<PAGE>
Pursuant to Rule 424(b)(5)
Registration No. 333-00766
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 13, 1996)
4,000,000 SHARES
[LOGO]
AVALON PROPERTIES, INC.
8.96% SERIES B CUMULATIVE REDEEMABLE PREFERRED STOCK
(PAR VALUE $.01 PER SHARE)
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
---------------
Dividends on the 8.96% Series B Cumulative Redeemable Preferred Stock, par
value $.01 per share (the "Series B Preferred Stock"), of Avalon Properties,
Inc. ("Avalon" or the "Company") are cumulative from the date of original
issue and are payable quarterly on or about the fifteenth day of February,
May, August and November of each year, commencing November 18, 1996, at the
rate of 8.96% per annum of the $25.00 liquidation preference (equivalent to a
fixed annual amount of $2.24 per share). See "Description of Series B
Preferred Stock--Dividends."
The Series B Preferred Stock is not redeemable prior to October 15, 2001. On
and after October 15, 2001, the Series B Preferred Stock may be redeemed for
cash at the option of the Company, in whole or in part, at a redemption price
of $25.00 per share, plus accrued and unpaid dividends, if any, thereon to the
redemption date. The redemption price (other than the portion thereof
consisting of accrued and unpaid dividends) shall be payable solely out of the
sale proceeds of other capital stock of the Company, which may include shares
of other series of the Company's preferred stock, par value $.01 per share
(the "Preferred Stock"), and from no other source. The Series B Preferred
Stock has no stated maturity and will not be subject to any sinking fund or
mandatory redemption and will not be convertible into any other securities of
the Company. See "Description of Series B Preferred Stock--Redemption."
However, in order to ensure that the Company remains a qualified real estate
investment trust ("REIT") for Federal income tax purposes, shares of Series B
Preferred Stock may be exchanged for shares of Excess Stock (as defined in the
accompanying Prospectus) if a holder owns more than 9.8% of the Company's
capital stock (the "Ownership Limit"), and the Company will have the right to
purchase such Excess Stock from the holder. See "Restrictions on Transfers of
Capital Stock" in the accompanying Prospectus.
Application has been made to list the Series B Preferred Stock on the New
York Stock Exchange. If approved, trading of the Series B Preferred Stock on
the New York Stock Exchange is expected to commence within a 30-day period
after the initial delivery of the Series B Preferred Stock. See
"Underwriting."
---------------
SEE "RISK FACTORS" COMMENCING ON PAGE 3 OF THE ACCOMPANYING PROSPECTUS FOR
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------
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. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Discounts Proceeds to
Public (1) and Commissions (2) Company (1)(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................. $25.00 $.7875 $24.2125
- -------------------------------------------------------------------------------
Total .................... $100,000,000 $3,150,000 $96,850,000
- -------------------------------------------------------------------------------
Total Assuming Full
Exercise of Over-Allotment
Option (4)............... $115,000,000 $3,622,500 $111,377,500
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Plus accrued dividends, if any, from the date of original issue.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $100,000.
(4) Assuming exercise in full of the 30-day option granted by the Company to
the Underwriters to purchase up to 600,000 additional shares of Series B
Preferred Stock, on the same terms, solely to cover over-allotments. See
"Underwriting."
---------------
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 shares of Series B Preferred Stock are offered by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to their right to reject orders in whole or in part.
It is expected that delivery of the shares will be made in New York, New York
on or about October 22, 1996.
---------------
PAINEWEBBER INCORPORATED
DEAN WITTER REYNOLDS INC.
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
---------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS OCTOBER 17, 1996.
<PAGE>
THE OFFERING
Securities 4,000,000 shares of 8.96% Series B Cumulative Redeemable
Offered ........... Preferred Stock.
Rank .............. With respect to the payment of dividends and amounts upon
liquidation, the Series B Preferred Stock will rank pari
passu with the Company's 9% Series A Cumulative Redeemable
Preferred Stock and senior to the Company's common stock,
par value $.01 per share (the "Common Stock").
Use of Proceeds ... The net proceeds from this offering will be used to repay
outstanding indebtedness. See "Use of Proceeds."
Dividends ......... Dividends on the Series B Preferred Stock are cumulative
from the date of original issue and are payable quarterly
on or about the fifteenth day of February, May, August and
November of each year, commencing on November 18, 1996, at
the rate of 8.96% per annum of the $25.00 liquidation
preference (equivalent to a fixed annual amount of $2.24
per share). The first dividend will be for less than a
full quarter. Dividends on the Series B Preferred Stock
will accrue whether or not the Company's credit facilities
at any time prohibit the current payment of dividends,
whether or not the Company has earnings, whether or not
there are funds legally available for the payment of such
dividends and whether or not such dividends are declared.
See "Description of Series B Preferred Stock--Dividends."
Liquidation The liquidation preference for each share of Series B
Preference ........ Preferred Stock is $25.00, plus an amount equal to all
accrued and unpaid dividends. See "Description of Series B
Preferred Stock--Liquidation Preference."
Redemption ........ Except in certain circumstances relating to the
preservation of the Company's status as a REIT (see
"Restrictions on Transfers of Capital Stock" in the
accompanying Prospectus), the Series B Preferred Stock is
not redeemable prior to October 15, 2001. On and after
October 15, 2001, the Series B Preferred Stock may be
redeemed for cash at the option of the Company, in whole
or in part, at a redemption price of $25.00 per share,
plus all accrued and unpaid dividends thereon to the date
fixed for redemption. The redemption price (other than the
portion thereof consisting of accrued and unpaid
dividends) shall be payable solely out of the sale
proceeds of other capital stock of the Company, which may
include shares of other series of Preferred Stock, and
from no other source. See "Description of Series B
Preferred Stock--Redemption."
Voting Rights...... Holders of Series B Preferred Stock will generally have no
voting rights except as required by law. However, whenever
dividends on any shares of Series B Preferred Stock shall
be in arrears for six or more quarterly periods, the
holders of such shares (voting separately as a class with
all other series of Preferred Stock upon which like voting
rights have been conferred and are exercisable) will be
entitled to vote for the election of two additional
directors of the Company until all dividends accumulated
on such shares of Series B Preferred Stock have been fully
paid or declared and a sum sufficient for the payment
thereof set aside for payment. See "Description of Series
B Preferred Stock--Voting Rights."
Conversion......... The Series B Preferred Stock is not convertible into or
exchangeable for any other property or securities of the
Company, except that the shares of Series B Preferred
Stock may be exchanged by the Company for shares of Excess
Stock in order to ensure that the Company remains a
qualified REIT for Federal income tax purposes. See
"Restrictions on Transfers of Capital Stock" in the
accompanying Prospectus.
Restrictions on Ownership by a single holder of more than 9.8% of the
Ownership.......... capital stock of the Company, including the Series B
Preferred Stock, is restricted in order to ensure that the
Company remains a qualified REIT for Federal income tax
purposes. See "Restrictions on Transfers of Capital Stock"
in the accompanying Prospectus.
Trading............ Application has been made to list the Series B Preferred
Stock on the New York Stock Exchange. If approved, trading
of the Series B Preferred Stock on the New York Stock
Exchange is expected to commence within a 30-day period
after the initial delivery of the Series B Preferred
Stock. See "Underwriting."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES B
PREFERRED STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
S-2
<PAGE>
THE COMPANY
Avalon is an integrated operating company, concentrating exclusively on
apartment community acquisition, construction, development and management in
the Mid-Atlantic and Northeast regions of the United States. The Company was
incorporated under the laws of the State of Maryland in August 1993 and was
formed to continue and expand the multifamily apartment community acquisition,
construction, development and management operations of the Trammell Crow
Residential Mid-Atlantic and Northeast Groups (collectively, the
"Predecessor"). Avalon is a self-administered and self-managed equity REIT. As
of the date of this Prospectus Supplement, the Company's portfolio includes
16,188 Class A, institutional-quality apartment homes including 2,854
apartment homes under construction and the Company manages 1,645 apartment
homes for unaffiliated institutional owners. The Company's apartment
communities are conveniently located in areas within close proximity to
recreational amenities, schools, entertainment and dining, and easy access to
employment. The Company currently employs approximately 765 people.
A principal operating objective of the Company's management ("Management")
is to increase operating cash flow growth and long-term stockholder value.
Management's strategies to achieve this objective include (i) generating
consistent, sustained earnings growth at each community through increased
revenue (from high occupancy and targeted value pricing) and increased
operating margins (from aggressive expense management); (ii) selective
investment in new acquisition and development communities in the Company's
targeted geographical areas; and (iii) the use of a conservative capital
structure to provide continued access to capital markets at the lowest
possible cost. Management believes that these strategies are best implemented
by building and acquiring institutional-quality assets in supply-constrained
markets while maintaining the financial discipline to ensure maximum balance
sheet flexibility. Management believes that these strategies will lead to
higher occupancy levels, increased rental rates and highly predictable and
growing cash flow.
The Company intensely focuses on the operations of its existing portfolio in
order to realize consistent, sustained earnings growth. The Company recruits,
trains and retains a high quality on-site and off-site management team with a
mandate to provide a high service level to residents. Ensuring resident
satisfaction, increasing rents as market conditions allow, maximizing rent
collections and maintaining community occupancy at optimal levels comprise the
principal strategies to maximize revenue. Controlling and leveraging operating
expenses also contribute to earnings growth. High occupancy through resident
retention is a principal goal. High resident retention eliminates the cost of
preparing an apartment home for a new resident, and reduces marketing and
other costs. Since 1991, the Company or its Predecessor has maintained
physical occupancy levels exceeding 94.1% and over the past two years,
economic occupancy has averaged 96.0%. Growth in the portfolio and the
resulting increase in revenue allows the Company to spread fixed operating
costs over a larger volume of revenue, thereby increasing operating margins.
Operating expenses are aggressively managed by on-site property managers and
regularly reviewed and analyzed by Management. The Company has enjoyed
significant operating cost leverage in recent years as operating costs,
including write-off of deferred development costs, as a percentage of total
revenues, have declined from 55% in 1990 to 38% in 1996 (year-to-date through
September 30, 1996).
The Company intends to pursue appropriate investments (acquisitions of
existing communities and development of new communities) in the Mid-Atlantic
and Northeast regions of the United States where constraints to new supply
exist and where new household formations have out-paced multifamily permit
activity in recent years. Management believes that the Company can best
achieve consistent earnings growth by investing in both established and new
development communities of institutional quality located in markets that have
significant barriers to entry, thereby limiting supply and protecting the
existing and future revenue stream of such properties from competition. The
Company seeks to invest in locations within its targeted markets that are in
close proximity to growing employment centers which are expected to provide
jobs (and thus residents) with the potential for above average personal income
growth. Such growth will increase the potential for rental rate increases at
the Company's communities. The operating history of the Company supports this
view, as operating income growth during the period 1990 through September 30,
1996 averaged more than 4% annually. This
S-3
<PAGE>
demonstrates Management's ability to effectively deliver sustained earnings
growth through all phases of an economic cycle. Management intends to
generally avoid markets with ease of entry, significant competition and easy
access to capital.
Management also intends to continue to maintain a conservative capital
structure that allows the Company continued cost-effective access to the
capital markets. As of September 30, 1996, the Company's debt to total market
capitalization was 33.4% and its long-term floating rate debt represented only
2.1% of total market capitalization. Management intends to limit the use of
long-term floating rate debt to low cost tax-exempt debt and in no event to
incur any such debt in an amount greater than 10% of the Company's total
market capitalization.
The Company's executive offices are located at 15 River Road, Suite 210,
Wilton, Connecticut 06897 and its telephone number is (203) 761-6500. The
Company also maintains acquisition, construction, development or
administrative offices in Alexandria, Virginia; Boston, Massachusetts;
Princeton, New Jersey; and Richmond, Virginia.
THE COMMUNITIES
The Current Communities (as hereinafter defined) are primarily upscale,
garden-style apartment communities consisting of two and three-story buildings
in landscaped settings. Additionally, the Company owns six high-rise apartment
communities and two four-story mid-rise apartment communities. All of these
communities are institutional-quality assets. The communities offer many
attractive amenities designed to enhance their market appeal to discriminating
residents who are willing to pay premium rental rates to live in these
communities. Such amenities include vaulted ceilings, lofts, fireplaces,
patios/decks and modern appliances. Other features include swimming pools,
fitness centers, tennis courts and business centers. As of the date of this
Prospectus Supplement, there were 45 Current Communities.
Avalon operates with a simple corporate structure whereby the Company
directly holds a fee simple ownership interest in 42 operating communities, a
general partnership interest in two other operating communities (a 50%
interest in Falkland Chase and a 49% interest in Avalon Run) and a 100%
interest in a senior participating mortgage note secured by another operating
community (Avalon Arbor) which is accounted for as an investment in real
estate. The Company also holds a direct fee simple ownership interest in eight
communities under development ("Development Communities"). One of the eight
Development Communities is subject to an agreement to form a joint venture
upon completion of the community.
The Company is considering the development of an additional 20 communities
("Development Rights"). These are opportunities in the earliest phase of the
development process for which the Company has options to acquire (and in two
instances has acquired) land to develop a new community and where related pre-
development costs have been incurred and capitalized in pursuit of these new
developments. The Company generally avoids the purchase of land until all
permits and zoning approvals have been received and construction is ready to
commence.
The Company (or its Predecessor) developed 25 and acquired 20 of the Current
Communities. All of the Current Communities are managed and operated by the
Company. As of September 30, 1996 (the latest practicable date for which this
information is available), the Current Communities had a physical occupancy
rate of 96.9%. The average age of 43 of the Current Communities, weighted
according to number of apartment homes, is approximately seven years. The
remaining two Current Communities (Falkand Chase and Longwood Towers) are
architecturally significant, vintage communities that were acquired by the
Company and have been recently renovated or are currently under renovation.
S-4
<PAGE>
The following is a summary of the Company's Current and Development
Communities as of the date of this Prospectus Supplement:
<TABLE>
<CAPTION>
COMMUNITIES APARTMENT HOMES
------------------------------- ------------------------------------------
CURRENT(1) DEVELOPMENT(2) TOTAL CURRENT(1) DEVELOPMENT(2) TOTAL
---------- -------------- ----- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Virginia................ 14 1 15 3,849 28.9% 558 19.6% 4,407 27.2%
District of Columbia.... 1 0 1 308 2.3% 0 0.0% 308 1.9%
Maryland................ 12 1 13 3,604 27.0% 132 4.6% 3,736 23.1%
New Jersey.............. 4 1 5 1,504 11.3% 504 17.6% 2,008 12.4%
New York................ 3 2 5 502 3.8% 816 28.6% 1,318 8.1%
Connecticut............. 6 3 9 2,452 18.4% 844 29.6% 3,296 20.4%
Massachusetts........... 5 0 5 1,115 8.3% 0 0% 1,115 6.9%
--- --- --- ------ ------ ------ ------- ------ ------
45 8 53 13,334 100.0% 2,854 100.0% 16,188 100.0%
=== === === ====== ====== ====== ======= ====== ======
</TABLE>
- --------
(1) "Current Communities" are apartment communities on which construction has
been completed and which have either reached stabilized occupancy or are
in the initial lease-up process. A Current Community can be (i) a
"Stabilized Community" that has completed its initial lease-up and has
attained a physical occupancy level of 95% or has been completed for one
year, whichever occurs earlier, and/or (ii) an "Established Community"
that has been a Stabilized Community with stabilized operating costs
during the current and prior year reporting periods such that its
operating results are comparable between periods.
(2) Development Communities are communities that are under construction and
may be partially complete and operating and for which a final certificate
of occupancy has not been received.
RECENT DEVELOPMENTS
Land Acquisitions for New Developments. On July 3, 1996, the Company
purchased a 47.4 acre tract of land in Nanuet, New York for $7,000,000. A new
504 apartment home community commenced construction in the third quarter of
1996.
On October 2, 1996, the Company purchased a 10.8 acre tract of land in
Melville, New York for $3,000,000. Construction of a new 154 apartment home
community, Avalon Court, will start in the fourth quarter of 1996.
Acquisition of Existing Communities. On July 23, 1996, the Company purchased
Avalon Fairway Hills II, two luxury, garden-style communities (formerly
Greenbriar and Fairway Pointe) located in Columbia, Maryland for $32,430,000.
These communities contain a total of 527 apartment homes and, along with
another Company-owned community, Avalon Meadows, operate as two phases of one
community.
On September 25, 1996, the Company purchased Avalon at the Boulders
(formerly Boulder Springs) in Richmond, Virginia for $14,831,000. This luxury,
garden-style community contains a total of 284 apartment homes.
Financing Activities. On August 1, 1996, the Company completed a new tax-
exempt credit enhancement facility with the Federal National Mortgage
Association that will provide a long-term, cost-effective credit enhancement
source for the Company's current and future tax-exempt bond debt. In
connection with this facility, the Company completed the refinancing of
approximately $91,000,000 of its tax-exempt bond debt. The facility will
initially involve eleven communities, seven that are financed with tax-exempt
bonds and four unencumbered communities that are pledged as additional
collateral.
In September 1996, pricing on the Company's unsecured credit facilities
("Unsecured Facilities") was reduced. The consortium of banks providing the
Company's $165,000,000 unsecured facility lowered the interest rate charged
under the facility to LIBOR plus 1.19% from LIBOR plus 1.44%. Pricing under
the unsecured credit facility provided by First Union National Bank was
reduced to LIBOR plus .95% from LIBOR plus 1.25%.
S-5
<PAGE>
Recent Financial Results. The Company reported on October 15, 1996 that
Funds from Operations ("FFO") for the third quarter ended September 30, 1996
was $14,018,000 or $.46 per share compared to $11,843,000 or $.42 per share
for the quarter ended September 30, 1995, a per share increase of 9.5%. FFO
for the nine months ended September 30, 1996 was $40,076,000 or $1.31 per
share compared to $34,815,000 or $1.23 per share for the nine months ended
September 30, 1995, a per share increase of 6.5%. FFO is calculated based on
the revised definition adopted by the Board of Governors of the National
Association of Real Estate Investment Trusts and is considered the primary
earnings measure for equity REITs.
For the quarter ended September 30, 1996 compared to the prior year period,
revenue grew $7,615,000 or 30.3% and earnings before interest, taxes,
depreciation and amortization ("EBITDA") grew by $4,380,000 or 28.8%. The
overall increase in revenue and EBITDA comes from newly acquired communities,
newly developed communities and Established Communities. Net income before
extraordinary item was $11,622,000 or $.38 per share compared to $8,226,000 or
$.29 per share for the prior year period. The Company recognized an
extraordinary item of $2,356,000 or $.08 per share resulting from the write-
off of unamortized deferred financing costs associated with the refinancing of
$90,727,000 of tax-exempt bonds in conjunction with the completion of a new
credit enhancement facility with the Federal National Mortgage Association and
the early retirement of debt. Net income available to common stockholders was
$6,798,000 or $.22 per share compared to $8,226,000 or $.29 per share for the
prior year.
For the nine months ended September 30, 1996 compared to the prior year nine
month period, revenue grew $20,372,000 or 29.0% and EBITDA grew by $11,382,000
or 26.6%. Net income available to common stockholders was $24,233,000 or $.79
per share compared to $24,123,000 or $.85 per share for the prior year nine
month period.
The following is a comparison of community results between periods:
Established Communities. During the quarter ended September 30, 1996
compared to the prior year period, average rental rates increased by 4.9%
from $853 to $895 while economic occupancy fell .8% to 95.9% resulting in
rental revenue growth of 4.1%. Operating expenses increased $303,000 or
4.1%. Accordingly, EBITDA increased by $597,000 or 4.1%. Operating margins
remained unchanged at 66.4 %. For the nine months ended September 30, 1996
compared to the prior year period, average rental rates increased by 4.9%
from $839 to $880 while economic occupancy fell .4% to 96.1% resulting in
rental revenue growth of 4.5%. Operating expenses increased $1,278,000 or
6.0%, resulting in an EBITDA increase of $1,625,000 or 3.8%. Operating
margins declined to 66.7% from 67.1%. Both operating expenses and operating
margins for the nine month period were adversely affected by the unusually
severe winter weather in the Northeast and Mid-Atlantic regions. Adjusting
for higher weather related costs, EBITDA would have increased to 4.4% and
operating margins would have been 67.0% for the nine month period.
New Communities. For the 15 communities totaling 3,102 apartment homes
acquired or completed since the 1st quarter of 1995, economic occupancy
averaged 97.4% and operating margins averaged 66.3% for the quarter ended
September 30, 1996. For the nine month period ended September 30, 1996,
economic occupancy averaged 96.6% and operating margins averaged 65.0%.
S-6
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Series B Preferred Stock are estimated at approximately $96,750,000. The
Company presently intends to use the net cash proceeds of the offering to
repay outstanding indebtedness under the Unsecured Facilities.
CAPITALIZATION
CAPITAL STRUCTURE
The following table sets forth the capitalization of the Company as of
September 30, 1996 on an historical basis and as adjusted to reflect the
issuance of the shares of Series B Preferred Stock and the application of the
assumed net proceeds from the offering. The information set forth in the table
should be read in conjunction with the Condensed Consolidated Financial
Statements of the Company and Notes thereto incorporated by reference herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------
HISTORICAL AS ADJUSTED
----------------- -----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
DEBT:
Unsecured Credit Facilities....... $ 136,000 $ 39,250
Mortgages and other notes
payable.......................... 177,799 177,799
Senior unsecured notes payable.... 99,864 99,864
----------------- ----------------
Total debt...................... 413,663 316,913
----------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value;
20,000,000 authorized;
9% Series A Cumulative Redeemable
Preferred Stock, 4,455,000 issued
and outstanding.................. 45 45
8.96% Series B Cumulative
Redeemable Preferred Stock,
4,000,000 shares issued and
outstanding, as adjusted......... -- 40
Common Stock, $.01 par value;
80,000,000 authorized; 30,732,361
issued and outstanding........... 307 307
Additional paid-in capital........ 580,486 677,196
Accumulated deficit............... (19,472) (19,472)
----------------- ----------------
Total stockholders' equity...... 561,366 658,116
----------------- ----------------
Total capitalization............ $ 975,029 $ 975,029
================= ================
</TABLE>
RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The Company's ratio of earnings to fixed charges and preferred stock
dividends for the six months ended June 30, 1996 was 1.97x, and for the years
ended December 31, 1995 and 1994 and the period November 18, 1993 through
December 31, 1993 was 2.37x, 3.60x and 3.29x, respectively.
For purposes of computing these ratios, earnings have been calculated by
adding fixed charges (excluding capitalized interest) and preferred stock
dividends to income (loss) before income taxes and extraordinary items. Fixed
charges and preferred stock dividends consist of interest costs, whether
expensed or capitalized, the interest component of rental expense, the
amortization of debt discounts and issue costs, whether expensed or
capitalized, and preferred stock dividends.
Prior to completion of the Company's initial public offering on November 18,
1993, the Company's predecessor (the "Predecessor"), as a privately-held
entity, operated in a manner so as to minimize net taxable income. As a
result, the Predecessor had losses before extraordinary items for the period
January 1, 1993 through November 17, 1993 and its years ended December 31,
1992 and 1991. Consequently, the computation of the ratio of earnings to fixed
charges and preferred stock dividends for such periods indicates that earnings
were inadequate to cover fixed charges by $7,359,000, $9,398,000 and
$14,462,000 for the period January 1, 1993 through November 17, 1993 and the
years ended December 31, 1992 and 1991, respectively.
S-7
<PAGE>
DESCRIPTION OF SERIES B PREFERRED STOCK
This description of the particular terms of the Series B Preferred Stock
supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the Preferred Stock set
forth in the accompanying Prospectus, to which description reference is hereby
made.
GENERAL
The Company is authorized to issue up to 20,000,000 shares of Preferred
Stock in one or more series, with such terms, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption, in each
case, if any, as are permitted by Maryland law and as the Board of Directors
of the Company may determine by adoption of an amendment of the Company's
Amended and Restated Articles of Incorporation (the "Articles"), without any
further vote or action by the Company's stockholders. See "Description of
Capital Stock--Preferred Stock" in the accompanying Prospectus. The Series B
Preferred Stock is a series of the Company's Preferred Stock.
In February 1996, the Company completed the offering and sale of 4,455,000
shares of its 9% Series A Cumulative Redeemable Preferred Stock (the "Series A
Preferred Stock"), the terms of which are substantially identical to the
Series B Preferred Stock, other than dividend rate and redemption date.
Holders of Series B Preferred Stock will share ratably with holders of the
Series A Preferred Stock in dividend distributions, rights upon liquidation
and voting rights. See "Description of Series B Preferred Stock--Rank."
On October 16, 1996, the Board of Directors of the Company adopted an
amendment (the "Designating Amendment") of the Articles determining the terms
of a series of Preferred Stock consisting of up to 4,600,000 shares,
designated 8.96% Series B Cumulative Redeemable Preferred Stock. The following
summary of the terms and provisions of the Series B Preferred Stock does not
purport to be complete and is qualified in its entirety by reference to the
pertinent sections of the Articles and the Designating Amendment, each of
which is available from the Company.
The transfer agent, registrar and dividend disbursing agent for the Series B
Preferred Stock will be Fleet National Bank, Providence, Rhode Island.
RANK
The Series B Preferred Stock shall, with respect to dividend rights and
rights upon liquidation, dissolution or winding up of the Corporation, rank
(i) senior to all classes or series of Common Stock of the Corporation, and to
all equity securities ranking junior to the Series B Preferred Stock; (ii) on
a parity with the Series A Preferred Stock, and with all equity securities
issued by the Corporation the terms of which specifically provide that such
equity securities rank on a parity with the Series B Preferred Stock; and
(iii) junior to all equity securities issued by the Corporation the terms of
which specifically provide that such equity securities rank senior to the
Series B Preferred Stock. The term "equity securities" shall not include
convertible debt securities.
DIVIDENDS
Holders of shares of the Series B Preferred Stock shall be entitled to
receive, when and as declared by the Board of Directors, out of funds legally
available for the payment of dividends, cumulative preferential cash dividends
at the rate of 8.96% per annum of the $25.00 liquidation preference
(equivalent to a fixed annual amount of $2.24 per share). Such dividends shall
be cumulative from the date of original issue and shall be payable quarterly
in arrears on or about the fifteenth day of February, May, August and November
or, if not a business day, the next succeeding business day (each, a "Dividend
Payment Date"). The first dividend, which will be paid on November 18, 1996,
will be for less than a full quarter. Such dividend and any dividend payable
on the Series B Preferred Stock for any partial dividend period will be
computed on the basis of a 360-day year consisting of twelve 30-day months.
Dividends will be payable to holders of record as they appear in the stock
records of the Company at the close of business on the applicable record date,
which shall be the first day of the
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<PAGE>
calendar month in which the applicable Dividend Payment Date falls or on such
other date designated by the Board of Directors of the Company for the payment
of dividends that is not more than 30 nor less than 10 days prior to such
Dividend Payment Date (each, a "Dividend Record Date").
No dividends on shares of Series B Preferred Stock shall be declared by the
Board of Directors of the Company or paid or set apart for payment by the
Company at such time as the terms and provisions of any agreement of the
Company, including any agreement relating to its indebtedness, prohibits such
declaration, payment or setting apart for payment or provides that such
declaration, payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such declaration or payment shall be
restricted or prohibited by law. Covenants in the Company's Unsecured
Facilities and construction indebtedness provide generally that the Company
may not pay dividends in excess of (i) 95% of annual Funds from Operations or
(ii) 100% of net operating cash flow after debt service if the Company's
quarter end total debt to total market capitalization exceeds 50%, but such
covenants permit the Company to pay dividends in an amount necessary to
maintain its qualification as a REIT for Federal income tax purposes.
Notwithstanding the foregoing, dividends on the Series B Preferred Stock
will accrue whether or not the above covenants at any time prohibit the
current payment of dividends, whether or not the Company has earnings, whether
or not there are funds legally available for the payment of such dividends and
whether or not such dividends are declared. Accrued but unpaid dividends on
the Series B Preferred Stock will accumulate as of the Dividend Payment Date
on which they first become payable. When dividends are not paid in full (or a
sum sufficient for such full payment is not so set apart) upon the Series B
Preferred Stock and the shares of any other series of Preferred Stock ranking
on a parity as to dividends with the Series B Preferred Stock, all dividends
declared upon the Series B Preferred Stock and any other series of Preferred
Stock ranking on a parity as to dividends with the Series B Preferred Stock
shall be declared pro rata so that the amount of dividends declared per share
of Series B Preferred Stock and such other series of Preferred Stock shall in
all cases bear to each other the same ratio that accrued dividends per share
on the Series B Preferred Stock and such other series of Preferred Stock
(which shall not include any accrual in respect of unpaid dividends for prior
dividend periods if such Preferred Stock does not have a cumulative dividend)
bear to each other. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the Series B
Preferred Stock which may be in arrears.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Series B Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof is set apart for payment for all past dividend periods and
the then current dividend period, no dividends (other than in shares of Common
Stock or other shares of capital stock ranking junior to the Series B
Preferred Stock as to dividends and upon liquidation) shall be declared or
paid or set aside for payment nor shall any other distribution be declared or
made upon the Common Stock, or any other capital shares of the Company ranking
junior to or on a parity with the Series B Preferred Stock as to dividends or
upon liquidation, nor shall any shares of Common Stock, or any other shares of
capital stock of the Company ranking junior to or on a parity with the Series
B Preferred Stock as to dividends or upon liquidation be redeemed, purchased
or otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any such shares) by the
Company (except by conversion into or exchange for other capital shares of the
Company ranking junior to the Series B Preferred Stock of such series as to
dividends and upon liquidation). Holders of shares of the Series B Preferred
Stock shall not be entitled to any dividend, whether payable in cash, property
or stock, in excess of full cumulative dividends on the Series B Preferred
Stock as provided above. Any dividend payment made on shares of the Series B
Preferred Stock shall first be credited against the earliest accrued but
unpaid dividend due with respect to such shares which remains payable. See
"Description of Capital Stock--Preferred Stock--Dividends" in the accompanying
Prospectus.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, the holders of shares of Series B Preferred Stock
are entitled to be paid out of the assets of the Company legally available for
distribution to its stockholders a liquidation preference of $25.00 per share,
plus an amount equal
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<PAGE>
to any accrued and unpaid dividends to the date of payment, before any
distribution of assets is made to holders of Common Stock or any other class
or series of capital stock of the Company that ranks junior to the Series B
Preferred Stock as to liquidation rights. After payment of the full amount of
the liquidating distributions to which they are entitled, the holders of
Series B Preferred Stock will have no right or claim to any of the remaining
assets of the Company. The consolidation or merger of the Company with or into
any other corporation, trust or entity or of any other corporation with or
into the Company, or the sale, lease or conveyance of all or substantially all
of the property or business of the Company, shall not be deemed to constitute
a liquidation, dissolution or winding up of the Company. For further
information regarding the rights of the holders of the Series B Preferred
Stock upon the liquidation, dissolution or winding up of the Company, see
"Description of Capital Stock--Preferred Stock--Liquidation Preference" in the
accompanying Prospectus.
REDEMPTION
The Series B Preferred Stock is not redeemable prior to October 15, 2001.
However, in order to ensure that the Company remains a qualified REIT for
Federal income tax purposes, Series B Preferred Stock owned by a stockholder
in excess of the Ownership Limit will automatically be exchanged for shares of
Excess Stock, and the Company will have the right to purchase Excess Stock
from the holder. See "Restrictions on Transfers of Capital Stock" in the
accompanying Prospectus. On and after October 15, 2001, the Company, at its
option upon not less than 30 nor more than 60-days' written notice, may redeem
shares of the Series B Preferred Stock, in whole or in part, at any time or
from time to time, for cash at a redemption price of $25.00 per share, plus
all accrued and unpaid dividends thereon to the date fixed for redemption
(except as provided below), without interest. The redemption price of the
Series B Preferred Stock (other than the portion thereof consisting of accrued
and unpaid dividends) is payable solely out of the sale proceeds of other
capital stock of the Company, which may include other series of Preferred
Stock, and from no other source. For purposes of the preceding sentence,
"capital stock" means any equity securities (including Common Stock and
Preferred Stock), shares, interest, participation or other ownership interests
(however designated) and any rights (other than debt securities convertible
into or exchangeable for equity securities) or options to purchase any of the
foregoing. Holders of Series B Preferred Stock to be redeemed shall surrender
such Series B Preferred Stock at the place designated in such notice and shall
be entitled to the redemption price and any accrued and unpaid dividends
payable upon such redemption following such surrender. If notice of redemption
of any shares of Series B Preferred Stock has been given and if the funds
necessary for such redemption have been set aside by the Company in trust for
the benefit of the holders of any shares of Series B Preferred Stock so called
for redemption, then from and after the redemption date dividends will cease
to accrue on such shares of Series B Preferred Stock, such shares of Series B
Preferred Stock shall no longer be deemed outstanding and all rights of the
holders of such shares will terminate, except the right to receive the
redemption price. If less than all of the outstanding Series B Preferred Stock
is to be redeemed, the Series B Preferred Stock to be redeemed shall be
selected pro rata (as nearly as may be practicable without creating fractional
shares) or by any other equitable method determined by the Company.
Unless full cumulative dividends on all shares of Series B Preferred Stock
shall have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for payment for all past
dividend periods and the then current dividend period, no shares of Series B
Preferred Stock shall be redeemed unless all outstanding shares of Series B
Preferred Stock are simultaneously redeemed, and the Company shall not
purchase or otherwise acquire directly or indirectly any shares of Series B
Preferred Stock (except by exchange for capital stock of the Company ranking
junior to the Series B Preferred Stock as to dividends and upon liquidation);
provided, however, that the foregoing shall not prevent the purchase by the
Company of shares of Excess Stock in order to ensure that the Company remains
qualified as a REIT for Federal income tax purposes, as described under
"Restrictions on Transfers of Capital Stock" in the accompanying Prospectus,
or the purchase or acquisition of shares of Series B Preferred Stock pursuant
to a purchase or exchange offer made on the same terms to holders of all
outstanding shares of Series B Preferred Stock.
Notice of redemption will be given by publication in a newspaper of general
circulation in the City of New York, such publication to be made once a week
for two successive weeks commencing not less than 30 nor more than 60 days
prior to the redemption date. A similar notice will be mailed by the Company,
postage prepaid, not
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<PAGE>
less than 30 nor more than 60 days prior to the redemption date, addressed to
the respective holders of record of the Series B Preferred Stock to be
redeemed at their respective addresses as they appear on the stock transfer
records of the Company. No failure to give such notice or any defect thereto
or in the mailing thereof shall affect the validity of the proceedings for the
redemption of any shares of Series B Preferred Stock except as to the holder
to whom notice was defective or not given. Each notice shall state: (i) the
redemption date; (ii) the redemption price; (iii) the number of shares of
Series B Preferred Stock to be redeemed; (iv) the place or places where the
Series B Preferred Stock is to be surrendered for payment of the redemption
price; and (v) that dividends on the shares to be redeemed will cease to
accrue on such redemption date. If less than all of the Series B Preferred
Stock held by any holder is to be redeemed, the notice mailed to such holder
shall also specify the number of shares of Series B Preferred Stock held by
such holder to be redeemed.
The holders of Series B Preferred Stock at the close of business on a
Dividend Record Date will be entitled to receive the dividend payable with
respect to such Series B Preferred Stock on the corresponding Dividend Payment
Date notwithstanding the redemption thereof between such Dividend Record Date
and the corresponding Dividend Payment Date or the Company's default in the
payment of the dividend due. Except as provided above, the Company will make
no payment or allowance for unpaid dividends, whether or not in arrears, on
called Series B Preferred Stock.
The Series B Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption. However, in order to ensure that
the Company remains a qualified REIT for Federal income tax purposes, Series B
Preferred Stock owned by a stockholder in excess of the Ownership Limit will
automatically be exchanged for shares of Excess Stock, and the Company will
have the right to purchase Excess Stock from the holder.
VOTING RIGHTS
Holders of the Series B Preferred Stock will not have any voting rights,
except as set forth below or as otherwise from time to time required by law.
Whenever dividends on any shares of Series B Preferred Stock shall be in
arrears for six or more quarterly periods (a "Preferred Dividend Default"),
the Board of Directors shall take such action as may be required to increase
the number of directors of the Company by two and the holders of such shares
of Series B Preferred Stock (voting separately as a class with all other
series of Preferred Stock upon which like voting rights have been conferred
and are exercisable) will be entitled to vote for the election of two
additional directors of the Company (the "Preferred Stock Directors") at a
special meeting called by the holders of record of at least 10% of the Series
B Preferred Stock or the holders of any other series of Preferred Stock so in
arrears (unless such request is received less than 90 days before the date
fixed for the next annual or special meeting of the stockholders) or at the
next annual meeting of stockholders, and at each subsequent annual meeting
until all dividends accrued on such shares of Series B Preferred Stock for the
past dividend periods and the then current dividend period shall have been
fully paid or declared and a sum sufficient for the payment thereof set aside
for payment. If and when all accrued dividends on the Series B Preferred Stock
shall have been paid in full or set aside for payment in full, the holders of
shares of Series B Preferred Stock shall be divested of the foregoing voting
rights (subject to revesting in the event of each and every Preferred Dividend
Default) and, provided that no Preferred Dividend Default exists for any other
series of Preferred Stock upon which similar voting rights have been conferred
and are exercisable, the term of office of each Preferred Stock Director so
elected shall terminate and the Board of Directors shall take such action as
may be necessary to reduce the number of directors of the Company by two
(subject to the increase in the number of directors pursuant to the foregoing
provisions in the case of a future Preferred Dividend Default). Any Preferred
Stock Director may be removed at any time with or without cause by, and shall
not be removed otherwise than by the vote of, the holders of record of a
majority of the outstanding shares of the Series B Preferred Stock (voting
separately as a class with all other series of Preferred Stock upon which like
voting rights have been conferred and are exercisable). So long as a Preferred
Dividend Default shall continue, any vacancy in the office of a Preferred
Stock Director may be filled
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<PAGE>
by written consent of the Preferred Stock Director remaining in office, or if
none remains in office, by a vote of the holders of record of a majority of
the outstanding shares of Series B Preferred Stock (voting separately as a
class with all other series of Preferred Stock upon which like voting rights
have been conferred and are exercisable). The Preferred Stock Directors shall
each be entitled to one vote per director on any matter.
So long as any shares of Series B Preferred Stock remain outstanding, the
Company will not, without the affirmative vote or consent of the holders of at
least two-thirds of the shares of the Series B 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), (a) authorize or create, or increase the
authorized or issued amount of, any class or series of capital stock ranking
prior to the Series B Preferred Stock with respect to payment of dividends or
the distribution of assets upon liquidation, dissolution or winding up or
reclassify any authorized capital stock of the Company into such shares, or
create, authorize or issue any obligation or security convertible into or
evidencing the right to purchase any such shares; or (b) amend, alter or
repeal the provisions of the Articles or the Designating Amendment, whether by
merger, consolidation or otherwise (an "Event"), so as to materially and
adversely affect any right, preference, privilege or voting power of the
Series B Preferred Stock or the holders thereof; provided, however, with
respect to the occurrence of any Event set forth in (b) above, so long as the
Series B 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 effect such rights,
preferences, privileges or voting power of holders of the Series B Preferred
Stock and provided further that (i) any increase in the amount of the
authorized Preferred Stock or the creation or issuance of any other series of
Preferred Stock, or (ii) any increase in the amount of authorized shares of
such series, in each case ranking on a parity with or junior to the Series B
Preferred Stock with respect to payment of dividends or the distribution of
assets upon liquidation, dissolution or winding up, shall not be deemed to
materially and adversely affect such rights, preferences, privileges or voting
powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of Series B Preferred Stock shall have
been redeemed or called for redemption upon proper notice and sufficient funds
shall have been deposited in trust to effect such redemption.
CONVERSION
The Series B Preferred Stock is not convertible into or exchangeable for any
other property or securities of the Company, except that the shares of Series
B Preferred Stock may be exchanged by the Company for shares of Excess Stock
in order to ensure that the Company remains qualified as a REIT for Federal
income tax purposes. See "Restrictions on Transfers of Capital Stock" in the
accompanying Prospectus.
RESTRICTIONS ON OWNERSHIP
For information regarding restrictions on ownership of the Series B
Preferred Stock, see "Restrictions on Transfers of Capital Stock" in the
accompanying Prospectus.
S-12
<PAGE>
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 Internal Revenue Code of 1986, as amended (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 Series B Preferred Stock) out of current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
taken into account by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. For purposes of determining
whether distributions on the Series B Preferred Stock are out of current or
accumulated earnings and profits, the earnings and profits of the Company will
be allocated first to the Series A Preferred Stock and the Series B Preferred
Stock pro rata, and then allocated to the Company's Common Stock.
Distributions that are designated as capital gain dividends will be taxed as
long-term capital gains (to the extent they do not exceed the Company's actual
net capital gain for the taxable year) without regard to the period for which
the holder has held its Series B Preferred Stock. However, corporate holders
may be required to treat up to 20% of certain capital gain dividends as
ordinary income. Distributions in excess of current and accumulated earnings
and profits will not be taxable to a holder to the extent that they do not
exceed the adjusted tax basis of the holder's shares, but rather will reduce
the adjusted basis of such shares. To the extent that such distributions
exceed the adjusted basis of a holder's shares they will be included in income
as long-term capital gain (or short-term capital gain if the shares have been
held for one year or less) assuming the shares are a capital asset in the
hands of the holder. In addition, any dividend declared by the Company in
October, November or December of any year payable to a stockholder of record
on a specified date in any such month shall be treated as both paid by the
Company and received by the stockholder on December 31 of such year, provided
that the dividend is actually paid by the Company during January of the
following calendar year. Stockholders may not include in their individual
income tax returns any net operating losses or capital losses of the Company.
Sale or Redemption of Series B Preferred Stock. On the sale of shares of
Series B Preferred Stock, gain or loss will be recognized by the holder in an
amount equal to the difference between (i) the amount of cash and fair market
value of any property received on such sale, and (ii) the holder's adjusted
basis in the Series B Preferred Stock. Such gain or loss will be capital gain
or loss if the shares of Series B Preferred Stock are held as capital assets,
and will be long-term gain or loss if such shares are held for more than one
year. In general, any loss upon a sale or exchange of shares by a holder who
has held such shares for six 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 Series B Preferred Stock will be treated under Section 302
of the Code as a distribution that is taxable at ordinary income tax rates as
a dividend (to the extent of the Company's current or accumulated earnings and
profits), unless the redemption satisfies certain tests set forth in Section
302(b) of the Code enabling the redemption to be treated as a sale of the
Series B Preferred Stock. The redemption will satisfy such tests if it
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<PAGE>
(i) is "substantially disproportionate" with respect to the holder (which will
not be the case if only Series B Preferred Stock is redeemed, since it
generally does not have voting rights), (ii) results in a "complete
termination" of the holder's stock interest in the Company, or (iii) is "not
essentially equivalent to a dividend" with respect to the holder, all within
the meaning of Section 302(b) of the Code. In determining whether any of these
tests have been met, shares considered to be owned by the holder by reason of
certain constructive ownership rules set forth in the Code, as well as shares
actually owned, must generally be taken into account. Because the
determination as to whether any of the alternative tests of Section 302(b) of
the Code will be satisfied with respect to any particular holder of Series B
Preferred Stock depends upon the facts and circumstances at the time that the
determination must be made, prospective investors are advised to consult their
own tax advisors to determine such tax treatment.
If a redemption of the Series B Preferred Stock is treated as a distribution
that is taxable as a dividend, the amount of the distribution will be measured
by the amount of cash and the fair market value of any property received by
the stockholders. The stockholder's adjusted tax basis in such redeemed Series
B Preferred Stock will be transferred to the holder's remaining stockholdings
in the Company. If, however, the stockholder has no remaining stockholdings in
the Company, such basis could be transferred to a related person or it may be
lost.
BACKUP WITHHOLDING
The Company will report to its domestic stockholders and the Internal
Revenue Service (the "IRS") the amount of dividends paid during each calendar
year, and the amount of tax withheld, if any. Under the backup withholding
rules, a stockholder may be subject to backup withholding at the rate of 31%
with respect to dividends paid and redemptions unless such holder (a) is a
corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies that the holder is not subject to backup withholding, and
otherwise complies with applicable requirements of the backup withholding
rules. A stockholder that does not provide the Company with his correct
taxpayer identification number may also be subject to penalties imposed by the
IRS. Any amount paid as backup withholding will be creditable against the
stockholder's income tax liability.
TAXATION OF CERTAIN TAX-EXEMPT STOCKHOLDERS
Generally, a tax-exempt investor that is exempt from tax on its investment
income, such as an individual retirement account ("IRA") or a Section 401(k)
plan, that holds the Series B Preferred Stock as an investment will not be
subject to tax on dividends paid by the Company. However, if such tax-exempt
investor is treated as having purchased its Series B Preferred Stock with
borrowed funds, some or all of its dividends from the Series B Preferred 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 Series B Preferred Stock
dividends even if their Series B Preferred Stock is held for investment and is
not treated as acquired with borrowed funds.
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
own property, transact business or reside. The state and local tax treatment
of the Company and its stockholders may not conform to the Federal income tax
consequences discussed above. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local tax
laws on an investment in the Company.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions in the Underwriting Agreement (the
"Underwriting Agreement") among the Company and the Underwriters named below
(the "Underwriters"), for whom PaineWebber Incorporated, Dean Witter Reynolds
Inc., Prudential Securities Incorporated and Smith Barney Inc. are acting as
Representatives, the Company has agreed to sell to each of the Underwriters
and each of the Underwriters has severally agreed to purchase the number of
shares of Series B Preferred Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
PaineWebber Incorporated.......................................... 774,000
Dean Witter Reynolds Inc. ........................................ 774,000
Prudential Securities Incorporated................................ 774,000
Smith Barney Inc. ................................................ 774,000
Alex. Brown & Sons Incorporated................................... 88,000
A.G. Edwards & Sons, Inc.......................................... 88,000
Bear, Stearns & Co. Inc. ......................................... 88,000
Dillon, Read & Co. Inc. .......................................... 88,000
Donaldson, Lufkin & Jenrette Securities Corporation............... 88,000
J.P. Morgan Securities Inc. ...................................... 88,000
Lehman Brothers Inc. ............................................. 88,000
Oppenheimer & Co., Inc. .......................................... 88,000
Cowen & Company................................................... 40,000
Legg Mason Wood Walker, Incorporated.............................. 40,000
McDonald & Company Securities, Inc. .............................. 40,000
McGinn Smith Co. Inc. ............................................ 40,000
Wheat First Butcher Singer........................................ 40,000
---------
Total......................................................... 4,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters will be obligated to purchase all of the shares of Series B
Preferred Stock if any are purchased.
The Underwriters have advised the Company that they propose initially to
offer the shares of Series B Preferred Stock directly to the public at the
public offering price set forth on the cover page of this Prospectus
Supplement, and to certain dealers at such price less a concession not in
excess of $.50 per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $.35 per share to certain other
dealers. After the initial public offering, the public offering price and such
concession may be changed.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus Supplement, to purchase up
to 600,000 additional shares of Series B Preferred Stock at the price to the
public set forth on the cover page of this Prospectus Supplement, less the
underwriting discount. If the Underwriters exercise this option, each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof which the number of shares
to be purchased by it shown in the foregoing table bears to the 4,000,000
shares offered hereby.
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribute to payments the Underwriters may be required to make
in respect thereof.
Application has been made to list the Series B Preferred Stock on the New
York Stock Exchange. If approved, trading of the Series B Preferred Stock on
the New York Stock Exchange is expected to commence within a 30-day period
after the initial delivery of the Series B Preferred Stock. The Underwriters
have advised
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<PAGE>
the Company that they intend to make a market in the Series B Preferred Stock
prior to the commencement of trading on the New York Stock Exchange. The
Underwriters will have no obligation to make a market in the Series B
Preferred Stock, however, and may cease market making activities, if
commenced, at any time.
In the ordinary course of their respective businesses, the Underwriters and
their affiliates have engaged and may in the future engage in investment
banking transactions with the Company.
LEGAL MATTERS
Certain legal matters, including the legality of the Series B Preferred
Stock, will be passed upon for the Company by Goodwin, Procter & Hoar llp,
Boston, Massachusetts, and for the Underwriters by O'Melveny & Myers llp, New
York, New York.
EXPERTS
The consolidated financial statements and financial statement schedule of
the Company as of December 31, 1995 and 1994 and for the years ended December
31, 1995 and 1994 and the period November 18, 1993 through December 31, 1993
and the combined financial statements of the Predecessor for the period
January 1, 1993 through November 17, 1993 included in the Company's Annual
Report on Form 10-K and incorporated by reference herein have been
incorporated herein in reliance on the reports of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
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<PAGE>
PROSPECTUS
$327,670,000
AVALON PROPERTIES, INC.
DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
WARRANTS
----------------
Avalon Properties, Inc. ("Avalon" 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"),
(iii) shares of common stock, $.01 par value per share ("Common Stock"), or
(iv) warrants or other rights to purchase Preferred Stock or Common Stock
("Warrants"), with an aggregate public offering price of up to $327,670,000,
in amounts, at prices and on other terms to be determined at the time of
offering. The Debt Securities, Preferred Stock, Common Stock and Warrants
(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 Preferred Stock or Common 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;
(iii) in the case of Common Stock, any initial public offering price; and (iv)
in the case of Warrants, the duration, offering price, exercise price and
detachability. 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.
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 directly, 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.
Since the Company's initial public offering in November 1993, it has paid
regular quarterly dividends to holders of its Common Stock. The Common Stock
is listed on the New York Stock Exchange (the "NYSE") under the symbol "AVN."
On February 9, 1996, the reported last sale price of the Common Stock on the
NYSE was $22 5/8 per share.
----------------
SEE "RISK FACTORS" COMMENCING ON PAGE 3 FOR CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
----------------
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 FEBRUARY 13, 1996.
<PAGE>
AVAILABLE INFORMATION
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, proxy statements and other information with the
Securities and Exchange Commission (the "SEC" or the "Commission"). Such
reports, proxy statements and other information can 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. Copies of such materials can be obtained upon
written request 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 such materials can be inspected and copied at the NYSE, 20 Broad
Street, New York, New York 10005.
The Company has filed with the 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 a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. The Registration Statement,
including exhibits thereto, may be inspected and copied at the locations
described above. 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Company with the Commission
pursuant to the Exchange Act are incorporated in this Prospectus by reference:
(i) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 1-12452), (ii) the Company's Quarterly Reports on
Form 10-Q for the fiscal quarters ended March 31, June 30, and September 30,
1995, (iii) the Company's Current Report on Form 8-K dated August 24, 1995, as
amended by Form 8-K/A on August 31, 1995, (iv) the Company's proxy statement
with respect to its Annual Meeting of Stockholders held on May 9, 1995 and (v)
the description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A declared effective by the Commission on
November 11, 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.
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 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 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 Thomas J. Sargeant, Chief Financial
Officer, Avalon Properties, Inc., 5904 Richmond Highway, Alexandria, Virginia,
22303, telephone (703) 329-6300.
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RISK FACTORS
An investment in the Securities involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained or incorporated by reference in this
Prospectus and the applicable Prospectus Supplement before making a decision
to purchase any Securities.
RISKS OF DEVELOPMENT, CONSTRUCTION AND ACQUISITION ACTIVITIES
The Company intends to actively continue development and construction of
multifamily apartment communities. There can be no assurance that the Company
will undertake to develop any particular site or that it will be able to
complete such development if it is undertaken. Risks associated with the
Company's development and construction activities include: development
opportunities may be abandoned; construction costs of a community may exceed
original estimates, possibly making the community uneconomical; occupancy
rates and rents at a newly completed community may not be sufficient to make
the community profitable; financing may not be available on favorable terms
for 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
authorization.
The Company intends to continue to acquire multifamily apartment communities
on a select basis. Acquisitions of multifamily communities entail risks that
investments will fail to perform in accordance with expectations. Estimates of
the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property may prove
inaccurate.
The Company anticipates that future developments and acquisitions will be
financed, in whole or in part, under lines of credit or other forms of secured
or unsecured financing or through the issuance of additional equity by the
Company. The use of equity financing, rather than debt, for future
developments or acquisitions could have a dilutive effect on the interests of
existing stockholders of the Company. If new developments are financed through
construction loans, there is a risk that, upon completion of construction,
permanent financing for newly developed communities may not be available or
may be available only on disadvantageous terms.
REAL ESTATE FINANCING RISKS
No Limitation on Debt. The Company currently has a policy of incurring debt
only if upon such incurrence the ratio of debt to total market capitalization
(i.e., the total consolidated debt of the Company as a percentage of the
market value of issued and outstanding equity securities plus total
consolidated debt) would be 50% or less, but the organizational documents of
the Company do not contain any limitation on the amount of indebtedness the
Company may incur. Accordingly, the Company's Board of Directors could alter
or eliminate this policy.
Existing Debt Maturities, Balloon Payments and Refinancing Risks. The
Company is subject to the risks normally associated with debt financing,
including the risk that the Company's cash flow will be insufficient to meet
required payments of principal and interest. Because the Company anticipates
that only a small portion of the principal of the Company's indebtedness will
be repaid prior to maturity, it will be necessary for the Company to refinance
debt. Accordingly, there is a risk that existing indebtedness will not be able
to be refinanced or that the terms of such refinancing will not be as
favorable as the terms of the existing indebtedness.
Risk of Rising Interest Rates. The Company has incurred and expects in the
future to incur floating rate indebtedness under credit facilities or in
connection with the construction of multifamily apartment communities, as well
as for other purposes. Accordingly, increases in interest rates would increase
the Company's interest costs (to the extent that the related indebtedness was
not protected by interest rate protection arrangements).
Bond Compliance Requirements. Certain of the Company's multifamily apartment
communities are financed with obligations issued by various local government
agencies or instrumentalities, the interest on which
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is exempt from Federal income taxation. These obligations are commonly
referred to as "tax-exempt bonds." Under the terms of tax-exempt bonds, the
Company must comply with various restrictions on the use of the properties,
including that a percentage of apartments be made available to low and middle
income households. The bond compliance requirements in effect, 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 properties subject
to the financing. In addition, certain of the tax-exempt bond financing
documents require that a financial institution (the "credit enhancer")
guarantee payment of principal of, and interest on, the bonds, which may take
the form of a letter of credit, surety bond, guarantee agreement or other
additional collateral. If the credit enhancer defaults in its credit
enhancement obligations, or the Company is unable to renew the applicable
credit enhancement or otherwise post satisfactory collateral, a default will
occur under the applicable tax-exempt bonds and the property could be
foreclosed upon.
REAL ESTATE INVESTMENT RISKS
General Risks. Real property investments are subject to varying degrees of
risk. If the Company's communities do not generate revenues sufficient to meet
operating expenses, including debt service and capital expenditures, the
Company's cash flow and ability to make distributions to its stockholders will
be adversely affected. A multifamily apartment community's revenues and value
may be adversely affected by the general economic climate; the local economic
climate (including the fiscal condition of the relevant governmental bodies);
local real estate conditions (such as oversupply of or reduced demand for
apartment homes); the perceptions by prospective residents of the safety,
convenience and attractiveness of the communities or neighborhoods in which
they are located and the quality of local schools and other amenities; 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.
Dependence on Primary Markets. The Company's multifamily apartment
communities are located in the mid-Atlantic and Northeast regions of the
United States and the Company's performance and its ability to perform its
obligations with respect to the Securities or make distributions to
stockholders could be adversely affected by economic and social conditions in
these geographic areas.
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 its stockholders.
Competition. There are numerous housing alternatives that compete with the
Company's multifamily apartment communities in attracting residents. These
communities compete directly with other multifamily rental apartments and
single family homes or condominiums that are available for rent or purchase in
the markets in which the communities are located. In addition, other
competitors for development and acquisitions of properties, including other
REITs, may have greater resources than the Company.
Operating Risks. The Company's multifamily apartment communities are subject
to all operating risks common to multifamily apartment communities in general.
Increases in unemployment or in the supply of apartment homes in the areas in
which the communities are located might adversely affect occupancy or rental
rates. Increases in operating costs due to inflation and other factors may not
necessarily be offset by increased rents. Residents may be unable or unwilling
to pay rent increases. Future enactment of rent control or rent stabilization
laws or other laws regulating multifamily housing may reduce rental revenue or
increase operating costs. If operating expenses increase, the local rental
market may limit the extent to which rents may be increased to meet increased
expenses without decreasing occupancy rates.
4
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Affordable Housing Laws. Certain of the Company's communities are, and will
be in the future, subject to Federal, state and local statutes or other
restrictions requiring that a percentage of apartments be made available to
low and middle income households. These laws and obligations, 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 to those
persons satisfying such requirements, could adversely affect the Company's
profitability and its ability to develop certain communities in the future.
RISKS INVOLVED IN ACQUISITIONS THROUGH PARTNERSHIPS AND JOINT VENTURES
Instead of purchasing properties directly, the Company may invest as a
partner or a co-venturer. Partnership or joint venture investments may, under
certain circumstances, involve risks not otherwise present, including the
possibility that the Company's partner or co-venturer might become bankrupt,
that such partner or co-venturer might at any time have economic or other
business interests or goals which are inconsistent with the business interests
or goals of the Company, and that such partner or co-venturer may be in a
position to take action contrary to the instructions or the requests of the
Company or contrary to the Company's policies or objectives, including the
Company's policy with respect to maintaining its qualification as a REIT. Such
investments may also have the potential risk of impasse on decisions because
neither the partner nor the co-venturer would have full control over the
partnership or joint venture. The Company will, however, seek to maintain
sufficient control of such partnerships or joint ventures to permit the
Company's objectives to be achieved. There is no limitation under the
Company's organizational documents as to the amount of available funds that
may be invested in partnerships or joint ventures.
CHANGES IN POLICIES WITHOUT STOCKHOLDER APPROVAL
The investment, financing and borrowing policies of the Company and its
policies with respect to all other activities, including termination of
qualification as a REIT, growth, debt, capitalization, dividends and
operations, will be determined by the Board of Directors. Although the Board
of Directors has no present intention to do so, these policies may be amended
or revised at any time and from time to time at the discretion of the Board of
Directors without a vote of the stockholders of the Company. A change in these
policies could adversely affect the Company's financial condition, results of
operations or the market price of the Securities.
LIMITS ON CHANGES IN CONTROL
Certain provisions contained in the Company's Amended and Restated Articles
of Incorporation (the "Articles of Incorporation") and the Company's Amended
and Restated Bylaws (the "Bylaws") and under Maryland law may have the effect
of discouraging a third party from making an acquisition proposal for the
Company and may thereby inhibit a change in control of the Company. For
example, such provisions may (i) deter tender offers for the Common Stock,
which offers may be attractive to the stockholders, or (ii) deter purchases of
large blocks of Common Stock, thereby limiting the opportunity for
stockholders to receive a premium for their Common Stock over then-prevailing
market prices. These provisions include the following:
Preferred Stock. The Articles of Incorporation authorize the Board of
Directors to issue up to 20 million shares of Preferred Stock (together with
the Common Stock, the "Voting Securities") and to establish the preferences
and rights (including the right to vote and the right to convert into Common
Stock) of any Preferred Stock issued.
Ownership Limit. In order for the Company to maintain its qualification as a
REIT, not more than 50% in value of its outstanding Voting Securities may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code). For the purpose of preserving the Company's REIT qualification, the
Articles of Incorporation, subject to certain exceptions, provide that no
holder may own, directly or indirectly, more than 9.8% of the outstanding
Voting Securities of the Company. Although the Board of Directors of the
Company presently has no intention to do so, the Board of Directors could
waive this restriction if it were satisfied, based upon the advice of tax-
counsel, that ownership in excess of this limit would not jeopardize the
Company's status
5
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as a REIT and the Board of Directors otherwise decided such action would be in
the best interests of the Company.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT; OTHER TAX LIABILITIES
The Company intends at all times to operate so as 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 effect 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.
POSSIBLE 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 clean up
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 clean-up costs incurred by such
parties in connection with the contamination, which may be substantial. The
presence of such substances (or the failure to properly remediate the
contamination) may adversely effect the owner's ability to borrow against,
sell or rent such property.
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND SIMILAR LAWS
Under the Americans with Disabilities Act of 1990 (the "ADA"), all places of
public accommodation are required to meet certain Federal requirements related
to access and use by disabled persons. Although the Company believes that its
communities are substantially in compliance with present requirements of the
ADA, the Company may incur additional costs of complying with the ADA. A
number of additional Federal, state and local laws exist that also may require
modifications to the Company's communities, or restrict certain further
renovations thereof, with respect to access thereto by disabled persons. For
example, the Fair Housing Amendments Act of 1988 (the "FHAA") requires
apartment communities first occupied after March 13, 1990 to be accessible to
the handicapped. Noncompliance with the FHAA could result in the imposition of
fines or an award of damages to private litigants. The Company believes that
its communities that are subject to the FHAA are in compliance with such law.
Additional legislation may impose further burdens or restrictions on owners
with respect to access by disabled persons. The ultimate amount of the cost of
compliance with the ADA or such legislation is not currently ascertainable,
and, while such costs are not expected to have a material effect on the
Company, such costs could be substantial.
POSSIBLE ADVERSE IMPACT OF MARKET CONDITIONS ON MARKET PRICE
The market value of the Securities could be substantially affected by
general market conditions, including changes in interest rates. A continued
increase in market interest rates would lead purchasers of Debt Securities and
may lead purchasers of Common Stock or Preferred Stock to demand a higher
annual yield, which could adversely affect the market price of the outstanding
Common Stock and other Securities. Moreover, numerous other factors, such as
government regulatory action and changes in tax laws, could have a significant
impact on the future market price of the Common Stock or other Securities.
6
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THE COMPANY
Avalon Properties, Inc. (the "Company") is one of the largest developers,
owners and operators of institutional-quality multifamily apartment
communities in the Mid-Atlantic and Northeast regions of the United States,
with five offices located throughout its regions. The Company is a self-
administered and self-managed real estate investment trust (a "REIT"). At
January 15, 1996, the Company owned or had an ownership interest in 39
multifamily apartment communities containing a total of 11,615 apartment
homes. As of December 31, 1995, the Company's established communities had a
physical occupancy rate of 95.7%. In addition, at January 15, 1996, the
Company owned or had an ownership interest in 11 apartment communities under
construction, which the Company anticipates will contain a total of 2,771
apartment homes, with estimated completion dates from the first quarter of
1996 through the second quarter of 1997. As of January 15, 1996, the Company
owned land for one development community, and also owned rights to acquire 15
parcels of land.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Securities for
general corporate purposes, which may include the development or acquisition
of additional apartment communities, the repayment of outstanding debt or the
improvement of certain apartment communities already in the Company's
portfolio. The Company incurs debt from time to time in the ordinary course of
business in connection with the development, acquisition and improvement of
new or existing apartment communities, which debt may be refinanced with the
proceeds of the sale of Securities for which this Prospectus and a related
Prospectus Supplement are delivered.
RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the nine months ended
September 30, 1995 was 2.59x, and for the year ended December 31, 1994 and the
period November 18, 1993 through December 31, 1993 was 3.60x and 3.29x,
respectively.
For purposes of computing these ratios, earnings have been calculated by
adding fixed charges (excluding capitalized interest) to income (loss) before
income taxes and extraordinary items. Fixed charges consist of interest costs,
whether expensed or capitalized, the interest component of rental expense, and
the amortization of debt discounts and issue costs, whether expensed or
capitalized.
Prior to completion of the Company's initial public offering on November 18,
1993, the Company's predecessor (the "Predecessor"), as a privately-held
entity, operated in a manner so as to minimize net taxable income. As a
result, the Predecessor had losses before extraordinary items for the period
January 1, 1993 through November 17, 1993 and its years ended December 31,
1992, 1991 and 1990. Consequently, the computation of the ratio of earnings to
fixed charges for such periods indicates that earnings were inadequate to
cover fixed charges by $7,359,000, $9,398,000, $14,462,000 and $17,609,000 for
the period January 1, 1993 through November 17, 1993 and the years ended
December 31, 1992, 1991 and 1990, respectively.
To date, the Company has not issued any Preferred Stock; therefore, the
ratios of earnings to combined fixed charges and preferred stock dividend
requirements are the same as the ratios of earnings to fixed charges presented
above.
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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
General. 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 the Debt Securities of such series, 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.
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;
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(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 or Make-Whole
Amount (as defined in the Indenture), 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 or Make-
Whole Amount, 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;
(13) Whether the principal of (and premium or Make-Whole Amount, if any)
or interest or Additional Amounts, if any, on the Debt Securities of the
series are to be payable, at the election of the Company or a holder
thereof, in a currency or currencies, currency unit or units or composite
currency or currencies other than that in which such Debt Securities are
denominated or stated to be payable, the period or periods within which,
and the terms and conditions upon which, such election may be made, and the
time and manner of, and identity of the exchange rate agent with
responsibility for, determining the exchange rate between the currency or
currencies, currency unit or units or composite currency or currencies in
which such Debt Securities are denominated or stated to be payable and the
currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are to be so payable;
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(14) Provisions, if any, granting special rights to the holders of Debt
Securities of the series upon the occurrence of such events as may be
specified;
(15) Any deletions from, modifications of or additions to the Events of
Default (as defined in the Indenture) or covenants of the Company with
respect to Debt Securities of the series, whether or not such Events of
Default or covenants are consistent with the Events of Default or covenants
set forth herein;
(16) Whether Debt Securities of the series are to be issuable as
Registered Securities, Bearer Securities (with or without coupons) or both,
any restrictions applicable to the offer, sale or delivery of Bearer
Securities and the terms upon which Bearer Securities of the series may be
exchanged for Registered Securities of the series and vice versa (if
permitted by applicable laws and regulations), whether any Debt Securities
of the series are to be issuable initially in temporary global form and
whether any Debt Securities of the series are to be issuable in permanent
global form with or without coupons and, if so, whether beneficial owners
of interests in any such permanent global Security may exchange such
interests for Debt Securities of such series and of like tenor of any
authorized form and denomination and the circumstances under which any such
exchanges may occur, if other than in the manner provided in the Indenture,
and, if Registered Securities of the series are to be issuable as a Global
Security (as defined), the identity of the depository for such series;
(17) The date as of which any Bearer Securities of the series and any
temporary Global Security representing outstanding Debt Securities of the
series shall be dated if other than the date of original issuance of the
first Security of the series to be issued;
(18) The Person to whom any interest on any Registered Security of the
series shall be payable, if other than the Person in whose name that
Security (or one or more Predecessor Securities) is registered at the close
of business on the Regular Record Date for such interest, the manner in
which, or the Person to whom, any interest on any Bearer Security of the
series shall be payable, if otherwise than upon presentation and surrender
of the coupons appertaining thereto as they severally mature, and the
extent to which, or the manner in which, any interest payable on a
temporary Global Security on an Interest Payment Date will be paid if other
than in the manner provided in the Indenture;
(19) The applicability, if any, of the defeasance and covenant defeasance
provisions of the Indenture to the Debt Securities of the series and any
provisions in modification of, in addition to or in lieu of any of the
provisions of Article Fourteen;
(20) If the Debt Securities of such series are to be issuable in
definitive form (whether upon original issue or upon exchange of a
temporary Security of such series) only upon receipt of certain
certificates or other documents or satisfaction of other conditions, then
the form and/or terms of such certificates, documents or conditions;
(21) If the Debt Securities of the series are to be issued upon the
exercise of warrants, the time, manner and place for such Debt Securities
to be authenticated and delivered;
(22) Whether and under what circumstances the Company will pay Additional
Amounts as contemplated by the Indenture on the Debt Securities of the
series to any holder who is not a United States person (including any
modification to the definition of such term) in respect of any tax,
assessment or governmental charge and, if so, whether the Company will have
the option to redeem such Debt Securities rather than pay such Additional
Amounts (and the terms of any such option);
(23) The obligation, if any, of the Company to permit the conversion of
the Debt Securities of such series into the Company's Common Stock or
Preferred Stock, as the case may be, and the terms and conditions upon
which such conversion shall be effected (including, without limitation, the
initial conversion price or rate, the conversion period, any adjustment of
the applicable conversion price and any requirements relative to the
reservation of such shares for purposes of conversion); and
(24) Any other terms of the series (which terms shall not be inconsistent
with the provisions of this Indenture).
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If so provided 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, all material U.S. federal income tax, accounting and other
considerations applicable to Original Issue Discount Securities will be
described in the applicable Prospectus Supplement.
Change of Control, Highly Leveraged Transactions and Similar
Transactions. 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 any
series of Debt Securities protection in the event of a highly leveraged or
similar transaction, or in the event of a change of control, involving the
Company that may adversely affect holders of Debt Securities. To the extent
that any covenant or provision governing any series of Debt Securities that
would afford protection to holders of such series of Debt Securities in the
event of a highly leveraged or similar transaction or a change of control may
be (a) waived by the Board of Directors of the Company or the relevant Trustee
or (b) limited in its applicability in the event of a leveraged buy-out or
similar transaction initiated or supported by the Company, management of the
Company or any affiliate, the relevant Prospectus Supplement will describe
such provisions.
Any Prospectus Supplement relating to a series of Debt Securities that is
subject to optional redemption, prepayment or conversion of such series of
Debt Securities upon the occurrence of a change of control or other similar
events will describe, to the extent applicable, the following:
(1) the effect that such provisions may have in deterring mergers, tender
offers or other takeover attempts, as well as any possible adverse effect
on the market price of the Company's securities or its ability to obtain
additional financing in the future;
(2) the Company's obligation to comply with the requirements of Rule
14(e)-1 under the Exchange Act and any other applicable securities laws in
connection with such provisions and any related offers by the Company, and
to the extent that a series of convertible Debt Securities are the subject
of such Prospectus Supplement, the Company's obligation to comply with Rule
13e-4;
(3) whether the occurrence of the specified events may give rise to
cross-defaults on other indebtedness resulting in effective subordination
of the Company's obligation to make payments on such series of Debt
Securities;
(4) any legal or financial limitations on the Company's ability to
repurchase the series of Debt Securities offered by such Prospectus
Supplement upon the triggering of an "event risk" provision requiring such
a repurchase or offer to repurchase;
(5) the impact, if any, under the Indenture or other governing
instruments of any failure to repurchase or offer to repurchase, including
whether such failure following a change of control or similar event will
(or would, after the lapse of time or giving of notice, or both) result in
an event of default with respect to such series of Debt Securities;
(6) that there can be no assurance that sufficient funds will be
available to the Company to make any required repurchase at the time such
"event risk" provision is triggered;
(7) the material effect of any subordination of payment on such series of
Debt Securities to other obligations of the Company or its subsidiaries
that may be accelerated as a result of a change in control, fundamental
change or "poison put" provision on such change in control, fundamental
change or "poison put" provision and on such series of Debt Securities;
(8) the material effect, if any, of any anti-takeover provision relating
to the Company's equity securities on the Company's outstanding debt
securities, including the series of Debt Securities offered by such
Prospectus Supplement;
(9) to the extent that the term "change of control" includes the concept
of "all or substantially all," how such concept is quantified or what is
the established meaning of such concept under applicable law and the
Indenture and, in the event that there is no definition or established
meaning for such concept, the
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effect of such uncertainty on the ability of holders of such series of Debt
Securities to determine when a "change of control" has occurred; and
(10) other material effects and limitations of "change of control," as
applicable to such series of Debt Securities, including whether "change of
control" provisions will be triggered if a change in control of the
Company's Board of Directors occurs as a result of a proxy contest
involving solicitation of revocable proxies.
The Company's Articles of Incorporation contain certain restrictions on
ownership and transfers of the Common Stock and Preferred Stock that are
designed to preserve its status as a REIT. Such restrictions may act to
prevent or hinder a change of control. See "Description of Capital Stock--
Common Stock" and "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 or Make-Whole Amount, 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.
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the holder on the applicable Regular Record
Date and may either be paid to the Person in whose name such Debt Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
Trustee, in which case notice thereof shall be given to the holder of such
Debt Security not less than 10 days prior to such Special Record Date, or may
be paid at any time in any other lawful manner, all as more completely
described in the applicable Indenture.
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 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.
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Neither the Company nor any Trustee shall be required to (a) issue, register
the transfer of or exchange Debt Securities of any series during a period
beginning at the opening of business 15 days before selection of any Debt
Securities selected for redemption and ending at the close of business on the
day of mailing of the notice of redemption; (b) 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 (c) 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 the 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 or Make-Whole Amount, 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
material 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.
Insurance. The Indentures will require the Company to cause each of its and
its subsidiaries' insurable properties to be insured against loss or damage at
least equal to their then full insurable value 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, (a) 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 (b) 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.
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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, to (a) transmit
by mail to all holders of Debt Securities, as their names and addresses appear
in the applicable register for such Debt Securities, promptly upon written
request and 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, (b) 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 (c) 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 in the
payment of any interest on or any Additional Amount payable in respect of any
Debt Security of such series when such interest or Additional Amount becomes
due and payable that continues for a period of 30 days; (b) default in the
payment of the principal of (or premium or Make-Whole Amount, if any, on) any
Debt Security of such series when due and payable; (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 in the Indenture with respect to the Debt Securities of such
series and continuance of such default or breach for a period of 60 days after
written notice as provided in the Indenture; (e) default under any bond,
debenture, note, 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 by any Subsidiary, the repayment of which
the Company has guaranteed or for which the Company is directly responsible or
liable as obligor or guarantor), having an aggregate principal amount
outstanding of at least $10,000,000, whether such indebtedness now exists or
shall hereafter 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, without such
indebtedness having been discharged, or such acceleration having been
rescinded or annulled, within a period of 10 days after written notice to the
Company as provided in the Indenture, provided, however, that such a default
on indebtedness which constitutes tax-exempt financing having an aggregate
principal amount outstanding not exceeding $25,000,000 that results solely
from a failure of an entity providing credit support for such indebtedness to
honor a demand for payment on a letter of credit shall not constitute an Event
of Default; (f) the entry by a court of competent jurisdiction of one or more
judgments, orders or decrees against the Company or any of its Subsidiaries in
an aggregate amount (excluding amounts covered by insurance) in excess of
$10,000,000 and such judgments, orders or decrees remain undischarged,
unstayed and unsatisfied in an aggregate amount (excluding amounts covered by
insurance) in excess of $10,000,000 for a period of 30 consecutive days; (g)
certain events of bankruptcy, insolvency or reorganization, or court
appointment of a receiver, liquidator or trustee of the Company or any
Significant Subsidiary; and (h) 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.
If an Event of Default under any Indenture with respect to Debt Securities
of any series 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, and premium or
Make-Whole Amount, if any, on, all the Debt Securities of that series to be
due and payable immediately by written notice
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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 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 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
or Make-Whole Amount, if any) and interest on the Debt Securities of such
series, 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 and the premium or
Make-Whole Amount, if any), with respect to Debt Securities of such series
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 may waive any past default
with respect to such series and its consequences, except a default (i) in the
payment of the principal of (or premium or Make-Whole Amount, if any) or
interest on any Debt Security of such series or (ii) 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 or Make-Whole Amount, 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 or Make-Whole Amount, if any) and interest on such
Debt Securities at the respective due dates or redemption 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.
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
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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 or Make-Whole
Amount, if any) on, any such Debt Security; (b) reduce the principal amount
of, or the rate or amount of interest on, or any premium or Make-Whole Amount
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 or Make-Whole Amount, 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: (a) to evidence
the succession of another person to the Company as obligor under such
Indenture; (b) 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; (c) to add events of
default for the benefit of the holders of all or any series of Debt
Securities; (d) 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; (e) 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; (f) to secure the Debt Securities;
(g) 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; (h) 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; (i)
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 (j) 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, (a) 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, (b) 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 (a) above),
(c) the principal amount of an indexed security that shall be deemed
outstanding shall be the principal face amount
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of such indexed security at original issuance, unless otherwise provided with
respect to such indexed security pursuant such Indenture, and (d) 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 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: (a) there shall be no
minimum quorum requirement for such meeting, and (b) 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 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.
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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 or Make-Whole
Amount, 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 "--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
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(and premium or Make-Whole Amount, 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 or Make-Whole Amount, if any) and interest.
"Government Obligations" means securities that are (a) 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 (b) 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 provided 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 or Make-Whole Amount, 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 provided in the applicable Prospectus Supplement, all
payments of principal of (and premium or Make-Whole Amount, if any) and
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 of 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
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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 of 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.
BOOK-ENTRY SYSTEM
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities ("Global Securities") that will be
deposited with, or on behalf of, a depository (the "Depository") identified in
the Prospectus Supplement relating to such series. Global Securities, if any,
issued in the United States are expected to be deposited with the Depository
Trust Company, as Depository. Global Securities may be issued in fully
registered form and may be issued in either temporary or permanent form.
Unless and until it is exchanged in whole or in part for the individual Debt
Securities represented thereby, a Global Security may not be transferred
except as a whole by the Depository for such Global Security to a nominee of
such Depository or by a nominee of such Depository to such Depository or
another nominee of such Depository or by such Depository or any nominee of
such Depositor to a successor Depository or any nominee of such successor.
The specific terms of the depository arrangement with respect to a series of
Debt Securities will be described in the Prospectus Supplement relating to
such series. The Company expects that unless otherwise indicated in the
applicable Prospectus Supplement, the following provisions will apply to
depository arrangements.
The certificates representing the Notes will be issued in the form of one or
more fully registered global securities without coupons ("Global Securities").
It is expected that the Notes initially will be represented by a single
permanent global certificate in definitive fully registered form (the "Global
Note") and will be deposited with, or on behalf of, DTC and registered in the
name of Cede & Co., as nominee of DTC. Except under the circumstances
described in the accompanying Prospectus under the caption "Description of
Debt Securities-Book-Entry System," the Notes will not be issuable in
definitive form. Unless and until it is exchanged in whole or in part for the
individual Notes represented thereby, interests in the Global Note may not be
transferred except as a whole by DTC to a nominee of DTC or by a nominee of
DTC to DTC or another nominee of DTC or by DTC or any nominee of DTC to a
successor depository or any nominee of such successor.
DTC has advised the Company of the following information regarding DTC: DTC
is a limited purpose trust company created to hold securities for its
participating organizations (collectively, the "Participants" or "DTC's
Participants") and to facilitate the clearance and settlement of transactions
in such securities between Participants through electronic book-entry changes
in the accounts of its Participants. DTC's Participants include securities
brokers and dealers, banks and trust companies, clearing corporations and
certain other organizations. Access to DTC's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively,
the "Indirect Participants" or "DTC's Indirect Participants") that clear
through or maintain a custodial
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relationship with a Participant, either directly or indirectly. Persons who
are not Participants may beneficially own securities held by or on behalf of
DTC only through DTC's Participants or DTC's Indirect Participants.
The Company expects that, pursuant to procedures established by DTC,
ownership of the Notes evidenced by the Global Note will be shown on, and the
transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the interests of DTC's Participants), DTC's
Participants and DTC's Indirect Participants. Neither the Company nor the
Trustee will have any responsibility or liability for any aspect of the
records of DTC or for maintaining, supervising or reviewing any records of DTC
relating to the Notes. Holders are advised that the laws of some states
require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer Notes
evidenced by Global Securities will be limited to such extent.
So long as the holder of the Global Note is the registered owner of any
Notes, the holder of the Global Note will be considered the sole holder under
the Indenture of any Notes evidenced by the Global Note. Beneficial owners of
Notes evidenced by the Global Note will not be considered the owners or
holders thereof under the Indenture for any purpose, including with respect to
the giving of any direction, instructions or approvals to the Trustee
thereunder. Accordingly, each person owning a beneficial interest in the
Global Note must rely on the procedures of DTC and, if such person is not a
Participant, on the procedures of the Participant through which such person
owns its interests, to exercise any rights of a holder under the Indenture.
The Company understands that, under existing industry practice, if it requests
any action of holders or if an owner of a beneficial interest in the Global
Note desires to give or take any action which a holder is entitled to give or
take under the Indenture, DTC would authorize the Participants holding the
relevant beneficial interest to give or take such action, and such
Participants would authorize beneficial owners through such Participants to
give or take such actions or would otherwise act upon the instructions of
beneficial owners holding through them.
Payments in respect of the principal of, premium, if any, and interest on,
any Notes registered in the name of the holder of the Global Note on the
applicable record date will be payable by the Trustee to or at the direction
of the holder of the Global Note in its capacity as the registered holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee may treat the persons in whose names Notes, including the Global Note,
are registered as the owners thereof for the purpose of receiving such
payments. Consequently, neither the Company nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of Notes (including principal, premium, if any, and interest). The
Company believes, however, that it is currently the policy of DTC to
immediately credit the accounts of the relevant Participants with such
payments, in amounts proportionate to their respective holdings of beneficial
interests in the relevant security as shown on the records of DTC. Payments by
DTC's Participants and DTC's Indirect Participants to the beneficial owners of
Notes will be governed by standing instructions and customary practice and
will be the responsibility of DTC's Participants for DTC's Indirect
Participants.
Neither the Company nor the Trustee will be liable for any delay by the
holder of the Global Note or DTC in identifying the beneficial owners of Notes
and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the holder of the Global Note or
DTC for all purposes. The rules applicable to DTC and its Participants are on
file with the Securities and Exchange Commission. See "Description of Debt
Securities-Book-Entry System" in the accompanying Prospectus for further
information concerning Notes issued in the form of Global Securities.
If a Depository for any Debt Securities is at any time unwilling, unable or
ineligible to continue as depository and a successor depository is not
appointed by the Company within 90 days, the Company will issue individual
Debt Securities in exchange for the Global Security representing such Debt
Securities. In addition, the Company may at any time and in its sole
discretion, subject to any limitations described in the Prospectus Supplement
relating to such Debt Securities, determine not to have any of such Debt
Securities represented by one or more Global Securities and in such event will
issue individual Debt Securities in exchange for the Global Security or
Securities representing such Debt Securities. Individual Debt Securities so
issued will be issued in denominations of $1,000 and integral multiple
thereof.
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PAYMENT
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium or Make-Whole Amount, 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, Make-Whole Amount or interest on
any Debt Security which remain unclaimed at the end of two years after such
principal, premium, Make-Whole Amount 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.
DESCRIPTION OF CAPITAL STOCK
The description of the Company's capital 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, each as amended and restated,
copies of which are exhibits to the Registration Statement of which this
Prospectus is a part. See "Available Information."
GENERAL
Under its Articles of Incorporation, the Company has authority to issue up
to 150 million shares of stock, consisting of 80 million shares of Common
Stock, par value $.01 per share, 50 million shares of "Excess Stock" (as
described under "Restrictions on Transfer" below), par value $.01 per share,
and 20 million shares of Preferred Stock, par value $.01 per share. Under
Maryland law, stockholders generally are not responsible for the corporation's
debts or obligations. At January 26, 1996 there were 30,600,065 shares of
Common Stock issued and outstanding and no Preferred Stock issued or
outstanding. An aggregate of an additional 1,952,500 shares of Common Stock
have been reserved for issuance under the 1993 Stock Option and Incentive Plan
and the 1995 Equity Incentive Plan. The Common Stock is listed on the NYSE
under the symbol "AVN."
COMMON STOCK
General. 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 are entitled to
receive dividends on 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 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.
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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 Maryland General Corporation Law ("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 (but
not less than a majority of all of the votes to be cast on the matter) is set
forth in the corporation'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 and Registrar. The transfer agent and registrar for the
Common Stock is Fleet Bank, National Association.
PREFERRED STOCK
General. 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 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, 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 by the Company 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 accrue,
if applicable;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Stock;
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(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;
(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; (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; 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. 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
or 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
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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 accrual in respect of unpaid dividends for prior dividend periods
if such 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 shares 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 shares 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 provided 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 accrual 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 (a) 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 (b) 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
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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 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 lot in a 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 share transfer books of
the Company. Each notice shall state: (a) the redemption date; (b) the number
of shares and series of the Preferred Stock to be redeemed; (c) the redemption
price; (d) the place or places where certificates for such Preferred Stock are
to be surrendered for payment of the redemption price; (e) that dividends on
the shares to be redeemed will cease to accrue on such redemption date; and
(f) 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 shareholders liquidating distributions
in the amount of the liquidation preference per share (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
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ranking junior to the Preferred Stock upon liquidation, dissolution or winding
up, according to their respective 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), (a) 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 (b) 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 Event set forth in (b) 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 (i) any increase
in the amount of the authorized Preferred Stock or the creation or issuance of
any other series of Preferred Stock, or (ii) any increase in the amount of
authorized shares of such series 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 shares of 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 applicable Prospectus Supplement will specify any
additional ownership limitation relating to a series of Preferred Stock. See
"Restrictions on Transfers of Capital Stock."
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Transfer Agent and Registrar. The transfer agent and registrar for the
Preferred Stock will be set forth in the applicable Prospectus Supplement.
DESCRIPTION OF WARRANTS
The Company has no Warrants or other stock purchase rights outstanding
(other than options issued under the Company's 1993 Incentive and Stock Option
Plan and its 1995 Equity Incentive Plan). The Company may issue Warrants for
the purchase of Preferred Stock or Common Stock. Warrants may be issued
independently, together with any other Securities offered by any Prospectus
Supplement or through a dividend or other distribution to the Company's
stockholders and may be attached to or separate from such Securities. Warrants
may be issued under a warrant agreement (each, a "Warrant Agreement") to be
entered into between the Company and a warrant agent specified in the
applicable Prospectus Supplement (the "Warrant Agent"). The Warrant Agent will
act solely as an agent of the Company in connection with the Warrants of a
particular series and will not assume any obligation or relationship of agency
or trust for or with any holders or beneficial owners of Warrants. The
following sets forth certain general terms and provisions of the Warrants
offered hereby. Further terms of the Warrants and the applicable Warrant
Agreement will be set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the Warrants
in respect of which this Prospectus is being delivered, including, where
applicable, the following: (a) the title of such Warrants; (b) the aggregate
number of such Warrants; (c) the price or prices at which such Warrants will
be issued; (d) the designation, number and terms of the shares of Preferred
Stock or Common Stock purchasable upon exercise of such Warrants; (e) the
designation and terms of the other Securities, if any, with which such
Warrants are issued and the number of such Warrants issued with each such
Security; (f) the date, if any, on and after which such Warrants and the
related Preferred Stock or Common Stock, if any, will be separately
transferable; (g) the price at which each share of Preferred Stock or Common
Stock purchasable upon exercise of such Warrants may be purchased; (h) the
date on which the right to exercise such Warrants shall commence and the date
on which such right shall expire; (i) the minimum or maximum amount of such
Warrants which may be exercised at any one time; (j) information with respect
to book-entry procedures, if any; (k) a discussion of certain federal income
tax considerations; and (l) any other terms of such Warrants, including terms,
procedures and limitations relating to the transferability, exchange and
exercise of such Warrants.
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 (other than the first
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 (other than
the first year) or during a proportionate part of a shorter taxable year. See
"Federal Income Tax Considerations." 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 9.8% (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.
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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.
This ownership limitation may have the effect of precluding acquisition of
control of the Company unless the Board of Directors determines that the
maintenance of REIT status is no longer in the best interests of the Company.
FEDERAL INCOME TAX CONSIDERATIONS
The Company believes it has operated, and the Company intends to continue to
operate, in such manner as to qualify as a REIT under the Code, but no
assurance can be given that it will at all times so qualify.
The provisions of the Code pertaining to REITs are highly technical and
complex. The following is a brief and general summary of certain provisions
that currently govern the federal income tax treatment of the Company and its
stockholders. For the particular provisions that govern the federal income tax
treatment of the Company and its stockholders, reference is made to Sections
856 through 860 of the Code and the regulations thereunder. The following
summary is qualified in its entirety by such reference.
Under the Code, if certain requirements are met in a taxable year, a REIT
generally will not be subject to federal income tax with respect to income
that it distributes to its stockholders. If the Company fails to qualify
during any taxable year as a REIT, unless certain relief provisions are
available, it will be subject to tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates, which could
have a material adverse effect upon its stockholders and creditors.
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In any year in which the Company qualifies to be taxed as a REIT,
distributions made to its stockholders out of current or accumulated earnings
and profits will be taxed to stockholders as ordinary income except that
distributions of net capital gains designated by the Company as capital gain
dividends will be taxed as long-term capital gain income to the stockholders.
To the extent that distributions exceed current or accumulated earnings and
profits, they will constitute a return of capital, rather than dividend or
capital gain income, and will reduce the basis for the stockholder's
Securities with respect to which the distribution is paid or, to the extent
that they exceed such basis, will be taxed in the same manner as gain from the
sale of those Securities.
Investors are urged to consult their own tax advisors with respect to the
appropriateness of an investment in the Securities offered hereby and with
respect to the tax consequences arising under federal law and the laws of any
state, municipality or other taxing jurisdiction, including tax consequences
resulting from such investor's own tax characteristics. In particular, foreign
investors should consult their own tax advisors concerning the tax
consequences of an investment in the Company, including the possibility of
United States income tax withholding on Company distributions.
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 individual, institutional or other purchasers, through agents or through
any combination of these methods of sale. Direct sales to investors may also
be accomplished through subscription rights distributed on a pro rata basis to
the Company's stockholders, which may or may not be transferable by such
stockholders. 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 or 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, 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. Any shares of Common Stock
sold pursuant to a Prospectus Supplement will be listed on the NYSE, 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 will be, and
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.
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Underwriters, dealers and agents may engage in transactions with, or perform
services for, the Company in the ordinary course of business.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers or other persons 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 no less than, and the aggregate principal amounts 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 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 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 the Contracts. If in
conjunction with the sale of Securities to institutions under Contracts,
Securities are also being sold to the public, the consummation of the sale
under the Contracts shall occur simultaneously with the consummation of the
sale to the public. 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, Boston, Massachusetts.
EXPERTS
The consolidated financial statements and financial statement schedule of
Avalon Properties, Inc. as of December 31, 1994 and 1993 and for the year
ended December 31, 1994 and the period November 18, 1993 through December 31,
1993 and the combined financial statements of the Predecessor for the period
January 1, 1993 through November 17, 1993 and the year ended December 31, 1992
included in the Company's Annual Report on Form 10-K and the combined
statement of revenue and certain operating expenses of certain communities
acquired during 1995 for the year ended December 31, 1994 included in the
Current Report on Form 8-K/A, dated August 31, 1995, and incorporated by
reference herein, have been incorporated herein in reliance on the reports of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
31
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIR-
CUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF-
FAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS SUP-
PLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITA-
TION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO
WHICH THEY RELATE. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CON-
STITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES
IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
---------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Offering............................................................. S-2
The Company.............................................................. S-3
The Communities.......................................................... S-4
Recent Developments...................................................... S-5
Use of Proceeds.......................................................... S-7
Capitalization........................................................... S-7
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Divi-
dends................................................................... S-7
Description of Series B Preferred Stock.................................. S-8
Certain Federal Income Tax Considerations................................ S-13
Underwriting............................................................. S-15
Legal Matters............................................................ S-16
Experts.................................................................. S-16
PROSPECTUS
Available Information.................................................... 2
Incorporation of Certain Documents By Reference.......................... 2
Risk Factors............................................................. 3
The Company.............................................................. 7
Use of Proceeds.......................................................... 7
Ratios of Earnings to Fixed Charges...................................... 7
Description of Debt Securities........................................... 8
Description of Capital Stock............................................. 22
Description of Warrants.................................................. 28
Restrictions on Transfers of Capital Stock............................... 28
Federal Income Tax Considerations........................................ 29
Plan of Distribution..................................................... 30
Legal Matters............................................................ 31
Experts.................................................................. 31
</TABLE>
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4,000,000 SHARES
AVALON PROPERTIES, INC.
8.96% SERIES B CUMULATIVE
REDEEMABLE PREFERRED STOCK
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PROSPECTUS SUPPLEMENT
---------------
PAINEWEBBER INCORPORATED
DEAN WITTER REYNOLDS INC.
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
---------------
OCTOBER 17, 1996
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