-----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, SZIevwxZAloKc+4ulPUrT9h1E7p+a8zfdyi216PuLoD8jj95WQ/XOU9CVenuPNrZ mVTNKCvKExAmtyQwZgr2/w== 0000906345-97-000074.txt : 19970617 0000906345-97-000074.hdr.sgml : 19970617 ACCESSION NUMBER: 0000906345-97-000074 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970415 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970616 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAMDEN PROPERTY TRUST CENTRAL INDEX KEY: 0000906345 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 766088377 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-12110 FILM NUMBER: 97624705 BUSINESS ADDRESS: STREET 1: 3200 SOUTHWEST FRWY STREET 2: STE 1500 CITY: HOUSTON STATE: TX ZIP: 77027 BUSINESS PHONE: 7139643555 MAIL ADDRESS: STREET 1: 3200 SOUTHWEST FREEWAY STREET 2: SUITE 1500 CITY: HOUSTON STATE: TX ZIP: 77027 8-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A AMENDMENT NO.1 TO CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported): April 15, 1997 CAMDEN PROPERTY TRUST (Exact name of Registrant as Specified in Charter) TEXAS 1-12110 76-6088377 (State or Other (Commission File Number) (I.R.S. Employer Jurisdiction Identification Number) of Incorporation) 3200 Southwest Freeway, Suite 1500, Houston, Texas 77027 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 964-3555 Not applicable (Former name or former address, if changed since last report) The undersigned registrant hereby amends Item 7 of its Current Report on Form 8-K dated April 15, 1997 to read in its entirety as follows: Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of Businesses Acquired. Filed with this Report as Attachment A are the following audited financial statements of Paragon Group, Inc. ("Paragon"): (1) Independent Auditors' Report (2) Consolidated Balance Sheets as of December 31, 1996 and 1995 (3) Consolidated and Combined Statements of Operations for the years ended December 31, 1996 and 1995, the period July 27 to December 31, 1994, as restated, and the period January 1 to July 26, 1994 (4) Consolidated and Combined Statements of Stockholders' Equity (Partners' and Owners' Deficit) for the years ended December 31, 1996 and 1995, the period ended December 31, 1994, as restated, and the period ended July 26, 1994 (5) Consolidated and Combined Statements of Cash Flows for the years ended December 31, 1996 and 1995, the period July 27 to December 31, 1994, as restated, and the period January 1 to July 26, 1994 (6) Notes to Consolidated and Combined Financial Statements (b) Pro Forma Financial Information. Pro forma financial information for the registrant is set forth as Attachment B. (c) Exhibits. 23.1 Consent of Ernst & Young L.L.P. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: June 13, 1997 CAMDEN PROPERTY TRUST By: /s/ G. Steven Dawson ---------------------- G. Steven Dawson Senior Vice President - Finance, Chief Financial Officer and Treasurer ATTACHMENT A INDEPENDENT AUDITORS' REPORT - --------------------------------------------------------------------------- To the Board of Directors and Stockholders of Paragon Group, Inc. We have audited the accompanying consolidated balance sheets of Paragon Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated and combined statements of operations, stockholders' equity (partners' and owners' deficit), and cash flows of Paragon Group, Inc. and Predecessors for the years ended December 31, 1996 and 1995, the period from July 27, 1994 through December 31, 1994, as restated, and the period from January 1, 1994 through July 26, 1994. Our audits also included the financial statement schedule listed in the index at Item 14(a)1 and 2. These consolidated and combined financial statements and schedule are the responsibility of the management of Paragon Group, Inc. and Predecessors. Our responsibility is to express an opinion on these consolidated and combined financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated and combined financial statements referred to above present fairly, in all material respects, the financial position of Paragon Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of Paragon Group, Inc. and Predecessors' operations and cash flows for the years ended December 31, 1996 and 1995, the period from July 27, 1994 through December 31, 1994, as restated, and the period from January 1, 1994 through July 26, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 2, the Company, since its initial public offering on July 27, 1994, accounted for the investment in its property services subsidiary, Paragon Group Property Services, Inc. ("PGPSI"), under the cost method consistent with prior regulatory direction. However, in September 1995, the Emerging Issues Task Force of the Financial Accounting Standards Board (EITF) reached a consensus in EITF 95-6 that the cost method of accounting for such investments was not appropriate. Accordingly, in 1995, the Company changed its method of accounting for PGPSI from the cost method to consolidation of the financial position and results of operations of PGPSI with the Company. Furthermore, as required by EITF 95-6, the 1994 financial statements (specifically, the period from July 27, 1994 through December 31, 1994) have been restated to consolidate PGPSI. The effect of the restatement was to decrease stockholders' equity at December 31, 1994 by approximately $20,456,000 and to decrease net income for the period from July 27 through December 31, 1994 by approximately $120,000. The effect on earnings per share was nominal. Ernst & Young LLP Dallas, Texas March 21, 1997 52 PARAGON GROUP, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
December 31, December 31, 1996 1995 - --------------------------------------------------------------------------- ASSETS Real estate assets: Land $ 81,214 $ 86,602 Buildings and improvements 441,921 459,129 Furniture, fixtures and equipment 60,657 57,796 --------- --------- 583,792 603,527 Less: Accumulated depreciation (127,829) (126,437) --------- --------- Operating real estate assets 455,963 477,090 Construction in process 13,339 27,944 Real estate held for sale 20,604 - --------- --------- Net real estate assets 489,906 505,034 Cash and cash equivalents 7,087 6,583 Restricted cash 4,241 3,909 Accounts receivable, including amounts due from affiliates of $212 and $1,424, respectively in 1996 and 1995 1,437 4,716 Advances to affiliates 1,532 186 Investment in ventures 15,164 7,401 Notes receivable from venture 9,839 - Deferred charges, net 5,774 9,254 Deferred rent receivable - 260 Deferred tax asset 93 863 Other assets 1,794 1,405 --------- --------- Total assets $ 536,867 $ 539,611 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable $ 297,292 $ 293,780 Accrued interest payable 1,363 1,106 Accrued real estate taxes payable 1,741 2,030 Accounts payable and accrued liabilities, including amounts due to affiliates of $10 in 1996 10,019 10,883 Tenant security deposits 2,205 2,273 Deferred tax liability 93 863 Deferred gain on sale of commercial property services business 1,100 - --------- --------- Total liabilities 313,813 310,935 --------- --------- Minority interests 48,548 50,210 --------- --------- Commitments and contingencies Stockholders' equity: Common stock $.01 par value, authorized 100,000,000 shares, issued 14,791,165 shares 148 148 Additional paid-in capital 204,617 204,537 Unamortized employee restricted stock compensation (1,053) (4,085) Accumulated deficit (27,411) (21,236) --------- --------- 176,301 179,364 Less: Cost of 84,486 treasury shares (42,266 in 1995) (1,795) (898) --------- --------- Total stockholders' equity 174,506 178,466 --------- --------- Total liabilities and stockholders' equity $ 536,867 $ 539,611 ========= =========
See accompanying notes. 53 PARAGON GROUP, INC. AND PREDECESSORS CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data)
Company Predecessors --------------------------------------------------- - -------------- For the Year For the Year For the Period For the Period Ended Ended July 27 to January 1 to December 31, December 31, December 31, July 26, 1996 1995 1994, as Restated 1994 - --------------------------------------------------------------------------- - --------------- Revenue Rental $ 91,037 $ 80,437 $32,099 $39,018 Property management services - third party 2,406 6,859 3,729 4,693 Property management services - affiliates 2,573 4,454 1,688 2,751 Leasing and other property services - third party 2,646 8,847 3,437 4,445 Leasing and other property services - affiliates 1,226 2,136 967 1,986 Interest - third party 559 537 445 156 Interest - affiliates 161 - - - Other - properties 3,285 3,023 1,222 2,225 Other - property services 836 1,275 1,125 1,668 -------- -------- ------- ------- Total revenue 104,729 107,568 44,712 56,942 -------- -------- ------- ------- Expenses Property operating and maintenance: Personnel 10,685 9,385 3,767 4,748 Advertising and promotion 1,924 1,621 625 860 Utilities 5,694 4,911 1,927 2,649 Building repair and maintenance 7,648 6,463 2,259 3,510 Real estate taxes and insurance 9,951 8,932 3,759 4,923 Other operating expenses 3,555 2,950 909 2,092 -------- -------- ------- ------- 39,457 34,262 13,246 18,782 Depreciation and amortization 19,552 18,561 7,019 6,499 Property management, net of amounts reimbursed by affiliates of $92, $114, $235 and $316 for 1996, 1995, the period July 27 to December 31, 1994, and the period January 1 to July 26, 1994, respectively 12,336 18,141 8,705 12,587 Interest - third party 22,066 17,011 6,448 14,057 Interest - affiliates - - - 801 General and administrative - property services, net of amounts reimbursed by affiliates of $179, $216, $182 and $945 for 1996, 1995, the period July 27 to December 31, 1994, and the period January 1 to July 26, 1994, respectively 4,997 5,693 2,052 2,006 General and administrative - corporate 1,919 1,979 795 - Reorganization costs - - 7,796 - -------- -------- ------- ------- Total expenses 100,327 95,647 46,061 54,732 -------- -------- ------- ------- Income (loss) before equity in income of ventures, gain (loss) on sale of properties, income taxes, minority interests and extraordinary items 4,402 11,921 (1,349) 2,210 Equity in income of ventures 1,012 775 317 429 Gain (loss) on sale of properties 9,209 (21) - - Gain on sale of commercial property services business 11,930 - - - -------- -------- ------- ------- Income (loss) before income taxes, minority interests and extraordinary items 26,553 12,675 (1,032) 2,639 Income taxes - - - - -------- -------- ------- ------- Income (loss) before minority interests and extraordinary items 26,553 12,675 (1,032) 2,639 Minority interests (5,338) (2,612) 207 - -------- -------- ------- ------- Income (loss) before extraordinary items 21,215 10,063 (825) 2,639 Extraordinary gain from forgiveness of debt, net of minority interests - - 6,832 1,776 Extraordinary loss from early extinguishment of debt, net of minority interests - - (5,196) - -------- -------- ------- ------- Net income $ 21,215 $ 10,063 $ 811 $ 4,415 ======== ======== ======= ======= Per share data: Income (loss) before extraordinary items $ 1.43 $ 0.68 $ (0.06) ======== ======== ======== $ 1.43 $ 0.68 $ 0.06 ======== ======== ========
See accompanying notes. 54 PARAGON GROUP, INC. AND PREDECESSORS CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (PARTNERS' AND OWNERS' DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995, THE PERIOD ENDED DECEMBER 31, 1994, AS RESTATED, AND THE PERIOD ENDED JULY 26, 1994 (Dollars in thousands)
Unamortized Employee Less: Additional Restricted Cost of Common Paid-in Stock Accumulated Treasury Stock Capital Compensation Deficit Shares Total - --------------------------------------------------------------------------- - --------------- / PARTNERS' AND OWNERS' DEFICIT AT DECEMBER 31, 1993 $ - $ - $ - $(40,031) $ - - $(40,031) Contributions - - - 3,202 - - 3,202 Distributions - - - (7,912) - - (7,912) Net Income - - - 4,415 - - 4,415 ---- -------- ------- -------- - ------- -------- PARTNERS' AND OWNERS' DEFICIT AT JULY 26, 1994 - - - (40,326) - - (40,326) Paragon Group, Inc. formation transactions - - - 13,391 - - 13,391 Reclassification of accumulated deficit at date of initial offering - (26,935) - 26,935 - - - Proceeds of initial offering, net of underwriting discount and offering costs of $24,813 137 266,069 - - - - 266,206 Shares issued in exchange for note receivable from property services corporation 7 14,393 - - - - 14,400 Shares issued pursuant to employee restricted stock plan 3 6,890 (6,136) - (757) - Adjustment for minority interests at date of initial offering - (56,786) - - - - (56,786) Net income - - - 811 - - 811 Amortization of employee restricted stock compensation - - 577 - - - 577 Dividends paid - - - (4,839) - - (4,839) ---- -------- ------- -------- - ------- -------- STOCKHOLDERS' EQUITY AT DECEMBER 31, 1994, AS RESTATED 147 203,631 (5,559) (4,028) (757) 193,434 Acquisition of land for Units - 1,251 - - - - 1,251 Acquisition of partner- ship interest for Units - (1,559) - - - - (1,559) Conversion of Units to common stock 1 1,214 - - - - 1,215 Net income - - - 10,063 - - 10,063 Amortization of employee restricted stock compensation - - 1,333 - - - 1,333 Redemption of employee restricted stock, net of additional grants - - 141 - (141) - Dividends paid - - - (27,271) - - (27,271) ---- -------- ------- -------- - ------- -------- STOCKHOLDERS' EQUITY AT DECEMBER 31, 1995 148 204,537 (4,085) (21,236) (898) 178,466 Partial repayment of note payable to affiliates with Units - 80 - - - - 80 Net income - - - 21,215 - - 21,215 Amortization of employee restricted stock compensation - - 2,135 - - - 2,135 Redemption of employee restricted stock, net of additional grants - - 897 - (897) - Dividends paid - - - (27,390) - - (27,390) ---- -------- ------- -------- - ------- -------- STOCKHOLDERS' EQUITY AT DECEMBER 31, 1996 $148 $204,617 $(1,053) $(27,411) $(1,795) $174,506 ==== ======== ======= ======== ======= ========
See accompanying notes. 55 PARAGON GROUP, INC. AND PREDECESSORS CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Company Predecessors - -------------------------------------------------------- For the Year For the Year For the Period For the Period Ended Ended July 27 to January 1 to December 31, December 31, December 31, July 26, 1996 1995 1994, as Restated 1994 - --------------------------------------------------------------------------- - --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 21,215 $ 10,063 $ 811 $ 4,415 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 18,859 16,182 6,471 6,455 Amortization 693 2,379 548 44 Amortization of deferred financing costs 1,473 1,559 602 472 Amortization of employee restricted stock compensation 1,368 1,333 577 - Equity in income of ventures - - (122) (171) Loss (gain) on sale of properties (9,209) 21 - - Gain on sale of commercial property services business (11,930) - - - Post-Measurement Date cash flow of commercial property services business 167 - - - Minority interests in income (loss) 5,338 2,612 (207) - Gain on forgiveness of debt, net of minority interests - - (6,832) (1,776) Loss on early extinguish- ment of debt, net of minority interests - - 5,196 - Changes in assets and liabilities: Decrease (increase) in restricted cash (383) 367 3,019 (695) Decrease (increase) in accounts receivable 3,261 (1,860) (2,415) 345 Decrease (increase) in deferred rent receivable 7 (18) 25 19 Increase in prepaid leasing costs (62) (136) (55) - Decrease (increase) in other assets (523) (1,614) (472) 63 Increase (decrease) in accrued interest payable 386 463 (619) 898 Increase (decrease) in accrued real estate taxes (90) 861 (930) 2,572 Increase (decrease) in accounts payable and accrued liabilities (1,707) 4,052 4,089 (678) Increase in tenant security deposits 73 258 1,412 32 -------- -------- ------- - ------- Net cash provided by operating activities 28,936 36,522 11,098 11,995 -------- -------- ------- - ------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to operating real estate assets (29,018) (56,082) (183,554) (3,229) Additions to construction in process, net of payables (36,740) (43,560) (3,217) - Additions to investment in ventures (95) (3,624) (60) - Purchase of working capital assets, net - (553) - - Purchase of management and leasing contracts - - (5,600) - Payments of organization costs - (22) (82) - Distributions received from ventures 6,835 462 36 89 Increase in note receivable from venture (9,723) - - - Proceeds from sale of properties, net of selling 37,018 13 - - costs of $782 in 1996 Proceeds from sale of commercial property services business, net of selling costs paid of $947 17,289 - - - -------- -------- ------- - ------- Net cash used in investing activities (14,434) (103,366) (192,477) (3,140) -------- -------- ------- - ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of common stock - - 266,206 - Dividends (27,390) (27,271) (4,839) - Contributions from minority interests - - 100 - Distributions to minority interests (7,020) (7,063) (1,235) - Capital contributions - - - 3,202 Capital distributions - - - (7,912) Deemed distributions at formation - - (11,442) - Payments of deferred financing costs (777) (1,139) (4,336) (115) Proceeds from notes payable 81,100 174,080 129,248 8,300 Payments on notes payable (58,162) (72,512) (182,902) (9,507) Payment of participation fees and prepayment penalties - - (5,778) - Distributions to repay off-balance sheet debt - - (2,600) - Decrease (increase) in advances to affiliates (1,749) 1,419 (1,450) - Proceeds from partner loans - - - 283 Payments on partner loans - - (1,463) (178) -------- -------- ------- - ------- Net cash provided by (used in) financing activities (13,998) 67,514 179,509 (5,927) -------- -------- ------- - ------- Net increase (decrease) in cash and cash equivalents 504 670 (1,870) 2,928 Cash and cash equivalents, beginning of period 6,583 5,913 7,783 4,855 -------- -------- ------- - ------- Cash and cash equivalents, end of period $ 7,087 $ 6,583 $ 5,913 $ 7,783 ======== ======== ======= ======= Cash paid for interest $ 22,023 $ 16,556 $ 6,475 $13,305 ======== ======== ======= =======
See supplemental non-cash disclosures at Note 15. See accompanying notes. 56 PARAGON GROUP, INC. AND PREDECESSORS NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- December 31, 1996 (Dollars in thousands, except per share or share/unit data) 1. ORGANIZATION AND FORMATION OF THE COMPANY Paragon Group, Inc. (together with its subsidiaries, the "Company"), qualifies as a real estate investment trust ("REIT") for Federal income tax purposes and was incorporated in the state of Maryland on March 23, 1994 to continue the operations of certain entities involved in management, leasing, construction, development and ownership of real estate assets (collectively the "Predecessors"). On July 27, 1994, the Company completed an initial public offering (the "Initial Offering") of 13,000,000 shares of common stock (including 1,000,000 shares issued upon exercise of the underwriters' over-allotment option), a sale of 695,000 shares of common stock to the sponsors (the "Private Placement") and a business combination with the Predecessors. The offering price of all shares sold was $21.25 per share, resulting in net proceeds (less the underwriters' discount and offering costs) of approximately $266,206. Additionally, in August 1994, the Company issued 324,400 shares of common stock for use in the Employee Restricted Stock Plan. Upon completion of the Initial Offering, the Company, through its wholly-owned subsidiary, Paragon Group LP Holdings, Inc., acquired a 79.1% limited partner interest in Paragon Group L.P. (the "Operating Partnership"). The Operating Partnership succeeded to substantially all of the interests of the Predecessors and certain others in certain properties. The Company, through its wholly-owned subsidiary, Paragon Group GP Holdings, Inc., is the sole general partner and the holder of a 1% interest in the Operating Partnership. In consideration for the sale of certain properties and partnership interests, certain owners of the Predecessors, including affiliates of the Company, elected to receive limited partnership units ("Units") in the Operating Partnership. The 3,648,546 Units received by such owners at formation represented an approximate 19.9% equity interest in the Operating Partnership. Proceeds from the Initial Offering, the Private Placement and new borrowings totaled $408.5 million. The Company and the Operating Partnership used these proceeds to (i) purchase certain properties and interests in certain other properties, (ii) retire existing debt associated with certain properties, (iii) pay expenses of the offering including underwriting discounts, accounting, legal, and other formation costs, (iv) pay prepayment penalties, purchase lender participation interests, buy down interest rates on certain mortgage loans and pay loan costs on new indebtedness, (v) make distributions to certain owners of the Predecessors to repay off-balance sheet debt associated with one of the properties, (vi) purchase the property services businesses from affiliates, (vii) pay real estate taxes and fund interest and tax escrows, and (viii) establish working capital reserves. During 1995, the Operating Partnership issued 116,136 Units to acquire additional property and partnership interests from affiliates of the Company and 94,118 Units were redeemed for shares of common stock in the Company (with the Company acquiring such Units in exchange for a like number of shares). On January 3, 1996, the Operating Partnership issued 4,694 Units in partial settlement of debt assumed on the purchase of the Overlook Apartments. At December 31, 1996, the Company's ownership interest in the Operating Partnership was 80.1%. Subsequent to the business combination and prior to June 30, 1996, the Company's management, leasing, construction and development businesses were conducted through Paragon Group Property Services, Inc. ("PGPSI"). The Company, through the Operating Partnership, owned 100% of the non-voting stock and 1% of the voting stock of PGPSI (collectively representing 99% of the total equity). As discussed in Note 4, effective June 30, 1996, the Company sold its interest in PGPSI (after spin-off of the residential property services business) and formed Paragon Residential Services, Inc. ("PRSI") to continue the Company's residential property services business previously conducted through PGPSI. The Company has a 95% economic interest in PRSI through ownership of 100% of the nonvoting common stock and 1% of the voting stock. The remaining 99% of the voting stock, which represents a 5% economic interest, is owned by a partnership controlled by certain current and former executive officers of the Company. 57 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation for Periods after the Initial Offering For the periods after the Initial Offering, the accompanying consolidated financial statements include the accounts of the Company, Paragon Group GP Holdings, Inc., Paragon Group LP Holdings, Inc., Paragon Group L.P., PGPSI (through the date of sale), Paragon Residential Services, Inc., 8 wholly-owned partnerships and one limited liability company, and partnerships owning 13 properties where the Company, through the Operating Partnership, has a controlling interest. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company, subsequent to the Initial Offering on July 27, 1994 and through the third quarter of 1995, accounted for its investment in PGPSI under the cost method consistent with prior regulatory direction. However, in September 1995, the Emerging Issues Task Force of the Financial Accounting Standards Board ("EITF") reached a consensus in EITF 95-6 "Accounting by a Real Estate Investment Trust for an investment in a Service Corporation" that the cost method of accounting for such investments was not appropriate and, based upon the specific facts and circumstances, either the equity method or consolidation accounting should be used. While the Company only held 1% of the voting stock of PGPSI, due to its 99% economic interest and other factors the Company believes that the consolidation method should be used and provides for the most meaningful financial statement presentation. Accordingly, in the fourth quarter of 1995, the Company changed its method of accounting for PGPSI from the cost method to consolidation of the financial position and results of operations of PGPSI in the Company's consolidated financial statements. Furthermore, as required by EITF 95-6, the 1994 financial statements (specifically, the period from July 27, 1994 through December 31, 1994) have been restated to consolidate PGPSI. The effect of the restatement was to decrease stockholders' equity at December 31, 1994 by $20,456 and to decrease income before extraordinary items and net income by $120. The effect on net income per share was nominal. The business combination was structured to allow the partners and owners of the entities in the Predecessors to receive either cash or Units in the Operating Partnership. (Units can be exchanged, with certain restrictions, for cash or common stock in the Company, at the Company's election, on a one-for-one basis.) Purchase accounting was applied to the acquisition of all non-controlled interests from persons who received either cash or Units in the Operating Partnership as consideration as well as controlled interests from persons who received cash. The acquisition of all other interests was accounted for as a reorganization of entities under common control and, accordingly, was reflected at historical cost in a manner similar to that of pooling of interests accounting. Acquisitions subsequent to the Initial Offering have been accounted for in a similar manner. Basis of Presentation for Periods prior to the Initial Offering For periods prior to the Initial Offering, the accompanying combined financial statements of the Predecessors include the accounts of 45 partnerships owning multifamily apartment communities, two partnerships owning retail properties, one partnership owning an office property and various entities engaged in property management, leasing, construction and development on a contractual basis. Additionally included are the accounts of a partnership which owns a 20% interest in an office property and is therefore accounted for using the equity method. The Predecessors is not a legal entity but rather a combination for financial reporting purposes. The accompanying combined financial statements are presented on a combined basis because of common ownership and management. All significant inter-entity accounts and transactions have been eliminated in combination. The accompanying combined financial statements prior to the business combination exclude or carve out certain assets and liabilities that were not contributed to the Operating Partnership or transferred to PGPSI. 58 Real Estate Assets and Depreciation Real estate assets are stated at cost. Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments are capitalized and depreciated on a straight-line basis over the estimated useful lives of the properties (buildings and related land improvements - 10 to 40 years; furniture, fixtures, and equipment - 3 to 10 years; and tenant improvements - over the life of the related tenant lease). With respect to the operating apartment properties, the Company capitalizes floor and window coverings and depreciates such items over 5 years; appliances and heating, ventilating and air conditioning equipment are capitalized and depreciated over 10 years. With respect to construction in process, the Company capitalizes all costs associated with development activities, including interest and taxes, until each project is complete. Capitalized interest for the years ended December 31, 1996, 1995 and 1994 aggregated to $1,687, $1,608 and $47, respectively. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long Lived Assets" ("FAS 121"). FAS 121 establishes accounting standards for the impairment of long lived assets and is effective for fiscal years beginning after December 15, 1995, with early adoption encouraged. The Company adopted FAS 121 in 1995. Accordingly, the Company records impairment losses on long lived assets used in operations when events and circumstances indicate that the assets may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. No such impairment losses with respect to real estate assets used in operations have been recognized to date. Real estate assets to be disposed of are carried at the lower of the carrying amount or estimated fair value less selling costs and are classified as real estate held for sale in the accompanying consolidated balance sheets. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all investments purchased with an original maturity of three months or less to be cash equivalents. Restricted Cash Restricted cash is comprised of tenant security deposits, real estate tax and insurance escrows, required reserves for property replacements, and other cash restricted pursuant to loan or other agreements. Investment in Ventures The Company's 20% interest in Gateway One Office Venture ("Gateway"), its 10% interest in Fair Grove Properties, L.L.C. ("Fair Grove") and its approximate 44% interest in Paradim, Inc. and it's subsidiaries (collectively, "Paradim") are accounted for using the equity method of accounting. Deferred Charges Deferred charges include costs incurred in connection with the formation of each entity which are generally amortized on a straight-line basis over five years; deferred financing costs which are amortized on a straight-line basis over the life of the related loan; prepaid leasing costs on the office and retail properties which are amortized on a straight-line basis over the life of the related tenant lease; and management and leasing contracts purchased at formation which are amortized on a straight-line basis over five years. 59 Revenue Recognition Rental income attributable to residential leases is recognized when earned. Minimum rental income related to retail and office leases is recognized on a straight-line basis over the terms of the leases. Certain of the leases include scheduled rent increases and provisions whereby the tenant is not responsible for rental payments during specified initial occupancy periods. Rental income recognized in excess of payments due is reflected as a deferred rent receivable in the accompanying balance sheets. The retail and office leases also provide for reimbursement of actual operating expenses in excess of base amounts. Management fees are based on a percentage of the rental receipts of properties managed and are recognized when earned. Leasing fees are based on the gross value of leases signed and are recognized as earned under the terms of the various contracts. Construction and development fees are generally based on a fixed percentage of costs and are recognized as the project costs are incurred. Stock Compensation In October 1995, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("FAS 123") which establishes financial accounting and disclosure standards for stock based employee compensation plans and is effective for fiscal years beginning after December 15, 1995. FAS 123 provides an alternative of adopting the new accounting standards of the statement or remaining under the existing requirements of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has decided to continue accounting for its stock compensation arrangements under the provisions of APB 25. Per Share Data and Dividends Earnings per share with respect to the Company for the periods following the Initial Offering are computed based upon the weighted average number of shares outstanding during the respective period. Historical per share data with respect to the periods prior to the Initial Offering is not relevant since the Predecessors' financial statements are a presentation of the combined operations of partnerships and S corporations. For the years ended December 31, 1996 and 1995 and the period from July 27, 1994 through December 31, 1994, the Company paid dividends of $27,390, $27,271 and $4,839, respectively. For income tax purposes, dividends paid to stockholders consist of ordinary income, short-term capital gains, long-term capital gains or return of capital. The following is a summary of the income tax treatment of the dividends paid by the Company: Period Year Ended December 31, July 27 to ----------------------- December 31, 1996 1995 1994 ------------------------------------ Ordinary income............... 53.24% 47.41% - Short-term capital gain....... 0.89% - - Long-term capital gain........ 16.51% - - Return of capital............. 29.36% 52.59% 100.00% ------ ------ ------ Total 100.00% 100.00% 100.00% ====== ====== ====== 60 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Concentrations At December 31, 1996 and 1995, there were cash and restricted cash balances with banks in excess of the FDIC insured limits by $5,188, and $3,376, respectively. The Company has not experienced any losses in its cash accounts, and believes it is not exposed to any significant credit risk on cash and cash equivalents. As of December 31, 1996, certain apartment units are leased to tenants that have common employers and may be dependent on one related source of income. Management believes that any possible loss resulting from the above-mentioned concentrations would not be material as the apartment units could be re-leased if the current tenants fail to perform under their obligations. 3. REAL ESTATE INVESTMENTS Real Estate As of December 31, 1996, the Company, through the Operating Partnership, controls, either through direct ownership or in some instances through an investment in a partnership or a limited liability company, 58 multifamily residential properties in Florida, Kentucky, Missouri, North Carolina, South Carolina and Texas. The Company, through the Operating Partnership, also owns an interest in Paradim which owns 3 multifamily residential properties that were previously wholly-owned by the Company, and has a minority interest in Gateway and Fair Grove which own three office properties; one in Missouri and two in suburban Washington, D.C. In addition, the Company has entered into a non-recourse ground lease, which commenced on October 24, 1996, related to approximately 27.47 acres in Louisville, Kentucky for potential development of a multifamily residential community in 1997. At December 31, 1996, the 58 multifamily residential properties controlled by the Company include 55 operating properties containing 15,026 apartment units, two properties under development for which 520 units are planned and a 12.6 acre tract of land for which 320 units are planned which the Company acquired in December 1996 for future development. Two of the operating properties containing 548 units are in the initial lease-up phase. The three multifamily residential properties owned by Paradim include two operating properties containing 928 apartment units and one property under development for which 336 units are planned. 61 The following is a summary of the Company's real estate investments at December 31, 1996: Number of Properties Number of Apartment Units -------------------- ------------------------- Under Under Location Operating Development Total Operating Development Total - -------- --------- ----------- ----- --------- ----------- ----- Multifamily Properties FLORIDA Tampa/St. Petersburg 13 - 13 4,013 - 4,013 Orlando (1) 7 1 8 1,802 320 2,122 Winterhaven. 1 - 1 192 - 192 -- -- -- ------- ----- ------- 21 1 22 6,007 320 6,327 -- -- -- ------- ----- ------- KENTUCKY Louisville 5 - 5 1,142 - 1,142 -- -- -- ------- ----- ------- MISSOURI St. Louis 12 - 12 3,142 - 3,142 Kansas City 1 1 2 308 288 596 -- -- -- ------- ----- ------- 13 1 14 3,450 288 3,738 -- -- -- ------- ----- ------- NORTH CAROLINA Charlotte (2) 6 1 7 1,647 232 1,879 Greensboro (3) 2 1 3 520 336 856 -- -- -- ------- ----- ------- 8 2 10 2,167 568 2,735 -- -- -- ------- ----- ------- SOUTH CAROLINA Charleston 1 - 1 352 - 352 -- -- -- ------- ----- ------- TEXAS Dallas (4) 9 - 9 2,836 - 2,836 -- -- -- ------- ----- ------- Total Residential 57 4 61 15,954 1,176 17,130 == == == ======= ===== ======= Number of Properties Number of Square Feet -------------------- ------------------------- Under Under Location Operating Development Total Operating Development Total - -------- --------- ----------- ----- --------- ----------- ----- Office Properties MISSOURI St. Louis (5) 1 - 1 401,625 - 401,625 Washington, D.C.(6) 2 - 2 322,845 - 322,845 -- -- -- ------- ----- ------- Total Office 3 - 3 724,470 - 724,470 == == == ======= ===== ======= (1) Operating information includes a 272 unit project that is in the initial lease-up phase. Development information includes 320 units related to land purchased in December 1996 for future development. (2) Operating information includes a 220 unit project owned by Paradim in which the Company holds an approximate 44% interest. (3) Development information includes a 336 unit project owned by Paradim in which the Company holds an approximate 44% interest. (4) Operating information includes a 276 unit project that is in the initial lease-up phase and a 708 unit project owned by Paradim in which the Company holds an approximate 44% interest. (5) Represents an office building owned by Gateway in which the Company holds a 20% interest. (6) Represents two office buildings owned by Fair Grove in which the Company holds a 10% interest. 62 Development On January 29, 1996, the Company, through PGPSI, acquired a 5.15 acre tract of land in suburban Dallas, Texas and commenced construction on the 108,600 square feet Post and Paddock office/warehouse development. Construction was completed in November 1996 and the property was sold on December 4, 1996 for $3,700. The Company has entered into a non-recourse ground lease, which commenced on October 24, 1996, related to approximately 27.47 acres in Louisville, Kentucky for potential development in 1997. The ground lease allows the Company to develop, at its' discretion, a one or two phase multifamily residential community on the leased acreage. The lease has a term of 40 years and under certain conditions, the Company has the option to acquire the land. Monthly lease payments which are estimated to range from $7 to $14 have been deferred until July 1, 1997. On December 13, 1996, the Company acquired a 12.6 acre tract of land in Orlando, Florida for $2,007. A 320 unit multifamily residential community is planned for the site which, when developed, will be the second phase of the completed 272 unit Renaissance Pointe apartments. During 1996, the Company completed construction of three multifamily residential properties containing a total of 824 apartment units. At December 31, 1996, an additional 856 apartment units were under construction which are scheduled for completion in the first and second quarters of 1997, including 336 units owned by Paradim. The three multifamily residential properties completed in 1996 include the 276 unit Heron Pointe apartments in Tampa, Florida completed in February 1996, the 272 unit Renaissance Pointe apartments in Orlando, Florida completed in July 1996 and the 276 unit Stone Gate apartments completed in August 1996. At December 31, 1996, the Renaissance Pointe apartments and the Stone Gate apartments were in the initial lease-up phase. Acquisitions On November 8, 1996, the Company purchased two North Carolina multifamily residential communities (the 240 unit Habersham Pointe apartments in Charlotte, North Carolina and the 216 unit River Oaks apartments in Greensboro, North Carolina) from a single seller for a total purchase price of $20,900, including the assumption of mortgage indebtedness in the amount of $6,357 collateralized by the River Oaks apartments. Dispositions As a result of the sale of its commercial property services business discussed in Note 4, the Company disposed of its three wholly-owned operating commercial properties in the fourth quarter of 1996. The Company also sold the Turtle Creek I and the Turtle Creek II apartments in Asheville, North Carolina in the fourth quarter of 1996. The 1996 property sales are summarized in the following table: 63 SF/# of Sales Date Sold Property Location Units Price --------- -------- -------- ----- -------- Commercial Properties - --------------------- October 1, 1996 Southwood Mall Bradenton, FL 113,949 $ 3,170 October 31, 1996 Westgate Centre St. Louis, MO 58,935 7,130 December 19, 1996 The Paragon St. Louis, MO 102,486 10,000 Multifamily Properties - ---------------------- December 12, 1996 Turtle Creek I Asheville, NC 208 7,075 December 12, 1996 Turtle Creek II Asheville, NC 176 6,725 ------- Total $34,100 ======= In accordance with FAS 121, properties held for sale are to be carried at the lower of the carrying amount or estimated fair value less selling costs. Accordingly, at June 30, 1996, the Company recognized an impairment adjustment of $1,143, all of which related to Southwood Mall, which is included in gain (loss) on sale of properties in the accompanying statements of operations. In addition, in an effort to maximize the long term growth potential of the portfolio, management intends to regularly evaluate the possible disposition of targeted multifamily residential assets where a redeployment of capital can increase geographic efficiencies or improve operating results. At December 31, 1996, three multifamily properties (the 232 unit Brookfield apartments in Dallas, Texas; the 352 unit Westchase Apartments in Charleston, South Carolina; and the 251 unit San Miguel Apartments in St. Louis, Missouri) are classified as held for sale. The Company expects to sell these properties at prices in excess of carrying amounts. Joint Venture On April 1, 1996, the Company entered into a joint venture (Paradim) with Careit Investments Limited Partnership ("Careit"), an affiliate of Caisse de depot et placement du Quebec, to acquire, develop and operate selected multifamily residential properties in markets in which the Company operates. The Company and Careit each have committed to invest up to $22,500, primarily through a newly formed Maryland corporation, Paradim, Inc., which intends to qualify as a REIT for Federal income tax purposes. Each investment by Paradim, Inc. is to be made through separate limited liability companies or limited partnerships in which Paradim, Inc. will own an 89%interest as the managing member or general partner, the Company will own a 1% interest and a number of private investors will own the remaining interests. In connection with Paradim, Inc.'s initial capitalization, the Company effectively contributed its interest in three properties (Overlook, formerly known as The Phoenix, a 220-unit multifamily residential complex in Charlotte, North Carolina; Highpoint, a 708-unit multifamily residential complex in Dallas, Texas; and Brassfield Park, a 336-unit multifamily residential complex under development in Greensboro, North Carolina) and Careit contributed $7,926 in cash. At formation, the Company also received a distribution of approximately $6,618, which was used to repay existing indebtedness under the line of credit. The Company recorded the initial contribution of these properties at their net carrying value on April 1, 1996, which was approximately $14,726 (net book value of$41,842 subject to existing indebtedness of $27,116). The Company's investment, which includes a direct 1% interest in two limited liability companies and one limited partnership and an approximate 43% indirect interest in such entities through its ownership in Paradim, Inc. (collectively, approximately 44%), is being accounted for under the equity method. As of December 31, 1996, the Company's aggregate investment in Paradim was approximately $7,954. 64 4. PROPERTY SERVICES Subsequent to the business combination on July 27, 1994 and through June 30, 1996, the Company's management, leasing, construction and development businesses were conducted through PGPSI. PGPSI provided residential and commercial property services to the Company, affiliates of the Company and unrelated third parties. PGPSI was originally capitalized with $3,000 of cash and the issuance of a $17,000 note. During 1995, PGPSI was realigned from a regional multi-product organization to two national product groups - one for residential operations and one for commercial operations. As a result of the realignment, PGPSI incurred non-recurring charges totaling $748 related to employee severance and other costs, including $195 of non-cash charges associated with the accelerated vesting of outstanding restricted stock made available to certain employees (See Note 9). At December 31, 1995, PGPSI managed over 26.4 million square feet of commercial space and 22,085 apartment units. In May 1996, the Company executed an agreement to sell its commercial property services business to an affiliate of Insignia Financial Group, Inc. ("Insignia"). In order to accomplish the sale, PGPSI's residential property services business was transferred to PRSI. Immediately following the transfer, as of June 30, 1996, Insignia acquired all of the outstanding stock of PGPSI and a $12,432 note receivable from PGPSI held by the Company. The acquisition price included initial cash consideration of$18,200 and two potential earn-out payments totaling up to $4,000 which are contingent upon PGPSI revenue meeting certain specified targets over the next three years. The earn-out payments may be reduced by as much as $2,900 in the event certain management contracts are terminated within a two-year period after closing. In addition, the initial acquisition price may be reduced by up to $1,100 in the event the employment of certain employees of PGPSI is terminated within one year after closing or certain existing management contracts are terminated within a five-year period after closing. In connection with the sale, the Company received warrants to purchase up to 50,000 shares of Insignia Financial Group, Inc. stock at a price of $28.96 per share and Insignia received warrants to purchase 50,000 shares of the Company's stock at$18.25 per share and may receive warrants to purchase an additional 238,000 shares at$18.25 per share, depending on the termination of certain management contracts during the two-year period after closing. As a result of the sale, the Company recognized a gain of $11,930 which does not consider potential earn-out payments, the value of warrants issued or received, or$1,100 of the initial acquisition price which is contingent on future events. The contingent portion of the initial acquisition price and the earn-out payments, if any, will be recognized when earned. The gain on sale was determined in accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations", whereby the commercial property service business net loss of $843 from the date (May 7,1996) management committed to the disposal of the commercial property services business (the "Measurement Date") through the date of sale (June 30, 1996) was treated as a reduction of the gain on sale. The post-Measurement Date net loss is summarized as follows: 65 Revenue Property management services - third party........... $ 724 Property management services -affiliates............. 471 Leasing and other property services - third party.... 1,318 Leasing and other property services - affiliates..... 376 Other................................................ 430 ------ 3,319 ------ Expenses Property management.................................. 3,348 General and administrative........................... 570 Interest............................................. 1 Depreciation and amortization........................ 243 ------ 4,162 ------ Net Loss.................................................. $ (843) ====== Included in property management expenses is $767 of amortization primarily related to the June 30, 1996 accelerated vesting of employee restricted stock granted to certain employees of the commercial property services business. The closing of the sale occurred on July 2, 1996, at which time the Company received net proceeds from the sale of $18,072 (net of prorations of $165). Proceeds from the sale were used to reduce borrowings outstanding under the line of credit. PRSI will continue the Company's residential property services business and will provide all residential property service functions previously provided by PGPSI, including property management, leasing, development, acquisition and disposition for its owned residential communities as well as for affiliated and third party residential owners. As of December 31, 1996, the Company, through PRSI, managed 77 multifamily residential communities located across the United States, totaling approximately 21,696 apartment units (of which 57 communities and 15,954 apartment units were for the Company, including two communities and 928 apartment units for Paradim). 5. DEFERRED CHARGES Deferred charges consist of the following: December 31, December 31, 1996 1995 ----------- ----------- Deferred financing costs............ $7,229 $ 8,378 Organization costs.................. 249 249 Prepaid leasing costs............... - 421 Management and leasing contracts.... 1,356 4,044 ------- ------- 8,834 13,092 Less: Accumulated amortization...... (3,060) (3,838) ------- ------- $ 5,774 $ 9,254 ======= ======= Amortization of organization costs and prepaid leasing costs was $94, $148 and $110 for the years ended December 31, 1996, 1995 and 1994, respectively. Amortization of deferred financing costs, which is included in interest expense in the accompanying statements of operations, was $1,473, $1,559 and $1,074 for the years ended December 31, 1996, 1995 and 1994, respectively. During 1996, an additional $204 of construction period amortization of deferred financing costs related to multifamily residential developments under construction was capitalized. 66 Amortization of management and leasing contracts purchased at formation was $797, $2,231 and $482 for the years ended December 31, 1996 and 1995 and the period from July 27, 1994 through December 31, 1994, respectively. Management has estimated the useful life of the contracts initially acquired to be five years, based upon historical experience with other contracts with similar terms. During 1996 and 1995, certain of the contracts were terminated, and as a result, the Company recognized impairment adjustments of $258 and $1,111, respectively, which are included in amortization expense in the accompanying statements of operations. The impairment adjustments, determined on a prorata basis, were based upon the percentage of contracts terminated during 1996 and 1995. The contracts terminated in 1996 and 1995 were allocated gross values of $359 and $1,556 and related accumulated amortization of $101 and $445, respectively. Management intends to periodically evaluate the carrying amount of the management and leasing contracts in the future and, if necessary, record additional impairment adjustments. In 1996, the Company wrote-off $2,329 of management and leasing contracts (and $941 of related accumulated amortization) which related to the commercial property services business sold in 1996 which is included in gain on sale of commercial property services business in the accompanying statements of operations. In addition, $462 of prepaid leasing costs (and $185 of related accumulated amortization) which related to the commercial properties sold in 1996 was written-off in 1996 and is included in the gain (loss) on sale of properties in the accompanying statements of operations. In 1996 and 1995, the Company also wrote-off certain fully amortized deferred charges including $1,841 of deferred financing costs in 1996 and $206 of organization costs, $86 of prepaid leasing costs and $730 of deferred financing costs in 1995. As a result of loan repayments in 1994, $970 of deferred financing costs were written-off and are reflected as an extraordinary loss in the accompanying statements of operations. 6. INCOME TAXES Periods after the Initial Offering The Company has elected to be taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended, commencing with its taxable year ended December 31, 1994. As a result, the Company will generally not be subject to Federal income tax on its taxable income to the extent it distributes annually at least 95% of its taxable income to its shareholders and complies with certain other requirements. Accordingly, no provision for Federal income taxes has been made for the Company and certain of its subsidiaries in the accompanying consolidated financial statements. State, local and other taxes are not significant for the Company or its subsidiaries. As of December 31, 1996 and 1995, the net assets reported in the consolidated financial statements for the Company exceed the tax basis in net assets by approximately $39,000 and $44,000, respectively. PGPSI and PRSI file separate tax returns and are subject to income tax. Accordingly, the provision for income taxes for PGPSI through the date of sale on June 30, 1996 and for PRSI for the period from July 1, 1996 through December 31, 1996 has been calculated in accordance with the Statement of Financial Accounting Standards 109, "Accounting for Income Taxes" ("FAS 109"). Under the provisions of FAS 109, deferred tax assets and liabilities are provided for certain temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes, computed based on provisions of the enacted tax law. Significant components of deferred tax assets and liabilities for PGPSI as of December 31, 1995 and PRSI as of December 31, 1996 are as follows: 67 PRSI PGPSI December 31, December 31, 1996 1995 ------------ ------------ Deferred tax assets: Intangible assets....................... $1,266 $4,189 Net operating loss...................... 819 1,284 Employee restricted stock compensation.. 388 561 Other ................................ 225 133 ------ ------ 2,698 6,167 Valuation allowance..................... (2,605) (5,304) ------ ------ $ 93 $ 863 ====== ====== Deferred tax liabilities: Depreciable assets...................... $ 87 $ 858 Other ................................ 6 5 ------ ------ $ 93 $ 863 ====== ====== Deferred tax assets relate primarily to (i) the difference in the carrying amount of intangible assets recognized at formation of each entity for financial reporting purposes and the amount recognized for tax purposes; (ii) the amortization of employee restricted stock compensation for financial reporting purposes; and (iii) tax net operating losses, which for PRSI expires in 2011. Deferred tax liabilities relate primarily to the difference in the carrying amount of certain depreciable assets for financial reporting purposes which are deducted for tax purposes. A valuation allowance has been recognized to offset the net deferred tax assets, due to the uncertainty of the ultimate realization of those deferred tax assets in future years. Periods prior to the Initial Offering The entities included in the combined financial statements of the Predecessors were either limited partnerships or S corporations and were not subject to Federal and state income taxes. Accordingly, no recognition has been given to income taxes in the combined financial statements of the Predecessors since the income or loss of the entities are to be included in the tax returns of the individual owners. 7. NOTES PAYABLE Debt Restructuring During 1994, net proceeds from the Initial Offering, the Private Placement and new borrowings were utilized to retire 28 loans (26 of which were retired prior to maturity) with outstanding balances of $174,449, including seven loans which were repaid at a discount. In order to retire certain loans, the Company was required to pay lender participation interests of $2,577 and prepayment penalties of $3,201. In connection with the Initial Offering, the Company paid $680 and entered into an interest rate swap agreement in the notional amount of $6,760. The agreement, which expires on January 27, 2000, effectively reduces the fixed interest rate on one mortgage note from 9.5% to 7.5%. Additionally, the Company reduced the outstanding principal balances of seven loans by $4,229 and utilized $755 to reduce the interest rates on four loans. During 1994, debt restructuring resulted in an extraordinary gain from the forgiveness of debt (before minority interests) of $10,675 and an extraordinary loss from early extinguishment of debt (before minority interests) of $6,748. 68 Mortgages Payable Concurrent with the Initial Offering, the Company obtained new debt in the amount of $108,540 which is collateralized by certain properties. The new debt is structured in two pools; Pool A, in the amount of $61,710, requires monthly payments of interest only at 8.36% per annum and matures in July 2001; and Pool B, in the amount of $46,830, requires monthly payments of interest only at 8.52% per annum and matures in July 1999. Effective October 1, 1995, the Company assumed debt in the amount of $9,856 associated with the acquisition of partnership interests related to the 372 unit Spanish Trace apartments in St. Louis, Missouri. The loan requires monthly payments of principal and interest, bears interest at 7.35% per annum, matures in September 2028 and is insured by the United States Department of Housing and Urban Development ("HUD"). There are no restrictions on the use or operation of this property. In December 1995, the Company obtained new debt in the amount of $69,000 collateralized by various properties. The new debt requires monthly interest only payments at 7.29% per annum for three years and monthly principal and interest payments for years four through ten based on a 25 year amortization schedule and matures December 2005. Net proceeds of the new debt were used to repay existing borrowings under the Company's line of credit. Additionally, in December 1995, in conjunction with the purchase of the 220 unit Overlook apartments in Charlotte, North Carolina, the Company obtained new debt in the amount of $5,400 which is collateralized by the property. The loan requires monthly payments and bears interest at 7.5% fixed throughout the term with interest only payments for the first two years and principal and interest payments for the last 5 years based on a 25 year amortization schedule. The note matures in January 2003. On April 1, 1996, the loan was assumed by Paradim. Also in December 1995, concurrent with the acquisition of two properties, the Company borrowed $20,250 and $7,930. The notes required monthly payments of interest only at interest rates of 7.66% and 7.63% respectively. The notes were collateralized by various properties and had maturity dates of June and March 1996, respectively. The $7,930 loan was repaid at maturity on March 28, 1996 and on April 1, 1996, the $20,250 loan was assumed by Paradim. On November 6, 1996, the Company obtained new debt in the amount of $7,400 collateralized by the 278 unit Schooner Bay apartments in Tampa, Florida. The new debt requires monthly payments of principal and interest at 7.7% per annum for seven years and matures in November 2003. Net proceeds of the new debt were used to fund a portion of the purchase of the 240 unit Habersham Pointe apartments in Charlotte, North Carolina and the 216 unit River Oaks apartments in Greensboro, North Carolina on November 8, 1996. On November 8, 1996, in conjunction with the purchase of the 216 unit River Oaks apartments in Greensboro, North Carolina, the Company assumed mortgage indebtedness in the amount of $6,357 collateralized by the property. The loan requires monthly payments of principal and interest at 8.44% per annum and matures on October 15, 1999. Mortgages payable consist of 30 loans ($254,592 principal amount) at December 31, 1996 and 33 loans ($279,280 principal amount) at December 31, 1995, each of which is collateralized by properties included in real estate assets. At December 31, 1996, 22 of the loans ($219,134 principal amount) carry a fixed interest rate and provide for the monthly payment of interest only, and 8 loans ($35,458 principal amount) provide for monthly payments of principal and interest at a fixed rate. Interest rates on the fixed rate mortgages range from 5.75% to 8.52% at December 31, 1996 with a weighted average interest rate of 7.75%. At December 31, 1995, 27 of the loans carry a fixed interest rate and provide for the monthly payment of interest only, and 6 loans provide for monthly payments of principal and interest at a fixed rate. Interest rates on the fixed rate mortgages range from 5.75% to 10% at December 31, 1995 with a weighted average interest rate of 7.71%. During 1996, $12,762 of principal was repaid on mortgage loans. 69 At December 31, 1996 and 1995, two of the mortgage loans collateralize tax exempt housing revenue bonds and two related mortgage loans collateralize taxable housing revenue bonds. The Predecessors obtained these mortgages during 1993. As additional security for these loans, the Predecessors entered into reimbursement agreements, paid premiums of $1,587, and agreed to pay an annual servicing fee of .1% of the original loan balances. The underlying collateral for the bonds is subject to land use restrictions which provide, among other things, that at least 20% of the multifamily housing units be leased to low or moderate income families as established by HUD. On July 27, 1994, the Operating Partnership assumed the aforementioned mortgage loans and succeeded to the agreements and restrictions thereto. At December 31, 1996, the Company owned one other multifamily property which was previously financed with the proceeds of multifamily revenue bonds and remains subject to similar HUD restrictions which expire under certain conditions in 1997. Line of Credit Concurrent with the Initial Offering, the Company obtained a line of credit facility in the amount of $75,000. The commitment was subsequently increased to $115,000 and in December 1995 was reduced by the Company to $90,000 and under certain conditions could be increased to $150,000. On July 27, 1996, the Company executed a renewal and modification of the line of credit facility. Under the terms of the new agreement, the Company may borrow up to $85,000 including up to $50,000 related to development activities. The line of credit matures in July 1998, but may be extended through July 1999 at the Company's option. Borrowings under the line of credit are collateralized by specified operating properties and properties under development. The interest rate on the amounts outstanding under the line are based on, at the Company's election, either (i) the greater of the prime rate or the Federal Funds rate plus .50% or, (ii) the London Interbank Offer Rate ("LIBOR") plus 2.0% - 2.25%, depending on certain financial ratios concerning leverage and debt service coverage. The line of credit reprices, at the Company's discretion, in defined intervals ranging from 1 to 360 days. As the line of credit is drawn or reprices, the Company enters into a contract and selects the term and the interest rate option it desires. If the Company selects a contract based upon LIBOR plus 2.0% - 2.25%, then the interest rate becomes fixed for the term selected. Otherwise, the contract rate varies based upon the appropriate index. At December 31, 1996, $42,700 is outstanding under the line of credit in two separate contracts. One contract in the amount of $30,700 is priced at 7.63% and the second contract in the amount of $12,000 is priced at 7.69%. At December 31, 1996 the prime rate, Federal Funds rate and three month LIBOR were 8.25%, 5.02%, and 5.56%, respectively. During 1996, $73,700 of new borrowings were drawn under the line of credit and $45,500 of principal was repaid. The scheduled principal payments related to all debt outstanding as of December 31, 1996 are as follows: Year Amount ----------------------------- 1997 .......... $ 623 1998 .......... 47,081 1999 .......... 68,380 2000 .......... 8,068 2001 .......... 63,540 Thereafter......... 109,600 -------- Total .......... $297,292 ======== 70 The maturities reflected above for 1998 include $42,700 of amounts outstanding under the line of credit which reprice in 1997. Pledged Assets The aggregate net book value at December 31, 1996 and 1995 of property pledged as collateral for indebtedness amounted to approximately $470,126 and $441,564, respectively. 8. MINORITY INTERESTS In connection with the formation of the Company and the Operating Partnership, certain persons received either common stock of the Company or Units in the Operating Partnership. A Unit in the Operating Partnership and a share of common stock of the Company have the same economic characteristics in as much as they effectively share equally in the net income or loss of the Operating Partnership and any distributions from the Operating Partnership. Beginning one year after the closing of the Initial Offering, which occurred on July 27, 1994, each Unit may be redeemed by holders of the Units for either one share of common stock or, at the option of the Company, cash equal to the fair market value of a share at the time of the redemption. When a unitholder redeems a Unit for a share, minority interests will be reduced and the Company's investment in the Operating Partnership will be increased. During 1995, 94,118 Units were exchanged for shares of common stock of the Company. The number of Units held by minority interest unitholders were 3,675,258 and 3,670,564 at December 31, 1996 and 1995, respectively. At December 31, 1996, the unitholders' minority interest ownership percentage in the Operating Partnership was 19.9%. Minority interests in the accompanying consolidated financial statements relate to holders of Units in the Operating Partnership, the minority interest in PRSI and the ownership of certain partnership interests in various properties where the Operating Partnership holds a controlling interest. The Operating Partnership acquired its controlling partnership interests by contributing cash for, in most instances, an agreed upon cumulative preferred return in the existing property partnerships. 9. STOCKHOLDERS' EQUITY Capital Stock The Company is authorized to issue up to 100,000,000 shares of $.01 par value common stock. On July 27, 1994, the Company completed the Initial Offering of 13,000,000 shares of common stock and the Private Placement of 695,000 shares of common stock at the offering price for all shares of $21.25. In addition, on July 27, 1994, the Company issued 677,047 shares of common stock and paid $2,600 in cash in exchange for the $17,000 note receivable from PGPSI which was issued as part of the initial capitalization of PGPSI. Effective July 27, 1994, the Company also issued 324,400 shares of common stock pursuant to the Employee Restricted Stock Plan discussed below. The value of the employee restricted stock ($6,893, representing 324,400 shares valued at the Initial Offering price of $21.25 per share) is being amortized and recognized as compensation expense ratably over a three to five year vesting period. Amortization of employee restricted stock compensation for 1996, 1995 and 1994 was $2,135, $1,333 and $577, respectively, and is included in property management expense in the accompanying consolidated statements of operations, except for $767 in 1996 of post-Measurement Date amortization primarily related to the June 30, 1996 accelerated vesting of employee restricted stock granted to certain employees of the commercial property services business which is included in gain on sale of commercial property services business. The unamortized portion of the employee restricted stock has been classified for financial reporting purposes as a reduction to stockholders' equity. At December 31, 1996 and 1995, 84,486 and 42,266 shares, respectively, of employee restricted stock were held by the Company and had not been granted to employees. Accordingly, such shares are classified as treasury shares for financial reporting purposes in the accompanying consolidated balance sheets. 71 During 1996 and 1995, the Company paid quarterly dividends, with respect to the fourth quarter of 1994 through the third quarter of 1996, of $.465 per share of common stock. Concurrent with the quarterly dividend payments, the Operating Partnership distributed $.465 per Unit. Stock Plans In connection with the Initial Offering, the Company adopted an Employee Restricted Stock Plan (the "Initial Plan") which was designed to retain and motivate officers and other employees. In August 1994, a total of 324,400 shares of the Company's common stock were issued for use in the Initial Plan. Initially, 288,800 shares of restricted stock issued under the Initial Plan were granted to 81 employees at no cost to the employees. The restricted shares pursuant to the Initial Plan were treated as outstanding shares in connection with the Initial Offering. As such, the issuance of the restricted stock had no dilutive effect on the Company's stockholders. Generally, the Initial Plan calls for vesting in three annual installments beginning on the third anniversary date and ending on the fifth anniversary date. During the vesting period the restricted shares are non-transferable but entitle the participants to all other rights of a stockholder, including the right to vote and receive dividends. During 1995, 10,000 shares originally issued under the Initial Plan were granted to certain employees. Additionally, management redeemed 16,666 shares and eliminated the vesting requirements for 10,134 shares granted to employees terminated in connection with the realignment of PGPSI. In 1996, 9,525 additional shares were granted to employees and 51,745 shares were redeemed. The vesting was accelerated and eliminated on 129,380 shares in 1996 including 90,643 shares on which the vesting was accelerated in connection with the sale of the commercial property services business on June 30, 1996. The related amortization of compensation expense in 1996 and 1995 was adjusted accordingly. At December 31, 1996, 100,400 shares of restricted stock issued to 18 employees under the Initial Plan were outstanding. The Company has established the 1994 Employee Stock Option, Unit Option, Restricted Stock, Restricted Unit and Restricted Stock Right Plan, as amended and restated, (the "Employee Plan") for the purpose of attracting, retaining, and motivating officers and other employees. The Employee Plan authorizes the issuance of up to 1,460,000 shares of common stock and/or Units pursuant to options or restricted shares or Units granted or issued under the plan. The Employee Plan limits the number of shares of restricted stock, stock rights and/or Units, which are eligible for grant at no cost, to 485,000 shares/Units. Options granted under the Employee Plan have a ten year term and will have such pricing, vesting and other terms as the committee approving the grant will determine. Effective August 23, 1994, options to purchase 80,000 shares of common stock were granted to eight officers under the Employee Plan. These options are at a price of $21.25 per share and are fully vested. Effective April 4, 1995, options to purchase an additional 283,000 shares were granted to 64 officers and employees under the Employee plan. These options are at a price of $17.25 and vest over periods ranging from three to five years. Effective August 22, 1995, options to purchase an additional 4,000 shares were granted to four officers and employees under the Employee Plan at a price of $17.50 under the same vesting provisions. During 1996, no additional options were granted. On September 11, 1996, restricted stock rights to receive 79,500 shares of restricted stock upon the occurrence of certain triggering events including the merger, consolidation or reorganization of the Company were issued to five officers of the Company. The proposed merger with Camden Property Trust discussed in Note 17 will constitute a triggering event. At December 31, 1996, no shares of restricted stock and/or Units had been granted under the Employee Plan. 72 The Company has adopted a Non-Employee Director Stock Option Plan (the "Director Plan"). Under the Director Plan, each non-employee director, in connection with the Initial Offering, was granted options to purchase 5,000 shares of common stock. The Director Plan also provides for automatic annual grants of 2,500 shares of common stock following the annual election of directors. The exercise price of all options granted under the Director Plan is the fair market value of the common stock on the date of grant. Each option granted has a term of ten years and vests six months after the date of grant. At December 31, 1996, options to purchase 60,000 shares of common stock had been granted under the Director Plan. The Company has elected to follow APB 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by FAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.22% and 5.39%; a dividend yield of approximately 10.5%; volatility factor of the expected market price of the Company's common stock of .171; and a weighted-average expected life of the options of 5 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net income for 1996 and 1995 was $21,201 and $10,034, respectively, with no impact on reported earnings per share. Because FAS 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1997. A summary of the Company's stock option activity, and related information for the years ended December 31 follows: 1996 1995 1994 ---------------- --------------- ---------------- Weighted- Weighted- Weighted- Average Average Average Options Exercise Options Exercise Options Exercise (000) Price (000) Price (000) Price ------- -------- ------- -------- ------- -------- Outstanding-beginning of year 396 $18.38 110 $21.25 - $ - Granted 15 17.75 302 17.27 110 21.25 Exercised - - - - - - Forfeited (134) 17.26 (16) 17.25 - - --- ------ --- ------ --- ------ Outstanding-end of year 277 $18.89 396 $18.38 110 $21.25 === ====== === ====== === ====== Exercisable at end of year 140 $20.49 125 $20.82 110 $21.25 Weighted-average fair value of options granted during the year $ .67 $ .51 Exercise prices for options outstanding as of December 31, 1996 ranged from $17.25 to $21.25. The weighted-average remaining contractual life of those options is 8.06 years. 73 10. EARNINGS PER SHARE Per share amounts are computed based on the weighted average number of shares outstanding during the period (14,791,165 in 1996, 14,698,336 in 1995 and 14,513,503 in 1994). Earnings per share will be unaffected by partners who elect to convert Units in the Operating Partnership to shares of common stock in the Company as unitholders and stockholders effectively share equally in the net income of the Operating Partnership. The assumed exercise of outstanding stock options, using the treasury stock method, is not dilutive and therefore, is not considered in determining shares outstanding. For the years ended December 31, 1996 and 1995, the Company had earnings of $1.43 and $.68 per share, respectively. For the period July 27, 1994 through December 31, 1994, the Company incurred a loss before extraordinary items of $(.06) per share. The effect of the extraordinary gain from the forgiveness of debt, net of minority interests, increased earnings per share by $.47, while the extraordinary loss from the early extinguishment of debt, net of minority interests, decreased earnings per share by $(.36), resulting in net income per share of $.06. During the period, the Company incurred $7,796 in non-recurring reorganization costs, principally legal, accounting, and other costs incurred in connection with the formation of the Company. The effect of these costs, net of minority interests of $1,668, was to reduce the income (loss) before the extraordinary items by $(.42) per share. 11. RELATED PARTY TRANSACTIONS On August 8, 1994, the Company exercised an option to purchase a 19.05 acre tract of partially developed land from a corporation whose sole shareholders were three executive officers (including two who are also directors) of the Company. The option agreement required consideration of $128 in cash, and Units with a value of $1,568, as well as reimbursement of all pre-development costs totaling $367. The Unit portion of the purchase price was paid one year from the date of purchase, based on the value of Units at the election date of the option (August 8, 1994) and totaled 73,783 Units. Effective October 1, 1995, the Company issued 42,353 Units with a value of $900 (based on the price of the Company's stock at the Initial Offering date) to an entity whose sole shareholders were two executive officers and directors of the Company. The Units represented partial consideration for the purchase of partnership interests. In December 1995, the Company purchased the Overlook Apartments, formerly known as The Phoenix, from a partnership which was owned by affiliates of the Company and outside investors. As consideration for the purchase, the Company paid cash of $8,500 and assumed $300 of debt payable to affiliates. Affiliates of the Company did not receive any of the cash portion of the purchase price. However, on January 3, 1996, the $300 of affiliated debt was repaid by the Company with cash of $200 and the issuance of 4,694 Units. The Company, through PRSI (and previously PGPSI), uses a centralized disbursement and receipt system whereby, for certain properties owned by the Company and other affiliated properties, all project deposits are transferred to a central operating account and all expenses and other disbursements are paid therefrom. In other cases, certain properties maintain a separate cash account for recording project receipts and disbursements; however, certain common operating expenses are paid through the centralized account and are subsequently reimbursed by the appropriate properties. Additionally, cash of PRSI (and previously PGPSI) is periodically transferred to the Operating Partnership for short term investment purposes. 74 PRSI (and previously PGPSI) provides services to affiliated partnerships on a contractual basis. The related party fees and expenses for such services are reflected in the accompanying consolidated financial statements. At December 31, 1996, the Company has three notes receivable from Paradim in the total outstanding amount of $9,839. One note, in the outstanding amount of $9,723 at December 31, 1996, represents amounts advanced to Paradim to fund construction of Brassfield Park, a planned 336-unit multifamily residential complex under development in Greensboro, North Carolina. Under the terms of the loan agreement effective April 1, 1996, Paradim may borrow up to $11,500 from the Company. The loan bears interest at a variable rate based on the non-default rate of interest charged to the Company under its line of credit. For the period April 1 through December 31, 1996, the interest rate averaged approximately 7.41% per annum. Monthly payments of interest only are due until maturity on September 30, 1997 at which time the outstanding principal and accrued interest will be due and payable. The loan is collateralized by Brassfield Park. The other two notes, in the total amount of $116, were executed in connection with the formation of Paradim and relate to the redemption of certain of the Company's interests in the properties contributed to Paradim. These two notes bear interest at 8% per annum and mature on June 30, 1997. 12. COMMITMENTS AND CONTINGENCIES Commitments PRSI is a party to office and equipment leases with varying terms which expire over the next eight years. Future minimum lease payments for noncancelable office and equipment leases for the next five years and thereafter, as of December 31, 1996, are as follows: Year Capital Operating ---- ------- --------- 1997 ........................... $35 $ 793 1998 ........................... 10 459 1999 ........................... 5 458 2000 ........................... - 473 2001 ........................... - 391 Thereafter .......................... - 1,135 --- ------ Total minimum lease payments........ 50 $3,709 ====== Amounts representing interest....... (3) --- Present value of net minimum lease payments.................... $47 === In addition, the Company has entered into a non-recourse ground lease, which commenced on October 24, 1996, related to approximately 27.47 acres in Louisville, Kentucky for potential development in 1997. The ground lease allows the Company to develop, at its' discretion, a one or two phase multifamily residential community on the leased acreage. The lease has a term of 40 years and under certain conditions, the Company has the option to purchase the land. Monthly lease payments are required based upon the number of apartment units developed and include certain scheduled payment increases, some of which are tied to the Consumer Price Index ("CPI"). The Company believes that the monthly lease payments will range between $7 and $14 over the lease term, subject to CPI adjustments. The monthly lease payments have been deferred until July 1, 1997. The eligible employees of PRSI (and previously PGPSI) and the Predecessors participate in a contributory employee savings plan. Under the plan, PRSI may make matching contributions with respect to contributions made by eligible employees. Expenses under the plan for the years ended December 31, 1996, 1995 and 1994 were not material. 75 Contingencies The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such matters will not have a material adverse effect on the financial position or results of operations of the Company. In connection with the Initial Offering, environmental consultants were engaged to perform environmental assessments on each of the properties. The environmental assessments identified certain properties with underground or above ground storage tanks, pipelines, asbestos containing materials or radon levels in excess of the Environmental Protection Agency standards and noted that one property is located within one-half mile of a site included on the National Priorities List issued pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, as amended. The environmental assessments revealed only one property, Knollwood I, that had contamination in significant amounts requiring remediation. Remediation was successfully completed in 1994 at a cost of $70. Management intends to monitor all properties for possible environmental impact. As of December 31, 1996 no remedial actions are currently considered necessary. 13. SEGMENT OPERATIONS The Operating Partnership is engaged in the ownership and rental of residential apartment communities, office buildings and retail properties and PRSI (and previously PGPSI) provides property management, construction, development and other services to both related and unrelated parties. As discussed in Note 3, the Company sold its wholly-owned office building and retail properties in the fourth quarter of 1996. Revenue from property management and other services provided to affiliated partnerships, which collectively represent a major customer of PRSI (and previously PGPSI), was approximately 39%, 28%, 24% and 30% of total property services revenue for the years ended December 31, 1996 and 1995, the period July 27 to December 31, 1994 and the period January 1 to July 26, 1994, respectively. Revenue from property management and other services provided to the consolidated group are recognized in the period in which the services are provided and are eliminated in consolidation. The following table presents operating and other information divided among the two primary lines of the Company's and Predecessors' business. Property Management and Other Rental Services Combined Operations Operations Elimination Total ---------- ---------- ----------- -------- YEAR ENDED DECEMBER 31, 1996: Revenue - third party........ $ 94,792 $ 5,977 $ - $100,769 Revenue - affiliates......... 161 3,799 - 3,960 Intersegment revenue......... 2,074 3,150 (5,224) - -------- ------- ------- -------- Total revenue............. 97,027 12,926 (5,225) 104,729 Operating expenses........... (44,430) (17,183) 2,904 (58,709) ------- ------- -------- ------- Operating profit........... $ 52,597 $(4,257) $(2,320) $ 46,020 ======== ======= ======== ======= Depreciation and amortization $ 17,826 $ 1,726 $ - $ 19,552 ======== ======= ======== ======= Identifiable assets at December 31, 1996.......... $561,473 $ 9,866 $(34,472) $536,867 ======== ======= ======== ======== Capital expenditures and investments................ $ 70,039 $ 3,664 $ - $ 73,703 ======== ======= ======== ======== 76 Property Management and Other Rental Services Combined Operations Operations Elimination Total ---------- ---------- ----------- -------- YEAR ENDED DECEMBER 31, 1995: Revenue - third party........ $ 83,902 $17,076 $ - $100,978 Revenue - affiliates......... - 6,590 - 6,590 Intersegment revenue......... 2,342 2,840 (5,182) - -------- ------- -------- -------- Total revenue.............. 86,244 26,506 (5,182) 107,568 Operating expenses........... (39,092) (23,684) 2,701 (60,075) -------- ------- -------- -------- Operating profit........... $ 47,152 $ 2,822 $ (2,481) $ 47,493 ======== ======= ======== ======== Depreciation and amortization $ 15,447 $ 3,114 $ - $ 18,561 ======== ======= ======== ======== Identifiable assets at December 31, 1995.......... $552,186 $20,422 $(32,997) $539,611 ======== ======= ======== ======== Capital expenditures and investments................ $115,495 $ 2,258 $ - $117,753 ======== ======= ======== ======== PERIOD JULY 27 TO DECEMBER 31, 1994: Revenue - third party........ $ 33,731 $ 8,326 $ - $ 42,057 Revenue - affiliates......... - 2,655 - 2,655 Intersegment revenue......... 877 1,057 (1,934) - -------- ------- -------- -------- Total revenue.............. 34,608 12,038 (1,934) 44,712 Operating expenses........... (15,146) (10,671) 1,019 (24,798) -------- ------- -------- -------- Operating profit .......... $ 19,462 $ 1,367 $ (915) $ 19,914 ======== ======= ======== ======== Depreciation and amortization $ 6,393 $ 626 $ - $ 7,019 ======== ======= ======== ======== Identifiable assets at December 31, 1994.......... $455,461 $21,437 $(34,350) $442,548 ======== ======= ======== ======== Capital expenditures and investments................ $197,577 $ 3,505 $ - $201,082 ======== ======= ======== ======== PERIOD JANUARY 1 TO JULY 26, 1994: Revenue - third party........ $ 41,359 $10,846 $ - $ 52,205 Revenue - affiliates......... - 4,737 - 4,737 Intersegment revenue......... - 2,185 (2,185) - -------- ------- -------- -------- Total revenue.............. 41,359 17,768 (2,185) 56,942 Operating expenses........... (20,811) (14,593) 2,029 (33,375) -------- ------- -------- -------- Operating profit .......... $ 20,548 $ 3,175 $ (156) $ 23,567 ======== ======= ======== ======== Depreciation and amortization $ 6,448 $ 258 $ (207) $ 6,499 ======== ======= ======== ======== Identifiable assets at July 26, 1994.............. $264,538 $ 3,717 $ (5,579) $262,676 ======== ======= ======== ======== Capital expenditures and investments................ $ 3,029 $ 314 $ (114) $ 3,229 ======== ======= ======== ======== 77 14. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 requires disclosure about fair value for all financial instruments, whether or not recognized, for financial statement purposes. Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 1996 and December 31, 1995. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Management estimates that the fair value of (i) cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate carrying value due to the relatively short maturity of these instruments; (ii) the interest rate swap agreement approximates carrying value based upon the terms of the agreement relative to current interest rates; and (iii) notes payable approximate carrying value based upon the Company's effective borrowing rate for issuance of debt with similar terms and remaining maturities. 15. SUPPLEMENTAL CASH FLOW INFORMATION In connection with the business combination on July 27, 1994, certain non-cash transactions were recorded by the Company, including: (i) basis adjustments for the purchase of partnership interests for cash or Units, or assumption of debt, (ii) elimination of historical basis of certain assets purchased for cash, (iii) adjustments resulting from the transfer of the property management, leasing, construction and development businesses of the Predecessors to PGPSI, (iv) elimination of net working capital due to/from prior owners at closing, (v) issuance of stock in exchange for note receivable from PGPSI, (vi) issuance of stock pursuant to the Employee Restricted Stock Plan, (vii) recognition of mortgage principal and accrued interest concessions by lenders, (viii) write-off of deferred financing costs associated with debt repaid at closing, (ix) write-off of fully amortized deferred charges, (x) elimination of partner loans, and (xi) allocation of capital to minority interests. These transactions, with respect to the elimination of historical basis on assets purchased for cash, the adjustments resulting from transfer of the property management, leasing, construction and development businesses to PGPSI and the net working capital adjustments, also include certain cash components. These cash adjustments are presented as deemed distributions at formation in the accompanying consolidated statements of cash flows. Certain non-cash transactions were also recorded effective October 1, 1995 in connection with the acquisition of partnership interests related to Spanish Trace for a combination of cash and Units and on April 1, 1996 in connection with the formation of Paradim and the Company's corresponding contribution of certain properties that were previously wholly-owned. The aggregate effect of the non-cash transactions recorded in connection with the business combination in 1994, the acquisition of partnership interest related to Spanish Trace in 1995 and the formation of Paradim in 1996 are summarized as follows: 78 Period Year Ended December 31, July 27 to ------------------------- December 31, 1996 1995 1994, as Restated -------------------------------------------- Operating real estate assets $(35,461) $15,968 $(39,575) Accumulated depreciation - (8,280) 26,973 Construction in process (6,293) - - Accounts receivable (18) - (171) Advances to affiliates (403) - 155 Investment in ventures 14,452 - 7,289 Notes receivables from venture 116 - - Deferred charges, net (85) 222 (1,342) Other assets (36) - (749) --------- ------- -------- $(27,728) $ 7,910 $ (7,420) ========= ======= ======== Notes payable $(25,650) $ 9,856 $(28,956) Accrued interest payable (166) - (10,822) Accrued real estate taxes (205) - (2,875) Accounts payable and accrued liabilities (1,566) 13 (2,647) Partners loans - - (10,650) Tenant security deposits (141) - (1,231) Minority interests - - 56,886 Stockholders' equity - (1,959) (7,125) --------- ------- -------- $(27,728) $ 7,910 $ (7,420) ========= ======= ======== Other non-cash investing and financing activities during 1996, 1995 and 1994 are as follows: Company Predecessor --------------------------- ----------- Period July 27 to Period Year Ended December January 1 December 31, 31, 1994, to ----------------- as July 26, 1996 1995 Restated 1994 ------- ------- -------- -------- Construction in process payables $ 3,537 $ 2,053 $ 214 $ - Additions to operating real estate assets transferred from construction 43,656 22,546 - - Accrual of distributions from unconsolidated ventures - - 242 - Accrual of liability associated with the acquisitions of land for Units - (1,568) 1,568 - Mortgage principal concessions recognized prior to the business combination - - - 1,776 Debt assumed in connection with the acquisition of property 6,357 300 - - Conversion of Units to common stock - 1,215 - - Partial repayment of note payable to affiliates with Units 100 - - - Accrued net selling costs related to sale of commercial property services business 1,216 - - - Deferred gain on sale of commercial property services business 1,100 - - - 79 16. QUARTERLY FINANCIAL INFORMATION (Unaudited) The following is a summary of quarterly results of operations for the years ended December 31, 1996 and 1995: First Second Third Quarter, Quarter, Quarter, as as as Restated Restated Restated Fourth for 1995 for 1995 for 1995 Quarter Total -------- -------- -------- ------- ------- Year Ended December 31, 1996: Revenues $28,538 $26,145 $25,202 $24,844 $104,729 Net income 1,378 9,203 1,137 9,497 21,215 Per share data: Net income 0.09 0.62 0.08 0.64 1.43 Year Ended December 31, 1995: Revenues $25,303 $26,266 $26,897 $29,102 $107,568 Net income 2,054 2,677 3,091 2,241 10,063 Per share data: Net income 0.14 0.18 0.21 0.15 0.68 As described in Note 2, the Company, in the fourth quarter of 1995, changed its method of accounting for its investment in PGPSI from the cost method to consolidation. Accordingly, all previously reported periods have been restated to reflect this change in accounting method. The effect of this change on the reported results of operations for the first quarter, second quarter and third quarter of 1995 was an increase in revenue of $5,056, $5,089, and $5,069, a decrease in net income of $(889), $(229), and $(163), and a corresponding decrease in net income per share of $(.06), $(.02), and $(.01), respectively. 17. PROPOSED MERGER On December 16, 1996 the Company executed an Agreement and Plan of Merger (the "Agreement") with Camden Property Trust ("Camden") which provides for, among other things, the merger of the Company into a wholly-owned subsidiary of Camden through a tax-free exchange of each share of the Company's common stock for .64 common shares of beneficial interest of Camden, whereby stockholders of the Company will become shareholders of Camden. The Company has the option to terminate the Agreement in the event the average closing price of Camden common shares ("Average Closing Price") falls below $25.67 during a specified pricing period prior to a special meeting of the stockholders of the Company. In the event the Company elects to terminate the Agreement, Camden has the option of adjusting the exchange ratio of .64 to equal a number obtained by dividing $16.43 by the Average Closing Price. An affirmative vote of holders of two-thirds of the outstanding shares of the Company's common stock is required to approve the Agreement. A special meeting of the Company's stockholders is scheduled for April 15, 1997 to vote on the Agreement. 80 18. SUBSEQUENT EVENTS (Unaudited) On January 2, 1997, the Company declared a dividend, with respect to the fourth quarter of 1996, of $.465 per share of common stock which was paid on January 23, 1997 to holders of record on January 13, 1997. Concurrent with the dividend announcement, the Operating Partnership authorized a distribution of $.465 per Unit which was paid on January 23, 1997 to holders of record on January 13, 1997. In January 1997, the Company sold the 232 unit Brookfield apartments in Dallas, Texas for $5,459, the 352 unit Westchase apartments in Charleston, South Carolina for $11,130 and the 251 unit San Miguel apartments in St. Louis, Missouri for $6,875. Net proceeds from the sale of these properties were used to repay borrowings under the Company's line of credit, fund multifamily development expenditures and for general working capital purposes. On March 18, 1997, the Company declared a dividend, with respect to the first quarter of 1997, of $.3136 per share of common stock, payable April 15, 1997 to holders of record on March 31, 1997. Concurrent with the dividend announcement, the Operating Partnership authorized a distribution of $.3136 per Unit, payable April 15, 1997 to holders of record on March 31, 1997. 81 PAGE
Schedule III PARAGON GROUP, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1996 (Dollars in thousands) Gross Amount at which Initial Costs Carried at December 31, 1996 ------------------ Costs ------------------------------------- Buildings Capitalized Buildings and Subsequent and Construc- Notes Improve- to Acqui- Improve- tion in Property Name Payable Land ments sition Land ments Process Total - ------------------ ----------- ------- --------- -------- ------ --------- -------- -------- FLORIDA 4th St. Station I $ 5,120( 3) $ 800 $ - $ 12,989 $ 1,499 $ 12,290 $ - $ 13,789 4th St. Station II 5,070( 3) 656 - 11,706 1,643 10,719 - 12,362 Broadmoor 4,660( 2) 1,536 5,265 4,118 2,080 8,839 - 10,919 Chasewood 2,850( 2) 992 4,534 1,739 1,182 6,083 - 7,265 Citrus Lakes I - 208 2,942 276 208 3,218 - 3,426 Coco West I 2,670( 3) 68 - 8,450 630 7,888 - 8,518 Coco West II 3,780( 3) 111 - 11,766 589 11,288 - 11,877 Dolphin Pointe 7,250( 2) 1,456 25 15,416 1,919 14,978 - 16,897 Greenhouse 3,580( 3) 808 - 9,797 1,146 9,459 - 10,605 Grove 2,700( 2) 1,431 4,269 355 1,431 4,624 - 6,055 Heron Pointe -(11) 990 - 12,412 990 12,412 - 13,402 Landtree 3,780( 3) 624 - 8,261 1,277 7,608 - 8,885 Lookout Pointe 6,700( 2) 1,563 - 13,906 1,823 13,646 - 15,469 Parsons Run 3,840( 3) 902 - 9,325 1,424 8,803 - 10,227 Renaissance Pointe -(11) 1,564 - 13,209 1,564 13,209 - 14,773 Renaissance Pointe II - 2,067 - 8 - - 2,075 2,075 The Reserve 3,100( 2) 1,060 - 6,374 1,093 6,341 - 7,434 Schooner Bay 7,392( 7) 1,518 8,966 393 1,518 9,359 - 10,877 Summerplace I & II 6,330( 3) 1,016 - 13,140 1,729 12,427 - 14,156 Summerplace III 3,720( 3) 753 - 7,489 1,117 7,125 - 8,242 Summerset Bend 4,500( 3) 779 - 9,499 1,141 9,137 - 10,278 The Vineyard 10,500( 9) 2,602 - 15,211 3,118 14,695 - 17,813 KENTUCKY Copper Creek 9,130( 8) 649 - 6,760 649 6,760 - 7,409 Deerfield 9,886( 8) 1,610 - 18,981 2,421 18,170 - 20,591 Glenridge 3,695( 9) 970 - 6,634 1,119 6,485 - 7,604 Post Oak 2,450( 2) - - 3,806 339 3,467 - 3,806 Sundance 2,800( 2) 447 - 6,027 738 5,736 - 6,474 MISSOURI Camden Passage 7,350( 9) 1,345 9,455 2,658 1,817 11,641 - 13,458 Camden Passage II -(11) 1,169 - 10,748 1,169 6,817 3,931 11,917 The Cove 12,480( 5) 2,308 10,418 6,564 3,505 15,785 - 19,290 Knolls -(11) 978 3,778 363 980 4,139 - 5,119 Knollwood I 7,215( 5) 1,764 7,928 407 1,764 8,335 - 10,099 Knollwood II 7,027( 5) 1,272 9,328 148 1,272 9,476 - 10,748 Pear Tree -(11) 366 2,684 212 366 2,896 - 3,262 Spanish Trace 9,764( 4) 2,445 15,508 785 2,445 16,293 - 18,738 Sunswept -(11) 1,813 5,496 375 1,813 5,871 - 7,684 Tempo 6,205( 5) 2,168 5,982 814 2,168 6,796 - 8,964 Westchase Park 4,900( 2) - - 11,763 1,024 10,739 - 11,763 Westgate I 4,500( 2) 380 3,165 3,561 615 6,491 - 7,106 Westgate II 8,200( 2) 790 - 17,115 2,131 15,774 - 17,905
Schedule III Net Date of Accumulated Real Estate Construction/ Depreciable Property Name Depreciation Assets Acquisition Lives-Years - ------------------ ------------ ------------ ------------- ----------- FLORIDA 4th St. Station I 4,896 8,893 1982 5-40 Years 4th St. Station II 3,555 8,807 1983 5-40 Years Broadmoor 2,650 8,269 1986/1987 5-40 Years Chasewood 2,052 5,213 1985/1987 5-40 Years Citrus Lakes I 234 3,192 1976 5-40 Years Coco West I 2,615 5,903 1983 5-40 Years Coco West II 4,108 7,769 1985 5-40 Years Dolphin Pointe 3,956 12,941 1989 5-40 Years Greenhouse 4,180 6,425 1982 5-40 Years Grove 354 5,701 1973 5-40 Years Heron Pointe 999 12,403 1996 5-40 Years Landtree 2,948 5,937 1983 5-40 Years Lookout Pointe 5,770 9,699 1987 5-40 Years Parsons Run 3,175 7,052 1986 5-40 Years Renaissance Pointe 278 14,495 1996(1) 5-40 Years Renaissance Pointe II - 2,075 (1) - The Reserve 1,528 5,906 1991 5-40 Years Schooner Bay 274 10,603 1995 5-40 Years Summerplace I & II 4,992 9,164 1984 5-40 Years Summerplace III 2,714 5,528 1986 5-40 Years Summerset Bend 3,756 6,522 1984 5-40 Years The Vineyard 3,655 14,158 1990 5-40 Years KENTUCKY Copper Creek 3,126 4,283 1987 5-40 Years Deerfield 4,901 15,690 1987 5-40 Years Glenridge 1,786 5,818 1990 5-40 Years Post Oak 1,940 1,866 1981 5-30 Years Sundance 2,671 3,803 1975 5-40 Years MISSOURI Camden Passage 2,251 11,207 1989 5-40 Years Camden Passage II 32 11,885 (1) 5-40 Years The Cove 2,950 16,340 1990 5-40 Years Knolls 329 4,790 1973/1974 5-40 Years Knollwood I 586 9,513 1981 5-40 Years Knollwood II 673 10,075 1985 5-40 Years Pear Tree 221 3,041 1967 5-40 Years Spanish Trace 9,175 9,563 1972/1995 5-40 Years Sunswept 469 7,215 1971/1994 5-40 Years Tempo 592 8,372 1975 5-40 Years Westchase Park 3,288 8,475 1986 5-40 Years Westgate I 2,675 4,431 1973 5-40 Years Westgate II 6,561 11,344 1980 5-40 Years
82 PAGE
SCHEDULE III PARAGON GROUP, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1996 (Dollars in thousands) Gross Amount at which Initial Costs Carried at December 31, 1996 ------------------ Costs ------------------------------------- Buildings Capitalized Buildings and Subsequent and Construc- Notes Improve- to Acqui- Improve- tion in Property Name Payable Land ments sition Land ments Process Total - ------------------ ----------- ------- --------- -------- ------ --------- -------- -------- NORTH CAROLINA Copper Creek $ 2,600( 2) $ 930 $ - $ 6,628 $ 928 $ 6,630 $ - $ 7,558 Eastchase 2,949( 9) 1,265 - 6,116 1,352 6,029 - 7,381 Falls 5,700( 2) 1,010 - 11,308 1,475 10,843 - 12,318 Glen 6,572( 9) 1,713 6,808 196 1,713 7,004 - 8,717 Habersham Pointe - 1,124 10,273 3 1,124 10,276 - 11,400 Pinehurst 14,000( 5) 3,591 15,213 356 3,591 15,569 - 19,160 The Park -(11) 906 - 8,568 1,110 1,031 7,333 9,474 River Oaks 6,350( 6) 1,056 8,635 5 1,056 8,640 - 9,696 TEXAS Chesapeake 3,300( 2) 1,061 4,939 3,633 1,471 8,162 - 9,633 Fairlane 3,461( 9) 710 - 9,149 1,449 8,410 - 9,859 Highland Trace -(11) 1,450 2,871 835 1,539 3,617 - 5,156 Los Rios 9,000( 5) 1,494 - 9,572 1,517 9,549 - 11,066 Nob Hill 9,050( 5) 2,944 5,714 6,787 3,462 11,983 - 15,445 Stone Creek -(11) 1,696 367 10,182 1,696 10,549 - 12,245 Stone Gate -(11) 2,275 - 13,521 2,275 13,521 - 15,796 Miscellaneous Assets 3(10) - - 4,946 - 4,946 - 4,946 -------- ------- -------- -------- ------- -------- ------- -------- 246,129 67,203 154,563 375,365 81,214 502,578 13,339 597,131 -------- ------- -------- -------- ------- -------- ------- -------- Real estate held for sale: San Miguel (Missouri) -(11) 1,321 5,487 390 1,321 5,877 - 7,198 Westchase (South Carolina) 4,440( 3) 1,496 - 11,631 1,895 11,232 - 13,127 Brookfield (Texas) 4,023( 5) 1,481 2,643 1,904 1,578 4,450 - 6,028 -------- ------- -------- -------- ------- -------- ------- -------- 8,463 4,298 8,130 13,925 4,794 21,559 - 26,353 -------- ------- -------- -------- ------- -------- ------- -------- Total $254,592 $71,501 $162,693 $389,290 $86,008 $524,137 $13,339 $623,484 ======== ======= ======== ======== ======= ======== ======= ========
Net Date of Accumulated Real Estate Construction/ Depreciable Property Name Depreciation Assets Acquisition Lives-Years - --------------------- ------------ ----------- ------------- ----------- NORTH CAROLINA Copper Creek $ 1,637 5,921 1989 5-40 Years Eastchase 2,675 4,706 1986 5-40 Years Falls 4,338 7,980 1984 5-40 Years Glen 488 8,229 1980 5-40 Years Habersham Pointe 146 11,254 1986 5-40 Years Pinehurst 843 18,317 1967/1994 5-40 Years The Park 3 9,471 (1) 5-40 Years River Oaks 43 9,653 1985 5-40 Years TEXAS Chesapeake 2,925 6,708 1982 5-40 Years Fairlane 3,847 6,012 1980 5-40 Years Highland Trace 1,142 4,014 1985/1987 5-40 Years Los Rios 1,744 9,322 1992 5-40 Years Nob Hill 2,676 12,769 1986/1987 5-40 Years Stone Creek 484 11,761 1995 5-40 Years Stone Gate 241 15,555 1996(1) 5-40 Years Miscellaneous Assets 1,682 3,264 1994/1995 5 Years ------- ------- 127,829 469,302 ------- ------- Real estate held for sale: San Miguel (Missouri) 433 6,765 1970/1994 5-40 Years Westchase (South Carolina) 4,162 8,965 1986 5-40 Years Brookfield (Texas) 1,154 4,874 1986/1987 5-40 Years ------- ------ 5,749 20,604 ------- ------ Total $133,578 489,906 ======== =======
(1) Construction still in process and/or property still in initial lease-up phase at December 31, 1996. (2) These properties serve as collateral for the "Pool A" mortgage note payable obtained concurrent with the Initial Offering in the amount of $61,710. (3) These properties serve as collateral for the "Pool B" mortgage notes payable obtained concurrent with the Initial Offering in the amount of $46,830. (4) This property serves as collateral for the mortgage note payable insured by HUD assumed effective October 1, 1995 in the outstanding amount of $9,764 at December 31, 1996. (5) These properties serve as collateral for mortgage notes payable obtained in December 1995 in the amount of $69,000. (6) This property serves as collateral for the mortgage note payable assumed effective November 8, 1996 in the outstanding amount of $6,350 at December 31, 1996. (7) This property serves as collateral for mortgage notes payable obtained in November 6, 1996 in the outstanding amount of $7,392 at December 31, 1996. (8) These properties serve as collateral for housing revenue bonds assumed at the Initial Offering in the outstanding amount of $19,016 at December 31, 1996. (9) These properties serve as collateral for mortgage notes payable assumed at the Initial Offering in the outstanding amount of $34,527 at December 31, 1996. (10) A portion of these assets with a net book value at December 31, 1996 of $5 serve as collateral for a vehicle loan in the outstanding amount of $3 at December 31, 1996. (11) These properties serve as collateral for the line of credit facility in the outstanding amount of $42,700 at December 31, 1996.
83 PAGE PARAGON GROUP INC. REAL ESTATE AND ACCUMULATED DEPRECIATION - --------------------------------------------------------------------------- December 31, 1996 (Dollars in thousands) A summary of activity for real estate and accumulated depreciation is as follows:
December 31, -------------------------------------- 1994, 1996 1995 as Restated - --------------------------------------------------------------------------- Real Estate: Balance at beginning of year $631,471 $513,761 $361,554 Additions and basis adjustments 73,703 117,753 204,311 Dispositions and other (81,690)(3) (43) (52,104)(1) -------- -------- -------- Balance at end of year $623,484 $631,471 $513,761 ======== ======== ======== Accumulated Depreciation: Balance at beginning of year $126,437 $101,984 $116,031 Depreciation and basis adjustments 18,904 (4) 24,462 (2) 12,926 Dispositions and other (11,763) (9) 26,973(1) -------- -------- -------- Balance at end of year $133,578 $126,437 $101,984 ======== ======== ========
(1) Represents the non-cash effect of the elimination of the historical basis of certain assets purchased for cash and adjustments resulting from the transfer of the property management, leasing, construction and development businesses of the Predecessors to PGPSI pursuant to the formation of the Company on July 27, 1994. (2) Includes an $8,280 adjustment to accumulated depreciation related to the acquisition of a partnership interest (Spanish Trace) for Units. (3) Includes a $41,754 adjustment related to the contribution of property to Paradim. (4) Includes $45 of Post-Measurement Date depreciation related to the commercial property services business. Depreciation and amortization in buildings and improvements reflected in the statements of operations are calculated on a straight-line basis over the estimated useful lives of the properties (buildings and related land improvements - 10 to 40 years; furniture, fixtures and equipment - three to 10 years; and tenant improvements - over the life of the related tenant lease).With respect to the apartment properties, the Company capitalizes floor and window coverings and depreciates such items over five years; appliances and heating, ventilating and air conditioning equipment are capitalized and depreciated over ten years. As of December 31, 1996, 1995 and 1994, the aggregate cost for federal income tax purposes was approximately $525,000, $532,000 and $414,000, respectively. 84 PAGE ATTACHMENT B CAMDEN PROPERTY TRUST UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS For the Year Ended December 31, 1996 Basis of Presentation The Unaudited Pro Forma Combined Statement of Operations for the year ended December 31, 1996 is presented as if Paragon's merger into Camden Property Trust ("Camden" or the "Company") had occurred on January 1, 1996. The Unaudited Pro Forma Combined Statement of Operations gives effect to the merger under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, and as if the combined entity qualifying as a REIT, distributed at least 95% of its taxable income, and therefore, incurred no federal income tax liability for the period presented. In addition to the merger, the Unaudited Pro Forma Combined Statement of Operations gives effect to the sale of Paragon's interest in Paragon Group Property Services, Inc. ("PGPSI") (after spin-off of the residential property services business) as if the sale had occurred on January 1, 1996 (see Note B to the Unaudited Pro Forma Combined Statement of Operations). The merger adjustments are based on certain estimates and currently available information. Such adjustments could change as additional information becomes available, as estimates are refined or as additional events occur, however, management does not expect any changes in the allocation of the purchase price to be significant. The Unaudited Pro Forma Combined Statement of Operations is further adjusted to reflect the effects of the conversion of $20.2 million principal amount of Camden's 7.33% Convertible Subordinated Debentures into $20.2 million of common equity, net of costs, subsequent to December 31, 1996 and through May 25, 1997. In the opinion of management, all adjustments necessary to reflect the effects of these transactions have been made. The Unaudited Pro Forma Combined Statement of Operations is presented for comparative purposes only and is not necessarily indicative of what the actual combined results of Camden and Paragon would have been for the year ended December 31, 1996 if the merger and the debenture conversion adjustments had occurred on January 1, 1996, nor does it purport to be indicative of the results of operations in future periods. The Unaudited Pro Forma Combined Statement of Operations should be read in conjunction with, and are qualified in their entirety by, the respective consolidated financial statements and notes thereto of Camden and Paragon for the year ended December 31, 1996 included in their respective Annual Reports on Form 10-K. -1- CAMDEN PROPERTY TRUST UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS For The Year Ended December 31, 1996 (In thousands, except per share amounts)
Historical Pro Forma ------------------- ------------------------------ As Sale of Merger Camden Further Further Camden(A) Paragon(A) PGPSI(B) Adjustments Combined Adjustments(H) Adjusted --------- ---------- -------- ----------- -------- -------------- --------- Revenues Rental income $105,785 $ 91,037 $ $ $196,822 $ $196,822 Other property income 4,453 3,285 7,738 7,738 -------- -------- ------- ------- -------- ------- -------- Total property income 110,238 94,322 204,560 204,560 Equity in income of joint ventures 1,012 59(C) 1,071 1,071 Fee and asset management 949 9,687 (5,824) 4,812 4,812 Other income 419 720 (2) 1,137 1,137 -------- -------- ------- ------- -------- ------- -------- Total revenues 111,606 105,741 (5,826) 59 211,580 211,580 Expenses (I) Property operating and maintenance 40,604 43,437 (4,060) 79,981 79,981 Real estate taxes 13,192 8,356 21,548 21,548 General and adminis- trative 2,631 6,916 (1,081) 8,466 8,466 Interest 17,336 22,066 (3) (1,351)(D) 38,048 (1,478) 36,570 Depreciation and amortization 23,894 19,552 (385) 2,849 (E) 45,910 45,910 Minority interest in consolidated partnerships 106 106 106 -------- -------- ------- ------- -------- ------- -------- Total expenses 97,657 100,433 (5,529) 1,498 194,059 (1,478) 192,581 -------- -------- ------- ------- -------- ------- -------- Income before gain on sales of properties and business, extin- guishment of hedges upon debt refinancing and minority interest 13,949 5,308 (297) (1,439) 17,521 1,478 18,999 Gain on sales of properties and business 115 21,139 843 22,097 22,097 Extinguishment of hedges upon debt refinancing (5,351) (5,351) (5,351) -------- -------- ------- ------- -------- ------- -------- Income before minority interest 8,713 26,447 546 (1,439) 34,267 1,478 35,745 Minority interest of unitholders in Operating Partnership (5,232) (109) (510)(F) (5,851) (5,851) -------- -------- ------- ------- -------- ------- -------- Net income 8,713 21,215 437 (1,949) 28,416 1,478 29,894 Preferred share dividends (4) (4) (4) -------- -------- ------- ------- -------- ------- -------- Net income to common shareholders $ 8,709 $ 21,215 $ 437 $(1,949) $28,412 $ 1,478 $ 29,890 ======== ======== ======= ======= ======== ======= ======== Net income per common and common equivalent share $ 0.58 $ 1.16 $ 1.18 Distributions declared per common share $ 1.90 $ 1.90 $ 1.90 Weighted average number of common and common equivalent shares outstanding 14,940 9,466 24,406(G) 840 25,246 The accompanying notes are an integral part of this pro forma financial statement.
-2- PAGE CAMDEN PROPERTY TRUST NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS For the Year Ended December 31, 1996 (In thousands, except per share amounts) (A) Certain reclassifications have been made to Camden's and Paragon's historical statements of operations to conform to the combined financial statement presentation. (B) Represents the elimination of the non-residential operations of PGPSI. Prior to June 30, 1996, Paragon's management, leasing, construction and development businesses were conducted through PGPSI. Effective June 30, 1996, Paragon sold its interest in PGPSI (after the spin-off of the residential property services business) and formed Paragon Residential Services, Inc. ("PRSI") to continue Paragon's residential property services business previously conducted through PGPSI. (C) Represents the amortization of the premium required to record Paragon's share of the debt of the joint ventures at fair value based on current interest rates. (D) Represents the net adjustment to interest expense, as follows: To reverse the amortization of Paragon's deferred financing costs which will have a zero fair value in connection with the merger $(1,473) To record the amortization of the premium required to record Paragon's mortgages and other notes payable at fair value based on current interest rates. (211) To reflect the additional borrowings of $11,685 to fund the merger and registration costs (See Notes (B) and (I) of the Pro Forma Combined Balance Sheet) at average market interest rates of 7.04% available to Camden under its unsecured credit facility 835 To record the net reduction in interest expense due to the retirement of Paragon debt and to finance the retirement of this debt with Camden's unsecured credit facility (502) ------- $(1,351) ======= (E) Represents the net increase in depreciation of real estate owned as a result of recording the Paragon real estate assets at fair value versus historical cost. 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 23 years. Buildings have been depreciated over 35 years and other assets over 3 to 15 years depending on the useful life of the related asset. -3- Calculation of the fair value of depreciable real estate assets at December 31, 1996: Purchase price (See Pro Forma Combined Balance Sheet Note (B)) $664,653 Less: Purchase price allocated to projects under development, including land 13,339 Purchase price allocated to investment in real estate joint ventures 21,128 Purchase price allocated to real estate held for sale 22,904 Purchase price allocated to cash and other assets 19,706 Purchase price allocated to land 81,214 -------- Pro forma basis of Paragon's depreciable real estate held for investment at fair value $506,362 ======== Calculation of depreciation of real estate owned for the year ended December 31, 1996 is as follows: Depreciation expense based upon an estimated weighted average useful life of approximately 23 years. $22,016 Less historical Paragon depreciation of real estate owned (19,167) ------- Pro forma adjustment $ 2,849 ======= (F) Represents an adjustment in the Unitholders' minority interest ownership to 19.9% of the earnings of Camden Subsidiary, Inc. ("Sub"). Such Unitholders' interest is in the earnings of assets owned by the Sub only, and not the combined entity. (G) The pro forma weighted average shares outstanding for the year ended December 31, 1996 is computed as follows: Camden's historical weighted average number of common and common equivalent shares outstanding 14,940 Issuance of Camden's common shares at an exchange ratio of 0.64 for all of Paragon's common stock in connection with the merger* 9,466 ------ Pro forma shares 24,406 ====== * Paragon's December 31, 1996 common shares outstanding multiplied by the exchange ratio. (H) Represents further adjustments to reflect the reduction of interest expense resulting from the conversion of $20.2 million principal amount of Camden's 7.33% Convertible Subordinated Debentures into $20.2 million of common equity, net of costs, subsequent to December 31, 1996 and through May 25, 1997. -4- (I) Although not presented as pro forma adjustments because they do not meet the criteria for such presentation, management anticipates that the merger will create significant administrative cost savings of approximately $6 million in the first full year of operations. -5- CAMDEN PROPERTY TRUST UNAUDITED PRO FORMA COMBINED BALANCE SHEET December 31, 1996 Basis of Presentation The Unaudited Pro Forma Combined Balance Sheet is presented as if Paragon's merger into Camden had occurred on December 31, 1996. The Unaudited Pro Forma Combined Balance Sheet gives effect to the merger under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16. In the opinion of management, all significant adjustments necessary to reflect the effects of the merger have been made. The merger adjustments are based on certain estimates and currently available information. Such adjustments could change as additional information becomes available, as estimates are refined or as additional events occur, however, management does not expect any changes in the allocation of the purchase price to be significant. The Unaudited Pro Forma Combined Balance Sheet is further adjusted to reflect the effects of the conversion of $20.2 million principal amount of Camden's 7.33% Convertible Subordinated Debentures into $20.2 million of common equity, net of costs, subsequent to December 31, 1996 and through May 25, 1997. In the opinion of management, all adjustments necessary to reflect the effects of these transactions have been made. The Unaudited Pro Forma Combined Balance Sheet is presented for comparative purposes only and is not necessarily indicative of what the actual combined financial position of Camden and Paragon would have been at December 31, 1996, nor does it purport to represent the future combined financial position of Camden and Paragon. This Unaudited Pro Forma Combined Balance Sheet should be read in conjunction with, and is qualified in its entirety by, the respective consolidated financial statements and notes thereto of Camden and Paragon for the year ended December 31, 1996 included in their respective Annual Reports on Form 10-K. -6- CAMDEN PROPERTY TRUST UNAUDITED PRO FORMA COMBINED BALANCE SHEET December 31, 1996 (In thousands)
Historical Pro Forma --------------------- --------------------- Merger Further As Adjustments Camden Adjustments Further Camden Paragon(A) (B) Combined (J) Adjusted -------- ---------- ----------- -------- ----------- --------- ASSETS: Real estate assets: Real estate held for investment, net $553,629 $455,963 $131,613 (C)$1,141,205 $ $1,141,205 Projects under development, including land 36,547 13,339 49,886 49,886 Investment in real estate joint ventures 19,831 1,297 (D) 21,128 21,128 Real estate held for sale 20,604 2,300 (D) 22,904 22,904 -------- -------- -------- ---------- --------- ---------- 590,176 509,737 135,210 1,235,123 1,235,123 Cash and cash equivalents 2,366 7,087 9,453 9,453 Other assets 10,968 20,043 (7,424)(E) 23,587 (586) 23,001 -------- -------- -------- ---------- --------- ---------- Total assets $603,510 $536,867 $127,786 $1,268,163 $ (586) $1,267,577 ======== ======== ======== ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Notes payable: Unsecured $185,800 $ $115,612 (F) $ 301,412 $ $ 301,412 Secured 58,382 297,292 (94,882)(F) 260,792 260,792 -------- -------- -------- ---------- --------- ---------- 244,182 297,292 20,730 562,204 562,204 Distributions payable 7,765 5,614 (G) 13,379 13,379 Accounts payable, accrued expenses and other 28,433 19,209 (135)(H) 47,507 47,507 -------- -------- -------- ---------- --------- ---------- Total liabilities 280,380 316,501 26,209 623,090 623,090 -------- -------- -------- ---------- --------- ---------- Minority interest of unitholders in Operating Partnership 45,860 19,408 (B) 64,151 64,151 (1,117)(G) 7.33% Convertible Subordinated Debentures 27,702 27,702 (20,163) 7,539 Shareholders' Equity: Common shares of beneficial interest 165 148 (53)(I) 260 8 268 Additional paid-in capital 348,339 204,617 57,576 (I) 610,532 19,569 630,101 Distributions in excess of net income (49,515) (27,411) 22,915 (I) (54,011) (54,011) Unearned restricted share awards (3,561) (2,848) 2,848 (I) (3,561) (3,561) -------- -------- -------- ---------- -------- ---------- Total shareholders' equity 295,428 174,506 83,286 553,220 19,577 572,797 -------- -------- -------- ---------- -------- ---------- Total liabilities and shareholders' equity $603,510 $536,867 $127,786 $1,268,163 $ (586) $1,267,577 ======== ======== ======== ========== ======== ========== The accompanying notes are an integral part of this pro forma financial statement.
-7- PAGE \ CAMDEN PROPERTY TRUST NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET December 31, 1996 (In thousands, except per share amounts) (A) Certain reclassifications have been made to Paragon's historical balance sheet to conform to Camden's balance sheet presentation. (B) Represents adjustments to record the merger in accordance with the purchase method of accounting, based upon the assumed purchase price of $664,653 assuming a market value of $27.75 per share of Camden common shares, as follows: Issuance of 9,466 shares of Camden common shares based on a 0.64 exchange ratio in exchange for 14,791 shares of Paragon common stock $262,688 Issuance of 2,352 operating partnership units to unitholders based on a 0.64 exchange ratio for 3,675 units in Paragon Operating Partnership 65,269 Assumption of Paragon liabilities 316,501 Adjustment to record Paragon mortgages, other notes payable and other liabilities at fair value 8,910 Merger costs (See calculation below) 11,285 -------- $664,653 ======== The following is a calculation of the estimated fees and other expenses related to the merger: Advisory fees $ 7,000 Legal and accounting fees 1,700 Termination, severance and relocations costs 2,000 Payment of options 85 Due diligence 250 Other 250 ------- $11,285 ======= (C) Fair value adjustments of Paragon's real estate assets held for investment based upon Camden's purchase price and the adjustment to eliminate Paragon's historical accumulated depreciation of $127,829. (D) To fair value the historical cost in Paragon's other real estate assets based on subsequent sales, contracts and fair values. (E) To fair value Paragon's other assets by $2,452 and to reverse deferred financing costs and similar costs of $4,972, which have a zero fair value in connection with the merger. -8- (F) Represents the net adjustment to notes payable as follows: Unsecured Secured Notes Payable Notes Payable ------------- ------------- To record the premium required to adjust Paragon mortgages and other notes payable to estimated fair value using current market quotations. $ $ 9,045 Additional borrowings of $11,685 of unsecured debt incurred by Camden to fund merger costs of $11,285 See Note (B) and registration costs of $400 (See Note (I)). 11,685 To record the retirement of Paragon debt and related prepayment penalties with Camden's unsecured credit facility. 103,927 (103,927) -------- -------- Pro forma adjustment $115,612 $(94,882) ======== ======== (G) To adjust historical distributions declared on December 31, 1996 at $0.475 per common share or unit based on the issuance by Camden of 9,466 common shares and 2,352 Units to Unitholders as if the shares had been issued at that date. (H) Adjustment to record Paragon's accrued expenses and other liabilities at fair value. (I) To adjust Camden's and Paragon's shareholders' equity to reflect the issuance of 9,466 (at an exchange ratio of 0.64) shares of Camden common stock at an assumed price of $27.75 per share, in exchange for all of the 14,791 outstanding shares of Paragon's common stock and to record the estimated registration costs in connection with the merger of $400, as follows: Additional Distributions Unearned Common Paid-in in Excess Restricted Shares Capital of Net Income Share Awards ------ ---------- ------------- ------------ Issuance of Camden common shares $ 95 $ 262,593 $ $ Registration costs incurred in connection with the merger (400) Distributions on issued common shares (4,496) Paragon's historical shareholders' equity (148) (204,617) 27,411 2,848 ----- --------- ------- ------ Pro forma adjustments $ (53) $ 57,576 $22,915 $2,848 ===== ========= ======= ====== -9- (J) Represents further adjustments to reflect the net effect of the conversion of $20.2 million principal amount of Camden's 7.33% Convertible Subordinated Debentures into $20.2 million of common equity, net of costs, subsequent to December 31, 1996 and through May 25, 1997. -10- EX-23.1 2 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-80230, Form S-3 No. 33-84536, Form S-3 No. 33-83362, Form S-3 No. 33-84658, and Form S-3 No. 333-24637) of Camden Property Trust of our report dated March 21, 1997, with respect to the consolidated and combined financial statements and financial statement schedule of Paragon Group, Inc. for the years ended December 31, 1996, 1995, and 1994 as restated, included in the Annual Report (Form 10-K) for 1996 filed with the Securities and Exchange Commission. ERNST & YOUNG LLP /S/ Ernst & Young LLP Dallas, Texas June 13, 1997 -----END PRIVACY-ENHANCED MESSAGE-----