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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 1-12672
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BAY APARTMENT COMMUNITIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MARYLAND 77-0404318
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
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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
8.50% SERIES C CUMULATIVE REDEEMABLE PREFERRED STOCK, $.01 PAR VALUE
8.00% SERIES D CUMULATIVE REDEEMABLE PREFERRED STOCK, $.01 PAR VALUE
SERIES E JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK, $.01 PAR VALUE
(TITLE OF CLASSES)
NEW YORK STOCK EXCHANGE
PACIFIC EXCHANGE
(NAME OF EXCHANGES ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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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 24, 1998 was approximately $966 million based on the
closing price on the New York Stock Exchange for such stock on March 24, 1998.
The number of shares of the Registrant's common stock, par value $.01 per
share, outstanding as of March 24, 1998 was 26,196,490.
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BAY APARTMENT COMMUNITIES, INC.
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Shareholders............. 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 14
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
Item 8. Financial Statements and Supplementary Data................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 32
Item 11. Executive Compensation...................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 43
Item 13. Certain Relationships and Related Transactions.............. 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 47
Signatures............................................................ 51
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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 acquisition, development, construction, reconstruction, marketing,
leasing and management for over 19 years in Northern California and, in
particular, the San Francisco Bay Area. The Company has also recently expanded
into selected markets in Southern California, Washington and Oregon. 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' over-allotment 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. As of
March 24, 1998, the Company owns and manages 59 apartment home communities
containing 16,669 apartment homes, including the apartment homes delivered at
Toscana, a partially developed community in Sunnyvale, California. The Company
also owns five land sites in the San Francisco Bay Area on which it is building
five communities which will contain an aggregate of approximately 1,288
apartment homes, including the remaining apartment homes under construction at
Toscana. The Company owns one additional land site in the San Francisco Bay Area
for future development. As of December 31, 1997, the Company's portfolio had an
average physical occupancy rate of 96.4%. The Company employed approximately 500
employees at December 31, 1997.
The Company is a fully-integrated apartment company with in-house
acquisition, development, construction, reconstruction, financing, marketing,
leasing and management expertise. The Company pays no development, acquisition
or management fees to third parties, except for the management of the recent
acquisition in Oregon. Thirty-seven of the Company's operating communities are
located in Northern California (principally in the San Francisco Bay Area), 19
in Southern California, two in the Seattle, Washington area and one in the
Portland, Oregon area.
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 and taxable income. In 1997 and 1996, the Company
paid cash distributions in excess of net income and taxable income and may
continue to pay cash distributions in excess of net income and taxable income in
the future. In 1996, the Company paid cash distributions in excess of its
earnings and profits. Under current tax law, the excess of distributions less
earnings and profits 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. In 1997, the Company did not pay cash
distributions in excess of its earnings and profits, but it may pay cash
distributions in excess of its earnings and profits in the future.
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
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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 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, excluding
Toscana, which is under construction, have a relatively low weighted average age
of approximately 17 years based on the original construction date of each
community. If however, the reconstruction date is used for those communities
that have undergone substantial reconstruction (i.e., reconstruction costs
exceed 10% of the community's purchase price) and the 24 communities under
reconstruction are excluded from the computation, the weighted average age of
the communities is approximately 8 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. The Company refinanced this debt in 1997 to mature in June
2025 at an all-inclusive interest rate of 5.80% fixed for ten years. In 1996, as
part of the purchase of the
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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.
The Company refinanced these bonds in 1997 to mature in June 2025 at an
all-inclusive interest rate of 5.50% fixed for five years. 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
program it has offered for many years. This 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 other similar topics. The Company also offers, through San Jose State
University, Certificate in Managing Properties and Certificate in Construction
Management training courses with 12.6 and 29.6 continuing education units,
respectively.
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 convertible 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 limited the rate of apartment community
construction. This limited rate of 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 19 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 Northern and Southern California, Washington and
Oregon, particularly in light of management's experience and the Company's
in-house capability in all aspects of real estate acquisition, construction,
reconstruction 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 19 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.
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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 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 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, except for the management of the recent acquisition in
Oregon. 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 relative geographic concentration of
the communities in each of the Company's markets 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 1998 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, on
a selective basis, in an effort to lower its cost of capital and obtain
favorable long-term financing for new development and the acquisition and
reconstruction 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 historically 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 revenue caused by compliance with such restrictions is anticipated to
be 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
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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 may be
required (in many instances regardless of knowledge or responsibility) 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, which may be substantial. The presence of such substances (or
the failure to properly remediate the contamination) may adversely affect the
owner's ability to borrow against, sell or rent such property. 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.
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 that any ACMs were used in connection with the construction of the
communities developed by the Company, all of which were constructed after 1983.
The Company is aware that ACMs were used in connection with the construction of
the following Communities acquired by the Company: Regatta Bay, Village Square,
Sea Ridge, Parc Centre, Sunset Towers, Mill Creek, Crowne Ridge (formerly
Channing Heights), Lafayette Place (formerly Martinique Gardens), SummerWalk
(formerly Rancho Penasquitos), TimberWood (formerly The Village), SunScape
(formerly Banbury Cross), Cardiff Gardens, Mission Woods (formerly Genesee
Gardens), Cedar Ridge (formerly Regency), The Park, Lakeside, Creekside,
Governor's Square, Viewpointe, Mission Bay Club, Westwood Club, Pacifica Club,
Warner Oaks, Amberway, Arbor Park and Cabrillo Square. The Company currently has
in place or intends to implement an operations and maintenance program for ACMs
at these communities. The Company does not anticipate that it will incur any
material liabilities in connection with the presence of ACMs at these
communities.
All of the Company's communities and the Current Development Communities
(defined below) have been subjected to a Phase I or similar environmental
assessment (which involves general inspections without soil sampling or
groundwater analysis and generally without radon testing) completed by an
independent environmental consultant. The assessments 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, required underground storage tank removal
and other environmental cleanup. The Company is also aware that certain of the
Communities have lead paint and the Company is undertaking or intends to
undertake appropriate remediation activity. 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
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material environmental liability or (ii) the current environmental condition of
the communities or the Current Development Communities will not be affected by
the condition of land or operations in the vicinity of such communities (such as
the presence of underground storage tanks), or by third parties unrelated to the
Company.
ITEM 2. PROPERTIES
The Company's real estate portfolio consists exclusively of apartment
communities and land held for the development of apartment communities located
in California, Washington and Oregon. 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 Communities: Those communities acquired during
1997.
-- 1998 Acquisition Communities: Warner Oaks, Amberway, Arbor Park,
Laguna Brisas and Cabrillo Square.
-- Current Development Communities: Toscana, CentreMark, Paseo
Alameda, Bay Towers (formerly San Francisco, CA Land Site), Mountain View,
CA Land Site and Rosewalk II.
The specific communities included in these categories are detailed
beginning on page 7.
As of December 31, 1997 the Company owned substantially all of the
ownership interests in 54 communities comprised of 15,297 upscale apartment
homes in California, Washington and Oregon. 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.
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.
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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 creates 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 their acquired communities, as
appropriate, in an effort to enhance returns and upgrade each community's
competitive position in its respective submarket. At the end of 1997, the
Company had committed to undertake or completed capital improvements totaling
$175.6 million for 37 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.
The following table sets forth certain information regarding the Company's
communities:
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AVERAGE
AVERAGE MONTHLY
APARTMENT RENT PER
YEAR NUMBER HOME SIZE APARTMENT OCCUPANCY
OF ORIGINAL OF (SQUARE HOME AT AT
PROPERTY LOCATION OWNERSHIP CONSTRUCTION UNITS FEET) 12/31/97(1) 12/31/97
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ORIGINAL COMMUNITIES
Fairway Glen............ San Jose, CA 100% 1986 144 826 $1,062 97.9%
Foxchase................ San Jose, CA 100% 1986/1987 396(2) 844 1,120 98.7%
Glen Creek.............. Morgan Hill, CA 100% 1989 138 819 1,122 88.4%
San Marino.............. San Jose, CA 100% 1984/1988 248 845 1,153 97.2%
Villa Mariposa.......... Mountain View, CA 94%(3) 1986 248 844 1,481 97.2%
Waterford............... Hayward, CA 100% 1985/1986 544 830 904 97.2%
Willow Creek............ Fremont, CA 100% 1985 235 820 1,135 98.7%
Alicante................ Fremont, CA 100% 1992 135 952 1,276 98.5%
Hampton Place........... Fremont, CA 100% 1992 308 1,046 1,369 98.1%
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Subtotal Original Communities.............. 2,396 868 1,151 97.3%
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1994 ACQUISITION COMMUNITIES
Hacienda Gardens........ Pleasanton, CA 100% 1988 456 803 1,067 96.1%
Regatta Bay............. Foster City, CA 100% 1973 288 738 1,177 92.7%
Barrington Hills........ Hayward, CA 100% 1986 188 897 946 98.9%
Sommerset............... Vacaville, CA 100% 1987 136 733 670 98.5%
Village Square.......... San Francisco, CA 100% 1972 154 821 1,205 98.7%
Reflections............. Fresno, CA 100% 1990 516 818 543 92.8%
Blairmore............... Rancho Cordova, CA 100% 1986 252 843 589 98.4%
Crossbrook.............. Rohnert Park, CA 100% 1986 226 725 754 97.8%
------ ----- ------ ----
Subtotal 1994 Acquisition Communities...... 2,216 800 848 95.9%
------ ----- ------ ----
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
AVERAGE
AVERAGE MONTHLY
APARTMENT RENT PER
YEAR NUMBER HOME SIZE APARTMENT OCCUPANCY
OF ORIGINAL OF (SQUARE HOME AT AT
PROPERTY LOCATION OWNERSHIP CONSTRUCTION UNITS FEET) 12/31/97(1) 12/31/97
-------- -------- --------- ------------ ------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 ACQUISITION COMMUNITIES
Sea Ridge............... Pacifica, CA 100% 1971 220 849 1,088 99.1%
Rivershore.............. Bay Point, CA 100% 1986 245 842 700 98.0%
City Heights(4)......... San Francisco, CA 100% 1990 185 591 1,143 97.8%
Promenade............... Sunnyvale, CA 100% 1987 220 726 1,205 96.8%
The Pointe.............. Fairfield, CA 100% 1991 296 876 811 96.6%
------ ----- ------ ----
Subtotal 1995 Acquisition Communities...... 1,166 790 967 97.6%
------ ----- ------ ----
1995 DEVELOPMENT COMMUNITIES
Carriage Square......... San Jose, CA 100% 1995 324 984 1,463 95.1%
Canyon Creek............ Campbell, CA 100% 1995 348 933 1,326 98.3%
------ ----- ------ ----
Subtotal 1995 Development Communities...... 672 958 1,392 96.8%
------ ----- ------ ----
1996 ACQUISITION COMMUNITIES
Parc Centre(4).......... Union City, CA 100% 1973 208 796 946 96.6%
Parkside Commons........ Sunnyvale, CA 100% 1991 192 1,038 1,538 99.5%
Sunset Towers(5)........ San Francisco, CA 100% 1961 243 708 1,168 95.1%
CountryBrook(4)......... San Jose, CA 100%(6) 1985 360 898 1,151 98.6%
Larkspur Canyon(4)...... Mission Viejo, CA 100% 1984 166 752 784 92.2%
The Fountains(4)........ San Jose, CA 100% 1990 226 929 1,520 96.5%
Mill Creek(4)........... Costa Mesa, CA 100% 1973 258 810 861 93.0%
Crown Ridge(4).......... San Rafael, CA 100% 1973 254 873 1,077 98.0%
Lafayette Place(5)...... Costa Mesa, CA 100% 1956 145 907 N/A N/A
------ ----- ------ ----
Subtotal 1996 Acquisition Communities...... 2,052 856 1,132 96.4%
------ ----- ------ ----
1996 DEVELOPMENT COMMUNITY
Rosewalk................ San Jose, CA 100% 1997 300 905 1,504 94.3%
------ ----- ------ ----
1997 ACQUISITION COMMUNITIES
SummerWalk(4)........... San Diego, CA 100% 1982 176 802 767 98.3%
TimberWood(5)........... West Covina, CA 100% 1972 209 907 N/A N/A
SunScape(5)............. Huntington Beach, CA 100% 1972 400 882 N/A N/A
Cardiff Gardens(5)...... Campbell, CA 100% 1966 252 782 N/A N/A
Villa Serena(5)......... Rancho Santa 100% 1990 301 762 823 97.0%
Margarita, CA
Amador Oaks(4).......... Dublin, CA 100% 1989 204 879 1,154 97.6%
Mission Woods(5)........ San Diego, CA 100% 1960 200 1,060 N/A N/A
Cedar Ridge(5).......... Daly City, CA 100% 1975 195 725 N/A N/A
The Park(5)............. Hacienda Heights, CA 100% 1970 351 790 720 93.7%
Lakeside(5)............. Burbank, CA 100% 1969 750 709 766 95.3%
Gallery Place(5)........ Redmond, WA 100%(7) 1991 222 928 951 90.1%
Landing West(5)......... Seattle, WA 100% 1989 190 790 649 97.4%
Creekside(5)............ Mountain View, CA 100% 1962 294 734 1,045 95.6%
Governor's Square(5).... Sacramento, CA 100% 1972/1976 302 968 N/A N/A
Waterhouse Place(5)..... Beaverton, OR 100% 1990 279 930 N/A N/A
Viewpointe(5)........... Woodland Hills, CA 100% 1989 663 894 N/A N/A
Mission Bay Club(5)..... San Diego, CA 100% 1969 564 713 N/A N/A
Westwood Club(5)........ Los Angeles, CA 100% 1966 363 632 N/A N/A
Pacifica Club(5)........ Huntington Beach, CA 100% 1971 304 882 N/A N/A
------ ----- ------ ----
Subtotal 1997 Acquisition Communities...... 6,219 813 839 95.4%
------ ----- ------ ----
CURRENT DEVELOPMENT COMMUNITY
Toscana................. Sunnyvale, CA 100% 1997 276(8) 917 N/A N/A
------ ----- ------ ----
Total Operating Properties at December 31,
1997..................................... 15,297 834 1,023 96.4%
------ ----- ------ ----
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
AVERAGE
AVERAGE MONTHLY
APARTMENT RENT PER
YEAR NUMBER HOME SIZE APARTMENT OCCUPANCY
OF ORIGINAL OF (SQUARE HOME AT AT
PROPERTY LOCATION OWNERSHIP CONSTRUCTION UNITS FEET) 12/31/97(1) 12/31/97
-------- -------- --------- ------------ ------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 ACQUISITION COMMUNITIES
Warner Oaks............. Woodland Hills, CA 100% 1978 227 824 N/A N/A
Amberway................ Anaheim, CA 100% 1983 272 756 N/A N/A
Arbor Park.............. Upland, CA 100% 1973 260 771 N/A N/A
Laguna Brisas........... Laguna Niguel, CA 100% 1988 176 1,000 N/A N/A
Cabrillo Square......... San Diego, CA 100% 1973 293 768 N/A N/A
------ ----- ------ ----
Subtotal 1998 Acquisition Communities...... 1,228 810 N/A N/A
------ ----- ------ ----
CURRENT DEVELOPMENT COMMUNITY
Toscana................. Sunnyvale, CA 100% 1998 144(9) 917 N/A N/A
------ ----- ------ ----
Total Current Operating Properties......... 16,669 832 1,023 96.4%
------ ----- ------ ----
CURRENT DEVELOPMENT COMMUNITIES
Toscana................. Sunnyvale, CA 100% N/A 290 917 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
Bay Towers.............. San Francisco, CA 100%(10) N/A 226 1,098 N/A N/A
Rosewalk II............. San Jose, CA 100% N/A 156 982 N/A N/A
Mountain View Land
Site.................. Mountain View, CA 100% N/A N/A N/A N/A N/A
------ ----- ------ ----
Subtotal Current Development Communities... 1,288 983 N/A N/A
------ ----- ------ ----
TOTALS......................................... 17,957 844 $1,023 96.4%
====== ===== ====== ====
</TABLE>
- ---------------
(1) Excludes washer/dryer rental fees, covered parking fees, credit check and
application fees and other similar charges.
(2) The Foxchase community includes 252 apartment homes constructed in 1986 as
Phase I and 144 apartment homes constructed in 1987 as Phase II.
(3) 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.
(4) Reconstruction was completed in 1997.
(5) Reconstruction is ongoing or planned as of December 31, 1997.
(6) 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,
1997, the Company had issued 166,142 shares of common stock to limited
partners of Bay Countrybrook L.P. who had requested a redemption of their
partnership units. Countrybrook units redeemed for cash aggregated 762 as
of December 31, 1997.
(7) As part of the purchase price for the Gallery Place community acquired in
September 1997, the Company issued to the seller 163,448 operating
partnership units (with a value of approximately $6.2 million) of a special
purpose limited partnership, Bay Pacific Northwest, 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, 1997, no operating partnership units had been redeemed.
(8) As of December 31, 1997, 276 of the total 710 apartment homes at the
Toscana community had been completed.
(9) Represents the additional 72 apartment homes completed during January 1998
and 72 apartment homes completed in March 1998 at the Toscana community.
9
<PAGE> 12
(10) The Company acquired this land site through a special purpose limited
partnership, Bay Rincon, L.P., in which it is the sole general partner.
Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that judgments with respect to the costs of
improvements to bring an acquired community up to standards established for the
market position intended for that community will prove inaccurate, as well as
general investment risks associated with any new real estate investment.
Although the Company undertakes an evaluation of the physical condition of each
new community before it is acquired, certain defects or necessary repairs may
not be detected until after the community is acquired, which could significantly
increase the Company's total acquisition costs.
As described below, construction costs are increasing and the cost to
reposition communities that have been acquired has, in some cases, exceeded
management's original estimates. Management believes that it may experience
similar increases in the future. There can be no assurances that the Company
will be able to charge rents upon completing the repositioning of the
communities that will be sufficient to fully offset the effects of any increases
in construction costs.
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 herein and 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 six land sites on which it is building, or plans
to commence building in the future, the Current Development Communities with a
total of approximately 1,908 apartment homes.
- TOSCANA, SUNNYVALE, CALIFORNIA. The Company purchased this partially
built and abandoned 17.8 acre site in May 1996 on which it is building a 710
apartment home community. The original total budgeted construction cost of this
community was $95.7 million. The site, located approximately at the intersection
of Highway 101 and Lawrence Expressway, is close to the center of Silicon
Valley. This 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 were completed and occupied in July 1997. As of December 31,
1997, construction had been completed on 276 apartment homes.
- CENTREMARK, SAN JOSE, CALIFORNIA. 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 Boulevard 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.
The Company has estimated a total budgeted construction cost for this community
of $44.1 million. Stabilized operations are expected in the first quarter of
1999 and the first apartment homes are expected to be occupied in the third
quarter of 1998.
- PASEO ALAMEDA, SAN JOSE, CALIFORNIA. The Company purchased 7.44 acres of
this 8.87 acre site in February 1997 after it obtained substantially all of the
necessary public approvals for development of the community. The remainder of
this site was purchased in April 1997. The site is located on a major street,
approximately one mile from downtown San Jose. The Company has approvals to
build a 305 apartment home community which will include a large leasing
pavilion, business center, fitness center, 75 foot lap pool, a small commercial
area and secure underground parking. The Company has estimated a total budgeted
construction cost for this community of $44.4 million. Stabilized operations are
expected in the second quarter of 1999 and the first apartment homes are
expected to be occupied in the fourth quarter of 1998.
10
<PAGE> 13
- BAY TOWERS, SAN FRANCISCO, CALIFORNIA. The Company acquired, through a
limited partnership in which it is the sole general partner, a portion of a city
block in the Rincon Hill area of San Francisco for approximately $7.8 million in
June 1997. The Company is constructing twin, 16-story towers above a four story
parking garage on this land site. All public approvals have been received to
allow 226 apartment homes, approximately 2,900 square feet of retail space and
between 224 and 271 controlled access parking spaces. The land site is on Beale
Street, between Harrison and Folsom Streets, almost two blocks north of the Bay
Bridge, approximately three blocks south of Market Street and three blocks west
of the Embarcadero and San Francisco Bay. The Company began site work in late
1997 and actual construction of the community in early 1998, with initial
occupancy expected in 1999. The community will contain one, two and three
bedroom apartment homes, with resident amenities including a health club,
meeting and conference rooms, business center, leasing pavillion and parking
deck gardens.
- ROSEWALK II, SAN JOSE, CALIFORNIA. In October 1997, the Company acquired
a 5.82 acre land site adjacent to the Company's recently constructed 300
apartment home community, Rosewalk, in San Jose, California. The Company has
public approvals and is under construction on 156 apartment homes as a second
phase of Rosewalk on this land site. The Company has estimated a total budgeted
construction cost for this community of $20.3 million. Stabilized operations are
expected in the second quarter of 1999 and the first apartment homes are
expected to be occupied in the fourth quarter of 1998.
- MOUNTAIN VIEW, CALIFORNIA LAND SITE. In September 1997, the Company
acquired a 1.917 acre land site in Mountain View, California which includes a
50% undivided interest in an existing underground parking garage adjacent to
this land site, subject to agreements which specifically allocate parking rights
between an adjacent office building and this development, including 266 spaces
reserved exclusively for residents of the community planned for this site. The
Company intends to build two residential towers on this land site, which will
contain an as yet undetermined number of apartment homes, expected to be at
least 200, and approximately 10,000 square feet of ground level space for a
recreation, leasing and community center. The acquisition of this site,
purchased in two separate parcels for approximately $8.93 million, includes
various public approvals and previously paid fees totaling approximately
$800,000.
The Company intends to continue to pursue the development and construction
of apartment home communities in accordance with the Company's development and
underwriting policies. Risks associated with the Company's development and
construction activities may include: the abandonment of development and
acquisition opportunities explored by the Company; construction costs of a
community may exceed original estimates due to increased materials, labor or
other expenses, which could make completion of the community uneconomical;
occupancy rates and rents at a newly completed community are dependent on a
number of factors, including market and general economic conditions, and may not
be sufficient to make the community profitable; financing may not be available
on favorable terms for the development of a community; and construction and
lease-up may not be completed on schedule, resulting in increased debt service
expense and construction costs. Development activities are also subject to risks
relating to the inability to obtain, or delays in obtaining, all necessary
zoning, land-use, building, occupancy, and other required governmental permits
and authorizations. The occurrence of any of the events described above could
adversely affect the Company's ability to achieve its projected yields on
communities under development or reconstruction and could prevent the Company
from paying distributions to its stockholders.
For new development communities, the Company's goal, on average, is to
achieve projected earnings before interest, income taxes, depreciation and
amortization ("EBITDA") as a percentage of total budgeted construction cost of
approximately 10%. Projected EBITDA as a percentage of total budgeted
construction cost represents EBITDA projected to be received in the first
calendar year after a community reaches stabilized occupancy (i.e., the first
month when the community has a weighted average physical occupancy of at least
95%), based on current market rents, less projected stabilized property
operating and maintenance expenses, before interest, income taxes, depreciation
and amortization. Total budgeted construction cost is based on current
construction costs, including interest capitalized during the construction
period. Market rents and construction costs reflect those prevailing in the
community's market at the time the Company's development budgets are prepared
while taking into consideration certain changes to those market conditions
anticipated by the Company at the time. Although the Company attempts to
anticipate changes in market
11
<PAGE> 14
conditions, the Company cannot predict with certainty what those changes will
be. For example, upon the acquisition of the Toscana land site in May 1996, the
Company estimated that the total budgeted construction cost for this Current
Development Community would be $95.7 million. Since that time, construction
costs have been increasing and management believes that the total construction
cost for this development will be higher than the original budget. Nonetheless,
because of increases in prevailing market rents, management believes that it
will still be able to achieve projected EBITDA as a percentage of total budgeted
construction cost of at least 10%. Management believes that it will experience
similar increases in construction costs and market rents with respect to the
CentreMark and Paseo Alameda Current Development Communities. However, there can
be no assurances that market rents in effect at the time the Current Development
Communities are leased-up will be sufficient to fully offset the effects of any
increased construction costs.
SEISMIC CONCERNS
Many of the communities are located in the general vicinity of active
earthquake faults. In June 1997, the Company obtained a seismic risk analysis
from an engineering firm which estimated the probable maximum loss ("PML") for
each of the 41 communities owned at that time and Toscana, a Current Development
Community, individually and for all of such communities and Toscana 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. The engineers then established an aggregate PML at that
time of $63.8 million for the 41 communities owned at that time and Toscana. The
$63.8 million PML for those communities was a PML level that is expected to be
exceeded only 10% of the time in the event of such a severe earthquake. The
actual aggregate PML could be higher or lower as a result of variations in soil
classifications and structural vulnerabilities. For each community, the
engineers' analysis calculated an individual PML as a percentage of the
community's replacement cost and projected revenues. Two of the communities had
individual PMLs of 30%, while seven had individual PMLs of 25%, and the
remaining 32 communities owned at such time and Toscana each had individual PMLs
of 20% or less. The Company has obtained an individual PML assessment for each
of the seventeen communities acquired since June 1997. One community had an
individual PML of 50%, one had an individual PML of 30%, three had individual
PMLs of 24%, one had an individual PML of 21% and the remaining eleven
communities had individual PMLs of 20% or less. While the Company has not yet
obtained an engineers' analysis establishing an aggregate PML for all of the
communities combined, the Company currently intends to do so on an annual basis
in order to assist it in evaluating appropriate levels of insurance coverage. No
assurance can be given that an earthquake would not cause damage or loss greater
than the PML assessments indicate, that future PML levels will not be higher
than the current PML levels for the communities, or that future acquisitions or
developments will not have PML assessments indicating the possibility of greater
damage or loss than currently indicated.
In July 1997, the Company renewed its earthquake insurance, both for
physical damage and lost revenue, with respect to the 41 communities then owned
and Toscana. In addition, the seventeen communities acquired subsequent to June
1997 are included under the Company's earthquake insurance policy. For any
single occurrence, the Company self-insures the first $25 million of loss and
has in place $35 million of coverage above this amount. 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
revenue 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.
12
<PAGE> 15
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, 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, 1997.
13
<PAGE> 16
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 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, 1997, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
PERIOD OR QUARTER ENDED HIGH LOW
----------------------- -------- --------
<S> <C> <C>
December 31, 1997...................................... $40.3125 $37.7500
September 30, 1997..................................... $39.9375 $36.8125
June 30, 1997.......................................... $37.3750 $33.1250
March 31, 1997......................................... $37.1250 $34.2500
December 31, 1996...................................... $36.0000 $28.2500
September 30, 1996..................................... $29.1250 $24.7500
June 30, 1996.......................................... $26.0000 $23.2500
March 31, 1996......................................... $25.3750 $22.8750
December 31, 1995...................................... $24.5000 $19.8750
September 30, 1995..................................... $21.7500 $19.1250
June 30, 1995.......................................... $20.0000 $16.7500
March 31, 1995......................................... $20.8750 $18.0000
December 31, 1994...................................... $21.1250 $17.7500
September 30, 1994..................................... $22.1250 $19.7500
June 30, 1994.......................................... $22.6250 $20.0000
March 31, 1994 (from March 10, 1994)................... $21.5000 $20.0000
</TABLE>
On March 24, 1998 the last reported sale price per share of common stock on
the NYSE was $36.875. On March 24, 1998 there were 484 holders of record of the
26,196,490 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.
Dividends declared per common share for 1997, 1996, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
PERIOD OR QUARTER ENDED DIVIDENDS
----------------------- ---------
<S> <C>
December 31, 1997........ $ .42
September 30, 1997....... .42
June 30, 1997............ .41
March 31, 1997........... .41
-----
Total 1997.......... $1.66
=====
December 31, 1996........ $ .41
September 30, 1996....... .40
June 30, 1996............ .40
March 31, 1996........... .40
-----
Total 1996.......... $1.61
=====
</TABLE>
<TABLE>
<CAPTION>
PERIOD OR QUARTER ENDED DIVIDENDS
----------------------- ---------
<S> <C>
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>
14
<PAGE> 17
The following summarizes the tax components of the Company's common
dividends declared for the years ending December 31, 1997, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
% OF COMMON DIVIDENDS DECLARED FOR:
-------------------------------------
1997 1996 1995 1994
------- ------ ------ ------
<S> <C> <C> <C> <C>
TAX COMPONENT
Ordinary income........................................ 100% 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, 1997, 1996 and 1995 represented ordinary income for tax
purposes. All of the dividends declared on the Series B preferred stock for the
years ended December 31, 1997 and 1996 represented ordinary income for tax
purposes. All dividends declared on the Series C Cumulative Redeemable Preferred
Stock during the year ended December 31, 1997 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 "Countrybrook 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 Countrybrook Partnership, 298,577 units of limited
partnership interests ("Countrybrook 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 Countrybrook Units have the right
to require the Countrybrook Partnership to redeem their Countrybrook 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 Countrybrook
Units in satisfaction of the Countrybrook Partnership's obligation to redeem the
Countrybrook Units for cash. During the period January 1, 1997 through December
31, 1997, 162,330 Countrybrook Units were 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. The Company is relying on
the exemption provided in Rule 506 based upon factual representations received
from the recipients of the shares.
On September 12, 1997, the Company entered into an Agreement of Limited
Partnership of Bay Pacific Northwest L.P. (the "Northwest Partnership"), of
which the Company is the sole general partner, for the purpose of acquiring the
Gallery Place community. In connection with the formation of the Northwest
Partnership, 163,448 units of limited partnership interests ("Northwest Units")
were issued to the existing partners of the contributor of the Gallery Place
community pursuant to an exemption from registration provided in Rule 506 of
Regulation D under the Securities Act. Under the terms of the limited
partnership agreement, holders of Northwest Units have the right to require the
Northwest Partnership to redeem their Northwest 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 Northwest Units in
satisfaction of the Northwest Partnership's obligation to redeem the Northwest
Units for cash. During the period September 12, 1997 through December 31, 1997,
no Northwest Units had been redeemed for cash or the Company's common stock.
15
<PAGE> 18
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 DECEMBER 31, MARCH 17- JANUARY 1- YEAR ENDED
--------------------------------- DECEMBER 31, MARCH 16, DECEMBER 31,
1997 1996 1995 1994 1994 1993
---------- --------- -------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental............................ $ 121,873 $ 80,377 $ 52,110 $ 31,073 $ 4,982 $ 23,728
Other............................. 4,161 2,216 1,411 955 158 1,081
---------- --------- -------- --------- ------- --------
Total revenue....................... 126,034 82,593 53,521 32,028 5,140 24,809
---------- --------- -------- --------- ------- --------
Expenses:
Property operating(1)............. 29,016 18,924 12,452 7,001 1,429 5,173
Property taxes.................... 9,467 6,353 4,349 2,786 459 2,342
General and administrative........ 6,308 3,785 2,467 1,590 229 276
Abandoned project costs........... 710 110 -- -- -- --
Management fees -- affiliates..... -- -- -- -- 270 1,205
Interest and financing............ 14,113 14,276 11,472 4,782 2,358 10,932
Depreciation and amortization..... 27,009 18,689 13,714 8,366 1,111 5,328
---------- --------- -------- --------- ------- --------
Total expenses...................... 86,623 62,137 44,454 24,525 5,856 25,256
---------- --------- -------- --------- ------- --------
Income (loss) before minority
interest, gain on sale and
extraordinary item................ 39,411 20,456 9,067 7,503 (716) (447)
Minority interest................... (470) (319) (19) (17) -- --
---------- --------- -------- --------- ------- --------
Income (loss) from operations....... 38,941 20,137 9,048 7,486 (716) (447)
Gain on sale........................ -- -- 2,412 -- -- --
---------- --------- -------- --------- ------- --------
Income (loss) before extraordinary
item.............................. 38,941 20,137 11,460 7,486 (716) (447)
Extraordinary item.................. -- (511) -- -- -- --
---------- --------- -------- --------- ------- --------
Net income (loss)................... 38,941 19,626 11,460 7,486 (716) (447)
Preferred stock dividend
requirement....................... (7,480) (4,264) (917) -- -- --
---------- --------- -------- --------- ------- --------
Earnings available to common
shares............................ $ 31,461 $ 15,362 $ 10,543 $ 7,486 $ (716) $ (447)
========== ========= ======== ========= ======= ========
Earnings per common share:
Income before minority interest,
gain on sale and extraordinary
item.............................. $ 1.42 $ 1.08 $ .70 $ .65 $ -- $ --
Minority interest................... (.02) (.02) -- -- -- --
---------- --------- -------- --------- ------- --------
Income from operations.............. 1.40 1.06 .70 .65 -- --
Gain on sale........................ -- -- .21 -- -- --
---------- --------- -------- --------- ------- --------
Income before extraordinary item.... 1.40 1.06 .91 .65 -- --
Extraordinary item.................. -- (.03) -- -- -- --
---------- --------- -------- --------- ------- --------
Earnings available to common
shares............................ $ 1.40 $ 1.03 $ .91 $ .65 $ -- $ --
========== ========= ======== ========= ======= ========
Cash dividends declared per common
share............................. $ 1.66 $ 1.61 $ 1.55 $ 1.20 $ -- $ --
========== ========= ======== ========= ======= ========
Cash dividends declared per Series A
and B preferred share............. $ 1.71 $ 1.66 $ .40 $ -- $ -- $ --
========== ========= ======== ========= ======= ========
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
THE GREENBRIAR GROUP
-------------------------
YEAR ENDED DECEMBER 31, MARCH 17- JANUARY 1- YEAR ENDED
--------------------------------- DECEMBER 31, MARCH 16, DECEMBER 31,
1997 1996 1995 1994 1994 1993
---------- --------- -------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER APARTMENT HOME DATA)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Cash flows from:
Operating activities.............. $ 64,850 $ 40,223 $ 22,598 $ 17,654 $ 647 $ 3,638
Investing activities.............. $ (577,170) $(216,999) $(87,247) $(189,430) $(2,211) $ (1,643)
Financing activities.............. $ 514,588 $ 176,019 $ 61,628 $ 175,168 $ (446) $ (2,373)
EBITDA(2)........................... $ 80,533 $ 53,421 $ 34,253 $ 20,651 $ 2,753 $ 15,813
Funds from Operations(3)............ $ 62,417 $ 38,293 $ 21,884 $ 15,430 $ 395 $ 4,881
Total communities, end of period.... 54 34 25 19 10 10
Total apartment homes, end of
period............................ 15,297 8,754 6,450 4,844 2,396 2,396
Total apartment homes, weighted
average........................... 10,840 7,594 5,652 4,211 2,396 2,396
Average monthly rental revenue per
apartment home, end of period:
Original Communities(4)........... $ 1,151 $ 1,057 $ 959 $ 913 $ 888 $ 886
1994 Acquisition Communities(4)... $ 848 $ 795 $ 752 $ 734 $ -- $ --
1995 Acquisition Communities(4)... $ 967 $ 889 $ 845 $ -- $ -- $ --
1995 Development Communities(4)... $ 1,392 $ 1,310 $ 1,120 $ -- $ -- $ --
1996 Acquisition Communities(4)... $ 1,132 $ 1,017 $ -- $ -- $ -- $ --
1996 Development Community(4)..... $ 1,504 $ 1,410 $ -- $ -- $ -- $ --
1997 Acquisition Communities(4)... $ 839 $ -- $ -- $ -- $ -- $ --
Average annual
occupancy -- stabilized
communities....................... 97.5% 96.8% 95.8% 95.7% 96.1% 96.3%
Ratio of earnings to combined fixed
charges and preferred stock
dividends(5)...................... 1.84x 1.61x 1.26x 1.76x .71x .96x
Ratio of earnings to fixed
charges(6)........................ 2.48x 2.00x 1.33x 1.76x .71x .96x
BALANCE SHEET DATA:
Operating real estate assets, before
accumulated depreciation.......... $1,203,154 $ 699,402 $474,930 $ 346,584 $ -- $178,244
Development real estate assets...... $ 170,361 $ 50,945 $ 23,280 $ 51,749 $ -- $ 10,797
Total assets........................ $1,317,650 $ 711,909 $477,190 $ 390,016 $ -- $165,367
Debt................................ $ 487,484 $ 273,688 $227,801 $ 181,731 $ -- $168,796
Debt -- affiliates.................. $ -- $ -- $ -- $ -- $ -- $ 3,184
Total liabilities................... $ 515,822 $ 292,630 $239,607 $ 193,306 $ -- $176,585
Minority interest................... $ 9,133 $ 7,002 $ -- $ -- $ -- $ --
Shareholders' equity/owner's capital
(deficit)......................... $ 792,695 $ 412,277 $237,583 $ 196,710 $ -- $(11,218)
</TABLE>
- ---------------
(1) Property operating expenses are defined as property related repair and
maintenance expenses, utilities and on-site property management costs, and
exclude property taxes, 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) Many industry analysts consider Funds from Operations ("FFO") an appropriate
measure of performance of an equity REIT. FFO as defined by the National
Association of Real Estate Investment Trusts ("NAREIT") means 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
17
<PAGE> 20
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. The Company computes FFO in accordance
with the revised NAREIT definition, which may differ from the methodology
for computing FFO utilized by other equity REITs, and, accordingly, may not
be comparable to such other REITs. The Company believes that in order to
facilitate a clear understanding of the historical operating results, FFO
should be examined in conjunction with net income (loss) as presented in the
financial statements. FFO 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.
(4) The "Original Communities," "1994 Acquisition Communities," "1995
Development Communities," "1995 Acquisition Communities," "1996 Acquisition
Communities," "1996 Development Community" and "1997 Acquisition
Communities" are those listed beginning on page 8.
(5) The ratio of earnings to combined fixed charges and preferred stock
dividends is computed by dividing earnings by the combination of fixed
charges and preferred stock dividends incurred. For this purpose, earnings
consist of net income plus fixed charges less capitalized interest. Fixed
charges consist of interest expense, capitalized interest and the
amortization of debt issuance costs.
(6) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, earnings consist of net income plus fixed
charges less capitalized interest. Fixed charges consist of interest
expense, capitalized interest and the amortization of debt issuance costs.
18
<PAGE> 21
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. Increases in operating results in 1997, 1996 and 1995 are due to
the significant recapitalization upon the 1995 Offering (defined below), the
1996 Offerings (defined below), the 1997 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 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 ACQUISITION COMMUNITIES
- ---------------------------------------------
COMMUNITY DATE ACQUIRED
--------- -------------------
<S> <C>
Sea Ridge(a)............ February 17, 1995
Rivershore.............. April 28, 1995
City Heights(b)......... October 19, 1995
Promenade............... October 25, 1995
The Pointe.............. December 12, 1995
</TABLE>
<TABLE>
<CAPTION>
1995 DEVELOPMENT COMMUNITIES
- ---------------------------------------------
COMMUNITY DATE STABILIZED(D)
--------- -------------------
<S> <C>
Carriage Square......... October 1995(e)
Canyon Creek............ December 1995(f)
</TABLE>
<TABLE>
<CAPTION>
1996 ACQUISITION COMMUNITIES
- ---------------------------------------------
COMMUNITY DATE ACQUIRED
--------- -------------------
<S> <C>
Parc Centre(b).......... May 15, 1996
Parkside Commons........ May 15, 1996
Sunset Towers(c)........ May 22, 1996
CountryBrook(b)......... July 12, 1996
Larkspur Canyon(b)...... July 19, 1996
The Fountains(b)........ July 26, 1996
Mill Creek(b)........... July 26, 1996
Crowne Ridge(b)......... August 7, 1996
Lafayette Place(c)...... August 7, 1996
</TABLE>
<TABLE>
<CAPTION>
1996 DEVELOPMENT COMMUNITY
- ---------------------------------------------
COMMUNITY DATE STABILIZED(D)
--------- -------------------
<S> <C>
Rosewalk................ February 1997(g)
</TABLE>
<TABLE>
<CAPTION>
1997 ACQUISITION COMMUNITIES
- ---------------------------------------------
COMMUNITY DATE ACQUIRED
--------- -------------------
<S> <C>
SummerWalk(b)........... January 3, 1997
TimberWood(c)........... March 13, 1997
SunScape(c)............. April 1, 1997
Cardiff Gardens(c)...... April 18, 1997
Villa Serena(c)......... April 25, 1997
Amador Oaks(b).......... April 30, 1997
Mission Woods(c)........ May 16, 1997
Cedar Ridge(c).......... July 15, 1997
The Park(c)............. September 4, 1997
Lakeside(c)............. September 5, 1997
Gallery Place(c)........ September 23, 1997
Landing West(c)......... October 1, 1997
Creekside(c)............ October 31, 1997
Governor's Square(c).... December 11, 1997
Waterhouse Place(c)..... December 18, 1997
Viewpointe(c)........... December 18, 1997
Mission Bay Club(c)..... December 30, 1997
Westwood Club(c)........ December 30, 1997
Pacifica Club(c)........ December 30, 1997
</TABLE>
<TABLE>
<CAPTION>
CURRENT DEVELOPMENT COMMUNITIES
- ---------------------------------------------
COMMUNITY DATE STABILIZED(D)
--------- ------------------
<S> <C>
Toscana................. (h)
CentreMark.............. (i)
Paseo Alameda........... (j)
Bay Towers.............. (k)
Rosewalk II............. (l)
Mountain View Land (m)
Site..................
</TABLE>
19
<PAGE> 22
The 1995 Acquisition Communities, the 1995 Development Communities, the
1996 Acquisition Communities, the 1996 Development Community, the 1997
Acquisition Communities and Toscana are collectively termed the "Acquisition
Communities".
- ---------------
(a) Reconstruction was completed in 1996.
(b) Reconstruction was completed in 1997.
(c) Reconstruction is ongoing or planned as of December 31, 1997.
(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.
(h) Occupancy commenced in July 1997 and operations are expected to be
stabilized in the fourth quarter of 1998.
(i) Occupancy is expected to commence in the third quarter of 1998 and
operations are expected to be stabilized in the first quarter of 1999.
(j) Occupancy is expected to commence in the fourth quarter of 1998 and
operations are expected to be stabilized in the second quarter of 1999.
(k) Occupancy is expected to commence in 1999 and operations are expected to be
stabilized in 2000.
(l) Occupancy is expected to commence in the fourth quarter of 1998 and
operations are expected to be stabilized in the second quarter of 1999
(m) This Community is still undergoing planning and development.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996
The Company's results of operations are summarized as follows for the years
ended 1997 and 1996 (Dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
------------------
1997 1996 $-CHANGE %-CHANGE
-------- ------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
Rental........................................ $121,873 $80,377 $41,496 51.6%
Other......................................... 4,161 2,216 1,945 87.8%
-------- ------- ------- ------
Total revenue......................... 126,034 82,593 43,441 52.6%
-------- ------- ------- ------
EXPENSES:
Property operating............................ 29,016 18,924 10,092 53.3%
Property taxes................................ 9,467 6,353 3,114 49.0%
General and administrative.................... 6,308 3,785 2,523 66.7%
Abandoned project costs....................... 710 110 600 545.5%
Interest and financing........................ 14,113 14,276 (163) (1.1%)
Depreciation and amortization................. 27,009 18,689 8,320 44.5%
-------- ------- ------- ------
Total expenses........................ 86,623 62,137 24,486 39.4%
-------- ------- ------- ------
Income before minority interest and
extraordinary item............................ 39,411 20,456 18,955 92.7%
Minority interest............................... (470) (319) (151) 47.3%
-------- ------- ------- ------
Income before extraordinary item................ 38,941 20,137 18,804 93.4%
Extraordinary item.............................. -- (511) 511 (100.0%)
-------- ------- ------- ------
Net income...................................... $ 38,941 $19,626 $19,315 98.4%
======== ======= ======= ======
</TABLE>
20
<PAGE> 23
Rental revenue from rental property increased primarily as a result of the
addition of the Acquisition Communities. The 1996 Acquisition and Development
Communities represented $12,534 and $4,083, respectively, of the increase while
the 1997 Acquisition Communities and Toscana contributed $16,965 and $1,337,
respectively, to the increase. The remainder of the portfolio increased rental
revenue by $6,577, $5,990 of which was attributable to the 1997 Same Store
Communities (defined below).
Other income increased primarily as a result of the addition of the 1996
and 1997 Acquisition Communities, the 1996 Development Community and Toscana,
and the 1997 Same Store Communities which contributed $936, $174 and $645,
respectively, to the increase. The remaining increase of $190 was attributable
to the remainder of the portfolio.
Property operating expenses increased primarily as a result of the addition
of the Acquisition Communities. Of the $10,092 total increase, $3,126 was
attributable to the 1996 Acquisition Communities, $4,872 was attributable to the
1997 Acquisition Communities, $461 was attributable to the 1996 Development
Community, $355 was attributable to the apartment homes delivered at Toscana,
$729 was attributable to the 1997 Same Store Communities and $549 was
attributable to the remainder of the portfolio.
Property taxes increased by $3,114 due to $2,556 attributable to the
addition of the 1996 and 1997 Acquisition Communities, $386 attributable to the
1996 Development Community and Toscana, and $172 attributable to the increase in
the remainder of the portfolio.
General and administrative costs increased primarily due to the growth in
employee-related costs and other costs necessary to manage the Acquisition
Communities. Abandoned project costs increased primarily due to a one-time write
off of $450 in the quarter ended June 30, 1997, as a result of the termination
of the Company's efforts to acquire a portfolio of multifamily communities. The
1997 and 1996 amounts are net of $6,407 and $2,275, respectively, of allocated
indirect project costs capitalized to construction and reconstruction projects,
representing approximately 48% and 37% of total general and administrative
expense, including abandoned project costs, for 1997 and 1996, respectively.
Interest and financing expense decreased due to higher capitalization of
interest from increased development, construction and reconstruction activity
offset in part by increased borrowing for new acquisitions.
Depreciation and amortization expense increased primarily due to the
addition of the Acquisition Communities.
21
<PAGE> 24
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 1996
Same Store Communities (defined below). Rental revenue decreased $933 due to the
sale of the Larkspur Woods Community in 1995.
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 1996 Same Store Communities. Property taxes also
increased 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.
22
<PAGE> 25
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.
THE COMPANY'S RESULTS OF PROPERTY OPERATIONS (EARNINGS BEFORE INTEREST, TAXES,
DEPRECIATION AND AMORTIZATION -- "EBITDA") FOR THE "1997 SAME STORE
COMMUNITIES"(1) IS SUMMARIZED BELOW FOR THE YEARS ENDED 1997 AND 1996:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
------------------
1997 1996 $-CHANGE %-CHANGE
------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue.......................... $74,467 $67,832 $6,635(2) 9.8%
Expenses......................... 21,089 20,422 667(3) 3.3%
------- ------- ------ ----
EBITDA........................... $53,378 $47,410 $5,968 12.6%
======= ======= ====== ====
</TABLE>
- ---------------
(1) The 1997 Same Store Communities consist of 24 apartment communities
comprising a total of 6,230 apartment homes. These communities include all
those which were owned for all of 1996 and 1997 and to which the Company
made no major renovations after January 1, 1996.
(2) The increase in revenue from the 1997 Same Store Communities is primarily
the result of rental increases of $5,752, vacancy reductions of $321,
increase in month-to-month fees of $184, increase in parking revenue of
$139, decrease in bad debts of $91 and increase in cable TV income of $60.
(3) The increase in expenses from the 1997 Same Store Communities is primarily
the result of increased property taxes, higher management and administrative
costs, higher building maintenance costs and increased earthquake insurance
due to the purchase of additional, portfolio-wide coverage in July 1996.
THE COMPANY'S RESULTS OF PROPERTY OPERATIONS (EARNINGS BEFORE INTEREST, TAXES,
DEPRECIATION AND AMORTIZATION -- "EBITDA") FOR THE "1996 SAME STORE
COMMUNITIES"(1) IS SUMMARIZED BELOW FOR THE YEARS ENDED 1996 AND 1995:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
------------------
1996 1995 $-CHANGE %-CHANGE
------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<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 revenue from the 1996 Same Store Communities is due to
rental increases of $3,052, vacancy reductions of $470, concession
reductions of $163, offset in part by an increase in bad debts of $23.
(3) The increase in expenses from the 1996 Same Store Communities 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.
23
<PAGE> 26
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, the
distributions required with respect to its Series C and D Cumulative Redeemable
Preferred Stock and the distributions required to maintain the Company's REIT
qualification under the Code.
The Company expects to fund certain committed acquisition, development,
construction, and reconstruction projects with a combination of working capital
and proceeds available under 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 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".
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 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 had an original maturity date in May 1999, and bore interest at a rate of
LIBOR (based on a maturity selected by the Company) plus 1.55% per annum.
In July 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 July
1996, the Company assumed $7.6 million of tax-exempt bond debt as part of the
purchase of the Larkspur Canyon community. These bonds floated 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.
In October 1996, the Company paid down the amount outstanding on the $25.5
million construction loan for the Rosewalk community.
In April 1997, the Company assumed seven-year seller financing of $12.87
million in connection with the acquisition of the Cardiff Gardens community. The
interest rate on this interest only note is fixed at 7.25%.
24
<PAGE> 27
In July 1997, the Company assumed two-year seller financing of $1.0 million
in connection with the acquisition of the Cedar Ridge Community. Interest only
payments are required monthly at a fixed rate of interest of 6.5%.
In July 1997, the Company refinanced approximately $20.8 million of its
tax-exempt bonds which were issued in connection with its acquisition of the
City Heights community in October 1995. The all-inclusive interest rate on the
new variable rate 28-year tax-exempt bonds has been fixed for 10 years at a rate
of 5.8%.
In August 1997, the Company refinanced approximately $7.635 million of its
tax-exempt bonds issued in connection with its acquisition of the Larkspur
Canyon community in July 1996. These new variable rate 28-year tax-exempt bonds
have been fixed for five years at an all-inclusive interest rate of 5.5%.
In September 1997, the Company assumed $11.733 million of financing in
connection with the acquisition of the Gallery Place community. The interest
rate on this loan is fixed at 7.31%. The loan is partially amortizing and
matures in May 2001.
In December 1997, the Company assumed $14.184 million of financing in
connection with the acquisition of the Governor's Square community. The interest
rate on this loan is fixed at 7.65%. The loan is partially amortizing and
matures in August 2004.
During 1997, the Company amended the terms of its Unsecured Line of Credit
twice. In July 1997, the Company received a one-year extension of its $200
million acquisition and construction line of credit from May 1999 to May 2000.
The credit line extension carries a more favorable interest rate of .90 percent
over LIBOR versus 1.55 percent over LIBOR prior to the amendment. In addition,
the Unsecured Line of Credit, as amended, carries a competitive bid option under
which the Company may solicit competitive bids from the participating banks for
short-term borrowings priced at a margin above or below the 30, 60 or 90 day
LIBOR. In November 1997, the Company amended the Unsecured Line of Credit to
increase its size from $200 million to $350 million. The Company paid
non-refundable fees in July and November 1997 totaling $550,000 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.
As of December 31, 1997, the proceeds from the Unsecured Line of Credit
were used primarily for the acquisition, development and construction of the six
Current Development Communities and renovations on the Acquisition Communities.
As a result of the above transactions, the weighted average interest rate
on the Company's debt increased from 6.35% at December 31, 1996 to 6.44% at
December 31, 1997.
25
<PAGE> 28
The Company's debt as of December 31, 1997 is summarized as follows:
<TABLE>
<CAPTION>
BALANCE AVAILABLE MATURES RATE INTEREST RATE PROTECTION
-------- --------- ---------------- ----- ------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Tax-exempt variable
rate under interest November 2022 - Interest rate is fixed
rate swap........... $ 87,991 $ -- June 2025 6.48%(a) until June 2010.
Tax-exempt variable
rate under interest November 2007 - Interest rate is fixed
rate swap........... 87,380 -- March 2017 5.88%(b) until March 2004.
Tax-exempt fixed Interest rate is fixed
rate................ 19,850 -- March 2012 7.87%(a) until April 2002.
Tax-exempt variable
rate under interest Interest rate is fixed
rate swap........... 20,714 -- June 2025 5.80%(a) until July 2007.
Tax-exempt variable
rate under interest Interest rate is fixed
rate swap........... 7,610 -- June 2025 5.50%(a) until September 2002.
Fixed rate............ 12,870 -- May 2004 7.25%
Fixed rate............ 1,000 -- July 1999 6.50%
Fixed rate............ 11,685 -- May 2001 7.31%
Fixed rate............ 14,184 -- August 2004 7.65%
-------- --------
Subtotal.... 263,284 --
$350,000 Unsecured LIBOR
Line of Credit(c)... 224,200 125,800 May 2000 +0.90%
-------- --------
Total....... $487,484 $125,800
======== ========
</TABLE>
- ---------------
(a) This 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%.
(c) Amounts drawn on the Unsecured Line of Credit were used for development and
construction purposes and to fund the acquisition of additional communities.
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 Parc Centre,
Parkside Commons and Sunset Towers communities and to repay borrowings under the
Credit Facilities. 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, Crowne Ridge
and Lafayette Place, 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".
26
<PAGE> 29
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, of approximately $49.2 million, were used to reduce
borrowings under the Company's Unsecured Line of Credit, which were used to fund
the acquisition and development of additional apartment communities, including
the SummerWalk acquisition. In April 1997, the Company sold in a direct
placement 1,662,000 shares of common stock at a price of $36.125 per share. The
net proceeds to the Company, of approximately $58.6 million, were used to reduce
borrowings under the Company's Unsecured Line of Credit, which were used to fund
the acquisition and development of additional apartment communities, including
the TimberWood, SunScape and Cardiff Gardens communities. In June 1997, the
Company sold in an underwritten public offering 2,300,000 shares of 8.50
percent, five year non-call Series C Cumulative Redeemable Preferred Stock
(including 300,000 shares sold in connection with the exercise of the
underwriters' over-allotment option) at a price of $25 per share. The net
proceeds to the Company, of approximately $55.5 million, were used to reduce
borrowings under the Company's Unsecured Line of Credit, which were used to fund
the acquisition and development of additional apartment communities, including
the Villa Serena, Amador Oaks and Mission Woods communities and one land site in
San Francisco, California. In September 1997, the Company sold in an
underwritten public offering 2,645,000 shares of common stock (including 345,000
shares sold in connection with the exercise of the underwriters' over-allotment
option) at a price of $38.6875 per share. The net proceeds to the Company, after
all anticipated issuance costs, were approximately $97.0 million. The net
proceeds were used to reduce borrowings under the Company's Unsecured Line of
Credit, which were used to fund the acquisition and development of additional
apartment communities, including the Cedar Ridge, The Park and Lakeside
communities and one land site in Mountain View, California. In December 1997,
the Company issued 869,587 shares of common stock in a direct placement and sold
156,600 shares of common stock in an underwritten public offering at a price of
$39.125 per share. The net proceeds to the Company, after all anticipated
issuance costs, were approximately $39.5 million. The net proceeds were used to
reduce borrowings under the Company's Unsecured Line of Credit, which were used
to fund the acquisition and development of additional apartment communities,
including the Gallery Place, Landing West and Creekside communities and one land
site in San Jose, California. Also in December 1997, the Company sold in an
underwritten public offering 3,267,700 shares of 8.00 percent, five year
non-call Series D Cumulative Redeemable Preferred Stock (including 267,700
shares sold in connection with the exercise of the underwriters' over-allotment
option) at a price of $25 per share. The net proceeds to the Company, after all
anticipated issuance costs, were approximately $79.0 million. The net proceeds
were used to reduce borrowings under the Company's Unsecured Line of Credit,
which were used to fund the acquisition and development of additional apartment
communities, including the Governor's Square community. The January 1997, April
1997, June 1997, September 1997 and December 1997 offerings are collectively
called the "1997 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 Available For Distribution (defined below). For the year ended
December 31, 1997, dividends were 72% of Funds Available For Distribution.
Net cash provided by operations for the year ended December 31, 1997
increased to $64.9 million from $40.2 million for the year ended December 31,
1996, principally due to higher net income before non-cash charges for
depreciation and amortization from the addition of the 1996 and 1997 Acquisition
Communities and the 1996 and Current Development Communities.
Net cash used for investing activities was $577.2 million and $217.0
million for the years ended December 31, 1997 and 1996, respectively. This
change reflects the increased level of acquisition and reconstruction projects
and the development and construction of new communities.
Net cash provided by financing activities was $514.6 million and $176.0
million for the years ended December 31, 1997 and 1996, respectively. The net
cash provided from financing activities in 1997 is primarily from the net
proceeds of the 1997 Offerings and net borrowings under the Unsecured Line of
Credit less dividends paid. The net cash provided from financing activities in
1996 reflects primarily the net proceeds of the 1996 Offerings and net
borrowings under the Unsecured Line of Credit less dividends paid.
27
<PAGE> 30
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.
YEAR 2000 COMPLIANCE
The Year 2000 compliance issue concerns the inability of computerized
information systems to accurately calculate, store or use a date after 1999.
This could result in a system failure or miscalculations causing disruptions of
operations. The Year 2000 issue affects virtually all companies and all
organizations.
The Company has conducted an assessment of its core internal and external
computer information systems and is taking the further necessary steps to
understand the nature and extent of the work required to make its systems, in
those situations in which the Company is required to do so, Year 2000 compliant.
These steps may require the Company to modify, upgrade or replace some of its
internal financial and operational systems. The total cost of bringing all
internal systems, equipment and operations into Year 2000 compliance has not
been fully quantified. The Company continues to evaluate the estimated costs
associated with these compliance efforts. While these efforts involve additional
costs, the Company believes, based on available information, that these costs
will not have a material adverse effect on its business, financial condition or
results of operations. While the Company believes it will be Year 2000 compliant
by December 31, 1999, if these efforts are not completed on time or if the cost
of updating or replacing the Company's information systems exceeds the Company's
current estimates, the Year 2000 issue could have a material impact on the
Company's ability to meet its financial and reporting requirements. Further, no
estimates can be made as to any potential adverse impact resulting from the
failure of third-party service providers and vendors to prepare for the Year
2000. The Company is attempting to identify those risks as well as to receive
compliance certificates from all third parties that have a material impact on
the Company's operations, but the cost and timing of third party Year 2000
compliance is not within the Company's control and no assurance can be given
with respect to the cost or timing of such efforts or the potential effects of
any failure to comply.
FFO AND FUNDS AVAILABLE FOR DISTRIBUTION
Many industry analysts consider FFO an appropriate measure of performance
of an equity REIT. FFO as defined by NAREIT means 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. 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.
The Company computes FFO in accordance with the revised NAREIT definition, which
may differ from the methodology for computing FFO utilized by other equity
REITs, and, accordingly, may not be comparable to such other REITs. The Company
believes that in order to facilitate a clear understanding of the historical
operating results, FFO should be examined in conjunction with net income (loss)
as presented in the financial statements. FFO 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, 1997, FFO increased from $38.3 million to
$62.4 million. This increase is primarily due to higher net income and
depreciation add back due to the addition of the 1996 Acquisition and
Development Communities, the 1997 Acquisition Communities and Toscana.
28
<PAGE> 31
FFO and Funds Available for Distribution for the years ended December 31,
1997, 1996 and 1995 are summarized as follows:
CALCULATION OF FFO AND FUNDS AVAILABLE FOR DISTRIBUTION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER APARTMENT HOME DATA)
<S> <C> <C> <C>
Net income................................ $ 38,941 $ 19,626 $ 11,460
Series C & D preferred dividend
requirement............................. (2,840) -- --
Depreciation -- real estate assets........ 25,963 17,800 12,319
Gain on sale.............................. -- -- (2,412)
Extraordinary item........................ -- 511 --
Non-recurring adjustments to net income:
Amortization of non-recurring costs,
primarily legal, from the issuance of
tax-exempt bonds(1).................. 353 356 517
----------- ----------- -----------
FFO(2).................................... 62,417 38,293 21,884
Recurring adjustments to net income:
Amortization of origination fees on
Credit Facilities(3)................. -- 159 609
Amortization of reincorporation costs... 27 13 --
Amortization of credit enhancement
costs(4)............................. 152 152 152
Depreciation -- non real estate
assets............................... 514 202 117
Capital expenditures(5)................... (1,598) (1,319) (693)
Loan principal payments................... (1,201) (480) (299)
----------- ----------- -----------
Funds Available for Distribution
("FAD")................................. $ 60,311 $ 37,020 $ 21,770
=========== =========== ===========
Weighted average shares outstanding(6).... 25,508,309 17,817,623 12,196,003
=========== =========== ===========
</TABLE>
- ---------------
(1) 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.
(2) FFO before recurring adjustments to net income represents the definition of
FFO adopted by the NAREIT Board of Governors for periods after 1995.
(3) 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.
(4) 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.
29
<PAGE> 32
(5) Capital improvements represent amounts expended primarily at communities
acquired or developed prior to 1996. A breakdown of the expenditures for
1997 is as follows:
<TABLE>
<CAPTION>
TOTAL PER APARTMENT HOME
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1997
------------------- --------------------
<S> <C> <C>
NON-REVENUE GENERATING:
Exterior painting.................... $ 535 $ 48
Leasing pavilion rehabilitation...... 377 32
Landscape............................ 264 20
Security gate system................. 160 13
Parking area resurfacing............. 11 1
Other capital expenditures........... 251 21
------ ----
Subtotal -- capital
expenditures............... 1,598 135
------ ----
REVENUE GENERATING:
Watersubmeters....................... 919 73
Appliances........................... 521 44
Trash Compactors..................... 342 30
Fixtures............................. 339 30
Cable TV System...................... 286 28
Water heater controllers............. 64 5
------ ----
Subtotal..................... 2,471 210
------ ----
Total capital improvements... $4,069 $345
====== ====
</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
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. Capitalized
expenditures as described here exclude major reconstruction costs incurred
in conjunction with the acquisition and repositioning of apartment
communities. Such costs are added to the cost basis of those communities.
Capitalized expenditures also exclude costs 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. The per apartment home calculation for the year is the sum
of the quarterly calculations which are based on the ending number of
apartment homes in the portfolio at the end of each quarter.
(6) 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.
SUBSEQUENT EVENTS
On March 9, 1998, the Company announced that it had signed a definitive
merger agreement with Avalon Properties, Inc. The surviving company is to be
named Avalon Bay Communities, Inc. Under the terms of the agreement, Avalon
Properties, Inc. will be merged into the Company, with the Company being the
surviving entity, through an exchange of shares in which the Avalon Properties,
Inc. common shareholders will receive 0.7683 of a share of the Company's common
stock for each share of Avalon Properties, Inc. common stock they own. Avalon
Properties, Inc. preferred shareholders will receive comparable preferred shares
of the Company as a result of the merger. The merger, which has been unanimously
approved by the board of directors of both companies and is expected to close in
June 1998, is intended to qualify as a tax-free transaction and will be
accounted for as a purchase of Avalon Properties, Inc. by the Company. The
merger is subject to the approval of the shareholders of both companies and
other customary closing conditions. In connection with the execution of the
merger agreement, the Company and Avalon Properties, Inc. each issued to the
other an option to buy 19.9% of its outstanding common stock under certain
circumstances. In addition,
30
<PAGE> 33
the Company and Avalon Properties, Inc. each adopted shareholders' rights
agreements. Avalon Bay Communities, Inc. will be governed by a twelve-member
Board of Directors, six of whom will be from the Company's Board of Directors
and six of whom will be from Avalon Properties, Inc.'s Board of Directors. Nine
of the twelve Board members will be independent.
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.
31
<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and biographical descriptions set forth certain
information with respect to the six directors and executive officers of the
Company, based on information furnished to the Company by each director and
executive officer. There is no family relationship between any director or
executive officer of the Company. Unless otherwise specified, the following
information is as of March 24, 1998, and all percentages have been calculated
based on 26,196,490 shares of common stock outstanding at the close of business
on such date.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
DIRECTOR OWNERSHIP OF OF
NAME OF DIRECTOR AGE SINCE COMMON STOCK(1) CLASS
---------------- --- -------- ----------------- -------
<S> <C> <C> <C> <C>
Gilbert M. Meyer...................... 53 1978 1,113,208(2) 4.22%
Max L. Gardner........................ 46 1996 60,602(3) *
Bruce A. Choate....................... 50 1994 21,000(4) *
John J. Healy, Jr. ................... 51 1996 18,000(5) *
Brenda J. Mixson...................... 45 1994 22,000(4) *
Thomas H. Nielsen..................... 67 1994 31,697(4)(6) *
</TABLE>
- ---------------
* Less than one percent.
(1) Except as otherwise noted, each individual in this table has sole voting and
investment power over the shares listed.
(2) Includes (i) 190,000 shares issuable upon the exercise of stock options that
have vested or will vest by May 23, 1998 and (ii) 15,095 shares issuable
upon Mr. Meyer's termination of employment with the Company pursuant to an
election to defer compensation in accordance with the terms of the Stock
Incentive Plan.
(3) Includes (i) 50,000 shares issuable upon the exercise of stock options that
have vested or will vest by May 16, 1998 and (ii) 343 shares issuable upon
Mr. Gardner's termination of employment with the Company pursuant to an
election to defer compensation in accordance with the terms of the Stock
Incentive Plan.
(4) Includes 21,000 shares issuable upon the exercise of stock options that have
vested or will vest by May 23, 1998.
(5) Includes 15,000 shares issuable upon the exercise of stock options that have
vested or will vest by May 23, 1998.
(6) Includes 697 shares issuable upon Mr. Nielsen's cessation as a director of
the Company pursuant to an election to defer the receipt of directors fees
in accordance with the terms of the Stock Incentive Plan. Mr. Nielsen is a
co-trustee of a trust that holds 2,000 shares of common stock. He shares
voting and investment power over the shares held by the trust with his wife
and with the U.S. Trust Company of California pursuant to an investment
management agreement.
DIRECTORS
GILBERT M. MEYER is the founder, Chairman of the Board of Directors,
President and Chief Executive Officer of the Company and, since 1978, has been
continuously involved with the Company as an executive officer, director and
stockholder. Mr. Meyer also was the founder and stockholder of certain
affiliates of the Company. Prior to founding the Company, Mr. Meyer was Chief
Financial Officer for BAS Homes and prior to that was a Vice President
responsible for real estate workouts for Boise Cascade Credit Corporation. Mr.
Meyer is a licensed Certified Public Accountant and General Contractor, and
holds a B.A. degree from St. Mary's College of California and an M.B.A. degree
from the University of California, Berkeley.
32
<PAGE> 35
MAX L. GARDNER has been Executive Vice President and Chief Operating
Officer of the Company since December 1995 and has served as a director of the
Company since May 1996. From 1988 to 1995, Mr. Gardner served as President and
Chief Executive Officer of West RS, Inc. (d/b/a Trammell Crow Residential
Services), a company which specializes in the development, construction, finance
and management of residential apartment properties. Mr. Gardner graduated from
Duke University with a degree in Political Science, and he received a Master of
Professional Accountancy degree from Georgia State University.
BRUCE A. CHOATE is a Director of the Company and has been Chief Financial
Officer of Watson Land Company, a privately-held REIT in Carson, California
since 1991. Prior to joining Watson Land Company, Mr. Choate was employed by
Bixby Ranch Company, a privately-held real estate investment company in Seal
Beach, California as Senior Vice President and Chief Financial Officer. Mr.
Choate graduated from the University of California, Los Angeles and attended the
Graduate School of Business at the University of Southern California.
JOHN J. HEALY, JR. has been a Director of the Company since May 1996, and
is the founder and President of Hyde Street Holdings, Inc. From 1988 to 1996,
Mr. Healy was a founder and a managing principal of the Hanford/Healy Companies,
a national commercial real estate services company acquired by General Motors
Acceptance Corporation -- CM in September 1996. Mr. Healy was also a managing
principal of Hanford/Healy Appraisal Company, a national real estate appraisal
and consulting firm, and a principal of Hanford/Healy Asset Management Company,
a national real estate asset management firm. Mr. Healy graduated from Hofstra
University with a B.B.A. in Finance, Investment and Banking and a Master of
Business Administration.
BRENDA J. MIXSON is a Director of the Company and has been Chief Investment
Officer and Managing Director of Prime Capital Holding since December 1997. From
February 1996 until December 1997, Ms. Mixson was a Managing Director of the
Emerging Markets, Fixed Income Department for ING Barings (U.S.) Securities,
Inc., a member of the ING Group. Ms. Mixson previously served as Vice
President -- Real Estate Finance of ING Capital Corporation from March 1995 to
February 1996. She served as an Executive Vice President and Chief Operating
Officer of Reichmann International from April 1994 to March 1995. From 1989 to
1994, she was an Executive Vice President and Managing Director and a Regional
Manager, Northeast Region, of Travelers Realty Investment Company. Prior to
joining Travelers Realty Investment Company, Ms. Mixson was employed by Chemical
Bank as a Vice President and Regional Manager. Ms. Mixson graduated from the
University of Minnesota with a B.S. degree in Economics.
THOMAS H. NIELSEN is a Director of the Company and has been a self-employed
consultant for large-scale real estate development projects since 1991. In 1993,
Mr. Nielsen was named a Managing Director of the Orange County Office of U.S.
Trust of California, N.A., and he held that position until July 1995, at which
time he was named Consulting Director. He also served as Chief Executive Officer
of the Orange County Performing Arts Center from 1993 to 1995. From 1978 to
1990, Mr. Nielsen served in various positions for The Irvine Company, a
privately-held real estate development company, including President and Vice
Chairman, and he presently serves as a Director. Mr. Nielsen holds a B.S. degree
in Civil Engineering from the University of Washington and an M.B.A. degree from
Stanford University.
EXECUTIVE OFFICERS
JEFFREY B. VAN HORN has been Vice President, Chief Financial Officer and
Treasurer of the Company since June 1996, and Secretary of the Company since
September 1997. Prior to joining the Company, Mr. Van Horn was a partner in the
real estate services group with the accounting firm Arthur Andersen LLP. Mr. Van
Horn joined Arthur Andersen in June 1982, was admitted as a partner in September
1995 and has worked with a wide variety of west coast REITs and real estate
companies. He has been involved in a number of initial public offerings, mergers
and acquisitions and other audit, business and tax advisory services. In
addition, Mr. Van Horn was a member of Arthur Andersen's national REIT tax
specialty team. Mr. Van Horn earned a B.A. degree in Accounting from California
State University -- Stanislaus and is a licensed Certified Public Accountant.
33
<PAGE> 36
MORTON L. NEWMAN has been Vice President -- Construction of the Company
since 1985. In that capacity, Mr. Newman has managed the design, construction,
and warranty services for the apartments and single-family homes that the
Company and its affiliates have built during that period. Previously, Mr. Newman
was President of Newman Construction Company and has over 30 years experience in
all aspects of residential and commercial construction. Mr. Newman is a graduate
of the University of Pennsylvania and is a registered Civil Engineer in
Pennsylvania and California.
DANIEL E. MURPHY has been Vice President -- Northern California of the
Company since December 1997. In that capacity, Mr. Murphy is responsible for the
acquisition, development and construction activities of the Company for the
Northern California region. From January 1996 to December 1997, Mr. Murphy
served as Vice President -- Development of the Company, and from October 1994
through January 1996 he served as the Company's Director of Development. From
1992 to 1994, Mr. Murphy worked for Landtech Investment Corporation and provided
real estate consulting services. Between 1990 and 1991, Mr. Murphy served as
Vice President -- Development of Rosewood Property Company. Between 1985 and
1990, Mr. Murphy completed various urban residential and mixed-use development
projects with Prometheus Development Company as Senior Project Manager. Mr.
Murphy graduated with a B.S. degree in Civil Engineering from Cleveland State
University in 1982 and earned an M.S. degree in Civil Engineering/ Construction
Management from Stanford University in 1984.
JOHN H. PRINGLE has been Vice President -- Property Operations since April
1997. From March 1987 through March 1997, Mr. Pringle was employed by Maxim
Property Management (formerly known as Prometheus Development Company) and
served as Senior Vice President, General Manager. Mr. Pringle graduated from
Colorado State University with a B.S. degree in Economics.
DEBRA L. SHOTWELL has been Vice President -- Human Resources of the Company
since July 1995. From July 1990 to June 1995, she was the Director -- Corporate
Human Resources of PacifiCare Health Systems, Inc. Ms. Shotwell graduated from
California State University -- Sacramento with a degree in Business
Administration.
BOARD OF DIRECTORS AND ITS COMMITTEES
Board of Directors. The Company is currently managed by a six-member Board
of Directors, a majority of whom are independent of the Company's management.
The Board of Directors met six times in person and held 13 telephonic meetings
during 1997. Each of the directors attended at least 75% of the total number of
meetings of the Board of Directors and meetings of the committees of the Board
of Directors that he or she was eligible to attend.
Audit Committee. The Board of Directors has established an audit committee
(the "Audit Committee") consisting of Bruce A. Choate, Brenda J. Mixson, Thomas
H. Nielsen and John J. Healy, Jr. The Audit Committee makes recommendations
concerning the engagement of independent public accountants, reviews the plans
and results of the audit engagement with the independent public accountants,
approves professional services provided by the independent public accountants,
reviews the independence of the independent public accountants, considers the
range of audit and non-audit fees and reviews the adequacy of the Company's
internal accounting controls. The Audit Committee met two times during 1997.
Compensation Committee. The Company's Board of Directors has established a
compensation committee (the "Compensation Committee") to determine compensation
for the Company's executive officers. The current members of the Compensation
Committee are Bruce A. Choate, Brenda J. Mixson, Thomas H. Nielsen and John J.
Healy, Jr. The Compensation Committee exercises all powers of the Board of
Directors in connection with compensation matters, including incentive
compensation and benefit plans. The Compensation Committee also has authority to
grant awards under the Stock Incentive Plan to the employee directors,
management and other employees of the Company and its subsidiaries. The
Compensation Committee met two times during 1997.
The Board of Directors does not have a standing nominating committee. The
full Board of Directors performs the function of such a committee.
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<PAGE> 37
DIRECTOR COMPENSATION
Directors of the Company who are also employees receive no additional
compensation for their services as directors. Each non-employee director of the
Company received an annual director's fee of $18,000 in fiscal year 1997. Each
non-employee director also received $1,000 for each regular quarterly meeting of
the Board of Directors attended, $1,000 for each special meeting of the Board of
Directors attended, $500 for participating in each special telephonic meeting of
the Board of Directors and $1,000 for each committee meeting attended, other
than committee meetings that are held on the same date as a regular or special
meeting for which a fee is already paid. Under the Stock Incentive Plan, on the
fifth business day following each annual meeting of stockholders, each of the
Company's non-employee directors automatically receives options to purchase
5,000 shares of common stock at the last reported sale price of the common stock
on the NYSE on the date of grant. In addition, on January 30, 1998 the Board of
Directors approved a discretionary grant of options to purchase 5,000 shares of
common stock to each non-employee director. These options are subject to the
same conditions and vesting provisions, and shall be granted on the same date,
as those options that will be granted automatically to the non-employee
directors on the fifth business day following the Annual Meeting. All of such
stock options granted to non-employee directors become exercisable one year
after the date of grant.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who own more than 10% of a registered class of the
Company's equity securities (collectively, "Insiders"), to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC") and one national securities exchange on which such securities are
registered. In accordance with Rule 16a-3(c) under the Exchange Act, the Company
has designated the NYSE as the one national securities exchange with which
reports pursuant to Section 16(a) of the Exchange Act need be filed. Insiders
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. To the Company's knowledge, based solely on a review of
copies of such reports and written representations that no other reports were
required during the fiscal year ended December 31, 1997, all transactions in the
Company's securities that were engaged in by Insiders, and therefore required to
be disclosed pursuant to Section 16(a) of the Exchange Act, were timely
reported.
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<PAGE> 38
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for each of the Company's last three fiscal
years, the annual compensation awarded to the Company's chief executive officer
and six of its other executive officers during 1997 (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------------------
SECURITIES
ANNUAL UNDER- RESTRICTED
COMPENSATION LYING STOCK ALL OTHER
---------------------- OPTIONS AWARDS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) (#)(3) ($)(4) ($)(5)
--------------------------- ---- --------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gilbert M. Meyer.............. 1997 $ 294,455(6) $250,287(6) 100,000 $379,375(7) $ 1,000
Chairman of the Board, 1996 244,231 183,173 100,000 727,500(8) 1,000
President and 1995 194,900 97,400 40,000 0 1,000
Chief Executive Officer
Max L. Gardner(9)............. 1997 216,047(10) 83,539 10,000 37,938(11) 1,250
Executive Vice President and 1996 209,427 150,000 20,000 36,375(12) 1,250
Chief Operating Officer 1995 11,500 5,800 100,000 110,000(13) 0
Jeffrey B. Van Horn(14)....... 1997 192,246 83,811 50,000 379,375(7) 31,939(15)
Vice President and 1996 83,823 36,190 45,000 61,750(16) 25,099(17)
Chief Financial Officer
Morton L. Newman.............. 1997 150,794 50,893 15,000 37,938(11) 1,000
Vice President -- Construction 1996 141,365 87,788 10,000 36,375(12) 1,000
1995 135,800 61,100 5,000 0 1,000
Daniel E. Murphy.............. 1997 152,193(18) 48,244 20,000 37,938(11) 1,250
Vice President -- Development 1996 128,346 74,321 30,000 36,375(12) 1,250
1995 93,998 45,000 10,000 0 0
John H. Pringle(19)........... 1997 120,435 37,262 50,000(20) 34,250(21) 0
Vice President -- Property
Operations
Debra L. Shotwell(9).......... 1997 126,316 42,111 10,000 37,938(11) 937
Vice President -- Human 1996 118,919 48,273 5,000 18,188(22) 936
Resources 1995 52,300 14,900 25,000 0 0
</TABLE>
- ---------------
(1) Includes amounts deferred under the Company's 401(k) plan.
(2) Bonuses may be paid under the Company's Incentive Bonus Plan in the
discretion of the Compensation Committee to executive officers, subject to
certain performance-based criteria. For a general description of the
Incentive Bonus Plan, see "Compensation Committee Report on Executive
Compensation."
(3) Unless otherwise noted, the Compensation Committee authorized the grant of
all of the options to purchase common stock listed for 1997 on January 30,
1998.
(4) During the period from March 1994 through December 31, 1997, 37,500 shares
of restricted stock were granted by the Company to the Named Executive
Officers. Based on the last reported sale price of the Company's common
stock on the NYSE on December 31, 1997 of $39 per share, the aggregate
dollar value of these 37,500 shares of restricted stock was $1,462,500.
(5) Unless otherwise noted, consists of amounts contributed by the Company to
the Named Executive Officer's 401(k) account.
(6) An aggregate of $265,493 of Mr. Meyer's salary and bonus compensation was
deferred pursuant to the Stock Incentive Plan. Under the terms of the Stock
Incentive Plan, such deferred compensation will be payable in the form of
common stock upon Mr. Meyer's termination of employment. See "Summary of
Stock Incentive Plan -- Unrestricted Stock."
(7) Consists of 10,000 shares of restricted stock awarded as of January 30,
1998, valued at $37.9375 per share. These shares vest in five equal annual
installments beginning on January 30, 1999. Dividends are payable on these
shares.
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<PAGE> 39
(8) Consists of 20,000 shares of restricted stock awarded as of February 3,
1997, valued at $36.375 per share. These shares vest in five equal annual
installments beginning on February 3, 1998. Dividends are payable on these
shares.
(9) The following Named Executive Officers began employment in 1995: Max L.
Gardner, December 4, 1995; Debra L. Shotwell, July 13, 1995.
(10) Includes $10,058 of compensation deferred pursuant to the Stock Incentive
Plan. Under the terms of the Stock Incentive Plan, such deferred
compensation will be payable in the form of common stock upon Mr. Gardner's
termination of employment. See "Summary of Stock Incentive
Plan -- Unrestricted Stock."
(11) Consists of 1,000 shares of restricted stock awarded as of January 30,
1998, valued at $37.9375 per share. These shares vest in five equal annual
installments beginning on January 30, 1999. Dividends are payable on these
shares.
(12) Consists of 1,000 shares of restricted stock awarded as of February 3,
1997, valued at $36.375 per share. These shares vest in five equal annual
installments beginning on February 3, 1998. Dividends are payable on these
shares.
(13) Consists of 5,000 shares of restricted stock awarded on December 4, 1995,
valued at $22.00 per share. These shares vest in five equal annual
installments beginning on December 4, 1996. Dividends are payable on these
shares.
(14) Mr. Van Horn began employment on June 19, 1996.
(15) Includes $7,539 of imputed interest income derived from Mr. Van Horn's
interest-free loan from the Company and $24,400 of imputed income resulting
from the forgiveness by the Company of one-fifth of the outstanding
principal amount of such loan. For a more detailed discussion of the loan,
see "Certain Relationships and Related Transactions -- Indebtedness of
Management."
(16) Consists of (i) 1,000 shares of restricted stock awarded on August 6, 1996,
valued at $25.375 per share, which vest in five equal annual installments
beginning on June 19, 1997, and (ii) 1,000 shares of restricted stock
awarded as of February 3, 1997, valued at $36.375 per share, which vest in
five equal annual installments beginning on February 3, 1998. Dividends are
payable on these shares.
(17) Includes $20,682 reimbursed to Mr. Van Horn for all moving-related expenses
incurred in connection with his hiring in June 1996 and $3,578 of imputed
interest income derived from Mr. Van Horn's interest-free loan from the
Company. For a more detailed discussion of the loan, see "Certain
Relationships and Related Transactions -- Indebtedness of Management."
(18) Includes $21,121 of compensation deferred pursuant to the Stock Incentive
Plan. Under the terms of the Stock Incentive Plan, such deferred
compensation will be payable in the form of common stock upon Mr. Murphy's
termination of employment. See "Summary of Stock Incentive
Plan -- Unrestricted Stock."
(19) Mr. Pringle began employment on April 16, 1997.
(20) These options to purchase common stock were granted on April 16, 1997.
(21) Consists of 1,000 shares of restricted stock awarded as of May 1, 1997,
valued at $34.25 per share. These shares vest in five equal annual
installments beginning on May 1, 1997. Dividends are payable on these
shares.
(22) Consists of 500 shares of restricted stock awarded as of February 3, 1997,
valued at $36.375 per share. These shares vest in five equal annual
installments beginning on February 3, 1998. Dividends are payable on these
shares.
37
<PAGE> 40
OPTION GRANTS WITH RESPECT TO FISCAL YEAR 1997
Option Grants with respect to Fiscal Year 1997. The following table sets
forth the options granted with respect to the fiscal year ended December 31,
1997 to the Company's Named Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF
SHARES TOTAL OPTIONS STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION
OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM
GRANTED FOR FISCAL PRICE EXPIRATION -----------------------
NAME (#)(1) YEAR 1997(2) ($/SH) DATE 5%($) 10%($)
---- ---------- -------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gilbert M. Meyer........... 100,000 29.20% $37.9375 1/30/08 $2,385,871 $6,046,261
Max L. Gardner............. 10,000 2.92% 37.9375 1/30/08 238,588 604,627
Jeffrey B. Van Horn........ 50,000 14.60% 37.9375 1/30/08 1,192,936 3,023,131
Morton L. Newman........... 15,000 4.38% 37.9375 1/30/08 357,881 906,940
Daniel E. Murphy........... 20,000 5.84% 37.9375 1/30/08 477,175 1,209,253
John H. Pringle............ 50,000(3) 14.60% 36.1250 4/16/07 1,135,942 2,878,698
Debra L. Shotwell.......... 10,000 2.92% 37.9375 1/30/08 238,588 604,627
</TABLE>
- ---------------
(1) All of these options will vest in four equal installments on the first,
second, third and fourth anniversaries of the date of grant. Unless
otherwise noted, the date of grant of all of these options was January 30,
1998. This chart excludes options granted on January 24, 1997 with respect
to the fiscal year ended December 31, 1996 in the following amounts: Mr.
Meyer, 100,000; Mr. Gardner, 20,000; Mr. Van Horn, 20,000; Mr. Newman,
10,000; Mr. Murphy, 10,000; and Ms. Shotwell, 5,000. The grant of those
options was disclosed in the Company's 1997 Proxy Statement.
(2) A total of 342,500 options were granted to employees of the Company with
respect to the fiscal year ended December 31, 1997.
(3) These options were granted to Mr. Pringle on April 16, 1997.
Option Exercises and Year-End Holdings. The following table sets forth the
aggregate number of options exercised in 1997 and the value of options held as
of December 31, 1997 by the Company's Named Executive Officers.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND
FISCAL YEAR-END 1997 OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
SHARES YEAR-END YEAR-END
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE(#) UNEXERCISABLE($)(1)
---- ----------- ----------- ----------------------- --------------------
<S> <C> <C> <C> <C>
Gilbert M. Meyer.......... 0 0 115,000/185,000 $2,200,000/1,800,000
Max L. Gardner............ 0 0 50,000/70,000 950,000/997,500
Jeffrey B. Van Horn....... 0 0 6,250/38,750 85,157/302,969
Morton L. Newman.......... 1,311 22,287(2) 23,689/25,000 453,998/304,219
Daniel E. Murphy.......... 0 0 12,500/27,500 159,063/283,438
John H. Pringle........... 0 0 0/50,000 0/143,750
Debra L. Shotwell......... 0 0 6,250/17,500 121,094/254,063
</TABLE>
- ---------------
(1) Based on the last reported sale price of the Company's common stock on the
NYSE on December 31, 1997 of $39 per share.
(2) Based on the last reported sale price of the Company's common stock on the
NYSE on June 30, 1997, the date of exercise, of $37 per share.
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<PAGE> 41
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement (each an "Employment
Agreement") with each of Messrs. Meyer, Gardner, Van Horn and Newman. The
Employment Agreements of Messrs. Meyer and Newman are automatically renewed on
each anniversary of the closing of the Company's initial public offering unless
otherwise terminated by the Company or the respective employee, and the
Employment Agreements of Messrs. Gardner and Van Horn terminate on the third
anniversary of the date of such agreement. Pursuant to their respective
Employment Agreements, as amended, Mr. Meyer serves as President of the Company,
Mr. Gardner serves as Executive Vice President and Chief Operating Officer, Mr.
Van Horn serves as Vice President and Chief Financial Officer and Mr. Newman
serves as Vice President -- Construction. The Employment Agreements provide for
base salaries in the amounts of $350,000, $225,000, $250,000 and $175,000,
respectively. The Employment Agreements of Messrs. Meyer and Newman provide for
base salary increases based on increases in the consumer price index, and all of
the Employment Agreements provide for base salary increases in the discretion of
the Compensation Committee. In addition, Messrs. Meyer, Gardner, Van Horn and
Newman are eligible for additional compensation in the form of bonuses under the
Company's Incentive Bonus Plan (the "Incentive Bonus Plan").
Under the Employment Agreements, each of the officers has agreed to devote
substantially all of his working time to the business and affairs of the
Company. Mr. Meyer's Employment Agreement provides that during the term of
employment, and for two years thereafter in the event that he is terminated for
cause or voluntarily terminates his employment other than for cause, he will be
prohibited from competing directly or indirectly with the Company with respect
to any development or acquisition project undertaken or being considered by the
Company at the time of termination or actively engaging in the development,
construction or management of multifamily real estate property, without the
prior written consent of the Board of Directors.
If the employment of Mr. Meyer is terminated without cause after a "change
in control," or upon the occurrence of certain other events, Mr. Meyer will be
entitled to receive a severance amount (the "Meyer Severance Amount") equal to
three times the sum of his base salary and his bonus for the preceding year. In
the event that the Meyer Severance Amount payable exceeds three times his
average total annual compensation during the preceding five years, the excess of
such payment would constitute an "excess golden parachute payment" under the
Code and would not be deductible by the Company. If the employment of either Mr.
Gardner or Mr. Van Horn is terminated without cause within one year after a
"change in control" or upon the occurrence of certain other events, such officer
will be entitled to receive a severance amount equal to his base salary for the
preceding year.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Objectives of Executive Compensation. The Company's executive compensation
program is intended to attract, retain and reward experienced, highly motivated
executives who are capable of leading the Company effectively and continuing its
growth and profitability. The Company's objective is to utilize a combination of
cash and equity-based compensation to provide appropriate incentives for
executives while aligning their interests with those of the Company's
stockholders.
The Company compensates its executive officers through a combination of
annual base salary, annual cash bonuses and awards under the Stock Incentive
Plan. The Company's goal is to provide total compensation to its executive
officers which is competitive with those levels of total compensation paid in
the REIT industry for companies with similar property portfolios and of similar
size, makeup and performance. For purposes of evaluating relative executive
compensation amounts, the Compensation Committee reviewed the total compensation
paid by comparable REITs that were selected based primarily on financial
performance, property type, geographical location and market capitalization.
The Company's compensation program has three principal elements: base
salary, performance incentive bonuses under the Incentive Bonus Plan and awards
under the Stock Incentive Plan.
BASE SALARY. The Company establishes base salary levels for its key
executives relative to base salary levels for key executives of comparable
REITs. For fiscal year 1997, base salaries of the Company's
39
<PAGE> 42
President, Chief Operating Officer and Chief Financial Officer were set at
rates that the Company believes were generally lower than the median base
salaries earned by officers holding similar positions within other
comparable REITs. This is consistent with the Company's policy to place
greater emphasis on performance-related incentive compensation, such as
bonuses and stock options.
PERFORMANCE INCENTIVE BONUS. Under the Company's Incentive Bonus Plan,
the Compensation Committee, which is composed of the four non-employee
directors whose names appear below this report, may award annual cash
bonuses to executive officers and certain other members of management for
the achievement of specified performance goals for the Company and the
individual. The Incentive Bonus Plan rewards executives for their
performance during the past fiscal year based on increases in FFO per
share, as well as officer-specific performance objectives, such as
involvement in property acquisitions and developments and assisting in
efforts to raise debt or equity financing for the Company.
STOCK INCENTIVE PLAN AWARDS. Stock options and restricted stock
granted under the Company's Stock Incentive Plan are designed to provide
long-term performance incentives and rewards tied to the price of the
Company's common stock and, generally, will vest ratably over a period of
four years. Stock options are granted primarily based on the performance
criteria established for granting performance incentive bonuses under the
Incentive Bonus Plan. The Compensation Committee views stock options and
restricted stock as a means of aligning management and stockholder
interests and expanding management's long-term perspective.
Compensation Committee Procedures. The Company's executive compensation
program is administered under the direction of the Compensation Committee. Final
compensation determinations for each fiscal year are generally made after the
end of the fiscal year after financial statements for such year become
available. At that time, bonuses, if any, are determined for the past year's
performance, base salaries for the following fiscal year are set and grants of
stock options and restricted stock, if any, are generally made. At a meeting on
January 30, 1998 the Compensation Committee determined annual cash bonuses under
the Incentive Bonus Plan and awards of stock options and restricted stock under
the Stock Incentive Plan for its officers and certain key employees, as
described in the Summary Compensation Table included in this Proxy Statement.
Compensation of the Chief Executive Officer. The Compensation Committee
considers the Company's financial performance to be the principal determinant in
the overall compensation package of the Chief Executive Officer. The
Compensation Committee considers the Company's growth in FFO per share to be the
best indicator of the Company's financial performance when establishing the
compensation for Mr. Meyer. In addition to the overall increase in FFO during
1997 of approximately 63%, the Compensation Committee particularly noted that
the Company was able to increase FFO per share by approximately 14% to maintain
an annualized increase in FFO per share of approximately 14.1% since the
Company's initial public offering in March 1994, even with an increase of 32.5%
in the number of outstanding shares of common stock and Series A and Series B
preferred stock. The Compensation Committee also considers the market
performance of the Company's common stock to be a factor in determining
executive compensation, although it does not consider the Company's stock price
alone to be as important as the Company's underlying earnings performance. In
1997, the Company's price per share of common stock increased by approximately
8.3% from $36 on December 31, 1996 to $39 on December 31, 1997.
In determining Mr. Meyer's compensation, the Compensation Committee also
noted that in 1997 the Company successfully completed the acquisition of 19
apartment home communities, completed reconstruction programs at nine
communities and had ongoing or planned reconstruction programs at 19 communities
at the end of 1997. In addition, the Compensation Committee viewed favorably the
Company's development activity during 1997, including the completion of
construction of one community, continued construction at another community and
initiation of development or construction at five additional apartment home
communities. The Compensation Committee also noted Mr. Meyer's leadership of the
Company's initial expansion into the Pacific Northwest apartment home market. As
of December 31, 1997, the Company's portfolio of apartment home communities had
increased to a total of 54 communities, and the portfolio has subsequently been
complemented by the acquisition of five additional communities in 1998.
40
<PAGE> 43
Along with the Company's implementation of its acquisition and development
strategy, the Compensation Committee considered, among other things,
- the increase in "same store" EBITDA by 12.6% over 1996;
- the reduction in the payout ratio from 72.7% at the end of 1996 to 66.2%
at the end of 1997;
- amendments to the Company's Unsecured Line of Credit resulting in an
increase in the acquisition and construction line of credit from $200
million to $350 million, a one year extension of the date of maturity to
May 2000 and a reduction in the interest rate from LIBOR plus 1.55% to
LIBOR plus .90% and the addition of a competitive bid option under which
the Company may solicit competitive bids from the participating banks for
short-term borrowings priced at a margin above or below the 30, 60 or 90
day LIBOR;
- the refinancing of approximately $28.4 million of tax-exempt bond
indebtedness with a weighted average interest rate of approximately 5.7%;
- the attainment of BBB and Baa2 corporate credit ratings from Standard &
Poor's and Moody's Investors Service;
- the successful completion of underwritten public offerings of Series C
Preferred Stock and Series D Preferred Stock, two direct placements of
common stock and three underwritten public offerings of common stock,
which raised an aggregate of approximately $393.7 million in gross
proceeds for the Company; and
- the strengthening of the management team and the enhancement of employee
development programs.
Based upon its evaluation of factors such as the foregoing, the
Compensation Committee makes subjective determinations of base salary and bonus
compensation levels.
Mr. Meyer's annual base salary for 1997 was $300,000, and the Compensation
Committee believes that this rate, when considered together with Mr. Meyer's
incentive compensation, is consistent with the Company's performance and his
contribution to such performance and is in accord with industry practices. In
addition, the Compensation Committee determined to increase Mr. Meyer's 1997
base salary under his Employment Agreement to be more consistent with industry
compensation rates. Under the Incentive Bonus Plan, the Compensation Committee
approved an incentive bonus for Mr. Meyer for fiscal year 1997 in the amount of
$250,287. The Compensation Committee also awarded Mr. Meyer options to purchase
100,000 shares of common stock based upon his 1997 performance. These options
will vest in equal installments over a four-year period and will be exercisable
at $37.9375 per share, the last reported sale price of the common stock on the
NYSE on the date of grant, January 30, 1998. This grant of options is intended
to enhance Mr. Meyer's long-term incentive to contribute to the Company's
success, and was made without regard for his current share ownership. Finally,
the Compensation Committee approved an award for Mr. Meyer of 10,000 shares of
restricted stock in consideration for his presiding over the Company's
performance in 1997. These shares vest in five equal annual installments
beginning on January 30, 1999 provided that, among other factors, Mr. Meyer
continues his employment with the Company.
Compensation of Other Executive Officers. The Company's executive
compensation program for other executive officers is based on the same
performance goals and other factors described above for the Chief Executive
Officer, although the corporate, business unit and individual performance goals
and the relative weighting of the quantitative performance factors described
above varies, depending on the responsibilities of particular officers. The
Compensation Committee seriously considers the Chief Executive Officer's
evaluations and recommendations with respect to the other executive officers of
the Company. In recognition of the Company's achievements as described above,
the Compensation Committee approved the Named Executive Officers' incentive
bonuses described in the Summary Compensation Table for the Company's fiscal
year 1997 pursuant to the Incentive Bonus Plan.
For all of the Named Executive Officers, the Compensation Committee also
considers stock options to be an important component of total compensation.
Based on the factors described above, the Compensation
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<PAGE> 44
Committee authorized the grant to (i) Mr. Van Horn of options to purchase 50,000
shares of common stock, (ii) Mr. Murphy of options to purchase 20,000 shares of
common stock, (iii) Mr. Newman of options to purchase 15,000 shares of common
stock and (iv) each of Mr. Gardner and Ms. Shotwell of options to purchase
10,000 shares of common stock. All of these options will vest in four equal
annual installments and will be exercisable at $37.9375 per share, the last
reported sale price of the common stock on the NYSE on the date of grant,
January 30, 1998. In addition, the Compensation Committee approved the grant to
Mr. Van Horn of 10,000 shares of restricted stock and the grant to each of
Messrs. Gardner, Newman, Murphy and Ms. Shotwell of 1,000 shares of restricted
stock. All of these shares of restricted stock vest in five equal annual
installments beginning on January 30, 1999. These Named Executive Officers and
the Company's stockholders will therefore benefit from an appreciation in the
Company's stock price.
The SEC requires that this report comment upon the Company's policy with
respect to Section 162(m) of the Code, which limits the deductibility on the
Company's tax return of compensation over $1 million to any of the Named
Executive Officers of the Company unless, in general, the compensation is paid
pursuant to a plan which is performance-related, non-discretionary and has been
approved by the Company's stockholders. The Compensation Committee's policy with
respect to Section 162(m) is to make every reasonable effort to ensure that
compensation is deductible to the extent permitted, while simultaneously
providing Company executives with appropriate rewards for their performance. The
Company did not pay any compensation with respect to 1997 that would be subject
to Section 162(m).
Submitted by the Compensation Committee:
Bruce A. Choate
John J. Healy, Jr.
Brenda J. Mixson
Thomas H. Nielsen
42
<PAGE> 45
STOCK PERFORMANCE GRAPH
The following graph provides a comparison, from the Company's initial
public offering in March 1994 through December 1997, of the cumulative total
shareholder return (assuming reinvestment of any dividends) among the Company,
the Standard & Poor's ("S&P") 500 Index and the NAREIT Equity REIT Total Return
Index (the "NAREIT Equity Index"), an industry index of 176 REITs, including the
Company. The NAREIT Equity Index includes REITs with 75% or more of their gross
invested book value of assets invested directly or indirectly in the equity
ownership of real estate. Upon written request, the Company will provide any
stockholder with a list of the REITs included in the Index. The historical
information set forth below is not necessarily indicative of future performance.
Data for the NAREIT Equity Index and the S&P 500 Index were provided to the
Company by NAREIT.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3/94 6/94 12/94 6/95 12/95 6/96 12/96 6/97 12/97
- --------------------------------------------------------------------------------------------------------
Bay Apartment 100.00 99.39 101.61 100.34 129.63 142.82 204.53 215.21 231.72
- --------------------------------------------------------------------------------------------------------
Equity REITs 100.00 101.84 99.77 105.46 115.01 122.85 155.57 164.46 187.11
- --------------------------------------------------------------------------------------------------------
S&P 500 100.00 100.41 105.33 126.55 144.75 159.36 177.98 214.66 237.37
- --------------------------------------------------------------------------------------------------------
</TABLE>
[Performance Graph]
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Mr. Bruce A. Choate, Mr. John J.
Healy, Jr., Ms. Brenda J. Mixson and Mr. Thomas H. Nielsen. None of them has
served as an officer of the Company or has any other business relationship or
affiliation with the Company, except his or her service as a director.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
common stock as to (i) each person or entity who is known by the Company to have
beneficially owned more than five percent of the Company's common stock as of
December 31, 1997 or thereafter based upon filings as of March 18, 1998 received
by the Company on Schedules 13D and 13G under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), (ii) each of the Company's directors,
(iii) each of the Named Executive Officers, and (iv) all directors and Named
Executive Officers as a group, based on representations of officers and
directors
43
<PAGE> 46
of the Company as of March 24, 1998. All such information was provided by the
stockholders listed (unless otherwise indicated) and reflects their beneficial
ownership known by the Company. All percentages have been calculated as of March
24, 1998, based on 26,196,490 shares of common stock outstanding at the close of
business on such date.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK PERCENT
NAME AND BUSINESS ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF CLASS
--------------------------------------------- --------------------- --------
<S> <C> <C>
Gilbert M. Meyer............................................ 1,113,208(2) 4.22%
Max L. Gardner.............................................. 60,602(3) *
Jeffrey B. Van Horn......................................... 23,250(4) *
Bruce A. Choate............................................. 21,000(5) *
John J. Healy, Jr........................................... 18,000(6) *
Brenda J. Mixson............................................ 22,000(5) *
Thomas H. Nielsen........................................... 31,697(5)(7) *
Morton L. Newman............................................ 42,892(8) *
Daniel E. Murphy............................................ 16,571(9) *
John H. Pringle............................................. 13,500(10) *
Debra L. Shotwell........................................... 9,334(11) *
All directors and Named Executive Officers as a group (11
persons).................................................. 1,372,054 5.16
Avalon Properties, Inc.(12)................................. 5,212,000 16.59
15 River Road, Suite 210, Wilton, CT 06897
FMR Corp.(13)............................................... 2,997,020 11.44
82 Devonshire Street, Boston, MA 02109
LaSalle Advisors Capital Management, Inc.(14)............... 2,220,723 8.48
200 East Randolph Drive, Chicago, IL 60601
Morgan Stanley, Dean Witter, Discover & Co.(15)............. 1,639,277 6.26
1585 Broadway, New York, NY 10036
Stichting Pensioenfonds ABP(16)............................. 1,554,100 5.93
Oude Lindestraat 70, postbus 2889, 6401 DL Heerlen, The
Netherlands
</TABLE>
- ---------------
* Less than one percent
(1) Except as otherwise noted, each individual in the table above has the sole
voting and investment power over the shares listed.
(2) Includes (i) 190,000 shares issuable upon the exercise of stock options
that have vested or will vest by May 23, 1998 and (ii) 15,095 shares
issuable upon Mr. Meyer's termination of employment with the Company
pursuant to an election to defer compensation in accordance with the terms
of the Stock Incentive Plan.
(3) Includes (i) 50,000 shares issuable upon the exercise of stock options that
have vested or will vest by May 23, 1998 and (ii) 343 shares issuable upon
Mr. Gardner's termination of employment with the Company pursuant to an
election to defer compensation in accordance with the terms of the Stock
Incentive Plan.
(4) Includes 11,250 shares issuable upon the exercise of stock options that
have vested or will vest by May 23, 1998.
(5) Includes 21,000 shares issuable upon the exercise of stock options that
have vested or will vest by May 23, 1998 .
(6) Includes 15,000 shares issuable upon the exercise of stock options that
have vested or will vest by May 23, 1998.
(7) Includes 697 shares issuable upon Mr. Nielsen's cessation as a director of
the Company pursuant to an election to defer the receipt of directors fees
in accordance with the terms of the Stock Incentive Plan. Mr. Nielsen is a
co-trustee of a trust that holds 2,000 shares of common stock. He shares
voting and
44
<PAGE> 47
investment power over the shares held by the trust with his wife and with the
U.S. Trust Company of California pursuant to an investment management agreement.
(8) Includes 36,189 shares issuable upon the exercise of stock options that
have vested or will vest by May 23, 1998.
(9) Includes 12,500 shares issuable upon the exercise of stock options that
have vested or will vest by May 23, 1998 and (ii) 734 shares issuable upon
termination of employment with the Company pursuant to Mr. Murphy's
election to defer compensation in accordance with the terms of the Stock
Incentive Plan.
(10) Includes 12,500 shares issuable upon the exercise of stock options that
have vested or will vest by May 23, 1998.
(11) Includes 7,500 shares issuable upon the exercise of stock options that have
vested or will vest by May 23, 1998.
(12) Information reported is based upon a Schedule 13D filed with the SEC on
March 18, 1998. Beneficial ownership of all of such shares was reported as
a result of an option granted by the Company to purchase 19.9% (determined
as a percentage of the outstanding shares of the Company's common stock
immediately prior to the exercise of this option) of the outstanding number
of shares of the Company's common stock. Since the option has not yet
become exercisable, Avalon disclaims beneficial ownership of such shares.
The inclusion of such securities in the table shall not be deemed an
admission that Avalon is the beneficial owner of such securities for any
purposes.
(13) Information reported is based upon a Schedule 13G/A filed with the SEC on
February 9, 1998 reporting beneficial ownership as of December 31, 1997.
This Schedule 13G/A indicates that the reporting entity is an investment
adviser registered under Section 203 of the Investment Advisers Act of
1940. The Schedule 13G also indicates that the reporting entity has sole
dispositive power with respect to all of the shares and sole voting power
with respect to 530,900 of the shares.
(14) The information reported in the table above includes 1,893,873 shares
beneficially owned by ABKB/LaSalle Securities Limited Partnership
("ABKB/LaSalle"), a Maryland limited partnership, the limited partner of
which is LaSalle Advisors Capital Management, Inc. ("LaSalle"). Information
reported is based upon a Schedule 13G/A filed with the SEC on February 13,
1998 reporting beneficial ownership as of December 31, 1997. The Schedule
13G/A indicates that the reporting entities are investment advisers
registered under Section 203 of the Investment Advisers Act of 1940. The
Schedule 13G/A also indicates that LaSalle has shared dispositive power
with respect to 326,850 shares, while ABKB/LaSalle has shared dispositive
power with respect to 1,590,373 of the shares and shared voting power with
respect to 1,542,868 shares.
(15) Information reported is based upon a Schedule 13G filed with the SEC on
February 12, 1998 reporting beneficial ownership as of December 31, 1997.
The Schedule 13G indicates that the reporting entity is an investment
adviser registered under Section 203 of the Investment Advisers Act of
1940. The Schedule 13G also indicates that the reporting entity has shared
dispositive power with respect to all of the shares and shared voting power
with respect to 1,495,090 of the shares.
(16) Information reported is based upon a Schedule 13D filed with the SEC on May
1, 1997 reporting beneficial ownership as of April 23, 1997. The Schedule
13D indicates that the reporting entity is an entity established under the
laws of The Kingdom of the Netherlands, whose principal business is
investing funds held on behalf of public sector employees of The Kingdom of
the Netherlands. The Schedule 13D indicates that the reporting entity has
sole voting and dispositive power with respect to 1,385,000 of the shares.
The Schedule 13D also indicates that the reporting entity has shared
dispositive power with respect to an additional 169,100 shares of common
stock held by the reporting entity in two securities accounts with ABN AMRO
BANK N.V. managed by ABKB/LaSalle Securities and Cohen and Steers Capital
Management.
45
<PAGE> 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN BUSINESS RELATIONSHIPS
Greenbriar Homes Company and its affiliates (collectively "GHC") are
corporations wholly-owned by Mr. Meyer and his wife, Carol M. Meyer, that
develop and sell single-family residential properties. Mr. Meyer does not
provide any significant management services to GHC and he devotes substantially
all of his business time and attention to the affairs of the Company. Since the
consummation of the Company's initial public offering in March 1994, the Company
has shared certain warehouse space and computer training facilities with GHC,
and each of the Company and GHC are obligated for the rent payments with respect
to the portion of the space it leases. In addition, pursuant to an
administrative services agreement, the Company and GHC share certain
administrative and office facility services, which are primarily related to
health insurance and training facility services. During fiscal year 1997, GHC
incurred in the aggregate approximately $265,000 of costs under such agreement
payable to the Company. This amount is calculated on a basis intended to
approximate the cost of the use of these services and not to generate a profit.
The non-employee directors of the Company periodically review and approve the
terms of this agreement including amounts payable thereunder. The Company
believes that such administrative services agreement is upon terms that are fair
to the Company and as favorable as the terms that the Company could have
obtained from unaffiliated third parties.
INDEBTEDNESS OF MANAGEMENT
In connection with the hiring of Mr. Van Horn as Vice President and Chief
Financial Officer of the Company in June 1996, the Company entered into an
employment agreement (the "CFO Agreement") with Mr. Van Horn pursuant to which
Mr. Van Horn received a loan from the Company in the amount of $140,000 (the
"Loan"). During the term of Mr. Van Horn's employment with the Company, the Loan
does not bear interest. Under the terms of the promissory note executed by Mr.
Van Horn in connection with the Loan, the Loan shall be repaid in installments
equal to 90% of any bonus compensation (after the deduction of taxes) received
by Mr. Van Horn concurrently with the receipt of any such bonus. On January 30,
1998 the Compensation Committee determined to extend the maturity date for the
Loan by one year and to forgive the outstanding principal amount under the Loan
(i.e., $122,000 as of January 30, 1998) ratably over the remaining five year
period of the Loan. This decision was based upon Mr. Van Horn's performance on
behalf of the Company during fiscal year 1997. Accordingly, on January 30, 1998
the Company forgave $24,400 of the outstanding principal amount under the Loan
owed by Mr. Van Horn to the Company.
In the event Mr. Van Horn's employment with the Company is terminated by
the Company without Good Reason (as defined in the CFO Agreement) or within one
year following a Change-in-Control (as defined in the CFO Agreement), any
outstanding balance under the Loan shall be forgiven by the Company. In the
event Mr. Van Horn's employment is terminated for any other reason, the Loan
shall be converted to a fifteen-year amortization schedule with a five-year
balloon payment and shall bear interest at the lower of: (i) the average of the
rates (assuming no points) quoted on the employment termination date for a
fifteen-year fully amortized conventional fixed-rate residential mortgage by the
main headquarters of each of Citibank, N.A., BankBoston and Chase Bank (or their
respective successors), and (ii) ten percent per annum. As of March 24, 1998,
the outstanding principal amount of the Loan was $97,600.
46
<PAGE> 49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
(a) 1. Financial Statements
Report of Independent Accountants................. 52
Consolidated Balance Sheets at December 31, 1997
and 1996........................................ 53
Consolidated Statements of Operations for the
years ended December 31, 1997, 1996 and 1995.... 54
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1997, 1996 and
1995............................................ 55
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995.... 56
Notes to Consolidated Financial Statements........ 57
2. Financial Statement Schedule
Schedule III: Real Estate Investments and
Accumulated Depreciation at December 31, 1997... 75
Note to Schedule III.............................. 76
3. Exhibits
Index to Exhibits
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3(i).1 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(i).4 Articles Supplementary relating to the 8.50% Series C
Cumulative Redeemable Preferred Stock of the Company.
(Incorporated by reference to Exhibit 3(i) to Form 8-K of
Bay Apartment Communities, Inc. dated July 25, 1997.)
3(i).5 Articles Supplementary relating to the 8.00% Series D
Cumulative Redeemable Preferred Stock of the Company.
(Incorporated by reference to Exhibit 1 to Form 8-A of Bay
Apartment Communities, Inc. dated December 17, 1997.)
3(ii).1 Bylaws of the Company. (Incorporated by reference to Exhibit
10.1 to Form 8-B of Bay Apartment Communities, Inc. dated
June 8, 1995.)
3(ii).2 Text of Amendment to Bylaws of the Company. (Incorporated by
reference to Exhibit 4.2 to Form 8-K of Bay Apartment
Communities, Inc. dated March 8, 1998.)
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 Agreement between the Company and Morton L.
Newman. (Incorporated by reference to Exhibit 10.4 to Form
10-Q of Bay Apartment Communities, Inc. dated May 13, 1994.)
</TABLE>
47
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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 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.)
10.14 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.)
10.15 Master Reimbursement Agreement. (Incorporated by reference
to Exhibit 10.23 to Form 10-Q of Bay Apartment Communities,
Inc. dated August 11, 1995.)
10.16 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.)
10.17 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.)
10.18 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.)
10.19 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.)
10.20 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>
48
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.21 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.)
10.22 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.)
10.23 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.)
10.24 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.)
10.25 First Amendment to Agreement to Contribute between
Countrybrook of Berryessa Associates and the Company, dated
June 27, 1996. (Incorporated by reference to Exhibit 10.34
to Form 10-K of Bay Apartment Communities, Inc. dated March
18, 1996.)
10.26 Agreement dated as of May 16, 1997, between the Company J.E.
Butler & Associates, Inc. and AP Companies, Ltd. relating to
the formation of Bay Rincon, L.P. (Incorporated by reference
to Exhibit 10.1 to Form 10-Q of Bay Apartment Communities,
Inc. dated August 14, 1997.)
10.27 Severance Agreement and Mutual General Release, dated July
31, 1997, between the Company and Geoffrey L. Baker.
(Incorporated by reference to Exhibit 10.1 to Form 10-Q of
Bay Apartment Communities, Inc. dated November 13, 1997.)
10.28 Agreement of Limited Partnership of Bay Pacific Northwest,
L.P. dated as of September 12, 1997, between the Company and
certain other defined Persons. (Incorporated by reference to
Exhibit 10.1 to Form 8-K of Bay Apartment Communities, Inc.
dated October 28, 1997.)
10.29 Registration Rights Agreement, dated as of September 23,
1997, between the Company and certain defined Holders of
units of limited partnership interests in Bay Pacific
Northwest, L.P. (Incorporated by reference to Exhibit 10.2
to Form 8-K of Bay Apartment Communities, Inc. dated October
28, 1997.)
10.30 Second Amended and Restated Revolving Loan Agreement dated
November 21, 1997, between the Company, Union Bank of
Switzerland, as Co-Agent and Bank, Union Bank of California,
N.A., as Co-Agent and Bank, Union Bank of Switzerland, as
Administrative Agent, and the other Banks signatory thereto.
(Incorporated by reference to Exhibit 10.1 to Form 8-K of
Bay Apartment Communities, Inc. dated December 16, 1997.)
10.31 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 March 5, 1998, File No. 333-47405.)
10.32 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.)
10.33 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 October 28, 1997, relating to the
acquisition of the Landing West apartment home community and the Rosewalk Phase
II land site and, through Bay Pacific Northwest, L.P., the Gallery Place
apartment home community. This Form 8-K contained Financial Statements under
Rule 3-14 of Registration S-X and pro forma financial statements.
49
<PAGE> 52
Form 8-K of the Company, dated December 11, 1997, relating to the
acquisition of the Creekside apartment home community. This Form 8-K contained
Financial Statements under Rule 3-14 of Regulation S-X and pro forma financial
statements.
Form 8-K of the Company, dated December 16, 1997, relating to (i) the
amendment and restatement of the Company's unsecured line of credit from Union
Bank of Switzerland, pursuant to which the maximum revolving credit amount was
increased to $350 million, and (ii) the acquisition of the Governor's Square
apartment home community. This Form 8-K contained Financial Statements under
Rule 3-14 of Regulation S-X and pro forma financial statements.
Form 8-K of the Company, dated December 22, 1997, relating to the
underwritten public offering of 3,267,700 shares of the Company's 8.00% Series D
Cumulative Redeemable Preferred Stock, par value $.01 per share, at a price per
share of $25.00.
50
<PAGE> 53
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.
Date: March 24, 1998 /s/ GILBERT M. MEYER
--------------------------------------
Gilbert M. Meyer
President and Chairman of the Board
Date: March 24, 1998 /s/ JEFFREY B. VAN HORN
--------------------------------------
Jeffrey B. Van Horn
Chief Financial Officer
(Authorized Officer of the Registrant
and Principal 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ BRUCE A. CHOATE Director March 24, 1998
- -----------------------------------------------------
Bruce A. Choate,
/s/ MAX L. GARDNER Chief Operating Officer March 24, 1998
- ----------------------------------------------------- and Director
Max L. Gardner
/s/ JOHN J. HEALY, JR. Director March 24, 1998
- -----------------------------------------------------
John J. Healy, Jr.
/s/ BRENDA J. MIXSON Director March 24, 1998
- -----------------------------------------------------
Brenda J. Mixson
/s/ THOMAS H. NIELSEN Director March 24, 1998
- -----------------------------------------------------
Thomas H. Nielsen
</TABLE>
51
<PAGE> 54
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, 1997 and 1996 and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 1997, 1996 and 1995. These financial statements and the
financial statement schedule are the responsibility of the management of Bay
Apartment Communities, Inc. 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, 1997 and 1996 and the consolidated results
of their operations and their cash flows for the years ended December 31, 1997,
1996 and 1995 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 30, 1998
Except for Note 14, as to which the date is
March 24, 1998
52
<PAGE> 55
BAY APARTMENT COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Real estate assets:
Land...................................................... $ 299,885 $152,277
Buildings and improvements................................ 839,638 511,583
Furniture, fixtures and equipment......................... 63,631 35,542
---------- --------
1,203,154 699,402
Less accumulated depreciation............................. (79,031) (52,554)
---------- --------
Operating real estate assets.............................. 1,124,123 646,848
Construction in progress.................................. 170,361 50,945
---------- --------
Net real estate assets............................ 1,294,484 697,793
Cash and cash equivalents................................... 3,188 920
Restricted cash............................................. 1,597 960
Other assets, net........................................... 18,381 12,236
---------- --------
TOTAL ASSETS...................................... $1,317,650 $711,909
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable............................................... $ 487,484 $273,688
Accounts payable and accrued expenses....................... 7,727 5,450
Dividends payable........................................... 12,591 8,939
Other liabilities........................................... 8,020 4,553
---------- --------
TOTAL LIABILITIES................................. 515,822 292,630
---------- --------
Contingencies (Note 9)...................................... -- --
---------- --------
Minority interest........................................... 9,133 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, 1997 and December 31, 1996; 405,022
shares of Series B outstanding at both December 31,
1997 and December 31, 1996; 2,300,000 shares of Series
C outstanding at December 31, 1997 and no shares
outstanding at December 31, 1996; 3,267,700 shares of
Series D outstanding at December 31, 1997 and no shares
outstanding at December 31, 1996....................... 83 27
Common stock, $.01 par value; 40,000,000 shares
authorized; 26,077,518 shares outstanding at December
31, 1997; 19,007,988 shares outstanding at December 31,
1996................................................... 261 190
Paid-in capital........................................... 823,520 435,723
Dividends in excess of accumulated earnings............... (31,169) (23,663)
---------- --------
TOTAL SHAREHOLDERS' EQUITY........................ 792,695 412,277
---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $1,317,650 $711,909
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
53
<PAGE> 56
BAY APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
REVENUE:
Rental.................................................... $121,873 $80,377 $52,110
Other..................................................... 4,161 2,216 1,411
-------- ------- -------
Total revenue..................................... 126,034 82,593 53,521
-------- ------- -------
EXPENSES:
Property operating........................................ 29,016 18,924 12,452
Property taxes............................................ 9,467 6,353 4,349
General and administrative................................ 6,308 3,785 2,467
Abandoned project costs................................... 710 110 --
Interest and financing.................................... 14,113 14,276 11,472
Depreciation and amortization............................. 27,009 18,689 13,714
-------- ------- -------
Total expenses.................................... 86,623 62,137 44,454
-------- ------- -------
Income before minority interest, gain on sale and
extraordinary item........................................ 39,411 20,456 9,067
Minority interest........................................... (470) (319) (19)
-------- ------- -------
Income from operations...................................... 38,941 20,137 9,048
Gain on sale................................................ -- -- 2,412
-------- ------- -------
Income before extraordinary item............................ 38,941 20,137 11,460
Extraordinary item.......................................... -- (511) --
-------- ------- -------
Net income.................................................. 38,941 19,626 11,460
Preferred stock dividend requirement:
Series A & B.............................................. (4,640) (4,264) (917)
Series C & D.............................................. (2,840) -- --
-------- ------- -------
Earnings available to common shares......................... $ 31,461 $15,362 $10,543
======== ======= =======
Basic and diluted earnings per common share:
Income before extraordinary item.......................... $ 1.40 $ 1.06 $ .91
Extraordinary item........................................ -- (.03) --
-------- ------- -------
Earnings available to common shares....................... $ 1.40 $ 1.03 $ .91
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
54
<PAGE> 57
BAY APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
$.01 PAR VALUE $.01 PAR VALUE DIVIDENDS
------------------ ------------------- IN EXCESS OF
SHARES SHARES PAID-IN ACCUMULATED
ISSUED AMOUNT ISSUED AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ ---------- ------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1995........................... -- $-- 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 Countrybrook 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
January issuance of common stock, net of issuance
costs of $150................................... -- -- 1,400,000 14 49,207 -- 49,221
April issuance of common stock, net of issuance
costs of $200................................... -- -- 1,662,000 17 58,622 -- 58,639
June issuance of Series C preferred stock, net of
issuance costs
of $200......................................... 2,300,000 23 -- -- 55,466 -- 55,489
September issuance of common stock, net of
issuance costs of $200.......................... -- -- 2,645,000 26 96,997 -- 97,023
December issuance of common stock, net of issuance
costs of $40.................................... -- -- 1,026,187 10 39,447 -- 39,457
December issuance of Series D preferred stock, net
of issuance costs of $100....................... 3,267,700 33 -- -- 78,986 -- 79,019
Employee stock purchase plan...................... -- -- 13,863 -- 513 -- 513
Exercise of stock options......................... -- -- 26,251 1 553 -- 554
Restricted stock grants........................... -- -- 26,500 -- -- -- --
Conversion of Countrybrook partnership units to
common stock.................................... -- -- 162,330 2 3,950 -- 3,952
Dividend Reinvestment Plan........................ -- -- 107,399 1 4,056 -- 4,057
Net Income year ended December 31, 1997........... -- -- -- -- -- 38,941 38,941
Dividends Declared................................ -- -- -- -- -- (46,447) (46,447)
--------- --- ---------- ---- -------- -------- --------
BALANCE DECEMBER 31, 1997......................... 8,281,522 $83 26,077,518 $261 $823,520 $(31,169) $792,695
========= === ========== ==== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
55
<PAGE> 58
BAY APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income (loss)......................................... $ 38,941 $ 19,626 $ 11,460
NONCASH EXPENSES INCLUDED IN NET INCOME (LOSS):
Depreciation and amortization............................. 27,009 18,689 13,714
Minority interest......................................... 470 319 19
Extraordinary item........................................ -- 511 --
Gain on sale.............................................. -- -- (2,412)
CASH PROVIDED BY (USED FOR) OPERATING ASSETS AND
LIABILITIES:
Restricted cash........................................... (637) (960) 1,000
Other assets.............................................. (6,677) (1,579) (381)
Accounts payable and accrued expenses..................... 2,277 1,396 (1,583)
Other liabilities......................................... 3,467 2,221 781
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 64,850 40,223 22,598
--------- --------- ---------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Capital improvements...................................... (4,069) (1,319) (693)
Acquisition of properties................................. (445,528) (144,052) (55,760)
Construction in progress.................................. (127,573) (71,628) (48,281)
Proceeds from sale, net................................... -- -- 17,487
--------- --------- ---------
NET CASH (USED FOR) INVESTING ACTIVITIES.................... (577,170) (216,999) (87,247)
--------- --------- ---------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from stock offerings, net of issuance costs...... 378,848 183,507 48,269
Exercise of stock options................................. 554 744 --
Proceeds from dividend reinvestment plan.................. 4,057 -- --
Proceeds from employee stock purchase plan................ 513 -- --
Borrowings on notes payable............................... -- -- 77,200
Deferred financing costs paid............................. -- -- (4,218)
Notes payable principal payments.......................... (1,201) (480) (299)
Payoff of mortgage and construction notes payable......... -- (21) (40,010)
Borrowings on construction notes payable.................. -- 21 16,992
Borrowings on lines of credit............................. 555,000 174,200 118,061
Repayments on lines of credit............................. (379,800) (155,700) (136,525)
Partner and minority interest distributions............... (588) (200) (64)
Dividends paid............................................ (42,795) (26,052) (17,778)
--------- --------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES........ 514,588 176,019 61,628
--------- --------- ---------
Increase (decrease) in cash and cash equivalents............ 2,268 (757) (3,021)
Cash and cash equivalents, beginning of period.............. 920 1,677 4,698
--------- --------- ---------
Cash and cash equivalents, end of period.................... $ 3,188 $ 920 $ 1,677
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized)...................... $ 14,846 $ 14,292 $ 11,042
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of partnership units to common stock........... $ 3,952 $ 91 $ --
========= ========= =========
Noncash transfers of construction-in-progress............. $ 8,207 $ 43,963 $ 76,750
========= ========= =========
Assumption of notes payable by the Company................ $ 39,797 $ 27,868 $ 10,651
========= ========= =========
Contribution of minority interest......................... $ 6,201 $ 7,270 $ --
========= ========= =========
Dividends declared but not paid........................... $ 12,591 $ 8,939 $ 5,420
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
56
<PAGE> 59
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Organization
Bay Apartment Communities, Inc., in conjunction with 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 the Greenbriar
Development Company 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. On March 17, 1994, the
Greenbriar Development Company became Bay Apartment Communities, Inc. as a
result of certain reorganization transactions in connection with the sale of
10,889,742 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 and Southern California. At December
31, 1997, the Company owned 54 apartment communities, of which 37 are in
Northern California, 14 are in Southern California, two are in the Seattle,
Washington area and one community is in the Portland, Oregon area, comprising
15,297 apartment homes, including the apartment homes delivered at Toscana -- a
partially developed community. In addition to Toscana, the Company had five
communities in Northern California under development.
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 "Countrybrook
Partnership"). The general partner of the Countrybrook Partnership is a
wholly-owned subsidiary of the Company, Bay GP, Inc., a Maryland corporation.
The accompanying consolidated financial statements also include the accounts of
Bay Rincon, LP, a California limited partnership (the "Rincon Partnership") and
Bay Pacific Northwest, L.P., a Delaware limited partnership (the "Northwest
Partnership"). The Company is the sole general partner of the Rincon Partnership
and Northwest Partnership. All significant intercompany balances and
transactions have been eliminated in consolidation.
Bay Countrybrook L.P.
In connection with the formation of the Countrybrook Partnership in July
1996, 298,577 units of limited partnership interests ("Countrybrook Units") were
issued to the existing partners of the contributor of the CountryBrook
community. Under the terms of the Countrybrook Partnership's Limited Partnership
Agreement, holders of Countrybrook Units have the right to require the
Countrybrook Partnership to redeem their Countrybrook Units for cash, subject to
certain conditions. The Company may, however, elect to deliver an equivalent
number of shares of the Company's common stock to the holders of Countrybrook
Units in satisfaction of the Countrybrook Partnership's obligation to redeem the
Countrybrook Units for cash. Countrybrook Units converted into the Company's
common stock aggregated 166,142 and 3,812 as of December 31, 1997 and December
31, 1996, respectively. Countrybrook Units redeemed for cash aggregated 762 as
of December 31, 1997. No Countrybrook Units were redeemed for cash as of
December 31, 1996.
Bay Pacific Northwest, L.P.
In connection with the formation of the Northwest Partnership in September
1997, 163,448 units of limited partnership interest ("Northwest Units") were
issued to the existing partners of the contributor of the Gallery Place
community. Under the terms of the Northwest Partnership's Limited Partnership
Agreement,
57
<PAGE> 60
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
holders of Northwest Units have the right to require the Northwest Partnership
to redeem their Northwest 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 Northwest Units in satisfaction of the Northwest
Partnership's obligation to redeem the Northwest Units for cash. No Northwest
Units were converted into the Company's common stock or redeemed for cash as of
December 31, 1997.
Operating Real Estate Assets
Subsequent to occupancy, significant expenditures, generally exceeding $5,
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 and Reconstruction
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 assets (including interest and related loan fees, property
taxes and other direct and indirect costs) begins when an apartment home is
taken out of service for reconstruction and ends when the apartment home
reconstruction is completed and the apartment home is 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.
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.
58
<PAGE> 61
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summarizes the tax components of the Company's common
dividends declared for the years ending December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
% OF COMMON DIVIDENDS
DECLARED FOR:
---------------------
1997 1996 1995
----- ---- ----
<S> <C> <C> <C>
TAX COMPONENT
Ordinary income....................................... 100% 81% 74%
Capital gain.......................................... -- -- 12%
Non-taxable return of capital......................... -- 19% 14%
</TABLE>
All of the dividends declared on the Series A convertible preferred stock
for the years ended December 31, 1997, 1996 and 1995 represented ordinary income
for tax purposes. All dividends declared on the Series B convertible preferred
stock for the years ended December 31, 1997 and 1996 represented ordinary income
for tax purposes. All dividends declared on the Series C Cumulative Redeemable
Preferred Stock for the year ended December 31, 1997 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 $375 for the year ended December 31, 1997, $178 for the year
ended December 31, 1996 and $243 for the year ended December 31, 1995.
Restricted Cash
Restricted cash at December 31, 1997 consists of replacement reserves
related to the debt on the Barrington Hills, Crossbrook, Rivershore, Canyon
Creek, Sea Ridge and CountryBrook communities.
Earnings per Common Share
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share". In accordance with the provisions of
SFAS No. 128, basic earnings per share for the years ended December 31, 1997,
1996 and 1995 is computed by dividing income available to common shares (net
income less preferred stock dividend requirement) by the weighted average number
of shares outstanding during the period.
Additionally, other potentially dilutive common shares are considered when
calculating earnings per share on a diluted basis.
59
<PAGE> 62
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BASIC EPS CALCULATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Income before minority interest, gain on sale and
extraordinary item........................................ $39,411 $20,456 $ 9,067
Minority interest........................................... (470) (319) (19)
------- ------- -------
Income from operations...................................... 38,941 20,137 9,048
Gain on sale................................................ -- -- 2,412
------- ------- -------
Income before extraordinary item............................ 38,941 20,137 11,460
Extraordinary item.......................................... -- (511) --
------- ------- -------
Net income.................................................. 38,941 19,626 11,460
Preferred stock dividend requirement:
Series A & B.............................................. (4,640) (4,264) (917)
Series C & D.............................................. (2,840) -- --
------- ------- -------
Earnings available to common shares......................... $31,461 $15,362 $10,543
======= ======= =======
</TABLE>
60
<PAGE> 63
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STOCK TRANSACTIONS
<TABLE>
<CAPTION>
SHARES FRACTION WEIGHTED
OUTSTANDING OF PERIOD AVERAGE SHARES
----------- --------- --------------
<S> <C> <C> <C>
Balance at January 1, 1995............................. 11,544,287 365/365 11,544,287
---------- ----------
TOTAL AT DECEMBER 31, 1995............................. 11,544,287 11,544,287
========== ==========
Balance at January 1, 1996............................. 11,544,287 366/366 11,544,287
Issuance of common stock on May 9, 1996................ 1,661,414 237/366 1,075,834
Issuance of common stock on August 5, 1996............. 5,750,000 149/366 2,340,847
Issuance of restricted stock grants on August 6,
1996................................................. 6,000 148/366 2,426
Conversion of Countrybrook Units on November 4, 1996... 762 58/366 121
Conversion of Countrybrook Units on November 8, 1996... 1,525 54/366 225
Conversion of Countrybrook Units on November 18,
1996................................................. 1,525 44/366 183
Miscellaneous common stock issued...................... 42,475 1/2 21,237
---------- ----------
TOTAL AT DECEMBER 31, 1996............................. 19,007,988 14,985,160
========== ==========
Balance at January 1, 1997............................. 19,007,988 365/365 19,007,988
Conversion of Countrybrook Units on January 28, 1997... 6,099 338/365 5,648
Issuance of common stock on January 29, 1997........... 1,400,000 337/365 1,292,603
Issuance of stock grants on February 3, 1997........... 25,500 332/365 23,194
Conversion of Countrybrook Units on March 26, 1997..... 28,575 281/365 21,999
Issuance of dividend reinvestment stock on April 15,
1997................................................. 10,269 261/365 7,343
Issuance of common stock on April 23, 1997............. 1,662,000 253/365 1,152,016
Conversion of Countrybrook Units on May 2, 1997........ 73,927 244/365 49,420
Conversion of Countrybrook Units on May 5, 1997........ 48,870 241/365 32,268
Issuance of employee stock purchase plan on July 1,
1997................................................. 13,863 184/365 6,988
Conversion of Countrybrook Units on July 1, 1997....... 1,000 184/365 504
Issuance of dividend reinvestment stock on July 15,
1997................................................. 22,387 170/365 10,427
Conversion of Countrybrook Units on July 28, 1997...... 809 157/365 348
Issuance of common stock on September 16, 1997......... 2,645,000 107/365 775,384
Conversion of Countrybrook Units on September 23,
1997................................................. 1,525 100/365 418
Issuance of dividend reinvestment stock on October 15,
1997................................................. 74,720 78/365 15,968
Issuance of common stock on December 12, 1997.......... 1,026,187 20/365 56,229
Conversion of Countrybrook Units on December 29,
1997................................................. 1,525 3/365 12
Miscellaneous common stock issued...................... 27,274 1/2 13,637
---------- ----------
TOTAL AT DECEMBER 31, 1997............................. 26,077,518 22,472,394
========== ==========
</TABLE>
61
<PAGE> 64
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BASIC EPS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Income before minority interest, gain on sale and
extraordinary item........................................ $1.42 $1.08 $ .70
Minority interest........................................... (.02) (.02) --
----- ----- -----
Income from operations...................................... 1.40 1.06 .70
Gain on sale................................................ -- -- .21
----- ----- -----
Income before extraordinary item............................ 1.40 1.06 .91
Extraordinary item.......................................... -- (.03) --
----- ----- -----
Net income.................................................. $1.40 $1.03 $ .91
===== ===== =====
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, there were no
potentially dilutive common shares outstanding during the period. Therefore,
diluted earnings per share is the same as basic earnings per share.
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 revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
Concentration of Geographic Risk
The majority of the Company's apartment communities are located in Northern
California and most of these Northern California communities 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 and is amortized over the remaining
life of the agreements.
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 $6,985, $2,567 and $3,641 for the years ended December 31, 1997,
1996 and 1995, respectively, have been capitalized.
62
<PAGE> 65
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. OTHER ASSETS, NET
Deferred financing costs which are included in "Other assets, net"
aggregated $11,735 and $10,185 at December 31, 1997 and 1996, respectively.
Accumulated amortization related to deferred financing costs aggregated $3,561
and $2,918 at December 31, 1997 and 1996, respectively.
4. NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<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 a Swap Agreement under which the interest rate is fixed
until March 2004 at an effective rate of 5.88% Such bonds
require monthly payments of interest only. The bonds contain
covenants which require 20% of the apartment homes 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 a Swap Agreement with under which
the interest rate is fixed until March 2004 at an effective
rate of 5.88%. 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 apartment homes 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 a 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 apartment
homes to be leased or held available for lease to low or
moderate income families.................................... 13,185 13,338
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
a 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 apartment homes to be
leased or held available for lease to low or moderate income
families.................................................... 8,484 8,579
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 a 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 apartment
homes to be leased or held available for lease to low or
moderate income families.................................... 10,309 10,445
</TABLE>
63
<PAGE> 66
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
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
a 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 apartment homes to be
leased or held available for low income families............ 38,534 38,800
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
a 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 apartment homes to be
leased or held available for lease to low income families... 17,479 17,600
City Heights is encumbered by a first deed of trust which
collateralizes housing bond issues maturing June 1, 2025,
partially amortizing over the term. The Company has entered
into a Swap Agreement under which the interest rate is fixed
until July 2007 at an effective interest rate of 5.80%,
including the amortization of deferred financing costs. The
bonds contain convenants which require 20% of the apartment
homes to be leased or held available for lease to low income
families.................................................... 20,714 --
Larkspur Canyon is encumbered by a first deed of trust which
collateralizes housing bond issues maturing June 1, 2025,
partially amortizing over the term. The Company has entered
into a Swap Agreement under which the interest rate is fixed
until September 2002 at an effective interest rate of 5.50%,
including the amortization of deferred financing costs. The
bonds contain covenants which require 20% of the apartment
homes to be leased or held available for lease to low or
moderate income families.................................... 7,610 --
-------- --------
Subtotal.......................................... 203,695 176,142
-------- --------
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 apartment homes to be leased or held available
for lease to low or moderate income families................ 19,850 20,111
-------- --------
Subtotal.......................................... 19,850 20,111
-------- --------
</TABLE>
64
<PAGE> 67
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
TAX-EXEMPT VARIABLE RATE:
City Heights was encumbered by a first deed of trust which
collateralized housing bond issues maturing March 1, 2018.
Interest only payments were required monthly at a variable
rate set weekly by the remarketing agent (6.50% at December
31, 1996, including the amortization of deferred financing
costs). The bonds contained convenants which required 20% of
the apartment homes to be leased or held available for lease
to low income families. These bonds were refinanced in July
1997........................................................ -- 20,800
Larkspur Canyon was encumbered by a first deed of trust
which collateralized housing bond issues maturing March 1,
2023. Interest only payments were 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 were secured by a $7,823
irrevocable direct pay letter of credit. The bonds contained
covenants which required 20% of the apartment homes to be
leased or held available for lease to low or moderate income
families. These bonds were refinanced in August 1997........ -- 7,635
-------- --------
Subtotal.......................................... -- 28,435
-------- --------
FIXED RATE:
Governor's Square is encumbered by a first deed of trust
maturing August 1, 2004, partially amortizing over the term.
The interest rate on the loan is fixed at 7.65%............. 14,184 --
Cardiff Gardens is encumbered by a first deed of trust
maturing May 1, 2004. Interest only payments are required
monthly at a fixed interest rate of 7.25%................... 12,870 --
Gallery Place is encumbered by a first deed of trust
maturing May 15, 2001, partially amortizing over the term.
The interest rate on the loan is fixed at 7.31%............. 11,685 --
Note payable assumed in connection with the Cedar Ridge
acquisition maturing July 15, 1999. Interest only payments
are required monthly at a fixed interest rate of 6.50%...... 1,000 --
-------- --------
Subtotal.......................................... 39,739 --
-------- --------
CREDIT LINE:
Unsecured line of credit (the "Unsecured Line of Credit")
with an aggregate borrowing amount of up to $350,000
maturing May 2000. This line bears interest at various LIBOR
rates plus 0.90%, with a competitive bid option............. 224,200 49,000
-------- --------
Subtotal.......................................... 224,200 49,000
-------- --------
Total Notes Payable............................... $487,484 $273,688
======== ========
</TABLE>
65
<PAGE> 68
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Principal payments on outstanding notes payable as of December 31, 1997 are
due as follows:
<TABLE>
<S> <C>
1998...................................... $ 2,024
1999...................................... 3,175
2000...................................... 226,538
2001...................................... 13,308
2002...................................... 2,435
Thereafter................................ 240,004
--------
Total........................... $487,484
========
</TABLE>
5. FINANCIAL INSTRUMENTS
The Company uses Swap Agreements to reduce the impact of interest rate
fluctuations. As of December 31, 1997, 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.
- $87,991 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.
- $20,714 in notional amount based on the PSA Municipal Swap Index
maturing in July 2007. The interest rate is 4.75%, with an all-in interest
cost of 5.80%. 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.
- $7,610 in notional amount based on the PSA Municipal Swap Index
maturing in September 2002. The interest rate is 4.42%, with an all-in
interest cost of 5.50%. 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 $203,695 of the Company's debt
at an average interest rate of 6.12% with an average maturity over 9 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.
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
66
<PAGE> 69
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
- Unsecured Line of Credit with an aggregate carrying value of
$224,200 and $49,000 had an estimated aggregate fair value of $224,200 and
$49,000 at December 31, 1997 and 1996, respectively.
- Bond indebtedness and notes payable with an aggregate carrying value
of $263,284 and $224,688 had an estimated aggregate fair value of $291,293
and $244,031 at December 31, 1997 and 1996, 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, 1997
and 1996.
Disclosures about fair value of financial instruments are based on
pertinent information available to management as of December 31, 1997 and 1996.
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 April 1997, the Company assumed $12,870 of fixed rate debt as part of
the purchase of the Cardiff Gardens community. The interest rate is fixed at
7.25% and the debt matures in May 2004.
In July 1997, the Company assumed a $1,000 note in connection with the
acquisition of the Cedar Ridge community. The rate on the note is fixed at 6.5%
and the note matures in July 1999.
In September 1997, as part of the purchase of the Gallery Place community,
the Company assumed $11,733 of the seller's note payable secured by the
property. The interest rate on the loan is fixed at 7.31% and the loan matures
in May 2001. Also in connection with the purchase of the Gallery Place
community, the Company paid the seller approximately $6,151 by issuing 163,448
Units of the Northwest Partnership.
In December 1997, the Company assumed a $14,194 note as part of the
acquisition of the Governor's Square community. The rate is fixed at 7.65% and
the note matures in August 2004.
7. ISSUANCES OF STOCK
On March 17, 1994, the Company completed its initial public offering of
10,889,742 shares of common stock at a price of $20 per share. The net proceeds
to the Company, of $199,998, 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 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
67
<PAGE> 70
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
of 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, of $134,026, were used to
purchase two apartment communities, Crowne Ridge and Lafayette Place, and to
reduce 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 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, of $49,221, were used to reduce borrowings under the
Company's Unsecured Line of Credit, which were used to fund the acquisition and
development of additional apartment communities, including the SummerWalk
(formerly Rancho Penasquitos) acquisition.
In April 1997, the Company sold in a direct placement 1,662,000 shares of
common stock at a price of $36.125 per share. The net proceeds to the Company,
of $58,639, were used to reduce borrowings under the Company's Unsecured Line of
Credit, which were used to fund the acquisition and development of additional
apartment communities, including TimberWood (formerly The Village), SunScape
(formerly Banbury Cross) and Cardiff Gardens.
In June 1997, the Company sold in an underwritten public offering 2,300,000
shares of 8.50 percent, five year non-call Series C Cumulative Redeemable
Preferred Stock (including 300,000 shares sold in connection with the exercise
of the underwriters' over-allotment option) at a price of $25 per share. The net
proceeds to the Company, of $55,489, were used to reduce borrowing under the
Company's Unsecured Line of Credit, which were used to fund the acquisition and
development of additional apartment communities, including the Villa Serena,
Amador Oaks and Mission Woods (formerly Genesee Gardens) communities and one
land site in San Francisco, California.
In September 1997, the Company sold in an underwritten public offering
2,645,000 shares of common stock (including 345,000 shares sold in connection
with the exercise of the underwriters' over-allotment option) at a price of
$38.6875 per share. The net proceeds to the Company, of $97,023, were used to
reduce borrowings under the Company's Unsecured Line of Credit, which were used
to fund the acquisition and development of additional apartment communities,
including the Cedar Ridge (formerly Regency), The Park and Lakeside communities
and one land site in Mountain View, California.
In December 1997, the Company issued 869,587 shares of common stock in a
direct placement and sold 156,600 shares of common stock in an underwritten
public offering at a price of $39.125 per share. The net proceeds to the
Company, of $39,457, were used to reduce borrowings under the Company's
Unsecured Line
68
<PAGE> 71
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
of Credit, which were used to fund the acquisition and development of additional
apartment communities, including the Gallery Place, Landing West and Creekside
communities and one land site in San Jose, California.
Also in December 1997, the Company sold in an underwritten public offering
3,267,700 shares of 8.00 percent, five year non-call Series D Cumulative
Redeemable Preferred Stock (including 267,700 shares sold in connection with the
exercise of the underwriters' over-allotment option) at a price of $25 per
share. The net proceeds to the Company, of $79,019, were used to reduce
borrowings under the Company's Unsecured Line of Credit, which were used to fund
the acquisition and development of additional apartment communities, including
the Governor's Square community.
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 series A and B 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 the Company'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. 107,399 shares were issued under the Reinvestment Plan as
of December 31, 1997. No shares were issued under the Reinvestment Plan as of
December 31, 1996.
8. RELATED PARTY TRANSACTIONS
During fiscal year 1997, the Company shared certain warehouse space and
administrative and office facility services with certain affiliated entities.
The Company is a party to an agreement with these affiliates to share all costs
not specifically identified.
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 the affiliated entities were $265, $154 and $202
for the years ended December 31, 1997, 1996 and 1995, respectively.
An executive officer and director of the Company has a limited partnership
interest in the Northwest Partnership.
69
<PAGE> 72
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
On September 8, 1997, the Company agreed to purchase through the Northwest
Partnership, a 264 apartment home community currently under construction in
Redmond, Washington from Avondale Bear Creek Limited Partnership. The proposed
acquisition of Verandas at Bear Creek will not be consummated until 90 days
after construction has been completed and the community is 90 percent occupied
by residents. This community is currently 90 percent occupied and is expected to
close during the second quarter of 1998 and the purchase price is anticipated to
be approximately $34.3 million. In connection with this proposed acquisition,
the company has agreed to pay off mortgage indebtedness secured by the community
in the amount of approximately $28 million and the Northwest Partnership will
issue Northwest Units valued at approximately $3.9 million. The total number of
Northwest Units issued in connection with this proposed acquisition will be
determined based on a price per unit equal to the average closing sale price of
the Company's common stock on the New York Stock Exchange for a specified number
of days preceding the closing date of the acquisition. These Northwest Units
will have the same 4.5% initial annual priority return applicable to the
Northwest Units issued in connection with the Company's acquisition of the
Gallery Place community. In addition, subject to certain terms and conditions,
the holders of such Northwest Units may require the Northwest Partnership to
redeem all or a portion of their Northwest Units in exchange for cash. The
Company may, however, at its election, redeem such Northwest Units in exchange
for shares of the Company's common stock. All of such shares will be covered by
a registration rights agreement. Because the consummation of the acquisition of
Verandas at Bear Creek is subject to the satisfaction of certain conditions that
are not within the control of the Company, there can be no assurance that the
Company will consummate the acquisition or, if the community is acquired, that
it will be purchased on the terms currently contemplated.
10. PROPERTY OPERATING EXPENSES
Property operating expenses include amounts incurred for repair and
maintenance aggregating $4,817, $3,510 and $2,121 for the years ended December
31, 1997, 1996 and 1995, respectively.
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.
70
<PAGE> 73
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>
OUTSTANDING, JANUARY 1, 1995................. 368,200
Issued....................................... 325,900 $18.38-$20.00
Options canceled............................. (130,350)
Options exercised............................ --
---------
OUTSTANDING, DECEMBER 31, 1995............... 563,750
Issued....................................... 229,100 $23.38-$27.75
Options canceled............................. (32,500)
Options exercised............................ (37,475) $19.63-$20.00
---------
OUTSTANDING DECEMBER 31, 1996................ 722,875
Issued....................................... 394,100 $34.38-$39.63
Options canceled............................. (20,350)
Options exercised............................ (26,251) $19.63-$27.75
---------
OUTSTANDING DECEMBER 31, 1997................ 1,070,374
=========
</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, 1997 CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------- ------------------ ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$18.000 -- -- $18.000 -- $ --
$18.375 90,000 7.25 18.375 45,000 18.375
$19.250 9,000 7.36 19.250 9,000 19.250
$19.625 64,100 7.56 19.625 21,650 19.625
$19.750 -- -- 19.750 -- --
$20.000 196,124 6.19 20.000 142,249 20.000
$20.000 100,000 7.86 20.000 50,000 20.000
$20.500 9,000 6.27 20.500 9,000 20.500
$23.375 55,000 8.07 23.375 13,750 23.375
$25.375 25,000 8.47 25.375 6,250 25.375
$25.375 20,000 8.34 25.375 20,000 25.375
$27.750 117,750 8.66 27.750 27,075 27.750
$34.375 40,000 9.34 34.375 -- --
$36.125 50,000 9.29 36.125 -- --
$36.625 266,900 9.07 36.625 -- --
$38.8125 20,000 9.84 38.8125 -- --
$39.625 7,500 9.73 39.625 -- --
--------- ---- ------- ------- -------
1,070,374 8.06 $27.016 343,974 $20.912
========= ==== ======= ======= =======
</TABLE>
At December 31, 1997 and 1996, there were 343,974 and 189,426,
respectively, options exercisable.
The number of shares available for granting options was 348,400 and 786,125
at December 31, 1997 and 1996, respectively.
71
<PAGE> 74
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 SFAS No.
123, Accounting for Stock-Based Compensation, the Company's net income and
earnings per share would have been reduced by approximately $920 or $.04 per
share for the year ended December 31, 1997, approximately $325 or $.02 per share
for the year ended December 31, 1996, and approximately $192 or $.01 per share
for the year ended December 31, 1995. The fair value of the options granted
during 1997 is estimated as $5.48 per share on the date of grant using the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 4.44%, volatility of 18.30%, risk free interest rates of 6.34%, actual
forfeitures, and an expected life of approximately 4 years. The fair value of
the options granted during 1996 is estimated as $3.17 per share on the date of
grant using the Black-Scholes option pricing model with the following
assumptions: dividend yield of 6.50%, volatility of 20.18%, risk free interest
rates of 6.17%, actual forfeitures, and an expected life of approximately 4
years. The fair value of the options granted during 1995 is estimated as $1.76
per share on the date of grant using the Black-Scholes option pricing model with
the following assumptions: dividend yield of 8.35%, volatility of 20.18%, risk
free interest rates of 6.15%, 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
participants compensation or $1, of the participant's annual contribution. The
Company made contributions of approximately $134, $68 and $15 to the plan for
the years ended December 31, 1997, 1996, and 1995, 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. The Company issued 13,863 shares
under the plan as of December 31, 1997. No shares were issued under the Plan as
of December 31, 1996.
12. PRO-FORMA FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma financial information has been prepared
as if the 1996 Offerings, the 1997 Offerings, the acquisition of apartment
communities in 1996 and 1997 and the related financing activity had occurred on
January 1, 1996. 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, 1996, nor
does it purport to represent the results of operations for future periods. The
72
<PAGE> 75
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Revenue.................................... $ 167,262 $ 152,914
Earnings available to common shares........ $ 36,027 $ 28,656
Earnings available per common share........ $ 1.39 $ 1.11
Common shares outstanding.................. 26,077,518 26,077,518
</TABLE>
13. QUARTERLY FINANCIAL INFORMATION STATEMENTS (UNAUDITED)
Quarterly financial information for the years ended December 31 1997, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue..................................... $26,257 $29,780 $32,738 $37,258
Net income.................................. $ 7,771 $ 8,479 $10,653 $12,039
Earnings per common share................... $ .33 $ .33 $ .36 $ .37
</TABLE>
<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 $ .31 $ .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>
14. SUBSEQUENT EVENTS
In January 1998, the Company engaged in the following transactions:
- Purchased the Warner Oaks apartment community for $20,000. This
community contains 227 apartment homes and is located in Woodland
Hills, California.
- Issued $150,000 of senior unsecured notes. $50,000 of the notes will
bear interest at 6.25 percent and will mature on January 15, 2003,
$50,000 of the notes will bear interest at 6.5 percent and will mature
on January 15, 2005 and $50,000 of the notes will bear interest at
6.625 percent and will mature on January 15, 2008. The net proceeds to
the Company were $148,700. The net proceeds were used to reduce
borrowings under the Company's Unsecured Line of Credit, which were
used to fund the acquisition and development of additional apartment
communities, including the Viewpointe, Waterhouse Place, Mission Bay
Club, Westwood Club, Pacifica Club and Warner Oaks communities.
73
<PAGE> 76
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- Purchased the Amberway apartment community for $17,500. This community
contains 272 apartment homes and is located in Anaheim, California.
- Purchased the Arbor Park apartment community for $12,400. This
community contains 260 apartment homes and is located in Upland,
California.
In February 1998, the Company
- Purchased the Laguna Brisas apartment community for $17,200. As part
of this transaction, the Company assumed approximately $10,400 in
variable rate tax-exempt bonds maturing March 1, 2009. This community
contains 176 apartment homes and is located in Laguna Niguel,
California.
- Amended and restated the 1994 Stock Plan increasing the number of
shares reserved for issuance from 1,520,000 to 2,000,000.
In March 1998, the Company engaged in the following transactions:
- Purchased the Cabrillo Square apartment community for $22,900. This
community contains 293 apartment homes and is located in San Diego,
California.
- Announced that it had signed a definitive merger agreement with
Avalon Properties, Inc. The surviving company is to be named Avalon
Bay Communities, Inc. Under the terms of the agreement, Avalon
Properties, Inc. will be merged into the Company, with the Company
being the surviving entity, through an exchange of shares in which
the Avalon Properties, Inc. common shareholders will receive 0.7683
of a share of the Company's common stock for each share of Avalon
Properties, Inc. common stock they own. Avalon Properties, Inc.
preferred shareholders will receive comparable preferred shares of
the Company as a result of the merger. The merger, which has been
unanimously approved by the board of directors of both companies and
is expected to close in June 1998, is intended to qualify as a
tax-free transaction and will be accounted for as a purchase of
Avalon Properties, Inc. by the Company. The merger is subject to the
approval of the shareholders of both companies and other customary
closing conditions. In connection with the execution of the merger
agreement, the Company and Avalon Properties, Inc. each issued to the
other an option to buy 19.9% of its outstanding common stock under
certain circumstances. In addition, the Company and Avalon
Properties, Inc. each adopted shareholders' rights agreements. Avalon
Bay Communities, Inc. will be governed by a twelve-member Board of
Directors, six of whom will be from the Company's Board of Directors
and six of whom will be from Avalon Properties, Inc.'s Board of
Directors. Nine of the twelve Board members will be independent.
74
<PAGE> 77
SCHEDULE III
BAY APARTMENT COMMUNITIES, INC.
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COSTS COSTS
----------------------------------- CAPITALIZED
BUILDING FURNITURE SUBSEQUENT
RELATED AND AND TO
APARTMENTS ENCUMBRANCES LAND IMPROVEMENTS FIXTURES ACQUISITION
---------- ------------ -------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Fairway Glen, San Jose, CA................. $ 9,580 $ 2,159 $ 6,125 $ 367 $ 553
Foxchase, San Jose, CA..................... 26,400 7,019 17,975 1,129 3,976
Glen Creek, Morgan Hill, CA(a)............. -- 1,671 7,425 359 573
San Marino, San Jose, CA(a)................ -- 2,415 12,117 626 4,806
Villa Mariposa, Mountain View, CA.......... 18,300 4,518 11,831 864 4,448
Waterford, Hayward, CA..................... 33,100 6,785 25,838 1,729 7,780
Willow Creek, Fremont, CA(a)............... -- 2,098 9,333 568 5,839
Alicante, Fremont, CA(a)................... -- 2,540 13,130 328 (98)
Hampton Place, Fremont, CA................. -- 7,427 28,269 1,044 (499)
Barrington Hills, Hayward, CA.............. 13,185 3,046 11,646 805 201
Regatta Bay, Foster City, CA............... -- 4,182 15,255 1,050 3,293
Sommerset, Vacaville, CA................... -- 1,337 5,087 337 76
Hacienda Gardens, Pleasanton, CA(a)........ -- 6,991 25,439 1,758 880
Village Square, San Francisco, CA(a)....... -- 3,827 8,312 613 271
Reflections, Fresno, CA(a)................. -- 2,595 14,813 916 1,786
Blairmore, Rancho Cordova, CA(a)........... -- 1,983 7,110 479 980
Crossbrook, Rohnert Park, CA............... 8,484 3,280 9,049 642 (20)
Carriage Square, San Jose, CA.............. -- 8,913 26,638 1,151 450
Canyon Creek, Campbell, CA................. 38,534 6,096 28,137 1,446 258
Sea Ridge, Pacifica, CA.................... 17,479 2,942 13,753 899 203
Rivershore, Bay Point, CA.................. 10,309 3,152 9,479 668 1,122
City Heights, San Francisco, CA............ 20,714 2,389 12,636 757 1,147
Promenade, Sunnyvale, CA................... -- 5,372 11,967 878 885
The Pointe, Fairfield, CA.................. -- 3,058 14,136 870 548
Parc Centre, Union City, CA................ -- 2,716 8,147 549 3,115
Parkside Commons, Sunnyvale, CA............ -- 10,684 13,598 1,228 37
Larkspur Canyon, Mission Viejo, CA......... 7,610 2,889 6,740 487 2,544
Sunset Towers, San Francisco, CA........... -- 3,561 19,623 1,173 1,472
Rosewalk, San Jose, CA..................... -- 3,267 25,070 1,111 3
CountryBrook, San Jose, CA................. 19,850 10,967 16,451 1,387 4,455
Fountains, San Jose, CA.................... -- 9,026 17,521 1,343 1,280
Mill Creek, Costa Mesa, CA................. -- 4,165 12,496 843 3,534
Crowne Ridge, San Rafael, CA............... -- 3,494 20,198 1,178 5,467
Lafayette Place, Costa Mesa, CA............ -- 4,402 2,698 359 1,670
SummerWalk, San Diego, CA.................. -- 2,976 7,286 519 1,709
TimberWood, West Covina, CA................ -- 1,210 8,100 471 (948)
SunScape, Huntington Beach, CA............. -- 6,663 19,990 1,348 (1,873)
Villa Serena, Rancho Santa Margarita, CA... -- 5,228 11,636 853 1,499
Cardiff Gardens, Campbell, CA.............. 12,870 3,414 14,554 909 (4,393)
Mission Woods, San Diego, CA............... -- 2,710 10,196 653 (1,947)
Amador Oaks, Dublin, CA.................... -- 6,848 15,243 1,118 758
Cedar Ridge, Daly City, CA................. 1,000 4,230 8,989 669 (13,425)
Toscana, Sunnyvale, CA..................... -- -- -- -- 25,573
The Park, Hacienda Heights, CA............. -- 2,984 16,910 1,006 178
Lakeside, Burbank, CA...................... -- 22,483 25,353 2,420 438
Gallery Place, Redmond, WA................. 11,685 4,558 16,161 1,048 371
Landing West, Seattle, WA.................. -- 2,316 6,264 433 87
Creekside, Mountain View, CA............... -- 4,685 22,872 1,394 149
Governor's Square, Sacramento, CA.......... 14,184 7,053 16,456 1,189 81
Viewpointe, Woodland Hills, CA............. -- 23,828 37,269 3,091 (16,814)
Pacifica Club, Huntington Beach, CA........ -- 12,248 13,269 1,290 209
Mission Bay Club, San Diego, CA............ -- 14,179 27,523 2,109 1,208
Westwood Club, Los Angeles, CA............. -- 13,753 16,810 1,546 908
Waterhouse Place, Beaverton, OR............ -- 2,109 12,746 752 51
Miscellaneous investments.................. -- -- -- 729 2,702
Construction in Progress................... -- -- -- -- --
-------- -------- -------- ------- --------
$263,284 $294,441 $795,669 $53,488 $ 59,556
======== ======== ======== ======= ========
<CAPTION>
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF PERIOD
------------------------------------------------
BUILDING FURNITURE
AND AND ACCUMULATED CONSTRUCTION
APARTMENTS LAND IMPROVEMENTS FIXTURES TOTAL DEPRECIATION COMPLETION
---------- -------- ------------ --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Fairway Glen, San Jose, CA................. $ 2,209 $ 6,417 $ 578 $ 9,204 $ (944) 1986
Foxchase, San Jose, CA..................... 7,608 20,762 1,729 30,099 (3,472) 1986/87
Glen Creek, Morgan Hill, CA(a)............. 1,738 7,783 507 10,028 (2,109) 1989
San Marino, San Jose, CA(a)................ 3,068 15,873 1,023 19,964 (2,409) 1984/88
Villa Mariposa, Mountain View, CA.......... 5,288 14,807 1,566 21,661 (4,401) 1986
Waterford, Hayward, CA..................... 8,116 31,241 2,775 42,132 (10,464) 1985/86
Willow Creek, Fremont, CA(a)............... 3,131 13,991 716 17,838 (3,539) 1985
Alicante, Fremont, CA(a)................... 2,542 12,945 413 15,900 (3,151) 1992
Hampton Place, Fremont, CA................. 7,427 27,609 1,205 36,241 (6,452) 1992
Barrington Hills, Hayward, CA.............. 3,046 11,704 948 15,698 (1,961) 1986
Regatta Bay, Foster City, CA............... 4,182 18,317 1,281 23,780 (2,740) 1973
Sommerset, Vacaville, CA................... 1,337 5,144 356 6,837 (842) 1987
Hacienda Gardens, Pleasanton, CA(a)........ 6,991 26,151 1,926 35,068 (4,234) 1988
Village Square, San Francisco, CA(a)....... 3,827 8,515 681 13,023 (1,302) 1972
Reflections, Fresno, CA(a)................. 2,595 16,487 1,028 20,110 (2,279) 1990
Blairmore, Rancho Cordova, CA(a)........... 1,983 7,947 622 10,552 (1,136) 1986
Crossbrook, Rohnert Park, CA............... 3,280 8,943 728 12,951 (1,331) 1986
Carriage Square, San Jose, CA.............. 8,913 27,012 1,227 37,152 (2,833) 1995
Canyon Creek, Campbell, CA................. 6,096 28,257 1,584 35,937 (2,722) 1995
Sea Ridge, Pacifica, CA.................... 2,942 13,886 969 17,797 (1,323) 1971
Rivershore, Bay Point, CA.................. 3,152 10,212 1,057 14,421 (1,204) 1986
City Heights, San Francisco, CA............ 2,389 13,778 762 16,929 (1,185) 1990
Promenade, Sunnyvale, CA................... 5,372 12,798 932 19,102 (1,174) 1987
The Pointe, Fairfield, CA.................. 3,057 14,600 955 18,612 (1,220) 1991
Parc Centre, Union City, CA................ 2,716 11,260 551 14,527 (648) 1973
Parkside Commons, Sunnyvale, CA............ 10,684 13,635 1,228 25,547 (1,025) 1991
Larkspur Canyon, Mission Viejo, CA......... 2,889 9,283 488 12,660 (464) 1984
Sunset Towers, San Francisco, CA........... 3,561 21,021 1,247 25,829 (1,349) 1961
Rosewalk, San Jose, CA..................... 3,267 25,070 1,114 29,451 (1,087) 1997
CountryBrook, San Jose, CA................. 11,027 20,825 1,408 33,260 (1,178) 1985
Fountains, San Jose, CA.................... 9,026 18,693 1,451 29,170 (1,147) 1990
Mill Creek, Costa Mesa, CA................. 4,165 15,980 893 21,038 (831) 1973
Crowne Ridge, San Rafael, CA............... 3,494 25,657 1,186 30,337 (1,157) 1973
Lafayette Place, Costa Mesa, CA............ 4,424 4,278 427 9,129 (131) 1956
SummerWalk, San Diego, CA.................. 2,976 8,988 526 12,490 (333) 1982
TimberWood, West Covina, CA................ 1,210 7,103 520 8,833 (266) 1972
SunScape, Huntington Beach, CA............. 6,663 18,051 1,414 26,128 (616) 1972
Villa Serena, Rancho Santa Margarita, CA... 5,228 12,978 1,010 19,216 (365) 1990
Cardiff Gardens, Campbell, CA.............. 3,414 10,151 919 14,484 (422) 1966
Mission Woods, San Diego, CA............... 2,710 8,182 720 11,612 (265) 1960
Amador Oaks, Dublin, CA.................... 6,849 15,938 1,180 23,967 (455) 1989
Cedar Ridge, Daly City, CA................. 4,230 (4,439) 672 463 (84) 1975
Toscana, Sunnyvale, CA..................... -- 24,342 1,231 25,573 (183) 1998
The Park, Hacienda Heights, CA............. 2,984 17,077 1,017 21,078 (231) 1970
Lakeside, Burbank, CA...................... 22,483 25,749 2,462 50,694 (387) 1969
Gallery Place, Redmond, WA................. 4,558 16,532 1,048 22,138 (188) 1991
Landing West, Seattle, WA.................. 2,316 6,350 434 9,100 (68) 1989
Creekside, Mountain View, CA............... 4,685 23,016 1,399 29,100 (163) 1962
Governor's Square, Sacramento, CA.......... 7,053 16,537 1,189 24,779 (40) 1972/76
Viewpointe, Woodland Hills, CA............. 23,828 20,455 3,091 47,374 (66) 1989
Pacifica Club, Huntington Beach, CA........ 12,340 13,376 1,300 27,016 -- 1971
Mission Bay Club, San Diego, CA............ 14,567 28,285 2,167 45,019 (7) 1969
Westwood Club, Los Angeles, CA............. 14,139 17,289 1,589 33,017 (4) 1966
Waterhouse Place, Beaverton, OR............ 2,110 12,797 751 15,658 (19) 1990
Miscellaneous investments.................. -- -- 3,431 3,431 (1,425) 1990-97
Construction in Progress................... -- -- -- 170,361 -- N/A
-------- -------- ------- ---------- --------
$299,885 $839,638 $63,631 $1,373,515 $(79,031)
======== ======== ======= ========== ========
<CAPTION>
DEPRECIABLE
DATE LIVES
APARTMENTS ACQUIRED YEARS
---------- -------- -----------
<S> <C> <C>
Fairway Glen, San Jose, CA................. 1986 5-30 Years
Foxchase, San Jose, CA..................... 1986/87 5-30 Years
Glen Creek, Morgan Hill, CA(a)............. 1989 5-30 Years
San Marino, San Jose, CA(a)................ 1984/88 5-30 Years
Villa Mariposa, Mountain View, CA.......... 1986 5-30 Years
Waterford, Hayward, CA..................... 1985/86 5-30 Years
Willow Creek, Fremont, CA(a)............... 1985 5-30 Years
Alicante, Fremont, CA(a)................... 1992 5-30 Years
Hampton Place, Fremont, CA................. 1992 5-30 Years
Barrington Hills, Hayward, CA.............. 1994 5-30 Years
Regatta Bay, Foster City, CA............... 1994 5-30 Years
Sommerset, Vacaville, CA................... 1994 5-30 Years
Hacienda Gardens, Pleasanton, CA(a)........ 1994 5-30 Years
Village Square, San Francisco, CA(a)....... 1994 5-30 Years
Reflections, Fresno, CA(a)................. 1994 5-30 Years
Blairmore, Rancho Cordova, CA(a)........... 1994 5-30 Years
Crossbrook, Rohnert Park, CA............... 1994 5-30 Years
Carriage Square, San Jose, CA.............. 1995 5-30 Years
Canyon Creek, Campbell, CA................. 1995 5-30 Years
Sea Ridge, Pacifica, CA.................... 1995 5-30 Years
Rivershore, Bay Point, CA.................. 1995 5-30 Years
City Heights, San Francisco, CA............ 1995 5-30 Years
Promenade, Sunnyvale, CA................... 1995 5-30 Years
The Pointe, Fairfield, CA.................. 1995 5-30 Years
Parc Centre, Union City, CA................ 1996 5-30 Years
Parkside Commons, Sunnyvale, CA............ 1996 5-30 Years
Larkspur Canyon, Mission Viejo, CA......... 1996 5-30 Years
Sunset Towers, San Francisco, CA........... 1996 5-30 Years
Rosewalk, San Jose, CA..................... 1996 5-30 Years
CountryBrook, San Jose, CA................. 1996 5-30 Years
Fountains, San Jose, CA.................... 1996 5-30 Years
Mill Creek, Costa Mesa, CA................. 1996 5-30 Years
Crowne Ridge, San Rafael, CA............... 1996 5-30 Years
Lafayette Place, Costa Mesa, CA............ 1996 5-30 Years
SummerWalk, San Diego, CA.................. 1997 5-30 Years
TimberWood, West Covina, CA................ 1997 5-30 Years
SunScape, Huntington Beach, CA............. 1997 5-30 Years
Villa Serena, Rancho Santa Margarita, CA... 1997 5-30 Years
Cardiff Gardens, Campbell, CA.............. 1997 5-30 Years
Mission Woods, San Diego, CA............... 1997 5-30 Years
Amador Oaks, Dublin, CA.................... 1997 5-30 Years
Cedar Ridge, Daly City, CA................. 1997 5-30 Years
Toscana, Sunnyvale, CA..................... 1996 5-30 Years
The Park, Hacienda Heights, CA............. 1997 5-30 Years
Lakeside, Burbank, CA...................... 1997 5-30 Years
Gallery Place, Redmond, WA................. 1997 5-30 Years
Landing West, Seattle, WA.................. 1997 5-30 Years
Creekside, Mountain View, CA............... 1997 5-30 Years
Governor's Square, Sacramento, CA.......... 1997 5-30 Years
Viewpointe, Woodland Hills, CA............. 1997 5-30 Years
Pacifica Club, Huntington Beach, CA........ 1997 5-30 Years
Mission Bay Club, San Diego, CA............ 1997 5-30 Years
Westwood Club, Los Angeles, CA............. 1997 5-30 Years
Waterhouse Place, Beaverton, OR............ 1997 5-30 Years
Miscellaneous investments.................. 1990-97 5-7 Years
Construction in Progress................... N/A N/A
</TABLE>
- ---------------
(a) Pledged as collateral to guarantor of tax-exempt bonds.
75
<PAGE> 78
BAY APARTMENT COMMUNITIES, INC.
NOTE TO SCHEDULE III
DECEMBER 31, 1997
(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, 1995 to December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
REAL ESTATE ASSETS:
Balance at beginning of year.............................. $ 750,347 $498,210 $398,333
Sale of Larkspur Woods.................................... -- -- (15,508)
Improvements and acquisitions for year.................... 623,168 252,137 115,385
---------- -------- --------
Balance at end of year.................................... $1,373,515 $750,347 $498,210
========== ======== ========
ACCUMULATED DEPRECIATION:
Balance at beginning of year.............................. $ 52,554 $ 34,552 $ 22,550
Sale of Larkspur Woods.................................... -- -- (434)
Depreciation for year..................................... 26,477 18,002 12,436
---------- -------- --------
Balance at end of year.................................... $ 79,031 $ 52,554 $ 34,552
========== ======== ========
</TABLE>
76
<PAGE> 79
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3(i).1 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(i).4 Articles Supplementary relating to the 8.50% Series C
Cumulative Redeemable Preferred Stock of the Company.
(Incorporated by reference to Exhibit 3(i) to Form 8-K of
Bay Apartment Communities, Inc. dated July 25, 1997.)
3(i).5 Articles Supplementary relating to the 8.00% Series D
Cumulative Redeemable Preferred Stock of the Company.
(Incorporated by reference to Exhibit 1 to Form 8-A of Bay
Apartment Communities, Inc. dated December 17, 1997.)
3(ii).1 Bylaws of the Company. (Incorporated by reference to Exhibit
10.1 to Form 8-B of Bay Apartment Communities, Inc. dated
June 8, 1995.)
3(ii).2 Text of Amendment to Bylaws of the Company. (Incorporated by
reference to Exhibit 4.2 to Form 8-K of Bay Apartment
Communities, Inc. dated March 8, 1998.)
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 Agreement between the Company 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.)
</TABLE>
84
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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 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.)
10.14 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.)
10.15 Master Reimbursement Agreement. (Incorporated by reference
to Exhibit 10.23 to Form 10-Q of Bay Apartment Communities,
Inc. dated August 11, 1995.)
10.16 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.)
10.17 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.)
10.18 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.)
10.19 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.)
10.20 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.)
10.21 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.)
10.22 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.)
10.23 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.)
10.24 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.)
10.25 First Amendment to Agreement to Contribute between
Countrybrook of Berryessa Associates and the Company, dated
June 27, 1996. (Incorporated by reference to Exhibit 10.34
to Form 10-K of Bay Apartment Communities, Inc. dated March
18, 1996.)
10.26 Agreement dated as of May 16, 1997, between the Company J.E.
Butler & Associates, Inc. and AP Companies, Ltd. relating to
the formation of Bay Rincon, L.P. (Incorporated by reference
to Exhibit 10.1 to Form 10-Q of Bay Apartment Communities,
Inc. dated August 14, 1997.)
10.27 Severance Agreement and Mutual General Release, dated July
31, 1997, between the Company and Geoffrey L. Baker.
(Incorporated by reference to Exhibit 10.1 to Form 10-Q of
Bay Apartment Communities, Inc. dated November 13, 1997.)
10.28 Agreement of Limited Partnership of Bay Pacific Northwest,
L.P. dated as of September 12, 1997, between the Company and
certain other defined Persons. (Incorporated by reference to
Exhibit 10.1 to Form 8-K of Bay Apartment Communities, Inc.
dated October 28, 1997.)
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85
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10.29 Registration Rights Agreement, dated as of September 23,
1997, between the Company and certain defined Holders of
units of limited partnership interests in Bay Pacific
Northwest, L.P. (Incorporated by reference to Exhibit 10.2
to Form 8-K of Bay Apartment Communities, Inc. dated October
28, 1997.)
10.30 Second Amended and Restated Revolving Loan Agreement dated
November 21, 1997, between the Company, Union Bank of
Switzerland, as Co-Agent and Bank, Union Bank of California,
N.A., as Co-Agent and Bank, Union Bank of Switzerland, as
Administrative Agent, and the other Banks signatory thereto.
(Incorporated by reference to Exhibit 10.1 to Form 8-K of
Bay Apartment Communities, Inc. dated December 16, 1997.)
10.31 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 March 5, 1998, File No. 333-47405.)
10.32 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.)
10.33 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>
86
<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. 333-47405), Form S-8 (File
No. 333-16837), Form S-3 (File No. 333-16647), Form S-3 (File No. 333-15407),
Form S-3 (File No. 333-39037) and Form S-3 (File No. 333-41511) of our report
dated January 30, 1998, except for Note 14, as to which the date is March 24,
1998, on our audits of the consolidated financial statements and financial
statement schedule of the Bay Apartment Communities, Inc. as of December 31,
1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995, which
report is included in this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
---------------------------------
Coopers & Lybrand L.L.P.
San Francisco, California
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH ANNUAL FILING ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,188
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,373,515
<DEPRECIATION> 79,031
<TOTAL-ASSETS> 1,317,650
<CURRENT-LIABILITIES> 0
<BONDS> 487,484
0
83
<COMMON> 261
<OTHER-SE> 792,351
<TOTAL-LIABILITY-AND-EQUITY> 1,317,650
<SALES> 121,873
<TOTAL-REVENUES> 126,034
<CGS> 0
<TOTAL-COSTS> 72,980
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,113
<INCOME-PRETAX> 38,941
<INCOME-TAX> 0
<INCOME-CONTINUING> 38,941
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,941
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.40
</TABLE>
