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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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.)
0-22569 (IRVINE APARTMENT COMMUNITIES, L.P.)
1-13721 (IAC CAPITAL TRUST)
IRVINE APARTMENT COMMUNITIES, INC.
IRVINE APARTMENT COMMUNITIES, L.P.
IAC CAPITAL TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MARYLAND 33-0698698
DELAWARE 33-0587829
DELAWARE 91-6452946
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
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550 NEWPORT CENTER DRIVE, SUITE 300, NEWPORT BEACH, CALIFORNIA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANTS' TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 720-5500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
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COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE, INC.;
(IRVINE APARTMENT COMMUNITIES, INC.) PACIFIC EXCHANGE, INC.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF DECEMBER 31, 1998: 20,163,643
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS:
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UNITS OF GENERAL PARTNERSHIP INTEREST
(IRVINE APARTMENT COMMUNITIES, L.P.)
NUMBER OF UNITS OUTSTANDING AS OF DECEMBER 31, 1998: 20,163,643
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
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SERIES A PREFERRED SECURITIES NEW YORK STOCK EXCHANGE, INC.
(IAC CAPITAL TRUST)
NUMBER OF SECURITIES OUTSTANDING AS OF DECEMBER 31, 1998: 6,000,000
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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:
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Irvine Apartment Communities, Inc. Yes [X] No [ ]
Irvine Apartment Communities, L.P. Yes [X] No [ ]
IAC Capital Trust 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 registrants' 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 January 31, 1999 was $531,666,000 assuming that all officers
and directors of the Company are affiliates.
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IRVINE APARTMENT COMMUNITIES, INC.
IRVINE APARTMENT COMMUNITIES, L.P.
IAC CAPITAL TRUST
TABLE OF CONTENTS
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ITEM PAGE
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PART I
1. Business.................................................... 3
2. Properties.................................................. 14
3. Legal Proceedings........................................... 17
4. Submission of Matters to a Vote of Security Holders......... 17
PART II
5. Market for Registrants' Common Equity and Related
Stockholder Matters....................................... 18
6. Selected Financial Data..................................... 20
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 30
8. Financial Statements and Supplementary Data................. 31
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 31
PART III
10. Directors and Executive Officers of the Registrants......... 32
11. Executive Compensation...................................... 35
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 41
13. Certain Relationships and Related Transactions.............. 42
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 44
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PART I
ITEM 1. BUSINESS
ORGANIZATION AND GENERAL BUSINESS DESCRIPTION
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, 1998, the Company had a 44.6% general
partnership interest in and was the sole managing general partner of Irvine
Apartment Communities, L.P. (the "Operating Partnership"), which began
operations December 8, 1993, the date of the Company's initial public offering
of common stock (the "Offering"). At December 31, 1998, The Irvine Company and
certain of its affiliates had a 55.2% limited partnership interest in the
Operating Partnership. In addition, at December 31, 1998, The Irvine Company and
certain of its affiliates owned approximately 17.9% of the common stock of the
Company. As used herein, unless the context otherwise requires, the term
"Company" includes Irvine Apartment Communities, Inc. and 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. The Company's intent is to create new
market positions in California which possess rental demographic and economic
growth prospects similar to those on the Irvine Ranch. As of December 31, 1998,
the Operating Partnership owned and operated 65 properties (the "Properties")
containing 16,439 operating apartment units and had 3,039 units under
construction or development. Until July 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.
IAC Capital Trust, a Delaware business trust (the "Trust") was formed on
October 31, 1997. The Trust is a limited purpose financing vehicle established
by the Company. The Trust exists for the sole purpose of issuing its preferred
securities and investing the proceeds thereof in preferred limited partner units
of the Operating Partnership. In January 1998, the Trust issued 6.0 million of
8 1/4% Series A Preferred Securities resulting in gross proceeds of $150
million.
In March 1998, the Operating Partnership and Western National Property
Management ("WNPM") entered into a strategic alliance that, in April 1998,
assumed all property management responsibilities for the Operating Partnership's
Southern California portfolio. The new entity, Irvine Apartment Management
Company ("IAMC"), is owned 51% by the Operating Partnership and 49% by WNPM. The
Company believes that this strategic alliance creates greater efficiencies and
enhances service to customers.
The address of the Company is 550 Newport Center Drive, Suite 300, Newport
Beach, California 92660. Its telephone number is (949) 720-5500.
Going Private Transaction
On February 1, 1999, the Company and TIC Acquisition LLC, an indirect
wholly owned subsidiary of The Irvine Company, entered into a definitive merger
agreement providing for a merger of the Company into TIC Acquisition LLC in
which the Company's shareholders will receive $34 in cash per share. The
transaction, which is subject to the approval of the holders of (i) at least
two-thirds of the outstanding shares of common stock of the Company and (ii) a
number of shares of common stock of the Company (excluding the shares held by
TIC Acquisition LLC and its affiliates) representing a majority of the total
number of shares of common stock of the Company entitled to vote, and other
customary conditions, is expected to be completed late in the second quarter or
early in the third quarter of 1999.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in one business segment, that of owning, operating and
developing apartment communities in California. See the consolidated financial
statements and notes thereto included in Item 8 of this Annual Report on Form
10-K/A for financial information about the industry segment.
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DESCRIPTION OF BUSINESS
As of December 31, 1998, the Operating Partnership owned and operated 55
stabilized properties containing 15,975 units (the "Stabilized Communities").
Together with the units under construction or development (the "Communities
Under Development"), the Operating Partnership owns a total of 19,478 units.
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 since 1864, for development of additional apartment communities
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 part of an urban master-planned community. 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.
In 1997, the Company commenced operations in Northern California's Silicon
Valley and the northern coastal markets of San Diego County. In 1998, the
Company purchased a property in Los Angeles County. The Company's intent is to
create new market positions in California which possess rental demographics and
economic growth prospects similar to those on the Irvine Ranch. See "Business
Strategy -- Off-Ranch Expansion."
For the year ended December 31, 1998, the average physical occupancy
(number of units occupied divided by the total number of units) of the
Stabilized Communities was 94.1% and the average monthly rent per unit was
$1,213. The Communities Under Development will include a total of 3,503
apartment units and have an aggregate estimated cost of approximately $622
million. As of December 31, 1998, 464 units were completed with 403 units
occupied and generating rental revenue in Communities Under Development.
The information set forth in this Annual Report on Form 10-K/A relating to
the expansion program, the timing of future commencement and completion of
construction, the commencement of leasing activity and initial stabilized
occupancy, the estimated costs of apartment communities that are in development
and the completion and timing of completion of the merger of the Company into
TIC Acquisition LLC are forward-looking statements. 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;
product design changes; entitlement decisions by local government authorities;
weather patterns; changes in interest rate levels; other changes in capital
markets; unanticipated regulatory delays; and third party interest in acquiring
the Company. No assurance can be given that the timing or estimates will not
vary substantially from actual results.
BUSINESS STRATEGY
Operating Strategies
- - Provide an exceptional living environment for residents. The Properties are
developed and maintained to appeal to the highly educated, relatively affluent
base of renters. As a result of the region's closely managed master-planning
process, the Properties are and will be situated amid parks and other open
space, and in close proximity to employment centers, schools, retail centers,
and recreational facilities. They provide numerous amenities, are well
maintained and offer a high standard of customer service.
- - Enhance efficiency of operations. The Company had historically subcontracted
on-site staffing, personnel management and accounting functions to four
independent property management firms. In March 1998, the Operating
Partnership and WNPM entered into a strategic alliance that, in April 1998,
assumed all property management responsibilities for the Operating
Partnership's Southern California portfolio. The new entity, IAMC, is owned
51% by the Operating Partnership and 49% by WNPM. By centralizing all property
management functions into one entity, the new strategic alliance provides
greater efficiencies,
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reduces property management fees and property management costs, improves
training of on-site employees and enhances service to customers. Management
fee cost savings relating to IAMC were approximately $1.0 million for the
period April 1, 1998 to December 31, 1998. WNPM is the managing member of IAMC
and responsible for its day to day operations, but the Company, through its
control of a majority of the board of directors of IAMC, has significant
control over IAMC including approval of business plans and budgets,
compensation, and the employment of the executive officers of IAMC. In
addition, the Company pays IAMC a property management fee which is adjusted to
reflect the actual operating performance of the Properties, thereby more
closely aligning the interests of IAMC and the Company. The Company also
granted 100,000 options to certain executives of WNPM in order to better align
their interests with the Company. Commencing in April 2001, the Company will
also have the right, but not the obligation, to purchase WNPM's interest in
IAMC for $49,000.
- - Capitalize on strong brand identity with enhanced marketing and merchandising
programs. The Company has enhanced certain of its marketing programs to
broaden its 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 website and a single source 800 telephone number to
provide information on the Properties; rental information centers within a
major shopping center and the University of California at Irvine; and a
targeted advertising campaign promoting the Company's portfolio and its
quality of life characteristics.
Development Strategies
- - Develop new communities to complement and expand the Company's existing rental
market base. The broad employment and renter base on the Irvine Ranch allows
development of 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 through market segmentation, identifies target markets and, supported
by consumer research and focus group studies, market segmentation decisions
are made at the earliest planning stages, when new residential villages for
the Irvine Ranch are conceived and the villages' largest and most important
amenities are selected. Location of schools, recreational facilities, retail
centers, open space and views are all important considerations. Individual
development decisions -- including site location, product design, amenities
and marketing programs -- are also geared to appeal to the needs and desires
of the target rental market.
- - Utilize experienced management to create high-quality, well-built properties
designed to sustain their value. The Company brings considerable management
expertise to all aspects of the development, construction and leasing process.
Senior management is actively involved in new project development from the
inception of a new Irvine Ranch village and is responsible for target market
identification; design of site plans, building plans, and floor plans; project
and unit amenity selection; and site-specific governmental approvals. In
addition, the Company directs the bidding and contracting of all major
construction activities, in essence acting as general contractor. The Company
engages experienced 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 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.
"Off-Ranch" Expansion
While the Company's principal focus has been on the development of
apartment communities on the Irvine Ranch, in 1997 the Company commenced an
"off-Ranch" expansion program. The Company's strategic growth plan is designed
to create meaningful market positions off the Irvine Ranch in some of
California's most promising growth centers by developing or acquiring apartment
communities in areas that possess rental demographics and economic growth
prospects similar to those on the Irvine Ranch.
Initially, the Company's "off-Ranch" expansion program was centered in
Northern California's Silicon Valley and the northern coastal markets of San
Diego County. In 1997, the Company acquired a 923-unit apartment community (The
Villas of Renaissance) located in the La Jolla region of Northern San Diego
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County. In 1998, the Company completed construction of a 342-unit apartment
community (The Hamptons at Cupertino) in the Silicon Valley and began
construction on three additional apartment communities (with a total of
approximately 660 units) in the Silicon Valley and two additional apartment
communities (with a total of approximately 560 units) in Northern San Diego
County. Also in 1998, the Company purchased a 119-unit, high-rise apartment
building under renovation located in Santa Monica (1221 Ocean Avenue).
The Company has also entered into an agreement giving it the right, but not
the obligation, to acquire a development site in Northern California for the
development of over 2,000 apartment units. The Company's decision whether to
exercise the option is subject to completion of necessary due diligence and the
receipt of all necessary entitlements. Accordingly, no assurance can be given
that the option will be exercised.
Irvine Ranch Master Plan
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 the pioneering
comprehensive Master Plan for future community development which originally
constituted 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 Irvine Ranch 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 and other civic and
environmental groups to obtain the necessary local support and entitlements 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 (which include
major business and retail centers, and research and development and industrial
parks) as well as civic, cultural, recreational, educational and other
supportive facilities, all with an emphasis on improving the quality of life and
achieving long-term balanced regional economic growth.
The success of the Irvine Ranch as a master-planned development is, in
large part, attributable to the early creation of a broad employment base. The
Irvine Company has emphasized the promotion of job creation on the Irvine Ranch
and has been involved in creating four major employment centers on the Irvine
Ranch, each easily accessible by apartment residents and the surrounding area.
The Irvine Company has been the sole developer of the Irvine Spectrum, a
5,000-acre research, technology and employment center which houses more than
2,200 companies and approximately 44,000 employees and includes 25 million
square feet of research and development and office space. The Irvine Business
Complex, which surrounds the John Wayne airport, houses over 100,000 employees
and includes more than 24 million square feet of office and other commercial
space and over 14 million square feet of industrial space. Newport Center
contains over 4.5 million square feet of office space, a 1.3 million square-foot
regional mall (Fashion Island), a tennis club and two country clubs. In
addition, The Irvine Company donated land to the University of California at
Irvine, a 1,489-acre campus which currently has more than 17,700 students and
6,200 employees. The proximity of the Irvine Ranch Properties to these
employment centers makes them attractive residential locations.
Market Segmentation and the Village Concept
The Irvine Company's land use planning emphasizes market segmentation in
order to ensure adequate and appropriate allocation of land uses which support
sustained growth for the long term. Through careful planning, design and
marketing, The Irvine Company also promotes compatibility and synergy among
properties of the same type in order to maximize the likelihood of success of
new projects, to preserve and build value for existing projects and to build
sustainable long-term market value for homeowners, local merchants and
employers. In accordance with the Master Plan, The Irvine Company has created
twelve villages which are used as micro-planning areas in an effort to
facilitate the desired segmentation of products.
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Each village across the Irvine Ranch has a thematic identity which
characterizes the primary features and attributes of the village and helps to
identify the target market for the Company's product. For example, Tustin Ranch,
in the City of Tustin, is a family-oriented village featuring an 18-hole
championship gold course, athletic fields, jogging, hiking and equestrian
trails. Along the ocean is the village of Newport Coast, an upscale community
featuring ocean views and million-dollar custom built homes. The Village of
Westpark, in Irvine, caters to young professionals with growing families and
offers the highly renowned public school system and recreational facilities of
the City of Irvine.
Within each village, the Company's target market is further defined. The
primary factor which determines the appropriate target for the product is
location. For example, the conventional product which is targeted towards young
professionals is typically located near major business centers and in close
proximity to entertainment, retail establishments and major transportation
corridors. The student product, on the other hand, is located within walking
distance of a college or university, student-oriented retail centers, and public
transportation.
Finally, the Company specifically designs its products to appeal to a
target market. The Company's luxury product is typically in a unique location
with ocean and golf course views. The family product offers spacious play areas
and tot lots, a children's multi-purpose room with an activities coordinator,
individual garages and in-unit washers and dryers.
Exclusive Land Rights Agreement
The Company and The Irvine Company are parties to 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 in accordance with The Irvine Company's Master Plan. The
determination to exercise an option with respect to a site is made solely by the
Independent Directors Committee of the Company's Board of Directors. The Irvine
Company has no obligation to designate any land for sale and development of
additional apartment communities. Under this Agreement, the Operating
Partnership has purchased ten apartment community land sites since the Offering.
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 of the Company or common limited partnership interests
in the Operating Partnership ("Common 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 apartment sites which
encompassed the first 1,800 apartment units the Company developed commencing in
mid-1995 were set at an amount such that each project's budgeted pro forma
unleveraged return on costs for the first 12 months following stabilized
occupancy was between 10.0% and 10.5%. Seven land sites for the development of
apartment communities which contain 1,884 units have been purchased under this
arrangement. Accordingly, the purchase price for all future land sites will be
no greater than 95% of the appraised value. Independent appraisals will be
obtained by each of the Company and The Irvine Company for all future sites,
prior to the Independent Directors Committee determining whether the Company
will exercise its right to purchase a land site. The Irvine Company may not
develop, construct, maintain, operate, use, lease or sell land or any
improvements thereon, for apartment use, without the express written consent of
the Operating Partnership. 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 its Chairman,
Donald Bren, have agreed to conduct their apartment community development and
ownership activities on the Irvine Ranch solely through the Company. These
restrictions terminate upon the occurrence of certain conditions. See "Item 13.
Certain Relationships and Related Transactions -- Transactions with The Irvine
Company."
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Capital and Financing Strategies
The Company intends to maintain a conservative ratio of debt to total
market capitalization (the market value of issued and outstanding shares of
common stock of the Company and the common limited partnership units of the
Operating Partnership plus total minority redeemable preferred interests and
debt) of not greater than 60%. As of December 31, 1998, the ratio of debt to
total market capitalization was 31%.
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. Although the Company will consider
factors other than market capitalization in making decisions regarding the
incurrence of debt and the issuance of preferred limited partner units by the
Operating Partnership (such as the estimated market value of such properties
upon refinancing, and the ability of particular properties and the Company as a
whole to generate cash flow to cover expected debt services), there can be no
assurance that the Company will maintain the ratio of debt to market
capitalization (or to any other measure of asset value) described above.
The Company completed four significant equity and financing transactions in
1998. In January, the Trust issued 6.0 million of its 8 1/4% Series A Preferred
Securities. The gross proceeds of $150 million were used to purchase an
equivalent amount of 8 1/4% Series A Preferred Limited Partner Units in the
Operating Partnership. The Operating Partnership used the $150 million of
proceeds, net of issuance costs, all of which were paid by the Operating
Partnership, to repay the outstanding borrowings under the unsecured line of
credit and to fund development of new apartment communities. In May, the Company
priced a $334 million offering of unsecured tax-exempt debt at an average
interest rate of 4.93% in three tranches ranging from 10 to 15 years. Proceeds
from this offering were used to refinance the Company's existing tax-exempt
mortgage debt. In November, the Company completed a $50 million private
placement of preferred securities yielding 8.75%. The net proceeds were used to
reduce the outstanding balance on the Company's unsecured line of credit. Also
in November, the Company placed a $100 million unsecured term loan at an
interest rate of 6.11%. The net proceeds were used to reduce the outstanding
balance on the Company's unsecured line of credit and to fund the Company's
ongoing development program. All of these transactions are more fully discussed
in Management's Discussion and Analysis included in this Annual Report on Form
10-K/A.
COMPETITION
The Properties are located in developed areas. There are numerous other
rental apartment properties within and around the market area of each property.
The number of competitive rental properties in the area could have a material
effect on the Company's ability to rent apartments and increase rents.
EMPLOYEES
As of February 10, 1999, the Company had 68 employees. None of the
Company's employees are subject to a collective bargaining agreement and the
Company has experienced no labor-related work stoppages. The Company considers
its relations with its personnel to be good.
TAX STATUS
The Company has made an election to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). The
Company generally will not be subject to federal income tax to the extent it
distributes at least 95% of its REIT taxable income to its shareholders. If the
Company fails to qualify as a REIT in any taxable year, the Company will be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate rates. Even if the Company qualifies
for taxation as a REIT, the Company may be subject to certain state and local
taxes on its income and property and to federal income and excise taxes on its
undistributed income.
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CYCLICALITY
The Company's business, and the residential housing industry in general,
are cyclical. The Company's operations and markets are affected by local and
regional factors such as local economies, demographic demand for housing,
population growth, property taxes, energy costs, and by national factors such as
short and long-term interest rates, federal mortgage financing programs, federal
income tax provisions and general economic trends. Occupancy varies only
slightly on a seasonal basis, with the lowest occupancy typically occurring in
the summer months.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, an
owner of real property may be held liable for the costs of removal or
remediation of certain hazardous or toxic substances located on or in the
property. These laws often impose such liability without regard to whether the
owner knew of, or was responsible for, the presence of the 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 U.S.
Marine Corps air bases where soil and groundwater contamination have been
discovered are located adjacent to the Irvine Ranch. Although the Company
believes, based on a site assessment report prepared for the U.S. Marine Corps,
that contamination at one of these bases is localized, there can be no
assurances that it has not migrated onto any of the Irvine Ranch 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, based on information provided by the Orange County
Water District, that contamination from this base has migrated into the
groundwater underlying approximately nine of the Irvine Ranch Properties (with a
total of approximately 1,775 units). The Company believes that most of the
groundwater is located at a substantial depth under the land surface. The Orange
County Water District and the Irvine Ranch 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, including under the
Company's properties, to stabilize and ultimately remediate the contamination in
the area, including under the Company's properties. Based on current
information, 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
9
<PAGE> 10
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 Properties in 1993 or later except for two which
were obtained more than five years ago. In addition, environmental assessments
are performed on all sites under option prior to the Company exercising its
option. The Company is not aware of any environmental liability relating to the
Properties that it believes would have a material adverse effect on its
business, assets or results of operations. Nevertheless, it is possible that the
environmental assessments did not reveal all environmental liabilities with
respect to the Properties, that environmental liabilities have developed with
respect to the Properties since the environmental assessments were prepared or
that there are material environmental liabilities of which the Company is
unaware with respect to the Properties. Moreover, no assurance can be given that
future laws, ordinances or regulations will not impose material environmental
liabilities or that the current environmental condition of the Properties will
not be affected by residents and occupants of the Properties or by the uses or
condition of properties in the vicinity of the Properties, such as leaking
underground storage tanks, or by third parties unrelated to the Company.
REGULATION
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 except 1221 Ocean Avenue. However, there can be no assurance that
rent control requirements will not be initiated on additional communities in the
future.
The Properties and any newly acquired or developed apartment community must
comply with Title II of the Americans with Disabilities Act (the "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
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 (the "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 3,000 units in portions of 33 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 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. These bonds were refinanced in June 1998 by the
same issuer. Most of the income restrictions on the new bonds will terminate
upon the maturity date of the new bonds. Additionally, in October
10
<PAGE> 11
1998, the Company purchased a 216-unit apartment community (One Park Place) for
$28 million of which $18 million was the assumption of tax-exempt multifamily
housing revenue bonds.
In addition to the rental restrictions imposed by the bond regulatory
agreements, many of the 24 properties and four 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 but differ as to expiration dates from the other restrictions
discussed above.
Five of the 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 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,
1998, the average remaining term of the HAP contracts was approximately 4 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.
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 service
its debt and other obligations and to make distributions to its
shareholders/partners will be adversely affected. In addition, the Properties
consist primarily of rental apartment communities geographically concentrated in
Orange County. Income from and the performance of the Irvine Ranch Properties
may therefore be adversely affected by the general economic climate in Orange
11
<PAGE> 12
County, including unemployment rates and local conditions such as the supply of
and demand for apartments in the area, the attractiveness of the Irvine Ranch
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 and other debt 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 Irvine Ranch 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's "off-Ranch" expansion program was initially centered in
Northern California's Silicon Valley and the northern coastal markets of San
Diego County. In 1997, the Company acquired a 923-unit apartment community (The
Villas of Renaissance) located in the La Jolla region of Northern San Diego
County. In 1998, the Company completed construction of a 342-unit apartment
community (The Hamptons at Cupertino) in the Silicon Valley and began
construction on three additional apartment communities (with a total of
approximately 660 units) in the Silicon Valley and two additional apartment
communities (with a total of approximately 560 units) in Northern San Diego
County. Also in 1998, the Company purchased a 119-unit, high-rise apartment
building under renovation located in Santa Monica (1221 Ocean Avenue). These new
Properties represent the Company's first strategic expansion off the Irvine
Ranch and the Company may make additional investments in California in the
future. 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 Irvine Ranch Properties which are
located entirely in Orange County. For jurisdictions off the Irvine Ranch, local
jurisdiction approvals with respect to entitlements may impose requirements and
conditions different from those applicable to the Irvine Ranch. 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 Company
in the Properties and any additional properties that may be developed or
acquired by the Company, are relatively illiquid. Such illiquidity limits the
ability of 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.
The Properties are subject to all operating risks common to apartment
ownership in general. Such risks include: the Company's ability to rent units at
the Properties, including the 3,503 units in the Communities Under Development;
competition from other apartment communities; excessive building of comparable
properties 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; increased affordable housing
requirements that might adversely affect rental rates; 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 meet its debt service and
other obligations and to make distributions with respect to its common stock and
the partnership interests of the Operating Partnership could be adversely
affected.
Real Estate Development and Acquisition: A primary focus of the Company is
the development of new apartment communities on sites acquired or that may be
acquired in the future, primarily from The Irvine Company, although the Company
also plans to develop new rental apartment communities on sites acquired or that
may be acquired in the future from third parties. The Company has also acquired,
and may continue to acquire, completed communities. The real estate development
business involves significant risks in addition to
12
<PAGE> 13
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 long-term debt or equity financing is
not available on acceptable terms to finance new development or acquisitions
undertaken without long-term financing, further development activities or
acquisitions might be curtailed or cash available for debt service and other
obligations might be adversely affected.
The development of apartment communities both on and off the Irvine Ranch,
requires the investment of funds, sometimes in substantial amounts, prior to the
completion of necessary due diligence and/or the receipt of necessary
entitlements for the acquisition of a land site or an apartment community. In
addition, the Company has entered into an agreement giving it the right, but not
the obligation, to acquire a land site in Northern California for the
development of over 2,000 apartment units, subject to the receipt of necessary
entitlements. If such entitlements are not obtained, or if for any reason any
projects are abandoned, the associated costs would be expensed. While the
Operating Partnership seeks to mitigate such risk and has not written off
significant amounts to date, no assurance can be given that it will not be
required to do so in the future.
Insurance: The Company 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 Company does not carry
earthquake insurance on any of the Properties. Should an uninsured loss or a
loss in excess of insured limits occur, the Company 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 Company, would
remain obligated for any mortgage debt or other financial obligations related to
the property. Any such loss would adversely affect the Company. The Company
believes that the Properties are adequately insured. In addition, in light of
the California earthquake risk, California building codes since the early 1970's
have established construction standards for all newly built and renovated
buildings, including apartment buildings, the current and strictest construction
standards having been adopted in 1984. Thirty-six of the existing 55 Stabilized
Communities (representing approximately 71% of the units in the Communities)
have been completed and occupied since January 1, 1985, and the Company believes
that all of the Stabilized Communities were constructed, and all of the
Communities Under Development are being constructed, in full compliance with the
applicable standards existing at the time of construction. While earthquakes
have occurred from time to time in 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.
13
<PAGE> 14
ITEM 2. PROPERTIES
The Company owns Stabilized Communities containing 15,975 apartment units
and had ten Communities Under Development. Below is 1998 operating information
for the Stabilized Communities:
<TABLE>
<CAPTION>
1998 AVERAGE MONTHLY
RENTAL RATES 1998
AVERAGE --------------------- AVERAGE
YEAR NUMBER UNIT SIZE PER SQUARE PHYSICAL
PROPERTY COMPLETED OF UNITS (SQUARE FEET) PER UNIT FOOT OCCUPANCY
-------- ---------- ----------- ------------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
PROPERTIES STABILIZED BEFORE 1998
IRVINE, CA (36 PROPERTIES)
Amherst Court........................ 1991 162 724 $1,079 $1.49 92.6%
Berkeley Court....................... 1986 152 877 1,139 1.30 92.8%
Cedar Creek.......................... 1985 176 811 1,024 1.26 96.5%
Columbia Court....................... 1984 58 852 1,067 1.25 94.3%
Cornell Court........................ 1984 109 894 1,174 1.31 93.9%
Cross Creek.......................... 1985 136 935 1,081 1.16 97.1%
Dartmouth Court...................... 1986 294 896 1,150 1.28 92.4%
Deerfield............................ 1975/83 192/96 847 981 1.16 94.4%
Harvard Court........................ 1986 112 826 1,080 1.31 93.7%
Northwood Park....................... 1985 168 944 1,019 1.08 95.6%
Northwood Place...................... 1986 604 954 1,025 1.08 94.6%
Orchard Park......................... 1982 60 971 1,006 1.04 99.3%
Park West............................ 1970/71/72 256/276/348 1,004 1,044 1.04 94.1%
Parkwood............................. 1974 296 883 1,016 1.15 94.0%
Rancho San Joaquin................... 1976 368 896 1,104 1.23 93.1%
San Carlo............................ 1989 354 1,074 1,298 1.21 94.3%
San Leon............................. 1987 248 951 1,134 1.19 95.5%
San Marco............................ 1988 426 923 1,072 1.16 94.5%
San Marino........................... 1986 200 927 1,117 1.21 94.1%
San Mateo............................ 1990 283 720 1,041 1.45 94.5%
San Paulo............................ 1993 382 1,001 1,035 1.03 94.1%
San Remo............................. 1986/88 136/112 966 1,092 1.13 93.6%
Santa Clara(1)....................... 1996 378 967 1,293 1.34 93.5%
Santa Maria(2)....................... 1997 227 1,125 1,505 1.34 92.2%
Santa Rosa(1)........................ 1996 368 895 1,228 1.37 94.7%
Stanford Court....................... 1985 320 799 1,070 1.34 93.8%
The Parklands........................ 1983 121 794 1,135 1.43 99.6%
Turtle Rock Canyon................... 1991 217 1,024 1,370 1.34 94.2%
Turtle Rock Vista.................... 1976/77 112/140 1,155 1,319 1.14 93.0%
Villa Coronado(1).................... 1996 513 929 1,271 1.37 93.8%
Windwood Glen........................ 1985 196 878 1,058 1.21 95.1%
Windwood Knoll....................... 1983 248 903 986 1.09 95.4%
Woodbridge Oaks...................... 1983 120 976 1,072 1.10 99.9%
Woodbridge Pines..................... 1976 220 872 1,043 1.20 94.5%
Woodbridge Villas.................... 1982 258 871 995 1.14 95.4%
Woodbridge Willows................... 1984 200 894 1,036 1.16 95.5%
----------- ----- ------ ----- -----
Subtotal........................... 9,642 929 1,118 1.20 94.4%
----------- ----- ------ ----- -----
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
1998 AVERAGE MONTHLY
RENTAL RATES 1998
AVERAGE --------------------- AVERAGE
YEAR NUMBER UNIT SIZE PER SQUARE PHYSICAL
PROPERTY COMPLETED OF UNITS (SQUARE FEET) PER UNIT FOOT OCCUPANCY
-------- ---------- ----------- ------------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
NEWPORT BEACH, CA (8 PROPERTIES)
Baypointe(2)......................... 1997 300 1,037 1,484 1.43 96.0%
Bayport.............................. 1971 104 867 1,127 1.30 96.0%
Bayview.............................. 1971 64 1,154 1,370 1.19 93.8%
Baywood.............................. 1973/84 320/68 1,074 1,244 1.16 93.5%
Mariner Square....................... 1969 114 1,104 1,230 1.11 95.7%
Newport North........................ 1986 570 947 1,158 1.22 93.8%
Newport Ridge(1)..................... 1996 512 957 1,508 1.58 93.9%
Promontory Point..................... 1974 520 1,056 1,799 1.70 91.5%
----------- ----- ------ ----- -----
Subtotal........................... 2,572 1,010 1,416 1.40 93.7%
----------- ----- ------ ----- -----
TUSTIN, CA (6 PROPERTIES)
Rancho Alisal........................ 1988/91 344/12 967 1,074 1.11 94.7%
Rancho Maderas....................... 1989 266 939 1,126 1.20 94.0%
Rancho Mariposa...................... 1992 238 856 1,078 1.26 93.6%
Rancho Monterey(1)................... 1996 436 932 1,267 1.36 94.1%
Rancho Tierra........................ 1989 252 1,031 1,181 1.15 94.0%
Sierra Vista......................... 1992 306 852 1,147 1.35 94.8%
----------- ----- ------ ----- -----
Subtotal........................... 1,854 930 1,154 1.24 94.2%
----------- ----- ------ ----- -----
Subtotal (50 Properties)......... 13,541 939 1,107 1.18 94.6%
----------- ----- ------ ----- -----
OFF-RANCH (1 PROPERTY)
Villas of Renaissance (San Diego
County)(2)......................... 1992 923 957 1,284 1.34 91.4%
----------- ----- ------ ----- -----
PROPERTIES STABILIZED BEFORE 1998
(51 PROPERTIES)...................... 14,991 942 1,162 1.23 94.1%
----------- ----- ------ ----- -----
PROPERTIES STABILIZED OR ACQUIRED
DURING 1998
One Park Place (Irvine)(3)........... 1995 216 922 984 1.07 96.3%
Rancho Santa Fe (Tustin)(3).......... 1998 316 1,120 1,552 1.39 94.4%
Santa Rosa II (Irvine)(3)............ 1998 207 1,233 1,668 1.35 95.6%
The Colony at Fashion Island (Newport
Beach)(3).......................... 1998 245 1,326 2,368 1.79 96.0%
----------- ----- ------ ----- -----
Subtotal........................... 984 1,152 1,655 1.44 95.5%
----------- ----- ------ ----- -----
TOTAL PORTFOLIO (55
PROPERTIES)................. 15,975 957 $1,213 $1.27 94.1%
=========== ===== ====== ===== =====
</TABLE>
- ---------------
(1) Represents properties stabilized during 1996.
(2) Represents properties stabilized during 1997.
(3) Represents amounts from initial stabilization date or acquisition date.
15
<PAGE> 16
The Properties are located within the following jurisdictions in
California:
<TABLE>
<CAPTION>
STABILIZED COMMUNITIES
COMMUNITIES UNDER DEVELOPMENT TOTAL
--------------------- --------------------- ---------------------
NUMBER OF NUMBER NUMBER OF NUMBER NUMBER OF PERCENT
LOCATION PROPERTIES OF UNITS PROPERTIES OF UNITS PROPERTIES OF TOTAL
-------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
ORANGE COUNTY
Irvine........................................... 38 10,065 3 1,815 41 61%
Newport Beach.................................... 8 2,305 8 12%
Tustin........................................... 7 2,170 7 11%
Newport Coast.................................... 1 512 1 2%
SAN FRANCISCO BAY AREA
Cupertino........................................ 1 342 1 2%
Redwood City..................................... 2 361 2 2%
Sunnyvale........................................ 1 298 1 1%
NORTHERN SAN DIEGO COUNTY.......................... 1 923 2 568 3 8%
LOS ANGELES COUNTY
Santa Monica..................................... 1 119 1 1%
-- ------ -- ----- -- ----
Totals.................................... 55 15,975 10 3,503 65 100%
== ====== == ===== == ====
</TABLE>
The unit mix of the Properties is as follows:
<TABLE>
<CAPTION>
STABILIZED
COMMUNITIES COMMUNITIES TOTAL
NUMBER OF UNDER DEVELOPMENT NUMBER PERCENT OF
UNIT TYPE UNITS NUMBER OF UNITS OF UNITS TOTAL UNITS
--------- ----------- ----------------- ---------- -----------
<S> <C> <C> <C> <C>
Studio/Junior............................................ 471 92 563 3%
One Bedroom.............................................. 4,108 1,325 5,433 28%
Two Bedroom.............................................. 9,884 1,917 11,801 60%
Three Bedrooms or More................................... 1,512 169 1,681 9%
------ ----- ------ ----
Total........................................... 15,975 3,503 19,478 100%
====== ===== ====== ====
</TABLE>
The consolidated real estate and accumulated depreciation schedule of
Irvine Apartment Communities, Inc. is included on pages F-21 through F-23 of
this Annual Report on Form 10-K/A.
The Company believes that the Properties are well maintained and have no
material deferred maintenance requirements or current need for major
renovations. The average age of the Stabilized Communities is approximately 11
years. The oldest of the Stabilized Communities was completed in 1969, and 36 of
the 55 Stabilized Communities, totaling 11,307 units or approximately 71% of the
Stabilized Communities, have been completed since January 1, 1985. The number of
units per Property ranges from 58 units to 923 units, with an average of
approximately 290 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 Stabilized Communities provide, and the Communities Under
Development will provide, residents with numerous amenities and include
extensive landscaping. More than 87% of the 55 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 fireplaces, enclosed
garages, refrigerators, washers and dryers, and microwave ovens. The Communities
Under Development contain most of these amenities.
16
<PAGE> 17
ITEM 3. LEGAL PROCEEDINGS
Shortly after the public announcement of TIC Acquisition LLC's offer to
acquire the outstanding publicly held shares of the Company, certain lawsuits
were initiated by shareholders of the Company against The Irvine Company, TIC
Acquisition LLC, the Company and the Company's Directors (including Donald Bren)
(collectively, the "Defendants") alleging, among other things, that the price
offered by TIC Acquisition LLC for the shares held by the public shareholders of
the Company was inadequate, that the Directors failed to take adequate steps to
obtain the highest possible price for the public shareholders of the Company and
that negotiations were not conducted at arm's-length. A total of four class
actions were filed in the Superior Court of California, Orange County, on behalf
of plaintiff Shareholders and a purported class of all nonaffiliated
shareholders. Subsequently, a consolidated class action (combining the four
prior purported class actions relating to the acquisition offer) was served. The
consolidated class action complaint makes general allegations similar to those
made in the four prior actions, in addition to the added allegations that
advisors working for the Company, TIC Acquisition LLC and The Irvine Company
were not sufficiently independent because of their other relationships with
interested parties. Although the consolidated class action complaint seeks
injunctive relief (including enjoining the special meeting of shareholders and
the merger, or rescinding the merger if it is consummated) and unspecified money
damages, no motions seeking to enjoin the merger or the special meeting of
shareholders have been filed.
The plaintiff shareholders and the Defendants have reached an agreement in
principle to settle the consolidated class action lawsuit based on the final
terms of the merger. The agreement in principle is subject to, among other
things, documentation and court approval.
The Defendants each believe that their respective actions in connection
with the proposed merger have been in accordance with applicable Maryland and
other law (based on each party's consultation with legal counsel, including
Maryland legal counsel).
None of the Company, the Operating Partnership, the Trust nor the
Properties are subject to any other material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
IRVINE APARTMENT COMMUNITIES, INC.
The Company's common stock is listed on the New York and Pacific Stock
Exchanges under the ticker symbol: IAC. As of February 20, 1999, there were
approximately 1,200 holders of record of the Company's common stock. The Company
believes that there are approximately 11,000 beneficial shareholders. The
following table sets forth the high and low closing sales price per share of the
common stock as reported on the New York Stock Exchange (the "NYSE").
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ------- -------
<S> <C> <C>
1998:
Fourth Quarter.............................................. $32.000 $23.375
Third Quarter............................................... 29.750 23.500
Second Quarter.............................................. 31.875 28.313
First Quarter............................................... 32.188 30.313
1997:
Fourth Quarter.............................................. 33.500 29.750
Third Quarter............................................... 33.375 28.250
Second Quarter.............................................. 30.000 25.625
First Quarter............................................... 29.375 24.875
</TABLE>
The following table sets forth the distributions paid by the Company and
its return of capital portion for each dividend.
<TABLE>
<CAPTION>
DISTRIBUTION TYPE FOR
FEDERAL INCOME TAX
TAX PURPOSES
----------------------
CASH DISTRIBUTION TAXABLE RETURN OF
PAYABLE DATE PER SHARE INCOME CAPITAL
------------ ----------------- -------- ----------
<S> <C> <C> <C>
11/30/98................................................. $0.385 33% 67%
8/28/98.................................................. 0.385 33% 67%
5/28/98.................................................. 0.375 33% 67%
2/28/98.................................................. 0.375 33% 67%
11/26/97................................................. 0.375 91% 9%
8/29/97.................................................. 0.375 91% 9%
5/30/97.................................................. 0.365 91% 9%
2/28/97.................................................. 0.365 91% 9%
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>
18
<PAGE> 19
The merger agreement relating to the proposed merger of the Company with
TIC Acquisition LLC permits the continued declaration and payment of regular
quarterly dividends of $.385 per share on the Company's common stock, in
accordance with past practice, but also requires that the record dates for the
second and third quarter 1999 quarterly dividends not be earlier than June 15,
1999 and September 15, 1999, respectively. Such dates are later than the record
dates in prior years. The Company currently intends to set the close of business
on June 15, 1999 as the record date for the second quarter 1999 quarterly
dividend. Therefore, if the merger is consummated on or before June 15, 1999,
additional dividends will not be paid on the Company's common stock. The Company
cannot predict what dividends, if any, with respect to the membership interests
of TIC Acquisition LLC will be paid following the merger, if it is consummated.
If the merger is not consummated, the Company intends to continue to pay
regular quarterly dividends on the Company's common stock.
IRVINE APARTMENT COMMUNITIES, L.P.
There is no established public trading market for the Operating
Partnership's common partnership interests. As of February 10, 1999, there were
ten (including the general partner interest) holders of common partnership
interests.
The table set forth under Irvine Apartment Communities, Inc. regarding
dividends and return of capital is equally applicable on a per unit basis to the
Operating Partnership as to the Company.
The merger agreement relating to the proposed merger of the Company with
TIC Acquisition LLC permits the continued declaration and payment of regular
quarterly distributions on the common partnership interests of the Operating
Partnership. The Company anticipates that any future distributions, if any, on
common partnership interests of the Operating Partnership will be paid in
conjunction with dividends on the Company's common stock. The Company cannot
predict what distributions, if any, with respect to the common partnership
interests of the Operating Partnership will be paid following the merger, if it
is consummated.
If the merger is not consummated, the Company intends to continue to pay
regular quarterly distributions on the common partnership interests of the
Operating Partnership.
During the fourth quarter of 1998, the Operating Partnership sold 2,000,000
Series B Preferred L.P. Units in the Operating Partnership to Greene Street 1998
Exchange Fund, L.P. for aggregate consideration of $50,000,000 (less a
$1,250,000 placement fee) pursuant to exemptions provided by Section 4(2) of the
Securities Act of 1933. Each Series B Preferred L.P. Unit is exchangeable under
certain circumstances into preferred stock of the Company or preferred
securities of the Trust.
There were no issuances of common limited partnership interests in the
Operating Partnership during the fourth quarter of 1998.
IAC CAPITAL TRUST
There were no issuances of securities of the Trust during the fourth
quarter of 1998.
19
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data and other operating
information of the Company, the Operating Partnership and the Trust. The
selected financial data in the table are derived from the consolidated financial
statements of the Company, the Operating Partnership and the Trust. The data
should be read in conjunction with the consolidated financial statements,
related notes, and other financial information included herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES, PER SHARE/UNIT/SECURITY AND
PROPERTY INFORMATION)
<S> <C> <C> <C> <C> <C>
IRVINE APARTMENT COMMUNITIES, INC.
SELECTED OPERATING INFORMATION
Total revenues................................. $ 220,837 $ 186,945 $158,698 $136,168 $130,236
Income before extraordinary item, minority
redeemable preferred interests and minority
interest in income........................... $ 73,549 $ 58,583 $ 41,192 $ 25,056 $ 12,279
Net income..................................... $ 8,356 $ 26,404 $ 18,746 $ 8,465 $ 7,273
Basic earnings per share(1).................... $ 0.42 $ 1.34 $ 1.06 $ 0.61 $ 0.62
Diluted earnings per share(1).................. $ 0.41 $ 1.33 $ 1.05 $ 0.05 $ 0.41
Cash distributions per share................... $ 1.52 $ 1.48 $ 1.44 $ 1.39 $ 1.11
Total apartment units (at end of period)....... 16,439 15,136 13,656 12,776 11,358
SELECTED STABILIZED PROPERTY INFORMATION(2)
Total properties (at end of period)............ 55 51 48 43 43
Average physical occupancy(3).................. 94.1% 94.5% 94.9% 94.6% 95.6%
Average monthly rent per unit(4)............... $ 1,213 $ 1,116 $ 1,025 $ 996 $ 981
SELECTED BALANCE SHEET INFORMATION AT DECEMBER
31,
Total assets................................... $1,374,624 $1,163,677 $900,998 $853,230 $757,240
Total long-term debt........................... $ 751,818 $ 704,063 $553,064 $563,286 $540,689
Minority redeemable preferred interests and
minority interest............................ $ 378,610 $ 210,307 $$140,327 $109,133 $109,296
Shareholders' equity........................... $ 195,858 $ 210,920 $180,017 $155,433 $ 81,753
IRVINE APARTMENT COMMUNITIES, L.P.
SELECTED OPERATING INFORMATION
Total revenues................................. $ 220,837 $ 186,945 $158,698 $136,168 $130,236
Income before extraordinary item and redeemable
preferred interests.......................... $ 73,549 $ 58,583 $ 41,192 $ 25,056 $ 12,279
Net income..................................... $ 18,781 $ 58,583 $ 41,192 $ 1,629 $ 12,279
Basic earnings per unit........................ $ 0.42 $ 1.34 $ 1.06 $ 0.05 $ 0.41
Diluted earnings per unit...................... $ 0.41 $ 1.34 $ 1.05 $ 0.05 $ 0.41
Cash distributions per unit.................... $ 1.52 $ 1.48 $ 1.44 $ 1.39 $ 1.11
Total apartment units (at end of period)....... 16,439 15,136 13,656 12,776 11,358
SELECTED STABILIZED PROPERTY INFORMATION(2)
Total properties (at end of period)............ 55 51 48 43 43
Average physical occupancy(3).................. 94.1% 94.5% 94.9% 94.6% 95.6%
Average monthly rent per unit(4)............... $ 1,213 $ 1,116 $ 1,025 $ 996 $ 981
SELECTED BALANCE SHEET INFORMATION AT DECEMBER
31,
Total assets................................... $1,374,624 $1,163,677 $900,998 $853,230 $757,240
Total long-term debt........................... $ 751,818 $ 704,063 $553,064 $563,286 $540,689
Redeemable preferred interests................. $ 192,789
Partners' capital.............................. $ 381,679 $ 421,227 $320,344 $264,566 $191,049
IAC CAPITAL TRUST
SELECTED OPERATING INFORMATION
Income from investment in subsidiary........... $ 11,722
Net income..................................... $ --
Basic and diluted earnings per security........ $ 0.00
SELECTED BALANCE SHEET INFORMATION AT DECEMBER
31,
Total assets................................... $ 150,005
Redeemable preferred interest.................. $ 150,000
Equity......................................... $ 5
</TABLE>
20
<PAGE> 21
- ---------------
(1) Differences between basic and diluted earnings per share in 1995 and 1994
are primarily due to the impact of the Company's debt extinguishment costs
which were allocated to The Irvine Company in accordance with the Operating
Partnership's partnership agreement (the "Partnership Agreement").
(2) A property is considered stabilized at the earlier of one year after
completion of construction or when it achieves 95% occupancy. Properties are
not considered in the calculations of average physical occupancy and average
monthly rent per unit until such time as they are deemed stabilized.
(3) Average physical occupancy is calculated by dividing the total occupied
units in the stabilized properties on a weekly basis by the total units in
the stabilized properties on a weekly basis.
(4) Average monthly rent per unit is calculated by dividing average rental
revenue per unit by average economic occupancy.
21
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Data, the Consolidated Financial Statements of the Company, the
Operating Partnership and the Trust 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, 1998, the Company had a 44.6% 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. At December 31, 1998, the limited partners had a 55.4% limited
partnership interest in the Operating Partnership, with The Irvine Company and
certain of its affiliates owning a 55.2% common limited partnership interest in
the Operating Partnership. In addition, at December 31, 1998, The Irvine Company
and its affiliates owned approximately 17.9% of the common shares of the
Company.
The Company is a self-administered equity REIT engaged in the operation and
development of apartment communities in California. The Company's strategic
growth plan is designed to create new market positions in California which
possess rental demographics and economic growth prospects similar to those on
the Irvine Ranch. As of December 31, 1998, the Operating Partnership owned and
operated 65 properties containing 16,439 apartment units and had 3,039 units
under construction or development. In March 1998, the Operating Partnership and
Western National Property Management ("WNPM") announced the formation of a
strategic alliance that, in April 1998, assumed all property management
responsibilities for the Operating Partnership's Southern California portfolio.
The new entity, Irvine Apartment Management Company ("IAMC"), is owned 51% by
the Operating Partnership and 49% by WNPM. Until July 31, 2020, the Company and
the Operating Partnership have the exclusive right, but not the obligation, to
acquire land from The Irvine Company for development of additional apartment
communities on the Irvine Ranch.
IAC Capital Trust, a Delaware Business trust (the "Trust"), was formed on
October 31, 1997. The Trust is a limited purpose financing vehicle established
by the Company and the Operating Partnership. The Trust exists for the sole
purpose of issuing preferred securities and investing the proceeds thereof in
preferred limited partner units of the Operating Partnership. In January 1998,
the Trust issued 6.0 million of its 8 1/4% Series A Preferred Securities
resulting in gross proceeds of $150 million.
Going Private Transaction
On February 1, 1999, the Company and TIC Acquisition LLC, an indirect
wholly owned subsidiary of The Irvine Company, entered into a definitive merger
agreement providing for a merger of the Company into TIC Acquisition LLC in
which the Company's shareholders will receive $34 in cash per share. The
transaction, which is subject to the approval of the holders of (i) at least
two-thirds of the outstanding shares of common stock of the Company and (ii) a
number of shares of common stock of the Company (excluding the shares held by
TIC Acquisition LLC and its affiliates) representing a majority of the total
number of shares of common stock of the Company entitled to vote, and other
customary conditions, is expected to be completed late in the second quarter or
early in the third quarter of 1999.
RESULTS OF OPERATIONS
The Company's income before extraordinary item, minority redeemable
preferred interests and minority interest in income was $73.5 million in 1998,
up from $58.6 million in 1997 and $41.2 million in 1996. The Company's financial
results improved in 1998 due to the contribution of newly delivered rental units
from its development program, properties that stabilized during 1997, an
increase in rental rates within its stabilized portfolio, and an acquisition in
1998, partially offset by a slight decrease in physical occupancy and an
increase in minority redeemable preferred interests due to the issuance of
preferred securities in January and November 1998. In 1997, financial results
improved due to the contribution of newly delivered rental units
22
<PAGE> 23
from its development program, an acquisition in 1997 and an increase in rental
rates within its stabilized portfolio.
REVENUE AND EXPENSE DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
COMMUNITIES STABILIZED BEFORE 1997
(MORE THAN TWO YEARS)(1)
Number of communities..................................... 48 48
Number of units at end of period.......................... 13,541 13,541
Operating revenues........................................ $181,182 $172,562
Property expenses......................................... $ 41,143 $ 41,322
Real estate taxes......................................... $ 13,774 $ 13,652
Depreciation and amortization............................. $ 26,059 $ 26,315
COMMUNITIES STABILIZED IN 1997 (LESS THAN TWO YEARS)(2)
Number of communities..................................... 2
Number of units at end of period.......................... 527
Operating revenues........................................ $ 9,131
Property expenses......................................... $ 1,595
Real estate taxes......................................... $ 675
Depreciation and amortization............................. $ 1,720
LEASE-UP AND NEWLY ACQUIRED COMMUNITIES(3)
Number of communities..................................... 7
Number of units at end of period.......................... 2,371
Operating revenues........................................ $ 29,060
Property expenses......................................... $ 6,660
Real estate taxes......................................... $ 2,760
Depreciation and amortization............................. $ 5,425
</TABLE>
- ---------------
(1) Represents 43 communities (11,334 units) that achieved stabilized occupancy
(95%) prior to 1996 and 5 communities (2,207 units) that achieved stabilized
occupancy in 1996. No comparison for 1997 and 1996 is shown since not all of
the properties were stabilized for comparable periods.
(2) Represents two communities (527 units) that achieved stabilized occupancy
during 1997. No year-over-year comparison is provided since the properties
were not stabilized for comparable periods.
(3) Represents three properties (768 units) that achieved stabilized occupancy
at various dates in 1998, the Villas of Renaissance apartment community (923
units) purchased on June 30, 1997, One Park Place apartment community (216
units) purchased on October 8, 1998, and two apartment communities in
lease-up at December 31, 1998.
OPERATING REVENUES (rental and other income) increased by 17.9% to $219.4
million in 1998, up from $186.1 million in 1997. Operating revenues in 1997 had
increased by 17.7% from $158.1 million in 1996. Operating revenues rose in 1998
because of higher rental rates and a larger average number of rental units in
service, primarily as a result of new development. Newly delivered and acquired
units along with unit growth in the Company's portfolio stabilized less than two
years added $38.2 million to operating revenues from nine properties in 1998,
compared to $13.5 million from six properties in 1997. Operating revenues
generated by communities stabilized more than two years increased 5.0% in 1998
due to an improvement in the portfolio's average rental rate, partially offset
by a decrease in average physical occupancy to 94.3% from 94.6%. The average
monthly rental rate for these communities increased 5.2% to $1,165 in 1998, from
$1,107 in 1997.
23
<PAGE> 24
Operating revenues rose in 1997 because of higher rental rates and a larger
average number of rental units in service as a result of both new development
and an acquisition in June 1997. Newly delivered, acquired and stabilized units
added $45.5 million to operating revenues in 1997 from eleven properties,
compared to $24.7 million in 1996 from five properties. Operating revenues
generated by communities owned and stabilized more than two years increased 5.5%
in 1997, due to an improvement in the average monthly rental rate, partially
offset by a decrease in average physical occupancy to 94.6% from 95.0%. The
average monthly rental rate for these communities increased 6.2% to $1,078 in
1997, from $1,015 in 1996.
PROPERTY EXPENSES increased by 10.8% to $49.4 million in 1998 from $44.6
million in 1997, which had increased from $38.4 million in 1996. The 1998
increase reflects incremental expenses from newly delivered and acquired rental
units and communities stabilized during 1997. Property expenses for communities
stabilized more than two years decreased by $0.2 million to $41.1 million in
1998. Average monthly property expenses generated by these communities decreased
to $253 per unit in 1998 from $254 per unit in 1997. Newly delivered and
acquired units and communities stabilized less than two years added $8.3 million
to property expenses from nine properties in 1998 compared to $3.2 million from
six properties in 1997. To improve operating efficiency and reduce operating
costs, the Company formed IAMC to manage the Company's properties in April 1998.
Accordingly, the personnel and office costs of IAMC are included in 1998
property expenses. For comparative purposes, prior period management fees have
been included in property expenses.
The 1997 increase primarily reflects the added expenses from the newly
delivered and acquired rental units and communities stabilized less than two
years. Property expenses for communities owned and stabilized more than two
years increased by $3.0 million to $41.3 million from $38.3 million in 1996.
Average monthly property expenses generated by these communities increased to
$254 per unit in 1997 from $236 per unit in 1996, primarily as a result of five
communities that stabilized during 1996, as well as higher insurance expenses,
higher unit turnover and related expenses, and preventative maintenance
scheduled in anticipation of an unseasonably wet winter. Lease-up and newly
acquired properties added $3.2 million in 1997.
REAL ESTATE TAXES totaled $17.2 million in 1998, $15.0 million in 1997 and
$13.5 million in 1996. Real estate taxes increased in 1998 and 1997 primarily
due to the addition of new rental units.
NET INTEREST EXPENSE decreased to $27.8 million in 1998 from $30.4 million
in 1997, which had increased from $29.5 million in 1996. Total interest incurred
was $40.1 in 1998 compared with $36.1 million in 1997 and $32.7 million in 1996.
The increase in interest incurred in 1998 was primarily due to unsecured notes
payable that were outstanding for the entire period, partially offset by lower
interest rates in 1998. Net interest expense declined in 1998 because the
Company's increased level of development resulted in a higher level of
capitalized interest. Net interest expense rose in 1997 largely due to a greater
level of borrowing under the credit facility, which was used to finance an
acquisition in June 1997. The Company capitalizes interest on projects actively
under development using qualifying asset balances and applicable weighted
average interest rates. Capitalized interest totaled $12.3 million in 1998, $5.7
million in 1997 and $3.2 million in 1996.
INTEREST INCOME totaled $1.5 million in 1998, $0.8 million in 1997 and $0.6
million in 1996. The changes in interest income reflect changes in the Company's
average cash balances.
AMORTIZATION OF DEFERRED FINANCING COSTS decreased by 20.8% to $1.9 million
in 1998 from $2.4 million in 1997, which was down from $2.6 million in 1996. The
$0.5 million decrease in 1998 was due to the full amortization of certain loan
costs during the prior year and a lower level of deferred financing costs
associated with the unsecured tax-exempt bond financings. The $0.2 million
decrease in 1997 was due to the full amortization of certain loan costs during
that year.
DEPRECIATION AND AMORTIZATION EXPENSE increased by 15.4% to $33.8 million
in 1998, up from $29.3 million in 1997. These expenses had increased in 1997 by
7.7% from $27.2 million in 1996. The increases in both years reflect the
completion and delivery of newly developed rental units. In addition, the 1998
amount reflects three months of depreciation from One Park Place, a community
acquired in 1998, and the 1997 amount reflects six months of depreciation from
The Villas of Renaissance, a community acquired in 1997.
24
<PAGE> 25
GENERAL AND ADMINISTRATIVE EXPENSE increased by 40.3% to $9.4 million in
1998, up from $6.7 million in 1997 and $6.3 million in 1996. The increase in
1998 was largely the result of $1.0 million of costs related to The Irvine
Company's acquisition offer, increased salary expenses due to a new chief
executive officer, $453,000 of project abandonment expenses and increased staff
levels necessitated by the Company's growth. The increase in 1997 was largely
the result of increased staff levels necessitated by the Company's growth.
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 short-term and long-term
liquidity requirements, such as construction costs, 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, partnership units by the Operating
Partnership or preferred securities by the Trust. The Operating Partnership has
a $250 million unsecured revolving credit facility that was amended in July
1998. The amended credit facility currently bears interest at LIBOR plus 0.65%
or prime and matures in June 2001. The interest rates under the credit facility
are adjusted up or down based on the credit ratings on the Operating
Partnership's senior unsecured long-term indebtedness. In January 1998, all
outstanding borrowings under the credit facility were repaid from the proceeds
of the offering by the Trust of its 8 1/4% Series A Preferred Securities. In
1998, the Company entered into letters of credit under the credit facility
totaling $29.1 million related to land and building purchases (see "Capital
Investments in New Development"). The letters of credit reduced the remaining
amount available under the line of credit. Availability under the credit
facility was $220.9 million at December 31, 1998. At March 29, 1999, the
interest rate applicable to borrowings under the credit facility was 5.59%
(LIBOR + 0.65%).
SHELF REGISTRATION STATEMENTS: On May 14, 1997, the Company filed a shelf
registration statement with the Securities and Exchange Commission providing for
the issuance from time to time of up to $350 million of common stock, preferred
stock, and warrants to purchase common stock and preferred stock. The Company
plans to use the proceeds raised from any securities issued under its shelf
registration statement for general corporate purposes, including the development
of new apartment communities, acquisitions and the repayment of existing debt.
Availability under the Company's shelf registration statement was $350 million
at December 31, 1998. Concurrently, the Operating Partnership filed a shelf
registration statement with the Securities and Exchange Commission providing for
the issuance from time to time of up to $350 million of debt securities. The
Operating Partnership plans to use the proceeds raised from any securities
issued under its shelf registration statement for general corporate purposes,
including the development of new apartment communities, acquisitions and the
repayment of existing debt. On October 1, 1997, the Operating Partnership issued
$100 million aggregate principal amount of 7% senior unsecured notes pursuant to
its shelf registration statement. Availability under the Operating Partnership's
shelf registration statement was $250 million at December 31, 1998. The
Operating Partnership, pursuant to a Prospectus Supplement dated April 9, 1998,
may issue from time to time up to $250 million aggregate initial offering price
of its Medium-Term Notes, Series A due nine months or more from the date of
issue. Issuances of medium-term notes will reduce availability under the
Operating Partnership's shelf registration statement by the amount of
medium-term notes issued. Similarly, issuances of other debt securities under
the Operating Partnership's shelf registration statement will reduce the amount
of medium-term notes that may be issued. As of December 31, 1998, there have
been no issuances of medium-term notes.
IAC CAPITAL TRUST: The Trust was formed on October 31, 1997. The Trust is a
limited purpose financing vehicle established by the Company and the Operating
Partnership. The Trust exists for the sole purpose of issuing its preferred
securities and investing the proceeds thereof in preferred limited partner units
of the Operating Partnership. In January 1998, the Trust issued 6.0 million of
its 8 1/4% Series A Preferred Securities. The proceeds of $150 million were used
to purchase an equivalent amount of 8 1/4% Series A Preferred Limited Partner
Units in the Operating Partnership. The Operating Partnership used the $150
million of proceeds, net
25
<PAGE> 26
of costs and expenses, all of which were paid by the Operating Partnership, to
repay outstanding borrowings under the credit facility and to fund development
and an acquisition.
DEBT: The Company's conventional and tax-exempt debt bears interest at
fixed interest rates. 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 that range from 2000 to 2008. The
weighted average effective interest rate on the Company's debt, including the
non-cash charges of amortization of deferred financing costs, was 6.03% at
December 31, 1998. In June 1998, the Company completed a $334 million offering
of unsecured tax-exempt debt at an average interest rate of 4.93% in three
tranches ranging from 10 to 15 years. Proceeds from the offering were used to
repay the Company's existing tax-exempt mortgage debt and to pay a portion of
the costs associated with prepayment penalties and the unwinding of certain swap
agreements.
DEBT STRUCTURE
<TABLE>
<CAPTION>
BALANCE AT WEIGHTED
DECEMBER 31, AVERAGE
1998 INTEREST RATE
------------ -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Fixed rate debt
Conventional mortgage financings......................... $129.5 7.12%
Mortgage notes payable to The Irvine Company............. 49.5 5.75%
Tax-exempt assessment district debt...................... 5.3 6.29%
Unsecured tax-exempt bond financings..................... 334.2 4.93%
Unsecured notes payable.................................. 99.3 7.10%
Unsecured term loan...................................... 100.0 6.11%
------ ----
Total fixed rate debt............................ 717.8 5.86%
------ ----
Variable rate debt
Tax-exempt mortgage bond financings...................... 18.0 4.29%
Tax-exempt assessment district debt...................... 16.0 3.51%
------ ----
Total variable rate debt......................... 34.0 3.92%
------ ----
Total debt....................................... $751.8 5.77%
====== ====
</TABLE>
OPERATING ACTIVITIES: Cash provided by operating activities was $83.8
million, $94.7 million and $73.0 million for 1998, 1997 and 1996, respectively.
Cash provided by operating activities decreased in 1998 compared to 1997 due to
an extraordinary item related to debt extinguishment, partially offset by higher
revenues from newly developed and acquired apartment units, as well as an
increase in revenues within the Company's stabilized portfolio achieved through
higher rental rates.
INVESTING ACTIVITIES: Cash used in investing activities was $231.7 million,
$249.6 million and $66.6 million in 1998, 1997 and 1996, respectively. Changes
in the amount of cash used in investing activities in each year reflect changing
levels of real estate development and acquisitions in 1998 and 1997. Real estate
development and acquisitions are typically funded by the line of credit until
long-term financing is obtained (see "Financing Activities" and "Capital
Expenditures").
FINANCING ACTIVITIES: Cash provided by (used in) financing activities was
$148.2 million, $156.3 million, and $(7.6) million in 1998, 1997 and 1996,
respectively. The Operating Partnership received net proceeds of $192.7 million
from the sale of preferred limited partner units in January and November of
1998, a portion of which was used to pay down the Operating Partnership's line
of credit. Additionally, the Operating Partnership received a $100 million
unsecured term loan with which it paid down the Operating Partnership's line of
credit. The Company and the Operating Partnership received $66 million from the
issuance of common stock and partnership units in 1997. These proceeds were used
to pay down borrowings under the line of credit. In June 1997, $118 million was
borrowed under the line of credit to fund the acquisition of The Villas of
Renaissance. In October 1997, the Operating Partnership received net proceeds of
$97.9 million from the issuance of the 7% Notes. These proceeds were used to
repay outstanding borrowings under the line of credit.
26
<PAGE> 27
Additionally, the Company paid $80.7 million in distributions to common
shareholders, common limited partners and minority redeemable preferred
interests holders in 1998 compared to $64.1 million in 1997 and $56.1 million in
1996. Among the factors affecting cash in 1996, the Company received $60.0
million from the sale of common stock and partnership units. These proceeds were
used to repay borrowings under the line of credit.
CAPITAL EXPENDITURES
Capital expenditures consist of capital improvements and investments in
real estate assets. Capital improvements to operating real estate assets totaled
$5.9 million, $5.0 million and $4.8 million in 1998, 1997 and 1996,
respectively. Capital investments in real estate assets totaled $226 million,
$245 million and $62 million in 1998, 1997 and 1996, respectively, and consisted
of capital investments in new developments, nonrecurring capital replacements,
acquisitions of apartment communities and land purchases.
RECURRING CAPITAL IMPROVEMENTS WITHIN ALL STABILIZED COMMUNITIES. The
following table details expenditures for recurring capital improvements for all
communities for 1998.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Carpet replacements......................................... $1,997
Exterior building enhancements, siding and stucco........... 1,050
Upgrades, renovations and major building items.............. 307
Appliances, water heaters and air conditioning.............. 278
Roofing, concrete and pavement.............................. 1,172
Equipment and other......................................... 1,079
------
Total............................................. $5,883
======
</TABLE>
RECURRING CAPITAL IMPROVEMENTS WITHIN COMMUNITIES STABILIZED BEFORE
1997. Expenditures for recurring capital improvements within communities
stabilized before 1997 totaled $5.7 million, $5.0 million and $4.8 million in
1998, 1997 and 1996, respectively. Average recurring capital improvements per
unit were $418, $372 and $353 in 1998, 1997 and 1996, respectively. 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 recurring capital
improvements in 1999 are expected to be similar to 1998 levels.
RECURRING CAPITAL IMPROVEMENTS WITHIN COMMUNITIES STABILIZED IN OR AFTER
1997. Expenditures for recurring capital improvements within communities
stabilized in or after 1997 totaled $0.2 million.
NONRECURRING CAPITAL REPLACEMENTS: Nonrecurring capital replacements
consist of special programs to upgrade and enhance a community to achieve higher
rental rates. Expenditures for nonrecurring capital replacements totaled $6.8
million in 1998. These expenditures were made at two properties, Promontory
Point and The Villas of Renaissance. Expenditures for nonrecurring capital
replacements are expected to be approximately $9 million in 1999.
CAPITAL INVESTMENTS IN NEW DEVELOPMENT: The major cash requirements in 1999
are expected to be for the construction of new apartment communities and
possible acquisitions of apartment communities. Currently, the Company has nine
apartment communities under development or construction that will require total
expenditures of approximately $570 million, of which $212 million had been
incurred at December 31, 1998. Funding for these developments is expected to
come from the Operating Partnership's $250 million unsecured revolving credit
facility (of which $220.9 million was available as of December 31, 1998), debt
offerings of the Operating Partnership and preferred securities offerings of the
Trust. In addition, the Company may issue other equity securities as discussed
in the "Liquidity" section.
27
<PAGE> 28
CONSTRUCTION INFORMATION
<TABLE>
<CAPTION>
TOTAL
COMMENCEMENT ESTIMATED
COMMENCEMENT OF LEASING COSTS
APARTMENT COMMUNITY LOCATION UNITS OF CONSTRUCTION ACTIVITY (IN MILLIONS)
------------------- ------------ ----- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
On Irvine Ranch:
Sonoma at Oak Creek............. Irvine 196 11/97 8/98 $ 25
Brittany at Oak Creek........... Irvine 393 12/97 1/99 45
Bellagio (Park Place)........... Irvine 1,226 9/98 219
----- ----
1,815 289
----- ----
Off Irvine Ranch:
Arcadia at Stonecrest........... San Diego 336 4/98 2/99 42
The Colony at Aventine.......... La Jolla 232 5/98 44
The Villas at Bair Island
Marina....................... Redwood City 155 6/98 40
1221 Ocean Avenue............... Santa Monica 119 8/98 75
Lonestar........................ Redwood City 206 11/98 39
Olson Ranch..................... Sunnyvale 298 11/98 41
----- ----
1,346 281
----- ----
Total................... 3,161 $570
===== ====
</TABLE>
The timing of future commencement and completion of construction, the
commencement of leasing activity 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; product design changes; entitlement decisions by local
government authorities; weather patterns; 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 table will not vary substantially from
actual results.
YEAR 2000
GENERAL: As is the case with many computer and microprocessor-based
systems, certain of the Company's systems use two digit date fields which
recognize dates using the assumption that the first two digits are "19" (i.e.,
the number "98" is recognized as the year "1998"). Because of the nature of its
operations, the Company does not believe that its business, results of
operations or financial condition will be materially adversely affected by a
failure of these systems. Nonetheless, the Company has initiated a plan to
assess (and remediate, as necessary) its computer and microprocessor-based
systems.
STATE OF YEAR 2000 READINESS: The Company's Year 2000 project is divided
into four general exposure types -- infrastructure, applications software,
third-party suppliers and customers ("third parties"), and process control and
instrumentation ("PC&I"). The general resolution phases common to all sections
are: (1) compiling potential Year 2000-sensitive items; (2) assigning priorities
to identified items; (3) assessing the Year 2000 compliance of items determined
to be material to the Company; (4) repairing or replacing material items that
are determined not to be Year 2000 compliant; and (5) testing material items.
The completion percentages of the general resolution phases are based on
the level of effort expended to date versus the level of effort estimated to be
necessary to complete the task.
The infrastructure and applications software sections consist of hardware
and systems software. As of December 31, 1998, all infrastructure has been
repaired or replaced and is believed to be Year 2000 compliant. As of December
31, 1998, approximately 90% of the Company's applications software had been
confirmed to be Year 2000 compliant. The Company expects to complete the
remaining assessment and repair or replacement, including testing, during the
second quarter of 1999.
28
<PAGE> 29
The third parties section consists of identifying and prioritizing critical
suppliers and communicating with them about their plans and progress in
addressing the Year 2000 issue. The state of readiness of the Company's third
parties is based primarily on representations from such parties. The Company has
queried 100% of its significant suppliers and subcontractors that do not share
information systems with the Company. The Company has received written Year 2000
status letters from all of the significant suppliers and subcontractors queried.
Of the significant suppliers and subcontractors queried, 100% had a plan to
remediate any Year 2000 issues and 100% had begun assessing their systems, but
none had completed their plan or were Year 2000 compliant. Follow-up inquiries
are scheduled through the remainder of 1999, at which time the Company will
implement contingency plans or other alternatives, as necessary, depending on
the third parties' Year 2000 readiness. To date, the Company is not aware of any
third parties with a Year 2000 issue that would materially impact the Company's
results of operations, liquidity, or capital resources. However, the Company has
no means of ensuring that third parties will be Year 2000 ready.
Plans detailing the tasks and resources required for the PC&I section are
in place. This section includes the hardware, software and associated embedded
computer chips that are used in the operation of all facilities operated by the
Company. PC&I equipment includes security systems, lighting systems, HVAC
systems and sprinkler systems. As of December 31, 1998, the Company had assessed
the Year 2000 readiness in approximately 90% of its PC&I systems. The Company
believes that the repair or replacement and testing of PC&I equipment is
approximately 25% complete. The Company expects to complete the repair or
replacement of its PC&I systems by the second quarter of 1999, with all testing
scheduled to be completed by year-end 1999.
COSTS: The Company has incurred less than $50,000 in connection with its
Year 2000 remediation efforts. The Company estimates its future costs related to
its Year 2000 remediation efforts to be less than $50,000. Overall, the Company
does not expect its Year 2000 expenditures to be material to the Company's
business, results of operations or financial condition.
RISK AND CONTINGENCY PLANNING: Management of the Company believes it has a
program in place to adequately resolve the Year 2000 issue in a timely manner.
As noted above, the Company has not yet completed all necessary resolution
phases of the Year 2000 project. In the event that the Company does not complete
any additional phases related to its infrastructure, applications software or
PC&I, the Company does not believe that there will be a material adverse effect
on its business, results of operations or financial condition. A Year 2000
failure by an important third party could materially disrupt the Company's
operations. For example, a Year 2000 failure by one or more of the financial
institutions or utility companies with which the Company does business could
cause the Company to lose access to its funds or could restrict the Company's
ability to borrow or operate a property. A Year 2000 failure by a trustee or
transfer agent or by The Depository Trust Company could restrict the Company's
ability to pay interest on its bonds or to pay dividends or distributions on its
equity securities. In addition, disruption in the economy generally resulting
from Year 2000 issues could also materially adversely affect the Company. The
Company could be subject to litigation relating to the adverse effects resulting
from the Year 2000 issue. The amount of potential liability and lost revenue
cannot be reasonably estimated at this time. The Company currently has no
contingency plans in place in the event it does not complete all resolution
phases of the Year 2000 project. The Company plans to periodically evaluate the
status of completion and determine whether such a plan is necessary.
The Company's assessment of its risks, and its expectations as to future
Year 2000 compliance, are forward-looking statements.
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
29
<PAGE> 30
contracts for the development and construction of new apartment communities.
These are fixed-fee contracts and thus partially insulate the Company from
inflationary risk.
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 use this definition of FFO.
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
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C>
Net income.................................................. $ 8,356 $26,404 $18,746
Add:
Depreciation and amortization............................. 33,204 29,052 27,087
Extraordinary item related to debt extinguishment......... 42,451
One-time charge related to transition of Irvine Apartment
Management Company..................................... 345
Loss on settlement of unused treasury locks............... 7,763
Costs associated with The Irvine Company acquisition
offer.................................................. 1,023
Minority interest in income............................... 10,425 32,179 22,446
-------- ------- -------
Funds from operations....................................... $103,567 $87,635 $68,279
======== ======= =======
</TABLE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's current and future debt obligations. The Company's
philosophy is to maintain a fairly low tolerance to interest rate fluctuation
risk. The Company is still vulnerable, however, to significant fluctuations of
interest rates on its LIBOR rate debt, repricing on its fixed rate debt at
various points in the future and future debt.
The Company has managed and will continue to manage interest rate risk by
maintaining a ratio of fixed rate long-term debt to total debt such that
variable rate exposure is kept at an acceptable level, fixing certain variable
rate long-term debt through the use of interest rate swaps with appropriately
matched maturities and taking advantage of favorable market conditions for
long-term debt and/or equity.
The following table provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates. For debt obligations, the table presents principal
cash flows and related weighted-average interest rates by expected maturity
dates. For the interest rate swap, the table presents notional amounts and
weighted-average interest rates by contractual maturity dates. Notional amounts
are used to calculate the contractual cash flows to be exchanged under the
contract.
30
<PAGE> 31
INTEREST RATE SENSITIVITY
PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST (SWAP) RATE/CAP STRIKE PRICE
<TABLE>
<CAPTION>
THERE- FAIR VALUE
1999 2000 2001 2002 2003 AFTER TOTAL 12/31/98
----------- ------- ------ ------ ------- -------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES
Tax-exempt mortgage bond
financings....................... $ 18,000 $ 18,000 $ 18,000
Average interest rate(1).........
Conventional mortgage financings... $ 2,958 $36,754 $2,773 $3,000 $13,928 70,126 129,539 135,938
Average interest rate............ 7.06% 8.20% 7.08% 7.16% 7.63% 8.48%
Mortgage notes payable to The
Irvine Company................... 931 986 1,044 1,106 1,171 44,279 49,517 43,432
Average interest rate............ 5.75% 5.75% 5.75% 5.75% 5.75% 5.75%
Tax-exempt assessment district
debt............................. 326 522 583 642 668 18,551 21,292 21,292
Average interest rate(2).........
Unsecured tax-exempt bond
financings....................... 334,190 334,190 339,886
Average interest rate............ 5.23%
Unsecured term loan................ 100,000 100,000 100,000
Average interest rate............ LIBOR+1.50%
Unsecured notes payable............ 99,280 99,280 89,096
Average interest rate............ 7.10%
INTEREST RATES DERIVATIVE FINANCIAL
INSTRUMENTS RELATED TO DEBT
Interest rate swap.................
Pay fixed/receive variable....... 100,000 100,000 2,762
Average pay rate................. 4.88%
Average receive rate............. LIBOR+1.50%
</TABLE>
- ---------------
(1) The average interest rate is a weekly remarketed tax-exempt base rate. The
weighted average interest rate as of December 31, 1998 was 4.29%.
(2) $5,268 of debt is fixed at 6.29% and $16,024 is variable at the daily
remarketed tax-exempt base rate. The weighted average variable interest rate
was 3.51% as of December 31, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related reports of independent auditors listed
in the accompanying index are filed as part of this report. See "Index to
Financial Statements" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
31
<PAGE> 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
BOARD OF DIRECTORS OF IRVINE APARTMENT COMMUNITIES, INC.
The following sets forth certain information regarding the Board of
Directors of the Company as of February 16, 1999:
DONALD BREN, 66. Mr. Bren has been Chairman of the Board of the Company
since its formation. He was President and Chief Executive Officer of the Company
from February 1997 to July 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.
ANTHONY M. FRANK, 67. Mr. Frank has been a Director of the Company since
December 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., General American Investors Company,
Inc., Crescent Real Estate Equities, Charles Schwab, Inc. and Financial Security
Assurance, Inc.
JOHN F. GRUNDHOFER, 60. Mr. Grundhofer has been a Director of the Company
since December 1993. Mr. Grundhofer is Chairman, President and Chief Executive
Officer of U.S. Bancorp, Minneapolis, Minnesota. He has served as President and
Chief Executive Officer since joining U.S. Bancorp (then known as First Bank
System, Inc.) on January 31, 1990. Upon joining U.S. Bancorp until the merger of
the former U.S. Bancorp of Portland, Oregon with First Bank System in August
1997, he also served as Chairman of the Board. Mr. Grundhofer reassumed the
position of Chairman on January 1, 1999. 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, President and Chief Executive Officer of U.S. Bancorp, Mr.
Grundhofer is also a Director of Minnesota Life Insurance Company and of
Donaldson Company, Inc. Mr. Grundhofer is a Director of the Horatio Alger
Association, an Advisory Director of the Metropolitan Economic Development
Association, and a member of Minnesota Meeting, the Bankers Roundtable, the CEO
Board of the School of Business Administration at the University of Southern
California and the Board of Trustees of Loyola Marymount University.
BOWEN H. MCCOY, 61. Mr. McCoy has been a Director of the Company since
December 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 the Stanford University Center for Economic Policy Research,
Chairman of the Los Angeles American Red Cross and Trustee of the Pacific School
of Religion.
WILLIAM H. MCFARLAND, 58. Mr. McFarland has been a Director of the Company
since December 1996. Mr. McFarland joined the Company as President and Chief
Executive Officer in July 1997. From 1984 to 1997, Mr. McFarland was Executive
Vice President, Land and Residential Development of The Irvine Company 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
32
<PAGE> 33
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.
MICHAEL D. MCKEE, 53. Mr. McKee has been a Director of the Company since
January 1995. Mr. McKee has been Executive Vice President, Chief Financial
Officer and Secretary of The Irvine Company since January 1997 and was Executive
Vice President, Chief Legal Officer and Secretary of The Irvine Company from
April 1994 to December 1996. 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, 75. Mr. Peltason has been a Director of the Company since
December 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 the University of California, Irvine and a Fellow of the
American Academy of Arts and Sciences. Mr. Peltason has served as President of
the Donald L. Bren Foundation (a California non-profit public benefit
corporation foundation affiliated with Mr. Bren) since September 1997, and was a
consultant to Mr. Bren with respect to charitable giving and the formation of
the Donald L. Bren Foundation from October 1995 through December 1997. Mr.
Peltason is a director of AST Research, Inc. and Infotech, Inc.
JOHN F. SEYMOUR, JR., 61. Senator Seymour has been a Director of the
Company since December 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.
RAYMOND L. WATSON, 72. Mr. Watson rejoined the Company as a Director in
July 1997. Mr. Watson previously served as a Director of the Company from its
formation in 1993 until January 1995. Mr. Watson has been Vice Chairman of the
Board of The Irvine Company since 1986. From 1973 to 1977, Mr. Watson was
President and Chief Executive Officer of The Irvine Company and he has been a
member of the Executive Committee of the Board of Directors of The Irvine
Company since 1983. Mr. Watson is a member of the Board of Directors of Pacific
Life Insurance Company, Mitchell Energy and Development Company and The Walt
Disney Company, where he is also Chairman of the Executive Committee.
33
<PAGE> 34
EXECUTIVE OFFICERS OF IRVINE APARTMENT COMMUNITIES, INC.
The following sets forth certain information regarding the executive
officers of the Company as of February 16, 1999 and other positions held by them
over the last five years:
<TABLE>
<CAPTION>
YEARS
NAME AGE PRESENT AND PRIOR POSITIONS HELD(1) POSITIONS HELD
---- --- ----------------------------------- --------------
<S> <C> <C> <C>
William H. 58
McFarland........... President and Chief Executive Officer 1997 - Present
Executive Vice President, Land and Residential
Development,
The Irvine Company 1984 - 1997
William W. Thompson... 53 Executive Vice President, President, California
Division 1998 - Present
Senior Vice President, President, California
Division 1997 - 1998
President, Thompson Residential 1996 - 1997
Partner, Trammell Crow Residential, Northern
California 1984 - 1995
Richard E. 39 Senior Vice President, President, Irvine Ranch
Lamprecht........... Division 1997 - Present
Vice President, Development 1993 - 1997
Bruce N. Dorfman...... 38 Senior Vice President, Development, California
Division 1998 - Present
Vice President, Development, California
Division 1997 - 1998
Vice President, Development, Thompson
Residential 1996 - 1997
Vice President, Finance, Trammell Crow
Residential,
Northern California 1992 - 1995
Rudy A. Svrcek........ 46 Senior Vice President, Corporate Marketing 1998 - Present
Senior Vice President, Land and Residential
Development,
The Irvine Company 1990 - 1998
Scott A. Reinert...... 40 President, Irvine Apartment Management Company 1998 - Present
Vice President, Operations 1994 - 1998
Chief Operating Officer, Southeast, GFS
Northstar 1990 - 1994
Shawn Howie........... 43 Interim Chief Financial Officer and Secretary 1999 - Present
Vice President, Corporate Finance and
Controller 1997 - 1999
Vice President and Controller 1993 - 1997
</TABLE>
- ---------------
(1) Unless indicated, the position held is with the Company. The Irvine Company
is an affiliate of the Company.
34
<PAGE> 35
ITEM 11. EXECUTIVE COMPENSATION
IRVINE APARTMENT COMMUNITIES, INC.
Set forth below are tables prescribed by Item 402 of Regulation S-K which
represent compensation information for the Company's chief executive officer,
and the four other most highly compensated executive officers who were serving
as executive officers at the end of 1998 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION(1) COMPENSATION AWARDS
--------------------- ------------------------------
RESTRICTED ALL OTHER
STOCK COMPENSATION
SALARY(2) BONUS(3) AWARDS(4) OPTIONS(5) (6)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
--------------------------- ---- --------- -------- ---------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
William H. McFarland......... 1998 $400,000 $400,000 $881,719 -- $ 8,800
President and Chief Executive 1997 $177,436 $190,000 $811,250 100,000 $ --
Officer and Director
William W. Thompson.......... 1998 $242,500 $212,000 $ -- 10,000 $ 6,478
Executive Vice President, 1997 $195,046 $120,000 $671,875 35,000 $ --
President, California
Division
James E. Mead................ 1998 $250,000 $165,000 $632,500 38,000 $ 8,800
Former Senior Vice President, 1997 $220,000 $165,000 $134,375 25,000 $ 8,800
Chief Financial Officer and 1996 $200,000 $145,000 $ -- -- $ 8,250
Secretary
Richard E. Lamprecht......... 1998 $200,000 $170,000 $128,250 10,000 $ 8,800
Senior Vice President, 1997 $179,722 $200,000 $266,250 30,000 $10,341
President, Irvine Ranch
Division 1996 $135,000 $ 55,000 $ -- -- $ 6,300
Bruce N. Dorfman............. 1998 $170,000 $130,000 $ -- 20,000 $ 7,219
Senior Vice President, 1997 $119,687 $ 65,000 $268,750 10,000 $ --
Development, California
Division
</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. McFarland, Thompson and Dorfman were July 15,
1997, February 4, 1997 and February 4, 1997, respectively.
(3) The bonuses for each year were paid in February or March of the following
year.
(4) 1998 amounts represent 27,500, 20,000 and 4,000 restricted stock award units
granted to Messrs. McFarland, Mead and Lamprecht, respectively, as of
February 2, 1998. 1997 amounts represent 27,500, 25,000, 5,000, 10,000 and
10,000 restricted stock unit awards, granted to Messrs. McFarland, Thompson,
Mead, Lamprecht and Dorfman, respectively, as of July 15, 1997, February 4,
1997, February 4, 1997, April 25, 1997 and February 4, 1997, respectively.
The Company did not grant any restricted stock unit awards to the Named
Executive Officers in 1996. Except as disclosed below with respect to awards
granted to Mr. McFarland, 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
audit unit awards are available for vesting in the year in which the award
was granted. 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. 20% of a person's award may be earned as of December 31 in each of the
three years following the year the award was granted and 40% of such
person's award may be earned as of December 31 in the fourth year following
the year of grant, in each case upon the achievement of established FAD
targets, except that Mr. McFarland's award vests automatically on December
31 of each year without regard to achievement of FAD or other performance
targets. In addition, (i) Mr. McFarland's 1998 restricted stock unit award
vests 20% on each of December 31, 1999 and 2000 and 60% on December 31, 2001
and (ii) in the event of termination other than for cause, all of Mr.
McFarland's restricted stock unit awards vest immediately. As of December
31, 1998 (giving effect to awards earned with respect to 1998 and paid
35
<PAGE> 36
in February 1999), the number of shares outstanding in respect of unvested
restricted stock or performance unit awards was 49,500, 20,000, 34,000,
16,000 and 8,000 for Messrs. McFarland, Thompson, Mead, Lamprecht and
Dorfman, respectively. The value of such unvested awards as of December 31,
1998 was $1,577,813, $637,500, $1,083,750, $510,000 and $255,000,
respectively.
(5) Reflects options granted pursuant to the 1993 Long-Term Stock Incentive Plan
or the 1996 Long-Term Stock Incentive Plan.
(6) These amounts represent the Company's aggregate contributions to the
Company's 401(k) savings plan.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
-----------------------------------
% OF
TOTAL POTENTIAL REALIZABLE
OPTIONS VALUE AT ASSUMED ANNUAL
NUMBER OF GRANTED RATES OF STOCK PRICE
SECURITIES TO APPRECIATION FOR OPTION
UNDERLYING ALL EXERCISE TERM
OPTIONS EMPLOYEES PRICE ------------------------
NAME GRANTED IN 1998 ($/SH) EXPIRATION DATE 5%($)(2) 10%($)(2)
---- ---------- --------- -------- ---------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
William H. McFarland..... -- -- -- -- -- --
Willam W. Thompson....... 10,000 4.1% $31.3125 April 1, 2008 $196,923 $ 499,041
James E. Mead............ 38,000 15.8% $31.6250 February 2, 2008 $755,774 $1,915,280
Richard E. Lamprecht..... 10,000 4.1% $32.0625 February 2, 2008 $201,639 $ 510,994
Bruce N. Dorfman......... 10,000 8.3% $32.0625 February 2, 2008 $201,639 $ 510,994
10,000 $31.3125 April 1, 2008 $196,923 $ 499,041
</TABLE>
- ---------------
(1) One third of each grantee's options become exercisable on the first
anniversary of the grant, with another one third becoming exercisable on
each of the second and third anniversaries. The options may be exercised at
any time prior to the tenth anniversary of the grant, unless the grantee's
employment with the Company is sooner terminated, in which case
unexercisable options are forfeited, and the grantee shall have a specified
period in which to exercise any options which had previously become
exercisable.
(2) The dollar amounts under these columns are the result of calculations at the
5% and 10% rate of increase from the grant date set by the SEC and therefore
are not intended to forecast possible future appreciation, if any, of the
Company's stock price.
OPTION EXERCISES IN 1998 AND
DECEMBER 31, 1998 OPTION VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES
ACQUIRED UNDERLYING VALUE OF UNEXERCISED
ON VALUE UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
NAME EXERCISE REALIZED AT DECEMBER 31, 1998(#) AT DECEMBER 31, 1998($)(1)
---- ----------- -------- ----------------------- --------------------------
<S> <C> <C> <C> <C> <C>
William H. McFarland........ -- -- Exercisable 33,333 $ 79,166
Unexercisable 66,667 $158,334
William W. Thompson......... -- -- Exercisable 11,667 $ 58,335
Unexercisable 33,333 $122,290
James E. Mead............... 11,000 $113,775 Exercisable 21,666 $251,660
Unexercisable 54,667 $ 92,835
Richard E. Lamprecht........ 21,500 $308,438 Exercisable 38,500 $481,979
Unexercisable 30,000 $103,333
Bruce N. Dorfman............ -- -- Exercisable 3,333 $ 16,665
Unexercisable 26,667 $ 38,960
</TABLE>
- ---------------
(1) Represents the difference between the closing price of the Company's Common
Stock on the NYSE on December 31, 1998 of $31.875 per share and the exercise
price of the options, but not less than zero.
36
<PAGE> 37
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. McCoy and Seymour served on the Compensation Committee during 1998.
No Compensation Committee interlocks or insider participation existed in 1998.
COMPENSATION OF DIRECTORS
The Company pays its Directors who are neither officers of the Company nor
officers or directors of The Irvine Company ("Outside Directors") fees for their
services as directors. Directors receive annual compensation of $30,000 plus a
fee of $1,500 for attendance (in person or by telephone) at each meeting of the
Board of Directors, plus a fee of $750 for attendance (in person or by
telephone) at each meeting of a committee of the Board of Directors, whether or
not such committee meeting occurs on the same day as a meeting of the Board of
Directors, plus annual compensation of $3,000 for acting as chairperson of a
standing committee of the Board of Directors. Outside Directors will be able to
defer their annual retainer fee in accordance with the Company's 1998 Deferred
Compensation Plan for Outside Directors. The Company also has established the
1993 Stock Option Plan for Directors, as amended, pursuant to which each
Eligible Director, as defined below, is (1) awarded an option to purchase 5,000
shares of the Company's Common Stock upon initial appointment or election to the
Board and (2) awarded an option to purchase 2,500 shares of the Company's Common
Stock at each subsequent annual meeting, except for Eligible Directors as
defined in the 1993 Stock Option Plan for Directors 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. For purposes
of the Plan, "Eligible Director" means any 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.
In addition to the Company's normal fees for attendance at meetings and
reimbursement of expenses, Messrs. Grundhofer and Seymour will each receive
$20,000 for their service as members of the special committee evaluating the
merger proposal by TIC Acquisition LLC through March 31, 1999 and Messrs. Frank
and McCoy will each receive $50,000 for their service as Co-Chairmen of the
special committee through March 31, 1999.
CERTAIN RIGHTS OF THE IRVINE COMPANY WITH RESPECT TO THE BOARD OF DIRECTORS
Pursuant to the Miscellaneous Rights Agreement, The Irvine Company, its
shareholders and affiliates and Mr. Bren and his affiliates (the "Irvine
Persons") have the right, and will continue to have the right so long as the
Irvine Persons beneficially own at least 20% of the outstanding Common Stock
(including for this purpose Common Stock issuable upon exchange of common
limited partner interests ("Common 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 Persons 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 Persons will have the
right to nominate one person for election to the Board of Directors. In
connection with the foregoing, the Irvine Company is authorized to act for the
Irvine Persons. The three current Directors nominated by the Irvine Persons are
Messrs. Bren, McKee and Watson.
Two provisions of the Company's Articles of Incorporation give The Irvine
Company additional rights with respect to the Company's Board of Directors:
First, the Company's Articles of Incorporation provide 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.
37
<PAGE> 38
Second, the Company's Articles of Incorporation provide 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's Articles of Incorporation or Company Bylaws or the Partnership
Agreement; (iii) any waiver or modification of the ownership limit provisions of
the Company's Articles of Incorporation; (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.
EMPLOYMENT AND TERMINATION OF EMPLOYMENT AGREEMENTS
William H. McFarland was appointed Chief Executive Officer and President of
the Company on July 15, 1997. Pursuant to an agreement entered into at the
commencement of his employment with the Company, Mr. McFarland received an
annualized base salary of $400,000 for 1997 and is eligible for an annual bonus
of 0% to 100% of his base salary, with $183,000 and $400,000 guaranteed for 1997
and 1998, respectively. In addition, the agreement provides that Mr. McFarland
will be a participant in the Company's fringe benefit programs and long-term
incentive plans. Upon hire Mr. McFarland received options to purchase 100,000
shares of Common Stock and also received (i) for 1997 a grant of 27,500
restricted stock units vesting 0% in 1997, 20% in each of 1998, 1999 and 2000
and 40% in 2001 and (ii) for 1998 a grant of 27,500 restricted stock units
vesting 0% in 1998, 20% in each of 1999 and 2000 and 60% in 2001, and will
receive an annual award of 27,500 restricted stock units in each of the years
1999 and 2000 assuming continued employment. These restricted stock unit awards
will vest automatically on December 31 of each year and do not require that any
performance targets be met; the restricted stock unit awards to be granted in
1999 and 2000 each vest over periods ending in 2001. In addition, upon Mr.
McFarland's death or disability or if Mr. McFarland is terminated without cause,
all unvested restricted stock unit awards will vest immediately and all then
ungranted restricted stock units will also be granted to Mr. McFarland and will
immediately vest. Pursuant to one of the letter agreements described below, in
the event of a business transaction such as the merger between the Company and a
subsidiary of The Irvine Company, Mr. McFarland will not receive any of the
options to which he would otherwise be entitled, but he will receive payments
with respect to future restricted stock units as set forth in the letter
agreements.
Under an agreement between him and the Company (superseded by a later
agreement as described below) covering the period January 1, 1998 to December
31, 2002, James E. Mead, the former Senior Vice President, Chief Financial
Officer and Secretary of the Company, was entitled to an annualized base salary
of $250,000, subject to increase at the discretion of the Compensation
Committee, and an annual bonus of 0% to 100% of his base salary. In addition,
the agreement provided that Mr. Mead would be a participant in the Company's
fringe benefit programs and long-term incentive plans. In accordance with the
agreement, Mr. Mead was granted for 1998 options to purchase 38,000 shares of
Common Stock and a restricted stock unit award with respect to 20,000 shares of
Common Stock vesting 0% in 1998, 20% in each of 1999, 2000 and 2001 and 40% in
2002, and assuming continued employment, would have been awarded options to
purchase 25,000 shares and 20,000 shares in 1999 and 2000, respectively, and
10,000 restricted stock units in each of 1999 and 2000, such restricted stock
units to vest over periods ending in 2002. All such restricted stock units were
eligible for vesting in accordance with FAD per share targets established or, in
the case of the 1999 and 2000 awards, to be established by the Compensation
Committee. With respect to the 1999 and 2000 restricted stock unit awards,
shares not earned by 2002 would have remained eligible for vesting until 2003 in
the case of the 1999 award, and 2004 in the case of the 2000 award. If Mr.
Mead's employment had been terminated involuntarily, other than for cause, prior
to December 31, 2000 he would have received a severance payment of 24 months
salary; if such termination had been between January 1, 2001 and December 31,
2002, he would have received a severance payment of 18 months salary.
38
<PAGE> 39
In October 1998, the Company announced that Mr. Mead would be resigning in
early 1999 to pursue other opportunities. In connection with Mr. Mead's
resignation, the Company entered into an agreement with Mr. Mead revising the
terms of his employment. Pursuant to the agreement, Mr. Mead was entitled to the
payment on or about February 1, 1999 of a cash bonus of $165,000 and an
additional payment of $375,000. At such time, all vesting of Mr. Mead's
restricted stock units and options ceased. All of Mr. Mead's vested options will
remain exercisable for 90 days from the date of Mr. Mead's termination of
employment with the Company. The agreement also provides for Mr. Mead to remain
as a consultant to the Company for 6 months for a total of $125,000 and to
continue to participate in the Company's fringe benefit programs.
Pursuant to an agreement between him and the Company, Richard E. Lamprecht
was promoted to the position of Senior Vice President, and President, Irvine
Ranch Division. The agreement provides for an annualized base salary of $200,000
and a cash bonus for 1997 of $200,000. The agreement provides that in future
years Mr. Lamprecht will be eligible for an annual bonus of 0% to 100% of his
base salary. Pursuant to the agreement, Mr. Lamprecht was granted in 1997
options to purchase 20,000 shares of Common Stock (which award was in addition
to options to purchase 10,000 shares of Common Stock previously granted in 1997)
and a restricted stock unit award in respect of 10,000 shares of Common Stock.
In addition, Mr. Lamprecht will receive in each of 1998 through 2001 options to
purchase 10,000 shares and a restricted stock unit award in respect of 4,000
shares of Common Stock, assuming continued employment. Pursuant to one of the
letter agreements described below, in the event of a business transaction such
as the merger between the Company and a subsidiary of The Irvine Company, Mr.
Lamprecht will receive cash payments in consideration of his currently
outstanding options and restricted stock units, but his letter agreement does
not provide for payment for any of the options or restricted stock units to
which he may be entitled.
The Company has entered into letter agreements dated January 22, 1999 with
each holder (other than Mr. Mead) of employee options or restricted stock units.
The letter agreements will have no effect unless a business combination, such as
the merger between the Company and a subsidiary of The Irvine Company, is
consummated. The letter agreements provide that each holder of an employee
option will be entitled to receive a cash amount equal to the excess of $34.00
over the exercise price for each share of the Company's common stock subject to
the option, payable at the consummation of the merger if then vested, or at the
time such option or portion of an option would otherwise have vested according
to the relevant award agreement. In the case of a restricted stock unit, the
letter agreements provide that each holder will be entitled to receive a cash
amount equal to $34.00 per restricted stock unit, payable at the time such
restricted stock unit would otherwise have been available for vesting according
to the relevant award agreement, assuming the achievement of all applicable
performance targets for the relevant periods. In the case of Mr. McFarland's
future restricted stock units, his letter agreement provides that he will be
entitled to receive a cash amount equal to $34.00 per future restricted stock
unit, payable at the time the future restricted stock units would otherwise have
been available for vesting according to Mr. McFarland's original agreement,
assuming that restricted stock units had been granted to Mr. McFarland in
accordance with the terms of Mr. McFarland's original agreement. It is a
condition of payment with respect to both options and restricted stock units
that the holder remain continuously employed by the Company until the respective
payment dates, except as otherwise described below. The restricted stock unit
amounts will bear interest from the consummation of the merger to the relevant
payment date, payable on the last day of each calendar quarter, at the annual
rate of 5% through February 29, 2000, and 6% from March 1, 2000 until the date
such restricted stock unit would have been available for vesting or, if sooner,
until payment for such restricted stock units is accelerated in accordance with
the letter agreements. Interest will be payable in cash as promptly as
practicable following each interest payment date.
Pursuant to the letter agreements, in the event that a holder's employment
is terminated involuntarily by the Company without cause or by the holder for
good reason (as defined in the letter agreements) prior to the relevant payment
date, payment for unvested options and restricted stock units will be
accelerated and made within 10 days after such employment termination date.
The table below shows the options and restricted stock units (and future
restricted stock units) currently held by each of the Named Executive Officers
and the amounts in respect of such options and restricted stock units (and
future restricted stock units) such individuals will be entitled to receive at
the consummation, if
39
<PAGE> 40
any, of the merger and in the future (not including interest). All amounts to be
paid at the consummation of the merger relate to vested options.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING PAYMENT AT POTENTIAL FUTURE
NAME GRANTED UNITS(1) MERGER PAYMENTS
---- ----------- ------------ ---------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
William H. McFarland..................... 100,000 104,500 $150.0 $3,853.0
William W. Thompson...................... 45,000 20,000 $175.2 $ 781.0
Richard E. Lamprecht..................... 68,500 16,000 $643.2 $ 629.8
Bruce N. Dorfman......................... 30,000 8,000 $ 62.9 $ 326.6
</TABLE>
- ---------------
(1) Represents restricted stock units that have been granted except in Mr.
McFarland's case where it represents restricted stock units granted as well
as future restricted stock units.
Messrs. McFarland, Thompson and Lamprecht (each, an "executive") also
entered into termination protection and severance arrangements with the Company
set forth in their letter agreements, which provide that, in addition to the
above-mentioned treatment of options and restricted stock units (and future
restricted stock units, in Mr. McFarland's case), an executive whose employment
is terminated involuntarily by the Company without cause, or by himself for good
reason within eighteen months following the consummation of the merger, will be
entitled to one year's base salary at the rate in effect at either (i) the time
of his termination of employment or (ii) the consummation of the merger,
whichever is higher. Such amount will be paid to the executive in a lump sum,
without reduction for the time value of money, as soon as practicable, but in
any event within 10 days, after the date of his termination of employment. The
severance benefits payable under the letter agreements depend on the effective
rate of the base salary applicable to an executive at the time of his
termination of employment. Therefore, the severance amount payable to an
executive is not precisely determinable. However, assuming termination at
current levels of base salaries, the amounts that would be payable to Messrs.
McFarland, Thompson and Lamprecht, if paid currently, would be $400,000,
$275,000 and $200,000, respectively.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers and directors, and
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 1998, 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 Exchange Act on a
timely basis, except that Form 4s were filed late with respect to the vesting of
restricted stock units in February 1998 for Messrs. Alfred Baker, Howie,
Lamprecht, McAllister, Mead and Reinert.
IRVINE APARTMENT COMMUNITIES, L.P.
The Operating Partnership does not have any directors or officers. The
Operating Partnership is managed by the Company. Information with respect to the
Operating Partnership required under Part III (Items 10, 11, 12 and 13) is
included as described above under "Irvine Apartment Communities, Inc." All of
such information is equally applicable to the Operating Partnership as to the
Company. Supplementally, the ownership of Common L.P. Units by The Irvine
Company and certain of its affiliates constitutes 99.7% of the outstanding
Common L.P. Units.
IAC CAPITAL TRUST
The Trust does not have any directors or officers. The Trust is managed by
the Company. Information with respect to the Trust required under Part III
(Items 10, 11, 12 and 13) is included as described above under "Irvine Apartment
Communities, Inc." All of such information is equally applicable to the Trust as
to the Company.
40
<PAGE> 41
ITEM 12. SECURITY 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 Chief Executive Officer, each of the four most highly
compensated executive officers who were serving as executive officers at the end
of 1998, other than the Company's Chief Executive 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 16, 1999. The Company has relied upon
information supplied by its officers, directors, and certain shareholders and
upon information contained in filings with the SEC.
<TABLE>
<CAPTION>
PERCENT OF
ALL SHARES OF PERCENT OF
NUMBER OF COMMON STOCK ALL SHARES OF
SHARES OF PERCENT OF NUMBER OF (ASSUMING EXCHANGE COMMON STOCK/
COMMON STOCK ALL SHARES OF COMMON OF HOLDER'S COMMON COMMON
NAME BENEFICIALLY OWNED COMMON STOCK L.P. UNITS L.P. UNITS)(1) L.P. UNITS(1)
---- ------------------ ------------- ---------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS:
Donald Bren.................... 3,613,738(2) 17.9% 24,952,412(3) 63.2% 63.1 %
Anthony M. Frank............... 12,500(4) * -- * *
John F. Grundhofer............. 11,500(5) * -- * *
Bowen H. McCoy................. 15,500(4) * -- * *
William H. McFarland........... 59,063(6) * -- * *
Michael D. McKee............... 5,000 * -- * *
Jack W. Peltason............... 11,100(4) * -- * *
John F. Seymour, Jr............ 10,605(4) * -- * *
Raymond L. Watson.............. 20,000 * -- * *
William W. Thompson............ 29,165(7) * 74,523(8) * *
James E. Mead.................. 21,666(9) * -- * *
Richard E. Lamprecht........... 49,202(10) * -- * *
Bruce N. Dorfman............... 14,332(11) * 74,523(8) * *
All current directors and
executive officers as a group
(15 persons)(12)............. 3,934,626(13) 19.3% 24,721,228 64.2% 64.2 %
5% SHAREHOLDERS(14):
The Irvine Company(15) 550
Newport Center Drive
Newport Beach, CA 92660...... 3,430,413 17.0% 24,646,705 62.6% 62.3 %
Morgan Stanley Dean Witter
& Co.(16) 1585 Broadway
New York, NY 10036........... 1,168,100 5.8% -- 5.8% 2.6 %
</TABLE>
- ---------------
* Less than 1.0%
(1) Assumes Common L.P. Units (other than those referred to in Note 3 below
which are not exchangeable within 60 days of the date of this table) are
exchanged for shares of Common Stock, without regard to certain ownership
limit provisions set forth in the Company's Articles of Incorporation. 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 Common L.P. Units beneficially owned by The Irvine Company and
affiliates of Mr. Bren (see Note 3) for shares of Common Stock, at an
exchange ratio of one Common L.P. Unit for each share of Common Stock,
subject to adjustment. The Company's Articles of Incorporation place a
limit on ownership by The Irvine Company, Mr. Bren and their affiliates, in
the aggregate, of 20% of the outstanding Common Stock.
(2) Includes (i) 3,430,413 shares of Common Stock beneficially owned by The
Irvine Company, of which Mr. Bren is the sole shareholder and Chairman of
the Board of Directors, and (ii) 183,325 shares of Common Stock held by a
trust, of which Mr. Bren is trustee. Mr. Bren disclaims beneficial
ownership of the Common Stock beneficially owned by The Irvine Company.
(3) Includes (i) 24,646,705 Common L.P. Units beneficially owned by The Irvine
Company, of which Mr. Bren is the sole shareholder and Chairman of the
Board of Directors, and (ii) 305,707 Common L.P. Units owned by Stonecrest
Village Company, LLC ("Stonecrest"), of which Mr. Bren is the sole owner of
the two members. Of the 305,707 Common L.P. Units owned by Stonecrest,
106,696 Common L.P. Units are not exchangeable for shares of Common Stock,
pursuant to an agreement with the NYSE. Mr. Bren disclaims beneficial
ownership of the Common L.P. Units beneficially owned by The Irvine Company
and Stonecrest.
(4) Includes currently exercisable options to purchase 10,500 shares of Common
Stock granted to each of Messrs. Frank, McCoy, Peltason and Seymour
pursuant to the 1993 Stock Option Plan for Directors.
41
<PAGE> 42
(5) Includes 8,000 shares held in Mr. Grundhofer's Individual Retirement
Account and currently exercisable options to purchase 3,500 shares of
Common Stock granted to Mr. Grundhofer pursuant to the 1993 Stock Option
Plan for Directors.
(6) Includes currently exercisable options to purchase 33,333 shares of Common
Stock granted to Mr. McFarland pursuant to the 1996 Long-Term Stock
Incentive Plan.
(7) Includes currently exercisable options to purchase 26,665 shares of Common
Stock granted to Mr. Thompson pursuant to the 1996 Long-Term Stock
Incentive Plan.
(8) Messrs. Thompson and Dorfman and one officer of the Company not named in
the table may be deemed the beneficial owners of 74,523 Common L.P. Units
held by Thompson Residential Company ("TRC"). Messrs. Thompson and Dorfman
own 80% and 10%, respectively, of TRC.
(9) Represents currently exercisable options to purchase shares of Common Stock
granted to Mr. Mead pursuant to the 1996 Long-Term Stock Incentive Plan.
(10) Includes currently exercisable options to purchase 45,165 shares of Common
Stock granted to Mr. Lamprecht pursuant to the 1993 Long-Term Stock
Incentive Plan and the 1996 Long-Term Stock Incentive Plan.
(11) Includes currently exercisable options to purchase 13,332 shares of Common
Stock granted to Mr. Dorfman pursuant to the 1996 Long-Term Stock Incentive
Plan.
(12) See Notes 2 through 11. Does not include shares owned by Mr. Mead.
(13) Includes currently exercisable options to purchase 242,661 shares of Common
Stock granted pursuant to the 1993 Long-Term Stock Incentive Plan and the
1996 Long-Term Stock Incentive Plan.
(14) Information based on a review of Schedule 13Ds or 13Gs filed with the
Securities and Exchange Commission as of February 19, 1999.
(15) Represents shares of Common Stock and Common L.P. Units owned directly or
indirectly by The Irvine Company. Does not include Common L.P. Units owned
by Stonecrest. See Note 3.
(16) Based on information provided in a Schedule 13G filed on February 2, 1999
by Morgan Stanley Dean Witter & Co. Morgan Stanley Dean Witter & Co. had
shared voting power with respect to 863,000 of such shares and shared
dispositive power with respect to all of such shares.
ITEM 13. 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 1998,
the Company incurred costs of approximately $185,000 pursuant to the
administrative services agreement.
The Company and The Irvine Company have also entered into leases pursuant
to which the Company leases space from The Irvine Company. Pursuant to the
leases, $447,000 was incurred in 1998. The Company also incurred parking costs
to The Irvine Company of approximately $52,000 in 1998.
Two of the Company's apartment communities are financed by mortgage notes
payable to The Irvine Company. These mortgage notes totaled $49,517,000 at
December 31, 1998. 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, 1998, are fully amortizing, and mature in 2015 and
2024. Interest incurred on the mortgage notes payable to The Irvine Company
totaled $2,871,000 for the year ended December 31, 1998. 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 $49,890,000 as of December 31, 1998. As of January 31, 1999, the
amount outstanding under each note was $16,228,000 and $33,214,000.
In addition, during 1998, the Company sold in the aggregate 78,272 shares
of Common Stock to The Irvine Company at varying prices ranging from $25.449 to
$30.043 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 and the Miscellaneous Rights
Agreement, purchased an aggregate of 108,306 Common L.P. Units and 25,812 shares
of Common Stock at varying prices ranging from $25.449 to $30.656. All of the
foregoing Common L.P. Units are exchangeable for Common Stock on a one for one
basis, subject to adjustment and certain limitations.
The Company, the Operating Partnership and The Irvine Company are parties
to 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 on the Irvine Ranch which have been entitled for
42
<PAGE> 43
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.
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, 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 Common L.P. Units).
The Land Rights Agreement is subject to early termination upon the
occurrence of the following events: (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 or (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 Articles of Incorporation 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.
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 Common 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 apartment sites encompassing the
first 1,800 apartment units the Company develops starting in mid-1995 was set at
an amount such that each project's budgeted pro forma unleveraged return on
costs for the first 12 months following stabilized occupancy was between 10.0%
and 10.5%. Seven land sites, which will contain a total of 1,884 apartment
units, were purchased under this arrangement. Accordingly, the purchase price
for all future land acquisitions under the Land Rights Agreement will be no
greater than 95% of the appraised value.
Pursuant to the Land Rights Agreement, 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.
Three Directors of the Company, Messrs. Bren, McKee and Watson, are
affiliated with The Irvine Company. Mr. Bren is Chairman of the Board and the
sole stockholder of The Irvine Company. Mr. McKee is Executive Vice President
and Chief Financial Officer and a director of The Irvine Company. Mr. Watson is
Vice Chairman of the Board of The Irvine Company.
The respective interests of the Company and The Irvine Company (and certain
of its affiliates) in the Operating Partnership were 44.6% and 55.2%,
respectively, at December 31, 1998, and 44.4% and 55.4%, respectively, at
December 31, 1997.
Going Private Transaction
On February 1, 1999, the Company and TIC Acquisition LLC, an indirect
wholly owned subsidiary of The Irvine Company, entered into a definitive merger
agreement providing for a merger of the Company into TIC Acquisition LLC in
which the Company's shareholders will receive $34 in cash per share. The
transaction, which is subject to the approval of the holders of (i) at least
two-thirds of the outstanding shares
43
<PAGE> 44
of common stock of the Company and (ii) a number of shares of common stock of
the Company (excluding the shares held by TIC Acquisition LLC and its
affiliates) representing a majority of the total number of shares of common
stock of the Company entitled to vote, and other customary conditions, is
expected to be completed late in the second quarter or early in the third
quarter of 1999.
AGREEMENT WITH MESSRS. THOMPSON, DORFMAN AND HUGHES
On February 4, 1997, the Operating Partnership acquired the assets
(primarily options on three parcels of land in Northern California) of Thompson
Residential Company, Inc. ("TRC") in exchange for 74,523 Common L.P. Units in
the Operating Partnership (currently approximately 0.2% of the Common L.P. Units
outstanding). In addition, TRC is entitled to an "earn out" based on the
performance of the apartment community built on one of the three parcels of land
during the 12 months following stabilization of this apartment community (May
1999 through April 2000), payable in June 2000, up to a maximum of $2,000,000.
The Company currently projects that TRC would be entitled to the maximum "earn
out." Concurrently with these transactions, each of the three owners of TRC
(William W. Thompson, Bruce N. Dorfman and Robert J. Hughes) became officers of
the Company.
The Operating Partnership has entered into a Stock Purchase Agreement with
Messrs. Thompson, Dorfman and Hughes, pursuant to which they will sell their
shares in TRC to the Operating Partnership or its assignee for an aggregate of
$4,533,782. This is equivalent to the sum of (i) $34.00 per Common L.P. Unit
(each Common L.P. Unit is exchangeable into one share of Common Stock) held by
TRC and (ii) the maximum $2,000,000 "earn out." The consummation of the Stock
Purchase Agreement is conditioned upon the merger of the Company with TIC
Acquisition LLC.
OTHER TRANSACTIONS
Mr. Grundhofer is Chairman, President and Chief Executive Officer of U.S.
Bancorp (formerly First Bank System, Inc.) which, through an affiliate, is a
member of the bank syndicate that provided the Company's $250,000,000 revolving
credit facility. There was no outstanding balance under the credit facility as
of February 16, 1999. An affiliate of U.S. Bancorp is also a member of the bank
syndicate that provided the Company's $100,000,000 term loan facility. Based on
this bank's percentage participation in these credit facilities (and the
predecessor facilities), the Company estimates that the amount of interest and
fees paid to the affiliate totaled $364,000 in 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1 and 2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and financial statement schedules listed in the
Index to Financial Statements on Page F-1 of this report are filed as part of
this report.
(a)(3) EXHIBITS
The Exhibit Index is included on pages 45 to 48 of this report.
44
<PAGE> 45
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1.1 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")).
2.2 Purchase and Sale Agreement and Joint Escrow Instructions
dated April 18, 1997 by and between Aoki Construction (CA)
Co., Ltd. and the Operating Partnership (incorporated by
reference to Exhibit 2.1 of the Current Report on Form 8-K
of the Company and the Operating Partnership filed on August
6, 1997).
2.3 Agreement and Plan of Merger dated as of February 1, 1999,
between TIC Acquisition LLC and the Company (incorporated by
reference to Exhibit 2.1 of the Current Report on Form 8-K
of the Company filed on February 2, 1999).
2.4 Stock Purchase Agreement dated as of February 1, 1999 among
the Operating Partnership, as buyer, and William H.
Thompson, Bruce Dorfman and Robert Hughes, as sellers.*
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).
3.5 Second Amended and Restated Agreement of Limited Partnership
of Irvine Apartment Communities, L.P. dated January 20, 1998
(incorporated by reference to Exhibit 3.5 of the Annual
Report on Form 10-K of the Company and the Operating
Partnership for the year ended December 31, 1997 (the "1997
Form 10-K")).
3.5.1 Amendment No. 1 dated as of October 30, 1998 to the Second
Amended and Restated Agreement of Limited Partnership of the
Operating Partnership dated as of January 20, 1998.*
3.6 Designation Instrument dated January 20, 1998, relating to
the Series A Preferred L.P. Units of the Operating
Partnership (incorporated by reference to Exhibit 3.6 of the
1997 Form 10-K).
3.6.1 Designation Instrument dated November 12, 1998, relating to
the Series B Preferred L.P. Units of the Operating
Partnership.*
4.1 Indenture dated as of October 1, 1997 between the Operating
Partnership and First Trust of California, National
Association, as Trustee (the "Trustee") (incorporated by
reference to Exhibit 4.1 of the Current Report on Form 8-K
of the Company and the Operating Partnership filed on
October 1, 1997 (the "October 1997 Form 8-K")).
4.2 Supplemental Indenture No. 1 dated as of October 1, 1997,
relating to the Operating Partnership's 7% Notes due 2007,
between the Operating Partnership and the Trustee
(incorporated by reference to Exhibit 4.2 of the October
1997 Form 8-K).
4.3 Form of Series A Trust Preferred Security (included in
Exhibit 4.5).
4.4 Amended and Restated Declaration of Trust dated January 20,
1998 of IAC Capital Trust (incorporated by reference to
Exhibit 4.4 of the 1997 Form 10-K).
4.5 Certificate of Terms dated January 20, 1998 Relating to
Series A Preferred Securities of IAC Capital Trust
(incorporated by reference to Exhibit 4.5 of the 1997 Form
10-K).
</TABLE>
45
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
4.6 Officer's Certificate dated April 9, 1998 setting forth
certain terms and provisions applicable to the Operating
Partnership's Medium-Term Notes, Series A (incorporated by
reference to Exhibit 4.1 of the Current Report on Form 8-K
of the Company and the Operating Partnership filed on April
10, 1998 (the "MTN 8-K")).
4.7 Form of the Operating Partnership's Fixed Rate Medium-Term
Note, Series A (incorporated by reference to Exhibit 4.2 of
the MTN 8-K).
4.8 Form of the Operating Partnership's Floating Rate
Medium-Term Note, Series A (incorporated by reference to
Exhibit 4.3 of the MTN 8-K).
4.9 Supplemental Indenture No. 2 dated as of April 9, 1998 to
the Indenture dated as of October 1, 1997 between the
Operating Partnership and U.S. Bank Trust National
Association, trustee (incorporated by reference to Exhibit
4.4 of the MTN 8-K).
10.1 Purchase and Sale Agreement and Joint Escrow Instructions
dated April 18, 1997 by and between Aoki Construction (CA)
Co., Ltd. and the Operating Partnership (see Exhibit 2.2).
10.2 Lease Agreement (incorporated by reference to Exhibit 10.2
of the Annual Report on Form 10-K of the Company for the
year ended December 31, 1993 (the "1993 Form 10-K").
10.3 Employment Agreement with Former Senior Vice President,
Chief Financial Officer and Secretary (incorporated by
reference to Exhibit 10.3 of the 1997 Form 10-K).
10.3.1 Confidentiality Agreement and General Release dated as of
October 13, 1998 between the Company and the former Senior
Vice President, Chief Financial Officer and Secretary.*
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).
10.4.1 Amendment No. 1 to the Miscellaneous Rights Agreement
(incorporated by reference to Exhibit 10.4.1 of the
Quarterly Report on Form 10-Q of the Company and the
Operating Partnership for the quarter ended September 30,
1997 (the "1997 Third Quarter Form 10-Q")).
10.4.2 Amendment No. 2 to the Miscellaneous Rights Agreement
(incorporated by reference to Exhibit 10.4.2 of the 1997
Form 10-K).
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).
10.5.4 Amendment No. 4 to the Administrative Services Agreement
(incorporated by reference to Exhibit 10.5.4 of the
Quarterly Report on Form 10-Q of the Company, the Operating
Partnership and the Trust for the quarter ended June 30,
1998 (the "1998 Second Quarter Form 10-Q")).
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 Quarterly Report on Form 10-Q of the
Company for the quarter ended June 30, 1995 (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).
10.6.4 Amendment No. 4 to the Exclusive Land Rights and
Non-Competition Agreement (incorporated by reference to
Exhibit 10.6.4 of the 1997 Third Quarter Form 10-Q).
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.6.5 Amendment No. 5 to the Exclusive Land Rights and
Non-Competition Agreement (incorporated by reference to
Exhibit 10.6.5 of the 1997 Form 10-K).
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).
10.8.1 Irvine Apartment Communities, Inc. Amended and Restated 1993
Stock Option Plan for Directors (incorporated by reference
to Exhibit 10.8.1 of the 1998 Second Quarter Form 10-Q).
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 as of June 27, 1997
(incorporated by reference to Exhibit 10.11 of the Quarterly
Report on Form 10-Q of the Company and the Operating
Partnership for the quarter ended June 30, 1997 (the "1997
Second Quarter Form 10-Q")).
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 Agreement with Chief Executive Officer
(incorporated by reference to Exhibit 10.13 of the 1997
Second Quarter Form 10-Q).
10.14 Irvine Apartment Communities, Inc. 1996 Long-Term Stock
Incentive Plan (incorporated by reference to Exhibit 10.14
of the Form 8-B).
10.15 Employment Agreement with the Senior Vice President,
President, Irvine Ranch Division (incorporated by reference
to Exhibit 10.15 of the 1997 Form 10-K).
10.16 Stock Purchase Agreement dated as of February 1, 1999 among
the Operating Partnership, as buyer, and William H.
Thompson, Bruce Dorfman and Robert Hughes, as sellers (see
Exhibit 2.4).
10.17 Irvine Apartment Management Company Partnership Agreement
dated March 12, 1998 by and between Apartment Management
Company, LLC and Western National Securities d/b/a Western
National Property Management ("WNPM") (incorporated by
reference to Exhibit 10.17 of the Quarterly Report on Form
10-Q of the Company, the Operating Partnership and the Trust
for the quarter ended March 31, 1998 (the "1998 First
Quarter Form 10-Q")).
10.18 Management Agreement dated as of April 1, 1998 by and
between the Operating Partnership and Irvine Apartment
Management Company (incorporated by reference to Exhibit
10.18 of the 1998 First Quarter Form 10-Q).
10.19 Guaranty dated as of March 12, 1998 by the Operating
Partnership in favor of WNPM and the WNPM Indemnities (as
defined in Exhibit 10.17 hereto) (incorporated by reference
to Exhibit 10.19 of the 1998 First Quarter Form 10-Q).
10.20 Irvine Apartment Communities, Inc. Deferred Compensation
Plan for Outside Directors (incorporated by reference to
Exhibit 10.20 of the 1998 Second Quarter Form 10-Q).
10.21 Letter Agreement dated February 1, 1999 from The Irvine
Company to the Company.*
10.22 Unsecured Loan Agreement dated as of November 20, 1998 by
and among the Operating Partnership, the Banks listed
therein, Wells Fargo Bank, N.A., as Co-Arranger and
Administrative Agent, and U.S. Bank National Association, as
Co-Arranger.*
10.23.1 Retention Agreement with Mr. McFarland dated January 22,
1999.*
10.23.2 Form of Retention Agreement with certain of the Company's
executive officers.*
</TABLE>
47
<PAGE> 48
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.23.3 Form of Retention Agreement with holders of awards under the
1993 Long-Term Stock Incentive Plan or the 1996 Long-Term
Stock Incentive Plan.*
10.24 Loan Agreement by and between California Statewide
Communities Development Authority and the Operating
Partnership dated as of May 15, 1998.*
10.25 Indenture of Trust by and between California Statewide
Communities Development Authority and U.S. Bank Trust
National Association, as Trustee dated as of May 15, 1998
securing $334,190,000 California Statewide Communities
Development Authority Apartment Development Revenue
Refunding Bonds, Series 1998A (Irvine Apartment Communities,
L.P.).*
10.26 First Supplemental Indenture of Trust by and between
California Statewide Communities Development Authority and
U.S. Bank Trust National Association, as Trustee dated as of
June 11, 1998 ($334,190,000 California Statewide Communities
Development Authority Apartment Development Revenue
Refunding Bonds, Series 1995A).*
10.27 Registration Rights Agreement dated as of November 12, 1998
by and among the Operating Partnership, the Company, the
Trust and Greene Street 1998 Exchange Fund, L.P.*
12 The Company's ratio of earnings to fixed charges for the
year ended December 31, 1998.*
21.1 Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 of the 1997 Form 10-K).
21.2 Subsidiaries of the Operating Partnership (incorporated by
reference to Exhibit 21.2 of the 1997 Form 10-K).
21.3 Subsidiaries of the Trust (none).
23.1 Consent of Ernst & Young LLP (with respect to Irvine
Apartment Communities, Inc.).
23.2 Consent of Ernst & Young LLP (with respect to Irvine
Apartment Communities, L.P.).
23.3 Consent of Ernst & Young LLP (with respect to IAC Capital
Trust).
27.1 Financial Data Schedule for the Company (only included in
electronically-filed document).*
27.2 Financial Data Schedule for the Operating Partnership (only
included in electronically-filed document).*
27.3 Financial Data Schedule for IAC Capital Trust (only included
in electronically-filed document).*
</TABLE>
- ---------------
* Filed with initial filing of this Report.
(b) REPORTS ON FORM 8-K
The Company filed one report on Form 8-K during the fourth quarter of 1998,
for the purpose of acknowledging that the Company received a letter from TIC
Acquisition LLC proposing the acquisition of all outstanding shares of common
stock of the Company for $32.50 per share. This report was filed on December 7,
1998.
The Operating Partnership did not file any reports on Form 8-K during the
fourth quarter of 1998.
IAC Capital Trust did not file any reports on Form 8-K during the fourth
quarter of 1998.
48
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrants have duly caused this Amended Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
IRVINE APARTMENT COMMUNITIES, INC.
Date: April 30, 1999 By: /s/ SHAWN HOWIE
------------------------------------
Shawn Howie
Interim Chief Financial Officer and
Secretary
IRVINE APARTMENT COMMUNITIES, L.P.
By: Irvine Apartment Communities,
Inc.,
its sole general partner
Date: April 30, 1999 By: /s/ SHAWN HOWIE
------------------------------------
Shawn Howie
Interim Chief Financial Officer and
Secretary
IAC CAPITAL TRUST
Date: April 30, 1999 By: /s/ SHAWN HOWIE
------------------------------------
Shawn Howie
Regular Trustee
49
<PAGE> 50
IRVINE APARTMENT COMMUNITIES, INC.
IRVINE APARTMENT COMMUNITIES, L.P.
IAC CAPITAL TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
IRVINE APARTMENT COMMUNITIES, INC.
Consolidated Balance Sheets............................... F-2
Consolidated Statements of Operations..................... F-3
Consolidated Statements of Changes in Shareholders'
Equity................................................. F-4
Consolidated Statements of Cash Flows..................... F-5
Notes to Consolidated Financial Statements................ F-6
Schedule III -- Consolidated Real Estate and Accumulated
Depreciation........................................... F-21
Report of Independent Auditors............................ F-24
IRVINE APARTMENT COMMUNITIES, L.P.
Consolidated Balance Sheets............................... F-25
Consolidated Statements of Operations..................... F-26
Consolidated Statements of Changes in Partners' Capital... F-27
Consolidated Statements of Cash Flows..................... F-28
Notes to Consolidated Financial Statements................ F-29
Schedule III -- Consolidated Real Estate and Accumulated
Depreciation........................................... F-44
Report of Independent Auditors............................ F-47
IAC CAPITAL TRUST
Balance Sheet............................................. F-48
Statements of Operations and Equity....................... F-49
Statement of Cash Flows................................... F-50
Notes to Financial Statements............................. F-51
Report of Independent Auditors............................ F-52
</TABLE>
F-1
<PAGE> 51
IRVINE APARTMENT COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Real estate assets, at cost
Land...................................................... $ 248,105 $ 208,687
Buildings and improvements................................ 1,172,877 1,015,696
---------- ----------
1,420,982 1,224,383
Accumulated depreciation.................................. (281,449) (248,245)
---------- ----------
1,139,533 976,138
Under development, including land......................... 205,371 148,424
---------- ----------
1,344,904 1,124,562
Cash and cash equivalents................................... 4,888 4,624
Restricted cash............................................. 1,653 1,464
Deferred financing costs, net of accumulated amortization,
of $8,814 in 1998 and $10,659 in 1997..................... 12,159 19,079
Other assets................................................ 11,020 13,948
---------- ----------
$1,374,624 $1,163,677
========== ==========
LIABILITIES
Mortgages and notes payable
Tax-exempt mortgage bond financings....................... $ 18,000 $ 325,644
Conventional mortgage financings.......................... 129,539 132,256
Mortgage notes payable to The Irvine Company.............. 49,517 50,397
Tax-exempt assessment district debt....................... 21,292 21,544
Unsecured tax-exempt bond financings...................... 334,190
Unsecured term loan....................................... 100,000
Unsecured notes payable................................... 99,280 99,222
Unsecured line of credit.................................. 75,000
---------- ----------
751,818 704,063
Accounts payable and accrued liabilities.................... 38,871 30,689
Security deposits........................................... 9,467 7,698
---------- ----------
800,156 742,450
MINORITY REDEEMABLE PREFERRED INTERESTS
Series A.................................................... 144,097
Series B.................................................... 48,692
MINORITY INTEREST........................................... 185,821 210,307
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; 20,164 shares and 19,901 shares issued and
outstanding, respectively................................. 202 199
Excess stock, par value $0.01 per share; 160,000 shares
authorized; no shares issued or outstanding...............
Additional paid-in capital.................................. 242,495 235,487
Accumulated deficit......................................... (46,839) (24,766)
---------- ----------
195,858 210,920
---------- ----------
$1,374,624 $1,163,677
========== ==========
</TABLE>
See accompanying notes.
F-2
<PAGE> 52
IRVINE APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Rental income.............................................. $213,296 $181,902 $154,925
Other income............................................... 6,077 4,203 3,162
Interest income............................................ 1,464 840 611
-------- -------- --------
220,837 186,945 158,698
-------- -------- --------
EXPENSES
Property expenses.......................................... 49,398 44,556 38,361
Real estate taxes.......................................... 17,209 15,013 13,496
Interest expense, net...................................... 27,822 30,368 29,506
Amortization of deferred financing costs................... 1,942 2,369 2,627
Depreciation and amortization.............................. 33,802 29,309 27,239
General and administrative................................. 9,352 6,747 6,277
Loss on settlement of unused treasury locks................ 7,763
-------- -------- --------
147,288 128,362 117,506
-------- -------- --------
Income before extraordinary item, minority redeemable
preferred interests and minority interest in income...... 73,549 58,583 41,192
Extraordinary item related to debt extinguishment.......... (42,451)
-------- -------- --------
Income before minority redeemable preferred interests and
minority interest in income.............................. 31,098 58,583 41,192
Minority redeemable preferred interests.................... 12,317
Minority interest in income................................ 10,425 32,179 22,446
======== ======== ========
NET INCOME................................................. $ 8,356 $ 26,404 $ 18,746
======== ======== ========
EARNINGS PER SHARE
Basic...................................................... $ 0.42 $ 1.34 $ 1.06
Diluted.................................................... $ 0.41 $ 1.33 $ 1.05
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 53
IRVINE APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
COMMON STOCK, PAR VALUE OF $0.01 PER SHARE
Balance at beginning of year............................... $ 199 $ 186 $ 170
Common stock offerings................................... 12 15
Dividend reinvestment and additional cash investment plan
and stock options exercised........................... 3 1 1
-------- -------- --------
Balance at end of year..................................... $ 202 $ 199 $ 186
======== ======== ========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year............................... $235,487 $202,116 $170,747
Net proceeds from common stock offerings................. 29,588 29,810
Proceeds from stock options exercised and stock awards
issued................................................ 766 2,648 1,343
Net proceeds from dividend reinvestment and additional
cash investment plan.................................. 6,242 1,135 216
-------- -------- --------
Balance at end of year..................................... $242,495 $235,487 $202,116
======== ======== ========
ACCUMULATED DEFICIT
Balance at beginning of year............................... $(24,766) $(22,285) $(15,484)
Net income............................................... 8,356 26,404 18,746
Distributions to shareholders............................ (30,429) (28,885) (25,547)
-------- -------- --------
Balance at end of year..................................... $(46,839) $(24,766) $(22,285)
======== ======== ========
TOTAL SHAREHOLDERS' EQUITY................................. $195,858 $210,920 $180,017
======== ======== ========
SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of year............................... 19,901 18,556 16,975
Additional shares issued under common stock offerings.... 1,150 1,491
Stock options exercised and stock awards issued.......... 38 155 77
Additional shares issued under the dividend reinvestment
and additional cash investment plan................... 225 40 13
-------- -------- --------
Balance at end of year..................................... 20,164 19,901 18,556
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 54
IRVINE APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 8,356 $ 26,404 $ 18,746
Adjustments to reconcile net income to net cash provided by
operating activities:
Write-off of deferred financing costs..................... 8,314
Amortization of deferred financing costs.................. 1,942 2,369 2,627
Depreciation and amortization............................. 33,802 29,309 27,239
Minority redeemable preferred interests................... 12,317
Minority interest in income............................... 10,425 32,179 22,446
Increase (decrease) in cash attributable to changes in
assets and liabilities:
Restricted cash......................................... (189) (88) (195)
Other assets............................................ 2,330 (3,042) (104)
Accounts payable and accrued liabilities................ 4,725 5,972 1,308
Security deposits....................................... 1,769 1,604 970
--------- --------- --------
Net Cash Provided by Operating Activities................... 83,791 94,707 73,037
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital improvements to operating real estate assets........ (5,883) (5,041) (4,766)
Capital investments in real estate assets................... (225,844) (244,517) (61,850)
--------- --------- --------
Net Cash Used in Investing Activities....................... (231,727) (249,558) (66,616)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under unsecured line of credit................... 150,000 202,000 78,900
Payments on unsecured line of credit........................ (225,000) (143,000) (84,900)
Proceeds from unsecured tax-exempt bond financings.......... 334,190
Payments on tax-exempt mortgage bond financings............. (325,644)
Proceeds from unsecured term loan........................... 100,000
Proceeds from issuance of unsecured notes payable........... 99,208
Principal payments.......................................... (3,849) (7,224) (7,101)
Additions to deferred financing costs....................... (3,336) (1,261)
Net proceeds from issuance of minority redeemable preferred
interests................................................. 192,725
Net proceeds from dividend reinvestment and additional cash
investment plan........................................... 9,291 1,926 650
Proceeds from stock options exercised....................... 527 2,407 1,144
Net proceeds from common stock offerings.................... 29,969 29,825
Contributions from The Irvine Company and certain of its
affiliates................................................ 36,333 30,000
Distributions to minority redeemable preferred interests.... (12,317)
Distributions to The Irvine Company and certain of its
affiliates................................................ (37,380) (35,093) (30,579)
Distributions to other limited partners..................... (578) (110)
Distributions to shareholders............................... (30,429) (28,885) (25,547)
--------- --------- --------
Net Cash Provided by (Used in) Financing Activities......... 148,200 156,270 (7,608)
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 264 1,419 (1,187)
Cash and Cash Equivalents at Beginning of Year.............. 4,624 3,205 4,392
--------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 4,888 $ 4,624 $ 3,205
========= ========= ========
Supplemental Disclosure of Cash Flow Information
Interest paid, net of amounts capitalized................. $ 26,950 $ 28,309 $ 29,644
Tax-exempt debt assumed................................... $ 18,000 $ 2,771
========= ========= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 55
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., a Maryland corporation (the "Company"),
operates as a real estate investment trust ("REIT") under the Internal Revenue
Code of 1986, as amended. In connection with the Company's initial public
offering of common stock (the "Offering"), the Company obtained a general
partnership interest in and became the sole managing general partner of Irvine
Apartment Communities, L.P., a Delaware limited partnership (the "Operating
Partnership"). The Operating Partnership was formed on November 15, 1993 and
began operations as of December 8, 1993, the date of the Offering. In connection
with the Offering, The Irvine Company transferred 42 apartment communities and a
99% interest in a limited partnership which owns one apartment community to the
Operating Partnership. At December 31, 1998, the Company had a 44.6% general
partnership interest in and was the sole managing general partner of the
Operating Partnership. At December 31, 1998, the common limited partners had a
55.4% common limited partnership interest in the Operating Partnership, with The
Irvine Company and certain of its affiliates owning a 55.2% common limited
partnership interest in the Operating Partnership. In addition, at December 31,
1998, The Irvine Company and certain of its affiliates owned approximately 17.9%
of the common shares of the Company. In February 1997, the Operating Partnership
acquired the assets of Thompson Residential Company, Inc. The purchase price was
paid by the issuance of 74,523 common limited partnership units in the Operating
Partnership. At December 31, 1998, Thompson Residential Company, Inc. had a 0.2%
common limited partnership interest in the Operating Partnership. 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. In May 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 (through the Operating Partnership) of apartment communities in
Orange County, California and, beginning in 1997, other locations in California.
As of December 31, 1998, the Operating Partnership owned 65 apartment
communities representing 16,439 operating apartment units and 3,039 apartment
units under construction or development (collectively, the "Properties"). In
March 1998, the Operating Partnership and Western National Property Management
("WNPM") announced the formation of a strategic alliance that, in April 1998,
assumed all property management responsibilities for the Operating Partnership's
Southern California portfolio. The new entity, Irvine Apartment Management
Company ("IAMC"), is owned 51% by the Operating Partnership and 49% by WNPM.
Until July 31, 2020, the Company and the Operating Partnership have the
exclusive right, but not the obligation, to acquire land from The Irvine Company
for development of additional apartment communities on the Irvine Ranch.
IAC Capital Trust, a Delaware business trust (the "Trust"), was formed on
October 31, 1997. The Trust is a limited purpose financing vehicle established
by the Company and the Operating Partnership. The Trust exists for the sole
purpose of issuing redeemable preferred securities and investing the proceeds
thereof in preferred limited partner units of the Operating Partnership.
The accompanying financial statements of the Company include the
consolidated accounts of the Operating Partnership and its financially
controlled subsidiaries. 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, 1998 and 1997, and the revenues and expenses for the three years
ended December 31, 1998. Actual results could differ from those estimates.
F-6
<PAGE> 56
IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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, on a property-by-property
basis, are impaired and the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amounts. As of December 31, 1998, no
impairment losses have been recorded. 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 remaining original 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.
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 collectibility each month. 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: All earnings per share amounts for all periods reflect
basic and diluted earnings per share and have been restated from the previous
standard of primary and fully diluted earnings per share. See Note 10 for
additional information regarding basic and diluted earnings per share.
DESCRIPTIVE INFORMATION ABOUT REPORTABLE SEGMENTS: During the fourth
quarter of 1998, the Company adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 131,
F-7
<PAGE> 57
IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Disclosures About Segments of an Enterprise and Related Information ("Statement
No. 131"). Statement No. 131 superseded FASB Statement No. 14, Financial
Reporting for Segments of a Business Enterprise. Statement No. 131 establishes
standards for the way that public business enterprises report information
regarding reportable operating segments. The adoption of Statement No. 131 did
not affect the results of operations or financial position of the Company.
The Company operates and develops apartment communities in California which
generated rental and other income through the leasing of apartment units to a
diverse base of renters. The Company separately evaluates the performance of
each of its apartment communities. However, because each of the apartment
communities have similar economic characteristics, facilities, services and
tenants, the apartment communities have been aggregated into a single dominant
apartment communities segment.
The Company evaluates performance and allocates resources primarily based
on the net operating income ("NOI") of individual apartment communities. NOI is
defined by the Company as rental and other income less property expenses and
real estate taxes. Accordingly, NOI excludes certain expenses included in the
determination of net income. NOI from apartment communities totaled $152,766,
$126,536 and $106,230 for the years ended December 31, 1998, 1997 and 1996,
respectively. All other segment measurements are disclosed in the Company's
consolidated financial statements.
All revenues are from external customers and no revenues are generated from
transactions with other segments. There are no tenants which contributed 10% or
more of the Company's total revenues during 1998, 1997 or 1996. Interest expense
on debt is not allocated to individual apartment communities, even if such debt
is secured by the apartment communities. Further, minority interest in
consolidated subsidiaries is not allocated to the apartment communities. There
is no provision for income taxes as the Company is organized as a REIT under the
Internal Revenue Code.
RECLASSIFICATIONS: Certain amounts in the 1997 and 1996 financial
statements have been reclassified to conform with financial statement
presentations in 1998.
NOTE 3 -- MORTGAGES AND NOTES PAYABLE
TAX-EXEMPT MORTGAGE BOND FINANCINGS: In October 1998, the Operating
Partnership assumed $18 million in tax-exempt mortgage bond financings
associated with the purchase of a 216-unit apartment community ("One Park
Place"). The tax-exempt financings represent loans payable that are
collateralized by One Park Place. Monthly interest payments are made to a
trustee, which in turn pays the bondholders when interest is due. The bonds bear
interest at a weekly remarketed tax-exempt rate and are due April 2025.
CONVENTIONAL MORTGAGE FINANCINGS: Conventional mortgages are collateralized
by apartment communities having a net book value of $145,120 as of December 31,
1998. 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 6.31% to 8.30%. As
of December 31, 1998, the weighted average interest rate was 7.12%. Including
the amortization of deferred financing costs, the all-in interest rate was
8.30%. The interest reduction periods expire prior to or at the loan maturity
dates and range from 2000 to 2008.
MORTGAGE NOTES PAYABLE TO THE IRVINE COMPANY: Two of the Operating
Partnership's apartment communities are financed by mortgage notes payable to
The Irvine Company. These mortgage notes totaled $49,517 and $50,397 at December
31, 1998 and 1997, 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, 1998, are fully amortizing
and mature in 2015 and 2024. Interest incurred on the mortgage notes payable to
The Irvine Company totaled $2,871, $2,920 and $2,966 for the years ended
F-8
<PAGE> 58
IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31, 1998, 1997 and 1996, 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
$49,890 and $50,651 as of December 31, 1998 and 1997, respectively.
TAX-EXEMPT ASSESSMENT DISTRICT DEBT: In connection with the Offering, the
Operating Partnership assumed certain tax-exempt assessment district debt of the
predecessor entity. In conjunction with the purchase of land, the Operating
Partnership assumed $2,771 in 1996 in tax-exempt assessment district debt.
Tax-exempt assessment district debt represents debt issued by municipal
government authorities to finance the construction of infrastructure and
improvements. The debt obligations are repaid by the Operating Partnership
through assessments.
UNSECURED TAX-EXEMPT BOND FINANCINGS: In June 1998, the Operating
Partnership completed a $334 million offering of unsecured tax-exempt debt at an
average interest rate of 4.93% in three tranches ranging from 10 to 15 years.
Proceeds from the offering were used to repay the Operating Partnership's
existing tax-exempt mortgage debt and to pay costs associated with prepayment
penalties and the unwinding of certain swap agreements. The Operating
Partnership recorded an extraordinary item related to debt extinguishment of
$42.5 million in June 1998.
UNSECURED TERM LOAN: In November 1998, the Operating Partnership placed a
$100 million unsecured term loan with two banks. The term loan is interest-only
and bears interest at LIBOR plus 1.5%. The floating rate has been fixed through
an interest rate swap agreement. The term loan is due in November 1999. The term
loan can be extended for two six-month periods if the loan is not in default.
UNSECURED NOTES PAYABLE: In October 1997, the Operating Partnership issued
$100 million aggregate principal amount of 7% senior unsecured notes term
pursuant to its shelf registration statement. The notes are due on October 1,
2007. Net proceeds from the offering of $97.9 million were used to repay
indebtedness under the Operating Partnership's line of credit. The Operating
Partnership was in compliance with all covenant requirements at December 31,
1998.
UNSECURED LINE OF CREDIT: The Operating Partnership has a $250 million
unsecured revolving credit facility that was amended in July 1998. The amended
credit facility currently bears interest at LIBOR plus 0.65% or prime and
matures in June 2001. The interest rates under the credit facility are adjusted
up or down based on credit ratings on the Operating Partnership's senior
unsecured long-term indebtedness. Under the credit facility, the Operating
Partnership is able to borrow funds from the participating banks through a
competitive bid process to obtain a lower interest rate. The Operating
Partnership may also enter into letters of credit under the facility. Borrowings
under the credit facility, which are guaranteed by the Company, are available to
finance the Operating Partnership's ongoing rental property development,
possible acquisitions and for general working capital needs. The Company and the
Operating Partnership must comply with certain affirmative and negative
covenants, including limitations on distributions, and the maintenance of
certain net worth, cash flow and financial ratios. At December 31, 1998, the
Company and the Operating Partnership were in compliance with all of these
covenants. In 1998, the Company entered into letters of credit under the
facility totaling $29.1 million related to acquisitions. The letters of credit
reduce the remaining amount available under the line of credit. As of December
31, 1998, there was no outstanding balance under the line of credit and $220.9
million was available.
INTEREST RATE SWAP AGREEMENT: The Operating Partnership uses an interest
rate swap agreement to effectively convert its floating rate unsecured term loan
to a fixed-rate basis, thus reducing the impact on future income of fluctuations
in interest rates. The swap agreement terminates in 1999. The swap counterparty
is a financial institution rated AAA by Standard & Poor's. The difference to be
paid or received is accrued and included in interest expense as a yield
adjustment and the related amount payable or receivable from the counterparty is
included in accrued liabilities or other assets. Additionally, the Operating
Partnership
F-9
<PAGE> 59
IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
restructured several interest rate swaps related to the retired tax-exempt bonds
in May 1995. One of the transactions reduces the interest expense on unsecured
tax-exempt bond financings by approximately 30 basis points per year through
2001. At December 31, 1998, the average fixed interest rate paid to the
counterparty was 4.88% and the average variable interest rate received was
5.56%. This resulted in a net interest receivable of $56 which was settled on
January 20, 1999. Based on prevailing interest rates at December 31, 1998, the
interest rate swap agreement had a fair value of $2,762.
TREASURY RATE LOCK AGREEMENTS: The Operating Partnership entered into
treasury rate lock agreements to hedge a planned debt offering of $100 million
and lock into a treasury rate of 5.67%. In November 1998, the Operating
Partnership terminated all of its outstanding treasury rate lock agreements
because management determined that the planned debt offering would not occur.
The cost of terminating these agreements was $7.8 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 $156.4 million, $76.6 million and $40.0 million
for the years ended December 31, 1998, 1997 and 1996, respectively. Interest
capitalized was $12,280, $5,704 and $3,151 in 1998, 1997 and 1996, respectively.
Interest incurred totaled $40,102, $36,072 and $32,657 for the years ended
December 31, 1998, 1997 and 1996, respectively.
OTHER MATTERS: Mortgages and notes payable totaling $198,190 are subject to
prepayment penalties.
MORTGAGES AND NOTES PAYABLE AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
EXPIRATION OF
OUTSTANDING EFFECTIVE INTEREST RATE INTEREST RATE
PRINCIPAL INTEREST REDUCTION AFTER MATURITY
TYPE OF DEBT BALANCE RATE PERIOD STEP-UP DATE
------------ ----------- --------- ------------- ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Tax-exempt mortgage bond financings......... $ 18,000 4.29% 4/25
Conventional mortgage financings:
Bayport................................... 4,706 6.91% 7/08 9.25% 7/18
Bayview................................... 3,397 6.91% 7/08 9.25% 7/18
Baywood................................... 20,299 6.91% 7/08 9.25% 7/18
Deerfield Phase I......................... 7,212 6.57% 7/02 8.90% 7/08
Mariner Square............................ 5,439 6.32% 9/00 8.50% 8/08
The Parklands............................. 5,666 6.15% 4/04
Parkwood.................................. 12,195 6.31% 8/00 8.50% 7/08
Promontory Point.......................... 35,008 8.30% 8/00
Rancho Mariposa........................... 12,336 7.75% 6/03
San Paulo................................. 1,458 4.00% 1/13
San Paulo................................. 700 3.00% 1/08
Turtle Rock Vista......................... 12,931 6.31% 8/00 8.50% 7/08
Woodbridge Pines.......................... 8,192 6.91% 9/08 9.25% 8/18
-------- --------- -----
129,539 7.12% 7/08
-------- --------- -----
Mortgage notes payable to The Irvine
Company:
Park West................................. 33,247 5.75% 7/24
Rancho San Joaquin........................ 16,270 5.75% 1/15
-------- --------- -----
49,517 5.75% 5/21
-------- --------- -----
</TABLE>
F-10
<PAGE> 60
IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
EXPIRATION OF
OUTSTANDING EFFECTIVE INTEREST RATE INTEREST RATE
PRINCIPAL INTEREST REDUCTION AFTER MATURITY
TYPE OF DEBT BALANCE RATE PERIOD STEP-UP DATE
------------ ----------- --------- ------------- ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Tax-exempt assessment district debt:
Fixed rate................................ 5,268 6.29% 7/17
Variable rate............................. 16,024 3.51% 9/18
-------- --------- -----
21,292 4.20% 5/18
-------- --------- -----
Unsecured tax-exempt bond financings........ 334,190 4.93% 11/09
-------- --------- -----
Unsecured term loan......................... 100,000 6.11% 11/99
-------- --------- -----
Unsecured notes payable..................... 99,280 7.10% 10/07
-------- --------- -----
Total/weighted average...................... $751,818 5.77% 5/09
======== ========= =====
</TABLE>
SCHEDULED PRINCIPAL AMORTIZATION: MORTGAGES AND NOTES PAYABLE AT DECEMBER 31,
1998
<TABLE>
<CAPTION>
YEAR OF MATURITY
-----------------------------------------------------------
TYPE OF DEBT 1999 2000 2001 2002 2003 THEREAFTER TOTAL
------------ -------- ------- ------ ------ ------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Tax-exempt mortgage bond
financings....................... $ 18,000 $ 18,000
Conventional mortgage financings... $ 2,958 $36,754 $2,773 $3,000 $13,928 70,126 129,539
Mortgage notes payable to
The Irvine Company............... 931 986 1,044 1,106 1,171 44,279 49,517
Tax-exempt assessment district
debt............................. 326 522 583 642 668 18,551 21,292
Unsecured tax-exempt bond
financings....................... 334,190 334,190
Unsecured term loan................ 100,000 100,000
Unsecured notes payable............ 99,280 99,280
-------- ------- ------ ------ ------- -------- --------
Totals............................. $104,215 $38,262 $4,400 $4,748 $15,767 $584,426 $751,818
======== ======= ====== ====== ======= ======== ========
Percentage of debt................. 13.9% 5.1% 0.6% 0.6% 2.1% 77.7% 100.0%
======== ======= ====== ====== ======= ======== ========
</TABLE>
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 the conventional mortgage financings and the 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 ranges from
6.3% to 7.3% based on the terms of the loan. As of December 31, 1998, the fair
values of the conventional mortgage financings and the mortgage notes payable to
The Irvine Company were $135,938 and $43,432, respectively. The fair values of
the unsecured notes payable and unsecured tax-exempt bond financings based on
the prevailing interest rates at December 31, 1998 were $89,096 and $339,886,
respectively.
NOTE 5 -- MINORITY REDEEMABLE PREFERRED INTERESTS
In January 1998, IAC Capital Trust issued 6.0 million of 8 1/4% Series A
Preferred Securities. The proceeds of $150 million were used to purchase an
equivalent amount of 8 1/4% Series A Preferred Limited Partner Units in the
Operating Partnership. The Operating Partnership used the $150 million of
proceeds, net of costs and offering expenses, all of which were paid by the
Operating Partnership, to repay the outstanding balance on the Operating
Partnership's credit facility and to fund development.
F-11
<PAGE> 61
IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In November 1998, the Operating Partnership issued 2.0 million of 8 3/4%
Series B Preferred Limited Partner Units. The Operating Partnership used the net
proceeds to reduce the outstanding balance on its unsecured line of credit.
NOTE 6 -- EQUITY
In July 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 common limited
partnership units to The Irvine Company, totaled $60.0 million. Proceeds were
used to repay $43 million of debt outstanding under the revolving credit
facility. The remaining proceeds were used to fund ongoing development programs
and for general corporate purposes.
In February 1997, the Company sold 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 common
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 credit facility and for general corporate purposes,
including ongoing development activities on and off the Irvine Ranch.
In May 1997, the Company filed a shelf registration statement with the
Securities and Exchange Commission providing for the issuance from time to time
of up to $350 million of common stock, preferred stock, and warrants to purchase
common stock and preferred stock. The Company plans to use the proceeds raised
from any securities issued under its shelf registration statement for general
corporate purposes, including the development of new apartment communities,
acquisitions and the repayment of existing debt. Availability under the
Company's shelf registration statement was $350 million at December 31, 1998.
Concurrently, the Operating Partnership filed a shelf registration statement
with the Securities and Exchange Commission providing for the issuance from time
to time of up to $350 million of debt securities. The Operating Partnership
plans to use the proceeds raised from any securities issued under its shelf
registration statement for general corporate purposes, including the development
of new apartment communities, acquisitions and the repayment of existing debt.
On October 1, 1997, the Operating Partnership issued $100 million aggregate
principal amount of 7% senior unsecured notes pursuant to its shelf registration
statement. Availability under the Operating Partnership's shelf registration
statement was $250 million at December 31, 1998.
The Operating Partnership, pursuant to a Prospectus Supplement dated April
9, 1998, may issue from time to time up to $250 million aggregate initial
offering price of its Medium-Term Notes, Series A due nine months or more from
the date of issue. Issuances of Medium-Term Notes will reduce availability under
the Operating Partnership's Registration Statement by the amount of Medium-Term
Notes issued. Similarly, issuances of other debt securities under the Operating
Partnership's Registration Statement will reduce the amount of Medium-Term Notes
that may be used. As of December 31, 1998, there have been no issuances of
Medium-Term Notes.
F-12
<PAGE> 62
IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RECONCILIATION OF COMMON LIMITED PARTNERSHIP UNITS OUTSTANDING
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------- -------------------------------------
THE IRVINE THE IRVINE
COMPANY COMPANY OTHER TOTAL COMPANY COMPANY OTHER TOTAL
------- ---------- ----- ------ ------- ---------- ----- ------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period........... 19,901 24,844 75 44,820 18,556 22,292 40,848
Stock options exercised and awards
issued................................. 38 38 156 156
Dividend reinvestment plan and additional
cash investment plan................... 225 108 333 39 27 66
Common stock offerings and related cash
contributions from The Irvine
Company................................ 1,150 1,394 2,544
Acquisition of Thompson Residential
Company, Inc. assets................... 75 75
Contributions of property by The Irvine
Company and certain of its
affiliates............................. 1,131 1,131
------ ------ --- ------ ------ ------ --- ------
Balance at end of period................. 20,164 24,952 75 45,191 19,901 24,844 75 44,820
====== ====== === ====== ====== ====== === ======
Ownership interest at end of period...... 44.6% 55.2% 0.2% 100% 44.4% 55.4% 0.2% 100%
====== ====== === ====== ====== ====== === ======
</TABLE>
The following tables represent a reconciliation of the minority interest
balances and the computation of the minority interest in income.
RECONCILIATION OF MINORITY INTEREST
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period.............................. $210,307 $140,327
Minority interest in income................................. 10,425 32,179
Distributions............................................... (37,958) (35,203)
Cash contributions.......................................... 36,333
Contributions of property by The Irvine Company and certain
of its affiliates......................................... 33,905
Acquisition of Thompson Residential Company, Inc. assets.... 2,000
Contributions under dividend reinvestment plan and
additional cash investment plan........................... 3,047 766
-------- --------
Balance at end of period.................................... $185,821 $210,307
======== ========
</TABLE>
COMPUTATION OF MINORITY INTEREST IN INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income before minority interest............................. $18,781 $ 58,583 $ 41,192
Income allocated to the Company based on its ownership
interest.................................................. (8,356) (26,404) (18,746)
------- -------- --------
Minority interest in income................................. $10,425 $ 32,179 $ 22,446
======= ======== ========
Income allocated to The Irvine Company and certain of its
affiliates based on their ownership interest.............. $10,394 $ 32,088 $ 22,446
Income allocated to Thompson Residential Company, Inc. based
on
its ownership interest.................................... $ 31 $ 91
</TABLE>
NOTE 7 -- ACQUISITION OF THOMPSON RESIDENTIAL ASSETS
In February 1997, the assets of Thompson Residential Company, Inc. ("TRC"),
a privately held, Northern California-based multi-family development company
were acquired for $2 million which was paid
F-13
<PAGE> 63
IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
by the issuance of 74,523 common limited partnership units (exchangeable for
common stock of the Company), using the average closing price of the Company's
common stock for the ten trading days preceding the acquisition's closing date.
In addition, TRC may be paid up to an additional $2 million in cash or common
limited partnership units if an apartment community (The Hamptons) achieves
certain performance targets. As of December 31, 1998, the performance targets
have not been achieved.
NOTE 8 -- 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, 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 common limited partnership units at the option of
the Company. After July 31, 2000, the choice of consideration will revert to The
Irvine Company.
NOTE 9 -- 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, human resources and other services of $185 for
the year ended December 31, 1998. The amounts for the corresponding periods in
1997 and 1996 were $132 and $108, 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 $447, $384
and $349 for the years ended December 31, 1998, 1997 and 1996, respectively,
related to leases with The Irvine Company that expire in 2003. For the years
ended December 31, 1998, 1997 and 1996, The Irvine Company contributed $3,763,
$766 and $354, respectively, in connection with stock issuances under the
dividend reinvestment and additional cash investment plan.
In March 1996, the Company acquired a development site known as Santa Maria
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 common limited partnership units in the Operating
Partnership to The Irvine Company. The common limited partnership units are
exchangeable for common stock on a one-for-one basis, subject to adjustment and
certain limitations.
Concurrent with the Company's common stock offering in July 1996, The
Irvine Company, pursuant to its rights under the Operating Partnership
Agreement, purchased 1.49 million common limited partnership units at a price of
$20.125 per unit (which is equal to the public offering price of common stock
less an amount equivalent to the underwriting discount) 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.
F-14
<PAGE> 64
IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In July 1996, the Company acquired a development site known as The Colony
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 common
limited partnership units in the Operating Partnership to The Irvine Company.
The common limited partnership units are exchangeable for common stock on a one-
for-one basis, subject to adjustment and certain limitations.
In December 1996, the Company acquired a development site known as Santa
Rosa II 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 common limited partnership
units in the Operating Partnership to The Irvine Company. The common limited
partnership units are exchangeable for common stock on a one-for-one basis,
subject to adjustment and certain limitations.
In February 1997, the Company acquired a development site known as Rancho
Santa Fe for $8.4 million from The Irvine Company for the development of 316
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 313,439 additional common limited partnership
units in the Operating Partnership to The Irvine Company. The common limited
partnership units are exchangeable for common stock on a one-for-one basis,
subject to adjustment and certain limitations. Pursuant to the terms of the
acquisition, a portion of the common limited partnership units in the Operating
Partnership are subject to forfeiture if the apartment community developed on
the site does not achieve a 10% unleveraged return on costs for the first twelve
months following stabilized occupancy.
Concurrent with the Company's common stock offering in February 1997, The
Irvine Company, pursuant to its rights under the Operating Partnership
Agreement, purchased 1.39 million common limited partnership units at a price of
$26.06 per unit (which is equal to the public offering price of the common stock
less an amount equivalent to the underwriting discount) or a total of $36.2
million. These units are exchangeable for common stock on a one-for-one basis,
subject to adjustment and certain limitations.
In October 1997, the Company acquired a development site known as Sonoma
for $5.7 million from The Irvine Company for the development of 196 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 179,433 additional common limited partnership units
in the Operating Partnership to The Irvine Company. The common limited
partnership units are exchangeable for common stock on a one-for-one basis,
subject to adjustment and certain limitations. Pursuant to the terms of the
acquisition, a portion of the common limited partnership units in the Operating
Partnership are subject to forfeiture if the apartment community developed on
the site does not achieve a 10% unleveraged return on costs for the first twelve
months following stabilized occupancy.
In December 1997, the Company acquired a development site known as
Stonecrest, located in San Diego County, for $9.5 million from an affiliate of
The Irvine Company for the development of 326 rental units. The Company's board
committee of independent directors approved the purchase. The purchase price was
paid through the issuance of 305,707 additional common limited partnership units
in the Operating Partnership to an affiliate of The Irvine Company. Of the
common limited partnership units issued, 199,011 are exchangeable for common
stock on a one-for-one basis and 106,696 common limited partnership units are
not exchangeable for common stock absent approval of the shareholders of the
Company.
F-15
<PAGE> 65
IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In December 1997, the Company acquired a development site known as Brittany
for $10.3 million from The Irvine Company for the development of 393 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 332,060 additional common limited partnership units
in the Operating Partnership to The Irvine Company. The common limited
partnership units are exchangeable for common stock on a one-for-one basis,
subject to adjustment and certain limitations.
One of the Company's directors is chairman of a bank which participates in
the Operating Partnership's credit facility. 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 $364, $279 and $245 in 1998, 1997 and
1996, respectively.
NOTE 10 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings per share --
Net income............................................. $ 8,356 $26,404 $18,746
======= ======= =======
Denominator:
Denominator for basic earnings per share -- weighted
average shares outstanding............................. 20,040 19,656 17,732
Effect of dilutive securities:
Stock plans............................................ 105 137 151
------- ------- -------
Denominator for diluted earnings per share --
Adjusted weighted average shares after effect of
dilutive securities.................................. 20,145 19,793 17,883
======= ======= =======
Basic earnings per share:
Income before extraordinary item and minority interest in
income................................................. $ 1.36
Extraordinary item related to debt extinguishment......... (0.94)
-------
Basic Earnings Per Share.................................... $ 0.42 $ 1.34 $ 1.06
======= ======= =======
Diluted earnings per share:
Income before extraordinary item and minority interest in
income................................................. $ 1.35
Extraordinary item related to debt extinguishment......... (0.94)
-------
Diluted Earnings Per Share.................................. $ 0.41 $ 1.33 $ 1.05
======= ======= =======
</TABLE>
Options to purchase 333,000 and 51,000 shares of common stock were
outstanding during 1998 and 1997, respectively, but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares and, therefore,
the effect would be antidilutive. Convertible common limited partnership units
totaling 24,981,000, 23,930,000 and 21,221,000 were outstanding during 1998,
1997 and 1996, respectively, but were not included in the computation of diluted
earnings per share because the effect would be antidilutive.
In January 1998, the Trust issued 6.0 million of 8 1/4% Series A Preferred
Securities. The proceeds were used to purchase an equivalent amount of 8 1/4%
Series A Preferred Limited Partner Units in the Operating
F-16
<PAGE> 66
IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Partnership. Income will be allocated to the Series A Preferred Limited Partner
Unit Holders at an annual rate of 8 1/4%.
In November 1998, the Operating Partnership issued 2.0 million of 8 3/4%
Series B Preferred Limited Partner Units. Income will be allocated to the Series
B Preferred Limited Partner Units Holders at an annual rate of 8 3/4%.
NOTE 11 -- 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 common limited partnership units and common stock outstanding from time to
time. The non-qualified stock options in the table below vest in equal
installments over a three-year period from the date of grant 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>
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
Granted................................................. 265,000 $26.63 to $29.81
Exercised............................................... (139,666) $15.88 to $17.50
Canceled................................................ (95,001) $15.88 to $26.88
-------- ----------------
Outstanding at December 31, 1997........................ 439,333 $16.13 to $29.81
Granted................................................. 269,000 $29.81 to $32.06
Exercised............................................... (29,834) $16.13 to $26.88
Canceled................................................ (49,666) $20.00 to $32.06
-------- ----------------
Outstanding at December 31, 1998........................ 628,833 $16.13 to $32.06
======== ================
Vested and exercisable at December 31, 1998............. 234,499 $16.13 to $29.50
======== ================
</TABLE>
The restricted stock awards of the Company's President and Chief Executive
Officer vest over four years. The restricted stock performance awards issued to
other officers vest over a five-year period provided that the Company meets
certain financial targets.
F-17
<PAGE> 67
IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PERFORMANCE AWARD TRANSACTIONS
<TABLE>
<CAPTION>
NUMBER OF AWARDS
----------------
<S> <C>
Outstanding at December 31, 1995............................ 325,000
Granted..................................................... 10,000
Issued...................................................... (20,000)
Canceled.................................................... (82,049)
--------
Outstanding at December 31, 1996............................ 232,951
Granted..................................................... 96,500
Issued...................................................... (62,951)
Canceled.................................................... (105,710)
--------
Outstanding at December 31, 1997............................ 160,790
Granted..................................................... 75,500
Issued...................................................... (15,000)
Canceled.................................................... (15,797)
--------
Outstanding at December 31, 1998............................ 205,493
========
Vested at December 31, 1998................................. 31,703
========
</TABLE>
The total number of shares available to be granted at December 31, 1998
under these plans was 1,121,606.
DIRECTORS' STOCK OPTION PLAN: The 1993 Stock Option Plan for Directors was
amended in 1998. The amended plan allows for 250,000 shares that may be granted
to independent directors and increases the annual number of options that may be
granted to 2,500. 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 from 1995 to 1997. In 1998, this amount was
increased to 2,500. 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>
Outstanding at December 31, 1995........................ 30,000 $15.63 to $17.44
Granted................................................. 5,000 $20.06
------- ----------------
Outstanding at December 31, 1996........................ 35,000 $15.63 to $20.06
Granted................................................. 5,000 $26.75
Exercised............................................... (7,000) $15.63 to $20.06
------- ----------------
Outstanding at December 31, 1997........................ 33,000 $15.63 to $26.75
Granted................................................. 12,500 $30.13
------- ----------------
Outstanding at December 31, 1998........................ 45,500 $15.63 to $30.13
======= ================
Available for future grant.............................. 197,500
=======
</TABLE>
EQUITY COMPENSATION PLANS: The Company applies APB Opinion No. 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 been determined utilizing the fair value of the award
over the service period. Had the Company
F-18
<PAGE> 68
IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
applied FAS Statement No. 123 for stock-based compensation, it would have
resulted in net income and earnings per share amounts that approximate the
amounts reported. Under FAS Statement No. 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 1998, 1997 and 1996,
respectively: risk-free interest rates of 5.69%, 6.43%, and 6.46%; dividend
yields of 4.82%, 5.27% and 7.09%; volatility factors of the expected market
price of the Company's common stock of 0.191, 0.184 and 0.204; and a weighted
average expected life of the options of seven years.
NOTE 12 -- 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 are accrued 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 $178, $125 and $122 in 1998, 1997 and 1996, respectively.
NOTE 13 -- AGREEMENTS, COMMITMENTS AND CONTINGENCIES
MANAGEMENT AGREEMENT: The Company has a management agreement with IAMC
whereby IAMC has the exclusive right to manage all of the Company's properties
located on the Irvine Ranch and, to the extent practical, any other properties.
Management fees range from $15/unit/month to $28/unit/month depending on whether
the property is in lease-up or stabilized. The agreement expires in March 2001.
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 statements.
ASSESSMENT DISTRICTS: In some of the local jurisdictions within Orange
County where the predecessor entity developed property, assessment districts
were formed by local governments to finance major infrastructure improvements.
At December 31, 1998, the Company had $37.9 million of assessment district debt,
of which $21.3 million was reflected in the balance sheet.
EXCHANGE RIGHTS: The Irvine Company and certain of its affiliates have the
right to exchange up to one-third of the total common limited partnership units
owned by them for shares of common stock in each twelve-month period commencing
on December 8 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 and certain of its affiliates have the right to sell to the
Company for cash generally up to one-third of its common limited partnership
units in each twelve-month period commencing on December 8 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 and certain of its
affiliates would bear the costs of sale (other than underwriting discounts and
commissions). The Irvine Company and certain of its affiliates 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.
F-19
<PAGE> 69
IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RENT RESTRICTIONS: As of December 31, 1998, 18.1% 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 $3,921, $3,903 and $3,977 for the years
ended December 31, 1998, 1997 and 1996, respectively.
NOTE 14 -- ACQUISITION OFFER FROM THE IRVINE COMPANY
On February 1, 1999, the Company and TIC Acquisition LLC, a wholly-owned
subsidiary of The Irvine Company, entered into a definitive merger agreement
providing for the acquisition by TIC Acquisition LLC of all the outstanding
common shares of the Company in a business combination for $34 per share in
cash. Because the terms of the transaction are subject to various approvals,
there can be no assurance that the transaction will be consummated.
NOTE 15 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998 QUARTERS ENDED
Revenues..................................... $51,569 $ 53,309 $56,537 $59,422
Expenses..................................... $33,790 $ 33,278 $34,968 $45,252
Extraordinary item........................... $(42,451)
Net income (loss)............................ $ 6,816 $(11,359) $ 8,226 $ 4,673
Basic and diluted earnings (loss) per
share...................................... $ 0.34 $ (0.57) $ 0.41 $ 0.23
1997 QUARTERS ENDED
Revenues..................................... $43,280 $ 44,673 $48,913 $50,079
Expenses..................................... $29,761 $ 29,583 $34,567 $34,451
Net income................................... $ 6,111 $ 6,809 $ 6,479 $ 7,005
Basic and diluted earnings per share......... $ 0.32 $ 0.34 $ 0.33 $ 0.35
</TABLE>
F-20
<PAGE> 70
IRVINE APARTMENT COMMUNITIES, INC.
SCHEDULE III -- CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
CARRIED AT DECEMBER 31, 1998(A)(B)
NUMBER -------------------------------------
OF BUILDINGS AND ACCUMULATED DATE OF
APARTMENT COMMUNITY NAME (CITY) UNITS ENCUMBRANCES(C) LAND(E) IMPROVEMENTS TOTAL DEPRECIATION COMPLETION
- ------------------------------- ------ --------------- -------- ------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES STABILIZED FOR ALL
OF 1998:
IRVINE
Amherst Court............. 162 $ 1,430 $ 11,373 $ 12,803 $ 3,049 1991
Berkeley Court............ 152 858 8,299 9,157 3,256 1986
Cedar Creek............... 176 519 8,718 9,237 3,534 1985
Columbia Court............ 58 321 2,715 3,036 1,040 1984
Cornell Court............. 109 785 5,091 5,876 1,921 1984
Cross Creek............... 136 561 7,351 7,912 2,998 1985
Dartmouth Court........... 294 2,674 17,493 20,167 6,493 1986
Deerfield................. 288 $ 7,212 3,810 11,972 15,782 5,101 1975/83
Harvard Court............. 112 1,034 5,901 6,935 2,281 1986
Northwood Park............ 168 1,246 8,547 9,793 3,551 1985
Northwood Place........... 604 4,613 34,748 39,361 13,011 1986
Orchard Park.............. 60 1,138 2,138 3,276 957 1982
Park West................. 880 33,247 18,768 54,174 72,942 29,742 1970/71/72
Parkwood.................. 296 12,195 7,667 13,060 20,727 5,659 1974
Rancho San Joaquin........ 368 16,270 7,910 28,618 36,528 14,410 1976
San Carlo................. 354 2,790 26,107 28,897 7,343 1989
San Leon.................. 248 1,779 14,627 16,406 5,233 1987
San Marco................. 426 2,977 24,574 27,551 7,598 1988
San Marino................ 200 1,425 11,661 13,086 4,398 1986
San Mateo................. 283 1,482 18,733 20,215 4,857 1990
San Paulo................. 382 2,158 1,956 26,984 28,940 4,170 1993
San Remo.................. 248 1,820 14,400 16,220 5,231 1986/88
Santa Clara............... 378 3,761 31,027 34,788 3,476 1996
Santa Maria............... 227 3,343 19,174 22,517 1,326 1997
Santa Rosa................ 368 3,277 27,615 30,892 3,267 1996
Stanford Court............ 320 2,202 14,354 16,556 5,971 1985
The Parklands............. 121 5,666 68 7,471 7,539 2,841 1983
Turtle Rock Canyon........ 217 1,889 20,191 22,080 4,904 1991
Turtle Rock Vista......... 252 12,931 6,327 13,578 19,905 6,026 1976/77
Villa Coronado............ 513 5,842 38,147 43,989 4,569 1996
Windwood Glen............. 196 1,266 9,763 11,029 3,715 1985
Windwood Knoll............ 248 1,111 11,917 13,028 4,439 1983
Woodbridge Oaks........... 120 832 6,868 7,700 2,602 1983
Woodbridge Pines.......... 220 8,192 5,755 10,788 16,543 4,699 1976
Woodbridge Villas......... 258 4,353 9,549 13,902 4,245 1982
Woodbridge Willows........ 200 1,421 11,563 12,984 5,425 1984
------ -------- -------- ---------- ---------- --------
9,642 97,871 109,010 589,289 698,299 193,338
------ -------- -------- ---------- ---------- --------
NEWPORT BEACH
Baypointe................. 300 4,190 28,715 32,905 1,738 1997
Bayport................... 104 4,706 3,146 4,273 7,419 1,954 1971
Bayview................... 64 3,397 2,353 2,983 5,336 1,385 1971
Baywood................... 388 20,299 10,809 20,823 31,632 8,752 1973/84
Mariner Square............ 114 5,439 392 5,240 5,632 3,622 1969
Newport North............. 570 8,849 31,717 40,566 11,643 1986
Newport Ridge............. 512 9,542 45,150 54,692 4,757 1996
Promontory Point.......... 520 35,008 18,775 41,942 60,717 18,843 1974
------ -------- -------- ---------- ---------- --------
2,572 68,849 58,056 180,843 238,899 52,694
------ -------- -------- ---------- ---------- --------
<CAPTION>
DEPRECIABLE
APARTMENT COMMUNITY NAME (CITY) LIFE(D)
- ------------------------------- -----------
<S> <C>
PROPERTIES STABILIZED FOR ALL
OF 1998:
IRVINE
Amherst Court............. 5-40 yrs.
Berkeley Court............ 5-40 yrs.
Cedar Creek............... 5-40 yrs.
Columbia Court............ 5-40 yrs.
Cornell Court............. 5-40 yrs.
Cross Creek............... 5-40 yrs.
Dartmouth Court........... 5-40 yrs.
Deerfield................. 5-40 yrs.
Harvard Court............. 5-40 yrs.
Northwood Park............ 5-40 yrs.
Northwood Place........... 5-40 yrs.
Orchard Park.............. 5-40 yrs.
Park West................. 5-40 yrs.
Parkwood.................. 5-40 yrs.
Rancho San Joaquin........ 5-40 yrs.
San Carlo................. 5-40 yrs.
San Leon.................. 5-40 yrs.
San Marco................. 5-40 yrs.
San Marino................ 5-40 yrs.
San Mateo................. 5-40 yrs.
San Paulo................. 5-40 yrs.
San Remo.................. 5-40 yrs.
Santa Clara............... 5-40 yrs.
Santa Maria............... 5-40 yrs.
Santa Rosa................ 5-40 yrs.
Stanford Court............ 5-40 yrs.
The Parklands............. 5-40 yrs.
Turtle Rock Canyon........ 5-40 yrs.
Turtle Rock Vista......... 5-40 yrs.
Villa Coronado............ 5-40 yrs.
Windwood Glen............. 5-40 yrs.
Windwood Knoll............ 5-40 yrs.
Woodbridge Oaks........... 5-40 yrs.
Woodbridge Pines.......... 5-40 yrs.
Woodbridge Villas......... 5-40 yrs.
Woodbridge Willows........ 5-40 yrs.
NEWPORT BEACH
Baypointe................. 5-40 yrs.
Bayport................... 5-40 yrs.
Bayview................... 5-40 yrs.
Baywood................... 5-40 yrs.
Mariner Square............ 5-40 yrs.
Newport North............. 5-40 yrs.
Newport Ridge............. 5-40 yrs.
Promontory Point.......... 5-40 yrs.
</TABLE>
F-21
<PAGE> 71
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
CARRIED AT DECEMBER 31, 1998(A)(B)
NUMBER -------------------------------------
OF BUILDINGS AND ACCUMULATED DATE OF
APARTMENT COMMUNITY NAME (CITY) UNITS ENCUMBRANCES(C) LAND(E) IMPROVEMENTS TOTAL DEPRECIATION COMPLETION
- ------------------------------- ------ --------------- -------- ------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
TUSTIN
Rancho Alisal............. 356 $ 3,558 $ 20,269 $ 23,827 $ 7,003 1988/91
Rancho Maderas............ 266 1,144 16,365 17,509 4,637 1989
Rancho Mariposa........... 238 $ 12,336 683 16,373 17,056 3,548 1992
Rancho Monterey........... 436 6,823 34,010 40,833 3,589 1996
Rancho Tierra............. 252 1,215 16,554 17,769 4,830 1989
Sierra Vista.............. 306 2,318 23,001 25,319 4,886 1992
------ -------- -------- ---------- ---------- --------
1,854 12,336 15,741 126,572 142,313 28,493
------ -------- -------- ---------- ---------- --------
LA JOLLA
Villas of Renaissance..... 923 23,075 111,765 134,840 4,180 1992
------ -------- -------- ---------- ---------- --------
TOTAL PROPERTIES STABILIZED FOR
ALL OF 1998................. 14,991 179,056 205,882 1,008,469 1,214,351 278,705
------ -------- -------- ---------- ---------- --------
PROPERTIES STABILIZED OR
ACQUIRED DURING 1998:
The Colony at Fashion
Island (Newport Beach)... 245 3,545 42,132 45,677 1,046 1998
Rancho Santa Fe (Tustin)... 316 8,408 29,614 38,022 618 1998
Santa Rosa II (Irvine).... 207 5,999 20,636 26,635 476 1998
One Park Place (Irvine)... 216 18,000 5,720 22,532 28,252 99
------ -------- -------- ---------- ---------- --------
TOTAL PROPERTIES STABILIZED OR
ACQUIRED DURING 1998:....... 984 18,000 23,672 114,914 138,586 2,239
------ -------- -------- ---------- ---------- --------
TOTAL STABILIZED PORTFOLIO.... 15,975 197,056 229,554 1,123,383 1,352,937 280,944
------ -------- -------- ---------- ---------- --------
DELIVERED UNITS IN PROJECTS
UNDER DEVELOPMENT
The Hamptons at Cupertino
(Cupertino)............. 342 15,000 36,923 51,923 359
Sonoma at Oak Creek
(Irvine)................ 122 3,551 12,240 15,791 66
Other..................... 331 331 80
------ -------- -------- ---------- ---------- --------
TOTAL DELIVERED UNITS......... 464 18,551 49,494 68,045 505
------ -------- -------- ---------- ---------- --------
TOTAL STABILIZED AND
DELIVERED................... 16,439 197,056 248,105 1,172,877 1,420,982 281,449
------ -------- -------- ---------- ---------- --------
UNITS UNDER DEVELOPMENT
Sonoma at Oak Creek
(Irvine)................ 74 2,146 6,450 8,596
Brittany at Oak Creek
(Irvine)................ 393 10,325 23,486 33,811
Park Place (Irvine)....... 1,226 40,000 2,842 42,842
Arcadia at Stonecrest
(San Diego)............. 336 9,475 14,692 24,167
The Colony at Aventine
(La Jolla).............. 232 7,950 4,861 12,811
The Villas at Bair Island
Marina (Redwood City)... 155 3,900 9,739 13,639
1221 Ocean Avenue
(Santa Monica).......... 119 24,000 28,667 52,667
Lonestar (Redwood City)... 206 4,600 938 5,538
Olson Ranch (Sunnyvale)... 298 1,969 1,969
Other..................... 9,331 9,331
------ -------- -------- ---------- ---------- --------
TOTAL UNITS UNDER DEVELOPMENT.. 3,039 102,396 102,975 205,371
------ -------- -------- ---------- ---------- --------
TOTAL................. 19,478 $197,056 $350,501 $1,275,852 $1,626,353 $281,449
====== ======== ======== ========== ========== ========
<CAPTION>
DEPRECIABLE
APARTMENT COMMUNITY NAME (CITY) LIFE(D)
- ------------------------------- -----------
<S> <C>
TUSTIN
Rancho Alisal............. 5-40 yrs.
Rancho Maderas............ 5-40 yrs.
Rancho Mariposa........... 5-40 yrs.
Rancho Monterey........... 5-40 yrs.
Rancho Tierra............. 5-40 yrs.
Sierra Vista.............. 5-40 yrs.
LA JOLLA
Villas of Renaissance..... 5-40 yrs.
TOTAL PROPERTIES STABILIZED FOR
ALL OF 1998.................
PROPERTIES STABILIZED OR
ACQUIRED DURING 1998:
The Colony at Fashion
Island (Newport Beach)... 5-40 yrs.
Rancho Santa Fe (Tustin)... 5-40 yrs.
Santa Rosa II (Irvine).... 5-40 yrs.
One Park Place (Irvine)... 5-40 yrs.
TOTAL PROPERTIES STABILIZED OR
ACQUIRED DURING 1998:.......
TOTAL STABILIZED PORTFOLIO....
DELIVERED UNITS IN PROJECTS
UNDER DEVELOPMENT
The Hamptons at Cupertino
(Cupertino)............. 5-40 yrs.
Sonoma at Oak Creek
(Irvine)................ 5-40 yrs.
Other.....................
TOTAL DELIVERED UNITS.........
TOTAL STABILIZED AND
DELIVERED...................
UNITS UNDER DEVELOPMENT
Sonoma at Oak Creek
(Irvine)................
Brittany at Oak Creek
(Irvine)................
Park Place (Irvine).......
Arcadia at Stonecrest
(San Diego).............
The Colony at Aventine
(La Jolla)..............
The Villas at Bair Island
Marina (Redwood City)...
1221 Ocean Avenue
(Santa Monica)..........
Lonestar (Redwood City)...
Olson Ranch (Sunnyvale)...
Other.....................
TOTAL UNITS UNDER DEVELOPMENT..
TOTAL.................
</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.
F-22
<PAGE> 72
(d) Estimated useful lives are five to seven years for furniture and fixtures,
five to twenty years for improvements and forty years for buildings.
(e) Land acquired from The Irvine Company is recorded at cost based on the
purchase price.
A summary of activity of real estate and accumulated depreciation is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
REAL ESTATE 1998 1997 1996
----------- ---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year........................... $1,372,807 $1,084,234 $1,005,633
Additions:
Through cash expenditures............................ 235,546 252,668 66,857
Through assumption of tax-exempt debt................ 18,000 2,771
Through issuance of Operating Partnership units...... 35,905 8,973
---------- ---------- ----------
Balance at end of year................................. $1,626,353 $1,372,807 $1,084,234
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
ACCUMULATED DEPRECIATION 1998 1997 1996
------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year........................... $ 248,245 $ 219,193 $ 192,106
Charges to depreciation expense........................ 33,204 29,052 27,087
---------- ---------- ----------
Balance at end of period............................... $ 281,449 $ 248,245 $ 219,193
========== ========== ==========
</TABLE>
F-23
<PAGE> 73
IRVINE APARTMENT COMMUNITIES, INC.
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, 1998 and 1997,
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, 1998. Our audits also included the financial statement schedule on pages
F-21 to F-23. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. Also, in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as whole, presents fairly in
all material respects the information set forth therein.
ERNST & YOUNG LLP
Newport Beach, California
February 1, 1999
F-24
<PAGE> 74
IRVINE APARTMENT COMMUNITIES, L.P.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Real estate assets, at cost Land............................ $ 248,105 $ 208,687
Buildings and improvements.................................. 1,172,877 1,015,696
---------- ----------
1,420,982 1,224,383
Accumulated depreciation.................................... (281,449) (248,245)
---------- ----------
1,139,533 976,138
Under development, including land........................... 205,371 148,424
---------- ----------
1,344,904 1,124,562
Cash and cash equivalents................................... 4,888 4,624
Restricted cash............................................. 1,653 1,464
Deferred financing costs, net of accumulated amortization of
$8,814 in 1998 and $10,659 in 1997........................ 12,159 19,079
Other assets................................................ 11,020 13,948
---------- ----------
$1,374,624 $1,163,677
========== ==========
LIABILITIES
Mortgages and notes payable
Tax-exempt mortgage bond financings....................... $ 18,000 $ 325,644
Conventional mortgage financings.......................... 129,539 132,256
Mortgage notes payable to The Irvine Company.............. 49,517 50,397
Tax-exempt assessment district debt....................... 21,292 21,544
Unsecured tax-exempt bond financings...................... 334,190
Unsecured term loan....................................... 100,000
Unsecured notes payable................................... 99,280 99,222
Unsecured line of credit.................................. 75,000
---------- ----------
751,818 704,063
Accounts payable and accrued liabilities.................... 38,871 30,689
Security deposits........................................... 9,467 7,698
---------- ----------
800,156 742,450
---------- ----------
REDEEMABLE PREFERRED INTERESTS
Redeemable Series A preferred limited partner units, 6,000
preferred partnership units outstanding at December 31,
1998...................................................... 144,097
Redeemable Series B preferred limited partner units, 2,000
preferred partnership units outstanding at December 31,
1998...................................................... 48,692
----------
192,789
----------
PARTNERS' CAPITAL
45,191 and 44,820 common partnership units outstanding at
December 31, 1998 and 1997, respectively
General Partner, 20,164 and 19,901 common partnership units
outstanding at December 31, 1998 and 1997, respectively... 195,858 210,920
Limited Partners, 25,027 and 24,919 common partnership units
outstanding at December 31, 1998 and 1997, respectively... 185,821 210,307
---------- ----------
381,679 421,227
---------- ----------
$1,374,624 $1,163,677
========== ==========
</TABLE>
See accompanying notes.
F-25
<PAGE> 75
IRVINE APARTMENT COMMUNITIES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C>
REVENUES
Rental income.............................................. $213,296 $181,902 $154,925
Other income............................................... 6,077 4,203 3,162
Interest income............................................ 1,464 840 611
-------- -------- --------
220,837 186,945 158,698
-------- -------- --------
EXPENSES
Property expenses.......................................... 49,398 44,556 38,361
Real estate taxes.......................................... 17,209 15,013 13,496
Interest expense, net...................................... 27,822 30,368 29,506
Amortization of deferred financing costs................... 1,942 2,369 2,627
Depreciation and amortization.............................. 33,802 29,309 27,239
General and administrative................................. 9,352 6,747 6,277
Loss on settlement of unused treasury locks................ 7,763
-------- -------- --------
147,288 128,362 117,506
-------- -------- --------
Income before extraordinary item and redeemable preferred
interests................................................ 73,549 58,583 41,192
Extraordinary item related to debt extinguishment.......... (42,451)
-------- -------- --------
Income before redeemable preferred interests............... 31,098 58,583 41,192
Redeemable preferred interests............................. 12,317
-------- -------- --------
NET INCOME................................................. $ 18,781 $ 58,583 $ 41,192
======== ======== ========
ALLOCATION OF NET INCOME
General Partner............................................ $ 8,356 $ 26,404 $ 18,746
Limited Partners........................................... $ 10,425 $ 32,179 $ 22,446
======== ======== ========
EARNINGS PER UNIT
Basic...................................................... $ 0.42 $ 1.34 $ 1.06
Diluted.................................................... $ 0.41 $ 1.34 $ 1.05
======== ======== ========
</TABLE>
See accompanying notes.
F-26
<PAGE> 76
IRVINE APARTMENT COMMUNITIES, L.P.
CONSOLIDATED STATEMENTS OF CHANGES
IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
GENERAL PARTNER LIMITED PARTNERS TOTAL
--------------- ---------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
PARTNERS' CAPITAL
Balance at January 1, 1996........................ $155,433 $109,133 $264,566
Net income...................................... 18,746 22,446 41,192
Contributions................................... 31,385 39,327 70,712
Distributions................................... (25,547) (30,579) (56,126)
-------- -------- --------
Balance at December 31, 1996...................... 180,017 140,327 320,344
Net income...................................... 26,404 32,179 58,583
Contributions................................... 33,384 73,004 106,388
Distributions................................... (28,885) (35,203) (64,088)
-------- -------- --------
Balance at December 31, 1997...................... 210,920 210,307 421,227
Net income...................................... 8,356 10,425 18,781
Contributions................................... 7,011 3,047 10,058
Distributions................................... (30,429) (37,958) (68,387)
-------- -------- --------
Balance at December 31, 1998 $195,858 $185,821 $381,679
======== ======== ========
COMMON PARTNERSHIP UNITS OUTSTANDING
Balance at January 1, 1996........................ 16,975 20,397 37,372
Additional common partnership units issued...... 1,581 1,895 3,476
-------- -------- --------
Balance at December 31, 1996...................... 18,556 22,292 40,848
Additional common partnership units issued...... 1,345 2,627 3,972
-------- -------- --------
Balance at December 31, 1997...................... 19,901 24,919 44,820
Additional common partnership units issued...... 263 108 371
-------- -------- --------
Balance at December 31, 1998...................... 20,164 25,027 45,191
======== ======== ========
</TABLE>
See accompanying notes.
F-27
<PAGE> 77
IRVINE APARTMENT COMMUNITIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 18,781 $ 58,583 $ 41,192
Adjustments to reconcile net income to net cash provided
by operating activities:
Write-off of deferred financing costs.................. 8,314
Amortization of deferred financing costs............... 1,942 2,369 2,627
Depreciation and amortization.......................... 33,802 29,309 27,239
Redeemable preferred interests......................... 12,317
Increase (decrease) in cash attributable to changes in
assets and liabilities:
Restricted cash..................................... (189) (88) (195)
Other assets........................................ 2,330 (3,042) (104)
Accounts payable and accrued liabilities............ 4,725 5,972 1,308
Security deposits................................... 1,769 1,604 970
--------- --------- --------
Net Cash Provided by Operating Activities................ 83,791 94,707 73,037
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital improvements to operating real estate assets..... (5,883) (5,041) (4,766)
Capital investments in real estate assets................ (225,844) (244,517) (61,850)
--------- --------- --------
Net Cash Used in Investing Activities.................... (231,727) (249,558) (66,616)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under unsecured line of credit................ 150,000 202,000 78,900
Payments on unsecured line of credit..................... (225,000) (143,000) (84,900)
Proceeds from unsecured tax-exempt bond financings....... 334,190
Payments on tax-exempt mortgage bond financings.......... (325,644)
Proceeds from unsecured term loan........................ 100,000
Proceeds from issuance of unsecured notes payable........ 99,208
Principal payments....................................... (3,849) (7,224) (7,101)
Additions to deferred financing costs.................... (3,336) (1,261)
Net proceeds from issuance of redeemable preferred
limited partner units.................................. 192,725
Distributions to redeemable preferred limited partner
unit holders........................................... (12,317)
Contributions from common partners....................... 9,818 70,635 61,619
Distributions to common partners......................... (68,387) (64,088) (56,126)
--------- --------- --------
Net Cash Provided by (Used in) Financing Activities...... 148,200 156,270 (7,608)
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 264 1,419 (1,187)
Cash and Cash Equivalents at Beginning of Year........... 4,624 3,205 4,392
--------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR................. $ 4,888 $ 4,624 $ 3,205
========= ========= ========
Supplemental Disclosure of Cash Flow Information
Interest paid, net of amounts capitalized.............. $ 26,950 $ 28,309 $ 29,644
Tax-exempt debt assumed................................ $ 18,000 $ 2,771
========= ========= ========
</TABLE>
See accompanying notes.
F-28
<PAGE> 78
IRVINE APARTMENT COMMUNITIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Irvine Apartment Communities, L.P., a Delaware limited partnership (the
"Operating Partnership"), was formed on November 15, 1993. In connection with an
initial public offering (the "Offering") of common shares on December 8, 1993,
Irvine Apartment Communities, Inc. (the "Company") obtained a general
partnership interest in and became the sole managing general partner of the
Operating Partnership. The Irvine Company transferred 42 apartment communities
and a 99% interest in a limited partnership which owns one apartment community
to the Operating Partnership. The Operating Partnership's management and
operating decisions are under the unilateral control of the Company. All
management powers over the business and affairs of the Operating Partnership are
vested exclusively in the Company. No limited partner of the Operating
Partnership has any right to exercise control or management power over the
business and affairs of the Operating Partnership. At December 31, 1998, the
Company had a 44.6% general partnership interest in the Operating Partnership
and the limited partners had a 55.4% common limited partnership interest in the
Operating Partnership, with The Irvine Company and certain of its affiliates
owning a 55.2% common limited partnership interest. In addition, at December 31,
1998, The Irvine Company and certain of its affiliates owned approximately 17.9%
of the Company. In February 1997, the Operating Partnership acquired the assets
of Thompson Residential Company, Inc. The purchase price was paid by the
issuance of 74,523 common limited partnership units in the Operating
Partnership. At December 31, 1998, Thompson Residential Company, Inc. had a 0.2%
common limited partnership interest in the Operating Partnership.
The Operating Partnership is 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, 1998, the Operating Partnership
owned 65 apartment communities representing 16,439 operating apartment units and
3,039 apartment units under construction or development (collectively, the
"Properties"). In March 1998, the Operating Partnership and Western National
Property Management ("WNPM") announced the formation of a strategic alliance
that, in April 1998, assumed all property management responsibilities for the
Operating Partnership's Southern California portfolio. The new entity, Irvine
Apartment Management Company ("IAMC"), is owned 51% by the Operating Partnership
and 49% by WNPM. Until July 31, 2020, the Operating Partnership 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.
IAC Capital Trust, a Delaware business trust (the "Trust"), was formed on
October 31, 1997. The Trust is a limited purpose financing vehicle established
by the Company and the Operating Partnership. The Trust exists for the sole
purpose of issuing redeemable preferred securities and investing the proceeds
thereof in preferred limited partner units of the Operating Partnership.
Profits and losses are generally allocated to the Company and to the
limited partners based upon their respective ownership interests in the
Operating Partnership.
The accompanying financial statements include the consolidated accounts of
the Operating Partnership and its financially controlled subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
Under the terms of the partnership agreement, all costs incurred by the
Company relating to the ownership of interests in and operation of the Operating
Partnership, including the compensation of its officers and employees, stock
incentive plans, director fees and the costs and expenses of being a public
company, are reimbursed by the Operating Partnership. In addition, The Irvine
Company has the right, but not the obligation, to match on the same terms and
conditions any capital contributions made by the Company based on the pro rata
ownership interest at the time of such contribution.
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
F-29
<PAGE> 79
IRVINE APARTMENT COMMUNITIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
liabilities as of December 31, 1998 and 1997, and the revenues and expenses for
the three years ended December 31, 1998. 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, on a property-by-property
basis, are impaired and the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amounts. As of December 31, 1998, no
impairment losses have been recorded. 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 Operating Partnership considers all highly
liquid investments with a remaining original 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.
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 Operating Partnership 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 collectibility each month. 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 Operating Partnership's taxable income is reportable by
its partners. Accordingly, no provision has been made for federal income taxes
in the accompanying statements of operations.
PER UNIT DATA: All earnings per unit amounts for all periods reflect basic
and diluted earnings per unit and have been restated from the previous standard
of primary and fully diluted earnings per unit. See Note 10 for additional
information regarding basic and diluted earnings per unit.
DESCRIPTIVE INFORMATION ABOUT REPORTABLE SEGMENTS: During the fourth
quarter of 1998, the Operating Partnership adopted the Financial Accounting
Standards Board's Statement of Financial Accounting
F-30
<PAGE> 80
IRVINE APARTMENT COMMUNITIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Standards No. 131, Disclosures About Segments of an Enterprise and Related
Information ("Statement No. 131"). Statement No. 131 superseded FASB Statement
No. 14, Financial Reporting for Segments of a Business Enterprise. Statement No.
131 establishes standards for the way that public business enterprises report
information regarding reportable operating segments. The adoption of Statement
No. 131 did not affect the results of operations or financial position of the
Operating Partnership.
The Operating Partnership operates and develops apartment communities in
California which generated rental and other income are through the leasing of
apartment units to a diverse base of renters. The Operating Partnership
separately evaluates the performance of each of its apartment communities.
However, because each of the apartment communities have similar economic
characteristics, facilities, services and tenants, the apartment communities
have been aggregated into a single dominant apartment communities segment.
The Operating Partnership evaluates performance and allocates resources
primarily based on the net operating income ("NOI") of individual apartment
communities. NOI is defined by the Operating Partnership as rental and other
income less property expenses and real estate taxes. Accordingly, NOI excludes
certain expenses included in the determination of net income. NOI from apartment
communities totaled $152,766, $126,536 and $106,230 for the years ended December
31, 1998, 1997 and 1996, respectively. All other segment measurements are
disclosed in the Operating Partnership's consolidated financial statements.
All revenues are from external customers and there are no revenues from
transactions with other segments. There are no tenants which contributed 10% or
more of the total revenues during 1998, 1997 or 1996. Interest expense on debt
is not allocated to individual apartment communities, even if such debt is
secured by the apartment communities. There is no provision for income taxes as
the Operating Partnership's taxable income is reported by each of its partners.
RECLASSIFICATIONS: Certain amounts in the 1997 and 1996 financial
statements have been reclassified to conform with financial statement
presentations in 1998.
NOTE 3 -- MORTGAGES AND NOTES PAYABLE
TAX-EXEMPT MORTGAGE BOND FINANCINGS: In October 1998, the Operating
Partnership assumed $18 million in tax-exempt mortgage bond financings
associated with the purchase of a 216-unit apartment community ("One Park
Place"). The tax-exempt financings represent loans payable that are
collateralized by One Park Place. Monthly interest payments are made to a
trustee, which in turn pays the bondholders when interest is due. The bonds bear
interest at a weekly remarketed tax-exempt rate and are due April 2025.
CONVENTIONAL MORTGAGE FINANCINGS: Conventional mortgages are collateralized
by apartment communities having a net book value of $145,120 as of December 31,
1998. 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 6.31% to 8.30%. As
of December 31, 1998, the weighted average interest rate was 7.12%. Including
the amortization of deferred financing costs, the all-in interest rate was
8.30%. The interest reduction periods expire prior to or at the loan maturity
dates and range from 2000 to 2008.
MORTGAGE NOTES PAYABLE TO THE IRVINE COMPANY: Two of the Operating
Partnership's apartment communities are financed by mortgage notes payable to
The Irvine Company. These mortgage notes totaled $49,517 and $50,397 at December
31, 1998 and 1997, 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, 1998, are fully amortizing
and mature in 2015 and 2024. Interest incurred on the mortgage notes payable to
The Irvine Company totaled $2,871, $2,920 and $2,966 for the years ended
F-31
<PAGE> 81
IRVINE APARTMENT COMMUNITIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
December 31, 1998, 1997 and 1996, 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
$49,890 and $50,651 as of December 31, 1998 and 1997, respectively.
TAX-EXEMPT ASSESSMENT DISTRICT DEBT: In connection with the Offering, the
Operating Partnership assumed certain tax-exempt assessment district debt of the
predecessor entity. In conjunction with the purchase of land, the Operating
Partnership assumed $2,771 in 1996 in tax-exempt assessment district debt.
Tax-exempt assessment district debt represents debt issued by municipal
government authorities to finance the construction of infrastructure and
improvements. The debt obligations are repaid by the Operating Partnership
through assessments.
UNSECURED TAX-EXEMPT BOND FINANCINGS: In June 1998, the Operating
Partnership completed a $334 million offering of unsecured tax-exempt debt at an
average interest rate of 4.93% in three tranches ranging from 10 to 15 years.
Proceeds from the offering were used to repay the Operating Partnership's
existing tax-exempt mortgage debt and to pay costs associated with prepayment
penalties and the unwinding of certain swap agreements. The Operating
Partnership recorded an extraordinary item related to debt extinguishment of
$42.5 million in June 1998.
UNSECURED TERM LOAN: In November 1998, the Operating Partnership placed a
$100 million unsecured term loan with two banks. The term loan is interest-only
and bears interest at LIBOR plus 1.5%. The floating rate has been fixed through
an interest rate swap agreement. The term loan is due in November 1999. The term
loan can be extended for two six-month periods if the loan is not in no default.
UNSECURED NOTES PAYABLE: In October 1997, the Operating Partnership issued
$100 million aggregate principal amount of 7% senior unsecured notes pursuant to
its shelf registration statement. The notes are due on October 1, 2007. Net
proceeds from the offering of $97.9 million were used to repay indebtedness
under the Operating Partnership's line of credit. The Partnership was in
compliance with all covenant requirements at December 31, 1998.
UNSECURED LINE OF CREDIT: The Operating Partnership has a $250 million
unsecured revolving credit facility that was amended in July 1998. The amended
credit facility currently bears interest at LIBOR plus 0.65% or prime and
matures in June 2001. The interest rates under the credit facility are adjusted
up or down based on credit ratings on the Operating Partnership's senior
unsecured long-term indebtedness. Under the credit facility, the Operating
Partnership is able to borrow funds from the participating banks through a
competitive bid process to obtain a lower interest rate. The Operating
Partnership may also enter into letters of credit under the facility. Borrowings
under the credit facility, which are guaranteed by the Company, are available to
finance the Operating Partnership's ongoing rental property development,
possible acquisitions and for general working capital needs. The Company and the
Operating Partnership must comply with certain affirmative and negative
covenants, including limitations on distributions, and the maintenance of
certain net worth, cash flow and financial ratios. At December 31, 1998, the
Company and the Operating Partnership were in compliance with all of these
covenants. In 1998, the Company entered into letters of credit under the
facility totaling $29.1 million related to acquisitions. The letters of credit
reduced the remaining amount available under the line of credit. As of December
31, 1998, there were no outstanding amounts under the line of credit and $220.9
million was available under the credit facility.
INTEREST RATE SWAP AGREEMENT: The Operating Partnership uses an interest
rate swap agreement to effectively convert its floating rate unsecured term loan
to a fixed-rate basis, thus reducing the impact on future income of fluctuations
in interest rates. The swap agreement terminates in 1999. The swap counterparty
is a financial institution rated AAA by Standard & Poor's. The difference to be
paid or received is accrued and included in interest expense as a yield
adjustment and the related amount payable or receivable from the counterparty is
included in accrued liabilities or other assets. Additionally, the Operating
Partnership
F-32
<PAGE> 82
IRVINE APARTMENT COMMUNITIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
restructured several interest rate swaps related to the retired tax-exempt bonds
in May 1995. These transactions reduce the interest expense on unsecured
tax-exempt bond financings by approximately 30 basis points per year through
2001. At December 31, 1998, the average fixed interest rate paid to the
counterparties was 4.88% and the average variable interest rate received was
5.56%. This resulted in a net interest receivable of $56 which was settled on
January 20, 1999. Based on prevailing interest rates at December 31, 1998, the
interest rate swap agreement had a fair value of $2,762.
TREASURY RATE LOCK AGREEMENTS: The Operating Partnership entered into
treasury lock agreements to hedge a planned debt offering of $100 million and
lock into a treasury rate of 5.67%. In November 1998, the Operating Partnership
terminated all of its outstanding treasury rate lock agreements because
management determined that the planned debt offering would not occur. The cost
of terminating these agreements was $7.8 million.
CAPITALIZED INTEREST: The Operating Partnership 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 $156.4 million, $76.6 million
and $40.0 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Interest capitalized was $12,280, $5,704 and $3,151 in 1998, 1997
and 1996, respectively. Interest incurred totaled $40,102, $36,072 and $32,657
for the years ended December 31, 1998, 1997 and 1996, respectively.
OTHER MATTERS: Mortgages and notes payable totaling $198,190 are subject to
prepayment penalties.
MORTGAGES AND NOTES PAYABLE AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
EXPIRATION OF
OUTSTANDING EFFECTIVE INTEREST RATE INTEREST RATE
PRINCIPAL INTEREST REDUCTION AFTER MATURITY
TYPE OF DEBT BALANCE RATE PERIOD STEP-UP DATE
------------ ----------- --------- ------------- ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Tax-exempt mortgage bond financings...... $ 18,000 4.29% 4/25
-------- ---- -----
Conventional mortgage financings:
Bayport................................ 4,706 6.91% 7/08 9.25% 7/18
Bayview................................ 3,397 6.91% 7/08 9.25% 7/18
Baywood................................ 20,299 6.91% 7/08 9.25% 7/18
Deerfield Phase I...................... 7,212 6.57% 7/02 8.90% 7/08
Mariner Square......................... 5,439 6.32% 9/00 8.50% 8/08
The Parklands.......................... 5,666 6.15% 4/04
Parkwood............................... 12,195 6.31% 8/00 8.50% 7/08
Promontory Point....................... 35,008 8.30% 8/00
Rancho Mariposa........................ 12,336 7.75% 6/03
San Paulo.............................. 1,458 4.00% 1/13
San Paulo.............................. 700 3.00% 1/08
Turtle Rock Vista...................... 12,931 6.31% 8/00 8.50% 7/08
Woodbridge Pines....................... 8,192 6.91% 9/08 9.25% 8/18
-------- ---- -----
129,539 7.12% 7/08
-------- ---- -----
Mortgage notes payable to The Irvine
Company:
Park West.............................. 33,247 5.75% 7/24
Rancho San Joaquin..................... 16,270 5.75% 1/15
-------- ---- -----
49,517 5.75% 5/21
-------- ---- -----
</TABLE>
F-33
<PAGE> 83
IRVINE APARTMENT COMMUNITIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
EXPIRATION OF
OUTSTANDING EFFECTIVE INTEREST RATE INTEREST RATE
PRINCIPAL INTEREST REDUCTION AFTER MATURITY
TYPE OF DEBT BALANCE RATE PERIOD STEP-UP DATE
------------ ----------- --------- ------------- ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Tax-exempt assessment district debt:
Fixed rate............................. 5,268 6.29% 7/17
Variable rate.......................... 16,024 3.51% 9/18
-------- ---- -----
21,292 4.20% 5/18
-------- ---- -----
Unsecured tax-exempt bond financings..... 334,190 4.93% 11/09
-------- ---- -----
Unsecured term loan...................... 100,000 6.11% 11/99
-------- ---- -----
Unsecured notes payable.................. 99,280 7.10% 10/07
-------- ---- -----
Total/weighted average................... $751,818 5.77% 5/09
======== ==== =====
</TABLE>
SCHEDULED PRINCIPAL AMORTIZATION: MORTGAGES AND NOTES PAYABLE AT DECEMBER 31,
1998
<TABLE>
<CAPTION>
YEAR OF MATURITY
-----------------------------------------------------------
TYPE OF DEBT 1999 2000 2001 2002 2003 THEREAFTER TOTAL
------------ -------- ------- ------ ------ ------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Tax-exempt mortgage bond financings...... $ 18,000 $ 18,000
Conventional mortgage financings......... $ 2,958 $36,754 $2,773 $3,000 $13,928 70,126 129,539
Mortgage notes payable to The Irvine
Company................................ 931 986 1,044 1,106 1,171 44,279 49,517
Tax-exempt assessment district debt...... 326 522 583 642 668 18,551 21,292
Unsecured tax-exempt bond financings..... 334,190 334,190
Unsecured term loan...................... 100,000 100,000
Unsecured notes payable.................. 99,280 99,280
-------- ------- ------ ------ ------- -------- --------
Totals................................... $104,215 $38,262 $4,400 $4,748 $15,767 $584,426 $751,818
======== ======= ====== ====== ======= ======== ========
Percentage of debt....................... 13.9% 5.1% 0.6% 0.6% 2.1% 77.7% 100.0%
======== ======= ====== ====== ======= ======== ========
</TABLE>
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 the conventional mortgage financings and the mortgage notes payable to
The Irvine Company are estimated using discounted cash flow analyses and the
Operating Partnership's current estimated borrowing rates for similar types of
borrowing arrangements. The interest rate used in the fair value calculation
ranges from 6.3% to 7.3% based on the terms of the loan. As of December 31,
1998, the fair values of the conventional mortgage financings and the mortgage
notes payable to The Irvine Company were $135,938 and $43,432, respectively. The
fair values of the unsecured notes payable and unsecured tax-exempt bond
financings based on prevailing interest rates at December 31, 1998 were $89,096
and $339,886, respectively.
NOTE 5 -- REDEEMABLE PREFERRED INTERESTS
In January 1998, IAC Capital Trust issued 6.0 million of 8 1/4% Series A
Preferred Securities. The proceeds of $150 million were used to purchase an
equivalent amount of 8 1/4% Series A Preferred Limited Partner Units in the
Operating Partnership. The Operating Partnership used the $150 million of
proceeds, net of costs and offering expenses, all of which were paid by the
Operating Partnership, to repay the outstanding balance on the Operating
Partnership's credit facility and to fund development.
F-34
<PAGE> 84
IRVINE APARTMENT COMMUNITIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
In November 1998, the Operating Partnership issued 2.0 million of 8 3/4%
Series B Preferred Limited Partner Units. The Operating Partnership used the net
proceeds to reduce the outstanding balance on its unsecured line of credit.
NOTE 6 -- PARTNERS' CAPITAL
In July 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 common limited
partnership units to The Irvine Company, totaled $60.0 million. Proceeds were
used to repay $43 million of debt outstanding under the revolving credit
facility. The remaining proceeds were used to fund ongoing development programs
and for general corporate purposes.
In February 1997, the Company sold 1.15 million shares of common stock at
$27.50 per share. Concurrently, The Irvine Company, pursuant to its rights under
the partnership agreement, purchased 1.39 million additional common 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 credit facility and for general corporate purposes,
including ongoing development activities on and off the Irvine Ranch.
In May 1997, the Company filed a shelf registration statement with the
Securities and Exchange Commission providing for the issuance from time to time
of up to $350 million of common stock, preferred stock, and warrants to purchase
common stock and preferred stock. The Company plans to use the proceeds raised
from any securities issued under its shelf registration statement for general
corporate purposes, including the development of new apartment communities,
acquisitions and the repayment of existing debt. Availability under the
Company's shelf registration statement was $350 million at December 31, 1998.
Concurrently, the Operating Partnership filed a shelf registration statement
with the Securities and Exchange Commission providing for the issuance from time
to time of up to $350 million of debt securities. The Operating Partnership
plans to use the proceeds raised from any securities issued under its shelf
registration statement for general corporate purposes, including the development
of new apartment communities, acquisitions and the repayment of existing debt.
On October 1, 1997, the Operating Partnership issued $100 million aggregate
principal amount of 7% senior unsecured notes pursuant to its shelf registration
statement. Availability under the Operating Partnership's shelf registration
statement was $250 million at December 31, 1998.
The Operating Partnership, pursuant to a Prospectus Supplement dated April
9, 1998, may issue from time to time up to $250 million aggregate initial
offering price of its Medium-Term Notes, Series A due nine months or more from
the date of issue. Issuances of Medium-Term Notes will reduce availability under
the Operating Partnership's Registration Statement by the amount of Medium-Term
Notes issued. Similarly, issuances of other debt securities under the Operating
Partnership's Registration Statement will reduce the amount of Medium-Term Notes
that may be issued. As of December 31, 1998, there have been no issuances of
Medium-Term Notes.
F-35
<PAGE> 85
IRVINE APARTMENT COMMUNITIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
RECONCILIATION OF COMMON LIMITED PARTNERSHIP UNITS OUTSTANDING
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------- -------------------------------------
THE IRVINE THE IRVINE
COMPANY COMPANY OTHER TOTAL COMPANY COMPANY OTHER TOTAL
------- ---------- ----- ------ ------- ---------- ----- ------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period........... 19,901 24,844 75 44,820 18,556 22,292 40,848
Stock options exercised and awards
issued................................. 38 38 156 156
Dividend reinvestment plan and additional
cash investment plan................... 225 108 333 39 27 66
Common stock offerings and related cash
contributions from The Irvine
Company................................ 1,150 1,394 2,544
Acquisition of Thompson Residential
Company, Inc. assets................... 75 75
Contributions of property by The Irvine
Company and certain of its
affiliates............................. 1,131 1,131
------ ------ --- ------ ------ ------ --- ------
Balance at end of period................. 20,164 24,952 75 45,191 19,901 24,844 75 44,820
------ ------ --- ------ ------ ------ --- ------
Ownership interest at end of period...... 44.6% 55.2% 0.2% 100% 44.4% 55.4% 0.2% 100%
====== ====== === ====== ====== ====== === ======
</TABLE>
NET INCOME ALLOCATION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
(DOLLARS IN THOUSANDS)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Limited Partners:
Income allocated to The Irvine Company and certain of its
affiliates based on their ownership interest.............. $10,394 $32,088 $22,446
Income allocated to Thompson Residential Company, Inc. based
on its ownership interest................................. 31 91
------- ------- -------
10,425 32,179 22,446
Company:
Income allocated to the Company based on its ownership
interest.................................................. 8,356 26,404 18,746
------- ------- -------
Net Income.................................................. $18,781 $58,583 $41,192
======= ======= =======
</TABLE>
NOTE 7 -- ACQUISITION OF THOMPSON RESIDENTIAL ASSETS
In February 1997, the assets of Thompson Residential Company, Inc. ("TRC"),
a privately held, Northern California-based multi-family development company
were acquired for $2 million which was paid by the issuance of 74,523 common
limited partnership units (exchangeable for common stock of the Company), using
the average closing price of the Company's common stock for the ten trading days
preceding the acquisition's closing date. In addition, TRC may be paid up to an
additional $2 million in cash or common limited partnership units if an
apartment community (The Hamptons) achieves certain performance targets. As of
December 31, 1998, the performance targets have not been achieved.
NOTE 8 -- LAND RIGHTS AGREEMENT WITH THE IRVINE COMPANY
The Operating Partnership 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
Operating Partnership 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, whose members are unaffiliated with The Irvine
Company. In addition, The Irvine Company and its chairman,
F-36
<PAGE> 86
IRVINE APARTMENT COMMUNITIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Donald Bren, have agreed to conduct their apartment community development and
ownership activities on the Irvine Ranch solely through the Operating
Partnership.
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 common limited partnership units at the option of
the Operating Partnership. After July 31, 2000, the choice of consideration will
revert to The Irvine Company.
NOTE 9 -- CERTAIN TRANSACTIONS WITH RELATED PARTIES
Substantially all costs incurred by the Company are borne by the Operating
Partnership. 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, human resources and other services
of $185 for the year ended December 31, 1998. The amounts for the corresponding
periods in 1997 and 1996 were $132 and $108, respectively. The Irvine Company
and the Operating Partnership jointly purchase employee health care insurance
and property and casualty insurance. In addition, the Operating Partnership
incurred rent totaling $447, $384 and $349 for the years ended December 31,
1998, 1997 and 1996, respectively, related to leases with The Irvine Company
that expire in 2003. For the years ended December 31, 1998, 1997 and 1996, The
Irvine Company contributed $3,763, $766 and $354, respectively, in connection
with stock issuances under the dividend reinvestment and additional cash
investment plan.
In March 1996, the Operating Partnership acquired a development site known
as Santa Maria for $3.3 million from The Irvine Company for the development of
227 rental units, pursuant to the Land Rights Agreement between the Operating
Partnership 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 Operating Partnership 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 common limited
partnership units in the Operating Partnership to The Irvine Company. The common
limited partnership units are exchangeable for common stock on a one-for-one
basis, subject to adjustment and certain limitations.
Concurrent with the Company's common stock offering in July 1996, The
Irvine Company, pursuant to its rights under the partnership agreement,
purchased 1.49 million common limited partnership units at a price of $20.125
per unit (which is equal to the public offering price of common stock less an
amount equivalent to the underwriting discount) 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.
In July 1996, the Operating Partnership acquired a development site known
as The Colony for $3.5 million from The Irvine Company for the development of
245 rental units pursuant to the Land Rights Agreement between the Operating
Partnership 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 common limited partnership units in the Operating Partnership to The
Irvine Company. The common limited partnership units are exchangeable for common
stock on a one-for-one basis, subject to adjustment and certain limitations.
In December 1996, the Operating Partnership acquired a development site
known as Santa Rosa II for $6.0 million from The Irvine Company for the
development of 207 rental units pursuant to the Land Rights Agreement between
the Operating Partnership 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 common limited partnership units in the Operating
F-37
<PAGE> 87
IRVINE APARTMENT COMMUNITIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Partnership to The Irvine Company. The common limited partnership units are
exchangeable for common stock on a one-for-one basis, subject to adjustment and
certain limitations.
In February 1997, the Operating Partnership acquired a development site
known as Rancho Santa Fe for $8.4 million from The Irvine Company for the
development of 316 rental units pursuant to the Land Rights Agreement between
the Operating Partnership 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 313,439
additional common limited partnership units in the Operating Partnership to The
Irvine Company. The common limited partnership units are exchangeable for common
stock on a one-for-one basis, subject to adjustment and certain limitations.
Pursuant to the terms of the acquisition, a portion of the common limited
partnership units in the Operating Partnership are subject to forfeiture if the
apartment community developed on the site does not achieve a 10% unleveraged
return on costs for the first twelve months following stabilized occupancy.
Concurrent with the Company's common stock offering in February 1997, The
Irvine Company, pursuant to its rights under the partnership agreement,
purchased 1.39 million common limited partnership units at a price of $26.06 per
unit (which is equal to the public offering price of the common stock less an
amount equivalent to the underwriting discount) or a total of $36.2 million.
These units are exchangeable for common stock on a one-for-one basis, subject to
adjustment and certain limitations.
In October 1997, the Operating Partnership acquired a development site
known as Sonoma for $5.7 million from The Irvine Company for the development of
196 rental units pursuant to the Land Rights Agreement between the Operating
Partnership 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 179,433 additional common
limited partnership units in the Operating Partnership to The Irvine Company.
The common limited partnership units are exchangeable for common stock on a
one-for-one basis, subject to adjustment and certain limitations. Pursuant to
the terms of the acquisition, a portion of the common limited partnership units
in the Operating Partnership are subject to forfeiture if the apartment
community developed on the site does not achieve a 10% unleveraged return on
costs for the first twelve months following stabilized occupancy.
In December 1997, the Operating Partnership acquired a development site
known as Stonecrest, located in San Diego County, for $9.5 million from an
affiliate of The Irvine Company for the development of 326 rental units. The
Company's board committee of independent directors approved the purchase. The
purchase price was paid through the issuance of 305,707 additional common
limited partnership units in the Operating Partnership to an affiliate of The
Irvine Company. Of the common limited partnership units issued, 199,011 are
exchangeable for common stock on a one-for-one basis and 106,696 common limited
partnership units are not exchangeable for common stock absent approval of the
shareholders of the Company.
In December 1997, the Operating Partnership acquired a development site
known as Brittany for $10.3 million from The Irvine Company for the development
of 393 rental units pursuant to the Land Rights Agreement between the Operating
Partnership 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 332,060 additional common
limited partnership units in the Operating Partnership to The Irvine Company.
The common limited partnership units are exchangeable for common stock on a
one-for-one basis, subject to adjustment and certain limitations.
One of the Company's directors is chairman of a bank which participates in
the Operating Partnership's credit facility. Based on the bank's percentage
participation in the credit facility, the Operating Partnership estimates that
the amount of interest and fees paid to the bank totaled $364, $279 and $245 in
1998, 1997 and 1996, respectively.
F-38
<PAGE> 88
IRVINE APARTMENT COMMUNITIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
NOTE 10 -- EARNINGS PER UNIT
The following table sets forth the computation of basic and diluted
earnings per unit:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings per unit -- Net
income................................................. $18,781 $58,583 $41,192
======= ======= =======
Denominator:
Denominator for basic earnings per unit -- weighted
average units outstanding.............................. 45,021 43,586 38,953
Effect of dilutive securities:
Stock plans............................................ 105 137 151
------- ------- -------
Denominator for diluted earnings per unit --
Adjusted weighted average units after effect of
dilutive securities.................................. 45,126 43,723 39,104
======= ======= =======
Basic earnings per unit:
Income before extraordinary item.......................... $ 1.36 $ 1.34 $ 1.34
Extraordinary item related to debt extinguishment......... (0.94)
------- ------- -------
Basic Earnings Per Unit..................................... $ 0.42 $ 1.34 $ 1.06
======= ======= =======
Diluted earnings per unit:
Income before extraordinary item.......................... $ 1.36 $ 1.34 $ 1.05
Extraordinary item related to debt extinguishment......... (0.94)
------- ------- -------
Diluted Earnings Per Unit................................... $ 0.42 $ 1.34 $ 1.05
======= ======= =======
</TABLE>
Options to purchase 333,000 and 51,000 shares of the Company's common
stock, the cost of which is borne by the Operating Partnership, were outstanding
during 1998 and 1997, respectively, but were not included in the computation of
diluted earnings per unit because the options' exercise price was greater than
the average market price of the common shares and, therefore, the effect would
be antidilutive.
In January 1998, the Trust issued 6.0 million of 8 1/4% Series A Preferred
Securities. The proceeds were used to purchase an equivalent amount of 8 1/4%
Series A Preferred Limited Partner Units in the Operating Partnership. Income
will be allocated to the Series A Preferred Limited Partner Unit Holders at an
annual rate of 8 1/4%.
In November 1998, the Operating Partnership issued 2.0 million of 8 3/4%
Series B Preferred Limited Partner Units. Income will be allocated to the Series
B Preferred Limited Partner Units Holders at an annual rate of 8 3/4%.
NOTE 11 -- STOCK PLANS
Under the terms of the partnership agreement, payments under the Company's
stock incentive plans are reimbursed by the Operating Partnership.
F-39
<PAGE> 89
IRVINE APARTMENT COMMUNITIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
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 common limited partnership units and common stock outstanding from time to
time. The non-qualified stock options in the table below vest in equal
installments over a three-year period from the date of grant 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>
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
Granted................................................. 265,000 $26.63 to $29.81
Exercised............................................... (139,666) $15.88 to $17.50
Canceled................................................ (95,001) $15.88 to $26.88
-------- ----------------
Outstanding at December 31, 1997........................ 439,333 $16.13 to $29.81
Granted................................................. 269,000 $29.81 to $32.06
Exercised............................................... (29,834) $16.13 to $26.88
Canceled................................................ (49,666) $20.00 to $32.06
-------- ----------------
Outstanding at December 31, 1998........................ 628,833 $16.13 to $32.06
======== ================
Vested and exercisable at December 31, 1998............. 234,499 $16.13 to $29.50
======== ================
</TABLE>
The restricted stock awards of the Company's President and Chief Executive
Officer vest over four years. The restricted stock performance awards issued to
other officers vest over a five-year period provided that the Operating
Partnership meets certain financial targets.
PERFORMANCE AWARD TRANSACTIONS
<TABLE>
<CAPTION>
NUMBER OF AWARDS
----------------
<S> <C>
Outstanding at December 31, 1995............................ 325,000
Granted..................................................... 10,000
Issued...................................................... (20,000)
Canceled.................................................... (82,049)
--------
Outstanding at December 31, 1996............................ 232,951
Granted..................................................... 96,500
Issued...................................................... (62,951)
Canceled.................................................... (105,710)
--------
Outstanding at December 31, 1997............................ 160,790
Granted..................................................... 75,500
Issued...................................................... (15,000)
Canceled.................................................... (15,797)
--------
Outstanding at December 31, 1998............................ 205,493
========
Vested at December 31, 1998................................. 31,703
========
</TABLE>
F-40
<PAGE> 90
IRVINE APARTMENT COMMUNITIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
The total number of shares available to be granted at December 31, 1998
under these plans was 1,121,606.
DIRECTORS' STOCK OPTION PLAN: The 1993 Stock Option Plan for Directors was
amended in 1998. The amended plan allows for 250,000 shares that may be granted
to independent directors and increases the annual number of options that may be
granted to 2,500. 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 from 1995 to 1997. In 1998, this amount was
increased to 2,500. 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>
Outstanding at December 31, 1995............................ 30,000 $15.63 to $17.44
Granted..................................................... 5,000 $20.06
------- ----------------
Outstanding at December 31, 1996............................ 35,000 $15.63 to $20.06
Granted..................................................... 5,000 $26.75
Exercised................................................... (7,000) $15.63 to $20.06
------- ----------------
Outstanding at December 31, 1997............................ 33,000 $15.63 to $26.75
Granted..................................................... 12,500 $30.13
------- ----------------
Outstanding at December 31, 1998............................ 45,500 $15.63 to $30.13
------- ================
Available for future grant.................................. 197,500
=======
</TABLE>
EQUITY COMPENSATION PLANS: The Operating Partnership applies APB Opinion
No. 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 been determined utilizing the fair value of the
award over the service period. Had the Operating Partnership applied FAS
Statement No. 123 for stock-based compensation, it would have resulted in net
income and earnings per share amounts that approximate the amounts reported.
Under FAS Statement No. 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 1998, 1997 and 1996, respectively: risk-free
interest rates of 5.69%, 6.43% and 6.46%; dividend yields of 4.82%, 5.27% and
7.09%; volatility factors of the expected market price of the Company's common
stock of 0.191, 0.184, and 0.204; and a weighted average expected life of the
options of seven years.
NOTE 12 -- 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 Operating Partnership matches employee
contributions up to 50%, within certain limits, which are accrued as incurred.
The Operating Partnership 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 Operating Partnership was $178,
$125 and $122 in 1998, 1997 and 1996, respectively.
F-41
<PAGE> 91
IRVINE APARTMENT COMMUNITIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
NOTE 13 -- AGREEMENTS, COMMITMENTS AND CONTINGENCIES
MANAGEMENT AGREEMENT: The Company has a management agreement with IAMC
whereby IAMC has the exclusive right to manage all of the Company's properties
located on the Irvine Ranch and, to the extent practical, any other properties.
Management fees range from $15/unit/month to $28/unit/month depending on whether
the property is in lease-up or stabilized. The agreement expires in March 2001.
LITIGATION: The Operating Partnership 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 Operating Partnership's
consolidated financial statements.
ASSESSMENT DISTRICTS: In some of the local jurisdictions within Orange
County where the predecessor entity developed property, assessment districts
were formed by local governments to finance major infrastructure improvements.
At December 31, 1998, the Operating Partnership had $37.9 million of assessment
district debt, of which $21.3 million was reflected in the balance sheet.
EXCHANGE RIGHTS: The Irvine Company and certain of its affiliates have the
right to exchange up to one-third of the total common limited partnership units
owned by them for shares of common stock in each twelve-month period commencing
on December 8 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 PARTNERSHIP UNITS: The Irvine
Company and certain of its affiliates have the right to sell to the Company for
cash generally up to one-third of its common limited partnership units in each
twelve-month period commencing on December 8 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
and certain of its affiliates 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, 1998, 18.1% of the apartment units
within the Operating Partnership'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 $3,921, $3,903 and $3,977 for the
years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 14 -- ACQUISITION OFFER FROM THE IRVINE COMPANY
On February 1, 1999, the Company and TIC Acquisition LLC, a wholly-owned
subsidiary of The Irvine Company, entered into a definitive merger agreement
providing for the acquisition by TIC Acquisition LLC of all the outstanding
common shares of the Company in a business combination for $34 per share in
cash.
F-42
<PAGE> 92
IRVINE APARTMENT COMMUNITIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
NOTE 15 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C>
1998 QUARTERS ENDED
Revenues..................................... $51,569 $ 53,309 $56,537 $59,422
Expenses..................................... $33,790 $ 33,278 $34,968 $45,252
Extraordinary item........................... $(42,451)
Net income (loss)............................ $15,338 $(25,513) $18,475 $10,483
Basic and diluted earnings (loss) per unit... $ 0.34 $ (0.57) $ 0.41 $ 0.23
1997 QUARTERS ENDED
Revenues..................................... $43,280 $ 44,673 $48,913 $50,079
Expenses..................................... $29,761 $ 29,583 $34,567 $34,451
Net income................................... $13,519 $ 15,090 $14,346 $15,628
Basic and diluted earnings per unit.......... $ 0.32 $ 0.34 $ 0.33 $ 0.35
</TABLE>
F-43
<PAGE> 93
IRVINE APARTMENT COMMUNITIES, L.P.
SCHEDULE III -- CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
CARRIED AT DECEMBER 31, 1998(A)(B)
NUMBER -------------------------------------
OF BUILDINGS AND ACCUMULATED DATE OF
APARTMENT COMMUNITY NAME (CITY) UNITS ENCUMBRANCES(C) LAND(E) IMPROVEMENTS TOTAL DEPRECIATION COMPLETION
- ------------------------------- ------ --------------- -------- ------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES STABILIZED FOR ALL
OF 1998:
IRVINE
Amherst Court............. 162 $ 1,430 $ 11,373 $ 12,803 $ 3,049 1991
Berkeley Court............ 152 858 8,299 9,157 3,256 1986
Cedar Creek............... 176 519 8,718 9,237 3,534 1985
Columbia Court............ 58 321 2,715 3,036 1,040 1984
Cornell Court............. 109 785 5,091 5,876 1,921 1984
Cross Creek............... 136 561 7,351 7,912 2,998 1985
Dartmouth Court........... 294 2,674 17,493 20,167 6,493 1986
Deerfield................. 288 $ 7,212 3,810 11,972 15,782 5,101 1975/83
Harvard Court............. 112 1,034 5,901 6,935 2,281 1986
Northwood Park............ 168 1,246 8,547 9,793 3,551 1985
Northwood Place........... 604 4,613 34,748 39,361 13,011 1986
Orchard Park.............. 60 1,138 2,138 3,276 957 1982
Park West................. 880 33,247 18,768 54,174 72,942 29,742 1970/71/72
Parkwood.................. 296 12,195 7,667 13,060 20,727 5,659 1974
Rancho San Joaquin........ 368 16,270 7,910 28,618 36,528 14,410 1976
San Carlo................. 354 2,790 26,107 28,897 7,343 1989
San Leon.................. 248 1,779 14,627 16,406 5,233 1987
San Marco................. 426 2,977 24,574 27,551 7,598 1988
San Marino................ 200 1,425 11,661 13,086 4,398 1986
San Mateo................. 283 1,482 18,733 20,215 4,857 1990
San Paulo................. 382 2,158 1,956 26,984 28,940 4,170 1993
San Remo.................. 248 1,820 14,400 16,220 5,231 1986/88
Santa Clara............... 378 3,761 31,027 34,788 3,476 1996
Santa Maria............... 227 3,343 19,174 22,517 1,326 1997
Santa Rosa................ 368 3,277 27,615 30,892 3,267 1996
Stanford Court............ 320 2,202 14,354 16,556 5,971 1985
The Parklands............. 121 5,666 68 7,471 7,539 2,841 1983
Turtle Rock Canyon........ 217 1,889 20,191 22,080 4,904 1991
Turtle Rock Vista......... 252 12,931 6,327 13,578 19,905 6,026 1976/77
Villa Coronado............ 513 5,842 38,147 43,989 4,569 1996
Windwood Glen............. 196 1,266 9,763 11,029 3,715 1985
Windwood Knoll............ 248 1,111 11,917 13,028 4,439 1983
Woodbridge Oaks........... 120 832 6,868 7,700 2,602 1983
Woodbridge Pines.......... 220 8,192 5,755 10,788 16,543 4,699 1976
Woodbridge Villas......... 258 4,353 9,549 13,902 4,245 1982
Woodbridge Willows........ 200 1,421 11,563 12,984 5,425 1984
------ -------- -------- ---------- ---------- --------
9,642 97,871 109,010 589,289 698,299 193,338
------ -------- -------- ---------- ---------- --------
NEWPORT BEACH
Baypointe................. 300 4,190 28,715 32,905 1,738 1997
Bayport................... 104 4,706 3,146 4,273 7,419 1,954 1971
Bayview................... 64 3,397 2,353 2,983 5,336 1,385 1971
Baywood................... 388 20,299 10,809 20,823 31,632 8,752 1973/84
Mariner Square............ 114 5,439 392 5,240 5,632 3,622 1969
Newport North............. 570 8,849 31,717 40,566 11,643 1986
Newport Ridge............. 512 9,542 45,150 54,692 4,757 1996
Promontory Point.......... 520 35,008 18,775 41,942 60,717 18,843 1974
------ -------- -------- ---------- ---------- --------
2,572 68,849 58,056 180,843 238,899 52,694
------ -------- -------- ---------- ---------- --------
<CAPTION>
DEPRECIABLE
APARTMENT COMMUNITY NAME (CITY) LIFE(D)
- ------------------------------- -----------
<S> <C>
PROPERTIES STABILIZED FOR ALL
OF 1998:
IRVINE
Amherst Court............. 5-40 yrs.
Berkeley Court............ 5-40 yrs.
Cedar Creek............... 5-40 yrs.
Columbia Court............ 5-40 yrs.
Cornell Court............. 5-40 yrs.
Cross Creek............... 5-40 yrs.
Dartmouth Court........... 5-40 yrs.
Deerfield................. 5-40 yrs.
Harvard Court............. 5-40 yrs.
Northwood Park............ 5-40 yrs.
Northwood Place........... 5-40 yrs.
Orchard Park.............. 5-40 yrs.
Park West................. 5-40 yrs.
Parkwood.................. 5-40 yrs.
Rancho San Joaquin........ 5-40 yrs.
San Carlo................. 5-40 yrs.
San Leon.................. 5-40 yrs.
San Marco................. 5-40 yrs.
San Marino................ 5-40 yrs.
San Mateo................. 5-40 yrs.
San Paulo................. 5-40 yrs.
San Remo.................. 5-40 yrs.
Santa Clara............... 5-40 yrs.
Santa Maria............... 5-40 yrs.
Santa Rosa................ 5-40 yrs.
Stanford Court............ 5-40 yrs.
The Parklands............. 5-40 yrs.
Turtle Rock Canyon........ 5-40 yrs.
Turtle Rock Vista......... 5-40 yrs.
Villa Coronado............ 5-40 yrs.
Windwood Glen............. 5-40 yrs.
Windwood Knoll............ 5-40 yrs.
Woodbridge Oaks........... 5-40 yrs.
Woodbridge Pines.......... 5-40 yrs.
Woodbridge Villas......... 5-40 yrs.
Woodbridge Willows........ 5-40 yrs.
NEWPORT BEACH
Baypointe................. 5-40 yrs.
Bayport................... 5-40 yrs.
Bayview................... 5-40 yrs.
Baywood................... 5-40 yrs.
Mariner Square............ 5-40 yrs.
Newport North............. 5-40 yrs.
Newport Ridge............. 5-40 yrs.
Promontory Point.......... 5-40 yrs.
</TABLE>
F-44
<PAGE> 94
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
CARRIED AT DECEMBER 31, 1998(A)(B)
NUMBER -------------------------------------
OF BUILDINGS AND ACCUMULATED DATE OF
APARTMENT COMMUNITY NAME (CITY) UNITS ENCUMBRANCES(C) LAND(E) IMPROVEMENTS TOTAL DEPRECIATION COMPLETION
- ------------------------------- ------ --------------- -------- ------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
TUSTIN
Rancho Alisal............. 356 $ 3,558 $ 20,269 $ 23,827 $ 7,003 1988/91
Rancho Maderas............ 266 1,144 16,365 17,509 4,637 1989
Rancho Mariposa........... 238 $ 12,336 683 16,373 17,056 3,548 1992
Rancho Monterey........... 436 6,823 34,010 40,833 3,589 1996
Rancho Tierra............. 252 1,215 16,554 17,769 4,830 1989
Sierra Vista.............. 306 2,318 23,001 25,319 4,886 1992
------ -------- -------- ---------- ---------- --------
1,854 12,336 15,741 126,572 142,313 28,493
------ -------- -------- ---------- ---------- --------
LA JOLLA
Villas of Renaissance..... 923 23,075 111,765 134,840 4,180 1992
------ -------- -------- ---------- ---------- --------
TOTAL PROPERTIES STABILIZED FOR
ALL OF 1998................. 14,991 179,056 205,882 1,008,469 1,214,351 278,705
------ -------- -------- ---------- ---------- --------
PROPERTIES STABILIZED OR
ACQUIRED DURING 1998:
The Colony at Fashion
Island (Newport Beach)... 245 3,545 42,132 45,677 1,046 1998
Rancho Santa Fe (Tustin)... 316 8,408 29,614 38,022 618 1998
Santa Rosa II (Irvine).... 207 5,999 20,636 26,635 476 1998
One Park Place (Irvine)... 216 18,000 5,720 22,532 28,252 99
------ -------- -------- ---------- ---------- --------
TOTAL PROPERTIES STABILIZED OR
ACQUIRED DURING 1998:....... 984 18,000 23,672 114,914 138,586 2,239
------ -------- -------- ---------- ---------- --------
TOTAL STABILIZED PORTFOLIO.... 15,975 $197,056 $229,554 $1,123,383 $1,352,937 $280,944
------ -------- -------- ---------- ---------- --------
DELIVERED UNITS IN PROJECTS
UNDER DEVELOPMENT
The Hamptons at Cupertino
(Cupertino)............. 342 15,000 36,923 51,923 359
Sonoma at Oak Creek
(Irvine)................ 122 3,551 12,240 15,791 66
Other..................... 331 331 80
------ -------- -------- ---------- ---------- --------
TOTAL DELIVERED UNITS......... 464 18,551 49,494 68,045 505
------ -------- -------- ---------- ---------- --------
TOTAL STABILIZED AND
DELIVERED................... 16,439 197,056 248,105 1,172,877 1,420,982 281,449
------ -------- -------- ---------- ---------- --------
UNITS UNDER DEVELOPMENT
Sonoma at Oak Creek
(Irvine)................ 74 2,146 6,450 8,596
Brittany at Oak Creek
(Irvine)................ 393 10,325 23,486 33,811
Park Place (Irvine)....... 1,226 40,000 2,842 42,842
Arcadia at Stonecrest
(San Deigo)............. 336 9,475 14,692 24,167
The Colony at Aventine (La
Jolla).................. 232 7,950 4,861 12,811
The Villas at Bair Island
Marina (Redwood City)... 155 3,900 9,739 13,639
1221 Ocean Avenue (Santa
Monica)................. 119 24,000 28,667 52,667
Lonestar (Redwood City)... 206 4,600 938 5,538
Olson Ranch (Sunnyvale)... 298 1,969 1,969
Other..................... 9,331 9,331
------ -------- -------- ---------- ---------- --------
TOTAL UNITS UNDER DEVELOPMENT.. 3,039 102,396 102,975 205,371
------ -------- -------- ---------- ---------- --------
TOTAL................. 19,478 $197,056 $350,501 $1,275,852 $1,626,353 $281,449
====== ======== ======== ========== ========== ========
<CAPTION>
DEPRECIABLE
APARTMENT COMMUNITY NAME (CITY) LIFE(D)
- ------------------------------- -----------
<S> <C>
TUSTIN
Rancho Alisal............. 5-40 yrs.
Rancho Maderas............ 5-40 yrs.
Rancho Mariposa........... 5-40 yrs.
Rancho Monterey........... 5-40 yrs.
Rancho Tierra............. 5-40 yrs.
Sierra Vista.............. 5-40 yrs.
LA JOLLA
Villas of Renaissance..... 5-40 yrs.
TOTAL PROPERTIES STABILIZED FOR
ALL OF 1998.................
PROPERTIES STABILIZED OR
ACQUIRED DURING 1998:
The Colony at Fashion
Island (Newport Beach)... 5-40 yrs.
Rancho Santa Fe (Tustin)... 5-40 yrs.
Santa Rosa II (Irvine).... 5-40 yrs.
One Park Place (Irvine)... 5-40 yrs.
TOTAL PROPERTIES STABILIZED OR
ACQUIRED DURING 1998:.......
TOTAL STABILIZED PORTFOLIO....
DELIVERED UNITS IN PROJECTS
UNDER DEVELOPMENT
The Hamptons at Cupertino
(Cupertino)............. 5-40 yrs.
Sonoma at Oak Creek
(Irvine)................ 5-40 yrs.
Other.....................
TOTAL DELIVERED UNITS.........
TOTAL STABILIZED AND
DELIVERED...................
UNITS UNDER DEVELOPMENT
Sonoma at Oak Creek
(Irvine)................
Brittany at Oak Creek
(Irvine)................
Park Place (Irvine).......
Arcadia at Stonecrest
(San Deigo).............
The Colony at Aventine (La
Jolla)..................
The Villas at Bair Island
Marina (Redwood City)...
1221 Ocean Avenue (Santa
Monica).................
Lonestar (Redwood City)...
Olson Ranch (Sunnyvale)...
Other.....................
TOTAL UNITS UNDER DEVELOPMENT..
TOTAL.................
</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.
F-45
<PAGE> 95
(d) Estimated useful lives are five to seven years for furniture and fixtures,
five to twenty years for improvements and forty years for buildings.
(e) Land acquired from The Irvine Company is recorded at cost based on the
purchase price.
A summary of activity of real estate and accumulated depreciation is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
REAL ESTATE 1998 1997 1996
----------- ---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year........................... $1,372,807 $1,084,234 $1,005,633
Additions:
Through cash expenditures............................ 235,546 252,668 66,857
Through assumption of tax-exempt debt................ 18,000 2,771
Through issuance of Operating Partnership units...... 35,905 8,973
---------- ---------- ----------
Balance at end of year................................. $1,626,353 $1,372,807 $1,084,234
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
ACCUMULATED DEPRECIATION 1998 1997 1996
------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year........................... $ 248,245 $ 219,193 $ 192,106
Charges to depreciation expense........................ 33,204 29,052 27,087
---------- ---------- ----------
Balance at end of period............................... $ 281,449 $ 248,245 $ 219,193
========== ========== ==========
</TABLE>
F-46
<PAGE> 96
IRVINE APARTMENT COMMUNITIES, L.P.
REPORT OF INDEPENDENT AUDITORS
To the Partners
Irvine Apartment Communities, L.P.
We have audited the accompanying consolidated balance sheets of Irvine
Apartment Communities, L.P., a Delaware limited partnership, as of December 31,
1998 and 1997, and the related consolidated statements of operations, changes in
partners' capital and cash flows for each of the three years in the period ended
December 31, 1998. Our audits also included the financial statement schedule on
pages F-44 to F-46. These financial statements and schedule are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Irvine
Apartment Communities, L.P. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, 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
February 1, 1999
F-47
<PAGE> 97
IAC CAPITAL TRUST
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
(DOLLARS IN THOUSANDS,
EXCEPT SECURITIES)
<S> <C>
ASSETS
Cash........................................................ $ 5
Investment in Subsidiary.................................... 150,000
--------
$150,005
========
LIABILITIES AND EQUITY
Redeemable Preferred Interest, 25,000,000 securities
authorized
Redeemable Series A Preferred Securities, 6,900,000
securities authorized,
6,000,000 securities issued and outstanding............ $150,000
Equity
Common Securities, 20,000 securities authorized, 200
securities issued and outstanding...................... 5
--------
$150,005
========
</TABLE>
See accompanying notes.
F-48
<PAGE> 98
IAC CAPITAL TRUST
STATEMENTS OF OPERATIONS AND EQUITY
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 20, 1998
(COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1998
----------------------------
(IN THOUSANDS, EXCEPT PER
SECURITY AMOUNTS)
<S> <C>
REVENUE
Income from investment in subsidiary........................ $11,722
-------
INCOME BEFORE REDEEMABLE PREFERRED INTEREST................. 11,722
Redeemable preferred interest............................... 11,722
-------
NET INCOME.................................................. $ --
=======
EARNINGS PER SECURITY
Basic and diluted........................................... $ 0.00
-------
Equity -- beginning of period............................... $ --
Issuance of common securities............................... 5
Net income.................................................. --
-------
EQUITY -- END OF PERIOD..................................... $ 5
=======
</TABLE>
See accompanying notes.
F-49
<PAGE> 99
IAC CAPITAL TRUST
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 20, 1998
(COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1998
----------------------------
(IN THOUSANDS, EXCEPT PER
SECURITY AMOUNTS)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ --
Adjustments to reconcile net income to net cash provided by
operating activities:
Redeemable preferred interest............................. 11,722
---------
Net Cash Provided by Operating Activities................... 11,722
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiary.................................... (150,000)
---------
Net Cash Used in Investing Activities....................... (150,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common securities................. 5
Proceeds from issuance of redeemable preferred securities... 150,000
Distributions to preferred securities holders............... (11,722)
---------
Net Cash Provided by Financing Activities................... 138,283
---------
NET INCREASE IN CASH........................................ 5
Cash at Inception........................................... --
---------
CASH AT END OF PERIOD....................................... $ 5
=========
</TABLE>
See accompanying notes.
F-50
<PAGE> 100
IAC CAPITAL TRUST
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
IAC Capital Trust (the "Trust") is a business trust formed on October 31,
1997 under the Delaware Business Trust Act. Irvine Apartment Communities, Inc.
(the "Company") and certain members of management of the Company acquired all of
the common securities of the Trust, representing common undivided beneficial
interests in all of the assets of the Trust, for an aggregate consideration of
$5,000.
The Trust is a limited purpose financing vehicle established by the Company
and Irvine Apartment Communities, L.P. (the "Operating Partnership") and exists
for the sole purpose of issuing redeemable preferred securities and investing
the proceeds thereof in redeemable preferred limited partner units of the
Operating Partnership. The redeemable preferred securities have no voting rights
except in limited circumstances. The Trust's declaration does not permit the
incurrence by the Trust of any indebtedness for borrowed money or the making of
any investment other than in the redeemable preferred limited partner units of
the Operating Partnership.
The Operating Partnership pays all obligations (other than with respect to
the Trust securities) and all costs and expenses of the Trust, including the
fees and expenses of the trustees and any income taxes, duties and other
governmental charges.
NOTE 2 -- REDEEMABLE PREFERRED INTEREST
There are 6.0 million redeemable preferred securities outstanding that bear
an annual cash distribution rate of 8 1/4% which is paid quarterly. The
redeemable preferred securities have a stated maturity of December 31, 2092.
NOTE 3 -- INVESTMENT IN IRVINE APARTMENT COMMUNITIES, L.P.
The proceeds from the issuance of redeemable preferred securities were
invested in redeemable preferred limited partner units of the Operating
Partnership which bear an annual cash distribution rate of 8 1/4% which is paid
quarterly. The Trust accounts for its investment in the Operating Partnership
using the equity method of accounting.
NOTE 4 -- 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 Trust 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.
F-51
<PAGE> 101
IAC CAPITAL TRUST
REPORT OF INDEPENDENT AUDITORS
To the Trustees
IAC Capital Trust
We have audited the accompanying balance sheet of IAC Capital Trust, a
Delaware Business Trust, as of December 31, 1998 and the related statements of
operations, changes in equity and cash flows for the period January 20, 1998
(commencement of operations) through December 31, 1998. These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of IAC Capital Trust at
December 31, 1998 and the results of its operations and its cash flows for the
period January 20, 1998 (commencement) through December 31, 1998, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Newport Beach, California
February 1, 1999
F-52
<PAGE> 1
IRVINE APARTMENT COMMUNITIES, INC.
CONSENT OF INDEPENDENT AUDITORS
Exhibit 23.1
We consent to the use of our report dated February 1, 1999 with respect to the
consolidated financial statements and related financial statement schedule of
Irvine Apartment Communities, Inc., included in this Annual Report on Form
10-K/A of Irvine Apartment Communities, Inc.
We also consent to the incorporation by reference of our report dated February
1, 1999 with respect to the consolidated financial statements and related
financial statement schedule of Irvine Apartment Communities, Inc., in the
Registration Statement (Form S-8) pertaining to the Irvine Apartment
Communities, Inc. 1993 Stock Option Plan for Directors, in the Registration
Statement (Form S-8) pertaining to the Irvine Apartment Communities, Inc. 1993
Long-Term Stock Incentive Plan, in the Registration Statement (Form S-8)
pertaining to the Irvine Apartment Communities, Inc. 1996 Long-Term Stock
Incentive Plan, in the Registration Statement (Form S-3) pertaining to the
Irvine Apartment Communities, Inc. Dividend Reinvestment and Additional Cash
Investment Plan, and in the Registration Statement (Form S-3) of Irvine
Apartment Communities, Inc. pertaining to the registration of $350,000,000 of
Debt Securities, Preferred Stock, Common Stock and Warrants.
Newport Beach, California
April 30, 1999
<PAGE> 1
IRVINE APARTMENT COMMUNITIES, L.P.
CONSENT OF INDEPENDENT AUDITORS
Exhibit 23.2
We consent to the use of our report dated February 1, 1999 with respect to the
consolidated financial statements and related financial statement schedule of
Irvine Apartment Communities, L.P., included in this Annual Report on Form
10-K/A of Irvine Apartment Communities, L.P.
We also consent to the incorporation by reference of our report dated February
1, 1999 with respect to the consolidated financial statements and related
financial statement schedule of Irvine Apartment Communities, L.P. in the
Registration Statement (Form S-3) pertaining to the Irvine Apartment
Communities, L.P. registration of $350,000,000 of Debt Securities.
Newport Beach, California
April 30, 1999
<PAGE> 1
IAC CAPITAL TRUST
CONSENT OF INDEPENDENT AUDITORS
Exhibit 23.3
We consent to the use of our report dated February 1, 1999 with respect to the
financial statements of IAC Capital Trust included in this Annual Report on
Form 10-K/A of IAC Capital Trust.
Newport Beach, California
April 30, 1999
