424B5: Prospectus filed pursuant to Rule 424(b)(5)
Published on December 17, 1997
Filed Pursuant to Rule 424(b)(5)
File No. 333-39037
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 30, 1997)
3,000,000 SHARES
[LOGO] BAY APARTMENT COMMUNITIES, INC.
8.00% SERIES D CUMULATIVE REDEEMABLE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
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Dividends on the 8.00% Series D Cumulative Redeemable Preferred Stock, par
value $.01 per share (the "Series D Preferred Stock"), of Bay Apartment
Communities, Inc. (the "Company") are cumulative from the date of original
issuance and are payable quarterly, commencing March 15, 1998, at the rate of
8.00% per annum of the $25.00 liquidation preference (equivalent to a fixed
annual rate of $2.00 per share). See "Description of Preferred Stock--Series D
Preferred Stock--Dividends."
Except in certain circumstances relating to the Company's qualification as
a real estate investment trust (a "REIT"), the Series D Preferred Stock is not
redeemable prior to December 15, 2002. On and after December 15, 2002, the
Series D Preferred Stock may be redeemed for cash at the option of the Company,
in whole or in part, at a redemption price of $25.00 per share, plus accrued and
unpaid dividends, if any, thereon to the redemption date. The redemption price
(other than the portion thereof consisting of accrued and unpaid dividends)
shall be payable solely out of the sale proceeds of other capital stock of the
Company, which may include other series of the Company's preferred stock, par
value $.01 per share ("Preferred Stock"), and from no other source. The Series D
Preferred Stock has no stated maturity and will not be subject to any sinking
fund or mandatory redemption and will not be convertible into any other
securities of the Company. See "Description of Preferred Stock--Series D
Preferred Stock--Redemption." In order to ensure that the Company remains a
qualified REIT for federal income tax purposes, shares of Series D Preferred
Stock may be exchanged for shares of Excess Stock (as defined in the
accompanying Prospectus) if a holder owns more than 9.0% of the Series D
Preferred Stock, and the Company will have the right to purchase Excess Stock
from the holder. See "Restrictions on Transfers of Capital Stock" in the
accompanying Prospectus.
Application has been made to list the Series D Preferred Stock on the New
York Stock Exchange (the "NYSE") and the Pacific Exchange (the "PCX"). If
approved, trading of the Series D Preferred Stock on the NYSE and the PCX is
expected to commence within a 30-day period after the initial delivery of the
Series D Preferred Stock. See "Underwriting."
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SEE "RISK FACTORS" COMMENCING ON PAGE S-5 FOR A DISCUSSION OF CERTAIN RISK
FACTORS RELEVANT TO AN INVESTMENT IN THE SERIES D PREFERRED STOCK.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(1) Plus accrued dividends, if any, from the date of original issuance.
(2) The Company has agreed to indemnify the underwriters (the "Underwriters")
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $100,000.
(4) Assuming exercise in full of the 30-day option granted by the Company to the
Underwriters to purchase up to 450,000 additional shares of Series D
Preferred Stock, on the same terms, solely to cover over-allotments. See
"Underwriting."
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The shares of Series D Preferred Stock are offered by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to their right to reject orders in whole or in part. It
is expected that delivery of the shares of Series D Preferred Stock will be made
in New York, New York on or about December 18, 1997.
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PAINEWEBBER INCORPORATED MORGAN STANLEY DEAN WITTER
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THE DATE OF THIS PROSPECTUS SUPPLEMENT IS DECEMBER 15, 1997.
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PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus Supplement and the
accompanying Prospectus or incorporated herein and therein by reference. Unless
the context otherwise requires, all references in this Prospectus Supplement to
the "Company" refer to Bay Apartment Communities, Inc. and its subsidiaries on a
consolidated basis. This Prospectus Supplement contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Company's actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
are discussed in the section entitled "Risk Factors" starting on page S-5 of
this Prospectus Supplement. The Company cautions the reader, however, that the
factors discussed in that section may not be exhaustive.
THE COMPANY
The Company is a fully integrated apartment company with in-house
acquisition, development, construction, reconstruction, financing, marketing,
leasing and management expertise, and is one of the most experienced developers
and operators of upscale apartment communities in Northern California and, in
particular, the San Francisco Bay Area (i.e., Alameda, Contra Costa, Marin,
Napa, San Francisco, San Mateo, Santa Clara, Solano and Sonoma Counties).
The Company currently owns, or holds substantially all of the ownership
interests in, and manages 49 apartment communities (the "Communities")
containing 13,124 apartment homes, including homes delivered at Toscana, a
partially developed community. A substantial majority of the Communities, 37 out
of 49, are located in Northern California (principally in the San Francisco Bay
Area), with a concentration in the counties of San Francisco, San Mateo, Alameda
and Santa Clara (the "Primary Markets"), while ten Communities are located in
Southern California and two Communities are located in the State of Washington.
The Company has also agreed, subject to certain contingencies, to acquire a 264
apartment home community currently under construction in Redmond, Washington. In
addition to the Communities, the Company owns six land sites on which it is
building, or plans to commence building in the future, six communities (the
"Current Development Communities"), which will contain an aggregate of
approximately 1,698 apartment homes, including the remaining apartment homes
under construction at Toscana.
The Company elected to be taxed as a REIT for federal income tax purposes
for the year ending December 31, 1994 and has not revoked such election. The
Company was incorporated under the laws of the State of California in 1978 and
was reincorporated in the State of Maryland in July 1995. Its executive offices
are located at 4340 Stevens Creek Boulevard, Suite 275, San Jose, California
95129 and its telephone number is (408) 983-1500.
THE OFFERING
SECURITIES OFFERED....... 3,000,000 shares of 8.00% Series D Preferred Stock.
RANKING.................. With respect to the payment of dividends and amounts
upon liquidation, the Series D Preferred Stock will
rank (i) senior to the Company's common stock, par
value $.01 per share ("Common Stock"), the Company's
Series A Convertible Preferred Stock, par value $.01
per share ("Series A Convertible Preferred Stock"),
and the Company's Series B Convertible Preferred
Stock, par value $.01 per share ("Series B Convertible
Preferred Stock"), and (ii) pari passu with the
Company's 8.50% Series C Cumulative Redeemable
Preferred Stock, par value $.01 per share ("Series C
Preferred Stock"), which represent the only capital
stock of the Company currently outstanding. See
"Description of Preferred Stock -- Series A
Convertible Preferred Stock and Series B Convertible
Preferred Stock," "-- Series C Preferred Stock," and
"-- Series D Preferred Stock."
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES D PREFERRED
STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF THE SERIES D PREFERRED
STOCK TO STABILIZE ITS MARKET PRICE AND THE PURCHASE OF THE SERIES D PREFERRED
STOCK TO COVER SHORT POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
S-2
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USE OF PROCEEDS........... The net proceeds from the sale of the Series D
Preferred Stock will be used to reduce borrowings
under the Company's $350 million unsecured line of
credit from Union Bank of Switzerland and other
participating banks (the "Unsecured Credit
Facility"). See "Use of Proceeds."
DIVIDENDS................. Dividends on the Series D Preferred Stock are
cumulative from the date of original issuance and are
payable quarterly on or about the 15th day of each
March, June, September and December, commencing on
March 15, 1998 at the rate of 8.00% per annum of the
$25.00 liquidation preference (equivalent to a fixed
annual rate of $2.00 per share). The first dividend
will be for less than a full quarter. Dividends on
the Series D Preferred Stock will accrue whether or
not the Company's credit facilities at any time
prohibit the current payment of dividends, whether or
not the Company has earnings, whether or not there
are funds legally available for the payment of such
dividends and whether or not such dividends are
declared. See "Description of Preferred Stock --
Series D Preferred Stock -- Dividends."
LIQUIDATION PREFERENCE.... The liquidation preference for each share of Series D
Preferred Stock is $25.00, plus an amount equal to
all accrued and unpaid dividends. See "Description of
Preferred Stock -- Series D Preferred Stock --
Liquidation Preference."
REDEMPTION................ Except in certain circumstances relating to the
preservation of the Company's status as a REIT (see
"Restrictions on Transfers of Capital Stock" in the
accompanying Prospectus), the Series D Preferred
Stock is not redeemable prior to December 15, 2002.
On and after December 15, 2002, the Series D
Preferred Stock may be redeemed for cash at the
option of the Company, in whole or in part, at $25.00
per share, plus all accrued and unpaid dividends
thereon to the date fixed for redemption. The
redemption price (other than the portion thereof
consisting of accrued and unpaid dividends) shall be
payable solely out of the sale proceeds of other
capital stock of the Company, which may include other
series of Preferred Stock, and from no other source.
See "Description of Preferred Stock -- Series D
Preferred Stock -- Redemption."
VOTING RIGHTS............. Holders of Series D Preferred Stock will generally
have no voting rights except as required by law.
However, whenever dividends on any shares of Series D
Preferred Stock shall be in arrears for six or more
quarterly periods, the holders of the Series D
Preferred Stock (voting separately as a class with
all other series of Preferred Stock upon which like
voting rights have been conferred and are
exercisable) will be entitled to vote for the
election of a total of two directors of the Company
until all dividends accumulated on such shares of
Series D Preferred Stock have been fully paid or
declared and a sum sufficient for the payment thereof
set aside for payment. See "Description of Preferred
Stock -- Series D Preferred Stock -- Voting Rights."
CONVERSION................ The Series D Preferred Stock is not convertible into
or exchangeable for any other property or securities
of the Company, except that the shares of Series D
Preferred Stock may be exchanged by the Company for
shares of Excess Stock in order to ensure that the
Company remains a qualified REIT for federal income
tax purposes. See "Restrictions on Transfers of
Capital Stock" in the accompanying Prospectus.
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S-3
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RESTRICTIONS ON
OWNERSHIP................. Ownership by a single holder of more than 9.0% of any
class or series of the capital stock of the Company,
including the Series D Preferred Stock, is restricted
in order to ensure that the Company remains a
qualified REIT for federal income tax purposes. See
"Restrictions on Transfers of Capital Stock" in the
accompanying Prospectus.
TRADING................... Application has been made to list the Series D
Preferred Stock on the NYSE and the PCX. If approved,
trading of the Series D Preferred Stock on the NYSE
and the PCX is expected to commence within a 30-day
period after the initial delivery of the shares of
Series D Preferred Stock.
RISK FACTORS
An investment in the Series D Preferred Stock involves various risks, and
prospective investors should carefully consider the matters discussed under
"Risk Factors" commencing on page S-5 of this Prospectus Supplement before
making any investment in the Company.
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S-4
RISK FACTORS
An investment in the Company involves various risks. Prospective
stockholders should consider the following risk factors:
DEVELOPMENT AND ACQUISITION RISKS
The Company intends to continue to pursue the development and construction
of apartment home communities in accordance with the Company's development and
underwriting policies. Risks associated with the Company's development and
construction activities may include: the abandonment of development and
acquisition opportunities explored by the Company; construction costs of a
community may exceed original estimates due to increased materials, labor or
other expenses, which could make completion of the community uneconomical;
occupancy rates and rents at a newly completed community are dependent on a
number of factors, including market and general economic conditions, and may not
be sufficient to make the community profitable; financing may not be available
on favorable terms for the development of a community; and construction and
lease-up may not be completed on schedule, resulting in increased debt service
expense and construction costs. Development activities are also subject to risks
relating to the inability to obtain, or delays in obtaining, all necessary
zoning, land-use, building, occupancy, and other required governmental permits
and authorizations. The occurrence of any of the events described above could
adversely affect the Company's ability to achieve its projected yields on
communities under development or reconstruction and could prevent the Company
from making expected distributions. See "-- Real Estate Investment Risks."
For new development communities, the Company's goal, on average, is to
achieve projected earnings before interest, income taxes, depreciation and
amortization ("EBITDA") as a percentage of total budgeted construction cost of
approximately 10%. Projected EBITDA as a percentage of total budgeted
construction cost represents EBITDA projected to be received in the first
calendar year after a community reaches stabilized occupancy (i.e., the first
month when the community has a weighted average physical occupancy of at least
95%), based on current market rents, less projected stabilized property
operating and maintenance expenses, before interest, income taxes, depreciation
and amortization. Total budgeted construction cost is based on current
construction costs, including interest capitalized during the construction
period. Market rents and construction costs reflect those prevailing in the
community's market at the time the Company's development budgets are prepared
while taking into consideration certain changes to those market conditions
anticipated by the Company at the time. Although the Company attempts to
anticipate changes in market 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, the Company has obtained bids for the construction of the first
two phases of this four-phase project. Construction costs are increasing and
management believes that when the last two phases are bid in late 1997, 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.
Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that judgments with respect to the costs of
improvements to bring an acquired community up to standards established for the
market position intended for that community will prove inaccurate, as well as
general investment risks associated with any new real estate investment.
Although the Company undertakes an evaluation of the physical condition of each
new community before it is acquired, certain defects or necessary repairs may
not be detected until after the community is acquired, which could significantly
increase the Company's total acquisition costs.
S-5
As described above, construction costs are increasing and the cost to
reposition Communities that have been acquired has, in some cases, exceeded
management's original estimates. Management believes that it may experience
similar increases in the future. There can be no assurances that the Company
will be able to charge rents upon completing the repositioning of the
Communities that will be sufficient to fully offset the effects of any increases
in construction costs.
REAL ESTATE INVESTMENT RISKS
General Risks. Real property investments are subject to varying degrees of
risk. The yields available from equity investments in real estate depend on the
amount of income generated and expenses incurred. If the Communities do not
generate revenues sufficient to meet operating expenses, including debt service
and capital expenditures, the Company's cash flow and ability to pay
distributions to its stockholders will be adversely affected.
An apartment community's revenues and value may be adversely affected by a
number of factors, including the national economic climate; the local economic
climate (which may be adversely impacted by plant closings, industry slowdowns,
military base closings and other factors); local real estate conditions (such as
an oversupply of or a reduced demand for apartment homes); the perceptions by
prospective residents of the safety, convenience and attractiveness of the
community; the ability of the owner to provide adequate management, maintenance
and insurance; and increased operating costs (including real estate taxes and
utilities). Certain significant expenditures associated with each equity
investment (such as mortgage payments, if any, real estate taxes, insurance and
maintenance costs) are generally not reduced when circumstances cause a
reduction in income from the investment. If a community is mortgaged to secure
payment of indebtedness, and if the Company is unable to meet its mortgage
payments, a loss could be sustained as a result of foreclosure on the community
or the exercise of other remedies by the mortgagee. In addition, real estate
values and income from communities are also affected by such factors as the cost
of compliance with government regulation, including zoning and tax laws,
interest rate levels and the availability of financing.
Operating Risks. Each of the Communities is subject to all operating risks
common to apartment communities in general, any and all of which might adversely
affect apartment home occupancy or rental rates. Increases in unemployment and a
decline in household formation in Northern or Southern California, or the State
of Washington, generally might adversely affect occupancy or rental rates.
Increases in operating costs due to inflation and other factors may not be
offset by increased rents. Residents may be unable or unwilling to pay rent
increases. Rent control or rent stabilization laws or other laws regulating
housing are applicable in certain of the cities where the Company owns
Communities and may be enacted in the future in the jurisdictions in which one
or more communities are located or may be acquired; if enacted, compliance with
these laws may prevent the Company from raising rents to offset increases in
operating costs. Similarly, the local rental market may limit the extent to
which rents may be increased to meet increased expenses without decreasing
occupancy rates. If any of the above occurs, the Company's ability to achieve
its desired yields on the Communities and to make expected distributions to
stockholders could be adversely affected.
Market Illiquidity. Equity real estate investments are relatively illiquid.
Such illiquidity will tend to limit the ability of the Company to vary its
portfolio promptly in response to changes in economic or other conditions. In
addition, the Internal Revenue Code of 1986, as amended (the "Code"), limits the
Company's ability to sell properties held for fewer than four years, which may
affect the Company's ability to sell properties without adversely affecting
returns to holders of Common Stock.
Competition. There are numerous housing alternatives that compete with the
Communities in attracting residents. The Communities compete directly with other
rental apartments and single-family homes that are available for rent in the
markets in which the Communities are located. The Communities also compete for
residents with the new and existing home markets. The number of competitive
residential properties in a particular area could have a material adverse effect
on the Company's ability to lease apartment homes and on the rents charged. In
addition, competitors for acquisitions and development projects may have greater
resources than the Company thereby putting the Company at a competitive
disadvantage.
S-6
Affordable Housing Laws or Restrictions. A number of the Communities are,
and will be in the future, subject to federal, state and local statutes or other
restrictions requiring that a percentage of apartment homes be made available to
residents satisfying certain income requirements. The Company must comply with
these restrictions as a condition to obtaining tax-exempt financing for these
Communities. These laws and restrictions, as well as any changes thereto making
it more difficult to meet such requirements, or a reduction in or elimination of
certain financing advantages available in some instances to persons satisfying
such requirements, could adversely affect the Company's profitability and its
development and acquisition projects in the future.
DEPENDENCE ON NORTHERN CALIFORNIA AND PRIMARY MARKETS
Although the Company may expand further outside of Northern California, and
intends to make additional selective acquisitions in Southern California and the
State of Washington from time to time, currently a substantial majority of the
Communities are located in Northern California (primarily in the San Francisco
Bay Area), where the Company has most of its acquisition, development,
construction and marketing expertise. The Company's performance, therefore, is
dependent upon economic conditions in these markets. A decline in the economy in
these markets may adversely affect the ability of the Company to make expected
distributions to stockholders. Similarly, a decline in demand for discretionary
consumer goods and leisure travel, as well as a deterioration of market
fundamentals affecting high technology industries, could have an adverse impact
upon Northern California. Reductions in the level of government spending in the
defense industry may also have an impact upon employment and demand for
residential real estate in the Primary Markets.
NEW MARKETS
In 1996, the Company expanded beyond Northern California and has since
acquired ten Communities located in Southern California (including Orange, Los
Angeles and San Diego Counties) and two Communities located in the State of
Washington (i.e., King County). The Company has also agreed to acquire a 264
apartment home community currently under construction in Redmond, Washington.
This proposed acquisition will not be consummated until 90 days after
construction is completed and the community is 90% occupied by residents.
Because the consummation of the acquisition 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 acquire the community or, if the community is
acquired, that it will be purchased on the terms currently contemplated. The
Company also intends to make other selective acquisitions in these markets and
other new markets from time to time. The Company's historical experience is in
Northern California, primarily in the San Francisco Bay Area, and it is possible
that the Company's expertise in those markets may not assist the Company in its
new markets. In such event, the Company may be exposed to, among others, risks
associated with (i) a lack of market knowledge and understanding of the local
economy, (ii) an inability to access land and property acquisition
opportunities, (iii) an inability to obtain construction tradespeople, (iv)
sudden adverse shifts in supply and demand factors and (v) an unfamiliarity with
local governmental procedures.
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, and established an aggregate PML at that time of $63.8
million for the 41 Communities owned at that time and Toscana, which is a PML
level that is expected to be exceeded only 10% of the time in the event of such
a severe earthquake. The actual aggregate PML could be higher as a result of
variations in soil classifications
S-7
and structural vulnerabilities. Two of the Communities had individual PMLs of
30%, while seven Communities had PMLs of 25%, and the remaining 32 Communities
owned at such time and Toscana each had PMLs of 20% or less. The Company has
obtained an individual PML assessment for each of the seven Communities acquired
since June 1997. One Community had an individual PML of 30%, another had an
individual PML of 24%, and the remaining five Communities each 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 seven 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, with a 5% deductible subject to
a maximum deductible of $2.43 million. 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.
REAL ESTATE FINANCING RISKS
Risks Relating to the Credit Enhancement. As of September 30, 1997, the
Company was obligated for certain mortgage indebtedness funded by tax-exempt
bonds (the "Bonds") in the aggregate principal amount of approximately $224
million on 12 Communities (Waterford, Villa Mariposa, Fairway Glen, Foxchase,
Barrington Hills, Crossbrook, Rivershore, Canyon Creek, Sea Ridge, City Heights,
Countrybrook and Larkspur Canyon). Principal and interest payments due to
holders of the Bonds are secured by a first deed of trust on the Community
associated with the respective Bond issue.
Scheduled principal and interest payments due on the Bonds financing
Foxchase, Fairway Glen, Waterford and Villa Mariposa (the "1994 Bonds") are
guaranteed by an insurance policy (the "FGIC Credit Enhancement") issued by
Financial Guaranty Insurance Company ("FGIC"). The FGIC Credit Enhancement will
terminate on March 17, 2004 and, if the FGIC Credit Enhancement is not renewed
or replaced, the 1994 Bond documents may require balloon payments in 2004
aggregating approximately $87.4 million, less any unscheduled principal
amortization. Scheduled interest and principal payments due on the Bonds
financing Barrington Hills, Crossbrook, Rivershore, Canyon Creek, Sea Ridge,
City Heights and Larkspur Canyon are supported by a 30-year credit enhancement,
expiring June 15, 2025 (the "FNMA Credit Enhancement" and, together with the
FGIC Credit Enhancement, the "Credit Enhancements"), provided by the Federal
National Mortgage Association ("FNMA"). The Bonds financing Countrybrook are
also supported by a credit enhancement provided by FNMA through April 1, 2002.
Each of the Credit Enhancements contains certain provisions under which a
default of certain payment obligations or covenants would entitle FGIC or FNMA,
as the case may be, to declare a default under its respective Credit Enhancement
documents and exercise its remedies (including foreclosure) under mortgages that
encumber 11 of the 12 Bond-financed Communities and eight additional
Communities, with a consequent loss of income and asset value to the Company. In
addition, gross rents collected from the residents of these 19 Communities have
been and will continue to be deposited in cash collateral accounts established
with financial institutions acceptable to FGIC or FNMA, as applicable. The
Company does not have access to these funds until all required monthly debt
service payments due on the Bonds and certain other payments are made. A default
under either of the Credit Enhancements or the Bond documents may adversely
affect the ability of
S-8
the Company to make expected distributions to shareholders, including
distributions required to maintain its REIT status. See "Certain Federal Income
Tax Considerations."
Bond Compliance Requirements. The 12 Bond-financed Communities are subject
to deed restrictions or restrictive covenants relating to tax-exempt bond
financing. In addition, the Code and the regulations promulgated thereunder
impose various restrictions, conditions and requirements relating to the
exclusion from gross income for federal income tax purposes of interest on
qualified Bond obligations, including requirements that at least 20% of
apartment homes be made available to residents with gross incomes that do not
exceed 80% of the median income (50% in the case of the Canyon Creek, City
Heights and Sea Ridge Communities) in the area, measured annually. Some of the
Communities financed with Bonds are also subject to a requirement that the
rental rates for the 20% of the apartment homes that are subject to the
foregoing requirement may not exceed 30% of one-half of the applicable median
income. In addition to federal requirements, certain state and local authorities
have imposed rental restrictions. The Bond compliance requirements and the
requirements of any future tax-exempt bond financing utilized by the Company may
have the effect of limiting the Company's income from the Bond-financed
Communities if the Company is required to lower its rental rates materially to
attract residents who satisfy the median income test. If the required number of
apartment homes are not reserved for residents satisfying these income
requirements, the tax-exempt status of the Bonds may be terminated, the
obligations of the Company under the Bond documents may be accelerated and other
contractual remedies against the Company may be available.
Risk of Rising Interest Rates. As of September 30, 1997, the Company had
outstanding variable rate indebtedness aggregating approximately $291 million,
consisting of $204 million of tax-exempt financing and $87 million of borrowings
under the Company's Unsecured Credit Facility. As of such date, all of the
Company's $204 million of variable rate tax-exempt financing had been fixed
through interest rate swap agreements, of which an aggregate of $87.4 million
had been fixed at an all-inclusive interest rate of 5.88% per annum until March
2004, an aggregate of $88.3 million had been fixed at an all-inclusive interest
rate of 6.48% per annum until June 2010, $20.7 million had been fixed at an
all-inclusive interest rate of 5.80% per annum until July 2007 and $7.6 million
had been fixed at an all-inclusive interest rate of 5.50% per annum until
September 2002. Additional indebtedness that the Company may incur under the
Unsecured Credit Facility will also bear interest at a variable rate. To the
extent the Company uses variable rate debt for future financings, and with
respect to the portion of the Company's outstanding indebtedness that will bear
interest at a variable rate, increases in these interest rates could adversely
affect the Company's ability to make distributions to stockholders.
Consideration will be given to acquiring interest rate hedging or protection
agreements, if appropriate and cost effective, with respect to future variable
rate indebtedness to seek to reduce exposure to interest rate increases on such
debt.
POTENTIAL ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws, a current or
previous owner or operator of real estate may be required (typically regardless
of knowledge or responsibility) to investigate and remediate the effects of
hazardous or toxic substances or petroleum product releases at such property,
and may be held liable to a governmental entity or to third parties for property
damage and for investigation and remediation costs incurred by such parties in
connection with the contamination, which costs may be substantial. The presence
of such substances (or the failure to properly remediate the contamination) may
adversely affect the owner's ability to borrow against, sell or rent such
property.
Certain federal, state and local laws and regulations govern the removal,
encapsulation or disturbance of asbestos-containing materials ("ACMs") when such
materials are in poor condition or in the event of construction, remodeling,
renovation or demolition of a building. Such laws may impose liability for
release of ACMs and may provide for third parties to seek recovery from owners
or operators of real properties for personal injury associated with ACMs. In
connection with its ownership and operation of the Communities, the Company
potentially may be liable for such costs. The Company is not aware that any ACMs
were used in connection with the construction of the Communities developed by
the Company, all of which were constructed after 1983. The Company is aware that
ACMs were used in connection with the construction of the following Communities
acquired by the Company: Regatta Bay, Sea Ridge, Village Square, Sunset
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Towers, Mill Creek, Crowne Ridge (formerly Channing Heights), Lafayette Place
(formerly Martinique Gardens), SummerWalk (formerly Rancho Penasquitos),
TimberWood (formerly The Village), SunScape (formerly Banbury Cross), Cardiff
Gardens, Mission Woods (formerly Genesee Gardens), Cedar Ridge (formerly
Regency), The Park, Lakeside, Creekside and Governor's Square. The Company does
not anticipate that it will incur any material liabilities in connection with
the presence of ACMs at the Communities. The Company currently has in place or
intends to implement an operations and maintenance program for ACMs at the
Regatta Bay, Sea Ridge, Village Square, Sunset Towers, Mill Creek, Crowne Ridge,
Lafayette Place, SummerWalk, TimberWood, SunScape, Cardiff Gardens, Mission
Woods, Cedar Ridge, The Park, Lakeside, Creekside and Governor's Square
Communities.
All of the Communities, and all of the Current Development Communities,
have been subjected to a Phase I or similar environmental assessment (which
involves general inspections without soil sampling or groundwater analysis and
generally without radon testing). These assessments have not revealed any
environmental liability that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations. However, one
Community and one Current Development Community are subject to soil and
groundwater remediation of contamination from adjacent landowners. In the case
of one of the Current Development Communities, Toscana, National Semiconductor
Corporation is causing remediation to occur and has provided an indemnity which
the Company may rely upon for certain environmental liabilities. Additionally,
another Current Development Community, Paseo Alameda, required underground
storage tank removal and other environmental cleanup. The Company is also aware
that certain of the Communities have lead paint and the Company is undertaking
or intends to undertake appropriate remediation activity. Nevertheless, it is
possible that the assessments do not reveal all environmental liabilities or
there are material environmental liabilities of which the Company is unaware. No
assurances can be given that (i) future laws, ordinances or regulations will not
impose material environmental liability, or (ii) the current environmental
condition of the Communities or the Current Development Communities will not be
affected by the condition of land or operations in the vicinity of such
Communities (such as the presence of underground storage tanks), or by third
parties unrelated to the Company.
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THE COMPANY
The Company is a fully-integrated apartment company with in-house
acquisition, development, construction, reconstruction, financing, marketing,
leasing and management expertise and is one of the most experienced developers
and operators of upscale apartment communities in Northern California and, in
particular, in the San Francisco Bay Area. With its experience and in-house
capabilities, the Company believes it is well-positioned to continue to take
advantage of the strong demand for upscale apartment homes and the development
and acquisition opportunities presented by the current economic conditions in
Northern and Southern California and the State of Washington. See "Risk
Factors."
The Company is a self-administered and self-managed REIT that currently
owns, or holds substantially all of the ownership interests in, and manages 49
Communities containing 13,124 apartment homes, including homes delivered at
Toscana, a partially developed community. A substantial majority of the
Communities, 37 out of 49, are located in Northern California (principally in
the San Francisco Bay Area), with a concentration in the counties of San
Francisco, San Mateo, Alameda and Santa Clara, while ten Communities are located
in Southern California and two Communities are located in the State of
Washington. The Company has also agreed, subject to certain contingencies, to
acquire a 264 apartment home community currently under construction in Redmond,
Washington. In addition to the Communities, the Company owns six land sites on
which it is building, or plans to commence building in the future, six
communities which will contain an aggregate of approximately 1,698 apartment
homes, including the remaining apartment homes under construction at Toscana.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Series D Preferred Stock offered pursuant to this Prospectus Supplement, after
all anticipated issuance costs, are estimated to be approximately $72.5 million
(approximately $83.4 million if the Underwriters' over-allotment option is
exercised in full). The Company will use the net proceeds from this offering to
reduce borrowings under the Unsecured Credit Facility, which were used to fund
the acquisition of the Governor's Square Community and the development of the
Current Development Communities. The Unsecured Credit Facility bears interest at
the London Interbank Offered Rate (based on a maturity selected by the Company)
plus 0.90% per annum (6.81% per annum as of December 12, 1997) and matures in
May 2000.
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CAPITALIZATION
The following table sets forth the historical capitalization for the
Company as of September 30, 1997 and the pro forma capitalization for the
Company as of such date to reflect the issuance of Common Stock in December
1997, and as adjusted to give effect to this offering, including the use of the
net proceeds derived therefrom as described in "Use of Proceeds."
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(1) As of December 12, 1997 there was $125.1 million outstanding under the
Unsecured Credit Facility.
(2) Excludes 1,419,474 shares of Common Stock reserved for issuance under the
1994 Stock Incentive Plan, as amended and restated.
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The following table sets forth the Company's consolidated ratios of
earnings to combined fixed charges and preferred stock dividends for the periods
shown:
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(1) Ratios for the period January 1 - March 16, 1994 and the years ended 1993
and 1992 reflect periods prior to the recapitalization and initial public
offering of the Company on March 17, 1994. The earnings for these periods
were inadequate to cover fixed charges as follows:
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of pre-tax income from
continuing operations plus fixed charges. Fixed charges consist of interest
expense, capitalized interest and the amortization of debt issuance costs. The
Company issued 2,308,800 shares of Series A Convertible Preferred Stock in
October 1995, 405,022 shares of Series B Convertible Preferred Stock in May
1996, and 2,300,000 shares of Series C Preferred Stock in June 1997.
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DESCRIPTION OF PREFERRED STOCK
This description of the particular terms of the Preferred Stock supplements
and, to the extent inconsistent therewith, replaces the description of the
general terms and provisions of the Preferred Stock set forth in the
accompanying Prospectus, to which description reference is hereby made.
GENERAL
The Company is authorized to issue up to 25,000,000 shares of Preferred
Stock in one or more series, with such terms, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption, in each
case, if any, as are permitted by Maryland law and as the Board of Directors of
the Company may determine by adoption of an amendment of the Company's Articles
of Incorporation, as amended (the "Articles"), without any further vote or
action by the Company's stockholders. See "Description of Preferred Stock" in
the accompanying Prospectus. The Series D Preferred Stock is a series of the
Company's Preferred Stock.
Prior to the completion of the offering, the Board of Directors of the
Company will adopt an amendment of the Articles determining the terms of a
series of Preferred Stock consisting of up to 3,450,000 shares, designated 8.00%
Series D Cumulative Redeemable Preferred Stock. The following summary of the
terms and provisions of the Preferred Stock does not purport to be complete and
is qualified in its entirety by reference to the pertinent sections of the
Articles and the Articles Supplementary creating the Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock and Series C Preferred
Stock and the Articles Supplementary to be adopted with respect to the Series D
Preferred Stock (the "Designating Amendment"), each of which is available from
the Company.
The transfer agent, registrar and dividend disbursing agent for the Series
D Preferred Stock will be American Stock Transfer & Trust Company of New York,
New York.
SERIES A CONVERTIBLE PREFERRED STOCK AND SERIES B CONVERTIBLE PREFERRED STOCK
The Company currently has outstanding 2,308,800 shares of Series A
Convertible Preferred Stock and 405,022 shares of Series B Convertible Preferred
Stock. The Series A Convertible Preferred Stock and the Series B Convertible
Preferred Stock have substantially the same terms and conditions. Both Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock are
entitled to receive dividends equal to one hundred and three percent (103%) of
the dividends, if any, paid on the Common Stock. The Series D Preferred Stock
will rank senior to the Series A Convertible Preferred Stock and the Series B
Convertible Preferred Stock with respect to the payment of dividends and
payments upon liquidation. The Series A Convertible Preferred Stock and the
Series B Convertible Preferred Stock generally have no voting rights and, except
in certain limited circumstances, cannot be converted into Common Stock prior to
October 1998. Thereafter, the Series A Convertible Preferred Stock and the
Series B Convertible Preferred Stock may be converted on a share-for-share basis
into shares of Common Stock, subject to certain ownership limitations. In
October 2005, all outstanding shares of Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock will be automatically converted into shares
of Common Stock. The Series A Convertible Preferred Stock and the Series B
Convertible Preferred Stock are not traded on any securities exchange and the
Company does not have any obligation to list or quote those securities on any
securities exchange. The holders of the Series A Convertible Preferred Stock and
the Series B Convertible Preferred Stock have registration rights with respect
to the shares of Common Stock issuable upon conversion of those securities.
SERIES C PREFERRED STOCK
The Company currently has outstanding 2,300,000 shares of Series C
Preferred Stock. Holders of shares of the Series C Preferred Stock are entitled
to receive, when and as declared by the Board of Directors, out of funds legally
available for the payment of dividends, cumulative preferential cash dividends
at the rate of 8.50% per annum of their $25.00 liquidation preference
(equivalent to a fixed annual rate of $2.125 per share). Such dividends are
cumulative from the date of original issue and are payable quarterly in arrears
on or before the 15th day of each March, June, September and December or, if
such day is not a business day, the next
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succeeding business day. The Series C Preferred Stock is not redeemable prior to
June 20, 2002. On and after June 20, 2002, the Company, at its option upon not
less than 30 nor more than 60 days' prior written notice, may redeem shares of
the Series C Preferred Stock, in whole or in part, at any time or from time to
time, for cash at a redemption price of $25.00 per share, plus all accrued and
unpaid dividends thereon to the date fixed for redemption. The Series C
Preferred Stock is listed on the NYSE and the PCX under the symbol "BYA pc."
Except with respect to the foregoing description of the dividend rate and
redemption date of the Series C Preferred Stock, the terms of the Series C
Preferred Stock are substantially identical to the terms of the Series D
Preferred Stock. See "-- Series D Preferred Stock." The Series D Preferred Stock
will rank pari passu with the Series C Preferred Stock with respect to the
payment of dividends and payments upon liquidation.
SERIES D PREFERRED STOCK
DIVIDENDS
Holders of shares of the Series D Preferred Stock shall be entitled to
receive, when and as declared by the Board of Directors, out of funds legally
available for the payment of dividends, cumulative preferential cash dividends
at the rate of 8.00% per annum of their $25.00 liquidation preference
(equivalent to a fixed annual rate of $2.00 per share). Such dividends shall be
cumulative from the date of original issue and shall be payable quarterly in
arrears on or before the 15th day of each March, June, September and December
or, if such day is not a business day, the next succeeding business day (each, a
"Dividend Payment Date"). The first dividend, which will be paid on March 15,
1998, will be for less than a full quarter. Such dividend and any dividend
payable on the Series D Preferred Stock for any partial dividend period will be
computed on the basis of a 360-day year consisting of twelve 30-day months.
Dividends will be payable to holders of record as they appear in the stock
records of the Company at the close of business on the applicable record date,
which shall be the first day of the calendar month in which the applicable
Dividend Payment Date falls or on such other date designated by the Board of
Directors of the Company for the payment of dividends that is not more than 30
nor less than 10 days prior to such Dividend Payment Date (each, a "Dividend
Record Date"). The Series D Preferred Stock will rank senior to the Common
Stock, the Series A Convertible Preferred Stock and the Series B Convertible
Preferred Stock, and pari passu with the Series C Preferred Stock, with respect
to the payment of dividends.
No dividends on shares of the Series D Preferred Stock shall be declared by
the Board of Directors of the Company or paid or set apart for payment by the
Company at such time as the terms and provisions of any agreement of the
Company, including any agreement relating to its indebtedness, prohibits such
declaration, payment or setting apart for payment or provides that such
declaration, payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such declaration or payment shall be
restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Series D Preferred Stock
will accrue whether or not the Company has earnings, whether or not there are
funds legally available for the payment of such dividends and whether or not
such dividends are declared. Accrued but unpaid dividends on the Series D
Preferred Stock will accumulate as of the Dividend Payment Date on which they
first become payable. Except as set forth in the next sentence, no dividends
will be declared or paid or set apart for payment on any capital stock of the
Company or any other series of Preferred Stock ranking, as to dividends, on a
parity with or junior to the Series D Preferred Stock (other than a dividend in
shares of the Company's Common Stock or in any other class of capital stock
ranking junior to the Series D Preferred Stock as to dividends and upon
liquidation) for any period unless full cumulative dividends have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for such payment on the Series D Preferred Stock
for all past dividend periods and the then current dividend period. When
dividends are not paid in full (and a sum sufficient for such full payment is
not so set apart) upon the Series D Preferred Stock and the shares of any other
series of Preferred Stock ranking on a parity as to dividends with the Series D
Preferred Stock, all dividends declared upon the Series D Preferred Stock and
any other series of Preferred Stock ranking on a parity as to dividends with the
Series D Preferred Stock shall be declared pro rata so that the amount of
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dividends declared per share of Series D Preferred Stock and such other series
of Preferred Stock shall in all cases bear to each other the same ratio that
accrued dividends per share on the Series D Preferred Stock and such other
series of Preferred Stock (which shall not include any accrual in respect of
unpaid dividends for prior dividend periods if such Preferred Stock does not
have a cumulative dividend) bear to each other. No interest, or sum of money in
lieu of interest, shall be payable in respect of any dividend payment or
payments on the Series D Preferred Stock which may be in arrears.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Series D Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for payment for all past dividend periods and the
then current dividend period, no dividends (other than in shares of Common Stock
or other shares of capital stock ranking junior to the Series D Preferred Stock
as to dividends and upon liquidation) shall be declared or paid or set aside for
payment nor shall any other distribution be declared or made upon the Common
Stock, or any other capital stock of the Company ranking junior to or on a
parity with the Series D Preferred Stock as to dividends or upon liquidation,
nor shall any shares of Common Stock, or any other shares of capital stock of
the Company ranking junior to or on a parity with the Series D Preferred Stock
as to dividends or upon liquidation be redeemed, purchased or otherwise acquired
for any consideration (or any moneys be paid to or made available for a sinking
fund for the redemption of any such shares) by the Company (except by conversion
into or exchange for other capital stock of the Company ranking junior to the
Series D Preferred Stock as to dividends and upon liquidation). Holders of
shares of the Series D Preferred Stock shall not be entitled to any dividend,
whether payable in cash, property or stock, in excess of full cumulative
dividends on the Series D Preferred Stock as provided above. Any dividend
payment made on shares of the Series D Preferred Stock shall first be credited
against the earliest accrued but unpaid dividend due with respect to such shares
which remains payable. See "Description of Preferred Stock -- Dividends" in the
accompanying Prospectus.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, the holders of shares of Series D Preferred Stock
are entitled to be paid out of the assets of the Company legally available for
distribution to its stockholders a liquidation preference of $25.00 per share,
plus an amount equal to any accrued and unpaid dividends to the date of payment,
before any distribution of assets is made to holders of Common Stock or any
other class or series of capital stock of the Company that ranks junior to the
Series D Preferred Stock as to liquidation rights. After payment of the full
amount of the liquidating distributions to which they are entitled, the holders
of Series D Preferred Stock will have no right or claim to any of the remaining
assets of the Company. The consolidation or merger of the Company with or into
any other corporation, trust or entity or of any other corporation with or into
the Company, or the sale, lease or conveyance of all or substantially all of the
property or business of the Company, shall not be deemed to constitute a
liquidation, dissolution or winding up of the Company. For further information
regarding the rights of the holders of the Series D Preferred Stock upon the
liquidation, dissolution or winding up of the Company, see "Description of
Preferred Stock -- Liquidation Preference" in the accompanying Prospectus. The
Series D Preferred Stock will rank senior to the Common Stock, the Series A
Convertible Preferred Stock and the Series B Convertible Preferred Stock, and
pari passu with the Series C Preferred Stock, with respect to payments upon
liquidation.
REDEMPTION
The Series D Preferred Stock is not redeemable prior to December 15, 2002.
However, in order to ensure that the Company remains a qualified REIT for
federal income tax purposes, Series D Preferred Stock owned by a stockholder in
excess of the Ownership Limit (as defined in the accompanying Prospectus) may
automatically be exchanged for shares of Excess Stock, and the Company will have
the right to purchase Excess Stock from the holder. See "Restrictions on
Transfers of Capital Stock" in the accompanying Prospectus. On and after
December 15, 2002, the Company, at its option upon not less than 30 nor more
than 60 days' written notice, may redeem shares of the Series D Preferred Stock,
in whole or in part, at any time or from time to time, for cash at a redemption
price of $25.00 per share, plus all accrued and unpaid dividends thereon to the
date fixed for redemption (except as provided below), without interest. The
redemption price of
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the Series D Preferred Stock (other than the portion thereof consisting of
accrued and unpaid dividends) is payable solely out of the sale proceeds of
other capital stock of the Company, which may include other series of Preferred
Stock, and from no other source. For purposes of the preceding sentence,
"capital stock" means any equity securities (including Common Stock and
Preferred Stock), shares, interest, participation or other ownership interests
(however designated) and any rights (other than debt securities convertible into
or exchangeable for equity securities) or options to purchase any of the
foregoing. Holders of Series D Preferred Stock to be redeemed shall surrender
such Series D Preferred Stock at the place designated in such notice and shall
be entitled to the redemption price and any accrued and unpaid dividends payable
upon such redemption following such surrender. If notice of redemption of any
shares of Series D Preferred Stock has been given and if the funds necessary for
such redemption have been set aside by the Company in trust for the benefit of
the holders of any shares of Series D Preferred Stock so called for redemption,
then from and after the redemption date dividends will cease to accrue on such
shares of Series D Preferred Stock, such shares of Series D Preferred Stock
shall no longer be deemed outstanding and all rights of the holders of such
shares will terminate, except the right to receive the redemption price. If less
than all of the outstanding shares of Series D Preferred Stock is to be
redeemed, the Series D Preferred Stock to be redeemed shall be selected pro rata
(as nearly as may be practicable without creating fractional shares) or by any
other equitable method determined by the Company.
Unless full cumulative dividends on all shares of Series D Preferred Stock
shall have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past dividend
periods and the then current dividend period, no shares of Series D Preferred
Stock shall be redeemed unless all outstanding shares of Series D Preferred
Stock are simultaneously redeemed and the Company shall not purchase or
otherwise acquire directly or indirectly any shares of Series D Preferred Stock
(except by exchange for capital stock of the Company ranking junior to the
Series D Preferred Stock as to dividends and upon liquidation); provided,
however, that the foregoing shall not prevent the purchase by the Company of
shares of Excess Stock in order to ensure that the Company remains qualified as
a REIT for federal income tax purposes, as described under "Restrictions on
Transfers of Capital Stock" in the accompanying Prospectus, or the purchase or
acquisition of shares of Series D Preferred Stock pursuant to a purchase or
exchange offer made on the same terms to holders of all outstanding shares of
such Series D Preferred Stock.
Notice of redemption will be given by publication in a newspaper of general
circulation in the City of New York, such publication to be made once a week for
two successive weeks commencing not less than 30 nor more than 60 days prior to
the redemption date. A similar notice will be mailed by the Company, postage
prepaid, not less than 30 nor more than 60 days prior to the redemption date,
addressed to the respective holders of record of the Series D Preferred Stock to
be redeemed at their respective addresses as they appear on the stock transfer
records of the Company. No failure to give such notice or any defect thereto or
in the mailing thereof shall affect the validity of the proceedings for the
redemption of any shares of Series D Preferred Stock except as to the holder to
whom notice was defective or not given. Each notice shall state: (i) the
redemption date; (ii) the redemption price; (iii) the number of shares of Series
D Preferred Stock to be redeemed; (iv) the place or places where the Series D
Preferred Stock is to be surrendered for payment of the redemption price; and
(v) that dividends on the shares to be redeemed will cease to accrue on such
redemption date. If less than all of the Series D Preferred Stock held by any
holder is to be redeemed, the notice mailed to such holder shall also specify
the number of shares of Series D Preferred Stock held by such holder to be
redeemed.
The holders of Series D Preferred Stock at the close of business on a
Dividend Record Date will be entitled to receive the dividend payable with
respect to such Series D Preferred Stock on the corresponding Dividend Payment
Date notwithstanding the redemption thereof between such Dividend Record Date
and the corresponding Dividend Payment Date or the Company's default in the
payment of the dividend due. Except as provided above, the Company will make no
payment or allowance for unpaid dividends, whether or not in arrears, on called
Series D Preferred Stock.
The Series D Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption. However, in order to ensure that
the Company remains a qualified REIT for federal
S-16
income tax purposes, Series D Preferred Stock owned by a stockholder in excess
of the Ownership Limit may automatically be exchanged for shares of Excess
Stock, and the Company will have the right to purchase Excess Stock from the
holder.
VOTING RIGHTS
Holders of the Series D Preferred Stock will not have any voting rights,
except as set forth below or as otherwise from time to time required by law.
Whenever dividends on any shares of Series D Preferred Stock shall be in
arrears for six or more quarterly periods (a "Preferred Dividend Default"), the
holders of such shares of Series D Preferred Stock (voting separately as a class
with all other series of Preferred Stock ranking on a parity with the Series D
Preferred Stock as to dividends or upon liquidation ("Parity Preferred") upon
which like voting rights have been conferred and are exercisable), will be
entitled to vote for the election of a total of two directors of the Company
(the "Preferred Stock Directors") at a special meeting called by the holders of
record of at least 20% of the Series D Preferred Stock or the holders of any
other series of Parity Preferred so in arrears (unless such request is received
less than 90 days before the date fixed for the next annual or special meeting
of the stockholders) or at the next annual meeting of stockholders, and at each
subsequent annual meeting until all dividends accrued on such shares of Series D
Preferred Stock for the past dividend periods and the then current dividend
period shall have been fully paid or declared and a sum sufficient for the
payment thereof set aside for payment. If and when all accumulated dividends and
the dividend for the then current dividend period on the Series D Preferred
Stock shall have been paid in full or set aside for payment in full, the holders
thereof shall be divested of the foregoing voting rights (subject to revesting
in the event of each and every Preferred Dividend Default) and, if all
accumulated dividends and the dividend for the then current dividend period have
been paid in full or set aside for payment in full on all series of Parity
Preferred upon which like voting rights have been conferred and are exercisable,
the term of office of each Preferred Stock Director so elected shall terminate.
Any Preferred Stock Director may be removed at any time with or without cause
by, and shall not be removed otherwise than by the vote of, the holders of
record of a majority of the outstanding shares of the Series D Preferred Stock
when they have the voting rights described above (voting separately as a class
with all other series of Parity Preferred upon which like voting rights have
been conferred and are exercisable). So long as a Preferred Dividend Default
shall continue, any vacancy in the office of a Preferred Stock Director may be
filled by written consent of the Preferred Stock Director remaining in office,
or if none remains in office, by a vote of the holders of record of a majority
of the outstanding shares of Series D Preferred Stock when they have the voting
rights described above (voting separately as a class with all other series of
Parity Preferred upon which like voting rights have been conferred and are
exercisable). The Preferred Stock Directors shall each be entitled to one vote
per director on any matter.
So long as any shares of Series D Preferred Stock remain outstanding, the
Company will not, without the affirmative vote or consent of the holders of at
least two-thirds of the shares of the Series D Preferred Stock outstanding at
the time, given in person or by proxy, either in writing or at a meeting (voting
separately as a class), (a) authorize or create, or increase the authorized or
issued amount of, any class or series of capital stock ranking senior to the
Series D Preferred Stock with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up or reclassify
any authorized capital stock of the Company into such shares, or create,
authorize or issue any obligation or security convertible into or evidencing the
right to purchase any such shares; or (b) amend, alter or repeal the provisions
of the Articles or the Designating Amendment, whether by merger, consolidation
or otherwise (an "Event"), so as to materially and adversely affect any right,
preference, privilege or voting power of the Series D Preferred Stock the
holders thereof; provided, however, with respect to the occurrence of any Event
set forth in (b) above, so long as the Series D Preferred Stock remains
outstanding with the terms thereof materially unchanged, taking into account
that upon the occurrence of an Event the Company may not be the surviving
entity, the occurrence of any such Event shall not be deemed to materially and
adversely affect such rights, preferences, privileges or voting power of holders
of the Series D Preferred Stock and provided further that (i) any increase in
the amount of the authorized Preferred Stock or the creation or issuance of any
other series of Preferred Stock, or (ii) any increase in the amount of
authorized shares of such series, in each case ranking on a parity with or
junior to
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the Series D Preferred Stock with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, shall not be
deemed to materially and adversely affect such rights, preferences, privileges
or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of Series D Preferred Stock shall have been
redeemed or called for redemption upon proper notice and sufficient funds shall
have been deposited in trust to effect such redemption.
CONVERSION
The Series D Preferred Stock is not convertible into or exchangeable for
any other property or securities of the Company, except that the shares of
Series D Preferred Stock may be exchanged for shares of Excess Stock in order to
ensure that the Company remains qualified as a REIT for federal income tax
purposes. See "Restrictions on Transfers of Capital Stock" in the accompanying
Prospectus.
RESTRICTIONS ON OWNERSHIP
For information regarding restrictions on ownership of the Series D
Preferred Stock, see "Restrictions on Transfers of Capital Stock" in the
accompanying Prospectus.
S-18
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations is based
on current law, is for general information only, and is not tax advice. This
discussion does not purport to address all aspects of taxation that may be
relevant to particular stockholders in light of their personal investment or tax
circumstances, or to certain types of stockholders (including insurance
companies, tax exempt organizations, financial institutions or broker dealers,
foreign corporations and persons who are not citizens or residents of the United
States) subject to special treatment under the federal income tax laws.
The Company intends to operate in a manner that will enable it to qualify
as a REIT under the Code. Although management of the Company believes that the
Company is organized and operates in such a manner, no assurance can be given
that the Company qualifies or will remain qualified as a REIT. Qualification as
a REIT involves the application of highly technical and complex Code provisions
for which there are only limited judicial and administrative interpretations.
The determination of various factual matters and circumstances not entirely
within the Company's control may affect the Company's ability to qualify as a
REIT. If the Company fails to qualify as a REIT, it will be subject to Federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. In addition, unless entitled to relief under
certain statutory provisions, the Company will be disqualified from treatment as
a REIT for the four taxable years following the year during which qualification
is lost. The additional tax would significantly reduce the cash flow available
for distribution to stockholders. This Prospectus Supplement does not address
the taxation of the Company or the impact on the Company of its election to be
taxed as a REIT. The discussion set forth below assumes that the Company
qualifies as a REIT under the Code.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
Dividends and Other Distributions. As long as the Company qualifies as a
REIT, distributions made to the Company's taxable domestic stockholders
(including holders of Series D Preferred Stock) out of current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
taken into account by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. For purposes of determining
whether distributions on the Series D Preferred Stock are out of current or
accumulated earnings and profits, the earnings and profits of the Company will
be allocated first to the Company's outstanding Series C Preferred Stock and
Series D Preferred Stock on a pari passu basis, next to the Company's
outstanding Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock on a pari passu basis, and then allocated to the Company's
Common Stock. Distributions that are designated as capital gain dividends will
be taxed as long-term capital gains (to the extent they do not exceed the
Company's actual net capital gain for the taxable year) without regard to the
period for which the holder has held its Series D Preferred Stock. However,
corporate holders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. Distributions in excess of current and accumulated
earnings and profits will not be taxable to a holder to the extent that they do
not exceed the adjusted tax basis of the holder's shares, but rather will reduce
the adjusted basis of such shares. To the extent that such distributions exceed
the adjusted basis of a holder's shares they will be included in income as
long-term capital gain (or short-term capital gain if the shares have been held
for one year or less) assuming the shares are a capital asset in the hands of
the holder. In addition, any dividend declared by the Company in October,
November or December of any year payable to a stockholder of record on a
specified date in any such month shall be treated as both paid by the Company
and received by the stockholder on December 31 of such year, provided that the
dividend is actually paid by the Company during January of the following
calendar year. Stockholders may not include in their individual income tax
returns any net operating losses or capital losses of the Company.
Sale or Redemption of Series D Preferred Stock. On the sale of shares of
the Series D Preferred Stock, gain or loss will be recognized by the holder in
an amount equal to the difference between (i) the amount of cash and fair market
value of any property received on such sale, and (ii) the holder's adjusted
basis in the Series D Preferred Stock. Such gain or loss will be capital gain or
loss if the shares of the Series D Preferred Stock are held as capital assets,
and will be long-term gain or loss if such shares are held for more than one
year. In general, any loss upon a sale or exchange of shares by a holder who has
held such shares for six
S-19
months or less (after applying certain holding period rules), will be treated as
a long-term capital loss to the extent of distributions from the Company
required to be treated by such holder as long-term capital gain.
A redemption of the Series D Preferred Stock will be treated under Section
302 of the Code as a distribution that is taxable at ordinary income tax rates
as a dividend (to the extent of the Company's current or accumulated earnings
and profits), unless the redemption satisfies certain tests set forth in Section
302(b) of the Code enabling the redemption to be treated as a sale of the Series
D Preferred Stock. The redemption will satisfy such tests if it (i) is
"substantially disproportionate" with respect to the holder (which will not be
the case if only the Series D Preferred Stock is redeemed, since it generally
does not have voting rights), (ii) results in a "complete termination" of the
holder's stock interest in the Company, or (iii) is "not essentially equivalent
to a dividend" with respect to the holder, all within the meaning of Section
302(b) of the Code. In determining whether any of these tests have been met,
shares considered to be owned by the holder by reason of certain constructive
ownership rules set forth in the Code, as well as shares actually owned, must
generally be taken into account. Because the determination as to whether any of
the alternative tests of Section 302(b) of the Code will be satisfied with
respect to any particular holder of the Series D Preferred Stock depends upon
the facts and circumstances at the time that the determination must be made,
prospective investors are advised to consult their own tax advisors to determine
such tax treatment.
If a redemption of the Series D Preferred Stock is treated as a
distribution that is taxable as a dividend, the amount of the distribution will
be measured by the amount of cash and the fair market value of any property
received by the stockholders. The stockholder's adjusted tax basis in such
redeemed Series D Preferred Stock will be transferred to the holder's remaining
stockholdings in the Company. If, however, the stockholder has no remaining
stockholdings in the Company, such basis could be transferred to a related
person or it may be lost.
BACKUP WITHHOLDING
The Company will report to its domestic stockholders and the Internal
Revenue Service (the "IRS") the amount of dividends paid during each calendar
year, and the amount of tax withheld, if any. Under the backup withholding
rules, a stockholder may be subject to backup withholding at the rate of 31%
with respect to dividends paid and redemptions unless such holder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (b) provides a taxpayer identification number,
certifies that the holder is not subject to backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules. A
stockholder that does not provide the Company with his correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the stockholder's
income tax liability.
TAXATION OF CERTAIN TAX-EXEMPT STOCKHOLDERS
Generally, a tax-exempt investor that is exempt from tax on its investment
income, such as an individual retirement account ("IRA") or a Section 401(k)
plan, that holds the Series D Preferred Stock as an investment will not be
subject to tax on dividends paid by the Company. However, if such tax-exempt
investor is treated as having purchased its Series D Preferred Stock with
borrowed funds, some or all of its dividends from the Series D Preferred Stock
will be subject to tax. In addition, under some circumstances certain pension
plans (including Section 401(k) plans but not, for example, IRAs) that own more
than 10% (by value) of the Company's outstanding capital stock, including Common
Stock, could be subject to tax on a portion of their Series D Preferred Stock
dividends even if their Series D Preferred Stock is held for investment and is
not treated as acquired with borrowed funds.
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they own
property, transact business or reside. The state and local tax treatment of the
Company and its stockholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in the Company.
S-20
UNDERWRITING
Subject to the terms and conditions in an underwriting agreement between
the Company and the Underwriters (the "Underwriting Agreement"), the Company has
agreed to sell to each of the Underwriters named below, and each of such
Underwriters, for whom PaineWebber Incorporated and Morgan Stanley & Co.
Incorporated are acting as representatives (the "Representatives"), has
severally agreed to purchase from the Company, the respective number of shares
of Series D Preferred Stock set forth opposite its name below. Pursuant to the
terms of the Underwriting Agreement, the Underwriters are obligated to purchase
all of such shares of the Series D Preferred Stock if any are purchased.
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of the Series D Preferred Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus Supplement, and to certain dealers at such price less a concession
not in excess of $0.50 per share. The Underwriters may allow, and such dealers
may reallow, a discount not in excess of $0.40 per share on sales to certain
other dealers after the public offering of the Series D Preferred Stock.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus Supplement, to purchase up
to 450,000 additional shares of the Series D Preferred Stock to cover
over-allotments, if any, at the public offering price, less the underwriting
discounts and commissions set forth on the cover page of this Prospectus
Supplement.
Pursuant to the Underwriting Agreement, the Company has agreed to indemnify
the Underwriters against certain civil liabilities, including liabilities under
the Securities Act of 1933, as amended, or to contribute to payments the
Underwriters may be required to make in respect thereof.
Application has been made to list the Series D Preferred Stock on the NYSE
and the PCX. If approved, trading of the Series D Preferred Stock on the NYSE
and the PCX is expected to commence within the 30-day period after initial
delivery of the Series D Preferred Stock. The Representatives have advised the
Company that they intend to make a market in the Series D Preferred Stock prior
to the commencement of trading on the NYSE and the PCX. The Representatives will
have no obligation to make a market in the Series D Preferred Stock, however,
and may cease market-making activities, if commenced, at any time.
Until the distribution of the Series D Preferred Stock is completed, rules
of the Securities and Exchange Commission may limit the ability of the
Underwriters to bid for and purchase the Series D Preferred Stock. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Series D Preferred Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Series D Preferred Stock.
If the Underwriters create a short position in the Series D Preferred Stock
in connection with this offering, i.e., if they sell more shares of the Series D
Preferred Stock than are set forth on the cover page of this Prospectus
Supplement, the Underwriters may reduce that short position by purchasing shares
of the Series D Preferred Stock in the open market. The Underwriters may also
elect to reduce any short position by exercising all or part of the
over-allotment option described above.
S-21
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above might have on the price of the Series D Preferred Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
In the ordinary course of business, the Underwriters and their affiliates
have in the past engaged, and may in the future engage, in investment banking
transactions with the Company.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Goodwin,
Procter & Hoar LLP, Boston, Massachusetts as securities and tax counsel to the
Company and for the Underwriters by O'Melveny & Myers LLP, San Francisco,
California.
S-22
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH THEY RELATE. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
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TABLE OF CONTENTS
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3,000,000 SHARES
[LOGO] BAY
APARTMENT
COMMUNITIES, INC.
8.00% SERIES D CUMULATIVE REDEEMABLE
PREFERRED STOCK
---------------------
PROSPECTUS SUPPLEMENT
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PAINEWEBBER INCORPORATED
MORGAN STANLEY DEAN WITTER
---------------------
DECEMBER 15, 1997
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