-----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, Wm/QfQAmFVnUCLE15vcTYa8hyKpV9rziL0ieGhgSl8WAP4kNkhymF5el0cm2DFct 5Z6mPBiOfk0jC3ecnGShvg== 0000916641-98-001132.txt : 19981026 0000916641-98-001132.hdr.sgml : 19981026 ACCESSION NUMBER: 0000916641-98-001132 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980911 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19981023 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED DOMINION REALTY TRUST INC CENTRAL INDEX KEY: 0000074208 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 540857512 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-10524 FILM NUMBER: 98729919 BUSINESS ADDRESS: STREET 1: 10 S 6TH ST STE 203 CITY: RICHMOND STATE: VA ZIP: 23219-3802 BUSINESS PHONE: 8047802691 MAIL ADDRESS: STREET 1: 10 SOUTH SIXTH STREET STREET 2: SUITE 203 CITY: RICHMOND STATE: VA ZIP: 23219-3802 FORMER COMPANY: FORMER CONFORMED NAME: OLD DOMINION REAL ESTATE INVESTMENT TRUST DATE OF NAME CHANGE: 19850110 FORMER COMPANY: FORMER CONFORMED NAME: OLD DOMINION REIT ONE DATE OF NAME CHANGE: 19770921 FORMER COMPANY: FORMER CONFORMED NAME: OLD DOMINION REAL ESTATE INVESTMENT TRUS DATE OF NAME CHANGE: 19741216 8-K 1 UNITED DOMINION REALTY TRUST, INC. 8-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported): September 11, 1998 ------------------ UNITED DOMINION REALTY TRUST, INC ------------------------------------------------------ (Exact name of registrant as specified in its charter) Virginia 1-10524 54-0857512 - ------------------------------- ------------------------ ------------------- (State or other jurisdiction of (Commission File Number) (I.R.S. Employer incorporation of organization) Identification No.)
10 South Sixth Street, Virginia 23219-3802 ---------------------------------------------------- (Address of principal executive offices - zip code) (804) 780-2691 -------------------------------------------------- Registrant's telephone number, including area code Item 2. Acquisition or Disposition of Assets On September 11, 1998, United Dominion Realty Trust, Inc. (United Dominion), entered into an Agreement and Plan of Merger (Merger Agreement) between United Dominion and American Apartment Communities II, Inc. (AAC). Pursuant to the Merger Agreement, each share of AAC common and preferred stock is entitled to receive 7.812742 shares of United Dominion Series D Convertible Preferred Stock (Preferred Stock) and $46.1824 in cash. In exchange for the Preferred Stock and cash, United Dominion will acquire AAC's 79.1% interest in AAC II, LP. In addition, United Dominion entered into a Partnership Interest Purchase and Exchange Agreement (Partnership Exchange Agreement) between United Dominion, United Dominion Realty, L.P. (United Dominion's Operating Partnership) and American Apartment Communities Operating Partnership, L.P., AAC Management LLC and Schnitzer Investment Corporation (the Limited Partners). The Limited Partners own a combined 20.9% interest in AAC II, LP. In exchange for the Limited Partners 20.9% interest in AAC II, LP, United Dominion will issue 5,614,035 Operating Partnership Units (OP Units) and cash. The transaction has been structured as a tax-free merger (Merger) and exchange of OP Units and will be treated as a purchase for accounting purposes. In accordance with the Merger Agreement, the purchase price consists of the following: (i) 8,000,000 shares of 7.5% Series D Convertible Preferred Stock ($25 liquidation preference value) which is convertible into United Dominion common stock at $16.25 per share with a fair market value of $175 million, (ii) the issuance of 5,614,035 OP Units with an aggregate fair value of $67.4 million, (iii) the assumption of $466.2 million of secured notes payable at fair value, (iv) the assumption of other liabilities aggregating $24.7 million and (v) $56.5 million of cash. The aggregate purchase price of the Merger is estimated at approximately $806.0 million, including transaction costs and mortgage premiums. AAC owns 54 communities located in the West, Northwest, Midwest and Florida. The 54 communities contain 14,141 apartment homes with a weighted average year built of 1979. AAC's apartment communities are geographically distributed as follows: Number of Number of City/State Apartment Communities Apartment Homes - ---------- --------------------- --------------- San Francisco/San Jose, CA 4 980 Monterey Peninsula, CA 13 2,076 Sacramento, CA 2 914 Los Angeles, CA 2 926 Other CA 2 444 -- ------ Total California 23 5,340 Portland, OR 4 996 Seattle, WA 3 492 Denver, CO 2 876 -- ------ Pacific Northwest 9 2,364 Columbus, OH 4 1,344 Indianapolis, IN 3 875 Detroit, MI 4 744 Lansing, MI 4 1,227 Other Midwest 4 819 -- ------ Total Midwest 19 5,009 Tampa, FL 2 1,108 South Florida 1 320 -- ------ Total Florida 3 1,428 Total 54 14,141 == ====== 2 ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits Description Location ----------- -------- (a) Financial Statements of Businesses Acquired 4 through 37 (b) Pro Forma Financial Information 38 through 49 (c) Exhibits (23) Consent of Independent Public Accountants 52 through 53 3 AMERICAN APARTMENT COMMUNITIES II, L.P. (a Delaware limited partnership) AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1998 (UNAUDITED), AND DECEMBER 31, 1997 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of American Apartment Communities II, L.P.: We have audited the accompanying consolidated balance sheet of American Apartment Communities II, L.P. (a Delaware limited partnership) and Subsidiaries as of December 31, 1997, and the related consolidated statements of operations, partners' capital and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Apartment Communities II, L.P. and Subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Francisco, California, February 12, 1998 5 AMERICAN APARTMENT COMMUNITIES II, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1998 (UNAUDITED), AND DECEMBER 31, 1997
June 30, December 31, 1998 1997 ----------------- ------------------ (unaudited) ASSETS REAL ESTATE ASSETS, net of accumulated depreciation $ 651,848,085 $ 652,483,662 CASH 12,866,657 15,474,627 RESTRICTED CASH 12,292,000 13,215,914 INVESTMENT IN UNIVERSITY VILLAGE 2,294,239 2,204,154 DEFERRED FINANCING COSTS, net of accumulated amortization 2,477,781 2,722,836 DUE FROM AFFILIATES 241,849 965,473 OTHER ASSETS 1,655,757 2,351,599 ----------------- ------------------ Total assets $ 683,676,368 $ 689,418,265 ================= ================== LIABILITIES AND PARTNERS' CAPITAL MORTGAGE NOTES PAYABLE $ 464,741,372 $ 465,853,431 ACCOUNTS PAYABLE AND ACCRUED EXPENSES 7,777,362 8,600,859 ACCRUED INTEREST 2,754,888 2,744,782 DISTRIBUTIONS PAYABLE TO PARTNERS 4,415,752 4,724,112 TENANT SECURITY DEPOSITS 4,047,294 3,733,876 ----------------- ------------------ Total liabilities 483,736,668 485,657,060 MINORITY INTEREST 5,711,464 5,871,608 PARTNERS' CAPITAL 194,228,236 197,889,597 ----------------- ------------------ Total liabilities and partners' capital $ 683,676,368 $ 689,418,265 ================= ==================
The accompanying notes are an integral part of these consolidated statements. 6 AMERICAN APARTMENT COMMUNITIES II, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED), AND FOR THE YEAR ENDED DECEMBER 31, 1997
Six Months Ended Six Months Year Ended June 30, 1998 Ended December 31, June 30, 1997 1997 ------------------ ----------------- ----------------- (unaudited) (unaudited) REVENUES: Rental income $ 51,865,220 $ 40,387,308 $ 90,444,294 Lease income 1,091,736 988,224 1,943,771 Management fee income 367,611 160,060 333,534 Other income 2,472,091 1,526,592 4,690,922 ------------------ ----------------- ----------------- Total revenues 55,796,658 43,062,184 97,412,521 ------------------ ----------------- ----------------- OPERATING EXPENSES: Property and maintenance 16,389,911 12,320,045 28,649,761 Real estate taxes 4,158,251 3,072,692 7,418,230 Management expenses 1,525,754 1,134,206 2,786,038 ------------------ ----------------- ----------------- Total operating expenses 22,073,916 16,526,943 38,854,029 ------------------ ----------------- ----------------- Income before other expenses 33,722,742 26,535,241 58,558,492 ------------------ ----------------- ----------------- OTHER EXPENSES: Depreciation 8,575,170 6,545,832 14,617,582 Amortization 495,533 206,261 745,064 General and administrative expenses 1,666,265 1,700,441 3,936,660 Interest expense 17,318,116 12,857,320 29,547,365 ------------------ ----------------- ----------------- Total other expenses 28,055,084 21,309,854 48,846,671 ------------------ ----------------- ----------------- Net income before minority interest 5,667,658 5,225,387 9,711,821 MINORITY INTEREST IN LOSS OF CONSOLIDATED SUBSIDIARIES 9,649 39,773 16,091 ------------------ ----------------- ----------------- Net income $ 5,677,307 $ 5,265,160 $ 9,727,912 ================== ================= =================
The accompanying notes are an integral part of these consolidated statements. 7 AMERICAN APARTMENT COMMUNITIES II, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED), AND FOR THE YEAR ENDED DECEMBER 31, 1997
American Schnitzer Apartment Fox Point, Investment Communities II, AACOP LLC Corp. Inc. Total ---------------------------------------------------------------------- PARTNERS' CAPITAL AT DECEMBER 31, 1996 $39,189,755 $ -- $2,434,936 $117,932,493 $159,557,184 Contributions -- -- 1,538,000 25,000,000 26,538,000 Transaction fees and costs (93,493) -- (10,509) (394,068) (498,070) Distributions (3,202,920) -- (327,702) (12,975,091) (16,505,713) Preferred equity advances by partners -- 2,255,140 1,921,040 15,823,820 20,000,000 Distributions on preferred equity advances -- (101,309) (89,680) (738,727) (929,716) Net income 1,888,292 -- 193,019 7,646,601 9,727,912 ---------------------------------------------------------------------- PARTNERS' CAPITAL AT DECEMBER 31, 1997 37,781,634 2,153,831 5,659,104 152,295,028 197,889,597 Distributions (1,601,460) -- (180,000) (6,750,045) (8,531,505) Distributions on preferred equity advances -- (90,769) (79,483) (636,911) (807,163) Net income 1,065,695 -- 119,781 4,491,831 5,677,307 ---------------------------------------------------------------------- PARTNERS' CAPITAL AT JUNE 30, 1998 (UNAUDITED) $37,245,869 $2,063,062 $5,519,402 $149,399,903 $194,228,236 ======================================================================
The accompanying notes are an integral part of these consolidated statements. 8 AMERICAN APARTMENT COMMUNITIES II, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED), AND FOR THE YEAR ENDED DECEMBER 31, 1997
Six Months Six Months Year Ended Ended June 30, Ended June 30, December 31, 1998 1997 1997 ------------------------------------------------- (unaudited) (unaudited) OPERATIONS: Net income $ 5,677,307 $ 5,265,160 $ 9,727,912 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,070,703 6,830,627 15,362,646 Gain on sale of real estate assets -- (523,818) Investment income--University Village (90,085) (80,819) (146,680) Minority interest in loss of consolidated subsidiaries (9,649) (39,773) (16,091) Changes in certain assets and liabilities: Other assets 695,842 1,020,981 561,000 Accounts payable and accrued expenses (823,497) (1,960,942) 2,944,533 Accrued interest 10,106 1,410,875 1,322,381 Payable to affiliates -- -- (997,525) Tenant security deposits 313,418 577,969 842,353 ------------------------------------------------- Net cash provided by operating activities 14,844,145 13,024,078 29,076,711 ------------------------------------------------- INVESTMENTS: Increase in restricted cash 923,914 55,248 (2,933,643) Additions to real estate assets (7,939,593) (4,463,950) (13,991,940) Acquisitions of real estate properties -- (74,681,284) (115,744,655) Proceeds from sales of assets -- -- 9,519,077 ------------------------------------------------- Net cash used in investing activities (7,015,679) (79,089,986) (123,151,161) ------------------------------------------------- FINANCING: Proceeds from borrowings on mortgage notes payable 2,267,443 58,675,484 85,888,750 Mortgage principal payments (3,379,503) (2,149,250) (4,159,777) Line of credit payments -- (12,680,000) (12,680,000) Increase in deferred financing fees (250,478) (1,597,493) (2,833,151) Increase in due from affiliates 723,624 (997,525) (965,473) Increase in distributions payable (308,359) -- 980,517 Distributions to partners (9,338,668) (7,401,320) (17,435,429) Contributions from partners, net of transaction fees and costs -- 26,139,930 26,039,930 Preferred equity advances from partners -- -- 20,000,000 Minority interest (150,495) 1,636,970 1,611,204 ------------------------------------------------- Net cash provided by (used in) financing activities (10,436,436) 61,626,796 96,446,571 ------------------------------------------------- NET INCREASE (DECREASE) IN CASH (2,607,970) (4,439,112) 2,372,121 CASH AT BEGINNING OF PERIOD 15,474,627 13,102,506 13,102,506 ------------------------------------------------- CASH AT END OF PERIOD $ 12,866,657 $ 8,663,394 $ 15,474,627 ================================================= CASH PAID FOR INTEREST $ 17,308,010 $ 11,466,445 $ 28,224,984 ================================================= DEBT ASSUMED ON PROPERTY ACQUISITIONS $ -- $ 11,016,681 $ 71,940,764 ================================================= PAYMENT OF DEBT THROUGH PROCEEDS FROM REFINANCING $ 6,232,557 $ 35,000,000 $ 48,750,000 =================================================
The accompanying notes are an integral part of these consolidated statements. 9 AMERICAN APARTMENT COMMUNITIES II, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED), AND DECEMBER 31, 1997 1. HISTORY OF PREDECESSOR ENTITIES: American Apartment Communities Operating Partnership, L.P., a Delaware limited partnership ("AACOP"), was formed on May 13, 1994, to acquire, own and operate apartment communities in select regions of the United States. During 1994, entities controlled by James D. Klingbeil (collectively, the "Klingbeil Organization") and Schnitzer Investment Corp. ("Schnitzer") entered into an agreement whereby the Klingbeil Organization and Schnitzer contributed certain apartment communities or partnership interests in 13 apartment communities in exchange for limited partnership interests in AACOP (the "1994 Contribution Transactions"). As part of the 1994 Contribution Transactions, Mr. Klingbeil became the chief executive officer and certain employees of the Klingbeil Organization became the management of AACOP. American Apartment Communities, Inc., which is owned by Mr. Klingbeil, is the sole general partner of AACOP. The Klingbeil Organization, Schnitzer and various individuals who exchanged their interests in single asset partnerships for limited partnership interests in AACOP (as part of the 1994 Contribution Transactions) are limited partners in AACOP. Concurrent with the Recapitalization Transaction (see Note 2 below), the Klingbeil Organization and various individuals exchanged their interests in the following single asset partnerships for limited partnership interests in AACOP: Winterland San Francisco Partners, which owns the 2000 Post apartment community ("2000 Post"); Northbay Properties II, L.P., which owns the Highlands of Marin apartment community ("Highlands"); and Sunset Company, which owns the Sunset Village apartment community ("Sunset Village"). The aforementioned transactions are hereinafter referred to as the 1995 Contribution Transactions. After the 1995 Contribution Transactions, AACOP owned 29 apartment communities containing a total of 7,635 apartments, of which 12 were contributed by the Klingbeil Organization, 4 were contributed by Schnitzer, and 13 were acquired by AACOP in 1994 from third parties. 2. ORGANIZATION AND CAPITALIZATION: Recapitalization Transaction American Apartment Communities II, L.P., a Delaware limited partnership (the "Partnership"), was formed on December 15, 1995, to effectuate a recapitalization of AACOP's business. AACOP transferred substantially all of its assets (including its officers and employees) and liabilities to the Partnership in exchange for an initial 29.5% limited partnership interest in the Partnership plus $6,084,169. LF Strategic Realty 10 Investors L.P. and certain of its affiliates (hereinafter collectively referred to as "LFSRI") contributed 85,001,000 to American Apartment Communities II, Inc. ("AAC II"), a real estate investment trust and the sole general partner of the Partnership, which simultaneously contributed such funds to the Partnership in exchange for an initial 70.5% general partnership interest in the Partnership. The aforementioned transactions are hereinafter referred to as the Recapitalization Transaction. The $85,001,000 contributed by LFSRI was received on March 15, 1996. These funds were used primarily to repay certain mortgage indebtedness and certain notes payable to affiliates, to cover transaction costs incurred in connection with the Recapitalization Transaction, and to provide working capital; in addition, $6,084,169 was distributed to AACOP primarily to fund a partial redemption of partnership interests in AACOP. Subsequent Contributions During 1996 and 1997, LFSRI contributed an additional $40,000,000 and $25,000,000, respectively, to AAC II, which simultaneously contributed such funds to the Partnership, which raised its total contributions to $150,001,000 and increased its ownership in the Partnership from 70.5% to 79.1%. In addition, in 1996 and 1997, Schnitzer contributed $2,462,000 and $1,538,000, respectively, to the Partnership in exchange for a 2.1% limited partnership interest in the Partnership (which is distinct from Schnitzer's 39.9% ownership in AACOP as a result of the 1994 Contribution Transactions). During 1997, certain partners of the Partnership and of AACOP (Klingbeil II, LLC) have made a preferred equity commitment of $30,000,000 ($20,000,000 was advanced at December 31, 1997) that will receive a 9% preferred distribution. These advances are redeemable within one year from the commitment upon certain terms and conditions, as defined in the Partnership agreement (the "Agreement"). Allocation of Net Income and Distributions The Agreement provides for several distribution tiers relating to both distributions of cash from operations and distributions of cash from a Liquidity Event, as defined in the Agreement. AAC Management LLC (an entity comprising certain officers and employees of the Partnership) may receive distributions from a Liquidity Event if certain internal rate of return hurdle amounts are achieved, as defined in the Agreement. At December 31, 1997, the Partnership had $4,724,112 of fourth quarter distributions declared but unpaid (these distributions were paid in January 1998). This amount is reflected in distributions payable to partners on the accompanying consolidated balance sheet. Net income has been allocated based on each partner's respective ownership interest in the Partnership. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation The accompanying consolidated financial statements include the accounts of the Partnership and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. Investments in which the Partnership does not have a controlling interest are accounted for using the equity method of accounting. 11 Pursuant to generally accepted accounting principles, the assets and liabilities of AACOP contributed to the Partnership in connection with the Recapitalization Transaction have been recorded at fair value. The fair value of AACOP's assets and liabilities was based upon the amount LFSRI paid for its ownership interest in the Partnership in connection with the Recapitalization Transaction. No amounts were ascribed to assets of AACOP that had no fair value. 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 assets and liabilities and disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Real Estate Assets and Depreciation Real estate assets, which primarily consist of apartment communities, are stated at historical cost or fair value at the contribution date. Repair and maintenance expenditures are expensed as incurred. Major replacements and betterments are capitalized. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets (principally 40 years for building and related improvements and 5 to 10 years for fixtures and equipment). Investment in University Village The investment in University Village, which is accounted for on the equity method, represents the Partnership's 20% limited partnership interest in the University Arms Limited Partnership. The University Arms Limited Partnership owns University Village, a 979-unit apartment community in Columbus, Ohio. Deferred Financing Costs Costs incurred in obtaining financing for the Partnership have been capitalized and are being amortized over the term of the related debt. Revenue Recognition The Partnership leases apartment units under operating leases with terms generally of one year or less. Credit investigations are performed for all prospective tenants, and security deposits are generally obtained. Rental income is recognized on an accrual basis as it is earned over the term of the lease. Tenant receivables are evaluated periodically for collectibility and are included in other assets. Fair Value of Financial Instruments The cost basis of the Partnership's mortgage notes payable approximates fair value based upon current market rates for loans of similar risks and maturities. 12 Income Taxes The taxable income or loss of the Partnership is reported in the tax returns of the partners. Accordingly, no provision for federal or state income taxes is reflected in the accompanying consolidated financial statements. The Partnership's tax returns are subject to examination by federal and state taxing authorities. Because many types of transactions are susceptible to varying interpretations under federal and state income tax laws and regulations, the amounts reported in the Partnership's tax returns may be subject to change at a later date upon final determination by the respective taxing authorities. The net income for financial reporting purposes differs from the net income for income tax reporting purposes primarily due to differences in depreciation lives and methods. Interim Financial Information The consolidated financial statements as of and for the six months ended June 30, 1998 and 1997 are unaudited. In management's opinion, these consolidated financial statements have been prepared on a basis substantially consistent with those for the year ended December 31, 1997, and include all necessary accruals and adjustments necessary for them to be in conformity with generally accepted accounting principles. 4. RESTRICTED CASH: As requested by certain lenders, including governmental agencies within the Federal Housing Administration, certain properties are required to maintain separate security deposit accounts, make monthly impound deposits to cover insurance premiums and property taxes, and maintain a reserve for replacements. The property tax, insurance and replacement reserves are held by the lenders, and expenditures are subject to the lenders' supervision and approval. Restricted cash consisted of the following: June 30, December 31, 1998 1997 ----------------- ---------------- (unaudited) Security deposits $ 4,329,287 $ 4,046,914 Replacement reserves 2,759,772 5,004,778 Property tax and insurance reserves 4,528,384 3,584,223 Loan collateral 674,557 579,999 ----------------- ---------------- $ 12,292,000 $ 13,215,914 ================= ================ 5. INVESTMENT IN CONSOLIDATED SUBSIDIARIES: The Monterey Portfolio Coastal Monterey Properties, LLC ("CMP"), a Delaware limited liability company, which is owned 72.7% by the Partnership and 27.3% by Monterey Property Associates, LLC ("MPA"), an unrelated entity, was formed 13 on October 25, 1996, to acquire and own real estate. On October 31, 1996, CMP acquired 16 apartment communities, consisting of 2,076 units, and various other real estate in Monterey County, California. In connection with this acquisition, the Partnership has provided financing to CMP in the form of mezzanine debt amounting to $11,547,700 at December 31, 1997 (this balance is exclusive of accrued interest of $376,915 at December 31, 1997). This debt bears interest at 17% and is due in October 2001. The mezzanine debt, which requires interest-only payments monthly, has a pay rate of 10%, and the remaining 7% is accrued and deferred until maturity. The mezzanine debt provided to CMP by the Partnership is eliminated in consolidation. The CMP operating agreement (the "CMP Agreement") provides for several tiers relating to distribution of CMP's cash flow. MPA may receive distributions from Liquidity Event proceeds in amounts greater than its 27.3% ownership interest if certain internal rate of return hurdle amounts are achieved, as defined in the CMP Agreement. In addition, the CMP Agreement provides for affiliates of MPA to manage the CMP real estate as long as certain operating performance tests are met. The affiliates of MPA are paid a monthly management fee of 3% of gross receipts and a monthly asset management fee of 1.5% of gross receipts. The Partnership is paid a monthly advisory fee of 1% of gross receipts, which is eliminated in consolidation. The Seattle Portfolio AAC/FSC Seattle Properties, LLC ("FSC"), which is owned 90% by the Partnership and 10% by FSC Realty, LLC ("Fimberg LLC"), an unrelated entity, was formed in June 1997 to acquire and own three Seattle apartment communities (the "Seattle Portfolio"), which consist of 492 units. In connection with these acquisitions, the Partnership has provided financing to FSC in the form of mezzanine debt amounting to $6,290,000 at December 31, 1997 (this balance is exclusive of accrued interest of $89,106 at December 31, 1997). This debt bears interest at 17% and is due in July 2002. The mezzanine debt, which requires interest-only payments monthly, has a pay rate of 10% (9% the first year), and the remaining 7% (8% the first year) is accrued and deferred until maturity. The mezzanine debt provided to FSC by the Partnership is eliminated in consolidation. The FSC operating agreement (the "FSC Agreement") provides for several tiers relating to distributions of the Seattle Portfolio cash flow. The Fimberg LLC may receive distributions from Liquidity Event proceeds in amounts greater than its 10% ownership interest if certain internal rate of return hurdle amounts are achieved as defined in the FSC Agreement. In addition, the FSC Agreement provides for affiliates of the Fimberg LLC to manage the Seattle Portfolio as long as certain operating performance tests are met. The affiliates of the Fimberg LLC are paid a monthly management fee of 3% of gross receipts and a monthly asset management fee of 1% of gross receipts. The Partnership receives a monthly advisory fee of 1% of gross receipts, which is eliminated in consolidation. Pine Avenue Condominiums Coastal Long Beach Properties, LLC, a Delaware limited liability company ("CLB"), which is owned 85% by the Partnership and 15% by affiliates of MPA, was formed in April 1997 to acquire and own the Pine Avenue Condominiums apartment community, which consists of 158 apartment units in Long Beach, California. The CLB operating agreement (the "CLB Agreement") provides for several tiers relating to distributions of Pine Avenue Condominiums' cash flow. The affiliates of MPA may receive distributions from Liquidity Event 14 proceeds in amounts greater than their 15% ownership interest if certain internal rate of return hurdle amounts are achieved as defined in the CLB Agreement. In addition, the CLB Agreement provides for affiliates of MPA to manage Pine Avenue Condominiums as long as certain operating performance tests are met. The affiliates of MPA are paid a monthly management fee of 4% of gross receipts and a monthly asset management fee of 1% of gross receipts. The Partnership receives a monthly advisory fee of 1% of gross receipts, which is eliminated in consolidation. The Grand Resort Coastal Anaheim Properties, LLC, a Delaware limited liability company ("CA"), which is owned 85% by the Partnership and 15% by affiliates of MPA, was formed in February 1997 to acquire and own The Grand Resort apartment community, which consists of 768 units in Anaheim, California. In connection with this acquisition, the Partnership has loaned $28,300,000 to CA, which bears interest at the 30-day LIBOR plus 1.75% (7.71% at December 31, 1997) and is due on December 31, 1998. The debt provided to CA by the Partnership was eliminated upon consolidation. The CA operating agreement (the "CA Agreement") provides for several tiers relating to distributions of The Grand Resort's cash flow. The affiliates of MPA may receive distributions from Liquidity Event proceeds in amounts greater than their 15% ownership interest if certain internal rate of return hurdle amounts are achieved as defined in the CA Agreement. In addition, the CA Agreement provides for affiliates of MPA to manage The Grand Resort as long as certain operating performance tests are met. The affiliates of MPA are paid a monthly management fee of 4% of gross receipts and a monthly asset management fee of 1% of gross receipts. The Partnership receives a monthly advisory fee of 1% of gross receipts, which is eliminated in consolidation. 6. REAL ESTATE ASSETS: As noted above, AACOP contributed 29 apartment communities consisting of 7,635 units to the Partnership in 1995. During 1996, the Partnership acquired 20 apartment communities consisting of 3,208 units. During 1997, the Partnership acquired 11 apartment communities consisting of 3,587 units and sold one apartment community consisting of 136 units. At June 30, 1998, and December 31, 1997, the Partnership owns 59 communities consisting of 14,294 units, which are primarily located in four regions: the California region, the Western region (which includes Oregon, Washington and Colorado and excludes California), the Midwest region (which includes Ohio, Michigan, Indiana and Kentucky) and the Florida region. 15 Real estate assets consisted of the following: June 30, December 31, 1998 1997 ----------------- ------------------ (unaudited) Land $ 84,623,757 $ 84,623,757 Buildings and improvements 599,782,282 591,854,552 ----------------- ------------------ 684,406,039 676,478,309 Accumulated depreciation (32,557,954) (23,994,647) ================= ================== $ 651,848,085 $ 652,483,662 ================= ================== Two of the apartment communities acquired in 1996 were acquired subject to unsubordinated ground leases. Both require a monthly base rental payment and an annual percentage rent payment based on formulas involving each apartment community's gross rental receipts. The future minimum lease payments for the two leases each year for the next five years are $1,011,774. One ground lease expires in 2043 and the other expires in 2019, with an extension option through the year 2044. During 1997, the Partnership sold an apartment community, a trailer park, a commercial building and four single-family residences. The Partnership received proceeds of $9,519,077 in connection with these sales, resulting in a net gain of $523,818, which is reflected in other income. Three of the apartment communities (the "Florida properties") acquired during 1997 were acquired whereby an unrelated entity involved in these acquisitions may receive distributions from Liquidity Event proceeds if certain internal rate of return hurdle amounts are achieved. This unrelated entity receives a monthly asset management fee of 1% of the Florida properties' gross receipts. 7. MORTGAGE NOTES PAYABLE: Loans Secured by Multiple Properties Teachers Insurance and Annuity Association College Retirement Equities Fund Mortgage Notes Payable--This loan is secured by mortgages on the following properties: American Heritage, Brandywine Creek, Cold Springs Manor, Foothills Tennis Village, Fountainhead, International Village, Jamestown of St. Matthews, Jamestown of Toledo, Kings Gate, Lakewood, Lancaster Commons, Lancaster Lakes, Nemoke Trail, Sugar Mill Creek and Tualatin Heights. The mortgage note payable bears interest at 7.9% and requires monthly payments of principal and interest, based on a 25-year amortization term. The loan is due on November 1, 2005. The mortgage 16 note payable has an outstanding balance of $111,015,818 at December 31, 1997. The loan requires the borrower to make monthly deposits into a property tax and insurance reserve and a replacement reserve. This loan can be prepaid in whole or in part by not more than 20% as it relates to a partial prepayment. For the first eight years of the loan, the prepayment penalty amount is the greater of yield maintenance or 2% of the loan amount. During the ninth year and the first half of the tenth year, the prepayment penalty amount is the greater of yield maintenance or 1% of the loan amount. Thereafter, the loan can be prepaid without penalty. Line of Credit--On December 31, 1997, the Partnership has outstanding $86,758,750 on a $100,000,000 acquisition and working capital line of credit ("line of credit"). The line of credit is secured by mortgages on the following properties: Mountain View, Silk Oak, Grandview Terrace, Ashton Pines, 2900 Place, Hickory Creek, The Grand Resort, Greensview, Double Tree--Phase I and Windward Point. The line of credit bears interest at the 30-day LIBOR rate plus 1.75% (7.71% at December 31, 1997) and requires monthly payments of interest only. The line of credit is due on December 31, 1998, but can be extended for one year by paying a .25% extension fee. Merrill Lynch Mortgage Note Payable--Coastal Monterey Properties--This loan is secured by a mortgage on the following properties: The Pointe at Harden Ranch, Boronda Manor, The Pointe at Northridge, Heather Plaza, Pine Grove, Laurel Tree, The Pointe at Westlake, The Capri and Harding Park Townhomes. The mortgage note payable, which has an outstanding balance of $44,387,263 at December 31, 1997, bears interest at 7.75% and requires monthly payments of principal and interest based on a 25-year amortization term. The loan is due in January 2004 and requires the borrower to make monthly deposits into a property tax and insurance reserve and a replacement reserve. This loan cannot be prepaid prior to December 2001. Thereafter, the loan can be prepaid without penalty. Merrill Lynch Mortgage Note Payable--Birch Creek and Marina Playa--This loan is secured by a mortgage on the improvements only of the following properties, as these properties were acquired subject to unsubordinated ground leases: Birch Creek and Marina Playa. The mortgage note payable, which has an outstanding balance of $20,940,017 at December 31, 1997, bears interest at 7.74% and requires monthly payments of principal and interest based on a 30-year amortization term. The loan is due in July 2007 and requires the borrower to make monthly deposits into a property tax and insurance reserve and a replacement reserve. For the first nine and a half years of this loan, the prepayment penalty amount is the greater of yield maintenance or 1% of the loan amount. For the last half year, the loan can be prepaid without penalty. American Savings Bank Mortgage Note Payable--This loan is secured by a mortgage on the following properties: Santanna, Glenridge, Garden Court, The Claremont, New San Pablo, Old San Pablo and Valli High. The mortgage note payable, which has an outstanding balance of $14,128,835 at December 31, 1997, bears interest at a rate equal to 1-year Treasury Bills plus 2.30% (7.92% at December 31, 1997) and requires monthly payments of principal and interest based on a 30-year amortization term. The loan is due in September 2027 and requires the borrower to make monthly deposits into a property tax and insurance reserve and a replacement reserve. 17 Alexandria Executive Club Mortgage Note Payable--The Partnership, which owns the Alexandria Executive Club, issued a series of notes payable with a variable interest rate (6.03% at December 31, 1997) based on one of seven different rate formulas (determined at periodic times by the issuer). The notes, with an aggregate outstanding balance of $8,105,000 at December 31, 1997, are due on June 1, 2001. Scheduled principal payments are due in defined installments. The notes payable are secured by an irrevocable letter of credit, and the reimbursement obligation for the irrevocable letter of credit is secured by a mortgage on the property. The irrevocable letter of credit, which has a cost of 1.25% of the outstanding loan balance per annum, expires in June 1999 and the reimbursement obligation for the letter of credit is also secured by a second deed of trust on the Ft. Craig Executive Club. The reimbursement obligation for the irrevocable letter of credit is cross-defaulted with the Ft. Craig Executive Club obligations. The Partnership has an agreement in principal to extend the letter of credit to June 2000 and reduce the combined principal amounts outstanding on the Alexandria Executive Club and Ft. Craig Executive Club notes payable by approximately $2.4 million. Until certain loan-to-value provisions have been met, the loan has the economics of a cash flow mortgage. Therefore, until the loan-to-value provisions have been obtained, all cash flow after debt service, operating expenses and a replacement reserve (which is a lender requirement based on 4% of Alexandria Executive Club's gross revenue) is paid to the note holders. Ft. Craig Executive Club Mortgage Note Payable--The Partnership, which owns the Ft. Craig Executive Club, issued a series of notes payable with a variable interest rate (6.03% at December 31, 1997) based on one of seven different rate formulas (determined at periodic times by the issuer). The notes, with an aggregate outstanding balance of $6,805,000 at December 31, 1997, are due in September 2005. Scheduled principal payments are due in defined installments. The notes payable are secured by an irrevocable letter of credit, and the reimbursement obligation for the irrevocable letter of credit is secured by a mortgage on the property. The irrevocable letter of credit, which has a cost of 1.25% of the outstanding loan balance per annum, expires in September 1998 and the reimbursement obligation for the letter of credit is also secured by a second deed of trust on the Alexandria Executive Club. The reimbursement obligation for the irrevocable letter of credit is cross-defaulted with the Alexandria Executive Club obligations. The Partnership has an agreement in principal to extend the letter of credit for one year and reduce the combined principal amounts outstanding on the Alexandria Executive Club and Ft. Craig Executive Club notes payable by approximately $2.4 million. Until certain loan-to-value provisions have been met, the loan has the economics of a cash flow mortgage. Therefore, until the loan-to-value provisions have been obtained, all cash flow after debt service, operating expenses and a replacement reserve (which is a lender requirement based on 4% of Ft. Craig Executive Club's gross revenue) is paid to the note holders. 18 Loans Secured by Single Properties Parker's Landing Mortgage Note Payable--The Parker's Landing mortgage note payable bears a fixed interest rate of 7.47%, requires monthly payments of principal and interest based on a 25-year amortization term, and is due in February 2004. The mortgage, which has an outstanding balance of $33,341,934 at December 31, 1997, requires the borrower to make monthly deposits into a property tax and insurance reserve and a replacement reserve. The prepayment penalty amount for this loan is the greater of yield maintenance or 1% of the loan amount. 2000 Post Mortgage Note Payable--2000 Post funded the construction of the apartment community through an agreement with the City and County of San Francisco ("CCSF"). CCSF issued $30,000,000 in variable rate multifamily housing revenue bonds in June 1985. Through a third-party trustee, the proceeds from the bond issuance were used to make a loan to 2000 Post for construction of the apartment community. The revenue bonds are secured by an irrevocable letter of credit, for which 2000 Post paid an annual fee; 2000 Post reached an agreement with the letter of credit provider to reduce the annual fee from 2.00% to 1.50% effective March 1, 1998. In connection with this agreement, 2000 Post has agreed to pay a termination fee of .50% of the outstanding bonds if the letter of credit is replaced prior to February 1999. The reimbursement obligation for the letter of credit is secured by 2000 Post's real property. The letter of credit matures in June 1999, and under the terms of the loan agreement, 2000 Post must obtain an extension or substitute letter of credit to remain in compliance. As required by the loan agreement with CCSF, in order to preserve the federal income tax-exempt status of the revenue bonds issued pursuant to Section 103 of the Internal Revenue Code, 2000 Post executed a regulatory agreement which provides, among other things, that substantially all of the proceeds are to be utilized to finance multifamily housing, of which 20% or more of the units are to be occupied by individuals with low to moderate income within the meaning of and for the period required by Section 103 of the Internal Revenue Code. In the event that the bonds do not maintain their tax-exempt status, whether by change in law or noncompliance with the rules and regulations related thereto, repayment of the loan may be accelerated. 2000 Post's loan bears interest based on a seven-day variable rate (3.35% at December 31, 1997). The loan, which has an outstanding balance of $27,250,000 at December 31, 1997, is to be repaid in amounts and at times necessary to enable the trustee, on behalf of CCSF, to pay when due all amounts payable with respect to the bonds whether at maturity, redemption, acceleration or otherwise. The currently scheduled payments of the loan follow the redemption plan of the bond issuance, which calls for annual redemption amounts in defined installments through June 1, 2005, and a final payment of $22,750,000 when the bonds mature on June 1, 2006. 19 Highlands of Marin Mortgage Note Payable--Highlands funded the construction of the apartment community through an agreement with the Housing Authority of the County of Marin ("HACM"). HACM issued $22,500,000 in variable rate multifamily housing revenue bonds in July 1989. Through a third-party trustee, the proceeds from the bond issuance were used to make a loan to Highlands for construction of the apartment community. The revenue bonds are secured by an irrevocable letter of credit (the "Primary Letter of Credit"), for which Highlands pays an annual fee of .875% of the Primary Letter of Credit amount. The Primary Letter of Credit matures on May 29, 2000, and under the terms of the loan agreement, Highlands must obtain an extension or substitute letter of credit to remain in compliance. The reimbursement obligation for the Primary Letter of Credit is secured by a first deed of trust on Highlands' real property. As required by the loan agreement with HACM, in order to preserve the federal income tax-exempt status of the revenue bonds issued pursuant to Section 103 of the Internal Revenue Code, Highlands executed two regulatory agreements (one for each phase of the community) which provide, among other things, that substantially all of the proceeds be utilized to finance multifamily housing, of which 20% or more of the units are to be leased or held available to lease only to very low income families within the meaning of, and for the period required by, Section 142 of the Internal Revenue Code. In the event that the bonds do not maintain their tax-exempt status, whether by change in law or noncompliance with the rules and regulations related thereto, repayment of the loan may be accelerated. Highlands' loan bears interest based on a seven-day variable rate (4.35% at December 31, 1997). The loan, which has an outstanding balance of $21,200,000 at December 31, 1997, is to be repaid in amounts and at times necessary to enable the trustee, on behalf of HACM, to pay when due all amounts payable with respect to the bonds whether at maturity, redemption, acceleration or otherwise. The bonds mature in April 2029. 20 To provide additional security to the provider of the Primary Letter of Credit, Highlands obtained a $874,000 letter of credit (the "Secondary Letter of Credit") from a different financial institution. The Secondary Letter of Credit matures in November 1998 and earns a fee equal to 1% of the Secondary Letter of Credit amount. Governor's Square Mortgage Note Payable--The Governor's Square property is financed through a mortgage insured by the Federal Housing Administration ("FHA"). This mortgage, which has an outstanding balance of $19,034,044 at December 31, 1997, is financed under Section 223(f) of the National Housing Act, and as a result, the partnership which owns Governor's Square must follow certain procedures that comply with federal regulations administered by the Department of Housing and Urban Development ("HUD"). The mortgage requires monthly payments of principal and interest and matures in October 2028. The mortgage also requires monthly deposits into a property tax and insurance reserve and a replacement reserve. The mortgage is secured by the property, the property tax and insurance reserve and the replacement reserve. The stated interest rate is fixed at 8%, and the loan is not allowed to be prepaid before October 1998. Beginning in November 1998, there will be a 5% prepayment penalty which will decrease by one percentage point each year thereafter. Cash distributions from Governor's Square can only be made from cash available after all necessary and reasonable expenses have been paid (as defined by HUD and referred to as surplus cash) or if funds have been set aside for such payment. Surplus cash is determined twice a year, as of June 30 and December 31, and can be made to partners up to the surplus cash amount any time after the latest determination. Woodlake Village Mortgage Note Payable--The Woodlake Village mortgage note payable bears a fixed interest rate of 8.015%, requires monthly payments of principal and interest, and is due in November 2003. The mortgage, which has an outstanding balance of $16,548,809 at December 31, 1997, also requires that the borrower make monthly deposits into a property tax and insurance reserve and a replacement reserve. The mortgage is secured by the property, the property tax and insurance reserve and the replacement reserve. For the first six and a half years of this loan, the prepayment penalty amount is the greater of yield maintenance or 1% of the loan amount. For the last half year, the loan can be prepaid with the prepayment penalty amount equaling 1% of the loan amount, except that during the last 90 days prior to maturity, the loan can be prepaid without penalty. Polo Chase Mortgage Note Payable--The Polo Chase mortgage note payable bears a fixed interest rate of 7.65%, requires monthly payments of principal and interest based on a 25-year amortization term, and is due in December 1999. The mortgage, which has an outstanding balance of $12,304,170 at December 31, 1997, requires the borrower to make monthly deposits into a property tax and insurance reserve and a replacement reserve. 21 University Park Mortgage Note Payable--The University Park property is financed with multifamily housing revenue bonds (the "Bonds"). The Bonds have a variable interest rate (3.80% at December 31, 1997), require monthly payments of interest only and mature on October 2011. The Bonds, which have an outstanding balance of $7,345,000 at December 31, 1997, are secured by the property and an irrevocable letter of credit. The reimbursement obligation for the letter of credit is secured by a second deed of trust on University Park's real property. University Park pays an annual fee of 1.75% on the irrevocable letter of credit, which expires in October 1999, and under the terms of the loan agreement, University Park must obtain an extension or substitute letter of credit to remain in compliance. Regency Park South Mortgage Note Payable--The Regency Park South property was financed by a mortgage insured by the FHA. This mortgage is financed under Section 223(f) of the National Housing Act, and as a result, the partnership which owned Regency Park South was required to follow certain federal regulations administered by HUD. The mortgage required monthly payments of principal and interest and matured in January 2028. The mortgage also required monthly deposits into a property tax and insurance reserve and a replacement reserve. The mortgage was secured by the property, the property tax and insurance reserve and the replacement reserve. The stated interest rate was fixed at 8.5%. Subsequent to December 31, 1997, the Partnership repaid the $6,243,898 outstanding principal of this loan with proceeds received from the line of credit provider. Pine Avenue Condominiums Mortgage Note Payable--The Pine Avenue Condominiums mortgage note payable bears interest at 11th District Cost of Funds plus 2.5% (7.45% at December 31, 1997), requires monthly payments of principal and interest based on a 30-year amortization term, and is due in July 2003. The mortgage has an outstanding balance of $6,206,137 at December 31, 1997. Clocktower Mortgage Note Payable--The Clocktower mortgage note payable bears a fixed interest rate of 7.67%, requires monthly payments of principal and interest based on a 30-year amortization term, and is due in August 2004. The mortgage, which has an outstanding balance of $5,350,494 at December 31, 1997, requires the borrower to make monthly deposits into a property tax and insurance reserve and a replacement reserve. For the first six and a half years of this loan, the prepayment penalty amount is the greater of yield maintenance or 1% of the loan amount. For the last half year, the loan can be prepaid with the prepayment penalty amount equaling 1% of the loan amount, except that during the last 90 days prior to maturity, the loan can be prepaid without penalty. Crown Pointe Mortgage Note Payable--The Crown Pointe mortgage note payable bears a fixed interest rate of 7.35%, requires monthly payments of principal and interest based on a 30-year amortization term, and is due in January 2003. The mortgage, which has an outstanding balance of $5,000,703 at December 31, 1997, requires the borrower to make monthly deposits into a property tax and insurance reserve and a replacement reserve. For the first five years of this loan, the prepayment penalty amount is the greater of yield maintenance or 1% of the loan amount. For the last two years, the loan can be prepaid with the prepayment penalty amount equaling 1% of the loan amount, except that during the last 90 days prior to maturity, the loan can be prepaid without penalty. 22 Double Tree--Phase II Mortgage Note Payable--Double Tree--Phase II is financed through a mortgage insured by the FHA. This mortgage, which has an outstanding balance of $4,730,504 at December 31, 1997, is financed under Section 223(f) of the National Housing Act, and as a result, the partnership that owns Double Tree--Phase II must follow certain procedures that comply with federal regulations administered by HUD. The mortgage requires monthly payments of principal and interest and matures in June 2034. The mortgage also requires monthly deposits into a property tax and insurance reserve and a replacement reserve. The mortgage is secured by the property, the property tax and insurance reserve and the replacement reserve. The stated interest rate is fixed at 8.25%. The loan cannot be prepaid prior to March 2004. Thereafter, the loan can be prepaid without penalty. Cash distributions from Double Tree--Phase II can only be made from cash available after all necessary and reasonable expenses have been paid (as defined by HUD and referred to as "surplus cash") or if funds have been set aside for such payment. Surplus cash is determined twice a year, as of June 30 and December 31, and can be made to partners up to the surplus cash amount any time after the latest determination. Hilltop Mortgage Note Payable--The Hilltop mortgage note payable bears a fixed interest rate of 7.42%, requires monthly payments of principal and interest based on a 30-year amortization term, and is due in January 2006. The mortgage, which has an outstanding balance of $4,591,077 at December 31, 1997, requires the borrower to make monthly deposits into a property tax and insurance reserve and a replacement reserve. For the first nine and a half years of this loan, the prepayment penalty amount is the greater of yield maintenance or 1% of the loan amount. For the last half year, the loan can be prepaid with the prepayment penalty amount equaling 1% of the loan amount, except that during the last 90 days prior to maturity, the loan can be prepaid without penalty. Sunset Village Mortgage Note Payable--Sunset Village is financed through a mortgage insured by the FHA. This mortgage, which has an outstanding balance of $2,884,228 at December 31, 1997, is financed under Section 223(f) of the National Housing Act, and as a result, the partnership which owns Sunset Village must follow certain procedures that comply with federal regulations administered by HUD. The mortgage requires monthly payments of principal and interest and matures in October 2023. The mortgage also requires monthly deposits into a property tax and insurance reserve and a replacement reserve. The mortgage is secured by the property, the property tax and insurance reserve and the replacement reserve. The stated interest rate is fixed at 7.62%, and there is a prepayment penalty of 1% until November 1, 1998. After November 1, 1998, no prepayment penalty will be assessed. Cash distributions from Sunset Village can only be made from cash available after all necessary and reasonable expenses have been paid (as defined by HUD and referred to as surplus cash) or if funds have been set aside for such payment. Surplus cash is determined twice a year, as of June 30 and December 31, and can be made to partners up to the surplus cash amount any time after the latest determination. 23 Tivoli Mortgage Note Payable--The Tivoli property is financed through a mortgage insured by the FHA. This mortgage, which has an outstanding balance of $1,681,750 at December 31, 1997, is financed under Section 223(f) of the National Housing Act, and as a result, the partnership which owns Tivoli must follow certain procedures that comply with federal regulations administered by HUD. The mortgage requires monthly payments of principal and interest and matures in October 2028. The mortgage also requires monthly deposits into a property tax and insurance reserve and a replacement reserve. The mortgage is secured by the property, the property tax and insurance reserve and the replacement reserve. The stated interest rate is fixed at 9%. Cash distributions from Tivoli can only be made from cash available after all necessary and reasonable expenses have been paid (as defined by HUD and referred to as surplus cash) or if funds have been set aside for such payment. Surplus cash is determined twice a year, as of June 30 and December 31, and can be made to partners up to the surplus cash amount any time after the latest determination. For the purpose of lowering its overall interest costs, the partnership that owns Tivoli converted the fixed rate on its HUD mortgage (9%) to a lower variable rate by obtaining a loan in an amount equal to the HUD mortgage and using the proceeds to purchase the mortgage from the originator as a Government National Mortgage Association ("GNMA") mortgage-backed security. The bank loan was secured by the GNMA mortgage-backed security. The bank loan's interest rate floated at the federal funds rate plus 1.5% (7.34% at December 31, 1997), and principal payments were applied to the loan in an amount equal to the amortization of the mortgage payable. The difference between the HUD mortgage payment and the bank loan payment, less an administrative fee, was divided equally, with half disbursed to the partnership and half credited to a restricted cash account. This account was maintained by the bank as additional security and was funded until such balance plus the market value of the GNMA mortgage-backed security equaled 103% of the outstanding loan balance, at which time the entire payment differential was disbursed to the partnership as received. Principal Amortization of Mortgage Notes Payable The principal amortization of the mortgage notes payable as of December 31, 1997, is as follows: 1998 $ 91,836,917 1999 17,488,718 2000 5,764,612 2001 13,357,572 2002 6,467,256 Thereafter 330,938,356 ================= $ 465,853,431 ================= 24 8. LITIGATION: The Partnership and its subsidiaries are defendants in various legal actions arising out of the ordinary course of business. It is management's belief that the outcome of these proceedings will not have a material impact upon the Partnership and its subsidiaries' consolidated financial position or results of operations. 9. RISK OF UNINSURED LOSSES: The Partnership carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with policy specifications, limits and deductibles customarily carried for similar properties. There are, however, certain types of extraordinary losses that may be either uninsurable or not economically insurable. Should an uninsured loss occur, the Partnership could lose its investment in, and anticipated profits and cash flows from, the damaged properties. 10. LEASE INCOME: In connection with the 1994 Contribution Transactions, Alexandria Executive Club and Ft. Craig Executive Club (the "Executive Clubs") were leased in their entirety by the respective partnerships that own them to a company owned by an individual who is a limited partner in AACOP and who became an officer of the Partnership subsequent to December 31, 1996. The lease states that the lessee pays the lessor base rent or percentage rent, whichever is larger. The lessee is responsible for all of the operating expenses of the Executive Clubs except for property taxes and real and personal property casualty insurance, which are the responsibility of the respective partnerships that own them. The Executive Clubs' leases, which expire in October 1999, call for minimum future base rental payments as follows: 1998 $ 1,935,048 1999 1,612,540 -------------- $ 3,547,588 ============== 11. RELATED-PARTY TRANSACTIONS: LFSRI received fees in connection with its additional capital contribution in 1997, as well as the preferred equity advances, as described in Note 2. These amounts have been charged to the capital accounts of the partners in accordance with their partnership interests. LFSRI had also guaranteed certain letters of credit during a portion of 1997, for which the Partnership paid LFSRI a fee for the use of its credit. These fees are reflected in interest expense in the accompanying consolidated statement of operations. In connection with these transactions, LFSRI has earned fees and interest of approximately $643,000 during the year ended December 31, 1997. 25 The Partnership and American Apartment Communities III, L.P. ("AAC III") have entered into an agreement whereby the Partnership will manage certain of AAC III's apartment communities in return for a 4% property and asset management fee. In connection with this agreement, AAC III will reimburse the Partnership for certain general and administrative costs, including salary and related costs, incurred by the Partnership on behalf of AAC III. The agreement also calls for the Partnership to receive acquisition fees in the amount of 0.5% of the purchase price of properties acquired by AAC III or $50,000, whichever is larger. In addition, the Partnership has funded certain acquisition deposits of AAC III. In connection with the aforementioned items, the Partnership has receivables from AAC III of $235,784 (unaudited) and $946,441 as of June 30, 1998, and December 31, 1997, respectively, which are reflected in due from affiliates on the accompanying consolidated balance sheets. 12. SUBSEQUENT EVENTS (UNAUDITED): On September 11, 1998, AAC II and the Partnership entered into an Agreement and Plan of Merger with United Dominion Realty Trust, Inc. ("United Dominion"). In addition to United Dominion assuming the Partnership's obligations, the partners of the Partnership will receive a combination of cash, convertible preferred stock, and operating partnership units. The transaction has been structured as a tax-free merger. 26 American Apartment Communities II, Inc. Financial Statements As of June 30, 1998 (Unaudited) and December 31, 1997 Together with Auditors' Report REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of American Apartment Communities II, Inc.: We have audited the accompanying balance sheet of American Apartment Communities II, Inc. (the "Company"), a Maryland corporation, as of December 31, 1997, and the related statements of operations, changes in shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP New York, New York February 27, 1998 28 American Apartment Communities II, Inc. Balance Sheets June 30, 1998 (Unaudited) and December 31, 1997
June 30, 1998 December 31, 1997 -------------- ----------------- (Unaudited) Assets: Investment in American Apartment Communities II, L.P. $169,199,842 $ 169,237,855 Cash and cash equivalents - 189,161 Advance to LF Strategic Realty Investors L.P. 10,509,933 3,693,049 Receivable from affiliate - 2,556,357 ------------ ------------- Total assets $179,709,775 $ 175,676,422 ============ ============= Liabilities and Shareholders' Equity: Loans payable $ 19,550,000 $ 22,150,000 Accounts payable and accrued expenses 62,920 63,537 ------------ ------------ Total liabilities 19,612,920 22,213,537 ------------ ------------ Shareholders' Equity: Class A cumulative redeemable preferred stock, 170,000 shares issued and outstanding, stated 85,000,000 85,000,000 liquidation value - $500 Common stock, $.01 par value, authorized 10,100,000 shares; shares issued and outstanding - 852,968 8,530 8,530 Additional paid-in capital 67,311,521 67,311,521 Retained earnings 7,776,804 1,142,834 ------------ ------------ Total shareholders' equity 160,096,855 153,462,885 ------------ ------------ Total liabilities and shareholders' equity $179,709,775 $ 175,676,422 ============ ============= The accompanying notes to financial statements are an integral part of these balance sheets.
29 American Apartment Communities II, Inc. Statements of Operations For the Six Months Ended June 30, 1998 (Unaudited) and For the Year Ended December 31, 1997
Six Months Ended Year Ended June 30, 1998 December 31, 1997 ----------------- ----------------- (Unaudited) Revenues: Earnings from investments in real estate: American Apartment Communities II, L.P. $ 7,473,237 $ 13,444,061 Commonwealth Atlantic Properties, Inc. - 915,696 Other income 8,199 263,591 ----------- ------------ Total revenues 7,481,436 14,623,348 ----------- ------------ Expenses: Interest expense 654,793 3,053,932 Professional fees 190,368 165,027 Other expenses 2,305 77,232 ----------- ------------ Total expenses 847,466 3,296,191 ----------- ------------ Net income $ 6,633,970 $ 11,327,157 =========== ============ The accompanying notes to financial statements are an integral part of these statements.
30 American Apartment Communities II, Inc. Statements of Cash Flows For the Six Months Ended June 30, 1998 (Unaudited) and For the Year Ended December 31, 1997
Six Months Ended Year Ended June 30, 1998 December 31, 1997 ---------------- ----------------- (Unaudited) Cash Flows from Operating Activities: Net income $ 6,633,970 $ 11,327,157 Adjustments to reconcile net income to net cash provided by operating activities: Earnings from investments in real estate (7,473,237) (14,359,757) Distributions of earnings received from investments in real estate 7,511,250 12,573,340 Decrease in accounts payable and accrued expenses (617) (68,989) ----------- ------------ Net cash provided by operating activities 6,671,366 9,471,751 ----------- ------------ Cash Flows from Investing Activities: Proceeds from sale of investment in Commonwealth Atlantic Properties, Inc. 2,556,357 38,750,000 Investment in American Apartment Communities II, L.P. - (40,823,819) Increase in advance to LF Strategic Realty Investors L.P. (6,816,884) (1,391,462) ----------- ------------ Net cash used in investing activities (4,260,527) (3,465,281) ----------- ------------ Cash Flows from Financing Activities: Proceeds from issuance of common stock - 37,698,413 Dividends paid - (12,344,988) Repayment of loans payable (2,600,000) (59,850,000) ----------- ------------ Net cash used in financing activities (2,600,000) (34,496,575) ----------- ------------ Net decrease in cash and cash equivalents (189,161) (28,490,105) Cash and Cash Equivalents, beginning of period 189,161 28,679,266 ------------ ------------- Cash and Cash Equivalents, end of period $ - $ 189,161 ============ ============= The accompanying notes to financial statements are an integral part of these statements.
31 American Apartment Communities II, Inc. Statements of Changes in Shareholders' Equity For the Six Months Ended June 30, 1998 (Unaudited) and For the Year Ended December 31, 1997
Additional Common Preferred Paid-in Retained Stock Stock Capital Earnings Total ------ --------- ---------- -------- ----- Balance at December 31, 1996 $ 1,000 $ 85,000,000 $ 27,818,002 $ 2,160,665 $ 114,979,667 Issuance of 752,968 shares of common stock 7,530 - 37,690,883 - 37,698,413 Deemed capital contribution (Note 4) - - 1,802,636 - 1,802,636 Dividends - - - (12,344,988) (12,344,988) Net income - - - 11,327,157 11,327,157 ------- ------------ ------------ ----------- ------------- Balance at December 31, 1997 8,530 85,000,000 67,311,521 1,142,834 153,462,885 Net income (Unaudited) - - - 6,633,970 6,633,970 ------- ------------ ------------ ----------- ------------- Balance at June 30, 1998 $ 8,530 $ 85,000,000 $ 67,311,521 $ 7,776,804 $ 160,096,855 (Unaudited) ======= ============ ============ =========== ============= The accompanying notes to financial statements are an integral part of these statements.
32 American Apartment Communities II, Inc. Notes to Financial Statements June 30, 1998 (Unaudited) and December 31, 1997 1. Formation and Purpose of the Company: Purpose American Apartment Communities II, Inc. (the "Company" or "AAC II Inc.") was incorporated on December 28, 1995 as a Maryland corporation that operates as a real estate investment trust ("REIT"). AAC II Inc. was formed for the purpose of investing in American Apartment Communities II, L.P. ("AACOP"), a Delaware limited partnership that invests in multifamily residential apartment communities throughout the United States. Capitalization AAC II Inc. was initially capitalized on March 15, 1996, when LF Strategic Realty Investors L.P. ("LFSRI") purchased 169,900 shares of preferred stock and 99,900 shares of common stock for $85 million. Also during 1996, LFSRI contributed additional paid-in capital of $27.8 million to the Company. On January 31, 1997, LFSRI purchased an additional 252,968 shares of common stock of AAC II Inc. for $12.7 million, and on March 25, 1997, LFSRI purchased another 500,000 shares of common stock for $25 million. To facilitate AAC II Inc.'s qualification as a REIT, 100 shares of preferred stock and 100 shares of common stock were granted to 100 individuals who are affiliates of LFSRI and AACOP management. The preferred stock is redeemable at any time, in whole or in part, at the option of the Company. The preferred shareholders are entitled to a 9% cumulative preference return on their basis, which at December 31, 1997 was approximately $664 per share. During 1997, AAC II Inc. declared and paid preferred dividends of approximately $12.1 million. During 1997, AAC II Inc. declared and paid common dividends of $284,000. 2. Summary of Significant Accounting Policies: Basis of Presentation The accompanying financial statements are prepared using the accrual basis of accounting under generally accepted accounting principles. The Company recognizes revenues as earned and expenses as incurred. 33 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 assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investments in Real Estate The Company accounts for investments in and earnings from real estate operating entities under the equity method. Under the equity method, the Company increases its cost basis in each investment for equity contributions made and its proportionate share of the entities' operating profits, and decreases its cost basis in each investment for any distributions received and its proportionate share of the entities' operating losses. Cash and Cash Equivalents For financial reporting purposes, the Company considers all highly liquid short-term investments purchased with a maturity of 90 days or less to be cash equivalents. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS 107"), requires the Company to disclose fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price, if one exists. Quoted market prices are not available for the Company's financial instruments. As a result, the fair values presented are estimates derived using present value or other valuation techniques and may not be indicative of net realizable value. In addition, the calculation of estimated fair value is based on market conditions at a specific point in time and may not be reflective of future fair values. Income Taxes The Company has elected to be taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended. Accordingly, no provisions have been made for federal income taxes in the accompanying financial statements. (Unaudited) The financial statements as of and for the six months ended June 30, 1998 are unaudited. In management's opinion, these financial statements have been prepared on a basis substantially consistent with those for the year ended December 31, 1997, and include all necessary accruals and adjustments necessary for them to be in conformity with generally accepted accounting principles. 34 3. Investment in American Apartment Communities II, L.P.: As of December 31, 1997, the Company maintains an approximate 79.1% interest in AACOP. At the time of the initial investment by AAC II Inc., AACOP owned interests in 29 apartment communities containing over 7,600 apartments. During 1996 and 1997, AACOP increased its real estate holdings to 59 apartment communities totaling over 14,200 units. Contributions to AACOP The Company utilized the proceeds of LFSRI's initial and subsequent capital contributions to invest $150 million in AACOP. AAC II Inc.'s investment in AACOP was fully funded in March 1997. During 1997, AAC II Inc. and its partners in AACOP agreed to contribute up to an additional $30 million of funds to AACOP in the form of preferred equity. The preferred equity yields a 9% cumulative preferred return, which is superior in priority to all other forms of invested capital. As of December 31, 1997, $20 million of preferred equity was invested in AACOP, $15.8 million of which was funded by AAC II Inc. Allocation of Income/Distributions AAC II Inc. is the sole general partner of AACOP and pursuant to AACOP's partnership agreement is entitled to seniority in liquidation and a preferential return on its invested capital. Furthermore, the distribution of proceeds from a Liquidity Event, as defined, are adjusted to reflect the results of certain investment return measures. As the rate of total investment return increases above AAC II Inc.'s preference hurdles, AACOP's management receives an increasing share of the proceeds and the other partners receive proportionately less. AAC II Inc. recorded earnings from its investment in AACOP of $13.4 million during 1997. Pursuant to the preference arrangements in the AACOP partnership agreement, AAC II Inc. records its equity in income of AACOP based upon the change in its distributable share of the net assets of AACOP under a hypothetical liquidation at book value. Cash distributions received by AAC II Inc. from AACOP with respect to preference returns totaled $12.6 million during 1997. As of December 31, 1997, AAC II Inc. was due, and subsequently received, its preference return for the 4th quarter, which totaled $3.7 million. 35 Summarized Financial Information The summarized financial information of AACOP on a historical cost basis prepared in accordance with generally accepted accounting principles as of and for the six months ended June 30, 1998 (unaudited) and year ended December 31, 1997 is as follows: Balance Sheet Data: June 30, 1998 December 31, 1997 ------------- ----------------- (Unaudited) Real estate assets - net of accumulated depreciation of $32,558,000 (unaudited) and $23,995,000, respectively $654,142,000 $654,688,000 Cash and cash equivalents 12,867,000 15,475,000 Other assets 16,667,000 19,256,000 ------------ ------------ 683,676,000 689,419,000 ------------ ------------ Mortgage notes payable 464,741,000 465,853,000 Distributions payable to partners 4,416,000 4,724,000 Other liabilities 20,291,000 20,952,000 ------------ ------------ 489,448,000 491,529,000 ------------ ------------ Partners' capital $194,228,000 $197,890,000 ============ ============ Company's capital account $149,400,000 $152,295,000 ============ ============ Adjustment - see components below 19,800,000 16,943,000 ------------ ------------ Company's investment account $169,200,000 $169,238,000 ============ ============ 36 Operating Data: June 30, 1998 December 31, 1997 ------------- ----------------- (Unaudited) Rent and lease income $52,957,000 $92,388,000 Other income 2,840,000 5,024,000 ----------- ----------- 55,797,000 97,412,000 ----------- ----------- Operating expenses 22,074,000 38,854,000 Interest expense 17,318,000 29,547,000 Depreciation and amortization 9,071,000 15,362,000 Other expenses 1,657,000 3,921,000 ----------- ----------- 50,120,000 87,684,000 ----------- ----------- Net income $5,677,000 $9,728,000 =========== =========== Net income allocated to Company $4,492,000 $7,647,000 =========== =========== Preference adjustments* 2,981,000 5,797,000 ----------- ----------- Company's recorded earnings from AACOP $7,473,000 $13,444,000 =========== =========== The amounts charged to the Company's capital account in AACOP which were not recognized by the Company in its investment account (as a result of its preferred position) are comprised of the following: June 30, 1998 December 31, 1997 ------------- ----------------- (Unaudited) Transaction costs associated with capital raised $3,881,000 $3,881,000 Partnership distribution payable to AAC II, Inc. ** 3,547,000 3,671,000 Cumulative preference adjustments attributable to income allocation* 12,372,000 9,391,000 ----------- ----------- $19,800,000 $16,943,000 =========== =========== *The preference adjustment attributable to income allocation represents the difference between the distributable net assets of AACOP that the Company would receive in a hypothetical liquidation at book value, taking into account the Company's 9% preferred return and other preferences, and the Company's allocated share of AACOP's net income based on its stated ownership percentage. **As previously discussed, under the equity method of accounting, the Company decreases its cost basis in its investment upon receipt of distributions from AACOP. 37 4. Investment in Commonwealth Atlantic Properties, Inc.: During 1996, the Company utilized $38,750,000 of borrowings from a line of credit established by LFSRI (Note 6) to acquire 19.4% of the common stock of Commonwealth Atlantic Properties, Inc. ("CAP"). CAP is a Maryland corporation that operates as a REIT. CAP is a major real estate owner and developer which directly controls 1.7 million square feet of commercial office space, 3,400 acres of land and partnership interests in commercial, industrial and residential real estate assets in Northern Virginia and the Richmond, Virginia area. During 1997, a wholly owned subsidiary of LFSRI purchased the shares of CAP held by the Company for approximately $41.3 million, of which $38,750,000 had been paid as of December 31, 1997. Due to the related party nature of this transaction, the excess of the purchase price over the carrying amount has been recorded as deemed a capital contribution in the accompanying statement of shareholders' equity. The Company utilized the sale proceeds to repay a portion of its borrowings under the line of credit. For the year ended December 31, 1997, the Company recognized earnings from its investment in CAP of approximately $916,000, which represents the Company's proportionate share of earnings during the period the investment was held. 5. Advance to LF Strategic Realty Investors L.P.: As of December 31, 1997, the Company had advanced $3,693,049 to LFSRI. The balance in the advance account represents the net cash activity between the Company and LFSRI in excess of dividends declared and paid. 6. Loans Payable: In October 1996, LFSRI entered into a $150 million revolving line of credit facility with a group of banks, led by Chase Manhattan Bank (the "Chase Facility"). The initial term of the Chase Facility expires on December 13, 1998, unless extended by LFSRI for up to one additional year. The Company, in its role as a Qualified Borrower (the "Borrower"), may obtain loans for general corporate purposes as well as acquisition financing under the Chase Facility. 38 LFSRI is a guarantor of all borrowings made by Qualified Borrowers. The Chase Facility is collateralized by all rights, title and interest in the unfunded capital commitments of certain partners of LFSRI and a pledge of certain bank accounts maintained by LFSRI. Amounts available under the Chase Facility are calculated based on the remaining portion of unfunded capital commitments of certain partners in LFSRI. The maximum amount available under the Chase Facility at December 31, 1997 was $118 million. As of December 31, 1997, the Company had borrowings of $22,150,000 outstanding under this facility. Borrowings bear interest, which is payable monthly, at the Borrower's option of either the Eurodollar rate plus 0.625% or the prime rate. The Chase Facility provides for the payment of certain Arrangement and Syndication Fees and other costs associated with establishing the facility by LFSRI. In addition, LFSRI is required to pay a fee equal to 0.2% per annum on the average daily unused portion of the available amount of the Chase Facility. The Company does not bear any costs associated with the fees, costs or collateralization associated with establishing and maintaining credit under the Chase Facility. At December 31, 1997, the carrying value of the Chase Facility approximates its fair value due to the short-term nature. 7. Fair Value of Financial Instruments: The carrying amount of cash and cash equivalents, other assets, loans payable and other liabilities approximates fair value as of December 31, 1997 because of the short-term nature of these instruments. 8. Subsequent Events (Unaudited): On September 11, 1998, the Company and AACOP entered into an Agreement and Plan of Merger with United Dominion Realty Trust, Inc. ("United Dominion"). In addition to United Dominion assuming AACOP's obligations, the partners of AACOP will receive a combination of cash, convertible preferred stock and operating partnership units. The transaction has been structured as a tax-free merger. 39 UNITED DOMINION REALTY TRUST, INC. UNAUDITED CONSOLIDATED PRO FORMA CONDENSED BALANCE SHEET JUNE 30, 1998 BASIS OF PRESENTATION The accompanying Unaudited Consolidated Pro Forma Condensed Balance Sheet gives effect to the proposed Merger as if it had occurred on June 30, 1998. The Unaudited Consolidated Pro Forma Condensed Balance Sheet gives effect to the proposed Merger under the purchase method of accounting in accordance with Accounting Standards Board Opinion No. 16. In the opinion of management, all significant adjustments necessary to reflect the effects of the proposed Merger have been made. Included in the AAC II, LP Historical Balance Sheet are two communities which will not be acquired by United Dominion. The Unaudited Consolidated Pro Forma Condensed Balance Sheet is presented for comparative purposes only and is not necessarily indicative of what the actual combined financial position of United Dominion and AAC would have been at June 30, 1998, nor does it purport to represent the future combined financial position of United Dominion and AAC. This Unaudited Consolidated Pro Forma Condensed Balance Sheet should be read in conjunction with, and is qualified in its entirety by, the historical financial statements and notes thereto of United Dominion included in its Annual Report on Form 10-K for the year ended December 31, 1997, its Quarterly Report on Form 10-Q for the six months ended June 30, 1998 and the pro forma financial statements and notes thereto of United Dominion's Form 8-K dated May 28, 1998 as filed with the Securities and Exchange Commission on October 19, 1998. 40 UNITED DOMINION REALTY TRUST, INC. UNAUDITED CONSOLIDATED PRO FORMA CONDENSED BALANCE SHEET June 30, 1998 (In thousands, except for share data)
United Pro Forma Dominion United Dominion AAC II, LP AAC II, Inc. Merger Pro Forma Historical (A) Historical (B) Historical (C) Adjustments (D) Combined --------------- -------------- -------------- --------------- --------- ASSETS Real estate owned: Real estate held for investment $2,813,957 $684,406 $ $ 93,649 (E) $3,592,012 Less: accumulated depreciation (242,803) (32,558) 32,558 (E) (242,803) ---------- -------- -------- --------- ---------- 2,571,154 651,848 0 126,207 3,349,209 Real estate under development 43,811 43,811 Real estate held for disposition 104,864 104,864 Investment in AAC II, LP 169,200 (169,200) (F) 0 Cash and cash equivalents 11,575 12,867 (358) (G) 24,084 Other assets 97,796 18,961 10,510 (14,013) (H) 113,254 ---------- -------- -------- --------- ---------- Total assets $2,829,200 $683,676 $179,710 $ (57,364) $3,635,222 ========== ======== ======== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable-secured $ 623,248 $464,741 $ 19,550 $ (18,138) (I) $1,089,401 Notes payable-unsecured 827,881 72,756 (J) 900,637 Distributions payable to common and preferred shareholders 29,867 29,867 Accounts payable, accrued expenses and other liabilities 73,085 18,996 63 (68) (K) 92,076 ---------- -------- -------- --------- ---------- Total liabilities 1,554,081 483,737 19,613 54,550 2,111,981 Minority interest of unitholders in operating partnership 51,675 5,711 67,411 (L) 124,797 Shareholders' equity: Preferred stock, no par value; $25 liquidation preference, 25,000,000 shares authorized; 4,200,000 shares 9.25% Series A Cumulative Redeemable 105,000 85,000 (85,000) (M) 105,000 6,000,000 shares 8.60% Series B Cumulative Redeemable 150,000 150,000 8,000,000 shares 7.50% Series D Convertible 200,000 (M) 200,000 Common stock, $1 par value; 150,000,000 shares authorized 101,988,375 shares issued and outstanding 101,988 8 (8) (M) 101,988 Additional paid-in capital 1,070,440 67,312 (92,312) (M) 1,045,440 Notes receivable from officer-shareholders (8,333) (8,333) Distributions in excess of net income (195,651) 7,777 (7,777) (M) (195,651) Partners Capital 194,228 (194,228) (M) 0 ---------- -------- -------- --------- ---------- Total shareholders' equity 1,223,444 194,228 160,097 (179,325) 1,398,444 ---------- -------- -------- --------- ---------- Total liabilities and shareholders' equity $2,829,200 $683,676 $179,710 $ (57,364) $3,635,222 ========== ======== ======== ========= ==========
41 UNITED DOMINION REALTY TRUST, INC. NOTES TO UNAUDITED CONSOLIDATED PRO FORMA CONDENSED BALANCE SHEET JUNE 30, 1998 (Amounts in thousands, except per share and OP Unit data) (A) Represents United Dominion's Historical Consolidated Balance Sheet contained in its Quarterly Report on Form 10-Q at June 30, 1998. (B) Represents the AAC II, LP Historical Balance Sheet at June 30, 1998 as reported elsewhere herein. Certain reclassifications have been made to AAC II, LP's Historical Balance Sheet at June 30, 1998 to conform to United Dominion's balance sheet presentation. (C) Represents the AAC II, Inc. Historical Balance Sheet at June 30, 1998 as reported elsewhere herein. Certain reclassifications have been made to AAC II, Inc.'s Historical Balance Sheet at June 30, 1998 to conform to United Dominion's balance sheet presentation. (D) Represents adjustments to record the proposed Merger in accordance with the purchase method of accounting, based upon an assumed purchase price of $806.0 million, as follows (in thousands of dollars): Assumption of AAC secured notes payable $450,427 Adjustment to record AAC fixed-rate secured notes payable at fair value 15,727 Issuance of Series D Convertible Preferred Stock, at fair value 175,000 Issuance of 5,614,035 OP Units, at fair value 67,411 Assumption of AAC liabilities and minority interest 24,701 Cash paid to AAC Partners 56,454 Merger costs (See calculation below) 15,521 Net asset value** 781 -------- $806,022 ======== The following is a calculation of the estimated fees and other expenses related to the proposed Merger (in thousands of dollars): Advisory fees $ 9,098 Loan assumption fees 2,500 Legal and accounting costs 1,736 Severance and other employee termination costs 1,000 Recording costs 500 Title insurance 312 Due diligence 275 Other 100 ------- $15,521 ======= ** Pursuant to the Merger Agreement, if the Net Asset Value (as defined in the Merger Agreement) is greater than $336.5 million, then the aggregate consideration will be increased by the difference between the $336.5 million and the Net Asset Value, as calculated. Conversely, is the Net Asset Value is less than $336.5 million, then the aggregate consideration will be decreased by the difference between the $336.5 million and the Net Asset Value, as calculated. 42 (E) Increase of $93.6 million in the book value of AAC's real estate assets based upon United Dominion's assumed purchase price of $806.0 and the adjustment to eliminate AAC's historical accumulated depreciation as follows (in thousands of dollars): Purchase price (See note (D)) $806,022 Less basis of AAC's assets assumed: Real estate held for investment 682,530 Land held for development 1,876 Cash and cash equivalents 24,549 Investment in Joint Venture 2,294 Other assets (see Note (H)) 1,124 712,373 ------- -------- Pro forma adjustment 93,649 AAC historical accumulated depreciation 32,558 -------- Total pro forma adjustment to real estate held for investment $126,207 ========
(F) Represents the elimination of AAC II, Inc's investment in AAC II, L.P which was not consolidated by AAC II, Inc. in its June 30, 1998 Historical Balance Sheet as AAC II, Inc. accounts for its investment in AAC II, LP under the equity method of accounting. Pursuant to the Merger Agreement, United Dominion will issue Preferred Stock and cash in exchange for AAC II, Inc.'s 79.1% interest in AAC II, LP, at which time, United Dominion will consolidate AAC II, LP into its Consolidated Balance Sheet. (G) Eliminate cash included in the AAC II, L.P. Historical Balance Sheet related to two communities which United Dominion will not acquire in connection with the proposed Merger. (H) To adjust the historical basis of AAC's other assets in the aggregate amount of $14,013, which will be eliminated in connection with the proposed Merger. (I) Represents the following adjustments to notes payable: (i) the $15,727 premium required to adjust the AAC notes payable to estimated fair value, (ii) the elimination of two notes payable aggregating $14,315 securing two communities included in the AAC II LP Historical Balance Sheet that will not be acquired by United Dominion in connection with the proposed Merger and (iii) the elimination of the $19,550 AAC II, Inc. note payable which will be paid off simultaneously with the consummation of the proposed Merger. (J) United Dominion anticipates issuing debt prior to the effective date of the proposed Merger. Proceeds of $72,756 from the debt issuance are expected to be used to fund the following costs in connection with the Merger (in thousands of dollars): Cash portion of purchase price $56,454 Merger costs (See Note (D)) 15,521 Net asset value (See Note (D)) 781 ------- $72,756 ======= (K) Represents the adjustment to eliminate other liabilities included in the AAC II, L.P. Historical Balance Sheet related to two communities which United Dominion will not acquire in connection with the proposed Merger. 43 (L) Adjustment to record the fair value of 5,614,035 OP Units which will be issued in connection with the proposed Merger. Pursuant to the Partnership Exchange Agreement, each OP Unit is convertible into one share of United Dominion common stock at a price of $14.25 per Unit. The fair value of the OP Units is estimated at a value of $12 per Unit. (M) To adjust AAC's shareholders' equity to reflect the issuance of 8,000,000 shares of United Dominion Series D Convertible Preferred Stock and cash in exchange for all of AAC's outstanding common stock and preferred stock as follows (in thousands of dollars):
Preferred Common Additional Accumulated Partners Stock Stock Paid-in Capital Deficit Capital Total --------- ------ --------------- ----------- -------- ----- Issuance of Series D Convertible Preferred Stock $ 200,000 $ (25,000) $ 175,000 AAC II, LP Historical Shareholders' Equity $(194,228) $ (194,228) AAC II, Inc. Historical Shareholders' Equity (85,000) $ (8) (67,312) $(7,777) $ (160,097) --------- ----- --------- ------- --------- ---------- Pro forma adjustment $ 115,000 $ (8) $ (92,312) $(7,777) $(194,228) $ (179,325) ========= ===== ========= ======= ========= ==========
44 UNAUDITED CONSOLIDATED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1998 BASIS OF PRESENTATION The Unaudited Pro Forma Combined Statements of Operations for the twelve months ended December 31, 1997 and the six months ended June 30, 1998 are presented as if the proposed Merger had occurred on January 1, 1997. The Unaudited Pro Forma Combined Statements of Operations give effect to the proposed Merger under the purchase method of accounting in accordance with Accounting Standards Board Opinion No. 16, and the combined entity qualifying as a REIT, distributing at least 95% of its taxable income, and therefore, incurring no federal income tax liability for the periods presented. In addition to the proposed Merger, column titled "Previously Reported Transactions" is presented as if the following acquisitions occurred on January 1, 1997: (i) 39 apartment communities with 7,550 apartment homes owned by ASR Investment Corporation that were merged with and into a wholly-owned subsidiary of the United Dominion, in a statutory merger on March 27, 1998, (ii) the 1998 acquisitions of 13 communities containing 4,318 apartment homes for an aggregate purchase price of approximately $144.0 million, including closing costs and (iii) the 1997 acquisition of 17 communities containing 5,394 apartment homes for an aggregate purchase price of approximately $218.5 million, including closing costs (See Note (A) to the Unaudited Pro Forma Combined Statements of Operations). In the opinion of management, all adjustments necessary to reflect the effects of these transactions have been made. The Unaudited Pro Forma Condensed Statements of Operations are presented for comparative purposes only and are not necessarily indicative of what United Dominion Consolidated actual results would have been for the year ended December 31, 1997 and the six months ended June 30, 1998 if the proposed Merger and other acquisitions had occurred at the beginning of each period presented, nor do they purport to be indicative of the results of operations in future periods. The Unaudited Pro Forma Condensed Statements of Operations should be read in conjunction with, and are qualified in their entirety by, the historical financial statements and notes thereto of United Dominion included in its Annual Report on Form 10-K for the year ended December 31, 1997, its Quarterly Report on Form 10-Q for the six months ended June 30, 1998 and the pro forma financial statements and notes thereto of United Dominion's Form 8-K dated May 28, 1998 as filed with the Securities and Exchange Commission on October 19, 1998. 45 UNITED DOMINION REALTY TRUST, INC. UNAUDITED CONSOLIDATED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
Previously Reported Previously Transactions United Dominion Reported Pro Forma Historical (A) Transactions (B) Adjustments (C) --------------- ---------------- --------------- Revenues Rental income $386,672 $74,829 $15,240 Earnings from investments in real estate Interest and other non-property income 1,123 732 (162) -------- ------- ------- 387,795 75,561 15,078 Expenses Rental expenses: Utilities 24,861 4,568 1,173 Repairs and maintenance 54,607 8,739 2,018 Real estate taxes 30,961 6,569 1,693 Property management 12,203 3,127 (654) Other rental expenses 41,099 10,599 1,689 Real estate depreciation 76,688 6,335 10,872 Interest 79,004 9,642 19,096 General and administrative 7,075 3,114 (2,487) Acquisition related expenses 6,684 Other depreciation and amortization 2,084 412 - Impairment loss on real estate held for disposition 1,400 -------- ------- ------- 329,982 59,789 33,400 Income from gains on sales of mortgage assets 17,213 (17,213) Income before gains on sales of investments and minority interest of unitholders in operating partnership 57,813 32,985 (35,535) Gains on sales of investments 12,664 474 -------- ------- ------- Income before minority interest of unitholders in operating partnership and extraordinary item 70,477 33,459 (35,535) Minority interest of unitholders in operating partnership (278) (355) (1,272) -------- ------- ------- Income before extraordinary item 70,199 33,104 (36,807) Extraordinary items-early extinguishment of debt (50) -------- ------- ------- Net income 70,149 33,104 (36,807) Dividends to preferred shareholders (17,345) -------- ------- ------- Net income available to common shareholders 52,804 33,104 (36,807) ======== ======= ======= Basic earnings per common share $ 0.61 Diluted earnings per common share $ 0.60 Dividends declared per common share $ 1.01 Weighted average number of common shares-basic 87,145 8,340 Weighted average number of common shares -diluted 87,339 11,024
United Dominion Pre AAC Merger AAC II, LP AAC II, Inc. Pro Forma Historical (D) Historical (E) --------------- -------------- -------------- Revenues Rental income $476,741 $90,444 Earnings from investments in real estate $14,360 Interest and other non-property income 1,693 6,969 264 -------- ------- ------- 478,434 97,413 14,624 Expenses Rental expenses: Utilities 30,602 6,740 Repairs and maintenance 65,364 10,200 Real estate taxes 39,223 7,418 Property management 14,676 2,786 Other rental expenses 53,387 11,710 Real estate depreciation 93,895 14,618 Interest 107,742 30,292 3,054 General and administrative 7,702 3,937 243 Acquisition related expenses 6,684 Other depreciation and amortization 2,496 Impairment loss on real estate held for disposition 1,400 -------- ------- ------- 423,171 87,701 3,297 Income from gains on sales of mortgage assets - Income before gains on sales of investments and minority interest of unitholders in operating partnership 55,263 9,712 11,327 Gains on sales of investments 13,138 -------- ------- ------- Income before minority interest of unitholders in operating partnership and extraordinary item 68,401 9,712 11,327 Minority interest of unitholders in operating partnership (1,905) 16 -------- ------- ------- Income before extraordinary item 66,496 9,728 11,327 Extraordinary items-early extinguishment of debt (50) -------- ------- ------- Net income 66,446 9,728 11,327 Dividends to preferred shareholders (17,345) -------- ------- ------- Net income available to common shareholders 49,101 9,728 11,327 ======== ======= ======= Basic earnings per common share $ 0.51 Diluted earnings per common share $ 0.50 Dividends declared per common share $ 1.01 Weighted average number of common shares-basic 95,485 Weighted average number of common shares -diluted 98,363
Adjustments to AAC AAC II, LP Pro Forma United Dominion Historical Merger Pro Forma Financials (F) Adjustments Combined -------------- ----------- --------------- Revenues Rental income $567,185 Earnings from investments in real estate $(14,360) (G) - Interest and other non-property income $(1,957) (264) (H) 6,705 ------- -------- -------- (1,957) (14,624) 573,890 Expenses Rental expenses: Utilities 37,342 Repairs and maintenance 75,564 Real estate taxes (152) 46,489 Property management 17,462 Other rental expenses (74) 65,023 Real estate depreciation (632) 5,213 (I) 113,094 Interest (1,098) (387)(J) 139,603 General and administrative (2,961)(K) 8,921 Acquisition related expenses 6,684 Other depreciation and amortization 2,496 Impairment loss on real estate held for disposition 1,400 ------- -------- -------- (1,956) 1,865 514,078 Income from gains on sales of mortgage assets Income before gains on sales of investments and minority interest of unitholders in operating partnership (1) (16,489) 59,812 Gains on sales of investments 0 13,138 ------- -------- -------- Income before minority interest of unitholders in operating partnership and extraordinary item (1) (16,489) 72,950 Minority interest of unitholders in operating partnership (1,450) (L) (3,339) ------- -------- -------- Income before extraordinary item (1) (17,939) 69,611 Extraordinary items-early extinguishment of debt (50) ------- -------- -------- Net income (1) (17,939) 69,561 Dividends to preferred shareholders (15,000) (M) (32,345) ------- -------- -------- Net income available to common shareholders (1) (32,939) 37,216 ======= ======== ======== Basic earnings per common share $ 0.39 Diluted earnings per common share $ 0.39 Dividends declared per common share $ 1.01 Weighted average number of common shares-basic 95,485 Weighted average number of common shares -diluted 5,614 (N) 103,977
See accompanying notes. 46 UNITED DOMINION REALTY TRUST, INC. UNAUDITED CONSOLIDATED PRO FORMA CONDENSED STATEMENT OF OPERATIONS For the Six Months Ended June 30, 1998 (In thousands, except per share data)
Previously Reported Previously Transactions United Dominion United Dominion Reported Pro Forma Pre AAC Merger Historical (A) Transactions (B) Adjustments (C) Pro Forma --------------- ---------------- ---------------- -------------- Income Rental income $ 222,275 $ 16,648 $ 1,095 $ 240,018 Earnings from investments in real estate Interest and non-property income 2,159 252 2,411 ------------ --------- ----------- -------- 224,434 16,900 1,095 242,429 Expenses Rental expenses: Utilities 11,945 998 52 12,995 Repairs and maintenance 28,035 1,712 144 29,891 Real estate taxes 19,341 1,610 86 21,037 Property management 7,920 564 (100) 8,384 Other rental expenses 23,031 2,561 138 25,730 Depreciation of real estate owned 46,476 2,613 770 49,859 Interest 48,561 3,452 1,848 53,861 General and administrative 4,618 1,273 (993) 4,898 Other depreciation and amortization 1,541 189 (18) 1,712 ------------ --------- ----------- -------- 191,468 14,972 1,927 208,367 ------------ --------- ----------- -------- Income before gains on sales of investments and minority interest of unitholders in operating partnership 32,966 1,928 (832) 34,062 Gains on sales of investments 20,461 20,461 ------------ --------- ----------- -------- Income before minority interest of unitholders in operating partnership and extraordinary item 53,427 1,928 (832) 54,523 Minority interest of unitholders in operating partnership (1,122) (363) (405) (1,890) ------------ --------- ----------- -------- Income before extraordinary item 52,305 1,565 (1,237) 52,633 Extraordinary items (116) (7,053) 7,053 (116) ------------ --------- ----------- -------- Net income 52,189 (5,488) 5,816 52,517 Dividends to preferred shareholders (11,303) (11,303) ------------ --------- ----------- -------- Net income available to common shareholders $ 40,886 $ (5,488) $ 5,816 $ 41,214 ============ ========= =========== ======== Basic earnings per common share $ 0.42 $ 0.41 ============ ======== Diluted earnings per common share $ 0.42 $ 0.40 ============ ======== Distributions declared per common share $ 0.5250 $ 0.5250 ============ ======== Weighted average number of common shares outstanding-basic 96,244 3,961 100,205 Weighted average number of common shares outstanding-diluted 98,666 5,313 103,979 Adjustments to AAC AAC II LP Pro Forma AAC II, LP AAC II, Inc. Historical Merger Historical (D) Historical (E) Financials (F) Adjustments ---------------- -------------- ---------------- ----------------- Income Rental income $ 51,865 $ $ $ Earnings from investments in real estate 7,473 (7,473) (G) Interest and non-property income 3,932 8 (1,099) (8) (H) ------ ---------- ------- ------- 55,797 7,481 (1,099) (7,481) Expenses Rental expenses: Utilities 3,576 Repairs and maintenance 5,885 Real estate taxes 4,158 (80) Property management 1,526 Other rental expenses 6,930 (44) Depreciation of real estate owned 8,575 (302) 3,372 (I) Interest 17,814 655 (515) 556 (J) General and administrative 1,666 192 (1,373)(K) Other depreciation and amortization ------ ---------- ------- ------- 50,130 847 (941) 2,555 ------ ---------- ------- ------- Income before gains on sales of investments and minority interest of unitholders in operating partnership 5,667 6,634 (158) (10,036) Gains on sales of investments ------ ---------- ------- ------- Income before minority interest of unitholders in operating partnership and extraordinary item 5,667 6,634 (158) (10,036) Minority interest of unitholders in operating partnership 10 (1,306) (L) ------ ---------- ------- ------- Income before extraordinary item 5,677 6,634 (158) (11,342) Extraordinary items ------ ---------- ------- ------- Net income 5,677 6,634 (158) (11,342) Dividends to preferred shareholders (7,500) (M) ------ ---------- ------- ------- Net income available to common shareholders $ 5,677 $ 6,634 $ (158) $ (18,842) ------ ---------- ------- ------- Basic earnings per common share Diluted earnings per common share Distributions declared per common share Weighted average number of common shares outstanding-basic Weighted average number of common shares outstanding-diluted 5,614 (N) United Dominion Pro Forma Combined ---------- Income Rental income $ 291,883 Earnings from investments in real estate 0 Interest and non-property income 5,244 -------- 297,127 Expenses Rental expenses: Utilities 16,571 Repairs and maintenance 35,776 Real estate taxes 25,115 Property management 9,910 Other rental expenses 32,616 Depreciation of real estate owned 61,504 Interest 72,371 General and administrative 5,383 Other depreciation and amortization 1,712 -------- 260,958 -------- Income before gains on sales of investments and minority interest of unitholders in operating partnership 36,169 Gains on sales of investments 20,461 -------- Income before minority interest of unitholders in operating partnership and extraordinary item 56,630 Minority interest of unitholders in operating partnership (3,186) -------- Income before extraordinary item 53,444 Extraordinary items (116) -------- Net income 53,328 Dividends to preferred shareholders (18,803) -------- Net income available to common shareholders $ 34,525 -------- Basic earnings per common share $ 0.34 ========== Diluted earnings per common share $ 0.34 ========= Distributions declared per common share $ 0.5250 ========= Weighted average number of common shares outstanding-basic 100,205 Weighted average number of common shares outstanding-diluted 109,593
UNITED DOMINION REALTY TRUST, INC. UNAUDITED NOTES TO CONSOLIDATED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1998 (Amounts in thousands, except per share and OP Unit data) (A) Represents United Dominion's Historical Consolidated Statements of Operations contained in its Annual Report on Form 10-K for the twelve month period ended December 31, 1997 and its Quarterly Report on Form 10-Q for the six month period ended June 30, 1998. (B) Represents the actual results of operations of the following 1998 and 1997 acquisitions by United Dominion (collectively, the Previously Reported Transactions): (i) 39 apartment communities with 7,550 apartment homes owned by ASR Investment Corporation (ASR Merger) that were merged with and into a wholly-owned subsidiary of the United Dominion, in a statutory merger on March 27, 1998, (as previously reported on Form 8-K dated March 27, 1998 and subsequently amended on Form 8-K/A No.1 dated March 27, 1998 which was filed with the Securities and Exchange Commission on June 12, 1998), (ii) a portfolio of three apartment communities (collectively the Tennessee Portfolio) acquired on January 9, 1998 which consists of The Trails at Kirby Parkway Apartments and The Trails at Mount Moriah Apartments (which run as one community under the name The Trails), and Cinnamon Trails Apartments (as previously reported on Form 8-K dated June 9, 1998 which was filed with the Securities and Exchange Commission on June 24, 1998), (iii) Dogwood Creek Apartments acquired on February 6, 1998 (as previously reported on Form 8-K dated June 9, 1998 which was filed with the Securities and Exchange Commission on June 24, 1998), (iv) a portfolio of eight apartment communities (collectively the San Antonio Portfolio) acquired on April 16, 1998 which consists of Audubon Apartments, Carmel Apartments, Cimarron Apartments, Grand Cypress Apartments, Kenton Place Apartments, Peppermill Apartments, The Crest Apartments and Villages of Thousand Oaks Apartments (as previously reported on Form 8-K dated June 9, 1998 which was filed with the Securities and Exchange Commission on June 24, 1998, (v) Rancho Mirage Apartments acquired on May 28, 1998 (as previously reported on Form 8-K dated May 28, 1998 which was filed with the Securities and Exchange Commission on October 19, 1998), (vi) Crosswinds Apartments (formerly Tradewinds Apartments), Stoney Pointe Apartments (formerly Stoneybrooke Apartments) and Dominion Trinity Place Apartments, (formerly Trinity Place Apartments) acquired on February 28, 1997, (collectively the "Option Properties) (as previously reported on Form 8-K dated July 1, 1997 and subsequently amended on Form 8-K/A No. 1 dated July 1, 1997 which was filed with the Securities and Exchange Commission on September 15, 1997), (vii) Anderson Mill Oaks Apartments acquired on March 25, 1997, Oak Ridge Apartments (formerly Post Oak Ridge Apartments) acquired on March 27, 1997, Green Oaks Apartments (formerly Pineloch Apartments) and Skyhawk Apartments (formerly Seahawk Apartments) acquired on May 8, 1997, (collectively the "Texas Portfolio") (as previously reported on Form 8-K dated July 1, 1997 and subsequently amended on Form 8-K/A No. 1 dated July 1, 1997 which was filed with the Securities and Exchange Commission on September 15, 1997), (viii) a portfolio of five apartment communities containing 934 apartment homes acquired on July 1, 1997 (the "Florida Portfolio") which consist of Lakeside Apartments, Mallards of Brandywine Apartments, Lotus Landing Apartments , Orange Oaks Apartments and Forest Creek Apartments, (as previously reported on Form 8-K dated July 1, 1997 and subsequently amended on Form 8-K/A No. 1 dated July 1, 1997 which was filed with the Securities and Exchange Commission on September 15, 1997), (ix) a portfolio of four apartment communities (collectively the "Houston Portfolio") which consist of Greenhouse Patio Apartments (formerly Pecan Grove Apartments) and Braesridge Apartments acquired on September 26, 1997, Bammelwood Apartments acquired on October 30, 1997 and Camino Village Apartments acquired on November 20, 1997, (as previously reported on Form 8-K dated October 21, 1997 and subsequently amended on Form 8-K/A No. 1 dated October 21, 1997 which was filed with the Securities and Exchange Commission on December 31, 1997) and (x) Waterside at Ironbridge Apartments acquired on September 29, 1997, (as previously reported on Form 8-K dated October 21, 1997 and subsequently amended on Form 8-K/A No. 1 dated October 21, 1997 which was filed with the Securities and Exchange Commission on December 31, 1997). 48 The acquisitions described in (i) through (x) above are shown in detail in United Dominion's Form 8-K dated May 28, 1998 as filed with the Securities and Exchange Commission on October 19, 1998. (C) Represents the aggregate pro forma adjustments for United Dominion's 1998 and 1997 Previously Reported Transactions as described in Note B above. The pro forma adjustments for these acquisitions are shown in detail in United Dominion's Form 8-K dated May 28, 1998 as filed with the Securities and Exchange Commission on October 19, 1998. (D) Represents the AAC II, LP Historical Consolidated Statement of Operations for the twelve months ended December 31, 1997 and the six months ended June 30, 1998 as appearing elsewhere herein. Certain reclassifications have been made to AAC II, LP Historical Consolidated Statements of Operations to conform to United Dominion's presentation. (E) Represents the AAC II, Inc. Historical Consolidated Statement of Operations for the twelve months ended December 31, 1997 and the six months ended June 30, 1998 as appearing elsewhere herein. Certain reclassifications have been made to AAC II, Inc.'s Historical Consolidated Statements of Operations to conform to United Dominion's presentation. (F) Represents the elimination of rental income and rental expenses related to the results of operations of two properties included in the AAC II, LP Historical Statements of Operations for the twelve months ended December 31, 1997 and the six months ended June 30, 1998. Pursuant to the Merger Agreement, there are two properties that will not be acquired by United Dominion in connection with the proposed Merger. (G) Represents the elimination of AAC II, Inc's equity earnings in AAC II, LP. Pursuant to the Merger Agreement, United Dominion will issue Preferred Stock and cash in exchange for AAC II, Inc.'s 79.1% interest in AAC II, LP, at which time, United Dominion will consolidate the operations of AAC II, LP into its consolidated results of operations. (H) Represents the elimination of other income included in AAC II, Inc's Historical Statements of Operations Operations for the twelve months ended December 31, 1997 and the six months ended June 30, 1998. The other income is eliminated since this income will not have a continuing impact on the results of operations for the combined entity. (I) Represents the estimated net increase in depreciation of real estate owned as a result of recording the AAC real estate at fair value versus historical cost and using United Dominion's depreciable lives. 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 27.6 years. Buildings have been depreciated over 35 years and other assets over 5, 10 or 20 years depending on the useful life of the related asset. Calculation of the fair value of depreciable real estate assets as of June 30, 1998 (in thousands of dollars):
Purchase price $ 806,022 Less: Purchase price allocated to cash and cash equivalents 24,549 Purchase price allocated to other assets 1,124 Purchase price allocated to land 117,678 Purchase price allocated to land held for development 1,876 Purchase price allocated to minority interest investment 2,294 ---------- Pro forma basis of AAC's depreciable real estate held for investment at fair value $ 658,501 ==========
49 Calculation of pro forma adjustment to depreciation of real estate owned for the twelve months ended December 31,1997 and the six months ended June 30, 1998 (in thousands of dollars):
Twelve Months Six Months Ended Ended December 31, 1997 ** June 30, 1998 -------------------- ------------- Depreciation expense based upon an estimated weighted average useful life of approximately 27.6 years $ 19,831 $ 11,947 Less: AAC's depreciation of real estate owned (14,618) (8,575) ----------- --------- Pro forma adjustment $ 5,213 $ 3,372 =========== =========
** During the twelve months ended December 31, 1997, AAC acquired 17 communities throughout the period for an aggregate purchase price of $318 million. Consequently, the pro forma depreciation expense calculation for the twelve months ended December 31, 1997 is based upon AAC's average depreciable assets for the twelve months ended December 31, 1997 of $497,805, a proportionate increase of fair value of 9.8%. (J) Represents the estimated net adjustment to interest expense for the twelve months ended December 31, 1997 and the six months ended June 30, 1998 associated with the proposed Merger, as follows (in thousands of dollars):
Twelve Months Six Months Ended Ended December 31, 1997 June 30, 1998 ----------------- ------------- To adjust amortization of AAC's deferred financing costs which were eliminated in the proposed Merger $ (745) $ (496) To reflect amortization of the adjustment required to record AAC's mortgage notes payable at fair value (2,030) (1,015) To eliminate the interest expense related to the $19,550 secured note payable on AAC II, Inc's Historical Balance Sheet which will be paid off simultaneously with the consummation of the proposed Merger (3,054) (655) To reflect interest expense associated with United Dominion's anticipated issuance of debt at an interest rate of 7.48%. 5,442 2,722 ---------- ------- Pro forma adjustment $ (387) $ 556 ========== =======
(K) Reflects the net estimated reduction of general and administrative expenses of $2,961 and $1,373 for the twelve months ended December 31, 1997 and the six months ended June 30, 1998, respectively, based upon the identified historical costs of certain items which are anticipated to be eliminated or reduced as a result of the proposed Merger, as follows (in thousands of dollars):
Twelve Months Six Months Ended Ended December 31, 1997 June 30, 1998 ----------------- ------------- Net reduction in salary, benefits and other compensation due to the termination of AAC employees prior to the proposed Merger in accordance with the Merger Agreement $ 2,809 $ 1,295 Net reduction in office rent as a result of the Merger 152 78 ---------- --------- Pro forma adjustment $ 2,961 $ 1,373 ========== =========
50 (L) Reflects the increase in minority interest expense assuming the consummation of the proposed Merger on January 1, 1997. A percentage of net income was allocated to Minority Interest representing interests not owned by United Dominion. The pro forma allocation to Minority Interest is based upon the percentage estimated to be owned by such Minority Interests as a result of the proposed Merger. In connection with the Merger Agreement, United Dominion Realty, LP will issue 5,614,035 OP Units to the Limited Partners in exchange for their 20.9% interest in AAC II, LP. As a result, the pro forma weighted average OP Units outstanding, including the pro forma effect of the AAC Merger (as a percentage of all common stock and Operating Partnership Units) was 8.28% and 8.47% for and the twelve months ended December 31, 1997 and the six months ended June 30, 1998, respectively. The Minority Interest ownership in United Dominion is calculated as follows:
Twelve Months Six Months Ended Ended December 31, 1997 June 30, 1998 ----------------- ------------- United Dominion historical weighted average common shares outstanding 87,145 96,244 Common shares issued in connection with the Previously Reported Transactions 8,340 3,961 ----- ----- Total pro forma weighted average common shares 95,485 100,205 United Dominion historical weighted average OP Units outstanding 317 2,312 OP Units issued in connection with the Previously Reported Transactions 2,684 1,352 OP Units issued in connection with the Merger 5,614 5,614 ----- ----- Total pro forma weighted average OP Units 8,615 9,278 Total weighted average common shares and OP Units 104,100 109,483 Pro forma Minority Interest ownership of United Dominion's Operating Partnership 8.28% 8.47%
(M) Reflects the increase in dividends to preferred shareholders of $15,000 and $7,500 for the twelve months ended December 31, 1997 and the six months ended June 30, 1998. Based upon the Merger Agreement, United Dominion will issue 8,000,000 shares of 7.5% Convertible Preferred Stock (Preferred Stock) for an aggregate stated value of $200 million to AAC II, Inc. in exchange for their 79.1% interest in AAC II, LP. The Preferred Stock has an estimated fair value of $175,000. 51 (N) Represents the adjustment to United Dominion's weighted average number of common shares outstanding to reflect the proposed Merger as if it had occurred on January 1, 1997. In connection with the proposed Merger, United Dominion Realty, LP will issue 5,614,035 OP Units to the AAC Limited Partners in exchange for their 20.9% ownership interest in AAC. 52 Signatures Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. UNITED DOMINION REALTY TRUST, INC. Date: October 23, 1998 /s/ James Dolphin ------------------------------------ James Dolphin, Senior Vice President Chief Financial Officer Date: October 23, 1998 /s/ Robin R. Flanagan ------------------------------------ Robin R. Flanagan, Assistant Vice President and Chief Accounting Officer EX-23.1 2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report on American Apartment Communities II, Inc. dated February 27, 1998, and our report on American Apartment Communities II, L.P., dated February 12, 1998, included in this Form 8-K, into United Dominion Realty Trust, Inc.'s previously filed Registration Statements File Nos. 333-27221, 33-64275, 333-53401, 333-48557, 333-11207, 33-40433, 333-44463, 333-15133, 333-42691, 33-48000, 333-32829, 33-47296 and 33-58201. /s/ ARTHUR ANDERSEN LLP San Francisco, California October 20, 1998 -----END PRIVACY-ENHANCED MESSAGE-----