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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 1996
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.
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(Exact Name of Registrant as Specified in Its Charter)
Maryland 33-0698698
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(State of Incorporation) (I.R.S. Employer Identification Number)
550 Newport Center Drive, Suite 300, Newport Beach, California 92660
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(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 720-5500
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class: on which registered:
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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, 1996: 18,555,647
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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 .
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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 28, 1997 was $527,218,902 assuming that all
officers and directors of the Company are affiliates.
Documents incorporated by reference:
Portions of the annual report to shareholders for the year ended
December 31, 1996 are incorporated by reference into Parts I and II
of this Form 10-K.
Portions of the proxy statement for the registrant's annual
shareholders' meeting to be held April 25, 1997 are incorporated by
reference into Part III of this Form 10-K.
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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, and beginning
in 1997, other locations in California. At December 31, 1996, 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, 1996, the Operating Partnership owned and operated 52
apartment communities containing 13,656 operating apartment units and had 864
units 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.
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 and, beginning in
1997, other locations in California. See the consolidated financial statements
and notes thereto included in Item 8 of this Annual Report on Form 10-K for
financial information about the industry segment.
DESCRIPTION OF BUSINESS
The Company owns and operates 48 high quality apartment communities
aggregating 13,541 units (the "Stabilized Communities"), of which 11,334 units
have been stabilized for more than two years, and has four additional apartment
communities aggregating 979 units under construction ("Communities Under
Construction"). Upon completion of the Communities Under Construction, the
Company will own a total of 14,520 units in 52 apartment communities,
representing an increase of approximately 28% 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. As of December 31, 1996, all of the Company's
Properties were 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 by The Irvine Company covers approximately 90 square
miles and includes more than 50,000 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.
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The Irvine Company is a real estate investment and community development
firm engaged in the long-term development of the Irvine Ranch. The urbanization
of the Irvine Ranch began in the 1960s with the adoption of a comprehensive
Master Plan for future community development which originally consisted of a
large map of the Irvine Ranch and a series of supporting maps detailing land
uses. Subsequently, The Irvine Company worked closely with the various local
jurisdictions which govern the Irvine Ranch to adopt general plans for the
future development of their jurisdictions. The Irvine Company's overall Master
Plan was refined to accord with the approved general plans and the residential,
commercial, industrial, environmental and aesthetic balance desired by each
jurisdiction. As a result, today the Master Plan is a compilation of the
various interlocking general plans described above. The Irvine Company
continuously engages in planning activities and the Master Plan refinement
process is ongoing. The Irvine Company works closely with local government
representatives, community residents, the Company and other civic and
environmental groups to obtain the necessary local support and entitlement for
its developments. The goal of the Master Plan was and remains to create
innovative urban and suburban environments through the well-planned, coordinated
development of residential communities and employment centers.
The Company believes that a variety of factors have produced a historically
strong apartment market in Orange County. 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 exclusive right through July 2020 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 with populations of 100,000
or more in the United States;
- The close proximity of the Properties and of future development sites to
major employment centers, high quality schools, extensive resort,
recreational and open space amenities, and the Pacific Ocean;
- 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 approximately 20 years of experience among the Company's ten
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, 1996, the average physical occupancy (the
number of units occupied in stabilized communities divided by the total number
of units in stabilized communities) of the Stabilized Communities was 94.9% and
the average monthly rent per unit was $1,025. The Communities Under
Construction,
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when completed, will contain 979 apartment units and have an aggregate
estimated cost of approximately $127.2 million. As of December 31, 1996, 115
units were completed with 88 units occupied and generating rental revenue. In
addition, pre-lease deposits had been received for 27 units. It is anticipated
that two of the Communities Under Construction will be substantially completed
by mid-1997 and will achieve stabilized occupancy by the end of 1997.
In early 1997, IAC launched an expansion program beyond its traditional
Irvine Ranch boundaries. The Company's strategic intent is to create meaningful
market positions in a handful of the state's most promising growth centers. As
a first step, the Company acquired the assets and absorbed the senior management
team of a Northern California-based developer, Thompson Residential Company.
Included in the acquisition were the purchase rights to three Northern
California development sites situated in the Silicon Valley. The Company
expects to begin construction on one of these sites in 1997.
The information set forth in this Form 10-K relating to the expansion
program, timing of completion of construction and initial stabilized occupancy
and estimated costs of apartment communities that are in development 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; changes in interest rate levels; and other changes in capital
markets. No assurance can be given that the timing or estimates will not vary
substantially from actual results.
BUSINESS STRATEGY
The Company's primary business objective is to deliver strong, consistent
total annual returns to its shareholders 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, and in similar high growth regions of California. Through adherence 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 Stabilized Communities and
the development of new apartment communities.
Operating Strategies
o Provide an exceptional living environment for residents. The Company's
Stabilized 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 situated amid parks and other open space, and in
close proximity to 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 1996, the Stabilized
Communities produced an average monthly rent of $1,025 per unit, which is
approximately $200 more than the average monthly rent in Orange County.
o Enhance efficiency of operations. Management selectively subcontracts on-site
staffing, personnel management and accounting functions to three independent
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, property expenses
were reduced by 2.8% during 1996 within communities stabilized more than two
years.
o 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 52 Properties; rental
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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
o 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
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 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.
o 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 independent 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, as discussed above, 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 with 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 no event shall the purchase price for any site exceed 95% of
the value of that site as determined by independent appraisals. In addition,
the purchase price for future apartment sites after December 31, 1996,
encompassing the next 821 apartment units the Company develops, 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%. A 316-unit site was purchased in February 1997 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.
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Capital and Financing Strategies
The Company employs 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
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, 1996, the ratio of debt to total market capitalization was 35.1%.
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 two significant finance-related transactions in 1996.
In July, its credit facility was amended to reduce the line's interest rate to
Eurodollar plus 1.5% and a follow-on offering of stock was completed, along with
an investment from The Irvine Company in the Operating Partnership, providing
aggregate proceeds of $60.0 million. All of these transactions are more fully
discussed in Management's Discussion and Analysis included in this Annual Report
on Form 10-K. In February 1997, the credit facility was amended to increase the
borrowing capacity from $175 million to $250 million.
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 28, 1997, the Company had 53 employees. None of the
Company's employees is 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
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presence of the 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 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 48 Stabilized Communities in 1993 or later except
for two which were obtained more than five 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.
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REGULATION
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 Stabilized
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 Stabilized 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 Stabilized 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 qualifying resident is required to pay
only 30% of their adjusted monthly income as rent and HUD
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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, 1996, the average remaining term of the HAP
contracts was approximately 7 years.
Each of the resident and income restricted units within the Company's
portfolio has 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.
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.
The Company has recently acquired the assets of Thompson Residential
Company, Inc., a Northern California-based multifamily development company.
This acquisition represents the Company's first strategic expansion off the
Irvine Ranch and the Company may make additional investments in Northern
California and possibly the San Diego area in the future. See "Recent
Developments - 'Off-Ranch' Expansion." The development, construction and
operation of rental apartment communities in such new markets may present risks
different than or in addition to the risks discussed above related to the
Properties which are located entirely in Orange County. No assurance can be
given that the Company will be successful in pursuing any additional "off-Ranch"
expansion or that any "off-Ranch" apartment communities will be successful.
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 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.
9
<PAGE> 10
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 plans to 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 1970s 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-nine of the 48 Stabilized Communities
(representing approximately 60% 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.
10
<PAGE> 11
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information regarding the executive
officers of the Company as of March 15, 1997 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>
Donald L. Bren 64 Chairman, President and Chief Executive Officer 1997 - Present
Chairman, The Irvine Company 1983 - Present
James E. Mead 37 Senior Vice President, Chief Financial Officer and 1996 - Present
Secretary
Senior Vice President and Treasurer 1994 - 1996
Vice President, Corporate Finance, The Irvine 1991 - 1994
Company
William W. Thompson 51 Senior Vice President, Off-Ranch Operations 1997 - Present
President, Thompson Residential 1996 - 1997
Partner, Trammell Crow Residential, Northern 1984 - 1995
California
Hank Baker 48 Vice President, Marketing 1996 - Present
Owner, Baker Property Advisors 1992 - 1996
Vice President, Northern California, Forest City
Properties Corporation 1986 - 1992
Bruce N. Dorfman 37 Vice President, Development, Off-Ranch Operations 1997 - Present
Vice President, Development, Thompson Residential 1996 - 1997
Vice President, Finance, Trammell Crow Residential,
Northern California 1992 - 1995
Shawn Howie 41 Vice President, Corporate Finance and Controller 1997 - Present
Vice President and Controller 1993 - 1997
Senior Manager, Ernst & Young 1986 - 1993
Robert J. Hughes 46 Vice President, Construction, Off-Ranch Operations 1997 - Present
Vice President, Construction, Thompson Residential 1996 - 1997
Vice President, Construction, Trammell Crow 1994 - 1996
Residential 1987 - 1993
President of Construction, Grancorp
Richard E. Lamprecht 37 Vice President, Development 1993 - Present
Vice President, Development, Irvine Pacific 1989 - 1993
David A. McAllister 62 Vice President, Construction 1993 - Present
Director of Operations, California Pacific Homes 1992 - 1993
Scott A. Reinert 38 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.
ITEM 2. PROPERTIES
As of December 31, 1996, the Company owned stabilized properties containing
13,541 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
STABILIZED COMMUNITIES UNDER CONSTRUCTION TOTAL
----------------------- ------------------ ----------------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF NUMBER OF NUMBER
MUNICIPALITY PROPERTIES UNITS PROPERTIES UNITS PROPERTIES OF UNITS
------------ ---------- ----- ---------- ----- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Irvine 35 9,415 2 434 37 9,849
Newport Beach 6 1,760 2 545 8 2,305
Tustin 6 1,854 6 1,854
Unincorporated 1 512 1 512
-- ------ - --- -- ------
48 13,541 4 979 52 14,520
== ====== = === == ======
</TABLE>
11
<PAGE> 12
The unit mix of the Properties is as follows:
<TABLE>
<CAPTION>
STABILIZED 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 3.2%
One Bedroom 3,523 143 3,666 25.3%
Two Bedroom 8,405 656 9,061 62.4%
Three Bedrooms or More 1,144 180 1,324 9.1%
------ --- ------ -----
Total 13,541 979 14,520 100.0%
====== === ====== =====
</TABLE>
Information as to the Company's Properties is included on pages 22 and 39
of the Company's 1996 Annual Report to Shareholders, which are included as part
of Exhibit 13 and are incorporated in this Annual Report on Form 10-K. In
addition, the real estate and accumulated depreciation schedule of Irvine
Apartment Communities, Inc. is included on pages 16 and 17 of this Annual Report
on Form 10-K.
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 Stabilized Communities is approximately 12
years. The oldest of the Stabilized Communities was completed in 1969, and 29 of
the 48 Stabilized Communities, totaling 8,873 units or approximately 66% of the
Stabilized Communities, have been completed since January 1, 1985. 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
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. Approximately 80% of the 48 Stabilized 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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of February 12, 1997, there were 315 holders of record of the Company's
common stock. The Company believes that there are approximately 10,615
beneficial holders of the Company's common stock.
Information as to the Company's quarterly stock prices is included on the
inside back cover of the Company's 1996 Annual Report to Shareholders, which is
included as part of Exhibit 13 and is incorporated in this Annual Report on Form
10-K.
12
<PAGE> 13
Information as to the principal markets on which the Company's common stock
is being traded is included on the inside back cover of the Company's 1996
Annual Report to Shareholders, which is included as part of Exhibit 13 and is
incorporated in this Annual Report on Form 10-K.
The Company intends to pay regular quarterly distributions. The Company's
historical quarterly distribution payments are included on the inside back cover
of the Company's 1996 Annual Report to Shareholders, which is included as part
of Exhibit 13 and is incorporated in this Annual Report on Form 10-K.
During 1996 the Operating Partnership sold to affiliates of The Irvine
Company the following units of limited partner interest ("LP units") in the
Operating Partnership pursuant to Section 4(2) of the Securities Act of 1933:
1. an aggregate of 15,851 L.P. units were sold at various times for
$353,861 in cash at prices ranging from $19.784 to $23.875 per L.P.
unit, in connection with The Irvine Company's exercise of its
proportional purchase rights with respect to sales of the Company's
common stock pursuant to its Dividend Reinvestment and Additional Cash
Investment Plan.
2. 1,490,700 L.P. units were sold in July 1996 for $30 million in cash,
$20.125 per L.P. unit, in connection with The Irvine Company's exercise
of its proportional purchase rights with respect to the Company's
follow-on offering of 1,490,700 shares of common stock; and
3. an aggregate of 388,759 L.P. units were issued at various times in
connection with the acquisition by the Operating Partnership of three
land sites pursuant to the Land Rights Agreement. The number of L.P.
units issued in each acquisition was equal to the land purchase price
determined in accordance with the Land Rights Agreement divided by the
average of the closing prices of the common stock for the 10 trading
days immediately preceding the closing date of the acquisition.
Each of the foregoing L.P. units is exchangeable for common stock of the
Company on a one-for-one basis, subject to adjustment and certain limitations
set forth in the Amended and Restated Agreement of Limited Partnership of the
Operating Partnership.
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Information of Irvine Apartment Communities, Inc.
and Predecessor for the five-year period ended December 31, 1996 is included on
page 17 of the Company's 1996 Annual Report to Shareholders, which is included
as part of Exhibit 13 and is incorporated in this Annual Report on Form 10-K. It
should be read in conjunction with the consolidated financial statements
included on pages 18 through 38 in the Company's 1996 Annual Report to
Shareholders which are also included as part of Exhibit 13 and incorporated in
this Annual Report on Form 10-K and the financial statement schedule below in
Item 14 of this Annual Report on Form 10-K.
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 18 through 24 in the Company's 1996 Annual
Report to Shareholders, which are included as part of Exhibit 13 and are
incorporated in this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Irvine Apartment Communities, Inc.
are included on pages 25 through 38 in the Company's 1996 Annual Report to
Shareholders, which are included as part of Exhibit 13 and are incorporated in
this Annual Report on Form 10-K. Reference is made to the Index to Financial
Statements in Item 14 below.
A financial statement schedule for the Company is included on pages 16 and
17 of this Annual Report on Form 10-K. Reference is made to the Index to
Financial Statement Schedule in Item 14 below.
13
<PAGE> 14
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 1997 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 pursuant
to General Instruction G(3) of Form 10-K, provides the remaining information
required under Part III (ITEMS 10, 11, 12, AND 13.)
14
<PAGE> 15
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 financial statements, together with the report thereon of
Ernst & Young LLP dated January 31, 1997, all appearing on pages 25 through 38
in the 1996 Annual Report to Shareholders, are incorporated in this Annual
Report on Form 10-K. The aforementioned information and the information
incorporated in Items 1, 2, 5, 6, 7 and 8, from the 1996 Annual Report to
Shareholders attached as Exhibit 13, is incorporated into this Annual Report on
Form 10-K.
PAGE NO. IN
ANNUAL REPORT
IRVINE APARTMENT COMMUNITIES, INC. TO SHAREHOLDERS
- ---------------------------------- ---------------
Report of Independent Auditors 38
Consolidated Balance Sheets as of 25
December 31, 1996 and 1995
Consolidated Statements of Operations 26
for the years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Changes in 27
Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for 28
the years ended December 31, 1996, 1995
and 1994
Notes to Consolidated Financial Statements 29 through 38
Shareholder Information Inside Back Cover
Pages 17 through 38 and the inside back cover of the 1996 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 Financial Statements and related notes thereto,
the Report of Independent Auditors, Shareholder Information and Quarterly Stock
Prices. These pages are included as part of Exhibit 13 to this Annual Report on
Form 10-K.
Schedule III-Real Estate and Accumulated Depreciation is included on pages
16 and 17 of this Annual Report on Form 10-K.
15
<PAGE> 16
IRVINE APARTMENT COMMUNITIES, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
CARRIED AT
DECEMBER 31, 1996(a)(b)
-----------------------
CITY, STATE NUMBER OF BUILDINGS AND ACCUMULATED DATE OF DEPRECIABLE
APARTMENT COMMUNITY NAME UNITS ENCUMBRANCES(c) LAND(d) IMPROVEMENTS TOTAL DEPRECIATION COMPLETION LIFE(e)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STABILIZED MORE THAN 2 YEARS
IRVINE, CALIFORNIA
Amherst Court 162 $1,430 $11,247 $12,677 $2,255 1991 5-40 yrs.
Berkeley Court 152 $7,808 858 8,257 9,115 2,821 1986 5-40 yrs.
Cedar Creek 176 8,586 519 8,614 9,133 3,021 1985 5-40 yrs.
Columbia Court 58 2,601 321 2,683 3,004 881 1984 5-40 yrs.
Cornell Court 109 5,202 785 5,044 5,829 1,597 1984 5-40 yrs.
Cross Creek 136 6,754 561 7,287 7,848 2,568 1985 5-40 yrs.
Dartmouth Court 294 17,303 2,674 17,230 19,904 5,513 1986 5-40 yrs.
Deerfield 288 10,812 3,810 11,495 15,305 4,383 1975/83 5-40 yrs.
Harvard Court 112 5,158 1,034 5,864 6,898 1,952 1986 5-40 yrs.
Northwood Park 168 7,759 1,246 8,459 9,705 3,058 1985 5-40 yrs.
Northwood Place 604 30,143 4,613 34,096 38,709 11,191 1986 5-40 yrs.
Orchard Park 60 1,138 2,099 3,237 837 1982 5-40 yrs.
Park West 880 33,992 18,768 53,522 72,290 25,328 1970/71/72 5-40 yrs.
Parkwood 296 12,642 7,667 12,698 20,365 4,850 1974 5-40 yrs.
Rancho San Joaquin 368 17,234 7,910 28,325 36,235 12,972 1976 5-40 yrs.
San Carlo 354 2,715 25,720 28,435 5,907 1989 5-40 yrs.
San Leon 248 12,380 1,726 14,507 16,233 4,449 1987 5-40 yrs.
San Marco 426 24,327 2,873 24,355 27,228 6,199 1988 5-40 yrs.
San Marino 200 9,849 1,376 11,567 12,943 3,756 1986 5-40 yrs.
San Mateo 283 1,444 18,621 20,065 3,696 1990 5-40 yrs.
San Paulo 382 26,591 1,906 26,785 28,691 2,487 1993 5-40 yrs.
San Remo 248 13,832 1,765 14,287 16,052 4,457 1986/88 5-40 yrs.
Stanford Court 320 13,877 2,202 14,226 16,428 5,202 1985 5-40 yrs.
The Parklands 121 6,512 68 7,068 7,136 2,216 1983 5-40 yrs.
Turtle Rock Canyon 217 18,791 1,889 19,969 21,858 3,703 1991 5-40 yrs.
Turtle Rock Vista 252 13,405 6,327 13,340 19,667 5,120 1976/77 5-40 yrs.
Windwood Glen 196 9,852 1,266 9,668 10,934 3,124 1985 5-40 yrs.
Windwood Knoll 248 1,111 11,575 12,686 3,724 1983 5-40 yrs.
Woodbridge Oaks 120 832 6,718 7,550 2,217 1983 5-40 yrs.
Woodbridge Pines 220 8,459 5,755 10,484 16,239 3,985 1976 5-40 yrs.
Woodbridge Villas 258 4,353 9,105 13,458 3,729 1982 5-40 yrs.
Woodbridge Willows 200 9,655 1,421 11,468 12,889 4,888 1984 5-40 yrs.
- ----------------------------------------------------------------------------------------------------------------------------------
8,156 333,524 92,363 466,383 558,746 152,086
- ----------------------------------------------------------------------------------------------------------------------------------
NEWPORT BEACH, CALIFORNIA
Bayport 104 4,862 3,146 4,226 7,372 1,678 1971 5-40 yrs.
Bayview 64 3,510 2,353 2,925 5,278 1,193 1971 5-40 yrs.
Baywood 388 20,972 10,809 20,362 31,171 7,450 1973/84 5-40 yrs.
Mariner Square 114 5,637 392 5,030 5,422 3,106 1969 5-40 yrs.
Newport North 570 37,970 8,849 31,314 40,163 9,963 1986 5-40 yrs.
Promontory Point 520 36,303 18,775 41,153 59,928 16,083 1974 5-40 yrs.
- ----------------------------------------------------------------------------------------------------------------------------------
1,760 109,254 44,324 105,010 149,334 39,473
- ----------------------------------------------------------------------------------------------------------------------------------
TUSTIN, CALIFORNIA
Rancho Alisal 356 20,625 3,558 19,894 23,452 5,884 1988/91 5-40 yrs.
Rancho Maderas 266 19,372 1,144 16,263 17,407 3,732 1989 5-40 yrs.
Rancho Mariposa 238 12,839 683 16,241 16,924 2,535 1992 5-40 yrs.
Rancho Tierra 252 19,622 1,215 16,470 17,685 3,918 1989 5-40 yrs.
Sierra Vista 306 2,318 22,667 24,985 3,405 1992 5-40 yrs.
- ----------------------------------------------------------------------------------------------------------------------------------
1,418 72,458 8,918 91,535 100,453 19,474
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL STABILIZED MORE THAN 2
YEARS 11,334 $515,236 $145,605 $662,928 $808,533 $211,033
- ----------------------------------------------------------------------------------------------------------------------------------
STABILIZED LESS THAN 2 YEARS
IRVINE, CALIFORNIA
Villa Coronado 513 $5,842 $37,985 $43,827 $2,058 1995/96 5-40 yrs.
Santa Rosa 368 3,169 27,615 30,784 1,410 1995/96 5-40 yrs.
Santa Clara 378 3,624 31,126 34,750 1,468 1995/96 5-40 yrs.
- ----------------------------------------------------------------------------------------------------------------------------------
1,259 12,635 96,726 109,361 4,936
- ----------------------------------------------------------------------------------------------------------------------------------
TUSTIN, CALIFORNIA
Rancho Monterey 436 6,823 33,970 40,793 1,385 1995/96 5-40 yrs.
- ----------------------------------------------------------------------------------------------------------------------------------
436 6,823 33,970 40,793 1,385
- ----------------------------------------------------------------------------------------------------------------------------------
NEWPORT COAST, CALIFORNIA
Newport Ridge 512 9,357 45,265 54,622 1,813 1995/96 5-40 yrs.
- ----------------------------------------------------------------------------------------------------------------------------------
512 9,357 45,265 54,622 1,813
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL STABILIZED LESS THAN 2 2,207 $28,815 $175,961 $204,776 $8,134
YEARS
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes on next page.
16
<PAGE> 17
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
CARRIED AT
DECEMBER 31, 1996(a)(b)
-----------------------
APARTMENT NUMBER OF BUILDINGS AND ACCUMULATED DATE OF DEPRECIABLE
COMMUNITY NAME (CITY) UNITS ENCUMBRANCES(c) LAND(d) IMPROVEMENTS TOTAL DEPRECIATION COMPLETION LIFE(e)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DELIVERED UNITS IN PROJECTS
UNDER CONSTRUCTION
Baypointe (Newport Beach) 68 $953 $6,609 $7,562 $13 1996 5-40 yrs.
Santa Maria (Irvine) 47 697 4,426 5,123 13 1996 5-40 yrs.
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL DELIVERED UNITS 115 $1,650 $11,035 $12,685 $26
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL STABILIZED AND DELIVERED 13,656 $176,070 $849,924 $1,025,994 $219,193
- ----------------------------------------------------------------------------------------------------------------------------------
UNITS UNDER CONSTRUCTION
Baypointe (Newport Beach) 232 $3,237 $18,602 $21,839
Santa Maria (Irvine) 180 2,646 11,638 14,284
The Colony (Newport Beach) 245 3,545 9,772 13,317
Santa Rosa II (Irvine) 207 5,999 1,323 7,322
Other 1,478 1,478
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL UNITS UNDER CONSTRUCTION 864 $15,428 $42,813 $58,241
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 14,520 $515,236 $191,497 $892,737 $1,084,234 $219,193
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(a) The aggregate cost of land and buildings for federal income tax purposes is
approximately $654,007 (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) Land acquired from The Irvine Company is recorded at cost based on the
purchase price.
(e) Estimated useful lives are five to seven years for furniture and fixtures,
five to twenty years for improvements and forty years for buildings.
A summary of activity of real estate and accumulated
depreciation is as follows:
<TABLE>
<CAPTION>
Real Estate
December 31,
---------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $1,005,633 $869,756 $792,510
Additions:
Through cash expenditures 66,857 124,368 61,590
Through assumption of tax-exempt
assessment district debt 2,771 4,184 15,656
Through issuance of Operating
Partnership units 8,973 7,325
- ---------------------------------------------------------------------------------------
Balance at end of year $1,084,234 $1,005,633 $869,756
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Accumulated Depreciation
December 31,
---------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $192,106 $169,039 $148,052
Charges to depreciation expense 27,087 23,067 20,987
- ---------------------------------------------------------------------------------------
Balance at end of period $219,193 $192,106 $169,039
- ---------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
2.1 Agreement and Plan of Merger dated as of March 20, 1996 between the
Company and Irvine Apartment Communities, Inc., a Delaware corporation
(incorporated by reference to Exhibit 2.1 of the Company's Registration
Statement on Form 8-B, filed with the Securities and Exchange Commission
on April 30, 1996 (the "Form 8-B")).
3.1 Articles of Amendment and Restatement of the Company (incorporated by
reference to Exhibit 3.1 of the Form 8-B").
3.2 Articles of Merger dated May 2, 1996 between the Company and Irvine
Apartment Communities, Inc., a Delaware corporation (incorporated by
reference to Exhibit 14 of Amendment No. 5 to Schedule 13D filed on July
15, 1996 by The Irvine Company, TIC Investment Company A, TIC Investment
Company C and Donald L. Bren).
3.3 Amended Bylaws of the Company (incorporated by reference to Exhibit 3.2
of the Form 8-B).
3.4 Specimen of Certificate Representing Shares of Common Stock
(incorporated by reference to Exhibit 3.3 of the Form 8-B).
10.1 Agreement of Limited Partnership of the Operating Partnership (the
"Operating Partnership Agreement") (incorporated by reference to Exhibit
10.1 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")).
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).
10.1.4 Amendment No. 4 to the Operating Partnership Agreement (incorporated by
reference to Exhibit 10.1.4 of the Form 8-B).
10.1.5 Amendment No. 5 to the Operating Partnership Agreement (incorporated by
reference to Exhibit 10.1.5 of the Form 8-B).
10.1.6 Amendment No. 6 to the Operating Partnership Agreement (incorporated by
reference to Exhibit 24 of Amendment No. 6 to Schedule 13D filed on
March 4, 1997 by The Irvine Company, TIC Investment Company A, TIC
Investment Company C and Donald L. Bren ("Amendment No. 6 to the
Schedule 13D")).
10.1.7 Amendment No. 7 to the Operating Partnership Agreement (incorporated by
reference to Exhibit 25 of Amendment No. 6 to the Schedule 13D).
10.2 Lease Agreement (incorporated by reference to Exhibit 10.2 of the 1993
Form 10-K).
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C>
10.4 Miscellaneous Rights Agreement among the Company and the persons named
therein (incorporated by reference to Exhibit 10.4 of the Form 8-B).
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).
10.6 Exclusive Land Rights and Non-Competition Agreement (incorporated by
reference to Exhibit 10.6 of the 1993 Form 10-K).
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).
10.6.3 Amendment No. 3 to the Exclusive Land Rights and Non-Competition
Agreement (incorporated by reference to Exhibit 10.6.3 of the Form 8-B).
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 Annual Report on Form 10-K of the
Company for the year ended December 31, 1995, File No. 1-12478 (the
"1995 Form 10-K)).
10.11.1 Amendment No. 1 to the Revolving Credit Agreement dated July 1, 1996.
10.11.2 Amendment No. 2 to the Revolving Credit Agreement dated August 15, 1996.
10.11.3 Amendment No. 3 to the Revolving Credit Agreement dated February 20,
1997.
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).
10.14 Irvine Apartment Communities, Inc. 1996 Long-Term Stock Incentive Plan
(incorporated by reference to Exhibit 10.14 of the Form 8-B). Severance
Agreement with the Company's former Chief Financial Officer.
10.15 Severance Agreement with the Company's former Chief Financial Officer.
10.16 Severance Agreement with the Company's former Chief Executive Officer.
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C>
13 Portions of the Company's Annual Report to Shareholders for the year
ended December 31, 1996.
21 Subsidiaries of the Registrant.
22 Notice and Proxy Statement for the Annual Meeting of Shareholders to be
held on April 25, 1997.
23.1 Opinion of Ernst & Young LLP on Schedule III.
23.2 Consent of Ernst & Young LLP
27 Financial Data Schedule
</TABLE>
REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth quarter of
1996.
20
<PAGE> 21
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
21
<PAGE> 22
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>
DONALD BREN Chairman of the Board of Directors; March 24, 1997
- ---------------------- President and Chief Executive Officer
Donald Bren
ANTHONY M. FRANK Director March 24, 1997
- ----------------------
Anthony M. Frank
JOHN F. GRUNDHOFER Director March 24, 1997
- ----------------------
John F. Grundhofer
BOWEN H. MCCOY Director March 24, 1997
- ----------------------
Bowen H. McCoy
WILLIAM H. MCFARLAND Director March 24, 1997
- ----------------------
William H. McFarland
MICHAEL D. MCKEE Director March 24, 1997
- ----------------------
Michael D. McKee
JACK W. PELTASON Director March 24, 1997
- ----------------------
Jack W. Peltason
JOHN F. SEYMOUR, JR. Director March 24, 1997
- ----------------------
John F. Seymour, Jr.
JAMES E. MEAD Senior Vice President, March 24, 1997
- ---------------------- Chief Financial Officer and
James E. Mead Secretary (Principal Financial
Officer)
SHAWN HOWIE Vice President, Corporate March 24, 1997
- ---------------------- Finance and Controller
Shawn Howie (Principal Accounting Officer)
</TABLE>
22
<PAGE> 1
Exhibit 10.11.1
AMENDMENT NO. 1 TO
REVOLVING CREDIT AGREEMENT
THIS AMENDMENT NO. 1 dated as of July 1, 1996 (this "Amendment")
between Irvine Apartment Communities, L.P., a Delaware limited partnership (the
"Borrower"), the Lenders signatory hereto, Wells Fargo Bank. N.A. (the "Managing
Agent") and Bank of America National Trust and Savings Association (the
"Administrative Agent"), as agents and representatives for the Lenders, to the
Revolving Credit Agreement dated as of November 30, 1995 between the Borrower,
the Lenders, the Managing Agent and the Administrative Agent (the "Credit
Agreement"). Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Credit Agreement.
WHEREAS, the Borrower, the Lenders, the Managing Agent and the
Administrative Agent have agreed to amend the Credit Agreement as set forth
herein.
NOW, THEREFORE, the parties hereto agree:
ARTICLE I
AMENDMENTS TO THE CREDIT AGREEMENT
1.1. Amendment to Definition of "Applicable Margin." The definition of
"Applicable Margin" set forth in Section 1.1 of the Credit Agreement is hereby
amended and restated to read in its entirety as follows:
"APPLICABLE MARGIN" means 1.50% per annum in respect of
Euro-Dollar Rate Loans.
1.2 Amendment to Section 2.3.1.1. Section 2.3.1.1 of the Credit
Agreement is hereby amended and restated to read in its entirety as follows:
2.3.1.1. Each Loan shall bear interest on the unpaid principal
amount thereof, from and including the date of the making of
such Loan to the date of any repayment thereof, at the
following rates per annum: (a) for so long as and to the
extent that such Loan is a Base Rate Loan (including a Swing
Line Loan), at the Base Rate (as in effect from time to time)
(b) for so long as and to the extent that such Loan is a
Euro-Dollar Rate Loan, at the Euro-Dollar Rate for each
Borrowing Period applicable thereto plus the Applicable
Margin.
1.3 Amendment to Section 2.3.1.4. Section 2.3.1.4 of the Credit
Agreement is hereby amended and restated to read in its entirety as follows:
2.3.1.4. Interest accrued through the last day of each month
shall be payable in arrears (a) in the case of any Type of
Loan, on each Periodic Payment Date; and (b) in the case of
any Loan, when the Loan shall
<PAGE> 2
become due (whether at maturity , by reason of prepayment,
acceleration or otherwise).
1.4. Amendment to Section 2.5.1. Section 2.5.1 of the Credit Agreement
is hereby amended and restated to read in its entirety as follows:
2.5.1. UNUSED FEE. On each of January 10, April 10, July 10
and October 10 of each year, the Borrower shall pay in arrears
to the Administrative Agent for the pro rata benefit of the
Lenders, an unused fee for the most recently concluded Fiscal
Quarter computed on the basis of a 360 day year and the actual
number of days elapsed in such Fiscal Quarter, at a rate of
0.15% per annum times the average daily difference between (x)
the aggregate amount of the Revolving Commitments (as same may
be reduced or terminated from time to time) and (y) the
average Revolving Commitment Usage during such Fiscal Quarter.
For any period greater than or less than three months, such
payments shall be prorated appropriately. In the event of any
involuntary cancellation or termination of the Revolving
Commitments, the Borrower shall thereupon pay all accrued fees
payable hereunder.
ARTICLE II
GENERAL PROVISIONS
2.1. Integration: Entire Agreement. The Amendment is an amendment of
the Credit Agreement pursuant to Section 9.3.1. of the Credit Agreement. Upon
execution and delivery of this Amendment by all parties hereto, the Credit
Agreement shall be modified and amended in accordance with this Amendment, and
all the terms and conditions of both shall be read together as though they
constitute one instrument, except that, in the case of conflict, the provisions
of this Amendment will prevail. The Credit Agreement, as amended by this
Amendment, together with the other Loan Documents, is intended by the parties as
the final expression their agreement regarding the subject matter hereof and as
a complete and exclusive statement of the terms and conditions of such
agreement. The Credit Agreement, as amended hereby, and each of the Loan
Documents, remain in full force and effect and all amounts payable by Borrower
thereunder are payable without defense, offset or counterclaim of any kind
whatsoever.
2.2. Benefits of Amendment. The terms and provisions of this Amendment
shall be binding upon and inure to the benefit of the parties hereto and their
respect successors and assigns to the extent contemplated by the Credit
Agreement.
2.3. Interpretation. The headings used in this Amendment are for
convenience of reference only and shall not affect the construction hereof.
2.4. Execution in Counterparts. This Amendment may be executed in any
number of counterparts, each of which counterparts, when so executed and
delivered, shall be deemed to be
2
<PAGE> 3
an original and all of which counterparts, taken together, shall constitute but
one and the same Amendment. This Amendment shall become effective as of the date
set forth above upon the execution of a counterpart hereof by each of the
parties hereto. Faxed signatures of this Amendment shall be binding for all
purposes.
2.5. Severability. If any provision of this Amendment shall be held to
be invalid, illegal or unenforceable under Applicable Law in any jurisdiction,
such provision shall be ineffective only to the extent of such invalidity,
illegality or unenforceability, which shall not affect any other provisions
hereof or the validity, legality and enforceability of such provision in any
other jurisdiction.
2.6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA (OTHER THAN CHOICE OF
LAW RULES THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF ANY OTHER
JURISDICTION).
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered as of the date first set forth above.
BORROWER:
IRVINE APARTMENT COMMUNITIES, L.P.
A DELAWARE LIMITED PARTNERSHIP
BY: IRVINE APARTMENT COMMUNITIES, INC.,
A MARYLAND CORPORATION,
GENERAL PARTNER
By: /s/ Tyler H. Rose
---------------------------------
Name: Tyler H. Rose
-------------------------------
Title: Senior Vice President
------------------------------
By: /s/ James E. Mead
---------------------------------
Name: James E. Mead
-------------------------------
Title: Senior Vice President
and Treasurer
------------------------------
CO-AGENTS:
WELLS FARGO BANK, N.A.
By: /s/ Debra Autry
-----------------------------------------------
Name: Debra Autry
---------------------------------------------
Title: Vice President
---------------------------------------------
3
<PAGE> 4
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By: /s/ Gregory R. Andrews
------------------------------------------
Name: Gregory R. Andrews
----------------------------------------
Title: Vice President
---------------------------------------
LENDERS:
WELLS FARGO BANK, N.A., A NATIONAL BANKING
ASSOCIATION
By: /s/ Kristin Miller
------------------------------------------
Name: Kristin Miller
----------------------------------------
Title: Asst. Vice President
---------------------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, A NATIONAL BANKING ASSOCIATION
By: /s/ Gregory R. Andrews
------------------------------------------
Name: Gregory R. Andrews
----------------------------------------
Title: Vice President
---------------------------------------
FIRST NATIONAL BANK OF BOSTON, A NATIONAL
BANKING ASSOCIATION
By: /s/ William F. Hipp
------------------------------------------
Name: William F. Hipp
----------------------------------------
Title: Division Executive
---------------------------------------
FIRST BANK NATIONAL ASSOCIATION, A NATIONAL
BANKING ASSOCIATION
By: /s/ Stephen P. Bailey
------------------------------------------
Name: Stephen P. Bailey
----------------------------------------
Title: Vice President
---------------------------------------
4
<PAGE> 5
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, A NEW
YORK CORPORATION
By: /s/ Timothy V. O'Donovan
------------------------------------------
Name: Timothy V. O'Donovan
----------------------------------------
Title: Vice President
---------------------------------------
5
<PAGE> 1
Exhibit 10.11.2
AMENDMENT NO. 2 TO
REVOLVING CREDIT AGREEMENT
THIS AMENDMENT NO. 2 dated as of August 15, 1996 (this "Amendment")
between Irvine Apartment Communities, L.P., a Delaware limited partnership (the
"Borrower"), the Lenders signatory hereto, Wells Fargo Bank. N.A. (the "Managing
Agent") and Bank of America National Trust and Savings Association (the
"Administrative Agent"), as agents and representatives for the Lenders, to the
Revolving Credit Agreement dated as of November 30, 1995 between the Borrower,
the Lenders, the Managing Agent and the Administrative Agent, as amended by
Amendment No. 1 to the Revolving Credit Agreement dated as of July 1, 1996 (as
amended, the "Credit Agreement"). Capitalized terms not otherwise defined herein
shall have the meanings ascribed to them in the Credit Agreement.
WHEREAS, the Borrower, the Lenders, the Managing Agent and the
Administrative Agent have agreed to amend the Credit Agreement as set forth
herein.
NOW, THEREFORE, the parties hereto agree:
ARTICLE I
AMENDMENTS TO THE CREDIT AGREEMENT
1.1. Deletion of Section 5.10. Section 5.10 of the Credit Agreement is
hereby deleted in its entirety and replaced with the words "INTENTIONALLY
OMITTED."
1.2 Addition of Section 6.4.11. A new Section 6.4.11 is added to the
Credit Agreement to read in its entirety as follows:
6.4.11. CONSTRUCTION IN PROCESS. The value of all construction in
process of the Borrower as of the end of any Fiscal Quarter,
calculated at the lower of cost or fair market value (in each case
determined in accordance with GAAP) shall not exceed 20% of Gross
Asset Value for such Fiscal Quarter.
1.3 Amendment to Section 6.2.3. Section 6.2.3 of the Credit Agreement
is hereby amended and restated to read in its entirety as follows:
6.2.3. Existing apartment projects or land upon which the Borrower
plans to develop apartment projects;
1.4 Amendment to Section 6.10. Section 6.10 of the Credit Agreement is
hereby amended and restated to read in its entirety as follows:
6.10. No Borrower Party shall engage in any material acquisition,
merger, formation, investment in any partnership/joint
venture/Subsidiary, asset purchases, or transfer of assets without
the prior written approval of
<PAGE> 2
the Majority Lenders. For purposes of this Section 6.10,
material is defined as any transaction in which the obligation
of a Borrower Party equals or exceeds Five Million Dollars
($5,000,000) or any transaction which is not incidental to the
ownership, construction and operation of apartment communities
of the Borrower. Notwithstanding the foregoing, (i) Borrower
may purchase Real Property without consent of the Majority
Lenders; and (ii) the Guarantor may reincorporate in any State
of the United States, by merger with and into a wholly owned
subsidiary formed solely for the purpose of reincorporation
which, prior to such merger, conducts no business and has no
assets or liabilities; provided, however, that in connection
with any such reincorporation, the Guarantor or its successor
shall deliver or cause to be delivered to the Lender Parties
such documents and instruments as the Co-Agents may reasonably
request in form and substance acceptable to the Co-Agents in
their reasonable judgment, including without limitation a
reaffirmation or re-execution of the Guaranty, certified
copies of all organizational documents, agreements and plans
of merger, and certificates issued by Governmental
Authorities, evidence that the partnership agreement of the
Borrower does not require consent to such transaction or that
such consent has been obtained, evidence that the partnership
of the Borrower remains in full force and effect
notwithstanding such merger, and legal opinions regarding the
authorization, execution and delivery of any new Guaranty and
the continued enforceability of the Loan Documents.
ARTICLE II
GENERAL PROVISIONS
2.1. Integration: Entire Agreement. The Amendment is an amendment
of the Credit Agreement pursuant to Section 9.3.1. of the Credit Agreement. Upon
execution and delivery of this Amendment by all parties hereto, the Credit
Agreement shall be modified and amended in accordance with this Amendment, and
all the terms and conditions of both shall be read together as though they
constitute one instrument, except that, in the case of conflict, the provisions
of this Amendment will prevail. The Credit Agreement, as amended by this
Amendment, together with the other Loan Documents, is intended by the parties as
the final expression their agreement regarding the subject matter hereof and as
a complete and exclusive statement of the terms and conditions of such
agreement. The Credit Agreement, as amended hereby, and each of the Loan
Documents, remain in full force and effect and all amounts payable by Borrower
thereunder are payable without defense, offset or counterclaim of any kind
whatsoever.
2.2. Benefits of Amendment. The terms and provisions of this
Amendment shall be binding upon and inure to the benefit of the parties hereto
and their respect successors and assigns to the extent contemplated by the
Credit Agreement.
2.3. Interpretation. The headings used in this Amendment are for
convenience of reference only and shall not affect the construction hereof.
2
<PAGE> 3
2.4. Execution in Counterparts. This Amendment may be executed in any
number of counterparts, each of which counterparts, when so executed and
delivered, shall be deemed to be an original and all of which counterparts,
taken together, shall constitute but one and the same Amendment. This Amendment
shall become effective as of the date set forth above upon the execution of a
counterpart hereof by each of the parties hereto. Faxed signatures of this
Amendment shall be binding for all purposes.
2.5. Severability. If any provision of this Amendment shall be held to
be invalid, illegal or unenforceable under Applicable Law in any jurisdiction,
such provision shall be ineffective only to the extent of such invalidity,
illegality or unenforceability, which shall not affect any other provisions
hereof or the validity, legality and enforceability of such provision in any
other jurisdiction.
2.6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA (OTHER THAN CHOICE OF
LAW RULES THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF ANY OTHER
JURISDICTION).
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered as of the date first set forth above.
BORROWER:
IRVINE APARTMENT COMMUNITIES, L.P.
A DELAWARE LIMITED PARTNERSHIP
BY: IRVINE APARTMENT COMMUNITIES, INC.,
A MARYLAND CORPORATION,
GENERAL PARTNER
By: /s/ Richard E. Moran Jr.
---------------------------------
Name: Richard E. Moran Jr.
-------------------------------
Title: Executive Vice President and
Chief Financial Officer
------------------------------
By: /s/ Tyler H. Rose
---------------------------------
Name: Tyler H. Rose
-------------------------------
Title: Senior Vice President
------------------------------
CO-AGENTS:
WELLS FARGO BANK, N.A.
By: /s/ Debra L. Autry
----------------------------------------------
Name: Debra L. Autry
---------------------------------------------
Title: Vice President
--------------------------------------------
3
<PAGE> 4
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By: /s/ Elena B. Bennett
------------------------------------------
Name: Elena B. Bennett
----------------------------------------
Title: Vice President
---------------------------------------
LENDERS:
WELLS FARGO BANK, N.A., A NATIONAL BANKING
ASSOCIATION
By: /s/ Kristin Miller
------------------------------------------
Name: Kristin Miller
----------------------------------------
Title: Asst. Vice President
---------------------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, A NATIONAL BANKING ASSOCIATION
By: /s/ Elena B. Bennett
------------------------------------------
Name: Elena B. Bennett
----------------------------------------
Title: Vice President
---------------------------------------
FIRST NATIONAL BANK OF BOSTON, A NATIONAL
BANKING ASSOCIATION
By: /s/ William F. Hipp
------------------------------------------
Name: William F. Hipp
----------------------------------------
Title: Division Executive
---------------------------------------
FIRST BANK NATIONAL ASSOCIATION, A NATIONAL
BANKING ASSOCIATION
By: /s/ Stephen P. Bailey
------------------------------------------
Name: Stephen P. Bailey
----------------------------------------
Title: Vice President
---------------------------------------
4
<PAGE> 5
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, A NEW
YORK CORPORATION
By: /s/ Timothy V. O'Donovan
------------------------------------------
Name: Timothy V. O'Donovan
----------------------------------------
Title: Vice President
---------------------------------------
5
<PAGE> 1
Exhibit 10.11.3
AMENDMENT NO. 3 TO
REVOLVING CREDIT AGREEMENT
THIS AMENDMENT NO. 3 dated as of February 20, 1997 (this "Amendment")
between Irvine Apartment Communities, L.P., a Delaware limited partnership (the
"Borrower"), the Lenders signatory hereto, Wells Fargo Bank, N.A. (the "Managing
Agent") and Bank of America National Trust and Savings Association (the
"Administrative Agent"), as agents and representatives for the Lenders, to the
Revolving Credit Agreement dated as of November 30, 1995 between the Borrower,
the Lenders, the Managing Agent and the Administrative Agent, as amended by
Amendment No. 1 to the Revolving Credit Agreement dated as of July 1, 1996 and
by Amendment No. 2 to the Revolving Credit Agreement dated as of August 15, 1996
(as amended, the "Credit Agreement"). Capitalized terms not otherwise defined
herein shall have the meanings ascribed to them in the Credit Agreement.
WHEREAS, the Borrower, the Lenders, the Managing Agent and the
Administrative Agent have agreed to amend the Credit Agreement as set forth
herein.
NOW, THEREFORE, the parties hereto agree:
ARTICLE I
AMENDMENTS TO THE CREDIT AGREEMENT
1.1 Definition of Revolving Commitment. The definition of
Revolving Commitment is hereby deleted in its entirety and restated to read in
its entirety as follows:
"REVOLVING COMMITMENT" Means, with respect to each Lender, the
amount set forth for such Lender as its "Revolving Commitment"
on Schedule 1.1G, as amended from time to time, as such amount
may be reduced or terminated from time to time pursuant to the
terms hereof.
1.2 Definition of Term Commitment. The definition of Term
Commitment is hereby deleted in its entirety and restated to read in its
entirety as follows:
"TERM COMMITMENT" Means, with respect to each Lender, the
amount set forth for such Lender as its "Term Commitment" on
Schedule 1.1G, as amended from time to time, as such amount
may be reduced or terminated from time to time pursuant to the
terms hereof.
1.3 Definition of Availability. The definition of Availability is
hereby deleted in its entirety and restated to read in its entirety as follows:
"AVAILABILITY" means, on any date, the lesser of (i) an amount
equal to (A) Stabilized Asset Value as of the later of (1) the
end of the most recently concluded Fiscal Quarter for which
the Borrower is, as of such date of determination, required to
have reported to the Lenders pursuant to
<PAGE> 2
Section 5.1.8 hereof, and (2) the date of the most recent
Early Availability Report, divided by (B) the Availability
Ratio as of such date of determination, and (ii) $250,000,000.
Notwithstanding the foregoing, commencing on the date of
Amendment No. 3, Availability shall be calculated pursuant to
the Officers' Certificate delivered by the Borrower on the the
date of Amendment No. 3 until such time as Availability is
otherwise changed or modified under this Agreement.
1.4 Amended Schedule 1.1G. Schedule 1.1G to the Credit Agreement
is hereby deleted in its entirety and replaced with the Schedule 1.1G attached
hereto as Appendix A.
1.5 Section 4.2.3. The first sentence of Section 4.2.3 is hereby
deleted in its entirety and restated to read in its entirety as follows:
"As of the date of the Amendment No. 3 to this Agreement,
Guarantor owns 19,721,647 partnership units of the Borrower,
free and clear of any Liens."
1.6 Cover Page. The amount of "$175,000,000" set forth on the
cover page of the Credit Agreement is hereby amended to be "$250,000,000."
ARTICLE II
AMENDED NOTES
2.1 Amended Revolving Loan Notes. Concurrently with the execution
and delivery of this Amendment by the Borrower, the Borrower has executed and
delivered to each of the Lenders an amended Revolving Loan Note (each, an
"Amended Revolving Loan Note;" and collectively the "Amended Revolving Loan
Notes") in favor of such Lender in the form attached hereto as Appendix B.
Immediately upon delivery of such Amended Revolving Loan Note, the Revolving
Loan Note held by such Lender shall be deemed canceled without any further
action on the part of the Lender, all obligations thereunder shall be
terminated, and the Amended Revolving Loan Note shall thenceforth be the
Revolving Loan Note for all purposes under the Credit Agreement. The Lender
shall promptly thereafter conspicuously mark such Revolving Loan Note "canceled"
and return it to the Borrower.
2.2 Amended Swing Line Notes. Concurrently with the execution and
delivery of this Amendment by the Borrower, the Borrower has executed and
delivered to each of the Lenders an amended Swing Line Note (each, an "Amended
Swing Line Note;" collectively the "Amended Swing Line Notes;" and together with
the Amended Revolving Loan Notes the "Amended Notes") in favor of such Lender in
the form attached hereto as Appendix C. Immediately upon delivery of such
Amended Swing Line Note, the Swing Line Note held by such Lender shall be deemed
canceled without any further action on the part of the Lender, all obligations
thereunder shall be terminated, and the Amended Swing Line Note shall
thenceforth be the Swing Line Note for all purposes under the Credit Agreement.
The Lender shall promptly thereafter conspicuously mark such Swing Line Note
"canceled" and return it to the Borrower.
2
<PAGE> 3
ARTICLE III
MODIFICATION FEE
3.1 Modification Fee. In consideration for this Amendment, the Borrower
agrees to pay and has paid, receipt of which is hereby acknowledged, to the
Administrative Agent for the pro rata benefit of the Lenders, a modification fee
equal to one fifth of one percent (.20%) times Seventy-Five Million Dollars
($75,000,000), or One Hundred Fifty Thousand Dollars ($150,000).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lenders as follows:
4.1 Bring Down of Representations and Warranties. Except as set forth
on Schedule 1 attached hereto, all representations and warranties of the
Borrower Parties contained in the Credit Agreement and the other Loan Documents
to which the Borrower Parties are parties are true and correct in all material
respects as of the date hereof as if made on such date.
4.2 No Default. No Default or Event of Default exists on and as of the
date hereof or would result after giving effect to this Amendment.
4.3 Conditions Precedent. All of the conditions precedent set forth in
Section 3.2 of the Credit Agreement have been satisfied.
ARTICLE V
GENERAL PROVISIONS
5.1 Integration; Entire Agreement. This Amendment is an amendment of
the Credit Agreement pursuant to Section 9.3.1. of the Credit Agreement. Upon
execution and delivery of this Amendment by all parties hereto, of the Consent
of Guarantor by the Guarantor, and of the Amended Notes by the Borrower, the
Credit Agreement shall be modified and amended in accordance with this
Amendment, and all the terms and conditions of both shall be read together as
though they constitute one instrument, except that, in the case of conflict, the
provisions of this Amendment will prevail. The Credit Agreement, as amended by
this Amendment, together with the other Loan Documents, as amended, is intended
by the parties as the final expression of their agreement regarding the subject
matter hereof and as a complete and exclusive statement of the terms and
conditions of such agreement. The Credit Agreement, as amended hereby, and each
of the Loan Documents, as amended, remain in full force and effect and all
amounts payable by Borrower thereunder are payable without defense, offset or
counterclaim of any kind whatsoever.
5.2 Benefits of Amendment. The terms and provisions of this Amendment
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns to the extent contemplated by the Credit
Agreement.
5.3 Interpretation. The headings used in this Amendment are for the
convenience of reference only and shall not affect the construction hereof.
3
<PAGE> 4
5.4 Execution in Counterparts. This Amendment may be executed in any
number of counterparts, each of which counterparts, when so executed and
delivered, shall be deemed to be an original and all of which counterparts,
taken together, shall constitute but one and the same Amendment. This Amendment
shall become effective as of the date set forth above upon the execution of a
counterpart hereof by each of the parties hereto and upon the execution and
delivery of the original Amended Notes. Faxed signatures of this Amendment shall
be binding for all purposes.
5.6 Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA (OTHER THAN CHOICE OF
LAW RULES THAT WOULD REQUIRE THE APPLICATION OF LAWS OF ANY OTHER JURISDICTION).
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 3
to be executed and delivered as of the date first set forth above.
BORROWER:
IRVINE APARTMENT COMMUNITIES, L.P.
A DELAWARE LIMITED PARTNERSHIP
BY: IRVINE APARTMENT COMMUNITIES, INC.,
A MARYLAND CORPORATION,
GENERAL PARTNER
By: /s/ Tyler H. Rose
---------------------------------
Name: Tyler H. Rose
-------------------------------
Title: Senior Vice President and
Treasurer
------------------------------
By: /s/ James E. Mead
---------------------------------
Name: James E. Mead
-------------------------------
Title: Senior Vice President
and Chief Financial Officer
------------------------------
CO-AGENTS:
WELLS FARGO BANK, N.A.
By: /s/ Rita M. Swayne
-----------------------------------------------
Name: Rita M. Swayne
---------------------------------------------
Title: Sr. Loan Administrative Officer
---------------------------------------------
4
<PAGE> 5
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By: /s/ Elena B. Bennett
--------------------------------------------
Name: Elena B. Bennett
------------------------------------------
Title: Vice President
-------------------------------------------
LENDERS:
WELLS FARGO BANK, N.A.
By: /s/ Ann Fragen
--------------------------------------------
Name: Ann Fragen
------------------------------------------
Title: Assistant Vice President
-------------------------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, A NATIONAL BANKING ASSOCIATION
By: /s/ Elena B. Bennett
--------------------------------------------
Name: Elena B. Bennett
------------------------------------------
Title: Vice President
-------------------------------------------
THE FIRST NATIONAL BANK OF BOSTON, A NATIONAL
BANKING ASSOCIATION
By: /s/ Daniel Silbert
--------------------------------------------
Name: Daniel Silbert
------------------------------------------
Title: Assistant Vice President
-------------------------------------------
FIRST BANK NATIONAL ASSOCIATION, A NATIONAL
BANKING ASSOCIATION
By: /s/ Stephen P. Bailey
--------------------------------------------
Name: Stephen P. Bailey
------------------------------------------
Title: Vice President
-------------------------------------------
5
<PAGE> 6
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, A NEW
YORK CORPORATION
By: /s/ Carolyn W. Steffey
--------------------------------------------
Name: Carolyn W. Steffey
------------------------------------------
Title: Vice President
-------------------------------------------
6
<PAGE> 1
EXHIBIT 10.15
CONFIDENTIALITY AGREEMENT AND GENERAL RELEASE
This CONFIDENTIALITY AGREEMENT AND GENERAL RELEASE (hereafter
"Agreement") is made and entered into this 1st day of November, 1996, by and
between Irvine Apartment Communities ("Company") and Richard E. Moran, Jr.
(MORAN).
WHEREAS, MORAN was employed by the Company from December 8, 1993 to
December 1, 1996; and
WHEREAS, MORAN's active services for the Company will terminate on
December 1, 1996; and
WHEREAS, MORAN and the Company desire to resolve any and all claims
arising out of or related to MORAN's employment relationship with the Company,
or its termination;
NOW, THEREFORE, in consideration of the premises and mutual promises
contained in this Agreement, it is agreed as follows:
1. (a) The Company will provide MORAN with twelve monthly payments
of $22,500 commencing December, 1996 for consulting services provided to the
Company in accordance with the following terms and conditions:
(i) MORAN will provide consulting services as requested in
a professional and timely manner for a maximum of ten hours per month.
Such services will be similar in kind to the expertise MORAN provided to
the Company during the period of his employment.
(ii) In exchange for MORAN's continued adherence to the
commitments in subparagraph 1(a)(i) and paragraph 2, Company agrees to
pay MORAN the following amounts during the consulting period:
(1) $22,500 per month retainer, payable on or about
the first day of the month.
(2) Company will reimburse reasonable expenses
incurred by MORAN (telephone, travel, etc.) which are
necessarily incurred and approved in advance in the performance
of services requested by Company under this agreement.
(iii) Should MORAN breach his obligations in subparagraph
1(a)(i) and/or paragraph 2, payments under subparagraph 1(a)(ii) shall
stop in addition to any other legal or equitable remedies the Company
may pursue.
(b) Stock dividend equivalent payments for dividends paid the
third quarter of 1996 will be provided to MORAN in 1996 totaling approximately
$38,000.
(c) MORAN may exercise his vested stock options consistent with
the terms of his stock option award Agreements.
<PAGE> 2
Confidentiality Agreement and General Release Page 2
Richard E. Moran, Jr.
(d) MORAN's restricted stock awards shall vest and be paid
consistent with the terms of his restricted stock award Agreements.
(e) MORAN's group insurance coverage pursuant to the terms of
the Company's group insurance plans will be continued at the Company's expense
through December 31, 1996 at which time MORAN may continue such insurance if he
desires in accordance with the provisions of such plans. The Company will
provide MORAN with twelve monthly payments of $2,500 commencing January, 1997 in
order to assist MORAN with purchasing his own benefits.
(f) All earned and unused vacation and personal holiday as of
December 1, 1996 will be paid out with MORAN's final payroll check.
(g) The Company will provide Moran with executive-level
professional outplacement services at a cost not to exceed $15,000.
2. MORAN promises not to disparage the Company or its related entities
and not to use or disclose any confidential information or trade secrets which
he learned while employed by the Company, and further promises not to disclose
to anyone (other than his spouse and tax/legal advisor) the terms of this
Agreement or the fact or amount of any payment made by the Company in
settlement of MORAN's claims.
3. In exchange for the payments and benefits provided in Paragraph 1,
MORAN hereby unconditionally releases and forever discharges the Company and
its related or successor companies, its owners, directors, officers, employees,
representatives and agents, from any and all claims, (including, but not
limited to, any claims under any state or federal statutes), liabilities,
demands, losses and expenses (including attorneys' fees) of any nature
whatsoever, known or unknown, including, but not limited to, employment
relationship or termination, which he now has or may have in the future based
on any act or omission which occurred prior to the effective date of this
agreement. MORAN expressly waives and relinquishes all rights and benefits
afforded by Section 1542 of the California Civil Code, and does so
understanding and acknowledging the significance of such specific waiver of
section 1542. Section 1542 states as follows:
"A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by his must have materially affected his
settlement with the debtor."
4. This Agreement shall not in any way be construed as an admission by
the Company of any liability or wrongdoing on the part of the Company, or that
MORAN has any valid claims or rights whatsoever against the Company.
5. This agreement contains all of the terms, promises,
representations, and understandings made between the parties. MORAN agrees that
no promises, representations, or inducements have been made to him other than
those which are expressly set forth herein. MORAN acknowledges and agrees that
he has had sufficient opportunity to fully and privately review this document
prior to its execution, and has had ample opportunity to consult an attorney in
connection therewith, if he so desired.
<PAGE> 3
Confidentiality Agreement and General Release Page 3
Richard E. Moran, Jr.
6. This Agreement will be interpreted in accordance with the laws of
the State of California. Any dispute arising hereafter between the parties
regarding this Agreement or MORAN's employment or otherwise shall be resolved by
an experienced employment law arbitrator selected in accordance with the
procedures of the Judicial Arbitration and Mediation Services/Endispute. Should
MORAN pursue any other legal or administrative action, the Company shall be
entitled to recover all costs, expenses, and attorney's fees it incurs as a
result of such action.
7. In exchange for material portions of the additional pay and
benefits provided in paragraph 1 and in accordance with the Older Workers
Benefit Protection Act, MORAN hereby knowingly and voluntarily waives and
releases all rights and claims, known and unknown, arising under the Age
Discrimination In Employment Act of 1967, as amended, which he might otherwise
have had against the Company or their related entities, officers, directors,
managers or employees regarding any aspect of his employment or any other act or
omission up to and including the effective date of this agreement.
MORAN is hereby advised (a) to consult with an attorney prior to signing this
Agreement and (b) that he has 21 days in which to consider and accept this
Agreement by signing and returning this Agreement to the Vice President of
Human Resources of The Irvine Company. In addition, MORAN has a period of 7
days following his signing of this Agreement in which he may revoke the
Agreement. If MORAN does not advise the Company (by writing received by the
Vice President of Human Resources of The Irvine Company within such 7 day
period) of his intent to revoke the Agreement, the Agreement will become
effective and enforceable upon the expiration of the 7 days.
DATED: November 1, 1996 By: /s/ RICHARD E. MORAN, JR.
------------------------------
Richard E. Moran, Jr.
Witness of Voluntary Signature
DATED: November 1, 1996 By: /s/ ANN R. NORMAN
------------------------------
Ann R. Norman
Witness's Signature
IRVINE APARTMENT COMMUNITIES
DATED: November 1, 1996 By: /s/ DONALD L. BREN
------------------------------
Donald L. Bren
DATED: November 1, 1996 By: /s/ MICHAEL D. MCKEE
------------------------------
Michael D. Mckee
Director
<PAGE> 1
EXHIBIT 10.16
CONSULTING AGREEMENT AND GENERAL RELEASE
This CONSULTING AGREEMENT AND GENERAL RELEASE (hereafter "Agreement") is made
and entered into this 7th day of February, 1997, by and between Irvine Apartment
Communities ("Company") and Steven P. Albert ("ALBERT").
WHEREAS, ALBERT was employed by the Company from May 1, 1995 to February 7,
1997; and
WHEREAS, ALBERT'S active services with the Company will terminate on February
7, 1997; and
WHEREAS, ALBERT and the Company desire to resolve any and all claims arising
out of or related to ALBERT's employment relationship with the Company, or its
termination; and
WHEREAS, the Company desires to retain ALBERT's services on a consulting basis
for one year;
NOW, THEREFORE, in consideration of the premises and mutual promises contained
in this Agreement, it is agreed as follows:
1. The Company will pay SGA Investment Corporation ("SGA") a monthly retainer
for consulting services provided by ALBERT to the Company for the twelve
months beginning February, 1997 in accordance with the following terms and
conditions.
(a) ALBERT will provide consulting services as reasonably requested in a
professional and timely manner for a maximum of five hours per month
during normal business hours and upon reasonable notice. Such
consulting services will be similar in kind to the expertise ALBERT
provided to the Company during the period of his employment.
(b) In addition, ALBERT agrees, upon reasonable advance notice, to
cooperate with the Company regarding the investigation or the
defense of any legal or business issues or claims which may arise,
and which relate to the time ALBERT was employed by the Company and
of which ALBERT has knowledge, or is reasonably believed to have
knowledge. To the extent such activities require time in excess of
the five hours per month stipulated herein, SGA will be paid for
additional consulting services at the rate of $300 per hour.
(c) In exchange for ALBERT's commitments in subparagraph 1(a) and
paragraph 3, the Company agrees to pay to SGA the following amounts
during the consulting period:
(i) $22,917 per month retainer, payable on our about the first
day of each month.
(ii) In addition, the Company will reimburse SGA for reasonable
expenses incurred by ALBERT or SGA (telephone, travel,
etc.) which are necessarily incurred and approved in
advance in the performance of services requested by the
Company under this Agreement.
(iii) Should ALBERT breach his obligations in subparagraph I(a)
and/or paragraph 3, the Company shall have the right to
terminate the consulting relationship and stop making
retainer payments under paragraph 1(c)(i), in addition
to any other legal or equitable remedies the Company may
pursue.
1
<PAGE> 2
2. ALBERT will be entitled to the following payments and benefits:
(a) Stock dividend equivalent payments for dividends paid to shareholders in
February 1997 for the fourth quarter of 1996 will be paid to ALBERT
consistent with his Performance Unit Award Agreement, notwithstanding
the fact that ALBERT's employment terminated prior to the record date
for payment of said dividends.
(b) ALBERT may exercise his vested stock options consistent with the terms
of his Non-qualified Stock Option Agreement.
(c) ALBERT's restricted stock awards shall vest and be paid consistent with
the terms of his Performance Unit Award Agreement.
(d) ALBERT's group insurance coverage pursuant to the terms of the Company's
group insurance plans will be continued at the Company's expense through
February 28, 1997 at which time ALBERT may continue such insurance if he
desires in accordance with the provisions of such plans. The Company
will provide ALBERT with twelve monthly payments of $2,500 commencing
February, 1997 in order to assist ALBERT with purchasing his own
benefits.
(e) All earned and unused vacation and personal holiday time as of February
7, 1997 will be paid out with ALBERT's final payroll check.
(f) ALBERT will be paid a severance payment of $141,000, less legally
required deductions, within 10 days following ALBERT's execution of this
Agreement and its return to the Vice President of Human Resources of the
Irvine Company.
3. ALBERT promises not to make any statements intended to damage the reputation
of the Company or its related entities and not to use or disclose any
confidential information or trade secrets which he learned while employed by
the Company, and further promises not to disclose to anyone (other than his
spouse and tax/legal advisor, or as required by law) the terms of this
Agreement or the fact or amount of any payment made by the Company pursuant
to this Agreement.
4. In exchange for the payments and benefits provided in paragraph 2, ALBERT
hereby unconditionally releases and forever discharges the Company and its
related or successor companies, its owners, directors, officers, employees,
representatives, and agents, from any and all claims, (including but not
limited to any claims under any state or federal statutes), liabilities,
demands, losses and expenses (including attorneys' fees) of any nature
whatsoever, known or unknown, including, but not limited to, employment
relationship or termination, which he now has or may have in the future
based on any act or omission which occurred prior to the effective date of
this Agreement. In addition, the Company similarly releases all of its
claims against ALBERT. Each party expressly waives and relinquishes all
rights and benefits afforded by Section 1542 of the California Civil Code,
and does so understanding and acknowledging the significance of such
specific waiver of Section 1542. Section 1542 states as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
2
<PAGE> 3
Notwithstanding the above, nothing in this Agreement is intended to alter
ALBERT's right to defense and/or indemnification as may be provided by
applicable laws.
5. This Agreement shall not in any way be construed as an admission by either
party of any liability or wrongdoing on the part of the other, or that
either party has any valid claims or rights whatsoever against the other.
6. This Agreement contains all of the terms, promises, representations, and the
understandings made between the parties. ALBERT agrees that no promises,
representations, or inducements have been made to him other than those which
are expressly set forth herein. ALBERT acknowledges and agrees that he has
had sufficient opportunity to fully and privately review this document prior
to its execution, and has had ample opportunity to consult an attorney in
connection therewith, if he so desired.
7. This Agreement will be interpreted in accordance with the laws of the State
of California. Any dispute arising hereafter between the parties regarding
this Agreement, or breach thereof, or ALBERT's employment or otherwise shall
be resolved by an experienced employment law arbitrator selected in
accordance with the procedures of the Judicial Arbitration and Mediation
Services/Endispute. At the arbitrators discretion, the prevailing party in
any arbitration or mediation hereunder may be entitled to recover reasonable
legal fees and costs. should either party pursue any other legal or
administrative action, the other party shall be entitled to recover all
costs, expenses, and attorneys' fees it incurs as a result of such action.
8. In exchange for material portions of the additional pay and benefits
provided in paragraph 2 and in accordance with the Older Workers Benefit
Protection Act, ALBERT hereby knowingly and voluntarily waives and releases
all rights and claims, known and unknown, arising under the Age
Discrimination In Employment Act of 1967, as amended, which he might
otherwise have had against the Company or their related entities, officers,
directors, managers, or employees regarding any aspect of his employment or
any other act or omission up to and including the effective date of this
Agreement.
ALBERT is hereby advised (a) to consult with an attorney prior to signing this
Agreement and (b) that he has 21 days in which to consider and accept this
Agreement by signing and returning this Agreement to the Vice President of Human
Resources of the Irvine Company. In addition, ALBERT has a period of 7 days
following his signing of this Agreement in which he may revoke the Agreement. If
ALBERT does not advise the Company (by writing received by the Vice President of
Human Resources of the Irvine Company) within such 7 day period of his intent to
revoke the Agreement, the Agreement will become effective and enforceable upon
the expiration of the 7 days.
DATED: February 13, 1997 By: /s/ STEVEN P. ALBERT
------------------------------
Steven P. Albert
Witness of voluntary signature
DATED: February 13, 1997 By: /s/ SUE BUTLER
------------------------------
Sue Butler
Witness' Signature
IRVINE APARTMENT COMMUNITIES
DATED: February __, 1997 By: /s/ DONALD L. BREN
------------------------------
Donald L. Bren
Chairman
DATED: February 13, 1997 By: /s/ MICHAEL D. MCKEE
------------------------------
Michael D. McKee
Director
3
<PAGE> 1
EXHIBIT 13
FINANCIAL REVIEW
Selected Financial Information 17
Management's Discussion and Analysis 18
Financial Statements 25
Notes to Financial Statements 29
Report of Independent Auditors 38
Operating Information 39
Directors and Officers 40
Shareholder Information IBC
<PAGE> 2
IRVINE APARTMENT COMMUNITIES, INC.
SELECTED FINANCIAL INFORMATION(1)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
(in thousands, except percentages,
per share and property information) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING INFORMATION
Total revenues $ 158,698 $ 136,168 $ 130,236 $ 124,820 $ 121,194
Income (loss) before extraordinary item and
minority/predecessor interest in income (loss) $ 41,192 $ 25,056 $ 12,279 $ (387) $ (1,600)
Net income $ 18,746 $ 8,465 $ 7,273 $ 115
Income after minority interest in income and
before extraordinary item per share $ 1.06 $ 0.84 $ 0.62 $ 0.04
Net income per share $ 1.06 $ 0.61 $ 0.62 $ 0.01
Cash distributions per share $ 1.44 $ 1.39 $ 1.11
Apartment units (at end of period) 13,656 12,776 11,358 11,334 10,952
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED STABILIZED
PROPERTY INFORMATION(2)
Total properties (at end of period) 48 43 43 42 42
Average units 12,139 11,334 11,334 10,799 10,446
Average physical occupancy 94.9% 94.6% 95.6% 96.3% 96.2%
Average monthly rent per unit(3) $ 1,025 $ 996 $ 981 $ 963 $ 950
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED BALANCE SHEET INFORMATION
AT DECEMBER 31,
Total assets $ 900,998 $ 853,230 $ 757,240 $ 740,120 $ 654,694
Total long-term debt $ 553,064 $ 563,286 $ 540,689 $ 513,943 $ 555,491
Shareholders' equity and minority interest/
predecessor's equity $ 320,344 $ 264,566 $ 191,049 $ 212,344 $ 90,274
==================================================================================================================================
</TABLE>
1 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 Consolidated Financial
Statements.
2 A property is considered stabilized at the earlier of one year after
completion of construction or when it achieves 95% occupancy.
3 Average monthly rent per unit is calculated by dividing average rental
revenue per unit by average economic occupancy.
17
<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 Financial Statements of Irvine Apartment
Communities, Inc. and the Notes thereto.
OVERVIEW
Irvine Apartment Communities, Inc. (the "Company"), a Maryland corporation,
operates as a real estate investment trust ("REIT") under the Internal Revenue
code of 1986, as amended. At December 31, 1996, 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"). At December 31, 1996, The Irvine Company (the
"Limited Partner") 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 and beginning
in 1997, other locations in California. As of December 31, 1996 the Operating
Partnership owned and operated 52 properties containing 13,656 operating
apartment units and had 864 units 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 Financial Statements).
RESULTS OF OPERATIONS
The Company's income before extraordinary item and minority interest was $41.2
million in 1996, up from $25.1 million in 1995 and $12.3 million in 1994. The
Company's financial results improved in 1996 due to the contribution of newly
delivered rental units from its development program, cost reductions and an
increase in revenues within its stabilized portfolio achieved primarily through
higher occupancy and higher rental rates. In 1995, financial results improved
largely as a result of the contribution of newly delivered rental units and
operating cost reductions within the Company's stabilized portfolio.
REVENUE AND EXPENSE DATA
<TABLE>
<CAPTION>
Years Ended December 31,
(dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMUNITIES STABILIZED
MORE THAN TWO YEARS
Number of communities 43 43
Number of units at end of period 11,334 11,334
Operating revenues $133,287 $130,082
Property expenses $ 29,466 $ 30,325
Real estate taxes $ 10,799 $ 11,256
Property management fees $ 3,851 $ 3,733
Depreciation and amortization $ 20,757 $ 21,237
COMMUNITIES STABILIZED
LESS THAN TWO YEARS*
Number of communities 5 5
Number of units at end of period 2,207 1,442
Operating revenues $ 24,656 $ 5,675
Property expenses $ 4,351 $ 1,436
Real estate taxes $ 2,693 $ 746
Property management fees $ 647 $ 160
Depreciation and amortization $ 6,304 $ 1,858
LEASE-UP COMMUNITIES
Number of communities 2
Number of units at end of period 115
Operating revenues $ 144
Property expenses $ 42
Real estate taxes $ 4
Property management fees $ 4
Depreciation and amortization $ 26
================================================================================
</TABLE>
*Represents five communities that began leasing in 1995 and reached stabilized
occupancy (95%) at various dates in 1996.
OPERATING REVENUES (rental and other income) increased by 16.4% to $158.1
million in 1996, up from $135.8 million in 1995. Operating revenues in 1995 had
increased by 5.3% from $128.9 million in 1994. Operating revenues rose in 1996
as a result of higher occupancy and rental rates, and the contribution of newly
delivered rental units from five properties which achieved stabilization during
1996. In total, these new units added $24.7 million to operating revenues in
1996, compared to $5.7 million in 1995. Within communities
18
<PAGE> 4
IRVINE APARTMENT COMMUNITIES, INC.
stabilized more than two years, operating revenues increased 2.5% in 1996,
primarily due to increases in rental rates and an increase in average physical
occupancy to 95.0% from 94.6% in 1995. Average monthly rental rates in these
communities increased 1.9% to $1,015 in 1996, from $996 in 1995.
Operating revenues improved in 1995 from the prior year largely as a result
of the contribution of newly delivered rental units. In total, these new units
added $5.7 million to operating revenues in 1995. They made virtually no
contribution in 1994. Within communities stabilized more than two years,
operating revenues increased less than 1% in 1995, as modest increases in rental
rates were largely offset by a decline in average physical occupancy to 94.6%
from 95.6% in 1994. Average monthly rental rates increased 1.5% to $996 in 1995,
from $981 in 1994.
PROPERTY EXPENSES increased by 6.6% to $33.9 million in 1996 from $31.8 million
in 1995. These expenses had decreased in 1995 by 4.1% from $33.1 million in
1994. The increase in 1996 reflects the added expenses of newly delivered rental
units from five properties which achieved stabilization during 1996. Property
expenses within communities stabilized more than two years decreased 2.8% to
$29.5 million in 1996 from $30.3 million in 1995. Over the past several 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 customer service and property
maintenance operations. In 1996, average monthly property expenses within
communities stabilized more than two years decreased to $217 per unit from $223
in 1995 and $243 in 1994. Properties stabilized less than two years added $4.4
million to property expenses in 1996 and $1.4 million in 1995.
REAL ESTATE TAXES totaled $13.5 million in 1996, $12.0 million in 1995, and
$11.8 million in 1994. Taxes increased in 1996 due to the addition of rental
units, partially offset by a reduction in assessed values. In 1995, the
Company's real estate taxes increased from the 1994 level due to the addition of
rental units.
PROPERTY MANAGEMENT FEES increased to $4.5 million in 1996 from $3.9 million in
1995 and $3.8 million in 1994. Management fees increased in 1996 and 1995 due to
the addition of rental units and an increase in revenue from communities
stabilized more than two years.
NET INTEREST EXPENSE increased to $29.5 million in 1996 from $25.9 million in
1995 and $26.8 million in 1994. The increase in 1996 net interest expense was
due to new properties being placed into service. The Company capitalizes
interest on projects actively under development using qualifying asset balances
and applicable weighted average interest rates. Capitalized interest totaled
$3.2 million in 1996 compared to $6.8 million in 1995 and $1.3 million in 1994.
In 1995, net interest expense decreased $0.9 million from the prior year
primarily due to a higher level of capitalized interest resulting from increased
construction activity, offset by higher interest incurred as a result of the
Company's May 1995 refinancing of tax-exempt mortgage debt and increased
borrowings under bank lines of credit. Total interest incurred was $32.7 million
in 1996 and 1995, and $27.6 million in 1994.
INTEREST INCOME totaled $0.6 million in 1996, $0.4 million in 1995 and $1.3
million in 1994. The changes in interest income reflect changes in the Company's
average cash balances.
AMORTIZATION OF DEFERRED FINANCING COSTS decreased by 69.1% to $2.6 million in
1996 from $8.5 million in 1995 and $15.9 million in 1994. The $5.9 million
decrease in 1996 and $7.4 million decrease in 1995 were largely due to the
elimination of deferred financing costs through an extraordinary charge of $23.4
million related to the refinancing of tax-exempt mortgage debt in May 1995.
19
<PAGE> 5
IRVINE APARTMENT COMMUNITIES, INC.
DEPRECIATION AND AMORTIZATION EXPENSE increased by 17.7% to $27.2 million in
1996, up from $23.1 million in 1995. These expenses had increased in 1995 by
9.9% from $21.1 million in 1994. The increases in both years reflect the
completion and delivery of newly developed rental units.
GENERAL AND ADMINISTRATIVE EXPENSE increased to $6.3 million in 1996, up from
$5.9 million in 1995. General and administrative expense had increased in 1995
from $5.4 million in 1994. These increases were largely the result of increased
staffing levels.
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 potential future 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. During 1996 the Operating
Partnership had a $175 million unsecured credit facility, used primarily to
finance an ongoing rental property development program. As of December 31, 1996,
$159 million was available under the credit facility. On July 1, 1996, the
credit facility was amended to reduce the interest rate to Eurodollar plus 1.5%.
On February 20, 1997, the credit facility was increased to $250 million.
ADDITIONAL EQUITY: On July 3, 1996 the Company sold, pursuant to its shelf
registration statement, 1.49 million shares of common stock at $20.125 per
share. Concurrently, The Irvine Company, pursuant to its rights under the
Operating Partnership Agreement, purchased 1.49 million additional limited
partnership units at $20.125 per unit which are exchangeable for common stock on
a one for one basis, subject to adjustment and certain limitations. The proceeds
from the two transactions totaled $60 million and were used to repay $43 million
of indebtedness outstanding under the revolving line of credit. Availability
under the shelf registration statement was approximately $130.7 million as of
December 31, 1996.
On February 20, 1997 the Company sold, pursuant to its shelf registration
statement, 1.15 million shares of common stock at $27.50 per share.
Concurrently, The Irvine Company, pursuant to its rights under the Operating
Partnership Agreement, purchased 1.39 million additional limited partnership
units at $26.06 per unit (which is equal to the public offering price of the
common stock less an amount equivalent to the underwriting discount) which are
exchangeable for common stock on a one for one basis, subject to adjustment and
certain limitations. The proceeds from the two transactions totaled $66 million
and were used to repay all indebtedness outstanding under the revolving line of
credit, and will be used for general corporate purposes, including ongoing
development activities on and off the Irvine Ranch. After the above transaction,
availability under the shelf registration statement is approximately $99
million.
20
<PAGE> 6
IRVINE APARTMENT COMMUNITIES, INC.
DEBT STRUCTURE
<TABLE>
<CAPTION>
Balance at Weighted
December Average
(in millions) 31, 1996 Interest Rate
- -------------------------------------------------------------------
<S> <C> <C>
Fixed rate debt
Conventional mortgage financings $ 134.8 6.45%
Mortgage notes payable to
The Irvine Company 51.2 5.75%
Tax-exempt mortgage
bond financings 329.2 5.82%
Tax-exempt assessment
district debt 5.6 6.27%
- -------------------------------------------------------------------
Total fixed rate debt 520.8 5.98%
- -------------------------------------------------------------------
Variable rate debt
Line of credit 16.0 7.50%
Tax-exempt assessment
district debt 16.3 3.95%
- -------------------------------------------------------------------
Total variable rate debt 32.3 5.71%
===================================================================
Total debt $ 553.1 5.97%
===================================================================
</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 Company's December 1993
initial public offering through interest rate buy-down agreements that are
scheduled to expire at various dates prior to loan maturity. (See Note 3 to the
Consolidated Financial Statements.) The weighted average effective interest rate
on the Company's debt, including non-cash charges for amortization of deferred
financing costs, was 6.44% at December 31, 1996. 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 average interest rate on the tax-exempt
mortgage bond financings, after giving effect to the swap agreements and
including all fees, was 5.77% in 1996.
OPERATING ACTIVITIES: Cash flow provided by operating activities was $73.0
million, $55.4 million and $49.8 million for 1996, 1995 and 1994, respectively.
Cash provided by operating activities increased in 1996 and 1995 compared to
prior years primarily due to higher revenues and lower operating costs.
INVESTING ACTIVITIES: Cash flow used in investing activities was $66.6 million,
$128.2 million and $50.9 million in 1996, 1995 and 1994, respectively. Changes
in levels of cash flows used in investing activities for each year reflect the
changing levels of real estate development programs of the Company. (See Capital
Expenditures.)
FINANCING ACTIVITIES: Cash flow (used in) provided by financing activities was
$(7.6) million, $73.7 million and $(23.3) million in 1996, 1995 and 1994,
respectively. Among the factors affecting these cash flows in 1996, the Company
received $60.0 million for the sale of common stock and partnership units,
compared to $109.3 million in 1995. These proceeds were used to pay down
borrowings from the line of credit. In 1995, the Company received $8.3 million
of additional proceeds from the refinancing of tax-exempt debt, while incurring
loan origination costs of $9.2 million and net borrowings from lines of credit
of $15.7 million. Distributions paid in 1996 increased to $56.1 million from
$44.8 million in 1995. In 1994, cash flows used in financing activities included
$33.6 million in distributions paid, partially offset by new borrowings in
excess of principal reductions of about $11.1 million and net borrowings from
lines of credit of $6.3 million.
DEFERRED FINANCING COSTS
<TABLE>
<CAPTION>
Balance Weighted
December Average
(dollars in millions) 31, 1996 Remaining Term
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest rate buy-downs on
conventional mortgage
financings $ 10.1 9.1 yrs
Loan origination costs and other 10.1 26.0 yrs
- --------------------------------------------------------------------------------
Total $ 20.2 17.6 yrs
================================================================================
</TABLE>
21
<PAGE> 7
IRVINE APARTMENT COMMUNITIES, INC.
CAPITAL EXPENDITURES
CAPITAL EXPENDITURES ON NEW DEVELOPMENT: The Company's major cash requirements
in 1997 are expected to be for the construction of new apartment communities and
possibly for acquisitions of apartment communities. In 1995 and 1996, the
Company began construction on four additional apartment communities (Baypointe,
Santa Maria, The Colony and Santa Rosa II) that will require total expenditures
of approximately $127.2 million, of which $69.4 million had been incurred at
December 31, 1996. Nearly all of the remaining $57.8 million will be incurred in
1997. In February 1997 the Company started construction on one community (Rancho
Santa Fe) which is expected to cost approximately $39 million. Funding for these
developments is expected to come from the $250 million unsecured revolving
credit facility and the $66 million of proceeds from the February 1997 offering
transactions. In addition the Company may issue other debt or equity securities,
as discussed in the Liquidity section.
LEASE-UP INFORMATION
Status at December 31, 1996
<TABLE>
<CAPTION>
Units
Leased as
Percentage a Percentage
Units Percentage Units of Delivered Units of Units
Apartment Community Total Units Delivered Delivered Occupied Units Occupied Leased Delivered
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Baypointe 300 68 23% 52 76% 60 88%
Santa Maria 227 47 21% 36 77% 55 117%
- -------------------------------------------------------------------------------------------------------------------------
Total 527 115 22% 88 77% 115 100%
=========================================================================================================================
CONSTRUCTION INFORMATION
<CAPTION>
Estimated Total
Commencement Initial Estimated
Commencement of Leasing Stabilized Costs
Apartment Community Village, City Units of Construction Activity Occupancy (in millions)
- --------------------------------------------------------------------------------------------------------------------------------
Baypointe Newport North, Newport Beach 300 11/95 10/96 3Q '97 $ 33.4
Santa Maria Westpark II, Irvine 227 3/96 11/96 3Q '97 24.6
The Colony Newport Center, Newport Beach 245 7/96 4Q '97 1Q '99 42.0
Santa Rosa II Westpark II, Irvine 207 12/96 4Q '97 3Q '98 27.2
Rancho Santa Fe Tustin Ranch, Tustin 316 2/97 4Q '97 1Q '99 39.0
- --------------------------------------------------------------------------------------------------------------------------------
Total 1,295 $166.2
================================================================================================================================
</TABLE>
The timing of future completion of construction and initial stabilized occupancy
and estimated costs of apartment communities that are in development 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; changes in interest rate levels; and other changes in capital
markets. No assurance can be given that the timing or estimates set forth in the
foregoing tables will not vary substantially from actual results.
22
<PAGE> 8
IRVINE APARTMENT COMMUNITIES, INC.
CAPITAL REPLACEMENTS WITHIN COMMUNITIES STABILIZED MORE THAN TWO YEARS.
Expenditures for capital replacements within communities stabilized more than
two years totaled $4.7 million, $4.5 million and $5.6 million in 1996, 1995 and
1994, respectively. Average capital replacements per unit within communities
stabilized more than two years were $415, $399 and $490 in 1996, 1995 and 1994,
respectively. In 1995 these expenditures declined from the 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 1997
are expected to be similar to 1996 levels.
CAPITAL REPLACEMENTS WITHIN COMMUNITIES
STABILIZED MORE THAN TWO YEARS
<TABLE>
<CAPTION>
Total
Year Ended December 31, 1996 (in thousands) Per unit
- --------------------------------------------------------------------------------
<S> <C> <C>
Carpet replacements $1,462 $ 129
Exterior painting, siding and stucco 786 69
Upgrades, renovations and
major building items 970 86
Appliances, water heaters
and air conditioning 401 35
Roofing, concrete and pavement 542 48
Equipment and other 545 48
- --------------------------------------------------------------------------------
Total $4,706 $ 415
================================================================================
</TABLE>
ACQUISITION OF THOMPSON
RESIDENTIAL AND EXPANSION INTO
NORTHERN CALIFORNIA
On February 4, 1997, the Operating Partnership acquired for $2 million the
assets of Thompson Residential Company, Inc. ("TRC"), a privately held, Northern
California-based multi-family development company (the "TRC Acquisition").
Included in the purchase were options to purchase three development sites
located in Northern California's Silicon Valley. The purchase price was paid by
the issuance of 74,523 limited partnership units in the Operating Partnership,
exchangeable for common stock of the Company, with the price per unit based on
the average closing price of the Company's common stock for the 10 trading days
preceding the acquisition's closing date. In addition, TRC may be paid up to an
additional $2 million in cash or partnership units if the apartment community
achieves certain performance targets. The three senior real estate executives at
TRC have also joined the Company with primary responsibility for the Company's
California operations outside of the Irvine Ranch.
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.
23
<PAGE> 9
IRVINE APARTMENT COMMUNITIES, INC.
FUNDS FROM OPERATIONS
The Company generally considers funds from operations ("FFO") a useful measure
of performance for 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 of real
estate assets, and after adjustments for unconsolidated partnerships and joint
ventures. Other REITs may not consistently use this definition of FFO. In March
1995 NAREIT modified the definition of FFO. The "Old" FFO definition, among
other things, included amortization of deferred financing costs and depreciation
of non-real estate assets as items added back to net income when computing FFO.
The Company implemented the "new" method of calculating FFO commencing January
1, 1996. FFO should be considered in conjunction with net income as presented in
the Company's Consolidated Financial Statements and Notes thereto. FFO should
not be considered an alternative to net income as an indication of the Company's
performance and is not indicative of cash available to fund all cash flow needs.
FFO does not represent cash flows from operating, investing, or financing
activities as defined by generally accepted accounting principles.
CALCULATION OF FFO
(in thousands, unaudited)
<TABLE>
<CAPTION>
FFO "Old" FFO Definition
- -----------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $18,746 $ 8,465 $ 7,273 $18,746 $ 8,465 $ 7,273
Add:
Depreciation and amortization 27,087 23,095 21,007 27,087 23,095 21,007
Depreciation of non-real estate assets 152 48 48
Amortization of deferred financing costs 2,627 8,510 15,942
Extraordinary item - debt extinguishment 23,427 23,427
Minority interest in income (loss) 22,446 (6,836) 5,006 22,446 (6,836) 5,006
- -----------------------------------------------------------------------------------------------------------------------
Funds from operations $68,279 $48,151 $33,286 $71,058 $56,709 $49,276
=======================================================================================================================
</TABLE>
OPERATING PARTNERSHIP UNITS OUTSTANDING
<TABLE>
<CAPTION>
Years Ended December 31,
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year 37,372 30,247 30,247
Additions relating to:
Stock awards issued and options exercised 77
Dividend reinvestment plan and additional cash investment plan 29
Common stock offerings and related cash contributions from
The Irvine Company (see Note 5) 2,982 6,675
Contributions of property by The Irvine Company (see Note 6) 388 450
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year 40,848 37,372 30,247
- -----------------------------------------------------------------------------------------------------------------------
Weighted average equivalent number of shares outstanding
assuming conversion of Operating Partnership units 38,953 33,191 30,247
=======================================================================================================================
</TABLE>
24
<PAGE> 10
IRVINE APARTMENT COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(in thousands, except per share amounts) 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real estate assets, at cost
Land $ 176,070 $ 163,169
Buildings and improvements 849,924 768,737
- -------------------------------------------------------------------------------------------------------
1,025,994 931,906
Accumulated depreciation (219,193) (192,106)
- -------------------------------------------------------------------------------------------------------
806,801 739,800
Under development, including land 58,241 73,727
- -------------------------------------------------------------------------------------------------------
865,042 813,527
Cash and cash equivalents 3,205 4,392
Restricted cash 1,376 1,181
Deferred financing costs, net of accumulated amortization
of $8,290 in 1996 and $5,663 in 1995 20,187 22,814
Other assets 11,188 11,316
- -------------------------------------------------------------------------------------------------------
$ 900,998 $ 853,230
======================================================================================================
LIABILITIES
Mortgages and notes payable
Line of credit $ 16,000 $ 22,000
Tax-exempt mortgage bond financings 329,248 332,602
Conventional mortgage financings 134,761 136,960
Mortgage notes payable to The Irvine Company 51,227 52,011
Tax-exempt assessment district debt 21,828 19,713
- -------------------------------------------------------------------------------------------------------
553,064 563,286
Accounts payable and accrued liabilities 21,496 20,254
Security deposits 6,094 5,124
- -------------------------------------------------------------------------------------------------------
580,654 588,664
MINORITY INTEREST 140,327 109,133
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;
18,556 shares and 16,975 shares issued and outstanding, respectively 186 170
Excess stock, par value $0.01 per share; 160,000 shares authorized;
no shares issued or outstanding
Additional paid-in capital 202,116 170,747
Retained earnings (deficit) (22,285) (15,484)
- -------------------------------------------------------------------------------------------------------
180,017 155,433
- -------------------------------------------------------------------------------------------------------
$ 900,998 $ 853,230
======================================================================================================
See accompanying notes.
</TABLE>
25
<PAGE> 11
IRVINE APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Rental income $154,925 $133,678 $127,338
Other income 3,162 2,079 1,585
Interest income 611 411 1,313
- -------------------------------------------------------------------------------------------------------------------------
158,698 136,168 130,236
- -------------------------------------------------------------------------------------------------------------------------
EXPENSES
Property expenses 33,859 31,761 33,105
Real estate taxes 13,496 12,002 11,786
Property management fees 4,502 3,893 3,800
Interest expense, net 29,506 25,894 26,827
Amortization of deferred financing costs 2,627 8,510 15,942
Depreciation and amortization 27,239 23,143 21,055
General and administrative 6,277 5,909 5,442
- -------------------------------------------------------------------------------------------------------------------------
117,506 111,112 117,957
- -------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and minority interest in income 41,192 25,056 12,279
Extraordinary item - charge related to debt extinguishment (23,427)
- -------------------------------------------------------------------------------------------------------------------------
Income before minority interest in income (loss) 41,192 1,629 12,279
Minority interest in income (loss) 22,446 (6,836) 5,006
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 18,746 $ 8,465 $ 7,273
=========================================================================================================================
SHARE DATA:
Weighted average number of shares outstanding 17,732 13,856 11,800
Net income after minority interest and before
extraordinary item per share $ 1.06 $ 0.84 $ 0.62
Extraordinary item per share $ (1.69)
Net income per share $ 1.06 $ 0.61 $ 0.62
Cash distributions declared and paid per share $ 1.44 $ 1.39 $ 1.11
=========================================================================================================================
</TABLE>
See accompanying notes.
26
<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) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK, PAR VALUE OF $0.01 PER SHARE
Balance at beginning of year $ 170 $ 118 $ 118
Net proceeds from stock options exercised 1
Net proceeds from common stock offerings 15 52
- ----------------------------------------------------------------------------------------------------------
Balance at end of year $ 186 $ 170 $ 118
==========================================================================================================
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year $ 170,747 $ 87,345 $ 87,345
Net proceeds from stock options exercised 1,143
Stock awards issued 200
Net proceeds from dividend reinvestment plan 216
Net proceeds from common stock offerings 29,810 83,402
- ----------------------------------------------------------------------------------------------------------
Balance at end of year $ 202,116 $ 170,747 $ 87,345
==========================================================================================================
RETAINED EARNINGS (DEFICIT)
Balance at beginning of year $ (15,484) $ (5,710) $ 115
Net income 18,746 8,465 7,273
Distributions to shareholders (25,547) (18,239) (13,098)
- ----------------------------------------------------------------------------------------------------------
Balance at end of year $ (22,285) $ (15,484) $ (5,710)
==========================================================================================================
TOTAL SHAREHOLDERS' EQUITY $ 180,017 $ 155,433 $ 81,753
==========================================================================================================
SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of year 16,975 11,800 11,800
Additional shares issued under common stock offerings 1,491 5,175
Additional shares issued under the dividend reinvestment plan 13
Stock options exercised 67
Stock awards issued 10
- ----------------------------------------------------------------------------------------------------------
Balance at end of year 18,556 16,975 11,800
==========================================================================================================
</TABLE>
See accompanying notes.
27
<PAGE> 13
IRVINE APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 18,746 $ 8,465 $ 7,273
Adjustments to reconcile net income to net cash provided by operating
activities:
Extraordinary item - charge related to debt extinguishment 23,427
Amortization of deferred financing costs 2,627 8,510 15,942
Depreciation and amortization 27,239 23,143 21,055
Minority interest in income (loss) 22,446 (6,836) 5,006
Increase (decrease) in cash attributable to changes in assets and
liabilities:
Restricted cash (195) (150) 16
Other assets (104) (4,882) (975)
Accounts payable and accrued liabilities 1,308 3,147 895
Security deposits 970 579 574
- --------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 73,037 55,403 49,786
==============================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
Capital improvements to operating real estate assets (4,766) (4,520) (5,555)
Investment in real estate assets, net of construction payables (61,850) (123,698) (45,363)
- --------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (66,616) (128,218) (50,918)
==============================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under lines of credit 78,900 143,344 6,256
Payments on lines of credit (84,900) (127,600)
Proceeds from tax-exempt mortgage bond financings
and notes payable 334,190 9,833
Payments on tax-exempt mortgage bond financings (325,845)
Principal payments (7,101) (5,676) (4,999)
Additions to deferred financing costs (9,237) (832)
Proceeds from dividend reinvestment and
additional cash investment plans 650
Proceeds from stock options exercised 1,144
Net proceeds from common stock offerings 29,825 83,454
Contributions from The Irvine Company 30,000 25,875
Distributions to The Irvine Company (30,579) (26,527) (20,476)
Distributions to shareholders (25,547) (18,239) (13,098)
- --------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (7,608) 73,739 (23,316)
- --------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,187) 924 (24,448)
Cash and Cash Equivalents at Beginning of Year 4,392 3,468 27,916
- --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,205 $ 4,392 $ 3,468
==============================================================================================================
Supplemental Disclosure of Cash Flow Information
Interest paid, net of amounts capitalized $ 29,644 $ 25,165 $ 25,860
Tax-exempt assessment district debt assumed $ 2,771 $ 4,184 $ 15,656
==============================================================================================================
</TABLE>
See accompanying notes.
28
<PAGE> 14
IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Irvine Apartment Communities, Inc. (the "Company") operates as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended.
At December 31, 1996, 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,
1996, 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
was incorporated in Delaware on September 10, 1993. On May 2, 1996, the Company
changed its state of incorporation from Delaware to Maryland.
The Company is a self-administered equity REIT engaged in the operation and
development of apartment communities in Orange County, California. The Company
utilizes independent third party property management and construction management
firms. As of December 31, 1996 the Operating Partnership owned and operated 52
properties containing 13,656 operating apartment units and 864 units 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 Financial Statements).
The financial statements include the accounts of the Company and its
financially controlled subsidiary, the Operating Partnership. 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, 1996 and 1995 and the revenues and expenses for the three years
ended December 31, 1996. 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.
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.
29
<PAGE> 15
IRVINE APARTMENT COMMUNITIES, INC.
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 buy-down 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.
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.
RECLASSIFICATIONS: Certain amounts in the 1995 and 1994 financial statements
have been reclassified to conform with financial statement presentations in
1996.
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. 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 1.5% 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, 1996 the Operating Partnership and the Company were in
compliance with all of these covenants. As of December 31, 1996, $16 million was
outstanding and $159 million was available under the line of credit. In February
1997, the Company increased its capacity in the line of credit to $250 million.
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 ratings 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 $281,211 as of December 31,
1996. 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
30
<PAGE> 16
IRVINE APARTMENT COMMUNITIES, INC.
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 4.76% in December 1996.
CONVENTIONAL MORTGAGE FINANCINGS: Conventional mortgages are collateralized by
apartment communities with a net book value of $148,493 as of December 31, 1996.
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 5.82% to 7.75%. As of
December 31, 1996 the weighted average interest rate was 6.45%. Including the
amortization of deferred financing costs the all-in interest rate was 8.16%. The
interest reduction periods expire prior to or at the loan maturity dates and
range from 1997 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 $51,227 and $52,011 at December 31, 1996 and 1995,
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, 1996, are fully amortizing and mature in 2015 and 2024.
Interest incurred on the mortgage notes payable to The Irvine Company totaled
$2,966, $3,010 and $3,055 for the years ended December 31, 1996, 1995 and 1994,
respectively. The mortgage notes payable to The Irvine Company "wrap around"
secured first trust deed notes payable to third party financial institutions.
The secured first trust deed notes totaled $51,363 and $52,030 as of December
31, 1996 and 1995, respectively.
TAX-EXEMPT ASSESSMENT DISTRICT DEBT: In conjunction with the purchase of land,
the Company assumed $2,771 in 1996 and $4,184 in 1995 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 on future income of fluctuations in
interest rates. At December 31, 1996, the Company had interest rate swap
agreements on notional amounts totaling $329,248 which pay fixed rates of
interest and receive floating rates of interest based on a municipal bond index
that is remarketed weekly. The swap agreement periods mature from 2002 to 2007.
The swap counterparties are primarily financial institutions rated AAA by
Standard & Poor's. The differences to be paid or received are accrued and
included in interest expense as a yield adjustment and the related amount
payable or receivable from counterparties is included in other assets or accrued
liabilities. Additionally, the Company restructured several interest rate swaps
related to the retired tax-exempt bonds in May 1995. These transactions reduce
the interest expense on tax-exempt mortgage bond financings by approximately 30
basis points per year through 2001. At December 31, 1996, the average fixed
interest rate paid to the counterparties was 5.10% and the average variable
interest rate received was 3.64%. This resulted in a net interest payable of
$381 which was settled in the first week of January 1997. Based on prevailing
interest rates at December 31, 1996, the interest rate swap agreements have a
fair value of negative $4 million.
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 $40 million for the year ended December 31, 1996.
Interest capitalized was $3,151, $6,779 and $1,261 in 1996, 1995 and 1994,
respectively. Interest incurred totaled $32,657, $32,673 and $27,617 for the
years ended December 31, 1996, 1995 and 1994, respectively.
OTHER MATTERS: Mortgages and notes payable totaling $183,829 are subject to
prepayment penalties.
31
<PAGE> 17
IRVINE APARTMENT COMMUNITIES, INC.
MORTGAGES AND NOTES PAYABLE
(at December 31, 1996)
<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 $329,248 5.82% n/a n/a 6/25
- -------------------------------------------------------------------------------------------------------------------------------
Conventional mortgage financings:
Bayport 4,862 6.91% 7/08 9.25% 7/18
Bayview 3,510 6.91% 7/08 9.25% 7/18
Baywood 20,972 6.91% 7/08 9.25% 7/18
Deerfield Phase I 7,462 6.57% 7/02 8.90% 7/08
Mariner Square 5,637 6.32% 9/00 8.50% 8/08
The Parklands 6,512 6.15% n/a n/a 4/04
Parkwood 12,642 6.31% 8/00 8.50% 7/08
Promontory Point 36,303 5.82% 9/97 8.30% 8/00
Rancho Mariposa 12,839 7.75% n/a 7.75% 6/03
San Paulo 1,458 4.00% n/a n/a 1/13
San Paulo 700 3.00% n/a n/a 1/08
Turtle Rock Vista 13,405 6.31% 8/00 8.50% 7/08
Woodbridge Pines 8,459 6.91% 9/08 9.25% 8/18
- -------------------------------------------------------------------------------------------------------------------------------
134,761 6.45% 8.42% 6/07
- -------------------------------------------------------------------------------------------------------------------------------
Mortgage notes payable to The Irvine Company:
Park West 33,993 5.75% n/a n/a 7/24
Rancho San Joaquin 17,234 5.75% n/a n/a 1/15
- -------------------------------------------------------------------------------------------------------------------------------
51,227 5.75% 3/20
- -------------------------------------------------------------------------------------------------------------------------------
Tax-exempt assessment district debt:
Fixed rate 5,554 6.27% n/a n/a 1/16
Variable rate 16,274 3.95% n/a n/a 2/17
- -------------------------------------------------------------------------------------------------------------------------------
21,828 4.54% 10/16
- -------------------------------------------------------------------------------------------------------------------------------
Line of credit 16,000 7.50% n/a n/a 12/97
- -------------------------------------------------------------------------------------------------------------------------------
Total/weighted average $553,064 5.97% 7/18
===============================================================================================================================
</TABLE>
SCHEDULED PRINCIPAL AMORTIZATION: MORTGAGES AND NOTES PAYABLE
(at December 31, 1996)
<TABLE>
<CAPTION>
Tax-Exempt Mortgage Tax-Exempt
Mortgage Conventional Notes Payable Assessment Percentage
Line of Bond Mortgage to The Irvine District of
Year of Maturity Credit Financings Financings Company Debt Totals Total Debt
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 $16,000 $ 3,604 $ 2,504 $ 830 $ 284 $ 23,222 4.2%
1998 3,876 2,717 879 303 7,775 1.4%
1999 4,165 2,958 931 326 8,380 1.5%
2000 4,478 36,754 986 522 42,740 7.7%
2001 4,813 2,773 1,044 583 9,213 1.7%
Thereafter 308,312 87,055 46,557 19,810 461,734 83.5%
- ----------------------------------------------------------------------------------------------------------------------------
Total $16,000 $329,248 $134,761 $51,227 $ 21,828 $553,064 100.0%
- ----------------------------------------------------------------------------------------------------------------------------
Number of Loans 1 25 11 2 6 45
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 18
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 rate used in the fair value
calculation was 7.72% based on the terms of the loan. As of December 31, 1996
the fair value of the mortgage notes payable to The Irvine Company was $42,590.
See Note 3 to the Consolidated Financial Statements for a discussion of the fair
value of the interest rate swap agreements.
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 from time to time of up to $250 million 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, acquisitions and the
repayment of existing debt.
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.
Concurrently, 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 net proceeds from the two
transactions 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.
Pursuant to the shelf registration statement, on July 3, 1996 the Company
completed the sale of 1.49 million shares of common stock at $20.125 per share.
The proceeds from this offering of $30.0 million together with proceeds from the
sale of newly issued limited partnership units to The Irvine Company (see Note
6), totaled $60.0 million. Proceeds were used to repay $43 million of debt
outstanding under the revolving line of credit. The remaining proceeds were used
to fund ongoing development programs and for general corporate purposes.
Availability under the shelf registration statement was $130.7 million at
December 31, 1996.
On February 20, 1997 the Company sold, pursuant to its shelf registration
statement, 1.15 million shares of common stock at $27.50 per share.
Concurrently, The Irvine Company, pursuant to its rights under the Operating
Partnership Agreement, purchased 1.39 million additional limited partnership
units at $26.06 per unit (which is equal to the public offering price of the
common stock less an amount equivalent to the underwriting discount) which are
exchangeable for common stock on a one for one basis, subject to adjustment and
certain limitations. The proceeds from the two transactions totaled $66 million
and were used to repay all indebtedness outstanding under the revolving line of
credit, and will be used for general corporate purposes, including ongoing
development activities on and off the Irvine Ranch. After the above transaction,
availability under the shelf registration statement is approximately $99
million.
The computation of primary earnings per share is based on a weighted average
of 17,732,172 shares of common stock outstanding during the year ended December
31, 1996. The weighted average number of shares excludes the effect of the
conversion of Operating Partnership units into shares. Such a conversion would
increase the weighted average number of shares outstanding to 38,953,092 for the
year ended December 31, 1996.
33
<PAGE> 19
IRVINE APARTMENT COMMUNITIES, INC.
RECONCILIATION OF OPERATING PARTNERSHIP UNITS OUTSTANDING
<TABLE>
<CAPTION>
(in thousands) Year Ended December 31, 1996 Year Ended December 31, 1995
- ----------------------------------------------------------------------------------------------------------
The Irvine The Irvine
Company Company Total Company Company Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period 16,975 20,397 37,372 11,800 18,447 30,247
Stock awards issued and options exercised 77 77
Dividend reinvestment plan 13 16 29
Common stock offerings and related cash
contributions from The Irvine Company 1,491 1,491 2,982 5,175 1,500 6,675
Contributions of property by
The Irvine Company 388 388 450 450
- ----------------------------------------------------------------------------------------------------------
Balance at end of period 18,556 22,292 40,848 16,975 20,397 37,372
- ----------------------------------------------------------------------------------------------------------
Ownership interest at end of period 45.4% 54.6% 100% 45.4% 54.6% 100%
==========================================================================================================
</TABLE>
The following tables represent a reconciliation of the minority interest
balances and the computation of the minority interest in income (loss).
RECONCILIATION OF MINORITY INTEREST
<TABLE>
<CAPTION>
For the Year Ended December 31,
1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $109,133 $109,296
Minority interest in income (loss) 22,446 (6,836)
Distributions (30,579) (26,527)
Cash contributions 30,000 25,875
Contributions of property 8,973 7,325
Contributions under
dividend reinvestment plan 354
- -----------------------------------------------------------------------
Balance at end of period $140,327 $109,133
=======================================================================
</TABLE>
COMPUTATION OF MINORITY INTEREST IN
INCOME (LOSS)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Income before minority interest $41,192 $ 1,629 $ 12,279
Specific allocations to
The Irvine Company 17,741 6,370
- -----------------------------------------------------------------------
Income before specific allocations 41,192 19,370 18,649
Income allocated to the Company
based on its ownership interest (18,746) (8,465) (7,273)
Income allocated to
The Irvine Company based on
its ownership interest 22,446 10,905 11,376
Specific allocations to
The Irvine Company (17,741) (6,370)
- -----------------------------------------------------------------------
Minority interest in income (loss) $22,446 $ (6,836) $ 5,006
=======================================================================
</TABLE>
Prior to December 31, 1995, the Company incurred debt extinguishment costs
and swap amortization costs that were allocated 100% to The Irvine Company in
accordance with the Operating Partnership Agreement. As of December 31, 1995,
all such allocations have been completed.
NOTE 6 -- CERTAIN TRANSACTIONS
WITH RELATED PARTIES
Included in general and administrative expenses are charges from The Irvine
Company pursuant to an administrative service agreement covering services for
risk management, income taxes and other services of $108 for the year ended
December 31, 1996. The amounts for the corresponding periods in 1995 and 1994
were $106 and $160, respectively. The Irvine Company and the Company jointly
purchase employee health care insurance and property and casualty insurance. In
addition, the Company incurred rent totaling $349, $270 and $203 for the years
ended December 31, 1996, 1995 and 1994, respectively, related to leases with The
Irvine Company that expire in 1997 and 1998. For the year ended December 31,
1996 The Irvine Company contributed $354, or the maximum allowable in connection
with stock issuances under the dividend reinvestment and additional cash
investment plan.
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.
34
<PAGE> 20
IRVINE APARTMENT COMMUNITIES, INC.
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 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.
In March 1996 the Company acquired a land site for $3.3 million from The
Irvine Company for the development of 227 rental units, pursuant to the Land
Rights Agreement between the Company and The Irvine Company. The Company's board
committee of independent directors approved the purchase in accordance with the
Land Rights Agreement. As partial financing for the site acquisition, the
Company assumed $2.8 million in tax-exempt assessment district debt. The balance
of the purchase price was paid through the issuance of 28,358 additional limited
partnership units in the Operating Partnership to The Irvine Company.
Concurrent with the Company's common stock offering on July 3, 1996 (see Note
5 to the Consolidated Financial Statements), The Irvine Company, pursuant to its
rights under the Operating Partnership Agreement, purchased 1.49 million limited
partnership units at a price equal to the public offering price of $20.125 per
common share of stock, or a total of $30.0 million. These units are exchangeable
for common stock on a one for one basis, subject to adjustment and certain
limitations.
On July 29, 1996 the Company acquired a land site for $3.5 million from The
Irvine Company for the development of 245 rental units pursuant to the Land
Rights Agreement between the Company and The Irvine Company. The Company's board
committee of independent directors approved the purchase in accordance with the
Land Rights Agreement. Of the total purchase price, $2.4 million was paid
through the issuance of 115,544 additional limited partnership units in the
Operating Partnership to The Irvine Company.
On December 23, 1996, the Company acquired a land site for $6.0 million from
The Irvine Company for the development of 207 rental units pursuant to the Land
Rights Agreement between the Company and The Irvine Company. The Company's board
committee of independent directors approved the purchase in accordance with the
Land Rights Agreement. The purchase price was paid through the issuance of
244,857 additional limited partnership units in the Operating Partnership to The
Irvine Company.
One of the Company's directors is chairman of a bank which participates in
the Company's line of credit. Based on the bank's percentage participation in
the credit facility, the Company estimates that the amount of interest and fees
paid to the bank totaled $245, $388 and $96 in 1996, 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
35
<PAGE> 21
IRVINE APARTMENT COMMUNITIES, INC.
addition, the purchase price for future apartment sites encompassing the next
505 apartment units IAC develops 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.
NOTE 8 -- STOCK PLANS
EMPLOYEE STOCK OPTION PLAN: The Company has adopted long term stock incentive
plans that provide for awards of non-qualified or incentive stock options, stock
appreciation rights, performance awards, restricted stock, restricted stock
units and stock unit awards. The plans limit the number of shares of common
stock to be issued with respect to these awards to 5% of the total partnership
units and common stock outstanding at the end of each year. 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
Granted 10,000 $20.00
Exercised (66,667) $16.13 to $17.50
Canceled (33,333) $16.13
- ---------------------------------------------------------------------------
Outstanding at December 31, 1996 409,000 $15.88 to $20.00
===========================================================================
Vested and exercisable at
December 31, 1996 170,667 $15.88 to $17.50
===========================================================================
</TABLE>
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
- ---------------------------------------------------------
Granted in 1996 10,000
Awarded in 1996 (20,000)
Canceled in 1996 (82,049)
- ---------------------------------------------------------
Outstanding at December 31, 1996 232,951
=========================================================
Vested at December 31, 1996 62,951
=========================================================
</TABLE>
The total number of shares available to be granted at December 31, 1996 under
these plans was 1,323,770.
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 purchase 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
were 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
Granted in 1996 5,000 $20.06
- ----------------------------------------------------------------------
Outstanding at December 31, 1996 35,000 $15.63 to $20.06
======================================================================
Available for future grant 65,000
======================================================================
</TABLE>
EQUITY COMPENSATION PLANS: The Company applies APB Opinion 25 and related
interpretations in accounting for its equity compensation plans as described
above. Accordingly, no compensation cost has been recognized for its stock
option plans. Compensation cost for the Company's other stock-based compensation
plans has
36
<PAGE> 22
IRVINE APARTMENT COMMUNITIES, INC.
been determined utilizing the fair value of the award over the service period.
Had the Company applied FAS Statement 123 for stock-based compensation it would
result in net income and earnings per share amounts that approximate the amounts
reported. Under FAS Statement 123 the fair value for options was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 1995 and 1996, respectively: risk-free interest
rates of 7.15% and 6.46%; dividend yields of 8.49% and 7.09%; volatility factors
of the expected market price of the Company's common stock of 0.242 and 0.204;
and a weighted average expected life of the options of 7 years.
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 $122, $95 and $82 in 1996, 1995 and 1994, respectively.
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. Management fees range from 2.5% to 3.25% of revenues depending on
the size of the property (resulting in a weighted average rate of approximately
2.8% of revenues). These 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.
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,
1996, the Company had $39.0 million of assessment district debt, of which $21.9
million was reflected in the balance sheet.
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, 1996, 21% 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 $3,977, $4,023 and $3,932 for the years
ended December 31, 1996, 1995 and 1994, respectively.
37
<PAGE> 23
IRVINE APARTMENT COMMUNITIES, INC.
NOTE 11 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1996 Quarters Ended March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 37,089 $ 38,967 $ 40,680 $ 41,962
Expenses 28,401 29,811 29,619 29,675
Net income 3,947 4,158 5,043 5,598
Net income per share $ 0.23 $ 0.24 $ 0.27 $ 0.30
================================================================================
</TABLE>
<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>
REPORT OF INDEPENDENT AUDITORS
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, 1996 and 1995, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Newport Beach, California
January 31, 1997
38
<PAGE> 24
IRVINE APARTMENT COMMUNITIES, INC.
PROPERTY INFORMATION - STABILIZED PORTFOLIO
<TABLE>
<CAPTION>
1996 Average Monthly
Rental Rates
--------------------
1996
Average Per Average
Year Number of Unit Size Square Physical
Property Completed Units (Square Feet) Per Unit Foot Occupancy
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PROPERTIES STABILIZED MORE THAN TWO YEARS:
IRVINE, CA
Amherst Court 1991 162 724 $ 976 $1.35 94.0%
Berkeley Court 1986 152 828 1,032 1.25 92.5%
Cedar Creek 1985 176 811 897 1.11 94.9%
Columbia Court 1984 58 852 975 1.14 95.2%
Cornell Court 1984 109 894 1,043 1.17 95.2%
Cross Creek 1985 136 935 959 1.03 95.9%
Dartmouth Court 1986 294 896 1,032 1.15 92.6%
Deerfield 1975/83 192/96 849 879 1.04 94.8%
Harvard Court 1986 112 826 978 1.18 94.5%
Northwood Park 1985 168 944 907 0.96 95.0%
Northwood Place 1986 604 954 907 0.95 95.0%
Orchard Park 1982 60 971 1,009 1.04 99.9%
Park West 1970/71/72 256/276/348 1,004 934 0.93 94.1%
Parkwood 1974 296 886 921 1.04 94.1%
Rancho San Joaquin 1976 368 896 975 1.09 96.2%
San Carlo 1989 354 1,074 1,158 1.08 96.4%
San Leon 1987 248 951 1,006 1.06 94.3%
San Marco 1988 426 923 950 1.03 95.4%
San Marino 1986 200 926 981 1.06 94.6%
San Mateo 1990 283 720 919 1.28 95.6%
San Paulo 1993 382 1,001 934 0.93 95.0%
San Remo 1986/88 136/112 963 968 1.01 94.3%
Stanford Court 1985 320 799 951 1.19 95.0%
The Parklands 1983 121 794 1,135 1.43 99.8%
Turtle Rock Canyon 1991 217 1,024 1,218 1.19 96.7%
Turtle Rock Vista 1976/77 112/140 1,155 1,161 1.01 96.3%
Windwood Glen 1985 196 878 916 1.04 96.5%
Windwood Knoll 1983 248 906 899 0.99 95.2%
Woodbridge Oaks 1983 120 976 1,072 1.10 99.9%
Woodbridge Pines 1976 220 872 935 1.07 94.6%
Woodbridge Villas 1982 258 867 919 1.06 94.9%
Woodbridge Willows 1984 200 894 937 1.05 95.9%
- ----------------------------------------------------------------------------------- -------------------------------------------
SUBTOTAL 8,156 923 972 1.05 95.1%
- ----------------------------------------------------------------------------------- -------------------------------------------
NEWPORT BEACH, CA
Bayport 1971 104 867 991 1.14 97.0%
Bayview 1971 64 1,154 1,208 1.05 96.4%
Baywood 1973/84 320/68 1,074 1,106 1.03 96.1%
Mariner Square 1969 114 1,104 1,109 1.00 95.0%
Newport North 1986 570 947 1,058 1.12 94.7%
Promontory Point 1974 520 1,056 1,566 1.48 92.7%
- ----------------------------------------------------------------------------------- -------------------------------------------
SUBTOTAL 1,760 1,020 1,224 1.20 94.6%
- ----------------------------------------------------------------------------------- -------------------------------------------
TUSTIN, CA
Rancho Alisal 1988/91 344/12 967 956 0.99 93.9%
Rancho Maderas 1989 266 939 1,003 1.07 94.5%
Rancho Mariposa 1992 238 856 973 1.14 94.4%
Rancho Tierra 1989 252 1,031 1,052 1.02 95.3%
Sierra Vista 1992 306 852 1,028 1.21 94.5%
- ----------------------------------------------------------------------------------- -------------------------------------------
SUBTOTAL 1,418 930 1,000 1.08 94.5%
- ----------------------------------------------------------------------------------- -------------------------------------------
TOTAL PORTFOLIO STABILIZED MORE THAN TWO YEARS 11,334 939 1,015 1.08 95.0%
- ----------------------------------------------------------------------------------- -------------------------------------------
PROPERTIES STABILIZED LESS THAN TWO YEARS:(1)
Villa Coronado 1996 513 929 1,170 1.26 92.6%
Santa Rosa 1996 368 895 1,110 1.24 94.8%
Santa Clara 1996 378 967 1,181 1.22 95.5%
Rancho Monterey 1996 436 932 1,176 1.26 95.1%
Newport Ridge 1996 512 951 1,376 1.45 94.5%
- ----------------------------------------------------------------------------------- -------------------------------------------
TOTAL PORTFOLIO STABILIZED LESS THAN TWO YEARS 2,207 936 1,169 1.25 94.4%
- ----------------------------------------------------------------------------------- -------------------------------------------
TOTAL STABILIZED PORTFOLIO 13,541 938 $1,025 $1.09 94.9%
===================================================================================================================================
</TABLE>
1 Represents amounts from initial stabilization date.
39
<PAGE> 25
IRVINE APARTMENT COMMUNITIES, INC.
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Donald Bren(1)
Chairman
Irvine Apartment Communities, Inc. and The Irvine Company
[Picture]
Anthony M. Frank(2),(3)
Chairman
Acrogen, Inc.
[Picture]
John F. Grundhofer(2),(3)
Chairman, President and
Chief Executive Officer
First Bank System, Inc.
[Picture]
Bowen H. McCoy(1),(3),(4)
President
Buzz McCoy Associates, Inc.
[Picture]
William H. McFarland(1)
Executive Vice President
The Irvine Company
[Picture]
Michael D. McKee(1)
Executive Vice President
and Chief Financial Officer
The Irvine Company
[Picture]
Jack W. Peltason(2),(3)
Retired President
University of California
[Picture]
John F. Seymour(3),(4)
Chief Executive Officer
Southern California Housing
Development Corporation
[Picture]
(1) Executive Committee Member
(2) Audit Committee Member
(3) Independent Directors Committee Member
(4) Compensation Committee Member
OFFICERS
Donald Bren
President and
Chief Executive Officer
James E. Mead
Senior Vice President,
Chief Financial Officer
and Secretary
William W. Thompson
Senior Vice President,
Off-Ranch Operations
Hank Baker
Vice President, Marketing
Bruce N. Dorfman
Vice President, Development,
Off-Ranch Operations
Shawn Howie
Vice President, Corporate
Finance and Controller
Robert J. Hughes
Vice President, Construction,
Off-Ranch Operations
Richard E. Lamprecht
Vice President, Development
David A. McAllister
Vice President, Construction
Scott A. Reinert
Vice President,
Asset Management
40
<PAGE> 26
IRVINE APARTMENT COMMUNITIES, INC.
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
Irvine Apartment Communities, Inc.
550 Newport Center Drive, Suite 300
Newport Beach, California 92660-7011
Telephone: (714) 720-5500
Fax: (714) 720-5550
NORTHERN CALIFORNIA OFFICE
591 Redwood Highway, Suite 5275
Mill Valley, California 94941
Telephone: (415) 381-3001
Fax: (415) 381-3046
TRANSFER AGENT
Boston EquiServe, L.P.
P.O. Box 8040
Boston, Massachusetts 02266-8040
(800) 733-5001
STOCK EXCHANGE LISTING
The Company's common stock is listed on the New York Stock and the Pacific Stock
Exchanges under the ticker symbol: IAC.
ANNUAL SHAREHOLDERS' MEETING
The Company's annual shareholders' meeting will be held at the Hyatt Regency
Irvine Hotel in Irvine, California, at 10:00 a.m. on Friday, April 25, 1997.
FORM 10-K
The Company's Form 10-K filed with the Securities and Exchange Commission may be
obtained without charge by writing to the Investor Relations Department.
DIVIDEND REINVESTMENT AND
ADDITIONAL CASH INVESTMENT PLAN
Shareholders may automatically reinvest their dividends or make periodic cash
investments in additional shares of the Company's common stock under this plan.
For additional information and enrollment materials, please contact Boston
EquiServe, L.P. at (800) 733-5001.
COMMON STOCK CLOSING PRICES ON THE
NEW YORK STOCK EXCHANGE
<TABLE>
<CAPTION>
Period High Low
- -------------------------------------------------------------
<S> <C> <C>
1996:
Fourth Quarter $25.000 $22.125
Third Quarter 23.375 20.250
Second Quarter 20.625 19.000
First Quarter 21.000 18.750
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
==============================================================
</TABLE>
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>
11/27/96 $0.365 82% 18%
8/30/96 0.365 82% 18%
5/31/96 0.355 82% 18%
2/29/96 0.355 82% 18%
11/30/95 0.355 25% 75%
8/31/95 0.355 25% 75%
5/31/95 0.340 25% 75%
2/28/95 0.340 25% 75%
11/30/94 0.340 28% 72%
8/31/94 0.340 28% 72%
5/31/94 0.340 28% 72%
2/28/94 0.090 28% 72%
==========================================================
</TABLE>
<PAGE> 1
EXHIBIT 21
IRVINE APARTMENT COMMUNITIES, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of
Incorporation
Subsidiary of Organization
- ---------- ---------------
<S> <C>
Irvine Apartment Communities, L.P. Delaware
San Rafael Apartment Limited Partnership California
IAC Management, Inc. California
</TABLE>
<PAGE> 1
EXHIBIT 22
IRVINE APARTMENT COMMUNITIES, INC.
550 Newport Center Drive
Newport Beach, California 92660
--------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held April 25, 1997
--------------------
The 1997 Annual Meeting of the shareholders of Irvine Apartment
Communities, Inc. will be held at the Hyatt Regency Irvine Hotel, 17900 Jamboree
Boulevard, Irvine, California 92614 on Friday, April 25, 1997 at 10:00 a.m. for
the following purposes:
1. To elect three directors of the Company: two to serve until the
Annual Meeting of the shareholders in 2000 and one director to
serve until the Annual Meeting of the shareholders in 1998.
2. To approve the issuance of up to an aggregate of 3,950,000 shares
of the Company's Common Stock or operating partnership units in
Irvine Apartment Communities, L.P. that are exchangeable for
Common Stock to The Irvine Company in consideration for the
purchase of land sites for future apartment community development.
This authority would extend through the date of the Company's
Annual Meeting in 2001. All land purchases covered by this
authority would be subject to the Exclusive Land Rights and
Non-Competition Agreement dated November 21, 1993, as amended (the
"Land Rights Agreement"), among the Company, the Operating
Partnership, The Irvine Company and Mr. Donald Bren.
3. To approve the right of The Irvine Company to exchange 405,456
operating partnership units in Irvine Apartment Communities, L.P.
issued over the past two years in connection with three land
transactions under the Land Rights Agreement for shares of Common
Stock of the Company.
4. To transact such other business as may properly come before the
meeting and any and all adjournments or postponements thereof.
The Board of Directors has fixed the close of business on March 18, 1997
as the record date for the determination of the shareholders entitled to notice
of and to vote at the meeting and at any adjournment or postponement thereof.
Shareholders are invited to attend the meeting. Whether or not you expect
to attend, we urge you to sign, date and promptly return the enclosed proxy card
in the enclosed postage prepaid envelope. If you attend the meeting, you may
vote your shares in person, which will revoke any previously executed proxy.
If your shares are held of record by a broker, bank or other nominee and
you wish to attend the meeting, you must obtain a letter from the broker, bank
or other nominee confirming your beneficial ownership of the shares and bring it
to the meeting. In order to vote your shares at the meeting, you must obtain
from the record holder a proxy issued in your name.
By Order of the Board of
Directors,
James E. Mead
Senior Vice President, Chief
Financial Officer and Secretary
March 21, 1997
<PAGE> 2
IAC
IRVINE APARTMENT COMMUNITIES, INC.
550 Newport Center Drive
Newport Beach, California 92660
--------------------
PROXY STATEMENT
For Annual Meeting of Shareholders to be held April 25, 1997
--------------------
INTRODUCTION
This proxy statement is furnished in connection with the
solicitation of proxies on behalf of the Board of Directors of Irvine Apartment
Communities, Inc., a Maryland corporation (the "Company"), for the 1997 Annual
Meeting of the shareholders of the Company (the "1997 Annual Meeting") to be
held at the Hyatt Regency Irvine Hotel, 17900 Jamboree Boulevard, Irvine,
California 92614 on Friday, April 25, 1997 at 10:00 a.m. The Notice of Annual
Meeting, this proxy statement and the accompanying proxy are first being mailed
on or about March 21, 1997 to shareholders of record of the Company's common
stock ("Common Stock") as of the close of business on March 18, 1997. You can
ensure that your shares are voted at the meeting by signing, dating and promptly
returning the enclosed proxy in the envelope provided. Each share entitles the
registered holder to one vote. As of March 10, 1997, there were 19,760,121
shares of Common Stock outstanding. Sending in a signed proxy will not affect
your right to attend the meeting and vote in person. You may revoke your proxy
at any time before it is voted by notifying the Company's Transfer Agent, Boston
EquiServe, L.P., 435 Tasso Street, Suite 250, Palo Alto, California 94301 in
writing, or by executing a subsequent proxy, which revokes your previously
executed proxy. Additionally, if you attend the meeting, you may vote your
shares in person, which will revoke any previously executed proxy.
At the 1997 Annual Meeting, shareholders will have the
opportunity to elect three directors, two to serve until the Annual Meeting in
2000 and one to serve until the Annual Meeting in 1998; to approve the Future
L.P. Unit Proposal (as defined herein); and to approve the Outstanding L.P. Unit
Proposal (as defined herein).
The Company's principal executive offices are located at 550
Newport Center Drive, Newport Beach, California 92660.
VOTING OF PROXIES
Proxies will be voted as specified by the shareholders. Where
specific choices are not indicated, proxies will be voted FOR the election of
all nominees for Director (Proposal 1), FOR the Future L.P. Unit Proposal
(Proposal 2) and FOR the Outstanding L.P. Unit Proposal (Proposal 3). Under the
Maryland General Corporation Law (the "MGCL"), the Company's Articles of
Amendment and Restatement (the "Company Charter") and the Company's Bylaws (the
"Company Bylaws"), shares represented by proxies that reflect abstentions or
"broker non-votes" will be counted as shares that are present and entitled to
vote for purposes of determining the presence of a quorum. The election of
Directors (Proposal 1) requires the affirmative vote of a plurality of the
shares of Common Stock present, in person or by proxy, and entitled to vote at
the 1997 Annual Meeting. Accordingly, abstentions and broker non-votes have no
effect on the plurality of votes for election of directors. Each of the Future
L.P. Unit Proposal and the Outstanding L.P. Unit Proposal require the
affirmative vote of a majority of the aggregate votes cast by the holders of
Common Stock, provided that the total vote cast on each Proposal represents more
than 50% of the total number of votes entitled to be cast by the holders of
Common Stock. Accordingly, provided that more than 50% of the votes entitled to
be cast at the
1
<PAGE> 3
1997 Annual Meeting are cast, abstentions and broker non-votes have no effect on
the majority vote required to approve these matters. The shares of Common Stock
do not have cumulative voting rights.
Shareholders will not be entitled to appraisal rights in
connection with any matter to be voted on at the 1997 Annual Meeting.
2
<PAGE> 4
ITEM 1. ELECTION OF DIRECTORS
At the 1997 Annual Meeting, two Directors are to be elected to
serve for a term to expire at the 2000 Annual Meeting of the shareholders and
one Director is to be elected to serve for a term to expire at the 1998 Annual
Meeting of the shareholders. The nominees for election to serve until the 2000
Annual Meeting of the shareholders are Michael D. McKee and Jack W. Peltason.
The nominee for election to serve until the 1998 Annual Meeting of the
shareholders is William H. McFarland. Mr. McFarland was appointed by the Board
of Directors in December 1996 to replace Norman J. Metcalfe who resigned as a
Director. Pursuant to the MGCL, the Company Charter and the Company Bylaws, Mr.
McFarland may serve until the 1997 Annual Meeting. Information regarding the
Board's nominees for directors is set forth below. Information regarding the two
remaining Directors whose terms expire in 1998 and the three Directors whose
terms expire in 1999 is set forth below.
Pursuant to the Company Charter, the Board of Directors
consists of not less than three nor more than 10 directors, with the initial
number of directors set at nine. The Board of Directors is divided into three
classes serving staggered terms, with each class consisting of one-third of the
total number of directors. Each class holds office until the third annual
meeting following the election of such class, except that in connection with the
reincorporation of the Company in Maryland in 1996 the initial terms of the
three classes expire in 1997, 1998 and 1999, respectively.
Mr. Steven P. Albert whose term as a director would have
expired at the 1997 Annual Meeting resigned as a director and the Chief
Executive Officer and President of the Company in February 1997. The Board of
Directors of the Company has not yet determined whether to fill the vacancy on
the Board of Directors created by the resignation of Mr. Albert or to reduce the
size of the Board to eight persons. Accordingly, at the 1997 Annual Meeting,
shareholders of the Company will vote for the election of only two directors,
Messrs. McKee and Peltason, of the class whose term will expire at the Annual
Meeting of shareholders in 2000. In the event that this vacancy is filled by the
Board of Directors after the 1997 Annual Meeting, pursuant to the MGCL, the
Company Charter and the Company Bylaws, the person so appointed will serve until
the Annual Meeting of shareholders in 1998.
The accompanying proxy will be voted for election of the
Board's nominees unless contrary instructions are given. If any of the Board's
nominees is unable to serve, which is not anticipated, the persons named as
proxies intend to vote, unless the number of nominees is reduced by the Board of
Directors, for such other person or persons as the Board of Directors may
designate. Proxies cannot be voted for a greater number of persons than the
number of nominees named in this Proxy Statement.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF MESSRS. MCKEE,
PELTASON AND MCFARLAND AS DIRECTORS, WHICH IS DESIGNATED AS PROPOSAL NO. 1 ON
THE ENCLOSED PROXY CARD.
NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS FOR A THREE-YEAR TERM TO EXPIRE
AT THE 2000 ANNUAL MEETING OF SHAREHOLDERS
MICHAEL D. MCKEE, 51. Mr. McKee has been a Director of the Company since January
1995. Mr. McKee has been Executive Vice President and Chief Financial Officer of
The Irvine Company since January 1997 and was Executive Vice President and Chief
Legal Officer of The Irvine Company from April 1994 to January 1997. Prior to
joining The Irvine Company, Mr. McKee was the managing partner of the Orange
County office of Latham & Watkins, an international law firm with which he was
associated since 1979. Mr. McKee is a member of the Board of Directors of Circus
Circus Enterprises, Inc., Health Care Property Investors, Inc. and Realty Income
Corporation.
JACK W. PELTASON, 73. Mr. Peltason has been a Director of the Company since
December 8, 1993. Mr. Peltason was President of the University of California
from 1992 until his retirement in 1995. From 1984 to 1992 Mr. Peltason served as
Chancellor for the University of California, Irvine. He is a Professor of
Political Science at University of California,
3
<PAGE> 5
Irvine and a Fellow of the American Academy of Arts and Sciences. Mr. Peltason
is a director of AST Research, Inc. and Infotec, Inc. and a consultant to the
Bren Charitable Foundation.
NOMINEE FOR ELECTION TO THE BOARD OF DIRECTORS FOR A ONE-YEAR TERM TO EXPIRE AT
THE 1998 ANNUAL MEETING OF SHAREHOLDERS
WILLIAM H. MCFARLAND, 57. Mr. McFarland became a Director of the Company in
December 1996. Mr. McFarland has been Executive Vice President, Land and
Residential Development of The Irvine Company since 1984 and was responsible for
the operations and development activities of the Company's predecessor prior to
the Company's formation in 1993. Prior to joining The Irvine Company in 1984,
Mr. McFarland served as President and Chief Executive Officer of the Bren
Company. Prior to working for the Bren Company, he also served as General
Manager of Kaiser Aetna's Ponderosa Homes North Bay Division and as President of
the McCarthy Company. Mr. McFarland served three years as an officer in the U.S.
Marine Corps. He was elected to the California Building Industry Foundation Hall
of Fame in 1996.
MEMBERS OF THE BOARD OF DIRECTORS CONTINUING IN OFFICE; TERMS EXPIRE AT THE 1998
ANNUAL MEETING OF SHAREHOLDERS
ANTHONY M. FRANK, 65. Mr. Frank has been a Director of the Company since
December 8, 1993. Mr. Frank has been Chairman of Acrogen, Inc. and
Director/Consultant of Transamerica HomeFirst, Inc. since 1992. Prior to this,
Mr. Frank served as Postmaster General of the United States from March 1988 to
March 1992. From August 1971 through February 1988, Mr. Frank was Chairman and
Chief Executive Officer of First Nationwide Bank. He has also served as Chairman
of the Federal Home Loan Bank of San Francisco and Chairman of the California
Housing Finance Agency, and was the first Chairman of the Federal Home Loan
Mortgage Corporation Advisory Board. Mr. Frank is a director of Temple-Inland
Inc., Bedford Property Investors, Inc., Living Centers of America, Inc., General
American Investors Company, Inc., Crescent Real Estate Equities, Charles Schwab
Inc. and Financial Security Assurance, Inc.
JOHN F. SEYMOUR, JR., 59. Senator Seymour has been a Director of the Company
since December 8, 1993. Senator Seymour has been the Chief Executive Officer of
Southern California Housing Development Corporation since January 1995.
Previously he served as Executive Director of the California Housing Finance
Agency from December 1992 through December 1994. Prior to that, Senator Seymour
served as a United States Senator for the State of California from January 1991
to December 1992. From April 1982 to January 1991, Senator Seymour served as a
State Senator in the California state legislature. Senator Seymour also served
as a member of the Policy Advisory Board for the Center for Real Estate and
Urban Economics, University of California, Berkeley and the National Association
of Home Builders Mortgage Roundtable and as a director of the National Council
of State Housing Agencies. Senator Seymour is a director of Inco Homes
Corporation and Countrywide Investment Trust.
MEMBERS OF THE BOARD OF DIRECTORS CONTINUING IN OFFICE; TERMS EXPIRE AT THE 1999
ANNUAL MEETING OF SHAREHOLDERS
DONALD BREN, 64. Mr. Bren has been Chairman of the Board of the Company since
its formation and President and Chief Executive Officer of the Company since
February 4, 1997. Mr. Bren has been Chairman of the Board of The Irvine Company
since 1983. Mr. Bren is a member of the Board of Overseers of the University of
California, Irvine, and is a member of the Board of Trustees of the California
Institute of Technology, the Los Angeles County Museum of Art and the Orange
County Museum of Art.
JOHN F. GRUNDHOFER, 58. Mr. Grundhofer has been a Director of the Company since
December 8, 1993. Mr. Grundhofer has been Chairman, President and Chief
Executive Officer of First Bank System, Inc., Minneapolis, Minnesota since 1990.
From 1986 to 1990, Mr. Grundhofer served as Vice Chairman and Senior Executive
Officer for Southern California with Wells Fargo Bank, N.A. Prior to joining
Wells Fargo Bank in 1978, Mr. Grundhofer spent 18 years with Union Bank in
California. In addition to serving as Chairman of First Bank System, Mr.
Grundhofer is also a Trustee of Minnesota Mutual Life Insurance Company. Mr.
Grundhofer is Chairman of the Minnesota Business Partnership, Vice Chairman of
Minnesota Meeting, a Director of the Minneapolis Institute of Arts and of the
United Way
4
<PAGE> 6
of the Minneapolis area, an Advisory Director of the Metropolitan Economic
Development Association, and a member of the Bankers Roundtable and of the CEO
Board of the School of Business Administration at the University of Southern
California.
BOWEN H. MCCOY, 59. Mr. McCoy has been a Director of the Company since December
8, 1993. Mr. McCoy has been a real estate and business counselor with Buzz McCoy
Associates, Inc. since 1990. Prior to this, Mr. McCoy had a 28-year career with
Morgan Stanley & Co. Incorporated, and was President and Chairman of Morgan
Stanley Realty, Inc. Mr. McCoy is a Trustee of the Urban Land Institute and The
Hoover Institution. He is also President of The Real Estate Counselors and
President of the Urban Land Foundation. He has served as Chairman of the
Advisory Board for Stanford University Center for Economic Policy Research,
Chairman of the Los Angeles American Red Cross and Trustee of the Pacific School
of Religion.
REQUIREMENTS OF BOARD MEMBERS
Pursuant to the Company Charter and Bylaws a majority of the
Directors of the Company must be persons who are not (i) affiliates, or an
officer, director or employee, of The Irvine Company or (ii) the spouse,
ancestor and lineal descendant or brother or sister of Mr. Bren ("Unaffiliated
Directors"). In addition, The Irvine Company has certain rights to nominate
persons for election to the Board of Directors as described below.
COMMITTEES OF THE BOARD - BOARD MEETINGS
The Board of Directors held five meetings in 1996. In
addition, management conferred frequently with Directors on an informal basis to
discuss Company affairs. During 1996, all Directors attended 75% or more of the
aggregate of the total number of meetings of the Board of Directors and meetings
of all committees of the Board on which they served, except for Mr. Frank who
attended 70% of such meetings.
The Board of Directors has the following standing committees:
Audit Committee. The Audit Committee is responsible for making
recommendations concerning the engagement of independent public accountants, for
reviewing with the independent public accountants the plans and results of the
audit engagement, for approving professional services provided by the
independent public accountants, for reviewing the independence of the
independent public accountants, for considering the range of audit and non-audit
fees and for reviewing the adequacy of the Company's accounting controls. As
required by the Company Bylaws, the Audit Committee consists of three Directors,
at least two of whom are Unaffiliated Directors.
The members of the Audit Committee are Messrs. Grundhofer
(Chairman), Frank and Peltason. Two Audit Committee meetings were held in 1996.
Executive Committee. The Executive Committee has been
delegated authority in the Company Bylaws to act in lieu of the Board of
Directors on all matters permitted by law other than with respect to matters
which, pursuant to the Company Charter and Bylaws, must be approved by the
Independent Directors Committee or by a vote of more than 75% of the entire
Board of Directors (the "Required Directors").
The members of the Executive Committee during 1996 were
Messrs. Bren (Chairman), McCoy, McFarland, McKee and Steven P. Albert, the
Company's former Chief Executive Officer and President.
Independent Directors Committee. The Independent Directors
Committee is responsible for approving all transactions between the Company or
Irvine Apartment Communities, L.P., a Delaware limited partnership (the
"Operating Partnership"), and The Irvine Company and affiliates of The Irvine
Company and Mr. Bren, including, but not limited to, whether or not the Company
shall exercise any of its rights under the Exclusive Land Rights and
Non-Competition Agreement (the "Land Rights Agreement") with The Irvine Company
and the terms of any agreement between the Company and the Operating Partnership
and The Irvine Company or affiliates of The Irvine Company or Mr. Bren. In
addition, the Independent Directors Committee is responsible for selecting the
independent appraiser on behalf
5
<PAGE> 7
of the Company pursuant to the Land Rights Agreement. Pursuant to the Company
Bylaws, the Independent Directors Committee consists of at least five persons,
each of whom is an Unaffiliated Director and a person who has not been employed
by The Irvine Company or any of its subsidiaries within the five years preceding
such person's election as a director of the Company.
The members of the Independent Directors Committee are Messrs.
Frank (Chairman), Grundhofer, McCoy, Peltason and Seymour. Three Independent
Directors Committee meetings were held in 1996.
Compensation Committee. The Compensation Committee determines
compensation for the Company's executive officers and administers the Company's
stock-based incentive plans. As required by the Company Bylaws, the Compensation
Committee consists entirely of Unaffiliated Directors and does not include any
officer of the Company.
The members of the Compensation Committee are Messrs. McCoy
(Chairman) and Seymour. One Compensation Committee meetings were held in 1996.
Compensation Committee Interlocks and Insider Participation.
Messrs. McCoy and Seymour served on the Compensation Committee during 1996. No
Compensation Committee interlocks or insider participation existed in 1996.
The Company does not have a nominating committee.
COMPENSATION OF DIRECTORS
The Company pays its Directors who are neither officers of the
Company nor officers or directors of The Irvine Company fees for their services
as directors. Directors receive annual compensation of $18,000 plus a fee of
$1,500 for attendance (in person or by telephone) at each meeting of the Board
of Directors or any committee thereof, except that only one $1,500 fee will be
paid if a Board and committee meeting occur on the same day. The Company has
also established the 1993 Stock Option Plan for Directors, pursuant to which
each Director who: (i) is not an employee of the Company or any of its
subsidiaries or affiliates, (ii) is unaffiliated with The Irvine Company and Mr.
Bren and has not been employed by The Irvine Company within the preceding five
years and (iii) has not received a stock award within the preceding year under
an employee stock plan of the Company, is awarded an option to purchase 5,000
shares of the Company's Common Stock upon initial appointment or election to the
Board and an option to purchase 1,000 shares of the Company's Common Stock at
each subsequent annual meeting other than an eligible Director first elected to
the Board within the twelve months immediately preceding and including such
meeting. The exercise price of any such option is equal to the fair market value
of the Common Stock on the date of grant. Such options are exercisable at all
times during the period beginning on the date of grant and ending on the earlier
of (i) the tenth anniversary of the date of grant or (ii) the first anniversary
of the date on which the optionee ceases to be an Eligible Director, as defined
in the plan.
CERTAIN RIGHTS OF THE IRVINE COMPANY WITH RESPECT TO THE BOARD OF DIRECTORS
Pursuant to the Miscellaneous Rights Agreement, The Irvine
Company has the right, and will continue to have the right so long as it, its
shareholders or its affiliates beneficially own at least 20% of the outstanding
Common Stock (including for this purpose Common Stock issuable upon exchange of
limited partnership interests ("L.P. Units") in the Operating Partnership), to
nominate three persons (each, an "Irvine Company Board Representative") for
election to the Board of Directors of the Company. In the event this ownership
falls below 20% but is at least 15%, The Irvine Company will have the right to
nominate two persons for election to the Board of Directors; and if this
ownership falls below 15% but is at least 10%, The Irvine Company will have the
right to nominate one person for election to the Board of Directors. The three
current Directors nominated by The Irvine Company are Messrs. Bren, McFarland
and McKee.
Two provisions of the Company Charter give The Irvine Company
additional rights with respect to the Company's Board of Directors:
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First, the Company Charter provides that a majority of the
entire Board of Directors of the Company including at least one Irvine Company
Board Representative shall constitute a quorum for Board of Directors action at
any meeting.
Second, the Company Charter provides that approval of the
Required Directors is required to approve (i) a change of control (as defined
therein) of the Company or the Operating Partnership; (ii) any amendment to the
Company Charter or Bylaws or the partnership agreement of the Operating
Partnership; (iii) any waiver or modification of the ownership limit provisions
of the Company Charter; (iv) any merger, consolidation, statutory share exchange
or sale of all or substantially all of the assets of the Company or the
Operating Partnership; (v) subject to certain exceptions, the issuance of equity
securities of the Company; (vi) the Company taking title to assets or to conduct
business other than through the Operating Partnership, or for the Company or the
Operating Partnership to engage in another line of business; (vii) the Company
or the Operating Partnership making a general assignment for the benefit of
creditors or instituting (or consent to the institution of) proceedings in
bankruptcy or for the liquidation, dissolution, reorganization or winding up of
the Company or the Operating Partnership; and (viii) termination of the
Company's status as a real estate investment trust for federal income tax
purposes.
ITEM 2. THE FUTURE L.P. UNIT PROPOSAL
THE FOLLOWING PROPOSAL ADDRESSES THE ABILITY OF THE COMPANY TO USE COMMON STOCK
OR LIMITED PARTNERSHIP UNITS EXCHANGEABLE FOR COMMON STOCK AS FULL PAYMENT FOR
THE PURCHASE PRICE FOR FUTURE LAND SITES ACQUIRED FROM THE IRVINE COMPANY. THE
ABILITY TO DO SO SIGNIFICANTLY BENEFITS THE COMPANY, IN PARTICULAR PROVIDING AN
ADDITIONAL SOURCE OF EQUITY TO FINANCE THE COMPANY'S GROWTH, WHILE ALSO
PROVIDING THE IRVINE COMPANY CERTAIN BENEFITS (INCLUDING POTENTIAL TAX
BENEFITS). TO THE EXTENT THE COMPANY IS UNABLE TO USE COMMON STOCK OR
EXCHANGEABLE LIMITED PARTNERSHIP UNITS IN FULL PAYMENT FOR LAND SITES, ITS
ABILITY TO FINANCE FUTURE LAND ACQUISITIONS WOULD BE LIMITED AND ITS AVAILABLE
BORROWINGS UNDER ITS REVOLVING CREDIT FACILITY WOULD BE ADVERSELY AFFECTED. IF
APPROVED BY THE SHAREHOLDERS AT THE 1997 ANNUAL MEETING, THE ISSUANCE OF THE
MAXIMUM NUMBER OF SHARES OF COMMON STOCK OR EXCHANGEABLE LIMITED PARTNERSHIP
UNITS PERMITTED BY THE FOLLOWING PROPOSAL WOULD INCREASE THE IRVINE COMPANY'S
INTEREST IN THE OPERATING PARTNERSHIP FROM 54.8% TO 58.5% ON A PRO FORMA BASIS.
IN ADDITION, APPROVAL OF THE PROPOSAL AT THE 1997 ANNUAL MEETING WOULD PERMIT
THE COMPANY TO ISSUE TO THE IRVINE COMPANY, WITHOUT ANY FURTHER SHAREHOLDER
APPROVAL, COMMON STOCK AND EXCHANGEABLE LIMITED PARTNERSHIP UNITS IN CONNECTION
WITH INDIVIDUAL FUTURE LAND SITE ACQUISITIONS IN WHICH SHAREHOLDER APPROVAL
WOULD OTHERWISE HAVE BEEN REQUIRED. THE INDEPENDENT DIRECTORS OF THE COMPANY
UNANIMOUSLY RECOMMENDED THAT THE COMPANY'S SHAREHOLDERS VOTE FOR APPROVAL OF
THIS PROPOSAL.
GENERAL
One of the Company's principal assets is the Exclusive Land
Rights and Non-Competition Agreement dated November 21, 1993, as amended (the
"Land Rights Agreement"), among the Company, the Operating Partnership, The
Irvine Company and Mr. Donald Bren, pursuant to which through July 31, 2020 the
Company has the exclusive right, but not the obligation, to acquire from The
Irvine Company all land sites on the Irvine Ranch entitled for residential use
and designated for apartment community development.
Pursuant to the Land Rights Agreement the Company may pay for
land sites in cash, through the issuance of Common Stock or L.P. Units in the
Operating Partnership exchangeable for Common Stock or a combination of cash and
either exchangeable L.P. Units or Common Stock. The ability to use Common Stock
or L.P. Units exchangeable for Common Stock as the purchase currency for a land
site rather than cash is an important benefit to the Company and also provides
The Irvine Company with certain benefits; however, any limitation on the
Company's ability to use either Common Stock or exchangeable L.P. Units would be
adverse to the Company. See "--Board of Directors Considerations" below.
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As more fully described under "Background to the Proposal"
below, under certain circumstances the rules of the New York Stock Exchange (the
"NYSE Rules"), absent shareholder approval, would limit the ability of the
Company to use Common Stock or L.P. Units exchangeable for Common Stock as the
purchase currency for land acquisitions under the Land Rights Agreement expected
to occur over the next four years. Accordingly, at the 1997 Annual Meeting, the
shareholders of the Company will be asked to consider and vote upon a proposal
to approve the issuance to The Irvine Company or its nominee from time to time
through the date of the Company's Annual Meeting in 2001, upon the approval of
the Independent Directors Committee of the Board of Directors of the related
land acquisition, of up to an aggregate of 3,950,000 shares of Common Stock or
L.P. Units in the Operating Partnership exchangeable for Common Stock in
consideration for the purchase by the Company of land sites designated by The
Irvine Company as ready for apartment community development (the "Future L.P.
Unit Proposal").
APPROVAL OF THE FUTURE L.P. UNIT PROPOSAL BY SHAREHOLDERS WILL
NOT RESULT IN ANY CHANGES TO THE REQUIREMENTS OF THE LAND RIGHTS AGREEMENT WHICH
MUST BE SATISFIED PRIOR TO THE COMPANY'S PURCHASE OF A LAND SITE FROM THE IRVINE
COMPANY AND WILL NOT REQUIRE ANY OTHER AMENDMENT TO THAT AGREEMENT. SEE "--THE
LAND RIGHTS AGREEMENT" BELOW.
The Board of Directors at its regularly scheduled meeting held
on February 4, 1997, in which The Irvine Company Board Representatives, Messrs.
Bren, McKee and McFarland, did not participate in the consideration of the
Future L.P. Unit Proposal, unanimously concluded that the Future L.P. Unit
Proposal is advisable and is fair to, and in the bests interests of, the Company
and its shareholders, and unanimously adopted a resolution recommending that the
Company's shareholders vote FOR approval of the Future L.P. Unit Proposal.
BACKGROUND TO THE PROPOSAL AND VOTE REQUIRED
In general, under the NYSE Rules, the Company is prohibited
absent shareholder approval from issuing Common Stock or securities convertible
into Common Stock, including L.P. Units, to any "substantial security holder"
(as defined in such rules) of the Company in connection with the acquisition of
assets or property from such person if the number of shares of Common Stock or
Common Stock equivalents exceeds 1% of the number of shares of Common Stock
outstanding before the issuance (the "1% Limitation"). Since The Irvine Company
is a "substantial security holder" within the meaning of the NYSE Rules, the
Company is prohibited, absent shareholder approval, from issuing to The Irvine
Company and its affiliates Common Stock or L.P. Units exchangeable for Common
Stock for the purchase of land sites pursuant to the Land Rights Agreement if
the number of shares of Common Stock or the number of exchangeable L.P. Units
issued in the transaction exceeds 1% of the then outstanding Common Stock of the
Company. For purposes of the NYSE Rules, Common Stock excludes all Common Stock
issuable upon exchange of L.P. Units beneficially owned by The Irvine Company or
any other person.
Since the Company's initial public offering in 1993 (the
"Initial Public Offering"), the Company has purchased 10 land sites (the
"Completed Land Acquisitions") from The Irvine Company pursuant to the Land
Rights Agreement. The purchase price of eight of those land sites was in an
amount which, if paid solely in Common Stock or exchangeable L.P. Units, would
have exceeded the 1% Limitation, and three of such Completed Land Acquisitions
resulted in the issuance of a number of L.P. Units in excess of the 1%
Limitation. See "Item 3. Approval of The Irvine Company's Right To Exchange
Certain Outstanding L.P. Units for Common Stock."
Because the Company anticipates that individual land site
acquisitions from The Irvine Company over the next four years are also likely to
result in the issuance of Common Stock or L.P. Units exchangeable for Common
Stock in excess of the 1% Limitation, the Board of Directors of the Company has
determined to present the Future L.P. Unit Proposal to the shareholders in order
to permit the Company to consummate acquisitions of land sites pursuant to Land
Rights Agreement in excess of the 1% Limitation.
Pursuant to the Land Rights Agreement the number of shares or
L.P. Units issued in connection with the closing of a land transaction
thereunder is equal to the Land Purchase Price (as defined below) for such site,
net of any cash consideration paid (or debt assumed), divided by the average of
the closing prices of the Common Stock of the NYSE for the 10 trading days
immediately preceding the closing date of such transaction. As more fully
described below, the
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determination to purchase a land site from the Irvine Company is made solely by
the Independent Directors Committee of the Company's Board of Directors and the
Land Purchase Price for a site may not exceed 95% of the value of such site as
determined by independent appraisals.
Under the Future L.P. Unit Proposal, not more than an
aggregate of 3,950,000 shares of Common Stock and L.P. Units exchangeable for
Common Stock (the "L.P. Unit Basket Amount") may be issued in connection with
Independent Director Committee approved land transactions consummated between
the date of the 1997 Annual Meeting and the date of the Company's Annual Meeting
in 2001 in which the 1% Limitation is exceeded. The L.P. Unit Basket Amount
represents 19.9% of the Common Stock outstanding as of the record date for the
1997 Annual Meeting. All of the shares of Common Stock or L.P. Units
exchangeable for Common Stock issued in connection with a transaction under the
Land Rights Agreement in which the 1% Limitation is exceeded at the time of the
closing of such transaction will be counted against the L.P. Unit Basket Amount.
However, if the number of shares of Common Stock or L.P. Units exchangeable for
Common Stock to be issued in connection with the acquisition of a land site
pursuant to the Land Rights Agreement does not exceed the 1% Limitation at the
time of the closing of such acquisition, such shares or L.P. Units may be freely
issued by the Company or the Operating Partnership, respectively, and will not
be counted against the L.P. Unit Basket Amount.
Approval of the Future L.P. Unit Proposal will permit the
Company to issue to The Irvine Company, without any further shareholder
approval, Common Stock or exchangeable L.P. Units in connection with individual
future land site acquisitions in which the 1% Limitation is exceeded. Each such
acquisition, however, will continue to be subject to the requirements of the
Land Rights Agreement which must be satisfied prior to the Company's purchase of
a land site designated by The Irvine Company as subject to the Company's option
under the Land Rights Agreement, none having been so designated as of the date
of this Proxy Statement.
Under Maryland law, there is no requirement that the Future
L.P. Unit Proposal be approved by the shareholders of the Company. Under the
NYSE Rules, approval of the Future L.P. Unit Proposal requires a majority of the
aggregate votes cast by the holders of Common Stock, provided that the total
vote cast on the Proposal represents more than 50% of the total number of votes
entitled to be cast by the holders of Common Stock.
THE LAND RIGHTS AGREEMENT
General
The Irvine Company owns substantially all development sites
for future rental apartment communities in close proximity to the major
employment centers on the Irvine Ranch. The Company and The Irvine Company
intend for all future development of new rental apartment communities on the
Irvine Ranch to be conducted by the Company. To that end, in connection with the
Company's Initial Public Offering, the parties entered into the Land Rights
Agreement pursuant to which, through July 31, 2020, the Company has the
exclusive right, but not the obligation, to acquire all land sites entitled for
residential use and designated by The Irvine Company as ready for apartment
community development.
The purchase price for all future sites ,which are currently
unidentified, can be no greater than 95% of the fair market value determined by
independent appraisal. Independent appraisals are obtained by each of the
Company and The Irvine Company prior to the Independent Directors Committee of
the Company's Board of Directors determining whether the Company will exercise
its right to purchase a land site. If the Company elects not to exercise its
option for any site, pursuant to the Land Rights Agreement, the Company will
thereafter have a right of first refusal on the sale of such site to a third
party if the terms of such sale are more favorable than those offered to the
Company. The determination to exercise an option or the right of first refusal
with respect to a site will be made solely by the Independent Directors
Committee. In order to preserve the Company's exclusive rights to acquire and
develop all future land sites for rental apartment community purposes, through
July 31, 2020 any transfer by The Irvine Company, Mr. Bren or their affiliates
of any fee or leasehold interest in undeveloped land on the Irvine Ranch must
include a prohibition against apartment community use and development in the
deed or ground lease.
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The Irvine Company's overall planning process will determine
which land will be designated as single family, for-sale homes or condominiums
or as rental apartment communities. This process takes into account a number of
factors, including surrounding land uses, marketing considerations and the
preferences of various jurisdictions. While The Irvine Company controls the
overall development of the Irvine Ranch, the actual development of an apartment
community on sites purchased by the Company is controlled by the Company. The
design, configuration and amenities will be determined by the Company and will
be used by the Independent Directors Committee in determining the fairness of
the purchase price.
While the Irvine Ranch contains numerous potential sites for
development of rental apartment communities, only certain of those potential
sites have been earmarked by The Irvine Company for such development and, as of
the date of this Proxy Statement, no additional land sites have been designated
by The Irvine Company as subject to the Company's option under the Land Rights
Agreement. The process of obtaining village related entitlements has only
recently begun with respect to some of the potential sites and there can be no
assurance as to when village related entitlements will be obtained. In addition,
while the development of additional rental apartment communities is necessary
for the future build out of the Irvine Ranch, no assurance can be given that
additional land sites will be designated by The Irvine Company as subject to the
Company's option under the Land Rights Agreement.
Determination of Land Purchase Price
The Irvine Company must deliver an independent appraisal
("Irvine's Appraisal") for each land site to the Company at such time as the
Company's option to acquire such site is triggered under the Land Rights
Agreement (the "Option Commencement"). The Independent Directors Committee of
the Company's Board of Directors is required to obtain a separate independent
appraisal ("Company's Appraisal") of each land site, and the agreed fair market
value of each land site will be the average of Irvine's Appraisal and Company's
Appraisal. However, if the value set forth in each Appraisal is more than 10%
above the other Appraisal, then the two appraisers are required to appoint a
third independent appraiser to appraise the land site and the agreed fair market
value of the land site will be the average of the third appraisal and the
original appraisal that is closest to the third appraisal. All of the appraisers
appraise the fair market value of the land site based on rental apartment use
and a number of apartment units as reasonably determined by The Irvine Company.
As soon as possible following the Option Commencement for a
land site, the Company is required to submit to The Irvine Company a proposed
purchase price for the site, based on a Company prepared pro forma cost analysis
for development of the site by the Company. Thereafter the Company and The
Irvine Company attempt to agree on a purchase price for the site. If the parties
are able to agree on a purchase price within 30 days following the Option
Commencement for the land site, then the purchase price for the site (the "Land
Purchase Price") will be as agreed between the parties; provided that in no
event will the Land Purchase Price for any land site exceed 95% of the agreed
fair market value of the site determined by independent appraisal as set forth
above. If the parties are unable to agree on the Land Purchase Price for the
land site within such 30-day period, the Land Purchase Price for the site will
be no greater than 95% of the agreed fair market value of the site determined by
independent appraisal as set forth above. In addition, the Land Purchase Price
for apartment sites encompassing the first 1,800 apartment units developed by
the Company commencing in mid 1995 must 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 is between 10.0% and 10.5%. The November 1995,
the three 1996 and the one 1997 land site acquisitions were purchased under this
arrangement. See "Certain Transactions--Transactions with The Irvine Company"
for additional information with respect to such purchases. As of the date of
this Proxy Statement, future apartment sites encompassing 505 apartment units
remain to be purchased under this arrangement. If the actual number of units to
be constructed on the land site is more or less than that assumed in determining
the Land Purchase Price as described above, the Land Purchase Price is adjusted
proportionately.
Through July 31, 2000, the Land Purchase Price for each land
site may be paid, at the option of the Company, in cash, L.P. Units or Common
Stock, or a combination of cash and either L.P. Units or Common Stock. After
July 31, 2000, the choice of consideration will revert to The Irvine Company. If
paid in L.P. Units or Common Stock, the number of shares or L.P. Units (based on
one L.P. Unit being equivalent to one share of Common Stock, subject to
adjustment as provided in the Amended Partnership Agreement) payable will be
equal to the Land Purchase Price in dollars divided by
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the average of the closing prices of Common Stock on the New York Stock Exchange
for the 10 trading days immediately preceding the Land Closing Date (as defined
below). If paid in L.P. Units, such Units will be subject to the Exchange Rights
and the Cash Tender Rights set forth in the Amended Partnership Agreement. If
paid in Common Stock, such shares will be subject to the registration rights
granted to The Irvine Company. See "Certain Charter, Amended Partnership
Agreement and Miscellaneous Rights Agreement Provisions Applicable to Common
Stock and L.P. Units Beneficially Owned by The Irvine Company."
Pursuant to the Land Rights Agreement and the Company's
Bylaws, the decision to purchase a land site at the Land Purchase Price is made
solely by the Independent Directors Committee of the Company's Board of
Directors.
The Company must determine whether or not to purchase a land
site within a period of 11 months following the earlier of (the "Negotiated
Price Date") (i) the date the Company and The Irvine Company agree in writing on
the Land Purchase Price for the land site or (ii) 30 days following the Option
Commencement for such site. If the Company elects to purchase the site, the
closing of the land acquisition will occur on the earlier of (i) the date the
Company has obtained both the final tract map and building permit for the site
or (ii) one year following the Negotiated Price Date for the site. In no event,
however, will the closing occur before The Irvine Company has satisfied certain
conditions to the closing, including completion of such of the master
infrastructure as is necessary for the Company to commence construction on the
site.
Right of First Refusal
If the Company elects not to purchase a land site, for a
period of one year thereafter, The Irvine Company may sell the rejected site to
a third party but only for a price not less than the Land Purchase Price
originally determined for the site and otherwise on terms not more favorable to
the buyer than those offered to the Company. Thereafter, if The Irvine Company
decides to sell the rejected site on any terms, The Irvine Company must first
notify the Company of the price and terms of the proposed sale and the Company
will have a 30-day period in which to decide to purchase such site for such
price and on such terms. If the Company does not indicate its agreement within
such 30 day period, The Irvine Company may for a period of one year thereafter
sell the site to a third party but only for a price not less than the price
offered to the Company and otherwise on terms not more favorable to the buyer
than those stated in The Irvine Company's original notice. The determination to
exercise the right of first refusal under the Land Rights Agreement with respect
to any site will be made solely by the Independent Directors Committee.
CERTAIN CHARTER, AMENDED PARTNERSHIP AGREEMENT AND MISCELLANEOUS RIGHTS
AGREEMENT PROVISIONS APPLICABLE TO COMMON STOCK AND L.P. UNITS BENEFICIALLY
OWNED BY THE IRVINE COMPANY
Exchange Rights and Cash Tender Rights
The Irvine Company and certain related persons have certain
rights, exercisable once in each twelve-month period, to exchange (the "Exchange
Rights") generally up to one-third of the L.P. Units owned by them for shares of
Common Stock (subject to the applicable Ownership Limit Provision of the
Company's Charter discussed below) and to tender (the "Cash Tender Rights")
generally up to one-third of the L.P. Units owned by them to the Company for
cash payable solely out of the net proceeds of an offering of the Company's
Common Stock. All L.P. Units issued to The Irvine Company in connection with
future land acquisitions pursuant to the Land Rights Agreement would be subject
to such Exchange Rights and Cash Tender Rights.
Registration Rights
The Company has granted certain "demand" and "piggyback"
registration rights with respect to shares of Common Stock owned by The Irvine
Company or any of its affiliates, whether acquired pursuant to the Exchange
Rights, in connection with the Land Rights Agreement, in the open market or
otherwise.
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Restrictions on Ownership and Transfer of Common Stock
Because the Company expects to continue to qualify as a real
estate investment trust, the Company's Charter contains certain restrictions on
the number of shares of Common Stock that individual shareholders, including The
Irvine Company and its affiliates, may own in order for the Company to qualify
as a real estate investment trust under the Internal Revenue Code of 1986, as
amended (the "Code"). The ownership limit for The Irvine Company and certain
related person is 20% of the issued and outstanding Common Stock in the
aggregate.
BOARD OF DIRECTORS CONSIDERATIONS
In making its decision to recommend approval of the Future
L.P. Unit Proposal, the Board of Directors considered each of the factors listed
in paragraphs (i)-(viii) below, but it did not assign any particular weight to
any single factor. The Board based its determination regarding the fairness of
the Future L.P. Unit Proposal on all the factors identified in paragraphs (i)
through (viii) below, taken together.
(i) The Company's growth is largely dependent on its ability
to acquire new land and assets for the development of rental apartment
communities. Since The Irvine Company controls all available land on the Irvine
Ranch, the Land Rights Agreement provides a long-term source of development land
to the Company.
(ii) Payment for land under the Land Rights Agreement with
exchangeable L.P. Units and, to a lesser extent Common Stock, was fundamental to
the parties when the Agreement was entered into in connection with the Initial
Public Offering.
(iii) The Company significantly benefits from the issuance of
L.P. Units and Common Stock for land as it provides a source of equity capital
to the Company. To the extent that Common Stock and L.P. Units exchangeable for
Common Stock could not be used for the purchase of land sites, the Company's
ability to finance such land acquisitions would be limited and the Company's
cash flow or available borrowings under its revolving credit facility would be
adversely affected. In this connection the Board of Directors specifically noted
that through July 31, 2000 the Company has the sole option to determine whether
the currency used to purchase a land site will be either cash, L.P. Units or
Common Stock.
(iv) The contribution of land to the Operating Partnership by
The Irvine Company in exchange for L.P. Units exchangeable for Common Stock is a
nontaxable transaction for The Irvine Company under the Code. In contrast, The
Irvine Company would be subject to tax if Common Stock or cash is utilized.
Accordingly, the ability of the Company to use exchangeable L.P. Units as full
consideration for land sites gives an incentive to The Irvine Company to provide
new land to the Company. The Irvine Company has advised the Board that it
strongly prefers to receive L.P. Units exchangeable for Common Stock as the full
consideration for the land sites and that the Company's ability to use
exchangeable L.P. Units as full consideration for the potential land site would
cause The Irvine Company to favorably consider whether such potential land sites
should be designated as land sites under the Land Rights Agreement. The Board
noted that such consideration could result in such potential sites being
designated as land sites under the Land Rights Agreement, since such sites would
not be replaced by other less desirable land sites in which the tax effect on
The Irvine Company would be minimized. Accordingly, the Board noted that any
limitation on the Company's ability to use L.P. Units exchangeable for Common
Stock as full consideration for the land sites could result in reduced growth
and the impairment of shareholder values.
(v) Taken together, the Land Rights Agreement appraisal
process, Independent Director Committee approval process and the method of
determining the number of L.P. Units or shares of Common Stock issuable in
respect of the Land Purchase Price for a land site, are fair and reasonable to
the Company and its shareholders and ensure that individual land transactions
under the Land Rights Agreement are fair and reasonable to, and in the best
interests of, the Company and its shareholders.
(vi) The Future L.P. Unit Proposal does not obligate the
Company to purchase any land sites pursuant to the Land Rights Agreement. Each
individual acquisition will be separately reviewed once a site is designated by
The Irvine
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Company, with the terms of each potential acquisition being separately analyzed
by the Independent Directors Committee for fairness and whether the construction
of a rental apartment community on that site is in the best interests of the
Company and its shareholders.
(vii) In addition to the potential tax benefit to The Irvine
Company discussed in clause (iv) above in receiving L.P. Units exchangeable for
Common Stock in consideration for the contribution of land to the Operating
Partnership, the ability of the Company to issue Common Stock or exchangeable
L.P. Units to The Irvine Company also provides The Irvine Company with certain
other benefits. Specifically, the issuance of Common Stock or L.P. Units
exchangeable for Common Stock to The Irvine Company in consideration for the
future land transfers pursuant to the Land Rights Agreement will allow The
Irvine Company to increase over time its interest in the Operating Partnership
(and, assuming conversion of all L.P. Units into Common Stock, the Company) from
approximately 54.8% at March 1, 1997 to approximately 58.5% assuming the
issuance of the entire L.P. Unit Basket Amount and no other issuances of Common
Stock or exchangeable L.P. Units between the date of the 1997 Annual Meeting and
the date of the Company's Annual Meeting in 2001.
As a result of the foregoing, the Company's interest in the
Operating Partnership (and, assuming conversion of all L.P. Units into Common
Stock, the public shareholders interest in the Company) would be diluted from
approximately 45.1% at March 1, 1997 to approximately 41.3%.
The issuance of the entire L.P. Unit Basket Amount would
increase over time the amount of distributions received by The Irvine Company.
Based on the current Common Stock and L.P. Unit distribution rate of $1.46 per
annum, The Irvine Company would receive approximately $5.8 million of additional
distributions per annum assuming issuance of the entire L.P. Unit Basket Amount.
(viii) While the Company could use L.P. Units which are not
exchangeable for Common Stock in payment of the Land Purchase Price for a land
site without violating the New York Stock Exchange rules discussed under
"--General--Background to the Proposal" above, the use of exchangeable L.P.
Units as a purchase currency was fundamental to The Irvine Company when the
Company was formed in connection with the Initial Public Offering as evidenced
by the Exchange Rights and Cash Tender Rights and provides The Irvine Company
with a more liquid investment than non-exchangeable L.P. Units. The use of
non-exchangeable L.P. Units would thus seriously detract from the potential
benefits reasonably anticipated by The Irvine Company at the time the Land
Rights Agreement was entered into and would potentially result in a disincentive
to The Irvine Company to sell new land to the Company pursuant to the Land
Rights Agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FUTURE L.P. UNIT PROPOSAL,
WHICH IS DESIGNATED AS PROPOSAL NO. 2 ON THE ENCLOSED PROXY CARD.
13
<PAGE> 15
ITEM 3. APPROVAL OF THE IRVINE COMPANY'S RIGHT TO EXCHANGE CERTAIN OUTSTANDING
L.P. UNITS FOR COMMON STOCK
At the 1997 Annual Meeting, the shareholders of the Company
will be asked to consider and vote upon a proposal to approve the exchange of
405,456 outstanding L.P. Units in the Operating Partnership beneficially owned
by The Irvine Company for shares of Common Stock of the Company as more fully
described below (the "Outstanding L.P. Unit Proposal").
The Board of Directors at its regularly scheduled meeting held
on February 4, 1997, in which The Irvine Company Board Representatives, Messrs.
Bren, McKee and McFarland, did not participate in the consideration of the
Outstanding L.P. Unit Proposal, unanimously concluded that the Outstanding L.P.
Unit Proposal is advisable and is fair to, and in the bests interests of, the
Company and its shareholders, and unanimously adopted a resolution recommending
that the Company's shareholders vote FOR approval of the Outstanding L.P. Unit
Proposal.
BACKGROUND TO THE PROPOSAL AND VOTE REQUIRED
In March 1995, December 1996 and February 1997, the Operating
Partnership issued 336,432 L.P. Units, 244,857 L.P. Units and 313,439 L.P. Units
to The Irvine Company, respectively, as full or partial consideration for the
purchase of three land sites pursuant to the Land Rights Agreement. See "Certain
Transactions--Transactions with The Irvine Company". Except as discussed below,
such L.P. Units are exchangeable for Common Stock of the Company pursuant to the
Amended Partnership Agreement on basis of one L.P. Unit for each share of Common
Stock, subject to adjustment and certain limitations as set forth in the Amended
Partnership Agreement. However, in order to permit the Company to comply with
the 1% Limitation of the NYSE Rules, The Irvine Company, in separate agreements
entered into at the time of the closing of each land sale, agreed with the
Company and the Operating Partnership that it would not exchange or, subject to
certain exceptions, transfer 218,432 L.P. Units, 59,301 L.P. Units and 127,723
L.P. Units, respectively (collectively, the "Excess L.P. Units"), received in
connection with the three completed transactions unless and until approval of
the Company's shareholders of the right of The Irvine Company to exchange such
Excess L.P. Units has been obtained. The Company agreed to present a proposal
seeking approval of the right of The Irvine Company to exchange and transfer the
Excess L.P. Units to the Company's shareholders at the 1997 Annual Meeting.
Under Maryland law, there is no requirement that the
Outstanding L.P. Unit Proposal be approved by the shareholders of the Company.
Under the NYSE Rules, approval of the Outstanding L.P. Unit Proposal requires a
majority of the aggregate votes cast by the holders of Common Stock, provided
that the total vote cast on the Proposal represents more than 50% of the total
number of votes entitled to be cast by the holders of Common Stock.
BOARD OF DIRECTORS CONSIDERATIONS
In making its decision to recommend approval of the
Outstanding L.P. Unit Proposal, the Board of Directors considered the factors
listed in paragraphs (ii) and (viii) under "Item 2. The Future L.P. Unit
Proposal--Board of Directors Considerations," as well as its belief that The
Irvine Company, as the beneficial owner of the Excess L.P. Units, should have
the same right to transfer and exchange for Common Stock the Excess L.P. Units
as all other outstanding L.P. Units beneficially owned by The Irvine Company.
The Board did not assign any particular weight to any of the foregoing but based
its determination regarding the fairness of the Outstanding L.P. Unit Proposal
on all the foregoing, taken together.
Accordingly, the Board of Directors is presenting to the
Company's shareholders this proposal to approve the right of The Irvine Company
or any other holder of any Excess L.P. Units to transfer the Excess L.P. Units,
subject to the provisions of the Amended Partnership Agreement, and to exchange
in accordance with the Amended Partnership Agreement the Excess L.P. Units for
shares of Common Stock.
RECOMMENDATION OF THE BOARD OF DIRECTORS
14
<PAGE> 16
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE OUTSTANDING
L.P. UNIT PROPOSAL, WHICH IS DESIGNATED AS PROPOSAL NO. 3 ON THE ENCLOSED PROXY
CARD.
15
<PAGE> 17
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with
respect to beneficial ownership of the Company's Common Stock by each of the
Company's directors, the Company's new Chief Executive Officer, Donald Bren who
became Chief Executive Officer in February 1997, each of the four most highly
compensated executive officers (including the Company's former Senior Vice
President and Treasurer) who were serving as executive officers at the end of
1996, other than the Company's former Chief Executive Officer, the Company's
former Chief Executive Officer, the Company's former Executive Vice President
and Chief Financial Officer, all directors and current executive officers as a
group and each person who is known by the Company to beneficially own five
percent or more of any class of the Company's voting securities as of February
14, 1997. The Company has relied upon information supplied by its officers,
directors, and certain shareholders and upon information contained in filings
with the Securities and Exchange Commission (the "SEC").
16
<PAGE> 18
<TABLE>
<CAPTION>
PERCENT
OF
ALL
NUMBER OF SHARES
SHARES OF OF
COMMON PERCENT OF COMMON
STOCK ALL SHARES PERCENT OF STOCK/L.
BENEFICIALLY OF COMMON NUMBER OF ALL P.
NAME OWNED STOCK L.P. UNITS L.P. UNITS UNITS(1)
---- ----- ----- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Directors and Officers
Donald Bren 183,325 (2) 1.0% (2) -- (3) -- (3) * (3)
Anthony M. Frank 9,000 (4) * -- -- *
John F. Grundhofer 8,000 (5) * -- -- *
Bowen H. McCoy 12,000 (4) * -- -- *
Michael D. McKee 5,000 * -- -- *
William H. McFarland 20,647 * -- -- *
Jack W. Peltason 7,600 (4) * -- -- *
John F. Seymour, Jr. 7,100 (4) * -- -- *
Steven P. Albert 35,333 (6) * -- -- *
Richard E. Moran Jr. 35,500 (7) * -- -- *
James E. Mead 61,167 (8) * -- -- *
Tyler H. Rose 29,316 (9) * -- -- *
Richard E. Lamprecht 39,333 (8) * -- -- *
Scott A. Reinert 24,333 (8) * -- -- *
All current directors and
officers as a group (17
persons) 459,827 (10) 2.4% (10) -- -- 55.4% (3)
5% shareholders (11)
The Irvine Company (3)(12)
550 Newport Center Drive
Newport Beach, CA 92660 -- -- 22,200,097 (13) 99.7% (14) 54.4% (3)
Cohen & Steers Capital
Management, Inc. (15)
757 Third Avenue
New York, NY 10017 1,925,700 10.4% -- -- 4.7% (16)
LaSalle Advisors Limited
Partnership and ABKB/
LaSalle Securities Limited
Partnership(17)
11 South LaSalle Street
Chicago, IL 60603 1,314,600 7.1% -- -- 3.2% (16)
Travelers Group Inc.(18)
388 Greenwich Street
New York, NY 10013 1,292,219 7.0% -- -- 3.2% (16)
</TABLE>
* Less than 1.0%
(1) Assumes all of the L.P. Units beneficially owned by The Irvine
Company are exchanged for shares of Common Stock, without regard to
certain ownership limit provisions set forth in the Company Charter.
It is not anticipated that these ownership limit provisions will be
waived. The Irvine Company has the right, once in every twelve month
period beginning on December 8 of each year, generally to exchange up
to one third of the L.P. Units for shares of Common Stock, at an
exchange ratio on one L.P. Unit for each share of Common
17
<PAGE> 19
Stock, subject to adjustment. The Company Charter places a limit on
ownership by The Irvine Company, Mr. Bren and their affiliates, in
the aggregate, of 20% of the outstanding Common Stock.
(2) Shares are held by a trust of which Mr. Bren is trustee.
(3) Mr. Bren may be deemed the beneficial holder of the L.P. Units owned
by The Irvine Company due to his status as the sole shareholder
and Chairman of the Board of Directors of The Irvine Company.
Assuming the exchange of all L.P. Units beneficially owned by The
Irvine Company for shares of Common Stock (other than the L.P. Units
referred to in note 13 below), Mr. Bren would be deemed to
beneficially own 54.9% of the Common Stock and all directors and
officers as a group (17 persons) would be deemed to beneficially own
55.4% of the Common Stock (which percentage interest also reflects
the exchange of 74,523 L.P. Units for shares of Common Stock owned by
a limited partner of the Operating Partnership and as to which three
officers of the Company not named in the table may be deemed the
beneficial owner). If the Outstanding L.P. Unit Proposal (Proposal 3)
is adopted at the 1997 Annual Meeting, the L.P. Units referred to in
note 13 below will be exchangeable for Common Stock by The Irvine
Company and, accordingly, the foregoing percentages would increase to
55.3% and 55.8%, respectively.
(4) Includes currently exercisable options to purchase 7,000 shares of
Common Stock at prices ranging from $15.625 to $20.0625 per share
granted to each of Messrs. Frank, McCoy, Peltason and Seymour
pursuant to the 1993 Stock Option Plan for Directors.
(5) Includes 1,000 shares held in Mr. Grundhofer's Individual Retirement
Account.
(6) Mr. Albert resigned as the Chief Executive Officer and President and
a Director of the Company in February 1997. Represents currently
exercisable options to purchase shares of Common Stock pursuant to
the 1993 Long-Term Stock Incentive Plan and 2,000 shares owned by
such person.
(7) Mr. Moran resigned as the Executive Vice President, Chief Financial
Officer and Secretary of the Company in December 1996.
(8) Represents currently exercisable options to purchase shares of Common
Stock granted pursuant to the 1993 Long-Term Stock Incentive Plan
and, with respect to Messrs. Mead, Lamprecht and Reinert 4,500
shares, 1,000 shares and 1,000 shares of Common Stock, respectively,
owned by such persons.
(9) Mr. Rose resigned as Senior Vice President and Treasurer of the
Company in March 1997. Represents currently exercisable options to
purchase shares of Common Stock pursuant to the 1993 Long-Term Stock
Incentive Plan and 2,650 shares owned by such person.
(10) Includes 233,495 shares of Common Stock, including those referred to
in notes (2), (4) and (8), and currently exercisable options to
purchase 226,332 shares of Common Stock under the 1993 Long-Term
Stock Incentive Plan and the 1993 Stock Option Plan for Directors,
including those referred to in notes (4) and (8).
(11) Information based on a review of Schedule 13Ds or 13Gs filed with the
SEC as of February 21, 1997.
(12) Represents L.P. Units owned directly or indirectly by subsidiaries of
The Irvine Company.
(13) Excludes 405,456 L.P. Units which pursuant to agreements with the
NYSE are not exchangeable for Common Stock by The Irvine Company. If
the Outstanding L.P. Unit Proposal (Proposal 3) is adopted at the
1997 Annual Meeting, such L.P. Units will be exchangeable for Common
Stock by The Irvine Company and, accordingly, the percentage set
forth in the table would increase to 54.9%.
(14) 99.7% both before and after giving effect to the L.P. Units referred
to in note 13 above.
18
<PAGE> 20
(15) Based on information provided in Amendment No. 3 to a Schedule 13G
filed on February 4, 1997 by Cohen & Steers Capital Management
("Cohen & Steers"). As of December 31, 1996, Cohen & Steers had sole
dispositive power with respect to all of such shares, and sole voting
power with respect to 1,665,600 of such shares.
(16) 4.7% for Cohen & Steers, 3.2% for LaSalle and 3.1% for Travelers if
the Outstanding L.P. Unit Proposal (Proposal 3) is adopted at the
1997 Annual Meeting and the L.P. Units referred to in note 13 above
become exchangeable for Common Stock.
(17) Based on information provided in a Schedule 13G filed on February 14,
1997 by LaSalle Advisors Limited Partnership ("LALP"), ABKB/LaSalle
Securities Limited Partnership ("ABKB"), and two of their principals.
As of December 31, 1996 (i) LALP had sole voting and dispositive
power with respect to 354,700 shares, shared voting power with
respect to 131,300 shares and shared dispositive power with respect
to 361,500 shares; (ii) ABKB had sole voting and dispositive power
with respect to 122,400 shares, shared voting power with respect to
369,675 shares and shared dispositive power with respect to 476,000
shares; and (iii) each of the principals of LALP and ABKB had sole
voting and dispositive power with respect to 477,100 shares, shared
voting power with respect to 500,975 shares and shared dispositive
power with respect to 837,500 shares.
(18) Based on information provided in Amendment No. 3 to a Schedule 13G
filed on January 30, 1997 by Travelers Group Inc. ("TGI") and Smith
Barney Holdings Inc. ("SBHI"), a wholly-owned subsidiary of TGI. As
of December 31, 1996, SBHI and TGI had shared voting and dispositive
power with respect to all of such shares. Each of TGI and SBHI
disclaim beneficial ownership of all such shares.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH THE IRVINE COMPANY
The Company and The Irvine Company have entered into an
administrative services agreement, as amended, pursuant to which The Irvine
Company provides the Company with certain administrative services, including,
but not limited to, income tax services, risk management and other support
services. During 1996, the Company incurred costs of approximately $108,000
pursuant to the administrative services agreement.
The Company and The Irvine Company have also entered into a
lease pursuant to which the Company leases space from The Irvine Company.
Pursuant to the lease, $239,000 was incurred in 1996. Base rent payable by the
Company under the lease is approximately $236,000 per annum through 1998. The
Company also incurred parking costs to The Irvine Company of approximately
$33,000 in 1996. The Company also rents retail space for its Leasing and
Information Center from an affiliate of The Irvine Company. Pursuant to such
lease $74,000 was incurred in 1996. Base rent payable by the Company under such
lease is approximately $58,000 per annum through 1997. Additionally, the Company
has entered into a short term lease with The Irvine Company to provide for
offsite parking adjacent to one of the Company's construction sites for storing
materials and parking for laborers. The lease commenced September 1, 1996 at
$1,500 per month. The total amount incurred in 1996 was $6,000.
Two of the Company's apartment communities are financed by
mortgage notes payable to The Irvine Company. These mortgage notes totaled
$51,227,000 at December 31, 1996. The mortgage notes are collateralized by
all-inclusive trust deeds on each of the apartment communities financed, bore
fixed interest rates of 5.75% at December 31, 1996, are fully amortizing, and
mature in 2015 and 2024. Interest incurred on the mortgage notes payable to The
Irvine Company totaled $2,966,000 for the year ended December 31, 1996. The
mortgage notes payable to The Irvine Company "wrap around" secured first trust
deed notes payable to third party financial institutions. The secured first
trust deed notes totaled $51,363,000 as of December 31, 1996. The largest
aggregate
19
<PAGE> 21
amount of indebtedness outstanding under each note was $17,676,000 and
$34,334,000 during 1996. As of February 28, 1997, the amount outstanding under
each note was $17,158,000 and $33,933,000.
On July 3, 1996, the Company sold in a direct placement
1,490,700 shares of Common Stock at $20.125 per share. Concurrently therewith,
The Irvine Company, pursuant to its rights under the Partnership Agreement,
purchased 1,490,700 L.P. Units at $20.125 per unit. In addition, during 1996 the
Company sold in the aggregate 13,280 shares of Common Stock at varying prices
ranging from $19.784 to $23.875 per share pursuant to its Dividend Reinvestment
and Additional Cash Investment Plan. In connection with such sales, The Irvine
Company, pursuant to its rights under the Partnership Agreement, purchased an
aggregate of 15,851 L.P. Units at varying prices ranging from $19.784 to $23.875
per L.P. Unit. All of the foregoing L.P. Units are exchangeable for Common Stock
on a one for one basis, subject to adjustment and certain limitations.
The Company and The Irvine Company are parties to the Land
Rights Agreement. As more fully discussed under "Item 2. The Future L.P. Unit
Proposal", 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 the Independent Directors Committee of the Company's Board of
Directors. In addition, The Irvine Company and Donald Bren have agreed to
conduct their apartment community development and ownership activities on the
Irvine Ranch solely through the Company.
Under the 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 L.P. Units, at the option of the Company.
After July 31, 2000, the choice of consideration will revert to The Irvine
Company. In no event shall the purchase price for any apartment community land
site exceed 95% of the value of such site as determined by independent
appraisals. 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 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%. Five land sites, including the four
discussed below have been purchased under this arrangement and as of the date of
this Proxy Statement future apartment sites encompassing 505 apartment units
remain to be purchased under this arrangement.
In March, 1996, the Company acquired a 227-unit development
site known as Santa Maria for $3,343,000 from The Irvine Company. As partial
financing for the acquisition of the site, the Company elected to assume
$2,771,000 in tax-exempt assessment district debt. The balance of $572,000 was
paid through the issuance of 28,358 additional L.P. Units in the Operating
Partnership to The Irvine Company. In July 1996 the Company acquired a 245-unit
development site known as The Colony for $3,545,000 from The Irvine Company. The
purchase price for this site was through the issuance of 115,544 additional L.P.
Units in the Operating Partnership and $1,143,000 in cash. In December 1996, the
Company acquired a 207-unit development site known as Santa Rosa II for
$5,999,000 from The Irvine Company. The purchase price was paid through the
issuance of 244,857 additional L.P. Units in the Operating Partnership. The
foregoing L.P. Units are exchangeable for Common Stock of the Company on a one
for one basis, subject to adjustment and certain limitations, except that
pursuant to an agreement with the NYSE 59,301 of the L.P. Units issued to The
Irvine Company in connection with the Santa Rosa II acquisition are not
exchangeable for Common Stock absent shareholder approval of such exchange. If
the Outstanding L.P. Unit Proposal (Proposal 3) is adopted by the shareholders
at the 1997 Annual Meeting such agreement and restriction on exchange will
terminate and, accordingly, such 59,301 L.P. Units will be exchangeable for
Common Stock by The Irvine Company.
On February 10, 1997, the Company acquired a 316-unit
development site known as Rancho Santa Fe for $8,408,000 from The Irvine
Company. The purchase price was paid through the issuance of 313,439 additional
L.P. Units in the Operating Partnership. Pursuant to the terms of this
acquisition a portion of the purchase price is refundable, through the
forfeiture of a portion of such L.P. Units, if the apartment community to be
constructed on the site does not achieve a 10% unleveraged return on costs for
the first twelve months following stabilized
20
<PAGE> 22
occupancy. The 313,439 L.P. Units are exchangeable for Common Stock of the
Company on a one for one basis, subject to adjustment and certain limitations,
except that pursuant to an agreement with the NYSE 127,723 of such L.P. Units
are not exchangeable for Common Stock absent shareholder approval of such
exchange. If the Outstanding L.P. Unit Proposal (Proposal 3) is adopted by the
shareholders at the 1997 Annual Meeting such agreement and restriction on
exchange will terminate and, accordingly, such 127,723 L.P. Units will be
exchangeable for Common Stock by The Irvine Company.
Independent appraisals were obtained for each of the sites
referred to above, prior to the Independent Directors Committee determining that
the Company would exercise its right to purchase such land sites. If the Company
elects not to exercise its option for any site, the Company will thereafter have
a right of first refusal on the sale of such site to a third party if the terms
of such sale are more favorable than those offered to the Company. The
determination to exercise an option or the right of first refusal under the Land
Rights Agreement with respect to any site will be made solely by a majority of
the Independent Directors Committee.
Pursuant to the Land Rights Agreement, The Irvine Company and
Mr. Bren have agreed not to directly or indirectly acquire or develop, or
acquire an equity interest in any entity that has an ownership interest in, any
rental apartment community whether on or off the Irvine Ranch. This prohibition
terminates, with respect to communities on the Irvine Ranch, on July 31, 2020,
and with respect to communities off the Irvine Ranch, when (i) no nominee of The
Irvine Company is a member of the Company's Board of Directors and (ii) The
Irvine Company and certain related persons beneficially own less than 20% of the
outstanding Common Stock in the aggregate (including for this purpose Common
Stock issuable upon exchange of L.P. Units).
The Land Rights Agreement is subject to early termination upon
the occurrence of certain events including (i) the failure of the shareholders
of the Company to elect as directors of the Company the number of directors
which The Irvine Company is entitled to nominate to the Company's Board of
Directors, (ii) in the event of a vacancy on the Board of Directors of an Irvine
Company Board Representative, the remaining directors shall not promptly elect a
person designated by The Irvine Company to fill such vacancy and (iii) during
the period The Irvine Company has the right to nominate three persons to the
Company's Board of Directors, the provisions of the Charter and the Bylaws
requiring approval of the Required Directors to take certain actions shall be
repealed, modified or amended without the prior written consent of The Irvine
Company.
Three Directors of the Company, Messrs. Bren, McFarland and
McKee, are affiliated with The Irvine Company. Mr Bren is Chairman of the Board
and the majority shareholder of The Irvine Company. Mr. McFarland is Executive
Vice President, Land and Residential Development of The Irvine Company. Mr.
McKee is Executive Vice President and Chief Financial Officer of The Irvine
Company.
The respective interests of the Company and The Irvine Company
in the Operating Partnership were 45.4% and 54.6%, respectively, at December 31,
1996 and 1995.
OTHER TRANSACTIONS
Mr. Grundhofer is Chairman, President and Chief Executive
Officer of First Bank System, Inc. which, through an affiliate, is a member of
the bank syndicate that provided the Company's $175,000,000 revolving line of
credit facility. There was no outstanding balance under the revolving line of
credit facility as of February 28, 1997. Based on this bank's percentage
participation in this credit facility (and the predecessor facilities), the
Company estimates that the amount of interest and fees paid to the affiliate
totaled $245,000 in 1996.
EXECUTIVE COMPENSATION
Set forth below are tables prescribed by the proxy rules of
the SEC which present compensation information for the Company's former chief
executive officer who resigned in February 1997, the four other most highly
compensated executive officers who were serving as executive officers at the end
of 1996 (including the Company's former Senior Vice President and Treasurer who
resigned in March 1997) and the Company's former Executive Vice President and
Chief Financial Officer (the "Named Executive Officers").
21
<PAGE> 23
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
----------------------- ---------------------------
Restricted
Stock All Other
Salary(2) Bonus(3) Awards(4) Options(5) Compensation(6)
Name and Principal Position Year ($) ($) ($) (#) ($)
- --------------------------- ---- ---------- ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Steven P. Albert(7) 1996 $ 275,000 $ 7,563
Former Chief Executive 1995 $ 174,041 $ 100,000 $1,746,250 100,000 $ 27,058
Officer and President
James E. Mead 1996 $ 200,000 $ 145,000 $ 8,250
Senior Vice President, Chief 1995 $ 200,000 $ 140,000 $ 403,125 40,000 $ 8,250
Financial Officer and 1994 $ 187,397 $ 150,000 30,000 $ 8,250
Secretary
Richard E. Moran Jr.(7) 1996 $ 247,500 $ 82,212
Former Executive Vice 1995 $ 270,000 $ 110,000 $ 403,125 50,000 $ 11,250
President, Chief Financial 1994 $ 270,000 $ 110,000 $ 11,250
Officer and Secretary
Tyler H. Rose(7) 1996 $ 180,000 $ 130,000 $ 8,250
Former Senior Vice 1995 $ 154,849 $ 110,000 $ 403,125 40,000 $ 7,938
President, and Treasurer
Richard E. Lamprecht 1996 $ 135,000 $ 55,000 $ 6,300
Vice President, 1995 $ 135,000 $ 50,000 $ 161,250 35,000 $ 4,050
Development 1994 $ 118,780 $ 60,000 $ 4,893
Scott A. Reinert 1996 $ 135,000 $ 55,000 $ 6,582
Vice President, Asset 1995 $ 135,000 $ 50,000 $ 161,250 35,000
Management 1994 $ 2,077 $ 52,659
</TABLE>
(1) The officers listed in this table receive certain personal benefits;
however, such benefits do not exceed the lesser of $50,000 or 10% of
any such officer's salary and bonus for any period reported.
(2) The start dates for Messrs. Albert, Mead, Rose and Reinert were May
1, 1995, January 24, 1994, February 21, 1995 and December 28, 1994,
respectively.
(3) The bonuses for each year were paid in February or March of the
following year.
(4) 1995 amounts represent 25,000, 25,000, 25,000, 10,000 and 10,000
restricted stock unit awards granted to Messrs. Moran, Mead, Rose,
Lamprecht and Reinert as of March 1, 1995 and 110,000 performance
unit awards granted to Mr. Albert as of May 1, 1995. All of the
foregoing awards vest as described below based on the achievement of
certain funds available for distribution ("FAD") targets established
by the Compensation Committee. Dividend equivalents are paid on all
of the foregoing awards outstanding during the vesting period. None
of the restricted stock unit awards or performance unit awards are
available for vesting in the year in which the award was granted. 20%
of a person's award may be earned in each of the three years
following the year the award was granted and 40% of such person's
award may be earned in the fourth year following the year of grant,
in each case upon the achievement of established FAD targets.
Performance and restricted stock unit awards not earned in any year
in which they are available for vesting may be earned in a subsequent
year. The number of shares in respect of which awards granted to
Messrs. Albert, Mead, Moran Rose, Lamprecht and Reinert were
outstanding as of December 31, 1996 was 110,000, 25,000, 22,951,
25,000, 10,000 and 10,000, respectively. The value of Messrs.
Albert's, Mead's, Moran's, Rose's, Lamprecht's and Reinert's awards
as of December 31, 1996 was $2,750,000, $625,000, $573,775, $625,000,
$250,000 and
22
<PAGE> 24
$250,000, respectively. Mr. Albert's, Mr. Moran's and Mr. Rose's
restricted stock unit awards which had not previously vested and been
earned were forfeited in connection with their resignations in
February 1997, December 1996 and March 1997, respectively, though
they did receive dividend equivalent payments for dividends paid
through, and in respect of, the fourth quarter, in the case of
Messrs. Albert and Rose, and third quarter, in the case of Mr. Moran,
of 1996. The Company did not grant any restricted stock unit awards
to the Named Executive Officers in 1996.
(5) Reflects options granted pursuant to the 1993 Long-Term Stock
Incentive Plan. The Company did not grant any options to the Named
Executive Officers in 1996.
(6) These amounts represent the Company's aggregate contributions to the
Company's 401(k) savings plan except that, with respect to Mr.
Albert, the 1995 amount solely represents relocation expenses, with
respect to Mr. Moran, the 1996 amount includes $22,500 of consulting
payments and $48,462 of accrued vacation pay, and with respect to Mr.
Reinert, the 1994 amount solely represents relocation expenses. See
"Employment and Termination of Employment Agreements".
(7) Mr. Albert, Mr. Moran and Mr. Rose resigned from the Company in
February 1997, December 1996 and March 1997, respectively. Upon Mr.
Albert's resignation, Mr. Bren, the Chairman of the Board of
Directors of the Company, assumed the position of Chief Executive
Officer and President. Mr. Bren did not receive any compensation from
the Company in 1996 and will not receive any compensation from the
Company in 1997 for serving in such capacities.
OPTION EXERCISES IN 1996 AND
DECEMBER 31, 1996 OPTION VALUES
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-the-Money Options at
Name on Exercise(1) Realized(1) Options at December 31, 1996(#) December 31, 1996($)(2)
---- -------------- ----------- ------------------------------- -----------------------
<S> <C> <C> <C> <C>
Steven P. Albert Exercisable 33,333 $912,500
Unexercisable 66,667
James E. Mead Exercisable 33,333 $580,000
Unexercisable 36,667
Tyler H. Rose Exercisable 13,333 $355,000
Unexercisable 26,667
Richard E. Lamprecht Exercisable 26,666 $423,125
Unexercisable 23,334
Scott A. Reinert Exercisable 11,666 $310,625
Unexercisable 23,334
Richard E. Moran Jr. 66,667 $472,386 0 0
</TABLE>
(1) Except for Mr. Moran, none of the Named Executive Officers exercised
any stock options in 1996.
(2) Represents the difference between the closing price of the Company's
Common Stock on the NYSE on December 31, 1996 of $25.00 per share and
the exercise price of the options, but not less than zero.
23
<PAGE> 25
EMPLOYMENT AND TERMINATION OF EMPLOYMENT AGREEMENTS
Mr. Albert was appointed as Chief Executive Officer and
President of the Company on May 1, 1995. Pursuant to an offer letter, Mr. Albert
received an annualized base salary of $275,000 for 1995, subject to increases in
future years at the discretion of the Board, and is eligible to earn an annual
bonus of up to 60% of his base salary based upon both his and the Company's
performance. For 1995, Mr. Albert was guaranteed a minimum cash bonus of $90,000
assuming his continued employment through December 31, 1995. In addition, the
letter provides that Mr. Albert will be a participant in the Company's fringe
benefits programs and long-term incentive plans. Upon hire, he received stock
options with respect to 100,000 shares of the Company's common stock and
performance unit awards with respect to 110,000 shares of the Company's common
stock. If Mr. Albert's employment had been terminated by the Company prior to
December 31, 1996 for reasons other than gross misconduct, he would have been
entitled to receive a lump-sum severance payment of $182,500. On February 7,
1997, Mr. Albert entered into a Confidentiality Agreement and General Release
with the Company whereby he resigned from the Company. Pursuant to the
Agreement, Mr. Albert will provide consulting services to the Company in
exchange for 12 monthly payments of $22,917 each. Mr. Albert also received a
severance payment in the amount of $141,000, stock dividend equivalent payments
for dividends paid in respect of the fourth quarter of 1996, and the Company
agreed to continue his coverage, at the Company's expense, under the Company's
group insurance plans through February 28, 1997 and to pay him $2,500 per month
for twelve months thereafter in order to assist him with purchasing his own
benefits. In consideration of the foregoing, Mr. Albert is subject to a
confidentiality covenant and has given the Company and its owners, directors,
officers, employees, representatives and agents a general release.
On November 1, 1996, Mr. Moran entered into a Confidentiality
Agreement and General Release with the Company whereby he resigned from the
Company as of December 1, 1996. Pursuant to the Agreement, Mr. Moran will
provide consulting services to the Company in exchange for 12 monthly payments
of $22,500 each. Mr. Moran also received $38,000 of stock dividend equivalent
payments for dividends paid in respect of the third quarter of 1996, 11/12ths of
his restricted stock units available for vesting in 1996 were earned upon
achievement of FAD targets as determined by the Compensation Committee in
February 1997, and the Company agreed to continue his coverage, at the Company's
expense, under the Company's group insurance plans through December 31, 1996 and
to pay him $2,500 per month for twelve months thereafter in order to assist him
with purchasing his own benefits. In consideration of the foregoing, Mr. Moran
is subject to a confidentiality covenant and has given the Company and its
owners, directors, officers, employees, representatives and agents a general
release.
24
<PAGE> 26
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is
responsible for administering the executive compensation plans and programs of
the Company and for making recommendations to the Board of Directors regarding
the compensation of and benefits provided to the Chief Executive Officer and the
other executive officers.
The names of the Compensation Committee members are set forth below this report.
General Policies Regarding Compensation of Executive Officers
In establishing compensation for executive officers, the
Committee seeks to: (1) attract and retain individuals of superior ability and
managerial talent, (2) motivate executive officers to increase Company
performance for the benefit of its shareholders, and (3) reward executives for
exceptional individual contributions to the achievement of the Company's
business objectives. To these ends, the Company's executive compensation package
consists of salary, variable annual cash compensation (bonus) and stock-based
long-term incentive awards.
Base Salary. Salary levels of executive officers are
established after a subjective review of REIT issuers and other real estate
companies deemed comparable to the Company. In general, the Committee attempts
to set base salaries at the conservative end of the competitive spectrum with
the expectation that as Company performance improves, individual performance
will be rewarded with incentives and bonuses. The Committee generally compares
the Company's performance with that of other REITs and real estate companies
engaged in activities similar to those engaged in by the Company.
Annual Bonus. The Committee's practice with regard to awarding
annual bonuses to executive officers is to review the Company's performance
after the close of the year, taking into account whatever measures of
performance the Committee determines in its sole discretion to be appropriate
under the circumstances, and assigning such weight to any such factors as it
determines to be appropriate. See "1996 Compensation" below. In addition, the
Committee may from time to time pay bonuses to selected individuals on an ad hoc
basis in connection with special events or projects.
Long-Term Incentive Compensation. Stock-based incentives
constitute the long-term portion of the Company's executive compensation
package. Stock options granted at 100% of the stock's fair market value on the
grant date provide an incentive for executives to increase the Company's stock
price and, therefore, the return to the Company's shareholders. Stock options
were granted in 1996 to one of the Company's executive officers at the time he
commenced employment with the Company. In addition, the Committee granted
performance-based awards to this executive officer. Such awards will vest over
five years upon achievement of FAD targets established by the Committee. None of
such awards will vest in 1996. The Committee has not heretofore granted stock
appreciation rights, although it has the authority to do so under the Company's
stock-based award plans. In granting stock-based awards, the Committee takes
into account such factors as it determines to be appropriate under the
circumstances, including without limitation the extent of an executive's equity
ownership in the Company and the amounts and value of long-term compensation and
stock-based compensation received by similarly situated executives at competitor
firms.
Limitation on Deductibility of Executive Compensation. Section
162(m) of the Internal Revenue Code, enacted as part of the Revenue
Reconciliation Act of 1993, limits the deductibility of compensation paid to
certain executive officers of the Company. To qualify for deductibility under
Section 162(m), compensation in excess of $1,000,000 per year paid to the Chief
Executive Officer and the four other most highly compensated executive officers
at the end of such fiscal year generally must be "performance-based"
compensation as determined under Section 162(m).
The Committee generally intends to comply with the
requirements for full deductibility of executive compensation under Section
162(m). However, the Committee will balance the costs and burdens involved in
such compliance against the value to the Company and its shareholders of the tax
benefits to be obtained by the Company
25
<PAGE> 27
thereby, and may in certain instances pay compensation that is not fully
deductible if in its determination such costs and burdens outweigh such
benefits.
1996 Compensation
Base salaries for the executive officers named in the Summary
Compensation Table were not increased in 1996. The amounts shown as 1996 bonus
in the Summary Compensation Table were paid in February 1997 and were based on
achievement of the Company's business plan targets, new apartment community
development, occupancy levels and earnings without assigning relative weight to
any such factors, as well as the Committee's subjective assessment of the
executives' respective individual performance. In establishing such amounts, the
Committee noted that the Company exceeded its 1996 business plan FAD budget and
continued to produce growth in revenues and operating profits. In this regard,
the Committee also noted that in 1996, the Company achieved a total return to
shareholders of 37.1%, increased gross operating margins to 67.2% from 64.9%,
achieved stabilized occupancy on five projects totaling 2,207 units, completed a
$60 million direct equity placement and successfully improved pricing and terms
on its bank line.
The above-described approach to the compensation of executive
officers in 1996 was fully applicable to the compensation of Mr. Steven P.
Albert, the Company's former Chief Executive Officer who resigned as Chief
Executive Officer and President and as a director of the Company in February
1997.
Bowen H. McCoy
John F. Seymour, Jr.
<PAGE> 28
STOCK PRICE PERFORMANCE GRAPH
The Stock Price Performance Graph below compares cumulative
total shareholder return (assuming reinvestment of dividends) of the Company,
the New York Stock Exchange, Inc. ("NYSE") Composite Index and the National
Association of Real Estate Investment Trust (NAREIT) Equity REIT Total Return
Index for the period beginning December 8, 1993, the date on which trading of
the Company's Common Stock commenced, through December 31, 1996. The Company's
closing Common Stock price was $25.00 on December 31, 1996. The stock price
performance of the Company's Common Stock depicted in the graph below represents
past performance only and is not indicative of future performance. The Stock
Price Performance Graph assumes $100 was invested on December 8, 1993.
[GRAPH]
<TABLE>
<CAPTION>
12/08/93 12/31/93 12/31/94 12/31/95 12/31/96
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Irvine Apartment Communities $100.00 $103.62 $101.36 126.09 167.77
NAREIT Equity Index $100.00 $99.83 $107.56 123.98 167.71
NYSE Composite Index $100.00 $101.68 $98.49 129.33 153.97
</TABLE>
27
<PAGE> 29
INDEPENDENT ACCOUNTANTS
The firm of Ernst & Young LLP served as the Company's
independent accountants for fiscal 1996. This firm has advised the Company that
it has no direct or indirect financial interest in the Company. Representatives
of this firm are expected to be present at the 1997 Annual Meeting, with the
opportunity to make a statement, should they desire to do so, and will be
available to respond to appropriate questions from shareholders. The Audit
Committee will select the Company's independent accountants for 1997.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), requires the Company's executive officers and
directors, and beneficial owners of more than 10% of the Common Stock of the
Company, to file initial reports of ownership and reports of changes in
ownership with the SEC and the NYSE. Executive officers and directors are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file. Based solely on a review of the copies of such forms
furnished to the Company and written representations from the Company's
executive officers and directors, the Company noted that no individual who, at
any time during 1996, was a director, officer or beneficial owner of more than
10% of the Common Stock of the Company failed to file the reports required by
Section 16(a) of the 1934 Act on a timely basis, except that Mr. McFarland, a
director of the Company, did not file his initial statement of beneficial
ownership on Form 3 on a timely basis.
SOLICITATION OF PROXIES
The cost of soliciting proxies for the 1997 Annual Meeting
will be borne by the Company. In addition to solicitation by mail, solicitations
may also be made by personal interview, telegram and telephone. The Company has
engaged Georgeson & Company to assist in soliciting proxies for a fee of
approximately $12,500 plus reasonable out-of-pocket expenses. Arrangements will
be made with brokerage houses and other custodians, nominees and fiduciaries to
send proxies and proxy material to their principals, and the Company will
reimburse them for expenses in so doing. Consistent with the Company's
confidential voting procedure, directors, officers and other regular employees
of the Company, as yet undesignated, may also request the return of proxies by
telephone or telegram, or in person.
ANNUAL REPORT
The Company's audited financial statements and notes thereto,
including selected financial data and management's discussion and analysis of
financial condition and results of operations for the year ended December 31,
1996, are included on pages 17 through 38 of the Company's Annual Report, which
is being mailed to all shareholders with this proxy statement. THE FINANCIAL
STATEMENTS, THE REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS, THEREON,
SELECTED FINANCIAL DATA AND MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS INCLUDED IN THE 1996 ANNUAL REPORT ARE
INCORPORATED HEREIN BY REFERENCE. IN ADDITION, A COPY OF THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996, AS FILED WITH THE SEC,
WILL BE SENT TO ANY SHAREHOLDER WITHOUT CHARGE, UPON WRITTEN REQUEST TO IRVINE
APARTMENT COMMUNITIES, INC., 550 NEWPORT CENTER DRIVE, NEWPORT BEACH, CALIFORNIA
92660, ATTENTION: INVESTOR RELATIONS.
28
<PAGE> 30
SHAREHOLDER PROPOSALS
Shareholder proposals intended to be presented at an Annual
Meeting, including proposals for the nomination of directors, must be received
by the Company at its principal executive offices not less than 60 days nor more
than 90 days in advance of the Annual Meeting to be considered (unless less than
70 days' notice of the Annual Meeting is given, in which case the proposal must
be received by the Company within 10 days of the notice of the Annual Meeting).
The requirements for submitting such proposals are set forth in the Company
Bylaws.
Shareholder proposals intended to be considered for inclusion
in the proxy statement for presentation at the 1998 Annual Meeting must be
received by the Company at its principal executive offices by November 14, 1997,
unless the date of the 1998 Annual Meeting is more than 30 days prior to or
subsequent to April 25, 1998, in which case proposals must be received a
reasonable time before the mailing of the proxy statement relating to the 1998
Annual Meeting.
OTHER MATTERS
The Board of Directors does not know of any matter other than
that described in this proxy statement that will be presented for action at the
meeting. If other matters properly come before the meeting, the persons named as
proxies intend to vote the shares they represent in accordance with their
judgment.
By Order of the Board of Directors,
James E. Mead
Senior Vice President, Chief Financial Officer
and Secretary
March 21, 1997
29
<PAGE> 1
IRVINE APARTMENT COMMUNITIES, INC.
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE III
Exhibit 23.1
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, 1997
<PAGE> 1
IRVINE APARTMENT COMMUNITIES, INC.
CONSENT OF INDEPENDENT AUDITORS
Exhibit 23.2
We consent to the use of our reports dated January 31, 1997 with respect to the
consolidated financial statements and related financial statement schedule of
Irvine Apartment Communities, Inc., in the December 31, 1996 Form 10-K of Irvine
Apartment Communities, Inc.
We also consent to the use of our reports dated January 31, 1997 with respect to
the consolidated financial statements and related financial statement schedule
of Irvine Apartment Communities, Inc., in the Registration Statement (Form S-8
No. 33-77808) pertaining to the Irvine Apartment Communities, Inc. 1993 Stock
Option Plan for Directors, 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.
ERNST & YOUNG LLP
Newport Beach, California
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,205
<SECURITIES> 0
<RECEIVABLES> 0
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<CURRENT-ASSETS> 0
<PP&E> 1,025,994
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0
0
<COMMON> 186
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<TOTAL-LIABILITY-AND-EQUITY> 900,998
<SALES> 0
<TOTAL-REVENUES> 158,698
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