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As filed with the Securities and Exchange Commission on July 24, 1996
Registration No. 333-3598
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________________________
PARAGON GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 75-2540957
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7557 RAMBLER ROAD
SUITE 1200
DALLAS, TEXAS 75231
(214) 891-2000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
WILLIAM R. COOPER
PARAGON GROUP, INC.
7557 RAMBLER ROAD
SUITE 1200
DALLAS, TEXAS 75231
(202) 891-2000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
______________________________
COPIES TO:
J. WARREN GORRELL, JR.
DAVID W. BONSER
HOGAN & HARTSON L.L.P.
COLUMBIA SQUARE
555 THIRTEENTH STREET, N.W.
WASHINGTON, D.C. 20004-1109
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as possible after the effective date of this Registration Statement and
from time to time as determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. / /
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, please check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED
PROPOSED MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE PRICE PER AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE (1) OFFERING PRICE REGISTRATION FEE
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Common Stock, $0.01 par value . . . . . . . . 5,021,193 $17.25 $86,615,579 $29,687 (2)
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(1) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(c) under the Securities Act based on the
average of the high and low reported sales prices on the New York
Stock Exchange on April 11, 1996.
(2) Previously paid.
THE REGISTRANT HEREBY AMENDS THE 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 THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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CROSS REFERENCE SHEET
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<CAPTION>
ITEM NUMBERED CAPTION LOCATION OR HEADING IN PROSPECTUS
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<S> <C> <C>
1. Forepart of Registration Statement and Outside Front Cover Page
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Inside Front Cover Page and Outside
Pages of Prospectus Back Cover Page of Prospectus
3. Summary Information, Risk Factors Outside Front Cover Page and Prospectus
and Ratio of Earnings to Fixed Charges Summary
4. Use of Proceeds *
5. Determination of Offering Price *
6. Dilution *
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Plan of Distribution
9. Description of Securities to be Registered *
10. Interest of Named Experts and Counsel Experts and Legal Matters
11. Material Changes The Company--Recent Developments
12. Incorporation of Certain Information Incorporation of Certain Documents
by Reference by Reference
13. Disclosure of Commission Position on *
Indemnification for Securities Act
Liabilities
</TABLE>
______________________
* Item inapplicable or answer thereto is negative.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or a
solicitation of an offer to buy the securities described herein, nor shall
there be any sale of these securities in any jurisdiction in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such jurisdiction.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 24, 1996
PROSPECTUS
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5,021,193 SHARES
PARAGON GROUP, INC.
COMMON STOCK
______________________________
This Prospectus relates to the offer and sale from time to time by
certain holders (the "Selling Stockholders") of up to 5,021,193 shares (the
"Offered Shares") of common stock, par value $0.01 per share (the "Common
Stock"), of Paragon Group, Inc., a Maryland corporation (the "Company").
Three Selling Stockholders, owning 1,372,647 Offered Shares in the aggregate,
received their Offered Shares in connection with the formation of the Company
and one Selling Stockholder, owning 94,118 Offered Shares, received its
Offered Shares upon its redemption of units of limited partnership interest
in Paragon Group L.P. ("Units") in December 1995. The remaining 3,554,428
Offered Shares may be issued by the Company to Selling Stockholders holding
up to 3,554,428 Units, if and to the extent that such Selling Stockholders
redeem their Units and the Company issues them Common Stock in exchange
therefor. The Company is registering the Offered Shares as required under
the terms of certain agreements between the Company and the Selling
Stockholders. The registration of the Offered Shares does not necessarily
mean that any of the Offered Shares will be offered or sold by the Selling
Stockholders. The Company will receive no part of the proceeds of any sales
of the Offered Shares, but will incur certain expenses in connection with the
offering. See "Selling Stockholders" and "Plan of Distribution."
The Common Stock is listed on the New York Stock Exchange (the "NYSE")
under the symbol "PAO." To ensure that the Company maintains its
qualification as a real estate investment trust (a "REIT"), ownership by any
person is limited to 9.8% of the lesser of the number or value of outstanding
shares of Common Stock, with certain exceptions. The closing sale price of
the Common Stock as reported by the NYSE on April 11, 1996 was $17.25 per
share.
SEE "RISK FACTORS" BEGINNING ON PAGE 3 FOR CERTAIN FACTORS RELATING TO
AN INVESTMENT IN THE OFFERED SHARES.
______________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
______________________________
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THE OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
______________________________
The Selling Stockholders may from time to time offer and sell all or a
portion of the Offered Shares in transactions on the NYSE, in the
over-the-counter market, on any other national securities exchange on which
the Common Stock is listed or traded, in negotiated transactions or
otherwise, at prices then prevailing or related to the then-current market
price or at negotiated prices. The Offered Shares may be sold directly or
through agents or broker-dealers acting as principal or agent, or in block
trades or pursuant to a distribution by one or more underwriters on a firm
commitment or best-efforts basis. To the extent required, the names of any
agents or broker-dealers and applicable commissions or discounts and any
other required information with respect to any particular offer will be set
forth in this Prospectus under the caption "Plan of Distribution" or any
accompanying Prospectus Supplement. Each of the Selling Stockholders
reserves the right to accept or reject, in whole or in part, any proposed
purchase of the Offered Shares to be made directly or through agents. The
Selling Stockholders and any agents or broker-dealers participating in the
distribution of the Offered Shares may be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended (the "Securities Act"),
and any profit on the sale of Offered Shares by the Selling Stockholders and
any commissions received by any such agents or broker-dealers may be deemed
to be underwriting commissions or discounts under the Securities Act.
______________________________
THE DATE OF THIS PROSPECTUS IS __________ ___, 1996.
<PAGE>
AS USED HEREIN, THE TERM "COMPANY" INCLUDES PARAGON GROUP, INC. AND/OR
ITS DIRECT AND INDIRECT SUBSIDIARIES AND AFFILIATES, INCLUDING PARAGON GROUP
L.P. (THE "OPERATING PARTNERSHIP"), PARAGON GROUP GP HOLDINGS, INC. ("PARAGON
GP HOLDINGS"), PARAGON GROUP LP HOLDINGS, INC. ("PARAGON LP HOLDINGS") AND
PARAGON RESIDENTIAL SERVICES, INC. ("PRSI"), UNLESS THE CONTEXT INDICATES
OTHERWISE.
THE COMPANY
GENERAL
The Company is A fully integrated, diversified real estate investment
trust headquartered in Dallas, Texas focused on the operation, development
and acquisition of multifamily residential communities in its key markets in
the Southwest, Midwest, Carolina and Florida markets. The Company is a
self-administered and self-managed real estate investment trust ("REIT")
that, as of June 30, 1996, owned (either directly or through interests in
other entities) interests in 61 completed properties -- 55 multifamily
residential communities (the "Residential Properties") and four office
buildings and two shopping centers (the "Commercial Properties") located in
six states, with five additional multifamily residential communities,
totaling 1,404 residential units, currently under construction (collectively,
the "Properties"). The Residential Properties contain 15,334 apartment units
and the Commercial Properties contain approximately 1,000,000 rentable square
feet. In addition, as of June 30, 1996, the Company, through PRSI, managed
82 multifamily residential communities (including the Residential Properties)
located across the United States, totaling approximately 21,583 apartment
units.
The Company and its affiliates succeeded in July 1994 to substantially
all of the interests of Paragon Group, Inc., a Texas corporation ("Paragon"),
and certain others in the Properties and to Paragon's property services
businesses and consummated an initial public offering (the "Initial
Offering"). Paragon began its business activities in 1967 (through a
predecessor entity) as a developer and manager of multifamily residential
communities in the midwest and southwest regions of the United States. It
expanded its geographic focus to include ownership and management of
properties in the southeast and mid-atlantic regions in 1972 and added west
coast operations in 1981. Over the last 26 years, Paragon expanded its
residential and commercial property holdings primarily through development,
and also through acquisitions of individual or multi-product, multi-market
portfolios of properties owned and/or developed by others, and evolved into
one of the largest developers, owners and managers of multifamily residential
and commercial real estate in the United States.
The Company's principal executive offices are located at 7557 Rambler
Road, Suite 1200, Dallas, Texas 75231, and its telephone number is (214)
891-2000. The Company is a Maryland corporation that was incorporated on
March 23, 1994. The Company and its affiliates employed over 800 persons as
of June 30, 1996.
ORGANIZATIONAL STRUCTURE
The Company conducts substantially all of its business through the
Operating Partnership, which the Company controls through its wholly owned
subsidiaries, Paragon GP Holdings, the sole general partner of and the holder
of a 1.0% general partner interest in the Operating Partnership, and Paragon
LP Holdings, the holder of 79.1% of the units of limited partnership interest
("Units") in the Operating Partnership as of June 30, 1996. The other
limited partners of the Operating Partnership include entities controlled by
the Company's executive officers and other prior owners of interests in the
Properties and other assets owned by the Operating Partnership. As sole
general partner, Paragon GP Holdings has the exclusive power to manage and
conduct the business of the Operating Partnership. The Company's interests
in the Operating Partnership (through Paragon GP
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Holdings and Paragon LP Holdings) entitle it to share in cash distributions
from, and in the profits and losses of, the Operating Partnership in
proportion to its percentage interest therein.
The Company's residential property services business is conducted by
PRSI, an affiliate in which the Operating Partnership owns a 95% economic
interest by virtue of owning 1,880 shares of nonvoting common stock and one
share of voting common stock. The remaining 99 shares of voting common
stock, which represent a 5% economic interest, are owned by a partnership
controlled by certain current and former executive officers of the Company.
As discussed below under "Recent Developments," as of June 30, 1996, PRSI
succeeded to the residential property services business of Paragon Group
Property Services, Inc. ("PGPSI").
RECENT DEVELOPMENTS
SALE OF COMMERCIAL PROPERTY SERVICES BUSINESS. As of June 30, 1996, the
Company sold its economic interest in the commercial property services
business which previously had been conducted by PGPSI ("Paragon Commercial")
to Insignia Financial Group Inc. for initial cash consideration of
approximately $18.2 million. The acquisition price may be adjusted upward or
downward depending on the future revenue performance of Paragon Commercial.
This transaction does not include the sale of any residential or commercial
real estate assets owned by the Company. PRSI will continue the Company's
residential property services business and will provide all residential
property service functions previously provided by PGPSI, including property
management, leasing, development, acquisition and disposition for its owned
residential communities as well as for affiliated and third party residential
owners.
CAREIT JOINT VENTURE. On April 1, 1996, the Company entered into a
joint venture with Careit Investments Limited Partnership ("Careit"), an
affiliate of Caisse de depot et placement du Quebec, to acquire, develop and
operate selected multifamily residential properties in markets in which the
Company operates. The Company and Careit each have committed up to $22.5
million for investment in the joint venture corporation, which will be
operated so as to permit its qualification as a REIT for Federal income tax
purposes. The Company and Careit each effectively will own an approximately
45% interest and a number of private investors will own the remaining 10%
interest in the joint venture. In connection with the formation of the joint
venture, the Company and Careit each invested approximately $7.9 million in
connection with the joint venture's acquisition from the Company of three
properties: (i) Overlook, formerly known as The Phoenix, a 220-unit
multifamily residential complex in Charlotte, North Carolina; (ii) Highpoint,
a 708-unit multifamily residential complex in Dallas, Texas; and (iii)
Brassfield Park, a 336-unit multifamily residential complex under development
in Greensboro, North Carolina. The Company will record the initial
contribution of these properties at their net carrying value, which was
approximately $14.4 million (net book value of $40.0 million subject to
existing indebtedness of $25.6 million) on March 31, 1996. The Company will
account for its investment in the joint venture using the equity method of
accounting. Additional investments by Paragon and Careit will be made from
time to time when and if additional property acquisition or development
opportunities are approved for acquisition or development.
USE OF PROCEEDS
The Company will not receive any of the proceeds from sales of the
Offered Shares by the Selling Stockholders. All costs and expenses incurred
in connection with the registration under the Securities Act of the offering
made hereby will be paid by the Company, other than any brokerage fees and
commissions, fees and disbursements of legal counsel for the Selling
Stockholders and stock transfer and other taxes attributable to the sale of
the Offered Shares, which will be paid by the Selling Stockholders.
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RISK FACTORS
Prospective investors should carefully consider, among other factors,
the matters described below.
REAL ESTATE INVESTMENT RISKS
GENERAL RISKS. Real property investments are subject to varying degrees
of risk. The yields available from equity investments in real estate and the
Company's ability to service debt depend in large part on the amount of
income generated, expenses incurred and capital expenditures required. The
Company's income and ability to make distributions to its stockholders is
dependent upon the ability of its properties to generate income in excess of
its requirements to meet operating expenses, including debt service and
capital expenditures. The Company's income from multifamily residential or
commercial properties may be adversely affected by a number of factors,
including the general economic climate, local real estate conditions, such as
an oversupply of, or a reduction in demand for, apartments, retail space or
office space in the area, the attractiveness of the properties to tenants,
the quality and philosophy of management, competition from comparable
properties, inability to collect rent from tenants or residents, the effects
of any bankruptcies of major tenants in retail or office properties, changes
in market rental rates, the need to periodically repair, renovate and relet
space and to pay the costs thereof, and increases in operating costs due to
inflation and other factors (including increased real estate taxes), which
increases may not necessarily be passed fully through to tenants and
residents. In addition, income from properties and real estate values also
are affected by such factors as the cost of compliance with government
regulation, including zoning and tax laws, the potential for liability under
applicable laws, interest rate levels and the availability of financing.
Certain significant expenditures associated with each equity investment in a
property (such as mortgage payments, if any, real estate taxes and
maintenance costs) also are generally not reduced when circumstances cause a
reduction in income from the property. If any of the above occurred, the
Company's ability to make expected distributions to stockholders could be
adversely affected.
DEBT FINANCING. The Company is subject to the risks normally associated
with debt financing, including the risk that the Company will generate
insufficient funds to meet required payments of principal and interest, the
risk of rising interest rates on the Company's floating rate debt, the risk
that the Company will not be able to repay or refinance existing indebtedness
on the Properties at maturity (which generally will not have been fully
amortized at maturity) or that the terms of such refinancing will not be as
favorable as the terms of existing indebtedness. Since the Company
anticipates that very little of the principal of such indebtedness will be
amortized prior to maturity and the Company does not expect to have
sufficient funds on hand to repay all of such indebtedness at maturity, it
may be necessary for the Company to refinance such debt either through
additional debt financings secured by individual properties or groups of
properties, by unsecured private or public debt offerings or additional
equity offerings. If prevailing interest rates or other factors at the time
of refinancing result in higher interest rates on refinancings, the Company's
interest expenses would increase, which would adversely affect the Company's
funds from operations from operations and the level of or ability to make
distributions to stockholders. If the Company were unable to secure
refinancing of such indebtedness on acceptable terms, the Company could be
forced to dispose of properties upon disadvantageous terms, which could
result in losses to the Company and could adversely affect the cash flow
available for distribution. In addition, if a property or properties are
mortgaged to secure payment of indebtedness and the Company is unable to
generate funds to cover debt service, the mortgage securing the property
could be foreclosed upon by, or the property could be otherwise transferred
to, the mortgagee with a consequent loss of income and asset value to the
Company.
COMPETITION. All of the Properties are located in developed areas that
include other apartment communities, office buildings and retail centers.
The number of competitive apartment communities, office buildings and retail
centers in a particular area could have a material effect on
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the Company's ability to lease apartment units or commercial space at the
Properties or at any newly developed or acquired properties and on the rents
charged. The Company may be competing with others that have greater
resources than the Company. In particular, the Company will compete with
other REITs currently in its markets.
AMERICANS WITH DISABILITIES ACT. The Properties and any newly developed
or acquired properties must comply with Title III of the Americans with
Disabilities Act (the "ADA") to the extent that such properties are "public
accommodations" and/or "commercial facilities" as defined by the ADA. The
Company believes that it is in substantial compliance with the ADA and that
it will not be required to make substantial capital expenditures to address
the requirements of the ADA. However, compliance with the ADA could require
removal of structural barriers to handicapped access in certain public areas
of the Company's properties where such removal is readily achievable.
Noncompliance with the ADA could result in imposition of fines or awards of
damages to private litigants. The Company took into account an estimate of
funds required to make any changes required by the ADA in determining the
appropriate level of reserves and the expected level of distributions and
believes that such costs can be covered by funds from operations from
operations and established reserves without any material adverse effect on
the Company's financial conditions or results of operations. If required
changes involve a greater expenditure than the Company currently anticipates,
or if the changes must be made on a more accelerated schedule than the
Company anticipates, the Company's ability to make expected distributions to
stockholders could be adversely affected. The Company believes that its
competitors face similar costs of complying with the requirements of the ADA.
POSSIBLE ENVIRONMENTAL LIABILITIES. Under various Federal, state and
local laws, ordinances and regulations, a current or previous owner or
operator of real estate may be required to investigate and clean up certain
hazardous substances released at the property, and may be held liable to a
governmental entity or to third parties for property damage and for
investigation and cleanup costs incurred by such parties in connection with
the contamination. 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. The presence of contamination or the
failure to remediate contamination may adversely affect the owner's ability
to sell or lease real estate or to borrow using the real estate as
collateral. The owner or operator of a site may be liable under common law
to third parties for damages and injuries resulting from environmental
contamination emanating from the site. As of the date hereof, the Company
has not been notified by any governmental authority of any material
non-compliance, liability or other claim in connection with any of the
Properties and the Company is not aware of any other environmental condition
with respect to any of the Properties that could be material. No assurance,
however, can be given that no prior owner created any material environmental
condition not known to the Company, that no material environmental condition
with respect to any Property has occurred during the Company's ownership
thereof, or that future uses or conditions (including, without limitation,
changes in applicable environmental laws and regulations) will not result in
the imposition of environmental liability.
CONFLICTS OF INTEREST
OWNERSHIP OF UNITS. Certain members of the Company's Board of Directors
and executive officers own Units in the Operating Partnership and, thus, may
have interests that conflict with those of stockholders with respect to
business decisions affecting the Company and the Operating Partnership. In
particular, a holder of Units may suffer different and/or more adverse tax
consequences than the Company upon the sale or refinancing of some of the
Properties as a result of unrealized gain attributable to certain Properties.
These Unit holders and the Company, therefore, may have different objectives
regarding the appropriate pricing and timing of any sale or refinancing of
Properties. Although the Company (through Paragon GP Holdings), as the sole
general partner of the Operating Partnership, generally has authority as to
whether and on what terms to sell or
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refinance the Properties, these Unit holders might seek to influence the
Company not to sell or refinance the Properties, even though such a sale
might otherwise be financially advantageous to the Company, or may seek to
influence the Company to refinance a Property with a higher level of debt
than would be in the best interests of the Company.
INTERESTS IN OTHER PROPERTIES. Certain members of the Company's Board
of Directors and executive officers own interests in a number of joint
ventures or partnerships that have third-party partners or participating
lenders and other real property partnerships (most of which own commercial
properties) that were not contributed to the Company in connection with its
formation because such transfer was restricted or the cash flow or capital
structure of the properties to which such interests relate was inconsistent
with the Company's investment objectives. In some cases, one or more members
of the Company's Board of Directors or executive officers remains general
partner of the partnership owning the property, and therefore has certain
management and fiduciary obligations to that partnership that may conflict
with such person's responsibilities as an officer or director of the Company
and may adversely affect the Company's operations. Such directors and
officers have agreed that, subject to existing contractual arrangements with
partners, they will not sell any of these interests without first offering
such interests to the Company while such persons are employed by the Company.
PRSI CONFLICTS. PRSI provides management services (including property,
asset and partnership management services) to residential properties owned by
entities affiliated with certain members of the Company's Board of Directors
and executive officers but which are not owned by the Company. Contracts
relating to these services were not negotiated on an arm's-length basis.
Although the Company believes that the management and other fees charged by
PRSI to these persons are not below current market rates, there is no
assurance that these management fees will equal at all times those fees that
would be charged by an unaffiliated third party.
DEVELOPMENT AND ACQUISITION RISKS
The Company intends to continue development of new multifamily, retail,
office and industrial properties and acquisitions of existing multifamily,
retail, office and industrial properties when it believes that such
development or acquisition is consistent with the business strategies of the
Company. New project development is subject to a number of risks, including
construction delays or cost overruns that may increase project costs,
financing risks as described above, the failure to meet anticipated occupancy
or rent levels, failure to receive required zoning, occupancy and other
governmental permits and authorizations and changes in applicable zoning and
land use laws, which may result in the incurrence of development costs in
connection with projects that are not pursued to completion. In addition,
because the Company must distribute 95% of its taxable income in order to
maintain its qualification as a REIT, the Company anticipates that new
developments and acquisitions will be financed primarily through lines of
credit or other forms of secured or unsecured construction financing. If
permanent debt or equity financing is not available on acceptable terms to
refinance such new developments or acquisitions are undertaken without
permanent financing, further development activities or acquisitions may be
curtailed or cash available for distribution to stockholders may be adversely
affected. Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that judgments with respect to the costs of
improvements to bring an acquired property up to standards established for
the market position intended for that property will prove inaccurate, as well
as general investment risks associated with any new real estate investment.
See "--Real Estate Investment Risks" above.
PROPERTY SERVICES RISKS; CONTROL OF PRSI
GENERAL RISKS. The Company is subject to the risks associated with its
residential property services business. These risks include the risk that
management contracts or service agreements with third-party owners will be
lost to competitors, that contracts will not be renewed upon
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expiration or will not be renewed on terms consistent with current terms,
that the rental revenues upon which service fees are based will decline as a
result of general real estate market conditions or specific market factors
affecting properties serviced by the Company, resulting in decreased service
fee income, and that leasing activity generally may decline. In particular,
revenues from the Company's residential property services business are
largely dependent on contracts that generally are terminable by either party
upon 30 days' notice for any reason. There can be no assurance that a
substantial number of management contracts will not be terminated by clients.
These developments could adversely affect the ability of the Company to make
expected distributions to stockholders.
LACK OF CONTROL OVER PRSI. In order to maintain the Company's
qualification as a REIT while realizing income from the Company's third-party
residential management business, the capital stock of PRSI (which conducts
the Company's third-party residential property services business) is divided
into two classes. Voting common stock, representing 5.05% of the total
equity of PRSI, is held 99% by Paragon Management Partners L.P., a
partnership among certain current and former executive officers of the
Company, and 1% by the Company. Nonvoting common stock, representing 94.95%
of the total equity of PRSI, is held entirely by the Operating Partnership.
Paragon Management Partners L.P., as holder of 99% of the voting common
stock, has the ability to elect the board of directors of PRSI.
Consequently, the Company is unable to influence the day-to-day decisions of
such entity. As a result, the board of directors of PRSI may implement
business policies or decisions that would not have been implemented by
persons controlled by the Company and that are adverse to the interests of
the Company, which could adversely impact the Company's net operating income
and funds from operations from operations.
CHANGES IN POLICIES
The major policies of the Company, including its policies with respect
to development, acquisitions, financing, growth, operations, debt
capitalization and distributions, will be determined by its Board of
Directors. Although it has no present intention to do so, the Board of
Directors may amend or revise these and other policies from time to time
without a vote of the shareholders of the Company. A change in these
policies could adversely affect the Company's financial condition, results of
operations, funds available for distributions to stockholders or the market
price of the Common Stock. The Company cannot change its policy of seeking
to maintain its qualification as a REIT without the approval of the
stockholders of the Company.
CERTAIN TAX RISKS
TAX LIABILITIES AS A CONSEQUENCE OF THE FAILURE TO QUALIFY AS A REIT.
The Company believes that it has operated so as to qualify as a REIT under
the Internal Revenue Code of 1986, as amended (the "Code"), commencing with
its taxable year ending December 31, 1994, and intends to continue to so
operate. No assurance can be given, however, that the Company has so
qualified or will be able to remain so qualified. Qualification as a REIT
involves the application of highly technical and complex Code provisions as
to which there are only limited judicial and administrative interpretations.
Certain facts and circumstances that may be wholly or partially beyond the
Company's control may affect its ability to qualify or to continue to qualify
as a REIT. In addition, no assurance can be given that new legislation,
Treasury Regulations, administrative interpretations or court decisions will
not significantly change the tax laws with respect to the qualification as a
REIT or the Federal income tax consequences of such qualification.
If the Company fails to qualify as a REIT, it will be subject to Federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. In addition, unless entitled to relief
under certain statutory provisions, the Company would be disqualified from
treatment as a REIT for the four taxable years following the year during
which qualification is lost. The additional tax incurred in such event would
significantly reduce the cash
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flow available for distribution to stockholders. See "Federal Income Tax
Considerations--Taxation of the Company."
REIT DISTRIBUTION REQUIREMENTS AND POTENTIAL IMPACT OF BORROWINGS. To
obtain the favorable tax treatment associated with qualifying as a REIT under
the Code, the Company generally is required each year to distribute to its
stockholders at least 95% of its net taxable income. See "Federal Income Tax
Considerations--Taxation of the Company (Annual Distribution Requirements)."
The Company could be required to borrow funds on a short-term basis to meet
the distribution requirements that are necessary to achieve the tax benefits
associated with qualifying as a REIT, even if then prevailing market
conditions were not generally favorable for such borrowings. In the event
that the Company were for any reason unable to borrow such funds, the Company
could fail to continue to qualify as a REIT.
OTHER TAX LIABILITIES. Even if the Company qualifies as a REIT, it will
be subject to certain Federal, state and local taxes on its income and
property. See "Federal Income Tax Considerations--Taxation of the Company,"
"--Other Tax Considerations (PRSI)" and "--Other Tax Considerations (State
and Local Taxes; Texas Franchise Tax)." In particular, the Company will
derive a portion of its operating cash flow from activities of PRSI, which is
subject to Federal, state and local income tax. In addition, either the
Internal Revenue Service (the "IRS"), the State of Texas or other state tax
authorities might contend, through audit or examination procedures or as the
result of legislative or regulatory changes, that the Company is subject to
additional Federal or state income or franchise taxes.
LIMITS ON CONTROL AND FIDUCIARY DUTIES WITH RESPECT TO
PROPERTIES IN WHICH THE COMPANY HOLDS PARTIAL INTERESTS
With respect to certain Properties, the Company has invested through a
joint venture or partnership in which the Company has consent rights with
respect to major decisions affecting that Property. The Company also owns
partial interests in a number of the Properties through ownership of a
general partner interest or a limited partner interest combined with a
controlling general partner interest in the partnerships that own these
Properties. Although the Operating Partnership has sole control of major
decisions relating to most of these partially owned Properties (including
decisions regarding sale, refinancing and the timing and amount of
distributions therefrom), the Operating Partnership will have certain
fiduciary responsibilities to the other partners in those partnerships that
it will need to consider when making decisions that affect those Properties.
The foregoing may result in decisions with respect to such Properties that do
not fully reflect the interests of the Company at such time, including
decisions relating to the standards that the Company is required to satisfy
in order to maintain its status as a REIT for tax purposes.
COMMON STOCK PRICE FLUCTUATIONS AND TRADING VOLUME; SHARES AVAILABLE FOR
FUTURE SALE
A number of factors may adversely influence the price of the Company's
Common Stock in the public markets, many of which are beyond the control of
the Company. These factors include possible increases in market interest
rates, which may lead purchasers of shares of Common Stock to demand a higher
annual yield from distributions by the Company in relation to the price paid
for Common Stock, and the relatively low daily trading volume of REITs in
general, including the Common Stock. Sales of a substantial number of shares
of Common Stock, or the perception that such sales could occur, also could
adversely affect prevailing market prices for shares. The Company also may
issue shares of Common Stock upon redemption of Units issued in connection
with the formation of the Company, subsequent acquisitions or options granted
to employees of the Company. No prediction can be made about the effect that
any such factors will have on the market prices of shares of Common Stock.
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LIMITATION ON ACQUISITION AND CHANGE IN CONTROL
Certain provisions of the Company's Articles of Incorporation, as
amended (the "Charter"), and Bylaws and of Maryland law may have the effect
of discouraging a third party from making an acquisition proposal for the
Company and may thereby inhibit a change in control of the Company, even if
such a change in control were in the stockholders' interests. These
provisions include limits on ownership of the Company's capital stock,
staggered terms of the Company's directors, and the ability of the Board of
Directors to authorize the issuance of preferred stock.
POSSIBLE ADVERSE CONSEQUENCES OF LIMITS ON OWNERSHIP OF SHARES
In order to maintain its qualification as a REIT, not more than 50% in
value of the outstanding capital stock of the Company may be owned, directly
or constructively under the applicable attribution rules of the Internal
Revenue Code of 1986, as amended (the "Code"), by five or fewer individuals
(as defined in the Code to include certain entities) during the last half of
the taxable year (other than the first taxable year the Company qualifies as
a REIT). In order to protect the Company from the risk of losing its REIT
status due to a concentration of ownership among its stockholders, the
Company has limited ownership of the issued and outstanding capital stock by
any single stockholder to 9.8% of the outstanding shares. The Board of
Directors could waive this restriction if it were satisfied, based upon a
ruling from the Internal Revenue Service ("IRS") or an opinion of counsel
satisfactory to it, that ownership in excess of this limit would not
jeopardize the Company's status as a REIT and the Board of Directors
otherwise decided such action would be in the best interests of the Company.
A transfer of shares to a person who, as a result of the transfer, violates
the ownership limit will be void. Shares acquired or transferred in breach
of the limitation will be automatically exchanged for shares of a separate
class of stock not entitled to vote or to participate in distributions
("Excess Stock"). In addition, ownership, either directly or constructively
under the applicable attribution rules of the Code, of stock in excess of the
ownership limit generally will result in the conversion of those shares into
shares of Excess Stock. The Company will direct a holder of Excess Stock to
sell such stock to the Company for the lesser of the price paid or the
average closing price for the five trading days preceding the sale or to sell
such stock to a person whose ownership of the stock does not violate the
ownership limit.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion is a description of certain Federal income tax
considerations to the Company and holders of Common Stock. 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 holder in light of its
particular circumstances or to certain types of holders (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. As used in this discussion, the term "Company" refers solely to
Paragon Group, Inc., a Maryland corporation.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT WITH
ITS OWN TAX ADVISOR TO DETERMINE THE IMPACT OF SUCH PROSPECTIVE PURCHASER'S
INDIVIDUAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND SALE OF COMMON 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 SALE AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
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TAXATION OF THE COMPANY
GENERAL. The Company has elected to be taxed as a REIT under sections
856 through 860 of the Code effective for its taxable year ending December
31, 1994. In the opinion of Hogan & Hartson L.L.P., which has acted as
special tax counsel to the Company, the Company was organized and has operated
in conformity with the requirements for qualification and taxation as a REIT
under the Code for its taxable years ended December 31, 1994 and December 31,
1995, and the Company's current organization and method of operation should
enable it to continue to meet the requirements for qualification and taxation
as a REIT. It must be emphasized that this opinion is based on various
assumptions relating to the organization and operation of the Company, the
Operating Partnership, Paragon GP Holdings, Paragon LP Holdings, PRSI and
Paradim, Inc. and is conditioned upon certain factual representations made by
the Company, the Operating Partnership, PRSI, and Paradim, Inc. as to certain
relevant factual matters related to the organization, expected operation, and
assets of the Company, the Operating Partnership, Paragon GP Holdings, Paragon
LP Holdings, PRSI, and Paradim, Inc.
Qualification and taxation as a REIT depends upon the Company's ability
to meet on a continuing basis, through actual annual operating results,
distribution levels and diversity of stock ownership, the various
qualification tests imposed under the Code, some of which are summarized
below. Hogan & Hartson L.L.P. will not review the Company's compliance with
these requirements on a continuing basis. No assurance can be given that the
actual results of the operations of the Company, the Operating Partnership,
Paragon GP Holdings, Paragon LP Holdings, PRSI, and Paradim, Inc., the
sources of their income, the nature of their assets, the level of the
Company's distributions to shareholders and the diversity of its share
ownership for any given year will satisfy the requirements under the Code for
qualification an taxation as a REIT.
The following is a general summary of the Code provisions that govern
the Federal income tax treatment of a REIT and its stockholders. These
provisions of the Code are highly technical and complex. This summary is
qualified in its entirety by the applicable Code provisions, Treasury
Regulations, and administrative and judicial interpretations thereof.
If the Company qualifies for taxation as a REIT, it generally will not
be subject to Federal corporate income taxes on net income that it
distributes currently to stockholders. However, the Company will be subject
to Federal income tax on any income that it does not distribute and will be
subject to Federal income tax in certain circumstances on certain types of
income even though that income is distributed.
REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a corporation,
trust or association (1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares of
stock, or by transferable certificates of beneficial interest; (3) that would
be taxable as a domestic corporation, but for Sections 856 through 859 of the
Code; (4) that is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (5) the beneficial ownership of
which is held by 100 or more persons; (6) during the last half of each taxable
year not more than 50% in value of the outstanding stock of which is owned,
directly or indirectly, by five or fewer individuals (as defined in the Code
to include certain entities); and (7) that meets certain other tests, described
below, regarding the nature of its income and assets. The Code provides that
conditions (1) through (4), inclusive, must be met during the entire taxable
year and that condition (5) must be met 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. The Company's Charter includes restrictions regarding the
transfer of its shares that are intended to assist the Company in continuing
to satisfy the share ownership requirements described in (5) and (6) above.
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If a REIT owns a corporate subsidiary that is a "qualified REIT
subsidiary," that subsidiary is disregarded for Federal income tax purposes,
and all assets, liabilities, and items of income, deduction and credit of the
subsidiary are treated as assets, liabilities and such items of the REIT itself.
A "qualified REIT subsidiary" is a corporation all of the capital stock of
which has been owned by the REIT from the commencement of such corporation's
existence. Paragon GP Holdings and Paragon LP Holdings are "qualified REIT
subsidiaries," and thus all of the assets (I.E., the general and limited
partnership interests in the Operating Partnership), liabilities, and items
of income, deduction and credit of Paragon GP Holdings and Paragon LP Holdings
are treated as assets, liabilities, and items of income, deduction and credit
of the Company. PRSI is not a "qualified REIT subsidiary."
In addition, the Company's proportionate share of the assets,
liabilities and items of gross income of the Operating Partnership (including
the Operating Partnership's share of the assets, liabilities and gross income
of partnerships, joint ventures or limited liability companies in which the
Operating Partnership, either directly or indirectly, owns an interest
(collectively, the "Subsidiary Partnerships")) will be treated as assets,
liabilities and items of gross income of the Company for purposes of applying
the requirements described herein, provided that the Operating Partnership
and the Subsidiary Partnerships are treated as partnerships for Federal
income tax purposes. See "--Other Tax Considerations (Effect of Tax Status
of Operating Partnership and Other Partnerships on REIT Qualification)" below.
INCOME TESTS. In order for the Company to maintain its qualification as
a REIT, it must satisfy three gross income requirements annually. First, at
least 75% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived directly or
indirectly from investments relating to real property or mortgages on real
property (including "rents from real property" and, in certain circumstances,
interest) or from qualified types of temporary investments. Second, at least
95% of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from the same items which
qualify under the 75% income test, and from dividends, interest and gain from
the sale or disposition of stock or securities, or from any combination of
the foregoing. Third, short-term gain from the sale or other disposition of
stock or securities, gain from prohibited transactions and gain on the sale
or other disposition of real property held for less than four years (apart
from involuntary conversions and sales of foreclosure property) must
represent less than 30% of the Company's gross income (including gross income
from prohibited transactions) for each taxable year.
Rents received by the Company will qualify as "rents from real property"
in satisfying the gross income requirements described above only if several
conditions (related to the identity of the tenant, the computation of rent
payable, and the nature of the property leased) are met. In addition, for
rents received to qualify as "rents from real property," the Company generally
must not operate or manage the property or furnish or render services to
tenants, other than through an "independent contractor" from whom the Company
derives no revenue. The "independent contractor" requirement, however, does
not apply to the extent the services provided by the Company are "usually or
customarily rendered in connection with the rental of space for occupancy
only" and are not otherwise considered "rendered to the occupant." PRSI, which
is not an independent contractor, provides certain services with respect to
the Properties, but, except as described below, the Company believes that the
services provided by PRSI with respect to the Properties are "usually or
customarily rendered in connection with the rental of space for occupancy
only" in the geographic markets in which the Company operates and are not
otherwise rendered to particular tenants, and therefore the provision of such
services will not cause rents received with respect to the Properties to fail
to qualify as rents from real property. In some limited cases, the Company
provides maid service with respect to "corporate apartments" which may cause
the rent from such apartments not to qualify as rents from real property, but
the Company believes that the rent from such apartments does not exceed 1.5%
of its total revenues. Any other services with respect to the Properties
that the
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Company believes may not be provided by the Company directly without
jeopardizing the qualification of the Company as a REIT will be performed by
"independent contractors."
As described above, the Operating Partnership owns 1% of the voting
common stock and 100% of the nonvoting common stock of PRSI and a note issued
by PRSI. PRSI performs management, leasing and other property services for
residential properties owned by third parties. The income earned by and taxed
to PRSI would be nonqualifying income if earned by the Company through the
Operating Partnership directly rather than through a separate corporation.
As a result of the corporate subsidiary structure, however, such income is
earned by and taxed to PRSI and will be received by the Operating Partnership
only indirectly as dividends and interest which qualify under the 95% gross
income test (but not under the 75% gross income test). See "--Taxation of the
Company (Asset Tests)" and "--Other Tax Considerations (PRSI)" below.
If the Company fails to satisfy one or both of the 75% or the 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of these relief provisions. Even if
these relief provisions were to apply, a tax would be imposed with respect to
the "excess net income" attributable to failure to satisfy the 75% and 95%
gross income tests.
ASSET TESTS. The Company, at the close of each quarter of its taxable
year, must also satisfy three tests relating to the nature of its assets:
(i) at least 75% of the value of the Company's total assets must be represented
by "real estate assets," cash, cash items and government securities; (ii) not
more than 25% of the Company's total assets may be represented by securities
other than those in the 75% asset class; and (iii) of the investments included
in the 25% asset class, the value of any one issuer's securities (other than
interests in a partnership, securities of a "qualified REIT subsidiary" or
securities of another REIT) owned by the Company may not exceed 5% of the value
of the Company's total assets, and the Company may not own more than 10% of
any one issuer's outstanding voting securities (other than interests in a
partnership, securities of a qualified REIT subsidiary or another REIT).
The Operating Partnership owns 1% of the voting common stock and 100% of
the nonvoting common stock of PRSI. In addition, the Operating Partnership
holds a note issued by PRSI. By virtue of its ownership of Units, the Company
is considered to own its pro rata share of the assets of the Operating
Partnership, including the securities of PRSI described above. The Operating
Partnership will not own more than 10% of the voting stock of PRSI, and
therefore the Company will not own more than 10% of the voting stock of PRSI.
In addition, the Company and its senior management believe that the Company's
pro rata share of the value of the securities of PRSI does not exceed (taking
into account both the stock and the note of PRSI) 5% of the total value of the
Company's assets. There can be no assurance, however, that the IRS might not
contend either that the value of the securities of PRSI exceeds the 5% value
limitation or that the nonvoting stock of PRSI owned by the Operating
Partnership should be considered "voting stock" for this purpose.
The 5% value requirement must be satisfied each time the Company
increases its ownership of securities of PRSI (including as a result of
increasing its interest in the Operating Partnership as limited partners
exercise their redemption rights). Although the Company plans to take steps
to ensure that it satisfies the 5% value test for any quarter with respect to
which retesting is to occur, there can be no assurance that such steps always
will be successful or will not require a reduction in the Operating
Partnership's overall interest in PRSI.
The Operating Partnership owns common stock of a joint venture
corporation formed to acquire and develop multifamily residential properties.
The Company believes that, commencing with the taxable year ending December 31,
1996, the corporation will have been organized and operated in a manner to
qualify for taxation as a REIT under sections 856 through 860 of the Code.
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So long as the corporation qualifies for taxation as a REIT, the Company's
investment will not be subject to the 5% value test or the 10% voting
securities test described in (iii) above.
ANNUAL DISTRIBUTION REQUIREMENTS. To qualify as a REIT, the Company
generally must distribute to its stockholders at least 95% of its income each
year. In addition, the Company will be subject to tax on the undistributed
amount at regular capital gains and ordinary corporate tax rates and also may
be subject to a 4% excise tax on undistributed income in certain events.
The Company believes that it has made, and expects to continue to make,
timely distributions sufficient to satisfy the annual distribution requirements.
It is possible, however, that the Company, from time to time, may not have
sufficient cash or other liquid assets to meet the distribution requirements.
In that event, the Company may cause the Operating Partnership to arrange for
short-term, or possibly long-term, borrowing to permit the payments of required
dividends, even if then prevailing market conditions were not generally
favorable for such borrowings.
FAILURE TO QUALIFY. If the Company fails to qualify for taxation as a
REIT in any taxable year and the relief provisions do not apply, the Company
will be subject to tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates. Unless entitled to relief
under specific statutory provisions, the Company also will be disqualified
from taxation as a REIT for the four taxable years following the year during
which qualification was lost. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
TAXATION OF STOCKHOLDERS
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS. As long as the Company
qualifies as a REIT, distributions made to the Company's taxable domestic
stockholders out of current or accumulated earnings and profits (and not
designated as capital gain dividends) will be taken into account by them as
ordinary income, and corporate stockholders will not be eligible for the
dividends received deduction as to such amounts. Distributions that are
designated as capital gain dividends will be taxed as long-term capital gains
(to the extent they do not exceed the Company's actual net capital gain for
the taxable year) without regard to the period for which the stockholder has
held its stock. However, corporate stockholders may be required to treat up
to 20% of certain capital gain dividends as ordinary income. Distributions
in excess of current and accumulated earnings and profits will not be taxable
to a stockholder to the extent that they do not exceed the adjusted basis of
the stockholder's Common Stock, but rather will reduce the adjusted basis of
such Common Stock. To the extent that such distributions exceed the adjusted
basis of a stockholder's Common Stock, they will be included in income as
long-term capital gain (or short-term capital gain if the Common Stock has
been held for one year or less), assuming the Common Stock is a capital asset
in the hands of the stockholder.
In general, a domestic stockholder will realize capital gain or loss on
the disposition of Common Stock equal to the difference between (i) the
amount of cash and the fair market value of any property received on such
disposition and (ii) the stockholder's adjusted basis of such Common Stock.
Such gain or loss generally will constitute long-term capital gain or loss if
the stockholder has held such shares for more than one year. Loss upon a
sale or exchange of Common Stock by a stockholder who has held such Common
Stock for six months or less (after applying certain holding period rules)
will be treated as a long-term capital loss to the extent of distributions
from the Company required to be treated by such stockholder as long-term
capital gain.
Under certain circumstances, a stockholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid.
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TAXATION OF TAX-EXEMPT STOCKHOLDERS. The Company does not expect that
distributions by the Company to a tax-exempt entity will constitute "unrelated
business taxable income" ("UBTI"), provided that the tax-exempt entity has
not financed the acquisition of its Common Stock with "acquisition indebtedness"
within the meaning of the Code and the Common Stock is not otherwise held or
used in an unrelated trade or business of the tax-exempt entity.
TAXATION OF NON-U.S. STOCKHOLDERS. The rules governing U.S. 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 limited summary of such rules. Prospective Non-U.S. Stockholders should
consult with their own tax advisors to determine the impact of U.S. Federal,
state and local income tax laws with regard to an investment in Common Stock,
including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges
by the Company of U.S. 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 distributions, ordinarily, will be
subject to a withholding tax equal to 30% (unless reduced by a treaty) of the
gross amount of the distribution. Distributions in excess of current and
accumulated earnings and profits of the Company will not be taxable to the
extent that they do not exceed the adjusted basis of the Non-U.S. Stockholder's
Common Stock, but rather will reduce the adjusted basis of such Common Stock.
To the extent that such distributions exceed the adjusted basis of a Non-U.S.
Stockholder's Common Stock, they will give rise to tax liability if the Non-U.S.
Stockholder otherwise would be subject to tax on any gain from the sale or
disposition of his Common Stock as described below (in which case a Non-U.S.
Stockholder also may be subject to a 30% branch profits tax if it is a foreign
corporation). If it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of current and accumulated
earnings and profits, the distribution will be subject to withholding at the
rate applicable to dividends. However, the Non-U.S. Stockholder may seek a
refund of such amounts from the IRS if it is subsequently determined that such
distribution was, in fact, in excess of current and accumulated earnings and
profits of the Company.
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 U.S.
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")
at the normal capital gain rates applicable to domestic stockholders (subject
to applicable alternative minimum tax and a special alternative minimum tax
in the case of nonresident alien individuals). Also, distributions 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 relief or exemption. The Company is
required to withhold 35% of any distribution that is or could be designated by
the Company as a capital gain dividend. The amount withheld is creditable
against the Non-U.S. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of Common Stock
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held
directly or indirectly by foreign persons. The Company believes that it is a
"domestically controlled REIT," and, therefore, that the sale of Common Stock
will not be subject to taxation under FIRPTA. If the gain on the sale of
Common Stock were to be subject to tax under FIRPTA, the Non-U.S. Stockholder
would be subject to the same treatment as domestic stockholders with respect
to such gain (subject to applicable alternative minimum tax, possible 30%
branch profits tax in the case of a corporation, and a special alternative
minimum tax in the case of nonresident alien individuals), and the purchaser
of the Common Stock will be required to withhold and remit to the IRS 10% of
the purchase price.
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OTHER TAX CONSIDERATIONS
EFFECT OF TAX STATUS OF THE OPERATING PARTNERSHIP AND OTHER PARTNERSHIPS
ON REIT QUALIFICATION. All of the Company's investments are through the
Operating Partnership, which in turn will hold interests in the Subsidiary
Partnerships. This structure involves special tax considerations. The tax
considerations include (i) the status of the Operating Partnership and the
Subsidiary Partnerships as partnerships (as opposed to associations taxable
as corporations) for income tax purposes, (ii) the allocations of income and
expense items of the Operating Partnership and the Subsidiary Partnerships,
which could affect the computation of taxable income of the Company, and
(iii) the taking of actions by the Operating Partnership or the Subsidiary
Partnerships that could adversely affect the Company's qualification as a
REIT. The Company believes that the Operating Partnership and each of the
Subsidiary Partnerships qualify for Federal income tax purposes as partnerships
(and not as associations taxable as corporations). If, however, the Operating
Partnership or any of the Subsidiary Partnerships were treated as an
association taxable as a corporation, the Company would fail to qualify as
a REIT because it would not satisfy the asset tests described above. The
Partnership Agreement requires that the Operating Partnership be operated in
a manner that will enable the Company to satisfy the requirements for
classification as a REIT. There is no similar provision in the partnership
agreements of the Subsidiary Partnerships. In this regard, the Company will
control the operation of the Operating Partnership, and some but not all of
the Subsidiary Partnerships.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. The Operating
Partnership was formed by way of contributions of appreciated property
(including certain of the Properties and additional appreciated properties
that have been contributed to the Operating Partnership since its formation).
When property is contributed to a partnership in exchange for an interest in
the partnership, the partnership generally takes a carryover basis in that
property for tax purposes equal to the adjusted basis of the contributing
partner in the property, rather than a basis equal to the fair market value
of the property at the time of contribution (this difference is referred to
as a "Book-Tax Difference"). The Partnership Agreement requires allocations
of income, loss, gain and deduction with respect to the contributed Property
be made in a manner consistent with the special rules in section 704(c) of
the Code and the regulations thereunder, which allocations will tend to
eliminate the Book-Tax Differences with respect to the contributed Properties
over the life of the Operating Partnership. However, because of certain
technical limitations, the special allocation rules of section 704(c) of the
Code may not always entirely eliminate the Book-Tax Difference on an annual
basis or with respect to a specific taxable transaction such as a sale.
Thus, the carryover basis of the contributed Properties in the hands of the
Operating Partnership could cause the Company (i) to be allocated lower
amounts of depreciation and other deductions for tax purposes than would be
allocated to the Company if all Properties were to have a tax basis equal to
their fair market value at the time of their contribution to the Operating
Partnership, and (ii) possibly to be allocated taxable gain in the event of a
sale of such contributed Properties in excess of the economic or book income
allocated to the Company as a result of such sale.
PRSI. A substantial portion of the amounts to be used by the Operating
Partnership to fund distributions to partners, including the Company, comes
from PRSI, through payments on the note issued by PRSI and dividends on the
non-voting common stock of PRSI held by the Operating Partnership. PRSI does
not qualify as a REIT or a "qualified REIT subsidiary" and thus pays Federal,
state and local income taxes on its net income at normal corporate rates. As
a result of interest and amortization deductions, PRSI does not pay
significant income taxes currently. There can be no assurance, however, that
the IRS will not challenge these deductions. In any event, future increases
in the income of PRSI inevitably will be subject to income tax. To the extent
PRSI is required to pay Federal, state and local income taxes, the cash
available for distribution to stockholders of the Company will be reduced
accordingly.
In addition, as described above, the value of the securities of PRSI
held by the Company,
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through its interest in the Operating Partnership, cannot exceed 5% of the
value of the Company's assets at a time when a partner exercises his
redemption right (or the Company otherwise is considered to acquire
additional securities of PRSI). See "--Taxation of the Company (Asset
Tests)" above. This limitation may restrict the ability of PRSI to increase
the size of its respective business unless the value of the assets of the
Company is increasing at a commensurate rate.
STATE AND LOCAL TAXES; TEXAS FRANCHISE TAX. The Company and its
stockholders may be subject to state and local tax in various states and
localities, including those states and localities in which it or they
transact business, own property, or reside. The tax treatment of the Company
and its stockholders in such jurisdictions may differ from the Federal income
tax treatment described above. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local tax
laws upon an investment in the Common Stock of the Company.
In particular, the state of Texas imposes a franchise tax upon
corporations that do business in Texas, including REITs that are organized as
corporations. Paragon Group, Inc. is organized as a Maryland corporation and
is domiciled in, and doing business in the state of Texas. Paragon GP
Holdings is organized as a Delaware corporation and is domiciled and doing
business in the state of Texas. Paragon LP Holdings is organized as a
Delaware corporation and does not have any contacts with the state of Texas
other than its limited partnership interest in the Operating Partnership.
The Operating Partnership is registered in the state of Texas as a foreign
limited partnership qualified to do business in Texas.
The Texas franchise tax is imposed on a corporation doing business in
Texas with respect to the corporation's "net taxable capital" and its "net
taxable earned surplus" (generally, a corporation's Federal taxable income,
with certain adjustments). The franchise tax on net taxable capital
(apportioned to Texas on the basis of a single-factor gross receipts
apportionment formula) is imposed at the rate of $2.50 per $1,000 of a
corporation's net taxable capital. The franchise tax rate on "net taxable
earned surplus" (apportioned to Texas on the basis of a single-factor gross
receipts apportionment formula) is 4.5 percent. The Texas franchise tax is
generally equal to the greater of the tax on "net taxable capital" and the
tax on "net taxable earned surplus." The Texas franchise tax is not applied
on a consolidated group basis. Any Texas franchise tax that the Company is
required to pay will reduce the cash available for distribution by the
Company to stockholders. The office of the Texas State Comptroller of Public
Accounts (the "Comptroller"), the agency that administers the Texas franchise
tax, has issued a regulation providing that a corporation is not considered
to be doing business in Texas for Texas franchise tax purposes merely because
the corporation owns an interest as a limited partner in a limited
partnership that does business in Texas. The same regulation provides,
however, that a corporation is considered to be doing business in Texas if it
owns an interest as a general partner in a partnership that does business in
Texas. This regulation applies for purposes of the net taxable capital
component of the Texas franchise tax. The Comptroller has not made a similar
public determination with regard to the earned surplus component. The
Comptroller also has expressed, although not in a formal regulation, that a
corporation is not considered to be doing business in Texas for Texas
franchise tax purposes merely because the corporation owns stock in another
corporation that does business in Texas.
Paragon GP Holdings is subject to the Texas franchise tax because it is
domiciled and does business in the state of Texas. In accordance with the
pronouncements by the Comptroller, Paragon LP Holdings should not be
considered to be doing business in the state of Texas and should not be
subject to the Texas franchise tax. Although Paragon Group, Inc. is doing
business in the state of Texas, Paragon Group, Inc. should not be subject to
the Texas franchise tax on dividends it receives from Paragon GP Holdings and
Paragon LP Holdings. However, there is no assurance that the Comptroller
will not contend that Paragon LP Holdings is doing business in Texas for
Texas franchise tax purposes. First, no assurance exists that the
Comptroller will not revoke the pronouncements described above and contend
that the activities of Paragon LP Holdings constitute the doing of business
in Texas. Second, as noted above, it is not clear whether the Comptroller
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considers these pronouncements equally applicable to the tax on net taxable
earned surplus. Third, no assurance exists that the Comptroller will not
contend that in light of the overall structure of Paragon Group, Inc.,
Paragon GP Holdings and Paragon LP Holdings, the pronouncements otherwise are
inapplicable. If any of the preceding were to occur, Paragon LP Holdings
would be subject to Texas franchise tax on income earned from its limited
partnership interest in the Operating Partnership.
The Operating Partnership itself is not subject to the Texas franchise
tax under current law. There is no assurance, however, that the Texas
legislature will not expand the scope of the Texas franchise tax to apply to
limited partnerships such as the Operating Partnership. In this regard,
there have been some indications from time to time that the Texas Comptroller
might propose such legislation. In particular, the Comptroller's office
recently has conducted a study of the franchise tax revenue impact if certain
changes were made to the franchise tax. It is anticipated that the Texas
legislature will consider the Comptroller's study when it meets in the Spring
of 1997. It is not possible to predict whether legislation would be proposed
as a result of such consideration, and, if legislation were proposed, whether
such legislation would be enacted or what the impact of any such legislation
would be on the Operating Partnership.
In addition, PRSI is doing business in Texas and is subject to the Texas
franchise tax.
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SELLING STOCKHOLDERS
Three Selling Stockholders, owing 1,372,647 Offered Shares in the
aggregate, received their Offered Shares in connection with the formation of
the Company and one Selling Stockholder, owning 94,118 Offered Shares,
received its Offered Shares upon its redemption of Units in December 1995.
The remaining 3,554,428 Offered Shares may be issued by the Company to
Selling Stockholders holding up to 3,554,428 Units, if and to the extent that
such Selling Stockholders redeem their Units and the Company issues them
Common Stock in exchange therefor. The following table provides the name of
each Selling Stockholder, the number of shares of Common Stock owned by each
Selling Stockholder before the offering to which this Prospectus relates, and
the number of Offered Shares offered by each Selling Stockholder. The extent
to which the Offered Shares offered by a Selling Stockholder represent shares
of Common Stock that may be issued by the Company upon the redemption of such
Selling Stockholder's Units is indicated in the footnotes to the table below.
Since the Selling Stockholders may sell all or some of their Offered Shares,
no estimate can be made of the number of Offered Shares that will be sold by
the Selling Stockholders or that will be owned by each of the Selling
Stockholders upon completion of the offering. There is no assurance that the
Selling Stockholders will sell any of the Offered Shares. The Offered Shares
represent approximately 27.2% of the total shares of Common Stock (assuming
redemption of all outstanding Units for shares of Common Stock) outstanding
as of June 30, 1996.
NUMBER OF
SHARES OWNED
AND OFFERED
NAME OF SELLING STOCKHOLDER HEREBY
--------------------------- ------------
PGI Associates, L.P (1)..................................... 2,885,485(2)
FWP, L.P(3)................................................. 1,487,622(4)
William R. Cooper(5)........................................ 100,000(6)
Gateway Mall Associates I, L.P (7).......................... 376,471(8)
Fulcor Investment Co. ...................................... 34,218(8)
Allen Gilbert............................................... 1,161(8)
Fuller Financial Co. ....................................... 42,118(8)
Pearson Ranch, Ltd. ........................................ 94,118
---------
TOTAL.................................................. 5,021,193
---------
---------
_______________________
(1) PGI Associates, L.P. is a limited partnership, the general partner of
which is a company controlled by William R. Cooper and the limited
partners of which consist of William R. Cooper, Lewis A. Levey, James T.
Cobb and Brian F. Lavin, entities wholly owned by them and six other
officers or former officers of the Company or its affiliates. Messrs.
Cooper, Levey, Cobb and Lavin are executive officers and/or directors of
the Company or its affiliates.
(2) Includes 2,207,838 shares of Common Stock that may be issued by the Company
upon the redemption of Units.
(3) FWP, L.P. is a limited partnership, the general partner of which is a
company controlled by Thomas R. Delatour, Jr., a director of the Company.
(4) Includes 892,622 shares of Common Stock that may be issued by the Company
upon the redemption of Units.
(5) William R. Cooper is the Chairman of the Board and Chief Executive Officer
of the Company.
(6) Mr. Cooper also owns an additional 40,000 shares of Common Stock not
offered hereby.
(7) Gateway Mall Associates I, L.P. is a limited partnership, the general
partner of which is a partnership whose general partners include Messrs.
Cooper and Levey.
(8) Represents shares of Common Stock that may be issued by the Company upon
the redemption of Units.
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<PAGE>
PLAN OF DISTRIBUTION
Any of the Selling Stockholders may from time to time, in one or
more transactions, sell all or a portion of the Offered Shares on the
NYSE, in the over-the-counter market, on any other national securities
exchange on which the Common Stock is listed or traded, in negotiated
transactions, in underwritten transactions or otherwise, at prices then
prevailing or related to the then current market price or at negotiated
prices. The offering price of the Offered Shares from time to time will
be determined by the Selling Stockholders and, at the time of such
determination, may be higher or lower than the market price of the Common
Stock on the NYSE. In connection with an underwritten offering,
underwriters or agents may receive compensation in the form of discounts,
concessions or commissions from a Selling Stockholder or from purchasers
of Offered Shares for whom they may act as agents, and underwriters may
sell Offered Shares to or through dealers, and such dealers may receive
compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may
act as agents. Under agreements that may be entered into by the Company,
underwriters, dealers and agents who participate in the distribution of
Offered Shares may be entitled to indemnification by the Company against
certain liabilities, including liabilities under the Securities Act, or
to contribution with respect to payments which such underwriters, dealers
or agents may be required to make in respect thereof. The Offered Shares
may be sold directly or through broker-dealers acting as principal or
agent, or pursuant to a distribution by one or more underwriters on a
firm commitment or best-efforts basis. The methods by which the Offered
Shares may be sold include: (a) a block trade in which the broker-dealer
so engaged will attempt to sell the Offered Shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker-dealer as principal and resale by
such broker-dealer for its account pursuant to this Prospectus; (c)
ordinary brokerage transactions and transactions in which the broker
solicits purchasers; (d) an exchange distribution in accordance with the
rules of the NYSE; (e) privately-negotiated transactions; and (f)
underwritten transactions. The Selling Stockholders and any
underwriters, dealers or agents participating in the distribution of the
Offered Shares may be deemed to be "underwriters" within the meaning of
the Securities Act, and any profit on the sale of the Offered Shares by
the Selling Stockholders and any commissions received by an such
broker-dealers may be deemed to be underwriting commissions under the
Securities Act.
When a Selling Stockholder elects to make a particular offer of
Offered Shares, a prospectus supplement, if required, will be distributed
which will identify any underwriters, dealers or agents and any
discounts, commissions and other terms constituting compensation from
such Selling Stockholder and any other required information.
In order to comply with the securities laws of certain states, if
applicable, the Offered Shares may be sold only through registered or
licensed brokers or dealers. In addition, in certain states, the Offered
Shares may not be sold unless they have been registered or qualified for
sale in such state or an exemption from such registration or
qualification requirement is available and is complied with.
The Company has agreed to pay all costs and expenses incurred in
connection with the registration under the Securities Act of the Offered
Shares, including, without limitation, all registration and filing fees,
printing expenses and fees and disbursements of counsel and accountants
for the Company. The Selling Stockholders will pay any brokerage fees
and commissions, fees and disbursements of legal counsel for the Selling
Stockholders and stock transfer and other taxes attributable to the sale
of the Offered Shares. The Company also has agreed to indemnify each of
the Selling Stockholders and their respective officers, directors and
trustees and each person who controls (within the meaning of the
Securities Act) such Selling Stockholder against certain losses, claims,
damages, liabilities and expenses arising under the securities laws in
connection with this offering. Each of the Selling Stockholders has
agreed to indemnify the Company, its officers and directors and each
person who controls (within the meaning of the Securities Act) the
Company, and each of the other Selling Stockholders, against any losses,
claims,
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<PAGE>
damages, liabilities and expenses arising under the securities laws in
connection with this offering with respect to written information
furnished to the Company by such Selling Stockholder; PROVIDED, HOWEVER,
that the indemnification obligation is several, not joint, as to each
Selling Stockholder.
EXPERTS
The Consolidated and Combined Financial Statements incorporated in
this Prospectus by reference to the Annual Report on Form 10-K for the
year ended December 31, 1995 have been so incorporated in reliance on the
report of Ernst & Young LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The legality of the Offered Shares offered hereby will be passed
upon for the Company by Hogan & Hartson L.L.P., Washington, D.C. Certain
federal tax matters will be passed upon for the Company by Hogan &
Hartson L.L.P., Washington, D.C. Certain Texas tax matters will be
passed upon for the Company by Stutzman & Bromberg (A Professional
Corporation), Dallas, Texas.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information filed
by the Company with the Commission in accordance with the Exchange Act
can be inspected and copied at the Public Reference Section maintained by
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional offices of the Commission: Seven
World Trade Center, Suite 1300, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the Common Stock is listed on the New York Stock
Exchange under the symbol "PAO" and such reports, proxy statements and
other information concerning the Company can be inspected and copied at
the offices of the New York Stock Exchange, Inc., 20 Broad Street, New
York, New York 10005. 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 such site is "http://www.sec.gov".
The Company has filed with the Commission a registration statement
on Form S-3 (the "Registration Statement"), of which this Prospectus is a
part, under the Securities Act, with respect to the Offered Shares. This
Prospectus does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements
contained in this Prospectus as to the contents of any contract or other
documents are not necessarily complete, and in each instance, reference
is made to the copy of such contract or other documents filed as an
exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference and the exhibits and
schedules thereto. For further information regarding the Company and the
Offered Shares, reference is hereby made to the Registration Statement
and such exhibits and schedules which may be obtained from the Commission
at its principal office in Washington, D.C. upon payment of the fees
prescribed by the Commission.
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<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's (i) Annual Report on Form 10-K for the year ended
December 31, 1995, as amended by an Amendment No. 1 to Annual Report on
Form 10-K/A filed with the Commission on July 24, 1996, (ii) Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996, and (iii)
Current Report on Form 8-K dated June 3, 1996, have been filed by the
Company under the Exchange Act with the Commission and are incorporated
herein by reference.
All documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of all Offered
Shares shall be deemed to be incorporated by reference in this Prospectus
and shall be part hereof from the date of filing such documents.
Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that
a statement contained in the Prospectus (in the case of a statement in a
previously filed document incorporated or deemed to be incorporated by
reference herein), in any applicable Prospectus Supplement relating to a
specific offering of Offered Shares or in any other subsequently filed
document which also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus or any accompanying
Prospectus Supplement. Subject to the foregoing, all information
appearing in this Prospectus and each accompanying Prospectus Supplement
is qualified in its entirety by the information appearing in the
documents incorporated by reference.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request, a copy of any or
all of the documents incorporated herein by reference (other than
exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such information). Written requests for
such copies should be directed to Paragon Group, Inc., 7557 Rambler Road,
Suite 1200, Dallas, Texas 75231, Attention: Jerry J. Bonner, Secretary
(telephone number: (214) 891-2000).
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<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR THE SELLING STOCKHOLDERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, THE
OFFERED SHARES, IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT
IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE
IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF.
________________
TABLE OF CONTENTS
PAGE
----
The Company............................................................... 2
Use of Proceeds........................................................... 3
Risk Factors.............................................................. 4
Federal Income Tax Considerations......................................... 9
Selling Stockholders...................................................... 18
Plan of Distribution...................................................... 19
Experts................................................................... 20
Legal Matters............................................................. 20
Available Information..................................................... 20
Incorporation of Certain Documents
by Reference............................................................. 21
5,021,193 SHARES
PARAGON GROUP, INC.
COMMON STOCK
__________________
PROSPECTUS
___________________
__________ ___, 1996
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated fees and expenses payable
by the Company in connection with the issuance and distribution of the
securities being registered:
Registration Fee . . . . . . . . . . . . . . . . $ 29,687
Printing and Duplicating Expenses. . . . . . . . 10,000
Legal Fees and Expenses. . . . . . . . . . . . . 50,000
Accounting Fees and Expenses . . . . . . . . . . 10,000
Blue Sky Fees and Expenses . . . . . . . . . . . 10,000
Miscellaneous. . . . . . . . . . . . . . . . . . 15,313
--------
Total . . . . . . . . . . . . . . . . . . . . $125,000
--------
--------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's officers and directors are and will be indemnified under
Maryland and Delaware law, the charter and by-laws of the Company, the charter
and bylaws of Paragon GP Holdings and Paragon LP Holdings and the Amended and
Restated Agreement of Limited Partnership, as amended, of the Operating
Partnership (the "Partnership Agreement") against certain liabilities. The
charters of the Company, Paragon GP Holdings and Paragon LP Holdings require
them to indemnify their directors and officers to the fullest extent permitted
from time to time under the law under which they are organized.
The by-laws of the Company require it to indemnify (a) any present or
former director or officer who has 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 and (b) any present or former
director or officer against any claim or liability unless it is established
that (i) his act or omission was committed in bad faith or was the result of
active or 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. In addition, the Company's by-laws require it to pay
or reimburse, in advance of final disposition of a proceeding, reasonable
expenses incurred by a present or former director or officer made a party to
a proceeding by reason of his service as a director or officer provided that
the Company shall have received (i) a written affirmation by the director or
officer of his good faith belief that he has met the standard of conduct
necessary for indemnification by the Company as authorized by the by-laws and
(ii) a written undertaking by or on his behalf to repay the amount paid or
reimbursed by the Company if it shall ultimately be determined that the
standard of conduct was not met. The Company's by-laws also (i) permit the
Company to provide indemnification and advance expenses to a present or
former director or officer who served a predecessor of the Company in such
capacity, and to any employee or agent of the Company or a predecessor of the
Company, (ii) provide that any indemnification or payment or reimbursement of
the expenses permitted by the by-laws shall be furnished in accordance with
the procedures provided for indemnification and payment or reimbursement of
expenses under Section 2-418 of the Maryland General Corporation Law (the
"MGCL") for directors of Maryland corporations and (iii) permit the Company
to provide such other and further indemnification or payment or reimbursement
of expenses as may be permitted by Section 2-418 of the MGCL for directors of
Maryland corporations. The bylaws of Paragon GP Holdings and Paragon LP
Holdings contain indemnification provisions similar in scope to those set
forth in the Company's by-laws and to the maximum extent permissible under
Delaware law.
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Under Maryland law, a corporation formed in Maryland is permitted to
limit, by provision in its charter, the liability of directors and officers
so that no director or officer of the Company shall be liable to the Company
or to any shareholder for money damages except to the extent that (i) the
director or officer actually received an improper benefit in money, property
or services, for the amount of the benefit or profit in money, property or
services actually received, or (ii) a judgment or other final adjudication
adverse to the director or officer is entered in a proceeding based on a
finding in a proceeding that the director's or officer's action was the
result of active and deliberate dishonesty and was material to the cause of
action adjudicated in the proceeding. The charter of the Company has
incorporated the provisions of such law limiting the liability of directors
and officers.
The Partnership Agreement also provides for indemnification of the
Company and Paragon GP Holdings and their officers and directors to the same
extent indemnification is provided to officers and directors of the Company
and Paragon GP Holdings in their organizational documents, and limits the
liability of the Company and Paragon GP Holdings and their officers and
directors to the Operating Partnership and its partners to the same extent
liability of officers and directors of the Company and Paragon GP Holdings to
the Company, Paragon GP Holdings and their stockholders is limited under
their organizational documents.
ITEM 16. EXHIBITS
4.1 * - Articles of Incorporation of the Company
4.2 ** - By-laws of the Company
5 *** - Opinion of Hogan & Hartson L.L.P.
8.1 *** - Opinion of Hogan & Hartson L.L.P. regarding certain tax
matters
8.2 *** - Opinion of Stutzman & Bromberg (A Professional Corporation),
regarding certain tax matters
23.1 - Consent of Ernst & Young LLP
23.2 *** - Consent of Hogan & Hartson L.L.P. (included in Exhibit 5)
23.3 *** - Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1)
23.4 *** - Consent of Stutzman & Bromberg (A Professional Corporation)
(included in Exhibit 8.2)
24 + - Power of Attorney
_________________
* Incorporated by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
** Incorporated by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the three months ended March 31, 1995.
*** To be filed by amendment.
+ Previously filed.
ITEM 17. 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;
II-2
<PAGE>
(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 this registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement; and
(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 this
registration statement;
PROVIDED, HOWEVER, that subparagraphs (i) and (ii) above do not apply in
the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in the periodic reports filed with or
furnished to the Commission by the Registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the Offered Shares
offered herein, and the offering of such Offered Shares 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 Offered Shares being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby further undertakes that, for the
purposes of determining any liability under the Securities Act, each filing
of the Registrant's annual report pursuant to Section 13(a) or Section 15(d)
of the Securities Exchange Act of 1934 that is incorporated by reference in
this registration statement shall be deemed to be a new registration
statement relating to the Offered Shares offered herein, and the offering of
such Offered Shares at that time shall be deemed to be the initial BONA FIDE
offering thereof.
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 existing provisions or arrangements whereby the
registrant may indemnify a director, officer or controlling person of the
registrant against liabilities arising under the Securities Act of 1933, 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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Dallas, Texas, on July 24, 1996.
PARAGON GROUP, INC.,
a Maryland corporation
By: /s/ WILLIAM R. COOPER
--------------------------------
William R. Cooper
Chairman of the Board of
Directors, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities
indicated below on July 24, 1996:
Name Title
---- -----
/s/ WILLIAM R. COOPER Chairman of the Board, Chief
- --------------------------- Executive Officer and Director
William R. Cooper (principal executive officer)
* Vice Chairman of the Board and
- --------------------------- Director
Lewis A. Levey
* President, Chief Operating Officer
- --------------------------- and Director
Robert H. Gidel
/s/ THOMAS D. FERGUSON Senior Vice President and Chief
- --------------------------- Financial Officer (principal
Thomas D. Ferguson financial officer)
/s/ J.C. LOWENBERG III Vice President (principal
- --------------------------- accounting officer)
J.C. Lowenberg III
* Director
- ---------------------------
Don M. Shine
II-4
<PAGE>
* Director
- ---------------------------
Thomas R. Delatour, Jr.
* Director
- ---------------------------
Richard J. Haayen
* Director
- ---------------------------
Douglas D. Hawthorne
* Director
- ---------------------------
William S. Janes
* Director
- ---------------------------
John H. Massey
* Director
- ---------------------------
Joseph R. Musolino
* BY: /s/ THOMAS D. FERGUSON
------------------------
Thomas D. Ferguson
As Attorney-In-Fact
II-5
<PAGE>
INDEX TO EXHIBITS
Exhibit Sequentially
Number Description of Exhibit Numbered Page
- ------- ---------------------- -------------
4.1 * - Articles of Incorporation of the Company
4.2 ** - By-laws of the Company
5 *** - Opinion of Hogan & Hartson L.L.P.
8.1 *** - Opinion of Hogan & Hartson L.L.P., regarding certain tax
matters
8.2 *** - Opinion of Stutzman & Bromberg (A Professional Corporation),
regarding certain tax matters
23.1 - Consent of Ernst & Young LLP
23.2 *** - Consent of Hogan & Hartson L.L.P. (included in Exhibit 5)
23.3 *** - Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1)
23.4 *** - Consent of Stutzman & Bromberg (A Professional Corporation)
(included in Exhibit 8.2)
24 + - Power of Attorney (contained on page II-4 of this
Registration Statement)
* Incorporated by reference to Exhibit 3.1 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994.
** Incorporated by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the three months ended March 31, 1995.
*** To be filed by amendment.
+ Previously filed.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS CONSENT
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 of the Registration Statement (Form S-3) and the related
Prospectus of Paragon Group, Inc. for the registration of 5,021,193 shares
of its common stock pertaining to certain shares or units issued in connection
with the formation of the Company and to the incorporation by reference therein
of our report dated February 27, 1996, with respect to the consolidated and
combined financial statements and schedule of Paragon Group, Inc. on
Form 10-K/A for the year ended December 31, 1995, filed with the Securities
and Exchange Commission.
ERNST & YOUNG LLP
Dallas, Texas
July 23, 1996
