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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 1-12452
AVALON PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
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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)
(203) 761-6500
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, par value $.01 per share New York Stock Exchange
(Title of each class) (Name of each exchange on which registered)
9% Series A Cumulative Redeemable Preferred Stock, New York Stock Exchange
par value $.01 per share (Name of each exchange on which registered)
(Title of each class)
8.96% Series B Cumulative Redeemable Preferred Stock, New York Stock Exchange
par value $.01 per share (Name of each exchange on which registered)
(Title of each class)
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Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant, as of March 16, 1998, was $1,207,907,652.
The number of shares of the Registrant's Common Stock, par value $.01
per share, outstanding as of March 16, 1998 was 43,139,559.
Documents Incorporated by Reference
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None
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. COMMUNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT . . . . . . . . . . . . . . . . . . . 43
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . 56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
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PART I
This Form 10-K contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially
from those set forth in the forward-looking statement. Certain factors that
might cause such a difference are discussed in the section entitled
"Forward-Looking Statements" on page 26 of this Form 10-K.
ITEM 1. BUSINESS
Geographic Expansion and Merger
The Company continuously evaluates distinct geographical regions in
the U.S. for attractive investment opportunities. After careful analysis, the
Company has determined that selected markets in the Midwest region of the U.S.
have similar high barrier-to-entry characteristics similar to those experienced
in the Mid-Atlantic and Northeast markets. As a result, the Company has
expanded into the Midwest with the purchase of a portion of the Trammell Crow
Residential - Midwest ("TCR/MW") portfolio and has separately identified and
acquired four additional communities in the Midwest unrelated to the TCR/MW
portfolio.
On December 22, 1997, the Company and Avalon DownREIT V, L.P., a
limited partnership formed by the Company (the "Operating Partnership"),
completed the principal phase of the acquisitions contemplated by a
Contribution and Exchange Agreement (the "Contribution Agreement") with TCR/MW,
pursuant to which the Company acquired six apartment communities (the "TCR
Communities") containing a total of 1,625 apartment homes for approximately
$137,117,000 and the Company expects to acquire two additional apartment
communities (these two apartment communities are referred to as the "Pending
Midwest Communities," and, together with the TCR Communities, are referred to
as the "New Communities") containing a total of 704 apartment homes. In
connection with the acquisition of the TCR Communities, the Company assumed
tax-exempt floating rate debt with an outstanding principal balance of
approximately $27,305,000 maturing on December 1, 2025. The New Communities
are located in the Chicago, Cincinnati, Indianapolis, Minneapolis and St. Louis
metropolitan areas. The Company expects to acquire one of the Pending Midwest
Communities during the second quarter of 1998 and to acquire the other Pending
Midwest Community currently under construction in 1999. The Company also
acquired certain third-party management contracts and the right to acquire from
an unrelated third-party an undeveloped parcel of land on which the Company
expects to build one apartment community.
In addition to the acquisition of the TCR Communities, the Company has
separately identified and purchased four additional communities in the Midwest
containing a total of 1,383 apartment homes for an aggregate purchase price of
$84,392,000. Management believes the Midwest acquisitions will facilitate the
following goals:
- establish a growth platform in the high barrier-to-entry markets of
the Midwest at a lower cost than could be achieved in such markets
through single property acquisitions or development;
- allow the Company to enter markets in the Midwest with a critical
mass of apartment communities that have internal earnings growth
potential consistent with the Company's existing portfolio;
- provide important economic diversification of the Company's
portfolio of apartment communities;
- generate a pipeline of acquisition and development communities; and
- produce immediate earnings growth and accelerate long-term earnings
growth.
On March 8, 1998, the Company announced that it has entered into a
definitive strategic merger agreement with Bay Apartment Communities, Inc.
("Bay"), pursuant to which the Company will be merged into Bay, the surviving
entity (the "Merger"). Under the terms of the agreement, each outstanding
common share of the Company will be exchanged for 0.7683 shares of common stock
of Bay. The Merger will be structured as a purchase of the Company by Bay for
accounting purposes. The Merger is expected to close in June 1998 and is
subject to the approval of both companies' shareholders and other customary
regulatory conditions and there can be no assurance that the Merger will be
consummated or that the required conditions
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to closing will be met. The surviving company, to be named Avalon Bay
Communities, Inc. (the "New Company"), will own 140 apartment communities
containing 40,506 apartment homes in 29 markets in 15 states and the District
of Columbia.
On March 8, 1998, the Company announced that it is has entered into a
definitive agreement to acquire selected assets on a presale basis from
Trammell Crow Residential - Pacific Northwest ("TCR-NW"). The presale
acquisitions are expected to be completed during the next 24 to 36 months. The
acquisitions include seven communities in the Seattle, Washington market and
one community in the Portland, Oregon market for a total investment by the
Company of up to $279 million. Together, these eight communities are expected
to contain 2,411 apartment homes when completed. The Company will manage these
communities after acquiring ownership. Management believes the Northwest
markets of Seattle and Portland will enhance the Company's established
development strategy of operating in regions and markets where significant new
economic growth is expected and future multifamily housing supply is
constrained. This expansion is consistent with the Company's strategy to
achieve long term earnings growth by providing a high quality platform for
expansion while also providing additional economic and geographic diversity.
General
Avalon Properties, Inc. ("Avalon" or the "Company") is an integrated
real estate operating company concentrating exclusively on apartment community
acquisition, construction, development and management in the high
barrier-to-entry markets of the United States. The Company was incorporated
under the laws of the State of Maryland in August 1993 and was formed to
continue and expand the multifamily apartment community acquisition,
construction, development and management operations of the Trammell Crow
Residential Mid-Atlantic and Northeast Groups (collectively, the
"Predecessor"). Avalon is a self-administered and self-managed equity Real
Estate Investment Trust ("REIT"). As of March 16, 1998, the Company's
portfolio includes 22,549 Class A, institutional-quality apartment homes
including 2,825 apartment homes under construction (see "Communities") and the
Company manages 1,970 apartment homes for unaffiliated institutional owners.
The Company's apartment communities are conveniently located in areas within
close proximity to recreational amenities, schools, entertainment and dining,
and easy access to employment. The Company currently employs approximately 970
people.
A principal operating objective of the Company's management
("Management") is to increase both operating cash flow growth and long-term
stockholder value. Management's strategies to achieve this objective include
(i) generating consistent, sustained earnings growth at each community through
increased revenue (from high occupancy and targeted value pricing) and
increased operating margins (from aggressive expense management); (ii)
selective investment in new acquisition and development communities in the
Company's targeted geographical areas; and (iii) the use of a conservative
capital structure to provide continued access to capital markets at the lowest
possible cost. Management believes that these strategies are generally best
implemented by building and acquiring institutional-quality assets in
supply-constrained markets where new household formations have out-paced
multifamily permit activity. Management actively seeks opportunities to
acquire individual communities or portfolios of communities, which may include
entry into new supply-constrained markets, and enters into negotiations
concerning potential acquisitions. Management believes that its business
strategy will lead to higher occupancy levels, increased rental rates and
predictable and growing cash flow. There can be no assurance that any
negotiations will be successful and result in future acquisitions or that the
Company's business strategy will have its intended results.
The following business discussion relates to the Company's pre-merger.
Because the Company and Bay have similar strategies, markets and operations,
the Company expects that the combined entity will conduct its business in a
substantially similar manner after the Merger.
OPERATING STRATEGIES: Intense focus on the operations of the existing
portfolio is an important strategy necessary to realize consistent, sustained
earnings growth. Management believes that such focus is best achieved when
operating only one type of real estate. To this end, the Company concentrates
exclusively on apartment community acquisition, construction, development and
management. The Company intends to increase earnings through focused on-site
property management that is expected to result in higher revenue from
Company-owned communities and operating cost containment. Ensuring resident
satisfaction by
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providing service that exceeds the resident's expectations, increasing rents as
market conditions allow, maximizing rent collections and maintaining community
occupancy at optimal levels comprise the principal strategies to maximize
revenue. Lease terms are generally staggered based on vacancy exposure by
apartment type so that lease expirations are better matched to each community's
rental patterns. On-site property management teams receive bonuses based
largely upon the net operating income produced at their community as well as
rental rate increases achieved and lease renewals (which implicitly measure
resident satisfaction). Controlling and leveraging operating expenses also
contributes to earnings growth. High occupancy through resident retention is a
principal strategy. High resident retention eliminates the cost of preparing
an apartment home for a new resident and reduces marketing and other costs.
The Company also aggressively pursues real estate tax appeals and scrutinizes
operating costs. Invoices are recorded on-site to ensure the careful
monitoring of budgeted versus actual expenses; supplies are purchased in bulk
and directly from manufacturers where possible; vendor contracts are bid on a
volume basis; turnover work is performed in-house or by third parties depending
upon the least costly alternative; and preventive maintenance is undertaken
regularly to maximize resident satisfaction and property and equipment life.
Growth in the portfolio and the resulting increase in revenue allows the
Company to spread fixed operating costs over a larger volume of revenue,
thereby increasing operating margins. The Company has enjoyed significant
operating cost leverage in recent years as operating costs, including write-off
of deferred development costs, as a percentage of total revenues have declined
from 46% in 1991 to 36.1% in 1997.
INVESTMENT STRATEGIES: SELECTIVE ACQUISITIONS AND DEVELOPMENT IN
FAVORABLE MARKETS. Management believes that apartment communities present an
attractive investment opportunity compared to other real estate investments
because a broad potential resident base results in relatively stable demand
during all phases of a real estate cycle. The Company intends to pursue
appropriate new investments (both acquisitions of new communities and new
developments) where constraints to new supply exist and where new household
formations have out-paced multifamily permit activity in recent years.
Acquisitions. Management has targeted certain high barrier-to-entry
markets in the Northeast, Mid-Atlantic and Midwest regions of the United States
for acquisition opportunities. Recently, the company has begun expanding into
selected Pacific Northwest markets and entered into a merger agreement with Bay
that will add Bay's current markets in California to the Company's markets.
The Company will continue to diversify its investments within these regions,
not just geographically, but also by the number of apartment homes and features
offered. Each acquisition candidate must have the potential to deliver
sustained earnings growth over time that meets or exceeds the current portfolio
growth rate. Additionally, the following criteria are important in an
acquisition community: i) the community must have been completed after 1984
or, if older, must be in a non-duplicable in-fill location and be able to
support the capital investment required for a significant renovation; ii) the
community has existing tax-exempt debt financing; and iii) the community has
adjacent zoned land that can be acquired with the community and be developed.
One of the characteristics of the Company's markets is the presence of older
apartment communities (often 10 to 30 years old or older) that are currently
attractive acquisition targets for the Company. In many cases, these
communities are in attractive in-fill locations, but are poorly maintained and
marketed, inefficiently managed and are challenging to renovate. Improvements
to landscaping amenities and the physical structure of the buildings, coupled
with more effective management and marketing, may result in attractive yields
on these communities. Management believes that many of these older communities
can support the capital investment required to bring the community up to
institutional-quality condition while delivering attractive post-renovation
yields.
The financial position of the Company continues to support the ability
to make selective acquisitions, and Management expects to continue its
acquisition efforts into 1998, both before and after the Merger. Management's
discipline to be selective in its acquisition candidates is strengthened by the
presence of a strong development capability that is an important alternative
source of portfolio growth. Beyond 1998, Management anticipates that
attractive acquisition opportunities may diminish as the current real estate
recovery progresses. Given a competitive acquisition environment, Management
believes that the Company enjoys an advantage over other real estate investors
in the following areas:
- - The Company maintains seven offices throughout the Northeast, Mid-Atlantic
and Midwest regions and has substantial knowledge of local markets which
facilitates the acquisition process.
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- - The Company maintains a development capacity that lessens the dependence
on acquisitions for external earnings growth.
The Company also expects to add offices in the Pacific Northwest and
(after the Merger) in Northern and Southern California, and believes that it
will continue to benefit from these advantages.
Management also expects to divest communities to help ensure that the
overall portfolio can meet earnings growth targets. One community in
Frederick, Maryland was sold during 1997 pursuant to this strategy. Further, as
acquisition opportunities diminish due to the strengthening real estate market,
the reduced supply of acquisition candidates may provide a favorable
environment for the Company to sell assets. Accordingly, Management
anticipates additional dispositions will occur over the next several years.
New Developments. Management anticipates that selective development
of new apartment communities in the Company's supply-constrained markets will
remain an important component of portfolio growth for the next several years.
Because of its experience, Management believes that it understands and
appreciates the risks associated with development and that, generally, the
risks presented by development are justified by higher potential yields and the
ability to develop attractive new communities in locations where the
opportunity to acquire existing communities is limited. Generally, Management
believes that the long-term potential offered by a new development opportunity
will exceed the long-term potential offered by an acquisition opportunity
primarily because well executed, up-to-date, newly developed communities
generally attract greater demand at higher rents than an existing apartment
community.
Management has significant experience developing apartment communities
in its principal markets, as well as managing the unique development risks
presented by these markets. Since 1980, Management has developed approximately
19,400 apartment homes. Since the Company's initial pubic offering ("Initial
Offering"), Management has developed 17 communities, totaling 4,301 apartment
homes. The development of each of these communities is managed by an
experienced development vice president, who operates out of the local
development office, under the supervision of senior Management. The combined
years of experience for officers principally involved in construction and
development matters exceeds 100 years. As a developer of real estate, the
Company enjoys opportunities that are not available to companies that strictly
acquire existing developed real estate. There are risks, however, to
developing real estate, including risk of zoning changes and unforeseen
conditions (such as unforeseen problems presented by soils or environmental
conditions). Further, there is the possibility that a Development Right (as
hereinafter defined) could proceed to development based on certain assumptions
concerning economic conditions that may not be realized due to subsequent
unforeseen changes in economic conditions. These development risks, however,
are not dissimilar to the risks of acquiring real estate, and Management
believes that the Company's internal due diligence and financial analysis
procedures mitigate these risks. The following is a summary of how the
internal development process functions and how the Company mitigates risk.
Initial Financial Feasibility Projections. Before significant
time and money is incurred on a new development opportunity, a
financial feasibility review is performed. In preparing the financial
projections for a proposed new community, Management relies upon the
rents in today's marketplace, and no inflation of rent is assumed in
the projections. A minimum 6% economic vacancy rate is assumed in
preparing these projections, even though the Company's stabilized
portfolio has historically operated at vacancy rates of 4% to 5%. The
operating budget is derived from analysis of anticipated costs, from
utility rates and estimated taxes in the local community to the
staffing demands independently estimated by both development and
property operations teams. The compensation of development,
construction and operations personnel have significant components tied
to the reliability of each team's forecasts. Historically, actual
operating results of communities that proceeded to development have
generally met or exceeded the initial operating projections developed
during the financial feasibility phase. Once a development
opportunity is determined to meet the Company's financial feasibility
guidelines, the Company begins the process of obtaining entitlements.
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Entitlements Process. The Company operates in markets
dominated by no-growth attitudes and where little-to-no multifamily
zoning is readily available. The limited supply of zoned multifamily
land often requires the Company to "manufacture" the entitlements
necessary to develop a parcel by working through the local
entitlements process for extended periods of time, in most cases for
several years. There can be no assurance that the necessary
entitlements will be obtained. Because of these risks, the Company's
general policy is to acquire an option to purchase land, as opposed to
buying it, until zoning and related entitlements are in place. The
financial exposure associated with the entitlements process is largely
limited to overhead costs, third-party consultant costs and
non-refundable deposits, if any, should the zoning and site plan
approval process be unsuccessful. The Company's approach in measuring
and dealing with this risk is to provide a reserve that is increased
each quarter through a charge to earnings. Currently, this quarterly
charge is $200,000. In accordance with generally accepted accounting
principles ("GAAP"), the salaries (and related costs) of all persons
who spend substantially all of their time in development and
construction activities are capitalized into the cost of that
development. If a development opportunity does not proceed to
development, the accumulated capitalized direct costs, including
payroll and third-party costs for unsuccessful efforts, are
written-off against the established reserve.
Communities Under Construction. Once the entitlement process
is complete and permits are obtained, the option to acquire the land
is exercised and construction begins. In the development and
construction budget, a contingency for possible cost overruns exists
throughout construction. However, this contingency is adjusted during
planning and construction. The remaining contingency, if any, is
removed only after the job is completed.
Management believes that, by adhering to these principles, zoning,
site planning and construction risks as well as the risk of not achieving
projected yields are significantly reduced.
The success of the Company's development and acquisition strategies
depends upon trends in the economy as a whole, including interest rates, income
tax laws, governmental regulations, legislation, and population and demographic
trends. See "Communities." Also, as an owner of real estate, the Company is
subject to risks arising in connection with the availability of financing on
acceptable terms, as well as other risks relating to the real estate
investment, including environmental matters and changes in real estate and
zoning laws.
CAPITAL STRATEGIES: Maintaining a conservative capital structure that
allows the Company continuous, uninterrupted and cost-effective access to
capital markets has been, and continues to be, an important element of
Management's earnings growth strategy. The use of conservative financial
policies is illustrated by the investing and financing activities employed by
the Company since its Initial Offering.
Since the Company's Initial Offering, real estate investments have
been made totaling approximately $1.2 billion. These investments were financed
primarily from proceeds drawn under the Company's revolving unsecured credit
facility (the "Unsecured Facility") and the supplemental revolving unsecured
credit facility (the "Supplemental Unsecured Facility" and together with the
Unsecured Facility, the "Unsecured Facilities"). The Unsecured Facilities were
subsequently repaid from capital market offerings totaling $996.7 million
through December 31, 1997.
During this period, the Company maintained a conservative capital
structure, as total debt to total market capitalization (calculated on a
weighted average basis) was 25.8%. The Company's financial position as of
December 31, 1997 demonstrates Management's continued discipline in applying
conservative capital policies:
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- Total debt to total market capitalization totaled 25%.
- Long-term floating rate debt was only 2.6% of total market
capitalization. Management intends to limit the use of long-term
floating rate debt to no more than 10% of total market
capitalization.
- Debt service coverage for the year ended December 31, 1997 was
3.01x.
- At December 31, 1997, long-term debt maturities over the next 10
years total $284.7 million, or approximately 14% of the Company's
total market capitalization. Long-term debt maturities over the
next five years represents less than 5% of the Company's total
market capitalization. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
This history demonstrates Management's discipline to maintain a
conservative capital structure and the Company's historical ability to
cost-effectively access capital markets to maintain this conservative
structure.
At December 31, 1997, 47.5% of outstanding long-term debt is
tax-exempt debt and is generally collateralized by liens on certain Current
Communities (as hereinafter defined). Of the 66 Current Communities, 15 are
currently subject to mortgages that collateralize tax-exempt debt. As of
December 31, 1997, the ratio of collateralized debt to undepreciated book value
of real estate assets was 20.8%. Although the use of tax-exempt debt generally
encumbers the related property with a lien, the positive effect of the lower
tax-exempt interest rate (compared to conventional debt) is a lower cost
capital structure and higher debt service coverage levels. Although Management
will continue the selective use of tax-exempt debt financing, tax law changes
that took effect in 1986 combined with attractive unsecured debt alternatives
from improved ratings will likely result in a decline in the use of tax-exempt
financing.
Another important element in delivering consistent earnings growth
relative to financial structure is managing exposure to floating rate debt.
Exposure to variable interest rates on outstanding balances under the Unsecured
Facilities is generally managed with interest rate protection agreements,
although no such agreements are currently in place. Further, the Company has
retained a consultant to help manage interest rate risk. Management believes
these policies reduce the risk of eroding earnings growth as a result of higher
interest rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" for an
expanded discussion of current financing strategies.
Inflation and Tax Matters
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 a 60-day written notice
and payment of one month's rental as compensation for early termination.
Short-term leases combined with relatively consistent demand allow rents, and
therefore, cash flow from the portfolio to provide an attractive inflation
hedge.
The Company filed an election with its initial Federal income tax
return to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended (the "Code"), and intends to maintain its qualification as a REIT in
the future. As a qualified REIT, with limited exceptions, the Company will not
be taxed under Federal and certain state income tax laws at the corporate level
on its net income. In addition, due to non-cash charges such as depreciation
and amortization, the cash available for distribution is expected to exceed net
income. Under current tax law, this excess will be treated by stockholders as
a non-taxable return of capital that will reduce the stockholders' basis in the
shares of the Company's Common Stock.
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Environmental Matters
The Company's assessments of the Current Communities and Development
Communities (as hereinafter defined) have not revealed any environmental
liability that the Company believes would have a material adverse effect on the
Company's business, assets or results of operations, nor is the Company aware
of any such material environmental liability. Nevertheless, it is possible
that the Company's assessments did not reveal all environmental liabilities or
that there are material environmental liabilities of which the Company is
unaware. Further, because the Company does not routinely update environment
assessments on Current Communities, it is possible that conditions have
occurred since the most recent environmental assessment that could result in
potentially material environmental liability.
The Company believes that the Current and Development Communities are
in compliance in all material respects with all Federal, state and local laws,
ordinances and regulations regarding hazardous or toxic substances or petroleum
products. The Company has not been notified by any governmental authority, and
is not otherwise aware, of any material noncompliance, liability or claim
relating to hazardous or toxic substances or petroleum products in connection
with any of its Current or Development Communities. The Company does not
believe that the cost of continued compliance with applicable environmental
laws or regulations will have a material adverse effect on the Company or its
financial condition or results of operations. There can be no assurance,
however, that future environmental laws, regulations or ordinances will not
require additional remediation of existing conditions that are not currently
actionable, or impose additional or more stringent requirements on the Current
and Development Communities, the costs of compliance with which would have a
material adverse effect on the Company or its financial condition.
ITEM 2. COMMUNITIES
The Company's real estate holdings consist 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 both the current year 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.
The Company's holdings under each of the above categories are
discussed in the following paragraphs.
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Current Communities
The Current Communities are primarily garden-style apartment
communities consisting of two-and three-story buildings in landscaped settings.
The Current Communities, as of March 16, 1998, include eight high-rise
apartment communities, two four-story mid-rise apartment communities and one
six-story mid-rise apartment community. The Current Communities offer many
attractive amenities designed to enhance their market appeal to discriminating
residents who are willing to pay premium rental rates to live in these
apartment communities. Such amenities include vaulted ceilings, lofts,
fireplaces, patios/decks and modern appliances. Other features include swimming
pools, fitness centers, tennis courts and business centers. Management has an
extensive and ongoing maintenance program to keep all communities and apartment
homes free of deferred maintenance and, where vacant, available for immediate
occupancy. As of March 16, 1998, there were 66 Current Communities. These
Current Communities are institutional-quality multifamily apartment communities
located in the following areas:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF PERCENTAGE OF TOTAL
COMMUNITIES AT APARTMENT HOMES AT APARTMENT HOMES AT
---------------------- ---------------------- ----------------------
1-1-97 3-16-98 1-1-97 3-16-98 1-1-97 3-16-98
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Virginia 15 18 4,269 5,421 31.9% 27.5%
Connecticut 4 7 1,934 2,778 14.5% 14.1%
Maryland 13 12 3,736 3,430 27.9% 17.4%
New Jersey 4 5 1,504 2,008 11.3% 10.2%
Massachusetts 5 5 1,115 1,172 8.3% 5.9%
Washington, D.C. 1 1 308 308 2.3% 1.6%
New York 3 5 502 968 3.8% 4.9%
Ohio -- 1 -- 264 0.0% 1.3%
Indiana -- 2 -- 376 0.0% 1.9%
Minnesota -- 3 -- 904 0.0% 4.6%
Illinois -- 3 -- 887 0.0% 4.5%
Michigan -- 3 -- 983 0.0% 5.0%
Rhode Island -- 1 -- 225 0.0% 1.1%
-- -- ------ ------ ----- ------
45 66 13,368 19,724 100.0% 100.0%
== == ====== ====== ===== ======
</TABLE>
All of the Current Communities are managed and operated by the
Company. During the year ended December 31, 1997, the Company completed
construction of 2,372 apartment homes in seven communities for a capitalized
cost of $302.4 million. Forty-eight of the Current Communities have more than
200 apartment homes, with the largest having 932 apartment homes. The average
age of 64 of the Current Communities, weighted according to number of apartment
homes, is approximately eight years. The remaining Current Communities
(Falkland Chase and Longwood Towers) are older communities that were acquired
by the Company. Falkland Chase underwent extensive renovation in 1987.
Longwood Towers is currently under substantial renovation, which is scheduled
to be completed by the end of the second quarter of 1998.
To comply with the requirements of lenders and tax-exempt credit
enhancers, the Company holds 19 Current Communities and one Development
Community in 10 qualified REIT subsidiaries. The Company owns general
partnership interests in three Current Communities (a 50% interest in Falkland
Chase, a 49% equity interest in Avalon Run and a 50% interest in Avalon Grove),
a 99% general partnership interest in two partnerships structured as DownREITs
that owns a total of 8 Current Communities, a 100% interest in a senior
participating mortgage note secured by another Current Community (Avalon Arbor)
which is accounted for as an investment in real estate, a 100% partnership
interest in 4100 Massachusetts Avenue, Avalon at Lake Arbor, Avalon at
Decoverly, Avalon Commons and Avalon at Fairway Hills II and holds direct fee
simple interests in the remaining Current Communities.
8
<PAGE> 11
PROFILE OF CURRENT AND DEVELOPMENT COMMUNITIES
(DOLLARS IN THOUSANDS, EXCEPT PER APARTMENT HOME DATA)
<TABLE>
<CAPTION>
---------------------- -------------------------------- ----------- ---------------
Number Approximate Year
of Rentable Area Built or
City and State Homes (Sq. Ft.) Acres Acquired
-------------------------------- ---------------------- ---------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
1 Avalon Walk I Hamden, CT 430 433,010 23.3 1992
2 Avalon Walk II Hamden, CT 334 327,730 15.1 1994
3 Avalon Pavilions Manchester, CT 932 849,700 46.3 1990/92
4 Avalon Glen Stamford, CT 238 221,685 4.1 1991/95
5 Avalon Grove (4) Stamford, CT 402 402,970 4.0 1997
6 Avalon Gates Trumbull, CT 340 373,032 37.0 1997
7 Avalon Springs Wilton, CT 102 180,720 12.0 1997
8 4100 Massachusetts Avenue Washington, D.C. 308 298,345 2.7 1994
9 Avalon at Stratford Green Blommingdale, IL 192 237,204 12.7 1997
10 Village Park of Westmont Westmont, IL 400 388,400 17.4 1997
11 Avalon at Danada Wheaton, IL 295 350,581 19.2 1997
12 Avalon at Willow Lake Indianapolis, IN 230 228,708 20.0 1997
13 Avalon at Geist Lawrence, IN 146 160,554 18.0 1997
14 Longwood Towers Brookline, MA 307 226,000 4.2 1993
15 Avalon at Lexington Lexington, MA 198 226,830 18.0 1994
16 Avalon Summit Quincy, MA 245 194,063 9.1 1995/96
17 Avalon Arbor (6) Shrewsbury, MA 302 297,772 25.0 1991
18 Avalon West Westborough, MA 120 159,900 10.1 1996
19 Avalon Landing Annapolis, MD 158 117,078 13.8 1995
20 Avalon at Fairway Hills I Columbia, MD 192 193,728 10.1 1987
21 Avalon at Fairway Hills II Columbia, MD 527 529,727 32.0 1996
22 Avalon at Symphony Glen Columbia, MD 174 178,350 10.0 1986
23 Avalon Fields Gaithersburg, MD 192 202,100 5.7 1996
24 Avalon Knoll Germantown, MD 300 290,400 26.7 1985
25 Avalon at Lake Arbor Mitchellville, MD 209 170,052 18.0 1995
26 Avalon Lea Owings Mills, MD 296 300,440 15.7 1988
27 Avalon at Decoverly Rockville, MD 368 368,446 25.0 1995
28 Avalon Crossing Rockville, MD 132 154,488 5.0 1996
29 Avalon Ridge Silver Spring, MD 432 432,000 25.7 1988
30 Falkland Chase (7) Silver Spring, MD 450 346,500 22.3 1988
31 Avalon Heights Madison Heights, MI 225 206,970 17.1 1997
32 Aspen Meadows Rochester Hills, MI 214 202,390 35.0 1997
33 Village Park of Troy Troy, MI 544 522,250 84.0 1997
34 Avalon Devonshire Bloomington, MN 498 470,774 42.0 1997
35 Carriage Green (9) Eagan, MN 246 233,562 18.7 1998
36 Summer Place (9) Plymouth, MN 160 144,026 8.3 1998
37 Avalon Cove Jersey City, NJ 504 546,390 11.1 1997
38 Avalon Run (8) Lawrenceville, NJ 426 438,370 19.6 1994
39 Avalon Run East Lawrenceville, NJ 206 260,670 27.0 1996
40 Avalon Watch Lawrenceville, NJ 512 487,424 64.0 1988
41 Avalon Chase Marlton, NJ 360 312,840 58.5 1996
42 Avalon View Fishkill, NY 288 286,560 41.0 1993
43 Avalon Green Greenburgh, NY 105 115,930 16.9 1995
44 Avalon Towers Long Beach, NY 109 124,805 1.3 1995
45 Avalon Court Melville, NY 154 190,576 10.8 1997
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------- ------------ ----------
Average Economic
Average Physical Occupancy
Size Occupancy ---------------------------
(Sq. Ft.) at 12/31/97 1997 1996
-------------------------------- ------------- ---------------- ------------ ----------
<S> <C> <C> <C> <C>
1 Avalon Walk I 1,007 96.3% 95.4% 94.6%
2 Avalon Walk II 981 97.6% 95.9% 94.4%
3 Avalon Pavilions 912 94.6% 95.1% 93.6%
4 Avalon Glen 931 97.1% 95.5% 95.7%
5 Avalon Grove (4) 1,002 99.3% Lease-up N/A
6 Avalon Gates 1,097 98.2% Lease-up N/A
7 Avalon Springs 1,772 99.0% Lease-up N/A
8 4100 Massachusetts Avenue 969 96.4% 96.4% 96.0%
9 Avalon at Stratford Green 1,235 Lease-up Lease-up N/A
10 Village Park of Westmont 971 93.3% 94.5% N/A
11 Avalon at Danada 1,188 Lease-up Lease-up N/A
12 Avalon at Willow Lake 994 97.0% 96.7% N/A
13 Avalon at Geist 1,100 90.4% 90.2% N/A
14 Longwood Towers 736 91.3% 87.7%(5) 98.8%
15 Avalon at Lexington 1,146 97.0% 96.6% 98.5%
16 Avalon Summit 792 95.5% 97.8% 88.3%
17 Avalon Arbor (6) 986 94.7% 97.2% 96.6%
18 Avalon West 1,333 94.2% 96.3% Lease-up
19 Avalon Landing 741 98.7% 95.5% 95.3%
20 Avalon at Fairway Hills I 1,009 94.3% 95.9% 96.5%
21 Avalon at Fairway Hills II 1,005 92.8% 94.2% 94.2%
22 Avalon at Symphony Glen 1,025 96.0% 96.2% 95.2%
23 Avalon Fields 1,053 95.3% 96.0% 93.7%
24 Avalon Knoll 968 98.3% 96.5% 95.5%
25 Avalon at Lake Arbor 814 95.7% 94.4% 94.5%
26 Avalon Lea 1,015 98.7% 97.1% 96.0%
27 Avalon at Decoverly 1,001 95.4% 96.7% 96.7%
28 Avalon Crossing 1,170 97.7% 97.1% Lease-up
29 Avalon Ridge 1,000 98.2% 95.7% 94.9%
30 Falkland Chase (7) 770 96.0% 96.0% 96.8%
31 Avalon Heights 920 95.1% 94.4% N/A
32 Aspen Meadows 946 94.9% 95.6% N/A
33 Village Park of Troy 960 95.8% 95.2% N/A
34 Avalon Devonshire 945 97.6% 96.8% N/A
35 Carriage Green (9) 949 N/A N/A N/A
36 Summer Place (9) 900 N/A N/A N/A
37 Avalon Cove 1,084 97.2% 95.3% N/A
38 Avalon Run (8) 1,029 97.2% 96.1% 94.8%
39 Avalon Run East 1,265 99.0% 96.8% Lease-up
40 Avalon Watch 952 96.5% 97.6% 96.0%
41 Avalon Chase 869 93.6% 96.4% 95.8%
42 Avalon View 995 98.3% 97.1% 97.6%
43 Avalon Green 1,104 97.1% 96.3% 97.2%
44 Avalon Towers 1,145 93.6% 95.4% 96.7%
45 Avalon Court 1,238 98.1% Lease-up N/A
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Avg. Rental Rate (1)
--------------------------------- Financial
$ Per $ Per Property (2) Reporting
Apt. Sq. Ft. EBITDA Cost (3)
-------------------------------- --------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
1 Avalon Walk I $1,014 $1.01 $3,638 $34,587
2 Avalon Walk II 992 1.01 2,755 23,740
3 Avalon Pavilions 840 0.92 6,249 56,693
4 Avalon Glen 1,567 1.68 3,092 30,244
5 Avalon Grove (4) N/A N/A 4,916 N/A
6 Avalon Gates 1,190 1.08 2,556 35,369
7 Avalon Springs 2,063 N/A 1,893 15,775
8 4100 Massachusetts Avenue 1,357 1.40 3,244 34,931
9 Avalon at Stratford Green N/A N/A 42 21,572
10 Village Park of Westmont 790 0.81 276 25,743
11 Avalon at Danada N/A N/A 47 37,571
12 Avalon at Willow Lake 681 0.69 36 14,944
13 Avalon at Geist 723 0.66 27 12,080
14 Longwood Towers 1,611 2.19 2,472 37,377
15 Avalon at Lexington 1,563 1.36 2,692 14,325
16 Avalon Summit 938 1.18 1,945 16,289
17 Avalon Arbor (6) 937 0.95 2,187 28,461
18 Avalon West 1,227 0.92 1,233 10,810
19 Avalon Landing 757 1.02 853 9,303
20 Avalon at Fairway Hills I 857 0.85 1,265 9,454
21 Avalon at Fairway Hills II 832 0.83 3,354 33,924
22 Avalon at Symphony Glen 829 0.81 1,057 8,166
23 Avalon Fields 978 0.93 1,564 14,298
24 Avalon Knoll 806 0.83 1,823 8,067
25 Avalon at Lake Arbor 852 1.05 1,091 11,950
26 Avalon Lea 737 0.73 1,656 16,130
27 Avalon at Decoverly 1,008 1.01 3,223 31,151
28 Avalon Crossing 1,333 1.14 1,609 13,778
29 Avalon Ridge 844 0.84 2,785 25,269
30 Falkland Chase (7) 790 1.03 N/A N/A
31 Avalon Heights 786 0.85 177 15,308
32 Aspen Meadows 657 0.69 85 12,435
33 Village Park of Troy 698 0.73 432 31,290
34 Avalon Devonshire 820 0.87 80 36,143
35 Carriage Green (9) N/A N/A N/A N/A
36 Summer Place (9) N/A N/A N/A N/A
37 Avalon Cove 2,232 2.06 8,570 90,291
38 Avalon Run (8) 1,029 1.00 N/A N/A
39 Avalon Run East 1,235 0.98 1,910 16,233
40 Avalon Watch 1,024 1.08 4,340 28,423
41 Avalon Chase 918 1.06 2,430 23,661
42 Avalon View 940 0.94 2,000 17,812
43 Avalon Green 1,817 1.65 1,468 12,439
44 Avalon Towers 2,293 2.00 1,504 15,943
45 Avalon Court 1,458 1.18 490 17,231
</TABLE>
9
<PAGE> 12
PROFILE OF CURRENT AND DEVELOPMENT COMMUNITIES
(DOLLARS IN THOUSANDS, EXCEPT PER APARTMENT HOME DATA)
<TABLE>
<CAPTION>
---------------------------------------- ----------------- ------------------------------
Number Approximate Year
of Rentable Area Built or
City and State Homes (Sq. Ft.) Acres Acquired
-------------------------------- ---------------------- ---------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
46 Avalon Commons Smithtown, NY 312 374,360 20.6 1997
47 Avalon at Montgomery Cincinnati, OH 264 231,800 17.0 1997
48 Avalon at Center Place Providence, RI 225 222,750 1.2 1997
49 Avalon at Park Center Alexandria, VA 492 382,200 8.5 1994
50 Avalon at Ballston-
Quincy and Vermont Towers Arlington, VA 454 420,908 2.3 1997
51 Avalon at Ballston-
Washington Towers Arlington, VA 344 294,808 4.1 1990
52 Avalon Birches Chesapeake, VA 312 262,920 20.9 1995
53 AutumnWoods Fairfax, VA 420 355,320 24.2 1996
54 Avalon at Providence Park Fairfax, VA 140 147,472 4.0 1997
55 Avalon Station Fredericksburg, VA 223 210,331 15.9 1994/96
56 Avalon at Hampton I Hampton, VA 186 178,932 8.5 1985
57 Avalon at Hampton II Hampton, VA 231 227,535 11.3 1986
58 Avalon Park Manassas, VA 372 302,808 26.0 1988
59 Avalon at Carter Lake Reston, VA 259 225,848 47.6 1994
60 Avalon at Gayton Richmond, VA 328 282,408 27.6 1984
61 Avalon at Boulders Richmond, VA 284 313,782 32.1 1996
62 Avalon Woods Richmond, VA 268 158,669 18.5 1994
63 Avalon Pointe Stafford, VA 140 119,272 20.2 1994
64 Avalon at Dulles Sterling, VA 236 231,752 15.7 1986
65 Avalon Crescent Tysons Corner, VA 558 623,270 19.1 1997
66 Avalon Pines Virginia Beach, VA 174 142,854 9.7 1996
---------- ----------------- -----------
19,724 19,094,049 N/A
---------- ----------------- -----------
DEVELOPMENT COMMUNITIES
------------------------
67 Avalon at Faxon Park Quincy, MA 171 176,130 8.3 N/A
68 Avalon Fields II Gaithersburg, MD 96 100,704 3.5 N/A
69 Avalon Crest Fort Lee, NJ 351 367,692 13.1 N/A
70 Avalon Cove South Jersey City, NJ 269 243,445 2.8 N/A
71 Avalon Gardens Nanuet, NY 504 647,778 54.4 N/A
72 Avalon Willow Mamaroneck, NY 227 213,009 4.0 N/A
73 Avalon at Bronxville Bronxville, NY 110 119,350 1.5 N/A
74 Avalon at Cameron Court Alexandria, VA 460 488,496 16 N/A
75 Avalon at Fair Lakes Fairfax, VA 234 288,225 10 N/A
76 Avalon Valley (11) Danbury, CT 268 286,760 17 N/A
77 Avalon Lake (11) Danbury, CT 135 159,804 32 N/A
---------- ----------------- -----------
2,825 3,091,393 N/A
---------- ----------------- -----------
TOTAL: 22,549 22,185,442 N/A
========== ================= ===========
</TABLE>
<TABLE>
<CAPTION>
-------------------- ---------------- ----------- ----------
Average Economic
Average Physical Occupancy
Size Occupancy ---------------------------
(Sq. Ft.) at 12/31/97 1997 1996
------------------------------ --------------- ---------------- ------------ ----------
<S> <C> <C> <C> <C>
46 Avalon Commons 1,200 99.7% 98.6% N/A
47 Avalon at Montgomery 878 95.1% 96.1% N/A
48 Avalon at Center Place 990 96.1% 96.2% N/A
49 Avalon at Park Center 777 95.7% 95.4% 96.2%
50 Avalon at Ballston-
Quincy and Vermont Towers 927 97.4% 95.6% N/A
51 Avalon at Ballston-
Washington Towers 857 95.9% 96.8% (10) 96.7% (11)
52 Avalon Birches 843 93.9% 96.0% 97.0%
53 AutumnWoods 846 95.0% 96.7% 99.0%
54 Avalon at Providence Park 1,139 95.7% 94.9% N/A
55 Avalon Station 943 96.4% 95.0% 81.1%
56 Avalon at Hampton I 962 90.3% 95.2% 94.9%
57 Avalon at Hampton II 985 94.4% 94.8% 95.5%
58 Avalon Park 814 96.2% 96.9% 96.6%
59 Avalon at Carter Lake 872 96.5% 97.3% 97.6%
60 Avalon at Gayton 861 96.3% 95.8% 93.5%
61 Avalon at Boulders 1,105 96.1% 94.7% 95.3%
62 Avalon Woods 592 97.8% 96.1% 96.1%
63 Avalon Pointe 852 99.3% 96.2% 96.3%
64 Avalon at Dulles 982 96.6% 97.8% 96.4%
65 Avalon Crescent 1,117 97.7% Lease-up N/A
66 Avalon Pines 821 93.1% 95.0% 95.9%
--------------- ---------------- ------------ ----------
968 95.9% 95.9% 95.2%
--------------- ---------------- ------------ ----------
DEVELOPMENT COMMUNITIES
-----------------------
67 Avalon at Faxon Park 1,030 N/A N/A N/A
68 Avalon Fields II 1,049 N/A N/A N/A
69 Avalon Crest 1,048 N/A N/A N/A
70 Avalon Cove South 905 N/A N/A N/A
71 Avalon Gardens 1,285 N/A N/A N/A
72 Avalon Willow 938 N/A N/A N/A
73 Avalon at Bronxville 1,085 N/A N/A N/A
74 Avalon at Cameron Court 1,062 N/A N/A N/A
75 Avalon at Fair Lakes 1,232 N/A N/A N/A
76 Avalon Valley (11) 1,070 N/A N/A N/A
77 Avalon Lake (11) 1,184 N/A N/A N/A
--------------- ---------------- ------------ ----------
1,094 N/A N/A N/A
--------------- ---------------- ------------ ----------
TOTAL: 984 95.9% 95.9% 95.2%
=============== ================ ============ ==========
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Avg. Rental Rate (1)
--------------------------------- Financial
$ Per $ Per Property (2) Reporting
Apt. Sq. Ft. EBITDA Cost (3)
------------------------------ --------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
46 Avalon Commons 1,361 1.13 1,779 31,732
47 Avalon at Montgomery 640 0.73 46 15,153
48 Avalon at Center Place 1,579 1.59 1,610 26,424
49 Avalon at Park Center 922 1.19 3,596 37,658
50 Avalon at Ballston-
Quincy and Vermont Towers 1,077 1.16 3,860 46,722
51 Avalon at Ballston-
Washington Towers 1,110 1.30 2,989 36,893
52 Avalon Birches 693 0.82 1,692 13,461
53 AutumnWoods 870 1.03 2,969 30,631
54 Avalon at Providence Park 978 0.86 483 11,066
55 Avalon Station 705 0.75 1,209 12,001
56 Avalon at Hampton I 644 0.67 778 3,764
57 Avalon at Hampton II 659 0.67 1,065 8,229
58 Avalon Park 705 0.87 1,914 19,948
59 Avalon at Carter Lake 747 0.86 1,372 11,560
60 Avalon at Gayton 680 0.79 1,725 9,945
61 Avalon at Boulders 718 0.65 1,513 16,087
62 Avalon Woods 554 0.94 1,096 8,319
63 Avalon Pointe 744 0.87 781 7,841
64 Avalon at Dulles 836 0.85 1,547 11,706
65 Avalon Crescent 1,272 1.14 3,205 56,625
66 Avalon Pines 656 0.80 833 8,659
--------- ----------- -------------- ---------------
964 1.03 119,128 1,373,634
========= =========== ============== ===============
DEVELOPMENT COMMUNITIES
-----------------------
67 Avalon at Faxon Park N/A N/A N/A 10,780
68 Avalon Fields II N/A N/A N/A 2,997
69 Avalon Crest N/A N/A N/A 14,678
70 Avalon Cove South N/A N/A N/A 5,685
71 Avalon Gardens N/A N/A N/A 45,980
72 Avalon Willow 681 N/A N/A 12,714
73 Avalon at Bronxville N/A N/A N/A 3,767
74 Avalon at Cameron Court N/A N/A N/A 25,108
75 Avalon at Fair Lakes N/A N/A N/A 17,494
76 Avalon Valley (11) N/A N/A N/A N/A
77 Avalon Lake (11) N/A N/A N/A N/A
--------- ----------- -------------- ---------------
N/A N/A N/A 139,203
--------- ----------- -------------- ---------------
TOTAL: $964 $1.03 $119,128 $1,512,837
========= =========== ============== ===============
</TABLE>
See Page 15 for notes.
10
<PAGE> 13
LIST OF FEATURES - CURRENT AND DEVELOPMENT COMMUNITIES
<TABLE>
<CAPTION>
1BR/2BR 2BR/3BR Parking Mini-
1 Bath 2 Bath Other Spaces Blinds Carpeting
- ------------------------------------- ------------- ------------ ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT COMMUNITIES
- -------------------
1 Avalon Walk I 192/76 88/74 0 802 All All
2 Avalon Walk II 194/56 84/0 0 571 All All
3 Avalon Pavilions 472/168 220/72 0 1,696 All All
4 Avalon Glen 107/0 117/0 14 (12) 370 All All
5 Avalon Grove 246/0 144/12 0 549 All All
6 Avalon Gates 122/0 168/50 0 784 All All
7 Avalon Springs 0/0 70/32 0 162 All All
8 4100 Massachusetts Avenue 161/16 101/3 27 (13) 357 None All
9 Avalon at Stratford Green 63/0 108/9 12 (14) 437 All All
10 Village Park of Westmont 200/200 0 0 650 All All
11 Avalon at Danada 132/0 148/0 15 (15) 195 All All
12 Avalon at Willow Lake 72/32 94/32 321 All All
13 Avalon at Geist 40/16 68/22 59 All All
14 Longwood Towers 127/48 19/21 92 (16) 210 None All
15 Avalon at Lexington 28/24 90/56 0 364 All All
16 Avalon Summit 153/62 28/2 0 435 Some All
17 Avalon Arbor 83/106 59/51 3 (17) 561 All All
18 Avalon West 40/0 55/25 0 289 All All
19 Avalon Landing 83/18 57/0 0 257 All All
20 Avalon at Fairway Hills I 88/14 66/24 0 307 All All
21 Avalon at Fairway Hills II 180/223 88/36 0 830 All All
22 Avalon at Symphony Glen 86/14 54/20 0 279 Some All
23 Avalon Fields 80/32 80/0 0 285 All All
24 Avalon Knoll 136/56 80/28 0 510 Some All
25 Avalon at Lake Arbor 110/0 87/0 12 (18) 312 All All
26 Avalon Lea 130/28 108/30 0 518 All All
27 Avalon at Decoverly 102/0 104/0 162 (19) 550 All All
28 Avalon Crossing 0/54 60/0 18 (20) 224 All All
29 Avalon Ridge 188/42 146/56 0 691 All All
30 Falkland Chase 228/152 0/0 70 (21) 439 All Few
31 Avalon Heights 90/62 44/0 29 (22) 534 All All
32 Aspen Meadows 64/40 110/0 0 375 All All
33 Village Park of Troy 238/306 0 0 1,001 All All
34 Avalon Devonshire 194/0 304/0 0 824 All All
35 Carriage Green 102/0 111/33 0 496 All All
36 Summer Place 80/0 68/12 0 310 All All
37 Avalon Cove 238/0 240/26 0 568 All All
38 Avalon Run 144/90 108/84 0 709 All All
39 Avalon Run East 64/11 95/36 0 345 All All
40 Avalon Watch 251/0 179/82 0 768 All All
41 Avalon Chase 132/48 156/24 0 726 All All
42 Avalon View 112/48 64/64 0 614 All All
43 Avalon Green 25/24 56/0 0 218 All All
44 Avalon Towers 0/0 37/0 72 (23) 196 None All
45 Avalon Court 34/24 52/44 0 367 All All
46 Avalon Commons 128/40 112/32 0 568 All All
47 Arbors of Montgomery 176/0 88/0 0 557 All All
48 Avalon at Center Place 103/0 112/4 6 (13) 400 All All
</TABLE>
<TABLE>
<CAPTION>
Large
Washer & Vaulted Storage or Patio Deck
Dryer Hook-Ups Ceilings Walk-in Balcony or
or Units and/or Lofts Fireplace Closet Sunroom
- ------------------------------------- ---------------- -------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
CURRENT COMMUNITIES
- -------------------
1 Avalon Walk I All Some Some All All
2 Avalon Walk II All Some Some All All
3 Avalon Pavilions All Some Some All All
4 Avalon Glen All Some Some All All
5 Avalon Grove All Some Some All All
6 Avalon Gates All Some Some All All
7 Avalon Springs All All All All All
8 4100 Massachusetts Avenue All Some Some Some All
9 Avalon at Stratford Green All None Some All All
10 Village Park of Westmont None None None Some All
11 Avalon at Danada All None Some Some Some
12 Avalon at Willow Lake All Some Some All All
13 Avalon at Geist All None All All All
14 Longwood Towers Some None Some All No
15 Avalon at Lexington All Some Some All All
16 Avalon Summit None None None Some All
17 Avalon Arbor All Some Some All All
18 Avalon West All Some Some All All
19 Avalon Landing All None Some All All
20 Avalon at Fairway Hills I All Some Some All All
21 Avalon at Fairway Hills II All Some Some Some All
22 Avalon at Symphony Glen All Some Some All All
23 Avalon Fields All Some Some All All
24 Avalon Knoll All Some Some All All
25 Avalon at Lake Arbor All Some None All All
26 Avalon Lea All Some Some All All
27 Avalon at Decoverly All Some Some Some All
28 Avalon Crossing All Some Some All All
29 Avalon Ridge All Some Some All All
30 Falkland Chase Few None Some Some Some
31 Avalon Heights Most Some Some All All
32 Aspen Meadows All Some None All All
33 Village Park of Troy None Some None All Some
34 Avalon Devonshire Some Some Some Some Some
35 Carriage Green All Some Some Some All
36 Summer Place All Some Some All All
37 Avalon Cove All Some Some All Most
38 Avalon Run All Some Some All All
39 Avalon Run East All Some Some All All
40 Avalon Watch All Some Some All All
41 Avalon Chase All None Some All All
42 Avalon View All Some Some All All
43 Avalon Green All Some Some All All
44 Avalon Towers All None None All All
45 Avalon Court All Some Some All All
46 Avalon Commons All Some Some All All
47 Arbors of Montgomery All Some Some All All
48 Avalon at Center Place All None None Some Some
</TABLE>
<TABLE>
<CAPTION>
Other
- ----------------------------------- ---------------------------------------------------------------------------------------
<S> <C>
CURRENT COMMUNITIES
- -------------------
1 Avalon Walk I Double thermal pane windows, optional carports
2 Avalon Walk II Optional carports
3 Avalon Pavilions Double thermal pane windows, optional garages
4 Avalon Glen Controlled-access building entrances, outside storage, optional underground garage
and carports
5 Avalon Grove Security systems, controlled-access building entrances
6 Avalon Gates Reading room, security systems
7 Avalon Springs Mail area, trash recycling building, security system
8 4100 Massachusetts Avenue Hardwood entry floors, controlled-access entry, 24-hour front desk, underground
parking
9 Avalon at Stratford Green All homes have full-sized washers and dryers and most homes have attached direct
access garages.
10 Village Park of Westmont Business center, some ceiling fans
11 Avalon at Danada Attached garages, oversized windows
12 Avalon at Willow Lake Garages with electric openers, private entrances, garbage disposal, large pantries
13 Avalon at Geist All homes have detached or direct access attached garages and floor-to-ceiling windows,
private entrances, and garbage disposals
14 Longwood Towers Garage with valet parking, grand lobby, central laundry, across street from rapid
transit stop
15 Avalon at Lexington Optional carports
16 Avalon Summit Garbage disposals, laundry rooms, detached garages, storage
17 Avalon Arbor Optional carports
18 Avalon West Security systems, ceiling fans in some apartments, attached garages
19 Avalon Landing Optional carports, bay windows, storm windows
20 Avalon at Fairway Hills I Some apartments have built-in bookcases
21 Avalon at Fairway Hills II Optional bay windows, some apartments have built-in bookcases
22 Avalon at Symphony Glen Double thermal pane windows, outside storage, central laundry, some apartments have
built-in bookcases
23 Avalon Fields Ceiling fan hook-ups, pantries, security systems, detached garages
24 Avalon Knoll Controlled-access building entrances, central laundry, some apartments have built-in
bookcases
25 Avalon at Lake Arbor Thermal pane windows, energy-saving appliances, controlled access, microwaves, garbage
disposal, some lake views, sprinkler system
26 Avalon Lea Some apartments have built-in bookcases
27 Avalon at Decoverly Thermal pane windows, ice makers, garbage disposals, gas utilities
28 Avalon Crossing Attached/detached garages, security systems, pantries, ceiling fan hookups, 9'
ceilings, 6' windows
29 Avalon Ridge Central laundry, some apartments have built-in bookcases, car wash
30 Falkland Chase Laundry rooms, optional storage and garage parking, controlled-access intercom
systems, most apartments have hardwood floors
31 Avalon Heights Business center, security system
32 Aspen Meadows Garbage disposals
33 Village Park of Troy Laundry rooms, garbage disposal, microwaves
34 Avalon Devonshire Covered parking and attached garages
35 Carriage Green Underground parking, microwave
36 Summer Place Control-access building entrances, garbage disposals
37 Avalon Cove Security systems, controlled-access building entrances
38 Avalon Run Optional carports
39 Avalon Run East Security system with available 24-hour monitoring, icemakers
40 Avalon Watch Garages
41 Avalon Chase Some carports, some bay windows
42 Avalon View Optional carports
43 Avalon Green Security systems, central air conditioning, ceiling fans in some apartments
44 Avalon Towers Alarm systems, jacuzzi tubs, ceramic tile/granite backsplash in kitchens, microwaves,
self-clean ovens, some marble foyers in entrance area
45 Avalon Court Direct access garages, security systems
46 Avalon Commons Security system
47 Arbors of Montgomery Lake and wood views, ceiling fans, wallpaper
48 Avalon at Center Place Garage, control access, double pane windows
</TABLE>
11
<PAGE> 14
LIST OF FEATURES - CURRENT AND DEVELOPMENT COMMUNITIES
<TABLE>
<CAPTION>
1BR/2BR 2BR/3BR Parking Mini-
1 Bath 2 Bath Other Spaces Blinds Carpeting
- ------------------------------------- ------------- ------------ ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
49 Avalon at Park Center 384/0 108/0 0 684 All All
50 Avalon at Ballston-
Quincy and Vermont Towers 370/0 84/0 0 498 All All
51 Avalon at Ballston-
Washington Towers 205/31 108/0 0 471 All All
52 Avalon Birches 120/0 192/0 0 562 All All
53 AutumnWoods 252/72 96/0 0 727 All All
54 Avalon at Providence Park 24/0 108/0 8 (24) 296 All All
55 Avalon Station 68/31 100/24 0 682 All All
56 Avalon at Hampton I 82/22 64/18 0 276 All All
57 Avalon at Hampton II 95/44 56/36 0 350 All All
58 Avalon Park 140/40 138/0 54 (25) 784 All All
59 Avalon at Carter Lake 91/21 0/0 147 (20) 403 All Some
60 Avalon at Gayton 156/54 88/30 0 518 All All
61 Avalon at Boulders 90/0 179/15 0 571 All All
62 Avalon Woods 200/0 48/0 20 (13) 434 All All
63 Avalon Pointe 44/66 30/0 0 297 All All
64 Avalon at Dulles 104/40 76/16 0 464 All All
65 Avalon Crescent 186/24 312/0 36 (27) 977 All All
66 Avalon Pines 90/24 60/0 0 308 All All
------------- ------------ ----------- -----------
8719/2599 6374/1235 797 32,892
------------- ------------ ----------- -----------
DEVELOPMENT COMMUNITIES*
- ------------------------
67 Avalon at Faxon Park 68/0 75/28 0 330 All All
68 Avalon Fields II 32/0 32/32 0 466 All All
69 Avalon Crest 132/0 152/67 0 631 All All
70 Avalon Cove South 171/0 98/0 0 285 All All
71 Avalon Gardens 208/48 144/104 0 1,210 All All
72 Avalon Willow 151/0 76/0 0 379 All All
73 Avalon at Bronxville 58/0 52/0 0 167 All All
74 Avalon at Cameron Court 208/0 252/0 0 860 All All
75 Avalon at Fair Lakes 45/0 163/0 26 (27) 505 All All
76 Avalon Valley 106/0 134/28 0 572 All All
77 Avalon Lake 60/0 75/0 0 274 All All
------------- ------------ ----------- -----------
Subtotals 1239/48 1253/259 26 5,679
------------- ------------ ----------- -----------
TOTAL: 9958/2647 7627/1494 823 38,571
============= ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Large
Washer & Vaulted Storage or Patio Deck
Dryer Hook-Ups Ceilings Walk-in Balcony or
or Units and/or Lofts Fireplace Closet Sunroom
- ---------------------------------- ---------------- -------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
49 Avalon at Park Center All Some Some All All
50 Avalon at Ballston-
Quincy and Vermont Towers All None Some All All
51 Avalon at Ballston-
Washington Towers All None Some Some All
52 Avalon Birches All Some All All All
53 AutumnWoods All Some Some All All
54 Avalon at Providence Park All None Some All All
55 Avalon Station All Some Some All All
56 Avalon at Hampton I All Some Some All All
57 Avalon at Hampton II All Some Some All All
58 Avalon Park All Some Some All All
59 Avalon at Carter Lake None None None Some All
60 Avalon at Gayton All Some Some All All
61 Avalon at Boulders All None All All All
62 Avalon Woods All Some None Some Some
63 Avalon Pointe All Some None All All
64 Avalon at Dulles All Some Some All All
65 Avalon Crescent All Some Some All All
66 Avalon Pines All Some All All All
DEVELOPMENT COMMUNITIES*
- ------------------------
67 Avalon at Faxon Park All Some Some Some All
68 Avalon Fields II All Some Some All All
69 Avalon Crest All Some Some All All
70 Avalon Cove South All None None All Some
71 Avalon Gardens All Some Some All All
72 Avalon Willow All Some Some All All
73 Avalon at Bronxville All Some Some All All
74 Avalon at Cameron Court All Some Some All All
75 Avalon at Fair Lakes All Some Some Some All
76 Avalon Valley All Some Some All All
77 Avalon Lake All Some Some All All
Subtotals
TOTAL:
</TABLE>
<TABLE>
<CAPTION>
Other
- ------------------------------------- -------------------------------------------------------------------------------------------
<S> <C>
49 Avalon at Park Center Optional sunrooms, wallpaper in kitchens and baths, ceiling fans, controlled access in
mid-rise buildings, security systems in garden apartments, controlled-access gates at
communit
50 Avalon at Ballston-
Quincy and Vermont Towers Optional ceiling fans, optional garages
51 Avalon at Ballston-
Washington Towers Controlled-access building entrances
52 Avalon Birches Garbage disposals, ceiling fans, ice makers, double sinks, storage
53 AutumnWoods Optional bay windows, optional storage, some apartments have built-in bookcases
54 Avalon at Providence Park Garbage disposals, double pane windows, reading room
55 Avalon Station Garbage disposals, bay windows, 11 ft. ceilings in dens
56 Avalon at Hampton I Double thermal pane windows, central laundry, some apartments have built-in bookcases
57 Avalon at Hampton II Double thermal pane windows, central laundry, some apartments have built-in bookcases
58 Avalon Park Microwave ovens, all apartments have custom bookshelves and ceiling fans
59 Avalon at Carter Lake Garbage disposals, storm windows, laundry facilities
60 Avalon at Gayton Double thermal pane windows, some apartments have built-in bookshelves, wet bars and
controlled-access building entrances, optional storage units
61 Avalon at Boulders Optional storage closets, garbage disposals, ceiling fans
62 Avalon Woods Private entrances, ceiling fans, sun rooms in some units
63 Avalon Pointe Garbage disposals, vaulted ceilings
64 Avalon at Dulles Some apartments have built-in bookcases, pantries, optional bay windows
65 Avalon Crescent Pantries, icemakers, garbage disposals, security alarms, sprinkler system, walk-in
showers, ceramic tile entry foyer, breakfast bars
66 Avalon Pines Garages, ceiling fans, garbage disposals
DEVELOPMENT COMMUNITIES*
- ------------------------
67 Avalon at Faxon Park Security systems, garges
68 Avalon Fields II Pantries, ice makers, continious cleaning ovens, garbage disposals, breakfast bars
69 Avalon Crest Controlled access building entrance
70 Avalon Cove South Security system , some homes with bay windows
71 Avalon Gardens Security system, garages
72 Avalon Willow Security system, garages
73 Avalon at Bronxville Security system , some homes with bay windows
74 Avalon at Cameron Court Direct access garages, intrusion alarms, microwaves, garbage disposals, pantries,
breakfast bars
75 Avalon at Fair Lakes Controlled access building entrance, garbage disposals, direct access garages, pantries,
breakfast bars
76 Avalon Valley Garages, carports, game room
77 Avalon Lake Some garage parking
Subtotals
TOTAL:
</TABLE>
All apartment homes contain refrigerators and dishwashers and all homes are
cable TV ready.
* See page 15 for notes.
12
<PAGE> 15
RECREATIONAL AMENITIES - CURRENT AND DEVELOPMENT COMMUNITIES
<TABLE>
<CAPTION>
Indoor/
Outdoor
Clubhouse/ Fitness Tennis Racquet- Basket-
Clubroom Center Pool Court ball ball
- ------------------------------ ----------- ---------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CURRENT COMMUNITIES
- -------------------
1 Avalon Walk I Yes Yes Yes No Yes Yes
2 Avalon Walk II Yes Yes Yes Yes Yes Yes
3 Avalon Pavilions Yes Yes Yes Yes Yes Yes
4 Avalon Glen Yes Yes Yes No Yes No
5 Avalon Grove Yes Yes Yes No Yes Yes
6 Avalon Gates Yes Yes Yes Yes Yes Yes
7 Avalon Springs Yes Yes Yes No No No
8 4100 Massachusetts Avenue Yes Yes Yes No No No
9 Avalon at Stratford Green Yes No Yes No No No
10 Village Park of Westmont Yes Yes Yes No Yes Yes
11 Avalon at Danada Yes Yes Yes No No No
12 Avalon at Willow Lake Yes Yes Yes Yes No No
13 Avalon at Geist Yes Yes Yes No No No
14 Longwood Towers Yes No No No No No
15 Avalon at Lexington Yes Yes Yes No No Yes
16 Avalon Summit No Yes Yes No No No
17 Avalon Arbor Yes Yes Yes Yes No Yes
18 Avalon West Yes No Yes No No Yes
19 Avalon Landing Yes Yes Yes No No No
20 Avalon at Fairway Hills I Yes Yes Yes Yes No No
21 Avalon at Fairway Hills II Yes Yes Yes Yes Yes No
22 Avalon at Symphony Glen No No Yes No No No
23 Avalon Fields Yes Yes Yes No No No
24 Avalon Knoll Yes Yes Yes Yes No Yes
25 Avalon at Lake Arbor Yes Yes Yes No No No
26 Avalon Lea Yes Yes Yes Yes No No
27 Avalon at Decoverly Yes Yes Yes Yes Yes Yes
28 Avalon Crossing Yes Yes Yes No No No
29 Avalon Ridge Yes Yes Yes Yes Yes Yes
30 Falkland Chase Yes Yes No No No No
31 Avalon Heights Yes Yes Yes Yes Yes No
32 Aspen Meadows Yes No Yes Yes No No
33 Village Park of Troy Yes Yes Yes Yes Yes Yes
34 Avalon Devonshire Yes Yes Yes Yes No No
35 Carriage Green Yes Yes Yes Yes No No
36 Summer Place Yes Yes Yes Yes No No
37 Avalon Cove Yes Yes Yes No Yes Yes
38 Avalon Run Yes Yes Yes Yes Yes Yes
39 Avalon Run East Yes No Yes No No No
40 Avalon Watch Yes Yes Yes Yes Yes Yes
41 Avalon Chase Yes Yes Yes Yes No No
42 Avalon View Yes Yes Yes Yes No Yes
43 Avalon Green Yes No Yes No No No
44 Avalon Towers Yes Yes Yes No No No
45 Avalon Court Yes Yes Yes No No No
46 Avalon Commons Yes Yes Yes No No Yes
47 Arbors of Montgomery Yes Yes Yes Yes Yes Yes
48 Avalon at Center Place Yes Yes Yes No No No
49 Avalon at Park Center Yes Yes Yes No No Yes
50 Avalon at Ballston-
Quincy & Vermont Towers Yes Yes Yes Yes No No
51 Avalon at Ballston-
</TABLE>
<TABLE>
<CAPTION>
Tot Lot/ Sauna or
Tot Pool Whirlpool Other
- ------------------------------ ---------- ------------ ---------------------------------------------------------
<S> <C> <C> <C>
CURRENT COMMUNITIES
- -------------------
1 Avalon Walk I Yes No Heated pool, media room, ping-pong room
2 Avalon Walk II Yes Yes Aerobics studio, library
3 Avalon Pavilions Yes No Picnic area, media room, ping-pong room, heated pool,
sports court
4 Avalon Glen No No Heated pool, picnic area with barbecue grills
5 Avalon Grove Yes No
6 Avalon Gates Yes No Game room, picnic area
7 Avalon Springs Yes No Nature trail
8 4100 Massachusetts Avenue No No Rooftop pool, nearby parks
9 Avalon at Stratford Green No No Gazebos, prairie reserve, concierge services
10 Village Park of Westmont Yes Yes Billards
11 Avalon at Danada No No Conference room, concierge services
12 Avalon at Willow Lake No No Picnic areas with barbeque grills, covered car wash
13 Avalon at Geist No No Wooded picnic areas with barbeque grills
14 Longwood Towers No No Restaurant, ballroom, concierge
15 Avalon at Lexington Yes No Picnic area, heated pool, media room
16 Avalon Summit No No
17 Avalon Arbor Yes No Heated pool, lighted tennis courts
18 Avalon West Yes No
19 Avalon Landing No Yes Sauna, 14-acre wooded setting
20 Avalon at Fairway Hills I Yes No Picnic area, lighted tennis court
21 Avalon at Fairway Hills II Yes No Car wash area, tanning bed
22 Avalon at Symphony Glen Yes No Picnic area with barbecue grills
23 Avalon Fields Yes No Picnic/sitting areas, pool with landscaped deck, car
wash area
24 Avalon Knoll Yes Yes Lighted tennis courts, picnic area with barbecue grills
25 Avalon at Lake Arbor No Yes Jogging trail
26 Avalon Lea No Yes Lighted tennis court, English garden with gazebo
27 Avalon at Decoverly Yes Yes Lap pool & cocktail pool, car wash area, croquet court
28 Avalon Crossing Yes No Picnic/sitting area, walking path, play area
29 Avalon Ridge Yes Yes Walk and bike trails, picnic area with barbecue grills,
volleyball court
30 Falkland Chase Yes No Picnic area with barbecue grills and picnic tables,
community room
31 Avalon Heights Yes Yes Sand volleyball, jogging trails, jacuzzi
32 Aspen Meadows Yes No Sand volleyball, picnic area with barbecue grills
33 Village Park of Troy No Yes Sand volleyball, picnic area with barbecue grills
34 Avalon Devonshire No Yes Gazebos, picnic areas with barbecue grills, jogging
trails, billiards, large screen TV
35 Carriage Green Yes Yes Community rooms, sauna, picnic area, sand volleyball
36 Summer Place No Yes Sand volleyball, billiard table, tanning table
37 Avalon Cove Yes No
38 Avalon Run Yes No Media room, library, sport lawn
39 Avalon Run East Yes No Walking/jogging trail
40 Avalon Watch Yes Yes Lighted tennis courts, picnic areas
41 Avalon Chase No Yes Volleyball court, car wash area, picnic area with
barbecues
42 Avalon View Yes No Library, ping-pong room
43 Avalon Green No No Picnic area
44 Avalon Towers Yes Yes Adjacent to ocean boardwalk, enclosed garage with
carwash, 24-hour concierge, billiard room
45 Avalon Court Yes No
46 Avalon Commons Yes No
47 Arbors of Montgomery No Yes Car wash, sand volleyball court
48 Avalon at Center Place No No Conference room, storage facility, bicycle storage, car
wash area
49 Avalon at Park Center Yes Yes Sand volleyball court, walking trail
50 Avalon at Ballston-
Quincy & Vermont Towers No Yes
51 Avalon at Ballston-
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
Indoor/
Outdoor
Clubhouse/ Fitness Tennis Racquet- Basket-
Clubroom Center Pool Court ball ball
- -------------------------- ----------- ---------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Washington Towers Yes Yes Yes Yes No No
52 Avalon Birches Yes Yes Yes Yes No No
53 AutumnWoods Yes Yes Yes Yes No Yes
54 Avalon at Providence Park Yes No Yes No No No
55 Avalon Station Yes Yes Yes No No No
56 Avalon at Hampton I No Yes Yes Yes No No
57 Avalon at Hampton II Yes Yes Yes Yes No No
58 Avalon Park Yes Yes Yes Yes Yes No
59 Avalon at Carter Lake No No Yes Yes No No
60 Avalon at Gayton Yes Yes Yes Yes No No
61 Avalon at Boulders Yes Yes Yes Yes No No
62 Avalon Woods Yes Yes Yes Yes Yes No
63 Avalon Pointe Yes No Yes Yes No No
64 Avalon at Dulles Yes Yes Yes Yes No No
65 Avalon Crescent Yes Yes Yes No No Yes
66 Avalon Pines Yes Yes Yes No Yes Yes
DEVELOPMENT COMMUNITIES
- -----------------------
67 Avalon at Faxon Park Yes Yes Yes No No No
68 Avalon Fields II Yes Yes Yes No No No
69 Avalon Crest Yes Yes Yes No No Yes
70 Avalon Cove South Yes Yes Yes No No No
71 Avalon Gardens Yes Yes Yes Yes Yes Yes
72 Avalon Willow Yes Yes Yes No Yes No
73 Avalon at Bronxville Yes Yes No No No No
74 Avalon at Cameron Court Yes Yes Yes No No Yes
75 Avalon at Fair Lakes Yes Yes Yes Yes No No
76 Avalon Valley Yes Yes Yes No No No
77 Avalon Lake Yes Yes Yes No No Yes
</TABLE>
<TABLE>
<CAPTION>
Tot Lot/ Sauna or
Tot Pool Whirlpool Other
- -------------------------- ---------- ------------ ---------------------------------------------------------
<S> <C> <C> <C>
Washington Towers No No Lighted tennis court, community room
52 Avalon Birches Yes Yes Tanning bed, guest suite, 24-hour fitness center, sand
volleyball, lighted tennis courts, picnic area
53 AutumnWoods Yes Yes Sand volleyball court, car wash area, barbecue facilities,
community bicyles
54 Avalon at Providence Park No No Car wash area, business center
55 Avalon Station No No Volleyball court
56 Avalon at Hampton I Yes Yes Lighted tennis court, car wash
57 Avalon at Hampton II No Yes Picnic area, volleyball court, lighted tennis court
58 Avalon Park Yes Yes Lighted tennis courts
59 Avalon at Carter Lake Yes No Lighted tennis courts, volleyball, picnic area, lake view
60 Avalon at Gayton No Yes Lighted tennis courts, volleyball court, picnic area, sauna,
car wash
61 Avalon at Boulders No Yes Car wash area, picnic areas, jogging trails
62 Avalon Woods No Yes Tanning bed, dry sauna, boat storage area, car wash area
63 Avalon Pointe No Yes Picnic area, car wash area
64 Avalon at Dulles No Yes Lighted tennis court
65 Avalon Crescent Yes Resident business office and media/conference room, sand
volleyball court, walking/fitness trails, picnic area,
landscaped pond, perimeter fencing & gate
66 Avalon Pines No Yes Car wash area
DEVELOPMENT COMMUNITIES
- -----------------------
67 Avalon at Faxon Park Yes Yes Barbecue areas, community garden, putting green, gazebo and
a library at the leasing office.
68 Avalon Fields II Yes No Car wash area, picnic/sitting area with Barbecue grills,
pedestrian path
69 Avalon Crest No No Residents business center, childrens' play room off fitnes
center, irrigation system
70 Avalon Cove South No No Resident business center
71 Avalon Gardens Yes No Barbecue pavilions, resident business center
72 Avalon Willow No No Dance studio
73 Avalon at Bronxville No No Resident business center
74 Avalon at Cameron Court No Yes Resident business center, sand volleyball court, picnic areas
75 Avalon at Fair Lakes No No Picnic area, resident business center
76 Avalon Valley Yes No Picnic areas with grills
77 Avalon Lake No No Game room, picnic areas with grills
</TABLE>
14
<PAGE> 17
Notes to Community Information tables on pages 9 through 14
(1) Represents the average rental revenue per occupied apartment home.
(2) Property EBITDA is defined as property earnings before interest, income
taxes, depreciation, amortization, extraordinary items, gain/(loss) on
sale of a community, minority interest and before considering corporate
general and administrative expenses and central property management
overhead. Gross EBITDA discussed in Note (4) to the Selected Financial
Data represents consolidated earnings (net of general and administrative
expenses and central property management overhead), and including
minority interests, but before depreciation and amortization.
(3) Costs are presented in accordance with GAAP and exclude the step-up in
basis attributed to continuing investors. For Development Communities,
cost represents total costs incurred through December 31, 1997.
(4) Owned by a joint venture in which the Company has a 50% equity and 50%
cash flow interest with the remaining 50% interest held by an
institutional investor.
(5) Community under renovation in 1997.
(6) Ownership through ownership of the Avalon Arbor note. See Note 5 to
consolidated financial statements.
(7) Owned by a partnership in which the Company has a 50% ownership
interest. Extensive renovation completed in 1987.
(8) Owned by a joint venture in which the Company has a 49% equity and 40%
cash flow interest with the remaining 51% equity and 60% cash flow
interest held by an institutional investor.
(9) Communities acquired on 1-7-98. See "Acquisition Activities and Other
Recent Developments."
(10) Excludes corporate apartment homes.
(11) Construction commenced in 1998.
(12) Seven 1BR/1.5BA, three 2BR/1.5BA and four 2BR/2.5BA.
(13) Efficiencies.
(14) Twelve 3BR/2.5BA.
(15) Fifteen 3BR w/den/3-1/2BA.
(16) 7 guest rooms, 75 studio apartments, 10 3BR/3BA apartments.
(17) 3 apartment homes with 4BR.
(18) 2BR and 1-1/2BA.
(19) Fifty-four 1BR/1.5BA, sixty-four 2BR/3BA and forty-four 3BR/2BA.
(20) 2BR and 2-1/2BA.
(21) 35 2BR town homes and 35 3BR town homes.
(22) 24 efficiencies and five 2BR/1BA townhouse.
(23) Comprised of 1 studio, 1 2BR/3BA, 3 3BR/3BA and 67 1BR/2BA.
(24) 4 2BR town homes and 4 3BR town homes.
(25) Comprised of 40 efficiencies and 14 2BR town homes.
(26) 3BR and 3BA.
(27) Comprised of 36 2BR/2-1/2BA + loft apartments.
15
<PAGE> 18
Development Communities
As of March 16, 1998, 11 Development Communities were under
construction which, when completed, will add a total of 2,825 apartment homes
to the Company's portfolio. Subsequent to year end, the Company commenced
construction on two of the Development Rights (Avalon Valley and Avalon Lake)
which had a capitalized cost at December 31, 1997 of approximately $786,000.
The Development Communities will resemble the Current Communities and have been
designed to offer similar amenities. The total capitalized cost of these
Development Communities, when completed, is expected to be approximately $367.3
million. The following is a summary of the Development Communities:
DEVELOPMENT COMMUNITIES SUMMARY
<TABLE>
<CAPTION>
NUMBER OF BUDGETED ESTIMATED ESTIMATED EBITDA AS %
APARTMENT COST CONSTRUCTION INITIAL COMPLETION STABILIZATION OF TOTAL
HOMES ($ MILLIONS) START OCCUPANCY DATE DATE(1) BUDGETED COST(2)
--------- ------------ ------------ --------- ---------- ------------- ----------------
CONVENTIONALLY FINANCED
- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Avalon at Fair Lakes
Fairfax, VA 234 $ 23.2 Q1 1997 Q4 1997 Q2 1998 Q4 1998 10.5%
Avalon at Faxon Park
Quincy, MA 171 15.8 Q1 1997 Q4 1997 Q3 1998 Q4 1998 13.2%
Avalon Gardens
Nanuet, NY 504 53.8 Q3 1996 Q2 1997 Q4 1998 Q1 1999 11.3%
Avalon at Cameron Court
Alexandria, VA 460 44.7 Q2 1997 Q1 1998 Q4 1998 Q1 1999 11.0%
Avalon Willow
Mamaroneck, NY 227 41.8 Q2 1997 Q3 1998 Q1 1999 Q2 1999 9.2%
Avalon Fields II
Gaithersburg, MD 96 9.2 Q3 1997 Q2 1998 Q4 1998 Q1 1999 10.2%
Avalon Bronxville
Bronxville, NY 110 26.4 Q1 1998 Q2 1999 Q3 1999 Q4 1999 9.7%
Avalon Crest
Fort Lee, NJ 351 57.5 Q4 1997 Q2 1999 Q4 1999 Q1 2000 10.1%
Avalon Cove South
Jersey City, NJ 269 51.8 Q1 1998 Q2 1999 Q3 1999 Q4 1999 10.0%
Avalon Valley
Danbury, CT 268 26.1 Q2 1998 Q1 1999 Q3 1999 Q4 1999 10.4%
Avalon Lake
Danbury, CT 135 17.0 Q1 1998 Q1 1999 Q2 1999 Q3 1999 9.6%
----- ------ -----
2,825 $367.3 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. EBITDA is relevant to an understanding of the economics of the
Company because it indicates cash flow available from Company operations
to service fixed obligations. EBITDA should not be considered as an
alternative to operating performance, or to cash flows from operating
activities (as determined in accordance with GAAP) as a measure of
liquidity. EBITDA as disclosed by other REITs may not be comparable to
the Company's calculation of EBITDA.
16
<PAGE> 19
The Company intends to periodically update the projections in the
table on the preceding page to the extent Management believes there may be or
has been a material change in these projections on an aggregate basis. 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 during the years ended December 31, 1997, 1996 and 1995 totaled $9.0
million, $12.2 million and $6.0 million, respectively.
Development Rights
As of March 16, 1998, the Company was pursuing the development of 18
new apartment communities. The status of these new communities ranges from
land owned or under option 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.
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 4,900 institutional-quality apartment homes to the
Company's portfolio. Many of these apartment homes will offer features similar
to those offered by the Current Communities, including vaulted ceilings, lofts,
fireplaces, dishwashers, disposals, washer/dryer connections, ice-makers,
patios and decks. Recreational facilities may include swimming pools, fitness
facilities, playgrounds, picnic areas, tennis courts, racquetball courts or
indoor basketball courts. Direct-access garages are also planned for certain
Development Rights.
The Company generally holds Development Rights through options to
acquire land, although one development right is controlled through a joint
venture partnership that owns land (New Canaan, CT). As of December 31, 1997,
the cumulative capitalized costs for the 18 current Development Rights is
approximately $11.9 million including the capitalized cost of $7.3 million
related to the purchase of land in New Canaan, Connecticut. The properties
that comprise the Development Rights are located in Massachusetts, New Jersey,
New York, Illinois, Virginia and Connecticut and are in different stages of the
due diligence and regulatory approval process. The decisions as to which of
the Development Rights to pursue, if any, or to continue to pursue once an
investment in a Development Right is made are business judgments to be made by
Management after financial, demographic and other analysis is performed. 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 costs assumed in the financial projections. Finally, Management
intends to limit the percentage of debt used to finance new developments and
acquisitions. To comply with Management's self-imposed limitation in the use
of debt, future equity offerings may be required to finance the development of
those Development Rights scheduled to start construction after 1998.
Notwithstanding the lack of assurance with respect to the prospective
development of any particular community that is the subject of the Development
Rights, Management believes that the Development Rights, in the aggregate,
present attractive potential opportunities for future development and growth of
the Company's Funds from Operations (as hereinafter defined).
Historically, Management has been successful in controlling land
through option agreements prior to commencing construction. Generally, this
allowed the Company to limit exposure to development risks by purchasing land
only when the entitlement process was complete and when construction could
commence immediately after the purchase of the land. Accordingly, at March 16,
1998, the Company did not directly own any unentitled and undeveloped land.
The Company, however, holds an 86.5% non-recourse joint venture partnership
interest in a partnership that owns undeveloped land. The Company may purchase
undeveloped land before development and financing plans are complete if, in
Management's judgment, controlling the land through an option agreement is not
viable, the land can be acquired under attractive terms, is in the advanced
17
<PAGE> 20
stages of the entitlement process and can proceed to development within a
medium-term planning and marketing horizon. The current inventory of
Development Rights is summarized in the following table:
<TABLE>
<CAPTION>
TOTAL
ESTIMATED BUDGETED
NUMBER OF COST
LOCATION HOMES ($ MILLIONS)
-------- --------- ------------
<C> <S> <C> <C>
1. Darien, CT 172 $ 25.8
2. New Canaan, CT(1) 104 23.8
3. Orange, CT 172 15.5
4. Ridgefield, CT 240 30.2
5. Stamford, CT 195 30.5
6. Naperville, IL 200 20.5
7. Hull, MA 162 17.0
8. Peabody, MA 434 35.9
9. Wilmington, MA 204 21.2
10. Florham Park, NJ 270 37.5
11. Freehold, NJ 452 38.5
12. Westbury, NY 360 47.6
13. Greenburgh - II, NY 500 74.0
14. Greenburgh - III, NY 266 39.3
15. Melville - II, NY 340 40.0
16. New Rochelle, NY 408 62.7
17. Yonkers, NY 256 33.7
18. Herndon, VA 165 19.5
----- ------
Total 4,900 $613.2
===== ======
</TABLE>
(1) Currently anticipated that the land seller will retain a minority limited
partnership interest.
18
<PAGE> 21
Acquisition Activities and Other Recent Developments
Acquisitions of Existing Communities. In 1997, the Company acquired
15 communities that total 3,884 apartment homes, and through March 16, 1998,
two additional communities were acquired. These communities are summarized as
follows:
On January 11, 1997, the Company purchased Avalon at Ballston -
Vermont/Quincy, two luxury high-rise communities located in Arlington, Virginia
for approximately $45,698,000. These communities contain a total of 454
apartment homes.
On May 16, 1997, the Company purchased Avalon at Center Place, a 225
apartment home, luxury high-rise community located in Providence, Rhode Island
for approximately $26,000,000. This community was managed by the Company prior
to its acquisition and is subject to a 149 year land lease expiring in
September 2092.
On June 27, 1997, the Company purchased Avalon at Providence Park, a
140 apartment home, luxury garden-style apartment community located in Fairfax
City, Virginia for approximately $10,750,000.
On October 1, 1997, the Company purchased Avalon Colchester, a 57
apartment home community in Brookline, Massachusetts for approximately
$4,500,000. This community is near an existing community, Longwood Towers, and
the Company has combined the operations of these two communities.
On November 13, 1997, the Company purchased Avalon Heights (formerly
Village Green of Madison Heights), a 225 apartment home, garden-style community
located in Madison Heights, Michigan (metro Detroit) for approximately
$15,215,000.
On November 13, 1997, the Company purchased Village Park of Troy, a
544 apartment home, garden-style community located in Troy, Michigan (metro
Detroit) for approximately $31,120,000.
On November 26, 1997, the Company, through the Operating Partnership,
acquired a fee simple interest in Village Park of Westmont, a 400 apartment
home, garden-style community located in Westmont, Illinois (metro Chicago) for
approximately $25,695,000 including $23,695,000 in cash and Units of the
Operating Partnership valued at $2,000,000.
On December 11, 1997, the Company purchased Aspen Meadows, a 214
apartment home, garden-style community located in Rochester Hills, Michigan for
approximately $12,362,000.
On December 22, 1997, the Company and the Operating Partnership
completed the principal phase of the acquisitions contemplated by the
Contribution Agreement with TCR/MW, pursuant to which the Company acquired six
apartment communities containing a total of 1,625 apartment homes for
approximately $137,117,000 and expects to acquire two additional apartment
communities containing a total of 704 apartment homes. The Company also
acquired certain third-party management contracts and the right to acquire from
an unrelated third-party an undeveloped parcel of land on which the Company
expects to build one apartment community.
On January 7, 1998, the Company purchased two apartment communities
located in the Minneapolis metropolitan area. Carriage Green, a 246 apartment
home community located in Eagan, Minnesota, and Summer Place, a 160 apartment
home community located in Plymouth, Minnesota, were acquired for $27,625,000.
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
from the sale of approximately $16,500,000 from the sale were used for
reinvestment in a new acquisition community.
19
<PAGE> 22
Land Acquisitions for New Developments. On March 12, 1997, the
Company purchased 8.29 acres of land in Quincy, Massachusetts for $950,000.
Construction of a new 171 apartment home community, Avalon at Faxon Park,
commenced in the first quarter of 1997.
On April 15, 1997, the Company purchased the remaining nine acres of
land relating to the development of Avalon at Cameron Court in Alexandria,
Virginia for $5,714,000.
On April 18, 1997, the Company purchased the remaining 1.7 acres of
land relating to the Avalon Willow development in Mamaroneck, New York for
$2,300,000. This land is adjacent to a 2.3 acre parcel purchased in December
1996. Construction of a 227 apartment home community (Avalon Willow) on the
combined four acre site commenced in the second quarter of 1997. The first 2.3
acres of land were acquired in December 1996.
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.
On December 10, 1997, the Company purchased a 1.5 acres of land in
Bronxville, New York for $2,050,000. Construction of a new 110 apartment home
community, Avalon Bronxville, started in the first quarter of 1998.
On December 18, 1997, the Company purchased a 13 acre tract of land in
Fort Lee, New Jersey, for $11,000,000. Construction of a new apartment
community, Avalon Crest, started in the fourth quarter of 1997. Construction
of this 351 apartment home community is scheduled for completion in the fourth
quarter of 1999.
On December 19, 1997, the Company completed the purchase of 2.75 acres
of land adjacent to an existing community, Avalon Cove, in Jersey City, New
Jersey, for $4,100,000 for the purpose of expanding the existing community.
Construction of this 269 apartment home community, Avalon Cove South, started
in the first quarter of 1998.
On February 26, 1998, the Company purchased a 17.1 acre tract of land
in Danbury, Connecticut for $2,100,000. A new 268 apartment community, Avalon
Valley, is expected to commence construction in the second quarter of 1998.
On February 27, 1998, the Company purchased a 32 acre tract of land in
Danbury, Connecticut for $3,271,000. Construction of a new 135 apartment home
community, Avalon Lake, commenced in the first quarter of 1998.
On March 25, 1998, the Company purchased a 22.5 acre tract of land in
Wilmington, Massachusetts for $1,500,000. Construction of a new 204 apartment
home community, Avalon Oaks, will commence in the second quarter of 1998.
20
<PAGE> 23
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of the communities is presently subject to
any material litigation nor, to the Company's knowledge, is any litigation
threatened against the Company or any of the communities, other than routine
actions for negligence or other claims and administrative proceedings arising
in the ordinary course of business, some of which are expected to be covered by
liability insurance and all of which collectively are not expected to have a
material adverse effect on the business or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the year ended December 31, 1997.
21
<PAGE> 24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange
(the "NYSE") under the ticker symbol "AVN." The following table sets forth the
quarterly high and low closing prices per share of the Company's Common Stock
on the NYSE for the years ended December 31, 1997 and 1996, as reported by the
NYSE. On March 16, 1998, there were 361 holders of record of 43,139,559 shares
of the Company's Common Stock.
<TABLE>
<CAPTION>
1997 1996
------------------------------- -------------------------------
CLOSING PRICE CLOSING PRICE
------------------- DIVIDENDS ------------------- DIVIDENDS
QUARTER ENDED HIGH LOW PAID HIGH LOW PAID
- ------------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
March 31 $29.250 $26.750 $0.38 $23.000 $20.875 $0.37
June 30 $28.625 $26.250 $0.38 $22.125 $20.375 $0.37
September 30 $29.750 $27.438 $0.38 $23.750 $21.500 $0.37
December 31 $31.250 $28.938 $0.39 $29.000 $23.125 $0.38
</TABLE>
On January 22, 1998, the Company declared a cash dividend on its
Common Stock of $.39 per share for the fourth quarter of 1997. The dividend
was paid on February 17, 1998 to all stockholders of record as of February 6,
1998. The Company expects to continue its policy of paying regular quarterly
cash dividends. However, dividend distributions will be declared at the
discretion of the Board of Directors and will depend on actual Funds from
Operations of the Company, its financial condition, capital requirements, the
annual distribution requirements under the REIT provisions of the Code and such
other factors as the Board of Directors may deem relevant. The Board of
Directors may modify the Company's dividend policy from time-to-time.
The Company has an optional Dividend Reinvestment and Stock Purchase
Plan (the "Plan") which allows holders of Common Stock to acquire additional
stock by automatically reinvesting dividends. Common Stock is acquired pursuant
to the Plan at a price equal to 98% of the market price of such stock, without
payment of any brokerage commission or service charge on such purchases. The
Plan also allows stockholders to purchase a limited amount of additional stock
at 100% of the market price of such stock by making optional cash payments
without payment of any brokerage commission or service charge on such
purchases. Stockholders who do not participate in the Plan continue to receive
cash dividends as declared.
On December 16, 1996, the Company entered into an Agreement of
Limited Partnership of Avalon Ballston Associates L.P. (the "Ballston
Partnership"), the general partner of which is Avalon Ballston II, Inc. a
wholly owned subsidiary of the Company for the purpose of acquiring the Avalon
at Ballston - Quincy and Vermont community. In connection with the formation
of the Ballston Partnership, 25,271 units of limited partnership interest
("Ballston OP Units") were issued to the existing partners of the contributor
of the community.
On November 7, 1997 the Company entered into an Agreement of
Limited Partnership of Avalon DownREIT V, L.P. (the "DownREIT V Partnership"),
the general partner of which is Avalon DownREIT V, Inc., a wholly-owned
subsidiary of the Company, for the purpose of acquiring certain communities.
On November 26, 1997 the limited partnership agreement was amended and 68,608
units of limited partnership interest (the "DownREIT V OP Units") were issued
to the existing partners of the contributor of the Avalon at Westmont
acquisition. The limited partnership agreement was amended on December 22,
1997 to provide for the issuance of 511,309 DownREIT V OP Units to existing
partners of the contributor of the TCR Communities.
22
<PAGE> 25
All Ballston OP Units and DownREIT V OP Units (collectively, the "OP
Units") were issued pursuant to an exemption from registration provided in Rule
506 of Regulation D under the Securities Act of 1933, as amended (the
"Securities Act"). Under the terms of the limited partnership agreements,
holders of the OP Units have the right to require the partnerships to redeem
their OP Units for cash, subject to certain conditions. The Company may,
however, elect to deliver an equivalent number of shares of common stock to the
holders of OP Units in satisfaction of the partnership obligation to redeem the
OP Units for cash. As of December 31, 1997, no OP Units have been redeemed by
the Company
ITEM 6. SELECTED FINANCIAL DATA
The following table below provides historical consolidated financial,
operating and other data for the Company and the Predecessor. The table should
be read with the consolidated financial statements of the Company and the notes
included in this report.
<TABLE>
<CAPTION>
COMPANY(1) PREDECESSOR(1)
-------------------------------------------------------------- --------------
YEARS ENDED 11-18-93 1-1-93
------------------------------------------------- THROUGH THROUGH
12-31-97 12-31-96 12-31-95 12-31-94 12-31-93 11-17-93
---------- ---------- ---------- ---------- ---------- --------------
(Dollars in thousands, except per share information)
<S> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION:
Revenue:
Rental income $ 169,442 $ 123,354 $ 94,821 $ 71,756 $ 7,241 $ 50,102
Management fees 1,029 1,439 1,926 2,077 211 1,344
Other income 633 420 466 468 21 410
---------- ---------- ---------- ---------- ---------- --------
Total revenue 171,104 125,213 97,213 74,301 7,473 51,856
---------- ---------- ---------- ---------- ---------- --------
Expenses:
Operating expenses 61,058 47,074 35,998 27,808 2,770 21,620
Interest expense 16,977 9,545 11,056 5,687 632 24,557
Depreciation and amortization 29,113 20,956 16,558 12,342 1,247 10,851
General and administrative 5,093 3,438 3,132 2,354 200 1,341
Development costs write-off 650 450 400 400 47 --
---------- ---------- ---------- ---------- ---------- --------
Total expenses 112,891 81,463 67,144 48,591 4,896 58,369
---------- ---------- ---------- ---------- ---------- --------
Equity in income of
unconsolidated joint ventures 5,689 1,025 440 701 44 344
Interest income 1,346 887 953 872 118 599
Investment interest expense -- -- -- -- -- (204)
Minority interest 174 495 633 733 44 --
---------- ---------- ---------- ---------- ---------- --------
Income (loss) before gain on sale of
communities and extraordinary items 65,422 46,157 32,095 28,016 2,783 (5,774)
Gain on sale of communities 677 7,850 -- -- -- --
---------- ---------- ---------- ---------- ---------- --------
Income (loss) before extraordinary items 66,099 54,007 32,095 28,016 2,783 (5,774)
Extraordinary items (1,183) (2,356) (1,158) -- -- 10,194
---------- ---------- ---------- ---------- ---------- --------
Net income 64,916 51,651 30,937 28,016 2,783 4,420
Dividends attributable to preferred stock (19,656) (10,422) -- -- -- --
---------- ---------- ---------- ---------- ---------- --------
Net income available to common stockholders $ 45,260 $ 41,229 $ 30,937 $ 28,016 $ 2,783 $ 4,420
========== ========== ========== ========== ========== ========
PER COMMON SHARE AND SHARE INFORMATION:
Income before extraordinary items -- basic(2) $ 1.26 $ 1.42 $ 1.13 $ 1.10 $ 0.12 $ --
Income before extraordinary
items -- diluted(2) $ 1.26 $ 1.41 $ 1.13 $ 1.09 $ 0.12 $ --
Net income -- basic(2) $ 1.23 $ 1.34 $ 1.09 $ 1.10 $ 0.12 $ --
Net income -- diluted(2) $ 1.22 $ 1.34 $ 1.09 $ 1.09 $ 0.12 $ --
Cash dividends paid(2) $ 1.53 $ 1.49 $ 1.46 $ 1.08 $ 0.17 $ --
Weighted average shares
outstanding -- basic(2) 36,762,781 30,739,504 28,365,427 25,486,932 22,432,494 N/A
Weighted average shares
outstanding -- diluted(2) 37,006,148 30,836,193 28,410,803 25,602,032 22,432,494 N/A
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
COMPANY(1) PREDECESSOR(1)
-------------------------------------------------------------- --------------
YEARS ENDED 11-18-93 1-1-93
------------------------------------------------- THROUGH THROUGH
12-31-97 12-31-96 12-31-95 12-31-94 12-31-93 11-17-93
---------- ---------- ---------- ---------- ---------- --------------
(Dollars in thousands, except per share information)
<S> <C> <C> <C> <C> <C> <C>
OTHER INFORMATION:
Funds from Operations(3) $ 73,525 $ 54,622 $ 46,879 $ 39,485 $ 3,943 $ 4,588
Gross EBITDA(4) $ 110,166 $ 75,771 $ 58,756 $ 45,173 $ 4,544 $ 29,239
Total apartment communities(5) 64 45 38 31 22 21
Total number of apartment homes(5) 19,318 13,368 11,255 9,847 7,294 7,044
Development Starts: Communities 6 4 7 4 -- --
Apartment Homes 1,539 1,528 1,178 1,141 -- --
Developments Completed: Communities 7 6 1 3 -- --
Apartment Homes 1,985 1,390 246 958 -- --
Acquisitions Completed: Communities 15 6 7 6 1 --
Apartment Homes 3,884 1,765 1,304 1,594 250 --
Dispositions Completed: Communities 1 2 -- -- -- --
Apartment Homes 306 518 -- -- -- --
BALANCE SHEET INFORMATION:
Real estate, before accumulated depreciation $1,534,986 $1,081,906 $ 782,433 $ 593,632 $ 426,570 $ --
Total assets $1,529,703 $1,082,771 $ 786,711 $ 602,558 $ 451,851 $ --
Notes payable and Unsecured Facilities $ 506,129 $ 310,606 $ 340,686 $ 162,265 $ 94,648 $ --
CASH FLOW INFORMATION:
Net cash provided by operating activities $ 93,649 $ 65,841 $ 56,314 $ 36,453 $ 4,426 $ 6,984
Net cash used in investing activities $ (421,420) $ (261,033) $ (189,582) $ (154,252) $ (168,915) $(28,971)
Net cash provided by financing activities $ 320,252 $ 207,632 $ 132,207 $ 114,304 $ 170,846 $ 11,901
</TABLE>
24
<PAGE> 27
Notes to Selected Financial Data
(1) See consolidated financial statements of the Company and the related notes
included in this report.
(2) Share and per share information is only presented for the Company because
no common stock was outstanding during periods presented for the
Predecessor. The first full year operating as a public company was 1994
and the timing of dividend declarations and payments was such that only
three dividends were paid in 1994.
(3) 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 in
the consolidated financial data presented herein. 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 GAAP),
excluding gains (or losses) from debt restructuring and sales 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 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. The calculation of FFO for the periods
presented is reflected in the following table:
SUMMARY CALCULATION OF FUNDS FROM OPERATIONS
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
-------------------------------------------------------------- -----------
YEARS ENDED 11-18-93 1-1-93
------------------------------------------------- THROUGH THROUGH
12-31-97 12-31-96 12-31-95 12-31-94 12-31-93 11-17-93
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 64,916 $ 51,651 $ 30,937 $ 28,016 $ 2,783 $ 4,420
Depreciation (real estate
related) 27,360 18,566 14,468 11,153 1,122 10,083
Joint venture adjustments 399 321 316 316 38 279
Preferred stock dividends (19,656) (10,422) -- -- -- --
Gain on sale of communities (677) (7,850) -- -- -- --
Extraordinary items 1,183 2,356 1,158 -- -- (10,194)
---------- ---------- ---------- ---------- ---------- ----------
Funds from Operating $ 73,525 $ 54,622 $ 46,879 $ 39,485 $ 3,943 $ 4,588
========== ========== ========== ========== ========== ==========
Weighted average
shares outstanding-basic 36,762,781 30,739,504 28,365,427 25,486,932 22,432,494 --
========== ========== ========== ========== ========== ==========
</TABLE>
(4) Gross EBITDA represents earnings before interest, income taxes,
depreciation and amortization, gain on sale of communities and
extraordinary items. Gross EBITDA is relevant to an understanding of the
economics of the Company because it indicates cash flow available from
Company operations to service fixed obligations. Gross EBITDA should not
be considered as an alternative to operating income, as determined in
accordance with GAAP, as an indicator of the Company's operating
performance, or to cash flows from operating activities (as determined in
accordance with GAAP) as a measure of liquidity. See "Communities" for
property EBITDA and the related definition.
(5) These amounts include communities and apartment homes only after
stabilized occupancy has occurred. A community is considered by the
Company to have achieved stabilized occupancy on the earlier of (i) the
first day of any month in which the community reaches 94% physical
occupancy or (ii) one year after completion of construction. These
amounts also include Falkland Chase, which has 450 apartment homes,
Avalon Run, which has 426 apartment homes and Avalon Grove, which has 402
apartment homes, all of which are joint venture investments.
25
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K 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 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 not be successful in managing its
current growth in the number of apartment communities and the related growth of
its business operations; the Company's expansion into new geographic market
areas may not produce financial results that are consistent with its historical
performance; acquisitions of portfolios of apartment communities may result in
the Company acquiring communities that are more expensive to manage and
portfolio acquisitions may not be successfully completed, resulting in charges
to earnings; the Company may fail to secure or 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.
OVERVIEW
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included in this report.
The Company's operations consist of the development, construction,
acquisition and operation of apartment communities in the Mid-Atlantic,
Northeast and the Midwest regions of the United States. The Company also
recently announced plans to expand to certain high barrier-to-entry markets of
the West Coast. As of December 31, 1997, the Company held a fee simple
ownership interest in 52 operating communities (one of which, Avalon at Center
Place, is on land subject to a 149 year land lease), a general partnership
interest in three other operating communities (a 50% interest in Falkland
Chase, a 49% interest in Avalon Run, and a 50% interest in Avalon Grove), a 99%
general partner interest in two partnerships structured as DownREITs (Avalon at
Ballston Quincy and Avalon at Ballston Vermont, which are operated as a single
community, six communities acquired from Trammell Crow Residential - Midwest
and a single community located in Westmont, Illinois) and a 100% interest in a
senior participating mortgage note secured by another operating community
(Avalon Arbor) which is accounted for as an investment in real estate. The
Company also holds a fee simple ownership interest in nine Development
Communities. The existing DownREITs have been structured so that substantially
all of the economic interests of these partnerships accrue to the benefit of
the Company. The Company believes that it is unlikely that the limited
partners in these partnerships will receive any financial return on their
limited partnership interests other than the stated distributions on their
Units of the Operating Partnerships ("Units") or as a result of the possible
future conversion of their Units into shares of Common Stock. The DownREIT
partnerships are consolidated for financial reporting purposes.
On March 8, 1998, the Company announced that it has entered into a
definitive strategic merger agreement with Bay Apartment Communities, Inc.
("Bay"), pursuant to which the Company will be merged into Bay, the surviving
entity (the "Merger"). Under the terms of the agreement, each outstanding
common share of the Company will be exchanged for 0.7683 shares of common stock
of Bay. The Merger will be structured as a purchase of the Company by Bay for
accounting purposes. The Merger is expected to close in June 1998 and is
26
<PAGE> 29
subject to the approval of both companies' shareholders and other customary
regulatory conditions. There can be no assurance that the Merger will be
consummated, that the required conditions to closing will be met, or that the
Merger will be not terminated. The surviving company, to be named Avalon Bay
Communities, Inc. (the "New Company"), will own 140 apartment communities
containing 40,506 apartment homes in 29 markets in 15 states and the District
of Columbia, based on each company's current portfolio and assuming the
scheduled completion of 16 apartment communities under development.
On March 8, 1998, the Company announced that it is has entered into a
definitive agreement to acquire selected assets on a presale basis from
Trammell Crow Residential - Pacific Northwest (TCR-NW). The presale
acquisitions are expected to be completed during the next 24 to 36 months. The
acquisitions include seven communities in the Seattle, Washington market and
one community in the Portland, Oregon market for a total investment by the
Company of up to $279 million. Together, these eight communities contain 2,411
apartment homes. The Company will manage these communities after acquiring
ownership.
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, all occupied apartment homes owned are
included in the calculation of weighted average occupied apartment homes for
each comparable reporting period. For communities in the initial lease-up
phase, only apartment homes that are completed and occupied are included in the
weighted average number of occupied apartment homes calculation for each
reporting period.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
The Company's principal markets are characterized by high
barriers-to-entry and restrictive zoning regulations, and it often requires
several years to obtain entitlements to build an apartment community. At
December 31, 1997, Management had positioned the Company's portfolio of
Stabilized Communities to a physical occupancy level of 95.9%. For the year
ended December 31, 1997, these communities achieved an average economic
occupancy of 95.9% compared to 95.2% for 1996. This high occupancy was
achieved through aggressive marketing efforts combined with limited and
targeted pricing adjustments. 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, rental revenue and net income gains from Stabilized
Communities will continue primarily through higher rental rates and enhanced
operating cost leverage provided by high occupancy, rather than through
occupancy gains. Although Management believes the current occupancy levels can
be sustained for the foreseeable future at current rental rates, no assurance
can be given in this regard.
Income before gain on sale of communities and extraordinary items
increased $19,265,000 (41.7%) to $65,422,000 in 1997 from $46,157,000 in 1996.
The principal reasons for this increase are additional operating income from
communities developed or acquired during 1996 and 1997 as well as growth in
operating income from existing communities resulting principally from increases
in rental revenue. The notable reasons for these increases are discussed in
the following paragraphs.
Rental income increased $46,088,000 (37.4%) to $169,442,000 in 1997 from
$123,354,000 in 1996. Of this increase, $3,766,000 relates to rental revenue
increases from Established Communities and $42,322,000 is attributable to the
addition of newly completed or acquired apartment homes.
Overall Portfolio - The $46,088,000 increase in rental income 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. The weighted average number
of occupied apartment homes increased from 11,043 apartment homes during
1996 to 14,450 apartment homes during 1997 as a result of the
development and acquisition of new communities and an increase in
overall occupancy of Established Communities. Weighted average monthly
27
<PAGE> 30
revenue per occupied apartment home increased $71 (8.0%) from $893 in
1996 to $964 in 1997. Average economic occupancy increased .7% from
95.2% in 1996 to 95.9% in 1997.
Established Communities - Rental revenue increased $3,766,000 (3.9%) due
to strengthening market conditions and the resulting impact on rents.
Weighted average monthly revenue per occupied apartment home increased
$31 (3.4%) from $899 in 1996 to $930 in 1997. Average economic
occupancy increased .5% from 95.7% to 96.2%. When combined with a
slight decline in other income, total revenue increased $3,744,000
(3.8%) from $97,360,000 in 1996 to $101,104,000 in 1997.
Management fees decreased $410,000 (28.5%) to $1,029,000 in 1997 from
$1,439,000 in 1996. The decrease is primarily due to a decline in the number
of apartment homes managed for third-party owners during 1997. This decline is
due to the cancellation of management contracts of some third-party communities
in 1996 and 1997 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 previously managed by the Company for third-party owners.
Operating expenses (including write-off of deferred development costs)
increased $14,184,000 (29.8%) to $61,708,000 in 1997 from $47,524,000 in 1996.
Overall Portfolio - This increase 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 such communities move from the initial construction and
lease-up phase to the stabilized operating phase.
Established Communities - Operating expenses increased $713,000 (2.2%)
to $33,173,000 in 1997 from $32,460,000 in 1996. This increase was
concentrated in the marketing, maintenance, and insurance categories,
partially offset by lower snow removal costs as a result of the mild
winter 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 $7,432,000 (77.9%) to $16,977,000 in 1997
from $9,545,000 in 1996. This increase is primarily attributable to higher
average outstanding balances under the Company's Unsecured Facilities 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 $8,157,000 (38.9%) to
$29,113,000 in 1997 from $20,956,000 in 1996. This increase reflects
additional depreciation expense for the increased number of acquired and
developed communities.
General and administrative increased $1,655,000 (48.1%) to $5,093,000 in
1997 from $3,438,000 in 1996. The increase is 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. Costs related to positioning
the Company for further geographic expansion are also present in 1997 expenses
and not in 1996.
Equity in income of unconsolidated joint ventures increased $4,664,000
to $5,689,000 in 1997 from $1,025,000 in 1996. This increase is principally
the result of non-recurring income from the Avalon Grove joint venture in which
the Company was allocated 100% of the lease-up period income in 1997.
Gain on sale of communities totaled $677,000 during 1997 as a result of
the sale of one apartment community in Frederick, Maryland compared to the gain
of $7,850,000 on the sale of two communities in 1996.
28
<PAGE> 31
Extraordinary items totaled $1,183,000 during 1997 and reflect the
write-off of unamortized deferred financing costs associated with the early
retirement of the Company's previous $165,000,000 unsecured credit facility.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Income before gain on sale of communities and extraordinary items
increased $14,062,000 (43.8%) to $46,157,000 in 1996 from $32,095,000 in 1995.
The principal reasons for this increase are additional operating income from
newly completed and acquired communities during 1995 and 1996 as well as growth
in operating income from Established Communities resulting principally from
increases in rental revenue. The notable reasons for these increases are
discussed in the following paragraphs.
Rental income increased $28,533,000 (30.1%) to $123,354,000 in 1996 from
$94,821,000 in 1995. Of this increase, $3,591,000 relates to rental revenue
increases from Established Communities and $24,942,000 is attributable to the
addition of newly completed or acquired apartment homes.
Overall Portfolio - The $28,533,000 increase in rental income 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. The weighted average number
of occupied apartment homes increased from 9,304 apartment homes during
1995 to 11,043 apartment homes during 1996 as a result of the
development and acquisition of new communities. Weighted average
monthly revenue per occupied apartment home increased $47 (5.5%) from
$846 in 1995 to $893 in 1996. Average economic occupancy decreased .6%
from 95.8% in 1995 to 95.2% in 1996.
Established Communities - Rental revenue increased $3,591,000 (4.4%) due
to strengthening market conditions and the resulting impact on rents and
occupancy. Weighted average monthly revenue per occupied apartment home
increased $41 (4.8%) from $849 in 1995 to $890 in 1996. Average
economic occupancy decreased .4% from 96.3% to 95.9%. When combined
with a slight decline in other income, total revenue increased by
$3,553,000 in 1996, a 4.3% increase from 1995.
Management fees decreased $487,000 (25.3%) to $1,439,000 in 1996 from
$1,926,000 in 1995. The decrease is primarily due to a decline in the number
of apartment homes managed for third-party owners in 1996. This decline is due
to the sale and cancellation of management contracts of some third-party
communities in 1995 and 1996 as well as the acquisition of two Current
Communities in the third quarter of 1995 and one Current Community in the
second quarter of 1996 that were previously managed by the Company for
third-party owners prior to their acquisition.
Operating expenses (including write-off of deferred development costs)
increased $11,126,000 (30.6%) to $47,524,000 in 1996 from $36,398,000 in 1995.
Overall Portfolio - This increase 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 such communities move from the initial construction and
lease-up phase to the operating phase. The increased costs of snow
removal and other weather related expenses as a result of the severe
winter during the first quarter of 1996 also contributed to the
increase.
Established Communities - Operating expenses increased $1,202,000 (4.4%)
to $28,438,000 from $27,236,000 in 1995. This increase was concentrated
in the maintenance category principally due to the severe winter weather
throughout the Northeast and Mid-Atlantic regions during the first
quarter of 1996 as well as increases in the property taxes for newly
stabilized development communities and marketing expenses.
Interest expense decreased $1,511,000 (13.7%) to $9,545,000 in 1996 from
$11,056,000 in 1995. This decrease is primarily attributable to the sale of
4,872,000 shares of the Company's Common Stock, the sale of 4,455,000 shares of
the Company's Series A Cumulative Redeemable Preferred Stock and the sale of
4,300,000 shares of the Company's Series B Cumulative Redeemable Preferred
Stock in 1996, as the net cash proceeds from the sales were used principally to
retire indebtedness under the Company's Unsecured Facilities and variable rate
construction loans and to repay the mortgage note encumbering the Avalon at
Carter Lake community. Lower
29
<PAGE> 32
short-term interest rates under the Unsecured Facilities due to negotiated rate
reductions as well as lower market interest rates also contributed to the
decline. Finally, an increase in capitalized interest expense due to an
increase in the number of apartment homes under construction and lower interest
and credit enhancement costs in connection with the completion of the
tax-exempt, credit enhancement facility with Fannie Mae are other reasons for
the overall decline.
Depreciation and amortization increased $4,398,000 (26.6%) to
$20,956,000 in 1996 from $16,558,000 in 1995. This increase reflects
additional depreciation expense for recently acquired and developed communities
and the amortization of the costs related to the issuance of tax-exempt
custodial receipts in May 1995 as well as the costs related to the closing of
the Unsecured Facility and the issuance of $100,000,000 of unsecured senior
notes in September 1995.
General and administrative increased $306,000 (9.8%) to $3,438,000 in
1996 from $3,132,000 in 1995. This increase is primarily due to increased
compensation expense from the introduction of the restricted stock grant
program under the Amended and Restated 1995 Equity Incentive Plan (and related
legal and proxy costs) as well as staff additions related to growth in the
Company's portfolio and the implementation of the company-wide systems
enhancement program.
Equity in income of unconsolidated joint ventures increased $585,000 to
$1,025,000 in 1996 from $440,000 in 1995. This increase is principally the
result of non-recurring income from the anticipated Avalon Grove joint venture
in which the Company is allocated 100% of the lease-up period income.
Increased net income from the Falkland Partners joint venture due to an
increase in rental revenue as well as the income from the Town Close Associates
joint venture that was formed in June 1995 also contributed to the increase.
Gain on sale of communities totaled $7,850,000 during 1996 as a result
of the sale of two apartment communities near Hartford, Connecticut.
Extraordinary items totaled $2,356,000 during 1996 and reflect the
write-off of unamortized deferred financing costs associated with the
refinancing of tax-exempt bonds in conjunction with the completion of the new
credit enhancement facility with Fannie Mae.
30
<PAGE> 33
DISCUSSION OF CAPITALIZED COMMUNITY IMPROVEMENTS AND EXPENSED TURNOVER ("MAKE
READY") COSTS
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 in 1997 resulted in capitalized
expenditures for Stabilized Communities of approximately $2,286,000 or $155 per
apartment home. For the year ended December 31, 1997, the Company charged to
maintenance expense, including carpet and appliance replacements, a total of
approximately $12,700,000 for Stabilized Communities or $863 per apartment
home. Management anticipates that capitalized costs per 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 1997.
31
<PAGE> 34
EXPENDITURES FOR COMMUNITY AND CORPORATE UPGRADES (CAPITALIZED) AND COMMUNITY
MAINTENANCE (EXPENSED)
(Dollars in thousands, except per home data)
<TABLE>
<CAPTION>
1997 Capitalized Costs
-----------------------------------------
Acquisitions, Non-Revenue
Construction Generating Capx
Number Balance at Balance at and Revenue -------------------
Community of Homes 12-31-96 (1) 12-31-97 (1) Generating Costs Total Per Home
- ----------------------------- ------------ -------------- -------------- -------------------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
STABILIZED
- ----------
Avalon Watch 512 $ 28,340 $ 28,423 $ -- $ 83 $ 162
Avalon Pavilions 932 56,523 56,693 -- 170 182
Avalon Glen 238 30,077 30,244 32 135 567
Avalon Walk I 430 34,505 34,587 26 56 130
Avalon Walk II 334 23,597 23,740 -- 143 428
Avalon View 288 17,773 17,812 -- 39 135
Avalon Park 372 19,717 19,948 118 113 304
Avalon at Ballston -
Washington Towers 344 36,797 36,893 -- 96 279
Avalon at Gayton 328 9,830 9,945 35 80 244
Avalon at Hampton I 186 3,702 3,764 26 36 194
Avalon at Hampton II 231 8,144 8,229 -- 85 368
Avalon at Dulles 236 11,599 11,706 74 33 140
Avalon Knoll 300 7,905 8,067 114 48 160
Avalon Lea 296 16,101 16,130 -- 29 98
Avalon at Fairway Hills I 192 9,368 9,454 53 33 172
Avalon Ridge 432 25,030 25,269 156 83 192
Avalon at Symphony Glen 174 8,079 8,166 53 34 195
Avalon at Park Center 492 37,337 37,658 142 179 364
4100 Mass. Avenue 308 34,879 34,931 15 37 120
Avalon Woods 268 8,235 8,319 -- 84 313
Avalon at Carter Lake 259 11,502 11,560 -- 58 224
Avalon Pointe 140 7,748 7,841 45 48 343
Avalon Landing 158 9,261 9,303 -- 42 266
Avalon Birches 312 13,419 13,461 3 39 125
Avalon at Lake Arbor 209 11,900 11,950 1 49 234
Avalon at Decoverly 368 30,978 31,151 109 64 174
Avalon Summit 245 16,152 16,289 128 9 37
Avalon Towers 109 15,826 15,943 -- 117 1,073
Longwood Towers 307 16,620 21,501 4,868 13 42
Avalon Fields 192 14,262 14,298 -- 36 188
Avalon West 120 10,624 10,810 173 13 108
Avalon Chase 360 23,615 23,661 -- 46 128
Avalon Pines 174 8,578 8,659 54 27 155
Avalon at Fairway Hills II 527 33,807 33,924 94 23 44
Avalon at Boulders 284 16,038 16,087 -- 49 173
AutumnWoods 420 30,474 30,631 149 8 19
Avalon Run East 206 16,002 16,233 231 -- --
Avalon Station 223 11,838 12,001 163 -- --
Avalon Cove 504 85,831 90,291 4,460 -- --
Avalon Crossing 132 13,387 13,778 391 -- --
Avalon Springs 102 13,628 15,775 2,147 -- --
Avalon at Ballston -
Vermont/Quincy (2) 454 -- 46,722 46,707 15 33
Avalon at Center Place (2) 225 -- 26,424 26,415 9 40
Avalon at Providence Park (2) 140 -- 11,066 11,056 10 71
Avalon Gates 340 30,348 35,369 5,021 -- --
Avalon at Lexington 198 14,117 14,784 667 -- --
Avalon Green 105 12,294 12,439 130 15 --
Avalon Commons 312 17,603 31,732 14,129 -- --
Avalon Crescent 558 36,883 56,625 19,742 -- --
Avalon Court 154 5,048 17,231 12,183 -- --
------------ ----------- ----------- ------------ ------- --------
14,730 955,321 1,107,517 149,910 2,286 155
============ =========== =========== ============ ======= ========
<CAPTION>
1997
Maintenance Expensed
----------------------
Community Total Per Home
- ----------------------------- -------- ------------
<S> <C> <C>
STABILIZED
- ----------
Avalon Watch $ 423 $ 826
Avalon Pavilions 532 571
Avalon Glen 304 1,277
Avalon Walk I 285 663
Avalon Walk II 234 701
Avalon View 365 1,267
Avalon Park 410 1,102
Avalon at Ballston -
Washington Towers 348 1,012
Avalon at Gayton 313 954
Avalon at Hampton I 215 1,156
Avalon at Hampton II 232 1,004
Avalon at Dulles 279 1,182
Avalon Knoll 312 1,040
Avalon Lea 300 1,014
Avalon at Fairway Hills I 194 1,010
Avalon Ridge 412 954
Avalon at Symphony Glen 217 1,247
Avalon at Park Center 382 776
4100 Mass. Avenue 383 1,244
Avalon Woods 207 772
Avalon at Carter Lake 285 1,100
Avalon Pointe 159 1,136
Avalon Landing 205 1,297
Avalon Birches 223 715
Avalon at Lake Arbor 306 1,464
Avalon at Decoverly 257 698
Avalon Summit 223 910
Avalon Towers 235 2,156
Longwood Towers 378 1,231
Avalon Fields 148 771
Avalon West 107 892
Avalon Chase 372 1,033
Avalon Pines 116 667
Avalon at Fairway Hills II 472 896
Avalon at Boulders 275 968
AutumnWoods 330 786
Avalon Run East 122 592
Avalon Station 165 740
Avalon Cove 282 560
Avalon Crossing 130 985
Avalon Springs 79 775
Avalon at Ballston -
Vermont/Quincy (2) 433 954
Avalon at Center Place (2) 142 631
Avalon at Providence Park (2) 110 786
Avalon Gates 135 397
Avalon at Lexington 212 1,071
Avalon Green 187 1,781
Avalon Commons 104 333
Avalon Crescent 156 280
Avalon Court 19 123
-------- ------
12,714 863
======== ======
</TABLE>
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<PAGE> 35
EXPENDITURES FOR COMMUNITY AND CORPORATE UPGRADES (CAPITALIZED) AND COMMUNITY
MAINTENANCE (EXPENSED) - CONTINUED
(Dollars in thousands, except per home data)
<TABLE>
<CAPTION>
Number Balance at Balance at
Community of Homes 12-31-96 (1) 12-31-97 (1)
- ------------------------------------------ ------------ -------------- --------------
<S> <C> <C>
NEWLY ACQUIRED
- --------------
Village Park of Westmont (2) 400 -- 25,743
Village Park of Troy (2) 544 -- 31,290
Avalon Heights (2) 225 -- 15,308
Avalon at Willow Lake (2) 230 -- 14,944
Avalon at Geist (2) 146 -- 12,080
Avalon at Montgomery (2) 264 -- 15,153
Avalon Devonshire (2) 498 -- 36,143
Avalon at Danada Farms (2) 295 -- 37,571
Avalon at Stratford Green (2) 192 -- 21,572
Aspen Meadows (2) 214 -- 12,435
----------- ------------- -----------
3,008 -- 222,239
----------- ------------- -----------
NEW DEVELOPMENTS 2,422 70,678 154,762
- ---------------- ----------- ------------- -----------
OTHER
- -----
Longwood Towers - Renovation -- 6,829 15,876
Avalon Arbor (4) 302 27,822 28,461
Avalon Farm (5) -- 17,332 --
Corporate Level Expenditures -- 3,924 6,131
----------- ------------- -----------
Grand Total 20,462 (6) 1,081,906 1,534,986
=========== ============= ===========
<CAPTION>
1997 Capitalized Costs
-----------------------------------------
Acquisitions, Non-Revenue 1997
Construction Generating Capx Maintenance Expensed
and Revenue ------------------- ----------------------
Community Generating Costs Total Per Home Total Per Home
- ------------------------------------------ -------------------- ------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
NEWLY ACQUIRED
- --------------
Village Park of Westmont (2) 25,743 -- -- -- --
Village Park of Troy (2) 31,290 -- -- -- --
Village Green of Madison Heights (2) 15,308 -- -- -- --
Avalon at Willow Lake (2) 14,944 -- -- -- --
Avalon at Geist (2) 12,080 -- -- -- --
Avalon at Montgomery (2) 15,153 -- -- -- --
Avalon Devonshire (2) 36,143 -- -- -- --
Avalon at Danada Farms (2) 37,571 -- -- -- --
Avalon at Stratford Green (2) 21,572 -- -- -- --
Aspen Meadows (2) 12,435 -- -- -- --
------------ -------- -------- --------- -------
222,239 -- -- -- --
------------ -------- -------- --------- -------
NEW DEVELOPMENTS 84,084 -- -- 63 N/A
- ---------------- ------------ -------- -------- --------- -------
OTHER
- -----
Longwood Towers - Renovation 9,047 (3) -- -- -- --
Avalon Arbor (4) 639 -- N/A 349 1,156
Avalon Farm (5) -- 36 N/A 166 N/A
Corporate Level Expenditures 2,207 -- N/A -- --
------------ ------- -------- --------- -------
Grand Total 468,126 2,322 N/A 13,292 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) Represents renovation costs incurred.
(4) Ownership through ownership of the Avalon Arbor mortgage note. See Note
5 to the consolidated financial statements. Increase in capitalized
value relates primarily to accrued interest and does not reflect
capitalized community upgrades.
(5) Sold in 1997.
(6) Excludes Falkland Chase, Avalon Run and Avalon Grove, a total of 1,278
apartment homes owned by joint ventures in which the Company holds a 50%
interest, 49% interest and 50% interest, respectively.
33
<PAGE> 36
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, occupancy levels and the Company's
expenses with respect to such apartment homes. 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 believes that its
principal short-term liquidity needs are to fund normal recurring operating
expenses, debt service requirements and the minimum distribution required to
maintain the Company's REIT qualification under the Code. The Company
anticipates that these needs will be fully funded from cash flows provided by
operating activities. Any short-term liquidity needs not provided by current
operating cash flows would be funded from the Company's Unsecured Facilities.
Cash flows used in investing activities and provided by financing
activities have historically been dependent on the number of apartment homes
under active development and construction during any given period. Cash and
cash equivalents decreased $7,519,000 from $14,241,000 at December 31, 1996 to
$6,722,000 at December 31, 1997 due to the excess of cash flow used in
investing activities over cash provided by financing and operating activities._
Net cash provided by operating activities increased $27,808,000
from $65,841,000 to $93,649,000 primarily due to an increase in operating
income from newly developed and acquired communities and Established
Communities and improved operating margins from the absence in 1997 of
severe winter weather.
Net cash flows used in investing activities increased $160,387,000
from $261,033,000 to $421,420,000, primarily due to the acquisition of
fifteen communities for $310,917,000 in 1997, offset by the net proceeds
of $16,577,000 from the sale of one apartment community in 1997 compared
to the acquisition of six communities for $112,512,000 in 1996, offset by
the net proceeds of $31,663,000 from the sale of two apartment
communities in 1996.
Net cash provided by financing activities increased $112,620,000
from $207,632,000 to $320,252,000, primarily due to the net proceeds
received from the completion of the sale of 8,403,000 shares of Common
Stock and the issuance of $110,000,000 unsecured senior notes and
increased borrowings under the Unsecured Facilities in 1997, offset by an
increase in dividends paid.
Cash and cash equivalents increased $12,440,000 from $1,801,000 at
December 31, 1995 to $14,241,000 at December 31, 1996 due to the excess of cash
provided by financing and operating activities over cash flow used in investing
activities, primarily due to the issuance of $351,000,000 of equity and debt
securities in 1996 and the sale of two communities in the fourth quarter of
1996.
Net cash provided by operating activities increased $9,527,000
from $56,314,000 to $65,841,000 primarily due to an increase in operating
income from newly developed and acquired communities and Established
Communities, offset by a decline in margins due to severe winter weather
in 1996.
Net cash flows used in investing activities increased $71,451,000
from $189,582,000 to $261,033,000, due to an increase in the number of
apartment homes under development from an average of 2,030 in 1995 to
2,910 in 1996 and the acquisition of six communities for $109,025,000 in
1996 compared to the acquisition of seven communities for $87,958,000 in
1995, offset by the net proceeds of $31,663,000 from the sale of two
apartment communities in 1996.
Net cash provided by financing activities increased $75,425,000
from $132,207,000 to $207,632,000, primarily due to the net proceeds
received from the completion of the sale of 4,872,000 shares of the
Company's Common Stock and the sale of 8,755,000 shares of the Company's
Series A and Series B Cumulative Redeemable Preferred Stock in 1996 and
increased borrowings under the Unsecured Facilities, offset by an
increase in dividends paid.
34
<PAGE> 37
The Company's 7-3/8%, 6-7/8% and 6-5/8% unsecured senior notes will
mature in 2002, 2007 and 2005, respectively. Additionally, mortgage
indebtedness on the Avalon Pines and Avalon Walk II apartment communities will
mature in 2003 and 2004, respectively. Since Management anticipates that no
significant 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 2005.
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 $1.1 billion. Approximately $366.0 million was raised in
capital markets offerings in 1997. These offerings include:
<TABLE>
<CAPTION>
Date Description of Offerings
---- ------------------------
<S> <C>
July 1994 $33.7 million tax-exempt bond offering
August 1994 $102 million public offering of Common Stock
May 1995 $50.6 million tax-exempt unsecured custodial receipts offering
September 1995 $100 million unsecured senior notes offering
January 1996 $47.3 million direct placement of Common Stock to institutional investors
February 1996 $111.4 million 9% Series A Cumulative Redeemable Preferred Stock offering
October 1996 $107.5 million 8.96% Series B Cumulative Redeemable Preferred Stock offering
December 1996 $69.4 million public offering of Common Stock
December 1996 $8.8 million tax-exempt bond offering
April 1997 $75 million direct placement of Common Stock to an institutional investor
April 1997 $12.1 million tax-exempt bond offering
July 1997 $60.7 million public offering of Common Stock
December 1997 $108.2 million public offering of Common Stock
December 1997 $110 million unsecured senior notes offering
January 1998 $100 million unsecured senior notes offering
January 1998 $26.9 million direct placement of Common Stock to an institutional investor
</TABLE>
Management follows a focused strategy to help facilitate uninterrupted
access to capital. This strategy includes:
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 demand-supply 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. 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 help ensure that capital resources are
available to fund portfolio growth.
35
<PAGE> 38
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 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 December 31, 1997, $50,000,000 was borrowed,
$16,167,000 was used to provide letters of credit and $108,833,000 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 Facility 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 December 31, 1997, $3,214,000 of
available capacity was used to provide letters of credit and $21,500,000 was
borrowed under the Supplemental Unsecured Facility. Accordingly, the balance
that remains available at December 31, 1997 to be drawn under the Supplemental
Unsecured Facility is $25,286,000.
Interest Rate Protection Agreements
On October 8, 1997, the Company purchased interest rate protection for a
notional amount of $75,000,000. The Company realized a loss of $1,763,672
related to this interest rate protection that will be amortized as additional
interest expense over the term of the $110 million, 10-year senior note
offering completed on December 16, 1997, thereby increasing the effective rate
for the notes to 7.035% (see "Financing Transactions Completed").
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 agreement for $101,000. This agreement terminates October 31, 2002
and serves to place a ceiling on the interest rate on the bonds at 6.9% (see
"Financing Transactions Completed").
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 April 17, 1997, the Company completed a direct placement of 2,740,000
shares of its Common Stock to an institutional investor under its existing
shelf registration statement at a gross sales price of $27.375 per share. Net
cash proceeds of approximately $73,500,000 were used to retire indebtedness
under the Unsecured Facilities.
On April 28, 1997, the Company completed the loan closing related to the
tax-exempt financing for the Avalon Fields apartment community. The Community
Development Administration of Maryland issued $12,088,000 of thirty-year,
fixed-rate bonds at an all-in rate of 7.57%. The net cash proceeds from the
loan closing (approximately $11,565,000) were used to repay amounts outstanding
under the Unsecured Facilities.
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 variable-rate bonds will mature on June 15, 2026
and are credit enhanced by the Company's credit enhancement facility with
Fannie Mae.
36
<PAGE> 39
On December 9, 1997, the Company completed a public offering of
3,591,500 shares of common stock at a gross sales price of $30.125 per share.
The net cash proceeds from the offering of approximately $102,771,000 were used
primarily to repay amounts outstanding under the Unsecured Facilities.
On December 16, 1997, the Company completed a $110,000,000 offering of
unsecured senior notes. The notes bear an interest rate at 6.875% payable
semi-annually on June 15 and December 15 and will mature on December 15, 2007.
The notes were sold at a price of 99.821% par value to yield 6.9% to maturity
or a 110 basis point spread over the 10-year U.S. Treasury Note rate. The
Company used the net proceeds to repay amounts outstanding under the Unsecured
Facilities, and to purchase and develop additional apartment communities.
On January 22, 1998, the Company completed a $100,000,000 offering of
unsecured senior notes. The notes bear an interest rate at 6.625% payable
semi-annually on January 15 and July 15 and will mature on January 15, 2005.
The notes were sold at a price of 99.976% par value to yield 6.629% to maturity
or a 111 basis point spread over the 7-year U.S. Treasury Note rate. The
Company used the net proceeds of approximately $99,400,000 to repay amounts
outstanding under the Unsecured Facilities.
On January 27, 1998, the Company completed the sale of 923,856 shares of
Common Stock to The Prudential Insurance Company of America under its existing
shelf registration statement at a net purchase price of $29.09 per share. The
net proceeds of approximately $26,872,000 were used to retire indebtedness
under the Unsecured Facilities.
Registration Statements Filed in Connection with Financings
On February 24, 1997, the Company filed a shelf registration statement
with the Securities and Exchange Commission covering up to $350,000,000 of
securities. The registration statement provides for the issuance of Common
Stock, Preferred Stock, debt securities and warrants to purchase Common Stock.
This registration statement was used in connection with the April 28, 1997,
July 1, 1997 and December 9, 1997 offerings of Common Stock and the December
16, 1997 offering of unsecured senior notes and accordingly, no capacity
remains under this registration statement.
On December 17, 1997, the Company filed a shelf registration statement
with the Securities and Exchange Commission covering up to $400,000,000 of
securities. The registration statement provides for the issuance of Common
Stock, Preferred Stock, debt securities and warrants to purchase Common Stock.
Year 2000 Compliance
The Year 2000 compliance issue concerns the inability of computerized
information systems to accurately calculate, store or use a date after 1999.
This could result in a system failure or miscalculations causing disruptions of
operations. The Year 2000 issue affects virtually all companies and all
organizations.
The Company has conducted an assessment of its core internal and
external computer information systems and is taking the further necessary steps
to understand the nature and extent of the work required to make its systems,
in those situations in which the Company is required to do so, Year 2000
compliant. These steps may require the Company to modify, upgrade or replace
some of its internal financial and operational systems. The total cost of
bringing all internal systems, equipment and operations into Year 2000
compliance has not been fully quantified. The Company continues to evaluate
the estimated costs associated with these compliance efforts. While these
efforts involve additional costs, the Company believes, based on available
information, that these costs will not have a material adverse effect on its
business, financial condition or results of operations. While the Company
believes it will be Year 2000 compliant by December 31, 1999, if these efforts
are not completed on time or if the cost of updating or replacing the Company's
information systems exceeds the Company's current estimates, the Year 2000
issue could have a material adverse impact on the Company's ability to meet its
financial and reporting requirements. Further, no estimates can be made as to
any potential adverse impact resulting from the failure of third-party service
providers and vendors to prepare for the Year 2000. The Company is attempting
to identify those risks as well as to receive compliance certificates from all
third parties that have a material impact on the Company's operations, but the
cost and timing of third party Year 2000 compliance is not within the Company's
control and no assurance can be given with respect to the cost or timing of
such efforts or the potential effects of any failure to comply.
37
<PAGE> 40
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 expected
to be completed by the end of the second quarter of 1998 and is being funded by
advances under the Unsecured Facilities, operating cash flow or other financing
sources. 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 current
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 and as market conditions permit, 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 the 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):
38
<PAGE> 41
AVALON PROPERTIES, INC.
DEBT MATURITY SCHEDULE
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance Outstanding at
--------------------------
Community All-in Interest Rate Maturity Date 12-31-96 12-31-97
- ------------------------------------------ ------------------------- --------------- ------------ ----------
<S> <C> <C> <C> <C>
Tax-Exempt Bonds:
Fixed Rate
* Avalon Lea 8.02% Jun-2026 $ 16,782 $ 16,835
* Avalon Ridge 8.00% Jun-2026 26,724 26,815
* Avalon at Dulles 7.04% Jul-2024 12,360 12,360
* Avalon Hampton II 7.04% Jul-2024 11,550 11,550
* Avalon at Symphony Glen 7.06% Jul-2024 9,780 9,780
* Avalon View 7.55% Aug-2024 19,487 19,315
* Avalon at Lexington 6.56% Feb-2025 15,284 15,071
* Avalon Knoll 6.95% Jun-2026 14,070 13,917
* Avalon Landing 6.85% Jun-2026 6,969 6,892
* Avalon West 7.73% Dec-2036 8,771 8,731
* Avalon Fields 7.57% May-2027 -- 12,019
--------- ---------
141,777 153,285
Variable Rate
* Avalon at Fairway Hills I Jun-2026 11,500 11,500
* Avalon at Hampton I Jun-2026 8,060 8,060
* Avalon Pointe Jun-2026 6,387 6,387
* Avalon Devonshire Dec-2025 -- 27,305
--------- ---------
25,947 53,252
Conventional Loans:
Fixed Rate
* AutumnWoods (1) 9.25% Nov-1997 24,335 --
Unsecured Senior Notes 7.375% Sep-2002 99,869 99,892
Unsecured Senior Notes 7.035% Dec-2007 -- 109,803
* Avalon Pines 8.00% Dec-2003 5,529 5,433
* Avalon Walk II 8.93% Nov-2004 13,149 12,964
--------- ---------
142,882 228,092
Variable Rate-None -- --
--------- ---------
Total indebtedness - excluding Unsecured Facilities $ 310,606 $ 434,629
========= =========
<CAPTION>
Total Maturities
------------------------------------------------------------------
Community 1998 1999 2000 2001 2002 THEREAFTER
- ------------------------------------------ -------- ---------- --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Tax-Exempt Bonds:
Fixed Rate
* Avalon Lea $ -- $ -- $ -- $ -- $ -- $ 16,835
* Avalon Ridge -- -- -- -- -- 26,815
* Avalon at Dulles -- -- -- -- -- 12,360
* Avalon Hampton II -- -- -- -- -- 11,550
* Avalon at Symphony Glen -- -- -- -- -- 9,780
* Avalon View 230 290 330 350 373 17,742
* Avalon at Lexington 226 240 255 271 288 13,791
* Avalon Knoll 163 175 187 200 214 12,978
* Avalon Landing 83 89 95 101 108 6,416
* Avalon West 46 50 53 57 61 8,464
* Avalon Fields 127 137 147 157 169 11,282
------- ------- ------- ------- -------- ---------
875 981 1,067 1,136 1,213 148,013
Variable Rate
* Avalon at Fairway Hills I -- -- -- -- -- 11,500
* Avalon at Hampton I -- -- -- -- -- 8,060
* Avalon Pointe -- -- -- -- -- 6,387
* Avalon Devonshire -- -- -- -- -- 27,305
------- ------- ------- ------- -------- ---------
-- -- -- -- -- 53,252
Conventional Loans:
Fixed Rate
* AutumnWoods (1) -- -- -- -- -- --
Unsecured Senior Notes -- -- -- -- 99,892 --
Unsecured Senior Notes -- -- -- -- -- 109,803
* Avalon Pines 103 112 121 131 142 4,824
* Avalon Walk II 202 221 241 264 288 11,748
------- ------- ------- ------- -------- ---------
305 333 362 395 100,322 126,375
Variable Rate-None -- -- -- -- -- --
------- ------- ------- ------- -------- ---------
Total indebtedness - excluding Unsecured Facilities $ 1,180 $ 1,314 $ 1,429 $ 1,531 $101,535 $ 327,640
======= ======= ======= ======= ======== =========
</TABLE>
* Indicates loan is collateralized.
(1) Note repaid August 1997
39
<PAGE> 42
FUNDS FROM OPERATIONS
Management generally considers 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 the net income as presented in the consolidated
financial statements included elsewhere in this report. FFO is determined in
accordance with a resolution adopted by the Board of Governors of 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 sales 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.
The following table presents an analysis of Funds from Operations for
the periods presented (dollars in thousands):
40
<PAGE> 43
ANALYSIS OF 1997 AND 1996 FUNDS FROM OPERATIONS
<TABLE>
<CAPTION>
Three months ended Years ended
-------------------------------- ---------------------------
12-31-97 12-31-96 12-31-97 12-31-96
--------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
NET INCOME $ 18,121 $ 21,348 $ 64,916 $ 51,651
Depreciation (real estate related): 7,542 5,319 27,360 18,566
Joint venture adjustment 121 81 399 321
Gain on sale of communities -- (7,850) (677) (7,850)
Extraordinary items -- -- 1,183 2,356
Preferred stock dividends (4,914) (4,352) (19,656) (10,422)
--------------- -------------- ------------ ------------
FUNDS FROM OPERATIONS $ 20,870 $ 14,546 $ 73,525 $ 54,622
=============== ============== ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 39,326,420 31,268,140 36,762,781 30,739,504
=============== ============== ============ ============
OTHER CAPITALIZED EXPENDITURES AND OTHER INFORMATION
Capital expenditures:
Community level (1) $ 565 $ 521 $ 2,286 $ 1,731
Corporate level (2) $ 1,549 $ 277 $ 2,207 $ 2,087
Loan principal amortization payments $ 315 $ 211 $ 1,261 $ 634
Capitalized deferred financing costs (3) $ 2,890 $ 293 $ 3,901 $ 2,346
</TABLE>
--------------------
Footnotes to Funds from Operations
(1) The Company expenses all recurring non-revenue generating community
expenditures, including carpet and appliance replacements. See "Discussion
of Capitalized Community Improvements and Expensed Turnover ("Make Ready")
Costs."
(2) Represents the cost of new office equipment and costs related to the
implementation of the company-wide systems enhancement plan.
(3) Substantially all of the deferred financing costs incurred during the year
ended December 31, 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 the tax-exempt bonds
related to the Avalon Lea and Avalon Ridge Communities as well as the
closing of the $110 million unsecured senior notes.
41
<PAGE> 44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item 8 is included as a separate section of this
Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
42
<PAGE> 45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following are the biographical descriptions of the Directors and
executive officers of the Company as of March 16, 1998.
Directors
Richard L. Michaux. Mr. Michaux, 53, has been a director and the Chief
Executive Officer of the Company since its formation in August 1993. He had
previously been a partner of Trammell Crow Residential ("TCR"), which he joined
in 1980 and served as one of the three Group Managing Partners of Trammell Crow
Residential from 1986 to 1993. In that capacity, he was responsible for
residential development in the Mid-Atlantic, Northeastern and Midwestern
states. In previous positions, Mr. Michaux was in finance and general
management with Sea Pines Company on Hilton Head Island, South Carolina from
1973 to 1975, a Division Manager of Ryan Homes in Virginia from 1975 to 1978
and Marketing Director for the Burke Centre, a 6,000 unit development in
Fairfax, Virginia from 1978 to 1980. Mr. Michaux graduated from the United
States Naval Academy with distinction and holds a Masters degree in Business
Administration from the University of North Carolina at Chapel Hill where he
was a Morehead Fellow and a Dean's Scholar. Mr. Michaux's professional
affiliations include: past Chairman of the National Multi Housing Council;
member of the Gold Flight Council of Urban Land Institute (the "ULI"); Vice
President/Treasurer of the United States Naval Academy Class of 1966
Foundation; and founding Board member of the D.C. Early Child Care
Collaborative.
Charles H. Berman. Mr. Berman, 44, has been a director and the
President and Chief Operating Officer of the Company since its formation in
August 1993. He previously served as Divisional Partner of the Northeast Group
of TCR from 1986 to 1993, where he was responsible for overseeing the
development, management and construction operations of the Northeast Group of
TCR. Mr. Berman served on the Management Board of TCR from 1992 to 1993.
Prior to joining TCR, Mr. Berman was a partner at American Realty Capital,
Inc., where he managed equity syndications and joint venture financing for
several national development companies. He also held the position of Vice
President of Eastdil Equities, Inc., a subsidiary of Eastdil Realty, Inc. He
is a 1979 graduate of the Harvard Business School with an undergraduate degree
from Amherst College. Mr. Berman's professional affiliations include
membership in the Silver Flight Council of the ULI; Advisory Board of REF
Fairchester; and Advisory Board of ULI Fairchester. He is also a member of the
Board of Directors of Fairfield 2000 Homes Corporation, a non-profit housing
organization.
Michael A. Futterman. Mr. Futterman, 55, has been a director of the
Company since December 1993. He has been Chairman of American Realty Capital
from 1983 to the present. American Reality is a closely held real estate
company which has arranged investments for its partners and shareholders in
approximately $1.6 billion of property. From 1988 to 1992, he also held the
position of President of Elders American Realty Capital, Inc., a participating
mortgage lender subsidiary of Elders IXL, an Australian public company. Prior
to joining American Realty Capital, Inc., Mr. Futterman was employed by Eastdil
Realty, Inc. from 1969 to 1983, where he was most recently Executive Vice
President and a Director. Mr. Futterman also served as Director of Dollar Dry
Dock Savings Bank, July 1989 to March 1990, and Trustee of the International
Center of Photography, 1986 to 1992. Mr. Futterman graduated from the Carnegie
Institute of Technology and Georgetown University Law School.
Christopher B. Leinberger. Mr. Leinberger, 47, has been a director of
the Company since December 1993. He has been Managing Director and co-owner of
Robert Charles Lesser & Co. since 1982, where he specializes in metropolitan
development trends and strategic planning for cities and real estate companies.
Robert Charles Lesser & Co. is one of the largest independent real estate
advisory firms in the country, working on over 400 projects a year throughout
North America. Mr. Leinberger has written many articles on strategic planning
for real estate which have appeared in trade magazines such as Builder, Urban
Land and National Real Estate Investor. He is also the author of Strategy for
Real Estate Companies: Marketing, Finance,
43
<PAGE> 46
PART III
Organization, jointly published by the ULI and NAIOP. Mr. Leinberger is a
member of the Board of Directors of Realen Homes (named 1993's "Builder of the
Year" by Professional Builder magazine), is Chairman of the Metropolitan
Redevelopment Commission (City of Santa Fe) and Chairman of the Board of
Trustees of the College of Santa Fe. He is a graduate of Swarthmore College
and the Harvard Business School.
Richard W. Miller. Mr. Miller, 57, has been a director of the Company
since May 1997. He served as Senior Executive Vice President and Chief
Financial Officer of AT&T from 1993 to 1997 and was a member of AT&T's
Chairman's Office. Prior to joining AT&T, he held a number of operating
management and chief financial officer positions in high technology and
consumer companies. For the three years prior to joining AT&T, Mr. Miller led
a reorganization of Wang Laboratories, Inc., where he was Chairman, President
and CEO. From 1982-1988, he was with RCA Corporation and the General Electric
Company which acquired RCA in 1986, first as CFO then as Executive Vice
President--Consumer Products and Entertainment, overseeing what was then the
largest consumer electronics business in the U.S. From 1970 to 1982, Mr.
Miller was with Penn Central Corporation, holding positions such as the CFO of
the parent company and Executive Vice President of its principal real estate
subsidiary, Arvida Corporation. Mr. Miller holds a BBA degree in economics
from Case Western Reserve University and an MBA in finance from Harvard
Business School. Mr. Miller also serves as a Director of Closure Medical
Corporation and SBA, Inc.
Allan D. Schuster. Mr. Schuster, 56, has been a director of the Company
since December 1993. He has been a private investor since June 1993. From
April 1988 until June 1993, he was Chairman and Chief Executive Officer of the
Travelers Realty Investment Company, where he directed that Company's
investment activities in commercial and agricultural real estate. During Mr.
Schuster's tenure, Travelers' portfolio of mortgages, equities and joint
ventures ranged between $12 billion and $20 billion. During this same period,
Mr. Schuster was Chairman and Chief Executive Officer of Prospect Company, a $2
billion real estate development company. From December 1972 to September 1987,
Mr. Schuster was with Citibank, N.A., where during the last five years he was
Managing Director of Citicorp Real Estate, Inc. He is a Member of the
Appraisal Institute and the ULI.
44
<PAGE> 47
PART III
Executive Officers Who Are Not Directors
Bryce Blair. Mr. Blair, 39, has been Senior Vice
President--Development/Acquisitions of the Company since its formation. Mr.
Blair oversees development, construction, and acquisition activity throughout
the Company's markets. Mr. Blair joined the Northeast Group of TCR in 1985 and
was the partner responsible for overseeing development and acquisition of
multifamily opportunities throughout Massachusetts, Rhode Island and Long
Island, New York. Prior to joining the Northeast Group of TCR in 1985, he was
a Project Manager with the Exxon Corporation responsible for managing the
design, development and construction of capital improvement properties. Mr.
Blair is a 1985 graduate of the Harvard Business School. He graduated magna
cum laude with an undergraduate degree in Civil Engineering from the University
of New Hampshire. He is a member of the ULI, the Real Estate Finance
Association of Greater Boston Real Estate Board, and the Real Estate Investment
Advisory Council.
Robert H. Slater. Mr. Slater, 44, has been Senior Vice
President--Property Operations of the Company since its formation. He served
previously as Chief Operating Officer of Trammell Crow Residential Services for
the Mid-Atlantic region. Mr. Slater was responsible for opening and managing
the Raleigh, North Carolina TCR office and was responsible for the development
of several multifamily apartment communities. His responsibilities included
all aspects of property management including property operations, marketing,
training, human resources, risk management, resident services, engineering
services, and business development. Prior to joining TCR in 1988, Mr. Slater
served as law clerk to (now Chief) Justice James G. Exum, Jr. of the Supreme
Court of North Carolina and, thereafter, engaged in the private practice of
law. Mr. Slater is a 1980 graduate of the University of Virginia School of Law
with an undergraduate degree, cum laude, from Vanderbilt University.
Thomas J. Sargeant. Mr. Sargeant, 39, became Chief Financial Officer
and Secretary of the Company in March 1995 and has been Treasurer of the
Company since its formation. He is responsible for all of the financial
operations, including capital markets/finance, financial reporting and
financial services of Avalon as well as information technologies. He
previously served as Group Financial Officer for the Northeast Group of TCR,
the Mid-Atlantic Group of TCR and the Midwest Group of TCR and oversaw the
financial services operations (including accounting and financial reporting,
cash management, payroll, information systems and internal audit) as well as
project finance for the Midwest Group of TCR. Mr. Sargeant joined TCR in 1986
as Controller and was promoted to Chief Financial Officer in 1989 and to Group
Financial Officer in 1992. Prior to joining TCR, Mr. Sargeant was with Arthur
Andersen & Co., where he specialized in the construction and real estate
industries, serving both private and publicly held clients. Mr. Sargeant, a
certified public accountant, is a magna cum laude graduate of the University of
South Carolina where he was elected to Phi Beta Kappa and the Honors College.
Henry G. Irwig. Dr. Irwig, 54, has been Senior Vice
President--Construction of the Company since January 1998. He oversees all
construction activity throughout Avalon's markets. Prior to joining Avalon,
Dr. Irwig spent 13 years with the Beacon group of companies, most recently as
Executive Vice President--Management for Beacon Properties Corporation, a real
estate investment trust listed on the New York Stock Exchange. In this
capacity he played a critical role in developing a team-oriented organization,
geared to the requirements of the public market, which extended it's scope of
operations from 5 million square feet in the Northeast to 20 million square
feet nationally. Prior to this, as an executive at Beacon Construction
Company, Dr. Irwig was responsible for developing and implementing company-wide
procedures and systems for improved planning, control and monitoring of
projects. Before joining Beacon, Dr. Irwig was Winslow Associate Professor of
Civil Engineering at the Massachusetts Institute of Technology where he pursued
teaching and research in the fields of construction management and organization
while playing a key role in the development of the Center for Real Estate and
the Center for Construction Research and Education. Dr. Irwig received
Bachelor of Architecture as well as Doctor of Philosophy degrees from the
University of Witwatersrand, South Africa. He is a member of the American
Institute of Architects and the American Society of Civil Engineers.
Jeffrey B. Albert. Mr. Albert, 43, has been Vice President--Development
since the Company's formation with responsibility for development in the states
of New Jersey and Pennsylvania. Previously, Mr. Albert joined the Northeast
Group of TCR as a City Partner in 1989 to oversee community development,
45
<PAGE> 48
PART III
apartment development and acquisition activities in eastern Pennsylvania and
New Jersey. From 1978 to 1980, Mr. Albert spent two years with W.R. Grace &
Company in Philadelphia in its Land Development Division as project coordinator
of a planned unit development. In this capacity, he was responsible for the
planning, marketing and development of residential communities and
non-residential developments. Mr. Albert joined Eastern Properties, Inc. in
Cranbury, New Jersey as a project manager in 1980, became a Vice President of
that company in 1982 and remained with Eastern Properties until 1989. Mr.
Albert is a 1976 Phi Beta Kappa graduate of Clark University with an AB degree
with highest honors in Philosophy. In 1978, he received a Master of City
Planning MCP degree from the University of Pennsylvania.
David W. Bellman. Mr. Bellman, 41, has been Vice President--Mid/High
Rise Construction for all of Avalon's markets since January 1998. Prior to
joining Avalon, Mr. Bellman spent 16 years with Boston Properties, most
recently as Senior Vice President--Construction. He was responsible for all
New York City construction, overseeing the building of the $125 million 599
Lexington Avenue (a 1 million square foot 50-story office tower), the Mercer
Hotel (an historic rehabilitation of a landmark property) and the $550 million
Columbus Center (a 3.3 million square foot 68-story office, retail and
residential building). Prior to moving to New York, Mr. Bellman oversaw the
construction of four office parks aggregating to over 1 million square feet in
metropolitan Washington, DC. Mr. Bellman studied Engineering Administration at
George Washington University and is a member of the New York City Builders
Congress.
Samuel B. Fuller. Mr. Fuller, 36, has been Vice President--Development
since the Company's formation with responsibility for development in the states
of Connecticut and New York (excluding New York City and Long Island). Mr.
Fuller has managed the development activities for five communities totaling
1,456 apartment homes that are completed and stabilized. He currently oversees
the development of 1,814 apartment homes in five communities under construction
and manages the development of 1,726 homes in six communities in Avalon's
development pipelines. Previously, Mr. Fuller joined the Northeast Group of
TCR in 1989 as a Development Associate. In 1992, he was promoted to
Development Partner. Before joining TCR, Mr. Fuller was a Project Manager at
Texas Instruments, Inc., where he managed the design, development and
construction of large scale, automated assembly lines for the company's
facilities worldwide. Mr. Fuller is a 1989 Harvard Business School graduate,
with an undergraduate degree in Mechanical Engineering from the University of
New Hampshire.
David J. Hubbard. Mr. Hubbard, 41, has been Vice
President--Development since December 1997, joining Avalon as part of its
acquisition of the Midwestern Division of Trammell Crow Residential. He is
responsible for development and acquisition in several Midwestern markets,
including Chicago, Minneapolis, St. Louis, and Indianapolis. Prior to joining
Avalon, he was Division Partner for Trammell Crow Residential--Midwest, where
he was responsible for the development, acquisition, construction and asset
management of multifamily rental communities throughout the greater Midwest.
Prior to joining Trammell Crow Residential in 1985, Mr. Hubbard developed a
variety of properties for the John F. Denney Company in suburban Atlanta,
Georgia. Mr. Hubbard is a 1983 graduate of the Harvard Business School. Prior
to attending graduate school, he was a Pipeline Engineer with Exxon Pipeline
Company responsible for managing the design and construction of capital
improvement projects for the company. He earned his undergraduate degree in
Civil Engineering from the Georgia Institute of Technology, where he graduated
with High Honors in 1978. His professional affiliations include membership in
the Real Estate Investment Advisory Council and past membership in the
Apartment Association of Indiana where he served as a Member of the Board of
Directors.
Timothy J. Naughton. Mr. Naughton, 36, has been Vice
President--Development of the Company since its formation with responsibility
for development in the metropolitan Washington/Baltimore region. He joined the
Mid-Atlantic Group of TCR in 1989 and had development responsibilities for
multifamily rental communities in Delaware, Virginia and Maryland. He had been
a Development Partner since 1993. From 1987 to 1989, Mr. Naughton was a
Development Officer for Bourque/Perez Group in Lexington, Massachusetts, where
he directed the development of townhouses and multifamily communities. Mr.
Naughton received his Masters degree in Business Administration from the
Harvard Business School in 1987. He earned his undergraduate degree in
Economics from the University of Virginia, where he was elected to Phi Beta
Kappa and graduated with high distinction in 1983.
46
<PAGE> 49
PART III
Alexander C. Twining. Mr. Twining, 44, has been Vice
President--Development of the Company since February 1995 with responsibility
for the mid/high-rise development group throughout Avalon's markets. From 1990
until 1995, Mr. Twining was Director of Real Estate Development for Colgate -
Palmolive Company, directing development of an eight million square foot
planned community, including 1,000 apartments and office, retail and hotel
buildings in the New York metropolitan area. From 1986 to 1990, Mr. Twining
was Senior Vice President and Regional Partner for the Boston office of F.D.
Rich Company, where he directed acquisition, financing and development
activities, including over 20 acquisitions, a 300-apartment waterfront
community and a two million square foot mixed-use development. Before moving
to Boston, he was Vice President with B.F. Saul Company directing development
of an apartment, hotel, and office company in downtown Washington, D.C. Mr.
Twining is a 1977 graduate of the Yale School of Architecture and completed his
undergraduate degree at Yale University in 1974. He has taught at the New York
University Real Estate Institute and Yale University and is a licensed real
estate broker and architect. He is a member of the Urban Development/Mixed Use
Council of the ULI, the American Institute of Architects, and a former member
of the Washington Board of Realtors, Greater Boston Real Estate Board and the
Real Estate Board of New York.
Leo S. Horey. Mr. Horey, 35, has been Vice President--Property
Operations since August 1994. Mr. Horey is responsible for the management of
numerous communities in Virginia, Maryland, the District of Columbia, Indiana,
Ohio, Michigan and Minnesota. Mr. Horey previously served as Regional
Manager--Property Operations for both Avalon Properties, Inc. and Trammell Crow
Residential Services. In this capacity, he directed property operations for
numerous communities in the Washington, D.C. metropolitan area and coordinated
the real estate tax appeal process throughout the Mid-Atlantic region. Prior
to Avalon's formation, Mr. Horey worked as a financial manager focusing on
asset management and property disposition for the Mid-Atlantic regions of TCR.
Mr. Horey began his career with Trammell Crow Residential in 1989 in the
community development area in Princeton, New Jersey. Mr. Horey received his
Masters of Business Administration from The Kenan-Flagler Business School at
the University of North Carolina at Chapel Hill where he was a Richard H.
Jenrette Fellow. He also holds a Bachelor of Science degree in Computer
Science and Economics from Duke University.
Gwyneth J. Cote. Ms. Cote, 35, has been Vice President--Property
Operations since August 1994. Ms. Cote is responsible for the management of
all communities in the New Jersey, Connecticut, Massachusetts, Rhode Island,
Illinois and New York markets. Prior to Avalon's formation, Ms. Cote served in
numerous capacities with TCR. Ms. Cote began her career with TCR in 1989 as a
Development Associate for Trammell Crow Residential in New Jersey. In this
capacity, she was responsible for the development of multifamily apartment
communities and targeting potential site acquisitions. In 1990, she joined the
management group as a Divisional Manager, responsible for the operation of
eight properties in the Chicago and Kansas City markets. In 1992, Ms. Cote
relocated to Alexandria to become the Regional Manager for the mid-Atlantic
region of TCR. In this capacity, Ms. Cote oversaw property operations for
numerous Northern Virginia and Maryland properties. Just prior to the
formation of Avalon, Ms. Cote assumed additional operational responsibilities
when she added New Jersey to her portfolio. Shortly after Avalon was formed,
Ms. Cote relocated to the Northeast to assume all property operational
responsibilities for communities in New Jersey, New York, and Connecticut. Ms.
Cote received her Master of Business Administration degree from the Wharton
School of the University of Pennsylvania in 1989. She earned her undergraduate
degree in Liberal Arts from Swarthmore College.
Lili F. Dunn. Ms. Dunn, 29, has been Vice President--Acquisitions and
Dispositions since January 1996. Ms. Dunn has been responsible for
acquisitions and dispositions of apartment communities since the inception of
the Company. Prior to the Company's formation, Ms. Dunn served as the
Operations Analyst for the Northeast and Midwest regions of TCR. In that
capacity, she was responsible for completing asset management analyses and
property repositioning recommendations as well as designing and implementing
computer applications for on-site use. In 1992, Ms. Dunn relocated to
Alexandria, Virginia to become Director of Business Development and Market
Research for the Mid-Atlantic region of Trammell Crow Residential. In this
role, she secured third-party management contracts, maintained the Company's
market research database and published market information. Ms. Dunn is a magna
cum laude graduate of the University of Michigan where she earned a Bachelor of
Business Administration degree.
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<PAGE> 50
PART III
James L. Liberty. Mr. Liberty, 58, has been Vice
President--Construction Operations since May 1997. Mr. Liberty manages
construction operations from Virginia to Massachusetts, the "Northeast Region."
From 1993 to 1996 he was Regional Manager for The Baker Companies, where he was
responsible for large condominium developments in New Jersey. His experience
before joining The Baker Companies includes officerships in several prominent
real estate development companies from the 1960s to the present. His
management responsibilities have included high volume multi-family housing and
mid and high rise office building complexes in New York, New Jersey,
Washington, D.C., Chicago and Detroit. His corporate clients have included
General Motors Corporation, E.D.S., and Fairchild Industries. Mr. Liberty's
duties have included the entire development spectrum from land acquisition,
land development, design and engineering to construction. He is a graduate of
Rochester Institute of Technology and a licensed real estate broker.
Joanne M. Lockridge. Ms. Lockridge, 38, has been Vice
President--Finance since November 1997. Ms. Lockridge has been responsible for
financial forecasting as well as secured and unsecured financing activity in
various positions since the Company's formation. Prior to the Company's
formation, Ms. Lockridge was the Financial Manager for the Northeast Group of
TCR and had responsibility for budgeting, development project analysis and
project financings. Ms. Lockridge joined TCR as a Financial Analyst in 1989
and was promoted to Financial Manager in 1991. Before joining TCR, Ms.
Lockridge was a Financial Analyst for Xerox Realty Corporation, where she was
responsible for the analysis and asset management of commercial real estate
property. Ms. Lockridge received her Masters in Finance degree from Fairfield
University. She earned her undergraduate degree, magna cum laude, from St.
Anselm College.
William M. McLaughlin. Mr. McLaughlin, 33, has been Vice
President--Development since May 1997. He joined Avalon in 1994. He is
responsible for all new development activity in the greater Boston region.
Prior to joining Avalon, Mr. McLaughlin was Vice President of Lincoln Property
Company, responsible for multifamily acquisitions, development and management
in eastern New England involving approximately 1,000 multifamily homes. He
joined Lincoln Property Company in 1987, starting as an Assistant Vice
President and becoming a Vice President in 1991. Prior to that, Mr. McLaughlin
was a broker with Coldwell Banker Commercial's downtown Boston office and a
principal with McShea Realty, a small residential development entity. Mr.
McLaughlin received his Bachelor of Arts in Economics from Harvard University.
He has been a licensed real estate broker for 12 years, is a member of the
Greater Boston Real Estate Board and a Corporator of Mount Auburn Hospital in
Cambridge, Massachusetts.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Directors of the Company who are also employees receive no additional
compensation for their services as director. Non-employee directors of the
Company receive an annual director's fee for all services in such capacity,
including all meetings of the Board of Directors and its committees, in the
form of 2,500 shares of restricted Common Stock that vest twenty percent (20%)
on the date of grant and twenty percent (20%) on each of the following four
anniversaries of the date of grant. Under the 1995 Equity Incentive Plan,
following each annual meeting of stockholders, each of the Company's
non-employee directors also receives an option to purchase 10,000 shares of
Common Stock at the market price of the Common Stock on the date of grant. All
stock options granted to non-employee directors vest one year after the date of
grant and terminate ten years from the date of grant, except in cases where
directors are removed for Cause (as defined). Upon removal for Cause, a
director's stock options terminate immediately on the date he ceases to be a
director.
EXECUTIVE COMPENSATION
The following table sets forth the base compensation awarded to the
Company's Chief Executive Officer and four other most highly compensated
executive officers of the Company whose salary and bonus exceeded $100,000
during the fiscal year ended December 31, 1997 (the "Named Executive
Officers").
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<PAGE> 51
PART III
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
---------------------------
ANNUAL COMPENSATION RESTRICTED SHARES ALL
--------------------------- STOCK UNDERLYING OTHER
SALARY BONUS AWARD(S)(4) AWARD(S) COMPENSATION(5)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
- -------------------------------------------- -------- ------------ ----------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Michaux 1997 246,359 306,375 (1) 535,500 250,000 68,858
Chairman of the Board and Chief 1996 221,880 280,938 (2) 483,750 0 68,771
Executive Officer 1995 217,124 219,688 (3) 386,750 0 4,500
Charles H. Berman 1997 241,267 306,375 (1) 535,500 250,000 50,698
President and Chief Operating Officer 1996 217,220 280,938 (2) 483,750 0 50,183
1995 213,019 219,688 (3) 386,750 0 4,500
Bryce Blair 1997 185,000 243,229 (1) 286,195 110,000 27,817
Senior Vice President -- 1996 160,961 209,813 (2) 257,140 0 27,078
Development / Acqusitions 1995 159,008 157,946 (3) 201,110 0 4,464
Robert H. Slater 1997 185,000 216,549 (1) 286,195 110,000 32,932
Senior Vice President -- 1996 160,000 206,127 (2) 257,140 0 32,201
Property Operations 1995 159,608 154,031 (3) 201,110 0 4,248
Thomas J. Sargeant 1997 170,000 194,294 (1) 217,175 100,000 27,817
Chief Financial Officer, Treasurer 1996 150,000 185,178 (2) 195,113 0 26,530
and Secretary 1995 140,769 117,287 (3) 116,025 0 4,500
</TABLE>
- -------------------------
(1) Included in this amount is the value of the 20% of each executive
officer's restricted stock grant made on February 3, 1998that vested
immediately upon grant, as follows: Mr. Michaux, $133,875 (4,500
shares); Mr. Berman,$133,875 (4,500 shares); Mr. Blair, $71,549 (2,405
shares); Mr. Slater, $71,549 (2,405 shares); Mr. Sargeant, $54,294
(1,825 shares).
(2) Included in this amount is the value of the 20% of each executive
officer's restricted stock grant made on January 22, 1997 to each
executive officer that vested immediately upon grant, as follows: Mr.
Michaux, $120,938 (4,500 shares); Mr. Berman,$120,938 (4,500 shares);
Mr. Blair, $64,285 (2,392 shares); Mr. Slater, $64,285 (2,392 shares);
Mr. Sargeant, $48,778 (1,815 shares).
(3) Included in this amount is the value of the 20% of each executive
officer's restricted stock grant made on February 6, 1996 that vested
immediately upon grant, as follows: Mr. Michaux, $96,688 (4,250
shares); Mr. Berman, $96,688 (4,250 shares); Mr. Blair, $50,278 (2,210
shares); Mr. Slater, $50,278 (2,210 shares); Mr. Sargeant, $29,006
(1,275 shares).
(4) The number of shares of unvested restricted stock and the aggregate
market value at December 31, 1997 of such shares were as follows: Mr.
Michaux, $556,875 (18,000 shares); Mr. Berman, $556,875 (18,000
shares); Mr. Blair, $297,619 (9,620 shares); Mr. Slater, $297,619
(9,620 shares); Mr. Sargeant, $225,844 (7,300 shares). Restricted
stock awards were granted on February 3, 1998 and vest twenty percent
(20%) on each of the first four anniversaries of such date. Dividends
will be paid on these shares of restricted stock.
(5) The amounts shown include the dollar value of the benefit of premiums
paid for the whole-life portion of split-dollar life insurance polices
for each executive. and the Company's 401(k) contribution for the
calendar year. Premium amounts included for the year ended December
31, 1997 are as follows: Mr. Michaux, $64,358, Mr. Berman, $46,198, Mr.
Blair, $23,317, Mr. Slater, $28,432 and Mr. Sargeant, $23,317. Amounts
included for Company's 401(k) contribution for the same period are as
follows: Mr. Michaux, $4,500, Mr. Berman, $4,500, Mr. Blair $4,500,
Mr. Slater, $4,500 and Mr. Sargeant, $4,500.
Option Grants in Fiscal Year 1997. The following table sets forth the
options granted with respect to the fiscal year ended December 31, 1997 to
Avalon's Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
------------------------------------------------------------------------------ REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF
SHARES TOTAL OPTIONS STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION
OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM
GRANTED FOR FISCAL PRICE EXPIRATION ----------------------------
NAME (#) (1) YEAR 1997 (2) ($ / SHARE) DATE 5% ($) 10% ($)
---- ---------------- -------------------- ----------------- ----------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Michaux 250,000 21.35% $ 29.3125 10/29/07 4,608,618 11,679,144
Charles H. Berman 250,000 21.35% $ 29.3125 10/29/07 4,608,618 11,679,144
Bryce Blair 110,000 9.39% $ 29.3125 10/29/07 2,027,792 5,138,823
Robert H. Slater 110,000 9.39% $ 29.3125 10/29/07 2,027,792 5,138,823
Thomas J. Sargeant 100,000 (3) 8.54% $ 29.3125 10/29/07 1,843,447 4,671,658
</TABLE>
- ---------
(1) Unless otherwise noted, all options will vest in three equal installments
on the first, second and third anniversaries of the date of grant. The
date of grant of all of these options was October 29, 1997.
(2) A total of 1,171,000 options were granted to employees of Avalon with
respect to the fiscal year ended December 31, 1997.
(3) Mr. Sargeant's options vest in five equal installments on the first
five anniversaries of the date of grant.
Option Exercises and Year-End Holdings. The following table sets forth
the aggregate number of options exercised in 1997 and the value of options held
at the end of 1997 by the Company's Named Executive Officers.
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<PAGE> 52
PART III
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND
FISCAL YEAR-END 1997 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FISCAL AT FISCAL
SHARES YEAR-END (#) YEAR-END ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE(1)
- ----------------------- ---------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Richard L. Michaux . . 0 0 150,000 / 250,000 1,565,625 / 406,250
Charles H. Berman . . . 0 0 150,000 / 250,000 1,565,625 / 406,250
Bryce Blair . . . . . . 0 0 65,000 / 110,000 678,438 / 178,750
Robert H. Slater . . . 0 0 65,000 / 110,000 678,438 / 178,750
Thomas J. Sargeant . . 0 0 45,000 / 100,000 469,688 / 162,500
</TABLE>
(1) Value of unexercised in the money options was calculated using the
difference between the market price at December 31, 1997 and the option
strike price of $20.50 per share for exercisable options and $29.3125 for
unexercisable options.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements (each an "Employment
Agreement") with each of Messrs. Michaux, Berman, Slater, Blair, and Sargeant
(each an "Executive ") that continue in effect until December 31, 1999 (the
"Initial Term") and are automatically renewed for successive one year terms,
unless otherwise terminated. Each Employment Agreement sets forth the title
and annual minimum Base Salary of the relevant Executive as follows:
<TABLE>
<CAPTION>
Base Salary Base Salary Base Salary
Name Title 1997 1998 1999
- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C>
Mr. Michaux Chairman of the Board, CEO $230,000 $265,000 $300,000
Mr. Berman President, COO $230,000 $265,000 $300,000
Mr. Slater Senior V.P. - Property Operations $185,000 $210,000 $240,000
Mr. Blair Senior V.P. Development/ $185,000 $210,000 $240,000
Acquisitions
Mr. Sargeant CFO/Treasurer/Secretary $170,000 $195,000 $225,000
</TABLE>
Each Employment Agreement provides that the Compensation Committee of
the Board of Directors may award cash bonuses should it be determined, in its
discretion based on the performance of the Company and the individual during
the prior fiscal year, that such compensation is appropriate. Each Employment
Agreement also provides for annual minimum Base Salary increases based on the
greater of 5% or increases in the Consumer Price Index for years after the
Initial Term. The Company maintains a comprehensive medical plan for the
benefit of the Executives and their immediate families and pays the premiums on
split-dollar life insurance policies for their benefit ("Insurance Premiums").
The Company provides an allowance for each of Messrs. Michaux, Berman and Blair
for the cost of an automobile and reimburses Messrs. Michaux and Berman for the
dues of a club membership. The Executives are also eligible to participate in
benefit plans (except for severance plans), including the 401(k) plan, made
available generally to employees.
If an Executive's Employment Agreement is not renewed at any time
after the Initial Term, unless the nonrenewal is within 2 years following a
Change in Control (defined below), the Executive will be entitled to receive,
for twelve consecutive months, a monthly amount equal to the result obtained by
dividing the Covered Average Compensation (the average of Base Salary, cash
bonus, and the value of all stock and other
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PART III
equity-based compensation awards made to the Executive for the year during
which the termination occurs and the preceding 2 years) by 12. The Executive
will also be entitled to benefits comparable to the medical and disability
benefits currently provided to such Executive for a period of 24 months
following termination (such medical and disability benefits, together, the
"Termination Benefits"). In addition, the Company will pay the Insurance
Premiums as long as such payments are due, and all equity-based awards shall
become fully vested and exercisable. If such nonrenewal occurs within two (2)
years following a change in control, the Executive is entitled to the same
payments and benefits ("Severance Payments") as if the Executive were
terminated without cause after a Change in Control.
If an Executive's employment with the Company is terminated by the
Company without Cause (as defined in the Employment Agreement; for this
section, all capitalized and undefined terms shall have the meanings as set
forth in the relevant Employment Agreement) either prior to the occurrence of a
Change in Control or more than two years following a Change in Control, such
Executive will be entitled to receive, for twelve consecutive months, a monthly
amount equal to the result obtained by dividing two times the Covered Average
Compensation by twelve and will be entitled to receive Termination Benefits.
In addition, the Company will continue to pay the Insurance Premiums, and all
equity-based awards shall become fully vested and exercisable.
A Change in Control primarily refers to the following situations: (i)
any Person, (any individual, entity or group), other than the Company, one of
the Company's Subsidiaries or an Affiliate, becomes the Beneficial Owner of
securities representing 30% or more of the combined voting power of the
Company's then outstanding securities having the right to vote in an election
of the Company's Board of Directors ("Voting Securities"); (ii) individuals who
currently compose the Company's Board of Directors cease for any reason to
constitute at least a majority of the Board unless such persons were elected or
approved by a majority of the currently existing Board of Directors; (iii)
approval by the shareholders of the Company of a reorganization, merger of
consolidation of the Company; (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. However, a Change in Control does not occur if a
reorganization, merger or consolidation is the result of an acquisition of
securities directly from the Company or a Subsidiary thereof or an acquisition
by any corporation pursuant to a reorganization, consolidation, merger or sale
of substantially all of the Company's assets if all of the following are true:
(1) more than 50% of the then outstanding shares of Company common stock
resulting from such reorganization, merger or consolidation and the combined
voting power of the then outstanding Voting Securities is then Beneficially
Owned, directly or indirectly, by all or substantially all of the persons and
entities prior to such reorganization, merger, consolidation or sale; (2) no
Person (excluding the Company and its Subsidiaries) who did not Beneficially
Own 30% or more of the outstanding voting securities before the reorganization,
merger, consolidation or sale Beneficially Owns 30% or more of the outstanding
Voting Securities resulting from such reorganization, merger or consolidation;
and (3) at least a majority of the members of the resulting board of directors
were members of the Board of Directors at the time of the execution of the
initial agreement providing for such reorganization, merger, consolidation or
sale.
If an Executive's employment is terminated without Cause by the Company
or any of its successors within 2 years after a Change in Control, or if an
Executive terminates his employment (i) within 2 years of a Change in Control
in a Constructive Termination Without Cause (in general, a failure by the
Company, after a Change in Control, to continue in effect any material
compensation plan for the Executive, a reduction in such Executive's Base
Salary or the failure to pay any bonus when due, a material diminution of
Executive's responsibilities, or the failure of the Company to obtain the
assumption in writing of its obligations to perform this Agreement by any
successor to all or substantially all of the assets of the Company within 15
days after such Change in Control) or (ii) for any reason within one year after
a Complete Change in Control (a Change in Control other than one occurring by
the acquisition of 30% of the combined voting power of the Company's then
outstanding Voting Securities as defined in (i) of the previous paragraph), the
Executive is entitled to receive a lump sum payment equal to three times the
Covered Average Compensation. In addition, the Executive is entitled to
receive Termination Benefits for a period of 36 months following the date of
termination, the Company will continue to pay Insurance Premiums, and all
equity-based awards shall become fully vested and exercisable. If an Executive
terminates his employment more than 2 years after a Change in
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<PAGE> 54
PART III
Control in a Constructive Termination Without Cause, he is entitled to the same
benefits as if he were terminated by the Company without Cause within 2 years
of a Change in Control (including payment of Insurance Premiums), except that
the lump sum payment will be equal to 2 times the Covered Average Compensation,
and the Termination Benefits will be continued by the Company for 24 months.
If an Executive is terminated by the Company for Cause or voluntarily
terminates his employment during the term of the Employment Agreement, the
Executive shall be paid the amounts of earned but unpaid Base Salary and cash
incentive compensation earned through the date of termination in satisfaction
of all of his entitlements from the Company, and all equity-based awards not
vested as of the date of termination shall terminate.
If any of the Severance Payments would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, and
any Executive incurs any interest or penalties thereby (the excise tax,
penalties and interest, collectively, the "Excise Tax"), such Executive shall
be entitled to receive an additional payment so that the net amount retained by
the Executive after accrual or payment of such Excise Tax (but before accrual
or payment of applicable income and employment taxes) is equal to the Excise
Tax on the Severance Payments.
Each Employment Agreement contains noncompetition and nondisclosure
covenants and also provides for the indemnification and advancement of expenses
to the Executive by the Company, to the fullest extent permitted by applicable
law, with respect to any actions commenced against the Executive in his
capacity as an officer or director of the Company or an affiliate thereof for
which he is rendering service on behalf of the Company, the shareholders, or
third parties. Each Employment Agreement also entitles the Executive to
reimbursement, or in some cases advancement, of legal costs in certain
circumstances in connection with enforcement of the Executive's rights under
the Employment Agreement.
The following table presents certain information as to directors and
executive officers of the Company on March 16, 1998, based on representations
of officers and directors of the Company. All such information was provided by
the stockholders listed and reflects their beneficial ownership as of March 16,
1998, unless otherwise noted.
52
<PAGE> 55
PART III
<TABLE>
<CAPTION>
No. of Shares
Beneficially Percent
Name Owned (1) of Class
----------------- ------------- ----------------
<S> <C> <C>
Richard L. Michaux 707,939 (2) (3) (4) (7) 1.7%
Charles H. Berman 522,213 (2) (3) (4) (8) 1.2%
Michael A. Futterman 53,000 (5) (6) (9) *
Christopher B. Leinberger 46,000 (5) (6) *
Richard W. Miller 14,500 (6) *
Allan D. Schuster 48,000 (5) (6) *
Bryce Blair 153,421 (2) (3) (4) *
Robert H. Slater 174,662 (2) (3) (4) (10) *
Thomas J. Sargeant 83,975 (2) (3) (4) (11) *
Jeffrey B. Albert 91,261 (2) (3) (4) *
David W. Bellman (hired 1/98) 0 *
Gwyneth J. Cote 34,162 (2) (3) (4) *
Lili F. Dunn 21,100 (3) (4) *
Samuel B. Fuller 82,731 (2) (3) (4) *
Leo S. Horey 34,912 (2) (3) (4) *
David J. Hubbard (hired 12/97) 0 *
Henry G. Irwig (hired 1/98) 0 *
James R. Liberty 1,231 (4) *
Joanne M. Lockridge 11,238 (3) (4) *
William McLaughlin 8,533 (3) (4) (12) *
Timothy J. Naughton 73,881 (2) (3) (4) *
Alexander C. Twining 12,275 (2) (3) (4) *
All directors and executive officers as a group (22 persons) 2,175,034 5.1%
</TABLE>
------------------------
* Less than one percent
(1) Except as otherwise noted, each individual in the table above has
sole voting and investment power over the shares listed. Includes
shares subject to stock options presently exercisable or
exercisable within 60 days as follows: Mr. Michaux, 150,000; Mr.
Berman, 150,000; Mr. Futterman;38,000, Mr. Leinberger, 38,000; Mr.
Miller, 10,000; Mr. Schuster, 38,000; Mr. Blair, 65,000; Mr.
Slater, 65,000; Mr. Sargeant, 45,000; Mr. Albert, 40,000; Ms. Cote,
15,000; Ms. Dunn, 12,500; Mr. Fuller, 40,000; Mr. Horey, 15,000;
Ms. Lockridge, 8,500; Mr. McLaughlin, 5,000; Mr. Naughton, 35,000
and all executive officers as a group, 646,000.
(2) Includes shares of restricted Common Stock that vested twenty
percent (20%) on February 6, 1996, 1997 and 1998 and will vest
twenty percent (20%) on each of the next two anniversaries of such
date as follows: Mr. Michaux, 21,250; Mr. Berman, 21,250; Mr.
Blair, 11,050; Mr. Slater, 11,050; Mr. Sargeant, 6,375; Mr. Albert,
5,100; Ms. Cote, 4,250; Mr. Fuller, 5,100; Mr. Horey, 4,250; Mr.
Naughton, 4,250; Mr. Twining, 2,125.
(3) Includes shares of restricted Common Stock that vested twenty
percent (20%) on January 22, 1997 and 1998 and will vest twenty
percent (20%) on each of the next three anniversaries of such date
as follows: Mr. Michaux, 22,500; Mr. Berman, 22,500; Mr. Blair,
11,960; Mr. Slater 11,960; Mr. Sargeant, 9,075; Mr. Albert, 5,520;
Ms. Cote, 4,600; Ms. Dunn 3,800; Mr. Fuller, 5,520; Mr. Horey,
4,600; Ms. Lockridge, 1,368; Mr. McLaughlin, 920; Mr. Naughton,
5,520; Mr. Twining, 4,600.
53
<PAGE> 56
PART III
(4) Includes shares of restricted Common Stock that vested twenty
percent (20%) on February 3, 1998 and will vest twenty percent
(20%) on each of the next four anniversaries of such date as
follows: Mr. Michaux, 22,500; Mr. Berman, 22,500; Mr. Blair,
12,025; Mr. Slater 12,025; Mr. Sargeant, 9,125; Mr. Albert, 5,550;
Ms. Cote, 5,550; Ms. Dunn 4,700; Mr. Fuller, 7,050; Mr. Horey,
5,550; Ms. Lockridge, 1,370; Mr. Liberty, 1,231; Mr. McLaughlin,
2,313; Mr. Naughton, 5,550 and Mr. Twining, 5,550.
(5) Includes shares of restricted Common Stock that vested twenty
percent (20%) on July 3, 1996 and 1997 and will vest twenty percent
(20%) on each of the next three anniversaries of such date as
follows: Mr. Futterman, 2,500; Mr. Leinberger, 2,500; and Mr.
Schuster, 2,500.
(6) Includes shares of restricted Common Stock that vested twenty
percent (20%) on May 14, 1997 and will vest twenty percent (20%) on
each of the next four anniversaries of such date as follows: Mr.
Futterman, 2,500; Mr. Leinberger, 2,500; Mr. Miller, 2,500 and Mr.
Schuster, 2,500.
(7) Voting and investment power shared with spouse (509,257 shares);
sole voting and investment power (45,853 shares). Includes 2,829
shares owned by Mr. Michaux's spouse as to which Mr. Michaux has
neither voting nor investment power and disclaims beneficial
ownership.
(8) Includes 1,800 shares held by Mr. Berman in trust for his minor
children.
(9) Includes 10,000 shares held by Mr. Futterman's wife for which
voting and investment power is shared. Mr. Futterman disclaims
beneficial ownership of these shares. Includes 38,000 exercisable
option shares for which the economic interest has been assigned to
trusts for his two minor children. Mr. Futterman retains voting
power for these shares.
(10) Includes 1,500 shares held by Mr. Slater's spouse for the benefit
of their minor children. Voting and and investment power is shared
for all shares owned.
(11) Voting and investment power shared with spouse (11,830 shares);
sole voting and investment power (25,385 shares). Includes 1,800
shares held by Mr. Sargeant in a trust for his minor children.
Also includes 1,760 shares owned by Mr. Sargeant's spouse for which
he disclaims beneficial ownership. Includes 10,000 shares of
restricted Common Stock of which 3,300 shares vested on November
14, 1995, 3,300 shares vested on November 14, 1996 and 3,400 shares
vested on November 14, 1997.
(12) Includes 300 shares for which voting and investment powers are
shared with Mr. McLaughlin's spouse.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the
"Exchange Act") requires the Company's executive officers and directors and
persons who own more than 10% of a registered class of the Company's equity
securities to file reports of ownership and changes in ownership with the SEC
and the New York Stock Exchange. Officers, directors and greater than 10%
stockholders are required to furnish the Company with copies of all Section
16(a) forms they file. To the Company's knowledge, based solely on review of
the copies of such reports furnished to the Company and written representations
that no other reports were required during the fiscal year ended December 31,
1997, all Section 16(a) filing requirements applicable to its executive
officers, directors and greater than 10% beneficial owners were satisfied,
except that one report for each of Messrs. Michaux, Berman, Blair, Slater,
Sargeant, Albert, Fuller, Naughton, Horey, Twining, McLaughlin, Liberty, Ms.
Cote, Ms. Dunn and Ms. Lockridge, reporting the award of stock options in
October 1997 were inadvertently filed five months late. One report for the
same individuals reporting the award of Common Stock in February 1998 was
inadvertently filed one month late.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information about persons or
entities believed by the Company to own, directly or beneficially, more than
five percent of the Company's outstanding Common Stock on March 16, 1998. The
following information is based solely upon copies of filings on Schedule 13D
and Schedule 13G received by the Company pursuant to the rules of the SEC.
54
<PAGE> 57
PART III
<TABLE>
<CAPTION>
NO. OF SHARES
NAME AND ADDRESS BENEFICIALLY PERCENT
OF BENEFICIAL OWNER OWNED OF CLASS
------------------- ------ --------
<S> <C> <C>
Bay Apartments Communities, Inc.(1) 8,584,000 16.6%
4340 Stevens Creek Boulevard
Suite 275
San Jose, CA 95129
Cohen & Steers Capital Management, Inc. (2) 4,576,100 10.6%
757 Third Avenue
New York, New York 10017
Merrill Lynch & Co., Inc. (3) 2,725,000 6.3%
World Financial Center, North Tower
250 Vesey Street
New York, New York 10281
LaSalle Advisors Capital Management, Inc. (4) 2,511,428 5.8%
200 East Randolph Drive
Chicago, IL 60601
Stichting Pensioenfonds ABP (5) 2,740,000 6.4%
Oude Lindestraat 70
Postbus 2889, 6401 DL
Heerlen, The Netherlands
</TABLE>
- ----------------
(1) Information reported is based upon a Schedule 13D filed with SEC on March
19, 1998. Beneficial ownership of all of such shares was reported as a
result of an option granted by Avalon to purchase 19.9% (determined as a
percentage of the outstanding shares of Avalon common stock immediately
prior to the exercise of this option) of the outstanding number of
shares of Avalon common stock, as represented to Bay in the Merger
Agreement. Since the option has yet become exercisable, Bay disclaims
beneficial owners of such shares. The inclusion of such securities in
the table shall not be deemed an admission that Bay is the beneficial
owner of such securities for any purposes.
(2) Information reported is based upon a Schedule 13G filed with the SEC on
February 12, 1998 reporting beneficial ownership as of December 31, 1997.
This Schedule 13G indicates that the reporting entity is an Investment
Advisor registered under Section 203 of the Investment Advisors Act of
1940. The Schedule 13G also indicates that the reporting entity has
sole dispositive power with respect to all of the shares reported and
sole voting power with respect to 3,971,500 of the shares reported.
(3) Information reported is based upon a Schedule 13G filed with the SEC on
February 3, 1998 reporting beneficial ownership as of December 31, 1997.
The information reported includes 2,725,000 shares beneficially owned by
Princeton Services Inc. ("PSI"), a wholly owned subsidiary of Merrill
Lynch Group, Inc. ("ML Group"). PSI acts as the general partner of
Merrill Lynch Asset Management, L.P. (d/b/a) Merrill Lynch Asset
Management, L.P. ("MLAM") and Fund Asset Management, L.P. (d/b/a) Fund
Asset Management ("FAM"), each of which is an Investment Adviser
registered under section 203 of the Investment Advisers Act of 1940 (the
"Advisers Act") and acts as an investment adviser to investment
companies registered under Section 8 of the Investment Company Act of
1940 (the "Investment Company Act") and/or to private accounts. With
respect to securities held by those investment companies and private
accounts, several persons have the right to receive, or the power to
direct the receipt of dividends from or the proceeds from the sale of,
such securities.
(4) The information reported includes 772,450 shares beneficially owned by
LaSalle Advisors Capital Management, Inc. ("LaSalle") and 1,738,978
shares beneficially owned by ABKB/LaSalle Securities Limited Partnership
("ABKB/LaSalle"), a limited partnership controlled by LaSalle.
Information reported is based upon an amendment to a Schedule 13G filed
with the SEC on February 13, 1998 reporting beneficial ownership as of
December 31, 1997. The Schedule 13G indicates that the reporting
entities are Investment Advisors registered under Section 203 of the
Investment Advisers Act of 1940. The Schedule 13G also indicates that
LaSalle has sole dispositive and voting power with respect to 398,150
shares, shared dispositive power with respect to 374,300 shares, while
ABKB/LaSalle has sole dispositive and voting power with respect to
388,800 shares, shared dispositive power with respect to 1,350,178 shares
and shared voting power with respect to 1,293,903 shares.
(5) Information reported is based upon a Schedule 13D filed with the SEC on
April 25, 1997 by Stichting Pensioenfonds ABP, an entity established
under the laws of The Kingdom of the Netherlands (the "Fund"), whose
principal business is investing funds held on behalf of public sector
employees of The Kingdom of the Netherlands. The Schedule 13D reports
that the Fund beneficially owns and has the sole power to vote and
dispose of 2,740,000 shares and has shared power to dispose of an
additional 359,200 shares of common stock held by the Fund in securities
accounts with ABN AMRO Bank N.V. managed by ABKB/LaSalle Securities and
Cohen & Steers Capital Management, respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Loans Related to Restricted Stock Grants to Officers and Employees. On
January 22, 1997, the Board of Directors of the Company approved and the
Company instituted a loan program under which the Company may make loans to or
on behalf of the Company's employees in amounts equivalent to the employees'
tax liability stemming from grants of restricted stock (the "Loan") made to the
employees under the Company's 1995 Equity Incentive Plan (the "Grant Award").
The amount of each advance extended to an employee of the Company under a Loan
shall be determined on the date or dates on which the Grant Award vests and
shall be
55
<PAGE> 58
PART III
equal to the amount of the tax liability related to the portion of the Grant
Award then vesting, calculated using the employee's actual blended state, local
and Federal tax rate up to a maximum rate of 40% plus the tax liability related
to the then current projected annual dividend income generated by the Grant
Award calculated at a 40% tax rate (Federal, state and local combined). Each
employee receiving such Loan shall execute a promissory note payable to the
Company (the "Note").
Each advance under the Note will bear interest at the Short Term
Applicable Federal Rate (6.42% for Loans made by the Company in 1997) in effect
on the date of the Note (the "Interest Rate"), and such rate shall be fixed
until the fifth anniversary of the Note, at which date the Note shall become
immediately due and payable upon the fifth anniversary of the Note or any date
thereafter at the option of and upon demand by the Company (the "Maturity
Date"). After the fifth anniversary of the Note and until the Maturity Date,
interest shall continue to accrue at either the Interest Rate or, if the
prevailing Short Term Applicable Federal Rate is greater or less than the
Interest Rate by an increment of 4.0%, at the then prevailing Short Term
Applicable Federal Rate. Vested shares of the Grant Award serve as collateral
(the "Pledged Stock") for the Note until such time as the Note has been paid in
full. All dividends related to the employee's Grant Award (not just the vested
portion) will be applied to the outstanding Loan balance, first to interest,
then to outstanding principal. If the market value of the Pledged Stock
declines such that the Loan exceeds 50% of the value of the Pledged Stock (the
"LTV ratio") the Company may require the employee to make a cash payment
sufficient to bring the LTV ratio below 50%, or the Company may sell or
otherwise dispose of the amount of Pledged Stock needed to bring the LTV ratio
below 50%. The Company's recourse against an employee under a Note for
satisfaction of the Loan and all other amounts due is limited to the Company's
rights in the Pledged Stock.
As of March 16, 1998, the Company had extended Loans totaling $936,012
to its employees, including the amounts of $203,433 and $195,431 which were
extended to Messrs. Michaux and Berman, respectively.
Option to Acquire Property. The Company holds a right of first refusal
with respect to approximately three and one-half acres in Gaithersburg,
Maryland owned by an entity in which Mr. Michaux has an ownership interest.
This arrangement was described under "Reorganization Transactions" on page 86
of the Company's prospectus dated November 11, 1993 relating to the initial
public offering.
Loans to Directors and Executive Officers. Messrs. Michaux, Berman and
Blair are partners of an entity that is the general partner of Arbor Commons
Associates Limited Partnership ("Arbor Commons Associates"). Concurrently with
the Company's Offering, the Company purchased an existing participating
mortgage loan made to Arbor Commons Associates, which was originated by CIGNA
Investments, Inc. The mortgage loan is secured by the borrower's interests in
the Avalon Arbor community. The Company purchased the mortgage loan, rather
than the Avalon Arbor community, to avoid the current recapture of certain low
income housing tax credits by certain unaffiliated third-party investors. This
loan has an outstanding principal amount of $28.4 million and accrues interest
at a fixed rate of 10.2% per annum, payable at 9% per annum. Under the terms of
the loan, the Company receives (as contingent interest) 50% of the cash flow
after the 10.2% accrual rate is paid and 50% of the residual profits upon the
sale of the community.
56
<PAGE> 59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements and Financial Statement Schedule:
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for
the years ended December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for
the years ended December 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedule
Schedule III - Real Estate and Accumulated Depreciation F-20
3. Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as a part of this report. F-23
(b) Reports on Form 8-K
</TABLE>
On October 15, 1997, the Company filed a Current Report on Form 8-K, reporting
under item (5) the acquisitions of Avalon at Ballston - Vermont and Quincy
Towers, Avalon at Center Place and Avalon at Providence Park in unrelated
transactions for an aggregate contract purchase price of approximately
$82,448,000 on January 9, 1997, May 16, 1997 and June 27, 1997, respectively.
Historical and pro forma financial information concerning the communities
acquired and included in such filing are as set forth below:
1. Report of Independent Accountants
2. Combined Statement of Revenue and Certain Operating Expenses for the
Year Ended December 31, 1996
3. Notes to combined Statement of Revenue and Certain Operating Expenses
4. Estimates of Net Income and Funds from Operations of Certain Acquired
Communities
5. Notes to Estimates of Net Income and Funds from Operations of Certain
Acquired Communities
6. Pro Forma Condensed Consolidated Statement of Operations for the Six
Months Ended June 30, 1997 and for the Year Ended December 31, 1996
7. Notes to Pro Forma Condensed Consolidated Statement of Operations
On November 24, 1997, the Company filed a Current Report on Form 8-K, reporting
under item (5) the acquisition of a portion of the Trammell Crow Residential -
Midwest portfolio for an aggregate contract purchase price of approximately
$196,000,000.
57
<PAGE> 60
Historical and pro forma financial information concerning the communities
acquired and included in such filing are as set forth below:
1. Report of Independent Accountants
2. Combined Statement of Revenue and Certain Operating Expenses for the Year
Ended December 31, 1996
3. Notes to combined Statement of Revenue and Certain Operating Expenses
4. Estimates of Net Income and Funds from Operations of Certain Acquired
Communities
5. Notes to Estimates of Net Income and Funds from Operations of Certain
Acquired Communities
6. Pro Forma Condensed Consolidated Balance Sheet
7. Notes to Pro Forma Condensed Consolidated Balance Sheet
8. Pro Forma Condensed Consolidated Statement of Operations for the Nine Months
Ended September 30, 1997 and for the Year Ended December 31, 1996
9. Notes to Pro Forma Condensed Consolidated Statements of Operations
On December 12, 1997, the Company filed a Current Report on Form 8-K relating
to offering and sale of the Company's Common Stock.
On December 22, 1997, the Company filed a Current Report on Form 8-K relating
to the offering and sale of $100,000,000 aggregate principal amount of the
Company's 6 7/8% Senior Notes due 2007.
58
<PAGE> 61
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C> <C>
3.1(i)(a) -- Amended and Restated Articles of Incorporation of the Company (1)
3.1(i)(b) -- Articles Supplementary to Amended and Restated Articles of Incorporation Establishing Series A Cumulative
Redeemable Preferred Stock (5)
3.1(i)(c) -- Articles Supplementary to Amended and Restated Articles of Incorporation Establishing Series B Cumulative
Redeemable Preferred Stock (6)
3.1(i)(d) -- Rights Agreement, dated as of March 9, 1998, between Avalon Properties, Inc. And First Union National
Bank, including the Form of Right Certificate as Exhibit B and the Summary of Rights to Purchase
Preferred Shares as Exhibit C (16)
3.1(ii)(a) -- Amended and Restated Bylaws of the Company (2)
3.1(ii)(b) -- Amendment to Amended and Restated Bylaws of the Company (15)
4.1 -- Avalon Properties, Inc. 7-3/8% Senior Notes due 2002 (3)
4.1(a) -- Avalon Properties, Inc. 6-7/8% Notes due 2007 (13)
4.1(b) -- Avalon Properties, Inc. 6-5/8% Notes due 2005 (3)
4.2 -- Indenture dated as of September 18, 1995 (14)
4.3 -- First Supplemental Indenture dated as of September 18, 1995 (3)
4.4 -- Second Supplemental Indenture dated as of December 16, 1997 (13)
4.5 -- Third Supplemental Indenture dated as of January 22, 1998 (14)
10.1+ -- 1995 Equity Incentive Plan (4)
10.3 -- Management Registration Rights Agreement between the Company and certain
Management stockholders (1)
10.6 -- Form of Indemnification Agreement (1)
10.7 -- Swap Agreement with JP Morgan (7)
10.12 -- Master Reimbursement Agreement with Federal National Mortgage Association
10.13 -- Amended and Restated Revolving Credit Agreement with Fleet Bank, National Association dated as of March
31, 1997 (9)
10.14 -- Amended and Restated Revolving Credit Agreement with First Union National Bank of Virginia dated as of
May 30, 1997 (10)
10.15 -- Employment Agreement between the Company and Richard L. Michaux dated July 15, 1997 (11)
10.16 -- Employment Agreement between the Company and Charles H. Berman dated July 15, 1997 (11)
10.17 -- Employment Agreement between the Company and Bryce Blair dated August 4, 1997
10.18 -- Employment Agreement between the Company and Robert H. Slater dated July 17, 1997
10.19 -- Employment Agreement between the Company and Thomas J. Sargeant dated August 4, 1997
10.20 -- Contribution and Exchange Agreement Dated November 7, 1997 (12)
12.1 -- Calculation of Ratios of Earnings to Fixed Charges (8)
12.2 -- Calculation of Ratios of Earnings to Combined Fixed Charges (8)
21.1 -- Schedule of Subsidiaries of the Company
23.1 -- Consent of Coopers & Lybrand L.L.P.
27.1 -- Financial Data Schedule
99.1 -- Merger Agreement, dated as of March 9, 1998, by and between Avalon Properties,
Inc. and Bay Apartment Communities, Inc. (15)
</TABLE>
+ Management contract or compensatory plan or arrangement required to be
filed or incorporated by reference as an exhibit to this Form 10-K pursuant
to Item 14(c) of Form 10-K.
59
<PAGE> 62
(1) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1993.
(2) Incorporated by reference from the Company's Form 8-K Current Report
dated December 4, 1996.
(3) Incorporated by reference from the Company's Form 8-K Current Report
dated September 18, 1995.
(4) Incorporated by reference from the Company's Proxy Statement for the
Annual Meeting of Stockholders held on May 9, 1995.
(5) Incorporated by reference from the Company's Registration Statement on
Form 8-A filed on February 15, 1996.
(6) Incorporated by reference from the Company's Current Report on Form
8-K filed on October 23, 1996.
(8) Incorporated by reference from the Company's Registration Statement in
Form S-3 filed on February 24, 1997, Registration No. 333-22281.
(9) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997.
(10) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
(11) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997.
(12) Incorporated by reference from the Company's Current Report on Form
8-K filed on November 24, 1997.
(13) Incorporated by reference from the Company's Current Report on Form
8-K filed on December 22, 1997.
(14) Incorporated by reference from the Company's Current Report on Form
8-K filed on January 26, 1998.
(15) Incorporated by reference from the Company's Current Report on Form
8-K filed on March 10, 1998.
(16) Incorporated by reference from the Company's Amended Current Report on
Form 8-K/A, dated March 12, 1998.
60
<PAGE> 63
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: March 20, 1998 By /s/ RICHARD L. MICHAUX
---------------------------
Richard L. Michaux, Chairman of the Board
Chief Executive Officer and Director
(Principal Executive Officer)
Date: March 20, 1998 By /s/ CHARLES H. BERMAN
--------------------------
Charles H. Berman, President,
Chief Operating Officer and Director
Date: March 20, 1998 By /s/ THOMAS J. SARGEANT
---------------------------
Thomas J. Sargeant, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 20, 1998 By /s/ MICHAEL A. FUTTERMAN
-----------------------------
Michael A. Futterman, Director
Date: March 20, 1998 By /s/ CHRISTOPHER B. LEINBERGER
----------------------------------
Christopher B. Leinberger, Director
Date: March 20, 1998 By /s/ RICHARD W. MILLER
--------------------------
Richard W. Miller, Director
Date: March 20, 1998 By /s/ ALLAN D. SCHUSTER
--------------------------
Allan D. Schuster, Director
61
<PAGE> 64
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of
Avalon Properties, Inc.:
We have audited the consolidated balance sheets of Avalon Properties,
Inc. (the "Company") as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three year period ended December 31, 1997. We have
also audited the financial statement schedule included on pages F-20, F-21 and
F-22 of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Avalon
Properties, Inc. as of December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the years in the three
year period ended December 31, 1997, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
New York, New York
January 13, 1998, except for Note 14,
as to which the date is March 25, 1998.
COOPERS & LYBRAND L.L.P.
F-1
<PAGE> 65
AVALON PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 12-31-97 12-31-96
------------ -----------
<S> <C> <C>
Real estate
Land $ 247,613 $ 169,079
Buildings and improvements 1,120,505 754,545
Furniture, fixtures and equipment 39,830 27,455
------------ -----------
1,407,948 951,079
Less: accumulated depreciation (69,932) (44,547)
------------ -----------
Net operating real estate 1,338,016 906,532
Construction in progress (including land) 127,038 130,827
------------ -----------
TOTAL REAL ESTATE, NET 1,465,054 1,037,359
Cash and cash equivalents 6,722 14,241
Cash in escrow 4,109 3,945
Resident security deposits 7,812 5,995
Investments in unconsolidated joint ventures 18,315 2,573
Deferred financing costs, net of accumulated amortization
of $1,873 and $2,113 at December 31, 1997 and 1996, respectively 10,022 7,702
Deferred development costs 7,207 5,179
Prepaid expenses and other assets 10,462 5,777
------------ -----------
TOTAL ASSETS $ 1,529,703 $ 1,082,771
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Unsecured Facilities $ 71,500 $ --
Unsecured senior notes, 7-3/8% due 2002, net of unamortized discount 99,892 99,869
Unsecured senior notes, 6-7/8% due 2007, net of unamortized discount 109,803 --
Notes payable 224,934 210,737
Payables for construction 16,311 12,613
Accrued expenses and other liabilities 15,466 10,580
Accrued interest payable 3,041 4,342
Resident security deposits 9,589 6,642
------------ -----------
TOTAL LIABILITIES 550,536 344,783
------------ -----------
Minority interest of unitholders in consolidated operating partneships 18,157 --
============ ===========
Commitments and contingencies
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;
41,975,240 and 33,391,992 shares issued and outstanding
at December 31, 1997 and 1996, respectively 420 334
Additional paid-in capital 987,540 752,159
Deferred compensation (3,265) (1,699)
Dividends in excess of accumulated earnings (23,773) (12,894)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 961,010 737,988
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,529,703 $ 1,082,771
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 66
AVALON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Year ended
-----------------------------------------------------------
12-31-97 12-31-96 12-31-95
-------------- ---------------- --------------
<S> <C> <C> <C>
Revenue:
Rental income $ 169,442 $ 123,354 $ 94,821
Management fees 1,029 1,439 1,926
Other income 633 420 466
---------- ---------- ---------
Total revenue 171,104 125,213 97,213
---------- ---------- ---------
Expenses:
Operating expenses 61,058 47,074 35,998
Interest expense 16,977 9,545 11,056
Depreciation and amortization 29,113 20,956 16,558
General and administrative 5,093 3,438 3,132
Write-off of deferred development costs 650 450 400
---------- ---------- ---------
Total expenses 112,891 81,463 67,144
---------- ---------- ---------
Equity in income of unconsolidated joint ventures 5,689 1,025 440
Interest income 1,346 887 953
Minority interest 174 495 633
---------- ---------- ---------
Income before gain on sale of communities and extraordinary items 65,422 46,157 32,095
Gain on sale of communities 677 7,850 --
---------- ---------- ---------
Income before extraordinary items 66,099 54,007 32,095
Extraordinary items (1,183) (2,356) (1,158)
---------- ---------- ---------
Net income 64,916 51,651 30,937
Dividends attributable to preferred stock (19,656) (10,422) --
---------- ---------- ---------
Net income available to common stockholders $ 45,260 $ 41,229 $ 30,937
========== ========== =========
Per common share:
Income before extraordinary items - basic $ 1.26 $ 1.42 $ 1.13
========== ========== =========
Income before extraordinary items - diluted $ 1.26 $ 1.41 $ 1.13
========== ========== =========
Net income - basic $ 1.23 $ 1.34 $ 1.09
========== ========== =========
Net income - diluted $ 1.22 $ 1.34 $ 1.09
========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 67
AVALON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Shares Issued Amount
---------------------------------- ----------------------------- Additional
Common Preferred Common Preferred Paid-in
Stock Stock Stock Stock Capital
--------------- ------------------ -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance at 12-31-94 28,356,639 -- $ 284 $ -- $425,611
Net income -- -- -- -- --
Dividends declared ($1.46
per share) -- -- -- -- --
Issuance of Common Stock,
net of offering costs 16,426 -- -- -- 335
------------ --------- ----- ---- --------
Balance at 12-31-95 28,373,065 -- 284 -- 425,946
Net income -- -- -- -- --
Dividends declared to common
stockholders ($1.49 per share) -- -- -- -- --
Dividends declared to preferred
stockholders -- -- -- -- --
Issuance of Common Stock,
net of offering costs 4,910,064 -- 49 -- 112,496
Issuance of Restricted Common Stock 108,863 -- 1 -- 2,468
Deferred Compensation,
net of amortization -- -- -- -- --
Issuance of Series A Preferred
Stock, net of offering costs -- 4,455,000 -- 45 107,536
Issuance of Series B Preferred
Stock, net of offering costs -- 4,300,000 -- 43 103,713
------------ --------- ----- ---- --------
Balance at 12-31-96 33,391,992 8,755,000 334 88 752,159
Net income -- -- -- -- --
Dividends declared to common
stockholders ($1.53 per share) -- -- -- -- --
Dividends declared to preferred
stockholders -- -- -- -- --
Issuance of Common Stock,
net of offering costs 8,450,474 -- 85 -- 231,813
Issuance of Restricted Common Stock 132,774 -- 1 -- 3,568
Deferred Compensation,
net of amortization -- -- -- -- --
------------ --------- ----- ---- --------
Balance at 12-31-97 41,975,240 8,755,000 $ 420 $ 88 $987,540
============ ========= ===== ==== ========
<CAPTION>
Dividends in
Excess of
Deferred Accumulated Stockholders'
Compensation Earnings Equity
---------------- ----------------- ----------------
<S> <C> <C> <C>
Balance at 12-31-94 $ -- $ (357) $ 425,538
Net income -- 30,937 30,937
Dividends declared ($1.46
per share) -- (41,413) (41,413)
Issuance of Common Stock,
net of offering costs -- -- 335
--------- --------- ---------
Balance at 12-31-95 -- (10,833) 415,397
Net income -- 51,651 51,651
Dividends declared to common
stockholders ($1.49 per share) -- (45,774) (45,774)
Dividends declared to preferred
stockholders -- (7,938) (7,938)
Issuance of Common Stock,
net of offering costs -- -- 112,545
Issuance of Restricted Common Stock -- -- 2,469
Deferred Compensation,
net of amortization (1,699) -- (1,699)
Issuance of Series A Preferred
Stock, net of offering costs -- -- 107,581
Issuance of Series B Preferred
Stock, net of offering costs -- -- 103,756
--------- --------- ---------
Balance at 12-31-96 (1,699) (12,894) 737,988
Net income -- 64,916 64,916
Dividends declared to common
stockholders ($1.53 per share) -- (56,139) (56,139)
Dividends declared to preferred
stockholders -- (19,656) (19,656)
Issuance of Common Stock,
net of offering costs -- -- 231,898
Issuance of Restricted Common Stock -- -- 3,569
Deferred Compensation,
net of amortization (1,566) -- (1,566)
-------- --------- ---------
Balance at 12-31-97 $ (3,265) $ (23,773) $ 961,010
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 68
AVALON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended
---------------------------------------------------------
12-31-97 12-31-96 12-31-95
-------------- ---------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 64,916 $ 51,651 $ 30,937
Items not requiring (providing) cash:
Depreciation and amortization 29,113 20,956 16,558
Equity in income of unconsolidated joint ventures 65 (258) (754)
Amortization of deferred compensation 967 427 --
Gain on sale of communities (677) (7,850) --
Extraordinary items 1,183 2,356 1,158
Decrease (increase) in cash in escrow, net 966 (84) 703
Increase in prepaids and other assets (6,713) (270) (1,945)
Increase (decrease) in other operating liabilities 3,829 (1,087) 9,657
-------- ------- -------
Net cash provided by operating activities 93,649 65,841 56,314
-------- ------- -------
Cash flows used in investing activities:
Investments in unconsolidated joint ventures (7,980) (580) (4,986)
Proceeds received from JV Partner, net 37,700 -- --
Increase in construction payables 3,698 2,903 5,544
Purchase and development of real estate (471,415) (295,019) (190,140)
Proceeds from the sale of communities, net of selling costs 16,577 31,663 --
-------- ------- -------
Net cash used in investing activities (421,420) (261,033) (189,582)
-------- ------- -------
Cash flows from financing activities:
Issuance of Common Stock, net of offering costs 231,898 112,545 335
Issuance of Preferred Stock, net of offering costs -- 211,337 --
Dividends paid (75,795) (53,712) (41,413)
Borrowings under Unsecured Facilities 626,000 265,000 235,625
Repayments of Unsecured Facilities (554,500) (323,000) (207,395)
Borrowings under notes payable 121,891 15,771 150,179
Repayments of notes payable (25,341) (7,486) (8,908)
Borrowings under construction notes -- 31 14,091
Repayments of construction notes -- (10,508) (5,171)
Payment of deferred financing costs (3,901) (2,346) (5,136)
-------- ------- -------
Net cash provided by financing activities 320,252 207,632 132,207
-------- ------- -------
Net increase (decrease) in cash (7,519) 12,440 (1,061)
Cash and cash equivalents, beginning of year 14,241 1,801 2,862
-------- ------- -------
Cash and cash equivalents, end of year $ 6,722 $14,241 $ 1,801
======== ======= =======
Cash paid for interest, net of amount capitalized $ 17,371 $ 8,723 $ 7,043
======== ======= =======
</TABLE>
Non-cash investing and financing activities: In 1997, $27,305 of debt was
assumed in connection with the Avalon Devonshire acquisition. In 1996, $5,581
and $24,335 of debt was assumed in connection with the Avalon Pines and
AutumnWoods acquisitions, respectively.
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 69
AVALON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. Organization and Formation of the Company
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, (the "Code") and was incorporated
under the General Corporation Law of Maryland on August 24, 1993. The Company
began operations on November 18, 1993 upon the completion of its initial public
offering. The Company is engaged principally in the development, construction,
acquisition and operation of residential apartment communities, which currently
include the Mid-Atlantic, Northeast and Midwest regions of the United States.
Additionally, the Company provides management services for communities owned by
unrelated parties. At December 31, 1997, the Company's portfolio included 64
apartment communities with 19,318 apartment homes and nine apartment
communities with 2,422 apartment homes were under construction.
2. Acquisitions
During the period January 1, 1995 through December 31, 1996, the Company
acquired thirteen existing operating communities containing a total of 3,069
apartment homes from unrelated third parties for an aggregate contract
acquisition price of approximately $196,986 (cumulative capitalized cost of
$202,545).
For the year ended December 31, 1997, the Company acquired fifteen
existing operating communities containing a total of 3,884 apartment homes for
an aggregate contract acquisition price of approximately $308,456 (cumulative
capitalized cost of $310,917). These acquisitions have been accounted for as
purchases of real estate and operating results for those communities are
reflected in the accompanying consolidated financial statements from their
respective dates of acquisition. These communities were acquired with cash
proceeds drawn under the Company's Unsecured Facilities (as hereinafter defined
- - see Note 6), through the issuance of new operating partnership units of
DownREIT partnerships ($18,157) and through the assumption of debt ($27,305).
In connection with the purchase of a portion of the Trammell Crow
Residential - Midwest portfolio on December 22, 1997, the Company expects to
acquire two additional apartment communities containing a total of 704
apartment homes. The Company also acquired certain third-party management
contracts and the right to acquire from an unrelated third-party an undeveloped
parcel of land on which the Company expects to build one apartment community.
The following pro forma operating results for the Company have been
prepared as if the 1997 acquisitions had occurred on January 1, 1996. Unaudited
pro forma financial information is presented for informational purposes only
and may not be indicative of what the actual results of operations of the
Company would have been had the events occurred as of January 1, 1996, and may
not be indicative of the results of operations for future periods.
F-6
<PAGE> 70
<TABLE>
<CAPTION>
Pro Forma
-----------------------------------------
Year ended Year ended
12-31-97 12-31-96
(Unaudited) (Unaudited)
------------------ ------------------
<S> <C> <C>
Revenue $ 196,248 $ 157,439
================== ==================
Income before extraordinary items $ 65,876 $ 53,740
================== ==================
Net income $ 64,692 $ 51,384
================== ==================
Per common share:
Income before extraordinary items- basic $ 1.26 $ 1.41
================== ==================
Income before extraordinary items- diluted $ 1.25 $ 1.40
================== ==================
Net income- basic $ 1.23 $ 1.33
================== ==================
Net income- diluted $ 1.22 $ 1.33
================== ==================
</TABLE>
3. Summary of Significant Accounting Policies
Principles of Consolidation of the Company
The accompanying consolidated financial statements include the accounts of
the Company, its wholly-owned partnerships and subsidiaries and the operating
partnerships structured as DownREITs. All significant intercompany balances
and transactions have been eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires the Company's management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Geographical Concentration
The Company develops and operates residential apartment communities
located in the Northeast, Mid-Atlantic and Midwest regions of the United
States. This concentration imposes on the Company certain risks, which include
local economic conditions, that are not within management's control. See Note
14 regarding the Company's geographical expansion to the Pacific Northwest
region.
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"), No. 130
"Reporting Comprehensive Income" ("SFAS 130") and No. 131 "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS 131").
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
F-7
<PAGE> 71
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. SFAS 131 establishes
standards for disclosing information about an entity's operating segments and
related information in interim and annual financial statements.
The Company has adopted SFAS 128 and SFAS 129 effective with the December
31, 1997 reporting period. The adoption of SFAS 130 and SFAS 131 is not
expected to have a material impact on the Company's financial condition or
results of operations.
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 and 7 years,
respectively. If there is an event or change in circumstance that indicates
an impairment in the value of a community has occurred, the Company's policy is
to 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 the community.
If such carrying amounts are in excess of the estimated projected operating
cash flows 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 are charged to
operations as incurred. Significant renovations or betterments which extend
the economic useful life of the assets are capitalized.
The Company does not 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 Company's Board of Directors approves the decision to
sell.
Investments in Unconsolidated Joint Ventures
Investments in real estate joint ventures are accounted for under the
equity method as the Company does not control the operating and financial
policies of the joint ventures. The joint venture agreements require that a
majority voting interest of the partners approve potential sales, liquidations,
significant refinancings as well as operating budgets and capital and financing
plans.
Cash Equivalents
Cash equivalents consist of highly liquid assets with original maturities
of three months or less from the date of purchase. The majority of the
Company's cash, cash equivalents and cash in escrow is held at major commercial
banks.
F-8
<PAGE> 72
Deferred Financing and Development Costs
Deferred financing costs include fees and costs incurred to obtain debt
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.
Unamortized financing costs are written-off when debt is retired before the
maturity date (see Note 12). 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 consolidated financial statements include a charge to expense for
unrecoverable deferred development costs related to pre-development communities
that may not proceed to development.
Revenue Recognition
Apartment homes are leased to individual residents on a short-term basis.
Rental revenue is recognized monthly as earned. Fees for management of
communities owned by unrelated parties are also recognized monthly as earned.
Reclassifications
Certain reclassifications have been made to amounts in prior years'
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.
Income Taxes
The Company elected to be taxed as a REIT under the Code commencing with
the taxable year ended December 31, 1993. To qualify as a REIT, the Company
must, along with other requirements, distribute dividends to its stockholders
in an amount equal to at least 95% of the Company's taxable income, as defined
in the Code. As long as the Company qualifies for taxation as a REIT, the
Company will not be subject to Federal corporate income taxes. Accordingly, no
provision for Federal income taxes has been made for any period of the Company.
However, the Company may be subject to certain state and local income, excise
or franchise taxes.
The total of the four dividends paid in 1997 exceeds the net income
available to common stockholders for the year ended December 31, 1997 computed
in accordance with Federal income tax regulations. Accordingly, the Company
determined that 80% of the $1.53 per common share dividend paid and declared in
1997 represented ordinary dividend income, 17% is a non-taxable return of
capital, 2% is unrecaptured section 1250 capital gain and the remaining 1% is
20 percent long-term capital gain.
The Company determined that 97% of the $2.25 and $2.24 per share dividend
paid and declared on the Series A Preferred Stock and the Series B Preferred
Stock, respectively, in 1997 represented ordinary dividend income, 2% is
unrecaptured section 1250 capital gain and the remaining 1% is 20 percent
long-term capital gain.
Per Common Share Disclosures
Per common share disclosures for the years ended December 31, 1997, 1996
and 1995 are based upon the following basic and diluted weighted average number
of shares of common stock outstanding.
F-9
<PAGE> 73
<TABLE>
<CAPTION>
Year ended
--------------------------------------------------------------
12-31-97 12-31-96 12-31-95
------------------- ------------------- ------------------
<S> <C> <C> <C>
Weighted average common shares outstanding- basic 36,762,781 30,739,504 28,365,427
Shares issuable from assumed conversion of:
Common stock options 242,756 96,689 45,376
Operating partnership units 611 -- --
------------------- ------------------- ------------------
Weighted average common shares outstanding- diluted 37,006,148 30,836,193 28,410,803
=================== =================== ==================
</TABLE>
4. Stockholders' 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% of the liquidation preference of $25
per share, respectively. 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. The Series A Preferred Stock and the Series B Preferred Stock have no
stated maturity, are not subject to any sinking fund or mandatory redemption,
are not convertible into any other securities of the Company and may be
redeemed solely from proceeds of other capital stock of the Company, which
include shares of other series of preferred stock.
During 1997, the Company completed three separate offerings of Common
Stock totaling 8,403,000 shares. The net proceeds of approximately $231,324
from these offerings were used to retire indebtedness under the Company's
Unsecured Facilities.
On December 17, 1997, the Company filed a shelf registration statement
with the Securities and Exchange Commission covering up to $400,000 of
securities. The registration statement provides for the issuance of Common
Stock, Preferred Stock, debt securities and warrants to purchase Common Stock.
5. 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 December 31, 1997, the partnership had $2,898 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
December 31, 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.
6. Unsecured Facilities
The Company's unsecured credit facility (the "Unsecured Facility") is
provided by a consortium of banks that provides for $175,000 in short-term
credit and is subject to an annual fee of $263. The Unsecured Facility expires
in March 2000. As of December 31, 1997, approximately $16,167 of available
capacity was
F-10
<PAGE> 74
used to provide letters of credit and $50,000 was borrowed under the facility.
Accordingly, the balance that remained available at December 31, 1997 to be
drawn under the Unsecured Facility is $108,833. The Unsecured Facility bears
interest based upon a LIBOR, Prime or CD rate election at the Company's option.
Current pricing level 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 in March 2000 and bears a current interest rate of LIBOR plus
.80%. At December 31, 1997, $3,214 of available capacity was used to provide
letters of credit and $21,500 was borrowed under the Supplemental Unsecured
Facility. Accordingly, the balance that remains available at December 31, 1997
to be drawn under the Supplemental Unsecured Facility is $25,286.
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 years ended December 31, 1997, 1996 and 1995 were 6.3%, 7.3%
and 7.8%, respectively. Including the cost of facility fees and unused fees,
the weighted average effective interest rates on borrowings under the Unsecured
Facilities for the years ended December 31, 1997, 1996 and 1995 were 6.8%, 7.4%
and 8.1%, respectively.
The Company, among other things, is subject to certain customary covenants
under the credit agreements for the Unsecured Facilities including maintaining
certain maximum leverage ratios, minimum fixed charge coverage ratio, minimum
unencumbered asset and equity levels and is restricted from paying dividends in
amounts that exceed 95% of the Company's Funds from Operation, as defined.
F-11
<PAGE> 75
7. Notes Payable
The following notes payable were outstanding at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---------------- -----------------
<S> <C> <C>
Tax-exempt bonds:
Notes with fixed interest at:
7.04%, maturing July 2024 (c) $ 11,550 $ 11,550
7.06%, maturing July 2024 (c) 9,780 9,780
7.04%, maturing July 2024 (c) 12,360 12,360
7.55%, maturing August 2024 (a) (c) 19,315 19,487
6.56%, maturing February 2025 (a) (c) 15,071 15,284
6.95%, maturing June 2026 (a) (c) 13,917 14,070
8.02%, maturing June 2026 (a) (c) 16,835 16,782
8.00%, maturing June 2026 (a) (c) 26,815 26,724
6.85%, maturing June 2026 (a) (c) 6,892 6,969
7.57%, maturing May 2027 (a) (c) 12,019 --
7.73%, maturing December 2036 (a) (c) 8,731 8,771
--------- ---------
Total fixed rate notes 153,285 141,777
--------- ---------
Tax-exempt variable rate notes maturing (a) (b) (c)
December 2025 27,305 --
June 2026 8,060 8,060
June 2026 11,500 11,500
June 2026 6,387 6,387
--------- ---------
Total variable rate notes 53,252 25,947
--------- ---------
Conventional notes with fixed interest at:
9.25%, repaid August 1997 -- 24,335
7.375%, maturing September 2002 99,892 99,869
8.00%, maturing December 2003 (c) 5,433 5,529
8.93%, maturing November 2004 (c) 12,964 13,149
7.035%, maturing December 2007 109,803 --
--------- ---------
Total fixed rate notes 228,092 142,882
--------- ---------
Total notes payable $ 434,629 $ 310,606
========= =========
</TABLE>
(a) Various lenders require cash to be held in escrow for interest, property
taxes, principal repayments and bond remarketing costs.
(b) Average interest rates on these notes ranged from 4.09% to 5.76% during
the year ended December 31, 1997 and 2.37% to 4.93% during the year ended
December 31, 1996.
(c) Notes are collateralized by a community.
F-12
<PAGE> 76
Scheduled maturities of notes payable are as follows for the years ending
December 31:
<TABLE>
<S> <C>
1998 $ 1,180
1999 1,314
2000 1,429
2001 1,531
2002 101,535
Thereafter 327,640
--------
Total notes payable $434,629
========
</TABLE>
Capitalized interest was $9,024, $12,210, and $6,027 for the years ended
December 31, 1997, 1996 and 1995, respectively. The weighted average interest
rates on all borrowings outstanding (including the Unsecured Facilities and
related cost of the facility fees) during the years ended December 31, 1997,
1996 and 1995 was 6.90%, 7.26%, and 7.04%, respectively.
On April 28, 1997, the Company completed the loan closing related to the
tax-exempt financing for the Avalon Fields apartment community. The Community
Development Administration of Maryland issued $12,088 of thirty-year fixed-rate
bonds at an all-in rate of 7.57%. The net cash proceeds from the loan closing
of approximately $11,565 were used to retire indebtedness under the Company's
Unsecured Facilities.
On October 8, 1997, the Company obtained an interest rate protection
agreement for a notional amount of $75,000, which terminated on December 11,
1997. The Company realized a loss of $1,764 related to this interest rate
protection that will be amortized as additional interest expense over the term
of the $110,000 unsecured senior notes offering completed on December 16, 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 ceiling agreement for $101
from Morgan Guaranty Trust Company of New York. This agreement terminates on
October 31, 2002 and serves to limit the interest rate to no higher than 6.9%
per annum. This agreement had an estimated unrealized loss of $62 based on
prevailing interest rates at December 31, 1997.
On December 16, 1997, the Company completed a $110,000 offering of
unsecured senior notes. The notes bear an interest rate at 6.875% payable
semi-annually on June 15 and December 15 and will mature on December 15, 2007.
The notes were sold at a price of 99.821% of par value to yield 6.9% to
maturity or a 110 basis point spread over the 10-year U.S. Treasury Note rate.
The net proceeds were used to repay amounts outstanding under the Company's
Unsecured Facilities.
8. Investments in Unconsolidated Joint Ventures
At December 31, 1997, investments in joint ventures consisted 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 50% general partnership interest in Avalon
Grove. At December 31, 1996, investments in joint ventures included 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 and
100% of the operating income from the Avalon Grove joint venture. The
following is a combined summary of the financial position of these joint
ventures for the years presented:
F-13
<PAGE> 77
<TABLE>
<CAPTION>
Unaudited
-------------------------------------
12-31-97 12-31-96
---------------- ---------------
<S> <C> <C>
Assets:
Real estate, net $ 97,964 $ 92,835
Other assets 10,790 5,029
--------- --------
Total assets $ 108,754 $ 97,864
========= ========
Liabilities and partners' equity:
Mortgage notes payable $ 26,000 $ 26,000
Other liabilities 4,164 3,786
Partners' equity 78,590 68,078
--------- --------
Total liabilities and partners' equity $ 108,754 $ 97,864
========= ========
</TABLE>
The following is a combined summary of the results of operations of these
joint ventures for the periods presented:
<TABLE>
<CAPTION>
Year ended
---------------------------------------------------
12-31-97 12-31-96 12-31-95
---------------- --------------- --------------
<S> <C> <C> <C>
Summary of operations:
Rental income $16,497 $10,238 $ 9,004
Other income 44 58 67
Operating expenses (5,020) (4,238) (3,610)
Mortgage interest expense (893) (849) (1,027)
Depreciation and amortization (1,869) (1,779) (1,706)
------- ------- -------
Net income $ 8,759 $ 3,430 $ 2,728
======== ======== =======
</TABLE>
In 1997, the Company completed the construction of Avalon Grove, a
community which was subject to an agreement to form a joint venture with The
Prudential Insurance Company of America ("Prudential"). The agreement provided
for the admission of Prudential to the Company's single purpose entity owning a
fee simple interest in the community. On December 8, 1997, Prudential
exercised its right to acquire a 50% equity interest and 50% cash flow interest
in this community and made an equity contribution of $37,800. The proceeds of
the equity contribution were used primarily to repay amounts outstanding under
the Company's Unsecured Facilities. Operating cash flow from this community,
after the Company receives a management fee and after Prudential receives a
preferred return on two thirds of its equity contribution, will be allocated
pursuant to the cash flow interests of the Company and Prudential.
9. Commitments and Contingencies
401(k) Savings Plan
Eligible employees of the Company participate in a contributory employee
savings plan. Under the plan, the Company may match a percentage of
contributions made by eligible employees, such percentage to apply to a maximum
of 4% of their annual salary. The Company's contribution under this plan for
1997, 1996 and 1995 were $381, $322 and $223, respectively.
Employment Agreements
The Company entered into employment agreements with five executives that
will expire on December 31, 1999 and will automatically be renewed for
successive one-year terms, unless otherwise terminated. Each employment
agreement provides for annual minimum base salary increases based on increases
in the
F-14
<PAGE> 78
Consumer Price Index, plus additional compensation as a discretionary bonus as
determined by the Compensation Committee of the Board of Directors.
Contingencies
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. These matters are generally covered by
insurance. While the resolution of these matters cannot be predicted with
certainty, Management believes that the final outcome of such matters will not
have a material adverse effect on the financial position or results of
operations of the Company.
10. Value of Financial Instruments
Cash Equivalents and Cash in Escrow
The Company estimates that the fair value approximates carrying value due
to the relatively short maturity of these instruments.
Notes Payable, Loans Payable, Tax-Exempt Bonds and Unsecured Credit Facilities
The Company determines the fair value based on an analysis of discounted
future cash flows at a discount rate that approximates the Company's effective
current borrowing rate for instruments of comparable maturities. Based on this
analysis, the Company has determined that the fair value of these instruments
approximates carrying value.
11. Stock-Based Compensation Plans
The Company has adopted the 1995 Equity Incentive Plan (the "Plan"), as
amended and restated. Plan participants include officers of the Company, key
employees, non-employee directors, as well as other non-executive personnel of
the Company. The Plan authorizes (i) the grant of stock options that qualify
as incentive stock options under Section 422 of the Code, (ii) the grant of
stock options that do not so qualify, (iii) grants of shares of restricted and
unrestricted Common Stock contingent upon the attainment of performance goals
or subject to other restrictions, (iv) grants of shares of unrestricted Common
Stock in lieu of cash compensation and (v) dividend equivalent rights.
Under the Plan, a maximum of 3,315,054 shares of Common Stock may be
issued, plus any shares of Common Stock represented by awards under the
Company's 1993 Stock Option and Incentive Plan (the"1993 Plan") that are
forfeited, canceled, reacquired by the Company, satisfied without the issuance
of Common Stock or otherwise terminated (other than by exercise). Options
granted to officers, non-employee directors and employees under the Plan
generally vest ratably over a three-year term, expire ten years from the date
of grant and may be exercised at the market price on the date of grant.
Information with respect to stock options granted under the Plan and the 1993
Plan is as follows:
F-15
<PAGE> 79
<TABLE>
<CAPTION>
Weighted
Average
Exercise Price
Shares Per Share
--------------------- ------------------------
<S> <C> <C>
Options outstanding, December 31, 1994 1,069,750 $ 20.522
Exercised (15,000) 20.500
Granted 137,150 20.726
Forfeited (163,750) 20.511
--------- --------
Options outstanding, December 31, 1995 1,028,150 $ 20.551
Exercised (36,413) 20.630
Granted 106,800 22.409
Forfeited (43,536) 20.636
--------- --------
Options outstanding, December 31, 1996 1,055,001 $ 20.733
Exercised (45,313) 20.612
Granted 1,211,000 29.213
Forfeited (3,653) 22.197
--------- --------
Options outstanding, December 31, 1997 2,217,035 $ 25.365
========= ========
Options exercisable:
December 31, 1995 604,667 $ 20.031
========= ========
December 31, 1996 908,345 $ 20.525
========= ========
December 31, 1997 939,767 $ 20.619
========= ========
</TABLE>
Options to purchase 730,486, 711,223 and 924,350 shares of common stock
were available for grant under the Plan at December 31, 1997, 1996 and 1995,
respectively.
The Company has adopted the disclosure-only provision of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation expense has been recognized for
the options described above. Had compensation expense for these options been
determined based on the fair value at the grant date consistent with the
provisions of SFAS No. 123, the Company's net income and net income per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Pro Forma
----------------------------------------
Year ended Year ended
12-31-97 12-31-96
------------------ -------------------
<S> <C> <C>
Income before extraordinary items $ 65,505 $ 53,861
======== ========
Net income $ 64,322 $ 51,505
======== ========
Income before extraordinary items per common share - basic $ 1.25 $ 1.41
======== ========
Income before extraordinary items per common share - diluted $ 1.24 $ 1.41
======== ========
Net income per share - basic $ 1.21 $ 1.34
======== ========
Net income per share - diluted $ 1.20 $ 1.33
======== ========
</TABLE>
F-16
<PAGE> 80
The fair value for the Company's stock options granted subsequent to
December 31, 1995 was estimated at the time the options were granted using the
Binomial option pricing model with the following assumptions for 1997 and 1996,
respectively: risk-free interest rates ranging from 5.8% to 6.7% and 5.7% to
6.9%, dividend yields ranging from 5.0% to 5.5% and 5.7% to 7.0%, volatility
factors of the expected market price of the Company's Common Stock of .142 and
.176; and a weighted-average expected life of the options of 8 years. As of
December 31, 1997, the weighted average remaining contractual life of all
options outstanding was 8.2 years.
12. 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 totaling approximately $1,183 were written off.
In August 1996, the Company recorded a non-recurring charge of $2,356 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.
In 1995, the unamortized deferred financing costs associated with the
retirement of the secured revolving credit facility totaling $1,158 were
written off.
13. Quarterly Financial Information (Unaudited)
The following summary represents the quarterly results of operations for
the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------------------------
1997 March 31 June 30 September 30 December 31
- ---- ------------- ----------- --------------- --------------
<S> <C> <C> <C> <C>
Total revenue $37,527 $40,772 $ 44,583 $ 48,222
Income before extraordinary items $14,296 $15,859 $ 17,823 $ 18,121
Net income available to common stockholders $ 8,199 $10,945 $ 12,909 $ 13,207
Income before extraordinary items per common share - basic $ 0.280 $ 0.306 $ 0.336 $ 0.336
Income before extraordinary items per common share - diluted $ 0.278 $ 0.304 $ 0.334 $ 0.335
Net income per common share - basic $ 0.245 $ 0.306 $ 0.336 $ 0.336
Net income per common share - diluted $ 0.243 $ 0.304 $ 0.334 $ 0.335
</TABLE>
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------------------------
1996 March 31 June 30 September 30 December 31
- ---- ------------- ----------- --------------- --------------
<S> <C> <C> <C> <C>
Total revenue $28,108 $29,831 $ 32,811 $ 34,463
Income before extraordinary items $ 9,542 $11,495 $ 11,622 $ 13,498
Net income available to common stockholders $ 8,456 $ 8,979 $ 6,798 $ 16,996
Income before extraordinary items per common share - basic $ 0.280 $ 0.292 $ 0.298 $ 0.554
Income before extraordinary items per common share - diluted $ 0.280 $ 0.292 $ 0.297 $ 0.538
Net income per common share - basic $ 0.280 $ 0.292 $ 0.221 $ 0.544
Net income per common share - diluted $ 0.280 $ 0.292 $ 0.221 $ 0.538
</TABLE>
The sum of the quarterly net income per common share, basic and diluted,
for 1997 and 1996 are not equal to the full year amounts primarily because the
computations for each quarter and the full year are made independently.
14. Subsequent Events
F-17
<PAGE> 81
On January 7, 1998, the Company purchased two apartment communities
located in the Minneapolis metropolitan area. Carriage Green, a 246 apartment
home community located in Eagan, Minnesota, and Summer Place, a 160 apartment
home community located in Plymouth, Minnesota, were acquired for $27,625.
On January 9, 1998, the Company purchased a 5-story office building
located in Alexandria, Virginia for approximately $6,600. The Company has
relocated its Mid-Atlantic regional office to this location and it occupies
half of the 60,000 net rentable square feet of this office building. The
remaining 30,000 square feet is rented to unrelated third party tenants at
market rents.
On January 15, 1998, the Company announced that it entered into a letter
of intent with Prudential to purchase the residential component of the
Prudential Center in Boston Massachusetts. This property contains
approximately 779 apartment homes and related underground parking.
Negotiations are in a preliminary state, and there can be no assurance that
these negotiations will be successful.
On January 22, 1998, the Company completed a $100,000 offering of
unsecured senior notes. The notes bear an interest rate at 6.625% payable
semi-annually on January 15 and July 15 and will mature on January 15, 2005.
The notes were sold at a price of 99.976% of par value to yield 6.629% to
maturity or a 111 basis point spread over the 7-year U.S. Treasury Note rate.
The net proceeds of approximately $99,400 were used to repay amounts
outstanding under the Company's Unsecured Facilities.
On January 27, 1998, the Company completed the sale of 923,856 shares of
Common Stock to Prudential, under its existing shelf registration at a net
purchase price of $29.09 per share. The net proceeds of approximately $26,872
were used to retire indebtedness under the Company's Unsecured Facilities.
On February 26, 1998, the Company purchased a 7.4 acre tract of land in
Danbury, Connecticut for $2,100. A new 268 apartment community, Avalon Valley,
will commence construction in the second quarter of 1998.
On February 27, 1998, the Company purchased a 32 acre tract of land in
Danbury, Connecticut for $3,271. Construction of a new 135 apartment
community, Avalon Lake, commenced in the first quarter of 1998.
On March 8, 1998, the Company announced that it is has entered into a
definitive agreement to acquire selected assets on a presale basis from
Trammell Crow Residential - Pacific Northwest (TCR-NW). The presale
acquisitions are expected to be completed during the next 24 to 36 months. The
acquisitions include seven communities in the Seattle, Washington market and
one community in the Portland, Oregon market for a total investment by the
Company of up to $279,000. Together, these eight communities contain 2,411
apartment homes. The Company will manage these communities after acquiring
ownership.
On March 8, 1998, the Company announced that it has entered into a
definitive strategic merger agreement with Bay Apartment Communities, Inc.
("Bay"), pursuant to which the Company will be merged into Bay, the surviving
entity (the "Merger"). Under the terms of the agreement, each outstanding
common share of the Company will be exchanged for 0.7683 shares of common stock
of Bay. The Merger will be structured as a purchase of the Company by Bay for
accounting purposes. The Merger is expected to close in June 1998 and is
subject to the approval of both companies' shareholders and other customary
regulatory conditions and there can be no assurance that the Merger will be
consummated, that the required conditions to closing will be met, or that the
Merger will be terminated. The surviving company, to be named Avalon Bay
Communities, Inc. (the "New Company"), will own 140 apartment communities
containing 40,506 apartment homes in 29 markets in 15 states and the District
of Columbia.
On March 25, 1998, the Company purchased a 22.5 acre tract of land in
Wilmington, Massachusetts for $1,500. Construction of a new 204 apartment
community, Avalon Oaks, will commence in the second quarter of 1998.
F-18
<PAGE> 82
In connection with an agreement executed by the Company in March 1998 which
provides for the buyout of certain partners in DownREIT V Limited Partnership,
the Company granted such partners, or their respective affiliates, the option
to purchase two communities owned by the Company and located in Michigan for an
aggregate purchase price of approximately $43,900. The purchase option expired
on July 20, 1998.
F-19
<PAGE> 83
SCHEDULE III
AVALON PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST
-------------------------
COSTS
SUBSEQUENT
BUILDING & TO ACQUISITION/
LAND IMPROVEMENTS CONSTRUCTION LAND
----------- ------------ --------------- --------
<S> <C> <C> <C> <C>
Current Communities
4100 Massachusetts Avenue $ 6,848 $ 27,609 $ 474 $ 6,848
AutumnWoods 6,096 24,379 156 6,096
Avalon Arbor 5,133 20,958 2,370 5,133
Avalon at Ballston 7,291 29,166 436 7,291
Avalon at Boulders 3,207 12,831 49 3,207
Avalon at Carter Lake 2,280 9,128 152 2,280
Avalon at Decoverly 6,157 24,791 203 6,157
Avalon at Dulles 2,302 9,207 197 2,302
Avalon at Fairway Hills I 1,847 7,386 221 1,847
Avalon at Fairway Hills II 6,765 27,046 113 6,765
Avalon at Gayton 2,907 6,626 412 2,907
Avalon at Hampton I 727 2,908 129 727
Avalon at Hampton II 1,601 6,461 167 1,601
Avalon at Lake Arbor 2,354 9,541 55 2,354
Avalon at Lexington 2,124 12,061 140 2,124
Avalon at Park Center 7,293 29,400 965 7,293
Avalon at Symphony Glen 1,594 6,377 195 1,594
Avalon Birches 2,678 10,735 48 2,678
Avalon Chase 4,718 18,897 46 4,718
Avalon Commons 4,658 17,603 9,471 4,658
Avalon Court 3,083 5,048 9,100 3,083
Avalon Cove 8,760 78,531 3,000 8,760
Avalon Crescent 13,851 34,753 8,021 13,851
Avalon Crossing 2,207 11,188 383 2,207
Avalon Fields 2,608 11,654 36 2,608
Avalon Gates 4,414 28,343 2,612 4,414
Avalon Glen 5,956 23,935 353 5,956
Avalon Green 1,820 10,156 463 1,820
Avalon Knoll 1,528 6,113 426 1,528
Avalon Landing 1,849 7,404 50 1,849
Avalon Lea 3,193 12,773 164 3,193
Avalon Park 3,903 15,611 434 3,903
Avalon Pavilions 11,256 45,023 414 11,256
Avalon Pines 1,714 6,864 81 1,714
Avalon Pointe 1,537 6,175 129 1,537
Avalon Ridge 4,939 19,755 575 4,939
Avalon Run East 1,579 14,423 231 1,579
Avalon Springs 2,116 12,042 1,617 2,116
Avalon Station 1,719 10,086 196 1,719
Avalon Summit 1,743 14,451 95 1,743
Avalon Towers 3,118 12,702 123 3,118
Avalon View 3,529 14,114 169 3,529
Avalon Walk I 6,877 27,502 208 6,877
Avalon Walk II 2,225 21,222 293 2,225
Avalon Watch 5,585 22,339 499 5,585
Avalon West 944 9,680 186 944
Avalon Woods 1,490 6,610 219 1,490
Longwood Towers 4,219 13,240 70 4,219
--------- ---------- -------- ----------
186,342 814,847 46,146 186,342
--------- ---------- -------- ----------
<CAPTION>
TOTAL COST
----------------------------
BUILDING/
CONSTRUCTION TOTAL COST, NET YEAR OF
IN PROGRESS & ACCUMULATED OF ACCUMULATED COMPLETION/
IMPROVEMENTS TOTAL DEPRECIATION DEPRECIATION ENCUMBRANCES ACQUISITION
-------------- ---------- ------------ --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Current Communities
4100 Massachusetts Avenue $ 28,083 $ 34,931 $ 2,793 $ 32,138 $ -- 1994
AutumnWoods 24,535 30,631 725 29,906 -- 1996
Avalon Arbor 23,328 28,461 4,092 24,369 -- 1993 **
Avalon at Ballston 29,602 36,893 3,371 33,522 -- 1993 **
Avalon at Boulders 12,880 16,087 470 15,617 -- 1996
Avalon at Carter Lake 9,280 11,560 864 10,696 -- 1994
Avalon at Decoverly 24,994 31,151 1,678 29,473 -- 1995
Avalon at Dulles 9,404 11,706 1,152 10,554 12,360 1993 **
Avalon at Fairway Hills I 7,607 9,454 941 8,513 11,500 1993 **
Avalon at Fairway Hills II 27,159 33,924 1,111 32,813 -- 1996
Avalon at Gayton 7,038 9,945 1,034 8,911 -- 1993 **
Avalon at Hampton I 3,037 3,764 459 3,305 8,060 1993 **
Avalon at Hampton II 6,628 8,229 863 7,366 11,550 1993 **
Avalon at Lake Arbor 9,596 11,950 668 11,282 -- 1995
Avalon at Lexington 12,201 14,325 1,341 12,984 15,071 1994
Avalon at Park Center 30,365 37,658 3,245 34,413 -- 1994
Avalon at Symphony Glen 6,572 8,166 820 7,346 9,780 1993 **
Avalon Birches 10,783 13,461 857 12,604 -- 1995
Avalon Chase 18,943 23,661 1,035 22,626 -- 1996
Avalon Commons 27,074 31,732 342 31,390 -- 1997
Avalon Court 14,148 17,231 109 17,122 -- 1997
Avalon Cove 81,531 90,291 2,600 87,691 -- 1997
Avalon Crescent 42,774 56,625 810 55,815 -- 1997
Avalon Crossing 11,571 13,778 414 13,364 -- 1996
Avalon Fields 11,690 14,298 763 13,535 12,019 1996
Avalon Gates 30,955 35,369 671 34,698 -- 1997
Avalon Glen 24,288 30,244 2,613 27,631 -- 1993**/95
Avalon Green 10,619 12,439 818 11,621 -- 1995
Avalon Knoll 6,539 8,067 942 7,125 13,917 1993 **
Avalon Landing 7,454 9,303 613 8,690 6,892 1995
Avalon Lea 12,937 16,130 1,575 14,555 16,835 1993 **
Avalon Park 16,045 19,948 1,963 17,985 -- 1993 **
Avalon Pavilions 45,437 56,693 5,397 51,296 -- 1993 **
Avalon Pines 6,945 8,659 324 8,335 5,433 1996
Avalon Pointe 6,304 7,841 561 7,280 6,387 1994
Avalon Ridge 20,330 25,269 2,460 22,809 26,815 1993 **
Avalon Run East 14,654 16,233 575 15,658 -- 1996
Avalon Springs 13,659 15,775 408 15,367 -- 1997
Avalon Station 10,282 12,001 727 11,274 -- 1994
Avalon Summit 14,546 16,289 774 15,515 -- 1996
Avalon Towers 12,825 15,943 774 15,169 -- 1995
Avalon View 14,283 17,812 1,734 16,078 19,315 1993 **
Avalon Walk I 27,710 34,587 3,176 31,411 -- 1993 **
Avalon Walk II 21,515 23,740 1,909 21,831 12,964 1994
Avalon Watch 22,838 28,423 2,813 25,610 - 1993 **
Avalon West 9,866 10,810 473 10,337 8,731 1996
Avalon Woods 6,829 8,319 826 7,493 -- 1994
Longwood Towers 13,310 17,529 1,747 15,782 -- 1993
---------- ---------- ------- ------------ -----------
860,993 1,047,335 66,430 980,905 197,629
---------- ---------- ------- ------------ -----------
</TABLE>
F-20
<PAGE> 84
AVALON PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST
--------------------------
COSTS
SUBSEQUENT
BUILDING & TO ACQUISITION/
LAND IMPROVEMENTS CONSTRUCTION LAND
----------- ------------ --------------- --------
<S> <C> <C> <C> <C>
Acquisitions
Aspen Meadows 2,487 9,948 -- 2,487
Avalon at Ballston -
Vermont/Quincy 9,340 37,382 -- 9,340
Avalon at Center Place -- 26,424 -- --
Avalon at Danada Farms 7,514 30,057 -- 7,514
Avalon at Geist 2,416 9,664 -- 2,416
Avalon at Montgomery 3,031 12,122 -- 3,031
Avalon at Providence Park 2,152 8,914 -- 2,152
Avalon at Stratford Green 4,314 17,258 -- 4,314
Avalon at Willow Lake 2,989 11,955 -- 2,989
Avalon Devonshire 7,229 28,914 -- 7,229
Avalon Heights 3,062 12,246 -- 3,062
Village Park of Troy 6,258 25,032 -- 6,258
Village Park of Westmont 5,149 20,594 -- 5,149
--------- ----------- -------- ---------
55,941 250,510 -- 55,941
--------- ----------- -------- ---------
Development Communities*
Avalon at Cameron Court -- 25,108 -- --
Avalon at Fair Lakes 1,147 16,347 -- 1,147
Avalon at Faxon Park 179 10,601 -- 179
Avalon Bronxville -- 3,767 -- --
Avalon Cove South -- 5,685 -- --
Avalon Crest -- 14,678 -- --
Avalon Fields II -- 2,997 -- --
Avalon Gardens 4,004 41,976 -- 4,004
Avalon Willow -- 12,714 -- --
Issaquah *** -- 8,664 -- --
Kaiser *** -- 6,895 -- --
--------- ----------- -------- ---------
5,330 149,432 -- 5,330
--------- ----------- -------- ---------
Major Renovations/Improvements
Longwood Towers -- -- 19,848 --
Corporate -- 227 6,363 --
--------- ----------- -------- ---------
$ 247,613 $ 1,215,016 $ 72,357 $ 247,613
========= =========== ======== =========
<CAPTION>
TOTAL COST
----------------------------
BUILDING/
CONSTRUCTION TOTAL COST, NET YEAR OF
IN PROGRESS & ACCUMULATED OF ACCUMULATED COMPLETION/
IMPROVEMENTS TOTAL DEPRECIATION DEPRECIATION ENCUMBRANCES ACQUISITION
-------------- ---------- ------------ --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Acquisitions
Aspen Meadows 9,948 12,435 16 12,419 -- 1997
Avalon at Ballston -
Vermont/Quincy 37,382 46,722 995 45,727 -- 1997
Avalon at Center Place 26,424 26,424 438 25,986 -- 1997
Avalon at Danada Farms 30,057 37,571 22 37,549 -- 1997
Avalon at Geist 9,664 12,080 7 12,073 -- 1997
Avalon at Montgomery 12,122 15,153 10 15,143 -- 1997
Avalon at Providence Park 8,914 11,066 127 10,939 -- 1997
Avalon at Stratford Green 17,258 21,572 13 21,559 -- 1997
Avalon at Willow Lake 11,955 14,944 9 14,935 -- 1997
Avalon Devonshire 28,914 36,143 22 36,121 27,305 1997
Avalon Heights 12,246 15,308 46 15,262 -- 1997
Village Park of Troy 25,032 31,290 96 31,194 -- 1997
Village Park of Westmont 20,594 25,743 57 25,686 -- 1997
----------- ----------- -------- ----------- ---------
250,510 306,451 1,858 304,593 27,305
----------- ----------- -------- ----------- ---------
Development Communities*
Avalon at Cameron Court 25,108 25,108 -- 25,108 --
Avalon at Fair Lakes 16,347 17,494 11 17,483 --
Avalon at Faxon Park 10,601 10,780 -- 10,780 --
Avalon Bronxville 3,767 3,767 -- 3,767 --
Avalon Cove South 5,685 5,685 -- 5,685 --
Avalon Crest 14,678 14,678 -- 14,678 --
Avalon Fields II 2,997 2,997 -- 2,997 --
Avalon Gardens 41,976 45,980 135 45,845 --
Avalon Willow 12,714 12,714 -- 12,714 --
Issaquah *** 8,664 8,664 -- 8,664 --
Kaiser *** 6,895 6,895 -- 6,895 --
----------- ----------- -------- ----------- ---------
149,432 154,762 146 154,616 --
----------- ----------- -------- ----------- ---------
Major Renovations/Improvements
Longwood Towers 19,848 19,848 -- 19,848 -- 1993
Corporate 6,590 6,590 1,498 5,092 -- --
----------- ----------- -------- ----------- ---------
$ 1,287,373 $ 1,534,986 $ 69,932 $ 1,465,054 $ 224,934
=========== =========== ======== =========== =========
</TABLE>
*Under construction at December 31, 1997.
**Reflects acquisition of communities from the Predecessor of the Company on
November 18, 1993.
*** Presale Development Community.
F-21
<PAGE> 1
Exhibit 10.17
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") made as of the fourth day of
August, 1997 by and between Bryce Blair, residing at 24 Middle Street, Hingham,
MA 02043 (hereinafter referred to as "Executive") and Avalon Properties, Inc.,
a Maryland corporation, having a place of business at located at 100 Grandview
Road, Braintree, MA 02184 (hereinafter referred to as the "Company").
WHEREAS, Executive and the Company desire to enter into an Employment
Agreement effective as of January 1, 1997 on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, the parties hereto do hereby agree as follows:
1. Term. The term of this Agreement commenced on January 1, 1997
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 one year periods (each a "Renewal Term"),
unless notice that this Agreement will not be extended is given by either party
to the other six 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 Senior Vice President Development/
Acquisitions/Construction. In the performance of his duties, Executive shall be
subject to the direction of the President of the Company 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 written consent of the Board of Directors of the
Company (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.
(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 the Boston, MA 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.
<PAGE> 2
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, $185,000;
beginning January 1, 1998, $210,000; beginning January 1, 1999, $240,000. 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 Boston-Lawrence-Salem, MA-NH
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 of
Directors, or any 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. During the Employment Period,
Executive shall be entitled to secretarial services and a private office
commensurate with his title and duties.
(g) 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 and pension
plans, as are made generally available to employees of the Company from time to
time.
-2-
<PAGE> 3
4. Automobile. The Company shall provide Executive with a
monthly car allowance during the Employment Period of not less than $6,000 per
year (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 of Directors
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 of
Directors.
(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.
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.
-3-
<PAGE> 4
(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
(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 of Directors 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:
-4-
<PAGE> 5
(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 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 of Directors,
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 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
-5-
<PAGE> 6
(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.
(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,
-6-
<PAGE> 7
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 Senior Vice President of
the Company immediately prior to the Change in Control;
(iv) the relocation of the Company's
Braintree, MA office to a location more than 50 miles from Braintree, MA or the
failure to locate Executive's own office at the Braintree office (or at the
office to which such office is relocated which is within 50 miles of Braintree,
MA); or
(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
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.
-7-
<PAGE> 8
(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.
(7) 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, 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
-8-
<PAGE> 9
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;
(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;
(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
-9-
<PAGE> 10
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;
(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.
(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 and Executive shall have no
further entitlements with respect thereto.
(d) Additional Benefits.
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(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 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,
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<PAGE> 12
(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 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
advance shall
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<PAGE> 13
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 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
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<PAGE> 14
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 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 Massachusetts. 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.
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<PAGE> 15
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 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 8 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 Massachusetts 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 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
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<PAGE> 16
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.
IN WITNESS WHEREOF, this Agreement is entered into as of the date and
year first above written.
AVALON PROPERTIES, INC.
By:
------------------------------------------------
Its
---------------------------------------------------
BRYCE BLAIR
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<PAGE> 17
Annex A
AVALON PROPERTIES, INC.
CODE OF ETHICS
AVALON PROPERTIES, INC. (the "Company") is dedicated to the highest standards
of integrity and ethics. Personal integrity and moral fiber are as important
as technical competence and work ethic in advancement at the Company. We place
the highest trust, confidence, and responsibility in each person, and believe
in his/her fundamental honesty and integrity in daily relations with customers,
the public, and fellow associates and partners. We will not tolerate an
employee who achieves results by violating laws or being involved in dishonest
or unscrupulous business dealings or who jeopardizes our reputation. On the
other hand, we will always support an employee who passes up an opportunity or
advantage that could only be secured at the sacrifice of our principles.
Through our policies and actions, we seek from the Company the very best we can
achieve: a business that both creates economic value and acts on ethical
principle. It is the responsibility of the leaders of the Company to make
ethical behavior and efficient performance complementary. We measure
excellence by qualitative values as well as by quantitative results, motivating
all employees to "do the right thing" while "doing things right." We encourage
all employees to be alert to ethical ambiguity, to ask tough questions, and to
respond promptly to concerns about possible violations of laws and regulations.
We look to our leadership to uphold our policies and standards and to set the
example by instilling a spirit of honor in the workplace. With this in mind,
the Company and each employee pledges to comply with the following standards to
the best of their ability:
Company Name. We recognize the value of the name and reputation of the
Company. We will use the name only in activities sanctioned by the Board of
Directors (the "Board"), and we will protect it by using it only in situations
where we are satisfied that our conduct measures up to our Code of Ethics in
every respect.
Quality and Fairness. We will pursue quality in every product and service we
provide, and we expect to earn our customers' trust by giving full value.
Therefore, although we will protect our legitimate interests, we will not drive
unfair bargains that strain long-term relationships, nor will we deliver less
than the product we promise or that our customer expects. We will attempt to
reach a fair result for both sides in any negotiation.
Equal Opportunity. We will make employment decisions without regard to a
person's race, color, religion, national origin, sex, age, disability, or
military status. We will make reasonable accommodations for a person's
disability or religious practice. We strive to be a meritocracy, hiring,
retaining, and promoting based on the performance of each person. We will not
tolerate any form of harassment in our workplace, including harassment on the
basis of sex. Prohibited conduct includes unwelcome sexual advances, requests
for sexual favors, verbal or physical conduct of a sexual nature, such as
uninvited touching, and sexually related comments that create a hostile work
environment. The Company has an antinepotism policy whereby we will not hire
relatives of any employee without approval of the Board of Directors. In the
event employees marry after joining the Company, they can both continue with us
only as long as they are not working in the same department, or report to the
same person (or each other), and so long as the Board approves.
Health, Safety, and Environmental Protection. We seek to manage our activities
so that associates and partners are protected from unreasonable health and
safety risks on the job, so that reasonable
<PAGE> 18
expectations concerning the work environment are met, and so that our
customers, the public, and the environment are properly protected in the use of
our facilities, products and services.
Assets and Funds. Each employee with responsibility for the use of our
physical assets or funds is accountable and responsible for his/her proper
conduct as a fiduciary in relation to the use or protection of those assets.
Internal Financial Reports. Each employee in the Company has ethical and legal
responsibilities for the proper use and protection of assets and for reporting
financial and other important information with the firm. We have established
and must maintain high standards of accuracy, honesty, integrity, completeness
and confidentiality in our financial records and reporting.
Uniformity in certain basic accounting definitions,
classifications and reporting and control practices is
necessary in order to provide financial information for
various components of the Company's business on a complete,
accurate, timely and comparable basis. Consequently, accounts
and records will be maintained and financial reports will be
prepared in a manner which conforms with the firm's policies
and procedures.
Communication Regarding the Company; Confidential Information. In various
situations, outsiders need or desire information concerning the Company and
virtually all employees have access to some information of a confidential
nature.
No employee will use confidential information for his/her own
benefit or that of another person outside a proper
relationship with the Company. In particular, no employee
will trade securities of any issuer, or pass along information
about land, buildings, tenants, financing or other business
strategies on the basis of confidential information gained
through the Company or give such information to any other
person who might trade on the basis of or otherwise make use
of the information.
In disclosing information to outsiders for the Company
purposes, no employee will act until the persons designated to
make disclosure decisions have considered the interests of the
Company as a whole.
Authorized recipients of information regarding the Company are
entitled to rely on that information. Therefore, we will take
all reasonable measures to ensure the accuracy of the
information in all material respects, and we will not disclose
information unless we are comfortable with its accuracy or
include appropriate qualifications.
Selection of Suppliers. We select our suppliers on the basis of the needs of
our business. Consequently, we employ only reputable, qualified individuals or
firms under market compensation agreements which are reasonable in relation to
the services.
No employee may select a supplier for any reason other than
its ability to fulfill the Company's needs. In particular, no
employee may, in his/her personal capacity, accept any goods
or services or other forms of compensation or favors from a
supplier for less than cost. Further, no associate or partner
may own an interest in the business of a supplier or be a
creditor of a supplier, unless the interest is represented by
a publicly traded security and the employee does not own more
than five percent of the outstanding securities of any class.
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<PAGE> 19
The provisions of this section are not intended to apply to
routine, reasonable business entertainment customary in local
business relationships.
No employee may utilize a supplier, consultant or
subcontractor to work on his personal residence(s) or those of
related persons without the prior approval of the appropriate
Company officer.
Improper Payments. The Company expects all employees to use only legitimate
practices in commercial operations and in promoting the Company's position on
issues before governmental authorities. Kickbacks, fees, commissions or any
form of "bribes" intended to induce or reward favorable decisions and
governmental actions are unacceptable and prohibited.
No employee will, in violation of any applicable law, offer or
make directly or indirectly through any person or firm, any
payment of anything of value to:
Any person or firm employed by or acting for or on behalf of
Any customer, whether private or governmental for the purpose of
inducing or rewarding any favorable action by the customer in any
business transaction; or
Any governmental entity, for the purpose of inducing or rewarding
action (or withholding of action) by a governmental entity in any
governmental matter;
Any governmental official, political party, or official of such party, or
any candidate for political office, for the purpose of inducing or
rewarding favorable action (or withholding of action) or the exercise of
influence by such official, party or candidate in any business transaction
or in any governmental matter.
Employees are encouraged to participate in the
political process at local, regional and national
levels, and this may include legally allowed
political contributions to candidates as well as
working in campaigns.
Outside Activities of Employees. The Company recognizes and respects the right
of its employees to engage in outside activities which they may deem proper and
desirable, provided that these activities are legal, do not impair or interfere
with the conscientious performance of the employee's duties for the Company, do
not involve the misuse of the Company's influence, facilities, information or
other resources, do not divert opportunities from the Company and do not
reflect discredit upon the name and reputation of the Company.
Accordingly, for all business relationships with outside
individuals, companies and organizations and for all personal
undertakings, the Company's employees should:
Act in accordance with the law.
Consider the rights, interests and responsibilities of the outside
individuals, companies and organizations and themselves.
Consider that employment with the Company, unless expressly agreed
otherwise, is full-time.
Protect their own reputations and the interests of the Company against
actual or potential conflicting interests with outside parties.
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<PAGE> 20
Avoid personal transactions or situations in which their own interests
conflict or might be construed to conflict with those of the Company.
Individuals with managerial responsibilities will not engage
actively or invest passively (other than through a
non-controlling interest in a publicly traded entity, a
personal residence, or a personal recreational property) in
any business involving real estate (including development,
leasing, sale, brokerage, or mortgage banking, etc.) other
than through the Company unless disclosed to and approved in
writing by the Board. Further, no employee may directly or
indirectly buy, sell or lease any property, facilities,
services or equipment from or to the Company or use any such
property, facility, service, or equipment for personal
benefit, except with full disclosure and the approval of a
supervisor or department head. No significant personal use of
property, facilities, services or equipment of the Company
should be approved except in unusual circumstances and only
when approved by a supervisor.
In this connection, every employee shall disclose promptly, in
writing, any personal situation or transaction which is or may
be in conflict with the intent of this policy.
Fiduciary Duty To Shareholders. Every Company employee that manages assets or
business does so for the benefit of the Company's shareholders. In these
situations, employees act as stewards and must exercise the highest standards
of fiduciary responsibility.
Observance of Code of Ethics. Each employee has an obligation to observe and
support this Code of Ethics. Since the appearance of impropriety undermines
general support of the Code of Ethics, everyone should avoid even the
appearance of impropriety. Violations of this Code may result in disciplinary
actin, up to and including discharge.
Any questions about the meaning or applicability of our Code of Ethics should
be addressed to your supervisor or to appropriate officer designated from time
to time by the Board.
Please sign and date in the spaces below.
Read, understood and agreed to:
- ----------------------------------
Bryce Blair
Date:
-----------------------------
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<PAGE> 21
Annex B
NONDISCLOSURE AGREEMENT
AGREEMENT made as of the day of , 1997, by and
between the undersigned individual (hereinafter referred to as "Employee") and
AVALON PROPERTIES, INC., a Maryland corporation, having its principal place of
business in Wilton, CT (hereinafter referred to as the "Company").
WHEREAS, Employee is being employed by the Company in a capacity
wherein Employee will come into possession of material of a confidential,
sensitive or proprietary nature concerning the business, plans and trade
secrets of the Company and its Affiliates (as defined below) and of third
parties; and
WHEREAS, the continued confidential treatment of such information is
vital to the success of the Company's business.
NOW THEREFORE, the parties agree as follows:
1. Employee acknowledges that his work as an employee of the
Company will bring him into close contact with the Confidential Information (as
defined below) of the Company and third parties. Employee acknowledges that
such Confidential Information is reposed in him in trust.
2. Employee hereby agrees that he shall, both during and after
his employment, maintain such Confidential Information in confidence and
neither disclose to others (nor cause to be disclosed) nor use personally (nor
cause to be used) such Confidential Information without the prior written
permission of the Company. Employee also will take reasonable precautions to
prevent the inadvertent exposure of Confidential Information to unauthorized
persons or entities.
3. Employee acknowledges that he may, during his employment, add
to the Company's Confidential Information and he agrees that any such additions
shall fall within the strictures of this Nondisclosure Agreement.
4. Employee agrees that upon any termination of his employment
with the Company or any Affiliate thereof, or upon request if sooner, he shall
forthwith return to the Company all reports, correspondence, notes, financial
statements, computer printouts and other documents and recorded material of
every nature (including all copies thereof) that may be in his possession or
under his control dealing with Confidential Information.
5. Employee acknowledges that the covenants in this Agreement are
expressions of his duty as an employee not to use the Confidential Information
to the detriment of the Company. In addition, Employee acknowledges that he
shall benefit from entry into this Agreement as the Company shall be willing to
continue to provide access to Confidential Information to Employee.
6. Employee acknowledges that the Company would be irreparably
damaged and there would be no adequate remedy at law for Employee's breach of
this Agreement, and accordingly, the terms of this Agreement shall be
specifically enforced. Employee hereby consents to the entry of any temporary
restraining order or preliminary or ex parte injunction, in addition to any
other remedies available at law or in equity, to enforce the provisions hereof.
<PAGE> 22
7. This Agreement is not an agreement of employment and nothing
herein shall be construed to obligate the Company to employ Employee for any
definite duration or upon any specific terms.
8. As used herein, "Confidential Information" shall mean all
confidential information and trade secrets of the Company or any of its
Affiliates, whether now existing or hereafter acquired or developed, including
without limitation financial statements, business, plans, working methods,
investments, materials, processes, programs, designs, drawings, names of and
relationships with current or potential vendors and lenders and other third
parties, contractual arrangements, profit formulas, experimental
investigations, studies, current or potential customer names and requirements,
current or potential professional associations or contracts, information
submitted to the Company or its Affiliates by third parties on a confidential
basis and similar other non-public or otherwise confidential, sensitive or
proprietary information. "Confidential Information" shall not include
information that has become generally known within the Company's industry
without breach of any obligation of confidentiality of Employee or any third
party.
9. As used herein, the term "Affiliate" shall mean any individual
or entity controlling, controlled by or under common control with the Company,
now or in the future.
10. This Agreement shall survive the termination of the employment
of Employee and shall not be amended except by a writing signed by the parties
hereto. This Agreement shall be binding upon the Employee and his heirs, legal
representatives, successors and assigns.
11. This Agreement shall be governed and construed in accordance
with the laws of the State of Maryland.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
AVALON PROPERTIES, INC.
By:
--------------------------------------------
Its:
EMPLOYEE:
------------------------------------------------
Name: Bryce Blair
Address: 24 Middle Street
Hingham, MA 02043
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<PAGE> 1
Exhibit 10.18
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") made as of the seventeenth day
of July, 1997 by and between Robert H. Slater, residing at 816 Emerald Drive,
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 desire to enter into an Employment
Agreement effective as of January 1, 1997 on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, the parties hereto do hereby agree as follows:
1. Term. The term of this Agreement commenced on January 1, 1997
and, unless earlier terminated as provided in Section 7 below, shall terminate
on December 31, 1999 (the "Original Term"). The Original Term shall be
extended automatically for additional one year periods (each a "Renewal Term"),
unless notice that this Agreement will not be extended is given by either party
to the other six 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 Senior Vice President-Property Operations. In
the performance of his duties, Executive shall be subject to the direction of
the Chief Operating Officer of the Company 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 written consent of the Board of Directors of the
Company (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 8, 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.
(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, $185,000;
beginning January 1, 1998, $210,000; beginning January 1, 1999, $240,000. If
the Employment Period is extended beyond December 31, 1999, Executive's Base
Salary shall be reviewed no less frequently than
<PAGE> 2
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 of
Directors, or any 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. During the Employment Period,
Executive shall be entitled to secretarial services and a private office
commensurate with his title and duties.
(g) 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 and pension
plans, as are made generally available to employees of the Company from time to
time.
4. 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.
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<PAGE> 3
5. 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 of Directors
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 of
Directors.
(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.
6. 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 6(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.
7. 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 7. Upon any termination hereunder, the Employment Period shall
expire.
(b) Definitions. For purposes of this Section 7, 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
(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:
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<PAGE> 4
(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 of Directors 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 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 7(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 of Directors,
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%
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<PAGE> 5
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 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.
(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
7(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
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<PAGE> 6
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 Senior Vice
President-Property Operations 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
(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
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.
(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
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<PAGE> 7
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 7(b)(6) shall be followed, except that all awards made in
connection with the Company's initial public offering shall be disregarded.
(7) 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 7(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, 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
7(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.
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(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 7(c)(vi) hereof instead of the benefits
described in this Section 7(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 7(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;
(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;
(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 7(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;
(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.
(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 7(b)(4), or if Executive terminates his employment
for any
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<PAGE> 9
reason within one year after a Complete Change in Control, the Company shall,
in addition to paying the amounts provided under Section 7(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 7(c), Executive
shall receive the amounts set forth in Section 7(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 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 7
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 7(d)(iii),
all determinations required to be made under this Section 7, 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 7(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
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<PAGE> 10
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 should have been made (an "Underpayment"). In the
event that the Company exhausts its remedies pursuant to Section 7(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 7(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 7(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 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 7(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
7(d)(iii)) promptly pay to the Company
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<PAGE> 11
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 7(d)(iii) hereof (the "Required Section 7(d) Advance"), the
aggregate amount advanced or paid by the Company pursuant to this Section 7(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 7(d) Advance, so much of the aggregate amount so
advanced or paid by the Company pursuant to this Section 7(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
7(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 7(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 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 7 and Section 9.
(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 7(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
7(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 7
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 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.
8. 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,
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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 8 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 8 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 8, 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 8 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.
9. 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).
10. 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.
11. 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 signed by Executive or an
authorized officer of the Company, as the case may be.
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12. 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.
13. Resolution of Disputes.
(a) Procedures and Scope of Arbitration. Except for
any controversy or claim seeking equitable relief pursuant to Section 8 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 7(c) and, if
applicable, Section 7(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 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).
14. Survivorship. The provisions of Sections 4(b), 6, 8 and 13 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.
15. 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.
16. 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.
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17. 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.
18. Governing Law. This Agreement shall be construed and
regulated in all respects under the laws of the State of Maryland.
IN WITNESS WHEREOF, this Agreement is entered into as of the date and year
first above written.
AVALON PROPERTIES, INC.
By:
------------------------------------------------
Its
---------------------------------------------------
ROBERT S. SLATER
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<PAGE> 15
Annex A
AVALON PROPERTIES, INC.
CODE OF ETHICS
AVALON PROPERTIES, INC. (the "Company") is dedicated to the highest standards
of integrity and ethics. Personal integrity and moral fiber are as important
as technical competence and work ethic in advancement at the Company. We place
the highest trust, confidence, and responsibility in each person, and believe
in his/her fundamental honesty and integrity in daily relations with customers,
the public, and fellow associates and partners. We will not tolerate an
employee who achieves results by violating laws or being involved in dishonest
or unscrupulous business dealings or who jeopardizes our reputation. On the
other hand, we will always support an employee who passes up an opportunity or
advantage that could only be secured at the sacrifice of our principles.
Through our policies and actions, we seek from the Company the very best we can
achieve: a business that both creates economic value and acts on ethical
principle. It is the responsibility of the leaders of the Company to make
ethical behavior and efficient performance complementary. We measure
excellence by qualitative values as well as by quantitative results, motivating
all employees to "do the right thing" while "doing things right." We encourage
all employees to be alert to ethical ambiguity, to ask tough questions, and to
respond promptly to concerns about possible violations of laws and regulations.
We look to our leadership to uphold our policies and standards and to set the
example by instilling a spirit of honor in the workplace. With this in mind,
the Company and each employee pledges to comply with the following standards to
the best of their ability:
Company Name. We recognize the value of the name and reputation of the
Company. We will use the name only in activities sanctioned by the Board of
Directors (the "Board"), and we will protect it by using it only in situations
where we are satisfied that our conduct measures up to our Code of Ethics in
every respect.
Quality and Fairness. We will pursue quality in every product and service we
provide, and we expect to earn our customers' trust by giving full value.
Therefore, although we will protect our legitimate interests, we will not drive
unfair bargains that strain long-term relationships, nor will we deliver less
than the product we promise or that our customer expects. We will attempt to
reach a fair result for both sides in any negotiation.
Equal Opportunity. We will make employment decisions without regard to a
person's race, color, religion, national origin, sex, age, disability, or
military status. We will make reasonable accommodations for a person's
disability or religious practice. We strive to be a meritocracy, hiring,
retaining, and promoting based on the performance of each person. We will not
tolerate any form of harassment in our workplace, including harassment on the
basis of sex. Prohibited conduct includes unwelcome sexual advances, requests
for sexual favors, verbal or physical conduct of a sexual nature, such as
uninvited touching, and sexually related comments that create a hostile work
environment. The Company has an antinepotism policy whereby we will not hire
relatives of any employee without approval of the Board of Directors. In the
event employees marry after joining the Company, they can both continue with us
only as long as they are not working in the same department, or report to the
same person (or each other), and so long as the Board approves.
Health, Safety, and Environmental Protection. We seek to manage our activities
so that associates and partners are protected from unreasonable health and
safety risks on the job, so that reasonable expectations concerning the work
environment are met, and so that our customers, the public, and the environment
are properly protected in the use of our facilities, products and services.
Assets and Funds. Each employee with responsibility for the use of our
physical assets or funds is accountable and responsible for his/her proper
conduct as a fiduciary in relation to the use or protection of those assets.
Internal Financial Reports. Each employee in the Company has ethical and legal
responsibilities for the proper use and protection of assets and for reporting
financial and other important information with the firm. We have established
and must maintain high standards of accuracy, honesty, integrity, completeness
and confidentiality in our financial records and reporting.
<PAGE> 16
Uniformity in certain basic accounting definitions,
classifications and reporting and control practices is
necessary in order to provide financial information for
various components of the Company's business on a complete,
accurate, timely and comparable basis. Consequently, accounts
and records will be maintained and financial reports will be
prepared in a manner which conforms with the firm's policies
and procedures.
Communication Regarding the Company; Confidential Information. In various
situations, outsiders need or desire information concerning the Company and
virtually all employees have access to some information of a confidential
nature.
No employee will use confidential information for his/her own
benefit or that of another person outside a proper
relationship with the Company. In particular, no employee
will trade securities of any issuer, or pass along information
about land, buildings, tenants, financing or other business
strategies on the basis of confidential information gained
through the Company or give such information to any other
person who might trade on the basis of or otherwise make use
of the information.
In disclosing information to outsiders for the Company
purposes, no employee will act until the persons designated to
make disclosure decisions have considered the interests of the
Company as a whole.
Authorized recipients of information regarding the Company are
entitled to rely on that information. Therefore, we will take
all reasonable measures to ensure the accuracy of the
information in all material respects, and we will not disclose
information unless we are comfortable with its accuracy or
include appropriate qualifications.
Selection of Suppliers. We select our suppliers on the basis of the needs of
our business. Consequently, we employ only reputable, qualified individuals or
firms under market compensation agreements which are reasonable in relation to
the services.
No employee may select a supplier for any reason other than
its ability to fulfill the Company's needs. In particular, no
employee may, in his/her personal capacity, accept any goods
or services or other forms of compensation or favors from a
supplier for less than cost. Further, no associate or partner
may own an interest in the business of a supplier or be a
creditor of a supplier, unless the interest is represented by
a publicly traded security and the employee does not own more
than five percent of the outstanding securities of any class.
The provisions of this section are not intended to apply to
routine, reasonable business entertainment customary in local
business relationships.
No employee may utilize a supplier, consultant or
subcontractor to work on his personal residence(s) or those of
related persons without the prior approval of the appropriate
Company officer.
Improper Payments. The Company expects all employees to use only legitimate
practices in commercial operations and in promoting the Company's position on
issues before governmental authorities. Kickbacks, fees, commissions or any
form of "bribes" intended to induce or reward favorable decisions and
governmental actions are unacceptable and prohibited.
No employee will, in violation of any applicable law, offer or
make directly or indirectly through any person or firm, any
payment of anything of value to:
Any person or firm employed by or acting for or on behalf of
Any customer, whether private or governmental for the purpose of
inducing or rewarding any favorable action by the customer in any
business transaction; or
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<PAGE> 17
Any governmental entity, for the purpose of inducing or rewarding
action (or withholding of action) by a governmental entity in any
governmental matter;
Any governmental official, political party, or official of such party, or
any candidate for political office, for the purpose of inducing or
rewarding favorable action (or withholding of action) or the exercise of
influence by such official, party or candidate in any business transaction
or in any governmental matter.
Employees are encouraged to participate in the
political process at local, regional and national
levels, and this may include legally allowed
political contributions to candidates as well as
working in campaigns.
Outside Activities of Employees. The Company recognizes and respects the right
of its employees to engage in outside activities which they may deem proper and
desirable, provided that these activities are legal, do not impair or interfere
with the conscientious performance of the employee's duties for the Company, do
not involve the misuse of the Company's influence, facilities, information or
other resources, do not divert opportunities from the Company and do not
reflect discredit upon the name and reputation of the Company.
Accordingly, for all business relationships with outside
individuals, companies and organizations and for all personal
undertakings, the Company's employees should:
Act in accordance with the law.
Consider the rights, interests and responsibilities of the outside
individuals, companies and organizations and themselves.
Consider that employment with the Company, unless expressly agreed
otherwise, is full-time.
Protect their own reputations and the interests of the Company against
actual or potential conflicting interests with outside parties.
Avoid personal transactions or situations in which their own interests
conflict or might be construed to conflict with those of the Company.
Individuals with managerial responsibilities will not engage
actively or invest passively (other than through a
non-controlling interest in a publicly traded entity, a
personal residence, or a personal recreational property) in
any business involving real estate (including development,
leasing, sale, brokerage, or mortgage banking, etc.) other
than through the Company unless disclosed to and approved in
writing by the Board. Further, no employee may directly or
indirectly buy, sell or lease any property, facilities,
services or equipment from or to the Company or use any such
property, facility, service, or equipment for personal
benefit, except with full disclosure and the approval of a
supervisor or department head. No significant personal use of
property, facilities, services or equipment of the Company
should be approved except in unusual circumstances and only
when approved by a supervisor.
In this connection, every employee shall disclose promptly, in
writing, any personal situation or transaction which is or may
be in conflict with the intent of this policy.
Fiduciary Duty To Shareholders. Every Company employee that manages assets or
business does so for the benefit of the Company's shareholders. In these
situations, employees act as stewards and must exercise the highest standards
of fiduciary responsibility.
Observance of Code of Ethics. Each employee has an obligation to observe and
support this Code of Ethics. Since the appearance of impropriety undermines
general support of the Code of Ethics, everyone should avoid even the
appearance of impropriety. Violations of this Code may result in disciplinary
actin, up to and including discharge.
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<PAGE> 18
Any questions about the meaning or applicability of our Code of Ethics should
be addressed to your supervisor or to appropriate officer designated from time
to time by the Board.
Please sign and date in the spaces below.
Read, understood and agreed to:
- ----------------------------------
Robert S. Slater
Date:
-----------------------------
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<PAGE> 19
Annex B
NONDISCLOSURE AGREEMENT
AGREEMENT made as of the day of , 1997, by and
between the undersigned individual (hereinafter referred to as "Employee") and
AVALON PROPERTIES, INC., a Maryland corporation, having its principal place of
business in Wilton, CT (hereinafter referred to as the "Company").
WHEREAS, Employee is being employed by the Company in a capacity
wherein Employee will come into possession of material of a confidential,
sensitive or proprietary nature concerning the business, plans and trade
secrets of the Company and its Affiliates (as defined below) and of third
parties; and
WHEREAS, the continued confidential treatment of such information is
vital to the success of the Company's business.
NOW THEREFORE, the parties agree as follows:
1. Employee acknowledges that his work as an employee of the
Company will bring him into close contact with the Confidential Information (as
defined below) of the Company and third parties. Employee acknowledges that
such Confidential Information is reposed in him in trust.
2. Employee hereby agrees that he shall, both during and after
his employment, maintain such Confidential Information in confidence and
neither disclose to others (nor cause to be disclosed) nor use personally (nor
cause to be used) such Confidential Information without the prior written
permission of the Company. Employee also will take reasonable precautions to
prevent the inadvertent exposure of Confidential Information to unauthorized
persons or entities.
3. Employee acknowledges that he may, during his employment, add
to the Company's Confidential Information and he agrees that any such additions
shall fall within the strictures of this Nondisclosure Agreement.
4. Employee agrees that upon any termination of his employment
with the Company or any Affiliate thereof, or upon request if sooner, he shall
forthwith return to the Company all reports, correspondence, notes, financial
statements, computer printouts and other documents and recorded material of
every nature (including all copies thereof) that may be in his possession or
under his control dealing with Confidential Information.
5. Employee acknowledges that the covenants in this Agreement are
expressions of his duty as an employee not to use the Confidential Information
to the detriment of the Company. In addition, Employee acknowledges that he
shall benefit from entry into this Agreement as the Company shall be willing to
continue to provide access to Confidential Information to Employee.
6. Employee acknowledges that the Company would be irreparably
damaged and there would be no adequate remedy at law for Employee's breach of
this Agreement, and accordingly, the terms of this Agreement shall be
specifically enforced. Employee hereby consents to the entry of any temporary
restraining order or preliminary or ex parte injunction, in addition to any
other remedies available at law or in equity, to enforce the provisions hereof.
7. This Agreement is not an agreement of employment and nothing
herein shall be construed to obligate the Company to employ Employee for any
definite duration or upon any specific terms.
8. As used herein, "Confidential Information" shall mean all
confidential information and trade secrets of the Company or any of its
Affiliates, whether now existing or hereafter acquired or developed, including
without limitation financial statements, business, plans, working methods,
investments, materials, processes, programs, designs, drawings, names of and
relationships with current or potential vendors and lenders and other third
parties, contractual arrangements, profit formulas, experimental
investigations, studies, current or potential customer names and requirements,
current or potential professional associations or contracts, information
submitted to the Company or its Affiliates by third parties on a confidential
basis and similar other non-public or otherwise
-1-
<PAGE> 20
confidential, sensitive or proprietary information. "Confidential Information"
shall not include information that has become generally known within the
Company's industry without breach of any obligation of confidentiality of
Employee or any third party.
9. As used herein, the term "Affiliate" shall mean any individual
or entity controlling, controlled by or under common control with the Company,
now or in the future.
10. This Agreement shall survive the termination of the employment
of Employee and shall not be amended except by a writing signed by the parties
hereto. This Agreement shall be binding upon the Employee and his heirs, legal
representatives, successors and assigns.
11. This Agreement shall be governed and construed in accordance
with the laws of the State of Maryland.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
AVALON PROPERTIES, INC.
By:
--------------------------------------------
Its:
EMPLOYEE:
-----------------------------------------------
Name: Robert S. Slater
Address: 816 Emerald Drive
Alexandria, VA 22308
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<PAGE> 1
Exhibit 10.19
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") made as of the fourth day of
August, 1997 by and between Thomas J. 1Sargeant, residing at 6107 Woodmont
Road, Alexandria, VA 22307 (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 desire to enter into an Employment
Agreement effective as of January 1, 1997 on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, the parties hereto do hereby agree as follows:
1. Term. The term of this Agreement commenced on January 1, 1997
and, unless earlier terminated as provided in Section 7 below, shall terminate
on December 31, 1999 (the "Original Term"). The Original Term shall be
extended automatically for additional one year periods (each a "Renewal Term"),
unless notice that this Agreement will not be extended is given by either party
to the other six 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 Chief Financial Officer/Treasurer/Secretary.
In the performance of his duties, Executive shall be subject to the direction
of the President of the Company 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 written consent of the Board of Directors of the
Company (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 8, 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.
(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
<PAGE> 2
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, $170,000;
beginning January 1, 1998, $195,000; beginning January 1, 1999, $225,000. 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 of
Directors, or any 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. During the Employment Period,
Executive shall be entitled to secretarial services and a private office
commensurate with his title and duties.
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<PAGE> 3
(g) 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 and pension
plans, as are made generally available to employees of the Company from time to
time.
4. 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.
5. 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 of Directors
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 of
Directors.
(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.
6. 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 6(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.
7. Termination; Severance and Related Matters.
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<PAGE> 4
(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 7. Upon any termination hereunder, the Employment Period shall
expire.
(b) Definitions. For purposes of this Section 7, 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
((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 of Directors 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.
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<PAGE> 5
(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 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 7(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 of Directors,
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 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;
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<PAGE> 6
(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.
(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
7(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;
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<PAGE> 7
(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 Financial
Officer/Treasurer/Secretary 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
(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
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.
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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.
(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 7(b)(6) shall be followed, except that all awards made in
connection with the Company's initial public offering shall be disregarded.
(7) 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 7(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, in the case of equity-based awards which
have an exercise schedule, to become fully
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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
7(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 7(c)(vi) hereof instead of the benefits
described in this Section 7(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 7(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;
(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;
(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
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(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 7(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;
(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.
(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 7(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 7(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;
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(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 7(c), Executive
shall receive the amounts set forth in Section 7(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 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 7
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 7(d)(iii),
all determinations required to be made under this Section 7, 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 7(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 should have been made (an
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"Underpayment"). In the event that the Company exhausts its remedies pursuant
to Section 7(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 7(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 7(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 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
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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 7(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
7(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 7(d)(iii) hereof (the
"Required Section 7(d) Advance"), the aggregate amount advanced or paid by the
Company pursuant to this Section 7(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 7(d) Advance, so
much of the aggregate amount so advanced or paid by the Company pursuant to
this Section 7(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 7(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 7(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
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 7 and Section 9.
(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 7(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
7(d)(i) hereof. Further, the amount of any payment provided for in this
Agreement
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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 7
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 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.
8. 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 8 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 8 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
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Board of Directors, shall take any action in violation of this Section 8, 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 8
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.
9. 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).
10. 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.
11. 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 signed by Executive or an
authorized officer of the Company, as the case may be.
12. 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.
13. Resolution of Disputes.
(a) Procedures and Scope of Arbitration. Except for
any controversy or claim seeking equitable relief pursuant to Section 8 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 7(c) and, if
applicable, Section 7(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
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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 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).
14. Survivorship. The provisions of Sections 4(b), 6, 8 and 13 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.
15. 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.
16. 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.
17. 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.
18. Governing Law. This Agreement shall be construed and
regulated in all respects under the laws of the State of Maryland.
-16-
<PAGE> 17
IN WITNESS WHEREOF, this Agreement is entered into as of the date and
year first above written.
AVALON PROPERTIES, INC.
By:
------------------------------------------------
Its
---------------------------------------------------
THOMAS J. SARGEANT
-17-
<PAGE> 18
Annex A
AVALON PROPERTIES, INC.
CODE OF ETHICS
AVALON PROPERTIES, INC. (the "Company") is dedicated to the highest standards
of integrity and ethics. Personal integrity and moral fiber are as important
as technical competence and work ethic in advancement at the Company. We place
the highest trust, confidence, and responsibility in each person, and believe
in his/her fundamental honesty and integrity in daily relations with customers,
the public, and fellow associates and partners. We will not tolerate an
employee who achieves results by violating laws or being involved in dishonest
or unscrupulous business dealings or who jeopardizes our reputation. On the
other hand, we will always support an employee who passes up an opportunity or
advantage that could only be secured at the sacrifice of our principles.
Through our policies and actions, we seek from the Company the very best we can
achieve: a business that both creates economic value and acts on ethical
principle. It is the responsibility of the leaders of the Company to make
ethical behavior and efficient performance complementary. We measure
excellence by qualitative values as well as by quantitative results, motivating
all employees to "do the right thing" while "doing things right." We encourage
all employees to be alert to ethical ambiguity, to ask tough questions, and to
respond promptly to concerns about possible violations of laws and regulations.
We look to our leadership to uphold our policies and standards and to set the
example by instilling a spirit of honor in the workplace. With this in mind,
the Company and each employee pledges to comply with the following standards to
the best of their ability:
Company Name. We recognize the value of the name and reputation of the
Company. We will use the name only in activities sanctioned by the Board of
Directors (the "Board"), and we will protect it by using it only in situations
where we are satisfied that our conduct measures up to our Code of Ethics in
every respect.
Quality and Fairness. We will pursue quality in every product and service we
provide, and we expect to earn our customers' trust by giving full value.
Therefore, although we will protect our legitimate interests, we will not drive
unfair bargains that strain long-term relationships, nor will we deliver less
than the product we promise or that our customer expects. We will attempt to
reach a fair result for both sides in any negotiation.
Equal Opportunity. We will make employment decisions without regard to a
person's race, color, religion, national origin, sex, age, disability, or
military status. We will make reasonable accommodations for a person's
disability or religious practice. We strive to be a meritocracy, hiring,
retaining, and promoting based on the performance of each person. We will not
tolerate any form of harassment in our workplace, including harassment on the
basis of sex. Prohibited conduct includes unwelcome sexual advances, requests
for sexual favors, verbal or physical conduct of a sexual nature, such as
uninvited touching, and sexually related comments that create a hostile work
environment. The Company has an antinepotism policy whereby we will not hire
relatives of any employee without approval of the Board of Directors. In the
event employees marry after joining the Company, they can both continue with us
only as long as they are not working in the same department, or report to the
same person (or each other), and so long as the Board approves.
Health, Safety, and Environmental Protection. We seek to manage our activities
so that associates and partners are protected from unreasonable health and
safety risks on the job, so that reasonable
<PAGE> 19
expectations concerning the work environment are met, and so that our
customers, the public, and the environment are properly protected in the use of
our facilities, products and services.
Assets and Funds. Each employee with responsibility for the use of our
physical assets or funds is accountable and responsible for his/her proper
conduct as a fiduciary in relation to the use or protection of those assets.
Internal Financial Reports. Each employee in the Company has ethical and legal
responsibilities for the proper use and protection of assets and for reporting
financial and other important information with the firm. We have established
and must maintain high standards of accuracy, honesty, integrity, completeness
and confidentiality in our financial records and reporting.
Uniformity in certain basic accounting definitions,
classifications and reporting and control practices is
necessary in order to provide financial information for
various components of the Company's business on a complete,
accurate, timely and comparable basis. Consequently, accounts
and records will be maintained and financial reports will be
prepared in a manner which conforms with the firm's policies
and procedures.
Communication Regarding the Company; Confidential Information. In various
situations, outsiders need or desire information concerning the Company and
virtually all employees have access to some information of a confidential
nature.
No employee will use confidential information for his/her own
benefit or that of another person outside a proper
relationship with the Company. In particular, no employee
will trade securities of any issuer, or pass along information
about land, buildings, tenants, financing or other business
strategies on the basis of confidential information gained
through the Company or give such information to any other
person who might trade on the basis of or otherwise make use
of the information.
In disclosing information to outsiders for the Company
purposes, no employee will act until the persons designated to
make disclosure decisions have considered the interests of the
Company as a whole.
Authorized recipients of information regarding the Company are
entitled to rely on that information. Therefore, we will take
all reasonable measures to ensure the accuracy of the
information in all material respects, and we will not disclose
information unless we are comfortable with its accuracy or
include appropriate qualifications.
Selection of Suppliers. We select our suppliers on the basis of the needs of
our business. Consequently, we employ only reputable, qualified individuals or
firms under market compensation agreements which are reasonable in relation to
the services.
No employee may select a supplier for any reason other than
its ability to fulfill the Company's needs. In particular, no
employee may, in his/her personal capacity, accept any goods
or services or other forms of compensation or favors from a
supplier for less than cost. Further, no associate or partner
may own an interest in the business of a supplier or be a
creditor of a supplier, unless the interest is represented by
a publicly traded security and the employee does not own more
than five percent of the outstanding securities of any class.
-2-
<PAGE> 20
The provisions of this section are not intended to apply to
routine, reasonable business entertainment customary in local
business relationships.
No employee may utilize a supplier, consultant or
subcontractor to work on his personal residence(s) or those of
related persons without the prior approval of the appropriate
Company officer.
Improper Payments. The Company expects all employees to use only legitimate
practices in commercial operations and in promoting the Company's position on
issues before governmental authorities. Kickbacks, fees, commissions or any
form of "bribes" intended to induce or reward favorable decisions and
governmental actions are unacceptable and prohibited.
No employee will, in violation of any applicable law, offer or
make directly or indirectly through any person or firm, any
payment of anything of value to:
Any person or firm employed by or acting for or on behalf of
Any customer, whether private or governmental for the purpose of
inducing or rewarding any favorable action by the customer in any
business transaction; or
Any governmental entity, for the purpose of inducing or rewarding
action (or withholding of action) by a governmental entity in any
governmental matter;
Any governmental official, political party, or official of such party, or
any candidate for political office, for the purpose of inducing or
rewarding favorable action (or withholding of action) or the exercise of
influence by such official, party or candidate in any business transaction
or in any governmental matter.
Employees are encouraged to participate in the
political process at local, regional and national
levels, and this may include legally allowed
political contributions to candidates as well as
working in campaigns.
Outside Activities of Employees. The Company recognizes and respects the right
of its employees to engage in outside activities which they may deem proper and
desirable, provided that these activities are legal, do not impair or interfere
with the conscientious performance of the employee's duties for the Company, do
not involve the misuse of the Company's influence, facilities, information or
other resources, do not divert opportunities from the Company and do not
reflect discredit upon the name and reputation of the Company.
Accordingly, for all business relationships with outside
individuals, companies and organizations and for all personal
undertakings, the Company's employees should:
Act in accordance with the law.
Consider the rights, interests and responsibilities of the outside
individuals, companies and organizations and themselves.
Consider that employment with the Company, unless expressly agreed
otherwise, is full-time.
-3-
<PAGE> 21
Protect their own reputations and the interests of the Company against
actual or potential conflicting interests with outside parties.
Avoid personal transactions or situations in which their own interests
conflict or might be construed to conflict with those of the Company.
Individuals with managerial responsibilities will not engage
actively or invest passively (other than through a
non-controlling interest in a publicly traded entity, a
personal residence, or a personal recreational property) in
any business involving real estate (including development,
leasing, sale, brokerage, or mortgage banking, etc.) other
than through the Company unless disclosed to and approved in
writing by the Board. Further, no employee may directly or
indirectly buy, sell or lease any property, facilities,
services or equipment from or to the Company or use any such
property, facility, service, or equipment for personal
benefit, except with full disclosure and the approval of a
supervisor or department head. No significant personal use of
property, facilities, services or equipment of the Company
should be approved except in unusual circumstances and only
when approved by a supervisor.
In this connection, every employee shall disclose promptly, in
writing, any personal situation or transaction which is or may
be in conflict with the intent of this policy.
Fiduciary Duty To Shareholders. Every Company employee that manages assets or
business does so for the benefit of the Company's shareholders. In these
situations, employees act as stewards and must exercise the highest standards
of fiduciary responsibility.
Observance of Code of Ethics. Each employee has an obligation to observe and
support this Code of Ethics. Since the appearance of impropriety undermines
general support of the Code of Ethics, everyone should avoid even the
appearance of impropriety. Violations of this Code may result in disciplinary
actin, up to and including discharge.
Any questions about the meaning or applicability of our Code of Ethics should
be addressed to your supervisor or to appropriate officer designated from time
to time by the Board.
Please sign and date in the spaces below.
Read, understood and agreed to:
- ----------------------------------
Thomas J. Sargeant
Date:
-----------------------------
-4-
<PAGE> 22
Annex B
NONDISCLOSURE AGREEMENT
AGREEMENT made as of the day of , 1997, by and
between the undersigned individual (hereinafter referred to as "Employee") and
AVALON PROPERTIES, INC., a Maryland corporation, having its principal place of
business in Wilton, CT (hereinafter referred to as the "Company").
WHEREAS, Employee is being employed by the Company in a capacity
wherein Employee will come into possession of material of a confidential,
sensitive or proprietary nature concerning the business, plans and trade
secrets of the Company and its Affiliates (as defined below) and of third
parties; and
WHEREAS, the continued confidential treatment of such information is
vital to the success of the Company's business.
NOW THEREFORE, the parties agree as follows:
1. Employee acknowledges that his work as an employee of the
Company will bring him into close contact with the Confidential Information (as
defined below) of the Company and third parties. Employee acknowledges that
such Confidential Information is reposed in him in trust.
2. Employee hereby agrees that he shall, both during and after
his employment, maintain such Confidential Information in confidence and
neither disclose to others (nor cause to be disclosed) nor use personally (nor
cause to be used) such Confidential Information without the prior written
permission of the Company. Employee also will take reasonable precautions to
prevent the inadvertent exposure of Confidential Information to unauthorized
persons or entities.
3. Employee acknowledges that he may, during his employment, add
to the Company's Confidential Information and he agrees that any such additions
shall fall within the strictures of this Nondisclosure Agreement.
4. Employee agrees that upon any termination of his employment
with the Company or any Affiliate thereof, or upon request if sooner, he shall
forthwith return to the Company all reports, correspondence, notes, financial
statements, computer printouts and other documents and recorded material of
every nature (including all copies thereof) that may be in his possession or
under his control dealing with Confidential Information.
5. Employee acknowledges that the covenants in this Agreement are
expressions of his duty as an employee not to use the Confidential Information
to the detriment of the Company. In addition, Employee acknowledges that he
shall benefit from entry into this Agreement as the Company shall be willing to
continue to provide access to Confidential Information to Employee.
6. Employee acknowledges that the Company would be irreparably
damaged and there would be no adequate remedy at law for Employee's breach of
this Agreement, and accordingly, the terms of this Agreement shall be
specifically enforced. Employee hereby consents to the entry of any temporary
restraining order or preliminary or ex parte injunction, in addition to any
other remedies available at law or in equity, to enforce the provisions hereof.
<PAGE> 23
7. This Agreement is not an agreement of employment and nothing
herein shall be construed to obligate the Company to employ Employee for any
definite duration or upon any specific terms.
8. As used herein, "Confidential Information" shall mean all
confidential information and trade secrets of the Company or any of its
Affiliates, whether now existing or hereafter acquired or developed, including
without limitation financial statements, business, plans, working methods,
investments, materials, processes, programs, designs, drawings, names of and
relationships with current or potential vendors and lenders and other third
parties, contractual arrangements, profit formulas, experimental
investigations, studies, current or potential customer names and requirements,
current or potential professional associations or contracts, information
submitted to the Company or its Affiliates by third parties on a confidential
basis and similar other non-public or otherwise confidential, sensitive or
proprietary information. "Confidential Information" shall not include
information that has become generally known within the Company's industry
without breach of any obligation of confidentiality of Employee or any third
party.
9. As used herein, the term "Affiliate" shall mean any individual
or entity controlling, controlled by or under common control with the Company,
now or in the future.
10. This Agreement shall survive the termination of the employment
of Employee and shall not be amended except by a writing signed by the parties
hereto. This Agreement shall be binding upon the Employee and his heirs, legal
representatives, successors and assigns.
11. This Agreement shall be governed and construed in accordance
with the laws of the State of Maryland.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
AVALON PROPERTIES, INC.
By:
--------------------------------------------
Its:
EMPLOYEE:
------------------------------------------------
Name: Thomas J. Sargeant
Address: 6107 Woodmont Road
Alexandria, VA 22307
-2-
<PAGE> 1
EXHIBIT 21.1
SCHEDULE OF SUBIDIARIES OF AVALON PROPERTIES, INC.
Avalon Chase Glen, Inc.
Avalon Chase Grove, Inc.
Avalon Chase Hampton II, Inc.
Avalon Chase Heritage, Inc.
Avalon Chase Lea, Inc.
Avalon Chase Ridge, Inc.
Avalon 4100 Massachusett Ave., Inc.
Avalon Town Green II, Inc.
Avalon Town Meadows, Inc.
Avalon Town View, Inc.
Avalon Transactions, Inc.
Lexington Ridge-Avalon, Inc.
Town Cove Jersey City Urban Renewal, Inc.
Avalon Decoverly, Inc.
Avalon Lake Arbor, Inc.
Avalon Commons, Inc.
Avalon Collateral, Inc.
Town Cove II Jersey City Urban Renewal, Inc.
Avalon Fairway II, Inc.
Avalon Ballston II, Inc.
Avalon Oaks, Inc.
Avalon Development Services, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Avalon Properties, Inc. on Form S-3 (File No.333-42519) of our report dated
January 13, 1998, except for Note 14 as to which the date is March 25, 1998, on
our audits of the consolidated financial statements and financial statement
schedule of Avalon Properties, Inc. as of December 31, 1997 and 1996, and for
each of the three years in the period ended December 31, 1997, which report is
included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
New York, New York
March 30, 1998
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