424B2: Prospectus filed pursuant to Rule 424(b)(2)
Published on January 24, 1997
Filed Pursuant to Rule 424(b)2
Registration File No. 333-15875
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 18, 1996)
All of the shares of common stock offered hereby (the "Shares") are being
sold by Bay Apartment Communities, Inc. (the "Company"). The outstanding shares
of the Company's common stock, par value $.01 per share (the "Common Stock"),
are, and the Shares will be, listed on the New York Stock Exchange (the "NYSE")
and the Pacific Stock Exchange (the "PSE") under the symbol "BYA." On January
22, 1997, the reported last sale price of the Common Stock on the NYSE was
$37.125 per share.
SEE "RISK FACTORS" COMMENCING ON PAGE S-5 FOR CERTAIN FACTORS RELEVANT TO
AN INVESTMENT IN THE SHARES.
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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.
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(1) The Company has agreed to indemnify PaineWebber Incorporated against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses payable by the Company of $100,000.
(3) The Company has granted PaineWebber Incorporated a 30-day option to purchase
up to an additional 210,000 shares of Common Stock, on the same terms,
solely to cover over-allotments. See "Underwriting."
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The Shares offered hereby are offered by PaineWebber Incorporated, subject
to prior sale, when, as and if delivered to and accepted by PaineWebber
Incorporated and subject to its right to reject orders in whole or in part. It
is expected that delivery of the Shares offered hereby will be made in New York,
New York on or about January 28, 1997.
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PAINEWEBBER INCORPORATED
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The date of this Prospectus Supplement is January 22, 1997.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, THE PACIFIC STOCK
EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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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, 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 has been in
business for over 18 years and its senior executives have overseen the
development, acquisition or management of over 30,000 apartment homes. In
addition, the Company has a well-trained staff of over 300 real estate
professionals and associates.
The Company owns, or holds substantially all of the ownership interests in,
and manages 35 multifamily communities (the "Communities") containing 8,978
apartment homes. A substantial majority of the Communities, 29 out of 35, are
located in the San Francisco Bay Area, with a concentration in the counties of
San Francisco, San Mateo, Alameda and Santa Clara (the "Primary Markets"). As of
September 30, 1996, the Communities had an average monthly rental rate of $963
per apartment home and an average physical occupancy rate of 97.4%. The average
age of the Communities is 12 years. In addition to the Communities, the Company
owns two land sites containing a total of 25.7 acres and has entered into a
contract to acquire one additional land site containing 8.9 acres. The Company
intends to build three communities on these sites containing an aggregate of
1,324 apartment homes (the "Current Development Communities"). If all of the
Current Development Communities are developed as currently anticipated, the
Company will increase its apartment homes portfolio by approximately 15%.
The Company believes that apartment communities in the San Francisco Bay
Area and, in particular, the Primary Markets will continue to be attractive
long-term investments. The high cost of home ownership and current economic
conditions in the San Francisco Bay Area, including limited new apartment
construction, continued population and household growth, and high income levels,
make the upscale apartment community market particularly attractive. 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 California. In addition, the Company will
continue to explore opportunistic acquisitions in Southern California, where it
has acquired four Communities since July, 1996.
Since its initial public offering in March, 1994 (the "Initial Offering"),
the Company has pursued an aggressive growth strategy, developing and building
new apartment communities as well as acquiring and rebuilding well-located but
poorly maintained and managed communities. During this period, the Company has
completed the acquisition of 4,542 apartment homes in 19 Communities, at a total
purchase price of approximately $317.6 million. As of September 30, 1996, the
Company had spent approximately $15.2 million, and thereafter has budgeted to
spend an additional $21.7 million (including amounts budgeted for Rancho
Penasquitos), in repositioning the Communities. Additionally, the Company has
completed the development and construction of three Communities: Carriage
Square, a 324 apartment home community located in San Jose, California; Canyon
Creek, a 348 apartment home community located in Campbell, California; and
Rosewalk, a 300 apartment home community located in San Jose, California.
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The Company elected to be taxed as a real estate investment trust (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
All the Shares offered hereby (the "Offering") are being sold by the
Company. None of the Company's stockholders is selling any Shares in the
Offering.
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(1) Assumes that PaineWebber Incorporated's option to purchase up to an
additional 210,000 shares of Common Stock to cover over-allotments is not
exercised.
(2) Excludes (i) 1,470,525 shares of Common Stock reserved for issuance under
the Company's 1994 Stock Incentive Plan, as amended and restated; (ii)
999,977 shares of Common Stock reserved for issuance under the Company's
Dividend Reinvestment and Stock Purchase Plan; (iii) 1,000,000 shares of
Common Stock reserved for issuance under the Company's 1996 Non-Qualified
Employee Stock Purchase Plan; (iv) up to 294,765 shares of Common Stock
reserved for issuance, at the Company's discretion, upon the redemption of
an equivalent number of units of limited partnership of Bay Countrybrook
L.P., a Delaware limited partnership, the general partner of which is Bay
GP, Inc., a Maryland corporation, a subsidiary of the Company; and (v)
2,713,822 shares of Common Stock into which the Company's shares of Series A
Preferred Stock and Series B Preferred Stock may be converted at the option
of the holder at any time after October 2, 1998, subject to certain limited
exceptions, and are mandatorily convertible on October 2, 2005.
RISK FACTORS
An investment in the Shares 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.
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 dependant 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."
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.
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 unit occupancy or rental rates. Increases in unemployment and a decline
in household formation in the San Francisco Bay Area or Northern California
S-5
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 in the Primary Markets 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 projected 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 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.
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 into
markets such as the southern portion of Orange County, currently most of the
Communities are located 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 heightened competition in high technology industries, could
have an adverse impact upon Northern California. Further reductions in the level
of government spending in the defense industry may have an impact upon
employment and demand for residential real estate in the Primary Markets.
NEW SOUTHERN CALIFORNIA MARKETS
Since July, 1996, the Company has acquired four communities in Southern
California. The Company acquired the Mill Creek and the Larkspur Canyon
(formerly Villa Marguerite) Communities in July, 1996, the Martinique Gardens
Community in August, 1996, and the Rancho Penasquitos Community in January,
1997. Each of the Mill Creek, Larkspur Canyon and Martinique Gardens Communities
is located in the southern portion of Orange County in Southern California, and
the Rancho Penasquitos Community is located in northern San Diego, California.
The Company also intends to make other selective acquisitions in Southern
California from time to time. Although the Company has significant experience in
acquiring, developing and managing communities in Northern California, primarily
in the San Francisco Bay Area, it has only limited
S-6
experience in Southern California. In Southern California 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 qualified
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 July, 1996, the Company obtained a seismic risk analysis
from an engineering firm which estimated the probable maximum loss ("PML") for
each of the Communities owned at June 30, 1996 individually and for all of such
Communities combined. To establish a PML, the engineers first define a severe
earthquake event for the applicable geographic area, which is an earthquake that
has only a 10% likelihood of occurring over a 50-year period. The PML is
determined as the structural and architectural damage and business interruption
loss that has a 10% probability of being exceeded in the event of such an
earthquake. Because the Communities are concentrated in the San Francisco Bay
Area, the engineers' analysis defined an earthquake on the San Andreas Fault
with a Richter Scale magnitude of 8.0 as a severe earthquake with a 10%
probability of occurring within a 50-year period, and established an aggregate
PML at that time of $45.9 million for the 27 Communities owned at that time,
which is a PML level that is expected to be exceeded only 10% of the time in the
event of such a severe earthquake. This aggregate PML could be higher as a
result of variations in soil classifications and structural vulnerabilities. One
Community's individual PML was 30%, while four Communities had PMLs of 25%, and
the remaining 22 Communities owned at such time each had PMLs of 20% or less.
However, no assurance can be given that an earthquake would not cause damage or
losses greater than the PML assessments indicate, or that future acquisitions or
developments will not have PML assessments indicating the possibility of greater
damage or losses. The Company has obtained individual PML assessments for six of
the seven Communities acquired since July, 1996. Three of those Communities have
individual PMLs of 25% and the remaining Communities have individual PMLs of 20%
or less. The Company obtained an initial seismic risk analysis on the seventh
Community, which indicated a PML of approximately 31%. The Company is in the
process of obtaining a final seismic risk analysis for this Community from the
same engineering firm that conducted the seismic risk analysis for the other
Communities. While the Company has not yet obtained an engineers' analysis
establishing an aggregate PML for all of the Communities combined, the Company
intends to obtain such an aggregate PML in order to assist it in evaluating
appropriate levels of insurance coverage.
The Company recently obtained earthquake insurance, both for physical
damage and lost revenues, with respect to the Communities. For any single
occurrence, the Company self-insures the first $20 million of loss, and has in
place $25 million of coverage above this amount, with a 20% deductible. In
addition, the Company's general liability and property casualty insurance
provides coverage for personal liability and fire damage. In the event that an
uninsured disaster or a loss in excess of insured limits were to occur, the
Company could lose its capital invested in the affected Community, as well as
anticipated future revenues from such Community, and would continue to be
obligated to repay any mortgage indebtedness or other obligations related to the
Community. Any such loss could materially and adversely affect the business of
the Company and its financial condition and results of operations.
REAL ESTATE FINANCING RISKS
Risks Relating to the Credit Enhancement. As of September 30, 1996, the
Company was obligated for certain mortgage indebtedness funded by tax-exempt
bonds (the "Bonds") in the aggregate principal amount of approximately $224.9
million on 12 Communities (Waterford Apartments, Villa Mariposa, Fairway Glen
Apartments, Foxchase Apartments, Barrington Hills, Crossbrook, Rivershore,
Canyon Creek, Sea Ridge, City Heights, Countrybrook and Larkspur Canyon).
Principal and interest payments due to holders of the Bonds (the "Bondholders")
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 Enhance-
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ment 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 and Sea Ridge
(the "1995 Bonds") to the Bondholders are supported by a 30-year credit
enhancement (the "FNMA Credit Enhancement" and, together with the FGIC Credit
Enhancement, the "Credit Enhancements") provided by the Federal National
Mortgage Association ("FNMA").
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 nine 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 17 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 the Company to make expected distributions to
shareholders, including distributions required to maintain its REIT status. See
"Risk Factors -- Adverse Consequences of Failure to Qualify as a REIT."
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
may impose 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. The Company had variable rate indebtedness
aggregating approximately $61.2 million outstanding as of September 30, 1996
consisting of $28.4 million of tax-exempt financing and $32.8 million of
borrowings under the Unsecured Credit Facility. 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 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
S-8
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 (i) the construction of the Communities developed
by the Company, all of which were constructed after 1983, or (ii) the
construction of any of the Communities acquired by the Company other than
Regatta Bay, Sea Ridge, Village Square, Sunset Towers, Mill Creek, Channing
Heights, Martinique Gardens and Rancho Penasquitos. The Company does not
anticipate that it will incur any material liabilities in connection with the
presence of ACMs at the Communities. The Company currently has an operation and
maintenance program in place for ACMs at the Communities where ACMs have been
identified.
All of the Communities, as well as the three 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 does not include 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,
the Lawrence Expressway Site, 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, The Alameda Site, may require underground storage tank
removal and other environmental cleanup. 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.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
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.
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $49.3 million (approximately $56.7 million if PaineWebber
Incorporated's over-allotment option is exercised in full). The Company will use
the net proceeds from the Offering to repay borrowings under the Unsecured
Credit Facility, which were used to fund the acquisition and development of
additional apartment communities, including approximately $10.8 million borrowed
to acquire the Rancho Penasquitos Community. The Unsecured Credit Facility bears
interest at the 30-day London Interbank Offered Rate (based on a maturity
selected by the Company) plus 1.55% per annum and matures in May, 1999.
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THE COMPANY
GENERAL
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. The Company has been in business for
over 18 years and its senior executives have overseen the development,
acquisition or management of over 30,000 apartment homes. In addition, the
Company has a well-trained staff of over 300 real estate professionals and
associates. 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 California.
The Company is a self-administered and self-managed REIT that owns, or
holds substantially all of the ownership interests in, and manages 35
Communities containing 8,978 apartment homes. The largest Community has 544
apartment homes and the smallest has 135 apartment homes. As of September 30,
1996, the Communities had an average monthly rental rate per apartment home of
approximately $963 and an average physical occupancy rate of 97.4%. The average
age of the Communities is 12 years. Since the Initial Offering, the Company has
completed the development of three Communities: Carriage Square, a 324 apartment
home community located in San Jose, California; Canyon Creek, a 348 apartment
home community located in Campbell, California; and Rosewalk, a 300 apartment
home community located in San Jose, California. The Company also owns or has
under contract three sites on which it intends to develop three apartment
communities with an aggregate of 1,324 apartment homes. The Company has received
substantially all of the discretionary permits required to develop communities
on these sites and is in the process of obtaining all other required permits.
There can be no assurance that the Company will be able to construct apartment
home communities on these sites. See "Risk Factors -- Development and
Acquisition Risks."
A substantial majority of the Communities, 29 out of 35, are located in the
San Francisco Bay Area, where the Company believes that apartment communities
provide attractive long-term investments. The high cost of home ownership and
current economic conditions in the San Francisco Bay Area, including limited new
apartment construction, continued population and household growth, and high
income levels, make the upscale apartment home community market particularly
attractive. 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 California.
Since the Initial Offering, the Company has pursued an aggressive growth
strategy, developing and building new apartment communities as well as acquiring
and rebuilding well-located but poorly maintained and managed communities.
During this period, the Company completed the acquisition of 4,542 apartment
homes in 19 Communities, representing a total investment of approximately $317.6
million. As of September 30, 1996, the Company had spent approximately $15.2
million, and thereafter has budgeted to spend an additional $21.7 million
(including amounts budgeted for Rancho Penasquitos), in repositioning the
Communities.
GROWTH STRATEGY
Internal Growth. The Company seeks to grow internally by improving cash
flow from existing Communities through intensive, hands-on property management
that focuses on quality property maintenance, resident satisfaction and
retention, increases in rents and occupancy levels, and controlling operating
expenses. For example, the 13 Communities owned at the Initial Offering had, on
an annualized basis, increases in revenues, expenses and earnings of 8.5%, 6.8%
and 9.2%, respectively, for the period of nine quarters from July 1, 1994
through September 30, 1996.
External Growth. The Company also seeks to grow externally by selectively
acquiring and repositioning existing Communities and developing and constructing
new communities. Since the Initial Offering, the Company has added 5,514
apartment homes in 22 Communities, consisting of 4,542 apartment homes in 19
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Communities which the Company acquired and rebuilt, or is in the process of
rebuilding, and 972 apartment homes in three Communities which the Company
developed and built: Carriage Square, a 324 apartment home community located in
San Jose, California; Canyon Creek, a 348 apartment home community located in
Campbell, California; and Rosewalk, a 300 apartment home community located in
San Jose, California.
THE MARKETS
The Company believes that the combination of increasing rental rates and
declining vacancy rates in the Primary Markets provides an opportunity for
future revenue growth. However, there are practical limitations on the Company's
ability to increase rental rates for existing residents and the Company
currently has a policy of limiting rent increases for most lease renewals by
existing residents to 10% per year. Consequently, the actual market rates for
apartments in the Primary Markets have been rising more rapidly than the
Company's rental rates. As a result, as of September 30, 1996, the difference
between the revenues generated by the Company's existing leases and current
market rental rates (the "loss to lease") was approximately 9%, or $874,435 per
month. The Company believes that the Primary Markets will continue to be
attractive markets in which to develop and build, or acquire and rebuild,
apartment communities because of (i) an increasing demand for rental households,
(ii) the limited supply of new apartment homes, and (iii) the high cost of
alternatives to apartment homes.
Increasing Demand. The demand for apartment homes in the San Francisco Bay
Area and, in particular, the Primary Markets, has been growing at a substantial
rate. Based on a 1996 study by the Rosen Consulting Group, the Company believes
that each year between 1995 and 2000 the demand for new rental apartment homes
in the San Francisco Bay Area and the Primary Markets will increase by, on
average, approximately 15,000 and 8,000, respectively.
INCREASING DEMAND
Historical and Projected Population
Growth in the Company's Primary Markets
YEAR POPULATION
---- ----------
1980 3,666,755
1990 4,147,861
2000e 4,627,600
Source: 1990 U.S. Census Bureau; Rosen Consulting Group.
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Limited Supply. Over the past 10 years, the supply of new rental housing in
the San Francisco Bay Area and the Primary Markets has failed to keep pace with
the increasing demand. The number of multifamily permits issued in these markets
has declined and the supply of rental housing has been limited due to a number
of factors, including (i) the shortage and high cost of available land, (ii)
strict public planning procedures, (iii) high governmental fees, and (iv) high
development and construction costs.
LIMITED SUPPLY
Multifamily Construction Permits
Issued in the Company's Primary Markets
YEAR PERMITS
---- -------
1986 14,548
1987 13,391
1988 8,224
1989 7,723
1990 5,404
1991 4,750
1992 3,171
1993 3,206
1994 4,158
1995 2,798
1996e 5,164
Source: 1990 U.S. Census Bureau; Rosen Consulting Group.
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High-Cost Alternatives. The imbalance between the increasing demand for
apartment homes on one hand, and the limited supply of new apartment homes on
the other, is not necessarily alleviated by alternative housing opportunities,
which are becoming increasingly expensive in the San Francisco Bay Area and in
the Primary Markets. According to the Rosen Consulting Group, in 1996 the median
cost, on a weighted average basis, for a single-family home in the San Francisco
Bay Area and the Primary Markets was expected to be approximately $253,424 and
$263,969, respectively, compared to approximately $117,500 nationwide. Although
the mean household income in 1996 in the San Francisco Bay Area and in the
Primary Markets was estimated to be $84,040 and $87,354, respectively, compared
to an estimated mean household income nationwide of $46,027, only 36% of the
households in the San Francisco Bay Area and 41% of the households in the
Primary Markets could afford a median priced single-family home in 1995.
LIMITED HOME AFFORDABILITY
San
United Primary Francisco
States Markets Bay Area
------ ------- ---------
% of Households Able to Afford
Median-Price Home(1) 55% 41% 36%
% of Households that Rent(2) 36% 47% 44%
(1) Sources: California Association of Realtors 1995 Data. Federal Reserve
Board of Governors 1995 Data. U.S. Census Bureau, Bureau of Economic
Analysis 1995 Data, and Rosen Consulting Group.
(2) Source: U.S. Census Bureau. Calculations by Rosen Consulting Group.
BUSINESS PHILOSOPHY
The Company's primary business is to own and operate upscale apartment
communities with extensive landscaping and amenities, well-maintained common
facilities and convenient access to shopping areas, transportation or other
services. The Company has consistently followed this philosophy since it was
founded in 1978. In operating the Company, management emphasizes the following
business philosophies:
- Quality and Reputation. The Company believes that by setting high
standards with respect to the design, development, construction and
operation of its Communities, it has established an excellent reputation
and tradition of service in the Primary Markets. This dedication to
service and quality is designed to minimize resident turnover, reduce
operating expenses, and enhance the occupancy levels of its Communities.
- Long-Term Competitive Advantage. The Company, operating primarily in the
fully-developed metropolitan areas of Northern California, has
consistently aimed to build or acquire and own apartment community sites
which, as a result of their location and design, give the Company a
long-term competitive advantage. The Company seeks sites in urban
settings where no other comparable apartment can be built in the
foreseeable future. The Company also purchases sites with non-residential
buildings on them, then removes the old structures and builds new
apartment homes in otherwise fully developed neighborhoods. The Company
also buys existing apartments in fully developed neighborhoods and
substantially rebuilds them to a quality higher than any existing
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apartment in the area, which frequently results in the Company owning the
highest quality apartment community or the best rental value apartment
community in a neighborhood.
- Successful In-fill Development Strategy. The Company also favors in-fill
development sites that make its apartment locations very attractive to
the largest possible segment of the rental market. The Company
selectively seeks opportunities to acquire development sites or existing
apartment communities that have high drive-by traffic volume, very good
transportation access, convenient shopping and schools, close proximity
to major employment centers, lower than normal land or improvement costs,
significant public financial assistance, favorable tax-exempt financing
and other significant advantages which make the Company's apartment
locations very attractive. Management believes that the in-fill
characteristics and superior locations of its communities and the strict
growth controls in the Primary Markets are likely to limit new
competition and enhance the current and long-term value of the Company's
overall portfolio.
- Service Ethic. The Company believes that the best way to attract and
retain residents is to provide comprehensive personal service. The
Company has well-trained property managers, leasing agents and
maintenance managers each of whose objective is to be courteous and
responsive to resident needs 24 hours a day and to ensure that the
Communities are always maintained in their best condition. These
employees frequently attend educational programs to improve their
management and marketing skills. The Company also offers or makes
available many services to residents that make living in the Communities
more convenient, including package and laundry pick up and delivery
services, aerobics classes, community social activities and, for certain
communities, business centers with computers, printers, fax and copy
machines.
- Hands-on Construction. The Company carefully designs each development
project and serves as its own general contractor for new construction and
renovation work. It designs each community with full participation of key
Company development, construction, marketing, financial, and property
management personnel, as well as with building and landscape architects,
civil, soil, structural, mechanical, electrical, sound and environmental
engineers and a wide variety of major subcontractors that will be
involved in the construction and maintenance of the communities. In its
construction design and specifications, the Company includes as many
long-term, durable materials and equipment as are financially feasible to
minimize future maintenance costs. The Company takes significant steps to
control costs and schedules, such as widely bidding all phases of the
construction project and negotiating detailed contracts with
subcontractors so that the construction process is less likely to have
change orders or unanticipated costs. The Company maintains detailed
budgets, budget to actual cost analyses and construction schedules to
control all phases of the construction operation at its communities.
THE COMMUNITIES
The Company owns, or holds substantially all of the ownership interests in,
and manages 35 apartment Communities containing 8,978 apartment homes, most of
which are located in Northern California, primarily in the San Francisco Bay
Area. Since the Initial Offering, the Company has designed, developed and
constructed three of the Communities, representing 972 apartment homes, each of
which, with the exception of the Rosewalk Community (which was completed in
January, 1997), has operated at an average occupancy rate of greater than 95%
since stabilized occupancy, and has acquired, or acquired and redeveloped or
initiated redevelopment programs at, 19 of the Communities. Stabilized occupancy
is defined as the first month in which the Community achieves 95% occupancy,
which typically occurs between six and nine months after completion of
construction, depending on the size of the Community. All of the Communities are
managed by the Company.
The Communities generally are in locations that provide them with a
competitive advantage. The Company frequently selects in-fill, urban locations
where no other comparable, competitive apartment community can be built.
Similarly, the Company's high quality standards for the development and
construction of new communities as well as the reconstruction of acquired
communities often results in the
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Communities being the most attractive and having the best rental value within
their immediate market. Generally, the Communities also have the advantage of
being located in high visibility areas in close proximity to major
transportation arteries, mass transit lines, commercial districts, shopping or
other services. Apartment communities located in high visibility areas not only
provide many conveniences to residents, but also encourage greater walk-in
traffic and, consequently, improve leasing opportunities and allow the Company
to operate with reduced marketing costs.
With the exception of those mid-rise Communities located in the most urban
areas of San Francisco, the Communities typically are contemporary two- and
three-story buildings in extensively landscaped settings with lush gardens,
fountains or waterscapes. The objectives of the site layout and building design
are to provide residents with convenient indoor or covered parking, ample
private storage areas and a comfortable living environment. Most of the
Communities feature solar-heated swimming pools, hydro-jet spas, high-tech
fitness facilities, and expansive community areas. The apartment homes typically
offer spacious, open living areas with an abundance of natural light, and many
of the following amenities: ceiling fans, vaulted ceilings, patios or balconies,
fireplaces, designer coordinated carpeting and window treatment, separate
in-home laundry rooms with washing machines and dryers, and fully-equipped
kitchens often with built-in buffets, wine racks, microwaves, disposals and
dishwashers. In many cases, the Company makes certain other services available
to residents such as business centers, aerobics classes, dry cleaning pick-up
and delivery, and mail drops and package acceptance.
In addition to the physical advantages of the Communities, the Company
attributes its success to a highly-trained professional on-site management and
maintenance staff that provides courteous and responsive service to the
residents of each Community. Management believes that excellent design and
intensive, service-oriented property management that is focused on the specific
needs of residents create a very desirable living environment for residents.
This combination of features allows the Company to achieve higher rental rates
and occupancy levels while minimizing resident turnover and operating expenses
and maximizing current and long-term cash flow and the value of the Communities.
The Company designs its Communities to control costs both during
construction and operation and to provide maximum long-term investment value and
resident appeal. In connection with the preparation of the design and plans for
each Community and the apartment homes therein, the Company's employees have
regular meetings with all of the major trade contractors associated with the
project to ensure that the Communities are well-planned and construction is
well-coordinated, thereby minimizing the possibility for construction cost
overruns. The Company takes additional steps to control construction costs, such
as widely bidding all phases of the construction project and negotiating
detailed contracts with subcontractors so that the construction process has
little or no change orders or unanticipated costs.
The Company includes many long-term durable features in the design of
Communities that it constructs to maximize the useful life of the Communities.
For example, on newly constructed Communities, the Company typically uses
concrete tile roofs or heavy duty fire resistant composition shingles, cast iron
drains, waste and vent pipes, copper water pipes, extra deep base rock and
asphalt lifts. In addition, extensive measures are employed to minimize noise
between apartment homes. The Company uses condominium standards for this
purpose, including the use of double walls and double insulation between
apartment homes, lightweight concrete on floors and insulation between ceilings
and floors. Whenever possible, the Company locates closets, bathrooms, and
laundries against common walls to minimize sound transmission.
Concurrently with the Initial Offering, the Company acquired five
Communities with a total of 1,300 apartment homes. These Communities were
acquired for $85.8 million and the Company spent an additional $9.5 million in
repositioning these Communities. After completing the reconstruction of Larkspur
Woods, a Community purchased concurrently with the Initial Offering, the Company
sold the property for a gain of approximately $2.4 million. Since the Initial
Offering, the Company has acquired 19 additional Communities with a total of
4,542 apartment homes. These Communities were acquired for an aggregate purchase
price of $317.6 million. As of September 30, 1996, the Company had spent $15.2
million, and thereafter has budgeted to spend an additional $21.7 million
(including amounts budgeted for Rancho Penasquitos), in repositioning the
Communities. The Company's repositioning programs vary for each Community and
include some
S-15
combination of repairing and repainting building exteriors, repairing or
replacing foundations, roofs and plumbing and electrical systems, rebuilding
apartment home interiors, adding garages, upgrading landscaping, removing and
adding swimming pools, remodeling leasing and recreational facilities, and
adding electronic gate systems. The data in the following table is presented as
of September 30, 1996, except with respect to the acquisition of the Rancho
Penasquitos Community.
(1) Total Actual/Budgeted Cost consists of all capitalized costs incurred as of
September 30, 1996, or projected to be incurred thereafter, principally in
1997, to acquire and reposition the Community, determined in accordance with
GAAP.
(2) As part of the purchase price, the Company assumed approximately $20.3
million of the seller's tax-exempt bond debt secured by the property, and
paid the seller approximately $7.3 million in operating partnership units of
a special purpose limited partnership formed by the Company. The tax-exempt
bonds have an all-inclusive fixed interest rate of 7.87% per annum through
April, 2002.
(3) The Company assumed $7.6 million in long-term, tax-exempt bond debt secured
by the property in connection with the acquisition of this Community. The
bonds currently float in a seven-day put bond mode with a variable interest
rate as of September 30, 1996 of approximately 5.65% per annum.
Since the Initial Offering, the Company has completed the development and
construction of three Communities: Carriage Square, a 324 apartment home
community located in San Jose, California; Canyon Creek, a 348 apartment home
community located in Campbell, California; and Rosewalk, a 300 apartment home
community located in San Jose, California. These Communities were completed at a
total cost of approximately $102.8 million.
(1) Total Actual/Budgeted Cost for the Carriage Square and Canyon Creek
Communities consists of the total actual costs of construction for such
Communities. For the Rosewalk Community, Total Actual/Budgeted Cost consists
of the total actual construction costs incurred through September 30, 1996,
plus remaining budgeted costs for the completion of construction.
S-16
In addition, the Company has acquired two land sites, and has under
contract one additional land site, on which it is building, or plans to commence
building in the near future, three additional communities with a total of 1,324
apartment homes. No assurances can be given that the Company can obtain all
required permits, that development will proceed or that, if development does
proceed, the land sites can be developed at or under the Company's cost
estimates and within the proposed time-frames. See "Risk Factors -- Development
and Acquisition Risks."
(1) Estimated Total Construction Cost includes interest that is capitalized
during the construction period. In accordance with GAAP, the Company
capitalizes interest during the construction period on a per-building basis
until the building is available for occupancy.
(2) The Company has entered into a contract to acquire this land site.
RECENT DEVELOPMENTS
Since January 1, 1996, the Company has completed the following equity
offerings:
In May, 1996, the Company sold approximately $10 million of convertible
Series B Preferred Stock and $40.5 million of Common Stock to a number of
institutional investors. The Company sold 1,248,191 shares of Common Stock in a
direct placement at a price of $24.44 per share, which reflected a 1% discount
from the average closing price of the Common Stock during the 10 trading days
immediately preceding May 2, 1996, the last trading day prior to the date on
which the sale was priced. The Company also sold 405,022 shares of Series B
Preferred Stock together with 413,223 shares of Common Stock in an underwritten
offering at a weighted average sales price of $24.44 per share. The net proceeds
of the sale, approximately $49.5 million, were used to acquire the Park Centre,
Parkside Commons and Sunset Towers Communities and to repay borrowings under a
secured credit facility. The holders of the Series B Preferred Stock are
entitled to receive a dividend equal to 103% of the dividend paid on the Common
Stock. The Series B Preferred Stock generally has no voting rights and, except
in certain limited circumstances, cannot be converted into Common Stock prior to
October, 1998. Thereafter, the Series B Preferred Stock may be converted on a
share-for-share basis into shares of Common Stock, subject to certain ownership
limitations. In October, 2005, all outstanding shares of the Series B Preferred
Stock will be automatically converted into shares of Common Stock. The holders
of the Series B Preferred Stock have registration rights for the shares of
Common Stock issuable upon conversion of the Series B Preferred Stock.
In August, 1996, the Company sold in an underwritten public offering
5,750,000 shares of Common Stock (including 750,000 shares sold in connection
with the exercise of the underwriters' over-allotment option) at a price of
$24.75 per share. The net cash proceeds from the sale, approximately $134.0
million, were used to purchase two apartment Communities, Channing Heights and
Martinique Gardens, and to repay borrowings under its Unsecured Credit Facility,
including amounts borrowed to purchase four apartment Communities acquired prior
to the closing of the August, 1996 offering (Countrybrook, Larkspur Canyon, The
Fountains and Mill Creek).
S-17
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 deal with 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.
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. If
in any taxable year the Company were to fail to qualify as a REIT, the Company
would not be allowed a deduction for distributions to stockholders in computing
taxable income and would be subject to Federal income tax on its taxable income
at regular corporate rates. As a result, the funds available for distribution to
the Company's stockholders would be reduced.
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 Common 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 Common 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 A Preferred Stock and Series B 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 Common 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 Common Stock. On the sale of shares of Common 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 Common Stock.
Such gain or loss will be capital gain or loss if the shares of Common 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 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 Common 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 Common Stock. The
redemption will satisfy such tests if it (i) is "substantially disproportionate"
with respect to the holder, (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
S-18
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 Common
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 Common
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 Common 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 Common 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 Common Stock with borrowed funds, some or all of its
dividends from the Common Stock will be subject to tax. In addition, under some
circumstances certain pension plans (including Section 401(k) plans but not, for
example, IRA's) that own more than 10% (by value) of the Company's outstanding
stock, including Common Stock, could be subject to tax on a portion of their
Common Stock dividends even if their Common 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-19
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") between the Company and PaineWebber Incorporated
("PaineWebber"), the Company has agreed to sell to PaineWebber and PaineWebber
has agreed to purchase 1,400,000 shares of the Company's Common Stock. Under the
Underwriting Agreement, PaineWebber is committed to purchase all of such Shares
if any are purchased.
PaineWebber has advised the Company that it proposes to offer such Shares
to the public at the public offering price set forth on the cover page of this
Prospectus Supplement, and in part to certain dealers (who may include
PaineWebber) at such price less a concession not in excess of $1.15 per Share.
PaineWebber may allow, and such dealers may reallow, a discount not in excess of
$.10 per Share on sales to certain other dealers, including PaineWebber.
The Company has granted PaineWebber an option, exercisable for 30 days
after the date of this Prospectus Supplement, under which PaineWebber may
purchase up to 210,000 additional Shares to cover over-allotments, if any, at
the Offering price less the underwriting discount and commissions set forth on
the cover page of this Prospectus Supplement.
In the Underwriting Agreement, the Company has agreed to indemnify
PaineWebber against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments PaineWebber may
be required to make in respect thereof.
The Company and the Company's senior executive officers have agreed, with
limited exceptions, not to offer, sell or otherwise dispose of any shares of
Common Stock, or rights to acquire Common Stock, for a period of 60 days after
the date of this Prospectus Supplement without the prior written consent of
PaineWebber.
In the ordinary course of business, PaineWebber and its affiliates have
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 PaineWebber by O'Melveny & Myers LLP, San Francisco, California.
EXPERTS
Certain demographic and market information included in this Prospectus
Supplement has been prepared by Rosen Consulting Group and is set forth in a
report dated June 28, 1996, as supplemented (the "Rosen Report"). The Rosen
Report has been filed with the Securities and Exchange Commission (the "SEC") as
an exhibit to the Company's Form 8-K dated July 5, 1996, and an addendum thereto
has been filed as an exhibit to the Company's Form 8-K dated January 21, 1997,
and is incorporated herein by reference. Certain information from the Rosen
Report is included herein in reliance upon the authority of such firm as an
expert in, among other things, urban economics. Kenneth R. Rosen is the sole
shareholder of Rosen Consulting Group and is a member of AMB Rosen Real Estate
Securities L.L.C., which is the beneficial owner of 175,700 shares of the
Company's Common Stock.
Certain demographic and market information included in this Prospectus
Supplement has been prepared by Ann Roulac and Company and is set forth in a
report dated June 30, 1996 (the "Roulac Report"). The Roulac Report has been
filed with the SEC as an exhibit to the Company's Form 8-K dated July 5, 1996
and is incorporated herein by reference. Certain information from the Roulac
Report is included herein in reliance upon the authority of such firm as an
expert in, among other things, urban economics.
S-20
PROSPECTUS
$300,000,000
BAY APARTMENT COMMUNITIES, INC.
DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
------------------------
Bay Apartment Communities, Inc. ("Bay" or the "Company") may offer from
time to time in one or more series (i) unsecured debt securities ("Debt
Securities"), (ii) shares of preferred stock, $.01 par value per share
("Preferred Stock"), and (iii) shares of common stock, $.01 par value per share
("Common Stock"), with an aggregate public offering price of up to $300,000,000
in amounts, at prices and on terms to be determined at the time of offering. The
Debt Securities, Preferred Stock and Common Stock (collectively, the
"Securities") may be offered separately or together, in separate series, in
amounts, at prices and on terms to be set forth in one or more supplements to
this Prospectus (each a "Prospectus Supplement").
The specific terms of the Securities for which this Prospectus is being
delivered will be set forth in the applicable Prospectus Supplement and will
include, where applicable: (i) in the case of Debt Securities, the specific
title, aggregate principal amount, ranking, currency, form (which may be
registered or bearer, or certificated or global), authorized denominations,
maturity, rate (or manner of calculation thereof) and time of payment of
interest, terms for redemption at the option of the Company or repayment at the
option of the holder, terms for sinking fund payments, terms for conversion into
Common Stock or Preferred Stock, covenants and any initial public offering
price, (ii) in the case of Preferred Stock, the specific designation and stated
value per share, any dividend, liquidation, redemption, conversion, voting and
other rights, and any initial public offering price, and (iii) in the case of
Common Stock, any initial public offering price. In addition, such specific
terms may include limitations on direct or beneficial ownership and restrictions
on transfer of the Securities, in each case as may be consistent with the
Company's Articles of Incorporation or otherwise appropriate to preserve the
status of the Company as a real estate investment trust ("REIT") for federal
income tax purposes. See "Restrictions on Transfers of Capital Stock."
The applicable Prospectus Supplement will also contain information, where
appropriate, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities covered
by such Prospectus Supplement.
The Securities may be offered by the Company directly to one or more
purchasers, through agents designated from time to time by the Company or to or
through underwriters or dealers. If any agents or underwriters are involved in
the sale of any of the securities, their names, and any applicable purchase
price, fee, commission or discount arrangement between or among them, will be
set forth, or will be calculable from the information set forth, in an
accompanying Prospectus Supplement. See "Plan of Distribution." No Securities
may be sold without delivery of a Prospectus Supplement describing the method
and terms of the offering of such Securities.
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. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
The date of this Prospectus is November 18, 1996.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC" or "Commission") a Registration Statement on Form S-3 under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to the Securities.
This Prospectus, which constitutes part of the Registration Statement, omits
certain of the information contained in the Registration Statement and the
exhibits thereto on file with the Commission pursuant to the Securities Act and
the rules and regulations of the Commission thereunder. The Registration
Statement, including exhibits thereto, may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the Commission's Regional Offices at 7
World Trade Center, 13th Floor, New York, New York 10048, and Northwestern
Atrium Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661-2511,
and copies may be obtained at the prescribed rates from the Public Reference
Section of the Commission at its principal office in Washington, D.C. In
addition, the Company is required to file electronic versions of these documents
with the Commission through the Commission's Electronic Data Gathering, Analysis
and Retrieval (EDGAR) system, and such electronic versions are available to the
public at the Commission's World-Wide Web Site, http://www.sec.gov. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the locations described above. Copies of such materials
can be obtained via EDGAR or by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at
prescribed rates. In addition, the Common Stock is listed on the New York Stock
Exchange (the "NYSE") and the Pacific Stock Exchange (the "PSE"), and such
materials can be inspected and copied at the NYSE, 20 Broad Street, New York,
New York 10005, and at the PSE, 301 Pine Street, San Francisco, California
94104.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Company with the Commission
pursuant to the Exchange Act are incorporated by reference in this Prospectus:
(i) Annual Report on Form 10-K for the fiscal year ended December 31, 1995, (ii)
Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1996,
June 30, 1996, and September 30, 1996, (iii) Current Report on Form 8-K dated
May 6, 1996, (iv) Current Report on Form 8-K, dated May 23, 1996, as amended by
the Current Report on Form 8-K/A, dated May 23, 1996, (v) Current Report on Form
8-K dated July 5, 1996, (vi) Current Report on Form 8-K dated July 26, 1996, and
(vii) the description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A dated December 7, 1993.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of all Securities shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. The Company will provide, without charge, to
each person, including any beneficial owner, to whom a copy of this Prospectus
is delivered, at the request of such person, a copy of any or all of the
documents incorporated herein by reference (other than exhibits thereto, unless
such exhibits are specifically incorporated by reference into such documents).
Written requests for such copies should be directed to: Chief Financial Officer,
Bay Apartment Communities, Inc., 4340 Stevens Creek Blvd., Suite 275, San Jose,
California 95129, telephone (408) 983-1500.
Any statement contained herein or in a document incorporated or deemed to
be incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in an applicable Prospectus Supplement) or in any subsequently filed
document that is incorporated by reference herein modifies or supersedes such
statement. Any such statement
2
so modified or superseded shall not be deemed to constitute a part of this
Prospectus or any Prospectus Supplement, except as so modified or superseded.
THE COMPANY
The Company has engaged in apartment community acquisition, development,
construction, reconstruction, marketing, leasing and management since 1978 and
is one of the most experienced developers and operators of upscale apartment
communities in the San Francisco Bay Area. As a self-administered and self-
managed REIT, the Company owns and manages apartment communities (the
"Communities") located in Northern California (principally in the San Francisco
Bay Area) and in Orange County, California.
The Company is a fully-integrated real estate organization with in-house
development, construction, acquisition, reconstruction, financing, marketing,
leasing and management expertise. This in-house expertise has allowed the
Company to maintain its reputation for developing and constructing apartment
communities on time and on budget. With its experience and in-house
capabilities, the Company 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 California and Orange County. The Company has elected to qualify as a
REIT for Federal income tax purposes. The Company pays regular quarterly
dividends to its shareholders.
The Company was incorporated under the laws of the State of California in
1978 and reincorporated under the laws of the State of Maryland, pursuant to a
reincorporation merger, 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.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of Securities for general
corporate purposes, which may include the acquisition or development of
additional properties, the repayment of outstanding debt or the improvement of
certain properties already in the Company's portfolio.
3
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:
- ---------------
(1) Ratios for the period January 1 - March 16, 1994 and the years ended 1993,
1992 and 1991 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 Preferred Stock in October 1995 and
405,022 shares of Series B Preferred Stock in May 1996.
4
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities will be direct unsecured obligations of the Company and
may be either senior Debt Securities ("Senior Securities") or subordinated Debt
Securities ("Subordinated Securities"). The Debt Securities will be issued under
one or more indentures, each dated as of a date prior to the issuance of the
Debt Securities to which it relates. Senior Securities and Subordinated
Securities may be issued pursuant to separate indentures (respectively, a
"Senior Indenture" and a "Subordinated Indenture"), in each case between the
Company and a trustee (a "Trustee"), which may be the same Trustee, and in the
form that has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part, subject to such amendments or supplements as may be
adopted from time to time. The Senior Indenture and the Subordinated Indenture,
as amended or supplemented from time to time, are sometimes hereinafter referred
to collectively as the "Indentures." The Indentures will be subject to and
governed by the Trust Indenture Act of 1939, as amended (the "TIA"). The
statements made under this heading relating to the Debt Securities and the
Indentures are summaries of the anticipated provisions thereof, do not purport
to be complete and are qualified in their entirety by reference to the
Indentures and such Debt Securities.
Capitalized terms used herein and not defined shall have the meanings
assigned to them in the applicable Indenture.
TERMS
Unless otherwise indicated in the applicable Prospectus Supplement, the
indebtedness represented by the Senior Securities will rank equally with all
other unsecured and unsubordinated indebtedness of the Company. The indebtedness
represented by Subordinated Securities will be subordinated in right of payment
to the prior payment in full of the Senior Debt of the Company as described
under "-- Subordination." The particular terms of the Debt Securities offered by
a Prospectus Supplement will be described in the applicable Prospectus
Supplement, along with any applicable modifications of or additions to the
general terms of the Debt Securities as described herein and in the applicable
Indenture and any applicable federal income tax considerations. Accordingly, for
a description of the terms of any series of Debt Securities, reference must be
made to both the Prospectus Supplement relating thereto and the description of
the Debt Securities set forth in this Prospectus.
Except as set forth in any Prospectus Supplement, the Debt Securities may
be issued without limit as to aggregate principal amount, in one or more series,
in each case as established from time to time by the Company or as set forth in
the applicable Indenture or in one or more indentures supplemental to such
Indenture. All Debt Securities of one series need not be issued at the same time
and, unless otherwise provided, a series may be reopened, without the consent of
the holders of such series of the Debt Securities, for issuance of additional
Debt Securities of such series.
Each Indenture will provide that the Company may, but need not, designate
more than one Trustee thereunder, each with respect to one or more series of
Debt Securities. Any Trustee under an Indenture may resign or be removed with
respect to one or more series of Debt Securities and a successor Trustee may be
appointed to act with respect to such series. In the event that two or more
persons are acting as Trustee with respect to different series of Debt
Securities, each such Trustee shall be a Trustee of a trust under the applicable
Indenture separate and apart from the trust administered by any other Trustee,
and, except as otherwise indicated herein, any action described herein to be
taken by each Trustee may be taken by each such Trustee with respect to, and
only with respect to, the one or more series of Debt Securities for which it is
Trustee under the applicable Indenture.
5
The following summaries set forth certain general terms and provisions of
the Indentures and the Debt Securities. The Prospectus Supplement relating to
the series of Debt Securities being offered will contain further terms of such
Debt Securities, including the following specific terms:
(1) The title of such Debt Securities and whether such Debt Securities
are Senior Securities or Subordinated Securities;
(2) The aggregate principal amount of such Debt Securities and any
limit on such aggregate principal amount;
(3) The price (expressed as a percentage of the principal amount
thereof) at which such Debt Securities will be issued and, if other
than the principal amount thereof, the portion of the principal
amount thereof payable upon declaration of acceleration of the
maturity thereof, or (if applicable) the portion of the principal
amount of such Debt Securities that is convertible into Common
Stock or Preferred Stock, or the method by which any such portion
shall be determined;
(4) If convertible, the terms on which such Debt Securities are
convertible, including the initial conversion price or rate and the
conversion period and any applicable limitations on the ownership
or transferability of the Common Stock or Preferred Stock
receivable on conversion;
(5) The date or dates, or the method for determining such date or
dates, on which the principal of such Debt Securities will be
payable;
(6) The rate or rates (which may be fixed or variable), or the method
by which such rate or rates shall be determined, at which such Debt
Securities will bear interest, if any;
(7) The date or dates, or the method for determining such date or
dates, from which any such interest will accrue, the dates on which
any such interest will be payable, the record dates for such
interest payment dates, or the method by which such dates shall be
determined, the persons to whom such interest shall be payable, and
the basis upon which interest shall be calculated if other than
that of a 360-day year of twelve 30-day months;
(8) The place or places where the principal of (and premium, if any)
and interest, if any, on such Debt Securities will be payable,
where such Debt Securities may be surrendered for conversion or
registration of transfer or exchange and where notices or demands
to or upon the Company in respect of such Debt Securities and the
applicable Indenture may be served;
(9) The period or periods, if any, within which, the price or prices at
which, and the other terms and conditions upon which, such Debt
Securities may, pursuant to any optional or mandatory redemption
provisions, be redeemed, as a whole or in part, at the option of
the Company;
(10) The obligation, if any, of the Company to redeem, repay or purchase
such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a holder thereof, and the period or
periods within which, the price or prices at which and the other
terms and conditions upon which such Debt Securities will be
redeemed, repaid or purchased, as a whole or in part, pursuant to
such obligation;
(11) If other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and payable, which may be a
foreign currency or units of two or more foreign currencies or a
composite currency or currencies, and the terms and conditions
relating thereto;
(12) Whether the amount of payments of principal of (and premium, if
any) or interest, if any, on such Debt Securities may be determined
with reference to an index, formula or other method (which index,
formula or method may, but need not be, based on a currency,
currencies, currency unit or units, or composite currency or
currencies) and the manner in which such amounts shall be
determined;
6
(13) Whether such Debt Securities will be issued in certificated or
book-entry form and, if so, the identity of the depository for such
Debt Securities;
(14) Whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than
$1,000 and any integral multiple thereof and, if in bearer form,
the denominations thereof and terms and conditions relating
thereto;
(15) The applicability, if any, of the defeasance and covenant
defeasance provisions described herein or set forth in the
applicable Indenture, or any modification thereof;
(16) Whether and under what circumstances the Company will pay any
additional amounts on such Debt Securities in respect of any tax,
assessment or governmental charge and, if so, whether the Company
will have the option to redeem such Debt Securities in lieu of
making such payment;
(17) Any deletions from, modifications of or additions to the events of
default or covenants of the Company, to the extent different from
those described herein or set forth in the applicable Indenture
with respect to such Debt Securities, and any change in the right
of any Trustee or any of the holders to declare the principal
amount of any of such Debt Securities due and payable; and
(18) Any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture.
If so indicated in the applicable Prospectus Supplement, the Debt
Securities may be issued at a discount below their principal amount and provide
for less than the entire principal amount thereof to be payable upon declaration
of acceleration of the maturity thereof ("Original Issue Discount Securities").
In such cases, any special U.S. federal income tax, accounting and other
considerations applicable to Original Issue Discount Securities will be
described in the applicable Prospectus Supplement.
Except as may be set forth in any Prospectus Supplement, the Debt
Securities will not contain any provisions that would limit the ability of the
Company to incur indebtedness or that would afford holders of Debt Securities
protection in the event of a highly leveraged or similar transaction involving
the Company or in the event of a change of control. Restrictions on ownership
and transfers of the Common Stock and Preferred Stock are designed to preserve
its status as a REIT and, therefore, may act to prevent or hinder a change of
control. See "Restrictions on Transfers of Capital Stock." Reference is made to
the applicable Prospectus Supplement for information with respect to any
deletions from, modifications of, or additions to, the events of default or
covenants of the Company that are described below, including any addition of a
covenant or other provision providing event risk or similar protection.
DENOMINATION, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the
Debt Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof.
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest on any series of Debt
Securities will be payable at the corporate trust office of the applicable
Trustee, the address of which will be stated in the applicable Prospectus
Supplement; provided that, at the option of the Company, payment of interest may
be made by check mailed to the address of the person entitled thereto as it
appears in the applicable register for such Debt Securities or by wire transfer
of funds to such person at an account maintained within the United States.
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for any
authorized denomination of other Debt Securities of the same series and of a
like aggregate principal amount and tenor upon surrender of such Debt Securities
at the corporate trust office of the applicable Trustee or at the office of any
transfer agent designated by the Company for such purpose. In addition, subject
to certain limitations imposed upon Debt Securities issued in book-entry form,
the Debt Securities of any series may be surrendered for conversion or
registration of transfer
7
or exchange thereof at the corporate trust office of the applicable Trustee or
at the office of any transfer agent designated by the Company for such purpose.
Every Debt Security surrendered for conversion, registration of transfer or
exchange must be duly endorsed or accompanied by a written instrument of
transfer, and the person requesting such action must provide evidence of title
and identity satisfactory to the applicable Trustee or transfer agent. No
service charge will be made for any registration of transfer or exchange of any
Debt Securities, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith. If
the applicable Prospectus Supplement refers to any transfer agent (in addition
to the applicable Trustee) initially designated by the Company with respect to
any series of Debt Securities, the Company may at any time rescind the
designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts, except that the Company will be
required to maintain a transfer agent in each place of payment for such series.
The Company may at any time designate additional transfer agents with respect to
any series of Debt Securities.
Neither the Company nor any Trustee shall be required (i) to issue,
register the transfer of or exchange Debt Securities of any series during a
period beginning at the opening of business 15 days before the day of mailing of
a notice of redemption of any Debt Securities that may be selected for
redemption and ending at the close of business on the day of such mailing; (ii)
to register the transfer of or exchange any Debt Security, or portion thereof,
so selected for redemption, in whole or in part, except the unredeemed portion
of any Debt Security being redeemed in part; or (iii) to issue, register the
transfer of or exchange any Debt Security that has been surrendered for
repayment at the option of the holder, except the portion, if any, of such Debt
Security not to be so repaid.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indentures will provide that Company may, without the consent of the
holders of any outstanding Debt Securities, consolidate with, or sell, lease or
convey all or substantially all of its assets to, or merge with or into, any
other entity provided that (a) either the Company shall be the continuing
entity, or the successor entity (if other than the Company) formed by or
resulting from any such consolidation or merger or which shall have received the
transfer of such assets is organized under the laws of any domestic jurisdiction
and assumes the Company's obligations to pay principal of (and premium, if any)
and interest on all of the Debt Securities and the due and punctual performance
and observance of all of the covenants and conditions contained in each
Indenture; (b) immediately after giving effect to such transaction and treating
any indebtedness that becomes an obligation of the Company or any subsidiary as
a result thereof as having been incurred by the Company or such subsidiary at
the time of such transaction, no event of default under the Indentures, and no
event which, after notice or the lapse of time, or both, would become such an
event of default, shall have occurred and be continuing; and (c) an officers'
certificate and legal opinion covering such conditions shall be delivered to
each Trustee.
CERTAIN COVENANTS
Existence. Except as permitted under "-- Merger, Consolidation or Sale of
Assets," the Indentures will require the Company to do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, rights (by articles of incorporation, by-laws and statute) and
franchises; provided, however, that the Company shall not be required to
preserve any right or franchise if its Board of Directors determines that the
preservation thereof is no longer desirable in the conduct of its business.
Maintenance of Properties. The Indentures will require the Company to
cause all of its material properties used or useful in the conduct of its
business or the business of any subsidiary to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and will cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Company may
be necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, however, that the
Company and its subsidiaries shall not be prevented from selling or otherwise
disposing of their properties for value in the ordinary course of business.
8
Insurance. The Indentures will require the Company to cause each of its
and its subsidiaries' insurable properties to be insured against loss or damage
in an amount deemed reasonable by the Board of Directors with insurers of
recognized responsibility and, if described in the applicable Prospectus
Supplement, having a specified rating from a recognized insurance rating
service.
Payment of Taxes and Other Claims. The Indentures will require the Company
to pay or discharge or cause to be paid or discharged, before the same shall
become delinquent, (i) all taxes, assessments and governmental charges levied or
imposed upon it or any subsidiary or upon the income, profits or property of the
Company or any subsidiary and (ii) all lawful claims for labor, materials and
supplies which, if unpaid, might by law become a lien upon the property of the
Company or any subsidiary; provided, however, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith.
Provision of Financial Information. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, the Indentures will require the
Company, within 15 days of each of the respective dates by which the Company
would have been required to file annual reports, quarterly reports and other
documents with the Commission if the Company were so subject, (i) to transmit by
mail to all holders of Debt Securities, as their names and addresses appear in
the applicable register for such Debt Securities, without cost to such holders,
copies of the annual reports, quarterly reports and other documents that the
Company would have been required to file with the Commission pursuant to Section
13 or 15(d) of the Exchange Act if the Company were subject to such sections,
(ii) to file with the applicable Trustee copies of the annual reports, quarterly
reports and other documents that the Company would have been required to file
with the Commission pursuant to Section 13 or 15(d) of the Exchange Act if the
Company were subject to such Sections and (iii) to supply, promptly upon written
request and payment of the reasonable cost of duplication and delivery, copies
of such documents to any prospective holder.
Additional Covenants. Any additional covenants of the Company with respect
to any series of Debt Securities will be set forth in the Prospectus Supplement
relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless otherwise provided in the applicable Prospectus Supplement, each
Indenture will provide that the following events are "Events of Default" with
respect to any series of Debt Securities issued thereunder: (a) default for 30
days in the payment of any installment of interest on any Debt Security of such
series; (b) default in the payment of principal of (or premium, if any, on) any
Debt Security of such series at its maturity; (c) default in making any sinking
fund payment as required for any Debt Security of such series;
(d) default in the performance or breach of any other covenant or warranty of
the Company contained in the Indenture (other than a covenant added to the
Indenture solely for the benefit of a series of Debt Securities issued
thereunder other than such series), continued for 60 days after written notice
as provided in the applicable Indenture; (e) a default under any bond,
debenture, note or other evidence of indebtedness for money borrowed by the
Company or any of its subsidiaries (including obligations under leases required
to be capitalized on the balance sheet of the lessee under generally accepted
accounting principles but not including any indebtedness or obligations for
which recourse is limited to property purchased) in an aggregate principal
amount in excess of $5,000,000 or under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any indebtedness for money borrowed by the Company or any of its subsidiaries
(including such capitalized leases, but not including such indebtedness or
obligations for which recourse is limited to property purchased) in an aggregate
principal amount in excess of $5,000,000, whether such indebtedness exists on
the date of such Indenture or shall thereafter be created, which default shall
have resulted in such indebtedness becoming or being declared due and payable
prior to the date on which it would otherwise have become due and payable or
such obligations being accelerated, without such acceleration having been
rescinded or annulled; (f) certain events of bankruptcy, insolvency or
reorganization, or court appointment of a receiver, liquidator or trustee of the
Company or any Significant Subsidiary of the Company; and (g) any other event of
default provided with respect to a particular series of Debt Securities. The
term "Significant Subsidiary" has the meaning ascribed to such term in
Regulation S-X promulgated under the Securities Act.
9
If an event of default under any Indenture with respect to any series of
Debt Securities at the time outstanding occurs and is continuing, then in every
such case the applicable Trustee or the holders of not less than 25% in
principal amount of the Debt Securities of that series will have the right to
declare the principal amount (or, if the Debt Securities of that series are
Original Issue Discount Securities or indexed securities, such portion of the
principal amount as may be specified in the terms thereof) of all the Debt
Securities of that series to be due and payable immediately by written notice
thereof to the Company (and to the applicable Trustee if given by the holders).
However, at any time after such a declaration of acceleration with respect to
Debt Securities of such series (or of all Debt Securities then outstanding under
any Indenture, as the case may be) has been made, but before a judgment or
decree for payment of the money due has been obtained by the applicable Trustee,
the holders of not less than a majority in principal amount of outstanding Debt
Securities of such series (or of all Debt Securities then outstanding under the
applicable Indenture, as the case may be) may rescind and annul such declaration
and its consequences if (a) the Company shall have deposited with the applicable
Trustee all required payments of the principal of (and premium, if any) and
interest on the Debt Securities of such series (or of all Debt Securities then
outstanding under the applicable Indenture, as the case may be), plus certain
fees, expenses, disbursements and advances of the applicable Trustee and (b) all
events of default, other than the non-payment of accelerated principal (or
specified portion thereof), with respect to Debt Securities of such series (or
of all Debt Securities then outstanding under the applicable Indenture, as the
case may be) have been cured or waived as provided in such Indenture. The
Indentures will also provide that the holders of not less than a majority in
principal amount of the outstanding Debt Securities of any series (or of all
Debt Securities then outstanding under the applicable Indenture, as the case may
be) may waive any past default with respect to such series and its consequences,
except a default (x) in the payment of the principal of (or premium, if any) or
interest on any Debt Security of such series or (y) in respect of a covenant or
provision contained in the applicable Indenture that cannot be modified or
amended without the consent of the holder of each outstanding Debt Security
affected thereby.
The Indentures will require each Trustee to give notice to the holders of
Debt Securities within 90 days of a default under the applicable Indenture
unless such default shall have been cured or waived; provided, however, that
such Trustee may withhold notice to the holders of any series of Debt Securities
of any default with respect to such series (except a default in the payment of
the principal of (or premium, if any) or interest on any Debt Security of such
series or in the payment of any sinking fund installment in respect of any Debt
Security of such series) if specified responsible officers of such Trustee
consider such withholding to be in the interest of such holders.
The Indentures will provide that no holders of Debt Securities of any
series may institute any proceedings, judicial or otherwise, with respect to
such Indenture or for any remedy thereunder, except in the case of failure of
the applicable Trustee, for 60 days, to act after it has received a written
request to institute proceedings in respect of an event of default from the
holders of not less than 25% in principal amount of the outstanding Debt
Securities of such series, as well as an offer of indemnity reasonably
satisfactory to it. This provision will not prevent, however, any holder of Debt
Securities from instituting suit for the enforcement of payment of the principal
of (and premium, if any) and interest on such Debt Securities at the respective
due dates thereof.
The Indentures will provide that, subject to provisions in each Indenture
relating to its duties in case of default, a Trustee will be under no obligation
to exercise any of its rights or powers under an Indenture at the request or
direction of any holders of any series of Debt Securities then outstanding under
such Indenture, unless such holders shall have offered to the Trustee thereunder
reasonable security or indemnity. The holders of not less than a majority in
principal amount of the outstanding Debt Securities of any series (or of all
Debt Securities then outstanding under an Indenture, as the case may be) shall
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the applicable Trustee, or of exercising any trust
or power conferred upon such Trustee. However, a Trustee may refuse to follow
any direction which is in conflict with any law or the applicable Indenture,
which may involve such Trustee in personal liability or which may be unduly
prejudicial to the holders of Debt Securities of such series not joining
therein.
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Within 120 days after the close of each fiscal year, the Company will be
required to deliver to each Trustee a certificate, signed by one of several
specified officers of the Company, stating whether or not such officer has
knowledge of any default under the applicable Indenture and, if so, specifying
each such default and the nature and status thereof.
MODIFICATION OF THE INDENTURES
Modifications and amendments of an Indenture will be permitted to be made
only with the consent of the holders of not less than a majority in principal
amount of all outstanding Debt Securities issued under such Indenture affected
by such modification or amendment; provided, however, that no such modification
or amendment may, without the consent of the holder of each such Debt Security
affected thereby, (a) change the stated maturity of the principal of, or any
installment of interest (or premium, if any) on, any such Debt Security; (b)
reduce the principal amount of, or the rate or amount of interest on, or any
premium payable on redemption of, any such Debt Security, or reduce the amount
of principal of an Original Issue Discount Security that would be due and
payable upon declaration of acceleration of the maturity thereof or would be
provable in bankruptcy, or adversely affect any right of repayment of the holder
of any such Debt Security; (c) change the place of payment, or the coin or
currency, for payment of principal of, premium, if any, or interest on any such
Debt Security; (d) impair the right to institute suit for the enforcement of any
payment on or with respect to any such Debt Security; (e) reduce the
above-stated percentage of outstanding Debt Securities of any series necessary
to modify or amend the applicable Indenture, to waive compliance with certain
provisions thereof or certain defaults and consequences thereunder or to reduce
the quorum or voting requirements set forth in the applicable Indenture; or (f)
modify any of the foregoing provisions or any of the provisions relating to the
waiver of certain past defaults or certain covenants, except to increase the
required percentage to effect such action or to provide that certain other
provisions may not be modified or waived without the consent of the holder of
such Debt Security.
The holders of a majority in aggregate principal amount of the outstanding
Debt Securities of each series may, on behalf of all holders of Debt Securities
of that series, waive, insofar as that series is concerned, compliance by the
Company with certain restrictive covenants of the applicable Indenture.
Modifications and amendments of an Indenture will be permitted to be made
by the Company and the respective Trustee thereunder without the consent of any
holder of Debt Securities for any of the following purposes: (i) to evidence the
succession of another person to the Company as obligor under such Indenture;
(ii) to add to the covenants of the Company for the benefit of the holders of
all or any series of Debt Securities or to surrender any right or power
conferred upon the Company in such Indenture; (iii) to add events of default for
the benefit of the holders of all or any series of Debt Securities; (iv) to add
or change any provisions of an Indenture to facilitate the issuance of, or to
liberalize certain terms of, Debt Securities in bearer form, or to permit or
facilitate the issuance of Debt Securities in uncertificated form, provided that
such action shall not adversely affect the interests of the holders of the Debt
Securities of any series in any material respect; (v) to change or eliminate any
provisions of an Indenture, provided that any such change or elimination shall
become effective only when there are no Debt Securities outstanding of any
series created prior thereto which are entitled to the benefit of such
provision; (vi) to secure the Debt Securities; (vii) to establish the form or
terms of Debt Securities of any series, including the provisions and procedures,
if applicable, for the conversion of such Debt Securities into Common Stock or
Preferred Stock; (viii) to provide for the acceptance of appointment by a
successor Trustee or facilitate the administration of the trusts under an
Indenture by more than one Trustee; (ix) to cure any ambiguity, defect or
inconsistency in an Indenture, provided that such action shall not adversely
affect the interests of holders of Debt Securities of any series issued under
such Indenture; or (x) to supplement any of the provisions of an Indenture to
the extent necessary to permit or facilitate defeasance and discharge of any
series of such Debt Securities, provided that such action shall not adversely
affect the interests of the holders of the outstanding Debt Securities of any
series.
The Indentures will provide that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities,
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(i) the principal amount of an Original Issue Discount Security that shall be
deemed to be outstanding shall be the amount of the principal thereof that would
be due and payable as of the date of such determination upon declaration of
acceleration of the maturity thereof, (ii) the principal amount of any Debt
Security denominated in a foreign currency that shall be deemed Outstanding
shall be the U.S. dollar equivalent, determined on the issue date for such Debt
Security, of the principal amount (or, in the case of an Original Issue Discount
Security, the U.S. dollar equivalent on the issue date of such Debt Security of
the amount determined as provided in (i) above), (iii) the principal amount of
an indexed security that shall be deemed outstanding shall be the principal face
amount of such indexed security at original issuance, unless otherwise provided
with respect to such indexed security pursuant such Indenture, and (iv) Debt
Securities owned by the Company or any other obligor upon the Debt Securities or
any affiliate of the Company or of such other obligor shall be disregarded.
The Indentures will contain provisions for convening meetings of the
holders of Debt Securities of a series. A meeting will be permitted to be called
at any time by the applicable Trustee, and also, upon request, by the Company or
the holders of at least 10% in principal amount of the outstanding Debt
Securities of such series, in any such case upon notice given as provided in
such Indenture. Except for any consent that must be given by the holder of each
Debt Security affected by certain modifications and amendments of an Indenture,
any resolution presented at a meeting or adjourned meeting duly reconvened at
which a quorum is present may be adopted by the affirmative vote of the holders
of a majority in principal amount of the outstanding Debt Securities of that
series; provided, however, that, except as referred to above, any resolution
with respect to any request, demand, authorization, direction, notice, consent,
waiver or other action that may be made, given or taken by the holders of a
specified percentage, which is less than a majority, in principal amount of the
outstanding Debt Securities of a series may be adopted at a meeting or adjourned
meeting duly reconvened at which a quorum is present by the affirmative vote of
the holders of such specified percentage in principal amount of the outstanding
Debt Securities of that series. Any resolution passed or decision taken at any
meeting of holders of Debt Securities of any series duly held in accordance with
an Indenture will be binding on all holders of Debt Securities of that series.
The quorum at any meeting called to adopt a resolution, and at any reconvened
meeting, will be persons holding or representing a majority in principal amount
of the outstanding Debt Securities of a series; provided, however, that if any
action is to be taken at such meeting with respect to a consent or waiver which
may be given by the holders of not less than a specified percentage in principal
amount of the outstanding Debt Securities of a series, the persons holding or
representing such specified percentage in principal amount of the outstanding
Debt Securities of such series will constitute a quorum.
Notwithstanding the foregoing provisions, the Indentures will provide that
if any action is to be taken at a meeting of holders of Debt Securities of any
series with respect to any request, demand, authorization, direction, notice,
consent, waiver and other action that such Indenture expressly provides may be
made, given or taken by the holders of a specified percentage in principal
amount of all outstanding Debt Securities affected thereby, or of the holders of
such series and one or more additional series: (i) there shall be no minimum
quorum requirement for such meeting, and (ii) the principal amount of the
outstanding Debt Securities of such series that vote in favor of such request,
demand, authorization, direction, notice, consent, waiver or other action shall
be taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been made,
given or taken under such Indenture.
SUBORDINATION
Unless otherwise provided in the applicable Prospectus Supplement,
Subordinated Securities will be subject to the following subordination
provisions.
Upon any distribution to creditors of the Company in a liquidation,
dissolution or reorganization, the payment of the principal of and interest on
any Subordinated Securities will be subordinated to the extent provided in the
applicable Indenture in right of payment to the prior payment in full of all
Senior Debt (as defined below), but the obligation of the Company to make
payments of the principal of and interest on such Subordinated Securities will
not otherwise be affected. No payment of principal or interest will be permitted
to be made on Subordinated Securities at any time if a default on Senior Debt
exists that permits the holders of
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such Senior Debt to accelerate its maturity and the default is the subject of
judicial proceedings or the Company receives notice of the default. After all
Senior Debt is paid in full and until the Subordinated Securities are paid in
full, holders will be subrogated to the rights of holders of Senior Debt to the
extent that distributions otherwise payable to holders have been applied to the
payment of Senior Debt. The Subordinated Indenture will not restrict the amount
of Senior Indebtedness or other indebtedness of the Company and its
subsidiaries. As a result of these subordination provisions, in the event of a
distribution of assets upon insolvency, holders of Subordinated Indebtedness may
recover less, ratably, than general creditors of the Company.
Senior Debt will be defined in the applicable Indenture as the principal of
and interest on, or substantially similar payments to be made by the Company in
respect of, the following, whether outstanding at the date of execution of the
applicable Indenture or thereafter incurred, created or assumed: (a)
indebtedness of the Company for money borrowed or represented by purchase-money
obligations, (b) indebtedness of the Company evidenced by notes, debentures, or
bonds, or other securities issued under the provisions of an indenture, fiscal
agency agreement or other agreement, (c) obligations of the Company as lessee
under leases of property either made as part of any sale and leaseback
transaction to which the Company is a party or otherwise, (d) indebtedness of
partnerships and joint ventures which is included in the consolidated financial
statements of the Company, (e) indebtedness, obligations and liabilities of
others in respect of which the Company is liable contingently or otherwise to
pay or advance money or property or as guarantor, endorser or otherwise or which
the Company has agreed to purchase or otherwise acquire, and (f) any binding
commitment of the Company to fund any real estate investment or to fund any
investment in any entity making such real estate investment, in each case other
than (1) any such indebtedness, obligation or liability referred to in clauses
(a) through (f) above as to which, in the instrument creating or evidencing the
same pursuant to which the same is outstanding, it is provided that such
indebtedness, obligation or liability is not superior in right of payment to the
Subordinated Securities or ranks pari passu with the Subordinated Securities,
(2) any such indebtedness, obligation or liability which is subordinated to
indebtedness of the Company to substantially the same extent as or to a greater
extent than the Subordinated Securities are subordinated, and (3) the
Subordinated Securities. There will not be any restrictions in any Indenture
relating to Subordinated Securities upon the creation of additional Senior Debt.
If this Prospectus is being delivered in connection with a series of
Subordinated Securities, the accompanying Prospectus Supplement or the
information incorporated herein by reference will set forth the approximate
amount of Senior Debt outstanding as of the end of the Company's most recent
fiscal quarter.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise indicated in the applicable Prospectus Supplement, the
Company will be permitted, at its option, to discharge certain obligations to
holders of any series of Debt Securities issued under any Indenture that have
not already been delivered to the applicable Trustee for cancellation and that
either have become due and payable or will become due and payable within one
year (or scheduled for redemption within one year) by irrevocably depositing
with the applicable Trustee, in trust, funds in such currency or currencies,
currency unit or units or composite currency or currencies in which such Debt
Securities are payable in an amount sufficient to pay the entire indebtedness on
such Debt Securities in respect of principal (and premium, if any) and interest
to the date of such deposit (if such Debt Securities have become due and
payable) or to the stated maturity or redemption date, as the case may be.
The Indentures will provide that, unless otherwise indicated in the
applicable Prospectus Supplement, the Company may elect either (a) to defease
and be discharged from any and all obligations with respect to such Debt
Securities (except for the obligation to pay additional amounts, if any, upon
the occurrence of certain events of tax, assessment or governmental charge with
respect to payments on such Debt Securities and the obligations to register the
transfer or exchange of such Debt Securities, to replace temporary or mutilated,
destroyed, lost or stolen Debt Securities, to maintain an office or agency in
respect of such Debt Securities, to hold moneys for payment in trust and, with
respect to Subordinated Debt Securities which are convertible or exchangeable,
the right to convert or exchange) ("defeasance") or (b) to be released from its
obligations with respect to such Debt Securities under the applicable Indenture
(being the restrictions described under
13
"-- Certain Covenants") or, if provided in the applicable Prospectus Supplement,
its obligations with respect to any other covenant, and any omission to comply
with such obligations shall not constitute an event of default with respect to
such Debt Securities ("covenant defeasance"), in either case upon the
irrevocable deposit by the Company with the applicable Trustee, in trust, of an
amount, in such currency or currencies, currency unit or units or composite
currency or currencies in which such Debt Securities are payable at stated
maturity, or Government Obligations (as defined below), or both, applicable to
such Debt Securities, which through the scheduled payment of principal and
interest in accordance with their terms will provide money in an amount
sufficient to pay the principal of (and premium, if any) and interest on such
Debt Securities, and any mandatory sinking fund or analogous payments thereon,
on the scheduled due dates therefor.
Such a trust will only be permitted to be established if, among other
things, the Company has delivered to the applicable Trustee an opinion of
counsel (as specified in the applicable Indenture) to the effect that the
holders of such Debt Securities will not recognize income, gain or loss for U.S.
federal income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to U.S. federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
defeasance or covenant defeasance had not occurred, and such opinion of counsel,
in the case of defeasance, will be required to refer to and be based upon a
ruling received from or published by the Internal Revenue Service or a change in
applicable United States federal income tax law occurring after the date of the
Indenture. In the event of such defeasance, the holders of such Debt Securities
would thereafter be able to look only to such trust fund for payment of
principal (and premium, if any) and interest.
"Government Obligations" means securities that are (i) direct obligations
of the United States of America or the government which issued the foreign
currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged or (ii) obligations of
a person controlled or supervised by and acting as an agency or instrumentality
of the United States of America or such government which issued the foreign
currency in which the Debt Securities of such series are payable, the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States of America or such other government, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such Government obligation or a specific payment of interest on
or principal of any such Government Obligation held by such custodian for the
account of the holder of a depository receipt, provided that (except as required
by law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt.
Unless otherwise indicated in the applicable Prospectus Supplement, if
after the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any series,
(a) the holder of a Debt Security of such series is entitled to, and does, elect
pursuant to the applicable Indenture or the terms of such Debt Security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security, or
(b) a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which such deposit has been made, the
indebtedness represented by such Debt Security will be deemed to have been, and
will be, fully discharged and satisfied through the payment of the principal of
(and premium, if any) and interest on such Debt Security as they become due out
of the proceeds yielded by converting the amount so deposited in respect of such
Debt Security into the currency, currency unit or composite currency in which
such Debt Security becomes payable as a result of such election or such
cessation of usage based on the applicable market exchange rate. "Conversion
Event" means the cessation of use of (i) a currency, currency unit or composite
currency both by the government of the country which issued such currency and
for the settlement of transactions by a central bank or other public
institutions of or within the international banking community, (ii) the ECU both
within the European Monetary System and for the settlement of transactions by
public institutions of or within the European Communities or (iii) any currency
unit or composite currency other than the ECU for the purposes for which it was
established. Unless otherwise indicated in the applicable Prospectus Supplement,
all payments of principal of (and premium, if any) and
14
interest on any Debt Security that is payable in a foreign currency that ceases
to be used by its government of issuance shall be made in U.S. dollars.
In the event the Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because of
the occurrence of any event of default other than the event of default described
in clause (d) under "-- Events of Default, Notice and Waiver" with respect to
specified sections of an Indenture (which sections would no longer be applicable
to such Debt Securities) or described in clause (g) under "-- Events of Default,
Notice and Waiver" with respect to any other covenant as to which there has been
covenant defeasance, the amount in such currency, currency unit or composite
currency in which such Debt Securities are payable, and Government Obligations
on deposit with the applicable Trustee, will be sufficient to pay amounts due on
such Debt Securities at the time of their stated maturity but may not be
sufficient to pay amounts due on such Debt Securities at the time of the
acceleration resulting from such event of default. However, the Company would
remain liable to make payment of such amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions,
if any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock or Preferred Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include
whether such Debt Securities are convertible into shares of Common Stock or
Preferred Stock, the conversion price (or manner of calculation thereof), the
conversion period, provisions as to whether conversion will be at the option of
the holders or the Company, the events requiring an adjustment of the conversion
price and provisions affecting conversion in the event of the redemption of such
Debt Securities and any restrictions on conversion, including restrictions
directed at maintaining the Company's REIT status.
PAYMENT
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest on any series of Debt
Securities will be payable at the corporate trust office of the Trustee, the
address of which will be stated in the applicable Prospectus Supplement;
provided that, at the option of the Company, payment of interest may be made by
check mailed to the address of the person entitled thereto as it appears in the
applicable register for such Debt Securities or by wire transfer of funds to
such person at an account maintained within the United States.
All moneys paid by the Company to a paying agent or a Trustee for the
payment of the principal of or any premium or interest on any Debt Security
which remain unclaimed at the end of two years after such principal, premium or
interest has become due and payable will be repaid to the Company, and the
holder of such Debt Security thereafter may look only to the Company for payment
thereof.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary identified in the applicable
Prospectus Supplement relating to such series. Global Securities may be issued
in either registered or bearer form and in either temporary or permanent form.
The specific terms of the depositary arrangement with respect to a series of
Debt Securities will be described in the applicable Prospectus Supplement
relating to such series.
15
DESCRIPTION OF PREFERRED STOCK
The description of the Company's preferred stock, par value $.01 per share
("Preferred Stock"), set forth below does not purport to be complete and is
qualified in its entirety by reference to the Company's Articles of
Incorporation (the "Articles of Incorporation") and Bylaws (the "Bylaws").
GENERAL
Under the Company's Articles of Incorporation, the Company has authority to
issue twenty-five (25) million shares of Preferred Stock, of which 2,308,800
shares have been designated Series A Preferred Stock and are currently
outstanding and 405,022 shares have been designated Series B Preferred Stock and
are currently outstanding. Shares of Preferred Stock may be issued from time to
time, in one or more series, as authorized by the Board of Directors of the
Company. Prior to issuance of shares of each series, the Board of Directors is
required by the Maryland General Corporation Law, as amended (the "MGCL"), and
the Company's Articles of Incorporation to fix for each series, subject to the
provisions of the Company's Articles of Incorporation regarding excess stock,
$.01 par value per share ("Excess Stock"), the terms, preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption, as are
permitted by Maryland law. The Preferred Stock will, when issued, be fully paid
and nonassessable and will have no preemptive rights. The Board of Directors
could authorize the issuance of shares of Preferred Stock with terms and
conditions that could have the effect of discouraging a takeover or other
transaction that holders of Common Stock might believe to be in their best
interests or in which holders of some, or a majority, of the shares of Common
Stock might receive a premium for their shares over the then market price of
such shares of Common Stock.
TERMS
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Company's Articles of Incorporation and Bylaws and
any applicable amendment to the Articles of Incorporation designating terms of a
series of Preferred Stock (a "Designating Amendment").
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including:
(1) The title and stated value of such Preferred Stock;
(2) The number of shares of such Preferred Stock offered, the
liquidation preference per share and the offering price of such
Preferred Stock;
(3) The dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Stock;
(4) The date from which dividends on such Preferred Stock shall
accumulate, if applicable;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) The provision for a sinking fund, if any, for such Preferred Stock;
(7) The provision for redemption, if applicable, of such Preferred
Stock;
(8) Any listing of such Preferred Stock on any securities exchange;
(9) The terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into Common Stock, including the
conversion price (or manner of calculation thereof);
(10) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock;
(11) A discussion of federal income tax considerations applicable to
such Preferred Stock;
16
(12) The relative ranking and preference of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding
up of the affairs of the Company;
(13) Any limitations on issuance of any series of Preferred Stock
ranking senior to or on a parity with such series of Preferred
Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company; and
(14) Any limitations on direct or beneficial ownership and restrictions
on transfer, in each case as may be appropriate to preserve the
status of the Company as a REIT.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to dividend rights and rights upon liquidation,
dissolution or winding up of the Company, rank (i) senior to all classes or
series of Common Stock of the Company, and to all equity securities ranking
junior to such Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company; (ii) on a parity with all
equity securities issued by the Company the terms of which specifically provide
that such equity securities rank on a parity with the Preferred Stock with
respect to dividend rights or rights upon liquidation, dissolution or winding up
of the Company; and (iii) junior to all equity securities issued by the Company
the terms of which specifically provide that such equity securities rank senior
to the Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company. The term "equity
securities" does not include convertible debt securities.
DIVIDENDS
Holders of the Preferred Stock of each series will be entitled to receive,
when, as and if declared by the Board of Directors of the Company, out of assets
of the Company legally available for payment, cash dividends at such rates and
on such dates as will be set forth in the applicable Prospectus Supplement. Each
such dividend shall be payable to holders of record as they appear on the share
transfer books of the Company on such record dates as shall be fixed by the
Board of Directors of the Company.
Dividends on any series of the Preferred Stock may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors of the Company fails
to declare a dividend payable on a dividend payment date on any series of the
Preferred Stock for which dividends are non-cumulative, then the holders of such
series of the Preferred Stock will have no right to receive a dividend in
respect of the dividend period ending on such dividend payment date, and the
Company will have no obligation to pay the dividend accrued for such period,
whether or not dividends on such series are declared payable on any future
dividend payment date.
If Preferred Stock of any series is outstanding, no dividends will be
declared or paid or set apart for payment on any capital stock of the Company of
any other series ranking, as to dividends, on a parity with or junior to the
Preferred Stock of such series for any period unless (i) if such series of
Preferred Stock has a cumulative dividend, 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 Preferred Stock of such
series for all past dividend periods and the then current dividend period or
(ii) if such series of Preferred Stock does not have a cumulative dividend, full
dividends for the then current dividend period 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 Preferred Stock of such series. When
dividends are not paid in full (or a sum sufficient for such full payment is not
so set apart) upon Preferred Stock of any series and the shares of any other
series of Preferred Stock ranking on a parity as to dividends with the Preferred
Stock of such series, all dividends declared upon Preferred Stock of such series
and any other series of Preferred Stock ranking on a parity as to dividends with
such Preferred Stock shall be declared pro rata so that the amount of dividends
declared per share of Preferred Stock of such series 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 Preferred Stock of such series (which shall
not include any accumulation in respect of unpaid dividends for prior dividend
periods if such
17
Preferred Stock does not have a cumulative dividend) and such other series of
Preferred Stock 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
Preferred Stock of such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on the Preferred Stock of such series 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, and (ii) if such series of Preferred Stock does not have a
cumulative dividend, full dividends on the Preferred Stock of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof is set apart for payment for the then current dividend
period, no dividends (other than in shares of Common Stock or other shares of
capital stock ranking junior to the Preferred Stock of such series 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 Preferred Stock of such series 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 Preferred
Stock of such series 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 Preferred Stock of such series as to dividends and
upon liquidation).
Any dividend payment made on shares of a series of Preferred Stock shall
first be credited against the earliest accrued but unpaid dividend due with
respect to shares of such series which remains payable.
REDEMPTION
If so indicated in the applicable Prospectus Supplement, the Preferred
Stock will be subject to mandatory redemption or redemption at the option of the
Company, as a whole or in part, in each case upon the terms, at the times and at
the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon (which
shall not, if such Preferred Stock does not have a cumulative dividend, include
any accumulation in respect of unpaid dividends for prior dividend periods) to
the date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of shares of capital stock of the Company, the terms of
such Preferred Stock may provide that, if no such shares of capital stock shall
have been issued or to the extent the net proceeds from any issuance are
insufficient to pay in full the aggregate redemption price then due, such
Preferred Stock shall automatically and mandatorily be converted into the
applicable shares of capital stock of the Company pursuant to conversion
provisions specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if a series of Preferred Stock
has a cumulative dividend, full cumulative dividends on all shares of such
series of 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, and
(ii) if a series of Preferred Stock does not have a cumulative dividend, full
dividends on all shares of the Preferred Stock of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for payment for the then current dividend period, no
shares of such series of Preferred Stock shall be redeemed unless all
outstanding shares of Preferred Stock of such series are simultaneously
redeemed; provided, however, that the foregoing shall not prevent the purchase
or acquisition of Preferred Stock of such series to preserve the REIT status of
the Company or pursuant to a purchase or exchange offer made on the same terms
to holders of all outstanding shares of Preferred Stock of such series. In
addition, unless (i) if such
18
series of Preferred Stock has a cumulative dividend, full cumulative dividends
on all outstanding shares of such series of Preferred Stock 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, and (ii) if such series of Preferred Stock does not
have a cumulative dividend, full dividends on the Preferred stock of such series
have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for the then current
dividend period, the Company shall not purchase or otherwise acquire directly or
indirectly any shares of Preferred Stock of such series (except by conversion
into or exchange for capital shares of the Company ranking junior to the
Preferred Stock of such series as to dividends and upon liquidation); provided,
however, that the foregoing shall not prevent the purchase or acquisition of
shares of Preferred Stock of such series to preserve the REIT status of the
Company or pursuant to a purchase or exchange offer made on the same terms to
holders of all outstanding shares of Preferred Stock of such series.
If fewer than all of the outstanding shares of Preferred Stock of any
series are to be redeemed, the number of shares to be redeemed will be
determined by the Company and such shares may be redeemed pro rata from the
holders of record of such shares in proportion to the number of such shares held
or for which redemption is requested by such holder (with adjustments to avoid
redemption of fractional shares) or by any other equitable manner determined by
the Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Stock of
any series to be redeemed at the address shown on the stock transfer books of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
of shares and series of the Preferred Stock to be redeemed; (iii) the redemption
price; (iv) the place or places where certificates for such Preferred Stock are
to be surrendered for payment of the redemption price; (v) that dividends on the
shares to be redeemed will cease to accrue on such redemption date; and (vi) the
date upon which the holder's conversion rights, if any, as to such shares shall
terminate. If fewer than all the shares of Preferred Stock of any series are to
be redeemed, the notice mailed to each such holder thereof shall also specify
the number of shares of Preferred Stock to be redeemed from each such holder. If
notice of redemption of any 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 Preferred Stock so called for redemption, then
from and after the redemption date dividends will cease to accrue on such
Preferred Stock, and all rights of the holders of such shares will terminate,
except the right to receive the redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Common Stock or any other class or series of capital
stock of the Company ranking junior to the Preferred Stock in the distribution
of assets upon any liquidation, dissolution or winding up of the Company, the
holders of each series of Preferred Stock shall be entitled to receive out of
assets of the Company legally available for distribution to stockholders
liquidating distributions in the amount of the liquidation preference per share,
if any, set forth in the applicable Prospectus Supplement, plus an amount equal
to all dividends accrued and unpaid thereon (which shall not include any
accumulation in respect of unpaid noncumulative dividends for prior dividend
periods). After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Preferred Stock will have no right or
claim to any of the remaining assets of the Company. In the event that, upon any
such voluntary or involuntary liquidation, dissolution or winding up, the
available assets of the Company are insufficient to pay the amount of the
liquidating distributions on all outstanding shares of Preferred Stock and the
corresponding amounts payable on all shares of other classes or series of
capital stock of the Company ranking on a parity with the Preferred Stock in the
distribution of assets, then the holders of the Preferred Stock and all other
such classes or series of capital stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of any other classes or series of capital stock ranking junior to
the Preferred Stock upon liquidation, dissolution or winding up, according to
their respective
19
rights and preferences and in each case according to their respective number of
shares. For such purposes, the consolidation or merger of the Company with or
into any other corporation, trust or entity, 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.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock of a series remain outstanding, the Company will not,
without the affirmative vote or consent of the holders of at least two-thirds of
the shares of such series of Preferred Stock outstanding at the time, given in
person or by proxy, either in writing or at a meeting (such series voting
separately as a class), (i) authorize or create, or increase the authorized or
issued amount of, any class or series of capital stock ranking prior to such
series of 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 (ii) amend, alter or repeal the provisions
of the Company's Articles of Incorporation or the Designating Amendment for such
series of Preferred Stock, whether by merger, consolidation or otherwise (an
"Event"), so as to materially and adversely affect any right, preference,
privilege or voting power of such series of Preferred Stock or the holders
thereof; provided, however, with respect to the occurrence of any of the Events
set forth in (ii) above, so long as the 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
Preferred Stock, and provided further that (x) any increase in the amount of the
authorized Preferred Stock or the creation or issuance of any other series of
Preferred Stock, or (y) any increase in the amount of authorized shares of such
series or any other series of Preferred Stock, in each case ranking on a parity
with or junior to the Preferred Stock of such series 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 such series of Preferred Stock shall have
been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred Stock
is convertible into Common Stock will be set forth in the applicable Prospectus
Supplement relating thereto. Such terms will include the number of shares of
Common Stock into which the shares of Preferred Stock are convertible, the
conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the holders of the
Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such series of Preferred Stock.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), not more than 50% in value of its outstanding
capital stock may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities) during the last half of a
taxable year. To assist the Company in meeting this requirement, the Company may
take certain actions to limit the beneficial ownership, directly or indirectly,
by a single person of the Company's outstanding equity securities, including any
Preferred Stock of the Company. Therefore, the Designating Amendment for each
series of Preferred Stock may contain provisions restricting the ownership and
transfer of the Preferred Stock. The
20
applicable Prospectus Supplement will specify any additional ownership
limitation relating to a series of Preferred Stock. See "Restrictions on
Transfers of Capital Stock."
TRANSFER AGENT
The transfer agent and registrar for the Preferred Stock will be set forth
in the applicable Prospectus Supplement.
21
DESCRIPTION OF COMMON STOCK
The description of the Company's Common Stock set forth below does not
purport to be complete and is qualified in its entirety by reference to the
Company's Articles of Incorporation and Bylaws.
GENERAL
Under the Articles of Incorporation, the Company has authority to issue 40
million shares of Common Stock, par value $.01 per share. Under Maryland law,
stockholders generally are not responsible for the Company's debts or
obligations. As of November 15, 1996, the Company had outstanding 18,998,613
shares of Common Stock. The Common Stock is listed on the NYSE and the PSE under
the symbol "BYA."
TERMS
Subject to the preferential rights of any other shares or series of stock
and to the provisions of the Company's Articles of Incorporation regarding
Excess Stock, holders of shares of Common Stock will be entitled to receive
dividends on shares of Common Stock if, as and when authorized and declared by
the Board of Directors of the Company out of assets legally available therefor
and to share ratably in the assets of the Company legally available for
distribution to its stockholders in the event of its liquidation, dissolution or
winding-up after payment of, or adequate provision for, all known debts and
liabilities of the Company.
Subject to the provisions of the Company's Articles of Incorporation
regarding Excess Stock, each outstanding share of Common Stock entitles the
holder to one vote on all matters submitted to a vote of stockholders, including
the election of Directors and, except as otherwise required by law or except as
provided with respect to any other class or series of stock, the holders of
Common Stock will possess the exclusive voting power. There is no cumulative
voting in the election of Directors, which means that the holders of a majority
of the outstanding shares of Common Stock can elect all of the Directors then
standing for election, and the holders of the remaining shares of Common Stock
will not be able to elect any Directors.
Holders of Common Stock have no conversion, sinking fund or redemption
rights, or preemptive rights to subscribe for any securities of the Company.
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by an independent public accounting firm and quarterly reports for the
first three quarters of each fiscal year containing unaudited financial
information.
Subject to the provisions of the Company's Articles of Incorporation
regarding Excess Stock, all shares of Common Stock will have equal dividend,
distribution, liquidation and other rights, and will have no preference,
appraisal or exchange rights.
Pursuant to the MGCL, a corporation generally cannot dissolve, amend its
Articles of Incorporation, merge, sell all or substantially all of its assets,
engage in a share exchange or engage in similar transactions outside the
ordinary course of business unless approved by the affirmative vote of
stockholders holding at least two-thirds of the shares entitled to vote on the
matter unless a lesser percentage is set forth in the Company's Articles of
Incorporation. The Company's Articles of Incorporation do not provide for a
lesser percentage in such situations.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding capital stock may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year. To assist the Company in meeting this
requirement, the Company may take certain actions to limit the beneficial
ownership, directly or indirectly, by a single person of the Company's
outstanding equity securities. See "Restrictions on Transfers of Capital Stock."
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company of New York, New York.
22
RESTRICTIONS ON TRANSFERS OF CAPITAL STOCK
For the Company to qualify as a REIT under the Code, among other things,
not more than 50% in value of its outstanding capital stock may be owned,
directly or indirectly, by five or fewer individuals (defined in the Code to
include certain entities) during the last half of a taxable year, and such
capital stock must be beneficially owned by 100 or more persons during at least
335 days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year (in each case, other than the first such year). To ensure
that the Company remains a qualified REIT, the Articles of Incorporation,
subject to certain exceptions, provide that no holder may own, or be deemed to
own by virtue of the attribution provisions of the Code, more than nine percent
(9%) (the "Ownership Limit") of the Company's capital stock. The Board of
Directors may waive the Ownership Limit if evidence satisfactory to the Board of
Directors and the Company's tax counsel is presented that the changes in
ownership will not then or in the future jeopardize the Company's status as a
REIT. Any transfer of capital stock or any security convertible into capital
stock that would create a direct or indirect ownership of capital stock in
excess of the Ownership Limit or that would result in the disqualification of
the Company as a REIT, including any transfer that results in the capital stock
being owned by fewer than 100 persons or results in the Company being "closely
held" within the meaning of Section 856(h) of the Code, shall be null and void,
and the intended transferee will acquire no rights to the capital stock. The
foregoing restrictions on transferability and ownership will not apply if the
Board of Directors determines that it is no longer in the best interests of the
Company to attempt to qualify, or to continue to qualify, as a REIT.
Capital stock owned, or deemed to be owned, or transferred to a stockholder
in excess of the Ownership Limit will automatically be exchanged for shares of
Excess Stock that will be transferred, by operation of law, to the Company as
trustee of a trust for the exclusive benefit of the transferees to whom such
capital stock may be ultimately transferred without violating the Ownership
Limit. While the Excess Stock is held in trust, it will not be entitled to vote,
it will not be considered for purposes of any stockholder vote or the
determination of a quorum for such vote and, except upon liquidation, it will
not be entitled to participate in dividends or other distributions. Any dividend
or distribution paid to a proposed transferee of Excess Stock prior to the
discovery by the Company that capital stock has been transferred in violation of
the provisions of the Company's Articles of Incorporation shall be repaid to the
Company upon demand. The Excess Stock is not treasury stock, but rather
constitutes a separate class of issued and outstanding stock of the Company. The
original transferee-stockholder may, at any time the Excess Stock is held by the
Company in trust, transfer the interest in the trust representing the Excess
Stock to any individual whose ownership of the capital stock exchanged into such
Excess Stock would be permitted under the Ownership Limit, at a price not in
excess of the price paid by the original transferee-stockholder for the capital
stock that was exchanged in Excess Stock. Immediately upon the transfer to the
permitted transferee, the Excess Stock will automatically be exchanged for
capital stock of the class from which it was converted. If the foregoing
transfer restrictions are determined to be void or invalid by virtue of any
legal decision, statute, rule or regulation, then the intended transferee of any
Excess Stock may be deemed, at the option of the Company, to have acted as an
agent on behalf of the Company in acquiring the Excess Stock and to hold the
Excess Stock on behalf of the Company.
In addition to the foregoing transfer restrictions, the Company will have
the right, for a period of 90 days during the time any Excess Stock is held by
the Company in trust, to purchase all or any portion of the Excess Stock from
the original transferee-stockholder for the lesser of the price paid for the
capital stock by the original transferee-stockholder or the market price (as
determined in the manner set forth in the Articles of Incorporation) of the
capital stock on the date the Company exercises its option to purchase. The
90-day period begins on the date on which the Company receives written notice of
the transfer or other event resulting in the exchange of capital stock for
Excess Stock.
Each stockholder shall upon demand be required to disclose to the Company
in writing any information with respect to the direct, indirect and constructive
ownership of beneficial interests as the Board of Directors deems necessary to
comply with the provisions of the Code applicable to REITs, to comply with the
requirements of any taxing authority or governmental agency or to determine any
such compliance.
23
This ownership limitation may have the effect of precluding acquisition of
control of the Company unless the Board of Directors determines that maintenance
of REIT status is no longer in the best interests of the Company.
PLAN OF DISTRIBUTION
The Company may sell Securities to or through one or more underwriters or
dealers for public offering and sale by or through them, directly to one or more
purchasers, through agents or through any combination of these methods of sale.
Direct sale to investors may be accomplished through subscription rights
distributed to the Company's stockholders on a pro-rata basis. In connection
with any distribution of subscription rights to stockholders, if all of the
underlying Securities are not subscribed for, the Company may sell the
unsubscribed Securities directly to third parties or may engage the services of
one or more underwriters, dealers or agents, including standby underwriters, to
sell the unsubscribed Securities to third parties.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, or at negotiated prices (any of which may represent a discount
from the prevailing market prices).
In connection with the sale of Securities, underwriters or agents may
receive compensation from the Company or from purchasers of Securities, for whom
they may act as agents, in the form of discounts, concessions or commissions.
Underwriters may sell Securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agents. Underwriters, dealers, and agents that participate in the distribution
of Securities may be deemed to be underwriters under the Securities Act, and any
discounts or commissions they receive from the Company and any profit on the
resale of Securities they realize may be deemed to be underwriting discounts and
commissions under the Securities Act. Any such underwriter or agent will be
identified, and any such compensation received from the Company will be
described, in the applicable Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, each
series of Securities will be a new issue with no established trading market,
other than the Common Stock which is listed on the NYSE and the PSE. Any shares
of Common Stock sold pursuant to a Prospectus Supplement will be listed on the
NYSE and the PSE, subject to official notice of issuance. The Company may elect
to list any series of Debt Securities or Preferred Stock on an exchange, but is
not obligated to do so. It is possible that one or more underwriters may make a
market in a series of Securities, but will not be obligated to do so and may
discontinue any market making at any time without notice. Therefore, no
assurance can be given as to the liquidity of, or the trading market for, the
Securities.
Under agreements into which the Company may enter, underwriters, dealers
and agents who participate in the distribution of Securities may be entitled to
indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, or be tenants of, the Company in the ordinary course of
business.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Securities from the Company at the public offering
price set forth in such Prospectus Supplement pursuant to delayed delivery
contracts ("Contracts") providing for payment and delivery on the date or dates
stated in such Prospectus Supplement. Each Contract will be for an amount not
less than, and the aggregate principal amount of Securities sold pursuant to
Contracts shall be not less nor more than, the respective amounts stated in the
applicable Prospectus Supplement. Institutions with whom Contracts, when
authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions, and other institutions, but will in all cases be subject to the
approval of the Company. Contracts will not be subject to any conditions except
(i) the purchase by an institution of the Securities covered by its
24
Contracts shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject, and (ii)
if the Securities are being sold to underwriters, the Company shall have sold to
such underwriters the total principal amount of the Securities less the
principal amount thereof covered by Contracts. The underwriters and such other
agents will not have any responsibility in respect of the validity or
performance of such contracts.
In order to comply with the securities laws of certain states, if
applicable, the Securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states Securities may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Securities offered hereby may not
simultaneously engage in market making activities with respect to the Securities
for a period of two business days prior to the commencement of such
distribution.
LEGAL MATTERS
Certain legal matters, including the legality of the Securities, will be
passed upon for the Company by Goodwin, Procter & Hoar LLP, Boston,
Massachusetts.
EXPERTS
The financial statements and schedule thereto incorporated by reference in
this Prospectus or elsewhere in the Registration Statement, to the extent and
for the periods indicated in their report have been audited by Coopers & Lybrand
L.L.P., independent accountants, and are incorporated herein in reliance upon
the authority of said firm as experts in giving said reports.
25
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND
PROSPECTUS SUPPLEMENT. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR PAINEWEBBER
INCORPORATED. THIS PROSPECTUS AND PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS AND PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
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1,400,000 SHARES
[LOGO]
COMMON STOCK
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PROSPECTUS SUPPLEMENT
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PAINEWEBBER INCORPORATED
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JANUARY 22, 1997
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