<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 29, 1997)
[LOGO OF AVALON PROPERTIES,
INC APPEARS HERE]
$100,000,000
AVALON PROPERTIES, INC.
6 5/8% NOTES DUE 2005
Avalon Properties, Inc. ("Avalon" or the "Company") will issue its 6 5/8%
Notes due 2005 (the "Notes") offered hereby (the "Offering") in an aggregate
principal amount of $100,000,000. Interest on the Notes is payable semi-
annually in arrears on January 15 and July 15 of each year commencing July 15,
1998. See "Description of Notes--Principal and Interest." The Notes will
mature on January 15, 2005. The Notes may be redeemed at any time at the
option of the Company, in whole or in part, at a redemption price equal to the
sum of (i) the principal amount of the Notes being redeemed, plus accrued
interest to the redemption date, and (ii) the Make-Whole Amount (as defined in
"Description of the Notes--Optional Redemption"), if any. See "Description of
Notes--Optional Redemption." The Notes are unsecured obligations of the
Company and will rank equally with all unsecured and unsubordinated
indebtedness of the Company. The Notes are not subject to any mandatory
sinking fund. The Notes contain certain restrictions on the Company's ability
to incur additional indebtedness. See "Description of Notes."
The Notes constitute a separate series of debt securities which will be
represented by a single fully registered global note in book-entry form
without coupons (a "Global Note") registered in the name of The Depository
Trust Company ("DTC") or its nominee. Beneficial interests in the Global Note
will be shown on, and transfers thereof will be effected only through, records
maintained by DTC (with respect to beneficial interests of participants) or by
participants or persons that hold interests through participants (with respect
to beneficial interests of beneficial owners). Owners of beneficial interests
in the Global Note will be entitled to physical delivery of Notes in
certificated form equal in principal amount to their respective beneficial
interests only under the limited circumstances described under "Description of
Notes--Book-Entry System." Settlement of the Notes will be made in immediately
available funds. The Notes will trade in DTC's Same-Day Funds Settlement
System until maturity or earlier redemption, as the case may be, or until the
Notes are issued in certificated form, and secondary market trading activity
in the Notes will therefore settle in immediately available funds. All
payments of principal and interest in respect of the Notes will be made by the
Company in immediately available funds. See "Description of Notes--Same-Day
Settlement and Payment."
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 NOR HAS THE SECURITIES AND EXCHANGE 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 Note.................... 99.976% 0.625% 99.351%
- - --------------------------------------------------------------------------------
Total....................... $99,976,000 $625,000 $99,351,000
</TABLE>
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from January 15, 1998.
(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 $150,000.
---------------
The Notes 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 withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that delivery of the Notes will be made in New
York, New York on or about January 22, 1998.
---------------
PAINEWEBBER INCORPORATED J.P. MORGAN & CO.
---------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JANUARY 16, 1998.
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus Supplement and the accompanying Prospectus, including the
information incorporated herein and therein, contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The words "believe,"
"expect," "anticipate," "intend," "estimate," "assume" and other similar
expressions which are predictions of or indicate future events and trends and
which do not relate solely to historical matters identify forward-looking
statements. In addition, information concerning construction, occupancy and
completion of Development Communities and Development Rights and related cost
and EBITDA estimates, are forward-looking statements. Reliance should not be
placed on forward-looking statements because they involve known and unknown
risks, uncertainties and other factors, which are in some cases beyond the
control of the Company and may cause the actual results, performance or
achievements of the Company to differ materially from anticipated future
results, performance or achievements expressed or implied by such forward-
looking statements.
Factors that might cause such a difference include, but are not limited to,
the following: the Company may fail to secure or abandon development
opportunities; construction costs of a community may exceed original
estimates; construction and lease-up may not be completed on schedule,
resulting in increased debt service expense and construction costs and reduced
rental revenues; occupancy rates and market rents may be adversely affected by
local economic and market conditions which are beyond management's control;
financing may not be available, or may not be available on favorable terms;
the Company's cash flow may be insufficient to meet required payments of
principal and interest; and existing indebtedness may mature in an unfavorable
credit environment, preventing such indebtedness from being refinanced, or, if
refinanced, causing such refinancing to occur on terms that are not as
favorable as the terms of existing indebtedness. In addition, the factors
described under "Risk Factors" commencing on page 3 of the accompanying
Prospectus may result in such differences. Prospective purchasers of the Notes
offered hereby should carefully review all of these factors.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF NOTES IN THE OPEN MARKET TO STABILIZE
THE MARKET PRICE OF THE NOTES AND THE PURCHASE OF NOTES TO COVER SHORT
POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus Supplement or the
accompanying Prospectus or incorporated herein or therein by reference. Unless
the context otherwise requires, all references in this Prospectus Supplement to
the "Company" shall mean Avalon Properties, Inc. and its subsidiaries on a
consolidated basis or, where the context so requires, Avalon Properties, Inc.
only, and, as the context may require, its Predecessor (as hereinafter
defined).
THE COMPANY
Avalon is an integrated operating company, concentrating on apartment
community acquisition, construction, development and management in high
barrier-to-entry markets, which currently include the Mid-Atlantic, Northeast
and Midwest 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 real estate investment trust (a
"REIT"). Since its initial public offering in November 1993 (the "Initial
Offering"), the Company has completed the construction of 17 communities
totaling 4,301 apartment homes at a total cost of approximately $452.6 million,
and the Company has acquired 37 apartment communities with 9,203 apartment
homes for a total purchase price of approximately $652.4 million.
As of the date of this Prospectus Supplement, the Company's portfolio
includes 66 stabilized Class A, institutional-quality apartment communities
with 19,724 apartment homes (the "Current Communities") and nine apartment
communities with 2,422 apartment homes currently under construction (the
"Development Communities"). In addition, the Company holds the rights to
develop 20 additional multifamily apartment communities which, if completed
according to the Company's expectations, would add 5,403 apartment homes to the
Company's portfolio (the "Development Rights"). The Company's Current
Communities, Development Communities and Development Rights are conveniently
located in areas that are within close proximity to recreational amenities,
schools, entertainment and dining and provide easy access to centers of
employment. See "The Company."
RECENT DEVELOPMENTS
Midwest Portfolio Acquisition. On December 22, 1997, the Company and Avalon
DownREIT V, L.P., a limited partnership formed by the Company (the "Operating
Partnership"), completed the principal phase of the acquisitions contemplated
by a Contribution and Exchange Agreement (the "Contribution Agreement") with
Trammell Crow Residential Midwest ("TCR/MW"), pursuant to which the Company
acquired six apartment communities, and expects to acquire two additional
apartment communities (these two apartment communities are referred to as the
"Pending Midwest Communities," and, together with the six apartment communities
already acquired, are referred to as the "New Communities") containing a total
of 2,329 apartment homes (assuming completion of one Pending Midwest Community
currently under construction) (the "Transaction"). The New Communities are
located in the Chicago, Cincinnati, Indianapolis, Minneapolis and St. Louis
metropolitan areas. The Company expects to acquire one of the Pending Midwest
Communities during the first quarter of 1998, and to acquire the other Pending
Midwest Community currently under construction in 1999. The Company also
acquired certain third-party management contracts and the right to acquire from
an unrelated third-party an undeveloped parcel of land on which the Company
expects to build one apartment community. See "Recent Developments--Midwest
Portfolio Acquisition."
S-3
<PAGE>
Although the Company expects that the Pending Midwest Communities will be
successfully completed and that the Transaction and the Company's entry into
the Midwest markets will contribute to the realization of the Company's
business strategy, there can be no assurance of such completion or that such
benefits will be realized. See "Risk Factors--Risks Associated with New
Markets," "Risk Factors--Risks Associated with the Addition of a Substantial
Number of New Communities" and "Risk Factors--Portfolio Acquisition Risks."
Current Acquisition Negotiations. The Company announced on January 15, 1998
that it is negotiating with The Prudential Insurance Company of America to
purchase the residential component of the Prudential Center in Boston,
Massachusetts. This asset contains approximately 779 apartment homes and
related underground parking. Negotiations are in a preliminary state, and there
can be no assurance that these negotiations will be successful.
The Company also announced that it is pursuing negotiations for investment
opportunities in certain high barriers-to-entry markets on the West Coast. Such
investments could take the form of forward purchase agreements for to-be-
developed luxury apartment communities upon the completion of such communities.
The funding of such commitments could commence in the fourth quarter of 1999
and continue through the year 2000. If all of such negotiations are successful,
the total commitment could be for up to 20% of the Company's real estate assets
as of December 31, 1997. The Company can provide no assurance that all or any
of these negotiations will be successful.
BUSINESS STRATEGY
The principal operating objectives of management ("Management") are to
increase both operating cash flow growth and long-term stockholder value.
Management's strategies to achieve these objectives 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) investing
selectively in new acquisition and development communities in certain targeted
market areas with high barriers-to-entry and (iii) maintaining a conservative
capital structure to provide continued access to capital markets at the lowest
possible cost. Management believes that these strategies are generally best
implemented by building and acquiring institutional-quality assets in supply-
constrained markets where new household formations have out-paced multifamily
permit activity. Management actively seeks opportunities to acquire individual
communities or portfolios of communities, which may include entry into new
supply-constrained markets, and enters into negotiations concerning potential
acquisitions. Management believes that its business strategy will lead to
higher occupancy levels, increased rental rates and predictable and growing
cash flow. There can be no assurance that any negotiations will be successful
and result in future acquisitions or that the Company's business strategy will
have its intended results. See "Risk Factors--Risks Associated with the
Addition of a Substantial Number of New Communities," "Risk Factors--Portfolio
Acquisition Risks" and "Risk Factors--Risks Associated with New Markets."
RISK FACTORS
An investment in the Notes involves various risks, including risks associated
with the addition of a substantial number of New Communities to the Company's
portfolio in a new market area. Prospective investors should carefully consider
the matters discussed under "Risk Factors" commencing on page 3 of the
accompanying Prospectus before making any investment in the Company. Certain
statements contained in this Prospectus Supplement or incorporated herein by
reference are "forward-looking statements," which investors should not rely on
because they are subject to a variety of risks that may cause material
differences between actual and anticipated results, performance or
achievements. See "Forward-Looking Statements" on page S-2.
S-4
<PAGE>
THE OFFERING
Securities Offered.......... $100,000,000 aggregate principal amount of the 6
5/8% Notes due 2005.
Maturity.................... January 15, 2005.
Interest Payment Dates...... Semi-annually on January 15 and July 15,
commencing July 15, 1998.
Ranking..................... The Notes will be senior unsecured obligations of
the Company and will rank equally with the
Company's other unsecured and unsubordinated
indebtedness. The Notes will be effectively
subordinated to mortgages and other secured
indebtedness of the Company and to indebtedness
and other liabilities of any of the Company
subsidiaries.
Optional Redemption......... The Notes are redeemable at any time at the
option of the Company, in whole or in part, at a
redemption price equal to the sum of (i) the
principal amount of the Notes being redeemed,
plus accrued interest to the redemption date and
(ii) the Make-Whole Amount (as defined), if any.
See "Description of Notes--Optional Redemption."
Use of Proceeds............. The net proceeds of approximately $99,201,000
from the sale of the Notes will be used to fund a
portion of the purchase price of the New
Communities, for repayment of outstanding
borrowings under the unsecured credit facilities,
and for general corporate purposes, including
potential acquisitions. See "Use of Proceeds" and
"Underwriting."
Limitations on Incurrence
of Debt..................... The Notes contain various covenants including the
following:
. Neither the Company nor any Subsidiary (as
defined) may incur any Debt (as defined) if,
after giving effect thereto, the aggregate
principal amount of all outstanding Debt of the
Company and its Subsidiaries on a consolidated
basis is greater than 60% of the sum of (i) the
Total Assets (as defined) of the Company and
its Subsidiaries as of the end of the most
recent calendar quarter and (ii) the purchase
price of any real estate assets or mortgages
receivable acquired, and the amount of any
securities offering proceeds received (to the
extent that such proceeds were not used to
acquire real estate assets or mortgages
receivable or used to reduce Debt), by the
Company or any Subsidiary since the end of such
calendar quarter, including those proceeds
obtained in connection with the incurrence of
such additional Debt.
. Neither the Company nor any Subsidiary may
incur any Debt secured by any mortgage or other
lien upon any of the property of the Company or
any Subsidiary if, after giving effect thereto,
the aggregate principal amount of all
outstanding Debt of the Company and its
Subsidiaries on a consolidated basis which is
secured by any mortgage or other lien on the
property of the
S-5
<PAGE>
Company or any Subsidiary is greater than 40% of
the sum of (i) the Total Assets of the Company
and its Subsidiaries as of the end of the most
recent calendar quarter and (ii) the purchase
price of any real estate assets or mortgages
receivable acquired, and the amount of any
securities offering proceeds received (to the
extent that such proceeds were not used to
acquire real estate assets or mortgages
receivable or used to reduce Debt), by the
Company or any Subsidiary since the end of such
calendar quarter, including those proceeds
obtained in connection with the incurrence of
such additional Debt.
. The Company and its Subsidiaries may not at any
time own Total Unencumbered Assets (as defined)
equal to less than 150% of the aggregate
outstanding principal amount of the Unsecured
Debt (as defined) of the Company and its
Subsidiaries on a consolidated basis.
. Neither the Company nor any Subsidiary may
incur any Debt, if, after giving effect
thereto, the ratio of Consolidated Income
Available for Debt Service (as defined) to the
Annual Service Charge (as defined) for the four
consecutive fiscal quarters most recently ended
prior to the date on which such additional Debt
is to be incurred shall have been less than
1.5:1 on a pro forma basis after giving effect
to certain assumptions.
For a more complete description of the terms and
definitions used in the foregoing limitations,
see "Descriptions of Notes--Certain Covenants."
S-6
<PAGE>
THE COMPANY
GENERAL
Avalon is an integrated operating company, concentrating on apartment
community acquisition, construction, development and management in high
barrier-to-entry markets, which currently include the Mid-Atlantic, Northeast
and Midwest 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 Predecessor. Avalon is a self-
administered and self-managed equity REIT.
As of the date of this Prospectus Supplement, the Company's portfolio
includes 66 Current Communities, which are stabilized Class A, institutional-
quality apartment communities with 19,724 apartment homes and nine Development
Communities with 2,422 apartment homes currently under construction. In
addition, the Company holds Development Rights to develop 20 additional
multifamily apartment communities which, if completed according to the
Company's expectations, would consist of 5,403 apartment homes.
Since the Initial Offering in November 1993, the Company has completed the
construction of 17 communities totaling 4,301 apartment homes at a total cost
of approximately $452.6 million. In addition, the Company has acquired 37
apartment communities with 9,203 apartment homes for a total purchase price of
approximately $652.4 million. The Company's apartment communities are
conveniently located in areas within close proximity to recreational
amenities, schools, entertainment and dining and provide easy access to
centers of employment.
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;
Chicago, Illinois; Minneapolis, Minnesota; Princeton, New Jersey; and
Richmond, Virginia.
BUSINESS STRATEGY
The principal operating objectives of Management are to increase both
operating cash flow growth and long-term stockholder value. Management's
strategies to achieve these objectives 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) investing selectively in new
acquisition and development communities in certain targeted market areas with
high barriers-to-entry and (iii) maintaining a conservative capital structure
to provide continued access to capital markets at the lowest possible cost.
Management believes that these strategies are generally 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 predictable and growing
cash flow, although no assurance can be given that such results will be
achieved.
The Company continually evaluates geographical regions in the United States
to determine those regions that possess market fundamentals that are favorable
to long-term ownership of apartment communities. The Company emphasizes
regions where constraints to new supply exist and where new household
formations have out-paced multifamily permit activity in recent years.
Management engages in discussions with public and private real estate owners
regarding possible portfolio or single asset acquisitions. No assurance can be
made that the Company will acquire all or any of the property opportunities
currently under review or under discussion. See "The Company--Business
Strategy" and "The Communities."
S-7
<PAGE>
Financing Strategy. Management intends to continue to maintain a
conservative capital structure that allows the Company continued cost-
effective access to the capital markets. As of December 31, 1997, the
Company's debt to total market capitalization was 25.0% and its long-term
floating rate debt represented only 2.6% 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.
Acquisition Strategy. The Company's acquisition strategy is to create value
by identifying properties in high quality locations with strong potential for
improved performance through rehabilitation or repositioning (for example,
through improved management of rent and occupancy levels). In addition to the
communities acquired since the Initial Offering, the Company is currently
reviewing a number of other acquisition opportunities that offer potential for
rehabilitation or repositioning that the Company believes offer attractive
investment returns and long term earnings growth potential. Some of these
communities are under non-binding agreements and are subject to further due
diligence, contract negotiations and Board approval, and there can be no
assurance that the Company will acquire all or any of these communities. The
Company's successful history of development and its substantial inventory of
Development Rights strengthen its resolve to be selective with its acquisition
program.
Development Strategy. The Company's development strategy is to carefully
select land for development and to follow established procedures that are
designed to minimize both the cost and the risks of development. As one of the
largest developers of multifamily apartment communities in the Mid-Atlantic
and Northeast regions, the Company is able to capitalize on its market
presence and access to local market information through its five offices in
those regions, and anticipates realizing similar benefits through two offices
in the Midwest region. After selecting a target site, the Company negotiates
for the right to acquire it either through an option or a long-term
conditional contract, subject to obtaining zoning and permitting approvals and
appropriate environmental review. The Company generally begins design work
before purchasing the land, with the expenditure of design funds carefully
monitored based on the likelihood of obtaining approvals and financing. Once
the land is acquired the focus shifts to construction. The Company believes it
achieves significant cost savings by acting as its own general contractor.
Construction progress is monitored by the development team and the property
management team to ensure high quality workmanship and a smooth and timely
transition into the leasing and operational phase.
Property Management Strategy. The Company intends to increase earnings
through innovative, proactive property management that will result in higher
revenue from its communities. Intense focus on resident satisfaction,
increasing rents as market conditions permit and managing community occupancy
for optimal rental revenue levels comprise the principal strategies to
maximize revenue. Lease terms are generally staggered based on vacancy
exposure by apartment type so that lease expirations are better matched to
each community's traffic patterns. On-site property management teams receive
bonuses based largely upon the net operating income produced at their
community.
Controlling operating expenses is another way in which the Company intends
to increase earnings growth. An increase in growth in the Company's 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. The Company has enjoyed operating cost leverage in recent years as
operating costs as a percent of total revenue have declined from 41.1% in 1993
to 36.1% in 1997. The Company also aggressively pursues real estate tax
appeals and scrutinizes other operating costs. Invoices are recorded on-site
to ensure the careful monitoring of budgeted versus actual expenses, supplies
are purchased in bulk where possible, third-party contracts are bid on a
volume basis, turnover work is performed in-house or by third parties
depending upon the least costly alternative, and preventive maintenance is
undertaken regularly to maximize resident satisfaction and property and
equipment life. In addition, Management strives to retain residents through
high levels of service in order to eliminate the cost of preparing an
apartment home for a new resident and to reduce marketing and common area
utilities costs.
S-8
<PAGE>
The Company will also consider managing properties for third parties, if such
management will provide information about its new markets and provide an
acquisition opportunity, thereby enhancing the Company's opportunities for
growth.
Achievements. The successful implementation of the Company's business
strategy is evidenced by its performance since the Initial Offering. Since that
time, it has significantly increased the number of its apartment homes, its
revenues and its Funds from Operations ("FFO"), while maintaining a
conservative capital structure.
[BAR GRAPH APPEARS HERE]
<TABLE>
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG FFO, REVENUES INDEX AND NUMBER OF STABILIZED APARTMENT HOMES INDEX
NUMBER OF
STABILIZED
APARTMENT
<CAPTION> FFO REVENUES HOMES
Measurement period ________ ________ ________
(Fiscal Year Covered) Index Index
- - --------------------- -------- -------- --------
<S> <C> <C> <C>
1ST QUARTER 1994 $ 8,945 $16,095 $ 7,786
2ND QUARTER 1994 $ 9,108 $17,412 $ 8,362
3RD QUARTER 1994 $10,213 $19,953 $ 9,320
4TH QUARTER 1994 $11,219 $20,841 $ 9,847
------- -------
TOTAL $39,485 $74,301
------- -------
1ST QUARTER 1995 $11,373 $22,011 $10,005
2ND QUARTER 1995 $11,599 $23,164 $10,422
3RD QUARTER 1995 $11,843 $25,187 $11,255
4TH QUARTER 1995 $12,064 $26,851 $11,255
------- -------
TOTAL $46,879 $97,213
------- -------
1ST QUARTER 1996 $12,573 $28,108 $11,807
2ND QUARTER 1996 $13,485 $29,831 $12,317
3RD QUARTER 1996 $14,018 $32,811 $13,334
4TH QUARTER 1996 $14,546 $34,463 $13,368
------- --------
TOTAL $54,622 $125,213
------- --------
1ST QUARTER 1997 $15,601 $37,527 $14,326
2ND QUARTER 1997 $17,584 $40,772 $14,793
3RD QUARTER 1997 $19,470 $44,583 $15,286
4TH QUARTER 1997 $20,870 $48,222 $19,318
------- --------
TOTAL-YEAR-TO-DATE $73,525 $171,104
------- --------
</TABLE>
- - --------
(1) Management generally considers FFO to be an appropriate measure of the
operating performance of the Company because it provides investors an
understanding of the ability of the Company to incur and service debt and
to make capital expenditures. The Company believes that in order to
facilitate a clear understanding of the operating rules of the Company, FFO
should be examined in conjunction with net income as presented in the
Company's consolidated financial statements included or incorporated by
reference elsewhere in the Prospectus Supplement. FFO is determined in
accordance with a resolution adopted by the Board of Governors of the
National Association of Real Estate Investment Trusts, Inc. ("NAREIT"), and
is defined as net income (loss) (computed in accordance with GAAP),
excluding gains (or losses) from debt restructuring and sales of property,
plus depreciation of real estate assets and after adjustments for
unconsolidated partnerships and joint ventures. FFO does not represent cash
generated from operating activities in accordance with GAAP and therefore
should not be considered an alternative to net income as an indication of
the Company's performance, or to net cash flows from operating activities
as determined by GAAP as a measure of liquidity, and is not necessarily
indicative of cash available to fund cash needs. Further, FFO as disclosed
by other REITs may not be comparable to the Company's calculation of FFO.
S-9
<PAGE>
RECENT DEVELOPMENTS
OPERATING RESULTS
On January 13, 1998, the Company reported that FFO for the fourth quarter
ended December 31, 1997 was $20,870,000 or $.53 per share compared to
$14,546,000 or $.47 per share for the quarter ended December 31, 1996, a per
share increase of approximately 13%. FFO for the year ended December 31, 1997
was $73,525,000 or $2.00 per share compared to $54,622,000 or $1.78 per share
for the prior year, a per share increase of approximately 12%.
For the quarter ended December 31, 1997 compared to the prior year period,
revenue increased by $13,759,000 or 39.9% to $48,222,000 and earnings before
interest, taxes, depreciation and amortization ("EBITDA") increased by
$9,220,000 or 42.6% to $30,855,000. The overall increase in revenue and EBITDA
comes primarily from newly developed communities, although newly acquired
communities and established communities also contributed to growth. Income
before gain on sale of communities and extraordinary items was $18,121,000
compared to $13,498,000 for the prior year period. Net income available to
common stockholders was $13,207,000 or $.34 per share compared to $16,996,000
or $.54 per share for the prior year period. The decline in net income between
years is attributable to the gain on the sale of two apartment communities in
the fourth quarter of 1996, with no corresponding sales in the fourth quarter
of 1997.
For the year ended December 31, 1997 compared to the prior year, revenue
increased by $45,891,000 or 36.7% and EBITDA increased by $34,396,000 or
45.4%. Income before gain on sale of communities and extraordinary items was
$65,422,000 compared to $46,157,000 for the prior year. Net income available
for distribution to common stockholders was $45,260,000 or $1.23 per share
compared to $41,229,000 or $1.34 per share for the prior year.
EBITDA represents gross revenue before interest, income taxes, deprecation,
amortization and extraordinary items. EBITDA is relevant to an understanding
of the economics of the Company because it indicates cash flow available from
Company operations to service fixed obligations. EBITDA should not be
considered as an alternative to operating income, as determined in accordance
with GAAP, as an indicator of the Company's operating performance, or to cash
flows from operating activities (as determined in accordance with GAAP) as a
measure of liquidity. EBITDA as disclosed by other REITs may not be comparable
to the Company's calculation of EBITDA.
MIDWEST PORTFOLIO ACQUISITION
On December 22, 1997, the Company and the Operating Partnership completed
the principal phase of the acquisitions contemplated by the Contribution
Agreement, pursuant to which the Company acquired six of the New Communities
and expects to acquire the Pending Midwest Communities, containing a total of
2,329 apartment homes (assuming completion of one Pending Midwest Community
currently under construction). The New Communities are located in the Chicago,
Cincinnati, Indianapolis, Minneapolis and St. Louis metropolitan areas. The
Company also acquired certain third-party management contracts and the right
to acquire from an unrelated third-party an undeveloped parcel of land on
which the Company expects to build one apartment community.
Although the Company expects that the acquisition of the Pending Midwest
Communities will be successfully completed and that the Transaction and the
Company's entry into the Midwest markets will contribute to the realization of
the Company's business strategy, there can be no assurance of such completion
or that such benefits will be realized. See "Risk Factors--Risks Associated
with New Markets," "Risk Factors--Risks Associated with the Addition of a
Substantial Number of New Communities" and "Risk Factors--Portfolio
Acquisition Risks."
Purchase Price. In exchange for the contribution of the New Communities,
third-party management contracts and other rights, the Company and/or the
Operating Partnership will (i) have paid or will pay
S-10
<PAGE>
approximately $149 million in cash, (ii) have assumed approximately $27.3
million of debt, and (iii) have issued or will issue Units of the Operating
Partnership valued at approximately $20 million. The Contribution Agreement
restricts taxable sales or transfers of the New Communities for a period of
five years.
Subsequent to the completion of the public offering of the Company's 6 7/8%
Notes due 2007 on December 16, 1997, the following other recent business
developments have occurred:
COMPLETED ACQUISITIONS
Acquisitions of Existing Communities. On January 7, 1998, the Company
purchased two apartment communities located in the Minneapolis metropolitan
area. Carriage Green, a 246 apartment home community located in Eagan,
Minnesota, and Summerplace, a 160 apartment home community located in
Plymouth, Minnesota, were acquired for $27,625,000.
Land Acquisitions for New Development. On December 18, 1997, the Company
purchased a 13 acre tract of land in Fort Lee, New Jersey, for $11,000,000.
Construction of a new apartment community, Avalon Crest, started in the fourth
quarter of 1997. Construction of this 351 apartment home community is
scheduled for completion in the fourth quarter of 1999.
On December 19, 1997, the Company completed the purchase of 2.75 acres of
land adjacent to an existing community, Avalon Cove, in Jersey City, New
Jersey, for $4,100,000 for the purpose of expanding the existing community.
Construction of the 269 apartment home community, Avalon Cove South, is
expected to start in the first quarter of 1998.
CURRENT ACQUISITION NEGOTIATIONS
The Company announced on January 15, 1998 that it is negotiating with The
Prudential Insurance Company of America to purchase the residential component
of the Prudential Center in Boston, Massachusetts. This asset contains
approximately 779 apartment homes and related underground parking.
Negotiations are in a preliminary state, and there can be no assurance that
these negotiations will be successful.
The Company also announced that it is pursuing negotiations for investment
opportunities in certain high barriers-to-entry markets on the West Coast.
Such investments could take the form of forward purchase agreements for to-be-
developed luxury apartment communities upon the completion of such
communities. The funding of such commitments could commence in the fourth
quarter of 1999 and continue through the year 2000. If all of such
negotiations are successful, the total commitment could be for up to 20% of
the Company's real estate assets as of December 31, 1997. The Company can
provide no assurance that all or any of these negotiations will be successful.
S-11
<PAGE>
THE COMMUNITIES
THE COMPANY'S EXISTING COMMUNITIES AND DEVELOPMENT RIGHTS
The Current Communities. The Current Communities are primarily upscale,
garden-style apartment communities consisting of two and three-story buildings
in landscaped settings. The Current Communities also include eight high-rise
apartment communities, two four-story mid-rise apartment communities and one
six-story mid-rise community. All of the Current Communities are
institutional-quality assets. The Current 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 66 Current Communities.
Avalon owns most of its communities through a simple corporate structure
whereby the Company holds a fee simple ownership interest in 54 operating
communities (one of which, Avalon at Center Place, is on land subject to a 149
year land lease), a general partnership interest in three other operating
communities (a 50% interest in Falkland Chase, a 49% interest in Avalon Run
and a 50% interest in Avalon Grove), a 99% general partner interest in two
partnerships structured as DownREITs (Avalon at Ballston Quincy and Avalon at
Ballston Vermont, which are operated as a single community, six communities
acquired from TCR/MW and a single community located in Westmont, Illinois) 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 fee simple ownership interest in nine
Development Communities. The Company will hold the New Communities through a
99% general partner interest in a DownREIT partnership, and may acquire
additional communities through DownREIT partnerships in the future. The
existing DownREITs have been structured so that all of the economic interest
of these partnerships accrue to the benefit of the Company. The Company
believes that it is unlikely that the limited partners in these partnerships
will receive any financial return on their limited partnership interests other
than the stated distributions on their Units or the possible future conversion
of their Units into shares of Common Stock. See "Recent Developments--Midwest
Portfolio Acquisition."
The Company (or its Predecessor) developed 29 and acquired 37 of the Current
Communities. All of the Current Communities are managed and operated by the
Company. As of December 31, 1997 (the latest practicable date for which this
information is available), the Current Communities had a physical occupancy
rate of 95.9%. The average age of 64 of the Current Communities, weighted
according to the applicable number of apartment homes, is approximately eight
years. The remaining two Current Communities (Falkland 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.
The following is a summary of the Company's Current Communities and
Development Communities as of the date of this Prospectus Supplement:
<TABLE>
<CAPTION>
CURRENT DEVELOPMENT
COMMUNITIES(1) COMMUNITIES(2) TOTAL
--------------- -------------- ---------------
# OF % OF # OF % OF # OF % OF
APTS PORTFOLIO APTS PORTFOLIO APTS PORTFOLIO
----- --------- ---- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Virginia............. 5,421 27.5% 694 28.7% 6,115 27.6%
Maryland............. 3,430 17.4% 96 4.0% 3,526 15.9%
Connecticut.......... 2,778 14.1% -- -- 2,778 12.5%
New Jersey........... 2,008 10.2% 620 25.6% 2,628 11.9%
Massachusetts........ 1,172 5.9% 171 7.1% 1,343 6.1%
Michigan............. 983 5.0% -- -- 983 4.4%
New York............. 968 4.9% 841 34.6% 1,809 8.2%
Minnesota............ 904 4.6% -- -- 904 4.1%
Illinois............. 887 4.5% -- -- 887 4.0%
</TABLE>
S-12
<PAGE>
<TABLE>
<CAPTION>
CURRENT DEVELOPMENT
COMMUNITIES(1) COMMUNITIES(2) TOTAL
---------------- --------------- ----------------
# OF % OF # OF % OF # OF % OF
APTS PORTFOLIO APTS PORTFOLIO APTS PORTFOLIO
------ --------- ----- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Indiana................. 376 1.9% -- -- 376 1.7%
District of Columbia.... 308 1.6% -- -- 308 1.4%
Ohio.................... 264 1.3% -- -- 264 1.2%
Rhode Island............ 225 1.1% -- -- 225 1.0%
------ ----- ----- ----- ------ -----
19,724 100.0% 2,422 100.0% 22,146 100.0%
====== ===== ===== ===== ====== =====
</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 94%, or has been completed for one
year (without regard to physical occupancy level), 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.
The following chart illustrates the geographical distribution of the
apartment homes in the Company's Current Communities and Development
Communities as of the date of this Prospectus Supplement (based on the number
of apartment homes, after giving effect to the completion of the Development
Communities):
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Ohio 1.2%
Rhode Island 1.0%
District of Columbia 1.4%
Indiana 1.7%
Minnesota 4.1%
Michigan 4.4%
New York 8.2%
Illinois 4.0%
Massachusetts 6.1%
New Jersey 11.9%
Connecticut 12.5%
Maryland 15.9%
Virginia 27.6%
</TABLE>
Development Communities. As of the date of this Prospectus Supplement, nine
Development Communities were under construction. The total capitalized cost of
these Development Communities, when completed, is currently expected to be
approximately $324.2 million. There can be no assurance that the Company will
complete the Development Communities, that the Company's budgeted costs,
leasing, start dates, completion dates, occupancy or estimates of "EBITDA as %
of Total Budgeted Cost" will be realized or that future developments will
realize comparable returns. See "Risk Factors--Risks of Development,
Construction and Acquisition Activities."
The Company maintains an active development capacity that Management
anticipates will provide a continuing source of portfolio growth. During the
lease-up period of the development process, the Company anticipates that the
Development Communities will experience operating deficits for a three to six
month period until such time as new communities approach stabilized occupancy.
The amount and duration of operating
S-13
<PAGE>
deficits to be incurred are dependent upon a number of factors, including the
size of the community, the season in which leasing activity occurs and the
extent to which delivery of new apartment homes coincides with leasing and
occupancy of these new apartment homes (which is dependent on local market
conditions). For the year ended December 31, 1997, initial lease-up deficits
were not material to the financial position and operating results of the
Company.
The following is a summary of the Company's Development Communities as of
the date of this Prospectus Supplement:
DEVELOPMENT COMMUNITIES SUMMARY
<TABLE>
<CAPTION>
EBITDA
AS % OF
NUMBER OF BUDGETED ESTIMATED ESTIMATED TOTAL
APARTMENT COST CONSTRUCTION INITIAL COMPLETION STABILIZATION PERCENTAGE BUDGETED
HOMES ($ MILLION) START OCCUPANCY DATE DATE(1) LEASED(2) COST(3)
--------- ----------- ------------ --------- ---------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Avalon Gardens.......... 504 $ 53.8 Q3 1996 Q2 1997 Q4 1998 Q1 1999 63.3% 10.8%
Nanuet, NY
Avalon at Fair Lakes.... 234 23.2 Q1 1997 Q4 1997 Q2 1998 Q4 1998 29.1% 10.4%
Fairfax, VA
Avalon at Faxon Park.... 171 15.8 Q1 1997 Q4 1997 Q3 1998 Q4 1998 32.7% 12.1%
Quincy, MA
Avalon Willow........... 227 41.8 Q2 1997 Q3 1998 Q1 1999 Q2 1999 N/A 9.2%
Mamaroneck, NY
Avalon at Cameron
Court.................. 460 44.7 Q2 1997 Q1 1998 Q4 1998 Q1 1999 7.4% 10.3%
Alexandria, VA
Avalon Fields II........ 96 9.2 Q3 1997 Q2 1998 Q4 1998 Q1 1999 N/A 10.2%
Gaithersburg, MD
Avalon Crest............ 351 57.5 Q4 1997 Q2 1999 Q4 1999 Q1 2000 N/A 10.1%
Fort Lee, NJ
Avalon Cove South....... 269 51.8 Q1 1998 Q2 1999 Q3 1999 Q4 1999 N/A 10.0%
Jersey City, NJ
Avalon Bronxville....... 110 26.4 Q1 1998 Q2 1999 Q3 1999 Q4 1999 N/A 9.7%
----- ------ ----
Bronxville, NY
Totals/Average.......... 2,422 $324.2 10.2%
===== ====== ====
</TABLE>
- - --------
(1) Stabilized occupancy is defined as the first full quarter of 94% or
greater physical occupancy after initial lease-up, or one year after
completion (without regard to physical occupancy level), whichever occurs
earlier.
(2) Includes apartment homes for which leases have been executed or non-
refundable deposits have been paid as of January 4, 1998.
(3) Projected EBITDA represents gross potential earnings projected to be
achieved based on current rents prevailing in the respective community's
local market (without adjustment for potential growth factors) and before
interest, income taxes, depreciation, amortization and extraordinary
items, minus (a) economic vacancy and (b) projected stabilized operating
expenses. Total budgeted cost includes all capitalized costs projected to
be incurred to develop the respective Development Community, including
land acquisition costs, construction costs, real estate taxes, capitalized
interest and loan fees, permits, professional fees, allocated development
overhead and other regulatory fees. EBITDA is relevant to an understanding
of the economics of the Company because it indicates cash flow available
from Company operations to service fixed obligations. EBITDA should not be
considered as an alternative to operating income, as determined in
accordance with GAAP, as an indicator of the Company's operating
performance, or to cash flows from operating activities (as determined in
accordance with GAAP) as a measure of liquidity. EBITDA as disclosed by
other REITs may not be comparable to the Company's calculation of EBITDA.
Development Rights. The Company is considering the development of 20 new
apartment communities. The status of these Development Rights ranges from land
under contract for which design and architectural planning has just commenced,
to land under contract or owned by the Company with completed site plans and
drawings where construction can commence almost immediately. There can be no
assurance that the Company
S-14
<PAGE>
will succeed in obtaining zoning and other necessary governmental approvals or
the financing required to develop these communities, or that the Company will
decide to develop any particular community. Further, there can be no assurance
that construction of any particular community will be undertaken or, if
undertaken, will begin at the expected times assumed in the financial
projections or be completed at the total budgeted cost. Although there is no
assurance that all or any of these communities will proceed to development,
the successful completion of all of these communities would ultimately add
approximately 5,403 institutional-quality apartment homes to the Company's
portfolio. See "Risk Factors--Risks of Development, Construction and
Acquisition Activities." At December 31, 1997, the cumulative capitalized
costs incurred in pursuit of the 20 Development Rights were approximately
$13.7 million, including the capitalized cost of $7.1 million related to the
purchase of land in New Canaan, Connecticut. Many of these apartment homes
will offer features like those offered by the communities currently owned by
the Company. As of the date of this Prospectus Supplement, the 20 Development
Rights that the Company is currently pursuing are summarized below.
DEVELOPMENT RIGHTS SUMMARY
<TABLE>
<CAPTION>
ESTIMATED TOTAL
NUMBER OF BUDGETED COST
LOCATION APT HOMES ($ MILLIONS)
-------- --------- -------------
<S> <C> <C>
1. New Canaan, CT/(1)/........................... 104 $ 24.9
2. Greenburgh, NY--II............................. 500 74.0
3. Greenburgh, NY--III............................ 266 39.3
4. Darien, CT..................................... 172 26.1
5. Freehold, NJ................................... 452 38.7
6. Peabody, MA.................................... 434 35.9
7. Hull, MA....................................... 162 15.5
8. New Rochelle, NY............................... 408 62.7
9. Melville, NY--II............................... 340 39.8
10. Wilmington, MA................................. 204 21.1
11. Danbury, CT--I................................. 268 24.4
12. Yonkers, NY.................................... 256 33.7
13. Parsippany, NJ................................. 460 64.0
14. Florham Park, NJ............................... 270 37.5
15. Stamford, CT................................... 195 30.5
16. Orange, CT..................................... 172 15.7
17. Ridgefield, CT................................. 240 30.2
18. Danbury, CT--II................................ 135 17.4
19. Herndon, VA.................................... 165 19.5
20. Naperville, IL................................. 200 20.5
----- ------
Total............................................ 5,403 $671.4
===== ======
</TABLE>
- - --------
/(1)/ Currently anticipated that the land seller will retain a minority limited
partner interest.
Acquisition Activity. 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
revenue stream of such properties from competition. The Company therefore
intends to acquire existing communities or apartment portfolios and to develop
new communities in the Mid-Atlantic, Northeast and Midwest regions of the
United States where constraints to new supply currently exist and where new
household formations have out-paced multifamily permit activity. In addition,
the Company continuously analyzes other geographical regions of the United
States to determine whether any merit future investment by the Company. In
pursuing acquisition opportunities that meet the foregoing criteria,
Management continually engages in discussions with public and
S-15
<PAGE>
private real estate owners regarding possible portfolio or single-asset
acquisitions in various metropolitan areas, which may include entry into new
supply-constrained markets, and it enters into negotiations concerning
potential acquisitions. There can be no assurance that these negotiations will
be successful and result in future acquisitions. See "Risk Factors--Risks of
Development, Construction and Acquisition Activities" and "Recent
Developments--Current Acquisition Negotiations."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes are estimated to
be approximately $99,201,000 after deducting fees and expenses of this
Offering payable by the Company, estimated to be approximately $150,000. The
Company presently intends to use the net proceeds from this Offering to reduce
outstanding borrowings under the Company's unsecured credit facilities
incurred for acquisition and development activity, and for general corporate
purposes, including potential future acquisitions and development. The Company
continually examines potential property acquisitions and, at any given time,
one or more of such acquisitions may be under consideration. There can be no
assurance that any such acquisitions will be consummated. Pending such uses,
the Company may invest the remaining net proceeds of this Offering in short-
term, investment-grade, income producing investments such as investments in
commercial paper, government securities or money market funds that invest in
government securities.
Morgan Guaranty Trust Company, an affiliate of J.P. Morgan Securities, Inc.,
expects to receive up to $1.0 million in repayment of amounts outstanding
under the Company's unsecured credit facilities from the proceeds of this
Offering. See "Underwriting."
RATIOS OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The Company's ratio of earnings to fixed charges for the years ended
December 31, 1997, 1996, 1995 and 1994 and the period November 18, 1993
through December 31, 1993 was 3.08x, 2.36x, 2.37x, 3.60x and 3.29x,
respectively.
The Company's ratio of earnings to fixed charges and preferred stock
dividends for the years ended December 31, 1997, 1996, 1995 and 1994 and the
period November 18, 1993 through December 31, 1993 was 2.21x, 1.95x, 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 year ended December 31,
1992. 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-16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company on a
historical basis as of December 31, 1997 and as adjusted to give effect to the
sale by the Company of the Notes at their face value and the application of
the assumed net proceeds of this Offering. See "Use of Proceeds." The
information set forth in the table below should be read in conjunction with
the Consolidated Financial Statements of the Company and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997, and the Company's Current Reports on Form 8-K filed
on October 15, 1997 and November 24, 1997, all incorporated by reference in
this Prospectus Supplement.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
HISTORICAL AS ADJUSTED
---------------- -----------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
DEBT:
Unsecured Facilities..................... $ 71,500 $ 0
Mortgages and other notes payable........ 224,934 224,934
Senior unsecured notes payable........... 208,980 308,980
---------------- ----------------
Total debt............................. 505,414 533,914
---------------- ----------------
MINORITY INTEREST IN OPERATING
PARTNERSHIPS: 18,157 18,157
---------------- ----------------
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, 4,300,000 issued and
outstanding............................ 43 43
Common Stock, $.01 par value; 80,000,000
authorized;
41,975,240 issued and outstanding....... 420 420
Additional paid-in capital............... 987,541 987,541
Deferred compensation.................... (3,265) (3,265)
Accumulated deficit...................... (23,774) (23,774)
---------------- ----------------
Total stockholders' equity............. 961,010 961,010
---------------- ----------------
Total capitalization................... $ 1,484,581 $ 1,513,081
================ ================
</TABLE>
S-17
<PAGE>
DESCRIPTION OF NOTES
The following description of the particular terms of the Notes offered
hereby supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the "Debt Securities" set
forth under "Description of Debt Securities" in the accompanying Prospectus,
to which reference is hereby made.
The Notes are to be issued under an Indenture, dated as of September 18,
1995, a First Supplemental Indenture, dated as of September 18, 1995, a Second
Supplemental Indenture, dated as of December 16, 1997, and a Third
Supplemental Indenture, dated as of January 22, 1998 (collectively, the
"Indenture"), between the Company and The Bank of New York, as successor to
Signet Trust Company (the "Trustee"). The Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus Supplement is a
part and is available for inspection at the corporate trust office of the
Trustee at 101 Barclay Street, New York, New York 10286. The Indenture is
subject to, and governed by, the Trust Indenture Act of 1939, as amended (the
"TIA"). The statements made hereunder relating to the Indenture and the Notes
to be issued thereunder are summaries of certain provisions thereof, do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to all provisions of the Indenture and such Notes. All section
references appearing herein are to sections of the Indenture, and capitalized
terms used but not defined herein shall have the respective meanings set forth
in the Indenture.
GENERAL
The Notes will be limited to an aggregate principal amount of $100,000,000
and will be direct, senior unsecured obligations of the Company and will rank
equally with all other unsecured and unsubordinated indebtedness of the
Company from time to time outstanding. The Notes will be effectively
subordinated to mortgages and other secured indebtedness of the Company and to
indebtedness and other liabilities of any Subsidiaries now existing or that
may be formed by the Company in the future. Accordingly, such prior
indebtedness will have to be satisfied in full before holders of the Notes
will be able to realize any value from the secured or indirectly-held
properties.
As of December 31, 1997, on a pro forma basis after giving effect to the
issuance and sale of the Notes offered hereby and the application of the
proceeds from this offering, the total outstanding indebtedness of the Company
was approximately $533.9 million, of which approximately $206.5 million was
indebtedness of Subsidiaries. Approximately $224.9 million of the Company's
total outstanding indebtedness as of December 31, 1997 was secured. The
Company may incur additional indebtedness, including secured indebtedness,
subject to the provisions described below under "Certain Covenants--
Limitations on Incurrence of Debt."
PRINCIPAL AND INTEREST
The Notes will bear interest at 6 5/8% per annum and will mature on January
15, 2005. The Notes will bear interest from January 15, 1998 or from the
immediately preceding Interest Payment Date (as defined below) to which
interest has been paid, payable semi-annually in arrears on January 15 and
July 15 of each year, commencing on July 15, 1998 (each, an "Interest Payment
Date"), to the persons in whose name the applicable Notes are registered in
the Security Register on the preceding December 31 or June 30 (whether or not
a Business Day, as defined below), as the case may be (each, a "Regular Record
Date"). Interest on the Notes will be computed on the basis of a 360-day year
of twelve 30-day months.
If any Interest Payment Date or Stated Maturity falls on a day that is not a
Business Day, the required payment shall be on the next Business Day as if it
were made on the date such payment was due and no interest shall accrue on the
amount so payable for the period from and after such Interest Payment Date or
the Maturity Date, as the case may be. "Business Day" means any day, other
than a Saturday or Sunday, on which banks in the City of New York are not
required or authorized by law or executive order to close.
S-18
<PAGE>
Payment of principal (and premium or Make-Whole Amount (as defined below),
if any) and interest on the Notes will be made by check mailed to the address
of the Person entitled thereto as it appears in the Security Register or by
wire transfer of funds to such Person at an account maintained within the
United States.
OPTIONAL REDEMPTION
The Notes may be redeemed at any time at the option of the Company, in whole
or in part, at a redemption price equal to the sum of (i) the principal amount
of the Notes being redeemed, plus accrued interest thereon to the redemption
date, and (ii) the Make-Whole Amount, if any, with respect to such Notes (the
"Redemption Price").
If notice has been given as provided in the Indenture and funds for the
redemption of any Notes called for redemption shall have been made available
on the redemption date referred to in such notice, such Notes will cease to
bear interest on the date fixed for such redemption specified in such notice
and the only right of the Holders of the Notes will be to receive payment of
the Redemption Price.
Notice of any optional redemption of any Notes will be given to Holders at
their addresses, as shown in the Security Register, not more than 60 nor less
than 30 days prior to the date fixed for redemption. The notice of redemption
will specify, among other items, the Redemption Price and the principal amount
of the Notes held by such Holder to be redeemed.
If less than all the Notes are to be redeemed at the option of the Company,
the Company will notify the Trustee at least 45 days prior to the redemption
(or such shorter period as is satisfactory to the Trustee) of the aggregate
principal amount of Notes to be redeemed and their redemption date. The
Trustee shall select, in such manner as it shall deem fair and appropriate,
Notes to be redeemed in whole or in part. Notes may be redeemed in part in the
minimum authorized denomination for Notes or in any integral multiple thereof.
"Make-Whole Amount" means, in connection with any optional redemption or
accelerated payment of any Note, the excess, if any, of (i) the aggregate
present value as of the date of such redemption or accelerated payment of each
dollar of principal being redeemed or paid and the amount of interest
(exclusive of interest accrued to the date of redemption or accelerated
payment) that would have been payable in respect of such dollar if such
redemption or accelerated payment had not been made, determined by
discounting, on a semiannual basis, such principal and interest at the
Reinvestment Rate (determined on the third Business Day preceding the date
such notice of redemption is given or declaration of acceleration is made)
from the respective dates on which such principal and interest would have been
payable if such redemption or accelerated payment had not been made, over (ii)
the aggregate principal amount of the Notes being redeemed or paid.
"Reinvestment Rate" means .25% (twenty-five one hundredths of one percent)
plus the arithmetic mean of the yields under the respective headings "This
Week" and "Last Week" published in the Statistical Release under the caption
"Treasury Constant Maturities" for the maturity (rounded to the nearest month)
corresponding to the remaining life to maturity, as of the payment date of the
principal being redeemed or paid. If no maturity exactly corresponds to such
maturity, yields for the two published maturities most closely corresponding
to such maturity shall be calculated pursuant to the immediately preceding
sentence and the Reinvestment Rate shall be interpolated or extrapolated from
such yields on a straight-line basis, rounding in each of such relevant
periods to the nearest month. For purposes of calculating the Reinvestment
Rate, the most recent Statistical Release published prior to the date of
determination of the Make-Whole Amount shall be used.
"Statistical Release" means the statistical release designated "H.15(519)"
or any successor publication which is published weekly by the Federal Reserve
System and which establishes yields on actively traded United States
government securities adjusted to constant maturities or, if such statistical
release is not published at the time of any determination under the Indenture,
then such other reasonably comparable index which shall be designated by the
Company.
S-19
<PAGE>
CERTAIN COVENANTS
Limitations on Incurrence of Debt. The Company will not, and will not permit
any Subsidiary to, incur any Debt (as defined below) if, immediately after
giving effect to the incurrence of such additional Debt and the application of
the proceeds thereof, the aggregate principal amount of all outstanding Debt
of the Company and its Subsidiaries on a consolidated basis determined in
accordance with GAAP is greater than 60% of the sum of (without duplication)
(i) the Total Assets (as defined below) of the Company and its Subsidiaries as
of the end of the calendar quarter covered in the Company's Annual Report on
Form 10-K or Quarterly Report on Form 10-Q, as the case may be, most recently
filed with the Securities and Exchange Commission (the "Commission") (or, if
such filing is not permitted under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), with the Trustee) prior to the incurrence of
such additional Debt and (ii) the purchase price of any real estate assets or
mortgages receivable acquired, and the amount of any securities offering
proceeds received (to the extent that such proceeds were not used to acquire
real estate assets or mortgages receivable or used to-reduce Debt), by the
Company or any Subsidiary since the end of such calendar quarter, including
those proceeds obtained in connection with the incurrence of such additional
Debt.
In addition to the foregoing limitation on the incurrence of Debt, the
Company will not, and will not permit any Subsidiary to, incur any Debt
secured by any Encumbrance upon any of the property of the Company or any
Subsidiary if, immediately after giving effect to the incurrence of such
additional Debt and the application of the proceeds thereof, the aggregate
principal amount of all outstanding Debt of the Company and its Subsidiaries
on a consolidated basis which is secured by any Encumbrance (as defined below)
on property of the Company or any Subsidiary is greater than 40% of the sum of
(without duplication) (i) the Total Assets of the Company and its Subsidiaries
as of the end of the calendar quarter covered in the Company's Annual Report
on Form 10-K or Quarterly Report on Form 10-Q, as the case may be, most
recently filed with the Commission (or, if such filing is not permitted under
the Exchange Act, with the Trustee) prior to the incurrence of such additional
Debt and (ii) the purchase price of any real estate assets or mortgages
receivable acquired, and the amount of any securities offering proceeds
received (to the extent that such proceeds were not used to acquire real
estate assets or mortgages receivable or used to reduce Debt), by the Company
or any Subsidiary since the end of such calendar quarter, including those
proceeds obtained in connection with the incurrence of such additional Debt.
The Company and its Subsidiaries may not at any time own Total Unencumbered
Assets (as defined below) equal to less than 150% of the aggregate outstanding
principal amount of the Unsecured Debt of the Company and its Subsidiaries on
a consolidated basis.
In addition to the foregoing limitations on the incurrence of Debt, the
Company will not, and will not permit any Subsidiary to, incur any Debt if the
ratio of Consolidated Income Available for Debt Service (as defined below) to
the Annual Service Charge (as defined below) for the four consecutive fiscal
quarters most recently ended prior to the date on which such additional Debt
is to be Incurred shall have been less than 1.5:1, on a pro forma basis after
giving effect thereto and to the application of the proceeds therefrom, and
calculated on the assumption that (i) such Debt and any other Debt incurred by
the Company and its Subsidiaries since the first day of such four-quarter
period and the application of the proceeds therefrom, including to refinance
other Debt, had occurred at the beginning of such period; (ii) the repayment
or retirement of any other Debt by the Company and its Subsidiaries since the
first day of such four-quarter period had been repaid or retired at the
beginning of such period (except that, in making such computation, the amount
of Debt under any revolving credit facility shall be computed based upon the
average daily balance of such Debt during such period); (iii) in the case of
Acquired Debt (as defined below) or Debt incurred in connection with any
acquisition since the first day of such four-quarter period, the related
acquisition had occurred as of the first day of such period with the
appropriate adjustments with respect to such acquisition being included in
such pro forma calculation; and (iv) in the case of any acquisition or
disposition by the Company or its Subsidiaries of any asset or group of assets
since the first day of such four-quarter period, whether by merger, stock
purchase or sale, or asset purchase or sale, such acquisition or disposition
or any related repayment of Debt had occurred as of the first day of such
period with the appropriate adjustments with respect to such acquisition or
disposition being included in such pro forma calculation.
S-20
<PAGE>
As used herein, and in the Indenture:
"Acquired Debt" means Debt of a Person (i) existing at the time such Person
becomes a Subsidiary or (ii) assumed in connection with the acquisition of
assets from such Person, in each case, other than Debt incurred in connection
with, or in contemplation of, such Person becoming a Subsidiary or such
acquisition. Acquired Debt shall be deemed to be incurred on the date of the
related acquisition of assets from any Person or the date the acquired Person
becomes a Subsidiary.
"Annual Service Charge" as of any date means the maximum amount which is
payable in any period for interest on, and original issue discount of, Debt of
the Company and its Subsidiaries and the amount of dividends which are payable
in respect of any Disqualified Stock.
"Capital Stock" means, with respect to any Person, any capital stock
(including preferred stock), shares, interests, participations or other
ownership interests (however designated) of such Person and any rights (other
than debt securities convertible into or exchangeable for corporate stock),
warrants or options to purchase any thereof.
"Consolidated Income Available for Debt Service" for any period means
Earnings from Operations (as defined below) of the Company and its
Subsidiaries plus amounts which have been deducted, and minus amounts which
have been added, for the following (without duplication): (i) interest on Debt
of the Company and its Subsidiaries, (ii) provision for taxes of the Company
and its Subsidiaries based on income, (iii) amortization of debt discount and
other deferred financing costs, (iv) provisions for gains and losses on
properties and property depreciation and amortization, (v) the effect of any
noncash charge resulting from a change in accounting principles in determining
Earnings from Operations for such period and (vi) amortization of deferred
charges.
"Debt" of the Company or any Subsidiary means, without duplication, any
indebtedness of the Company or any Subsidiary, whether or not contingent, in
respect of (i) borrowed money or evidenced by bonds, notes, debentures or
similar instruments, (ii) indebtedness for borrowed money secured by any
Encumbrance existing on property owned by the Company or any Subsidiary, (iii)
the reimbursement obligations, contingent or otherwise, in connection with any
letters of credit actually issued (other than letters of credit issued to
provide credit enhancement or support with respect to other indebtedness of
the Company or any Subsidiary otherwise reflected as Debt hereunder) or
amounts representing the balance deferred and unpaid of the purchase price of
any property or services, except any such balance that constitutes an accrued
expense or trade payable, or all conditional sale obligations or obligations
under any title retention agreement, (iv) the principal amount of all
obligations of the Company or any Subsidiary with respect to redemption,
repayment or other repurchase of any Disqualified Stock or (v) any lease of
property by the Company or any Subsidiary as lessee which is reflected on the
Company's Consolidated Balance Sheet as a capitalized lease in accordance with
GAAP, to the extent, in the case of items of indebtedness under (i) through
(iii) above, that any such items (other than letters of credit) would appear
as a liability on the Company's Consolidated Balance Sheet in accordance with
GAAP, and also includes, to the extent not otherwise included, any obligation
by the Company or any Subsidiary to be liable for, or to pay, as obligor,
guarantor or otherwise (other than for purposes of collection in the ordinary
course of business), Debt of another Person (other than the Company or any
Subsidiary) (it being understood that Debt shall be deemed to be incurred by
the Company or any Subsidiary whenever the Company or such Subsidiary shall
create, assume, guarantee or otherwise become liable in respect thereof).
"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person which by the terms of such Capital Stock (or by the terms of any
security into which it is convertible or for which it is exchangeable or
exercisable), upon the happening of any event or otherwise (i) matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise
(other than Capital Stock which is redeemable solely in exchange for common
stock), (ii) is convertible into or exchangeable or exercisable for Debt or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part (other than Capital Stock which is redeemable solely in
exchange for common stock), in each case on or prior to the Stated Maturity of
the Notes.
S-21
<PAGE>
"Earnings from Operations" for any period means net earnings excluding gains
and losses on sales of investments, as reflected in the financial statements
of the Company and its Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP.
"Encumbrances" means any mortgage, lien, charge, pledge or security interest
of any kind.
"Significant Subsidiary" means any Subsidiary which is a "significant
subsidiary" (as defined in Article I, Rule 1-02 of Regulation S-X, promulgated
under the Securities Act of 1933, as amended) of the Company.
"Subsidiary" means, with respect to any Person, any corporation or other
entity of which a majority of (i) the voting power of the voting equity
securities or (ii) the outstanding equity interests of which are owned,
directly or indirectly, by such Person. For the purposes of this definition,
"voting equity securities" means equity securities having voting power for the
election of directors, whether at all times or only so long as no senior class
of security has such voting power by reason of any contingency.
"Total Assets" as of any date means the sum of (i) the Undepreciated Real
Estate Assets and (ii) all other assets of the Company and its Subsidiaries
determined in accordance with GAAP (but excluding accounts receivable and
intangibles).
"Total Unencumbered Assets" means the sum of (i) those Undepreciated Real
Estate Assets not subject to an Encumbrance for borrowed money and (ii) all
other assets of the Company and its Subsidiaries not subject to an Encumbrance
for borrowed money determined in accordance with GAAP (but excluding accounts
receivable and intangibles).
"Undepreciated Real Estate Assets" as of any date means the cost (original
cost plus capital improvements) of real estate assets of the Company and its
Subsidiaries on such date, before depreciation and amortization determined on
a consolidated basis in accordance with GAAP.
"Unsecured Debt" means Debt which is not secured by any Encumbrance upon any
of the properties of the Company or any Subsidiary.
See "Description of Debt Securities--Certain Covenants" in the prospectus
for a description of additional covenants applicable to the Company.
MERGER, CONSOLIDATION OR SALE OF ASSETS
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
Indenture, 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.
EVENTS OF DEFAULT, NOTICE AND WAIVER
The Indenture provides that the following events are "Events of Default"
with respect to the Notes: (a) default in the payment of any interest on any
Notes when such interest 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
S-22
<PAGE>
any, on) any Notes when due and payable; (c) default in the performance, or
breach, of any other covenant or warranty of the Company in the Indenture with
respect to the Notes and continuance of such default or breach for a period of
60 days after written notice as provided in the Indenture; (d) 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; (e) 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; or
(f) certain events of bankruptcy, insolvency or reorganization, or court
appointment of a receiver, liquidator or trustee of the Company or any
Significant Subsidiary or for all or substantially all of either of its
property.
See "Description of Debt Securities--Events of Default, Notice and Waiver"
in the Prospectus for a description of rights, remedies and other matters
relating to Events of Default.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The provisions of Article 14 of the Indenture relating to defeasance and
covenant defeasance, which are described in the accompanying Prospectus will
apply to the Notes, including without limitation the covenants described under
"Description of Notes--Certain Covenants."
BOOK-ENTRY SYSTEM
The Notes will be issued in the form of one or more fully registered global
notes ("Global Notes") which will be deposited with, or on behalf of DTC, and
registered in the name of DTC's nominee, Cede & Co. Except under the
circumstance described below, 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, a 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.
Upon the issuance of a Global Note, DTC or its nominee will credit on its
book-entry registration and transfer system the respective principal amounts
of the individual Notes represented by such Global Note to the accounts of
persons that have accounts with DTC ("Participants"). Such accounts shall be
designated by the underwriters, dealers or agents with respect to the Notes.
Ownership of beneficial interests in a Global Note will be limited to
Participants or persons that may hold interests through Participants.
Ownership of beneficial interests in such Global Note will be shown on, and
the transfer of that ownership will be effected only through, records
maintained by DTC or its nominee (with respect to beneficial interests of
Participants) and records of Participants (with respect to beneficial
interests of persons who hold through Participants). The laws of some states
require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and laws may impair the ability to
own, pledge or transfer any beneficial interest in a Global Note.
So long as DTC or its nominee is the registered owner of such Global Note,
DTC or its nominee, as the case may be, will be considered the sole owner or
holder of the Notes represented by such Global Note for all
S-23
<PAGE>
purposes under the Indenture and the beneficial owners of the Notes will be
entitled only to those rights and benefits afforded to them in accordance with
DTC's regular operating procedures. Except as provided below, owners of
beneficial interest in a Global Note will not be entitled to have any of the
individual Notes registered in their names, will not receive or be entitled to
receive physical delivery of any such notes in definitive form and will not be
considered the owners or holders thereof under the Indenture.
Payments of principal of and any interest on, individual Notes represented
by a Global Note registered in the name of DTC or its nominee will be made to
DTC or its nominee, as the case may be, as the registered owner of the Global
Note representing such Notes. None of the Company, the Trustee, any Paying
Agent or the Security Registrar will have any responsibility or liability for
any aspect of the records relating to or payments made on account of
beneficial ownership interests in the Global Note for such Notes or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a permanent Global Note representing any
Notes, immediately will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of such Global Note as shown on the records of DTC or its nominee. The Company
also expects that payments by Participants to owners of beneficial interests
in such Global Note held through such Participants will be governed by
standing instructions and customary practices, as is the case with securities
held for the account of customers in bearer form or registered in "street
name." Such payments will be the responsibility of such Participants.
If DTC 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 Notes in exchange for the Global
Note or Notes representing the Notes. In addition, the Company may, at any
time and in its sole discretion, determine not to have any Notes represented
by one or more Global Notes and, in such event, will issue individual Notes in
exchange for the Global Note or Notes representing the Notes. Individual Notes
so issued will be issued in denominations unless otherwise specified by the
Company, of $1,000 and integral multiples thereof.
DTC has advised the Company of the following information regarding DTC: DTC
is a limited-purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its Participants deposit with DTC. DTC also facilities
the settlement among its Participants of securities transactions, such as
transfers and pledges, in deposited securities through electronic computerized
book-entry charges in its Participants' accounts, thereby eliminating the need
for physical movement of securities certificates. Direct Participants of DTC
include securities brokers and dealers (including the Underwriters), banks,
trust companies, clearing corporations, and certain other organizations. DTC
is owned by a number of its direct Participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc. and the National Association
of Securities Dealers, Inc. Access to the DTC system is also available to
others such as securities brokers and dealers, banks and trust companies that
clear through or maintain a custodial relationship with a direct Participant
of DTC, either directly or indirectly. The rules applicable to DTC and its
participants are on file with the Commission.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Underwriters in immediately
available funds. All payments of principal and interest in respect of the
Notes will be made by the Company in immediately available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing house or next-day funds. In contrast, the Notes
will trade in DTC's Same-Day Funds Settlement System until maturity or until
the Notes are issued in certificated form, and secondary market trading
activity in the Notes
S-24
<PAGE>
will therefore be required by DTC to settle in immediately available funds. No
assurance can be given as to the effect, if any, of settlement in immediately
available funds on trading activity in the Notes.
GOVERNING LAW
The Indenture is governed by and shall be construed in accordance with the
laws of the State of New York.
NO PERSONAL LIABILITY OR RECOURSE
No recourse under or upon any obligation, covenant or agreement contained in
the Indenture or the Notes, or because of any indebtedness evidenced thereby,
shall be had against any past, present or future stockholder, employee,
officer or director, as such, of the Company or any successor, either directly
or through the Company or any successor, under any rule of law, statute or
constitutional provision or by the enforcement of any assessment or by any
legal or equitable proceeding or otherwise. Each holder of Notes waives and
releases all such liability by accepting such Notes. The waiver and release
are part of the consideration for the issue of the Notes.
S-25
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") between the Company and the underwriters named
below (the "Underwriters"), the Company has agreed to sell to the
Underwriters, and each Underwriter has agreed to purchase from the Company,
the respective principal amount of Notes set forth opposite its name. Pursuant
to the terms of the Underwriting Agreement, the Underwriters are obligated to
purchase the entire aggregate principal amount of such Notes if any are
purchased.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
UNDERWRITERS OF NOTES
------------ ------------
<S> <C>
PaineWebber Incorporated....................................... $ 60,000,000
J.P. Morgan Securities Inc. ................................... 40,000,000
------------
Total........................................................ $100,000,000
============
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the Notes in part to the public at the public offering price set forth
on the cover page of this Prospectus Supplement, and in part to certain
securities dealers (which may include the Underwriters) at such price less a
concession not in excess of 0.375% of the principal amount of the Notes. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of 0.250% of the principal amount of the Notes to certain other
dealers, including the Underwriters. Following the completion of the initial
offering of the Notes, the public offering price, concession and reallowance
may change.
The Notes are a new issue of securities with no established trading market.
The Company has been advised by the Underwriters that the Underwriters intend
to make a market in the Notes but are not obligated to do so and may
discontinue market making at any time without notice. No assurance can be
given as to the liquidity of the trading market for the Notes.
Pursuant to the Underwriting Agreement, the Company has agreed to indemnify
the Underwriters against certain civil liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
Underwriters may be required to make in respect thereof.
Until the distribution of the Notes is completed, rules of the Commission
may limit the ability of the Underwriters to bid for and purchase the Notes.
As an exception to these rules, the Underwriters are permitted to engage in
certain transactions that stabilize the price of the Notes. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Notes.
If the Underwriters create a short position in the Notes in connection with
the Offering, i.e., if the Underwriters sell a greater aggregate principal
amount of Notes than are set forth on the cover page of this Prospectus
Supplement, the Underwriters may reduce that short position by purchasing
Notes in the open market. In general, purchases of a security for the purpose
of stabilization or to reduce a short position could cause the price of the
security to be higher than it might be in the absence of such purchases.
Neither the Company nor the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above might have on the price of the Notes. In
addition, neither the Company nor the Underwriters makes any representation
that the Underwriters will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
In the ordinary course of their respective businesses, the Underwriters and
their affiliates have engaged and may in the future engage in commercial
banking and investment banking transactions with the Company and its
affiliates. Morgan Guaranty Trust Company of New York, an affiliate of J.P.
Morgan Securities Inc., expects to receive up to $1.0 million in repayment of
amounts outstanding under the Company's unsecured credit facilities from the
proceeds of this Offering. See "Use of Proceeds."
S-26
<PAGE>
LEGAL MATTERS
Certain legal matters, including the legality of the Notes, will be passed
upon for the Company by Goodwin, Procter & Hoar LLP, Boston, Massachusetts,
and for the Underwriters by O'Melveny & Myers LLP, San Francisco, California.
EXPERTS
The consolidated financial statements and financial statement schedule of
the Company as of December 31, 1996 and 1995 and for each of the years in the
three year period ended December 31, 1996, included in the Company's Annual
Report on Form 10-K, and the combined statements of revenue and certain
operating expenses of certain acquired communities for the year ended December
31, 1996 included in the Company's Current Reports on Form 8-K filed on
October 15, 1997 and November 24, 1997, each incorporated by reference in this
prospectus, 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.
S-27
<PAGE>
PROSPECTUS
[LOGO OF AVALON PROPERTIES,
INC. APPEARS HERE]
$397,243,562
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, par value $.01 per share ("Preferred Stock"),
(iii) shares of common stock, par value $.01 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 $397,243,562,
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 December 16, 1997, the reported last sale price of the Common Stock on the
NYSE was $30.1875 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
THE DATE OF THIS PROSPECTUS IS DECEMBER 29, 1997.
<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 filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at 7 World Trade Center, New York, New York
10048, and Northwestern Atrium Center, 500 West Madison Street, 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 files information electronically with the Commission, and the
Commission maintains a Web Site that contains reports, proxy and information
statements and other information regarding registrants (including the Company)
that file electronically with the Commission. The address of the Commission's
Web Site is (http://www.sec.gov).
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 and the exhibits and financial schedules thereto,
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 document
referred to are not necessarily complete, and in each instance reference is
made to the copy of such 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, 1996 (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,
1997, (iii) the Company's Current Reports on Form 8-K filed with the
Commission on October 15, November 24 and December 12, 1997, (iv) the
Company's proxy statement with respect to its Annual Meeting of Stockholders
held on May 6, 1997 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.
ANY PERSON RECEIVING A COPY OF THIS PROSPECTUS MAY OBTAIN, WITHOUT CHARGE,
UPON WRITTEN OR ORAL REQUEST, A COPY OF ANY OF THE DOCUMENTS INCORPORATED BY
REFERENCE HEREIN, EXCEPT FOR THE EXHIBITS TO SUCH DOCUMENTS. WRITTEN REQUESTS
SHOULD BE MAILED TO THOMAS J. SARGEANT, CHIEF FINANCIAL OFFICER, AVALON
PROPERTIES, INC., 2900 EISENHOWER AVENUE, ALEXANDRIA, VIRGINIA 22314.
TELEPHONE REQUESTS MAY BE DIRECTED TO (703) 329-6300.
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FORWARD LOOKING STATEMENTS
This Prospectus, including any related Prospectus Supplement and the
documents incorporated herein and therein by reference, contain forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. The words
"believe," "expect," "anticipate," "intend," "estimate," "assume" and other
similar expressions which are predictions of or indicate future events and
trends and which do not relate solely to historical matters identify forward-
looking statements. In addition, information concerning construction,
occupancy and completion of the Company's apartment communities and financial
information, including information concerning construction budgets, Funds from
Operations, and EBITDA, relating to periods after the date of this Prospectus
or the related Prospectus Supplement, are forward-looking statements. Reliance
should not be placed on forward-looking statements because they involve known
and unknown risks, uncertainties and other factors, which are in some cases
beyond the control of the Company and may cause the actual results,
performance or achievements of the Company to differ materially from
anticipated future results, performance or achievements expressed or implied
by such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
the following: the Company may fail to secure or abandon development
opportunities; construction costs of a community may exceed original
estimates; construction and lease-up may not be completed on schedule,
resulting in increased debt service expense and construction costs and reduced
rental revenues; occupancy rates and market rents may be adversely affected by
local economic and market conditions which are beyond management's control;
financing may not be available, or may not be available on favorable terms;
the Company's cash flow may be insufficient to meet required payments of
principal and interest; and existing indebtedness may mature in an unfavorable
credit environment, preventing such indebtedness from being refinanced, or, if
refinanced, causing such refinancing to occur on terms that are not as
favorable as the terms of existing indebtedness. In addition, the factors
described under "Risk Factors" commencing on page 3 of this Prospectus may
result in such differences. Prospective purchasers of the Securities offered
hereby should carefully review all of these factors.
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 ASSOCIATED WITH THE ADDITION OF A SUBSTANTIAL NUMBER OF NEW COMMUNITIES
The Company is currently experiencing a period of accelerated growth. The
Company's ability to manage its growth effectively will require the Company,
among other things, to successfully apply its experience in managing its
existing portfolio to an increased number of communities. In addition, the
Company will be required to successfully manage the integration of a
substantial number of new management and operations personnel. There can be no
assurance that the Company will be able to integrate and manage these
operations effectively or maintain or improve its historical financial
performance.
RISKS ASSOCIATED WITH NEW MARKETS
The Company is currently expanding its operations beyond its current Mid-
Atlantic and Northeast market areas into certain Midwest markets, and it is
possible that the Company may enter other new markets in the future. The
Company may make other selected acquisitions in markets outside of its current
market areas from time to time if appropriate opportunities arise. The
Company's historical experience is in the Mid-Atlantic and Northeast market
areas, and the Company's experience in these market areas does not ensure that
it will be able to operate successfully in new market areas. Like the risks
associated with the addition of a substantial number of new communities, entry
into new market areas will require, among other things, the Company to
successfully
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apply its experience to new market areas. Some of the risks related to entry
into new markets include, among others: (i) a lack of market knowledge and
understanding of the local economies; (ii) an inability to obtain land for
development or to identify acquisition opportunities; (iii) an inability to
obtain construction tradespeople; and (iv) an unfamiliarity with local
governmental and permitting procedures.
PORTFOLIO ACQUISITION RISKS
The Company has increasingly emphasized, and intends to continue to
emphasize, acquisitions of multiple apartment communities in single
transactions in order to reduce acquisition expenses per apartment community
and to enable the Company to gain a critical mass of assets that provides
operating leverage. However, portfolio acquisitions are more complex than
single-property acquisitions, and the risk that a multiple-property
acquisition will not close may be greater than in a single-property
acquisition. In addition, the Company's costs for a portfolio acquisition that
does not close are generally greater than for a single property acquisition
that does not close. If the Company fails to close portfolio acquisitions, its
ability to increase its Funds from Operations will be limited and a charge to
earnings for costs related to the failed acquisition may occur.
Portfolio acquisitions may also result in the Company owning apartment
communities in geographically dispersed markets that are geographically
removed from the Company's principal markets. This geographic diversity will
place additional demands on the Company's ability to manage such operations.
Another risk associated with portfolio acquisitions is that a seller may
require that a group of apartment communities be purchased as a package, even
though one or more of the apartment communities in the portfolio does not meet
the Company's investment criteria. In such cases, the Company may attempt to
make a joint bid with another buyer, or the Company may purchase a portfolio
of apartment communities with the intent to subsequently dispose of those
which do not meet its criteria. In the case of joint bids, however, it is
possible that the other buyer may default in its obligations, which increases
the risk that the acquisition may not close, with the adverse consequences
described above. In cases where the Company intends to dispose of apartment
communities it does not wish to own, there can be no assurance as to how
quickly the Company could sell or exchange such apartment communities or the
terms on which they could be sold or exchanged. In addition, any gains on the
sale of such apartment communities within four years of the date of
acquisition could be subject to a 100% tax.
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
4
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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 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.
5
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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.
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,
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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 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 equity 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 acquire or own, directly or indirectly, beneficial ownership of
more than 9.8% of the aggregate value of all outstanding equity 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 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.
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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.
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THE COMPANY
Avalon Properties, Inc. (the "Company") is an integrated operating company,
concentrating on apartment community acquisition, construction, development
and management in high barrier-to-entry markets, which currently include the
Mid-Atlantic, Midwest and Northeast regions of the United States, with seven
offices located throughout its regions. The Company is a self-administered and
self-managed real estate investment trust (a "REIT"). At November 30, 1997,
the Company owned or had an ownership interest in 56 multifamily apartment
communities containing a total of 17,325 apartment homes. As of November 30,
1997, the Company's established communities had a physical occupancy rate of
96.6%. In addition, at November 30, 1997, the Company owned or had an
ownership interest in seven apartment communities under construction, which
the Company anticipates will contain a total of 1,846 apartment homes, with
estimated completion dates from the fourth quarter of 1997 through the first
quarter of 1999. As of November 30, 1997, the Company owned land for one
development community, and also owned rights to acquire 19 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.
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
The Company's ratio of earnings to fixed charges for the nine months ended
September 30, 1997 was 3.03x, and for the years ended December 31, 1996, 1995
and 1994 and the period November 18, 1993 through December 31, 1993 was 2.36x,
2.37x, 3.60x and 3.29x, respectively.
The Company's ratio of earnings to fixed charges and preferred stock
dividends for the nine months ended September 30, 1997 was 2.16x, and for the
years ended December 31, 1996, 1995 and 1994 and the period November 18, 1993
through December 31, 1993 was 1.95x, 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 the year ended December 31,
1992. 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.
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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:
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(1) The title of such Debt Securities and whether such Debt Securities
are Senior Securities or Subordinated Securities;
(2) The aggregate principal amount of such Debt Securities and any limit
on such aggregate principal amount;
(3) The price (expressed as a percentage of the principal amount thereof)
at which such Debt Securities will be issued and, if other than the
principal amount thereof, the portion of the principal amount thereof
payable upon declaration of acceleration of the maturity thereof, or (if
applicable) the portion of the principal amount of such Debt Securities
that is convertible into Common Stock or Preferred Stock, or the method by
which any such portion shall be determined;
(4) If convertible, the terms on which such Debt Securities are
convertible, including the initial conversion price or rate and the
conversion period and any applicable limitations on the ownership or
transferability of the Common Stock or Preferred Stock receivable on
conversion;
(5) The date or dates, or the method for determining such date or dates,
on which the principal of such Debt Securities will be payable;
(6) The rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which such Debt Securities
will bear interest, if any;
(7) The date or dates, or the method for determining such date or dates,
from which any such interest will accrue, the dates on which any such
interest will be payable, the record dates for such interest payment dates,
or the method by which such dates shall be determined, the persons to whom
such interest shall be payable, and the basis upon which interest shall be
calculated if other than that of a 360-day year of twelve 30-day months;
(8) The place or places where the principal of (and premium 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
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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;
(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
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(24) Any other terms of the series (which terms shall not be inconsistent
with the provisions of this Indenture).
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;
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(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 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
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agent acts, except that the Company will be required to maintain a transfer
agent in each place of payment for such series. The Company may at any time
designate additional transfer agents with respect to any series of Debt
Securities.
Neither the Company nor any Trustee shall be required 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
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law become a lien upon the property of the Company or any subsidiary;
provided, however, that the Company shall not be required to pay or discharge
or cause to be paid or discharged any such tax, assessment, charge or claim
whose amount, applicability or validity is being contested in good faith.
Provision of Financial Information. Whether or not the Company is subject to
Section 13 or 15(d) of the Exchange Act, the Indentures will require the
Company, within 15 days of each of the respective dates by which the Company
would have been required to file annual reports, quarterly reports and other
documents with the Commission if the Company were so subject, 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
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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 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.
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MODIFICATION OF THE INDENTURES
Modifications and amendments of an Indenture will be permitted to be made
only with the consent of the holders of not less than a majority in principal
amount of all outstanding Debt Securities issued under such Indenture affected
by such modification or amendment; provided, however, that no such
modification or amendment may, without the consent of the holder of each such
Debt Security affected thereby, (a) change the stated maturity of the
principal of, or any installment of interest (or premium 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
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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 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
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the amount of Senior Indebtedness or other indebtedness of the Company and its
subsidiaries. As a result of these subordination provisions, in the event of a
distribution of assets upon insolvency, holders of Subordinated Indebtedness
may recover less, ratably, than general creditors of the Company.
Senior Debt will be defined in the applicable Indenture as the principal of
and interest on, or substantially similar payments to be made by the Company
in respect of, the following, whether outstanding at the date of execution of
the applicable Indenture or thereafter incurred, created or assumed: (a)
indebtedness of the Company for money borrowed or represented by purchase-
money obligations, (b) indebtedness of the Company evidenced by notes,
debentures, or bonds, or other securities issued under the provisions of an
indenture, fiscal agency agreement or other agreement, (c) obligations of the
Company as lessee under leases of property either made as part of any sale and
leaseback transaction to which the Company is a party or otherwise, (d)
indebtedness of partnerships and joint ventures which is included in the
consolidated financial statements of the Company, (e) indebtedness,
obligations and liabilities of others in respect of which the Company is
liable contingently or otherwise to pay or advance money or property or as
guarantor, endorser or otherwise or which the Company has agreed to purchase
or otherwise acquire, and (f) any binding commitment of the Company to fund
any real estate investment or to fund any investment in any entity making such
real estate investment, in each case other than (1) any such indebtedness,
obligation or liability referred to in clauses (a) through (f) above as to
which, in the instrument creating or evidencing the same pursuant to which the
same is outstanding, it is provided that such indebtedness, obligation or
liability is not superior in right of payment to the Subordinated Securities
or ranks pari passu with the Subordinated Securities, (2) any such
indebtedness, obligation or liability which is subordinated to indebtedness of
the Company to substantially the same extent as or to a greater extent than
the Subordinated Securities are subordinated, and (3) the Subordinated
Securities. There will not be any restrictions in any Indenture relating to
Subordinated Securities upon the creation of additional Senior Debt.
If this Prospectus is being delivered in connection with a series of
Subordinated Securities, the accompanying Prospectus Supplement or the
information incorporated herein by reference will set forth the approximate
amount of Senior Debt outstanding as of the end of the Company's most recent
fiscal quarter.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise indicated in the applicable Prospectus Supplement, the
Company will be permitted, at its option, to discharge certain obligations to
holders of any series of Debt Securities issued under any Indenture that have
not already been delivered to the applicable Trustee for cancellation and that
either have become due and payable or will become due and payable within one
year (or scheduled for redemption within one year) by irrevocably depositing
with the applicable Trustee, in trust, funds in such currency or currencies,
currency unit or units or composite currency or currencies in which such Debt
Securities are payable in an amount sufficient to pay the entire indebtedness
on such Debt Securities in respect of principal (and premium 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
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currency or currencies in which such Debt Securities are payable at stated
maturity, or Government Obligations (as defined below), or both, applicable to
such Debt Securities, which through the scheduled payment of principal and
interest in accordance with their terms will provide money in an amount
sufficient to pay the principal of (and premium 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.
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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 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, The Depository Trust
Company ("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.
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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 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.
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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.
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 November 30, 1997 there were issued and outstanding
38,473,440 shares of Common Stock (which does not include 3,500,000 shares of
Common Stock issued on December 9, 1997), 4,455,000 shares of Series A
Cumulative Redeemable Preferred Stock, par value $.01 per share, and 4,300,000
shares of Series B Cumulative Redeemable Preferred Stock, par value $.01 per
share. An aggregate of an additional 3,299,500 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.
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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.
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 First Union National Bank.
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
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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;
(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
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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 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
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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 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
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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 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
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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."
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.
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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.
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.
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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.
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).
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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.
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.
33
<PAGE>
LEGAL MATTERS
Certain legal matters, including the legality of the Securities, will be
passed upon for the Company by Goodwin, Procter & Hoar LLP, Boston,
Massachusetts.
EXPERTS
The consolidated financial statements and financial statement schedule of
Avalon Properties, Inc. as of December 31, 1996 and 1995 and for the years
ended December 31, 1996, 1995 and 1994 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 1997 included in the Current
Reports on Form 8-K, Filed on October 15 and November 24, 1997, 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.
34
<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.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary............................................ S-3
The Company.............................................................. S-7
Recent Developments...................................................... S-10
The Communities.......................................................... S-12
Use of Proceeds.......................................................... S-16
Ratios of Earnings to Combined Fixed Charges and Preferred Stock Divi-
dends................................................................... S-16
Capitalization........................................................... S-17
Description of Notes..................................................... S-18
Underwriting............................................................. S-26
Legal Matters............................................................ S-27
Experts.................................................................. S-27
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Available Information....................................................... 2
Incorporation of Certain Documents By Reference............................. 2
Forward Looking Statements.................................................. 3
Risk Factors................................................................ 3
The Company................................................................. 9
Use of Proceeds............................................................. 9
Ratios of Earnings to Fixed Charges......................................... 9
Description of Debt Securities.............................................. 10
Description of Capital Stock................................................ 24
Description of Warrants..................................................... 30
Restrictions on Transfers of Capital Stock.................................. 31
Federal Income Tax Considerations........................................... 32
Plan of Distribution........................................................ 32
Legal Matters............................................................... 34
Experts..................................................................... 34
</TABLE>
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$100,000,000
[LOGO OF AVALON PROPERTIES, INC. APPEARS HERE]
AVALON PROPERTIES, INC.
6 5/8% NOTES DUE 2005
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PROSPECTUS SUPPLEMENT
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PAINEWEBBER INCORPORATED
J.P. MORGAN & CO.
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JANUARY 16, 1998
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