-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WDsV6Qb1YdDJNTFXJsmivqiJggSxAV+wWwtI/wT5ZfR3Eafyp5NtrGA6QrPvywKT ShCP6FDkYQTvTfhFk14tfw== 0000950134-98-007945.txt : 19981007 0000950134-98-007945.hdr.sgml : 19981007 ACCESSION NUMBER: 0000950134-98-007945 CONFORMED SUBMISSION TYPE: S-11 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19981005 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WALDEN RESIDENTIAL PROPERTIES INC CENTRAL INDEX KEY: 0000913280 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 752506197 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-11 SEC ACT: SEC FILE NUMBER: 333-65341 FILM NUMBER: 98721046 BUSINESS ADDRESS: STREET 1: 5400 LBJ FREEWAY STE 400 STREET 2: C/O ONE LINCOLN CENTRE CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 9727880510 MAIL ADDRESS: STREET 1: ONE LINCOLN CENTRE STREET 2: 5400 LBJ FREEWAY LB45 SUITE 400 CITY: DALLAS STATE: TX ZIP: 75240 S-11 1 FORM S-11 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 5, 1998 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM S-11 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ WALDEN RESIDENTIAL PROPERTIES, INC. (Exact name of Registrant as specified in its charter) 5080 SPECTRUM DRIVE SUITE 1000 EAST ADDISON, TEXAS 75001-6410 (972) 788-0510 MARYLAND (Address, including zip code, and telephone number, 75-2506197 (State or other jurisdiction of including area code, of Registrant's Principal Executive (I.R.S. Employer incorporation or organization) Offices) Identification No.)
------------------------ MICHAEL E. MASTERSON CHAIRMAN OF THE BOARD OF DIRECTORS WALDEN RESIDENTIAL PROPERTIES, INC. 5080 SPECTRUM DRIVE SUITE 1000 EAST ADDISON, TEXAS 75001-6410 (972) 788-0510 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ Copies to: KENNETH L. BETTS, ESQ. WINSTEAD SECHREST & MINICK P.C. 1201 ELM STREET, SUITE 5400 DALLAS, TEXAS 75270 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to time following the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share............................... 12,560,746(1) Not Applicable $300,092,533(2) $ 88,528 - --------------------------------------------------------------------------------------------------------------------------------- 9.00% Redeemable Preferred Stock, par value $.01 per share.................. 1,999,909 Not Applicable $ 54,997,498(3) $ 16,224 - --------------------------------------------------------------------------------------------------------------------------------- Series B Warrants..................... 6,666,363 Not Applicable (4) (4) - --------------------------------------------------------------------------------------------------------------------------------- Total....................... Not Applicable $355,090,031 $104,752 - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) Includes 2,222,121 shares of Common Stock, par value $.01 per share, issuable upon exercise of the Series B Warrants. (2) Estimated pursuant to Rule 457(f) under the Securities Act based upon (i) the book value of the Common OP Units to be received by the Company in exchange for the issuance of 10,338,625 shares of Common Stock, and (ii) the exercise price for each share of Common Stock issuable upon exercise of the Series B Warrants. (3) Estimated pursuant to Rule 457(f) under the Securities Act based upon the book value of the Preferred OP Units to be received by the Company in exchange for the issuance of 1,999,909 shares of 9.00% Redeemable Preferred Stock and 6,666,363 Series B Warrants. (4) Included as part of the value of the 9.00% Redeemable Preferred Stock; issuable in conjunction with the 9.00% Redeemable Preferred Stock upon exchange of Preferred OP Units. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 SUBJECT TO COMPLETION, DATED OCTOBER 5, 1998 PROSPECTUS WALDEN RESIDENTIAL PROPERTIES, INC. COMMON STOCK, 9.00% REDEEMABLE PREFERRED STOCK AND SERIES B WARRANTS ------------------------ Walden Residential Properties, Inc. is a self-administered, self-managed, fully integrated real estate investment trust focused on middle income multifamily properties located primarily in selected Southwestern and Southeastern metropolitan areas. We currently own and operate 155 properties containing 42,429 apartment units. This prospectus relates to the possible issuance by us from time to time of up to (i) 12,560,746 shares of our common stock, (ii) 1,999,909 shares of our 9.00% redeemable preferred stock, and (iii) 6,666,363 series B warrants (each of which is exercisable for one-third of one share of common stock at $26.875 per share), if and to the extent that common and preferred unitholders of Walden/Drever Operating Partnership, L.P. elect to receive such securities in exchange for their common and preferred units. These units were issued in connection with our acquisition of 79 apartment properties in October 1997 from partnerships of which Drever Partners, Inc. and certain of its affiliates were the general partners. A description of the procedures to exchange your partnership interests can be found under "Procedure to Exchange Units" in this prospectus. We will not receive any proceeds from the issuance of any of our securities in connection with the exchange of WDOP units. We will, however, acquire additional partnership units in exchange for any common stock, redeemable preferred stock or series B warrants that we may issue pursuant to this prospectus, which will increase our ownership of the operating partnership. The common stock is listed on the New York Stock Exchange under the symbol "WDN" and the preferred stock has been approved for listing on the NYSE subject to official notice of issuance. On October 2, 1998, the closing sales price of the common stock as reported on the NYSE was $22.6875 per share. POTENTIAL INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET FORTH IN "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMPANY'S SECURITIES. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE SECURITIES OFFERED HEREBY OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THE DATE OF THIS PROSPECTUS IS OCTOBER 5, 1998. 3 TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUMMARY.......................................... 6 The Company............................................... 6 Risk Factors.............................................. 7 The Properties............................................ 8 Summary Consolidated and Combined Financial and Operating Information............................................ 10 Plan of Distribution...................................... 11 Dividends and Distributions Policy........................ 11 Tax Status of the Company................................. 11 RISK FACTORS................................................ 12 Tax Consequences to Unitholders of Exchange of Units...... 12 Geographic Concentration of Properties.................... 12 Ability of the Company to Incur Additional Indebtedness; Restrictive Covenants.................................. 12 Borrowing Risks........................................... 13 Acquisition Risks......................................... 14 Real Estate Investment Considerations..................... 14 No Restriction on Changes in Investment, Financing and Other Policies......................................... 15 Certain Antitakeover Provisions; Ownership Limits......... 15 Shares Available for Future Sale.......................... 16 Adverse Consequences of Failure to Qualify as a REIT...... 16 Possible Environmental Liabilities........................ 16 Costs of Compliance with Americans with Disabilities Act and Similar Laws....................................... 17 Uninsured Loss............................................ 17 Year 2000................................................. 18 Risks Associated with Forward-Looking Statements Included in this Prospectus..................................... 18 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS........................................... 19 THE COMPANY................................................. 20 General................................................... 20 Business Strategies....................................... 21 Property Management....................................... 21 PRICE RANGE OF COMMON STOCK................................. 22 DIVIDENDS AND DISTRIBUTIONS POLICY.......................... 23 SELECTED FINANCIAL DATA..................................... 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................. 27 Overview.................................................. 27 Results of Operations..................................... 27 Liquidity and Capital Resources........................... 32 Funds from Operations..................................... 36 Inflation................................................. 37 New Accounting Standards.................................. 37 Year 2000 Conversion...................................... 38 BUSINESS AND PROPERTIES..................................... 39 The Properties............................................ 39 Property Management....................................... 50 Employees................................................. 51
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PAGE ---- Competition............................................... 51 Legal Proceedings......................................... 51 Regulation................................................ 51 Environmental Matters..................................... 52 Insurance................................................. 53 Available Information..................................... POLICIES WITH RESPECT TO CERTAIN ACTIVITIES................. 54 MANAGEMENT.................................................. 56 Executive Officers........................................ 56 Independent Directors..................................... 57 Board of Directors........................................ 58 Committees of the Board of Directors...................... 58 Compensation of Directors................................. 59 Compensation Committee Interlocks and Insider Participation.......................................... 59 Executive Compensation.................................... 60 Option Grants............................................. 61 Option Exercises and Year-End Option Values............... 61 Employment Agreements..................................... 61 PRINCIPAL STOCKHOLDERS...................................... 63 Security Ownership of Certain Beneficial Owners........... 63 Security Ownership of Management.......................... 63 DESCRIPTION OF COMMON STOCK................................. 65 General................................................... 65 Restrictions on Transfer.................................. 65 DESCRIPTION OF REDEEMABLE PREFERRED STOCK................... 67 General................................................... 67 Rank...................................................... 67 Dividends................................................. 67 Redemption................................................ 68 Liquidation Preference.................................... 68 Voting Rights............................................. 68 Restrictions on Ownership................................. 68 DESCRIPTION OF SERIES B WARRANTS............................ 68 General................................................... 68 Exercise of Series B Warrants............................. 69 Amendments and Supplements to Warrant Agreement........... 69 Adjustments............................................... 69 CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S ARTICLES AND BYLAWS....................................... 71 Classification of the Board of Directors.................. 71 Limitation of Liability and Indemnification............... 71 Business Combinations..................................... 72 Control Share Acquisitions................................ 72 Amendment to the Articles................................. 73 Dissolution of the Company................................ 73 Advance Notice of Director Nominations and New Business... 73 Meetings of Stockholders.................................. 73
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PAGE ---- FEDERAL INCOME TAX CONSIDERATIONS........................... 74 General................................................... 74 REIT Qualification........................................ 74 Taxation of the Company as a REIT......................... 78 Failure to Qualify as a REIT.............................. 78 Taxation of Stockholders.................................. 79 Backup Withholding........................................ 79 Taxation of Tax Exempt Entities........................... 80 Taxation of Foreign Investors............................. 80 State and Local Taxes..................................... 82 ERISA CONSIDERATIONS........................................ 82 INFORMATION REGARDING WALDEN/DREVER OPERATING PARTNERSHIP, L.P....................................................... 84 General................................................... 84 The WDOP Partnership Agreement............................ 84 Policies of WDOP.......................................... 89 Real Estate............................................... 89 Tax Treatment of WDOP..................................... 89 WDOP Partnership Interests................................ 91 PLAN OF DISTRIBUTION........................................ 92 PROCEDURE TO EXCHANGE UNITS................................. 92 General................................................... 92 Delivery of Exchange Notice and Certificates.............. 93 Lost or Missing Certificates.............................. 94 TAX CONSEQUENCES OF EXCHANGING UNITS........................ 94 General................................................... 94 Tax Consequences of Exchange.............................. 94 LEGAL MATTERS............................................... 95 EXPERTS..................................................... 95
4 6 SUMMARY The following information supplements, and should be read in conjunction with, the information contained in this prospectus. THE COMPANY The Company is a self-administered, self-managed, fully integrated real estate investment trust. We focus on middle income multifamily properties located primarily in selected Southwestern and Southeastern metropolitan areas. As of August 31, 1998, we owned and operated 155 multifamily properties containing 42,429 apartment units. Approximately 92% of our properties are located in the Houston, Dallas/Fort Worth, Austin, Phoenix, Tampa, Nashville, Jacksonville, Oklahoma City, San Antonio, Atlanta, Salt Lake City and San Diego areas, with the remaining properties primarily located in other areas in the Southwest and Southeast regions of the United States. Of all our apartment units, approximately 30% are located in the Houston metropolitan area, and approximately 26% are located in the Dallas/Fort Worth metropolitan area. On October 1, 1997, we acquired the assets and business of Drever Partners, Inc. and its affiliates, including 18 partnerships of which Drever Partners, Inc. and certain of its affiliates were the general partners. In this transaction we acquired 79 apartment properties (consisting of 18,118 units) and paid approximately $95.0 million in cash, assumed $286.0 million of mortgage debt and issued $303.9 million of operating partnership units of a newly-formed partnership subsidiary of the Company, Walden/Drever Operating Partnership, L.P. These partnership units are exchangeable, subject to certain conditions, on or after October 1, 1998, into shares of common stock, shares of redeemable preferred stock and warrants. For a more complete description of the securities for which the partnership units are exchangeable see "Description of Common Stock," "Description of Redeemable Preferred Stock" and "Description of Series B Warrants." PLAN OF DISTRIBUTION This prospectus relates to the issuance by us of our common stock, preferred stock and warrants when the holders of partnership units exchange such units. Each common unit is exchangeable for one share of our common stock. Each preferred unit is exchangeable for one share of our redeemable preferred stock and three and one-third series B warrants. With each exchange, our interest in the operating partnership will increase, but we will not receive any cash proceeds from the exchange. For a more detailed description of the exchange procedures, see "Procedures to Exchange Units." All expenses incident to the offering and sale of the Walden Securities incurred by the Company shall be paid by the Company. See "Plan of Distribution," "Procedure to Exchange Units," "Tax Consequences of Exchanging Units" and "Federal Income Tax Considerations." RISK FACTORS An investment in our securities involves a number of risks. We urge you to carefully consider the matters discussed under "Risk Factors" beginning on page 12 before investing in the company. Such risks include, among others: - Tax Consequences to Unitholders of Exchange of Units. In general, the exchange of Units will be treated as a sale of the unit. As such, you will be attributed gain or loss from the "sale" of the unit based on the difference between the amount considered realized for tax purposes and your adjusted tax basis in the unit. - Geographic Concentration of Properties. As of August 31, 1998, approximately 68.39% of our apartment units were located in Texas, with 30% located in the Houston metropolitan area and 26% in the Dallas/ Fort Worth metropolitan area. An economic decline in the Texas markets, and specifically in Houston and Dallas/Fort Worth, could adversely affect our financial condition. - Ability of the Company to Incur Additional Indebtedness; Restrictive Covenants. We are not limited in the amount of indebtedness we may incur, other than certain contractual restrictions. We can offer you no assurance that we will not become more highly leveraged in the future. 5 7 - Acquisition Risks. We continuously acquire properties and are subject to risks associated with these and future acquisitions, including properties failing to perform to expectations, overpaying for acquisitions, or underestimating the costs of improvements to bring the properties up to established standards. - Development Risks. We have entered into certain agreements to construct apartment communities. As a result we will be subject to risks of real estate development, including risks of lack of financing, construction delays, budget overruns and leasing. - Shares Available for Future Sale. We cannot predict the effect that future sales of our common stock will have on the market price of our common stock. - Adverse Consequences of Failure to Qualify as a REIT. If we were to fail to qualify as a real estate investment trust, we would be subject to taxation as a corporation at regular corporate rates. - Possible Environmental Liabilities. As an owner or operator of real property, we may be liable for the costs of removal or remediation of certain hazardous substances released on or in our properties. The costs of investigation, remediation or removal of such substances may be substantial. In addition, we may be subject to third-party lawsuits related to environmental contamination. - Uninsured Loss. Certain types of property losses (such as those from wars or earthquakes) are not generally insured due to economic considerations or the lack of available insurance. Should an uninsured loss or a loss in excess of insured limits occur, we could suffer substantial losses. THE PROPERTIES Our properties contain 42,429 apartment units and are primarily located in metropolitan areas in the Southwest and Southeast regions of the United States. The geographic distribution of our properties reflects our belief that geographic diversification will lessen the impact of local and regional economic fluctuations on our business. At the same time, we also seek to create concentrations of properties to allow us to achieve economies of scale in our property management operations. Our properties were built between 1967 and 1998 and are generally comprised of two- and three-story buildings in landscaped settings and generally include such attractive amenities as a clubhouse, swimming pools, laundry facilities and cable television access. DIVIDENDS AND DISTRIBUTIONS POLICY In accordance with federal income tax rules we paid dividends per share in the aggregate of $1.86, $1.93, and $.965 for the years ended December 31, 1996 and 1997 and the six months ended June 30, 1998, respectively. We intend to continue to pay regular quarterly dividends to our stockholders. TAX STATUS OF THE COMPANY We have elected to be taxed as a real estate investment trust. As a result, we are generally not subject to federal income tax. We are, however subject to a number of organizational and operational requirements. If we fail to qualify as a real estate investment trust in any taxable year, the Company will be subject to Federal income tax on its taxable income at regular corporate rates. 6 8 SUMMARY CONSOLIDATED AND COMBINED FINANCIAL AND OPERATING INFORMATION The following table sets forth selected financial data of the Company and should be read in conjunction with the financial statements of the Company and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus. The summary financial data below provides information about the Company's financial history and may not be indicative of future operating results. The data for the years ended December 31, 1997, 1996 and 1995 has been derived from audited financial statements. The data for the six months ended June 30, 1998 and 1997 has been derived from unaudited financial statements. In the opinion of management, the operating data for the six months ended June 30, 1998 and 1997 include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth herein. The results of interim periods are not necessarily indicative of results for the full year and the consolidated historical operating results of the Company may not be indicative of future operating results of the Company.
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ---------------------- ---------------------------------- 1998 1997 1997 1996 1995 ---------- -------- ---------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AND PROPERTY DATA) OPERATING DATA Revenues Rental and other property income...................... $ 137,845 $ 67,192 $ 169,537 $109,475 $ 81,559 Other revenue......................................... 724 849 1,598 1,696 1,265 ---------- -------- ---------- -------- -------- Total revenues.................................. 138,569 68,041 171,135 111,171 82,824 ---------- -------- ---------- -------- -------- Expenses Operating expenses.................................... 59,659 28,574 73,288 47,560 36,085 General and administrative............................ 5,701 3,394 7,734 5,124 3,811 Interest.............................................. 26,688 10,121 28,447 20,573 17,111 Depreciation.......................................... 29,035 13,121 33,841 19,810 15,734 Amortization.......................................... 485 411 827 916 900 Unusual charge........................................ -- -- 1,940 -- -- ---------- -------- ---------- -------- -------- Total expenses.................................. 121,568 55,621 146,077 93,983 73,641 ---------- -------- ---------- -------- -------- Operating income........................................ 17,001 12,420 25,058 17,188 9,183 Gain on disposition of real property.................... -- -- 2,055 1,934 1,502 Extraordinary loss on debt extinguishment............... (104) -- (422) (1,848) (1,352) Income allocated to minority interests.................. (5,667) (800) (4,109) (1,705) (922) Preferred distributions................................. (6,560) (6,623) (13,186) (2,387) -- ---------- -------- ---------- -------- -------- Net income available to common stockholders............. $ 4,670 $ 4,997 $ 9,396 $ 13,182 $ 8,411 ========== ======== ========== ======== ======== Net income per share: Basic............................. $ 0.25 $ 0.29 $ 0.53 $ 0.90 $ 0.69 Distributions per share................................. $ 0.965 $ 0.965 $ 1.93 $ 1.86 $ 1.82 Weighted average shares outstanding: Basic.............. 18,384 17,329 17,590 14,720 12,155 OTHER DATA Net operating income(1)................................. $ 78,186 $ 38,618 $ 96,249 $ 61,915 $ 45,474 PROPERTY DATA Total properties (at period end)........................ 156 75 154 68 55 Total units (at period end)............................. 42,858 23,188 42,482 21,407 17,205 Total units (weighted average).......................... 42,758 22,111 27,346 18,430 14,601 BALANCE SHEET DATA Real estate assets (at cost)............................ $1,496,973 N/A $1,507,613 $683,515 $513,341 Total assets............................................ $1,487,653 N/A $1,469,472 $689,714 $510,548 Mortgages notes payable................................. $ 461,261 N/A $ 428,354 $258,908 $252,515 Unsecured credit facility and term loan................. $ 285,000 N/A $ 274,000 -- $ 6,500 Total stockholders' equity including minority interests............................................. $ 695,620 N/A $ 717,131 $411,421 $235,127
- --------------- (1) Rental and other property income less operating expenses. 7 9 RISK FACTORS An investment in Walden Residential Properties, Inc. involves various risks. You should carefully consider the following information, in conjunction with the other information contained in this Prospectus, before making a decision to exchange your units for our securities. TAX CONSEQUENCES OF EXCHANGE OF UNITS If you decide to exercise your right to exchange your units for our securities, the exchange will be treated as a sale of your units for Federal tax purposes. As a result of the exchange, you will realize, for Federal tax purposes, an amount equal to the fair market value of the securities you receive, plus the amount of any Walden/Drever Operating Partnership L.P. liabilities allocable to your units. You will recognize gain or loss equal to the difference between the amount realized for Federal income tax purposes and the sum of your adjusted tax basis in your exchanged units and the tax basis of your right to exchange. It is possible that the amount of gain you recognize or your resulting tax liability could exceed the value of our securities you receive. See "Tax Consequences of Exchanging Units." GEOGRAPHIC CONCENTRATION OF PROPERTIES As of August 31, 1998, 112 of our 155 apartment properties, containing 29,019 apartment units (68.39% of our apartment units), were located in Texas. Of these 112 apartment properties, 54 apartment properties, containing 12,561 apartment units (29.60% of our apartment units) were located in the Houston metropolitan area and 37 apartment properties, containing 10,884 apartment units (25.65% of our apartment units) were located in the Dallas/Fort Worth metropolitan area. Our performance is, therefore, largely dependent upon economic conditions in Texas generally and, specifically, in the Houston and Dallas/Fort Worth metropolitan areas. An economic decline in the Texas markets may adversely affect our ability to make expected distributions to its stockholders. BORROWING RISKS Debt Financing and Existing Debt Maturities Our organizational documents do not limit the amount of indebtedness we may incur. Subject to certain restrictions contained in the instruments governing our current indebtedness, the amount of debt we may incur is solely within the discretion of our Board of Directors. We could incur additional debt which could increase the amount of our debt service payments and increase the risk of default on our obligations. Any increase in leverage could potentially adversely affect our financial condition and results of operations. As of June 30, 1998, we had approximately $746 million aggregate principal amount of debt outstanding. Approximately $85 million of that amount is unsecured debt under our credit facility and approximately $200 million of that amount was borrowed under our unsecured term loan. The remaining amounts are mortgage indebtedness secured by 109 of our apartment properties. General risks associated with our debt include: - Declining economic performance of our apartment properties could adversely affect our funds from operations which could adversely affect cash available to pay our debts. - As of June 30, 1998, we had approximately $300 million of debt which becomes payable during the remainder of 1998 and 1999. We may need to refinance portions of this debt or incur additional debt secured by individual properties or groups of properties or conduct unsecured public or private debt offerings. There are no guarantees we will be able to refinance our debt or refinance such debt on acceptable terms. If we are not able to refinance our debt on acceptable terms, we could be required to dispose of certain properties on unfavorable terms. This could result in losses and could adversely affect our ability to make distributions to our stockholders. - If we are unable to meet scheduled mortgage payments, the apartment properties securing such debt could be foreclosed upon or otherwise be transferred to the lender. This would result in a loss of both income and asset value. 8 10 - Certain of our debt (approximately $349 million) bears interest at variable rates. If prevailing interest rates or other factors at the time of refinancing of any debt result in higher interest rates or if interest rates increase generally over time, our interest expense would increase and our ability to make distributions to our stockholders could be adversely affected. Debt Instruments The agreements which govern our debt, including our unsecured credit facility and term loan, contain certain covenants which restrict our ability (and the ability of our subsidiaries) to engage in certain activities. These activities include: - incurring additional debt; - making investments in or engaging in transactions with stockholders and affiliates; - incurring liens; - creating restrictions on the ability of certain subsidiaries to pay dividends or make certain payments to us; - merging or consolidating with any other entity; or - selling, assigning, transferring, leasing or otherwise disposing of all or substantially all of our assets. The credit facility and term loan also require us to maintain certain financial ratios. There can be no assurance that we will be able to maintain these ratios or that the covenants described above will not adversely affect our ability to finance our future operations or capital needs. In addition, the terms of our debt instruments may limit our ability to engage in other business activities that may be of interest. The breach of any of these covenants described above or the inability to maintain the required financial ratios could result in a default under the credit facility or term loan. In addition, certain of our debt instruments contain cross-default and/or cross-acceleration provisions. Therefore, an inability to meet our obligations with respect to the provisions of one debt agreement could result in a default under other debt agreements. If we default on our debt, any amounts borrowed, together with accrued interest, could be declared due and payable. If our indebtedness were accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full. Forward Treasury Lock Agreements. In order to hedge our exposure to interest rate fluctuations on our debt refinancing, we have entered into three forward treasury lock agreements. Under these agreements, we pay or receive an amount equal to the difference between the reference yield and the market yield on the date of exercise. The exercise date may be any date up to the settlement date. Any gain or loss under these agreements will be amortized to interest expense over the terms of the financing. If, however, new debt financing is not obtained, any gain or loss will be recorded as an expense. As of September 18, 1998, we had a loss position on these forward treasury lock agreements of approximately $29.8 million. ACQUISITION RISKS Since the consummation of our initial public offering through August 31, 1998, we have purchased 151 apartment properties (and sold certain properties) and increased the number of apartment units we own to 42,429, an increase of over 500% from the 6,343 apartment units we initially owned. We intend to continue to grow by acquiring additional apartment properties. Risks associated with past and continuing acquisitions include, but are not limited to: - the risk that acquired apartment properties may not perform in accordance with expectations, including projected occupancy and rental rates; - the risk that we may have overpaid for acquired apartment properties; and 9 11 - the risk that we may have underestimated the cost of improvements required to bring an acquired apartment property up to standards established for the market position intended for that property. Our ability to acquire additional apartment properties is dependent upon our ability to obtain equity or debt financing. As of June 30, 1998, we had additional borrowing availability of approximately $52 million under our credit facility. The issuance of additional equity to obtain financing for the acquisitions of additional properties could result in a dilution of ownership for our existing stockholders. In addition, if cash flows generated from the investment of the net proceeds from equity offerings in our properties or otherwise is less than the distributions payable to such new stockholders, distributions to all stockholders may be adversely affected. When we finance our operations with debt, we expect that the apartment properties will generate cash flow adequate to service the indebtedness. However, if cash flow from the properties decreases, funds from operations would be adversely affected. DEVELOPMENT RISKS As of August 31, 1998, we had entered into four development agreements to construct apartment communities, which we will purchase upon completion of construction and lease up. We will be subject to some risks of real estate development with respect to these four properties, including risks of lack of financing, construction delays, budget overruns and leasing. We will also be subject to similar risks in connection with any future development property. REAL ESTATE INVESTMENT CONSIDERATIONS Effect of Economic and Real Estate Conditions. Real property investments are subject to varying degrees of risk. The yields available from equity investments in real estate depend on income generated and expenses incurred. If our apartment properties do not generate sufficient revenue to meet operating expenses, including debt service and capital expenditures, our cash flow and our ability to make distributions to stockholders may be adversely affected. Market Illiquidity. Real estate investments are relatively illiquid. Such illiquidity will tend to limit our ability to promptly vary our portfolio in response to changes in economic or other conditions. In addition, provisions of the Internal Revenue Code relating to REITs limit our ability to sell properties held for fewer than four years. This limitation may affect our ability to sell properties without adversely affecting returns to our stockholders. Operating Risks. Our apartment properties are subject to all operating risks common to multifamily properties in general, such as the risk of increased unemployment in markets where our properties are located, any or all of which might adversely affect occupancy or rental rates. In addition, increases in operating costs due to inflation and other factors may not necessarily be offset by increased rents. Operating apartment properties is also subject to the risk that residents will be unable or unwilling to pay rent increases. The local rental market may limit the extent to which rents may be increased to meet increased operating expenses, if any, without decreasing occupancy rates. If any of the above occurs, our ability to make expected distributions to our stockholders could be adversely affected. Affordable Housing Restrictions. Fifteen of our apartment properties are subject to restrictions requiring that a specified percentage of the apartment units in such properties be made available to persons with lower and moderate incomes (currently, approximately 70% of the total number of apartment units in the fifteen affected properties and 9% of the total number of our apartment units). In addition, state and local authorities in some cases impose certain restrictions on the amount of rent that can be charged. Future enactment of rent control laws or other laws regulating multifamily properties could adversely impact our operations. 10 12 Competition. There are numerous real estate companies, including those which operate in the markets in which our properties are located, which compete with us for apartment properties to acquire and residents to occupy such properties. Our properties compete directly with other multifamily properties and single family homes that are available for rent in markets in which the properties are located. Our properties also compete with the new and existing home market for residents. In addition, competitors for acquisition projects may have greater resources than we do. NO RESTRICTION ON CHANGES IN INVESTMENT, FINANCING AND OTHER POLICIES Our Board of Directors determines our investment and financing policies, including our policies with respect to growth, debt, capitalization, dividends and operating policies. Although the Board of Directors has no present intention to amend or waive its current policies, it could do so at any time, or from time to time, in its discretion without a vote of our stockholders. A change in these policies could adversely affect our financial condition or results of operations and could adversely affect the market price of our securities. See "Policies with Respect to Certain Activities." CERTAIN ANTITAKEOVER PROVISIONS; OWNERSHIP LIMITS Charter Provisions. Certain provisions of our articles of incorporation may discourage third parties from making acquisition proposals and could inhibit a change in control, which could give our stockholders the opportunity to realize a premium over the then-prevailing market prices for their interests. These same antitakeover provisions may also impede our stockholders' ability to effect a change in management. In order to maintain our qualification as a real estate investment trust, no more than 50% in value of our outstanding shares of capital stock may be owned, directly or indirectly, by five or fewer individuals or entities. As a result, our articles of incorporation prohibit ownership, either directly or under the applicable attribution rules of the Internal Revenue Code, of more than 9% of the shares of our capital stock by any stockholder (other than Don R. Daseke, the former Chairman of the Company) . This prohibition is subject to certain exceptions, including the potential waiver of this limitation on a case-by-case basis by the board of directors. As a result of this ownership prohibition, the board of directors could be able to prevent an acquisition of control. See "Certain Provisions of Maryland Law and of the Company's Articles and Bylaws" and "Federal Income Tax Considerations." Staggered Board. Our board of directors is divided into three classes. The terms of the first, second and third classes will expire at the annual meeting of stockholders in 1999, 2000 and 2001, respectively. Directors of each class will be elected for a three-year term upon the expiration of the current class' term. The staggered terms for directors may affect the stockholders' ability to effect a change in control even if a change in control were in our stockholders' best interest. See "Certain Provisions of Maryland Law and of the Company's Articles and Bylaws." Preferred Stock. Our articles of incorporation authorize the board of directors to issue up to 10 million shares of preferred stock and to establish the preference and rights of any such shares. See "Capital Stock of the Company -- Preferred Stock." The issuance of additional preferred stock could have the effect of delaying or preventing a change in control even if a change in control were in our stockholders' best interest. SHARES AVAILABLE FOR FUTURE SALE Future sales of shares of our common stock, or the availability of such shares for future sale, could impact the prevailing market price of our common stock from time to time. Sales of substantial amounts of our common stock (including shares issued upon the exercise of employee stock options), or the perception that such sales could occur, could adversely affect prevailing market prices for our common stock. Upon consummation of the exchange of all common units and the exercise of all series B warrants, we will have 30,631,666 shares of common stock outstanding, all of which will be freely transferable without further registration under Federal securities laws. 11 13 ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT Qualification as a real estate investment trust, or REIT, involves the application of highly technical and complex Code provisions for which there are limited judicial or administrative interpretations. Such qualification is also subject to various factual matters and circumstances not entirely within our control. For example, in order to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources and we must make distributions to our stockholders aggregating annually at least 95% of our taxable income (excluding net capital gains). No assurance can be given that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification. We are not aware, however, of any currently pending tax legislation that would adversely affect our ability to continue to qualify as a REIT. If we fail to qualify as a REIT for any taxable year, we would be subject to federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to our stockholders because of the additional tax liability. In addition, distributions to our stockholders would no longer qualify for the dividends paid deduction and such distributions would no longer be required to be made. To the extent we would have made distributions in anticipation of qualifying as a REIT, we might be required to borrow funds or liquidate certain investments in order to pay the applicable tax. POSSIBLE ENVIRONMENTAL LIABILITIES Hazardous Substances. Various Federal, state and local environmental laws impose certain responsibilities on an owner or operator of real estate and subjects such persons to potential liabilities. Typical provisions of such laws include: - Responsibility and liability for the costs of removal or remediation of certain hazardous substances released on or in real property, generally without regard to knowledge or responsibility of the presence of the contaminants. - Liability for the costs of removal or remediation of hazardous substances at disposal facilities for persons who arrange for the disposal or treatment of such substances. - Potential liability for common law claims by third parties based on damages and costs of environmental contaminants. The costs of investigation, remediation or removal of hazardous substances may be substantial. In addition, the presence of hazardous substances on one of our apartment properties, or the failure to properly remediate a contaminated property, could adversely affect our ability to sell or rent the property or to borrow using the property as collateral. Asbestos-Containing Materials. In addition to general environmental laws, certain laws and regulations govern the removal, encapsulation or disturbance of asbestos-containing materials when such materials are in poor condition or in the event of building remodeling, renovations or demolition. These laws potentially impose liability for release of asbestos-containing materials and may permit third parties to sue for personal injuries associated with such materials. Environmental Assessments. We have performed "Phase I" environmental assessments on each of our apartment properties. These assessments revealed elevated lead content in the drinking water of three of our properties and asbestos-containing materials at 75 of our properties (some of which is friable but in good and manageable condition). The consulting firm which conducted these assessments has prepared an operations and maintenance program recommending certain procedures in dealing with the asbestos-containing materials. The cost from any future 12 14 disturbance of asbestos-containing materials will depend on the magnitude of the disturbance and the location of the materials. Our environmental consulting firm has advised that we are not required by Federal law to take any action with regard to the elevated lead levels in the water of the three properties. However, we are currently attempting to determine the most effective remedial action we can take. We anticipate any remedial action will cost, in the aggregate, between $760,000 and $780,000 and the amount will be capitalized when incurred. We expect to fund this amount through cash flow from operations. Except as otherwise described above, we believe our apartment properties are in compliance in all material respects with the laws regarding hazardous or toxic substances. We have not been notified, and are not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances on our apartment properties. We do not believe the matters described above, or compliance with applicable environmental laws or regulations in general, will have a material adverse effect on our financial condition, results of operations and cash flows. COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND SIMILAR LAWS Our apartment properties are required to meet certain Federal requirements related to access and use by disabled persons as a result of the Americans with Disabilities Act of 1990. In addition, a number of additional Federal, state and local laws may require modifications to our apartment properties, or may restrict certain further renovations thereof, with respect to access by disabled persons. For example, the Fair Housing Amendments Act of 1988 requires apartment communities first occupied after March 13, 1990 to be accessible to the handicapped. Noncompliance with any such laws or regulations could result in the imposition of fines or an award of damages to private litigants. We have obtained structural reports from outside consultants which indicate certain modifications need to be made to some of our apartment properties to bring those properties into full compliance with the Americans with Disabilities Act. We do no believe the costs of these modifications will have a material adverse effect on our financial condition, results of operations and cash flows. However, additional legislation could impose additional financial obligations or restrictions with respect to access by disabled persons. If required changes involve greater expenditures than we currently anticipate, or if the changes must be made on a more accelerated basis, our ability to make expected distributions could be adversely affected. UNINSURED LOSS We carry comprehensive liability, fire, extended coverage and rental loss insurance with respect to all of our apartment properties with policy specifications, insured limits and deductibles customary for similar properties. There are, however, certain types of losses (such as losses arising from wars or earthquakes) we do not generally insure because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, we could lose our capital invested in the affected property, as well as the anticipated future revenues from such property. In addition, we would continue to be obligated on any mortgage indebtedness or other obligations related to the property. Although we believe the properties are currently adequately insured in accordance with industry standards, any such loss could adversely affect our operations. YEAR 2000 Many of the world's computer systems currently record years in a two-digit format. Such computer systems will be unable to properly interpret dates beyond the year 1999, which could lead to disruptions in our operations (commonly referred to as the "Year 2000" issue). We have identified three systems which are vulnerable to the Year 2000 issue, including our general ledger/accounts payable system, our payroll system, and our on-site accounting system (rent roll activities). Although we are currently utilizing internal and external resources to reprogram, replace and test our systems for Year 2000 compliance, there can be no guarantees that all of our systems will be Year 2000 compliant or that other companies on which we rely will be timely converted. As a result, our operations could be adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000." 13 15 RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS This prospectus contains certain forward-looking statements within the meaning of Federal securities laws which are intended to be covered by the safe harbors created thereby. These statements include our plans and objectives for future operations, including plans and objectives relating to future growth and availability of funds. These forward-looking statements are based on current expectations that involve numerous risks and uncertainties. Assumptions relating to these statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to accurately predict and many of which are beyond our control. Although we believe the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that these forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in these forward-looking statements, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS The Company's ratio of earnings to combined fixed charges and preferred stock dividends for the six months ended June 30, 1998 and the five year period ended December 31, 1997 (of which the period January 1, 1994 through February 8, 1994 and the year ended December 31, 1993 are based on the results of the Walden Predecessors) was 1.20, 1.25, 1.59, 1.52, 1.68 and .63, respectively. The Company had no preferred dividend requirement in any of such years prior to 1995; therefore, the ratio of earnings to combined fixed charges and preferred stock dividends are the same as the ratio of earnings to fixed charges for such years. Earnings were calculated by adding certain fixed charges (consisting of interest on indebtedness and amortization of financing costs) to the Company's income before extraordinary items. The Company's earnings (in thousands) were inadequate to cover fixed charges by $45 and $4,795 for the period from January 1, 1994 to February 8, 1994 and the year ended December 31, 1993, respectively, all of which were prior to the Company's initial public offering in February of 1994. 14 16 THE COMPANY GENERAL The Company is a self-administered, self-managed, fully integrated REIT focused on middle income multifamily properties located primarily in selected Southwestern and Southeastern metropolitan areas. The Company, a Maryland corporation headquartered in Dallas, Texas, was formed in September 1993 to continue and expand the multifamily property ownership, management, acquisition and marketing operations and related business objectives and strategies of The Walden Group, Inc. and its subsidiaries and affiliates (collectively, the "Walden Predecessors"). The Company owned and operated 155 multifamily properties as of August 31, 1998, containing 42,429 apartment units. Approximately 92% of the Properties are located in the Houston, Dallas/Fort Worth, Austin, Phoenix, Tampa, Nashville, Jacksonville, Oklahoma City, San Antonio, Atlanta, Salt Lake City and San Diego areas (the "Target Markets"), with the remaining Properties primarily located in other areas in the Southwest and Southeast regions of the United States. Of the total units owned, approximately 30% are located in Houston (in eight different submarkets), and approximately 26% are located in Dallas/Fort Worth (in 15 different submarkets). The Properties had a weighted average physical occupancy rate of approximately 93.3% for 1997 and 95.3% for the month of August 1998. Upon completion of the Company's initial public offering on February 9, 1994 (the "IPO"), the Company purchased the multifamily operations of the Walden Predecessors, including 18 properties containing 5,895 apartment units (of which a 299-unit property was sold in April 1995, a 384-unit property was sold in April 1996, a 144-unit property was sold in September 1996, and a 200-unit property and a 248-unit property were sold in August 1998), and concurrently purchased two additional properties containing 448 apartment units, one of which was owned by a third party and the other of which was principally owned by the Walden Predecessors (collectively, the "Original Properties"). Since the consummation of the IPO, the Company has acquired 151 properties (the "Acquisition Properties") (of which a 242-unit property was sold in December 1995, a 304-unit property was sold in August 1996, a 392-unit property was sold in October 1997, a 273-unit property and a 430-unit property were sold in August 1998 and six properties were combined in 1997 with certain other properties owned to achieve operating efficiencies), containing an aggregate of 39,002 apartments units, for an aggregate acquisition cost of $1.4 billion. In connection with one property acquired in December 1996, the Company acquired approximately 81 acres of adjacent undeveloped land for $4 million. The land is zoned for an additional 900 apartment units, which offers the Company the opportunity to develop apartment communities in the future. Management believes that these acquisitions are consistent with its core acquisition strategy of acquiring well located garden apartment properties at prices less than replacement costs, which serve middle income residents and can benefit from the Company's comprehensive management and enhancement programs. On October 1, 1997, the Company acquired the assets and business of Drever Partners, Inc. and its affiliates, including 18 partnerships of which Drever Partners, Inc. and certain of its affiliates were the general partners, (collectively, "Drever"), a private real estate management company based in San Francisco and Houston. This transaction included the acquisition by the Company of 79 apartment properties (consisting of 18,118 units) (the "Drever Properties"), which are included in the 151 properties acquired by the Company since its IPO. Pursuant to the Exchange Agreement with Drever, the consideration exchanged by the Company consisted of approximately $95.0 million of cash, the assumption of $286.0 million of mortgage debt (of which the Company repaid $119.0 million with proceeds from an unsecured term loan and its unsecured credit facility) and $303.9 million of operating partnership units (the "Common OP Units" and "Preferred OP Units", collectively the "Units") issued by a newly-formed partnership subsidiary of the Company, Walden/Drever Operating Partnership, L.P. ("WDOP"), to the shareholders and partners of and equity participants in Drever. The Units are exchangeable on or after October 1, 1998, into an aggregate of 10,338,625 shares of the Company's common stock, par value $.01 per share (the "Common Stock"), 1,999,909 shares of the Company's 9.00% Redeemable Preferred Stock, par value $.01 per share (the "Redeemable Preferred Stock") and 6,666,363 Series B Warrants (each of which is exercisable for one-third of one share of the Company's common stock at $26.875 per share) (the "Series B Warrants" and, collectively with the Common Stock and Redeemable Preferred Stock, the "Walden Securities"). The 15 17 Redeemable Preferred Stock and the Preferred OP Units are redeemable at the option of the Company in 10 years at a redemption price of $25 per share or unit. The Company's executive offices are located at 5080 Spectrum Drive, Suite 1000, Addison, Texas 75001-6401. The telephone number is (972) 788-0510. The Company was incorporated in Maryland on September 29, 1993, and the duration of its existence is perpetual. BUSINESS STRATEGIES The Company's primary business objective is to maximize stockholder value by maintaining long-term growth in funds from operations for distributions to its stockholders. To achieve this objective, the Company will focus on maximizing the internal growth of its expanded portfolio through property management and resident services, implementation of a property enhancement program and acquisition of garden apartment properties that have strong cash flow growth potential and are located in the Company's Target Markets. The completion of the Drever combination has provided the Company with increased management depth and expertise in property and asset management and property redevelopment. Specifically, the Company intends to implement the following business strategies: Increased Property Cash Flow. The continuing integration of the Company's and Drever's property management operations is expected to produce a level of service that is successful at resident retention and focused on increasing occupancy and rental rates. The Company also anticipates increasing its cash flow by controlling operating expenses and implementing programs to generate ancillary income (such as cable, telephone and laundry). Property Enhancement/Repositioning Program. The Company has initiated a property enhancement program to upgrade the physical appearance (both exterior and interior) of certain properties. These property enhancements are expected to generate high yields through increased rental rates and resident retention. In addition, certain of the Company's properties have been targeted for repositioning. By reinvesting in its properties, the Company expects to set them apart from deteriorating, similar aged properties and increase their competitiveness with newly constructed units that are generally available at considerably higher rates. These upgrades are expected to yield substantially increased revenue streams. Acquisitions. The Company also seeks to increase its funds from operations by acquiring multifamily properties that have prospects for long-term growth and can be purchased at prices substantially below replacement cost. Following the IPO, the Company has engaged in an active acquisition program, acquiring 151 multifamily properties, containing an aggregate of 39,002 apartment units (including the Drever transaction of 79 properties consisting of 18,118 units). The Company is currently focusing its acquisition efforts in the Target Markets due to the attractive demographics of these markets and the availability of properties for sale. Dispositions. Through the Company's asset management function, properties are routinely evaluated to determine that optimal operating results are achieved. In connection with this evaluation, properties may be targeted for disposition once a determination is made that such properties have achieved their maximum investment return. In addition, certain properties not located in the Company's core markets may be targeted for disposition. New Development. Selective development of new apartment properties in the Target Markets will become increasingly important to the growth of the Company's portfolio over the next several years. Management will select properties for development that meet an identified market demand, are well-located in their markets and have an anticipated total return in excess of that projected for acquisition properties. PROPERTY MANAGEMENT The Company conducts its property management operations with an experienced staff of professionals and support personnel, including property directors and sales directors. The depth of the organization is intended to enable the Company to deliver quality services on an uninterrupted basis, thereby promoting resident satisfaction and improving resident retention. Each of the Company's owned or managed properties is 16 18 operated by a staff specifically selected based on the size, location, age, management plan and marketing plan of the individual property. Personnel are carefully trained in their areas of expertise, such as property management, marketing and leasing, resident relations and maintenance. The Company's standardized policies and procedures specify reporting requirements and management guidelines which are to be applied at each property. Such policies and procedures facilitate management consistency in all markets. The Company uses customized software programs, including an on-site computerized rent roll system, to provide site, regional and executive management with rapid access to all marketing and accounting information. Weekly marketing reports are prepared by on-site property directors which track each property's leasing status, occupancy rate, prospective resident traffic, unit availability, lease renewals, residents moving in and out of apartments, notices by residents to vacate their apartments and delinquent rental charges or other fees. Accounting elements such as receivables, payables, rent roll status and budget compliance are regularly monitored through this system. Marketing and leasing activities and procedures are designed to comply with all established Federal, state and local laws and regulations. The Company generally offers leases having six to 12 month terms, with individual property marketing plans structured to respond to local market conditions. Qualifying standards for prospective residents are established to comply with the affordable housing restrictions placed on certain of the Properties, the Fair Housing Amendments Act of 1988 (the "FHA") and the regulations thereunder and are designed to stabilize service levels and income streams. The Company has fifteen properties which are currently subject to restrictions that require a specified number of apartments be offered to households with lower or moderate incomes. The Company utilizes standard lease contracts promulgated by local apartment associations to ensure compliance with the most recent legislative and judicial activities related to multifamily properties, as well as to permit uniform lease administration relating to rent collections, security deposit dispositions, evictions, repairs and renewals. PRICE RANGE OF COMMON STOCK The Common Stock has traded on the New York Stock Exchange ("NYSE") under the symbol "WDN" since February 2, 1994, the date on which the Common Stock began trading. The following table sets forth for the periods indicated the high and low sales prices per common share as reported on the NYSE and the distributions declared by the Company per common share for each such period in 1998, 1997 and 1996:
DISTRIBUTIONS QUARTER ENDED HIGH LOW PER SHARE ------------- ------- ------- ------------- March 31, 1998...................................... $27.125 $23.750 $0.4825 June 30, 1998....................................... 26.000 23.813 0.4825 September 30, 1998.................................. 23.063 22.750 0.4825 March 31, 1997...................................... $26.875 $24.000 $0.4825 June 30, 1997....................................... 25.688 21.250 0.4825 September 30, 1997.................................. 25.750 22.750 0.4825 December 31, 1997................................... 26.000 23.500 0.4825 March 31, 1996...................................... $22.125 $20.000 $0.465 June 30, 1996....................................... 21.875 20.250 0.465 September 30, 1996.................................. 21.875 19.750 0.465 December 31, 1996................................... 26.000 20.875 0.465
The closing price of the Common Stock on October 2, 1998 was $22.6875. As of August 31, 1998, the Common Stock was held by 1,590 stockholders of record, including shares held in nominee or street name by brokers. 17 19 The Redeemable Preferred Stock is approved for listing on the NYSE under the symbol "WDN pd" subject to official notice of issuance. It is expected that the Series B Warrants will trade on the NASDAQ OTC system. DIVIDENDS AND DISTRIBUTIONS POLICY In accordance with applicable REIT requirements, the Company has made distributions in accordance with the Code. The Company paid dividends per share in the aggregate of $1.86, $1.93, and $1.4475 for the years ended December 31, 1996 and 1997 and the nine months ended September 30, 1998, respectively. See "Price Range of Common Stock." The Company intends to continue to pay regular quarterly dividends to its stockholders. Pursuant to a provision of the Company's credit facility, distributions to stockholders may not exceed 90% of funds from operations, as defined in the credit facility. The Company does not anticipate its distributions to be restricted by this provision. Future distributions made by the Company will be at the discretion of the Board of Directors and will depend upon numerous factors, including the gross revenues received from its properties, the operating expenses of the Company, the interest expense incurred in borrowing and capital expenditures. The Company anticipates that distributions will exceed net income determined in accordance with generally accepted accounting principles due to non-cash expenses, primarily depreciation and amortization. Distributions by the Company to the extent of its current and accumulated earnings and profits for federal income tax purposes generally will be taxable to stockholders as ordinary dividend income, ordinary gain or capital gain. Distributions in excess of such earnings and profits generally will be treated as a non-taxable deduction of the stockholder's basis in the shares of Common Stock to the extent thereof (which may have the effect of deferring taxation until such stockholder's sale of the shares of Common Stock), and thereafter as taxable gain. 18 20 SELECTED FINANCIAL DATA The following tables set forth selected consolidated financial data for the Company and the combined financial data for 18 of the Original Properties (certain of which have been sold) acquired concurrently with the closing of the IPO and the assets, liabilities and operations of the Walden Predecessors' operating companies. The historical consolidated operating data for the Company for the years ended December 31, 1997, 1996 and 1995 and the period from February 9, 1994 (date of commencement of operations) to December 31, 1994 and the balance sheet data as of December 31, 1997, 1996, 1995 and 1994 and the combined operating data of the Walden Predecessors for the period January 1, 1994 to February 8, 1994 and the year ended December 31, 1993 and the balance sheet data as of December 31, 1993 have been derived from the consolidated financial statements and accounting records of the Company and the combined financial statements and accounting records of the Walden Predecessors, respectively. These financial statements have been audited by independent auditors. The data for the six months ended June 30, 1998 and 1997 has been derived from unaudited financial statements. In the opinion of management, the operating data for the six months ended June 30, 1998 and 1997 include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein. The results of interim periods are not necessarily indicative of results for the full year and the consolidated and combined historical operating results of the Company and the Walden Predecessors may not be indicative of future operating results of the Company. The following selected financial information should be read in conjunction with the discussion set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and all of the financial statements included elsewhere in this report. All amounts are in thousands except per share and property data.
THE COMPANY -------------------------------------------------------------------- SIX MONTHS ENDED YEARS ENDED FEBRUARY 9 JUNE 30, DECEMBER 31, TO ------------------- ------------------------------- DECEMBER 31, 1998(A) 1997 1997(A) 1996 1995 1994 -------- -------- -------- --------- -------- ------------ OPERATING DATA Revenues Rental income............................... $132,557 $ 64,587 $163,224 $ 105,602 $ 78,469 $ 39,602 Other property income....................... 5,288 2,605 6,313 3,873 3,090 1,493 Interest income............................. 724 849 1,598 1,433 856 365 Other income................................ -- -- -- 263 409 533 -------- -------- -------- --------- -------- --------- Total revenues......................... 138,569 68,041 171,135 111,171 82,824 41,993 Expenses Property operating and maintenance.......... 45,761 22,013 56,483 37,521 28,748 15,607 Real estate taxes........................... 13,898 6,561 16,805 10,039 7,337 3,275 General and administrative.................. 5,701 3,394 7,734 5,124 3,811 2,507 Unusual charge -- officer settlement agreement................................. -- -- 1,940 -- -- -- Interest expense............................ 26,688 10,121 28,447 20,573 17,111 6,288 Depreciation and amortization............... 29,520 13,532 34,668 20,726 16,634 8,960 -------- -------- -------- --------- -------- --------- Total expenses......................... 121,568 55,621 146,077 93,983 73,641 36,637 -------- -------- -------- --------- -------- --------- Operating income.............................. 17,001 12,420 25,058 17,188 9,183 5,356 Gain on disposition of real property.......... -- -- 2,055 1,934 1,502 -- Extraordinary loss on debt extinguishment..... (104) -- (422) (1,848) (1,352) -- -------- -------- -------- --------- -------- --------- Income before income allocated to minority interests................................... 16,897 12,420 26,691 17,274 9,333 5,356 Income allocated to minority interests........ (5,667) (800) (4,109) (1,705) (922) -- -------- -------- -------- --------- -------- --------- Net income.................................... 11,230 11,620 22,582 15,569 8,411 5,356 Preferred distributions....................... (6,560) (6,623) (13,186) (2,387) -- -- -------- -------- -------- --------- -------- --------- Net income available to common stockholders... $ 4,670 $ 4,997 $ 9,396 $ 13,182 $ 8,411 $ 5,356 ======== ======== ======== ========= ======== ========= Basic net income per share.................... $ 0.25 $ 0.29 $ 0.53 $ 0.90 $ 0.69 $ 0.62 ======== ======== ======== ========= ======== ========= Diluted net income per share.................. $ 0.25 $ 0.29 $ 0.53 $ 0.89 $ 0.69 $ 0.62 ======== ======== ======== ========= ======== ========= Distributions per share of common stock....... $ 0.965 $ 0.965 $ 1.93 $ 1.86 $ 1.82 $ 1.09 ======== ======== ======== ========= ======== ========= Basic weighted average number of common shares outstanding................................. 18,384 17,329 17,590 14,720 12,155 8,689 ======== ======== ======== ========= ======== =========
19 21
THE COMPANY -------------------------------------------------------------------- SIX MONTHS ENDED YEARS ENDED FEBRUARY 9 JUNE 30, DECEMBER 31, TO ------------------- ------------------------------- DECEMBER 31, 1998(A) 1997 1997(A) 1996 1995 1994 -------- -------- -------- --------- -------- ------------ PROPERTY DATA Total properties (at end of period)(b)........................... 156 75 154 68 55 40 Total units (at end of period)......... 42,858 23,188 42,482 21,407 17,205 12,319 Total units (weighted average)......... 42,758 22,111 27,346 18,430 14,601 9,140 Weighted average monthly property revenue per unit(c)..................................... $ 537 $ 506 $ 517 $ 495 $ 465 $ 420 OTHER DATA Funds from operations(d)...................... $ 38,930 $ 20,829 $ 50,233 $ 36,998 $ 24,917 $ 13,945 Cash flows provided by (used in): Operating activities...................... $ 31,561 $ 23,248 $ 70,822 $ 38,281 $ 31,317 $ 16,420 Investing activities...................... $(25,289) $(67,297) $327,814 $(158,668) $(86,926) $(256,114) Financing activities...................... $ (9,505) $ 20,147 $237,029 $ 143,306 $ 58,121 $ 243,982
DECEMBER 31, JUNE 30, ------------------------------------------- 1998 1997 1996 1995 1994 ------------ ---------- -------- -------- -------- BALANCE SHEET DATA Real estate assets (at cost).................. $1,496,973 $1,507,613 $683,515 $513,341 $329,206 Total assets.................................. 1,487,653 1,469,472 689,714 510,548 334,937 Mortgage notes payable, credit facility and term loan................................... 746,261 702,354 258,908 259,015 165,439 Minority interests............................ 314,922 321,916 14,886 18,608 -- Stockholders' equity.......................... 380,968 395,215 396,535 216,519 160,267
- --------------- (a) On October 1, 1997, the Company acquired Drever. For a discussion of the Drever transaction, see "The Company." (b) The number of properties was reduced to 154 as of December 31, 1997, upon the combination of six properties during 1997 with certain other properties owned by the Company to achieve operating efficiencies. (c) Represents rental income and other property income, divided by weighted average units, divided by the number of months. (d) Management generally considers funds from operations ("FFO") to be an appropriate measure of the performance of an equity REIT. The National Association of Real Estate Investment Trusts ("NAREIT") currently defines FFO as net income (loss) (determined in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real estate assets, amortization and income allocated to minority interests. In addition, extraordinary or unusual items that are non-recurring events which would materially distort the comparative measure of FFO are typically excluded. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs and cash distributions. FFO should not be considered as an alternative to net income as an indication of the Company's performance or as an alternative to cash flow as a measure of liquidity. The Company's FFO is not necessarily comparable to similar entitled items reported by other REITs. The Company's computation of FFO assumes the conversion of all convertible securities, including minority interest securities. FFO for the 1995 and 1994 periods have been restated to reflect NAREIT's revised definition of FFO. 20 22
WALDEN PREDECESSORS --------------------------- JANUARY 1 TO YEAR ENDED FEBRUARY 8, DECEMBER 31, 1994 1993 ------------ ------------ OPERATING DATA Revenues Rental income............................................. $3,047 $27,336 Other property income..................................... 134 1,286 Interest income........................................... 37 124 Property management fees.................................. 150 1,266 ------ ------- Total revenues..................................... 3,368 30,012 Expenses Property operating and maintenance........................ 1,242 11,398 Real estate taxes......................................... 226 2,159 General and administrative................................ 217 2,263 Interest expense.......................................... 1,075 11,456 Amortization and financing costs.......................... 20 1,417 Depreciation.............................................. 633 6,114 ------ ------- Total expenses..................................... 3,413 34,807 ------ ------- Net loss(a)................................................. $ (45) $(4,795) ====== ======= PROPERTY DATA Total properties (at end of period)......................... 18 18 Total units (at end of period).............................. 5,895 5,895 Total units (weighted average).............................. 5,895 5,895 Weighted average monthly property revenue per unit(b)....... $ 421 $ 405 OTHER DATA Funds from operations(c).................................... $ 588 $ 1,370 Cash flows provided by (used in): Operating activities...................................... $1,858 $ 1,698 Investing activities...................................... $ -- $ (23) Financing activities...................................... $ (311) $(1,476)
DECEMBER 31, 1993 ------------ BALANCE SHEET DATA Real estate assets.......................................... $195,421 Accumulated depreciation and impairment allowance........... (83,026) Total assets................................................ 121,889 Mortgage notes payable...................................... 147,322 Partners' deficit........................................... (33,610)
- --------------- (a) Net loss of Walden Predecessors is before income tax benefits and extraordinary gains. (b) Represents rental income and other property income, divided by weighted average units, divided by the number of months. (c) Management generally considers funds from operations ("FFO") to be an appropriate measure of the performance of an equity REIT. The National Association of Real Estate Investment Trusts ("NAREIT") currently defines FFO as net income (loss) (determined in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real estate assets, amortization and income allocated to minority interests. In addition, extraordinary or unusual items that are non-recurring events which would materially distort the comparative measure of FFO are typically excluded. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs and cash distributions. FFO should not be considered as an alternative to net income as an indication of the Company's performance or as an alternative to cash flow as a measure of liquidity. The Company's FFO is not necessarily comparable to similar entitled items reported by other REITs. The Company's computation of FFO assumes the conversion of all convertible securities, including minority interest securities. FFO for the 1994 and 1993 periods have been restated to reflect NAREIT's revised definition of FFO. 21 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion should be read in conjunction with the "Selected Financial Data" and all of the financial statements and notes thereto included elsewhere in this Prospectus. Such financial statements and information have been prepared to reflect the consolidated statements of income of the Company for the six months ended June 30, 1998 and 1997 and the three years ended December 31, 1997 and the balance sheets of the Company as of December 31, 1997 and 1996. Changes in revenues and expenses related to the Properties during 1998, 1997, 1996 and 1995 are primarily the result of property acquisitions. Where appropriate, comparisons are made on a dollars-per-weighted-average-unit basis in order to adjust for changes in the number of units owned during each period. RESULTS OF OPERATIONS Results of Operations for the Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997 The weighted average number of units owned for the six months ended June 30, 1998, increased by 20,647 units, or 93.4% from 22,111 units for the first six months of 1997 to 42,758 units for the first six months of 1998 as a result of the acquisition of additional properties. Total units owned at June 30, 1997 and 1998 were 23,188 and 42,858, respectively. The portfolio had an average physical occupancy of 92.5% and 93.1% for the first six months of 1997 and 1998, respectively. The Company owned 64 properties with 20,845 units throughout both periods in 1998 and 1997 ("same store"). A summary of the historical operating performance for "same store" properties is as follows:
SIX MONTHS ENDED JUNE 30, ------------------ 1998 1997 % CHANGE ------- ------- -------- Rental and other property revenue (in thousands)...... $65,457 $63,635 2.9% Property operating expenses (in thousands)(1)......... 28,082 26,913 4.3% ------- ------- Property operating income (in thousands).............. $37,375 $36,722 1.8% ======= ======= Average physical occupancy............................ 91.8% 92.4% N/A ======= ======= Average monthly revenue per unit...................... $ 523 $ 509 2.9% ======= ======= Average annualized property operating and maintenance expenses per unit................................... $ 2,063 $ 1,992 3.6% ======= ======= Average annualized real estate taxes per unit......... $ 631 $ 590 6.9% ======= ======= Operating expense ratio............................... 42.9% 42.3% N/A ======= =======
- --------------- (1) Consists of property operating and maintenance and real estate tax expenses. 22 24 The operating performance of properties not owned throughout periods ended June 30, 1998 and 1997 is summarized as follows:
SIX MONTHS ENDED JUNE 30, ----------------- 1998 1997 ------- ------ Rental and other property revenue (in thousands)............ $72,388 $3,557 Property operating expenses (in thousands)(1)............... 31,577 1,661 ------- ------ Property operating income (in thousands).................... $40,811 $1,896 ======= ====== Weighted average number of units............................ 21,913 1,266 ======= ====== Average physical occupancy.................................. 93.5% 93.5% ======= ====== Average monthly revenue per unit............................ $ 551 $ 468 ======= ====== Average annualized property operating and maintenance expenses per unit......................................... $ 2,214 $1,975 ======= ====== Average annualized real estate taxes per unit............... $ 669 $ 649 ======= ====== Operating expense ratio..................................... 43.6% 46.7% ======= ======
- --------------- (1) Consists of property operating and maintenance and real estate tax expenses. General and administrative expenses increased $2.3 million for the first six months of 1998, or 68.0%, from $3.4 million for the first six months of 1997 to $5.7 million for the first six months of 1998. This represents a per unit decrease of $40, or 13.0%, on an annualized basis. This per unit decrease is primarily due to increased operating efficiencies. The increases in general and administrative expenses were primarily due to increased properties owned which resulted in increased salary costs and occupancy costs for additional corporate and regional office space. Interest expense increased $16.6 million for the first six months of 1998, or 163.7%, from $10.1 million for the first six months of 1997 to $26.7 million for the first six months of 1998. The increases were primarily due to indebtedness incurred on properties acquired during 1997. Depreciation increased $15.9 million for the first six months of 1998, or 121.3%, from $13.1 million for the first six months of 1997 to $29.0 million for the first six months of 1998. The increases were due to depreciation on additional properties acquired and capital improvements on existing properties. The $104,000 extraordinary loss on debt extinguishment in 1998 was due to prepayment penalties incurred in connection with the Company's payoff of a $7.2 million mortgage loan in April 1998, and the write off of unamortized deferred financing costs related to the refinancing of certain of the Company's indebtedness during the first and second quarter of 1998. Results of Operations for the Company for the Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996 The weighted average number of units owned increased by 8,916 in 1997, or 48.4%, from 18,430 units in 1996 to 27,346 in 1997 as a result of the acquisition of additional properties. Total units owned at December 31, 1996 and 1997 were 21,407 and 42,482, respectively. The portfolio had a weighted average physical occupancy of 93.5% for 1996 and 93.3% for 1997. 23 25 The Company owned 51 properties with 15,981 apartment units throughout both calendar years 1997 and 1996 ("same store"). The operating performance of these same store properties is summarized as follows:
YEAR ENDED DECEMBER 31, ------------------ 1997 1996 % CHANGE ------- ------- -------- Rental and other property revenue (in thousands)...... $97,520 $95,294 2.3% Property operating expenses (in thousands)(1)......... 41,412 41,437 (0.1%) ------- ------- Property operating income (in thousands).............. $56,108 $53,857 4.2% ======= ======= Weighted average physical occupancy................... 92.7% 93.6% N/A ======= ======= Average monthly revenue per unit...................... $ 509 $ 497 2.3% ======= ======= Average annual operating and maintenance expenses per unit................................................ $ 2,005 $ 2,041 (1.8%) ======= ======= Average annual real estate taxes per unit............. $ 586 $ 552 6.2% ======= ======= Operating expense ratio............................... 42.5% 43.5% N/A ======= =======
- --------------- (1) Consists of property operating and maintenance and real estate tax expenses. The operating performance of properties not owned throughout both calendar years 1997 (103 properties) and 1996 (17 properties) is summarized as follows:
YEAR ENDED DECEMBER 31, ------------------ 1997 1996 ------- ------- Rental and other property revenue (in thousands)............ $72,017 $14,181 Property operating expenses (in thousands)(1)............... 31,876 6,123 ------- ------- Property operating income (in thousands).................... $40,141 $ 8,058 ======= ======= Weighted average number of units............................ 11,365 2,449 ======= ======= Weighted average physical occupancy......................... 94.1% 92.9% ======= ======= Average monthly revenue per unit............................ $ 528 $ 483 ======= ======= Average annual operating and maintenance expenses per unit...................................................... $ 2,151 $ 2,005 ======= ======= Average annual real estate taxes per unit................... $ 654 $ 495 ======= ======= Operating expense ratio..................................... 44.3% 43.2% ======= =======
- --------------- (1) Consists of property operating and maintenance and real estate tax expenses. Interest income increased $165,000 in 1997, or 11.5%, from $1,433,000 in 1996 to $1,598,000 in 1997, primarily as the result of increased cash balances during 1997. The other income of $263,000 in 1996 was primarily attributable to the net income from WDN Management Company allocated to the Company. WDN Management Company was merged into the Company effective December 31, 1996. General and administrative expenses increased $2.6 million in 1997, or 51.0%, from $5.1 million in 1996 to $7.7 million in 1997. This represented a weighted average increase of $5 per unit, or 1.8%. The increases in general and administrative expenses were primarily the result of adding corporate personnel, due to the acquisition of properties during 1997, increased salary costs, higher professional fees, higher costs related to stockholders (quarterly mailings to stockholders, transfer services, etc.) and a one-time severance charge relating to the departure of an executive of the Company during the second quarter of 1997. 24 26 The $1.9 million unusual charge resulted from a settlement agreement relating to the resignation of the Company's former Chairman of the Board of Directors and Chief Executive Officer in October 1997. Interest expense increased $7.8 million in 1997, or 37.9%, from $20.6 million in 1996 to $28.4 million in 1997, due to an increase in weighted average indebtedness outstanding of approximately $99.3 million associated with the acquisition of properties and a slight increase in the weighted average interest rate in 1997 of approximately 0.1%. Depreciation expense increased $14.0 million in 1997, or 70.7%, from $19.8 million in 1996 to $33.8 million in 1997, due to depreciation on additional properties acquired and capital improvements on existing properties. This represented a weighted average increase of $162 per unit, or 15.1%. The $2.1 million gain on disposition of real property in 1997 related to the sale of a 392-unit property located in Dallas, Texas on October 2, 1997. The Company received total net sales proceeds from the disposition of approximately $4.1 million ($8.7 million sale proceeds less $4.6 million repayment of related debt), which was used to purchase additional properties. The $0.4 million extraordinary loss on debt extinguishment in 1997 resulted from the write-off of unamortized deferred financing costs and prepayment penalties incurred in connection with the repayment of debt on the property sold in October 1997. Results of Operations for the Company for the Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995 The weighted average number of units owned increased by 3,829 units in 1996, or 26.2%, from 14,601 units in 1995 to 18,430 units in 1996 as a result of the acquisition of additional properties. Total units owned at December 31, 1995 and 1996 were 17,205 and 21,407, respectively. The portfolio had a weighted average occupancy of 94.5% for both 1995 and 1996. The Company owned 36 properties with 11,188 apartment units throughout both calendar years 1996 and 1995. The operating performance of these properties is summarized as follows:
YEAR ENDED DECEMBER 31, ------------------ 1996 1995 % CHANGE ------- ------- -------- Rental and other property revenue (in thousands)...... $63,623 $60,684 4.8% Property operating expenses (in thousands)(1)......... 27,675 27,239 1.6% ------- ------- Property operating income (in thousands).............. $35,948 $33,445 7.5% ======= ======= Weighted average physical occupancy................... 94.4% 94.7% N/A ======= ======= Average monthly revenue per unit...................... $ 474 $ 452 4.8% ======= ======= Average annual operating and maintenance expenses per unit................................................ $ 2,007 $ 1,975 1.6% ======= ======= Average annual real estate taxes per unit............. $ 467 $ 460 1.5% ======= ======= Operating expense ratio............................... 43.5% 44.9% N/A ======= =======
- --------------- (1) Consists of property operating and maintenance and real estate tax expenses. 25 27 The operating performance of properties not owned throughout both calendar years 1996 and 1995 is summarized as follows:
YEAR ENDED DECEMBER 31, ----------------- 1996 1995 % CHANGE ------- ------- -------- Rental and other property revenue (in thousands).......... $45,852 $20,875 119.7% Property operating expenses (in thousands)(1)............. 19,885 8,846 124.8% ------- ------- Property operating income (in thousands).................. $25,967 $12,029 115.9% ======= ======= Weighted average number of units.......................... 7,242 3,413 112.2% ======= ======= Weighted average physical occupancy....................... 94.7% 93.8% N/A ======= ======= Average monthly revenue per unit.......................... $ 528 $ 510 3.5% ======= ======= Average annual operating and maintenance expenses per unit.................................................... $ 2,081 $ 1,948 6.8% ======= ======= Average annual real estate taxes per unit................. $ 665 $ 644 3.3% ======= ======= Operating expense ratio................................... 43.4% 42.4% N/A ======= =======
- --------------- (1) Consists of property operating and maintenance and real estate tax expenses. Interest income increased $577,000 in 1996, or 67.4%, from $856,000 in 1995 to $1,433,000 in 1996, primarily as the result of increased cash balances and interest earned on recourse notes entered into by certain officers and directors of the Company in December 1995 and January 1996 in connection with the acquisition of shares of Common Stock by such persons. Other income decreased $146,000 in 1996, or 35.7%, from $409,000 in 1995 to $263,000 in 1996, primarily due to the reduction in third-party management contracts and an increase in operating expenses of WDN Management unrelated to third-party management contracts. The number of third-party management contracts decreased from ten at December 31, 1995 to eight at the end of 1996. General and administrative expenses increased $1.3 million in 1996, or 34.5%, from $3.8 million in 1995 to $5.1 million in 1996. This represented a weighted average increase of $17 per unit, or 6.5%. The increase in general and administrative expenses was primarily due to increased occupancy cost due to the relocation of the Company's corporate office, increased salary expense and increased costs associated with the increased number of stockholders (quarterly mailings to stockholders, transfer services, NYSE listing fees, etc.). Interest expense increased $3.5 million in 1996, or 20.2%, from $17.1 million in 1995 to $20.6 million in 1996, due to an increase in weighted average indebtedness outstanding of approximately $60.9 million associated with the acquisition of properties, offset by a decrease in the weighted average interest rate in 1996 of approximately 0.5%. Depreciation expense increased $4.1 million in 1996, or 25.9%, from $15.7 million in 1995 to $19.8 million in 1996, due to depreciation on additional properties acquired and capital improvements on existing properties. This represented a weighted average decrease of $1 per unit, or 0.1%. The $1.9 million gain on disposition of real property in 1996 related to the sale of three properties: a 384-unit property located in Wichita, Kansas on April 24, 1996, a 304-unit property located in Corpus Christi, Texas on August 30, 1996 and a 144-unit property located in Stone Mountain, Georgia on September 27, 1996. The Company received total net sales proceeds from these dispositions of approximately $22.9 million, which were used to purchase additional properties. The $1.8 million extraordinary loss on debt extinguishment in 1996 resulted from the write-off of unamortized deferred financing costs and prepayment penalties incurred in connection with the refinances of the Company's credit facility in February 1996 ($488,000) and December 1996 ($767,000), the refinancing of $22 million of variable rate tax-exempt debt in May 1996 ($96,000), the repayment of debt on a property sold 26 28 in September 1996 ($488,000) and the refinancing of $14.4 million of fixed rate debt on three properties in October 1996 ($9,000). As of July 1, 1996, the Company revised its method of accounting to capitalize the cost of replacement carpets, on a prospective basis ($864,000 was capitalized in 1996 which would have been expended under the old policy). The Company believes that this accounting policy change is preferable because it is consistent with policies currently being used by the majority of the largest publicly traded apartment REITs and provides a better matching of expenses with the related benefit of the expenditures. LIQUIDITY AND CAPITAL RESOURCES The Company intends to maintain what it believes is a conservative capital structure by: (i) maintaining a debt-to-total-market capitalization of 50% or less, (ii) managing interest exposure by obtaining fixed rate debt or hedging interest rates, (iii) obtaining unsecured indebtedness when possible, (iv) staggering principal maturities when possible and (v) maintaining an interest coverage ratio (operating income before interest expense, depreciation and amortization to interest expense) of 2.5 times or greater. The Company's principal demands for liquidity are distributions to its stockholders, ongoing maintenance and repair of its properties, capital improvements to its properties, acquisitions of properties, development of properties, interest on indebtedness and debt repayments. During the first six months of 1998, the Company had cash flows from operating activities of $31.6 million and proceeds from stock offerings of $12.4 million, including $3.3 million from its dividend reinvestment plan. These funds, in addition to $35.7 million of net proceeds from mortgage notes and the Company's credit facility, were used during the period primarily to pay for $5.1 million of the total acquisition cost of two apartment properties (containing 376 units), distributions to stockholders and unit holders of $37.3 million, capital improvements to properties of $20.2 million, financing costs of $3.2 million, principal payments of $2.6 million, and the purchase of 572,000 shares of the Company's common stock for $14.0 million. As a result, the Company had a net decrease in cash of $3.2 million. In 1997, the Company received a total of $28.2 million in net equity proceeds from the exercise of the over allotment option on a public offering closed in December 1996 and from its dividend reinvestment plan. The Company also received $274.0 million from net borrowings under the Company's credit facility and term loan. In addition, the Company received net cash proceeds of approximately $4.1 million from the sale of a property in October 1997. These funds were primarily used to purchase 93 properties (21,467 units) with an aggregate net cash purchase price of approximately $304.1 million. As more fully described below, cash and cash equivalents decreased $19.9 million, from $29.7 million as of December 31, 1996 to $9.8 million as of December 31, 1997. Net cash provided by operating activities increased $8.3 million for the first six months of 1998 compared to the same period in 1997. Cash flow from operating activities before changes in operating accounts increased $21.2 million, primarily due to an increased number of units owned, which was offset by a $12.9 million decrease in the net effect of changes in operating accounts. The net decrease in operating accounts resulted primarily from an increase in the payment of real estate taxes and funding of escrow deposits. Net cash provided by operating activities increased by $32.5 million in 1997, from $38.3 million in 1996 to $70.8 million in 1997, primarily due to an increase in property operating income from properties owned throughout both years, as well as property operating income from properties acquired in 1997. As of June 30, 1998, net cash used in investing activities was $25.3 million, compared to $67.3 million for the same period in 1997. Of the $25.3 million, the Company spent $5.1 million to purchase two apartment properties and $20.2 million for real estate asset additions. Net cash used in investing activities was $327.8 million for the year ended December 31, 1997, primarily due to $304.1 million of property acquisitions and $32.4 million of capital improvements on the properties, offset by $8.7 million of cash proceeds from the sale of a property in October 1997. 27 29 Net cash provided by financing activities decreased by $29.7 million for the first six months of 1998 compared to the same period in 1997. The decrease is primarily due to the repurchase of 572,000 shares of Common Stock for an aggregate price of $14.0 million in 1998 and increased distributions to stockholders and minority interest holders. Net cash provided from financing activities was $237.0 million for the year ended December 31, 1997, primarily due to $28.2 million of net proceeds from the issuance of stock and $393.1 million of fundings received under the Company's term loan and the Credit Facility, less repayments and principal amortization of mortgage financings and the Credit Facility of $127.5 million, distributions to stockholders and minority interest holders of $48.0 million and $6.7 million of purchases of the Company's common stock. The Company intends to meet its short-term liquidity requirements, including capital expenditures related to maintaining and improving its Properties, through cash flow provided by operations and when necessary will utilize unused portions of its $150 million unsecured Credit Facility, which expires in February 1999, to meet working capital needs. The Credit Facility has been used to finance property acquisitions, including capital improvements, and to meet short-term liquidity requirements. As of June 30, 1998, the unused amount of the Credit Facility was $65 million. The availability of funds to the Company under the Credit Facility is subject, however, to certain borrowing base and other customary covenants. Historically, the cash provided by operations has been adequate to meet both its operating requirements and distribution payments; however, the Company's current repositioning program will require borrowings under the Credit Facility to fund capital improvements. The Company has certain loans which require principal payments on a monthly basis for which cash provided by operating activities may or may not be sufficient. Accordingly, the Company anticipates borrowing under the Credit Facility, as described below, to fund such payments, if necessary. During the first six months of 1998, the Company has spent $10.7 million for recurring and non-recurring capital items, and $9.5 million for repositioning and acquisition rehabilitation costs. During the year ended December 31, 1997, the Company spent approximately $32.4 million in capital expenditures and rehabilitation expenditures on acquisition properties. Rehabilitation costs of $13.9 million and capital expenditures on Properties of $8.5 million were funded from net cash provided by operating activities. Non-recurring capital expenditures of $9.2 million and capital expenditures under the Company's repositioning program of $0.8 million were funded from borrowings under the Credit Facility. The Company has budgeted capital improvements of $24.0 million for 1998 on its Matured Properties (of which $9.5 million represents non-recurring costs for the construction of covered carports, the installation of access gates with perimeter fencing, retaining walls and the reconstruction of balconies and exterior stairwells), $5.9 million to complete necessary renovations to properties acquired in 1997 and $22.2 million to reposition certain properties. Both acquisition renovation and repositioning capital expenditures are anticipated to be funded from borrowings under the Credit Facility. For the year ended December 31, 1997, the Company paid distributions of $33.9 million to common stockholders, $12.5 million to preferred stockholders and $1.6 million to minority interest holders. For the nine months ended September 30, 1998, the Company paid distributions of $26.4 million to common stockholders, $9.8 million to preferred stockholders and $19.6 million to minority interest holders. The quarterly distributions paid to common stockholders and minority interest holders of common units were $0.4825 per share or unit, which equates to an annualized distribution of $1.93 per share or unit. Distributions on the Company's preferred stock, Preferred OP Units and certain of the minority interests of common stock have a priority over other distributions. The Company's Board of Directors has authorized the Company to repurchase up to 3.5 million shares of outstanding Common Stock. As of June 30, 1998, the Company had purchased approximately 0.9 million shares of Common Stock, leaving approximately 2.6 million shares authorized for repurchase. As of September 30, 1998, approximately 2.4 million shares of Common Stock remain authorized for repurchase. Future purchases of Common Stock will be funded with borrowings under the Company's Credit Facility. The Company has entered into four development agreements to construct apartment communities which the Company will purchase upon completion of the construction and lease-up. The Company has committed 28 30 to purchase $82.0 million in four development properties (containing 1,080 units) in 1999 and 2000. The commitments will be funded by additional mortgage debt and borrowings under the Credit Facility. As of June 30, 1998, the Company had outstanding indebtedness in the aggregate principal amount of $746.3 million, consisting of fixed rate debt of $397.7 million and variable rate debt of $348.6 million. The weighted average interest rate and weighted average years to maturity on the Company's outstanding indebtedness at June 30, 1998 were approximately 7.3 and 7.5 years, respectively. As of December 31, 1997, the Company had outstanding indebtedness in the aggregate principal amount of $702.4 million, consisting of $370.1 million of conventional and tax-exempt fixed rate debt and $332.3 million of variable rate debt (including $274.0 million outstanding under the Company's unsecured term loan and unsecured credit facility). During the year ended December 31, 1997 and the six months ended June 30, 1998, the Company refinanced, repaid or assumed debt as summarized below (in thousands):
OUTSTANDING OUTSTANDING INDEBTEDNESS INDEBTEDNESS AS OF DEBT DEBT DEBT PRINCIPAL AS OF 12/31/96 PROCEEDS ASSUMED REPAID AMORTIZATION 12/31/97 ------------ -------- -------- -------- ------------ ------------ Fixed rate indebtedness... $207,823 $ -- $170,611 $ 4,649 $3,716 $370,069 Unsecured Term Loan....... -- 200,000 -- -- -- 200,000 Unsecured Credit Facility................ -- 193,098 -- 119,098 -- 74,000 Other variable rate debt.................... 51,085 -- 7,200 -- -- 58,285 -------- -------- -------- -------- ------ -------- Total............ $258,908 $393,098 $177,811 $123,747 $3,716 $702,354 ======== ======== ======== ======== ====== ========
OUTSTANDING OUTSTANDING INDEBTEDNESS INDEBTEDNESS AS OF DEBT DEBT DEBT PRINCIPAL AS OF 12/31/97 PROCEEDS ASSUMED REPAID AMORTIZATION 6/30/98 ------------ -------- -------- -------- ------------ ------------ Fixed rate indebtedness... $370,069 $ 31,948 $ 5,056 $ 6,870 $2,570 $397,633 Unsecured Term Loan....... 200,000 -- -- -- -- 200,000 Unsecured Credit Facility................ 74,000 83,000 -- 72,000 -- 85,000 Other variable rate debt.................... 58,285 57,955 5,750 58,285 77 63,628 -------- -------- -------- -------- ------ -------- Total............ $702,354 $172,903 $ 10,806 $137,155 $2,647 $746,261 ======== ======== ======== ======== ====== ========
The following table sets forth certain information regarding the Company's outstanding indebtedness as of June 30, 1998:
WEIGHTED AVERAGE ------------------- OUTSTANDING PERCENTAGE INTEREST YEARS TO PRINCIPAL OF RATE MATURITY BALANCE(1) TOTAL -------- -------- ----------- ---------- Conventional fixed rate........................... 7.69% 7.3 $329,390 44.1% Tax-exempt fixed rate............................. 6.48% 21.0 68,243 9.1% ---- ---- -------- ----- Average/Total fixed rate........................ 7.48% 9.7 397,633 53.2% ---- ---- -------- ----- Tax-exempt variable rate.......................... 4.65% 26.0 63,628 8.5% Unsecured Term Loan............................... 7.66% 0.4 200,000 26.8% Unsecured Credit Facility......................... 7.33% 0.6 85,000 11.5% ---- ---- -------- ----- Total variable rate........................... 7.03% 5.1 348,628 46.8% ---- ---- -------- ----- Total.................................... 7.27% 7.5 $746,261 100.0% ==== ==== ======== =====
- --------------- (1) In thousands. 29 31 As of June 30, 1998, the Company's total indebtedness becomes due as follows (in thousands):
BALLOON PRINCIPAL PAYMENTS TOTAL --------- -------- -------- 1998...................................................... $ 3,000 $205,750 $208,750 1999...................................................... 6,334 85,000 91,334 2000...................................................... 6,777 7,067 13,844 2001...................................................... 5,768 67,952 73,720 2002...................................................... 5,877 -- 5,877 Thereafter................................................ 105,328 247,407 352,735 -------- -------- -------- Total............................................ $133,084 $613,176 $746,260 ======== ======== ========
The Credit Facility is with BankBoston, as agent for a group of financial institutions and provides an unsecured borrowing capacity of up to $150 million, with borrowings outstanding under the Credit Facility generally bearing interest at LIBOR (5.7% at December 31, 1997) plus 1.375%. The Credit Facility expires in February 1999. As of June 30, 1998, $85 million was outstanding under the Credit Facility. In December 1997, the Company entered into a term loan agreement (the "Term Loan") with BankBoston, as agent for a group of financial institutions. The term loan provides unsecured borrowings of $200 million, bears interest at 1.375% over LIBOR and matures December 15, 1998. The Credit Facility and Term Loan contain customary representations, warranties and events of default which require the Company to comply with certain affirmative and negative covenants. The primary restrictive covenants provide that: (1) distributions to stockholders may not exceed 90% of funds from operations, as defined in the Credit Facility and Term Loan; (2) secured mortgage indebtedness may not exceed 40% of the Company's total assets before depreciation; (3) the Company's fixed charge coverage ratio, as defined, must exceed 1.25; and (4) the Company's debt service coverage ratio, as defined, must exceed 2.0. As of June 30, 1998, the Company is in compliance with all covenants of the Credit Facility and Term Loan. Balloon payments in the amount of $206 million and $85 million come due in 1998 and 1999, respectively. The Company anticipates issuing secured or unsecured fixed rate debt during the year prior to the December maturity of the $200 million Term Loan. In addition, the Credit Facility expires in February 1999, but the Company has the option, subject to certain conditions, to extend the Credit Facility for one year. Under these agreements, the Company pays or receives an amount equal to the difference between the reference yield and the market yield (as defined in each of the agreements) on the date of exercise. The exercise date may be any date up to the settlement date. Any gain or loss under these agreements will be amortized to interest expense over the term of the financing; however, if such debt financing is not obtained any gain or loss will be recorded in current operations. As of September 18, 1998, the Company has a loss position on these forward treasury lock agreements of approximately $29.8 million. The following forward treasury lock agreements were in place as of September 30, 1998:
NOTIONAL AMOUNT SETTLEMENT DATE REFERENCE YIELD REFERENCE TREASURY - --------------- ----------------- --------------- ------------------- (IN THOUSANDS) $ 75,000 November 23, 1998 5.8950% 5.750% due 11/30/02 25,000 November 23, 1998 5.9600% 6.125% due 8/15/07 175,000 November 20, 1998 6.5010% 5.625% due 5/15/08 -------- $275,000 ========
In addition to the Credit Facility and Term Loan, in March 1998 the Company entered into a $110 million fixed rate loan arrangement with Commingled Pension Trust Fund (Fixed Income-Mortgage Private Placements). Eighty million dollars of this debt bears interest at 6.62% per annum and is due on March 31, 2007 and $30 million of this debt bears interest at 7.06% per annum and is due on June 30, 2016. Payments on this loan are interest only; therefore the entire loan balance is outstanding until maturity. As of August 31, 1998, the Company had 89 real estate assets collateralized under various secured debt agreements. 30 32 The Company expects to meet its long-term liquidity requirements, such as refinancing mortgages, developing properties and acquiring properties, including capital improvements on property acquisitions, through long-term borrowings, both secured and unsecured, and the issuance of debt or equity securities. The Company's ability to acquire additional properties is dependent upon its ability to obtain equity or debt financing. During 1997 and 1998, the Company was able to raise additional equity and incur indebtedness to acquire 96 properties. As of August 31, 1998, the Company's debt-to-total-market capitalization ratio was approximately 46.5%, based on outstanding debt of $745.8 million, leaving the Company the ability to borrow funds to acquire additional properties in the amount of approximately $55.7 million and still maintain its 50% debt-to-total-market capitalization policy. When the Company finances its acquisitions with debt, the Company expects that such acquired properties will generate cash flow adequate to service the associated indebtedness. FUNDS FROM OPERATIONS The Company considers funds from operations ("FFO") to be an appropriate measure of the performance of an equity REIT. The National Association of Real Estate Investment Trusts ("NAREIT") currently defines FFO as net income (loss) (determined in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real estate assets, amortization and income allocated to minority interests. In addition, extraordinary or unusual items that are non-recurring events which would materially distort the comparative measure of FFO are typically excluded. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs and cash distributions. FFO should not be considered as an alternative to net income as an indication of the Company's performance or as an alternative to cash flow as a measure of liquidity. The Company's FFO is not necessarily comparable to similar entitled items reported by other REITs. The Company's computation of FFO assumes the conversion of all convertible securities, including minority interest securities. During 1995, NAREIT adopted certain changes to the calculation of FFO. The Company adopted these changes effective January 1, 1996, and the Company has restated below its 1995 calculation of FFO for comparative purposes. Under NAREIT's new definition of FFO, the Company (as well as other REITs who used the old definition) will no longer add back amortization of financing costs. The following is a calculation of FFO under the new definition (in thousands):
SIX MONTHS ENDED YEARS ENDED JUNE 30, DECEMBER 31, ------------------- -------------------------------- 1998 1997 1997 1996 1995 -------- -------- --------- --------- -------- Net income available to common stockholders.......................... $ 4,670 $ 4,997 $ 9,396 $ 13,182 $ 8,411 Preferred distributions(1).............. 1,960 2,023 2,861 2,387 -- Income allocated to minority interests(2).......................... 3,417 800 4,109 1,705 922 Extraordinary loss on debt extinguishment........................ 104 -- 422 1,848 1,352 Gain on disposition of real property.... -- -- (2,055) (1,934) (1,502) Depreciation of real estate assets...... 28,779 13,009 33,560 19,810 15,734 Unusual charge -- officer settlement agreement............................. -- -- 1,940 -- -- -------- -------- --------- --------- -------- Funds from operations................. $ 38,930 $ 20,829 $ 50,233 $ 36,998 $ 24,917 ======== ======== ========= ========= ======== Cash flows provided by (used in): Operating Activities.................. $ 31,561 $ 23,248 $ 70,822 $ 38,281 $ 31,317 Investing Activities.................. (25,289) (67,297) (327,814) (158,668) (86,926) Financing Activities.................. (9,505) (20,147) 237,029 143,306 58,121
- --------------- (1) Distributions on convertible preferred stock were added back in computing FFO since the conversion to common shares has been assumed. (2) Cumulative undeclared distributions on the Preferred OP Units were deducted in computing FFO ($1,125 for 1997 and for each quarter in 1998). 31 33 FFO increased $18.1 million, or 86.9%, from $20.8 million for the six months ended June 30, 1997 to $38.9 million for the six months ended June 30, 1998. The increase in FFO was primarily attributable to additional operating income resulting from an increase in the number of apartment units owned. FFO increased $13.2 million, or 35.7%, from $37.0 million for the year ended December 31, 1996 to $50.2 million for the year ended December 31, 1997. The increase in FFO was primarily attributable to additional operating income, which resulted from an increase in the number of units owned as a result of property acquisitions and increased operating income from properties owned throughout both periods. As discussed in Note (3) to the consolidated financial statements, effective July 1, 1996, the Company revised its method of accounting to capitalize the cost of replacement carpets on a prospective basis. Following is the effect on depreciation, net income and FFO of this change in accounting policy for the year ended December 31, 1996: Adjustment for change in accounting policy to capitalize $864 carpet replacement costs (and effect on FFO).............. Adjustment for effect of depreciation on capitalized carpet (43) replacement costs......................................... ---- Net effect on net income.................................... $821 ====
INFLATION The Company leases apartments under lease terms generally ranging from six to 12 months. Management believes that such short-term lease contracts lessen the impact of inflation due to the ability to adjust rental rates to market levels as leases expire. NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. SFAS No. 128, which is effective for periods ending after December 15, 1997, specifies the computation, presentation and disclosure requirements of earnings per share and supersedes Accounting Principles Board Opinion No. 15. SFAS No. 128 requires a dual presentation of basic and diluted earnings per share. Basic earnings per share, which excludes the impact of common share equivalents, replaces primary earnings per share. Diluted earnings per share, which utilizes the average market price per share as opposed to the greater of the average or ending market price per share when applying the treasury stock method in determining common share equivalents, replaces fully diluted earnings per share. The Company adopted the provisions of SFAS No. 128 in 1997 and retroactively restated prior year amounts to be comparable. In February 1997, the FASB issued SFAS No. 129, Disclosure of Information about Capital Structure, which establishes standards for disclosing information about an entity's capital structure. SFAS No. 129 is effective for periods ending after December 15, 1997. The adoption of SFAS No. 129 did not impact the Company's capital structure disclosures as the Company was already in compliance with this accounting standard. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments and related information in interim and annual financial statements. SFAS Nos. 130 and 131 are effective for periods beginning after December 15, 1997. SFAS No. 130 could impact the Company's reporting as it relates to its outstanding derivatives and management will implement SFAS No. 131 for the year ending December 31, 1998 by reporting its operating segments by geographic location. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes standards for accounting and reporting for derivative instruments. SFAS No. 133 is effective for periods beginning after June 15, 1999; however, earlier application is permitted. The 32 34 Company is currently not planning an early adoption of SFAS No. 133 and has not had an opportunity to evaluate the impact of the provisions of SFAS No. 133 on the Company's consolidated financial statements relating to future adoption. YEAR 2000 CONVERSION Many of the world's computer systems currently record years in a two-digit format. Such computer systems will be unable to properly interpret dates beyond the year 1999, which could lead to disruptions in the Company's operations (commonly referred to as the "Year 2000" issue). The Company has identified three of its primary systems which are vulnerable to the Year 2000 issue: (1) General Ledger/Accounts Payable System. The current system is not Year 2000 compliant. The Company selected a system which has been warranted to be Year 2000 compliant and has started installation of the new system which will be completed by the end of 1998. The cost of the new system is expected to be approximately $900,000, of which $800,000 has been incurred to date. (2) Payroll. The Company processes its payroll through ADP, an outside payroll vendor. ADP's current payroll processing system is not Year 2000 compliant. The Company is currently evaluating other payroll vendors and expects to have selected a vendor which is Year 2000 compliant and have the system converted and tested by the end of the first quarter of 1999. The cost to complete the payroll conversion is anticipated to be between $100,000 and $300,000, depending primarily on whether the Company continues to use an outside vendor or converts to an in-house package. (3) On-Site Accounting. The Company processes its on-site accounting (rent roll activities) on AMSI. The AMSI version which the Company currently uses is Year 2000 compliant. The Company has additionally identified those vendors it believes could have an impact on its day-to-day operations and has developed a short questionnaire regarding the vendor's Year 2000 status. These vendors, consisting primarily of financial institutions, will be contacted before January 1, 1999 to determine their Year 2000 status. The Company fully anticipates its internal systems will be Year 2000 compliant as all systems other than payroll have been modified or replaced. In the event a new payroll system cannot be implemented, the Company will continue to use an upgraded, Year 2000 compliant ADP system. In the event a vendor's systems will not be Year 2000 compliant, the Company will assess the potential risk and, to the extent it is feasible, transfer its business to alternate vendors. The Company will utilize both internal and external resources to reprogram, replace and test its systems for Year 2000 modifications. The Company anticipates completing the Year 2000 project by the first quarter of 1999. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's operations. The cost of Year 2000 compliance and the estimated date of completion of necessary modifications is based on the Company's best estimates, which were derived from various assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. 33 35 BUSINESS AND PROPERTIES THE PROPERTIES The Company's Portfolio. As of August 31, 1998, the Company's portfolio consisted of 155 multifamily properties containing 42,429 apartment units located in 11 states. The Properties are generally comprised of two and three-story buildings in landscaped settings and generally include such amenities as a clubhouse, swimming pools, laundry facilities and cable television access. Certain of the Properties offer additional amenities such as saunas, whirlpools, exercise facilities, tennis courts and covered parking. The Properties contain an average of 274 apartment units, with the largest property containing 994 apartment units. The apartment units have an average size of 788 square feet. The Properties were built between 1967 and 1998 and have a weighted average age by number of apartment units of approximately 15 years. The Properties (as owned effective August 1, 1998) are concentrated in the following markets:
NUMBER NUMBER PERCENT LOCATION OF PROPERTIES OF UNITS OF TOTAL UNITS - -------- ------------- -------- -------------- Houston.................................. 54 12,561 29.60% Dallas/Fort Worth........................ 37 10,884 25.65% Austin................................... 11 3,216 7.58% Phoenix.................................. 7 2,360 5.56% Tampa.................................... 7 1,904 4.49% Nashville................................ 4 1,858 4.38% Jacksonville............................. 5 1,748 4.12% Oklahoma City............................ 4 1,196 2.82% San Antonio.............................. 5 1,146 2.70% Atlanta.................................. 4 1,002 2.36% Salt Lake City........................... 2 768 1.81% San Diego................................ 3 480 1.13% --- ------ ------ Subtotal............................ 143 39,123 92.20% Other Markets(a)......................... 12 3,306 7.80% --- ------ ------ Total.......................... 155 42,429 100.00% === ====== ======
- --------------- (a) Represents properties in five different states. No single property accounts for greater than 10% of the Company's total revenues. The Properties had a weighted average physical occupancy of 93.3% for 1997 and 95.3% for the month of August 1998. Resident leases are generally for six to 12 month terms and often require security deposits. The Properties are located in mature, developed neighborhoods. Management believes the Properties are well built and have been well maintained. Capital Expenditures. The Company has adopted a policy of expensing all maintenance and non-major, recurring repair and replacement items, with the exception of carpet replacement which, as of July 1, 1996, is capitalized on a prospective basis. Such maintenance expense items include, but are not limited to, landscaping, pest control, electrical, plumbing, cleaning units, interior painting of the units, window blinds, and pool and recreation facility maintenance. Non-major expense items include but are not limited to roofing, exterior painting and asphalt resurfacing under approximately $10,000. Repair and maintenance expenses for 1997 were approximately $13.0 million, or $477 per weighted average unit and for the six months ended June 30, 1998 were approximately $11.0 million, or $256 per weighted average unit. The Company capitalizes all major repairs and replacements which are not considered part of the normal maintenance of the Properties or turnover of an apartment unit. As of July 1, 1996, the Company revised its method of accounting to capitalize the cost of replacement carpets, on a prospective basis ($864,000 was capitalized in 1996 which would have been expended under the old policy). The Company believes that this 34 36 accounting policy change is preferable because it is consistent with policies currently being used by the majority of the largest publicly traded apartment REITs and provides a better matching of expenses with the related benefit of the expenditures. In addition, the Company capitalizes non-recurring items such as access gates and carports initially installed on the property. The Company also capitalizes all deferred maintenance items of an acquisition property which are planned at the time of acquisition to bring the property to satisfactory operating condition. Such renovation of an acquisition property generally takes six to 18 months to complete, depending on the magnitude of the renovations. The Company's management believes that asset quality is one of the most important characteristics of an apartment property. Asset quality can be significantly improved by repositioning the asset through capital improvements that create an attractive, upscale residential appearance, like building facades or enhancements that improve with age, such as landscaping enhancements. The Company's repositioning program includes professional design of exterior buildings and clubhouse interiors. This program also includes interior upgrades such as modern lighting, wall mirrors and crown molding. All of these capital improvements help distinguish the Properties from their aging contemporaries. The economic justification for the Company's repositioning program is the anticipated higher yield on the total cost of a property, which is achieved through sustained high occupancy rates and rental rate increases. For the year ended December 31, 1997, the Company spent approximately $32.4 million of capital expenditures on its Properties, of which $13.9 million related to acquisition renovation costs for properties acquired in 1997 and 1996. An additional $9.2 million was expended on non-recurring items, $0.8 million was expended for repositioning programs and $8.5 million was expended for normal recurring capital expenditures to properties not under renovation (the "Matured Properties") (of which $6.1 million related to the Company's 15,981 same store units, as defined later, resulting in an average cost of $384 per unit). During the first six months of 1998, the Company has spent $10.7 million for recurring and non-recurring capital items, and $9.5 million for repositioning and acquisition rehabilitation costs. Recurring and non-recurring capital expenditures and repositioning and rehabilitation are anticipated to be approximately $13.3 million and $18.6 million, respectively, for the second half of 1998. 35 37 WALDEN RESIDENTIAL PROPERTIES, INC. APARTMENTS OWNED
TOTAL NUMBER YEAR RENTABLE OF CONSTRUCTION AREA TOTAL METROPOLITAN AREA/PROPERTY LOCATION UNITS COMPLETED(1) (SQ. FT.) ACREAGE - -------------------------- -------- ------- ------------ ---------- -------- AUSTIN Arbors of Austin* Austin, TX 226 1985 154,920 9.68 Arbors of Wells Branch* Austin, TX 212 1986 156,228 11.20 Ashbury Parke* Austin, TX 416 1983 278,936 13.20 Audubon Square* Austin, TX 164 1985 139,476 6.50 Harper's Creek Austin, TX 268 1982 201,838 8.00 Lakes of Renaissance* Austin, TX 308 1987 215,024 11.60 Oak Ridge* Austin, TX 253 1978 173,699 9.29 Pinto Creek Austin, TX 249 1985 199,146 22.60 Polo Club Austin, TX 304 1986 203,784 11.20 Shadow Creek* Austin, TX 420 1982 314,936 18.02 Trestles of Austin Austin, TX 396 1984 275,904 10.66 ------ ---- ---------- -------- Austin Total/ Weighted Average 3,216 1984 2,313,891 131.95 ------ ---- ---------- -------- CORPUS CHRISTI Rafters, The* Corpus Christi, TX 250 1984 216,496 12.00 Wharf, The* Corpus Christi, TX 250 1984 216,496 17.13 Willowick* Corpus Christi, TX 250 1984 216,496 12.00 ------ ---- ---------- -------- Corpus Christi Total/ Weighted Average 750 1984 649,488 41.13 ------ ---- ---------- -------- DALLAS/FT. WORTH Arbor Creek* Dallas, TX 280 1984 216,676 12.22 Arbors of Bedford* Bedford, TX 204 1983 161,332 8.56 Arbors of Carrollton* Carrollton, TX 131 1984 112,418 8.56 Arbors of Euless* Euless, TX 272 1984 213,794 12.82 Bent Creek* Dallas, TX 326 1980 234,082 11.72 Braden's Walk* Bedford, TX 706 1983 514,220 32.79 Brittany Park* Dallas, TX 217 1978 193,556 8.67 Canyon Ridge* Dallas, TX 164 1983 120,812 7.33 Casa Valley* Dallas, TX 150 1986 130,926 5.46 Cinnamon Park* Arlington, TX 272 1985 213,192 13.00 Clover Hill* Arlington, TX 216 1984 178,928 8.87 Creekwood Village* Dallas, TX 362 1985 256,584 9.40 Fielder's Glen Arlington, TX 220 1985 165,752 10.00 Gables, The McKinney, TX 220 1986 169,880 10.00 Greens Crossing Dallas, TX 364 1984 262,761 10.50 Hillcrest* Grand Prairie, TX 310 1984 204,146 12.94 Hilltop* North Richland Hills, TX 238 1984 179,256 12.20 Montfort Oaks* Dallas, TX 276 1979 215,476 12.07 Newport Irving, TX 308 1982 238,768 12.40 Parks at Treepoint* Arlington, TX 586 1985 471,968 29.52 Pinnacle* Lewisville, TX 150 1985 119,774 6.30 Post Oak Place* Euless, TX 354 1983 255,798 11.08
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TOTAL NUMBER YEAR RENTABLE OF CONSTRUCTION AREA TOTAL METROPOLITAN AREA/PROPERTY LOCATION UNITS COMPLETED(1) (SQ. FT.) ACREAGE - -------------------------- -------- ------- ------------ ---------- -------- Preston Greens* Dallas, TX 256 1980 246,340 11.21 Reflections of Highpoint Dallas, TX 372 1986 281,940 11.10 Remington Hill Fort Worth, TX 440 1986 339,008 15.00 Rivercrest Arlington, TX 420 1979 337,056 19.30 Shadow Creek* North Richland Hills, TX 240 1986 181,896 12.20 Shadowridge Village* Dallas, TX 144 1985 118,804 5.97 Sierra Springs Bedford, TX 286 1985 211,006 15.96 Springfield Mesquite, TX 264 1985 193,212 9.00 Summer Meadows Plano, TX 389 1986 323,434 21.60 Summer Villas Dallas, TX 460 1984 328,020 15.80 Summers Crossing Plano, TX 293 1986 238,697 15.70 Summers Landing* Fort Worth, TX 196 1985 139,300 7.80 Trinity Mills* Dallas, TX 208 1982 162,960 10.53 Trinity Oaks* Dallas, TX 240 1983 150,318 4.90 Waterford on the Meadow* Plano, TX 350 1985 310,746 21.98 ------ ---- ---------- -------- Dallas Total/Weighted Average 10,884 1984 8,392,836 464.46 ------ ---- ---------- -------- HOUSTON Arbor Point* Houston, TX 65 1984 57,000 2.20 Ashton Woods* Houston, TX 177 1978 151,142 6.85 Aston Brook* Houston, TX 152 1982 119,376 5.29 Bar Harbor* Houston, TX 316 1983 209,076 13.19 Bayou Oaks* Houston, TX 210 1984 158,470 6.08 Brandon Oaks* Houston, TX 196 1984 168,856 8.00 Briarcrest* Houston, TX 376 1982 296,760 13.90 Brookfield* Houston, TX 250 1984 188,974 10.93 Carriage Hill* Houston, TX 252 1980 242,088 11.20 Central Park Condos* Houston, TX 93 1985 99,080 7.20 Central Park Regency* Houston, TX 348 1983 318,968 13.38 Charleston, The* Houston, TX 312 1981 226,499 5.69 Cimarron Park Houston, TX 162 1984 134,756 6.50 Cimarron Parkway* Houston, TX 272 1983 238,264 9.26 Colony Oaks* Houston, TX 162 1967 166,830 6.20 Colorado Club* Houston, TX 300 1986 225,788 10.13 Copper Cove* Houston, TX 270 1983 204,240 7.00 Enclave at Cypress Park* Houston, TX 384 1984 329,844 11.20 Foxboro Houston, TX 220 1982 162,712 6.30 Georgetown* Houston, TX 156 1968 237,328 34.40 Harbor Pointe* Houston, TX 198 1968 178,700 4.80 Harpers Mill* Houston, TX 180 1981 143,252 6.79 Hidden Lake* Houston, TX 440 1986 318,748 32.63 Holiday on Hayes* Houston, TX 312 1981 250,564 10.47 Hunt Club, The* Houston, TX 204 1984 135,948 8.25 Huntley, The* Houston, TX 214 1985 165,054 7.35 Laurel Creek Houston, TX 428 1985 323,568 15.80 Live Oak* Houston, TX 162 1978 121,558 5.49
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TOTAL NUMBER YEAR RENTABLE OF CONSTRUCTION AREA TOTAL METROPOLITAN AREA/PROPERTY LOCATION UNITS COMPLETED(1) (SQ. FT.) ACREAGE - -------------------------- -------- ------- ------------ ---------- -------- Meadows on Memorial* Houston, TX 96 1982 94,940 3.56 Mill Creek* Houston, TX 174 1982 149,640 5.59 Monticello on Cranbrook* Houston, TX 244 1983 203,500 11.20 Northwoods* Houston, TX 200 1978 237,636 17.44 One Camden Court* Houston, TX 136 1982 104,216 4.47 One Cypress Landing* Houston, TX 464 1979 358,156 15.27 One Westfield Lake* Houston, TX 246 1984 269,454 19.98 One Willow Chase* Houston, TX 136 1983 104,216 4.36 One Willow Park* Houston, TX 178 1984 140,165 6.00 Pathway, The* Houston, TX 144 1978 139,498 5.95 Pine Creek* Houston, TX 216 1980 170,184 8.06 Polo Club on Cranbrook I* Houston, TX 228 1981 161,456 9.30 Polo Club on Cranbrook II* Houston, TX 292 1982 215,080 7.00 Retreat at Eldridge Houston, TX 168 1998 158,304 12.54 Richmond Green* Houston, TX 224 1980 214,494 8.76 Riverwalk* Houston, TX 184 1984 140,560 7.58 Silverado* Houston, TX 344 1979 248,960 11.31 South Green Houston, TX 268 1982 219,948 8.9 Stony Creek* Houston, TX 252 1980 194,240 9.30 Timbers of Cranbrook* Houston, TX 274 1984 206,884 9.50 Tranquility Lake* Houston, TX 90 1983 84,446 10.10 Wimbledon* Houston, TX 161 1978 154,601 6.30 Woodborough* Houston, TX 320 1983 222,640 10.30 Woodchase* Houston, TX 270 1978 252,542 9.98 Woodedge* Houston, TX 126 1982 113,850 6.65 Woodlake* Houston, TX 315 1976 242,587 8.28 ------ ---- ---------- -------- Houston Total/ Weighted Average 12,561 1982 10,375,640 524.16 ------ ---- ---------- -------- SAN ANTONIO Costa del Sol* San Antonio, TX 244 1985 180,798 10.00 Country View San Antonio, TX 272 1981 213,120 11.00 Remington* San Antonio, TX 158 1986 112,018 4.90 Summer Oaks* San Antonio, TX 256 1983 171,464 9.50 Villas of St. Moritz* San Antonio, TX 216 1986 149,040 7.50 ------ ---- ---------- -------- San Antonio Total/ Weighted Average 1,146 1984 826,440 42.90 ------ ---- ---------- -------- OTHER TEXAS Fountaingate* Wichita Falls, TX 280 1980 252,040 17.79 Settler's Cove Beaumont, TX 182 1982 133,654 6.24 ------ ---- ---------- -------- Other Texas Total/ Weighted Average 462 1981 385,694 24.03 ------ ---- ---------- -------- Texas Total/ Weighted Average 29,019 1983 22,943,989 1,228.63 ------ ---- ---------- --------
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TOTAL NUMBER YEAR RENTABLE OF CONSTRUCTION AREA TOTAL METROPOLITAN AREA/PROPERTY LOCATION UNITS COMPLETED(1) (SQ. FT.) ACREAGE - -------------------------- -------- ------- ------------ ---------- -------- JACKSONVILLE Bentley Green Jacksonville, FL 444 1986 308,096 25.69 Brookwood Club Jacksonville, FL 360 1987 287,480 15.00 Huntington at Hidden Hills Jacksonville, FL 224 1986 183,200 14.97 Remington at Ponte Vedra Ponte Vedra Beach, FL 344 1986 302,904 28.60 Sandpiper Jacksonville, FL 376 1985 289,112 17.00 ------ ---- ---------- -------- Jacksonville Total/ Weighted Average 1,748 1986 1,370,792 101.26 ------ ---- ---------- -------- TAMPA Ashton Park* Tampa, FL 192 1988 152,072 10.93 Bel Shores Largo, FL 250 1985 189,874 22.30 Carlyle at Waters Tampa, FL 392 1986 281,893 13.00 Oak Ramble Tampa, FL 256 1985 229,384 20.56 South Pointe Tampa, FL 112 1986 97,232 5.0 St. James Crossing* Tampa, FL 264 1986 198,424 21.46 Three Palms Tampa, FL 438 1986 369,362 34.70 ------ ---- ---------- -------- Tampa Total/ Weighted Average 1,904 1986 1,518,241 127.60 ------ ---- ---------- -------- OTHER FLORIDA Saratoga Melbourne, FL 210 1986 146,732 14.00 ------ ---- ---------- -------- Florida Total/ Weighted Average 3,862 1986 3,035,765 243.21 ------ ---- ---------- -------- PHOENIX Casa Verde Phoenix, AZ 268 1983 178,140 8.23 Crestwood* Phoenix, AZ 276 1984 149,433 8.29 Fairways, The* Phoenix, AZ 160 1981 118,192 5.80 Garden Place* Phoenix, AZ 286 1979 231,120 14.20 Meadow Glen Glendale, AZ 290 1987 242,020 11.20 Terra Vida Mesa, AZ 384 1988 305,600 15.40 Woodstone Phoenix, AZ 696 1986 573,564 19.70 ------ ---- ---------- -------- Phoenix Total/ Weighted Average 2,360 1985 1,798,069 82.82 ------ ---- ---------- -------- OKLAHOMA CITY Copperfield Oklahoma City, OK 262 1983 187,080 7.70 Hunter's Ridge Oklahoma City, OK 212 1984 155,587 6.00 Summerfield Place Oklahoma City, OK 224 1981 154,528 9.00 Woodscape Oklahoma City, OK 498 1985 363,073 15.60 ------ ---- ---------- -------- Oklahoma City Total/ Weighted Average 1,196 1984 860,268 38.30 ------ ---- ---------- -------- TULSA Burning Tree Tulsa, OK 256 1978 156,848 11.32 Cinnamon Stick Tulsa, OK 424 1978 256,672 14.57
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TOTAL NUMBER YEAR RENTABLE OF CONSTRUCTION AREA TOTAL METROPOLITAN AREA/PROPERTY LOCATION UNITS COMPLETED(1) (SQ. FT.) ACREAGE - -------------------------- -------- ------- ------------ ---------- -------- Lift, The Tulsa, OK 328 1979 194,168 14.23 ------ ---- ---------- -------- Tulsa Total/Weighted Average 1,008 1978 607,688 40.12 ------ ---- ---------- -------- Oklahoma Total/ Weighted Average 2,204 1981 1,467,956 78.42 ------ ---- ---------- -------- NASHVILLE Brandywine* Nashville, TN 300 1985 203,418 21.00 Nashboro Village* Nashville, TN 994 1982 959,153 60.73 Raintree Nashville, TN 332 1985 216,930 24.90 Windsor Park Hendersonville, TN 232 1985 151,954 13.35 ------ ---- ---------- -------- Nashville Total/ Weighted Average 1,858 1984 1,531,455 119.98 ------ ---- ---------- -------- SALT LAKE CITY James Pointe Murray, UT 312 1985 236,928 11.60 Stillwater Murray, UT 456 1986 343,216 15.34 ------ ---- ---------- -------- Salt Lake City Total/ Weighted Average 768 1986 580,144 26.94 ------ ---- ---------- -------- ATLANTA Parkway Station* Atlanta, GA 344 1986 369,960 28.63 Saratoga Springs* Atlanta, GA 266 1985 223,402 20.00 Shannon Chase* Atlanta, GA 156 1987 163,400 26.00 Villas at Indian Trails* Atlanta, GA 236 1986 242,044 39.70 ------ ---- ---------- -------- Atlanta Total/ Weighted Average 1,002 1986 998,806 114.33 ------ ---- ---------- -------- SAN DIEGO Felicita Creek* San Diego, CA 136 1987 104,440 6.20 Park Bonita* San Diego, CA 184 1984 154,256 11.12 Sun Ridge* San Diego, CA 160 1986 134,800 5.44 ------ ---- ---------- -------- San Diego Total/ Weighted Average 480 1986 393,496 22.76 ------ ---- ---------- -------- OTHER MARKETS Eagle Pointe Indianapolis, IN 256 1988 202,000 19.77 Silverado* Albuquerque, NM 256 1985 183,656 8.10 Winridge Aurora, CO (Denver) 364 1986 303,438 15.80 ------ ---- ---------- -------- Other Markets Total/ Weighted Average 876 1986 689,094 43.67 ------ ---- ---------- -------- Total/Weighted Average 42,429 1983 33,438,774 1,960.76 ====== ==== ========== ========
- --------------- (1) Year construction completed indicates the year in which the final certificate of occupancy for the property was issued. * Represents properties owned by WDOP. 40 42
AVERAGE MONTHLY RENTAL UNIT TYPE OCCUPANCY RATE PER UNIT ---------------------- AVERAGE ----------------- ----------------- 3BR/ APT SIZE AUGUST DECEMBER AUGUST DECEMBER 1BR 2BR 4BR (SQ. FT.) 1998 1997 1998 1997 ------ ------ ---- --------- ------ -------- ------ -------- AUSTIN Arbors of Austin 182 44 -- 685 94.5% 96.0% $556 $551 Arbors of Wells Branch 164 48 -- 737 98.3% 97.1% 602 595 Ashbury Parke 304 112 -- 671 97.5% 95.2% 560 549 Audubon Square 36 128 -- 850 97.3% 94.8% 626 611 Harper's Creek 228 40 -- 753 98.3% 95.8% 573 570 Lakes of Renaissance 218 84 6 698 95.3% 97.1% 594 579 Oakridge 151 102 -- 687 97.7% 97.5% 592 563 Pinto Creek 162 87 -- 800 90.3% 95.4% 663 636 Polo Club 240 64 -- 670 96.4% 95.2% 554 534 Shadow Creek 354 66 -- 750 94.0% 94.6% 541 531 Trestles of Austin 252 144 -- 697 81.6% 93.6% 624 613 ------ ------ --- ----- ---- ---- ---- ---- Austin Total/Weighted Average 2291 919 6 719 94.1% 95.5% 586 572 ------ ------ --- ----- ---- ---- ---- ---- CORPUS CHRISTI Rafters, The 74 132 44 866 93.5% 92.8% 584 573 Wharf, The 74 132 44 866 92.4% 94.1% 593 599 Willowick 74 132 44 866 94.7% 94.9% 607 595 ------ ------ --- ----- ---- ---- ---- ---- Corpus Christi Total/Weighted Average 222 396 132 866 93.5% 93.9% 595 589 ------ ------ --- ----- ---- ---- ---- ---- DALLAS/FT. WORTH Arbor Creek 136 144 -- 774 93.6% 92.8% 619 593 Arbors of Bedford 128 76 -- 791 93.7% 89.7% 572 569 Arbors of Carrollton 55 76 -- 858 93.9% 95.7% 626 624 Arbors of Euless 136 136 -- 786 91.5% 91.7% 583 556 Bent Creek 284 42 -- 718 95.4% 93.9% 504 495 Braden's Walk(1) 468 238 -- 728 95.3% N/A 542 N/A Brittany Park 149 68 -- 892 96.8% 91.8% 633 625 Canyon Ridge 76 88 -- 737 97.6% 97.2% 589 573 Casa Valley 120 30 -- 873 91.7% 94.2% 717 704 Cinnamon Park 144 112 16 784 93.0% 90.6% 571 563 Clover Hill 104 112 -- 828 96.0% 92.6% 540 530 Creekwood Village 328 34 -- 709 94.6% 95.9% 534 519 Fielder's Glen 140 80 -- 753 96.4% 93.4% 546 513 Gables, The 160 60 -- 772 93.7% 94.8% 622 617 Greens Crossing 292 72 -- 722 93.2% 89.9% 508 495 Hillcrest 264 46 -- 659 95.6% 94.3% 482 472 Hilltop 150 88 -- 753 93.5% 95.6% 519 528 Montfort Oaks 160 116 -- 781 94.7% 98.1% 622 605 Newport 208 100 -- 775 99.4% 94.4% 561 575 Parks at Treepoint 276 294 16 805 96.0% 92.7% 551 543 Pinnacle 86 64 -- 798 92.1% 95.5% 639 610 Post Oak Place 270 84 -- 723 92.9% 91.3% 553 541 Preston Greens 164 92 -- 962 70.8% 91.4% 726 693 Reflections of Highpoint 276 96 -- 758 89.6% 92.6% 627 613
41 43
AVERAGE MONTHLY RENTAL UNIT TYPE OCCUPANCY RATE PER UNIT ---------------------- AVERAGE ----------------- ----------------- 3BR/ APT SIZE AUGUST DECEMBER AUGUST DECEMBER 1BR 2BR 4BR (SQ. FT.) 1998 1997 1998 1997 ------ ------ ---- --------- ------ -------- ------ -------- Remington Hill 300 140 -- 770 97.5% 93.3% 577 563 Rivercrest 320 100 -- 803 94.1% 89.3% 526 535 Shadow Creek 120 120 -- 758 94.5% 93.6% 549 545 Shadowridge Village 112 32 -- 825 96.8% 87.7% 619 614 Sierra Springs(1) 160 126 -- N/A N/A N/A N/A N/A Springfield 192 72 -- 732 98.5% 95.4% 547 534 Summer Meadows 236 153 -- 831 87.0% 92.0% 685 667 Summer Villas 380 80 -- 713 95.4% 91.9% 583 565 Summers Crossing 215 78 -- 815 94.7% 94.7% 669 652 Summers Landing 172 24 -- 711 92.2% 97.0% 582 563 Trinity Mills 128 80 -- 783 98.6% 91.3% 635 612 Trinity Oaks 189 51 -- 626 96.8% 96.9% 547 538 Waterford on the Meadow 102 248 -- 888 98.2% 93.0% 667 654 ------ ------ --- ----- ---- ---- ---- ---- Dallas Total/Weighted Average 7,200 3,652 32 771 98.0% 92.6% 581 569 ------ ------ --- ----- ---- ---- ---- ---- HOUSTON Arbor Point 43 22 -- 877 92.8% 97.0% 659 631 Ashton Woods 76 74 27 854 94.2% 93.2% 522 496 Aston Brook 88 64 -- 785 98.6% 95.5% 497 463 Bar Harbor 260 56 -- 662 95.4% 92.8% 510 487 Bayou Oaks 138 72 -- 755 98.4% 96.9% 495 480 Brandon Oaks 88 108 -- 862 96.7% 90.2% 569 540 Briarcrest 232 144 -- 789 95.9% 90.5% 529 511 Brookfield 190 60 -- 756 96.0% 95.8% 529 505 Carriage Hill 96 120 36 961 98.2% 95.5% 590 568 Central Park Condos 29 52 12 1,065 93.4% 97.2% 743 715 Central Park Regency 132 216 -- 917 95.1% 95.6% 593 570 Charleston, The 228 84 -- 726 96.3% 96.1% 487 452 Cimarron Park 100 54 8 832 97.8% 95.2% 567 546 Cimarron Parkway 216 56 -- 876 97.4% 97.1% 550 536 Colony Oaks 92 70 -- 1,030 95.7% 97.6% 620 604 Colorado Club 220 80 -- 753 96.4% 96.4% 536 523 Copper Cove 192 78 -- 756 91.2% 88.8% 508 496 Enclave at Cypress Park 232 124 28 859 95.3% 93.7% 574 563 Foxboro 160 60 -- 740 94.0% 93.0% 500 487 Georgetown 42 33 81 1,521 99.1% 97.9% 975 941 Harbor Pointe 90 104 4 903 91.6% 91.4% 648 636 Harpers Mill 88 92 -- 796 94.7% 90.7% 476 462 Hidden Lake 288 152 -- 724 94.1% 96.4% 672 639 Holiday on Hayes 172 140 -- 803 96.8% 96.2% 563 536 Hunt Club, The 168 36 -- 666 94.1% 97.7% 472 456 Huntley, The 128 86 -- 771 96.2% 95.8% 651 617 Laurel Creek 304 100 24 756 94.5% 93.2% 596 578 Live Oak 136 26 -- 750 91.1% 95.5% 539 515 Meadows on Memorial -- 75 21 989 95.3% 97.6% 638 612
42 44
AVERAGE MONTHLY RENTAL UNIT TYPE OCCUPANCY RATE PER UNIT ---------------------- AVERAGE ----------------- ----------------- 3BR/ APT SIZE AUGUST DECEMBER AUGUST DECEMBER 1BR 2BR 4BR (SQ. FT.) 1998 1997 1998 1997 ------ ------ ---- --------- ------ -------- ------ -------- Mill Creek 76 98 -- 860 96.4% 97.4% 505 484 Monticello on Cranbrook 73 171 -- 834 98.4% 96.8% 524 502 Northwoods -- 100 100 1,188 99.0% 96.2% 699 675 One Camden Court 60 76 -- 766 95.5% 95.6% 441 422 One Cypress Landing 396 68 -- 772 96.0% 90.9% 465 442 One Westfield Lake 72 126 48 1,095 96.8% 95.5% 667 637 One Willow Chase 60 76 -- 766 98.1% 97.5% 508 482 One Willow Park 131 47 -- 787 94.7% 96.9% 532 509 Pathway, The 136 8 -- 969 96.4% 96.4% 684 655 Pine Creek 128 88 -- 788 95.3% 91.9% 496 475 Polo Club on Cranbrook I 156 72 -- 708 95.1% 94.3% 452 429 Polo Club on Cranbrook II 176 116 -- 737 95.7% 91.4% 465 443 Retreat at Eldridge(1) 108 60 -- 942 N/A N/A N/A N/A Richmond Green 74 150 -- 958 97.5% 97.7% 662 644 Riverwalk 128 56 -- 764 98.0% 94.9% 537 527 Silverado 272 72 -- 724 97.1% 97.3% 552 526 South Green(1) 172 96 -- 821 N/A N/A N/A N/A Stoney Creek 164 88 -- 771 95.3% 96.7% 480 464 Timbers of Cranbrook 184 90 -- 755 91.8% 95.5% 526 470 Tranquility Lake 35 55 -- 938 97.0% 98.0% 731 699 Wimbledon 49 106 6 960 98.1% 96.8% 598 567 Woodborough 240 80 -- 696 96.0% 95.4% 456 428 Woodchase 86 184 -- 935 96.7% 94.5% 615 601 Woodedge 21 104 1 904 98.3% 95.4% 569 541 Woodlake 260 52 3 770 92.7% 95.8% 548 517 ------ ------ --- ----- ---- ---- ---- ---- Houston Total/Weighted Average 7,485 4,677 399 826 95.7% 94.9% 558 535 ------ ------ --- ----- ---- ---- ---- ---- SAN ANTONIO Costa Del Sol 170 74 -- 741 93.2% 89.6% 506 522 Country View 176 96 -- 784 95.5% 96.3% 488 486 Remington 108 50 -- 709 95.5% 91.6% 492 504 Summer Oaks 184 72 -- 670 96.5% 91.0% 447 464 Villas of St. Moritz 136 80 -- 690 99.1% 98.5% 480 483 San Antonio Total/Weighted Average 774 372 -- 721 94.3% 93.5% 482 491 ------ ------ --- ----- ---- ---- ---- ---- OTHER TEXAS Fountaingate 160 104 16 900 94.2% 89.6% 523 526 Settler's Cove 138 44 -- 734 93.7% 94.8% 516 501 Other Texas Total/Weighted Average 298 148 16 835 94.0% 91.6% 520 516 ------ ------ --- ----- ---- ---- ---- ---- Texas Total/Weighted Average 18,588 10,259 601 789 96.3% 93.9% 567 551 ------ ------ --- ----- ---- ---- ---- ----
43 45
AVERAGE MONTHLY RENTAL UNIT TYPE OCCUPANCY RATE PER UNIT ---------------------- AVERAGE ----------------- ----------------- 3BR/ APT SIZE AUGUST DECEMBER AUGUST DECEMBER 1BR 2BR 4BR (SQ. FT.) 1998 1997 1998 1997 ------ ------ ---- --------- ------ -------- ------ -------- JACKSONVILLE Bentley Green 336 108 -- 694 95.7% 94.0% 556 559 Brookwood Club 200 160 -- 799 92.9% 87.0% 768 547 Huntington at Hidden Hills 64 160 -- 818 94.6% 95.6% 566 541 Remington at Ponte Vedra 136 208 -- 881 96.0% 93.1% 662 651 Sandpiper 200 144 32 769 96.4% 89.7% 561 548 ------ ------ --- ----- ---- ---- ---- ---- Jacksonville Total/Weighted Average 936 780 32 784 95.2% 91.6% 623 570 ------ ------ --- ----- ---- ---- ---- ---- TAMPA Ashton Park(1) 122 70 -- 792 92.2% N/A 583 N/A Bel Shores 138 112 -- 759 91.2% 93.9% 622 608 Carlyle at Waters 310 82 -- 719 93.4% 90.6% 522 511 Oak Ramble 128 128 -- 896 90.9% 94.3% 626 621 South Pointe(1) 72 40 -- 868 94.2% N/A 655 N/A St. James Crossing(1) 176 88 -- 752 94.2% N/A 531 N/A Three Palms 254 184 -- 843 96.3% 86.0% 632 623 ------ ------ --- ----- ---- ---- ---- ---- Tampa Total/Weighted Average 1,200 704 -- 786 93.5% 90.4% 590 587 ------ ------ --- ----- ---- ---- ---- ---- OTHER FLORIDA Saratoga 160 50 -- 699 97.1% 93.4% 563 514 Florida Total/Weighted Average 2,296 1,534 32 786 94.5% 91.3% 603 573 ------ ------ --- ----- ---- ---- ---- ---- PHOENIX Casa Verde 184 84 -- 665 98.1% 93.3% 425 408 Crestwood 255 21 -- 541 96.9% 95.5% 475 450 Fairways, The 108 52 -- 739 96.4% 92.8% 561 546 Garden Place 132 154 -- 808 93.2% 94.8% 608 580 Meadow Glen 90 200 -- 835 95.6% 96.3% 636 610 Terra Vida 128 224 32 796 85.1% 96.5% 621 613 Woodstone 432 240 24 824 92.7% 89.5% 600 589 ------ ------ --- ----- ---- ---- ---- ---- Phoenix Total/Weighted Average 1,329 975 56 762 93.2% 93.5% 572 554 ------ ------ --- ----- ---- ---- ---- ---- OKLAHOMA CITY Copperfield 196 66 -- 714 94.3% 94.7% 469 473 Hunter's Ridge 148 64 -- 734 90.9% 90.7% 453 455 Summerfield Place 176 48 -- 690 88.7% 89.9% 445 445 Woodscape 348 150 -- 729 95.2% 88.8% 473 475 ------ ------ --- ----- ---- ---- ---- ---- Oklahoma City Total/Weighted Average 868 328 -- 719 93.0% 90.6% 463 465 ------ ------ --- ----- ---- ---- ---- ---- TULSA Burning Tree 208 48 -- 613 95.3% 97.0% 377 359 Cinnamon Stick 360 64 -- 605 93.6% 92.5% 361 352 Lift, The 280 48 -- 592 91.2% 90.9% 358 348 ------ ------ --- ----- ---- ---- ---- ---- Tulsa Total/Weighted Average 848 160 -- 603 93.3% 93.1% 364 352 ------ ------ --- ----- ---- ---- ---- ---- Oklahoma Total/Weighted Average 1,716 488 -- 666 93.1% 91.8% 418 414 ------ ------ --- ----- ---- ---- ---- ----
44 46
AVERAGE MONTHLY RENTAL UNIT TYPE OCCUPANCY RATE PER UNIT ---------------------- AVERAGE ----------------- ----------------- 3BR/ APT SIZE AUGUST DECEMBER AUGUST DECEMBER 1BR 2BR 4BR (SQ. FT.) 1998 1997 1998 1997 ------ ------ ---- --------- ------ -------- ------ -------- NASHVILLE Brandywine 240 60 -- 678 95.7% 88.0% 535 543 Nashboro Village 456 426 112 965 88.2% 91.0% 641 632 Raintree 252 80 -- 653 96.2% 84.9% 535 545 Windsor Park 186 46 -- 655 94.7% 92.8% 379 534 ------ ------ --- ----- ---- ---- ---- ---- Nashville Total/Weighted Average 1,134 612 112 824 91.7% 89.7% 572 590 ------ ------ --- ----- ---- ---- ---- ---- SALT LAKE CITY James Pointe 144 168 -- 759 97.0% 90.4% 600 588 Stillwater 152 304 -- 753 98.8% 94.5% 604 597 ------ ------ --- ----- ---- ---- ---- ---- Salt Lake City Total/Weighted Average 296 472 -- 755 98.1% 92.9% 602 593 ------ ------ --- ----- ---- ---- ---- ---- ATLANTA Parkway Station(1) 72 164 108 1,075 81.8% N/A 712 N/A Saratoga Springs 128 138 -- 840 96.9% 94.8% 648 635 Shannon Chase 50 106 -- 1,047 91.7% 90.6% 709 674 Villas at Indian Trails 60 176 -- 1,026 84.3% 84.5% 691 684 ------ ------ --- ----- ---- ---- ---- ---- Atlanta Total/Weighted Average 310 584 108 997 88.0% 90.1% 690 662 ------ ------ --- ----- ---- ---- ---- ---- SAN DIEGO Felicita Creek 36 100 -- 768 97.6% 97.9% 692 649 Park Bonita 36 148 -- 838 99.7% 94.0% 825 789 Sun Ridge 16 144 -- 843 97.5% 93.6% 648 629 ------ ------ --- ----- ---- ---- ---- ---- San Diego Total/Weighted Average 88 392 -- 820 98.4% 95.0% 728 696 ------ ------ --- ----- ---- ---- ---- ---- OTHER MARKETS Eagle Pointe 152 104 -- 789 93.0% 90.1% 588 576 Silverado 180 76 -- 717 88.5% 88.6% 554 560 Winridge 262 102 -- 834 93.4% 93.7% 647 627 ------ ------ --- ----- ---- ---- ---- ---- Other Markets Total/Weighted Average 594 282 -- 787 91.9% 91.1% 603 593 ------ ------ --- ----- ---- ---- ---- ---- Total/Weighted Average 26,033 15,503 893 788 95.3% 93.2% $569 $553 ====== ====== === ===== ==== ==== ==== ====
- --------------- (1) Represents recently acquired property for which historical information is not available. PROPERTY MANAGEMENT The Company conducts its property management operations with an experienced staff of professionals and support personnel, including property directors and sales directors. At August 31, 1998, the Company employed approximately 1,259 persons, approximately 1,060 of whom are located at the properties. The depth of the organization is intended to enable the Company to deliver quality services on an uninterrupted basis, thereby promoting resident satisfaction and improving resident retention. Each of the Company's owned or managed properties is operated by a staff specifically selected based on the size, location, age, management plan and marketing plan of the individual property. Personnel are carefully trained in their appropriate areas of expertise, such as property management, marketing and leasing, resident relations and maintenance. The Company's standardized policies and procedures specify reporting requirements and management guidelines to be applied at each property which facilitate management consistency in all markets. The 45 47 Company uses customized software programs to provide on-site, regional and executive management with rapid access to all marketing and accounting information. Weekly marketing reports are prepared by on-site property directors which track each property's leasing status, occupancy rate, prospective resident traffic, unit availability, lease renewals, residents moving in and out of apartments during the week, notices by residents to vacate their apartment and delinquent rental charges or other fees. Accounting elements such as receivables, payables, rent roll status and budget compliance are regularly monitored through this system. Marketing and leasing activities and procedures are designed to comply with all established Federal, state and local laws and regulations. The Company offers leases having six- to 12-month terms, with individual property marketing plans structured to respond to local market conditions. Qualifying standards for prospective residents are established to comply with the affordable housing restrictions placed on certain of the Properties, the FHA and the regulations thereunder and are designed to stabilize service levels and income streams. Fifteen of the properties are currently subject to restrictions that require that a specified number of apartments be offered to persons with lower or moderate income. See "Business and Properties -- Regulation." The Company utilizes standard lease contracts promulgated by local apartment associations to ensure compliance with the most recent legislative and judicial activities related to multifamily properties, as well as to permit uniform lease administration relating to rent collections, security deposit dispositions, evictions, repairs and renewals. EMPLOYEES As of August 31, 1998, the Company had 1,259 employees, of which 199 are located at the Company's headquarters in Dallas, Texas and its regional offices located in Atlanta, Austin, Dallas, Fort Worth, Houston, Jacksonville, Phoenix, San Antonio, Tampa and Tulsa. The remaining 1,060 employees are located at the properties owned by the Company and those fee managed. None of the Company's employees are currently represented by a union. The Company believes that relations with its employees are good. COMPETITION All of the Properties are located in developed areas that include other multifamily properties. The number of multifamily properties in a particular area could have a material effect on the Company's ability to lease units at its Properties or at any newly acquired properties and on the rents charged. Additionally, there are other housing alternatives that compete with the Properties in attracting residents. The Properties also compete directly with single family homes that are available in the markets in which the Properties are located. The Company competes for acquisitions with other entities, such as insurance companies, pension funds, private individuals, investment companies and other REITs, which may have greater resources than the Company. LEGAL PROCEEDINGS Neither the Company nor the Properties are presently subject to any material litigation nor, to the Company's knowledge, is any material litigation threatened against the Company or the Properties. The Company and the Properties are occasionally subjected to routine litigation arising in the ordinary course of business, which has been and is expected to be covered by liability insurance and none of which has had or is expected to have a material adverse effect on the business, financial condition, results of operations or cash flows of the Company. REGULATION General. Apartment community properties are subject to various laws, ordinances and regulations, including regulations relating to recreational facilities such as swimming pools, activity centers and other common areas. The Company believes that it has the necessary permits and approvals under present laws, ordinances and regulations to operate its business in the manner described herein. 46 48 Americans with Disabilities Act. The Properties and any newly acquired or developed multifamily properties must comply with Title III of the Americans with Disabilities Act of 1990 (the "ADA") to the extent that such properties are "public accommodations" and/or "commercial facilities" as defined by the ADA. Compliance with the ADA requirements could require removal of structural barriers to handicapped access in certain public areas of the Properties where such removal is readily achievable. The ADA does not, however, consider residential properties, such as multifamily properties, to be public accommodations or commercial facilities, except to the extent that portions of such facilities, such as leasing offices, are open to the public. The Company obtained structural reports from third-party consultants specifying certain modifications to certain of the Properties that needed to be made in order to bring such properties into full compliance with the ADA. The Company has substantially completed such modifications. Fair Housing Amendments Act of 1988. The FHA requires multifamily properties first occupied after March 13, 1990 to be accessible to the handicapped. Noncompliance with the FHA could result in the imposition of fines or an award of damages to private litigants. All of the Company's Properties were occupied prior to March 13, 1990. Affordable Housing Restrictions. The Company has 15 properties which are subject to restrictions requiring that a specified percentage of the apartment units in such Properties be offered to households with lower or moderate incomes (currently, 70% of the total number of apartment units in the 15 affected properties and 9% of the total number of the Company's apartment units). Generally, these provisions originated from the use of tax exempt financing in those instances where it was determined that the benefits of the lower interest rate associated with such financing offset the potential reduction of rental income resulting from such rental restrictions. In addition, three of these properties are subject to limits on the amount of rent that can be charged for certain of the apartment units. The Company believes it is in compliance with these restrictions. These restrictions have not had a material adverse effect on the Company's operations or ability to rent the units, and management does not anticipate that such restrictions will have a material adverse effect on future operations or possible sales of the 15 properties in the future. Rent Control Legislation. State and local rent control laws in certain jurisdictions limit a property owner's ability to increase rents and to recover from residents increases in operating expenses and the costs of capital improvements. Enactment of such laws has been considered from time to time in other jurisdictions, although none of the jurisdictions in which the Company presently operates has adopted such laws. The Company does not presently own, nor does it intend to acquire, multifamily properties in markets that are either subject to rent control or in which rent limiting legislation exists. ENVIRONMENTAL MATTERS Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and remediate hazardous or toxic substances or petroleum product releases at such property and may be held liable to a government entity or third party for property damage, investigation and remediation costs incurred by such parties in connection with such contamination. Such laws typically impose cleanup responsibility and liability without regard to whether the owner or operator knew of, or caused the presence of, the contaminants. The costs of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's ability to sell or rent such real estate or to borrow using such real estate as collateral. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Individuals who arrange for the disposal or treatment of hazardous or toxic substances may be held liable for the costs of investigation, remediation or removal of such hazardous or toxic substances at or from the disposal or treatment facility regardless of whether such facility is owned or operated by such person. Finally, the owner of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. Certain federal, state and local laws, ordinances and regulations govern the removal, encapsulation or disturbance of asbestos-containing materials ("ACMs") when such materials are in poor condition or in the 47 49 event of the remodeling, renovation or demolition of a building. Such laws may impose liability for the release of ACMs and may provide for third parties to seek recovery from owners or operators of real estate for personal injury associated with ACMs. In connection with the ownership and operation of its properties, the Company may be potentially liable for costs in connection with the matters discussed above. All of the Properties have been the subject of environmental assessments, which are intended to reveal information regarding, and to evaluate the environmental condition of, the surveyed properties and surrounding properties. The environmental assessments generally include a historical review, a public records review, a preliminary investigation of the site and surrounding properties, screening for the presence of asbestos and equipment containing polychlorinated biphenyls and underground storage tanks and the preparation and issuance of a written report, but do not include soil sampling or subsurface investigations. The environmental assessments on each of the 155 Properties have revealed elevated lead content in the drinking water at three of the Properties and ACMs at 75 of the Properties (some of which is friable, but in good and manageable condition). The consulting firm that conducted the environmental studies has prepared an operations and maintenance program recommending procedures to be followed in dealing with ACMs if they are moved or otherwise disturbed. The cost to the Company resulting from any future disturbance of the ACMs will depend upon the magnitude of the disturbance and the location of the ACMs. The consulting firm advised the Company that it is not required by Federal law to take any action to address the lead levels in the water; however, the Company is currently evaluating the remedial actions and notification options. The Company anticipates any such remedial actions and notifications for these matters will cost between $760,000 and $780,000 in the aggregate, which will be capitalized when incurred and is expected to be funded through the Properties' cash flow from operations. Environmental assessments performed on the Properties have not revealed any environmental liability that the Company believes would have a material adverse effect on the Company's business, assets, or results of operations, nor is the Company aware of any such environmental liability. Nevertheless, it is possible that these assessments did not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. Moreover, no assurances can be given that (i) future laws, ordinances or regulations will not require any material expenditures by or impose any material liabilities on the Company in connection with environmental conditions by or on the Company or its properties, (ii) the current environmental condition of a property will not be adversely affected by residents and occupants of such property, by the condition of properties in the vicinity of such property (such as the presence of underground storage tanks) or by third parties unrelated to the Company, or (iii) prior owners of the Properties did not create environmental problems of which the Company is not aware. The Company believes the Properties are in compliance in all material respects with all Federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances or petroleum products. Except as otherwise described above, the Company has not been notified by any governmental authority, and is not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products with respect to any of the Properties. The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimatable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remediation feasibility study. Such accruals are adjusted as further information develops or circumstances change. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. Management is not aware of any environmental remediation obligations which would materially affect the operations, financial position or cash flows of the Company. INSURANCE The Company carries comprehensive liability, fire, extended coverage and rental loss insurance with respect to all of the Properties, with policy specifications, insured limits and deductibles customarily carried for similar properties. There are, however, certain types of losses (such as losses arising from earthquakes or wars) that are not generally insured because they are either uninsurable or not economically insurable. Should 48 50 an uninsured loss or a loss in excess of insured limits occur, the Company could lose its capital invested in the affected property, as well as the anticipated future revenues from such property and would continue to be obligated on any mortgage indebtedness or other obligations related to the property. Any such loss could adversely affect the Company. Management believes that the Properties are currently adequately insured in accordance with industry standards. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (of which this Prospectus is a part) on Form S-11 under the Securities Act, with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and financial statements thereto. Statements contained in this Prospectus as to the content of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of the document filed as an exhibit to the Registration Statement or incorporated herein by reference, each statement being qualified in all respects by that reference and the exhibits to the Registration Statement. For further information regarding the Company and the securities offered hereby, reference is hereby made to the Registration Statement and the exhibits to the Registration Statement which may be obtained for a fee from the Commission at its principal office in Washington, D.C. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in accordance therewith, files reports, proxy statements and other information with the Commission. Reports, proxy statements and other information filed by the Company can be inspected and copied at the offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at its Regional Offices located in Chicago, Illinois; and New York, New York. Copies of such material can be obtained for a fee from the Public Reference Section of the Commission in Washington, D.C. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's Web site is: http://www.sec.gov. The Common Stock is listed on, and the 9.00% Redeemable Preferred Stock is approved for listing on, the New York Stock Exchange, Inc. (the "NYSE") and reports, proxy statements and other information concerning the Company can be inspected at the offices of the NYSE in New York, New York. The Company furnishes its stockholders with annual reports containing financial statements audited by its independent auditors. POLICIES WITH RESPECT TO CERTAIN ACTIVITIES The following is a discussion of the Company's current policies with respect to investments, financing, affiliate transactions and certain other activities. The Company's policies with respect to these activities have been established by Management. These policies may be amended or waived from time to time at the discretion of the Board of Directors without a vote of the stockholders of the Company. No assurance can be given that the Company's investment objectives will be attained or that the value of the Company will not decrease. INVESTMENT POLICIES Investments in Real Estate or Interests in Real Estate. The Company's primary business objective is to maximize stockholder value by maintaining long-term growth in cash available for distribution to its stockholders. The Company intends to pursue this objective by continuing to acquire and develop garden apartment properties for long-term ownership and to manage its properties, and thereby seek to maximize current and long-term net income and the value of its assets. The Company's policy is to acquire and develop assets where the Company believes that opportunities exist for acceptable investment returns. See "The Company -- Business Strategies." 49 51 The Company expects to pursue its investment objectives primarily through the direct ownership of properties. The Company currently invests in developed garden apartment communities primarily located in its Target Markets. However, future investment activities will not be limited to any geographic area or product type or to a specified percentage of the Company's assets. Although the Company is not currently doing so, it may also participate with other entities in property ownership, through joint ventures or other types of common ownership. Equity investments may be subject to existing mortgage financing and other indebtedness which have priority over the equity interests of the Company. Investments in Real Estate Mortgages. While the Company intends to emphasize equity real estate investments, it may, at its discretion, invest in mortgages or other real estate interests consistent with its qualification as a REIT. The Company may also invest in participating or convertible mortgages if the Board of Directors concludes that the Company and its stockholders may benefit from the cash flow or any appreciation in the value of the subject property. Such mortgages are similar to equity participation. The mortgages in which the Company may invest may be either first mortgages or junior mortgages and may or may not be insured by a governmental agency. Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers. Subject to the percentage of ownership limitations and gross income tests necessary for REIT qualification, the Company also may invest in securities of entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities, although it does not currently intend to do so. See "Federal Income Tax Considerations -- Taxation of the Company as a REIT." Periodic Review of Assets. The Company intends to dispose of certain Properties. The Company reserves the right to dispose of any Property if the Company determines that the disposition of such Property is in the best interests of the Company and its stockholders. FINANCING POLICIES As a general policy, the Company intends to maintain a ratio of total indebtedness to market capitalization (i.e., the market value of issued and outstanding shares of capital stock plus total debt) of less than 50%. However, no assurance can be given that the Company will be able to accomplish this objective. The debt-to-total market capitalization ratio is based upon the stock market value of equity, and accordingly fluctuates with changes in the price of the shares and differs from a debt-to-tangible net worth ratio which is based on the net tangible book value of assets because the Company believes that market capitalization is a more appropriate measure of the market value of the Company's assets than the net tangible book value of its assets and more indicative of its ability to repay debt. The Company may from time to time reevaluate its debt policy in light of current economic conditions, relative costs of debt and equity capital, changes in the market capitalization of the Company, acquisition opportunities and other factors, and may modify its debt financing policy and may increase or decrease its ratio of debt-to-total market capitalization without a vote of its stockholders. The Articles and the Company's Bylaws do not contain any limitations on the amount or percentage of indebtedness the Company may incur. Future indebtedness incurred by the Company may be in the form of bank borrowings, purchase money obligations to the sellers of properties, assumed indebtedness, publicly or privately placed debt instruments or financing from institutional investors or other lenders, any of which indebtedness may be unsecured or may be secured by mortgages on or other interests in properties owned by the Company. The recourse of the holders of such indebtedness may be to all or any part of the properties of the Company or may be limited to the particular property to which the indebtedness relates. Subject to any contractual restrictions, the proceeds from any borrowings by the Company may be used for the payment of dividends, for working capital, to refinance existing indebtedness or to finance acquisitions of new properties. In the event that the Board of Directors determines to raise additional equity capital, the Board of Directors has the authority, without stockholder approval, to issue additional shares of Common Stock or shares of preferred stock in any manner (and on such terms and for such consideration) it deems appropriate, 50 52 including in exchange for property, subject to the provisions of Maryland General Corporation Law. Existing stockholders would have no preemptive right to purchase such shares in any offering, and any such offering might cause a dilution of a stockholder's investment in the Company. See "Capital Stock of the Company." 51 53 MANAGEMENT The Company is managed by its Board of Directors (the "Board"), who are elected annually by the shareholders. The directors are responsible for appointing the executive officers of the Company and for determining the strategic direction of the Company. The executive officers of the Company serve at the discretion of the Board and are chosen annually by the Board at its first meeting following the annual meeting of stockholders. The following table sets forth the names and ages of the executive officers and directors of the Company and the positions held with the Company by each individual.
NAME AGE TITLE - ---- --- ----- EXECUTIVE OFFICERS Michael E. Masterson........... 55 Chairman of the Board of Directors Marshall B. Edwards... 53 Chief Executive Officer, President, Chief Operating Officer and Director Mark S. Dillinger..... 46 Executive Vice President, Chief Financial Officer and Director Michael L. Collier.... 55 Executive Vice President of Property Management Don R. Daseke......... 58 Chairman Emeritus Maxwell B. Drever..... 57 Chairman Emeritus INDEPENDENT DIRECTORS Linda Walker Bynoe.... 45 Director Francesco Galesi...... 67 Director Robert L. Honstein.... 42 Director Arch K. Jacobson...... 70 Director Louis G. Munin........ 64 Director J. Otis Winters....... 65 Director
EXECUTIVE OFFICERS Michael E. Masterson has been Chairman of the Board and a director of the Company since October 1997. Prior thereto, Mr. Masterson was Executive Vice President of Drever from 1989 to 1992 and President of Drever from 1992 to October 1997. As President of Drever, Mr. Masterson was responsible for the overall administration of Drever and its subsidiaries, he coordinated institutional financing and oversaw the several joint ventures in which institutions are investors. From 1986 to 1989, he was President of Asset Development and Management, Inc. in San Francisco, a company charged with the management of a major portion of the commercial REO portfolio of BA Properties I, a subsidiary of Bank of America. Prior to that (1984-1988), Mr. Masterson held the positions of Executive Vice President and President, respectively, of The Innisfree Companies and IMG Financial of Sausalito, major San Francisco Bay Area real estate development and marketing concerns. His projects have won numerous awards, including the U.S. Department of Energy National Energy Award, awards from the City and County of Honolulu and the Pacific Coast Builders Choice Grand Award. Marshall B. Edwards has been a Director and the Chief Acquisitions Officer of the Company since October 1993 and was elected President of the Company on June 8, 1995. On October 20, 1997, Mr. Edwards was elected as Chief Executive Officer of the Company. Prior to joining the Company, Mr. Edwards served as President of Westglen Realty Advisors, Inc. from 1992 to 1993. From 1988 to 1992, Mr. Edwards was Executive Vice President of NHP Real Estate Corporation and President of NHP Acquisition Corporation, both affiliates of NHP, Inc., one of the largest owners and operators of multifamily rental housing in the United States. His principal responsibilities at NHP included the acquisition, financing, asset management and disposition of non-subsidized rental apartments. Mr. Edwards was previously with Walden from 1983 to 1988 as Vice President of Acquisitions and later as President of Walden's management subsidiary. Mark S. Dillinger has been the Executive Vice President and Chief Financial Officer of the Company since October 1993. Mr. Dillinger joined The Walden Group, Inc. ("Walden Group"), one of the Company's predecessor entities, in 1982 and has served as Executive Vice President and the Chief Financial Officer of 52 54 Walden Group since 1987. Mr. Dillinger is a member of the American Institute of Certified Public Accountants, the National Association of Real Estate Investment Trusts and the National Multi-Housing Council. Michael L. Collier has been the Executive Vice President of Property Management of the Company since October 1997. He has also been President of Concierge Management Corporation, the management subsidiary of Drever since its formation in 1987. He was founder of that company in 1987, together with Mr. Drever. From 1983 to 1987, Mr. Collier was President of Midkiff Property Development Company, a management and development concern. A member of the National Multi Housing Council, Mr. Collier is also on the Board of Directors of the Houston Apartment Association. Don R. Daseke has been a Director of the Company since its formation in September 1993 and Chairman of the Board of Directors and Chief Executive Officer of the Company from October 1993 to October 1997. In October 1997, Mr. Daseke resigned as Chairman of the Board and Chief Executive Officer and was elected as Chairman Emeritus of the Company. He has been the Chairman of the Board of Directors, President and Chief Executive Officer of Walden Group and its predecessor since 1974. Mr. Daseke is a Certified Public Accountant and a member of the American, Connecticut and New York Institutes of Certified Public Accountants, Chairman of the Board of Galapagos Studios, Inc., Chairman of the Board of Netier Technologies, Inc., Chairman of the Board of U.S. Telephone Holding, Inc., Director of Promise House and has served on the Board of Trustees of DePauw University since 1984. Maxwell B. Drever has been Chairman Emeritus and a director of the Company since October 1997. From 1985 until October 1997, Mr. Drever was Chairman of Drever Properties, Inc. ("Drever"), which along with certain of its affiliates, was the general partner of the partnerships from which the Company acquired a 79 property portfolio consisting of approximately 18,100 apartment units. In his capacity as Chairman of Drever, he set company policies and devised strategies relevant to the acquisition, enhancement and management of Drever's 79 apartment properties in Texas, Georgia, Arizona and California. From 1970 to 1985, Mr. Drever was President of Drever, McIntosh, Inc., acquiring, refurbishing and managing 60 projects in Seattle, Memphis, Columbus, Tampa and other comparable cities. Mr. Drever is a Director of the National Multi Housing council and a Full Member of the Urban Land Institute. INDEPENDENT DIRECTORS Linda Walker Bynoe has been a Director of the Company since February 1994. Ms. Bynoe is the President and Chief Operating Officer of Telemat Ltd., a private investment and project management company located in Chicago, Illinois. She was previously with Morgan Stanley from 1978 to 1989 where she served as Vice President -- Capital Markets. Ms. Bynoe, a certified public accountant, was on the audit staff of Arthur Andersen & Co. from 1974 to 1976. She currently serves on the Boards of Directors of the American Odyssey Funds, Inc. and The Executives' Club of Chicago. Ms. Bynoe is also a Trustee of The Museum of Contemporary Art in Chicago and a member of The Economic Club of Chicago and The Financial Research and Advisory Committee of The Commercial Club. Francesco Galesi has been the Chairman of the Board and sole equity holder of each entity constituting the Galesi Group since 1969. The Galesi Group consists of a group of privately owned entities that invest in real estate, telecommunications and manufacturing. These entities own and develop town home developments and apartment complexes located in Florida, Texas, Georgia and Colorado, office buildings in New York and Texas and 10 million square feet of industrial parks. Mr. Galesi currently serves on the Board of Director of LDDS WORLDCOM, one of the largest long distance telephone companies. In 1978, Mr. Galesi received the Award of Achievement from President Carter for his contribution to economic development in the United States. Robert L. Honstein has been a director of the Company since October 1997. Mr. Honstein has been a member of Nassau Capital L.L.C., the investment manager for private investments of Princeton University's endowment, since 1995. Prior thereto, Mr. Honstein was a Vice President at Princeton University Investment Company where he focused on the real estate investing nationwide for Princeton University's endowment from 1991 to 1995. Before Princeton, he was partner at Matrix Development Group, a commercial and industrial 53 55 real estate development firm in New Jersey. Mr. Honstein serves as a Director of Corporate Realty Investment Company and Affordable Residential Communities. Arch K. Jacobson is currently President of Jacobson-Berger Capital Group, Inc. Previously, Mr. Jacobson was Chairman and Chief Executive Officer of Union Pacific Realty Corporation (a subsidiary of Union Pacific Corporation) from 1986 to 1993. He was with the Real Estate Department of The Prudential Insurance Company from 1955 to 1980 and was President and Chief Executive Officer of the Prudential Development Company (a subsidiary of the Prudential Insurance Company) from 1982 to 1986. Mr. Jacobson is a member of the Urban Land Institute, a director of Patriot American Hospitality, Inc. and Chairman of the Board of Trustees of the University of Mary Hardin Baylor. Louis G. Munin retired in 1989 as Executive Vice President and Chief Financial Officer of Lafarge Corporation (North America's largest cement manufacturer). Previously, he was with General Portland Cement from 1966 until it was acquired by Lafarge in 1981 where he served as Senior Vice President and Chief Financial Officer. Mr. Munin currently serves on the Boards of Directors of Lafarge Canada, Inc. and Chieftain International, Inc. and as a member of the Finance Council of the Catholic Diocese of Dallas. He is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants and the Financial Executives Institute. J. Otis Winters has been the Chairman of the Board of PWS Group, Inc. (formerly Pate, Winters & Stone, Inc.), a corporate consulting firm, since 1990. He previously served as Executive Vice President and Director of The Williams Companies and Executive Vice President and Director of the First National Bank and Trust Co. of Tulsa, Oklahoma. Mr. Winters currently serves on the Boards of Directors of AMX Corporation and NGC Corporation. He is a registered professional engineer (Oklahoma). BOARD OF DIRECTORS The Board of Directors is divided into three classes. The terms of the first, second and third classes expire in 1999, 2000, and 2001, respectively. Directors of each class are elected for three year terms upon the expiration of the current class' term. The staggered terms for directors may affect the stockholders' ability to effect a change in control of the Company even if a change in control were in the stockholders' best interest. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has an Executive Committee, an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. The Executive Committee currently consists of Linda Walker Bynoe, Francesco Galesi, Robert L. Honstein, Arch K. Jacobson, Louis G. Munin and J. Otis Winters. The Executive Committee has all powers of the Board of Directors except for those which require action by all directors under the Articles or the Company's bylaws or under applicable law. The Executive Committee met three times during the fiscal year ended December 31, 1997. The Audit Committee is an advisory committee whose current members are Messrs. Munin, Honstein and Jacobson. The Audit Committee met four times during the fiscal year ended December 31, 1997. The function of the Audit Committee is to make recommendations concerning the engagement of independent public accountants, review with the independent public accountants the plans and results of the audit engagement, approve professional services provided by the independent public accountants, review the independence of the independent public accountants, consider the range of audit and nonaudit fees and review the adequacy of the Company's internal accounting controls. The Compensation Committee currently consists of Ms. Bynoe, Mr. Galesi and Mr. Winters. The Compensation Committee recommends compensation for the Company's executive officers to the Board of Directors and administers the Company's Amended and Restated 1994 Stock Option Plan (the "Stock Option Plan"). The Compensation Committee met four times during the fiscal year ended December 31, 1997. 54 56 The Nominating and Corporate Governance Committee currently consists of Ms. Bynoe and Messrs. Galesi, Honstein, Jacobson, Munin and Winters. The Nominating and Corporate Governance Committee selects the candidates for election as directors to be recommended to the Board of Directors for either filling vacancies that arise from time to time on the Board or for presenting to the stockholders at each annual meeting of stockholders. The committee also assists the Board of Directors in carrying out its responsibilities by reviewing corporate governance issues. The Nominating and Corporate Governance Committee met three times during the fiscal year ended December 31, 1997. COMPENSATION OF DIRECTORS Directors who are not employees of the Company are paid a $15,000 annual retainer, with an additional $5,000 annual retainer being paid to each member of the Executive Committee (which amount is payable in shares of restricted stock) and an additional $5,000 annual retainer payable to each committee chairperson. In addition, each non-employee director receives a fee of $1,500 for attending each meeting of the Board of Directors and an additional fee of $1,000 for attending each committee meeting. Directors who are employees of the Company are not paid any director's fees. The Company may reimburse all directors for their travel expenses incurred in connection with attending meetings and their activities on behalf of the Company. The Stock Option Plan provides each director who is not an employee of the Company and who is serving as a director on such date with automatic annual grants of options to purchase 5,000 shares of Common Stock, within five days following each annual meeting of Stockholders. Each of the current non-employee directors was granted an option to acquire 5,000 shares of Common Stock in 1997. Each such non-employee director option is exercisable on the first anniversary of the date such option was granted. The exercise price of each such non-employee director option is the greater of the fair market value of the shares of Common Stock on the date of the grant or the average of the closing prices of the Common Stock on the 20 business days preceding the date of grant. Each non-employee director option will expire on the tenth anniversary of the date of the grant. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee consists of Ms. Bynoe and Messrs. Galesi and Winters, none of whom is a former or current officer or employee of the Company or any of its subsidiaries. No executive officer of the Company serves as an officer, director or member of any entity which has an executive officer or director who is a member of the Compensation Committee. 55 57 EXECUTIVE COMPENSATION The following table sets forth certain information with respect to annual and long-term compensation for the periods ended December 31, 1997, 1996 and 1995, paid, or accrued with respect to, certain of the Company's executive officers (the "Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS -------------------------------------- ------------ SECURITIES NAME AND OTHER ANNUAL UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION ------------------ ---- -------- ------------ ------------ ------------ ------------ Don R. Daseke(1)......... 1997 $304,500 $ -0- -- 260,000 $ 4,750(2) 1996 $290,000 $150,000 -- 170,000 $26,149(2) 1995 $239,885 $106,650 $13,000(4) 90,000 $ 9,368(2) Marshall B. Edwards(3)... 1997 $260,900 $ -0- -- 190,000 $ 4,750(5) 1996 $240,000 $110,000 -- 125,000 $ 7,220(5) 1995 $186,808 $ 83,050 $ 188(4) 70,000 $ 2,583(5) Mark S. Dillinger(6)..... 1997 $172,000 $ -0- -- 125,000 $ 4,208(5) 1996 $165,000 $ 59,000 -- 75,000 $ 6,882(5) 1995 $134,923 $ 60,000 $ 163(4) 50,000 $ 2,319(5)
- --------------- (1) Mr. Daseke was Chairman of the Board and Chief Executive Officer of the Company during the years ended December 31, 1996 and 1995 and for the period from January 1, 1997 to October 20, 1997. (2) Amount includes 50% of the annual premium ($6,931 in 1995 and $19,095 in 1996) on a $5,000,000 life insurance policy insuring Mr. Daseke, with 50% of the death benefit being payable to Mr. Daseke's estate and the other 50% payable to the Company (the policy was canceled July 1, 1997 and no premium was paid for 1997), and the Company's matching contribution ($2,437 in 1995, $7,054 in 1996 and $4,750 in 1997) under its 401(k) Plan. (3) Mr. Edwards was President (from June 8, 1995 to present) and Chief Acquisitions Officer of the Company during the years ended December 31, 1995, 1996 and 1997. On October 20, 1997, Mr. Edwards was also elected as Chief Executive Officer of the Company. (4) Represents the amount equal to the difference between the fair market value of the Common Stock and the purchase price of the Common Stock acquired by each of the Executive Officers pursuant to loans made by the Company in December 1995. See "Certain Relationships and Related Transactions." (5) Represents the Company's matching contribution under its 401(k) Plan. (6) Mr. Dillinger was the Executive Vice President and Chief Financial Officer of the Company for the years ended December 31, 1995, 1996 and 1997. 56 58 OPTION GRANTS The following table sets forth certain information with respect to the issuance of options granted to the Executive Officers during the fiscal year ended December 31, 1997 under the Stock Option Plan. OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS -------------------------------------------------- POTENTIAL REALIZABLE VALUE AT NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF SECURITIES TOTAL EXERCISE STOCK PRICE APPRECIATION FOR UNDERLYING OPTIONS PRICE OPTION TERM(1) OPTIONS GRANTED TO PER EXPIRATION ------------------------------ NAME GRANTED EMPLOYEES SHARE DATE 5% 10% - ---- ---------- ---------- -------- ---------- ------------- ------------- Don R. Daseke(2)........... 60,000 25.1 $26.00 10/02 $ 431,000 $ 952,400 200,000 13.3 $25.25 10/02 $1,395,200 $3,083,100 Marshall B. Edwards(3)..... 40,000 16.7 $26.00 2/07 $ 654,100 $1,657,500 150,000 10.0 $25.25 10/07 $2,381,900 $6,036,300 Mark S. Dillinger(3)....... 25,000 10.4 $26.00 2/07 $ 408,800 $1,035,900 100,000 6.6 $25.25 10/07 $1,588,000 $4,024,200
- --------------- (1) "Potential Realizable Value" is disclosed in response to Securities and Exchange Commission rules, which require such disclosure for illustrative purposes only, and is based on the difference between the potential market value of shares issuable (based upon assumed appreciation rates) upon exercise of such Options and the exercise price of such Options. The values disclosed are not intended to be, and should not be interpreted by investors as, representations or projections of future value of the Company's stock or of the stock price. (2) The options were granted on February 5, 1997 and October 1, 1997 and became fully vested on October 20, 1997. (3) The options were granted on February 5, 1997 and October 1, 1997 and vest in equal increments on each of the first four anniversaries of their date of grant. OPTION EXERCISES AND YEAR-END OPTION VALUES The following table sets forth certain information concerning the value of the unexercised options as of December 31, 1997 held by the Executive Officers. No options were exercised by the Executive Officers during the fiscal year ended December 31, 1997. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTION/SARS AT FISCAL OPTIONS/SARS AT FISCAL YEAR-END YEAR END(1) ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ------------- ----------- ------------- Don R. Daseke..................... 720,000 -0- $2,598,125 $ -0- Marshall B. Edwards............... 130,000 340,000 $ 752,340 $794,530 Mark S. Dillinger................. 81,250 218,750 $ 471,720 $502,650
- --------------- (1) The fair market value on December 31, 1997 of the Common Stock underlying the options was $25.50 per share. EMPLOYMENT AGREEMENTS Each of Messrs. Edwards and Dillinger has entered into an employment agreement with the Company that expires on October 20, 2002 and February 5, 2002, respectively, and each of Messrs. Masterson, Collier and Drever has entered into an employment agreement with the Company that expires on October 1, 2002 57 59 (collectively, the "Employment Agreements"). The Employment Agreements provide annual salaries for each of such executives, subject to increase at the discretion of the Board of Directors. The Employment Agreements for Mr. Masterson and Mr. Collier grant such executives the right, on the third and fourth anniversaries of the date of execution (October 1, 1997), respectively, to resign as an officer of the Company and to be engaged as a consultant for the remainder of the term of the Employment Agreement. Pursuant to the terms of the Settlement and Employment Agreement entered into between the Company and Mr. Daseke in connection with his resignation as Chairman of the Board and Chief Executive Officer of the Company, Mr. Daseke is to serve as Chairman Emeritus of the Company until October 2000. Mr. Daseke's agreement does grant him the option, exercisable for a sixty-day period commencing on January 1, 1999, to resign as an officer of the Company and to be engaged as a consultant for the remainder of the term of the agreement. Under the terms of the respective Employment Agreements (other than Mr. Daseke's), if the covered executive's employment with the Company is terminated by the Company other than for "cause" (as defined in the Employment Agreement) or by "constructive discharge" (as defined in the Employment Agreement), the terminated executive will be entitled to receive an amount equal to the highest annualized rate of salary prior to the date of termination. The Employment Agreements also provide that the covered executive may terminate his employment for any reason upon 30 days' prior written notice. In the event of such a termination, the Company will be obligated to pay the executive the compensation due him up to the effective date of termination. The Employment Agreements also provide for the payment of severance compensation in an amount equal to 2.99 times the Executive Officer's compensation (which includes both salary and any cash bonus) in the event the Executive Officer is terminated without cause or by constructive discharge within three years following a "change in control" (as defined in the Employment Agreements). 58 60 PRINCIPAL STOCKHOLDERS SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table and the notes thereto set forth certain information with respect to the beneficial ownership of shares of Common Stock, as of August 31, 1998 (except as noted in the footnotes to such table), by each person or group within the meaning of Section 13(d)(3) of the Exchange Act who is known to the management of the Company to be the beneficial owner of more than five percent of the outstanding Common Stock of the Company:
NUMBER OF SHARES NAME AND ADDRESS BENEFICIALLY PERCENT OF BENEFICIAL OWNER OWNED OF CLASS - ------------------- ------------ -------- Don R. Daseke(1)............................................ 1,578,410(2) 8.43% Morgan Stanley, Dean Witter, Discover & Co.................. 1,241,450(3) 6.90% 1585 Broadway New York, New York 10036
- --------------- (1) The business address of such person is 5430 LBJ Freeway, Suite 1600, Dallas, Texas 75240. (2) Includes 514,905 shares of Common Stock owned of record by The Walden Group, Inc., of which Mr. Daseke is the holder of 90% of the common stock and the sole director, 720,000 shares of Common Stock which Mr. Daseke has the right to acquire through the exercise of options granted pursuant to the Stock Option Plan and 30,000 shares of restricted Common Stock issued under the Company's Long-Term Investment Plan, which shares may not be transferred until October 20, 2000 and 1,701 shares acquired through a 401(k) plan. (3) This information is provided in reliance on a Schedule 13G filed with the SEC on or about February 12, 1998 by Morgan Stanley, Dean Witter, Discover & Co. SECURITY OWNERSHIP OF MANAGEMENT The following table and the notes thereto set forth certain information with respect to the beneficial ownership of shares of Common Stock of the Company, as of August 31, 1998, by each director, each nominee for director, each executive officer of the Company and by all executive officers and directors as a group:
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT BENEFICIAL OWNER(1)(2) BENEFICIALLY OWNED OF CLASS - ---------------------- ------------------ -------- Marshall B. Edwards........................................ 344,576(3) 1.89% Michael S. Masterson....................................... 377,008(11) 2.05% Mark S. Dillinger.......................................... 191,000(4) 1.05% Michael L. Collier......................................... 202,295(10) 1.11% Maxwell B. Drever.......................................... 1,530,058(9) 7.84% Don R. Daseke.............................................. 1,578,410(5) 8.43% Linda Walker Bynoe......................................... 23,479(6) * Francesco Galesi........................................... 728,141(7) 3.89% Robert L. Honstein......................................... 201(12) * Arch K. Jacobson........................................... 26,801(6) * Louis G. Munin............................................. 26,201(6) * J. Otis Winters............................................ 21,201(8) * All Directors and Executive Officers (12 persons).......... 4,337,431 24.10%
- --------------- (1) The business address of the persons named above is c/o Walden Residential Properties, Inc., 5080 Spectrum Drive, Suite 1000 East, Addison, Texas 75001-6410. 59 61 (2) Except as otherwise indicated, (i) the persons named in this table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, and (ii) none of the shares shown in this table or referred to in the footnotes hereto are shares of which the persons named in this table have the right to acquire beneficial ownership as specified in Rule 13d-3(d)(1) promulgated under the Exchange Act. (3) Includes 242,500 shares of Common Stock which Mr. Edwards has the right to acquire through the exercise of options granted pursuant to the Stock Option Plan, 20,000 shares of restricted Common Stock granted under the Company's Long-Term Incentive Plan, which shares may not be transferred until February 12, 2001, at which time the transfer restrictions on 40% of such shares lapse and the restriction on 10% of the remaining shares lapses each year thereafter until February 12, 2007 (the "Officer Restricted Shares") and 3,000 shares of restricted Common Stock granted under the Company's Long-Term Incentive Plan, which shares may not be transferred until February 4, 1999, at which time the transfer restriction on one-third of such shares lapses and the restriction on half of the remaining shares lapses in each of the two years thereafter (the "Bonus Shares"). (4) Includes 139,075 shares which Mr. Dillinger has the right to acquire through the exercise of options granted pursuant to the Stock Option Plan, 10,000 Officer Restricted Shares and 1,000 Bonus Shares. (5) Includes 514,905 shares of Common Stock owned of record by Walden Group, of which Mr. Daseke is the holder of 90% the common stock and the sole director, 720,000 shares which Mr. Daseke has the right to acquire through the exercise of options granted pursuant to the Stock Option Plan and 30,000 shares of restricted Common Stock issued under the Company's Long-Term Incentive Plan, which shares may not be transferred until October 30, 2000. (6) Includes 20,000 shares of Common Stock which such person has the right to acquire through the exercise of options granted pursuant to the Stock Option Plan, 1,000 shares of restricted Common Stock granted under the Company's Long-Term Incentive Plan, one-third of which are currently transferable and the transfer restrictions lapse on half of the remaining shares on February 12, 1999 and the other half on February 12, 2000 (the "Director Restricted Shares") and 201 restricted shares as to which the transfer restrictions lapse quarterly ending December 31, 1998. (7) Consists of 711,940 shares of Common Stock which entities controlled by Mr. Galesi have the right to acquire pursuant to the conversion of partnership interests held in Walden Residential Operating Partnership, L.P., a Georgia limited partnership and an affiliate of the Company ("Walden Operating Partnership"), 20,000 shares of Common Stock which Mr. Galesi has the right to acquire through the exercise of options granted pursuant to the Stock Option Plan, 1,000 Director Restricted Shares and 201 restricted shares as to which the transfer restrictions lapse quarterly ending December 31, 1998. The Galesi entities acquired such partnership interests in connection with the sale of the controlling interest in the predecessor to the Walden Residential Operating Partnership to the Company in June 1995. (8) Includes 20,000 shares of Common Stock which Mr. Winters has the right to acquire through the exercise of options granted pursuant to the Stock Option Plan, 1,000 Director Restricted Shares and 201 restricted shares as to which the transfer restrictions lapse quarterly ending December 31, 1998. (9) Includes 1,430,437 shares of Common Stock which Mr. Drever has the right to acquire pursuant to the conversion of Units and 87,500 shares of Common Stock which Mr. Drever has the right to acquire through the exercise of options granted under the Stock Option Plan. (10) Includes 149,795 shares of Common Stock which Mr. Collier has the right to acquire pursuant to the conversion of Units and 37,500 shares of Common Stock which Mr. Collier has the right to acquire through the exercise of options granted under the Stock Option Plan. (11) Includes 300,556 shares of Common Stock which Mr. Masterson has the right to acquire pursuant to the conversion of Units and 56,250 shares of Common Stock which Mr. Masterson has the right to acquire through the exercise of options granted under the Stock Option Plan. (12) Consists of 201 restricted shares as to which the transfer restrictions lapse quarterly ending December 31, 1998. * Less than one percent. 60 62 DESCRIPTION OF COMMON STOCK The summary of the terms of the Common Stock set forth below does not purport to be complete and is subject to, and qualified in its entirety by, reference to the Company's Articles of Incorporation, as amended and restated (the "Articles"), and the Company's Bylaws. The Articles authorize the Company to issue up to 50 million shares of Common Stock, 10 million shares of Preferred Stock and 60 million shares of excess stock, par value $.01 per share (the "Excess Stock"). At August 31, 1998, 17,993,341 shares of Common Stock were issued and outstanding, all of which are fully paid and nonassessable. Under the Maryland General Corporation Law (the "MGCL"), stockholders generally are not liable for the corporation's debts or obligations. GENERAL All shares of Common Stock issued upon exchange of the Common OP Units will be duly authorized, fully paid and nonassessable. Subject to the preferential rights of shares of all the preferred stock, and any other shares or series of stock hereinafter designated by the Board of Directors of the Company (the "Board of Directors"), holders of shares of Common Stock are entitled to receive dividends on the stock if, as and when authorized and declared by the Board of Directors out of assets legally available therefor and to share ratably in the assets of the Company legally available for distribution to its stockholders in the event of its liquidation, dissolution or winding-up after payment of, or adequate provision for payment of, all known debts and liabilities of the Company. The Company has paid regular quarterly dividends to date and intends to continue paying regular quarterly dividends. Each outstanding share of Common Stock entitles the holder thereof to one vote on all matters submitted to a vote of stockholders, including the election of directors and, except as otherwise required by law or except as provided with respect to any other class or series of stock, the holders of shares of Common Stock will possess the exclusive voting power. There is no cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of Common Stock can elect all of the directors then standing for election and the holders of the remaining shares will not be able to elect any directors. Holders of shares of Common Stock have no conversion, sinking fund, redemption rights or preemptive rights to subscribe for any securities of the Company. Shares of Common Stock have equal dividend, distribution, liquidation and other rights and will have no preference or exchange rights. Pursuant to the MGCL, a corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions unless approved by the holders of at least two-thirds of the shares of stock entitled to vote on the matter unless a lesser percentage (but not less than a majority of all of the votes to be cast on the matter) is set forth in the corporation's charter. The Articles provide for the vote of the holders of a majority of the shares of stock outstanding and entitled to vote on the matter to approve any of such actions, except for amendments to the Articles relating to the number of directors and the classification of the Board of Directors which require approval of holders of at least two-thirds of the shares of stock entitled to vote on the matter. The transfer agent and registrar for the Common Stock is Boston Equiserve L.P. RESTRICTIONS ON TRANSFER For the Company to qualify as a REIT under the Code, shares of Common Stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of twelve months (other than the first year) or during a proportionate part of a shorter taxable year. Further, not more than 50% of the value of the issued and outstanding shares of capital stock of the Company may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include, except in limited circumstances, certain entities such as qualified private pension plans) during the last half of a taxable year (other than the first year) or during a proportionate part of a shorter taxable year. 61 63 Since the Board of Directors believes it is essential for the Company to maintain its status as a REIT under the Code, the Articles provide that no person, except Mr. Don R. Daseke, may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9.0% (the "Ownership Limit") of the aggregate value of all outstanding shares of capital stock of the Company. Mr. Daseke beneficially owns in the aggregate approximately 6.1% of the shares of Common Stock and may acquire additional shares of Common Stock; provided, however, that Mr. Daseke may not own, directly or indirectly, more than 13.0% of the aggregate value of all outstanding shares of capital stock of the Company (the "Existing Holder Limit"). The Board of Directors, upon receipt of evidence and assurances satisfactory to the Board of Directors, may also exempt a proposed transferee from the Ownership Limit or Existing Holder Limit. In connection therewith, the Board of Directors may require opinions of counsel, affidavits, undertakings or agreements as it may deem necessary or advisable in order to determine or ensure the Company's status as a REIT. Any acquisition or transfer of shares of Common Stock that would: (i) result in the shares of Common Stock being owned by fewer than 100 persons or (ii) result in the Company being "closely-held" within the meaning of Section 856(h) of the Code, shall be null and void, and the intended transferee will acquire no rights to the shares of Common Stock. The foregoing restrictions on transferability and ownership will not apply if the Board of Directors determines that it is no longer in the best interests of the Company to attempt to qualify, or to continue to qualify, as a REIT and the Articles are amended accordingly. Any purported transfer of shares of capital stock that would result in a person owning shares of capital stock in excess of the Ownership Limit or Existing Holder Limit will result in the shares subject to such purported transfer being automatically exchanged for an equal number of shares of Excess Stock. Under the Articles, Excess Stock shall be deemed to have been transferred to the Company as trustee of a separate trust (the "Trust") for the exclusive benefit of the person or persons to whom the interest in the Trust can ultimately be transferred. Excess Stock is not transferable. The purported transferee of any shares of capital stock that are exchanged for Excess Stock may designate a transferee of the interest in the Trust if the Excess Stock held in the Trust and represented by such Trust interest to be transferred would not be Excess Stock in the hands of the designated transferee at a price not to exceed the price paid by the purported transferee (or, if no consideration was paid, the Market Price (as hereinafter defined) measured on the date of the original attempted transfer) at which point such Excess Stock will automatically be exchanged for the shares of Common Stock or Preferred Stock to which the Excess Stock is attributable. In addition, Excess Stock is subject to purchase by the Company at a purchase price equal to the lesser of: (i) the price paid for the shares of capital stock by the intended transferee (or, if no consideration was paid, the Market Price of the shares of capital stock the attempted transfer of which resulted in Excess Stock, measured on the date of the transfer); or (ii) the Market Price of the shares of capital stock the attempted transfer of which resulted in Excess Stock measured on the date on which the Company elects to purchase the Excess Stock. "Market Price" means the average daily per share closing sales price of a share of capital stock if such shares of capital stock are listed on a national securities exchange or quoted on Nasdaq National Market or if not then traded on any exchange or quotation system, the mean between the average per share closing bid prices and the average per share closing asked prices, in each case, during the 30 calendar day period ending on the business day prior to the measurement date, or if there have been no sales on a national securities exchange or the Nasdaq National Market and no published bid and asked quotations with respect to shares of such stock during such 30 calendar day period, then the market price of the shares of capital stock on the relevant date shall be as determined in good faith by the Board of Directors. From and after the intended transfer to the purported transferee of the shares of Excess Stock, the purported transferee shall cease to be entitled to distributions (except upon liquidation), voting rights and other benefits with respect to the Excess Stock except the right to payment of the purchase price for the applicable shares of underlying capital stock. Any dividend or distribution paid to a purported transferee on Excess Stock prior to the discovery by the Company that the shares have been transferred in violation of the Articles shall be repaid to the Company upon demand. If the foregoing transfer restrictions are determined to be void or invalid by virtue of any legal decision, statute, rule or regulation, then the intended transferee of any Excess Stock may be deemed, at the option of the Company, to have acted as an agent on behalf of the 62 64 Company in acquiring the Excess Stock and to hold the Excess Stock on behalf of the Company. All certificates representing shares of capital stock will bear a legend referring to the restrictions described above. In addition, each stockholder shall, upon demand, be required to disclose to the Company in writing all information regarding the direct and indirect beneficial ownership of shares of capital stock as the Board of Directors deems reasonably necessary to comply with the provisions of the Code applicable to a REIT, to comply with the requirements of any taxing authority or governmental agency or to determine any such compliance. These ownership limitations could have the effect of discouraging a takeover or other transaction in which holders of some, or a majority, of shares of capital stock might receive a premium for their shares over the then-prevailing market price or which these holders might believe to be otherwise in their best interest. DESCRIPTION OF REDEEMABLE PREFERRED STOCK The following description of terms of the Redeemable Preferred Stock sets forth certain general terms and provisions of the Redeemable Preferred Stock. The description of certain provisions of the Redeemable Preferred Stock set forth below does not purport to be complete and is subject to and qualified in its entirety by reference to the Articles and the Board of Directors' resolution or resolutions relating to the Preferred Stock. GENERAL Subject to limitations prescribed by the MGCL and the Articles, the Board of Directors is authorized to issue shares of Preferred Stock in one or more series, to establish from time to time the number of shares of Preferred Stock to be included in any such series and to fix for any such series the designation and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption. The Company is authorized to issue 10 million shares of Preferred Stock. At August 31, 1998, 1,712,082 shares of the Company's 9.16% Series B Convertible Redeemable Preferred Stock (the "Series B Preferred Stock") and 4,000,000 shares of the Company's 9.20% Senior Preferred Stock (the "Senior Preferred Stock") were outstanding. Boston Equiserve L.P. will be the transfer agent and registrar for shares of each series of Preferred Stock. RANK The Redeemable Preferred Stock will, with respect to dividend rights upon liquidation, dissolution or winding up of the Company, rank (i) senior to the Common Stock, all Excess Stock, with certain limited exceptions, and to all other equity securities of the Company, except those the terms of which specifically provide that such securities rank senior to or on a parity with the Redeemable Preferred Stock; (ii) on a parity with the Series B Preferred Stock and all other equity securities issued by the Company the terms of which specifically provide that such equity securities rank on a parity with the Redeemable Preferred Stock; and (iii) junior to the Senior Preferred Stock and all other equity securities issued by the Company the terms of which specifically provide that such equity securities rank senior to the Redeemable Preferred Stock. The rights of the holders of Redeemable Preferred Stock will be subordinate to those of the Company's general creditors. DIVIDENDS Holders of Redeemable Preferred Stock will be entitled to receive out of assets of the Company legally available for payment, when and as declared by the Board of Directors of the Company, cash dividends at the rate of $2.25 per annum per share. Dividends on shares of Redeemable Preferred Stock will accrue and be cumulative from the date of issuance of the Redeemable Preferred Stock. Dividends will be payable quarterly in arrears in March, June, September and December of each year. 63 65 REDEMPTION Shares of Redeemable Preferred Stock may be redeemed, in whole or from time to time in part, at any time after January 1, 2008, at the option of the Company at the price of $25.00 per share, plus all accrued and unpaid dividends thereon. Shares of Redeemable Preferred Stock redeemed by the Company will be restored to the status of authorized but unissued preferred stock of the Company. In the event that fewer than all of the outstanding shares of Redeemable Preferred Stock are redeemed, the number of shares to be redeemed will be determined by lot or pro rata (subject to rounding to avoid fractional shares) as may be determined by the Company or by any other method as may be determined by the Company in its sole discretion to be equitable. LIQUIDATION PREFERENCE Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, then, before any distribution or payment shall be made to the holders of any Junior Stock, the holders of each series of Preferred Stock shall be entitled to receive out of assets of the Company legally available for distribution to stockholders, liquidating distributions in the amount of the liquidation preference per share, plus an amount equal to all dividends accrued and unpaid thereon (which shall not include any accumulation in respect of unpaid dividends for prior dividend periods if such Preferred Stock does not have a cumulative dividend). After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Preferred Stock will have no right or claim to any of the remaining assets of the Company. In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the available assets of the Company are insufficient to pay the amount of the liquidating distributions on all outstanding Preferred Stock and the corresponding amounts payable on all shares of other classes or series of equity securities of the Company ranking on a parity with the Preferred Stock in the distribution of assets, then the holders of the Preferred Stock and all other such classes or series of equity securities shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled. VOTING RIGHTS Except in certain limited circumstances when dividends on the Redeemable Preferred Stock have been in arrears for six or more quarterly periods, or except as required by applicable law, holders of the Redeemable Preferred Stock will not be entitled to vote for any purpose. RESTRICTIONS ON OWNERSHIP See "Description of Common Stock -- Restrictions on Transfer" for a discussion of the restrictions on transfer of shares of capital stock necessary for the Company to qualify as a REIT under the Code. DESCRIPTION OF SERIES B WARRANTS GENERAL Each Series B Warrant is exercisable, at any time beginning on October 1, 1998 and ending on December 31, 2007, for one-third of one share of Common Stock at $26.875 per share, subject to adjustment in the event of certain events such as stock dividends, stock splits, reverse stock splits, reclassifications and the issuance by the Company of certain types of securities or certain distributions by the Company. No fractional share of Common Stock will be issued in connection with the exercise of the Series B Warrants and the holder of a Series B Warrant will be paid in lieu of such fractional shares, cash in an amount equal to the Current Market Value (as defined in the Series B Warrant Agreement relating to the Series B Warrants) of a share of Common Stock multiplied by such fraction. Although they will be initially issued in conjunction with shares of Redeemable Preferred Stock, the Series B Warrants will be separately transferable upon receipt. Prior to the exercise of the Series B Warrants, holders of Series B Warrants will not have any rights of holders of Common Stock, including the right to receive payments of dividends, if any, on Common Stock, or to exercise any applicable right to vote. 64 66 The Company will have the obligation to repurchase all outstanding Series B Warrants upon the occurrence of certain events, such as the consolidation or merger of the Company with another entity (in certain circumstances) or the sale of all or substantially all of the assets of the Company (in certain circumstances). Warrant certificates may be exchanged for new Warrant certificates of different denominations, may (if in registered form) be presented for registration of transfer and may be exercised at the corporate trust office of the Warrant Agent. EXERCISE OF SERIES B WARRANTS Each Series B Warrant will entitle the holder thereof to purchase Common Stock, at $26.875 per share. After the close of business on December 31, 2007 (or such later date to which such expiration date may be extended by the Company), unexercised Series B Warrants will become void. Series B Warrants may be exercised by delivering to the Warrant Agent payment of the amount required to purchase the shares of Common Stock, purchasable upon such exercise together with certain information set forth on the reverse side of the Warrant certificate. Series B Warrants will be deemed to have been exercised upon receipt of payment of the exercise price, subject to the receipt within five (5) business days of the Warrant certificate evidencing such Series B Warrants. Upon receipt of such payment and the Warrant certificate properly completed and duly executed at the corporate trust office of the Warrant Agent, the Company will, as soon as practicable, issue and deliver the shares of Common Stock, purchasable upon such exercise. If fewer than all of the Series B Warrants represented by such Warrant certificate are exercised, a new Warrant certificate will be issued for the remaining amount of Warrants. AMENDMENTS AND SUPPLEMENTS TO SERIES B WARRANT AGREEMENT The Series B Warrant Agreement may be amended or supplemented without the consent of the holders of the Series B Warrants issued thereunder to effect changes that are not inconsistent with the provisions of the Series B Warrants and that do not adversely affect the interests of the holders of the Series B Warrants. ADJUSTMENTS The exercise price of, and the number of shares of Common Stock covered by, a Series B Warrant are subject to adjustment in certain events, including (i) payment of a dividend on the Common Stock payable in shares of capital stock and stock splits, combinations or reclassification of the Common Stock; (ii) issuance to all holders of Common Stock of rights or warrants to subscribe for or purchase shares of Common Stock at less than their current market price; and (iii) certain distributions of evidences of indebtedness or assets (including securities but excluding cash dividends or distributions paid out of consolidated earnings or retained earnings or dividends payable in shares of Common Stock) or of subscription rights and warrants (excluding those referred to above). No adjustment will be required unless such adjustment would require a change of at least 1% in the exercise price then in effect. Except as stated above, the exercise price of, and the number of shares of Common Stock covered by, a Series B Warrant will not be adjusted for the issuance of shares of Common Stock or any securities convertible into or exchangeable for Common Stock, or carrying the right or option to purchase or otherwise acquire the foregoing, in exchange for cash, other property or services. No adjustment in the exercise price of, and the number of shares of Common Stock covered by, a Series B Warrant will be made for regular quarterly or other periodic or recurring cash dividends or distributions or for cash dividends or distributions to the extent paid from consolidated earnings or retained earnings. In the event of any (i) consolidation or merger of the Company with or into any entity (other than a consolidation or a merger that does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock); (ii) sale, transfer, lease or conveyance of all or substantially all of the assets of the Company; or (iii) reclassification, capital reorganization or change of the Common Stock (other than solely a change in par value or from par value to no par value), a holder of a Series B Warrant will be 65 67 entitled, on or after the occurrence of any such event, to receive on exercise of such Series B Warrant the kind and amount of shares of beneficial interest or other securities, cash or other property (or any combination thereof) that the holder would have received had such holder exercised such holder's Series B Warrant immediately prior to the occurrence of such event. If the consideration to be received upon exercise of the Series B Warrant following any such event consists of common shares of the surviving entity, then from and after the occurrence of such event, the exercise price of such Series B Warrant will be subject to the same anti-dilution and other adjustments described in the second preceding paragraph, applied as if such shares were shares of Common Stock. 66 68 CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S ARTICLES AND BYLAWS The following discussion summarizes certain provisions of MGCL and the Articles and the Company's Bylaws. This summary does not purport to be complete and is subject to and qualified in its entirety by reference to the Company's Articles and Bylaws. CLASSIFICATION OF THE BOARD OF DIRECTORS The Bylaws provide that the number of directors of the Company shall be as set in the Articles or as may be established by the Board of Directors but may not be fewer than the number required under the MGCL nor more than 15. Any vacancy will be filled, at any regular meeting or at any special meeting called for that purpose, by a majority of the remaining directors, except that a vacancy resulting from an increase in the number of directors will be filled by a majority of the entire Board of Directors. The stockholders may elect a director to fill a vacancy on the Board of Directors which results from the removal of a director. Pursuant to the terms of the Articles, the Directors are divided into three classes. As the term of each class expires, directors in that call are elected for a term of three years. The Company believes that classification of the Board of Directors helps to assure the continuity and stability of the Company's business strategies and policies as determined by the Board of Directors. The classified director provision could have the effect of making the removal of incumbent directors more time-consuming and difficult, which would discourage a third party from making a tender offer or otherwise attempting to obtain control of the Company, even though such an attempt might be beneficial to the Company and its stockholders. At least two annual meetings of stockholders, instead of one, will generally be required to effect a change in a majority of the Board of Directors. Thus, the classified board provision could increase the likelihood that incumbent directors will retain their positions. Further, holders of shares of Common Stock have no right to cumulative voting for the election of directors. Consequently, at each annual meeting of stockholders, the holders of a majority of shares of Common Stock will be able to elect all of the successors of the class of directors whose term expires at that meeting. LIMITATION OF LIABILITY AND INDEMNIFICATION The Articles limit the liability of the Company's directors and officers to the Company and its stockholders to the fullest extent permitted from time to time by the MGCL. The MGCL presently permits the liability of directors and officers to a corporation or its stockholders for money damages to be limited, except (i) to the extent that it is proved that the director or officer actually received an improper benefit or profit or (ii) to the extent that a judgment or other final adjudication is entered adverse to the director or officer in a proceeding based on a finding that the director's or officer's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. This provision does not limit the ability of the Company or its stockholders to obtain other relief, such as an injunction or rescission. The Articles require the Company to indemnify its directors, officers and certain other parties to the fullest extent permitted from time to time by the MGCL. The MGCL permits a corporation, subject to certain exceptions, to indemnify its directors, officers and certain other parties against judgments, penalties, fines, settlements and reasonable expenses, including attorneys' fees, actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service to or at the request of the corporation, unless it is established that (i) the act or omission of the indemnified party was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty, (ii) the indemnified party actually received an improper personal benefit, or (iii) in the case of any criminal proceeding, the indemnified party had reasonable cause to believe that the act or omission was unlawful. Indemnification may be made against judgments, penalties, fines, settlements and reasonable expenses actually incurred by the director or officer in connection with the proceeding; provided, however, that if the proceeding is won by or in the right of the corporation, indemnification may not be made with respect to any proceeding in which the director or officer has been adjudged to be liable to the corporation. In addition, a 67 69 director or officer may not be indemnified with respect to any proceeding charging improper personal benefit to the director or officer in which the director or officer was adjudged to be liable on the basis that personal benefit was improperly received. The termination of any proceeding by conviction, or upon a plea of nolo contenders or its equivalent, of an entry of any order of probation prior to judgment, creates a rebuttable presumption that the director or officer did not meet the requisite standard of conduct required for indemnification to be permitted. It is the position of the Commission that indemnification of directors and officers for liabilities arising under the Securities Act is against public policy and is unenforceable pursuant to Section 14 of the Securities Act. BUSINESS COMBINATIONS Under the MGCL, as amended effective October 1, 1994, certain "business combinations" (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any person who beneficially owns 10 or more of the voting power of the corporation's shares after the date on which the corporation had 100 or more beneficial owners of its stock or an affiliate or associate of the corporation and was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding stock of the corporation who, at any time within the two-year period prior to the date in question and after the date on which the corporation had 100 or more beneficial owners of its stock (an "Interested Stockholder") or an affiliate thereof, are prohibited for five years after the most recent date on which the Interested Stockholder became an Interested Stockholder. Thereafter, any such business combination must be recommended by the board of directors of such corporation and approved by the affirmative vote of at least (i) 80% of the votes entitled to be cast by holders of outstanding voting shares of the corporation voting together as a single voting group and (ii) two-thirds of the votes entitled to be cast by holders of outstanding voting shares of the corporation other than shares held by the Interested Stockholder with whom the business combination is to be effected, unless, among other things, the corporation's stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its shares. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by the board of directors of the corporation prior to the time that the Interested Stockholder becomes an Interested Stockholder. The Articles contain a provision exempting from these provisions of the MGCL any business combination involving Mr. Daseke (or his affiliates) or any other person acting in concert or as a group with any of the foregoing persons. CONTROL SHARE ACQUISITIONS The MGCL provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares of stock owned by the acquiror, by officers or by directors who are employees of the corporation. "Control shares" are voting shares of stock which, if aggregated with all other such shares of stock previously acquired by such person, or in respect of which such person is able to exercise or direct the exercise of voting power, would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of control shares, subject to certain exceptions. A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses), may compel the board of directors to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting. If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the MGCL, then, subject to certain conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting rights for control shares, as of the date of the last control share acquisition or of any meeting of stockholders at which the voting 68 70 rights of such shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquire becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquiring person in the control share acquisition, and certain limitations and restrictions otherwise applicable to the exercise of dissenters' rights do not apply in the context of a control share acquisition. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or to acquisitions approved or exempted by the charter or bylaws of the corporation. The Articles contain a provision exempting from the control share acquisition statute any and all acquisitions by Mr. Daseke (or his affiliates) or any other person acting in concert or as a group with any of the foregoing persons of shares of the Company's capital stock. There can be no assurance that such provision will not be amended or eliminated at any point in the future. AMENDMENT TO THE ARTICLES The Articles may be amended by the affirmative vote of the holders of a majority of all shares entitled to be voted on the matter, except for the provision relating to the classification of the Board of Directors which may be amended only by the affirmative vote of the holders of not less than two-thirds of all shares entitled to be voted on the matter. DISSOLUTION OF THE COMPANY The Articles permit the dissolution of the Company by (i) the affirmation or vote of a majority of the entire Board of Directors declaring such dissolution to be advisable and directing that the proposed dissolution be submitted for consideration at an annual or special meeting of stockholders and (ii) upon proper notice, stockholder approval by the affirmative vote of the holders of not less than a majority of all of the votes entitled to be cast on the matter or the written consent of all the votes entitled to be cast on the matter. ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS The Bylaws provide that with respect to an annual meeting of stockholders, nominations of persons for election to the Board of Directors and the proposal of business to be considered by stockholders may be made only (i) by, or at the direction of, a majority of the Board of Directors or (ii) by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in the Bylaws. The provisions in the Articles on classification of the Board of Directors, the business combination and control share acquisition provisions of the MGCL and the advance notice provisions of the Bylaws could have the effect of discouraging a takeover or other transaction in which holders of some, or a majority, of the shares of Common Stock might receive a premium for their shares of Common Stock over the then prevailing market price or which such holders might believe to be otherwise in their best interests. MEETINGS OF STOCKHOLDERS An annual meeting of the stockholders for the election of directors and the transaction of any business within the powers of the Company shall be held on the second Wednesday in May or at such other time as set by the Board of Directors. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, special meetings of the stockholders may be called by the Chairman of the Board of Directors, by the President or by a resolution adopted by a majority of the directors and by the Secretary of the Company upon the written request of the holders of 25% or more of the outstanding voting stock. Such request shall state the purpose or purposes of such meeting and the matters proposed to be acted upon at such meeting. 69 71 FEDERAL INCOME TAX CONSIDERATIONS GENERAL The following summary of material federal income tax considerations that may be relevant to a holder of Common Stock or Preferred Stock is based on current law and is not intended as tax advice. The following discussion, which is not exhaustive of all possible tax considerations, does not include a detailed discussion of any state, local or foreign tax considerations. Nor does it discuss all of the aspects of federal income taxation that may be relevant to a prospective stockholder in light of his or her particular circumstances or to certain types of stockholders (including insurance companies, tax-exempt entities, financial institutions or broker-dealers, foreign corporations and persons who are not citizens or residents of the United States) who are subject to special treatment under the federal income tax laws. The statements in this discussion are based on current provisions of the Code, existing, temporary and currently proposed Treasury Regulations under the Code, the legislative history of the Code, existing administrative rulings and practices of the IRS and judicial decisions. No assurance can be given that legislative, judicial or administrative changes will not affect the accuracy of any statements in this Prospectus with respect to transactions entered into or contemplated prior to the effective date of such changes. THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING. EACH PROSPECTIVE PURCHASER OF COMMON STOCK OR PREFERRED STOCK IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF COMMON STOCK OR PREFERRED STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, DISPOSITION AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. The Company has elected to be treated as a REIT for federal income tax purposes commencing with its taxable year ended December 31, 1994. Based on certain assumptions and representations that are summarized below, Winstead Sechrest & Minick P.C., counsel to the Company, is of the opinion that beginning with its taxable year ended December 31, 1994, the Company has been organized and has operated in conformity with the requirements for qualification and taxation as a REIT under the Code and that its proposed method of operations described in this Prospectus will enable it to continue to satisfy the requirements for qualification as a REIT. The rules governing REITs are highly technical and require ongoing compliance with a variety of tests that depend, among other things, on future operating results. Winstead Sechrest & Minick P.C. will not monitor the Company's compliance with these requirements. While the Company expects to satisfy these tests, and will use its best efforts to do so, no assurance can be given that the Company will qualify as a REIT for any particular year, or that the applicable law will not change and adversely affect the Company and its stockholders. See "-- Failure to Qualify as a REIT." The following is a summary of the material federal income tax considerations affecting the Company as a REIT and its stockholders: REIT QUALIFICATION The Company must be organized as an entity that would, if it does not maintain its REIT status, be taxable as a regular corporation. It cannot be a financial institution or an insurance company. The Company must be managed by one or more directors. The Company's taxable year must be the calendar year. Beneficial ownership of the Company must be evidenced by transferable shares. The Company's capital stock must be held by at least 100 persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a taxable year of less than 12 months. Not more than 50% of the value of the shares of capital stock of the Company may be held, directly or indirectly, applying certain constructive ownership rules, by five or fewer individuals at any time during the last half of each of the Company's taxable years. The outstanding Common Stock is owned by a sufficient number of investors and in appropriate proportions to permit it to satisfy these requirements. To protect against violations of these requirements, the Articles provide restrictions 70 72 on transfers of the Company's shares of Common Stock, as well as provisions that automatically convert shares of stock into nonvoting, non-dividend paying Excess Stock to the extent that the ownership otherwise might jeopardize the Company's REIT status. To monitor the Company's compliance with the share ownership requirements, the Company is required to and maintains records disclosing the actual ownership of common shares. To do so, the Company will demand written statements each year from the record holders of certain percentages of shares in which the record holders are to disclose the actual owners of the shares (i.e., the persons required to include in gross income the REIT dividends). A list of those persons failing or refusing to comply with this demand will be maintained as part of the Company's records. Stockholders who fail or refuse to comply with the demand must submit a statement with their tax returns disclosing the actual ownership of the shares and certain other information. The Company currently satisfies, and expects to continue to satisfy, each of these requirements discussed above. The Company also currently satisfies, and expects to continue to satisfy, the requirements that are separately described below concerning the nature and amounts of the Company's income and assets and the levels of required annual distributions. Sources of Gross Income. In order to qualify as a REIT for a particular year, the Company also must meet two tests governing the sources of its income. These tests are designed to ensure that a REIT derives its income principally from passive real estate investments. In evaluating a REIT's income, the REIT will be treated as receiving its proportionate share of the income produced by any partnership in which the REIT holds an interest as a partner, and any such income will retain the character that it has in the hands of the partnership. The Code allows the Company to own and operate a number of its properties through wholly-owned subsidiaries which are "qualified REIT subsidiaries." The Code provides that a qualified REIT subsidiary is not treated as a separate corporation, and all of its assets, liabilities and items of income, deduction and credit are treated as assets, liabilities and such items of the REIT. 75% Gross Income Test. At least 75% of a REIT's gross income for each taxable year must be derived from specified classes of income that principally are real estate related. The permitted categories of principal importance to the Company are: (i) rents from real property; (ii) interest on loans secured by real property; (iii) gain from the sale of real property or loans secured by real property (excluding gain from the sale of property held primarily for sale to customers in the ordinary course of the Company's trade or business, referred to below as "dealer property"); (iv) income from the operation and gain from the sale of certain property acquired in connection with the foreclosure of a mortgage securing that property ("foreclosure property"); (v) distributions on, or gain from the sale of, shares of other qualifying REITs; (vi) abatements and refunds of real property taxes; and (vii) "qualified temporary investment income" (described below). In evaluating the Company's compliance with the 75% gross income test (as well as the 95% gross income test described below), gross income does not include gross income from "prohibited transactions." In general, a prohibited transaction is one involving a sale of dealer property, not including foreclosure property and certain dealer property held by the Company for at least four years. The Company expects that substantially all of its operating gross income will be considered rent from real property. Rent from real property is qualifying income for purposes of the gross income tests only if certain conditions are satisfied. Rent from real property includes charges for services customarily rendered to tenants, and rent attributable to personal property leased together with the real property so long as the personal property rent is less than 15% of the total rent. The Company does not expect to earn material amounts in these categories. Rent from real property generally does not include rent based on the income or profits derived from the property. The Company does not intend to lease property and receive rentals based on the tenant's net income or profit. However, rent based on a percentage of gross income is permitted as rent from real property and the Company will have leases where rent is based on a percentage of gross income. Also excluded from "rents from real property" is rent received from a person or corporation in which the Company (or any of its 10% or greater owners) directly or indirectly through the constructive ownership rules contained in Section 318 of the Code, owns a 10% or greater interest ("Related Party Tenant Rent"). A third exclusion covers amounts received with respect to real property if the Company furnishes services to the tenants or 71 73 manages or operates the property, other than through an "independent contractor" from whom the Company does not derive any income. The obligation to operate through an independent contractor generally does not apply, however, if the services provided by the Company are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not considered rendered primarily for the convenience of the tenant (applying standards that govern in evaluating whether rent from real property would be unrelated business taxable income when received by a tax exempt owner of the property). Further, if the value of the non-customary service income with respect to a property (valued at no less than 150% of the Company's direct cost of performing such services) is 1% or less of the total income derived from the property, then all rental income from that property except the non-customary service income will qualify as "rents from real property." The Company will, in most instances, directly operate and manage its assets without using an "independent contractor." The Company believes that the only material services to be provided to tenants will be those usually or customarily rendered in connection with the rental of space for occupancy only. The Company will not provide services that might be considered rendered primarily for the convenience of the tenants, such as hotel, health care or extensive recreational or social services. Consequently, the Company believes that substantially all of its rental income will be qualifying income under the gross income tests, and that the Company's provision of services will not cause the rental income to fail to be included under that test. Upon the Company's ultimate sale of properties, any gains realized also are expected to constitute qualifying income, as gain from the sale of real property (not involving a prohibited transaction). 95% Gross Income Test. In addition to earning 75% of its gross income from the sources listed above, at least an additional 20% of the Company's gross income for each taxable year must come either from those sources, or from dividends, interest or gains from the sale or other disposition of stock or other securities that do not constitute dealer property. This test permits a REIT to earn a significant portion of its income from traditional "passive" investment sources that are not necessarily real estate related. The term "interest" (under both the 75% and 95% tests) does not include amounts that are based on the income or profits of any person, unless the computation is based only on a fixed percentage of receipts or sales. Failing the 75% or 95% Tests; Reasonable Cause. As a result of the 75% and 95% tests, REITs generally are not permitted to earn more than 5% of their gross income from active sources (such as brokerage commissions or other fees for services rendered). The Company may receive certain types of such income. This type of income will not qualify for the 75% test or 95% test but is not expected to be significant and such income, together with other nonqualifying income (including Related Party Tenant Rent, as discussed above), is expected to be at all times less than 5% of the Company's annual gross income. While the Company does not anticipate that it will earn substantial amounts of nonqualifying income, if nonqualifying income exceeds 5% of the Company's gross income, the Company could lose its status as a REIT. The Company has one subsidiary of which the Company holds less than 10% of the voting stock, which subsidiary holds assets generating non-qualifying income. The income generated by this subsidiary is substantially less than 5% of the Company's annual gross income. The Company may establish other such subsidiaries in the future. The gross income generated by these subsidiaries would not be included in the Company's gross income. However, dividends from such subsidiaries to the Company would be included in the Company's gross income and qualify for the 95% income test. If the Company fails to meet either the 75% or 95% income tests during a taxable year, it may still qualify as a REIT for that year if (i) it reports the source and nature of each item of its gross income in its federal income tax return for that year; (ii) the inclusion of any incorrect information in its return is not due to fraud with intent to evade tax; and (iii) the failure to meet the tests is due to reasonable cause and not to willful neglect. However, in that case the Company would be subject to a 100% tax based on the greater of the amount by which it fails either the 75% or 95% income tests for such year, multiplied by a fraction intended to reflect the Company's profitability. See "-- Taxation of the Company as a REIT." Character of Assets Owned. On the last day of each calendar quarter, the Company also must meet two tests concerning the nature of its investments. First, at least 75% of the value of the total assets of the Company generally must consist of real estate assets, cash, cash items (including receivables) and government securities. For this purpose, "real estate assets" include interests in real property, interests in loans secured by 72 74 mortgages on real property or by certain interests in real property, shares in other REITs and certain options, but excluding mineral, oil or gas royalty interests. The temporary investment of new capital in debt instruments also qualifies under this 75% asset test, but only for the one-year period beginning on the date the Company receives the new capital. Second, although the balance of the Company's assets generally may be invested without restriction, the Company will not be permitted to own (i) securities of any one non-governmental issuer that represent more than 5% of the value of the Company's total assets or (ii) more than 10% of the outstanding voting securities of any single issuer. A REIT, however, may own 100% of the stock of a qualified REIT subsidiary, in which case the assets, liabilities and items of income, deduction and credit of the subsidiary are treated as those of the REIT. In evaluating a REIT's assets, if the REIT invests in a partnership, it is deemed to own its proportionate share of the assets of the partnership. The Company currently complies with, and expects to continue to satisfy, these asset tests. Annual Distributions to Stockholders. To maintain REIT status, the Company generally must distribute to its stockholders in each taxable year at least 95% of its net ordinary income (capital gain is not required to be distributed). More precisely, the Company must distribute an amount equal to (i) 95% of the sum of (a) its "REIT Taxable Income" before deduction of dividends paid and excluding any net capital gain and (b) any net income from foreclosure property less the tax on such income, minus (ii) certain limited categories of "excess noncash income" (including, cancellation of indebtedness and original issue discount income). REIT Taxable Income is defined to be the taxable income of the REIT, computed as if it were an ordinary corporation, with certain modifications. For example, the deduction for dividends paid is allowed, but neither net income from foreclosure property, nor net income from prohibited transactions, is included. In addition, the REIT may carry over, but not carry back, a net operating loss for 20 years following the year in which it was incurred. A REIT may satisfy the 95% distribution test with dividends paid during the taxable year and with certain dividends paid after the end of the taxable year. Dividends paid in January that were declared during the last calendar quarter of the prior year and were payable to stockholders of record on a date during the last calendar quarter of that prior year are treated as paid on December 31 of the prior year (for both the Company and its stockholders). Other dividends declared before the due date of the Company's tax return for the taxable year (including extensions) also will be treated as paid in the prior year for the Company if they are paid (i) within 12 months of the end of such taxable year and (ii) no later than the Company's next regular distribution payment. Dividends that are paid after the close of a taxable year that do not qualify under the rule governing payments made in January (described above) will be taxable to the shareholders in the year paid, even though they may be taken into account by the Company for a prior year. A nondeductible excise tax equal to 4% will be imposed on the Company for each calendar year to the extent that dividends declared and distributed or deemed distributed before December 31 are less than the sum of (a) 85% of the Company's "ordinary income" plus (b) 95% of the Company's capital gain net income plus (c) any undistributed income from prior periods. The Company will be taxed at regular corporate rates to the extent that it retains any portion of its taxable income (e.g., if the Company distributes only the required 95% of its taxable income, it would be taxed on the retained 5%). Under certain circumstances the Company may not have sufficient cash or other liquid assets to meet the distribution requirement. This could arise because of competing demands for the Company's funds, or due to timing differences between tax reporting and cash receipts and disbursements (i.e., income may have to be reported before cash is received, or expenses may have to be paid before a deduction is allowed). Although the Company does not anticipate any difficulty in meeting this requirement, no assurance can be given that necessary funds will be available. In the event that such circumstances do occur, then in order to meet the 95% distribution requirement, the Company may cause WDOP to arrange for short-term, or possibly long-term, borrowings to permit the payment of required dividends. If the Company fails to meet the 95% distribution requirement because of an adjustment to the Company's taxable income by the IRS, the Company may be able to cure the failure retroactively by paying a "deficiency dividend" (as well as applicable interest and penalties) within a specified period. 73 75 TAXATION OF THE COMPANY AS A REIT As a REIT, the Company generally will not be subject to corporate income tax to the extent the Company currently distributes its REIT taxable income to its stockholders. This treatment effectively eliminates the "double taxation" (i.e., taxation at both the corporate and stockholder levels) imposed on investments in most corporations. The Company generally will be taxed only on the portion of its taxable income that it retains (which will include any undistributed net capital gain), because the Company will be entitled to a deduction for dividends paid to stockholders during the taxable year. A dividends paid deduction is not available for dividends that are considered preferential within any given class of shares or as between classes except to the extent such class is entitled to such preference. The Company does not anticipate that it will pay any such preferential dividends. Because Excess Stock will represent a separate class of outstanding shares, the fact that those shares will not be entitled to dividends should not adversely affect the Company's ability to deduct its dividend payments. Even as a REIT, the Company will be subject to tax in certain circumstances as follows: (i) the Company would be subject to tax on any income or gain from foreclosure property at the highest corporate rate (currently 35%); (ii) a confiscatory tax of 100% applies to any net income from prohibited transactions (which are, in general, certain sales or other dispositions of property held primarily for sale to customers in the ordinary course of business); (iii) if the Company fails to meet either the 75% or 95% source of income tests described above, but still qualifies for REIT status under the reasonable cause exception to those tests, a 100% tax would be imposed equal to the amount obtained by multiplying (a) the greater of the amount, if any, by which it failed either the 75% income test or the 95% income test, times (b) the ratio of the Company's REIT Taxable Income to the Company's gross income (excluding capital gain and certain other items); (iv) the Company will be subject to the alternative minimum tax on items of tax preference (excluding items specifically allocable to the Company's stockholders); (v) if the Company should fail to distribute with respect to each calendar year at least the sum of (a) 85% of its REIT ordinary income for such year, (b) 95% of its REIT capital gain net income for such year, and (c) any undistributed taxable income from prior years, the Company would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed; and (vi) under regulations that are to be promulgated, the Company also may be taxed at the highest regular corporate tax rate on any built-in gain (i.e., the excess of value over adjusted tax basis) attributable to assets that the Company acquires in certain tax-free corporate transactions, to the extent the gain is recognized during the first ten years after the Company acquires such assets. FAILURE TO QUALIFY AS A REIT For any taxable year in which the Company fails to qualify as a REIT and certain relief provisions do not apply, it would be taxed at regular corporate rates on all of its taxable income. Distributions to its stockholders would not be deductible in computing that taxable income, and distributions would no longer be required to be made. Any corporate level taxes generally would reduce the amount of cash available to the Company for distribution to its stockholders and, because the stockholders would continue to be taxed on the distributions they receive, the net after tax yield to the stockholders from their investment in the Company likely would be reduced substantially. As a result, the Company's failure to qualify as a REIT during any taxable year could have a material adverse effect upon the Company and its stockholders. If the Company loses its REIT status, unless certain relief provisions apply, the Company will not be eligible to elect REIT status again until the fifth taxable year which begins after the taxable year during which the Company's election was terminated. 74 76 TAXATION OF STOCKHOLDERS Distributions generally will be taxable to stockholders as ordinary income to the extent of the Company's earning and profits. Dividends declared during the last quarter of a calendar year and actually paid during January of the immediately following calendar year are generally treated as if received by the stockholders on December 31 of the calendar year during which they were declared. Distributions paid to stockholders will not constitute passive activity income, and as a result generally cannot be offset by losses from passive activities of a stockholder who is subject to the passive activity rules. Distributions designated by the Company as capital gains dividends generally will be taxed as long term capital gains to stockholders to the extent that the distributions do not exceed the Company's actual net capital gain for the taxable year. Corporate stockholders may be required to treat up to 20% of any such capital gains dividends as ordinary income. If the Company elects to retain and pay income tax on any net long-term capital gain, stockholders of the Company would include in their income as long-term capital gain their proportionate share of such net long-term capital gain. Such stockholders would receive a credit for such stockholder's proportionate share of the tax paid by the Company on such retained capital gains and an increase in basis in the stock of the Company in an amount equal to the difference between the undistributed long-term capital gains and the amount of tax paid by the Company. Distributions by the Company, whether characterized as ordinary income or as capital gains, are not eligible for the dividends received deduction for corporations. Stockholders are not permitted to deduct losses or loss carry-forwards of the Company. Future regulations may require that the stockholders take into account, for purposes of computing their individual alternative minimum tax liability, certain tax preference items of the Company. The Company may generate cash in excess of its net earnings. If the Company distributes cash to stockholders in excess of the Company's current and accumulated earnings and profits (other than as a capital gain dividend), the excess cash will be deemed to be a return of capital to each stockholder to the extent of the adjusted tax basis of the stockholder's shares. Distributions in excess of the adjusted tax basis will be treated as gain from the sale or exchange of the shares of stock. A stockholder who has received a distribution in excess of current and accumulated earnings and profits of the Company may, upon the sale of the shares, realize a higher taxable gain or a smaller loss because the basis of the shares as reduced will be used for purposes of computing the amount of the gain or loss. Generally, gain or loss realized by a stockholder upon the sale of Common Stock or Preferred Stock will be reportable as capital gain or loss. If a stockholder receives a long-term capital gain dividend from the Company and has held the shares of stock for six months or less, any loss incurred on the sale or exchange of the shares is treated as a long-term capital loss to the extent of the corresponding long-term capital gain dividend received. In any year in which the Company fails to qualify as a REIT, the stockholders generally will continue to be treated in the same fashion described above, except that none of the Company dividends will be eligible for treatment as capital gains dividends, corporate stockholders will qualify for the dividends received deduction and the stockholders will not be required to report any share of the Company's tax preference items. BACKUP WITHHOLDING The Company will report to its stockholders and the IRS the amount of dividends paid during each calendar year and the amount of tax withheld, if any. If a stockholder is subject to backup withholding, the Company will be required to deduct and withhold from any dividends payable to that stockholder a tax of 31%. These rules may apply (i) when a stockholder fails to supply a correct taxpayer identification number, (ii) when the IRS notifies the Company that the stockholder is subject to the rules or has furnished an incorrect taxpayer identification number, or (iii) in the case of corporations or others within certain exempt categories, when they fail to demonstrate that fact when required. A stockholder that does not provide a correct taxpayer identification number may also be subject to penalties imposed by the IRS. Any amount withheld as backup withholding may be credited against the stockholder's federal income tax liability. The Company also may be required to withhold a portion of capital gain distributions made to stockholders who fail to certify their non-foreign status to the Company. 75 77 The United States Treasury has recently issued final regulations (the "Final Regulations") regarding the withholding and information reporting rules discussed above. In general, the Final Regulations do not alter the substantive withholding and information reporting requirements but unify current certification procedures and clarify reliance standards. The Final Regulations are generally effective for payments made on or after January 1, 2000, subject to certain transition rules. Prospective investors should consult their own tax advisors concerning the adoption of the Final Regulations and the potential effect on their ownership of Common Stock or Preferred Stock. TAXATION OF TAX EXEMPT ENTITIES In general, a tax exempt entity that is a stockholder of the Company will not be subject to tax on distributions from the Company or gain realized on the sale of shares. In Revenue Ruling 66-106, the IRS confirmed that a REIT's distributions to a tax exempt employees' pension trust did not constitute unrelated business taxable income ("UBTI"). A tax exempt entity may be subject to UBTI, however, to the extent that it has financed the acquisition of its shares with "acquisition indebtedness" within the meaning of the Code. The Revenue Reconciliation Act of 1993 has modified the rules for tax exempt employees' pension and profit sharing trusts which qualify under Section 401(a) of the Code and are exempt from tax under Section 501(a) of the Code ("qualified trusts") for tax years beginning after December 31, 1993. In determining the number of stockholders a REIT has for purposes of the "50% test" described above under "-- REIT Qualification --," generally, any stock held by a qualified trust will be treated as held directly by its beneficiaries in proportion to their actuarial interests in such trust and will not be treated as held by such trust. A qualified trust owning more than 10% of a REIT may be required to treat a percentage of dividends from the REIT as UBTI. The percentage is determined by dividing the REIT's gross income (less direct expenses related thereto) derived from an unrelated trade or business for the year (determined as if the REIT were a qualified trust) by the gross income of the REIT for the year in which the dividends are paid. However, if this percentage is less than 5%, dividends are not treated as UBTI. These UBTI rules apply only if the REIT qualifies as a REIT because of the change in the 50% test discussed above and if the trust is "predominantly held" by qualified trusts. A REIT is predominantly held by qualified trusts if at least one pension trust owns more than 25% of the value of the REIT or a group of pension trusts each owning more than 10% of the value of the REIT collectively own more than 50% of the value of the REIT. The Company does not currently meet either of these requirements. For social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans exempt from federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, income from an investment in the Company will constitute UBTI unless the organization is able to deduct an amount properly set aside or placed in reserve for certain purposes so as to offset the unrelated business taxable income generated by the investment in the Company. These prospective investors should consult their own tax advisors concerning the "set aside" and reserve requirements. TAXATION OF FOREIGN INVESTORS The rules governing federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships and other foreign stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt will be made herein to provide more than a summary of such rules. Prospective Non-U.S. Stockholders should consult with their own tax advisors to determine the impact of federal, state and local income tax laws with regard to an investment in shares of Common Stock or Preferred Stock, including any reporting requirements, as well as the tax treatment of such an investment under the laws of their home country. Dividends that are not attributable to gain from sales or exchanges by the Company of United States real property interests and not designated by the Company as capital gain dividends will be treated as dividends of ordinary income to the extent that they are made out of current or accumulated earnings and profits of the Company. Such dividends ordinarily will be subject to a withholding tax equal to 30% of the gross amount of 76 78 the dividend unless an applicable tax treaty reduces or eliminates that tax. However, if income from the investment in the Common Stock or Preferred Stock is treated as effectively connected with the Non-U.S. Stockholder's conduct of a United States trade or business, the Non-U.S. Stockholder generally will be subject to a tax at graduated rates, in the same manner as U.S. stockholders are taxed with respect to such dividends (and may also be subject to the 30% branch profits tax in the case of a stockholder that is a foreign corporation). For withholding tax purposes, the Company is currently required to treat all distributions as if made out of its current and accumulated earnings and profits and thus intends to withhold at the rate of 30% (or a reduced treaty rate if applicable) on the amount of any distribution (other than distributions designated as capital gain dividends) made to a Non-U.S. Stockholder unless (i) the Non-U.S. Stockholder files on IRS Form 1001 claiming that a lower treaty rate applies or (ii) the Non-U.S. Stockholder files an IRS Form 4224 with the Company claiming that the dividend is effectively connected income. Under the Final Regulations, generally effective for distributions on or after January 1, 2000, the Company would not be required to withhold at the 30% rate on distributions it reasonably estimates to be in excess of the Company's current and accumulated earnings and profits. Dividends in excess of current and accumulated earnings and profits of the Company will not be taxable to a stockholder to the extent that they do not exceed the adjusted basis of the stockholder's shares, but rather will reduce the adjusted basis of such shares. To the extent that such dividends exceed the adjusted basis of a Non-U.S. Stockholder's shares of stock, they will give rise to tax liability if the Non-U.S. Stockholder would otherwise be subject to tax on any gain from the sale or disposition of his shares, as described below. If it cannot be determined at the time a dividend is paid whether or not such dividend will be in excess of current and accumulated earnings and profits, the dividends will be subject to such withholding. The Company does not intend to make quarterly estimates of that portion of dividends that are in excess of earnings and profits, and, as a result, all dividends will be subject to such withholding. However, the Non-U.S. Stockholder may seek a refund of such amounts from the IRS. For any year in which the Company qualifies as a REIT, distributions that are attributable to gain from sales or exchanges by the Company of United States real property interests will be taxed to a Non-U.S. Stockholder under the provisions of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA, those dividends are taxed to a Non-U.S. Stockholder as if such gain were effectively connected with a United States business. Non-U.S. Stockholders would thus be taxed at the normal capital gain rates applicable to U.S. stockholders (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). Also, dividends subject to FIRPTA may be subject to a 30% branch profits tax in the hands of a corporate Non-U.S. Stockholder not entitled to treaty exemption. The Company is required by the Code and applicable Treasury Regulations to withhold 35% of any dividend that could be designated by the Company as a capital gain dividend. This amount is creditable against the Non-U.S. Stockholder's FIRPTA tax liability. Gain recognized by a Non-U.S. Stockholder upon a sale of shares generally will not be taxed under FIRPTA if the Company is a "domestically controlled REIT," defined generally as a REIT in which at all times during a specified testing period less than 50% in value of the shares was held directly or indirectly by foreign persons. It is currently anticipated that the Company will be a "domestically controlled REIT," and therefore the sale of shares will not be subject to taxation under FIRPTA. Because the shares of Common Stock will be publicly traded, however, no assurance can be given that the Company will remain a "domestically controlled REIT." However, gain not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i) investment in the shares of Common Stock or Preferred Stock is effectively connected with the Non-U.S. Stockholder's United States trade or business, in which case the Non-U.S. Stockholder will be subject to the same treatment as U.S. stockholders with respect to such gain (and may also be subject to the 30% branch profits tax in the case of a corporate Non-U.S. Stockholder, or (ii) the Non-U.S. Stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a "tax home" in the United States, in which case the nonresident alien individual will be subject to a 30% withholding tax on the individual's capital gains. If the Company were not a domestically controlled REIT, whether or not a Non-U.S. Stockholder's sale of shares of Common Stock or Preferred Stock would be subject to tax under FIRPTA would depend on whether or not the shares of Common Stock or Preferred Stock were regularly traded on an established securities market (such as the NYSE) and on the size of selling Non-U.S. Stockholder's interest in the Company. If the gain on the sale of shares were to be subject to 77 79 taxation under FIRPTA, the Non-U.S. Stockholder will be subject to the same treatment as U.S. stockholders with respect to such gain (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals) and the purchaser of such shares of Common Stock or Preferred Stock may be required to withhold 10% of the gross purchase price. STATE AND LOCAL TAXES The Company and its stockholders may be subject to state or local taxation in various state or local jurisdictions, including those in which it or they transact business or reside. Consequently, prospective stockholders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in the Company. ERISA CONSIDERATIONS A fiduciary of a pension, profit-sharing, retirement or other employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (a "Plan"), should consider the fiduciary standards under ERISA in the context of the Plan's particular circumstances before authorizing an investment of a portion of such Plan's assets in the shares of Common Stock. In particular, such fiduciary should consider (i) whether the investment satisfies the diversification requirements of Section 404(a)(1)(c) of ERISA, (ii) whether the investment is in accordance with the documents and instruments governing the Plan as required by Section 404(a)(1)(D) of ERISA, (iii) whether the investment is for the exclusive purpose of providing benefits to participants in the Plan and their beneficiaries or defraying reasonable administrative expenses of the Plan, and (iv) whether the investment is prudent under ERISA. In addition to the imposition of general fiduciary standards of investment prudence and diversification, ERISA, and the corresponding provisions of the Code, prohibit a wide range of transactions involving the assets of a Plan or an individual retirement account ("IRA") and persons who have certain specified relationships to the Plan or an IRA ("parties in interest" within the meaning of ERISA, "disqualified persons" within the meaning of the Code). Thus, a fiduciary of a Plan or an IRA considering an investment in the shares of Common Stock also should consider whether the acquisition or the continued holding of the shares of Common Stock might constitute or give rise to a direct or indirect prohibited transaction. The Department of Labor (the "DOL") has issued final regulations (the "Regulations") as to what constitutes assets of an employee benefit plan under ERISA. Under the Regulations, if a Plan or an IRA acquires an equity interest in an entity, which interest is neither a "publicly offered security" nor a security issued by an investment company registered under the Investment Company Act of 1940, as amended, the Plan's and IRA's assets would include, for purposes of the fiduciary responsibility provisions of ERISA and the prohibited transaction provisions of ERISA and the Code, both the equity interest and an undivided interest in each of the entity's underlying assets unless certain specified exceptions apply. The Regulations define a publicly-offered security as a security that is "widely held," "freely transferable," and either part of a class of securities registered under the Exchange Act, or sold pursuant to an effective registration statement under the Securities Act (provided the securities are registered under the Exchange Act within 120 days after the end of the fiscal year of the issuer during which the offering occurred). The Offered Securities will be sold in an offering registered under the Securities Act and are or will be registered under the Exchange Act. The Regulations provide that a security is "widely held" only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. A security will not fail to be "widely held" because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer's control. The Regulations provide that whether a security is "freely transferable" is a factual question to be determined on the basis of all relevant facts and circumstances. The DOL Regulations further provide that when a security is part of an offering in which the minimum investment is $10,000 or less certain restrictions ordinarily will not, alone or in combination, affect the finding that such securities are freely transferable. The Company believes that the restrictions imposed under the Articles on the transfer of the capital stock are limited to the restrictions on transfer generally permitted under the Regulations and are not likely to result in 78 80 the failure of the capital stock to be "freely transferable." The Company also believes that certain restrictions that apply to the capital stock held by the Company or which may be derived from contractual arrangements requested by the underwriters in connection with Walden Securities offered pursuant to an underwritten agreement are unlikely to result in the failure of the capital stock to be "freely transferable." The Regulations only establish a presumption in favor of the finding of free transferability, and, therefore, no assurance can be given that the DOL and the U.S. Treasury Department will not reach a contrary conclusion. Assuming that the Walden Securities will be "widely held," the Company believes that the Walden Securities will be publicly held for purposes of the Regulations and that the assets of the Company will not be deemed to be "plan assets" of any Plan or IRA that invests in the Offered Securities. 79 81 INFORMATION REGARDING WALDEN/DREVER OPERATING PARTNERSHIP, L.P. GENERAL Walden/Drever Operating Partnership, L.P. ("WDOP") is a Delaware limited partnership of which the Company is the sole general partner. WDOP is consolidated with the Company for accounting purposes. WDOP was originally formed for the purpose of acquiring the partnership interests of the partnerships (the "Drever Partnerships") of which Drever Partners, Inc. ("Drever") and certain of its affiliates were the general partners (the "Former General Partners"). The stated purpose of WDOP is to invest in, purchase, develop, own, manage, lease, finance and dispose of multifamily real estate properties, enter into partnership, joint venture or similar arrangements to engage in the foregoing, or any other activity which all of the partners approve. The principal place of business of WDOP is 5080 Spectrum Drive, Suite 1000 East, Addison, Texas 75001. The term of WDOP is until the first to occur of (i) December 31, 2017 or (ii) the dissolution of WDOP pursuant to the express provisions of the WDOP Partnership Agreement or by law. THE WDOP PARTNERSHIP AGREEMENT The summary of the terms of the WDOP Partnership Agreement set forth below does not purport to be complete and is subject to, and qualified in its entirety by, reference to the WDOP Partnership Agreement, a copy of which is available without charge. See "Available Information." Capitalized terms used in this section but not otherwise defined herein shall have the respective meanings ascribed to such terms in the WDOP Partnership Agreement. Distributions. Within 60 days after the end of each fiscal quarter, the Company, as the general partner, will cause WDOP to distribute 100% of cash funds derived from the operation of WDOP's business, after deduction of operating expenses, all scheduled payments on indebtedness, expenditures for capital improvements, all current liabilities and a working capital reserve in an amount the Company deems reasonably necessary or advisable. The priority of distributions will be as follows: (i) to the Class B Limited Partners holding Preferred OP Units on the record date for such distribution, in an amount equal to (a) the product of the number of Preferred OP Units owned and $.5625, plus (b) the amount of distributions previously unpaid to the Class B Limited Partners in respect to their Preferred OP Units together with all accrued and unpaid interest thereon, (ii) to the Class B Limited Partners holding Common OP Units on the record date for such distribution, in an amount equal to (a) the number of shares of Common Stock for which each such Common Unit is then exchangeable (which, as of the Closing Date, will be one share, subject to adjustment under certain circumstances) multiplied by the dividend then payable by the Company on a share of Common Stock plus (b) the amount of distributions due but previously unpaid to the Class B Limited Partners in respect to their Common OP Units together with all accrued and unpaid interest thereon and (iii) of the remainder, 1% to the Company, as general partner, and 99% to WDN Properties, Inc. or any other person admitted pursuant to the WDOP Partnership Agreement as a Class A Limited Partner (each, a "Class A Limited Partner"). If WDOP does not make all or any portion of such quarterly distributions to the holders of the Units, the unpaid amount will bear interest at a rate equal to the prime rate (as calculated pursuant to the terms of the WDOP Partnership Agreement) plus 8% per annum. Upon exchange of Common OP Units or Preferred OP Units, WDOP will distribute to the exchanging Limited Partner, in cash or shares, an amount equal to the amount of distributions due but unpaid to the exchanging Limited Partner in respect of the Common OP Units and Preferred OP Units being exchanged, together with all accrued and unpaid interest thereon. Tax Allocations. Section 5.3(a) of the WDOP Partnership Agreement provides that any profits of WDOP will be allocated in the following order and priority: (i) first, to the Class B Preferred Limited Partners in proportion to their respective Percentage Interests until the amount of Profits allocated to the Class B Preferred Limited Partners pursuant to this clause (i) for the current Fiscal Year equals the excess of (A) the sum of (I) the cumulative amount of the Class B Preferred Distribution for each Fiscal Quarter of the current Fiscal Year and all prior Fiscal Years and (II) the cumulative amount of the interest component of the Unpaid Preferred Distribution 80 82 Account described in clause (ii) of the definition of Unpaid Preferred Distribution Account in Article 1 of the WDOP Partnership Agreement (but, in the case of both (I) and (II) above, only to the extent that such distributions or interest component have been previously paid to the Class B Preferred Limited Partners pursuant to Sections 5.1(a)(i) or 5.1(b) of the WDOP Partnership) over (B) the cumulative amount of profits allocated to the Class B Preferred Limited Partners pursuant to Section 5.3(a)(i) of the WDOP Partnership Agreement for all prior Fiscal Years; (ii) second, to the Class B Common Limited Partners in proportion to their respective Percentage Interests until the amount of profits allocated to the Class B Common Limited Partners pursuant to Section 5.3(a)(ii) of the WDOP Partnership Agreement for the current Fiscal Year equals the excess of (A) the sum of (I) the cumulative amount of the Class B Common Distribution for each Fiscal Quarter of the current Fiscal Year and all prior Fiscal Years and (II) the cumulative amount of the interest component of the Unpaid Common Distribution Account described in clause (ii) of the definition of Unpaid Common Distribution Account in Article 1 of the WDOP Partnership Agreement (but, in the case of both (I) and (II) above, only to the extent that such distributions or interest component have been previously paid to the Class B Common Limited Partners pursuant to Sections 5.1(a)(ii) or 5.1(b) of the WDOP Partnership Agreement) over (B) the cumulative amount of profits allocated to the Class B Common Limited Partners pursuant to this clause (ii) for all prior Fiscal Years; (iii) third, to the Company, as general partner of WDOP, in proportion to and to the extent of an amount equal to the excess, if any, of (A) the cumulative Losses allocated to the Company pursuant to the last sentence of Section 5.6 of the WDOP Partnership Agreement for all prior Fiscal Years, over (B) the cumulative profits allocated to the Company pursuant to Section 5.3(a)(iii) of the WDOP Partnership Agreement for all prior Fiscal Years; (iv) fourth, to the Partners (other than the Class B Limited Partners), in proportion to and to the extent of an amount equal to the excess, if any, of (A) the cumulative Losses allocated to such Partners pursuant to Section 5.3(b)(iv) of the WDOP Partnership Agreement hereof for all prior Fiscal Years, over (B) the cumulative profits allocated to such Partners pursuant to Section 5.3(a)(iv) of the WDOP Partnership Agreement for all prior Fiscal Years; (v) fifth, to the Class B Preferred Limited Partners, in proportion to and to the extent of an amount equal to the excess, if any, of (A) the cumulative Losses allocated to each such Partner pursuant to Section 5.3(b)(iii) of the WDOP Partnership Agreement for all prior Fiscal Years, over (B) the cumulative profits allocated to such Partner pursuant to Section 5.3(a)(v) of the WDOP Partnership Agreement for all prior Fiscal Years; (vi) sixth, to the Class B Common Limited Partners, in proportion to and to the extent of an amount equal to the excess, if any, of (A) the cumulative Losses allocated to each such Partner pursuant to Section 5.3(b)(ii) of the WDOP Partnership Agreement for all prior Fiscal Years, over (B) the cumulative profits allocated to such Partner pursuant to Section 5.3(a)(vi) of the WDOP Partnership Agreement for all prior Fiscal Years; and (vii) thereafter, to the Company, as general partner of WDOP, and the Class A Limited Partners in accordance with their respective Percentage Interests. Section 5.3(b) of the WDOP Partnership Agreement provides that any losses of WDOP will be allocated in the following order: (i) first, to the Company, as general partner of WDOP, and the Class A Limited Partners in proportion to and until the amount of losses allocated pursuant to this clause (i) for the current Fiscal Year equals the excess, if any, of (A) the sum of (I) their respective Capital Account balances on the Effective Date, (II) the Capital Contributions made by such Partners subsequent to the Effective Date and (III) the cumulative amount of Profits allocated to such Partners pursuant to Section 5.3(a)(vi) of the WDOP Partnership Agreement over (B) the sum of (I) cumulative amount of losses allocated to such Partners pursuant to this clause (i) for all prior Fiscal Years and (II) the cumulative amount of distributions made to them pursuant to Section 5.1(a)(iii) of the WDOP Partnership Agreement; 81 83 (ii) second, to the Class B Common Limited Partners, in proportion to their respective Percentage Interests until the amount of losses allocated pursuant to this clause (ii) for the current Fiscal Year equals the excess, if any, of (A) the sum of (I) the aggregate amount of the portion of their Capital Account balances on the Effective Date attributable to Class B Common OP Units, (II) the aggregate Capital Contributions made by such Partners subsequent to the Effective Date in respect of their Class B Common OP Units, and (III) the cumulative amount of Profits allocated to them pursuant to Section 5.3(a)(ii) of the WDOP Partnership Agreement over (B) the sum of (I) cumulative amount of losses allocated to such Partners pursuant to this clause (ii) for all prior Fiscal Years and (II) the cumulative amount of distributions made to them pursuant to Section 5.1(a)(ii) of the WDOP Partnership Agreement; (iii) third, to the Class B Preferred Limited Partners, in proportion to their respective Percentage Interests until the amount of losses allocated pursuant to this clause (iii) for the current Fiscal Year equals the excess, if any, of (A) the sum of (I) the aggregate amount of the portion of their Capital Account balances on the Effective Date attributable to Class B Preferred OP Units, (II) the aggregate Capital Contributions made by such Partners subsequent to the Effective Date in respect of their Class B Preferred OP Units, and (III) the cumulative amount of profits allocated to them pursuant to Section 5.3(a)(i) of the WDOP Partnership Agreement over (B) the sum of (I) the cumulative amount of losses allocated to such Partners pursuant to this clause (iii) for all prior Fiscal Years and (II) the cumulative amount of distributions made to them pursuant to Section 5.1(a)(i) of the WDOP Partnership Agreement; and (iv) thereafter, 1% to the Company, as general partner of WDOP, and 99% to the Limited Partners (other than the Class B Limited Partners) in accordance with their Percentage Interests. In addition to the allocations described above, commencing on the first day of the month following the first anniversary of the Effective Date, the WDOP Partnership Agreement provides for a special allocation of depreciation to the Class B Common Limited Partners who continue to be Class B Common Limited Partners on December 31 of the taxable year in respect of which such special allocation is to be made. Status of Limited Partners. The power to participate in the management and control of WDOP business, the power to transact WDOP business and the power to act for and bind WDOP is vested solely in the Company, as general partner, and no limited partner of WDOP will be bound by or personally liable for the expenses, liabilities or obligations of WDOP other than those required by statute. The Company may not be removed as general partner with or without cause. All management powers are vested exclusively in the Company, including, without limitation: (1) The making of any expenditures, the lending or borrowing of money, the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness and the incurring of any obligations it deems necessary for the conduct of the activities of WDOP; (2) The acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any properties of WDOP; (3) The use of the assets of WDOP and affiliates of WDOP controlled by WDOP for any purpose consistent with the terms of the WDOP Partnership Agreement; (4) The management, operation, leasing, landscaping, repair, alteration, demolition or improvement of any real property or improvements owned by WDOP either directly or through one or more contractors; (5) The distribution of WDOP cash or property in accordance with the WDOP Partnership Agreement; (6) Holding, managing, investing and reinvesting cash and other assets of WDOP; 82 84 (7) The formation of, or acquisition of an interest in, and the contribution of property to, any other limited or general partnerships, joint venture or other relationship that it deems desirable; (8) The exercise of any of the powers of the general partner enumerated in the WDOP Partnership Agreement on behalf of or in connection with any other person in which WDOP has a direct or indirect interest, or jointly with any other persons; (9) The making, execution and delivery of any and all deeds, leases, notes, deeds to secure debt, mortgages, deeds of trust, security agreements, conveyances, contracts, guarantees, warranties, indemnities, waivers, releases or legal instruments or agreements in writing necessary or appropriate in the judgment of the Company for the accomplishment of any of the powers of the Company enumerated in the WDOP Partnership Agreement; (10) The merger, consolidation or other combination of WDOP with any other person; and (11) The undertaking of any action necessary to admit any person as an additional or substitute limited partner pursuant to the terms of the WDOP Partnership Agreement. The Company, as general partner, may file amendments to and restatements of the WDOP Partnership Agreement to the extent that the Company determines such action to be reasonable and necessary or appropriate and provided that it is not inconsistent with any provision of the WDOP Partnership Agreement. The Company can also prevent acts which it believes, in its sole and absolute discretion, (i) could adversely affect the ability of the Company to continue to qualify as a REIT, (ii) could subject the Company to any taxes under Section 857 or Section 4981 of the Code, or (iii) could violate any law or regulation. As the sole general partner, the Company will have full authority to conduct the business of WDOP, provided that without the consent of Class B Limited Partners holding a majority of the partnership interests in WDOP then held by such partners, the Company may not execute "Major Actions." Major Actions include: 1. The sale, exchange, transfer or other disposition of certain properties prior to the third anniversary of the effective date of WDOP Partnership Agreement; 2. The commencement by WDOP of a voluntary case under any applicable bankruptcy law in effect at or after the effective date of the WDOP Partnership Agreement; 3. The taking of any action that makes it impossible for WDOP to fulfill its stated purpose; 4. Withdrawal of the Company as general partner of WDOP; and 5. Effecting a dissolution of WDOP prior to the tenth anniversary after the effective date of the WDOP Partnership Agreement. WDOP has established a special committee (the "Special Committee") consisting of two members appointed by the Company, as general partner, and two members appointed by the Class B Limited Partners. The purpose of the Special Committee is to approve transactions between WDOP and affiliated entities and other Partnership decisions that could affect the Class B Limited Partners. The WDOP Partnership Agreement requires the Company obtain the Special Committee's approval of the following matters: 1. Determination of the fair market value of certain in-kind contributions and distributions of property; 2. Lending or contributing funds or other assets of WDOP to persons in which WDOP has an equity investment; and 3. Transfers of WDOP assets to joint ventures, other partnerships, corporations or other business entities in which WDOP is or thereby becomes a participant. Members of the Special Committee do not receive compensation for their service on such committee. The Special Committee will terminate on the first date on which the percentage of interest in WDOP owned by the Class B Limited Partners is reduced below 33.33%. 83 85 Capital Contributions. The Company, as general partner, is generally authorized to issue such additional partnership interests (but without rights, powers and duties senior to the Common OP Units or Preferred OP Units) as it shall determine, in its sole and absolute discretion. No partner has the right to demand the return of its capital contribution or that interest be paid on its capital contribution. Preemptive, preferential or similar rights with respect to (i) additional capital contributions or (ii) the issuance or sale of WDOP interests are expressly denied. Transfers of Partnership Interests; Withdrawal from WDOP. The Company, as general partner, must have approval of a majority in interest of the limited partners of WDOP to transfer its interest, except for transfers to affiliates, transfers by consolidation or merger or acquisitions of the Company. The consent of the Company is required for any limited partner of WDOP to transfer its interest in WDOP other than transfers to affiliates of such transferee, which require no consent. The term "transfer" includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise. Limited partners of WDOP may withdraw from WDOP only by transfer of their interest in WDOP. Upon transfer of a limited partner's interest in WDOP and upon the admission of all assignees to WDOP, such limited partner immediately ceases to be a limited partner of WDOP. WDOP has the right to redeem each Preferred OP Unit, on or after the tenth anniversary of the effective date of the WDOP Partnership Agreement, for cash equal to the sum of (i) $25.00 and (ii) the portion of any unpaid distributions relating to the redeemed Preferred OP Unit. Dissolution. WDOP will dissolve and its affairs will be wound-up upon the first to occur of the following: 1. The expiration of WDOP's stated term on December 31, 2017; 2. An event of withdrawal of the Company as general partner; 3. An election to dissolve (prior to the tenth anniversary of the effective date of the WDOP Partnership Agreement) WDOP made by the Company as general partner with the approval of all of the limited partners; 4. An election to dissolve made by the Company as general partner after the tenth anniversary of the effective date of the WDOP Partnership Agreement and following 20 days after notice is given to the limited partners; 5. The entry of a decree of judicial dissolution of WDOP; 6. The sale or disposition of all or substantially all of the assets and properties of WDOP pursuant to the terms of the WDOP Partnership Agreement; 7. The bankruptcy of the Company; and 8. A change in the Code, regulations and/or administrative rulings of the Internal Revenue Service to the effect that ownership of WDOP interests by the Company, WDN Properties, Inc. or their affiliates will likely cause the Company to fail to qualify as a REIT. The proceeds from winding-up the operations of WDOP will be applied and distributed in the following order: 1. First, to the payment and discharge of all of WDOP's debts and liabilities to creditors other than partners; 2. Second, to the payment and discharge of all of WDOP's debts and liabilities to partners; and 3. The balance, if any, to and among the partners of WDOP pro rata in accordance with the positive balances of their capital accounts, after giving effect to all contributions, distributions, and allocations for all periods. 84 86 POLICIES OF WDOP As the general partner of WDOP, the Company controls the operations and policies of WDOP, except as otherwise provided by law or the WDOP Partnership Agreement. The Company operates WDOP in a manner consistent with operations and policies of the Company. See "The Company" and "Policies with Respect to Certain Activities." REAL ESTATE WDOP, directly or indirectly through its affiliates, holds title to 104 of the Properties owned by the Company. These Properties are indicated with an asterisk on the property information table entitled "Apartments Owned" on pages 38 through 42 of this Prospectus. TAX TREATMENT OF WDOP General. In general, a partnership is treated as a "pass-through" entity for Federal income tax purposes and thus is not subject to Federal income taxation. Each partner of a partnership, however, is subject to tax on his allocable share of partnership tax items, including partnership income, gains, losses, deductions, and credits ("Partnership Tax Items") for each taxable year during which he continues to be a partner, regardless of whether such partner receives any actual distributions from the partnership during the taxable year. Generally, the characterization of any particular Partnership Tax Item is determined at the partnership, rather than at the partner level, and the amount of a partner's allocable share of such item is governed by the terms of the partnership agreement. Accordingly, for each taxable year during which a WDOP limited partner continues to hold Units, such partner will be (i) required to include in income his allocable share of any WDOP income or gain and (ii) entitled to deduct his allocable share of any WDOP deductions or losses, subject to certain limitations imposed upon the deductibility of partnership losses discussed below under the heading "Loss Limitations." Cash Distributions. Cash distributions received from a partnership do not necessarily correlate with income, if any, earned by the partnership as determined for Federal income tax purposes. Thus, a partner's Federal income tax liability in respect of his allocable share of partnership taxable income for a particular taxable year may exceed the amount of cash, if any, distributed by the partnership to the partner during such year. If cash distributions, including a "deemed" cash distribution resulting from a reduction of certain WDOP liabilities as discussed below, received by a WDOP limited partner in any taxable year exceed his allocable share of WDOP's taxable income for the year, the excess will constitute, for Federal income tax purposes, a return of capital, to the extent of such partner's Adjusted Tax Basis in his Units, which will not be subject to tax. If a WDOP limited partner's Adjusted Tax Basis in his Units is reduced to zero, a subsequent cash distribution or "deemed" cash distribution received by such partner will be subject to tax generally as capital gain, but only if, and to the extent that, such distribution exceeds the subsequent positive adjustments, if any, to the Adjusted Tax Basis of the WDOP limited partner's Units as determined generally at the end of the taxable year during which such distribution is received. A decrease in a WDOP limited partner's share of WDOP liabilities resulting from the payment or other settlement of such liabilities is generally treated, for Federal income tax purposes, as a deemed cash distribution. WDOP may determine to pay down certain direct obligations of WDOP or obligations of its lower tier partnerships. Accordingly, as a result of such liability reduction, it is possible that a WDOP limited partner may be treated as receiving a hypothetical distribution of cash resulting from a decrease in a such partner's share of WDOP liabilities. Special Allocations of Partnership Tax Items. Section 704(c) Gain. Generally, under section 704(c) of the Code, when a partner contributes appreciated property to a partnership and the partnership subsequently disposes of the contributed property in a taxable transaction, the gain recognized as a result of such disposition will be specially allocated to the 85 87 contributing partner in an amount equal to the lesser of (i) the excess of the fair market value of such property at the time of contribution over the contributing partner's adjusted tax basis in the property at such time (i.e., "built-in gain") or (ii) the gain recognized by the partnership upon the disposition of the property. Accordingly, if WDOP determines to cause the Partnership to dispose of Partnership property in a taxable transaction, which property constitutes built-in gain property held by the Partnership on the Effective Date, gain from such taxable disposition will be specially allocated to the Limited Partner to the extent of his allocable share of the built-in gain in respect of such property. Although the WDOP Partnership Agreement generally prohibits WDOP from causing the Partnership to dispose of built-in gain property during the three-year period commencing with the Effective Date, WDOP will thereafter be free to dispose of any such property in a taxable disposition, thereby triggering a special allocation of built-in gain to the contributing Limited Partners. See "Description of the Offer -- The WDOP Partnership Agreement -- Status of Limited Partners" above. Other Special Allocations. Commencing on the first day of the month following the first anniversary of the Effective Date, the WDOP Partnership Agreement provides for a special allocation of depreciation to the Class B Common Limited Partners who continue to be Class B Common Limited Partners on December 31 of the taxable year in respect of which such special allocation is to be made. See "Description of the Offer -- The WDOP Partnership Agreement -- Tax Allocations" above. No assurance can be given that the IRS would not challenge such special allocations. Accordingly, such Unit holders are urged to consult with their tax advisors with respect to this issue. LOSS LIMITATIONS Basis Limitation. To the extent that a WDOP limited partner's allocable share of deductions and losses exceeds his Adjusted Tax Basis in his Units at the end of the taxable year in which such losses flow through, the excess losses cannot be used, for Federal income tax purposes, by the WDOP limited partner in such year. Such excess losses may, however, be used in the first succeeding taxable year in which, and to the extent that, there is an increase in such partner's Adjusted Tax Basis in his Units, but only to the extent permitted under the "at risk" and passive activity loss rules discussed below. Passive Activity Loss Limitation Rules. Generally, an investment in the Units by a WDOP Limited Partner received in an exchange for an Interest will be treated as an investment in a passive activity for purposes of the passive activity loss limitation rules. See "-- Rules Applicable to All Limited Partners Exchanging Interests Pursuant to the Offer -- Passive Activity Losses" above. Under the passive activity loss rules, a WDOP limited partner who is an individual investor, as well as certain other types of investors, will not be able to use losses from WDOP to offset nonpassive activity income, including salary, business income, and portfolio income (e.g., dividends, interest, royalties, and gain on the disposition of portfolio investments) received during the taxable year. Passive activity losses that are disallowed for a particular taxable year may, however, be carried forward to offset passive activity income earned by the WDOP limited partner in future taxable years. In addition, such disallowed losses may be claimed as a deduction, subject to the application of the at risk limitation rules discussed below, upon a taxable disposition of all of the Units by the WDOP limited partner. If WDOP were to be treated as a "publicly traded partnership," as discussed below under the heading "Publicly Traded Partnership Considerations," the passive activity loss rules would be applied separately to an investment in the Units. Accordingly, passive activity losses generated by other passive activity investments held by a WDOP limited partner, as well as passive activity loss carryovers including any passive activity loss carryovers attributable to an Interest, could not be used to offset such partner's allocable share of income generated by WDOP. In addition, passive activity losses generated by WDOP and allocated to a WDOP limited partner could not be used to offset any passive activity income generated by other passive activity investments held by a WDOP limited partner. "At Risk" Limitation Rules. Under the "at risk" limitation rules of section 465 of the Code, a noncorporate taxpayer and a closely held corporate taxpayer are generally not permitted to claim a deduction, for Federal income tax purposes, in respect of a loss from an activity, to the extent that the loss exceeds the 86 88 aggregate dollar amount that the taxpayer has "at risk" in respect of such activity at the close of the taxable year. The at risk limitation rules do not apply to losses arising from any activity which constitutes "the holding of real property" with respect to qualified non-recourse financing, the holding of a Unit should constitute. Accordingly, WDOP does not expect that WDOP limited partners will be subject to the at risk limitation rules. Publicly Traded Partnership Considerations. Under the publicly traded partnership Treasury Regulations, a partnership will be treated as a "publicly traded partnership" if partners are "readily able" to sell or exchange their partnership interests in a "manner that is comparable" to trading on an established securities market. Subject to certain exceptions, a partnership that is treated as a publicly traded partnership will not be treated as a "pass-through" entity for Federal income tax purposes and will be subject to tax as if it were a regular corporation. Although it is unclear whether the right of a WDOP limited partner to exchange Units for Walden Securities pursuant to the Exchange Right would cause WDOP to be classified as a publicly traded partnership, WDOP presently intends to take the position that the Exchange Right does not cause WDOP to be classified as a publicly traded partnership. If WDOP were to be classified as a publicly traded partnership, WDOP believes that it would still continue to be subject to treatment as a "pass-through" entity for Federal income tax purposes, and not subject to tax as if it were a corporation, under an exception that is available to partnerships, such as WDOP, that engage principally in real estate activities. Accordingly, in order to preserve its status as a "pass-through" entity for Federal income tax purposes, WDOP intends to adopt a method of operation that will enable it to qualify, on an ongoing basis, for the real property exception available to publicly traded partnerships. WDOP PARTNERSHIP INTERESTS Class A Limited Partners. The sole Class A Limited Partner is WDN Properties, Inc., a New York corporation and direct, wholly-owned subsidiary of the Company. After payment of the Class B Common Distribution and the Class B Preferred Distribution described below, the Class A Limited Partners are entitled to receive a distribution of 99% of the cash available for distribution under the Partnership Agreement. The Company, as general partner of WDOP, is entitled to receive a distribution of 1% of the remaining cash available, if any. Class B Limited Partners. The Class B Limited Partners consist of the former partners of the Drever Partnerships who received either Class B Common Units ("Common OP Units") or Class B Preferred Units ("Preferred OP Units"), or a combination thereof, in exchange for their interests in the Drever Partnerships. Common OP Units. Holders of Common OP Units are entitled to receive the "Class B Common Distribution." The Class B Common Distribution is equal to the product of (i) the aggregate number of outstanding Common OP Units, (ii) the "conversion factor" (currently equal to 1.0), and (iii) the dividend associated with the Common Stock of the Company which has a record date which is the same as WDOP's record date. The "conversion factor" may be adjusted in the event the Company (a) declares a dividend or other distribution on the Common Stock payable in Common Stock, (b) subdivides (by reclassification or otherwise) the outstanding shares of Common Stock, or (c) combines (by reclassification or otherwise) the outstanding shares of Common Stock into a smaller number of shares. See "The WDOP Partnership Agreement -- Distributions" above. Preferred OP Units. Holders of Preferred OP Units are entitled to receive the "Class B Preferred Distribution." The Class B Preferred Distribution is equal to (i) with respect to each fiscal quarter during which there was not at least one share of Redeemable Preferred Stock issued and outstanding on each day of such fiscal quarter, the product of (a) the aggregate number of outstanding Preferred OP Units, and (b) $0.5625; or (ii) with respect to each fiscal quarter during which there was at least one share of Redeemable Preferred Stock issued and outstanding on each day of such fiscal quarter, the product of (x) the aggregate number of outstanding Preferred OP Units, and (y) the preferred dividend associated with the Redeemable Preferred Stock which has a record date which is the same as the record date for the Preferred OP Units. See "The WDOP Partnership Agreement -- Distributions" above. 87 89 PLAN OF DISTRIBUTION On October 1, 1997, the Company completed the acquisition (the "Drever Transaction") of 79 apartment properties (the "Drever Properties"), previously owned by partnerships (the "Drever Partnerships") of which Drever Partners, Inc. ("Drever") and certain of its affiliates were the general partners (the "General Partners"). In connection with the acquisition of the Drever Properties and the operations of the General Partners, a newly formed partnership subsidiary of the Company, Walden/Drever Operating Partnership, L.P. ("WDOP"), issued to the partners of the Drever partnerships approximately $94.7 million in cash, 10,322,397 common units of beneficial ownership in WDOP (the "Common OP Units") and 1,999,909 preferred units of beneficial interest in WDOP (the "Preferred OP Units" and, collectively with the Common OP Units, the "Units"). As set forth in the WDOP Partnership Agreement, each Common OP Unit is exchangeable on or after October 1, 1998 for one share of Common Stock, plus any distributions currently due or not previously paid on account of the exchanged Common OP Unit. The WDOP Partnership Agreement additionally provides that the Preferred OP Units are exchangeable, subject to certain conditions, on or after October 1, 1998 for one share of Redeemable Preferred Stock (plus any distributions currently due or not previously paid on account of the exchanged Preferred OP Unit) and three and one-third Series B Warrants, each of which is exercisable for one-third of a share of Common Stock at an exercise price of $26.875 per share. The number of shares of Common Stock, Redeemable Preferred Stock issuable upon exchange of Units is subject to adjustment to give effect to the following events affecting the Company's equity securities: (i) Payment of dividends, subdividing of outstanding shares, combination of outstanding shares into a smaller number of shares or issuance of shares in a reclassification; (ii) A distribution by the Company of evidences of indebtedness or assets, options, subscription rights or warrants to holders of Common Stock or Redeemable Preferred Stock; and (iii) Any capital reorganization of the Company, any reclassification of the Common Stock or the Redeemable Preferred Stock, a consolidation or merger of the Company with another entity or the sale of substantially all of the properties and assets of the Company. If the Company is a party to a consolidation or merger with another entity, or the sale of substantially all of the properties and assets of the Company occurs, the right to exchange Units for shares of Common Stock or Redeemable Preferred Stock and Series B Warrants will become a right to exchange such Units for securities, cash or other assets of Walden or such other entity. PROCEDURE TO EXCHANGE UNITS GENERAL The tender by of Units pursuant to the procedure set forth below will constitute an agreement between the tendering Unitholder and the Company in accordance with the terms and subject to the conditions set forth herein and in the notice of exchange (the "Exchange Notice") delivered to each Unitholder. All questions as to the form of all documents and the validity, eligibility, and acceptance of tendered Units will be determined by the Company, in its sole discretion, which determination shall be final and binding. Alternative, conditional or contingent exchanges of Units will not be considered valid. The Company expressly reserves the absolute right to reject any and all proposed exchanges not in proper form and to determine whether the proposed exchange would be unlawful. The Company also reserves the absolute right, subject to applicable law, to waive any defect or irregularity of a proposed exchange as to particular Units. Neither the Company nor Boston EquiServe L.P., the exchange agent for this transaction, or any other person, will be under any duty to give notification of any defects or irregularities in proposed exchanges or will incur any liability for failure to give any such notification. No proposed exchange will be deemed to have been validly made until all defects and irregularities with respect to such tendered Units have been cured or waived. Any Units received by the exchange agent that are not properly tendered and as to which irregularities have not been cured or waived will be returned by the exchange agent to the appropriate Unitholder as soon as practicable. 88 90 A Unitholder may not tender Units for exchange unless such Unitholder tenders at least (i) 100 Units, or (ii) if the Unitholder holds less than 100 Units, the total number of Units held by such Unitholder. The Company will not issue fractional shares of Common Stock or Redeemable Preferred Stock in connection with any exchange. The portion of any exchange that would constitute a fractional share will be paid in cash based upon the then current market price of the Common Stock or the Redeemable Preferred Stock, whichever is applicable. For a Unitholder to validly tender Units for exchange, the Unitholder must deliver a properly completed and duly executed Exchange Notice (or a facsimile thereof), and all other documents required by the Exchange Notice, including any certificates representing Units, to Boston Equiserve L.P., the exchange agent, at one of the following addresses: BankBoston, N.A. BankBoston, N.A. Attn: Corporate Reorganization Attn: Corporate Reorganization P.O. Box 8029 150 Royall Street Boston, MA 02266-8029 Canton, MA 02021 Securities Transfer & Reporting Services, Inc c/o Boston EquiServe LP 100 William St./Galleria NY, NY 10038
The method of delivery of the Exchange Notice and Unit certificates is at the option and risk of the exchanging Unitholder. Once submitted for exchange, an Exchange Notice may not be withdrawn by a Unitholder. The determination to exchange Units is solely at the option of the respective Unitholder, except for those Unitholders which are identified as "Class B-TE Limited Partners" (tax-exempt entities) in the WDOP Partnership Agreement. DELIVERY OF EXCHANGE NOTICE AND CERTIFICATES If the certificates representing Units are registered in the name of a person other than the person who signs the related Exchange Notice, then, in order to tender such Units for exchange, the certificates representing such Units must be endorsed exactly as the name or names of the registered owner or owners appear on the certificates. If the Exchange Notice is signed by a beneficial owner who is not either (a) the registered owner of such Units, or (b) the agent thereof duly appointed by written proxy delivered to the Exchange Agent, the registered owner must instead complete and sign the Exchange Notice. Any beneficial owner whose Units are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender Units for exchange should contact such registered holder and instruct such registered holder to tender Units for exchange on such beneficial owner's behalf. If such beneficial owner wishes to tender such Units himself, such beneficial owner must, prior to completing and executing the Exchange Notice and delivering the Units, make appropriate arrangements to register ownership of the Units in such beneficial owner's name. The transfer of record ownership may take a considerable amount of time. EXCHANGE NOTICES, CERTIFICATES REPRESENTING UNITS, AND ANY OTHER REQUIRED DOCUMENTS, SHOULD BE SENT TO THE EXCHANGE AGENT ONLY AND NOT TO THE COMPANY. THE METHOD OF DELIVERY OF THE EXCHANGE NOTICE, CERTIFICATES REPRESENTING UNITS, AND ANY OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE UNITHOLDER AND DELIVERY WILL BE DEEMED MADE WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. INSTEAD OF EFFECTING DELIVERY BY MAIL IT IS RECOMMENDED THAT UNITHOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IF SUCH DELIVERY IS BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED. 89 91 LOST OR MISSING CERTIFICATES If a Unitholder desires to tender Units for exchange, but the certificate(s) evidencing such Units have been mutilated, lost, stolen or destroyed, such Unitholder should write to or telephone the Company concerning the procedures for obtaining replacement certificates for such Units or arranging for indemnification or any other matter that requires handling by the Company's Transfer Agent. TAX CONSEQUENCES OF EXCHANGING UNITS GENERAL The following discussion summarizes certain federal income tax considerations that may be relevant to a Unitholder should he exercise his Exchange Right, is based on current law, is for general information only, and is not tax advice. This discussion is based on current law, is for general information only, and should not be considered tax advice. This discussion does not purport to address all aspects of taxation which may be relevant to individual Unitholders in light of their personal investment or tax circumstances, or to certain types of Unitholders which are subject to special treatment under the federal income tax laws. In addition, the discussion below does not address state, local, foreign or other tax considerations. Each Unitholder should consult his personal tax advisor. A Unitholder must notify the Company of its desire to exchange Units. A Unitholder may not exercise his Exchange Right for less than 100 Units or, if such Unitholder holds less than 100 Units, all of the Units held by such Unitholder. A Unitholder is not entitled to exchange his Units if the delivery of Walden Securities would be prohibited under the provisions of the WDOP Partnership Agreement to protect the Company's qualification as a REIT. TAX CONSEQUENCES OF EXCHANGE Tax Treatment of Exchange of Units. If a Unit is exchanged for Walden Securities pursuant to the "Procedure to Exchange Units", such exchange will be treated as a sale of the Unit. The gain or loss from such sale will be equal to the difference between the amount realized for tax purposes and the adjusted tax basis in the Unit. See "-- Basis of Units." Upon the sale of a Unit, the amount realized will be equal to the sum of the fair market value of the Walden Securities at the time received, plus the amount of any WDOP liabilities allocable to the Unit immediately prior to its sale. To the extent that the amount realized exceeds a Unitholder's adjusted tax basis in the Unit exchanged, such Unitholder will recognize gain. It is possible that the amount of gain recognized or the tax liability resulting from such gain could exceed the value of the Walden Securities received upon such disposition. Except as described below, any gain recognized upon a sale or other disposition of Units will be treated as gain attributable to the sale or disposition of a capital asset. Such gain will generally be considered a capital gain. Except as provided below, if the Units have been held for more than one year, such gain will be subject to a tax rate of 20%, except that the portion of the gain attributable to real estate depreciation deductions will be subject to a 25% tax rate. However, to the extent that the amount realized upon the sale of a Unit attributable to a Unitholder's share of "unrealized receivables" of WDOP (as defined in Section 751 of the Code) exceeds the basis attributed to those assets, such excess will be treated as ordinary income. Unrealized receivables include, to the extent not previously included in WDOP income, any rights to payment for services rendered or to be rendered. Unrealized receivables also include amounts that would be subject to recapture as ordinary income if WDOP had sold its assets at their fair market value at the time of the transfer of a Unit. The Company does not presently anticipate that any portion of the amount realized by a Unitholder in an exchange of Units will be attributable to such unrealized receivables. Basis of Units. The basis used to determine a gain or loss on the exchange of the Unit(s) should include the sum of (i) the Unitholder's adjusted tax basis (apportioned to such Unit if not all Units are being exchanged) plus (ii) the tax basis of the Exchange Right. In general, a Unitholder who acquired his Units by contribution of a partnership interest to WDOP had an initial tax basis in his Units ("Initial Basis") equal to 90 92 (a) the sum of his adjusted tax basis in such transferred interest plus any gain recognized in the exchange and (b) reduced by cash, if any, received in the exchange and the fair market value of the Exchange Right. Unitholders are urged to consult their own tax advisors regarding their Initial Basis. A Unitholder's Initial Basis in his Units is generally increased by (i) such Unitholder's share of WDOP taxable and tax exempt income and (ii) increases in such Unitholder's allocable share of liabilities of WDOP (including any increase in his share of liabilities occurring in connection with the acquisition of his Units). Generally, such Unitholder's basis in his Units is decreased (but not below zero) by (i) such Unitholder's share of WDOP distributions, (ii) decreases in such Unitholder's allocable share of liabilities of WDOP (including any decrease in his share of liabilities of the WDOP occurring in connection with the acquisition of his Units), (iii) such Unitholder's share of losses and deductible expenses of WDOP and (iv) such Unitholder's share of nondeductible expenditures of WDOP that are not chargeable to his capital account. For purposes of determining a Unitholder's adjusted tax basis in the Units immediately prior to the exchange of such Units for Walden Securities, his adjusted tax basis in such Units will include his allocable share of WDOP gain or loss for the taxable year. In the event a Unitholder disposes of less than all of his Units, the Adjusted Tax Basis in his Units will be allocated between that portion of the Units which are sold and the portion of the Units such Unitholder continues to hold on the basis of each such Unit's respective fair market value. A Unitholder who exchanges Units for Walden Securities pursuant to the Exchange Right will have an initial basis in such securities equal to their fair market value on the date received. Differences between Units and Walden Securities. If a Unitholder exchanges his Units for Walden Securities pursuant to the "Procedure to Exchange Units," the Unitholder will become a stockholder of the Company rather than a holder of Units in WDOP. The nature of an investment in Walden Securities is generally economically equivalent to an investment in Units of WDOP. There are, however, differences between ownership of Units and Walden Securities. WDOP is taxed as a partnership. Generally each Unitholder includes on his individual income tax return as income, gain, deduction or loss his distributive share of WDOP's items. Distributions to the Unitholder by WDOP are generally not taxable to the Unitholder except to the extent such distributions exceed the Unitholder's basis in such Unitholder's Units. In contrast the Company is a corporation taxed as a REIT. Stockholders do not include on their returns a portion of the Company's income or gain. Stockholders also may not include in their individual income tax returns either their distributive share or any amount of the net operating losses or capital losses of the Company. As long as the Company qualifies as a REIT, distributions made to the Company's taxable U.S. stockholders out of current or accumulated earnings and profits will be taken into account by such stockholder as ordinary income. LEGAL MATTERS Certain legal matters in connection with the Walden Securities, including the validity of the Walden Securities, will be passed upon for the Company by Winstead Sechrest & Minick P.C., Dallas, Texas. EXPERTS The consolidated financial statements of Walden Residential Properties, Inc. as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 and the related financial statement schedule as of December 31, 1997 and the combined financial statements of Drever Partners, Inc. and affiliates as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. 91 93 INDEX TO FINANCIAL STATEMENTS WALDEN RESIDENTIAL PROPERTIES, INC. Financial Statements for the six months ended June 30, 1998 and 1997: Condensed Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and December 31, 1997...................... F-2 Condensed Consolidated Statements of Income for the three months and six months ended June 30, 1998 and 1997 (Unaudited)............................................ F-3 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997 (Unaudited).... F-4 Notes to the Condensed Consolidated Financial Statements (Unaudited)............................................ F-5 Financial Statements for the years ended December 31, 1997, 1996 and 1995: Independent Auditors' Report.............................. F-11 Consolidated Balance Sheets as of December 31, 1997 and 1996................................................... F-12 Consolidated Statements of Income for each of the three years ended December 31, 1997.......................... F-13 Consolidated Statements of Stockholders' Equity for each of the three years ended December 31, 1997............. F-14 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1997.................... F-15 Notes to Consolidated Financial Statements................ F-17 Pro Forma Financial Statements (Unaudited): Pro Forma Condensed Consolidated Statement of Income for the year ended December 31, 1997....................... F-37 Notes to Pro Forma Condensed Consolidated Statement of Income (Unaudited)..................................... F-38 DREVER PARTNERS, INC. AND AFFILIATES Financial Statements for the years ended December 31, 1996, 1995 and 1994 and the six months ended June 30, 1997: Independent Auditors' Report.............................. F-39 Combined Balance Sheets as of December 31, 1996 and 1995 and June 30, 1997 (Unaudited).......................... F-40 Combined Statements of Operations for each of the three years ended December 31, 1996 and the six months ended June 30, 1997 and 1996 (Unaudited)..................... F-41 Combined Statements of Partners'/Stockholders' Equity for each of the three years ended December 31, 1996 and the six months ended June 30, 1997 (Unaudited)............. F-42 Combined Statements of Cash Flows for each of the three years ended December 31, 1996 and the six months ended June 30, 1997 and 1996 (Unaudited)..................... F-43 Notes to Combined Financial Statements.................... F-44 FINANCIAL STATEMENT SCHEDULE AS OF DECEMBER 31, 1997 The following financial statement supplementary schedule of the Registrant and its subsidiaries required to be included in Item 27 is listed below: Schedule III -- Real Estate and Accumulated Depreciation.... S-1
F-1 94 WALDEN RESIDENTIAL PROPERTIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, 1998 DECEMBER 31, 1997 ------------- ----------------- (UNAUDITED) ASSETS Real estate assets, at cost Land...................................................... $ 170,673 $ 173,635 Buildings................................................. 1,326,300 1,333,978 ---------- ---------- 1,496,973 1,507,613 Less: Accumulated depreciation............................ (98,316) (74,584) ---------- ---------- 1,398,657 1,433,029 Real estate assets held for sale............................ 43,476 -- Rent and other receivables ($1.5 million related party at June 30, 1998)............................................ 3,696 1,613 Prepaid and other assets.................................... 7,542 6,903 Deferred financing costs, net............................... 8,648 6,603 Cash and cash equivalents................................... 6,524 9,757 Restricted cash: Escrow deposits........................................... 16,260 9,047 Additional collateral on loans............................ 2,850 2,520 ---------- ---------- Total assets.............................................. $1,487,653 $1,469,472 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Mortgage notes payable.................................... $ 461,261 $ 428,354 Unsecured term loan....................................... 200,000 200,000 Unsecured credit facility................................. 85,000 74,000 Accrued real estate taxes................................. 18,214 22,571 Accounts payable.......................................... 11,054 13,648 Accrued expenses and other liabilities.................... 16,113 13,377 Preferred distribution payable to minority interests...... 391 391 ---------- ---------- Total liabilities......................................... 792,033 752,341 Commitments and contingencies (Note 8) Minority interests.......................................... 314,922 321,916 Stockholders' equity: Preferred stock........................................... 57 57 Common stock.............................................. 182 180 Additional paid in capital................................ 458,936 456,842 Officers and directors notes for stock purchases.......... (8,823) (5,263) Deferred compensation on restricted stock................. (1,417) (1,404) Distributions in excess of net income..................... (68,237) (55,197) ---------- ---------- Total stockholders' equity................................ 380,698 395,215 ---------- ---------- Total liabilities and stockholders' equity................ $1,487,653 $1,469,472 ========== ==========
See Notes to Condensed Consolidated Financial Statements. F-2 95 WALDEN RESIDENTIAL PROPERTIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------- 1998 1997 1998 1997 ------- ------- -------- ------- REVENUES Rental income.................................. $66,650 $33,071 $132,557 $64,587 Other property income.......................... 2,742 1,333 5,288 2,605 Interest income................................ 363 346 724 849 ------- ------- -------- ------- Total revenues................................. 69,755 34,750 138,569 68,041 ------- ------- -------- ------- EXPENSES Property operating and maintenance............. 23,249 11,444 45,761 22,013 Real estate taxes.............................. 6,950 3,412 13,898 6,561 General and administrative..................... 2,866 1,972 5,701 3,394 Interest....................................... 13,374 5,244 26,688 10,121 Amortization................................... 252 200 485 411 Depreciation................................... 14,701 6,793 29,035 13,121 ------- ------- -------- ------- Total expenses.............................. 61,392 29,065 121,568 55,621 ------- ------- -------- ------- Income before extraordinary item and income allocated to minority interests................ 8,363 5,685 17,001 12,420 Extraordinary loss on debt extinguishment........ (80) -- (104) -- ------- ------- -------- ------- Income before income allocated to minority interests...................................... 8,283 5,685 16,897 12,420 Income allocated to minority interests........... (2,769) (395) (5,667) (800) ------- ------- -------- ------- Net income.................................. 5,514 5,290 11,230 11,620 Preferred distributions.......................... (3,280) (3,311) (6,560) (6,623) ------- ------- -------- ------- Net income available to common stockholders...... $ 2,234 $ 1,979 $ 4,670 $ 4,997 ======= ======= ======== ======= Basic net income per share....................... $ 0.12 $ 0.11 $ 0.25 $ 0.29 ======= ======= ======== ======= Diluted net income per share..................... $ 0.12 $ 0.11 $ 0.25 $ 0.29 ======= ======= ======== ======= Basic weighted average number of common shares outstanding.................................... 18,488 17,502 18,384 17,329 ======= ======= ======== ======= Diluted weighted average number of common shares and common share equivalents outstanding....... 18,632 17,623 18,554 17,486 ======= ======= ======== =======
See Notes to Condensed Consolidated Financial Statements. F-3 96 WALDEN RESIDENTIAL PROPERTIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------ 1998 1997 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................. $ 11,230 $11,620 Adjustments to reconcile net income to net cash provided by operating activities: Income allocated to minority interests.................... 5,667 800 Depreciation and amortization............................. 29,520 13,532 Amortization of deferred compensation on restricted stock.................................................. 123 108 Amortization of prepaid interest expense.................. 608 -- Extraordinary loss on debt extinguishment................. 104 -- Net effect of changes in operating accounts: Escrow deposits........................................... (7,213) (751) Other assets.............................................. (3,009) (1,301) Accrued real estate taxes................................. (4,357) (935) Accounts payable.......................................... (3,848) (222) Other liabilities......................................... 2,736 397 -------- ------- Net cash provided by operating activities......... 31,561 23,248 -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of real estate assets............................ (5,082) (52,371) Real estate asset additions............................... (20,207) (14,926) -------- ------- Net cash used in investing activities............. (25,289) (67,297) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from stock issuance, net of issuance costs....... 12,402 15,968 Purchase of the Company's common stock.................... (14,002) -- Purchase of minority interest securities.................. (130) -- Distributions paid........................................ (37,306) (23,424) Proceeds from mortgage notes payable and credit facility............................................... 172,903 35,350 Payment of mortgage notes payable and credit facility..... (137,155) (6,000) Payment of financing costs................................ (3,240) (91) Additional collateral on loans............................ (330) -- Principal reductions of debt.............................. (2,647) (1,656) -------- ------- Net cash provided by (used in) financing activities....................................... (9,505) 20,147 -------- ------- NET DECREASE IN CASH AND CASH EQUIVALENTS................... (3,233) (23,902) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 9,757 29,720 -------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 6,524 $ 5,818 ======== ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.................................... $ 23,671 $ 9,781 ======== ======= SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Accrued real estate asset additions....................... $ 1,722 $ 345 ======== ======= Mortgages assumed......................................... $ 10,806 $ -- ======== ======= Notes receivable for officer and director stock purchases.............................................. $ 3,560 $ -- ======== ======= Deferred compensation on restricted stock................. $ 136 $ 2,571 ======== ======= Distribution payable to minority interest holders......... $ 391 $ 391 ======== ======= Minority interest securities issued....................... $ 505 $ 1,050 ======== =======
See Notes to Condensed Consolidated Financial Statements. F-4 97 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) 1. INTERIM UNAUDITED FINANCIAL INFORMATION Walden Residential Properties, Inc. (the "Company") is a self-administered and self-managed real estate company operated as a real estate investment trust, as defined under the Internal Revenue Code of 1986, as amended. As of June 30, 1998, the Company owned 156 multifamily properties, containing 42,858 apartment units, located primarily in the Southwest and Southeast regions of the United States. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein for the year ended December 31, 1997. The accompanying interim unaudited condensed consolidated financial information has been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in the annual financial statements have been condensed or omitted pursuant to rules and regulations of the SEC. Management believes that the disclosures contained herein are adequate to make the information presented not misleading. In the opinion of management, all adjustments and eliminations, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position of the Company and its subsidiaries as of June 30, 1998 and the consolidated results of their operations for the three and six months ended June 30, 1998 and 1997 and consolidated cash flows for the six months ended June 30, 1998 and 1997, have been included. The consolidated results of operations for the three and six months ended June 30, 1998 are not necessarily indicative of the results for the full year. As of June 30, 1998, the Company had six apartment properties held for sale. Management has determined that such properties do not match the Company's long-term investment strategies. (See Note 8) In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (the "Statement"), which establishes standards for accounting and reporting for derivative instruments. SFAS No. 133 is effective for periods beginning after June 15, 1999; however, earlier application is permitted. Management is currently not planning on early adoption of this Statement and has not had an opportunity to evaluate the impact of the provisions of the Statement on the Company's consolidated financial statements relating to future adoption. 2. ACQUISITIONS On February 18, 1998, the Company acquired two apartment properties with a total of 376 units, located in Tampa, Florida for approximately $15.9 million. The Company funded these acquisitions by assuming $5.7 million of variable rate, tax-exempt debt maturing in the year 2007, assuming $5.1 million of 7.35% fixed rate debt maturing in the year 2005, and borrowing the remaining amount under the Company's unsecured credit facility. The credit enhancement on the $5.7 million variable rate debt expires in November 1998 and is guaranteed by the Company. 3. TRANSACTIONS WITH AFFILIATES On June 22, 1998, the Company acquired the 1% general partner interest in a limited partnership which owns a 504-unit apartment property in Austin, Texas. At that time, the Company loaned $1.5 million to the partnership which was used to refinance the first mortgage indebtedness on the property. The note requires monthly payments of excess cash flow from the property and matures on January 1, 2009. 4. MORTGAGE NOTES PAYABLE During the first six months of 1998, the Company refinanced $45.5 million and $12.5 million of the Company's variable rate, tax-exempt mortgage indebtedness and extended the related mortgage loan and credit enhancement maturity to February 15, 2028 and January 15, 2023, respectively. F-5 98 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On March 25, 1998, $78.1 million of conventional fixed-rate mortgage notes were refinanced with $110.0 million of fixed-rate debt, of which $80.0 million of such debt bears interest at 6.62% and matures in March 2007 and the remaining $30.0 million bears interest at 7.22% and matures in June 2016. Of the excess financing proceeds, $20 million was used to repay a portion of the Company's credit facility. On April 14, 1998, the Company repaid $7.2 million of variable rate indebtedness related to one property. 5. STOCKHOLDERS' EQUITY AND MINORITY INTERESTS Minority Interests In connection with certain apartment property acquisitions, certain partnership subsidiaries of the Company have issued Common Operating Partnership ("OP") Units and Preferred OP Units which are exchangeable into the Company's common stock and 9.00% redeemable preferred stock, with detachable warrants, respectively. The holders of the Preferred OP Units are entitled to receive quarterly distributions of $0.5625 per unit and the holders of the Common OP Units are entitled to receive quarterly distributions equal to those paid on the Company's common stock. A portion of the Common OP Units that are exchangeable into 810,128 shares of the Company's common stock are entitled to receive quarterly distributions of a minimum of $369,000 in the aggregate. All OP Unit securities have been recorded as minority interests in the accompanying balance sheets. On June 15, 1998, an additional 20,621 Common OP Units were issued at the market price of the Company's common stock on such date ($24.50 per unit) to adjust the purchase price of the October 1, 1997 acquisition of the assets and business of Drever Partners, Inc. and its affiliates. On June 30, 1998, the Company purchased 5,503 minority interest securities at $24.50 (the market price of the Company's common stock on the purchase date). As of June 30, 1998, the Company had 1,999,909 Preferred OP Units and 11,192,022 Common OP Units outstanding. Public Offering On February 19, 1998, the Company issued 323,232 shares of its common stock at $23.515 per share for net proceeds of approximately $7.6 million. Restricted Stock In February 1997, the Company adopted a Long-Term Incentive Plan to attract and retain individuals to serve as directors, officers and employees of the Company. Pursuant to this plan, the Company has issued 5,206 restricted shares of common stock ("Restricted Stock") during the six months ended June 30, 1998, for $0.01 per share to two of its executive officers and its six outside directors. The shares issued vest ratably over a three-year and one-year period, respectively. Deferred compensation on Restricted Stock was computed based upon the market value of the shares at the date of issuance. This deferred compensation is being amortized over the respective vesting periods. Officer Notes for Stock Purchases On February 17, 1998, the Company implemented a new officer loan program allowing officers to purchase the Company's common stock at current market prices and to exercise vested stock options with the assistance of loans from the Company. Under this program, officers are eligible to purchase stock on March 1 and September 1 of each year in an aggregate amount of up to three times the officer's annual salary. A cash payment of 5% to 15% of the purchase price is required by the officer, depending upon the amount of the purchase, with the remainder loaned on a full recourse basis to the officer. Each loan is evidenced by a note with a five-year term, requiring quarterly payments of interest only at a fixed interest rate equal to the Company's then current interest rate under its credit facility. The loan is secured by a pledge of the shares of common stock purchased by each officer pursuant to such loan. F-6 99 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On March 2, 1998, the Company issued loans to 25 officers under the officer loan program in the amount of approximately $3.6 million, bearing interest at 7%. Such loans related to the issuance of 138,692 shares of the Company's common stock at $24.75 per share (the closing price of the common stock on the New York Stock Exchange for the previous trading day) and the exercise of 26,192 common stock options at a stock option grant price of $19.25 per share. Shareholder Rights Plan On March 26, 1998, the Company adopted a shareholder rights plan (the "Plan") designed to assure that all stockholders receive fair treatment in the event of a proposed acquisition. The key provisions of the Plan is a mechanism that will distribute, for each outstanding share of the Company's Common Stock, one right that becomes exercisable upon the occurrence of certain events. The Plan entails a dividend of one right for each outstanding share of the Company's common stock. Each right will entitle the holder to buy one one-hundredth of a share of a new Series A Junior Participating Preferred Stock, at an exercise price of $70.00 per share. The rights will trade with the Company's common stock until exercisable and will expire on April 20, 2008. The rights will not be exercisable until ten days following a public announcement that a person or group has acquired 15% or more of the Company's common stock or until ten business days after a person or group begins a tender offer that would result in ownership of 15% or more of the Company's common stock, subject to certain extensions by the Board. On April 20, 1998, the Company issued a dividend of one right for each share of common stock owned by stockholders of record as of April 7, 1998. Effective April 8, 1998, each share of the Company's common stock has one right attached to it. Associate Stock Purchase Plan Effective April 1, 1998, the Company adopted an Associate Stock Purchase Plan. This plan allows Company employees to purchase on a quarterly basis shares of the Company's common stock at a 15% discount. Stock Repurchase Program On June 4, 1998, the Company adopted a Stock Repurchase Program. This program authorizes the Company to purchase up to 2.5 million shares of the Company's common stock. This is in addition to the prior stock repurchase program, announced July 11, 1997, authorizing the Company to purchase up to 1.0 million shares of its common stock by December 31, 1998. The Company repurchased 572,000 shares of its outstanding common stock in May and June of 1998, leaving 2.6 million shares authorized for repurchase under both programs at June 30, 1998. Distributions In March 1998 and June 1998, the Company paid distributions of $12.0 million and $12.3 million, respectively, to stockholders of record on February 18, 1998, and May 18, 1998, respectively. The common stockholders were paid $0.4825 per share; the 9.16% Convertible Redeemable Preferred Stockholders were paid $0.5725 per share and the 9.20% Senior Preferred Stockholders were paid $0.575 per share. The Company paid distributions of $5.4 million on the Common OP Units (which represented $0.4825 per unit) and $1.1 million on the Preferred OP Units (which represented $0.5625 per unit) in both March and June. 6. NET INCOME PER SHARE OF COMMON STOCK Basic net income per share has been computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted net income per share has been computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding plus potential dilutive common share equivalents. F-7 100 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents information necessary to calculate basic and diluted net income per share for the three months and six months ended June 30, 1998 and 1997 (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- ------------------ 1998 1997 1998 1997 -------- -------- ------- ------- Net Income for Basic and Diluted Computation: Income before extraordinary item and income allocated to minority interests............ $ 8,363 $ 5,685 $17,001 $12,420 Extraordinary loss on debt extinguishment..... (80) -- (104) -- -------- -------- ------- ------- Income before income allocated to minority interests.................................. 8,283 5,685 16,897 12,420 Income allocated to minority interests........ (2,769) (395) (5,667) (800) -------- -------- ------- ------- Net income.................................... 5,514 5,290 11,230 11,620 Preferred distributions....................... (3,280) (3,311) (6,560) (6,623) -------- -------- ------- ------- Net income available to common stockholders (basic and diluted net income per share computation)............................... $ 2,234 $ 1,979 $ 4,670 $ 4,997 ======== ======== ======= ======= Basic Net Income per Share: Before extraordinary item, less preferred distributions.............................. $ 0.13 $ 0.11 $ 0.26 $ 0.29 Extraordinary loss on debt extinguishment..... (0.01) -- (0.01) -- -------- -------- ------- ------- Net income available to common stockholders... $ 0.12 $ 0.11 $ 0.25 $ 0.29 ======== ======== ======= ======= Diluted Net Income per Share: Before extraordinary item, less preferred distributions.............................. $ 0.13 $ 0.11 $ 0.26 $ 0.29 Extraordinary loss on debt extinguishment..... (0.01) -- (0.01) -- -------- -------- ------- ------- Net income available to common stockholders... $ 0.12 $ 0.11 $ 0.25 $ 0.29 ======== ======== ======= ======= Weighted Average Number of Shares Outstanding (a): Basic......................................... 18,488 17,502 18,384 17,329 Dilutive effect of outstanding options.......... 144 121 170 157 -------- -------- ------- ------- Diluted......................................... 18,632 17,623 18,554 17,486 ======== ======== ======= =======
- --------------- (a) Excludes the convertible preferred shares, warrants, Common OP Units (see Note 5) and 1,658,750 stock options, which are not dilutive at June 30, 1998. F-8 101 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. PRO FORMA STATEMENTS OF INCOME The following unaudited condensed pro forma information for the six months ended June 30, 1998 and 1997 was prepared from the financial statements of the Company by adjusting for the effect of the 1997 acquisition of 21,467 apartment units at a cost of $799.2 million, the 1998 property acquisitions described in Note 2 herein, and debt incurred in connection with these property acquisitions as if all of these transactions had occurred on January 1, 1997. The following information is not necessarily indicative of what the performance would have been had the Company owned these properties for the entire period, nor does it purport to represent future results of operations of the Company. (In thousands, except per share information.)
PRO FORMA SIX MONTHS ENDED JUNE 30, -------------------- 1998 1997 -------- -------- Revenues.................................................... $138,905 $133,387 Expenses.................................................... 121,845 119,608 -------- -------- Income before extraordinary items and income allocated to minority interests........................................ 17,060 13,779 Extraordinary loss on debt extinguishment................... (104) -- -------- -------- Income before income allocated to minority interests........ 16,956 13,779 Income allocated to minority interests...................... (5,687) (4,583) -------- -------- Net Income.................................................. 11,269 9,196 Preferred distributions..................................... (6,560) (6,623) -------- -------- Net income available to common stockholders................. $ 4,709 $ 2,573 ======== ======== Basic net income per share.................................. $ 0.26 $ 0.15 ======== ======== Diluted net income per share................................ $ 0.25 $ 0.15 ======== ========
8. COMMITMENTS AND CONTINGENCIES On February 27, 1998, the Company entered into a joint venture agreement with The Grupe Company whereby The Grupe Company will construct and the Company will later purchase, two Sacramento, California area properties with a combined total of 616 apartment units. The Company is committed to purchase 100% of the properties for approximately $47 million upon the completion of construction and the achievement of certain targeted net operating income amounts. This purchase is anticipated to occur sometime in late 1999. As of June 30, 1998, The Grupe Company has spent approximately $8.5 million, consisting primarily of permits and professional fees, for both properties. As of June 30, 1998, the Company had executed contracts to sell four of its apartment properties held for sale, containing an aggregate of 1,151 units, for an aggregate sales price of $37.6 million. The closing is anticipated to occur in August 1998. F-9 102 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. SUBSEQUENT EVENTS On July 1, 1998, the Company executed a contract to purchase South Green Apartments, a 268-unit apartment community located in Houston, Texas. The purchase contract in the amount of $9.5 million is anticipated to be consummated in August 1998. On July 29, 1998, the Company entered into an agreement to loan $5.0 million to the Greystone Group, Inc., an unrelated third-party, to purchase 260,082 net rentable square feet of land in Chandler, Arizona. The loan bears an interest rate of LIBOR plus 1.50%, is secured by a mortgage loan on the property and a guarantee by The Greystone Group, Inc., and is generally due upon the earlier of completion of construction and subsequent purchase by the Company or substitution of a third-party lender. The Company anticipates entering into a purchase agreement with the Greystone Group, Inc. in August 1998, whereby The Greystone Group, Inc. will construct a 272-unit apartment community on the land described herein. The Company will be committed to purchase the property for approximately $21.3 million upon completion of construction and the achievement of certain targeted occupancy levels, anticipated to occur sometime in late 1999. On July 29, 1998, the Company executed a contract to acquire a 286-unit apartment community located in Bedford, Texas for approximately $11.0 million. In connection with this contract, the Company deposited $200,000 of non-refundable earnest money. The Company has completed normal due diligence procedures; however, because financing for the acquisition will not be funded until the closing date, there is no assurance that the Company will purchase the property. F-10 103 INDEPENDENT AUDITORS' REPORT To the Directors and Stockholders of Walden Residential Properties, Inc. We have audited the accompanying consolidated balance sheets of Walden Residential Properties, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. Our audit for the year ended December 31, 1997 also included the financial statement schedule III -- Real Estate and Accumulated Depreciation as of December 31, 1997. These financial statements and financial statement schedule are the responsibility of the management of Walden Residential Properties, Inc. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Walden Residential Properties, Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for the cost of replacement carpets effective July 1, 1996. / s / Deloitte & Touche LLP DELOITTE & TOUCHE LLP Dallas, Texas March 25, 1998 F-11 104 WALDEN RESIDENTIAL PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
DECEMBER 31, ---------------------- 1997 1996 ---------- -------- ASSETS Real estate assets, at cost Land...................................................... $ 173,635 $ 80,914 Buildings and improvements................................ 1,333,978 602,601 ---------- -------- 1,507,613 683,515 Less: Accumulated depreciation....................... (74,584) (41,707) ---------- -------- 1,433,029 641,808 Rent and other receivables.................................. 1,613 1,324 Prepaid and other assets.................................... 6,903 3,146 Deferred financing costs, net............................... 6,603 5,827 Cash and cash equivalents................................... 9,757 29,720 Restricted cash: Escrow deposits........................................... 9,047 5,369 Additional collateral on loans............................ 2,520 2,520 ---------- -------- Total assets......................................... $1,469,472 $689,714 ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Mortgage notes payable.................................... $ 428,354 $258,908 Unsecured term loan....................................... 200,000 -- Unsecured credit facility................................. 74,000 -- Accrued real estate taxes................................. 22,571 7,960 Accounts payable.......................................... 13,648 5,653 Accrued expenses and other liabilities.................... 13,377 5,395 Preferred distribution payable to minority interests...... 391 377 ---------- -------- Total liabilities...................................... 752,341 278,293 Commitments and contingencies (Note 13) Minority interests.......................................... 321,916 14,886 Stockholders' equity: Preferred stock, $.01 par value per share, 10,000 shares authorized, 5,712 and 5,786 shares issued and outstanding as of December 31, 1997 and 1996, respectively (aggregate liquidation value of $142,805).............................................. 57 58 Common stock, $.01 par value per share, 50,000 shares authorized, 18,030 and 16,880 shares issued and outstanding as of December 31, 1997 and 1996, respectively........................................... 180 169 Excess stock, $.01 par value per share, 60,000 shares authorized, no shares issued....................................... -- -- Additional paid in capital................................ 456,842 432,974 Officer and director notes for stock purchases............ (5,263) (5,263) Deferred compensation on Restricted Stock................. (1,404) -- Distributions in excess of net income..................... (55,197) (31,403) ---------- -------- Total stockholders' equity............................. 395,215 396,535 ---------- -------- Total liabilities and stockholders' equity........... $1,469,472 $689,714 ========== ========
See Notes to Consolidated Financial Statements. F-12 105 WALDEN RESIDENTIAL PROPERTIES, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 -------- -------- ------- REVENUES Rental income........................................... $163,224 $105,602 $78,469 Other property income................................... 6,313 3,873 3,090 Interest income......................................... 1,598 1,433 856 Other income............................................ -- 263 409 -------- -------- ------- Total revenues....................................... 171,135 111,171 82,824 EXPENSES Property operating and maintenance...................... 56,483 37,521 28,748 Real estate taxes....................................... 16,805 10,039 7,337 General and administrative.............................. 7,734 5,124 3,811 Unusual charge -- officer settlement agreement.......... 1,940 -- -- Interest................................................ 28,447 20,573 17,111 Amortization............................................ 827 916 900 Depreciation............................................ 33,841 19,810 15,734 -------- -------- ------- Total expenses....................................... 146,077 93,983 73,641 -------- -------- ------- Operating income.......................................... 25,058 17,188 9,183 Gain on disposition of real property.................... 2,055 1,934 1,502 -------- -------- ------- Income before extraordinary item and income allocated to minority interests...................................... 27,113 19,122 10,685 Extraordinary loss on debt extinguishment............... (422) (1,848) (1,352) -------- -------- ------- Income before income allocated to minority interests...... 26,691 17,274 9,333 Income allocated to minority interests.................. (4,109) (1,705) (922) -------- -------- ------- Net income................................................ 22,582 15,569 8,411 Preferred distributions................................. (13,186) (2,387) -- -------- -------- ------- Net income available to common stockholders............... $ 9,396 $ 13,182 $ 8,411 ======== ======== ======= Basic net income per share................................ $ 0.53 $ 0.90 $ 0.69 ======== ======== ======= Diluted net income per share.............................. $ 0.53 $ 0.89 $ 0.69 ======== ======== ======= Basic weighted average number of common shares outstanding............................................. 17,590 14,720 12,155 ======== ======== ======= Diluted weighted average number of common shares and common share equivalents outstanding.................... 17,747 14,792 12,155 ======== ======== =======
See Notes to Consolidated Financial Statements. F-13 106 WALDEN RESIDENTIAL PROPERTIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (In thousands)
OFFICER/DIRECTOR PREFERRED STOCK COMMON STOCK ADDITIONAL NOTES FOR ------------------ ------------------- PAID IN STOCK SHARES PAR VALUE SHARES PAR VALUE CAPITAL PURCHASES ------ --------- ------- --------- ---------- ---------------- Balance, January 1, 1995......................... -- $ -- 10,070 $101 $167,546 $(3,438) Stock issued to purchase real estate assets.... 216 2 4,205 Public offering, net of offering costs......... 3,500 35 60,138 Stock issued under the dividend reinvestment plan......................................... 404 4 7,037 Repurchases of the Company's common stock...... Officers'/Directors' stock purchase............ (27) (1,533) Distributions.................................. Net income..................................... ----- ---- ------ ---- -------- ------- Balance, December 31, 1995....................... -- -- 14,190 142 238,899 (4,971) Repurchases of the Company's common stock...... Officers'/Directors' stock purchase............ 19 -- (22) (292) Retirement of common stock repurchased......... (318) (3) (6,075) Public offerings, net of offering costs........ 5,800 58 2,756 28 196,094 Conversion of preferred stock to common stock........................................ (14) -- 16 -- Stock issued under the dividend reinvestment plan......................................... 217 2 4,331 Purchase and cancellation of minority interest securities................................... (253) Distributions.................................. Net income..................................... ----- ---- ------ ---- -------- ------- Balance, December 31, 1996....................... 5,786 58 16,880 169 432,974 (5,263) Repurchases of the Company's common stock Retirement of common stock purchased........... (278) (3) (6,663) Public offerings, net of offering costs........ 161 2 3,522 Conversion of preferred stock to common stock........................................ (74) (1) 84 1 Stock issued under the dividend reinvestment plan......................................... 955 9 21,950 Stock issued through exercise of options....... 138 1 2,700 Restricted stock issuance...................... 108 1 2,833 Restricted stock cancellation.................. (18) -- (474) Amortization of deferred compensation.......... Distributions.................................. Net income..................................... ----- ---- ------ ---- -------- ------- Balance, December 31, 1997....................... 5,712 $ 57 18,030 $180 $456,842 $(5,263) ===== ==== ====== ==== ======== ======= DISTRIBUTIONS DEFERRED STOCK IN EXCESS OF COMPENSATION REPURCHASES NET INCOME ------------ ----------- ------------- Balance, January 1, 1995......................... $ -- $ -- $ (3,942) Stock issued to purchase real estate assets.... Public offering, net of offering costs......... Stock issued under the dividend reinvestment plan......................................... Repurchases of the Company's common stock...... (2,038) Officers'/Directors' stock purchase............ 2,038 Distributions.................................. (22,020) Net income..................................... 8,411 ------- ------- -------- Balance, December 31, 1995....................... -- -- (17,551) Repurchases of the Company's common stock...... (6,462) Officers'/Directors' stock purchase............ 387 Retirement of common stock repurchased......... 6,075 Public offerings, net of offering costs........ Conversion of preferred stock to common stock........................................ Stock issued under the dividend reinvestment plan......................................... Purchase and cancellation of minority interest securities................................... Distributions.................................. (29,421) Net income..................................... 15,569 ------- ------- -------- Balance, December 31, 1996....................... -- -- (31,403) Repurchases of the Company's common stock (6,666) Retirement of common stock purchased........... 6,666 Public offerings, net of offering costs........ Conversion of preferred stock to common stock........................................ Stock issued under the dividend reinvestment plan......................................... Stock issued through exercise of options....... Restricted stock issuance...................... (2,834) Restricted stock cancellation.................. 474 Amortization of deferred compensation.......... 956 Distributions.................................. (46,376) Net income..................................... 22,582 ------- ------- -------- Balance, December 31, 1997....................... $(1,404) $ -- $(55,197) ======= ======= ========
See Notes to Consolidated Financial Statements. F-14 107 WALDEN RESIDENTIAL PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.......................................... $ 22,582 $ 15,569 $ 8,411 Adjustments to reconcile net income to net cash provided by operating activities: Income allocated to minority interests........... 4,109 1,705 922 Depreciation and amortization.................... 34,668 20,726 16,634 Amortization of deferred compensation on restricted stock............................... 956 -- -- Amortization of prepaid interest expense......... 121 -- -- Gain on disposition of real property............. (2,055) (1,934) (1,502) Extraordinary loss on debt extinguishment........ 422 1,848 1,352 Net effect of changes in operating accounts: Escrow deposits................................ (1,099) (1,299) (850) Other assets................................... 622 (784) 203 Accrued real estate taxes...................... 6,172 1,438 3,521 Accounts payable............................... 294 492 1,352 Other liabilities.............................. 4,030 520 1,274 --------- --------- --------- Net cash provided by operating activities... 70,822 38,281 31,317 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of net assets of Drever Partners, Inc. and its affiliates, net of noncash items shown below............................................ (201,032) -- -- Purchase of real estate assets, net of noncash items shown below...................................... (103,114) (168,219) (103,631) Real estate asset additions......................... (32,363) (9,455) (6,451) Proceeds from disposition of real property, net of noncash items shown below........................ 8,695 18,667 23,156 Purchase of WDN Management net assets, net of noncash item shown below......................... -- 339 -- --------- --------- --------- Net cash used in investing activities............ (327,814) (158,668) (86,926) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from stock issuance, net of issuance costs............................................ 28,185 200,614 67,723 Purchase of the Company's common stock.............. (6,666) (6,573) (1,928) Purchase of minority interest securities............ -- (3,975) -- Distributions paid on common and preferred stock and minority interests............................... (47,979) (31,210) (22,481) Proceeds from term loan and credit facility......... 393,098 166,770 152,471 Payment of mortgage notes payable and credit facility......................................... (123,747) (172,188) (130,753) Principal reductions of mortgage notes payable...... (3,716) (5,242) (1,197) Payment of financing costs.......................... (1,798) (4,143) (3,751) Prepayment penalties on debt extinguishment......... (348) (97) (914) Additional collateral on loans...................... -- (650) (1,049) --------- --------- --------- Net cash provided by financing activities........ 237,029 143,306 58,121 --------- --------- ---------
F-15 108 WALDEN RESIDENTIAL PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) (In thousands)
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................................... $ (19,963) $ 22,919 $ 2,512 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........ 29,720 6,801 4,289 ========= ========= ========= CASH AND CASH EQUIVALENTS, END OF PERIOD.............. $ 9,757 $ 29,720 $ 6,801 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest.............................. $ 26,342 $ 20,706 $ 16,916 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Purchase of net assets of Drever Partners, Inc. and its affiliates: Rent and other receivables....................... $ 4,635 $ -- $ -- Prepaid and other assets......................... 315 -- -- Escrow deposits.................................. 2,579 -- -- Mortgage notes payable........................... (166,995) -- -- Accrued real estate taxes........................ (8,433) -- -- Accounts payable................................. (7,765) -- -- Accrued expenses and other liabilities........... (3,998) -- -- Minority interest securities..................... (303,488) -- -- --------- --------- --------- $(483,150) $ -- $ -- ========= ========= ========= Items related to purchase of assets: Mortgage notes assumed........................... $ 10,816 $ 14,748 $ 73,055 ========= ========= ========= Securities issued for purchase of assets......... $ 1,050 $ -- $ 22,825 ========= ========= ========= Accrued real estate asset additions................. $ 104 $ 517 $ 416 ========= ========= ========= Mortgage notes assumed by buyer upon disposition of property......................................... $ -- $ 4,195 $ -- ========= ========= ========= Purchase of WDN Management net assets: Rent and other receivables....................... $ -- $ 48 $ -- Prepaid and other assets......................... -- 1,022 -- Amortizable assets............................... -- 8 -- Accounts payable................................. -- 58 -- Accrued expenses and other liabilities........... -- (267) -- Notes payable to the Company..................... -- (923) -- Stockholders' equity............................. -- (300) -- --------- --------- --------- $ -- $ (354) $ -- ========= ========= ========= Notes receivable for officers' and directors' stock purchases........................................ $ -- $ 292 $ 1,533 ========= ========= ========= Deferred compensation on restricted stock, net of cancellations.................................... $ 2,359 $ -- $ -- ========= ========= ========= Distribution payable to minority interest holders... $ 391 $ 377 $ 461 ========= ========= =========
See Notes to Consolidated Financial Statements. F-16 109 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION Walden Residential Properties, Inc. (the "Company") was formed on September 29, 1993 as a Maryland corporation. The Company is a self-administered and self-managed equity real estate investment trust ("REIT") as defined under the Internal Revenue Code of 1986, as amended. On February 9, 1994, the Company completed an initial public offering ("IPO") of its common stock, which is listed on the New York Stock Exchange. As of December 31, 1997, the Company owned 154 multifamily properties, containing 42,482 apartment units, primarily in the Southwest and Southeast regions of the United States. (2) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned corporation and partnership subsidiaries and two limited partnerships in which the Company has a controlling interest. The limited partnership interests not owned by the Company are accounted for as minority interests (see Note 11). All material intercompany transactions and account balances have been eliminated in consolidation. Income Recognition Rental, interest and other income are recorded on the accrual method of accounting as earned. Rental Operations As of December 31, 1997, the Company owned 154 multifamily properties in eleven states; with 69% of its apartment units located in Texas and 25% located in Florida, Oklahoma, Arizona, Tennessee and Utah. Of the total units owned, 12,125 or 29% are located in the Houston area and 11,749 or 28% are located in the Dallas/Fort Worth area. Apartment units are leased to residents on terms of one year or less, with monthly payments due in advance. Certain of the properties are subject to Federal, state and local statutes or other restrictions requiring that a percentage of apartments be made available to lower or moderate income families. In management's opinion, due to the number of residents, the type and diversity of markets in which the properties operate and the collection terms, there is no concentration of credit risk. Unusual Charge -- Officer Settlement Agreement In October 1997, the Company entered into a settlement agreement in connection with the resignation of its former Chief Executive Officer ("CEO") and Chairman of the Board. The Company has recorded the total cost of this settlement ($1.9 million) as an unusual charge in the statement of income. The vesting of the restricted stock that was issued to this individual was accelerated and these shares now vest in October 2000. The vesting of all stock options held by this individual was accelerated such that they vested immediately and expire in October 2002. Cash and Cash Equivalents All cash and investments in money market accounts, excluding restricted cash, that have a maturity of three months or less at the time of purchase are considered to be cash and cash equivalents. Restricted Cash Restricted cash consists of two major components: (1) security deposits and escrow deposits held by lenders for the payment of property taxes, insurance and replacement reserves and (2) additional collateral on mortgage notes payable. Restricted cash related to security and escrow deposits is invested primarily in F-17 110 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) short-term securities. Restricted cash related to additional collateral on mortgage notes is invested in long-term government securities. The additional collateral is not available for general operating purposes. Real Estate Assets and Depreciation Expenditures directly related to the acquisition and improvement of real estate assets are capitalized at cost as land, buildings and improvements. The Company capitalizes the cost of appliances, exterior painting, roof replacement and expenditures for other major property improvements, as well as rehabilitation costs incurred for properties acquired. Effective July 1, 1996, the Company revised its method of accounting to capitalize the cost of replacement carpets on a prospective basis (see Note 3). Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets which range from 14 to 30 years for buildings and five, ten or 15 years for personal property. The Company's management routinely reviews its investments for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on the Company's policy of reviewing for impairment of long-lived assets by reviewing expected future cash flows of its properties, there were no adjustments necessary for impairment of properties during the three year period ended December 31, 1997. Deferred Financing Costs and Amortization Legal fees and other costs associated with obtaining financing have been capitalized and are being amortized over the terms of the related debt. Financing costs were reported net of accumulated amortization of $1,625,000 and $632,000 as of December 31, 1997 and 1996, respectively. Forward Treasury Lock Agreements During 1997, the Company entered into forward treasury lock agreements in order to hedge its exposure to interest rate fluctuations. Any gains or losses under the forward treasury lock agreements will be amortized as interest expense over the term of the financing. Income Taxes The Company elected to be taxed as a REIT for Federal income tax purposes as provided under the Internal Revenue Code of 1986, as amended, effective with its taxable year ended December 31, 1994. As a result, the Company generally will not be subject to Federal income taxation if it distributes 95% of its REIT taxable income to its stockholders and satisfies certain other requirements. The Company qualified as a REIT for its taxable years ended December 31, 1996 and 1995 and anticipates that its method of operations will enable it to continue to satisfy the requirements for such qualification. Minority Interests Minority interests represent limited partnership interests not owned by the Company. Amounts are recorded based on the fair value of the cash and securities issued in exchange for the net assets acquired (see Note 11). Partnership units are convertible into common stock (11,176,904 units at December 31, 1997) ("Common OP Units") and preferred stock (1,999,909 units at December 31, 1997) ("Preferred OP Units") (collectively, the "OP Units") in accordance with the partnership agreements. Minority interest holders are entitled to cash distributions at rates equivalent to common or preferred stockholders as defined in the partnership agreements. Certain Common OP Units have guaranteed distributions. Income allocated to minority interests is equal to either (i) the preferred distributions paid or accrued or (ii) an amount equal to income before income allocated to minority interests divided by the number of common shares and Common OP Units. F-18 111 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company revised its prior financial statements by reclassifying the convertible equity securities formerly reported as a component of stockholders' equity in its consolidated balance sheets to minority interests and by restating its statements of income to reflect distributions or income on such convertible equity securities as income allocated to minority interests which is deducted in arriving at net income. The Company believes these changes were necessary to conform the Company's prior financial statements to generally accepted accounting principles. These changes had no impact on the financial condition, business or assets of the Company and did not change the Company's net income available to common stockholders per share. Stock-based Compensation The Company has elected not to recognize compensation expense for stock options issued as calculated under Statement of Financial Accounting Standards ("SFAS") No. 123, but rather will continue recognizing expense as prescribed by APB Opinion No. 25. Disclosure of amounts required by SFAS No. 123 for stock options issued are included in Note 10. The Company also accounts for restricted stock issued as prescribed by APB Opinion No. 25 (see Note 11). Net Income Per Share of Common Stock Basic net income per share has been computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted net income per share has been computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding plus potential dilutive common share equivalents. F-19 112 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents information necessary to calculate basic and diluted net income per share for the periods indicated, with 1996 and 1995 being restated to conform with the requirements of the SFAS No. 128, Earnings per Share (in thousands, except per share amounts):
FOR THE YEAR ENDED DECEMBER 31, --------------------------- 1997 1996 1995 ------- ------- ------- Net Income for Basic and Diluted Computation: Income before extraordinary item and income allocated to minority interests..................................... $27,113 $19,122 $10,685 Extraordinary loss on debt extinguishment................. (422) (1,848) (1,352) ------- ------- ------- Income before minority interests.......................... 26,691 17,274 9,333 Income allocated to minority interests.................... (4,109) (1,705) (922) ------- ------- ------- Net income................................................ 22,582 15,569 8,411 Preferred distributions................................... (13,186) (2,387) -- ------- ------- ------- Net income available to common stockholders (basic and diluted net income per share computation).............. $ 9,396 $13,182 $ 8,411 ======= ======= ======= Basic Net Income per Share: Before extraordinary item, less preferred distributions... $ 0.55 $ 1.02 $ 0.80 Extraordinary loss on debt extinguishment................. (0.02) (0.12) (0.11) ------- ------- ------- Net income available to common stockholders............... $ 0.53 $ 0.90 $ 0.69 ======= ======= ======= Diluted Net Income per Share: Before extraordinary item, less preferred distributions... $ 0.55 $ 1.02 $ 0.80 Extraordinary loss on debt extinguishment................. (0.02) (0.13) (0.11) ------- ------- ------- Net income available to common stockholders............... $ 0.53 $ 0.89 $ 0.69 ======= ======= ======= Weighted Average Number of Shares Outstanding (a): Basic..................................................... 17,590 14,720 12,155 Dilutive effect of outstanding options.................... 157 72 -- ------- ------- ------- Diluted................................................... 17,747 14,792 12,155 ======= ======= =======
- --------------- (a) Excludes the convertible preferred shares, warrants and Common OP Units (see Note 11) and 1,696,750 stock options, which are anti-dilutive. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of certain assets, liabilities, revenues and expenses as of and for the reporting periods. Actual results may differ from such estimates. Environmental Remediation Costs The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remediation feasibility study. Such accruals are adjusted as further information develops or circumstances change. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. The F-20 113 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's management is not aware of any environmental remediation obligations which would materially affect the operations, financial position or cash flows of the Company. New Accounting Pronouncements In December 1997, the Company adopted the provisions of Financial Accounting Standards Board ("FASB") SFAS No. 128, Earnings Per Share. SFAS No. 128 specifies the computation, presentation and disclosure requirements of earnings per share and supersedes Accounting Principles Board Opinion No. 15. SFAS No. 128 requires a dual presentation of basic and diluted earnings per share. Basic earnings per share, which excludes the impact of common share equivalents, replaces primary earnings per share. Diluted earnings per share, which utilizes the average market price per share as opposed to the greater of the average or ending market price per share when applying the treasury stock method in determining common share equivalents, replaces fully diluted earnings per share. In February 1997, the FASB issued SFAS No. 129, Disclosure of Information about Capital Structure, which establishes standards for disclosing information about an entity's capital structure. SFAS No. 129 is effective for periods ending after December 15, 1997. The adoption of SFAS No. 129 did not impact the Company's capital structure disclosures, as the Company was already in compliance with this accounting standard. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments and related information in interim and annual financial statements. SFAS No. 130 and 131 are effective for periods beginning after December 15, 1997. SFAS No. 130 could impact the Company's reporting as it relates to its outstanding derivatives and management will implement SFAS No. 131 for the year ending December 31, 1998 by reporting its operating segments by geographic location. Reclassifications Certain previously reported amounts have been reclassified to conform to current financial statement presentation. (3) CHANGE IN ACCOUNTING POLICY Effective July 1, 1996, the Company revised its method of accounting to capitalize the cost of replacement carpets on a prospective basis ($864,000 capitalized in 1996 which would have been expensed under the old policy, which represents $0.06 for basic and diluted net income per share). The Company believes that this accounting policy change is preferable because it is consistent with policies currently being used by the majority of the largest publicly traded apartment REITs and provides a better matching of expenses with the related benefit of the expenditures. F-21 114 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Following is pro forma information as if the revised capitalization policy was in effect as of January 1, 1995 (in thousands, except per share data):
YEAR ENDED DECEMBER 31, ------------------ 1996 1995 ------- ------- Income before extraordinary item and income allocated to minority interests as reported............................ $19,122 $10,685 Add: Adjustment for change in accounting policy to capitalize carpet replacement costs....................... 264 875 ------- ------- Income before extraordinary item and income allocated to minority interests as adjusted............................ $19,386 $11,560 ======= ======= Net income as adjusted...................................... $15,833 $ 9,286 ======= ======= Net income available to common stockholders as adjusted..... $13,446 $ 9,286 ======= ======= Basic net income per share: Before extraordinary item, less preferred distributions and income allocated to minority interests as reported............................................... $ 1.02 $ 0.80 Adjustment for effect of change in accounting policy...... 0.02 0.08 ------- ------- Income before extraordinary item, less preferred distributions and income allocated to minority interests as adjusted.................................. $ 1.04 $ 0.88 ======= ======= Net income available to common stockholders as reported... $ 0.90 $ 0.69 Adjustment for effect of change in accounting policy...... 0.02 0.08 ------- ------- Net income available to common stockholders as adjusted... $ 0.92 $ 0.77 ======= ======= Diluted net income per share: Before extraordinary item, less preferred distributions and income allocated to minority interests as reported............................................... $ 1.02 $ 0.80 Adjustment for effect of change in accounting policy...... 0.02 0.07 ------- ------- Income before extraordinary item, less preferred distributions and income allocated to minority interests as adjusted.................................. $ 1.04 $ 0.87 ======= ======= Net income available to common stockholders as reported... $ 0.89 $ 0.69 Adjustment for effect of change in accounting policy...... 0.02 0.07 ------- ------- Net income available to common stockholders as adjusted... $ 0.91 $ 0.76 ======= =======
(4) ACQUISITIONS AND DISPOSITIONS Acquisitions During 1997 the Company acquired 93 apartment properties containing 21,467 units (or 6,037 weighted average units) for a cost of $799.2 million. During 1996 the Company acquired 16 apartment properties containing 5,034 units (or 1,631 weighted average units) for a cost of $179.0 million. In addition, in connection with one property acquired in December 1996, the Company acquired approximately 81 acres of adjacent undeveloped land for $4 million. The properties acquired in 1997 and 1996 are located in the states of Texas, Florida, California, Georgia, Arizona and Tennessee. The acquisitions are accounted for by the purchase method of accounting, and the accompanying consolidated financial statements reflect the results of operations of the acquired properties since the date of purchase. F-22 115 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On October 1, 1997, the Company acquired the assets and business of Drever Partners, Inc. and its affiliates, including 18 partnerships of which Drever Partners, Inc. and certain of its affiliates were the general partners, (collectively, "Drever"), a private real estate management company based in San Francisco and Houston. This transaction included the acquisition by the Company of 79 apartment properties (consisting of 18,118 units), which are included in the 93 properties acquired by the Company during 1997. Pursuant to an Exchange Agreement with Drever, the consideration exchanged by the Company consisted of approximately $94.7 million of cash, the assumption of $286.0 million of mortgage debt (of which the Company repaid $119.0 million with proceeds from an unsecured term loan and its unsecured credit facility) and $303.5 million (based upon the price of the Company's stock at the time of the announcement of the acquisition) of Common OP Units and Preferred OP Units, issued by a newly-formed operating partnership subsidiary of the Company, Walden/Drever Operating Partnership, L.P. ("WDOP"), to the shareholders and partners of and equity participants in Drever. The Units are exchangeable on or after October 1, 1998 into an aggregate of 10,322,397 shares of the Company's common stock, 1,999,909 shares of the Company's 9.00% Redeemable Preferred Stock and 6,666,363 Series B Warrants (each of which is exercisable for one-third of one share of the Company's common stock at $26.875 per share). The 9.00% Redeemable Preferred Stock and the Preferred OP Units are redeemable at the option of the Company in ten years at a redemption price of $25 per share or unit. On February 18, 1998, the Company acquired two apartment properties with a total of 376 units located in Tampa, Florida for approximately $16.2 million. The Company funded these acquisitions by assuming $5.8 million of variable rate tax-exempt debt maturing in the year 2007, assuming $5.1 million of 7.35% fixed rate debt maturing in the year 2005, and borrowing the remaining amount under the Company's unsecured credit facility. The credit enhancement on the $5.8 million variable rate debt expires in November 1998 and is guaranteed by the Company. Dispositions On October 2, 1997, the Company disposed of one 392-unit property located in Dallas, Texas. During 1996 the Company disposed of three properties: a 384-unit property located in Wichita, Kansas, on April 24, 1996; a 304-unit property located in Corpus Christi, Texas, on August 30, 1996; and a 144-unit property located in Stone Mountain, Georgia, on September 27, 1996. In connection with these dispositions, the Company reported gains in the amount of $2,055,000 and $1,934,000 for the year ended December 31, 1997 and 1996, respectively. Pro Forma Information (Unaudited) The following unaudited condensed pro forma information for the two years ended December 31, 1997 was prepared from the financial statements of the Company by adjusting for the effect of all public offerings and all property dispositions and acquisitions in 1997 and 1996, including debt used to finance acquisitions or repaid from proceeds of dispositions, as if all of these transactions had occurred on January 1, 1996. The pro forma results do not include gains on property dispositions or extraordinary losses on early extinguishment of debt. The following information is not necessarily indicative of what the performance would have been had the Company owned these properties for the entire period, nor does it purport to represent future results of operations of the Company. (In thousands, except per share information.) F-23 116 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- Revenues.................................................... $268,113 $261,070 Expenses.................................................... 245,361 237,814 -------- -------- Income before income allocated to minority interests........ 22,752 23,256 Income allocated to minority interests...................... (7,362) (7,619) -------- -------- Net income.................................................. 15,390 15,637 Preferred distributions..................................... (13,186) (13,296) -------- -------- Net income available to common stockholders................. $ 2,204 $ 2,341 ======== ======== Basic net income per share.................................. $ 0.13 $ 0.14 ======== ======== Diluted net income per share................................ $ 0.12 $ 0.14 ======== ========
(5) REAL ESTATE ASSETS Changes in real estate assets and related accumulated depreciation for the years ended December 31, 1997 and 1996 are as follows (in thousands): Real estate assets: Balance at January 1, 1996................................ $ 513,341 Purchase of real estate assets............................ 182,967 Sale of real estate assets................................ (22,765) Fixed asset additions..................................... 9,972 ---------- Balance at December 31, 1996.............................. 683,515 Purchase of real estate assets............................ 799,162 Sale of real estate assets................................ (7,323) Fixed asset additions..................................... 32,259 ---------- Balance at December 31, 1997.............................. $1,507,613 ========== Accumulated depreciation: Balance at January 1, 1996................................ $ 23,734 Depreciation expense...................................... 19,810 Write off related to real estate assets sold.............. (1,837) ---------- Balance at December 31, 1996.............................. 41,707 Depreciation expense...................................... 33,560 Write off related to real estate assets sold.............. (683) ---------- Balance at December 31, 1997.............................. $ 74,584 ==========
(6) WDN MANAGEMENT COMPANY For the period February 9, 1994 through December 31, 1996, the Company owned 5% of the voting common stock and 100% of the non-voting common stock (which represented 95% of the economic interest) of WDN Management Company ("WDN Management"). The remaining 95% of the voting common stock (which represented a 5% economic interest) was owned by the Company's four executive officers. For this period, the results of operations of WDN Management were accounted for on the equity method. On December 31, 1996, the Company purchased the additional 5% economic interest in WDN Management from F-24 117 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the four executive officers for $15,000 which represents the four executive officers' original cost of the shares. At such time, WDN Management and its wholly-owned subsidiary were merged into the Company and WDN Management was dissolved. (7) MORTGAGE NOTES PAYABLE, UNSECURED TERM LOAN AND UNSECURED CREDIT FACILITY Mortgage notes payable and the Company's unsecured term loan (the "Term Loan") and unsecured credit facility (the "Credit Facility") consist of the following (in thousands):
AS OF DECEMBER 31, 1997 PRINCIPAL BALANCE ------------------------------------ AS OF DECEMBER 31, WEIGHTED AVERAGE WEIGHTED AVERAGE ------------------- INTEREST RATE YEARS TO MATURITY 1997 1996 ---------------- ----------------- -------- -------- Conventional Fixed Rate Mortgage Notes: Mortgage notes payable to the Federal National Mortgage Association...................... 8.81% 6.1 $ 43,101 $ 48,343 Mortgage notes payable to insurance companies.............................. 7.83% 3.8 248,155 86,452 Mortgage notes - other.................... 8.50% 2.6 3,175 3,208 ---- ---- -------- -------- 7.98% 4.1 294,431 138,003 Tax-exempt Mortgage Notes: Fixed rate................................ 6.51% 19.3 75,638 69,820 Variable rate............................. 5.53% 0.5 51,085 51,085 ---- ---- -------- -------- 6.11% 11.7 126,723 120,905 Variable Rate Notes: Unsecured Term Loan....................... 7.98% 0.9 200,000 -- Unsecured Credit Facility................. 7.72% 1.1 74,000 -- Other..................................... 8.63% 2.9 7,200 -- ---- ---- -------- -------- 7.93% 1.0 281,200 -- ---- ---- -------- -------- Total/Weighted Average.................... 7.62% 4.2 $702,354 $258,908 ==== ==== ======== ========
As of December 31, 1997, the Company had collateralized 88 of its 154 properties under various mortgage loans. Conventional Mortgage Notes Payable Conventional mortgage notes payable include 60 loans encumbering 75 properties at December 31, 1997. Mortgage notes for $294.4 million are payable in monthly installments aggregating approximately $2.3 million, including principal and interest at various fixed rates ranging from 6.95% to 9.22% per annum. One mortgage loan for $7.2 million is a variable rate loan requiring monthly payments of interest only (8.63% interest rate at December 31, 1997). Scheduled maturities are at various dates ranging from March 31, 1998 through December 1, 2005. Tax-Exempt Mortgage Notes Payable At December 31, 1997, 13 of the Company's properties are encumbered by 12 mortgage notes which were financed from the proceeds of tax-exempt bonds and which have credit enhancements. Mortgage notes of approximately $75.7 million are payable in monthly installments of approximately $0.5 million, including principal and interest at fixed rates ranging from 6.13% to 6.75% per annum. Mortgage notes in the amount of $68.8 million have scheduled maturities ranging from October 1, 2005 through September 1, 2028. The remaining mortgage note of $6.9 million was refinanced in February 1998 (see below). The remaining F-25 118 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) tax-exempt mortgage notes in the amount of $51.1 million have variable interest rates, are payable in monthly installments of interest only and have a weighted average interest rate of 5.53% as of December 31, 1997. The bonds underlying these mortgage notes are scheduled to mature on May 1, 2024, while the credit enhancements mature on June 30, 1998. The Company has guaranteed $6.4 million of the tax-exempt mortgage notes as of December 31, 1997 and 1996. On January 29, 1998 and February 12, 1998, the Company refinanced $12.7 million and $6.9 million, respectively, of the variable rate tax-exempt mortgage loans and extended the mortgage loan and credit enhancement maturity to February 15, 2028. The Company has also received a commitment to refinance the remaining variable rate tax-exempt mortgage loans to provide a 30-year credit enhancement. In March 1998, $78.1 million of conventional fixed-rate mortgage notes were refinanced with $110.0 million of fixed-rate debt, of which 80.0 million of such debt bears interest at 6.62% and matures in December 2007 and the remaining $30.0 million bears interest at 7.06% and matures in December 2017. Unsecured Term Loan and Unsecured Credit Facility On December 15, 1997, the Company entered into an unsecured $200 million one year term loan agreement (the "Term Loan") with BankBoston, as agent for a group of financial institutions. The interest rate on the borrowing is identical to that of the Credit Facility (see below). This borrowing was utilized to repay a $110 million term loan obtained on October 1, 1997 in connection with the acquisition of the apartment properties owned by Drever. The balance of the proceeds of the Term Loan were used to reduce the Credit Facility borrowings. The Company paid a loan fee of $1.2 million dollars for the Term Loan which is being amortized over the life of the loan. The Company has a $150 million unsecured Credit Facility with BankBoston, as agent for a group of financial institutions, which matures February 1999. At the Company's election, the interest rate on any borrowings under its Credit Facility is at a floating rate equal to either (i) BankBoston's base rate (8.5% at December 31, 1997) plus 0.5%, or (ii) LIBOR (5.7% at December 31, 1997) plus 1.375%. The Term Loan and Credit Facility contain customary representations, warranties and events of default which require the Company to comply with certain affirmative and negative covenants. The primary restrictive covenants provide that: (i) distributions to stockholders may not exceed 90% of funds from operations, as defined in the Term Loan and Credit Facility; (ii) secured mortgage indebtedness may not exceed 40% of the Company's total assets before depreciation; (iii) the Company's fixed charge coverage ratio, as defined, must exceed 1.25; and (iv) the Company's debt service coverage ratio, as defined, must exceed 2.0. As of December 31, 1997, the Company is in compliance with all covenants of the Term Loan and Credit Facility. Principal Debt Maturities Principal debt maturities, including balloon payments, for the next five years are as follows (in thousands): 1998........................................................ $341,206 1999........................................................ 79,612 2000........................................................ 20,270 2001........................................................ 72,890 2002........................................................ 4,986 Thereafter.................................................. 183,390 -------- Total..................................................... $702,354 ========
F-26 119 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Extraordinary Items As a result of the sale of a property during 1997, the Company recorded an extraordinary loss in the amount of $0.4 million, which represented the write-off of unamortized deferred financing costs and prepayment penalties from the early retirement of debt. During 1996, the Company refinanced approximately $36.4 million of mortgage loans and the Credit Facility prior to maturity, which resulted in an aggregate extraordinary loss of $1.8 million. These losses represented prepayment fees and unamortized financing costs related to the debt retired. Forward Treasury Lock Agreements The Company has entered into five forward treasury lock agreements in order to hedge its exposure to interest rate fluctuations on anticipated debt financing expected to close in 1998. Under these agreements, the Company will pay or receive an amount equal to the difference between the Reference Yield and the Market Yield, as defined, on the date of exercise. The exercise date may be any date up to the settlement date. Any gain or loss under these agreements will be amortized to interest expense over the term of the financing. The following forward treasury lock agreements were in place as of December 31, 1997:
NATIONAL AMOUNT SETTLEMENT DATE REFERENCE YIELD REFERENCE TREASURY --------------- --------------- --------------- ------------------ (In thousands) $75,000 November 23, 1998 5.8950% 5.750% due 11/30/02 25,000 November 23, 1998 5.9600% 6.125% due 08/15/07 100,000 May 22, 1998 6.3205% 6.125% due 08/15/07 75,000 May 21, 1998 6.4745% 6.125% due 08/15/07 20,000 May 22, 1998 6.2594% 6.625% due 02/15/27 -------- $295,000 ========
(8) EMPLOYEE BENEFIT PLAN Effective October 1, 1995, WDN Management adopted a 401(k) Plan for its employees and the employees of the Company. The 401(k) plan is a voluntary defined contribution plan. Qualified employees may participate in the plan by contributing up to 15% (20% effective October 1, 1997) of the participant's annual compensation (not to exceed $9,500, $9,500 and $9,240 per annum for 1997, 1996 and 1995, respectively). In 1997, the Company made an annual matching contribution on the participants' behalf of $136,000, representing up to 3% of the participant's annual compensation for the periods from October 1, 1996 through September 30, 1997 and from October 1, 1997 through December 31, 1997. In 1996, WDN Management made an annual matching contribution on the participant's behalf of $217,000. This represented up to 6% and 3% of the participant's annual compensation for the periods from October 1, 1995 through March 31, 1996 and from April 1, 1996 through September 30, 1996, respectively. The amount relating to the Company's employees was reimbursed to WDN Management by the Company in 1996. A participant's salary deferral contribution is 100% vested and nonforfeitable. A participant will become vested in the Company's matching contributions after five years. (9) OFFICER AND DIRECTOR NOTES FOR STOCK PURCHASES On July 19, 1994, the Company issued 183,000 shares of its common stock, at $20.875 per share (the closing sales price of the common stock on the New York Stock Exchange for that date), to four executive officers and to seven other officers of the Company. Each officer acquiring stock paid 10% of the purchase price in cash, with the remaining 90% loaned by the Company. Each such loan is evidenced by a note with a five year term, bearing interest at a fixed rate of 7.25% per annum, payable quarterly, and is secured by F-27 120 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) a pledge of the shares of common stock purchased by each officer pursuant to such loans. One officer is personally liable for the indebtedness evidenced by his note, while the loans to each of the other officers are non-recourse. On December 14, 1995, the Company authorized the issuance of shares of its common stock at $19.375 per share, the closing sales price of the common stock on the New York Stock Exchange for that date, to four executive officers, three other officers and four directors. On December 20, 1995, the Company agreed to issue 122,600 shares of its common stock to such officers and directors. On such date, the closing sales price of the Company's common stock on the New York Stock Exchange was $19.50 per share. Of such shares of common stock, the Company issued 103,800 on December 28, 1995 and 18,800 on January 18, 1996. Such shares were issued from common stock repurchased pursuant to the Company's stock repurchase program (see Note 11). Each officer and director acquiring stock paid 20% and 50%, respectively, of the purchase price in cash with the remaining amount loaned by the Company. Each loan is evidenced by a note with a five year term, bearing interest at a fixed rate of 8% per annum, payable quarterly, and is secured by a pledge of the shares of common stock purchased. In addition, each officer and director is personally liable for the indebtedness evidenced by the respective note. On February 17, 1998, the Company implemented a new officer loan program allowing officers to purchase the Company's common stock at current market prices and to exercise vested stock options with the assistance of a loan from the Company. Under this program, officers are eligible to purchase stock on March 1 and September 1 of each year in an aggregate amount of up to three times the officer's annual salary. A cash payment of 5% to 15% of the purchase price is required by the officer, depending upon the amount of the purchase, with the remainder loaned on a full recourse basis to the officer. Each loan is evidenced by a note with a five-year term, requiring quarterly payments of interest only at a fixed interest rate equal to the Company's then current interest rate under its Credit Facility. The loan is secured by a pledge of the shares of common stock purchased by each officer pursuant to such loan. On March 2, 1998, the Company issued 138,692 shares of its common stock, at $24.75 per share (the closing price of the common stock on the New York Stock Exchange for the previous trading day) and 26,192 shares of its common stock at a stock option grant price of $19.25 per share, to 25 officers under the officer loan program. The Company issued loans to officers in the amount of approximately $3.6 million, bearing interest at 7%. (10) STOCK OPTION PLAN The Company adopted a stock option plan (the "Option Plan") in 1994 to provide incentives to officers, key employees and directors. Stock options granted under the Option Plan include non-qualified options and incentive stock options ("ISOs"). Options granted to non-employee directors vest over a one-year period. Options granted to officers and other employees vest ratably over a four-year period. All options expire ten years from the date of grant. Shares of common stock reserved for issuance under the Option Plan are in an amount equal to 10% of the Company's outstanding shares including exchangeable or convertible securities. As of December 31, 1997, 3,115,953 shares of common stock were reserved for issuance under the Option Plan. The Option Plan limits the number of shares of common stock issuable pursuant to ISOs to 1,500,000. Following is a summary of stock option activity for the three years ended December 31, 1997: F-28 121 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 1996 1995 -------------------- -------------------- ------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS -------- --------- -------- --------- -------- ------- Options outstanding, beginning of year................................ $20.07 1,392,750 $19.23 792,500 $19.25 521,350 Granted............................. 25.34 1,778,250 21.16 603,250 19.21 286,150 Exercised........................... 19.56 (138,813) 19.25 (125) 19.25 (1,875) Canceled............................ 22.83 (148,562) 20.64 (2,875) 19.25 (13,125) ------ --------- ------ --------- ------ ------- Options outstanding, end of year...... $23.20 2,883,625 $20.07 1,392,750 $19.23 792,500 ====== ========= ====== ========= ====== ======= Exercisable options, end of year...... $21.21 1,076,619 $19.22 356,900 $19.25 141,713 ====== ========= ====== ========= ====== =======
As of December 31, 1997, options for 1,076,619 shares of common stock were exercisable at prices ranging from $18.47 to $26.00 per share and had a weighted average remaining contractual life of 5.5 years. Outstanding options as of December 31, 1997 had a weighted average contractual life of 7.9 years. SFAS No. 123, "Accounting for Stock-Based Compensation," requires companies to use recognized option pricing models to estimate the fair value of stock based compensation, including stock options. The Company has elected not to recognize compensation expense as calculated under SFAS No. 123, but rather will continue recognizing expense as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed under SFAS No. 123. Had compensation expense been determined based on the fair value of the stock option grants at the grant dates consistent with the method of SFAS No. 123, the Company's net income and net income per common share would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 ------ ------- ------ Net income available to common stockholders: As reported (in thousands)................................ $9,396 $13,182 $8,411 Pro forma (in thousands).................................. $8,180 $12,806 $8,184 Basic net income per share: As reported............................................... $ 0.53 $ 0.90 $ 0.69 Pro forma................................................. $ 0.47 $ 0.87 $ 0.67 Diluted net income per share: As reported............................................... $ 0.53 $ 0.89 $ 0.69 Pro forma................................................. $ 0.46 $ 0.87 $ 0.67 Stock options issued (in thousands)......................... 1,778 603 286 Weighted average exercise price............................. $25.34 $ 21.16 $19.21 Weighted average compensation value of options granted per option(1)................................................. $ 2.38 $ 1.14 $ 1.20 Compensation cost (in thousands)............................ $1,397 $ 376 $ 227
- --------------- (1) Calculated in accordance with the binomial model, using the following assumptions; (i) expected volatility computed using the monthly average of the Company's common stock market price as listed on the New York Stock Exchange for the period April 1995 through September 1997 for the year ended December 31, 1997, with an average market price volatility of 13.4% and the period February 1994 through July 1996 for the periods ended December 31, 1996 and 1995, with an average market price volatility of 11.92%; (ii) expected dividend yield ranging from 7.42% to 9.90%; (iii) expected option term of six years; (iv) risk-free rate of return as of the date of grant, which ranged from 5.39% to 7.61%, based on extrapolated yield of six year U.S. Treasury securities and (v) forfeiture rate of 4.0%. F-29 122 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (11) STOCKHOLDERS' EQUITY AND MINORITY INTERESTS Minority Interests In connection with apartment acquisitions in June 1995, the Company issued Common OP Units that are exchangeable for an aggregate of 810,128 shares of the Company's common stock at the option of the unit holders. Prior to exchange, the holders of these Common OP Units will be entitled to receive quarterly distributions equal to the greater of the Company's actual distributions on 810,128 shares of common stock, or $369,000 in the aggregate ($391,000 was accrued as of December 31, 1997). Distributions of $1,564,000, $1,789,000 and $461,000 were paid to these unit holders for the years ended December 31, 1997, 1996 and 1995, respectively. These securities have been recorded as minority interests in the accompanying balance sheets. In connection with an apartment acquisition in April 1997, the Company issued $1.1 million of Common OP Units which are convertible into 44,379 shares of the Company's common stock. Prior to conversion, the holders of these Common OP Units will be entitled to receive quarterly distributions on the equivalent of 44,379 shares of common stock if and when declared and paid ($38,000 was declared and paid during the year ended December 31, 1997). These securities have been recorded as minority interests in the accompanying balance sheets. In connection with the properties acquired from Drever in October 1997 (see Note 4), the Company issued $303.5 million of Common OP Units and Preferred OP Units which are exchangeable on or after October 1, 1998, into common stock and 9.00% redeemable preferred stock with detachable warrants, respectively. Approximately half of these Common OP Units and Preferred OP Units must convert to common and preferred shares, respectively, on October 1, 1998. Beginning in 1998, the holders of the Preferred OP Units will be entitled to receive quarterly distributions of $0.5625 per unit and the holders of the Common OP Units will be entitled to receive quarterly distributions equal to those on the Company's common stock. These securities have been recorded as minority interests in the accompanying balance sheets. On March 4, 1998, the Company paid distributions of $5.4 million on the Common OP Units (which represented $0.4825 per unit) and $1.1 million on the Preferred OP Units (which represented $0.5625 per unit). Dividend Reinvestment Program The Company has a Dividend Reinvestment and Stock Purchase Program ("DRP") which allows stockholders to reinvest their common or preferred distributions quarterly into shares of the Company's common stock, in lieu of receiving cash distributions. The current DRP provides that the issue price of dividend reinvestment purchases are at 95% of the average closing market price of the Company's common stock for the five days preceding such purchase. The Company has filed various shelf registration statements for an aggregate of 2,500,000 shares of common stock to be issued pursuant to the DRP, of which 923,726 shares were available for issuance as of December 31, 1997. Pursuant to the DRP, the Company issued 216,867 and 955,434 shares of its common stock during 1996 and 1997, respectively. Other Shelf Registrations On June 2, 1995, the Company filed a shelf registration statement for $150,000,000 in shares of common or preferred stock. On October 9, 1996, the Company filed another registration statement for $150,000,000 in shares of common or preferred stock or stock warrants. The amount of securities available for issuance under these registration statements at December 31, 1997 were $6,032,000 and $19,993,000, respectively. F-30 123 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Public Offerings Following is a summary of the Company's public offerings through December 31, 1997:
DESCRIPTION DATE ISSUED ISSUE PRICE SHARES NET PROCEEDS ----------- ----------------- ----------- -------------- -------------- (In thousands) (In thousands) Common Stock: IPO.................................. February 9, 1994 $19.250 8,386(1) $143,680(2) Follow-on offerings: November 7, 1994 $19.250 1,500 26,706 June 23, 1995 $18.375 3,500 60,173 August 27, 1996 $20.625 1,680 32,626(2) December 24, 1996 $24.250 1,237 28,233(3) ------ -------- 16,303 $291,418 ====== ======== Preferred Stock/Warrants: 9.16% Series A Convertible Redeemable Preferred Stock........ April 26, 1996 $25.000 1,800 43,500 9.20% Senior Preferred Stock and Warrants................ December 27, 1996 $25.000 4,000 95,344 ------ -------- 5,800 138,844 ------ -------- Total public offerings................. 22,103 $430,262 ====== ========
- --------------- (1) Includes 645,000 shares issued to Walden and certain officers of Walden (the "Restricted Shares"). (2) Includes overallotment option exercised. (3) Includes 161,000 shares issued in January 1997 pursuant to an overallotment option. Net proceeds were $3,524,000. On February 19, 1998, the Company issued 323,232 shares of its common stock at a price of $23.515 per share, resulting in net equity proceeds of $7.6 million. Preferred Stock and Warrants On April 26, 1996, the Company sold 1,800,000 shares of a 9.16% Series A Convertible Redeemable Preferred Stock ("Series A") at $25.00 per share. On August 14, 1996, 1,707,300 shares of Series A were exchanged for the same number of shares of a 9.16% Series B Convertible Redeemable Preferred Stock ("Series B"). On July 1, 1996, 14,000 shares of Series A were converted into 15,968 shares of common stock. During 1997, 73,818 shares of Series B were converted into 84,194 shares of common stock. On July 2, 1997, the remaining Series A shares which had not converted to shares of the Company's common stock, were automatically exchanged for Series B shares pursuant to the terms of the Series A shares. Distributions on Series B shares are cumulative and are equal to the greater of (i) $2.29 per annum or (ii) the distribution on the number of shares of common stock into which a share of Series B is convertible. Series B shares are convertible into 1.1406 shares of common stock and are redeemable at the option of the Company on or after April 30, 2006 at $25.00 per share. On December 27, 1996, the Company sold 4,000,000 units at $25.00 per unit. Each unit represented one share of 9.20% Senior Preferred Stock and one detachable warrant. The preferred stock is not convertible into common stock and is redeemable by the Company on or after December 31, 2006 at $25.00 per share. Distributions on the preferred stock are cumulative. A warrant may be exchanged for one-third share of common stock at an exercise price of $26.875 per share. The warrants expire on January 1, 2002. F-31 124 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The aggregate liquidation preference of the Company's preferred stock was $142,805,000 as of December 31, 1997. Restricted Stock On February 6, 1997, the Company adopted a Long-Term Incentive Plan to attract and retain individuals to serve as directors, officers and employees of the Company. The recipients of the Company's restricted shares of common stock (the "Restricted Stock") are required to pay the $0.01 par value of the common stock. On February 12, 1997, the Company issued 107,500 shares of Restricted Stock under this plan to four executive officers, its non-employee directors and certain other employees of the Company (of which 18,000 shares of Restricted Stock were canceled upon departures of certain individuals). The shares issued to the non-employee directors vest ratably over a three-year period; while the shares issued to the executive officers and other employees vest over a ten-year period, with an initial vesting of 40% after the fourth anniversary and a 10% annual vesting thereafter. Deferred compensation related to the Restricted Stock was computed based upon the market value of the shares at the date of issuance less the amount paid for the shares. This deferred compensation is being amortized over the respective vesting periods. The unamortized amount as of December 31, 1997 was $1,404,000. The vesting period of the Restricted Stock issued to the Company's former CEO and Chairman of the Board was accelerated to October 2000, pursuant to a settlement agreement. In addition, the balance of the deferred compensation on such Restricted Stock ($739,000) was fully amortized in 1997, and is included in the unusual charge -- officer settlement agreement in the statement of income. On February 4, 1998, the Company issued 4,000 restricted shares of common stock to two executive officers which shares vest ratably over a three year period. Other Stock Issuances On April 19, 1995, the Company acquired a multifamily property for $14 million. The acquisition was funded by $9.8 million in financing and the issuance of 215,700 shares of the Company's common stock at a price of $19.55 per share. As discussed in Note 9, 183,000 shares of common stock were sold to 11 officers of the Company on July 19, 1994; 103,800 shares of common stock were sold to seven officers and four directors on December 28, 1995 and 18,800 shares were sold to one officer on January 18, 1996. All of the stock sold was pursuant to an officer/director stock purchase plan at the then current market price. Stock Repurchases In December 1995, the Company announced its intention to repurchase shares of its common stock. During 1995, the Company repurchased 103,800 shares of its common stock at a cost of $2,038,000, of which $110,000 was not paid until January 1996. All 103,800 shares were reissued to officers and directors on December 28, 1995 pursuant to an officer and director stock purchase agreement (see Note 9). During 1996, the Company repurchased 318,300 shares of its common stock at a cost of $6,462,000; of which 18,800 shares were reissued on January 18, 1996 pursuant to an officer and director stock purchase agreement (see Note 9). The remaining 299,500 shares were retired in 1996. In July 1997, the Company announced its intention to repurchase additional shares of its common stock. During 1997 the Company repurchased and retired 278,500 shares of its common stock at a cost of $6,666,000. F-32 125 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Distributions to Common and Preferred Stockholders For the year ended December 31, 1995, the Company paid distributions of $22,020,000 (or $1.82 per share of common stock), of which 45.75% represented a return of capital, 3.84% represented a long-term capital gain and 50.41% represented ordinary taxable dividend income. For the year ended December 31, 1996, the Company paid distributions of $27.0 million to its common stockholders (or $1.86 per share of common stock), of which 43.3% represented a return of capital, 3.7% represented a long-term capital gain and 53.0% represented ordinary taxable dividend income. In addition, the Company paid distributions of $2.4 million on its 9.16% Convertible Redeemable Preferred Stock (or $1.335 per share), of which 6.53% represented a long-term capital gain and 93.47% represented ordinary taxable dividend income. For the year ended December 31, 1997, the Company paid distributions of $33,852,000 (or $1.93 per share of common stock), of which 44.06% represented a return of capital, 2.23% represented a 20% long-term capital gain and 53.71% represented ordinary taxable dividend income. In addition, the Company paid distributions of $3,986,000 on its 9.16% Convertible Redeemable Preferred Stock (or $2.29 per share) and $8,538,000 on its 9.2% Senior Preferred Stock (or $2.30 per share), of which 3.99% represented a long-term capital gain and 96.01% represented ordinary taxable dividend income. On March 4, 1998, the Company paid distributions of $12.0 million to stockholders of record on February 18, 1998. The common stockholders were paid $0.4825 per share; the 9.16% Convertible Redeemable Preferred Stockholders were paid $0.5725 per share and the 9.20% Senior Preferred Stockholders were paid $0.575 per share. Distribution Preferences Distributions on the Company's preferred stock and certain of its minority interest securities have priority over other distributions. Following are the Company's distribution preferences: (a) First, to holders of the 9.20% Senior Preferred Stock (4,000,000 shares at December 31, 1997, with an annual dividend rate of $2.30 per share); then (b) to holders of the 9.16% Series B Convertible Redeemable Preferred Stock (1,712,182 shares at December 31, 1997, with an annual dividend rate of $2.29 per share) and the holders of 1,999,909 Preferred OP Units (with an annual distribution of $2.25 per unit); then (c) to holders of 810,128 Common OP Units (at a minimum cumulative annual distribution equal to $1.82 per unit); and (d) finally, to all remaining holders of Common OP Units and common stock. (12) FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS The following disclosure of estimated fair value of financial instruments was determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgement is necessary to interpret market data and develop the related estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash and cash equivalents, receivables (including notes receivable from officers and directors), accounts payable and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair value. F-33 126 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 1997, the outstanding balance of fixed rate mortgage notes payable of $370.1 million had a fair value of $379.1 million (excluding prepayment penalties) as estimated based upon interest rates available for the issuance of debt with similar terms and remaining maturities as of December 31, 1997. Of these mortgages, $179.0 million were not prepayable at December 31, 1997. The remaining notes were subject to prepayment penalties of $5.6 million at December 31, 1997, which would be required to retire these notes prior to maturity. The floating rate mortgage notes payable balance at December 31, 1997 reasonably approximates fair value. As of December 31, 1996, the outstanding balance of fixed rate mortgage notes payable of $207.8 million had a fair value of $211.7 million (excluding prepayment penalties) as estimated based upon interest rates available for the issuance of debt with similar terms and remaining maturities as of December 31, 1996. Of these mortgage notes, $178.0 million were not prepayable at December 31, 1996. The remaining notes were subject to prepayment penalties of $1.9 million at December 31, 1996, which would be required to retire these notes prior to maturity. The floating rate mortgage notes payable balance of $51.1 million at December 31, 1996 reasonably approximates fair value. The fair value of the Company's forward treasury lock agreements (used to hedge against exposure to interest rate fluctuations) is $9.3 million, the estimated amount that the Company would pay to terminate the agreements as of December 31, 1997. The amount was determined based on a quote received from a financial institution which transacts these type of settlements. The fair value estimates presented herein are based on information available to management as of December 31, 1997 and 1996. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein. (13) COMMITMENTS AND CONTINGENCIES The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such matters will not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Effective October 1, 1995, the Company entered into a lease agreement for its corporate office space. The lease requires monthly lease payments of $25,000 for a period of sixty months. In January 1998, the Company executed a lease agreement for additional office space. The lease requires monthly lease payments commencing at $66,000 up to $78,000 for a period of 120 months, beginning May 1998. As of December 31, 1997, the Company had employment agreements with five executive officers for five-year periods ending in February or October 2002. The aggregate remaining compensation due under these agreements was approximately $4.9 million as of December 31, 1997. Under such agreements, the Company is liable for the compensation benefits for one year if an executive officer were to be terminated without cause, as defined. On various dates in 1996 and 1997, the Company entered into contractual obligations with a third party to construct carports on 59 of the Company's properties. The total cost of the carports was estimated to be approximately $13.6 million, of which $9.3 million had been incurred as of December 31, 1997. The remaining $4.3 million is expected to be paid during 1998. On February 27, 1998, the Company signed a joint venture agreement with The Grupe Company ("Grupe") to purchase, for approximately $47 million, two Sacramento area properties which will consist of F-34 127 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 616 apartment units. Under the terms of the joint venture, Grupe will build and lease-up the two properties before the Company would purchase 100% of both properties from the joint venture. The purchase is anticipated to occur sometime in late 1999. (14) QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial information for the two year period ended December 31, 1997 is as follows (in thousands, except per share amounts):
1997 QUARTERS ENDED -------------------------------------------------------------- MARCH JUNE 30 SEPTEMBER 30 DECEMBER 31 (A) TOTAL -------- ------- ------------ --------------- -------- Revenues.................................. $33,291 $34,750 $36,499 $66,595 $171,135 Expenses.................................. 26,556 29,065 30,328 60,128 146,077 ------- ------- ------- ------- -------- Operating income.......................... 6,735 5,685 6,171 6,467 25,058 Gain on disposition of real property...... -- -- -- 2,055 2,055 Extraordinary loss on debt extinguishment.......................... -- -- -- (422) (422) Income allocated to minority interests.... (405) (395) (397) (2,912) (4,109) ------- ------- ------- ------- -------- Net income................................ 6,330 5,290 5,774 5,188 22,582 Preferred distributions................... (3,312) (3,311) (3,282) (3,281) (13,186) ------- ------- ------- ------- -------- Net income available to common stockholders............................ $ 3,018 $ 1,979 $ 2,492 $ 1,907 $ 9,396 ======= ======= ======= ======= ======== Basic net income per share: Before extraordinary item, less preferred distributions and income allocated to minority interests...................... $ 0.18 $ 0.11 $ 0.14 $ 0.13 $ 0.55 Extraordinary loss on debt extinguishment.......................... -- -- -- (0.02) (0.02) ------- ------- ------- ------- -------- Net income available to common stockholders............................ $ 0.18 $ 0.11 $ 0.14 $ 0.11 $ 0.53 ======= ======= ======= ======= ======== Diluted net income per share: Before extraordinary item, less preferred distributions and income allocated to minority interests...................... $ 0.17 $ 0.11 $ 0.14 $ 0.13 $ 0.55 Extraordinary loss on debt extinguishment.......................... -- -- -- (0.02) (0.02) ------- ------- ------- ------- -------- Net income available to common stockholders............................ $ 0.17 $ 0.11 $ 0.14 $ 0.11 $ 0.53 ======= ======= ======= ======= ========
- --------------- (a) Operations for the fourth quarter of 1997 include Drever, which was acquired on October 1, 1997 (see Note 11). F-35 128 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 QUARTERS ENDED ---------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL -------- ------- ------------ ----------- -------- Revenues................................... $25,275 $25,962 $28,899 $31,035 $111,171 Expenses................................... 21,755 22,117 24,136 25,975 93,983 ------- ------- ------- ------- -------- Operating income........................... 3,520 3,845 4,763 5,060 17,188 Gain on disposition of real property....... -- 1,272 724 (62) 1,934 Extraordinary loss on debt extinguishment........................... (488) (96) (488) (776) (1,848) Income allocated to minority interests..... (471) (471) (387) (376) (1,705) ------- ------- ------- ------- -------- Net income................................. 2,561 4,550 4,612 3,846 15,569 Preferred distributions.................... -- (342) (1,022) (1,023) (2,387) ------- ------- ------- ------- -------- Net income available to common stockholders............................. $ 2,561 $ 4,208 $ 3,590 $ 2,823 $ 13,182 ======= ======= ======= ======= ======== Basic net income per share: Before extraordinary item, less preferred distributions and income allocated to minority interests....................... $ 0.21 $ 0.31 $ 0.28 $ 0.23 $ 1.02 Extraordinary loss on debt extinguishment........................... (0.03) (0.01) (0.03) (0.05) (0.12) ------- ------- ------- ------- -------- Net income available to common stockholders............................. $ 0.18 $ 0.30 $ 0.25 $ 0.18 $ 0.90 ======= ======= ======= ======= ======== Diluted net income per share: Before extraordinary item, less preferred distributions and income allocated to minority interests....................... $ 0.21 $ 0.31 $ 0.28 $ 0.23 $ 1.01 Extraordinary loss on debt extinguishment........................... (0.03) (0.01) (0.03) (0.05) (0.12) ------- ------- ------- ------- -------- Net income available to common stockholders............................. $ 0.18 $ 0.30 $ 0.25 $ 0.18 $ 0.90 ======= ======= ======= ======= ========
F-36 129 WALDEN RESIDENTIAL PROPERTIES, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
DREVER PRO FORMA PRO-FORMA PRO HISTORICAL ADJUSTMENTS(A) ADJUSTMENTS(B) FORMA ---------- -------------- -------------- -------- REVENUES Rental income............................. $163,224 $10,234 $82,566 $256,024 Other property income..................... 6,313 537 2,785 9,635 Interest income........................... 1,598 (290) 493 1,801 Other income.............................. -- -- 653 653 -------- ------- ------- -------- Total revenues.................... 171,135 10,481 86,497 268,113 -------- ------- ------- -------- EXPENSES Property operating and maintenance........ 56,483 3,723 31,917 92,123 Real estate taxes......................... 16,805 943 8,670 26,418 General and administrative................ 7,734 -- 8,069 15,803 Unusual charge -- officer settlement agreement.............................. 1,940 -- -- 1,940 Interest.................................. 28,447 1,468 23,346(c) 53,261 Amortization.............................. 827 (7) -- 820 Depreciation.............................. 33,841 2,190 18,965(d) 54,996 -------- ------- ------- -------- Total expenses.................... 146,077 8,317 90,967 245,361 -------- ------- ------- -------- Operating income............................ 25,058 2,164 (4,470) 22,752 Gain on disposition of real property........ 2,055 (2,055) -- -- -------- ------- ------- -------- Income before extraordinary item and income allocated to minority interests........... 27,113 109 (4,470) 22,752 Extraordinary loss on debt forgiveness...... (422) 422 -- -- -------- ------- ------- -------- Income before income allocated to minority interests................................. 26,691 531 (4,470) 22,752 Income allocated to minority interests...... (4,109) -- (3,253)(e) (7,362) -------- ------- ------- -------- Net income.................................. 22,582 531 (7,723) 15,390 Preferred distributions..................... (13,186) -- -- (13,186) -------- ------- ------- -------- Net income available to common stockholders.............................. $ 9,396 $ 531 $(7,723) $ 2,204 ======== ======= ======= ======== Basic net income per share.................. $ .53 $ .13 ======== ======== Diluted net income per share................ $ .53 $ .12 ======== ======== Basic weighted average number of common shares outstanding........................ 17,590 17,599 ======== ======== Diluted weighted average number of common shares and common share equivalents outstanding............................... 17,747 17,756 ======== ========
See Note 4 of Notes to Consolidated Financial Statements to the Company's Consolidated Financial Statements for the year ended December 31, 1997 for an explanation of 1997 acquisitions and dispositions. F-37 130 WALDEN RESIDENTIAL PROPERTIES, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT PROPERTY INFORMATION) (a) The pro forma adjustments for the year ended December 31, 1997, reflect as of January 1, 1997: (i) the operations of fourteen apartment properties acquired and one apartment property disposed of by the Company in 1997, (ii) the reduction in interest income, net increase in interest expense on indebtedness incurred, and the net increase in depreciation expense related to such acquisitions and dispositions. (b) The Drever pro forma adjustments for the year ended December 31, 1997 reflected as of January 1, 1997 the operations of 79 apartment properties acquired by the Company in 1997 from Drever. (c) Represents interest expense related to indebtedness incurred in connection with the Drever acquisitions, including the amounts borrowed under the Company's variable rate credit facility and term loan and mortgages assumed. The pro forma weighted average combined interest rate was 7.53% for the year ended December 31, 1997. (d) Represents an adjustment to depreciation of real estate owned as a result of acquiring the real estate assets of Drever. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets which have an estimated weighted average useful life of approximately 24 years. Buildings are being depreciated over 25 years and other depreciable assets over 5, 10, or 15 years depending on the useful life of the related asset. (e) Represents an adjustment for common partnership OP Units issued in connection with the Drever transaction. F-38 131 INDEPENDENT AUDITORS' REPORT To the Directors, Stockholders and Partners of Drever Partners, Inc. and Affiliates We have audited the accompanying combined balance sheets of Drever Partners, Inc. and affiliates as of December 31, 1996 and 1995, and the related combined statements of operations, partners'/stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the management of Drever Partners, Inc. and affiliates. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly, in all material respects, the financial position of Drever Partners, Inc. and affiliates at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP - --------------------------------- DELOITTE & TOUCHE LLP Dallas, Texas June 27, 1997 October 1, 1997 as to Note 14 F-39 132 DREVER PARTNERS, INC. AND AFFILIATES COMBINED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, -------------------- JUNE 30, 1997 1996 1995 ------------- -------- -------- (UNAUDITED) ASSETS Real estate assets, at cost: Land................................................. $ 70,108 $ 70,336 $ 70,336 Buildings and improvements........................... 466,413 464,432 452,852 Less accumulated depreciation........................ (109,649) (99,260) (76,812) -------- -------- -------- Total real estate assets............................. 426,872 435,508 446,376 Rent and other receivables............................. 421 479 326 Receivables from related parties....................... 3,201 2,957 1,700 Prepaid and other assets............................... 1,305 765 3,674 Deferred financing costs, net.......................... 3,339 3,741 4,417 Deferred tax asset..................................... 174 174 268 Cash and cash equivalents.............................. 11,318 10,866 11,828 Restricted cash........................................ 2,537 4,402 6,549 -------- -------- -------- Total assets......................................... $449,167 $458,892 $475,138 ======== ======== ======== LIABILITIES AND PARTNERS'/STOCKHOLDERS' EQUITY Liabilities: Mortgage notes payable............................... $287,266 $290,854 $293,702 Other long-term debt................................. 626 759 1,469 Investor notes payable............................... 6,336 6,497 6,594 Accrued real estate taxes............................ 5,845 9,699 9,365 Accounts payable..................................... 2,473 3,481 3,033 Payable to related parties........................... 318 301 538 Accrued expenses and other liabilities............... 8,265 8,056 7,823 -------- -------- -------- Total liabilities................................. 311,129 319,647 322,524 Commitments and contingencies (Note 11) Partners'/Stockholders' equity: Partners' capital.................................... 182,806 179,559 182,213 Common stock......................................... 25 25 25 Treasury stock....................................... (371) (371) (371) Additional paid-in capital........................... 639 639 639 Accumulated deficit.................................. (45,061) (40,607) (29,892) -------- -------- -------- Total partners'/stockholders' equity.............. 138,038 139,245 152,614 -------- -------- -------- Total liabilities and partners'/stockholders' equity... $449,167 $458,892 $475,138 ======== ======== ========
See notes to combined financial statements. F-40 133 DREVER PARTNERS, INC. AND AFFILIATES COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ----------------- ------------------------------ 1997 1996 1996 1995 1994 ------- ------- -------- -------- -------- (UNAUDITED) REVENUES Rental income............................... $54,635 $53,007 $107,344 $101,630 $ 84,935 Other property income....................... 1,633 1,584 3,259 3,025 2,463 Construction revenue........................ -- 647 919 308 -- Interest income............................. 229 230 620 979 750 Other income (expense)...................... (200) (178) (1,092) 508 1,668 ------- ------- -------- -------- -------- Total revenues...................... 56,297 55,290 111,050 106,450 89,816 ------- ------- -------- -------- -------- EXPENSES: Property operating and maintenance.......... 20,048 19,697 40,682 40,060 33,585 Real estate taxes........................... 5,780 5,689 11,486 11,051 8,940 Construction cost of sales.................. -- 652 891 240 -- General and administrative.................. 4,209 4,729 9,343 9,654 10,485 Interest.................................... 11,060 11,445 22,909 23,412 19,531 Amortization................................ 430 440 888 953 794 Depreciation................................ 11,278 11,461 22,888 21,227 17,050 ------- ------- -------- -------- -------- Total expenses...................... 52,805 54,113 109,087 106,597 90,385 ------- ------- -------- -------- -------- OPERATING INCOME (LOSS)....................... 3,492 1,177 1,963 (147) (569) Gain (loss) on disposition of property...... (170) -- -- (90) 156 Loss on debt forgiveness.................... -- -- -- (455) -- ------- ------- -------- -------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND INCOME TAXES................................ 3,322 1,177 1,963 (692) (413) INCOME TAXES.................................. (322) (243) (647) (487) (373) ------- ------- -------- -------- -------- INCOME(LOSS) BEFORE EXTRAORDINARY ITEM........ 3,000 934 1,316 (1,179) (786) Extraordinary gain (loss) on debt extinguishment........................... -- 71 348 -- (735) ------- ------- -------- -------- -------- NET INCOME (LOSS)............................. $ 3,000 $ 1,005 $ 1,664 $ (1,179) $ (1,521) ======= ======= ======== ======== ========
See notes to combined financial statements. F-41 134 DREVER PARTNERS, INC. AND AFFILIATES COMBINED STATEMENTS OF PARTNERS'/STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
TOTAL COMMON STOCK ADDITIONAL PARTNERS'/ PARTNERS' --------------- TREASURY PAID-IN ACCUMULATED STOCKHOLDERS' CAPITAL SHARES AMOUNT STOCK CAPITAL DEFICIT EQUITY --------- ------ ------ -------- ---------- ----------- ------------- Partners'/stockholders' equity at January 1, 1994........... $102,232 15,000 $15 $ (41) $607 $(10,688) $ 92,125 Net income (loss)......... 7,671 (9,192) (1,521) Contributions............. 80,323 80,323 Distributions............. (14,646) (14,646) Purchase of treasury stock.................. (330) (330) -------- ------ --- ----- ---- -------- -------- Partners'/stockholders' equity at December 31, 1994......... 175,580 15,000 15 (371) 607 (19,880) 155,951 Net income (loss)......... 8,833 (10,012) (1,179) Contributions............. 12,304 12,304 Distributions............. (14,504) (14,504) Common stock issued....... 10,000 10 32 42 -------- ------ --- ----- ---- -------- -------- Partners'/stockholders' equity at December 31, 1995...................... 182,213 25,000 25 (371) 639 (29,892) 152,614 Net income (loss)......... 12,379 (10,715) 1,664 Contributions............. 195 195 Distributions............. (15,228) (15,228) -------- ------ --- ----- ---- -------- -------- Partners'/stockholders' equity at December 31, 1996...................... 179,559 25,000 25 (371) 639 (40,607) 139,245 Net income (loss) (unaudited)............ 7,454 (4,454) 3,000 Distributions (unaudited)............ (4,207) (4,207) -------- ------ --- ----- ---- -------- -------- Partners'/stockholders' equity at June 30, 1997 (unaudited)............... $182,806 25,000 $25 $(371) $639 $(45,061) $138,038 ======== ====== === ===== ==== ======== ========
See notes to combined financial statements. F-42 135 DREVER PARTNERS, INC. AND AFFILIATES COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, --------------------- ---------------------------- 1997 1996 1996 1995 1994 ----------- ------- ------- ------- -------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).................................... $ 3,000 $ 1,005 $ 1,664 $(1,179) $ (1,521) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization...................... 11,708 11,901 23,776 22,180 17,844 (Gain)/loss on disposition of real property........ 170 -- -- 90 (156) Extraordinary (gain) loss on debt extinguishments.................................. -- (71) (348) 455 735 Deferred income tax................................ -- -- 94 756 (423) Net effect of changes in operating accounts: Restricted cash.................................. 1,865 3,230 2,147 1,366 (654) Other assets..................................... (598) 1,090 2,469 (6,723) 702 Receivables...................................... 58 (303) (153) 118 632 Receivables from related parties................. (244) 219 (1,257) 1,445 214 Accrued real estate taxes........................ (3,854) (3,846) 334 1,620 3,372 Accounts payable................................. (1,008) (795) 448 (58) 340 Payables to related parties...................... 17 9 (237) (1,038) 4 Other liabilities................................ 209 1,498 233 (226) 1,204 ------- ------- ------- ------- -------- Net cash provided by operating activities..... 11,323 13,937 29,170 18,806 22,293 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of real estate assets....................... -- -- -- (20,257) (113,056) Real estate asset additions.......................... (4,105) (6,264) (11,580) (21,851) (19,494) Proceeds from disposition of real property........... -- -- -- 110 1,485 ------- ------- ------- ------- -------- Net cash used in investing activities.............. (4,105) (6,264) (11,580) (41,998) (131,065) CASH FLOWS FROM FINANCING ACTIVITIES: Contributions received............................... -- 195 195 12,304 80,323 Distributions paid to partners....................... (4,207) (6,108) (15,228) (14,504) (14,646) Common stock issued.................................. -- -- -- 42 -- Proceeds from mortgage notes payable................. -- 21,380 39,080 17,389 163,127 Payment of mortgage notes payable.................... -- (20,700) (36,978) -- (98,181) Principal reductions of debt......................... (2,237) (2,511) (4,380) (4,000) (2,713) Payment of financing costs........................... (28) (75) (434) (1,266) (3,179) Payment of investor notes............................ (161) (97) (97) (120) (737) Payment of other long-term debt...................... (133) (664) (710) (948) (160) ------- ------- ------- ------- -------- Net cash (used in) provided by financing activities....................................... (6,766) (8,580) (18,552) 8,897 123,834 ------- ------- ------- ------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 452 (907) (962) (14,295) 15,062 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......... 10,866 11,828 11,828 26,123 11,061 ------- ------- ------- ------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD............... $11,318 $10,921 $10,866 $11,828 $ 26,123 ======= ======= ======= ======= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest............................... $11,051 $11,414 $22,318 $22,861 $ 18,021 ======= ======= ======= ======= ======== Income taxes paid.................................... $ 325 $ 376 $ 391 $ 655 $ 165 ======= ======= ======= ======= ======== SUPPLEMENTAL NON CASH FINANCING ACTIVITIES: Obligation incurred for treasury stock............... $ -- $ -- $ -- $ -- $ 330 ======= ======= ======= ======= ======== Debt assumed by purchaser of property................ $ 1,351 $ -- $ -- $ -- $ -- ======= ======= ======= ======= ========
See notes to combined financial statements. F-43 136 DREVER PARTNERS, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED), AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. BASIS OF PRESENTATION AND ORGANIZATION Drever Partners, Inc. and affiliates (collectively "Drever") consists of Drever Partners, Inc. and its majority owned subsidiaries Concierge Management Corporation ("CMC"), Drever Construction Corporation, Inc. ("DCC"), Concierge Realty & Finance Corporation ("CRFC"), Drever McIntosh & Co. ("DM & Co.") (collectively "DPI"), two affiliated corporations, 18 limited partnerships (collectively the "Partnerships" or individually the "Partnership") and an affiliated entity, which collectively owned and operated 79 multifamily apartment properties (the "Properties") as of June 30, 1997, 80 properties as of December 31, 1996 and 1995, and 79 properties as of December 31, 1994. CMC serves as the property management company for the Properties, DCC performs construction and maintenance services, CRFC assists in real estate acquisitions and financings and DM & Co. performs asset management services for certain of the Partnerships. Drever Partners, Inc. is the general partner in each of the Partnerships except for Apartment Opportunity Fund, L.P. ("AOF") and Apartment Opportunity Fund II, L.P. ("AOFII"). AOF, Inc. is an affiliate of DPI and the general partner of AOF Newgen, L.P., which is, in turn, the general partner of AOF. AOFII, Inc. is an affiliate of DPI and the general partner of AOFII. Drever owns properties in Texas, Arizona, California and Georgia consisting of 18,118 apartment units. On May 21, 1997, Drever entered into a definitive agreement with Walden Residential Properties, Inc. ("Walden") which, if consummated, will result in the combination of Walden, DPI and the Partnerships. The transaction value is approximately $670 million, consisting of $295 million in operating partnership units to be issued by Walden Drever Operating Partnership ("WDOP") which are convertible into $240 million in Walden Common Stock (10,322,580 shares) and $55 million in preferred stock (2,000,000 shares of 9% Redeemable Preferred Stock) with detachable warrants (6,666,667 Series B Warrants, each of which is exercisable for one-third of one share of Common Stock at $26.875 per share) and $85 million in cash. The balance of the consideration consists of the assumption of approximately $290 million of mortgage debt. Pursuant to the agreement, Walden will offer to acquire the partnership interest of each limited partner in exchange for that portion of the transaction consideration which would have been allocable to such partner under the applicable partnership agreement assuming that the transaction had been structured as a sale of the Partnerships' underlying assets. The transaction is contingent upon limited partners owning more than 50% of the total limited partner interests in AOF and AOF II accepting their respective exchange offers. The transaction also requires the majority consent of the Walden common shareholders. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF COMBINATION -- The accompanying combined financial statements include the consolidated accounts of DPI; AOF, Inc.; AOFII, Inc.; the accounts of the Partnerships; and the affiliated entity, since DPI or one of its affiliates is the general partner of the Partnerships and consequently controls and manages their operations. All material inter-entity transactions and balances are eliminated in the combination. INCOME RECOGNITION -- Rental, interest and other income are recorded using the accrual method of accounting as earned. PROPERTY CONCENTRATION -- As of December 31, 1996, Drever owned 80 multifamily properties in four states, with 90% of its apartment units located in Texas and 10% located in Arizona, Georgia and California. Of the total units owned, 11,207 units, or 62%, are located in the Houston area. Apartment units are leased to residents on terms of one year or less, with monthly rental payments due in advance. In management's opinion, due to the number of residents and the type of markets in which the properties operate and the collection terms, there is not a significant concentration of credit risk. F-44 137 DREVER PARTNERS, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CASH AND CASH EQUIVALENTS -- All cash and investments in money market accounts, excluding restricted cash, that have a maturity of three months or less at the time of purchase are considered to be cash and cash equivalents. RESTRICTED CASH -- Restricted cash consists of security deposits and escrow deposits held by lenders for the payment of property taxes, insurance and replacement reserves. Restricted cash is invested primarily in short-term securities. Also included in restricted cash are amounts held in trust for non-combined affiliated entities of Drever Partners, Inc. Such amounts represent cash of affiliated entities of Drever Partners, Inc. which has been put under the care and control of Drever Partners, Inc. A reserve has been established in an amount equal to the cash balances held in trust and is included in accounts and notes payable to related parties in the accompanying financial statements. REAL ESTATE ASSETS AND DEPRECIATION -- Expenditures directly related to the acquisitions and improvement of real estate assets are capitalized at cost as land, buildings and improvements. Drever capitalizes the cost of appliances, carpets, major exterior painting, roof replacement and expenditures for other major property improvements, as well as rehabilitation costs incurred for properties acquired. Depreciation is computed on a straight-line basis over the estimated useful lives of 30 years for buildings and five, ten or 15 years for personal property. In March 1995, Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of," was issued. Drever adopted SFAS No. 121 in 1995. Drever's management routinely reviews its investments for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on Drever's policy for reviewing impairment of long-lived assets, there was no adjustment necessary for impairment of properties during the three-year period ended December 31, 1996. DEFERRED FINANCING COSTS AND AMORTIZATION -- Legal fees and other costs associated with obtaining financing have been capitalized and are being amortized over the terms of the related debt. Financing costs were reported net of amortization of $2,998,000, $2,568,000, and $2,107,000 as of June 30, 1997, and December 31, 1996 and 1995, respectively. EARNINGS PER SHARE -- The accompanying combined financial statements do not include disclosures of earnings per share as Drever Partners, Inc. and affiliates represent privately held corporate entities and partnerships for which this disclosure would be meaningless. INCOME TAXES -- DPI, AOF, Inc. and AOFII, Inc. elected to be taxed as C Corporations under the Internal Revenue Code and account for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the use of the liability method of accounting for income taxes. Deferred taxes are recorded based on the difference between the financial statement and income tax bases of assets and liabilities. A valuation allowance is recognized for deferred tax assets when it is more likely than not that some or all of the deferred tax asset will not be realized. No provision for income taxes has been made in the accompanying combined financial statements for the combined operations of the Partnerships because these taxes are the responsibility of the individual partners. USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses during the reporting period. Actual results may differ from such estimates. ENVIRONMENTAL REMEDIATION COSTS -- Drever accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from F-45 138 DREVER PARTNERS, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. Drever's management is not aware of any environmental remediation obligations which would materially affect the operations, financial position or cash flows of the combined entity. INTERIM FINANCIAL DATA -- In the opinion of management, the accompanying unaudited combined financial statements contain all the adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the combined entity as of June 30, 1997 and 1996, and the results of their operations and changes in their financial position for the six months ended June 30, 1997 and 1996. 3. ACQUISITIONS AND DISPOSITIONS ACQUISITIONS -- During 1995, the Partnerships acquired two apartment properties containing 484 units for a cost of $20,257,000 located in San Diego, California and Houston, Texas. During 1994, the Partnerships acquired 18 apartment properties containing 4,492 units for a cost of $113,056,000. These properties are located in Houston, Dallas, Austin and Corpus Christi, Texas; San Diego, California; and Atlanta, Georgia. No properties were acquired during 1996. The acquisitions were accounted for by the purchase method of accounting and the accompanying combined financial statements reflect the results of operations of the acquired properties since the date of purchase. DISPOSITIONS -- During 1994, a Partnership disposed of one apartment property containing 326 units for $1,536,000, less closing costs. In connection with this disposition, the Partnership recorded a gain on the sale of property of $156,000. During 1995, a Partnership sold land adjacent to one of its apartment properties due to condemnation. In connection with this disposition, the Partnership recorded a loss on sale of $90,000. No real estate asset dispositions occurred during 1996. In April 1997, a Partnership disposed of one apartment property having 72 units. In connection with this disposition, the buyer assumed the mortgage notes on the property of $1,351,000 and the Partnership recorded a net loss on the sale of property of $170,000. F-46 139 DREVER PARTNERS, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. REAL ESTATE ASSETS Changes in real estate assets and related accumulated depreciation for the years ended December 31, 1996, 1995 and 1994, and the six-month period ended June 30, 1997, are as follows: Real estate assets: Balance at January 1, 1994................................ $350,074,000 Purchase of real estate assets............................ 113,056,000 Sale of real estate assets................................ (1,344,000) Fixed asset additions..................................... 19,494,000 ------------ Balance at December 31, 1994.............................. 481,280,000 Purchase of real estate assets............................ 20,257,000 Sale of real estate assets................................ (200,000) Fixed asset additions..................................... 21,851,000 ------------ Balance at December 31, 1995.............................. 523,188,000 Fixed asset additions..................................... 11,580,000 ------------ Balance at December 31, 1996.............................. 534,768,000 Fixed asset additions (unaudited)......................... 4,105,000 Sale of real estate assets (unaudited).................... (2,352,000) ------------ Balance at June 30, 1997 (unaudited)...................... $536,521,000 ============ Accumulated depreciation: Balance at January 1, 1994................................ $ 39,348,000 Depreciation expense...................................... 16,776,000 Write-off related to real estate assets sold.............. (15,000) ------------ Balance at December 31, 1994.............................. 56,109,000 Depreciation expense...................................... 20,703,000 ------------ Balance at December 31, 1995.............................. 76,812,000 Depreciation expense...................................... 22,448,000 ------------ Balance at December 31, 1996.............................. 99,260,000 Depreciation expense (unaudited).......................... 11,220,000 Write-off related to real estate assets sold (unaudited)............................................ (831,000) ------------ Balance at June 30, 1997 (unaudited)...................... $109,649,000 ============
F-47 140 DREVER PARTNERS, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 5. ACCRUED EXPENSES AND OTHER LIABILITIES Included in accrued expenses and other liabilities at June 30, 1997, and December 31, 1996 and 1995, are the following:
DECEMBER 31, ------------------------ JUNE 30, 1997 1996 1995 ------------- ---------- ---------- (UNAUDITED) Security deposits..................................... $3,804,000 $3,782,000 $3,649,000 Accrued interest...................................... 1,694,000 1,685,000 1,915,000 Other accrued liabilities............................. 2,306,000 1,657,000 1,526,000 Self-insurance reserve................................ -- 468,000 336,000 Federal income taxes payable.......................... 461,000 464,000 397,000 ---------- ---------- ---------- $8,265,000 $8,056,000 $7,823,000 ========== ========== ==========
Other accrued liabilities include construction advances, net over billings for construction services, and other miscellaneous operational accruals for DPI and the Partnerships. SELF INSURANCE RESERVE -- During 1996, 1995 and 1994, Drever maintained a self-insurance program for that portion of employee health care and Texas workers' compensation costs which are not covered by insurance contracts. The self-insurance reserve represents Drever's estimated liability for workers' compensation and health benefits claims, including those that have been incurred but not yet reported. The amounts are based on actuarially determined estimates. Beginning January 1, 1997, all of Drever's employees became covered under a standard workers' compensation insurance contract. Any claims incurred after January 1, 1997, will be covered under the new policy. Existing claims for injuries prior to January 1, 1997, will be covered under the self-insurance program. 6. MORTGAGE NOTES PAYABLE AND OTHER LONG TERM DEBT Mortgage notes payable consist of the following:
AS OF DECEMBER 31, 1996 PRINCIPAL BALANCE AS OF ----------------------------- ------------------------------------------ WEIGHTED WEIGHTED DECEMBER 31, AVERAGE AVERAGE YEARS --------------------------- JUNE 30, INTEREST RATE TO MATURITY 1996 1995 1997 ------------- ------------- ------------ ------------ ------------ (Unaudited) Fixed rate conventional mortgage notes payable, bearing interest at rates ranging from 6.95% to 9.63% per annum, maturing at various dates from August 1998 through February 2007........................ 7.43% 4.2 years $242,580,000 $244,630,000 $240,513,000 Variable rate conventional mortgage notes payable, bearing interest at rates ranging from LIBOR plus 1.75% to prime plus 1.50% per annum, maturing at various dates from August 1997 through November 2026........................ 8.08% 5.4 years 48,274,000 49,072,000 46,753,000 ----- --------- ------------ ------------ ------------ Total/weighted average........ 7.55% 4.3 years $290,854,000 $293,702,000 $287,266,000 ===== ========= ============ ============ ============
F-48 141 DREVER PARTNERS, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) At June 30, 1997 and December 31, 1996 and 1995, all of Drever's real estate assets were collateral for the various mortgage loans which are nonrecourse to the partners. Drever Partners, Inc. has guaranteed the payment of $17,750,000 of the Partnerships' mortgage notes as of December 31, 1996 and June 30, 1997. OTHER LONG-TERM DEBT -- In September 1994, CMC received $700,000 under a promissory note which was principally used to finance computer conversions and expansions. The note is secured by certain computer equipment and is guaranteed by Drever Partners, Inc. The note bears interest at the lenders prime rate. At June 30, 1997, and December 31, 1996 and 1995, the outstanding amount due under the note was $81,000, $162,000 and $599,000, respectively. The balance of the note is due December 1997. At June 30, 1997, and December 31, 1996 and 1995, DPI has additional notes due to other third parties. These notes are non-interest-bearing and are due on various dates in 1997 ($140,000) and 1998 ($40,000). The balance of these notes at June 30, 1997, and December 31, 1996 and 1995, were $130,000, $180,000 and $12,000, respectively. In February 1994, AOF II, Inc. entered into a $383,000 note agreement with an investor in AOF II. The note bears interest at 9% with monthly payments of interest only. The outstanding principal and unpaid interest is due in November 2003. The outstanding amount due under this note at June 30, 1997, and December 31, 1996 and 1995, was $295,000. At December 31, 1995, Drever Partners, Inc. had a $440,000 note with a lending institution. Such note bears interest at the bank's prime rate and matured in September 1996. Drever Partners, Inc. has a note payable with a lending institution which bears interest at 11.5% and matures in January 2010. The outstanding balance at June 30, 1997, and December 31, 1996 and 1995, was $120,000, $122,000 and $123,000, respectively. PRINCIPAL DEBT MATURITIES -- Principal debt maturities, including balloon payments, for the next five years are as follows:
JUNE 30, 1997 (UNAUDITED) DECEMBER 31, 1996 ---------------------------- ---------------------------- MORTGAGE OTHER LONG- MORTGAGE OTHER LONG- NOTES PAYABLE TERM DEBT NOTES PAYABLE TERM DEBT ------------- ------------ ------------- ------------ 1997.................................... $ 6,279,000 $ 173,000 $ 8,516,000 $ 306,000 1998.................................... 23,149,000 45,000 24,500,000 45,000 1999.................................... 12,801,000 5,000 12,801,000 5,000 2000.................................... 76,428,000 6,000 76,428,000 6,000 2001.................................... 145,762,000 7,000 145,762,000 7,000 Thereafter.............................. 22,847,000 390,000 22,847,000 390,000 ------------ ------------ ------------ ------------ Total......................... $287,266,000 $ 626,000 $290,854,000 $ 759,000 ============ ============ ============ ============
EXTRAORDINARY ITEMS -- During 1996, Drever refinanced approximately $36,978,000 of mortgage loans prior to maturity, which resulted in an aggregate extraordinary gain of $348,000. During 1994, Drever refinanced $98,181,000 of mortgage loans prior to maturity which resulted in an aggregate extraordinary loss of $735,000. 7. INVESTOR NOTES Investor notes represent amounts due to investors by the Partnerships. Investor notes bear interest at various rates ranging between 9.5% and 10% and mature at various dates ranging from December 1997 F-49 142 DREVER PARTNERS, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) ($304,000) through December 1998 ($2,141,000). Interest only payments are due monthly with the principal due in full upon maturity. The balance of these notes at June 30, 1997, and December 31, 1996 and 1995, was $2,336,000, $2,445,000 and $2,366,000, respectively. Also included in investor notes is the outstanding principal and accrued interest due under a note between Houston Portfolio Joint Venture II ("HPJVII"), a Partnership, and an investor, which was executed in February 1990. The note bears base interest at 5% and will earn additional interest equal to approximately 25% of the respective Partnership's profits realized upon sale of its properties. All base interest, unpaid principal and additional interest is due upon disposition of the Partnership's assets or in February 2002. The outstanding amount due under this note at June 30, 1997, and December 31, 1996 and 1995, was $4,000,000, $4,052,000 and $4,131,000, respectively, including all unpaid interest. The note is convertible into partners' capital at the option of the investor or HPJVII upon the satisfaction of certain conditions precedent as specified in the note agreement. 8. PARTNERS'/STOCKHOLDERS' EQUITY PARTNERS' CAPITAL -- Each of the Partnerships were formed under the provisions of a partnership agreement (collectively, the "Agreements"). Pursuant to the Agreements, initial contributions were made by each of the partners. A capital account is maintained for each partner in which their account is increased with the initial and any subsequent contributions and income from operations and decreased for any distributions and losses from operations. During the years ended December 31, 1996, 1995 and 1994, distributions to limited partners were $15,168,000, $14,504,000 and $14,646,000, respectively. Distributions to the general partner were $20,000 and $60,000 for the six month period ended June 30, 1997 and year ended December 31, 1996, respectively. No distributions were made to the general partner with respect to its carried interest during the years ended December 31, 1995 and 1994. During the six-month period ended June 30, 1997, distributions to limited partners were $4,187,000. Contributions to the partnerships for the years ended December 31, 1996, 1995 and 1994, were $195,000, $12,304,000 and $80,323,000. No contributions were received during the six-month period ended June 30, 1997. Each partner's capital account is increased for their allocated share of net income of the partnership and decreased for their allocated share of net losses. Net income and losses are allocated to each partner based on their ownership interest in the partnership. However, no losses are allocated to the limited partners once their capital account is zero. Limited partners' unallocated losses are allocated to the general partner. STOCKHOLDERS' EQUITY -- Drever Partners, Inc. has 5,000 shares of no par value stock authorized and issued and 4,050 shares outstanding at June 30, 1997, and December 31, 1996 and 1995. CMC, DCC and CRFC each have 1,000 shares of $1 par value stock authorized, issued and outstanding at June 30, 1997, and December 31, 1996 and 1995. DM & Co. has 2,500 shares of no class, no par value stock authorized and 100 shares issued and outstanding at June 30, 1997, and December 31, 1996 and 1995. Drever Partners, Inc. owns 100% of DCC and DM & Co., 95% of CRFC and 90% of CMC outstanding stock. The remaining shares are held by officers of the entities. During the six-month period ended June 30, 1997 and the three-year period ended December 31, 1996, no dividends were declared or paid by Drever Partners, Inc., DCC, CMC or CRFC. As of June 30, 1997, a sale of Drever Partners, Inc.'s investment in DM & Co. to a third party is pending, which is expected to be completed in the third quarter of 1997. AOF, Inc. and AOFII, Inc. each have 10,000 shares of $1 par value stock authorized, issued and outstanding at June 30, 1997, and December 31, 1996 and 1995. During the three-year period ended December 31, 1996, and the six-month period ended June 30, 1997, no dividends were declared or paid by AOF, Inc. and AOFII, Inc. F-50 143 DREVER PARTNERS, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 9. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS The following disclosure of estimated fair value of financial instruments was determined by Drever using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts. Cash and cash equivalents, receivables (including receivables from related parties), accounts payable and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair value. The fixed rate mortgage notes payable of $242,580,000 and $244,630,000 as of December 31, 1996 and 1995, respectively, have a fair value which approximates the book value as estimated based upon interest rates available for the issuance of debt with similar terms and remaining maturities as of the respective year end. The fair value estimates presented herein are based on information available to management as of December 31, 1996 and 1995. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates, and current estimates of fair value may differ significantly from the amounts presented herein. 10. PROVISION FOR INCOME TAXES The provision for income taxes for DPI consists of the following for the six-month periods ended June 30, 1997 and 1996, and the years ended December 31, 1996, 1995 and 1994:
JUNE 30 DECEMBER 31, -------------------- ---------------------------------- 1997 1996 1996 1995 1994 -------- -------- -------- --------- --------- (Unaudited) Current......................... $322,000 $243,000 $553,000 $(269,000) $ 796,000 Deferred........................ -- -- 94,000 756,000 (423,000) -------- -------- -------- --------- --------- $322,000 $243,000 $647,000 $ 487,000 $ 373,000 ======== ======== ======== ========= =========
DPI's effective tax rate differs from the federal statutory rate of 34% in 1997, 1996, 1995 and 1994 primarily due to nondeductible meals and entertainment, penalties and state income taxes. Deferred taxes result primarily from temporary differences in the recognition of bad debt expense, self-insurance reserves, depreciation and accrual versus cash accounting between reporting for income tax and financial statement purposes. The tax effects of items that gave rise to significant portions of the deferred tax accounts are as follows: F-51 144 DREVER PARTNERS, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, ---------------------- JUNE 30, 1997 1996 1995 ------------- --------- --------- (UNAUDITED) Deferred tax assets: Fixed asset depreciable basis adjustment............. $ 172,000 $ 172,000 $ 156,000 Accruals not deductible until paid................... 178,000 178,000 308,000 Bad debt allowance................................... 180,000 180,000 180,000 Other................................................ 79,000 79,000 59,000 --------- --------- --------- 609,000 609,000 703,000 Deferred tax liability -- Partnership tax basis adjustment........................................... (435,000) (435,000) (435,000) --------- --------- --------- $ 174,000 $ 174,000 $ 268,000 ========= ========= =========
Management believes that DPI has the ability to utilize its deferred tax assets by applying them against taxable income to be generated in future years. Accordingly, no valuation allowance for deferred tax assets has been recorded for 1997, 1996 or 1995. 11. COMMITMENTS AND CONTINGENCIES Drever is the lessee under various noncancelable operating leases for its principal office facilities and other equipment leases. Minimum annual lease payments required under these operating leases at December 31, 1996, are as follows: 1997........................................................ $ 841,000 1998........................................................ 511,000 1999........................................................ 439,000 2000........................................................ 226,000 ---------- Total..................................................... $2,017,000 ==========
Rent expense for the years ended December 31, 1996, 1995 and 1994, and the six-month periods ended June 30, 1997 and 1996, was $954,000, $1,091,000, $1,089,000, $529,000 and $501,000, respectively. As part of a written Stock Purchase Agreement, Drever Partners, Inc. has the obligation to acquire 500 shares of common stock held by a former officer of Drever Partners, Inc. The purchase price is to be the fair market value of such shares as of May 1, 1994, as determined by a court-appointed appraiser. Contemporaneous to the May 1, 1994 valuation date, management ordered an independent appraisal to provide management with an estimate of its obligation to acquire such shares. The independent appraisal resulted in a $322,000 fair market value for the shares as of May 1, 1994. Drever Partners, Inc. has recorded this estimate for the obligation, which is included in accrued expenses and other liabilities in the accompanying combined financial statements. Drever is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of such matters cannot be predicted with certainty, management believes that the final outcome of such matters will not have a material adverse effect on the financial position, results of operations or cash flows of Drever. 12. RELATED PARTY TRANSACTIONS PAYABLES TO RELATED PARTIES -- Payable to related parties represents amounts held in trust at December 31, 1996 ($325,000), and June 30, 1997 ($56,000), for non-combined affiliated entities of Drever Partners, Inc. Such amounts represent cash of affiliated entities of Drever Partners, Inc. which has been put F-52 145 DREVER PARTNERS, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) under the care and control of the Company. The cash amounts are recorded in restricted cash in the accompanying financial statements. The remaining balance of payable to related parties represents miscellaneous amounts due to non-combined affiliated entities. RECEIVABLES FROM RELATED PARTIES -- Drever Partners, Inc. has notes receivable from Tassajara Shopping Center Associates, a non-combined affiliate of DPI, which bear interest at the lesser of 10% or prime plus 2%. The notes mature in March 1998 ($170,000) and July 1998 ($625,000). The outstanding balance for these notes at June 30, 1997, and December 31, 1996 and 1995, was $542,000, $795,000 and $263,000, respectively. Included in receivables from related parties is accrued interest on the notes of $15,000, $21,000 and $8,000 at June 30, 1997, and December 31, 1996 and 1995, respectively Also included in receivables from related parties are notes from officers of Drever Partners, Inc. and individual investors in affiliated partnerships. Officer notes bear interest at the lesser of 8% or the prime rate and are due upon liquidation of certain Partnerships. The balance of the officer notes at June 30, 1997, and December 31, 1996 and 1995, were $474,000, $368,000 and $181,000, respectively, including accrued interest. The individual investor notes bear interest at 9%, are secured by limited partnership interests in Las Positas Land Partners, LP, a non-combined affiliate, and mature upon the sale of the assets of Las Positas Land Partners, LP. The balance of the individual investor notes at June 30, 1997, and December 31, 1996 and 1995, was $74,000 $73,000 and $66,000, respectively, including accrued interest. The remaining balance of receivables from related parties represents miscellaneous receivables, including employee advances and receivables from non-combined affiliated entities. During 1995, Drever Partners, Inc. forgave certain debt due from officers resulting in a loss of $455,000. 13. EMPLOYEE BENEFIT PLANS 401(k) PLAN -- Drever Partners, Inc. adopted a 401(k) Plan (the "Plan") for its employees and the employees of DPI. The Plan is a voluntary defined contribution plan. Employees are eligible to participate in the Plan following the completion of six months of service and the attainment of 18 years of age. Each participant may make contributions into the Plan in the form of a salary deferral of up to 20% of their annual salary (not to exceed $9,500 and $9,240 for 1996 and 1995, respectively). DPI contributes up to 10% of the employee's salary deferral up to a maximum of $120 per year in the form of a matching contribution. DPI also has the option to make additional discretionary contributions. A participant's salary deferral contribution is 100% vested at all times. Prior to January 1, 1995, a participant vested immediately in the DPI matching contribution. Subsequent to January 1, 1995, a participant vested in the DPI matching contribution after five years of service. DPI matching contributions for the years ended December 31, 1996, 1995 and 1994, were $20,000, $19,000 and $12,000, respectively. Matching contributions for the six-month periods ended June 30, 1997 and 1996, were $12,000 and $10,000, respectively. 14. SUBSEQUENT EVENTS On October 1, 1997, the assets and business of Drever Partners, Inc. and Affiliates ("DPI"), were acquired by Walden through an acquisition pursuant to an Exchange Agreement and a Contribution agreement each dated as of May 21, 1997 by and between Walden and DPI as described in Note 1. Certain aspects of the Acquisition were approved by the stockholders of Walden at a special meeting held September 29, 1997 and the limited partners of each of the 18 limited partnerships of DPI and DPI's shareholders agreed to the exchange of their partnership interests and shares for Units (as defined below) and cash. The transaction value was $685 million, consisting of $303 million in operating partnership units ("Units") issued by Walden/Drever Operating Partnership ("WDOP") which are convertible, on or after the F-53 146 DREVER PARTNERS, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) first anniversary of issuance, into $245 million of Walden Common Stock (10,322,580 shares) and $58 million of preferred stock (2,000,000 shares of 9% Redeemable Preferred Stock) with detachable warrants (6,666,667 Series B Warrants, each of which is exercisable for one-third of one share of Common Stock at $26.875 per share) and $95 million in cash. The balance of the consideration consisted of the assumption of $287 million of mortgage debt. F-54 147 WALDEN RESIDENTIAL PROPERTIES, INC. SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1997 (IN THOUSANDS)
COST CAPITALIZED SUBSEQUENT TO INITIAL COST TO COMPANY ACQUISITION ----------------------- ------------------- BUILDING & BUILDINGS & PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS ------------- -------- ------------ -------- ------------ ---- ------------ ORIGINAL PROPERTIES Burning Tree Tulsa, OK $ 2,379 $ 635 $ 3,475 $-- $ 638 Casa Verde Phoenix, AZ 1,997 1,027 3,586 -- 379 Cinnamon Stick Tulsa, OK 3,177 962 5,565 -- 670 Club at Springlake Haltom City, TX -- 613 2,648 -- 334 Country View San Antonio, TX (A) 719 5,302 -- 689 Eagle Pointe Indianapolis, IN (A) 494 7,993 (4) 377 Fountaingate Wichita Falls, TX -- 751 6,498 -- 592 James Pointe Murray, UT 8,234 1,040 10,937 (28) 397 Lift, The Tulsa, OK 2,743 804 4,164 -- 525 Post Oak Place Euless, TX -- 1,570 6,582 -- 859 Preston Greens Dallas, TX -- 1,468 6,687 -- 573 Raintree Nashville, TN 5,245 715 6,457 -- 1,200 Settler's Cove Beaumont, TX 3,175 159 5,056 -- 591 Stillwater Murray, UT 11,994 2,019 16,839 3 647 Trestles of Austin Austin, TX (A) 1,100 9,977 -- 1,070 Woodridge Fort Worth, TX -- 340 2,586 -- 505 Woodstone Phoenix, AZ 12,636 4,325 14,210 -- 664 -------- -------- ---------- ---- ------- Subtotal 51,580 18,741 118,562 (29) 10,710 -------- -------- ---------- ---- ------- 1994 ACQUISITIONS Bel Shores Largo, FL 4,653 1,847 6,072 -- 812 Brookwood Club Jacksonville, FL 6,872 952 8,647 -- 1,104 Carlyle at Waters Tampa, FL (B) 1,678 11,154 -- 1,368 Cinnamon Park Arlington, TX (A) 855 7,723 (4) 499 Copper Cove Houston, TX -- 935 6,194 -- 639 Copperfield Oklahoma City, OK 4,150 357 6,473 -- 252 Fielder's Glen Arlington, TX (A) 556 5,031 -- 443 Foxboro Houston, TX (A) 800 3,882 -- 656 Gables, The McKinney, TX (A) 544 6,885 -- 553 Greens Crossing Dallas, TX (B) 1,368 6,795 -- 918 GROSS AMOUNT AT WHICH CARRIED AT DECEMBER 31, 1997 ------------------------------------ BUILDINGS & ACCUMULATED DATE DEPRECIABLE PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE (YEARS)(D) ------------- -------- ------------ ---------- ------------ -------- ---------------- ORIGINAL PROPERTIES Burning Tree $ 635 $ 4,113 $ 4,748 $ (1,066) 02/94 Casa Verde 1,027 3,965 4,992 (812) 02/94 Cinnamon Stick 962 6,235 7,197 (1,695) 02/94 Club at Springlake 613 2,982 3,595 (557) 02/94 Country View 719 5,991 6,710 (1,284) 02/94 Eagle Pointe 490 8,370 8,860 (1,421) 02/94 Fountaingate 751 7,090 7,841 (1,429) 02/94 James Pointe 1,012 11,334 12,346 (2,060) 02/94 Lift, The 804 4,689 5,493 (1,083) 02/94 Post Oak Place 1,570 7,441 9,011 (1,449) 02/94 Preston Greens 1,468 7,260 8,728 (1,621) 02/94 Raintree 715 7,657 8,372 (1,420) 02/94 Settler's Cove 159 5,647 5,806 (1,193) 02/94 Stillwater 2,022 17,486 19,508 (3,132) 02/94 Trestles of Austin 1,100 11,047 12,147 (2,094) 02/94 Woodridge 340 3,091 3,431 (602) 02/94 Woodstone 4,325 14,874 19,199 (2,620) 02/94 -------- ---------- ---------- -------- Subtotal 18,712 129,272 147,984 (25,538) -------- ---------- ---------- -------- 1994 ACQUISITIONS Bel Shores 1,847 6,884 8,731 (986) 03/94 Brookwood Club 952 9,751 10,703 (1,204) 11/94 Carlyle at Waters 1,678 12,522 14,200 (1,349) 12/94 Cinnamon Park 851 8,222 9,073 (940) 09/94 Copper Cove 935 6,833 7,768 (859) 06/94 Copperfield 357 6,725 7,082 (850) 06/94 Fielder's Glen 556 5,474 6,030 (726) 05/94 Foxboro 800 4,538 5,338 (619) 06/94 Gables, The 544 7,438 7,982 (965) 05/94 Greens Crossing 1,368 7,713 9,081 (836) 12/94
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COST CAPITALIZED SUBSEQUENT TO INITIAL COST TO COMPANY ACQUISITION ----------------------- ------------------- BUILDING & BUILDINGS & PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS ------------- -------- ------------ -------- ------------ ---- ------------ Harper's Creek Austin, TX $ (A) $ 868 $ 8,871 $-- $ 653 Hunter's Ridge Oklahoma City, OK 3,547 300 4,927 -- 246 Newport Irving, TX 7,097 1,200 8,878 -- 338 Rivercrest Arlington, TX 5,390 1,650 7,877 -- 866 Silverado Albuquerque, NM (B) 1,194 8,082 -- 245 Springfield Mesquite, TX (A) 1,042 6,507 -- 494 Summerfield Place Oklahoma City, OK (A) 619 5,586 -- 392 Woodscape Oklahoma City, OK (A) 1,077 13,280 -- 486 -------- -------- ---------- ---- ------- Subtotal 31,709 17,842 132,864 (4) 10,964 -------- -------- ---------- ---- ------- 1995 ACQUISITIONS Braden's Walk (E) Bedford, TX -- 1,839 18,495 -- 1,136 North Richland Hilltop Hills, TX -- 801 5,314 -- 464 Laurel Creek Houston, TX (A) 2,067 12,011 -- 1,023 Pinnacle Lewisville, TX -- 672 4,190 -- 353 Pinto Creek Austin, TX (A) 487 8,403 -- 762 Reflections of Highpoint Dallas, TX 12,490 1,984 12,358 -- 677 Ponte Vedra Beach, Remington at Ponte Vedra FL 12,000 1,425 13,468 -- 853 Remington Hill Fort Worth, TX 13,880 1,846 11,847 -- 418 Sandpiper Jacksonville, FL (B) 1,102 10,377 -- 934 North Richland Shadow Creek Hills, TX -- 666 5,899 -- 563 Summer Meadows Plano, TX 12,296 2,393 14,908 -- 462 Summer Villas Dallas, TX -- 2,270 14,140 -- 1,059 Summers Crossing Plano, TX 9,176 1,730 10,774 -- 771 Summers Landing Fort Worth, TX -- 819 5,259 -- 571 Three Palms Tampa, FL (C) 1,735 14,017 -- 925 Winridge Aurora, CO 12,715 790 15,939 -- 523 -------- -------- ---------- ---- ------- Subtotal 72,557 22,626 177,399 -- 11,494 -------- -------- ---------- ---- ------- 1996 ACQUISITIONS Ashbury Parke Austin, TX -- 2,007 11,591 -- 928 Bentley Green Jacksonville, FL -- 1,430 14,095 -- 1,344 GROSS AMOUNT AT WHICH CARRIED AT DECEMBER 31, 1997 ------------------------------------ BUILDINGS & ACCUMULATED DATE DEPRECIABLE PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE (YEARS)(D) ------------- -------- ------------ ---------- ------------ -------- ---------------- Harper's Creek $ 868 $ 9,525 $ 10,393 $ (1,138) 06/94 Hunter's Ridge 300 5,173 5,473 (669) 06/94 Newport 1,200 9,215 10,415 (1,134) 06/94 Rivercrest 1,650 8,743 10,393 (1,221) 04/94 Silverado 1,194 8,327 9,521 (898) 12/94 Springfield 1,042 7,001 8,043 (851) 06/94 Summerfield Place 619 5,978 6,597 (657) 11/94 Woodscape 1,077 13,766 14,843 (1,717) 06/94 -------- ---------- ---------- -------- Subtotal 17,838 143,828 161,666 (17,619) -------- ---------- ---------- -------- 1995 ACQUISITIONS 12/95, 010/96 & Braden's Walk (E) 1,839 1,963 121,470 (708) 2/97 Hilltop 801 5,778 6,579 (427) 12/95 Laurel Creek 2,067 1,303 415,101 (1,282) 04/95 Pinnacle 672 4,543 5,215 (400) 06/95 Pinto Creek 487 9,165 9,652 (949) 01/95 Reflections of Highpoint 1,984 13,035 15,019 (1,122) 06/95 Remington at Ponte Vedra 1,425 14,321 15,746 (1,263) 06/95 Remington Hill 1,846 12,265 14,111 (1,094) 06/95 Sandpiper 1,102 11,311 12,413 (943) 10/95 Shadow Creek 666 6,462 7,128 (476) 12/95 Summer Meadows 2,393 15,370 17,763 (1,367) 06/95 Summer Villas 2,270 15,199 17,469 (1,291) 06/95 Summers Crossing 1,730 11,545 13,275 (1,010) 06/95 Summers Landing 819 5,830 6,649 (538) 06/95 Three Palms 1,735 14,942 16,677 (1,325) 06/95 Winridge 790 16,462 17,252 (1,453) 06/95 -------- ---------- ---------- -------- Subtotal 22,626 188,893 211,519 (15,648) -------- ---------- ---------- -------- 1996 ACQUISITIONS Ashbury Parke 2,007 12,519 14,526 (658) 06/96 08/96 & Bentley Green 1,430 15,439 16,869 (767) 09/96
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COST CAPITALIZED SUBSEQUENT TO INITIAL COST TO COMPANY ACQUISITION ----------------------- ------------------- BUILDING & BUILDINGS & PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS ------------- -------- ------------ -------- ------------ ---- ------------ Brandywine Nashville, TN $ -- $ 646 $ 8,479 $-- $ 1,052 Costa del Sol San Antonio, TX -- 871 6,432 -- 557 Huntington at Hidden Hills Jacksonville, FL -- 722 6,165 -- 1,393 Meadow Glen Mesa, AZ 7,049 1,802 10,754 -- 353 Nashboro Village Nashville, TN -- 6,186 42,869 -- 2,451 Parks at Treepoint (F) Arlington, TX -- 1,966 15,036 -- 1,634 Remington San Antonio, TX -- 427 4,411 -- 485 Saratoga Melbourne, FL -- 676 5,788 -- 589 Summer Oaks San Antonio, TX -- 826 5,624 -- 598 Terra Vida Mesa, AZ 7,383 1,929 13,383 -- 909 Villas of St. Moritz San Antonio, TX -- 653 5,544 -- 613 Waterford Plano, TX -- 2,156 11,423 -- 965 -------- -------- ---------- ---- ------- Subtotal 14,432 22,297 161,594 -- 13,871 -------- -------- ---------- ---- ------- 1997 ACQUISITIONS Arbor Park Dallas, TX -- 916 12,104 -- 399 Arbors of Austin Austin, TX -- 670 7,306 -- 395 Arbors of Bedford Bedford, TX -- 531 5,623 -- 385 Arbors of Carrollton Carrollton, TX -- 684 4,019 -- 257 Arbors of Euless Euless, TX -- 1,206 6,733 -- 830 Ashton Park Tampa, FL 3,946 935 6,094 -- -- Clover Hill Arlington, TX -- 725 5,944 -- 101 Hillcrest Grand Prairie, TX -- 1,040 6,823 -- 133 Oak Ramble Tampa, FL -- 1,247 8,797 -- 87 Parkway Station Atlanta, GA -- 666 17,761 -- 2 Windsor Park Hendersonville, TN 6,870 500 9,012 -- 181 -------- -------- ---------- ---- ------- Subtotal 10,816 9,120 90,216 -- 2,770 -------- -------- ---------- ---- ------- DREVER TRANSACTION Arbor Creek Dallas, TX -- 2,284 9,841 -- 22 Arbor Point Houston, TX 1,457 313 2,568 -- 8 Arbors of Wells Branch Austin, TX -- 912 7,522 -- 20 Ashton Woods Houston, TX -- 251 4,423 -- 19 Aston Brook Houston, TX 1,653 194 3,676 -- 15 Audubon Square Austin, TX -- 529 6,284 -- 26 GROSS AMOUNT AT WHICH CARRIED AT DECEMBER 31, 1997 ------------------------------------ BUILDINGS & ACCUMULATED DATE DEPRECIABLE PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE (YEARS)(D) ------------- -------- ------------ ---------- ------------ -------- ---------------- Brandywine $ 646 $ 9,531 $ 10,177 $ (499) 08/96 Costa del Sol 871 6,989 7,860 (377) 06/96 Huntington at Hidden Hills 722 7,558 8,280 (409) 08/96 Meadow Glen 1,802 11,107 12,909 (426) 11/96 Nashboro Village 6,186 45,320 51,506 (1,595) 12/96 09/96 & Parks at Treepoint (F) 1,966 16,670 18,636 (728) 01/97 Remington 427 4,896 5,323 (263) 06/96 Saratoga 676 6,377 7,053 (303) 09/96 Summer Oaks 826 6,222 7,048 (335) 06/96 Terra Vida 1,929 14,292 16,221 (802) 06/96 Villas of St. Moritz 653 6,157 6,810 (347) 06/96 Waterford 2,156 12,388 14,544 (574) 09/96 -------- ---------- ---------- -------- Subtotal 22,297 175,465 197,762 (8,083) -------- ---------- ---------- -------- 1997 ACQUISITIONS Arbor Park 916 12,503 13,419 (302) 04/97 Arbors of Austin 670 7,701 8,371 (180) 04/97 Arbors of Bedford 531 6,008 6,539 (152) 04/97 Arbors of Carrollton 684 4,276 4,960 (105) 04/97 Arbors of Euless 1,206 7,563 8,769 (184) 04/97 Ashton Park 935 6,094 7,029 (35) 12/97 Clover Hill 725 6,045 6,770 (35) 10/97 Hillcrest 1,040 6,956 7,996 (125) 06/97 Oak Ramble 1,247 8,884 10,131 (51) 11/97 Parkway Station 666 17,763 18,429 (100) 12/97 Windsor Park 500 9,193 9,693 (132) 07/97 -------- ---------- ---------- -------- Subtotal 9,120 92,986 102,106 (1,401) -------- ---------- ---------- -------- DREVER TRANSACTION Arbor Creek 2,284 9,863 12,147 (103) 10/97 Arbor Point 313 2,576 2,889 (27) 10/97 Arbors of Wells Branch 912 7,542 8,454 (79) 10/97 Ashton Woods 251 4,442 4,693 (47) 10/97 Aston Brook 194 3,691 3,885 (39) 10/97 Audubon Square 529 6,310 6,839 (66) 10/97
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COST CAPITALIZED SUBSEQUENT TO INITIAL COST TO COMPANY ACQUISITION ----------------------- ------------------- BUILDING & BUILDINGS & PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS ------------- -------- ------------ -------- ------------ ---- ------------ Bar Harbor Houston, TX $ 5,202 $ 1,149 $ 9,326 $-- $ 42 Bayou Oaks Houston, TX 2,777 222 6,120 -- 16 Bent Creek Dallas, TX 4,174 1,802 8,155 -- 19 Brandon Oaks Houston, TX 2,612 293 6,454 -- 19 Briarcrest Houston, TX 4,057 714 11,199 -- 40 Brittany Park Dallas, TX -- 1,620 7,892 -- 28 Brookfield Houston, TX -- 400 8,422 -- 23 Canyon Ridge Dallas, TX 2,394 1,127 5,620 -- 28 Carriage Hill Houston, TX 4,273 410 8,474 -- 21 Casa Valley Dallas, TX -- 1,020 6,010 -- 19 Central Park Condos Houston, TX 2,076 370 3,945 -- 9 Central Park Regency Houston, TX 5,943 490 12,636 -- 31 Charleston, The Houston, TX 4,356 810 8,469 -- 20 Cimarron Park Houston, TX 2,250 334 4,888 -- 15 Cimarron Parkway Houston, TX -- 1,319 9,527 -- 18 Colony Oaks Houston, TX 2,519 540 6,044 -- 29 Colorado Club Houston, TX 7,200 883 9,780 -- 27 Creekwood Village Dallas, TX 5,098 1,433 11,173 -- 36 Crestwood Phoenix, AZ -- 932 9,151 -- 21 Enclave at Cypress Park Houston, TX -- 1,595 12,455 -- 62 Fairways, The Phoenix, AZ -- 766 5,747 -- 19 Felicita Creek San Diego, CA 3,112 1,594 5,550 -- 15 Garden Place Phoenix, AZ -- 1,596 12,480 -- 22 Georgetown Houston, TX -- 1,565 7,826 -- 16 Harbor Pointe Houston, TX -- 413 7,506 -- 23 Harpers Mill Houston, TX 2,071 967 3,657 -- 13 Hidden Lake Houston, TX -- 2,843 19,840 -- 40 Holiday on Hayes Houston, TX 4,787 1,491 10,600 -- 15 Hunt Club, The Houston, TX 2,820 1,175 5,184 -- 14 Huntley, The Houston, TX 5,285 640 8,974 -- 21 La Prada Club Dallas, TX -- 1,493 9,485 -- 26 Lakes of Renaissance Austin, TX -- 945 10,463 -- 26 Live Oak Houston, TX -- 782 4,475 -- 29 Meadows on Memorial Houston, TX -- 609 2,348 -- 20 Mill Creek Houston, TX 1,633 205 4,595 -- 18 GROSS AMOUNT AT WHICH CARRIED AT DECEMBER 31, 1997 ------------------------------------ BUILDINGS & ACCUMULATED DATE DEPRECIABLE PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE (YEARS)(D) ------------- -------- ------------ ---------- ------------ -------- ---------------- Bar Harbor $ 1,149 $ 9,368 $ 10,517 $ (99) 10/97 Bayou Oaks 222 6,136 6,358 (65) 10/97 Bent Creek 1,802 8,174 9,976 (86) 10/97 Brandon Oaks 293 6,473 6,766 (68) 10/97 Briarcrest 714 11,239 11,953 (118) 10/97 Brittany Park 1,620 7,920 9,540 (83) 10/97 Brookfield 400 8,445 8,845 (88) 10/97 Canyon Ridge 1,127 5,648 6,775 (59) 10/97 Carriage Hill 410 8,495 8,905 (89) 10/97 Casa Valley 1,020 6,029 7,049 (63) 10/97 Central Park Condos 370 3,954 4,324 (41) 10/97 Central Park Regency 490 12,667 13,157 (133) 10/97 Charleston, The 810 8,489 9,299 (89) 10/97 Cimarron Park 334 4,903 5,237 (52) 10/97 Cimarron Parkway 1,319 9,545 10,864 (100) 10/97 Colony Oaks 540 6,073 6,613 (64) 10/97 Colorado Club 883 9,807 10,690 (103) 10/97 Creekwood Village 1,433 11,209 12,642 (118) 10/97 Crestwood 932 9,172 10,104 (96) 10/97 Enclave at Cypress Park 1,595 12,517 14,112 (132) 10/97 Fairways, The 766 5,766 6,532 (60) 10/97 Felicita Creek 1,594 5,565 7,159 (59) 10/97 Garden Place 1,596 12,502 14,098 (131) 10/97 Georgetown 1,565 7,842 9,407 (51) 10/97 Harbor Pointe 413 7,529 7,942 (79) 10/97 Harpers Mill 967 3,670 4,637 (39) 10/97 Hidden Lake 2,843 19,880 22,723 (208) 10/97 Holiday on Hayes 1,491 10,615 12,106 (111) 10/97 Hunt Club, The 1,175 5,198 6,373 (55) 10/97 Huntley, The 640 8,995 9,635 (94) 10/97 La Prada Club 1,493 9,511 11,004 (100) 10/97 Lakes of Renaissance 945 10,489 11,434 (110) 10/97 Live Oak 782 4,504 5,286 (47) 10/97 Meadows on Memorial 609 2,368 2,977 (26) 10/97 Mill Creek 205 4,613 4,818 (49) 10/97
S-4 151
COST CAPITALIZED SUBSEQUENT TO INITIAL COST TO COMPANY ACQUISITION ----------------------- ------------------- BUILDING & BUILDINGS & PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS ------------- -------- ------------ -------- ------------ ---- ------------ Montfort Oaks Dallas, TX $ 5,170 $ 2,256 $ 11,177 $-- $ 26 Monticello on Cranbrook Houston, TX 3,434 410 7,522 -- 22 Northwoods Houston, TX 2,853 638 8,176 -- 24 Oak Ridge Austin, TX -- 834 10,389 -- 28 One Camden Court Houston, TX -- 164 2,479 -- 15 One Cypress Landing Houston, TX -- 559 11,830 -- 33 One Westfield Lake Houston, TX -- 731 9,692 -- 30 One Willow Chase Houston, TX -- 160 3,425 -- 7 One Willow Park Houston, TX -- 219 5,880 -- 13 Park Bonita San Diego, CA 5,777 6,951 5,647 -- 10 Pathway, The Houston, TX -- 848 5,855 -- 11 Pine Creek Houston, TX -- 414 5,697 -- 16 Polo Club Austin, TX 6,346 912 10,586 -- 24 Polo Club on Cranbrook I Houston, TX 2,851 340 5,693 -- 22 Polo Club on Cranbrook II Houston, TX 3,909 256 7,362 -- 26 Rafters, The Corpus Christi, TX 3,926 899 8,304 -- 13 Richmond Green Houston, TX -- 1,248 10,049 -- 26 Riverwalk Houston, TX 2,892 390 6,497 -- 14 Saratoga Springs Atlanta, GA 4,404 1,568 12,041 -- 23 Shadow Creek Austin, TX 6,080 1,617 13,250 -- 38 Shadowridge Village Dallas, TX 2,662 918 5,055 -- 20 Shannon Chase Atlanta, GA 3,016 3,465 4,564 -- 15 Silverado Houston, TX 5,027 1,611 12,003 -- 29 Stony Creek Houston, TX 2,986 478 6,540 -- 18 Sun Ridge San Diego, CA 3,231 3,400 3,316 -- 15 Timbers of Cranbrook Houston, TX -- 348 8,273 -- 28 Tranquility Lake Houston, TX -- 742 3,231 -- 13 Trinity Mills Dallas, TX 3,531 1,968 6,372 -- 18 Trinity Oaks Dallas, TX 3,110 916 8,688 -- 31 Villas at Indian Trails Atlanta, GA 3,625 3,119 6,138 -- 21 Wharf, The Corpus Christi, TX 3,882 1,283 8,928 -- 37 Willowick Corpus Christi, TX 3,902 899 9,161 -- 24 GROSS AMOUNT AT WHICH CARRIED AT DECEMBER 31, 1997 ------------------------------------ BUILDINGS & ACCUMULATED DATE DEPRECIABLE PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE (YEARS)(D) ------------- -------- ------------ ---------- ------------ -------- ---------------- Montfort Oaks $ 2,256 $ 11,203 $ 13,459 $ (117) 10/97 Monticello on Cranbrook 410 7,544 7,954 (79) 10/97 Northwoods 638 8,200 8,838 (86) 10/97 Oak Ridge 834 10,417 11,251 (109) 10/97 One Camden Court 164 2,494 2,658 (26) 10/97 One Cypress Landing 559 11,863 12,422 (125) 10/97 One Westfield Lake 731 9,722 10,453 (102) 10/97 One Willow Chase 160 3,432 3,592 (36) 10/97 One Willow Park 219 5,893 6,112 (62) 10/97 Park Bonita 6,951 5,657 12,608 (59) 10/97 Pathway, The 848 5,866 6,714 (62) 10/97 Pine Creek 414 5,713 6,127 (60) 10/97 Polo Club 912 10,610 11,522 (111) 10/97 Polo Club on Cranbrook I 340 5,715 6,055 (62) 10/97 Polo Club on Cranbrook II 256 7,388 7,644 (76) 10/97 Rafters, The 899 8,317 9,216 (87) 10/97 Richmond Green 1,248 10,075 11,323 (106) 10/97 Riverwalk 390 6,511 6,901 (68) 10/97 Saratoga Springs 1,568 12,064 13,632 (126) 10/97 Shadow Creek 1,617 13,288 14,905 (140) 10/97 Shadowridge Village 918 5,075 5,993 (53) 10/97 Shannon Chase 3,465 4,579 8,044 (12) 10/97 Silverado 1,611 12,032 13,643 (126) 10/97 Stony Creek 478 6,558 7,036 (69) 10/97 Sun Ridge 3,400 3,331 6,731 (35) 10/97 Timbers of Cranbrook 348 8,301 8,649 (87) 10/97 Tranquility Lake 742 3,244 3,986 (33) 10/97 Trinity Mills 1,968 6,390 8,358 (67) 10/97 Trinity Oaks 916 8,719 9,635 (92) 10/97 Villas at Indian Trails 3,119 6,159 9,278 (93) 10/97 Wharf, The 1,283 8,965 10,248 (94) 10/97 Willowick 899 9,185 10,084 (96) 10/97
S-5 152
COST CAPITALIZED SUBSEQUENT TO INITIAL COST TO COMPANY ACQUISITION ----------------------- ------------------- BUILDING & BUILDINGS & PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS ------------- -------- ------------ -------- ------------ ---- ------------ Wimbledon Houston, TX $ -- $ 231 $ 5,667 $-- $ 15 Woodborough Houston, TX -- 376 8,731 -- 31 Woodchase Houston, TX 4,495 1,422 10,826 -- 47 Woodedge Houston, TX 1,747 243 3,606 -- 11 Woodlake Houston, TX -- 1,179 10,338 -- 18 -------- -------- ---------- ---- ------- Subtotal 166,605 83,042 601,772 -- 1,762 -------- -------- ---------- ---- ------- Subtotal -- 1997 177,421 92,162 691,988 -- 4,532 -------- -------- ---------- ---- ------- Total(G) $347,699 $173,668 $1,282,407 $(33) $51,571 ======== ======== ========== ==== ======= GROSS AMOUNT AT WHICH CARRIED AT DECEMBER 31, 1997 ------------------------------------ BUILDINGS & ACCUMULATED DATE DEPRECIABLE PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE (YEARS)(D) ------------- -------- ------------ ---------- ------------ -------- ---------------- Wimbledon $ 231 $ 5,682 $ 5,913 $ (60) 10/97 Woodborough 376 8,762 9,138 (92) 10/97 Woodchase 1,422 10,873 12,295 (114) 10/97 Woodedge 243 3,617 3,860 (38) 10/97 Woodlake 1,179 10,356 11,535 (109) 10/97 -------- ---------- ---------- -------- Subtotal 83,042 603,534 686,576 (6,295) -------- ---------- ---------- -------- Subtotal -- 1997 92,162 696,520 788,682 (7,696) -------- ---------- ---------- Total(G) $173,635 $1,333,978 $1,507,613 $(74,584) ======== ========== ========== ========
- --------------- (A) Property is pledged as collateral under a $57.417 million mortgage note payable to an insurance company. (B) Property is pledged as collateral under a $23.238 million mortgage note payable to an insurance company. (C) Property is pledged as collateral under the mortgage notes secured by Reflections of Highpoint, Remington at Ponte Vedra, Remington Hill and Winridge. (D) Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets which range from 14 to 30 years for buildings and 5, 10 or 15 years for personal property. (E) Braden's Walk, Oak Forest and Woods of Bedford were combined on December 31, 1997 to be operated as one property. (F) Timber Creek and Treepoint were combined on January 8, 1997 and Quayle Walk was combined on December 31, 1997, to be operated as one property -- Parks at Treepoint. (G) The aggregate cost for Federal income tax purposes at December 31, 1997 is approximately $1.3 billion. S-6 153 INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not Applicable. ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses expected to be paid by the Company in connection with the issuance and distribution of the securities being registered are as follows: SEC Registration Fee........................................ $ 104,782 NYSE Filing Fee............................................. * Printing and engraving expenses............................. * Legal Fees and Expenses..................................... * Accounting Fees and Expenses................................ * Exchange Agent Fees and Custodian Fees...................... * Miscellaneous Expenses...................................... * ---------- Total..................................................... * ==========
- --------------- * To be completed by amendment. ITEM 32. SALES TO SPECIAL PARTIES. None. ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES. None. ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Articles of Incorporation, as amended and restated (the "Articles of Incorporation"), provide certain limitations on the liability of the Company's directors and officers for monetary damages to the Company. The Articles of Incorporation obligate the Company to indemnify its directors and officers, and permit the Company to indemnify its employees and other agents, against certain liabilities incurred in connection with their service in such capacities. These provisions could reduce the legal remedies available to the Company and the stockholders against these individuals. See "Certain Provisions of Maryland Law and of the Company's Articles and Bylaws--Limitation of Liability and Indemnification." The Articles of Incorporation require it to indemnify (a) the Company's directors and officers whether serving the Company or at its request any other entity who have been successful, on the merits or otherwise, in the defense of a proceeding to which he was made a party by reason of his service in that capacity against reasonable expenses incurred by him in connection with the proceeding unless it is established that (i) his act or omission was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty, (ii) he actually received an improper personal benefit in money, property or services, or (iii) in the case of a criminal proceeding, he had reasonable cause to believe that his act or omission was unlawful and (b) other employees and agents of the Company to such extent as shall be authorized by the Board of Directors or the Company's Bylaws and be permitted by law. In addition, the Articles of Incorporation require the Company to pay or reimburse, in advance of the final disposition of a proceeding, reasonable expenses incurred by a director or officer who is a party to a proceeding under procedures provided for under the Maryland General Corporation Law (the "MGCL"). The Company's Bylaws also permit the Company to provide such other and further indemnification or payment or reimbursement of expenses as the Board of Directors deems to be in the interest of the Company and as may be permitted by the MGCL for directors, officers and employees of Maryland corporations. II-1 154 The Company has entered into indemnification agreements with each of the Company's officers and directors. The indemnification agreements require, among other things, that the Company indemnify its officers and directors to the fullest extent permitted by law and advance to the officers and directors all related expenses, subject to reimbursement if it is subsequently determined that indemnification is not permitted. The Company must also indemnify and advance all expenses incurred by officers and directors seeking to enforce their rights under the indemnification agreements and cover officers and directors under the Company's directors' and officers' liability insurance. Although the indemnification agreements offer substantially the same scope of coverage afforded by law, they provide assurance to directors and officers that indemnification will be available because such contracts cannot be modified unilaterally in the future by the Board of Directors or the stockholders to eliminate the rights they provide. ITEM 35. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED. Not applicable ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements included in this Registration Statement are: (1) Financial Statements of the Company for the six months ended June 30, 1998 and 1997: Condensed Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and December 31, 1997 Condensed Consolidated Statements of Income for the three months and six months ended June 30, 1998 and 1997 (Unaudited) Condensed Consolidated of Cash Flows for the six months ended June 30, 1998 and 1997 (Unaudited) Notes to Condensed Consolidated Financial Statements (Unaudited) (2) Financial Statements of the Company for the years ended December 31, 1997, 1996 and 1995: Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Income for each of the three years ended December 31, 1997 Consolidated Statements of Stockholders' Equity for each of the three years ended December 31, 1997 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1997 Notes to Consolidated Financial Statements (3) Pro Forma Financial Statements (Unaudited): Pro Forma Condensed Consolidated Statement of Income for the year ended December 31, 1997 Notes to Pro Forma Condensed Consolidated Statement of Income (Unaudited) (4) Financial Statements of Drever Partners, Inc. and Affiliates for the years ended December 31, 1996, 1995 and 1994 and for the six months ended June 30, 1997: Independent Auditors' Report Combined Balance Sheets as of December 31, 1996 and 1995 and June 30, 1997 (Unaudited) Combined Statements of Operations for each of the three years ended December 31, 1996 and the six months ended June 30, 1997 and 1996 (Unaudited) Combined Statements of Stockholders' Equity for each of the three years ended December 31, 1996 and the six months ended June 30, 1997 (Unaudited) Combined Statements of Cash Flows for each of the three years ended December 31, 1996 and the six months ended June 30, 1997 and 1996 (Unaudited) Notes to Combined Financial Statements II-2 Financial Statement Schedule Schedule III--Real Estate and Accumulated Depreciation as of December 31, 1997 II-3 155 (b) Exhibits 2.1 Contribution Agreement by and among Walden/Drever Operating Partnership, L.P., Walden Residential Properties, Inc., the Shareholders of Drever Partners, Inc., AOF, Inc., and AOF II, Inc. (1) 2.2 Exchange Agreement among Walden Residential Properties, Inc., Walden/Drever Operating Partnership, L.P., Drever Partners, Inc., AOF, Inc. and AOF II, Inc. (1) 3.1 Articles of Amendment and Restatement of the Company. (2) 3.2 Restated Bylaws of the Company. (2) 4.1 Specimen of certificate representing shares of Common Stock. (3) 4.2 Form of certificate representing shares of 9.16% Series B Convertible Redeemable Preferred Stock. (4) 4.3 Form of certificate representing shares of 9.20% Senior Preferred Stock. (5) 4.4 Form of certificate representing shares of 9.00% Redeemable Preferred Stock* 4.5 Form of Articles Supplementary relating to 9.16% Series B Convertible Redeemable Preferred Stock (4) 4.6 Form of Articles Supplementary relating to 9.20% Senior Preferred Stock. (5) 4.7 Form of Articles Supplementary relating to 9.00% Redeemable Preferred Stock (9) 4.8 Form of Series B Warrant Certificate* 5.1 Form of Opinion of Winstead Sechrest & Minick P.C. regarding legality of the securities** 8.1 Form of Opinion of Winstead Sechrest & Minick P.C. regarding certain tax matters** 10.1 Dividend Reinvestment and Stock Purchase Plan. (6) 10.2 Transfer and Assignment Agreement between The Arbors of Austin and Walden Residential Operating Partnership, L.P. (Arbors of Austin Apartments) (1) 10.3 Transfer and Assignment Agreement between Arbors of Bedford Limited and Walden Residential Operating Partnership, L.P. (Arbors of Bedford Apartments) (1) 10.4 Transfer and Assignment Agreement between Euless II Limited and Walden Residential Operating Partnership, L.P. (Arbors of Euless Apartments) (1) 10.5 Transfer and Assignment Agreement between The Arbors on Forest Lane Limited and Walden Residential Operating Partnership, L.P. (Arbors on Forest Lane Apartments) (1) 10.6 Transfer and Assignment Agreement between Arbor Park Limited and Walden Residential Operating Partnership, L.P. (Arbor Park Apartments) (1) 10.7 Transfer and Assignment Agreement between Arbor Mill Limited and Walden Residential Operating Partnership, L.P. (Arbors of Carrollton Apartments) (1) 10.8 Real Estate Sales Contract by and between Village/Hillcrest Limited Partnership and Walden Residential Properties, Inc. (Hillcrest Apartments) (1) 10.9 Purchase and Sale Agreement by and between Windsor Park Apartments, Inc. and Walden Residential Operating Partnership, L.P. (Windsor Park Apartments) (7)
II-4 156 10.10 Real Estate Sales Contract by and between 1990 Clover Hill Limited Partnership and Walden Residential Properties, Inc. (Clover Hill Apartments) (7) 10.11 Third Amendment to the Revolving Credit Agreement by and among WDN Properties, Ltd., Walden Residential Properties, Inc., Walden Residential Operating Partnership, L.P., WDN Properties, Inc., Walden/Drever Operating Partnership, L.P., BankBoston, N.A., individually, Bank of Montreal, Chicago Branch, Corestates Bank, N.A., Dresdner Bank AG New York and Grand Cayman Branches, Keybank National Association, Signet Bank, and BankBoston, N.A. as Agent, dated October 1, 1997. (8)
II-5 157 10.12 Agreement to Sell Real Estate between MIG-Oak Ramble Associates Limited Partnership and Walden Residential Properties, Inc., dated as of September 16, 1997. (Oak Ramble Apartments) (8) 10.13 Purchase and Sale Agreement and Joint Escrow Instructions between Pacific Life Insurance Company and Walden Residential Properties, Inc., dated as of November 10, 1997. (Woods of Bedford Apartments) (8) 10.14 First Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions between Pacific Life Insurance Company and Walden Residential Properties, Inc., dated as of December 15, 1997. (Woods of Bedford Apartments) (8) 10.15 Contract of Sales between MGI Properties and Walden Residential Operating Partnership, L.P. dated as of November 7, 1997. (St. James Crossing and South Pointe Apartments) (8) 10.16 Purchase and Sale Agreement by and between Windsor at Ashton Park Limited Partnership and Walden Residential Properties, Inc., dated as of November 14, 1997. (Ashton Park Apartments) (8) 10.17 Agreement of Sale and Purchase by and between Windsor at Parkway Station Limited Partnership and Walden Residential Properties, Inc., dated as of November 14, 1997. (Parkway Station Apartments) (8) 10.18 Revolving Credit Agreement dated December 15, 1997, by and among Walden Residential Properties, Inc., Walden/Drever Operating Partnership, L.P., BankBoston, N.A. and BankBoston, N.A., as Managing Agent for the Banks. (8) 10.19 Term Loan Agreement dated December 15, 1997, by and among Walden Residential Properties, Inc., Walden/Drever Operating Partnership, L.P., BankBoston, N.A. and BankBoston, N.A., as Managing Agent for the Banks. (8) 10.20 Settlement and Employment Agreement, dated as of October 20, 1997, between Walden Residential Properties, Inc. and Don R. Daseke. (8) 10.21 Employment Agreement, dated as of October 1, 1997, between Walden Residential Properties, Inc. and Maxwell B. Drever. (8) 10.22 Employment Agreement, dated as of October 1, 1997, between Walden Residential Properties, Inc. and Michael E. Masterson. (8) 10.23 Employment Agreement, dated as of October 1, 1997, between Walden Residential Properties, Inc. and Michael L. Collier. (8) 10.24 Employment Agreement, dated as of October 20, 1997, between Walden Residential Properties, Inc. and Marshall B. Edwards. (8) 10.25 Construction Loan Agreement by and among Walden/Grupe Elk Grove, L.P., BankBoston, N.A. and BankBoston, N.A. as Agent for Other Banks, dated as of February 27, 1998. (8) 10.26 Construction Loan Agreement by and among Walden/Grupe Roseville, L.P., BankBoston, N.A. and BankBoston, N.A. as Agent for Other Banks, dated as of February 27, 1998. (8) 10.27 Treasury Lock Agreement by and between Walden Residential Properties, Inc. and Smith Barney Capital Services, Inc., dated as of August 29, 1997. (8) 10.28 Treasury Lock Agreement by and between BankBoston, N.A. and Walden Residential Properties, Inc., dated as of December 17, 1997. (8) 10.29 Treasury Lock Agreement by and between BankBoston, N.A. and Walden Residential Properties, Inc., dated as of December 17, 1997. (8)
II-6 158 12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.* 21.1 Subsidiaries of the Company.* 23.1 Independent Auditors' Consent.* 23.2 Consent of Winstead Sechrest & Minick P.C. (included in Exhibits 5.1 and 8.1) 24.2 Power of Attorney (included on page II-7) 99.1 Form of Notice of Exchange*
- --------------- * Filed herewith. ** To be filed by amendment. (1) Previously filed with the Company's Form 10-Q filed with the Securities and Exchange Commission on August 12, 1997 and incorporated herein by reference. (2) Previously filed with the Amendment No. 3 to the Company's Registration Statement on Form S-11 (Registration No. 33-70132) filed with the Securities and Exchange Commission on December 23, 1993 and incorporated herein by reference. (3) Previously filed with the Company's Registration Statement on Form S-3 (Registration No. 33-90438) filed with the Securities and Exchange Commission on March 8, 1995 and incorporated herein by reference. (4) Previously filed with the Company's Registration Statement on Form S-3 (Registration No. 33-13809) filed with the Securities and Exchange Commission on October 9, 1996 and herein incorporated by reference. (5) Previously filed with the Company's Form 8-A filed with the Securities and Exchange Commission on December 20, 1996 and incorporated herein by reference. (Previously numbered Exhibit 1.1 and 2.3) (6) Previously filed with the Company's Registration Statement on Form S-3D (Registration No. 333-34507) filed with the Securities and Exchange Commission on August 28, 1997 and incorporated herein by reference. (7) Previously filed with the Company's Form 10-Q filed with the Securities and Exchange Commission on November 14, 1997 and herein incorporated by reference. (Previously numbered Exhibits 10.1 through 10.2) (8) Previously filed with the Company's Form 10-K filed with the Securities and Exchange Commission on March 30, 1998 and herein incorporated by reference. (9) Previously filed with the Company's Form 8-A filed with the Securities and Exchange Commission on September 22, 1997 and incorporated herein by reference. ITEM 37. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) to file during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. II-7 159 Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Company pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934, that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. That for purposes of determining any liability under the Securities Act, the information omitted from the Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-8 160 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this Registration Statement on Form S-11 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on October 2, 1998. WALDEN RESIDENTIAL PROPERTIES, INC., a Maryland Corporation By: MARSHALL B. EDWARDS -------------------------------------------------- Marshall B. Edwards Chief Executive Officer Each person whose signature appears below constitutes and appoints Marshall B. Edwards and Mark S. Dillinger, and each of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign on his behalf individually and in each capacity stated below any amendment, (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement on Form S-11 has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ MARSHALL B. EDWARDS Chief Executive Officer, President and Director (Principal October 2, 1998 - --------------------------------------------- Executive Offer) Marshall B. Edwards /s/ MARK S. DILLINGER Executive Vice President, Chief Financial Officer and October 2, 1998 - --------------------------------------------- Director (Principal Financial and Accounting Officer) Mark S. Dillinger /s/ MICHAEL E. MASTERSON Chairman of the Board of Directors October 2, 1998 - --------------------------------------------- Michael E. Masterson Chairman Emeritus October , 1998 - --------------------------------------------- Don R. Daseke /s/ MAXWELL B. DREVER Chairman Emeritus October 2, 1998 - --------------------------------------------- Maxwell B. Drever Director October , 1998 - --------------------------------------------- Linda Walker Bynoe /s/ FRANCESCO GALESI Director October 2, 1998 - --------------------------------------------- Francesco Galesi Director October , 1998 - --------------------------------------------- Robert L. Honstein
II-9 161
SIGNATURE TITLE DATE --------- ----- ---- /s/ ARCH K. JACOBSON Director October 2, 1998 - --------------------------------------------- Arch K. Jacobson /s/ LOUIS G. MUNIN Director October 2, 1998 - --------------------------------------------- Louis G. Munin Director October , 1998 - --------------------------------------------- J. Otis Winters
II-10 162 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NO. DESCRIPTION NUMBERED PAGE ----------- ----------- ------------- 2.1 Contribution Agreement by and among Walden/Drever Operating Partnership, L.P., Walden Residential Properties, Inc., the Shareholders of Drever Partners, Inc., AOF, Inc., and AOF II, Inc. (1) 2.2 Exchange Agreement among Walden Residential Properties, Inc., Walden/Drever Operating Partnership, L.P., Drever Partners, Inc., AOF, Inc. and AOF II, Inc. (1) 3.1 Articles of Amendment and Restatement of the Company. (2) 3.2 Restated Bylaws of the Company. (2) 4.1 Specimen of certificate representing shares of Common Stock. (3) 4.2 Form of certificate representing shares of 9.16% Series B Convertible Redeemable Preferred Stock. (4) 4.3 Form of certificate representing shares of 9.20% Senior Preferred Stock. (5) 4.4 Form of certificate representing shares of 9.00% Redeemable Preferred Stock* 4.5 Form of Articles Supplementary relating to 9.16% Series B Convertible Redeemable Preferred Stock (4) 4.6 Form of Articles Supplementary relating to 9.20% Senior Preferred Stock. (5) 4.7 Form of Articles Supplementary relating to 9.00% Redeemable Preferred Stock (9) 4.8 Form of Series B Warrant Certificate* 5.1 Form of Opinion of Winstead Sechrest & Minick P.C. regarding legality of the securities** 8.1 Form of Opinion of Winstead Sechrest & Minick P.C. regarding certain tax matters** 10.1 Dividend Reinvestment and Stock Purchase Plan. (6) 10.2 Transfer and Assignment Agreement between The Arbors of Austin and Walden Residential Operating Partnership, L.P. (Arbors of Austin Apartments) (1) 10.3 Transfer and Assignment Agreement between Arbors of Bedford Limited and Walden Residential Operating Partnership, L.P. (Arbors of Bedford Apartments) (1) 10.4 Transfer and Assignment Agreement between Euless II Limited and Walden Residential Operating Partnership, L.P. (Arbors of Euless Apartments) (1) 10.5 Transfer and Assignment Agreement between The Arbors on Forest Lane Limited and Walden Residential Operating Partnership, L.P. (Arbors on Forest Lane Apartments) (1) 10.6 Transfer and Assignment Agreement between Arbor Park Limited and Walden Residential Operating Partnership, L.P. (Arbor Park Apartments) (1) 10.7 Transfer and Assignment Agreement between Arbor Mill Limited and Walden Residential Operating Partnership, L.P. (Arbors of Carrollton Apartments) (1)
163
SEQUENTIALLY EXHIBIT NO. DESCRIPTION NUMBERED PAGE ----------- ----------- ------------- 10.8 Real Estate Sales Contract by and between Village/Hillcrest Limited Partnership and Walden Residential Properties, Inc. (Hillcrest Apartments) (1) 10.9 Purchase and Sale Agreement by and between Windsor Park Apartments, Inc. and Walden Residential Operating Partnership, L.P. (Windsor Park Apartments) (7) 10.10 Real Estate Sales Contract by and between 1990 Clover Hill Limited Partnership and Walden Residential Properties, Inc. (Clover Hill Apartments) (7) 10.11 Third Amendment to the Revolving Credit Agreement by and among WDN Properties, Ltd., Walden Residential Properties, Inc., Walden Residential Operating Partnership, L.P., WDN Properties, Inc., Walden/Drever Operating Partnership, L.P., BankBoston, N.A., individually, Bank of Montreal, Chicago Branch, Corestates Bank, N.A., Dresdner Bank AG New York and Grand Cayman Branches, Keybank National Association, Signet Bank, and BankBoston, N.A. as Agent, dated October 1, 1997. (8) 10.12 Agreement to Sell Real Estate between MIG-Oak Ramble Associates Limited Partnership and Walden Residential Properties, Inc., dated as of September 16, 1997. (Oak Ramble Apartments) (8) 10.13 Purchase and Sale Agreement and Joint Escrow Instructions between Pacific Life Insurance Company and Walden Residential Properties, Inc., dated as of November 10, 1997. (Woods of Bedford Apartments) (8) 10.14 First Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions between Pacific Life Insurance Company and Walden Residential Properties, Inc., dated as of December 15, 1997. (Woods of Bedford Apartments) (8) 10.15 Contract of Sales between MGI Properties and Walden Residential Operating Partnership, L.P. dated as of November 7, 1997. (St. James Crossing and South Pointe Apartments) (8) 10.16 Purchase and Sale Agreement by and between Windsor at Ashton Park Limited Partnership and Walden Residential Properties, Inc., dated as of November 14, 1997. (Ashton Park Apartments) (8) 10.17 Agreement of Sale and Purchase by and between Windsor at Parkway Station Limited Partnership and Walden Residential Properties, Inc., dated as of November 14, 1997. (Parkway Station Apartments) (8) 10.18 Revolving Credit Agreement dated December 15, 1997, by and among Walden Residential Properties, Inc., Walden/Drever Operating Partnership, L.P., BankBoston, N.A. and BankBoston, N.A., as Managing Agent for the Banks. (8) 10.19 Term Loan Agreement dated December 15, 1997, by and among Walden Residential Properties, Inc., Walden/Drever Operating Partnership, L.P., BankBoston, N.A. and BankBoston, N.A., as Managing Agent for the Banks. (8) 10.20 Settlement and Employment Agreement, dated as of October 20, 1997, between Walden Residential Properties, Inc. and Don R. Daseke. (8) 10.21 Employment Agreement, dated as of October 1, 1997, between Walden Residential Properties, Inc. and Maxwell B. Drever. (8)
164
SEQUENTIALLY EXHIBIT NO. DESCRIPTION NUMBERED PAGE ----------- ----------- ------------- 10.22 Employment Agreement, dated as of October 1, 1997, between Walden Residential Properties, Inc. and Michael E. Masterson. (8) 10.23 Employment Agreement, dated as of October 1, 1997, between Walden Residential Properties, Inc. and Michael L. Collier. (8) 10.24 Employment Agreement, dated as of October 20, 1997, between Walden Residential Properties, Inc. and Marshall B. Edwards. (8) 10.25 Construction Loan Agreement by and among Walden/Grupe Elk Grove, L.P., BankBoston, N.A. and BankBoston, N.A. as Agent for Other Banks, dated as of February 27, 1998. (8) 10.26 Construction Loan Agreement by and among Walden/Grupe Roseville, L.P., BankBoston, N.A. and BankBoston, N.A. as Agent for Other Banks, dated as of February 27, 1998. (8) 10.27 Treasury Lock Agreement by and between Walden Residential Properties, Inc. and Smith Barney Capital Services, Inc., dated as of August 29, 1997. (8) 10.28 Treasury Lock Agreement by and between BankBoston, N.A. and Walden Residential Properties, Inc., dated as of December 17, 1997. (8) 10.29 Treasury Lock Agreement by and between BankBoston, N.A. and Walden Residential Properties, Inc., dated as of December 17, 1997. (8) 12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.* 21.1 Subsidiaries of the Company.* 23.1 Independent Auditors' Consent.* 23.2 Consent of Winstead Sechrest & Minick P.C. (included in Exhibits 5.1 and 8.1) 24.2 Power of Attorney (included on page II-7) 99.1 Form of Notice of Exchange*
- --------------- * Filed herewith. ** To be filed by amendment. (1) Previously filed with the Company's Form 10-Q filed with the Securities and Exchange Commission on August 12, 1997 and incorporated herein by reference. (2) Previously filed with the Amendment No. 3 to the Company's Registration Statement on Form S-11 (Registration No. 33-70132) filed with the Securities and Exchange Commission on December 23, 1993 and incorporated herein by reference. (3) Previously filed with the Company's Registration Statement on Form S-3 (Registration No. 33-90438) filed with the Securities and Exchange Commission on March 8, 1995 and incorporated herein by reference. (4) Previously filed with the Company's Registration Statement on Form S-3 (Registration No. 33-13809) filed with the Securities and Exchange Commission on October 9, 1996 and herein incorporated by reference. (5) Previously filed with the Company's Form 8-A filed with the Securities and Exchange Commission on December 20, 1996 and incorporated herein by reference. (6) Previously filed with the Company's Registration Statement on Form S-3D (Registration No. 333-34507) filed with the Securities and Exchange Commission on August 28, 1997 and incorporated herein by reference. (7) Previously filed with the Company's Form 10-Q filed with the Securities and Exchange Commission on November 14, 1997 and herein incorporated by reference. (Previously numbered Exhibits 10.1 through 10.2) (8) Previously filed with the Company's Form 10-K filed with the Securities and Exchange Commission on March 30, 1998 and herein incorporated by reference. (9) Previously filed with the Company's Form 8-A filed with the Securities and Exchange Commission on September 22, 1997 and incorporated herein by reference. EX-4.4 2 FORM OF CERTIFICATE REPRESENTING SHARES OF 9.00% 1 Exhibit 4.4 [FRONT OF STOCK CERTIFICATE] SHARES OF 9.00% REDEEMABLE SHARES OF 9.00% REDEEMABLE PREFERRED STOCK PREFERRED STOCK PAR VALUE $.01 PAR VALUE $.01 FORMED UNDER THE SHARES LAWS OF THE STATE OF MARYLAND WALDEN RESIDENTIAL PROPERTIES, INC. THIS CERTIFICATE IS TRANSFERABLE IN BOSTON MASS. AND NEW YORK, N.Y. CUSIP 931210 _____ SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES THAT is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF 9.00% REDEEMABLE PREFERRED STOCK OF Walden Residential Properties, Inc. (the "Company"), transferable only on the books of the Company by the holder hereof in person, or by duly authorized attorney, upon the surrender of this Certificate is properly endorsed. This Certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Company and the facsimile signatures of its duly authorized representatives. Dated: WALDEN RESIDENTIAL PROPERTIES, INC. CORPORATE SEAL MARYLAND SECRETARY PRESIDENT Counter signed and Registered: BOSTON EQUIRSERVE, L.P, Transfer Agent and Registrar By: Authorized Signature THERE ARE RESTRICTIONS ON THE TRANSFER OF THE SHARES EVIDENCED BY THIS CERTIFICATE AS MORE FULLY SET FORTH ON THE REVERSE HEREOF. 2 [BACK OF STOCK CERTIFICATE] WALDEN RESIDENTIAL PROPERTIES, INC. THE CORPORATION WILL FURNISH TO ANY STOCKHOLDER ON REQUEST AND WITHOUT CHARGE A FULL STATEMENT OF THE DESIGNATIONS AND ANY PREFERENCES, CONVERSION AND OTHER RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DIVIDENDS, QUALIFICATIONS AND TERMS, AND CONDITIONS OF REDEMPTION OF THE STOCK OF EACH CLASS WHICH THE CORPORATION IS AUTHORIZED TO ISSUE, OR THE DIFFERENCES IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN THE SHARES OF EACH SERIES OF A CLASS IN SERIES WHICH THE CORPORATION IS AUTHORIZED TO ISSUE. TO THE EXTENT THEY HAVE BEEN SET, AND OF THE AUTHORITY OF THE BOARD OF DIRECTORS TO SET THE RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES OR CLASSES, SUCH REQUEST MAY BE MADE TO THE SECRETARY OF THE CORPORATION OR TO ITS TRANSFER AGENT. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON OWNERSHIP AND TRANSFER FOR THE PURPOSE OF THE CORPORATION'S MAINTENANCE OF ITS STATUS AS A REAL STATE INVESTMENT TRUST UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"). EXCEPT AS OTHERWISE PROVIDED PURSUANT TO THE CHARTER OF THE CORPORATION, NO PERSON MAY (1) BENEFICIALLY OWN SHARES OF STOCK IN EXCESS OF 9.0% (OR SUCH OTHER PERCENTAGE AS MAY BE PROVIDED IN THE CHARTER OF THE CORPORATION) OF THE AGGREGATE VALUE OF ALL OUTSTANDING STOCK (UNLESS SUCH PERSON IS THE EXISTING HOLDER), OR (2) BENEFICIALLY OWN STOCK THAT WOULD RESULT IN THE CORPORATION BEING "CLOSELY HELD" UNDER SECTION 856(h) OF THE CODE. ANY PERSON WHO ATTEMPTS TO BENEFICIALLY OWN SHARES OF STOCK IN EXCESS OF THE ABOVE LIMITATIONS MUST IMMEDIATELY NOTIFY THE CORPORATION. IF THE RESTRICTIONS ON OWNERSHIP OR TRANSFER ARE VIOLATED, THE SHARES OF STOCK REPRESENTED HEREBY WILL BE AUTOMATICALLY CONVERTED INTO SHARES OF EXCESS STOCK WHICH WILL BE HELD IN TRUST BY THE CORPORATION. THE CORPORATION HAS THE OPTION TO REDEEM SHARES OF EXCESS STOCK UNDER CERTAIN CIRCUMSTANCES. ALL TERMS IN THIS LEGEND NOT OTHERWISE DEFINED HEREIN HAVE THE MEANINGS ASCRIBED THERETO IN THE CORPORATION'S CHARTER, AS THE SAME MAY BE FURTHER AMENDED FROM TIME TO TIME, A COPY OF WHICH, INCLUDING THE RESTRICTIONS ON OWNERSHIP OR TRANSFER, WILL BE SENT WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS. The following abbreviations, when used in the inscription of the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common UNIF TRAN MIN ACT -- ______ Custodian ________ TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as tenants in common under Uniform Transfers to Minors Act ___________________ (State)
Additional abbreviations may also be used though not in the above list. For Value Received, _____________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________ ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ __________________________________________________________________________shares of 9.00% Redeemable Preferred Stock represented by the within certificate, and do hereby irrevocably constitute and appoint __________________________________ ______________________________________________ Attorney to transfer the said shares on the books of the within-named Company with full power of substitution in the premises. Dated, ---------------------- ---------------------------------------------------- NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed by: - ------------------------------- EX-4.8 3 FORM OF SERIES B WARRANT CERTIFICATE 1 EXHIBIT 4.8 FORM OF WARRANT CERTIFICATE WALDEN RESIDENTIAL PROPERTIES, INC. No. Series B Warrants CUSIP NO. ---------------------------- -------- WARRANTS TO PURCHASE COMMON STOCK This certifies that ___________, or its registered assigns, is the owner of the number of Series B Warrants set forth above, each of which represents the right to purchase, on or after October 1, 1998, from WALDEN RESIDENTIAL PROPERTIES, INC., a Maryland corporation ('Walden"), one-third (1/3) of a share of Common Stock, par value $.01 per share (the "Common Stock"), of Walden at the purchase price (as adjusted from time to time, the "Exercise Price") of $26.875 per share of Common Stock (subject to adjustment as provided in the Warrant Agreement hereinafter referred to), upon surrender hereof at the office of BOSTON EQUISERVE L.P. or to its successor as the warrant agent under the Warrant Agreement hereinafter referred to (any such warrant agent being herein called the "Warrant Agent"), with the Subscription Form on the reverse hereof duly executed, with signature guaranteed as therein specified and simultaneous payment in full (by wire transfer or by certified or official bank or bank cashier's check payable to the order of Walden, or by the surrender of Warrants having an aggregate Spread (as defined in the Warrant Agreement) equal to the Exercise Price of the Warrants being exercised) of the purchase price for the share(s) as to which the Warrant(s) represented by this Warrant Certificate are exercised, all subject to the terms and conditions hereof and of the Warrant Agreement. Notwithstanding the foregoing, Walden shall have the right to not allow an exercise of any Warrants in the event the Registration Statement is not effective arid available at the time Warrants are exercised, unless prior to the exercise of such Warrants, the Holder thereof furnishes to the Warrant Agent and Walden such certifications, legal opinions or other information as either of them may reasonably require to confirm that such exercise is being made pursuant to an exemption from the registration requirements of the Securities Act. This Warrant Certificate is issued under and in accordance with a Series B Warrant Agreement dated as of October 1, 1997 (the "Warrant Agreement"), between Walden and the Warrant Agent, and is subject to the terms and provisions contained therein, to all of which terms and provisions the Holder of this Warrant Certificate consents by acceptance hereof. The Warrant Agreement is hereby incorporated herein by reference and made a part hereof. Reference is hereby made to the Warrant Agreement for a full description of the rights, limitations of rights, obligations, duties and immunities thereunder of Walden and the Holders of the Warrants. The summary of the terms of the Warrant Agreement contained in this Warrant Certificate is qualified in its entirety by express reference to the Warrant Agreement. All terms used in this Warrant Certificate that are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. Copies of the Warrant Agreement are on file at the office of the Warrant Agent and may be obtained by writing to the Warrant Agent at the following address: 150 Royall Street Canton, Massachusetts 02021 Attention: Reorganization Department A "Repurchase Event", as defined in the Warrant Agreement, shall be deemed to occur on any date when Walden (i) consolidates or merges into or with another Person (but only where the holders of Common Stock receive consideration in exchange for all or part of such Common Stock other than common stock in the surviving Person) if the Common Stock, (or other securities) thereafter, issuable upon exercise of the Warrants is not registered under the Exchange Act or (ii) sells all or substantially all of its assets to another Person if the Common Stock (or other securities) thereafter issuable upon exercise of the Warrants is not registered under the Exchange Act; provided that in 2 each case a "Repurchase Event" will not be deemed to have occurred if the consideration for the Common Stock in such transaction consists solely of cash. Following a Repurchase Event, Walden must make an offer to repurchase all outstanding Warrants (a "Repurchase Offer"). If Walden makes a Repurchase Offer, Holders may, until the Expiration Date of such offer, surrender all or part of their Warrants for repurchase by Walden. Warrants received by the Warrant Agent in proper form during a Repurchase Offer will, except as otherwise provided in the Warrant Agreement, be repurchased by Walden at a price in cash (the "Repurchase Price") equal to the value on the Valuation Date relating thereto of the Common Stock and other securities or property which would have been delivered upon exercise of the Warrants had the Warrants been exercised, less the Exercise Price (whether or not the Warrants are then exercisable). The value of such Common Stock and other securities will be (i) if the Common Stock (or other class of securities) is registered under the Exchange Act, determined based upon the average of the closing sales prices of the Common Stock (or other securities) for the 20 consecutive trading days immediately preceding such Valuation Date or, if the Common Stock (or other securities) have been registered under the Exchange Act for less than 20 consecutive trading days before such date, then the average of the closing sales prices for all of the trading days before such date for which closing sales prices are available or (ii) if the Common Stock (or other class of securities) is not registered under the Exchange Act or if the value cannot otherwise be computed under clause (i) above, determined by the Independent Financial Expert (as defined in the Warrant Agreement), in each case as set forth in the Warrant Agreement. The "Valuation Date" with respect to a Repurchase Offer is the date five Business Days prior to the date notice of such Repurchase Offer is first given. If Walden fails to make or complete a Repurchase Offer (a "Default") as required by the Warrant Agreement, it shall be obligated to increase the amount otherwise payable pursuant to the Warrant Agreement in respect of the Repurchase Offer by an amount equal to interest thereon at a rate per annum of 12% from the date of the Default to the date of payment, which interest shall compound quarterly. If Walden merges or consolidates with or into, or sells all or substantially all of its property and assets to, another Person solely for cash, or in the event of the dissolution, liquidation or winding up of Walden, the Holders of Warrants shall be entitled to receive distributions on the date of such event on an equal basis with holders of Common Stock (or other securities issuable upon exercise of the Warrants) as if the Warrants had been exercised immediately prior to such event (less the Exercise Price) or the amount payable pursuant to an outstanding Repurchase Offer if a Repurchase Offer is then outstanding or required, if higher. The number of shares of Common Stock purchasable upon the exercise of each Warrant and the price per share are subject to adjustment as provided in the Warrant Agreement. Except as stated in the immediately preceding paragraph, in the event Walden merges or consolidates with, or sells all or substantially all of its assets to, another Person, each Warrant will, upon exercise, entitle the Holder thereof to receive the number of shares of capital stock or other securities or the amount of money and other property which the holder of a share of Common Stock (or other securities or property issuable upon exercise of a Warrant) is entitled to receive upon completion of such merger, consolidation or sale. As to any final fraction of a share which the same Holder of one or more Warrants would otherwise be entitled to purchase upon exercise thereof in the same transaction, Walden shall pay the cash value thereof determined as provided in the Warrant Agreement. All Common Stock or other securities issuable by Walden upon the exercise of Warrants shall be validly issued, fully paid and nonassessable and Walden shall pay all taxes and other governmental charges that may be imposed under the laws of the United States of America or any political subdivision or taxing authority thereof or therein in respect of the issue or delivery of such shares or of other securities deliverable upon exercise of Warrants, Walden shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for Common Stock, and in such case Walden shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the Warrant Agent's and Walden's satisfaction that no tax or other charge is due. 3 This Warrant Certificate and all rights hereunder are transferable by the registered Holder hereof, in whole or in part, on the register of Walden maintained by the Warrant Agent for such purpose, upon surrender of this Warrant Certificate duly endorsed, or accompanied by a written instrument of transfer in form satisfactory to Walden and the Warrant Agent duly executed, with signatures guaranteed as specified in the attached Form of Assignment, by the registered Holder hereof or his attorney duly authorized in writing and upon payment of any necessary transfer tax or other governmental charge imposed upon such transfer. Upon any partial transfer, Walden will issue and the Warrant Agent will deliver to such Holder a new Warrant Certificate or Certificates with respect to any portion not so transferred. Each taker and Holder of this Warrant Certificate, by taking and holding the same, consents and agrees that prior to the registration of transfer as provided in the Warrant Agreement, Walden and the Warrant Agent may treat the Person in whose name the Warrants are registered as the absolute owner hereof for any purpose and the Person entitled to exercise the rights represented hereby, any notice to the contrary notwithstanding. This Warrant Certificate may be exchanged at the office of the Warrant Agent maintained for such purpose for Warrant Certificates representing the same aggregate number of Warrants, each new Warrant Certificate to represent such number of Warrants as the Holder hereof shall designate at the time of such exchange. Prior to the exercise of the Warrants represented hereby, the Holder of this Warrant Certificate, as such, shall not be entitled to any rights of a stockholder of Walden, including, without limitation, the right to vote or to consent to any action of the stockholders, to receive dividends or other distributions, to exercise any preemptive right or to receive any notice of meetings of stockholders, and shall not be entitled to receive any notice of any proceedings of Walden except as provided in the Warrant Agreement. This Warrant Certificate shall be void and all rights evidenced hereby shall cease on December 31, 2007, unless sooner terminated by the liquidation, dissolution or winding up of Walden or as otherwise provided in the Warrant Agreement upon the consolidation or merger of Walden with, or sale of Walden to, another Person or unless such date is extended as provided in the Warrant Agreement. This Warrant Certificate shall not be valid for any purpose until it shall have been countersigned by the Warrant Agent. Dated: , 199 -------- -- WALDEN RESIDENTIAL PROPERTIES, INC. By: -------------------------------- Name: Title: Countersigned: BOSTON EQUISERVE L.P., as Warrant Agent By: --------------------------------- Authorized Signatory 4 FORM OF REVERSE OF WARRANT CERTIFICATE SUBSCRIPTION FORM (To be executed only upon exercise of Warrant) To: The undersigned irrevocably exercises ____________ of the Warrants represented by the Warrant Certificate, each of which entitles the holder to purchase one-third (subject to adjustment) of a share of Common Stock, par value $.01 per share, of WALDEN RESIDENTIAL PROPERTIES, INC. and herewith makes payment of $__________ (such payment being by wire transfer or by certified or official bank or bank cashier's check payable to the order or at the direction of Walden Residential Properties, Inc., or by the surrender of Warrants having an aggregate Spread (as defined in the Warrant Agreement) equal to the Exercise Price of the Warrants being exercised), all at the exercise price and on the terms and conditions specified in the within Warrant Certificate and the Warrant Agreement therein referred to, surrenders this Warrant Certificate and all right, title and interest therein to and directs that the Common Stock deliverable upon the exercise of such Warrants be registered or placed in the name and at the address specified below and delivered thereto. Dated: ----------------------------------------- (Signature of Owner) ----------------------------------------- (Street Address) ----------------------------------------- (City) (State) (Zip Code) Signature Guaranteed By:(1) ----------------------------------------- Securities and/or check to be issued to: Please insert social Security or identifying number: Name: Street Address: City State and Zip Code: - ------------- (1) The Holder's signature must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" as defined by Rule 17Ad-15 under the Exchange Act. 5 FORM OF CERTIFICATE FOR SURRENDER FOR REPURCHASE OFFER (To be executed only upon repurchase of Warrant by Walden) To: The undersigned, having received prior notice of the consideration for which WALDEN RESIDENTIAL PROPERTIES, INC. will repurchase the Warrants represented by the within Warrant Certificate, hereby surrenders the Warrant Certificate for repurchase by WALDEN RESIDENTIAL PROPERTIES, INC. of the number of Warrants specified below for the consideration set forth in such notice. Dated: ---------------------------------------------- (Number of Warrants to be Repurchased) ---------------------------------------------- (Signature of Owner) ---------------------------------------------- (Street Address) ---------------------------------------------- (City) (State) (Zip Code) Signature Guaranteed By(2) ---------------------------------------------- Securities and/or check to be issued to: Please insert social Security or identifying number: Name: Street Address: City State and Zip Code: - -------------- (2) The Holder's signature must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" as defined by Rule 17Ad-15 under the Exchange Act. 6 FORM OF ASSIGNMENT FOR VALUE RECEIVED the undersigned registered holder of the within Warrant Certificate hereby sells, assigns, and transfers unto the Assignee(s) named below (including the undersigned with respect to any Warrants constituting a part of the Warrants evidenced by the within Warrant Certificate not being assigned hereby) all of the right of the undersigned under the within Warrant Certificate, with respect to the number of Warrants set forth below: Name(s) of Assignee(s): --------------------------------- Address: -------------------------------------------------- No. of Warrants: ------------------------------------------ and does hereby irrevocably constitute and appoint _______________________ the undersigned's attorney to make such transfer on the books of ______________ maintained for the purposes, with full power of substitution in the premises. Dated: ------------------------------------------- (Signature of Owner) ------------------------------------------- (Street Address) ------------------------------------------- (City) (State) (Zip Code) Signature Guaranteed By(3) ------------------------------------------- - ---------------- (3) The Holder's signature must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" as defined by Rule 17Ad-15 under the Exchange Act. EX-12.1 4 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 Exhibit 12.1 WALDEN RESIDENTIAL PROPERTIES, INC. COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in thousands)
For the period February 9, 1994 (Commencement Six Months of Operations) to Ended June 30 Year Ended December 31, December 31, ------------- ------------------------------- ----------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- Income before extraordinary item and income allocated to minority interests .................................. $17,001 $27,113 $19,122 $10,685 $ 5,356 Add: Interest on indebtedness ................... 26,688 28,447 20,573 17,111 6,288 Amortization of deferred financing costs ......................... 485 827 916 900 371 ------- ------- ------- ------- ------- Earnings ................................ $44,174 $56,387 $40,611 $28,696 $12,015 ======= ======= ======= ======= ======= Fixed charges and preferred stock dividends: Interest on indebtedness ................... 26,688 28,447 20,573 17,111 6,288 Amortization of deferred financing costs ......................... 485 827 916 900 371 ------- ------- ------- ------- ------- Fixed charges ........................... 27,173 29,274 21,489 18,011 6,659 Add: Preferred stock dividends ............... 9,592 15,889 4,092 922 -- ------- ------- ------- ------- ------- Combined fixed charges and preferred stock dividends ............ $36,765 $45,163 $25,581 $18,933 $ 6,659 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges .............. 1.63x 1.93x 1.89x 1.59x 1.80x Ratio of earnings to fixed charges and preferred stock dividends .............. 1.20x 1.25x 1.59x 1.52x 1.80x
EX-21.1 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 WALDEN RESIDENTIAL PROPERTIES, INC. SCHEDULE OF SUBSIDIARIES OF THE COMPANY AS OF AUGUST 31, 1997
Percentage Equity Subsidiaries Ownership ------------ --------- Apartment Opportunity Fund, L.P. .................................. 100% (California) Colorado Club Partners, L.P. ...................................... 100% (California) Concierge Management Corporation................................... 100% (Texas) Concierge Realty and Finance Corporation........................... 100% (Texas) Cornerstone Associates............................................. 100% (California) Crossing & Meadows Corporation..................................... 100% (Texas) Crossing & Meadows Partnership, Ltd. .............................. 100% (Texas) DMH 90............................................................. 100% (California) Drever Construction Corporation, Inc. ............................. 100% (California) Drever/Monticello Investors, L.P. ................................. 100% (California) Drever Partners, Inc. ............................................. 100% (California) Fullerton Portfolio Joint Venture.................................. 100% (California) Houston Portfolio Joint Venture II................................. 100% (California) Hunter's Ridge Partnership, Ltd. .................................. 100% (Texas) Newport Partnership, Ltd. ......................................... 100% (Texas) Peppertree Associates, Ltd. ....................................... 1% (Texas) Resident Profiles, Inc. ........................................... 100% (Texas) Walden AZ Corporation.............................................. 100% (Delaware) Walden/Drever Operating Partnership, L.P. ......................... 38% (Delaware) Walden Glen Corporation............................................ 100% (Delaware) Walden Operating, Inc. ............................................ 100% (Delaware) Walden Residential Operating Partnership, L.P. .................... 88% (Georgia) Walden Residential Operating Partnership, L.P. .................... 100% (Delaware)
2 Walden South Pointe GP, Inc. ...................................... 100% (Delaware) Walden South Pointe, L.P. ......................................... 100% (Delaware) Walden Special Corp. .............................................. 10% (Texas) Walden Special Partners, Ltd. ..................................... 100% (Texas) Walden "Utah" Properties, Ltd. .................................... 100% (Texas) WDN Properties, Inc. .............................................. 100% (New York) WDN Properties, Ltd. .............................................. 100% (Texas) EX-23.1 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Walden Residential Properties, Inc. on Form S-11 of our report dated March 25, 1998 with respect to the consolidated financial statements and financial statement schedule of Walden Residential Properties, Inc. for the years ended December 31, 1997 and 1996 and each of the three years in the period ended December 31, 1997 and our report dated June 27, 1997 (October 1, 1997 as to Note 14) with respect to the combined financial statements of Drever Partners, Inc. and affiliates for the years ended December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, each appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Dallas, Texas October 5, 1998 EX-99.1 7 FORM OF NOTICE OF EXCHANGE 1 NOTICE OF EXCHANGE TO TENDER FOR EXCHANGE COMMON AND/OR PREFERRED UNITS OF WALDEN/DREVER OPERATING PARTNERSHIP PURSUANT TO THE PROSPECTUS BY WALDEN RESIDENTIAL PROPERTIES, INC. UNITS TENDERED FOR EXCHANGE MAY NOT BE WITHDRAWN AT ANY TIME AFTER SUCH UNITS ARE TENDERED FOR EXCHANGE. To the Exchange Agent: BOSTON EQUISERVE L.P. By Mail: By Overnight Mail or Courier: By Hand: Boston Equiserve L.P. Boston Equiserve L.P. Boston Equiserve L.P. Attention: --------------- Attention: --------------- Attention: --------------- [Address] [Address] [Address] [City, State, Zip] [City, State, Zip] [City, State, Zip] Facsimile Transmission Number: Confirm by Telephone: Information: ( ) - ( ) - ( ) - ( ) -
THE DOCUMENTS ACCOMPANYING THIS NOTICE OF EXCHANGE AND THE INSTRUCTIONS INCLUDED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS NOTICE OF EXCHANGE IS COMPLETED. DELIVERY OF THIS NOTICE OF EXCHANGE TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. YOU MUST SIGN THIS NOTICE OF EXCHANGE WHERE INDICATED BELOW AND COMPLETE THE SUBSTITUTE FORM W-9 AND NON-FOREIGN TAX AFFIDAVIT PROVIDED BELOW. 2 The undersigned acknowledges that he has received and reviewed the Prospectus (the "Prospectus") of Walden Residential Properties, Inc., a Maryland corporation (the "Company"), and this Notice of Exchange (the "Notice of Exchange"). The Prospectus and Notice of Exchange together describe the terms and conditions of the right of the holders of certain units (each a "Holder") of Walden/Drever Operating Partnership (the "Partnership"), pursuant to Article 11 of the Amended and Restated Limited Partnership Agreement (the "Partnership Agreement") of the Partnership to exchange (i) Class B Common Units (a "Common Unit") of the Partnership for one share of common stock, par value $.01 per share (the "Common Stock"), of the Company and (ii) Class B Preferred Units (a "Preferred Unit") of the Partnership for one share of 9% Redeemable Preferred Stock, par value $.01 per share (the "Redeemable Preferred Stock"), of the Company and three and one-third Series B Warrants (the "Warrants") of the Company, respectively (the "Exchange"). The Class B Common Units and the Class B Preferred Units are collectively referred to herein as the "Units." The Common Stock, Redeemable Preferred Stock and the Warrants are collectively referred to herein as the "Walden Securities." Any Units not exchanged will remain restricted securities and may be resold only (i) pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), and (ii) in accordance with the terms of the Partnership Agreement. Upon the terms and subject to the conditions set forth in the Partnership Agreement, the Prospectus and this Notice of Exchange, the Company will exchange (i) one share of Common Stock registered under the Securities Act pursuant to a registration statement on Form S-11 filed by the Company (the "Registration Statement"), plus, at the election of the Company, cash and/or whole shares of Common Stock in an amount equal to such Holder's Proportionate Prior Unpaid Class B Common Distributions (as defined in the Partnership Agreement), if any, for each Common Unit properly tendered for exchange; and (ii) one share of Redeemable Preferred Stock and three and one-third Warrants registered under the Securities Act pursuant to the Registration Statement plus, at the election of the Company, cash and/or whole shares of Redeemable Preferred Stock in an amount equal to such Holder's Proportionate Current Unpaid Preferred Distributions (as defined in the Partnership Agreement), if any, for each Preferred Unit properly tendered for exchange. In order to exchange Units, a Holder must deliver to Boston Equiserve L.P., as Exchange Agent (the "Exchange Agent"), (a) a properly completed Notice of Exchange, and (b) any certificates representing Units. A Holder may only tender for exchange a minimum of the lesser of (x) 100 Common or Preferred Units or (y) the total number of Units held by such Holder. If a Holders' Units are not properly tendered for exchange, such Holder will not receive Walden Securities. No alternative, conditional or contingent tenders for exchange will be accepted. A tendering Holder, by execution of this Notice of Exchange, waives all rights to receive notice of acceptance of such Holder's Units for exchange. Capitalized terms used but not defined herein have the meanings given to them in the Prospectus. 2 3 PLEASE READ THIS ENTIRE NOTICE OF EXCHANGE CAREFULLY BEFORE COMPLETING ANY INFORMATION List below the Units that are to be tendered for exchange pursuant to this Notice of Exchange. If the space below is inadequate, list the information requested below on a separate signed schedule and affix the list to this Notice of Exchange. - ------------------------------------------------------------------------------------------------- DESCRIPTION OF UNITS TENDERED - ------------------------------------------------------------------------------------------------- Name(s) and Address(es) of Holder(s) Certificate (Please fill in, if blank) Number(s) - ------------------------------------------------------------------------------------------------- --------------------------------------------------- --------------------------------------------------- --------------------------------------------------- --------------------------------------------------- --------------------------------------------------- - ------------------------------------------------------------------------------------------------- Total Number of Units Tendered for Exchange - ------------------------------------------------------------------------------------------------- (1) Unless otherwise indicated in this column, any Holder tendering Units for exchange will be deemed to have tendered the entire number of Units indicated in the column labeled "Number of Units Represented by Certificate(s)". See Instruction 5. - -------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------- DESCRIPTION DESCRIPTION OF UNITS TENDERED - ------------------------------------------------------------------------------------------------- Number of Units Number of Units Name(s) and Address(es) of Holder(s) Represented Tendered for (Please fill in, if blank) by Certificate(s) Exchange(1) - ------------------------------------------------------------------------------------------------- --------------------------------------------------- --------------------------------------------------- --------------------------------------------------- --------------------------------------------------- --------------------------------------------------- - ------------------------------------------------------------------------------------------------- Total Number of Units Tendered for Exchange - ------------------------------------------------------------------------------------------------- (1) Unless otherwise indicated in this colu deemed to have tendered the entire numb of Units Represented by Certificate(s)" - -------------------------------------------------------------------------------------------------
NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Only registered Holders are entitled to tender their Units. Persons who are beneficial owners of Units but are not registered Holders and who seek to tender Units for exchange should (i) contact the registered Holder of such Units and instruct such registered Holder to tender for exchange on his behalf, (ii) obtain and include with this Notice of Exchange certificates representing the Units to be exchanged properly endorsed for transfer by the registered Holder or (iii) effect a record transfer of such Units from the registered Holder to such beneficial owner and comply with the requirements applicable to registered Holders for tendering Units for exchange. See "Procedure to Exchange Units" in the Prospectus. 3 4 To: Walden Residential Properties, Inc. (the "Company") Upon the terms and subject to the conditions of the Partnership Agreement, the Prospectus and this Note of Exchange (collectively, the "Exchange"), the undersigned hereby tenders to the Company for exchange, the Units indicated above. Subject to, and effective upon, acceptance for exchange of the Units tendered herewith, the undersigned hereby sells, assigns and transfers to or upon the order of the Company, all right, title and interest in and to all such Units tendered for exchange hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent the true and lawful agent and attorney-in-fact of the undersigned (with full knowledge that the Exchange Agent also acts as agent of the Company) with respect to such Units, with full power of substitution and resubstitution (such power of attorney being deemed to be an irrevocable power coupled with an interest) to (a) deliver certificates representing such Units, together, in each such case, with all accompanying evidences of transfer and authenticity to or upon the order of the Company, (b) present such Units for transfer on the relevant register and (c) receive all benefits or otherwise exercise all rights of beneficial ownership of such Units (except that the Exchange Agent will have no rights to or control, except as agent for the Company, for the Walden Securities delivered in connection with the Exchange) all in accordance with the terms of the Exchange. THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS FULL POWER AND AUTHORITY TO TENDER FOR EXCHANGE, SELL, ASSIGN AND TRANSFER THE UNITS TENDERED FOR EXCHANGE HEREBY AND, THAT WHEN THE SAME ARE ACCEPTED FOR EXCHANGE, THE COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE AND CLEAR OF ALL SECURITY INTERESTS, LIENS, RESTRICTIONS, CLAIMS, CHARGES, ENCUMBRANCES, CONDITIONAL SALES AGREEMENTS OR OTHER OBLIGATIONS RELATING TO THE SALE OR TRANSFER THEREOF, AND NOT BE SUBJECT TO ANY ADVERSE CLAIM. THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL DOCUMENTS DEEMED BY THE EXCHANGE AGENT OR THE COMPANY TO BE NECESSARY OR DESIRABLE TO COMPLETE THE ASSIGNMENT, TRANSFER AND PURCHASE OF THE UNITS TENDERED FOR EXCHANGE HEREBY. THE UNDERSIGNED HAS READ THE PROSPECTUS AND THIS NOTICE OF EXCHANGE AND AGREES TO ALL OF THE TERMS AND CONDITIONS OF THE EXCHANGE. DELIVERY OF ENCLOSED UNITS SHALL BE EFFECTED, AND RISK OF LOSS AND TITLE TO SUCH UNITS SHALL PASS, ONLY UPON PROPER DELIVERY THEREOF TO THE EXCHANGE AGENT. All authority conferred or agreed to be conferred pursuant to this Notice of Exchange and every obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrators, trustees in bankruptcy, and personal and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. Units properly tendered may not be withdrawn at any time subsequent to their tender for exchange. In the event a Holder submits a nonconforming tender of Units for exchange, all such Units will be returned to the undersigned without cost to the undersigned as soon as practicable following the discovery of such nonconformity, at the address shown below the undersigned's signature(s) unless otherwise indicated under "Special Issuance Instructions" below. Unless otherwise indicated under "Special Issuance Instructions" below, the Exchange Agent will issue the Walden Securities for Units properly tendered hereby for exchange and/or return any certificates representing Units not properly tendered for exchange in the name(s) of the Holder(s) appearing under "Description of Units Tendered." Similarly, unless otherwise indicated under "Special Delivery Instructions," the Walden Securities, and/or any certificates representing Units not tendered for exchanged or not accepted for exchange (and accompanying documents, as appropriate) to be returned will be sent to the address(es) of the Holder(s) appearing under "Description of Units Tendered." In the event that both the Special Issuance Instructions and the Special Delivery Instructions are completed, the Walden Securities will be issued, if applicable, and the certificates representing any Units not tendered for exchange (and any accompanying documents, as appropriate) will be returned in the name of, and delivered to, the person or persons so indicated. The undersigned recognizes that neither the Exchange Agent nor the Company has any obligation pursuant to the Special Issuance Instructions to transfer any Units from the name of the Holder thereof if the Company does not accept for exchange any of the Units so tendered due to a failure to properly tender such Units for exchange. 4 5 SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7) To be completed ONLY if the certificates representing the Walden Securities and/or certificates representing Units not tendered for exchange are to be issued in the name of someone other than the undersigned. Issue Certificate(s) to: Name: (Please Print) Address: (Include Zip Code) (Taxpayer Identification or Social Security Number) SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7) To be completed ONLY if the Walden Securities and/or certificates representing the Units not tendered for exchange are to be sent to someone other than the undersigned or to the undersigned at an address other than that shown above. Mail Certificate(s) to: Name: (Please Print) Address: (Include Zip Code) (Taxpayer Identification or Social Security Number) 5 6 SIGNATURES HOLDERS OF UNITS SIGN HERE IMPORTANT: COMPLETE AND SIGN THE SUBSTITUTE FORM W-9 IN THIS NOTICE OF EXCHANGE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Signature(s) of Holder(s) of Units) Date: ________________, ____ (Must be signed by the Holder(s) exactly as name(s) appear(s) on certificate(s) representing the Units or by person(s) authorized to become Holder(s) by certificates and documents transmitted herewith. If signature is by attorney-in-fact, executor, administrator, trustee, guardian, officer of a corporation or other person acting in a fiduciary or representative capacity, please provide the following information and see Instruction 6.) Capacity (Full Title): Name(s): (Please Type or Print) Address: (Include Zip Code) Area Code and Telephone Number Tax Identification or Social Security No. 6 7 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE 1. BENEFICIAL OWNERS. Persons who are beneficial owners of Units but are not Holders and who seek to tender Units for exchange should (i) contact the Holder of such Units and instruct such Holder to tender on his behalf, (ii) obtain and include with this Notice of Exchange Units properly endorsed for transfer by the Holder, or (iii) effect a record transfer of such Units from the Holder to such beneficial owner and comply with the requirements applicable to Holders for tendering Units. See Instruction 6. 2. REQUIREMENTS OF TENDER FOR EXCHANGE. For a Holder to properly tender Units for exchange, a properly completed and duly executed Notice of Exchange (or a facsimile thereof), together with any other documents required by these Instructions, must be received by the Exchange Agent at one of the addresses set forth on the cover hereof and certificates representing such Units must also be received by the Exchange Agent at such address. THE METHOD OF DELIVERY OF CERTIFICATES REPRESENTING UNITS, THIS NOTICE OF EXCHANGE AND ANY OTHER REQUIRED DOCUMENTS, IS AT THE OPTION AND RISK OF THE TENDERING HOLDER AND DELIVERY WILL BE DEEMED MADE WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. 3. WITHDRAWAL OF TENDERS AND REVOCATION OF CONSENTS. Tenders of Units for exchange may not be withdrawn once submitted to the Exchange Agent. 4. PARTIAL EXCHANGES. If fewer than the entire number of Units evidenced by a submitted certificate are tendered for exchange, the tendering Holder should fill in the applicable amount of the Units that are to be tendered in the box entitled "Description of Units Tendered." The entire number of Units represented by the certificates for all Units delivered to the Exchange Agent will be deemed to have been tendered for exchange unless otherwise indicated. If the entire number of Units is not tendered for exchange, new certificate(s) representing the remainder of the number of Units that were evidenced by the old certificate(s) will be sent to the Holder, unless otherwise provided in the boxes entitled "Special Payment Instructions" or "Special Delivery Instructions" above, as soon as practicable. 5. SIGNATURES ON THIS NOTICE OF EXCHANGE. If this Notice of Exchange is signed by the Holder(s) of the Units tendered for exchange hereby, the signature(s) must correspond exactly with the name(s) as written on the face of the certificate(s) without alteration or any change whatsoever. If any of the Units tendered hereby are owned of record by two or more joint owners, all such owners must sign this Notice of Exchange. If any tendered Units are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate Notices of Exchange as there are names in which certificates are held. If this Notice of Exchange or any certificates are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing and proper evidence satisfactory to the Company of their authority so to act must be submitted, unless waived by the Company. If this Notice of Exchange is signed by the Holder(s) of the Units listed and transmitted hereby, no endorsements of certificates are required unless certificates for Units not tendered for exchange are to be issued to, a person other than the Holder(s). 6. TRANSFER TAXES. The Company will pay or cause to be paid any transfer taxes with respect to the transfer and sale of Units to it or its order pursuant to the Exchange. If, however, the Walden Securities are to be registered in the name of any person other than the Holder(s), or if certificates tendered for exchange are registered in the name of any person other than the person(s) signing this Notice of Exchange, the amount of any transfer taxes (whether imposed on the Holder(s) or such other person) payable on account of the transfer to such person will be due from the Holder prior to completion of the exchange unless satisfactory evidence of the payment of such taxes or exemption therefrom is submitted. Except as provided in this Instruction 6, it will not be necessary for transfer tax stamps to be affixed to the certificates listed in this Notice of Exchange. 7 8 7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If Walden Securities are to be issued in the name of, and/or certificates representing Units not exchanged are to be returned to, a person other than the person(s) signing this Notice of Exchange or if Walden Securities are to be sent and/or such certificates are to be returned to a person other than the person(s) signing this Notice of Exchange or to an address other than that shown above, the appropriate boxes on this Notice of Exchange should be completed. 8. WAIVER OF CONDITIONS. To the extent permitted by applicable law, the Company reserves the right to waive any and all conditions to the Exchange and accept for exchange any Units tendered for exchange 9. TAX IDENTIFICATION NUMBER AND BACKUP WITHHOLDING. Federal income tax law generally requires that a Holder whose tendered Units are accepted for exchange, or such Holder's assignee (in either case, the "Payee"), provide the Company (the "Payor"), with his or her correct Taxpayer Identification Number ("TIN"), which, in the case of a Payee who is an individual, is his or her social security number. If the Payor is not provided with the correct TIN or an adequate basis for an exemption, such Payee may be subject to a $50 penalty imposed by the Internal Revenue Service and backup withholding in an amount equal to 31% of the interest paid on the Exchange. If withholding results in an overpayment of taxes, a refund may be obtained. To prevent backup withholding, each Payee must provide his correct TIN by completing the "Substitute Form W-9" set forth herein, certifying that the TIN provided is correct (or that such Payee is awaiting a TIN) and that (i) the Payee is exempt from backup withholding, (ii) the Payee has not been notified by the Internal Revenue Service that he is subject to backup withholding as a result of a failure to report all interest or dividends, or (iii) the Internal Revenue Service has notified the Payee that he is no longer subject to backup withholding. If the Payee does not have a TIN, such Payee should consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for instructions on applying for a TIN, write "Applied For" in the space for the TIN in Part 1 of the Substitute Form W-9, and sign and date the Substitute Form W-9 and the Certificate of Awaiting Taxpayer Identification Number set forth herein. Note: Writing "Applied For" on the form means that the Payee has already applied for a TIN or that such Payee intends to apply for one in the near future. If the Units are held in more than one name or are not in the name of the actual owner, consult the W-9 Guidelines for information on which TIN to report. Exempt Payees (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. To prevent possible erroneous backup withholding, an exempt Payee should write "Exempt" in Part 2 of Substitute Form W-9. See the W-9 Guidelines for additional instructions. In order for a nonresident alien or foreign entity to qualify as exempt, such person must submit a completed Form W-8, "Certificate of Foreign Status." Such form may be obtained from the Payor. 10. MUTILATED, LOST, STOLEN OR DESTROYED SECURITIES. Any Holder whose certificates representing Units have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at one of the addresses indicated above for further instructions. 11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance may be directed to the Company at (972) 788-0510. Additional copies of the Prospectus, this Notice of Exchange and the Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 may be obtained from the Exchange Agent. 8 9 TO BE COMPLETED BY ALL PAYEES (SEE INSTRUCTION 9) - ----------------------------------------------------------------------------------------------------------------------- PAYOR'S NAME: - ----------------------------------------------------------------------------------------------------------------------- Name SUBSTITUTE FORM W-9 Address (Number and Street) DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE (City)(State)(Zip Code) PAYOR'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN) AND CERTIFICATION ------------------------------------------------------------------------------------ PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT RIGHT AND CERTIFY BY TIN SIGNING AND DATING BELOW (Social Security Number or Employer Identification Number ------------------------------------------------------------------------------------
PART 2 -- FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING PLEASE WRITE "EXEMPT" HERE (SEE INSTRUCTIONS) ------------------------------------------------------------------------------------
PART 3 -- CERTIFICATION UNDER PENALTIES OF PERJURY, I CERTIFY THAT (1) The number shown on this form is my correct TIN (or I am waiting for a number to be issued to me), and (2) I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends or (c) the IRS has notified me that I am no longer subject to backup withholding. SIGNATURE DATE ________________________ - -------------------------------------------------------------------------------- You must cross out Part 2 above if you have been notified by the IRS that you are currently subject to backup withholding because of underreporting interest or dividends on your tax return. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU WROTE "APPLIED FOR" IN PART 1 OF THE SUBSTITUTE FORM W-9 CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and that I have mailed or delivered an application to receive a taxpayer identification number of the appropriate Internal Revenue Service Center or Social Security Administration Office (or I intend to mail or deliver an application in the near future). I understand that if I do not provide a taxpayer identification number to the Payor, the Payor is required to withhold 31 percent of all cash payments made to me until I provide a number. SIGNATURE DATE ________________________ NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31 PERCENT OF ANY CASH PAYMENTS. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. 9 10 TO THE EXCHANGE AGENT: BOSTON EQUISERVE L.P. By Mail: By Overnight Mail or Courier: By Hand: Boston Equiserve L.P. Boston Equiserve L.P. Boston Equiserve L.P. Attention: --------------- Attention: --------------- Attention: --------------- [Address] [Address] [Address] [City, State, Zip] [City, State, Zip] [City, State, Zip] Facsimile Transmission Number: Confirm by Telephone: Information: ( ) - ( ) - ( ) - ( ) -
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