) (determined in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt restructuring
and sales of property, plus depreciation of real estate assets, amortization
and income allocated to minority interests. In addition, extraordinary or
unusual items that are non-recurring events which would materially distort
the comparative measure of FFO are typically excluded. FFO does not
represent cash generated from operating activities in accordance with
generally accepted accounting principles and is not necessarily indicative
of cash available to fund cash needs and cash distributions. FFO should not
be considered as an alternative to net income as an indication of the
Company's performance or as an alternative to cash flow as a measure of
liquidity. The Company's FFO is not necessarily comparable to similar
entitled items reported by other REITs. The Company's computation of FFO
assumes the conversion of all convertible securities, including minority
interest securities. FFO for the 1994 and 1993 periods have been restated to
reflect NAREIT's revised definition of FFO.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the "Selected
Financial Data" and all of the financial statements and notes thereto included
elsewhere in this Prospectus. Such financial statements and information have
been prepared to reflect the consolidated statements of income of the Company
for the six months ended June 30, 1998 and 1997 and the three years ended
December 31, 1997 and the balance sheets of the Company as of December 31, 1997
and 1996.
Changes in revenues and expenses related to the Properties during 1998,
1997, 1996 and 1995 are primarily the result of property acquisitions. Where
appropriate, comparisons are made on a dollars-per-weighted-average-unit basis
in order to adjust for changes in the number of units owned during each period.
RESULTS OF OPERATIONS
Results of Operations for the Six Months Ended June 30, 1998 Compared
to the Six Months Ended June 30, 1997
The weighted average number of units owned for the six months ended June
30, 1998, increased by 20,647 units, or 93.4% from 22,111 units for the first
six months of 1997 to 42,758 units for the first six months of 1998 as a result
of the acquisition of additional properties. Total units owned at June 30, 1997
and 1998 were 23,188 and 42,858, respectively. The portfolio had an average
physical occupancy of 92.5% and 93.1% for the first six months of 1997 and 1998,
respectively.
The Company owned 64 properties with 20,845 units throughout both periods
in 1998 and 1997 ("same store"). A summary of the historical operating
performance for "same store" properties is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1998 1997 % CHANGE
------- ------- --------
<S> <C> <C> <C>
Rental and other property revenue (in thousands)...... $65,457 $63,635 2.9%
Property operating expenses (in thousands)(1)......... 28,082 26,913 4.3%
------- -------
Property operating income (in thousands).............. $37,375 $36,722 1.8%
======= =======
Average physical occupancy............................ 91.8% 92.4% N/A
======= =======
Average monthly revenue per unit...................... $ 523 $ 509 2.9%
======= =======
Average annualized property operating and maintenance
expenses per unit................................... $ 2,063 $ 1,992 3.6%
======= =======
Average annualized real estate taxes per unit......... $ 631 $ 590 6.9%
======= =======
Operating expense ratio............................... 42.9% 42.3% N/A
======= =======
</TABLE>
- ---------------
(1) Consists of property operating and maintenance and real estate tax expenses.
22
<PAGE> 24
The operating performance of properties not owned throughout periods ended
June 30, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1998 1997
------- ------
<S> <C> <C>
Rental and other property revenue (in thousands)............ $72,388 $3,557
Property operating expenses (in thousands)(1)............... 31,577 1,661
------- ------
Property operating income (in thousands).................... $40,811 $1,896
======= ======
Weighted average number of units............................ 21,913 1,266
======= ======
Average physical occupancy.................................. 93.5% 93.5%
======= ======
Average monthly revenue per unit............................ $ 551 $ 468
======= ======
Average annualized property operating and maintenance
expenses per unit......................................... $ 2,214 $1,975
======= ======
Average annualized real estate taxes per unit............... $ 669 $ 649
======= ======
Operating expense ratio..................................... 43.6% 46.7%
======= ======
</TABLE>
- ---------------
(1) Consists of property operating and maintenance and real estate tax expenses.
General and administrative expenses increased $2.3 million for the first
six months of 1998, or 68.0%, from $3.4 million for the first six months of 1997
to $5.7 million for the first six months of 1998. This represents a per unit
decrease of $40, or 13.0%, on an annualized basis. This per unit decrease is
primarily due to increased operating efficiencies. The increases in general and
administrative expenses were primarily due to increased properties owned which
resulted in increased salary costs and occupancy costs for additional corporate
and regional office space.
Interest expense increased $16.6 million for the first six months of 1998,
or 163.7%, from $10.1 million for the first six months of 1997 to $26.7 million
for the first six months of 1998. The increases were primarily due to
indebtedness incurred on properties acquired during 1997.
Depreciation increased $15.9 million for the first six months of 1998, or
121.3%, from $13.1 million for the first six months of 1997 to $29.0 million for
the first six months of 1998. The increases were due to depreciation on
additional properties acquired and capital improvements on existing properties.
The $104,000 extraordinary loss on debt extinguishment in 1998 was due to
prepayment penalties incurred in connection with the Company's payoff of a $7.2
million mortgage loan in April 1998, and the write off of unamortized deferred
financing costs related to the refinancing of certain of the Company's
indebtedness during the first and second quarter of 1998.
Results of Operations for the Company for the Year Ended December 31, 1997
Compared to the Year Ended December 31, 1996
The weighted average number of units owned increased by 8,916 in 1997, or
48.4%, from 18,430 units in 1996 to 27,346 in 1997 as a result of the
acquisition of additional properties. Total units owned at December 31, 1996 and
1997 were 21,407 and 42,482, respectively. The portfolio had a weighted average
physical occupancy of 93.5% for 1996 and 93.3% for 1997.
23
<PAGE> 25
The Company owned 51 properties with 15,981 apartment units throughout both
calendar years 1997 and 1996 ("same store"). The operating performance of these
same store properties is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1997 1996 % CHANGE
------- ------- --------
<S> <C> <C> <C>
Rental and other property revenue (in thousands)...... $97,520 $95,294 2.3%
Property operating expenses (in thousands)(1)......... 41,412 41,437 (0.1%)
------- -------
Property operating income (in thousands).............. $56,108 $53,857 4.2%
======= =======
Weighted average physical occupancy................... 92.7% 93.6% N/A
======= =======
Average monthly revenue per unit...................... $ 509 $ 497 2.3%
======= =======
Average annual operating and maintenance expenses per
unit................................................ $ 2,005 $ 2,041 (1.8%)
======= =======
Average annual real estate taxes per unit............. $ 586 $ 552 6.2%
======= =======
Operating expense ratio............................... 42.5% 43.5% N/A
======= =======
</TABLE>
- ---------------
(1) Consists of property operating and maintenance and real estate tax expenses.
The operating performance of properties not owned throughout both calendar
years 1997 (103 properties) and 1996 (17 properties) is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Rental and other property revenue (in thousands)............ $72,017 $14,181
Property operating expenses (in thousands)(1)............... 31,876 6,123
------- -------
Property operating income (in thousands).................... $40,141 $ 8,058
======= =======
Weighted average number of units............................ 11,365 2,449
======= =======
Weighted average physical occupancy......................... 94.1% 92.9%
======= =======
Average monthly revenue per unit............................ $ 528 $ 483
======= =======
Average annual operating and maintenance expenses per
unit...................................................... $ 2,151 $ 2,005
======= =======
Average annual real estate taxes per unit................... $ 654 $ 495
======= =======
Operating expense ratio..................................... 44.3% 43.2%
======= =======
</TABLE>
- ---------------
(1) Consists of property operating and maintenance and real estate tax expenses.
Interest income increased $165,000 in 1997, or 11.5%, from $1,433,000 in
1996 to $1,598,000 in 1997, primarily as the result of increased cash balances
during 1997.
The other income of $263,000 in 1996 was primarily attributable to the net
income from WDN Management Company allocated to the Company. WDN Management
Company was merged into the Company effective December 31, 1996.
General and administrative expenses increased $2.6 million in 1997, or
51.0%, from $5.1 million in 1996 to $7.7 million in 1997. This represented a
weighted average increase of $5 per unit, or 1.8%. The increases in general and
administrative expenses were primarily the result of adding corporate personnel,
due to the acquisition of properties during 1997, increased salary costs, higher
professional fees, higher costs related to stockholders (quarterly mailings to
stockholders, transfer services, etc.) and a one-time severance charge relating
to the departure of an executive of the Company during the second quarter of
1997.
24
<PAGE> 26
The $1.9 million unusual charge resulted from a settlement agreement
relating to the resignation of the Company's former Chairman of the Board of
Directors and Chief Executive Officer in October 1997.
Interest expense increased $7.8 million in 1997, or 37.9%, from $20.6
million in 1996 to $28.4 million in 1997, due to an increase in weighted average
indebtedness outstanding of approximately $99.3 million associated with the
acquisition of properties and a slight increase in the weighted average interest
rate in 1997 of approximately 0.1%.
Depreciation expense increased $14.0 million in 1997, or 70.7%, from $19.8
million in 1996 to $33.8 million in 1997, due to depreciation on additional
properties acquired and capital improvements on existing properties. This
represented a weighted average increase of $162 per unit, or 15.1%.
The $2.1 million gain on disposition of real property in 1997 related to
the sale of a 392-unit property located in Dallas, Texas on October 2, 1997. The
Company received total net sales proceeds from the disposition of approximately
$4.1 million ($8.7 million sale proceeds less $4.6 million repayment of related
debt), which was used to purchase additional properties.
The $0.4 million extraordinary loss on debt extinguishment in 1997 resulted
from the write-off of unamortized deferred financing costs and prepayment
penalties incurred in connection with the repayment of debt on the property sold
in October 1997.
Results of Operations for the Company for the Year Ended December 31, 1996
Compared to the Year Ended December 31, 1995
The weighted average number of units owned increased by 3,829 units in
1996, or 26.2%, from 14,601 units in 1995 to 18,430 units in 1996 as a result of
the acquisition of additional properties. Total units owned at December 31, 1995
and 1996 were 17,205 and 21,407, respectively. The portfolio had a weighted
average occupancy of 94.5% for both 1995 and 1996.
The Company owned 36 properties with 11,188 apartment units throughout both
calendar years 1996 and 1995. The operating performance of these properties is
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1995 % CHANGE
------- ------- --------
<S> <C> <C> <C>
Rental and other property revenue (in thousands)...... $63,623 $60,684 4.8%
Property operating expenses (in thousands)(1)......... 27,675 27,239 1.6%
------- -------
Property operating income (in thousands).............. $35,948 $33,445 7.5%
======= =======
Weighted average physical occupancy................... 94.4% 94.7% N/A
======= =======
Average monthly revenue per unit...................... $ 474 $ 452 4.8%
======= =======
Average annual operating and maintenance expenses per
unit................................................ $ 2,007 $ 1,975 1.6%
======= =======
Average annual real estate taxes per unit............. $ 467 $ 460 1.5%
======= =======
Operating expense ratio............................... 43.5% 44.9% N/A
======= =======
</TABLE>
- ---------------
(1) Consists of property operating and maintenance and real estate tax expenses.
25
<PAGE> 27
The operating performance of properties not owned throughout both calendar
years 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995 % CHANGE
------- ------- --------
<S> <C> <C> <C>
Rental and other property revenue (in thousands).......... $45,852 $20,875 119.7%
Property operating expenses (in thousands)(1)............. 19,885 8,846 124.8%
------- -------
Property operating income (in thousands).................. $25,967 $12,029 115.9%
======= =======
Weighted average number of units.......................... 7,242 3,413 112.2%
======= =======
Weighted average physical occupancy....................... 94.7% 93.8% N/A
======= =======
Average monthly revenue per unit.......................... $ 528 $ 510 3.5%
======= =======
Average annual operating and maintenance expenses per
unit.................................................... $ 2,081 $ 1,948 6.8%
======= =======
Average annual real estate taxes per unit................. $ 665 $ 644 3.3%
======= =======
Operating expense ratio................................... 43.4% 42.4% N/A
======= =======
</TABLE>
- ---------------
(1) Consists of property operating and maintenance and real estate tax expenses.
Interest income increased $577,000 in 1996, or 67.4%, from $856,000 in 1995
to $1,433,000 in 1996, primarily as the result of increased cash balances and
interest earned on recourse notes entered into by certain officers and directors
of the Company in December 1995 and January 1996 in connection with the
acquisition of shares of Common Stock by such persons.
Other income decreased $146,000 in 1996, or 35.7%, from $409,000 in 1995 to
$263,000 in 1996, primarily due to the reduction in third-party management
contracts and an increase in operating expenses of WDN Management unrelated to
third-party management contracts. The number of third-party management contracts
decreased from ten at December 31, 1995 to eight at the end of 1996.
General and administrative expenses increased $1.3 million in 1996, or
34.5%, from $3.8 million in 1995 to $5.1 million in 1996. This represented a
weighted average increase of $17 per unit, or 6.5%. The increase in general and
administrative expenses was primarily due to increased occupancy cost due to the
relocation of the Company's corporate office, increased salary expense and
increased costs associated with the increased number of stockholders (quarterly
mailings to stockholders, transfer services, NYSE listing fees, etc.).
Interest expense increased $3.5 million in 1996, or 20.2%, from $17.1
million in 1995 to $20.6 million in 1996, due to an increase in weighted average
indebtedness outstanding of approximately $60.9 million associated with the
acquisition of properties, offset by a decrease in the weighted average interest
rate in 1996 of approximately 0.5%.
Depreciation expense increased $4.1 million in 1996, or 25.9%, from $15.7
million in 1995 to $19.8 million in 1996, due to depreciation on additional
properties acquired and capital improvements on existing properties. This
represented a weighted average decrease of $1 per unit, or 0.1%.
The $1.9 million gain on disposition of real property in 1996 related to
the sale of three properties: a 384-unit property located in Wichita, Kansas on
April 24, 1996, a 304-unit property located in Corpus Christi, Texas on August
30, 1996 and a 144-unit property located in Stone Mountain, Georgia on September
27, 1996. The Company received total net sales proceeds from these dispositions
of approximately $22.9 million, which were used to purchase additional
properties.
The $1.8 million extraordinary loss on debt extinguishment in 1996 resulted
from the write-off of unamortized deferred financing costs and prepayment
penalties incurred in connection with the refinances of the Company's credit
facility in February 1996 ($488,000) and December 1996 ($767,000), the
refinancing of $22 million of variable rate tax-exempt debt in May 1996
($96,000), the repayment of debt on a property sold
26
<PAGE> 28
in September 1996 ($488,000) and the refinancing of $14.4 million of fixed rate
debt on three properties in October 1996 ($9,000).
As of July 1, 1996, the Company revised its method of accounting to
capitalize the cost of replacement carpets, on a prospective basis ($864,000 was
capitalized in 1996 which would have been expended under the old policy). The
Company believes that this accounting policy change is preferable because it is
consistent with policies currently being used by the majority of the largest
publicly traded apartment REITs and provides a better matching of expenses with
the related benefit of the expenditures.
LIQUIDITY AND CAPITAL RESOURCES
The Company intends to maintain what it believes is a conservative capital
structure by: (i) maintaining a debt-to-total-market capitalization of 50% or
less, (ii) managing interest exposure by obtaining fixed rate debt or hedging
interest rates, (iii) obtaining unsecured indebtedness when possible, (iv)
staggering principal maturities when possible and (v) maintaining an interest
coverage ratio (operating income before interest expense, depreciation and
amortization to interest expense) of 2.5 times or greater.
The Company's principal demands for liquidity are distributions to its
stockholders, ongoing maintenance and repair of its properties, capital
improvements to its properties, acquisitions of properties, development of
properties, interest on indebtedness and debt repayments.
During the first six months of 1998, the Company had cash flows from
operating activities of $31.6 million and proceeds from stock offerings of $12.4
million, including $3.3 million from its dividend reinvestment plan. These
funds, in addition to $35.7 million of net proceeds from mortgage notes and the
Company's credit facility, were used during the period primarily to pay for $5.1
million of the total acquisition cost of two apartment properties (containing
376 units), distributions to stockholders and unit holders of $37.3 million,
capital improvements to properties of $20.2 million, financing costs of $3.2
million, principal payments of $2.6 million, and the purchase of 572,000 shares
of the Company's common stock for $14.0 million. As a result, the Company had a
net decrease in cash of $3.2 million.
In 1997, the Company received a total of $28.2 million in net equity
proceeds from the exercise of the over allotment option on a public offering
closed in December 1996 and from its dividend reinvestment plan. The Company
also received $274.0 million from net borrowings under the Company's credit
facility and term loan. In addition, the Company received net cash proceeds of
approximately $4.1 million from the sale of a property in October 1997. These
funds were primarily used to purchase 93 properties (21,467 units) with an
aggregate net cash purchase price of approximately $304.1 million.
As more fully described below, cash and cash equivalents decreased $19.9
million, from $29.7 million as of December 31, 1996 to $9.8 million as of
December 31, 1997.
Net cash provided by operating activities increased $8.3 million for the
first six months of 1998 compared to the same period in 1997. Cash flow from
operating activities before changes in operating accounts increased $21.2
million, primarily due to an increased number of units owned, which was offset
by a $12.9 million decrease in the net effect of changes in operating accounts.
The net decrease in operating accounts resulted primarily from an increase in
the payment of real estate taxes and funding of escrow deposits. Net cash
provided by operating activities increased by $32.5 million in 1997, from $38.3
million in 1996 to $70.8 million in 1997, primarily due to an increase in
property operating income from properties owned throughout both years, as well
as property operating income from properties acquired in 1997.
As of June 30, 1998, net cash used in investing activities was $25.3
million, compared to $67.3 million for the same period in 1997. Of the $25.3
million, the Company spent $5.1 million to purchase two apartment properties and
$20.2 million for real estate asset additions. Net cash used in investing
activities was $327.8 million for the year ended December 31, 1997, primarily
due to $304.1 million of property acquisitions and $32.4 million of capital
improvements on the properties, offset by $8.7 million of cash proceeds from the
sale of a property in October 1997.
27
<PAGE> 29
Net cash provided by financing activities decreased by $29.7 million for
the first six months of 1998 compared to the same period in 1997. The decrease
is primarily due to the repurchase of 572,000 shares of Common Stock for an
aggregate price of $14.0 million in 1998 and increased distributions to
stockholders and minority interest holders. Net cash provided from financing
activities was $237.0 million for the year ended December 31, 1997, primarily
due to $28.2 million of net proceeds from the issuance of stock and $393.1
million of fundings received under the Company's term loan and the Credit
Facility, less repayments and principal amortization of mortgage financings and
the Credit Facility of $127.5 million, distributions to stockholders and
minority interest holders of $48.0 million and $6.7 million of purchases of the
Company's common stock.
The Company intends to meet its short-term liquidity requirements,
including capital expenditures related to maintaining and improving its
Properties, through cash flow provided by operations and when necessary will
utilize unused portions of its $150 million unsecured Credit Facility, which
expires in February 1999, to meet working capital needs. The Credit Facility has
been used to finance property acquisitions, including capital improvements, and
to meet short-term liquidity requirements. As of June 30, 1998, the unused
amount of the Credit Facility was $65 million. The availability of funds to the
Company under the Credit Facility is subject, however, to certain borrowing base
and other customary covenants.
Historically, the cash provided by operations has been adequate to meet
both its operating requirements and distribution payments; however, the
Company's current repositioning program will require borrowings under the Credit
Facility to fund capital improvements. The Company has certain loans which
require principal payments on a monthly basis for which cash provided by
operating activities may or may not be sufficient. Accordingly, the Company
anticipates borrowing under the Credit Facility, as described below, to fund
such payments, if necessary.
During the first six months of 1998, the Company has spent $10.7 million
for recurring and non-recurring capital items, and $9.5 million for
repositioning and acquisition rehabilitation costs. During the year ended
December 31, 1997, the Company spent approximately $32.4 million in capital
expenditures and rehabilitation expenditures on acquisition properties.
Rehabilitation costs of $13.9 million and capital expenditures on Properties of
$8.5 million were funded from net cash provided by operating activities.
Non-recurring capital expenditures of $9.2 million and capital expenditures
under the Company's repositioning program of $0.8 million were funded from
borrowings under the Credit Facility. The Company has budgeted capital
improvements of $24.0 million for 1998 on its Matured Properties (of which $9.5
million represents non-recurring costs for the construction of covered carports,
the installation of access gates with perimeter fencing, retaining walls and the
reconstruction of balconies and exterior stairwells), $5.9 million to complete
necessary renovations to properties acquired in 1997 and $22.2 million to
reposition certain properties. Both acquisition renovation and repositioning
capital expenditures are anticipated to be funded from borrowings under the
Credit Facility.
For the year ended December 31, 1997, the Company paid distributions of
$33.9 million to common stockholders, $12.5 million to preferred stockholders
and $1.6 million to minority interest holders. For the nine months ended
September 30, 1998, the Company paid distributions of $26.4 million to common
stockholders, $9.8 million to preferred stockholders and $19.6 million to
minority interest holders. The quarterly distributions paid to common
stockholders and minority interest holders of common units were $0.4825 per
share or unit, which equates to an annualized distribution of $1.93 per share or
unit. Distributions on the Company's preferred stock, Preferred OP Units and
certain of the minority interests of common stock have a priority over other
distributions.
The Company's Board of Directors has authorized the Company to repurchase
up to 3.5 million shares of outstanding Common Stock. As of June 30, 1998, the
Company had purchased approximately 0.9 million shares of Common Stock, leaving
approximately 2.6 million shares authorized for repurchase. As of September 30,
1998, approximately 2.4 million shares of Common Stock remain authorized for
repurchase. Future purchases of Common Stock will be funded with borrowings
under the Company's Credit Facility.
The Company has entered into four development agreements to construct
apartment communities which the Company will purchase upon completion of the
construction and lease-up. The Company has committed
28
<PAGE> 30
to purchase $82.0 million in four development properties (containing 1,080
units) in 1999 and 2000. The commitments will be funded by additional mortgage
debt and borrowings under the Credit Facility.
As of June 30, 1998, the Company had outstanding indebtedness in the
aggregate principal amount of $746.3 million, consisting of fixed rate debt of
$397.7 million and variable rate debt of $348.6 million. The weighted average
interest rate and weighted average years to maturity on the Company's
outstanding indebtedness at June 30, 1998 were approximately 7.3 and 7.5 years,
respectively. As of December 31, 1997, the Company had outstanding indebtedness
in the aggregate principal amount of $702.4 million, consisting of $370.1
million of conventional and tax-exempt fixed rate debt and $332.3 million of
variable rate debt (including $274.0 million outstanding under the Company's
unsecured term loan and unsecured credit facility).
During the year ended December 31, 1997 and the six months ended June 30,
1998, the Company refinanced, repaid or assumed debt as summarized below (in
thousands):
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING
INDEBTEDNESS INDEBTEDNESS
AS OF DEBT DEBT DEBT PRINCIPAL AS OF
12/31/96 PROCEEDS ASSUMED REPAID AMORTIZATION 12/31/97
------------ -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate indebtedness... $207,823 $ -- $170,611 $ 4,649 $3,716 $370,069
Unsecured Term Loan....... -- 200,000 -- -- -- 200,000
Unsecured Credit
Facility................ -- 193,098 -- 119,098 -- 74,000
Other variable rate
debt.................... 51,085 -- 7,200 -- -- 58,285
-------- -------- -------- -------- ------ --------
Total............ $258,908 $393,098 $177,811 $123,747 $3,716 $702,354
======== ======== ======== ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING
INDEBTEDNESS INDEBTEDNESS
AS OF DEBT DEBT DEBT PRINCIPAL AS OF
12/31/97 PROCEEDS ASSUMED REPAID AMORTIZATION 6/30/98
------------ -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate indebtedness... $370,069 $ 31,948 $ 5,056 $ 6,870 $2,570 $397,633
Unsecured Term Loan....... 200,000 -- -- -- -- 200,000
Unsecured Credit
Facility................ 74,000 83,000 -- 72,000 -- 85,000
Other variable rate
debt.................... 58,285 57,955 5,750 58,285 77 63,628
-------- -------- -------- -------- ------ --------
Total............ $702,354 $172,903 $ 10,806 $137,155 $2,647 $746,261
======== ======== ======== ======== ====== ========
</TABLE>
The following table sets forth certain information regarding the Company's
outstanding indebtedness as of June 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
------------------- OUTSTANDING PERCENTAGE
INTEREST YEARS TO PRINCIPAL OF
RATE MATURITY BALANCE(1) TOTAL
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Conventional fixed rate........................... 7.69% 7.3 $329,390 44.1%
Tax-exempt fixed rate............................. 6.48% 21.0 68,243 9.1%
---- ---- -------- -----
Average/Total fixed rate........................ 7.48% 9.7 397,633 53.2%
---- ---- -------- -----
Tax-exempt variable rate.......................... 4.65% 26.0 63,628 8.5%
Unsecured Term Loan............................... 7.66% 0.4 200,000 26.8%
Unsecured Credit Facility......................... 7.33% 0.6 85,000 11.5%
---- ---- -------- -----
Total variable rate........................... 7.03% 5.1 348,628 46.8%
---- ---- -------- -----
Total.................................... 7.27% 7.5 $746,261 100.0%
==== ==== ======== =====
</TABLE>
- ---------------
(1) In thousands.
29
<PAGE> 31
As of June 30, 1998, the Company's total indebtedness becomes due as
follows (in thousands):
<TABLE>
<CAPTION>
BALLOON
PRINCIPAL PAYMENTS TOTAL
--------- -------- --------
<S> <C> <C> <C>
1998...................................................... $ 3,000 $205,750 $208,750
1999...................................................... 6,334 85,000 91,334
2000...................................................... 6,777 7,067 13,844
2001...................................................... 5,768 67,952 73,720
2002...................................................... 5,877 -- 5,877
Thereafter................................................ 105,328 247,407 352,735
-------- -------- --------
Total............................................ $133,084 $613,176 $746,260
======== ======== ========
</TABLE>
The Credit Facility is with BankBoston, as agent for a group of financial
institutions and provides an unsecured borrowing capacity of up to $150 million,
with borrowings outstanding under the Credit Facility generally bearing interest
at LIBOR (5.7% at December 31, 1997) plus 1.375%. The Credit Facility expires in
February 1999. As of June 30, 1998, $85 million was outstanding under the Credit
Facility.
In December 1997, the Company entered into a term loan agreement (the "Term
Loan") with BankBoston, as agent for a group of financial institutions. The term
loan provides unsecured borrowings of $200 million, bears interest at 1.375%
over LIBOR and matures December 15, 1998.
The Credit Facility and Term Loan contain customary representations,
warranties and events of default which require the Company to comply with
certain affirmative and negative covenants. The primary restrictive covenants
provide that: (1) distributions to stockholders may not exceed 90% of funds from
operations, as defined in the Credit Facility and Term Loan; (2) secured
mortgage indebtedness may not exceed 40% of the Company's total assets before
depreciation; (3) the Company's fixed charge coverage ratio, as defined, must
exceed 1.25; and (4) the Company's debt service coverage ratio, as defined, must
exceed 2.0. As of June 30, 1998, the Company is in compliance with all covenants
of the Credit Facility and Term Loan.
Balloon payments in the amount of $206 million and $85 million come due in
1998 and 1999, respectively. The Company anticipates issuing secured or
unsecured fixed rate debt during the year prior to the December maturity of the
$200 million Term Loan. In addition, the Credit Facility expires in February
1999, but the Company has the option, subject to certain conditions, to extend
the Credit Facility for one year. Under these agreements, the Company pays or
receives an amount equal to the difference between the reference yield and the
market yield (as defined in each of the agreements) on the date of exercise. The
exercise date may be any date up to the settlement date. Any gain or loss under
these agreements will be amortized to interest expense over the term of the
financing; however, if such debt financing is not obtained any gain or loss will
be recorded in current operations. As of September 18, 1998, the Company has a
loss position on these forward treasury lock agreements of approximately $29.8
million. The following forward treasury lock agreements were in place as of
September 30, 1998:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT SETTLEMENT DATE REFERENCE YIELD REFERENCE TREASURY
- --------------- ----------------- --------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
$ 75,000 November 23, 1998 5.8950% 5.750% due 11/30/02
25,000 November 23, 1998 5.9600% 6.125% due 8/15/07
175,000 November 20, 1998 6.5010% 5.625% due 5/15/08
--------
$275,000
========
</TABLE>
In addition to the Credit Facility and Term Loan, in March 1998 the Company
entered into a $110 million fixed rate loan arrangement with Commingled Pension
Trust Fund (Fixed Income-Mortgage Private Placements). Eighty million dollars of
this debt bears interest at 6.62% per annum and is due on March 31, 2007 and $30
million of this debt bears interest at 7.06% per annum and is due on June 30,
2016. Payments on this loan are interest only; therefore the entire loan balance
is outstanding until maturity.
As of August 31, 1998, the Company had 89 real estate assets collateralized
under various secured debt agreements.
30
<PAGE> 32
The Company expects to meet its long-term liquidity requirements, such as
refinancing mortgages, developing properties and acquiring properties, including
capital improvements on property acquisitions, through long-term borrowings,
both secured and unsecured, and the issuance of debt or equity securities.
The Company's ability to acquire additional properties is dependent upon
its ability to obtain equity or debt financing. During 1997 and 1998, the
Company was able to raise additional equity and incur indebtedness to acquire 96
properties. As of August 31, 1998, the Company's debt-to-total-market
capitalization ratio was approximately 46.5%, based on outstanding debt of
$745.8 million, leaving the Company the ability to borrow funds to acquire
additional properties in the amount of approximately $55.7 million and still
maintain its 50% debt-to-total-market capitalization policy. When the Company
finances its acquisitions with debt, the Company expects that such acquired
properties will generate cash flow adequate to service the associated
indebtedness.
FUNDS FROM OPERATIONS
The Company considers funds from operations ("FFO") to be an appropriate
measure of the performance of an equity REIT. The National Association of Real
Estate Investment Trusts ("NAREIT") currently defines FFO as net income (loss)
(determined in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation of real estate assets, amortization and income allocated to
minority interests. In addition, extraordinary or unusual items that are
non-recurring events which would materially distort the comparative measure of
FFO are typically excluded. FFO does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and is
not necessarily indicative of cash available to fund cash needs and cash
distributions. FFO should not be considered as an alternative to net income as
an indication of the Company's performance or as an alternative to cash flow as
a measure of liquidity. The Company's FFO is not necessarily comparable to
similar entitled items reported by other REITs. The Company's computation of FFO
assumes the conversion of all convertible securities, including minority
interest securities.
During 1995, NAREIT adopted certain changes to the calculation of FFO. The
Company adopted these changes effective January 1, 1996, and the Company has
restated below its 1995 calculation of FFO for comparative purposes. Under
NAREIT's new definition of FFO, the Company (as well as other REITs who used the
old definition) will no longer add back amortization of financing costs. The
following is a calculation of FFO under the new definition (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
------------------- --------------------------------
1998 1997 1997 1996 1995
-------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Net income available to common
stockholders.......................... $ 4,670 $ 4,997 $ 9,396 $ 13,182 $ 8,411
Preferred distributions(1).............. 1,960 2,023 2,861 2,387 --
Income allocated to minority
interests(2).......................... 3,417 800 4,109 1,705 922
Extraordinary loss on debt
extinguishment........................ 104 -- 422 1,848 1,352
Gain on disposition of real property.... -- -- (2,055) (1,934) (1,502)
Depreciation of real estate assets...... 28,779 13,009 33,560 19,810 15,734
Unusual charge -- officer settlement
agreement............................. -- -- 1,940 -- --
-------- -------- --------- --------- --------
Funds from operations................. $ 38,930 $ 20,829 $ 50,233 $ 36,998 $ 24,917
======== ======== ========= ========= ========
Cash flows provided by (used in):
Operating Activities.................. $ 31,561 $ 23,248 $ 70,822 $ 38,281 $ 31,317
Investing Activities.................. (25,289) (67,297) (327,814) (158,668) (86,926)
Financing Activities.................. (9,505) (20,147) 237,029 143,306 58,121
</TABLE>
- ---------------
(1) Distributions on convertible preferred stock were added back in computing
FFO since the conversion to common shares has been assumed.
(2) Cumulative undeclared distributions on the Preferred OP Units were deducted
in computing FFO ($1,125 for 1997 and for each quarter in 1998).
31
<PAGE> 33
FFO increased $18.1 million, or 86.9%, from $20.8 million for the six
months ended June 30, 1997 to $38.9 million for the six months ended June 30,
1998. The increase in FFO was primarily attributable to additional operating
income resulting from an increase in the number of apartment units owned.
FFO increased $13.2 million, or 35.7%, from $37.0 million for the year
ended December 31, 1996 to $50.2 million for the year ended December 31, 1997.
The increase in FFO was primarily attributable to additional operating income,
which resulted from an increase in the number of units owned as a result of
property acquisitions and increased operating income from properties owned
throughout both periods.
As discussed in Note (3) to the consolidated financial statements,
effective July 1, 1996, the Company revised its method of accounting to
capitalize the cost of replacement carpets on a prospective basis. Following is
the effect on depreciation, net income and FFO of this change in accounting
policy for the year ended December 31, 1996:
<TABLE>
<S> <C>
Adjustment for change in accounting policy to capitalize $864
carpet replacement costs (and effect on FFO)..............
Adjustment for effect of depreciation on capitalized carpet (43)
replacement costs.........................................
----
Net effect on net income.................................... $821
====
</TABLE>
INFLATION
The Company leases apartments under lease terms generally ranging from six
to 12 months. Management believes that such short-term lease contracts lessen
the impact of inflation due to the ability to adjust rental rates to market
levels as leases expire.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share. SFAS No. 128, which is effective for periods ending after December 15,
1997, specifies the computation, presentation and disclosure requirements of
earnings per share and supersedes Accounting Principles Board Opinion No. 15.
SFAS No. 128 requires a dual presentation of basic and diluted earnings per
share. Basic earnings per share, which excludes the impact of common share
equivalents, replaces primary earnings per share. Diluted earnings per share,
which utilizes the average market price per share as opposed to the greater of
the average or ending market price per share when applying the treasury stock
method in determining common share equivalents, replaces fully diluted earnings
per share. The Company adopted the provisions of SFAS No. 128 in 1997 and
retroactively restated prior year amounts to be comparable.
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure, which establishes standards for disclosing information
about an entity's capital structure. SFAS No. 129 is effective for periods
ending after December 15, 1997. The adoption of SFAS No. 129 did not impact the
Company's capital structure disclosures as the Company was already in compliance
with this accounting standard.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments and related information in interim and annual financial statements.
SFAS Nos. 130 and 131 are effective for periods beginning after December 15,
1997. SFAS No. 130 could impact the Company's reporting as it relates to its
outstanding derivatives and management will implement SFAS No. 131 for the year
ending December 31, 1998 by reporting its operating segments by geographic
location.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes standards for accounting
and reporting for derivative instruments. SFAS No. 133 is effective for periods
beginning after June 15, 1999; however, earlier application is permitted. The
32
<PAGE> 34
Company is currently not planning an early adoption of SFAS No. 133 and has not
had an opportunity to evaluate the impact of the provisions of SFAS No. 133 on
the Company's consolidated financial statements relating to future adoption.
YEAR 2000 CONVERSION
Many of the world's computer systems currently record years in a two-digit
format. Such computer systems will be unable to properly interpret dates beyond
the year 1999, which could lead to disruptions in the Company's operations
(commonly referred to as the "Year 2000" issue). The Company has identified
three of its primary systems which are vulnerable to the Year 2000 issue:
(1) General Ledger/Accounts Payable System. The current system is not
Year 2000 compliant. The Company selected a system which has been warranted
to be Year 2000 compliant and has started installation of the new system
which will be completed by the end of 1998. The cost of the new system is
expected to be approximately $900,000, of which $800,000 has been incurred
to date.
(2) Payroll. The Company processes its payroll through ADP, an
outside payroll vendor. ADP's current payroll processing system is not Year
2000 compliant. The Company is currently evaluating other payroll vendors
and expects to have selected a vendor which is Year 2000 compliant and have
the system converted and tested by the end of the first quarter of 1999.
The cost to complete the payroll conversion is anticipated to be between
$100,000 and $300,000, depending primarily on whether the Company continues
to use an outside vendor or converts to an in-house package.
(3) On-Site Accounting. The Company processes its on-site accounting
(rent roll activities) on AMSI. The AMSI version which the Company
currently uses is Year 2000 compliant.
The Company has additionally identified those vendors it believes could
have an impact on its day-to-day operations and has developed a short
questionnaire regarding the vendor's Year 2000 status. These vendors, consisting
primarily of financial institutions, will be contacted before January 1, 1999 to
determine their Year 2000 status.
The Company fully anticipates its internal systems will be Year 2000
compliant as all systems other than payroll have been modified or replaced. In
the event a new payroll system cannot be implemented, the Company will continue
to use an upgraded, Year 2000 compliant ADP system. In the event a vendor's
systems will not be Year 2000 compliant, the Company will assess the potential
risk and, to the extent it is feasible, transfer its business to alternate
vendors.
The Company will utilize both internal and external resources to reprogram,
replace and test its systems for Year 2000 modifications. The Company
anticipates completing the Year 2000 project by the first quarter of 1999.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted and would not have an
adverse effect on the Company's operations.
The cost of Year 2000 compliance and the estimated date of completion of
necessary modifications is based on the Company's best estimates, which were
derived from various assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
33
<PAGE> 35
BUSINESS AND PROPERTIES
THE PROPERTIES
The Company's Portfolio. As of August 31, 1998, the Company's portfolio
consisted of 155 multifamily properties containing 42,429 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 274 apartment units, with the largest property
containing 994 apartment units. The apartment units have an average size of 788
square feet. The Properties were built between 1967 and 1998 and have a weighted
average age by number of apartment units of approximately 15 years.
The Properties (as owned effective August 1, 1998) are concentrated in the
following markets:
<TABLE>
<CAPTION>
NUMBER NUMBER PERCENT
LOCATION OF PROPERTIES OF UNITS OF TOTAL UNITS
- -------- ------------- -------- --------------
<S> <C> <C> <C>
Houston.................................. 54 12,561 29.60%
Dallas/Fort Worth........................ 37 10,884 25.65%
Austin................................... 11 3,216 7.58%
Phoenix.................................. 7 2,360 5.56%
Tampa.................................... 7 1,904 4.49%
Nashville................................ 4 1,858 4.38%
Jacksonville............................. 5 1,748 4.12%
Oklahoma City............................ 4 1,196 2.82%
San Antonio.............................. 5 1,146 2.70%
Atlanta.................................. 4 1,002 2.36%
Salt Lake City........................... 2 768 1.81%
San Diego................................ 3 480 1.13%
--- ------ ------
Subtotal............................ 143 39,123 92.20%
Other Markets(a)......................... 12 3,306 7.80%
--- ------ ------
Total.......................... 155 42,429 100.00%
=== ====== ======
</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 95.3% for the month of August 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.
Capital Expenditures. The Company has adopted a policy of expensing all
maintenance and non-major, recurring repair and replacement items, with the
exception of carpet replacement which, as of July 1, 1996, is capitalized on a
prospective basis. Such maintenance expense items include, but are not limited
to, landscaping, pest control, electrical, plumbing, cleaning units, interior
painting of the units, window blinds, and pool and recreation facility
maintenance. Non-major expense items include but are not limited to roofing,
exterior painting and asphalt resurfacing under approximately $10,000. Repair
and maintenance expenses for 1997 were approximately $13.0 million, or $477 per
weighted average unit and for the six months ended June 30, 1998 were
approximately $11.0 million, or $256 per weighted average unit.
The Company capitalizes all major repairs and replacements which are not
considered part of the normal maintenance of the Properties or turnover of an
apartment unit. As of July 1, 1996, the Company revised its method of accounting
to capitalize the cost of replacement carpets, on a prospective basis ($864,000
was capitalized in 1996 which would have been expended under the old policy).
The Company believes that this
34
<PAGE> 36
accounting policy change is preferable because it is consistent with policies
currently being used by the majority of the largest publicly traded apartment
REITs and provides a better matching of expenses with the related benefit of the
expenditures. In addition, the Company capitalizes non-recurring items such as
access gates and carports initially installed on the property. The Company also
capitalizes all deferred maintenance items of an acquisition property which are
planned at the time of acquisition to bring the property to satisfactory
operating condition. Such renovation of an acquisition property generally takes
six to 18 months to complete, depending on the magnitude of the renovations.
The Company's management believes that asset quality is one of the most
important characteristics of an apartment property. Asset quality can be
significantly improved by repositioning the asset through capital improvements
that create an attractive, upscale residential appearance, like building facades
or enhancements that improve with age, such as landscaping enhancements. The
Company's repositioning program includes professional design of exterior
buildings and clubhouse interiors. This program also includes interior upgrades
such as modern lighting, wall mirrors and crown molding. All of these capital
improvements help distinguish the Properties from their aging contemporaries.
The economic justification for the Company's repositioning program is the
anticipated higher yield on the total cost of a property, which is achieved
through sustained high occupancy rates and rental rate increases.
For the year ended December 31, 1997, the Company spent approximately $32.4
million of capital expenditures on its Properties, of which $13.9 million
related to acquisition renovation costs for properties acquired in 1997 and
1996. An additional $9.2 million was expended on non-recurring items, $0.8
million was expended for repositioning programs and $8.5 million was expended
for normal recurring capital expenditures to properties not under renovation
(the "Matured Properties") (of which $6.1 million related to the Company's
15,981 same store units, as defined later, resulting in an average cost of $384
per unit).
During the first six months of 1998, the Company has spent $10.7 million
for recurring and non-recurring capital items, and $9.5 million for
repositioning and acquisition rehabilitation costs. Recurring and non-recurring
capital expenditures and repositioning and rehabilitation are anticipated to be
approximately $13.3 million and $18.6 million, respectively, for the second half
of 1998.
35
<PAGE> 37
WALDEN RESIDENTIAL PROPERTIES, INC.
APARTMENTS OWNED
<TABLE>
<CAPTION>
TOTAL
NUMBER YEAR RENTABLE
OF CONSTRUCTION AREA TOTAL
METROPOLITAN AREA/PROPERTY LOCATION UNITS COMPLETED(1) (SQ. FT.) ACREAGE
- -------------------------- -------- ------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
AUSTIN
Arbors of Austin* Austin, TX 226 1985 154,920 9.68
Arbors of Wells Branch* Austin, TX 212 1986 156,228 11.20
Ashbury Parke* Austin, TX 416 1983 278,936 13.20
Audubon Square* Austin, TX 164 1985 139,476 6.50
Harper's Creek Austin, TX 268 1982 201,838 8.00
Lakes of Renaissance* Austin, TX 308 1987 215,024 11.60
Oak Ridge* Austin, TX 253 1978 173,699 9.29
Pinto Creek Austin, TX 249 1985 199,146 22.60
Polo Club Austin, TX 304 1986 203,784 11.20
Shadow Creek* Austin, TX 420 1982 314,936 18.02
Trestles of Austin Austin, TX 396 1984 275,904 10.66
------ ---- ---------- --------
Austin Total/ Weighted
Average 3,216 1984 2,313,891 131.95
------ ---- ---------- --------
CORPUS CHRISTI
Rafters, The* Corpus Christi, TX 250 1984 216,496 12.00
Wharf, The* Corpus Christi, TX 250 1984 216,496 17.13
Willowick* Corpus Christi, TX 250 1984 216,496 12.00
------ ---- ---------- --------
Corpus Christi Total/
Weighted Average 750 1984 649,488 41.13
------ ---- ---------- --------
DALLAS/FT. WORTH
Arbor Creek* Dallas, TX 280 1984 216,676 12.22
Arbors of Bedford* Bedford, TX 204 1983 161,332 8.56
Arbors of Carrollton* Carrollton, TX 131 1984 112,418 8.56
Arbors of Euless* Euless, TX 272 1984 213,794 12.82
Bent Creek* Dallas, TX 326 1980 234,082 11.72
Braden's Walk* Bedford, TX 706 1983 514,220 32.79
Brittany Park* Dallas, TX 217 1978 193,556 8.67
Canyon Ridge* Dallas, TX 164 1983 120,812 7.33
Casa Valley* Dallas, TX 150 1986 130,926 5.46
Cinnamon Park* Arlington, TX 272 1985 213,192 13.00
Clover Hill* Arlington, TX 216 1984 178,928 8.87
Creekwood Village* Dallas, TX 362 1985 256,584 9.40
Fielder's Glen Arlington, TX 220 1985 165,752 10.00
Gables, The McKinney, TX 220 1986 169,880 10.00
Greens Crossing Dallas, TX 364 1984 262,761 10.50
Hillcrest* Grand Prairie, TX 310 1984 204,146 12.94
Hilltop* North Richland Hills, TX 238 1984 179,256 12.20
Montfort Oaks* Dallas, TX 276 1979 215,476 12.07
Newport Irving, TX 308 1982 238,768 12.40
Parks at Treepoint* Arlington, TX 586 1985 471,968 29.52
Pinnacle* Lewisville, TX 150 1985 119,774 6.30
Post Oak Place* Euless, TX 354 1983 255,798 11.08
</TABLE>
36
<PAGE> 38
<TABLE>
<CAPTION>
TOTAL
NUMBER YEAR RENTABLE
OF CONSTRUCTION AREA TOTAL
METROPOLITAN AREA/PROPERTY LOCATION UNITS COMPLETED(1) (SQ. FT.) ACREAGE
- -------------------------- -------- ------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
Preston Greens* Dallas, TX 256 1980 246,340 11.21
Reflections of Highpoint Dallas, TX 372 1986 281,940 11.10
Remington Hill Fort Worth, TX 440 1986 339,008 15.00
Rivercrest Arlington, TX 420 1979 337,056 19.30
Shadow Creek* North Richland Hills, TX 240 1986 181,896 12.20
Shadowridge Village* Dallas, TX 144 1985 118,804 5.97
Sierra Springs Bedford, TX 286 1985 211,006 15.96
Springfield Mesquite, TX 264 1985 193,212 9.00
Summer Meadows Plano, TX 389 1986 323,434 21.60
Summer Villas Dallas, TX 460 1984 328,020 15.80
Summers Crossing Plano, TX 293 1986 238,697 15.70
Summers Landing* Fort Worth, TX 196 1985 139,300 7.80
Trinity Mills* Dallas, TX 208 1982 162,960 10.53
Trinity Oaks* Dallas, TX 240 1983 150,318 4.90
Waterford on the Meadow* Plano, TX 350 1985 310,746 21.98
------ ---- ---------- --------
Dallas Total/Weighted
Average 10,884 1984 8,392,836 464.46
------ ---- ---------- --------
HOUSTON
Arbor Point* Houston, TX 65 1984 57,000 2.20
Ashton Woods* Houston, TX 177 1978 151,142 6.85
Aston Brook* Houston, TX 152 1982 119,376 5.29
Bar Harbor* Houston, TX 316 1983 209,076 13.19
Bayou Oaks* Houston, TX 210 1984 158,470 6.08
Brandon Oaks* Houston, TX 196 1984 168,856 8.00
Briarcrest* Houston, TX 376 1982 296,760 13.90
Brookfield* Houston, TX 250 1984 188,974 10.93
Carriage Hill* Houston, TX 252 1980 242,088 11.20
Central Park Condos* Houston, TX 93 1985 99,080 7.20
Central Park Regency* Houston, TX 348 1983 318,968 13.38
Charleston, The* Houston, TX 312 1981 226,499 5.69
Cimarron Park Houston, TX 162 1984 134,756 6.50
Cimarron Parkway* Houston, TX 272 1983 238,264 9.26
Colony Oaks* Houston, TX 162 1967 166,830 6.20
Colorado Club* Houston, TX 300 1986 225,788 10.13
Copper Cove* Houston, TX 270 1983 204,240 7.00
Enclave at Cypress Park* Houston, TX 384 1984 329,844 11.20
Foxboro Houston, TX 220 1982 162,712 6.30
Georgetown* Houston, TX 156 1968 237,328 34.40
Harbor Pointe* Houston, TX 198 1968 178,700 4.80
Harpers Mill* Houston, TX 180 1981 143,252 6.79
Hidden Lake* Houston, TX 440 1986 318,748 32.63
Holiday on Hayes* Houston, TX 312 1981 250,564 10.47
Hunt Club, The* Houston, TX 204 1984 135,948 8.25
Huntley, The* Houston, TX 214 1985 165,054 7.35
Laurel Creek Houston, TX 428 1985 323,568 15.80
Live Oak* Houston, TX 162 1978 121,558 5.49
</TABLE>
37
<PAGE> 39
<TABLE>
<CAPTION>
TOTAL
NUMBER YEAR RENTABLE
OF CONSTRUCTION AREA TOTAL
METROPOLITAN AREA/PROPERTY LOCATION UNITS COMPLETED(1) (SQ. FT.) ACREAGE
- -------------------------- -------- ------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
Meadows on Memorial* Houston, TX 96 1982 94,940 3.56
Mill Creek* Houston, TX 174 1982 149,640 5.59
Monticello on Cranbrook* Houston, TX 244 1983 203,500 11.20
Northwoods* Houston, TX 200 1978 237,636 17.44
One Camden Court* Houston, TX 136 1982 104,216 4.47
One Cypress Landing* Houston, TX 464 1979 358,156 15.27
One Westfield Lake* Houston, TX 246 1984 269,454 19.98
One Willow Chase* Houston, TX 136 1983 104,216 4.36
One Willow Park* Houston, TX 178 1984 140,165 6.00
Pathway, The* Houston, TX 144 1978 139,498 5.95
Pine Creek* Houston, TX 216 1980 170,184 8.06
Polo Club on Cranbrook I* Houston, TX 228 1981 161,456 9.30
Polo Club on Cranbrook II* Houston, TX 292 1982 215,080 7.00
Retreat at Eldridge Houston, TX 168 1998 158,304 12.54
Richmond Green* Houston, TX 224 1980 214,494 8.76
Riverwalk* Houston, TX 184 1984 140,560 7.58
Silverado* Houston, TX 344 1979 248,960 11.31
South Green Houston, TX 268 1982 219,948 8.9
Stony Creek* Houston, TX 252 1980 194,240 9.30
Timbers of Cranbrook* Houston, TX 274 1984 206,884 9.50
Tranquility Lake* Houston, TX 90 1983 84,446 10.10
Wimbledon* Houston, TX 161 1978 154,601 6.30
Woodborough* Houston, TX 320 1983 222,640 10.30
Woodchase* Houston, TX 270 1978 252,542 9.98
Woodedge* Houston, TX 126 1982 113,850 6.65
Woodlake* Houston, TX 315 1976 242,587 8.28
------ ---- ---------- --------
Houston Total/ Weighted
Average 12,561 1982 10,375,640 524.16
------ ---- ---------- --------
SAN ANTONIO
Costa del Sol* San Antonio, TX 244 1985 180,798 10.00
Country View San Antonio, TX 272 1981 213,120 11.00
Remington* San Antonio, TX 158 1986 112,018 4.90
Summer Oaks* San Antonio, TX 256 1983 171,464 9.50
Villas of St. Moritz* San Antonio, TX 216 1986 149,040 7.50
------ ---- ---------- --------
San Antonio Total/ Weighted
Average 1,146 1984 826,440 42.90
------ ---- ---------- --------
OTHER TEXAS
Fountaingate* Wichita Falls, TX 280 1980 252,040 17.79
Settler's Cove Beaumont, TX 182 1982 133,654 6.24
------ ---- ---------- --------
Other Texas Total/ Weighted
Average 462 1981 385,694 24.03
------ ---- ---------- --------
Texas Total/ Weighted
Average 29,019 1983 22,943,989 1,228.63
------ ---- ---------- --------
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
TOTAL
NUMBER YEAR RENTABLE
OF CONSTRUCTION AREA TOTAL
METROPOLITAN AREA/PROPERTY LOCATION UNITS COMPLETED(1) (SQ. FT.) ACREAGE
- -------------------------- -------- ------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
JACKSONVILLE
Bentley Green Jacksonville, FL 444 1986 308,096 25.69
Brookwood Club Jacksonville, FL 360 1987 287,480 15.00
Huntington at Hidden Hills Jacksonville, FL 224 1986 183,200 14.97
Remington at Ponte Vedra Ponte Vedra Beach, FL 344 1986 302,904 28.60
Sandpiper Jacksonville, FL 376 1985 289,112 17.00
------ ---- ---------- --------
Jacksonville Total/
Weighted Average 1,748 1986 1,370,792 101.26
------ ---- ---------- --------
TAMPA
Ashton Park* Tampa, FL 192 1988 152,072 10.93
Bel Shores Largo, FL 250 1985 189,874 22.30
Carlyle at Waters Tampa, FL 392 1986 281,893 13.00
Oak Ramble Tampa, FL 256 1985 229,384 20.56
South Pointe Tampa, FL 112 1986 97,232 5.0
St. James Crossing* Tampa, FL 264 1986 198,424 21.46
Three Palms Tampa, FL 438 1986 369,362 34.70
------ ---- ---------- --------
Tampa Total/ Weighted
Average 1,904 1986 1,518,241 127.60
------ ---- ---------- --------
OTHER FLORIDA
Saratoga Melbourne, FL 210 1986 146,732 14.00
------ ---- ---------- --------
Florida Total/ Weighted
Average 3,862 1986 3,035,765 243.21
------ ---- ---------- --------
PHOENIX
Casa Verde Phoenix, AZ 268 1983 178,140 8.23
Crestwood* Phoenix, AZ 276 1984 149,433 8.29
Fairways, The* Phoenix, AZ 160 1981 118,192 5.80
Garden Place* Phoenix, AZ 286 1979 231,120 14.20
Meadow Glen Glendale, AZ 290 1987 242,020 11.20
Terra Vida Mesa, AZ 384 1988 305,600 15.40
Woodstone Phoenix, AZ 696 1986 573,564 19.70
------ ---- ---------- --------
Phoenix Total/ Weighted
Average 2,360 1985 1,798,069 82.82
------ ---- ---------- --------
OKLAHOMA CITY
Copperfield Oklahoma City, OK 262 1983 187,080 7.70
Hunter's Ridge Oklahoma City, OK 212 1984 155,587 6.00
Summerfield Place Oklahoma City, OK 224 1981 154,528 9.00
Woodscape Oklahoma City, OK 498 1985 363,073 15.60
------ ---- ---------- --------
Oklahoma City Total/
Weighted Average 1,196 1984 860,268 38.30
------ ---- ---------- --------
TULSA
Burning Tree Tulsa, OK 256 1978 156,848 11.32
Cinnamon Stick Tulsa, OK 424 1978 256,672 14.57
</TABLE>
39
<PAGE> 41
<TABLE>
<CAPTION>
TOTAL
NUMBER YEAR RENTABLE
OF CONSTRUCTION AREA TOTAL
METROPOLITAN AREA/PROPERTY LOCATION UNITS COMPLETED(1) (SQ. FT.) ACREAGE
- -------------------------- -------- ------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
Lift, The Tulsa, OK 328 1979 194,168 14.23
------ ---- ---------- --------
Tulsa Total/Weighted
Average 1,008 1978 607,688 40.12
------ ---- ---------- --------
Oklahoma Total/ Weighted
Average 2,204 1981 1,467,956 78.42
------ ---- ---------- --------
NASHVILLE
Brandywine* Nashville, TN 300 1985 203,418 21.00
Nashboro Village* Nashville, TN 994 1982 959,153 60.73
Raintree Nashville, TN 332 1985 216,930 24.90
Windsor Park Hendersonville, TN 232 1985 151,954 13.35
------ ---- ---------- --------
Nashville Total/ Weighted
Average 1,858 1984 1,531,455 119.98
------ ---- ---------- --------
SALT LAKE CITY
James Pointe Murray, UT 312 1985 236,928 11.60
Stillwater Murray, UT 456 1986 343,216 15.34
------ ---- ---------- --------
Salt Lake City Total/
Weighted Average 768 1986 580,144 26.94
------ ---- ---------- --------
ATLANTA
Parkway Station* Atlanta, GA 344 1986 369,960 28.63
Saratoga Springs* Atlanta, GA 266 1985 223,402 20.00
Shannon Chase* Atlanta, GA 156 1987 163,400 26.00
Villas at Indian Trails* Atlanta, GA 236 1986 242,044 39.70
------ ---- ---------- --------
Atlanta Total/ Weighted
Average 1,002 1986 998,806 114.33
------ ---- ---------- --------
SAN DIEGO
Felicita Creek* San Diego, CA 136 1987 104,440 6.20
Park Bonita* San Diego, CA 184 1984 154,256 11.12
Sun Ridge* San Diego, CA 160 1986 134,800 5.44
------ ---- ---------- --------
San Diego Total/ Weighted
Average 480 1986 393,496 22.76
------ ---- ---------- --------
OTHER MARKETS
Eagle Pointe Indianapolis, IN 256 1988 202,000 19.77
Silverado* Albuquerque, NM 256 1985 183,656 8.10
Winridge Aurora, CO (Denver) 364 1986 303,438 15.80
------ ---- ---------- --------
Other Markets Total/
Weighted Average 876 1986 689,094 43.67
------ ---- ---------- --------
Total/Weighted Average 42,429 1983 33,438,774 1,960.76
====== ==== ========== ========
</TABLE>
- ---------------
(1) Year construction completed indicates the year in which the final
certificate of occupancy for the property was issued.
* Represents properties owned by WDOP.
40
<PAGE> 42
<TABLE>
<CAPTION>
AVERAGE
MONTHLY RENTAL
UNIT TYPE OCCUPANCY RATE PER UNIT
---------------------- AVERAGE ----------------- -----------------
3BR/ APT SIZE AUGUST DECEMBER AUGUST DECEMBER
1BR 2BR 4BR (SQ. FT.) 1998 1997 1998 1997
------ ------ ---- --------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AUSTIN
Arbors of Austin 182 44 -- 685 94.5% 96.0% $556 $551
Arbors of Wells Branch 164 48 -- 737 98.3% 97.1% 602 595
Ashbury Parke 304 112 -- 671 97.5% 95.2% 560 549
Audubon Square 36 128 -- 850 97.3% 94.8% 626 611
Harper's Creek 228 40 -- 753 98.3% 95.8% 573 570
Lakes of Renaissance 218 84 6 698 95.3% 97.1% 594 579
Oakridge 151 102 -- 687 97.7% 97.5% 592 563
Pinto Creek 162 87 -- 800 90.3% 95.4% 663 636
Polo Club 240 64 -- 670 96.4% 95.2% 554 534
Shadow Creek 354 66 -- 750 94.0% 94.6% 541 531
Trestles of Austin 252 144 -- 697 81.6% 93.6% 624 613
------ ------ --- ----- ---- ---- ---- ----
Austin Total/Weighted Average 2291 919 6 719 94.1% 95.5% 586 572
------ ------ --- ----- ---- ---- ---- ----
CORPUS CHRISTI
Rafters, The 74 132 44 866 93.5% 92.8% 584 573
Wharf, The 74 132 44 866 92.4% 94.1% 593 599
Willowick 74 132 44 866 94.7% 94.9% 607 595
------ ------ --- ----- ---- ---- ---- ----
Corpus Christi Total/Weighted
Average 222 396 132 866 93.5% 93.9% 595 589
------ ------ --- ----- ---- ---- ---- ----
DALLAS/FT. WORTH
Arbor Creek 136 144 -- 774 93.6% 92.8% 619 593
Arbors of Bedford 128 76 -- 791 93.7% 89.7% 572 569
Arbors of Carrollton 55 76 -- 858 93.9% 95.7% 626 624
Arbors of Euless 136 136 -- 786 91.5% 91.7% 583 556
Bent Creek 284 42 -- 718 95.4% 93.9% 504 495
Braden's Walk(1) 468 238 -- 728 95.3% N/A 542 N/A
Brittany Park 149 68 -- 892 96.8% 91.8% 633 625
Canyon Ridge 76 88 -- 737 97.6% 97.2% 589 573
Casa Valley 120 30 -- 873 91.7% 94.2% 717 704
Cinnamon Park 144 112 16 784 93.0% 90.6% 571 563
Clover Hill 104 112 -- 828 96.0% 92.6% 540 530
Creekwood Village 328 34 -- 709 94.6% 95.9% 534 519
Fielder's Glen 140 80 -- 753 96.4% 93.4% 546 513
Gables, The 160 60 -- 772 93.7% 94.8% 622 617
Greens Crossing 292 72 -- 722 93.2% 89.9% 508 495
Hillcrest 264 46 -- 659 95.6% 94.3% 482 472
Hilltop 150 88 -- 753 93.5% 95.6% 519 528
Montfort Oaks 160 116 -- 781 94.7% 98.1% 622 605
Newport 208 100 -- 775 99.4% 94.4% 561 575
Parks at Treepoint 276 294 16 805 96.0% 92.7% 551 543
Pinnacle 86 64 -- 798 92.1% 95.5% 639 610
Post Oak Place 270 84 -- 723 92.9% 91.3% 553 541
Preston Greens 164 92 -- 962 70.8% 91.4% 726 693
Reflections of Highpoint 276 96 -- 758 89.6% 92.6% 627 613
</TABLE>
41
<PAGE> 43
<TABLE>
<CAPTION>
AVERAGE
MONTHLY RENTAL
UNIT TYPE OCCUPANCY RATE PER UNIT
---------------------- AVERAGE ----------------- -----------------
3BR/ APT SIZE AUGUST DECEMBER AUGUST DECEMBER
1BR 2BR 4BR (SQ. FT.) 1998 1997 1998 1997
------ ------ ---- --------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Remington Hill 300 140 -- 770 97.5% 93.3% 577 563
Rivercrest 320 100 -- 803 94.1% 89.3% 526 535
Shadow Creek 120 120 -- 758 94.5% 93.6% 549 545
Shadowridge Village 112 32 -- 825 96.8% 87.7% 619 614
Sierra Springs(1) 160 126 -- N/A N/A N/A N/A N/A
Springfield 192 72 -- 732 98.5% 95.4% 547 534
Summer Meadows 236 153 -- 831 87.0% 92.0% 685 667
Summer Villas 380 80 -- 713 95.4% 91.9% 583 565
Summers Crossing 215 78 -- 815 94.7% 94.7% 669 652
Summers Landing 172 24 -- 711 92.2% 97.0% 582 563
Trinity Mills 128 80 -- 783 98.6% 91.3% 635 612
Trinity Oaks 189 51 -- 626 96.8% 96.9% 547 538
Waterford on the Meadow 102 248 -- 888 98.2% 93.0% 667 654
------ ------ --- ----- ---- ---- ---- ----
Dallas Total/Weighted Average 7,200 3,652 32 771 98.0% 92.6% 581 569
------ ------ --- ----- ---- ---- ---- ----
HOUSTON
Arbor Point 43 22 -- 877 92.8% 97.0% 659 631
Ashton Woods 76 74 27 854 94.2% 93.2% 522 496
Aston Brook 88 64 -- 785 98.6% 95.5% 497 463
Bar Harbor 260 56 -- 662 95.4% 92.8% 510 487
Bayou Oaks 138 72 -- 755 98.4% 96.9% 495 480
Brandon Oaks 88 108 -- 862 96.7% 90.2% 569 540
Briarcrest 232 144 -- 789 95.9% 90.5% 529 511
Brookfield 190 60 -- 756 96.0% 95.8% 529 505
Carriage Hill 96 120 36 961 98.2% 95.5% 590 568
Central Park Condos 29 52 12 1,065 93.4% 97.2% 743 715
Central Park Regency 132 216 -- 917 95.1% 95.6% 593 570
Charleston, The 228 84 -- 726 96.3% 96.1% 487 452
Cimarron Park 100 54 8 832 97.8% 95.2% 567 546
Cimarron Parkway 216 56 -- 876 97.4% 97.1% 550 536
Colony Oaks 92 70 -- 1,030 95.7% 97.6% 620 604
Colorado Club 220 80 -- 753 96.4% 96.4% 536 523
Copper Cove 192 78 -- 756 91.2% 88.8% 508 496
Enclave at Cypress Park 232 124 28 859 95.3% 93.7% 574 563
Foxboro 160 60 -- 740 94.0% 93.0% 500 487
Georgetown 42 33 81 1,521 99.1% 97.9% 975 941
Harbor Pointe 90 104 4 903 91.6% 91.4% 648 636
Harpers Mill 88 92 -- 796 94.7% 90.7% 476 462
Hidden Lake 288 152 -- 724 94.1% 96.4% 672 639
Holiday on Hayes 172 140 -- 803 96.8% 96.2% 563 536
Hunt Club, The 168 36 -- 666 94.1% 97.7% 472 456
Huntley, The 128 86 -- 771 96.2% 95.8% 651 617
Laurel Creek 304 100 24 756 94.5% 93.2% 596 578
Live Oak 136 26 -- 750 91.1% 95.5% 539 515
Meadows on Memorial -- 75 21 989 95.3% 97.6% 638 612
</TABLE>
42
<PAGE> 44
<TABLE>
<CAPTION>
AVERAGE
MONTHLY RENTAL
UNIT TYPE OCCUPANCY RATE PER UNIT
---------------------- AVERAGE ----------------- -----------------
3BR/ APT SIZE AUGUST DECEMBER AUGUST DECEMBER
1BR 2BR 4BR (SQ. FT.) 1998 1997 1998 1997
------ ------ ---- --------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mill Creek 76 98 -- 860 96.4% 97.4% 505 484
Monticello on Cranbrook 73 171 -- 834 98.4% 96.8% 524 502
Northwoods -- 100 100 1,188 99.0% 96.2% 699 675
One Camden Court 60 76 -- 766 95.5% 95.6% 441 422
One Cypress Landing 396 68 -- 772 96.0% 90.9% 465 442
One Westfield Lake 72 126 48 1,095 96.8% 95.5% 667 637
One Willow Chase 60 76 -- 766 98.1% 97.5% 508 482
One Willow Park 131 47 -- 787 94.7% 96.9% 532 509
Pathway, The 136 8 -- 969 96.4% 96.4% 684 655
Pine Creek 128 88 -- 788 95.3% 91.9% 496 475
Polo Club on Cranbrook I 156 72 -- 708 95.1% 94.3% 452 429
Polo Club on Cranbrook II 176 116 -- 737 95.7% 91.4% 465 443
Retreat at Eldridge(1) 108 60 -- 942 N/A N/A N/A N/A
Richmond Green 74 150 -- 958 97.5% 97.7% 662 644
Riverwalk 128 56 -- 764 98.0% 94.9% 537 527
Silverado 272 72 -- 724 97.1% 97.3% 552 526
South Green(1) 172 96 -- 821 N/A N/A N/A N/A
Stoney Creek 164 88 -- 771 95.3% 96.7% 480 464
Timbers of Cranbrook 184 90 -- 755 91.8% 95.5% 526 470
Tranquility Lake 35 55 -- 938 97.0% 98.0% 731 699
Wimbledon 49 106 6 960 98.1% 96.8% 598 567
Woodborough 240 80 -- 696 96.0% 95.4% 456 428
Woodchase 86 184 -- 935 96.7% 94.5% 615 601
Woodedge 21 104 1 904 98.3% 95.4% 569 541
Woodlake 260 52 3 770 92.7% 95.8% 548 517
------ ------ --- ----- ---- ---- ---- ----
Houston Total/Weighted Average 7,485 4,677 399 826 95.7% 94.9% 558 535
------ ------ --- ----- ---- ---- ---- ----
SAN ANTONIO
Costa Del Sol 170 74 -- 741 93.2% 89.6% 506 522
Country View 176 96 -- 784 95.5% 96.3% 488 486
Remington 108 50 -- 709 95.5% 91.6% 492 504
Summer Oaks 184 72 -- 670 96.5% 91.0% 447 464
Villas of St. Moritz 136 80 -- 690 99.1% 98.5% 480 483
San Antonio Total/Weighted
Average 774 372 -- 721 94.3% 93.5% 482 491
------ ------ --- ----- ---- ---- ---- ----
OTHER TEXAS
Fountaingate 160 104 16 900 94.2% 89.6% 523 526
Settler's Cove 138 44 -- 734 93.7% 94.8% 516 501
Other Texas Total/Weighted
Average 298 148 16 835 94.0% 91.6% 520 516
------ ------ --- ----- ---- ---- ---- ----
Texas Total/Weighted Average 18,588 10,259 601 789 96.3% 93.9% 567 551
------ ------ --- ----- ---- ---- ---- ----
</TABLE>
43
<PAGE> 45
<TABLE>
<CAPTION>
AVERAGE
MONTHLY RENTAL
UNIT TYPE OCCUPANCY RATE PER UNIT
---------------------- AVERAGE ----------------- -----------------
3BR/ APT SIZE AUGUST DECEMBER AUGUST DECEMBER
1BR 2BR 4BR (SQ. FT.) 1998 1997 1998 1997
------ ------ ---- --------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JACKSONVILLE
Bentley Green 336 108 -- 694 95.7% 94.0% 556 559
Brookwood Club 200 160 -- 799 92.9% 87.0% 768 547
Huntington at Hidden Hills 64 160 -- 818 94.6% 95.6% 566 541
Remington at Ponte Vedra 136 208 -- 881 96.0% 93.1% 662 651
Sandpiper 200 144 32 769 96.4% 89.7% 561 548
------ ------ --- ----- ---- ---- ---- ----
Jacksonville Total/Weighted
Average 936 780 32 784 95.2% 91.6% 623 570
------ ------ --- ----- ---- ---- ---- ----
TAMPA
Ashton Park(1) 122 70 -- 792 92.2% N/A 583 N/A
Bel Shores 138 112 -- 759 91.2% 93.9% 622 608
Carlyle at Waters 310 82 -- 719 93.4% 90.6% 522 511
Oak Ramble 128 128 -- 896 90.9% 94.3% 626 621
South Pointe(1) 72 40 -- 868 94.2% N/A 655 N/A
St. James Crossing(1) 176 88 -- 752 94.2% N/A 531 N/A
Three Palms 254 184 -- 843 96.3% 86.0% 632 623
------ ------ --- ----- ---- ---- ---- ----
Tampa Total/Weighted Average 1,200 704 -- 786 93.5% 90.4% 590 587
------ ------ --- ----- ---- ---- ---- ----
OTHER FLORIDA
Saratoga 160 50 -- 699 97.1% 93.4% 563 514
Florida Total/Weighted Average 2,296 1,534 32 786 94.5% 91.3% 603 573
------ ------ --- ----- ---- ---- ---- ----
PHOENIX
Casa Verde 184 84 -- 665 98.1% 93.3% 425 408
Crestwood 255 21 -- 541 96.9% 95.5% 475 450
Fairways, The 108 52 -- 739 96.4% 92.8% 561 546
Garden Place 132 154 -- 808 93.2% 94.8% 608 580
Meadow Glen 90 200 -- 835 95.6% 96.3% 636 610
Terra Vida 128 224 32 796 85.1% 96.5% 621 613
Woodstone 432 240 24 824 92.7% 89.5% 600 589
------ ------ --- ----- ---- ---- ---- ----
Phoenix Total/Weighted Average 1,329 975 56 762 93.2% 93.5% 572 554
------ ------ --- ----- ---- ---- ---- ----
OKLAHOMA CITY
Copperfield 196 66 -- 714 94.3% 94.7% 469 473
Hunter's Ridge 148 64 -- 734 90.9% 90.7% 453 455
Summerfield Place 176 48 -- 690 88.7% 89.9% 445 445
Woodscape 348 150 -- 729 95.2% 88.8% 473 475
------ ------ --- ----- ---- ---- ---- ----
Oklahoma City Total/Weighted
Average 868 328 -- 719 93.0% 90.6% 463 465
------ ------ --- ----- ---- ---- ---- ----
TULSA
Burning Tree 208 48 -- 613 95.3% 97.0% 377 359
Cinnamon Stick 360 64 -- 605 93.6% 92.5% 361 352
Lift, The 280 48 -- 592 91.2% 90.9% 358 348
------ ------ --- ----- ---- ---- ---- ----
Tulsa Total/Weighted Average 848 160 -- 603 93.3% 93.1% 364 352
------ ------ --- ----- ---- ---- ---- ----
Oklahoma Total/Weighted Average 1,716 488 -- 666 93.1% 91.8% 418 414
------ ------ --- ----- ---- ---- ---- ----
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
AVERAGE
MONTHLY RENTAL
UNIT TYPE OCCUPANCY RATE PER UNIT
---------------------- AVERAGE ----------------- -----------------
3BR/ APT SIZE AUGUST DECEMBER AUGUST DECEMBER
1BR 2BR 4BR (SQ. FT.) 1998 1997 1998 1997
------ ------ ---- --------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NASHVILLE
Brandywine 240 60 -- 678 95.7% 88.0% 535 543
Nashboro Village 456 426 112 965 88.2% 91.0% 641 632
Raintree 252 80 -- 653 96.2% 84.9% 535 545
Windsor Park 186 46 -- 655 94.7% 92.8% 379 534
------ ------ --- ----- ---- ---- ---- ----
Nashville Total/Weighted Average 1,134 612 112 824 91.7% 89.7% 572 590
------ ------ --- ----- ---- ---- ---- ----
SALT LAKE CITY
James Pointe 144 168 -- 759 97.0% 90.4% 600 588
Stillwater 152 304 -- 753 98.8% 94.5% 604 597
------ ------ --- ----- ---- ---- ---- ----
Salt Lake City Total/Weighted
Average 296 472 -- 755 98.1% 92.9% 602 593
------ ------ --- ----- ---- ---- ---- ----
ATLANTA
Parkway Station(1) 72 164 108 1,075 81.8% N/A 712 N/A
Saratoga Springs 128 138 -- 840 96.9% 94.8% 648 635
Shannon Chase 50 106 -- 1,047 91.7% 90.6% 709 674
Villas at Indian Trails 60 176 -- 1,026 84.3% 84.5% 691 684
------ ------ --- ----- ---- ---- ---- ----
Atlanta Total/Weighted Average 310 584 108 997 88.0% 90.1% 690 662
------ ------ --- ----- ---- ---- ---- ----
SAN DIEGO
Felicita Creek 36 100 -- 768 97.6% 97.9% 692 649
Park Bonita 36 148 -- 838 99.7% 94.0% 825 789
Sun Ridge 16 144 -- 843 97.5% 93.6% 648 629
------ ------ --- ----- ---- ---- ---- ----
San Diego Total/Weighted Average 88 392 -- 820 98.4% 95.0% 728 696
------ ------ --- ----- ---- ---- ---- ----
OTHER MARKETS
Eagle Pointe 152 104 -- 789 93.0% 90.1% 588 576
Silverado 180 76 -- 717 88.5% 88.6% 554 560
Winridge 262 102 -- 834 93.4% 93.7% 647 627
------ ------ --- ----- ---- ---- ---- ----
Other Markets Total/Weighted
Average 594 282 -- 787 91.9% 91.1% 603 593
------ ------ --- ----- ---- ---- ---- ----
Total/Weighted Average 26,033 15,503 893 788 95.3% 93.2% $569 $553
====== ====== === ===== ==== ==== ==== ====
</TABLE>
- ---------------
(1) Represents recently acquired property for which historical information is
not available.
PROPERTY MANAGEMENT
The Company conducts its property management operations with an experienced
staff of professionals and support personnel, including property directors and
sales directors. At August 31, 1998, the Company employed approximately 1,259
persons, approximately 1,060 of whom are located at the properties. The depth of
the organization is intended to enable the Company to deliver quality services
on an uninterrupted basis, thereby promoting resident satisfaction and improving
resident retention. Each of the Company's owned or managed properties is
operated by a staff specifically selected based on the size, location, age,
management plan and marketing plan of the individual property. Personnel are
carefully trained in their appropriate areas of expertise, such as property
management, marketing and leasing, resident relations and maintenance.
The Company's standardized policies and procedures specify reporting
requirements and management guidelines to be applied at each property which
facilitate management consistency in all markets. The
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<PAGE> 47
Company uses customized software programs to provide on-site, regional and
executive management with rapid access to all marketing and accounting
information. Weekly marketing reports are prepared by on-site property directors
which track each property's leasing status, occupancy rate, prospective resident
traffic, unit availability, lease renewals, residents moving in and out of
apartments during the week, notices by residents to vacate their apartment and
delinquent rental charges or other fees. Accounting elements such as
receivables, payables, rent roll status and budget compliance are regularly
monitored through this system.
Marketing and leasing activities and procedures are designed to comply with
all established Federal, state and local laws and regulations. The Company
offers leases having six- to 12-month terms, with individual property marketing
plans structured to respond to local market conditions. Qualifying standards for
prospective residents are established to comply with the affordable housing
restrictions placed on certain of the Properties, the FHA and the regulations
thereunder and are designed to stabilize service levels and income streams.
Fifteen of the properties are currently subject to restrictions that require
that a specified number of apartments be offered to persons with lower or
moderate income. See "Business and Properties -- Regulation." The Company
utilizes standard lease contracts promulgated by local apartment associations to
ensure compliance with the most recent legislative and judicial activities
related to multifamily properties, as well as to permit uniform lease
administration relating to rent collections, security deposit dispositions,
evictions, repairs and renewals.
EMPLOYEES
As of August 31, 1998, the Company had 1,259 employees, of which 199 are
located at the Company's headquarters in Dallas, Texas and its regional offices
located in Atlanta, Austin, Dallas, Fort Worth, Houston, Jacksonville, Phoenix,
San Antonio, Tampa and Tulsa. The remaining 1,060 employees are located at the
properties owned by the Company and those fee managed. None of the Company's
employees are currently represented by a union. The Company believes that
relations with its employees are good.
COMPETITION
All of the Properties are located in developed areas that include other
multifamily properties. The number of multifamily properties in a particular
area could have a material effect on the Company's ability to lease units at its
Properties or at any newly acquired properties and on the rents charged.
Additionally, there are other housing alternatives that compete with the
Properties in attracting residents. The Properties also compete directly with
single family homes that are available in the markets in which the Properties
are located.
The Company competes for acquisitions with other entities, such as
insurance companies, pension funds, private individuals, investment companies
and other REITs, which may have greater resources than the Company.
LEGAL PROCEEDINGS
Neither the Company nor the Properties are presently subject to any
material litigation nor, to the Company's knowledge, is any material litigation
threatened against the Company or the Properties. The Company and the Properties
are occasionally subjected to routine litigation arising in the ordinary course
of business, which has been and is expected to be covered by liability insurance
and none of which has had or is expected to have a material adverse effect on
the business, financial condition, results of operations or cash flows of the
Company.
REGULATION
General. Apartment community properties are subject to various laws,
ordinances and regulations, including regulations relating to recreational
facilities such as swimming pools, activity centers and other common areas. The
Company believes that it has the necessary permits and approvals under present
laws, ordinances and regulations to operate its business in the manner described
herein.
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<PAGE> 48
Americans with Disabilities Act. The Properties and any newly acquired or
developed multifamily properties must comply with Title III of the Americans
with Disabilities Act of 1990 (the "ADA") to the extent that such properties are
"public accommodations" and/or "commercial facilities" as defined by the ADA.
Compliance with the ADA requirements could require removal of structural
barriers to handicapped access in certain public areas of the Properties where
such removal is readily achievable. The ADA does not, however, consider
residential properties, such as multifamily properties, to be public
accommodations or commercial facilities, except to the extent that portions of
such facilities, such as leasing offices, are open to the public. The Company
obtained structural reports from third-party consultants specifying certain
modifications to certain of the Properties that needed to be made in order to
bring such properties into full compliance with the ADA. The Company has
substantially completed such modifications.
Fair Housing Amendments Act of 1988. The FHA requires multifamily
properties first occupied after March 13, 1990 to be accessible to the
handicapped. Noncompliance with the FHA could result in the imposition of fines
or an award of damages to private litigants. All of the Company's Properties
were occupied prior to March 13, 1990.
Affordable Housing Restrictions. The Company has 15 properties which are
subject to restrictions requiring that a specified percentage of the apartment
units in such Properties be offered to households with lower or moderate incomes
(currently, 70% of the total number of apartment units in the 15 affected
properties and 9% of the total number of the Company's apartment units).
Generally, these provisions originated from the use of tax exempt financing in
those instances where it was determined that the benefits of the lower interest
rate associated with such financing offset the potential reduction of rental
income resulting from such rental restrictions. In addition, three of these
properties are subject to limits on the amount of rent that can be charged for
certain of the apartment units. The Company believes it is in compliance with
these restrictions. These restrictions have not had a material adverse effect on
the Company's operations or ability to rent the units, and management does not
anticipate that such restrictions will have a material adverse effect on future
operations or possible sales of the 15 properties in the future.
Rent Control Legislation. State and local rent control laws in certain
jurisdictions limit a property owner's ability to increase rents and to recover
from residents increases in operating expenses and the costs of capital
improvements. Enactment of such laws has been considered from time to time in
other jurisdictions, although none of the jurisdictions in which the Company
presently operates has adopted such laws. The Company does not presently own,
nor does it intend to acquire, multifamily properties in markets that are either
subject to rent control or in which rent limiting legislation exists.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and remediate hazardous or toxic substances or petroleum
product releases at such property and may be held liable to a government entity
or third party for property damage, investigation and remediation costs incurred
by such parties in connection with such contamination. Such laws typically
impose cleanup responsibility and liability without regard to whether the owner
or operator knew of, or caused the presence of, the contaminants. The costs of
investigation, remediation or removal of such substances may be substantial, and
the presence of such substances, or the failure to properly remediate such
substances, may adversely affect the owner's ability to sell or rent such real
estate or to borrow using such real estate as collateral. In addition, some
environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
Individuals who arrange for the disposal or treatment of hazardous or toxic
substances may be held liable for the costs of investigation, remediation or
removal of such hazardous or toxic substances at or from the disposal or
treatment facility regardless of whether such facility is owned or operated by
such person. Finally, the owner of a site may be subject to common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from a site.
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
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<PAGE> 49
event of the remodeling, renovation or demolition of a building. Such laws may
impose liability for the release of ACMs and may provide for third parties to
seek recovery from owners or operators of real estate for personal injury
associated with ACMs. In connection with the ownership and operation of its
properties, the Company may be potentially liable for costs in connection with
the matters discussed above.
All of the Properties have been the subject of environmental assessments,
which are intended to reveal information regarding, and to evaluate the
environmental condition of, the surveyed properties and surrounding properties.
The environmental assessments generally include a historical review, a public
records review, a preliminary investigation of the site and surrounding
properties, screening for the presence of asbestos and equipment containing
polychlorinated biphenyls and underground storage tanks and the preparation and
issuance of a written report, but do not include soil sampling or subsurface
investigations.
The environmental assessments on each of the 155 Properties have revealed
elevated lead content in the drinking water at three of the Properties and ACMs
at 75 of the Properties (some of which is friable, but in good and manageable
condition). The consulting firm that conducted the environmental studies has
prepared an operations and maintenance program recommending procedures to be
followed in dealing with 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 remedial actions and notification options. The Company
anticipates any such remedial actions and notifications for these matters will
cost between $760,000 and $780,000 in the aggregate, which will be capitalized
when incurred and is expected to be funded through the Properties' cash flow
from operations.
Environmental assessments performed on the Properties have not revealed any
environmental liability that the Company believes would have a material adverse
effect on the Company's business, assets, or results of operations, nor is the
Company aware of any such environmental liability. Nevertheless, it is possible
that these assessments did not reveal all environmental liabilities or that
there are material environmental liabilities of which the Company is unaware.
Moreover, no assurances can be given that (i) future laws, ordinances or
regulations will not require any material expenditures by or impose any material
liabilities on the Company in connection with environmental conditions by or on
the Company or its properties, (ii) the current environmental condition of a
property will not be adversely affected by residents and occupants of such
property, by the condition of properties in the vicinity of such property (such
as the presence of underground storage tanks) or by third parties unrelated to
the Company, or (iii) prior owners of the Properties did not create
environmental problems of which the Company is not aware.
The Company believes 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. Except as
otherwise described above, 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 or petroleum products with
respect to any of the Properties.
The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimatable. Accruals
for estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remediation feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Recoveries of environmental remediation costs from other parties are recorded as
assets when their receipt is deemed probable. Management is not aware of any
environmental remediation obligations which would materially affect the
operations, financial position or cash flows of the Company.
INSURANCE
The Company carries comprehensive liability, fire, extended coverage and
rental loss insurance with respect to all of the Properties, with policy
specifications, insured limits and deductibles customarily carried for similar
properties. There are, however, certain types of losses (such as losses arising
from earthquakes or wars) that are not generally insured because they are either
uninsurable or not economically insurable. Should
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<PAGE> 50
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 that the Properties
are currently adequately insured in accordance with industry standards.
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-11 under 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 and the exhibits and financial statements thereto.
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 document filed as an exhibit to the Registration
Statement or incorporated herein by reference, 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 for a fee from the Commission at
its principal office in Washington, D.C.
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 offices of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549; and at its Regional Offices located in Chicago,
Illinois; and New York, New York. Copies of such material can be obtained for a
fee from the Public Reference Section of the Commission in Washington, D.C. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the Commission's Web site is:
http://www.sec.gov. The Common Stock is listed on, and the 9.00% Redeemable
Preferred Stock is approved for listing on, the New York Stock Exchange, Inc.
(the "NYSE") and reports, proxy statements and other information concerning the
Company can be inspected at the offices of the NYSE in New York, New York.
The Company furnishes its stockholders with annual reports containing
financial statements audited by its independent auditors.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's current policies with
respect to investments, financing, affiliate transactions and certain other
activities. The Company's policies with respect to these activities have been
established by Management. These policies may be amended or waived from time to
time at the discretion of the Board of Directors without a vote of the
stockholders of the Company. No assurance can be given that the Company's
investment objectives will be attained or that the value of the Company will not
decrease.
INVESTMENT POLICIES
Investments in Real Estate or Interests in Real Estate. The Company's
primary business objective is to maximize stockholder value by maintaining
long-term growth in cash available for distribution to its stockholders. The
Company intends to pursue this objective by continuing to acquire and develop
garden apartment properties for long-term ownership and to manage its
properties, and thereby seek to maximize current and long-term net income and
the value of its assets. The Company's policy is to acquire and develop assets
where the Company believes that opportunities exist for acceptable investment
returns. See "The Company -- Business Strategies."
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<PAGE> 51
The Company expects to pursue its investment objectives primarily through
the direct ownership of properties. The Company currently invests in developed
garden apartment communities primarily located in its Target Markets. However,
future investment activities will not be limited to any geographic area or
product type or to a specified percentage of the Company's assets.
Although the Company is not currently doing so, it may also participate
with other entities in property ownership, through joint ventures or other types
of common ownership. Equity investments may be subject to existing mortgage
financing and other indebtedness which have priority over the equity interests
of the Company.
Investments in Real Estate Mortgages. While the Company intends to
emphasize equity real estate investments, it may, at its discretion, invest in
mortgages or other real estate interests consistent with its qualification as a
REIT. The Company may also invest in participating or convertible mortgages if
the Board of Directors concludes that the Company and its stockholders may
benefit from the cash flow or any appreciation in the value of the subject
property. Such mortgages are similar to equity participation. The mortgages in
which the Company may invest may be either first mortgages or junior mortgages
and may or may not be insured by a governmental agency.
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. Subject to the percentage of ownership limitations
and gross income tests necessary for REIT qualification, the Company also may
invest in securities of entities engaged in real estate activities or securities
of other issuers, including for the purpose of exercising control over such
entities, although it does not currently intend to do so. See "Federal Income
Tax Considerations -- Taxation of the Company as a REIT."
Periodic Review of Assets. The Company intends to dispose of certain
Properties. The Company reserves the right to dispose of any Property if the
Company determines that the disposition of such Property is in the best
interests of the Company and its stockholders.
FINANCING POLICIES
As a general policy, the Company intends to maintain a ratio of total
indebtedness to market capitalization (i.e., the market value of issued and
outstanding shares of capital stock plus total debt) of less than 50%. However,
no assurance can be given that the Company will be able to accomplish this
objective. The debt-to-total market capitalization ratio is based upon the stock
market value of equity, and accordingly fluctuates with changes in the price of
the shares and differs from a debt-to-tangible net worth ratio which is based on
the net tangible book value of assets because the Company believes that market
capitalization is a more appropriate measure of the market value of the
Company's assets than the net tangible book value of its assets and more
indicative of its ability to repay debt.
The Company may from time to time reevaluate its debt policy in light of
current economic conditions, relative costs of debt and equity capital, changes
in the market capitalization of the Company, acquisition opportunities and other
factors, and may modify its debt financing policy and may increase or decrease
its ratio of debt-to-total market capitalization without a vote of its
stockholders. The Articles and the Company's Bylaws do not contain any
limitations on the amount or percentage of indebtedness the Company may incur.
Future indebtedness incurred by the Company may be in the form of bank
borrowings, purchase money obligations to the sellers of properties, assumed
indebtedness, publicly or privately placed debt instruments or financing from
institutional investors or other lenders, any of which indebtedness may be
unsecured or may be secured by mortgages on or other interests in properties
owned by the Company. The recourse of the holders of such indebtedness may be to
all or any part of the properties of the Company or may be limited to the
particular property to which the indebtedness relates. Subject to any
contractual restrictions, the proceeds from any borrowings by the Company may be
used for the payment of dividends, for working capital, to refinance existing
indebtedness or to finance acquisitions of new properties.
In the event that the Board of Directors determines to raise additional
equity capital, the Board of Directors has the authority, without stockholder
approval, to issue additional shares of Common Stock or shares of preferred
stock in any manner (and on such terms and for such consideration) it deems
appropriate,
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including in exchange for property, subject to the provisions of Maryland
General Corporation Law. Existing stockholders would have no preemptive right to
purchase such shares in any offering, and any such offering might cause a
dilution of a stockholder's investment in the Company. See "Capital Stock of the
Company."
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<PAGE> 53
MANAGEMENT
The Company is managed by its Board of Directors (the "Board"), who are
elected annually by the shareholders. The directors are responsible for
appointing the executive officers of the Company and for determining the
strategic direction of the Company. The executive officers of the Company serve
at the discretion of the Board and are chosen annually by the Board at its first
meeting following the annual meeting of stockholders. The following table sets
forth the names and ages of the executive officers and directors of the Company
and the positions held with the Company by each individual.
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
EXECUTIVE OFFICERS
Michael E.
Masterson........... 55 Chairman of the Board of Directors
Marshall B. Edwards... 53 Chief Executive Officer, President, Chief Operating Officer and Director
Mark S. Dillinger..... 46 Executive Vice President, Chief Financial Officer and Director
Michael L. Collier.... 55 Executive Vice President of Property Management
Don R. Daseke......... 58 Chairman Emeritus
Maxwell B. Drever..... 57 Chairman Emeritus
INDEPENDENT DIRECTORS
Linda Walker Bynoe.... 45 Director
Francesco Galesi...... 67 Director
Robert L. Honstein.... 42 Director
Arch K. Jacobson...... 70 Director
Louis G. Munin........ 64 Director
J. Otis Winters....... 65 Director
</TABLE>
EXECUTIVE OFFICERS
Michael E. Masterson has been Chairman of the Board and a director of the
Company since October 1997. Prior thereto, Mr. Masterson was Executive Vice
President of Drever from 1989 to 1992 and President of Drever from 1992 to
October 1997. As President of Drever, Mr. Masterson was responsible for the
overall administration of Drever and its subsidiaries, he coordinated
institutional financing and oversaw the several joint ventures in which
institutions are investors. From 1986 to 1989, he was President of Asset
Development and Management, Inc. in San Francisco, a company charged with the
management of a major portion of the commercial REO portfolio of BA Properties
I, a subsidiary of Bank of America. Prior to that (1984-1988), Mr. Masterson
held the positions of Executive Vice President and President, respectively, of
The Innisfree Companies and IMG Financial of Sausalito, major San Francisco Bay
Area real estate development and marketing concerns. His projects have won
numerous awards, including the U.S. Department of Energy National Energy Award,
awards from the City and County of Honolulu and the Pacific Coast Builders
Choice Grand Award.
Marshall B. Edwards has been a Director and the Chief Acquisitions Officer
of the Company since October 1993 and was elected President of the Company on
June 8, 1995. On October 20, 1997, Mr. Edwards was elected as Chief Executive
Officer of the Company. Prior to joining the Company, Mr. Edwards served as
President of Westglen Realty Advisors, Inc. from 1992 to 1993. From 1988 to
1992, Mr. Edwards was Executive Vice President of NHP Real Estate Corporation
and President of NHP Acquisition Corporation, both affiliates of NHP, Inc., one
of the largest owners and operators of multifamily rental housing in the United
States. His principal responsibilities at NHP included the acquisition,
financing, asset management and disposition of non-subsidized rental apartments.
Mr. Edwards was previously with Walden from 1983 to 1988 as Vice President of
Acquisitions and later as President of Walden's management subsidiary.
Mark S. Dillinger has been the Executive Vice President and Chief Financial
Officer of the Company since October 1993. Mr. Dillinger joined The Walden
Group, Inc. ("Walden Group"), one of the Company's predecessor entities, in 1982
and has served as Executive Vice President and the Chief Financial Officer of
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<PAGE> 54
Walden Group since 1987. Mr. Dillinger is a member of the American Institute of
Certified Public Accountants, the National Association of Real Estate Investment
Trusts and the National Multi-Housing Council.
Michael L. Collier has been the Executive Vice President of Property
Management of the Company since October 1997. He has also been President of
Concierge Management Corporation, the management subsidiary of Drever since its
formation in 1987. He was founder of that company in 1987, together with Mr.
Drever. From 1983 to 1987, Mr. Collier was President of Midkiff Property
Development Company, a management and development concern. A member of the
National Multi Housing Council, Mr. Collier is also on the Board of Directors of
the Houston Apartment Association.
Don R. Daseke has been a Director of the Company since its formation in
September 1993 and Chairman of the Board of Directors and Chief Executive
Officer of the Company from October 1993 to October 1997. In October 1997, Mr.
Daseke resigned as Chairman of the Board and Chief Executive Officer and was
elected as Chairman Emeritus of the Company. He has been the Chairman of the
Board of Directors, President and Chief Executive Officer of Walden Group and
its predecessor since 1974. Mr. Daseke is a Certified Public Accountant and a
member of the American, Connecticut and New York Institutes of Certified Public
Accountants, Chairman of the Board of Galapagos Studios, Inc., Chairman of the
Board of Netier Technologies, Inc., Chairman of the Board of U.S. Telephone
Holding, Inc., Director of Promise House and has served on the Board of Trustees
of DePauw University since 1984.
Maxwell B. Drever has been Chairman Emeritus and a director of the Company
since October 1997. From 1985 until October 1997, Mr. Drever was Chairman of
Drever Properties, Inc. ("Drever"), which along with certain of its affiliates,
was the general partner of the partnerships from which the Company acquired a 79
property portfolio consisting of approximately 18,100 apartment units. In his
capacity as Chairman of Drever, he set company policies and devised strategies
relevant to the acquisition, enhancement and management of Drever's 79 apartment
properties in Texas, Georgia, Arizona and California. From 1970 to 1985, Mr.
Drever was President of Drever, McIntosh, Inc., acquiring, refurbishing and
managing 60 projects in Seattle, Memphis, Columbus, Tampa and other comparable
cities. Mr. Drever is a Director of the National Multi Housing council and a
Full Member of the Urban Land Institute.
INDEPENDENT DIRECTORS
Linda Walker Bynoe has been a Director of the Company since February 1994.
Ms. Bynoe is the President and Chief Operating Officer of Telemat Ltd., a
private investment and project management company located in Chicago, Illinois.
She was previously with Morgan Stanley from 1978 to 1989 where she served as
Vice President -- Capital Markets. Ms. Bynoe, a certified public accountant, was
on the audit staff of Arthur Andersen & Co. from 1974 to 1976. She currently
serves on the Boards of Directors of the American Odyssey Funds, Inc. and The
Executives' Club of Chicago. Ms. Bynoe is also a Trustee of The Museum of
Contemporary Art in Chicago and a member of The Economic Club of Chicago and The
Financial Research and Advisory Committee of The Commercial Club.
Francesco Galesi has been the Chairman of the Board and sole equity holder
of each entity constituting the Galesi Group since 1969. The Galesi Group
consists of a group of privately owned entities that invest in real estate,
telecommunications and manufacturing. These entities own and develop town home
developments and apartment complexes located in Florida, Texas, Georgia and
Colorado, office buildings in New York and Texas and 10 million square feet of
industrial parks. Mr. Galesi currently serves on the Board of Director of LDDS
WORLDCOM, one of the largest long distance telephone companies. In 1978, Mr.
Galesi received the Award of Achievement from President Carter for his
contribution to economic development in the United States.
Robert L. Honstein has been a director of the Company since October 1997.
Mr. Honstein has been a member of Nassau Capital L.L.C., the investment manager
for private investments of Princeton University's endowment, since 1995. Prior
thereto, Mr. Honstein was a Vice President at Princeton University Investment
Company where he focused on the real estate investing nationwide for Princeton
University's endowment from 1991 to 1995. Before Princeton, he was partner at
Matrix Development Group, a commercial and industrial
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real estate development firm in New Jersey. Mr. Honstein serves as a Director of
Corporate Realty Investment Company and Affordable Residential Communities.
Arch K. Jacobson is currently President of Jacobson-Berger Capital Group,
Inc. Previously, Mr. Jacobson was Chairman and Chief Executive Officer of Union
Pacific Realty Corporation (a subsidiary of Union Pacific Corporation) from 1986
to 1993. He was with the Real Estate Department of The Prudential Insurance
Company from 1955 to 1980 and was President and Chief Executive Officer of the
Prudential Development Company (a subsidiary of the Prudential Insurance
Company) from 1982 to 1986. Mr. Jacobson is a member of the Urban Land
Institute, a director of Patriot American Hospitality, Inc. and Chairman of the
Board of Trustees of the University of Mary Hardin Baylor.
Louis G. Munin retired in 1989 as Executive Vice President and Chief
Financial Officer of Lafarge Corporation (North America's largest cement
manufacturer). Previously, he was with General Portland Cement from 1966 until
it was acquired by Lafarge in 1981 where he served as Senior Vice President and
Chief Financial Officer. Mr. Munin currently serves on the Boards of Directors
of Lafarge Canada, Inc. and Chieftain International, Inc. and as a member of the
Finance Council of the Catholic Diocese of Dallas. He is a Certified Public
Accountant and a member of the American Institute of Certified Public
Accountants and the Financial Executives Institute.
J. Otis Winters has been the Chairman of the Board of PWS Group, Inc.
(formerly Pate, Winters & Stone, Inc.), a corporate consulting firm, since 1990.
He previously served as Executive Vice President and Director of The Williams
Companies and Executive Vice President and Director of the First National Bank
and Trust Co. of Tulsa, Oklahoma. Mr. Winters currently serves on the Boards of
Directors of AMX Corporation and NGC Corporation. He is a registered
professional engineer (Oklahoma).
BOARD OF DIRECTORS
The Board of Directors is divided into three classes. The terms of the
first, second and third classes expire in 1999, 2000, and 2001, respectively.
Directors of each class are elected for three year terms upon the expiration of
the current class' term. The staggered terms for directors may affect the
stockholders' ability to effect a change in control of the Company even if a
change in control were in the stockholders' best interest.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Executive Committee, an Audit Committee, a
Compensation Committee and a Nominating and Corporate Governance Committee.
The Executive Committee currently consists of Linda Walker Bynoe, Francesco
Galesi, Robert L. Honstein, Arch K. Jacobson, Louis G. Munin and J. Otis
Winters. The Executive Committee has all powers of the Board of Directors except
for those which require action by all directors under the Articles or the
Company's bylaws or under applicable law. The Executive Committee met three
times during the fiscal year ended December 31, 1997.
The Audit Committee is an advisory committee whose current members are
Messrs. Munin, Honstein and Jacobson. The Audit Committee met four times during
the fiscal year ended December 31, 1997. The function of the Audit Committee is
to make recommendations concerning the engagement of independent public
accountants, review with the independent public accountants the plans and
results of the audit engagement, approve professional services provided by the
independent public accountants, review the independence of the independent
public accountants, consider the range of audit and nonaudit fees and review the
adequacy of the Company's internal accounting controls.
The Compensation Committee currently consists of Ms. Bynoe, Mr. Galesi and
Mr. Winters. The Compensation Committee recommends compensation for the
Company's executive officers to the Board of Directors and administers the
Company's Amended and Restated 1994 Stock Option Plan (the "Stock Option Plan").
The Compensation Committee met four times during the fiscal year ended December
31, 1997.
54
<PAGE> 56
The Nominating and Corporate Governance Committee currently consists of Ms.
Bynoe and Messrs. Galesi, Honstein, Jacobson, Munin and Winters. The Nominating
and Corporate Governance Committee selects the candidates for election as
directors to be recommended to the Board of Directors for either filling
vacancies that arise from time to time on the Board or for presenting to the
stockholders at each annual meeting of stockholders. The committee also assists
the Board of Directors in carrying out its responsibilities by reviewing
corporate governance issues. The Nominating and Corporate Governance Committee
met three times during the fiscal year ended December 31, 1997.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are paid a $15,000 annual
retainer, with an additional $5,000 annual retainer being paid to each member of
the Executive Committee (which amount is payable in shares of restricted stock)
and an additional $5,000 annual retainer payable to each committee chairperson.
In addition, each non-employee director receives a fee of $1,500 for attending
each meeting of the Board of Directors and an additional fee of $1,000 for
attending each committee meeting. Directors who are employees of the Company are
not paid any director's fees. The Company may reimburse all directors for their
travel expenses incurred in connection with attending meetings and their
activities on behalf of the Company.
The Stock Option Plan provides each director who is not an employee of the
Company and who is serving as a director on such date with automatic annual
grants of options to purchase 5,000 shares of Common Stock, within five days
following each annual meeting of Stockholders. Each of the current non-employee
directors was granted an option to acquire 5,000 shares of Common Stock in 1997.
Each such non-employee director option is exercisable on the first anniversary
of the date such option was granted. The exercise price of each such
non-employee director option is the greater of the fair market value of the
shares of Common Stock on the date of the grant or the average of the closing
prices of the Common Stock on the 20 business days preceding the date of grant.
Each non-employee director option will expire on the tenth anniversary of the
date of the grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Ms. Bynoe and Messrs. Galesi and
Winters, none of whom is a former or current officer or employee of the Company
or any of its subsidiaries. No executive officer of the Company serves as an
officer, director or member of any entity which has an executive officer or
director who is a member of the Compensation Committee.
55
<PAGE> 57
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to annual
and long-term compensation for the periods ended December 31, 1997, 1996 and
1995, paid, or accrued with respect to, certain of the Company's executive
officers (the "Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
-------------------------------------- ------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
------------------ ---- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Don R. Daseke(1)......... 1997 $304,500 $ -0- -- 260,000 $ 4,750(2)
1996 $290,000 $150,000 -- 170,000 $26,149(2)
1995 $239,885 $106,650 $13,000(4) 90,000 $ 9,368(2)
Marshall B. Edwards(3)... 1997 $260,900 $ -0- -- 190,000 $ 4,750(5)
1996 $240,000 $110,000 -- 125,000 $ 7,220(5)
1995 $186,808 $ 83,050 $ 188(4) 70,000 $ 2,583(5)
Mark S. Dillinger(6)..... 1997 $172,000 $ -0- -- 125,000 $ 4,208(5)
1996 $165,000 $ 59,000 -- 75,000 $ 6,882(5)
1995 $134,923 $ 60,000 $ 163(4) 50,000 $ 2,319(5)
</TABLE>
- ---------------
(1) Mr. Daseke was Chairman of the Board and Chief Executive Officer of the
Company during the years ended December 31, 1996 and 1995 and for the period
from January 1, 1997 to October 20, 1997.
(2) Amount includes 50% of the annual premium ($6,931 in 1995 and $19,095 in
1996) on a $5,000,000 life insurance policy insuring Mr. Daseke, with 50% of
the death benefit being payable to Mr. Daseke's estate and the other 50%
payable to the Company (the policy was canceled July 1, 1997 and no premium
was paid for 1997), and the Company's matching contribution ($2,437 in 1995,
$7,054 in 1996 and $4,750 in 1997) under its 401(k) Plan.
(3) Mr. Edwards was President (from June 8, 1995 to present) and Chief
Acquisitions Officer of the Company during the years ended December 31,
1995, 1996 and 1997. On October 20, 1997, Mr. Edwards was also elected as
Chief Executive Officer of the Company.
(4) Represents the amount equal to the difference between the fair market value
of the Common Stock and the purchase price of the Common Stock acquired by
each of the Executive Officers pursuant to loans made by the Company in
December 1995. See "Certain Relationships and Related Transactions."
(5) Represents the Company's matching contribution under its 401(k) Plan.
(6) Mr. Dillinger was the Executive Vice President and Chief Financial Officer
of the Company for the years ended December 31, 1995, 1996 and 1997.
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<PAGE> 58
OPTION GRANTS
The following table sets forth certain information with respect to the
issuance of options granted to the Executive Officers during the fiscal year
ended December 31, 1997 under the Stock Option Plan.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL EXERCISE STOCK PRICE APPRECIATION FOR
UNDERLYING OPTIONS PRICE OPTION TERM(1)
OPTIONS GRANTED TO PER EXPIRATION ------------------------------
NAME GRANTED EMPLOYEES SHARE DATE 5% 10%
- ---- ---------- ---------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Don R. Daseke(2)........... 60,000 25.1 $26.00 10/02 $ 431,000 $ 952,400
200,000 13.3 $25.25 10/02 $1,395,200 $3,083,100
Marshall B. Edwards(3)..... 40,000 16.7 $26.00 2/07 $ 654,100 $1,657,500
150,000 10.0 $25.25 10/07 $2,381,900 $6,036,300
Mark S. Dillinger(3)....... 25,000 10.4 $26.00 2/07 $ 408,800 $1,035,900
100,000 6.6 $25.25 10/07 $1,588,000 $4,024,200
</TABLE>
- ---------------
(1) "Potential Realizable Value" is disclosed in response to Securities and
Exchange Commission rules, which require such disclosure for illustrative
purposes only, and is based on the difference between the potential market
value of shares issuable (based upon assumed appreciation rates) upon
exercise of such Options and the exercise price of such Options. The values
disclosed are not intended to be, and should not be interpreted by investors
as, representations or projections of future value of the Company's stock or
of the stock price.
(2) The options were granted on February 5, 1997 and October 1, 1997 and became
fully vested on October 20, 1997.
(3) The options were granted on February 5, 1997 and October 1, 1997 and vest in
equal increments on each of the first four anniversaries of their date of
grant.
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth certain information concerning the value of
the unexercised options as of December 31, 1997 held by the Executive Officers.
No options were exercised by the Executive Officers during the fiscal year ended
December 31, 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTION/SARS AT FISCAL OPTIONS/SARS AT FISCAL
YEAR-END YEAR END(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Don R. Daseke..................... 720,000 -0- $2,598,125 $ -0-
Marshall B. Edwards............... 130,000 340,000 $ 752,340 $794,530
Mark S. Dillinger................. 81,250 218,750 $ 471,720 $502,650
</TABLE>
- ---------------
(1) The fair market value on December 31, 1997 of the Common Stock underlying
the options was $25.50 per share.
EMPLOYMENT AGREEMENTS
Each of Messrs. Edwards and Dillinger has entered into an employment
agreement with the Company that expires on October 20, 2002 and February 5,
2002, respectively, and each of Messrs. Masterson, Collier and Drever has
entered into an employment agreement with the Company that expires on October 1,
2002
57
<PAGE> 59
(collectively, the "Employment Agreements"). The Employment Agreements provide
annual salaries for each of such executives, subject to increase at the
discretion of the Board of Directors. The Employment Agreements for Mr.
Masterson and Mr. Collier grant such executives the right, on the third and
fourth anniversaries of the date of execution (October 1, 1997), respectively,
to resign as an officer of the Company and to be engaged as a consultant for the
remainder of the term of the Employment Agreement. Pursuant to the terms of the
Settlement and Employment Agreement entered into between the Company and Mr.
Daseke in connection with his resignation as Chairman of the Board and Chief
Executive Officer of the Company, Mr. Daseke is to serve as Chairman Emeritus of
the Company until October 2000. Mr. Daseke's agreement does grant him the
option, exercisable for a sixty-day period commencing on January 1, 1999, to
resign as an officer of the Company and to be engaged as a consultant for the
remainder of the term of the agreement.
Under the terms of the respective Employment Agreements (other than Mr.
Daseke's), if the covered executive's employment with the Company is terminated
by the Company other than for "cause" (as defined in the Employment Agreement)
or by "constructive discharge" (as defined in the Employment Agreement), the
terminated executive will be entitled to receive an amount equal to the highest
annualized rate of salary prior to the date of termination. The Employment
Agreements also provide that the covered executive may terminate his employment
for any reason upon 30 days' prior written notice. In the event of such a
termination, the Company will be obligated to pay the executive the compensation
due him up to the effective date of termination. The Employment Agreements also
provide for the payment of severance compensation in an amount equal to 2.99
times the Executive Officer's compensation (which includes both salary and any
cash bonus) in the event the Executive Officer is terminated without cause or by
constructive discharge within three years following a "change in control" (as
defined in the Employment Agreements).
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<PAGE> 60
PRINCIPAL STOCKHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table and the notes thereto set forth certain information
with respect to the beneficial ownership of shares of Common Stock, as of August
31, 1998 (except as noted in the footnotes to such table), by each person or
group within the meaning of Section 13(d)(3) of the Exchange Act who is known to
the management of the Company to be the beneficial owner of more than five
percent of the outstanding Common Stock of the Company:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
NAME AND ADDRESS BENEFICIALLY PERCENT
OF BENEFICIAL OWNER OWNED OF CLASS
- ------------------- ------------ --------
<S> <C> <C>
Don R. Daseke(1)............................................ 1,578,410(2) 8.43%
Morgan Stanley, Dean Witter, Discover & Co.................. 1,241,450(3) 6.90%
1585 Broadway
New York, New York 10036
</TABLE>
- ---------------
(1) The business address of such person is 5430 LBJ Freeway, Suite 1600, Dallas,
Texas 75240.
(2) Includes 514,905 shares of Common Stock owned of record by The Walden Group,
Inc., of which Mr. Daseke is the holder of 90% of the common stock and the
sole director, 720,000 shares of Common Stock which Mr. Daseke has the right
to acquire through the exercise of options granted pursuant to the Stock
Option Plan and 30,000 shares of restricted Common Stock issued under the
Company's Long-Term Investment Plan, which shares may not be transferred
until October 20, 2000 and 1,701 shares acquired through a 401(k) plan.
(3) This information is provided in reliance on a Schedule 13G filed with the
SEC on or about February 12, 1998 by Morgan Stanley, Dean Witter, Discover &
Co.
SECURITY OWNERSHIP OF MANAGEMENT
The following table and the notes thereto set forth certain information
with respect to the beneficial ownership of shares of Common Stock of the
Company, as of August 31, 1998, by each director, each nominee for director,
each executive officer of the Company and by all executive officers and
directors as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT
BENEFICIAL OWNER(1)(2) BENEFICIALLY OWNED OF CLASS
- ---------------------- ------------------ --------
<S> <C> <C>
Marshall B. Edwards........................................ 344,576(3) 1.89%
Michael S. Masterson....................................... 377,008(11) 2.05%
Mark S. Dillinger.......................................... 191,000(4) 1.05%
Michael L. Collier......................................... 202,295(10) 1.11%
Maxwell B. Drever.......................................... 1,530,058(9) 7.84%
Don R. Daseke.............................................. 1,578,410(5) 8.43%
Linda Walker Bynoe......................................... 23,479(6) *
Francesco Galesi........................................... 728,141(7) 3.89%
Robert L. Honstein......................................... 201(12) *
Arch K. Jacobson........................................... 26,801(6) *
Louis G. Munin............................................. 26,201(6) *
J. Otis Winters............................................ 21,201(8) *
All Directors and Executive Officers (12 persons).......... 4,337,431 24.10%
</TABLE>
- ---------------
(1) The business address of the persons named above is c/o Walden Residential
Properties, Inc., 5080 Spectrum Drive, Suite 1000 East, Addison, Texas
75001-6410.
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<PAGE> 61
(2) Except as otherwise indicated, (i) the persons named in this table have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them, and (ii) none of the shares shown in
this table or referred to in the footnotes hereto are shares of which the
persons named in this table have the right to acquire beneficial ownership
as specified in Rule 13d-3(d)(1) promulgated under the Exchange Act.
(3) Includes 242,500 shares of Common Stock which Mr. Edwards has the right to
acquire through the exercise of options granted pursuant to the Stock
Option Plan, 20,000 shares of restricted Common Stock granted under the
Company's Long-Term Incentive Plan, which shares may not be transferred
until February 12, 2001, at which time the transfer restrictions on 40% of
such shares lapse and the restriction on 10% of the remaining shares lapses
each year thereafter until February 12, 2007 (the "Officer Restricted
Shares") and 3,000 shares of restricted Common Stock granted under the
Company's Long-Term Incentive Plan, which shares may not be transferred
until February 4, 1999, at which time the transfer restriction on one-third
of such shares lapses and the restriction on half of the remaining shares
lapses in each of the two years thereafter (the "Bonus Shares").
(4) Includes 139,075 shares which Mr. Dillinger has the right to acquire
through the exercise of options granted pursuant to the Stock Option Plan,
10,000 Officer Restricted Shares and 1,000 Bonus Shares.
(5) Includes 514,905 shares of Common Stock owned of record by Walden Group, of
which Mr. Daseke is the holder of 90% the common stock and the sole
director, 720,000 shares which Mr. Daseke has the right to acquire through
the exercise of options granted pursuant to the Stock Option Plan and
30,000 shares of restricted Common Stock issued under the Company's
Long-Term Incentive Plan, which shares may not be transferred until October
30, 2000.
(6) Includes 20,000 shares of Common Stock which such person has the right to
acquire through the exercise of options granted pursuant to the Stock
Option Plan, 1,000 shares of restricted Common Stock granted under the
Company's Long-Term Incentive Plan, one-third of which are currently
transferable and the transfer restrictions lapse on half of the remaining
shares on February 12, 1999 and the other half on February 12, 2000 (the
"Director Restricted Shares") and 201 restricted shares as to which the
transfer restrictions lapse quarterly ending December 31, 1998.
(7) Consists of 711,940 shares of Common Stock which entities controlled by Mr.
Galesi have the right to acquire pursuant to the conversion of partnership
interests held in Walden Residential Operating Partnership, L.P., a Georgia
limited partnership and an affiliate of the Company ("Walden Operating
Partnership"), 20,000 shares of Common Stock which Mr. Galesi has the right
to acquire through the exercise of options granted pursuant to the Stock
Option Plan, 1,000 Director Restricted Shares and 201 restricted shares as
to which the transfer restrictions lapse quarterly ending December 31,
1998. The Galesi entities acquired such partnership interests in connection
with the sale of the controlling interest in the predecessor to the Walden
Residential Operating Partnership to the Company in June 1995.
(8) Includes 20,000 shares of Common Stock which Mr. Winters has the right to
acquire through the exercise of options granted pursuant to the Stock
Option Plan, 1,000 Director Restricted Shares and 201 restricted shares as
to which the transfer restrictions lapse quarterly ending December 31,
1998.
(9) Includes 1,430,437 shares of Common Stock which Mr. Drever has the right to
acquire pursuant to the conversion of Units and 87,500 shares of Common
Stock which Mr. Drever has the right to acquire through the exercise of
options granted under the Stock Option Plan.
(10) Includes 149,795 shares of Common Stock which Mr. Collier has the right to
acquire pursuant to the conversion of Units and 37,500 shares of Common
Stock which Mr. Collier has the right to acquire through the exercise of
options granted under the Stock Option Plan.
(11) Includes 300,556 shares of Common Stock which Mr. Masterson has the right
to acquire pursuant to the conversion of Units and 56,250 shares of Common
Stock which Mr. Masterson has the right to acquire through the exercise of
options granted under the Stock Option Plan.
(12) Consists of 201 restricted shares as to which the transfer restrictions
lapse quarterly ending December 31, 1998.
* Less than one percent.
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<PAGE> 62
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 August 31, 1998,
17,993,341 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 issued upon exchange of the Common OP Units will
be duly authorized, fully paid and nonassessable. Subject to the preferential
rights of shares of all the preferred stock, and any other shares or series of
stock hereinafter designated by the Board of Directors of the Company (the
"Board of Directors"), holders of shares of Common Stock are entitled to receive
dividends on the stock if, as and when authorized and declared by the Board of
Directors out of assets legally available therefor and to share ratably in the
assets of the Company legally available for distribution to its stockholders in
the event of its liquidation, dissolution or winding-up after payment of, or
adequate provision for payment of, all known debts and liabilities of the
Company. The Company has paid regular quarterly dividends to date and intends to
continue paying regular quarterly dividends.
Each outstanding share of Common Stock entitles the holder thereof to one
vote on all matters submitted to a vote of stockholders, including the election
of directors and, except as otherwise required by law or except as provided with
respect to any other class or series of stock, the holders of shares of Common
Stock will possess the exclusive voting power. There is no cumulative voting in
the election of directors, which means that the holders of a majority of the
outstanding shares of Common Stock can elect all of the directors then standing
for election and the holders of the remaining shares will not be able to elect
any directors. Holders of shares of Common Stock have no conversion, sinking
fund, redemption rights or preemptive rights to subscribe for any securities of
the Company.
Shares of Common Stock have equal dividend, distribution, liquidation and
other rights and will have no preference or exchange rights.
Pursuant to the MGCL, a corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions unless approved by the holders of at
least two-thirds of the shares of stock entitled to vote on the matter unless a
lesser percentage (but not less than a majority of all of the votes to be cast
on the matter) is set forth in the corporation's charter. The Articles provide
for the vote of the holders of a majority of the shares of stock outstanding and
entitled to vote on the matter to approve any of such actions, except for
amendments to the Articles relating to the number of directors and the
classification of the Board of Directors which require approval of holders of at
least two-thirds of the shares of stock entitled to vote on the matter.
The transfer agent and registrar for the Common Stock is Boston Equiserve
L.P.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under 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.
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<PAGE> 63
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. Don R. Daseke, may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 9.0% (the "Ownership Limit") of
the aggregate value of all outstanding shares of capital stock of the Company.
Mr. Daseke beneficially owns in the aggregate approximately 6.1% of the shares
of Common Stock and may acquire additional shares of Common Stock; provided,
however, that Mr. Daseke may not own, directly or indirectly, more than 13.0% of
the aggregate value of all outstanding shares of capital stock of the Company
(the "Existing Holder Limit"). The Board of Directors, upon receipt of evidence
and assurances satisfactory to the Board of Directors, may also exempt a
proposed transferee from the Ownership Limit or Existing Holder Limit. In
connection therewith, the Board of Directors may require opinions of counsel,
affidavits, undertakings or agreements as it may deem necessary or advisable in
order to determine or ensure the Company's status as a REIT. Any acquisition or
transfer of shares of Common Stock that would: (i) result in the shares of
Common Stock being owned by fewer than 100 persons or (ii) result in the Company
being "closely-held" within the meaning of Section 856(h) of the Code, shall be
null and void, and the intended transferee will acquire no rights to the shares
of Common Stock. The foregoing restrictions on transferability and ownership
will not apply if the Board of Directors determines that it is no longer in the
best interests of the Company to attempt to qualify, or to continue to qualify,
as a REIT and the Articles are amended accordingly.
Any purported transfer of shares of capital stock that would result in a
person owning shares of capital stock in excess of the Ownership Limit or
Existing Holder Limit will result in the shares subject to such purported
transfer being automatically exchanged for an equal number of shares of Excess
Stock. Under the Articles, Excess Stock shall be deemed to have been transferred
to the Company as trustee of a separate trust (the "Trust") for the exclusive
benefit of the person or persons to whom the interest in the Trust can
ultimately be transferred.
Excess Stock is not transferable. The purported transferee of any shares of
capital stock that are exchanged for Excess Stock may designate a transferee of
the interest in the Trust if the Excess Stock held in the Trust and represented
by such Trust interest to be transferred would not be Excess Stock in the hands
of the designated transferee at a price not to exceed the price paid by the
purported transferee (or, if no consideration was paid, the Market Price (as
hereinafter defined) measured on the date of the original attempted transfer) at
which point such Excess Stock will automatically be exchanged for the shares of
Common Stock or Preferred Stock to which the Excess Stock is attributable. In
addition, Excess Stock is subject to purchase by the Company at a purchase price
equal to the lesser of: (i) the price paid for the shares of capital stock by
the intended transferee (or, if no consideration was paid, the Market Price of
the shares of capital stock the attempted transfer of which resulted in Excess
Stock, measured on the date of the transfer); or (ii) the Market Price of the
shares of capital stock the attempted transfer of which resulted in Excess Stock
measured on the date on which the Company elects to purchase the Excess Stock.
"Market Price" means the average daily per share closing sales price of a share
of capital stock if such shares of capital stock are listed on a national
securities exchange or quoted on Nasdaq National Market or if not then traded on
any exchange or quotation system, the mean between the average per share closing
bid prices and the average per share closing asked prices, in each case, during
the 30 calendar day period ending on the business day prior to the measurement
date, or if there have been no sales on a national securities exchange or the
Nasdaq National Market and no published bid and asked quotations with respect to
shares of such stock during such 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
62
<PAGE> 64
Company in acquiring the Excess Stock and to hold the Excess Stock on behalf of
the Company. All certificates representing shares of capital stock will bear a
legend referring to the restrictions described above.
In addition, each stockholder shall, upon demand, be required to disclose
to the Company in writing all information regarding the direct and indirect
beneficial ownership of shares of capital stock as the Board of Directors deems
reasonably necessary to comply with the provisions of the Code applicable to a
REIT, to comply with the requirements of any taxing authority or governmental
agency or to determine any such compliance.
These ownership limitations could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of shares
of capital stock might receive a premium for their shares over the
then-prevailing market price or which these holders might believe to be
otherwise in their best interest.
DESCRIPTION OF REDEEMABLE PREFERRED STOCK
The following description of terms of the Redeemable Preferred Stock sets
forth certain general terms and provisions of the Redeemable Preferred Stock.
The description of certain provisions of the Redeemable Preferred Stock set
forth below 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 the 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 August 31, 1998, 1,712,082 shares of the Company's 9.16% Series B
Convertible Redeemable Preferred Stock (the "Series B Preferred Stock") and
4,000,000 shares of the Company's 9.20% Senior Preferred Stock (the "Senior
Preferred Stock") were outstanding.
Boston Equiserve L.P. will be the transfer agent and registrar for shares
of each series of Preferred Stock.
RANK
The Redeemable Preferred Stock will, with respect to dividend rights upon
liquidation, dissolution or winding up of the Company, rank (i) senior to the
Common Stock, all Excess Stock, with certain limited exceptions, and to all
other equity securities of the Company, except those the terms of which
specifically provide that such securities rank senior to or on a parity with the
Redeemable Preferred Stock; (ii) on a parity with the Series B Preferred Stock
and all other equity securities issued by the Company the terms of which
specifically provide that such equity securities rank on a parity with the
Redeemable Preferred Stock; and (iii) junior to the Senior Preferred Stock and
all other equity securities issued by the Company the terms of which
specifically provide that such equity securities rank senior to the Redeemable
Preferred Stock. The rights of the holders of Redeemable Preferred Stock will be
subordinate to those of the Company's general creditors.
DIVIDENDS
Holders of Redeemable Preferred Stock will be entitled to receive out of
assets of the Company legally available for payment, when and as declared by the
Board of Directors of the Company, cash dividends at the rate of $2.25 per annum
per share. Dividends on shares of Redeemable Preferred Stock will accrue and be
cumulative from the date of issuance of the Redeemable Preferred Stock.
Dividends will be payable quarterly in arrears in March, June, September and
December of each year.
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REDEMPTION
Shares of Redeemable Preferred Stock may be redeemed, in whole or from time
to time in part, at any time after January 1, 2008, at the option of the Company
at the price of $25.00 per share, plus all accrued and unpaid dividends thereon.
Shares of Redeemable Preferred Stock redeemed by the Company will be restored to
the status of authorized but unissued preferred stock of the Company. In the
event that fewer than all of the outstanding shares of Redeemable Preferred
Stock are redeemed, the number of shares to be redeemed will be determined by
lot or pro rata (subject to rounding to avoid fractional shares) as may be
determined by the Company or by any other method as may be determined by the
Company in its sole discretion to be equitable.
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, 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.
VOTING RIGHTS
Except in certain limited circumstances when dividends on the Redeemable
Preferred Stock have been in arrears for six or more quarterly periods, or
except as required by applicable law, holders of the Redeemable Preferred Stock
will not be entitled to vote for any purpose.
RESTRICTIONS ON OWNERSHIP
See "Description of Common Stock -- Restrictions on Transfer" for a
discussion of the restrictions on transfer of shares of capital stock necessary
for the Company to qualify as a REIT under the Code.
DESCRIPTION OF SERIES B WARRANTS
GENERAL
Each Series B Warrant is exercisable, at any time beginning on October 1,
1998 and ending on December 31, 2007, for one-third of one share of Common Stock
at $26.875 per share, subject to adjustment in the event of certain events such
as stock dividends, stock splits, reverse stock splits, reclassifications and
the issuance by the Company of certain types of securities or certain
distributions by the Company. No fractional share of Common Stock will be issued
in connection with the exercise of the Series B Warrants and the holder of a
Series B Warrant will be paid in lieu of such fractional shares, cash in an
amount equal to the Current Market Value (as defined in the Series B Warrant
Agreement relating to the Series B Warrants) of a share of Common Stock
multiplied by such fraction. Although they will be initially issued in
conjunction with shares of Redeemable Preferred Stock, the Series B Warrants
will be separately transferable upon receipt. Prior to the exercise of the
Series B Warrants, holders of Series B Warrants will not have any rights of
holders of Common Stock, including the right to receive payments of dividends,
if any, on Common Stock, or to exercise any applicable right to vote.
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The Company will have the obligation to repurchase all outstanding Series B
Warrants upon the occurrence of certain events, such as the consolidation or
merger of the Company with another entity (in certain circumstances) or the sale
of all or substantially all of the assets of the Company (in certain
circumstances).
Warrant certificates may be exchanged for new Warrant certificates of
different denominations, may (if in registered form) be presented for
registration of transfer and may be exercised at the corporate trust office of
the Warrant Agent.
EXERCISE OF SERIES B WARRANTS
Each Series B Warrant will entitle the holder thereof to purchase Common
Stock, at $26.875 per share. After the close of business on December 31, 2007
(or such later date to which such expiration date may be extended by the
Company), unexercised Series B Warrants will become void.
Series B Warrants may be exercised by delivering to the Warrant Agent
payment of the amount required to purchase the shares of Common Stock,
purchasable upon such exercise together with certain information set forth on
the reverse side of the Warrant certificate. Series B Warrants will be deemed to
have been exercised upon receipt of payment of the exercise price, subject to
the receipt within five (5) business days of the Warrant certificate evidencing
such Series B Warrants. Upon receipt of such payment and the Warrant certificate
properly completed and duly executed at the corporate trust office of the
Warrant Agent, the Company will, as soon as practicable, issue and deliver the
shares of Common Stock, purchasable upon such exercise. If fewer than all of the
Series B Warrants represented by such Warrant certificate are exercised, a new
Warrant certificate will be issued for the remaining amount of Warrants.
AMENDMENTS AND SUPPLEMENTS TO SERIES B WARRANT AGREEMENT
The Series B Warrant Agreement may be amended or supplemented without the
consent of the holders of the Series B Warrants issued thereunder to effect
changes that are not inconsistent with the provisions of the Series B Warrants
and that do not adversely affect the interests of the holders of the Series B
Warrants.
ADJUSTMENTS
The exercise price of, and the number of shares of Common Stock covered by,
a Series B Warrant are subject to adjustment in certain events, including (i)
payment of a dividend on the Common Stock payable in shares of capital stock and
stock splits, combinations or reclassification of the Common Stock; (ii)
issuance to all holders of Common Stock of rights or warrants to subscribe for
or purchase shares of Common Stock at less than their current market price; and
(iii) certain distributions of evidences of indebtedness or assets (including
securities but excluding cash dividends or distributions paid out of
consolidated earnings or retained earnings or dividends payable in shares of
Common Stock) or of subscription rights and warrants (excluding those referred
to above).
No adjustment will be required unless such adjustment would require a
change of at least 1% in the exercise price then in effect. Except as stated
above, the exercise price of, and the number of shares of Common Stock covered
by, a Series B Warrant will not be adjusted for the issuance of shares of Common
Stock or any securities convertible into or exchangeable for Common Stock, or
carrying the right or option to purchase or otherwise acquire the foregoing, in
exchange for cash, other property or services. No adjustment in the exercise
price of, and the number of shares of Common Stock covered by, a Series B
Warrant will be made for regular quarterly or other periodic or recurring cash
dividends or distributions or for cash dividends or distributions to the extent
paid from consolidated earnings or retained earnings.
In the event of any (i) consolidation or merger of the Company with or into
any entity (other than a consolidation or a merger that does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares of
Common Stock); (ii) sale, transfer, lease or conveyance of all or substantially
all of the assets of the Company; or (iii) reclassification, capital
reorganization or change of the Common Stock (other than solely a change in par
value or from par value to no par value), a holder of a Series B Warrant will be
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entitled, on or after the occurrence of any such event, to receive on exercise
of such Series B Warrant the kind and amount of shares of beneficial interest or
other securities, cash or other property (or any combination thereof) that the
holder would have received had such holder exercised such holder's Series B
Warrant immediately prior to the occurrence of such event. If the consideration
to be received upon exercise of the Series B Warrant following any such event
consists of common shares of the surviving entity, then from and after the
occurrence of such event, the exercise price of such Series B Warrant will be
subject to the same anti-dilution and other adjustments described in the second
preceding paragraph, applied as if such shares were shares of Common Stock.
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CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE COMPANY'S ARTICLES AND BYLAWS
The following discussion summarizes certain provisions of MGCL and the
Articles and the Company's Bylaws. This summary does not purport to be complete
and is subject to and qualified in its entirety by reference to the Company's
Articles and Bylaws.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Bylaws provide that the number of directors of the Company shall be as
set in the Articles or as may be established by the Board of Directors but may
not be fewer than the number required under the MGCL nor more than 15. Any
vacancy will be filled, at any regular meeting or at any special meeting called
for that purpose, by a majority of the remaining directors, except that a
vacancy resulting from an increase in the number of directors will be filled by
a majority of the entire Board of Directors. The stockholders may elect a
director to fill a vacancy on the Board of Directors which results from the
removal of a director. Pursuant to the terms of the Articles, the Directors are
divided into three classes. As the term of each class expires, directors in that
call are elected for a term of three years. The Company believes that
classification of the Board of Directors helps to assure the continuity and
stability of the Company's business strategies and policies as determined by the
Board of Directors.
The classified director provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which would
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its stockholders. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in a
majority of the Board of Directors. Thus, the classified board provision could
increase the likelihood that incumbent directors will retain their positions.
Further, holders of shares of Common Stock have no right to cumulative voting
for the election of directors. Consequently, at each annual meeting of
stockholders, the holders of a majority of shares of Common Stock will be able
to elect all of the successors of the class of directors whose term expires at
that meeting.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Articles limit the liability of the Company's directors and officers to
the Company and its stockholders to the fullest extent permitted from time to
time by the MGCL. The MGCL presently permits the liability of directors and
officers to a corporation or its stockholders for money damages to be limited,
except (i) to the extent that it is proved that the director or officer actually
received an improper benefit or profit or (ii) to the extent that a judgment or
other final adjudication is entered adverse to the director or officer in a
proceeding based on a finding that the director's or officer's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. This provision
does not limit the ability of the Company or its stockholders to obtain other
relief, such as an injunction or rescission.
The Articles require the Company to indemnify its directors, officers and
certain other parties to the fullest extent permitted from time to time by the
MGCL. The MGCL permits a corporation, subject to certain exceptions, to
indemnify its directors, officers and certain other parties against judgments,
penalties, fines, settlements and reasonable expenses, including attorneys'
fees, actually incurred by them in connection with any proceeding to which they
may be made a party by reason of their service to or at the request of the
corporation, unless it is established that (i) the act or omission of the
indemnified party was material to the matter giving rise to the proceeding and
was committed in bad faith or was the result of active and deliberate
dishonesty, (ii) the indemnified party actually received an improper personal
benefit, or (iii) in the case of any criminal proceeding, the indemnified party
had reasonable cause to believe that the act or omission was unlawful.
Indemnification may be made against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by the director or officer in connection
with the proceeding; provided, however, that if the proceeding is won by or in
the right of the corporation, indemnification may not be made with respect to
any proceeding in which the director or officer has been adjudged to be liable
to the corporation. In addition, a
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director or officer may not be indemnified with respect to any proceeding
charging improper personal benefit to the director or officer in which the
director or officer was adjudged to be liable on the basis that personal benefit
was improperly received. The termination of any proceeding by conviction, or
upon a plea of nolo contenders or its equivalent, of an entry of any order of
probation prior to judgment, creates a rebuttable presumption that the director
or officer did not meet the requisite standard of conduct required for
indemnification to be permitted. It is the position of the Commission that
indemnification of directors and officers for liabilities arising under the
Securities Act is against public policy and is unenforceable pursuant to Section
14 of the Securities Act.
BUSINESS COMBINATIONS
Under the MGCL, as amended effective October 1, 1994, certain "business
combinations" (including a merger, consolidation, share exchange or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and any person who beneficially owns
10 or more of the voting power of the corporation's shares after the date on
which the corporation had 100 or more beneficial owners of its stock or an
affiliate or associate of the corporation and was the beneficial owner, directly
or indirectly, of 10% or more of the voting power of the then outstanding stock
of the corporation who, at any time within the two-year period prior to the date
in question and after the date on which the corporation had 100 or more
beneficial owners of its stock (an "Interested Stockholder") or an affiliate
thereof, are prohibited for five years after the most recent date on which the
Interested Stockholder became an Interested Stockholder. Thereafter, any such
business combination must be recommended by the board of directors of such
corporation and approved by the affirmative vote of at least (i) 80% of the
votes entitled to be cast by holders of outstanding voting shares of the
corporation voting together as a single voting group and (ii) two-thirds of the
votes entitled to be cast by holders of outstanding voting shares of the
corporation other than shares held by the Interested Stockholder with whom the
business combination is to be effected, unless, among other things, the
corporation's stockholders receive a minimum price (as defined in the MGCL) for
their shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. These provisions
of the MGCL do not apply, however, to business combinations that are approved or
exempted by the board of directors of the corporation prior to the time that the
Interested Stockholder becomes an Interested Stockholder. The Articles contain a
provision exempting from these provisions of the MGCL any business combination
involving Mr. Daseke (or his affiliates) or any other person acting in concert
or as a group with any of the foregoing persons.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror, by officers or by directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
such person, or in respect of which such person is able to exercise or direct
the exercise of voting power, would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting power:
(i) one-fifth or more but less than one-third, (ii) one-third or more but less
than a majority, or (iii) a majority. Control shares do not include shares the
acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares. If
no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the MGCL, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights for control
shares, as of the date of the last control share acquisition or of any meeting
of stockholders at which the voting
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rights of such shares are considered and not approved. If voting rights for
control shares are approved at a stockholders meeting and the acquire becomes
entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiring person in the control share
acquisition, and certain limitations and restrictions otherwise applicable to
the exercise of dissenters' rights do not apply in the context of a control
share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws of
the corporation.
The Articles contain a provision exempting from the control share
acquisition statute any and all acquisitions by Mr. Daseke (or his affiliates)
or any other person acting in concert or as a group with any of the foregoing
persons of shares of the Company's capital stock. There can be no assurance that
such provision will not be amended or eliminated at any point in the future.
AMENDMENT TO THE ARTICLES
The Articles may be amended by the affirmative vote of the holders of a
majority of all shares entitled to be voted on the matter, except for the
provision relating to the classification of the Board of Directors which may be
amended only by the affirmative vote of the holders of not less than two-thirds
of all shares entitled to be voted on the matter.
DISSOLUTION OF THE COMPANY
The Articles permit the dissolution of the Company by (i) the affirmation
or vote of a majority of the entire Board of Directors declaring such
dissolution to be advisable and directing that the proposed dissolution be
submitted for consideration at an annual or special meeting of stockholders and
(ii) upon proper notice, stockholder approval by the affirmative vote of the
holders of not less than a majority of all of the votes entitled to be cast on
the matter or the written consent of all the votes entitled to be cast on the
matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws provide that with respect to an annual meeting of stockholders,
nominations of persons for election to the Board of Directors and the proposal
of business to be considered by stockholders may be made only (i) by, or at the
direction of, a majority of the Board of Directors or (ii) by a stockholder who
is entitled to vote at the meeting and has complied with the advance notice
procedures set forth in the Bylaws.
The provisions in the Articles on classification of the Board of Directors,
the business combination and control share acquisition provisions of the MGCL
and the advance notice provisions of the Bylaws could have the effect of
discouraging a takeover or other transaction in which holders of some, or a
majority, of the shares of Common Stock might receive a premium for their shares
of Common Stock over the then prevailing market price or which such holders
might believe to be otherwise in their best interests.
MEETINGS OF STOCKHOLDERS
An annual meeting of the stockholders for the election of directors and the
transaction of any business within the powers of the Company shall be held on
the second Wednesday in May or at such other time as set by the Board of
Directors.
Subject to the rights, if any, of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, special
meetings of the stockholders may be called by the Chairman of the Board of
Directors, by the President or by a resolution adopted by a majority of the
directors and by the Secretary of the Company upon the written request of the
holders of 25% or more of the outstanding voting stock. Such request shall state
the purpose or purposes of such meeting and the matters proposed to be acted
upon at such meeting.
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FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary of material federal income tax considerations that
may be relevant to a holder of Common Stock or Preferred Stock is based on
current law and is not intended as tax advice. The following discussion, which
is not exhaustive of all possible tax considerations, does not include a
detailed discussion of any state, local or foreign tax considerations. Nor does
it discuss all of the aspects of federal income taxation that may be relevant to
a prospective stockholder in light of his or her particular circumstances or to
certain types of stockholders (including insurance companies, tax-exempt
entities, financial institutions or broker-dealers, foreign corporations and
persons who are not citizens or residents of the United States) who are subject
to special treatment under the federal income tax laws.
The statements in this discussion are based on current provisions of the
Code, existing, temporary and currently proposed Treasury Regulations under the
Code, the legislative history of the Code, existing administrative rulings and
practices of the IRS and judicial decisions. No assurance can be given that
legislative, judicial or administrative changes will not affect the accuracy of
any statements in this Prospectus with respect to transactions entered into or
contemplated prior to the effective date of such changes.
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK OR PREFERRED STOCK IS ADVISED TO
CONSULT WITH HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES
TO HIM OR HER OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF COMMON STOCK OR
PREFERRED STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REIT, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, DISPOSITION AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX
LAWS.
The Company has elected to be treated as a REIT for federal income tax
purposes commencing with its taxable year ended December 31, 1994. Based on
certain assumptions and representations that are summarized below, Winstead
Sechrest & Minick P.C., counsel to the Company, is of the opinion that beginning
with its taxable year ended December 31, 1994, the Company has been organized
and has operated in conformity with the requirements for qualification and
taxation as a REIT under the Code and that its proposed method of operations
described in this Prospectus will enable it to continue to satisfy the
requirements for qualification as a REIT. The rules governing REITs are highly
technical and require ongoing compliance with a variety of tests that depend,
among other things, on future operating results. Winstead Sechrest & Minick P.C.
will not monitor 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." The
following is a summary of the material federal income tax considerations
affecting the Company as a REIT and its stockholders:
REIT QUALIFICATION
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's taxable year must be the calendar year.
Beneficial ownership of the Company must be evidenced by transferable shares.
The Company's capital stock must be held by at least 100 persons during at least
335 days of a taxable year of 12 months or during a proportionate part of a
taxable year of less than 12 months. Not more than 50% of the value of the
shares of capital stock of the Company may be held, directly or indirectly,
applying certain constructive ownership rules, by five or fewer individuals at
any time during the last half of each of the Company's taxable years. The
outstanding Common Stock is owned by a sufficient number of investors and in
appropriate proportions to permit it to satisfy these requirements. To protect
against violations of these requirements, the Articles provide restrictions
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on transfers of the Company's shares of Common Stock, as well as provisions that
automatically convert shares of stock into nonvoting, non-dividend paying Excess
Stock to the extent that the ownership otherwise might jeopardize the Company's
REIT status.
To monitor the Company's compliance with the share ownership requirements,
the Company is required to and maintains records disclosing the actual ownership
of common shares. To do so, the Company will demand written statements each year
from the record holders of certain percentages of shares in which the record
holders are to disclose the actual owners of the shares (i.e., the persons
required to include in gross income the REIT dividends). A list of those persons
failing or refusing to comply with this demand will be maintained as part of 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 and certain other information.
The Company currently satisfies, and expects to continue to satisfy, each
of these requirements discussed above. The Company also currently satisfies, and
expects to continue to satisfy, the requirements that are separately described
below concerning the nature and amounts of the Company's income and assets and
the levels of required annual distributions.
Sources of Gross Income. In order to qualify as a REIT for a particular
year, the Company also must meet two tests governing the sources of its income.
These tests are designed to ensure that a REIT derives its income principally
from passive real estate investments. In evaluating a REIT's income, the REIT
will be treated as receiving its proportionate share of the income produced by
any partnership in which the REIT holds an interest as a partner, and any such
income will retain the character that it has in the hands of the partnership.
The Code allows the Company to own and operate a number of its properties
through wholly-owned subsidiaries which are "qualified REIT subsidiaries." The
Code provides that a qualified REIT subsidiary is not treated as a separate
corporation, and all of its assets, liabilities and items of income, deduction
and credit are treated as assets, liabilities and such items of the REIT.
75% Gross Income Test. At least 75% of a REIT's gross income for each
taxable year must be derived from specified classes of income that principally
are real estate related. The permitted categories of principal importance to the
Company are: (i) rents from real property; (ii) interest on loans secured by
real property; (iii) gain from the sale of real property or loans secured by
real property (excluding gain from the sale of property held primarily for sale
to customers in the ordinary course of the Company's trade or business, referred
to below as "dealer property"); (iv) income from the operation and gain from the
sale of certain property acquired in connection with the foreclosure of a
mortgage securing that property ("foreclosure property"); (v) distributions on,
or gain from the sale of, shares of other qualifying REITs; (vi) abatements and
refunds of real property taxes; and (vii) "qualified temporary investment
income" (described below). In evaluating the Company's compliance with the 75%
gross income test (as well as the 95% gross income test described below), gross
income does not include gross income from "prohibited transactions." In general,
a prohibited transaction is one involving a sale of dealer property, not
including foreclosure property and certain dealer property held by the Company
for at least four years.
The Company expects that substantially all of its operating gross income
will be considered rent from real property. Rent from real property is
qualifying income for purposes of the gross income tests only if certain
conditions are satisfied. Rent from real property includes charges for services
customarily rendered to tenants, and rent attributable to personal property
leased together with the real property so long as the personal property rent is
less than 15% of the total rent. 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. The Company does
not intend to lease property and receive rentals based on the tenant's net
income or profit. However, rent based on a percentage of gross income is
permitted as rent from real property and the Company will have leases where rent
is based on a percentage of gross income. Also excluded from "rents from real
property" is rent received from a person or corporation in which the Company (or
any of its 10% or greater owners) directly or indirectly through the
constructive ownership rules contained in Section 318 of the Code, owns a 10% or
greater interest ("Related Party Tenant Rent"). A third exclusion covers amounts
received with respect to real property if the Company furnishes services to the
tenants or
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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 the
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 tenant (applying standards that
govern in evaluating whether rent from real property would be unrelated business
taxable income when received by a tax exempt owner of the property). Further, if
the value of the non-customary service income with respect to a property (valued
at no less than 150% of the Company's direct cost of performing such services)
is 1% or less of the total income derived from the property, then all rental
income from that property except the non-customary service income will qualify
as "rents from real property."
The Company will, in most instances, directly operate and manage its assets
without using an "independent contractor." The Company believes that the only
material services to be provided to tenants will be those usually or customarily
rendered in connection with the rental of space for occupancy only. The Company
will not provide services that might be considered rendered primarily for the
convenience of the tenants, such as hotel, health care or extensive recreational
or social services. Consequently, the Company believes that substantially all of
its rental income will be qualifying income under the gross income tests, and
that the Company's provision of services will not cause the rental income to
fail to be included under that test.
Upon the Company's ultimate sale of 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). The Company may receive certain types of such income. This
type of income will not qualify for the 75% test or 95% test but is not expected
to be significant and such income, together with other nonqualifying income
(including Related Party Tenant Rent, as discussed above), is 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. The Company has one subsidiary of which
the Company holds less than 10% of the voting stock, which subsidiary holds
assets generating non-qualifying income. The income generated by this subsidiary
is substantially less than 5% of the Company's annual gross income. The Company
may establish other such subsidiaries in the future. The gross income generated
by these subsidiaries would not be included in the Company's gross income.
However, dividends from such subsidiaries to the Company would be included in
the Company's gross income and qualify for the 95% income test.
If the Company fails to meet either the 75% or 95% income tests during a
taxable year, it may still qualify as a REIT for that year if (i) it reports the
source and nature of each item of its gross income in its federal income tax
return for that year; (ii) the inclusion of any incorrect information in its
return is not due to fraud with intent to evade tax; and (iii) the failure to
meet the tests is due to reasonable cause and not to willful neglect. However,
in that case the Company would be subject to a 100% tax based on the greater of
the amount by which it fails either the 75% or 95% income tests for such year,
multiplied by a fraction intended to reflect the Company's profitability. See
"-- Taxation of the Company as a REIT."
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
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mortgages on real property or by certain interests in real property, shares in
other REITs and certain options, but excluding mineral, oil or gas royalty
interests. The temporary investment of new capital in debt instruments also
qualifies under this 75% asset test, but only for the one-year period beginning
on the date the Company receives the new capital. Second, although the balance
of the Company's assets generally may be invested without restriction, the
Company will not be permitted to own (i) securities of any one non-governmental
issuer that represent more than 5% of the value of the Company's total assets or
(ii) more than 10% of the outstanding voting securities of any single issuer. A
REIT, however, may own 100% of the stock of a qualified REIT subsidiary, in
which case the assets, liabilities and items of income, deduction and credit of
the subsidiary are treated as those of the REIT. In evaluating a REIT's assets,
if the REIT invests in a partnership, it is deemed to own its proportionate
share of the assets of the partnership. The Company currently complies with, and
expects to continue to satisfy, these asset tests.
Annual Distributions to Stockholders. To maintain REIT status, the Company
generally must distribute to its stockholders in each taxable year at least 95%
of its net ordinary income (capital gain is not required to be distributed).
More precisely, the Company must distribute an amount equal to (i) 95% of the
sum of (a) its "REIT Taxable Income" before deduction of dividends paid and
excluding any net capital gain and (b) any net income from foreclosure property
less the tax on such income, minus (ii) certain limited categories of "excess
noncash income" (including, cancellation of indebtedness and original issue
discount income). REIT Taxable Income is defined to be the taxable income of the
REIT, computed as if it were an ordinary corporation, with certain
modifications. For example, the deduction for dividends paid is allowed, but
neither net income from foreclosure property, nor net income from prohibited
transactions, is included. In addition, the REIT may carry over, but not carry
back, a net operating loss for 20 years following the year in which it was
incurred.
A REIT may satisfy the 95% distribution test with dividends paid during the
taxable year and with certain dividends paid after the end of the taxable year.
Dividends paid in January that were declared during the last calendar quarter of
the prior year and were payable to stockholders of record on a date during the
last calendar quarter of that prior year are treated as paid on December 31 of
the prior year (for both the Company and its stockholders). Other dividends
declared before the due date of the Company's tax return for the taxable year
(including extensions) also will be treated as paid in the prior year for the
Company if they are paid (i) within 12 months of the end of such taxable year
and (ii) no later than the Company's next regular distribution payment.
Dividends that are paid after the close of a taxable year that do not qualify
under the rule governing payments made in January (described above) will be
taxable to the shareholders in the year paid, even though they may be taken into
account by the Company for a prior year. A nondeductible excise tax equal to 4%
will be imposed on the Company for each calendar year to the extent that
dividends declared and distributed or deemed distributed before December 31 are
less than the sum of (a) 85% of the Company's "ordinary income" plus (b) 95% of
the Company's capital gain net income plus (c) any undistributed income from
prior periods.
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. In the event that such circumstances do occur, then in order to
meet the 95% distribution requirement, the Company may cause WDOP to arrange for
short-term, or possibly long-term, borrowings to permit the payment of required
dividends.
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.
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TAXATION OF THE COMPANY AS A REIT
As a REIT, the Company 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 corporations. The Company generally will be taxed only on
the portion of its taxable income that it retains (which will include any
undistributed net capital gain), because the Company will be entitled to a
deduction for dividends paid to stockholders during the taxable year. A
dividends paid deduction is not available for dividends that are considered
preferential within any given class of shares or as between classes except to
the extent such class is entitled to such preference. The Company does not
anticipate that it will pay any such preferential dividends. Because Excess
Stock will represent a separate class of outstanding shares, the fact that those
shares will not be entitled to dividends should not adversely affect the
Company's ability to deduct its dividend payments.
Even as a REIT, the Company will be subject to tax in certain circumstances
as follows:
(i) the Company would be subject to tax on any income or gain from
foreclosure property at the highest corporate rate (currently 35%);
(ii) a confiscatory tax of 100% applies to any net income from
prohibited transactions (which are, in general, certain sales or other
dispositions of property held primarily for sale to customers in the
ordinary course of business);
(iii) 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);
(iv) the Company will be subject to the alternative minimum tax on
items of tax preference (excluding items specifically allocable to the
Company's stockholders);
(v) if the Company should fail to distribute with respect to each
calendar year at least the sum of (a) 85% of its REIT ordinary income for
such year, (b) 95% of its REIT capital gain net income for such year, and
(c) any undistributed taxable income from prior years, the Company would be
subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed; and
(vi) 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 and
certain relief provisions do not apply, it would be taxed at regular 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 to be made. 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 taxable year during which the Company's election was terminated.
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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. If the Company elects to
retain and pay income tax on any net long-term capital gain, stockholders of the
Company would include in their income as long-term capital gain their
proportionate share of such net long-term capital gain. Such stockholders would
receive a credit for such stockholder's proportionate share of the tax paid by
the Company on such retained capital gains and an increase in basis in the stock
of the Company in an amount equal to the difference between the undistributed
long-term capital gains and the amount of tax paid by the Company. Distributions
by the Company, whether characterized as ordinary income or as capital gains,
are not eligible for the dividends received deduction for corporations.
Stockholders are not permitted to deduct 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. Distributions in
excess of the adjusted tax basis will be treated as gain from the sale or
exchange of the shares of stock. A stockholder who has received a distribution
in excess of current and accumulated earnings and profits of the Company may,
upon the sale of the shares, realize a higher taxable gain or a smaller loss
because the basis of the shares as reduced will be used for purposes of
computing the amount of the gain or loss.
Generally, gain or loss realized by a stockholder upon the sale of Common
Stock or Preferred Stock will be reportable as capital gain or loss. If a
stockholder receives a long-term capital gain dividend from the Company and has
held the shares of stock for six months or less, any loss incurred on the sale
or exchange of the shares is treated as a long-term capital loss to the extent
of the corresponding long-term capital gain dividend received.
In any year in which the Company fails to qualify as a REIT, the
stockholders generally will continue to be treated in the same fashion described
above, except that none of the Company dividends will be eligible for treatment
as capital gains dividends, corporate stockholders will qualify for the
dividends received deduction and the stockholders will not be required to report
any share of the Company's tax preference items.
BACKUP WITHHOLDING
The Company will report to its stockholders and the IRS the amount of
dividends paid during each calendar year and the amount of tax withheld, if any.
If a stockholder is subject to backup withholding, the Company will be required
to deduct and withhold from any dividends payable to that stockholder a tax of
31%. These rules may apply (i) when a stockholder fails to supply a correct
taxpayer identification number, (ii) when the IRS notifies the Company that the
stockholder is subject to the rules or has furnished an incorrect taxpayer
identification number, or (iii) in the case of corporations or others within
certain exempt categories, when they fail to demonstrate that fact when
required. A stockholder that does not provide a correct taxpayer identification
number may also be subject to penalties imposed by the IRS. Any amount withheld
as backup withholding may be credited against the stockholder's federal income
tax liability. The Company also may be required to withhold a portion of capital
gain distributions made to stockholders who fail to certify their non-foreign
status to the Company.
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The United States Treasury has recently issued final regulations (the
"Final Regulations") regarding the withholding and information reporting rules
discussed above. In general, the Final Regulations do not alter the substantive
withholding and information reporting requirements but unify current
certification procedures and clarify reliance standards. The Final Regulations
are generally effective for payments made on or after January 1, 2000, subject
to certain transition rules. Prospective investors should consult their own tax
advisors concerning the adoption of the Final Regulations and the potential
effect on their ownership of Common Stock or Preferred Stock.
TAXATION OF TAX EXEMPT ENTITIES
In general, a tax exempt entity that is a stockholder of the Company will
not be subject to tax on distributions from the Company or gain realized on the
sale of shares. In Revenue Ruling 66-106, the IRS confirmed that a REIT's
distributions to a tax exempt employees' pension trust did not constitute
unrelated business taxable income ("UBTI"). A tax exempt entity may be subject
to UBTI, however, to the extent that it has financed the acquisition of its
shares with "acquisition indebtedness" within the meaning of the Code. The
Revenue Reconciliation Act of 1993 has modified the rules for tax exempt
employees' pension and profit sharing trusts which qualify under Section 401(a)
of the Code and are exempt from tax under Section 501(a) of the Code ("qualified
trusts") for tax years beginning after December 31, 1993. In determining the
number of stockholders a REIT has for purposes of the "50% test" described above
under "-- REIT Qualification --," generally, any stock held by a qualified trust
will be treated as held directly by its beneficiaries in proportion to their
actuarial interests in such trust and will not be treated as held by such trust.
A qualified trust owning more than 10% of a REIT may be required to treat a
percentage of dividends from the REIT as UBTI. The percentage is determined by
dividing the REIT's gross income (less direct expenses related thereto) derived
from an unrelated trade or business for the year (determined as if the REIT were
a qualified trust) by the gross income of the REIT for the year in which the
dividends are paid. However, if this percentage is less than 5%, dividends are
not treated as UBTI. These UBTI rules apply only if the REIT qualifies as a REIT
because of the change in the 50% test discussed above and if the trust is
"predominantly held" by qualified trusts. A REIT is predominantly held by
qualified trusts if at least one pension trust owns more than 25% of the value
of the REIT or a group of pension trusts each owning more than 10% of the value
of the REIT collectively own more than 50% of the value of the REIT. The Company
does not currently meet either of these requirements.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt from
federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of
the Code, respectively, income from an investment in the Company will constitute
UBTI unless the organization is able to deduct an amount properly set aside or
placed in reserve for certain purposes so as to offset the unrelated business
taxable income generated by the investment 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 or Preferred Stock, including any reporting
requirements, as well as the tax treatment of such an investment under the laws
of their home country.
Dividends that are not attributable to gain from 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
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the dividend unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Common Stock or Preferred Stock is
treated as effectively connected with the Non-U.S. Stockholder's conduct of a
United States trade or business, the Non-U.S. Stockholder generally will be
subject to a tax at graduated rates, in the same manner as U.S. stockholders are
taxed with respect to such dividends (and may also be subject to the 30% branch
profits tax in the case of a stockholder that is a foreign corporation). For
withholding tax purposes, the Company is currently required to treat all
distributions as if made out of its current and accumulated earnings and profits
and thus intends to withhold at the rate of 30% (or a reduced treaty rate if
applicable) on the amount of any distribution (other than distributions
designated as capital gain dividends) made to a Non-U.S. Stockholder unless (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. Under the
Final Regulations, generally effective for distributions on or after January 1,
2000, the Company would not be required to withhold at the 30% rate on
distributions it reasonably estimates to be in excess of the Company's current
and accumulated earnings and profits. 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, but rather will reduce the adjusted basis of such shares.
To the extent that such dividends exceed the adjusted basis of a Non-U.S.
Stockholder's shares of stock, they will give rise to tax liability if the
Non-U.S. Stockholder would otherwise be subject to tax on any gain from the sale
or disposition of his shares, as described below. If it cannot be determined at
the time a dividend is paid whether or not such dividend will be in excess of
current and accumulated earnings and profits, the dividends will be subject to
such withholding. The Company does not intend to make quarterly estimates of
that portion of dividends that are in excess of earnings and profits, and, as a
result, all dividends will be subject to such withholding. However, the Non-U.S.
Stockholder may seek a refund of such amounts from the IRS.
For any year in which the Company qualifies as a REIT, distributions 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 corporate Non-U.S. 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 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 shares 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 will not
be subject to taxation under FIRPTA. Because the shares of Common Stock will be
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 or Preferred Stock is effectively connected with the Non-U.S.
Stockholder's United States trade or business, in which case the Non-U.S.
Stockholder will be subject to the same treatment as U.S. stockholders with
respect to such gain (and may also be subject to the 30% branch profits tax in
the case of a corporate Non-U.S. Stockholder, or (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%
withholding tax on the individual's capital gains. If the Company were not a
domestically controlled REIT, whether or not a Non-U.S. Stockholder's sale of
shares of Common Stock or Preferred Stock would be subject to tax under FIRPTA
would depend on whether or not the shares of Common Stock or Preferred Stock
were regularly traded on an established securities market (such as the NYSE) and
on the size of selling Non-U.S. Stockholder's interest in the Company. If the
gain on the sale of shares were to be subject to
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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 the purchaser of such shares of Common Stock
or Preferred Stock may be required to withhold 10% of the gross purchase price.
STATE AND LOCAL TAXES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in the Company.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") (a "Plan"), should consider the fiduciary standards under
ERISA in the context of the Plan's particular circumstances before authorizing
an investment of a portion of such Plan's assets in the shares of Common Stock.
In particular, such fiduciary should consider (i) whether the investment
satisfies the diversification requirements of Section 404(a)(1)(c) of ERISA,
(ii) whether the investment is in accordance with the documents and instruments
governing the Plan as required by Section 404(a)(1)(D) of ERISA, (iii) whether
the investment is for the exclusive purpose of providing benefits to
participants in the Plan and their beneficiaries or defraying reasonable
administrative expenses of the Plan, and (iv) whether the investment is prudent
under ERISA. In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA, and the corresponding provisions
of the Code, prohibit a wide range of transactions involving the assets of a
Plan or an individual retirement account ("IRA") and persons who have certain
specified relationships to the Plan or an IRA ("parties in interest" within the
meaning of ERISA, "disqualified persons" within the meaning of the Code). Thus,
a fiduciary of a Plan or an IRA considering an investment in the shares of
Common Stock also should consider whether the acquisition or the continued
holding of the shares of Common Stock might constitute or give rise to a direct
or indirect prohibited transaction.
The Department of Labor (the "DOL") has issued final regulations (the
"Regulations") as to what constitutes assets of an employee benefit plan under
ERISA. Under the Regulations, if a Plan or an IRA acquires an equity interest in
an entity, which interest is neither a "publicly offered security" nor a
security issued by an investment company registered under the Investment Company
Act of 1940, as amended, the Plan's and IRA's assets would include, for purposes
of the fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code, both the equity interest and an
undivided interest in each of the entity's underlying assets unless certain
specified exceptions apply. The Regulations define a publicly-offered security
as a security that is "widely held," "freely transferable," and either part of a
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
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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 Walden Securities offered pursuant to an
underwritten agreement are unlikely to result in the failure of the capital
stock to be "freely transferable." The Regulations only establish a presumption
in favor of the finding of free transferability, and, therefore, no assurance
can be given that the DOL and the U.S. Treasury Department will not reach a
contrary conclusion.
Assuming that the Walden Securities will be "widely held," the Company
believes that the Walden Securities will be publicly held for purposes of the
Regulations and that the assets of the Company will not be deemed to be "plan
assets" of any Plan or IRA that invests in the Offered Securities.
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INFORMATION REGARDING WALDEN/DREVER OPERATING PARTNERSHIP, L.P.
GENERAL
Walden/Drever Operating Partnership, L.P. ("WDOP") is a Delaware limited
partnership of which the Company is the sole general partner. WDOP is
consolidated with the Company for accounting purposes. WDOP was originally
formed for the purpose of acquiring the partnership interests of the
partnerships (the "Drever Partnerships") of which Drever Partners, Inc.
("Drever") and certain of its affiliates were the general partners (the "Former
General Partners"). The stated purpose of WDOP is to invest in, purchase,
develop, own, manage, lease, finance and dispose of multifamily real estate
properties, enter into partnership, joint venture or similar arrangements to
engage in the foregoing, or any other activity which all of the partners
approve. The principal place of business of WDOP is 5080 Spectrum Drive, Suite
1000 East, Addison, Texas 75001. The term of WDOP is until the first to occur of
(i) December 31, 2017 or (ii) the dissolution of WDOP pursuant to the express
provisions of the WDOP Partnership Agreement or by law.
THE WDOP PARTNERSHIP AGREEMENT
The summary of the terms of the WDOP Partnership Agreement set forth below
does not purport to be complete and is subject to, and qualified in its entirety
by, reference to the WDOP Partnership Agreement, a copy of which is available
without charge. See "Available Information." Capitalized terms used in this
section but not otherwise defined herein shall have the respective meanings
ascribed to such terms in the WDOP Partnership Agreement.
Distributions. Within 60 days after the end of each fiscal quarter, the
Company, as the general partner, will cause WDOP to distribute 100% of cash
funds derived from the operation of WDOP's business, after deduction of
operating expenses, all scheduled payments on indebtedness, expenditures for
capital improvements, all current liabilities and a working capital reserve in
an amount the Company deems reasonably necessary or advisable. The priority of
distributions will be as follows: (i) to the Class B Limited Partners holding
Preferred OP Units on the record date for such distribution, in an amount equal
to (a) the product of the number of Preferred OP Units owned and $.5625, plus
(b) the amount of distributions previously unpaid to the Class B Limited
Partners in respect to their Preferred OP Units together with all accrued and
unpaid interest thereon, (ii) to the Class B Limited Partners holding Common OP
Units on the record date for such distribution, in an amount equal to (a) the
number of shares of Common Stock for which each such Common Unit is then
exchangeable (which, as of the Closing Date, will be one share, subject to
adjustment under certain circumstances) multiplied by the dividend then payable
by the Company on a share of Common Stock plus (b) the amount of distributions
due but previously unpaid to the Class B Limited Partners in respect to their
Common OP Units together with all accrued and unpaid interest thereon and (iii)
of the remainder, 1% to the Company, as general partner, and 99% to WDN
Properties, Inc. or any other person admitted pursuant to the WDOP Partnership
Agreement as a Class A Limited Partner (each, a "Class A Limited Partner"). If
WDOP does not make all or any portion of such quarterly distributions to the
holders of the Units, the unpaid amount will bear interest at a rate equal to
the prime rate (as calculated pursuant to the terms of the WDOP Partnership
Agreement) plus 8% per annum.
Upon exchange of Common OP Units or Preferred OP Units, WDOP will
distribute to the exchanging Limited Partner, in cash or shares, an amount equal
to the amount of distributions due but unpaid to the exchanging Limited Partner
in respect of the Common OP Units and Preferred OP Units being exchanged,
together with all accrued and unpaid interest thereon.
Tax Allocations. Section 5.3(a) of the WDOP Partnership Agreement provides
that any profits of WDOP will be allocated in the following order and priority:
(i) first, to the Class B Preferred Limited Partners in proportion to
their respective Percentage Interests until the amount of Profits allocated
to the Class B Preferred Limited Partners pursuant to this clause (i) for
the current Fiscal Year equals the excess of (A) the sum of (I) the
cumulative amount of the Class B Preferred Distribution for each Fiscal
Quarter of the current Fiscal Year and all prior Fiscal Years and (II) the
cumulative amount of the interest component of the Unpaid Preferred
Distribution
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Account described in clause (ii) of the definition of Unpaid Preferred
Distribution Account in Article 1 of the WDOP Partnership Agreement (but,
in the case of both (I) and (II) above, only to the extent that such
distributions or interest component have been previously paid to the Class
B Preferred Limited Partners pursuant to Sections 5.1(a)(i) or 5.1(b) of
the WDOP Partnership) over (B) the cumulative amount of profits allocated
to the Class B Preferred Limited Partners pursuant to Section 5.3(a)(i) of
the WDOP Partnership Agreement for all prior Fiscal Years;
(ii) second, to the Class B Common Limited Partners in proportion to
their respective Percentage Interests until the amount of profits allocated
to the Class B Common Limited Partners pursuant to Section 5.3(a)(ii) of
the WDOP Partnership Agreement for the current Fiscal Year equals the
excess of (A) the sum of (I) the cumulative amount of the Class B Common
Distribution for each Fiscal Quarter of the current Fiscal Year and all
prior Fiscal Years and (II) the cumulative amount of the interest component
of the Unpaid Common Distribution Account described in clause (ii) of the
definition of Unpaid Common Distribution Account in Article 1 of the WDOP
Partnership Agreement (but, in the case of both (I) and (II) above, only to
the extent that such distributions or interest component have been
previously paid to the Class B Common Limited Partners pursuant to Sections
5.1(a)(ii) or 5.1(b) of the WDOP Partnership Agreement) over (B) the
cumulative amount of profits allocated to the Class B Common Limited
Partners pursuant to this clause (ii) for all prior Fiscal Years;
(iii) third, to the Company, as general partner of WDOP, in proportion
to and to the extent of an amount equal to the excess, if any, of (A) the
cumulative Losses allocated to the Company pursuant to the last sentence of
Section 5.6 of the WDOP Partnership Agreement for all prior Fiscal Years,
over (B) the cumulative profits allocated to the Company pursuant to
Section 5.3(a)(iii) of the WDOP Partnership Agreement for all prior Fiscal
Years;
(iv) fourth, to the Partners (other than the Class B Limited
Partners), in proportion to and to the extent of an amount equal to the
excess, if any, of (A) the cumulative Losses allocated to such Partners
pursuant to Section 5.3(b)(iv) of the WDOP Partnership Agreement hereof for
all prior Fiscal Years, over (B) the cumulative profits allocated to such
Partners pursuant to Section 5.3(a)(iv) of the WDOP Partnership Agreement
for all prior Fiscal Years;
(v) fifth, to the Class B Preferred Limited Partners, in proportion to
and to the extent of an amount equal to the excess, if any, of (A) the
cumulative Losses allocated to each such Partner pursuant to Section
5.3(b)(iii) of the WDOP Partnership Agreement for all prior Fiscal Years,
over (B) the cumulative profits allocated to such Partner pursuant to
Section 5.3(a)(v) of the WDOP Partnership Agreement for all prior Fiscal
Years;
(vi) sixth, to the Class B Common Limited Partners, in proportion to
and to the extent of an amount equal to the excess, if any, of (A) the
cumulative Losses allocated to each such Partner pursuant to Section
5.3(b)(ii) of the WDOP Partnership Agreement for all prior Fiscal Years,
over (B) the cumulative profits allocated to such Partner pursuant to
Section 5.3(a)(vi) of the WDOP Partnership Agreement for all prior Fiscal
Years; and
(vii) thereafter, to the Company, as general partner of WDOP, and the
Class A Limited Partners in accordance with their respective Percentage
Interests.
Section 5.3(b) of the WDOP Partnership Agreement provides that any losses
of WDOP will be allocated in the following order:
(i) first, to the Company, as general partner of WDOP, and the Class A
Limited Partners in proportion to and until the amount of losses allocated
pursuant to this clause (i) for the current Fiscal Year equals the excess,
if any, of (A) the sum of (I) their respective Capital Account balances on
the Effective Date, (II) the Capital Contributions made by such Partners
subsequent to the Effective Date and (III) the cumulative amount of Profits
allocated to such Partners pursuant to Section 5.3(a)(vi) of the WDOP
Partnership Agreement over (B) the sum of (I) cumulative amount of losses
allocated to such Partners pursuant to this clause (i) for all prior Fiscal
Years and (II) the cumulative amount of distributions made to them pursuant
to Section 5.1(a)(iii) of the WDOP Partnership Agreement;
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(ii) second, to the Class B Common Limited Partners, in proportion to
their respective Percentage Interests until the amount of losses allocated
pursuant to this clause (ii) for the current Fiscal Year equals the excess,
if any, of (A) the sum of (I) the aggregate amount of the portion of their
Capital Account balances on the Effective Date attributable to Class B
Common OP Units, (II) the aggregate Capital Contributions made by such
Partners subsequent to the Effective Date in respect of their Class B
Common OP Units, and (III) the cumulative amount of Profits allocated to
them pursuant to Section 5.3(a)(ii) of the WDOP Partnership Agreement over
(B) the sum of (I) cumulative amount of losses allocated to such Partners
pursuant to this clause (ii) for all prior Fiscal Years and (II) the
cumulative amount of distributions made to them pursuant to Section
5.1(a)(ii) of the WDOP Partnership Agreement;
(iii) third, to the Class B Preferred Limited Partners, in proportion
to their respective Percentage Interests until the amount of losses
allocated pursuant to this clause (iii) for the current Fiscal Year equals
the excess, if any, of (A) the sum of (I) the aggregate amount of the
portion of their Capital Account balances on the Effective Date
attributable to Class B Preferred OP Units, (II) the aggregate Capital
Contributions made by such Partners subsequent to the Effective Date in
respect of their Class B Preferred OP Units, and (III) the cumulative
amount of profits allocated to them pursuant to Section 5.3(a)(i) of the
WDOP Partnership Agreement over (B) the sum of (I) the cumulative amount of
losses allocated to such Partners pursuant to this clause (iii) for all
prior Fiscal Years and (II) the cumulative amount of distributions made to
them pursuant to Section 5.1(a)(i) of the WDOP Partnership Agreement; and
(iv) thereafter, 1% to the Company, as general partner of WDOP, and
99% to the Limited Partners (other than the Class B Limited Partners) in
accordance with their Percentage Interests.
In addition to the allocations described above, commencing on the first day
of the month following the first anniversary of the Effective Date, the WDOP
Partnership Agreement provides for a special allocation of depreciation to the
Class B Common Limited Partners who continue to be Class B Common Limited
Partners on December 31 of the taxable year in respect of which such special
allocation is to be made.
Status of Limited Partners. The power to participate in the management and
control of WDOP business, the power to transact WDOP business and the power to
act for and bind WDOP is vested solely in the Company, as general partner, and
no limited partner of WDOP will be bound by or personally liable for the
expenses, liabilities or obligations of WDOP other than those required by
statute. The Company may not be removed as general partner with or without
cause. All management powers are vested exclusively in the Company, including,
without limitation:
(1) The making of any expenditures, the lending or borrowing of money, the
assumption or guarantee of, or other contracting for, indebtedness and
other liabilities, the issuance of evidences of indebtedness and the
incurring of any obligations it deems necessary for the conduct of the
activities of WDOP;
(2) The acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any properties of WDOP;
(3) The use of the assets of WDOP and affiliates of WDOP controlled by
WDOP for any purpose consistent with the terms of the WDOP Partnership
Agreement;
(4) The management, operation, leasing, landscaping, repair, alteration,
demolition or improvement of any real property or improvements owned
by WDOP either directly or through one or more contractors;
(5) The distribution of WDOP cash or property in accordance with the WDOP
Partnership Agreement;
(6) Holding, managing, investing and reinvesting cash and other assets of
WDOP;
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(7) The formation of, or acquisition of an interest in, and the
contribution of property to, any other limited or general
partnerships, joint venture or other relationship that it deems
desirable;
(8) The exercise of any of the powers of the general partner enumerated in
the WDOP Partnership Agreement on behalf of or in connection with any
other person in which WDOP has a direct or indirect interest, or
jointly with any other persons;
(9) The making, execution and delivery of any and all deeds, leases,
notes, deeds to secure debt, mortgages, deeds of trust, security
agreements, conveyances, contracts, guarantees, warranties,
indemnities, waivers, releases or legal instruments or agreements in
writing necessary or appropriate in the judgment of the Company for
the accomplishment of any of the powers of the Company enumerated in
the WDOP Partnership Agreement;
(10) The merger, consolidation or other combination of WDOP with any other
person; and
(11) The undertaking of any action necessary to admit any person as an
additional or substitute limited partner pursuant to the terms of the
WDOP Partnership Agreement.
The Company, as general partner, may file amendments to and restatements of
the WDOP Partnership Agreement to the extent that the Company determines such
action to be reasonable and necessary or appropriate and provided that it is not
inconsistent with any provision of the WDOP Partnership Agreement. The Company
can also prevent acts which it believes, in its sole and absolute discretion,
(i) could adversely affect the ability of the Company to continue to qualify as
a REIT, (ii) could subject the Company to any taxes under Section 857 or Section
4981 of the Code, or (iii) could violate any law or regulation.
As the sole general partner, the Company will have full authority to
conduct the business of WDOP, provided that without the consent of Class B
Limited Partners holding a majority of the partnership interests in WDOP then
held by such partners, the Company may not execute "Major Actions." Major
Actions include:
1. The sale, exchange, transfer or other disposition of certain properties
prior to the third anniversary of the effective date of WDOP
Partnership Agreement;
2. The commencement by WDOP of a voluntary case under any applicable
bankruptcy law in effect at or after the effective date of the WDOP
Partnership Agreement;
3. The taking of any action that makes it impossible for WDOP to fulfill
its stated purpose;
4. Withdrawal of the Company as general partner of WDOP; and
5. Effecting a dissolution of WDOP prior to the tenth anniversary after
the effective date of the WDOP Partnership Agreement.
WDOP has established a special committee (the "Special Committee")
consisting of two members appointed by the Company, as general partner, and two
members appointed by the Class B Limited Partners. The purpose of the Special
Committee is to approve transactions between WDOP and affiliated entities and
other Partnership decisions that could affect the Class B Limited Partners. The
WDOP Partnership Agreement requires the Company obtain the Special Committee's
approval of the following matters:
1. Determination of the fair market value of certain in-kind contributions
and distributions of property;
2. Lending or contributing funds or other assets of WDOP to persons in
which WDOP has an equity investment; and
3. Transfers of WDOP assets to joint ventures, other partnerships,
corporations or other business entities in which WDOP is or thereby
becomes a participant.
Members of the Special Committee do not receive compensation for their
service on such committee. The Special Committee will terminate on the first
date on which the percentage of interest in WDOP owned by the Class B Limited
Partners is reduced below 33.33%.
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Capital Contributions. The Company, as general partner, is generally
authorized to issue such additional partnership interests (but without rights,
powers and duties senior to the Common OP Units or Preferred OP Units) as it
shall determine, in its sole and absolute discretion.
No partner has the right to demand the return of its capital contribution
or that interest be paid on its capital contribution. Preemptive, preferential
or similar rights with respect to (i) additional capital contributions or (ii)
the issuance or sale of WDOP interests are expressly denied.
Transfers of Partnership Interests; Withdrawal from WDOP. The Company, as
general partner, must have approval of a majority in interest of the limited
partners of WDOP to transfer its interest, except for transfers to affiliates,
transfers by consolidation or merger or acquisitions of the Company. The consent
of the Company is required for any limited partner of WDOP to transfer its
interest in WDOP other than transfers to affiliates of such transferee, which
require no consent. The term "transfer" includes a sale, assignment, gift,
pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition
by law or otherwise.
Limited partners of WDOP may withdraw from WDOP only by transfer of their
interest in WDOP. Upon transfer of a limited partner's interest in WDOP and upon
the admission of all assignees to WDOP, such limited partner immediately ceases
to be a limited partner of WDOP.
WDOP has the right to redeem each Preferred OP Unit, on or after the tenth
anniversary of the effective date of the WDOP Partnership Agreement, for cash
equal to the sum of (i) $25.00 and (ii) the portion of any unpaid distributions
relating to the redeemed Preferred OP Unit.
Dissolution. WDOP will dissolve and its affairs will be wound-up upon the
first to occur of the following:
1. The expiration of WDOP's stated term on December 31, 2017;
2. An event of withdrawal of the Company as general partner;
3. An election to dissolve (prior to the tenth anniversary of the
effective date of the WDOP Partnership Agreement) WDOP made by the
Company as general partner with the approval of all of the limited
partners;
4. An election to dissolve made by the Company as general partner after
the tenth anniversary of the effective date of the WDOP Partnership
Agreement and following 20 days after notice is given to the limited
partners;
5. The entry of a decree of judicial dissolution of WDOP;
6. The sale or disposition of all or substantially all of the assets and
properties of WDOP pursuant to the terms of the WDOP Partnership
Agreement;
7. The bankruptcy of the Company; and
8. A change in the Code, regulations and/or administrative rulings of the
Internal Revenue Service to the effect that ownership of WDOP interests
by the Company, WDN Properties, Inc. or their affiliates will likely
cause the Company to fail to qualify as a REIT.
The proceeds from winding-up the operations of WDOP will be applied and
distributed in the following order:
1. First, to the payment and discharge of all of WDOP's debts and
liabilities to creditors other than partners;
2. Second, to the payment and discharge of all of WDOP's debts and
liabilities to partners; and
3. The balance, if any, to and among the partners of WDOP pro rata in
accordance with the positive balances of their capital accounts, after
giving effect to all contributions, distributions, and allocations for
all periods.
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POLICIES OF WDOP
As the general partner of WDOP, the Company controls the operations and
policies of WDOP, except as otherwise provided by law or the WDOP Partnership
Agreement. The Company operates WDOP in a manner consistent with operations and
policies of the Company. See "The Company" and "Policies with Respect to Certain
Activities."
REAL ESTATE
WDOP, directly or indirectly through its affiliates, holds title to 104 of
the Properties owned by the Company. These Properties are indicated with an
asterisk on the property information table entitled "Apartments Owned" on pages
38 through 42 of this Prospectus.
TAX TREATMENT OF WDOP
General. In general, a partnership is treated as a "pass-through" entity
for Federal income tax purposes and thus is not subject to Federal income
taxation. Each partner of a partnership, however, is subject to tax on his
allocable share of partnership tax items, including partnership income, gains,
losses, deductions, and credits ("Partnership Tax Items") for each taxable year
during which he continues to be a partner, regardless of whether such partner
receives any actual distributions from the partnership during the taxable year.
Generally, the characterization of any particular Partnership Tax Item is
determined at the partnership, rather than at the partner level, and the amount
of a partner's allocable share of such item is governed by the terms of the
partnership agreement.
Accordingly, for each taxable year during which a WDOP limited partner
continues to hold Units, such partner will be (i) required to include in income
his allocable share of any WDOP income or gain and (ii) entitled to deduct his
allocable share of any WDOP deductions or losses, subject to certain limitations
imposed upon the deductibility of partnership losses discussed below under the
heading "Loss Limitations."
Cash Distributions. Cash distributions received from a partnership do not
necessarily correlate with income, if any, earned by the partnership as
determined for Federal income tax purposes. Thus, a partner's Federal income tax
liability in respect of his allocable share of partnership taxable income for a
particular taxable year may exceed the amount of cash, if any, distributed by
the partnership to the partner during such year.
If cash distributions, including a "deemed" cash distribution resulting
from a reduction of certain WDOP liabilities as discussed below, received by a
WDOP limited partner in any taxable year exceed his allocable share of WDOP's
taxable income for the year, the excess will constitute, for Federal income tax
purposes, a return of capital, to the extent of such partner's Adjusted Tax
Basis in his Units, which will not be subject to tax. If a WDOP limited
partner's Adjusted Tax Basis in his Units is reduced to zero, a subsequent cash
distribution or "deemed" cash distribution received by such partner will be
subject to tax generally as capital gain, but only if, and to the extent that,
such distribution exceeds the subsequent positive adjustments, if any, to the
Adjusted Tax Basis of the WDOP limited partner's Units as determined generally
at the end of the taxable year during which such distribution is received.
A decrease in a WDOP limited partner's share of WDOP liabilities resulting
from the payment or other settlement of such liabilities is generally treated,
for Federal income tax purposes, as a deemed cash distribution. WDOP may
determine to pay down certain direct obligations of WDOP or obligations of its
lower tier partnerships. Accordingly, as a result of such liability reduction,
it is possible that a WDOP limited partner may be treated as receiving a
hypothetical distribution of cash resulting from a decrease in a such partner's
share of WDOP liabilities.
Special Allocations of Partnership Tax Items.
Section 704(c) Gain. Generally, under section 704(c) of the Code, when a
partner contributes appreciated property to a partnership and the partnership
subsequently disposes of the contributed property in a taxable transaction, the
gain recognized as a result of such disposition will be specially allocated to
the
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contributing partner in an amount equal to the lesser of (i) the excess of the
fair market value of such property at the time of contribution over the
contributing partner's adjusted tax basis in the property at such time (i.e.,
"built-in gain") or (ii) the gain recognized by the partnership upon the
disposition of the property. Accordingly, if WDOP determines to cause the
Partnership to dispose of Partnership property in a taxable transaction, which
property constitutes built-in gain property held by the Partnership on the
Effective Date, gain from such taxable disposition will be specially allocated
to the Limited Partner to the extent of his allocable share of the built-in gain
in respect of such property. Although the WDOP Partnership Agreement generally
prohibits WDOP from causing the Partnership to dispose of built-in gain property
during the three-year period commencing with the Effective Date, WDOP will
thereafter be free to dispose of any such property in a taxable disposition,
thereby triggering a special allocation of built-in gain to the contributing
Limited Partners. See "Description of the Offer -- The WDOP Partnership
Agreement -- Status of Limited Partners" above.
Other Special Allocations. Commencing on the first day of the month
following the first anniversary of the Effective Date, the WDOP Partnership
Agreement provides for a special allocation of depreciation to the Class B
Common Limited Partners who continue to be Class B Common Limited Partners on
December 31 of the taxable year in respect of which such special allocation is
to be made. See "Description of the Offer -- The WDOP Partnership
Agreement -- Tax Allocations" above. No assurance can be given that the IRS
would not challenge such special allocations. Accordingly, such Unit holders are
urged to consult with their tax advisors with respect to this issue.
LOSS LIMITATIONS
Basis Limitation. To the extent that a WDOP limited partner's allocable
share of deductions and losses exceeds his Adjusted Tax Basis in his Units at
the end of the taxable year in which such losses flow through, the excess losses
cannot be used, for Federal income tax purposes, by the WDOP limited partner in
such year. Such excess losses may, however, be used in the first succeeding
taxable year in which, and to the extent that, there is an increase in such
partner's Adjusted Tax Basis in his Units, but only to the extent permitted
under the "at risk" and passive activity loss rules discussed below.
Passive Activity Loss Limitation Rules. Generally, an investment in the
Units by a WDOP Limited Partner received in an exchange for an Interest will be
treated as an investment in a passive activity for purposes of the passive
activity loss limitation rules. See "-- Rules Applicable to All Limited Partners
Exchanging Interests Pursuant to the Offer -- Passive Activity Losses" above.
Under the passive activity loss rules, a WDOP limited partner who is an
individual investor, as well as certain other types of investors, will not be
able to use losses from WDOP to offset nonpassive activity income, including
salary, business income, and portfolio income (e.g., dividends, interest,
royalties, and gain on the disposition of portfolio investments) received during
the taxable year. Passive activity losses that are disallowed for a particular
taxable year may, however, be carried forward to offset passive activity income
earned by the WDOP limited partner in future taxable years. In addition, such
disallowed losses may be claimed as a deduction, subject to the application of
the at risk limitation rules discussed below, upon a taxable disposition of all
of the Units by the WDOP limited partner.
If WDOP were to be treated as a "publicly traded partnership," as discussed
below under the heading "Publicly Traded Partnership Considerations," the
passive activity loss rules would be applied separately to an investment in the
Units. Accordingly, passive activity losses generated by other passive activity
investments held by a WDOP limited partner, as well as passive activity loss
carryovers including any passive activity loss carryovers attributable to an
Interest, could not be used to offset such partner's allocable share of income
generated by WDOP. In addition, passive activity losses generated by WDOP and
allocated to a WDOP limited partner could not be used to offset any passive
activity income generated by other passive activity investments held by a WDOP
limited partner.
"At Risk" Limitation Rules. Under the "at risk" limitation rules of
section 465 of the Code, a noncorporate taxpayer and a closely held corporate
taxpayer are generally not permitted to claim a deduction, for Federal income
tax purposes, in respect of a loss from an activity, to the extent that the loss
exceeds the
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aggregate dollar amount that the taxpayer has "at risk" in respect of such
activity at the close of the taxable year. The at risk limitation rules do not
apply to losses arising from any activity which constitutes "the holding of real
property" with respect to qualified non-recourse financing, the holding of a
Unit should constitute. Accordingly, WDOP does not expect that WDOP limited
partners will be subject to the at risk limitation rules.
Publicly Traded Partnership Considerations. Under the publicly traded
partnership Treasury Regulations, a partnership will be treated as a "publicly
traded partnership" if partners are "readily able" to sell or exchange their
partnership interests in a "manner that is comparable" to trading on an
established securities market. Subject to certain exceptions, a partnership that
is treated as a publicly traded partnership will not be treated as a
"pass-through" entity for Federal income tax purposes and will be subject to tax
as if it were a regular corporation.
Although it is unclear whether the right of a WDOP limited partner to
exchange Units for Walden Securities pursuant to the Exchange Right would cause
WDOP to be classified as a publicly traded partnership, WDOP presently intends
to take the position that the Exchange Right does not cause WDOP to be
classified as a publicly traded partnership. If WDOP were to be classified as a
publicly traded partnership, WDOP believes that it would still continue to be
subject to treatment as a "pass-through" entity for Federal income tax purposes,
and not subject to tax as if it were a corporation, under an exception that is
available to partnerships, such as WDOP, that engage principally in real estate
activities. Accordingly, in order to preserve its status as a "pass-through"
entity for Federal income tax purposes, WDOP intends to adopt a method of
operation that will enable it to qualify, on an ongoing basis, for the real
property exception available to publicly traded partnerships.
WDOP PARTNERSHIP INTERESTS
Class A Limited Partners. The sole Class A Limited Partner is WDN
Properties, Inc., a New York corporation and direct, wholly-owned subsidiary of
the Company. After payment of the Class B Common Distribution and the Class B
Preferred Distribution described below, the Class A Limited Partners are
entitled to receive a distribution of 99% of the cash available for distribution
under the Partnership Agreement. The Company, as general partner of WDOP, is
entitled to receive a distribution of 1% of the remaining cash available, if
any.
Class B Limited Partners. The Class B Limited Partners consist of the
former partners of the Drever Partnerships who received either Class B Common
Units ("Common OP Units") or Class B Preferred Units ("Preferred OP Units"), or
a combination thereof, in exchange for their interests in the Drever
Partnerships.
Common OP Units. Holders of Common OP Units are entitled to receive the
"Class B Common Distribution." The Class B Common Distribution is equal to the
product of (i) the aggregate number of outstanding Common OP Units, (ii) the
"conversion factor" (currently equal to 1.0), and (iii) the dividend associated
with the Common Stock of the Company which has a record date which is the same
as WDOP's record date. The "conversion factor" may be adjusted in the event the
Company (a) declares a dividend or other distribution on the Common Stock
payable in Common Stock, (b) subdivides (by reclassification or otherwise) the
outstanding shares of Common Stock, or (c) combines (by reclassification or
otherwise) the outstanding shares of Common Stock into a smaller number of
shares. See "The WDOP Partnership Agreement -- Distributions" above.
Preferred OP Units. Holders of Preferred OP Units are entitled to receive
the "Class B Preferred Distribution." The Class B Preferred Distribution is
equal to (i) with respect to each fiscal quarter during which there was not at
least one share of Redeemable Preferred Stock issued and outstanding on each day
of such fiscal quarter, the product of (a) the aggregate number of outstanding
Preferred OP Units, and (b) $0.5625; or (ii) with respect to each fiscal quarter
during which there was at least one share of Redeemable Preferred Stock issued
and outstanding on each day of such fiscal quarter, the product of (x) the
aggregate number of outstanding Preferred OP Units, and (y) the preferred
dividend associated with the Redeemable Preferred Stock which has a record date
which is the same as the record date for the Preferred OP Units. See "The WDOP
Partnership Agreement -- Distributions" above.
87
<PAGE> 89
PLAN OF DISTRIBUTION
On October 1, 1997, the Company completed the acquisition (the "Drever
Transaction") of 79 apartment properties (the "Drever Properties"), 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"). In connection with the acquisition of the Drever Properties and the
operations of the General Partners, a newly formed partnership subsidiary of the
Company, Walden/Drever Operating Partnership, L.P. ("WDOP"), issued to the
partners of the Drever partnerships approximately $94.7 million in cash,
10,322,397 common units of beneficial ownership in WDOP (the "Common OP Units")
and 1,999,909 preferred units of beneficial interest in WDOP (the "Preferred OP
Units" and, collectively with the Common OP Units, the "Units"). As set forth in
the WDOP Partnership Agreement, each Common OP Unit is exchangeable on or after
October 1, 1998 for one share of Common Stock, plus any distributions currently
due or not previously paid on account of the exchanged Common OP Unit. The WDOP
Partnership Agreement additionally provides that the Preferred OP Units are
exchangeable, subject to certain conditions, on or after October 1, 1998 for one
share of Redeemable Preferred Stock (plus any distributions currently due or not
previously paid on account of the exchanged Preferred OP Unit) and three and
one-third Series B Warrants, each of which is exercisable for one-third of a
share of Common Stock at an exercise price of $26.875 per share. The number of
shares of Common Stock, Redeemable Preferred Stock issuable upon exchange of
Units is subject to adjustment to give effect to the following events affecting
the Company's equity securities:
(i) Payment of dividends, subdividing of outstanding shares,
combination of outstanding shares into a smaller number of shares or
issuance of shares in a reclassification;
(ii) A distribution by the Company of evidences of indebtedness or
assets, options, subscription rights or warrants to holders of Common Stock
or Redeemable Preferred Stock; and
(iii) Any capital reorganization of the Company, any reclassification
of the Common Stock or the Redeemable Preferred Stock, a consolidation or
merger of the Company with another entity or the sale of substantially all
of the properties and assets of the Company.
If the Company is a party to a consolidation or merger with another entity,
or the sale of substantially all of the properties and assets of the Company
occurs, the right to exchange Units for shares of Common Stock or Redeemable
Preferred Stock and Series B Warrants will become a right to exchange such Units
for securities, cash or other assets of Walden or such other entity.
PROCEDURE TO EXCHANGE UNITS
GENERAL
The tender by of Units pursuant to the procedure set forth below will
constitute an agreement between the tendering Unitholder and the Company in
accordance with the terms and subject to the conditions set forth herein and in
the notice of exchange (the "Exchange Notice") delivered to each Unitholder. All
questions as to the form of all documents and the validity, eligibility, and
acceptance of tendered Units will be determined by the Company, in its sole
discretion, which determination shall be final and binding. Alternative,
conditional or contingent exchanges of Units will not be considered valid. The
Company expressly reserves the absolute right to reject any and all proposed
exchanges not in proper form and to determine whether the proposed exchange
would be unlawful. The Company also reserves the absolute right, subject to
applicable law, to waive any defect or irregularity of a proposed exchange as to
particular Units. Neither the Company nor Boston EquiServe L.P., the exchange
agent for this transaction, or any other person, will be under any duty to give
notification of any defects or irregularities in proposed exchanges or will
incur any liability for failure to give any such notification. No proposed
exchange will be deemed to have been validly made until all defects and
irregularities with respect to such tendered Units have been cured or waived.
Any Units received by the exchange agent that are not properly tendered and as
to which irregularities have not been cured or waived will be returned by the
exchange agent to the appropriate Unitholder as soon as practicable.
88
<PAGE> 90
A Unitholder may not tender Units for exchange unless such Unitholder
tenders at least (i) 100 Units, or (ii) if the Unitholder holds less than 100
Units, the total number of Units held by such Unitholder. The Company will not
issue fractional shares of Common Stock or Redeemable Preferred Stock in
connection with any exchange. The portion of any exchange that would constitute
a fractional share will be paid in cash based upon the then current market price
of the Common Stock or the Redeemable Preferred Stock, whichever is applicable.
For a Unitholder to validly tender Units for exchange, the Unitholder must
deliver a properly completed and duly executed Exchange Notice (or a facsimile
thereof), and all other documents required by the Exchange Notice, including any
certificates representing Units, to Boston Equiserve L.P., the exchange agent,
at one of the following addresses:
<TABLE>
<S> <C>
BankBoston, N.A. BankBoston, N.A.
Attn: Corporate Reorganization Attn: Corporate Reorganization
P.O. Box 8029 150 Royall Street
Boston, MA 02266-8029 Canton, MA 02021
Securities Transfer & Reporting Services, Inc
c/o Boston EquiServe LP
100 William St./Galleria
NY, NY 10038
</TABLE>
The method of delivery of the Exchange Notice and Unit certificates is at the
option and risk of the exchanging Unitholder. Once submitted for exchange, an
Exchange Notice may not be withdrawn by a Unitholder. The determination to
exchange Units is solely at the option of the respective Unitholder, except for
those Unitholders which are identified as "Class B-TE Limited Partners"
(tax-exempt entities) in the WDOP Partnership Agreement.
DELIVERY OF EXCHANGE NOTICE AND CERTIFICATES
If the certificates representing Units are registered in the name of a
person other than the person who signs the related Exchange Notice, then, in
order to tender such Units for exchange, the certificates representing such
Units must be endorsed exactly as the name or names of the registered owner or
owners appear on the certificates. If the Exchange Notice is signed by a
beneficial owner who is not either (a) the registered owner of such Units, or
(b) the agent thereof duly appointed by written proxy delivered to the Exchange
Agent, the registered owner must instead complete and sign the Exchange Notice.
Any beneficial owner whose Units are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
Units for exchange should contact such registered holder and instruct such
registered holder to tender Units for exchange on such beneficial owner's
behalf. If such beneficial owner wishes to tender such Units himself, such
beneficial owner must, prior to completing and executing the Exchange Notice and
delivering the Units, make appropriate arrangements to register ownership of the
Units in such beneficial owner's name. The transfer of record ownership may take
a considerable amount of time.
EXCHANGE NOTICES, CERTIFICATES REPRESENTING UNITS, AND ANY OTHER REQUIRED
DOCUMENTS, SHOULD BE SENT TO THE EXCHANGE AGENT ONLY AND NOT TO THE COMPANY.
THE METHOD OF DELIVERY OF THE EXCHANGE NOTICE, CERTIFICATES REPRESENTING
UNITS, AND ANY OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
UNITHOLDER AND DELIVERY WILL BE DEEMED MADE WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. INSTEAD OF EFFECTING DELIVERY BY MAIL IT IS RECOMMENDED THAT
UNITHOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IF SUCH DELIVERY IS BY
MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED, REGISTERED MAIL WITH
RETURN RECEIPT REQUESTED.
89
<PAGE> 91
LOST OR MISSING CERTIFICATES
If a Unitholder desires to tender Units for exchange, but the
certificate(s) evidencing such Units have been mutilated, lost, stolen or
destroyed, such Unitholder should write to or telephone the Company concerning
the procedures for obtaining replacement certificates for such Units or
arranging for indemnification or any other matter that requires handling by the
Company's Transfer Agent.
TAX CONSEQUENCES OF EXCHANGING UNITS
GENERAL
The following discussion summarizes certain federal income tax
considerations that may be relevant to a Unitholder should he exercise his
Exchange Right, is based on current law, is for general information only, and is
not tax advice. This discussion is based on current law, is for general
information only, and should not be considered tax advice. This discussion does
not purport to address all aspects of taxation which may be relevant to
individual Unitholders in light of their personal investment or tax
circumstances, or to certain types of Unitholders which are subject to special
treatment under the federal income tax laws. In addition, the discussion below
does not address state, local, foreign or other tax considerations. Each
Unitholder should consult his personal tax advisor.
A Unitholder must notify the Company of its desire to exchange Units. A
Unitholder may not exercise his Exchange Right for less than 100 Units or, if
such Unitholder holds less than 100 Units, all of the Units held by such
Unitholder. A Unitholder is not entitled to exchange his Units if the delivery
of Walden Securities would be prohibited under the provisions of the WDOP
Partnership Agreement to protect the Company's qualification as a REIT.
TAX CONSEQUENCES OF EXCHANGE
Tax Treatment of Exchange of Units. If a Unit is exchanged for Walden
Securities pursuant to the "Procedure to Exchange Units", such exchange will be
treated as a sale of the Unit. The gain or loss from such sale will be equal to
the difference between the amount realized for tax purposes and the adjusted tax
basis in the Unit. See "-- Basis of Units." Upon the sale of a Unit, the amount
realized will be equal to the sum of the fair market value of the Walden
Securities at the time received, plus the amount of any WDOP liabilities
allocable to the Unit immediately prior to its sale. To the extent that the
amount realized exceeds a Unitholder's adjusted tax basis in the Unit exchanged,
such Unitholder will recognize gain. It is possible that the amount of gain
recognized or the tax liability resulting from such gain could exceed the value
of the Walden Securities received upon such disposition.
Except as described below, any gain recognized upon a sale or other
disposition of Units will be treated as gain attributable to the sale or
disposition of a capital asset. Such gain will generally be considered a capital
gain. Except as provided below, if the Units have been held for more than one
year, such gain will be subject to a tax rate of 20%, except that the portion of
the gain attributable to real estate depreciation deductions will be subject to
a 25% tax rate. However, to the extent that the amount realized upon the sale of
a Unit attributable to a Unitholder's share of "unrealized receivables" of WDOP
(as defined in Section 751 of the Code) exceeds the basis attributed to those
assets, such excess will be treated as ordinary income. Unrealized receivables
include, to the extent not previously included in WDOP income, any rights to
payment for services rendered or to be rendered. Unrealized receivables also
include amounts that would be subject to recapture as ordinary income if WDOP
had sold its assets at their fair market value at the time of the transfer of a
Unit. The Company does not presently anticipate that any portion of the amount
realized by a Unitholder in an exchange of Units will be attributable to such
unrealized receivables.
Basis of Units. The basis used to determine a gain or loss on the exchange
of the Unit(s) should include the sum of (i) the Unitholder's adjusted tax basis
(apportioned to such Unit if not all Units are being exchanged) plus (ii) the
tax basis of the Exchange Right. In general, a Unitholder who acquired his Units
by contribution of a partnership interest to WDOP had an initial tax basis in
his Units ("Initial Basis") equal to
90
<PAGE> 92
(a) the sum of his adjusted tax basis in such transferred interest plus any gain
recognized in the exchange and (b) reduced by cash, if any, received in the
exchange and the fair market value of the Exchange Right. Unitholders are urged
to consult their own tax advisors regarding their Initial Basis. A Unitholder's
Initial Basis in his Units is generally increased by (i) such Unitholder's share
of WDOP taxable and tax exempt income and (ii) increases in such Unitholder's
allocable share of liabilities of WDOP (including any increase in his share of
liabilities occurring in connection with the acquisition of his Units).
Generally, such Unitholder's basis in his Units is decreased (but not below
zero) by (i) such Unitholder's share of WDOP distributions, (ii) decreases in
such Unitholder's allocable share of liabilities of WDOP (including any decrease
in his share of liabilities of the WDOP occurring in connection with the
acquisition of his Units), (iii) such Unitholder's share of losses and
deductible expenses of WDOP and (iv) such Unitholder's share of nondeductible
expenditures of WDOP that are not chargeable to his capital account. For
purposes of determining a Unitholder's adjusted tax basis in the Units
immediately prior to the exchange of such Units for Walden Securities, his
adjusted tax basis in such Units will include his allocable share of WDOP gain
or loss for the taxable year.
In the event a Unitholder disposes of less than all of his Units, the
Adjusted Tax Basis in his Units will be allocated between that portion of the
Units which are sold and the portion of the Units such Unitholder continues to
hold on the basis of each such Unit's respective fair market value.
A Unitholder who exchanges Units for Walden Securities pursuant to the
Exchange Right will have an initial basis in such securities equal to their fair
market value on the date received.
Differences between Units and Walden Securities. If a Unitholder exchanges
his Units for Walden Securities pursuant to the "Procedure to Exchange Units,"
the Unitholder will become a stockholder of the Company rather than a holder of
Units in WDOP. The nature of an investment in Walden Securities is generally
economically equivalent to an investment in Units of WDOP. There are, however,
differences between ownership of Units and Walden Securities. WDOP is taxed as a
partnership. Generally each Unitholder includes on his individual income tax
return as income, gain, deduction or loss his distributive share of WDOP's
items. Distributions to the Unitholder by WDOP are generally not taxable to the
Unitholder except to the extent such distributions exceed the Unitholder's basis
in such Unitholder's Units. In contrast the Company is a corporation taxed as a
REIT. Stockholders do not include on their returns a portion of the Company's
income or gain. Stockholders also may not include in their individual income tax
returns either their distributive share or any amount of the net operating
losses or capital losses of the Company. As long as the Company qualifies as a
REIT, distributions made to the Company's taxable U.S. stockholders out of
current or accumulated earnings and profits will be taken into account by such
stockholder as ordinary income.
LEGAL MATTERS
Certain legal matters in connection with the Walden Securities, including
the validity of the Walden Securities, will be passed upon for the Company by
Winstead Sechrest & Minick P.C., Dallas, Texas.
EXPERTS
The consolidated financial statements of Walden Residential Properties,
Inc. as of December 31, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997 and the related financial statement schedule as
of December 31, 1997 and the combined financial statements of Drever Partners,
Inc. and affiliates as of December 31, 1996 and 1995 and for each of the three
years in the period ended December 31, 1996 included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and have been so included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
91
<PAGE> 93
INDEX TO FINANCIAL STATEMENTS
WALDEN RESIDENTIAL PROPERTIES, INC.
<TABLE>
<S> <C>
Financial Statements for the six months ended June 30, 1998
and 1997:
Condensed Consolidated Balance Sheets as of June 30, 1998
(Unaudited) and December 31, 1997...................... F-2
Condensed Consolidated Statements of Income for the three
months and six months ended June 30, 1998 and 1997
(Unaudited)............................................ F-3
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 (Unaudited).... F-4
Notes to the Condensed Consolidated Financial Statements
(Unaudited)............................................ F-5
Financial Statements for the years ended December 31, 1997,
1996 and 1995:
Independent Auditors' Report.............................. F-11
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-12
Consolidated Statements of Income for each of the three
years ended December 31, 1997.......................... F-13
Consolidated Statements of Stockholders' Equity for each
of the three years ended December 31, 1997............. F-14
Consolidated Statements of Cash Flows for each of the
three years ended December 31, 1997.................... F-15
Notes to Consolidated Financial Statements................ F-17
Pro Forma Financial Statements (Unaudited):
Pro Forma Condensed Consolidated Statement of Income for
the year ended December 31, 1997....................... F-37
Notes to Pro Forma Condensed Consolidated Statement of
Income (Unaudited)..................................... F-38
DREVER PARTNERS, INC. AND AFFILIATES
Financial Statements for the years ended December 31, 1996,
1995 and 1994 and the six months ended June 30, 1997:
Independent Auditors' Report.............................. F-39
Combined Balance Sheets as of December 31, 1996 and 1995
and June 30, 1997 (Unaudited).......................... F-40
Combined Statements of Operations for each of the three
years ended December 31, 1996 and the six months ended
June 30, 1997 and 1996 (Unaudited)..................... F-41
Combined Statements of Partners'/Stockholders' Equity for
each of the three years ended December 31, 1996 and the
six months ended June 30, 1997 (Unaudited)............. F-42
Combined Statements of Cash Flows for each of the three
years ended December 31, 1996 and the six months ended
June 30, 1997 and 1996 (Unaudited)..................... F-43
Notes to Combined Financial Statements.................... F-44
FINANCIAL STATEMENT SCHEDULE AS OF DECEMBER 31, 1997
The following financial statement supplementary schedule
of the Registrant and its subsidiaries required to be
included in Item 27 is listed below:
Schedule III -- Real Estate and Accumulated Depreciation.... S-1
</TABLE>
F-1
<PAGE> 94
WALDEN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate assets, at cost
Land...................................................... $ 170,673 $ 173,635
Buildings................................................. 1,326,300 1,333,978
---------- ----------
1,496,973 1,507,613
Less: Accumulated depreciation............................ (98,316) (74,584)
---------- ----------
1,398,657 1,433,029
Real estate assets held for sale............................ 43,476 --
Rent and other receivables ($1.5 million related party at
June 30, 1998)............................................ 3,696 1,613
Prepaid and other assets.................................... 7,542 6,903
Deferred financing costs, net............................... 8,648 6,603
Cash and cash equivalents................................... 6,524 9,757
Restricted cash:
Escrow deposits........................................... 16,260 9,047
Additional collateral on loans............................ 2,850 2,520
---------- ----------
Total assets.............................................. $1,487,653 $1,469,472
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................... $ 461,261 $ 428,354
Unsecured term loan....................................... 200,000 200,000
Unsecured credit facility................................. 85,000 74,000
Accrued real estate taxes................................. 18,214 22,571
Accounts payable.......................................... 11,054 13,648
Accrued expenses and other liabilities.................... 16,113 13,377
Preferred distribution payable to minority interests...... 391 391
---------- ----------
Total liabilities......................................... 792,033 752,341
Commitments and contingencies (Note 8)
Minority interests.......................................... 314,922 321,916
Stockholders' equity:
Preferred stock........................................... 57 57
Common stock.............................................. 182 180
Additional paid in capital................................ 458,936 456,842
Officers and directors notes for stock purchases.......... (8,823) (5,263)
Deferred compensation on restricted stock................. (1,417) (1,404)
Distributions in excess of net income..................... (68,237) (55,197)
---------- ----------
Total stockholders' equity................................ 380,698 395,215
---------- ----------
Total liabilities and stockholders' equity................ $1,487,653 $1,469,472
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-2
<PAGE> 95
WALDEN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
REVENUES
Rental income.................................. $66,650 $33,071 $132,557 $64,587
Other property income.......................... 2,742 1,333 5,288 2,605
Interest income................................ 363 346 724 849
------- ------- -------- -------
Total revenues................................. 69,755 34,750 138,569 68,041
------- ------- -------- -------
EXPENSES
Property operating and maintenance............. 23,249 11,444 45,761 22,013
Real estate taxes.............................. 6,950 3,412 13,898 6,561
General and administrative..................... 2,866 1,972 5,701 3,394
Interest....................................... 13,374 5,244 26,688 10,121
Amortization................................... 252 200 485 411
Depreciation................................... 14,701 6,793 29,035 13,121
------- ------- -------- -------
Total expenses.............................. 61,392 29,065 121,568 55,621
------- ------- -------- -------
Income before extraordinary item and income
allocated to minority interests................ 8,363 5,685 17,001 12,420
Extraordinary loss on debt extinguishment........ (80) -- (104) --
------- ------- -------- -------
Income before income allocated to minority
interests...................................... 8,283 5,685 16,897 12,420
Income allocated to minority interests........... (2,769) (395) (5,667) (800)
------- ------- -------- -------
Net income.................................. 5,514 5,290 11,230 11,620
Preferred distributions.......................... (3,280) (3,311) (6,560) (6,623)
------- ------- -------- -------
Net income available to common stockholders...... $ 2,234 $ 1,979 $ 4,670 $ 4,997
======= ======= ======== =======
Basic net income per share....................... $ 0.12 $ 0.11 $ 0.25 $ 0.29
======= ======= ======== =======
Diluted net income per share..................... $ 0.12 $ 0.11 $ 0.25 $ 0.29
======= ======= ======== =======
Basic weighted average number of common shares
outstanding.................................... 18,488 17,502 18,384 17,329
======= ======= ======== =======
Diluted weighted average number of common shares
and common share equivalents outstanding....... 18,632 17,623 18,554 17,486
======= ======= ======== =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-3
<PAGE> 96
WALDEN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1998 1997
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 11,230 $11,620
Adjustments to reconcile net income to net cash provided by
operating activities:
Income allocated to minority interests.................... 5,667 800
Depreciation and amortization............................. 29,520 13,532
Amortization of deferred compensation on restricted
stock.................................................. 123 108
Amortization of prepaid interest expense.................. 608 --
Extraordinary loss on debt extinguishment................. 104 --
Net effect of changes in operating accounts:
Escrow deposits........................................... (7,213) (751)
Other assets.............................................. (3,009) (1,301)
Accrued real estate taxes................................. (4,357) (935)
Accounts payable.......................................... (3,848) (222)
Other liabilities......................................... 2,736 397
-------- -------
Net cash provided by operating activities......... 31,561 23,248
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate assets............................ (5,082) (52,371)
Real estate asset additions............................... (20,207) (14,926)
-------- -------
Net cash used in investing activities............. (25,289) (67,297)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance, net of issuance costs....... 12,402 15,968
Purchase of the Company's common stock.................... (14,002) --
Purchase of minority interest securities.................. (130) --
Distributions paid........................................ (37,306) (23,424)
Proceeds from mortgage notes payable and credit
facility............................................... 172,903 35,350
Payment of mortgage notes payable and credit facility..... (137,155) (6,000)
Payment of financing costs................................ (3,240) (91)
Additional collateral on loans............................ (330) --
Principal reductions of debt.............................. (2,647) (1,656)
-------- -------
Net cash provided by (used in) financing
activities....................................... (9,505) 20,147
-------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (3,233) (23,902)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 9,757 29,720
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 6,524 $ 5,818
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 23,671 $ 9,781
======== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Accrued real estate asset additions....................... $ 1,722 $ 345
======== =======
Mortgages assumed......................................... $ 10,806 $ --
======== =======
Notes receivable for officer and director stock
purchases.............................................. $ 3,560 $ --
======== =======
Deferred compensation on restricted stock................. $ 136 $ 2,571
======== =======
Distribution payable to minority interest holders......... $ 391 $ 391
======== =======
Minority interest securities issued....................... $ 505 $ 1,050
======== =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-4
<PAGE> 97
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
1. INTERIM UNAUDITED FINANCIAL INFORMATION
Walden Residential Properties, Inc. (the "Company") is a self-administered
and self-managed real estate company operated as a real estate investment trust,
as defined under the Internal Revenue Code of 1986, as amended. As of June 30,
1998, the Company owned 156 multifamily properties, containing 42,858 apartment
units, located primarily in the Southwest and Southeast regions of the United
States.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included elsewhere herein for the year ended December 31, 1997.
The accompanying interim unaudited condensed consolidated financial information
has been prepared pursuant to the rules and regulations of the SEC. Certain
information and footnote disclosures normally included in the annual financial
statements have been condensed or omitted pursuant to rules and regulations of
the SEC. Management believes that the disclosures contained herein are adequate
to make the information presented not misleading. In the opinion of management,
all adjustments and eliminations, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position of
the Company and its subsidiaries as of June 30, 1998 and the consolidated
results of their operations for the three and six months ended June 30, 1998 and
1997 and consolidated cash flows for the six months ended June 30, 1998 and
1997, have been included. The consolidated results of operations for the three
and six months ended June 30, 1998 are not necessarily indicative of the results
for the full year.
As of June 30, 1998, the Company had six apartment properties held for
sale. Management has determined that such properties do not match the Company's
long-term investment strategies. (See Note 8)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (the "Statement"), which establishes
standards for accounting and reporting for derivative instruments. SFAS No. 133
is effective for periods beginning after June 15, 1999; however, earlier
application is permitted. Management is currently not planning on early adoption
of this Statement and has not had an opportunity to evaluate the impact of the
provisions of the Statement on the Company's consolidated financial statements
relating to future adoption.
2. ACQUISITIONS
On February 18, 1998, the Company acquired two apartment properties with a
total of 376 units, located in Tampa, Florida for approximately $15.9 million.
The Company funded these acquisitions by assuming $5.7 million of variable rate,
tax-exempt debt maturing in the year 2007, assuming $5.1 million of 7.35% fixed
rate debt maturing in the year 2005, and borrowing the remaining amount under
the Company's unsecured credit facility. The credit enhancement on the $5.7
million variable rate debt expires in November 1998 and is guaranteed by the
Company.
3. TRANSACTIONS WITH AFFILIATES
On June 22, 1998, the Company acquired the 1% general partner interest in a
limited partnership which owns a 504-unit apartment property in Austin, Texas.
At that time, the Company loaned $1.5 million to the partnership which was used
to refinance the first mortgage indebtedness on the property. The note requires
monthly payments of excess cash flow from the property and matures on January 1,
2009.
4. MORTGAGE NOTES PAYABLE
During the first six months of 1998, the Company refinanced $45.5 million
and $12.5 million of the Company's variable rate, tax-exempt mortgage
indebtedness and extended the related mortgage loan and credit enhancement
maturity to February 15, 2028 and January 15, 2023, respectively.
F-5
<PAGE> 98
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 25, 1998, $78.1 million of conventional fixed-rate mortgage notes
were refinanced with $110.0 million of fixed-rate debt, of which $80.0 million
of such debt bears interest at 6.62% and matures in March 2007 and the remaining
$30.0 million bears interest at 7.22% and matures in June 2016. Of the excess
financing proceeds, $20 million was used to repay a portion of the Company's
credit facility.
On April 14, 1998, the Company repaid $7.2 million of variable rate
indebtedness related to one property.
5. STOCKHOLDERS' EQUITY AND MINORITY INTERESTS
Minority Interests
In connection with certain apartment property acquisitions, certain
partnership subsidiaries of the Company have issued Common Operating Partnership
("OP") Units and Preferred OP Units which are exchangeable into the Company's
common stock and 9.00% redeemable preferred stock, with detachable warrants,
respectively. The holders of the Preferred OP Units are entitled to receive
quarterly distributions of $0.5625 per unit and the holders of the Common OP
Units are entitled to receive quarterly distributions equal to those paid on the
Company's common stock. A portion of the Common OP Units that are exchangeable
into 810,128 shares of the Company's common stock are entitled to receive
quarterly distributions of a minimum of $369,000 in the aggregate. All OP Unit
securities have been recorded as minority interests in the accompanying balance
sheets. On June 15, 1998, an additional 20,621 Common OP Units were issued at
the market price of the Company's common stock on such date ($24.50 per unit) to
adjust the purchase price of the October 1, 1997 acquisition of the assets and
business of Drever Partners, Inc. and its affiliates. On June 30, 1998, the
Company purchased 5,503 minority interest securities at $24.50 (the market price
of the Company's common stock on the purchase date). As of June 30, 1998, the
Company had 1,999,909 Preferred OP Units and 11,192,022 Common OP Units
outstanding.
Public Offering
On February 19, 1998, the Company issued 323,232 shares of its common stock
at $23.515 per share for net proceeds of approximately $7.6 million.
Restricted Stock
In February 1997, the Company adopted a Long-Term Incentive Plan to attract
and retain individuals to serve as directors, officers and employees of the
Company. Pursuant to this plan, the Company has issued 5,206 restricted shares
of common stock ("Restricted Stock") during the six months ended June 30, 1998,
for $0.01 per share to two of its executive officers and its six outside
directors. The shares issued vest ratably over a three-year and one-year period,
respectively. Deferred compensation on Restricted Stock was computed based upon
the market value of the shares at the date of issuance. This deferred
compensation is being amortized over the respective vesting periods.
Officer Notes for Stock Purchases
On February 17, 1998, the Company implemented a new officer loan program
allowing officers to purchase the Company's common stock at current market
prices and to exercise vested stock options with the assistance of loans from
the Company. Under this program, officers are eligible to purchase stock on
March 1 and September 1 of each year in an aggregate amount of up to three times
the officer's annual salary. A cash payment of 5% to 15% of the purchase price
is required by the officer, depending upon the amount of the purchase, with the
remainder loaned on a full recourse basis to the officer. Each loan is evidenced
by a note with a five-year term, requiring quarterly payments of interest only
at a fixed interest rate equal to the Company's then current interest rate under
its credit facility. The loan is secured by a pledge of the shares of common
stock purchased by each officer pursuant to such loan.
F-6
<PAGE> 99
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 2, 1998, the Company issued loans to 25 officers under the officer
loan program in the amount of approximately $3.6 million, bearing interest at
7%. Such loans related to the issuance of 138,692 shares of the Company's common
stock at $24.75 per share (the closing price of the common stock on the New York
Stock Exchange for the previous trading day) and the exercise of 26,192 common
stock options at a stock option grant price of $19.25 per share.
Shareholder Rights Plan
On March 26, 1998, the Company adopted a shareholder rights plan (the
"Plan") designed to assure that all stockholders receive fair treatment in the
event of a proposed acquisition. The key provisions of the Plan is a mechanism
that will distribute, for each outstanding share of the Company's Common Stock,
one right that becomes exercisable upon the occurrence of certain events.
The Plan entails a dividend of one right for each outstanding share of the
Company's common stock. Each right will entitle the holder to buy one
one-hundredth of a share of a new Series A Junior Participating Preferred Stock,
at an exercise price of $70.00 per share. The rights will trade with the
Company's common stock until exercisable and will expire on April 20, 2008. The
rights will not be exercisable until ten days following a public announcement
that a person or group has acquired 15% or more of the Company's common stock or
until ten business days after a person or group begins a tender offer that would
result in ownership of 15% or more of the Company's common stock, subject to
certain extensions by the Board. On April 20, 1998, the Company issued a
dividend of one right for each share of common stock owned by stockholders of
record as of April 7, 1998. Effective April 8, 1998, each share of the Company's
common stock has one right attached to it.
Associate Stock Purchase Plan
Effective April 1, 1998, the Company adopted an Associate Stock Purchase
Plan. This plan allows Company employees to purchase on a quarterly basis shares
of the Company's common stock at a 15% discount.
Stock Repurchase Program
On June 4, 1998, the Company adopted a Stock Repurchase Program. This
program authorizes the Company to purchase up to 2.5 million shares of the
Company's common stock. This is in addition to the prior stock repurchase
program, announced July 11, 1997, authorizing the Company to purchase up to 1.0
million shares of its common stock by December 31, 1998. The Company repurchased
572,000 shares of its outstanding common stock in May and June of 1998, leaving
2.6 million shares authorized for repurchase under both programs at June 30,
1998.
Distributions
In March 1998 and June 1998, the Company paid distributions of $12.0
million and $12.3 million, respectively, to stockholders of record on February
18, 1998, and May 18, 1998, respectively. The common stockholders were paid
$0.4825 per share; the 9.16% Convertible Redeemable Preferred Stockholders were
paid $0.5725 per share and the 9.20% Senior Preferred Stockholders were paid
$0.575 per share.
The Company paid distributions of $5.4 million on the Common OP Units
(which represented $0.4825 per unit) and $1.1 million on the Preferred OP Units
(which represented $0.5625 per unit) in both March and June.
6. NET INCOME PER SHARE OF COMMON STOCK
Basic net income per share has been computed by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding. Diluted net income per share has been computed by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding plus potential dilutive common share equivalents.
F-7
<PAGE> 100
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents information necessary to calculate basic and
diluted net income per share for the three months and six months ended June 30,
1998 and 1997 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net Income for Basic and Diluted Computation:
Income before extraordinary item and income
allocated to minority interests............ $ 8,363 $ 5,685 $17,001 $12,420
Extraordinary loss on debt extinguishment..... (80) -- (104) --
-------- -------- ------- -------
Income before income allocated to minority
interests.................................. 8,283 5,685 16,897 12,420
Income allocated to minority interests........ (2,769) (395) (5,667) (800)
-------- -------- ------- -------
Net income.................................... 5,514 5,290 11,230 11,620
Preferred distributions....................... (3,280) (3,311) (6,560) (6,623)
-------- -------- ------- -------
Net income available to common stockholders
(basic and diluted net income per share
computation)............................... $ 2,234 $ 1,979 $ 4,670 $ 4,997
======== ======== ======= =======
Basic Net Income per Share:
Before extraordinary item, less preferred
distributions.............................. $ 0.13 $ 0.11 $ 0.26 $ 0.29
Extraordinary loss on debt extinguishment..... (0.01) -- (0.01) --
-------- -------- ------- -------
Net income available to common stockholders... $ 0.12 $ 0.11 $ 0.25 $ 0.29
======== ======== ======= =======
Diluted Net Income per Share:
Before extraordinary item, less preferred
distributions.............................. $ 0.13 $ 0.11 $ 0.26 $ 0.29
Extraordinary loss on debt extinguishment..... (0.01) -- (0.01) --
-------- -------- ------- -------
Net income available to common stockholders... $ 0.12 $ 0.11 $ 0.25 $ 0.29
======== ======== ======= =======
Weighted Average Number of Shares Outstanding
(a):
Basic......................................... 18,488 17,502 18,384 17,329
Dilutive effect of outstanding options.......... 144 121 170 157
-------- -------- ------- -------
Diluted......................................... 18,632 17,623 18,554 17,486
======== ======== ======= =======
</TABLE>
- ---------------
(a) Excludes the convertible preferred shares, warrants, Common OP Units (see
Note 5) and 1,658,750 stock options, which are not dilutive at June 30,
1998.
F-8
<PAGE> 101
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. PRO FORMA STATEMENTS OF INCOME
The following unaudited condensed pro forma information for the six months
ended June 30, 1998 and 1997 was prepared from the financial statements of the
Company by adjusting for the effect of the 1997 acquisition of 21,467 apartment
units at a cost of $799.2 million, the 1998 property acquisitions described in
Note 2 herein, and debt incurred in connection with these property acquisitions
as if all of these transactions had occurred on January 1, 1997.
The following information is not necessarily indicative of what the
performance would have been had the Company owned these properties for the
entire period, nor does it purport to represent future results of operations of
the Company. (In thousands, except per share information.)
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues.................................................... $138,905 $133,387
Expenses.................................................... 121,845 119,608
-------- --------
Income before extraordinary items and income allocated to
minority interests........................................ 17,060 13,779
Extraordinary loss on debt extinguishment................... (104) --
-------- --------
Income before income allocated to minority interests........ 16,956 13,779
Income allocated to minority interests...................... (5,687) (4,583)
-------- --------
Net Income.................................................. 11,269 9,196
Preferred distributions..................................... (6,560) (6,623)
-------- --------
Net income available to common stockholders................. $ 4,709 $ 2,573
======== ========
Basic net income per share.................................. $ 0.26 $ 0.15
======== ========
Diluted net income per share................................ $ 0.25 $ 0.15
======== ========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
On February 27, 1998, the Company entered into a joint venture agreement
with The Grupe Company whereby The Grupe Company will construct and the Company
will later purchase, two Sacramento, California area properties with a combined
total of 616 apartment units. The Company is committed to purchase 100% of the
properties for approximately $47 million upon the completion of construction and
the achievement of certain targeted net operating income amounts. This purchase
is anticipated to occur sometime in late 1999. As of June 30, 1998, The Grupe
Company has spent approximately $8.5 million, consisting primarily of permits
and professional fees, for both properties.
As of June 30, 1998, the Company had executed contracts to sell four of its
apartment properties held for sale, containing an aggregate of 1,151 units, for
an aggregate sales price of $37.6 million. The closing is anticipated to occur
in August 1998.
F-9
<PAGE> 102
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SUBSEQUENT EVENTS
On July 1, 1998, the Company executed a contract to purchase South Green
Apartments, a 268-unit apartment community located in Houston, Texas. The
purchase contract in the amount of $9.5 million is anticipated to be consummated
in August 1998.
On July 29, 1998, the Company entered into an agreement to loan $5.0
million to the Greystone Group, Inc., an unrelated third-party, to purchase
260,082 net rentable square feet of land in Chandler, Arizona. The loan bears an
interest rate of LIBOR plus 1.50%, is secured by a mortgage loan on the property
and a guarantee by The Greystone Group, Inc., and is generally due upon the
earlier of completion of construction and subsequent purchase by the Company or
substitution of a third-party lender. The Company anticipates entering into a
purchase agreement with the Greystone Group, Inc. in August 1998, whereby The
Greystone Group, Inc. will construct a 272-unit apartment community on the land
described herein. The Company will be committed to purchase the property for
approximately $21.3 million upon completion of construction and the achievement
of certain targeted occupancy levels, anticipated to occur sometime in late
1999.
On July 29, 1998, the Company executed a contract to acquire a 286-unit
apartment community located in Bedford, Texas for approximately $11.0 million.
In connection with this contract, the Company deposited $200,000 of
non-refundable earnest money. The Company has completed normal due diligence
procedures; however, because financing for the acquisition will not be funded
until the closing date, there is no assurance that the Company will purchase the
property.
F-10
<PAGE> 103
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholders of
Walden Residential Properties, Inc.
We have audited the accompanying consolidated balance sheets of Walden
Residential Properties, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. Our
audit for the year ended December 31, 1997 also included the financial statement
schedule III -- Real Estate and Accumulated Depreciation as of December 31,
1997. These financial statements and financial statement schedule are the
responsibility of the management of Walden Residential Properties, Inc. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Walden Residential Properties,
Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, the
Company changed its method of accounting for the cost of replacement carpets
effective July 1, 1996.
/ s / Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Dallas, Texas
March 25, 1998
F-11
<PAGE> 104
WALDEN RESIDENTIAL PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- --------
<S> <C> <C>
ASSETS
Real estate assets, at cost
Land...................................................... $ 173,635 $ 80,914
Buildings and improvements................................ 1,333,978 602,601
---------- --------
1,507,613 683,515
Less: Accumulated depreciation....................... (74,584) (41,707)
---------- --------
1,433,029 641,808
Rent and other receivables.................................. 1,613 1,324
Prepaid and other assets.................................... 6,903 3,146
Deferred financing costs, net............................... 6,603 5,827
Cash and cash equivalents................................... 9,757 29,720
Restricted cash:
Escrow deposits........................................... 9,047 5,369
Additional collateral on loans............................ 2,520 2,520
---------- --------
Total assets......................................... $1,469,472 $689,714
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................... $ 428,354 $258,908
Unsecured term loan....................................... 200,000 --
Unsecured credit facility................................. 74,000 --
Accrued real estate taxes................................. 22,571 7,960
Accounts payable.......................................... 13,648 5,653
Accrued expenses and other liabilities.................... 13,377 5,395
Preferred distribution payable to minority interests...... 391 377
---------- --------
Total liabilities...................................... 752,341 278,293
Commitments and contingencies (Note 13)
Minority interests.......................................... 321,916 14,886
Stockholders' equity:
Preferred stock, $.01 par value per share, 10,000 shares
authorized, 5,712 and 5,786 shares issued and
outstanding as of December 31, 1997 and 1996,
respectively (aggregate liquidation value of
$142,805).............................................. 57 58
Common stock, $.01 par value per share, 50,000 shares
authorized, 18,030 and 16,880 shares issued and
outstanding as of December 31, 1997 and 1996,
respectively........................................... 180 169
Excess stock, $.01 par value per share, 60,000 shares
authorized,
no shares issued....................................... -- --
Additional paid in capital................................ 456,842 432,974
Officer and director notes for stock purchases............ (5,263) (5,263)
Deferred compensation on Restricted Stock................. (1,404) --
Distributions in excess of net income..................... (55,197) (31,403)
---------- --------
Total stockholders' equity............................. 395,215 396,535
---------- --------
Total liabilities and stockholders' equity........... $1,469,472 $689,714
========== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-12
<PAGE> 105
WALDEN RESIDENTIAL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
REVENUES
Rental income........................................... $163,224 $105,602 $78,469
Other property income................................... 6,313 3,873 3,090
Interest income......................................... 1,598 1,433 856
Other income............................................ -- 263 409
-------- -------- -------
Total revenues....................................... 171,135 111,171 82,824
EXPENSES
Property operating and maintenance...................... 56,483 37,521 28,748
Real estate taxes....................................... 16,805 10,039 7,337
General and administrative.............................. 7,734 5,124 3,811
Unusual charge -- officer settlement agreement.......... 1,940 -- --
Interest................................................ 28,447 20,573 17,111
Amortization............................................ 827 916 900
Depreciation............................................ 33,841 19,810 15,734
-------- -------- -------
Total expenses....................................... 146,077 93,983 73,641
-------- -------- -------
Operating income.......................................... 25,058 17,188 9,183
Gain on disposition of real property.................... 2,055 1,934 1,502
-------- -------- -------
Income before extraordinary item and income allocated to
minority interests...................................... 27,113 19,122 10,685
Extraordinary loss on debt extinguishment............... (422) (1,848) (1,352)
-------- -------- -------
Income before income allocated to minority interests...... 26,691 17,274 9,333
Income allocated to minority interests.................. (4,109) (1,705) (922)
-------- -------- -------
Net income................................................ 22,582 15,569 8,411
Preferred distributions................................. (13,186) (2,387) --
-------- -------- -------
Net income available to common stockholders............... $ 9,396 $ 13,182 $ 8,411
======== ======== =======
Basic net income per share................................ $ 0.53 $ 0.90 $ 0.69
======== ======== =======
Diluted net income per share.............................. $ 0.53 $ 0.89 $ 0.69
======== ======== =======
Basic weighted average number of common shares
outstanding............................................. 17,590 14,720 12,155
======== ======== =======
Diluted weighted average number of common shares and
common share equivalents outstanding.................... 17,747 14,792 12,155
======== ======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-13
<PAGE> 106
WALDEN RESIDENTIAL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(In thousands)
<TABLE>
<CAPTION>
OFFICER/DIRECTOR
PREFERRED STOCK COMMON STOCK ADDITIONAL NOTES FOR
------------------ ------------------- PAID IN STOCK
SHARES PAR VALUE SHARES PAR VALUE CAPITAL PURCHASES
------ --------- ------- --------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995......................... -- $ -- 10,070 $101 $167,546 $(3,438)
Stock issued to purchase real estate assets.... 216 2 4,205
Public offering, net of offering costs......... 3,500 35 60,138
Stock issued under the dividend reinvestment
plan......................................... 404 4 7,037
Repurchases of the Company's common stock......
Officers'/Directors' stock purchase............ (27) (1,533)
Distributions..................................
Net income.....................................
----- ---- ------ ---- -------- -------
Balance, December 31, 1995....................... -- -- 14,190 142 238,899 (4,971)
Repurchases of the Company's common stock......
Officers'/Directors' stock purchase............ 19 -- (22) (292)
Retirement of common stock repurchased......... (318) (3) (6,075)
Public offerings, net of offering costs........ 5,800 58 2,756 28 196,094
Conversion of preferred stock to common
stock........................................ (14) -- 16 --
Stock issued under the dividend reinvestment
plan......................................... 217 2 4,331
Purchase and cancellation of minority interest
securities................................... (253)
Distributions..................................
Net income.....................................
----- ---- ------ ---- -------- -------
Balance, December 31, 1996....................... 5,786 58 16,880 169 432,974 (5,263)
Repurchases of the Company's common stock
Retirement of common stock purchased........... (278) (3) (6,663)
Public offerings, net of offering costs........ 161 2 3,522
Conversion of preferred stock to common
stock........................................ (74) (1) 84 1
Stock issued under the dividend reinvestment
plan......................................... 955 9 21,950
Stock issued through exercise of options....... 138 1 2,700
Restricted stock issuance...................... 108 1 2,833
Restricted stock cancellation.................. (18) -- (474)
Amortization of deferred compensation..........
Distributions..................................
Net income.....................................
----- ---- ------ ---- -------- -------
Balance, December 31, 1997....................... 5,712 $ 57 18,030 $180 $456,842 $(5,263)
===== ==== ====== ==== ======== =======
<CAPTION>
DISTRIBUTIONS
DEFERRED STOCK IN EXCESS OF
COMPENSATION REPURCHASES NET INCOME
------------ ----------- -------------
<S> <C> <C> <C>
Balance, January 1, 1995......................... $ -- $ -- $ (3,942)
Stock issued to purchase real estate assets....
Public offering, net of offering costs.........
Stock issued under the dividend reinvestment
plan.........................................
Repurchases of the Company's common stock...... (2,038)
Officers'/Directors' stock purchase............ 2,038
Distributions.................................. (22,020)
Net income..................................... 8,411
------- ------- --------
Balance, December 31, 1995....................... -- -- (17,551)
Repurchases of the Company's common stock...... (6,462)
Officers'/Directors' stock purchase............ 387
Retirement of common stock repurchased......... 6,075
Public offerings, net of offering costs........
Conversion of preferred stock to common
stock........................................
Stock issued under the dividend reinvestment
plan.........................................
Purchase and cancellation of minority interest
securities...................................
Distributions.................................. (29,421)
Net income..................................... 15,569
------- ------- --------
Balance, December 31, 1996....................... -- -- (31,403)
Repurchases of the Company's common stock (6,666)
Retirement of common stock purchased........... 6,666
Public offerings, net of offering costs........
Conversion of preferred stock to common
stock........................................
Stock issued under the dividend reinvestment
plan.........................................
Stock issued through exercise of options.......
Restricted stock issuance...................... (2,834)
Restricted stock cancellation.................. 474
Amortization of deferred compensation.......... 956
Distributions.................................. (46,376)
Net income..................................... 22,582
------- ------- --------
Balance, December 31, 1997....................... $(1,404) $ -- $(55,197)
======= ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-14
<PAGE> 107
WALDEN RESIDENTIAL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 22,582 $ 15,569 $ 8,411
Adjustments to reconcile net income to net cash
provided by operating activities:
Income allocated to minority interests........... 4,109 1,705 922
Depreciation and amortization.................... 34,668 20,726 16,634
Amortization of deferred compensation on
restricted stock............................... 956 -- --
Amortization of prepaid interest expense......... 121 -- --
Gain on disposition of real property............. (2,055) (1,934) (1,502)
Extraordinary loss on debt extinguishment........ 422 1,848 1,352
Net effect of changes in operating accounts:
Escrow deposits................................ (1,099) (1,299) (850)
Other assets................................... 622 (784) 203
Accrued real estate taxes...................... 6,172 1,438 3,521
Accounts payable............................... 294 492 1,352
Other liabilities.............................. 4,030 520 1,274
--------- --------- ---------
Net cash provided by operating activities... 70,822 38,281 31,317
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of net assets of Drever Partners, Inc. and
its affiliates, net of noncash items shown
below............................................ (201,032) -- --
Purchase of real estate assets, net of noncash items
shown below...................................... (103,114) (168,219) (103,631)
Real estate asset additions......................... (32,363) (9,455) (6,451)
Proceeds from disposition of real property, net of
noncash items shown below........................ 8,695 18,667 23,156
Purchase of WDN Management net assets, net of
noncash item shown below......................... -- 339 --
--------- --------- ---------
Net cash used in investing activities............ (327,814) (158,668) (86,926)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance, net of issuance
costs............................................ 28,185 200,614 67,723
Purchase of the Company's common stock.............. (6,666) (6,573) (1,928)
Purchase of minority interest securities............ -- (3,975) --
Distributions paid on common and preferred stock and
minority interests............................... (47,979) (31,210) (22,481)
Proceeds from term loan and credit facility......... 393,098 166,770 152,471
Payment of mortgage notes payable and credit
facility......................................... (123,747) (172,188) (130,753)
Principal reductions of mortgage notes payable...... (3,716) (5,242) (1,197)
Payment of financing costs.......................... (1,798) (4,143) (3,751)
Prepayment penalties on debt extinguishment......... (348) (97) (914)
Additional collateral on loans...................... -- (650) (1,049)
--------- --------- ---------
Net cash provided by financing activities........ 237,029 143,306 58,121
--------- --------- ---------
</TABLE>
F-15
<PAGE> 108
WALDEN RESIDENTIAL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... $ (19,963) $ 22,919 $ 2,512
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........ 29,720 6,801 4,289
========= ========= =========
CASH AND CASH EQUIVALENTS, END OF PERIOD.............. $ 9,757 $ 29,720 $ 6,801
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.............................. $ 26,342 $ 20,706 $ 16,916
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of net assets of Drever Partners, Inc. and
its affiliates:
Rent and other receivables....................... $ 4,635 $ -- $ --
Prepaid and other assets......................... 315 -- --
Escrow deposits.................................. 2,579 -- --
Mortgage notes payable........................... (166,995) -- --
Accrued real estate taxes........................ (8,433) -- --
Accounts payable................................. (7,765) -- --
Accrued expenses and other liabilities........... (3,998) -- --
Minority interest securities..................... (303,488) -- --
--------- --------- ---------
$(483,150) $ -- $ --
========= ========= =========
Items related to purchase of assets:
Mortgage notes assumed........................... $ 10,816 $ 14,748 $ 73,055
========= ========= =========
Securities issued for purchase of assets......... $ 1,050 $ -- $ 22,825
========= ========= =========
Accrued real estate asset additions................. $ 104 $ 517 $ 416
========= ========= =========
Mortgage notes assumed by buyer upon disposition of
property......................................... $ -- $ 4,195 $ --
========= ========= =========
Purchase of WDN Management net assets:
Rent and other receivables....................... $ -- $ 48 $ --
Prepaid and other assets......................... -- 1,022 --
Amortizable assets............................... -- 8 --
Accounts payable................................. -- 58 --
Accrued expenses and other liabilities........... -- (267) --
Notes payable to the Company..................... -- (923) --
Stockholders' equity............................. -- (300) --
--------- --------- ---------
$ -- $ (354) $ --
========= ========= =========
Notes receivable for officers' and directors' stock
purchases........................................ $ -- $ 292 $ 1,533
========= ========= =========
Deferred compensation on restricted stock, net of
cancellations.................................... $ 2,359 $ -- $ --
========= ========= =========
Distribution payable to minority interest holders... $ 391 $ 377 $ 461
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-16
<PAGE> 109
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
Walden Residential Properties, Inc. (the "Company") was formed on September
29, 1993 as a Maryland corporation. The Company is a self-administered and
self-managed equity real estate investment trust ("REIT") as defined under the
Internal Revenue Code of 1986, as amended. On February 9, 1994, the Company
completed an initial public offering ("IPO") of its common stock, which is
listed on the New York Stock Exchange. As of December 31, 1997, the Company
owned 154 multifamily properties, containing 42,482 apartment units, primarily
in the Southwest and Southeast regions of the United States.
(2) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company, its wholly-owned corporation and partnership subsidiaries and two
limited partnerships in which the Company has a controlling interest. The
limited partnership interests not owned by the Company are accounted for as
minority interests (see Note 11). All material intercompany transactions and
account balances have been eliminated in consolidation.
Income Recognition
Rental, interest and other income are recorded on the accrual method of
accounting as earned.
Rental Operations
As of December 31, 1997, the Company owned 154 multifamily properties in
eleven states; with 69% of its apartment units located in Texas and 25% located
in Florida, Oklahoma, Arizona, Tennessee and Utah. Of the total units owned,
12,125 or 29% are located in the Houston area and 11,749 or 28% are located in
the Dallas/Fort Worth area. Apartment units are leased to residents on terms of
one year or less, with monthly payments due in advance. Certain of the
properties are subject to Federal, state and local statutes or other
restrictions requiring that a percentage of apartments be made available to
lower or moderate income families. In management's opinion, due to the number of
residents, the type and diversity of markets in which the properties operate and
the collection terms, there is no concentration of credit risk.
Unusual Charge -- Officer Settlement Agreement
In October 1997, the Company entered into a settlement agreement in
connection with the resignation of its former Chief Executive Officer ("CEO")
and Chairman of the Board. The Company has recorded the total cost of this
settlement ($1.9 million) as an unusual charge in the statement of income. The
vesting of the restricted stock that was issued to this individual was
accelerated and these shares now vest in October 2000. The vesting of all stock
options held by this individual was accelerated such that they vested
immediately and expire in October 2002.
Cash and Cash Equivalents
All cash and investments in money market accounts, excluding restricted
cash, that have a maturity of three months or less at the time of purchase are
considered to be cash and cash equivalents.
Restricted Cash
Restricted cash consists of two major components: (1) security deposits and
escrow deposits held by lenders for the payment of property taxes, insurance and
replacement reserves and (2) additional collateral on mortgage notes payable.
Restricted cash related to security and escrow deposits is invested primarily in
F-17
<PAGE> 110
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
short-term securities. Restricted cash related to additional collateral on
mortgage notes is invested in long-term government securities. The additional
collateral is not available for general operating purposes.
Real Estate Assets and Depreciation
Expenditures directly related to the acquisition and improvement of real
estate assets are capitalized at cost as land, buildings and improvements. The
Company capitalizes the cost of appliances, exterior painting, roof replacement
and expenditures for other major property improvements, as well as
rehabilitation costs incurred for properties acquired. Effective July 1, 1996,
the Company revised its method of accounting to capitalize the cost of
replacement carpets on a prospective basis (see Note 3).
Depreciation is computed on a straight-line basis over the estimated useful
lives of the related assets which range from 14 to 30 years for buildings and
five, ten or 15 years for personal property.
The Company's management routinely reviews its investments for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Based on the Company's policy of reviewing for
impairment of long-lived assets by reviewing expected future cash flows of its
properties, there were no adjustments necessary for impairment of properties
during the three year period ended December 31, 1997.
Deferred Financing Costs and Amortization
Legal fees and other costs associated with obtaining financing have been
capitalized and are being amortized over the terms of the related debt.
Financing costs were reported net of accumulated amortization of $1,625,000 and
$632,000 as of December 31, 1997 and 1996, respectively.
Forward Treasury Lock Agreements
During 1997, the Company entered into forward treasury lock agreements in
order to hedge its exposure to interest rate fluctuations. Any gains or losses
under the forward treasury lock agreements will be amortized as interest expense
over the term of the financing.
Income Taxes
The Company elected to be taxed as a REIT for Federal income tax purposes
as provided under the Internal Revenue Code of 1986, as amended, effective with
its taxable year ended December 31, 1994. As a result, the Company generally
will not be subject to Federal income taxation if it distributes 95% of its REIT
taxable income to its stockholders and satisfies certain other requirements. The
Company qualified as a REIT for its taxable years ended December 31, 1996 and
1995 and anticipates that its method of operations will enable it to continue to
satisfy the requirements for such qualification.
Minority Interests
Minority interests represent limited partnership interests not owned by the
Company. Amounts are recorded based on the fair value of the cash and securities
issued in exchange for the net assets acquired (see Note 11). Partnership units
are convertible into common stock (11,176,904 units at December 31, 1997)
("Common OP Units") and preferred stock (1,999,909 units at December 31, 1997)
("Preferred OP Units") (collectively, the "OP Units") in accordance with the
partnership agreements. Minority interest holders are entitled to cash
distributions at rates equivalent to common or preferred stockholders as defined
in the partnership agreements. Certain Common OP Units have guaranteed
distributions. Income allocated to minority interests is equal to either (i) the
preferred distributions paid or accrued or (ii) an amount equal to income before
income allocated to minority interests divided by the number of common shares
and Common OP Units.
F-18
<PAGE> 111
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company revised its prior financial statements by reclassifying the
convertible equity securities formerly reported as a component of stockholders'
equity in its consolidated balance sheets to minority interests and by restating
its statements of income to reflect distributions or income on such convertible
equity securities as income allocated to minority interests which is deducted in
arriving at net income. The Company believes these changes were necessary to
conform the Company's prior financial statements to generally accepted
accounting principles. These changes had no impact on the financial condition,
business or assets of the Company and did not change the Company's net income
available to common stockholders per share.
Stock-based Compensation
The Company has elected not to recognize compensation expense for stock
options issued as calculated under Statement of Financial Accounting Standards
("SFAS") No. 123, but rather will continue recognizing expense as prescribed by
APB Opinion No. 25. Disclosure of amounts required by SFAS No. 123 for stock
options issued are included in Note 10. The Company also accounts for restricted
stock issued as prescribed by APB Opinion No. 25 (see Note 11).
Net Income Per Share of Common Stock
Basic net income per share has been computed by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding. Diluted net income per share has been computed by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding plus potential dilutive common share equivalents.
F-19
<PAGE> 112
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents information necessary to calculate basic and
diluted net income per share for the periods indicated, with 1996 and 1995 being
restated to conform with the requirements of the SFAS No. 128, Earnings per
Share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net Income for Basic and Diluted Computation:
Income before extraordinary item and income allocated to
minority interests..................................... $27,113 $19,122 $10,685
Extraordinary loss on debt extinguishment................. (422) (1,848) (1,352)
------- ------- -------
Income before minority interests.......................... 26,691 17,274 9,333
Income allocated to minority interests.................... (4,109) (1,705) (922)
------- ------- -------
Net income................................................ 22,582 15,569 8,411
Preferred distributions................................... (13,186) (2,387) --
------- ------- -------
Net income available to common stockholders (basic and
diluted net income per share computation).............. $ 9,396 $13,182 $ 8,411
======= ======= =======
Basic Net Income per Share:
Before extraordinary item, less preferred distributions... $ 0.55 $ 1.02 $ 0.80
Extraordinary loss on debt extinguishment................. (0.02) (0.12) (0.11)
------- ------- -------
Net income available to common stockholders............... $ 0.53 $ 0.90 $ 0.69
======= ======= =======
Diluted Net Income per Share:
Before extraordinary item, less preferred distributions... $ 0.55 $ 1.02 $ 0.80
Extraordinary loss on debt extinguishment................. (0.02) (0.13) (0.11)
------- ------- -------
Net income available to common stockholders............... $ 0.53 $ 0.89 $ 0.69
======= ======= =======
Weighted Average Number of Shares Outstanding (a):
Basic..................................................... 17,590 14,720 12,155
Dilutive effect of outstanding options.................... 157 72 --
------- ------- -------
Diluted................................................... 17,747 14,792 12,155
======= ======= =======
</TABLE>
- ---------------
(a) Excludes the convertible preferred shares, warrants and Common OP Units (see
Note 11) and 1,696,750 stock options, which are anti-dilutive.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of certain assets, liabilities,
revenues and expenses as of and for the reporting periods. Actual results may
differ from such estimates.
Environmental Remediation Costs
The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remediation feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Recoveries of environmental remediation costs from other parties are recorded as
assets when their receipt is deemed probable. The
F-20
<PAGE> 113
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's management is not aware of any environmental remediation obligations
which would materially affect the operations, financial position or cash flows
of the Company.
New Accounting Pronouncements
In December 1997, the Company adopted the provisions of Financial
Accounting Standards Board ("FASB") SFAS No. 128, Earnings Per Share. SFAS No.
128 specifies the computation, presentation and disclosure requirements of
earnings per share and supersedes Accounting Principles Board Opinion No. 15.
SFAS No. 128 requires a dual presentation of basic and diluted earnings per
share. Basic earnings per share, which excludes the impact of common share
equivalents, replaces primary earnings per share. Diluted earnings per share,
which utilizes the average market price per share as opposed to the greater of
the average or ending market price per share when applying the treasury stock
method in determining common share equivalents, replaces fully diluted earnings
per share.
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure, which establishes standards for disclosing information
about an entity's capital structure. SFAS No. 129 is effective for periods
ending after December 15, 1997. The adoption of SFAS No. 129 did not impact the
Company's capital structure disclosures, as the Company was already in
compliance with this accounting standard.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments and related information in interim and annual financial statements.
SFAS No. 130 and 131 are effective for periods beginning after December 15,
1997. SFAS No. 130 could impact the Company's reporting as it relates to its
outstanding derivatives and management will implement SFAS No. 131 for the year
ending December 31, 1998 by reporting its operating segments by geographic
location.
Reclassifications
Certain previously reported amounts have been reclassified to conform to
current financial statement presentation.
(3) CHANGE IN ACCOUNTING POLICY
Effective July 1, 1996, the Company revised its method of accounting to
capitalize the cost of replacement carpets on a prospective basis ($864,000
capitalized in 1996 which would have been expensed under the old policy, which
represents $0.06 for basic and diluted net income per share). The Company
believes that this accounting policy change is preferable because it is
consistent with policies currently being used by the majority of the largest
publicly traded apartment REITs and provides a better matching of expenses with
the related benefit of the expenditures.
F-21
<PAGE> 114
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is pro forma information as if the revised capitalization policy
was in effect as of January 1, 1995 (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Income before extraordinary item and income allocated to
minority interests as reported............................ $19,122 $10,685
Add: Adjustment for change in accounting policy to
capitalize carpet replacement costs....................... 264 875
------- -------
Income before extraordinary item and income allocated to
minority interests as adjusted............................ $19,386 $11,560
======= =======
Net income as adjusted...................................... $15,833 $ 9,286
======= =======
Net income available to common stockholders as adjusted..... $13,446 $ 9,286
======= =======
Basic net income per share:
Before extraordinary item, less preferred distributions
and income allocated to minority interests as
reported............................................... $ 1.02 $ 0.80
Adjustment for effect of change in accounting policy...... 0.02 0.08
------- -------
Income before extraordinary item, less preferred
distributions and income allocated to minority
interests as adjusted.................................. $ 1.04 $ 0.88
======= =======
Net income available to common stockholders as reported... $ 0.90 $ 0.69
Adjustment for effect of change in accounting policy...... 0.02 0.08
------- -------
Net income available to common stockholders as adjusted... $ 0.92 $ 0.77
======= =======
Diluted net income per share:
Before extraordinary item, less preferred distributions
and income allocated to minority interests as
reported............................................... $ 1.02 $ 0.80
Adjustment for effect of change in accounting policy...... 0.02 0.07
------- -------
Income before extraordinary item, less preferred
distributions and income allocated to minority
interests as adjusted.................................. $ 1.04 $ 0.87
======= =======
Net income available to common stockholders as reported... $ 0.89 $ 0.69
Adjustment for effect of change in accounting policy...... 0.02 0.07
------- -------
Net income available to common stockholders as adjusted... $ 0.91 $ 0.76
======= =======
</TABLE>
(4) ACQUISITIONS AND DISPOSITIONS
Acquisitions
During 1997 the Company acquired 93 apartment properties containing 21,467
units (or 6,037 weighted average units) for a cost of $799.2 million. During
1996 the Company acquired 16 apartment properties containing 5,034 units (or
1,631 weighted average units) for a cost of $179.0 million. In addition, in
connection with one property acquired in December 1996, the Company acquired
approximately 81 acres of adjacent undeveloped land for $4 million. The
properties acquired in 1997 and 1996 are located in the states of Texas,
Florida, California, Georgia, Arizona and Tennessee.
The acquisitions are accounted for by the purchase method of accounting,
and the accompanying consolidated financial statements reflect the results of
operations of the acquired properties since the date of purchase.
F-22
<PAGE> 115
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 1, 1997, the Company acquired the assets and business of Drever
Partners, Inc. and its affiliates, including 18 partnerships of which Drever
Partners, Inc. and certain of its affiliates were the general partners,
(collectively, "Drever"), a private real estate management company based in San
Francisco and Houston. This transaction included the acquisition by the Company
of 79 apartment properties (consisting of 18,118 units), which are included in
the 93 properties acquired by the Company during 1997. Pursuant to an Exchange
Agreement with Drever, the consideration exchanged by the Company consisted of
approximately $94.7 million of cash, the assumption of $286.0 million of
mortgage debt (of which the Company repaid $119.0 million with proceeds from an
unsecured term loan and its unsecured credit facility) and $303.5 million (based
upon the price of the Company's stock at the time of the announcement of the
acquisition) of Common OP Units and Preferred OP Units, issued by a newly-formed
operating partnership subsidiary of the Company, Walden/Drever Operating
Partnership, L.P. ("WDOP"), to the shareholders and partners of and equity
participants in Drever. The Units are exchangeable on or after October 1, 1998
into an aggregate of 10,322,397 shares of the Company's common stock, 1,999,909
shares of the Company's 9.00% Redeemable Preferred Stock and 6,666,363 Series B
Warrants (each of which is exercisable for one-third of one share of the
Company's common stock at $26.875 per share). The 9.00% Redeemable Preferred
Stock and the Preferred OP Units are redeemable at the option of the Company in
ten years at a redemption price of $25 per share or unit.
On February 18, 1998, the Company acquired two apartment properties with a
total of 376 units located in Tampa, Florida for approximately $16.2 million.
The Company funded these acquisitions by assuming $5.8 million of variable rate
tax-exempt debt maturing in the year 2007, assuming $5.1 million of 7.35% fixed
rate debt maturing in the year 2005, and borrowing the remaining amount under
the Company's unsecured credit facility. The credit enhancement on the $5.8
million variable rate debt expires in November 1998 and is guaranteed by the
Company.
Dispositions
On October 2, 1997, the Company disposed of one 392-unit property located
in Dallas, Texas. During 1996 the Company disposed of three properties: a
384-unit property located in Wichita, Kansas, on April 24, 1996; a 304-unit
property located in Corpus Christi, Texas, on August 30, 1996; and a 144-unit
property located in Stone Mountain, Georgia, on September 27, 1996. In
connection with these dispositions, the Company reported gains in the amount of
$2,055,000 and $1,934,000 for the year ended December 31, 1997 and 1996,
respectively.
Pro Forma Information (Unaudited)
The following unaudited condensed pro forma information for the two years
ended December 31, 1997 was prepared from the financial statements of the
Company by adjusting for the effect of all public offerings and all property
dispositions and acquisitions in 1997 and 1996, including debt used to finance
acquisitions or repaid from proceeds of dispositions, as if all of these
transactions had occurred on January 1, 1996. The pro forma results do not
include gains on property dispositions or extraordinary losses on early
extinguishment of debt. The following information is not necessarily indicative
of what the performance would have been had the Company owned these properties
for the entire period, nor does it purport to represent future results of
operations of the Company. (In thousands, except per share information.)
F-23
<PAGE> 116
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues.................................................... $268,113 $261,070
Expenses.................................................... 245,361 237,814
-------- --------
Income before income allocated to minority interests........ 22,752 23,256
Income allocated to minority interests...................... (7,362) (7,619)
-------- --------
Net income.................................................. 15,390 15,637
Preferred distributions..................................... (13,186) (13,296)
-------- --------
Net income available to common stockholders................. $ 2,204 $ 2,341
======== ========
Basic net income per share.................................. $ 0.13 $ 0.14
======== ========
Diluted net income per share................................ $ 0.12 $ 0.14
======== ========
</TABLE>
(5) REAL ESTATE ASSETS
Changes in real estate assets and related accumulated depreciation for the
years ended December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<S> <C>
Real estate assets:
Balance at January 1, 1996................................ $ 513,341
Purchase of real estate assets............................ 182,967
Sale of real estate assets................................ (22,765)
Fixed asset additions..................................... 9,972
----------
Balance at December 31, 1996.............................. 683,515
Purchase of real estate assets............................ 799,162
Sale of real estate assets................................ (7,323)
Fixed asset additions..................................... 32,259
----------
Balance at December 31, 1997.............................. $1,507,613
==========
Accumulated depreciation:
Balance at January 1, 1996................................ $ 23,734
Depreciation expense...................................... 19,810
Write off related to real estate assets sold.............. (1,837)
----------
Balance at December 31, 1996.............................. 41,707
Depreciation expense...................................... 33,560
Write off related to real estate assets sold.............. (683)
----------
Balance at December 31, 1997.............................. $ 74,584
==========
</TABLE>
(6) WDN MANAGEMENT COMPANY
For the period February 9, 1994 through December 31, 1996, the Company
owned 5% of the voting common stock and 100% of the non-voting common stock
(which represented 95% of the economic interest) of WDN Management Company ("WDN
Management"). The remaining 95% of the voting common stock (which represented a
5% economic interest) was owned by the Company's four executive officers. For
this period, the results of operations of WDN Management were accounted for on
the equity method. On December 31, 1996, the Company purchased the additional 5%
economic interest in WDN Management from
F-24
<PAGE> 117
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the four executive officers for $15,000 which represents the four executive
officers' original cost of the shares. At such time, WDN Management and its
wholly-owned subsidiary were merged into the Company and WDN Management was
dissolved.
(7) MORTGAGE NOTES PAYABLE, UNSECURED TERM LOAN AND UNSECURED CREDIT FACILITY
Mortgage notes payable and the Company's unsecured term loan (the "Term
Loan") and unsecured credit facility (the "Credit Facility") consist of the
following (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 PRINCIPAL BALANCE
------------------------------------ AS OF DECEMBER 31,
WEIGHTED AVERAGE WEIGHTED AVERAGE -------------------
INTEREST RATE YEARS TO MATURITY 1997 1996
---------------- ----------------- -------- --------
<S> <C> <C> <C> <C>
Conventional Fixed Rate Mortgage Notes:
Mortgage notes payable to the Federal
National
Mortgage Association...................... 8.81% 6.1 $ 43,101 $ 48,343
Mortgage notes payable to insurance
companies.............................. 7.83% 3.8 248,155 86,452
Mortgage notes - other.................... 8.50% 2.6 3,175 3,208
---- ---- -------- --------
7.98% 4.1 294,431 138,003
Tax-exempt Mortgage Notes:
Fixed rate................................ 6.51% 19.3 75,638 69,820
Variable rate............................. 5.53% 0.5 51,085 51,085
---- ---- -------- --------
6.11% 11.7 126,723 120,905
Variable Rate Notes:
Unsecured Term Loan....................... 7.98% 0.9 200,000 --
Unsecured Credit Facility................. 7.72% 1.1 74,000 --
Other..................................... 8.63% 2.9 7,200 --
---- ---- -------- --------
7.93% 1.0 281,200 --
---- ---- -------- --------
Total/Weighted Average.................... 7.62% 4.2 $702,354 $258,908
==== ==== ======== ========
</TABLE>
As of December 31, 1997, the Company had collateralized 88 of its 154
properties under various mortgage loans.
Conventional Mortgage Notes Payable
Conventional mortgage notes payable include 60 loans encumbering 75
properties at December 31, 1997. Mortgage notes for $294.4 million are payable
in monthly installments aggregating approximately $2.3 million, including
principal and interest at various fixed rates ranging from 6.95% to 9.22% per
annum. One mortgage loan for $7.2 million is a variable rate loan requiring
monthly payments of interest only (8.63% interest rate at December 31, 1997).
Scheduled maturities are at various dates ranging from March 31, 1998 through
December 1, 2005.
Tax-Exempt Mortgage Notes Payable
At December 31, 1997, 13 of the Company's properties are encumbered by 12
mortgage notes which were financed from the proceeds of tax-exempt bonds and
which have credit enhancements. Mortgage notes of approximately $75.7 million
are payable in monthly installments of approximately $0.5 million, including
principal and interest at fixed rates ranging from 6.13% to 6.75% per annum.
Mortgage notes in the amount of $68.8 million have scheduled maturities ranging
from October 1, 2005 through September 1, 2028. The remaining mortgage note of
$6.9 million was refinanced in February 1998 (see below). The remaining
F-25
<PAGE> 118
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tax-exempt mortgage notes in the amount of $51.1 million have variable interest
rates, are payable in monthly installments of interest only and have a weighted
average interest rate of 5.53% as of December 31, 1997. The bonds underlying
these mortgage notes are scheduled to mature on May 1, 2024, while the credit
enhancements mature on June 30, 1998. The Company has guaranteed $6.4 million of
the tax-exempt mortgage notes as of December 31, 1997 and 1996.
On January 29, 1998 and February 12, 1998, the Company refinanced $12.7
million and $6.9 million, respectively, of the variable rate tax-exempt mortgage
loans and extended the mortgage loan and credit enhancement maturity to February
15, 2028. The Company has also received a commitment to refinance the remaining
variable rate tax-exempt mortgage loans to provide a 30-year credit enhancement.
In March 1998, $78.1 million of conventional fixed-rate mortgage notes were
refinanced with $110.0 million of fixed-rate debt, of which 80.0 million of such
debt bears interest at 6.62% and matures in December 2007 and the remaining
$30.0 million bears interest at 7.06% and matures in December 2017.
Unsecured Term Loan and Unsecured Credit Facility
On December 15, 1997, the Company entered into an unsecured $200 million
one year term loan agreement (the "Term Loan") with BankBoston, as agent for a
group of financial institutions. The interest rate on the borrowing is identical
to that of the Credit Facility (see below). This borrowing was utilized to repay
a $110 million term loan obtained on October 1, 1997 in connection with the
acquisition of the apartment properties owned by Drever. The balance of the
proceeds of the Term Loan were used to reduce the Credit Facility borrowings.
The Company paid a loan fee of $1.2 million dollars for the Term Loan which is
being amortized over the life of the loan.
The Company has a $150 million unsecured Credit Facility with BankBoston,
as agent for a group of financial institutions, which matures February 1999. At
the Company's election, the interest rate on any borrowings under its Credit
Facility is at a floating rate equal to either (i) BankBoston's base rate (8.5%
at December 31, 1997) plus 0.5%, or (ii) LIBOR (5.7% at December 31, 1997) plus
1.375%.
The Term Loan and Credit Facility contain customary representations,
warranties and events of default which require the Company to comply with
certain affirmative and negative covenants. The primary restrictive covenants
provide that: (i) distributions to stockholders may not exceed 90% of funds from
operations, as defined in the Term Loan and Credit Facility; (ii) secured
mortgage indebtedness may not exceed 40% of the Company's total assets before
depreciation; (iii) the Company's fixed charge coverage ratio, as defined, must
exceed 1.25; and (iv) the Company's debt service coverage ratio, as defined,
must exceed 2.0. As of December 31, 1997, the Company is in compliance with all
covenants of the Term Loan and Credit Facility.
Principal Debt Maturities
Principal debt maturities, including balloon payments, for the next five
years are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $341,206
1999........................................................ 79,612
2000........................................................ 20,270
2001........................................................ 72,890
2002........................................................ 4,986
Thereafter.................................................. 183,390
--------
Total..................................................... $702,354
========
</TABLE>
F-26
<PAGE> 119
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Extraordinary Items
As a result of the sale of a property during 1997, the Company recorded an
extraordinary loss in the amount of $0.4 million, which represented the
write-off of unamortized deferred financing costs and prepayment penalties from
the early retirement of debt. During 1996, the Company refinanced approximately
$36.4 million of mortgage loans and the Credit Facility prior to maturity, which
resulted in an aggregate extraordinary loss of $1.8 million. These losses
represented prepayment fees and unamortized financing costs related to the debt
retired.
Forward Treasury Lock Agreements
The Company has entered into five forward treasury lock agreements in order
to hedge its exposure to interest rate fluctuations on anticipated debt
financing expected to close in 1998. Under these agreements, the Company will
pay or receive an amount equal to the difference between the Reference Yield and
the Market Yield, as defined, on the date of exercise. The exercise date may be
any date up to the settlement date. Any gain or loss under these agreements will
be amortized to interest expense over the term of the financing. The following
forward treasury lock agreements were in place as of December 31, 1997:
<TABLE>
<CAPTION>
NATIONAL AMOUNT SETTLEMENT DATE REFERENCE YIELD REFERENCE TREASURY
--------------- --------------- --------------- ------------------
(In thousands)
<C> <S> <C> <C>
$75,000 November 23, 1998 5.8950% 5.750% due 11/30/02
25,000 November 23, 1998 5.9600% 6.125% due 08/15/07
100,000 May 22, 1998 6.3205% 6.125% due 08/15/07
75,000 May 21, 1998 6.4745% 6.125% due 08/15/07
20,000 May 22, 1998 6.2594% 6.625% due 02/15/27
--------
$295,000
========
</TABLE>
(8) EMPLOYEE BENEFIT PLAN
Effective October 1, 1995, WDN Management adopted a 401(k) Plan for its
employees and the employees of the Company. The 401(k) plan is a voluntary
defined contribution plan. Qualified employees may participate in the plan by
contributing up to 15% (20% effective October 1, 1997) of the participant's
annual compensation (not to exceed $9,500, $9,500 and $9,240 per annum for 1997,
1996 and 1995, respectively). In 1997, the Company made an annual matching
contribution on the participants' behalf of $136,000, representing up to 3% of
the participant's annual compensation for the periods from October 1, 1996
through September 30, 1997 and from October 1, 1997 through December 31, 1997.
In 1996, WDN Management made an annual matching contribution on the
participant's behalf of $217,000. This represented up to 6% and 3% of the
participant's annual compensation for the periods from October 1, 1995 through
March 31, 1996 and from April 1, 1996 through September 30, 1996, respectively.
The amount relating to the Company's employees was reimbursed to WDN Management
by the Company in 1996. A participant's salary deferral contribution is 100%
vested and nonforfeitable. A participant will become vested in the Company's
matching contributions after five years.
(9) OFFICER AND DIRECTOR NOTES FOR STOCK PURCHASES
On July 19, 1994, the Company issued 183,000 shares of its common stock, at
$20.875 per share (the closing sales price of the common stock on the New York
Stock Exchange for that date), to four executive officers and to seven other
officers of the Company. Each officer acquiring stock paid 10% of the purchase
price in cash, with the remaining 90% loaned by the Company. Each such loan is
evidenced by a note with a five year term, bearing interest at a fixed rate of
7.25% per annum, payable quarterly, and is secured by
F-27
<PAGE> 120
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a pledge of the shares of common stock purchased by each officer pursuant to
such loans. One officer is personally liable for the indebtedness evidenced by
his note, while the loans to each of the other officers are non-recourse.
On December 14, 1995, the Company authorized the issuance of shares of its
common stock at $19.375 per share, the closing sales price of the common stock
on the New York Stock Exchange for that date, to four executive officers, three
other officers and four directors. On December 20, 1995, the Company agreed to
issue 122,600 shares of its common stock to such officers and directors. On such
date, the closing sales price of the Company's common stock on the New York
Stock Exchange was $19.50 per share. Of such shares of common stock, the Company
issued 103,800 on December 28, 1995 and 18,800 on January 18, 1996. Such shares
were issued from common stock repurchased pursuant to the Company's stock
repurchase program (see Note 11). Each officer and director acquiring stock paid
20% and 50%, respectively, of the purchase price in cash with the remaining
amount loaned by the Company. Each loan is evidenced by a note with a five year
term, bearing interest at a fixed rate of 8% per annum, payable quarterly, and
is secured by a pledge of the shares of common stock purchased. In addition,
each officer and director is personally liable for the indebtedness evidenced by
the respective note.
On February 17, 1998, the Company implemented a new officer loan program
allowing officers to purchase the Company's common stock at current market
prices and to exercise vested stock options with the assistance of a loan from
the Company. Under this program, officers are eligible to purchase stock on
March 1 and September 1 of each year in an aggregate amount of up to three times
the officer's annual salary. A cash payment of 5% to 15% of the purchase price
is required by the officer, depending upon the amount of the purchase, with the
remainder loaned on a full recourse basis to the officer. Each loan is evidenced
by a note with a five-year term, requiring quarterly payments of interest only
at a fixed interest rate equal to the Company's then current interest rate under
its Credit Facility. The loan is secured by a pledge of the shares of common
stock purchased by each officer pursuant to such loan.
On March 2, 1998, the Company issued 138,692 shares of its common stock, at
$24.75 per share (the closing price of the common stock on the New York Stock
Exchange for the previous trading day) and 26,192 shares of its common stock at
a stock option grant price of $19.25 per share, to 25 officers under the officer
loan program. The Company issued loans to officers in the amount of
approximately $3.6 million, bearing interest at 7%.
(10) STOCK OPTION PLAN
The Company adopted a stock option plan (the "Option Plan") in 1994 to
provide incentives to officers, key employees and directors. Stock options
granted under the Option Plan include non-qualified options and incentive stock
options ("ISOs"). Options granted to non-employee directors vest over a one-year
period. Options granted to officers and other employees vest ratably over a
four-year period. All options expire ten years from the date of grant. Shares of
common stock reserved for issuance under the Option Plan are in an amount equal
to 10% of the Company's outstanding shares including exchangeable or convertible
securities. As of December 31, 1997, 3,115,953 shares of common stock were
reserved for issuance under the Option Plan. The Option Plan limits the number
of shares of common stock issuable pursuant to ISOs to 1,500,000. Following is a
summary of stock option activity for the three years ended December 31, 1997:
F-28
<PAGE> 121
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS
-------- --------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
year................................ $20.07 1,392,750 $19.23 792,500 $19.25 521,350
Granted............................. 25.34 1,778,250 21.16 603,250 19.21 286,150
Exercised........................... 19.56 (138,813) 19.25 (125) 19.25 (1,875)
Canceled............................ 22.83 (148,562) 20.64 (2,875) 19.25 (13,125)
------ --------- ------ --------- ------ -------
Options outstanding, end of year...... $23.20 2,883,625 $20.07 1,392,750 $19.23 792,500
====== ========= ====== ========= ====== =======
Exercisable options, end of year...... $21.21 1,076,619 $19.22 356,900 $19.25 141,713
====== ========= ====== ========= ====== =======
</TABLE>
As of December 31, 1997, options for 1,076,619 shares of common stock were
exercisable at prices ranging from $18.47 to $26.00 per share and had a weighted
average remaining contractual life of 5.5 years. Outstanding options as of
December 31, 1997 had a weighted average contractual life of 7.9 years.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires companies
to use recognized option pricing models to estimate the fair value of stock
based compensation, including stock options. The Company has elected not to
recognize compensation expense as calculated under SFAS No. 123, but rather will
continue recognizing expense as prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees," as allowed under SFAS No. 123.
Had compensation expense been determined based on the fair value of the
stock option grants at the grant dates consistent with the method of SFAS No.
123, the Company's net income and net income per common share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Net income available to common stockholders:
As reported (in thousands)................................ $9,396 $13,182 $8,411
Pro forma (in thousands).................................. $8,180 $12,806 $8,184
Basic net income per share:
As reported............................................... $ 0.53 $ 0.90 $ 0.69
Pro forma................................................. $ 0.47 $ 0.87 $ 0.67
Diluted net income per share:
As reported............................................... $ 0.53 $ 0.89 $ 0.69
Pro forma................................................. $ 0.46 $ 0.87 $ 0.67
Stock options issued (in thousands)......................... 1,778 603 286
Weighted average exercise price............................. $25.34 $ 21.16 $19.21
Weighted average compensation value of options granted per
option(1)................................................. $ 2.38 $ 1.14 $ 1.20
Compensation cost (in thousands)............................ $1,397 $ 376 $ 227
</TABLE>
- ---------------
(1) Calculated in accordance with the binomial model, using the following
assumptions; (i) expected volatility computed using the monthly average of
the Company's common stock market price as listed on the New York Stock
Exchange for the period April 1995 through September 1997 for the year
ended December 31, 1997, with an average market price volatility of 13.4%
and the period February 1994 through July 1996 for the periods ended
December 31, 1996 and 1995, with an average market price volatility of
11.92%; (ii) expected dividend yield ranging from 7.42% to 9.90%; (iii)
expected option term of six years; (iv) risk-free rate of return as of the
date of grant, which ranged from 5.39% to 7.61%, based on extrapolated
yield of six year U.S. Treasury securities and (v) forfeiture rate of 4.0%.
F-29
<PAGE> 122
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) STOCKHOLDERS' EQUITY AND MINORITY INTERESTS
Minority Interests
In connection with apartment acquisitions in June 1995, the Company issued
Common OP Units that are exchangeable for an aggregate of 810,128 shares of the
Company's common stock at the option of the unit holders. Prior to exchange, the
holders of these Common OP Units will be entitled to receive quarterly
distributions equal to the greater of the Company's actual distributions on
810,128 shares of common stock, or $369,000 in the aggregate ($391,000 was
accrued as of December 31, 1997). Distributions of $1,564,000, $1,789,000 and
$461,000 were paid to these unit holders for the years ended December 31, 1997,
1996 and 1995, respectively. These securities have been recorded as minority
interests in the accompanying balance sheets.
In connection with an apartment acquisition in April 1997, the Company
issued $1.1 million of Common OP Units which are convertible into 44,379 shares
of the Company's common stock. Prior to conversion, the holders of these Common
OP Units will be entitled to receive quarterly distributions on the equivalent
of 44,379 shares of common stock if and when declared and paid ($38,000 was
declared and paid during the year ended December 31, 1997). These securities
have been recorded as minority interests in the accompanying balance sheets.
In connection with the properties acquired from Drever in October 1997 (see
Note 4), the Company issued $303.5 million of Common OP Units and Preferred OP
Units which are exchangeable on or after October 1, 1998, into common stock and
9.00% redeemable preferred stock with detachable warrants, respectively.
Approximately half of these Common OP Units and Preferred OP Units must convert
to common and preferred shares, respectively, on October 1, 1998. Beginning in
1998, the holders of the Preferred OP Units will be entitled to receive
quarterly distributions of $0.5625 per unit and the holders of the Common OP
Units will be entitled to receive quarterly distributions equal to those on the
Company's common stock. These securities have been recorded as minority
interests in the accompanying balance sheets.
On March 4, 1998, the Company paid distributions of $5.4 million on the
Common OP Units (which represented $0.4825 per unit) and $1.1 million on the
Preferred OP Units (which represented $0.5625 per unit).
Dividend Reinvestment Program
The Company has a Dividend Reinvestment and Stock Purchase Program ("DRP")
which allows stockholders to reinvest their common or preferred distributions
quarterly into shares of the Company's common stock, in lieu of receiving cash
distributions. The current DRP provides that the issue price of dividend
reinvestment purchases are at 95% of the average closing market price of the
Company's common stock for the five days preceding such purchase. The Company
has filed various shelf registration statements for an aggregate of 2,500,000
shares of common stock to be issued pursuant to the DRP, of which 923,726 shares
were available for issuance as of December 31, 1997. Pursuant to the DRP, the
Company issued 216,867 and 955,434 shares of its common stock during 1996 and
1997, respectively.
Other Shelf Registrations
On June 2, 1995, the Company filed a shelf registration statement for
$150,000,000 in shares of common or preferred stock. On October 9, 1996, the
Company filed another registration statement for $150,000,000 in shares of
common or preferred stock or stock warrants. The amount of securities available
for issuance under these registration statements at December 31, 1997 were
$6,032,000 and $19,993,000, respectively.
F-30
<PAGE> 123
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Public Offerings
Following is a summary of the Company's public offerings through December
31, 1997:
<TABLE>
<CAPTION>
DESCRIPTION DATE ISSUED ISSUE PRICE SHARES NET PROCEEDS
----------- ----------------- ----------- -------------- --------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Common Stock:
IPO.................................. February 9, 1994 $19.250 8,386(1) $143,680(2)
Follow-on offerings: November 7, 1994 $19.250 1,500 26,706
June 23, 1995 $18.375 3,500 60,173
August 27, 1996 $20.625 1,680 32,626(2)
December 24, 1996 $24.250 1,237 28,233(3)
------ --------
16,303 $291,418
====== ========
Preferred Stock/Warrants:
9.16% Series A Convertible
Redeemable Preferred Stock........ April 26, 1996 $25.000 1,800 43,500
9.20% Senior Preferred
Stock and Warrants................ December 27, 1996 $25.000 4,000 95,344
------ --------
5,800 138,844
------ --------
Total public offerings................. 22,103 $430,262
====== ========
</TABLE>
- ---------------
(1) Includes 645,000 shares issued to Walden and certain officers of Walden
(the "Restricted Shares").
(2) Includes overallotment option exercised.
(3) Includes 161,000 shares issued in January 1997 pursuant to an overallotment
option. Net proceeds were $3,524,000.
On February 19, 1998, the Company issued 323,232 shares of its common stock
at a price of $23.515 per share, resulting in net equity proceeds of $7.6
million.
Preferred Stock and Warrants
On April 26, 1996, the Company sold 1,800,000 shares of a 9.16% Series A
Convertible Redeemable Preferred Stock ("Series A") at $25.00 per share. On
August 14, 1996, 1,707,300 shares of Series A were exchanged for the same number
of shares of a 9.16% Series B Convertible Redeemable Preferred Stock ("Series
B"). On July 1, 1996, 14,000 shares of Series A were converted into 15,968
shares of common stock. During 1997, 73,818 shares of Series B were converted
into 84,194 shares of common stock. On July 2, 1997, the remaining Series A
shares which had not converted to shares of the Company's common stock, were
automatically exchanged for Series B shares pursuant to the terms of the Series
A shares. Distributions on Series B shares are cumulative and are equal to the
greater of (i) $2.29 per annum or (ii) the distribution on the number of shares
of common stock into which a share of Series B is convertible. Series B shares
are convertible into 1.1406 shares of common stock and are redeemable at the
option of the Company on or after April 30, 2006 at $25.00 per share.
On December 27, 1996, the Company sold 4,000,000 units at $25.00 per unit.
Each unit represented one share of 9.20% Senior Preferred Stock and one
detachable warrant. The preferred stock is not convertible into common stock and
is redeemable by the Company on or after December 31, 2006 at $25.00 per share.
Distributions on the preferred stock are cumulative. A warrant may be exchanged
for one-third share of common stock at an exercise price of $26.875 per share.
The warrants expire on January 1, 2002.
F-31
<PAGE> 124
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate liquidation preference of the Company's preferred stock was
$142,805,000 as of December 31, 1997.
Restricted Stock
On February 6, 1997, the Company adopted a Long-Term Incentive Plan to
attract and retain individuals to serve as directors, officers and employees of
the Company. The recipients of the Company's restricted shares of common stock
(the "Restricted Stock") are required to pay the $0.01 par value of the common
stock. On February 12, 1997, the Company issued 107,500 shares of Restricted
Stock under this plan to four executive officers, its non-employee directors and
certain other employees of the Company (of which 18,000 shares of Restricted
Stock were canceled upon departures of certain individuals). The shares issued
to the non-employee directors vest ratably over a three-year period; while the
shares issued to the executive officers and other employees vest over a ten-year
period, with an initial vesting of 40% after the fourth anniversary and a 10%
annual vesting thereafter. Deferred compensation related to the Restricted Stock
was computed based upon the market value of the shares at the date of issuance
less the amount paid for the shares. This deferred compensation is being
amortized over the respective vesting periods. The unamortized amount as of
December 31, 1997 was $1,404,000.
The vesting period of the Restricted Stock issued to the Company's former
CEO and Chairman of the Board was accelerated to October 2000, pursuant to a
settlement agreement. In addition, the balance of the deferred compensation on
such Restricted Stock ($739,000) was fully amortized in 1997, and is included in
the unusual charge -- officer settlement agreement in the statement of income.
On February 4, 1998, the Company issued 4,000 restricted shares of common
stock to two executive officers which shares vest ratably over a three year
period.
Other Stock Issuances
On April 19, 1995, the Company acquired a multifamily property for $14
million. The acquisition was funded by $9.8 million in financing and the
issuance of 215,700 shares of the Company's common stock at a price of $19.55
per share.
As discussed in Note 9, 183,000 shares of common stock were sold to 11
officers of the Company on July 19, 1994; 103,800 shares of common stock were
sold to seven officers and four directors on December 28, 1995 and 18,800 shares
were sold to one officer on January 18, 1996. All of the stock sold was pursuant
to an officer/director stock purchase plan at the then current market price.
Stock Repurchases
In December 1995, the Company announced its intention to repurchase shares
of its common stock. During 1995, the Company repurchased 103,800 shares of its
common stock at a cost of $2,038,000, of which $110,000 was not paid until
January 1996. All 103,800 shares were reissued to officers and directors on
December 28, 1995 pursuant to an officer and director stock purchase agreement
(see Note 9). During 1996, the Company repurchased 318,300 shares of its common
stock at a cost of $6,462,000; of which 18,800 shares were reissued on January
18, 1996 pursuant to an officer and director stock purchase agreement (see Note
9). The remaining 299,500 shares were retired in 1996.
In July 1997, the Company announced its intention to repurchase additional
shares of its common stock. During 1997 the Company repurchased and retired
278,500 shares of its common stock at a cost of $6,666,000.
F-32
<PAGE> 125
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Distributions to Common and Preferred Stockholders
For the year ended December 31, 1995, the Company paid distributions of
$22,020,000 (or $1.82 per share of common stock), of which 45.75% represented a
return of capital, 3.84% represented a long-term capital gain and 50.41%
represented ordinary taxable dividend income.
For the year ended December 31, 1996, the Company paid distributions of
$27.0 million to its common stockholders (or $1.86 per share of common stock),
of which 43.3% represented a return of capital, 3.7% represented a long-term
capital gain and 53.0% represented ordinary taxable dividend income. In
addition, the Company paid distributions of $2.4 million on its 9.16%
Convertible Redeemable Preferred Stock (or $1.335 per share), of which 6.53%
represented a long-term capital gain and 93.47% represented ordinary taxable
dividend income.
For the year ended December 31, 1997, the Company paid distributions of
$33,852,000 (or $1.93 per share of common stock), of which 44.06% represented a
return of capital, 2.23% represented a 20% long-term capital gain and 53.71%
represented ordinary taxable dividend income. In addition, the Company paid
distributions of $3,986,000 on its 9.16% Convertible Redeemable Preferred Stock
(or $2.29 per share) and $8,538,000 on its 9.2% Senior Preferred Stock (or $2.30
per share), of which 3.99% represented a long-term capital gain and 96.01%
represented ordinary taxable dividend income.
On March 4, 1998, the Company paid distributions of $12.0 million to
stockholders of record on February 18, 1998. The common stockholders were paid
$0.4825 per share; the 9.16% Convertible Redeemable Preferred Stockholders were
paid $0.5725 per share and the 9.20% Senior Preferred Stockholders were paid
$0.575 per share.
Distribution Preferences
Distributions on the Company's preferred stock and certain of its minority
interest securities have priority over other distributions. Following are the
Company's distribution preferences:
(a) First, to holders of the 9.20% Senior Preferred Stock (4,000,000 shares
at December 31, 1997, with an annual dividend rate of $2.30 per share);
then
(b) to holders of the 9.16% Series B Convertible Redeemable Preferred Stock
(1,712,182 shares at December 31, 1997, with an annual dividend rate of
$2.29 per share) and the holders of 1,999,909 Preferred OP Units (with
an annual distribution of $2.25 per unit); then
(c) to holders of 810,128 Common OP Units (at a minimum cumulative annual
distribution equal to $1.82 per unit); and
(d) finally, to all remaining holders of Common OP Units and common stock.
(12) FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value of financial instruments
was determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgement is necessary to
interpret market data and develop the related estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that could be realized upon disposition of the financial
instruments. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Cash and cash equivalents, receivables (including notes receivable from
officers and directors), accounts payable and accrued expenses and other
liabilities are carried at amounts which reasonably approximate their fair
value.
F-33
<PAGE> 126
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997, the outstanding balance of fixed rate mortgage
notes payable of $370.1 million had a fair value of $379.1 million (excluding
prepayment penalties) as estimated based upon interest rates available for the
issuance of debt with similar terms and remaining maturities as of December 31,
1997. Of these mortgages, $179.0 million were not prepayable at December 31,
1997. The remaining notes were subject to prepayment penalties of $5.6 million
at December 31, 1997, which would be required to retire these notes prior to
maturity. The floating rate mortgage notes payable balance at December 31, 1997
reasonably approximates fair value.
As of December 31, 1996, the outstanding balance of fixed rate mortgage
notes payable of $207.8 million had a fair value of $211.7 million (excluding
prepayment penalties) as estimated based upon interest rates available for the
issuance of debt with similar terms and remaining maturities as of December 31,
1996. Of these mortgage notes, $178.0 million were not prepayable at December
31, 1996. The remaining notes were subject to prepayment penalties of $1.9
million at December 31, 1996, which would be required to retire these notes
prior to maturity. The floating rate mortgage notes payable balance of $51.1
million at December 31, 1996 reasonably approximates fair value.
The fair value of the Company's forward treasury lock agreements (used to
hedge against exposure to interest rate fluctuations) is $9.3 million, the
estimated amount that the Company would pay to terminate the agreements as of
December 31, 1997. The amount was determined based on a quote received from a
financial institution which transacts these type of settlements.
The fair value estimates presented herein are based on information
available to management as of December 31, 1997 and 1996. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date, and current estimates of fair
value may differ significantly from the amounts presented herein.
(13) COMMITMENTS AND CONTINGENCIES
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. These matters are generally covered by
insurance. While the resolution of these matters cannot be predicted with
certainty, management believes that the final outcome of such matters will not
have a material adverse effect on the financial position, results of operations
or cash flows of the Company.
Effective October 1, 1995, the Company entered into a lease agreement for
its corporate office space. The lease requires monthly lease payments of $25,000
for a period of sixty months.
In January 1998, the Company executed a lease agreement for additional
office space. The lease requires monthly lease payments commencing at $66,000 up
to $78,000 for a period of 120 months, beginning May 1998.
As of December 31, 1997, the Company had employment agreements with five
executive officers for five-year periods ending in February or October 2002. The
aggregate remaining compensation due under these agreements was approximately
$4.9 million as of December 31, 1997. Under such agreements, the Company is
liable for the compensation benefits for one year if an executive officer were
to be terminated without cause, as defined.
On various dates in 1996 and 1997, the Company entered into contractual
obligations with a third party to construct carports on 59 of the Company's
properties. The total cost of the carports was estimated to be approximately
$13.6 million, of which $9.3 million had been incurred as of December 31, 1997.
The remaining $4.3 million is expected to be paid during 1998.
On February 27, 1998, the Company signed a joint venture agreement with The
Grupe Company ("Grupe") to purchase, for approximately $47 million, two
Sacramento area properties which will consist of
F-34
<PAGE> 127
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
616 apartment units. Under the terms of the joint venture, Grupe will build and
lease-up the two properties before the Company would purchase 100% of both
properties from the joint venture. The purchase is anticipated to occur sometime
in late 1999.
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial information for the two year period ended
December 31, 1997 is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 QUARTERS ENDED
--------------------------------------------------------------
MARCH JUNE 30 SEPTEMBER 30 DECEMBER 31 (A) TOTAL
-------- ------- ------------ --------------- --------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $33,291 $34,750 $36,499 $66,595 $171,135
Expenses.................................. 26,556 29,065 30,328 60,128 146,077
------- ------- ------- ------- --------
Operating income.......................... 6,735 5,685 6,171 6,467 25,058
Gain on disposition of real property...... -- -- -- 2,055 2,055
Extraordinary loss on debt
extinguishment.......................... -- -- -- (422) (422)
Income allocated to minority interests.... (405) (395) (397) (2,912) (4,109)
------- ------- ------- ------- --------
Net income................................ 6,330 5,290 5,774 5,188 22,582
Preferred distributions................... (3,312) (3,311) (3,282) (3,281) (13,186)
------- ------- ------- ------- --------
Net income available to common
stockholders............................ $ 3,018 $ 1,979 $ 2,492 $ 1,907 $ 9,396
======= ======= ======= ======= ========
Basic net income per share:
Before extraordinary item, less preferred
distributions and income allocated to
minority interests...................... $ 0.18 $ 0.11 $ 0.14 $ 0.13 $ 0.55
Extraordinary loss on debt
extinguishment.......................... -- -- -- (0.02) (0.02)
------- ------- ------- ------- --------
Net income available to common
stockholders............................ $ 0.18 $ 0.11 $ 0.14 $ 0.11 $ 0.53
======= ======= ======= ======= ========
Diluted net income per share:
Before extraordinary item, less preferred
distributions and income allocated to
minority interests...................... $ 0.17 $ 0.11 $ 0.14 $ 0.13 $ 0.55
Extraordinary loss on debt
extinguishment.......................... -- -- -- (0.02) (0.02)
------- ------- ------- ------- --------
Net income available to common
stockholders............................ $ 0.17 $ 0.11 $ 0.14 $ 0.11 $ 0.53
======= ======= ======= ======= ========
</TABLE>
- ---------------
(a) Operations for the fourth quarter of 1997 include Drever, which was
acquired on October 1, 1997 (see Note 11).
F-35
<PAGE> 128
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 QUARTERS ENDED
----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues................................... $25,275 $25,962 $28,899 $31,035 $111,171
Expenses................................... 21,755 22,117 24,136 25,975 93,983
------- ------- ------- ------- --------
Operating income........................... 3,520 3,845 4,763 5,060 17,188
Gain on disposition of real property....... -- 1,272 724 (62) 1,934
Extraordinary loss on debt
extinguishment........................... (488) (96) (488) (776) (1,848)
Income allocated to minority interests..... (471) (471) (387) (376) (1,705)
------- ------- ------- ------- --------
Net income................................. 2,561 4,550 4,612 3,846 15,569
Preferred distributions.................... -- (342) (1,022) (1,023) (2,387)
------- ------- ------- ------- --------
Net income available to common
stockholders............................. $ 2,561 $ 4,208 $ 3,590 $ 2,823 $ 13,182
======= ======= ======= ======= ========
Basic net income per share:
Before extraordinary item, less preferred
distributions and income allocated to
minority interests....................... $ 0.21 $ 0.31 $ 0.28 $ 0.23 $ 1.02
Extraordinary loss on debt
extinguishment........................... (0.03) (0.01) (0.03) (0.05) (0.12)
------- ------- ------- ------- --------
Net income available to common
stockholders............................. $ 0.18 $ 0.30 $ 0.25 $ 0.18 $ 0.90
======= ======= ======= ======= ========
Diluted net income per share:
Before extraordinary item, less preferred
distributions and income allocated to
minority interests....................... $ 0.21 $ 0.31 $ 0.28 $ 0.23 $ 1.01
Extraordinary loss on debt
extinguishment........................... (0.03) (0.01) (0.03) (0.05) (0.12)
------- ------- ------- ------- --------
Net income available to common
stockholders............................. $ 0.18 $ 0.30 $ 0.25 $ 0.18 $ 0.90
======= ======= ======= ======= ========
</TABLE>
F-36
<PAGE> 129
WALDEN RESIDENTIAL PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
DREVER
PRO FORMA PRO-FORMA PRO
HISTORICAL ADJUSTMENTS(A) ADJUSTMENTS(B) FORMA
---------- -------------- -------------- --------
<S> <C> <C> <C> <C>
REVENUES
Rental income............................. $163,224 $10,234 $82,566 $256,024
Other property income..................... 6,313 537 2,785 9,635
Interest income........................... 1,598 (290) 493 1,801
Other income.............................. -- -- 653 653
-------- ------- ------- --------
Total revenues.................... 171,135 10,481 86,497 268,113
-------- ------- ------- --------
EXPENSES
Property operating and maintenance........ 56,483 3,723 31,917 92,123
Real estate taxes......................... 16,805 943 8,670 26,418
General and administrative................ 7,734 -- 8,069 15,803
Unusual charge -- officer settlement
agreement.............................. 1,940 -- -- 1,940
Interest.................................. 28,447 1,468 23,346(c) 53,261
Amortization.............................. 827 (7) -- 820
Depreciation.............................. 33,841 2,190 18,965(d) 54,996
-------- ------- ------- --------
Total expenses.................... 146,077 8,317 90,967 245,361
-------- ------- ------- --------
Operating income............................ 25,058 2,164 (4,470) 22,752
Gain on disposition of real property........ 2,055 (2,055) -- --
-------- ------- ------- --------
Income before extraordinary item and income
allocated to minority interests........... 27,113 109 (4,470) 22,752
Extraordinary loss on debt forgiveness...... (422) 422 -- --
-------- ------- ------- --------
Income before income allocated to minority
interests................................. 26,691 531 (4,470) 22,752
Income allocated to minority interests...... (4,109) -- (3,253)(e) (7,362)
-------- ------- ------- --------
Net income.................................. 22,582 531 (7,723) 15,390
Preferred distributions..................... (13,186) -- -- (13,186)
-------- ------- ------- --------
Net income available to common
stockholders.............................. $ 9,396 $ 531 $(7,723) $ 2,204
======== ======= ======= ========
Basic net income per share.................. $ .53 $ .13
======== ========
Diluted net income per share................ $ .53 $ .12
======== ========
Basic weighted average number of common
shares outstanding........................ 17,590 17,599
======== ========
Diluted weighted average number of common
shares and common share equivalents
outstanding............................... 17,747 17,756
======== ========
</TABLE>
See Note 4 of Notes to Consolidated Financial Statements to the Company's
Consolidated Financial Statements for the year ended December 31, 1997 for an
explanation of 1997 acquisitions and dispositions.
F-37
<PAGE> 130
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PROPERTY INFORMATION)
(a) The pro forma adjustments for the year ended December 31, 1997, reflect
as of January 1, 1997: (i) the operations of fourteen apartment properties
acquired and one apartment property disposed of by the Company in 1997, (ii) the
reduction in interest income, net increase in interest expense on indebtedness
incurred, and the net increase in depreciation expense related to such
acquisitions and dispositions.
(b) The Drever pro forma adjustments for the year ended December 31, 1997
reflected as of January 1, 1997 the operations of 79 apartment properties
acquired by the Company in 1997 from Drever.
(c) Represents interest expense related to indebtedness incurred in
connection with the Drever acquisitions, including the amounts borrowed under
the Company's variable rate credit facility and term loan and mortgages assumed.
The pro forma weighted average combined interest rate was 7.53% for the year
ended December 31, 1997.
(d) Represents an adjustment to depreciation of real estate owned as a
result of acquiring the real estate assets of Drever. Depreciation is computed
on a straight-line basis over the estimated useful lives of the related assets
which have an estimated weighted average useful life of approximately 24 years.
Buildings are being depreciated over 25 years and other depreciable assets over
5, 10, or 15 years depending on the useful life of the related asset.
(e) Represents an adjustment for common partnership OP Units issued in
connection with the Drever transaction.
F-38
<PAGE> 131
INDEPENDENT AUDITORS' REPORT
To the Directors, Stockholders and Partners of
Drever Partners, Inc. and Affiliates
We have audited the accompanying combined balance sheets of Drever
Partners, Inc. and affiliates as of December 31, 1996 and 1995, and the related
combined statements of operations, partners'/stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the management of Drever
Partners, Inc. and affiliates. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of Drever Partners, Inc. and
affiliates at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- ---------------------------------
DELOITTE & TOUCHE LLP
Dallas, Texas
June 27, 1997
October 1, 1997 as to Note 14
F-39
<PAGE> 132
DREVER PARTNERS, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
JUNE 30, 1997 1996 1995
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Real estate assets, at cost:
Land................................................. $ 70,108 $ 70,336 $ 70,336
Buildings and improvements........................... 466,413 464,432 452,852
Less accumulated depreciation........................ (109,649) (99,260) (76,812)
-------- -------- --------
Total real estate assets............................. 426,872 435,508 446,376
Rent and other receivables............................. 421 479 326
Receivables from related parties....................... 3,201 2,957 1,700
Prepaid and other assets............................... 1,305 765 3,674
Deferred financing costs, net.......................... 3,339 3,741 4,417
Deferred tax asset..................................... 174 174 268
Cash and cash equivalents.............................. 11,318 10,866 11,828
Restricted cash........................................ 2,537 4,402 6,549
-------- -------- --------
Total assets......................................... $449,167 $458,892 $475,138
======== ======== ========
LIABILITIES AND PARTNERS'/STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable............................... $287,266 $290,854 $293,702
Other long-term debt................................. 626 759 1,469
Investor notes payable............................... 6,336 6,497 6,594
Accrued real estate taxes............................ 5,845 9,699 9,365
Accounts payable..................................... 2,473 3,481 3,033
Payable to related parties........................... 318 301 538
Accrued expenses and other liabilities............... 8,265 8,056 7,823
-------- -------- --------
Total liabilities................................. 311,129 319,647 322,524
Commitments and contingencies (Note 11)
Partners'/Stockholders' equity:
Partners' capital.................................... 182,806 179,559 182,213
Common stock......................................... 25 25 25
Treasury stock....................................... (371) (371) (371)
Additional paid-in capital........................... 639 639 639
Accumulated deficit.................................. (45,061) (40,607) (29,892)
-------- -------- --------
Total partners'/stockholders' equity.............. 138,038 139,245 152,614
-------- -------- --------
Total liabilities and partners'/stockholders' equity... $449,167 $458,892 $475,138
======== ======== ========
</TABLE>
See notes to combined financial statements.
F-40
<PAGE> 133
DREVER PARTNERS, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------- ------------------------------
1997 1996 1996 1995 1994
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Rental income............................... $54,635 $53,007 $107,344 $101,630 $ 84,935
Other property income....................... 1,633 1,584 3,259 3,025 2,463
Construction revenue........................ -- 647 919 308 --
Interest income............................. 229 230 620 979 750
Other income (expense)...................... (200) (178) (1,092) 508 1,668
------- ------- -------- -------- --------
Total revenues...................... 56,297 55,290 111,050 106,450 89,816
------- ------- -------- -------- --------
EXPENSES:
Property operating and maintenance.......... 20,048 19,697 40,682 40,060 33,585
Real estate taxes........................... 5,780 5,689 11,486 11,051 8,940
Construction cost of sales.................. -- 652 891 240 --
General and administrative.................. 4,209 4,729 9,343 9,654 10,485
Interest.................................... 11,060 11,445 22,909 23,412 19,531
Amortization................................ 430 440 888 953 794
Depreciation................................ 11,278 11,461 22,888 21,227 17,050
------- ------- -------- -------- --------
Total expenses...................... 52,805 54,113 109,087 106,597 90,385
------- ------- -------- -------- --------
OPERATING INCOME (LOSS)....................... 3,492 1,177 1,963 (147) (569)
Gain (loss) on disposition of property...... (170) -- -- (90) 156
Loss on debt forgiveness.................... -- -- -- (455) --
------- ------- -------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
INCOME TAXES................................ 3,322 1,177 1,963 (692) (413)
INCOME TAXES.................................. (322) (243) (647) (487) (373)
------- ------- -------- -------- --------
INCOME(LOSS) BEFORE EXTRAORDINARY ITEM........ 3,000 934 1,316 (1,179) (786)
Extraordinary gain (loss) on debt
extinguishment........................... -- 71 348 -- (735)
------- ------- -------- -------- --------
NET INCOME (LOSS)............................. $ 3,000 $ 1,005 $ 1,664 $ (1,179) $ (1,521)
======= ======= ======== ======== ========
</TABLE>
See notes to combined financial statements.
F-41
<PAGE> 134
DREVER PARTNERS, INC. AND AFFILIATES
COMBINED STATEMENTS OF PARTNERS'/STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL PARTNERS'/
PARTNERS' --------------- TREASURY PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL SHARES AMOUNT STOCK CAPITAL DEFICIT EQUITY
--------- ------ ------ -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Partners'/stockholders'
equity at
January 1, 1994........... $102,232 15,000 $15 $ (41) $607 $(10,688) $ 92,125
Net income (loss)......... 7,671 (9,192) (1,521)
Contributions............. 80,323 80,323
Distributions............. (14,646) (14,646)
Purchase of treasury
stock.................. (330) (330)
-------- ------ --- ----- ---- -------- --------
Partners'/stockholders'
equity at
December 31, 1994......... 175,580 15,000 15 (371) 607 (19,880) 155,951
Net income (loss)......... 8,833 (10,012) (1,179)
Contributions............. 12,304 12,304
Distributions............. (14,504) (14,504)
Common stock issued....... 10,000 10 32 42
-------- ------ --- ----- ---- -------- --------
Partners'/stockholders'
equity at December 31,
1995...................... 182,213 25,000 25 (371) 639 (29,892) 152,614
Net income (loss)......... 12,379 (10,715) 1,664
Contributions............. 195 195
Distributions............. (15,228) (15,228)
-------- ------ --- ----- ---- -------- --------
Partners'/stockholders'
equity at December 31,
1996...................... 179,559 25,000 25 (371) 639 (40,607) 139,245
Net income (loss)
(unaudited)............ 7,454 (4,454) 3,000
Distributions
(unaudited)............ (4,207) (4,207)
-------- ------ --- ----- ---- -------- --------
Partners'/stockholders'
equity at June 30, 1997
(unaudited)............... $182,806 25,000 $25 $(371) $639 $(45,061) $138,038
======== ====== === ===== ==== ======== ========
</TABLE>
See notes to combined financial statements.
F-42
<PAGE> 135
DREVER PARTNERS, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------- ----------------------------
1997 1996 1996 1995 1994
----------- ------- ------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ 3,000 $ 1,005 $ 1,664 $(1,179) $ (1,521)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization...................... 11,708 11,901 23,776 22,180 17,844
(Gain)/loss on disposition of real property........ 170 -- -- 90 (156)
Extraordinary (gain) loss on debt
extinguishments.................................. -- (71) (348) 455 735
Deferred income tax................................ -- -- 94 756 (423)
Net effect of changes in operating accounts:
Restricted cash.................................. 1,865 3,230 2,147 1,366 (654)
Other assets..................................... (598) 1,090 2,469 (6,723) 702
Receivables...................................... 58 (303) (153) 118 632
Receivables from related parties................. (244) 219 (1,257) 1,445 214
Accrued real estate taxes........................ (3,854) (3,846) 334 1,620 3,372
Accounts payable................................. (1,008) (795) 448 (58) 340
Payables to related parties...................... 17 9 (237) (1,038) 4
Other liabilities................................ 209 1,498 233 (226) 1,204
------- ------- ------- ------- --------
Net cash provided by operating activities..... 11,323 13,937 29,170 18,806 22,293
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate assets....................... -- -- -- (20,257) (113,056)
Real estate asset additions.......................... (4,105) (6,264) (11,580) (21,851) (19,494)
Proceeds from disposition of real property........... -- -- -- 110 1,485
------- ------- ------- ------- --------
Net cash used in investing activities.............. (4,105) (6,264) (11,580) (41,998) (131,065)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions received............................... -- 195 195 12,304 80,323
Distributions paid to partners....................... (4,207) (6,108) (15,228) (14,504) (14,646)
Common stock issued.................................. -- -- -- 42 --
Proceeds from mortgage notes payable................. -- 21,380 39,080 17,389 163,127
Payment of mortgage notes payable.................... -- (20,700) (36,978) -- (98,181)
Principal reductions of debt......................... (2,237) (2,511) (4,380) (4,000) (2,713)
Payment of financing costs........................... (28) (75) (434) (1,266) (3,179)
Payment of investor notes............................ (161) (97) (97) (120) (737)
Payment of other long-term debt...................... (133) (664) (710) (948) (160)
------- ------- ------- ------- --------
Net cash (used in) provided by financing
activities....................................... (6,766) (8,580) (18,552) 8,897 123,834
------- ------- ------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 452 (907) (962) (14,295) 15,062
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......... 10,866 11,828 11,828 26,123 11,061
------- ------- ------- ------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD............... $11,318 $10,921 $10,866 $11,828 $ 26,123
======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest............................... $11,051 $11,414 $22,318 $22,861 $ 18,021
======= ======= ======= ======= ========
Income taxes paid.................................... $ 325 $ 376 $ 391 $ 655 $ 165
======= ======= ======= ======= ========
SUPPLEMENTAL NON CASH FINANCING ACTIVITIES:
Obligation incurred for treasury stock............... $ -- $ -- $ -- $ -- $ 330
======= ======= ======= ======= ========
Debt assumed by purchaser of property................ $ 1,351 $ -- $ -- $ -- $ --
======= ======= ======= ======= ========
</TABLE>
See notes to combined financial statements.
F-43
<PAGE> 136
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED), AND
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. BASIS OF PRESENTATION AND ORGANIZATION
Drever Partners, Inc. and affiliates (collectively "Drever") consists of
Drever Partners, Inc. and its majority owned subsidiaries Concierge Management
Corporation ("CMC"), Drever Construction Corporation, Inc. ("DCC"), Concierge
Realty & Finance Corporation ("CRFC"), Drever McIntosh & Co. ("DM & Co.")
(collectively "DPI"), two affiliated corporations, 18 limited partnerships
(collectively the "Partnerships" or individually the "Partnership") and an
affiliated entity, which collectively owned and operated 79 multifamily
apartment properties (the "Properties") as of June 30, 1997, 80 properties as of
December 31, 1996 and 1995, and 79 properties as of December 31, 1994. CMC
serves as the property management company for the Properties, DCC performs
construction and maintenance services, CRFC assists in real estate acquisitions
and financings and DM & Co. performs asset management services for certain of
the Partnerships.
Drever Partners, Inc. is the general partner in each of the Partnerships
except for Apartment Opportunity Fund, L.P. ("AOF") and Apartment Opportunity
Fund II, L.P. ("AOFII"). AOF, Inc. is an affiliate of DPI and the general
partner of AOF Newgen, L.P., which is, in turn, the general partner of AOF.
AOFII, Inc. is an affiliate of DPI and the general partner of AOFII.
Drever owns properties in Texas, Arizona, California and Georgia consisting
of 18,118 apartment units.
On May 21, 1997, Drever entered into a definitive agreement with Walden
Residential Properties, Inc. ("Walden") which, if consummated, will result in
the combination of Walden, DPI and the Partnerships. The transaction value is
approximately $670 million, consisting of $295 million in operating partnership
units to be issued by Walden Drever Operating Partnership ("WDOP") which are
convertible into $240 million in Walden Common Stock (10,322,580 shares) and $55
million in preferred stock (2,000,000 shares of 9% Redeemable Preferred Stock)
with detachable warrants (6,666,667 Series B Warrants, each of which is
exercisable for one-third of one share of Common Stock at $26.875 per share) and
$85 million in cash. The balance of the consideration consists of the assumption
of approximately $290 million of mortgage debt. Pursuant to the agreement,
Walden will offer to acquire the partnership interest of each limited partner in
exchange for that portion of the transaction consideration which would have been
allocable to such partner under the applicable partnership agreement assuming
that the transaction had been structured as a sale of the Partnerships'
underlying assets. The transaction is contingent upon limited partners owning
more than 50% of the total limited partner interests in AOF and AOF II accepting
their respective exchange offers. The transaction also requires the majority
consent of the Walden common shareholders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION -- The accompanying combined financial statements
include the consolidated accounts of DPI; AOF, Inc.; AOFII, Inc.; the accounts
of the Partnerships; and the affiliated entity, since DPI or one of its
affiliates is the general partner of the Partnerships and consequently controls
and manages their operations. All material inter-entity transactions and
balances are eliminated in the combination.
INCOME RECOGNITION -- Rental, interest and other income are recorded using
the accrual method of accounting as earned.
PROPERTY CONCENTRATION -- As of December 31, 1996, Drever owned 80
multifamily properties in four states, with 90% of its apartment units located
in Texas and 10% located in Arizona, Georgia and California. Of the total units
owned, 11,207 units, or 62%, are located in the Houston area. Apartment units
are leased to residents on terms of one year or less, with monthly rental
payments due in advance. In management's opinion, due to the number of residents
and the type of markets in which the properties operate and the collection
terms, there is not a significant concentration of credit risk.
F-44
<PAGE> 137
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS -- All cash and investments in money market
accounts, excluding restricted cash, that have a maturity of three months or
less at the time of purchase are considered to be cash and cash equivalents.
RESTRICTED CASH -- Restricted cash consists of security deposits and escrow
deposits held by lenders for the payment of property taxes, insurance and
replacement reserves. Restricted cash is invested primarily in short-term
securities.
Also included in restricted cash are amounts held in trust for non-combined
affiliated entities of Drever Partners, Inc. Such amounts represent cash of
affiliated entities of Drever Partners, Inc. which has been put under the care
and control of Drever Partners, Inc. A reserve has been established in an amount
equal to the cash balances held in trust and is included in accounts and notes
payable to related parties in the accompanying financial statements.
REAL ESTATE ASSETS AND DEPRECIATION -- Expenditures directly related to the
acquisitions and improvement of real estate assets are capitalized at cost as
land, buildings and improvements. Drever capitalizes the cost of appliances,
carpets, major exterior painting, roof replacement and expenditures for other
major property improvements, as well as rehabilitation costs incurred for
properties acquired.
Depreciation is computed on a straight-line basis over the estimated useful
lives of 30 years for buildings and five, ten or 15 years for personal property.
In March 1995, Statement of Financial Accounting Standard ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of," was issued. Drever adopted SFAS No. 121 in 1995. Drever's
management routinely reviews its investments for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Based on Drever's policy for reviewing impairment of long-lived
assets, there was no adjustment necessary for impairment of properties during
the three-year period ended December 31, 1996.
DEFERRED FINANCING COSTS AND AMORTIZATION -- Legal fees and other costs
associated with obtaining financing have been capitalized and are being
amortized over the terms of the related debt. Financing costs were reported net
of amortization of $2,998,000, $2,568,000, and $2,107,000 as of June 30, 1997,
and December 31, 1996 and 1995, respectively.
EARNINGS PER SHARE -- The accompanying combined financial statements do not
include disclosures of earnings per share as Drever Partners, Inc. and
affiliates represent privately held corporate entities and partnerships for
which this disclosure would be meaningless.
INCOME TAXES -- DPI, AOF, Inc. and AOFII, Inc. elected to be taxed as C
Corporations under the Internal Revenue Code and account for income taxes under
the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109
requires the use of the liability method of accounting for income taxes.
Deferred taxes are recorded based on the difference between the financial
statement and income tax bases of assets and liabilities. A valuation allowance
is recognized for deferred tax assets when it is more likely than not that some
or all of the deferred tax asset will not be realized.
No provision for income taxes has been made in the accompanying combined
financial statements for the combined operations of the Partnerships because
these taxes are the responsibility of the individual partners.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of certain assets,
liabilities, revenues and expenses during the reporting period. Actual results
may differ from such estimates.
ENVIRONMENTAL REMEDIATION COSTS -- Drever accrues for losses associated
with environmental remediation obligations when such losses are probable and
reasonably estimable. Accruals for estimated losses from
F-45
<PAGE> 138
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
environmental remediation obligations generally are recognized no later than
completion of the remedial feasibility study. Such accruals are adjusted as
further information develops or circumstances change. Recoveries of
environmental remediation costs from other parties are recorded as assets when
their receipt is deemed probable. Drever's management is not aware of any
environmental remediation obligations which would materially affect the
operations, financial position or cash flows of the combined entity.
INTERIM FINANCIAL DATA -- In the opinion of management, the accompanying
unaudited combined financial statements contain all the adjustments (consisting
of only normal recurring accruals) necessary to present fairly the financial
position of the combined entity as of June 30, 1997 and 1996, and the results of
their operations and changes in their financial position for the six months
ended June 30, 1997 and 1996.
3. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS -- During 1995, the Partnerships acquired two apartment
properties containing 484 units for a cost of $20,257,000 located in San Diego,
California and Houston, Texas. During 1994, the Partnerships acquired 18
apartment properties containing 4,492 units for a cost of $113,056,000. These
properties are located in Houston, Dallas, Austin and Corpus Christi, Texas; San
Diego, California; and Atlanta, Georgia. No properties were acquired during
1996.
The acquisitions were accounted for by the purchase method of accounting
and the accompanying combined financial statements reflect the results of
operations of the acquired properties since the date of purchase.
DISPOSITIONS -- During 1994, a Partnership disposed of one apartment
property containing 326 units for $1,536,000, less closing costs. In connection
with this disposition, the Partnership recorded a gain on the sale of property
of $156,000. During 1995, a Partnership sold land adjacent to one of its
apartment properties due to condemnation. In connection with this disposition,
the Partnership recorded a loss on sale of $90,000. No real estate asset
dispositions occurred during 1996.
In April 1997, a Partnership disposed of one apartment property having 72
units. In connection with this disposition, the buyer assumed the mortgage notes
on the property of $1,351,000 and the Partnership recorded a net loss on the
sale of property of $170,000.
F-46
<PAGE> 139
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. REAL ESTATE ASSETS
Changes in real estate assets and related accumulated depreciation for the
years ended December 31, 1996, 1995 and 1994, and the six-month period ended
June 30, 1997, are as follows:
<TABLE>
<S> <C>
Real estate assets:
Balance at January 1, 1994................................ $350,074,000
Purchase of real estate assets............................ 113,056,000
Sale of real estate assets................................ (1,344,000)
Fixed asset additions..................................... 19,494,000
------------
Balance at December 31, 1994.............................. 481,280,000
Purchase of real estate assets............................ 20,257,000
Sale of real estate assets................................ (200,000)
Fixed asset additions..................................... 21,851,000
------------
Balance at December 31, 1995.............................. 523,188,000
Fixed asset additions..................................... 11,580,000
------------
Balance at December 31, 1996.............................. 534,768,000
Fixed asset additions (unaudited)......................... 4,105,000
Sale of real estate assets (unaudited).................... (2,352,000)
------------
Balance at June 30, 1997 (unaudited)...................... $536,521,000
============
Accumulated depreciation:
Balance at January 1, 1994................................ $ 39,348,000
Depreciation expense...................................... 16,776,000
Write-off related to real estate assets sold.............. (15,000)
------------
Balance at December 31, 1994.............................. 56,109,000
Depreciation expense...................................... 20,703,000
------------
Balance at December 31, 1995.............................. 76,812,000
Depreciation expense...................................... 22,448,000
------------
Balance at December 31, 1996.............................. 99,260,000
Depreciation expense (unaudited).......................... 11,220,000
Write-off related to real estate assets sold
(unaudited)............................................ (831,000)
------------
Balance at June 30, 1997 (unaudited)...................... $109,649,000
============
</TABLE>
F-47
<PAGE> 140
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Included in accrued expenses and other liabilities at June 30, 1997, and
December 31, 1996 and 1995, are the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
JUNE 30, 1997 1996 1995
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Security deposits..................................... $3,804,000 $3,782,000 $3,649,000
Accrued interest...................................... 1,694,000 1,685,000 1,915,000
Other accrued liabilities............................. 2,306,000 1,657,000 1,526,000
Self-insurance reserve................................ -- 468,000 336,000
Federal income taxes payable.......................... 461,000 464,000 397,000
---------- ---------- ----------
$8,265,000 $8,056,000 $7,823,000
========== ========== ==========
</TABLE>
Other accrued liabilities include construction advances, net over billings
for construction services, and other miscellaneous operational accruals for DPI
and the Partnerships.
SELF INSURANCE RESERVE -- During 1996, 1995 and 1994, Drever maintained a
self-insurance program for that portion of employee health care and Texas
workers' compensation costs which are not covered by insurance contracts. The
self-insurance reserve represents Drever's estimated liability for workers'
compensation and health benefits claims, including those that have been incurred
but not yet reported. The amounts are based on actuarially determined estimates.
Beginning January 1, 1997, all of Drever's employees became covered under a
standard workers' compensation insurance contract. Any claims incurred after
January 1, 1997, will be covered under the new policy. Existing claims for
injuries prior to January 1, 1997, will be covered under the self-insurance
program.
6. MORTGAGE NOTES PAYABLE AND OTHER LONG TERM DEBT
Mortgage notes payable consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 PRINCIPAL BALANCE AS OF
----------------------------- ------------------------------------------
WEIGHTED WEIGHTED DECEMBER 31,
AVERAGE AVERAGE YEARS --------------------------- JUNE 30,
INTEREST RATE TO MATURITY 1996 1995 1997
------------- ------------- ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Fixed rate conventional
mortgage notes payable,
bearing interest at rates
ranging from 6.95% to 9.63%
per annum, maturing at
various dates from August
1998 through February
2007........................ 7.43% 4.2 years $242,580,000 $244,630,000 $240,513,000
Variable rate conventional
mortgage notes payable,
bearing interest at rates
ranging from LIBOR plus
1.75% to prime plus 1.50%
per annum, maturing at
various dates from August
1997 through November
2026........................ 8.08% 5.4 years 48,274,000 49,072,000 46,753,000
----- --------- ------------ ------------ ------------
Total/weighted average........ 7.55% 4.3 years $290,854,000 $293,702,000 $287,266,000
===== ========= ============ ============ ============
</TABLE>
F-48
<PAGE> 141
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 1997 and December 31, 1996 and 1995, all of Drever's real
estate assets were collateral for the various mortgage loans which are
nonrecourse to the partners.
Drever Partners, Inc. has guaranteed the payment of $17,750,000 of the
Partnerships' mortgage notes as of December 31, 1996 and June 30, 1997.
OTHER LONG-TERM DEBT -- In September 1994, CMC received $700,000 under a
promissory note which was principally used to finance computer conversions and
expansions. The note is secured by certain computer equipment and is guaranteed
by Drever Partners, Inc. The note bears interest at the lenders prime rate. At
June 30, 1997, and December 31, 1996 and 1995, the outstanding amount due under
the note was $81,000, $162,000 and $599,000, respectively. The balance of the
note is due December 1997.
At June 30, 1997, and December 31, 1996 and 1995, DPI has additional notes
due to other third parties. These notes are non-interest-bearing and are due on
various dates in 1997 ($140,000) and 1998 ($40,000). The balance of these notes
at June 30, 1997, and December 31, 1996 and 1995, were $130,000, $180,000 and
$12,000, respectively.
In February 1994, AOF II, Inc. entered into a $383,000 note agreement with
an investor in AOF II. The note bears interest at 9% with monthly payments of
interest only. The outstanding principal and unpaid interest is due in November
2003. The outstanding amount due under this note at June 30, 1997, and December
31, 1996 and 1995, was $295,000.
At December 31, 1995, Drever Partners, Inc. had a $440,000 note with a
lending institution. Such note bears interest at the bank's prime rate and
matured in September 1996.
Drever Partners, Inc. has a note payable with a lending institution which
bears interest at 11.5% and matures in January 2010. The outstanding balance at
June 30, 1997, and December 31, 1996 and 1995, was $120,000, $122,000 and
$123,000, respectively.
PRINCIPAL DEBT MATURITIES -- Principal debt maturities, including balloon
payments, for the next five years are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997
(UNAUDITED) DECEMBER 31, 1996
---------------------------- ----------------------------
MORTGAGE OTHER LONG- MORTGAGE OTHER LONG-
NOTES PAYABLE TERM DEBT NOTES PAYABLE TERM DEBT
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
1997.................................... $ 6,279,000 $ 173,000 $ 8,516,000 $ 306,000
1998.................................... 23,149,000 45,000 24,500,000 45,000
1999.................................... 12,801,000 5,000 12,801,000 5,000
2000.................................... 76,428,000 6,000 76,428,000 6,000
2001.................................... 145,762,000 7,000 145,762,000 7,000
Thereafter.............................. 22,847,000 390,000 22,847,000 390,000
------------ ------------ ------------ ------------
Total......................... $287,266,000 $ 626,000 $290,854,000 $ 759,000
============ ============ ============ ============
</TABLE>
EXTRAORDINARY ITEMS -- During 1996, Drever refinanced approximately
$36,978,000 of mortgage loans prior to maturity, which resulted in an aggregate
extraordinary gain of $348,000. During 1994, Drever refinanced $98,181,000 of
mortgage loans prior to maturity which resulted in an aggregate extraordinary
loss of $735,000.
7. INVESTOR NOTES
Investor notes represent amounts due to investors by the Partnerships.
Investor notes bear interest at various rates ranging between 9.5% and 10% and
mature at various dates ranging from December 1997
F-49
<PAGE> 142
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($304,000) through December 1998 ($2,141,000). Interest only payments are due
monthly with the principal due in full upon maturity. The balance of these notes
at June 30, 1997, and December 31, 1996 and 1995, was $2,336,000, $2,445,000 and
$2,366,000, respectively.
Also included in investor notes is the outstanding principal and accrued
interest due under a note between Houston Portfolio Joint Venture II ("HPJVII"),
a Partnership, and an investor, which was executed in February 1990. The note
bears base interest at 5% and will earn additional interest equal to
approximately 25% of the respective Partnership's profits realized upon sale of
its properties. All base interest, unpaid principal and additional interest is
due upon disposition of the Partnership's assets or in February 2002. The
outstanding amount due under this note at June 30, 1997, and December 31, 1996
and 1995, was $4,000,000, $4,052,000 and $4,131,000, respectively, including all
unpaid interest. The note is convertible into partners' capital at the option of
the investor or HPJVII upon the satisfaction of certain conditions precedent as
specified in the note agreement.
8. PARTNERS'/STOCKHOLDERS' EQUITY
PARTNERS' CAPITAL -- Each of the Partnerships were formed under the
provisions of a partnership agreement (collectively, the "Agreements"). Pursuant
to the Agreements, initial contributions were made by each of the partners. A
capital account is maintained for each partner in which their account is
increased with the initial and any subsequent contributions and income from
operations and decreased for any distributions and losses from operations.
During the years ended December 31, 1996, 1995 and 1994, distributions to
limited partners were $15,168,000, $14,504,000 and $14,646,000, respectively.
Distributions to the general partner were $20,000 and $60,000 for the six month
period ended June 30, 1997 and year ended December 31, 1996, respectively. No
distributions were made to the general partner with respect to its carried
interest during the years ended December 31, 1995 and 1994. During the six-month
period ended June 30, 1997, distributions to limited partners were $4,187,000.
Contributions to the partnerships for the years ended December 31, 1996, 1995
and 1994, were $195,000, $12,304,000 and $80,323,000. No contributions were
received during the six-month period ended June 30, 1997.
Each partner's capital account is increased for their allocated share of
net income of the partnership and decreased for their allocated share of net
losses. Net income and losses are allocated to each partner based on their
ownership interest in the partnership. However, no losses are allocated to the
limited partners once their capital account is zero. Limited partners'
unallocated losses are allocated to the general partner.
STOCKHOLDERS' EQUITY -- Drever Partners, Inc. has 5,000 shares of no par
value stock authorized and issued and 4,050 shares outstanding at June 30, 1997,
and December 31, 1996 and 1995. CMC, DCC and CRFC each have 1,000 shares of $1
par value stock authorized, issued and outstanding at June 30, 1997, and
December 31, 1996 and 1995. DM & Co. has 2,500 shares of no class, no par value
stock authorized and 100 shares issued and outstanding at June 30, 1997, and
December 31, 1996 and 1995. Drever Partners, Inc. owns 100% of DCC and DM & Co.,
95% of CRFC and 90% of CMC outstanding stock. The remaining shares are held by
officers of the entities. During the six-month period ended June 30, 1997 and
the three-year period ended December 31, 1996, no dividends were declared or
paid by Drever Partners, Inc., DCC, CMC or CRFC. As of June 30, 1997, a sale of
Drever Partners, Inc.'s investment in DM & Co. to a third party is pending,
which is expected to be completed in the third quarter of 1997.
AOF, Inc. and AOFII, Inc. each have 10,000 shares of $1 par value stock
authorized, issued and outstanding at June 30, 1997, and December 31, 1996 and
1995. During the three-year period ended December 31, 1996, and the six-month
period ended June 30, 1997, no dividends were declared or paid by AOF, Inc. and
AOFII, Inc.
F-50
<PAGE> 143
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value of financial instruments
was determined by Drever using available market information and appropriate
valuation methodologies. However, considerable judgment is necessary to
interpret market data and develop the related estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that could be realized upon disposition of the financial
instruments. The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair value amounts.
Cash and cash equivalents, receivables (including receivables from related
parties), accounts payable and accrued expenses and other liabilities are
carried at amounts which reasonably approximate their fair value.
The fixed rate mortgage notes payable of $242,580,000 and $244,630,000 as
of December 31, 1996 and 1995, respectively, have a fair value which
approximates the book value as estimated based upon interest rates available for
the issuance of debt with similar terms and remaining maturities as of the
respective year end.
The fair value estimates presented herein are based on information
available to management as of December 31, 1996 and 1995. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since those dates, and current estimates of fair
value may differ significantly from the amounts presented herein.
10. PROVISION FOR INCOME TAXES
The provision for income taxes for DPI consists of the following for the
six-month periods ended June 30, 1997 and 1996, and the years ended December 31,
1996, 1995 and 1994:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31,
-------------------- ----------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current......................... $322,000 $243,000 $553,000 $(269,000) $ 796,000
Deferred........................ -- -- 94,000 756,000 (423,000)
-------- -------- -------- --------- ---------
$322,000 $243,000 $647,000 $ 487,000 $ 373,000
======== ======== ======== ========= =========
</TABLE>
DPI's effective tax rate differs from the federal statutory rate of 34% in
1997, 1996, 1995 and 1994 primarily due to nondeductible meals and
entertainment, penalties and state income taxes.
Deferred taxes result primarily from temporary differences in the
recognition of bad debt expense, self-insurance reserves, depreciation and
accrual versus cash accounting between reporting for income tax and financial
statement purposes.
The tax effects of items that gave rise to significant portions of the
deferred tax accounts are as follows:
F-51
<PAGE> 144
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
JUNE 30, 1997 1996 1995
------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Fixed asset depreciable basis adjustment............. $ 172,000 $ 172,000 $ 156,000
Accruals not deductible until paid................... 178,000 178,000 308,000
Bad debt allowance................................... 180,000 180,000 180,000
Other................................................ 79,000 79,000 59,000
--------- --------- ---------
609,000 609,000 703,000
Deferred tax liability -- Partnership tax basis
adjustment........................................... (435,000) (435,000) (435,000)
--------- --------- ---------
$ 174,000 $ 174,000 $ 268,000
========= ========= =========
</TABLE>
Management believes that DPI has the ability to utilize its deferred tax
assets by applying them against taxable income to be generated in future years.
Accordingly, no valuation allowance for deferred tax assets has been recorded
for 1997, 1996 or 1995.
11. COMMITMENTS AND CONTINGENCIES
Drever is the lessee under various noncancelable operating leases for its
principal office facilities and other equipment leases. Minimum annual lease
payments required under these operating leases at December 31, 1996, are as
follows:
<TABLE>
<S> <C>
1997........................................................ $ 841,000
1998........................................................ 511,000
1999........................................................ 439,000
2000........................................................ 226,000
----------
Total..................................................... $2,017,000
==========
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994, and the
six-month periods ended June 30, 1997 and 1996, was $954,000, $1,091,000,
$1,089,000, $529,000 and $501,000, respectively.
As part of a written Stock Purchase Agreement, Drever Partners, Inc. has
the obligation to acquire 500 shares of common stock held by a former officer of
Drever Partners, Inc. The purchase price is to be the fair market value of such
shares as of May 1, 1994, as determined by a court-appointed appraiser.
Contemporaneous to the May 1, 1994 valuation date, management ordered an
independent appraisal to provide management with an estimate of its obligation
to acquire such shares. The independent appraisal resulted in a $322,000 fair
market value for the shares as of May 1, 1994. Drever Partners, Inc. has
recorded this estimate for the obligation, which is included in accrued expenses
and other liabilities in the accompanying combined financial statements.
Drever is subject to various legal proceedings and claims that arise in the
ordinary course of business. These matters are generally covered by insurance.
While the resolution of such matters cannot be predicted with certainty,
management believes that the final outcome of such matters will not have a
material adverse effect on the financial position, results of operations or cash
flows of Drever.
12. RELATED PARTY TRANSACTIONS
PAYABLES TO RELATED PARTIES -- Payable to related parties represents
amounts held in trust at December 31, 1996 ($325,000), and June 30, 1997
($56,000), for non-combined affiliated entities of Drever Partners, Inc. Such
amounts represent cash of affiliated entities of Drever Partners, Inc. which has
been put
F-52
<PAGE> 145
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
under the care and control of the Company. The cash amounts are recorded in
restricted cash in the accompanying financial statements.
The remaining balance of payable to related parties represents
miscellaneous amounts due to non-combined affiliated entities.
RECEIVABLES FROM RELATED PARTIES -- Drever Partners, Inc. has notes
receivable from Tassajara Shopping Center Associates, a non-combined affiliate
of DPI, which bear interest at the lesser of 10% or prime plus 2%. The notes
mature in March 1998 ($170,000) and July 1998 ($625,000). The outstanding
balance for these notes at June 30, 1997, and December 31, 1996 and 1995, was
$542,000, $795,000 and $263,000, respectively. Included in receivables from
related parties is accrued interest on the notes of $15,000, $21,000 and $8,000
at June 30, 1997, and December 31, 1996 and 1995, respectively Also included in
receivables from related parties are notes from officers of Drever Partners,
Inc. and individual investors in affiliated partnerships. Officer notes bear
interest at the lesser of 8% or the prime rate and are due upon liquidation of
certain Partnerships. The balance of the officer notes at June 30, 1997, and
December 31, 1996 and 1995, were $474,000, $368,000 and $181,000, respectively,
including accrued interest. The individual investor notes bear interest at 9%,
are secured by limited partnership interests in Las Positas Land Partners, LP, a
non-combined affiliate, and mature upon the sale of the assets of Las Positas
Land Partners, LP. The balance of the individual investor notes at June 30,
1997, and December 31, 1996 and 1995, was $74,000 $73,000 and $66,000,
respectively, including accrued interest.
The remaining balance of receivables from related parties represents
miscellaneous receivables, including employee advances and receivables from
non-combined affiliated entities.
During 1995, Drever Partners, Inc. forgave certain debt due from officers
resulting in a loss of $455,000.
13. EMPLOYEE BENEFIT PLANS
401(k) PLAN -- Drever Partners, Inc. adopted a 401(k) Plan (the "Plan") for
its employees and the employees of DPI. The Plan is a voluntary defined
contribution plan. Employees are eligible to participate in the Plan following
the completion of six months of service and the attainment of 18 years of age.
Each participant may make contributions into the Plan in the form of a salary
deferral of up to 20% of their annual salary (not to exceed $9,500 and $9,240
for 1996 and 1995, respectively). DPI contributes up to 10% of the employee's
salary deferral up to a maximum of $120 per year in the form of a matching
contribution. DPI also has the option to make additional discretionary
contributions. A participant's salary deferral contribution is 100% vested at
all times. Prior to January 1, 1995, a participant vested immediately in the DPI
matching contribution. Subsequent to January 1, 1995, a participant vested in
the DPI matching contribution after five years of service. DPI matching
contributions for the years ended December 31, 1996, 1995 and 1994, were
$20,000, $19,000 and $12,000, respectively. Matching contributions for the
six-month periods ended June 30, 1997 and 1996, were $12,000 and $10,000,
respectively.
14. SUBSEQUENT EVENTS
On October 1, 1997, the assets and business of Drever Partners, Inc. and
Affiliates ("DPI"), were acquired by Walden through an acquisition pursuant to
an Exchange Agreement and a Contribution agreement each dated as of May 21, 1997
by and between Walden and DPI as described in Note 1. Certain aspects of the
Acquisition were approved by the stockholders of Walden at a special meeting
held September 29, 1997 and the limited partners of each of the 18 limited
partnerships of DPI and DPI's shareholders agreed to the exchange of their
partnership interests and shares for Units (as defined below) and cash.
The transaction value was $685 million, consisting of $303 million in
operating partnership units ("Units") issued by Walden/Drever Operating
Partnership ("WDOP") which are convertible, on or after the
F-53
<PAGE> 146
DREVER PARTNERS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
first anniversary of issuance, into $245 million of Walden Common Stock
(10,322,580 shares) and $58 million of preferred stock (2,000,000 shares of 9%
Redeemable Preferred Stock) with detachable warrants (6,666,667 Series B
Warrants, each of which is exercisable for one-third of one share of Common
Stock at $26.875 per share) and $95 million in cash. The balance of the
consideration consisted of the assumption of $287 million of mortgage debt.
F-54
<PAGE> 147
WALDEN RESIDENTIAL PROPERTIES, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COST CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
----------------------- -------------------
BUILDING & BUILDINGS &
PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
------------- -------- ------------ -------- ------------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
ORIGINAL PROPERTIES
Burning Tree Tulsa, OK $ 2,379 $ 635 $ 3,475 $-- $ 638
Casa Verde Phoenix, AZ 1,997 1,027 3,586 -- 379
Cinnamon Stick Tulsa, OK 3,177 962 5,565 -- 670
Club at Springlake Haltom City, TX -- 613 2,648 -- 334
Country View San Antonio, TX (A) 719 5,302 -- 689
Eagle Pointe Indianapolis, IN (A) 494 7,993 (4) 377
Fountaingate Wichita Falls, TX -- 751 6,498 -- 592
James Pointe Murray, UT 8,234 1,040 10,937 (28) 397
Lift, The Tulsa, OK 2,743 804 4,164 -- 525
Post Oak Place Euless, TX -- 1,570 6,582 -- 859
Preston Greens Dallas, TX -- 1,468 6,687 -- 573
Raintree Nashville, TN 5,245 715 6,457 -- 1,200
Settler's Cove Beaumont, TX 3,175 159 5,056 -- 591
Stillwater Murray, UT 11,994 2,019 16,839 3 647
Trestles of Austin Austin, TX (A) 1,100 9,977 -- 1,070
Woodridge Fort Worth, TX -- 340 2,586 -- 505
Woodstone Phoenix, AZ 12,636 4,325 14,210 -- 664
-------- -------- ---------- ---- -------
Subtotal 51,580 18,741 118,562 (29) 10,710
-------- -------- ---------- ---- -------
1994 ACQUISITIONS
Bel Shores Largo, FL 4,653 1,847 6,072 -- 812
Brookwood Club Jacksonville, FL 6,872 952 8,647 -- 1,104
Carlyle at Waters Tampa, FL (B) 1,678 11,154 -- 1,368
Cinnamon Park Arlington, TX (A) 855 7,723 (4) 499
Copper Cove Houston, TX -- 935 6,194 -- 639
Copperfield Oklahoma City, OK 4,150 357 6,473 -- 252
Fielder's Glen Arlington, TX (A) 556 5,031 -- 443
Foxboro Houston, TX (A) 800 3,882 -- 656
Gables, The McKinney, TX (A) 544 6,885 -- 553
Greens Crossing Dallas, TX (B) 1,368 6,795 -- 918
<CAPTION>
GROSS AMOUNT
AT WHICH CARRIED
AT DECEMBER 31, 1997
------------------------------------
BUILDINGS & ACCUMULATED DATE DEPRECIABLE
PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE (YEARS)(D)
------------- -------- ------------ ---------- ------------ -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
ORIGINAL PROPERTIES
Burning Tree $ 635 $ 4,113 $ 4,748 $ (1,066) 02/94
Casa Verde 1,027 3,965 4,992 (812) 02/94
Cinnamon Stick 962 6,235 7,197 (1,695) 02/94
Club at Springlake 613 2,982 3,595 (557) 02/94
Country View 719 5,991 6,710 (1,284) 02/94
Eagle Pointe 490 8,370 8,860 (1,421) 02/94
Fountaingate 751 7,090 7,841 (1,429) 02/94
James Pointe 1,012 11,334 12,346 (2,060) 02/94
Lift, The 804 4,689 5,493 (1,083) 02/94
Post Oak Place 1,570 7,441 9,011 (1,449) 02/94
Preston Greens 1,468 7,260 8,728 (1,621) 02/94
Raintree 715 7,657 8,372 (1,420) 02/94
Settler's Cove 159 5,647 5,806 (1,193) 02/94
Stillwater 2,022 17,486 19,508 (3,132) 02/94
Trestles of Austin 1,100 11,047 12,147 (2,094) 02/94
Woodridge 340 3,091 3,431 (602) 02/94
Woodstone 4,325 14,874 19,199 (2,620) 02/94
-------- ---------- ---------- --------
Subtotal 18,712 129,272 147,984 (25,538)
-------- ---------- ---------- --------
1994 ACQUISITIONS
Bel Shores 1,847 6,884 8,731 (986) 03/94
Brookwood Club 952 9,751 10,703 (1,204) 11/94
Carlyle at Waters 1,678 12,522 14,200 (1,349) 12/94
Cinnamon Park 851 8,222 9,073 (940) 09/94
Copper Cove 935 6,833 7,768 (859) 06/94
Copperfield 357 6,725 7,082 (850) 06/94
Fielder's Glen 556 5,474 6,030 (726) 05/94
Foxboro 800 4,538 5,338 (619) 06/94
Gables, The 544 7,438 7,982 (965) 05/94
Greens Crossing 1,368 7,713 9,081 (836) 12/94
</TABLE>
S-1
<PAGE> 148
<TABLE>
<CAPTION>
COST CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
----------------------- -------------------
BUILDING & BUILDINGS &
PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
------------- -------- ------------ -------- ------------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Harper's Creek Austin, TX $ (A) $ 868 $ 8,871 $-- $ 653
Hunter's Ridge Oklahoma City, OK 3,547 300 4,927 -- 246
Newport Irving, TX 7,097 1,200 8,878 -- 338
Rivercrest Arlington, TX 5,390 1,650 7,877 -- 866
Silverado Albuquerque, NM (B) 1,194 8,082 -- 245
Springfield Mesquite, TX (A) 1,042 6,507 -- 494
Summerfield Place Oklahoma City, OK (A) 619 5,586 -- 392
Woodscape Oklahoma City, OK (A) 1,077 13,280 -- 486
-------- -------- ---------- ---- -------
Subtotal 31,709 17,842 132,864 (4) 10,964
-------- -------- ---------- ---- -------
1995 ACQUISITIONS
Braden's Walk (E) Bedford, TX -- 1,839 18,495 -- 1,136
North Richland
Hilltop Hills, TX -- 801 5,314 -- 464
Laurel Creek Houston, TX (A) 2,067 12,011 -- 1,023
Pinnacle Lewisville, TX -- 672 4,190 -- 353
Pinto Creek Austin, TX (A) 487 8,403 -- 762
Reflections of Highpoint Dallas, TX 12,490 1,984 12,358 -- 677
Ponte Vedra Beach,
Remington at Ponte Vedra FL 12,000 1,425 13,468 -- 853
Remington Hill Fort Worth, TX 13,880 1,846 11,847 -- 418
Sandpiper Jacksonville, FL (B) 1,102 10,377 -- 934
North Richland
Shadow Creek Hills, TX -- 666 5,899 -- 563
Summer Meadows Plano, TX 12,296 2,393 14,908 -- 462
Summer Villas Dallas, TX -- 2,270 14,140 -- 1,059
Summers Crossing Plano, TX 9,176 1,730 10,774 -- 771
Summers Landing Fort Worth, TX -- 819 5,259 -- 571
Three Palms Tampa, FL (C) 1,735 14,017 -- 925
Winridge Aurora, CO 12,715 790 15,939 -- 523
-------- -------- ---------- ---- -------
Subtotal 72,557 22,626 177,399 -- 11,494
-------- -------- ---------- ---- -------
1996 ACQUISITIONS
Ashbury Parke Austin, TX -- 2,007 11,591 -- 928
Bentley Green Jacksonville, FL -- 1,430 14,095 -- 1,344
<CAPTION>
GROSS AMOUNT
AT WHICH CARRIED
AT DECEMBER 31, 1997
------------------------------------
BUILDINGS & ACCUMULATED DATE DEPRECIABLE
PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE (YEARS)(D)
------------- -------- ------------ ---------- ------------ -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Harper's Creek $ 868 $ 9,525 $ 10,393 $ (1,138) 06/94
Hunter's Ridge 300 5,173 5,473 (669) 06/94
Newport 1,200 9,215 10,415 (1,134) 06/94
Rivercrest 1,650 8,743 10,393 (1,221) 04/94
Silverado 1,194 8,327 9,521 (898) 12/94
Springfield 1,042 7,001 8,043 (851) 06/94
Summerfield Place 619 5,978 6,597 (657) 11/94
Woodscape 1,077 13,766 14,843 (1,717) 06/94
-------- ---------- ---------- --------
Subtotal 17,838 143,828 161,666 (17,619)
-------- ---------- ---------- --------
1995 ACQUISITIONS
12/95,
010/96 &
Braden's Walk (E) 1,839 1,963 121,470 (708) 2/97
Hilltop 801 5,778 6,579 (427) 12/95
Laurel Creek 2,067 1,303 415,101 (1,282) 04/95
Pinnacle 672 4,543 5,215 (400) 06/95
Pinto Creek 487 9,165 9,652 (949) 01/95
Reflections of Highpoint 1,984 13,035 15,019 (1,122) 06/95
Remington at Ponte Vedra 1,425 14,321 15,746 (1,263) 06/95
Remington Hill 1,846 12,265 14,111 (1,094) 06/95
Sandpiper 1,102 11,311 12,413 (943) 10/95
Shadow Creek 666 6,462 7,128 (476) 12/95
Summer Meadows 2,393 15,370 17,763 (1,367) 06/95
Summer Villas 2,270 15,199 17,469 (1,291) 06/95
Summers Crossing 1,730 11,545 13,275 (1,010) 06/95
Summers Landing 819 5,830 6,649 (538) 06/95
Three Palms 1,735 14,942 16,677 (1,325) 06/95
Winridge 790 16,462 17,252 (1,453) 06/95
-------- ---------- ---------- --------
Subtotal 22,626 188,893 211,519 (15,648)
-------- ---------- ---------- --------
1996 ACQUISITIONS
Ashbury Parke 2,007 12,519 14,526 (658) 06/96
08/96 &
Bentley Green 1,430 15,439 16,869 (767) 09/96
</TABLE>
S-2
<PAGE> 149
<TABLE>
<CAPTION>
COST CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
----------------------- -------------------
BUILDING & BUILDINGS &
PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
------------- -------- ------------ -------- ------------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Brandywine Nashville, TN $ -- $ 646 $ 8,479 $-- $ 1,052
Costa del Sol San Antonio, TX -- 871 6,432 -- 557
Huntington at Hidden Hills Jacksonville, FL -- 722 6,165 -- 1,393
Meadow Glen Mesa, AZ 7,049 1,802 10,754 -- 353
Nashboro Village Nashville, TN -- 6,186 42,869 -- 2,451
Parks at Treepoint (F) Arlington, TX -- 1,966 15,036 -- 1,634
Remington San Antonio, TX -- 427 4,411 -- 485
Saratoga Melbourne, FL -- 676 5,788 -- 589
Summer Oaks San Antonio, TX -- 826 5,624 -- 598
Terra Vida Mesa, AZ 7,383 1,929 13,383 -- 909
Villas of St. Moritz San Antonio, TX -- 653 5,544 -- 613
Waterford Plano, TX -- 2,156 11,423 -- 965
-------- -------- ---------- ---- -------
Subtotal 14,432 22,297 161,594 -- 13,871
-------- -------- ---------- ---- -------
1997 ACQUISITIONS
Arbor Park Dallas, TX -- 916 12,104 -- 399
Arbors of Austin Austin, TX -- 670 7,306 -- 395
Arbors of Bedford Bedford, TX -- 531 5,623 -- 385
Arbors of Carrollton Carrollton, TX -- 684 4,019 -- 257
Arbors of Euless Euless, TX -- 1,206 6,733 -- 830
Ashton Park Tampa, FL 3,946 935 6,094 -- --
Clover Hill Arlington, TX -- 725 5,944 -- 101
Hillcrest Grand Prairie, TX -- 1,040 6,823 -- 133
Oak Ramble Tampa, FL -- 1,247 8,797 -- 87
Parkway Station Atlanta, GA -- 666 17,761 -- 2
Windsor Park Hendersonville, TN 6,870 500 9,012 -- 181
-------- -------- ---------- ---- -------
Subtotal 10,816 9,120 90,216 -- 2,770
-------- -------- ---------- ---- -------
DREVER TRANSACTION
Arbor Creek Dallas, TX -- 2,284 9,841 -- 22
Arbor Point Houston, TX 1,457 313 2,568 -- 8
Arbors of Wells Branch Austin, TX -- 912 7,522 -- 20
Ashton Woods Houston, TX -- 251 4,423 -- 19
Aston Brook Houston, TX 1,653 194 3,676 -- 15
Audubon Square Austin, TX -- 529 6,284 -- 26
<CAPTION>
GROSS AMOUNT
AT WHICH CARRIED
AT DECEMBER 31, 1997
------------------------------------
BUILDINGS & ACCUMULATED DATE DEPRECIABLE
PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE (YEARS)(D)
------------- -------- ------------ ---------- ------------ -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Brandywine $ 646 $ 9,531 $ 10,177 $ (499) 08/96
Costa del Sol 871 6,989 7,860 (377) 06/96
Huntington at Hidden Hills 722 7,558 8,280 (409) 08/96
Meadow Glen 1,802 11,107 12,909 (426) 11/96
Nashboro Village 6,186 45,320 51,506 (1,595) 12/96
09/96 &
Parks at Treepoint (F) 1,966 16,670 18,636 (728) 01/97
Remington 427 4,896 5,323 (263) 06/96
Saratoga 676 6,377 7,053 (303) 09/96
Summer Oaks 826 6,222 7,048 (335) 06/96
Terra Vida 1,929 14,292 16,221 (802) 06/96
Villas of St. Moritz 653 6,157 6,810 (347) 06/96
Waterford 2,156 12,388 14,544 (574) 09/96
-------- ---------- ---------- --------
Subtotal 22,297 175,465 197,762 (8,083)
-------- ---------- ---------- --------
1997 ACQUISITIONS
Arbor Park 916 12,503 13,419 (302) 04/97
Arbors of Austin 670 7,701 8,371 (180) 04/97
Arbors of Bedford 531 6,008 6,539 (152) 04/97
Arbors of Carrollton 684 4,276 4,960 (105) 04/97
Arbors of Euless 1,206 7,563 8,769 (184) 04/97
Ashton Park 935 6,094 7,029 (35) 12/97
Clover Hill 725 6,045 6,770 (35) 10/97
Hillcrest 1,040 6,956 7,996 (125) 06/97
Oak Ramble 1,247 8,884 10,131 (51) 11/97
Parkway Station 666 17,763 18,429 (100) 12/97
Windsor Park 500 9,193 9,693 (132) 07/97
-------- ---------- ---------- --------
Subtotal 9,120 92,986 102,106 (1,401)
-------- ---------- ---------- --------
DREVER TRANSACTION
Arbor Creek 2,284 9,863 12,147 (103) 10/97
Arbor Point 313 2,576 2,889 (27) 10/97
Arbors of Wells Branch 912 7,542 8,454 (79) 10/97
Ashton Woods 251 4,442 4,693 (47) 10/97
Aston Brook 194 3,691 3,885 (39) 10/97
Audubon Square 529 6,310 6,839 (66) 10/97
</TABLE>
S-3
<PAGE> 150
<TABLE>
<CAPTION>
COST CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
----------------------- -------------------
BUILDING & BUILDINGS &
PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
------------- -------- ------------ -------- ------------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Bar Harbor Houston, TX $ 5,202 $ 1,149 $ 9,326 $-- $ 42
Bayou Oaks Houston, TX 2,777 222 6,120 -- 16
Bent Creek Dallas, TX 4,174 1,802 8,155 -- 19
Brandon Oaks Houston, TX 2,612 293 6,454 -- 19
Briarcrest Houston, TX 4,057 714 11,199 -- 40
Brittany Park Dallas, TX -- 1,620 7,892 -- 28
Brookfield Houston, TX -- 400 8,422 -- 23
Canyon Ridge Dallas, TX 2,394 1,127 5,620 -- 28
Carriage Hill Houston, TX 4,273 410 8,474 -- 21
Casa Valley Dallas, TX -- 1,020 6,010 -- 19
Central Park Condos Houston, TX 2,076 370 3,945 -- 9
Central Park Regency Houston, TX 5,943 490 12,636 -- 31
Charleston, The Houston, TX 4,356 810 8,469 -- 20
Cimarron Park Houston, TX 2,250 334 4,888 -- 15
Cimarron Parkway Houston, TX -- 1,319 9,527 -- 18
Colony Oaks Houston, TX 2,519 540 6,044 -- 29
Colorado Club Houston, TX 7,200 883 9,780 -- 27
Creekwood Village Dallas, TX 5,098 1,433 11,173 -- 36
Crestwood Phoenix, AZ -- 932 9,151 -- 21
Enclave at Cypress Park Houston, TX -- 1,595 12,455 -- 62
Fairways, The Phoenix, AZ -- 766 5,747 -- 19
Felicita Creek San Diego, CA 3,112 1,594 5,550 -- 15
Garden Place Phoenix, AZ -- 1,596 12,480 -- 22
Georgetown Houston, TX -- 1,565 7,826 -- 16
Harbor Pointe Houston, TX -- 413 7,506 -- 23
Harpers Mill Houston, TX 2,071 967 3,657 -- 13
Hidden Lake Houston, TX -- 2,843 19,840 -- 40
Holiday on Hayes Houston, TX 4,787 1,491 10,600 -- 15
Hunt Club, The Houston, TX 2,820 1,175 5,184 -- 14
Huntley, The Houston, TX 5,285 640 8,974 -- 21
La Prada Club Dallas, TX -- 1,493 9,485 -- 26
Lakes of Renaissance Austin, TX -- 945 10,463 -- 26
Live Oak Houston, TX -- 782 4,475 -- 29
Meadows on Memorial Houston, TX -- 609 2,348 -- 20
Mill Creek Houston, TX 1,633 205 4,595 -- 18
<CAPTION>
GROSS AMOUNT
AT WHICH CARRIED
AT DECEMBER 31, 1997
------------------------------------
BUILDINGS & ACCUMULATED DATE DEPRECIABLE
PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE (YEARS)(D)
------------- -------- ------------ ---------- ------------ -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Bar Harbor $ 1,149 $ 9,368 $ 10,517 $ (99) 10/97
Bayou Oaks 222 6,136 6,358 (65) 10/97
Bent Creek 1,802 8,174 9,976 (86) 10/97
Brandon Oaks 293 6,473 6,766 (68) 10/97
Briarcrest 714 11,239 11,953 (118) 10/97
Brittany Park 1,620 7,920 9,540 (83) 10/97
Brookfield 400 8,445 8,845 (88) 10/97
Canyon Ridge 1,127 5,648 6,775 (59) 10/97
Carriage Hill 410 8,495 8,905 (89) 10/97
Casa Valley 1,020 6,029 7,049 (63) 10/97
Central Park Condos 370 3,954 4,324 (41) 10/97
Central Park Regency 490 12,667 13,157 (133) 10/97
Charleston, The 810 8,489 9,299 (89) 10/97
Cimarron Park 334 4,903 5,237 (52) 10/97
Cimarron Parkway 1,319 9,545 10,864 (100) 10/97
Colony Oaks 540 6,073 6,613 (64) 10/97
Colorado Club 883 9,807 10,690 (103) 10/97
Creekwood Village 1,433 11,209 12,642 (118) 10/97
Crestwood 932 9,172 10,104 (96) 10/97
Enclave at Cypress Park 1,595 12,517 14,112 (132) 10/97
Fairways, The 766 5,766 6,532 (60) 10/97
Felicita Creek 1,594 5,565 7,159 (59) 10/97
Garden Place 1,596 12,502 14,098 (131) 10/97
Georgetown 1,565 7,842 9,407 (51) 10/97
Harbor Pointe 413 7,529 7,942 (79) 10/97
Harpers Mill 967 3,670 4,637 (39) 10/97
Hidden Lake 2,843 19,880 22,723 (208) 10/97
Holiday on Hayes 1,491 10,615 12,106 (111) 10/97
Hunt Club, The 1,175 5,198 6,373 (55) 10/97
Huntley, The 640 8,995 9,635 (94) 10/97
La Prada Club 1,493 9,511 11,004 (100) 10/97
Lakes of Renaissance 945 10,489 11,434 (110) 10/97
Live Oak 782 4,504 5,286 (47) 10/97
Meadows on Memorial 609 2,368 2,977 (26) 10/97
Mill Creek 205 4,613 4,818 (49) 10/97
</TABLE>
S-4
<PAGE> 151
<TABLE>
<CAPTION>
COST CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
----------------------- -------------------
BUILDING & BUILDINGS &
PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
------------- -------- ------------ -------- ------------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Montfort Oaks Dallas, TX $ 5,170 $ 2,256 $ 11,177 $-- $ 26
Monticello on Cranbrook Houston, TX 3,434 410 7,522 -- 22
Northwoods Houston, TX 2,853 638 8,176 -- 24
Oak Ridge Austin, TX -- 834 10,389 -- 28
One Camden Court Houston, TX -- 164 2,479 -- 15
One Cypress Landing Houston, TX -- 559 11,830 -- 33
One Westfield Lake Houston, TX -- 731 9,692 -- 30
One Willow Chase Houston, TX -- 160 3,425 -- 7
One Willow Park Houston, TX -- 219 5,880 -- 13
Park Bonita San Diego, CA 5,777 6,951 5,647 -- 10
Pathway, The Houston, TX -- 848 5,855 -- 11
Pine Creek Houston, TX -- 414 5,697 -- 16
Polo Club Austin, TX 6,346 912 10,586 -- 24
Polo Club on Cranbrook I Houston, TX 2,851 340 5,693 -- 22
Polo Club on Cranbrook II Houston, TX 3,909 256 7,362 -- 26
Rafters, The Corpus Christi, TX 3,926 899 8,304 -- 13
Richmond Green Houston, TX -- 1,248 10,049 -- 26
Riverwalk Houston, TX 2,892 390 6,497 -- 14
Saratoga Springs Atlanta, GA 4,404 1,568 12,041 -- 23
Shadow Creek Austin, TX 6,080 1,617 13,250 -- 38
Shadowridge Village Dallas, TX 2,662 918 5,055 -- 20
Shannon Chase Atlanta, GA 3,016 3,465 4,564 -- 15
Silverado Houston, TX 5,027 1,611 12,003 -- 29
Stony Creek Houston, TX 2,986 478 6,540 -- 18
Sun Ridge San Diego, CA 3,231 3,400 3,316 -- 15
Timbers of Cranbrook Houston, TX -- 348 8,273 -- 28
Tranquility Lake Houston, TX -- 742 3,231 -- 13
Trinity Mills Dallas, TX 3,531 1,968 6,372 -- 18
Trinity Oaks Dallas, TX 3,110 916 8,688 -- 31
Villas at Indian Trails Atlanta, GA 3,625 3,119 6,138 -- 21
Wharf, The Corpus Christi, TX 3,882 1,283 8,928 -- 37
Willowick Corpus Christi, TX 3,902 899 9,161 -- 24
<CAPTION>
GROSS AMOUNT
AT WHICH CARRIED
AT DECEMBER 31, 1997
------------------------------------
BUILDINGS & ACCUMULATED DATE DEPRECIABLE
PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE (YEARS)(D)
------------- -------- ------------ ---------- ------------ -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Montfort Oaks $ 2,256 $ 11,203 $ 13,459 $ (117) 10/97
Monticello on Cranbrook 410 7,544 7,954 (79) 10/97
Northwoods 638 8,200 8,838 (86) 10/97
Oak Ridge 834 10,417 11,251 (109) 10/97
One Camden Court 164 2,494 2,658 (26) 10/97
One Cypress Landing 559 11,863 12,422 (125) 10/97
One Westfield Lake 731 9,722 10,453 (102) 10/97
One Willow Chase 160 3,432 3,592 (36) 10/97
One Willow Park 219 5,893 6,112 (62) 10/97
Park Bonita 6,951 5,657 12,608 (59) 10/97
Pathway, The 848 5,866 6,714 (62) 10/97
Pine Creek 414 5,713 6,127 (60) 10/97
Polo Club 912 10,610 11,522 (111) 10/97
Polo Club on Cranbrook I 340 5,715 6,055 (62) 10/97
Polo Club on Cranbrook II 256 7,388 7,644 (76) 10/97
Rafters, The 899 8,317 9,216 (87) 10/97
Richmond Green 1,248 10,075 11,323 (106) 10/97
Riverwalk 390 6,511 6,901 (68) 10/97
Saratoga Springs 1,568 12,064 13,632 (126) 10/97
Shadow Creek 1,617 13,288 14,905 (140) 10/97
Shadowridge Village 918 5,075 5,993 (53) 10/97
Shannon Chase 3,465 4,579 8,044 (12) 10/97
Silverado 1,611 12,032 13,643 (126) 10/97
Stony Creek 478 6,558 7,036 (69) 10/97
Sun Ridge 3,400 3,331 6,731 (35) 10/97
Timbers of Cranbrook 348 8,301 8,649 (87) 10/97
Tranquility Lake 742 3,244 3,986 (33) 10/97
Trinity Mills 1,968 6,390 8,358 (67) 10/97
Trinity Oaks 916 8,719 9,635 (92) 10/97
Villas at Indian Trails 3,119 6,159 9,278 (93) 10/97
Wharf, The 1,283 8,965 10,248 (94) 10/97
Willowick 899 9,185 10,084 (96) 10/97
</TABLE>
S-5
<PAGE> 152
<TABLE>
<CAPTION>
COST CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
----------------------- -------------------
BUILDING & BUILDINGS &
PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
------------- -------- ------------ -------- ------------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Wimbledon Houston, TX $ -- $ 231 $ 5,667 $-- $ 15
Woodborough Houston, TX -- 376 8,731 -- 31
Woodchase Houston, TX 4,495 1,422 10,826 -- 47
Woodedge Houston, TX 1,747 243 3,606 -- 11
Woodlake Houston, TX -- 1,179 10,338 -- 18
-------- -------- ---------- ---- -------
Subtotal 166,605 83,042 601,772 -- 1,762
-------- -------- ---------- ---- -------
Subtotal -- 1997 177,421 92,162 691,988 -- 4,532
-------- -------- ---------- ---- -------
Total(G) $347,699 $173,668 $1,282,407 $(33) $51,571
======== ======== ========== ==== =======
<CAPTION>
GROSS AMOUNT
AT WHICH CARRIED
AT DECEMBER 31, 1997
------------------------------------
BUILDINGS & ACCUMULATED DATE DEPRECIABLE
PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE (YEARS)(D)
------------- -------- ------------ ---------- ------------ -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Wimbledon $ 231 $ 5,682 $ 5,913 $ (60) 10/97
Woodborough 376 8,762 9,138 (92) 10/97
Woodchase 1,422 10,873 12,295 (114) 10/97
Woodedge 243 3,617 3,860 (38) 10/97
Woodlake 1,179 10,356 11,535 (109) 10/97
-------- ---------- ---------- --------
Subtotal 83,042 603,534 686,576 (6,295)
-------- ---------- ---------- --------
Subtotal -- 1997 92,162 696,520 788,682 (7,696)
-------- ---------- ----------
Total(G) $173,635 $1,333,978 $1,507,613 $(74,584)
======== ========== ========== ========
</TABLE>
- ---------------
(A) Property is pledged as collateral under a $57.417 million mortgage note
payable to an insurance company.
(B) Property is pledged as collateral under a $23.238 million mortgage note
payable to an insurance company.
(C) Property is pledged as collateral under the mortgage notes secured by
Reflections of Highpoint, Remington at Ponte Vedra, Remington Hill and
Winridge.
(D) Depreciation is computed on a straight-line basis over the estimated useful
lives of the related assets which range from 14 to 30 years for buildings
and 5, 10 or 15 years for personal property.
(E) Braden's Walk, Oak Forest and Woods of Bedford were combined on December
31, 1997 to be operated as one property.
(F) Timber Creek and Treepoint were combined on January 8, 1997 and Quayle Walk
was combined on December 31, 1997, to be operated as one property -- Parks
at Treepoint.
(G) The aggregate cost for Federal income tax purposes at December 31, 1997 is
approximately $1.3 billion.
S-6
<PAGE> 153
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses expected to be paid by the Company in connection
with the issuance and distribution of the securities being registered are as
follows:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 104,782
NYSE Filing Fee............................................. *
Printing and engraving expenses............................. *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Exchange Agent Fees and Custodian Fees...................... *
Miscellaneous Expenses...................................... *
----------
Total..................................................... *
==========
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 32. SALES TO SPECIAL PARTIES.
None.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation, as amended and restated (the
"Articles of Incorporation"), provide certain limitations on the liability of
the Company's directors and officers for monetary damages to the Company. The
Articles of Incorporation obligate the Company to indemnify its directors and
officers, and permit the Company to indemnify its employees and other agents,
against certain liabilities incurred in connection with their service in such
capacities. These provisions could reduce the legal remedies available to the
Company and the stockholders against these individuals. See "Certain Provisions
of Maryland Law and of the Company's Articles and Bylaws--Limitation of
Liability and Indemnification."
The Articles of Incorporation require it to indemnify (a) the Company's
directors and officers whether serving the Company or at its request any other
entity who have been successful, on the merits or otherwise, in the defense of a
proceeding to which he was made a party by reason of his service in that
capacity against reasonable expenses incurred by him in connection with the
proceeding unless it is established that (i) his act or omission was material to
the matter giving rise to the proceeding and was committed in bad faith or was
the result of active and deliberate dishonesty, (ii) he actually received an
improper personal benefit in money, property or services, or (iii) in the case
of a criminal proceeding, he had reasonable cause to believe that his act or
omission was unlawful and (b) other employees and agents of the Company to such
extent as shall be authorized by the Board of Directors or the Company's Bylaws
and be permitted by law. In addition, the Articles of Incorporation require the
Company to pay or reimburse, in advance of the final disposition of a
proceeding, reasonable expenses incurred by a director or officer who is a party
to a proceeding under procedures provided for under the Maryland General
Corporation Law (the "MGCL"). The Company's Bylaws also permit the Company to
provide such other and further indemnification or payment or reimbursement of
expenses as the Board of Directors deems to be in the interest of the Company
and as may be permitted by the MGCL for directors, officers and employees of
Maryland corporations.
II-1
<PAGE> 154
The Company has entered into indemnification agreements with each of the
Company's officers and directors. The indemnification agreements require, among
other things, that the Company indemnify its officers and directors to the
fullest extent permitted by law and advance to the officers and directors all
related expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. The Company must also indemnify and advance
all expenses incurred by officers and directors seeking to enforce their rights
under the indemnification agreements and cover officers and directors under the
Company's directors' and officers' liability insurance. Although the
indemnification agreements offer substantially the same scope of coverage
afforded by law, they provide assurance to directors and officers that
indemnification will be available because such contracts cannot be modified
unilaterally in the future by the Board of Directors or the stockholders to
eliminate the rights they provide.
ITEM 35. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED.
Not applicable
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements included in this Registration Statement are:
(1) Financial Statements of the Company for the six months ended June 30,
1998 and 1997:
Condensed Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and
December 31, 1997
Condensed Consolidated Statements of Income for the three months and six
months ended June 30, 1998 and 1997 (Unaudited)
Condensed Consolidated of Cash Flows for the six months ended June 30,
1998 and 1997 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(2) Financial Statements of the Company for the years ended December 31,
1997, 1996 and 1995:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for each of the three years ended
December 31, 1997
Consolidated Statements of Stockholders' Equity for each of the three
years ended December 31, 1997
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1997
Notes to Consolidated Financial Statements
(3) Pro Forma Financial Statements (Unaudited):
Pro Forma Condensed Consolidated Statement of Income for the year ended
December 31, 1997
Notes to Pro Forma Condensed Consolidated Statement of Income (Unaudited)
(4) Financial Statements of Drever Partners, Inc. and Affiliates for the
years ended December 31, 1996, 1995 and 1994 and for the six months
ended June 30, 1997:
Independent Auditors' Report
Combined Balance Sheets as of December 31, 1996 and 1995 and June 30,
1997 (Unaudited)
Combined Statements of Operations for each of the three years ended
December 31, 1996 and the six months ended June 30, 1997 and 1996
(Unaudited)
Combined Statements of Stockholders' Equity for each of the three years
ended December 31, 1996 and the six months ended June 30, 1997
(Unaudited)
Combined Statements of Cash Flows for each of the three years ended
December 31, 1996 and the six months ended June 30, 1997 and 1996
(Unaudited)
Notes to Combined Financial Statements
II-2
Financial Statement Schedule
Schedule III--Real Estate and Accumulated Depreciation as of December 31,
1997
II-3
<PAGE> 155
(b) Exhibits
<TABLE>
<C> <S>
2.1 Contribution Agreement by and among Walden/Drever Operating
Partnership, L.P., Walden Residential Properties, Inc., the
Shareholders of Drever Partners, Inc., AOF, Inc., and AOF
II, Inc. (1)
2.2 Exchange Agreement among Walden Residential Properties,
Inc., Walden/Drever Operating Partnership, L.P., Drever
Partners, Inc., AOF, Inc. and AOF II, Inc. (1)
3.1 Articles of Amendment and Restatement of the Company. (2)
3.2 Restated Bylaws of the Company. (2)
4.1 Specimen of certificate representing shares of Common Stock.
(3)
4.2 Form of certificate representing shares of 9.16% Series B
Convertible Redeemable Preferred Stock. (4)
4.3 Form of certificate representing shares of 9.20% Senior
Preferred Stock. (5)
4.4 Form of certificate representing shares of 9.00% Redeemable
Preferred Stock*
4.5 Form of Articles Supplementary relating to 9.16% Series B
Convertible Redeemable Preferred Stock (4)
4.6 Form of Articles Supplementary relating to 9.20% Senior
Preferred Stock. (5)
4.7 Form of Articles Supplementary relating to 9.00% Redeemable
Preferred Stock (9)
4.8 Form of Series B Warrant Certificate*
5.1 Form of Opinion of Winstead Sechrest & Minick P.C. regarding
legality of the securities**
8.1 Form of Opinion of Winstead Sechrest & Minick P.C. regarding
certain tax matters**
10.1 Dividend Reinvestment and Stock Purchase Plan. (6)
10.2 Transfer and Assignment Agreement between The Arbors of
Austin and Walden Residential Operating Partnership, L.P.
(Arbors of Austin Apartments) (1)
10.3 Transfer and Assignment Agreement between Arbors of Bedford
Limited and Walden Residential Operating Partnership, L.P.
(Arbors of Bedford Apartments) (1)
10.4 Transfer and Assignment Agreement between Euless II Limited
and Walden Residential Operating Partnership, L.P. (Arbors
of Euless Apartments) (1)
10.5 Transfer and Assignment Agreement between The Arbors on
Forest Lane Limited and Walden Residential Operating
Partnership, L.P. (Arbors on Forest Lane Apartments) (1)
10.6 Transfer and Assignment Agreement between Arbor Park Limited
and Walden Residential Operating Partnership, L.P. (Arbor
Park Apartments) (1)
10.7 Transfer and Assignment Agreement between Arbor Mill Limited
and Walden Residential Operating Partnership, L.P. (Arbors
of Carrollton Apartments) (1)
10.8 Real Estate Sales Contract by and between Village/Hillcrest
Limited Partnership and Walden Residential Properties, Inc.
(Hillcrest Apartments) (1)
10.9 Purchase and Sale Agreement by and between Windsor Park
Apartments, Inc. and Walden Residential Operating
Partnership, L.P. (Windsor Park Apartments) (7)
</TABLE>
II-4
<PAGE> 156
<TABLE>
<C> <S>
10.10 Real Estate Sales Contract by and between 1990 Clover Hill
Limited Partnership and Walden Residential Properties, Inc.
(Clover Hill Apartments) (7)
10.11 Third Amendment to the Revolving Credit Agreement by and
among WDN Properties, Ltd., Walden Residential Properties,
Inc., Walden Residential Operating Partnership, L.P., WDN
Properties, Inc., Walden/Drever Operating Partnership, L.P.,
BankBoston, N.A., individually, Bank of Montreal, Chicago
Branch, Corestates Bank, N.A., Dresdner Bank AG New York and
Grand Cayman Branches, Keybank National Association, Signet
Bank, and BankBoston, N.A. as Agent, dated October 1, 1997.
(8)
</TABLE>
II-5
<PAGE> 157
<TABLE>
<C> <S>
10.12 Agreement to Sell Real Estate between MIG-Oak Ramble
Associates Limited Partnership and Walden Residential
Properties, Inc., dated as of September 16, 1997. (Oak
Ramble Apartments) (8)
10.13 Purchase and Sale Agreement and Joint Escrow Instructions
between Pacific Life Insurance Company and Walden
Residential Properties, Inc., dated as of November 10, 1997.
(Woods of Bedford Apartments) (8)
10.14 First Amendment to the Purchase and Sale Agreement and Joint
Escrow Instructions between Pacific Life Insurance Company
and Walden Residential Properties, Inc., dated as of
December 15, 1997. (Woods of Bedford Apartments) (8)
10.15 Contract of Sales between MGI Properties and Walden
Residential Operating Partnership, L.P. dated as of November
7, 1997. (St. James Crossing and South Pointe Apartments)
(8)
10.16 Purchase and Sale Agreement by and between Windsor at Ashton
Park Limited Partnership and Walden Residential Properties,
Inc., dated as of November 14, 1997. (Ashton Park
Apartments) (8)
10.17 Agreement of Sale and Purchase by and between Windsor at
Parkway Station Limited Partnership and Walden Residential
Properties, Inc., dated as of November 14, 1997. (Parkway
Station Apartments) (8)
10.18 Revolving Credit Agreement dated December 15, 1997, by and
among Walden Residential Properties, Inc., Walden/Drever
Operating Partnership, L.P., BankBoston, N.A. and
BankBoston, N.A., as Managing Agent for the Banks. (8)
10.19 Term Loan Agreement dated December 15, 1997, by and among
Walden Residential Properties, Inc., Walden/Drever Operating
Partnership, L.P., BankBoston, N.A. and BankBoston, N.A., as
Managing Agent for the Banks. (8)
10.20 Settlement and Employment Agreement, dated as of October 20,
1997, between Walden Residential Properties, Inc. and Don R.
Daseke. (8)
10.21 Employment Agreement, dated as of October 1, 1997, between
Walden Residential Properties, Inc. and Maxwell B. Drever.
(8)
10.22 Employment Agreement, dated as of October 1, 1997, between
Walden Residential Properties, Inc. and Michael E.
Masterson. (8)
10.23 Employment Agreement, dated as of October 1, 1997, between
Walden Residential Properties, Inc. and Michael L. Collier.
(8)
10.24 Employment Agreement, dated as of October 20, 1997, between
Walden Residential Properties, Inc. and Marshall B. Edwards.
(8)
10.25 Construction Loan Agreement by and among Walden/Grupe Elk
Grove, L.P., BankBoston, N.A. and BankBoston, N.A. as Agent
for Other Banks, dated as of February 27, 1998. (8)
10.26 Construction Loan Agreement by and among Walden/Grupe
Roseville, L.P., BankBoston, N.A. and BankBoston, N.A. as
Agent for Other Banks, dated as of February 27, 1998. (8)
10.27 Treasury Lock Agreement by and between Walden Residential
Properties, Inc. and Smith Barney Capital Services, Inc.,
dated as of August 29, 1997. (8)
10.28 Treasury Lock Agreement by and between BankBoston, N.A. and
Walden Residential Properties, Inc., dated as of December
17, 1997. (8)
10.29 Treasury Lock Agreement by and between BankBoston, N.A. and
Walden Residential Properties, Inc., dated as of December
17, 1997. (8)
</TABLE>
II-6
<PAGE> 158
<TABLE>
<C> <S>
12.1 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends.*
21.1 Subsidiaries of the Company.*
23.1 Independent Auditors' Consent.*
23.2 Consent of Winstead Sechrest & Minick P.C. (included in
Exhibits 5.1 and 8.1)
24.2 Power of Attorney (included on page II-7)
99.1 Form of Notice of Exchange*
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
(1) Previously filed with the Company's Form 10-Q filed with the Securities and
Exchange Commission on August 12, 1997 and incorporated herein by
reference.
(2) Previously filed with the Amendment No. 3 to the Company's Registration
Statement on Form S-11 (Registration No. 33-70132) filed with the
Securities and Exchange Commission on December 23, 1993 and incorporated
herein by reference.
(3) Previously filed with the Company's Registration Statement on Form S-3
(Registration No. 33-90438) filed with the Securities and Exchange
Commission on March 8, 1995 and incorporated herein by reference.
(4) Previously filed with the Company's Registration Statement on Form S-3
(Registration No. 33-13809) filed with the Securities and Exchange
Commission on October 9, 1996 and herein incorporated by reference.
(5) Previously filed with the Company's Form 8-A filed with the Securities and
Exchange Commission on December 20, 1996 and incorporated herein by
reference. (Previously numbered Exhibit 1.1 and 2.3)
(6) Previously filed with the Company's Registration Statement on Form S-3D
(Registration No. 333-34507) filed with the Securities and Exchange
Commission on August 28, 1997 and incorporated herein by reference.
(7) Previously filed with the Company's Form 10-Q filed with the Securities and
Exchange Commission on November 14, 1997 and herein incorporated by
reference. (Previously numbered Exhibits 10.1 through 10.2)
(8) Previously filed with the Company's Form 10-K filed with the Securities and
Exchange Commission on March 30, 1998 and herein incorporated by reference.
(9) Previously filed with the Company's Form 8-A filed with the Securities and
Exchange Commission on September 22, 1997 and incorporated herein by
reference.
ITEM 37. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) to file during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
II-7
<PAGE> 159
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Company pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934, that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
That for purposes of determining any liability under the Securities Act,
the information omitted from the Prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of prospectus filed
by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-8
<PAGE> 160
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Registration
Statement on Form S-11 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas, State of Texas, on October 2, 1998.
WALDEN RESIDENTIAL PROPERTIES, INC.,
a Maryland Corporation
By: MARSHALL B. EDWARDS
--------------------------------------------------
Marshall B. Edwards
Chief Executive Officer
Each person whose signature appears below constitutes and appoints Marshall
B. Edwards and Mark S. Dillinger, and each of them (with full power to each of
them to act alone), his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign on his behalf individually and in each
capacity stated below any amendment, (including post-effective amendments) to
this Registration Statement, and to file the same, with all exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents and either of them, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement on Form S-11 has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MARSHALL B. EDWARDS Chief Executive Officer, President and Director (Principal October 2, 1998
- --------------------------------------------- Executive Offer)
Marshall B. Edwards
/s/ MARK S. DILLINGER Executive Vice President, Chief Financial Officer and October 2, 1998
- --------------------------------------------- Director (Principal Financial and Accounting Officer)
Mark S. Dillinger
/s/ MICHAEL E. MASTERSON Chairman of the Board of Directors October 2, 1998
- ---------------------------------------------
Michael E. Masterson
Chairman Emeritus October , 1998
- ---------------------------------------------
Don R. Daseke
/s/ MAXWELL B. DREVER Chairman Emeritus October 2, 1998
- ---------------------------------------------
Maxwell B. Drever
Director October , 1998
- ---------------------------------------------
Linda Walker Bynoe
/s/ FRANCESCO GALESI Director October 2, 1998
- ---------------------------------------------
Francesco Galesi
Director October , 1998
- ---------------------------------------------
Robert L. Honstein
</TABLE>
II-9
<PAGE> 161
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ARCH K. JACOBSON Director October 2, 1998
- ---------------------------------------------
Arch K. Jacobson
/s/ LOUIS G. MUNIN Director October 2, 1998
- ---------------------------------------------
Louis G. Munin
Director October , 1998
- ---------------------------------------------
J. Otis Winters
</TABLE>
II-10
<PAGE> 162
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
----------- ----------- -------------
<C> <S> <C>
2.1 Contribution Agreement by and among Walden/Drever Operating
Partnership, L.P., Walden Residential Properties, Inc., the
Shareholders of Drever Partners, Inc., AOF, Inc., and AOF
II, Inc. (1)
2.2 Exchange Agreement among Walden Residential Properties,
Inc., Walden/Drever Operating Partnership, L.P., Drever
Partners, Inc., AOF, Inc. and AOF II, Inc. (1)
3.1 Articles of Amendment and Restatement of the Company. (2)
3.2 Restated Bylaws of the Company. (2)
4.1 Specimen of certificate representing shares of Common Stock.
(3)
4.2 Form of certificate representing shares of 9.16% Series B
Convertible Redeemable Preferred Stock. (4)
4.3 Form of certificate representing shares of 9.20% Senior
Preferred Stock. (5)
4.4 Form of certificate representing shares of 9.00% Redeemable
Preferred Stock*
4.5 Form of Articles Supplementary relating to 9.16% Series B
Convertible Redeemable Preferred Stock (4)
4.6 Form of Articles Supplementary relating to 9.20% Senior
Preferred Stock. (5)
4.7 Form of Articles Supplementary relating to 9.00% Redeemable
Preferred Stock (9)
4.8 Form of Series B Warrant Certificate*
5.1 Form of Opinion of Winstead Sechrest & Minick P.C. regarding
legality of the securities**
8.1 Form of Opinion of Winstead Sechrest & Minick P.C. regarding
certain tax matters**
10.1 Dividend Reinvestment and Stock Purchase Plan. (6)
10.2 Transfer and Assignment Agreement between The Arbors of
Austin and Walden Residential Operating Partnership, L.P.
(Arbors of Austin Apartments) (1)
10.3 Transfer and Assignment Agreement between Arbors of Bedford
Limited and Walden Residential Operating Partnership, L.P.
(Arbors of Bedford Apartments) (1)
10.4 Transfer and Assignment Agreement between Euless II Limited
and Walden Residential Operating Partnership, L.P. (Arbors
of Euless Apartments) (1)
10.5 Transfer and Assignment Agreement between The Arbors on
Forest Lane Limited and Walden Residential Operating
Partnership, L.P. (Arbors on Forest Lane Apartments) (1)
10.6 Transfer and Assignment Agreement between Arbor Park Limited
and Walden Residential Operating Partnership, L.P. (Arbor
Park Apartments) (1)
10.7 Transfer and Assignment Agreement between Arbor Mill Limited
and Walden Residential Operating Partnership, L.P. (Arbors
of Carrollton Apartments) (1)
</TABLE>
<PAGE> 163
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
----------- ----------- -------------
<C> <S> <C>
10.8 Real Estate Sales Contract by and between Village/Hillcrest
Limited Partnership and Walden Residential Properties, Inc.
(Hillcrest Apartments) (1)
10.9 Purchase and Sale Agreement by and between Windsor Park
Apartments, Inc. and Walden Residential Operating
Partnership, L.P. (Windsor Park Apartments) (7)
10.10 Real Estate Sales Contract by and between 1990 Clover Hill
Limited Partnership and Walden Residential Properties, Inc.
(Clover Hill Apartments) (7)
10.11 Third Amendment to the Revolving Credit Agreement by and
among WDN Properties, Ltd., Walden Residential Properties,
Inc., Walden Residential Operating Partnership, L.P., WDN
Properties, Inc., Walden/Drever Operating Partnership, L.P.,
BankBoston, N.A., individually, Bank of Montreal, Chicago
Branch, Corestates Bank, N.A., Dresdner Bank AG New York and
Grand Cayman Branches, Keybank National Association, Signet
Bank, and BankBoston, N.A. as Agent, dated October 1, 1997.
(8)
10.12 Agreement to Sell Real Estate between MIG-Oak Ramble
Associates Limited Partnership and Walden Residential
Properties, Inc., dated as of September 16, 1997. (Oak
Ramble Apartments) (8)
10.13 Purchase and Sale Agreement and Joint Escrow Instructions
between Pacific Life Insurance Company and Walden
Residential Properties, Inc., dated as of November 10, 1997.
(Woods of Bedford Apartments) (8)
10.14 First Amendment to the Purchase and Sale Agreement and Joint
Escrow Instructions between Pacific Life Insurance Company
and Walden Residential Properties, Inc., dated as of
December 15, 1997. (Woods of Bedford Apartments) (8)
10.15 Contract of Sales between MGI Properties and Walden
Residential Operating Partnership, L.P. dated as of November
7, 1997. (St. James Crossing and South Pointe Apartments)
(8)
10.16 Purchase and Sale Agreement by and between Windsor at Ashton
Park Limited Partnership and Walden Residential Properties,
Inc., dated as of November 14, 1997. (Ashton Park
Apartments) (8)
10.17 Agreement of Sale and Purchase by and between Windsor at
Parkway Station Limited Partnership and Walden Residential
Properties, Inc., dated as of November 14, 1997. (Parkway
Station Apartments) (8)
10.18 Revolving Credit Agreement dated December 15, 1997, by and
among Walden Residential Properties, Inc., Walden/Drever
Operating Partnership, L.P., BankBoston, N.A. and
BankBoston, N.A., as Managing Agent for the Banks. (8)
10.19 Term Loan Agreement dated December 15, 1997, by and among
Walden Residential Properties, Inc., Walden/Drever Operating
Partnership, L.P., BankBoston, N.A. and BankBoston, N.A., as
Managing Agent for the Banks. (8)
10.20 Settlement and Employment Agreement, dated as of October 20,
1997, between Walden Residential Properties, Inc. and Don R.
Daseke. (8)
10.21 Employment Agreement, dated as of October 1, 1997, between
Walden Residential Properties, Inc. and Maxwell B. Drever.
(8)
</TABLE>
<PAGE> 164
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
----------- ----------- -------------
<C> <S> <C>
10.22 Employment Agreement, dated as of October 1, 1997, between
Walden Residential Properties, Inc. and Michael E.
Masterson. (8)
10.23 Employment Agreement, dated as of October 1, 1997, between
Walden Residential Properties, Inc. and Michael L. Collier.
(8)
10.24 Employment Agreement, dated as of October 20, 1997, between
Walden Residential Properties, Inc. and Marshall B. Edwards.
(8)
10.25 Construction Loan Agreement by and among Walden/Grupe Elk
Grove, L.P., BankBoston, N.A. and BankBoston, N.A. as Agent
for Other Banks, dated as of February 27, 1998. (8)
10.26 Construction Loan Agreement by and among Walden/Grupe
Roseville, L.P., BankBoston, N.A. and BankBoston, N.A. as
Agent for Other Banks, dated as of February 27, 1998. (8)
10.27 Treasury Lock Agreement by and between Walden Residential
Properties, Inc. and Smith Barney Capital Services, Inc.,
dated as of August 29, 1997. (8)
10.28 Treasury Lock Agreement by and between BankBoston, N.A. and
Walden Residential Properties, Inc., dated as of December
17, 1997. (8)
10.29 Treasury Lock Agreement by and between BankBoston, N.A. and
Walden Residential Properties, Inc., dated as of December
17, 1997. (8)
12.1 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends.*
21.1 Subsidiaries of the Company.*
23.1 Independent Auditors' Consent.*
23.2 Consent of Winstead Sechrest & Minick P.C. (included in
Exhibits 5.1 and 8.1)
24.2 Power of Attorney (included on page II-7)
99.1 Form of Notice of Exchange*
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
(1) Previously filed with the Company's Form 10-Q filed with the Securities and
Exchange Commission on August 12, 1997 and incorporated herein by
reference.
(2) Previously filed with the Amendment No. 3 to the Company's Registration
Statement on Form S-11 (Registration No. 33-70132) filed with the
Securities and Exchange Commission on December 23, 1993 and incorporated
herein by reference.
(3) Previously filed with the Company's Registration Statement on Form S-3
(Registration No. 33-90438) filed with the Securities and Exchange
Commission on March 8, 1995 and incorporated herein by reference.
(4) Previously filed with the Company's Registration Statement on Form S-3
(Registration No. 33-13809) filed with the Securities and Exchange
Commission on October 9, 1996 and herein incorporated by reference.
(5) Previously filed with the Company's Form 8-A filed with the Securities and
Exchange Commission on December 20, 1996 and incorporated herein by
reference.
(6) Previously filed with the Company's Registration Statement on Form S-3D
(Registration No. 333-34507) filed with the Securities and Exchange
Commission on August 28, 1997 and incorporated herein by reference.
(7) Previously filed with the Company's Form 10-Q filed with the Securities and
Exchange Commission on November 14, 1997 and herein incorporated by
reference. (Previously numbered Exhibits 10.1 through 10.2)
(8) Previously filed with the Company's Form 10-K filed with the Securities and
Exchange Commission on March 30, 1998 and herein incorporated by reference.
(9) Previously filed with the Company's Form 8-A filed with the Securities and
Exchange Commission on September 22, 1997 and incorporated herein by
reference.
<PAGE> 1
Exhibit 4.4
[FRONT OF STOCK CERTIFICATE]
SHARES OF 9.00% REDEEMABLE SHARES OF 9.00% REDEEMABLE
PREFERRED STOCK PREFERRED STOCK PAR VALUE $.01
PAR VALUE $.01
FORMED UNDER THE SHARES
LAWS OF THE STATE
OF MARYLAND
WALDEN RESIDENTIAL
PROPERTIES, INC. THIS CERTIFICATE IS
TRANSFERABLE IN BOSTON
MASS. AND NEW YORK, N.Y.
CUSIP 931210 _____
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF 9.00% REDEEMABLE PREFERRED STOCK OF
Walden Residential Properties, Inc. (the "Company"), transferable only on the
books of the Company by the holder hereof in person, or by duly authorized
attorney, upon the surrender of this Certificate is properly endorsed. This
Certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal of the Company and the facsimile signatures
of its duly authorized representatives.
Dated:
WALDEN RESIDENTIAL PROPERTIES, INC.
CORPORATE
SEAL
MARYLAND
SECRETARY PRESIDENT Counter signed and Registered:
BOSTON EQUIRSERVE, L.P,
Transfer Agent and Registrar
By:
Authorized Signature
THERE ARE RESTRICTIONS ON THE TRANSFER
OF THE SHARES EVIDENCED BY THIS CERTIFICATE
AS MORE FULLY SET FORTH ON THE REVERSE HEREOF.
<PAGE> 2
[BACK OF STOCK CERTIFICATE]
WALDEN RESIDENTIAL PROPERTIES, INC.
THE CORPORATION WILL FURNISH TO ANY STOCKHOLDER ON REQUEST AND WITHOUT CHARGE A
FULL STATEMENT OF THE DESIGNATIONS AND ANY PREFERENCES, CONVERSION AND OTHER
RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DIVIDENDS, QUALIFICATIONS
AND TERMS, AND CONDITIONS OF REDEMPTION OF THE STOCK OF EACH CLASS WHICH THE
CORPORATION IS AUTHORIZED TO ISSUE, OR THE DIFFERENCES IN THE RELATIVE RIGHTS
AND PREFERENCES BETWEEN THE SHARES OF EACH SERIES OF A CLASS IN SERIES WHICH THE
CORPORATION IS AUTHORIZED TO ISSUE. TO THE EXTENT THEY HAVE BEEN SET, AND OF THE
AUTHORITY OF THE BOARD OF DIRECTORS TO SET THE RELATIVE RIGHTS AND PREFERENCES
OF SUBSEQUENT SERIES OR CLASSES, SUCH REQUEST MAY BE MADE TO THE SECRETARY OF
THE CORPORATION OR TO ITS TRANSFER AGENT.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON
OWNERSHIP AND TRANSFER FOR THE PURPOSE OF THE CORPORATION'S MAINTENANCE OF ITS
STATUS AS A REAL STATE INVESTMENT TRUST UNDER THE INTERNAL REVENUE CODE OF 1986,
AS AMENDED (THE "CODE"). EXCEPT AS OTHERWISE PROVIDED PURSUANT TO THE CHARTER OF
THE CORPORATION, NO PERSON MAY (1) BENEFICIALLY OWN SHARES OF STOCK IN EXCESS OF
9.0% (OR SUCH OTHER PERCENTAGE AS MAY BE PROVIDED IN THE CHARTER OF THE
CORPORATION) OF THE AGGREGATE VALUE OF ALL OUTSTANDING STOCK (UNLESS SUCH PERSON
IS THE EXISTING HOLDER), OR (2) BENEFICIALLY OWN STOCK THAT WOULD RESULT IN THE
CORPORATION BEING "CLOSELY HELD" UNDER SECTION 856(h) OF THE CODE. ANY PERSON
WHO ATTEMPTS TO BENEFICIALLY OWN SHARES OF STOCK IN EXCESS OF THE ABOVE
LIMITATIONS MUST IMMEDIATELY NOTIFY THE CORPORATION. IF THE RESTRICTIONS ON
OWNERSHIP OR TRANSFER ARE VIOLATED, THE SHARES OF STOCK REPRESENTED HEREBY WILL
BE AUTOMATICALLY CONVERTED INTO SHARES OF EXCESS STOCK WHICH WILL BE HELD IN
TRUST BY THE CORPORATION. THE CORPORATION HAS THE OPTION TO REDEEM SHARES OF
EXCESS STOCK UNDER CERTAIN CIRCUMSTANCES. ALL TERMS IN THIS LEGEND NOT OTHERWISE
DEFINED HEREIN HAVE THE MEANINGS ASCRIBED THERETO IN THE CORPORATION'S CHARTER,
AS THE SAME MAY BE FURTHER AMENDED FROM TIME TO TIME, A COPY OF WHICH, INCLUDING
THE RESTRICTIONS ON OWNERSHIP OR TRANSFER, WILL BE SENT WITHOUT CHARGE TO EACH
STOCKHOLDER WHO SO REQUESTS.
The following abbreviations, when used in the inscription of the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C> <C>
TEN COM -- as tenants in common UNIF TRAN MIN ACT -- ______ Custodian ________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as tenants in common under Uniform Transfers to Minors
Act ___________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, _____________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________shares
of 9.00% Redeemable Preferred Stock represented by the within certificate, and
do hereby irrevocably constitute and appoint __________________________________
______________________________________________ Attorney to transfer the said
shares on the books of the within-named Company with full power of substitution
in the premises.
Dated,
----------------------
----------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
Signature(s) Guaranteed by:
- -------------------------------
<PAGE> 1
EXHIBIT 4.8
FORM OF WARRANT CERTIFICATE
WALDEN RESIDENTIAL PROPERTIES, INC.
No. Series B Warrants CUSIP NO.
---------------------------- --------
WARRANTS TO PURCHASE COMMON STOCK
This certifies that ___________, or its registered assigns, is the
owner of the number of Series B Warrants set forth above, each of which
represents the right to purchase, on or after October 1, 1998, from WALDEN
RESIDENTIAL PROPERTIES, INC., a Maryland corporation ('Walden"), one-third
(1/3) of a share of Common Stock, par value $.01 per share (the "Common
Stock"), of Walden at the purchase price (as adjusted from time to time, the
"Exercise Price") of $26.875 per share of Common Stock (subject to adjustment
as provided in the Warrant Agreement hereinafter referred to), upon surrender
hereof at the office of BOSTON EQUISERVE L.P. or to its successor as the
warrant agent under the Warrant Agreement hereinafter referred to (any such
warrant agent being herein called the "Warrant Agent"), with the Subscription
Form on the reverse hereof duly executed, with signature guaranteed as therein
specified and simultaneous payment in full (by wire transfer or by certified or
official bank or bank cashier's check payable to the order of Walden, or by the
surrender of Warrants having an aggregate Spread (as defined in the Warrant
Agreement) equal to the Exercise Price of the Warrants being exercised) of the
purchase price for the share(s) as to which the Warrant(s) represented by this
Warrant Certificate are exercised, all subject to the terms and conditions
hereof and of the Warrant Agreement. Notwithstanding the foregoing, Walden
shall have the right to not allow an exercise of any Warrants in the event the
Registration Statement is not effective arid available at the time Warrants are
exercised, unless prior to the exercise of such Warrants, the Holder thereof
furnishes to the Warrant Agent and Walden such certifications, legal opinions
or other information as either of them may reasonably require to confirm that
such exercise is being made pursuant to an exemption from the registration
requirements of the Securities Act.
This Warrant Certificate is issued under and in accordance with a
Series B Warrant Agreement dated as of October 1, 1997 (the "Warrant
Agreement"), between Walden and the Warrant Agent, and is subject to the terms
and provisions contained therein, to all of which terms and provisions the
Holder of this Warrant Certificate consents by acceptance hereof. The Warrant
Agreement is hereby incorporated herein by reference and made a part hereof.
Reference is hereby made to the Warrant Agreement for a full description of the
rights, limitations of rights, obligations, duties and immunities thereunder of
Walden and the Holders of the Warrants. The summary of the terms of the
Warrant Agreement contained in this Warrant Certificate is qualified in its
entirety by express reference to the Warrant Agreement.
All terms used in this Warrant Certificate that are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
Copies of the Warrant Agreement are on file at the office of the
Warrant Agent and may be obtained by writing to the Warrant Agent at the
following address:
150 Royall Street
Canton, Massachusetts 02021
Attention: Reorganization Department
A "Repurchase Event", as defined in the Warrant Agreement, shall be
deemed to occur on any date when Walden (i) consolidates or merges into or with
another Person (but only where the holders of Common Stock receive
consideration in exchange for all or part of such Common Stock other than
common stock in the surviving Person) if the Common Stock, (or other
securities) thereafter, issuable upon exercise of the Warrants is not
registered under the Exchange Act or (ii) sells all or substantially all of its
assets to another Person if the Common Stock (or other securities) thereafter
issuable upon exercise of the Warrants is not registered under the Exchange
Act; provided that in
<PAGE> 2
each case a "Repurchase Event" will not be deemed to have occurred if the
consideration for the Common Stock in such transaction consists solely of cash.
Following a Repurchase Event, Walden must make an offer to repurchase
all outstanding Warrants (a "Repurchase Offer"). If Walden makes a Repurchase
Offer, Holders may, until the Expiration Date of such offer, surrender all or
part of their Warrants for repurchase by Walden.
Warrants received by the Warrant Agent in proper form during a
Repurchase Offer will, except as otherwise provided in the Warrant Agreement,
be repurchased by Walden at a price in cash (the "Repurchase Price") equal to
the value on the Valuation Date relating thereto of the Common Stock and other
securities or property which would have been delivered upon exercise of the
Warrants had the Warrants been exercised, less the Exercise Price (whether or
not the Warrants are then exercisable). The value of such Common Stock and
other securities will be (i) if the Common Stock (or other class of securities)
is registered under the Exchange Act, determined based upon the average of the
closing sales prices of the Common Stock (or other securities) for the 20
consecutive trading days immediately preceding such Valuation Date or, if the
Common Stock (or other securities) have been registered under the Exchange Act
for less than 20 consecutive trading days before such date, then the average of
the closing sales prices for all of the trading days before such date for which
closing sales prices are available or (ii) if the Common Stock (or other class
of securities) is not registered under the Exchange Act or if the value cannot
otherwise be computed under clause (i) above, determined by the Independent
Financial Expert (as defined in the Warrant Agreement), in each case as set
forth in the Warrant Agreement.
The "Valuation Date" with respect to a Repurchase Offer is the date
five Business Days prior to the date notice of such Repurchase Offer is first
given.
If Walden fails to make or complete a Repurchase Offer (a "Default")
as required by the Warrant Agreement, it shall be obligated to increase the
amount otherwise payable pursuant to the Warrant Agreement in respect of the
Repurchase Offer by an amount equal to interest thereon at a rate per annum of
12% from the date of the Default to the date of payment, which interest shall
compound quarterly.
If Walden merges or consolidates with or into, or sells all or
substantially all of its property and assets to, another Person solely for
cash, or in the event of the dissolution, liquidation or winding up of Walden,
the Holders of Warrants shall be entitled to receive distributions on the date
of such event on an equal basis with holders of Common Stock (or other
securities issuable upon exercise of the Warrants) as if the Warrants had been
exercised immediately prior to such event (less the Exercise Price) or the
amount payable pursuant to an outstanding Repurchase Offer if a Repurchase
Offer is then outstanding or required, if higher.
The number of shares of Common Stock purchasable upon the exercise of
each Warrant and the price per share are subject to adjustment as provided in
the Warrant Agreement. Except as stated in the immediately preceding
paragraph, in the event Walden merges or consolidates with, or sells all or
substantially all of its assets to, another Person, each Warrant will, upon
exercise, entitle the Holder thereof to receive the number of shares of capital
stock or other securities or the amount of money and other property which the
holder of a share of Common Stock (or other securities or property issuable
upon exercise of a Warrant) is entitled to receive upon completion of such
merger, consolidation or sale.
As to any final fraction of a share which the same Holder of one or
more Warrants would otherwise be entitled to purchase upon exercise thereof in
the same transaction, Walden shall pay the cash value thereof determined as
provided in the Warrant Agreement.
All Common Stock or other securities issuable by Walden upon the
exercise of Warrants shall be validly issued, fully paid and nonassessable and
Walden shall pay all taxes and other governmental charges that may be imposed
under the laws of the United States of America or any political subdivision or
taxing authority thereof or therein in respect of the issue or delivery of such
shares or of other securities deliverable upon exercise of Warrants, Walden
shall not be required, however, to pay any tax or other charge imposed in
connection with any transfer involved in the issue of any certificate for
Common Stock, and in such case Walden shall not be required to issue or deliver
any stock certificate until such tax or other charge has been paid or it has
been established to the Warrant Agent's and Walden's satisfaction that no tax
or other charge is due.
<PAGE> 3
This Warrant Certificate and all rights hereunder are transferable by
the registered Holder hereof, in whole or in part, on the register of Walden
maintained by the Warrant Agent for such purpose, upon surrender of this
Warrant Certificate duly endorsed, or accompanied by a written instrument of
transfer in form satisfactory to Walden and the Warrant Agent duly executed,
with signatures guaranteed as specified in the attached Form of Assignment, by
the registered Holder hereof or his attorney duly authorized in writing and
upon payment of any necessary transfer tax or other governmental charge imposed
upon such transfer. Upon any partial transfer, Walden will issue and the
Warrant Agent will deliver to such Holder a new Warrant Certificate or
Certificates with respect to any portion not so transferred. Each taker and
Holder of this Warrant Certificate, by taking and holding the same, consents
and agrees that prior to the registration of transfer as provided in the
Warrant Agreement, Walden and the Warrant Agent may treat the Person in whose
name the Warrants are registered as the absolute owner hereof for any purpose
and the Person entitled to exercise the rights represented hereby, any notice
to the contrary notwithstanding.
This Warrant Certificate may be exchanged at the office of the Warrant
Agent maintained for such purpose for Warrant Certificates representing the
same aggregate number of Warrants, each new Warrant Certificate to represent
such number of Warrants as the Holder hereof shall designate at the time of
such exchange.
Prior to the exercise of the Warrants represented hereby, the Holder
of this Warrant Certificate, as such, shall not be entitled to any rights of a
stockholder of Walden, including, without limitation, the right to vote or to
consent to any action of the stockholders, to receive dividends or other
distributions, to exercise any preemptive right or to receive any notice of
meetings of stockholders, and shall not be entitled to receive any notice of
any proceedings of Walden except as provided in the Warrant Agreement.
This Warrant Certificate shall be void and all rights evidenced hereby
shall cease on December 31, 2007, unless sooner terminated by the liquidation,
dissolution or winding up of Walden or as otherwise provided in the Warrant
Agreement upon the consolidation or merger of Walden with, or sale of Walden
to, another Person or unless such date is extended as provided in the Warrant
Agreement.
This Warrant Certificate shall not be valid for any purpose until it
shall have been countersigned by the Warrant Agent.
Dated: , 199
-------- --
WALDEN RESIDENTIAL PROPERTIES, INC.
By:
--------------------------------
Name:
Title:
Countersigned:
BOSTON EQUISERVE L.P.,
as Warrant Agent
By:
---------------------------------
Authorized Signatory
<PAGE> 4
FORM OF REVERSE OF WARRANT CERTIFICATE
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
To:
The undersigned irrevocably exercises ____________ of the Warrants
represented by the Warrant Certificate, each of which entitles the holder to
purchase one-third (subject to adjustment) of a share of Common Stock, par
value $.01 per share, of WALDEN RESIDENTIAL PROPERTIES, INC. and herewith makes
payment of $__________ (such payment being by wire transfer or by certified or
official bank or bank cashier's check payable to the order or at the direction
of Walden Residential Properties, Inc., or by the surrender of Warrants having
an aggregate Spread (as defined in the Warrant Agreement) equal to the Exercise
Price of the Warrants being exercised), all at the exercise price and on the
terms and conditions specified in the within Warrant Certificate and the
Warrant Agreement therein referred to, surrenders this Warrant Certificate and
all right, title and interest therein to and directs that the Common Stock
deliverable upon the exercise of such Warrants be registered or placed in the
name and at the address specified below and delivered thereto.
Dated:
-----------------------------------------
(Signature of Owner)
-----------------------------------------
(Street Address)
-----------------------------------------
(City) (State) (Zip Code)
Signature Guaranteed By:(1)
-----------------------------------------
Securities and/or check to be issued to:
Please insert social Security or identifying number:
Name:
Street Address:
City State and Zip Code:
- -------------
(1) The Holder's signature must be guaranteed by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" as
defined by Rule 17Ad-15 under the Exchange Act.
<PAGE> 5
FORM OF CERTIFICATE FOR SURRENDER FOR REPURCHASE OFFER
(To be executed only upon
repurchase of Warrant by Walden)
To:
The undersigned, having received prior notice of the consideration for
which WALDEN RESIDENTIAL PROPERTIES, INC. will repurchase the Warrants
represented by the within Warrant Certificate, hereby surrenders the Warrant
Certificate for repurchase by WALDEN RESIDENTIAL PROPERTIES, INC. of the number
of Warrants specified below for the consideration set forth in such notice.
Dated:
----------------------------------------------
(Number of Warrants to be Repurchased)
----------------------------------------------
(Signature of Owner)
----------------------------------------------
(Street Address)
----------------------------------------------
(City) (State) (Zip Code)
Signature Guaranteed By(2)
----------------------------------------------
Securities and/or check to be issued to:
Please insert social Security or identifying number:
Name:
Street Address:
City State and Zip Code:
- --------------
(2) The Holder's signature must be guaranteed by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" as
defined by Rule 17Ad-15 under the Exchange Act.
<PAGE> 6
FORM OF ASSIGNMENT
FOR VALUE RECEIVED the undersigned registered holder of the within
Warrant Certificate hereby sells, assigns, and transfers unto the Assignee(s)
named below (including the undersigned with respect to any Warrants
constituting a part of the Warrants evidenced by the within Warrant Certificate
not being assigned hereby) all of the right of the undersigned under the within
Warrant Certificate, with respect to the number of Warrants set forth below:
Name(s) of Assignee(s):
---------------------------------
Address:
--------------------------------------------------
No. of Warrants:
------------------------------------------
and does hereby irrevocably constitute and appoint _______________________ the
undersigned's attorney to make such transfer on the books of ______________
maintained for the purposes, with full power of substitution in the premises.
Dated:
-------------------------------------------
(Signature of Owner)
-------------------------------------------
(Street Address)
-------------------------------------------
(City) (State) (Zip Code)
Signature Guaranteed By(3)
-------------------------------------------
- ----------------
(3) The Holder's signature must be guaranteed by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" as
defined by Rule 17Ad-15 under the Exchange Act.
<PAGE> 1
Exhibit 12.1
WALDEN RESIDENTIAL PROPERTIES, INC.
COMPUTATION OF RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the period
February 9, 1994
(Commencement
Six Months of Operations) to
Ended June 30 Year Ended December 31, December 31,
------------- ------------------------------- -----------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income before extraordinary item
and income allocated to minority
interests .................................. $17,001 $27,113 $19,122 $10,685 $ 5,356
Add:
Interest on indebtedness ................... 26,688 28,447 20,573 17,111 6,288
Amortization of deferred
financing costs ......................... 485 827 916 900 371
------- ------- ------- ------- -------
Earnings ................................ $44,174 $56,387 $40,611 $28,696 $12,015
======= ======= ======= ======= =======
Fixed charges and preferred stock dividends:
Interest on indebtedness ................... 26,688 28,447 20,573 17,111 6,288
Amortization of deferred
financing costs ......................... 485 827 916 900 371
------- ------- ------- ------- -------
Fixed charges ........................... 27,173 29,274 21,489 18,011 6,659
Add:
Preferred stock dividends ............... 9,592 15,889 4,092 922 --
------- ------- ------- ------- -------
Combined fixed charges and
preferred stock dividends ............ $36,765 $45,163 $25,581 $18,933 $ 6,659
======= ======= ======= ======= =======
Ratio of earnings to fixed charges .............. 1.63x 1.93x 1.89x 1.59x 1.80x
Ratio of earnings to fixed charges
and preferred stock dividends .............. 1.20x 1.25x 1.59x 1.52x 1.80x
</TABLE>
<PAGE> 1
EXHIBIT 21.1
WALDEN RESIDENTIAL PROPERTIES, INC.
SCHEDULE OF SUBSIDIARIES OF THE COMPANY
AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
Percentage
Equity
Subsidiaries Ownership
------------ ---------
<S> <C> <C>
Apartment Opportunity Fund, L.P. .................................. 100%
(California)
Colorado Club Partners, L.P. ...................................... 100%
(California)
Concierge Management Corporation................................... 100%
(Texas)
Concierge Realty and Finance Corporation........................... 100%
(Texas)
Cornerstone Associates............................................. 100%
(California)
Crossing & Meadows Corporation..................................... 100%
(Texas)
Crossing & Meadows Partnership, Ltd. .............................. 100%
(Texas)
DMH 90............................................................. 100%
(California)
Drever Construction Corporation, Inc. ............................. 100%
(California)
Drever/Monticello Investors, L.P. ................................. 100%
(California)
Drever Partners, Inc. ............................................. 100%
(California)
Fullerton Portfolio Joint Venture.................................. 100%
(California)
Houston Portfolio Joint Venture II................................. 100%
(California)
Hunter's Ridge Partnership, Ltd. .................................. 100%
(Texas)
Newport Partnership, Ltd. ......................................... 100%
(Texas)
Peppertree Associates, Ltd. ....................................... 1%
(Texas)
Resident Profiles, Inc. ........................................... 100%
(Texas)
Walden AZ Corporation.............................................. 100%
(Delaware)
Walden/Drever Operating Partnership, L.P. ......................... 38%
(Delaware)
Walden Glen Corporation............................................ 100%
(Delaware)
Walden Operating, Inc. ............................................ 100%
(Delaware)
Walden Residential Operating Partnership, L.P. .................... 88%
(Georgia)
Walden Residential Operating Partnership, L.P. .................... 100%
(Delaware)
</TABLE>
<PAGE> 2
Walden South Pointe GP, Inc. ...................................... 100%
(Delaware)
Walden South Pointe, L.P. ......................................... 100%
(Delaware)
Walden Special Corp. .............................................. 10%
(Texas)
Walden Special Partners, Ltd. ..................................... 100%
(Texas)
Walden "Utah" Properties, Ltd. .................................... 100%
(Texas)
WDN Properties, Inc. .............................................. 100%
(New York)
WDN Properties, Ltd. .............................................. 100%
(Texas)
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Walden Residential
Properties, Inc. on Form S-11 of our report dated March 25, 1998 with respect to
the consolidated financial statements and financial statement schedule of Walden
Residential Properties, Inc. for the years ended December 31, 1997 and 1996 and
each of the three years in the period ended December 31, 1997 and our report
dated June 27, 1997 (October 1, 1997 as to Note 14) with respect to the combined
financial statements of Drever Partners, Inc. and affiliates for the years ended
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996, each appearing in the Prospectus, which is part of this
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
DELOITTE & TOUCHE LLP
Dallas, Texas
October 5, 1998
<PAGE> 1
NOTICE OF EXCHANGE
TO TENDER FOR EXCHANGE COMMON AND/OR PREFERRED UNITS
OF
WALDEN/DREVER OPERATING PARTNERSHIP
PURSUANT TO THE PROSPECTUS
BY
WALDEN RESIDENTIAL PROPERTIES, INC.
UNITS TENDERED FOR EXCHANGE MAY NOT BE WITHDRAWN AT ANY TIME
AFTER SUCH UNITS ARE TENDERED FOR EXCHANGE.
To the Exchange Agent:
BOSTON EQUISERVE L.P.
<TABLE>
<S> <C> <C>
By Mail: By Overnight Mail or Courier: By Hand:
Boston Equiserve L.P. Boston Equiserve L.P. Boston Equiserve L.P.
Attention: --------------- Attention: --------------- Attention: ---------------
[Address] [Address] [Address]
[City, State, Zip] [City, State, Zip] [City, State, Zip]
Facsimile Transmission Number: Confirm by Telephone: Information:
( ) - ( ) - ( ) -
( ) -
</TABLE>
THE DOCUMENTS ACCOMPANYING THIS NOTICE OF EXCHANGE AND THE INSTRUCTIONS
INCLUDED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS NOTICE OF EXCHANGE IS
COMPLETED.
DELIVERY OF THIS NOTICE OF EXCHANGE TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. YOU MUST SIGN THIS NOTICE OF
EXCHANGE WHERE INDICATED BELOW AND COMPLETE THE SUBSTITUTE FORM W-9 AND
NON-FOREIGN TAX AFFIDAVIT PROVIDED BELOW.
<PAGE> 2
The undersigned acknowledges that he has received and reviewed the
Prospectus (the "Prospectus") of Walden Residential Properties, Inc., a Maryland
corporation (the "Company"), and this Notice of Exchange (the "Notice of
Exchange"). The Prospectus and Notice of Exchange together describe the terms
and conditions of the right of the holders of certain units (each a "Holder") of
Walden/Drever Operating Partnership (the "Partnership"), pursuant to Article 11
of the Amended and Restated Limited Partnership Agreement (the "Partnership
Agreement") of the Partnership to exchange (i) Class B Common Units (a "Common
Unit") of the Partnership for one share of common stock, par value $.01 per
share (the "Common Stock"), of the Company and (ii) Class B Preferred Units (a
"Preferred Unit") of the Partnership for one share of 9% Redeemable Preferred
Stock, par value $.01 per share (the "Redeemable Preferred Stock"), of the
Company and three and one-third Series B Warrants (the "Warrants") of the
Company, respectively (the "Exchange"). The Class B Common Units and the Class B
Preferred Units are collectively referred to herein as the "Units." The Common
Stock, Redeemable Preferred Stock and the Warrants are collectively referred to
herein as the "Walden Securities."
Any Units not exchanged will remain restricted securities and may be resold
only (i) pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and (ii) in accordance with the terms of the Partnership
Agreement.
Upon the terms and subject to the conditions set forth in the Partnership
Agreement, the Prospectus and this Notice of Exchange, the Company will exchange
(i) one share of Common Stock registered under the Securities Act pursuant to a
registration statement on Form S-11 filed by the Company (the "Registration
Statement"), plus, at the election of the Company, cash and/or whole shares of
Common Stock in an amount equal to such Holder's Proportionate Prior Unpaid
Class B Common Distributions (as defined in the Partnership Agreement), if any,
for each Common Unit properly tendered for exchange; and (ii) one share of
Redeemable Preferred Stock and three and one-third Warrants registered under the
Securities Act pursuant to the Registration Statement plus, at the election of
the Company, cash and/or whole shares of Redeemable Preferred Stock in an amount
equal to such Holder's Proportionate Current Unpaid Preferred Distributions (as
defined in the Partnership Agreement), if any, for each Preferred Unit properly
tendered for exchange. In order to exchange Units, a Holder must deliver to
Boston Equiserve L.P., as Exchange Agent (the "Exchange Agent"), (a) a properly
completed Notice of Exchange, and (b) any certificates representing Units. A
Holder may only tender for exchange a minimum of the lesser of (x) 100 Common or
Preferred Units or (y) the total number of Units held by such Holder. If a
Holders' Units are not properly tendered for exchange, such Holder will not
receive Walden Securities.
No alternative, conditional or contingent tenders for exchange will be
accepted. A tendering Holder, by execution of this Notice of Exchange, waives
all rights to receive notice of acceptance of such Holder's Units for exchange.
Capitalized terms used but not defined herein have the meanings given to them in
the Prospectus.
2
<PAGE> 3
PLEASE READ THIS ENTIRE NOTICE OF EXCHANGE
CAREFULLY BEFORE COMPLETING ANY INFORMATION
List below the Units that are to be tendered for exchange pursuant to this
Notice of Exchange. If the space below is inadequate, list the information
requested below on a separate signed schedule and affix the list to this Notice
of Exchange.
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------
DESCRIPTION OF UNITS TENDERED
- -------------------------------------------------------------------------------------------------
Name(s) and Address(es) of Holder(s) Certificate
(Please fill in, if blank) Number(s)
- -------------------------------------------------------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
- -------------------------------------------------------------------------------------------------
Total Number of Units Tendered for Exchange
- -------------------------------------------------------------------------------------------------
(1) Unless otherwise indicated in this column, any Holder tendering Units for exchange will be
deemed to have tendered the entire number of Units indicated in the column labeled "Number
of Units Represented by Certificate(s)". See Instruction 5.
- -------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
DESCRIPTION DESCRIPTION OF UNITS TENDERED
- -------------------------------------------------------------------------------------------------
Number of Units Number of Units
Name(s) and Address(es) of Holder(s) Represented Tendered for
(Please fill in, if blank) by Certificate(s) Exchange(1)
- -------------------------------------------------------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
- -------------------------------------------------------------------------------------------------
Total Number of Units Tendered for Exchange
- -------------------------------------------------------------------------------------------------
(1) Unless otherwise indicated in this colu
deemed to have tendered the entire numb
of Units Represented by Certificate(s)"
- -------------------------------------------------------------------------------------------------
</TABLE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Only registered Holders are entitled to tender their Units. Persons who are
beneficial owners of Units but are not registered Holders and who seek to tender
Units for exchange should (i) contact the registered Holder of such Units and
instruct such registered Holder to tender for exchange on his behalf, (ii)
obtain and include with this Notice of Exchange certificates representing the
Units to be exchanged properly endorsed for transfer by the registered Holder or
(iii) effect a record transfer of such Units from the registered Holder to such
beneficial owner and comply with the requirements applicable to registered
Holders for tendering Units for exchange. See "Procedure to Exchange Units" in
the Prospectus.
3
<PAGE> 4
To: Walden Residential Properties, Inc. (the "Company")
Upon the terms and subject to the conditions of the Partnership Agreement,
the Prospectus and this Note of Exchange (collectively, the "Exchange"), the
undersigned hereby tenders to the Company for exchange, the Units indicated
above. Subject to, and effective upon, acceptance for exchange of the Units
tendered herewith, the undersigned hereby sells, assigns and transfers to or
upon the order of the Company, all right, title and interest in and to all such
Units tendered for exchange hereby. The undersigned hereby irrevocably
constitutes and appoints the Exchange Agent the true and lawful agent and
attorney-in-fact of the undersigned (with full knowledge that the Exchange Agent
also acts as agent of the Company) with respect to such Units, with full power
of substitution and resubstitution (such power of attorney being deemed to be an
irrevocable power coupled with an interest) to (a) deliver certificates
representing such Units, together, in each such case, with all accompanying
evidences of transfer and authenticity to or upon the order of the Company, (b)
present such Units for transfer on the relevant register and (c) receive all
benefits or otherwise exercise all rights of beneficial ownership of such Units
(except that the Exchange Agent will have no rights to or control, except as
agent for the Company, for the Walden Securities delivered in connection with
the Exchange) all in accordance with the terms of the Exchange.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS
FULL POWER AND AUTHORITY TO TENDER FOR EXCHANGE, SELL, ASSIGN AND TRANSFER THE
UNITS TENDERED FOR EXCHANGE HEREBY AND, THAT WHEN THE SAME ARE ACCEPTED FOR
EXCHANGE, THE COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE
THERETO, FREE AND CLEAR OF ALL SECURITY INTERESTS, LIENS, RESTRICTIONS, CLAIMS,
CHARGES, ENCUMBRANCES, CONDITIONAL SALES AGREEMENTS OR OTHER OBLIGATIONS
RELATING TO THE SALE OR TRANSFER THEREOF, AND NOT BE SUBJECT TO ANY ADVERSE
CLAIM. THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL
DOCUMENTS DEEMED BY THE EXCHANGE AGENT OR THE COMPANY TO BE NECESSARY OR
DESIRABLE TO COMPLETE THE ASSIGNMENT, TRANSFER AND PURCHASE OF THE UNITS
TENDERED FOR EXCHANGE HEREBY. THE UNDERSIGNED HAS READ THE PROSPECTUS AND THIS
NOTICE OF EXCHANGE AND AGREES TO ALL OF THE TERMS AND CONDITIONS OF THE
EXCHANGE. DELIVERY OF ENCLOSED UNITS SHALL BE EFFECTED, AND RISK OF LOSS AND
TITLE TO SUCH UNITS SHALL PASS, ONLY UPON PROPER DELIVERY THEREOF TO THE
EXCHANGE AGENT.
All authority conferred or agreed to be conferred pursuant to this Notice
of Exchange and every obligation of the undersigned hereunder shall be binding
upon the successors, assigns, heirs, executors, administrators, trustees in
bankruptcy, and personal and legal representatives of the undersigned and shall
not be affected by, and shall survive, the death or incapacity of the
undersigned. Units properly tendered may not be withdrawn at any time subsequent
to their tender for exchange.
In the event a Holder submits a nonconforming tender of Units for exchange,
all such Units will be returned to the undersigned without cost to the
undersigned as soon as practicable following the discovery of such
nonconformity, at the address shown below the undersigned's signature(s) unless
otherwise indicated under "Special Issuance Instructions" below.
Unless otherwise indicated under "Special Issuance Instructions" below, the
Exchange Agent will issue the Walden Securities for Units properly tendered
hereby for exchange and/or return any certificates representing Units not
properly tendered for exchange in the name(s) of the Holder(s) appearing under
"Description of Units Tendered." Similarly, unless otherwise indicated under
"Special Delivery Instructions," the Walden Securities, and/or any certificates
representing Units not tendered for exchanged or not accepted for exchange (and
accompanying documents, as appropriate) to be returned will be sent to the
address(es) of the Holder(s) appearing under "Description of Units Tendered." In
the event that both the Special Issuance Instructions and the Special Delivery
Instructions are completed, the Walden Securities will be issued, if applicable,
and the certificates representing any Units not tendered for exchange (and any
accompanying documents, as appropriate) will be returned in the name of, and
delivered to, the person or persons so indicated. The undersigned recognizes
that neither the Exchange Agent nor the Company has any obligation pursuant to
the Special Issuance Instructions to transfer any Units from the name of the
Holder thereof if the Company does not accept for exchange any of the Units so
tendered due to a failure to properly tender such Units for exchange.
4
<PAGE> 5
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if the certificates representing the Walden Securities
and/or certificates representing Units not tendered for exchange are to be
issued in the name of someone other than the undersigned.
Issue Certificate(s) to:
Name:
(Please Print)
Address:
(Include Zip Code)
(Taxpayer Identification or Social Security Number)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if the Walden Securities and/or certificates
representing the Units not tendered for exchange are to be sent to someone other
than the undersigned or to the undersigned at an address other than that shown
above.
Mail Certificate(s) to:
Name:
(Please Print)
Address:
(Include Zip Code)
(Taxpayer Identification or Social Security Number)
5
<PAGE> 6
SIGNATURES
HOLDERS OF UNITS
SIGN HERE
IMPORTANT: COMPLETE AND SIGN THE SUBSTITUTE FORM W-9 IN
THIS NOTICE OF EXCHANGE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Signature(s) of Holder(s) of Units)
Date: ________________, ____
(Must be signed by the Holder(s) exactly as name(s) appear(s) on certificate(s)
representing the Units or by person(s) authorized to become Holder(s) by
certificates and documents transmitted herewith. If signature is by
attorney-in-fact, executor, administrator, trustee, guardian, officer of a
corporation or other person acting in a fiduciary or representative capacity,
please provide the following information and see Instruction 6.)
Capacity (Full Title):
Name(s):
(Please Type or Print)
Address:
(Include Zip Code)
Area Code and Telephone Number
Tax Identification or Social Security No.
6
<PAGE> 7
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE
1. BENEFICIAL OWNERS. Persons who are beneficial owners of Units but are
not Holders and who seek to tender Units for exchange should (i) contact the
Holder of such Units and instruct such Holder to tender on his behalf, (ii)
obtain and include with this Notice of Exchange Units properly endorsed for
transfer by the Holder, or (iii) effect a record transfer of such Units from the
Holder to such beneficial owner and comply with the requirements applicable to
Holders for tendering Units. See Instruction 6.
2. REQUIREMENTS OF TENDER FOR EXCHANGE. For a Holder to properly tender
Units for exchange, a properly completed and duly executed Notice of Exchange
(or a facsimile thereof), together with any other documents required by these
Instructions, must be received by the Exchange Agent at one of the addresses set
forth on the cover hereof and certificates representing such Units must also be
received by the Exchange Agent at such address.
THE METHOD OF DELIVERY OF CERTIFICATES REPRESENTING UNITS, THIS NOTICE OF
EXCHANGE AND ANY OTHER REQUIRED DOCUMENTS, IS AT THE OPTION AND RISK OF THE
TENDERING HOLDER AND DELIVERY WILL BE DEEMED MADE WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT.
3. WITHDRAWAL OF TENDERS AND REVOCATION OF CONSENTS. Tenders of Units for
exchange may not be withdrawn once submitted to the Exchange Agent.
4. PARTIAL EXCHANGES. If fewer than the entire number of Units evidenced
by a submitted certificate are tendered for exchange, the tendering Holder
should fill in the applicable amount of the Units that are to be tendered in the
box entitled "Description of Units Tendered." The entire number of Units
represented by the certificates for all Units delivered to the Exchange Agent
will be deemed to have been tendered for exchange unless otherwise indicated. If
the entire number of Units is not tendered for exchange, new certificate(s)
representing the remainder of the number of Units that were evidenced by the old
certificate(s) will be sent to the Holder, unless otherwise provided in the
boxes entitled "Special Payment Instructions" or "Special Delivery Instructions"
above, as soon as practicable.
5. SIGNATURES ON THIS NOTICE OF EXCHANGE. If this Notice of Exchange is
signed by the Holder(s) of the Units tendered for exchange hereby, the
signature(s) must correspond exactly with the name(s) as written on the face of
the certificate(s) without alteration or any change whatsoever.
If any of the Units tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Notice of Exchange. If any tendered
Units are registered in different names on several certificates, it will be
necessary to complete, sign and submit as many separate Notices of Exchange as
there are names in which certificates are held.
If this Notice of Exchange or any certificates are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and proper evidence satisfactory to the
Company of their authority so to act must be submitted, unless waived by the
Company.
If this Notice of Exchange is signed by the Holder(s) of the Units listed
and transmitted hereby, no endorsements of certificates are required unless
certificates for Units not tendered for exchange are to be issued to, a person
other than the Holder(s).
6. TRANSFER TAXES. The Company will pay or cause to be paid any transfer
taxes with respect to the transfer and sale of Units to it or its order pursuant
to the Exchange. If, however, the Walden Securities are to be registered in the
name of any person other than the Holder(s), or if certificates tendered for
exchange are registered in the name of any person other than the person(s)
signing this Notice of Exchange, the amount of any transfer taxes (whether
imposed on the Holder(s) or such other person) payable on account of the
transfer to such person will be due from the Holder prior to completion of the
exchange unless satisfactory evidence of the payment of such taxes or exemption
therefrom is submitted.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the certificates listed in this Notice of
Exchange.
7
<PAGE> 8
7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If Walden Securities are to
be issued in the name of, and/or certificates representing Units not exchanged
are to be returned to, a person other than the person(s) signing this Notice of
Exchange or if Walden Securities are to be sent and/or such certificates are to
be returned to a person other than the person(s) signing this Notice of Exchange
or to an address other than that shown above, the appropriate boxes on this
Notice of Exchange should be completed.
8. WAIVER OF CONDITIONS. To the extent permitted by applicable law, the
Company reserves the right to waive any and all conditions to the Exchange and
accept for exchange any Units tendered for exchange
9. TAX IDENTIFICATION NUMBER AND BACKUP WITHHOLDING. Federal income tax
law generally requires that a Holder whose tendered Units are accepted for
exchange, or such Holder's assignee (in either case, the "Payee"), provide the
Company (the "Payor"), with his or her correct Taxpayer Identification Number
("TIN"), which, in the case of a Payee who is an individual, is his or her
social security number. If the Payor is not provided with the correct TIN or an
adequate basis for an exemption, such Payee may be subject to a $50 penalty
imposed by the Internal Revenue Service and backup withholding in an amount
equal to 31% of the interest paid on the Exchange. If withholding results in an
overpayment of taxes, a refund may be obtained.
To prevent backup withholding, each Payee must provide his correct TIN by
completing the "Substitute Form W-9" set forth herein, certifying that the TIN
provided is correct (or that such Payee is awaiting a TIN) and that (i) the
Payee is exempt from backup withholding, (ii) the Payee has not been notified by
the Internal Revenue Service that he is subject to backup withholding as a
result of a failure to report all interest or dividends, or (iii) the Internal
Revenue Service has notified the Payee that he is no longer subject to backup
withholding.
If the Payee does not have a TIN, such Payee should consult the enclosed
Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9 (the "W-9 Guidelines") for instructions on applying for a TIN, write
"Applied For" in the space for the TIN in Part 1 of the Substitute Form W-9, and
sign and date the Substitute Form W-9 and the Certificate of Awaiting Taxpayer
Identification Number set forth herein. Note: Writing "Applied For" on the form
means that the Payee has already applied for a TIN or that such Payee intends to
apply for one in the near future.
If the Units are held in more than one name or are not in the name of the
actual owner, consult the W-9 Guidelines for information on which TIN to report.
Exempt Payees (including, among others, all corporations and certain
foreign individuals) are not subject to these backup withholding and reporting
requirements. To prevent possible erroneous backup withholding, an exempt Payee
should write "Exempt" in Part 2 of Substitute Form W-9. See the W-9 Guidelines
for additional instructions. In order for a nonresident alien or foreign entity
to qualify as exempt, such person must submit a completed Form W-8, "Certificate
of Foreign Status." Such form may be obtained from the Payor.
10. MUTILATED, LOST, STOLEN OR DESTROYED SECURITIES. Any Holder whose
certificates representing Units have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at one of the addresses indicated above for
further instructions.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance
may be directed to the Company at (972) 788-0510. Additional copies of the
Prospectus, this Notice of Exchange and the Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9 may be obtained from the
Exchange Agent.
8
<PAGE> 9
TO BE COMPLETED BY ALL PAYEES
(SEE INSTRUCTION 9)
<TABLE>
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
PAYOR'S NAME:
- -----------------------------------------------------------------------------------------------------------------------
Name
SUBSTITUTE
FORM W-9 Address
(Number and Street)
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE (City)(State)(Zip Code)
PAYOR'S REQUEST FOR
TAXPAYER
IDENTIFICATION NUMBER (TIN)
AND CERTIFICATION
------------------------------------------------------------------------------------
PART 1 -- PLEASE PROVIDE YOUR TIN
IN THE BOX AT RIGHT AND CERTIFY BY TIN
SIGNING AND DATING BELOW (Social Security Number or
Employer Identification Number
------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
PART 2 -- FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING PLEASE WRITE "EXEMPT" HERE
(SEE INSTRUCTIONS)
------------------------------------------------------------------------------------
</TABLE>
PART 3 -- CERTIFICATION UNDER PENALTIES OF PERJURY, I
CERTIFY THAT
(1) The number shown on this form is my correct TIN
(or I am waiting for a number to be issued to
me), and
(2) I am not subject to backup withholding because:
(a) I am exempt from backup withholding, or (b) I
have not been notified by the Internal Revenue
Service (the "IRS") that I am subject to backup
withholding as a result of a failure to report
all interest or dividends or (c) the IRS has
notified me that I am no longer subject to backup
withholding.
SIGNATURE DATE ________________________
- --------------------------------------------------------------------------------
You must cross out Part 2 above if you have been notified by the IRS that
you are currently subject to backup withholding because of underreporting
interest or dividends on your tax return.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU WROTE "APPLIED FOR"
IN PART 1 OF THE SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and that I have mailed or delivered an application to
receive a taxpayer identification number of the appropriate Internal Revenue
Service Center or Social Security Administration Office (or I intend to mail or
deliver an application in the near future). I understand that if I do not
provide a taxpayer identification number to the Payor, the Payor is required to
withhold 31 percent of all cash payments made to me until I provide a number.
SIGNATURE DATE ________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31 PERCENT OF ANY CASH PAYMENTS. PLEASE REVIEW THE ENCLOSED GUIDELINES
FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9
FOR ADDITIONAL DETAILS.
9
<PAGE> 10
TO THE EXCHANGE AGENT:
BOSTON EQUISERVE L.P.
<TABLE>
<S> <C> <C>
By Mail: By Overnight Mail or Courier: By Hand:
Boston Equiserve L.P. Boston Equiserve L.P. Boston Equiserve L.P.
Attention: --------------- Attention: --------------- Attention: ---------------
[Address] [Address] [Address]
[City, State, Zip] [City, State, Zip] [City, State, Zip]
Facsimile Transmission Number: Confirm by Telephone: Information:
( ) - ( ) - ( ) -
( ) -
</TABLE>
10
