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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission file number 1-12452
AVALON PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
----------------
Maryland 06-1379111
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 River Road
Wilton, Connecticut 06897
(Address of principal executive offices) - (Zip Code)
(203) 761-6500
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
-------------------------------------
Indicate the number of shares outstanding of each issuer's classes of common
stock as of the latest practicable date:
38,471,981 shares outstanding as of November 7, 1997.
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AVALON PROPERTIES, INC.
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements Page
----
<S> <C> <C>
Condensed Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . 4
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 2 Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 3 Defaults upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . 23
Item 4 Submission of Matters to a Vote of Stockholders . . . . . . . . . . . . . . . 23
Item 5 Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . 23
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVALON PROPERTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS 9-30-97 12-31-96
------------- -------------
<S> <C> <C>
Real estate
Land $ 206,279 $ 169,079
Buildings and improvements 954,261 754,545
Furniture, fixtures and equipment 32,918 27,455
------------- -------------
1,193,458 951,079
Less: accumulated depreciation (63,325) (44,547)
------------- -------------
1,130,133 906,532
Construction in progress (including land) 89,347 130,827
------------- -------------
TOTAL REAL ESTATE, NET 1,219,480 1,037,359
Cash and cash equivalents 3,373 14,241
Cash in escrow 20,509 3,945
Resident security deposits 8,063 5,995
Investments in joint ventures 3,327 2,573
Deferred financing, net 7,421 7,702
Deferred development costs 9,611 5,179
Prepaid expenses and other assets 11,253 5,777
------------- -------------
TOTAL ASSETS $ 1,283,037 $ 1,082,771
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Unsecured Facilities $ 82,000 $ --
Unsecured senior notes, 7-3/8% due 2002, net of unamortized discount 99,886 99,869
Notes payable 197,897 210,737
Payables for construction 14,771 12,613
Accrued expenses and other liabilities 13,184 10,580
Accrued interest payable 3,201 4,342
Resident security deposits 9,303 6,642
------------- -------------
TOTAL LIABILITIES 420,242 344,783
------------- -------------
Minority interest of unitholders in consolidated operating partnership 700 --
Stockholders' equity
Preferred Stock, $.01 par value; 20,000,000 shares authorized;
4,455,000 shares of 9% Series A Cumulative Redeemable Preferred Stock
issued and outstanding (Aggregate liquidation preference of $111,375) 45 45
4,300,000 shares of 8.96% Series B Cumulative Redeemable Preferred Stock
issued and outstanding (Aggregate liquidation preference of $107,500) 43 43
Common Stock, $.01 par value; 80,000,000 shares authorized;
38,453,315 and 33,391,992 shares issued and outstanding at September 30, 1997
and December 31, 1996, respectively 384 334
Additional paid-in capital 887,181 752,159
Deferred compensation (3,583) (1,699)
Distributions in excess of accumulated earnings (21,975) (12,894)
------------- -------------
STOCKHOLDERS' EQUITY 862,095 737,988
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,283,037 $ 1,082,771
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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AVALON PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------------- ------------------------------
9-30-97 9-30-96 9-30-97 9-30-96
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue:
Rental income $ 44,120 $ 32,364 $ 121,646 $ 89,286
Management fees 280 355 779 1,151
Other income 184 92 457 313
----------- ---------- ----------- ----------
Total revenue 44,584 32,811 122,882 90,750
----------- ---------- ----------- ----------
Expenses:
Operating expenses 16,550 12,702 44,551 35,025
Interest expense 4,211 2,847 11,850 7,093
Depreciation and amortization 7,558 5,326 21,086 15,025
General and administrative expenses 1,416 902 3,375 2,597
----------- ---------- ----------- ----------
Total expenses 29,735 21,777 80,862 59,740
----------- ---------- ----------- ----------
Equity in income of joint ventures 1,799 282 4,145 598
Interest income 430 195 926 641
Minority interest 69 111 210 410
----------- ---------- ----------- ----------
Income before gain on sale of community
and extraordinary items 17,147 11,622 47,301 32,659
Gain on sale of community 677 -- 677 --
----------- ---------- ----------- ----------
Income before extraordinary items 17,824 11,622 47,978 32,659
Extraordinary items -- (2,356) (1,183) (2,356)
----------- ---------- ----------- ----------
Net income 17,824 9,266 46,795 30,303
Dividends attributable to preferred stock (4,914) (2,468) (14,742) (6,070)
----------- ---------- ----------- ----------
Net income available to common stockholders $ 12,910 $ 6,798 $ 32,053 $ 24,233
=========== ========== =========== ==========
Per common share (Note 2):
Income before extraordinary items $ 0.34 $ 0.22 $ 0.89 $ 0.79
=========== ========== =========== ==========
Net income per common share $ 0.34 $ 0.22 $ 0.89 $ 0.79
=========== ========== =========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
AVALON PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
-----------------------------
9-30-97 9-30-96
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 46,795 $ 30,303
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 21,086 15,025
Equity in income of joint ventures (300) 370
Amortization of deferred compensation 722 280
Gain on the sale of community (677) --
Extraordinary items 1,183 2,356
Decrease in resident security deposits,
net of related liability 593 60
Decrease in cash in escrow 191 246
Increase in prepaid expenses and other assets (9,908) (4,384)
Increase in accrued expenses, other liabilities
and accrued interest payable 1,678 3,182
---------- ----------
Total adjustments 14,568 17,135
---------- ----------
Net cash provided by operating activities 61,363 47,438
---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Investment in joint venture (454) (875)
Increase in construction payables 2,158 4,321
Purchase and development of real estate (217,583) (230,762)
---------- ----------
Net cash used in investing activities (215,879) (227,316)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net 131,505 47,027
Issuance of preferred stock, net -- 107,581
Dividends paid (55,876) (38,912)
Borrowings on notes payable 12,088 7,000
Repayments of notes payable (25,058) (7,127)
Borrowings under Unsecured Facilities 340,000 216,500
Repayments of Unsecured Facilities (258,000) (138,500)
Borrowings under construction loans -- 31
Repayments of construction loans -- (10,508)
Payments of deferred financing costs (1,011) (2,053)
---------- ----------
Net cash provided by financing activities 143,648 181,039
---------- ----------
Net (decrease) increase in cash (10,868) 1,161
Cash and cash equivalents, beginning of period 14,241 1,801
---------- ----------
Cash and cash equivalents, end of period $ 3,373 $ 2,962
========== ==========
Cash paid during period for interest, net of amount capitalized $ 12,339 $ 7,541
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
AVALON PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
1. Organization of the Company and Recent Developments
Avalon Properties, Inc. (the "Company") is a self-administered
and self-managed Real Estate Investment Trust ("REIT"), as defined
under the Internal Revenue Code of 1986 (as amended) and was
incorporated under the General Corporation Law of Maryland on August
24, 1993. The Company is engaged principally in the development,
construction, acquisition and operation of residential apartment
communities in the Northeast and Mid-Atlantic regions of the United
States. Additionally, the Company provides management services for
communities owned by unrelated parties.
On July 1, 1997, the Company completed a public offering of
2,163,000 shares of common stock at a gross sales price of $28.0625
per share. The net cash proceeds from the offering of approximately
$57,671 were used primarily to repay amounts outstanding under the
Company's unsecured credit facilities.
On July 18, 1997, the Company sold a garden-style apartment
community, Avalon Farm, located in Frederick, Maryland, to a single
buyer for a total sales price of $17,047. The net proceeds from the
sale of approximately $16,500 will be used for reinvestment in a new
acquisition community. The Company recorded a gain of approximately
$677 from the sale and structured the sale as a Section 1031 like-kind
exchange under the Internal Revenue Code to defer the recognition of
the taxable gain.
On August 18, 1997, the Company purchased a 3.54 acre tract of
land adjacent to an existing community, Avalon Fields, in
Gaithersburg, Maryland for $1,400 for the purpose of expanding the
existing community. Construction of a new 96 apartment home
community, Avalon Fields II, has started and is expected to be
completed in the fourth quarter of 1998.
2. Summary of Significant Accounting Policies
Principles of Consolidation of the Company
The accompanying condensed consolidated financial statements
include the accounts of the Company, its wholly owned partnerships and
subsidiaries and the operating partnership structured as a DownREIT.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Real Estate
Buildings and improvements are recorded at cost and are
depreciated on a straight-line basis over their estimated useful lives
of 40 years. The Company's policy is to annually assess any
impairment in value by making a comparison of the current and
projected operating cash flows of each of its communities over its
remaining useful life, on an undiscounted basis, to the carrying
amount of each community. If such carrying amount is in excess of the
estimated projected operating cash flow of the community, the Company
would recognize an impairment loss, equivalent to an amount required
to adjust the carrying amount to its estimated fair market value.
The cost of buildings and improvements include capitalized
interest, property taxes and insurance incurred during the
construction period. Furniture and fixtures are stated at cost and
depreciated over their estimated useful lives of seven years.
Expenditures for maintenance and repairs
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are charged to operations as incurred. Significant renovations or
betterments that exceed $15 and extend the economic useful life of an
asset are capitalized and depreciated over seven years.
The Company's policy is not to actively market any of its
communities for sale. In the event the Company decides to sell a
community, it will be reclassified as "held for sale" when the Board
of Directors approves the decision to sell.
Deferred Financing and Development Costs
Deferred financing costs include fees and costs incurred to
obtain financings and are amortized on a straight-line basis over the
shorter of the term of the loan or the related credit enhancement
facility, if applicable. Fees and other incremental costs incurred in
developing new communities are capitalized as deferred development
costs and are included in the cost of the community when construction
commences. The accompanying condensed consolidated financial
statements include a charge to expense for unrecoverable deferred
development costs related to pre-development communities that may not
proceed to development.
Net Income per Common Share
Net income per common share for the three months ended
September 30, 1997 and 1996 is based upon 38,453,694 and 30,726,468
weighted average shares of common stock outstanding, respectively. Net
income per common share for the nine months ended September 30, 1997
and 1996 is based upon 35,889,375 and 30,563,292 weighted average
shares of common stock outstanding, respectively.
Interim Financial Statements
These condensed consolidated financial statements are
unaudited and were prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. However, in the opinion of
the Company's management, all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair presentation of the
financial statements have been included. The operating results for
these periods are not necessarily indicative of the operating results
that may be attained for a full fiscal year. The accompanying
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements included in
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
Recently Issued Accounting Pronouncements
During 1997, the Financial Accounting Standard Board issued
Statements of Financial Accounting Standards No. 128 "Earnings Per
Share" ("SFAS 128"), No. 129 "Disclosure of Information About Capital
Structure" ("SFAS 129") and No. 130 "Reporting Comprehensive Income"
("SFAS 130").
SFAS 128 simplifies existing computational guidelines, revises
disclosure requirements and increases the comparability of earnings
per share data. This statement is effective for financial statements
for periods ending after December 15, 1997 and requires restatement of
all prior period earnings per share data presented. SFAS 129
establishes standards for disclosing information about an entity's
capital structure such as information about securities, liquidation
preference of preferred stock and redeemable stock. SFAS 130
specifies the presentation and disclosure requirement for reporting
comprehensive income which includes those items which have been
formerly reported as a component of shareholders' equity.
The adoption of SFAS 128, SFAS 129 and SFAS 130 is not
expected to have a material impact on the Company's financial
condition or results of operations.
5
<PAGE> 8
Stockholder's Equity
Dividends on the Series A and Series B Cumulative Redeemable
Preferred Stock are cumulative from the date of original issue and are
payable quarterly on or about the fifteenth day of February, May,
August and November of each year, at the annual rate of 9% and 8.96%,
respectively, on the liquidation preference of $25 per share. The
Series A Preferred Stock is not redeemable prior to February 15, 2001.
On or after February 15, 2001, the Series A Preferred Stock may be
redeemed for cash at the option of the Company in whole or in part, at
a redemption price of $25 per share, plus all accrued and unpaid
dividends, if any. The Series B Preferred Stock is not redeemable
prior to October 15, 2001. On or after October 15, 2001, the Series B
Preferred Stock may be redeemed for cash at the option of the Company
in whole or in part, at a redemption price of $25 per share, plus all
accrued and unpaid dividends, if any.
Reclassifications
Certain reclassifications have been made to amounts in prior
year financial statements to conform with current year presentations.
Specifically, overhead expense related to acquisitions previously
classified as general and administrative is now included in operating
expenses.
3. Senior Participating Mortgage Note
The Company's ownership of the senior participating mortgage
note related to the Town Arbor Partnership ("Avalon Arbor") has been
accounted for as an investment in real estate. Minority interest
represents the excess of the interest income at the pay rate on the
mortgage loan over the cash flow from operations generated by the
community. This excess is funded from payments drawn from an escrow
account established from contributions by the minority partners. At
September 30, 1997, the partnership had $2,903 of cash from these
contributions available to fund interest payments. The note bears
interest at 10.2%. Upon acquisition, the note was restructured to
provide for a 9% pay rate. The difference between the stated interest
and the pay rate is deferred interest and is added to the principal.
The loan also provides for contingent interest of 50% of gross
revenues, as defined, and is payable prior to any payments to the
partners. No contingent interest has been paid through September 30,
1997. The note entitles the holder to a 50% net residual value of the
property at maturity or upon prior disposition of the property. The
note may be prepaid subject to stipulated penalties.
4. Unsecured Facilities
The Company's unsecured credit facility (the "Unsecured
Facility") is provided by a consortium of six banks that provides for
$175,000 in short-term credit and is subject to an annual facility fee
of $263. The Unsecured Facility expires on March 31, 2000. As of
September 30, 1997, approximately $13,025 of available capacity was
used to provide letters of credit and $42,000 was borrowed under the
facility. Accordingly, the balance that remains available at
September 30, 1997 to be drawn under the Unsecured Facility is
$119,975. The Unsecured Facility bears interest based upon a LIBOR,
Prime or CD rate election at the Company's option. The current
pricing is LIBOR plus .80%, provided, however, that up to $75,000 can
be competitively bid at lower pricing if market conditions allow.
Pricing may be adjusted higher or lower depending on the Company's
senior unsecured debt ratings.
The Company's supplemental unsecured credit facility (the
"Supplemental Unsecured Facility" and together with the Unsecured
Facility, the "Unsecured Facilities") is provided by First Union
National Bank in the amount of $50,000 and is subject to an annual
facility fee of $75. The Supplemental Unsecured Facility expires on
March 31, 2000 and bears a current interest rate of LIBOR plus .80%.
At September 30, 1997, $2,542 of available capacity was used to
provide letters of credit and $40,000 was
6
<PAGE> 9
borrowed under the Supplemental Unsecured Facility. Accordingly, the
balance that remains available at September 30, 1997 to be drawn under
the Supplemental Unsecured Facility is $7,458.
The weighted average effective interest rates (excluding the
cost of facility fees and unused line of credit fees) on borrowings
under the Unsecured Facilities for the nine months ended September 30,
1997 and 1996 were 6.4% and 7.0%, respectively. Including the cost of
facility fees and unused fees, the weighted average effective
interest rates on borrowings under the Unsecured Facilities for the
nine months ended September 30, 1997 and 1996 were 7.0% and 7.6%,
respectively.
5. Stockholders' Equity
The following summarizes the changes in stockholders' equity
for the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
Distributions
Additional in excess of
Preferred Common paid-in Deferred accumulated
Stock Stock capital compensation earnings Total
--------- -------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity, 12-31-96 $ 88 $ 334 $752,159 $ (1,699) $ (12,894) $737,988
Net income -- -- -- -- 46,795 46,795
Dividends declared -- -- -- -- (55,876) (55,876)
Issuance of Restricted Common
Stock -- 1 3,566 -- -- 3,567
Deferred compensation,
net of amortization -- -- -- (1,884) -- (1,884)
Issuance of Common Stock -- 49 131,456 -- -- 131,505
--------- -------- ---------- ------------ ------------- ----------
Stockholders' equity, 9-30-97 $ 88 $ 384 $887,181 $ (3,583) $ (21,975) $862,095
========= ======== ========== ============ ============= ==========
</TABLE>
6. Investments in Joint Ventures
At September 30, 1997 and December 31, 1996, investments in
joint ventures consist of a 50% general partnership interest in
Falkland Partners, a 49% equity interest in Avalon Run, an 86.5%
effective equity interest in Town Close Associates (the New Canaan
Development Right) and 100% of the operating income from the
anticipated Avalon Grove joint venture. The following is a combined
summary of the financial position of these joint ventures for the
periods presented:
<TABLE>
<CAPTION>
9-30-97 12-31-96
---------- ---------
<S> <C> <C>
Assets:
Real estate, net $ 99,226 $92,835
Other assets 3,883 5,029
---------- ---------
Total assets $103,109 $97,864
========== =========
Liabilities and partners' equity:
Mortgage notes payable $ 26,000 $26,000
Other liabilities 2,879 3,786
Partners' equity 74,230 68,078
---------- ---------
Total liabilities and partners' equity $103,109 $97,864
========== =========
</TABLE>
At September 30, 1996, the investments in joint ventures
include a 50% general partnership interest in Falkland Partners, a 49%
equity interest in Avalon Run and an 86.5% effective equity interest
in Town Close Associates. The following is a combined summary of the
operating results of these joint ventures for the periods presented:
7
<PAGE> 10
<TABLE>
<CAPTION>
Three months ended Nine months ended
---------------------- ----------------------
09-30-97 9-30-96 9-30-97 9-30-96
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Rental income $ 4,505 $ 2,586 $11,794 $ 7,257
Other income 11 17 36 45
Operating expenses (1,384) (1,133) (3,793) (3,028)
Mortgage interest expense (222) (215) (661) (639)
Depreciation and amortization (735) (446) (1,991) (1,266)
--------- --------- --------- ---------
Net income $ 2,175 $ 809 $ 5,385 $ 2,369
========= ========= ========= =========
</TABLE>
7. Extraordinary Items
In March 1997, the unamortized deferred financing costs
associated with the early retirement of the Company's previous
$165,000 unsecured credit facility were written off.
In August 1996, the Company recorded a non-recurring charge to
earnings for the recorded value of the unamortized deferred financing
costs associated with the refinancing of tax-exempt bonds in
conjunction with the completion of the new credit enhancement facility
with the Federal National Mortgage Association.
8. Subsequent Events
On October 1, 1997, the Company purchased Avalon Colchester
(formerly 1470 Beacon Street), a 57 apartment home community in
Brookline, Massachusetts for $4,500. This community is near an
existing community, Longwood Towers, and the Company will combine the
operations of these two communities.
On October 8, 1997, the Company purchased interest rate
protection in the form of a treasury lock from PaineWebber. The
forward commitment of the lock agreement terminates on December 11,
1997.
On October 30, 1997, the Company completed a refinancing of
approximately $44,000 of tax-exempt bonds related to the Avalon Ridge
and Avalon Lea communities. These bonds bear a variable interest
rate, will mature on June 15, 2026 and are credit enhanced by the
Company's credit enhancement facility with the Federal National
Mortgage Association. In connection with this refinancing, the
Company purchased an interest rate cap for $101. This cap terminates
October 31, 2002 and serves to fix the interest rate on the bonds at
6.9%.
8
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PART I FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995 (the "Reform Act"). The words "believe," "expect,"
"anticipate," "intend," "estimate," "assume" and other similar expressions
which are predictions of or indicate future events and trends and which do not
relate solely to historical matters identify forward-looking statements. In
addition, information concerning construction, occupancy and completion of
Development Communities and Development Rights (as hereinafter defined) and
related cost and EBITDA estimates, are forward-looking statements. Reliance
should not be placed on forward-looking statements because they involve known
and unknown risks, uncertainties and other factors, which are in some cases
beyond the control of the Company and may cause the actual results, performance
or achievements of the Company to differ materially from anticipated future
results, performance or achievements expressed or implied by such
forward-looking statements.
Certain factors that might cause such differences include, but are not
limited to, the following: The Company may abandon development opportunities;
construction costs of a community may exceed original estimates; construction
and lease-up may not be completed on schedule, resulting in increased debt
service expense and construction costs and reduced rental revenues; occupancy
rates and market rents may be adversely affected by local economic and market
conditions which are beyond management's control; financing may not be
available on favorable terms; the Company's cash flow may be insufficient to
meet required payments of principal and interest; and existing indebtedness may
not be able to be refinanced or the terms of such refinancing may not be as
favorable as the terms of existing indebtedness.
The following discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto included
elsewhere herein.
RECENT DEVELOPMENTS
Acquisition of Existing Community. On October 1, 1997, the Company
purchased Avalon Colchester (formerly 1470 Beacon Street), a 57 apartment home
community, in Brookline, Massachusetts for $4,500,000. This community is near
an existing community, Longwood Towers, and the Company will combine the
operations of these two communities.
Sale of Existing Community. On July, 18 1997, the Company sold a
garden-style apartment community, Avalon Farm, located in Frederick, Maryland,
to a single buyer for a total sales price of $17,047,000. The net proceeds of
approximately $16,500,000 from the sale will be used for reinvestment in a new
acquisition community. The Company recorded a gain of approximately $677,000
from the sale and structured the sale as a Section 1031 like-kind exchange
under the Internal Revenue Code to defer the recognition of the taxable gain.
Land Acquisitions for New Development. On August 18, 1997, the
Company purchased a 3.54 acre tract of land adjacent to an existing community,
Avalon Fields, in Gaithersburg, Maryland for $1,400,000 for the purpose of
expanding the existing community. Construction of a new 96 apartment home
community, Avalon Fields II, has started and is expected to be completed in the
fourth quarter of 1998.
Financing Activities. On July 1, 1997, the Company completed a public
offering of 2,163,000 shares of common stock at a gross sales price of $28.0625
per share. The net cash proceeds from the offering of approximately
$57,671,000 were used primarily to repay amounts outstanding under the
Unsecured Facilities.
On October 8, 1997, the Company purchased interest rate protection in
the form of a treasury lock from PaineWebber. The forward commitment of the
lock agreement terminates on December 11, 1997.
On October 30, 1997, the Company completed a refinancing of
approximately $44,000,000 of tax-exempt bonds related to the Avalon Ridge and
Avalon Lea communities. These bonds bear a variable interest
9
<PAGE> 12
rate, will mature on June 15, 2026 and are credit enhanced by the Company's
credit enhancement facility with the Federal National Mortgage Association. In
connection with this refinancing, the Company purchased an interest rate cap
for $101,000. This cap terminates on October 31, 2002 and serves to fix the
interest rate on the bonds at 6.9%.
GENERAL
The Company's operations consist of the development, construction,
acquisition and operation of apartment communities in the Mid-Atlantic and
Northeast regions of the United States. At September 30, 1997, the Company
held a fee simple ownership in 47 completed and operating communities (one of
which, Avalon at Center Place, is subject to a 149 year land lease), a general
partnership interest in two other communities (a 50% interest in Falkland Chase
and a 49% interest in Avalon Run), a 99% general partner interest in a
partnership structured as a "DownREIT" (Avalon at Ballston - Vermont/Quincy)
and a 100% interest in a senior participating mortgage note secured by another
community (Avalon Arbor) which is accounted for as an investment in real
estate. The Company also has a fee simple ownership interest in nine
Development Communities.
The Company's real estate holdings consist exclusively of apartment
communities in various stages of the development cycle and can be divided into
three categories:
"Current Communities" are apartment communities where construction is
complete and the community has either reached stabilized occupancy or
is in the initial lease-up process. A "Stabilized Community" is a
Current Community that has completed its initial lease-up and has
attained a physical occupancy level of 94% or has been completed for
one year, whichever occurs earlier. An "Established Community" is a
Current Community that has been a Stabilized Community with stabilized
operating costs during the current and the beginning of the previous
calendar year such that its year-to-date operating results are
comparable between periods.
"Development Communities" are communities that are under construction
and may be partially complete and operating and for which a final
certificate of occupancy has not been received.
"Development Rights" are development opportunities in the very
earliest phase of the development process for which the Company has an
option to acquire land or owns land to develop a new community and
where related pre-development costs have been incurred and capitalized
in pursuit of these new developments.
RESULTS OF OPERATIONS
The changes in operating results from period-to-period are primarily
the result of increases in the number of apartment homes owned due to the
development and acquisition of additional communities. Where appropriate,
comparisons are made on a weighted average basis for the number of occupied
apartment homes in order to adjust for such changes in the number of apartment
homes. For Stabilized Communities (excluding communities owned by joint
ventures), all occupied apartment homes are included in the calculation of
weighted average occupied apartment homes for each reporting period. For
communities in the initial lease-up phase, only apartment homes of communities
that are completed and occupied are included in the weighted average number of
occupied apartment homes calculation for each reporting period.
The analysis that follows compares the operating results of the
Company for the three and nine months ended September 30, 1997 and 1996.
Net income increased $8,557,000 (92.3%) to $17,823,000 for the three
months ended September 30, 1997 compared to $9,266,000 for the comparable
period of the preceding year. Net income increased $16,492,000 (54.4%) to
$46,795,000 for the nine months ended September 30, 1997 compared to
$30,303,000 for the comparable period of the preceding year. The primary
reason for these increases is additional operating income from communities
developed or acquired during 1997 and 1996. Growth in operating income from
10
<PAGE> 13
existing communities as well as the gain recognized from the sale of a
community also contributed to these increases.
Rental income increased $11,756,000 (36.3%) to $44,120,000 for the
three months ended September 30, 1997 compared to $32,364,000 the comparable
period of the preceding year. Rental income increased $32,360,000 (36.2%) to
$121,646,000 for the nine months ended September 30, 1997 compared to
$89,286,000 for the comparable period of the preceding year. Of the increase
for the nine month period, $29,824,000 was due to newly completed or acquired
communities and $2,536,000 was due to rental rate growth from Established
Communities that were owned or completed during the period.
Overall Portfolio - The increase in rental income for the three month
and nine month period is primarily due to increases in the weighted
average number of occupied apartment homes as well as an increase in
the weighted average monthly rental income per occupied apartment
home. For the three months ended September 30, 1997, the weighted
average monthly revenue per occupied apartment home increased $63
(7.0%) to $963 compared to $900 for the comparable period of the
preceding year. For the nine months ended September 30, 1997, the
weighted average monthly revenue per occupied apartment home increased
$66 (7.4%) to $956 compared to $890 for the comparable period of the
preceding year. The weighted average number of occupied apartment
homes increased from 10,930 apartment homes for the nine months ended
September 30, 1996 to 12,265 apartment homes for the nine months ended
September 30, 1997 as a result of the development and acquisition of
new communities.
Established Communities - For the three months ended September 30,
1997, the weighted average monthly revenue per occupied apartment home
increased $33 (3.6%) to $943 compared to $910 for the comparable
period of the preceding year. The average economic occupancy
increased .4% to 96.5% in 1997 from 96.1% in 1996. For the nine
months ended September 30, 1997, the weighted average monthly revenue
per occupied apartment home increased $30 (3.4%) to $925 compared to
$895 for the comparable period of the preceding year. The average
economic occupancy increased by .1% to 96.2% in 1997 from 96.1% in
1996. Accordingly, rental revenue from Established Communities
increased $989,000 (4.0%) and $2,536,000 (3.5%) for the three and nine
month period ended September 30, 1997, respectively, compared to the
comparable periods of the preceding year.
Management fees decreased $75,000 (21.1%) to $280,000 for the three
months ended September 30, 1997 compared to $355,000 for the comparable period
of the preceding year. These fees decreased $372,000 (32.3%) to $779,000 for
the nine months ended September 30, 1997 compared to $1,151,000 for the
comparable period of the preceding year. These decreases are primarily due to
a decline in the number of apartment homes managed for third-party owners
during 1997. These declines are due to the sale and the cancellation of
management contracts of some third-party communities in 1996 as well as the
acquisition of one Current Community in the second quarter of 1996 and another
Current Community in the second quarter of 1997 that were managed by the
Company for third-party owners prior to their acquisitions.
Operating expenses increased $3,848,000 (30.3%) to $16,550,000 for the
three months ended September 30, 1997 compared to $12,702,000 for the
comparable period of the preceding year. These expenses increased $9,526,000
(27.2%) to $44,551,000 for the nine months ended September 30, 1997 compared to
$35,025,000 for the comparable period of the preceding year.
Overall Portfolio - The $9,526,000 increase for the nine month period
is primarily due to the acquisition of new communities, as well as the
completion of Development Communities whereby maintenance, property
taxes, insurance and other costs are expensed as communities move from
the initial construction and lease-up phase to the stabilized
operating phase.
Established Communities - Operating expenses increased $311,000 (3.7%)
to $8,756,000 for the three months ended September 30, 1997 compared
to $8,445,000 for the comparable period of the preceding year.
Operating expenses increased $384,000 (1.6%) to $24,877,000 for the
nine
11
<PAGE> 14
months ended September 30, 1997 compared to $24,493,000 for the
comparable period of the preceding year. These increases were
concentrated in the marketing, maintenance and insurance categories,
offset by lower snow removal costs as a result of the mild weather
conditions throughout the Northeast and Mid-Atlantic regions during
the first quarter of 1997 as compared to the severe winter weather
experienced during the first quarter of 1996.
Interest expense increased $1,364,000 (47.9%) to $4,211,000 for the
three months ended September 30, 1997 compared to $2,847,000 for the comparable
period of the preceding year. Interest expense increased $4,757,000 (67.1%) to
$11,850,000 for the nine months ended September 30, 1997 compared to $7,093,000
for the comparable period of the preceding year. These increases are primarily
attributable to higher average outstanding balances under the Company's
Unsecured Facilities (as hereinafter defined) in 1997 compared to 1996. In
addition, the Company assumed approximately $29,900,000 of conventional debt
resulting from the acquisitions of two communities in 1996 and completed the
loan closings related to the tax-exempt financing for the Avalon West and
Avalon Fields communities in December 1996 and April 1997, respectively. These
increases were offset by lower interest and credit enhancement costs in
connection with the completion of the tax-exempt, credit enhancement facility
with the Federal National Mortgage Association ("Fannie Mae") in the third
quarter of 1996 and lower pricing under the Unsecured Facilities.
Depreciation and amortization increased $2,232,000 (41.9%) to
$7,558,000 for the three months ended September 30, 1997 compared to $5,326,000
for the comparable period of the preceding year. Depreciation and amortization
increased $6,061,000 (40.3%) to $21,086,000 for the nine months ended September
30, 1997 compared to $15,025,000 for the comparable period of the preceding
year. These increases reflect additional depreciation expense for recently
acquired and developed communities, offset by lower amortization expense of
deferred financing costs due to the completion of the new credit enhancement
facility with Fannie Mae.
General and administrative expenses increased $514,000 (57.0%) to
$1,416,000 for the three months ended September 30, 1997 compared to $902,000
for the comparable period of the preceding year. These expenses increased
$778,000 (30.0%) to $3,375,000 for the nine months ended September 30, 1997
compared to $2,597,000 for the comparable period of the preceding year. These
increases are primarily due to higher telecommunication costs and staff
additions related to the implementation of the company-wide systems enhancement
program, as well as higher compensation expense under the restricted stock
grant program. General and administrative expenses as a percentage of total
revenue, however, decreased .2% to 2.7% for the nine months ended September 30,
1997 compared to 2.9% for the comparable period of the preceding year.
Equity in income of joint ventures increased $1,517,000 to $1,799,000
for the three months ended September 30, 1997 compared to $282,000 for the
comparable period of the preceding year. This income increased $3,547,000 to
$4,145,000 for the nine months ended September 30, 1997 compared to $598,000
for the comparable period of the preceding year. These increases are
principally the result of the non-recurring income from the anticipated Avalon
Grove joint venture in which the Company is allocated 100% of the income prior
to the formation of the joint venture.
Interest income increased $235,000 to $430,000 for the three months
ended September 30, 1997 compared to $195,000 for the comparable period of the
preceding year. Interest income increased $285,000 to $926,000 for the nine
months ended September 30, 1997 compared to $641,000 for the comparable period
of the preceding year. These increases are primarily due to higher average
escrowed cash balances in 1997 compared to 1996 from the sale of Avalon Farm
that was structured as a Section 1031 like-kind exchange under the Internal
Revenue Code whereby the escrowed proceeds from the sale will be used for
reinvestment in a new acquisition community.
Extraordinary items totaled $1,183,000 for the nine months ended
September 30, 1997 and reflects the write-off of unamortized deferred financing
costs associated with the early retirement of the Company's previous
$165,000,000 unsecured credit facility.
12
<PAGE> 15
FUNDS FROM OPERATIONS
Management generally considers Funds from Operations ("FFO") to be an
appropriate measure of the operating performance of the Company because it
provides investors an understanding of the ability of the Company to incur and
service debt and to make capital expenditures. The Company believes that in
order to facilitate a clear understanding of the operating results of the
Company, FFO should be examined in conjunction with net income as presented in
the condensed consolidated financial statements included elsewhere in this
report. FFO is determined in accordance with a resolution adopted by the Board
of Governors of the National Association of Real Estate Investment Trusts, Inc.
("NAREIT"), and is defined as net income (loss) (computed in accordance with
generally accepted accounting principles ("GAAP")), excluding gains (or losses)
from debt restructuring and sale of property, plus depreciation of real estate
assets and after adjustments for unconsolidated partnerships and joint
ventures. FFO does not represent cash generated from operating activities in
accordance with GAAP and therefore should not be considered an alternative to
net income as an indication of the Company's performance or to net cash flows
from operating activities as determined by GAAP as a measure of liquidity and
is not necessarily indicative of cash available to fund cash needs. Further,
FFO as disclosed by other REITs may not be comparable to the Company's
calculation of FFO.
ANALYSIS OF FUNDS FROM OPERATIONS ($ in 000's)
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------------- ----------------------------
9-30-97 9-30-96 9-30-97 9-30-96
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET INCOME $ 17,823 $ 9,266 $ 46,795 $ 30,303
Depreciation (real estate related) 7,130 4,783 19,818 13,247
Joint venture adjustment 108 81 278 240
Gain on sale of community (677) -- (677) --
Extraordinary items -- 2,356 1,183 2,356
Preferred stock dividends (4,914) (2,468) (14,742) (6,070)
------------- ------------- ------------- -------------
FUNDS FROM OPERATIONS $ 19,470 $ 14,018 $ 52,655 $ 40,076
============= ============= ============= =============
CASH FLOW PROVIDED BY (USED IN):
Operating activities $ 18,648 $ 16,133 $ 61,363 $ 47,438
Investing activities $ (42,123) $ (104,157) $ (215,879) $ (227,316)
Financing activities $ 24,096 $ 88,873 $ 143,648 $ 181,039
WEIGHTED AVERAGE SHARES OUTSTANDING 38,453,694 30,726,468 35,889,375 30,563,292
============= ============= ============= =============
OTHER CAPITALIZED EXPENDITURES AND OTHER INFORMATION
Non-recurring capital expenditures:
Community level- non-revenue generating (1) $ 441 $ 453 $ 1,721 $ 1,287
Corporate level (2) $ 185 $ 219 $ 658 $ 1,810
Loan principal amortization payments $ 304 $ 187 $ 946 $ 423
Capitalized deferred financing costs (3) $ 142 $ 1,594 $ 1,011 $ 2,053
</TABLE>
- ------------------
Footnotes to Analysis of Funds from Operations
(1) The Company expenses all recurring non-revenue generating community
expenditures, including carpet and appliance replacements. See
"Capitalization of Fixed Assets and Community Improvements."
(2) Represents the cost of new office equipment and computer costs related
to the implementation of a company-wide systems enhancement plan.
(3) Substantially all of the deferred financing costs incurred for the nine
months ended September 30, 1997 relate to the costs incurred on the
closing of the Avalon Fields tax-exempt bonds, the closing of the new
$175 million unsecured credit facility and the refinancing of
tax-exempt bonds related to the Avalon Lea and Avalon Ridge
Communities.
13
<PAGE> 16
CAPITALIZATION OF FIXED ASSETS AND COMMUNITY IMPROVEMENTS
The Company maintains a policy with respect to capital expenditures
that generally provides that only non-recurring expenditures are capitalized.
Improvements and upgrades are capitalized only if the item exceeds $15,000,
extends the useful life of the asset and is not related to making an apartment
home ready for the next resident. Under this policy, virtually all capitalized
costs are non-recurring, as recurring make ready costs are expensed as
incurred, including costs of carpet and appliance replacements, floor
coverings, interior painting and other redecorating costs. Purchases of
personal property (such as computers and furniture) are capitalized only if the
item is a new addition (i.e., not a replacement) and only if the item exceeds
$2,500. The application of these policies for the nine months ended September
30, 1997 resulted in non-revenue, generating capitalized expenditures for
Stabilized Communities of approximately $1,721,000 or $128 per apartment home.
For the nine months ended September 30, 1997, the Company charged to
maintenance expense, including carpet and appliance replacements, a total of
approximately $9,142,000 for Stabilized Communities or $682 per apartment home.
Management anticipates that capitalized costs per apartment home will gradually
rise as the Company's portfolio of communities matures. The table on the
following page is a summary of expenditures for both recurring maintenance
costs (expensed) and community upgrades (capitalized) for the nine months ended
September 30, 1997.
14
<PAGE> 17
EXPENDITURES FOR COMMUNITY AND CORPORATE UPGRADES (CAPITALIZED) AND COMMUNITY
MAINTENANCE (EXPENSED)
(Dollars in thousands, except per home data)
<TABLE>
<CAPTION>
Number Balance at Balance at
Community of Homes 12-31-96 (1) 9-30-97 (1)
- ------------------------------------------------ ----------- --------------- ----------------
<S> <C> <C> <C>
STABILIZED
- ----------
Avalon Watch 512 $ 28,340 $ 28,423
Avalon Pavilions 932 56,523 56,619
Avalon Glen 238 30,077 30,177
Avalon Walk I 430 34,505 34,560
Avalon Walk II 334 23,597 23,719
Avalon View 288 17,773 17,812
Avalon Park 372 19,717 19,945
Avalon at Ballston - Washington Towers 344 36,797 36,887
Avalon at Gayton 328 9,830 9,931
Avalon at Hampton I 186 3,702 3,739
Avalon at Hampton II 231 8,144 8,196
Avalon at Dulles 236 11,599 11,678
Avalon Knoll 300 7,905 7,980
Avalon Lea 296 16,101 16,130
Avalon at Fairway Hills I 192 9,368 9,401
Avalon Ridge 432 25,030 25,184
Avalon at Symphony Glen 174 8,079 8,116
Avalon at Park Center 492 37,337 37,612
4100 Mass. Avenue 308 34,879 34,919
Avalon Woods 268 8,235 8,318
Avalon at Carter Lake 259 11,502 11,560
Avalon Pointe 140 7,748 7,832
Avalon Landing 158 9,261 9,302
Avalon Birches 312 13,419 13,458
Avalon at Lake Arbor 209 11,900 11,914
Avalon at Decoverly 368 30,978 31,108
Avalon Summit 245 16,152 16,287
Avalon Towers 109 15,826 15,895
Longwood Towers 307 16,620 16,623
Avalon Fields 192 14,262 14,298
Avalon West 120 10,624 10,810
Avalon Chase 360 23,615 23,636
Avalon Pines 174 8,578 8,592
Avalon at Fairway Hills II 527 33,807 33,840
Avalon at Boulders 284 16,038 16,064
AutumnWoods 420 30,474 30,593
Avalon Run East 206 16,002 16,000
Avalon Station 223 11,838 11,932
Avalon Cove 504 85,831 89,875
Avalon Crossing 132 13,387 13,771
Avalon Springs 102 13,628 15,799
Avalon at Ballston - Vermont/Quincy (2) 454 -- 46,707
Avalon at Center Place (2) 225 -- 26,411
Avalon at Providence Park (2) 140 -- 11,051
Avalon Gates 340 30,348 34,885
----------- --------------- ----------------
13,403 869,376 967,589
----------- --------------- ----------------
NEW DEVELOPMENTS 3,118 130,212 241,567
- ----------------
OTHER
- -----
Avalon at Lexington 198 14,117 14,325
Longwood Towers - Renovation -- 6,829 14,022
Avalon Green 105 12,294 12,424
Avalon Arbor (5) 302 27,822 28,296
Avalon Farm (6) -- 17,332 --
Corporate Level Expenditures -- 3,924 4,582
----------- --------------- ----------------
Grand Total 17,126 (7) $ 1,081,906 $ 1,282,805
=========== =============== ================
</TABLE>
<TABLE>
<CAPTION>
YTD 1997 Capitalized Costs
-------------------------------------------------------
Acquisitions, Non-Revenue YTD 1997
Construction Generating Capx Maintenance Expensed
and Revenue ------------------------------ ------------------------------
Community Generating Costs Total Per Home Total Per Home
- ------------------------------------------ ---------------------- -------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
STABILIZED
- ----------
Avalon Watch $ -- $ 83 $ 162 $ 339 $ 662
Avalon Pavilions -- 96 103 421 452
Avalon Glen 7 93 391 204 857
Avalon Walk I 2 53 123 216 502
Avalon Walk II -- 122 365 176 527
Avalon View -- 39 135 300 1,042
Avalon Park 118 110 296 325 874
Avalon at Ballston - Washington Towers -- 90 262 263 765
Avalon at Gayton 32 69 210 245 747
Avalon at Hampton I 12 25 134 155 833
Avalon at Hampton II -- 52 225 168 727
Avalon at Dulles 46 33 140 220 932
Avalon Knoll 55 20 67 248 827
Avalon Lea -- 29 98 233 787
Avalon at Fairway Hills I -- 33 172 151 786
Avalon Ridge 89 65 150 340 787
Avalon at Symphony Glen 3 34 195 164 943
Avalon at Park Center 140 135 274 304 618
4100 Mass. Avenue 15 25 81 290 942
Avalon Woods -- 83 310 149 556
Avalon at Carter Lake -- 58 224 228 880
Avalon Pointe 35 49 350 119 850
Avalon Landing -- 41 259 170 1,076
Avalon Birches -- 39 125 165 529
Avalon at Lake Arbor -- 14 67 256 1,225
Avalon at Decoverly 109 21 57 202 549
Avalon Summit 128 7 29 167 682
Avalon Towers -- 69 633 173 1,587
Longwood Towers -- 3 10 290 945
Avalon Fields -- 36 188 116 604
Avalon West 173 13 108 78 650
Avalon Chase -- 21 58 294 817
Avalon Pines -- 14 80 80 460
Avalon at Fairway Hills II 17 16 30 345 655
Avalon at Boulders -- 26 92 197 694
AutumnWoods 114 5 12 241 574
Avalon Run East (2) -- -- 91 442
Avalon Station 94 -- -- 129 578
Avalon Cove 4,044 -- -- 191 379
Avalon Crossing 384 -- -- 87 659
Avalon Springs 2,171 -- -- 46 451
Avalon at Ballston - Vermont/Quincy (2) 46,707 -- -- 336 740
Avalon at Center Place (2) 26,411 -- -- 86 382
Avalon at Providence Park (2) 11,051 -- -- 63 450
Avalon Gates 4,537 -- -- 81 238
---------------------- -------------- ------------ -------------- -------------
96,492 1,721 128 9,142 682
---------------------- -------------- ------------ -------------- -------------
NEW DEVELOPMENTS 111,355 -- -- 173 N/A
- ----------------
OTHER
- -----
Avalon at Lexington 208 (3) -- -- 165 833
Longwood Towers - Renovation 7,193 (4) -- -- -- --
Avalon Green 130 -- -- 146 1,390
Avalon Arbor (5) 474 -- N/A 273 904
Avalon Farm (6) (17,332) 36 118 140 458
Corporate Level Expenditures 658 -- N/A -- --
---------------------- -------------- ------------ -------------- -------------
Grand Total $ 199,178 $ 1,757 N/A $ 10,039 N/A
====================== ============== ============ ============== =============
</TABLE>
- --------------------
(1) Costs are presented in accordance with GAAP and exclude the step-up in
basis attributed to continuing investors.
(2) Acquired in 1997.
(3) Payment of contingent land cost to land seller based on operating results.
This is the complete and final contingent payment due under the land
purchase agreement.
(4) Represents renovation costs incurred.
(5) Ownership through ownership of the Avalon Arbor mortgage note. See Note 3
to the unaudited condensed consolidated financial statements. Increases in
capitalized value relate primarily to accrued interest and do not reflect
capitalized community upgrades.
(6) Community sold in July 1997.
(7) Excludes Falkland Chase and Avalon Run, 876 apartment homes owned by joint
ventures in which the Company holds a 50% interest and 49% interest,
respectively.
15
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. A primary source of liquidity to the Company is cash flows
from operations. Operating cash flows have historically been determined by the
number of apartment homes, rental rates and the Company's expenses with respect
to such apartment homes. Cash flows used in investing activities and provided
by financing activities have historically been dependent on the number of
apartment homes under development and construction or that were acquired during
any given period.
Cash and cash equivalents increased $411,000 from $2,962,000 at
September 30, 1996 to $3,373,000 at September 30, 1997 due to an increase in
operating cash flow and a decrease in investing activities, offset by a
decrease in cash provided by investing activities.
Net cash provided by operating activities increased by
$13,925,000 from $47,438,000 at September 30, 1996 to $61,363,000 at
September 30, 1997 primarily due to an increase in operating income
from newly developed and acquired communities and Established
Communities.
Cash used in investing activities decreased by $11,437,000
from $227,316,000 at September 30, 1996 to $215,879,000 at September
30, 1997 primarily due to decreased costs related to the development
and construction of apartment communities.
Net cash provided by financing activities decreased by
$37,391,000 from $181,039,000 at September 30, 1996 to $143,648,000 at
September 30, 1997 primarily due to the repayment of the loan on the
AutumnWoods community and an increase in dividends paid.
The Company regularly reviews short-term liquidity needs and the
adequacy of Funds from Operations and other expected liquidity sources to meet
these needs. The Company's primary short-term liquidity needs are to fund
normal recurring operating expenses, debt service payments and the minimum
dividend payment required to maintain the Company's REIT qualification under
the Internal Revenue Code. Management anticipates that these needs will be
fully funded from cash flows provided by operating activities. Normal
recurring expenditures for maintenance and repairs (including carpet and
appliance replacements) are funded from the operating cash flows of Stabilized
Communities and are expensed as incurred. Major upgrades or community
improvements are capitalized and depreciated over the expected economic useful
life of the item only if the expenditure exceeds $15,000 per occurrence and
only if the expenditure extends the economic useful life of the community.
Purchases of personal property (such as computers and furniture) are
capitalized only if the item is a new addition (i.e., not a replacement) and
only if the item exceeds $2,500. The application of these policies for the
nine month period ended September 30, 1997 resulted in non-revenue, generating
capitalized expenditures for Stabilized Communities of $128 per apartment home.
The Company's $100,000,000 unsecured senior notes will mature in 2002.
Since Management anticipates that no portion of the principal of such
indebtedness will be repaid prior to maturity and the Company may not have
funds on hand sufficient to repay such indebtedness, it will be necessary for
the Company to refinance this debt. Such refinancing could be accomplished
through additional debt financing, which may be collateralized by mortgages on
individual communities or groups of communities, by uncollateralized private or
public debt offerings or by additional equity offerings. There can be no
assurance that such additional debt financing or debt offerings will be
available on terms satisfactory to the Company. Currently, no other permanent
indebtedness will require balloon payments prior to the year 2002.
Capital Resources. To sustain the Company's active development and
acquisitions program, continuous access to the capital markets is required.
Management intends to match the long-term nature of its real estate assets with
long-term cost effective capital. The Company has demonstrated regular and
continuous access to the capital markets since its initial public offering,
raising approximately $778.5 million and over $492 million in the last 22
months. Management follows a focused strategy to help facilitate uninterrupted
access to capital. This strategy includes:
16
<PAGE> 19
1. Hire, train and retain associates with a strong resident service
focus, which should lead to higher rents, lower turnover and reduced
operating costs;
2. Manage, acquire and develop institutional quality communities with
in-fill locations that should provide consistent, sustained earnings
growth;
3. Operate in markets with growing demand (as measured by household
formation and job growth) and high barriers to entry. These
characteristics combine to provide a favorable supply-demand balance,
which the Company believes will create a favorable environment for
future rental rate growth while protecting existing and new
communities from new supply. This strategy is expected to result in a
high level of quality to the revenue stream;
4. Maintain a conservative capital structure largely comprised of equity
and with modest, cost-effective leverage. Secured debt will generally
be avoided and used primarily to secure low cost, tax-exempt debt.
Such a structure should promote an environment for ratings upgrades
that can lead to a lower cost of capital;
5. Conservative accounting practices that provide a high level of quality
to reported earnings; and
6. Timely, accurate and detailed disclosures to the investment community.
Management believes that these strategies provide a disciplined
approach to capital access that is expected to ensure that capital resources
are available to fund future portfolio growth.
The following is a discussion of specific capital transactions,
arrangements and agreements that are important to the capital resources of the
Company.
Unsecured Facilities
On March 31, 1997, the Company obtained a new unsecured credit
facility (the "Unsecured Facility") for $175,000,000. This new facility
replaced the previous $165,000,000 unsecured credit facility. The new
Unsecured Facility is provided by a consortium of six banks and is subject to
an annual facility fee of $262,500. The Unsecured Facility expires in March
2000. Borrowings under the new facility bear an interest rate of .80% over
LIBOR. A competitive bid option is available for up to $75,000,000 which may
result in lower pricing if market conditions allow. At September 30, 1997,
$42,000,000 was borrowed, $13,025,000 was used to provide letters of credit
and $119,975,000 was available for borrowing under the Unsecured Facility. The
Company will use borrowings under the Unsecured Facility for capital
expenditures, acquisitions of developed or undeveloped communities,
construction, development and renovation costs, credit enhancement for
tax-exempt bonds and for working capital purposes.
The Company's supplemental unsecured credit facility (the
"Supplemental Unsecured Facility" and together with the Unsecured Facility, the
"Unsecured Facilities") is provided by First Union National Bank in the amount
of $50,000,000 and is subject to an annual facility fee of $75,000. The
Supplemental Unsecured Facility expires in March 2000 and bears an interest
rate of LIBOR plus .80%. At September 30, 1997, $2,542,000 of available
capacity was used to provide letters of credit and $40,000,000 was borrowed
under the Supplemental Unsecured Facility. Accordingly, the balance that
remains available at September 30, 1997 to be drawn under the Supplemental
Unsecured Facility is $7,458,000.
Interest Rate Protection Agreements
On October 8, 1997, the Company purchased interest rate protection in
the form of a treasury lock from PaineWebber. This agreement serves to hedge
interest rate risk of the Company's planned corporate 10-year debt offering at
an interest rate of 6.125% on a notional amount of $75,000,000. The forward
commitment of the lock agreement terminates on December 11, 1997.
In connection with the refinancing of the tax-exempt bonds related to
the Avalon Lea and Avalon Ridge communities, the Company purchased an interest
rate cap for $101. This cap terminates October 31, 2002 and serves to fix the
interest rate on the bonds at 6.9% (see "Financing Transactions Completed" on
the next page).
17
<PAGE> 20
The Company is not a party to any long-term interest rate agreements,
other than the interest rate protection agreements described above. The
Company intends, however, to evaluate the need for long-term interest rate
protection agreements as interest rate market conditions dictate and has
engaged a consultant to assist in managing the Company's interest rate risks
and exposure.
Financing Transactions Completed
On July 1, 1997, the Company completed a public offering of 2,163,000
shares of common stock at a gross sales price of $28.0625 per share. The net
cash proceeds from the offering of approximately $57,671,000 were used
primarily to repay amounts outstanding under the Unsecured Facilities.
On October 30, 1997, the Company completed a refinancing of
approximately $44,000,000 of tax-exempt bonds related to the Avalon Ridge and
Avalon Lea communities. These bonds bear a variable interest rate, will mature
on June 15, 2026 and are credit enhanced by the Company's credit enhancement
facility with the Federal National Mortgage Association.
Future Financing Needs
Substantially all of the capital expenditures to complete the
communities currently under construction will be funded from the Unsecured
Facilities and/or issuance of debt or equity securities. Except for Longwood
Towers, the Company has no present plans for any major capital improvements to
any of the Current Communities. The renovation of Longwood Towers is being
funded by advances under the Unsecured Facilities, operating cash flow or other
financing sources over the next year. Management expects to continue to fund
deferred development costs related to future developments from Funds from
Operations and advances under the Unsecured Facilities. The Company believes
that these sources of capital are adequate to take each of the proposed
communities to the point in the development cycle where construction can
commence.
Management anticipates that available borrowing capacity under the
Unsecured Facilities and Funds from Operations will be adequate to meet future
expenditures required to commence construction of each of the Development
Rights. In addition, the Company currently anticipates funding construction of
some (but not all) of the Development Rights under the expected remaining
capacity of the Unsecured Facilities. However, before the construction of a
Development Right commences, the Company intends, as appropriate, to issue
additional equity or debt securities, arrange additional capacity under the
Unsecured Facilities or future credit facilities or obtain additional
construction loan commitments not currently in place to ensure that adequate
liquidity sources are in place to fund the construction of a Development Right,
although no assurance can be given in this regard.
The table on the following page summarizes debt maturities for the
next five years (excluding the Unsecured Facilities):
18
<PAGE> 21
AVALON PROPERTIES, INC.
DEBT MATURITY SCHEDULE
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance Outstanding at
------------------------
All-in Maturity
Community Interest Rate Date 12-31-96 9-30-97
- ------------------------------------------------ ------------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Tax-Exempt Bonds:
Fixed Rate
* Avalon Lea (Custodial Receipts) 5.71% Nov-07 $ 16,782 $ 16,830
* Avalon Ridge (Custodial Receipts) 5.69% Nov-07 26,724 26,806
* Avalon at Dulles 7.04% Jul-24 12,360 12,360
* Avalon at Hampton II 7.04% Jul-24 11,550 11,550
* Avalon at Symphony Glen 7.06% Jul-24 9,780 9,780
* Avalon View 7.55% Aug-24 19,487 19,365
* Avalon at Lexington 6.56% Feb-25 15,284 15,125
* Avalon Knoll 6.95% Jun-26 14,070 13,956
* Avalon Landing 6.85% Jun-26 6,969 6,912
* Avalon West 7.73% Dec-36 8,771 8,739
* Avalon Fields 7.57% May-27 -- 12,049
--------- ---------
141,777 153,472
Variable Rate
* Avalon at Fairway Hills I Jun-26 11,500 11,500
* Avalon at Hampton I Jun-26 8,060 8,060
* Avalon Pointe Jun-26 6,387 6,387
--------- ---------
25,947 25,947
Conventional Loans:
Fixed Rate
* AutumnWoods (1) 9.25% Nov-97 24,335 --
Unsecured Senior Notes 7.375% Sep-02 99,869 99,886
* Avalon Pines 8.00% Dec-03 5,529 5,466
* Avalon Walk II 8.93% Nov-04 13,149 13,012
--------- ---------
142,882 118,364
Variable Rate-None -- --
--------- ---------
Total notes payable - excluding Unsecured Facilities $ 310,606 $ 297,783
========= =========
<CAPTION>
Total Maturities
----------------------------------------------------------
Balance
Community of 1997 1998 1999 2000 2001 Thereafter
- --------------------------------------------------- ------- ------ ------ ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tax-Exempt Bonds:
Fixed Rate
* Avalon Lea (Custodial Receipts) $ -- $ -- $ -- $ -- $ -- $ 16,830
* Avalon Ridge (Custodial Receipts) -- -- -- -- -- 26,806
* Avalon at Dulles -- -- -- -- -- 12,360
* Avalon at Hampton II -- -- -- -- -- 11,550
* Avalon at Symphony Glen -- -- -- -- -- 9,780
* Avalon View 51 230 290 330 350 18,114
* Avalon at Lexington 54 226 240 255 271 14,079
* Avalon Knoll 38 163 175 187 200 13,193
* Avalon Landing 20 83 89 95 101 6,524
* Avalon West 11 46 50 53 57 8,522
* Avalon Fields 40 127 137 147 157 11,441
------ ------ ------ ------ ------- ---------
214 875 981 1,067 1,136 149,199
Variable Rate
* Avalon at Fairway Hills I -- -- -- -- -- 11,500
* Avalon at Hampton I -- -- -- -- -- 8,060
* Avalon Pointe -- -- -- -- -- 6,387
------ ------ ------ ------ ------- ---------
-- -- -- -- -- 25,947
Conventional Loans:
Fixed Rate
* AutumnWoods (1) -- -- -- -- -- --
Unsecured Senior Notes -- -- -- -- -- 99,886
* Avalon Pines 32 103 112 121 131 4,967
* Avalon Walk II 48 202 221 241 264 12,036
------ ------ ------ ------ ------- ---------
80 305 333 362 395 116,889
Variable Rate-None -- -- -- -- -- --
------ ------ ------ ------ ------- ---------
Total notes payable - excluding Unsecured Facilities $ 294 $1,180 $1,314 $1,429 $ 1,531 $ 292,035
====== ====== ====== ====== ======= =========
</TABLE>
(1) Note repaid in August 1997.
* Indicates loan is collateralized by the community.
19
<PAGE> 22
BUSINESS CONDITIONS; INFLATION
The Company's principal markets are characterized by high barriers to
entry and restrictive zoning and it often takes years to obtain entitlements to
build an apartment community. For this reason, little new rental product has
been added in recent years. For the markets north of Maryland, Management is
not aware of any significant level of planned apartment construction starts.
For the Washington, D.C. metropolitan area, permitting activity has increased,
with 8,000 apartment homes in planning for delivery over the next 36-month
period. Estimated absorption during this period totals 9,000 apartment homes,
which would create a supply-demand balance that would be slightly favorable for
owners of multifamily apartment communities.
At September 30, 1997, Management had positioned the Company's
portfolio of Established Communities, excluding communities owned by joint
ventures, to a physical occupancy level of 97.3% and achieved an average
economic occupancy of 96.2% for the nine months ended September 30, 1997.
Average economic occupancy for the Established Communities for the nine months
ended September 30, 1996 was 96.1%. This continued high occupancy was achieved
through aggressive marketing efforts combined with limited and targeted pricing
adjustments. This positioning has resulted in overall growth in rental revenue
from Established Communities between periods. It is Management's strategy to
maximize total rental revenue through management of rental rates and occupancy
levels. If market and economic conditions change, Management may adopt a
strategy of maximizing rental rates, which could lead to lower occupancy
levels, if Management believes that this strategy will maximize rental revenue.
Given the currently high occupancy level of the portfolio, Management
anticipates that, for the foreseeable future, any rental revenue and net income
gains from currently owned and Established Communities would be achieved
primarily through higher rental rates and enhanced operating cost leverage
provided by high occupancy, rather than through continued occupancy gains.
Substantially all of the leases at the Current Communities are for a
term of one year or less, which may enable the Company to realize increased
rents upon renewal of existing leases or commencement of new leases. Such
short-term leases generally minimize the risk to the Company of the adverse
effects of inflation, although as a general rule these leases permit residents
to leave at the end of the lease term without penalty. The Company's current
policy is to permit residents to terminate leases upon 60-days written notice
and payment of one month's rent as compensation for early termination.
Short-term leases combined with relatively consistent demand allow rents, and
therefore cash flow from the Company's portfolio of apartments, to provide an
attractive inflation hedge.
DEVELOPMENT COMMUNITIES
At September 30, 1997, nine Development Communities were under
construction. The total capitalized cost of these Development Communities,
when completed, is currently expected to be approximately $295.6 million.
There can be no assurance that the Company will complete the Development
Communities, that the Company's budgeted costs, leasing, start dates,
completion dates, occupancy or estimates of "EBITDA as % of Total Budgeted
Cost" will be realized or that future developments will realize comparable
returns.
In accordance with GAAP, the Company capitalizes interest expense
during construction until each building obtains a certificate of occupancy,
thereafter, interest for each completed building is expensed. Capitalized
interest for the three months ended September 30, 1997 and 1996 totaled
$2,076,000 and $3,280,000, respectively. Capitalized interest for the nine
months ended September 30, 1997 and 1996 totaled $7,092,000 and $9,690,000,
respectively.
The following page presents a summary of Development Communities:
20
<PAGE> 23
DEVELOPMENT COMMUNITIES SUMMARY
<TABLE>
<CAPTION>
NUMBER OF BUDGETED ESTIMATED ESTIMATED EBITDA AS %
APARTMENT COST CONSTRUCTION INITIAL COMPLETION STABILIZATION OF TOTAL
HOMES ($ MILLIONS) START OCCUPANCY DATE DATE (1) BUDGETED COST (2)
---------- ------------- -------------- ------------ ------------ --------------- -------------------
Conventionally Financed
- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Avalon Commons
Smithtown, NY 312 $ 32.5 Q1 1996 Q1 1997 Q3 1997 Q4 1997 10.2%
Avalon Crescent
Tysons Corner, VA 558 57.3 Q1 1996 Q4 1996 Q4 1997 Q1 1998 10.9%
Avalon Gardens
Nanuet, NY 504 53.3 Q3 1996 Q2 1997 Q4 1998 Q1 1999 10.8%
Avalon Court
Melville, NY 154 17.8 Q4 1996 Q2 1997 Q4 1997 Q1 1998 10.9%
Avalon at Fair Lakes
Fairfax, VA 234 23.2 Q1 1997 Q4 1997 Q2 1998 Q4 1998 10.0%
Avalon at Faxon Park
Quincy, MA 171 15.8 Q1 1997 Q1 1998 Q3 1998 Q4 1998 11.0%
Avalon Fields II
Gaithersburg, MD 96 9.2 Q3 1997 Q3 1998 Q4 1998 Q1 1999 10.2%
Avalon Willow
Mamaroneck, NY 227 41.8 Q2 1997 Q3 1998 Q1 1999 Q2 1999 9.2%
Avalon at Cameron Court
Alexandria, VA 460 44.7 Q2 1997 Q1 1998 Q4 1998 Q1 1999 10.3%
---------- ------------- -------------------
2,716 $ 295.6 10.4%
========== ============= ===================
</TABLE>
------------
(1) Stabilized occupancy is defined as the first full quarter of 94% or greater
occupancy.
(2) Projected EBITDA represents gross potential earnings projected to be
achieved based on current rents prevailing in the respective community's
local market (without adjustment for potential growth factors) and before
interest, income taxes, depreciation, amortization and extraordinary items,
minus (a) economic vacancy and (b) projected stabilized operating expenses.
Total budgeted cost includes all capitalized costs projected to be incurred
to develop the respective Development Community, including land acquisition
costs, construction costs, real estate taxes, capitalized interest and loan
fees, permits, professional fees, allocated development overhead and other
regulatory fees.
21
<PAGE> 24
DEVELOPMENT RIGHTS
The Company is currently considering the development of 20 new
apartment communities. The status of these Development Rights range from land
owned or under contract for which design and architectural planning has just
commenced to land under contract or owned by the Company with completed site
plans and drawings where construction can commence almost immediately. There
can be no assurance that the Company will succeed in obtaining zoning and other
necessary governmental approvals or the financing required to develop these
communities, or that the Company will decide to develop any particular
community. Further, there can be no assurance that construction of any
particular community will be undertaken or, if undertaken, will begin at the
expected times assumed in the financial projections or be completed at the
total budgeted cost. Although there is no assurance that all or any of these
communities will proceed to development, the successful completion of all of
these communities would ultimately add approximately 5,628
institutional-quality apartment homes to the Company's portfolio. At September
30, 1997, the cumulative capitalized costs incurred in pursuit of the 20
Development Rights were approximately $16.1 million, including the capitalized
cost of $6.6 million related to the purchase of land in New Canaan,
Connecticut. Many of these apartment homes will offer features like those
offered by the communities currently owned by the Company. The 20 Development
Rights that the Company is currently pursuing are summarized below.
DEVELOPMENT RIGHTS SUMMARY
<TABLE>
<CAPTION>
TOTAL
ESTIMATED BUDGETED
NUMBER OF COST
LOCATION HOMES ($ MILLIONS)
---------------------- ------------- -------------
<S> <C> <C>
1. Freehold, NJ 452 $ 38.7
2. New Canaan, CT (1) 104 24.9
3. Greenburgh - II, NY 500 74.0
4. Greenburgh - III, NY 266 39.3
5. Darien, CT 172 22.3
6. Fort Lee, NJ 351 56.4
7. Peabody, MA 434 35.9
8. Hull, MA 162 15.0
9. Jersey City - II, NJ 269 50.8
10. New Rochelle, NY 408 62.7
11. Melville - II, NY 340 39.8
12. Wilmington, MA 204 19.5
13. Stamford, CT 190 29.6
14. Orange, CT 172 15.7
15. Ridgefield, CT 240 30.2
16. Bronxville, NY (1) 110 24.7
17. Parsippany, NJ 460 64.0
18. Danbury, CT 268 24.4
19. Yonkers, NY 256 33.7
20. Florham Park, NJ 270 37.5
------------- ------------
Total 5,628 $ 739.1
============= ============
</TABLE>
(1) Currently anticipated that the land seller will retain a minority
limited partnership interest.
22
<PAGE> 25
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1996, Procida Construction Corporation, the original
contractor selected to build Avalon Cove, notified the Company that it was not
able to complete the contract within the guaranteed maximum price and
subsequently defaulted on its contractual obligations. In April 1996, the
Company filed a demand for arbitration with the American Arbitration
Association in New York against Procida Construction Corporation to recover any
excess over the original guaranteed maximum price contract and instituted suit
in the U.S. District Court to compel arbitration. Procida Construction has
since filed Chapter 11 Bankruptcy. On October 21, 1997, the United States
Bankruptcy court entered an order authorizing a settlement reached between Town
Cove Jersey City Urban Renewal Inc. and the debtor, Procida Construction.
Pursuant to the settlement Town Cove Jersey City Urban Renewal Inc. agreed to
pay the Debtor $387,500.00 and the parties agreed to release one another from
any and all claims arising from performance of the work on the project. The
settlement was finalized on November 12, 1997.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
None.
ITEM 5. OTHER INFORMATION
On July 1, 1997, the Company completed a public offering of 2,163,000
shares of common stock at a gross sales price of $28.0625 per share. The net
cash proceeds from the offering of approximately $57,671,000 were used
primarily to repay amounts outstanding under the Company's Unsecured
Facilities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
a) Exhibit No. Description
10.15 New Employment Agreement between the Company and Richard L.
Michaux dated July 15, 1997
10.16 New Employment Agreement between the Company and Charles H.
Berman dated July 16, 1997
27.1 Financial Data Schedule
b) Reports on Form 8-K
</TABLE>
On July 1, 1997, the Company filed a Current Report on Form 8-K relating to the
public offering of 2,163,000 shares of common stock.
23
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AVALON PROPERTIES, INC.
Date: November 12, 1997 By /s/ RICHARD L. MICHAUX
------------------------------------------
Richard L. Michaux, Chairman of the Board,
Chief Executive Officer and
Director (Principal Executive Officer)
Date: November 12, 1997 By /s/ THOMAS J. SARGEANT
------------------------------------------
Thomas J. Sargeant, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting Officer)
24
<PAGE> 1
Exhibit 10.15
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") made as of the July day of 15
1997 by and between Richard L. Michaux, residing at 1142 Custis Street,
Alexandria, VA 22308 (hereinafter referred to as "Executive") and Avalon
Properties, Inc., a Maryland corporation, having its principal place of business
at 5904 Richmond Avenue, Alexandria, VA 22303 (hereinafter referred to as the
"Company").
WHEREAS, Executive and the Company have previously entered into an
Employment Agreement dated as of November 18, 1993, as amended as of December
16, 1994; and
WHEREAS, Executive and the Company desire to amend and restate such
Employment Agreement effective as of January 1, 1997 on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, the parties hereto do hereby amend and restate such
Employment Agreement as follows.
1. Term. The term of this Agreement originally commenced on
November 18, 1993 and, unless earlier terminated as provided in Section 8 below,
shall terminate on December 31, 1999 (the "Original Term"). The Original Term
shall be extended automatically for additional 1 year periods (each a "Renewal
Term"), unless notice that this Agreement will not be extended is given by
either party to the other 6 months prior to the expiration of the Original Term
or any Renewal Term. (The period of Executive's employment hereunder within the
Original Term and any Renewal Terms are herein referred to as the "Employment
Period.")
2. Employment Duties.
(a) During the Employment Period, Executive shall be
employed in the business of the Company and its affiliates. Executive shall
serve as a corporate officer with the title Chairman of the Board and Chief
Executive Officer. In the performance of his duties, Executive shall be subject
to the direction of the Board of Directors of the Company (the "Board of
Directors") and shall not be required to take direction from or report to any
other person. Executive's duties and authority shall be commensurate with his
title and position with the Company.
(b) Executive agrees to his employment as described in this
Section 2 and agrees to devote substantially all of his working time and efforts
to the performance of his duties under
<PAGE> 2
this Agreement; provided that nothing herein shall be interpreted to preclude
Executive from (i) participating with the prior written consent of the Board of
Directors as an officer or director of, or advisor to, any other entity or
organization that is not a customer or material service provider to the Company
or a Competing Enterprise, as defined in Section 9, so long as such
participation does not interfere with the performance of Executive's duties
hereunder, whether or not such entity or organization is engaged in religious,
charitable or other community or non-profit activities, or (ii) investing in any
entity or organization which is not a customer or material service provider to
the Company or a Competing Enterprise, so long as such investment does not
interfere with the performance of Executive's duties hereunder. The Company
consents to Executive's status as a "former partner" with a current financial
interest in certain Midwest projects of Trammell Crow Residential.
(c) In performing his duties hereunder, Executive shall be
available for reasonable travel as the needs of the business require. Executive
shall be based in Alexandria, VA or otherwise in the greater Washington, D.C.
metropolitan area. Breach by either party of any of its respective obligations
under this Section 2 shall be deemed a material breach of that party's
obligations hereunder.
3. Compensation/Benefits. In consideration of Executive's
services hereunder, the Company shall provide Executive the following:
(a) Base Salary. The Company shall pay Executive an annual
salary at least equal to the following amounts during the Employment Period
("Base Salary"): from January 1, 1997 through December 31, 1997, $230,000;
beginning January 1, 1998, $265,000; beginning January 1, 1999, $300,000. If the
Employment Period is extended beyond December 31, 1999, Executive's Base Salary
shall be reviewed no less frequently than annually by the Company commencing
January 1, 2000 and shall be increased to the greatest of (i) an amount equal to
Base Salary for the prior year plus 5%, (ii) a factor measured by the increase,
if any, in the Consumer Price Index for Wage Earners and Clerical Workers
(CPI-W) (City Average for Washington, D.C.-MD-VA 1982-84 = 100), as published by
the Bureau of Labor Statistics, for the prior calendar year (the "CPI
Adjustment") or (iii) such greater amount as may be agreed by Executive and the
Company. Base Salary shall be payable in accordance with the Company's normal
business practices, but in no event less frequently than monthly.
(b) Bonuses. Commencing at the close of each fiscal year
during the Employment Period, the Company shall review the performance of the
Company and of Executive during the prior fiscal year, and the Company may
provide Executive with additional compensation as a bonus if the Board, or any
2
<PAGE> 3
compensation committee hereof, in its discretion, determines that Executive's
contribution to the Company warrants such additional payment and the Company's
anticipated financial performance of the present period permits such payment.
The bonuses hereunder shall be paid as a lump sum not later than 60 days after
the end of the Company's preceding fiscal year.
(c) Medical Insurance/Physical. During the Employment
Period, the Company shall provide to Executive and Executive's immediate family
a comprehensive policy of health insurance. During the Employment Period,
Executive shall be entitled to a comprehensive annual physical performed, at the
expense of the Company by the physician or medical group of Executive's
choosing.
(d) Life Insurance/Disability Insurance. During the
Employment Period, the Company shall keep in force and pay the premiums on the
split-dollar life insurance policy referenced in the Split Dollar Insurance
Agreement between the Company and Executive annexed hereto as Exhibit 1, subject
to reimbursement by Executive as provided in such Split Dollar Agreement. The
Company shall reimburse Executive for the cost of the comprehensive disability
insurance policy, which is in effect on January 1, 1997, and shall also be
responsible for any increases in premiums which become effective during the
Employment Period as may be necessary to maintain the same level of insurance as
in effect on January 1, 1997. Executive agrees to submit to such medical
examinations as may be required in order to maintain such policies of insurance.
(e) Vacations. Executive shall be entitled to reasonable
paid vacations during the Employment Period in accordance with the then regular
procedures of the Company governing executives, not to exceed six weeks per
annum, in the aggregate.
(f) Office/Secretary, etc. During the Employment Period,
Executive shall be entitled to secretarial services and a private office
commensurate with his title and duties.
(g) Club Membership. The Company will pay, or at
Executive's election reimburse, during the Employment Period (i) the membership
dues and special assessments (exclusive of initiation or admittance costs) for
country club memberships of Executive's choice in an aggregate amount not to
exceed $10,000 per year, increased but not decreased for each succeeding twelve
month period during the Employment Period by the CPI Adjustment plus (ii) other
costs and fees of use of such country club(s) reasonably related to the
Company's business, subject to substantiation thereof in accordance with the
Company's policies in effect from time to time for executive employees of the
Company.
3
<PAGE> 4
(h) Other Benefits. During the Employment Period, the
Company shall provide to Executive such other benefits, excluding severance
benefits, but including the right to participate in such retirement or pension
plans, as are made generally available to employees of the Company from time to
time.
4. Automobile. The Company shall provide Executive with a monthly
car allowance during the Employment Period of not less than $925 per month
(adjusted annually for inflation by the CPI Adjustment); provided that, at
Executive's election, the Company may instead purchase or lease, and maintain
insurance for, an automobile of comparable value for use by Executive, who shall
be responsible for maintaining such automobile, at his own expense, with the
same standard of care Executive applies to his own property and as may be
required under any applicable lease agreement.
5. Expenses/Indemnification.
(a) During the Employment Period, the Company shall
reimburse Executive for the reasonable business expenses incurred by Executive
in the course of performing his duties for the Company hereunder, upon
submission of invoices, vouchers or other appropriate documentation, as may be
required in accordance with the policies in effect from time to time for
executive employees of the Company.
(b) To the full extent permitted by law, the Company shall
indemnify Executive with respect to any actions commenced against Executive in
his capacity as an officer or director or former officer or director of the
Company, or any affiliate thereof for which he may render service in such
capacity, whether by or on behalf of the Company, its shareholders or third
parties, and the Company shall advance to Executive on a timely basis an amount
equal to the reasonable fees and expenses incurred in defending such actions,
after receipt of an itemized request for such advance, and an undertaking from
Executive to repay the amount of such advance, with interest at a reasonable
rate from the date of the request, as determined by the Company, if it shall
ultimately be determined that he is not entitled to be indemnified against such
expenses. The Company agrees to use its best efforts to secure and maintain
officers and directors' liability insurance with respect to Executive.
6. Employer's Authority/Policies.
(a) General. Executive agrees to observe and comply with
the rules and regulations of the Company as adopted by its Board respecting the
performance of his duties and to carry out and perform orders, directions and
policies communicated to him from time to time by the Board.
(b) Ethics Policies. Executive agrees to comply with and be
bound by the Ethics Policies of the Company previously
4
<PAGE> 5
executed by Executive, as reflected in the attachment at Annex A hereto and made
a part hereof.
7. Records Nondisclosure Company Policies.
(a) General. All records, financial statements and similar
documents obtained, reviewed or compiled by Executive in the course of the
performance by him of services for the Company, whether or not confidential
information or trade secrets, shall be the exclusive property of the Company.
Executive shall have no rights in such documents upon any termination of this
Agreement.
(b) Nondisclosure Agreement. Without limitation on the
Company's rights under Section 7(a), Executive agrees to abide by and be bound
by the Nondisclosure Agreement of the Company previously executed by Executive
and the Company as reflected in the attachment at Annex B and made a part
hereof.
8. Termination; Severance and Related Matters.
(a) At-Will Employment. Executive's employment hereunder is
"at will" and, therefore, may be terminated at any time, with or without Cause,
at the option of the Company, subject only to the severance obligations under
this Section 8. Upon any termination hereunder, the Employment Period shall
expire.
(b) Definitions. For purposes of this Section 8, the
following terms shall have the indicated definitions:
(1) Cause. "Cause" shall mean:
(i) Executive is convicted of or enters a
plea of nolo contendere to an act which is defined as a felony under any
federal, state or local law, not based upon a traffic violation, which
conviction or plea has or can be expected to have, in the good faith opinion of
the Board of Directors, a material adverse impact on the business or reputation
of the Company;
(ii) any one or more acts of theft, larceny,
embezzlement, fraud or material intentional misappropriation from or with
respect to the Company;
(iii) a breach by Executive of his fiduciary
duties under Maryland law as an officer or member of the Board of Directors;
(iv) Executive's commission of any one or more
acts of gross negligence or willful misconduct which in the good faith opinion
of the Board of Directors has resulted in material harm to the business or
reputation of the Company; or
5
<PAGE> 6
(v) default by Executive in the performance
of his material duties under this Agreement; without correction of such action
within 15 days of written notice thereof.
Notwithstanding the foregoing, no termination of Executive's employment
by the Company shall be treated as for Cause or be effective until and unless
all of the steps described in subparagraphs (i) through (iii) below have been
complied with:
(i) Notice of intention to terminate for Cause has been given
by the Company within 120 days after the Board of Directors learns of
the act, failure or event (or latest in a series of acts, failures or
events) constituting "Cause";
(ii) The Board of Directors has voted (at a meeting of the
Board duly called and held as to which termination of Executive is an
agenda item) to terminate Executive for Cause after Executive has been
given notice of the particular acts or circumstances which are the
basis for the termination for Cause and has been afforded at least 20
days notice of the meeting and an opportunity to present his position
in writing; and
(iii) The Board of Directors has given a Notice of Termination
to Executive within 20 days of such Board meeting.
The Company may suspend Executive with pay at any time during the
period commencing with the giving of notice to Executive under clause (i) above
until final Notice of Termination is given under clause (iii) above. Upon the
giving of notice as provided in clause (iii) above, no further payments shall be
due Executive.
(2) Change in Control. A "Change in Control"
shall mean the occurrence of any one or more of the following events:
(i) Any individual, entity or group (a
"Person") within the meaning of Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934 (the "Act") (other than the Company, any corporation,
partnership, trust or other entity controlled by the Company (a "Subsidiary"),
or any trustee, fiduciary or other person or entity holding securities under any
employee benefit plan or trust of the Company or any of its Subsidiaries),
together with all "affiliates" and "associates" (as such terms are defined in
Rule 12b-2 under the Act) of such Person, shall become the "beneficial owner"
(as such term is defined in Rule 13d-3 under the Act) of securities of the
Company representing 30% or more of the combined voting power of the Company's
then outstanding securities having the right to vote generally in an
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election of the Company's Board of Directors ("Voting Securities"), other than
as a result of (A) an acquisition of securities directly from the Company or any
Subsidiary or (B) an acquisition by any corporation pursuant to a
reorganization, consolidation or merger if, following such reorganization,
consolidation or merger the conditions described in clauses (A), (B) and (C) of
subparagraph (iii) of this Section 8(b)(2) are satisfied; or
(ii) Individuals who, as of the date hereof, constitute
the Company's Board of Directors (the "Incumbent Directors") cease for any
reason to constitute at least a majority of the Board, provided, however, that
any individual becoming a director of the Company subsequent to the date hereof
(excluding, for this purpose, (A) any such individual whose initial assumption
of office is in connection with an actual or threatened election contest
relating to the election of members of the Board of Directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors, including by reason of agreement intended to avoid
or settle any such actual or threatened contest or solicitation, and (B) any
individual whose initial assumption of office is in connection with a
reorganization, merger or consolidation, involving an unrelated entity and
occurring during the Employment Period), whose election or nomination for
election by the Company's shareholders was approved by a vote of at least a
majority of the persons then comprising Incumbent Directors shall for purposes
of this Agreement be considered an Incumbent Director; or
(iii) Approval by the shareholders of the Company of a
reorganization, merger or consolidation of the Company, unless, following such
reorganization, merger or consolidation, (A) more than 50% of, respectively, the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the outstanding Voting Securities
immediately prior to such reorganization, merger or consolidation, (B) no Person
(excluding the Company, any employee benefit plan (or related trust) of the
Company, a Subsidiary or the corporation resulting from such reorganization,
merger or consolidation or any subsidiary thereof, and any Person beneficially
owning, immediately prior to such reorganization, merger or consolidation,
directly or indirectly, 30% or more of the outstanding Voting Securities),
beneficially owns, directly or indirectly, 30% or more of, respectively, the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation or the combined voting power of the then
outstanding voting securities of such
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corporation entitled to vote generally in the election of directors, and (C) at
least a majority of the members of the board of directors of the corporation
resulting from such reorganization, merger or consolidation were members of the
Incumbent Board at the time of the execution of the initial agreement providing
for such reorganization, merger or consolidation;
(iv) Approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company; or
(v) The sale, lease, exchange or other disposition of
all or substantially all of the assets of the Company, other than to a
corporation, with respect to which following such sale, lease, exchange or other
disposition (A) more than 50% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or indirectly, by
all or substantially all of the individuals and entities who were the beneficial
owners of the outstanding Voting Securities immediately prior to such sale,
lease, exchange or other disposition, (B) no Person (excluding the Company and
any employee benefit plan (or related trust) of the Company or a Subsidiary or
such corporation or a subsidiary thereof and any Person beneficially owning,
immediately prior to such sale, lease, exchange or other disposition, directly
or indirectly, 30% or more of the outstanding Voting Securities), beneficially
owns, directly or indirectly, 30% or more of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors and (C) at least a majority of the
members of the board of directors of such corporation were members of the
Incumbent Board at the time of the execution of the initial agreement or action
of the Board of Directors providing for such sale, lease, exchange or other
disposition of assets of the Company.
Notwithstanding the foregoing, a "Change in Control" shall not be
deemed to have occurred for purposes of this Agreement solely as the result of
an acquisition of securities by the Company which, by reducing the number of
shares of Voting Securities outstanding, increases the proportionate voting
power represented by the Voting Securities beneficially owned by any Person to
30% or more of the combined voting power of all then outstanding Voting
Securities; provided, however, that if any Person referred to in this sentence
shall thereafter become the beneficial owner of any additional shares of Stock
or other Voting Securities (other than pursuant to a stock split, stock
dividend, or similar transaction), then a "Change in Control" shall be deemed to
have occurred for purposes of this Agreement.
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(3) Complete Change in Control. A "Complete Change
in Control" shall mean that a Change in Control has occurred, after modifying
the definition of "Change in Control" by deleting clause (i) from Section
8(b)(2) of the Agreement.
(4) Constructive Termination Without Cause.
"Constructive Termination Without Cause" shall mean a termination of Executive's
employment after a Change in Control initiated by Executive not later than 12
months following the occurrence (not including any time during which an
arbitration proceeding referenced below is pending), without Executive's prior
written consent, of one or more of the following events (or the latest to occur
in a series of events), and effected after giving the Company not less than 10
working days' written notice of the specific act or acts relied upon and right
to cure:
(i) a reduction in, or delay in payment of,
Executive's Base Salary, or a reduction in, delay in payment of, or adverse
change in the terms and conditions of, any cash bonus, stock grant or stock
award, or a failure to make or pay such an award in accordance with the terms,
conditions and performance targets, if any, established with respect thereto
before or after the date of the Change in Control;
(ii) the failure by the Company to continue in
effect any compensation plan in which Executive participates immediately prior
to the Change in Control which is material to Executive's total compensation,
including, but not limited to, the Avalon Properties, Inc. Mid-Term Incentive
Plan (February 1995) and the Avalon Properties, Inc. Amended and Restated 1995
Equity Incentive Plan (the "Incentive Plans"), or any substitute plans adopted
prior to the Change in Control, unless comparable alternative arrangements
(embodied in ongoing substitute or alternative plans) have been implemented with
respect to such plans, or the failure by the Company to continue Executive's
participation therein (or in such substitute or alternative plans) on a basis
not materially less favorable, in terms of the amount of benefits provided and
the level of Executive's participation relative to other participants, as
existed during the last completed fiscal year of the Company prior to the Change
in Control;
(iii) a material diminution of Executive's
responsibilities, or the assignment to Executive of responsibilities materially
inconsistent with the level of his responsibilities as Chief Executive Officer
of the Company immediately prior to the Change in Control;
(iv) the failure to locate the Executive's own
office at the Company's principal executive office or the relocation of the
Company's principal executive office (for purposes of this Agreement, 5904
Richmond Avenue, Alexandria, VA 22303) to a location more than 50 miles from
Alexandria, VA; or
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(v) the failure of the Company to obtain the
assumption in writing of its obligation to perform this Agreement by any
successor to all or substantially all of the assets of the Company within 15
days after a Change in Control.
Notwithstanding the foregoing, a Constructive Termination Without Cause shall
not be treated as having occurred unless Executive has given a final Notice of
Termination delivered after expiration of the Company's cure period. Executive
or the Company may, at any time after the expiration of the Company's cure
period and either prior to or up until three months after giving a final Notice
of Termination, commence an arbitration proceeding to determine the question of
whether, taking into account the actions complained of and any efforts made by
the Company to cure such actions, a termination by Executive of his employment
should be treated as a Constructive Termination Without Cause for purposes of
this Agreement. If the Executive or the Company commences such a proceeding
prior to delivery by Executive of a final Notice of Termination, the
commencement of such a proceeding shall be without prejudice to either party and
Executive's and the Company's rights and obligations under this Agreement shall
continue unaffected unless and until the arbitrator has determined such question
in the affirmative, or, if earlier, the date on which Executive or the Company
has delivered a Notice of Termination in accordance with the provisions of this
Agreement.
(5) Covered Average Compensation. "Covered Average
Compensation" shall mean the sum of Executive's Covered Compensation as
calculated for the calendar year in which the Date of Termination occurs and for
each of the two preceding calendar years, divided by three.
(6) Covered Compensation. "Covered Compensation," for any
calendar year, shall mean an amount equal to the sum of (i) Executive's Base
Salary for the calendar year (disregarding any decreases made effective during
the Employment Period), (ii) the cash bonus actually paid to Executive with
respect to such calendar year, and (iii) the value of all stock and other
equity-based compensation awards made to Executive during such calendar year.
Covered Compensation shall be calculated according to the
following rules:
(A) In valuing awards for purposes of clause (iii)
above, all such awards shall be treated as if fully vested when granted, stock
grants shall be valued by reference to the fair market value on the date of
grant of the Company's common stock, par value $.01 per share, and other
equity-based compensation awards shall be valued at the value established by the
Compensation Committee of the Board of Directors on the date of grant.
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(B) In determining the cash bonus actually paid with
respect to a calendar year, if no cash bonus has been paid with respect to the
calendar year in which the Date of Termination occurs, the cash bonus paid with
respect to the immediately preceding calendar year shall be assumed to have been
paid in each of the current and immediately preceding calendar years, and if no
cash bonus has been paid by the Date of Termination with respect to the
immediately preceding calendar year, the cash bonus paid with respect to the
second preceding calendar year shall be assumed to have been paid in all three
of the calendar years taken into account in determining Covered Average
Compensation.
(C) If any cash bonus paid with respect to the
current or immediately preceding calendar year was paid within three months of
Executive's Date of Termination, and is lower than the last cash bonus paid more
than three months from the Date of Termination, any such cash bonus paid within
three months of the Date of Termination shall be disregarded and the last cash
bonus paid more than three months from the Date of Termination shall be
substituted for each cash bonus so disregarded.
(D) In determining the amount of stock and other
equity-based compensation awards made during a calendar year during the
averaging period, rules similar to those set forth in subparagraphs (B) and (C)
of this Section 8(b)(6) shall be followed, except that all awards made in
connection with the Company's initial public offering shall be disregarded.
(6) Disability. "Disability" shall mean Executive has been
determined to be disabled and to qualify for long-term disability benefits under
the long-term disability insurance policy obtained pursuant to Section 3(d) of
this Agreement.
(c) Rights Upon Termination.
(i) Payment of Benefits Earned Through Date
of Termination. Upon any termination of Executive's employment during the
Employment Period, Executive, or his estate, shall in all events be paid all
accrued but unpaid Base Salary and all earned but unpaid cash incentive
compensation earned through his Date of Termination. Executive shall also retain
all such rights with respect to vested equity-based awards as are provided under
the circumstances under the applicable grant or award agreement, and shall be
entitled to all other benefits which are provided under the circumstances in
accordance with the provisions of the Company's generally applicable employee
benefit plans, practices and policies, other than severance plans.
(ii) Death. In the event of Executive's death
during the Employment Period, the Company shall, in addition to paying the
amounts set forth in Section 8(c)(i), take whatever action is necessary to cause
all of Executive's unvested equity-based awards to become fully vested as of the
date of death and,
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in the case of equity-based awards which have an exercise schedule, to become
fully exercisable and continue to be exercisable for such period as is provided
in the case of vested and exercisable awards in the event of death under the
terms of the applicable award agreements.
(iii) Disability. In the event the Company
elects to terminate Executive's employment during the Employment Period on
account of Disability, the Company shall, in addition to paying the amounts set
forth in Section 8(c)(i), pay to Executive, in one lump sum, no later than 31
days following the Date of Termination, an amount equal to two times Covered
Average Compensation. The Company shall also, commencing upon the Date of
Termination:
(A) Continue, without cost to
Executive, benefits comparable to the medical and disability benefits provided
to Executive immediately prior to the Date of Termination under Section 3(c) and
Section 3(d) for a period of 24 months following the Date of Termination or
until such earlier date as Executive obtains comparable benefits through other
employment;
(B) Continue to pay, or reimburse
Executive, for all premiums then due or thereafter payable on the whole-life
portion of the split-dollar insurance policy referenced under Section 3(d) for
so long as such payments are due; and
(C) Take whatever action is necessary
to cause Executive to become vested as of the Date of Termination in all stock
options, restricted stock grants, and all other equity-based awards and be
entitled to exercise and continue to exercise all stock options and all other
equity-based awards having an exercise schedule and to retain such grants and
awards to the same extent as if they were vested upon termination of employment
in accordance with their terms.
(iv) Non-Renewal. In the event the Company
gives Executive a Notice of Non-Renewal pursuant to Section 1 above within two
years following the occurrence of a Change in Control, the Executive shall
receive the benefits required to be provided under Section 8(c)(vi) hereof
instead of the benefits described in this Section 8(c)(iv). In the event the
Company gives Executive a notice of non-renewal pursuant to Section 1 above,
either prior to the occurrence of a Change in Control or more than two years
following the occurrence of a Change in Control, the Company shall, in addition
to paying the amounts set forth in Section 8(c)(i), commencing upon the Date of
Termination:
(A) Pay to Executive, for 12
consecutive months, commencing with the first day of the month immediately
following the Date of Termination, a monthly amount equal to the result obtained
by dividing Covered Average Compensation by twelve;
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(B) Continue, without cost to
Executive, benefits comparable to the medical and disability benefits provided
to Executive immediately prior to the Date of Termination under Section 3(c) and
Section 3(d) for a period of 24 months following the Date of Termination or
until such earlier date as Executive obtains comparable benefits through other
employment; and
(C) Take whatever action is necessary
to cause Executive to become vested as of the Date of Termination in all stock
options, restricted stock grants, and all other equity-based awards and be
entitled to exercise and continue to exercise all stock options and all other
equity-based awards having an exercise schedule and to retain such grants and
awards to the same extent as if they were vested upon termination of employment
in accordance with their terms; and
(D) Continue to pay, or reimburse
Executive for, all premiums then due or thereafter payable on the whole-life
portion of the split-dollar insurance policy referenced under Section 3(d) for
so long as such payments are due.
(v) Termination Without Cause. In the event
the Company terminates Executive's employment without Cause, either prior to the
occurrence of a Change in Control or more than two years following the
occurrence of a Change in Control, the Company shall, in addition to paying the
amounts set forth in Section 8(c)(i), commencing upon the Date of Termination:
(A) Pay to Executive, for 12
consecutive months, commencing with the first day of the month immediately
following the Date of Termination, a monthly amount equal to the result obtained
by dividing two times Covered Average Compensation by twelve;
(B) Continue, without cost to
Executive, benefits comparable to the medical and disability benefits provided
to Executive immediately prior to the Date of Termination under Section 3(c) and
Section 3(d) for a period of 24 months following the Date of Termination or
until such earlier date as Executive obtains comparable benefits through other
employment; and
(C) Take whatever action is necessary
to cause Executive to become vested as of the Date of Termination in all stock
options, restricted stock grants, and all other equity-based awards and be
entitled to exercise and continue to exercise all stock options and all other
equity-based awards having an exercise schedule and to retain such grants and
awards to the same extent as if they were vested upon termination of employment
in accordance with their terms; and
(D) Continue to pay, or reimburse
Executive for, all premiums then due or thereafter payable on the whole-
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life portion of the split-dollar insurance policy referenced under Section 3(d)
for so long as such payments are due.
(vi) Termination Without Cause after Change in
Control; Constructive Termination Without Cause; Termination after Complete
Change in Control. In the event the Company or any successor to the Company
terminates Executive's employment without Cause, within two years after a Change
in Control, or if Executive terminates his employment at any time after a Change
in Control in a Constructive Termination Without Cause effected in the manner
prescribed by Section 8(b)(4), or if Executive terminates his employment for any
reason within one year after a Complete Change in Control, the Company shall, in
addition to paying the amounts provided under Section 8(c)(i), pay to Executive,
in one lump sum no later than 31 days following the Date of Termination, an
amount equal to (x) three times Covered Average Compensation, or (y) if
Executive terminates his employment more than two years after a Change in
Control in a Constructive Termination Without Cause, two times Covered Average
Compensation. The Company shall also, commencing upon the Date of Termination:
(A) Continue, without cost to
Executive, benefits comparable to the medical and disability benefits provided
to Executive immediately prior to the Date of Termination under Section 3(c) and
Section 3(d) for a period of 36 months following the Date of Termination (24
months, if Executive terminates his employment in a Constructive Termination
Without Cause more than two years after a Change in Control) or until such
earlier date as Executive obtains comparable benefits through other employment;
(B) Continue to pay, or reimburse
Executive, for so long as such payments are due, all premiums then due or
payable on the whole-life portion of the split-dollar insurance policy
referenced under Section 3(d); and
(C) Take whatever action is necessary
to cause Executive to become vested as of the Date of Termination in all stock
options, restricted stock grants, and all other equity-based awards and be
entitled to exercise and continue to exercise all stock options and all other
equity-based awards having an exercise schedule and to retain such grants and
awards to the same extent as if they were vested upon termination of employment
in accordance with their terms.
(vii) Termination for Cause; Voluntary
Resignation. In the event Executive's employment terminates during the
Employment Period other than in connection with a termination meeting the
conditions of subparagraphs (ii), (iii), (iv), (v) or (vi) of this Section 8(c),
Executive shall receive the amounts set forth in Section 8(c)(i) in full
satisfaction of all of his entitlements from the Company. All equity-based
awards not vested as of the Date of Termination shall terminate
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and Executive shall have no further entitlements with respect thereto.
(d) Additional Benefits.
(i) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution by the Company to or for the benefit of Executive, whether paid or
payable or distributed or distributable (1) pursuant to the terms of Section 8
of this Agreement, (2) pursuant to or in connection with any compensatory or
employee benefit plan, agreement or arrangement, including but not limited to
any stock options, restricted or unrestricted stock grants issued to or for the
benefit of Executive and forgiveness of any loans by the Company to Executive or
(3) otherwise (collectively, "Severance Payments"), would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code"), and any interest or penalties are incurred by Executive
with respect to such excise tax (such excise tax, together with any such
interest and penalties, are hereinafter collectively referred to as the "Excise
Tax"), then Executive shall be entitled to receive an additional payment (a
"Partial Gross-Up Payment"), such that the net amount retained by Executive,
before accrual or payment of any Federal, state or local income tax or
employment tax, but after accrual or payment of the Excise Tax attributable to
the Partial Gross-Up Payment, is equal to the Excise Tax on the Severance
Payments.
(ii) Subject to the provisions of Section 8(d)(iii),
all determinations required to be made under this Section 8, including whether a
Partial Gross-Up Payment is required and the amount of such Partial Gross-Up
Payment, shall be made by Coopers & Lybrand LLP or such other nationally
recognized accounting firm as may at that time be the Company's independent
public accountants (the "Accounting Firm"), which shall provide detailed
supporting calculations both to the Company and Executive within 15 business
days of the Date of Termination, if applicable, or at such earlier time as is
reasonably requested by the Company or Executive. The initial Partial Gross-Up
Payment, if any, as determined pursuant to this Section 8(d)(ii), shall be paid
to Executive within five days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is payable
by Executive, the Company shall furnish Executive with an opinion of counsel
that failure to report the Excise Tax on Executive's applicable federal income
tax return would not result in the imposition of a negligence or similar
penalty. Any determination by the Accounting Firm shall be binding upon the
Company and Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Partial Gross-Up Payments which
will not have been made by the Company
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should have been made (an "Underpayment"). In the event that the Company
exhausts its remedies pursuant to Section 8(d)(iii) and Executive thereafter is
required to make a payment of any Excise Tax, the Accounting Firm shall
determine the amount of the Underpayment that has occurred, consistent with the
calculations required to be made hereunder, and any such Underpayment, and any
interest and penalties imposed on the Underpayment and required to be paid by
Executive in connection with the proceedings described in Section 8(d)(iii), and
any related legal and accounting expenses, shall be promptly paid by the Company
to or for the benefit of Executive.
(iii) Executive shall notify the Company in writing
of any claim by the Internal Revenue Service that, if successful, would require
the payment by the Company of the Partial Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than 10 business days after
Executive knows of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid. Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which he gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies Executive in writing prior to the expiration of such
period that it desires to contest such claim, Executive shall:
(A) give the company any information
reasonably requested by the Company relating to such claim,
(B) take such action in connection with
contesting such claim as the Company shall reasonably request in writing from
time to time, including, without limitation, accepting legal representation with
respect to such claim by an attorney selected by the Company,
(C) cooperate with the Company in good faith
in order effectively to contest such claim, and
(D) permit the Company to participate in any
proceedings relating to such claim; provided, however that the Company shall
bear and pay directly all costs and expenses attributable to the failure to pay
the Excise Tax (including related additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold Executive harmless,
for any Excise Tax up to an amount not exceeding the Partial Gross-Up Payment,
including interest and penalties with respect thereto, imposed as a result of
such representation, and payment of related legal and accounting costs and
expenses (the "Indemnification Limit"). Without limitation on the foregoing
provisions of this Section 8(d)(iii), the Company shall control all proceedings
taken in connection with such contest and, at its sole option may pursue or
forego any and all administrative
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appeals, proceedings, hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct Executive to
pay the tax claimed and sue for a refund or contest the claim in any permissible
manner, and Executive agrees to prosecute such contest to a determination before
any administrative tribunal, in a court of initial jurisdiction and in one or
more appellate courts, as the Company shall determine; provided, however, that
if the Company directs Executive to pay such claim and sue for a refund, the
Company shall advance so much of the amount of such payment as does not exceed
the Excise Tax, and related interest and penalties, to Executive on an
interest-free basis and shall indemnify and hold Executive harmless, from any
related legal and accounting costs and expenses, and from any Excise Tax,
including related interest or penalties imposed with respect to such advance or
with respect to any imputed income with respect to such advance up to an amount
not exceeding the Indemnification Limit; and further provided that any extension
of the statute of limitations relating to payment of taxes for the taxable year
of Executive with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Partial Gross-Up
Payment would be payable hereunder and Executive shall be entitled to settle or
contest, as the case may be, any other issues raised by the Internal Revenue
Service or any other taxing authority.
(iv) If, after the receipt by Executive of an
amount advanced by the Company pursuant to Section 8(d)(iii), Executive becomes
entitled to receive any refund with respect to such claim, Executive shall
(subject to the Company's complying with the requirements of Section 8(d)(iii))
promptly pay to the Company so much of such refund (together with any interest
paid or credited thereon after taxes applicable thereto) (the "Refund") as is
equal to (A) if the Company advanced or paid the entire amount required to be so
advanced or paid pursuant to Section 8(d)(iii) hereof (the "Required Section
8(d) Advance"), the aggregate amount advanced or paid by the Company pursuant to
this Section 8(d) less the portion of such amount advanced to Executive to
reimburse him for related legal and accounting costs, or (B) if the Company
advanced or paid less than the Required Section 8(d) Advance, so much of the
aggregate amount so advanced or paid by the Company pursuant to this Section
8(d) as is equal to the difference, if any, between (C) the amount refunded to
Executive with respect to such claim and (D) the sum of the portion of the
Required Section 8(d) Advance that was paid by Executive and not paid or
advanced by the Company plus Executive's related legal and accounting fees, as
applicable. If, after the receipt by Executive of an amount advanced by the
Company pursuant to Section 8(d)(iii), a determination is made that Executive
shall not be entitled to any refund with respect to such claim and the Company
does not notify Executive in writing of its intent to contest such denial of
refund prior to the expiration of 30 days after such determination, then such
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advance shall be forgiven and shall not be required to be repaid and the amount
of such advance shall offset, to the extent thereof, the amount of Partial
Gross-Up Payment required to be paid.
(e) Notice of Termination. Notice of non-renewal of this
Agreement pursuant to Section 1 hereof or of any termination of Executive's
employment (other than by reason of death) shall be communicated by written
notice (a "Notice of Termination") from one party hereto to the other party
hereto in accordance with this Section 8 and Section 10.
(f) Date of Termination. "Date of Termination," with
respect to any termination of Executive's employment during the Employment
Period, shall mean (i) if Executive's employment is terminated for Disability,
30 days after Notice of Termination is given (provided that Executive shall not
have returned to the full-time performance of Executive's duties during such 30
day period), (ii) if Executive's employment is terminated for Cause, the date on
which a Notice of Termination is given which complies with the requirements of
Section 8(b)(1) hereof, and (iii) if Executive's employment is terminated for
any other reason, the date specified in the Notice of Termination. In the case
of a termination by the Company other than for Cause, the Date of Termination
shall not be less than 30 days after the Notice of Termination is given. In the
case of a termination by Executive, the Date of Termination shall not be less
than 15 days from the date such Notice of Termination is given. Notwithstanding
the foregoing, in the event that Executive gives a Notice of Termination to the
Company, the Company may unilaterally accelerate the Date of Termination and
such acceleration shall not result in the termination being treated as a
Termination without Cause. Upon any termination of his employment, Executive
will concurrently resign his membership on the Board of Directors.
(g) No Mitigation. The Company agrees that, if Executive's
employment by the Company is terminated during the term of this Agreement,
Executive is not required to seek other employment or to attempt in any way to
reduce any amounts payable to Executive by the Company pursuant to Section
8(d)(i) hereof. Further, the amount of any payment provided for in this
Agreement shall not be reduced by any compensation earned by Executive as the
result of employment by another employer, by retirement benefits, or, except for
amounts then due and payable in accordance with the terms of any promissory
notes given by Executive in favor of the Company, by offset against any amount
claimed to be owed by Executive to the Company or otherwise.
(h) Nature of Payments. The amounts due under this Section
8 are in the nature of severance payments considered to be reasonable by the
Company and are not in the nature of a penalty. Such amounts are in full
satisfaction of all claims
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Executive may have in respect of his employment by the Company or its affiliates
and are provided as the sole and exclusive benefits to be provided to Executive,
his estate, or his beneficiaries in respect of his termination of employment
from the Company or its affiliates.
9. Non-Competition; Non-Solicitation; Specific Enforcement.
(a) Non-Competition. Because Executive's services to the
Company are special and because Executive has access to the Company's
confidential information, Executive covenants and agrees that, during the
Employment Period and, for a period of one year following the Date of
Termination by the Company for Cause or a termination by Executive prior to a
Change in Control, Executive shall not, without the prior written consent of the
Board of Directors, become associated with, or engage in any "Restricted
Activities" with respect to any "Competing Enterprise," as such terms are
hereinafter defined, whether as an officer, employee, principal, partner, agent,
consultant, independent contractor or shareholder. "Competing Enterprise," for
purposes of this Agreement, shall mean any person, corporation, partnership,
venture or other entity which (a) is a publicly traded real estate investment
trust, or (b) is engaged in the business of managing, owning, leasing or joint
venturing residential real estate within 30 miles of residential real estate
owned or under management by the Company or its affiliates. "Restricted
Activities," for purposes of this Agreement, shall mean executive, managerial,
directorial, administrative, strategic, business development or supervisory
responsibilities and activities relating to all aspects of residential real
estate ownership, management, residential real estate franchising, and
residential real estate joint-venturing.
(b) Non-Solicitation. During the Employment Period, and for
a period of one year following the Date of Termination, Executive shall not,
without the prior written consent of the Company, except in the course of
carrying out his duties hereunder, solicit or attempt to solicit for employment
with or on behalf of any corporation, partnership, venture or other business
entity, any employee of the Company or any of its affiliates or any person who
was formerly employed by the Company or any of its affiliates within the
preceding six months, unless such person's employment was terminated by the
Company or any of such affiliates.
(c) Specific Enforcement. Executive and the Company agree
that the restrictions, prohibitions and other provisions of this Section 9 are
reasonable, fair and equitable in scope, terms, and duration, are necessary to
protect the legitimate business interests of the Company and are a material
inducement to the Company to enter into this Agreement. Should a decision be
made by a court of competent jurisdiction that the character, duration or
geographical scope of the provisions of this Section
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9 is unreasonable, the parties intend and agree that this Agreement shall be
construed by the court in such a manner as to impose all of those restrictions
on Executive's conduct that are reasonable in light of the circumstances and as
are necessary to assure to the Company the benefits of this Agreement. The
Company and Executive further agree that the services to be rendered under this
Agreement by Executive are special, unique and of extraordinary character, and
that in the event of the breach by Executive of the terms and conditions of this
Agreement or if Executive, without the prior consent of the Board of Directors,
shall take any action in violation of this Section 9, the Company will suffer
irreparable harm for which there is no adequate remedy at law. Accordingly,
Executive hereby consents to the entry of a temporary restraining order or ex
parte injunction, in addition to any other remedies available at law or in
equity, to enforce the provisions hereof. Any proceeding or action seeking
equitable relief for violation of this Section 9 must be commenced in the
federal or state courts, in either case in Virginia. Executive and the Company
irrevocably and unconditionally submit to the jurisdiction of such courts and
agree to take any and all future action necessary to submit to the jurisdiction
of such courts.
10. Notice. Any notice required or permitted hereunder shall be in
writing and shall be deemed sufficient when given by hand or by nationally
recognized overnight courier or by Express, registered or certified mail,
postage prepaid, return receipt requested, and addressed, if to the Company at
the address indicated above and if to Executive at the address indicated below
(or to such other address as may be provided by notice).
11. Miscellaneous. This Agreement, together with Schedule 1 and
Annex A and Annex B, constitutes the entire agreement between the parties
concerning the subjects hereof and supersedes any and all prior agreements or
understandings, including, without limitation, any plan or agreement providing
benefits in the nature of severance, but excluding benefits provided under other
Company plans or agreements, except to the extent this Agreement provides
greater rights than are provided under such other plans or agreements. This
Agreement may not be assigned by Executive without the prior written consent of
the Company, and may be assigned by the Company and shall be binding upon, and
inure to the benefit of, the Company's successors and assigns. Headings herein
are for convenience of reference only and shall not define, limit or interpret
the contents hereof.
12. Amendment. This Agreement may be amended, modified or
supplemented by the mutual consent of the parties in writing, but no oral
amendment, modification or supplement shall be effective. No waiver by either
party of any breach by the other party of any condition or provision contained
in this Agreement to be performed by such other party shall be deemed a waiver
of a similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any waiver must be in writing and
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signed by Executive or an authorized officer of the Company, as the case may be.
13. Severability. The provisions of this Agreement are severable.
The invalidity of any provision shall not affect the validity of any other
provision, and each provision of this Agreement shall be valid and enforceable
to the fullest extent permitted by law.
14. Resolution of Disputes.
(a) Procedures and Scope of Arbitration. Except for any
controversy or claim seeking equitable relief pursuant to Section 9 of this
Agreement, all controversies and claims arising under or in connection with this
Agreement or relating to the interpretation, breach or enforcement thereof and
all other disputes between the parties, shall be resolved by expedited, binding
arbitration, to be held in Virginia in accordance with the National Rules of the
American Arbitration Association governing employment disputes (the "National
Rules"). In any proceeding relating to the amount owed to Executive in
connection with his termination of employment, it is the contemplation of the
parties that the only remedy that the arbitrator may award in such a proceeding
is an amount equal to the termination payments, if any, required to be provided
under the applicable provisions of Section 8(c) and, if applicable, Section 8(d)
hereof, to the extent not previously paid, plus the costs of arbitration and
Executive's reasonable attorneys fees and expenses as provided below. Any award
made by such arbitrator shall be final, binding and conclusive on the parties
for all purposes, and judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.
(b) Attorneys Fees.
(i) Reimbursement After Executive Prevails. Except
as otherwise provided in this paragraph, each party shall pay the cost of his or
its own legal fees and expenses incurred in connection with an arbitration
proceeding. Provided an award is made in favor of Executive in such proceeding,
all of his reasonable attorneys fees and expenses incurred in pursuing or
defending such proceeding shall be promptly reimbursed to Executive by the
Company within five days of the entry of the award.
(ii) Reimbursement in Actions to Stay, Enjoin or
Collect. In any case where the Company or any other person seeks to stay or
enjoin the commencement or continuation of an arbitration proceeding, whether
before or after an award has been made, or where Executive seeks recovery of
amounts due after an award has been made, or where the Company brings any
proceeding challenging or contesting the award, all of Executive's reasonable
attorneys fees and expenses incurred in connection therewith shall be promptly
reimbursed by the Company to
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Executive, within five days of presentation of an itemized request for
reimbursement, regardless of whether Executive prevails, regardless of the forum
in which such proceeding is brought, and regardless of whether a Change in
Control has occurred.
(iii) Reimbursement After A Change in Control. Without
limitation on the foregoing, solely in a proceeding commenced by the Company or
by Executive after a Change in Control has occurred, the Company shall advance
to Executive, within five days of presentation of an itemized request for
reimbursement, all of Executive's legal fees and expenses incurred in connection
therewith, regardless of the forum in which such proceeding was commenced,
subject to delivery of an undertaking by Executive to reimburse the Company for
such advance if he does not prevail in such proceeding (unless such fees are to
be reimbursed regardless of whether Executive prevails as provided in clause
(ii) above).
15. Survivorship. The provisions of Sections 5(b), 7, 9 and 14 of
this Agreement shall survive Executive's termination of employment. Other
provisions of this Agreement shall survive any termination of Executive's
employment to the extent necessary to the intended preservation of each party's
respective rights and obligations.
16. Board Action. Where an action called for under this Agreement
is required to be taken by the Board of Directors, such action shall be taken by
the vote of not less than a majority of the members then in office and
authorized to vote on the matter.
17. Withholding. All amounts required to be paid by the Company
shall be subject to reduction in order to comply with applicable federal, state
and local tax withholding requirements.
18. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument. The execution of this
Agreement may be by actual or facsimile signature.
19. Governing Law. This Agreement shall be construed and regulated
in all respects under the laws of the State of Maryland.
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IN WITNESS WHEREOF, this Agreement is entered into as of the date and
year first above written.
AVALON PROPERTIES, INC.
By:
--------------------------------
Its
-----------------------------------
RICHARD L. MICHAUX
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<PAGE> 1
Exhibit 10.16
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") made as of the July day of 16,
1997 by and between Charles H. Berman, residing at 230 RoseBrook Road, New
Canaan, CT 06840 (hereinafter referred to as "Executive") and Avalon Properties,
Inc., a Maryland corporation, having a place of business located 15 River Road,
Wilton, CT 06897 (hereinafter referred to as the "Company").
WHEREAS, Executive and the Company have previously entered into an
Employment Agreement dated as of November 18, 1993, as amended as of December
16, 1994; and
WHEREAS, Executive and the Company desire to amend and restate such
Employment Agreement effective as of January 1, 1997 on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, the parties hereto do hereby amend and restate such
Employment Agreement as follows.
1. Term. The term of this Agreement originally commenced on
November 18, 1993 and, unless earlier terminated as provided in Section 8 below,
shall terminate on December 31, 1999 (the "Original Term"). The Original Term
shall be extended automatically for additional 1 year periods (each a "Renewal
Term"), unless notice that this Agreement will not be extended is given by
either party to the other 6 months prior to the expiration of the Original Term
or any Renewal Term. (The period of Executive's employment hereunder within the
Original Term and any Renewal Terms are herein referred to as the "Employment
Period.")
2. Employment Duties.
(a) During the Employment Period, Executive shall be
employed in the business of the Company and its affiliates. Executive shall
serve as a corporate officer with the title President and Chief Operating
Officer. In the performance of his duties, Executive shall be subject to the
direction of the Board of Directors of the Company (the "Board of Directors")
and shall not be required to take direction from or report to any other person.
Executive's duties and authority shall be commensurate with his title and
position with the Company.
(b) Executive agrees to his employment as described in this
Section 2 and agrees to devote substantially all of his working time and efforts
to the performance of his duties under this Agreement; provided that nothing
herein shall be interpreted to preclude Executive from (i) participating with
the prior
<PAGE> 2
written consent of the Board of Directors as an officer or director of, or
advisor to, any other entity or organization that is not a customer or material
service provider to the Company or a Competing Enterprise, as defined in Section
9, so long as such participation does not interfere with the performance of
Executive's duties hereunder, whether or not such entity or organization is
engaged in religious, charitable or other community or non-profit activities, or
(ii) investing in any entity or organization which is not a customer or material
service provider to the Company or a Competing Enterprise, so long as such
investment does not interfere with the performance of Executive's duties
hereunder. The Company consents to Executive's status as a "former partner" with
a current financial interest in certain Midwest projects of Trammell Crow
Residential.
(c) In performing his duties hereunder, Executive shall be
available for reasonable travel as the needs of the business require. Executive
shall be based in Wilton, CT, or otherwise in the greater New York metropolitan
area. Breach by either party of any of its respective obligations under this
Section 2 shall be deemed a material breach of that party's obligations
hereunder.
3. Compensation/Benefits. In consideration of Executive's
services hereunder, the Company shall provide Executive the following:
(a) Base Salary. The Company shall pay Executive an annual
salary at least equal to the following amounts during the Employment Period
("Base Salary"): from January 1, 1997 through December 31, 1997, $230,000;
beginning January 1, 1998, $265,000; beginning January 1, 1999, $300,000. If the
Employment Period is extended beyond December 31, 1999, Executive's Base Salary
shall be reviewed no less frequently than annually by the Company commencing
January 1, 2000 and shall be increased to the greatest of (i) an amount equal to
Base Salary for the prior year plus 5%, (ii) a factor measured by the increase,
if any, in the Consumer Price Index for Wage Earners and Clerical Workers
(CPI-W) (City Average for New York-Northern New Jersey-Long Island 1982-84 =
100), as published by the Bureau of Labor Statistics, for the prior calendar
year (the "CPI Adjustment") or (iii) such greater amount as may be agreed by
Executive and the Company. Base Salary shall be payable in accordance with the
Company's normal business practices, but in no event less frequently than
monthly.
(b) Bonuses. Commencing at the close of each fiscal year
during the Employment Period, the Company shall review the performance of the
Company and of Executive during the prior fiscal year, and the Company may
provide Executive with additional compensation as a bonus if the Board, or any
compensation committee hereof, in its discretion, determines that Executive's
contribution to the Company warrants such additional
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<PAGE> 3
payment and the Company's anticipated financial performance of the present
period permits such payment. The bonuses hereunder shall be paid as a lump sum
not later than 60 days after the end of the Company's preceding fiscal year.
(c) Medical Insurance/Physical. During the Employment
Period, the Company shall provide to Executive and Executive's immediate family
a comprehensive policy of health insurance. During the Employment Period,
Executive shall be entitled to a comprehensive annual physical performed, at the
expense of the Company by the physician or medical group of Executive's
choosing.
(d) Life Insurance/Disability Insurance. During the
Employment Period, the Company shall keep in force and pay the premiums on the
split-dollar life insurance policy referenced in the Split Dollar Insurance
Agreement between the Company and Executive annexed hereto as Exhibit 1, subject
to reimbursement by Executive as provided in such Split Dollar Agreement. The
Company shall reimburse Executive for the cost of the comprehensive disability
insurance policy, which is in effect on January 1, 1997, and shall also be
responsible for any increases in premiums which become effective during the
Employment Period as may be necessary to maintain the same level of insurance as
in effect on January 1, 1997. Executive agrees to submit to such medical
examinations as may be required in order to maintain such policies of insurance.
(e) Vacations. Executive shall be entitled to reasonable
paid vacations during the Employment Period in accordance with the then regular
procedures of the Company governing executives, not to exceed six weeks per
annum, in the aggregate.
(f) Office/Secretary, etc. During the Employment Period,
Executive shall be entitled to secretarial services and a private office
commensurate with his title and duties.
(g) Club Membership. The Company will pay, or at
Executive's election reimburse, during the Employment Period (i) the membership
dues and special assessments (exclusive of initiation or admittance costs) for
country club memberships of Executive's choice in an aggregate amount not to
exceed $10,000 per year, increased but not decreased for each succeeding twelve
month period during the Employment Period by the CPI Adjustment plus (ii) other
costs and fees of use of such country club(s) reasonably related to the
Company's business, subject to substantiation thereof in accordance with the
Company's policies in effect from time to time for executive employees of the
Company.
(h) Other Benefits. During the Employment Period, the
Company shall provide to Executive such other benefits, excluding severance
benefits, but including the right to participate in
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<PAGE> 4
such retirement or pension plans, as are made generally available to employees
of the Company from time to time.
4. Automobile. The Company shall provide Executive with a monthly
car allowance during the Employment Period of not less than $925 per month
(adjusted annually for inflation by the CPI Adjustment); provided that, at
Executive's election, the Company may instead purchase or lease, and maintain
insurance for, an automobile of comparable value for use by Executive, who shall
be responsible for maintaining such automobile, at his own expense, with the
same standard of care Executive applies to his own property and as may be
required under any applicable lease agreement.
5. Expenses/Indemnification.
(a) During the Employment Period, the Company shall
reimburse Executive for the reasonable business expenses incurred by Executive
in the course of performing his duties for the Company hereunder, upon
submission of invoices, vouchers or other appropriate documentation, as may be
required in accordance with the policies in effect from time to time for
executive employees of the Company.
(b) To the full extent permitted by law, the Company shall
indemnify Executive with respect to any actions commenced against Executive in
his capacity as an officer or director or former officer or director of the
Company, or any affiliate thereof for which he may render service in such
capacity, whether by or on behalf of the Company, its shareholders or third
parties, and the Company shall advance to Executive on a timely basis an amount
equal to the reasonable fees and expenses incurred in defending such actions,
after receipt of an itemized request for such advance, and an undertaking from
Executive to repay the amount of such advance, with interest at a reasonable
rate from the date of the request, as determined by the Company, if it shall
ultimately be determined that he is not entitled to be indemnified against such
expenses. The Company agrees to use its best efforts to secure and maintain
officers and directors' liability insurance with respect to Executive.
6. Employer's Authority/Policies.
(a) General. Executive agrees to observe and comply with
the rules and regulations of the Company as adopted by its Board respecting the
performance of his duties and to carry out and perform orders, directions and
policies communicated to him from time to time by the Board.
(b) Ethics Policies. Executive agrees to comply with and be
bound by the Ethics Policies of the Company previously executed by Executive, as
reflected in the attachment at Annex A hereto and made a part hereof.
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7. Records Nondisclosure Company Policies.
(a) General. All records, financial statements and similar
documents obtained, reviewed or compiled by Executive in the course of the
performance by him of services for the Company, whether or not confidential
information or trade secrets, shall be the exclusive property of the Company.
Executive shall have no rights in such documents upon any termination of this
Agreement.
(b) Nondisclosure Agreement. Without limitation on the
Company's rights under Section 7(a), Executive agrees to abide by and be bound
by the Nondisclosure Agreement of the Company previously executed by Executive
and the Company as reflected in the attachment at Annex B and made a part
hereof.
8. Termination; Severance and Related Matters.
(a) At-Will Employment. Executive's employment hereunder is
"at will" and, therefore, may be terminated at any time, with or without Cause,
at the option of the Company, subject only to the severance obligations under
this Section 8. Upon any termination hereunder, the Employment Period shall
expire.
(b) Definitions. For purposes of this Section 8, the
following terms shall have the indicated definitions:
(1) Cause. "Cause" shall mean:
(i) Executive is convicted of or enters a
plea of nolo contendere to an act which is defined as a felony under any
federal, state or local law, not based upon a traffic violation, which
conviction or plea has or can be expected to have, in the good faith opinion of
the Board of Directors, a material adverse impact on the business or reputation
of the Company;
(ii) any one or more acts of theft, larceny,
embezzlement, fraud or material intentional misappropriation from or with
respect to the Company;
(iii) a breach by Executive of his fiduciary
duties under Maryland law as an officer or member of the Board of Directors;
(iv) Executive's commission of any one or more
acts of gross negligence or willful misconduct which in the good faith opinion
of the Board of Directors has resulted in material harm to the business or
reputation of the Company; or
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<PAGE> 6
(v) default by Executive in the performance
of his material duties under this Agreement; without correction of such action
within 15 days of written notice thereof.
Notwithstanding the foregoing, no termination of Executive's employment
by the Company shall be treated as for Cause or be effective until and unless
all of the steps described in subparagraphs (i) through (iii) below have been
complied with:
(i) Notice of intention to terminate for Cause has been given
by the Company within 120 days after the Board of Directors learns of
the act, failure or event (or latest in a series of acts, failures or
events) constituting "Cause";
(ii) The Board of Directors has voted (at a meeting of the
Board duly called and held as to which termination of Executive is an
agenda item) to terminate Executive for Cause after Executive has been
given notice of the particular acts or circumstances which are the
basis for the termination for Cause and has been afforded at least 20
days notice of the meeting and an opportunity to present his position
in writing; and
(iii) The Board of Directors has given a Notice of Termination
to Executive within 20 days of such Board meeting.
The Company may suspend Executive with pay at any time during the
period commencing with the giving of notice to Executive under clause (i) above
until final Notice of Termination is given under clause (iii) above. Upon the
giving of notice as provided in clause (iii) above, no further payments shall be
due Executive.
(2) Change in Control. A "Change in Control" shall
mean the occurrence of any one or more of the following events:
(i) Any individual, entity or group (a "Person")
within the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of
1934 (the "Act") (other than the Company, any corporation, partnership, trust or
other entity controlled by the Company (a "Subsidiary"), or any trustee,
fiduciary or other person or entity holding securities under any employee
benefit plan or trust of the Company or any of its Subsidiaries), together with
all "affiliates" and "associates" (as such terms are defined in Rule 12b-2 under
the Act) of such Person, shall become the "beneficial owner" (as such term is
defined in Rule 13d-3 under the Act) of securities of the Company representing
30% or more of the combined voting power of the Company's then outstanding
securities having the right to vote generally in an
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<PAGE> 7
election of the Company's Board of Directors ("Voting Securities"), other than
as a result of (A) an acquisition of securities directly from the Company or any
Subsidiary or (B) an acquisition by any corporation pursuant to a
reorganization, consolidation or merger if, following such reorganization,
consolidation or merger the conditions described in clauses (A), (B) and (C) of
subparagraph (iii) of this Section 8(b)(2) are satisfied; or
(ii) Individuals who, as of the date hereof,
constitute the Company's Board of Directors (the "Incumbent Directors") cease
for any reason to constitute at least a majority of the Board, provided,
however, that any individual becoming a director of the Company subsequent to
the date hereof (excluding, for this purpose, (A) any such individual whose
initial assumption of office is in connection with an actual or threatened
election contest relating to the election of members of the Board of Directors
or other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board of Directors, including by reason of
agreement intended to avoid or settle any such actual or threatened contest or
solicitation, and (B) any individual whose initial assumption of office is in
connection with a reorganization, merger or consolidation, involving an
unrelated entity and occurring during the Employment Period), whose election or
nomination for election by the Company's shareholders was approved by a vote of
at least a majority of the persons then comprising Incumbent Directors shall for
purposes of this Agreement be considered an Incumbent Director; or
(iii) Approval by the shareholders of the Company of
a reorganization, merger or consolidation of the Company, unless, following such
reorganization, merger or consolidation, (A) more than 50% of, respectively, the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the outstanding Voting Securities
immediately prior to such reorganization, merger or consolidation, (B) no Person
(excluding the Company, any employee benefit plan (or related trust) of the
Company, a Subsidiary or the corporation resulting from such reorganization,
merger or consolidation or any subsidiary thereof, and any Person beneficially
owning, immediately prior to such reorganization, merger or consolidation,
directly or indirectly, 30% or more of the outstanding Voting Securities),
beneficially owns, directly or indirectly, 30% or more of, respectively, the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation or the combined voting power of the then
outstanding voting securities of such
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<PAGE> 8
corporation entitled to vote generally in the election of directors, and (C) at
least a majority of the members of the board of directors of the corporation
resulting from such reorganization, merger or consolidation were members of the
Incumbent Board at the time of the execution of the initial agreement providing
for such reorganization, merger or consolidation;
(iv) Approval by the shareholders of the Company of
a complete liquidation or dissolution of the Company; or
(v) The sale, lease, exchange or other disposition
of all or substantially all of the assets of the Company, other than to a
corporation, with respect to which following such sale, lease, exchange or other
disposition (A) more than 50% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or indirectly, by
all or substantially all of the individuals and entities who were the beneficial
owners of the outstanding Voting Securities immediately prior to such sale,
lease, exchange or other disposition, (B) no Person (excluding the Company and
any employee benefit plan (or related trust) of the Company or a Subsidiary or
such corporation or a subsidiary thereof and any Person beneficially owning,
immediately prior to such sale, lease, exchange or other disposition, directly
or indirectly, 30% or more of the outstanding Voting Securities), beneficially
owns, directly or indirectly, 30% or more of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors and (C) at least a majority of the
members of the board of directors of such corporation were members of the
Incumbent Board at the time of the execution of the initial agreement or action
of the Board of Directors providing for such sale, lease, exchange or other
disposition of assets of the Company.
Notwithstanding the foregoing, a "Change in Control" shall not be
deemed to have occurred for purposes of this Agreement solely as the result of
an acquisition of securities by the Company which, by reducing the number of
shares of Voting Securities outstanding, increases the proportionate voting
power represented by the Voting Securities beneficially owned by any Person to
30% or more of the combined voting power of all then outstanding Voting
Securities; provided, however, that if any Person referred to in this sentence
shall thereafter become the beneficial owner of any additional shares of Stock
or other Voting Securities (other than pursuant to a stock split, stock
dividend, or similar transaction), then a "Change in Control" shall be deemed to
have occurred for purposes of this Agreement.
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(3) Complete Change in Control. A "Complete Change
in Control" shall mean that a Change in Control has occurred, after modifying
the definition of "Change in Control" by deleting clause (i) from Section
8(b)(2) of the Agreement.
(4) Constructive Termination Without Cause.
"Constructive Termination Without Cause" shall mean a termination of Executive's
employment after a Change in Control initiated by Executive not later than 12
months following the occurrence (not including any time during which an
arbitration proceeding referenced below is pending), without Executive's prior
written consent, of one or more of the following events (or the latest to occur
in a series of events), and effected after giving the Company not less than 10
working days' written notice of the specific act or acts relied upon and right
to cure:
(i) a reduction in, or delay in payment of,
Executive's Base Salary, or a reduction in, delay in payment of, or adverse
change in the terms and conditions of, any cash bonus, stock grant or stock
award, or a failure to make or pay such an award in accordance with the terms,
conditions and performance targets, if any, established with respect thereto
before or after the date of the Change in Control;
(ii) the failure by the Company to continue
in effect any compensation plan in which Executive participates immediately
prior to the Change in Control which is material to Executive's total
compensation, including, but not limited to, the Avalon Properties, Inc.
Mid-Term Incentive Plan (February 1995) and the Avalon Properties, Inc. Amended
and Restated 1995 Equity Incentive Plan (the "Incentive Plans"), or any
substitute plans adopted prior to the Change in Control, unless comparable
alternative arrangements (embodied in ongoing substitute or alternative plans)
have been implemented with respect to such plans, or the failure by the Company
to continue Executive's participation therein (or in such substitute or
alternative plans) on a basis not materially less favorable, in terms of the
amount of benefits provided and the level of Executive's participation relative
to other participants, as existed during the last completed fiscal year of the
Company prior to the Change in Control;
(iii) a material diminution of Executive's
responsibilities, or the assignment to Executive of responsibilities materially
inconsistent with the level of his responsibilities as Chief Executive Officer
of the Company immediately prior to the Change in Control;
(iv) the relocation of the Company's Wilton,
CT office to a location more than 50 miles from Wilton, CT or the failure to
locate Executive's own office at the Wilton office (or at the office to which
such office is relocated which is within 50 miles of Wilton, CT); or
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(v) the failure of the Company to obtain the
assumption in writing of its obligation to perform this Agreement by any
successor to all or substantially all of the assets of the Company within 15
days after a Change in Control.
Notwithstanding the foregoing, a Constructive Termination Without Cause shall
not be treated as having occurred unless Executive has given a final Notice of
Termination delivered after expiration of the Company's cure period. Executive
or the Company may, at any time after the expiration of the Company's cure
period and either prior to or up until three months after giving a final Notice
of Termination, commence an arbitration proceeding to determine the question of
whether, taking into account the actions complained of and any efforts made by
the Company to cure such actions, a termination by Executive of his employment
should be treated as a Constructive Termination Without Cause for purposes of
this Agreement. If the Executive or the Company commences such a proceeding
prior to delivery by Executive of a final Notice of Termination, the
commencement of such a proceeding shall be without prejudice to either party and
Executive's and the Company's rights and obligations under this Agreement shall
continue unaffected unless and until the arbitrator has determined such question
in the affirmative, or, if earlier, the date on which Executive or the Company
has delivered a Notice of Termination in accordance with the provisions of this
Agreement.
(5) Covered Average Compensation. "Covered Average
Compensation" shall mean the sum of Executive's Covered Compensation as
calculated for the calendar year in which the Date of Termination occurs and for
each of the two preceding calendar years, divided by three.
(6) Covered Compensation. "Covered Compensation," for any
calendar year, shall mean an amount equal to the sum of (i) Executive's Base
Salary for the calendar year (disregarding any decreases made effective during
the Employment Period), (ii) the cash bonus actually paid to Executive with
respect to such calendar year, and (iii) the value of all stock and other
equity-based compensation awards made to Executive during such calendar year.
Covered Compensation shall be calculated according to the
following rules:
(A) In valuing awards for purposes of clause (iii)
above, all such awards shall be treated as if fully vested when granted, stock
grants shall be valued by reference to the fair market value on the date of
grant of the Company's common stock, par value $.01 per share, and other
equity-based compensation awards shall be valued at the value established by the
Compensation Committee of the Board of Directors on the date of grant.
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(B) In determining the cash bonus actually paid with
respect to a calendar year, if no cash bonus has been paid with respect to the
calendar year in which the Date of Termination occurs, the cash bonus paid with
respect to the immediately preceding calendar year shall be assumed to have been
paid in each of the current and immediately preceding calendar years, and if no
cash bonus has been paid by the Date of Termination with respect to the
immediately preceding calendar year, the cash bonus paid with respect to the
second preceding calendar year shall be assumed to have been paid in all three
of the calendar years taken into account in determining Covered Average
Compensation.
(C) If any cash bonus paid with respect to the
current or immediately preceding calendar year was paid within three months of
Executive's Date of Termination, and is lower than the last cash bonus paid more
than three months from the Date of Termination, any such cash bonus paid within
three months of the Date of Termination shall be disregarded and the last cash
bonus paid more than three months from the Date of Termination shall be
substituted for each cash bonus so disregarded.
(D) In determining the amount of stock and other
equity-based compensation awards made during a calendar year during the
averaging period, rules similar to those set forth in subparagraphs (B) and (C)
of this Section 8(b)(6) shall be followed, except that all awards made in
connection with the Company's initial public offering shall be disregarded.
(6) Disability. "Disability" shall mean Executive has been
determined to be disabled and to qualify for long-term disability benefits under
the long-term disability insurance policy obtained pursuant to Section 3(d) of
this Agreement.
(c) Rights Upon Termination.
(i) Payment of Benefits Earned Through Date of
Termination. Upon any termination of Executive's employment during the
Employment Period, Executive, or his estate, shall in all events be paid all
accrued but unpaid Base Salary and all earned but unpaid cash incentive
compensation earned through his Date of Termination. Executive shall also retain
all such rights with respect to vested equity-based awards as are provided under
the circumstances under the applicable grant or award agreement, and shall be
entitled to all other benefits which are provided under the circumstances in
accordance with the provisions of the Company's generally applicable employee
benefit plans, practices and policies, other than severance plans.
(ii) Death. In the event of Executive's death during
the Employment Period, the Company shall, in addition to paying the amounts set
forth in Section 8(c)(i), take whatever action is necessary to cause all of
Executive's unvested equity-based awards to become fully vested as of the date
of death and,
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in the case of equity-based awards which have an exercise schedule, to become
fully exercisable and continue to be exercisable for such period as is provided
in the case of vested and exercisable awards in the event of death under the
terms of the applicable award agreements.
(iii) Disability. In the event the Company elects to
terminate Executive's employment during the Employment Period on account of
Disability, the Company shall, in addition to paying the amounts set forth in
Section 8(c)(i), pay to Executive, in one lump sum, no later than 31 days
following the Date of Termination, an amount equal to two times Covered Average
Compensation. The Company shall also, commencing upon the Date of Termination:
(A) Continue, without cost to Executive,
benefits comparable to the medical and disability benefits provided to Executive
immediately prior to the Date of Termination under Section 3(c) and Section 3(d)
for a period of 24 months following the Date of Termination or until such
earlier date as Executive obtains comparable benefits through other employment;
(B) Continue to pay, or reimburse Executive,
for all premiums then due or thereafter payable on the whole-life portion of the
split-dollar insurance policy referenced under Section 3(d) for so long as such
payments are due; and
(C) Take whatever action is necessary to
cause Executive to become vested as of the Date of Termination in all stock
options, restricted stock grants, and all other equity-based awards and be
entitled to exercise and continue to exercise all stock options and all other
equity-based awards having an exercise schedule and to retain such grants and
awards to the same extent as if they were vested upon termination of employment
in accordance with their terms.
(iv) Non-Renewal. In the event the Company gives
Executive a Notice of Non-Renewal pursuant to Section 1 above within two years
following the occurrence of a Change in Control, the Executive shall receive the
benefits required to be provided under Section 8(c)(vi) hereof instead of the
benefits described in this Section 8(c)(iv). In the event the Company gives
Executive a notice of non-renewal pursuant to Section 1 above, either prior to
the occurrence of a Change in Control or more than two years following the
occurrence of a Change in Control, the Company shall, in addition to paying the
amounts set forth in Section 8(c)(i), commencing upon the Date of Termination:
(A) Pay to Executive, for 12 consecutive
months, commencing with the first day of the month immediately following the
Date of Termination, a monthly amount equal to the result obtained by dividing
Covered Average Compensation by twelve;
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(B) Continue, without cost to Executive,
benefits comparable to the medical and disability benefits provided to Executive
immediately prior to the Date of Termination under Section 3(c) and Section 3(d)
for a period of 24 months following the Date of Termination or until such
earlier date as Executive obtains comparable benefits through other employment;
and
(C) Take whatever action is necessary to
cause Executive to become vested as of the Date of Termination in all stock
options, restricted stock grants, and all other equity-based awards and be
entitled to exercise and continue to exercise all stock options and all other
equity-based awards having an exercise schedule and to retain such grants and
awards to the same extent as if they were vested upon termination of employment
in accordance with their terms; and
(D) Continue to pay, or reimburse Executive
for, all premiums then due or thereafter payable on the whole-life portion of
the split-dollar insurance policy referenced under Section 3(d) for so long as
such payments are due.
(v) Termination Without Cause. In the event the
Company terminates Executive's employment without Cause, either prior to the
occurrence of a Change in Control or more than two years following the
occurrence of a Change in Control, the Company shall, in addition to paying the
amounts set forth in Section 8(c)(i), commencing upon the Date of Termination:
(A) Pay to Executive, for 12 consecutive
months, commencing with the first day of the month immediately following the
Date of Termination, a monthly amount equal to the result obtained by dividing
two times Covered Average Compensation by twelve;
(B) Continue, without cost to Executive,
benefits comparable to the medical and disability benefits provided to Executive
immediately prior to the Date of Termination under Section 3(c) and Section 3(d)
for a period of 24 months following the Date of Termination or until such
earlier date as Executive obtains comparable benefits through other employment;
and
(C) Take whatever action is necessary to
cause Executive to become vested as of the Date of Termination in all stock
options, restricted stock grants, and all other equity-based awards and be
entitled to exercise and continue to exercise all stock options and all other
equity-based awards having an exercise schedule and to retain such grants and
awards to the same extent as if they were vested upon termination of employment
in accordance with their terms; and
(D) Continue to pay, or reimburse Executive
for, all premiums then due or thereafter payable on the whole-
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life portion of the split-dollar insurance policy referenced under Section 3(d)
for so long as such payments are due.
(vi) Termination Without Cause after Change in
Control; Constructive Termination Without Cause; Termination after Complete
Change in Control. In the event the Company or any successor to the Company
terminates Executive's employment without Cause, within two years after a Change
in Control, or if Executive terminates his employment at any time after a Change
in Control in a Constructive Termination Without Cause effected in the manner
prescribed by Section 8(b)(4), or if Executive terminates his employment for any
reason within one year after a Complete Change in Control, the Company shall, in
addition to paying the amounts provided under Section 8(c)(i), pay to Executive,
in one lump sum no later than 31 days following the Date of Termination, an
amount equal to (x) three times Covered Average Compensation, or (y) if
Executive terminates his employment more than two years after a Change in
Control in a Constructive Termination Without Cause, two times Covered Average
Compensation. The Company shall also, commencing upon the Date of Termination:
(A) Continue, without cost to Executive,
benefits comparable to the medical and disability benefits provided to Executive
immediately prior to the Date of Termination under Section 3(c) and Section 3(d)
for a period of 36 months following the Date of Termination (24 months, if
Executive terminates his employment in a Constructive Termination Without Cause
more than two years after a Change in Control) or until such earlier date as
Executive obtains comparable benefits through other employment;
(B) Continue to pay, or reimburse Executive,
for so long as such payments are due, all premiums then due or payable on the
whole-life portion of the split-dollar insurance policy referenced under Section
3(d); and
(C) Take whatever action is necessary to
cause Executive to become vested as of the Date of Termination in all stock
options, restricted stock grants, and all other equity-based awards and be
entitled to exercise and continue to exercise all stock options and all other
equity-based awards having an exercise schedule and to retain such grants and
awards to the same extent as if they were vested upon termination of employment
in accordance with their terms.
(vii) Termination for Cause; Voluntary Resignation.
In the event Executive's employment terminates during the Employment Period
other than in connection with a termination meeting the conditions of
subparagraphs (ii), (iii), (iv), (v) or (vi) of this Section 8(c), Executive
shall receive the amounts set forth in Section 8(c)(i) in full satisfaction of
all of his entitlements from the Company. All equity-based awards not vested as
of the Date of Termination shall terminate
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and Executive shall have no further entitlements with respect thereto.
(d) Additional Benefits.
(i) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution by the Company to or for the benefit of Executive, whether paid or
payable or distributed or distributable (1) pursuant to the terms of Section 8
of this Agreement, (2) pursuant to or in connection with any compensatory or
employee benefit plan, agreement or arrangement, including but not limited to
any stock options, restricted or unrestricted stock grants issued to or for the
benefit of Executive and forgiveness of any loans by the Company to Executive or
(3) otherwise (collectively, "Severance Payments"), would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code"), and any interest or penalties are incurred by Executive
with respect to such excise tax (such excise tax, together with any such
interest and penalties, are hereinafter collectively referred to as the "Excise
Tax"), then Executive shall be entitled to receive an additional payment (a
"Partial Gross-Up Payment"), such that the net amount retained by Executive,
before accrual or payment of any Federal, state or local income tax or
employment tax, but after accrual or payment of the Excise Tax attributable to
the Partial Gross-Up Payment, is equal to the Excise Tax on the Severance
Payments.
(ii) Subject to the provisions of Section 8(d)(iii),
all determinations required to be made under this Section 8, including whether a
Partial Gross-Up Payment is required and the amount of such Partial Gross-Up
Payment, shall be made by Coopers & Lybrand LLP or such other nationally
recognized accounting firm as may at that time be the Company's independent
public accountants (the "Accounting Firm"), which shall provide detailed
supporting calculations both to the Company and Executive within 15 business
days of the Date of Termination, if applicable, or at such earlier time as is
reasonably requested by the Company or Executive. The initial Partial Gross-Up
Payment, if any, as determined pursuant to this Section 8(d)(ii), shall be paid
to Executive within five days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is payable
by Executive, the Company shall furnish Executive with an opinion of counsel
that failure to report the Excise Tax on Executive's applicable federal income
tax return would not result in the imposition of a negligence or similar
penalty. Any determination by the Accounting Firm shall be binding upon the
Company and Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Partial Gross-Up Payments which
will not have been made by the Company
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should have been made (an "Underpayment"). In the event that the Company
exhausts its remedies pursuant to Section 8(d)(iii) and Executive thereafter is
required to make a payment of any Excise Tax, the Accounting Firm shall
determine the amount of the Underpayment that has occurred, consistent with the
calculations required to be made hereunder, and any such Underpayment, and any
interest and penalties imposed on the Underpayment and required to be paid by
Executive in connection with the proceedings described in Section 8(d)(iii), and
any related legal and accounting expenses, shall be promptly paid by the Company
to or for the benefit of Executive.
(iii) Executive shall notify the Company in writing
of any claim by the Internal Revenue Service that, if successful, would require
the payment by the Company of the Partial Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than 10 business days after
Executive knows of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid. Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which he gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies Executive in writing prior to the expiration of such
period that it desires to contest such claim, Executive shall:
(A) give the company any information
reasonably requested by the Company relating to such claim,
(B) take such action in connection with
contesting such claim as the Company shall reasonably request in writing from
time to time, including, without limitation, accepting legal representation with
respect to such claim by an attorney selected by the Company,
(C) cooperate with the Company in good faith
in order effectively to contest such claim, and
(D) permit the Company to participate in any
proceedings relating to such claim; provided, however that the Company shall
bear and pay directly all costs and expenses attributable to the failure to pay
the Excise Tax (including related additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold Executive harmless,
for any Excise Tax up to an amount not exceeding the Partial Gross-Up Payment,
including interest and penalties with respect thereto, imposed as a result of
such representation, and payment of related legal and accounting costs and
expenses (the "Indemnification Limit"). Without limitation on the foregoing
provisions of this Section 8(d)(iii), the Company shall control all proceedings
taken in connection with such contest and, at its sole option may pursue or
forego any and all administrative
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appeals, proceedings, hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct Executive to
pay the tax claimed and sue for a refund or contest the claim in any permissible
manner, and Executive agrees to prosecute such contest to a determination before
any administrative tribunal, in a court of initial jurisdiction and in one or
more appellate courts, as the Company shall determine; provided, however, that
if the Company directs Executive to pay such claim and sue for a refund, the
Company shall advance so much of the amount of such payment as does not exceed
the Excise Tax, and related interest and penalties, to Executive on an
interest-free basis and shall indemnify and hold Executive harmless, from any
related legal and accounting costs and expenses, and from any Excise Tax,
including related interest or penalties imposed with respect to such advance or
with respect to any imputed income with respect to such advance up to an amount
not exceeding the Indemnification Limit; and further provided that any extension
of the statute of limitations relating to payment of taxes for the taxable year
of Executive with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Partial Gross-Up
Payment would be payable hereunder and Executive shall be entitled to settle or
contest, as the case may be, any other issues raised by the Internal Revenue
Service or any other taxing authority.
(iv) If, after the receipt by Executive of an
amount advanced by the Company pursuant to Section 8(d)(iii), Executive becomes
entitled to receive any refund with respect to such claim, Executive shall
(subject to the Company's complying with the requirements of Section 8(d)(iii))
promptly pay to the Company so much of such refund (together with any interest
paid or credited thereon after taxes applicable thereto) (the "Refund") as is
equal to (A) if the Company advanced or paid the entire amount required to be so
advanced or paid pursuant to Section 8(d)(iii) hereof (the "Required Section
8(d) Advance"), the aggregate amount advanced or paid by the Company pursuant to
this Section 8(d) less the portion of such amount advanced to Executive to
reimburse him for related legal and accounting costs, or (B) if the Company
advanced or paid less than the Required Section 8(d) Advance, so much of the
aggregate amount so advanced or paid by the Company pursuant to this Section
8(d) as is equal to the difference, if any, between (C) the amount refunded to
Executive with respect to such claim and (D) the sum of the portion of the
Required Section 8(d) Advance that was paid by Executive and not paid or
advanced by the Company plus Executive's related legal and accounting fees, as
applicable. If, after the receipt by Executive of an amount advanced by the
Company pursuant to Section 8(d)(iii), a determination is made that Executive
shall not be entitled to any refund with respect to such claim and the Company
does not notify Executive in writing of its intent to contest such denial of
refund prior to the expiration of 30 days after such determination, then such
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advance shall be forgiven and shall not be required to be repaid and the amount
of such advance shall offset, to the extent thereof, the amount of Partial
Gross-Up Payment required to be paid.
(e) Notice of Termination. Notice of non-renewal of this
Agreement pursuant to Section 1 hereof or of any termination of Executive's
employment (other than by reason of death) shall be communicated by written
notice (a "Notice of Termination") from one party hereto to the other party
hereto in accordance with this Section 8 and Section 10.
(f) Date of Termination. "Date of Termination," with
respect to any termination of Executive's employment during the Employment
Period, shall mean (i) if Executive's employment is terminated for Disability,
30 days after Notice of Termination is given (provided that Executive shall not
have returned to the full-time performance of Executive's duties during such 30
day period), (ii) if Executive's employment is terminated for Cause, the date on
which a Notice of Termination is given which complies with the requirements of
Section 8(b)(1) hereof, and (iii) if Executive's employment is terminated for
any other reason, the date specified in the Notice of Termination. In the case
of a termination by the Company other than for Cause, the Date of Termination
shall not be less than 30 days after the Notice of Termination is given. In the
case of a termination by Executive, the Date of Termination shall not be less
than 15 days from the date such Notice of Termination is given. Notwithstanding
the foregoing, in the event that Executive gives a Notice of Termination to the
Company, the Company may unilaterally accelerate the Date of Termination and
such acceleration shall not result in the termination being treated as a
Termination without Cause. Upon any termination of his employment, Executive
will concurrently resign his membership on the Board of Directors.
(g) No Mitigation. The Company agrees that, if Executive's
employment by the Company is terminated during the term of this Agreement,
Executive is not required to seek other employment or to attempt in any way to
reduce any amounts payable to Executive by the Company pursuant to Section
8(d)(i) hereof. Further, the amount of any payment provided for in this
Agreement shall not be reduced by any compensation earned by Executive as the
result of employment by another employer, by retirement benefits, or, except for
amounts then due and payable in accordance with the terms of any promissory
notes given by Executive in favor of the Company, by offset against any amount
claimed to be owed by Executive to the Company or otherwise.
(h) Nature of Payments. The amounts due under this Section
8 are in the nature of severance payments considered to be reasonable by the
Company and are not in the nature of a penalty. Such amounts are in full
satisfaction of all claims
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Executive may have in respect of his employment by the Company or its affiliates
and are provided as the sole and exclusive benefits to be provided to Executive,
his estate, or his beneficiaries in respect of his termination of employment
from the Company or its affiliates.
9. Non-Competition; Non-Solicitation; Specific Enforcement.
(a) Non-Competition. Because Executive's services to the
Company are special and because Executive has access to the Company's
confidential information, Executive covenants and agrees that, during the
Employment Period and, for a period of one year following the Date of
Termination by the Company for Cause or a termination by Executive prior to a
Change in Control, Executive shall not, without the prior written consent of the
Board of Directors, become associated with, or engage in any "Restricted
Activities" with respect to any "Competing Enterprise," as such terms are
hereinafter defined, whether as an officer, employee, principal, partner, agent,
consultant, independent contractor or shareholder. "Competing Enterprise," for
purposes of this Agreement, shall mean any person, corporation, partnership,
venture or other entity which (a) is a publicly traded real estate investment
trust, or (b) is engaged in the business of managing, owning, leasing or joint
venturing residential real estate within 30 miles of residential real estate
owned or under management by the Company or its affiliates. "Restricted
Activities," for purposes of this Agreement, shall mean executive, managerial,
directorial, administrative, strategic, business development or supervisory
responsibilities and activities relating to all aspects of residential real
estate ownership, management, residential real estate franchising, and
residential real estate joint-venturing.
(b) Non-Solicitation. During the Employment Period, and for
a period of one year following the Date of Termination, Executive shall not,
without the prior written consent of the Company, except in the course of
carrying out his duties hereunder, solicit or attempt to solicit for employment
with or on behalf of any corporation, partnership, venture or other business
entity, any employee of the Company or any of its affiliates or any person who
was formerly employed by the Company or any of its affiliates within the
preceding six months, unless such person's employment was terminated by the
Company or any of such affiliates.
(c) Specific Enforcement. Executive and the Company agree
that the restrictions, prohibitions and other provisions of this Section 9 are
reasonable, fair and equitable in scope, terms, and duration, are necessary to
protect the legitimate business interests of the Company and are a material
inducement to the Company to enter into this Agreement. Should a decision be
made by a court of competent jurisdiction that the character, duration or
geographical scope of the provisions of this Section
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9 is unreasonable, the parties intend and agree that this Agreement shall be
construed by the court in such a manner as to impose all of those restrictions
on Executive's conduct that are reasonable in light of the circumstances and as
are necessary to assure to the Company the benefits of this Agreement. The
Company and Executive further agree that the services to be rendered under this
Agreement by Executive are special, unique and of extraordinary character, and
that in the event of the breach by Executive of the terms and conditions of this
Agreement or if Executive, without the prior consent of the Board of Directors,
shall take any action in violation of this Section 9, the Company will suffer
irreparable harm for which there is no adequate remedy at law. Accordingly,
Executive hereby consents to the entry of a temporary restraining order or ex
parte injunction, in addition to any other remedies available at law or in
equity, to enforce the provisions hereof. Any proceeding or action seeking
equitable relief for violation of this Section 9 must be commenced in the
federal or state courts, in either case in Connecticut. Executive and the
Company irrevocably and unconditionally submit to the jurisdiction of such
courts and agree to take any and all future action necessary to submit to the
jurisdiction of such courts.
10. Notice. Any notice required or permitted hereunder shall be in
writing and shall be deemed sufficient when given by hand or by nationally
recognized overnight courier or by Express, registered or certified mail,
postage prepaid, return receipt requested, and addressed, if to the Company at
the address indicated above and if to Executive at the address indicated below
(or to such other address as may be provided by notice).
11. Miscellaneous. This Agreement, together with Schedule 1 and
Annex A and Annex B, constitutes the entire agreement between the parties
concerning the subjects hereof and supersedes any and all prior agreements or
understandings, including, without limitation, any plan or agreement providing
benefits in the nature of severance, but excluding benefits provided under other
Company plans or agreements, except to the extent this Agreement provides
greater rights than are provided under such other plans or agreements. This
Agreement may not be assigned by Executive without the prior written consent of
the Company, and may be assigned by the Company and shall be binding upon, and
inure to the benefit of, the Company's successors and assigns. Headings herein
are for convenience of reference only and shall not define, limit or interpret
the contents hereof.
12. Amendment. This Agreement may be amended, modified or
supplemented by the mutual consent of the parties in writing, but no oral
amendment, modification or supplement shall be effective. No waiver by either
party of any breach by the other party of any condition or provision contained
in this Agreement to be performed by such other party shall be deemed a waiver
of a similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any waiver must be in writing and
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signed by Executive or an authorized officer of the Company, as the case may be.
13. Severability. The provisions of this Agreement are severable.
The invalidity of any provision shall not affect the validity of any other
provision, and each provision of this Agreement shall be valid and enforceable
to the fullest extent permitted by law.
14. Resolution of Disputes.
(a) Procedures and Scope of Arbitration. Except for any
controversy or claim seeking equitable relief pursuant to Section 9 of this
Agreement, all controversies and claims arising under or in connection with this
Agreement or relating to the interpretation, breach or enforcement thereof and
all other disputes between the parties, shall be resolved by expedited, binding
arbitration, to be held in Connecticut in accordance with the National Rules of
the American Arbitration Association governing employment disputes (the
"National Rules"). In any proceeding relating to the amount owed to Executive in
connection with his termination of employment, it is the contemplation of the
parties that the only remedy that the arbitrator may award in such a proceeding
is an amount equal to the termination payments, if any, required to be provided
under the applicable provisions of Section 8(c) and, if applicable, Section 8(d)
hereof, to the extent not previously paid, plus the costs of arbitration and
Executive's reasonable attorneys fees and expenses as provided below. Any award
made by such arbitrator shall be final, binding and conclusive on the parties
for all purposes, and judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.
(b) Attorneys Fees.
(i) Reimbursement After Executive Prevails. Except
as otherwise provided in this paragraph, each party shall pay the cost of his or
its own legal fees and expenses incurred in connection with an arbitration
proceeding. Provided an award is made in favor of Executive in such proceeding,
all of his reasonable attorneys fees and expenses incurred in pursuing or
defending such proceeding shall be promptly reimbursed to Executive by the
Company within five days of the entry of the award.
(ii) Reimbursement in Actions to Stay, Enjoin or
Collect. In any case where the Company or any other person seeks to stay or
enjoin the commencement or continuation of an arbitration proceeding, whether
before or after an award has been made, or where Executive seeks recovery of
amounts due after an award has been made, or where the Company brings any
proceeding challenging or contesting the award, all of Executive's reasonable
attorneys fees and expenses incurred in connection therewith shall be promptly
reimbursed by the Company to
21
<PAGE> 22
Executive, within five days of presentation of an itemized request for
reimbursement, regardless of whether Executive prevails, regardless of the forum
in which such proceeding is brought, and regardless of whether a Change in
Control has occurred.
(iii) Reimbursement After A Change in Control. Without
limitation on the foregoing, solely in a proceeding commenced by the Company or
by Executive after a Change in Control has occurred, the Company shall advance
to Executive, within five days of presentation of an itemized request for
reimbursement, all of Executive's legal fees and expenses incurred in connection
therewith, regardless of the forum in which such proceeding was commenced,
subject to delivery of an undertaking by Executive to reimburse the Company for
such advance if he does not prevail in such proceeding (unless such fees are to
be reimbursed regardless of whether Executive prevails as provided in clause
(ii) above).
15. Survivorship. The provisions of Sections 5(b), 7, 9 and 14 of
this Agreement shall survive Executive's termination of employment. Other
provisions of this Agreement shall survive any termination of Executive's
employment to the extent necessary to the intended preservation of each party's
respective rights and obligations.
16. Board Action. Where an action called for under this Agreement
is required to be taken by the Board of Directors, such action shall be taken by
the vote of not less than a majority of the members then in office and
authorized to vote on the matter.
17. Withholding. All amounts required to be paid by the Company
shall be subject to reduction in order to comply with applicable federal, state
and local tax withholding requirements.
18. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument. The execution of this
Agreement may be by actual or facsimile signature.
19. Governing Law. This Agreement shall be construed and regulated
in all respects under the laws of the State of Maryland.
22
<PAGE> 23
IN WITNESS WHEREOF, this Agreement is entered into as of the date and
year first above written.
AVALON PROPERTIES, INC.
By:
---------------------------------
Its
------------------------------------
CHARLES H. BERMAN
23
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