<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1995
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from
__________________ to _________________.
Commission File Number: 1-12478
IRVINE APARTMENT COMMUNITIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 33-0581775
(State of Incorporation) (I.R.S. Employer Identification Number)
550 Newport Center Drive, Suite 300, Newport Beach, California 92660
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 720-5500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on
which registered:
Common Stock, par value $.01 per share New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Number of shares of common stock outstanding as of December 31, 1995: 16,975,000
Indicate by check mark whether the registrant has (1) 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 time as required), 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 February 29, 1996 was $334,066,500 assuming that all
officers and directors of the Company are affiliates.
Documents incorporated by reference:
Portions of the Amended Annual Report to Shareholders for the year ended
December 31, 1995 are incorporated by reference into Parts I and II of
this Form 10-K/A.
Portions of the proxy statement for the registrant's annual shareholders'
meeting held April 30, 1996 are incorporated by reference into Part III
of this Form 10-K/A.
<PAGE> 2
The Company hereby amends and restates its Annual Report for the year
ended December 31, 1995 on Form 10-K, dated March 25, 1996. The principal
changes from the Form 10-K, dated March 25, 1996, are as follows:
FORM 10-K:
- ---------
(1) page 2, second paragraph -- deleting the disclosure of "aggregate average
return on cost"
EXHIBIT 13:
- ----------
(2) pages 3, 12, 24 and 25 and related Management's Discussion and Analysis on
pages 4, 5 and 6 -- eliminating the presentation of "operating expenses",
"net operating income", "gross operating margin" and "average monthly
operating expenses per unit" and disclosing separately the significant
changes in property expenses, real estate taxes and property management
fees.
(3) page 19, Note 5 -- EQUITY -- added tables reconciling the activity in
Minority Interest, the computation of the income and loss allocated to the
Minority Interest, and the Operating Partnership units outstanding.
PART I
ITEM 1. BUSINESS
ORGANIZATION AND GENERAL BUSINESS DESCRIPTION
Irvine Apartment Communities, Inc. (the "Company") is a self-administered
equity real estate investment trust ("REIT") engaged in the development and
operation of apartment communities in Orange County, California. At December 31,
1995, the Company had a 45.4% general partnership interest in Irvine Apartment
Communities, L.P. (the "Operating Partnership") and was its sole managing
general partner. At such date, The Irvine Company held a 54.6% limited
partnership interest in the Operating Partnership. The Operating Partnership's
management and operating decisions are under the unilateral control of the
Company.
At December 31, 1995, the Operating Partnership owned and operated 43
apartment communities with 11,334 units and had completed 1,442 of 2,507
apartment units within six new apartment communities under construction at
year-end (collectively, the "Properties"). Until July 31, 2020, the Company has
the exclusive right, but not the obligation, to acquire land from The Irvine
Company for development of additional apartment communities on the Irvine Ranch.
The Company was formed in December 1993. The "Predecessor" is the
apartment division of The Irvine Company that owned the Company's 43 completed
apartment communities and provided the related management functions prior to the
Company's December 8, 1993 initial public offering.
The address of the Company is 550 Newport Center Drive, Suite 300, Newport
Beach, California 92660. Its telephone number is (714) 720-5500.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in one business segment, that of owning, operating
and developing apartment communities in Orange County, California. See the
consolidated and combined financial statements and notes thereto included in
Item 8 of this Annual Report on Form 10-K/A for financial information about the
industry segment.
DESCRIPTION OF BUSINESS
The Company owns and operates 43 high quality apartment communities
aggregating 11,334 units (the "Existing Communities") and has six additional
apartment communities aggregating 2,507 units under construction ("Communities
Under Construction"). Upon completion of the Communities Under Construction, the
Company will own a total of 13,841 units in 49 apartment communities,
representing an increase of approximately 22% since the Company's initial public
offering in December 1993. Through July 2020, the Company holds the exclusive
right, but not the obligation, to acquire land from The Irvine Company, the
owner and developer of the Irvine Ranch, for development of additional apartment
communities on the Irvine Ranch. All of the Company's Properties are located on
the Irvine Ranch.
The Irvine Ranch is located in central Orange County, California between
San Diego and Los Angeles. The western boundary of the Irvine Ranch borders
approximately six miles of the Pacific Ocean. Today, the portion of the Irvine
Ranch which is still owned The Irvine Company covers approximately 90 square
miles and includes more than 52,000 undeveloped acres. The developed portion of
the Irvine Ranch, which includes significant parts of the cities of Irvine,
Newport Beach and Tustin, is one of the largest urban master-planned communities
in the United States. The Irvine Ranch has been developed over the past 30 years
in accordance with an original master plan (the "Master Plan") which, over time,
has been refined to accord with locally approved general plans. The Irvine Ranch
is one of the major commercial, retail and residential centers in Southern
California. The Irvine Ranch is home to more than 175,000 residents and 17,000
businesses with more than 200,000 employees.
1
<PAGE> 3
The Company believes that a variety of factors have produced an
historically strong apartment market in Orange County and the successful
operating record of its Existing Communities. The Company believes that these
same factors continue to support significant opportunities for the development
of additional apartment communities. Among the most important of these are:
- - The dominant market position of the Company, which owns over 65% of all
apartment units and approximately 85% of all units in apartment communities
having 100 or more units, on the Irvine Ranch;
- - The Company's 25-year exclusive right to acquire land from The Irvine Company
for development of additional rental apartment communities on the Irvine Ranch;
- - The limited supply of developable land, other than on the Irvine Ranch,
adjacent to major employment centers in Orange County;
- - The Irvine Company's Master Plan strategy which emphasizes market segmentation
in order to ensure adequate and appropriate allocation of land uses and supports
sustained growth for the long-term;
- - The high quality of design, construction and maintenance of the Properties and
their location in or near the City of Irvine, which is consistently ranked among
the safest cities in the United States with a population of 100,000 or more;
- - The close proximity of the Properties and of future development sites to major
employment centers, the Pacific Ocean, high quality schools, and extensive
resort, recreational and open space amenities;
- - An affluent, growing population and a diversified employment base in Orange
County and on the Irvine Ranch;
- - The Company's ability to defer the purchase of land under its land rights
agreement until the site and zoning entitlements have been obtained, the land is
ready for construction and the Company determines favorable market conditions
exist;
- - The operating efficiencies available to the Company because the Properties are
located in a single geographic area;
- - An average of more than 15 years of experience among the Company's seven most
senior members of management in the design, development, construction, property
management and financing of apartment communities; and
- - The effectiveness of management's policies regarding property management and
expense control.
For the year ended December 31, 1995, the average physical occupancy
(number of units occupied divided by the total number of units) of the Existing
Communities was 94.6% and the average monthly rent per unit was $996. The
Communities Under Construction will include a total of 2,507 apartment units and
have an aggregate estimated costs of approximately $237.9 million. As of
December 31, 1995, 1,442 units were completed with 1,113 units occupied and
generating rental revenue. In addition, pre-lease deposits have been received
for 116 units. It is anticipated that five of the Communities Under Construction
will be substantially completed by mid-1996 and will achieve stabilized
occupancy by the end of 1996.
The Company expects to begin construction of four additional apartment
communities that will contain approximately 1,032 units in 1996. These
communities will have aggregate estimated cost of approximately $132 million.
Land is purchased from The Irvine Company only after the land sites are entitled
for residential use and designated by The Irvine Company as ready for apartment
development in accordance with the Master Plan.
The information set forth in this Form 10-K/A relating to the timing of
commencement and completion of construction and initial stabilized occupancy,
number of units, estimated costs of completion and average return on costs for
the first
2
<PAGE> 4
year following stabilized occupancy of apartment communities that are in
development or are expected to be developed are only estimates. Actual results
will depend on numerous factors, many of which are beyond the control of the
Company. These include the extent and timing of economic growth in the Company's
rental markets; future trends in the pricing of construction materials and
labor; entitlement decisions by local government authorities; and change in
interest rate levels. No assurance can be given that the timing, estimated
returns, number of units or other estimates will not vary substantially from
actual results. The Company has made no commitments to build the projected 1996
construction starts and no assurance can be made that such properties will be
acquired, built or stabilized in the periods estimated.
Although the Company's focus is on growth on the Irvine Ranch, in certain
circumstances the Company may also elect to acquire or develop apartment
communities in other locations, principally in California.
BUSINESS STRATEGY
The Company's primary business objective is to deliver strong, consistent
total annual returns to its stockholders while enhancing the long-term growth in
value of its real estate portfolio. The Company believes it is well positioned
to meet this objective given the size and strength of the economic region in
which it operates, the quality of its existing apartment community portfolio and
the significant opportunities for new development within its market. Through
adherences to specific operating and development strategies, the most important
of which are discussed below, the Company seeks to achieve growth in its funds
from operations through maximization of cash flow from its Existing Communities
as well as the development of new apartment communities.
Operating Strategies
- - Provide an exceptional living environment for residents. The Company's
Existing Communities have been developed and are maintained to appeal to
the highly educated, relatively affluent base of renters attracted to the
Irvine Ranch. As a result of the region's closely managed master-planning
process, the Properties are carefully located amid parks and other open
space, and are located near employment centers, schools, retail centers,
and recreational facilities. They provide generous amenities, are well
maintained and offer a high standard of customer service. The Company's
success in providing an exceptional quality of life for its residents is
evidenced in part by the strong average rental rates its properties
command relative to average rental rates for Orange County as a whole. In
1995, the Existing Communities produced an average monthly rent of $996
per unit, which is approximately $200 more than the average monthly rent
in Orange County.
- - Enhance efficiency of operations. Management selectively subcontracts
on-site staffing, personnel management and accounting functions to three
property management firms which enables it to focus on marketing, product
pricing and positioning and approval of operating budgets. Management
additionally directs and tests the standards of property-level activities
conducted by the firms, including training of on-site staff. Management
also seeks to enhance operating efficiency and, as a result, operating
costs per unit were reduced by 7.7% in 1995.
- - Capitalize on strong brand identity with enhanced marketing and
merchandising programs. The Company enhanced certain of its marketing
programs to broaden its already strong brand name recognition in order to
attract new residents into its portfolio and broaden the existing resident
base. The Company's marketing programs include: a single source 800
telephone number to provide information on all 49 Properties; rental
information centers within major shopping centers and the University of
California, Irvine; and a targeted advertising campaign promoting the
Company's portfolio and its strong quality of life characteristics.
Development Strategies
- - Develop new communities to complement and expand the Company's existing
rental market base. A diverse regional economy, continuing population
growth, and an attractive quality of life all contribute to a broad and
varied demand
3
<PAGE> 5
for rental housing on the Irvine Ranch. As a result, opportunities exist
for a variety of apartment property types and amenity levels, including
projects designed for the family, luxury and senior markets, and the
area's large population of young professionals. The Company's new
development program seeks to capitalize on these opportunities through
market segmentation. Supported by consumer research and focus group
studies, market segmentation decisions are made at the earliest planning
stages, when new residential villages for the Irvine Ranch are conceived
and the villages' largest and most important amenities are selected.
Location of schools, recreational facilities, retail centers, open space
and views are all important considerations. Individual development
decisions -including site location, product design, amenities and
marketing programs -- are also geared to appeal to the needs and desires
of the target rental market.
- - Utilize experienced management to create high-quality, well-built
properties designed to sustain their value. The Company brings
considerable management expertise to all aspects of the development,
construction and leasing process. Senior management is actively involved
in new project development from the inception of a new Irvine Ranch
village and is responsible for target market identification; design of
site plans, building plans, and floor plans; project and unit amenity
selection; and site-specific governmental approvals. In addition, the
Company directs the bidding and contracting of all major construction
activities, in essence acting as general contractor. The Company engages
experienced construction managers to act as intermediaries with
subcontractors and to manage on-site activities under the close
supervision of the Company's internal construction group. The Company
builds properties using only high-quality construction materials and
techniques, and believes that this higher initial investment in quality
enhances long-term value creation by sustaining high community rental
income levels and reducing long-term expense levels.
While the Company's principal focus has been on the development of
apartment communities on the Irvine Ranch, the Company has and will continue to
consider other opportunities to acquire or develop apartment communities,
principally in California that offer attractive risk-adjusted returns.
The Company and The Irvine Company are parties to an exclusive land rights
and non-competition agreement (the "Land Rights Agreement"). This agreement,
which extends through July 31, 2020, provides the Company the exclusive right,
but not the obligation, to acquire additional land sites which have been
entitled for residential use and designated by The Irvine Company as ready for
apartment development in accordance with the Master Plan. The determination to
exercise an option with respect to a site is made solely by a majority of a
committee of independent directors of the Company (the "Independent Directors
Committee"), whose members are unaffiliated with The Irvine Company. In
addition, The Irvine Company, and its Chairman, Donald Bren, have agreed to
conduct their apartment community development and ownership activities on the
Irvine Ranch solely through the Company.
Under terms of the Land Right Agreement, through July 31, 2000, the
purchase price for any apartment community sites acquired may be paid with
either cash, common stock or Operating Partnership units at the option of the
Company. After July 31, 2000, the choice of consideration will revert to The
Irvine Company. In addition, the purchase price for future apartment sites
encompassing the first 1,800 apartment units the Company develops starting in
mid-1995 will be set at an amount such that each projects budgeted pro forma
unleveraged return on costs for the first 12 months following stabilized
occupancy will be between 10.0% and 10.5%. However, in no event shall the
purchase price for each such site exceed 95% of the value of such site as
determined by independent appraisals. A 300-unit site was purchased in November
1995 and a 227-unit site was purchased in March 1996 in accordance with this
arrangement.
The principal raw materials used in construction are concrete, forest
products, sheetrock and glass. The Company expects to maintain efficient
operations by utilizing standardized materials that are commercially available
on competitive terms from a number of sources.
Capital and Financing Strategies
The Company intends to employ conservative financing policies, although
there are no limitations on the level of debt that the Company may incur. The
Company's policy is to maintain a ratio of debt to total market capitalization
of less
4
<PAGE> 6
than 60% (i.e., total debt of the Company as a percentage of the market value of
issued and outstanding shares of common stock of the Company and the limited
partnership units of the Operating Partnership plus total debt.) As of December
31, 1995, the ratio of debt to total market capitalization was 43.9%.
The Company has established a debt policy relative to its total market
capitalization, a ratio commonly employed by REITs, rather than to the book
value of its assets because the Company believes that the book value of its
assets (which to a large extent is the depreciated value of its apartments) does
not accurately reflect its ability to borrow and to meet debt service
requirements. The market capitalization of the Company, however, is more
variable than book value and does not necessarily reflect the fair market value
of the underlying assets of the Company.
The Company completed three significant equity and financing transactions
in 1995. In May the Company refinanced its tax-exempt mortgage debt to expend
maturities to the year 2025 and provide fixed interest rates for periods from
seven to twelve years. In August a follow-on offering was completed along with
an investment from The Irvine Company in the Operating Partnership, providing
net proceeds of $109.3 million. In November a $175 million unsecured credit
facility was obtained. All three of these successful transactions are more fully
discussed in Management Discussion and Analysis included in this Annual Report
on Form 10-K/A.
COMPETITION
The Properties are located in developed areas. There are numerous other
rental apartment properties within and around the market area of each Property.
The number of competitive rental properties in the area could have a material
effect on the Company's ability to rent the apartments at the Properties and the
rents charged.
EMPLOYEES
As of February 29, 1996, the Company had forty-six employees. None of the
Company's employees are subject to a collective bargaining agreement and the
Company has experienced no labor-related work stoppages. The Company considers
its relations with its personnel to be good.
TAX STATUS
The Company has made an election to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). The
Company generally will not be subject to federal income tax to the extent it
distributes at least 95% of its REIT taxable income to its shareholders. If the
Company fails to qualify as a REIT in any taxable year, the Company will be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate rates. Even if the Company qualifies
for taxation as a REIT, the Company may be subject to certain state and local
taxes on its income and property and to federal income and excise taxes on its
undistributed income.
CYCLICALITY
The Company's business, and the residential housing industry in general,
are cyclical. The Company's operations and markets are affected by local and
regional factors such as local economies, demographic demand for housing,
population growth, property taxes, energy costs, and by national factors such as
short and long-term interest rates, federal mortgage financing programs, federal
income tax provisions and general economic trends. Occupancy varies only
slightly on a seasonal basis, with the lowest occupancy typically occurring in
the summer months.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations,
an owner of real property may be held liable for the costs of removal or
remediation of certain hazardous or toxic substances located on or in the
property. These laws often impose such liability without regard to whether the
owner knew of, or was responsible for, the presence of the
5
<PAGE> 7
hazardous or toxic substances. The costs of any required remediation or removal
of such substances may be substantial. In addition, the owner's liability as to
any property is generally not limited under such laws, ordinances and
regulations and could exceed the value of the property and/or the aggregate
assets of the owner. The presence of such substances, or the failure to
remediate such substances properly, may also adversely affect the owner's
ability to sell or rent the property or to borrow using the property as
collateral. Under such laws, ordinances and regulations, an owner or any entity
who arranges for the disposal of hazardous or toxic substances, such as
asbestos, at a disposal facility may also be liable for the costs of any
required remediation or removal of the hazardous or toxic substances at the
facility, whether or not the facility is owned or operated by such owner or
entity. In connection with the ownership of the Properties or the disposal of
hazardous or toxic substances, the Company may be liable for such costs.
The groundwater underlying portions of the City of Irvine generally
contains elevated levels of certain inorganic compounds. In addition, two United
States Marine Corps air bases where soil and groundwater contamination have been
discovered are located adjacent to the Irvine Ranch. Although the Company
believes that contamination at one of these bases is localized, there can be no
assurances that it has not migrated onto any of the Properties. The other base
is listed on the National Priorities List and activities from this base have
resulted in groundwater contamination in the vicinity of this base. The Company
has knowledge that contamination from this base has migrated into the
groundwater underlying some of the Properties. The Company believes that most of
the groundwater is located at a substantial depth under the land surface. Since
the Company believes that the Orange County Water District together with the
Department of Defense are currently conducting and will continue to conduct
remediation activities at this base and in the area, the Company believes that
it will not incur any remediation costs in connection with the groundwater
contamination.
Other federal, state and local laws may impose liability for release of
asbestos containing materials (ACMs) into the air or require the removal of
damaged ACMs in the event of remodeling or renovation. There are ACMs at 11 of
the Existing Properties, primarily in floor coverings and acoustical ceiling
materials. The Company believes that the ACMs at these properties are generally
in good condition. Comprehensive operations and maintenance plans have been
implemented for properties where ACMs are present. In addition, property
custodial, and maintenance workers are trained to deal effectively with the
maintenance of existing ACMs. The Company believes it is in compliance in all
material respects with all federal, state, and local laws relating to ACMs and
that there are no regulatory requirements that currently require the removal of
these ACMs; however, if the Company were required to remove all ACMs present in
its properties over a short time frame, the cost of such removal would have a
material adverse effect on its financial condition and results of operations.
The Company also believes that ACMs are not present in the remaining Properties.
The Irvine Ranch Water District, a municipal corporation, owns and maintains
underground cement water pipes which contain asbestos and which are serving a
number of the Properties. Since these pipes are owned and maintained by the
Irvine Ranch Water District, the Company believes that any potential
environmental liabilities associated with these pipes will be incurred by the
Irvine Ranch Water District.
The Company has not been notified by any governmental authority of any
material noncompliance, liability, or other claim in connection with any of the
Properties. In addition, environmental assessments (which involve physical
inspections without soil or groundwater analyses and generally without radon
testing) were obtained on all 43 Existing Communities in 1993 or 1994 except for
two which were obtained more than four years ago. Environmental assessments were
performed on all sites under construction prior to their purchase. The Company
is not aware of any environmental liability relating to the Properties that it
believes would have a material adverse effect on its business, assets or results
of operations. Nevertheless, it is possible that the environmental assessments
did not reveal all environmental liabilities with respect to the Properties,
that environmental liabilities have developed with respect to the Properties
since the environmental assessments were prepared or that there are material
environmental liabilities of which the Company is unaware with respect to the
Properties. Moreover, no assurance can be given that future laws, ordinances or
regulations will not impose material environmental liabilities or that the
current environmental condition of the Properties will not be affected by
residents and occupants of the Properties or by the uses or condition of
properties in the vicinity of the Properties, such as leaking underground
storage tanks, or by third parties unrelated to the Company.
REGULATION
6
<PAGE> 8
Apartment community properties are subject to various laws, ordinances,
and regulations, including regulations relating to recreational facilities such
as swimming pools, activity centers and other common areas. The Company believes
that each property has all material permits and approvals to operate its
business. Rent control laws currently are not applicable to any of the
Properties. However, there can be no assurance that rent control requirements
will not be initiated in the future.
The Properties and any newly acquired or developed apartment communities
must comply with Title II of the Americans with Disabilities Act (ADA) to the
extent that such properties are "public accommodations" and/or "commercial
facilities" as defined by the ADA. Compliance with the ADA requires removal of
structural barriers to handicapped access in certain public areas of the
Company's Properties where such removal is "readily achievable." The ADA does
not, however, consider residential properties, such as apartment communities, to
be public accommodations or commercial facilities, except to the extent portions
of such facilities, such as a leasing office, are open to the public. The
Company believes that the Properties comply in all material respects with all
present requirements under the ADA and applicable state laws. Noncompliance with
the ADA could result in imposition of fines or an award of damages to private
litigants.
The Fair Housing Act (FHA) requires, as part of the Fair Housing
Amendments Act of 1988, apartment communities first occupied after March 13,
1990 to be accessible to the handicapped. Noncompliance with the FHA could
result in the imposition of fines or an award of damages to private litigants.
The Company believes that the Properties that are subject to the FHA are in
compliance with such law.
Approximately 2,900 units in portions of 31 of the Company's Existing
Communities are currently subject to resident income limitations which generally
restrict rental of the affected units to low or moderate income residents and
which, in most instances, also limit the amount of rent that may be charged for
a particular unit. A brief summary of the basis and effect of these resident
income and other limitations follows:
The development of 23 of the 31 Existing Communities was financed with the
proceeds of tax-exempt multifamily housing revenue bonds issued by various local
municipalities. These bonds were refunded in May 1995 and consolidated under one
issuer, California Statewide Communities Development Authority. Regulatory
agreements applicable to such financings (a) require that a specified percentage
of the units be set aside for residents whose incomes do not exceed a specified
percentage of the area median income and (b) in most instances, limit the rent
which can be charged to a percentage of the maximum qualifying resident income
level for the affected unit. Most of these restrictions will terminate upon the
maturity date of the bond issue.
In addition to the rental restrictions imposed by the bond regulatory
agreements, many of the 23 properties and three additional properties are also
subject to resident income and rent limitations by virtue of development and
other agreements entered into with local municipalities and private and
quasi-public interest groups. These restrictions are similar in scope and
substance to the other restrictions discussed above.
Five of the 31 Existing Communities were developed with the assistance of
U.S. Department of Housing and Urban Development (HUD) administered programs
which provided mortgage insurance to the project lender. Certain regulatory and
other agreements with HUD applicable to such financings (a) impose resident
income restrictions similar to those imposed by the bond financing agreements,
and (b) generally require the Company to operate the Properties in accordance
with HUD's standards. With respect to one of the properties (i.e.,The
Parklands), a regulatory agreement additionally (a) limits the distribution of
income from the property to 10% of the HUD imputed equity in the property and
(b) requires that any income in excess of such 10% limit be deposited into a
residual receipts account. Amounts paid into such residual receipts account have
historically been used for capital improvements to the property, subject to
HUD's consent. At the expiration of the applicable regulatory or other
agreement, any amount remaining in such residual receipts account belongs to
HUD.
Under Section 8 of the United States Housing Act of 1937, HUD currently
provides rental assistance payments to each of these five HUD properties
pursuant to certain Housing Assistance Payments (HAP) contracts. Under the HAP
contracts, so long as the units are rented to residents whose income levels do
not exceed specified HUD guidelines, each
7
<PAGE> 9
qualifying resident is required to pay only 30% of their adjusted monthly income
as rent and HUD pays the difference between the 30% payment and the unit's
market rents as established by HUD. The above-mentioned restrictions and
limitations will continue for the remainder of each HAP contract term. Each HAP
contract has an initial term of 20 years with four 5-year renewal options
exercisable at the owners option. At December 31, 1995, the average remaining
term of the HAP contracts was approximately 8 years.
Each of the resident and income restricted units within the Company's
portfolio have been subject to one or more of the foregoing restrictions either
since their initial occupancy or as a result of subsequent agreements with the
applicable governmental authority or other private or quasi-public interest
groups. Accordingly, the effect of these restrictions on rental income from the
Properties has been reflected in the historical financial results of the Company
and its Predecessor.
The Company believes that it is in material compliance with all of the
foregoing requirements. The failure of the Company to comply with the terms of
any of the foregoing could adversely affect the Company's operations.
The Company may purchase land in the future, which as a condition of
purchase has the inclusion of units at below market rental rates. Construction
of such properties may be financed with tax-exempt debt. In any case, the
Company will evaluate the economics inclusive of any rental restriction and
benefit of below-market tax-exempt financing prior to purchasing the land.
ORANGE COUNTY BANKRUPTCY
On December 6, 1994 the County of Orange and the Orange County Investment
Pool filed separate petitions for federal bankruptcy protection. The long-term
effects of the bankruptcy on the Company, if any, cannot be predicted at this
time. Potential effects include, but are not limited to, a restructuring of
County government, reducing non-essential and discretionary services,
privatizing certain functions, sale of certain assets, failure to repay in full
funds invested in the Pool, an increase in the cost of government financing and
lower consumer confidence. However, the County experienced positive job growth
during 1995 and certain regional forecasts predict further job gains in 1996. If
the economy were to be adversely affected in the long run, such a development
could, in turn, have an adverse impact on demand for apartments in the Company's
Existing Communities and its Communities Under Construction.
FACTORS RELATING TO REAL ESTATE OPERATIONS AND DEVELOPMENT
General: Real property investments are subject to varying degrees of risk.
The investment returns available from equity investments in real estate depend
in large part on the amount of income earned and capital appreciation generated
by the related properties as well as the expenses incurred. If the Properties do
not generate revenue sufficient to meet operating expenses, including debt
service and capital expenditures, the Company's income and ability to make
distributions to its stockholders will be adversely affected. In addition, the
Properties consist exclusively of rental apartment communities located in Orange
County. Income from and the performance of the Properties may therefore be
adversely affected by the general economic climate in Orange County, including
unemployment rates and local conditions such as the supply of and demand for
apartments in the area, the attractiveness of the Properties to residents,
zoning or other regulatory restrictions, competition from other available
apartments and alternative forms of housing, the affordability of single family
homes, the ability of the Company to provide adequate maintenance and insurance
and the potential of increased operating costs (including real estate taxes).
Certain significant expenditures associated with an investment in real estate
(such as mortgage payments, real estate taxes and maintenance costs) generally
are not reduced when circumstances cause a reduction in revenue from the
investment. In addition, income from properties and real estate values are also
affected by a variety of other factors, such as governmental regulations and
applicable laws (including real estate, zoning and tax laws), interest rate
levels and the availability of financing. The Properties in the aggregate
historically have generated positive cash flow from operations; however, no
assurance can be given that such will be the case in the future.
Equity real estate investments, such as the investments made by the
Operating Partnership in the Properties and any additional properties that may
be developed or acquired by the Operating Partnership, and the Company's
investment in the Operating Partnership are relatively illiquid. Such
illiquidity limits the ability of the Operating Partnership (and, therefore, the
Company) to vary its portfolio in response to changes in economic or other
conditions. In addition, the
8
<PAGE> 10
Internal Revenue Code places limits on the Company's ability to sell properties
held for fewer than four years, which may affect the ability of the Company to
sell properties without adversely affecting returns to holders of common stock.
The Properties are subject to all operating risks common to apartment
ownership in general. Such risks include: competition from other apartment
communities both on and off the Irvine Ranch; excessive building of comparable
properties outside the Irvine Ranch which might adversely affect apartment
occupancy or rental rates; increases in operating costs due to inflation and
other factors, which increases may not necessarily be offset by increased rents;
inability or unwillingness of residents to pay rent increases; and future
enactment of rent control laws or other laws regulating apartment housing,
including present and possible future laws relating to access by disabled
persons. If operating expenses increase, the local rental market may limit the
extent to which rents may be increased to meet increased expenses without
decreasing occupancy rates. If any of the above occurred, the Company's ability
to make expected distributions to stockholders could be adversely affected.
Real Estate Development: A focus of the Company is on the development of
new rental apartment communities on sites acquired primarily from The Irvine
Company, although the Company may also develop new rental apartment communities
on sites acquired from third parties. The Company may also acquire completed
communities. The real estate development business involves significant risks in
addition to those involved in the ownership and operation of established
apartment communities, including the risks that specific project approvals may
take more time and resources to obtain than expected, that construction may not
be completed on schedule or budget and the properties may not achieve
anticipated rent or occupancy levels. In addition, if permanent debt or equity
financing is not available on acceptable terms to finance new development or
acquisitions undertaken without permanent financing, further development
activities or acquisitions might be curtailed or cash available for distribution
might be adversely affected.
Insurance: The Operating Partnership carries comprehensive liability,
fire, extended coverage and rental loss insurance covering all of the
Properties, with policy specifications and insured limits which the Company
believes are adequate and appropriate under the circumstances. There are,
however, certain types of losses (such as from earthquakes) that are not
generally insured because they are either uninsurable or not economically
insurable. The Operating Partnership does not carry earthquake insurance on any
of the Properties. Should an uninsured loss or a loss in excess of insured
limits occur, the Operating Partnership could lose its capital invested in the
property, as well as the anticipated future revenues from the property, and, in
the case of debt which is recourse to the Operating Partnership, would remain
obligated for any mortgage debt or other financial obligations related to the
property. Any such loss would adversely affect the Company. Moreover, as a
general partner of the Operating Partnership, the Company will generally be
liable for any unsatisfied obligations other than non-recourse obligations. The
Company believes that the Properties are adequately insured. In addition, in
light of the California earthquake risk, California building codes since the
early 1970's have established construction standards for all newly built and
renovated buildings, including apartment buildings, the current and strictest
construction standards having been adopted in 1984. Twenty-four of the 43
Existing Communities (representing approximately 59% of those units) have been
completed and occupied since 1984 and the Company believes that all of the
Properties were constructed in full compliance with the applicable standards
existing at the time of construction. In addition, the Company's apartment
communities contain multiple buildings, all of which are of wood frame
construction. While earthquakes have occurred from time to time in Southern
California, the Company has not experienced any material losses as a result of
earthquakes. No assurance can be given that this will be the case in the future.
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information regarding the executive
officers of the Company as of March 15, 1996 and other positions held by them
over the last five years:
<TABLE>
<CAPTION>
YEARS POSITIONS
NAME AGE PRESENT AND PRIOR POSITIONS HELD (1) HELD
- -------------------- --- ------------------------------------------------------------ ---------------
<S> <C> <C> <C>
</TABLE>
9
<PAGE> 11
<TABLE>
<S> <C> <C> <C>
Steven P. Albert 53 President and Chief Executive Officer 1995 - Present
President, Forest City Properties Corporation
and Forest City California Residential Development 1988 - 1995
Richard E. Moran Jr. 44 Executive Vice President, Chief Financial Officer and Secretary 1993 - Present
Executive Vice President, Corporate Finance
and Treasurer, The Irvine Company 1992 - 1993
Senior Vice President and Treasurer, The Irvine Company 1990 - 1992
James E. Mead 36 Senior Vice President and Treasurer 1994 - Present
Vice President, Corporate Finance, The Irvine Company 1991 - 1994
Vice President, Corporate Finance, J.P. Morgan 1989 - 1991
Tyler H. Rose 35 Senior Vice President, Corporate Finance 1995 - Present
Vice President, Corporate Finance, The Irvine Company 1994 - 1995
Vice President, Corporate Finance, J.P. Morgan 1990 - 1994
Hank Baker 47 Vice President, Marketing 1996 - Present
Owner, Baker Property Advisors 1992-1996
Vice President, Northern California, Forest City
Properties Corporation 1986-1992
Shawn Howie 40 Vice President and Controller 1993 - Present
Senior Manager, Ernst & Young 1986 - 1993
Richard E. Lamprecht 36 Vice President, Development 1993 - Present
Vice President, Development, Irvine Pacific 1989 - 1993
David A. McAllister 61 Vice President, Construction 1993 - Present
Director of Operations, California Pacific Homes 1992 - 1993
Vice President, Operations, Irvine Pacific 1979 - 1992
Scott A. Reinert 37 Vice President, Asset Management 1994 - Present
Chief Operating Officer, Southeast, GFS Northstar 1990 - 1994
</TABLE>
(1) The first position held is with the Company. The Irvine Company and
California Pacific Homes are affiliates of the Company. Irvine Pacific is
the Predecessor to the Company.
10
<PAGE> 12
ITEM 2. PROPERTIES
The Company owns stabilized properties containing 11,334 apartment units in
Orange County, California. The Company believes that the Properties are high
quality apartment communities with superior locations near major employment
centers within the master-planned Irvine Ranch. The Properties are all located
on the Irvine Ranch within the following individual jurisdictions:
<TABLE>
<CAPTION>
Communities
Existing Communities Under Construction Total
----------------------- ----------------------- ----------------------
Number of Number of Number of Number of Number of Percent
Municipality Properties Units Properties Units Properties of Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Irvine 32 8,156 3 1,259 35 9,415
Newport Beach 6 1,760 1 300 7 2,060
Tustin 5 1,418 1 436 6 1,854
Unincorporated 1 512 1 512
- ----------------------------------------------------------------------------------------------
43 11,334 6 2,507 49 13,841
- ----------------------------------------------------------------------------------------------
</TABLE>
The unit mix of the Properties is as follows:
<TABLE>
<CAPTION>
Existing Communities
Communities Under Construction Total Unit Percent of
Unit Type Unit Count Unit Count Count Total Units
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Studio/Junior 469 469 3.4%
One Bedroom 2,787 828 3,615 26.1%
Two Bedroom 6,934 1,679 8,613 62.2%
Three Bedrooms or More 1,144 1,144 8.3%
- ----------------------------------------------------------------------------------------
Total 11,334 2,507 13,841 100.0%
- ----------------------------------------------------------------------------------------
</TABLE>
Information as to the Company's Properties is included on pages 8 and 25 of
the Company's 1995 Amended Annual Report to Shareholders, which is included as
part of Exhibit 13 and is incorporated in this Annual Report on Form 10-K/A. In
addition, the real estate and accumulated depreciation schedule of Irvine
Apartment Communities, Inc. is included on pages 15 and 16 of this Annual
Report on Form 10-K/A.
The Company believes that the Properties are well maintained and have no
material deferred maintenance requirements or current need for major
renovations. The average age of the Existing Communities is approximately twelve
years. The oldest of the Existing Communities was completed in 1969, and 24 of
the 43 Existing Communities, totaling 6,666 units or approximately 59% of the
Existing Communities, have been completed since 1984. The number of units per
Property ranges from 58 units to 880 units, with an average of approximately 282
units.
The Company seeks to assure that the Properties remain attractive dwellings
for apartment residents and desired locations for prospective apartment
residents. Maintenance, custodial and groundskeeping personnel perform regular
11
<PAGE> 13
maintenance and upkeep on the Properties to preserve and enhance physical and
aesthetic attributes. The physical appearance of and apartment residents'
satisfaction with the Properties and with the performance of the local property
managers is monitored and evaluated on an on-going basis by the Company's senior
management.
All of the Properties provide residents with numerous amenities and include
extensive landscaping. More than 80% of the 43 Existing Communities contain
swimming pools, spas, air conditioning and covered parking. Additional amenities
may include a fitness center, recreational room, sauna and tennis courts. Each
apartment unit includes a patio, porch or balcony. Many apartment units offer
one or more of certain additional features, such as vaulted ceilings,
fireplaces, enclosed garages, refrigerators, washers and dryers, and microwave
ovens. The Communities Under Construction contain almost all of these amenities.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Properties are currently subject to any material
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of February 12, 1996, there were 211 holders of record of the Company's
common stock. The Company believes that there are approximately 11,000
shareholders.
Information as to the Company's quarterly stock prices is included on page 27
of the Company's 1995 Amended Annual Report to Shareholders, which is included
as part of Exhibit 13 and is incorporated in this Annual Report on Form 10-K/A.
Information as to the principal markets on which the Company's common stock
is being traded is included on page 27 of the Company's 1995 Amended Annual
Report to Shareholders, which is included as part of Exhibit 13 and is
incorporated in this Annual Report on Form 10-K/A.
The Company intends to pay regular quarterly distributions. The Company's
historical quarterly distribution payments are included on page 28 of the
Company's 1995 Amended Annual Report to Shareholders, which is included as
part of Exhibit 13 and is incorporated in this Annual Report on Form 10-K/A.
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Information of Irvine Apartment Communities, Inc. and
Predecessor for the five-year period ended December 31, 1995 is included on page
2 of the Company's 1995 Amended Annual Report to Shareholders, which is
included as part of Exhibit 13 and is incorporated in this Annual Report on
Form 10-K/A. It should be read in conjunction with the consolidated and
combined amended financial statements included on pages 10 through 24 in the
Company's 1995 Amended Annual Report to Shareholders which are also included
as part of Exhibit 13 and incorporated in this Annual Report on Form 10-K/A
and the financial statement schedule below in Item 14 of this Annual Report on
Form 10-K/A.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is included on pages 3 through 9 in the Company's 1995 Amended Annual
Report to Shareholders, which are included as part of Exhibit 13 and are
incorporated in this Annual Report on Form 10-K/A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated and combined financial statements of Irvine Apartment
Communities, Inc. and Predecessor are included on pages 10 through 24 in the
Company's 1995 Amended Annual Report to Shareholders, which are included as
part of Exhibit 13 and are incorporated in this Annual Report on Form 10-K/A.
Reference is made to the Index to Financial Statements in Item 14 below.
A financial statement schedule for the Company is included on pages 15 and 16
of this Annual Report on Form 10-K/A. Reference is made to the Index to
Financial Statement Schedule in Item 14 below.
13
<PAGE> 15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Information regarding executive officers required by Item 401 of Regulation
S-K is furnished in a separate disclosure in Part I of this report because the
Company did not furnish such information in its definitive Proxy Statement
prepared in accordance with Schedule 14A.
The Notice and Proxy Statement for the 1996 Annual Meeting of Shareholders,
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934,
which is incorporated by reference in this Annual Report on Form 10-K/A pursuant
to General Instruction G(3) of Form 10-K, provides the remaining information
required under Part III (ITEMS 10, 11, 12, AND 13.)
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The consolidated and combined financial statements, together with the report
thereon of Ernst & Young LLP dated January 31, 1996, all appearing on pages 10
through 24 in the 1995 Amended Annual Report to Shareholders, are incorporated
in this Annual Report on Form 10-K/A. The aforementioned information and the
information incorporated by reference to Items 2, 5, 6, 7 and 8, from the 1995
Amended Annual Report to Shareholders attached as Exhibit 13, is incorporated
into this Annual Report on Form 10-K/A.
<TABLE>
<CAPTION>
PAGE NO. IN
ANNUAL REPORT
IRVINE APARTMENT COMMUNITIES, INC. TO SHAREHOLDERS
---------------
<S> <C>
Independent Auditors' Report 24
Consolidated Balance Sheets as of
December 31, 1995 and 1994 10
Consolidated and Combined Statements of Operations
for the years ended December 31, 1995, 1994 and 1993 11
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1995, 1994 and 1993 12
Consolidated and Combined Statements of Cash Flows for
the years ended December 31, 1995, 1994 and 1993 13
Notes to Consolidated and Combined Financial Statements 14 through 24
Shareholder Information 27
</TABLE>
Pages 2 through 24 and page 27 of the 1995 Amended Annual Report to
Shareholders of Irvine Apartment Communities, Inc. include the Five Year
Summary, Management's Discussion and Analysis of Financial Condition and Results
of Operations, the Consolidated and Combined Financial Statements and related
notes thereto, the Independent Auditors' Report, Shareholder Information and
Quarterly Stock Prices. These pages are included as part of Exhibit 13 to this
Annual Report on Form 10-K/A.
Schedule III-Real Estate and Accumulated Depreciation is included on pages 15
and 16 of this Annual Report on Form 10-K/A.
14
<PAGE> 16
IRVINE APARTMENT COMMUNITIES, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
Gross Amount at Which
Carried at December 31, 1995(a)(b)
----------------------------------
City, State Number of Buildings and Accumulated Date of Depreciable
Apartment Community Name Units Encumbrances(c) Land Improvements Total Depreciation Completion Life(d)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IRVINE, CALIFORNIA
Amherst Court 162 $ 1,430 $ 11,227 $ 12,657 $ 1,836 1991 5-40 yrs.
Berkeley Court 152 $ 7,887 858 8,202 9,060 2,602 1986 5-40 yrs.
Cedar Creek 176 8,674 519 8,559 9,078 2,760 1985 5-40 yrs.
Columbia Court 58 2,627 321 2,672 2,993 801 1984 5-40 yrs.
Cornell Court 109 5,255 785 5,014 5,799 1,432 1984 5-40 yrs.
Cross Creek 136 6,822 561 7,244 7,805 2,346 1985 5-40 yrs.
Dartmouth Court 294 17,480 2,674 17,105 19,779 5,025 1986 5-40 yrs.
Deerfield 288 10,955 3,810 11,411 15,221 4,017 1975/83 5-40 yrs.
Harvard Court 112 5,210 1,034 5,846 6,880 1,782 1986 5-40 yrs.
Northwood Park 168 7,838 1,246 8,409 9,655 2,807 1985 5-40 yrs.
Northwood Place 604 30,450 4,613 33,949 38,562 10,308 1986 5-40 yrs.
Orchard Park 60 1,138 2,086 3,224 778 1982 5-40 yrs.
Park West 880 34,334 18,768 53,313 72,081 23,089 1970/71/72 5-40 yrs.
Parkwood 296 12,838 7,667 12,553 20,220 4,451 1974 5-40 yrs.
Rancho San Joaquin 368 17,676 7,910 28,147 36,057 12,061 1976 5-40 yrs.
San Carlo 354 2,683 25,625 28,308 5,115 1989 5-40 yrs.
San Leon 248 12,506 1,703 14,445 16,148 4,051 1987 5-40 yrs.
San Marco 426 24,575 2,828 24,296 27,124 5,496 1988 5-40 yrs.
San Marino 200 9,949 1,354 11,491 12,845 3,430 1986 5-40 yrs.
San Mateo 283 1,428 18,428 19,856 3,064 1990 5-40 yrs.
San Paulo 382 26,732 1,885 26,784 28,669 1,664 1993 5-40 yrs.
San Remo 248 13,973 1,741 14,217 15,958 4,061 1986/88 5-40 yrs.
Stanford Court 320 14,018 2,202 14,132 16,334 4,806 1985 5-40 yrs.
The Parklands 121 6,898 68 6,892 6,960 1,929 1983 5-40 yrs.
Turtle Rock Canyon 217 18,982 1,889 19,932 21,821 3,057 1991 5-40 yrs.
Turtle Rock Vista 252 13,613 6,327 13,160 19,487 4,674 1976/77 5-40 yrs.
Windwood Glen 196 9,952 1,266 9,557 10,823 2,836 1985 5-40 yrs.
Windwood Knoll 248 1,111 11,266 12,377 3,401 1983 5-40 yrs.
Woodbridge Oaks 120 832 6,621 7,453 2,040 1983 5-40 yrs.
Woodbridge Pines 220 8,575 5,755 10,285 16,040 3,617 1976 5-40 yrs.
Woodbridge Villas 258 4,353 8,976 13,329 3,494 1982 5-40 yrs.
Woodbridge Willows 200 9,753 1,421 11,403 12,824 4,612 1984 5-40 yrs.
- -----------------------------------------------------------------------------------------------------------------------------------
8,156 337,572 92,180 463,247 555,427 137,442
- -----------------------------------------------------------------------------------------------------------------------------------
NEWPORT BEACH, CALIFORNIA
Bayport 104 4,930 3,146 4,148 7,294 1,546 1971 5-40 yrs.
Bayview 64 3,559 2,353 2,880 5,233 1,098 1971 5-40 yrs.
Baywood 388 21,265 10,809 19,992 30,801 6,818 1973/84 5-40 yrs.
Mariner Square 114 5,724 392 4,967 5,359 2,846 1969 5-40 yrs.
Newport North 570 38,357 8,849 31,196 40,045 9,110 1986 5-40 yrs.
Promontory Point 520 36,875 18,775 40,603 59,378 14,693 1974 5-40 yrs.
- -----------------------------------------------------------------------------------------------------------------------------------
1,760 110,710 44,324 103,786 148,110 36,111
- -----------------------------------------------------------------------------------------------------------------------------------
TUSTIN, CALIFORNIA
Rancho Alisal 356 20,836 3,512 19,780 23,292 5,324 1988/91 5-40 yrs.
Rancho Maderas 266 19,570 1,118 16,156 17,274 3,251 1989 5-40 yrs.
Rancho Mariposa 238 13,062 683 16,193 16,876 2,040 1992 5-40 yrs.
Rancho Tierra 252 19,823 1,186 16,435 17,621 3,422 1989 5-40 yrs.
Sierra Vista 306 2,318 22,624 24,942 2,686 1992 5-40 yrs.
- -----------------------------------------------------------------------------------------------------------------------------------
1,418 73,291 8,817 91,188 100,005 16,723
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STABILIZED 11,334 $521,573 $145,321 $658,221 $803,542 $190,276
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes on next page.
15
<PAGE> 17
<TABLE>
<CAPTION>
Gross Amount at Which
Carried at December 31, 1995(a)(b)
----------------------------------
Apartment Community Number of Buildings and Accumulated Date of Depreciable
Name (City) Units Encumbrances(c) Land(e) Improvements Total Depreciation Completion Life(d)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DELIVERED UNITS IN PROJECTS
UNDER CONSTRUCTION
Villa Coronado (Irvine) 423 $ 4,674 $ 31,300 $ 35,974 $ 755 1994/95 5-40 yrs.
Santa Rosa (Irvine) 324 2,961 24,536 27,497 434 1995 5-40 yrs.
Santa Clara (Irvine) 229 2,241 18,140 20,381 284 1995 5-40 yrs.
Rancho Monterey (Tustin) 263 4,112 20,084 24,196 226 1995 5-40 yrs.
Newport Ridge
(Unincorporated) 203 3,860 16,456 20,316 131 1995 5-40 yrs.
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DELIVERED UNITS 1,442 17,848 110,516 128,364 1,830
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STABILIZED AND
DELIVERED 12,776 $521,573 163,169 768,737 931,906 192,106
- -----------------------------------------------------------------------------------------------------------------------------------
UNITS UNDER CONSTRUCTION
Villa Coronado (Irvine) 90 1,168 5,732 6,900
Santa Rosa (Irvine) 44 316 2,327 2,643
Santa Clara (Irvine) 149 1,520 11,048 12,568
Rancho Monterey (Tustin) 173 2,711 12,532 15,243
Newport Ridge
(Unincorporated) 309 5,682 21,358 27,040
Baypointe (Newport Beach) 300 4,190 2,882 7,072
Other 2,261 2,261
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL UNITS UNDER
CONSTRUCTION 1,065 15,587 58,140 73,727
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL 13,841 $521,573 $178,756 $826,877 $1,005,633 $192,106
===================================================================================================================================
</TABLE>
Notes:
(a) The aggregate cost of land and buildings for federal income tax purposes
is approximately $598,473 (unaudited).
(b) The gross amount at which buildings and improvements are carried represent
historical cost amounts incurred in the development of the projects and
capital improvements incurred subsequent to the completion of construction.
Prior to the Company's December 1993 initial public offering, the gross
land, buildings, and improvements amounts represent The Irvine Company's
historical cost basis.
(c) Encumbrances represent debt secured by deeds of trust.
(d) Estimated useful lives are five to seven years for furniture and fixtures,
five to twenty years for improvements and forty years for buildings.
(e) Land acquired from The Irvine Company is recorded at cost based on the
purchase price.
A summary of activity of real estate and accumulated depreciation is as follows:
Real Estate
December 31,
----------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Balance at beginning of year $ 869,756 $792,510 $768,861
Additions:
Through cash expenditures 124,368 61,590 23,649
Through assumption of tax-exempt
assessment district debt 4,184 15,656
Through issuance of Operating
Partnership units 7,325
- --------------------------------------------------------------------------------
Balance at end of year $1,005,633 $869,756 $792,510
================================================================================
Accumulated Depreciation
December 31,
----------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Balance at beginning of year $169,039 $148,052 $128,050
Charges to depreciation expense 23,067 20,987 20,002
- --------------------------------------------------------------------------------
Balance at end of period $192,106 $169,039 $148,052
================================================================================
16
<PAGE> 18
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Annual Report on
Form 10-K of the Company for the year ended December 31, 1993, File
No. 1-12478 (the "1993 Form 10-K")).
3.3 Amended Bylaws of the Company (incorporated by reference to Exhibit
3.3 of the 1993 Form 10-K).
3.4 Specimen of Certificate Representing Shares of Common Stock
(incorporated by reference to Exhibit 3.4 of the 1993 Form 10-K).
10.1 Agreement of Limited Partnership of Operating Partnership (the
"Operating Partnership Agreement") (incorporated by reference to
Exhibit 10.1 of the 1993 Form 10-K).
10.1.1 Amendment No. 1 to the Operating Partnership Agreement (incorporated
by reference to Exhibit 10.1.1 of the Quarterly Report on Form 10-Q
of the Company for the quarter ended June 30, 1995, File No. 1-12478
(the "1995 Second Quarter Form 10-Q")).
10.1.2 Amendment No. 2 to the Operating Partnership Agreement (incorporated
by reference to Exhibit 10.1.2 of the 1995 Second Quarter Form 10-Q).
10.1.3 Amendment No. 3 to the Operating Partnership Agreement (incorporated
by reference to Exhibit 10.1.3 of the 1995 Second Quarter Form 10-Q).
10.2 Lease Agreement (incorporated by reference to Exhibit 10.2 of the
1993 Form 10-K).
10.4 Miscellaneous Rights and Lock-Up Agreement among the Company and the
persons named therein (incorporated by reference to Exhibit 10.4 of
the 1993 Form 10-K).
10.4.1 Amendment No. 1 to the Miscellaneous Rights and Lock-Up Agreement
(incorporated by reference to Exhibit 10.4.1 of the 1995 Second
Quarter Form 10-Q).
10.5 Administrative Services Agreement (incorporated by reference to
Exhibit 10.5 of the 1993 Form 10-K).
10.5.1 Amendment and Extension to the Administrative Services Agreement
(incorporated by reference to Exhibit 10.5.1 of the Annual Report on
Form 10-K of the Company for the year ended December 31, 1994, File
No. 1-12478).
10.6 Exclusive Land Rights and Non-Competition Agreement (incorporated by
reference to Exhibit 10.6 of the 1993 Form 10-K).
17
<PAGE> 19
10.6.1 Amendment No. 1 to the Exclusive Land Rights and Non-Competition
Agreement (incorporated by reference to Exhibit 10.6.1 of the 1995
Second Quarter Form 10-Q).
10.6.2 Amendment No. 2 to the Exclusive Land Rights and Non-Competition
Agreement (incorporated by reference to Exhibit 10.6.2 of the 1995
Second Quarter Form 10-Q).
10.7 Contribution Agreement and Escrow Instructions Agreement
(incorporated by reference to Exhibit 10.7 of the 1993 Form 10-K).
10.8 Irvine Apartment Communities, Inc. 1993 Stock Option Plan for
Directors (incorporated by reference to Exhibit 10.8 of the 1993 Form
10-K).
10.9 Irvine Apartment Communities, Inc. 1993 Long-Term Stock Incentive
Plan (incorporated by reference to Exhibit 10.9 of the 1993 Form
10-K).
10.10 Irrevocable Trust Agreement (incorporated by reference to Exhibit
10.10 of the 1993 Form 10-K).
10.11 Revolving Credit Agreement dated November 30, 1995 (incorporated by
reference to Exhibit 10.11 of the 1995 Form 10-K).
10.12 Indenture of Trust for Tax-Exempt Mortgage Bond Financing
(incorporated by reference to Exhibit 10.13 of the 1995 Second
Quarter Form 10-Q).
10.13 Employment Arrangement Letter with Chief Executive Officer
(incorporated by reference to Exhibit 10.13 of the 1995 Form 10-K).
13 Amended Annual Report to Shareholders for the year ended
December 31, 1995.
21 Subsidiaries of the Registrant.
22 Notice and Proxy Statement for the Annual Meeting of Shareholders to
be held on April 30, 1996 (incorporated by reference to Exhibit 22
of the 1995 Form 10-K).
23.1 Consent of Ernst & Young LLP.
23.2 Opinion of Ernst & Young LLP on Schedule III.
REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of 1995.
18
<PAGE> 20
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.
IRVINE APARTMENT COMMUNITIES, INC.
By: JAMES E. MEAD
--------------------------------
James E. Mead
Senior Vice President,
Chief Financial Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
JAMES E. MEAD Senior Vice President, February 11, 1997
- ---------------------- Chief Financial Officer and
James E. Mead Secretary (Principal Financial Officer)
SHAWN HOWIE Vice President and Controller February 11, 1997
- ---------------------- (Principal Accounting Officer)
Shawn Howie
</TABLE>
19
<PAGE> 1
IRVINE APARTMENT COMMUNITIES, INC.
1995 Amended Annual Report to Shareholders
Exhibit 13
<TABLE>
<CAPTION>
Table of Contents Page
- ----------------- ----
<S> <C>
Selected Financial Information 2
Management's Discussion and Analysis 3
Financial Statements 10
Notes to Financial Statements 14
Independent Auditors' Report 24
Operating Information 25
Directors and Officers 26
Shareholder Information 27
</TABLE>
<PAGE> 2
IRVINE APARTMENT COMMUNITIES, INC.
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
(in thousands, except percentages, per Years Ended December 31,
share and property information) 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING INFORMATION
Total revenues $ 136,168 $ 130,236 $ 124,820 $ 121,194 $ 112,249
Operating revenues (excludes interest
income) $ 135,757 $ 128,923 $ 124,760 $ 121,194 $ 112,249
Income (loss) before extraordinary item
and minority/predecessor interest
in income (loss) $ 25,056 $ 12,279 $ (387) $ (1,600) $ (3,320)
Net income $ 8,465 $ 7,273 $ 115
Income after minority interest in income
and before extraordinary item per share $ 0.84 $ 0.62 $ 0.04
Net income per share $ 0.61 $ 0.62 $ 0.01
Cash distributions per share $ 1.39 $ 1.11
Total apartment units (at end of period) 12,776 11,358 11,334 10,952 10,616
- ----------------------------------------------------------------------------------------------------------------
SELECTED STABILIZED PROPERTY INFORMATION(1)
Total properties (at end of period) 43 43 42 42 40
Average units 11,334 11,334 10,799 10,446 9,990
Average economic occupancy(2) 94.1% 95.1% 96.1% 95.9% 95.0%
Average monthly rent per unit(3) $ 996 $ 981 $ 963 $ 950 $ 937
- ----------------------------------------------------------------------------------------------------------------
SELECTED BALANCE SHEET INFORMATION AT
DECEMBER 31
Total assets $ 853,230 $ 757,240 $ 740,120 $ 654,694 $ 655,343
Total long-term debt $ 563,286 $ 540,689 $ 513,943 $ 555,491 $ 517,868
Shareholders' equity and minority
interest/predecessor's equity $ 264,566 $ 191,049 $ 212,344 $ 90,274 $ 125,555
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Note: The selected financial information includes historical data of the Company
and, prior to December 8, 1993, the date of the Company's initial public
offering, the Company's Predecessor. See Note 1 to the Consolidated and Combined
Financial Statements.
(1) A property is stabilized at the earlier of one year after completion of
construction or when it achieves 95% occupancy.
(2) Economic occupancy is calculated by dividing the rental revenues collected
by gross potential rent (gross rental revenue plus assumed revenue on
vacant units at market rents) for the period.
(3) Average monthly rent per unit is calculated by dividing average rental
revenue per unit by average economic occupancy.
2
<PAGE> 3
IRVINE APARTMENT COMMUNITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Information, the Consolidated and Combined Financial Statements of
Irvine Apartment Communities, Inc. and its Predecessor and the Notes thereto.
OVERVIEW
Irvine Apartment Communities, Inc. (the "Company") was incorporated on September
10, 1993 and operates as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended. At December 31, 1995, the Company had
a 45.4% general partnership interest in and was the sole managing general
partner of Irvine Apartment Communities, L.P. (the "Operating Partnership")
which began operations as of December 8, 1993, the date of the Company's initial
public offering of Common Stock (the "Offering"). In connection with the
Offering, The Irvine Company (the "Limited Partner") transferred 42 apartment
communities and a 99% interest in a limited partnership which owns one apartment
community to the Operating Partnership. At December 31, 1995, The Irvine Company
had a 54.6% limited partnership interest in the Operating Partnership.
The Company is a self-administered equity REIT engaged in the operation and
development of apartment communities in Orange County, California. As of
December 31, 1995 the Operating Partnership owned and operated 43 properties and
had completed 1,442 apartment units within six new apartment communities under
construction (collectively, the "Properties"). Until July 31, 2020, the Company
has the exclusive right, but not the obligation, to acquire land from The Irvine
Company for development of additional apartment communities on the Irvine Ranch
(see Note 7 to the Consolidated and Combined Financial Statements).
RESULTS OF OPERATIONS
The Company's income before extraordinary item and minority interest was $25.1
million in 1995, up from $12.3 million in 1994 and $(0.04) million in 1993. The
Company's financial results improved in 1995 due to the contribution of newly
delivered rental units from its development program, as well as cost reductions
in property expenses within its stabilized portfolio. In 1994, financial results
improved largely as a result of the contribution of rental income from the
newly completed San Paulo property and a decrease in interest expense of $23.4
million was offset by an increase of $12.9 million in amortization of deferred
financing costs.
OPERATING REVENUES increased by 5.3% to $135.8 million in 1995, up from $128.9
million in 1994. Operating revenues in 1994 had increased by 3.3% from $124.8
million in 1993. Operating revenues rose in 1995 largely as a result of the
contribution of newly delivered rental units from five lease-up properties. In
total, these new units added $5.7 million to operating revenues in 1995. They
made virtually no contribution in 1994. Within the Company's stabilized
portfolio, operating revenues increased less than 1% in 1995, as modest
increases in rental rates were largely offset by a decline in average economic
occupancy to 94.1% from 95.1% in 1994. Average monthly rental rates increased
1.5% to $996 in 1995, from $981 in 1994.
Operating revenues improved in 1994 from the prior year primarily due to a
1.9% increase in rental rates within the Company's portfolio of 42 properties
fully stabilized in both years, partially offset by a decline in this
portfolio's average economic occupancy to 95.1% from 96.1%. Operating revenues
also benefited from an additional $2.9 million in rental income generated by the
San Paulo property.
3
<PAGE> 4
IRVINE APARTMENT COMMUNITIES, INC.
PROPERTY EXPENSES decreased by 4.1% to $31.8 million in 1995 from $33.1 million
in 1994. These expenses had decreased in 1994 by 2.8% from $34.1 million in
1993. Over the past two years, the Company has achieved sustained reductions in
its per unit property expenses through aggressive bidding of external service
and purchase contracts and a series of initiatives to enhance the efficiency of
internally managed customer service and property maintenance operations. In
1995, average monthly per unit property expenses within the Company's
stabilized portfolio decreased to $223 from $243 in 1994 and $255 in 1993.
Lease-up properties added $1.4 million to property expenses in 1995, a
negligible amount in 1994 and $0.5 million in 1993.
PROPERTY MANAGEMENT FEES increased by 2.4% to $3.9 million in 1995 from $3.8
million in 1994. This increase was due to the addition of rental units in
lease-up properties slightly offset by reducing percentage fees resulting from
third party property management contracts negotiated during 1994. Property
management fees decreased 2.1% in 1994 from $3.9 million in 1993 due to reduced
percentage fees resulting from third party property management contracts
negotiated during 1993.
REAL ESTATE TAXES totaled $12.0 million in 1995, $11.8 million in 1994 and $10.7
million in 1993. Taxes increased in 1995 due to the addition of rental units in
lease-up properties. In 1994, the Company's real estate taxes increased from the
1993 level primarily due to higher assessed property values as a result of the
Offering, which created an additional $0.7 million in taxes, and the addition of
the San Paulo community, which added $0.2 million in taxes.
PORTFOLIO REVENUE AND EXPENSE DATA
<TABLE>
<CAPTION>
Years Ended December 31,
(in thousands) 1995 1994
--------------------------------------------------
<S> <C> <C>
STABILIZED PORTFOLIO
Operating revenue $130,082 $128,921
Property expenses $ 30,324 $ 33,104
Real estate taxes $ 11,256 $ 11,785
Property management fees $ 3,733 $ 3,800
Depreciation and
amortization $ 21,237 $ 21,051
LEASE-UP PORTFOLIO
Operating revenue $ 5,675 $ 2
Property expenses $ 1,437 $ 2
Real estate taxes $ 746 $ 1
Property management fees $ 160 $ 0
Depreciation and
amortization $ 1,906 $ 4
--------------------------------------------------
</TABLE>
NET INTEREST EXPENSE decreased to $25.9 million in 1995 from $26.8 million in
1994 and $50.2 million in 1993. The decline in 1995 net interest expense was
largely due to a higher level of capitalized interest from increased
construction activity. Capitalized interest totaled $6.8 million in 1995
compared to $1.3 million in 1994. Total interest incurred grew by $5.1 million
in 1995, of which approximately $2.4 million was due to the Company's May 1995
refinancing of tax-exempt mortgage debt and $2.0 million was due to increased
borrowings under bank lines of credit to fund construction activities. In 1994,
net interest expense decreased by $23.4 million from the prior year primarily
due to the repayment of certain debt obligations and the adjustment of interest
rates to market levels at the Offering in late 1993.
INTEREST INCOME totaled $0.4 million in 1995, $1.3 million in 1994 and $0.1
million in 1993. The changes in interest income reflect changes in the Company's
average cash balances.
AMORTIZATION OF DEFERRED FINANCING COSTS decreased by 46.6% to $8.5 million in
1995 from $15.9 million in 1994. These costs had increased substantially in 1994
from $3.0 million in 1993. In May 1995, the Company refinanced all of its
tax-exempt mortgage debt and eliminated the related deferred financings costs
through an extraordinary charge of $23.4 million. As a result, amortization
expense was reduced by $6.2 million in the second half of 1995. In 1994, the
Company's amortization expense increased by $12.9 million from the prior year as
a result of the $54.9 million in deferred financing costs incurred and
capitalized at the Offering in late 1993.
4
<PAGE> 5
IRVINE APARTMENT COMMUNITIES, INC.
DEPRECIATION AND AMORTIZATION EXPENSE increased by 9.9% to $23.1 million in
1995, up from $21.1 million in 1994. These expenses had increased in 1994 by
5.3% from $20.0 million in 1993. The increases in both years reflect the
completion and delivery of newly developed rental units from the Company's
lease-up properties.
GENERAL AND ADMINISTRATIVE EXPENSE increased by 8.6% to $5.9 million in 1995, up
from $5.4 million in 1994. This increase was largely the result of increased
staffing levels. General and administrative expense had increased in 1994 by
66.0% from $3.3 million in 1993. This increase was primarily due to the
additional costs associated with public ownership and an increase in staffing
levels reflecting a greater level of new development.
ORANGE COUNTY BANKRUPTCY: On December 6, 1994 the County of Orange and the
Orange County Investment Pool filed separate petitions for federal bankruptcy
protection. The long-term effects of the bankruptcy on the Company, if any,
cannot be predicted at this time. Potential effects include, but are not limited
to, a restructuring of County government, reducing non-essential and
discretionary services, privatizing certain functions, sale of certain assets,
failure to repay in full funds invested in the Pool, an increase in the cost of
government financing and lower consumer confidence. However, the County
experienced positive job growth during 1995 and certain regional forecasts
predict further job gains in 1996. If the economy were to be adversely affected
in the long run, such a development could, in turn, have an adverse impact on
demand for apartments in the Company's existing communities and its communities
under construction.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that cash provided by operations will be adequate to meet
both operating requirements and payment of distributions by the Company in
accordance with REIT requirements in both the short and long term.
LIQUIDITY: The Company expects to meet its long-term liquidity requirements,
such as construction, scheduled debt maturities and possible property
acquisitions, through the issuance or refinancing of long-term debt, borrowings
from financial institutions, or the issuance of additional equity securities of
the Company and/or Operating Partnership units. In November 1995, the Company
obtained a $175 million unsecured credit facility for the Operating Partnership,
replacing a $50 million unsecured revolving line of credit and a $150 million
secured construction line of credit. The new facility will be used primarily to
finance an ongoing rental property development program. As of December 31, 1995,
$153 million was available under the credit facility.
SHELF REGISTRATION STATEMENT: On May 8, 1995 the Company filed a shelf
registration statement with the Securities and Exchange Commission for up to
$250 million of securities. The registration statement provides for the issuance
of common stock, preferred stock, debt securities, and warrants to purchase
common stock, preferred stock and debt securities. The Company plans to use the
proceeds raised from any securities issued under the shelf registration for
general corporate purposes, including the development of new apartment
communities and the repayment of existing debt. Subsequent to the follow-on
common stock offering discussed below, availability under the shelf registration
was approximately $160 million.
FOLLOW-ON COMMON STOCK OFFERING AND INVESTMENT BY THE IRVINE COMPANY: On August
9, 1995 the Company sold, pursuant to the shelf registration statement described
above, 5.175 million shares of common stock at $17.25 per share (the "Follow-On
Common Stock Offering"). Concurrent with the Follow-On Common Stock Offering,
The Irvine Company, pursuant to its rights under the Operating Partnership
Agreement, purchased 1.5 million additional limited partnership units at $17.25
per unit which are exchangeable for common stock on a one for one basis, subject
to adjustment and certain limitations ("The Irvine Company Investment"). The net
proceeds from the two transactions (the "Follow-On Offering")
5
<PAGE> 6
IRVINE APARTMENT COMMUNITIES, INC.
totaled $109.3 million. Proceeds of $80.1 million were used to repay amounts
outstanding under the Company's construction and revolving lines of credit. The
balance of $29.2 million was used to fund new construction.
Largely as a result of these transactions, the respective interests of the
Company and The Irvine Company in the Operating Partnership shifted to 45.4% and
54.6% at December 31, 1995 from 39% and 61% at December 31, 1994. The change in
percentage interests was also affected by the issuance of new Operating
Partnership units to The Irvine Company as partial payment for two land
acquisitions in 1995.
DEBT STRUCTURE
<TABLE>
<CAPTION>
Balance at Weighted
December Average
(dollars in millions) 31, 1995 Interest Rate
-----------------------------------------------------------------
<S> <C> <C>
Fixed rate debt
Conventional mortgage financings $ 137.0 6.22%
Mortgage notes payable to
The Irvine Company 52.0 5.75%
Tax-exempt mortgage
bond financings 332.6 5.71%
Tax-exempt assessment
district debt 6.1 6.86%
-----------------------------------------------------------------
Total fixed rate debt 527.7 5.86%
-----------------------------------------------------------------
Variable rate debt
Line of credit 22.0 7.78%
Tax-exempt assessment
district debt 13.6 3.31%
-----------------------------------------------------------------
Total variable rate debt 35.6 6.07%
-----------------------------------------------------------------
Total debt $ 563.3 5.87%
-----------------------------------------------------------------
</TABLE>
DEBT: The Company's conventional and tax-exempt mortgage debt bears interest at
fixed interest rates, or variable rates that have been effectively fixed through
interest rate swap agreements. Interest rates on conventional mortgage debt were
reduced to then-current market rates at the time of the Offering in December
1993 through interest rate buy-down agreements that are scheduled to expire at
various dates prior to loan maturity. A buy-down agreement relating to $13.1
million of conventional mortgage debt expired on January 1, 1996, when the fixed
rate increased from 5.29% to 7.75%. (See Note 3 to the Consolidated and Combined
Financial Statements regarding the refinancing of tax-exempt mortgage bond
financings in May 1995.) The weighted average effective interest rate on the
Company's debt, including the non-cash charges of amortization of deferred
financing costs, was 6.39% at December 31, 1995.
DEFERRED FINANCING COSTS
<TABLE>
<CAPTION>
Balance at Weighted
December Average
(dollars in millions) 31, 1995 Remaining Term
--------------------------------------------------------------
<S> <C> <C>
Interest rate buy-downs on
conventional mortgage financings $ 12.2 9.5 yrs.
Loan origination costs and other 10.6 26.7 yrs.
--------------------------------------------------------------
Total $ 22.8 17.5 yrs.
--------------------------------------------------------------
</TABLE>
6
<PAGE> 7
IRVINE APARTMENT COMMUNITIES, INC.
OPERATING ACTIVITIES: Cash flow provided by operating activities was $55.4
million, $49.8 million and $10.2 million for 1995, 1994 and 1993, respectively.
Cash provided by operating activities increased in 1995 compared to prior years
primarily due to higher revenues and lower operating costs.
INVESTING ACTIVITIES: Cash flow used in investing activities was $128.2 million,
$50.9 million and $23.6 million in 1995, 1994 and 1993, respectively. These
increases resulted from additional development activity in each subsequent year.
(See Capital Expenditures.)
FINANCING ACTIVITIES: Cash flow provided by (used in) financing activities was
$73.7 million, $(23.3) million and $36.4 million in 1995, 1994 and 1993,
respectively. Among the factors affecting these cash flows in 1995, the Company
received $83.5 million in net proceeds from the Follow-On Common Stock Offering,
$25.9 million from The Irvine Company concurrent with that offering and $8.3
million of additional proceeds from the refinancing of tax-exempt debt, while
incurring loan origination costs of $9.2 million. In addition, net borrowings
from lines of credit increased to $15.7 million in 1995 from $6.3 million in
1994, while distributions paid in 1995 increased to $44.8 million from $33.6
million in 1994. In 1994, cash flows used in financing activities included
distributions noted above, partially offset by new borrowings in excess of
principal reductions of about $11.1 million. In 1993, cash flow provided by
financing activities included net proceeds of $191.1 million in connection with
the Offering, partially offset by $118.1 million in debt extinguishment.
Excluding this debt extinguishment, the Company also received new borrowings in
excess of principal reductions of about $76.6 million and distributed, prior to
the Offering, $52.2 million to The Irvine Company.
CAPITAL EXPENDITURES
CAPITAL REPLACEMENTS ON EXISTING PROPERTIES: Expenditures for capital
replacements on existing properties totaled $4.5 million, $5.6 million and $5.3
million in 1995, 1994 and 1993, respectively. Average capital replacements per
unit for the existing properties were $399, $490 and $482 in 1995, 1994 and
1993, respectively. These expenditures declined in 1995 from prior year levels,
reflecting greater efficiency in property enhancement activities, including
centralized purchasing of major replacement materials. The Company has a policy
of capitalizing expenditures related to new assets, acquisitions, the material
enhancement of the value of an existing asset, or the substantial extension of
an existing asset's useful life. Expenditures for capital replacements in 1996
are expected to be similar to 1995 levels.
CAPITAL REPLACEMENTS ON EXISTING PROPERTIES
<TABLE>
<CAPTION>
Total
Year Ended December 31, 1995 (in thousands) Per unit
-------------------------------------------------------------
<S> <C> <C>
Carpet replacements $1,591 $140
Exterior painting, siding 781 69
and stucco
Upgrades, renovations and major
building items 1,123 99
Appliances, water heaters and
air conditioning 255 23
Roofing, concrete and pavement 407 36
Equipment and other 363 32
-------------------------------------------------------------
Total $4,520 $399
-------------------------------------------------------------
</TABLE>
CAPITAL EXPENDITURES ON NEW DEVELOPMENT: The Company's major cash requirements
in 1996 are expected to be for the construction of new apartment communities.
The Company initiated construction on five apartment communities in 1994
requiring total expenditures of approximately $204.5 million, of which $192.8
million had been incurred at December 31,
7
<PAGE> 8
IRVINE APARTMENT COMMUNITIES, INC.
1995. The remaining $11.7 million will be incurred in 1996. In addition, the
Company began construction of one apartment community in 1995 and plans four
additional starts in 1996. Initial funding for these four developments totaling
$132 million is expected to come from the $175 million unsecured revolving
credit facility.
The timing of commencement and completion of construction and initial
stabilized occupancy, number of units, and estimated costs of apartment
communities that are in development or are expected to be developed are only
estimates. Actual results will depend on numerous factors, many of which are
beyond the control of the Company. These include the extent and timing of
economic growth in the Company's rental markets; future trends in the pricing of
construction materials and labor; entitlement decisions by local government
authorities; and changes in interest rate levels. No assurance can be given that
the timing, number of units, or estimates set forth in the foregoing tables will
not vary substantially from actual results. The Company has made no commitments
to build the projected 1996 construction starts and no assurance can be made
that such properties will be acquired, built or stabilized in the periods
estimated.
LEASE-UP INFORMATION
Status at December 31, 1995
<TABLE>
<CAPTION>
Percentage Percentage
Units Percentage Units of Delivered Units of Delivered
Apartment Community Total Units Delivered Delivered Occupied Units Occupied Leased Units Leased
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Villa Coronado 513 423 82% 346 82% 359 85%
Santa Rosa 368 324 88% 250 77% 279 86%
Santa Clara 378 229 61% 210 92% 243 106%
Rancho Monterey 436 263 60% 161 61% 172 65%
Newport Ridge 512 203 40% 146 72% 176 87%
- ------------------------------------------------------------------------------------------------------------------
Total 2,207 1,442 65% 1,113 77% 1,229 85%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSTRUCTION INFORMATION: 1994/1995 STARTS
<TABLE>
<CAPTION>
Estimated Total
Commencement Initial Estimated
Commencement of Leasing Stabilized Costs
Apartment Community Village, City Units of Construction Activity Occupancy (in millions)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Villa Coronado Westpark I, Irvine 513 6/94 12/94 2Q '96 $43.9
Santa Rosa Westpark II, Irvine 368 6/94 2/95 2Q '96 30.9
Santa Clara Westpark II, Irvine 378 9/94 3/95 3Q '96 34.9
Rancho Monterey Tustin Ranch, Tustin 436 9/94 5/95 4Q '96 40.8
Newport Ridge Newport Ridge, Unincorporated 512 12/94 7/95 4Q '96 54.0
Baypointe Newport North, Newport Beach 300 11/95 1Q '97 4Q '97 33.4
- -------------------------------------------------------------------------------------------------------------------------------
Total 2,507 $237.9
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSTRUCTION INFORMATION: PROJECTED 1996 STARTS
<TABLE>
<CAPTION>
Total
Estimated Estimated
Estimated Commencement Costs
Apartment Community Village, City Units of Construction (in millions)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Santa Maria Westpark II, Irvine 227 1Q '96 $ 25
The Colony Newport Center, Newport Beach 245 2Q '96 42
Santa Rosa II Westpark II, Irvine 210 4Q '96 26
Rancho Santa Fe Tustin Ranch, Tustin 350 4Q '96 39
- -----------------------------------------------------------------------------------------------------
Total 1,032 $132
- -----------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
IRVINE APARTMENT COMMUNITIES, INC.
HISTORICAL AND PRO FORMA FUNDS FROM OPERATIONS
Industry analysts generally consider funds from operations ("FFO") an
appropriate measure of performance of an equity REIT. The Company computes FFO
in accordance with standards established by the National Association of Real
Estate Investment Trusts ("NAREIT"). FFO is defined as net income (computed in
accordance with generally accepted accounting principles), excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. In March 1995 NAREIT modified the definition of FFO for implementation
in 1996. The new definition, among other things, eliminates amortization of
deferred financing costs and depreciation of non-real estate assets as items
added back to net income when computing FFO. The Company will implement the new
method of calculating FFO ("New FFO") commencing January 1, 1996. FFO should be
examined in conjunction with net income as presented in the Consolidated and
Combined Financial Statements and Notes thereto. FFO should not be considered an
alternative to net income as an indication of the Company's performance or to
cash flows from operating activities as a measure of liquidity, both of which
are computed in accordance with generally accepted accounting principles.
CALCULATION OF FFO
(in thousands, unaudited)
<TABLE>
<CAPTION>
"Old" FFO Definition "New" FFO Definition
--------------------------------------------
Years Ended December 31, 1995 1994 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 8,465 $ 7,273 $ 8,465 $ 7,273
Add:
Depreciation and amortization 23,095 21,007 23,095 21,007
Depreciation of non-real estate assets 48 48
Amortization of deferred financing costs 8,510 15,942
Extraordinary item - debt extinguishment 23,427 23,427
Minority interest in income (loss) (6,836) 5,006 (6,836) 5,006
- ----------------------------------------------------------------------------------------
Funds from operations $ 56,709 $49,276 $48,151 $33,286
- ----------------------------------------------------------------------------------------
</TABLE>
OPERATING PARTNERSHIP UNITS OUTSTANDING
<TABLE>
<CAPTION>
Years Ended December 31,
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year 30,247 30,247 30,247
Additions relating to:
Offering and Follow-On Offering (see Note 5) 6,675
Acquisition of land (see Note 6) 450
- --------------------------------------------------------------------------------------
Balance at end of year 37,372 30,247 30,247
- --------------------------------------------------------------------------------------
Weighted average equivalent number of shares outstanding
assuming conversion of Operating Partnership units 33,191 30,247 30,247
- --------------------------------------------------------------------------------------
</TABLE>
IMPACT OF INFLATION
The Company's business is affected by general economic conditions, including the
impact of inflation and interest rates. Substantially all of the Company's
leases allow, at time of renewal, for adjustments in the rent payable
thereunder, and thus may enable the Company to seek increases in rents.
Substantially all leases are for a period of one year or less. The short-term
nature of these leases generally serves to minimize the risk to the Company of
the adverse effects of inflation. For construction, the Company has entered into
various contracts for the development and construction of new apartment
communities. These are fixed-fee contracts and thus partially insulate the
Company from inflationary risk.
9
<PAGE> 10
IRVINE APARTMENT COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(in thousands, except per share amounts) 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real estate assets, at cost
Land $ 163,169 $ 144,772
Buildings and improvements 768,737 656,003
- ----------------------------------------------------------------------------------
931,906 800,775
Accumulated depreciation (192,106) (169,039)
- ----------------------------------------------------------------------------------
739,800 631,736
Under development, including land 73,727 68,981
- ----------------------------------------------------------------------------------
813,527 700,717
Cash and cash equivalents 4,392 3,468
Restricted cash 1,181 1,031
Deferred financing costs, net of accumulated
amortization of $5,663 in 1995
and $17,524 in 1994 22,814 44,329
Other assets 11,316 7,695
- ----------------------------------------------------------------------------------
$ 853,230 $ 757,240
- ----------------------------------------------------------------------------------
LIABILITIES
Mortgages and notes payable
Lines of credit $ 22,000 $ 6,256
Tax-exempt mortgage bond financings 332,602 326,938
Conventional mortgage financings 136,960 139,088
Mortgage notes payable to The Irvine Company 52,011 52,751
Tax-exempt assessment district debt 19,713 15,656
- ----------------------------------------------------------------------------------
563,286 540,689
Accounts payable and accrued liabilities 20,254 20,957
Security deposits 5,124 4,545
- ----------------------------------------------------------------------------------
588,664 566,191
MINORITY INTEREST 109,133 109,296
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per share; 10,000
shares authorized; no shares issued or outstanding
Common stock, par value $0.01 per share; 150,000 shares
authorized; 16,975 shares and 11,800 shares issued and
outstanding, respectively 170 118
Excess stock, par value $0.01 per share; 160,000
authorized; no shares issued or outstanding
Additional paid-in capital 170,747 87,345
Retained earnings (deficit) (15,484) (5,710)
- ----------------------------------------------------------------------------------
155,433 81,753
- ----------------------------------------------------------------------------------
$ 853,230 $ 757,240
- ----------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
10
<PAGE> 11
IRVINE APARTMENT COMMUNITIES, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
(in thousands, except per share amounts) 1995 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Rental income $ 133,678 $ 127,338 $ 123,101
Other income 2,079 1,585 1,659
Interest income 411 1,313 60
- ---------------------------------------------------------------------------------------
136,168 130,236 124,820
- ---------------------------------------------------------------------------------------
EXPENSES
Property expenses 31,761 33,105 34,057
Real estate taxes 12,002 11,786 10,729
Property management fees 3,893 3,800 3,881
Interest expense, net 25,894 26,827 50,248
Amortization of deferred financing costs 8,510 15,942 3,012
Depreciation and amortization 23,143 21,055 20,002
General and administrative 5,909 5,442 3,278
- ---------------------------------------------------------------------------------------
111,112 117,957 125,207
- ---------------------------------------------------------------------------------------
Income (loss) before extraordinary item and
minority/predecessor interest in income (loss) 25,056 12,279 (387)
Extraordinary item - charge related to debt
extinguishment (23,427) (12,487)
- ---------------------------------------------------------------------------------------
Income (loss) before minority interest 1,629 12,279 (12,874)
Minority/predecessor interest in income (loss) (6,836) 5,006 (12,989)
- ---------------------------------------------------------------------------------------
NET INCOME $ 8,465 $ 7,273 $ 115
- ---------------------------------------------------------------------------------------
SHARE DATA:
Weighted average number of shares outstanding 13,856 11,800 11,800
Income after minority interest and before
extraordinary item per share $ 0.84 $ 0.62 $ 0.04
Extraordinary item per share $ (1.69) $ (1.06)
Net income per share $ 0.61 $ 0.62 $ 0.01
Cash distributions declared and paid per share $ 1.39 $ 1.11
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Includes the operations of the Predecessor through December 7, 1993 and of
the Company from December 8 through December 31, 1993. See accompanying
notes.
11
<PAGE> 12
IRVINE APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31,
(in thousands, except per share amounts) 1995 1994 1993
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK, PAR VALUE $0.01 PER SHARE
Balance at beginning of year $ 118 $ 118
Common stock offerings 52 $ 118
- ---------------------------------------------------------------------------------
Balance at end of year $ 170 $ 118 $ 118
- ---------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year $ 87,345 $ 87,345
Common stock offerings 83,402 $ 190,957
Pro rata allocation to minority interest (103,612)
- ---------------------------------------------------------------------------------
Balance at end of year $ 170,747 $ 87,345 $ 87,345
- ---------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
Balance at beginning of year $ (5,710) $ 115
Net income 8,465 7,273 $ 115
Distributions to shareholders (18,239) (13,098)
- ---------------------------------------------------------------------------------
Balance at end of year $ (15,484) $ (5,710) $ 115
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 155,433 $ 81,753 $ 87,578
- ---------------------------------------------------------------------------------
SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of year 11,800 11,800
Common stock offerings 5,175 11,800
- ---------------------------------------------------------------------------------
Balance at end of year 16,975 11,800 11,800
- ---------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
12
<PAGE> 13
IRVINE APARTMENT COMMUNITIES, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended December 31,
(in thousands) 1995 1994 1993(1)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,465 $ 7,273 $ 115
Adjustments to reconcile net income:
Write-off of deferred financing costs 23,427
Amortization of deferred financing costs 8,510 15,942 3,012
Depreciation and amortization 23,143 21,055 20,002
Minority/predecessor interest in income (loss) (6,836) 5,006 (12,989)
Increase (decrease) in cash attributable to:
Restricted cash (150) 16 736
Other assets (4,882) (975) (5,531)
Accounts payable and accrued liabilities 3,147 895 4,739
Security deposits 579 574 165
- ------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 55,403 49,786 10,249
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital improvements to operating real estate assets (4,520) (5,555) (5,343)
Investment in real estate assets, net of
construction payables (123,698) (45,363) (18,306)
- ------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (128,218) (50,918) (23,649)
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under lines of credit 143,344 6,256
Payments on lines of credit (127,600)
Proceeds from tax-exempt mortgage bond financings 334,190
Payments on tax-exempt mortgage bond financings (325,845)
Proceeds from mortgage notes payable 9,833 178,356
Principal payments on mortgage notes payable and
tax-exempt debt (4,809) (4,300) (219,900)
Principal payments on notes payable to The
Irvine Company (740) (699) (4)
Principal payments on assessment district liens (127)
Additions to deferred financing costs (9,237) (832) (56,968)
Net cash flow related to predecessor's equity account (52,176)
Issuance costs of initial public offering
allocated to minority interest (3,955)
Net proceeds from common stock offerings 83,454 191,075
Contributions from The Irvine Company 25,875
Distributions to The Irvine Company (26,527) (20,476)
Distributions to shareholders (18,239) (13,098)
- ------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing 73,739 (23,316) 36,428
Activities
- ------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH 924 (24,448) 23,028
EQUIVALENTS
Cash and Cash Equivalents at Beginning of Year 3,468 27,916 4,888
- ------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,392 $ 3,468 $ 27,916
- ------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Interest paid, net of amounts capitalized $ 25,165 $ 25,860 $ 49,275
Tax-exempt assessment district debt assumed $ 4,184 $ 15,656
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Includes the cash flows of the Predecessor through December 7, 1993 and of
the Company from December 8 through 31, 1993. See accompanying notes.
13
<PAGE> 14
IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Irvine Apartment Communities, Inc. (the "Company") was incorporated in Delaware
on September 10, 1993 and operates as a real estate investment trust ("REIT")
under the Internal Revenue Code of 1986, as amended. At December 31, 1995, the
Company had a 45.4% general partnership interest in and was the sole managing
general partner of Irvine Apartment Communities, L.P. (the "Operating
Partnership") which began operations as of December 8, 1993, the date of the
Company's initial public offering of Common Stock (the "Offering"). In
connection with the Offering, The Irvine Company (the "Limited Partner")
transferred 42 apartment communities and a 99% interest in a limited partnership
which owns one apartment community to the Operating Partnership. At December 31,
1995, The Irvine Company had a 54.6% limited partnership interest in the
Operating Partnership. The division of The Irvine Company that owned these
properties and provided the related management functions prior to the Offering
represents the "Predecessor." The Operating Partnership's management and
operating decisions are under the unilateral control of the Company.
The Company is a self-administered equity REIT engaged in the operation and
development of apartment communities in Orange County, California. As of
December 31, 1995 the Operating Partnership owned and operated 43 properties and
had completed 1,442 apartment units from six new apartment communities under
construction (collectively, the "Properties"). Until July 31, 2020, the Company
has the exclusive right, but not the obligation, to acquire land from The Irvine
Company for development of additional apartment communities on the Irvine Ranch
(see Note 7 to the Consolidated and Combined Financial Statements).
The financial statements include the accounts of the Company and its
financially controlled subsidiary, the Operating Partnership. The financial
statements for the year ended December 31, 1993, reflect the assets,
liabilities, revenues, expenses and cash flows associated with the operations of
the Properties that were transferred from the Predecessor to the Operating
Partnership on a combined historical cost basis. All intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
December 31, 1995 and 1994 and the revenues and expenses for the three years
ended December 31, 1995. Actual results could differ from those estimates.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REAL ESTATE ASSETS AND DEPRECIATION: Real estate assets, which are held as
long-term investments, are stated at cost less accumulated depreciation.
Impairment losses on long-lived assets used in operations are recorded when
events and circumstances indicate that the assets are impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts. Land and infrastructure costs are allocated to properties
based on relative fair value. Costs related to the development and construction
of properties are capitalized as incurred. Interest and property taxes are
capitalized to apartment communities which are under active development. When a
building within a community under construction is completed and held available
for occupancy, the related costs are expensed.
Repair and maintenance expenditures are expensed as incurred. Major
replacements and betterments are capitalized and depreciated over their useful
lives. Depreciation is computed on a straight-line basis over the useful lives
of the properties (principally forty years for buildings; twenty years for
siding, roofs and balconies; fifteen years for plumbing and air conditioning
equipment; ten years for pools, tennis courts, parking lots and driveways; and
five to ten years for furniture and fixtures).
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments
with a maturity when purchased of three months or less to be cash equivalents.
14
<PAGE> 15
IRVINE APARTMENT COMMUNITIES, INC.
RESTRICTED CASH: Restricted cash is comprised of reserve accounts for capital
replacements, property taxes, and insurance. These restricted funds are subject
to supervision and approval by a lender or a government agency. The terms of the
contract with the government agency contain certain restrictions concerning
operating policies, rental charges, operating expenditures, distributions to
owners and other matters.
DEFERRED FINANCING COSTS: Costs incurred in obtaining long-term financing or
costs to buy down or hedge interest costs are deferred and amortized over the
term of the related debt agreements using the effective interest method.
REVENUE RECOGNITION: The Company leases apartment units to a diverse resident
base for terms of one year or less. Credit investigations are performed for all
prospective residents and security deposits are also obtained. Resident
receivables are evaluated for collectability. Rental revenue is recognized on an
accrual basis as it is earned over the life of the lease. Interest income is
recorded as earned.
INTEREST EXPENSE: Interest rates are substantially fixed for specified periods
through interest rate swaps and buydown agreements for certain debt instruments.
These financial instruments are entered into as a hedge against the interest
exposure from variable rate debt. The differences paid or received on swaps and
related agreements are included in interest expense as yield adjustments.
INCOME TAXES: The Company has elected to be taxed as a REIT and, as such, will
generally not be subject to federal and state income taxation at the corporate
level. To maintain its REIT status, the Company is required to distribute
annually at least 95% of its REIT taxable income to its shareholders and to
satisfy certain other requirements. Accordingly, no provision has been made for
federal income taxes in the accompanying statements of operations.
INCOME TAXES BEFORE THE OFFERING: Prior to the Offering, the Properties included
in the accompanying financial statements were owned by entities, certain of
which were subject to federal and state income taxes. The properties were
transferred to the Operating Partnership as of the Offering date. Since the
earnings of the Operating Partnership are taxable to the partners and the
Company operates as a REIT, the accompanying financial statements have been
presented for the periods prior to the Offering date without effect for income
taxes. Management believes that this results in a more meaningful presentation
of the historical operating results and financial position since income taxes
are not part of the Operating Partnership's or the Company's ongoing operations.
COST ALLOCATION: The general and administrative expenses in the statement of
operations prior to the Offering include the specifically identified direct
costs incurred for the benefit of the Predecessor in operating the Properties
and an allocation of other services provided to the Predecessor by The Irvine
Company. These services generally relate to financing, legal, human resources
and risk management. Management believes that the method used to allocate common
services are reasonable and representative of the costs incurred for the
Predecessor.
PER SHARE DATA: The computation of net income per share is based on the weighted
average number of shares outstanding and excludes (i) the effect of the
conversion of Operating Partnership units into shares, and (ii) the effect of
stock options and performance awards since their dilutive effect is minimal.
Since the statement of operations for periods prior to the Offering includes the
combined historical operations of the Predecessor, a non-public entity, no per
share data is presented for these periods prior to the Offering.
RECLASSIFICATIONS: Certain amounts in the 1994 and 1993 financial statements
have been reclassified to conform with financial statement presentations in
1995.
15
<PAGE> 16
IRVINE APARTMENT COMMUNITIES, INC.
NOTE 3 -- MORTGAGES AND NOTES PAYABLE
LINE OF CREDIT: In November 1995, the Company obtained a $175 million unsecured
revolving credit facility for the Operating Partnership, replacing a $50 million
unsecured revolving line of credit and a $150 million secured construction line
of credit. The line of credit facility has a term of two years and at the
Company's option may be converted to a two-year term loan at maturity. This
revolving credit facility is available to finance the Company's ongoing rental
property development program and for general working capital needs. Borrowings
under the line of credit bear interest at the Company's option at variable rates
based on the Eurodollar rate plus a spread of 1.625% or the Prime rate. The
Company is also obligated to pay a fee on the average daily amount of the unused
portion of the commitment, and quarterly agent fees on the commitment amount.
The Operating Partnership and the Company must comply with certain affirmative
and negative covenants, including limitations on distributions to its partners,
limitations on payment of distributions, and the maintenance of certain net
worth, cash flow and financial ratios. At December 31, 1995 the Operating
Partnership and the Company were in compliance with all of these covenants. As
of December 31, 1995, $22,000 was outstanding and $153,000 was available under
the line of credit.
TAX-EXEMPT MORTGAGE BOND FINANCINGS: On May 25, 1995 the Company refinanced all
$324,816 of its outstanding tax-exempt mortgage debt. As a result of a new
30-year refunding agreement, which is backed by credit and liquidity support
from the Federal National Mortgage Association ("Fannie Mae"), the Company
obtained tax-exempt mortgage bond financings of $334,190 maturing in June 2025.
Standard & Poor's Rating Group assigned a rating of AAA/A-1+ to the bonds based
on the collateral agreement with Fannie Mae. In connection with the refinancing
transaction, the Company recorded an extraordinary charge of $23,427 to write
off deferred financing costs related to the debt that was refinanced.
The tax-exempt financings represent loans payable that are collateralized by
twenty-three properties with a net book value of $288,792 as of December 31,
1995. Monthly principal and interest payments are made to a trustee, which in
turn pays the bondholders when interest is due. The bonds are remarketed
periodically and bear interest at short term floating rates. The floating rates
have been fixed through interest rate swap agreements. (See Interest Rate Swap
Agreements.) Principal payments are amortized over a 30-year period and are held
in a principal payment fund. The tax-exempt mortgage bond financings, before
giving effect to the swap agreements, had an average floating interest rate
inclusive of fees of 5.27% in December 1995.
The Company is also required to deposit impounds for property taxes, property
and liability insurance and reserves for capital replacements on a monthly basis
with the servicing agent. These deposit impounds, totaling $2,703 at December
31, 1995, are included in other assets.
CONVENTIONAL MORTGAGE FINANCINGS: Conventional mortgages are collateralized by
apartment communities with a net book value of $151,255 as of December 31, 1995.
The mortgages are generally due in monthly installments and mature at various
dates through 2018. Prior to the Offering, interest rates were fixed at rates
which ranged from 7.75% to 9.63%, with a weighted average rate of 8.69%. In
connection with the Offering, the interest rates were adjusted to market rates
for specified periods of time and currently range from 5.29% to 6.91%. As of
December 31, 1995 the weighted average interest rate was 6.22%. Including the
amortization of deferred financing costs the all-in interest rate was 8.12%. The
interest reduction periods expire prior to or at the loan maturity dates and the
expiration dates range from 1996 to 2008.
MORTGAGE NOTES PAYABLE TO THE IRVINE COMPANY: Two of the Company's apartment
communities are financed by mortgage notes payable to The Irvine Company. These
mortgage notes totaled $52,011 and $52,751 at December 31, 1995 and 1994,
respectively. The mortgage notes are collateralized by all-inclusive trust deeds
on each of the apartment communities financed. They bore fixed interest rates of
5.75% at December 31, 1995, are fully amortizing and mature in 2015 and 2024.
Interest incurred on the mortgage notes payable to The Irvine Company totaled
$3,010, $3,055 and $5,988 for the years ended December 31, 1995, 1994 and 1993,
respectively. The mortgage notes payable to The Irvine Company
16
<PAGE> 17
IRVINE APARTMENT COMMUNITIES, INC.
"wrap around" secured first trust deed notes payable to third party financial
institutions. The secured first trust deed notes totaled $52,030 and $52,654 as
of December 31, 1995 and 1994, respectively.
TAX-EXEMPT ASSESSMENT DISTRICT DEBT: In conjunction with the purchase of land in
1995, the Company assumed $4,184 in 1995 and $15,656 in 1994 in tax-exempt
assessment district debt which represents debt issued by municipal government
authorities to finance the construction of infrastructure and improvements. The
debt obligations are repaid by the Company through assessments.
INTEREST RATE SWAP AGREEMENTS: The Company uses interest rate swap agreements to
effectively convert its floating rate tax-exempt mortgage bond financings to a
fixed-rate basis, thus reducing the impact of fluctuations in interest rates on
future income. The swap agreement periods range from 7 to 12 years, with an
average term of 8.8 years. These interest rate swaps effectively fixed the
average interest rate on the tax-exempt mortgage bond financings at 5.71% at
December 31, 1995. The Company makes or receives payments on several different
notional swap amounts totaling the full amount of the debt and receives interest
on the same notional amounts from the swap counterparties (primarily financial
institutions which are rated AAA by Standard & Poor's) based on a municipal bond
index that is remarketed each week. The differences to be paid or received are
accrued and included in interest expense as a yield adjustment. The related
amount payable or receivable from counterparties is included in other assets or
accrued liabilities.
CAPITALIZED INTEREST: The Company capitalizes interest on projects actively
under development using qualifying asset balances and applicable weighted
average interest rates. The average qualifying asset balance for projects under
development was approximately $82,876 for the year ended December 31, 1995.
Interest capitalized was $6,779, $1,261 and $233 in 1995, 1994 and 1993,
respectively. Interest incurred totaled $32,673, $27,617 and $50,481 for the
years ended December 31, 1995, 1994 and 1993, respectively.
OTHER MATTERS: Mortgages and notes payable totaling $186,921 are subject to
prepayment penalties.
17
<PAGE> 18
IRVINE APARTMENT COMMUNITIES, INC.
MORTGAGES AND NOTES PAYABLE
(at December 31, 1995, dollar amounts in thousands)
<TABLE>
<CAPTION>
Expiration of
Outstanding Effective Interest Rate Interest Rate
Principal Interest Reduction After Maturity
Type of Debt Balance Rate Period Step-Up Date
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tax-exempt mortgage bond financings $332,602 5.71% n/a n/a 6/25
- --------------------------------------------------------------------------------------------------------------------
Conventional mortgage financings:
Bayport 4,930 6.91% 7/08 9.25% 7/18
Bayview 3,558 6.91% 7/08 9.25% 7/18
Baywood 21,264 6.91% 7/08 9.25% 7/18
Deerfield Phase I 7,572 6.57% 7/02 8.90% 7/08
Mariner Square 5,724 6.32% 9/00 8.50% 8/08
The Parklands 6,898 6.15% n/a n/a 4/04
Parkwood 12,838 6.31% 8/00 8.50% 7/08
Promontory Point 36,875 5.82% 9/97 8.30% 8/00
Rancho Mariposa 13,062 5.29% 1/96 7.75% 6/03
San Paulo 1,350 4.00% n/a n/a 1/13
San Paulo 700 3.00% n/a n/a 1/08
Turtle Rock Vista 13,614 6.31% 8/00 8.50% 7/08
Woodbridge Pines 8,575 6.91% 9/08 9.25% 8/18
- --------------------------------------------------------------------------------------------------------------------
136,960 6.22% 8.42% 6/07
- --------------------------------------------------------------------------------------------------------------------
Mortgage notes payable to The Irvine Company:
Park West 34,335 5.75% n/a n/a 7/24
Rancho San Joaquin 17,676 5.75% n/a n/a 1/15
- --------------------------------------------------------------------------------------------------------------------
52,011 5.75% 3/20
- --------------------------------------------------------------------------------------------------------------------
Tax-exempt assessment district debt:
Fixed rate 6,101 6.86% n/a n/a 1/16
Variable rate 13,612 3.31% n/a n/a 2/17
- --------------------------------------------------------------------------------------------------------------------
19,713 4.41% 10/16
- --------------------------------------------------------------------------------------------------------------------
Line of credit 22,000 7.78% n/a n/a 12/97
- --------------------------------------------------------------------------------------------------------------------
Total / Weighted average $563,286 5.87% 7/18
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULED PRINCIPAL AMORTIZATION: MORTGAGES AND NOTES PAYABLE
(at December 31, 1995, dollar amounts in thousands)
<TABLE>
<CAPTION>
Mortgage Tax-
Tax- Notes Exempt Percentage
Year Exempt Mortgage Conventional Payable Assessment of
of Line of Bond Mortgage to The Irvine District Total
Maturity Credit Financings Financings Company Debt Totals Debt
- ----------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
1996 $ 3,354 $ 2,308 $ 784 $ 256 $ 6,702 1.2%
1997 $22,000 3,604 2,504 830 300 29,238 5.2%
1998 3,876 2,717 879 321 7,793 1.4%
1999 4,165 2,958 931 346 8,400 1.5%
2000 4,478 36,754 986 477 42,695 7.6%
Thereafter 313,125 89,719 47,601 18,013 468,458 83.1%
- ----------------------------------------------------------------------------------------------------------------------
Total $22,000 $332,602 $136,960 $52,011 $19,713 $563,286 100%
- ----------------------------------------------------------------------------------------------------------------------
Number of Loans 1 25 11 2 5 44
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
IRVINE APARTMENT COMMUNITIES, INC.
NOTE 4 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for financial instruments
approximate their fair value except as discussed below. The fair values of
mortgage notes payable to The Irvine Company are estimated using discounted cash
flow analyses and the Company's current estimated borrowing rates for similar
types of borrowing arrangements. The interest rates used in the fair value
calculation range from 7.25% to 7.33% based on the terms of the loan. As of
December 31, 1995 the fair value of the mortgage notes payable to The Irvine
Company was $47,843.
NOTE 5 -- EQUITY
SHELF REGISTRATION STATEMENT: On May 8, 1995 the Company filed a shelf
registration statement with the Securities and Exchange Commission providing for
the issuance of common stock, preferred stock, debt securities, and warrants to
purchase common stock, preferred stock and debt securities not to exceed
$250,000 of such securities. The Company plans to use the proceeds raised from
any securities issued under the shelf registration for general corporate
purposes, including the development of new apartment communities and the
repayment of existing debt. Subsequent to the follow-on common stock offering
discussed below, availability under the shelf registration was $160,731.
FOLLOW-ON COMMON STOCK OFFERING AND INVESTMENT BY THE IRVINE COMPANY: On August
9, 1995 the Company sold, pursuant to the shelf registration statement, 5.175
million shares of common stock at $17.25 per share (the "Follow-On Common Stock
Offering"). Concurrent with the Follow-On Common Stock Offering, The Irvine
Company, pursuant to its rights under the Operating Partnership Agreement,
purchased 1.5 million limited partnership units at $17.25 per unit. Such units
are exchangeable for common stock on a one for one basis, subject to adjustment
and certain limitations ("The Irvine Company Investment"). The net proceeds from
the two transactions (the "Follow-On Offering") totaled $109,329. Proceeds of
$80,100 were used to repay amounts outstanding under the Company's construction
and revolving lines of credit. The balance of $29,229 was used to fund new
construction.
Largely as a result of these transactions, the respective interests of the
Company and The Irvine Company in the Operating Partnership shifted to 45.4% and
54.6% at December 31, 1995, from 39% and 61% at December 31, 1994, respectively.
The change in percentage interests was also affected by the issuance of new
Operating Partnership units to The Irvine Company as partial payment for two
land acquisitions in 1995.
RECONCILIATION OF MINORITY INTEREST (in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
For the Year Ended Date of Formation
December 31, Through December 31,
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $109,296 $124,766 $136,616
Minority interest in income (loss) (6,836) 5,006 (11,850)
Distributions (26,527) (20,476) --
Cash contributions 25,875 -- --
Contributions of property 7,325 -- --
- --------------------------------------------------------------------------------
Balance at end of period $109,133 $109,296 $124,766
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COMPUTATION OF MINORITY INTEREST IN INCOME (LOSS) (in thousands)
- --------------------------------------------------------------------------------
For the Year Ended December 31,
- --------------------------------------------------------------------------------
Pro Forma
1995 1994 1993 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earnings (losses) before
minority interest $ 1,629 $12,279 $(12,874) $10,318
Specific allocations to
The Irvine Company:
Debt extinguishment and
swap costs 17,741 6,370 12,029 7,108
Earnings prior to
formation -- -- 1,139 --
-------- -------- -------- -------
Earnings before specific
allocations 19,370 18,649 294 17,426
Net income allocated to
the Company based on its
ownership interest (8,465) (7,273) (115) (6,796)
-------- -------- -------- -------
Earnings allocated to The
Irvine Company based on
its ownership interest 10,905 11,376 179 10,630
Specific allocations to
The Irvine Company (17,741) (6,370) (13,168) (7,108)
- --------------------------------------------------------------------------------
Minority/predecessor
interest in income
(loss) $ (6,836) $ 5,006 $(12,989) $ 3,522
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RECONCILIATION OF OPERATING PARTNERSHIP UNITS OUTSTANDING
(dollar amounts in thousands)
- --------------------------------------------------------------------------------
For the Year Ended Date of Formation through
December 31, 1995 December 31, 1994
- --------------------------------------------------------------------------------
The Irvine The Irvine
Company Company Total Company Company Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning
of period 11,800 18,447 30,247 11,800 18,447 30,247
Follow-on stock offer-
ing & related cash
contribution from
The Irvine Company 5,175 1,500 6,675 -- -- --
Contributions of
property by The
Irvine Company -- 450 450 -- -- --
------ ------ ------ ------ ------ ------
Balance at end of
period 16,975 20,397 37,372 11,800 18,447 30,247
- --------------------------------------------------------------------------------
Ownership interest at
end of period 45.4% 54.6% 100.0% 39.0% 61.0% 100.0%
- --------------------------------------------------------------------------------
</TABLE>
The Company incurred debt extinguishment costs totaling $15,276 and swap
amortization costs totaling $2,465 in 1995 that were allocated 100% to The
Irvine Company in accordance with the Operating Partnership Agreement. In 1994,
the Company incurred swap amortization costs totaling $6,370 that were allocated
100% to The Irvine Company. In 1993, the Company incurred debt extinguishment
costs totaling $11,569 and swap amortization costs totaling $460 that were
allocated 100% to The Irvine Company. As of December 31, 1995, all special
allocations specified in the Operating Partnership Agreement have been
completed.
NOTE 6 -- CERTAIN TRANSACTIONS WITH RELATED PARTIES
In the third quarter of 1994, the Company acquired four sites for development of
1,695 units for $19,703 from The Irvine Company. As partial financing for these
four sites, the Company elected to assume $15,656 in tax-exempt assessment
district debt and paid $4,047 in cash.
In March 1995 the Company acquired a 512-unit development site known as
Newport Ridge for $9,542 from The Irvine Company. As partial financing for the
acquisition of the site, the Company elected to assume $4,184 of tax-exempt
assessment district debt. The balance of $5,358 was paid through the issuance of
336,432 additional limited partnership units in the Operating Partnership to The
Irvine Company. In November 1995, the Company acquired a 300-unit development
site known as Baypointe from The Irvine Company for $4,190, of which $1,967 was
paid through the issuance of 113,372 additional limited partnership units in the
Operating Partnership issued to The Irvine Company. The limited partnership
units are exchangeable for common stock on a one for one basis, subject to
adjustment and certain limitations.
Included in general and administrative expenses are charges from the Limited
Partner pursuant to an administrative service agreement covering services for
risk management, income taxes and other services of $106 for 1995 and $160 for
1994. In addition, the Company incurred rent totaling $259 for 1995 and $203 for
1994 related to a lease with the Limited Partner that expires in 1998. In
November 1995 the Company signed a retail space lease with the Limited Partner
for $5 per month expiring in December 1996 for the Company's Apartment Leasing
and Information Center.
19
<PAGE> 20
IRVINE APARTMENT COMMUNITIES, INC.
One of the Company's directors is chairman of a bank which participates in
the Company's line of credit. Based on this bank's percentage participation in
the credit facility, the Company estimates that the amount of interest and fees
paid to this bank totaled $388 and $96 for 1995 and 1994, respectively.
NOTE 7 -- LAND RIGHTS AGREEMENT WITH THE IRVINE COMPANY
The Company and The Irvine Company are parties to an exclusive land rights and
non-competition agreement (the -Land Rights Agreement"). This agreement, which
extends through July 31, 2020, provides the Company the exclusive right, but not
the obligation, to acquire additional land sites which have been entitled for
residential use and designated by The Irvine Company as ready for apartment
development in accordance with the Master Plan. The determination to exercise an
option with respect to a site is made solely by a majority of a committee of
independent directors of the Company (the -Independent Directors Committee"),
whose members are unaffiliated with The Irvine Company. In addition, The Irvine
Company and its Chairman, Donald Bren, have agreed to conduct their apartment
community development and ownership activities on the Irvine Ranch solely
through the Company.
Under terms of the Land Rights Agreement, through July 31, 2000, the purchase
price for any apartment community sites acquired may be paid with either cash,
common stock or Operating Partnership units at the option of the Company. After
July 31, 2000, the choice of consideration will revert to The Irvine Company. In
addition, the purchase price for future apartment sites encompassing the next
1,800 apartment units IAC develops starting in mid-1995 will be set at an amount
such that each project's budgeted pro forma unleveraged return on costs for the
first 12 months following stabilized occupancy will be between 10.0% and 10.5%.
However, in no event shall the purchase price for each such site exceed 95% of
the value of such site as determined by independent appraisals. A 300-unit site
under this agreement was purchased in November 1995.
NOTE 8 -- STOCK PLANS
Employee Stock Option Plan: The Company has adopted the 1993 Long Term Stock
Incentive Plan, which provides for awards of non-qualified or incentive stock
options, stock appreciation rights, performance awards, restricted stock,
restricted stock units and stock unit awards. This plan limits the number of
shares of common stock to be granted with respect to these awards to 1,000,000
shares. As of December 31, 1995, the number of shares of common stock available
for grant with respect to these awards was 176,000 shares. The non-qualified
stock options in the table below vest in equal installments over a three-year
period and expire ten years from the grant dates.
NON-QUALIFIED STOCK OPTION TRANSACTIONS
<TABLE>
<CAPTION>
Number Exercise price
of Options per share
---------------------------------------------------------------
<S> <C> <C>
Granted in 1993 149,000 $17.50
---------------------------------------------------------------
Outstanding at December 31, 1993 149,000 $17.50
Granted 55,000 $17.50
Canceled (15,000) $17.50
---------------------------------------------------------------
Outstanding at December 31, 1994 189,000 $17.50
Granted 384,000 $15.88 to $16.13
Canceled (74,000) $16.13 to $17.50
---------------------------------------------------------------
Outstanding at December 31, 1995 499,000 $15.88 to $17.50
---------------------------------------------------------------
Vested and exercisable at
December 31, 1995 71,000 $17.50
---------------------------------------------------------------
</TABLE>
20
<PAGE> 21
IRVINE APARTMENT COMMUNITIES, INC.
In addition, restricted stock performance awards issued to certain officers of
the Company vest over a five-year period provided that the Company meets certain
financial targets.
PERFORMANCE AWARD TRANSACTIONS
<TABLE>
<CAPTION>
Number of Awards
----------------------------------------------------
<S> <C>
Granted in 1993 200,000
Granted in 1995 235,000
Canceled in 1995 (110,000)
----------------------------------------------------
Outstanding at December 31, 1995 325,000
----------------------------------------------------
Vested at December 31, 1995 20,000
----------------------------------------------------
</TABLE>
DIRECTORS' STOCK OPTION PLAN: The 1993 Stock Option Plan for Directors was
established with 100,000 shares that may be granted to independent directors.
Grants of fully vested options to purchases 5,000 shares of common stock at the
market price on the grant date were made to each independent director
immediately following the Offering. Additionally, grants of fully vested options
to purchase 1,000 shares of common stock at the market price on the grant date
are made to each independent director immediately following each annual
shareholders' meeting beginning in 1995. These options are fully vested when
granted and are exercisable for ten years from the grant dates.
DIRECTORS' OPTION TRANSACTIONS
<TABLE>
<CAPTION>
Number Exercise Price
of Options Per Share
------------------------------------------------------------
<S> <C> <C>
Granted in 1993 25,000 $17.44
Granted in 1995 5,000 $15.63
Outstanding at
December 31, 1995 30,000 $15.63 to $17.44
------------------------------------------------------------
Available for future grant 70,000
------------------------------------------------------------
</TABLE>
NOTE 9 -- SAVINGS PLAN
Effective January 1, 1994, the Company implemented a defined contribution 401(k)
benefit plan covering substantially all employees who have satisfied minimum age
and service requirements. The Company matches employee contributions up to 50%,
within certain limits, which is accrued by the Company as incurred. The Company
also makes contributions to this plan for each participant, generally equal to
3% of the participant's base salary. The aggregate cost of these contributions
by the Company was $95 in 1995 and $82 in 1994.
NOTE 10 -- AGREEMENTS, COMMITMENTS AND CONTINGENCIES
MANAGEMENT AGREEMENTS: The Company has management agreements with unaffiliated
property management companies to maintain and manage the operations of the
Properties. At the beginning of 1993, management fees were 3.25% of revenues.
Effective September 1, 1993, management fees were renegotiated to a range of
2.5% to 3.25% of revenues depending on the size of the property (resulting in a
weighted average rate of approximately 2.9% of revenues). These
21
<PAGE> 22
IRVINE APARTMENT COMMUNITIES, INC.
agreements are renewable annually and are generally cancelable on 30 days'
notice. Included in operating expenses are costs incurred by the management
companies on behalf of the Company or the Predecessor.
LITIGATION: The Company is party to various legal actions which are incidental
to its business. Management believes that these actions will not have a material
adverse effect on the Company's consolidated financial position.
ASSESSMENT DISTRICTS: In some of the local jurisdictions within Orange County
where the Predecessor developed property, assessment districts were formed by
local governments to finance major infrastructure improvements. At December 31,
1995, the Company retained $19,713 of assessment district debt on its balance
sheet and an additional $20,146 of these obligations which the Predecessor had
recorded as contingent liabilities.
EXCHANGE RIGHTS: The Irvine Company has the right to exchange up to one-third of
the total Operating Partnership units it owns for shares of common stock in each
twelve-month period commencing on December 1 of each year at an exchange ratio
of one-to-one, subject to adjustment in certain events. These exchanges are
subject to certain restrictions including percentage ownership limits.
COMPANY'S OBLIGATION TO PURCHASE TENDERED OPERATING PARTNERSHIP UNITS: The
Irvine Company has the right to sell to the Company for cash generally up to
one-third of its Operating Partnership units in each twelve-month period
commencing on December 1 of each year. These sales are subject to certain
restrictions. The Company is to purchase the tendered interests at a purchase
price equal to the average of the daily market prices for the common stock of
the Company for the ten consecutive trading days immediately preceding the date
of receipt by the Company of a notice of cash tender. The Company is to pay for
these interests solely with the net proceeds of an offering of the Company's
common stock. The Company would bear the costs of sale (other than underwriting
discounts and commissions). The Irvine Company would bear all market risk if the
market price at closing was less than the purchase price as determined on the
date of tender. Any proceeds of the offering in excess of the purchase price
would be for the sole benefit of the Company.
RENT RESTRICTIONS: As of December 31, 1995, 25.9% of the apartment units within
the Company's portfolio were required to be set aside for residents within
certain income levels and had limitations on the rent that could be charged to
such tenants. The rental revenue from five of these projects includes
governmental rent subsidy payments of $4,023, $3,932 and $3,757 for the years
ended December 31, 1995, 1994 and 1993, respectively.
NOTE 11 -- INITIAL PERIOD OF OPERATIONS FROM DECEMBER 8 THROUGH DECEMBER 31,
1993 The Company's operating results for the period from December 8 (the
Offering date) through December 31, 1993 are summarized as follows:
<TABLE>
<S> <C>
-------------------------------------------
Revenues $8,237
Expenses (7,485)
Extraordinary item (12,487)
Minority interest in loss 11,850
-------------------------------------------
Net income $115
-------------------------------------------
</TABLE>
NOTE 12 -- PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For comparison purposes, pro forma 1993 amounts are presented as if the Offering
had occurred at the beginning of 1993. The unaudited pro forma condensed
consolidated statement of operations is presented as if (i) the Company had a
39.0% general partnership interest and unilateral control over the management
and operations of the Operating Partnership; (ii) the
22
<PAGE> 23
IRVINE APARTMENT COMMUNITIES, INC.
Operating Partnership acquired the 43 properties from The Irvine Company at
January 1, 1993; (iii) the net proceeds of the Company's Offering were applied
as of January 1, 1993, assuming that the mortgage debt was repaid, the interest
rate buydowns to market rates occurred and the interest rate swap agreements
were marked to market as of such date; (iv) the common stock was sold in the
Offering at $17.50 per share; and (v) the Company qualified as a REIT,
distributed all of its taxable income, and therefore incurred no tax expense
during the year presented. The unaudited pro forma consolidated statement of
operations below gives effect to various adjustments as follows: (i) increased
property taxes resulting from reassessment due to change in ownership of the
Properties; (ii) reduced interest expense due to repayment of debt, interest
rate buydowns, and marking to market interest rate swap agreements; (iii)
increased amortization of deferred financing costs associated with the above;
and (iv) increased costs associated with public ownership of the Company. In
management's opinion, all adjustments necessary to reflect the effects of the
formation of the Company, the consummation of the Offering and the application
of the net proceeds therefrom have been made.
The unaudited pro forma condensed consolidated statement of operations
presented below is not necessarily indicative of what actual results of
operations of the Company would have been assuming the Company had been formed
and the Offering and related application of net offering proceeds had been
consummated as of the beginning of the year presented, nor does it purport to
represent the Company's results of operations for future periods.
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Historical Pro Forma
Statement of Pro Forma Statement of
For the year ended December 31, 1993 Operations Adjustments Operations
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $124,820 $124,820
- -------------------------------------------------------------------------------------------
Expenses
Property expenses 34,057 34,057
Real estate taxes 10,729 $ 750 11,479
Property management fees 3,881 3,881
Interest expense, net 50,248 (26,859) 23,389
Amortization of deferred financing costs 3,012 13,906 16,918
Depreciation and amortization 20,002 20,002
General and administrative 3,278 1,498 4,776
- -------------------------------------------------------------------------------------------
125,207 (10,705) 114,502
- -------------------------------------------------------------------------------------------
Income (Loss) Before Extraordinary Item (387) 10,705 10,318
Extraordinary item - charge related to
Debt extinguishment (12,487) 12,487
Minority/predecessor interest in income 3,522 3,522
- -------------------------------------------------------------------------------------------
Net Income (Loss) $(12,874) $ 19,670 $ 6,796
- -------------------------------------------------------------------------------------------
Pro Forma Net Income Per Share $ 0.58
- -------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
IRVINE APARTMENT COMMUNITIES, INC.
NOTE 13 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1995 Quarters Ended March 31 June 30 September 30 December 31
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $32,584 $33,170 $34,328 $36,086
Expenses 28,777 27,912 27,068 27,355
Net income (loss) 2,102 (783) 3,176 3,970
Net income (loss) per share $0.18 $(0.07) $0.21 $0.23
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1994 Quarters Ended March 31 June 30 September 30 December 31
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $32,339 $32,487 $32,657 $32,753
Expenses 29,450 29,562 29,716 29,229
Net income 1,829 1,840 1,845 1,759
Net income per share $0.15 $0.16 $0.16 $0.15
- -------------------------------------------------------------------------------------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Irvine Apartment Communities, Inc.
We have audited the accompanying consolidated balance sheets of Irvine Apartment
Communities, Inc. (the "Company") as of December 31, 1995 and 1994, and the
related consolidated and combined statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995 of the Company and Irvine Apartment Communities
Predecessor (the "Predecessor"). These financial statements are the
responsibility of the Company's and Predecessor'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. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated and combined financial statements referred
to above present fairly, in all material respects, the financial position of the
Company and Predecessor as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Newport Beach, California
January 31, 1996
24
<PAGE> 25
IRVINE APARTMENT COMMUNITIES, INC.
OPERATING INFORMATION-STABILIZED PROPERTIES
<TABLE>
<CAPTION>
1995 Average
Monthly
Rental Rates
---------------- 1995
Average Per Average
Year Number Unit Size Per Square Economic
Property Completed of Units (Square Feet) Unit Foot Occupancy
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
IRVINE, CA
Amherst Court 1991 162 724 $ 940 $1.30 92.4%
Berkeley Court 1986 152 828 995 1.20 91.2%
Cedar Creek 1985 176 811 877 1.08 93.2%
Columbia Court 1984 58 852 958 1.12 90.1%
Cornell Court 1984 109 894 991 1.11 95.6%
Cross Creek 1985 136 935 945 1.01 93.3%
Dartmouth Court 1986 294 896 986 1.10 94.1%
Deerfield 1975/83 192/96 849 862 1.01 94.5%
Harvard Court 1986 112 826 928 1.12 95.9%
Northwood Park 1985 168 944 890 0.94 94.7%
Northwood Place 1986 604 954 890 0.93 93.3%
Orchard Park 1982 60 971 1,008 1.04 99.6%
Park West 1970/71/72 256/276/348 1,004 908 0.90 92.4%
Parkwood 1974 296 886 890 1.00 95.4%
Rancho San Joaquin 1976 368 896 966 1.08 95.6%
San Carlo 1989 354 1,074 1,135 1.06 95.0%
San Leon 1987 248 951 979 1.03 94.8%
San Marco 1988 426 923 936 1.01 94.5%
San Marino 1986 200 926 969 1.05 94.9%
San Mateo 1990 283 720 909 1.26 93.5%
San Paulo 1993 382 1,001 926 0.92 93.4%
San Remo 1986/88 136/112 963 951 0.99 94.7%
Stanford Court 1985 320 799 910 1.14 94.4%
The Parklands 1983 121 794 1,135 1.43 99.6%
Turtle Rock Canyon 1991 217 1,024 1,195 1.17 96.6%
Turtle Rock Vista 1976/77 112/140 1,155 1,120 0.97 95.6%
Windwood Glen 1985 196 878 906 1.03 93.6%
Windwood Knoll 1983 248 906 884 0.98 97.1%
Woodbridge Oaks 1983 120 976 1,072 1.10 99.8%
Woodbridge Pines 1976 220 872 912 1.05 94.3%
Woodbridge Villas 1982 258 867 897 1.03 96.5%
Woodbridge Willows 1984 200 894 915 1.02 94.7%
- --------------------------------------------------------------------------------------------
SUBTOTAL 8,156 923 $ 950 $1.03 94.5%
- --------------------------------------------------------------------------------------------
NEWPORT BEACH, CA
Bayport 1971 104 867 $970 $1.12 95.0%
Bayview 1971 64 1,154 1,182 1.02 92.3%
Baywood 1973/84 320/68 1,074 1,082 1.01 93.5%
Mariner Square 1969 114 1,104 1,082 0.98 96.8%
Newport North 1986 570 947 1,052 1.11 94.1%
Promontory Point 1974 520 1,056 1,565 1.48 91.4%
- --------------------------------------------------------------------------------------------
SUBTOTAL 1,760 1,020 $1,212 $1.19 93.1%
- --------------------------------------------------------------------------------------------
TUSTIN, CA
Rancho Alisal 1988/91 344/12 967 $939 $0.97 93.6%
Rancho Maderas 1989 266 939 989 1.05 94.1%
Rancho Mariposa 1992 238 856 981 1.15 91.6%
Rancho Tierra 1989 252 1,031 1,029 1.00 93.2%
Sierra Vista 1992 306 852 1,022 1.20 94.4%
- --------------------------------------------------------------------------------------------
SUBTOTAL 1,418 930 $989 $1.06 93.5%
- --------------------------------------------------------------------------------------------
TOTAL 11,334 939 $996 $1.06 94.1%
- --------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
IRVINE APARTMENT COMMUNITIES, INC.
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
DONALD BREN (1)
Chairman
Irvine Apartment Communities, Inc.
The Irvine Company
STEVEN P. ALBERT
President and Chief Executive
Officer
Irvine Apartment Communities, Inc.
ANTHONY M. FRANK (2, 3)
Chairman
Acrogen, Inc.
JOHN F. GRUNDHOFER (2, 3)
Chairman, President and
Chief Executive Officer
First Bank System, Inc.
BOWEN H. MCCOY (1, 3, 4)
President
Buzz McCoy Associates, Inc.
MICHAEL D. MCKEE (1)
Executive Vice President
and Chief Legal Officer
The Irvine Company
NORMAN J. METCALFE (1)
Vice Chairman and
Chief Financial Officer
The Irvine Company
JACK W. PELTASON (2, 3)
Retired President
University of California
JOHN F. SEYMOUR, JR. (3, 4)
Chief Executive Officer
Southern California Housing
Development Corporation
(1) Executive Committee Member
(2) Audit Committee Member
(3) Independent Directors Committee Member
(4) Compensation Committee Member
[PICTURE OF DONALD BREN] [PICTURE OF NORMAN J. METCALFE]
[PICTURE OF ANTHONY M. FRANK] [PICTURE OF JACK W. PELTASON]
[PICTURE OF JOHN F. GRUNDHOFER] [PICTURE OF JOHN F. SEYMOUR, JR.]
[PICTURE OF BOWEN H. MCCOY] [PICTURE OF STEVEN P. ALBERT]
[PICTURE OF MICHAEL D. MCKEE] [PICTURE OF RICHARD E. MORAN JR.]
OFFICERS
STEVEN P. ALBERT
President and Chief Executive Officer
RICHARD E. MORAN JR.
Executive Vice President
Chief Financial Officer and Secretary
JAMES E. MEAD
Senior Vice President and Treasurer
TYLER H. ROSE
Senior Vice President,
Corporate Finance
HANK BAKER
Vice President, Marketing
SHAWN HOWIE
Vice President and Controller
RICHARD E. LAMPRECHT
Vice President, Development
DAVID A. MCALLISTER
Vice President, Construction
SCOTT A. REINERT
Vice President, Asset Management
26
<PAGE> 27
IRVINE APARTMENT COMMUNITIES, INC.
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
Irvine Apartment Communities, Inc.
550 Newport Center Drive, Suite 300
Newport Beach, California 92660
Telephone: (714) 720-5500
Facsimile: (714) 720-5550
TRANSFER AGENT
The First National Bank of Boston
c/o Boston EquiServe, L.P.
P.O. Box 644
Boston, Massachusetts 02102-0644
(800) 733-5001
STOCK EXCHANGE LISTING
The Company's common stock is listed on the New York Stock Exchange and the
Pacific Stock Exchange under ticker symbol: IAC.
ANNUAL SHAREHOLDERS' MEETING
The Company's annual shareholders' meeting was held at the Hyatt Regency
Irvine Hotel in Irvine, California, at 10:00 a.m. on Tuesday, April 30, 1996.
FORM 10-K
The Company's Form 10-K/A filed with the Securities and Exchange Commission
may be obtained without charge by writing to the Investor Relations Department.
COMMON STOCK PRICES ON THE NEW YORK STOCK EXCHANGE
<TABLE>
<CAPTION>
Prices
Period High Low
--------------------------------------------------------
<S> <C> <C>
1995:
Fourth Quarter $19.875 $16.875
Third Quarter $18.750 $17.125
Second Quarter $17.750 $15.375
First Quarter $16.625 $15.500
1994:
Fourth Quarter $18.125 $14.250
Third Quarter $20.875 $17.750
Second Quarter $20.375 $19.125
First Quarter $21.750 $17.375
--------------------------------------------------------
</TABLE>
27
<PAGE> 28
IRVINE APARTMENT COMMUNITIES, INC.
DISTRIBUTIONS
<TABLE>
<CAPTION>
Distribution Type for
Federal Income Tax Purposes
Cash ---------------------------
Payable Distribution Taxable Return of
Date Per Share Income Capital
-----------------------------------------------------------
<S> <C> <C> <C> <C>
11/30/95 $0.355 25% 75%
08/31/95 $0.355 25% 75%
05/31/95 $0.340 25% 75%
02/28/95 $0.340 25% 75%
11/30/94 $0.340 28% 72%
08/31/94 $0.340 28% 72%
05/31/94 $0.340 28% 72%
02/28/94 $0.090 28% 72%
-----------------------------------------------------------
</TABLE>
The portion of the Company's distributions which represent a return of capital
is estimated to be significantly lower after 1995.
DIVIDEND REINVESTMENT AND ADDITIONAL CASH INVESTMENT PLAN
Shareholders may automatically reinvest their dividends or make periodic
additional cash investments in additional shares of the Company's common stock
under this plan. For additional information and enrollment materials, please
contact The First National Bank of Boston (Boston EquiServe, L.P.) at (800)
733-5001.
28
<PAGE> 1
IRVINE APARTMENT COMMUNITIES, INC.
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21
STATE OF
INCORPORATION
SUBSIDIARY OR ORGANIZATION
- ---------- ---------------
Irvine Apartment Communities, L.P. Delaware
San Rafael Apartments Limited Partnership California
Irvine Apartment Communities
Maryland, Inc. Maryland
<PAGE> 1
IRVINE APARTMENT COMMUNITIES, INC.
CONSENT OF INDEPENDENT AUDITORS
EXHIBIT 23.1
We consent to the incorporation by reference in this Annual Report (Form 10-K/A)
of Irvine Apartment Communities, Inc. of our report dated January 31, 1996,
included in the 1995 Amended Annual Report to Shareholders of Irvine Apartment
Communities, Inc.
We also consent to the incorporation by reference, in the Registration Statement
(Form S-8 No. 33-77808) pertaining to the Irvine Apartment Communities, Inc.
1993 Stock Option Plan for Directors and in the Registration Statement (Form S-8
No. 33-77810) pertaining to the Irvine Apartment Communities, Inc. 1993
Long-Term Stock Incentive Plan and in the Registration Statement (Form S-3 No.
33-92036) pertaining to the Irvine Apartment Communities, Inc. Registration of
$250,000,000 of Debt Securities, Preferred Stock, Common Stock and Warrants, of
our report dated January 31, 1996 with respect to the consolidated and combined
financial statements incorporated herein by reference, and our report dated
January 31, 1996 with respect to the financial statement schedule included in
this Annual Report (Form 10-K/A) of Irvine Apartment Communities, Inc.
Ernst & Young LLP
Newport Beach, California
March 25, 1996
<PAGE> 1
IRVINE APARTMENT COMMUNITIES, INC.
INDEPENDENT AUDITORS' REPORT ON SCHEDULE III
EXHIBIT 23.2
Our audits also included the financial statement schedule listed in Item 14.
This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. 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 set forth therein.
Ernst & Young LLP
Newport Beach, California
January 31, 1996
