<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 1-12672
BAY APARTMENT COMMUNITIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MARYLAND 77-0404318
(I.R.S. EMPLOYER IDENTIFICATION
(STATE OF INCORPORATION) NO.)
</TABLE>
4340 STEVENS CREEK BLVD., #275, SAN JOSE, CALIFORNIA 95129
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
408-983-1500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value
(TITLE OF CLASS)
New York Stock Exchange
Pacific Stock Exchange
(NAME OF EXCHANGES ON WHICH REGISTERED)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past ninety (90) days:
Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of March 7, 1997 was approximately $753.8 million based on
the closing price on the New York Stock Exchange for such stock on March 7,
1997.
The number of shares of the Registrant's common stock, par value $.01 per
share, outstanding as of March 7, 1997 was 20,441,010.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 Bay Apartment Communities, Inc. Proxy Statement for
the Registrant's Annual Meeting of Shareholders to be held on April 25, 1997, a
definitive copy of which will be filed with the SEC within 120 days after the
end of the year covered by this Form 10-K, are incorporated by reference herein
as portions of Part III of this Form 10-K.
================================================================================
<PAGE> 2
BAY APARTMENT COMMUNITIES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I
Item 1. Business..................................................................... 1
Item 2. Properties................................................................... 6
Item 3. Legal Proceedings............................................................ 12
Item 4. Submission of Matters to a Vote of Shareholders.............................. 12
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters........ 13
Item 6. Selected Financial Data...................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 17
Item 8. Financial Statements and Supplementary Data.................................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.......................................................................... 26
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 27
Item 11. Executive Compensation....................................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 27
Item 13. Certain Relationships and Related Transactions............................... 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 28
Signatures............................................................................ 32
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
Bay Apartment Communities, Inc., in conjunction with its wholly-owned
partnerships and subsidiaries (the "Company"), has engaged in apartment
community development, construction, acquisition, refurbishing, marketing,
leasing and management for over 18 years in Northern California and, in
particular, the San Francisco Bay Area. The Company has also recently expanded
into selected markets in Southern California. On March 17, 1994, the Company
completed an initial public offering (the "Initial Offering") of 10,889,742
shares of common stock, including 1,420,401 shares issued pursuant to the
exercise of the underwriters' overallotment option. The Company is a
self-administered and self-managed real estate investment trust (a "REIT"). The
Company's senior executives have collectively overseen the development,
acquisition or management of over 30,000 apartment homes and as of March 7,
1997, the Company owns and manages 35 apartment home communities containing
8,978 apartment homes. As of December 31, 1996, the Company's portfolio had an
average physical occupancy rate of 96.0%. The Company employed approximately 300
employees at December 31, 1996.
The Company is a fully-integrated real estate organization with in-house
development, construction, acquisition, refurbishing, financing, marketing,
leasing and management expertise. The Company pays no development, acquisition
or management fees to third parties. All of the Company's communities are
located in California. Twenty-nine of the Company's operating communities are
located in the San Francisco Bay Area, three in Orange County, one in the
Sacramento area, one in Fresno and one in San Diego.
The Company has elected to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code"). As a qualified REIT, with limited
exceptions, the Company will not be taxed under Federal and certain state income
tax laws at the corporate level on its net income. Due to non-cash charges such
as depreciation and amortization, the Company's cash available for distribution
currently exceeds net income. In 1996 and 1995, the Company distributed cash
dividends in excess of net and taxable income and may continue to distribute
cash dividends in excess of net and taxable income. Under current tax law, the
excess of dividends less taxable income will be treated as a non-taxable return
of capital to shareholders that will reduce their basis in the shares of the
Company's common and preferred stock, as appropriate.
The Company was incorporated under the laws of the State of California in
1978. In July, 1995, the Company reincorporated in the State of Maryland. Its
executive offices are located at 4340 Stevens Creek Boulevard, Suite 275, San
Jose, California 95129 and its telephone number is (408) 983-1500.
BUSINESS PHILOSOPHY
The Company's primary business philosophy is to develop and build, or
acquire and substantially rebuild, apartment communities that offer upscale
apartment living, with extensive landscaping and amenities, well-maintained
common facilities and convenient access to shopping areas, transportation or
other services. The Company has consistently followed this philosophy since
1978. In operating the Company, management emphasizes the following business
philosophies:
- COMPETITIVE ADVANTAGE. The Company believes that it should own and
operate apartments in locations in which they will have a long-term, inherent,
competitive advantage over other apartments in the same market. Usually, this
competitive advantage is due to the location and quality of the community in
relation to the competition. The competitive positioning, however, also
generally includes consideration of relative pricing, amenities, and services.
- INFILL LOCATION. Usually the competitive advantage results from the fact
that the apartment community is at an infill location in a highly developed
neighborhood. In pursuing this infill strategy, the Company considers important
the amount of automobile traffic passing the community because a high percentage
of the rentals in the Company's communities have historically come from walk-in
traffic. The Company also considers the proximity of communities to freeway
intersections, convenient neighborhood and regional
1
<PAGE> 4
shopping, significant employment centers, major recreational amenities and
elementary, middle and high schools.
- QUALITY COMMUNITIES. The Company builds attractive residential
communities. Substantially all of the communities include an attractive leasing
pavilion and community center. The communities also have extensive and
well-manicured landscaping, large swimming pools, physical fitness facilities,
covered and often enclosed parking. The apartments offer spacious, open living
areas and include many of the following amenities: patios or balconies, separate
and in-home laundry rooms, often including washing machines and dryers, and
fully-equipped kitchens with built-in buffets, microwaves, disposals and
dishwashers.
- SERVICE ETHIC. The Company believes that the best way to attract and
retain residents is to provide comprehensive personal service. The Company has
well-trained property managers, leasing agents and maintenance managers whose
objective is to be courteous and responsive to resident needs and to ensure that
the communities are always maintained in their best condition. At many of the
communities, the Company also offers or makes available many services to
residents that make living in the communities more convenient, including
business centers, on-site laundry pickup and delivery, package delivery,
aerobics classes, community social activities and other on-site events.
- "HANDS-ON" TEAM APPROACH, CONSERVATIVE BUDGETING AND COST CONTROL. The
Company carefully designs its projects so that it can closely control costs
during both construction and operation of each community. It designs each
community with full participation of key Company development, construction,
marketing, financial and property management personnel as well as with outside
architects, engineers, and major subcontractors who will be involved in the
construction and maintenance of the communities. The Company also takes
additional steps to control construction costs and schedules, such as widely
bidding all phases of construction projects and negotiating detailed contracts
with subcontractors so that the construction process is less likely to have
change orders and unanticipated costs.
- LOW AVERAGE AGE AND PROACTIVE MAINTENANCE. The communities have a
relatively low weighted average age of approximately twelve years. The Company
has developed detailed capital improvement and preventive maintenance programs
which emphasize the importance of maintaining the high quality of the
communities. Management believes the physical repair and cleanliness of the
communities is a vital part of maintaining positive resident relationships. This
proactive philosophy is designed to lower operating costs, maintain the quality
of the communities, and maximize long-term value. In addition, the Company
includes long-term durable features in its design to maximize the useful life of
the communities.
- EXTENSIVE EXPERIENCE IN TAX-EXEMPT BOND INDEBTEDNESS. Concurrently with
the closing of the Initial Offering, the Company received $87.4 million of
credit enhancements to facilitate the remarketing of its existing long-term
tax-exempt bond indebtedness associated with four of the Company's communities.
The Company fixed the interest rate on this debt for 10 years at 5.88% exclusive
of financing costs (6.30% including the amortization of deferred financing
costs). In 1995, the Company issued $89.4 million of new and re-issued
tax-exempt bond indebtedness associated with five of the Company's communities.
The Company fixed the interest rate on this debt with an all-inclusive rate of
6.48% fixed for 15 years. Also in 1995, the Company re-issued $20.8 million in
tax-exempt bonds at a variable rate (6.50% at December 31, 1996, including the
amortization of deferred financing costs) maturing in March, 2018. In 1996, as
part of the purchase of the Countrybrook community, the Company assumed $20.3
million of the seller's tax-exempt bond debt secured by the property. These
tax-exempt bonds have an all-inclusive fixed interest rate of 7.87% through
April, 2002 and the bonds mature in March, 2012. Also in 1996, the Company
assumed $7.6 million of tax-exempt bond debt as part of the purchase of the
Larkspur Canyon community. These bonds currently float in a seven-day put bond
mode with a variable interest rate (5.90% all-inclusive rate as of December 31,
1996) maturing in March, 2023. The Company also will consider using similar
tax-exempt permanent financing strategies connected with new development
projects, and communities acquired in the future, where favorable opportunities
exist.
- EMPLOYEE TRAINING. The Company is continuing to enhance the training
programs it has offered for many years. The training program is led by human
resource and training professionals and offers seminars in budget preparation,
budget management, rental legalities, marketing techniques, safety, maintenance
and
2
<PAGE> 5
other similar topics. The Company also offers through San Jose State University
a training course in property management with almost 12 college-level credits.
GROWTH STRATEGIES
The Company's primary business objectives are to maximize the current
return to shareholders through increases in funds from operations per share and
to increase the long-term total returns to shareholders through appreciation in
value of the Company's common and preferred stock. The Company is committed to
achieving these objectives by pursuing the following external and internal
growth strategies:
- INFILL PROPERTY DEVELOPMENT. The Company intends to generate external
growth through the continued development of upscale apartment communities in
infill areas in California. The Company believes that the barriers to new
development in its markets caused by governmental growth controls, including
difficult permitting processes, and high capital requirements and limited
availability of construction financing, have reduced the number of potential
acquirers of undeveloped land and contributed to the decrease in the rate of
apartment community construction. This decline in construction coupled with the
trend toward strong population growth and household formations should present an
excellent opportunity for the Company to achieve favorable returns on the
development of well-located, upscale apartment communities. During the past 18
years, the Company and its affiliates have developed and constructed or acquired
and rebuilt over 10,000 residential units in the San Francisco Bay Area. The
Company believes that the size and quality of its portfolio, as well as the
relationships it has developed with local permitting and governmental
authorities and its experience with the development, construction and financing
process, have minimized barriers to new development often faced by less
experienced developers.
- SELECTIVE ACQUISITION AND PROPERTY RECONSTRUCTION. The Company also
intends to grow externally by acquiring existing apartment communities from
third parties. The Company believes that there are presently attractive
acquisition opportunities in both Northern California and Southern California,
particularly in light of management's experience and the Company's in-house
capability in all aspects of real estate acquisition, construction, refurbishing
and design. The Company will seek to acquire well-located apartment communities
that can be improved to meet the quality and performance standards of the
Company through development expertise, capital improvement programs and
proactive property management and that: (i) are in need of physical
improvements, (ii) are held, primarily as a result of repossession, by financial
institutions, insurance companies, pension fund advisors, or other similar
property owners, or (iii) secure maturing loans or credit enhancements for
tax-exempt indebtedness for which the owners are unable to satisfy their
obligations or renew their loans.
- PROACTIVE PROPERTY MANAGEMENT. The Company believes managing its
communities with an intensive hands-on approach is a fundamental component of
its internal growth. The Company has developed aggressive property management
and leasing programs over the past 18 years that are designed to maximize
revenue and minimize expenses, thereby increasing the Company's funds from
operations. The Company believes that its proactive approach to property
management results in consistently higher occupancy and rental revenue levels,
and a more stable resident base, than the overall market.
The Company intends to generate internal growth by (i) increasing average
occupancy and rental rates, as market conditions permit, while minimizing
resident turnover of the communities, and (ii) continuing to operate as a low
cost producer, with an efficient general and administrative staff and with
senior management providing direction and supervision of the on-site community
management teams. To the extent, however, that certain communities are financed
by tax-exempt indebtedness, bond compliance requirements may have the effect of
mitigating any rental rate increase if the Company is required to lower rental
rates to attract residents who satisfy the applicable median income tests.
However, the Company believes that for its current communities, such
restrictions are more than compensated for by the lower interest rate on
tax-exempt indebtedness as opposed to conventional financing.
Each community's management team consists of a community manager, leasing
consultants and maintenance personnel. The on-site community manager is both the
Company's representative to the residents and the manager of the leasing and
maintenance staff. The Company believes that its community managers
3
<PAGE> 6
play an integral role in its management team as well as each community's
success. Management personnel undergo an extensive training program and attend
continuing education classes to improve their marketing and management skills.
The Company's employees perform all property management functions, including
leasing and rent collection. In addition, the Company's employees perform most
of the on-site maintenance functions, including, for example, painting, carpet
replacement, plumbing and electrical repair, pool maintenance and general clean
up, as well as major repairs including repairs of leasing pavilions, recreation
buildings, kitchens and bathrooms. Furthermore, the geographic concentration of
the communities allows senior management the opportunity to visit each of the
communities frequently and to supervise the implementation of the leasing and
maintenance programs.
The Company has established a property management computer system which
tracks leasing, rent collection and expense activity at each of the communities.
The Company's management system, using both customized and conventional software
programs, provides the Company's management with current information about rent
collections, new rentals, delinquencies, 30-day termination notices, occupancy
levels and resident profiles. Both marketing and accounting information are
carefully and continuously monitored by management. The Company plans to
continue to implement significant enhancements to this system in 1997 to further
enhance management's ability to monitor property operations.
- STRATEGIC USE OF TAX-EXEMPT INDEBTEDNESS. The Company also intends to
increase funds from operations and long-term total return to shareholders
through the strategic use of tax-exempt indebtedness. The Company intends to
continue to use its expertise in low interest rate tax-exempt bond financing in
an effort to lower its cost of capital and obtain favorable long-term financing
for new development and the acquisition and refurbishing of existing apartment
communities from third parties. The use of low interest rate tax-exempt
financing for twelve of the communities has substantially contributed to the
investment returns to the Company.
Due to relatively high incomes in the Northern California and Southern
California markets, the Company has been able to take advantage of this low cost
tax-exempt indebtedness without the significant rental loss that ordinarily is
attributable to compliance with certain rental restrictions imposed in
connection with such indebtedness. The Company will continue to utilize low
interest rate tax-exempt indebtedness in markets where the reduction in rental
revenues caused by compliance with such restrictions is anticipated to be
substantially less than the savings realized through lower interest rates. As a
result of certain amendments in the Code, communities financed by new tax-exempt
indebtedness are now required to satisfy more stringent rental restrictions.
There can be no assurance that the rental revenue from communities that incur
tax-exempt indebtedness in the future will not be adversely affected by more
stringent rental restrictions. The Company intends to seek such financing in the
future only if it is economically advantageous to the Company.
COMPETITION
All of the Company's communities are located in developed areas that
include other upscale apartments. The number of competitive upscale apartment
properties in a particular area could have a material effect on the Company's
ability to lease apartment homes at its communities or at any newly developed or
acquired communities and on the rents charged. The Company may be competing with
others that have greater resources than the Company. In addition, other forms of
residential properties including single family housing, provide housing
alternatives to potential residents of upscale apartment communities.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate, as well as
certain other categories of parties, may be required to investigate and
remediate the effects of hazardous or toxic substances or petroleum product
releases at such property and may be held liable to a governmental entity or to
third parties for property damage and for investigation and remediation costs
incurred by such parties in connection with the contamination. Such laws
typically impose remediation responsibility and liability without regard to
whether the owner knew of or caused the presence of the contaminants, and the
liability under such laws has been interpreted to be joint and
4
<PAGE> 7
several unless the harm is divisible and there is a reasonable basis for
allocation of responsibility. The cost of investigation, remediation or removal
of such substances may be substantial, and the presence of such substances, or
the failure to properly remediate the contamination on such property, may
adversely affect the owner's ability to sell or rent such property or to borrow
using such property as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic substances also may be liable for the costs of
removal or remediation of such substances at the disposal or treatment facility,
whether or not such facility is owned or operated by such person. In addition,
some environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
Finally, the owner of a site may be subject to common law claims by third
parties based on damages and costs resulting from environmental contamination
emanating from a site.
Certain federal, state and local laws, regulations and ordinances govern
the removal, encapsulation or disturbance of asbestos-containing materials
("ACMs") when such materials are in poor condition or in the event of
construction, remodeling, renovation or demolition of a building. Such laws may
impose liability for release of ACMs and may provide for third parties to seek
recovery from owners or operators of real properties for personal injury
associated with ACMs. In connection with its ownership and operation of the
communities, the Company potentially may be liable for such costs. The Company
is not aware of any ACMs used in connection with the construction of the
communities developed by the Company, all of which were constructed after 1983.
The Company is not aware of any ACMs used in connection with the construction of
the Acquisition Communities (defined below) other than Regatta Bay, Village
Square, Sea Ridge, Sunset Towers, Mill Creek, Channing Heights, Martinique
Gardens and Rancho Penasquitos. The Company does not anticipate that it will
incur any material liabilities in connection with the presence of ACMs at these
communities. The Company currently has an operation and maintenance program in
place for ACMs at the communities where ACMs have been identified and intends to
take appropriate action as required in connection with the presence of such
ACMs.
All of the Company's communities and the three Current Development
Communities (defined below) have been subjected to a Phase I or similar
environmental assessment (which involves general inspections without soil
sampling or ground water analysis or radon testing) completed by an independent
environmental consultant. The Company's assessments of the communities and the
Current Development Communities have not revealed any environmental liability
that the Company believes would have a material adverse effect on the Company's
business, assets or results of operations. Two Current Development Communities
are subject to soil and groundwater remediation of contamination from adjacent
landowners. In the case of one of the Current Development Communities, Toscana,
National Semiconductor Corporation is causing remediation to occur and has
provided an indemnity which the Company may rely upon for certain environmental
liabilities. Additionally, another Current Development Community, Paseo Alameda,
may require underground storage tank removal and other environmental cleanup.
Nevertheless, it is possible that the Company's assessments do not reveal all
environmental liabilities or that there are material environmental liabilities
of which the Company is unaware. Furthermore, prior to the Initial Offering the
Company had been occasionally involved in developing, managing, leasing and
operating various properties for third parties and may be considered an operator
of such properties and, therefore, potentially liable for removal or remediation
costs or other potential costs which could relate to hazardous or toxic
substances. The Company is not aware of any environmental liabilities with
respect to properties it has managed or developed for such third parties.
Moreover, no assurances can be given that (i) future laws, ordinances or
regulations will not impose any material environmental liability or (ii) the
current environmental condition of the communities will not be affected by
residents and other occupants of the communities, by the condition of land or
operations in the vicinity of the communities (such as the presence of
underground storage tanks), or by third parties unrelated to the Company.
Environmental assessments in 1988 revealed the presence of residue from the
use of agricultural chemicals in the soil of two parcels of land on which two
communities, Alicante and Hampton Place, were developed. Remedial activities
undertaken by the Company resulted in the concentrations of agricultural
chemicals being lowered to levels that were acceptable to the California
Department of Health Services with respect to both of these sites.
5
<PAGE> 8
Villa Mariposa is located adjacent to a site owned by a third party which
was designated on the National Priorities List subsequent to the Company's
acquisition of the community. An environmental assessment conducted in 1993
revealed levels of contamination below state and federal action levels in the
groundwater underlying the community and may be associated with the
contamination found on the adjacent site. There can be no assurance that since
the date of the environmental assessment additional contamination has not
migrated, or that in the future it will not migrate, into the groundwater
underlying the community. The only responsible party that has been identified by
the United States Environmental Protection Agency (the "EPA") in connection with
the environmental contamination on this adjacent site is the current owner of
that property. Remediation activities by the adjacent site owner, under the
supervision of the EPA, are ongoing but have not yet been completed by the
owner.
The Company is aware of the presence of certain contaminants in the soil
and groundwater underlying Regatta Bay, which contaminants may be associated
with fill and/or naturally-occurring materials. The Company has been advised by
the California Regional Water Quality Control Board that, based on the
information available, no further investigation or cleanup is required.
Except as otherwise noted, the Company believes that each of the
communities and the land parcels for the three Current Development Communities
are in compliance in all material respects with all federal, state and local
laws, ordinances and regulations regarding hazardous or toxic substances or
petroleum products. Except as otherwise noted, the Company has not been notified
by any governmental authority, and is not otherwise aware, of any material
noncompliance, liability or claim relating to hazardous or toxic substances or
petroleum products in connection with any of its present properties.
ITEM 2. PROPERTIES
The Company's real estate portfolio consists of apartment communities and
land held for the development of apartment communities located in California.
For purposes of this discussion, the portfolio consists of the following
categories:
- -- Original Communities: Those communities owned directly or indirectly by the
Company or certain investors prior to the Initial
Offering.
- -- 1994 Acquisition Communities: Those communities acquired during 1994.
- -- 1995 Acquisition Communities: Those communities acquired during 1995.
- -- 1995 Development Communities: Carriage Square and Canyon Creek, which were
completed, leased up and stabilized in 1995.
- -- 1996 Acquisition Communities: Those communities acquired during 1996.
- -- 1996 Development Community: Rosewalk, which was completed in January, 1997
and leased up and stabilized in February, 1997.
- -- 1997 Acquisition Community: Rancho Penasquitos, which was acquired in
January, 1997.
- -- Current Development Communities: Toscana (formerly the Lawrence Expressway
Site), CentreMark (formerly the Stevens
Creek Site) and Paseo Alameda (formerly The
Alameda Site).
The specific communities included in these categories are detailed
beginning on page 8.
As of December 31, 1996 the Company owned substantially all of the
ownership interests in 34 communities comprised of 8,754 upscale apartment homes
in California. For those communities developed by the Company, stabilized
occupancy typically has occurred between six and nine months after completion of
construction, depending on the size of the community. Stabilized occupancy is
defined as the first calendar month following completion of construction in
which the community has a physical occupancy of at least 95%. The 1996
Development Community, Rosewalk, stabilized within one month after completion of
construction. The Company's portfolio has operated at an average occupancy of
more than 95% after operations stabilized.
6
<PAGE> 9
The communities generally are located in high visibility areas in close
proximity to major transportation arteries, mass transit lines, commercial
districts, shopping or other services. The Company attempts to develop or
acquire apartment communities in high visibility locations that not only provide
many conveniences for residents, but also encourage greater walk-in traffic and
consequently improve leasing opportunities and allow the Company to operate with
reduced marketing costs.
The communities generally contain contemporary two and three-story
buildings in extensively landscaped settings with lush gardens, fountains or
waterscapes. The objectives of the site layout and building design are to
provide residents with convenient indoor or covered parking, ample private
storage areas and a comfortable living environment. Most of the communities
feature solar-heated swimming pools, hydro-jet spas, high-tech fitness
facilities, and expansive community areas. The apartment homes typically offer
spacious, open living areas with an abundance of natural light, and many of the
following amenities: ceiling fans, vaulted ceilings, patios or balconies,
fireplaces, designer coordinated kitchens often with built-in buffets, wine
racks, microwaves, disposals and dishwashers. In many cases the Company makes
certain other services available to residents such as aerobics classes, dry
cleaning pick up and delivery, and mail drops and package acceptance.
In addition to the physical advantages of the communities, the Company has
highly-trained professional on-site management and maintenance staffs that
provide courteous and responsive service to the residents of each community.
Management believes that excellent design and intensive, service oriented
property management that is focused on the specific needs of residents create a
very desirable living environment for residents. This combination of features
allows the Company to achieve higher rental rates and occupancy levels while
minimizing resident turnover and operating expenses and maximizing current and
long-term cash flow and the value of the communities.
The communities were designed to control costs both during construction and
operation and to provide maximum long-term investment value and resident appeal.
In connection with the preparation of the design and plans for each community
and the apartment homes therein, the Company's employees have regular meetings
with all of the major trade contractors associated with the project to ensure
that the communities are well-planned and construction is well-coordinated,
thereby minimizing the possibility for construction cost overruns.
The Company includes many long-term durable features in the design of
communities that it constructs to maximize the useful life of the communities.
For example, on newly constructed communities, the Company used concrete tile
roofs, cast iron drains, waste and vent pipes, copper water pipes, extra deep
base rock and asphalt lifts. In addition, extensive measures are employed to
minimize noise between apartment homes. The Company uses condominium standards
for this purpose, including the use of double walls and double insulation
between apartment homes, lightweight concrete on floors and insulation between
ceilings and floors. The Company, whenever possible, locates closets, bathrooms,
and laundries in locations which minimize sound transmission.
The Company improves and repositions the communities it acquires as
appropriate in an effort to enhance returns and upgrade each community's
competitive position in its respective submarket. At the end of 1996, the
Company had committed or completed capital improvements totalling $35.1 million
for 18 communities acquired since the Initial Offering. The Company's
repositioning activities vary from community to community and include
reconstruction and renovation of leasing pavilions, pool areas, fitness
facilities, parking structures, landscaping, major plumbing, electrical, roofing
and siding repairs.
7
<PAGE> 10
The following table sets forth certain information regarding the Company's
communities:
<TABLE>
<CAPTION>
AVERAGE AVERAGE
UNIT MONTHLY
YEAR OF NUMBER SIZE RENT PER OCCUPANCY
ORIGINAL OF (SQUARE UNIT AT AT
PROPERTY LOCATION OWNERSHIP CONSTRUCTION UNITS FEET) 12/31/96(1) 12/31/96
- ------------------- ------------------- --------- ------------ ------ ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ORIGINAL COMMUNITIES
Fairway Glen San Jose, CA 100%(2) 1986 144 826 $ 994 96.5%
Foxchase San Jose, CA 100%(2) 1986/1987 396 (3) 844 1,041 97.5%
Glen Creek Morgan Hill, CA 100% 1989 138 819 990 100.0%
San Marino San Jose, CA 100% 1984/1988 248 845 1,032 97.6%
Villa Mariposa Mountain View, CA 94%(4) 1986 248 844 1,307 99.2%
Waterford Hayward, CA 100% 1985/1986 544 830 851 93.2%
Willow Creek Fremont, CA 100% 1985 235 820 1,028 94.9%
Alicante Fremont, CA 100% 1992 135 952 1,220 91.9%
Hampton Place Fremont, CA 100% 1992 308 1,046 1,274 96.1%
----- ----- ------ ------
Subtotal Original Communities 2,396 868 1,057 96.0%
----- ----- ------ ------
1994 ACQUISITION COMMUNITIES
Hacienda Gardens Pleasanton, CA 100% 1988 456 803 992 94.5%
Regatta Bay Foster City, CA 100% 1973 288 738 1,066 99.0%
Barrington Hills Hayward, CA 100% 1986 188 897 874 96.8%
Sommerset Vacaville, CA 100% 1987 136 733 654 97.8%
Village Square San Francisco, CA 100% 1972 154 821 1,104 99.4%
Reflections Fresno, CA 100% 1990 516 818 546 89.3%
Blairmore Rancho Cordova, CA 100% 1986 252 843 561 97.6%
Crossbrook Rohnert Park, CA 100% 1986 226 725 691 98.2%
----- ----- ------ ------
Subtotal 1994 Acquisition Communities 2,216 800 795 95.3%
----- ----- ------ ------
1995 ACQUISITION COMMUNITIES
Sea Ridge(5) Pacifica, CA 100% 1971 220 849 1,004 95.9%
Rivershore Bay Point, CA 100% 1986 245 842 666 98.4%
City Heights San Francisco, CA 100% 1990 185 591 1,025 98.9%
Promenade Sunnyvale, CA 100% 1987 220 726 1,062 98.2%
The Pointe Fairfield, CA 100% 1991 296 876 773 97.0%
----- ----- ------ ------
Subtotal 1995 Acquisition Communities 1,166 790 889 97.6%
----- ----- ------ ------
1995 DEVELOPMENT COMMUNITIES
Carriage Square San Jose, CA 100% 1995 324 984 1,370 96.9%
Canyon Creek Campbell, CA 100% 1995 348 933 1,254 96.8%
----- ----- ------ ------
Subtotal 1995 Development Communities 672 958 1,310 96.8%
----- ----- ------ ------
1996 ACQUISITION COMMUNITIES
Park Centre Union City, CA 100% 1973 208 796 864 N/A(6)
Parkside Commons Sunnyvale, CA 100% 1991 192 1,038 1,432 97.9%
Sunset Towers San Francisco, CA 100% 1961 243 708 1,072 96.7%
Countrybrook San Jose, CA 100%(7) 1985 360 898 1,051 93.6%
Larkspur Canyon Mission Viejo, CA 100% 1984 166 752 735 N/A(8)
The Fountains San Jose, CA 100% 1990 226 929 1,364 95.1%
Mill Creek Costa Mesa, CA 100% 1973 258 810 807 96.1%
Channing Heights San Rafael, CA 100% 1973 254 873 986 94.5%
Martinique Gardens Costa Mesa, CA 100% 1956 145 907 715 N/A(9)
----- ----- ------ ------
Subtotal 1996 Acquisition Communities 2,052 856 1,017 95.4%
----- ----- ------ ------
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
AVERAGE AVERAGE
UNIT MONTHLY
YEAR OF NUMBER SIZE RENT PER OCCUPANCY
ORIGINAL OF (SQUARE UNIT AT AT
PROPERTY LOCATION OWNERSHIP CONSTRUCTION UNITS FEET) 12/31/96(1) 12/31/96
- ------------------- ------------------- --------- ------------ ------ ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 DEVELOPMENT COMMUNITY
Rosewalk San Jose, CA 100% 1996 252 905 1,410 N/A(10)
----- ----- ------ ------
Total Operating Properties 8,754 846 989 96.0%
----- ----- ------ ------
Rosewalk San Jose, CA 100% 1997 48 (11) 905 N/A N/A
----- ----- ------ ------
1997 ACQUISITION COMMUNITY
Rancho Penasquitos San Diego, CA 100% 1982 176 802 N/A N/A
----- ----- ------ ------
CURRENT DEVELOPMENT COMMUNITIES
Toscana Sunnyvale, CA 100% N/A 709 917 N/A N/A
CentreMark San Jose, CA 100% N/A 311 948 N/A N/A
Paseo Alameda San Jose, CA 100% N/A 305 1,011 N/A N/A
----- ----- ------ ------
Subtotal Current Development Communities 1,325 946 N/A N/A
----- ----- ------ ------
TOTALS 10,303 858 $ 989 96.0%
===== ===== ====== ======
</TABLE>
- ---------------
(1) Excludes washer/dryer rental fees, covered parking fees, credit check and
application fees and other similar charges.
(2) To preserve the tax-exempt status of the tax-exempt bonds secured by
Fairway Glen and Foxchase, the Company held these communities through
partnerships and, as general partner, received 100% of the distributions of
cash from operations. Prior to January 2, 1996, an officer of the Company
held 1% of the interests in distributions of cash from any sale,
disposition or refinancing made by such partnership. On January 2, 1996,
the partnership exercised an option to redeem, and did redeem, the
remaining 1% interest not owned by the Company thereby making the Company
the 100% owner of these communities.
(3) The Foxchase community includes 252 units constructed in 1986 as Phase I
and 144 units constructed in 1987 as Phase II.
(4) The Company owns this community through a partnership, and, as general
partner, receives 94% of the distributions of cash from operations and
proceeds from any sale, refinancing or disposition made by the partnership.
An unrelated third party owns the remaining 6% interest in the partnership
as a limited partner.
(5) During 1995 and 1996, Sea Ridge underwent substantial renovation including
the replacement of the entire exterior, including new roofing, windows and
siding, and the refurbishment of all apartment interiors. The renovation
was completed and the last apartment home was reoccupied by approximately
March 31, 1996.
(6) Park Centre is undergoing substantial renovation including the replacement
of the Community's roof, repairing and repainting siding, substantially
refurbishing its landscaping, redecorating the interior of all apartment
homes, rebuilding its leasing facility and fitness center and gating the
Community.
(7) As part of the purchase price for the Countrybrook community acquired in
July, 1996, the Company issued to the seller 298,577 operating partnership
units (with a value of approximately $7.3 million) of a special purpose
limited partnership, Bay Countrybrook L.P., formed by the Company. The
operating partnership unitholders may request that they be redeemed for
cash, subject to the Company's right to satisfy any redemption request by
issuing an equivalent number of shares of common stock. As of December 31,
1996, the Company had issued 3,812 shares of common stock to limited
partners of Bay Countrybrook L.P. who had requested a redemption of their
partnership units.
9
<PAGE> 12
(8) Larkspur Canyon, formerly known as Villa Marguerite, is undergoing
substantial renovation including repairing and repainting the community's
exterior, replacing the leasing facility and fitness center and adding
garages and a gate system.
(9) Martinique Gardens is undergoing substantial renovation including replacing
its roof, repairing and repainting its exterior siding, replacing all
apartment home interiors, rebuilding its leasing facility and fitness
center, adding a substantial number of new garages, repaving its roadways
and replacing the swimming pool and all of the landscaping.
(10) As of December 31, 1996, 252 of the total 300 apartment homes at the
Rosewalk community had been completed.
(11) Represents the remaining 48 apartment homes at the Rosewalk community that
were completed during January, 1997.
1996 DEVELOPMENT COMMUNITY
The Rosewalk community consists of 10.8 acres of land on which 252 of the
300 apartment homes have been built as of December 31, 1996. Construction of the
community was completed in January, 1997, occupancy commenced in August, 1996
and stabilization occurred in February, 1997.
The Rosewalk community is among the first new communities built in its
submarket over the past several years. Rosewalk is located in a desirable infill
location and features apartment homes with convenient access to transportation,
shopping and major employment centers, spacious, open living areas, ample
storage areas, full-size washers and dryers, nine foot and/or vaulted ceilings,
extensive landscaping, recreational amenities and covered and/or secured garage
parking.
CURRENT DEVELOPMENT COMMUNITIES
This discussion contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements as a
result of, among other factors, the risk factors set forth in the Company's
filings with the Securities and Exchange Commission, changes in general economic
conditions and changes in the assumptions used in making such forward-looking
statements.
The Company has acquired three land sites on which it is building, or plans
to commence building in the near future, the Current Development Communities
with a total of 1,325 apartment homes.
- TOSCANA, SUNNYVALE, CA. The Company purchased this partially built and
abandoned 17.8 acre site in May, 1996 on which 709 apartment homes are being
built. The site, located approximately at the intersection of Highway 101 and
Lawrence Expressway, is at the center of Silicon Valley. This Current
Development Community will contain a large leasing pavilion, business center,
fitness center, two swimming pools, including one 75 foot lap pool, a small
commercial area, secure underground parking and a perimeter gate system.
Stabilized operations are expected in the fourth quarter of 1998, and the first
apartment homes are expected to be occupied in the third quarter of 1997.
- CENTREMARK, SAN JOSE, CA. The Company purchased 2.5 acres of this 7.9
acre site in May, 1996. The remainder of this site was purchased in December,
1996 after obtaining substantially all of the necessary public approvals for
development of the community. The site is located at the intersection of Stevens
Creek Blvd. and Interstate 280, in the northwest corner of San Jose, almost
immediately adjacent to the City of Cupertino. The planned 311 apartment home
community will include a large leasing facility, business center, fitness
center, 65 foot lap pool, secure underground parking and perimeter gate system.
Stabilized operations are expected in the fourth quarter of 1998, and the first
apartment homes are expected to be occupied in the first quarter of 1998.
- PASEO ALAMEDA, SAN JOSE, CA. The Company purchased this 7.4 acre parcel
in February, 1997 after it obtained substantially all of the necessary public
approvals for development of the community. The Company
10
<PAGE> 13
is also under contract to purchase a 1.43 acre parcel adjacent to this site for
$1.5 million. The site is located on a major street, approximately one mile from
downtown San Jose. Upon the purchase of the adjacent parcel, the Company intends
to build a 305 apartment home community with a large leasing pavilion, business
center, fitness center, 75 foot lap pool, a small commercial area and secure
underground parking. Stabilized operations are expected in the second quarter of
1999, and the first apartment homes are expected to be occupied in the second
quarter of 1998.
SEISMIC CONCERNS
Many of the communities are located in the general vicinity of active
earthquake faults. In July, 1996, the Company obtained a seismic risk analysis
from an engineering firm which estimated the probable maximum loss ("PML") for
each of the communities owned at June 30, 1996 individually and for all of such
communities combined. To establish a PML, the engineers first define a severe
earthquake event for the applicable geographic area, which is an earthquake that
has only a 10% likelihood of occurring over a 50-year period. The PML is
determined as the structural and architectural damage and business interruption
loss that has a 10% probability of being exceeded in the event of such an
earthquake. Because the communities are concentrated in the San Francisco Bay
Area, the engineers' analysis defined an earthquake on the San Andreas Fault
with a Richter Scale magnitude of 8.0 as a severe earthquake with a 10%
probability of occurring within a 50-year period, and established an aggregate
PML at that time of $45.9 million for the 27 communities owned at that time,
which is a PML level that is expected to be exceeded only 10% of the time in the
event of such a severe earthquake. This aggregate PML could be higher as a
result of variations in soil classifications and structural vulnerabilities. One
community's individual PML was 30% while four communities had PMLs of 25% and
the remaining 22 communities owned at such time each had PMLs of 20% or less.
However, no assurance can be given that an earthquake would not cause damage or
losses greater than the PML assessments indicate, or that future acquisitions or
developments will not have PML assessments indicating the possibility of greater
damage or losses. The Company has obtained individual PML assessments for six of
the seven communities acquired since July, 1996. Three of those communities have
individual PMLs of 25% and the remaining three communities have individual PMLs
of 20% or less. The Company obtained an initial seismic risk analysis on the
seventh community, which indicated a PML of approximately 31%. The Company is in
the process of obtaining a final seismic risk analysis for this community from
the same engineering firm that conducted the seismic risk analysis for the other
communities. While the Company has not yet obtained an engineers' analysis
establishing an aggregate PML for all of the communities combined, the Company
intends to obtain such an aggregate PML in order to assist it in evaluating
appropriate levels of insurance coverage.
In July, 1996, the Company obtained earthquake insurance, both for physical
damage and lost revenues, with respect to the communities. For any single
occurrence, the Company self-insures the first $20 million of loss, and has in
place $25 million of coverage above this amount, with a 20% deductible. In
addition, the Company's general liability and property casualty insurance
provides coverage for personal liability and fire damage. In the event that an
uninsured disaster or a loss in excess of insured limits were to occur, the
Company could lose its capital invested in the affected community, as well as
anticipated future revenues from such community, and would continue to be
obligated to repay any mortgage indebtedness or other obligations related to the
community. Any such loss could materially and adversely affect the business of
the Company and its financial condition and results of operations. No assurance
can be given that an earthquake would not cause damage or losses greater than
the PML assessments indicate, or that future acquisitions, if any, will not have
a PML assessment indicating a probability of loss in excess of the range
described.
AMERICANS WITH DISABILITIES ACT
The apartment communities owned by the Company and any newly acquired
apartment communities must comply with Title III 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 requirements could require removal of structural barriers to
handicapped access in certain public areas of the Company's properties where
such removal is readily achievable. The ADA does not,
11
<PAGE> 14
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 leasing offices, are open to the public. The Company
believes that its properties comply in all material respects with all present
requirements under the ADA and applicable state laws. Noncompliance could result
in imposition of fines or an award of damages to private litigants.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries or its communities is
presently subject to any material litigation, nor to the Company's knowledge, is
such litigation threatened against the Company, its subsidiaries or any of its
communities, other than routine actions for negligence or other claims and
administrative proceedings arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and all of which
collectively are not expected to have a material adverse effect on the business
or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matters were submitted to a vote of the Company's shareholders during
the last quarter of its fiscal year ended December 31, 1996.
12
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
MARKET INFORMATION
The Company's common stock began trading on the New York Stock Exchange
(the "NYSE") on March 10, 1994, under the symbol "BYA.". The Company's common
stock is also traded on the Pacific Stock Exchange under the symbol "BYA". The
following table sets forth the high and low sales prices per share of the common
stock for the periods indicated, as reported by the NYSE. The Company's initial
public offering of its common stock at $20.00 per share was completed on March
17, 1994.
The high and low sales prices per share of common stock each quarter during
the years ended December 31, 1996, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
PERIOD OR QUARTER ENDED HIGH LOW
----------------------------------------------------------------- ------- --------
<S> <C> <C>
December 31, 1996................................................ $36.000 $28.250
September 30, 1996............................................... $29.125 $24.750
June 30, 1996.................................................... $26.000 $23.250
March 31, 1996................................................... $25.375 $22.875
December 31, 1995................................................ $24.500 $19.875
September 30, 1995............................................... $21.750 $19.125
June 30, 1995.................................................... $20.000 $16.750
March 31, 1995................................................... $20.875 $18.000
December 31, 1994................................................ $21.125 $17.750
September 30, 1994............................................... $22.125 $19.750
June 30, 1994.................................................... $22.625 $20.000
March 31, 1994 (from March 10, 1994)............................. $21.500 $20.000
</TABLE>
On March 7, 1997, the last reported sale price per share of common stock on
the New York Stock Exchange was $36.875. On March 7, 1997, there were 170
holders of record of the 20,441,010 outstanding shares of the Company's common
stock. This number of holders does not include persons whose shares are held of
record by a broker or clearing agency, but does include such brokerage house or
clearing agency as one record holder.
13
<PAGE> 16
Dividends declared per common share for 1996, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
PERIOD OR QUARTER ENDED DIVIDENDS
------------------------------------------------------------------- ---------
<S> <C>
December 31, 1996.................................................. $ .41
September 30, 1996................................................. $ .40
June 30, 1996...................................................... $ .40
March 31, 1996..................................................... $ .40
-----
Total 1996.................................................... $1.61
=====
December 31, 1995.................................................. $ .39
September 30, 1995................................................. $ .39
June 30, 1995...................................................... $ .39
March 31, 1995..................................................... $ .38
-----
Total 1995.................................................... $1.55
=====
December 31, 1994.................................................. $ .38
September 30, 1994................................................. $ .38
June 30, 1994 (from March 17, 1994)................................ $ .44
-----
Total 1994.................................................... $1.20
=====
</TABLE>
The following summarizes the tax components of the Company's common
dividends declared for the years ending December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
% OF COMMON DIVIDENDS
DECLARED FOR:
----------------------
TAX COMPONENT 1996 1995 1994
------------------------------------------------------ ---- ---- ----
<S> <C> <C> <C>
Ordinary income....................................... 81% 74% 66%
Capital gain.......................................... -- 12% --
Non-taxable return of capital......................... 19% 14% 34%
</TABLE>
All of the dividends declared on the Series A preferred stock for the years
ended December 31, 1996 and 1995 represented ordinary income for tax purposes.
All dividends declared for the Series B preferred stock for the year ended
December 31, 1996 represented ordinary income for tax purposes.
In addition to the foregoing dividends, in March 1994, prior to the Initial
Offering, the Company paid a distribution to shareholders in the aggregate
amount of $1 million in order to be certain that there were no earnings and
profits accumulated for a non-REIT year.
The Company currently expects to continue to pay a regular quarterly
distribution. Future distributions by the Company will be at the discretion of
the Board of Directors and there can be no assurance that any such distributions
will be made by the Company.
RECENT SALES OF UNREGISTERED SECURITIES
On July 12, 1996, the Company entered into an Agreement of Limited
Partnership of Bay Countrybrook L.P. (the "Partnership"), the general partner of
which is Bay GP, Inc., a wholly-owned subsidiary of the Company, for the purpose
of acquiring the Countrybrook community. In connection with the formation of the
Partnership, 298,577 units of limited partnership interests ("LP Units") were
issued to the existing partners of the contributor of the Countrybrook community
pursuant to an exemption from registration provided in Rule 506 of Regulation D
under the Securities Act of 1933, as amended (the "Securities Act"). Under the
terms of the limited partnership agreement, holders of LP Units have the right
to require the partnership to redeem their LP Units for cash, subject to certain
conditions. The Company may, however, elect to deliver an equivalent number of
shares of common stock to the holders of LP Units in satisfaction of the
Partnership's obligation to redeem the LP Units for cash. As of December 31,
1996, 3,812 LP Units have been redeemed by the Company in exchange for shares of
common stock pursuant to the exemption from registration provided in Rule 506 of
Regulation D under the Securities Act.
14
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are summary consolidated and combined financial and
operating data for the Company and the Greenbriar Group, the predecessor of the
Company, as of and for the periods indicated on a historical basis.
<TABLE>
<CAPTION>
THE GREENBRIAR GROUP
-----------------------------------------
YEAR ENDED YEAR ENDED MARCH 17 - JANUARY 1 - YEAR ENDED YEAR ENDED
(Dollars in thousands, except per DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 16, DECEMBER 31, DECEMBER 31,
share data) 1996 1995 1994 1994 1993 1992
------------ ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental............................ $ 80,377 $ 52,110 $ 31,073 $ 4,982 $ 23,728 $ 21,126
Other............................. 2,216 1,411 955 158 1,081 718
--------- -------- --------- ------- -------- --------
Total revenue....................... 82,593 53,521 32,028 5,140 24,809 21,844
--------- -------- --------- ------- -------- --------
Expenses:
Property operating(1)............. 18,924 12,452 7,001 1,429 5,173 5,089
Property taxes.................... 6,353 4,349 2,786 459 2,342 1,971
General and administrative........ 3,895 2,467 1,590 229 276 226
Management fees-affiliates........ -- -- -- 270 1,205 1,071
Interest and financing............ 14,276 11,472 4,782 2,358 10,932 11,738
Depreciation and amortization..... 18,689 13,714 8,366 1,111 5,328 4,953
--------- -------- --------- ------- -------- --------
Total expenses...................... 62,137 44,454 24,525 5,856 25,256 25,048
--------- -------- --------- ------- -------- --------
Income (loss) before minority
interest, gain on sale and
extraordinary item................ 20,456 9,067 7,503 (716) (447) (3,204)
Minority interest................... (319) (19) (17) -- -- --
--------- -------- --------- ------- -------- --------
Income (loss) from operations....... 20,137 9,048 7,486 (716) (447) (3,204)
Gain on sale........................ -- 2,412 -- -- -- --
--------- -------- --------- ------- -------- --------
Income (loss) before extraordinary
item.............................. 20,137 11,460 7,486 (716) (447) (3,204)
Extraordinary item.................. (511) -- -- -- -- --
--------- -------- --------- ------- -------- --------
Net income (loss)................... 19,626 11,460 7,486 (716) (447) (3,204)
Preferred dividend requirement...... (4,264) (917) -- -- -- --
--------- -------- --------- ------- -------- --------
Earnings available to common
shares............................ $ 15,362 $ 10,543 $ 7,486 $ (716) $ (447) $ (3,204)
========= ======== ========= ======= ======== ========
Earnings per common share:
Income before minority interest,
gain on sale and extraordinary
item............................ $ 1.07 $ .70 $ .65 $ -- $ -- $ --
Minority interest................. (.02) -- -- -- -- --
--------- -------- --------- ------- -------- --------
Income from operations............ 1.05 .70 .65 -- -- --
Gain on sale...................... -- .21 -- -- -- --
--------- -------- --------- ------- -------- --------
Income before extraordinary
item............................ 1.05 .91 .65 -- -- --
Extraordinary item................ (.03) -- -- -- -- --
--------- -------- --------- ------- -------- --------
Earnings available to common
shares.......................... $ 1.02 $ .91 $ .65 $ -- $ -- $ --
========= ======== ========= ======= ======== ========
Cash dividends declared per common
share............................. $ 1.61 $ 1.55 $ 1.20 $ -- $ -- $ --
========= ======== ========= ======= ======== ========
Cash dividends declared per
preferred share................... $ 1.66 $ .40 $ -- $ -- $ -- $ --
========= ======== ========= ======= ======== ========
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
THE GREENBRIAR GROUP
-----------------------------------------
YEAR ENDED YEAR ENDED MARCH 17 - JANUARY 1 - YEAR ENDED YEAR ENDED
(Dollars in thousands, except per DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 16, DECEMBER 31, DECEMBER 31,
unit data) 1996 1995 1994 1994 1993 1992
------------ ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Cash flows from:
Operating activities.............. $ 40,223 $ 22,598 $ 17,654 $ 647 $ 3,638 $ (369)
Investing activities.............. $ (216,999) $(87,247) $ (189,430) $(2,211) $ (1,643) $ (9,975)
Financing activities.............. $ 176,019 $ 61,628 $ 175,168 $ (446) $ (2,373) $ 8,567
EBITDA(2)........................... $ 53,421 $ 34,253 $ 20,651 $ 2,753 $ 15,813 $ 13,487
Funds from Operations(3)............ $ 38,819 $ 22,762 $ 15,852 $ 395 $ 4,881 $ 1,749
Funds from Operations -- revised
definition(4)..................... $ 38,293 $ 21,884 $ 15,430 $ 395 $ 4,881 $ 1,749
Total properties, end of period..... 34 25 19 10 10 10
Total apartment homes, end of
period............................ 8,754 6,450 4,844 2,396 2,396 2,396
Total apartment homes, weighted
average........................... 7,594 5,652 4,211 2,396 2,396 2,303
Average monthly rental revenue per
apartment home, end of period:
Original Communities(5)........... $ 1,057 $ 959 $ 913 $ 888 $ 886 $ 873
1994 Acquisition Communities(5)... $ 795 $ 752 $ 734 $ -- $ -- $ --
1995 Development Communities(5)... $ 1,310 $ 1,120 $ -- $ -- $ -- $ --
1995 Acquisition Communities(5)... $ 889 $ 845 $ -- $ -- $ -- $ --
1996 Acquisition Communities(5)... $ 1,017 $ -- $ -- $ -- $ -- $ --
1996 Development Community(5)..... $ 1,410 $ -- $ -- $ -- $ -- $ --
Average annual
occupancy -- stabilized
communities....................... 96.8% 95.8% 95.7% 96.1% 96.3% 95.7%
BALANCE SHEET DATA:
Operating real estate assets, before
accumulated depreciation.......... $ 699,402 $474,930 $ 346,584 $ -- $178,244 $177,606
Development real estate assets...... $ 50,945 $ 23,280 $ 51,749 $ -- $ 10,797 $ 9,792
Total assets........................ $ 711,909 $477,190 $ 390,016 $ -- $165,367 $164,418
Debt................................ $ 273,688 $227,801 $ 181,731 $ -- $168,796 $170,346
Debt-affiliates..................... $ -- $ -- $ -- $ -- $ 3,184 $ 1,148
Total liabilities................... $ 292,630 $239,607 $ 193,306 $ -- $176,585 $174,331
Minority interest................... $ 7,002 $ -- $ -- $ -- $ -- $ --
Shareholders' equity/owner's capital
(deficit)......................... $ 412,277 $237,583 $ 196,710 $ -- $(11,218) $ (9,913)
</TABLE>
- ---------------
(1) Property operating expenses are defined as property related repair and
maintenance expenses, utilities and on-site property management costs, and
exclude interest, depreciation and amortization.
(2) "EBITDA" represents earnings before interest, income taxes, depreciation,
amortization, and minority interest. This data is relevant to an
understanding of the economics of the multifamily apartment community
business as it indicates funds available from operations to service debt and
satisfy certain fixed obligations. EBITDA should not be construed by the
reader as a substitute for operating income as an indicator of the Company's
operating performance, or for cash flow from operating activities, as
determined in accordance with Generally Accepted Accounting Principles
("GAAP"), as a measure of liquidity.
(3) Industry analysts generally consider Funds from Operations to be an
appropriate measure of the performance of an equity REIT. Funds from
Operations is defined as net income (or loss) (computed in accordance with
GAAP), excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. Funds from Operations does
not represent cash generated from operating activities in accordance with
GAAP, and therefore, should not be considered as a substitute for net income
as a measure of results of
16
<PAGE> 19
operations or for cash flow from operations as a measure of liquidity. The
definition was revised for periods starting in 1996 (see note (4) below).
(4) Funds from Operations -- revised definition represents the definition of
Funds from Operations adopted in 1995 by the NAREIT Board of Governors and
excludes the add back for recurring amortization and depreciation on
non-real estate assets.
(5) The "Original Communities," "1994 Acquisition Communities," "1995
Development Communities," "1995 Acquisition Communities," "1996 Acquisition
Communities" and "1996 Development Community" are those listed beginning on
page 8.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements as a
result of, among other factors, the risk factors set forth in the Company's
filings with the Securities and Exchange Commission, changes in general economic
conditions and changes in the assumptions used in making such forward-looking
statements.
RESULTS OF OPERATIONS
The following discussion sets forth historical results of operations for
the Company and its predecessor, the Greenbriar Group. Increases in operating
results in 1996, 1995 and 1994 are due to the significant recapitalization upon
the Initial Offering on March 17, 1994, the 1995 Offering (defined below), the
1996 Offerings (defined below), the completion and lease-up of communities under
development and the purchase of apartment communities. The following table
outlines the communities acquired or leased-up during 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 ACQUISITION 1996 ACQUISITION
COMMUNITIES COMMUNITIES
- -------------------------------------------- --------------------------------------------
COMMUNITY DATE ACQUIRED COMMUNITY DATE ACQUIRED
- ------------------ ------------------ ---------------------- ------------------
<S> <C> <C> <C>
Larkspur Woods(a) March 17, 1994 Park Centre(c) May 15, 1996
Barrington Hills March 17, 1994 Parkside Commons May 15, 1996
Regatta Bay March 17, 1994 Sunset Towers May 22, 1996
Sommerset March 17, 1994 Countrybrook July 12, 1996
Hacienda Gardens March 17, 1994 Larkspur Canyon(c) July 19, 1996
Village Square June 30, 1994 The Fountains July 26, 1996
Reflections June 30, 1994 Mill Creek July 26, 1996
Blairmore July 20, 1994 Channing Heights August 7, 1996
Crossbrook October 19, 1994 Martinique Gardens(c) August 7, 1996
</TABLE>
<TABLE>
<CAPTION>
1995 ACQUISITION 1995 DEVELOPMENT
COMMUNITIES COMMUNITIES
- ------------------------------------------- --------------------------------------------
COMMUNITY DATE ACQUIRED COMMUNITY DATE STABILIZED(d)
- ----------------- ------------------ ---------------------- ------------------
<S> <C> <C> <C>
Sea Ridge(b) February 17, 1995 Carriage Square October, 1995(e)
Rivershore April 28, 1995 Canyon Creek December, 1995(f)
City Heights October 19, 1995
Promenade October 25, 1995
The Pointe December 12, 1995
</TABLE>
<TABLE>
<CAPTION>
1996 DEVELOPMENT
COMMUNITY
--------------------------------------------
COMMUNITY DATE STABILIZED(d)
---------------------- ------------------
<S> <C> <C> <C>
Rosewalk February, 1997(g)
</TABLE>
17
<PAGE> 20
The 1994 Acquisition Communities, the 1995 Development Communities, the
1995 Acquisition Communities, the 1996 Acquisition Communities and the 1996
Development Community are collectively termed the "Acquisition Communities".
- ---------------
(a) Sold on June 13, 1995.
(b) Under significant renovation commencing July, 1995 and completed in March,
1996.
(c) Under significant renovation as of December, 1996.
(d) Stabilized occupancy is defined as the first calendar month following
completion of construction in which the community has a physical occupancy
of at least 95%.
(e) Occupancy commenced in January, 1995 and operations stabilized in October,
1995.
(f) Occupancy commenced in April, 1995 and operations stabilized in December,
1995.
(g) Occupancy commenced in August, 1996 and operations stabilized in February,
1997.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31,
1995.
The Company's results of operations are summarized as follows for the years
ended 1996 and 1995 (Dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
-------------------
1996 1995 $--CHANGE %--CHANGE
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Rental......................................... $80,377 $52,110 $28,267 54.2 %
Other.......................................... 2,216 1,411 805 57.1 %
------- ------- ------- -------
Total revenue.......................... 82,593 53,521 29,072 54.3 %
------- ------- ------- -------
Expenses:
Property operating............................. 18,924 12,452 6,472 52.0 %
Property taxes................................. 6,353 4,349 2,004 46.1 %
General and administrative..................... 3,895 2,467 1,428 57.9 %
Interest and financing......................... 14,276 11,472 2,804 24.4 %
Depreciation and amortization.................. 18,689 13,714 4,975 36.3 %
------- ------- ------- -------
Total expenses......................... 62,137 44,454 17,683 39.8 %
------- ------- ------- -------
Income before minority interest, gain on sale and
extraordinary item............................. 20,456 9,067 11,389 125.6 %
Minority interest................................ (319) (19) (300) 1,578.9 %
------- ------- ------- -------
Income from operations........................... 20,137 9,048 11,089 122.6 %
Gain on sale..................................... -- 2,412 (2,412) (100.0 %)
------- ------- ------- -------
Income before extraordinary item................. 20,137 11,460 8,677 75.7 %
Extraordinary item............................... (511) -- (511) 100.0 %
------- ------- ------- -------
Net income....................................... $19,626 $11,460 $ 8,166 71.3 %
======= ======= ======= =======
</TABLE>
Revenue from rental property increased primarily as a result of the
addition of the Acquisition Communities. The 1995 Acquisition and Development
Communities represented $7,898 and $5,037, respectively, of the increase while
the 1996 Acquisition Communities and 1996 Development Community contributed
$11,266 and $789, respectively, to the increase. The remainder of the portfolio
increased rental revenue by $4,210, $3,664 of which was attributable to the
Original Communities and four of the 1994 Acquisition Communities (the "Same
Store" communities). Rental revenue decreased $933 due to the sale of the
Larkspur Woods Community in 1995.
18
<PAGE> 21
Other income increased during the year ended December 31, 1996 as compared
to the year ended December 31, 1995 due to additional miscellaneous income from
the Acquisition Communities.
Property operating expenses increased by $2,283, $473, $2,641 and $198 for
the 1995 Acquisition Communities, 1995 Development Communities, 1996 Acquisition
Communities and 1996 Development Community, respectively. The remainder of the
portfolio experienced an $877 increase in property operating expenses, $439 of
which was attributable to the Same Store communities. Property taxes increased
also due primarily to the Acquisition Communities.
General and administrative costs increased for the year ended December 31,
1996 as compared with the year ended December 31, 1995 due to the higher cost of
administrating 34% more units on an average basis for 1996. The 1996 and 1995
amounts are net of $2,275 and $738, respectively, of allocated indirect project
costs capitalized to the construction projects and acquisition communities,
representing approximately 37% and 23% of the total general and administrative
expense for the years ended December 31, 1996 and 1995, respectively.
Interest and financing expense increased for the year ended December 31,
1996 as compared to the year ended December 31, 1995 due to higher balances of
debt and related interest expense on the 1995 and 1996 Acquisition Communities
as well as the 1995 and 1996 Development Communities offset in part by a lower
overall cost of funds.
Depreciation and amortization expense increased due to the addition of the
1995 and 1996 Acquisition Communities, as well as the 1995 and 1996 Development
Communities.
The gain on sale represents the gain from the sale of Larkspur Woods in
June, 1995. There were no sales in the year ended December 31, 1996.
19
<PAGE> 22
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER 31,
1994 (INCLUDING THE GREENBRIAR GROUP'S RESULTS FOR THE PERIOD JANUARY 1, 1994 TO
MARCH 16, 1994).
The Company's results of operations are summarized as follows for the years
ended 1995 and 1994 (Dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
-------------------
1995 1994(1) $--CHANGE %--CHANGE
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Rental......................................... $52,110 $36,055 $16,055 44.5%
Other.......................................... 1,411 1,113 298 26.8%
------- ------- ------- ------
Total revenue.......................... 53,521 37,168 16,353 44.0%
------- ------- ------- ------
Expenses:
Property operating............................. 12,452 8,430 4,022 47.7%
Property taxes................................. 4,349 3,245 1,104 34.0%
General and administrative..................... 2,467 1,819 648 35.6%
Management fees-affiliates..................... -- 270 (270) (100.0%)
Interest and financing......................... 11,472 7,140 4,332 60.7%
Depreciation and amortization.................. 13,714 9,477 4,237 44.7%
------- ------- ------- ------
Total expenses......................... 44,454 30,381 14,073 46.3%
------- ------- ------- ------
Income before minority interest and gain on
sale........................................... 9,067 6,787 2,280 33.6%
Minority interest................................ (19) (17) (2) 11.8%
------- ------- ------- ------
Income from operations........................... $ 9,048 $ 6,770 $ 2,278 33.6%
Gain on sale..................................... 2,412 -- 2,412 100.0%
------- ------- ------- ------
Net income....................................... $11,460 $ 6,770 $ 4,690 69.3%
======= ======= ======= ======
</TABLE>
- ---------------
(1) Includes the results of the Greenbriar Group for the period January
1 - March 16, 1994.
Revenue from rental property increased primarily as a result of the
addition of the 1994 and 1995 Acquisition Communities.
Other income increased during the year ended December 31, 1995 as compared
to the year ended December 31, 1994 due to additional miscellaneous income from
the 1994 and 1995 Acquisition Communities in 1995 and offset in part by higher
interest income from the proceeds of the exercise of the underwriters' over-
allotment option in 1994.
Property operating expenses increased primarily as a result of the addition
of the 1994 and 1995 Acquisition Communities. Property taxes increased also due
primarily to the 1994 and 1995 Acquisition Communities.
General and administrative costs increased for the year ended December 31,
1995 as compared with the year ended December 31, 1994 due to the higher cost of
administrating 34% more units on an average basis for 1995 and a full year of
operations as a public company in 1995. The 1995 and 1994 amounts are net of
$738 and $354, respectively, of allocated indirect project costs capitalized to
construction projects and acquisition communities, representing approximately
23% and 18% of total general and administrative expense for the years ended
December 31, 1995 and 1994, respectively. In addition, management fees paid to
affiliates decreased to $0 for the year ended December 31, 1995 due to the
termination of the related affiliated services agreements in connection with the
Initial Offering.
Interest and financing expense increased for the year ended December 31,
1995 as compared to the year ended December 31, 1994 due to higher balances of
debt and related interest expense on the 1994 and 1995
20
<PAGE> 23
Acquisition Communities, offset in part by paying off or defeasing debt of
$79,940 as of March 17, 1994 which had a weighted average interest rate of
8.28%.
Depreciation and amortization expense increased due to the addition of the
1994 and 1995 Acquisition Communities, a full year in 1995 of amortization
related to non-recurring costs expended to reissue tax-exempt bonds in
connection with the Initial Offering and additional amortization from costs
incurred to increase the availability of credit lines in 1995.
The gain on sale represents the gain from the sale of Larkspur Woods in
June, 1995. There were no sales in the year ended December 31, 1994.
THE COMPANY'S RESULTS OF PROPERTY OPERATIONS (EARNINGS BEFORE INTEREST, TAXES,
DEPRECIATION AND AMORTIZATION -- "EBITDA") FOR THE "SAME STORE" COMMUNITIES(1)
IS SUMMARIZED BELOW FOR THE YEARS ENDED 1996 AND 1995:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
-------------------
(Dollars in thousands) 1996 1995 $--CHANGE %--CHANGE
------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue........................................ $38,584 $34,922 $3,662(2) 10.5%
Expenses....................................... 11,092 10,730 362(3) 3.4%
------- ------- ------ ------
EBITDA......................................... $27,492 $24,192 $3,300 13.6%
======= ======= ====== ======
</TABLE>
- ---------------
(1) Includes the Original Communities and four of the 1994 Acquisition
Communities comprising a total of 3,330 apartment homes. These apartment
communities include all those which were owned for all of 1995 and 1996 and
to which the Company made no major renovations after January 1, 1995.
(2) The increase in Same Store revenue is due to rental increases of $3,052,
vacancy reductions of $470, concession reductions of $163, offset in part by
an increase in bad debt of $23.
(3) The increase in Same Store expenses is primarily the result of a change in
the Company's capitalization policy with respect to repair and maintenance
expenses resulting in less capitalized expenditures in 1996, higher
management and administrative costs and the purchase of additional,
portfolio-wide earthquake insurance in July, 1996, offset in part by
reductions in marketing and advertising costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has considered its short-term liquidity needs and anticipates
that these needs will be fully funded from cash flows provided by operating
activities. The Company believes that its principal short-term liquidity needs
are to fund normal recurring expenses, debt service requirements and the
distributions required to maintain the Company's REIT qualification under the
Internal Revenue Code of 1986, as amended.
The Company expects to fund certain committed construction, acquisition and
rehabilitation projects with a combination of working capital and the Unsecured
Line of Credit (defined below). The Company intends to use available working
capital first and proceeds available under its Unsecured Line of Credit second.
At the Initial Offering, the Company obtained a $40 million acquisition
credit facility with General Electric Capital Corporation ("GECC") and a $20
million construction credit facility. The Company subsequently obtained a $26
million construction loan for the Carriage Square community and a $22.3 million
construction loan for the Canyon Creek community. In January, 1995, the Company
restructured its $40 million secured revolving credit facility with GECC,
increasing the availability to $80 million and reducing the borrowing cost from
the 30-day London Interbank Offered Rate ("LIBOR") plus 3.75% per annum to
30-day LIBOR plus 2.25% per annum. In December, 1995, the Company repaid the $26
million construction loan, which had an interest rate of LIBOR plus 2.25% per
annum, and replaced the $20 million construction credit facility, which also had
an interest rate of LIBOR plus 2.25% per annum, with a revolving credit facility
(the "Union Bank Credit Facility"). The Union Bank Credit Facility was a secured
$47 million line of credit for both acquisition and construction with an
interest rate of LIBOR plus 1.6% per annum. In December, 1995, the Company also
obtained a new construction loan for the Rosewalk community which
21
<PAGE> 24
provided for approximately $25.5 million of borrowing at an interest rate of
LIBOR plus 2.15% per annum. These facilities are collectively called the "Credit
Facilities".
In May, 1996, the Company replaced both its $80 million secured credit
facility and its $47 million secured credit facility with a three-year $150
million unsecured line of credit from Union Bank of Switzerland and other banks
(the "Unsecured Line of Credit"). In August, 1996, the Company expanded this
Unsecured Line of Credit to $200 million. The Company paid non-refundable fees
totaling $800,000 so that the lender would make the Unsecured Line of Credit
available for construction purposes. These fees have been capitalized against
the construction projects to which the line relates. The Unsecured Line of
Credit matures in May, 1999, and bears interest at a rate of LIBOR (based on a
maturity selected by the Company) plus 1.55% per annum.
In October, 1996, the Company paid down the amount outstanding on the $25.5
million construction loan for the Rosewalk community.
During 1995, the Company assumed $10.7 million in tax-exempt bonds in
connection with the purchase of the Rivershore apartment community. These bonds,
along with the bonds secured by the Barrington Hills and Crossbrook communities,
were re-issued in June, 1995. Additionally, new bonds were issued and secured by
the Canyon Creek and Sea Ridge communities, the proceeds of which were held in
escrow for the benefit of the bondholders until the funds were released in
December, 1995. Also during 1995, the Company purchased $20.8 million of
tax-exempt debt secured by the City Heights community and subsequently placed
the debt with an institutional investor.
In 1996, as part of the purchase of the Countrybrook community, the Company
assumed $20.3 million of the seller's tax-exempt bond debt secured by the
property. These tax-exempt bonds have an all-inclusive fixed interest rate of
7.87% through April, 2002 and the bonds mature in March, 2012. Also in 1996, the
Company assumed $7.6 million of tax-exempt bond debt as part of the purchase of
the Larkspur Canyon community. These bonds currently float in a seven-day put
bond mode with a variable interest rate (5.90% all-inclusive rate as of December
31, 1996) maturing in March, 2023.
As of December 31, 1996, the proceeds from the Unsecured Line of Credit
were used primarily for the acquisition, development and construction of the
three Current Development Communities and renovations on the 1996 Acquisition
Communities.
As a result of the above transactions, the weighted average interest rate
on the Company's debt decreased from 6.73% at December 31, 1995 to 6.35% at
December 31, 1996.
The Company's debt as of December 31, 1996 is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) BALANCE AVAILABLE MATURES RATE PROTECTION
-------- --------- ------------------ ------------- -------------------------
<S> <C> <C> <C> <C> <C>
Tax-exempt variable rate
under interest rate swap... $ 88,762 $ -- November, 2022 - 6.48%(a) Interest rate is
June, 2025 fixed until June, 2010.
Tax-exempt variable rate
under interest rate swap... 87,380 -- November, 2007 - 5.88%(b) Interest rate is
March, 2017 fixed until March, 2004.
Tax-exempt fixed rate........ 20,111 -- March, 2012 7.87%(c) Interest rate is
fixed until April, 2002.
Tax-exempt variable rate..... 20,800 -- March, 2018 6.50%(d)
Tax-exempt variable rate..... 7,635 -- March, 2023 5.90%(e)
-------- -------
Subtotal................. 224,688 --
$200,000 Line of credit(f)... 49,000 151,000 May, 1999 LIBOR + 1.55%
-------- -------
Total.................... $273,688 $151,000
======== =======
</TABLE>
- ---------------
(a) The 6.48% rate represents an all-in financing cost, including amortization
of deferred financing costs.
(b) The 5.88% rate excludes the amortization of financing costs paid by the
sponsor prior to the Initial Offering; if such costs were included, the
all-inclusive effective rate would be 6.30%.
22
<PAGE> 25
(c) The 7.87% rate represents an all-in financing cost, including amortization
of deferred financing costs.
(d) The 6.50% rate represents an all-in financing cost, including amortization
of all deferred financing costs. The Company has the right to repurchase
these bonds and currently plans to repurchase and reissue them on a
long-term fixed rate basis by August 15, 1997.
(e) The 5.90% rate represents an all-in financing cost, including amortization
of deferred financing costs. The debt floats in a seven-day put bond mode
with a current interest rate of 4.00%.
(f) Amounts drawn on the line of credit were used for development and
construction purposes.
In October, 1995, the Company issued 2,308,800 shares of Series A preferred
stock for a net amount of approximately $48.3 million (the "1995 Offering"). The
proceeds were used to purchase land for future construction, pay off and close a
construction loan and pay down debt on credit lines which were subsequently
drawn on to purchase apartment communities.
In May, 1996, the Company sold approximately $10 million of Series B
preferred stock and $40.5 million of common stock to a number of institutional
investors. The Company sold 1,248,191 shares of common stock in a direct
placement at a price of $24.44 per share, which reflected a 1% discount from the
average closing price of the common stock during the 10 trading days immediately
preceding May 2, 1996, the last trading day prior to the date on which the sale
was priced. The Company also sold 405,022 shares of Series B preferred stock
together with 413,223 shares of common stock in an underwritten offering at a
weighted average sales price of $24.44 per share. The net proceeds of these
sales, approximately $49.5 million, were used to acquire the Park Centre,
Parkside Commons and Sunset Towers communities and to repay borrowings under the
Credit Facilities. The holders of the Series B preferred stock are entitled to
receive a dividend equal to 103% of the dividend paid on the common stock. The
Series B preferred stock generally has no voting rights and, except in certain
limited circumstances, cannot be converted into common stock prior to October,
1998. Thereafter, the Series B preferred stock may be converted on a
share-for-share basis into shares of common stock, subject to certain ownership
limitations. In October, 2005, all outstanding shares of the Series B preferred
stock will be automatically converted into shares of common stock. The holders
of the Series B preferred stock have registration rights for the shares of
common stock issuable upon conversion of the Series B preferred stock. In
August, 1996, the Company sold in an underwritten public offering 5,750,000
shares of common stock (including 750,000 shares sold in connection with the
exercise of the underwriters' over-allotment option) at a price of $24.75 per
share. The net cash proceeds from the sale, approximately $134.0 million, were
used to purchase two apartment Communities, Channing Heights and Martinique
Gardens, and to repay borrowings under its Unsecured Line of Credit, including
amounts borrowed to purchase four apartment Communities acquired prior to the
closing of the August, 1996 offering (Countrybrook, Larkspur Canyon, The
Fountains and Mill Creek). This offering, together with the May, 1996 offerings
are collectively called the "1996 Offerings".
The Company anticipates that its cash flow and cash available from the
Unsecured Line of Credit, will be adequate to meet its liquidity requirements
for the foreseeable future. The Company anticipates that dividends will be paid
from Funds from Operations. For the year ended December 31, 1996, dividends were
77.2% of FFO-revised definition (defined below).
Net cash provided by operations for the year ended December 31, 1996
increased to $40.2 million from $22.6 million for the year ended December 31,
1995, principally due to higher net income before noncash charges for
depreciation and amortization from the addition of the 1995 and 1996 Acquisition
and Development Communities.
Net cash used for investing activities was $217.0 million and $87.2 million
for the years ended December 31, 1996 and 1995, respectively. This change
reflects the increased level of acquisition and refurbishment projects. The 1996
amount includes the use of stock offering proceeds to purchase the 1996
Acquisition Communities, the Rosewalk construction project and other
refurbishment projects. The 1995 amount is net of the proceeds from the sale of
the Larkspur Woods community.
Net cash provided by financing activities was $176.0 million and $61.6
million for the years ended December 31, 1996 and 1995, respectively. The net
cash provided from financing activities in 1996 is primarily
23
<PAGE> 26
from the net proceeds of the 1996 Offerings and net borrowings under the
Unsecured Line of Credit less dividends paid. The net cash provided from
financing activities in 1995 reflects primarily the net proceeds of the 1995
Offering and issuance of tax-exempt debt on the Canyon Creek, Sea Ridge and City
Heights communities less the paydowns on the Credit Facilities and dividends
paid.
INFLATION
Substantially all of the leases at the Company's apartment communities are
for a term of one year or less, which may enable the Company to counter the
adverse effects of inflation by increasing rents upon renewal of existing leases
or commencement of new leases. However, these short-term leases permit a
resident to leave at the end of the lease term at minimal or no cost to the
resident.
FUNDS FROM OPERATIONS
AND FUNDS AVAILABLE FOR DISTRIBUTION
Many industry analysts consider Funds from Operations an appropriate
measure of performance of an equity REIT. Funds from Operations ("FFO") as
defined by the National Association of Real Estate Investment Trusts ("NAREIT"),
means net income (or loss) (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. This definition was revised by
NAREIT effective for periods after 1995 to exclude the add back of non-real
estate depreciation and the amortization of recurring deferred financing costs
("FFO-revised definition"). The Company believes that in order to facilitate a
clear understanding of the historical operating results, FFO and FFO-revised
definition should be examined in conjunction with net income (loss) as presented
in the financial statements. FFO and FFO-revised definition should not be
considered as a substitute for net income (loss) as a measure of results of
operations or for cash flow from operations as a measure of liquidity.
For the year ended December 31, 1996, FFO-revised definition increased from
$21.9 million to $38.3 million. This increase is primarily due to higher net
income and depreciation add back due to the addition of the 1995 and 1996
Acquisition and Development Communities.
24
<PAGE> 27
Funds from Operations and Funds Available for Distribution for the years
ended December 31, 1996 and 1995, the period March 17 - December 31, 1994, the
period January 1 - March 16, 1994 and the year ended December 31, 1993 are
summarized as follows:
CALCULATION OF FUNDS FROM OPERATIONS AND FUNDS AVAILABLE FOR DISTRIBUTION
<TABLE>
<CAPTION>
THE GREENBRIAR GROUP
--------------------------
PERIOD PERIOD
YEAR ENDED YEAR ENDED MARCH 17- JANUARY 1- YEAR ENDED
(Dollars in thousands, except per DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 16, DECEMBER 31,
unit data) 1996 1995 1994 1994 1993
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss)................... $ 19,626 $ 11,460 $ 7,486 $ (716) $ (447)
Depreciation -- real estate
assets(1)......................... 17,800 12,319 7,480 1,111 5,328
Gain on sale........................ -- (2,412) -- -- --
Extraordinary item.................. 511 -- -- -- --
Non-recurring adjustments to net
income:
Amortization of nonrecurring
costs, primarily legal, from
the issuance of tax-exempt
bonds(2)....................... 356 517 464 -- --
----------- ----------- ----------- ----------- -------- ---
FFO-revised definition(3)........... 38,293 21,884 15,430 395 4,881
Recurring adjustments to net income:
Amortization of origination fees
on Credit Facilities(4)........ 159 609 246 -- --
Amortization of reincorporation
costs.......................... 13 -- -- -- --
Amortization of credit enhancement
costs(5)....................... 152 152 129 -- --
Depreciation -- non real estate
assets......................... 202 117 47 -- --
----------- ----------- ----------- ----------- -------- ---
FFO................................. 38,819 22,762 15,852 395 4,881
Capital improvements(6)............. (1,319) (693) (222) (314) (638)
Loan principal payments............. (480) (299) (90) (564) (1,550)
----------- ----------- ----------- ----------- -------- ---
Funds Available for Distribution
("FAD")........................... $ 37,020 $ 21,770 $ 15,540 $ (483) $ 2,693
----------- ----------- ----------- ----------- -------- ---
Weighted average shares
outstanding(7).................... 17,817,623 12,196,003 11,544,287 -- --
=========== =========== =========== =========== ===========
</TABLE>
- ---------------
(1) Amounts for periods prior to March 17, 1994 include all depreciation and
amortization.
(2) Represents the amortization of pre-1986 bond issuance costs carried forward
to the Company, under the pooling of interest method of accounting, and
costs associated with the reissuance of tax-exempt bonds incurred prior to
the Initial Offering in order to preserve the tax-exempt status of the bonds
at the Initial Offering.
(3) FFO before recurring adjustments to net income represents the revised
definition of FFO adopted by the NAREIT Board of Governors for periods after
1995.
(4) Represents origination fees and costs incurred at the initial setup of the
Credit Facilities. Such costs were amortized over the life of the respective
Credit Facilities. These Credit Facilities were closed in May, 1996 and the
unamortized loan fees were recorded as an extraordinary item.
(5) Represents origination fees and costs incurred at the initial setup of the
credit enhancements used for the issuance of tax-exempt bonds. Such costs
are amortized over the life of the respective credit enhancements.
25
<PAGE> 28
(6) Capital improvements represent amounts expended primarily at the Original
Communities and the 1994 Acquisition Communities. A breakdown of the
expenditures for 1996 is as follows:
<TABLE>
<CAPTION>
TOTAL PER UNIT
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Non-revenue generating:
Leasing pavilion rehabilitation...................... $ 367 $ 45
Exterior painting.................................... 247 30
Security gate system................................. 39 6
Fitness center equipment............................. 37 4
Parking area resurfacing............................. 36 4
Other capital expenditures........................... 348 50
------ ------
Subtotal -- capital expenditures............. 1,074 139
------ ------
Revenue generating:
Appliances........................................... 148 17
Fixtures............................................. 97 11
------ ------
Subtotal..................................... 245 28
------ ------
Total capital improvements............................. $ 1,319 $ 167
====== ======
</TABLE>
The Company, as a matter of policy, expenses any apartment-related
expenditure of less than $5. These normally include any expenditure related
to the interior of an apartment. The Company typically capitalizes
non-revenue generating expenditures such as those for new security gate
systems, leasing pavilion reconstruction and redecorating, roofing repair
and replacement, exterior siding repair and repainting and parking area
resurfacing. The Company also capitalizes revenue generating expenditures
and cashflow enhancing improvements such as those expended for construction
of new garages or installation of water conservation devices which almost
immediately and permanently either earn additional revenue or reduce
expenses. Appliances represent primarily the acquisition of washer/dryer
units for apartments which generate additional rental and other income.
Capitalized expenditures as described here exclude major reconstruction
costs incurred in conjunction with the acquisition and repositioning of
newly purchased apartment communities. Such costs are added to the purchase
price of those communities. The per unit calculation for the year is the
sum of the quarterly calculations which are based on the ending number of
units in the portfolio at the end of each quarter.
(7) The weighted average shares outstanding shown differs from the weighted
average shares outstanding for the purpose of calculating earnings per share
because the conversion of preferred stock is antidilutive for calculating
earnings per share, but dilutive for the purposes of calculating FFO per
share and FFO-revised definition per share.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included as a separate section of this Annual
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
26
<PAGE> 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information pertaining to directors and executive officers of the
Registrant is set forth under "Election of Directors -- Information Regarding
Nominees and Executive Officers" in the Registrant's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on April 25, 1997 and is
herein incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information pertaining to executive compensation is set forth under
"Election of Directors -- Executive Compensation" in the Registrant's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held on April 25,
1997 and is herein incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to security ownership of the Registrant's Common
Stock is set forth under "Election of Directors -- Principal Shareholders" in
the Registrant's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 25, 1997 and is herein incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information pertaining to certain relationships and related transactions is
set forth under "Certain Relationships and Related Transactions" in the
Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on April 25, 1997 and is herein incorporated by reference.
27
<PAGE> 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Report of Independent Accountants........................................ 33
Consolidated Balance Sheets at December 31, 1996 and 1995................ 34
Consolidated Statements of Operations for the year ended December 31,
1996, year ended December 31, 1995, period March 17, 1994 through
December 31, 1994, and period January 1, 1994 through March 16, 1994... 35
Consolidated Statements of Shareholders' Equity for the year ended
December 31, 1996, year ended December 31, 1995, period March 17, 1994
through December 31, 1994, and period January 1, 1994 through March 16,
1994................................................................... 36
Consolidated Statements of Cash Flows for the year ended December 31,
1996, year ended December 31, 1995, period March 17, 1994 through
December 31, 1994, and period January 1, 1994 through March 16, 1994... 37
Notes to Consolidated Financial Statements............................... 38
</TABLE>
2. Financial Statement Schedule
<TABLE>
<S> <C>
Schedule III: Real Estate Investments and Accumulated Depreciation at
December 31, 1996...................................................... 51
Note to Schedule III..................................................... 52
</TABLE>
3. Exhibits
Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------
<S> <C>
3(i).1 Amended and Restated Articles of Incorporation of the Company. (Incorporated by
reference to Exhibit 3(i).1 to Form 8-B of Bay Apartment Communities, Inc. dated
June 8, 1995.)
3(i).2 Forms of Articles Supplementary relating to the Series A Preferred Stock of the
Company. (Incorporated by reference to Exhibit 3(i).1 to Form 8-K of Bay
Apartment Communities, Inc. dated September 25, 1995.)
3(i).3 Articles Supplementary relating to the Series B Preferred Stock of the Company.
(Incorporated by reference to Exhibit 3(i).1 to Form 8-K of Bay Apartment
Communities, Inc. dated May 6, 1996.)
3(ii).1 Amended and Restated Bylaws of the Company. (Incorporated by reference to Exhibit
10.1 to Form 8-B of Bay Apartment Communities, Inc. dated June 8, 1995.)
4.1 Bay Apartment Communities, Inc. -- Dividend Reinvestment and Stock Purchase Plan
dated November 22, 1996. (Incorporated by reference to Form S-3 of Bay Apartment
Communities, Inc., File No. 333-16647.)
10.1 Interest Rate Swap Agreement. (Incorporated by reference to Exhibit 10.1 to Form
10-Q of Bay Apartment Communities, Inc. dated May 13, 1994.)
10.2 Registration Rights Agreement between the Company and certain stockholders.
(Incorporated by reference to Exhibit 10.2 to Form 10-Q of Bay Apartment
Communities, Inc. dated May 13, 1994.)
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------
<S> <C>
10.3 Employment Agreement between the Company and Gilbert M. Meyer. (Incorporated by
reference to Exhibit 10.3 to Form 10-Q of Bay Apartment Communities, Inc. dated
May 13, 1994.)
10.4 Employment Agreements between the Company and each of Geoffrey L. Baker and
Morton L. Newman. (Incorporated by reference to Exhibit 10.4 to Form 10-Q of Bay
Apartment Communities, Inc. dated May 13, 1994.)
10.5 Registration Rights Agreement, dated as of September 15, 1995, by and between the
Company and Purchaser. (Incorporated by reference to Exhibit 4.1 to Form 8-K of
Bay Apartment Communities, Inc. dated September 25, 1995.)
10.6 Indemnification Agreements between the Company and the Directors and Officers of
the Company. (Incorporated by reference to Exhibit 10.6 to Form 10-Q of Bay
Apartment Communities, Inc. dated May 13, 1994.)
10.7 Umbrella Agreement, among the Company, certain subsidiaries of the Company,
Citibank, N.A., as collateral agent, and Financial Guaranty Insurance Company.
(Incorporated by reference to Exhibit 10.7 to Form 10-Q of Bay Apartment
Communities, Inc. dated May 13, 1994.)
10.8 Cash Collateral Account, Security, Pledge and Assignment Agreement among the
Company, certain subsidiaries of the Company, Citibank, N.A., as collateral
agent, and Financial Guaranty Insurance Company. (Incorporated by reference to
Exhibit 10.8 to Form 10-Q of Bay Apartment Communities, Inc. dated May 13, 1994.)
10.9 Reimbursement Agreements among certain subsidiaries of the Company, Citibank,
N.A., as collateral agent, and Financial Guaranty Insurance Company.
(Incorporated by reference to Exhibit 10.9 to Form 10-Q of Bay Apartment
Communities, Inc. dated May 13, 1994.)
10.10 Guaranty Agreements by Bay Asset Group, Inc., a subsidiary of the Company, in
favor of Citibank, N.A., as collateral agent for Financial Guaranty Insurance
Company. (Incorporated by reference to Exhibit 10.10 to Form 10-Q of Bay
Apartment Communities, Inc. dated May 13, 1994.)
10.11 Limited Guaranty Agreements by certain subsidiaries of the Company in favor of
Citibank, N.A., as collateral agent, and Financial Guaranty Insurance Company.
(Incorporated by reference to Exhibit 10.11 to Form 10-Q of Bay Apartment
Communities, Inc. dated May 13, 1994.)
10.12 Pledge Agreement between Bay Asset Group, Inc., a subsidiary of the Company and
Citibank, N.A., as collateral agent for Financial Guaranty Insurance Company.
(Incorporated by reference to Exhibit 10.12 to Form 10-Q of Bay Apartment
Communities, Inc. dated May 13, 1994.)
10.13 First Deed of Trust and Security Agreement (Sommerset). (Incorporated by
reference to Exhibit 10.15 to Form 10-Q of Bay Apartment Communities, Inc. dated
May 13, 1994.)
10.14 First Deed of Trust and Security Agreement (Willow Creek). (Incorporated by
reference to Exhibit 10.16 to Form 10-Q of Bay Apartment Communities, Inc. dated
May 13, 1994.)
10.15 Office lease dated January 4, 1995. (Incorporated by reference to Exhibit 10.21
to Form 10-Q of Bay Apartment Communities, Inc. dated May 10, 1995.)
10.16 Agreement and Plan of Merger. (Incorporated by reference to Exhibit 10.22 to Form
10-Q of Bay Apartment Communities, Inc. dated August 11, 1995.)
10.17 Master Reimbursement Agreement. (Incorporated by reference to Exhibit 10.23 to
Form 10-Q of Bay Apartment Communities, Inc. dated August 11, 1995.)
10.18 ISDA Master Agreement (Interest rate swap agreement). (Incorporated by reference
to Exhibit 10.24 to Form 10-Q of Bay Apartment Communities, Inc. dated August 11,
1995.)
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------
<S> <C>
10.19 Cash Collateral Pledge, Security and Custody Agreement. (Incorporated by
reference to Exhibit 10.25 to Form 10-Q of Bay Apartment Communities, Inc. dated
August 11, 1995.)
10.20 Series A Preferred Stock Purchase Agreement, dated as of September 15, 1995, by
and between the Registrant and the Purchaser. (Incorporated by reference to
Exhibit 10.1 to Form 8-K of Bay Apartment Communities, Inc. dated September 25,
1995.)
10.21 Building loan agreement in the amount of $25,500,000 between the Company and
Union Bank. (Incorporated by reference to Exhibit 10.26 to Form 10-K of Bay
Apartment Communities, Inc. dated March 18, 1996.)
10.22 Credit agreement in the amount of $47,000,000 between the Company and Union Bank.
(Incorporated by reference to Exhibit 10.27 to Form 10-K of Bay Apartment
Communities, Inc. dated March 18, 1996.)
10.23 Employment Agreement between the Company and Max L. Gardner. (Incorporated by
reference to Exhibit 10.28 to Form 10-K of Bay Apartment Communities, Inc. dated
March 18, 1996.)
10.24 Series B Preferred Stock Purchase Agreement, dated as of May 6, 1996, by and
between the Company and PaineWebber Incorporated. (Incorporated by reference to
Exhibit 10.1 to Form 8-K of Bay Apartment Communities, Inc. dated May 6, 1996.)
10.25 Placement Agent Agreement, dated as of May 6, 1996, by and between the Company
and PaineWebber Incorporated. (Incorporated by reference to Exhibit 10.2 to Form
8-K of Bay Apartment Communities, Inc. dated May 6, 1996.)
10.26 Purchase and Sale Agreement and Escrow Instructions, dated as of March 22, 1996,
by and between K. Philip Hwang and C. Gemma Hwang and the Company. (Incorporated
by reference to Exhibit 10.1 to Form 8-K/A of Bay Apartment Communities, Inc.
dated May 23, 1996.)
10.27 Purchase and Sale Agreement and Escrow Instructions, dated as of April 24, 1996,
by and between TCR #706 Parkside Limited Partnership and the Company.
(Incorporated by reference to Exhibit 10.2 to Form 8-K/A of Bay Apartment
Communities, Inc. dated May 23, 1996.)
10.28 Purchase and Sale Agreement and Escrow Instructions, dated as of April 20, 1996,
by and between Consolidated Sunset Limited Partnership and the Company.
(Incorporated by reference to Exhibit 10.3 to Form 8-K/A of Bay Apartment
Communities, Inc. dated May 23, 1996.)
10.29 Revolving Loan Agreement, dated as of May 8, 1996, among the Company as Borrower,
Union Bank of Switzerland (New York Branch) as Co-Agent and Bank, and Union Bank
of Switzerland (New York Branch) as Administrative Agent. (Incorporated by
reference to Exhibit 10.4 to Form 8-K/A of Bay Apartment Communities, Inc. dated
May 23, 1996.)
10.30 Form of Agreement of Limited Partnership of Bay Countrybrook, L.P., by and among
Bay GP, Inc., the Company and certain other defined Persons. (Incorporated by
reference to Exhibit 10.5 to Form 8-K/A of Bay Apartment Communities, Inc. dated
May 23, 1996.)
10.31 Agreement to Contribute, dated as of March 27, 1996, by and between the
Countrybrook of Berryessa Associates and the Company. (Incorporated by reference
to Exhibit 10.6 to Form 8-K/A of Bay Apartment Communities, Inc. dated May 23,
1996.)
10.32 Employment Agreement, dated June 19, 1996, between the Company and Jeffrey B. Van
Horn. (Incorporated by reference to Exhibit 10.1 to Form 8-K of Bay Apartment
Communities, Inc. dated January 21, 1997.)
10.33 Promissory Note, dated July 26, 1996, between the Company and Jeffrey B. Van
Horn. (Incorporated by reference to Exhibit 10.2 to Form 8-K of Bay Apartment
Communities, Inc. dated January 21, 1997.)
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------
<S> <C>
10.34 First Amendment to Agreement to Contribute between Countrybrook of Berryessa
Associates and the Company, dated June 27, 1996.
10.35 Letter agreement dated August 30, 1996 amending the Revolving Loan Agreement,
dated May 8, 1996, among the Company as Borrower, Union Bank of Switzerland (New
York Branch) as Co-Agent and Bank, and Union Bank of Switzerland (New York
Branch) as Administrative Agent. (Incorporated by reference to Exhibit 10.1 to
Form 10-Q of Bay Apartment Communities, Inc. dated November 14, 1996.)
10.36 Bay Apartment Communities, Inc. -- 1994 Stock Incentive Plan, as amended and
restated. (Incorporated by reference to Exhibit 99.1 to Form S-8 of Bay Apartment
Communities, Inc. dated November 26, 1996, File No. 333-16809.)
10.37 Bay Apartment Communities, Inc. -- 1996 Non-Qualified Employee Stock Purchase
Plan dated November 26, 1996. (Incorporated by reference to Exhibit 99.1 to Form
S-3 of Bay Apartment Communities, Inc., File No. 333-16837.)
10.38 Bay Apartment Communities, Inc. -- 1996 Non-Qualified Employee Stock Purchase
Plan -- Plan Information Statement dated November 26, 1996. (Incorporated by
reference to Exhibit 99.2 to Form S-3 of Bay Apartment Communities, Inc., File
No. 333-16837.)
21.1 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
Form 8-K of the Company, dated July 26, 1996, relating to the acquisition
of four apartment communities: Mill Creek, The Fountains, Channing Heights and
Martinique Gardens. Substantially all of the purchase price for Mill Creek and
The Fountains was funded by drawing on the Company's $200 million unsecured line
of credit from Union Bank of Switzerland, and substantially all of the purchase
price for Channing Heights and Martinique Gardens was funded using the proceeds
from the Company's underwritten public offering of 5,750,000 shares of common
stock on August 5, 1996. This Form 8-K contained Financial Statements under Rule
3-14 of Regulation S-X, Financial Statements of Businesses Acquired and Pro
Forma Financial Statements, Pro Forma Financial Information.
31
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BAY APARTMENT COMMUNITIES, INC.
<TABLE>
<S> <C>
Date: March 21, 1997 /s/ Gilbert M. Meyer
------------------------
Gilbert M. Meyer
President and Chairman of the Board
Date: March 21, 1997 /s/ Jeffrey B. Van Horn
---------------------------
Jeffrey B. Van Horn
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date: March 21, 1997 /s/ Geoffrey L. Baker
-------------------------
Geoffrey L. Baker
Chief Development and Acquisition Officer and Director
Date: March 21, 1997 /s/ Bruce A. Choate
-----------------------
Bruce A. Choate, Director
Date: March 21, 1997 /s/ Max L. Gardner
-----------------------
Max L. Gardner
Chief Operating Officer and Director
Date: March 21, 1997 /s/ John J. Healy, Jr.
------------------------
John J. Healy, Jr., Director
Date: March 21, 1997 /s/ Brenda J. Mixson
------------------------
Brenda J. Mixson, Director
Date: March 21, 1997 /s/ Thomas H. Nielsen
--------------------------
Thomas H. Nielsen, Director
</TABLE>
32
<PAGE> 35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Bay Apartment Communities, Inc.
We have audited the accompanying consolidated balance sheets and the
financial statement schedule of Bay Apartment Communities, Inc. and its
subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 1996 and 1995 and the period from March 17, 1994 to December
31, 1994. We have also audited the combined statements of operations, owners'
capital (deficit) and cash flows of the Greenbriar Group for the period January
1, 1994 to March 16, 1994. These financial statements and the financial
statement schedule are the responsibility of the management of Bay Apartment
Communities, Inc. and the Greenbriar Group. Our responsibility is to express an
opinion on these financial statements and the financial statement 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 Bay Apartment
Communities, Inc. as of December 31, 1996 and 1995 and the consolidated results
of their operations and their cash flows for the years ended December 31, 1996
and 1995 and the period from March 17, 1994 to December 31, 1994, and the
combined results of the operations of the Greenbriar Group and its cash flows
for the period January 1, 1994 to March 16, 1994, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects,
the information required to be included therein.
Coopers & Lybrand L.L.P.
San Francisco, California
January 24, 1997
Except for Note 14, as to which the date is
March 7, 1997
33
<PAGE> 36
BAY APARTMENT COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
(Dollars in thousands, except per share data) 1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Real estate assets:
Land............................................................. $152,277 $ 97,334
Buildings and improvements....................................... 511,583 354,213
Furniture, fixtures and equipment................................ 35,542 23,383
-------- --------
699,402 474,930
Less accumulated depreciation.................................... (52,554) (34,552)
-------- --------
Operating real estate assets..................................... 646,848 440,378
Construction in progress......................................... 50,945 23,280
-------- --------
Net real estate assets........................................ 697,793 463,658
Cash and cash equivalents.......................................... 920 1,677
Restricted cash.................................................... 960 --
Other assets, net.................................................. 12,236 11,855
-------- --------
TOTAL ASSETS....................................................... $711,909 $477,190
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable...................................................... $273,688 $227,801
Accounts payable and accrued expenses.............................. 5,450 4,054
Dividends payable.................................................. 8,939 5,420
Other liabilities.................................................. 4,553 2,332
-------- --------
TOTAL LIABILITIES.................................................. 292,630 239,607
-------- --------
Contingencies (Note 8)............................................. -- --
-------- --------
Minority interest.................................................. 7,002 --
-------- --------
Shareholders' equity:
Preferred stock, $.01 par value; 25,000,000 shares authorized;
2,308,800 shares of Series A outstanding at both December 31,
1996 and December 31, 1995; 405,022 shares of Series B
outstanding at December 31, 1996 and no shares outstanding at
December 31, 1995................................................ 27 23
Common stock, $.01 par value; 40,000,000 shares authorized;
19,007,988 shares outstanding at December 31, 1996; 11,544,287
shares outstanding at December 31, 1995.......................... 190 115
Paid-in capital.................................................. 435,723 251,163
Dividends in excess of accumulated earnings...................... (23,663) (13,718)
-------- --------
TOTAL SHAREHOLDERS' EQUITY......................................... 412,277 237,583
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................... $711,909 $477,190
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE> 37
BAY APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THE GREENBRIAR
GROUP
--------------
PERIOD PERIOD
YEAR ENDED YEAR ENDED MARCH 17 - JANUARY 1 -
(Dollars in thousands, except per share DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 16,
data) 1996 1995 1994 1994
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Revenue:
Rental............................... $ 80,377 $ 52,110 $ 31,073 $4,982
Other................................ 2,216 1,411 955 158
------- ------- ------- ------
Total revenue................ 82,593 53,521 32,028 5,140
------- ------- ------- ------
Expenses:
Property operating................... 18,924 12,452 7,001 1,429
Property taxes....................... 6,353 4,349 2,786 459
General and administrative........... 3,895 2,467 1,590 229
Management fees-affiliates........... -- -- -- 270
Interest and financing............... 14,276 11,472 4,782 2,358
Depreciation and amortization........ 18,689 13,714 8,366 1,111
------- ------- ------- ------
Total expenses............... 62,137 44,454 24,525 5,856
------- ------- ------- ------
Income (loss) before minority interest,
gain on sale and extraordinary
item................................. 20,456 9,067 7,503 (716)
Minority interest...................... (319) (19) (17) --
------- ------- ------- ------
Income (loss) from operations.......... 20,137 9,048 7,486 (716)
Gain on sale........................... -- 2,412 -- --
------- ------- ------- ------
Income (loss) before extraordinary
item................................. 20,137 11,460 7,486 (716)
Extraordinary item..................... (511) -- -- --
------- ------- ------- ------
Net income (loss)...................... 19,626 11,460 7,486 (716)
Preferred dividend requirement......... (4,264) (917) -- --
------- ------- ------- ------
Earnings available to common shares.... $ 15,362 $ 10,543 $ 7,486 $ (716)
======= ======= ======= ======
Earnings per common share:
Income before minority interest, gain
on sale and extraordinary item.... $ 1.07 $ .70 $ .65 $ --
Minority interest.................... (.02) -- -- --
------- ------- ------- ------
Income from operations............... 1.05 .70 .65 --
Gain on sale......................... -- .21 -- --
------- ------- ------- ------
Income before extraordinary item..... 1.05 .91 .65 --
Extraordinary item................... (.03) -- -- --
------- ------- ------- ------
Earnings available to common
shares............................ $ 1.02 $ .91 $ .65 $ --
======= ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE> 38
BAY APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK DIVIDENDS
$.01 PAR VALUE $.01 PAR VALUE IN EXCESS
------------------ ------------------- OF OWNERS'
(Dollars in thousands, except per SHARES SHARES PAID-IN ACCUMULATED CAPITAL
share data) ISSUED AMOUNT ISSUED AMOUNT CAPITAL EARNINGS (DEFICIT) TOTAL
---------- ------ ----------- ------ -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1994*........... -- $ -- -- $ -- $ -- $ -- $(11,218) $(11,218)
Capital contributions*............. -- -- -- -- -- -- 572 572
Capital distributions*............. -- -- -- -- -- -- (1,000) (1,000)
Net (loss) January 1 - March 16,
1994*............................ -- -- -- -- -- -- (716) (716)
-------- --- --------- ---- -------- -------- -------- --------
Balance March 16, 1994* -- -- -- -- -- -- (12,362) (12,362)
Proceeds of Initial Offering, net
of underwriting discount and
offering costs of $17,797........ -- -- 10,889,742 109 199,889 -- -- 199,998
Adjustment to reflect the purchase
of outside partners' interest.... -- -- -- -- -- -- 15,441 15,441
Adjustment to reflect the carryover
basis for continuing investors... -- -- 654,545 6 3,073 -- (3,079) --
Net income March 17 - December 31,
1994............................. -- -- -- -- -- 7,486 -- 7,486
Dividends declared................. -- -- -- -- -- (13,853) -- (13,853)
-------- --- --------- ---- -------- -------- -------- --------
Balance December 31, 1994.......... -- -- 11,544,287 115 202,962 (6,367) -- 196,710
Issuance of Series A preferred
stock, net of issuance costs of
$966............................. 2,308,800 23 -- -- 48,246 -- -- 48,269
Net income year ended December 31,
1995............................. -- -- -- -- -- 11,460 -- 11,460
Minority interest.................. -- -- -- -- (45) -- -- (45)
Dividends declared................. -- -- -- -- -- (18,811) -- (18,811)
-------- --- --------- ---- -------- -------- -------- --------
Balance December 31, 1995.......... 2,308,800 23 11,544,287 115 251,163 (13,718) -- 237,583
Issuance of Series B preferred
stock, net of issuance costs of
$201............................. 405,022 4 -- -- 9,795 -- -- 9,799
May issuance of common stock, net
of issuance costs of $824........ -- -- 1,661,414 17 39,665 -- -- 39,682
August issuance of common stock,
net of underwriting discount and
offering costs of $8,286......... -- -- 5,750,000 58 133,968 -- -- 134,026
Exercise of stock options.......... -- -- 37,475 -- 744 -- -- 744
Restricted stock grants............ -- -- 11,000 -- -- -- -- --
Minority interest.................. -- -- -- -- 295 -- -- 295
Conversion of partnership units to
common stock..................... -- -- 3,812 -- 93 -- -- 93
Net income year ended December 31,
1996............................. -- -- -- -- -- 19,626 -- 19,626
Dividends declared................. -- -- -- -- -- (29,571) -- (29,571)
-------- --- --------- ---- -------- -------- -------- --------
Balance December 31, 1996.......... 2,713,822 $ 27 19,007,988 $190 $435,723 $ (23,663) $ -- $412,277
======== === ========= ==== ======== ======== ======== ========
</TABLE>
- ---------------
* The Greenbriar Group
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE> 39
BAY APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THE GREENBRIAR
GROUP
--------------
PERIOD PERIOD
YEAR ENDED YEAR ENDED MARCH 17 - JANUARY 1-
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 16,
(Dollars in thousands, except per share data) 1996 1995 1994 1994
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income (loss).................................................. $ 19,626 $ 11,460 $ 7,486 $ (716)
NONCASH EXPENSES INCLUDED IN NET INCOME (LOSS):
Depreciation and amortization...................................... 18,689 13,714 8,366 1,111
Minority interest.................................................. 319 19 17 --
Extraordinary item................................................. 511 -- -- --
Gain on sale....................................................... -- (2,412) -- --
CASH PROVIDED BY (USED FOR) OPERATING ASSETS AND LIABILITIES:
Restricted cash.................................................... (960) 1,000 150 575
Other assets....................................................... (1,579) (381) 2,252 (682)
Accounts payable and accrued expenses.............................. 1,396 (1,583) 1,426 (2,114)
Other liabilities.................................................. 2,221 781 (2,043) 2,473
--------- --------- --------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................ 40,223 22,598 17,654 647
--------- --------- --------- -------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Capital expenditures............................................... (1,319) (693) (222) (314)
Acquisition of properties.......................................... (144,052) (55,760) (122,697) --
Construction in progress........................................... (71,628) (48,281) (39,055) (1,897)
Proceeds from sale, net............................................ -- 17,487 -- --
Purchase of partnership interests from outside partners............ -- -- (27,456) --
--------- --------- --------- -------
NET CASH (USED FOR) INVESTING ACTIVITIES............................. (216,999) (87,247) (189,430) (2,211)
--------- --------- --------- -------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from stock offerings, net of issuance costs............... 183,507 48,269 199,998 --
Exercise of stock options.......................................... 744 -- -- --
Borrowings on notes payable........................................ -- 77,200 -- 2,688
Deferred financing costs paid...................................... -- (4,218) (3,655) (1,570)
Notes payable principal payments................................... (480) (299) (90) (564)
Payoff of mortgage and construction notes payable.................. (21) (40,010) (79,940) --
Borrowings on construction notes payable........................... 21 16,992 23,018 --
Borrowings on lines of credit...................................... 174,200 118,061 56,051 --
Repayments on lines of credit...................................... (155,700) (136,525) (10,687) --
Partner and minority interest distributions........................ (200) (64) (61) (1,000)
Dividends paid..................................................... (26,052) (17,778) (9,466) --
--------- --------- --------- -------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES................. 176,019 61,628 175,168 (446)
--------- --------- --------- -------
Increase (decrease) in cash and cash equivalents..................... (757) (3,021) 3,392 (2,010)
Cash and cash equivalents, beginning of period....................... 1,677 4,698 1,306 3,316
--------- --------- --------- -------
Cash and cash equivalents, end of period............................. $ 920 $ 1,677 $ 4,698 $ 1,306
========= ========= ========= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized)............................... $ 14,292 $ 11,042 $ 4,984 $ 1,964
========= ========= ========= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Noncash charge to reflect carryover of historical basis of
properties for continuing investors.............................. $ -- $ -- $ 15,441 $ --
========= ========= ========= =======
Noncash transfers of construction in progress...................... $ 43,963 $ 76,750 $ 8,506 $ --
========= ========= ========= =======
Assumption of notes payable by the Company......................... $ 27,868 $ 10,651 $ 22,459 $ --
========= ========= ========= =======
Contribution of minority interest.................................. $ 7,270 $ -- $ -- $ 572
========= ========= ========= =======
Dividends declared but not paid.................................... $ 8,939 $ 5,420 $ 4,387 $ --
========= ========= ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE> 40
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Organization, Initial Public Offering and Subsequent Offerings:
Bay Apartment Communities, Inc. and its wholly-owned partnerships and
subsidiaries (the "Company") was formed in 1978 to develop, lease and manage
upscale apartment communities. Before March 17, 1994, the Company was a part of
the Greenbriar Group which consisted of Bay Apartment Communities, Inc. and
certain affiliated entities. The Greenbriar Group included one land parcel held
for future development, 12 apartment communities transferred to the Company in
the reorganization transactions and the partnerships that held 11 of these
apartment communities. The Greenbriar Group became Bay Apartment Communities,
Inc. as a result of certain reorganization transactions in connection with the
sale of shares of common stock in an initial public offering. Also included in
this reorganization was the combination of building and management affiliates
into the Company. The Company is a self-administered and self-managed real
estate investment trust ("REIT") which acquires, builds, owns and manages
apartment communities primarily in Northern California. At December 31, 1996,
the Company owned 34 apartment communities, comprised of 8,754 apartment homes.
The Company's portfolio consisted of 31 apartment home communities in the San
Francisco Bay Area and Northern California, and three in Orange County.
On March 17, 1994, the Company completed its initial public offering of
10,889,742 shares of common stock, and received $199,998 in net proceeds (the
"Initial Offering"). The net proceeds were used to pay off mortgage debt,
purchase five apartment communities, purchase outside partners' partnership
interests, and pay debt origination costs (primarily legal fees). In October,
1995, the Company issued 2,308,800 shares of Series A preferred stock for a net
amount of approximately $48,269 (the "1995 Offering"). The proceeds were used to
purchase land for future construction, pay off and close a construction loan and
pay down debt on credit lines which were subsequently drawn on to purchase
apartment communities.
In May, 1996, the Company issued 1,248,191 shares of common stock in a
direct placement and 413,223 shares of common stock and 405,022 shares of Series
B preferred stock in an underwritten offering and received approximately $49,481
in net proceeds. The proceeds were used to purchase three communities, Park
Centre, Parkside Commons and Sunset Towers, and to repay borrowings on a secured
credit facility. The Company's secured credit facilities were subsequently
closed, resulting in the write-off of $511, representing unamortized loan and
non-use fees, which was recorded as an extraordinary item. On August 5, 1996,
the Company completed an underwritten public offering of 5,750,000 shares of
common stock and received $134,026 in net proceeds. The net proceeds were used
to purchase two apartment communities acquired after the closing of the
offering, Channing Heights and Martinique Gardens, and to repay amounts borrowed
under the Company's unsecured line of credit, including amounts borrowed to
purchase four apartment communities acquired prior to the closing of the
offering; Countrybrook, Larkspur Canyon (formerly Villa Marguerite), The
Fountains, and Mill Creek. This offering, together with the May, 1996 offerings
are collectively called the "1996 Offerings".
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company, and its wholly-owned partnerships and subsidiaries. The
accompanying consolidated financial statements also include the accounts of Bay
Countrybrook L.P., a Delaware limited partnership (the "Partnership"). The
general partner of the Partnership is a wholly-owned subsidiary of the Company,
Bay GP, Inc., a Maryland corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
38
<PAGE> 41
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Principles of Combination
The accompanying combined statements of operations and cash flows for the
period January 1 - March 16, 1994 of the Greenbriar Group have been presented as
a combination of entities under common control. All significant inter-entity
accounts and transactions have been eliminated in combination. The combined
financial statements include the historical operations and cash flows for the
Greenbriar Group from the date that each entity commenced operations.
Bay Countrybrook L.P.
In connection with the formation of the Partnership, 298,577 units of
limited partnership interests ("Units") were issued to the existing partners of
the contributor of the Countrybrook community. Under the terms of the limited
partnership agreement, holders of Units have the right to require the
Partnership to redeem their Units for cash, subject to certain conditions. The
Company may, however, elect to deliver an equivalent number of shares of common
stock to the holders of Units in satisfaction of the Partnership's obligation to
redeem the Units for cash. As of December 31, 1996, 3,812 Partnership Units have
been converted into the Company's common stock.
Operating Real Estate Assets
Subsequent to occupancy, significant expenditures, generally exceeding $5
in 1996 and $1 in 1995 and 1994, which improve or extend the life of the asset
are capitalized. The operating real estate assets are stated at cost and consist
of land, buildings and improvements, furniture, fixtures and equipment, and
other costs incurred during development and construction.
Apartment homes available for occupancy are generally leased on a one year
or less basis. Rental income and operating costs incurred during the initial
lease-up period are fully recognized as they accrue.
Capitalization of Costs During Development
Cost capitalization during development of constructed assets (including
interest and related loan fees, property taxes and other direct and indirect
costs) begins when active development commences and ends when the asset is
delivered and a certificate of occupancy is issued. Cost capitalization during
reconstruction of acquired assets (including interest and related loan fees,
property taxes and other direct and indirect costs) begins when apartment homes
are taken out of service for reconstruction and ends when the apartment home
reconstruction is completed and placed in service.
Depreciation
Depreciation is calculated on operating real estate assets using the
straight-line method over their estimated useful lives, which range from ten to
thirty years. Furniture, fixtures and equipment are generally depreciated using
the straight-line method over their estimated useful lives, which range from
five to seven years.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended, (the "Code") beginning with the tax year which ended
December 31, 1994. A corporate REIT is a legal entity which holds real estate
interests and through certain levels of payments of dividends to shareholders
and other criteria, is permitted to reduce or avoid the payment of federal and
state income taxes at the corporate level. As a result, the Company will not be
subject to federal and state income taxation at the corporate level if certain
requirements are met. Accordingly, no provision for federal and state income
taxes has been made.
39
<PAGE> 42
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
No provision for federal and state income taxes has been made in the
accompanying combined financial statements of the Greenbriar Group as the
entities which made up the Greenbriar Group were organized in legal forms that
require the individual owners to report their share of taxable profits or losses
on their individual tax returns.
The following summarizes the tax components of the Company's common
dividends declared for the years ending December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
% OF COMMON DIVIDENDS
DECLARED FOR:
--------------------------
TAX COMPONENT 1996 1995 1994
---------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Ordinary income..................................... 81% 74% 66%
Capital gain........................................ -- 12% --
Non-taxable return of capital....................... 19% 14% 34%
</TABLE>
All of the dividends declared on the Series A preferred stock for the years
ended December 31, 1996 and 1995 represented ordinary income for tax purposes.
All dividends declared for the Series B preferred stock for the year ended
December 31, 1996 represented ordinary income for tax purposes.
Deferred Financing Costs
Included in other assets, net are costs associated with obtaining debt
financing and credit enhancements. Such costs are being amortized over the term
of the associated debt or credit enhancement.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments with an
original maturity of three months or less from the date acquired. Interest
income amounted to $178 for the year ended December 31, 1996, $243 for the year
ended December 31, 1995, $311 for the period March 17, 1994 - December 31, 1994
and $40 for the period January 1, 1994 - March 16, 1994.
Restricted Cash
Restricted cash at December 31, 1996 consists of replacement reserves
related to the debt on the Barrington Hills, Crossbrook, Rivershore, Canyon
Creek and Sea Ridge communities.
Earnings per Common Share
Earnings per share with respect to the Company for the years ended December
31, 1996 and 1995 and the period March 17 - December 31, 1994 is computed based
upon the weighted average number of common shares outstanding during the period
plus (in periods where they have a dilutive effect) the net additional number of
shares which would be issuable upon the exercise of stock options assuming that
the Company used the proceeds received to repurchase outstanding shares at
market prices.
Additionally, other potentially dilutive securities, which may not qualify
as common stock equivalents, are considered when calculating earnings per share
on a primary and fully diluted basis. No such securities were outstanding during
the period March 17, 1994 - December 31, 1994 and the assumed conversion of such
securities in 1995 and 1996 results in an antidilutive effect; therefore,
earnings per share presentation on a primary and fully diluted basis is
unnecessary. The weighted average number of shares outstanding utilized in the
calculations are 15,126,242, 11,554,191 and 11,544,287 for the years ended
December 31, 1996 and 1995 and the period March 17 - December 31, 1994,
respectively. Earnings per share is net of the preferred stock dividend
requirement for the period, which were $4,264 and $917, for the years ended
December 31, 1996 and
40
<PAGE> 43
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1995, respectively. No preferred stock was outstanding during the period March
17 - December 31, 1994. Historical per share data with respect to periods ending
prior to the Initial Offering is not relevant since it is a presentation of the
combined operations of partnerships and S Corporations.
Use of Estimates
The preparation of 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 and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Concentration of Geographic Risk
Primarily all of the Company's apartment communities are located in
Northern California and most are located in the San Francisco Bay Area. This
geographic concentration could expose the Company to a significant loss should
one event affect the entire area such as an earthquake or other environmental
event.
Financial Instruments
The Company enters into interest rate swap agreements (the "Swap
Agreements"), with parties whose credit ratings by Standard and Poor's Ratings
Group are AAA to limit the Company's exposure should interest rates rise above
specified levels. The Swap Agreements are held for purposes other than trading.
The amortization of the cost of the Swap Agreements is included in amortization
expense. The remaining unamortized cost of the Swap Agreements is included in
"Other assets, net" on the balance sheet.
Accounting for Stock-based Compensation:
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for its
stock-based compensation plans.
2. INTEREST CAPITALIZED
Interest costs associated with projects under development or reconstruction
aggregating $2,567 and $3,641 for the years ended December 31, 1996 and 1995,
respectively, and $2,096 during the period March 17, 1994 to December 31, 1994
have been capitalized. There was no interest capitalized for the period January
1, 1994 to March 16, 1994.
3. OTHER ASSETS, NET
Deferred financing costs which are included in other assets, net aggregated
$10,185 and $11,373 at December 31, 1996 and 1995, respectively. Accumulated
amortization related to deferred financing costs aggregated $2,918 and $3,000 at
December 31, 1996 and 1995, respectively.
41
<PAGE> 44
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
4. NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
TAX-EXEMPT VARIABLE RATE UNDER INTEREST RATE SWAPS:
Foxchase (Phase I and II) and Fairway Glen are encumbered by
first deeds of trust which collateralize three housing bond
issues maturing November 1, 2007. The Company has entered
into an interest rate swap agreement with a financial
institution under which the interest rate is fixed until
March, 2004 at a total of 5.88%, interest only. The bonds
contain covenants which require 20% of the units to be leased
or held available for lease to low or moderate income
families. $ 35,980 $ 35,980
Waterford and Villa Mariposa are encumbered by first deeds of
trust which collateralize two housing bond issues. The
Company has entered into an interest rate swap agreement with
a financial institution under which the interest rate is
fixed until March, 2004 at a total of 5.88%, interest only.
Such bonds require monthly payments of interest only and
mature on August 1, 2014 and March 1, 2017, respectively. The
bonds contain covenants which require 20% of the units to be
leased or held available for lease to low or moderate income
families. 51,400 51,400
Barrington Hills is encumbered by a first deed of trust which
collateralizes housing bond issues maturing June 15, 2025,
fully amortizing over the term. The Company has entered into
an interest rate swap agreement under which the interest rate
is fixed until June, 2010 at an effective rate of 6.48%,
including the amortization of deferred financing costs. The
bonds contain covenants which require 20% of the units to be
leased or held available for lease to low or moderate income
families. 13,338 13,482
Crossbrook is encumbered by a first deed of trust which
collateralizes housing bond issues maturing June 15, 2025,
fully amortizing over the term. The Company has entered into
an interest rate swap agreement under which the interest rate
is fixed until June, 2010 at an effective rate of 6.48%,
including the amortization of deferred financing costs. The
bonds contain covenants which require 20% of the units to be
leased or held available for lease to low or moderate income
families. 8,579 8,667
Rivershore is encumbered by a first deed of trust which
collateralizes housing bond issues maturing November 15,
2022, fully amortizing over the term. The Company has entered
into an interest rate swap agreement under which the interest
rate is fixed until June, 2010 at an effective rate of 6.48%,
including the amortization of deferred financing costs. The
bonds contain covenants which require 20% of the units to be
leased or held available for lease to low or moderate income
families. 10,445 10,572
Canyon Creek is encumbered by a first deed of trust which
collateralizes housing bond issues maturing June 15, 2025,
fully amortizing over the term. The Company has entered into
an interest rate swap agreement under which the interest rate
is fixed until June, 2010 at an effective rate of 6.48%,
including the amortization of deferred financing costs. The
bonds contain convenants which require 20% of the units to be
leased or held available for lease to low income families. 38,800 38,800
</TABLE>
42
<PAGE> 45
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Sea Ridge is encumbered by a first deed of trust which
collateralizes housing bond issues maturing June 15, 2025,
fully amortizing over the term. The Company has entered into
an interest rate swap agreement under which the interest rate
is fixed until June, 2010 at an effective rate of 6.48%,
including the amortization of deferred financing costs. The
bonds contain convenants which require 20% of the units to be
leased or held available for lease to low income families. 17,600 17,600
-------- --------
Subtotal 176,142 176,501
-------- --------
TAX-EXEMPT FIXED RATE:
Countrybrook is encumbered by a first deed of trust which
collateralizes housing bond issues maturing March 1, 2012,
partially amortizing over the term. The interest rate on the
bonds is fixed until April, 2002 at an effective interest
rate of 7.87%, including the amortization of deferred
financing costs. The bonds contain covenants which require
20% of the units to be leased or held available for lease to
low or moderate income families. 20,111 --
-------- --------
Subtotal 20,111 --
-------- --------
TAX-EXEMPT VARIABLE RATE:
City Heights is encumbered by a first deed of trust which
collateralizes housing bond issues maturing March 1, 2018.
Interest only payments are required monthly at a variable
rate set weekly by the remarketing agent (6.50% and 6.81% at
December 31, 1996 and 1995, respectively, including the
amortization of deferred financing costs). The bonds contain
convenants which require 20% of the units to be leased or
held available for lease to low income families. The bonds
have been placed with an institutional investor who has the
right to require the Company to repurchase the bonds by
August 15, 1997. The Company has the current right to
repurchase the bonds at its option at which time the Company
plans to reissue the bonds. 20,800 20,800
Larkspur Canyon is encumbered by a first deed of trust which
collateralizes housing bond issues maturing March 1, 2023.
Interest only payments are required monthly at a variable
rate set weekly by the remarketing agent (5.90% at December
31, 1996 including the amortization of deferred financing
costs). The bond payments are secured by a $7,823 irrevocable
direct pay letter of credit. The bonds contain covenants
which require 20% of the units to be leased or held available
for lease to low or moderate income families. 7,635 --
-------- --------
Subtotal 28,435 20,800
CONSTRUCTION NOTE PAYABLE:
Construction note payable with an aggregate amount available
of $25,500 bearing interest at LIBOR plus 2.15%. This note
was collateralized by a first deed of trust on the Rosewalk
community. This note was paid down in October, 1996. -- --
-------- --------
Subtotal -- --
-------- --------
</TABLE>
43
<PAGE> 46
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
CREDIT LINES:
Line of credit with an aggregate amount available of $80,000
maturing December, 1996 and collateralized by the Sommerset
and Regatta Bay communities. This line bears interest at the
30-day LIBOR rate plus 2.25%. Interest only payments are
required monthly. Based on the assets pledged as collateral,
there was $18,062 available under this line at December 31,
1995. This line was closed in May, 1996. -- --
Line of credit with an aggregate amount available of $47,000
maturing December, 1997 and collateralized by the Hampton
Place and Carriage Square communities. This line bears
interest at the prime rate or various LIBOR rates plus 1.60%.
This line of credit was closed in May, 1996. -- 30,500
Unsecured line of credit with an aggregate amount available
of $200,000 maturing May, 1999. This line bears interest at
various LIBOR rates plus 1.55%. 49,000 --
-------- --------
Subtotal 49,000 30,500
-------- --------
Total Notes Payable $273,688 $227,801
======== ========
</TABLE>
Principal payments on outstanding notes payable as of December 31, 1996 are
due as follows:
<TABLE>
<S> <C>
1997.............................................. $ 21,831
1998.............................................. 1,395
1999.............................................. 50,499
2000.............................................. 1,611
2001.............................................. 1,732
Thereafter........................................ 196,620
--------
$273,688
========
</TABLE>
5. FINANCIAL INSTRUMENTS
The Company uses swap agreements to reduce the impact of interest rate
fluctuations. As of December 31, 1996, the Company had swap agreements as
follows:
- $87,380 in notional amount based on the actual rate of the underlying
bonds and maturing in March, 2004. The interest rate is fixed at 4.40%
with a total interest cost of 5.88%, exclusive of deferred financing
costs.
- $88,762 in notional amount based on the PSA Municipal Swap Index maturing
in June, 2010. The weighted average interest rate is 5.41%, with an
all-in interest cost of 6.48%. The interest rate index used in the
interest rate swap is not identical to the interest rate on the
underlying bonds; however, management believes that it is unlikely that
the rate on the underlying bonds will be significantly higher than the
index the swap is based on and that the swap effectively fixes the
interest rate.
The effect of the swap agreements is to fix $176,142 of the Company's debt
at an average interest rate of 6.18% with an average maturity of over 10 years.
The Company had an interest rate cap agreement on tax-exempt debt based on
the J.J. Kenny Index with a face amount of $13,620 that matured in March, 1996.
44
<PAGE> 47
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The off-balance-sheet risk in these contracts involves the risk of a
counterparty not performing under the terms of the contract. The counterparties
to these contracts are major financial institutions with AAA credit ratings by
Standard and Poor's. The Company monitors the credit ratings of counterparties
and the level of contracts entered into with any one party. Therefore, the
Company believes the likelihood of realizing material losses from counterparty
nonperformance is remote.
Cash and cash equivalent balances are held with various financial
institutions and may at times exceed the applicable Federal Deposit Insurance
Corporation limit. The Company monitors credit ratings of these financial
institutions and the concentration of cash and cash equivalent balances with any
one financial institution and believes the likelihood of realizing material
losses from the excess of cash and cash equivalent balances over insurance
limits is remote.
The following estimated fair values of financial instruments were
determined by management using available market information and appropriate
valuation methodologies. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize on disposition
of the financial instruments. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
- Cash equivalents, rents receivable, accounts payable and accrued
expenses, and other liabilities are carried at amounts which reasonably
approximate their fair values.
- Notes payable with an aggregate carrying value of $49,000 and $30,500 had
an estimated aggregate fair value of $49,000 and $30,500 at December 31,
1996 and 1995, respectively.
- Bond indebtedness with an aggregate carrying value of $224,688 and
$197,301 had an estimated aggregate fair value of $222,988 and $198,444
at December 31, 1996 and 1995, respectively. Estimated fair value of
these instruments is based on the market value of related financial
instruments as determined by outside parties at December 31, 1996 and
1995.
Disclosures about fair value of financial instruments are based on
pertinent information available to management as of December 31, 1996 and 1995.
Although management is not aware of any factors that would significantly effect
the reasonable fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates and
current estimates of fair value may differ significantly from the amounts
presented herein.
6. NONMONETARY TRANSACTIONS
In July, 1996, as part of the purchase of the Countrybrook community, the
Company assumed $20,233 of the seller's tax-exempt bond debt secured by the
property. These tax-exempt bonds have an all-inclusive fixed interest rate of
7.87% through April, 2002 and the bonds mature in March, 2012. Also in
connection with the purchase of the Countrybrook community, the Company paid the
seller approximately $7,270 by issuing 298,577 Units of a special purpose
limited partnership, Bay Countrybrook L.P., formed by the Company.
In July, 1996, the Company assumed $7,635 of tax-exempt bond debt as part
of the purchase of the Larkspur Canyon community. These bonds currently float in
a seven-day put bond mode with a variable interest rate (5.90% all-inclusive
rate as of December 31, 1996) maturing in March, 2023.
7. ISSUANCE OF STOCK
In October, 1995, the Company sold 2,308,800 shares of Series A preferred
stock for $21.325 per share and received net proceeds of $48,269. The shares
generally have no voting rights and pay a dividend of 103% of the dividend paid
on common stock. The dividend is cumulative to the extent declared. These shares
are not generally convertible into common shares until October, 1999;
thereafter, the conversion (on a share-for-share
45
<PAGE> 48
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
basis) may occur at the holder's discretion subject to certain limitations. All
the Series A preferred stock must be converted into common shares by October,
2006.
In May, 1996, the Company sold 405,022 shares of Series B preferred stock
for $24.69 per share and received net proceeds of $9,799. The Series B preferred
stock has substantially the same dividend, voting and conversion terms as the
Series A preferred stock. The holders of the Series B preferred stock have
registration rights for the shares of common stock issuable upon conversion of
the Series B preferred stock.
Also in May, 1996, the Company sold 1,248,191 shares of common stock in a
direct placement at a price of $24.44 per share, which reflected a 1% discount
from the average closing price of the common stock during the 10 trading days
immediately preceding May 2, 1996, the last trading day prior to the date on
which the sale was priced. The Company also sold 413,223 shares of common stock
(together with the 405,022 shares of Series B preferred stock described above)
in an underwritten offering at a price of $24.20 per share. The Company received
net proceeds of $39,682 from these offerings.
In August, 1996, the Company sold in an underwritten public offering
5,750,000 shares of common stock (including 750,000 shares sold in connection
with the exercise of the underwriters' over-allotment option) at a price of
$24.75 per share. The net cash proceeds from the sale, approximately $134,026,
were used to purchase two apartment communities, Channing Heights and Martinique
Gardens, and to repay borrowings under the Company's unsecured line of credit,
including amounts borrowed to purchase four apartment communities acquired prior
to the closing of the August, 1996 offering (Countrybrook, Larkspur Canyon, The
Fountains and Mill Creek).
In November, 1996, the Company established the Bay Apartment Communities,
Inc. Dividend Reinvestment and Stock Purchase Plan (the "Reinvestment Plan").
One million shares of common stock are reserved for issuance under the
Reinvestment Plan that provides a convenient and economical method by which
shareholders may increase their ownership of the Company's common stock without
generally paying brokerage commissions, fees or service charges.
All holders of record of shares of the Company's common stock and preferred
stock are eligible to participate in the Reinvestment Plan. As a participant in
the Reinvestment Plan, shareholders may elect:
- to have all or a portion of their cash dividends automatically reinvested
in additional shares of common stock;
- to invest optional cash payments in additional shares of common stock; or
- to both reinvest cash dividends and invest optional cash payments in
additional shares of common stock.
An important feature of the Reinvestment Plan is that shares of common
stock acquired with reinvested dividends or optional cash payments may be
purchased either directly from the Company or on the open market, as determined
by Bay's Board of Directors. Shares acquired directly from the Company will be
purchased at 97% of the closing price of the common stock on the New York Stock
Exchange on a date determined under the Reinvestment Plan. The purchase price
for shares acquired on the open market will be the weighted average price paid
by the Reinvestment Plan administrator for all shares purchased for participants
in the Reinvestment Plan on a date determined under the Reinvestment Plan. No
shares were issued under the Reinvestment Plan during 1996.
8. RELATED PARTY TRANSACTIONS
The Company shares office space and related administrative expenses with
certain affiliated entities. The Company has entered into an agreement with
these affiliates to share all costs not specifically identified.
46
<PAGE> 49
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Administrative expenses are allocated between the Company and the
affiliates in accordance with a formula based on an analysis of labor costs
incurred. Such costs charged to and collected from the affiliated entities were
$154 and $202 for the years ended December 31, 1996 and 1995, respectively, and
$286 in the period March 17 - December 31, 1994.
Prior to March 17, 1994, certain properties were managed by an affiliate of
the Greenbriar Group, for fees ranging from 3% to 6% of defined gross income.
These fees were terminated as a result of the Initial Offering.
9. CONTINGENCIES
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. These matters are generally covered by
insurance. While the resolution of these matters cannot be predicted with
certainty, management believes that the final outcome of such matters will not
have a material adverse effect on the financial position or results of
operations of the Company.
10. RENTAL EXPENSES
Rental expenses include amounts incurred for repair and maintenance
aggregating $3,510 and $2,121 for the years ended December 31, 1996 and 1995,
$1,277 for the period March 17, through December 31, 1994 and $436 for the
period January 1, through March 16, 1994.
11. STOCK INCENTIVE PLAN AND EMPLOYEE BENEFIT PLANS
The Company has established the Bay Apartment Communities, Inc. 1994 Stock
Incentive Plan, as amended and restated (the "1994 Stock Plan"), for the purpose
of encouraging and enabling the Company's officers, employees and directors to
acquire a proprietary interest in the Company. The 1994 Stock Plan provides for
administration by the Compensation Committee of the Board of Directors. A
maximum of 1,520,000 common shares have been reserved for issuance under the
1994 Stock Plan. The 1994 Stock Plan authorized (i) the grant of stock options
that qualify as incentive stock options under Section 422 of the Code, (ii) the
grant of stock options that do not so qualify and (iii) grants of shares
contingent upon the attainment of performance goals or subject to other
restrictions.
Options granted to date under the 1994 Stock Plan vest ratably over four
years for employees and after one year for non-employee directors. Restricted
shares granted to date to employees under the 1994 Stock Plan vest over five
years.
47
<PAGE> 50
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Activity in stock options are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES OPTION PRICE
---------------- ----------------
<S> <C> <C>
Issued............................................ 396,600 $18.00 - $20.50
Options cancelled................................. (28,400)
Options exercised................................. --
-------
Outstanding, December 31, 1994.................... 368,200
Issued............................................ 325,900 $18.38 - $20.00
Options cancelled................................. (130,350)
Options exercised................................. --
-------
Outstanding, December 31, 1995.................... 563,750
Issued............................................ 229,100 $23.38 - $27.75
Options cancelled................................. (32,500)
Options exercised................................. (37,475)
-------
Outstanding December 31, 1996..................... 722,875
=======
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------- ------------------------------
NUMBER OUTSTANDING WEIGHTED AVERAGE WEIGHTED WEIGHTED
AS OF REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------- ------------------ ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 18.000 -- -- $ 18.000 -- $ --
$ 18.375 90,000 8.33 18.375 22,500 18.375
$ 19.250 9,000 8.53 19.250 9,000 19.250
$ 19.625 80,850 8.64 19.625 20,213 19.625
$ 19.750 -- -- 19.750 -- --
$ 20.000 207,425 7.28 20.000 103,713 20.000
$ 20.000 100,000 8.94 20.000 25,000 20.000
$ 20.500 9,000 7.36 20.500 9,000 20.500
$ 23.375 55,000 9.16 23.375 -- --
$ 25.375 25,000 9.55 25.375 -- --
$ 25.375 20,000 9.42 25.375 -- --
$ 27.750 126,600 9.74 27.750 -- --
------- ---- ------- ------- -------
722,875 8.52 $ 21.700 189,426 $ 19.760
======= ==== ======= ======= =======
</TABLE>
At December 31, 1996 and 1995, there were 189,426 and 80,588, respectively,
options exercisable.
The number of shares available for granting options was 786,125 and 99,104
at December 31, 1996 and 1995, respectively.
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for its
plan. Accordingly, no compensation expense has been recognized for its
stock-based compensation plan. Had compensation cost for the Company's stock
option plan been determined based upon the fair value at the grant date for
awards under the plan consistent with the methodology prescribed under Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, the Company's net income and earnings per share would have been
reduced by approximately $325 or $.02 per share for the year ended December 31,
1996, and approximately $192 or
48
<PAGE> 51
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
$.01 per share for the year ended December 31, 1995. The fair value of the
options granted during 1996 is estimated as $2.23 to $3.59 per share on the date
of grant using the Black-Scholes option pricing model with the following
assumptions: dividend yield of 6.16% to 7.23%, volatility of 20.18%, risk free
interest rates of 5.18% to 6.67%, actual forfeitures, and an expected life of
approximately 4 years. The fair value of the options granted during 1995 is
estimated as $1.65 to $2.06 per share on the date of grant using the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 8.16% to 8.98%, volatility of 20.18%, risk free interest rates of 5.67%
to 7.34%, actual forfeitures, and an expected life of approximately 4 years.
Effective February 1, 1990, the Company implemented the Bay Apartment
Communities, Inc. Savings and Retirement Plan (the "401(k) Plan"), which is a
voluntary, defined contribution plan. All employees are eligible to participate
in the 401(k) Plan following completion of 30 days of continuous service with
the Company. Each participant may contribute on a pretax basis between 1% and
15% of such participant's compensation. The Company makes matching contributions
on the participant's behalf up to 25%, but not more than the lesser of 6% of the
participant's compensation or $1, of the participant's annual contribution. The
Company made contributions of approximately $68, $15 and $27 to the plan for the
years ended December 31, 1996, 1995 and 1994, respectively.
In October, 1996, the Company adopted the Bay Apartment Communities, Inc.
1996 Non-Qualified Employee Stock Purchase Plan (the "Plan"). One million shares
of common stock are reserved for issuance under the plan. The primary purpose of
the Plan is to encourage common stock ownership by eligible directors and
employees (i.e., "Participants") in the belief that such ownership will increase
each Participant's interest in the success of the Company. Generally,
Participants may elect to participate in the Plan at six month periods beginning
each January 1 and July 1. Participation in the Plan entitles each Participant
to purchase common stock at a price which is equal to the lesser of 85% of the
closing price for a share of stock on the first day of such period or 85% of the
closing price on the last day of such period. No shares were issued under the
Plan during 1996.
12. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma financial information has been prepared
as if the 1995 Offering, the 1996 Offerings, the acquisition of apartment
communities in 1995 and 1996, the sale of the apartment community in 1995, and
the related financing activity had occurred on January 1, 1995. Unaudited pro
forma financial information is presented for informational purposes only and may
not be indicative of the actual results of operations of the Company had the
events occurred as of January 1, 1995, nor does it purport to represent the
results of operations for future periods. The effect of the gain on sale of real
estate and extraordinary item recognized in the Company's historical financial
statements is not included in the pro forma financial and operating data.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Revenue.................................... $ 94,220 $ 83,134
Earnings available to common shares........ $ 24,892 $ 20,467
Earnings available per common share........ $ 1.07 $ .84
Common shares outstanding.................. 19,007,988 19,007,988
</TABLE>
49
<PAGE> 52
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. QUARTERLY FINANCIAL INFORMATION STATEMENTS (UNAUDITED)
Quarterly financial information for the years ended December 31, 1996, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue............................. $16,472 $18,393 $23,050 $24,675
Income before extraordinary item.... $ 3,195 $ 4,083 $ 5,845 $ 7,014
Extraordinary item.................. $ -- $ (511) $ -- $ --
Net income.......................... $ 3,195 $ 3,572 $ 5,845 $ 7,014
Earnings per common share........... $ .19 $ .20 $ .28 $ .31
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue............................. $11,850 $12,847 $13,624 $15,200
Income from operations.............. $ 1,920 $ 2,007 $ 2,121 $ 3,000
Gain on sale........................ $ -- $ 2,412 $ -- $ --
Net income.......................... $ 1,920 $ 4,419 $ 2,121 $ 3,000
Earnings per common share........... $ .17 $ .38 $ .18 $ .18
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
-------------------------------------------
FIRST* SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue............................. $ 6,635 $ 8,990 $10,516 $11,027
Net income (loss)................... $ (320) $ 2,380 $ 2,296 $ 2,414
Earnings per common share........... N/A $ .21 $ .20 $ .21
</TABLE>
- ---------------
* Includes results of the Greenbriar Group from January 1 - March 16, 1994.
14. SUBSEQUENT EVENTS
In January, 1997, the Company purchased the Rancho Penasquitos apartment
community for $10,782. The community contains 176 apartment homes and is located
in San Diego, California.
Also in January, 1997, the Company sold in an underwritten public offering
1,400,000 shares of common stock at a price of $37.125 per share. The net
proceeds to the Company, after all anticipated issuance costs, were
approximately $49,271. The net proceeds were used to repay borrowings under the
Company's unsecured line of credit, which were used to fund the acquisition and
development of additional apartment communities, including the Rancho
Penasquitos acquisition.
Construction on the Rosewalk community was completed during January, 1997
and operations at the community were stabilized during February, 1997.
In February, 1997, the Company acquired the 7.44 acre site on The Alameda
for $4,952. The Company is also under contract to purchase a 1.43 acre parcel
adjacent to this site for $1,500. Upon the purchase of this adjacent site, the
Company plans to build a development, Paseo Alameda, comprising 305 apartment
homes and approximately 15,000 square feet of retail space.
As of March 7, 1997, the Company had issued an additional 6,099 shares of
common stock and cash in the amount of $28 to Limited Partners of Bay
Countrybrook L.P. who had requested redemption of their 6,861 partnership units.
50
<PAGE> 53
SCHEDULE III
BAY APARTMENT COMMUNITIES, INC.
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF
INITIAL COSTS COSTS PERIOD
------------------------------------ CAPITALIZED ------------------------
FURNITURE SUBSEQUENT
RELATED BUILDING AND AND TO BUILDING AND
APARTMENTS ENCUMBRANCES LAND IMPROVEMENTS FIXTURES ACQUISITION LAND IMPROVEMENTS
- --------------------------------- ------------ -------- ------------ -------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fairway Glen, San Jose........... $ 9,580 $ 2,159 $ 6,125 $ 367 $ 408 $ 2,209 $ 6,339
Foxchase, San Jose............... 26,400 7,019 17,975 1,129 3,419 7,609 20,328
Glen Creek, Morgan Hill(a)....... -- 1,671 7,425 359 523 1,738 7,774
San Marino, San Jose(a).......... -- 2,415 12,117 626 4,701 3,068 15,827
Villa Mariposa, Mountain View.... 18,300 4,518 11,831 864 4,262 5,288 14,827
Waterford, Hayward............... 33,100 6,785 25,838 1,729 7,467 8,116 31,157
Willow Creek, Fremont(a)......... -- 2,098 9,333 568 5,675 3,131 13,909
Alicante, Fremont(a)............. -- 2,540 13,130 328 (160) 2,542 12,945
Hampton Place, Fremont........... -- 7,427 28,269 1,044 (644) 7,427 27,609
Barrington Hills, Hayward........ 13,338 3,046 11,646 805 147 3,046 11,700
Regatta Bay, Foster City......... -- 4,182 15,255 1,050 3,044 4,182 18,097
Sommerset, Vacaville............. -- 1,337 5,087 337 20 1,337 5,102
Hacienda Gardens,
Pleasanton(a)................... -- 6,991 25,439 1,758 440 6,991 25,752
Village Square, San
Francisco(a).................... -- 3,827 8,312 613 243 3,827 8,515
Reflections, Fresno(a)........... -- 2,595 14,813 916 1,295 2,595 16,058
Blairmore, Rancho Cordova(a)..... -- 1,983 7,110 479 961 1,983 7,947
Crossbrook, Rohnert Park......... 8,579 3,280 9,049 642 888 3,280 9,854
Carriage Square, San Jose........ -- 8,913 26,638 1,151 236 8,913 26,864
Canyon Creek, Campbell........... 38,800 6,096 28,137 1,446 106 6,096 28,235
Sea Ridge, Pacifica.............. 17,600 2,942 13,753 899 180 2,942 13,863
Rivershore, Bay Point............ 10,445 3,152 9,479 668 986 3,152 10,212
City Heights, San Francisco...... 20,800 2,389 12,636 757 679 2,389 13,310
Promenade, Sunnyvale............. -- 5,372 11,967 878 780 5,372 12,743
The Pointe, Fairfield............ -- 3,058 14,136 870 407 3,057 14,541
Park Centre, Union City.......... -- 2,716 8,147 549 1,441 2,716 9,586
Parkside Commons, Sunnyvale...... -- 10,684 13,598 1,228 37 10,684 13,635
Larkspur Canyon, Mission Viejo... 7,635 2,889 6,740 487 (63) 2,889 6,677
Sunset Towers, San Francisco..... -- 3,561 19,623 1,173 283 3,561 19,902
Rosewalk, San Jose............... -- -- -- -- 18,562 -- 17,909
Countrybrook, San Jose........... 20,111 10,967 16,451 1,387 715 11,027 17,090
Fountains, San Jose.............. -- 9,026 17,521 1,343 101 9,026 17,614
Mill Creek, Costa Mesa........... -- 4,165 12,496 843 233 4,165 12,727
Channing Heights, San Rafael..... -- 3,494 20,198 1,178 256 3,494 20,452
Martinique Gardens, Costa Mesa... -- 4,402 2,698 359 (189) 4,425 2,483
Miscellaneous investments........ -- -- -- 729 1,733 -- --
Construction in progress......... -- -- -- -- -- -- --
-------- -------- -------- ------- ------- -------- --------
$224,688 $147,699 $462,972 $ 29,559 $59,172 $152,277 $511,583
======== ======== ======== ======= ======= ======== ========
<CAPTION>
FURNITURE
AND ACCUMULATED CONSTRUCTION DATE DEPRECIABLE
APARTMENTS FIXTURES TOTAL DEPRECIATION COMPLETION ACQUIRED LIVES YEARS
- --------------------------------- -------- -------- ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Fairway Glen, San Jose........... $ 511 $ 9,059 $ (650) 1986 1986 5-30 Years
Foxchase, San Jose............... 1,605 29,542 (2,621) 1986/87 1986/87 5-30 Years
Glen Creek, Morgan Hill(a)....... 466 9,978 (1,836) 1989 1989 5-30 Years
San Marino, San Jose(a).......... 964 19,859 (1,735) 1984/88 1984/88 5-30 Years
Villa Mariposa, Mountain View.... 1,360 21,475 (3,867) 1986 1986 5-30 Years
Waterford, Hayward............... 2,546 41,819 (9,346) 1985/86 1985/86 5-30 Years
Willow Creek, Fremont(a)......... 634 17,674 (2,965) 1985 1985 5-30 Years
Alicante, Fremont(a)............. 351 15,838 (2,711) 1992 1992 5-30 Years
Hampton Place, Fremont........... 1,060 36,096 (5,399) 1992 1992 5-30 Years
Barrington Hills, Hayward........ 898 15,644 (1,422) 1986 1994 5-30 Years
Regatta Bay, Foster City......... 1,252 23,531 (1,953) 1973 1994 5-30 Years
Sommerset, Vacaville............. 342 6,781 (618) 1987 1994 5-30 Years
Hacienda Gardens,
Pleasanton(a)................... 1,885 34,628 (3,086) 1988 1994 5-30 Years
Village Square, San
Francisco(a).................... 653 12,995 (921) 1972 1994 5-30 Years
Reflections, Fresno(a)........... 966 19,619 (1,590) 1990 1994 5-30 Years
Blairmore, Rancho Cordova(a)..... 603 10,533 (778) 1986 1994 5-30 Years
Crossbrook, Rohnert Park......... 725 13,859 (896) 1986 1994 5-30 Years
Carriage Square, San Jose........ 1,161 36,938 (1,767) 1995 1995 5-30 Years
Canyon Creek, Campbell........... 1,454 35,785 (1,542) 1995 1995 5-30 Years
Sea Ridge, Pacifica.............. 969 17,774 (722) 1971 1995 5-30 Years
Rivershore, Bay Point............ 921 14,285 (719) 1986 1995 5-30 Years
City Heights, San Francisco...... 762 16,461 (623) 1990 1995 5-30 Years
Promenade, Sunnyvale............. 882 18,997 (617) 1987 1995 5-30 Years
The Pointe, Fairfield............ 873 18,471 (602) 1991 1995 5-30 Years
Park Centre, Union City.......... 551 12,853 (215) 1973 1996 5-30 Years
Parkside Commons, Sunnyvale...... 1,228 25,547 (395) 1991 1996 5-30 Years
Larkspur Canyon, Mission Viejo... 487 10,053 (117) 1984 1996 5-30 Years
Sunset Towers, San Francisco..... 1,177 24,640 (501) 1961 1996 5-30 Years
Rosewalk, San Jose............... 653 18,562 (122) 1997 1997 5-30 Years
Countrybrook, San Jose........... 1,403 29,520 (357) 1985 1996 5-30 Years
Fountains, San Jose.............. 1,351 27,991 (337) 1990 1996 5-30 Years
Mill Creek, Costa Mesa........... 845 17,737 (234) 1973 1996 5-30 Years
Channing Heights, San Rafael..... 1,180 25,126 (340) 1973 1996 5-30 Years
Martinique Gardens, Costa Mesa... 362 7,270 (58) 1956 1996 5-30 Years
Miscellaneous investments........ 2,462 2,462 (892) 1989-96 1989-96 5-7 Years
Construction in progress......... -- 50,945 -- N/A N/A N/A
------- -------- -------
$ 35,542 $750,347 $(52,554)
======= ======== =======
</TABLE>
- ---------------
(a) Pledged as collateral to guarantor of tax-exempt bonds.
51
<PAGE> 54
BAY APARTMENT COMMUNITIES, INC.
NOTE TO SCHEDULE III
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
1. RECONCILIATION OF REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION:
The following table reconciles real estate assets and accumulated
depreciation from January 1, 1994 to December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Real estate assets:
Balance at beginning of year......................... $498,210 $398,333 $189,041*
Sale of Larkspur Woods............................... -- (15,508) --
Improvements and acquisitions for year............... 252,137 115,385 --
Improvements January 1 - March 16, 1994.............. -- -- 2,211*
Purchase of partnership interests from outside
partners.......................................... -- -- 21,823
Improvements and acquisitions March 17 - December 31,
1994.............................................. -- -- 185,258
-------- -------- --------
Balance at end of year............................... $750,347 $498,210 $398,333
======== ======== ========
Accumulated depreciation:
Balance at beginning of year......................... $ 34,552 $ 22,550 $ 34,825*
Sale of Larkspur Woods............................... -- (434) --
Depreciation for year................................ 18,002 12,436 --
Depreciation January 1 - March 16, 1994.............. -- -- 1,075*
Depreciation March 17 - December 31, 1994............ -- -- 7,527
Charge to reflect carryover of historical basis of
properties for continuing investors............... -- -- (15,441)
Charge to reflect carryover basis of those partners
with positive capital accounts.................... -- -- (5,436)
-------- -------- --------
Balance at end of year............................... $ 52,554 $ 34,552 $ 22,550
======== ======== ========
</TABLE>
- ---------------
* The Greenbriar Group
52
<PAGE> 55
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- -----------
<S> <C> <C>
3(i).1 Amended and Restated Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3(i).1 to Form 8-B of Bay Apartment
Communities, Inc. dated June 8, 1995.)
3(i).2 Forms of Articles Supplementary relating to the Series A Preferred Stock
of the Company. (Incorporated by reference to Exhibit 3(i).1 to Form 8-K
of Bay Apartment Communities, Inc. dated September 25, 1995.)
3(i).3 Articles Supplementary relating to the Series B Preferred Stock of the
Company. (Incorporated by reference to Exhibit 3(i).1 to Form 8-K of Bay
Apartment Communities, Inc. dated May 6, 1996.)
3(ii).1 Amended and Restated Bylaws of the Company. (Incorporated by reference to
Exhibit 10.1 to Form 8-B of Bay Apartment Communities, Inc. dated June 8,
1995.)
4.1 Bay Apartment Communities, Inc. -- Dividend Reinvestment and Stock
Purchase Plan dated November 22, 1996. (Incorporated by reference to Form
S-3 of Bay Apartment Communities, Inc., File No. 333-16647.)
10.1 Interest Rate Swap Agreement. (Incorporated by reference to Exhibit 10.1
to Form 10-Q of Bay Apartment Communities, Inc. dated May 13, 1994.)
10.2 Registration Rights Agreement between the Company and certain
stockholders. (Incorporated by reference to Exhibit 10.2 to Form 10-Q of
Bay Apartment Communities, Inc. dated May 13, 1994.)
10.3 Employment Agreement between the Company and Gilbert M. Meyer.
(Incorporated by reference to Exhibit 10.3 to Form 10-Q of Bay Apartment
Communities, Inc. dated May 13, 1994.)
10.4 Employment Agreements between the Company and each of Geoffrey L. Baker
and Morton L. Newman. (Incorporated by reference to Exhibit 10.4 to Form
10-Q of Bay Apartment Communities, Inc. dated May 13, 1994.)
10.5 Registration Rights Agreement, dated as of September 15, 1995, by and
between the Company and Purchaser. (Incorporated by reference to Exhibit
4.1 to Form 8-K of Bay Apartment Communities, Inc. dated September 25,
1995.)
10.6 Indemnification Agreements between the Company and the Directors and
Officers of the Company. (Incorporated by reference to Exhibit 10.6 to
Form 10-Q of Bay Apartment Communities, Inc. dated May 13, 1994.)
10.7 Umbrella Agreement, among the Company, certain subsidiaries of the
Company, Citibank, N.A., as collateral agent, and Financial Guaranty
Insurance Company. (Incorporated by reference to Exhibit 10.7 to Form 10-Q
of Bay Apartment Communities, Inc. dated May 13, 1994.)
10.8 Cash Collateral Account, Security, Pledge and Assignment Agreement among
the Company, certain subsidiaries of the Company, Citibank, N.A., as
collateral agent, and Financial Guaranty Insurance Company. (Incorporated
by reference to Exhibit 10.8 to Form 10-Q of Bay Apartment Communities,
Inc. dated May 13, 1994.)
10.9 Reimbursement Agreements among certain subsidiaries of the Company,
Citibank, N.A., as collateral agent, and Financial Guaranty Insurance
Company. (Incorporated by reference to Exhibit 10.9 to Form 10-Q of Bay
Apartment Communities, Inc. dated May 13, 1994.)
</TABLE>
53
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- -----------
<S> <C> <C>
10.10 Guaranty Agreements by Bay Asset Group, Inc., a subsidiary of the Company,
in favor of Citibank, N.A., as collateral agent for Financial Guaranty
Insurance Company. (Incorporated by reference to Exhibit 10.10 to Form
10-Q of Bay Apartment Communities, Inc. dated May 13, 1994.)
10.11 Limited Guaranty Agreements by certain subsidiaries of the Company in
favor of Citibank, N.A., as collateral agent, and Financial Guaranty
Insurance Company. (Incorporated by reference to Exhibit 10.11 to Form
10-Q of Bay Apartment Communities, Inc. dated May 13, 1994.)
10.12 Pledge Agreement between Bay Asset Group, Inc., a subsidiary of the
Company and Citibank, N.A., as collateral agent for Financial Guaranty
Insurance Company. (Incorporated by reference to Exhibit 10.12 to Form
10-Q of Bay Apartment Communities, Inc. dated May 13, 1994.)
10.13 First Deed of Trust and Security Agreement (Sommerset). (Incorporated by
reference to Exhibit 10.15 to Form 10-Q of Bay Apartment Communities, Inc.
dated May 13, 1994.)
10.14 First Deed of Trust and Security Agreement (Willow Creek). (Incorporated
by reference to Exhibit 10.16 to Form 10-Q of Bay Apartment Communities,
Inc. dated May 13, 1994.)
10.15 Office lease dated January 4, 1995. (Incorporated by reference to Exhibit
10.21 to Form 10-Q of Bay Apartment Communities, Inc. dated May 10, 1995.)
10.16 Agreement and Plan of Merger. (Incorporated by reference to Exhibit 10.22
to Form 10-Q of Bay Apartment Communities, Inc. dated August 11, 1995.)
10.17 Master Reimbursement Agreement. (Incorporated by reference to Exhibit
10.23 to Form 10-Q of Bay Apartment Communities, Inc. dated August 11,
1995.)
10.18 ISDA Master Agreement (Interest rate swap agreement). (Incorporated by
reference to Exhibit 10.24 to Form 10-Q of Bay Apartment Communities, Inc.
dated August 11, 1995.)
10.19 Cash Collateral Pledge, Security and Custody Agreement. (Incorporated by
reference to Exhibit 10.25 to Form 10-Q of Bay Apartment Communities, Inc.
dated August 11, 1995.)
10.20 Series A Preferred Stock Purchase Agreement, dated as of September 15,
1995, by and between the Registrant and the Purchaser. (Incorporated by
reference to Exhibit 10.1 to Form 8-K of Bay Apartment Communities, Inc.
dated September 25, 1995.)
10.21 Building loan agreement in the amount of $25,500,000 between the Company
and Union Bank. (Incorporated by reference to Exhibit 10.26 to Form 10-K
of Bay Apartment Communities, Inc. dated March 18, 1996.)
10.22 Credit agreement in the amount of $47,000,000 between the Company and
Union Bank. (Incorporated by reference to Exhibit 10.27 to Form 10-K of
Bay Apartment Communities, Inc. dated March 18, 1996.)
10.23 Employment Agreement between the Company and Max L. Gardner. (Incorporated
by reference to Exhibit 10.28 to Form 10-K of Bay Apartment Communities,
Inc. dated March 18, 1996.)
10.24 Series B Preferred Stock Purchase Agreement, dated as of May 6, 1996, by
and between the Company and PaineWebber Incorporated. (Incorporated by
reference to Exhibit 10.1 to Form 8-K of Bay Apartment Communities, Inc.
dated May 6, 1996.)
</TABLE>
54
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- -----------
<S> <C> <C>
10.25 Placement Agent Agreement, dated as of May 6, 1996, by and between the
Company and PaineWebber Incorporated. (Incorporated by reference to
Exhibit 10.2 to Form 8-K of Bay Apartment Communities, Inc. dated May 6,
1996.)
10.26 Purchase and Sale Agreement and Escrow Instructions, dated as of March 22,
1996, by and between K. Philip Hwang and C. Gemma Hwang and the Company.
(Incorporated by reference to Exhibit 10.1 to Form 8-K/A of Bay Apartment
Communities, Inc. dated May 23, 1996.)
10.27 Purchase and Sale Agreement and Escrow Instructions, dated as of April 24,
1996, by and between TCR #706 Parkside Limited Partnership and the
Company. (Incorporated by reference to Exhibit 10.2 to Form 8-K/A of Bay
Apartment Communities, Inc. dated May 23, 1996.)
10.28 Purchase and Sale Agreement and Escrow Instructions, dated as of April 20,
1996, by and between Consolidated Sunset Limited Partnership and the
Company. (Incorporated by reference to Exhibit 10.3 to Form 8-K/A of Bay
Apartment Communities, Inc. dated May 23, 1996.)
10.29 Revolving Loan Agreement, dated as of May 8, 1996, among the Company as
Borrower, Union Bank of Switzerland (New York Branch) as Co-Agent and
Bank, and Union Bank of Switzerland (New York Branch) as Administrative
Agent. (Incorporated by reference to Exhibit 10.4 to Form 8-K/A of Bay
Apartment Communities, Inc. dated May 23, 1996.)
10.30 Form of Agreement of Limited Partnership of Bay Countrybrook, L.P., by and
among Bay GP, Inc., the Company and certain other defined Persons.
(Incorporated by reference to Exhibit 10.5 to Form 8-K/A of Bay Apartment
Communities, Inc. dated May 23, 1996.)
10.31 Agreement to Contribute, dated as of March 27, 1996, by and between the
Countrybrook of Berryessa Associates and the Company. (Incorporated by
reference to Exhibit 10.6 to Form 8-K/A of Bay Apartment Communities, Inc.
dated May 23, 1996.)
10.32 Employment Agreement, dated June 19, 1996, between the Company and Jeffrey
B. Van Horn. (Incorporated by reference to Exhibit 10.1 to Form 8-K of Bay
Apartment Communities, Inc. dated January 21, 1997.)
10.33 Promissory Note, dated July 26, 1996, between the Company and Jeffrey B.
Van Horn. (Incorporated by reference to Exhibit 10.2 to Form 8-K of Bay
Apartment Communities, Inc. dated January 21, 1997.)
10.34 First Amendment to Agreement to Contribute between Countrybrook of
Berryessa Associates and the Company, dated June 27, 1996.
10.35 Letter agreement dated August 30, 1996 amending the Revolving Loan
Agreement, dated May 8, 1996, among the Company as Borrower, Union Bank of
Switzerland (New York Branch) as Co-Agent and Bank, and Union Bank of
Switzerland (New York Branch) as Administrative Agent. (Incorporated by
reference to Exhibit 10.1 to Form 10-Q of Bay Apartment Communities, Inc.
dated November 14, 1996.)
10.36 Bay Apartment Communities, Inc. -- 1994 Stock Incentive Plan, as amended
and restated. (Incorporated by reference to Exhibit 99.1 to Form S-8 of
Bay Apartment Communities, Inc. dated November 26, 1996, File No.
333-16809.)
10.37 Bay Apartment Communities, Inc. -- 1996 Non-Qualified Employee Stock
Purchase Plan dated November 26, 1996. (Incorporated by reference to
Exhibit 99.1 to Form S-8 of Bay Apartment Communities, Inc., File No.
333-16837.)
</TABLE>
55
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- -----------
<S> <C> <C>
10.38 Bay Apartment Communities, Inc. -- 1996 Non-Qualified Employee Stock
Purchase Plan -- Plan Information Statement dated November 26, 1996.
(Incorporated by reference to Exhibit 99.2 to Form S-8 of Bay Apartment
Communities, Inc., File No. 333-16837.)
21.1 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule.
</TABLE>
56
<PAGE> 1
EXHIBIT 10.34
FIRST AMENDMENT
TO AGREEMENT TO CONTRIBUTE
THIS FIRST AMENDMENT TO AGREEMENT TO CONTRIBUTE ("Amendment") is made
as of this 27th day of June, 1996 by and among Countrybrook of Berryessa
Associates, a California limited partnership ("Contributor") and Bay Apartment
Communities, Inc., a Maryland corporation ("Bay").
RECITALS
A. Contributor and Bay have entered into that Agreement To
Contribute dated as of March 27, 1996 (the "Agreement"). Terms defined in the
Agreement are used with the same meanings in this Amendment.
B. Contributor and Bay desire to enter into this Amendment to
clarify certain matters regarding the Agreement and to modify the Agreement in
certain respects.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in reliance on all of the
agreements, covenants and undertakings of the parties contained herein, each of
Contributor and Bay agree as follows:
ARTICLE 1 - AGREEMENTS OF THE PARTIES
1.1 Contributor and Bay acknowledge and agree that the Agreement
was executed and delivered by the parties thereto as of March 27, 1996, and
Contributor and Bay acknowledge and agree that the Agreement shall be dated as
of March 27, 1996.
1.2 The following material is added to the "Definitions" section
of the Agreement:
"Surviving Obligations" shall mean all obligations of the
parties to this Agreement under Sections 4.7, 9. 1, and 9.16 of this
Agreement.
1.3 Contributor and Bay agree that the last full paragraph of
Section 2.1(a) of the Agreement, which appears on pages 11 and 12 of the
Agreement as originally executed, shall be amended to read as follows:
From the date of this Agreement to that date which occurred
twenty five (25) days following the date on which the Contributor
delivered to Bay the Partnership Consent (the "Due Diligence Expiration
Date"), Bay had the right in its sole discretion to terminate this
Agreement at any time. The Due Diligence Expiration Date occurred on
June 10, 1996. On the Due Diligence Expiration Date, Bay is agreed to
have delivered written notice of its election to proceed with the
acquisition of the Property subject to the terms and conditions of this
Agreement (the "Notice to Proceed") to the Contributor. The Notice, to
Proceed is deemed to have been delivered in accordance with all terms
and
<PAGE> 2
conditions of this Agreement, and by delivery of the Notice to Proceed
in accordance with the terms of this Section, the Deposit became
nonrefundable, subject to Bay's right to return of the Deposit pursuant
to the terms of this Agreement.
1.4 The last sentence of Section 1.2 of the Agreement is amended
to read as follows:
One (1) day prior to Closing, the Contributor and Bay shall jointly
prepare a schedule (the "Limited Partnership Unit Schedule")
reflecting the aggregate number of Limited Partnership Units and cash
to be delivered to Contributor, the general partners of the
Contributor and certain assignees of the Partner Debt at Closing. Bay
and the Contributor agree that the Bay Stock Price is $24.35.
Additionally, one (1) day prior to Closing, Contributor shall prepare
and deliver to Bay a schedule setting forth the number of those
Limited Partnership Units set forth on the Limited Partnership Unit
Schedule and the portion of the cash set forth on this Limited
Partnership Unit Schedule to be delivered to each of the general
partners of the Contributor. In the event Contributor is not, despite
its good faith and diligent efforts, able to allocate the amount of
Limited Partnership Units to be delivered to each of the general
partners of the Contributor, the provisions of clause (ii) of Section
1.6 (as restated below) and the Escrow Instructions (as defined below)
shall apply.
1.5 Contributor and Bay agree that Section 1.6 should be restated
to read as follows:
1.6 Closing Date. Unless this Agreement is sooner
terminated pursuant to its terms, the closing of all transactions
contemplated by this Agreement (the "Closing") shall take place on the
date (the "Closing Date") which will occur thirty two (32) days after
the Due Diligence Expiration Date; the Closing Date is agreed to be
July 12, 1996. No later than Thursday, July 11, 1996, the parties
will deliver all Closing documents to be executed in connection with
this Agreement to Commonwealth Land Title Insurance Company (the
"Escrow Agent"), as escrow agent, which Closing documents shall be
held in escrow pursuant to the terms of the Escrow Instruction Letter,
dated July 11, 1996, addressed to the Escrow Agent from Cox, Castle
and Nicholson, LLP ("Cox Castle"), Goodwin, Procter & Hoar, LLP
("Goodwin") and Rudnick & Wolfe ("Rudnick") (the "Escrow
Instructions"). The Escrow Instructions shall provide, among other
things, that, (i) prior to the Closing Date, upon written instructions
of Cox, Castle, Goodwin and Rudnick, the Escrow Agent shall record all
conveyancing documents as appropriate, to deliver the Limited
Partnership Units in accordance with the Limited Partnership Unit
Schedule and to release all executed Closing documents to the parties,
and (ii) on the Closing Date, if the Escrow Agent has not previously
2
<PAGE> 3
been instructed to record and release the Closing documents and
deliver the Limited Partnership Units as specified above, the Escrow
Agent shall act on the unilateral direction of Cox Castle. The
Closing shall occur in the offices of the Escrow Agent in San Jose,
California, on the Closing Date, unless otherwise agreed in writing by
the Contributor and Bay. The Closing shall occur pursuant to closing
arrangements reasonably satisfactory to Bay and the Contributor.
1.6 Contributor and Bay agree as follows:
1.6.1 Partnership Consent was obtained by the Contributor
on May 14, 1996.
1.6.2 All matters shown on the Preliminary Report issued by
the Title Company dated May 10, 1996 Order No. 361650-B are Permitted
Exceptions, with the exception of the matters listed on Exhibit A
hereto, which constitute Initial Title Objections, and which must be
corrected to the satisfaction of Bay on or before the Closing Date.
All matters shown on the ALTA Survey prepared by Civil Engineering
Associates, identified as Job No. 96-116, dated May 21, 1996 and
revised June 6, 1996, and revised June 13, 1996 are Permitted
Exceptions. The endorsements listed on Exhibit B shall be included as
part of the Title Policy as a condition to Closing under Section 2.
l(b) of the Agreement. The Contributor shall deliver to the Tide
Company such evidence as the Title Company may require to satisfy the
requirements stated in Item No. 16 of the Preliminary Report.
1.6.3 Any reference in the Agreement to the "Diligence
Period Expiration Date" shall be understood and agreed to refer to the
Due Diligence Expiration Date.
1.7 Contributor and Bay agree that the definition of "Partner
Debt" on Exhibit D to the Agreement shall be restated to read:
2. The term "Partner Debt" includes the following: (a) all
principal and accrued interest due on a Promissory Note dated
September 29, 1983 made by Countrybrook of Berryessa Associates to the
order of Housing Associates of San Jose, Inc. and Donald H. Tishman
in the amount of $2,000,000; (b) all principal outstanding on a
non-interest bearing operating deficit note made by Countrybrook of
Berryessa Associates to the order of Donald H. Tishman and Housing
Associates of San Jose, Inc. in the amount of $500,000; and (c)
unsecured advances made to Countrybrook of Berryessa Associates by
either Housing Associates of San Jose, Inc. or Donald H. Tishman,
which advances were, as of the date of the Contribution Agreement, in
the amount of $1,045,105. As of the date of the Contribution
Agreement, the aggregate amount of Partner Debt was $5,615,105.
3
<PAGE> 4
1.8 The Contributor and Bay agreed that the following shall be added
to the end of Section 1.5 of the Agreement:
At Closing, Bay will cause Bay Countrybrook to pay to certain
assignees of a portion of the Partner Debt as listed on Exhibit 1.8
hereof the aggregate amount of $359,100, plus interest after June 30,
1996, in lieu of receiving Limited Partnership Units. Notwithstanding
anything to the contrary herein, the calculation of the Partner Debt
for purposes of determining the number of Limited Partnership Units to
be delivered to the Partner Creditors at Closing shall be reduced by
$359,100, plus interest after June 30, 1996.
ARTICLE 2 - GENERAL
2.1 Except to the extent expressly amended by this Amendment, the
Agreement is hereby ratified and reaffirmed in its entirety, and it will remain
in full force and effect as amended hereby. Any term capitalized and not
defined herein which is capitalized and defined in the Agreement shall be used
with the same meaning in this Amendment as in the Agreement.
2.2 This Amendment may be executed in multiple counterparts. If
so executed, all of such counterparts shall constitute but one agreement, and,
in proving this Amendment, it shall not be necessary to produce or account for
more than one such counterpart.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
an instrument under seal as of the date and year first above written.
CONTRIBUTOR:
COUNTRYBROOK OF BERRYESSA ASSOCIATES,
a California limited partnership
By: /s/ DONALD H. TISHMAN
--------------------------------------
Name: Donald H. Tishman
Title: General Partner
By: HOUSING ASSOCIATES OF SAN JOSE, INC.,
a California corporation
By: /s/ DONALD H. TISHMAN
--------------------------------------
Name: Donald H. Tishman
Title: President
BAY:
BAY APARTMENT COMMUNITIES, INC.,
a Maryland corporation
By: /s/ GEOFFREY L. BAKER
--------------------------------------
Name: Geoffrey L. Baker
Title: Chief Development & Acquisitions
Officer
5
<PAGE> 6
EXHIBIT A
INITIAL TITLE OBJECTIONS
The following Initial Title Objections are made with reference to
Commonwealth Land Title Insurance Company Preliminary Report dated as of May
10, 1996, and identified as Order No. 361650-B (the "Title Report"):
1. Exceptions B through 0 shall not appear on the Title Policy.
2. Exceptions Nos. 5, 7, 10, and 13 are Permitted Exceptions only
if the Title Company issues CLTA Endorsement No. 103.3 with respect to said
items.
3. Exception No. 14 is disapproved; Bay will, however, accept as
a Permitted Exception an exception for "Rights of persons identified on the
attached rent roll as parties in possession as tenants only.
4. Exception No. 15(C) is approved as a Permitted Exception if
the term "Northwest" is corrected to read "Northeast."
6
<PAGE> 7
EXHIBIT B
ENDORSEMENTS
1. CLTA 100, modified for Owner's Policy coverage.
2. CLTA 103.3, with reference to Preliminary Report Items 5, 7,
10, and 13, insuring against forced removal of the improvements encroaching
onto said easements.
3. CLTA 103.5 (modified), insuring that there is no right of
entry through the surface of the Property under the grant of water rights shown
as Preliminary Report Item 6.
4. CLTA 103.7, insuring that the Property abuts upon and has
access to a physically ,open street designated as Capitol Avenue.
5. CLTA 116, showing the Property improved with an apartment
complex designated as 1895 North Capitol Avenue, San Jose, California.
6. CLTA 116. 1, insuring the Property described in the
Preliminary Report to be the same as that shown in the ALTA Survey by Civil
Engineering Associates Job No. 96-116, dated May 21, 1996 and revised June 6,
1996.
7. CLTA 116.4, insuring that Lots 1 through 7 of the Property are
contiguous to one another, with no gaps or gores.
8. CLTA 123.2, zoning, improved property (modified to include
parking), insuring that the Property is zoned for use for multifamily
residence.
7
<PAGE> 1
EXHIBIT 21.1
BAY APARTMENT COMMUNITIES, INC.
Subsidiaries of the registrant:
Bay Asset Group, Inc., a Maryland corporation
Bay Waterford, Inc., a Maryland corporation
Bay Development Partners, Inc., a Maryland corporation
Bay GP, Inc. (formerly known as Bay Shelter Cove, Inc.), a Maryland corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Bay Apartment Communities, Inc. on Form S-8 (File No. 333-16809), Form S-8
(File No. 333-16837), Form S-3 (File No. 333-16647), Form S-3 (File No.
333-15407), and Form S-3 (File No. 333-15875) of our report dated January 24,
1997, except for Note 14, as to which the date is March 7, 1997, on our audits
of the consolidated financial statements and financial statement schedule of Bay
Apartment Communities, Inc. as of December 31, 1996 and 1995, and for the years
ended December 31, 1996 and 1995, the period from March 17, 1994 to December 31,
1994, and the period January 1, 1994 to March 16, 1994, for the Greenbriar
Group, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
San Francisco, California
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (a) the
Consolidated Balance Sheet at December 31, 1996 and the Consolidated Statement
of Operations for the year ended December 31, 1996, and is qualified in its
entirety by reference to such (b) annual filing on Form 10-K for the year ended
December 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 920
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 750,347
<DEPRECIATION> 52,554
<TOTAL-ASSETS> 711,909
<CURRENT-LIABILITIES> 0
<BONDS> 273,688
0
27
<COMMON> 190
<OTHER-SE> 412,060
<TOTAL-LIABILITY-AND-EQUITY> 711,909
<SALES> 80,377
<TOTAL-REVENUES> 82,593
<CGS> 0
<TOTAL-COSTS> 48,180
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,276
<INCOME-PRETAX> 20,137
<INCOME-TAX> 0
<INCOME-CONTINUING> 20,137
<DISCONTINUED> 0
<EXTRAORDINARY> 511
<CHANGES> 0
<NET-INCOME> 19,626
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.02
</TABLE>
