<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 1-12672
------------------------
BAY APARTMENT COMMUNITIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MARYLAND 77-0404318
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
4340 STEVENS CREEK BLVD., #275, SAN JOSE, CALIFORNIA 95129
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(408) 983-1500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS SHARES OUTSTANDING DATE
----- ------------------ ----
<S> <C> <C>
Common, $.01 par value 28,973,909 May 8, 1998
</TABLE>
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<PAGE> 2
BAY APARTMENT COMMUNITIES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
------
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997........................................... 2
Consolidated Statements of Operations for the Quarters ended
March 31, 1998 and 1997..................................... 3
Consolidated Statements of Cash Flows for the Quarters ended
March 31, 1998 and 1997..................................... 4
Notes to Consolidated Financial Statements.................. 5-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14-23
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 24
Item 2. Changes in Securities....................................... 24
Item 3. Defaults Upon Senior Securities............................. 24
Item 4. Submission of Matters to a Vote of Security Holders......... 24
Item 5. Other Information........................................... 24
Item 6. Exhibits and Reports on Form 8-K............................ 24-26
Signatures........................................................... 27
</TABLE>
1
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
BAY APARTMENT COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Real estate assets:
Land...................................................... $ 323,802 $ 299,885
Buildings and improvements................................ 940,608 839,638
Furniture, fixtures and equipment......................... 70,185 63,631
---------- ----------
1,334,595 1,203,154
Less accumulated depreciation............................. (88,762) (79,031)
---------- ----------
Operating real estate assets.............................. 1,245,833 1,124,123
Construction in progress.................................. 171,875 170,361
---------- ----------
Net real estate assets................................. 1,417,708 1,294,484
Cash and cash equivalents................................... 2,892 3,188
Restricted cash............................................. 1,845 1,597
Other assets, net........................................... 25,019 18,381
---------- ----------
Total assets...................................... $1,447,464 $1,317,650
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable............................................... $ 605,191 $ 487,484
Accounts payable and accrued expenses....................... 13,247 7,727
Dividends payable........................................... 12,695 12,591
Other liabilities........................................... 13,292 8,020
---------- ----------
Total liabilities................................. 644,425 515,822
---------- ----------
Contingencies (Note 4)...................................... -- --
---------- ----------
Minority interest........................................... 9,124 9,133
---------- ----------
Shareholders' equity:
Preferred stock, $.01 par value; 25,000,000 shares
authorized; 2,308,800 shares of Series A outstanding at
both March 31, 1998 and December 31, 1997; 405,022
shares of Series B outstanding at both March 31, 1998
and December 31, 1997; 2,300,000 shares of Series C
outstanding at both March 31, 1998 and December 31,
1997; 3,267,700 shares of Series D outstanding at both
March 31, 1998 and December 31, 1997................... 83 83
Common stock, $.01 par value; 40,000,000 shares
authorized; 26,197,865 shares outstanding at March 31,
1998; 26,077,518 shares outstanding at December 31,
1997................................................... 262 261
Paid-in capital........................................... 826,792 823,520
Dividends in excess of accumulated earnings............... (33,222) (31,169)
---------- ----------
Total shareholders' equity........................ 793,915 792,695
---------- ----------
Total liabilities and shareholders' equity........ $1,447,464 $1,317,650
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 4
BAY APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 31, MARCH 31,
1998 1997
------------- -------------
<S> <C> <C>
Revenue:
Rental.................................................... $43,666 $25,393
Other..................................................... 1,719 864
------- -------
Total revenue..................................... 45,385 26,257
------- -------
Expenses:
Property operating........................................ 10,344 5,971
Property taxes............................................ 3,626 1,914
General and administrative................................ 2,016 1,367
Abandoned project costs................................... 150 80
Interest and financing.................................... 6,249 3,317
Depreciation and amortization............................. 9,867 5,699
------- -------
Total expenses.................................... 32,252 18,348
------- -------
Income before minority interest............................. 13,133 7,909
Minority interest........................................... (154) (138)
------- -------
Net income.................................................. 12,979 7,771
Preferred stock dividend requirement:
Series A and B............................................ (1,174) (1,146)
Series C and D............................................ (2,855) --
------- -------
Earnings available to common shares......................... $ 8,950 $ 6,625
======= =======
Basic and diluted earnings per common share:
Income before minority interest............................. $ 0.35 $ 0.34
Minority interest......................................... (0.01) (0.01)
------- -------
Earnings available to common shares....................... $ 0.34 $ 0.33
======= =======
Dividends declared per common share......................... $ 0.42 $ 0.41
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
BAY APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income................................................ $ 12,979 $ 7,771
NONCASH EXPENSES INCLUDED IN NET INCOME:
Depreciation and amortization............................. 9,867 5,699
Minority interest......................................... 154 138
CASH PROVIDED BY (USED FOR) OPERATING ASSETS AND
LIABILITIES:
Restricted cash........................................... (248) (140)
Other assets.............................................. (6,774) (3,778)
Accounts payable and accrued expenses..................... 5,520 (1,756)
Other liabilities......................................... 5,272 (104)
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 26,770 7,830
--------- --------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Capital improvements...................................... (979) (640)
Acquisition of properties................................. (78,512) (20,562)
Construction in progress.................................. (43,064) (17,677)
--------- --------
NET CASH (USED FOR) INVESTING ACTIVITIES.................... (122,555) (38,879)
--------- --------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from stock offerings, net of issuance costs...... -- 49,271
Exercise of stock options................................. 208 80
Proceeds from employee stock purchase plan................ 241 --
Proceeds from dividend reinvestment plan.................. 2,824 --
Notes payable principal payments.......................... (493) (157)
Proceeds from senior unsecured note offerings............. 150,000 --
Borrowings on lines of credit............................. 106,700 36,500
Repayments on lines of credit............................. (148,900) (45,300)
Partner and minority interest distributions............... (163) (197)
Dividends paid............................................ (14,928) (8,940)
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 95,489 31,257
--------- --------
Increase (decrease) in cash and cash equivalents............ (296) 208
Cash and cash equivalents, beginning of period.............. 3,188 920
--------- --------
Cash and cash equivalents, end of period.................... $ 2,892 $ 1,128
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized)................... $ 4,278 $ 4,080
========= ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Noncash transfers of construction in progress............. $ 41,550 $ 7,818
========= ========
Assumption of notes payable by the Company................ $ 10,400 $ --
========= ========
Conversion of partnership units to common stock........... $ -- $ 844
========= ========
Dividends declared or accrued but not paid................ $ 12,695 $ 9,540
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 6
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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 March
31, 1998, the Company owned 59 apartment communities, of which 37 are in
Northern California, 19 are in Southern California, two are in the Seattle,
Washington area and one community is in the Portland, Oregon area, comprising
16,669 apartment homes, including the apartment homes delivered at Toscana -- a
partially completed community. In addition to Toscana, the Company had four
communities under construction and one land site held for future development in
Northern California.
The interim unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and in conjunction with the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements required by generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations. These
unaudited financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997. The results of operations for the
quarter ended March 31, 1998 are not necessarily indicative of the operating
results for the full year. Management believes that the disclosures are adequate
to make the information presented not misleading. In the opinion of management,
all adjustments and eliminations, consisting only of normal, recurring
adjustments necessary for a fair presentation of the financial statements for
the interim periods have been included.
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
Agree-
5
<PAGE> 7
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ment, 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. An aggregate of 166,142 Countrybrook Units had been
converted into the Company's common stock as of both March 31, 1998 and December
31, 1997. An aggregate of 762 Countrybrook Units had been redeemed for cash as
of both March 31, 1998 and December 31,1997.
Bay Pacific Northwest, L.P.
In connection with the formation of the Northwest Partnership in September
1997, 163,338 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, 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 had been converted into the Company's common stock or redeemed
for cash as of both March 31, 1998 and 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 or redevelopment and construction or reconstruction.
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 or post-reconstruction lease-up period are fully recognized as they
accrue.
Capitalization of Costs During Development and Redevelopment
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
redevelopment and 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"). A corporate REIT is a legal entity which
holds real estate interests and through certain levels
6
<PAGE> 8
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
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 $184 and $104 for the quarters ended March 31, 1998 and 1997,
respectively.
Restricted Cash
Restricted cash at March 31, 1998 and 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 quarters ended March 31, 1998 and
1997 is computed by dividing earnings 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. The Company's basic and
diluted weighted average shares outstanding for the quarters ended March 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Common shares -- basic...................................... 26,172,571 19,997,068
Shares issuable from assumed conversion of Series A and B
Preferred Stock........................................... 2,713,822 2,713,822
Shares issuable from assumed conversion of common stock
options................................................... 278,669 279,088
---------- ----------
Common shares -- diluted.................................... 29,165,062 22,989,978
========== ==========
</TABLE>
In calculating the earnings per common share for the quarters ended March
31, 1998 and 1997, the overall effect of all securities convertible into common
shares during both periods was anti-dilutive. 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.
7
<PAGE> 9
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 issued by Standard and Poor's
Ratings Group are AAA in order 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.
Newly Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" and No. 131 "Disclosure of Segment
Information." SFAS No. 130 establishes the disclosure requirements for reporting
comprehensive income in an entity's annual and interim financial statements and
becomes effective for the Company for the fiscal year ending December 31, 1998.
Comprehensive income includes unrealized gains and losses on securities
currently reported by the Company as a component of stockholders' equity which
the Company would be required to include in a financial statement and display
the accumulated balance of other comprehensive income separately in the equity
section of the consolidated balance sheet. The Company does not believe this
pronouncement will have a material effect on the Company's results of
operations.
SFAS No. 131 establishes standards for determining an entity's operating
segments and the type and level of financial information to be disclosed. SFAS
No. 131 becomes effective for the Company for the fiscal year ending December
31, 1998. The Company does not believe that this pronouncement will result in
any additional disclosures.
On March 19, 1998, the Emerging Issues Task Force of the Financial
Accounting Standards Board issued Ruling 97-11 entitled "Accounting for Internal
Costs Relating to Real Estate Property Acquisitions," which requires that
internal costs of identifying and acquiring operating property be expensed as
incurred. Costs associated with the acquisition of non-operating property may
still be capitalized. The ruling is effective for acquisitions completed
subsequent to March 19, 1998. The Company estimates that this ruling will not
have a material effect on the Company's consolidated financial statements.
2. INTEREST CAPITALIZED
Interest costs associated with projects under development and construction
or redevelopment and reconstruction aggregating $2,964 and $1,025 for the
quarters ended March 31, 1998 and 1997, respectively, have been capitalized.
8
<PAGE> 10
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. NOTES PAYABLE
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<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 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.................. 13,144 13,185
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........................ 8,459 8,484
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.................. 10,274 10,309
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 lease
to low income families.................................... 38,416 38,534
</TABLE>
9
<PAGE> 11
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Sea Ridge is encumbered by a first deed of trust which
collateralizes housing bond issues maturing June 15, 2025,
fully amortizing over the term. The Company has entered
into 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.................................... 17,426 17,479
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................ 20,661 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.................................................. 7,590 7,610
-------- --------
Subtotal.................................................... 203,350 203,695
-------- --------
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.................................................. 19,782 19,850
-------- --------
Subtotal.................................................... 19,782 19,850
-------- --------
TAX-EXEMPT VARIABLE RATE:
Laguna Brisas is encumbered by a first deed of trust which
collateralizes housing bond issues maturing March 1, 2009.
Interest only payments are required monthly at a variable
rate set weekly by the remarketing agent (5.37% at March
31, 1998, 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.................. 10,400 --
-------- --------
Subtotal.................................................... 10,400 --
-------- --------
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%..... 14,152 14,184
The Arbors (formerly 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 12,870
</TABLE>
10
<PAGE> 12
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
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%........... 11,637 11,685
-------- --------
Subtotal.................................................... 38,659 38,739
-------- --------
UNSECURED FIXED RATE:
Senior unsecured notes maturing January 15, 2003. Interest
only payments are required semi-annually at a fixed
interest rate of 6.25% (6.43% including the amortization
of deferred financing costs).............................. 50,000 --
Senior unsecured notes maturing January 15, 2005. Interest
only payments are required semi-annually at a fixed
interest rate of 6.50% (6.63% including the amortization
of deferred financing costs).............................. 50,000 --
Senior unsecured notes maturing January 15, 2008. Interest
only payments are required semi-annually at a fixed
interest rate of 6.625% (6.71% including the amortization
of deferred financing costs).............................. 50,000 --
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 1,000
-------- --------
Subtotal.................................................... 151,000 1,000
-------- --------
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..... 182,000 224,200
-------- --------
Subtotal.................................................... 182,000 224,200
-------- --------
Total Notes Payable............................... $605,191 $487,484
======== ========
</TABLE>
Principal payments on outstanding notes payable as of March 31, 1998 are
due as follows:
<TABLE>
<S> <C>
1998.............................................. $ 1,531
1999.............................................. 3,175
2000.............................................. 184,338
2001.............................................. 13,308
2002.............................................. 2,435
Thereafter........................................ 400,404
--------
Total................................... $605,191
========
</TABLE>
4. 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 that was under construction in
Redmond, Washington from Avondale Bear Creek Limited Partnership. The proposed
acquisition of Verandas at Bear Creek will not be consummated
11
<PAGE> 13
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
until 90 days after construction has been completed and the community is 90
percent occupied by residents. Construction at this community has recently been
completed and the community is 90 percent occupied by residents. The proposed
acquisition 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.
On March 9, 1998, the Company announced that it had signed a definitive
merger agreement with Avalon Properties, Inc. ("Avalon"). The surviving company
is to be named Avalon Bay Communities, Inc. Under the terms of the agreement,
Avalon will be merged with and into the Company, with the Company as the
surviving entity, through an exchange of shares in which the Avalon common
shareholders will receive 0.7683 of a share of the Company's common stock for
each share of Avalon common stock they own. Avalon 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 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 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 each adopted a shareholder
rights agreement. 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's Board of Directors. Nine of
the twelve Board members will be independent. Because the consummation of the
merger between the Company and Avalon is subject to the satisfaction of certain
conditions that are not within the control of the Company, there can be no
assurance that the merger will be consummated.
5. SUBSEQUENT EVENTS
In April 1998, the Company acquired a 5.05 acre site in San Jose,
California for approximately $4,700. The Company plans to develop, subject to
certain governmental approvals, an apartment home community with up to 288
apartment homes and approximately 8,500 square feet of retail space.
Also in April 1998, the Company sold in a public offering 1,244,147 shares
of common stock at a gross price of $37.375 per share. The net proceeds to the
Company, after all anticipated issuance costs, were approximately $44,000. The
net proceeds were used to reduce borrowings under the Unsecured Line of Credit.
On April 27, 1998, the owner of the Company's Series A Preferred Stock and
Series B Preferred Stock (the "Preferred Holder") converted 1,358,736 shares of
Series A Preferred Stock into an equal number of
12
<PAGE> 14
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
shares of the Company's common stock . This conversion occurred on the date
which was two business days after the record date for the Company's 1998 Annual
Meeting of Stockholders pursuant to a Shareholder Agreement, dated as of March
9, 1998 (the "Shareholder Agreement"), between the Company and the Preferred
Holder and in accordance with the procedure for conversion set forth in the
Company's charter. Under certain circumstances, the Preferred Holder is required
by the Shareholder Agreement to convert additional shares of the Company's
Series A Preferred Stock and/or Series B Preferred Stock. In consideration of
the Preferred Holder entering into the Shareholder Agreement, the Company paid
$485 to the Preferred Holder. In October 2005, all outstanding shares of the
Company's Series A Preferred Stock and Series B Preferred Stock will be
automatically converted into shares of common stock.
In May 1998, the Company purchased the Avalon Ridge apartment community for
approximately $21,300 including the purchase of approximately $18,800 in
tax-exempt bond financing on this community. The Company will hold these bonds
until it decides to either retire the bonds or refinance them with new tax-
exempt debt. This community contains 356 apartment homes and is located in
Renton, Washington.
13
<PAGE> 15
ITEM 2. 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 forward-looking statements
contained in this discussion are statements that involve risks and
uncertainties, including, but not limited to, the demand for apartment homes,
the effects of economic conditions, the impact of competition and competitive
pricing, changes in construction costs, the results of financing efforts,
potential acquisitions under agreement, the effects of the Company's accounting
policies and other risks detailed in the Company's filings with the Securities
and Exchange Commission.
RESULTS OF OPERATIONS
The following discussion sets forth historical results of operations for
the Company for the quarters ended March 31, 1998 and 1997. The following table
outlines the communities acquired or leased-up during 1997 and through March 31,
1998:
<TABLE>
<CAPTION>
1997 ACQUISITION
COMMUNITIES
----------------
COMMUNITY DATE ACQUIRED
- --------- -------------
<S> <C>
SummerWalk (a) January 3, 1997
TimberWood (b) March 13, 1997
SunScape (b) April 1, 1997
The Arbors (b) April 18, 1997
Villa Serena (c) April 25, 1997
Amador Oaks (a) April 30, 1997
Mission Woods (b) May 16, 1997
Cedar Ridge (b) July 15, 1997
The Park (b) September 4, 1997
Lakeside (b) September 5, 1997
Gallery Place (b) September 23, 1997
Landing West (b) October 1, 1997
Creekside (b) October 31, 1997
Governor's Square (b) December 11, 1997
Waterhouse Place (b) December 18, 1997
Viewpointe (b) December 18, 1997
Mission Bay Club (b) December 30, 1997
Westwood Club (b) December 30, 1997
Pacifica Club (b) December 30, 1997
</TABLE>
<TABLE>
<CAPTION>
1998 ACQUISITION
COMMUNITIES
----------------
COMMUNITY DATE ACQUIRED
- --------- -------------
<S> <C>
Warner Oaks (b) January 14, 1998
Amberway (b) January 28, 1998
Arbor Park (b) January 28, 1998
Laguna Brisas (b) February 11, 1998
Cabrillo Square (b) March 2, 1998
</TABLE>
<TABLE>
<CAPTION>
CURRENT DEVELOPMENT
COMMUNITIES
-------------------
COMMUNITY DATE STABILIZED (d)
- --------- -------------------
<S> <C>
Toscana (e)
CentreMark (f)
Paseo Alameda (g)
Bay Towers (h)
Rosewalk II (i)
Mountain View Land Site (j)
</TABLE>
The 1997 and 1998 Acquisition Communities and Toscana are collectively
termed the "Acquisition Communities."
- ---------------
(a) Reconstruction was completed in 1997.
(b) Reconstruction is ongoing or planned as of March 31, 1998.
(c) Reconstruction was completed during the quarter ended March 31, 1998.
(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%. As a result of delays due to weather conditions, the
estimated occupancy and stabilization dates for the Current Development
Communities have been adjusted by approximately six to eight weeks.
(e) Occupancy commenced in July 1997 and operations are expected to be
stabilized in the fourth quarter of 1998.
14
<PAGE> 16
(f) Occupancy is expected to commence in the third quarter of 1998 and
operations are expected to be stabilized in the first quarter of 1999.
(g) Occupancy is expected to commence in the fourth quarter of 1998 and
operations are expected to be stabilized in the second quarter of 1999.
(h) Occupancy is expected to commence in 1999 and operations are expected to be
stabilized in 2000.
(i) Occupancy is expected to commence in the fourth quarter of 1998 and
operations are expected to be stabilized in the second quarter of 1999.
(j) This community is still undergoing planning and development.
Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that judgments with respect to the cost 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.
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
offset the effects of increases in construction costs.
The Company's results of operations are summarized as follows for the
quarters ended March 31, 1998 and 1997 (Dollars in thousands):
<TABLE>
<CAPTION>
FOR THE QUARTER
ENDED MARCH 31,
------------------
1998 1997 $-CHANGE %-CHANGE
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Rental........................................... $43,666 $25,393 $18,273 72.0%
Other............................................ 1,719 864 855 99.0%
------- ------- ------- ----
Total revenue............................ 45,385 26,257 19,128 72.8%
------- ------- ------- ----
Expenses:
Property operating............................... 10,344 5,971 4,373 73.2%
Property taxes................................... 3,626 1,914 1,712 89.4%
General and administrative....................... 2,016 1,367 649 47.5%
Abandoned project costs.......................... 150 80 70 87.5%
Interest and financing........................... 6,249 3,317 2,932 88.4%
Depreciation and amortization.................... 9,867 5,699 4,168 73.1%
------- ------- ------- ----
Total expenses........................... 32,252 18,348 13,904 75.8%
------- ------- ------- ----
Income before minority interest.................... 13,133 7,909 5,224 66.1%
Minority interest.................................. (154) (138) (16) 11.6%
------- ------- ------- ----
Net income......................................... $12,979 $ 7,771 $ 5,208 67.0%
======= ======= ======= ====
</TABLE>
Revenue from rental property increased primarily as a result of the
addition of the Acquisition Communities. The 1997 and 1998 Acquisition
Communities contributed $12,746 and $1,612, respectively, to the increase.
Toscana, one of the Current Development Communities (defined below), contributed
$1,533 to the increase. The remainder of the portfolio increased rental revenue
by $2,382, of which $1,565 was attributable to the Same Store Communities
(defined below).
Other income increased primarily due to the additional miscellaneous income
from the Acquisition Communities.
15
<PAGE> 17
Property operating expenses increased primarily as a result of the addition
of the Acquisition Communities. Of the $4,373 increase, $3,814 was attributable
to the 1997 Acquisition Communities, $382 was attributable to the 1998
Acquisition Communities and $251 was attributable to the apartment homes
delivered at Toscana. The Same Store Communities contributed $96 to the increase
while the remainder of the portfolio decreased by $170. In addition, the
Acquisition Communities contributed $1,483 to the increase in property taxes and
the remainder of the portfolio increased property taxes by $229, of which $112
was attributable to the Same Store Communities.
General and administrative costs increased primarily due to the growth in
employee-related costs and other costs needed to manage the Acquisition
Communities. The 1998 and 1997 amounts are net of $2,255 and $1,252,
respectively, of allocated indirect project costs capitalized to construction
and reconstruction projects, representing approximately 51% and 46% of total
general and administrative expense, including abandoned project costs, for the
quarters ended March 31, 1998 and 1997, respectively.
Interest and financing expense increased primarily as a result of increased
borrowing for new acquisitions offset in part by higher capitalization of
interest from increased development, redevelopment, construction and
reconstruction activity.
Depreciation and amortization expense increased primarily due to the
addition of the Acquisition Communities.
THE COMPANY'S RESULTS OF PROPERTY OPERATIONS (EARNINGS BEFORE INTEREST,
INCOME TAXES, DEPRECIATION AND AMORTIZATION -- "EBITDA") FOR THE "SAME STORE
COMMUNITIES" (1) IS SUMMARIZED BELOW FOR THE QUARTERS ENDED MARCH 31, 1998 AND
1997:
<TABLE>
<CAPTION>
FOR THE QUARTER
ENDED MARCH 31,
------------------
1998 1997 $-CHANGE %-CHANGE
(DOLLARS IN THOUSANDS) ------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue............................................ $20,237 $18,522 $1,715(2) 9.3%
Expenses........................................... 5,508 5,300 208(3) 3.9%
------- ------- ------ ----
EBITDA............................................. $14,729 $13,222 $1,507 11.4%
======= ======= ====== ====
</TABLE>
- ---------------
(1) The Same Store Communities consist of 24 apartment communities comprising a
total of 6,354 apartment homes. These apartment communities include all
those which were owned for all of 1997 and during the quarter ended March
31, 1998 and to which the Company made no major renovations after January 1,
1997.
(2) Same Store Communities' revenue increased due to rental increases of $1,422,
vacancy decreases of $82, late fee increases of $47, concession decreases of
$47, month to month fee increases of $40, interest income increases of $30
and a net increase in other income of $47.
(3) Same Store Communities' expenses increased as a result of a $112 increase in
property taxes (primarily due to a one-time escape assessment charge of
$51), a $57 increase in management and administrative costs and a $40
increase in building maintenance costs, offset by a $1 decrease in net other
expenses.
CURRENT DEVELOPMENT COMMUNITIES
The Company has acquired six land sites on which it is building, or plans
to commence building in the future, the following Current Development
Communities, which will contain an aggregate 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 commmunity 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
16
<PAGE> 18
are expected in the fourth quarter of 1998 and the first apartment homes were
completed and occupied in July 1997. As of March 31, 1998, construction had been
completed on 420 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.
- 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 pavilion 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
17
<PAGE> 19
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 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
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 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.
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,
redevelopment, construction and reconstruction projects with a combination of
working capital and proceeds available under the Unsecured Line of Credit. The
Company intends to use available working capital first and proceeds available
under its Unsecured Line of Credit second.
As of March 31, 1998, the proceeds from the Unsecured Line of Credit were
used primarily for the acquisition, development and construction of the Current
Development Communities and redevelopment and reconstruction of the 1997 and
1998 Acquisition Communities.
In January 1998, the Company issued $150,000,000 of senior unsecured notes.
$50,000,000 of the notes bear interest at 6.25 percent and will mature on
January 15, 2003, $50,000,000 of the notes bear interest at 6.5 percent and will
mature on January 15, 2005 and $50,000,000 of the notes bear interest at 6.625
percent and will mature on January 15, 2008. The net proceeds to the Company
were approximately $148,700.00.
In February 1998, the Company assumed $10,400,000 of tax-exempt variable
rate debt in connection with the acquisition of the Laguna Brisas community. The
bonds, which mature on March 1, 2009, require
18
<PAGE> 20
monthly interest only payments at a variable rate set weekly by the remarketing
agent. The interest rate on the bonds at March 31, 1998 was 5.37 percent,
including the amortization of deferred financing costs.
The Company's outstanding debt as of March 31, 1998 is summarized as
follows:
<TABLE>
<CAPTION>
INTEREST RATE
(DOLLARS IN THOUSANDS) BALANCE AVAILABLE MATURES RATE PROTECTION
- ---------------------- -------- --------- ---------------- ----------- ----------------------
<S> <C> <C> <C> <C> <C>
NOTES SECURED BY PROPERTIES:
Tax-exempt variable $87,720 $ -- November 2022 - 6.48%(a) Interest rate is fixed
rate under interest June 2050 until June 2010.
rate swap
Tax-exempt variable 87,380 -- November 2007 - 5.88%(b) Interest rate is fixed
rate under interest March 2017 until March 2004.
rate swap
Tax-exempt fixed rate 19,782 -- March 2012 7.87%(a) Interest rate is fixed
until April 2002.
Tax-exempt variable 20,660 -- June 2025 5.80%(a) Interest rate is fixed
rate under interest until July 2007.
rate swap
Tax-exempt variable 7,590 -- June 2025 5.50%(a) Interest rate is fixed
rate under interest until September 2002.
rate swap
Tax-exempt variable 10,400 -- March 2009 5.37%(c)
rate
Fixed rate 12,870 -- May 2004 7.25%
Fixed rate 11,637 -- May 2001 7.31%
Fixed rate 14,152 -- August 2004 7.65%
-------- --------
Subtotal 272,191 --
UNSECURED NOTES:
Senior fixed rate 50,000 -- January 2003 6.43%(a)
notes
Senior fixed rate 50,000 -- January 2005 6.63%(a)
notes
Senior fixed rate 50,000 -- January 2008 6.71%(a)
notes
Fixed rate 1,000 -- July 1999 6.50%
-------- --------
Subtotal 151,000 --
Line of credit(d) 182,000 168,000 May 2000 LIBOR+0.90%
-------- --------
Total $605,191 $168,000
======== ========
</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 IPO; if such costs were included, the all-inclusive
effective rate would be 6.30%.
(c) The 5.37% rate represents an all-in financing cost, including amortization
of deferred financing costs. The debt floats in a seven-day put bond mode
with a current interest rate of 3.70%.
(d) The line of credit balance was used for acquisition, development,
redevelopment, construction and reconstruction purposes.
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).
Net cash provided by operations for the quarter ended March 31, 1998
increased to $26,770,000 from $7,830,000 for the quarter ended March 31, 1997,
primarily due to higher net income before noncash charges for depreciation and
amortization from the addition of the Acquisition Communities and before
increases in accrued interest payable due to the issuance of the Company's
senior unsecured notes.
Net cash used for investing activities was $122,555,000 and $38,879,000 for
the quarters ended March 31, 1998 and 1997, respectively. This increase reflects
the expenditures for the purchases of the 1998 Acquisition
19
<PAGE> 21
Communities, the amounts used for the acquisition, development and construction
of the Current Development Communities and the costs incurred on the communities
undergoing redevelopment and reconstruction.
Net cash provided by financing activities was $95,489,000 and $31,257,000
for the quarters ended March 31, 1998 and 1997, respectively. This increase is
primarily due to the increase in borrowings for the purchase of the 1998
Acquisition Communities, the amounts used for the acquisition, development and
construction of the Current Development Communities and the costs incurred on
the redevelopment and reconstruction projects, offset in part by the increased
dividends paid. The increase in borrowings included the issuance of $150,000,000
in senior unsecured notes in January 1998.
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.
NATURAL DISASTERS
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
20
<PAGE> 22
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
revenue. Two of the communities had individual PMLs of 30%, while seven
communities 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 eighteen 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 twelve 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 eighteen 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.
FUNDS FROM OPERATIONS AND FUNDS AVAILABLE FOR DISTRIBUTION
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 generally accepted accounting
principles), excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. This definition was revised by
NAREIT effective for periods after 1995 to exclude the add back of non-real
estate depreciation and the amortization of recurring deferred financing costs.
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 quarter ended March 31, 1998, FFO increased to $19,736,000 from
$13,321,000 for the quarter ended March 31, 1997. This increase is primarily due
to higher net income and real estate depreciation add back due to the addition
of the Acquisition Communities.
21
<PAGE> 23
FFO and Funds Available for Distribution (defined below) for the quarters
ended March 31, 1998, December 31, 1997, September 30, 1997, June 30, 1997 and
March 31, 1997 are summarized as follows:
CALCULATION OF FFO AND FUNDS AVAILABLE FOR DISTRIBUTION
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1998 1997 1997 1997 1997
---------------- ------------ ------------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER APARTMENT HOME DATA)
<S> <C> <C> <C> <C> <C>
Net income........................ $ 12,979 $ 12,039 $ 10,653 $ 8,479 $ 7,771
Series C and D preferred dividend
requirement..................... (2,856) (1,469) (1,222) (149) --
Depreciation -- real estate assets... 9,523 7,669 6,659 6,173 5,462
Non-recurring adjustments to net
income:
Amortization of non-recurring
costs, primarily legal, from the
issuance of tax-exempt
bonds(1)..................... 90 90 88 88 88
----------- ----------- ----------- ----------- -----------
FFO(2)............................ 19,736 18,329 16,178 14,591 13,321
Recurring adjustments to net income:
Amortization of reincorporation
costs........................ 7 7 7 7 7
Amortization of credit enhancement
costs(3)..................... 38 38 38 38 38
Depreciation -- non real estate
assets....................... 209 153 135 120 105
Capital expenditures(4)......... (668) (566) (280) (471) (281)
Loan principal payments......... (493) (463) (368) (213) (157)
----------- ----------- ----------- ----------- -----------
Funds Available for Distribution
("FAD")......................... $ 18,829 $ 17,498 $ 15,710 $ 14,072 $ 13,033
=========== =========== =========== =========== ===========
Weighted average shares
outstanding(5).................. 29,165,062 28,296,053 25,803,370 24,833,801 22,989,978
=========== =========== =========== =========== ===========
</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 enhancements used for the issuance of tax-exempt bonds. Such costs
are amortized over the life of the respective credit enhancements.
22
<PAGE> 24
(4) Capital improvements represent amounts expended primarily at communities
acquired or developed prior to 1996. A breakdown of the expenditures for the
quarter ended March 31, 1998 is as follows:
<TABLE>
<CAPTION>
TOTAL PER APARTMENT HOME
QUARTER ENDED QUARTER ENDED
MARCH 31, 1998 MARCH 31, 1998
-------------- ------------------
<S> <C> <C>
Non-revenue generating:
Landscaping....................................... $216 $13
Leasing pavilion rehabilitation................... 187 11
Exterior lighting................................. 32 2
Gate installation................................. 17 1
Other capital expenditures........................ 216 13
---- ---
Subtotal -- capital expenditures.......... 668 40
---- ---
Revenue generating:
Water submeters................................... 251 15
Appliances........................................ 39 3
Fixtures.......................................... 21 1
---- ---
Subtotal.................................. 311 19
---- ---
Total capital improvements.......................... $979 $59
==== ===
</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 redevelopment and reconstruction 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 quarter is
based on the ending number of apartment homes in the portfolio at March 31,
1998.
(5) 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.
23
<PAGE> 25
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 Underwriting Agreement, dated as of April 23, 1998, between
Bay Apartment Communities, Inc. (the "Company") and Merrill
Lynch, Pierce, Fenner & Smith Incorporated.
2.1 Agreement and Plan of Merger, dated as of March 9, 1998,
between the Company and Avalon Properties, Inc. ("Avalon").
(Incorporated by reference to Exhibit 99.1 to Form 8-K of
Bay Apartment Communities, Inc. filed March 11, 1998.)
3(i).1 Articles of Incorporation of the Company. (Incorporated by
reference to Exhibit 3(i) to Form 8-B of Bay Apartment
Communities, Inc. dated June 8, 1995.)
3(i).2 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. filed
May 20, 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. filed 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. filed December 17, 1997.)
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3(i).6 Articles Supplementary relating to the Series E Junior
Participating Cumulative Preferred Stock of the Company.
(Incorporated by reference to Exhibit 3.1 to Form 8-A of Bay
Apartment Communities, Inc. filed March 11, 1998.)
3(ii).1 Bylaws of the Company. (Incorporated by reference to Exhibit
3(ii) 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. filed March 11, 1998.)
3(ii).3 Text of Amendment to Bylaws of the Company. (Incorporated by
reference to Exhibit 3(ii).3 to Registration Statement on
Form S-4 of Bay Apartment Communities, Inc. filed May 5,
1998.)
4.1 Indenture, dated as of January 16, 1998, between the Company
and State Street Bank and Trust Company, as Trustee.
(Incorporated by reference to Exhibit 4.1 to Form 8-K of Bay
Apartment Communities, Inc. filed January 21, 1998.)
4.2 First Supplemental Indenture, dated as of January 20, 1998,
between Bay and State Street Bank and Trust Company, as
Trustee. (Incorporated by reference to Exhibit 4.2 to Form
8-K of Bay Apartment Communities, Inc. filed January 21,
1998.)
4.3 Bay Apartment Communities, Inc.'s 6.250% Senior Note due
2003. (Incorporated by reference to Exhibit 4.3 to Form 8-K
of Bay Apartment Communities, Inc. filed January 21, 1998.)
4.4 Bay Apartment Communities, Inc.'s 6.500% Senior Note due
2005. (Incorporated by reference to Exhibit 4.4 to Form 8-K
of Bay Apartment Communities, Inc. filed January 21, 1998.)
4.5 Bay Apartment Communities, Inc.'s 6.625% Senior Note due
2008. (Incorporated by reference to Exhibit 4.5 to Form 8-K
of Bay Apartment Communities, Inc. filed January 21, 1998.)
4.6 Shareholder Rights Agreement, dated March 9, 1998, between
the Company and American Stock Transfer and Trust Company,
as Rights Agent (including the form of Rights Certificate as
Exhibit B). (Incorporated by reference to Exhibit 4.1 to
Form 8-A of Bay Apartment Communities, Inc. filed March 11,
1998.)
10.1 Employment Agreement, dated as of March 9, 1998, between the
Company and Gilbert M. Meyer.
10.2 Employment Agreement, dated as of March 9, 1998, between the
Company and Jeffrey B. Van Horn.
10.3 Employment Agreement, dated as of March 9, 1998, between the
Company and Max L. Gardner.
10.4 Employment Agreement, dated as of March 9, 1998, between the
Company and Morton L. Newman.
10.5 Employment Agreement, dated as of March 9, 1998, between the
Company and Debra L. Shotwell.
10.6 Proxy Agreement, dated as of March 9, 1998, between the
Company and Central States, Southeast and Southwest Areas
Pension Fund, acting by and through its agent, LaSalle
Advisors Limited Partnership.
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.7 Shareholder Agreement, dated as of March 9, 1998, between
the Company and Central States, Southeast and Southwest
Areas Pension Fund, acting by and through its agent, LaSalle
Advisors Limited Partnership.
10.8 Stock Option Agreement, dated as of March 9, 1998, between
the Company, as issuer, and Avalon. (Incorporated by
reference to Exhibit 99.3 to Form 8-K of Bay Apartment
Communities, Inc. filed March 11, 1998.)
10.9 Stock Option Agreement, dated as of March 9, 1998, between
Avalon, as issuer, and the Company. (Incorporated by
reference to Exhibit 99.4 to Form 8-K of Bay Apartment
Communities, Inc. filed March 11, 1998.)
12.1 Statement re: Computation of Ratios.
27.1 Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K
Form 8-K of the Company, filed January 8, 1998, relating to the acquisition
of the Waterhouse Place, Viewpointe Apartments, Mission Bay Club, Westwood Club
and Pacifica Club apartment home communities.
Form 8-K of the Company, filed January 21, 1998, relating to (i) the
offering by the Company of $50,000,000 aggregate principal amount of its 6.250%
Senior Notes due 2003, $50,000,000 aggregate principal amount of its 6.500%
Senior Notes due 2005, and $50,000,000 aggregate principal amount of its 6.625%
Senior Notes due 2008, and (ii) the acquisition of the Warner Oaks apartment
home community.
Form 8-K of the Company, filed March 11, 1998, relating to (i) the
Agreement and Plan of Merger, dated as of March 9, 1998, between the Company and
Avalon, pursuant to which Avalon will merge with and into the Company, with the
Company as the surviving corporation, (ii) the Stock Option Agreement, dated as
of March 9, 1998, between the Company, as issuer, and Avalon, (iii) the Stock
Option Agreement, dated as of March 9, 1998, between Avalon, as issuer, and the
Company, and (iv) the adoption by the Company of a Shareholder Rights Agreement.
Form 8-K of the Company, filed March 27, 1998, relating to the acquisition
of the Laguna Brisas and Cabrillo Square apartment home communities. This Form
8-K contained Financial Statements under Rule 3-14 of Regulation S-X and pro
forma financial statements.
26
<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BAY APARTMENT COMMUNITIES, INC.
<TABLE>
<S> <C>
Date: May 12, 1998 /s/ GILBERT M. MEYER
----------------------------------------------
Gilbert M. Meyer
President and Chairman of the Board
Date: May 12, 1998 /s/ JEFFREY B. VAN HORN
----------------------------------------------
Jeffrey B. Van Horn
Chief Financial Officer
(Authorized Officer of the Registrant
and Principal Financial Officer)
</TABLE>
27
<PAGE> 1
EXHIBIT 1.1
1,244,147 Shares
BAY APARTMENT COMMUNITIES, INC.
UNDERWRITING AGREEMENT
April 23, 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Bay Apartment Communities, Inc., a Maryland corporation (the
"Company"), proposes to issue and sell an aggregate of 1,244,147 shares (the
"Shares") of the Company's common stock, $0.01 par value per share (the "Common
Stock") to Merrill Lynch, Pierce, Fenner & Smith Incorporated (the
"Underwriter") under the terms and conditions set forth in this agreement (the
"Agreement"). The Underwriter intends to deposit the Shares with the trustee of
the Equity Investor Fund Cohen & Steers Realty Majors Portfolio (a Unit
Investment Trust) (the "Trust") a registered unit investment trust under the
Investment Company Act of 1940, as amended, for which the Underwriter acts as
sponsor and depositor, in exchange for units in the Trust.
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the Underwriter that:
(a) The Company meets the requirements for use of Form S-3 and a
registration statement on Form S-3, as amended (File No. 333-41511), with
respect to the Shares, including a prospectus (the "Base Prospectus"), has been
carefully prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder and filed with the Commission and has become effective.
Such registration statement may have been amended prior to the date of this
Agreement; any such amendment was so prepared and filed, and any such amendment
filed after the effective date of such registration statement has become
effective. No stop order suspending the effectiveness of the registration
statement has been issued, and, to the Company's knowledge, no proceeding for
that purpose has been instituted or threatened by the Commission. A prospectus
supplement and a final prospectus containing information permitted to be omitted
at the time of effectiveness by Rule 430A of the Rules and Regulations has been
or will be so prepared and filed with the Commission pursuant to Rule 424(b) of
the Rules and Regulations on or before the second business day after the date
hereof (or such earlier time as may be required by the Rules and Regulations);
and the Rules and Regulations do not require the Company to, and, without the
Underwriter's consent, the Company will not, file a post-effective amendment
after the time of execution of this Agreement and prior to the filing of such
final form of prospectus. Copies of such registration statement and any such
amendments have
1
<PAGE> 2
been delivered to the Underwriter and its counsel. The term "Registration
Statement" means such registration statement as amended at the time it becomes
or became effective (the "Effective Date"), including financial statements and
all exhibits and any information deemed by virtue of Rule 430A of the Rules and
Regulations to be included in such Registration Statement at the Effective Date
and any prospectus supplement filed thereafter with the Commission and shall
include the documents incorporated by reference therein pursuant to Item 12 of
Form S-3 which were filed under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The term "Prospectus" means, collectively, the Base
Prospectus together with any prospectus supplement, in the respective forms they
are filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations. Any reference herein to the terms "amend," "amendment" or
"supplement" with respect to the Registration Statement, the Base Prospectus or
the Prospectus shall be deemed to refer to and include the filing of any
document under the Exchange Act after the Effective Date, or the date of the
Prospectus, as the case may be, that is incorporated therein by reference.
(b) Each part of the Registration Statement, when such part
became or becomes effective, and the Prospectus and any amendment or supplement
thereto, on the date of filing thereof with the Commission and at the Closing
Date (as hereinafter defined) conformed or will conform in all material respects
with the requirements of the Act and the Rules and Regulations; each part of the
Registration Statement, when such part became or becomes effective, did not or
will not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; the Prospectus and any amendment or supplement thereto,
on the date of filing thereof with the Commission and at the Closing Date, did
not or will not include an untrue statement of a material fact or omit to state
a material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; the foregoing shall
not apply to the statements in or omissions from any such document in reliance
upon, and in conformity with, written information furnished to the Company by
the Underwriter, specifically for use in the preparation thereof. The Company
acknowledges that the only information furnished to the Company by the
Underwriter specifically for inclusion in the Registration Statement is the
information set forth in Exhibit I hereto. The Company has not distributed any
offering material in connection with the offering or sale of the Shares other
than the Registration Statement, the Prospectus or any other materials, if any,
permitted by the Act.
(c) The financial statements and schedules included in the
Registration Statement and the Prospectus set forth fairly the financial
condition of the respective entity or entities presented as of the dates
indicated and the results of operations and changes in financial position for
the periods therein specified in conformity with generally accepted accounting
principles consistently applied throughout the periods involved (except as
otherwise stated therein). The pro forma financial statements of the Company
included in the Registration Statement and the Prospectus comply in all material
respects with the applicable requirements of Rule 11-02 of Regulation S-X of the
Commission and the pro form adjustments have been properly applied to the
historical amounts in the compilation of such statements. No other financial
statements (or schedules) of the Company or any predecessor of the Company are
required by the Act or the Rules and Regulations to be included in the
Registration Statement or the Prospectus. Coopers & Lybrand L.L.P. ("Coopers &
Lybrand"), who have reported on the financial statements and schedules which are
audited, are independent accountants with respect to the Company as required by
the Act and the Rules and Regulations.
(d) The Company has been duly organized and is validly existing
as a corporation, is in good standing under the laws of the State of Maryland,
has the power and authority to conduct its business as described in the
Registration Statement and Prospectus, and is duly qualified to do business in
2
<PAGE> 3
each jurisdiction in which it owns or leases real property or in which the
conduct of its business requires such qualification, except where the failure to
be so qualified, considering all such cases in the aggregate, does not involve
and will not involve a material risk to the business, properties, financial
position or results of operations of the Company and its subsidiaries (as
hereinafter defined) taken as a whole.
(e) The only subsidiaries (as defined in the Rules and
Regulations) of the Company are the subsidiaries listed on Exhibit II attached
hereto (the "subsidiaries"). Each of the Company's subsidiaries existing as of
the date hereof is a corporation or partnership, as the case may be, duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation or organization. Each of the Company's
subsidiaries existing as of the date hereof has the power and authority to
conduct its business as described in the Registration Statement and Prospectus
and is, or will be upon the Closing Date, duly qualified to do business in each
jurisdiction in which it owns or leases, or will own or lease, real property or
in which the conduct of its business requires such qualification except where
the failure to be so qualified, considering all such cases in the aggregate,
does not involve and will not involve a material risk to the business,
properties, financial position or results of operations of the Company or any
subsidiary taken as a whole. Except for the interests in the subsidiaries and as
disclosed in the Registration Statement, the Company does not own, directly or
indirectly, any shares of stock or any other equity or long-term debt securities
of any corporation or have any equity interest in any firm, partnership, joint
venture, trust, association or other entity. Complete and correct copies of the
articles or certificate of incorporation, partnership agreements, and of the
by-laws of each of the Company's subsidiaries and all amendments thereto have
been delivered to the Underwriter, and no changes therein will be made
subsequent to the date hereof and prior to the Closing Date, except as
heretofore disclosed in writing to the Underwriter. Except as otherwise
described in the Registration Statement or the Prospectus, or as described in
Exhibit II, all of the issued and outstanding capital stock of each corporate
subsidiary of the Company has been duly authorized and will be, as of the
Closing Date, validly issued, fully paid and non-assessable, and owned by the
Company, in each case free and clear of any security interest, mortgage, pledge,
lien, charge, encumbrance, claim, restriction or equity interest (each of the
foregoing, a "Lien").
(f) The outstanding securities of the Company, including the
Common Stock, $0.01 par value (the "Common Stock"), the outstanding shares of
Series A Preferred Stock (the "Series A Preferred Stock"), the Series B
Preferred Stock (the "Series B Preferred Stock"), the 8.50% Series C Cumulative
Redeemable Preferred Stock (the "Series C Preferred Stock"), and the 8.00%
Series D Cumulative Redeemable Preferred Stock (the "Series D Preferred Stock")
have been duly authorized and are, or when issued and delivered to the
Underwriter against full payment therefor as provided by this Agreement will be,
validly issued, fully paid and nonassessable by the Company and conform to the
description thereof in the Prospectus. There are no requirements, restrictions
or limitations in the terms of the Series A Preferred Stock, the Series B
Preferred Stock, the Series C Preferred Stock or the Series D Preferred Stock
applicable to the issuance and sale of the Shares. The shareholders of the
Company have no preemptive or similar rights with respect to the Shares. Except
as set forth in the Registration Statement or the Prospectus, the Company does
not have outstanding any option to purchase, or any rights or warrants to
subscribe for, or any securities or obligations convertible into, or any
contracts or commitments to issue or sell, any securities, any shares of capital
stock of any subsidiary or any such warrants, convertible securities or
obligations, except for stock options and shares of restricted stock granted,
and shares of unrestricted stock to be issued to certain employees in connection
with the deferment of income, pursuant to the Company's 1994 Stock Incentive
Plan, as amended and restated, stock issuable under the 1996 Non-Qualified
Employee Stock Purchase Plan and stock issuable under the Company's Dividend
Reinvestment and Stock Purchase Plan.
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<PAGE> 4
(g) Except as disclosed in or contemplated by the Prospectus,
subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus, the Company and its subsidiaries have
not incurred any liabilities or obligations, direct or contingent, or entered
into any transactions, not in the ordinary course of business, that are material
to the Company and its subsidiaries, taken as a whole, and there has not been
any material change in the capital stock, partnership interests, short-term debt
or long-term debt of the Company or any of its subsidiaries, or any material
adverse change, or any development involving a prospective material adverse
change, in the condition (financial or other), business prospects, net worth or
results of operations of the Company and its subsidiaries taken as a whole.
(h) Except as set forth in the Prospectus, there is not pending
or, to the knowledge of the Company, threatened any action, suit or proceeding
against or affecting the Company or any of its subsidiaries or any of their
respective directors, partners or officers in their capacity as such, or any of
the Communities (as defined in the Prospectus) before or by any Federal or state
court, commission, regulatory body, administrative agency or other governmental
body, domestic or foreign, wherein an unfavorable ruling, decision or finding
might result in any material adverse change in the condition (financial or
other), business prospects, net worth or results of operations of the Company
and its subsidiaries taken as a whole, or materially and adversely affect the
properties or assets of the Company and its subsidiaries taken as a whole.
(i) Since the respective dates as to which information is given
in the Registration Statement and the Prospectus, except as otherwise stated
therein, and except for regular dividends on the Common Stock, the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Cumulative
Redeemable Preferred Stock and the Series D Cumulative Redeemable Preferred
Stock, in amounts per share that are consistent with past practice, there has
been no dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(j) There are no contracts or documents of a character required
to be described in the Prospectus or to be filed as exhibits to the Registration
Statement by the Act or the Rules and Regulations that have not been so
described or filed (the "Contracts"). All Contracts executed and delivered on or
before the date hereof to which the Company or any subsidiary of the Company is
a party have been duly authorized, executed and delivered by the Company or such
subsidiary, constitute valid and binding agreements of the Company or such
subsidiary and are enforceable against the Company or such subsidiary in
accordance with the terms thereof, except as limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights generally
or, in the case of each such Contract which is to be executed and delivered on
the Closing Date, will on the Closing Date, be duly authorized, executed and
delivered by the Company or such subsidiary, constitute valid and binding
agreements of the Company or such subsidiary and be enforceable against the
Company or such subsidiary in accordance with the terms thereof, except as
limited by bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally.
(k) The Company has the corporate power and authority to enter
into this Agreement. This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding agreement of the
Company and is enforceable against the Company in accordance with the terms
hereof, except as limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally. Except as disclosed in
the Prospectus, the execution, delivery and the performance of this Agreement
and the consummation of the transactions herein contemplated will not result in
the creation or imposition of any lien, charge or encumbrance upon the
Communities (as defined
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<PAGE> 5
in the Prospectus) or any of the other assets of the Company or any of its
subsidiaries pursuant to the terms or provisions of, or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
or give any other party a right to terminate any of its obligations under, or
result in the acceleration of any obligation under, the articles of
incorporation of the Company or by-laws of the Company, the articles or
certificate of incorporation or by-laws or partnership agreements of any of the
Company's subsidiaries, or any Contract, or violate or conflict with any
judgment, ruling, decree, order, statute, rule or regulation of any court or
other governmental agency or body applicable to the Communities or business or
properties of the Company or any of its subsidiaries, except insofar as would
not have a material adverse effect on the Company and its subsidiaries, taken as
a whole. No consent, approval, authorization or order of, or filing with, any
court or governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement or in connection with the issuance
or sale of the Shares by the Company, except such as may be required under the
Act, the Exchange Act or state securities laws, or the by-laws and rules of the
National Association of Securities Dealers, Inc. (the "NASD") in connection with
the purchase and distribution by the Underwriter of the Shares to be sold by the
Company, and except where failure to so obtain would not have a material adverse
effect on the Company and its subsidiaries taken as a whole. The Company has the
power and authority to authorize, issue, offer and sell the Shares, as
contemplated by this Agreement.
(l) Each of the Company and its subsidiaries has complied in all
material respects with all laws, regulations and orders applicable to it or
their respective businesses and properties where the failure to comply would,
individually or in the aggregate, have a material adverse effect on the Company
and its subsidiaries taken as a whole; neither the Company nor any of its
subsidiaries is, and upon consummation of the Offering (as defined below), none
of them will be, in default under any Contract, the violation of which would
individually or in the aggregate have a material adverse effect on the Company
and its subsidiaries taken as a whole, and no other party under any such
Contract to which the Company or any of its subsidiaries is a party is, to the
knowledge of the Company, in default in any material respect thereunder; the
Company is not in violation of its articles of incorporation or by-laws; except
as disclosed in the Prospectus, the Company and each of its subsidiaries have
or, upon the Closing Date, will have all governmental licenses (including,
without limitation, a California real estate brokerage license and a California
general contractor's license, if applicable), permits, consents, orders,
approvals and other authorizations required to carry on its business as
contemplated in the Prospectus, and none of them has received any notice of
proceedings relating to the revocation or modification of any such governmental
license, permit, consent, order, approval or other authorization which,
individually or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially and adversely affect the condition,
financial or otherwise, or the earnings, business affairs or business prospects
of the Company and its subsidiaries considered as one enterprise.
(m) The Company, or its subsidiaries, as applicable, has good and
marketable title to the Communities, and the Communities are not subject to any
liens or encumbrances except for monetary liens as set forth in the Prospectus,
non-delinquent property taxes, utility easements and other immaterial
non-monetary liens or encumbrances of record. All liens, charges, encumbrances,
claims or restrictions on or affecting the Communities which are required to be
disclosed in the Prospectus are disclosed therein.
(n) The mortgages and deeds of trust encumbering the Communities
are not convertible nor will the Company or any of its subsidiaries hold a
participating interest therein and such mortgages and deeds of trust are not
cross-defaulted or cross-collateralized to any property not to be owned directly
or indirectly by the Company. To the knowledge of the Company (i) the present
and intended use and occupancy of each of the Communities complies with all
applicable codes and zoning laws and
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<PAGE> 6
regulations, if any, except for such failures to comply which would not
individually or in the aggregate have a material adverse effect on the
condition, financial or otherwise, or on the earnings, business affairs or
business prospects of the Company and its subsidiaries taken as a whole; and
(ii) there is no pending or, to the Company's knowledge, threatened
condemnation, zoning change, environmental or other proceeding or action that
will in any material respect affect the size of, use of, improvements on,
construction on, or access to the Communities, except for such proceedings or
actions that would not individually or in the aggregate have a material adverse
effect on the condition, financial or otherwise, or on the earnings, business
affairs or business prospects of the Company and its subsidiaries taken as a
whole.
(o) The Company and its subsidiaries maintain property and
casualty insurance (other than earthquake insurance) in favor of the Company and
its subsidiaries with respect to each of the Communities, in an amount and on
such terms as is reasonable for businesses of the type conducted by the Company
and its subsidiaries. The Company maintains earthquake insurance on the
Communities as set forth in the Prospectus. The Company or its subsidiaries has
not received from any insurance company notice of any material defects or
deficiencies affecting the insurability of any of the Communities (other than
with respect to seismic activities).
(p) As of the Closing Date the Company, and each of its
subsidiaries (i) will be in compliance in all material respects with any and all
applicable foreign, Federal, state and local laws and regulations relating to
the protection of human health and safety, the Hazardous Materials (as defined
below), or hazardous or toxic wastes, pollutants or contaminants (the
"Environmental Laws"); (ii) will have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct their
respective businesses; and (iii) will be in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals are otherwise disclosed in the Prospectus
or would not, individually or in the aggregate, have a material adverse effect
on the Company and its subsidiaries taken as a whole.
(q)(i) None of the Company or any partnership that owns a
Community (each a "Partnership") has at any time, and, to the best
knowledge of the Company after due inquiry and investigation, no other
party has, at any time, handled, buried, stored, retained, refined,
transported, processed, manufactured, generated, produced, spilled,
allowed to seep, leak, escape or leach, or be pumped, poured, emitted,
emptied, discharged, released, injected, dumped, transferred or
otherwise disposed of or dealt with, Hazardous Materials (as hereinafter
defined) on, to, above under, in, into or from the Communities, except
as disclosed in the environmental reports previously delivered to the
Underwriter or its counsel or referred to in the Prospectus, or such as
would not individually or in the aggregate have a material adverse
effect on the Company and its subsidiaries, taken as a whole. Neither
the Company nor its subsidiaries intends to use the Communities or any
subsequently acquired properties described in the Prospectus for the
purpose of handling, burying, storing, retaining, refining,
transporting, processing, manufacturing, generating, producing,
spilling, seeping, leaking, escaping, leaching, pumping, pouring,
emitting, emptying, discharging, releasing, injecting, dumping,
transferring or otherwise disposing of or dealing with Hazardous
Materials, except for the use, storage and transportation of small
quantities of substances that are regularly used as office supplies,
household cleaning supplies, gardening supplies, or pool maintenance
supplies in compliance with applicable Environmental Laws and in
accordance with prudent business practices and good hazardous materials
storage and handling practices.
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<PAGE> 7
(ii) None of the Company or the Partnerships, to the best
knowledge of the Company after due inquiry and investigation, knows of
any seepage, leak, escape, leach, discharge, injection, release,
emission, spill, pumping, pouring, emptying or dumping of Hazardous
Materials into waters on, under or adjacent to the Communities or onto
lands from which such hazardous or toxic waste or substances might seep,
flow or drain into such waters, except as disclosed in the environmental
reports previously delivered to the Underwriter or its counsel or
referred to in the Prospectus or such as would not individually or in
the aggregate have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(iii) None of the Company or the Partnerships to the best
knowledge of the Company after due inquiry and investigation, has
received notice of, or has knowledge of any occurrence or circumstance
which, with notice or passage of time or both, would give rise to, any
claim under or pursuant to any Environmental Law pertaining to Hazardous
Materials, hazardous or toxic waste or substances on or originating from
the Communities arising out of the conduct of any such party, including,
without limitation, pursuant to any Environmental Law, except as
disclosed in the environmental reports previously delivered to the
Underwriter or its counsel or referred to in the Prospectus or such as
would not individually or in the aggregate have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
As used herein, "Hazardous Material" shall include, without
limitation, any flammable materials or explosives, petroleum or petroleum-based
products, radioactive materials, hazardous materials, hazardous wastes,
hazardous or toxic substances, or related materials, asbestos or any material as
defined by any Federal, state or local environmental law, ordinance, rule, or
regulation including, without limitation, Environmental Laws, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. Section 9601, et seq.) ("CERCLA"), the Hazardous Materials Transportation
Act, as amended (49 U.S.C. Section 1801, et seq.), the Resource Conservation and
Recovery Act, as amended (42 U.S.C. Section 9601, et seq.), and in the
regulations adopted and publications promulgated pursuant to each of the
foregoing or by any Federal, state or local governmental authority having or
claiming jurisdiction over the Communities as described in the Prospectus.
(r) In the ordinary course of its business, each of the Company
and the Partnerships conducts a periodic review of the effect of Environmental
Laws on its business, operations and properties in the course of which it
identifies and evaluates associated costs and liabilities (including, without
limitation, any capital or operating expenditures required for investigation,
clean-up, closure of properties or compliance with Environmental Laws or any
permit, license or approval, any related constraints on operating activities and
any potential liabilities to third parties). On the basis of such review and on
the basis of the reviews conducted by the Company in connection with the
Communities, the Company has reasonably concluded that such associated costs and
liabilities would not individually or in the aggregate, have a material adverse
effect on the Company and its subsidiaries taken as a whole.
(s) The Company is not an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended (the "1940 Act").
(t) Neither the assets of the Company nor its subsidiaries
constitute, nor will such assets, as of the Closing Date, constitute, "plan
assets" under the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
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<PAGE> 8
(u) The Company has elected to be taxed as a REIT under the Code
and will use its best efforts to continue to be organized and will continue to
operate in a manner so as to qualify as a "real estate investment trust"
("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended (the "Code"), unless the Board of Directors determines that it is no
longer in the best interest of the Company to continue to be so qualified.
(v) Except as stated in the Prospectus, neither the Company nor
any of its directors, officers or controlling persons has taken, nor will it
take, directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Shares to facilitate the sale or resale of the Shares.
(w) The Company has not distributed and, prior to the later to
occur of (i) the Closing Date and (ii) completion of the distribution of the
Shares, will not distribute any offering material in connection with the
Offering other than the Registration Statement, the Prospectus or other
materials, if any, permitted by the Act.
(x) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that: (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to financial and corporate
books and records is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(y) The Company has applied to have the Shares authorized for
listing by the New York Stock Exchange and the Pacific Exchange.
(z) Neither the Company nor any of its subsidiaries is involved
in any material labor dispute nor, to the best knowledge of the Company after
due inquiry and investigation, is any such dispute threatened.
(aa) No holder of securities of the Company has rights to the
registration of any securities of the Company because of the filing of the
Registration Statement, except as set forth in that certain Registration Rights
Agreement dated March 16, 1994 among the Company and certain stockholders.
2. Purchase, Sale and Delivery of Shares.
(a) On the basis of the representations, warranties and
agreements contained herein, but subject to the terms and conditions set forth
herein, the Company agrees to issue and sell the Shares to the Underwriter as
hereinafter provided, and the Underwriter agrees to purchase from the Company
the Shares at the purchase price set forth in the Price Determination Agreement,
as hereinafter defined. The Company is advised by the Underwriter that the
Underwriter proposes to deposit the Shares with the trustee of the Trust, a
registered unit investment trust under the Investment Company Act of 1940, as
amended, for which the Underwriter acts as sponsor and depositor, in exchange
for units of the Trust (the "Offering") as soon after the execution and delivery
hereof as in the judgment of the Underwriter is advisable.
8
<PAGE> 9
(b) Delivery of the Shares shall be made to the Underwriter
against payment of the purchase price to the Company or to its order in
immediately available funds, at the office of the Underwriter, North Tower,
World Financial Center, New York, New York 10281-1209, at 10:00 a.m., New York
City time, on the third business day (or, if the Shares are priced as
contemplated by Rule 15c6-1(c) of the Exchange Act after 4:30 p.m., New York
City time, the fourth business day) following the date of this Agreement, or at
such time on such other date, not later than seven business days after the date
of this Agreement, as may be agreed upon by the Company and the Underwriters
(such date is herein referred to as the "Closing Date"). Such payment will be
made against delivery to the Underwriter of the Shares registered in such names
and in such denominations as the Underwriter shall request no less than two full
Business Days prior to the date of delivery, with transfer taxes, if any,
payable in connection with transfer to the Underwriter duly paid by the Company.
As used herein, the term "Business Day" means any day other than a day on which
banks are permitted or required to be closed in New York City. The Shares will
be delivered through the book entry facilities of The Depository Trust Company
("DTC") and will be made available for inspection by the Underwriter by 1:00
P.M. New York City time on the Business Day prior to the Closing Date at such
place in New York City as the Underwriter, DTC and the Company shall agree.
(c) The purchase price per share for the Shares to be paid by the
Underwriter shall be agreed upon by the Company and the Underwriter, and such
agreement shall be set forth in a separate written instrument substantially in
the form of Exhibit III hereto (the "Price Determination Agreement"). The Price
Determination Agreement may take the form of an exchange of any standard form of
written telecommunication between the Company and the Underwriter and shall
specify such applicable information as is indicated in Exhibit III hereto. The
Offering will be governed by this Agreement, as supplemented by the Price
Determination Agreement. From and after the date of the execution and delivery
of the Price Determination Agreement, this Agreement shall be deemed to
incorporate, and, unless the context otherwise indicates, all references
contained herein to "this Agreement" and to the phrase "herein" shall be deemed
to include, the Price Determination Agreement.
3. Covenants. The Company covenants and agrees with the Underwriter
that:
(a) The Company will cause the Prospectus to be filed as required
by Section 1(a) hereof (but only if the Underwriter has not reasonably objected
thereto by notice to the Company after having been furnished a copy a reasonable
time prior to filing) and will notify the Underwriter promptly of such filing;
it will notify the Underwriter promptly of the time when any subsequent
amendment to the Registration Statement has become effective or any supplement
to the Prospectus has been filed and of any request by the Commission for any
amendment or supplement to the Registration Statement or Prospectus or for
additional information; it will prepare and file with the Commission, promptly
upon the Underwriter's request, any amendments or supplements to the
Registration Statement or Prospectus that, in the Underwriter's opinion, may be
necessary or advisable in connection with the distribution of the Shares by the
Underwriter; and it will file no amendment or supplement to the Registration
Statement or Prospectus to which the Underwriter shall reasonably object by
notice to the Company after having been furnished a copy at a reasonable time
prior to the filing.
(b) The Company will advise the Underwriter, promptly after it
shall receive notice or obtain knowledge thereof, of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement, of the suspension of the qualification of the Shares for offering or
sale in any jurisdiction, or of the initiation or threatening of any proceeding
for any purpose; and it will
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<PAGE> 10
promptly use its best efforts to prevent the issuance of any stop order or to
obtain its withdrawal if such a stop order should be issued.
(c) Within the time during which a prospectus relating to the
Shares is required to be delivered under the Act, the Company will comply with
all requirements imposed upon it by the Act and by the Rules and Regulations, as
from time to time in force, so far as necessary to permit the continuance of
sales of or dealings in the Shares as contemplated by the provisions hereof and
the Prospectus. If during such period any event occurs as a result of which the
Prospectus as then amended or supplemented would include an untrue statement of
a material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances then existing, not misleading,
or if during such period it is necessary to amend or supplement the Registration
Statement or Prospectus to comply with the Act, the Company will promptly notify
the Underwriter and will amend or supplement the Registration Statement or
Prospectus (at the expense of the Company) so as to correct such statement or
omission or effect such compliance.
(d) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the opinion of
counsel for the Underwriter a prospectus is required by the Act to be delivered
in connection with sales by the Underwriter or dealer, the Company will
expeditiously deliver to the Underwriter and counsel for the Underwriter and
each dealer, without charge, as many copies of the Prospectus (and of any
amendment or supplement thereto) as the Underwriter or dealers may reasonably
request. The Company consents to the use of the Prospectus (and of any amendment
or supplement thereto) in accordance with the provisions of the Act, both in
connection with the Offering and for such period of time thereafter as the
Prospectus is required by the Act to be delivered in connection with sales by
the Underwriter or dealer. If during such period of time any event shall occur
that in the judgment of the Company or in the opinion of counsel for the
Underwriter is required to be set forth in the Prospectus (as then amended or
supplemented) or should be set forth therein in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary to supplement or amend the Prospectus to
comply with the Act or any other law, the Company will forthwith prepare and,
subject to the provisions of Section 3(a) hereof, file with the Commission an
appropriate supplement or amendment thereto, and will expeditiously furnish to
the Underwriter and dealers a reasonable number of copies thereof. In the event
that the Company and the Underwriter agree that the Prospectus should be amended
or supplemented, the Company, if requested by the Underwriter, will promptly
issue a press release announcing or disclosing the matters to be covered by the
proposed amendment or supplement.
(e) The Company will make generally available to its security
holders as soon as practicable, but not later than ninety (90) days after the
close of the period covered thereby, an earnings statement (in form complying
with the provisions of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations) covering a twelve-month period beginning not later than the first
day of the Company's fiscal quarter next following the "effective date" (as
defined in said Rule 158) of the Registration Statement.
(f) The Company agrees to pay the following costs and expenses
and all other costs and expenses incident to the performance by the Company of
the Company's obligations hereunder including, without limitation, its own
travel (including air fare) and lodging expenses related to the preparation of
the Prospectus and any sales efforts: (i) the preparation, printing or
reproduction, and filing with the Commission of the Registration Statement
(including financial statements and exhibits thereto), the Prospectus, and each
amendment or supplement to either of them; (ii) the printing or (reproduction)
and delivery (including postage, air freight charges and charges for counting
and packaging) of such copies
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<PAGE> 11
of the Registration Statement, the Prospectus and all amendments or supplements
to any of them as may be reasonably requested for use in connection with the
Offering; (iii) the preparation, printing, authentication, issuance and delivery
of certificates for the Shares, including any stamp taxes in connection with the
original issuance and sale of the Shares; (iv) the printing (or reproduction)
and delivery of this Agreement; (v) the Registration of the Shares under the
Exchange Act and the listing of the Shares on the New York Stock Exchange and
the Pacific Exchange; and (vi) the fees and expenses of the Company's
accountants and the fees and expenses of counsel (including local and special
counsel) for the Company.
(g) The Company will apply the net proceeds from the Offering in
the manner set forth in the Prospectus under "Use of Proceeds."
(h) Unless the Board of Directors of the Company determines in
its reasonable business judgment that continued qualification as a "real estate
investment trust" under the Code is not in the Company's best interest the
Company will use its best efforts to, and will continue to meet the requirements
to, qualify as a "real estate investment trust."
(i) The Company will not at any time, directly or indirectly,
take any action designed, or which might reasonably be expected to cause or
result in, or which will constitute, stabilization of the price of the Shares to
facilitate the sale or resale of any of the Shares.
(j) The Company will comply with all provisions of the
undertakings contained in item 17 of the Registration Statement.
(k) In the event that any portion of the Shares is issued without
certificates pursuant to Section 2-210 of the Maryland General Corporation Law
(the "MGCL"), at the time of issuance of such Shares the Company shall comply
fully with Sections 2-210 and 2-211 of the MGCL.
4. Conditions of Underwriter's Obligations. The obligations of the
Underwriter to purchase and pay for the Shares as provided herein shall be
subject to the accuracy, as of the date hereof and the Closing Date (as if made
at the Closing Date), of the representations and warranties of the Company
herein, to the performance by the Company of its obligations hereunder and to
the following additional conditions:
(a) Notification that the Registration Statement has become
effective shall be received by the Underwriter not later than 5:00 pm., New York
City time, on the date of this Agreement or at such later date and time as shall
be consented to in writing by the Underwriter and all filings required by Rule
424 and Rule 430A of the Rules and Regulations shall have been made; no stop
order suspending the effectiveness of the Registration Statement shall have been
issued and, to the knowledge of the Company or the Underwriter, no proceeding
for that purpose shall have been instituted or threatened by the Commission; and
any request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the Underwriter's satisfaction.
(b) The Underwriter shall not have advised the Company that the
Registration Statement or Prospectus, or any amendment or supplement thereto,
contains an untrue statement of fact that in the Underwriter's opinion is
material, or omits to state a fact that in the Underwriter's opinion is material
and is required to be stated therein or is necessary to make the statements
therein not misleading.
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(c) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, (i) there shall not have been any change in the capital
stock, partnership interests, short-term debt or long-term debt of the Company
or its subsidiaries, (ii) there shall not have been any adverse change, or any
development involving a prospective adverse change, in the condition (financial
or other), business, prospects, net worth or results of operations of the
Company and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, and (iii) neither the Company
nor any of its subsidiaries shall have sustained any material loss or
interference with its business or properties from fire, explosion, flood or
other casualty, whether or not covered by insurance, or from any labor dispute
or any court or legislative or other governmental action, order or decree, which
is not set forth in the Registration Statement and the Prospectus, if in the
reasonable judgment of the Underwriter any of the foregoing makes it impractical
or inadvisable to (x) commence or continue the offering of the units of the
Trust, or (y) enforce contracts for the sale of the units of the Trust.
(d) The Underwriter shall have received the opinion of Goodwin,
Procter & Hoar LLP, counsel for the Company dated the Closing Date, to the
effect that:
(i) The Registration Statement has been declared effective
under the Act; the Prospectus has been filed with the Commission
pursuant to Rule 424; and to the best knowledge of such counsel (which
may be based solely on an oral representation of a member of the staff
of the Commission) no stop order suspending the effectiveness of the
Registration Statement has been issued under the Act and no proceeding
for that purpose has been instituted or threatened by the Commission;
(ii) Each part of the Registration Statement, when such
part became effective, and the Prospectus and any amendment or
supplement thereto, on the date of filing thereof with the Commission
and at the Closing Date, complied as to form in all material respects
with the requirements of the Act and the Rules and Regulations (other
than (A) the financial statements and supporting schedules and other
financial and statistical information and data included therein or
omitted therefrom, and (B) any documents incorporated therein by
reference, as to which such counsel need express no opinion), it being
understood that in passing upon compliance as to the form of the
Registration Statement, such counsel may assume that the statements made
therein are correct and complete;
(iii) The descriptions in the Registration Statement
(other than the documents incorporated therein by reference) and
Prospectus of statutes are accurate in all material respects and fairly
present the information required to be shown; and such counsel do not
know of any statutes or legal or governmental proceedings required to be
described in the Prospectus that are not described as required, or of
any contracts or documents of a character required to be described in
the Registration Statement or Prospectus or to be filed as exhibits to
the Registration Statement that are not described and filed as required;
(iv) The form of organization of the Company and its
operations are such as to enable the Company to qualify as a "real
estate investment trust" under the applicable provisions of the Code.
The statements in the Prospectus set forth under the caption "Federal
Income Tax Considerations," to the extent such information constitutes
matters of law, summaries of legal matters, or legal conclusions, have
been reviewed by such counsel and are accurate in all material respects;
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<PAGE> 13
(v) The Company is not (after giving effect to the sale of
the Shares) required to be registered under the 1940 Act;
(vi) The Company is in good standing under the laws of the
State of California as a foreign corporation, has full power and
authority to conduct its business as described in the Registration
Statement and Prospectus;
(vii) Each of the partnerships that owns a Community (the
"Partnerships") is a limited partnership duly organized, validly
existing and in good standing under the laws of its state of
incorporation and has the power under its partnership agreement and the
applicable Limited Partnership Act necessary to conduct its business as
described in the Registration Statement and Prospectus; each of the
corporate subsidiaries of the Company is duly organized, validly
existing and in good standing under the laws of its state of
incorporation and has the corporate power and authority to conduct its
business as described in the Registration Statement and Prospectus;
(viii) The General Partners of each of the Partnerships
are duly qualified to do business in the State of California, except
where the failure to be so qualified, considering all such cases in the
aggregate, does not involve and will not involve a material risk to the
business, properties, financial position or results of operations of
such subsidiary;
(ix) All of the outstanding shares of Common Stock and the
Preferred Stock of the Company identified in the Prospectus (including
the Shares) have been duly authorized and are, or when issued as
contemplated herein will be, validly issued, fully paid and
nonassessable and conform, or when so issued will conform, to the
description thereof in the Prospectus; and the shareholders of the
Company have no preemptive or similar rights with respect to the Shares
pursuant to the Company's Charter or applicable statute or pursuant to
any contract identified on an exhibit to such opinion (which exhibit
lists all contracts identified by the Company in an officer's
certificate as material under the standard set forth in Item 601(b)(10)
of Regulation S-K);
(x) The Company has full corporate power and authority to
enter into this Agreement; this Agreement has been duly authorized,
executed and delivered by the Company; to the knowledge of such counsel,
the issuance and sale of the Shares to the Underwriter on the terms
contemplated herein will not (A) result in the creation or imposition of
any lien, charge or encumbrance upon any of the assets of the Company,
any of its subsidiaries or the Partnerships, pursuant to the terms or
provisions of any contract (i) which such counsel has prepared or
negotiated on behalf of the Company and (ii) to which any of its
subsidiaries or the Partnerships is a party or by or pursuant to which
any of them or their respective properties is bound, affected or
financed, or (B) result in a breach or violation of any of the terms or
provisions of, or constitute a default or result in the acceleration of
any obligation under, (i) the articles of incorporation or by-laws of
the Company, (ii) the articles or certificate of incorporation or
by-laws of any of the Company's subsidiaries, or the partnership
agreements or other organizational documents of the Partnerships, (iii)
any contract identified on the schedule to such opinion referenced above
to which the Company, any of its subsidiaries or the Partnerships is a
party or by or pursuant to which any of them or their respective
properties is bound, affected or financed or (iv) any statute, judgment,
ruling, decree, order, rule or regulation of any court or other
governmental agency or body applicable to the business or properties of
the Company, any of its subsidiaries or the Partnerships (except that
such counsel need express no opinion as to the securities or Blue Sky
laws of any jurisdiction other than the United States), where such
violation or default, individually or in the
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<PAGE> 14
aggregate, might have a material adverse effect on the business,
properties, business prospects, condition (financial or otherwise) or
results of operations of the Company or any of its subsidiaries taken as
a whole;
(xi) To the knowledge of such counsel, no consent,
approval, authorization or order of, or filing with, any court or
governmental agency or body is required in connection with the issuance
or sale of the Shares by the Company, except (i) such as have been
obtained under the Act, the Exchange Act, or (ii) such as may be
required under state securities laws or the by-laws of the NASD in
connection with the purchase and distribution of the Shares by the
Underwriter; and
(xii) To the knowledge of such counsel, none of the
Company, any of its subsidiaries or the Partnerships is in violation of
its articles or certificate of incorporation, by-laws, partnership
agreements, or other organizational documents, as applicable, or in
default (nor has an event occurred which with notice or lapse of time or
both would constitute a default or acceleration) in the performance of
any obligation, agreement or condition contained in any Contract known
to such counsel to which the Company, any of its subsidiaries or the
Partnerships is a party, or by or pursuant to which any of them or their
respective properties is bound, affected or financed, and, to the
knowledge of such counsel, none of the Company, any of its subsidiaries
or the Partnerships is in violation of any judgment, ruling, decree,
order, franchise, license or permit known to such counsel or any
statute, rule or regulation of any court or other governmental agency or
body applicable to the business or properties of the Company, any of its
subsidiaries or the Partnerships; where such violation or default,
individually or in the aggregate, might have a material adverse effect
on the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company or any of its
subsidiaries taken as a whole.
In connection with delivering such opinion such counsel shall also
state:
(a) No facts have come to their attention which cause them to believe
that the Registration Statement (excluding the financial
statements and notes thereto, financial schedules and other
financial or statistical information and data included therein or
omitted therefrom, as to which they need express an opinion), at
the time it became effective, contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading; and
(b) No facts have come to their attention which cause them to believe
that the Prospectus (excluding the financial statements and notes
thereto, financial schedules and other financial or statistical
information and data included therein or omitted therefrom, as to
which they need express no opinion), as of its date or the date
of such opinion, contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
In rendering such opinions, such counsel may rely on certificates of
public officers, upon opinions of counsel reasonably satisfactory to the
Underwriter, copies of which shall be contemporaneously delivered to the
Underwriter, and as to matters of fact, upon certificates of officers of the
Company; provided that such counsel shall state that the opinion of any other
counsel is in form satisfactory to such counsel and, such counsel is unaware of
any reason why it and the Underwriter are not justified in relying
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<PAGE> 15
on such opinions of other counsel. Copies of all such opinions and certificates
shall be furnished to counsel to the Underwriter on the Closing Date.
(e) The Underwriter shall have received the opinion of Cox,
Castle & Nicholson LLP, counsel for the Company, dated the Closing Date, to the
effect that to the best of their knowledge statements relating to the
Communities and the Current Development Communities (as defined in the
Prospectus) and tax-exempt bond financing in the Prospectus (but excluding the
statistical and financial data, physical condition and construction status of
such communities included therein) are materially fair and accurate.
(f) The Underwriter shall have received from O'Melveny & Myers
LLP, counsel for the Underwriter (based upon Goodwin Procter & Hoar LLP's
opinion respecting Maryland law), such opinion or opinions, dated the Closing
Date, with respect to the organization of the Company, the validity of the
Shares, the Registration Statement, the Prospectus and other related matters as
the Underwriter reasonably may request, and such counsel shall have received
such papers and information as they request to enable them to pass upon such
matters. In rendering such opinion, such counsel may rely upon certificates of
public officers and upon opinions of counsel, copies of which shall be
contemporaneously delivered to the Underwriter, and as to matters of fact, upon
certificates of officers of the Company.
(g) At the time of the execution of this Agreement, the
Underwriter shall have received from Coopers & Lybrand a letter dated such date,
in form and substance satisfactory to the Underwriter containing statements and
information of the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and other financial
information included in the Registration Statement and the Prospectus (the
"initial comfort letter"). On the Closing Date, the Underwriter shall have
received from Coopers & Lybrand a letter dated as of the Closing Date to the
effect that they reaffirm the statements made in the initial comfort letter,
except that the specified date referred to shall be a date not more than five
days prior to the Closing Date.
(h) The Underwriter shall have received from the Company a
certificate, signed by the Chairman of the Board or the President and by the
principal financial or accounting officer of the Company, dated the Closing
Date, to the effect that:
(i) The representations and warranties of the Company in
this Agreement were when originally made and are at the time such
certificate is delivered true and correct, as if made at and as of the
Closing Date, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at
or prior to the Closing Date;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and, to their knowledge, no
proceeding for that purpose has been instituted or is threatened, by the
Commission;
(iii) Since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an
amendment or supplement to the Registration Statement or Prospectus that
has not been so set forth; and
(iv) The Shares shall have been approved for listing on
the New York Stock Exchange and the Pacific Exchange, subject only to
official notice of issuance.
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<PAGE> 16
(i) The Company shall have filed with the Commission a Current
Report on Form 8-K disclosing all material acquisition activity occurring since
the Company's last public offering of securities which is required to be
disclosed on Form 8-K as of the date of the Prospectus Supplement and is not
otherwise disclosed in reports filed by the Company under the Exchange Act.
(j) The Company shall have furnished to the Underwriter such
further certificates and documents as the Underwriter shall have reasonably
requested.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to the Underwriter. The Company will furnish the Underwriter with such
conformed copies of such opinions, certificates, letters and other documents as
the Underwriter shall reasonably request.
5. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
(ii) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission;
(iii) against any and all expense whatsoever, as incurred
(including the reasonable fees and disbursements of counsel chosen by
the Underwriter), reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent (a) arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by the
Underwriter expressly for use in the Registration Statement (or any amendment
thereto), including the Rule 430A Information and the Rule 434 Information, if
applicable, or the Prospectus (or any amendment or supplement thereto) or (b)
resulting solely from an untrue statement of a material fact contained in, or
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<PAGE> 17
the omission of a material fact from, the Prospectus, which untrue statement or
omission was completely corrected in the Prospectus (as then amended or
supplemented) if the Underwriters sold Shares to the person alleging such loss,
claim, liability, expense or damage without sending or giving, at or prior to
the written confirmation of such sale, a copy of the Prospectus (as then amended
or supplemented) if the Company had previously furnished copies thereof to the
Underwriters within a reasonable amount of time prior to such sale or such
confirmation, and the Underwriters failed to deliver the corrected Prospectus,
if required by law to have so delivered it and if delivered would have corrected
the default giving rise to such loss, claim, liability expense or damage.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in subsection (a) of this Section 5, as incurred, but only with respect to
untrue statements or omissions, or alleged untrue statements or omissions, made
in the Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the Prospectus
(or any amendment or supplement thereto) in reliance upon and in conformity with
written information furnished to the Company by the Underwriter expressly for
use in the Registration Statement (or any amendment thereto) or the Prospectus
(or any amendment or supplement thereto).
(c) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure to
so notify an indemnifying party shall not relieve such indemnifying party from
any liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability which it
may have otherwise than on account of this indemnity agreement. In the case of
parties indemnified pursuant to Section 5(a) above, counsel to the indemnified
parties shall be selected by the Underwriter, and, in the case of parties
indemnified pursuant to Section 5(b) above, counsel to the indemnified parties
shall be selected by the Company. An indemnifying party may participate at its
own expense in the defense of any such action; provided, however, that counsel
to the indemnifying party shall not (except with the consent of the indemnified
party) also be counsel to the indemnified party. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 5 (whether or not the indemnified parties are
actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) The indemnifying party will be entitled to participate in
and, to the extent that it elects by delivering written notice to the
indemnified party promptly after receiving notice of the commencement of the
action from the indemnified party, jointly with any other indemnifying party
similarly notified, to assume the defense of the action, with counsel
satisfactory to the indemnified party, and after notice from the indemnifying
party to the indemnified party of its election to assume the defense,
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<PAGE> 18
the indemnifying party will not be liable to the indemnified party for any legal
or other expenses except as provided below and except for the reasonable costs
of investigation subsequently incurred by the indemnified party in connection
with the defense. The indemnified party will have the right to employ its own
counsel in any such action, but the fees, expenses and other charges of such
counsel will be at the expense of such indemnified party unless (1) the
employment of counsel by the indemnified party has been authorized in writing by
the indemnifying party, (2) the indemnified party has reasonably concluded
(based on advice of counsel) that there may be legal defenses available to it or
other indemnified parties that are different from or in addition to those
available to the indemnifying party, (3) a conflict or potential conflict exists
(based on advice of counsel to the indemnified party) between the indemnified
party and the indemnifying party (in which case the indemnifying party will not
have the right to direct the defense of such action on behalf of the indemnified
party) or (4) the indemnifying party has not in fact employed counsel to assume
the defense of such action within a reasonable time after receiving notice of
the commencement of the action, in each of which cases the reasonable fees,
disbursements and other charges of counsel will be at the expense of the
indemnifying party or parties. An indemnifying party will not be liable for any
settlement of any action or claim effected without its written consent (which
consent will not be unreasonably withheld).
(e) If the indemnification provided for this Section 5 is
applicable in accordance with its terms but is for any reason unavailable to or
insufficient to hold harmless an indemnified party in respect of any losses,
liabilities, claims, damages or expenses referred to therein; then each
indemnifying party shall contribute to the aggregate amount of such losses,
liabilities, claims, damages and expenses incurred by such indemnified party, as
incurred, (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriter on the
other hand from the Offering pursuant to this Agreement or (ii) if the
allocation provided by clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand and of the Underwriter on the other hand in connection with the statements
or omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriter on the other hand in connection with the Offering pursuant to this
Agreement shall be deemed to be in the same respective proportions as the total
net proceeds from the Offering pursuant to this Agreement (before deducting
expenses) received by the Company and the total underwriting discount received
by the Underwriter, in each case as set forth on the cover of the Prospectus,
or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to
the aggregate initial public offering price of the Shares as set forth on such
cover.
The relative fault of the Company on the one hand and the Underwriter on
the other hand shall be determined by reference to, among other things, whether
any such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company or by the Underwriter and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Underwriter agree that it would not be just and
equitable if contribution pursuant to this Section 5(e) were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 5(e). The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 5(e) shall be
deemed to include any legal or other expenses reasonably
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<PAGE> 19
incurred by such indemnified party in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, or any claim whatsoever based upon such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 5(e), the Underwriter
shall not be required to contribute any amount in excess of the amount by which
the total price at which the Shares underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which the
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 5(e), each person, if any, who controls the
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as the Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company.
6. Termination of Agreement.
(a) The Underwriter may terminate this Agreement, by notice to
the Company, at any time at or prior to Closing Date (i) if there has been,
since the time of execution of this Agreement or since the respective dates as
of which information is given in the Prospectus, any material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, or (ii)
if there has occurred any material adverse change in the financial markets in
the United States or the international financial markets, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of the Underwriter, impracticable or
inadvisable to (x) commence or continue the offering of the units of the Trust
to the public or (y) enforce contracts for the sale of the units of the Trust,
or (iii) if trading in any securities of the Company has been suspended or
materially limited by the Commission or the New York Stock Exchange, or if
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the Nasdaq National Market has been suspended or materially limited, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices have been required, by any of said exchanges or by such system or by
order of the Commission, the NASD or any other governmental authority, or (iv)
if a banking moratorium has been declared by either Federal or New York
authorities.
(b) If this Agreement is terminated pursuant to this Section 6,
such termination shall be without liability of any party to any other party
except as provided in Section 3(f) hereof, and provided further that Sections 1,
5, 6 and 7 shall survive such termination and remain in full force and effect.
7. Representations and Agreements to Survive Delivery. All
representations, warranties, agreements and covenants, of the Company herein or
in certificates delivered pursuant hereto, and the
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<PAGE> 20
agreements of the Underwriter contained in Section 5 hereof, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of the Underwriter or any controlling persons, or the Company or
any of its officers, directors or any controlling persons, and shall survive
delivery of and payment for the Shares hereunder.
8. Substitution of Underwriters. [Intentionally Omitted.]
9. Notices. All notices or communications hereunder shall be in writing
and if to the Underwriter shall be mailed, delivered, telexed or telecopied and
confirmed to the offices of Merrill Lynch, Pierce, Fenner & Smith Incorporated,
North Tower, World Financial Center, New York, New York 10281-1209, Attention:
Corporate Finance Department, or if sent to the Company, shall be mailed,
delivered, telexed or telecopied and confirmed to the Company at 4340 Stevens
Creek Boulevard, Suite 275, San Jose, California 95129, Attention: President.
Either party to this Agreement may change such address for notices by sending to
the other written notice of a new address for such purpose.
10. Parties. This Agreement shall inure to the benefit of and be binding
upon the Company and the Underwriter and their respective successors and the
persons or entities referred to in Section 5 hereof, and no other person will
have any right or obligation hereunder.
11. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE
CONFLICT OF LAWS PRINCIPLES OF SUCH STATE.
12. Counterparts. This Agreement may be signed in two or more
counterparts with the same effect as if the signatures thereto and hereto were
upon the same instrument.
13. Severability. In case any provision in this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
14. Waivers of Trial by Jury. The Company and the Underwriter each
hereby irrevocably waive any right they may have to a trial by jury in respect
of any claim based upon or arising out of this Agreement or the transactions
contemplated hereby.
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<PAGE> 21
If the foregoing correctly sets forth the understanding between
the Company and the Underwriter, please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
between the Company and the Underwriter.
Very truly yours,
BAY APARTMENT COMMUNITIES, INC.
By: /s/ Gilbert M. Meyer
---------------------------
Gilbert M. Meyer
President
CONFIRMED AND ACCEPTED as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: /s/ John C. Brady
---------------------------
Authorized Signatory
S - 1
<PAGE> 22
EXHIBIT I
INFORMATION IN PROSPECTUS
SUPPLEMENT FURNISHED BY
THE UNDERWRITER
The following information appearing in the Prospectus has been
furnished by the Underwriter in writing specifically for use in the preparation
of such Prospectus.
1. The following information contained in the Prospectus
Supplement under the heading "Underwriting":
a. The first and third sentences of the second paragraph.
I-1
<PAGE> 23
EXHIBIT II
LIST OF SUBSIDIARIES
Bay Apartment Communities, Inc. (the "Company") owns interests in
the following entities:
Subsidiaries
1. Bay Asset Group, Inc., a Maryland corporation, is a wholly-owned
subsidiary of the Company.
2. Bay GP, Inc., a Maryland corporation, is a wholly-owned subsidiary of
the Company.
3. Bay Development Partners, Inc., a Maryland corporation, is a
wholly-owned subsidiary of Bay Asset Group, Inc.
4. Bay Waterford, Inc., a Maryland corporation, is a wholly-owned
subsidiary of Bay Asset Group, Inc.
Partnerships
1. Bay GP, Inc. is the sole general partner of Bay Countrybrook, L.P., a
Delaware limited partnership. There are third-party limited partners.
2. Bay Development Partners, Inc. is the sole general partner of San
Francisco Bay Partners II, Ltd., a California limited partnership. There
is one third-party limited partner.
3. Bay Development Partners, Inc. is the sole general partner of San
Francisco Bay Partners III, L.P., a California limited partnership. The
Company is the sole limited partner.
4. Bay Development Partners, Inc. is the sole general partner of Toyon Road
San Jose Partners, L.P., a California limited partnership. The Company
is the sole limited partner.
5. Bay Development Partners, Inc. is the sole general partner of Foxchase
Drive San Jose Partners II, L.P., a California limited partnership. The
Company is the sole limited partner.
6. The Company is the sole general partner of Bay Rincon, L.P., a
California limited partnership. There are third-party limited partners.
7. The Company is the sole general partner of Bay Pacific Northwest, L.P.,
a Delaware limited partnership. There are third-party limited partners.
LIENS
The Financial Guaranty Insurance Company has a lien on all of the
issued and outstanding capital stock of Bay Waterford, Inc. and Bay Development
Partners, Inc.
II-1
<PAGE> 24
EXHIBIT III
PRICE DETERMINATION AGREEMENT
April 23, 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement, dated April 23,
1998 (the "Underwriting Agreement"), between Bay Apartment Communities, Inc., a
Maryland corporation (the "Company"), and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the "Underwriter"). The Underwriting Agreement provides for the
purchase by the Underwriter from the Company, subject to the terms and
conditions set forth therein, of an aggregate of 1,244,147 shares (the "Shares")
of the Company's common stock, par value $0.01 per share. This Agreement is the
Price Determination Agreement referred to in the Underwriting Agreement.
Pursuant to Section 2 of the Underwriting Agreement, the
undersigned agrees with the Underwriter as follows:
The purchase price per share for the Shares to be paid by the
Underwriter shall be $35.4128.
The Company represents and warrants to the Underwriter that the
representations and warranties of the Company set forth in Section 1 of the
Underwriting Agreement are accurate as though expressly made at and as of the
date hereof.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
If the foregoing is in accordance with your understanding of the
agreement between the Underwriter and the Company, please sign and return to the
Company a counterpart hereof, whereupon this instrument along with all
counterparts and together with the Underwriting Agreement shall be a binding
agreement between the Underwriter and the Company in accordance with its terms
and the terms of the Underwriting Agreement.
III-1
<PAGE> 25
Very truly yours,
BAY APARTMENT COMMUNITIES, INC.
By: /s/ Gilbert M. Meyer
-----------------------------
Name: Gilbert M. Meyer
Title: President
ACCEPTED as of the date
first above written
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: /s/ John C. Brady
---------------------------------
Name: John C. Brady
------------------------------
Title: Managing Director
------------------------------
III-2
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") made as of the 9th day of March,
1998 by and between Gilbert M. Meyer ("Executive") and Bay Apartment
Communities, Inc., a Maryland corporation (the "Company").
WHEREAS, Executive and the Company have previously entered into an
Employment Agreement dated as of March 10, 1994 (the "Prior Agreement"); and
WHEREAS, pursuant to the Agreement and Plan of Merger, by and between
the Company and Avalon Properties, Inc. ("Avalon"), dated as of March 9, 1998
(the "Merger Agreement"), Avalon will merge into the Company (the "Merger"); and
WHEREAS, Executive and the Company desire to enter into a new employment
agreement, effective as of the consummation of the merger contemplated by the
Merger Agreement (the "Effective Date"), to replace the Prior Agreement.
NOW, THEREFORE, the parties hereto do hereby agree as follows.
1. Term. Subject to the consummation of the merger contemplated by
the Merger Agreement, the Company hereby agrees to employ Executive, and
Executive hereby agrees to remain in the employ of the Company subject to the
terms and conditions of this Agreement for the period commencing on the
Effective Date and terminating on the third anniversary of the Effective Date
(the "Original Term"), unless earlier terminated as provided in Section 7. The
Original Term shall be extended automatically for additional 1 year periods
(each a "Renewal Term"), unless notice that this Agreement will not be extended
is given by either party to the other 6 months prior to the expiration of the
Original Term or any Renewal Term. Notwithstanding the foregoing, upon a Change
in Control, the Employment Period shall be extended automatically to 3 years
from the date of such Change in Control. (The period of Executive's employment
hereunder within the Original Term and any Renewal Terms is herein referred to
as the "Employment Period.")
2. Employment Duties.
(a) During the Employment Period, Executive shall be employed
in the business of the Company and its affiliates. Executive shall serve as a
corporate officer of the Company with the title of Executive Chairman of the
Board. In the performance of his duties, Executive shall be subject to the
direction of the Board of Directors of the Company (the "Board of Directors")
and shall not be required to take direction from or report to any other person.
Executive shall be appointed to the Board of Directors of the Company effective
as of the Effective Date (or otherwise continue on the Board of Directors).
Executive's duties and authority under this Agreement are set forth on Exhibit 1
to this Agreement.
(b) Executive agrees to his employment as described in this
Section 2 and agrees to devote substantially all of his working time and efforts
to the performance of his duties under this Agreement; provided that nothing
herein shall be interpreted to preclude Executive from (i) participating with
the prior written consent of the Board of Directors as an officer or
<PAGE> 2
director of, or advisor to, any other entity or organization that is not a
customer or material service provider to the Company or a Competing Enterprise,
as defined in Section 8, so long as such participation does not interfere with
the performance of Executive's duties hereunder, whether or not such entity or
organization is engaged in religious, charitable or other community or
non-profit activities, (ii) investing in any entity or organization which is not
a customer or material service provider to the Company or a Competing
Enterprise, so long as such investment does not interfere with the performance
of Executive's duties hereunder, or (iii) delivering lectures or fulfilling
speaking engagements so long as such lectures or engagements do not interfere
with the performance of Executive's duties hereunder. The Company consents to
Executive's status as a director and stockholder of Greenbriar Homes Company and
certain of its affiliates and as the owner of certain apartments in the San
Francisco Bay area previously disclosed to the Board of Directors, and neither
of such activities shall be treated as a Competing Enterprise.
(c) In performing his duties hereunder, Executive shall be
available for reasonable travel as the needs of the business require. Executive
shall be based in San Jose, California, or otherwise in the greater San
Francisco Bay area.
(d) Breach by either party of any of its respective
obligations under this Section 2 shall be deemed a material breach of that
party's obligations hereunder.
3. Compensation/Benefits. In consideration of Executive's services
hereunder, the Company shall provide Executive the following:
(a) Base Salary. During the Employment Period, the Executive
shall receive an annual rate of base salary ("Base Salary") in an amount not
less than $350,000. Executive's Base Salary will be reviewed by the Company as
of the first anniversary of the Effective Date, and may be adjusted upward (but
not downward) at such time to reflect any inequities in compensation. Commencing
as of January 1, 2000, Executive's Base Salary shall be reviewed no less
frequently than annually by the Company and may be adjusted upward (but not
downward) by the Company. Upon such annual review during the Renewal Term, if
any, Executive's Base Salary shall be increased to the greatest of (i) an amount
equal to Base Salary for the prior year plus 5%, (ii) a factor measured by the
increase, if any, in the Consumer Price Index for Wage Earners and Clerical
Workers (CPI-W) (City Average for New York - Northern New Jersey - Long Island
1982-84=100), as published by the Bureau of Labor Statistics, for the prior
calendar year (the "CPI Adjustment") or (iii) such greater amount as may be
agreed by Executive and the Company. Base Salary shall be payable in accordance
with the Company's normal business practices, but in no event less frequently
than monthly.
(b) Bonuses. Commencing at the close of each fiscal year
during the Employment Period, the Company shall review the performance of the
Company and of Executive during the prior fiscal year, and the Company may
provide Executive with additional compensation as a bonus if the Board, or any
compensation committee hereof, in its discretion, determines that Executive's
contribution to the Company warrants such additional payment and the Company's
anticipated financial performance of the present period permits such payment.
The bonuses hereunder shall be paid as a lump sum not later than 60 days after
the end of the Company's preceding fiscal year.
(c) Medical Insurance/Physical. During the Employment Period,
the Company shall provide to Executive and Executive's immediate family a
comprehensive policy of health insurance. During the Employment Period,
Executive shall be entitled to a
<PAGE> 3
comprehensive annual physical performed, at the expense of the Company by the
physician or medical group of Executive's choosing.
(d) Life Insurance/Disability Insurance. As of the Effective
Date, during the Employment Period, Executive will receive a split dollar life
insurance agreement and comprehensive disability policy comparable to those
provided to comparable Avalon executives. Such life insurance amount shall equal
$2,500,000, and both the life insurance and disability policy shall be subject
to evidence of Executive's insurability. Executive agrees to submit to such
medical examinations as may be required in order to establish or maintain such
policies of insurance.
(e) Vacations. Executive shall be entitled to reasonable paid
vacations during the Employment Period in accordance with the then regular
procedures of the Company governing executives, not to exceed 6 weeks per annum,
in the aggregate.
(f) Office/Secretary, etc. During the Employment Period,
Executive shall be entitled to secretarial services and a private office
commensurate with his title and duties.
(g) Club Membership. The Company will pay, or at Executive's
election reimburse, during the Employment Period (i) the membership dues and
special assessments (exclusive of initiation or admittance costs) for country
club memberships of Executive's choice in an aggregate amount not to exceed
$10,000 per year, increased but not decreased for each succeeding twelve month
period during the Employment Period by the CPI Adjustment plus (ii) other costs
and fees of use of such country club(s) reasonably related to the Company's
business, subject to substantiation thereof in accordance with the Company's
policies in effect from time to time for executive employees of the Company.
(h) Automobile. The Company shall provide Executive with a
monthly car allowance during the Employment Period of not less than $950 per
month (adjusted annually for inflation by the CPI Adjustment); provided that, at
Executive's election, the Company may instead purchase or lease, and maintain
insurance for, an automobile of comparable value for use by Executive, who shall
be responsible for maintaining such automobile, at his own expense, with the
same standard of care Executive applies to his own property and as may be
required under any applicable lease agreement.
(i) Other Benefits. During the Employment Period, the Company
shall provide to Executive such other benefits, excluding severance benefits,
but including the right to participate in such retirement or pension plans, as
are made generally available to executives of the Company from time to time.
4. Expenses/Indemnification.
(a) During the Employment Period, the Company shall reimburse
Executive for the reasonable business expenses incurred by Executive in the
course of performing his duties for the Company hereunder, upon submission of
invoices, vouchers or other appropriate documentation, as may be required in
accordance with the policies in effect from time to time for executive employees
of the Company.
(b) To the fullest extent permitted by law, the Company shall
indemnify Executive with respect to any actions commenced against Executive in
his capacity as an officer or director or former officer or director of the
Company, or any affiliate thereof for which he may
<PAGE> 4
render service in such capacity, whether by or on behalf of the Company, its
shareholders or third parties, and the Company shall advance to Executive on a
timely basis an amount equal to the reasonable fees and expenses incurred in
defending such actions, after receipt of an itemized request for such advance,
and an undertaking from Executive to repay the amount of such advance, with
interest at a reasonable rate from the date of the request, as determined by the
Company, if it shall ultimately be determined that he is not entitled to be
indemnified against such expenses. The Company agrees to use its best efforts to
secure and maintain officers and directors' liability insurance with respect to
Executive.
5. Employer's Authority/Policies.
(a) General. Executive agrees to observe and comply with the
rules and regulations of the Company as adopted by its Board respecting the
performance of his duties and to carry out and perform orders, directions and
policies communicated to him from time to time by the Board.
(b) Ethics Policies. Executive agrees to comply with and be
bound by the Ethics Policies of the Company, as reflected in the attachment at
Annex A hereto and made a part hereof.
6. Records/Nondisclosure/Company Policies.
(a) General. All records, financial statements and similar
documents obtained, reviewed or compiled by Executive in the course of the
performance by him of services for the Company, whether or not confidential
information or trade secrets, shall be the exclusive property of the Company.
Executive shall have no rights in such documents upon any termination of this
Agreement.
(b) Nondisclosure Agreement. Without limitation of the
Company's rights under Section 6(a), Executive agrees to abide by and be bound
by the Nondisclosure Agreement of the Company executed by Executive and the
Company as reflected in the attachment at Annex B and made a part hereof.
7. Termination; Severance and Related Matters.
(a) At-Will Employment. Executive's employment hereunder is
"at will" and, therefore, may be terminated at any time, with or without Cause,
at the option of the Company, subject only to the severance obligations under
this Section 7. Upon any termination hereunder, the Employment Period shall
expire.
(b) Definitions. For purposes of this Section 7, the following
terms shall have the indicated definitions:
(1) Cause. "Cause" shall mean:
(i) Executive is convicted of or enters a plea
of nolo contendere to an act which is defined as a felony under
any federal, state or local law, not based upon a traffic
violation, which conviction or plea has or can be expected to
have, in the good faith opinion of the Board of Directors, a
material adverse impact on the business or reputation of the
Company;
<PAGE> 5
(ii) any one or more acts of theft, larceny,
embezzlement, fraud or material intentional misappropriation from
or with respect to the Company;
(iii) a breach by Executive of his fiduciary
duties under Maryland law as an officer;
(iv) Executive's commission of any one or more
acts of gross negligence or willful misconduct which in the good
faith opinion of the Board of Directors has resulted in material
harm to the business or reputation of the Company; or
(v) default by Executive in the performance of
his material duties under this Agreement, without correction of
such action within 15 days of written notice thereof.
Notwithstanding the foregoing, no termination of Executive's employment
by the Company shall be treated as for Cause or be effective until and unless
all of the steps described in subparagraphs (i) through (iii) below have been
complied with:
Notice of intention to terminate for Cause has been
given by the Company within 120 days after the Board of Directors
learns of the act, failure or event (or latest in a series of
acts, failures or events) constituting "Cause";
The Board of Directors has voted (at a meeting of
the Board of Directors duly called and held as to which
termination of Executive is an agenda item) to terminate
Executive for Cause after Executive has been given notice of the
particular acts or circumstances which are the basis for the
termination for Cause and has been afforded at least 20 days
notice after the meeting and an opportunity to present his
position in writing; and
The Board of Directors has given a Notice of
Termination to Executive within 20 days of such Board meeting.
The Company may suspend Executive with pay at any time during the period
commencing with the giving of notice to Executive under clause (i) above until
final Notice of Termination is given under clause (iii) above. Upon the giving
of notice as provided in clause (iii) above, no further payments shall be due
Executive.
(2) Change in Control. A "Change in Control" shall mean the
occurrence of any one or more of the following events following the Effective
Date:
(i) Any individual, entity or group (a "Person") within
the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the "Act") (other than the Company, any corporation,
partnership, trust or other entity controlled by the Company (a
"Subsidiary"), or any trustee, fiduciary or other person or entity
holding securities under any employee benefit plan or trust of the
Company or any of its Subsidiaries), together with all "affiliates" and
"associates" (as such terms are defined in Rule 12b-2 under the Act) of
such Person, shall become the "beneficial owner" (as such term is
defined in Rule 13d-3 under the Act) of securities of the Company
representing 30% or more of the combined voting power of the Company's
then outstanding securities having the right to vote generally in an
election of the Company's Board of Directors
<PAGE> 6
("Voting Securities"), other than as a result of (A) an acquisition of
securities directly from the Company or any Subsidiary or (B) an
acquisition by any corporation pursuant to a reorganization,
consolidation or merger if, following such reorganization, consolidation
or merger the conditions described in clauses (A), (B) and (C) of
subparagraph (iii) of this Section 7(b)(2) are satisfied; or
(ii) Individuals who, as of the Effective Date,
constitute the Company's Board of Directors (the "Incumbent Directors")
cease for any reason to constitute at least a majority of the Board,
provided, however, that any individual becoming a director of the
Company subsequent to the date hereof (excluding, for this purpose, (A)
any such individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election
of members of the Board of Directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors, including by reason of agreement intended
to avoid or settle any such actual or threatened contest or
solicitation, and (B) any individual whose initial assumption of office
is in connection with a reorganization, merger or consolidation,
involving an unrelated entity and occurring during the Employment
Period), whose election or nomination for election by the Company's
shareholders was approved by a vote of at least a majority of the
persons then comprising Incumbent Directors shall for purposes of this
Agreement be considered an Incumbent Director; or
(iii) Consummation of a reorganization, merger or
consolidation of the Company, unless, following such reorganization,
merger or consolidation, (A) more than 50% of, respectively, the then
outstanding shares of common stock of the corporation resulting from
such reorganization, merger or consolidation and the combined voting
power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all
of the individuals and entities who were the beneficial owners,
respectively, of the outstanding Voting Securities immediately prior to
such reorganization, merger or consolidation, (B) no Person (excluding
the Company, any employee benefit plan (or related trust) of the
Company, a Subsidiary or the corporation resulting from such
reorganization, merger or consolidation or any subsidiary thereof, and
any Person beneficially owning, immediately prior to such
reorganization, merger or consolidation, directly or indirectly, 30% or
more of the outstanding Voting Securities), beneficially owns, directly
or indirectly, 30% or more of, respectively, the then outstanding shares
of common stock of the corporation resulting from such reorganization,
merger or consolidation or the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors, and (C) at least a majority of
the members of the board of directors of the corporation resulting from
such reorganization, merger or consolidation were members of the
Incumbent Board at the time of the execution of the initial agreement
providing for such reorganization, merger or consolidation;
(iv) Approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company; or
(v) The sale, lease, exchange or other disposition of
all or substantially all of the assets of the Company, other than to a
corporation, with respect to which following such sale, lease, exchange
or other disposition (A) more than 50% of,
<PAGE> 7
respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the
election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities
who were the beneficial owners of the outstanding Voting Securities
immediately prior to such sale, lease, exchange or other disposition,
(B) no Person (excluding the Company and any employee benefit plan (or
related trust) of the Company or a Subsidiary or such corporation or a
subsidiary thereof and any Person beneficially owning, immediately prior
to such sale, lease, exchange or other disposition, directly or
indirectly, 30% or more of the outstanding Voting Securities),
beneficially owns, directly or indirectly, 30% or more of, respectively,
the then outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors and
(C) at least a majority of the members of the board of directors of such
corporation were members of the Incumbent Board at the time of the
execution of the initial agreement or action of the Board of Directors
providing for such sale, lease, exchange or other disposition of assets
of the Company.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed
to have occurred for purposes of this Agreement solely as the result of an
acquisition of securities by the Company which, by reducing the number of shares
of Voting Securities outstanding, increases the proportionate voting power
represented by the Voting Securities beneficially owned by any Person to 30% or
more of the combined voting power of all then outstanding Voting Securities;
provided, however, that if any Person referred to in this sentence shall
thereafter become the beneficial owner of any additional shares of Stock or
other Voting Securities (other than pursuant to a stock split, stock dividend,
or similar transaction), then a "Change in Control" shall be deemed to have
occurred for purposes of this Agreement.
(3) Complete Change in Control. A "Complete Change in Control" shall
mean that a Change in Control has occurred, after modifying the definition of
"Change in Control" by deleting clause (i) from Section 7(b)(2) of this
Agreement.
(4) Constructive Termination Without Cause. "Constructive Termination
Without Cause" shall mean a termination of Executive's employment initiated by
Executive not later than 12 months following the occurrence (not including any
time during which an arbitration proceeding referenced below is pending),
without Executive's prior written consent, of one or more of the following
events (or the latest to occur in a series of events), and effected after giving
the Company not less than 10 working days' written notice of the specific act or
acts relied upon and right to cure:
(i) a material adverse change in the functions, duties
or responsibilities of Executive's position which would reduce the
level, importance or scope of such position; or any removal of Executive
from or failure to reappoint or reelect Executive to any position set
forth in this Agreement, except in connection with the termination of
Executive's employment for Disability, Cause, as a result of Executive's
death or by Executive other than for a Constructive Termination Without
Cause;
(ii) any material breach by the Company of this
Agreement;
<PAGE> 8
(iii) any purported termination of Executive's employment
for Cause by the Company which does not comply with the terms of Section
7(b)(1) of this Agreement;
(iv) the failure of the Company to obtain an agreement,
satisfactory to the Executive, from any successor or assign of the
Company, to assume and agree to perform this Agreement, as contemplated
in Section 10 of this Agreement;
(v) the failure by the Company to continue in effect
any compensation plan in which Executive participates immediately prior
to a Change in Control which is material to Executive's total
compensation, unless comparable alternative arrangements (embodied in
ongoing substitute or alternative plans) have been implemented with
respect to such plans, or the failure by the Company to continue
Executive's participation therein (or in such substitute or alternative
plans) on a basis not materially less favorable, in terms of the amount
of benefits provided and the level of Executive's participation relative
to other participants, as existed during the last completed fiscal year
of the Company prior to the Change in Control;
(vi) the relocation of the Company's San Jose offices to
a new location more than fifty (50) miles from San Jose or the failure
to locate Executive's own office at the San Jose office (or at the
office to which such office is relocated which is within 50 miles of San
Jose); or
(vii) any termination of employment by the Executive for
any reason during the 12-month period immediately following a Complete
Change in Control of the Company.
Notwithstanding the foregoing, a Constructive Termination Without Cause shall
not be treated as having occurred unless Executive has given a final Notice of
Termination delivered after expiration of the Company's cure period. Executive
or the Company may, at any time after the expiration of the Company's cure
period and either prior to or up until three months after giving a final Notice
of Termination, commence an arbitration proceeding to determine the question of
whether, taking into account the actions complained of and any efforts made by
the Company to cure such actions, a termination by Executive of his employment
should be treated as a Constructive Termination Without Cause for purposes of
this Agreement. If the Executive or the Company commences such a proceeding
prior to delivery by Executive of a final Notice of Termination, the
commencement of such a proceeding shall be without prejudice to either party and
Executive's and the Company's rights and obligations under this Agreement shall
continue unaffected unless and until the arbitrator has determined such question
in the affirmative, or, if earlier, the date on which Executive or the Company
has delivered a Notice of Termination in accordance with the provisions of this
Agreement.
(5) Covered Average Compensation. "Covered Average Compensation"
shall mean the sum of Executive's Covered Compensation as calculated for the
calendar year in which the Date of Termination occurs and for each of the two
preceding calendar years, divided by three.
(6) Covered Compensation. "Covered Compensation," for any calendar
year, shall mean an amount equal to the sum of (i) Executive's Base Salary for
the calendar year (disregarding any decreases made effective during the
Employment Period), (ii) the cash bonus
<PAGE> 9
actually earned by Executive with respect to such calendar year, and (iii) the
value of all stock and other equity-based compensation awards made to Executive
during such calendar year.
Covered Compensation shall be calculated according to the
following rules:
(A) In valuing awards for purposes of clause
(iii) above, all such awards shall be treated as if fully vested
when granted, stock grants shall be valued by reference to the
fair market value on the date of grant of the Company's common
stock, par value $.01 per share, and other equity-based
compensation awards shall be valued at the value established by
the Compensation Committee of the Board of Directors on the date
of grant.
(B) In determining the cash bonus actually paid
with respect to a calendar year, if no cash bonus has been paid
with respect to the calendar year in which the Date of
Termination occurs, the cash bonus paid with respect to the
immediately preceding calendar year shall be assumed to have been
paid in each of the current and immediately preceding calendar
years, and if no cash bonus has been paid by the Date of
Termination with respect to the immediately preceding calendar
year, the cash bonus paid with respect to the second preceding
calendar year shall be assumed to have been paid in all three of
the calendar years taken into account in determining Covered
Average Compensation.
(C) If any cash bonus paid with respect to the
current or immediately preceding calendar year was paid within
three months of Executive's Date of Termination, and is lower
than the last cash bonus paid more than three months from the
Date of Termination, any such cash bonus paid within three months
of the Date of Termination shall be disregarded and the last cash
bonus paid more than three months from the Date of Termination
shall be substituted for each cash bonus so disregarded.
(D) In determining the amount of stock and other
equity-based compensation awards made during a calendar year
during the averaging period, rules similar to those set forth in
subparagraphs (B) and (C) of this Section 7(b)(6) shall be
followed, except that all awards made in connection with the
Company's initial public offering shall be disregarded.
(7) Disability. "Disability" shall mean Executive has been determined
to be disabled and to qualify for long-term disability benefits under the
long-term disability insurance policy obtained pursuant to Section 3(d) of this
Agreement.
(c) Rights Upon Termination.
(i) Payment of Benefits Earned Through Date of
Termination. Upon any termination of Executive's employment during the
Employment Period, Executive, or his estate, shall in all events be paid
all accrued but unpaid Base Salary and all earned but unpaid cash
incentive compensation earned through his Date of Termination. Executive
shall also retain all such rights with respect to vested equity-based
awards as are provided under the circumstances under the applicable
grant or award agreement, and shall be entitled to all other benefits
which are provided under the circumstances in accordance with the
provisions of the Company's generally applicable employee benefit plans,
practices and policies, other than severance plans.
<PAGE> 10
(ii) Death. In the event of Executive's death during the
Employment Period, the Company shall, in addition to paying the amounts
set forth in Section 7(c)(i), take whatever action is necessary to cause
all of Executive's unvested equity-based awards to become fully vested
as of the date of death and, in the case of equity-based awards which
have an exercise schedule, to become fully exercisable and continue to
be exercisable for such period as is provided in the case of vested and
exercisable awards in the event of death under the terms of the
applicable award agreements.
(iii) Disability. In the event the Company elects to
terminate Executive's employment during the Employment Period on account
of Disability, the Company shall, in addition to paying the amounts set
forth in Section 7(c)(i), pay to Executive, in one lump sum, no later
than 31 days following the Date of Termination, an amount equal to two
times Covered Average Compensation. The Company shall also, commencing
upon the Date of Termination:
(A) Continue, without cost to Executive, benefits
comparable to the medical and disability benefits provided to
Executive immediately prior to the Date of Termination under
Section 3(c) and Section 3(d) for a period of 24 months following
the Date of Termination or until such earlier date as Executive
obtains comparable benefits through other employment;
(B) Continue to pay, or reimburse Executive, for
all premiums then due or thereafter payable on the whole-life
portion of the split-dollar insurance policy referenced under
Section 3(d) for so long as such payments are due; and
(C) Take whatever action is necessary to cause
Executive to become vested as of the Date of Termination in all
stock options, restricted stock grants, and all other
equity-based awards and be entitled to exercise and continue to
exercise all stock options and all other equity-based awards
having an exercise schedule and to retain such grants and awards
to the same extent as if they were vested upon termination of
employment in accordance with their terms.
(iv) Non-Renewal. In the event the Company gives
Executive a notice of non-renewal pursuant to Section 1 above, the
Company shall, in addition to paying the amounts set forth in Section
7(c)(i), commencing upon the Date of Termination:
(A) Pay to Executive, for 12 consecutive months,
commencing with the first day of the month immediately following
the Date of Termination, a monthly amount equal to the result
obtained by dividing Covered Average Compensation by twelve;
(B) Continue, without cost to Executive, benefits
comparable to the medical and disability benefits provided to
Executive immediately prior to the Date of Termination under
Section 3(c) and Section 3(d) for a period of 24 months following
the Date of Termination or until such earlier date as Executive
obtains comparable benefits through other employment; and
(C) Take whatever action is necessary to cause
Executive to become vested as of the Date of Termination in all
stock options, restricted stock grants, and all other
equity-based awards and be entitled to exercise and continue
<PAGE> 11
to exercise all stock options and all other equity-based awards
having an exercise schedule and to retain such grants and awards
to the same extent as if they were vested upon termination of
employment in accordance with their terms; and
(D) Continue to pay, or reimburse Executive for,
all premiums then due or thereafter payable on the whole-life
portion of the split-dollar insurance policy referenced under
Section 3(d) for so long as such payments are due.
(v) Termination Without Cause; Constructive Termination
Without Cause. In the event the Company or any successor to the Company
terminates Executive's employment without Cause, or if Executive
terminates his employment in a Constructive Termination without Cause,
the Company shall, in addition to paying the amounts provided under
Section 7(c)(i), pay to Executive, in one lump sum no later than 31 days
following the Date of Termination, an amount equal to three times
Covered Average Compensation. The Company shall also, commencing upon
the Date of Termination:
(A) Continue, without cost to Executive, benefits
comparable to the medical and disability benefits provided to
Executive immediately prior to the Date of Termination under
Section 3(c) and Section 3(d) for a period of 36 months following
the Date of Termination or until such earlier date as Executive
obtains comparable benefits through other employment;
(B) Continue to pay, or reimburse Executive, for
so long as such payments are due, all premiums then due or
payable on the whole-life portion of the split-dollar insurance
policy referenced under Section 3(d); and
(C) Take whatever action is necessary to cause
Executive to become vested as of the Date of Termination in all
stock options, restricted stock grants, and all other
equity-based awards and be entitled to exercise and continue to
exercise all stock options and all other equity-based awards
having an exercise schedule and to retain such grants and awards
to the same extent as if they were vested upon termination of
employment in accordance with their terms.
(vi) Termination for Cause; Voluntary Resignation. In
the event Executive's employment terminates during the Employment Period
other than in connection with a termination meeting the conditions of
subparagraphs (ii), (iii), (iv), or (v) of this Section 7(c), Executive
shall receive the amounts set forth in Section 7(c)(i) in full
satisfaction of all of his entitlements from the Company. All
equity-based awards not vested as of the Date of Termination shall
terminate (unless otherwise provided in the applicable award agreement)
and Executive shall have no further entitlements with respect thereto.
<PAGE> 12
(d) Additional Benefits.
(i) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution by the Company to or for the benefit of Executive, whether
paid or payable or distributed or distributable (1) pursuant to the
terms of Section 7 of this Agreement, (2) pursuant to or in connection
with any compensatory or employee benefit plan, agreement or
arrangement, including but not limited to any stock options, restricted
or unrestricted stock grants issued to or for the benefit of Executive
and forgiveness of any loans by the Company to Executive or (3)
otherwise (collectively, "Severance Payments"), would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986,
as amended (the "Code"), and any interest or penalties are incurred by
Executive with respect to such excise tax (such excise tax, together
with any such interest and penalties, are hereinafter collectively
referred to as the "Excise Tax"), then Executive shall be entitled to
receive an additional payment (a "Partial Gross-Up Payment"), such that
the net amount retained by Executive, before accrual or payment of any
Federal, state or local income tax or employment tax, but after accrual
or payment of the Excise Tax attributable to the Partial Gross-Up
Payment, is equal to the Excise Tax on the Severance Payments.
(ii) Subject to the provisions of Section 7(d)(iii), all
determinations required to be made under this Section 7, including
whether a Partial Gross-Up Payment is required and the amount of such
Partial Gross-Up Payment, shall be made by Coopers & Lybrand LLP or such
other nationally recognized accounting firm as may at that time be the
Company's independent public accountants immediately prior to the Change
in Control (the "Accounting Firm"), which shall provide detailed
supporting calculations both to the Company and Executive within 15
business days of the Date of Termination, if applicable, or at such
earlier time as is reasonably requested by the Company or Executive. The
initial Partial Gross-Up Payment, if any, as determined pursuant to this
Section 7(d)(ii), shall be paid to Executive within five days of the
receipt of the Accounting Firm's determination. If the Accounting Firm
determines that no Excise Tax is payable by Executive, the Company shall
furnish Executive with an opinion of counsel that failure to report the
Excise Tax on Executive's applicable federal income tax return would not
result in the imposition of a negligence or similar penalty. Any
determination by the Accounting Firm shall be binding upon the Company
and Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Partial Gross-Up Payments
which will not have been made by the Company should have been made (an
"Underpayment"). In the event that the Company exhausts its remedies
pursuant to Section 7(d)(iii) and Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine
the amount of the Underpayment that has occurred, consistent with the
calculations required to be made hereunder, and any such Underpayment,
and any interest and penalties imposed on the Underpayment and required
to be paid by Executive in connection with the proceedings described in
Section 7(d)(iii), and any related legal and accounting expenses, shall
be promptly paid by the Company to or for the benefit of Executive.
(iii) Executive shall notify the Company in writing of
any claim by the Internal Revenue Service that, if successful, would
require the payment by the Company of the Partial Gross-Up Payment. Such
notification shall be given as soon as practicable but no later than 10
business days after Executive knows of such claim and shall apprise
<PAGE> 13
the Company of the nature of such claim and the date on which such claim
is requested to be paid. Executive shall not pay such claim prior to the
expiration of the 30-day period following the date on which he gives
such notice to the Company (or such shorter period ending on the date
that any payment of taxes with respect to such claim is due). If the
Company notifies Executive in writing prior to the expiration of such
period that it desires to contest such claim, Executive shall:
(A) give the Company any information reasonably
requested by the Company relating to such claim,
(B) take such action in connection with
contesting such claim as the Company shall reasonably request in
writing from time to time, including, without limitation,
accepting legal representation with respect to such claim by an
attorney selected by the Company,
(C) cooperate with the Company in good faith in
order effectively to contest such claim, and
(D) permit the Company to participate in any
proceedings relating to such claim; provided, however that the
Company shall bear and pay directly all costs and expenses
attributable to the failure to pay the Excise Tax (including
related additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive
harmless, for any Excise Tax up to an amount not exceeding the
Partial Gross-Up Payment, including interest and penalties with
respect thereto, imposed as a result of such representation, and
payment of related legal and accounting costs and expenses (the
"Indemnification Limit"). Without limitation on the foregoing
provisions of this Section 7(d)(iii), the Company shall control
all proceedings taken in connection with such contest and, at its
sole option may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option,
either direct Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and
Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company
shall determine; provided, however, that if the Company directs
Executive to pay such claim and sue for a refund, the Company
shall advance so much of the amount of such payment as does not
exceed the Excise Tax, and related interest and penalties, to
Executive on an interest-free basis and shall indemnify and hold
Executive harmless, from any related legal and accounting costs
and expenses, and from any Excise Tax, including related interest
or penalties imposed with respect to such advance or with respect
to any imputed income with respect to such advance up to an
amount not exceeding the Indemnification Limit; and further
provided that any extension of the statute of limitations
relating to payment of taxes for the taxable year of Executive
with respect to which such contested amount is claimed to be due
is limited solely to such contested amount. Furthermore, the
Company's control of the contest shall be limited to issues with
respect to which a Partial Gross-Up Payment would be payable
hereunder and Executive shall be entitled to settle or contest,
as the case may be, any other issues raised by the Internal
Revenue Service or any other taxing authority.
<PAGE> 14
(iv) If, after the receipt by Executive of an amount
advanced by the Company pursuant to Section 7(d)(iii), Executive becomes
entitled to receive any refund with respect to such claim, Executive
shall (subject to the Company's complying with the requirements of
Section 7(d)(iii)) promptly pay to the Company so much of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto) (the "Refund") as is equal to (A) if the Company
advanced or paid the entire amount required to be so advanced or paid
pursuant to Section 7(d)(iii) hereof (the "Required Section 7(d)
Advance"), the aggregate amount advanced or paid by the Company pursuant
to this Section 7(d) less the portion of such amount advanced to
Executive to reimburse him for related legal and accounting costs, or
(B) if the Company advanced or paid less than the Required Section 7(d)
Advance, so much of the aggregate amount so advanced or paid by the
Company pursuant to this Section 7(d) as is equal to the difference, if
any, between (C) the amount refunded to Executive with respect to such
claim and (D) the sum of the portion of the Required Section 7(d)
Advance that was paid by Executive and not paid or advanced by the
Company plus Executive's related legal and accounting fees, as
applicable. If, after the receipt by Executive of an amount advanced by
the Company pursuant to Section 7(d)(iii), a determination is made that
Executive shall not be entitled to any refund with respect to such claim
and the Company does not notify Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 days after
such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to
the extent thereof, the amount of Partial Gross-Up Payment required to
be paid.
(e) Notice of Termination. Notice of non-renewal of this
Agreement pursuant to Section 1 hereof or of any termination of Executive's
employment (other than by reason of death) shall be communicated by written
notice (a "Notice of Termination") from one party hereto to the other party
hereto in accordance with this Section 7 and Section 9.
(f) Date of Termination. "Date of Termination," with respect
to any termination of Executive's employment during the Employment Period, shall
mean (i) if Executive's employment is terminated for Disability, 30 days after
Notice of Termination is given (provided that Executive shall not have returned
to the full-time performance of Executive's duties during such 30 day period),
(ii) if Executive's employment is terminated for Cause, the date on which a
Notice of Termination is given which complies with the requirements of Section
7(b)(1) hereof, and (iii) if Executive's employment is terminated for any other
reason, the date specified in the Notice of Termination. In the case of a
termination by the Company other than for Cause, the Date of Termination shall
not be less than 30 days after the Notice of Termination is given. In the case
of a termination by Executive, the Date of Termination shall not be less than 15
days from the date such Notice of Termination is given. Notwithstanding the
foregoing, in the event that Executive gives a Notice of Termination to the
Company, the Company may unilaterally accelerate the Date of Termination and
such acceleration shall not result in the termination being treated as a
Termination without Cause. Upon any termination of his employment, Executive
will concurrently resign his membership on the Board of Directors.
(g) No Mitigation. The Company agrees that, if Executive's
employment by the Company is terminated during the term of this Agreement,
Executive is not required to seek other employment, or to attempt in any way to
reduce any amounts payable to Executive by the Company pursuant to Section
7(d)(i) hereof. Further, the amount of any payment provided for in this
Agreement shall not be reduced by any compensation earned by Executive as the
result of employment by another employer, by retirement benefits, or, except for
amounts then due and
<PAGE> 15
payable in accordance with the terms of any promissory notes given by Executive
in favor of the Company, by offset against any amount claimed to be owed by
Executive to the Company or otherwise.
(h) Nature of Payments. The amounts due under this Section 7
are in the nature of severance payments considered to be reasonable by the
Company and are not in the nature of a penalty. Such amounts are in full
satisfaction of all claims Executive may have in respect of his employment by
the Company or its affiliates and are provided as the sole and exclusive
benefits to be provided to Executive, his estate, or his beneficiaries in
respect of his termination of employment from the Company or its affiliates.
8. Non-Competition; Non-Solicitation; Specific Enforcement.
(a) Non-Competition. Because Executive's services to the
Company are special and because Executive has access to the Company's
confidential information, Executive covenants and agrees that, during the
Employment Period and, for a period of one year following the Date of
Termination by the Company for Cause or a termination by Executive (other than a
Constructive Termination Without Cause) prior to a Change in Control, Executive
shall not, without the prior written consent of the Board of Directors, become
associated with, or engage in any "Restricted Activities" with respect to any
"Competing Enterprise," as such terms are hereinafter defined, whether as an
officer, employee, principal, partner, agent, consultant, independent contractor
or shareholder. "Competing Enterprise," for purposes of this Agreement, shall
mean any person, corporation, partnership, venture or other entity which (a) is
a publicly traded real estate investment trust, or (b) is engaged in the
business of managing, owning, leasing or joint venturing residential real estate
within 30 miles of residential real estate owned or under management by the
Company or its affiliates. "Restricted Activities," for purposes of this
Agreement, shall mean executive, managerial, directorial, administrative,
strategic, business development or supervisory responsibilities and activities
relating to all aspects of residential real estate ownership, management,
residential real estate franchising, and residential real estate
joint-venturing.
(b) Non-Solicitation. During the Employment Period, and for a
period of one year following the Date of Termination, Executive shall not,
without the prior written consent of the Company, except in the course of
carrying out his duties hereunder, solicit or attempt to solicit for employment
with or on behalf of any corporation, partnership, venture or other business
entity, any employee of the Company or any of its affiliates or any person who
was formerly employed by the Company or any of its affiliates within the
preceding six months, unless such person's employment was terminated by the
Company or any of such affiliates.
(c) Specific Enforcement. Executive and the Company agree that
the restrictions, prohibitions and other provisions of this Section 8 are
reasonable, fair and equitable in scope, terms, and duration, are necessary to
protect the legitimate business interests of the Company and are a material
inducement to the Company to enter into this Agreement. Should a decision be
made by a court of competent jurisdiction that the character, duration or
geographical scope of the provisions of this Section 8 is unreasonable, the
parties intend and agree that this Agreement shall be construed by the court in
such a manner as to impose all of those restrictions on Executive's conduct that
are reasonable in light of the circumstances and as are necessary to assure to
the Company the benefits of this Agreement. The Company and Executive further
agree that the services to be rendered under this Agreement by Executive are
special, unique and of extraordinary character, and that in the event of the
breach by Executive of the terms and conditions of this Agreement or if
Executive, without the prior consent of the Board of Directors,
<PAGE> 16
shall take any action in violation of this Section 8, the Company will suffer
irreparable harm for which there is no adequate remedy at law. Accordingly,
Executive hereby consents to the entry of a temporary restraining order or ex
parte injunction, in addition to any other remedies available at law or in
equity, to enforce the provisions hereof. Any proceeding or action seeking
equitable relief for violation of this Section 8 must be commenced in the
federal or state courts, in either case in California. Executive and the Company
irrevocably and unconditionally submit to the jurisdiction of such courts and
agree to take any and all future action necessary to submit to the jurisdiction
of such courts.
9. Notice. Any notice required or permitted hereunder shall be in
writing and shall be deemed sufficient when given by hand or by nationally
recognized overnight courier or by Express, registered or certified mail,
postage prepaid, return receipt requested, and addressed, if to the Company at
5904 Richmond Avenue, Alexandria, VA 22303, and if to Executive at the address
set forth in the Company records (or to such other address as may be provided by
notice).
10. Miscellaneous. This Agreement, together with Exhibit 1 and Annex
A and Annex B, constitutes the entire agreement between the parties concerning
the subjects hereof and supersedes any and all prior agreements or
understandings, including, without limitation, any plan or agreement providing
benefits in the nature of severance, but excluding benefits provided under other
Company plans or agreements, except to the extent this Agreement provides
greater rights than are provided under such other plans or agreements. As of the
Effective Date, this Agreement supersedes the Prior Agreement which will have no
further force or effect. Executive hereby waives, to the extent applicable, the
effect of the transactions contemplated by the Merger Agreement (or shareholder
approval of such transaction) on any change in control provisions in any Company
employee benefit plan or agreement. This Agreement shall terminate upon
termination of the Merger Agreement and abandonment of the merger contemplated
by the Merger Agreement. This Agreement may not be assigned by Executive without
the prior written consent of the Company, and may be assigned by the Company and
shall be binding upon, and inure to the benefit of, the Company's successors and
assigns. The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise. Headings herein are
for convenience of reference only and shall not define, limit or interpret the
contents hereof.
11. Amendment. This Agreement may be amended, modified or
supplemented by the mutual consent of the parties in writing, but no oral
amendment, modification or supplement shall be effective. No waiver by either
party of any breach by the other party of any condition or provision contained
in this Agreement to be performed by such other party shall be deemed a waiver
of a similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any waiver must be in writing and signed by Executive or an
authorized officer of the Company, as the case may be.
12. Severability. The provisions of this Agreement are severable. The
invalidity of any provision shall not affect the validity of any other
provision, and each provision of this Agreement shall be valid and enforceable
to the fullest extent permitted by law.
<PAGE> 17
13. Resolution of Disputes.
(a) Procedures and Scope of Arbitration. Except for any
controversy or claim seeking equitable relief pursuant to Section 8 of this
Agreement, all controversies and claims arising under or in connection with this
Agreement or relating to the interpretation, breach or enforcement thereof and
all other disputes between the parties, shall be resolved by expedited, binding
arbitration, to be held in California in accordance with the National Rules of
the American Arbitration Association governing employment disputes (the
"National Rules"). In any proceeding relating to the amount owed to Executive in
connection with his termination of employment, it is the contemplation of the
parties that the only remedy that the arbitrator may award in such a proceeding
is an amount equal to the termination payments, if any, required to be provided
under the applicable provisions of Section 7(c) and, if applicable, Section 7(d)
hereof, to the extent not previously paid, plus the costs of arbitration and
Executive's reasonable attorneys fees and expenses as provided below. Any award
made by such arbitrator shall be final, binding and conclusive on the parties
for all purposes, and judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.
(b) Attorneys Fees.
(i) Reimbursement After Executive Prevails. Except as
otherwise provided in this paragraph, each party shall pay the cost of
his or its own legal fees and expenses incurred in connection with an
arbitration proceeding. Provided an award is made in favor of Executive
in such proceeding, all of his reasonable attorneys fees and expenses
incurred in pursuing or defending such proceeding shall be promptly
reimbursed to Executive by the Company within five days of the entry of
the award.
(ii) Reimbursement in Actions to Stay, Enjoin or
Collect. In any case where the Company or any other person seeks to stay
or enjoin the commencement or continuation of an arbitration proceeding,
whether before or after an award has been made, or where Executive seeks
recovery of amounts due after an award has been made, or where the
Company brings any proceeding challenging or contesting the award, all
of Executive's reasonable attorneys fees and expenses incurred in
connection therewith shall be promptly reimbursed by the Company to
Executive, within five days of presentation of an itemized request for
reimbursement, regardless of whether Executive prevails, regardless of
the forum in which such proceeding is brought, and regardless of whether
a Change in Control has occurred.
(iii) Reimbursement After a Change in Control. Without
limitation on the foregoing, solely in a proceeding commenced by the
Company or by Executive after a Change in Control has occurred, the
Company shall advance to Executive, within five days of presentation of
an itemized request for reimbursement, all of Executive's legal fees and
expenses incurred in connection therewith, regardless of the forum in
which such proceeding was commenced, subject to delivery of an
undertaking by Executive to reimburse the Company for such advance if he
does not prevail in such proceeding (unless such fees are to be
reimbursed regardless of whether Executive prevails as provided in
clause (ii) above).
14. Survivorship. The provisions of Sections 4(b), 6, 8 and 13 of
this Agreement shall survive Executive's termination of employment. Other
provisions of this Agreement shall survive any termination of Executive's
employment to the extent necessary to the intended preservation of each party's
respective rights and obligations.
<PAGE> 18
15. Board Action. Where an action called for under this Agreement is
required to be taken by the Board of Directors, such action shall be taken by
the vote of not less than a majority of the members then in office and
authorized to vote on the matter.
16. Withholding. All amounts required to be paid by the Company shall
be subject to reduction in order to comply with applicable federal, state and
local tax withholding requirements.
17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument. The execution of this
Agreement may be by actual or facsimile signature.
18. Governing Law. This Agreement shall be construed and regulated in
all respects under the laws of the State of Maryland.
<PAGE> 19
IN WITNESS WHEREOF, this Agreement is entered into as of the date and
year first above written.
Bay Apartment Communities, Inc.
By: /s/ Jeffrey B. Van Horn
------------------------------------
Its: VP, CFO, Treas and Sec
/s/ Gilbert M. Meyer
----------------------------------------
Gilbert M. Meyer
<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") made as of the 9th day of March,
1998 by and between Jeffrey B. Van Horn ("Executive") and Bay Apartment
Communities, Inc., a Maryland corporation (the "Company").
WHEREAS, Executive and the Company have previously entered into an
Employment Agreement dated as of June 19, 1996 (the "Prior Agreement"); and
WHEREAS, pursuant to the Agreement and Plan of Merger, by and between
the Company and Avalon Properties, Inc. ("Avalon"), dated as of March 9, 1998
(the "Merger Agreement"), Avalon will merge into the Company (the "Merger"); and
WHEREAS, Executive and the Company desire to enter into a new employment
agreement, effective as of the consummation of the merger contemplated by the
Merger Agreement (the "Effective Date"), to replace the Prior Agreement.
NOW, THEREFORE, the parties hereto do hereby agree as follows.
1. Term. Subject to the consummation of the merger contemplated by
the Merger Agreement, the Company hereby agrees to employ Executive, and
Executive hereby agrees to remain in the employ of the Company subject to the
terms and conditions of this Agreement for the period commencing on the
Effective Date and terminating on the third anniversary of the Effective Date
(the "Original Term"), unless earlier terminated as provided in Section 7. The
Original Term shall be extended automatically for additional 1 year periods
(each a "Renewal Term"), unless notice that this Agreement will not be extended
is given by either party to the other 6 months prior to the expiration of the
Original Term or any Renewal Term. Notwithstanding the foregoing, upon a Change
in Control, the Employment Period shall be extended automatically to 3 years
from the date of such Change in Control. (The period of Executive's employment
hereunder within the Original Term and any Renewal Terms is herein referred to
as the "Employment Period.")
2. Employment Duties.
(a) During the Employment Period, Executive shall be employed
in the business of the Company and its affiliates. Executive shall serve as a
corporate officer of the Company with the title of Senior Vice
President-Investments. Executive's duties and authority shall be commensurate
with his title and position with the Company.
(b) Executive agrees to his employment as described in this
Section 2 and a grees to devote substantially all of his working time and
efforts to the performance of his duties under this Agreement; provided that
nothing herein shall be interpreted to preclude Executive from (i) participating
with the prior written consent of the Board of Directors as an officer or
director of, or advisor to, any other entity or organization that is not a
customer or material service provider to the Company or a Competing Enterprise,
as defined in Section 8, so long as such participation does not interfere with
the performance of Executive's duties hereunder, whether or not such entity or
organization is engaged in religious, charitable or other
<PAGE> 2
community or non-profit activities, (ii) investing in any entity or organization
which is not a customer or material service provider to the Company or a
Competing Enterprise, so long as such investment does not interfere with the
performance of Executive's duties hereunder, or (iii) delivering lectures or
fulfilling speaking engagements so long as such lectures or engagements do not
interfere with the performance of Executive's duties hereunder.
(c) In performing his duties hereunder, Executive shall be
available for reasonable travel as the needs of the business require. Executive
shall be based in San Jose, California, or otherwise in the greater San
Francisco Bay area.
(d) Breach by either party of any of its respective
obligations under this Section 2 shall be deemed a material breach of that
party's obligations hereunder.
3. Compensation/Benefits. In consideration of Executive's services
hereunder, the Company shall provide Executive the following:
(a) Base Salary. During the Employment Period, the Executive
shall receive an annual rate of base salary ("Base Salary") in an amount not
less than $270,000. Executive's Base Salary will be reviewed by the Company as
of the first anniversary of the Effective Date, and may be adjusted upward (but
not downward) at such time to reflect any inequities in compensation. Commencing
as of January 1, 2000, Executive's Base Salary shall be reviewed no less
frequently than annually by the Company and may be adjusted upward (but not
downward) by the Company. Upon such annual review during the Renewal Term, if
any, Executive's Base Salary shall be increased to the greatest of (i) an amount
equal to Base Salary for the prior year plus 5%, (ii) a factor measured by the
increase, if any, in the Consumer Price Index for Wage Earners and Clerical
Workers (CPI-W) (City Average for New York Northern New Jersey - Long Island
1982-84=100), as published by the Bureau of Labor Statistics, for the prior
calendar year (the "CPI Adjustment") or (iii) such greater amount as may be
agreed by Executive and the Company. Base Salary shall be payable in accordance
with the Company's normal business practices, but in no event less frequently
than monthly.
(b) Bonuses. Commencing at the close of each fiscal year
during the Employment Period, the Company shall review the performance of the
Company and of Executive during the prior fiscal year, and the Company may
provide Executive with additional compensation as a bonus if the Board, or any
compensation committee hereof, in its discretion, determines that Executive's
contribution to the Company warrants such additional payment and the Company's
anticipated financial performance of the present period permits such payment.
The bonuses hereunder shall be paid as a lump sum not later than 60 days after
the end of the Company's preceding fiscal year.
(c) Medical Insurance/Physical. During the Employment Period,
the Company shall provide to Executive and Executive's immediate family a
comprehensive policy of health insurance. During the Employment Period,
Executive shall be entitled to a comprehensive annual physical performed, at the
expense of the Company by the physician or medical group of Executive's
choosing.
(d) Life Insurance/Disability Insurance. As of the Effective
Date, during the Employment Period, Executive will receive a split dollar life
insurance agreement and comprehensive disability policy comparable to those
provided to comparable Avalon executives. Such life insurance amount shall equal
$1,500,000, and both the life insurance and disability policy shall be subject
to evidence of Executive's insurability. Executive agrees to
<PAGE> 3
submit to such medical examinations as may be required in order to establish or
maintain such policies of insurance.
(e) Vacations. Executive shall be entitled to reasonable paid
vacations during the Employment Period in accordance with the then regular
procedures of the Company governing executives, not to exceed 6 weeks per annum,
in the aggregate.
(f) Office/Secretary, etc. During the Employment Period,
Executive shall be entitled to secretarial services and a private office
commensurate with his title and duties.
(g) Company Stock Option. Notwithstanding the consummation of
the Merger, the Company granted to Executive on March 8, 1998, a non-qualified
employee stock option to purchase 70,000 shares of common stock of the Company,
par value $.01 per share (the "Company Stock Option"). The Company Stock Option
was granted at an exercise price equal to $37.00. The Company Stock Option was
granted with a 10-year term and shall be exercisable as to 100% of the shares
covered thereby on the tenth anniversary of the date of grant so long as
Executive remains employed by the Company or one of its affiliates; provided,
that, if the Merger is consummated, the Company Stock Option shall be
exercisable to the extent of 33 1/3% of the shares covered thereby on each of
the first three anniversaries of the Effective Date, so long as Executive
remains employed by the Company or one of its affiliates. Upon termination of
Executive's employment, vesting and exercisability of the Company Stock Option
shall be governed by the terms of the stock option agreement and this Agreement,
as applicable. During the Employment Period, Executive shall be eligible for
future employee stock option grants on the same basis as other senior management
of the Company.
(h) Automobile. The Company shall provide Executive with a
monthly car allowance during the Employment Period of not less than $750 per
month (adjusted annually for inflation by the CPI Adjustment); provided that, at
Executive's election, the Company may instead purchase or lease, and maintain
insurance for, an automobile of comparable value for use by Executive, who shall
be responsible for maintaining such automobile, at his own expense, with the
same standard of care Executive applies to his own property and as may be
required under any applicable lease agreement.
(i) Company Loan. Executive has an outstanding loan (the
"Company Loan") from the Company (currently $97,600). On January 1st of each
year during the Employment Period, 25% of the Company Loan will be forgiven. In
the event that Executive's employment with the Company is terminated by the
Company without Cause, any outstanding balance under the Company Loan will be
forgiven by the Company. In the event that Executive's employment with the
Company is terminated under any circumstances other than as described in the
preceding sentence, the Company Loan will be converted to a fifteen-year
amortization schedule with a five-year balloon payment and will bear interest at
the average market rate applicable at such time for a fifteen-year first
mortgage residential loan.
(j) Other Benefits. During the Employment Period, the Company
shall provide to Executive such other benefits, excluding severance benefits,
but including the right to participate in such retirement or pension plans, as
are made generally available to executives of the Company from time to time.
<PAGE> 4
4. Expenses/Indemnification.
(a) During the Employment Period, the Company shall reimburse
Executive for the reasonable business expenses incurred by Executive in the
course of performing his duties for the Company hereunder, upon submission of
invoices, vouchers or other appropriate documentation, as may be required in
accordance with the policies in effect from time to time for executive employees
of the Company.
(b) To the fullest extent permitted by law, the Company shall
indemnify Executive with respect to any actions commenced against Executive in
his capacity as an officer or director or former officer or director of the
Company, or any affiliate thereof for which he may render service in such
capacity, whether by or on behalf of the Company, its shareholders or third
parties, and the Company shall advance to Executive on a timely basis an amount
equal to the reasonable fees and expenses incurred in defending such actions,
after receipt of an itemized request for such advance, and an undertaking from
Executive to repay the amount of such advance, with interest at a reasonable
rate from the date of the request, as determined by the Company, if it shall
ultimately be determined that he is not entitled to be indemnified against such
expenses. The Company agrees to use its best efforts to secure and maintain
officers and directors' liability insurance with respect to Executive.
5. Employer's Authority/Policies.
(a) General. Executive agrees to observe and comply with the
rules and regulations of the Company as adopted by its Board respecting the
performance of his duties and to carry out and perform orders, directions and
policies communicated to him from time to time by the Board.
(b) Ethics Policies. Executive agrees to comply with and be
bound by the Ethics Policies of the Company, as reflected in the attachment at
Annex A hereto and made a part hereof.
6. Records/Nondisclosure/Company Policies.
(a) General. All records, financial statements and similar
documents obtained, reviewed or compiled by Executive in the course of the
performance by him of services for the Company, whether or not confidential
information or trade secrets, shall be the exclusive property of the Company.
Executive shall have no rights in such documents upon any termination of this
Agreement.
(b) Nondisclosure Agreement. Without limitation of the
Company's rights under Section 6(a), Executive agrees to abide by and be bound
by the Nondisclosure Agreement of the Company executed by Executive and the
Company as reflected in the attachment at Annex B and made a part hereof.
7. Termination; Severance and Related Matters.
(a) At-Will Employment. Executive's employment hereunder is
"at will" and, therefore, may be terminated at any time, with or without Cause,
at the option of the Company, subject only to the severance obligations under
this Section 7. Upon any termination hereunder, the Employment Period shall
expire.
<PAGE> 5
(b) Definitions. For purposes of this Section 7, the following
terms shall have the indicated definitions:
(1) Cause. "Cause" shall mean:
(i) Executive is convicted of or enters a plea of
nolo contendere to an act which is defined as a felony under any
federal, state or local law, not based upon a traffic violation,
which conviction or plea has or can be expected to have, in the
good faith opinion of the Board of Directors, a material adverse
impact on the business or reputation of the Company;
(ii) any one or more acts of theft, larceny,
embezzlement, fraud or material intentional misappropriation from
or with respect to the Company;
(iii) a breach by Executive of his fiduciary duties
under Maryland law as an officer;
(iv) Executive's commission of any one or more
acts of gross negligence or willful misconduct which in the good
faith opinion of the Board of Directors has resulted in material
harm to the business or reputation of the Company; or
(v) default by Executive in the performance of
his material duties under this Agreement, without correction of
such action within 15 days of written notice thereof.
Notwithstanding the foregoing, no termination of Executive's employment
by the Company shall be treated as for Cause or be effective until and unless
all of the steps described in subparagraphs (i) through (iii) below have been
complied with:
Notice of intention to terminate for Cause has been given by the
Company within 120 days after the Board of Directors learns of the act, failure
or event (or latest in a series of acts, failures or events) constituting
"Cause";
The Board of Directors has voted (at a meeting of the Board of
Directors duly called and held as to which termination of Executive is an agenda
item) to terminate Executive for Cause after Executive has been given notice of
the particular acts or circumstances which are the basis for the termination for
Cause and has been afforded at least 20 days notice after the meeting and an
opportunity to present his position in writing; and
The Board of Directors has given a Notice of Termination to
Executive within 20 days of such Board meeting.
The Company may suspend Executive with pay at any time during the period
commencing with the giving of notice to Executive under clause (i) above until
final Notice of Termination is given under clause (iii) above. Upon the giving
of notice as provided in clause (iii) above, no further payments shall be due
Executive.
<PAGE> 6
(2) Change in Control. A "Change in Control" shall mean the
occurrence of any one or more of the following events following the Effective
Date:
(i) Any individual, entity or group (a "Person") within
the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the "Act") (other than the Company, any corporation,
partnership, trust or other entity controlled by the Company (a
"Subsidiary"), or any trustee, fiduciary or other person or entity
holding securities under any employee benefit plan or trust of the
Company or any of its Subsidiaries), together with all "affiliates" and
"associates" (as such terms are defined in Rule 12b-2 under the Act) of
such Person, shall become the "beneficial owner" (as such term is
defined in Rule 13d-3 under the Act) of securities of the Company
representing 30% or more of the combined voting power of the Company's
then outstanding securities having the right to vote generally in an
election of the Company's Board of Directors ("Voting Securities"),
other than as a result of (A) an acquisition of securities directly from
the Company or any Subsidiary or (B) an acquisition by any corporation
pursuant to a reorganization, consolidation or merger if, following such
reorganization, consolidation or merger the conditions described in
clauses (A), (B) and (C) of subparagraph (iii) of this Section 7(b)(2)
are satisfied; or
(ii) Individuals who, as of the Effective Date,
constitute the Company's Board of Directors (the "Incumbent Directors")
cease for any reason to constitute at least a majority of the Board,
provided, however, that any individual becoming a director of the
Company subsequent to the date hereof (excluding, for this purpose, (A)
any such individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election
of members of the Board of Directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors, including by reason of agreement intended
to avoid or settle any such actual or threatened contest or
solicitation, and (B) any individual whose initial assumption of office
is in connection with a reorganization, merger or consolidation,
involving an unrelated entity and occurring during the Employment
Period), whose election or nomination for election by the Company's
shareholders was approved by a vote of at least a majority of the
persons then comprising Incumbent Directors shall for purposes of this
Agreement be considered an Incumbent Director; or
(iii) Consummation of a reorganization, merger or
consolidation of the Company, unless, following such reorganization,
merger or consolidation, (A) more than 50% of, respectively, the then
outstanding shares of common stock of the corporation resulting from
such reorganization, merger or consolidation and the combined voting
power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all
of the individuals and entities who were the beneficial owners,
respectively, of the outstanding Voting Securities immediately prior to
such reorganization, merger or consolidation, (B) no Person (excluding
the Company, any employee benefit plan (or related trust) of the
Company, a Subsidiary or the corporation resulting from such
reorganization, merger or consolidation or any subsidiary thereof, and
any Person beneficially owning, immediately prior to such
reorganization, merger or consolidation, directly or indirectly, 30% or
more of the outstanding Voting Securities), beneficially owns, directly
or indirectly, 30% or more of, respectively, the then outstanding shares
of common stock of the corporation
<PAGE> 7
resulting from such reorganization, merger or consolidation or the
combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors, and
(C) at least a majority of the members of the board of directors of the
corporation resulting from such reorganization, merger or consolidation
were members of the Incumbent Board at the time of the execution of the
initial agreement providing for such reorganization, merger or
consolidation;
(iv) Approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company; or
(v) The sale, lease, exchange or other disposition of
all or substantially all of the assets of the Company, other than to a
corporation, with respect to which following such sale, lease, exchange
or other disposition (A) more than 50% of, respectively, the then
outstanding shares of common stock of such corporation and the combined
voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by all or substantially
all of the individuals and entities who were the beneficial owners of
the outstanding Voting Securities immediately prior to such sale, lease,
exchange or other disposition, (B) no Person (excluding the Company and
any employee benefit plan (or related trust) of the Company or a
Subsidiary or such corporation or a subsidiary thereof and any Person
beneficially owning, immediately prior to such sale, lease, exchange or
other disposition, directly or indirectly, 30% or more of the
outstanding Voting Securities), beneficially owns, directly or
indirectly, 30% or more of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors and (C) at least a majority of
the members of the board of directors of such corporation were members
of the Incumbent Board at the time of the execution of the initial
agreement or action of the Board of Directors providing for such sale,
lease, exchange or other disposition of assets of the Company.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed
to have occurred for purposes of this Agreement solely as the result of an
acquisition of securities by the Company which, by reducing the number of shares
of Voting Securities outstanding, increases the proportionate voting power
represented by the Voting Securities beneficially owned by any Person to 30% or
more of the combined voting power of all then outstanding Voting Securities;
provided, however, that if any Person referred to in this sentence shall
thereafter become the beneficial owner of any additional shares of Stock or
other Voting Securities (other than pursuant to a stock split, stock dividend,
or similar transaction), then a "Change in Control" shall be deemed to have
occurred for purposes of this Agreement.
(3) Complete Change in Control. A "Complete Change in Control"
shall mean that a Change in Control has occurred, after modifying the definition
of "Change in Control" by deleting clause (i) from Section 7(b)(2) of this
Agreement.
(4) Constructive Termination Without Cause. "Constructive
Termination Without Cause" shall mean a termination of Executive's employment
initiated by Executive not later than 12 months following the occurrence (not
including any time during which an arbitration proceeding referenced below is
pending), without Executive's prior written consent, of one or more of the
following events (or the latest to occur in a series of events), and effected
<PAGE> 8
after giving the Company not less than 10 working days' written notice of the
specific act or acts relied upon and right to cure:
(i) a material adverse change in the functions, duties
or responsibilities of Executive's position which would reduce the
level, importance or scope of such position; or any removal of Executive
from or failure to reappoint or reelect Executive to any position set
forth in this Agreement, except in connection with the termination of
Executive's employment for Disability, Cause, as a result of Executive's
death or by Executive other than for a Constructive Termination Without
Cause;
(ii) any material breach by the Company of this
Agreement;
(iii) any purported termination of Executive's employment
for Cause by the Company which does not comply with the terms of Section
7(b)(1) of this Agreement;
(iv) the failure of the Company to obtain an agreement,
satisfactory to the Executive, from any successor or assign of the
Company, to assume and agree to perform this Agreement, as contemplated
in Section 10 of this Agreement;
(v) the failure by the Company to continue in effect
any compensation plan in which Executive participates immediately prior
to a Change in Control which is material to Executive's total
compensation, unless comparable alternative arrangements (embodied in
ongoing substitute or alternative plans) have been implemented with
respect to such plans, or the failure by the Company to continue
Executive's participation therein (or in such substitute or alternative
plans) on a basis not materially less favorable, in terms of the amount
of benefits provided and the level of Executive's participation relative
to other participants, as existed during the last completed fiscal year
of the Company prior to the Change in Control;
(vi) the relocation of the Company's San Jose offices to
a new location more than fifty (50) miles from San Jose or the failure
to locate Executive's own office at the San Jose office (or at the
office to which such office is relocated which is within 50 miles of San
Jose); or
(vii) any termination of employment by the Executive for
any reason during the 12-month period immediately following a Complete
Change in Control of the Company.
Notwithstanding the foregoing, a Constructive Termination Without Cause shall
not be treated as having occurred unless Executive has given a final Notice of
Termination delivered after expiration of the Company's cure period. Executive
or the Company may, at any time after the expiration of the Company's cure
period and either prior to or up until three months after giving a final Notice
of Termination, commence an arbitration proceeding to determine the question of
whether, taking into account the actions complained of and any efforts made by
the Company to cure such actions, a termination by Executive of his employment
should be treated as a Constructive Termination Without Cause for purposes of
this Agreement. If the Executive or the Company commences such a proceeding
prior to delivery by Executive of a final Notice of Termination, the
commencement of such a proceeding shall be without prejudice to either party and
Executive's and the Company's rights and obligations under this Agreement shall
<PAGE> 9
continue unaffected unless and until the arbitrator has determined such question
in the affirmative, or, if earlier, the date on which Executive or the Company
has delivered a Notice of Termination in accordance with the provisions of this
Agreement.
(5) Covered Average Compensation. "Covered Average
Compensation" shall mean the sum of Executive's Covered Compensation as
calculated for the calendar year in which the Date of Termination occurs and for
each of the two preceding calendar years, divided by three.
(6) Covered Compensation. "Covered Compensation," for any
calendar year, shall mean an amount equal to the sum of (i) Executive's Base
Salary for the calendar year (disregarding any decreases made effective during
the Employment Period), (ii) the cash bonus actually earned by Executive with
respect to such calendar year, and (iii) the value of all stock and other
equity-based compensation awards made to Executive during such calendar year.
Covered Compensation shall be calculated according to the following
rules:
(A) In valuing awards for purposes of clause (iii)
above, all such awards shall be treated as if fully vested when granted,
stock grants shall be valued by reference to the fair market value on
the date of grant of the Company's common stock, par value $.01 per
share, and other equity-based compensation awards shall be valued at the
value established by the Compensation Committee of the Board of
Directors on the date of grant.
(B) In determining the cash bonus actually paid with
respect to a calendar year, if no cash bonus has been paid with respect
to the calendar year in which the Date of Termination occurs, the cash
bonus paid with respect to the immediately preceding calendar year shall
be assumed to have been paid in each of the current and immediately
preceding calendar years, and if no cash bonus has been paid by the Date
of Termination with respect to the immediately preceding calendar year,
the cash bonus paid with respect to the second preceding calendar year
shall be assumed to have been paid in all three of the calendar years
taken into account in determining Covered Average Compensation.
(C) If any cash bonus paid with respect to the current
or immediately preceding calendar year was paid within three months of
Executive's Date of Termination, and is lower than the last cash bonus
paid more than three months from the Date of Termination, any such cash
bonus paid within three months of the Date of Termination shall be
disregarded and the last cash bonus paid more than three months from the
Date of Termination shall be substituted for each cash bonus so
disregarded.
(D) In determining the amount of stock and other
equity-based compensation awards made during a calendar year during the
averaging period, rules similar to those set forth in subparagraphs (B)
and (C) of this Section 7(b)(6) shall be followed, except that all
awards made in connection with the Company's initial public offering
shall be disregarded.
(7) Disability. "Disability" shall mean Executive has been
determined to be disabled and to qualify for long-term disability benefits under
the long-term disability insurance policy obtained pursuant to Section 3(d) of
this Agreement.
<PAGE> 10
(c) Rights Upon Termination.
(i) Payment of Benefits Earned Through Date of
Termination. Upon any termination of Executive's employment during the
Employment Period, Executive, or his estate, shall in all events be paid
all accrued but unpaid Base Salary and all earned but unpaid cash
incentive compensation earned through his Date of Termination. Executive
shall also retain all such rights with respect to vested equity-based
awards as are provided under the circumstances under the applicable
grant or award agreement, and shall be entitled to all other benefits
which are provided under the circumstances in accordance with the
provisions of the Company's generally applicable employee benefit plans,
practices and policies, other than severance plans.
(ii) Death. In the event of Executive's death during the
Employment Period, the Company shall, in addition to paying the amounts
set forth in Section 7(c)(i), take whatever action is necessary to cause
all of Executive's unvested equity-based awards to become fully vested
as of the date of death and, in the case of equity-based awards which
have an exercise schedule, to become fully exercisable and continue to
be exercisable for such period as is provided in the case of vested and
exercisable awards in the event of death under the terms of the
applicable award agreements.
(iii) Disability. In the event the Company elects to
terminate Executive's employment during the Employment Period on account
of Disability, the Company shall, in addition to paying the amounts set
forth in Section 7(c)(i), pay to Executive, in one lump sum, no later
than 31 days following the Date of Termination, an amount equal to two
times Covered Average Compensation. The Company shall also, commencing
upon the Date of Termination:
(A) Continue, without cost to Executive, benefits
comparable to the medical and disability benefits provided to
Executive immediately prior to the Date of Termination under
Section 3(c) and Section 3(d) for a period of 24 months following
the Date of Termination or until such earlier date as Executive
obtains comparable benefits through other employment;
(B) Continue to pay, or reimburse Executive, for
all premiums then due or thereafter payable on the whole-life
portion of the split-dollar insurance policy referenced under
Section 3(d) for so long as such payments are due; and
(C) Take whatever action is necessary to cause
Executive to become vested as of the Date of Termination in all
stock options, restricted stock grants, and all other
equity-based awards and be entitled to exercise and continue to
exercise all stock options and all other equity-based awards
having an exercise schedule and to retain such grants and awards
to the same extent as if they were vested upon termination of
employment in accordance with their terms.
(iv) Non-Renewal. In the event the Company gives
Executive a notice of non-renewal pursuant to Section 1 above, the
Company shall, in addition to paying the amounts set forth in Section
7(c)(i), commencing upon the Date of
<PAGE> 11
Termination:
(A) Pay to Executive, for 12 consecutive months,
commencing with the first day of the month immediately following
the Date of Termination, a monthly amount equal to the result
obtained by dividing Covered Average Compensation by twelve;
(B) Continue, without cost to Executive, benefits
comparable to the medical and disability benefits provided to
Executive immediately prior to the Date of Termination under
Section 3(c) and Section 3(d) for a period of 24 months following
the Date of Termination or until such earlier date as Executive
obtains comparable benefits through other employment; and
(C) Take whatever action is necessary to cause
Executive to become vested as of the Date of Termination in all
stock options, restricted stock grants, and all other
equity-based awards and be entitled to exercise and continue to
exercise all stock options and all other equity-based awards
having an exercise schedule and to retain such grants and awards
to the same extent as if they were vested upon termination of
employment in accordance with their terms; and
(D) Continue to pay, or reimburse Executive for,
all premiums then due or thereafter payable on the whole-life
portion of the split-dollar insurance policy referenced under
Section 3(d) for so long as such payments are due.
(v) Termination Without Cause; Constructive Termination
Without Cause. In the event the Company or any successor to the Company
terminates Executive's employment without Cause, or if Executive
terminates his employment in a Constructive Termination without Cause,
the Company shall, in addition to paying the amounts provided under
Section 7(c)(i), pay to Executive, in one lump sum no later than 31 days
following the Date of Termination, an amount equal to three times
Covered Average Compensation. The Company shall also, commencing upon
the Date of Termination:
(A) Continue, without cost to Executive, benefits
comparable to the medical and disability benefits provided to
Executive immediately prior to the Date of Termination under
Section 3(c) and Section 3(d) for a period of 36 months following
the Date of Termination or until such earlier date as Executive
obtains comparable benefits through other employment;
(B) Continue to pay, or reimburse Executive, for
so long as such payments are due, all premiums then due or
payable on the whole-life portion of the split-dollar insurance
policy referenced under Section 3(d); and
(C) Take whatever action is necessary to cause
Executive to become vested as of the Date of Termination in all
stock options, restricted stock grants, and all other
equity-based awards and be entitled to exercise and continue to
exercise all stock options and all other equity-based awards
having an exercise schedule and to retain such grants and awards
to the same extent as if they were vested upon termination of
employment in accordance with their
<PAGE> 12
terms.
(vi) Termination for Cause; Voluntary Resignation. In
the event Executive's employment terminates during the Employment Period
other than in connection with a termination meeting the conditions of
subparagraphs (ii), (iii), (iv), or (v) of this Section 7(c), Executive
shall receive the amounts set forth in Section 7(c)(i) in full
satisfaction of all of his entitlements from the Company. All
equity-based awards not vested as of the Date of Termination shall
terminate (unless otherwise provided in the applicable award agreement)
and Executive shall have no further entitlements with respect thereto.
(d) Additional Benefits.
(i) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution by the Company to or for the benefit of Executive, whether
paid or payable or distributed or distributable (1) pursuant to the
terms of Section 7 of this Agreement, (2) pursuant to or in connection
with any compensatory or employee benefit plan, agreement or
arrangement, including but not limited to any stock options, restricted
or unrestricted stock grants issued to or for the benefit of Executive
and forgiveness of any loans by the Company to Executive or (3)
otherwise (collectively, "Severance Payments"), would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986,
as amended (the "Code"), and any interest or penalties are incurred by
Executive with respect to such excise tax (such excise tax, together
with any such interest and penalties, are hereinafter collectively
referred to as the "Excise Tax"), then Executive shall be entitled to
receive an additional payment (a "Partial Gross-Up Payment"), such that
the net amount retained by Executive, before accrual or payment of any
Federal, state or local income tax or employment tax, but after accrual
or payment of the Excise Tax attributable to the Partial Gross-Up
Payment, is equal to the Excise Tax on the Severance Payments.
(ii) Subject to the provisions of Section 7(d)(iii), all
determinations required to be made under this Section 7, including
whether a Partial Gross-Up Payment is required and the amount of such
Partial Gross-Up Payment, shall be made by Coopers & Lybrand LLP or such
other nationally recognized accounting firm as may at that time be the
Company's independent public accountants immediately prior to the Change
in Control (the "Accounting Firm"), which shall provide detailed
supporting calculations both to the Company and Executive within 15
business days of the Date of Termination, if applicable, or at such
earlier time as is reasonably requested by the Company or Executive. The
initial Partial Gross-Up Payment, if any, as determined pursuant to this
Section 7(d)(ii), shall be paid to Executive within five days of the
receipt of the Accounting Firm's determination. If the Accounting Firm
determines that no Excise Tax is payable by Executive, the Company shall
furnish Executive with an opinion of counsel that failure to report the
Excise Tax on Executive's applicable federal income tax return would not
result in the imposition of a negligence or similar penalty. Any
determination by the Accounting Firm shall be binding upon the Company
and Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Partial Gross-Up Payments
which will not have been made by the Company should have been made (an
"Underpayment"). In the event that the Company exhausts its remedies
pursuant to Section 7(d)(iii) and
<PAGE> 13
Executive thereafter is required to make a payment of any Excise Tax,
the Accounting Firm shall determine the amount of the Underpayment that
has occurred, consistent with the calculations required to be made
hereunder, and any such Underpayment, and any interest and penalties
imposed on the Underpayment and required to be paid by Executive in
connection with the proceedings described in Section 7(d)(iii), and any
related legal and accounting expenses, shall be promptly paid by the
Company to or for the benefit of Executive.
(iii) Executive shall notify the Company in writing of
any claim by the Internal Revenue Service that, if successful, would
require the payment by the Company of the Partial Gross-Up Payment. Such
notification shall be given as soon as practicable but no later than 10
business days after Executive knows of such claim and shall apprise the
Company of the nature of such claim and the date on which such claim is
requested to be paid. Executive shall not pay such claim prior to the
expiration of the 30-day period following the date on which he gives
such notice to the Company (or such shorter period ending on the date
that any payment of taxes with respect to such claim is due). If the
Company notifies Executive in writing prior to the expiration of such
period that it desires to contest such claim, Executive shall:
(A) give the Company any information reasonably
requested by the Company relating to such claim,
(B) take such action in connection with
contesting such claim as the Company shall reasonably request in
writing from time to time, including, without limitation,
accepting legal representation with respect to such claim by an
attorney selected by the Company,
(C) cooperate with the Company in good faith in
order effectively to contest such claim, and
(D) permit the Company to participate in any
proceedings relating to such claim; provided, however that the
Company shall bear and pay directly all costs and expenses
attributable to the failure to pay the Excise Tax (including
related additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive
harmless, for any Excise Tax up to an amount not exceeding the
Partial Gross-Up Payment, including interest and penalties with
respect thereto, imposed as a result of such representation, and
payment of related legal and accounting costs and expenses (the
"Indemnification Limit"). Without limitation on the foregoing
provisions of this Section 7(d)(iii), the Company shall control
all proceedings taken in connection with such contest and, at its
sole option may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option,
either direct Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and
Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company
shall determine; provided, however, that if the Company directs
Executive to pay such claim and sue for a refund, the Company
shall advance so much of the amount of such payment as does not
exceed the Excise Tax, and related interest and penalties, to
Executive
<PAGE> 14
on an interest-free basis and shall indemnify and hold Executive
harmless, from any related legal and accounting costs and
expenses, and from any Excise Tax, including related interest or
penalties imposed with respect to such advance or with respect to
any imputed income with respect to such advance up to an amount
not exceeding the Indemnification Limit; and further provided
that any extension of the statute of limitations relating to
payment of taxes for the taxable year of Executive with respect
to which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, the Company's
control of the contest shall be limited to issues with respect to
which a Partial Gross-Up Payment would be payable hereunder and
Executive shall be entitled to settle or contest, as the case may
be, any other issues raised by the Internal Revenue Service or
any other taxing authority.
(iv) If, after the receipt by Executive of an amount
advanced by the Company pursuant to Section 7(d)(iii), Executive becomes
entitled to receive any refund with respect to such claim, Executive
shall (subject to the Company's complying with the requirements of
Section 7(d)(iii)) promptly pay to the Company so much of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto) (the "Refund") as is equal to (A) if the Company
advanced or paid the entire amount required to be so advanced or paid
pursuant to Section 7(d)(iii) hereof (the "Required Section 7(d)
Advance"), the aggregate amount advanced or paid by the Company pursuant
to this Section 7(d) less the portion of such amount advanced to
Executive to reimburse him for related legal and accounting costs, or
(B) if the Company advanced or paid less than the Required Section 7(d)
Advance, so much of the aggregate amount so advanced or paid by the
Company pursuant to this Section 7(d) as is equal to the difference, if
any, between (C) the amount refunded to Executive with respect to such
claim and (D) the sum of the portion of the Required Section 7(d)
Advance that was paid by Executive and not paid or advanced by the
Company plus Executive's related legal and accounting fees, as
applicable. If, after the receipt by Executive of an amount advanced by
the Company pursuant to Section 7(d)(iii), a determination is made that
Executive shall not be entitled to any refund with respect to such claim
and the Company does not notify Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 days after
such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to
the extent thereof, the amount of Partial Gross-Up Payment required to
be paid.
(e) Notice of Termination. Notice of non-renewal of this
Agreement pursuant to Section 1 hereof or of any termination of Executive's
employment (other than by reason of death) shall be communicated by written
notice (a "Notice of Termination") from one party hereto to the other party
hereto in accordance with this Section 7 and Section 9.
(f) Date of Termination. "Date of Termination," with respect
to any termination of Executive's employment during the Employment Period, shall
mean (i) if Executive's employment is terminated for Disability, 30 days after
Notice of Termination is given (provided that Executive shall not have returned
to the full-time performance of Executive's duties during such 30 day period),
(ii) if Executive's employment is terminated for Cause, the date on which a
Notice of Termination is given which complies with the requirements of Section
7(b)(1) hereof, and (iii) if Executive's employment is terminated for any other
reason, the date specified in the Notice of Termination. In the case of a
termination
<PAGE> 15
by the Company other than for Cause, the Date of Termination shall not be less
than 30 days after the Notice of Termination is given. In the case of a
termination by Executive, the Date of Termination shall not be less than 15 days
from the date such Notice of Termination is given. Notwithstanding the
foregoing, in the event that Executive gives a Notice of Termination to the
Company, the Company may unilaterally accelerate the Date of Termination and
such acceleration shall not result in the termination being treated as a
Termination without Cause. Upon any termination of his employment, Executive
will concurrently resign his membership on the Board of Directors.
(g) No Mitigation. The Company agrees that, if Executive's
employment by the Company is terminated during the term of this Agreement,
Executive is not required to seek other employment, or to attempt in any way to
reduce any amounts payable to Executive by the Company pursuant to Section
7(d)(i) hereof. Further, the amount of any payment provided for in this
Agreement shall not be reduced by any compensation earned by Executive as the
result of employment by another employer, by retirement benefits, or, except for
amounts then due and payable in accordance with the terms of any promissory
notes given by Executive in favor of the Company, by offset against any amount
claimed to be owed by Executive to the Company or otherwise.
(h) Nature of Payments. The amounts due under this Section 7
are in the nature of severance payments considered to be reasonable by the
Company and are not in the nature of a penalty. Such amounts are in full
satisfaction of all claims Executive may have in respect of his employment by
the Company or its affiliates and are provided as the sole and exclusive
benefits to be provided to Executive, his estate, or his beneficiaries in
respect of his termination of employment from the Company or its affiliates.
8. Non-Competition; Non-Solicitation; Specific Enforcement.
(a) Non-Competition. Because Executive's services to the
Company are special and because Executive has access to the Company's
confidential information, Executive covenants and agrees that, during the
Employment Period and, for a period of one year following the Date of
Termination by the Company for Cause or a termination by Executive (other than a
Constructive Termination Without Cause) prior to a Change in Control, Executive
shall not, without the prior written consent of the Board of Directors, become
associated with, or engage in any "Restricted Activities" with respect to any
"Competing Enterprise," as such terms are hereinafter defined, whether as an
officer, employee, principal, partner, agent, consultant, independent contractor
or shareholder. "Competing Enterprise," for purposes of this Agreement, shall
mean any person, corporation, partnership, venture or other entity which (a) is
a publicly traded real estate investment trust, or (b) is engaged in the
business of managing, owning, leasing or joint venturing residential real estate
within 30 miles of residential real estate owned or under management by the
Company or its affiliates. "Restricted Activities," for purposes of this
Agreement, shall mean executive, managerial, directorial, administrative,
strategic, business development or supervisory responsibilities and activities
relating to all aspects of residential real estate ownership, management,
residential real estate franchising, and residential real estate
joint-venturing.
(b) Non-Solicitation. During the Employment Period, and for a
period of one year following the Date of Termination, Executive shall not,
without the prior written consent of the Company, except in the course of
carrying out his duties hereunder, solicit or attempt to solicit for employment
with or on behalf of any corporation, partnership, venture or other business
entity, any employee of the Company or any of its affiliates or any person who
<PAGE> 16
was formerly employed by the Company or any of its affiliates within the
preceding six months, unless such person's employment was terminated by the
Company or any of such affiliates.
(c) Specific Enforcement. Executive and the Company agree that
the restrictions, prohibitions and other provisions of this Section 8 are
reasonable, fair and equitable in scope, terms, and duration, are necessary to
protect the legitimate business interests of the Company and are a material
inducement to the Company to enter into this Agreement. Should a decision be
made by a court of competent jurisdiction that the character, duration or
geographical scope of the provisions of this Section 8 is unreasonable, the
parties intend and agree that this Agreement shall be construed by the court in
such a manner as to impose all of those restrictions on Executive's conduct that
are reasonable in light of the circumstances and as are necessary to assure to
the Company the benefits of this Agreement. The Company and Executive further
agree that the services to be rendered under this Agreement by Executive are
special, unique and of extraordinary character, and that in the event of the
breach by Executive of the terms and conditions of this Agreement or if
Executive, without the prior consent of the Board of Directors, shall take any
action in violation of this Section 8, the Company will suffer irreparable harm
for which there is no adequate remedy at law. Accordingly, Executive hereby
consents to the entry of a temporary restraining order or ex parte injunction,
in addition to any other remedies available at law or in equity, to enforce the
provisions hereof. Any proceeding or action seeking equitable relief for
violation of this Section 8 must be commenced in the federal or state courts, in
either case in California. Executive and the Company irrevocably and
unconditionally submit to the jurisdiction of such courts and agree to take any
and all future action necessary to submit to the jurisdiction of such courts.
9. Notice. Any notice required or permitted hereunder shall be in
writing and shall be deemed sufficient when given by hand or by nationally
recognized overnight courier or by Express, registered or certified mail,
postage prepaid, return receipt requested, and addressed, if to the Company at
5904 Richmond Avenue, Alexandria, VA 22303, and if to Executive at the address
set forth in the Company records (or to such other address as may be provided by
notice).
10. Miscellaneous. This Agreement, together with Annex A and Annex B,
constitutes the entire agreement between the parties concerning the subjects
hereof and supersedes any and all prior agreements or understandings, including,
without limitation, any plan or agreement providing benefits in the nature of
severance, but excluding benefits provided under other Company plans or
agreements, except to the extent this Agreement provides greater rights than are
provided under such other plans or agreements. As of the Effective Date, this
Agreement supersedes the Prior Agreement which will have no further force or
effect. Executive hereby waives, to the extent applicable, the effect of the
transactions contemplated by the Merger Agreement (or shareholder approval of
such transaction) on any change in control provisions in any Company employee
benefit plan or agreement. This Agreement shall terminate upon termination of
the Merger Agreement and abandonment of the merger contemplated by the Merger
Agreement. This Agreement may not be assigned by Executive without the prior
written consent of the Company, and may be assigned by the Company and shall be
binding upon, and inure to the benefit of, the Company's successors and assigns.
The Company will require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company to assume expressly and agree to perform this
Agreement in the same manner
<PAGE> 17
and to the same extent that the Company would be required to perform it if no
such succession had taken place. As used in this Agreement, "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise. Headings herein are for convenience of reference
only and shall not define, limit or interpret the contents hereof.
11. Amendment. This Agreement may be amended, modified or
supplemented by the mutual consent of the parties in writing, but no oral
amendment, modification or supplement shall be effective. No waiver by either
party of any breach by the other party of any condition or provision contained
in this Agreement to be performed by such other party shall be deemed a waiver
of a similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any waiver must be in writing and signed by Executive or an
authorized officer of the Company, as the case may be.
12. Severability. The provisions of this Agreement are severable. The
invalidity of any provision shall not affect the validity of any other
provision, and each provision of this Agreement shall be valid and enforceable
to the fullest extent permitted by law.
13. Resolution of Disputes.
(a) Procedures and Scope of Arbitration. Except for any
controversy or claim seeking equitable relief pursuant to Section 8 of this
Agreement, all controversies and claims arising under or in connection with this
Agreement or relating to the interpretation, breach or enforcement thereof and
all other disputes between the parties, shall be resolved by expedited, binding
arbitration, to be held in California in accordance with the National Rules of
the American Arbitration Association governing employment disputes (the
"National Rules"). In any proceeding relating to the amount owed to Executive in
connection with his termination of employment, it is the contemplation of the
parties that the only remedy that the arbitrator may award in such a proceeding
is an amount equal to the termination payments, if any, required to be provided
under the applicable provisions of Section 7(c) and, if applicable, Section 7(d)
hereof, to the extent not previously paid, plus the costs of arbitration and
Executive's reasonable attorneys fees and expenses as provided below. Any award
made by such arbitrator shall be final, binding and conclusive on the parties
for all purposes, and judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.
(b) Attorneys Fees.
(i) Reimbursement After Executive Prevails. Except as
otherwise provided in this paragraph, each party shall pay the cost of
his or its own legal fees and expenses incurred in connection with an
arbitration proceeding. Provided an award is made in favor of Executive
in such proceeding, all of his reasonable attorneys fees and expenses
incurred in pursuing or defending such proceeding shall be promptly
reimbursed to Executive by the Company within five days of the entry of
the award.
(ii) Reimbursement in Actions to Stay, Enjoin or
Collect. In any case where the Company or any other person seeks to stay
or enjoin the commencement or continuation of an arbitration proceeding,
whether before or after an award has been made, or where Executive seeks
recovery of amounts due after an award has been made, or where the
Company brings any proceeding challenging or contesting the award, all
of Executive's reasonable attorneys fees and expenses incurred in
connection therewith shall be promptly reimbursed by the Company to
Executive, within five days
<PAGE> 18
of presentation of an itemized request for reimbursement, regardless of
whether Executive prevails, regardless of the forum in which such
proceeding is brought, and regardless of whether a Change in Control has
occurred.
(iii) Reimbursement After a Change in Control. Without
limitation on the foregoing, solely in a proceeding commenced by the
Company or by Executive after a Change in Control has occurred, the
Company shall advance to Executive, within five days of presentation of
an itemized request for reimbursement, all of Executive's legal fees and
expenses incurred in connection therewith, regardless of the forum in
which such proceeding was commenced, subject to delivery of an
undertaking by Executive to reimburse the Company for such advance if he
does not prevail in such proceeding (unless such fees are to be
reimbursed regardless of whether Executive prevails as provided in
clause (ii) above).
14. Survivorship. The provisions of Sections 4(b), 6, 8 and 13 of
this Agreement shall survive Executive's termination of employment. Other
provisions of this Agreement shall survive any termination of Executive's
employment to the extent necessary to the intended preservation of each party's
respective rights and obligations.
15. Board Action. Where an action called for under this Agreement is
required to be taken by the Board of Directors, such action shall be taken by
the vote of not less than a majority of the members then in office and
authorized to vote on the matter.
16. Withholding. All amounts required to be paid by the Company shall
be subject to reduction in order to comply with applicable federal, state and
local tax withholding requirements.
17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument. The execution of this
Agreement may be by actual or facsimile signature.
18. Governing Law. This Agreement shall be construed and regulated in
all respects under the laws of the State of Maryland.
<PAGE> 19
IN WITNESS WHEREOF, this Agreement is entered into as of the date and
year first above written.
Bay Apartment Communities, Inc.
By: /s/ Gilbert M. Meyer
------------------------------------
Its: Chairman
/s/ Jeffrey B. Van Horn
----------------------------------------
Jeffrey B. Van Horn
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") made as of the 9th day of March,
1998 by and between Max L. Gardner ("Employee") and Bay Apartment Communities,
Inc., a Maryland corporation (the "Company").
WHEREAS, Employee and the Company have previously entered into an
Employment Agreement as of November 10, 1995 (the "Prior Agreement"); and
WHEREAS, pursuant to the Agreement and Plan or Merger, by and between
the Company and Avalon Properties, Inc., dated as of March 9, 1998 (the "Merger
Agreement"), Avalon Properties, Inc. will merge into the Company; and
WHEREAS, Employee and the Company desire to enter into a new employment
agreement, effective as of the consummation of the merger contemplated by the
Merger Agreement (the "Effective Date"), to replace the Prior Agreement.
NOW, THEREFORE, the parties hereto do hereby agree as follows:
1. Term. Subject to the consummation of the merger contemplated by the
Merger Agreement, the Company hereby agrees to employ Employee, and Employee
hereby agrees to remain in the employ of the Company subject to the terms and
conditions of this Agreement for the period commencing on the Effective Date and
terminating on the first anniversary of the Effective Date, unless earlier
terminated as provided in Section 9 below. The term of the Agreement shall not
be extended. The period of Employee's employment under the Agreement is herein
referred to as the "Employment Period."
2. Employment. During the Employment Period, Employee shall be employed
as a senior executive officer of the Company with the title of Senior Vice
President-Merger Integration. Employee acknowledges and consents to his removal
as a member of the Board of Directors of the Company (the "Board of Directors")
on the earlier of the date of Company's 1998 annual meeting or the Effective
Date. In the performance of his duties, Employee shall be subject to the
direction of the Chief Executive Officer, the Senior Vice President-Property
Operations and the Board of Directors. Employee's duties and authority shall be
commensurate with his title and position with the Company. Employee agrees to
his employment as described in this Section 2 and agrees to devote substantially
all of his business time and efforts to the business and affairs of the Company.
Employee agrees to serve the Company faithfully and to the best of his ability,
and to perform such services and duties in connection with the business, affairs
and operations of the Company as may be assigned or delegated to him from time
to time by or under, and in accordance with, the authority and direction of the
Board of Directors, and to use his reasonable best efforts in the promotion and
advancement of the Company and its welfare.
<PAGE> 2
3. Noncompetition During Employment Period. Because Employee's services
to the Company are essential and because Employee has access to the Company's
confidential information, Employee covenants and agrees that during the
Employment Period, Employee will be a full-time employee of the Company as
provided in Section 2 hereof and Employee will not, without the express prior
written consent of the Board of Directors invest in any property or any business
or venture which competes, directly or indirectly, with the Company in the
development, construction, acquisition, management, leasing or marketing of
multi-family apartment communities or which investment would require Employee's
active involvement in such business or venture or would materially impair
Employee's ability to perform fully his obligations under this Agreement.
Notwithstanding anything contained herein to the contrary, Employee is not
prohibited by this Section 3 from making investments in any entity that owns,
invests in, refurbishes, manages, leases or markets multi-family apartment
communities if the shares of such entity are publicly traded and Employee's
aggregate investment in such entity constitutes less than 1% of the equity
ownership of such entity or from making passive investments in any properties or
other businesses provided that such investments are first offered to the Company
and refused by the Board of Directors.
4. Non-Solicitation. During the Employment Period and for a period of
one year following the date of any termination of employment, Employee shall
not, without the prior written consent of the Company, except in the course of
carrying out his duties hereunder, solicit or attempt to solicit for employment
with or on behalf of any corporation, partnership, venture or other business
entity, any employee of the Company or any of its affiliates or any person who
was formerly employed by the Company or any of its affiliates within the
preceding six months, unless such person's employment was terminated by the
Company or any of such affiliates. The agreement set forth in this Section 4
shall survive the expiration of the Employment Period and any termination of
this Agreement.
5. Base Salary. During the Employment Period, Employee's salary will be
at the rate of $250,000 per year ("Base Salary"). Base Salary shall be payable
in accordance with the Company's normal business practices for senior executive
officers, but no less frequently than monthly.
6. Initial Stock Option Grant. Notwithstanding the consummation of the
Merger, the Company shall grant to Employee on the date hereof a non-qualified
option to purchase 50,000 shares of common stock of the Company, par value $.01
per share ("Common Stock"), which option shall be referred to hereunder as the
"Company Stock Option". The Company Stock Option shall be granted at an exercise
price equal to $37.00. The Company Stock Option shall be granted with a 10-year
term and shall be exercisable as to 100% of the shares covered thereby on the
tenth anniversary of the date hereof so long as Employee remains employed by the
Company or one of its affiliates; provided, that, if the Merger is consummated,
the Company Stock Option shall be exercisable to the extent of 33 1/3% of the
shares covered thereby on each of the first three anniversaries of the Effective
Date, so long as Employee remains employed by the Company or one of its
affiliates.
2
<PAGE> 3
7. Incentive Compensation. Employee will be eligible for bonus
compensation in an amount up to 75% of the annual Base Salary with a target of
50% ("Bonus Compensation"), subject to proration for any period less than a full
year. The amount of Bonus Compensation to be paid to the Employee will be
determined by the Compensation Committee of the Board of Directors in its sole
and absolute discretion. In addition to Bonus Compensation, Employee will have
an opportunity to earn as long-term incentive compensation up to 2,000
restricted shares of Common Stock and an option to acquire up to 25,000 shares
of Common Stock. Any such grants shall be determined in the sole and absolute
discretion of the Compensation Committee of the Board of Directors.
8. Automobile and Other Benefits.
(a) Automobile. During the Employment Period, the Company shall
provide Employee with a monthly car allowance of not less than $750 per month.
(b) Other Benefits. During the Employment Period, Employee shall
have the right to participate in the Company's 401(k) Savings Plan, and any
health, dental, retirement, pension or other benefit plans that are made
generally available to all full-time employees of the Company from time to time.
Employee shall be entitled to reasonable paid vacation time in accordance with
the then regular procedures of the Company for senior executive officers.
9. Termination.
(a) At-Will Employment. Employee's employment hereunder is "at
will" and the Employment Period may be terminated by the Company at any
time prior to the expiration of the term of this Agreement in Section 1
for any reason upon ten (10) days' written notice to Employee, subject
only to the severance provisions set forth in Section 9(b) hereof.
(b) Certain Benefits upon Termination by Company without Cause or
by Employee With Good Reason. In the event that (A) Employee is
terminated by the Company without Cause (as defined in Section 9(d)
below) on or before the expiration of the Employment Period in Section
1, including termination of employment upon expiration of the Agreement,
or (B) Employee voluntarily terminates his employment for Good Reason
(as defined in 9(d) below), the Company shall continue to pay Employee's
Base Salary for the twelve (12) months immediately following the date of
termination of the Employment Period, at the rate in effect on the date
of termination and on the same periodic payment dates as payment would
have been made to Employee had the Employment Period not been
terminated. In addition, for the twelve (12) month period referred to in
the previous sentence, Employee will be eligible for Bonus Compensation
pursuant to Section 7 and the Company shall pay, for such twelve (12)
month period, for continuation coverage available to Employee under the
Company's health and dental plans and the car allowance under Section
8(a). Upon
3
<PAGE> 4
Employee's termination of employment, all options and restricted stock
awards granted to the Employee prior to March 5, 1998 shall become fully
vested and exercisable on the date of termination under this Section
9(b) and shall continue to be exercisable until the close of business on
the 91st day following said date of termination. With regard to the
Company Stock Option and other stock options and restricted stock grants
awarded under this Agreement, the following shall apply: (i) any stock
option, to the extent vested and exercisable pursuant to the terms of
the original grant agreement, shall continue to be exercisable until the
close of business on the 91st day following the date of termination, and
(ii) any other unvested stock awards, including any unvested restricted
stock or unexercisable stock option (but in no event vested restricted
stock), shall cease vesting and be forfeited on the date of termination.
(c) Termination by the Company for Cause or by Employee Without
Good Reason. In the event that (A) Employee is terminated by the Company
for Cause (as defined in Section 9 (d) below) or (B) Employee
voluntarily terminates his employment without Good Reason (as defined in
Section 9(d) below), then the Employment Period shall terminate as of
the effective date set forth in the written notice of such termination
in (A) or the date of termination in (B) and (i) Employee shall be
entitled to receive only his Base Salary at the rate provided pursuant
to Section 5 which is payable prior to the date of termination, (ii) any
outstanding vested stock options, including the Company Stock Option or
other stock options awarded under this Agreement, to the extent vested,
shall continue to be exercisable until the close of business on the 30th
day following such date of termination and (iii) other unvested stock
awards, including any unvested restricted stock or unexercisable Company
Stock Options (but in no event vested restricted stock), shall cease
vesting and be forfeited on the date of termination.
(d) Definitions. "Cause" shall mean a finding by the Board of
Directors that the Employee has (A) acted with gross negligence or
willful misconduct in connection with the performance of his material
duties hereunder, (B) defaulted in the performance of his material
duties hereunder and has not corrected such action within fifteen (15)
days of receipt of written notice thereof; (C) committed a material act
of common law fraud against the Company or its employees, which act has
had an adverse impact on the financial affairs of the Company; or (D)
been convicted of a felony and such conviction has had an adverse effect
on the interests of the Company. "Good Reason" shall mean (I) a failure
by the Board of Directors to elect Employee to offices with the same or
substantially the same duties and responsibilities as set forth in
Section 2, or (ii) a failure by the Company to comply with the
provisions of Sections 5, 6 or 7, provided that the Employee delivers
written notice of any such failure to the Board of Directors.
10. Remedies For Breach. If Employee breaches the terms of this
Agreement, in addition to any other remedies which it may have, the Company may
terminate Employee's employment and any further participation in any employee
plan in accordance with employment policies of the Company, as in effect from
time to time, and Employee shall
4
<PAGE> 5
forfeit any further compensation. In addition, the provisions of this Agreement
may be specifically enforced if not performed according to their terms. Without
limiting the generality of the foregoing, the parties acknowledge that the
Company would be irreparably damaged and there would be no adequate remedy at
law for Employee's breach of Sections 3, 4 and 11 hereof and, accordingly,
Employee hereby consents to the entry of any temporary restraining order or
preliminary or ex parte injunction, in addition to any other remedies available
at law or in equity, to enforce the provisions thereof. This Section 10 and the
agreement hereunder shall survive the termination of this Agreement.
11. Records and Nondisclosure of Confidential Information. All records,
financial statements and similar documents obtained, reviewed or compiled by
Employee in the course of the performance by him of services for the Company,
whether or not confidential information or trade secrets, shall be the exclusive
property of the Company. Employee shall have no rights in such documents upon
any termination of this Agreement. Employee agrees to comply with and be bound
by the Company's Policy on Securities Trading and Disclosure of Confidential
Information previously delivered to Employee and made a part hereof. The
agreement set forth in this Section 11 shall survive the expiration of the
Employment Period and any termination of this Agreement.
12. Waiver. The failure of the Company to require the performance of any
term or obligation provided for herein, or the waiver by the Company of any
breach of this Agreement, shall not prevent enforcement of such term or
obligation or be deemed a waiver of any subsequent breach.
13. Conflicting Agreements. Employee hereby represents and warrants that
the execution of this Agreement and the performance of his duties and
obligations hereunder will not breach or be in conflict with any other agreement
to which he is a party or is bound, and that he is not now subject to any
covenants against competition or similar covenants in favor of any other person
or entity which could affect the performance of his duties hereunder.
14. Entire Agreement. This Agreement constitutes the entire agreement
among the parties hereto with respect to the subject matter hereof. This
Agreement supersedes and replaces any prior agreement or arrangement relative to
Employee's employment by the Company, and all such prior agreements and
arrangements are hereby terminated.
15. Governing Law and Severability. This Agreement shall be governed by
and construed under the laws of the State of California and shall not be
modified or discharged in whole or in part except by an agreement in writing
signed by the parties hereto. In case any one or more of the provisions or parts
of a provision contained in this Agreement shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision or part of a provision of
this Agreement, but this Agreement shall be construed as if such invalid or
illegal or unenforceable provision or part of a provision had been limited or
modified (consistent with its general intent) to the extent necessary so that it
shall be valid, legal and enforceable, or if it shall not be
5
<PAGE> 6
possible to so limit or modify such invalid, illegal or unenforceable provision
or part of a provision, this Agreement shall be construed as if such invalid,
illegal or unenforceable provision or part of a provision had never been
contained herein, and the parties will use their best efforts to substitute a
valid, legal and enforceable provision which, insofar as practicable, implements
the purpose and intent of the provision or part of such provision originally
contained herein.
16. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns; provided, however, that this Agreement may not be assigned by
Employee without the prior written consent of the Company. The Company shall
require any successor of the Company which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets of the Company, by an agreement in form and
substance satisfactory to Employee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent as the Company would be
required to perform if no such succession had taken place.
17. Miscellaneous. This Agreement constitutes the entire agreement
between the parties concerning the subjects hereof and supersedes any and all
prior agreements or understandings, including, without limitation, any plan or
agreement providing benefits in the nature of severance, but excluding benefits
provided under other Company plans or agreements, except to the extent this
Agreement provides greater rights than are provided under such other plans or
agreements. As of the Effective Date, this Agreement supersedes the Prior
Agreement which will have no further force or effect. Employee hereby waives, to
the extent applicable, the effect of the transactions contemplated by the Merger
Agreement (or shareholder approval of such transaction) on any change in control
provisions in any employee benefit plan or agreement of the Company.
18. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which shall
constitute one agreement.
6
<PAGE> 7
IN WITNESS WHEREOF, the Agreement is entered into as of the date first
written above.
BAY APARTMENT COMMUNITIES, INC.
By: /s/ Gilbert M. Meyer
--------------------------------------------
Title: Chairman of the Board and President
/s/ Max L. Gardner
-------------------------------
MAX L. GARDNER
7
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") made as of the 9th day of March,
1998 by and between Morton L. Newman ("Executive") and Bay Apartment
Communities, Inc., a Maryland corporation (the "Company").
WHEREAS, Executive and the Company have previously entered into an
Employment Agreement dated as of March 10, 1994 (the "Prior Agreement"); and
WHEREAS, pursuant to the Agreement and Plan of Merger, by and between
the Company and Avalon Properties, Inc. ("Avalon"), dated as of March 9, 1998
(the "Merger Agreement"), Avalon will merge into the Company (the "Merger"); and
WHEREAS, Executive and the Company desire to enter into a new employment
agreement, effective as of the consummation of the merger contemplated by the
Merger Agreement (the "Effective Date"), to replace the Prior Agreement.
NOW, THEREFORE, the parties hereto do hereby agree as follows.
1. Term. Subject to the consummation of the merger contemplated by
the Merger Agreement, the Company hereby agrees to employ Executive, and
Executive hereby agrees to remain in the employ of the Company subject to the
terms and conditions of this Agreement for the period commencing on the
Effective Date and terminating on the third anniversary of the Effective Date
(the "Original Term"), unless earlier terminated as provided in Section 7. The
Original Term shall be extended automatically for additional 1 year periods
(each a "Renewal Term"), unless notice that this Agreement will not be extended
is given by either party to the other 6 months prior to the expiration of the
Original Term or any Renewal Term. Notwithstanding the foregoing, upon a Change
in Control, the Employment Period shall be extended automatically to 3 years
from the date of such Change in Control. (The period of Executive's employment
hereunder within the Original Term and any Renewal Terms is herein referred to
as the "Employment Period.")
2. Employment Duties.
(a) During the Employment Period, Executive shall be employed
in the business of the Company and its affiliates. Executive shall serve as a
corporate officer of the Company with the title Senior Vice
President-Construction. Executive's duties and authority shall be commensurate
with his title and position with the Company, and shall not be materially
diminished from, or materially inconsistent with, his primary duties and
authority with the Company immediately prior to the date of this Agreement.
(b) Executive agrees to his employment as described in this
Section 2 and agrees to devote substantially all of his working time and efforts
to the performance of his duties under this Agreement; provided that nothing
herein shall be interpreted to preclude Executive from (i) participating with
the prior written consent of the Board of Directors as an officer or director
of, or advisor to, any other entity or organization that is not a customer or
material service provider to the Company or a Competing Enterprise, as defined
in Section 8, so long as
<PAGE> 2
such participation does not interfere with the performance of Executive's duties
hereunder, whether or not such entity or organization is engaged in religious,
charitable or other community or non-profit activities, (ii) investing in any
entity or organization which is not a customer or material service provider to
the Company or a Competing Enterprise, so long as such investment does not
interfere with the performance of Executive's duties hereunder, or (iii)
delivering lectures or fulfilling speaking engagements so long as such lectures
or engagements do not interfere with the performance of Executive's duties
hereunder.
(c) In performing his duties hereunder, Executive shall be
available for reasonable travel as the needs of the business require. Executive
shall be based in San Jose, California, or otherwise in the greater San
Francisco Bay area.
(d) Breach by either party of any of its respective
obligations under this Section 2 shall be deemed a material breach of that
party's obligations hereunder.
3. Compensation/Benefits. In consideration of Executive's services
hereunder, the Company shall provide Executive the following:
(a) Base Salary. During the Employment Period, the Executive
shall receive an annual rate of base salary ("Base Salary") in an amount not
less than $200,000. Executive's Base Salary will be reviewed by the Company as
of the first anniversary of the Effective Date, and may be adjusted upward (but
not downward) at such time to reflect any inequities in compensation. Commencing
as of January 1, 2000, Executive's Base Salary shall be reviewed no less
frequently than annually by the Company and may be adjusted upward (but not
downward) by the Company. Upon such annual review during the Renewal Term, if
any, Executive's Base Salary shall be increased to the greatest of (i) an amount
equal to Base Salary for the prior year plus 5%, (ii) a factor measured by the
increase, if any, in the Consumer Price Index for Wage Earners and Clerical
Workers (CPI-W) (City Average for New York - Northern New Jersey - Long Island
1982-84=100), as published by the Bureau of Labor Statistics, for the prior
calendar year (the "CPI Adjustment") or (iii) such greater amount as may be
agreed by Executive and the Company. Base Salary shall be payable in accordance
with the Company's normal business practices, but in no event less frequently
than monthly.
(b) Bonuses. Commencing at the close of each fiscal year
during the Employment Period, the Company shall review the performance of the
Company and of Executive during the prior fiscal year, and the Company may
provide Executive with additional compensation as a bonus if the Board, or any
compensation committee hereof, in its discretion, determines that Executive's
contribution to the Company warrants such additional payment and the Company's
anticipated financial performance of the present period permits such payment.
The bonuses hereunder shall be paid as a lump sum not later than 60 days after
the end of the Company's preceding fiscal year.
(c) Medical Insurance/Physical. During the Employment Period,
the Company shall provide to Executive and Executive's immediate family a
comprehensive policy of health insurance. During the Employment Period,
Executive shall be entitled to a comprehensive annual physical performed, at the
expense of the Company by the physician or medical group of Executive's
choosing.
(d) Life Insurance/Disability Insurance. As of the Effective
Date, during the Employment Period, Executive will receive a split dollar life
insurance agreement and comprehensive disability policy comparable to those
provided to comparable Avalon executives.
<PAGE> 3
Such life insurance amount shall equal $750,000, and both the life insurance and
disability policy shall be subject to evidence of Executive's insurability.
Executive agrees to submit to such medical examinations as may be required in
order to establish or maintain such policies of insurance.
(e) Vacations. Executive shall be entitled to reasonable paid
vacations during the Employment Period in accordance with the then regular
procedures of the Company governing executives, not to exceed 6 weeks per annum,
in the aggregate.
(f) Office/Secretary, etc. During the Employment Period,
Executive shall be entitled to secretarial services and a private office
commensurate with his title and duties.
(g) Company Stock Option. Notwithstanding the consummation of
the Merger, the Company granted to Executive on March 8, 1998, a non-qualified
employee stock option to purchase 30,000 shares of common stock of the Company,
par value $.01 per share (the "Company Stock Option"). The Company Stock Option
was granted at an exercise price equal to $37.00. The Company Stock Option was
granted with a 10-year term and shall be exercisable as to 100% of the shares
covered thereby on the tenth anniversary of the date of grant so long as
Executive remains employed by the Company or one of its affiliates; provided,
that, if the Merger is consummated, the Company Stock Option shall be
exercisable to the extent of 33 1/3% of the shares covered thereby on each of
the first three anniversaries of the Effective Date, so long as Executive
remains employed by the Company or one of its affiliates. Upon termination of
Executive's employment, vesting and exercisability of the Company Stock Option
shall be governed by the terms of the stock option agreement and this Agreement,
as applicable. During the Employment Period, Executive shall be eligible for
future employee stock option grants on the same basis as other senior management
of the Company.
(h) Automobile. Executive shall continue his current car lease
and credit card arrangement with the Company, but following expiration of such
lease, the Company shall provide Executive with a monthly car allowance during
the Employment Period of not less than $750 per month (adjusted annually for
inflation by the CPI Adjustment); provided that, at Executive's election, the
Company may instead purchase or lease, and maintain insurance for, an automobile
of comparable value for use by Executive, who shall be responsible for
maintaining such automobile, at his own expense, with the same standard of care
Executive applies to his own property and as may be required under any
applicable lease agreement.
(i) Other Benefits. During the Employment Period, the Company
shall provide to Executive such other benefits, excluding severance benefits,
but including the right to participate in such retirement or pension plans, as
are made generally available to executives of the Company from time to time.
4. Expenses/Indemnification.
(a) During the Employment Period, the Company shall reimburse
Executive for the reasonable business expenses incurred by Executive in the
course of performing his duties for the Company hereunder, upon submission of
invoices, vouchers or other appropriate documentation, as may be required in
accordance with the policies in effect from time to time for executive employees
of the Company.
(b) To the fullest extent permitted by law, the Company shall
indemnify Executive with respect to any actions commenced against Executive in
his capacity as an officer
<PAGE> 4
or director or former officer or director of the Company, or any affiliate
thereof for which he may render service in such capacity, whether by or on
behalf of the Company, its shareholders or third parties, and the Company shall
advance to Executive on a timely basis an amount equal to the reasonable fees
and expenses incurred in defending such actions, after receipt of an itemized
request for such advance, and an undertaking from Executive to repay the amount
of such advance, with interest at a reasonable rate from the date of the
request, as determined by the Company, if it shall ultimately be determined that
he is not entitled to be indemnified against such expenses. The Company agrees
to use its best efforts to secure and maintain officers and directors' liability
insurance with respect to Executive.
5. Employer's Authority/Policies.
(a) General. Executive agrees to observe and comply with the
rules and regulations of the Company as adopted by its Board respecting the
performance of his duties and to carry out and perform orders, directions and
policies communicated to him from time to time by the Board.
(b) Ethics Policies. Executive agrees to comply with and be
bound by the Ethics Policies of the Company, as reflected in the attachment at
Annex A hereto and made a part hereof.
6. Records/Nondisclosure/Company Policies.
(a) General. All records, financial statements and similar
documents obtained, reviewed or compiled by Executive in the course of the
performance by him of services for the Company, whether or not confidential
information or trade secrets, shall be the exclusive property of the Company.
Executive shall have no rights in such documents upon any termination of this
Agreement.
(b) Nondisclosure Agreement. Without limitation of the
Company's rights under Section 6(a), Executive agrees to abide by and be bound
by the Nondisclosure Agreement of the Company executed by Executive and the
Company as reflected in the attachment at Annex B and made a part hereof.
7. Termination; Severance and Related Matters.
(a) At-Will Employment. Executive's employment hereunder is
"at will" and, therefore, may be terminated at any time, with or without Cause,
at the option of the Company, subject only to the severance obligations under
this Section 7. Upon any termination hereunder, the Employment Period shall
expire.
(b) Definitions. For purposes of this Section 7, the following
terms shall have the indicated definitions:
(1) Cause. "Cause" shall mean:
(i) Executive is convicted of or enters a plea of
nolo contendere to an act which is defined as a felony under any
federal, state or local law, not based upon a traffic violation,
which conviction or plea has or can be expected to have, in the
good faith opinion of the Board of Directors, a material adverse
impact on the business or reputation of the Company;
<PAGE> 5
(ii) any one or more acts of theft, larceny,
embezzlement, fraud or material intentional misappropriation from
or with respect to the Company;
(iii) a breach by Executive of his fiduciary duties
under Maryland law as an officer;
(iv) Executive's commission of any one or more
acts of gross negligence or willful misconduct which in the good
faith opinion of the Board of Directors has resulted in material
harm to the business or reputation of the Company; or
(v) default by Executive in the performance of
his material duties under this Agreement, without correction of
such action within 15 days of written notice thereof.
Notwithstanding the foregoing, no termination of Executive's employment
by the Company shall be treated as for Cause or be effective until and unless
all of the steps described in subparagraphs (i) through (iii) below have been
complied with:
Notice of intention to terminate for Cause has been
given by the Company within 120 days after the Board of Directors
learns of the act, failure or event (or latest in a series of
acts, failures or events) constituting "Cause";
The Board of Directors has voted (at a meeting of
the Board of Directors duly called and held as to which
termination of Executive is an agenda item) to terminate
Executive for Cause after Executive has been given notice of the
particular acts or circumstances which are the basis for the
termination for Cause and has been afforded at least 20 days
notice after the meeting and an opportunity to present his
position in writing; and
The Board of Directors has given a Notice of
Termination to Executive within 20 days of such Board meeting.
The Company may suspend Executive with pay at any time during the period
commencing with the giving of notice to Executive under clause (i) above until
final Notice of Termination is given under clause (iii) above. Upon the giving
of notice as provided in clause (iii) above, no further payments shall be due
Executive.
(2) Change in Control. A "Change in Control" shall mean the
occurrence of any one or more of the following events following the Effective
Date:
(i) Any individual, entity or group (a "Person") within
the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the "Act") (other than the Company, any corporation,
partnership, trust or other entity controlled by the Company (a
"Subsidiary"), or any trustee, fiduciary or other person or entity
holding securities under any employee benefit plan or trust of the
Company or any of its Subsidiaries), together with all "affiliates" and
"associates" (as such terms are defined in Rule 12b-2 under the Act) of
such Person, shall become the "beneficial owner" (as such term is
defined in Rule 13d-3 under the Act) of securities of the Company
representing 30% or more of the combined voting power of the Company's
then outstanding securities having the right to vote generally in an
election of the Company's Board of Directors
<PAGE> 6
("Voting Securities"), other than as a result of (A) an acquisition of
securities directly from the Company or any Subsidiary or (B) an
acquisition by any corporation pursuant to a reorganization,
consolidation or merger if, following such reorganization, consolidation
or merger the conditions described in clauses (A), (B) and (C) of
subparagraph (iii) of this Section 7(b)(2) are satisfied; or
(ii) Individuals who, as of the Effective Date,
constitute the Company's Board of Directors (the "Incumbent Directors")
cease for any reason to constitute at least a majority of the Board,
provided, however, that any individual becoming a director of the
Company subsequent to the date hereof (excluding, for this purpose, (A)
any such individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election
of members of the Board of Directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors, including by reason of agreement intended
to avoid or settle any such actual or threatened contest or
solicitation, and (B) any individual whose initial assumption of office
is in connection with a reorganization, merger or consolidation,
involving an unrelated entity and occurring during the Employment
Period), whose election or nomination for election by the Company's
shareholders was approved by a vote of at least a majority of the
persons then comprising Incumbent Directors shall for purposes of this
Agreement be considered an Incumbent Director; or
(iii) Consummation of a reorganization, merger or
consolidation of the Company, unless, following such reorganization,
merger or consolidation, (A) more than 50% of, respectively, the then
outstanding shares of common stock of the corporation resulting from
such reorganization, merger or consolidation and the combined voting
power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all
of the individuals and entities who were the beneficial owners,
respectively, of the outstanding Voting Securities immediately prior to
such reorganization, merger or consolidation, (B) no Person (excluding
the Company, any employee benefit plan (or related trust) of the
Company, a Subsidiary or the corporation resulting from such
reorganization, merger or consolidation or any subsidiary thereof, and
any Person beneficially owning, immediately prior to such
reorganization, merger or consolidation, directly or indirectly, 30% or
more of the outstanding Voting Securities), beneficially owns, directly
or indirectly, 30% or more of, respectively, the then outstanding shares
of common stock of the corporation resulting from such reorganization,
merger or consolidation or the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors, and (C) at least a majority of
the members of the board of directors of the corporation resulting from
such reorganization, merger or consolidation were members of the
Incumbent Board at the time of the execution of the initial agreement
providing for such reorganization, merger or consolidation;
(iv) Approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company; or
(v) The sale, lease, exchange or other disposition of
all or substantially all of the assets of the Company, other than to a
corporation, with respect to which following such sale, lease, exchange
or other disposition (A) more than 50% of,
<PAGE> 7
respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the
election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities
who were the beneficial owners of the outstanding Voting Securities
immediately prior to such sale, lease, exchange or other disposition,
(B) no Person (excluding the Company and any employee benefit plan (or
related trust) of the Company or a Subsidiary or such corporation or a
subsidiary thereof and any Person beneficially owning, immediately prior
to such sale, lease, exchange or other disposition, directly or
indirectly, 30% or more of the outstanding Voting Securities),
beneficially owns, directly or indirectly, 30% or more of, respectively,
the then outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors and
(C) at least a majority of the members of the board of directors of such
corporation were members of the Incumbent Board at the time of the
execution of the initial agreement or action of the Board of Directors
providing for such sale, lease, exchange or other disposition of assets
of the Company.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed
to have occurred for purposes of this Agreement solely as the result of an
acquisition of securities by the Company which, by reducing the number of shares
of Voting Securities outstanding, increases the proportionate voting power
represented by the Voting Securities beneficially owned by any Person to 30% or
more of the combined voting power of all then outstanding Voting Securities;
provided, however, that if any Person referred to in this sentence shall
thereafter become the beneficial owner of any additional shares of Stock or
other Voting Securities (other than pursuant to a stock split, stock dividend,
or similar transaction), then a "Change in Control" shall be deemed to have
occurred for purposes of this Agreement.
(3) Complete Change in Control. A "Complete Change in Control"
shall mean that a Change in Control has occurred, after modifying the definition
of "Change in Control" by deleting clause (i) from Section 7(b)(2) of this
Agreement.
(4) Constructive Termination Without Cause. "Constructive
Termination Without Cause" shall mean a termination of Executive's employment
initiated by Executive not later than 12 months following the occurrence (not
including any time during which an arbitration proceeding referenced below is
pending), without Executive's prior written consent, of one or more of the
following events (or the latest to occur in a series of events), and effected
after giving the Company not less than 10 working days' written notice of the
specific act or acts relied upon and right to cure:
(i) a material adverse change in the functions, duties
or responsibilities of Executive's position which would reduce the
level, importance or scope of such position; or any removal of Executive
from or failure to reappoint or reelect Executive to any position set
forth in this Agreement, except in connection with the termination of
Executive's employment for Disability, Cause, as a result of Executive's
death or by Executive other than for a Constructive Termination Without
Cause;
(ii) any material breach by the Company of this
Agreement;
(iii) any purported termination of Executive's employment
for Cause
<PAGE> 8
by the Company which does not comply with the terms of Section 7(b)(1)
of this Agreement;
(iv) the failure of the Company to obtain an agreement,
satisfactory to the Executive, from any successor or assign of the
Company, to assume and agree to perform this Agreement, as contemplated
in Section 10 of this Agreement;
(v) the failure by the Company to continue in effect
any compensation plan in which Executive participates immediately prior
to a Change in Control which is material to Executive's total
compensation, unless comparable alternative arrangements (embodied in
ongoing substitute or alternative plans) have been implemented with
respect to such plans, or the failure by the Company to continue
Executive's participation therein (or in such substitute or alternative
plans) on a basis not materially less favorable, in terms of the amount
of benefits provided and the level of Executive's participation relative
to other participants, as existed during the last completed fiscal year
of the Company prior to the Change in Control;
(vi) the relocation of the Company's San Jose offices to
a new location more than fifty (50) miles from San Jose or the failure
to locate Executive's own office at the San Jose office (or at the
office to which such office is relocated which is within 50 miles of San
Jose); or
(vii) any termination of employment by the Executive for
any reason during the 12-month period immediately following a Complete
Change in Control of the Company.
Notwithstanding the foregoing, a Constructive Termination Without Cause shall
not be treated as having occurred unless Executive has given a final Notice of
Termination delivered after expiration of the Company's cure period. Executive
or the Company may, at any time after the expiration of the Company's cure
period and either prior to or up until three months after giving a final Notice
of Termination, commence an arbitration proceeding to determine the question of
whether, taking into account the actions complained of and any efforts made by
the Company to cure such actions, a termination by Executive of his employment
should be treated as a Constructive Termination Without Cause for purposes of
this Agreement. If the Executive or the Company commences such a proceeding
prior to delivery by Executive of a final Notice of Termination, the
commencement of such a proceeding shall be without prejudice to either party and
Executive's and the Company's rights and obligations under this Agreement shall
continue unaffected unless and until the arbitrator has determined such question
in the affirmative, or, if earlier, the date on which Executive or the Company
has delivered a Notice of Termination in accordance with the provisions of this
Agreement.
(5) Covered Average Compensation. "Covered Average
Compensation" shall mean the sum of Executive's Covered Compensation as
calculated for the calendar year in which the Date of Termination occurs and for
each of the two preceding calendar years, divided by three.
(6) Covered Compensation. "Covered Compensation," for any
calendar year, shall mean an amount equal to the sum of (i) Executive's Base
Salary for the calendar year (disregarding any decreases made effective during
the Employment Period), (ii) the cash bonus actually earned by Executive with
respect to such calendar year, and (iii) the value of all stock
<PAGE> 9
and other equity-based compensation awards made to Executive during such
calendar year.
Covered Compensation shall be calculated according to the
following rules:
(A) In valuing awards for purposes of clause
(iii) above, all such awards shall be treated as if fully vested
when granted, stock grants shall be valued by reference to the
fair market value on the date of grant of the Company's common
stock, par value $.01 per share, and other equity-based
compensation awards shall be valued at the value established by
the Compensation Committee of the Board of Directors on the date
of grant.
(B) In determining the cash bonus actually paid
with respect to a calendar year, if no cash bonus has been paid
with respect to the calendar year in which the Date of
Termination occurs, the cash bonus paid with respect to the
immediately preceding calendar year shall be assumed to have been
paid in each of the current and immediately preceding calendar
years, and if no cash bonus has been paid by the Date of
Termination with respect to the immediately preceding calendar
year, the cash bonus paid with respect to the second preceding
calendar year shall be assumed to have been paid in all three of
the calendar years taken into account in determining Covered
Average Compensation.
(C) If any cash bonus paid with respect to the
current or immediately preceding calendar year was paid within
three months of Executive's Date of Termination, and is lower
than the last cash bonus paid more than three months from the
Date of Termination, any such cash bonus paid within three months
of the Date of Termination shall be disregarded and the last cash
bonus paid more than three months from the Date of Termination
shall be substituted for each cash bonus so disregarded.
(D) In determining the amount of stock and other
equity-based compensation awards made during a calendar year
during the averaging period, rules similar to those set forth in
subparagraphs (B) and (C) of this Section 7(b)(6) shall be
followed, except that all awards made in connection with the
Company's initial public offering shall be disregarded.
(7) Disability. "Disability" shall mean Executive has been
determined to be disabled and to qualify for long-term disability benefits under
the long-term disability insurance policy obtained pursuant to Section 3(d) of
this Agreement.
(c) Rights Upon Termination.
(i) Payment of Benefits Earned Through Date of
Termination. Upon any termination of Executive's employment during the
Employment Period, Executive, or his estate, shall in all events be paid
all accrued but unpaid Base Salary and all earned but unpaid cash
incentive compensation earned through his Date of Termination. Executive
shall also retain all such rights with respect to vested equity-based
awards as are provided under the circumstances under the applicable
grant or award agreement, and shall be entitled to all other benefits
which are provided under the circumstances in accordance with the
provisions of the Company's generally applicable employee benefit plans,
practices and policies, other than severance plans.
<PAGE> 10
(ii) Death. In the event of Executive's death during the
Employment Period, the Company shall, in addition to paying the amounts
set forth in Section 7(c)(i), take whatever action is necessary to cause
all of Executive's unvested equity-based awards to become fully vested
as of the date of death and, in the case of equity-based awards which
have an exercise schedule, to become fully exercisable and continue to
be exercisable for such period as is provided in the case of vested and
exercisable awards in the event of death under the terms of the
applicable award agreements.
(iii) Disability. In the event the Company elects to
terminate Executive's employment during the Employment Period on account
of Disability, the Company shall, in addition to paying the amounts set
forth in Section 7(c)(i), pay to Executive, in one lump sum, no later
than 31 days following the Date of Termination, an amount equal to two
times Covered Average Compensation. The Company shall also, commencing
upon the Date of Termination:
(A) Continue, without cost to Executive, benefits
comparable to the medical and disability benefits provided to
Executive immediately prior to the Date of Termination under
Section 3(c) and Section 3(d) for a period of 24 months following
the Date of Termination or until such earlier date as Executive
obtains comparable benefits through other employment;
(B) Continue to pay, or reimburse Executive, for
all premiums then due or thereafter payable on the whole-life
portion of the split-dollar insurance policy referenced under
Section 3(d) for so long as such payments are due; and
(C) Take whatever action is necessary to cause
Executive to become vested as of the Date of Termination in all
stock options, restricted stock grants, and all other
equity-based awards and be entitled to exercise and continue to
exercise all stock options and all other equity-based awards
having an exercise schedule and to retain such grants and awards
to the same extent as if they were vested upon termination of
employment in accordance with their terms.
(iv) Non-Renewal. In the event the Company gives
Executive a notice of non-renewal pursuant to Section 1 above, the
Company shall, in addition to paying the amounts set forth in Section
7(c)(i), commencing upon the Date of Termination:
(A) Pay to Executive, for 12 consecutive months,
commencing with the first day of the month immediately following
the Date of Termination, a monthly amount equal to the result
obtained by dividing Covered Average Compensation by twelve;
(B) Continue, without cost to Executive, benefits
comparable to the medical and disability benefits provided to
Executive immediately prior to the Date of Termination under
Section 3(c) and Section 3(d) for a period of 24 months following
the Date of Termination or until such earlier date as Executive
obtains comparable benefits through other employment; and
(C) Take whatever action is necessary to cause
Executive to become vested as of the Date of Termination in all
stock options, restricted stock grants, and all other
equity-based awards and be entitled to exercise and continue
<PAGE> 11
to exercise all stock options and all other equity-based awards
having an exercise schedule and to retain such grants and awards
to the same extent as if they were vested upon termination of
employment in accordance with their terms; and
(D) Continue to pay, or reimburse Executive for,
all premiums then due or thereafter payable on the whole-life
portion of the split-dollar insurance policy referenced under
Section 3(d) for so long as such payments are due.
(v) Termination Without Cause; Constructive Termination
Without Cause. In the event the Company or any successor to the Company
terminates Executive's employment without Cause, or if Executive
terminates his employment in a Constructive Termination without Cause,
the Company shall, in addition to paying the amounts provided under
Section 7(c)(i), pay to Executive, in one lump sum no later than 31 days
following the Date of Termination, an amount equal to three times
Covered Average Compensation. The Company shall also, commencing upon
the Date of Termination:
(A) Continue, without cost to Executive, benefits
comparable to the medical and disability benefits provided to
Executive immediately prior to the Date of Termination under
Section 3(c) and Section 3(d) for a period of 36 months following
the Date of Termination or until such earlier date as Executive
obtains comparable benefits through other employment;
(B) Continue to pay, or reimburse Executive, for
so long as such payments are due, all premiums then due or
payable on the whole-life portion of the split-dollar insurance
policy referenced under Section 3(d); and
(C) Take whatever action is necessary to cause
Executive to become vested as of the Date of Termination in all
stock options, restricted stock grants, and all other
equity-based awards and be entitled to exercise and continue to
exercise all stock options and all other equity-based awards
having an exercise schedule and to retain such grants and awards
to the same extent as if they were vested upon termination of
employment in accordance with their terms.
(vi) Termination for Cause; Voluntary Resignation. In
the event Executive's employment terminates during the Employment Period
other than in connection with a termination meeting the conditions of
subparagraphs (ii), (iii), (iv), or (v) of this Section 7(c), Executive
shall receive the amounts set forth in Section 7(c)(i) in full
satisfaction of all of his entitlements from the Company. All
equity-based awards not vested as of the Date of Termination shall
terminate (unless otherwise provided in the applicable award agreement)
and Executive shall have no further entitlements with respect thereto.
<PAGE> 12
(d) Additional Benefits.
(i) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution by the Company to or for the benefit of Executive, whether
paid or payable or distributed or distributable (1) pursuant to the
terms of Section 7 of this Agreement, (2) pursuant to or in connection
with any compensatory or employee benefit plan, agreement or
arrangement, including but not limited to any stock options, restricted
or unrestricted stock grants issued to or for the benefit of Executive
and forgiveness of any loans by the Company to Executive or (3)
otherwise (collectively, "Severance Payments"), would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986,
as amended (the "Code"), and any interest or penalties are incurred by
Executive with respect to such excise tax (such excise tax, together
with any such interest and penalties, are hereinafter collectively
referred to as the "Excise Tax"), then Executive shall be entitled to
receive an additional payment (a "Partial Gross-Up Payment"), such that
the net amount retained by Executive, before accrual or payment of any
Federal, state or local income tax or employment tax, but after accrual
or payment of the Excise Tax attributable to the Partial Gross-Up
Payment, is equal to the Excise Tax on the Severance Payments.
(ii) Subject to the provisions of Section 7(d)(iii), all
determinations required to be made under this Section 7, including
whether a Partial Gross-Up Payment is required and the amount of such
Partial Gross-Up Payment, shall be made by Coopers & Lybrand LLP or such
other nationally recognized accounting firm as may at that time be the
Company's independent public accountants immediately prior to the Change
in Control (the "Accounting Firm"), which shall provide detailed
supporting calculations both to the Company and Executive within 15
business days of the Date of Termination, if applicable, or at such
earlier time as is reasonably requested by the Company or Executive. The
initial Partial Gross-Up Payment, if any, as determined pursuant to this
Section 7(d)(ii), shall be paid to Executive within five days of the
receipt of the Accounting Firm's determination. If the Accounting Firm
determines that no Excise Tax is payable by Executive, the Company shall
furnish Executive with an opinion of counsel that failure to report the
Excise Tax on Executive's applicable federal income tax return would not
result in the imposition of a negligence or similar penalty. Any
determination by the Accounting Firm shall be binding upon the Company
and Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Partial Gross-Up Payments
which will not have been made by the Company should have been made (an
"Underpayment"). In the event that the Company exhausts its remedies
pursuant to Section 7(d)(iii) and Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine
the amount of the Underpayment that has occurred, consistent with the
calculations required to be made hereunder, and any such Underpayment,
and any interest and penalties imposed on the Underpayment and required
to be paid by Executive in connection with the proceedings described in
Section 7(d)(iii), and any related legal and accounting expenses, shall
be promptly paid by the Company to or for the benefit of Executive.
(iii) Executive shall notify the Company in writing of
any claim by the Internal Revenue Service that, if successful, would
require the payment by the Company of the Partial Gross-Up Payment. Such
notification shall be given as soon as practicable but no later than 10
business days after Executive knows of such claim and shall apprise
<PAGE> 13
the Company of the nature of such claim and the date on which such claim
is requested to be paid. Executive shall not pay such claim prior to the
expiration of the 30-day period following the date on which he gives
such notice to the Company (or such shorter period ending on the date
that any payment of taxes with respect to such claim is due). If the
Company notifies Executive in writing prior to the expiration of such
period that it desires to contest such claim, Executive shall:
(A) give the Company any information reasonably
requested by the Company relating to such claim,
(B) take such action in connection with
contesting such claim as the Company shall reasonably request in
writing from time to time, including, without limitation,
accepting legal representation with respect to such claim by an
attorney selected by the Company,
(C) cooperate with the Company in good faith in
order effectively to contest such claim, and
(D) permit the Company to participate in any
proceedings relating to such claim; provided, however that the
Company shall bear and pay directly all costs and expenses
attributable to the failure to pay the Excise Tax (including
related additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive
harmless, for any Excise Tax up to an amount not exceeding the
Partial Gross-Up Payment, including interest and penalties with
respect thereto, imposed as a result of such representation, and
payment of related legal and accounting costs and expenses (the
"Indemnification Limit"). Without limitation on the foregoing
provisions of this Section 7(d)(iii), the Company shall control
all proceedings taken in connection with such contest and, at its
sole option may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option,
either direct Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and
Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company
shall determine; provided, however, that if the Company directs
Executive to pay such claim and sue for a refund, the Company
shall advance so much of the amount of such payment as does not
exceed the Excise Tax, and related interest and penalties, to
Executive on an interest-free basis and shall indemnify and hold
Executive harmless, from any related legal and accounting costs
and expenses, and from any Excise Tax, including related interest
or penalties imposed with respect to such advance or with respect
to any imputed income with respect to such advance up to an
amount not exceeding the Indemnification Limit; and further
provided that any extension of the statute of limitations
relating to payment of taxes for the taxable year of Executive
with respect to which such contested amount is claimed to be due
is limited solely to such contested amount. Furthermore, the
Company's control of the contest shall be limited to issues with
respect to which a Partial Gross-Up Payment would be payable
hereunder and Executive shall be entitled to settle or contest,
as the case may be, any other issues raised by the Internal
Revenue Service or any other taxing authority.
<PAGE> 14
(iv) If, after the receipt by Executive of an amount
advanced by the Company pursuant to Section 7(d)(iii), Executive becomes
entitled to receive any refund with respect to such claim, Executive
shall (subject to the Company's complying with the requirements of
Section 7(d)(iii)) promptly pay to the Company so much of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto) (the "Refund") as is equal to (A) if the Company
advanced or paid the entire amount required to be so advanced or paid
pursuant to Section 7(d)(iii) hereof (the "Required Section 7(d)
Advance"), the aggregate amount advanced or paid by the Company pursuant
to this Section 7(d) less the portion of such amount advanced to
Executive to reimburse him for related legal and accounting costs, or
(B) if the Company advanced or paid less than the Required Section 7(d)
Advance, so much of the aggregate amount so advanced or paid by the
Company pursuant to this Section 7(d) as is equal to the difference, if
any, between (C) the amount refunded to Executive with respect to such
claim and (D) the sum of the portion of the Required Section 7(d)
Advance that was paid by Executive and not paid or advanced by the
Company plus Executive's related legal and accounting fees, as
applicable. If, after the receipt by Executive of an amount advanced by
the Company pursuant to Section 7(d)(iii), a determination is made that
Executive shall not be entitled to any refund with respect to such claim
and the Company does not notify Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 days after
such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to
the extent thereof, the amount of Partial Gross-Up Payment required to
be paid.
(e) Notice of Termination. Notice of non-renewal of this
Agreement pursuant to Section 1 hereof or of any termination of Executive's
employment (other than by reason of death) shall be communicated by written
notice (a "Notice of Termination") from one party hereto to the other party
hereto in accordance with this Section 7 and Section 9.
(f) Date of Termination. "Date of Termination," with respect
to any termination of Executive's employment during the Employment Period, shall
mean (i) if Executive's employment is terminated for Disability, 30 days after
Notice of Termination is given (provided that Executive shall not have returned
to the full-time performance of Executive's duties during such 30 day period),
(ii) if Executive's employment is terminated for Cause, the date on which a
Notice of Termination is given which complies with the requirements of Section
7(b)(1) hereof, and (iii) if Executive's employment is terminated for any other
reason, the date specified in the Notice of Termination. In the case of a
termination by the Company other than for Cause, the Date of Termination shall
not be less than 30 days after the Notice of Termination is given. In the case
of a termination by Executive, the Date of Termination shall not be less than 15
days from the date such Notice of Termination is given. Notwithstanding the
foregoing, in the event that Executive gives a Notice of Termination to the
Company, the Company may unilaterally accelerate the Date of Termination and
such acceleration shall not result in the termination being treated as a
Termination without Cause. Upon any termination of his employment, Executive
will concurrently resign his membership on the Board of Directors.
(g) No Mitigation. The Company agrees that, if Executive's
employment by the Company is terminated during the term of this Agreement,
Executive is not required to seek other employment, or to attempt in any way to
reduce any amounts payable to Executive by the Company pursuant to Section
7(d)(i) hereof. Further, the amount of any payment provided for in this
Agreement shall not be reduced by any compensation earned by Executive as the
result of employment by another employer, by retirement benefits, or, except for
amounts then due and
<PAGE> 15
payable in accordance with the terms of any promissory notes given by Executive
in favor of the Company, by offset against any amount claimed to be owed by
Executive to the Company or otherwise.
(h) Nature of Payments. The amounts due under this Section 7
are in the nature of severance payments considered to be reasonable by the
Company and are not in the nature of a penalty. Such amounts are in full
satisfaction of all claims Executive may have in respect of his employment by
the Company or its affiliates and are provided as the sole and exclusive
benefits to be provided to Executive, his estate, or his beneficiaries in
respect of his termination of employment from the Company or its affiliates.
8. Non-Competition; Non-Solicitation; Specific Enforcement.
(a) Non-Competition. Because Executive's services to the
Company are special and because Executive has access to the Company's
confidential information, Executive covenants and agrees that, during the
Employment Period and, for a period of one year following the Date of
Termination by the Company for Cause or a termination by Executive (other than a
Constructive Termination Without Cause) prior to a Change in Control, Executive
shall not, without the prior written consent of the Board of Directors, become
associated with, or engage in any "Restricted Activities" with respect to any
"Competing Enterprise," as such terms are hereinafter defined, whether as an
officer, employee, principal, partner, agent, consultant, independent contractor
or shareholder. "Competing Enterprise," for purposes of this Agreement, shall
mean any person, corporation, partnership, venture or other entity which (a) is
a publicly traded real estate investment trust, or (b) is engaged in the
business of managing, owning, leasing or joint venturing residential real estate
within 30 miles of residential real estate owned or under management by the
Company or its affiliates. "Restricted Activities," for purposes of this
Agreement, shall mean executive, managerial, directorial, administrative,
strategic, business development or supervisory responsibilities and activities
relating to all aspects of residential real estate ownership, management,
residential real estate franchising, and residential real estate
joint-venturing.
(b) Non-Solicitation. During the Employment Period, and for a
period of one year following the Date of Termination, Executive shall not,
without the prior written consent of the Company, except in the course of
carrying out his duties hereunder, solicit or attempt to solicit for employment
with or on behalf of any corporation, partnership, venture or other business
entity, any employee of the Company or any of its affiliates or any person who
was formerly employed by the Company or any of its affiliates within the
preceding six months, unless such person's employment was terminated by the
Company or any of such affiliates.
(c) Specific Enforcement. Executive and the Company agree that
the restrictions, prohibitions and other provisions of this Section 8 are
reasonable, fair and equitable in scope, terms, and duration, are necessary to
protect the legitimate business interests of the Company and are a material
inducement to the Company to enter into this Agreement. Should a decision be
made by a court of competent jurisdiction that the character, duration or
geographical scope of the provisions of this Section 8 is unreasonable, the
parties intend and agree that this Agreement shall be construed by the court in
such a manner as to impose all of those restrictions on Executive's conduct that
are reasonable in light of the circumstances and as are necessary to assure to
the Company the benefits of this Agreement. The Company and Executive further
agree that the services to be rendered under this Agreement by Executive are
special, unique and of extraordinary character, and that in the event of the
breach by Executive of the terms and conditions of this Agreement or if
Executive, without the prior consent of the Board of Directors,
<PAGE> 16
shall take any action in violation of this Section 8, the Company will suffer
irreparable harm for which there is no adequate remedy at law. Accordingly,
Executive hereby consents to the entry of a temporary restraining order or ex
parte injunction, in addition to any other remedies available at law or in
equity, to enforce the provisions hereof. Any proceeding or action seeking
equitable relief for violation of this Section 8 must be commenced in the
federal or state courts, in either case in California. Executive and the Company
irrevocably and unconditionally submit to the jurisdiction of such courts and
agree to take any and all future action necessary to submit to the jurisdiction
of such courts.
9. Notice. Any notice required or permitted hereunder shall be in
writing and shall be deemed sufficient when given by hand or by nationally
recognized overnight courier or by Express, registered or certified mail,
postage prepaid, return receipt requested, and addressed, if to the Company at
5904 Richmond Avenue, Alexandria, VA 22303, and if to Executive at the address
set forth in the Company records (or to such other address as may be provided by
notice).
10. Miscellaneous. This Agreement, together with Annex A and Annex B,
constitutes the entire agreement between the parties concerning the subjects
hereof and supersedes any and all prior agreements or understandings, including,
without limitation, any plan or agreement providing benefits in the nature of
severance, but excluding benefits provided under other Company plans or
agreements, except to the extent this Agreement provides greater rights than are
provided under such other plans or agreements. As of the Effective Date, this
Agreement supersedes the Prior Agreement which will have no further force or
effect. Executive hereby waives, to the extent applicable, the effect of the
transactions contemplated by the Merger Agreement (or shareholder approval of
such transaction) on any change in control provisions in any Company employee
benefit plan or agreement. This Agreement shall terminate upon termination of
the Merger Agreement and abandonment of the merger contemplated by the Merger
Agreement. This Agreement may not be assigned by Executive without the prior
written consent of the Company, and may be assigned by the Company and shall be
binding upon, and inure to the benefit of, the Company's successors and assigns.
The Company will require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company to assume expressly and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise. Headings herein are
for convenience of reference only and shall not define, limit or interpret the
contents hereof.
11. Amendment. This Agreement may be amended, modified or
supplemented by the mutual consent of the parties in writing, but no oral
amendment, modification or supplement shall be effective. No waiver by either
party of any breach by the other party of any condition or provision contained
in this Agreement to be performed by such other party shall be deemed a waiver
of a similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any waiver must be in writing and signed by Executive or an
authorized officer of the Company, as the case may be.
12. Severability. The provisions of this Agreement are severable. The
invalidity of any provision shall not affect the validity of any other
provision, and each provision of this Agreement shall be valid and enforceable
to the fullest extent permitted by law.
<PAGE> 17
13. Resolution of Disputes.
(a) Procedures and Scope of Arbitration. Except for any
controversy or claim seeking equitable relief pursuant to Section 8 of this
Agreement, all controversies and claims arising under or in connection with this
Agreement or relating to the interpretation, breach or enforcement thereof and
all other disputes between the parties, shall be resolved by expedited, binding
arbitration, to be held in California in accordance with the National Rules of
the American Arbitration Association governing employment disputes (the
"National Rules"). In any proceeding relating to the amount owed to Executive in
connection with his termination of employment, it is the contemplation of the
parties that the only remedy that the arbitrator may award in such a proceeding
is an amount equal to the termination payments, if any, required to be provided
under the applicable provisions of Section 7(c) and, if applicable, Section 7(d)
hereof, to the extent not previously paid, plus the costs of arbitration and
Executive's reasonable attorneys fees and expenses as provided below. Any award
made by such arbitrator shall be final, binding and conclusive on the parties
for all purposes, and judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.
(b) Attorneys Fees.
(i) Reimbursement After Executive Prevails. Except as
otherwise provided in this paragraph, each party shall pay the cost of
his or its own legal fees and expenses incurred in connection with an
arbitration proceeding. Provided an award is made in favor of Executive
in such proceeding, all of his reasonable attorneys fees and expenses
incurred in pursuing or defending such proceeding shall be promptly
reimbursed to Executive by the Company within five days of the entry of
the award.
(ii) Reimbursement in Actions to Stay, Enjoin or
Collect. In any case where the Company or any other person seeks to stay
or enjoin the commencement or continuation of an arbitration proceeding,
whether before or after an award has been made, or where Executive seeks
recovery of amounts due after an award has been made, or where the
Company brings any proceeding challenging or contesting the award, all
of Executive's reasonable attorneys fees and expenses incurred in
connection therewith shall be promptly reimbursed by the Company to
Executive, within five days of presentation of an itemized request for
reimbursement, regardless of whether Executive prevails, regardless of
the forum in which such proceeding is brought, and regardless of whether
a Change in Control has occurred.
(iii) Reimbursement After a Change in Control. Without
limitation on the foregoing, solely in a proceeding commenced by the
Company or by Executive after a Change in Control has occurred, the
Company shall advance to Executive, within five days of presentation of
an itemized request for reimbursement, all of Executive's legal fees and
expenses incurred in connection therewith, regardless of the forum in
which such proceeding was commenced, subject to delivery of an
undertaking by Executive to reimburse the Company for such advance if he
does not prevail in such proceeding (unless such fees are to be
reimbursed regardless of whether Executive prevails as provided in
clause (ii) above).
14. Survivorship. The provisions of Sections 4(b), 6, 8 and 13 of
this Agreement shall survive Executive's termination of employment. Other
provisions of this Agreement shall survive any termination of Executive's
employment to the extent necessary to the intended preservation of each party's
respective rights and obligations.
<PAGE> 18
15. Board Action. Where an action called for under this Agreement is
required to be taken by the Board of Directors, such action shall be taken by
the vote of not less than a majority of the members then in office and
authorized to vote on the matter.
16. Withholding. All amounts required to be paid by the Company shall
be subject to reduction in order to comply with applicable federal, state and
local tax withholding requirements.
17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument. The execution of this
Agreement may be by actual or facsimile signature.
18. Governing Law. This Agreement shall be construed and regulated in
all respects under the laws of the State of Maryland.
<PAGE> 19
IN WITNESS WHEREOF, this Agreement is entered into as of the date and
year first above written.
Bay Apartment Communities, Inc.
By: /s/ Gilbert M. Meyer
------------------------------------
Its: Chairman
/s/ Morton L. Newman
---------------------------------------
Morton L. Newman
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") made as of the 9th day of March,
1998 by and between Debbie L. Shotwell ("Executive") and Bay Apartment
Communities, Inc., a Maryland corporation (the "Company").
WHEREAS, Executive and the Company have previously entered into an
Employment Agreement dated as of May 1, 1995 (the "Prior Agreement"); and
WHEREAS, pursuant to the Agreement and Plan of Merger, by and between
the Company and Avalon Properties, Inc. ("Avalon"), dated as of March 9, 1998
(the "Merger Agreement"), Avalon will merge into the Company (the "Merger"); and
WHEREAS, Executive and the Company desire to enter into a new employment
agreement, effective as of the consummation of the merger contemplated by the
Merger Agreement (the "Effective Date"), to replace the Prior Agreement.
NOW, THEREFORE, the parties hereto do hereby agree as follows.
1. Term. Subject to the consummation of the merger contemplated by
the Merger Agreement, the Company hereby agrees to employ Executive, and
Executive hereby agrees to remain in the employ of the Company subject to the
terms and conditions of this Agreement for the period commencing on the
Effective Date and terminating on the third anniversary of the Effective Date
(the "Original Term"), unless earlier terminated as provided in Section 7. The
Original Term shall be extended automatically for additional 1 year periods
(each a "Renewal Term"), unless notice that this Agreement will not be extended
is given by either party to the other 6 months prior to the expiration of the
Original Term or any Renewal Term. Notwithstanding the foregoing, upon a Change
in Control, the Employment Period shall be extended automatically to 3 years
from the date of such Change in Control. (The period of Executive's employment
hereunder within the Original Term and any Renewal Terms is herein referred to
as the "Employment Period.")
2. Employment Duties.
(a) During the Employment Period, Executive shall be employed
in the business of the Company and its affiliates. Executive shall serve as a
corporate officer of the Company with the title Senior Vice
President-Administration. Executive's duties and authority shall be commensurate
with her title and position with the Company, and shall not be materially
diminished from, or materially inconsistent with, her primary duties and
authority with the Company immediately prior to the date of this Agreement.
(b) Executive agrees to her employment as described in this
Section 2 and agrees to devote substantially all of her working time and efforts
to the performance of her duties under this Agreement; provided that nothing
herein shall be interpreted to preclude Executive from (i) participating with
the prior written consent of the Board of Directors as an officer or director
of, or advisor to, any other entity or organization that is not a customer or
material service provider to the Company or a Competing Enterprise, as defined
in Section 8,
<PAGE> 2
so long as such participation does not interfere with the performance of
Executive's duties hereunder, whether or not such entity or organization is
engaged in religious, charitable or other community or non-profit activities,
(ii) investing in any entity or organization which is not a customer or material
service provider to the Company or a Competing Enterprise, so long as such
investment does not interfere with the performance of Executive's duties
hereunder, or (iii) delivering lectures or fulfilling speaking engagements so
long as such lectures or engagements do not interfere with the performance of
Executive's duties hereunder.
(c) In performing her duties hereunder, Executive shall be
available for reasonable travel as the needs of the business require. Executive
shall be based in San Jose, California.
(d) Breach by either party of any of its respective
obligations under this Section 2 shall be deemed a material breach of that
party's obligations hereunder.
3. Compensation/Benefits. In consideration of Executive's services
hereunder, the Company shall provide Executive the following:
(a) Base Salary. During the Employment Period, the Executive
shall receive an annual rate of base salary ("Base Salary") in an amount not
less than $160,000. Executive's Base Salary will be reviewed by the Company as
of the first anniversary of the Effective Date, and may be adjusted upward (but
not downward) at such time to reflect any inequities in compensation. Commencing
as of January 1, 2000, Executive's Base Salary shall be reviewed no less
frequently than annually by the Company and may be adjusted upward (but not
downward) by the Company. Upon such annual review during the Renewal Term, if
any, Executive's Base Salary shall be increased to the greatest of (i) an amount
equal to Base Salary for the prior year plus 5%, (ii) a factor measured by the
increase, if any, in the Consumer Price Index for Wage Earners and Clerical
Workers (CPI-W) (City Average for New York Northern New Jersey - Long Island
1982-84=100), as published by the Bureau of Labor Statistics, for the prior
calendar year (the "CPI Adjustment") or (iii) such greater amount as may be
agreed by Executive and the Company. Base Salary shall be payable in accordance
with the Company's normal business practices, but in no event less frequently
than monthly.
(b) Bonuses. Commencing at the close of each fiscal year
during the Employment Period, the Company shall review the performance of the
Company and of Executive during the prior fiscal year, and the Company may
provide Executive with additional compensation as a bonus if the Board, or any
compensation committee hereof, in its discretion, determines that Executive's
contribution to the Company warrants such additional payment and the Company's
anticipated financial performance of the present period permits such payment.
The bonuses hereunder shall be paid as a lump sum not later than 60 days after
the end of the Company's preceding fiscal year.
(c) Medical Insurance/Physical. During the Employment Period,
the Company shall provide to Executive and Executive's immediate family a
comprehensive policy of health insurance. During the Employment Period,
Executive shall be entitled to a comprehensive annual physical performed, at the
expense of the Company by the physician or medical group of Executive's
choosing.
(d) Life Insurance/Disability Insurance. As of the Effective
Date, during the Employment Period, Executive will receive a split dollar life
insurance agreement and comprehensive disability policy comparable to those
provided to comparable Avalon
<PAGE> 3
executives. Such life insurance amount shall equal $750,000, and both the life
insurance and disability policy shall be subject to evidence of Executive's
insurability. Executive agrees to submit to such medical examinations as may be
required in order to establish or maintain such policies of insurance.
(e) Vacations. Executive shall be entitled to reasonable paid
vacations during the Employment Period in accordance with the then regular
procedures of the Company governing executives, not to exceed 6 weeks per annum,
in the aggregate.
(f) Office/Secretary, etc. During the Employment Period,
Executive shall be entitled to secretarial services and a private office
commensurate with her title and duties.
(g) Company Stock Option. Notwithstanding the consummation of
the Merger, the Company granted to Executive on March 8, 1998, a non-qualified
employee stock option to purchase 20,000 shares of common stock of the Company,
par value $.01 per share (the "Company Stock Option"). The Company Stock Option
was granted at an exercise price equal to $37.00. The Company Stock Option was
granted with a 10-year term and shall be exercisable as to 100% of the shares
covered thereby on the tenth anniversary of the date of grant so long as
Executive remains employed by the Company or one of its affiliates; provided,
that, if the Merger is consummated, the Company Stock Option shall be
exercisable to the extent of 33 1/3% of the shares covered thereby on each of
the first three anniversaries of the Effective Date, so long as Executive
remains employed by the Company or one of its affiliates. Upon termination of
Executive's employment, vesting and exercisability of the Company Stock Option
shall be governed by the terms of the stock option agreement and this Agreement,
as applicable. During the Employment Period, Executive shall be eligible for
future employee stock option grants on the same basis as other senior management
of the Company.
(h) Automobile. The Company shall provide Executive with a
monthly car allowance during the Employment Period of not less than $750 per
month (adjusted annually for inflation by the CPI Adjustment); provided that, at
Executive's election, the Company may instead purchase or lease, and maintain
insurance for, an automobile of comparable value for use by Executive, who shall
be responsible for maintaining such automobile, at her own expense, with the
same standard of care Executive applies to her own property and as may be
required under any applicable lease agreement.
(i) Other Benefits. During the Employment Period, the Company
shall provide to Executive such other benefits, excluding severance benefits,
but including the right to participate in such retirement or pension plans, as
are made generally available to executives of the Company from time to time.
4. Expenses/Indemnification.
(a) During the Employment Period, the Company shall reimburse
Executive for the reasonable business expenses incurred by Executive in the
course of performing her duties for the Company hereunder, upon submission of
invoices, vouchers or other appropriate documentation, as may be required in
accordance with the policies in effect from time to time for executive employees
of the Company.
(b) To the fullest extent permitted by law, the Company shall
indemnify Executive with respect to any actions commenced against Executive in
her capacity as an
<PAGE> 4
officer or director or former officer or director of the Company, or any
affiliate thereof for which she may render service in such capacity, whether by
or on behalf of the Company, its shareholders or third parties, and the Company
shall advance to Executive on a timely basis an amount equal to the reasonable
fees and expenses incurred in defending such actions, after receipt of an
itemized request for such advance, and an undertaking from Executive to repay
the amount of such advance, with interest at a reasonable rate from the date of
the request, as determined by the Company, if it shall ultimately be determined
that she is not entitled to be indemnified against such expenses. The Company
agrees to use its best efforts to secure and maintain officers and directors'
liability insurance with respect to Executive.
5. Employer's Authority/Policies.
(a) General. Executive agrees to observe and comply with the
rules and regulations of the Company as adopted by its Board respecting the
performance of her duties and to carry out and perform orders, directions and
policies communicated to her from time to time by the Board.
(b) Ethics Policies. Executive agrees to comply with and be
bound by the Ethics Policies of the Company, as reflected in the attachment at
Annex A hereto and made a part hereof.
6. Records/Nondisclosure/Company Policies.
(a) General. All records, financial statements and similar
documents obtained, reviewed or compiled by Executive in the course of the
performance by her of services for the Company, whether or not confidential
information or trade secrets, shall be the exclusive property of the Company.
Executive shall have no rights in such documents upon any termination of this
Agreement.
(b) Nondisclosure Agreement. Without limitation of the
Company's rights under Section 6(a), Executive agrees to abide by and be bound
by the Nondisclosure Agreement of the Company executed by Executive and the
Company as reflected in the attachment at Annex B and made a part hereof.
7. Termination; Severance and Related Matters.
(a) At-Will Employment. Executive's employment hereunder is
"at will" and, therefore, may be terminated at any time, with or without Cause,
at the option of the Company, subject only to the severance obligations under
this Section 7. Upon any termination hereunder, the Employment Period shall
expire.
(b) Definitions. For purposes of this Section 7, the following
terms shall have the indicated definitions:
(1) Cause. "Cause" shall mean:
(i) Executive is convicted of or enters a plea of
nolo contendere to an act which is defined as a felony under any
federal, state or local law, not based upon a traffic violation,
which conviction or plea has or can be expected to have, in the
good faith opinion of the Board of Directors, a material adverse
impact on the business or reputation of the Company;
<PAGE> 5
(ii) any one or more acts of theft, larceny,
embezzlement, fraud or material intentional misappropriation from
or with respect to the Company;
(iii) a breach by Executive of her fiduciary duties
under Maryland law as an officer;
(iv) Executive's commission of any one or more
acts of gross negligence or willful misconduct which in the good
faith opinion of the Board of Directors has resulted in material
harm to the business or reputation of the Company; or
(v) default by Executive in the performance of
her material duties under this Agreement, without correction of
such action within 15 days of written notice thereof.
Notwithstanding the foregoing, no termination of Executive's employment
by the Company shall be treated as for Cause or be effective until and unless
all of the steps described in subparagraphs (i) through (iii) below have been
complied with:
Notice of intention to terminate for Cause has been
given by the Company within 120 days after the Board of Directors
learns of the act, failure or event (or latest in a series of
acts, failures or events) constituting "Cause";
The Board of Directors has voted (at a meeting of
the Board of Directors duly called and held as to which
termination of Executive is an agenda item) to terminate
Executive for Cause after Executive has been given notice of the
particular acts or circumstances which are the basis for the
termination for Cause and has been afforded at least 20 days
notice after the meeting and an opportunity to present her
position in writing; and
The Board of Directors has given a Notice of
Termination to Executive within 20 days of such Board meeting.
The Company may suspend Executive with pay at any time during the period
commencing with the giving of notice to Executive under clause (i) above until
final Notice of Termination is given under clause (iii) above. Upon the giving
of notice as provided in clause (iii) above, no further payments shall be due
Executive.
(2) Change in Control. A "Change in Control" shall mean the
occurrence of any one or more of the following events following the Effective
Date:
(i) Any individual, entity or group (a "Person") within
the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the "Act") (other than the Company, any corporation,
partnership, trust or other entity controlled by the Company (a
"Subsidiary"), or any trustee, fiduciary or other person or entity
holding securities under any employee benefit plan or trust of the
Company or any of its Subsidiaries), together with all "affiliates" and
"associates" (as such terms are defined in Rule 12b-2 under the Act) of
such Person, shall become the "beneficial owner" (as such term is
defined in Rule 13d-3 under the Act) of securities of the Company
representing 30% or more of the combined voting power of the Company's
then
<PAGE> 6
outstanding securities having the right to vote generally in an election
of the Company's Board of Directors ("Voting Securities"), other than as
a result of (A) an acquisition of securities directly from the Company
or any Subsidiary or (B) an acquisition by any corporation pursuant to a
reorganization, consolidation or merger if, following such
reorganization, consolidation or merger the conditions described in
clauses (A), (B) and (C) of subparagraph (iii) of this Section 7(b)(2)
are satisfied; or
(ii) Individuals who, as of the Effective Date,
constitute the Company's Board of Directors (the "Incumbent Directors")
cease for any reason to constitute at least a majority of the Board,
provided, however, that any individual becoming a director of the
Company subsequent to the date hereof (excluding, for this purpose, (A)
any such individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election
of members of the Board of Directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors, including by reason of agreement intended
to avoid or settle any such actual or threatened contest or
solicitation, and (B) any individual whose initial assumption of office
is in connection with a reorganization, merger or consolidation,
involving an unrelated entity and occurring during the Employment
Period), whose election or nomination for election by the Company's
shareholders was approved by a vote of at least a majority of the
persons then comprising Incumbent Directors shall for purposes of this
Agreement be considered an Incumbent Director; or
(iii) Consummation of a reorganization, merger or
consolidation of the Company, unless, following such reorganization,
merger or consolidation, (A) more than 50% of, respectively, the then
outstanding shares of common stock of the corporation resulting from
such reorganization, merger or consolidation and the combined voting
power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all
of the individuals and entities who were the beneficial owners,
respectively, of the outstanding Voting Securities immediately prior to
such reorganization, merger or consolidation, (B) no Person (excluding
the Company, any employee benefit plan (or related trust) of the
Company, a Subsidiary or the corporation resulting from such
reorganization, merger or consolidation or any subsidiary thereof, and
any Person beneficially owning, immediately prior to such
reorganization, merger or consolidation, directly or indirectly, 30% or
more of the outstanding Voting Securities), beneficially owns, directly
or indirectly, 30% or more of, respectively, the then outstanding shares
of common stock of the corporation resulting from such reorganization,
merger or consolidation or the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors, and (C) at least a majority of
the members of the board of directors of the corporation resulting from
such reorganization, merger or consolidation were members of the
Incumbent Board at the time of the execution of the initial agreement
providing for such reorganization, merger or consolidation;
(iv) Approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company; or
(v) The sale, lease, exchange or other disposition of
all or substantially all of the assets of the Company, other than to a
corporation, with respect
<PAGE> 7
to which following such sale, lease, exchange or other disposition (A)
more than 50% of, respectively, the then outstanding shares of common
stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners of the outstanding Voting
Securities immediately prior to such sale, lease, exchange or other
disposition, (B) no Person (excluding the Company and any employee
benefit plan (or related trust) of the Company or a Subsidiary or such
corporation or a subsidiary thereof and any Person beneficially owning,
immediately prior to such sale, lease, exchange or other disposition,
directly or indirectly, 30% or more of the outstanding Voting
Securities), beneficially owns, directly or indirectly, 30% or more of,
respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the
election of directors and (C) at least a majority of the members of the
board of directors of such corporation were members of the Incumbent
Board at the time of the execution of the initial agreement or action of
the Board of Directors providing for such sale, lease, exchange or other
disposition of assets of the Company.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed
to have occurred for purposes of this Agreement solely as the result of an
acquisition of securities by the Company which, by reducing the number of shares
of Voting Securities outstanding, increases the proportionate voting power
represented by the Voting Securities beneficially owned by any Person to 30% or
more of the combined voting power of all then outstanding Voting Securities;
provided, however, that if any Person referred to in this sentence shall
thereafter become the beneficial owner of any additional shares of Stock or
other Voting Securities (other than pursuant to a stock split, stock dividend,
or similar transaction), then a "Change in Control" shall be deemed to have
occurred for purposes of this Agreement.
(3) Complete Change in Control. A "Complete Change in Control"
shall mean that a Change in Control has occurred, after modifying the definition
of "Change in Control" by deleting clause (i) from Section 7(b)(2) of this
Agreement.
(4) Constructive Termination Without Cause. "Constructive
Termination Without Cause" shall mean a termination of Executive's employment
initiated by Executive not later than 12 months following the occurrence (not
including any time during which an arbitration proceeding referenced below is
pending), without Executive's prior written consent, of one or more of the
following events (or the latest to occur in a series of events), and effected
after giving the Company not less than 10 working days' written notice of the
specific act or acts relied upon and right to cure:
(i) a material adverse change in the functions, duties
or responsibilities of Executive's position which would reduce the
level, importance or scope of such position; or any removal of Executive
from or failure to reappoint or reelect Executive to any position set
forth in this Agreement, except in connection with the termination of
Executive's employment for Disability, Cause, as a result of Executive's
death or by Executive other than for a Constructive Termination Without
Cause;
(ii) any material breach by the Company of this
Agreement;
<PAGE> 8
(iii) any purported termination of Executive's employment
for Cause by the Company which does not comply with the terms of Section
7(b)(1) of this Agreement;
(iv) the failure of the Company to obtain an agreement,
satisfactory to the Executive, from any successor or assign of the
Company, to assume and agree to perform this Agreement, as contemplated
in Section 10 of this Agreement;
(v) the failure by the Company to continue in effect
any compensation plan in which Executive participates immediately prior
to a Change in Control which is material to Executive's total
compensation, unless comparable alternative arrangements (embodied in
ongoing substitute or alternative plans) have been implemented with
respect to such plans, or the failure by the Company to continue
Executive's participation therein (or in such substitute or alternative
plans) on a basis not materially less favorable, in terms of the amount
of benefits provided and the level of Executive's participation relative
to other participants, as existed during the last completed fiscal year
of the Company prior to the Change in Control;
(vi) the relocation of the Company's San Jose offices to
a new location more than fifty (50) miles from San Jose or the failure
to locate Executive's own office at the San Jose office (or at the
office to which such office is relocated which is within 50 miles of San
Jose); or
(vii) any termination of employment by the Executive for
any reason during the 12-month period immediately following a Complete
Change in Control of the Company.
Notwithstanding the foregoing, a Constructive Termination Without Cause shall
not be treated as having occurred unless Executive has given a final Notice of
Termination delivered after expiration of the Company's cure period. Executive
or the Company may, at any time after the expiration of the Company's cure
period and either prior to or up until three months after giving a final Notice
of Termination, commence an arbitration proceeding to determine the question of
whether, taking into account the actions complained of and any efforts made by
the Company to cure such actions, a termination by Executive of her employment
should be treated as a Constructive Termination Without Cause for purposes of
this Agreement. If the Executive or the Company commences such a proceeding
prior to delivery by Executive of a final Notice of Termination, the
commencement of such a proceeding shall be without prejudice to either party and
Executive's and the Company's rights and obligations under this Agreement shall
continue unaffected unless and until the arbitrator has determined such question
in the affirmative, or, if earlier, the date on which Executive or the Company
has delivered a Notice of Termination in accordance with the provisions of this
Agreement.
(5) Covered Average Compensation. "Covered Average
Compensation" shall mean the sum of Executive's Covered Compensation as
calculated for the calendar year in which the Date of Termination occurs and for
each of the two preceding calendar years, divided by three.
(6) Covered Compensation. "Covered Compensation," for any
calendar year, shall mean an amount equal to the sum of (i) Executive's Base
Salary for the calendar year (disregarding any decreases made effective during
the Employment Period), (ii) the cash
<PAGE> 9
bonus actually earned by Executive with respect to such calendar year, and (iii)
the value of all stock and other equity-based compensation awards made to
Executive during such calendar year.
Covered Compensation shall be calculated according to the
following rules:
(A) In valuing awards for purposes of clause
(iii) above, all such awards shall be treated as if fully vested
when granted, stock grants shall be valued by reference to the
fair market value on the date of grant of the Company's common
stock, par value $.01 per share, and other equity-based
compensation awards shall be valued at the value established by
the Compensation Committee of the Board of Directors on the date
of grant.
(B) In determining the cash bonus actually paid
with respect to a calendar year, if no cash bonus has been paid
with respect to the calendar year in which the Date of
Termination occurs, the cash bonus paid with respect to the
immediately preceding calendar year shall be assumed to have been
paid in each of the current and immediately preceding calendar
years, and if no cash bonus has been paid by the Date of
Termination with respect to the immediately preceding calendar
year, the cash bonus paid with respect to the second preceding
calendar year shall be assumed to have been paid in all three of
the calendar years taken into account in determining Covered
Average Compensation.
(C) If any cash bonus paid with respect to the
current or immediately preceding calendar year was paid within
three months of Executive's Date of Termination, and is lower
than the last cash bonus paid more than three months from the
Date of Termination, any such cash bonus paid within three months
of the Date of Termination shall be disregarded and the last cash
bonus paid more than three months from the Date of Termination
shall be substituted for each cash bonus so disregarded.
(D) In determining the amount of stock and other
equity-based compensation awards made during a calendar year
during the averaging period, rules similar to those set forth in
subparagraphs (B) and (C) of this Section 7(b)(6) shall be
followed, except that all awards made in connection with the
Company's initial public offering shall be disregarded.
(7) Disability. "Disability" shall mean Executive has been
determined to be disabled and to qualify for long-term disability benefits under
the long-term disability insurance policy obtained pursuant to Section 3(d) of
this Agreement.
<PAGE> 10
(c) Rights Upon Termination.
(i) Payment of Benefits Earned Through Date of
Termination. Upon any termination of Executive's employment during the
Employment Period, Executive, or her estate, shall in all events be paid
all accrued but unpaid Base Salary and all earned but unpaid cash
incentive compensation earned through her Date of Termination. Executive
shall also retain all such rights with respect to vested equity-based
awards as are provided under the circumstances under the applicable
grant or award agreement, and shall be entitled to all other benefits
which are provided under the circumstances in accordance with the
provisions of the Company's generally applicable employee benefit plans,
practices and policies, other than severance plans.
(ii) Death. In the event of Executive's death during the
Employment Period, the Company shall, in addition to paying the amounts
set forth in Section 7(c)(i), take whatever action is necessary to cause
all of Executive's unvested equity-based awards to become fully vested
as of the date of death and, in the case of equity-based awards which
have an exercise schedule, to become fully exercisable and continue to
be exercisable for such period as is provided in the case of vested and
exercisable awards in the event of death under the terms of the
applicable award agreements.
(iii) Disability. In the event the Company elects to
terminate Executive's employment during the Employment Period on account
of Disability, the Company shall, in addition to paying the amounts set
forth in Section 7(c)(i), pay to Executive, in one lump sum, no later
than 31 days following the Date of Termination, an amount equal to two
times Covered Average Compensation. The Company shall also, commencing
upon the Date of Termination:
(A) Continue, without cost to Executive, benefits
comparable to the medical and disability benefits provided to
Executive immediately prior to the Date of Termination under
Section 3(c) and Section 3(d) for a period of 24 months following
the Date of Termination or until such earlier date as Executive
obtains comparable benefits through other employment;
(B) Continue to pay, or reimburse Executive, for
all premiums then due or thereafter payable on the whole-life
portion of the split-dollar insurance policy referenced under
Section 3(d) for so long as such payments are due; and
(C) Take whatever action is necessary to cause
Executive to become vested as of the Date of Termination in all
stock options, restricted stock grants, and all other
equity-based awards and be entitled to exercise and continue to
exercise all stock options and all other equity-based awards
having an exercise schedule and to retain such grants and awards
to the same extent as if they were vested upon termination of
employment in accordance with their terms.
<PAGE> 11
(iv) Non-Renewal. In the event the Company gives
Executive a notice of non-renewal pursuant to Section 1 above, the
Company shall, in addition to paying the amounts set forth in Section
7(c)(i), commencing upon the Date of Termination:
(A) Pay to Executive, for 12 consecutive months,
commencing with the first day of the month immediately following
the Date of Termination, a monthly amount equal to the result
obtained by dividing Covered Average Compensation by twelve;
(B) Continue, without cost to Executive, benefits
comparable to the medical and disability benefits provided to
Executive immediately prior to the Date of Termination under
Section 3(c) and Section 3(d) for a period of 24 months following
the Date of Termination or until such earlier date as Executive
obtains comparable benefits through other employment; and
(C) Take whatever action is necessary to cause
Executive to become vested as of the Date of Termination in all
stock options, restricted stock grants, and all other
equity-based awards and be entitled to exercise and continue to
exercise all stock options and all other equity-based awards
having an exercise schedule and to retain such grants and awards
to the same extent as if they were vested upon termination of
employment in accordance with their terms; and
(D) Continue to pay, or reimburse Executive for,
all premiums then due or thereafter payable on the whole-life
portion of the split-dollar insurance policy referenced under
Section 3(d) for so long as such payments are due.
(v) Termination Without Cause; Constructive Termination
Without Cause. In the event the Company or any successor to the Company
terminates Executive's employment without Cause, or if Executive
terminates her employment in a Constructive Termination without Cause,
the Company shall, in addition to paying the amounts provided under
Section 7(c)(i), pay to Executive, in one lump sum no later than 31 days
following the Date of Termination, an amount equal to three times
Covered Average Compensation. The Company shall also, commencing upon
the Date of Termination:
(A) Continue, without cost to Executive, benefits
comparable to the medical and disability benefits provided to
Executive immediately prior to the Date of Termination under
Section 3(c) and Section 3(d) for a period of 36 months following
the Date of Termination or until such earlier date as Executive
obtains comparable benefits through other employment;
(B) Continue to pay, or reimburse Executive, for
so long as such payments are due, all premiums then due or
payable on the whole-life portion of the split-dollar insurance
policy referenced under Section 3(d); and
(C) Take whatever action is necessary to cause
Executive to become vested as of the Date of Termination in all
stock options, restricted stock grants, and all other
equity-based awards and be entitled to exercise and
<PAGE> 12
continue to exercise all stock options and all other equity-based
awards having an exercise schedule and to retain such grants and
awards to the same extent as if they were vested upon termination
of employment in accordance with their terms.
(vi) Termination for Cause; Voluntary Resignation. In
the event Executive's employment terminates during the Employment Period
other than in connection with a termination meeting the conditions of
subparagraphs (ii), (iii), (iv), or (v) of this Section 7(c), Executive
shall receive the amounts set forth in Section 7(c)(i) in full
satisfaction of all of her entitlements from the Company. All
equity-based awards not vested as of the Date of Termination shall
terminate (unless otherwise provided in the applicable award agreement)
and Executive shall have no further entitlements with respect thereto.
(d) Additional Benefits.
(i) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution by the Company to or for the benefit of Executive, whether
paid or payable or distributed or distributable (1) pursuant to the
terms of Section 7 of this Agreement, (2) pursuant to or in connection
with any compensatory or employee benefit plan, agreement or
arrangement, including but not limited to any stock options, restricted
or unrestricted stock grants issued to or for the benefit of Executive
and forgiveness of any loans by the Company to Executive or (3)
otherwise (collectively, "Severance Payments"), would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986,
as amended (the "Code"), and any interest or penalties are incurred by
Executive with respect to such excise tax (such excise tax, together
with any such interest and penalties, are hereinafter collectively
referred to as the "Excise Tax"), then Executive shall be entitled to
receive an additional payment (a "Partial Gross-Up Payment"), such that
the net amount retained by Executive, before accrual or payment of any
Federal, state or local income tax or employment tax, but after accrual
or payment of the Excise Tax attributable to the Partial Gross-Up
Payment, is equal to the Excise Tax on the Severance Payments.
(ii) Subject to the provisions of Section 7(d)(iii), all
determinations required to be made under this Section 7, including
whether a Partial Gross-Up Payment is required and the amount of such
Partial Gross-Up Payment, shall be made by Coopers & Lybrand LLP or such
other nationally recognized accounting firm as may at that time be the
Company's independent public accountants immediately prior to the Change
in Control (the "Accounting Firm"), which shall provide detailed
supporting calculations both to the Company and Executive within 15
business days of the Date of Termination, if applicable, or at such
earlier time as is reasonably requested by the Company or Executive. The
initial Partial Gross-Up Payment, if any, as determined pursuant to this
Section 7(d)(ii), shall be paid to Executive within five days of the
receipt of the Accounting Firm's determination. If the Accounting Firm
determines that no Excise Tax is payable by Executive, the Company shall
furnish Executive with an opinion of counsel that failure to report the
Excise Tax on Executive's applicable federal income tax return would not
result in the imposition of a negligence or similar penalty. Any
determination by the Accounting Firm shall be binding upon the Company
and Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
<PAGE> 13
Accounting Firm hereunder, it is possible that Partial Gross-Up Payments
which will not have been made by the Company should have been made (an
"Underpayment"). In the event that the Company exhausts its remedies
pursuant to Section 7(d)(iii) and Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine
the amount of the Underpayment that has occurred, consistent with the
calculations required to be made hereunder, and any such Underpayment,
and any interest and penalties imposed on the Underpayment and required
to be paid by Executive in connection with the proceedings described in
Section 7(d)(iii), and any related legal and accounting expenses, shall
be promptly paid by the Company to or for the benefit of Executive.
(iii) Executive shall notify the Company in writing of
any claim by the Internal Revenue Service that, if successful, would
require the payment by the Company of the Partial Gross-Up Payment. Such
notification shall be given as soon as practicable but no later than 10
business days after Executive knows of such claim and shall apprise the
Company of the nature of such claim and the date on which such claim is
requested to be paid. Executive shall not pay such claim prior to the
expiration of the 30-day period following the date on which she gives
such notice to the Company (or such shorter period ending on the date
that any payment of taxes with respect to such claim is due). If the
Company notifies Executive in writing prior to the expiration of such
period that it desires to contest such claim, Executive shall:
(A) give the Company any information reasonably
requested by the Company relating to such claim,
(B) take such action in connection with
contesting such claim as the Company shall reasonably request in
writing from time to time, including, without limitation,
accepting legal representation with respect to such claim by an
attorney selected by the Company,
(C) cooperate with the Company in good faith in
order effectively to contest such claim, and
(D) permit the Company to participate in any
proceedings relating to such claim; provided, however that the
Company shall bear and pay directly all costs and expenses
attributable to the failure to pay the Excise Tax (including
related additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive
harmless, for any Excise Tax up to an amount not exceeding the
Partial Gross-Up Payment, including interest and penalties with
respect thereto, imposed as a result of such representation, and
payment of related legal and accounting costs and expenses (the
"Indemnification Limit"). Without limitation on the foregoing
provisions of this Section 7(d)(iii), the Company shall control
all proceedings taken in connection with such contest and, at its
sole option may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option,
either direct Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and
Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company
shall determine; provided,
<PAGE> 14
however, that if the Company directs Executive to pay such claim
and sue for a refund, the Company shall advance so much of the
amount of such payment as does not exceed the Excise Tax, and
related interest and penalties, to Executive on an interest-free
basis and shall indemnify and hold Executive harmless, from any
related legal and accounting costs and expenses, and from any
Excise Tax, including related interest or penalties imposed with
respect to such advance or with respect to any imputed income
with respect to such advance up to an amount not exceeding the
Indemnification Limit; and further provided that any extension of
the statute of limitations relating to payment of taxes for the
taxable year of Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall
be limited to issues with respect to which a Partial Gross-Up
Payment would be payable hereunder and Executive shall be
entitled to settle or contest, as the case may be, any other
issues raised by the Internal Revenue Service or any other taxing
authority.
(iv) If, after the receipt by Executive of an amount
advanced by the Company pursuant to Section 7(d)(iii), Executive becomes
entitled to receive any refund with respect to such claim, Executive
shall (subject to the Company's complying with the requirements of
Section 7(d)(iii)) promptly pay to the Company so much of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto) (the "Refund") as is equal to (A) if the Company
advanced or paid the entire amount required to be so advanced or paid
pursuant to Section 7(d)(iii) hereof (the "Required Section 7(d)
Advance"), the aggregate amount advanced or paid by the Company pursuant
to this Section 7(d) less the portion of such amount advanced to
Executive to reimburse her for related legal and accounting costs, or
(B) if the Company advanced or paid less than the Required Section 7(d)
Advance, so much of the aggregate amount so advanced or paid by the
Company pursuant to this Section 7(d) as is equal to the difference, if
any, between (C) the amount refunded to Executive with respect to such
claim and (D) the sum of the portion of the Required Section 7(d)
Advance that was paid by Executive and not paid or advanced by the
Company plus Executive's related legal and accounting fees, as
applicable. If, after the receipt by Executive of an amount advanced by
the Company pursuant to Section 7(d)(iii), a determination is made that
Executive shall not be entitled to any refund with respect to such claim
and the Company does not notify Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 days after
such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to
the extent thereof, the amount of Partial Gross-Up Payment required to
be paid.
(e) Notice of Termination. Notice of non-renewal of this
Agreement pursuant to Section 1 hereof or of any termination of Executive's
employment (other than by reason of death) shall be communicated by written
notice (a "Notice of Termination") from one party hereto to the other party
hereto in accordance with this Section 7 and Section 9.
(f) Date of Termination. "Date of Termination," with respect
to any termination of Executive's employment during the Employment Period, shall
mean (i) if Executive's employment is terminated for Disability, 30 days after
Notice of Termination is given (provided that Executive shall not have returned
to the full-time performance of Executive's duties during such 30 day period),
(ii) if Executive's employment is terminated for
<PAGE> 15
Cause, the date on which a Notice of Termination is given which complies with
the requirements of Section 7(b)(1) hereof, and (iii) if Executive's employment
is terminated for any other reason, the date specified in the Notice of
Termination. In the case of a termination by the Company other than for Cause,
the Date of Termination shall not be less than 30 days after the Notice of
Termination is given. In the case of a termination by Executive, the Date of
Termination shall not be less than 15 days from the date such Notice of
Termination is given. Notwithstanding the foregoing, in the event that Executive
gives a Notice of Termination to the Company, the Company may unilaterally
accelerate the Date of Termination and such acceleration shall not result in the
termination being treated as a Termination without Cause. Upon any termination
of her employment, Executive will concurrently resign her membership on the
Board of Directors.
(g) No Mitigation. The Company agrees that, if Executive's
employment by the Company is terminated during the term of this Agreement,
Executive is not required to seek other employment, or to attempt in any way to
reduce any amounts payable to Executive by the Company pursuant to Section
7(d)(i) hereof. Further, the amount of any payment provided for in this
Agreement shall not be reduced by any compensation earned by Executive as the
result of employment by another employer, by retirement benefits, or, except for
amounts then due and payable in accordance with the terms of any promissory
notes given by Executive in favor of the Company, by offset against any amount
claimed to be owed by Executive to the Company or otherwise.
(h) Nature of Payments. The amounts due under this Section 7
are in the nature of severance payments considered to be reasonable by the
Company and are not in the nature of a penalty. Such amounts are in full
satisfaction of all claims Executive may have in respect of her employment by
the Company or its affiliates and are provided as the sole and exclusive
benefits to be provided to Executive, her estate, or her beneficiaries in
respect of her termination of employment from the Company or its affiliates.
8. Non-Competition; Non-Solicitation; Specific Enforcement.
(a) Non-Competition. Because Executive's services to the
Company are special and because Executive has access to the Company's
confidential information, Executive covenants and agrees that, during the
Employment Period and, for a period of one year following the Date of
Termination by the Company for Cause or a termination by Executive (other than a
Constructive Termination Without Cause) prior to a Change in Control, Executive
shall not, without the prior written consent of the Board of Directors, become
associated with, or engage in any "Restricted Activities" with respect to any
"Competing Enterprise," as such terms are hereinafter defined, whether as an
officer, employee, principal, partner, agent, consultant, independent contractor
or shareholder. "Competing Enterprise," for purposes of this Agreement, shall
mean any person, corporation, partnership, venture or other entity which (a) is
a publicly traded real estate investment trust, or (b) is engaged in the
business of managing, owning, leasing or joint venturing residential real estate
within 30 miles of residential real estate owned or under management by the
Company or its affiliates. "Restricted Activities," for purposes of this
Agreement, shall mean executive, managerial, directorial, administrative,
strategic, business development or supervisory responsibilities and activities
relating to all aspects of residential real estate ownership, management,
residential real estate franchising, and residential real estate
joint-venturing.
(b) Non-Solicitation. During the Employment Period, and for a
period of one year following the Date of Termination, Executive shall not,
without the prior written
<PAGE> 16
consent of the Company, except in the course of carrying out her duties
hereunder, solicit or attempt to solicit for employment with or on behalf of any
corporation, partnership, venture or other business entity, any employee of the
Company or any of its affiliates or any person who was formerly employed by the
Company or any of its affiliates within the preceding six months, unless such
person's employment was terminated by the Company or any of such affiliates.
(c) Specific Enforcement. Executive and the Company agree that
the restrictions, prohibitions and other provisions of this Section 8 are
reasonable, fair and equitable in scope, terms, and duration, are necessary to
protect the legitimate business interests of the Company and are a material
inducement to the Company to enter into this Agreement. Should a decision be
made by a court of competent jurisdiction that the character, duration or
geographical scope of the provisions of this Section 8 is unreasonable, the
parties intend and agree that this Agreement shall be construed by the court in
such a manner as to impose all of those restrictions on Executive's conduct that
are reasonable in light of the circumstances and as are necessary to assure to
the Company the benefits of this Agreement. The Company and Executive further
agree that the services to be rendered under this Agreement by Executive are
special, unique and of extraordinary character, and that in the event of the
breach by Executive of the terms and conditions of this Agreement or if
Executive, without the prior consent of the Board of Directors, shall take any
action in violation of this Section 8, the Company will suffer irreparable harm
for which there is no adequate remedy at law. Accordingly, Executive hereby
consents to the entry of a temporary restraining order or ex parte injunction,
in addition to any other remedies available at law or in equity, to enforce the
provisions hereof. Any proceeding or action seeking equitable relief for
violation of this Section 8 must be commenced in the federal or state courts, in
either case in California. Executive and the Company irrevocably and
unconditionally submit to the jurisdiction of such courts and agree to take any
and all future action necessary to submit to the jurisdiction of such courts.
9. Notice. Any notice required or permitted hereunder shall be in
writing and shall be deemed sufficient when given by hand or by nationally
recognized overnight courier or by Express, registered or certified mail,
postage prepaid, return receipt requested, and addressed, if to the Company at
5904 Richmond Avenue, Alexandria, VA 22303, and if to Executive at the address
set forth in the Company records (or to such other address as may be provided by
notice).
10. Miscellaneous. This Agreement, together with Annex A and Annex B,
constitutes the entire agreement between the parties concerning the subjects
hereof and supersedes any and all prior agreements or understandings, including,
without limitation, any plan or agreement providing benefits in the nature of
severance, but excluding benefits provided under other Company plans or
agreements, except to the extent this Agreement provides greater rights than are
provided under such other plans or agreements. As of the Effective Date, this
Agreement supersedes the Prior Agreement which will have no further force or
effect. Executive hereby waives, to the extent applicable, the effect of the
transactions contemplated by the Merger Agreement (or shareholder approval of
such transaction) on any change in control provisions in any Company employee
benefit plan or agreement. This Agreement shall terminate upon termination of
the Merger Agreement and abandonment of the merger contemplated by the Merger
Agreement. This Agreement may not be assigned by Executive without the prior
written consent of the Company, and may be assigned by the Company and shall be
binding upon, and inure to the benefit of, the Company's successors and
<PAGE> 17
assigns. The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise. Headings herein are
for convenience of reference only and shall not define, limit or interpret the
contents hereof.
11. Amendment. This Agreement may be amended, modified or
supplemented by the mutual consent of the parties in writing, but no oral
amendment, modification or supplement shall be effective. No waiver by either
party of any breach by the other party of any condition or provision contained
in this Agreement to be performed by such other party shall be deemed a waiver
of a similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any waiver must be in writing and signed by Executive or an
authorized officer of the Company, as the case may be.
12. Severability. The provisions of this Agreement are severable. The
invalidity of any provision shall not affect the validity of any other
provision, and each provision of this Agreement shall be valid and enforceable
to the fullest extent permitted by law.
13. Resolution of Disputes.
(a) Procedures and Scope of Arbitration. Except for any
controversy or claim seeking equitable relief pursuant to Section 8 of this
Agreement, all controversies and claims arising under or in connection with this
Agreement or relating to the interpretation, breach or enforcement thereof and
all other disputes between the parties, shall be resolved by expedited, binding
arbitration, to be held in California in accordance with the National Rules of
the American Arbitration Association governing employment disputes (the
"National Rules"). In any proceeding relating to the amount owed to Executive in
connection with her termination of employment, it is the contemplation of the
parties that the only remedy that the arbitrator may award in such a proceeding
is an amount equal to the termination payments, if any, required to be provided
under the applicable provisions of Section 7(c) and, if applicable, Section 7(d)
hereof, to the extent not previously paid, plus the costs of arbitration and
Executive's reasonable attorneys fees and expenses as provided below. Any award
made by such arbitrator shall be final, binding and conclusive on the parties
for all purposes, and judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.
(b) Attorneys Fees.
(i) Reimbursement After Executive Prevails. Except as
otherwise provided in this paragraph, each party shall pay the cost of
her or its own legal fees and expenses incurred in connection with an
arbitration proceeding. Provided an award is made in favor of Executive
in such proceeding, all of her reasonable attorneys fees and expenses
incurred in pursuing or defending such proceeding shall be promptly
reimbursed to Executive by the Company within five days of the entry of
the award.
(ii) Reimbursement in Actions to Stay, Enjoin or
Collect. In any case where the Company or any other person seeks to stay
or enjoin the commencement or continuation of an arbitration proceeding,
whether before or after an award has been made, or where Executive seeks
recovery of amounts due after an award has been
<PAGE> 18
made, or where the Company brings any proceeding challenging or
contesting the award, all of Executive's reasonable attorneys fees and
expenses incurred in connection therewith shall be promptly reimbursed
by the Company to Executive, within five days of presentation of an
itemized request for reimbursement, regardless of whether Executive
prevails, regardless of the forum in which such proceeding is brought,
and regardless of whether a Change in Control has occurred.
(iii) Reimbursement After a Change in Control. Without
limitation on the foregoing, solely in a proceeding commenced by the
Company or by Executive after a Change in Control has occurred, the
Company shall advance to Executive, within five days of presentation of
an itemized request for reimbursement, all of Executive's legal fees and
expenses incurred in connection therewith, regardless of the forum in
which such proceeding was commenced, subject to delivery of an
undertaking by Executive to reimburse the Company for such advance if
she does not prevail in such proceeding (unless such fees are to be
reimbursed regardless of whether Executive prevails as provided in
clause (ii) above).
14. Survivorship. The provisions of Sections 4(b), 6, 8 and 13 of
this Agreement shall survive Executive's termination of employment. Other
provisions of this Agreement shall survive any termination of Executive's
employment to the extent necessary to the intended preservation of each party's
respective rights and obligations.
15. Board Action. Where an action called for under this Agreement is
required to be taken by the Board of Directors, such action shall be taken by
the vote of not less than a majority of the members then in office and
authorized to vote on the matter.
16. Withholding. All amounts required to be paid by the Company shall
be subject to reduction in order to comply with applicable federal, state and
local tax withholding requirements.
17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument. The execution of this
Agreement may be by actual or facsimile signature.
18. Governing Law. This Agreement shall be construed and regulated in
all respects under the laws of the State of Maryland.
<PAGE> 19
IN WITNESS WHEREOF, this Agreement is entered into as of the date and
year first above written.
Bay Apartment Communities, Inc.
By: /s/ Gilbert M. Meyer
-------------------------------------
Its: Chairman
/s/ Debbie L. Shotwell
----------------------------------------
Debbie L. Shotwell
<PAGE> 1
EXHIBIT 10.6
PROXY AGREEMENT
This Proxy Agreement, dated as of March 9, 1998 (this "Agreement"), is
among Bay Apartment Communities, Inc., a Maryland corporation (the "Company"),
and Central States, Southeast and Southwest Areas Pension Fund (the
"Stockholder") acting by and through its agent, LaSalle Advisors Capital
Management, Inc. ("LaSalle"), a registered investment advisor and successor to
LaSalle Advisors Limited Partnership.
RECITALS:
A. As of the date hereof, the Stockholder owns 2,308,800 shares of
Series A Preferred Stock, par value $0.01 per share (the "Series A Preferred
Stock"), of the Company (such shares are hereinafter referred to as the
"Shares");
B. The Company and the Stockholder desire to effect certain amendments
to the Company's Articles of Incorporation, as amended, relating to the
liquidation and voting rights of the Series A Preferred Stock (the "Charter
Amendments"), which Charter Amendments are set forth on Exhibit A hereto;
C. The Company proposes to enter into an Agreement and Plan of Merger,
dated on or about the date hereof (as the same may be amended from time to time,
the "Merger Agreement"), which will provide, on the terms and subject to the
conditions thereof, for the merger of Avalon Properties, Inc. with and into the
Company and/or any of its affiliates (the "Merger"); and
D. As a condition to the willingness of the Company to recommend that
the Company's stockholders approve the Charter Amendments at an annual or
special meeting, the Company has requested that the Stockholder agree, and, in
order to induce the Company to recommend that the Company's stockholders approve
such Charter Amendments at such a meeting, the Stockholder is willing to agree,
to enter into this Agreement to grant the Company an irrevocable proxy to vote,
or to otherwise cause to be voted, the Shares pursuant to the terms and
conditions hereof.
NOW, THEREFORE, the parties hereto agree as follows:
I. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER
The Stockholder hereby represents and warrants to the Company as
follows:
1.1 Due Authority. The Stockholder has full power and authority to
execute and deliver this Agreement and to perform its obligations hereunder and
consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by or on behalf of the Stockholder and, assuming its due
authorization, execution and delivery by the
<PAGE> 2
Company, constitutes a legal, valid and binding obligation of the Stockholder,
enforceable against it in accordance with its terms.
1.2 No Conflict; Consents. (a) The execution and delivery of this
Agreement by the Stockholder does not, and the performance by the Stockholder of
its obligations under this Agreement and the compliance by the Stockholder with
the provisions hereof do not and will not, conflict with or violate (i) the
advisory agreement between LaSalle and the Stockholder (the "Advisory
Agreement") or (ii) any law, statute, rule, regulation, order, writ, judgment or
decree referred to in the Advisory Agreement applicable to the Stockholder or
the Shares.
(b) The execution and delivery of this Agreement by the
Stockholder does not, and the performance of this Agreement by the Stockholder
will not, require any consent, approval, authorization or permit of, or filing
with (except for applicable requirements, if any, of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")), or notification to, any government or
regulatory authority by the Stockholder.
(c) No other person or entity has, or will have during the Proxy
Term (subject to the Stockholder's right to terminate the Advisory Agreement, it
being understood that no such termination shall affect any of the Company's
rights or any of the Stockholder's obligations hereunder or under the
Irrevocable Proxy (the "Irrevocable Proxy") given to the Company by Mellon Bank,
N.A. ("Mellon")), any right, directly or indirectly, to vote or control or
affect the voting of the Shares.
1.3 Title to Shares. Mellon, as custodian, (a) is the record owner of
the Shares free and clear, to the Stockholder's knowledge, of any proxy or
voting restriction other than pursuant to this Agreement and (b) has, and during
the Proxy Term will have (subject to the possible termination of Mellon's right
to act as custodian, it being understood that no such termination shall affect
any of the Company's rights or any of the Stockholder's obligations hereunder or
under the Irrevocable Proxy), sole voting power (subject to the direction of
LaSalle) with respect to the Shares.
1.4 Acknowledgment of Reliance. The Stockholder understands and
acknowledges that the Company is agreeing to recommend that the Company's
stockholders approve the Charter Amendments in reliance upon the Stockholder's
execution and delivery of this Agreement.
2
<PAGE> 3
II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Stockholder as
follows:
2.1 Due Authority. The Company has full power, corporate or otherwise,
and authority to execute and deliver this Agreement and to perform its
obligations hereunder. This Agreement has been duly executed and delivered by or
on behalf of the Company and, assuming its due authorization, execution and
delivery by the Stockholder, constitutes a legal, valid and binding obligation
of the Company, enforceable against it in accordance with its terms.
2.2 No Conflict; Consents. (a) The execution and delivery of this
Agreement does not, and the performance by the Company of its obligations
contemplated by this Agreement and its compliance with any provisions hereof do
not and will not, (i) conflict with or violate any law, statute, rule,
regulation, order, writ, judgment or decree applicable to such party, (ii)
conflict with or violate the Company's charter or bylaws, or (iii) result in any
breach of or constitute a default (or an event that with notice or lapse of time
or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which the Company is a party or by which the
Company is bound.
(b) The execution and delivery of this Agreement by the Company
does not, and the performance of this Agreement by the Company will not, require
any consent, approval, authorization or permit of, or filing with (except for
applicable requirements, if any, of the Exchange Act) or notification to, any
governmental or regulatory authority by the Company.
III. CERTAIN COVENANTS OF THE STOCKHOLDER
The Stockholder hereby covenants and agrees with the Company as follows:
3.1 Transfer of Shares. Except pursuant to that certain Shareholder
Agreement, dated the date hereof, between the Company and the Stockholder,
during the Proxy Term the Stockholder shall not, and shall not permit anyone
else to, (a) sell, transfer, encumber, pledge, assign or otherwise dispose of
any of the Shares, (b) deposit the Shares into a voting trust or enter into a
voting agreement or arrangement with respect to the Shares or grant any proxy or
power of attorney with respect thereto, or (c) enter into any contract, option
or other legally binding undertaking providing for any transaction provided in
(a) or (b) hereof, unless the proposed transferee or pledgee shall have entered
into a written agreement with the Company, containing terms and conditions
satisfactory to the Company, in which such transferee or pledgee shall agree to
be bound by all the terms and conditions of this Agreement.
3
<PAGE> 4
3.2 Proxy. (a) The Stockholder, by this Agreement, hereby constitutes
and appoints the Company, with full power of substitution, during and for the
Proxy Term, as the Stockholder's true and lawful attorney and irrevocable proxy,
for and in the Stockholder's name, place and stead, to vote each of the Shares
owned by the Stockholder as Stockholder's proxy, at every meeting of the
stockholders of the Company or any adjournment thereof or in connection with any
written consent of the Company's stockholders, in favor of the Charter
Amendments. The Stockholder intends the foregoing proxy to be, and it shall be,
irrevocable and coupled with an interest during the Proxy Term and hereby
revokes any proxies previously granted by the Stockholder with respect to the
Shares.
(b) The Stockholder hereby further agrees, with respect to any
Shares not voted pursuant to paragraph (a) above, including without limitation
any Shares owned beneficially but not of record by the Stockholder, that during
the Proxy Term, at every meeting of the stockholders of the Company or any
adjournment thereof or in connection with any written consent of the Company's
stockholders, the Stockholder shall vote or cause to be voted, all Shares
whether or not owned of record or beneficially by the Stockholder except as
specifically requested in writing by the Company in advance, in favor of the
Charter Amendments.
(c) For the purposes of this Agreement, "Proxy Term" means the
period from the date hereof until the earlier of (i) the final adjournment of
the Company's next annual meeting of stockholders and (ii) the consummation of
the Merger in accordance with the terms of the Merger Agreement.
(d) The Stockholder agrees that it will not enter into any
agreement or understanding with any person or entity or take any action during
the Proxy Term which will permit any person or entity to vote or give
instructions to vote the Shares in any manner inconsistent with the terms of
this Section 3.2. The Stockholder further agrees to take such further action and
execute and deliver, and cause others to execute and deliver such other
instruments as may be necessary to effectuate the intent of this Agreement,
including without limitation, proxies and other documents permitting the Company
or any of its officers to vote the Shares or to direct the record owners thereof
to vote the Shares in accordance with this Agreement. Without limiting the
foregoing, the Stockholder will use commercially reasonable efforts to, and will
instruct the record owner of the Shares to, deliver to the Company a duly
executed Irrevocable Proxy in the form attached hereto as Exhibit B not later
than five business days after the date hereof.
(e) The Stockholder further approves and consents to, if and to
the extent such approval or consent is necessary pursuant to or for the purposes
of Section (5) of the Articles Supplementary to the Company's Articles of
Incorporation for the Series A Preferred Stock, the creation, authorization and
issuance of one or more new classes or series of stock having terms (other than
the number of shares, dividend rates, payment dates, and redemption provisions)
substantially similar to the existing terms of the Articles Supplementary for
the Company's Series C and Series D Preferred Stock.
4
<PAGE> 5
3.3 Legend. The Stockholder agrees that it will use commercially
reasonable efforts to, and will instruct the custodian of the shares to, tender
to the Company, within ten days after the date hereof, the certificate
representing the Shares and the Company may inscribe upon such certificate the
following legend, which the Company shall cause to be removed promptly following
the Proxy Term or as otherwise mutually agreed by the parties: "The shares of
Series A Preferred Stock, par value $.01 per share, of Bay Apartment
Communities, Inc. (the "Company") represented by this certificate are subject to
a Proxy Agreement dated as of March 9, 1998, and may not be sold or otherwise
transferred except in accordance therewith. Copies of such Agreement may be
obtained at the principal executive offices of the Company upon request and
without charge."
IV. MISCELLANEOUS; GENERAL PROVISIONS
4.1 Severability. If any term or other provision of this Agreement is
determined to be invalid, illegal or incapable of being enforced by any rule of
law or public policy, all other conditions and provisions of this Agreement will
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto will negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible to the fullest
extent permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
4.2 Entire Agreement. This Agreement constitutes the entire agreement of
the parties and supersedes all prior agreements and undertakings, both written
and oral, between the parties with respect to the subject matter hereof.
4.3 Amendments. This Agreement may not be modified, amended, waived,
altered or supplemented, except upon the execution and delivery of a written
agreement executed by the parties hereto.
4.4 Assignment. This Agreement may not be assigned by either party
hereto by operation of law or otherwise without the other party's consent and is
binding on each party's successors and permitted assignees.
4.5 Parties in Interest. This Agreement is binding upon, and shall inure
solely to the benefit of, each party hereto and nothing in this Agreement,
express or implied, is intended to or will confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
4.6 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event any provision of this Agreement was not
performed in accordance with the terms hereof or was otherwise breached. It is
accordingly agreed that the parties will be entitled to specific relief
hereunder including, without limitation, an injunction or injunctions
5
<PAGE> 6
to prevent and enjoin breaches of the provisions of this Agreement and to
enforce specifically the terms and provisions hereof, in any state or federal
court in the State of Maryland, in addition to any other remedy to which they
may be entitled at law or in equity. Any requirements for the securing or
posting of any bond with respect to any such remedy are hereby waived.
4.7 Governing Law; Jurisdiction and Venue. This Agreement shall be
governed by, and construed in accordance with, the internal laws of the State of
Maryland without regard to its rules of conflict of laws. The parties hereto
hereby irrevocably and unconditionally consent to and submit to the exclusive
jurisdiction of the federal and state Maryland courts for any litigation arising
out of or relating to this Agreement and the transactions contemplated hereby
(and agree not to commence any litigation relating thereto except in such
courts), waive any objection to the laying of venue of any such litigation in
such Maryland courts and agree not to plead or claim in any such Maryland court
that such litigation brought therein has been brought in any inconvenient forum.
4.8 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed will be deemed to be an original but all of which taken
together will constitute one and the same agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first written above.
BAY APARTMENT COMMUNITIES, INC.
By: /s/ Gilbert M. Meyer
-------------------------------------
Name: Gilbert M. Meyer
Title: President
CENTRAL STATES, SOUTHEAST AND
SOUTHWEST AREAS PENSION FUNDS
By Its Authorized Agent:
LaSalle Advisors Capital Management, Inc.
By: /s/ Stanley J. Kraska, Jr.
-------------------------------------
Name: Stanley J. Kraska, Jr.
Title: Managing Director
7
<PAGE> 8
EXHIBIT A
AMENDMENTS TO THE CHARTER OF
BAY APARTMENT COMMUNITIES, INC.
RELATING TO THE SERIES A PREFERRED STOCK
1. Article SECOND, Section (3)(a) of the Articles Supplementary to the
Articles of Incorporation of Bay Apartment Communities, Inc., which were filed
with the State Department of Assessments and Taxation of the State of Maryland
on September 29, 1995 in order to designate the rights, preferences and
privileges of the Series A Preferred Stock, would be deleted and the following
inserted in lieu thereof:
"(3) LIQUIDATION RIGHTS.
(a) Subject to any prior rights of any class or series of stock,
in the event of any liquidation, dissolution, or winding up of the
Corporation, either voluntary or involuntary, the holders of Series A
Preferred Stock shall be entitled to receive, prior and in preference to
any distribution of any of the assets or surplus funds of the
Corporation to the holders of Common Stock by reason of their ownership
of such stock, an amount equal to all accrued but unpaid dividends for
each share of Series A Preferred Stock then held by them. If upon the
occurrence of such event, the assets and funds thus distributed among
the holders of the Series A Preferred Stock shall be insufficient to
permit the payment to such holders of the full amounts to which they are
entitled under the preceding sentence, then, subject to any prior rights
of any classes or series of stock, the entire assets and funds of the
Corporation legally available for distribution shall be distributed
ratably to the holders of the Series A Preferred Stock and the holders
of any other shares of Stock on a parity for liquidation purposes with
the Series A Preferred Stock in proportion to the aggregate amounts owed
to each such holder."
2. Article SECOND, Section (5) of the Articles Supplementary to the
Company's Articles of Incorporation, which were filed with the State Department
of Assessments and Taxation of the State of Maryland on September 29, 1995 in
order to designate the rights, preferences and privileges of the Series A
Preferred Stock, would be deleted and the following inserted in lieu thereof:
"(5) VOTING RIGHTS.
Except as indicated in this Section 5, or except as otherwise
from time to time required by applicable law, the holders of shares of Series A
Preferred Stock shall not be entitled to vote on any matter on which the holders
of shares of Common Stock are entitled to vote, except that the holders of a
majority of the outstanding shares of Series A Preferred Stock, voting as a
separate class, shall be required to vote on and approve any material adverse
change in the
8
<PAGE> 9
rights, preferences or privileges of the Series A Preferred Stock. For purposes
of the foregoing, the creation of a new class of stock having rights,
preferences or privileges senior to, in parity with or junior to the rights,
preferences or privileges of the Series A Preferred Stock shall not be treated
as a material adverse change in the rights, preferences or privileges of the
Series A Preferred Stock, and the holders of Series A Preferred Stock shall not
have any right to vote on the creation of such new class of stock. Except as
provided above and as required by law, the holders of Series A Preferred Stock
are not entitled to vote on any merger or consolidation involving the
Corporation, on any share exchange or on a sale of all or substantially all of
the assets of the Corporation."
9
<PAGE> 10
EXHIBIT B
BAY APARTMENT COMMUNITIES, INC.
IRREVOCABLE PROXY
The undersigned holder of 2,308,800 shares of Series A Preferred Stock,
par value $.01 per share (the "Series A Preferred Stock"), of Bay Apartment
Communities, Inc., a Maryland corporation (the "Company"), hereby appoints
Messrs. Gilbert M. Meyer and Jeffrey B. Van Horn, each a shareholder and
individually the President and the Secretary of the Company, respectively, and
each of them singly, as proxies (the "Proxies"), each with full power of
substitution, for and in the name of the undersigned at an annual or special
meeting of the stockholders of the Company, and at any and all postponements or
adjournments thereof, to vote all shares of the Series A Preferred Stock of the
Company FOR the amendments to the Company's Articles of Incorporation relating
to the voting and liquidation rights of the Series A Preferred Stock which are
attached hereto as Exhibit I, as if the undersigned were present and voting such
shares. The undersigned hereby affirms that this Irrevocable Proxy is coupled
with an interest and is irrevocable, and ratifies and confirms all that the
Proxies may lawfully do or cause to be done by virtue hereof.
Executed this 22nd day of April, 1998.
WITNESS: MELLON BANK, N.A., CUSTODIAN
/s/ Jacqueline Davis By: Boston Safe Deposit and Trust Company
------------------------- Mellon Bank, N.A.
DTC No: 964
Name: /s/ Sandra M. Spontak
-----------------------------------
Title: Trust Officer
10
<PAGE> 11
EXHIBIT I
AMENDMENTS TO THE CHARTER OF
BAY APARTMENT COMMUNITIES, INC.
RELATING TO THE SERIES A PREFERRED STOCK
1. Article SECOND, Section (3)(a) of the Articles Supplementary to the
Articles of Incorporation of Bay Apartment Communities, Inc., which were filed
with the State Department of Assessments and Taxation of the State of Maryland
on September 29, 1995 in order to designate the rights, preferences and
privileges of the Series A Preferred Stock, would be deleted and the following
inserted in lieu thereof:
"(3) LIQUIDATION RIGHTS.
(a) Subject to any prior rights of any class or series of stock,
in the event of any liquidation, dissolution, or winding up of the
Corporation, either voluntary or involuntary, the holders of Series A
Preferred Stock shall be entitled to receive, prior and in preference to
any distribution of any of the assets or surplus funds of the
Corporation to the holders of Common Stock by reason of their ownership
of such stock, an amount equal to all accrued but unpaid dividends for
each share of Series A Preferred Stock then held by them. If upon the
occurrence of such event, the assets and funds thus distributed among
the holders of the Series A Preferred Stock shall be insufficient to
permit the payment to such holders of the full amounts to which they are
entitled under the preceding sentence, then, subject to any prior rights
of any classes or series of stock, the entire assets and funds of the
Corporation legally available for distribution shall be distributed
ratably to the holders of the Series A Preferred Stock and the holders
of any other shares of Stock on a parity for liquidation purposes with
the Series A Preferred Stock in proportion to the aggregate amounts owed
to each such holder."
2. Article SECOND, Section (5) of the Articles Supplementary to the
Company's Articles of Incorporation, which were filed with the State Department
of Assessments and Taxation of the State of Maryland on September 29, 1995 in
order to designate the rights, preferences and privileges of the Series A
Preferred Stock, would be deleted and the following inserted in lieu thereof:
"(5) VOTING RIGHTS.
Except as indicated in this Section 5, or except as otherwise
from time to time required by applicable law, the holders of shares of Series A
Preferred Stock shall not be entitled to vote on any matter on which the holders
of shares of Common Stock are entitled to vote, except that the holders of a
majority of the outstanding shares of Series A Preferred Stock, voting as a
separate class, shall be required to vote on and approve any material adverse
change in the
11
<PAGE> 12
rights, preferences or privileges of the Series A Preferred Stock. For purposes
of the foregoing, the creation of a new class of stock having rights,
preferences or privileges senior to, in parity with or junior to the rights,
preferences or privileges of the Series A Preferred Stock shall not be treated
as a material adverse change in the rights, preferences or privileges of the
Series A Preferred Stock, and the holders of Series A Preferred Stock shall not
have any right to vote on the creation of such new class of stock. Except as
provided above and as required by law, the holders of Series A Preferred Stock
are not entitled to vote on any merger or consolidation involving the
Corporation, on any share exchange or on a sale of all or substantially all of
the assets of the Corporation."
12
<PAGE> 1
EXHIBIT 10.7
SHAREHOLDER AGREEMENT
This Shareholder Agreement, dated as of March 9, 1998 (this
"Agreement"), is among Bay Apartment Communities, Inc., a Maryland corporation
(the "Company"), and Central States, Southeast and Southwest Areas Pension Fund
(the "Stockholder"), acting by and through its agent, LaSalle Advisors Capital
Management, Inc. ("LaSalle"), a registered investment advisor and successor to
LaSalle Advisors Limited Partnership.
RECITALS:
A. As of the date hereof, the Stockholder owns 2,308,800 shares of
Series A Preferred Stock, par value $0.01 per share (the "Series A Preferred
Stock"), and 405,022 shares of Series B Preferred Stock, par value $.01 per
share (the "Series B Preferred Stock"), of the Company (collectively, the shares
of Series A Preferred Stock and Series B Preferred Stock are hereinafter
referred to as the "Shares");
B. The Company proposes to enter into an Agreement and Plan of Merger,
dated on or about the date hereof (as the same may be amended from time to time,
the "Merger Agreement"), which will provide, on the terms and subject to the
conditions thereof, for the merger of Avalon Properties, Inc. with and into the
Company and/or any of its affiliates (the "Merger"); and
C. As a condition to the willingness of the Company to enter into the
Merger Agreement, the Company has requested that the Stockholder agree, and, in
order to induce the Company to enter into the Merger Agreement, the Stockholder
is willing to agree, to convert, or to cause to be converted, the Shares into
shares of common stock, par value $.01 per share (the "Common Stock"), of the
Company pursuant to the terms and conditions hereof.
NOW, THEREFORE, the parties hereto agree as follows:
I. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER
The Stockholder hereby represents and warrants to the Company as
follows:
1.1 Due Authority. The Stockholder has full power and authority to
execute and deliver this Agreement and to perform its obligations hereunder and
consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by or on behalf of the Stockholder and, assuming its due
authorization, execution and delivery by the Company, constitutes a legal, valid
and binding obligation of the Stockholder, enforceable against it in accordance
with its terms.
<PAGE> 2
1.2 No Conflict; Consents.
(a) The execution and delivery of this Agreement by the
Stockholder does not, and the performance by the Stockholder of its obligations
under this Agreement and the compliance by the Stockholder with the provisions
hereof do not and will not, conflict with or violate (i) the advisory agreement
between LaSalle and the Stockholder (the "Advisory Agreement") or (ii) any law,
statute, rule, regulation, order, writ, judgment or decree referred to in the
Advisory Agreement applicable to the Stockholder or the Shares.
(b) The execution and delivery of this Agreement by the
Stockholder does not, and the performance of this Agreement by the Stockholder
will not, require any consent, approval, authorization or permit of, or filing
with (except for applicable requirements, if any, of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")), or notification to, any government or
regulatory authority by the Stockholder.
(c) Only the Stockholder has, and during the Conversion Term will
have, any right, directly or indirectly, to convert or control the conversion of
the Shares.
1.3 Title to Shares. Each of Mellon Bank, N.A. ("Mellon"), as custodian,
with respect to all the outstanding shares of Series A Preferred Stock, and CS &
Co., with respect to all the outstanding shares of Series B Preferred Stock, (a)
is the record owner of the Shares free and clear, to the Stockholder's
knowledge, of any proxy or voting restriction other than pursuant to that
certain Proxy Agreement, dated as of the date hereof, between the Company and
the Stockholder (the "Proxy Agreement") and (b) has, and prior to their
conversion pursuant to this Agreement will have (subject to the possible
termination of Mellon's right to act as custodian, it being understood that no
such termination shall affect any of the Company's rights or any of the
Stockholder's obligations hereunder or under the Irrevocable Proxy given to the
Company by Mellon), the sole right to convert (subject to the direction of
LaSalle) the Shares.
II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Stockholder as
follows:
2.1 Due Authority. The Company has full power, corporate or otherwise,
and authority to execute and deliver this Agreement and to perform its
obligations hereunder. This Agreement has been duly executed and delivered by or
on behalf of the Company and, assuming its due authorization, execution and
delivery by the Stockholder, constitutes a legal, valid and binding obligation
of the Company enforceable against it in accordance with its terms.
2.2 No Conflict; Consents. (a) The execution and delivery of this
Agreement does
2
<PAGE> 3
not, and the performance by the Company of its obligations contemplated by this
Agreement and its compliance with any provisions hereof do not and will not, (i)
conflict with or violate any law, statute, rule, regulation, order, writ,
judgment or decree applicable to such party, (ii) conflict with or violate the
Company's charter or bylaws, or (iii) result in any breach of or constitute a
default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which the Company is a party or by which the Company is bound.
(b) The execution and delivery of this Agreement by the Company
does not, and the performance of this Agreement by the Company will not, require
any consent, approval, authorization or permit of, or filing with (except for
applicable requirements, if any, of the Exchange Act) or notification to, any
governmental or regulatory authority by the Company.
2.3 Affiliate Status. Assuming the Stockholder and LaSalle do not
increase their stock ownership in the Company and that the other current
relevant facts and circumstances do not change, the Company will not take the
position that either the Stockholder or LaSalle is an "affiliate" of the Company
as that term is defined in Rule 144 under the Securities Act of 1933, as
amended.
III. CERTAIN COVENANTS OF THE STOCKHOLDER
The Stockholder hereby covenants and agrees with the Company as follows:
3.1 Right to Convert. The Stockholder acknowledges and affirms that the
execution of the Merger Agreement by the Company will result in the right of the
Stockholder, pursuant to the terms of (A) Section 4.1(iii) of the Articles
Supplementary to the Company's Articles of Incorporation relating to the rights,
preferences and privileges of the Series A Preferred Stock (the "Series A
Articles Supplementary") and (B) Section 4.1(iii) of the Articles Supplementary
to the Company's Articles of Incorporation relating to the rights, preferences
and privileges of the Series B Preferred Stock (the "Series B Articles
Supplementary"), to convert the Shares into Common Stock.
3.2 Agreement Not to Convert. Notwithstanding anything contained in
Section 3.1 hereof, the Stockholder agrees that it shall not exercise its right
to convert the Shares into Common Stock as a result of the execution of the
Merger Agreement except as required by and pursuant to the terms of Section 3.3
hereof.
3.3 Conversion of Shares. On the date (the "Conversion Date") which is
two business days after the record date (the "Record Date") for determining the
holders of common stock of the Company entitled to notice of and to vote at any
annual or special meeting of stockholders called to approve the Merger Agreement
and the other transactions contemplated
3
<PAGE> 4
by the Merger, the Stockholder shall exercise its right to convert, or otherwise
cause to be converted, 1,345,000 shares of Series A Preferred Stock into an
aggregate of 1,345,000 shares (as adjusted, if hereafter required, pursuant to
the terms of the Series A Articles Supplementary) of Common Stock in accordance
with Section 3.4 hereof; provided, however, that if such number of shares of
Common Stock would then equal more than 4.9% of the number of shares of the
Company's Common Stock to be outstanding immediately after such conversion, the
number of shares of Series A Preferred Stock to be converted shall instead be
reduced so that the number of shares of Common Stock issued upon such conversion
will equal 4.9% of the number of shares of the Company's Common Stock to be
outstanding immediately after such conversion. If at any later date additional
shares of either Series A Preferred Stock or Series B Preferred Stock could be
converted without causing the 4.9% Limitation (as defined in the Series A
Articles Supplementary and Series B Articles Supplementary) to be exceeded, the
Stockholder will convert or cause to be converted such shares promptly (and will
convert or cause to be converted all shares of Series A Preferred Stock before
converting any shares of Series B Preferred Stock); provided, however, that it
shall have no obligation to do so unless the additional number of shares of
Common Stock which would be issued upon such conversions without exceeding the
4.9% Limitation would equal at least .5% of the number of shares of Common Stock
then outstanding or unless all of the then remaining outstanding shares of
Series A Preferred Stock could then be converted without exceeding the 4.9%
Limitation. In connection therewith, the Company agrees to provide written
notice to the Stockholder of the Record Date within 48 hours after it has been
fixed and publicly announced by the Company.
3.4 Procedure for Conversion. In order to convert the Shares into Common
Stock, the Stockholder shall comply with the procedures set forth in the Series
A Articles Supplementary or Series B Articles Supplementary, as the case may be,
except that even if the Stockholder does not comply with such procedures, at the
Company's election the Shares shall be deemed to have been converted immediately
prior to the close of business on the Conversion Date (or, in the event of
conversions after the Conversion Date, on the applicable date by which the
conversion should have occurred), and the person(s) entitled to receive the
Common Stock issuable upon such conversion shall be deemed for all purposes to
be record holder(s) of such Common Stock as of the close of business on such
Conversion Date (or, in the event of conversions after the Conversion Date, on
the applicable date by which the conversion should have occurred).
3.5 Transfer of Shares. (a) Except pursuant to the Proxy Agreement,
prior to the conversion of the Shares the Stockholder shall not, and shall not
permit anyone else to, (i) sell, tender, encumber, pledge, assign or otherwise
dispose of any of the Shares, (ii) deposit the Shares into a voting trust or
enter into a voting agreement or arrangement with respect to the Shares or grant
any proxy or power of attorney with respect thereto, or (iii) enter into any
contract, option or other legally binding undertaking providing for any
transaction listed in (i) or (ii) of this Section 3.5, unless prior thereto the
proposed transferee or pledgee shall have entered into a written agreement with
the Company, containing terms and conditions
4
<PAGE> 5
satisfactory to the Company, in which such transferee or pledgee shall agree to
be bound by all the terms and conditions of this Agreement.
(b) The Stockholder agrees to take such further action and
execute such other instruments as may be reasonably necessary to effectuate the
intent of this Agreement.
3.6 Legend. The Stockholder agrees it will use commercially reasonable
efforts to, and will instruct the custodian of the Shares to, tender to the
Company, within ten days after the date hereof, the certificates representing
the Shares and the Company will inscribe upon such certificates the following
legend: "The shares of preferred stock of Bay Apartment Communities, Inc. (the
"Company") represented by this certificate are subject to a Shareholder
Agreement dated as of March 9, 1998, and may not be converted, sold or otherwise
transferred except in accordance therewith. Copies of such Agreement may be
obtained at the principal executive offices of the Company upon request and
without charge."
IV. CONSIDERATION
As an inducement to the Stockholder to convert Shares pursuant to the
provisions of Article III hereof, the Company shall pay the Stockholder, at the
time of the conversion on the Conversion Date of the number of Shares required
to be converted pursuant to the first sentence of Section 3.3 hereof, Four
Hundred Eighty-Five Thousand Dollars ($485,000).
V. MISCELLANEOUS; GENERAL PROVISIONS
5.1 Severability. If any term or other provision of this Agreement is
determined to be invalid, illegal or incapable of being enforced by any rule of
law or public policy, all other conditions and provisions of this Agreement will
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto will negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible to the fullest
extent permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
5.2 Entire Agreement. This Agreement constitutes the entire agreement of
the parties and supersedes all prior agreements and undertakings, both written
and oral, between the parties with respect to the subject matter hereof.
5.3 Amendments. This Agreement may not be modified, amended, waived,
altered or supplemented, except upon the execution and delivery of a written
agreement executed by the parties hereto.
5.4 Assignment. This Agreement may not be assigned by either party
hereto by operation of law or otherwise without the other party's consent and is
binding on each party's successors and permitted assignees.
5
<PAGE> 6
5.5 Parties in Interest. This Agreement is binding upon, and shall inure
solely to the benefit of, each party hereto and nothing in this Agreement,
express or implied, is intended to or will confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
5.6 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event any provision of this Agreement was not
performed in accordance with the terms hereof or was otherwise breached. It is
accordingly agreed that the parties will be entitled to specific relief
hereunder including, without limitation, an injunction or injunctions to prevent
and enjoin breaches of the provisions of this Agreement and to enforce
specifically the terms and provisions hereof, in any state or federal court in
the State of Maryland, in addition to any other remedy to which they may be
entitled at law or in equity. Any requirements for the securing or posting of
any bond with respect to any such remedy are hereby waived.
5.7 Governing Law; Jurisdiction and Venue. This Agreement shall be
governed by, and construed in accordance with, the internal laws of the State of
Maryland without regard to its rules of conflict of laws. The parties hereto
hereby irrevocably and unconditionally consent to and submit to the exclusive
jurisdiction of the federal and state Maryland courts for any litigation arising
out of or relating to this Agreement and the transactions contemplated hereby
(and agree not to commence any litigation relating thereto except in such
courts), waive any objection to the laying of venue of any such litigation in
such Maryland courts and agree not to plead or claim in any such Maryland court
that such litigation brought therein has been brought in any inconvenient forum.
5.8 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed will be deemed to be an original but all of which taken
together will constitute one and the same agreement.
5.9 Termination. Except for Section 2.3 hereof, this Agreement shall
terminate upon the earlier of (i) the termination of the Merger Agreement and
(ii) the consummation of the Merger in accordance with the terms of the Merger
Agreement.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first written above.
BAY APARTMENT COMMUNITIES, INC.
By: /s/ Gilbert M. Meyer
-------------------------------------
Name: Gilbert M. Meyer
Title: President
CENTRAL STATES, SOUTHEAST AND
SOUTHWEST AREAS PENSION FUNDS
By Its Agent:
LaSalle Advisors Capital Management, Inc.
By: /s/ Stanley J. Kraska, Jr.
-------------------------------------
Name: Stanley J. Kraska, Jr.
Title: Managing Director
7
<PAGE> 1
Exhibit 12.1
BAY APARTMENT COMMUNITIES, INC.
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Quarter Year Year Year Year
Ended Ended Ended Ended March 17- January 1- Ended
March 31, December 31, December 31, December 31, December 31, March 16, December 31,
1998 1997 1996 1995 1994 1994 1993
------------ ------------ ------------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Operating Income $12,979 $38,941 $19,626 $11,460 $ 7,486 $ (716) $ (447)
(Less) Nonrecurring
Item:
Gain on sale $ 0 $ 0 $ 0 $(2,412) $ 0 $ 0 $ 0
Plus Extraordinary Item:
Unamortized loan fee
write-off $ 0 $ 0 $ 511 $ 0 $ 0 $ 0 $ 0
Plus Fixed Charges:
Interest expense $ 6,249 $14,113 $14,276 $11,472 $ 4,782 $2,358 $10,932
Interest capitalized 2,964 6,985 2,567 3,641 2,096 0 0
Debt cost amortization 128 505 667 1,278 241 80 218
Preferred dividend 4,029 7,480 4,264 917 0 0 0
------ ------ ------ ------ ------ ----- ------
Total fixed charges(1) $13,370 $29,083 $21,774 $17,308 $ 7,119 $2,438 $11,150
Less:
Interest capitalized $ 2,964 $ 6,985 $ 2,567 $ 3,641 $ 2,096 $ 0 $ 0
Preferred dividend 4,029 7,480 4,264 917 0 0 0
Adjusted earnings(2) $19,356 $53,559 $35,080 $21,798 $12,509 $1,722 $10,703
------ ------ ------ ------ ------ ----- ------
Ratio (2 divided by 1) 1.45 1.84 1.61 1.26 1.76 0.71 0.96
------ ------ ------ ------ ------ ----- ------
</TABLE>
<PAGE> 2
BAY APARTMENT COMMUNITIES, INC.
RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Quarter Year Year Year Year
Ended Ended Ended Ended March 17- January 1- Ended
March 31, December 31, December 31, December 31, December 31, March 16, December 31,
1998 1997 1996 1995 1994 1994 1993
------------ ------------ ------------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Operating Income $12,979 $38,941 $19,626 $11,460 $ 7,486 $ (716) $ (447)
(Less) Nonrecurring
Item:
Gain on sale $ 0 $ 0 $ 0 $(2,412) $ 0 $ 0 $ 0
Plus Extraordinary Item:
Unamortized loan fee
write-off $ 0 $ 0 $ 511 $ 0 $ 0 $ 0 $ 0
Plus Fixed Charges:
Interest expense $ 6,249 $14,113 $14,276 $11,472 $ 4,782 $2,358 $10,932
Interest capitalized 2,964 6,985 2,567 3,641 2,096 0 0
Debt cost amortization 128 505 667 1,278 241 80 218
------ ------ ------ ------ ------ ----- ------
Total fixed charges(1) $ 9,341 $21,603 $17,510 $16,391 $ 7,119 $2,438 $11,150
Less:
Interest capitalized $ 2,964 $ 6,985 $ 2,567 $ 3,641 $ 2,096 $ 0 $ 0
Adjusted earnings(2) $19,356 $53,559 $35,080 $21,798 $12,509 $1,722 $10,703
------ ------ ------ ------ ------ ----- ------
Ratio (2 divided by 1) 2.07 2.48 2.00 1.33 1.76 0.71 0.96
------ ------ ------ ------ ------ ----- ------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED BALANCE AT MARCH 31, 1998 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH (B) FIRST QUARTER FILING ON FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,892
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,506,470
<DEPRECIATION> 88,762
<TOTAL-ASSETS> 1,447,464
<CURRENT-LIABILITIES> 0
<BONDS> 605,191
0
83
<COMMON> 262
<OTHER-SE> 793,570
<TOTAL-LIABILITY-AND-EQUITY> 1,447,464
<SALES> 43,666
<TOTAL-REVENUES> 45,385
<CGS> 0
<TOTAL-COSTS> 26,157
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,249
<INCOME-PRETAX> 12,979
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,979
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,979
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
