<PAGE> 1
This filing is made pursuant to Rule 424(b)(5)
under the Securities Act of 1933 in connection
with Registration No. 33-92036
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 8, 1996)
1,150,000 SHARES
LOGO
IRVINE APARTMENT COMMUNITIES, INC.
COMMON STOCK
------------------------
Irvine Apartment Communities, Inc. (the "Company") is a self-administered
equity real estate investment trust
("REIT") engaged in the development and operation of apartment communities on
the Irvine Ranch, which is one of the largest urban master-planned communities
in the United States and is located in Orange County, California. At December
31, 1996, the Company owned a 45.4% economic interest in Irvine Apartment
Communities, L.P. (the "Operating Partnership") and was its sole managing
general partner. The Operating Partnership owns and operates 13,541 units in 48
high-quality apartment communities, and has 1,295 units in five additional
apartment communities under construction, with 115 units completed at December
31, 1996. Through July 2020, the Company holds the exclusive right, but not the
obligation, to acquire land from The Irvine Company for development of
additional rental apartment communities on the Irvine Ranch. The Company has
recently commenced an "off-Ranch" expansion program through the acquisition of
options to purchase three apartment community development sites located in
Northern California's Silicon Valley.
The Irvine Company has committed, pursuant to its rights under the
partnership agreement, to purchase 1,394,194 partnership units ("OP Units") in
the Operating Partnership (the "Irvine Investment") at a price per OP Unit equal
to the public offering price of the Common Stock offered hereby less an amount
equivalent to the underwriting discount. After completion of the Offering and
the Irvine Investment, the Company and the limited partners of the Operating
Partnership will own a 45.0% and 55.0% economic interest, respectively, in the
Operating Partnership, with The Irvine Company's economic ownership being 54.8%.
All of the shares of common stock (the "Common Stock") offered hereby are
being sold by the Company. The Common Stock is listed on the New York Stock
Exchange (the "NYSE") under the symbol "IAC". On February 13, 1997, the last
reported sale price of the Common Stock on the NYSE was $27 1/2 per share. To
ensure that the Company maintains its qualification as a REIT, ownership of
Common Stock by any person (other than The Irvine Company and certain related
persons) is, with certain exceptions, limited to 7.4% of the outstanding shares.
See "Description of Capital Stock -- Common Stock -- Restrictions in Ownership
and Transfer" in the accompanying Prospectus.
------------------------
SEE "RISK FACTORS" ON PAGE S-3 FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN
THE COMMON STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------------------
Per Share................................ $27.50 $1.44 $26.06
- -----------------------------------------------------------------------------------------------------------
Total(3)................................. $31,625,000 $1,656,000 $29,969,000
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Operating Partnership have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $275,000.
(3) The Company has granted the several Underwriters an option to purchase up to
an additional 172,500 shares of Common Stock to cover over-allotments. If
all such shares are purchased, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $36,368,750, $1,904,400, and
$34,464,350, respectively. See "Underwriting." The Irvine Company has
committed, pursuant to its rights under the partnership agreement, to
purchase up to an additional 209,129 OP Units if and to the extent that the
Underwriters' over-allotment option is exercised in order to maintain its
percentage interest in the Operating Partnership (the "Irvine Over-allotment
Investment").
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as, and if issued, delivered to and accepted by the
Underwriters, subject to approval of certain legal matters by counsel for the
Underwriters and certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of the shares of Common Stock offered hereby will
be made in New York, New York on or about February 20, 1997.
------------------------
MERRILL LYNCH & CO.
DEAN WITTER REYNOLDS INC.
MONTGOMERY SECURITIES
J.P. MORGAN & CO.
------------------------
The date of this Prospectus Supplement is February 13, 1997.
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, THE PACIFIC STOCK
EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
financial and other information appearing elsewhere in this Prospectus
Supplement and the accompanying Prospectus or incorporated herein or therein by
reference. Unless otherwise indicated, the information in this Prospectus
Supplement assumes that the Underwriters' over-allotment option is not exercised
and that the Irvine Investment (but not the Irvine Over-allotment Investment) is
completed. As used herein, the term the "Company" means Irvine Apartment
Communities, Inc. and, where the context so requires, includes Irvine Apartment
Communities, L.P. After completion of the Offering and the Irvine Investment,
the Company and the limited partners of the Operating Partnership will own a
45.0% and 55.0% economic interest, respectively, in the Operating Partnership,
with The Irvine Company's economic ownership being 54.8%.
THE COMPANY
The Company is a self-administered REIT that was formed to continue and
expand the business of owning and developing apartment communities previously
conducted by the apartment division of The Irvine Company. The Company owns and
operates 48 high-quality apartment communities aggregating 13,541 units (the
"Existing Communities") and has five additional apartment communities
aggregating 1,295 units under construction ("Communities Under Construction"
and, together with the Existing Communities, the "Properties"), of which 115
units were ready for occupancy, 88 of which were occupied and generating
revenue. Upon completion of the Communities Under Construction, the Company will
own a total of 14,836 units in 53 apartment communities, representing an
increase in units of approximately 31% since the Company's initial public
offering (the "Initial Offering") in December 1993. Through July 2020, the
Company holds the exclusive right, but not the obligation, to acquire land from
The Irvine Company, the owner and developer of the Irvine Ranch since 1864, for
development of additional apartment communities on the Irvine Ranch. All of the
Company's Properties are located on the Irvine Ranch. The Company has recently
commenced an "off-Ranch" expansion program through the acquisition of options to
purchase three development sites located in Northern California's Silicon
Valley. See "Recent Developments." The Company believes that the economic
expansion being experienced by the state of California provides the Company with
significant near-term growth potential.
The Irvine Ranch is located in central Orange County, California between
San Diego and Los Angeles. The western boundary of the Irvine Ranch borders
approximately six miles of the Pacific Ocean. Today, the portion of the Irvine
Ranch which is still owned by The Irvine Company covers approximately 50,000
acres and includes the largest remaining privately-owned undeveloped acreage in
Orange County. The developed portion of the Irvine Ranch, which includes
significant parts of the cities of Irvine, Newport Beach and Tustin, is one of
the largest urban master-planned communities in the United States. The Irvine
Ranch has been developed over the past 30 years in accordance with an original
master plan (the "Master Plan") which, over time, has been refined to accord
with locally approved general plans. The Irvine Ranch is one of the major
commercial, industrial, retail and residential centers in Southern California.
The Company believes that a variety of factors have contributed to the
strong apartment market in Orange County, the successful operating performance
of the Existing Communities and the existence of significant opportunities for
the development of additional apartment communities on the Irvine Ranch. Most
important among these factors are:
- The dominant market position of the Company, which owns over 65% of all
apartment units and approximately 85% of all units in apartment
communities having 100 or more units, on the Irvine Ranch;
- The Company's 23-year exclusive right to acquire land from The Irvine
Company for development of additional rental apartment communities on the
Irvine Ranch;
- The limited supply of developable land, other than on the Irvine Ranch,
adjacent to major employment centers in Orange County;
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<PAGE> 4
- The Irvine Company's Master Plan strategy which emphasizes market
segmentation in order to ensure adequate and appropriate allocation of
land uses which support sustained growth for the long-term;
- The high quality of design, construction and maintenance of the
Properties and their location in or near the City of Irvine, which was
ranked among the safest cities in the United States with a population of
100,000 or more;
- The close proximity of the Properties and of future development sites to
major employment centers, the Pacific Ocean, high quality schools, and
extensive resort, recreational and open space amenities;
- An affluent, growing population and diversified employment base in Orange
County and on the Irvine Ranch;
- The Company's ability to defer the purchase of land under its land rights
agreement until site and zoning entitlements have been obtained, the land
is ready for construction and the Company determines favorable market
conditions exist;
- The operating efficiencies available to the Company because the
Properties are located in a single geographic area;
- An average of over 19 years of experience of the Company's 11 most senior
members of management in the design, development, construction, property
management and financing of apartment communities; and
- The effectiveness of management's policies regarding property management
and expense control.
THE OFFERING
All of the shares of Common Stock offered hereby are being sold by the
Company. None of the Company's shareholders is selling any shares of Common
Stock in the Offering.
<TABLE>
<S> <C>
Common Stock Outstanding Prior to the Offering............... 18,571,647 shares
Common Stock Offered in the Offering(1)...................... 1,150,000 shares
Common Stock to be Outstanding After the Offering(1)......... 19,721,647 shares
OP Units to be issued in the Irvine Investment(2)(3)......... 1,394,194 OP Units
Common Stock to be Outstanding After the Offering(1)(3)(4)... 43,795,917 shares
Use of Proceeds.............................................. Proceeds of the Offering and the
Irvine Investment will be used to
repay outstanding debt under the
Company's revolving credit facility
and for general corporate purposes,
including ongoing development
activities on and off the Irvine
Ranch. See "Use of Proceeds."
NYSE Symbol.................................................. "IAC"
</TABLE>
- ---------------
(1) Assumes the Underwriters' over-allotment option is not exercised. See
"Underwriting."
(2) To be purchased by The Irvine Company concurrently with the completion of
the Offering.
(3) Assumes no additional OP Units are purchased pursuant to the Irvine
Over-allotment Investment.
(4) Assumes all OP Units, including OP Units issued pursuant to the Irvine
Investment, are exchanged for shares of Common Stock on a one-to-one basis
(without regard to the Ownership Limit).
S-2
<PAGE> 5
RISK FACTORS
Prospective investors should carefully consider the following information
in conjunction with the other information contained or incorporated by reference
in this Prospectus Supplement and accompanying Prospectus before making an
investment in the Common Stock.
FACTORS RELATING TO REAL ESTATE OPERATIONS AND DEVELOPMENT
General. Real property investments are subject to varying degrees of risk.
The investment returns available from equity investments in real estate depend
in large part on the amount of income earned and capital appreciation generated
by the related properties as well as the expenses incurred. If the Properties do
not generate revenue sufficient to meet operating expenses, including debt
service and capital expenditures, the Company's income and ability to make
distributions to its stockholders will be adversely affected. In addition, the
Properties consist exclusively of apartment communities located in Orange
County. Income from and the performance of the Properties may therefore be
adversely affected by the general economic climate in Orange County, including
unemployment rates and local conditions such as the supply of and demand for
apartments in the area, the attractiveness of the Properties to residents,
zoning or other regulatory restrictions, competition from other available
apartments and alternative forms of housing, the affordability of single family
homes, the ability of the Company to provide adequate maintenance and insurance
and the potential of increased operating costs (including real estate taxes).
Certain significant expenditures associated with an investment in real estate
(such as mortgage payments, real estate taxes and maintenance costs) generally
are not reduced when circumstances cause a reduction in revenue from the
investment. In addition, income from properties and real estate values are also
affected by a variety of other factors, such as governmental regulations and
applicable laws (including real estate, zoning and tax laws), interest rate
levels and the availability of financing. The Properties in the aggregate
historically have generated positive cash flow from operations; however, no
assurance can be given that such will be the case in the future.
The Company has recently acquired the assets of Thompson Residential
Company, Inc., a Northern California-based multifamily development company. This
acquisition represents the Company's first strategic expansion off the Irvine
Ranch and the Company may make additional investments in Northern California and
possibly San Diego in the future. See "Recent Developments -- 'Off-Ranch'
Expansion." The development, construction and operation of rental apartment
communities in such new markets may present risks different than or in addition
to the risks discussed above related to the Properties which are located
entirely in Orange County. No assurance can be given that the Company will be
successful in pursuing any additional "off-Ranch" expansion or that any
"off-Ranch" apartment communities will be successful.
Equity real estate investments, such as the investments made by the
Operating Partnership in the Properties and any additional properties that may
be developed or acquired by the Operating Partnership, and the Company's
investment in the Operating Partnership are relatively illiquid. Such
illiquidity limits the ability of the Operating Partnership (and, therefore, the
Company) to vary its portfolio in response to changes in economic or other
conditions. In addition, the Internal Revenue Code of 1986, as amended, places
limits on the Company's ability to sell properties held for fewer than four
years, which may affect the ability of the Company to sell properties without
adversely affecting returns to holders of Common Stock.
The Properties are subject to all operating risks common to apartment
ownership in general. Such risks include: the Company's ability to rent units at
the Properties, including the 1,295 units in the Communities Under Construction;
competition from other apartment communities both on and off the Irvine Ranch;
excessive building of comparable properties outside the Irvine Ranch which might
adversely affect apartment occupancy or rental rates; increases in operating
costs due to inflation and other factors, which increases may not necessarily be
offset by increased rents; increased affordable housing requirements that might
adversely affect rental rates (including requirements in connection with the
Company's refinancing of tax-exempt debt); inability or unwillingness of
residents to pay rent increases; and future enactment of rent control laws or
other laws regulating apartment housing, including present and possible future
laws relating to access by disabled persons. If operating expenses increase, the
local rental market may limit the extent to which rents may be
S-3
<PAGE> 6
increased to meet increased expenses without decreasing occupancy rates. If any
of the above occurred, the Company's ability to make expected distributions to
stockholders could be adversely affected.
A primary focus of the Company is on development of new apartment
communities, as described in "Business and Properties -- The Existing
Communities." The real estate development business involves significant risks in
addition to those involved in the ownership and operation of established
apartment communities, including risks that construction may not be completed on
schedule or budget and that apartment communities may not achieve anticipated
rent or occupancy levels.
Insurance. The Operating Partnership carries comprehensive liability,
fire, extended coverage and rental loss insurance covering all of the
Properties, with policy specifications and insured limits which the Company
believes are adequate and appropriate under the circumstances. There are,
however, certain types of losses (such as from earthquakes) that are not
generally insured because they are either uninsurable or not economically
insurable. The Operating Partnership does not carry earthquake insurance on any
of the Properties. Should an uninsured loss or a loss in excess of insured
limits occur, the Operating Partnership could lose its capital invested in the
property, as well as the anticipated future revenues from the property and, in
the case of debt which is recourse to the Operating Partnership, would remain
obligated for any mortgage debt or other financial obligations related to the
property. Any such loss would adversely affect the Company. Moreover, as the
general partner of the Operating Partnership, the Company will generally be
liable for any unsatisfied obligations other than non-recourse obligations. The
Company believes that the Properties are adequately insured. In addition, in
light of the California earthquake risk, California building codes since the
early 1970's have established construction standards for all newly built and
renovated buildings, including apartment buildings, the current and strictest
construction standards having been adopted in 1984. Twenty-nine of the 48
Existing Communities have been completed and occupied since January 1, 1985 and
the Company believes that all of the Existing Communities were constructed, and
all of the Communities Under Construction are being constructed, in full
compliance with the applicable standards existing at the time of construction.
In addition, the Company's apartment communities contain multiple buildings, all
of which are of wood frame construction. While earthquakes have occurred from
time to time in Southern California, the Company has not experienced any
material losses as a result of earthquakes. No assurance can be given that this
will be the case in the future.
CONFLICTS OF INTEREST
The Company has adopted certain policies and entered into certain
agreements with The Irvine Company and Donald Bren designed to eliminate or
minimize potential conflicts of interest. The Board of Directors has adopted a
policy and has provided in the Bylaws that no transaction between the Company
and either The Irvine Company, affiliates of The Irvine Company or Mr. Bren may
be entered into without the approval of the Independent Directors Committee,
members of which are unaffiliated with The Irvine Company. However, there can be
no assurance that these policies always will be successful in eliminating the
influence of such conflicts and, if they are not successful, decisions could be
made that might fail to reflect fully the interests of all stockholders.
Exclusive Land Rights; Non-Competition Arrangements. Purchases of property
by the Company from The Irvine Company under the Land Rights Agreement may be
made only with the approval of a majority of the Independent Directors
Committee. The Irvine Company determines which land is designated for apartment
community development in accordance with the Master Plan for the Irvine Ranch,
and therefore which land is eligible for purchase by the Company pursuant to the
Land Rights Agreement. No assurance can be given that The Irvine Company will
entitle land for development of additional apartment communities at a rate
consistent with prior development. In addition, The Irvine Company controls the
application for related entitlements and also has certain approval rights with
respect to the architectural design and physical layout of the rental apartment
communities. The Irvine Company and Mr. Bren have agreed not to directly or
indirectly acquire or develop, or acquire an equity ownership interest in any
entity that has an ownership interest in, any apartment community, whether on or
off the Irvine Ranch. The prohibition of The Irvine Company and Mr. Bren from
developing apartment communities on the Irvine Ranch will terminate on July 31,
2020. The Irvine Company and Mr. Bren remain prohibited from engaging in any
such activity off the Irvine Ranch until the date on which both of the following
conditions are satisfied: (i) no nominee of The
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<PAGE> 7
Irvine Company is a member of the Company's Board of Directors and (ii) The
Irvine Company and certain related persons beneficially own less than 20% of the
outstanding Common Stock in the aggregate (including for these purposes shares
issuable upon exercise of the rights to exchange OP Units subject to the
Ownership Limit in the Company's Articles of Amendment and Restatement (the
"Articles of Incorporation")). The land rights and non-competition arrangements
may be terminated earlier upon the occurrence of certain events not within the
control of The Irvine Company including (i) the failure of the stockholders to
elect as directors of the Company the number of directors The Irvine Company is
entitled to nominate, (ii) the occurrence of a vacancy on the Board of Directors
of a member nominated by The Irvine Company, which is not filled with a person
designated by The Irvine Company and (iii) the taking of certain actions
requiring the approval of more than a majority of the Board of Directors are
taken without the consent of The Irvine Company.
Other Business Activities of The Irvine Company. The Irvine Company has
significant business interests in developed industrial, commercial and other
properties and in the future development of such properties on the Irvine Ranch,
the value of which exceeds the value of its aggregate interest in the Company
and the Operating Partnership. The feasibility and development of other
apartment communities by the Company on the Irvine Ranch may be affected by the
feasibility and development of commercial, industrial and residential for-sale
properties by The Irvine Company on the Irvine Ranch. No assurance can be given
that The Irvine Company will not determine that certain potential apartment
community sites on undeveloped portions of the Irvine Ranch should be developed
as single family, for-sale homes or condominiums or as industrial or commercial
properties.
S-5
<PAGE> 8
RECENT DEVELOPMENTS
PRELIMINARY 1996 RESULTS
The information set forth below with respect to 1996 financial results is
based on unaudited financial information and may be subject to change upon
completion of the Company's annual audit. The Company has no reason to believe
that final audited results at or for the year ended December 31, 1996 will
differ materially from the information set forth below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1996 1995
-------- --------
(IN THOUSANDS, EXCEPT
PROPERTY AND PER
SHARE INFORMATION)
<S> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Rental income.......................................................... $154,925 $133,678
Other income........................................................... 3,162 2,079
Interest income........................................................ 611 411
-------- --------
158,698 136,168
-------- --------
Expenses:
Property expenses...................................................... 33,859 31,761
Real estate taxes...................................................... 13,496 12,002
Property management fees............................................... 4,502 3,893
Interest expense, net.................................................. 29,506 25,894
Amortization of deferred financing costs............................... 2,627 8,510
Depreciation and amortization.......................................... 27,239 23,143
General and administrative............................................. 6,277 5,909
-------- --------
117,506 111,112
-------- --------
Income before extraordinary item and minority interest................. 41,192 25,056
Extraordinary item -- charge related to debt extinguishment............ (23,427)
-------- --------
Income before minority interest........................................ 41,192 1,629
Minority interest in income (loss)..................................... 22,446 (6,836)
-------- --------
Net Income............................................................. $ 18,746 $ 8,465
======== ========
SHARE DATA:
Weighted average number of shares outstanding.......................... 17,732 13,856
Income after minority interest and before extraordinary item per
share................................................................ $ 1.06 $ 0.84
Extraordinary item per share(1)........................................ $ (1.69)
Net income per share................................................... $ 1.06 $ 0.61
Cash distributions declared and paid per share......................... $ 1.44 $ 1.39
STATISTICAL AND PROPERTY DATA:
Total stabilized communities (at period end)........................... 48 43
Total communities stabilized more than two years (at period end)(2).... 43 43
Apartment units (at period end)........................................ 13,656 12,776
Average units in communities stabilized more than two years(2)......... 11,334 11,334
Average physical occupancy in communities stabilized more than two
years(2)............................................................. 95.0% 94.6%
Average economic occupancy in communities stabilized more than two
years(2)(3).......................................................... 94.0% 94.1%
Average monthly rent per unit in communities stabilized more than two
years(4)............................................................. $ 1,015 $ 996
Capital replacement per unit in communities stabilized more than two
years................................................................ $ 415 $ 399
Funds from operations(5)............................................... $ 68,279 $ 48,151
Weighted average number of shares outstanding assuming conversion of OP
Units................................................................ 38,953 33,191
</TABLE>
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<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------
ACTUAL AS ADJUSTED(6)
-------- ---------------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Total assets....................................................... $900,998 $ 951,025
Total long-term debt............................................... $553,064 $ 537,064
Total liabilities.................................................. $580,654 $ 564,654
Shareholders' equity and minority interest......................... $320,344 $ 386,371
</TABLE>
- ---------------
(1) $(1.46) per share is attributable to minority interest.
(2) A property is stabilized at the earlier of (i) one year after completion of
construction or (ii) when it achieves 95% occupancy.
(3) Economic occupancy is calculated by dividing rental revenues by gross
potential rent (gross rental revenue plus assumed revenue on vacant units at
market rents) for the period.
(4) Average monthly rent per unit is calculated by dividing the average rental
revenue per unit by average economic occupancy.
(5) The Company considers funds from operations ("FFO") a useful measure of
performance for an equity REIT. The Company computes FFO in accordance with
standards established by the National Association of Real Estate Investment
Trusts ("NAREIT"). FFO is defined as net income (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from
debt restructuring and sales of property, plus depreciation and amortization
of real estate assets, and after adjustments for unconsolidated partnerships
and joint ventures. Other REITs may not use this definition of FFO. FFO
should be examined in conjunction with net income as presented in the
Company's consolidated financial statements and footnotes thereto. FFO
should not be considered an alternative to net income as an indication of
the Company's performance and is not indicative of cash available to fund
all cash flow needs. FFO does not represent cash flows from operating,
investing or financing activities as defined by generally accepted
accounting principles.
(6) As adjusted to give effect to the Offering and the Irvine Investment and the
application of the net proceeds thereof as described under "Use of
Proceeds."
After giving effect to the Offering and the Irvine Investment and the
application of the net proceeds therefrom as described in "Use of Proceeds"
based on the Price to Public of $27 1/2, the Company's ratio of
Debt-to-Total-Market-Capitalization (as defined below) would be 30.8%. The
Company's ratio of Debt-to-Total-Market-Capitalization means the ratio of the
Company's total indebtedness to the sum of (i) the aggregate market value of the
outstanding shares of Common Stock, assuming the exchange of all OP Units in the
Operating Partnership into shares of Common Stock and (ii) the Company's total
indebtedness.
"OFF-RANCH" EXPANSION
On February 4, 1997, the Company through the Operating Partnership acquired
for $2.0 million the assets, including options to purchase three apartment
community development sites located in Northern California's Silicon Valley, of
Thompson Residential Company, Inc. ("TRC"), a privately held, Northern
California-based multi-family development company (the "TRC Acquisition"). The
purchase price was paid in 74,523 OP Units based on the average closing price
for the Common Stock for the 10 trading days preceding the closing date. In
addition, if the apartment community to be constructed on the Cupertino
development site referred to below achieves greater than a specified project
yield for the first year following stabilized occupancy, then under the terms of
the acquisition agreement, the Operating Partnership would be required to pay
TRC a portion of the amount in excess of such specified yield, not exceeding
$2.0 million in the aggregate, in cash or, at TRC's option, in additional OP
Units. The OP Units issued or to be issued to TRC are exchangeable for Common
Stock of the Company on a one-for-one basis, subject to certain limitations and
the right of the Company to purchase such OP Units in connection with TRC's
exercise of its right to exchange. The three senior real estate executives at
TRC also joined the Company with primary responsibility for the Company's
"off-Ranch" California operations. See "Management Changes" below. The TRC
Acquisition represents the Company's first strategic investment off the Irvine
Ranch. Through the TRC
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<PAGE> 10
Acquisition and future acquisitions, the Company's intent is to create new
market positions in several of California's fastest growing markets, beginning
with the Silicon Valley and possibly San Diego in the future, that possess
strong rental demographics and economic growth prospects similar to those on the
Irvine Ranch. The Company currently has no commitments or understandings to
acquire any other specific business or assets and there can be no assurance that
the Company will be successful in pursuing any other acquisition opportunity.
The Company expects to begin construction on one of the development sites
acquired in the TRC Acquisition in the third quarter of 1997. Located in
Cupertino, California, at the intersection of Interstate 280 and Wolfe Road in
the center of the Silicon Valley, the proposed 342-unit apartment community is
immediately adjacent to major office and manufacturing facilities, housing such
companies as Tandem Computers Incorporated and Hewlett-Packard Co. It is also
within walking distance of local retail centers, restaurants, a hotel and a
regional mall. As of the date of this Prospectus Supplement, the Company has not
yet determined whether to construct apartment communities on the other two
development sites acquired in the TRC Acquisition.
MANAGEMENT CHANGES
On February 4, 1997, in order to support the Company's "off-Ranch" growth
initiative, the Company's Board of Directors implemented a series of management
changes. Donald Bren, the Company's founder and current chairman, was elected
Chief Executive Officer and President of the Company, assuming responsibility of
all the Company's operations, both on and off the Irvine Ranch. Mr. Bren has
been the Chairman of the Board of The Irvine Company since 1983 and has over 35
years experience in the development, construction and operation of industrial,
commercial and residential properties in California. He replaced Steven P.
Albert, the President, Chief Executive Officer and a director of the Company for
the past two years. In addition, the Company's Board of Directors created two
new senior operating positions. William W. Thompson, a founding partner of TRC,
was elected Senior Vice President, overseeing the Company's off-Ranch California
operations. The second position, responsible for the Company's existing Irvine
Ranch operations, is expected to be filled shortly. Prior to founding TRC, Mr.
Thompson spent 12 years as the northern California partner of Trammell Crow
Residential, where he developed and built more than 3,600 apartment and
condominium units in 15 projects. In addition, Mr. Thompson has 24 years of
experience in the California real estate industry. He holds a bachelor's degree
from Claremont McKenna College and an MBA from Harvard Business School.
In December 1996, the Board of Directors elected James E. Mead, Senior Vice
President, Chief Financial Officer and Secretary of the Company following the
resignation of the Company's former Chief Financial Officer. Mr. Mead had been
Senior Vice President and Treasurer of the Company since January 1994. Prior
thereto, he was Vice President, Corporate Finance at The Irvine Company since
1991. Also in December 1996, the Board of Directors of the Company elected
William E. McFarland a director of the Company to fill the vacancy created by
the resignation of Norman J. Metcalfe who had been a director of the Company
since its formation in 1993. Mr. Metcalfe had also been Vice Chairman and Chief
Financial Officer of The Irvine Company, positions which he also resigned. Mr.
McFarland has been Executive Vice President, Land and Residential Development of
The Irvine Company since 1984 and was responsible for the Company's operations
and development activities prior to the Company's formation in 1993.
RECENT LAND ACQUISITIONS PURSUANT TO THE LAND RIGHTS AGREEMENT
On February 10, 1997, the Company acquired from The Irvine Company a
316-unit development site known as Rancho Santa Fe for approximately $8.4
million. The purchase price was paid through the issuance of 313,439 OP Units
which, subject to certain exceptions and limitations, are exchangeable for
Common Stock of the Company on a one-for-one basis, subject to adjustment.
Pursuant to the terms of such acquisition, a portion of the OP Units are subject
to forfeiture if the apartment community project to be constructed on the site
does not achieve a 10% unleveraged return on costs (as defined in the agreement
relating to the acquisition) for the first twelve months following stabilized
occupancy.
S-8
<PAGE> 11
On December 23, 1996, the Company acquired from The Irvine Company a
207-unit development site known as Santa Rosa II for approximately $6.0 million.
The purchase price was paid through the issuance of 244,857 OP Units which,
subject to certain exceptions and limitations, are also exchangeable for Common
Stock of the Company.
For additional information regarding the Land Rights Agreement, see
"Business and Properties -- Exclusive Land Rights Agreement".
INCREASE IN SIZE OF REVOLVING CREDIT FACILITY
The Company is currently in discussions with its lenders to increase the
size of its unsecured revolving credit facility under its existing terms and
conditions from $175 million to $250 million. There can be no assurance,
however, that the size of the credit facility will be increased. The facility
bears interest at a floating rate of the Eurodollar Rate plus 150 basis points.
The facility matures in November 1997 but at the Company's option may be
converted into a two-year term loan.
DIVIDEND REINVESTMENT AND ADDITIONAL CASH INVESTMENT PLAN
In May 1996, the Company established a Dividend Reinvestment and Additional
Cash Investment Plan pursuant to which holders of the Company's Common Stock may
invest cash distributions and make optional additional cash investments, or
both, in additional shares of Common Stock without incurring brokerage
commissions, fees or charges. To the extent distributions are so reinvested or
additional cash payments are made, The Irvine Company has the right to purchase
additional OP Units or shares of Common Stock to maintain its aggregate economic
interest in the Operating Partnership.
S-9
<PAGE> 12
USE OF PROCEEDS
The net cash proceeds to the Company from the Offering, after deducting
Underwriters' discounts and estimated Offering expenses, are expected to be
approximately $29.7 million ($34.2 million if the Underwriters' over-allotment
option is exercised in full). Proceeds to the Operating Partnership from the
Irvine Investment are expected to be approximately $36.3 million ($41.8 million
if the Irvine Over-allotment Investment is made in full). The Underwriters will
receive no discounts or commissions with respect to the Irvine Investment (or
the Irvine Over-allotment Investment). The Company will contribute the net
proceeds of the Offering to the Operating Partnership in exchange for 1,150,000
OP Units (1,322,500 if the Underwriters' over-allotment option is exercised in
full). Following the Offering and the Irvine Investment, the Company's economic
interest in the Operating Partnership will be 45.0%. It is intended that the net
proceeds from the Offering and the Irvine Investment (a total of $66.0 million,
or $76.0 million if the Underwriters' over-allotment option is exercised in
full, and the related Irvine Over-allotment Investment is made in full) will be
used by the Operating Partnership to retire indebtedness outstanding under the
Operating Partnership's revolving credit facility (which had a balance as of
December 31, 1996 of $16 million with an average interest rate of 7.51% and, as
of February 20, 1997, is expected to have a balance of approximately $8.0
million). The remaining net proceeds of the Offering and the Irvine Investment
will be used for general corporate purposes, including ongoing development
activities on and off the Irvine Ranch and the possible acquisition of
additional properties off the Irvine Ranch. Pending such use, the net proceeds
will be invested in income-producing short-term investments.
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY
The Company's Common Stock is traded on the NYSE under the symbol "IAC." On
February 13, 1997, the last reported sale price of the Common Stock on the NYSE
was $27 1/2 per share. As of December 31, 1996, there were approximately 300
holders of record of the Common Stock. The following table sets forth the
quarterly high and low closing sales prices per share reported on the NYSE and
the distributions declared and paid by the Company during each quarterly period
indicated.
<TABLE>
<CAPTION>
CLOSING SALES
PRICES
--------------- DISTRIBUTIONS
PERIOD HIGH LOW DECLARED AND PAID
------------------------------------------------ ---- ---- -----------------
<S> <C> <C> <C>
1997:
First Quarter (through February 13, 1997)(1).... $27 3/4 $24 7/8 $ --
1996:
Fourth Quarter.................................. $ 25 $22 1/8 $ 0.365
Third Quarter................................... $23 3/8 $20 1/4 $ 0.365
Second Quarter.................................. $20 5/8 $ 19 $ 0.355
First Quarter................................... $ 21 $18 3/4 $ 0.355
1995:
Fourth Quarter.................................. $19 7/8 $16 7/8 $ 0.355
Third Quarter................................... $18 3/4 $17 1/8 $ 0.355
Second Quarter.................................. $17 3/4 $15 3/8 $ 0.340
First Quarter................................... $16 5/8 $15 1/2 $ 0.340
</TABLE>
- ---------------
(1) On February 4, 1997, the Company declared a quarterly distribution of $0.365
per share payable on February 28, 1997 to stockholders of record as of
February 14, 1997. Purchasers of Common Stock in the Offering will not
receive this distribution in respect of the shares of Common Stock offered
hereby. Similarly, The Irvine Company will not receive this distribution
from the Operating Partnership with respect to the OP Units issued pursuant
to the Irvine Investment (or the Irvine Over-allotment Investment).
S-10
<PAGE> 13
The Company currently intends to continue paying regular quarterly
distributions and to distribute amounts sufficient to maintain its status as a
REIT. Distributions are reviewed quarterly by the Board of Directors and future
distributions will depend upon factors deemed relevant by the Board of Directors
including operating performance, cash flow requirements and other needs.
Although the Company intends to continue to make quarterly distributions to its
stockholders, no assurance can be given as to the amounts to be distributed in
the future. Of the distributions declared for 1996, 18% represented a return of
capital to shareholders for tax purposes.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996, and as adjusted to give effect to the Offering and the
Irvine Investment and the application of the net proceeds therefrom of $66.0
million as described under the "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
(UNAUDITED, IN
THOUSANDS)
--------------------
AS
ACTUAL ADJUSTED
-------- --------
<S> <C> <C>
MORTGAGES AND NOTES
Revolving credit facility(1).......................................... $ -- $ --
Tax-exempt mortgage bond financings................................... 330,109 330,109
Conventional mortgage financings...................................... 135,357 135,357
Mortgage notes payable to The Irvine Company.......................... 51,427 51,427
Tax-exempt assessment district debt................................... 21,863 21,863
-------- --------
538,756 538,756
MINORITY INTEREST....................................................... 135,541 171,874
SHAREHOLDERS' EQUITY
Preferred stock, par value of $1.00, 10,000,000 shares authorized,
none issued and outstanding........................................ -- --
Common stock, par value of $0.01 per share, 150,000,000 shares
authorized, 18,483,856 shares issued and outstanding, 19,633,856
shares issued and outstanding, as adjusted(2)...................... 185 196
Additional paid-in capital............................................ 200,883 230,566
Retained earnings (deficit)........................................... (21,136) (21,136)
-------- --------
179,932 209,626
-------- --------
TOTAL CAPITALIZATION.................................................... $854,229 $920,256
======== ========
</TABLE>
- ---------------
(1) As of December 31, 1996, the revolving credit facility had a balance of $16
million, and, as of February 20, 1997, is expected to have a balance of
approximately $8.0 million, all of which will be repaid with proceeds from
the Offering and the Irvine Investment.
(2) Excludes as of September 30, 1996 (i) 22,041,148 shares of Common Stock
issuable upon exchange of OP Units, including OP Units issued with respect
to the Irvine Investment and the Irvine Over-allotment Investment, based on
an exchange ratio of one share of Common Stock for each OP Unit, (ii)
315,000 restricted stock unit awards and (iii) options to purchase 544,000
shares of Common Stock.
S-11
<PAGE> 14
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following Selected Consolidated Financial Information (other than
statistical and property data) has been derived from the Company's or the
Company's predecessor (the "Predecessor") consolidated financial statements.
Information as of December 31, 1995 and 1994 and for each of the years in the
three year period ended December 31, 1995 has been derived from the Company's
audited financial statements incorporated by reference herein. Information for
the year ended December 31, 1993 is on a combined and consolidated historical
basis for the Company and the Predecessor. Information at December 31, 1993 has
been derived from the Company's audited financial statements not incorporated by
reference herein and information at December 31, 1992 and 1991 and for each of
years in the two year period ended December 31, 1992 has been derived from the
Predecessor's audited financial statements not incorporated by reference herein.
Information at September 30, 1996 and for the respective nine month periods
ended September 30, 1996 and 1995 has been derived from the Company's unaudited
consolidated financial statements incorporated by reference herein and which, in
the opinion of the Company, reflect all adjustments considered necessary for a
fair presentation. Results for the nine month period ended September 30, 1996
are not necessarily indicative of results for the full year. All such financial
information is qualified in its entirety by reference to, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements (including
Notes thereto) incorporated by reference in this Prospectus Supplement. See
"Incorporation of Certain Information by Reference" herein.
See "Recent Developments" for information concerning preliminary 1996
results.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1996 1995 1995 1994 1993(1) 1992 1991
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PROPERTY AND PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Rental income...................... $114,000 $ 98,148 $133,678 $127,338 $123,101 $119,097 $110,424
Other income....................... 2,317 1,624 2,079 1,585 1,659 2,097 1,825
Interest income.................... 419 310 411 1,313 60
-------- -------- -------- -------- -------- -------- --------
116,736 100,082 136,168 130,236 124,820 121,194 112,249
-------- -------- -------- -------- -------- -------- --------
Expenses:
Property expenses.................. 24,903 23,462 31,761 33,105 34,057 35,685 34,785
Real estate taxes.................. 10,023 8,982 12,002 11,786 10,729 9,921 9,359
Property management fees........... 3,316 2,868 3,893 3,800 3,881 4,393 4,091
Interest expense, net.............. 22,378 19,430 25,894 26,827 50,248 49,154 43,960
Amortization of deferred financing
costs............................ 1,975 7,782 8,510 15,942 3,012 1,474 1,283
Depreciation and amortization...... 20,346 16,815 23,143 21,055 20,002 19,808 19,507
General and administrative......... 4,890 4,418 5,909 5,442 3,278 2,359 2,584
-------- -------- -------- -------- -------- -------- --------
87,831 83,757 111,112 117,957 125,207 122,794 115,569
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
item and minority/predecessor
interest in income (loss)........ 28,905 16,325 25,056 12,279 (387) (1,600) (3,320)
Extraordinary item -- charge
related to debt extinguishment... (23,427) (23,427) (12,487)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before minority
interest......................... 28,905 (7,102) 1,629 12,279 (12,874) (1,600) (3,320)
Minority/predecessor interest in
income (loss).................... 15,757 (11,597) (6,836) 5,006 (12,989) (1,600) (3,320)
-------- -------- -------- -------- -------- -------- --------
Net Income......................... $ 13,148 $ 4,495 $ 8,465 $ 7,273 $ 115 $ 0 $ 0
========= ========= ========= ========= ========= ========= =========
</TABLE>
S-12
<PAGE> 15
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1996 1995 1995 1994 1993(1) 1992 1991
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PROPERTY AND PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
SHARE DATA:
Weighted average number of shares
outstanding...................... 17,474 12,805 13,856 11,800 11,800
Income after minority interest and
before extraordinary item per
share............................ $ 0.75 $ 0.60 $ 0.84 $ 0.62 $ 0.04
Extraordinary item per share(2).... $ (1.69) $ (1.06)
Net income per share............... $ 0.75 $ 0.35 $ 0.61 $ 0.62 $ 0.01
Cash distributions declared and
paid per share................... $ 1.075 $ 1.035 $ 1.39 $ 1.11
STATISTICAL AND PROPERTY DATA:
Total stabilized properties
(at period end)(3)............... 47 43 43 43 42 42 40
Apartment units (at period end).... 13,541 12,334 12,776 11,358 11,334 10,952 10,616
Average units in stabilized
properties(3).................... 11,786 11,334 11,334 11,334 10,799 10,446 9,990
Weighted average physical occupancy
in stabilized properties(8)...... 94.8% 94.5% 94.6% 95.6% 96.3% 96.2% 95.7%
Weighted average economic occupancy
on stabilized properties(4)(8)... 93.8% 94.1% 94.1% 95.1% 96.1% 95.9% 95.0%
Weighted average monthly rent per
unit(5)(8)....................... $ 1,012 $ 994 $ 996 $ 981 $ 963 $ 950 $ 937
Capital replacements per
unit(6)(8)....................... $ 247 $ 260 $ 399 $ 490 $ 482 $ 458 $ 570
Funds from operations(7)........... $ 49,145 $ 33,104 $ 48,151 $ 33,286
Weighted average number of shares
outstanding assuming conversion
of OP Units...................... 38,410 31,807 33,191 30,247
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------------------------------------
1996 1995 1994 1993 1992 1991
-------------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Total assets............................. $886,865 $853,230 $757,240 $740,120 $654,694 $655,343
Total long-term debt..................... 538,756 563,286 540,689 513,943 555,491 517,868
Total liabilities........................ 571,392 588,664 566,191 527,776 564,420 529,788
Shareholders' equity and minority
interest/predecessor equity............ 315,473 264,566 191,049 212,344 90,274 125,555
</TABLE>
- ---------------
(1) Includes the operations of the Predecessor through December 7, 1993 and of
the Company from December 8 through December 31, 1993.
(2) $(1.46) per share is attributable to minority interest.
(3) A property is stabilized at the earlier of (i) one year after completion of
construction or (ii) when it achieves 95% occupancy.
(4) Economic occupancy is calculated by dividing rental revenues by gross
potential rent (gross rental revenue plus assumed revenue on vacant units at
market rents) for the period.
(5) Average monthly rent per unit is calculated by dividing the average rental
revenue per unit by average economic occupancy.
(6) Data for the years ended December 31, 1992 and 1991 exclude capital
replacements totaling $534 and $887, respectively, relating to a major
renovation program at the Company's Promontory Point property due to the
nonrecurring nature of the program.
(7) The Company considers funds from operations ("FFO") a useful measure of
performance for an equity REIT. The Company computes FFO in accordance with
standards established by the National Association of Real Estate Investment
Trusts ("NAREIT"). FFO is defined as net income (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from
debt restructuring and sales of property, plus depreciation and amortization
of real estate assets, and after adjustments for unconsolidated partnerships
and joint ventures. Other REITs may not use this definition of FFO. FFO
should be examined in conjunction with net income as presented in the
Company's consolidated financial statements and footnotes thereto. FFO
should not be considered an alternative to net income as an indication of
the Company's performance and is not indicative of cash available to fund
all cash flow needs. FFO does not represent cash flows from operating,
investing or financing activities as defined by generally accepted
accounting principles.
(8) With respect to each period presented for communities that have been
stabilized for less than one year, reflects data from the date of stabilized
occupancy.
S-13
<PAGE> 16
BUSINESS AND PROPERTIES
EXISTING COMMUNITIES
The Existing Communities consist of 48 two- and three-story garden
apartment communities containing 13,541 units. The Company believes that the
Existing Communities are well maintained and have no material deferred
maintenance requirements or current need for major renovations. The average age
of the Existing Communities is approximately 12 years. The oldest of the
Existing Communities was completed in 1969, and 29 of the 48 Existing
Communities, totaling 8,873 units or approximately 65.5% of the unit portfolio,
have been completed since January 1, 1985. The number of units per apartment
community ranges from 58 units to 880 units, with an average of 282 units. Over
88% of the units are one- or two-bedroom apartments. The apartment units average
940 square feet. Of the Existing Communities, 43, representing 11,334 units, had
been stabilized prior to January 1, 1996 and for the year ended December 31,
1996, these 43 Existing Communities had an average physical occupancy rate of
95% and an average monthly rent per unit of $1,015. The five remaining Existing
Communities were in lease-up throughout 1995 and achieved stabilized occupancy
during 1996.
All of the Existing Communities offer apartment residents numerous
amenities and include extensive landscaping. More than 85% of the Existing
Communities contain a swimming pool, spa, air conditioning and covered parking.
Additional amenities may include a fitness center, recreational room, sauna and
tennis courts. Each apartment unit includes a patio, entry porch or balcony.
Many apartment units offer one or more of certain additional features, such as
vaulted ceilings, fireplaces and washers and dryers.
EXISTING COMMUNITY INFORMATION
<TABLE>
<CAPTION>
1996
AVERAGE
MONTHLY 1996
AVERAGE RENTAL AVERAGE
YEAR NUMBER UNIT SIZE RATE ECONOMIC
COMMUNITY COMPLETED OF UNITS (SQUARE FEET) PER UNIT OCCUPANCY
- ------------------------------------------------ ---------- ------------ -------------- -------- ---------
<S> <C> <C> <C> <C> <C>
PROPERTIES STABILIZED OVER TWO YEARS:
IRVINE, CA
Amherst Court................................. 1991 162 724 $ 976 91.3%
Berkeley Court................................ 1986 152 828 1,032 89.7%
Cedar Creek................................... 1985 176 811 897 93.9%
Columbia Court................................ 1984 58 852 975 92.6%
Cornell Court................................. 1984 109 894 1,043 92.3%
Cross Creek................................... 1985 136 935 959 95.3%
Dartmouth Court............................... 1986 294 896 1,032 89.8%
Deerfield..................................... 1975/1983 192/96 849 879 94.1%
Harvard Court................................. 1986 112 826 978 91.9%
Northwood Park................................ 1985 168 944 907 94.2%
Northwood Place............................... 1986 604 954 907 93.8%
Orchard Park.................................. 1982 60 971 1,009 99.9%
Park West..................................... 1970/71/72 256/276/348 1,004 934 92.6%
Parkwood...................................... 1974 296 886 921 92.3%
Rancho San Joaquin............................ 1976 368 896 975 95.8%
San Carlo..................................... 1989 354 1,074 1,158 95.8%
San Leon...................................... 1987 248 951 1,006 93.3%
San Marco..................................... 1988 426 923 950 94.8%
San Marino.................................... 1986 200 926 981 93.9%
San Mateo..................................... 1990 283 720 919 94.9%
San Paulo..................................... 1993 382 1,001 934 94.0%
San Remo...................................... 1986/1988 136/112 963 968 93.2%
Stanford Court................................ 1985 320 799 951 93.4%
The Parklands................................. 1983 121 794 1,135 99.8%
Turtle Rock Canyon............................ 1991 217 1,024 1,218 96.5%
</TABLE>
S-14
<PAGE> 17
<TABLE>
<CAPTION>
1996
AVERAGE
MONTHLY 1996
AVERAGE RENTAL AVERAGE
YEAR NUMBER UNIT SIZE RATE ECONOMIC
COMMUNITY COMPLETED OF UNITS (SQUARE FEET) PER UNIT OCCUPANCY
- ------------------------------------------------ ---------- ------------ -------------- -------- ---------
<S> <C> <C> <C> <C> <C>
IRVINE, CA (CONTINUED)
Turtle Rock Vista............................. 1976/1977 112/140 1,155 $1,161 95.9%
Windwood Glen................................. 1985 196 878 916 95.4%
Windwood Knoll................................ 1983 248 906 899 94.8%
Woodbridge Oaks............................... 1983 120 976 1,072 99.8%
Woodbridge Pines.............................. 1976 220 872 935 93.5%
Woodbridge Villas............................. 1982 258 867 919 94.0%
Woodbridge Willows............................ 1984 200 894 937 95.0%
---- ----- -------- ---
Subtotal or Weighted Average................ 8,156 923 $ 972 94.1%
---- ----- -------- ---
NEWPORT BEACH, CA
Bayport....................................... 1971 104 867 $ 991 96.5%
Bayview....................................... 1971 64 1,154 1,208 95.6%
Baywood....................................... 1973/1984 320/68 1,074 1,106 95.4%
Mariner Square................................ 1969 114 1,104 1,109 94.4%
Newport North................................. 1986 570 947 1,058 93.9%
Promontory Point.............................. 1974 520 1,056 1,566 91.6%
---- ----- -------- ---
Subtotal or Weighted Average................ 1,760 1,020 $1,224 93.5%
---- ----- -------- ---
TUSTIN, CA
Rancho Alisal................................. 1988/1991 344/12 967 $ 956 92.7%
Rancho Maderas................................ 1989 266 939 1,003 93.6%
Rancho Mariposa............................... 1992 238 856 973 93.4%
Rancho Tierra................................. 1989 252 1,031 1,052 94.8%
Sierra Vista.................................. 1992 306 852 1,028 93.8%
---- ----- -------- ---
Subtotal or Weighted Average................ 1,418 930 $1,000 93.6%
---- ----- -------- ---
TOTAL PORTFOLIO STABILIZED OVER TWO YEARS OR
WEIGHTED AVERAGE.............................. 11,334 939 $1,015 94.0%
----- ----- -------- ---
TOTAL PROPERTIES STABILIZED LESS THAN TWO YEARS:
Villa Coronado................................ 1996 513 932 $1,170 90.2%
Santa Rosa.................................... 1996 368 895 1,110 93.1%
Santa Clara................................... 1996 378 378 1,181 94.3%
Rancho Monterey............................... 1996 436 933 1,176 91.8%
Newport Ridge................................. 1996 512 975 1,376 89.5%
----- -------- ---
TOTAL PORTFOLIO STABILIZED LESS THAN TWO YEARS
OR WEIGHTED AVERAGE........................... 2,207 943 $1,169 92.2%
---- ----- -------- ---
TOTAL STABILIZED PORTFOLIO OR WEIGHTED
AVERAGE....................................... 13,541 940 $1,025 93.8%
============= ======== =========
</TABLE>
S-15
<PAGE> 18
EXCLUSIVE LAND RIGHTS AGREEMENT
The Company and The Irvine Company are parties to the Land Rights Agreement
pursuant to which, through July 31, 2020, the Company has the exclusive right,
but not the obligation, to acquire all land sites to be entitled for residential
use and designated by The Irvine Company as ready for apartment community
development in accordance with The Irvine Company's Master Plan. The
determination to exercise an option with respect to a site is made solely by the
Independent Directors Committee of the Company's Board of Directors. Under this
Agreement, the Company has purchased 10 apartment community land sites since the
Initial Offering, five of which are now Existing Communities and five of which
are now the Communities Under Construction. Under the terms of the Land Rights
Agreement, through July 31, 2000, the purchase price for any apartment community
sites acquired may be paid with either cash, Common Stock or OP Units, at the
option of the Company. After July 31, 2000, the choice of consideration will
revert to The Irvine Company. In no event shall the purchase price for any
apartment community land site exceed 95% of the value of such site as determined
by independent appraisals. In addition, the purchase price for apartment sites
encompassing the first 1,800 apartment units the Company developed starting in
mid-1995 were and will be set at an amount such that each project's budgeted pro
forma unleveraged return on costs for the first 12 months following stabilized
occupancy will be between 10.0% and 10.5%. The land sites for the five
Communities Under Construction were purchased under this arrangement.
Accordingly, as of the date hereof future apartment sites encompassing 505
apartment units remain to be purchased under this arrangement. Independent
appraisals will be obtained by each of the Company and The Irvine Company for
all future sites, prior to the Independent Directors Committee determining
whether the Company will exercise its right to purchase a land site. If the
Company elects not to exercise its option for any site, the Company will
thereafter have a right of first refusal on the sale of such site to a third
party if the terms of such sale are more favorable than those offered to the
Company. The determination to exercise an option or the right of first refusal
under the Land Rights Agreement with respect to any site will be made solely by
a majority of the Independent Directors Committee.
Pursuant to the Land Rights Agreement, The Irvine Company and Mr. Bren have
agreed not to directly or indirectly acquire or develop, or acquire an equity
ownership interest in any entity that has an ownership interest in, any
apartment community whether on or off the Irvine Ranch. This prohibition
terminates on July 31, 2020. The Irvine Company and Mr. Bren remain prohibited
from engaging in any such activity off the Irvine Ranch until the date on which
both of the following conditions are satisfied: (i) no nominee of The Irvine
Company is a member of the Company's Board of Directors and (ii) The Irvine
Company and certain related persons beneficially own less than 20% of the
outstanding Common Stock in the aggregate (including for these purposes Common
Stock issuable upon exchange of OP Units subject to the Ownership Limit in the
Company's Articles of Incorporation).
The Land Rights Agreement may be terminated earlier upon the occurrence of
certain events not within the control of The Irvine Company including (i) the
failure of the stockholders to elect as directors of the Company the number of
directors which The Irvine Company is entitled to nominate, (ii) the occurrence
of a vacancy on the Board of Directors of a member designated by The Irvine
Company which is not filled by a person designated by The Irvine Company and
(iii) the taking of certain actions requiring approval of more than a majority
of the Board of Directors without the consent of The Irvine Company.
S-16
<PAGE> 19
MANAGEMENT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
- -------------------------- --- -------------------------------------------------------
<S> <C> <C>
Donald Bren(1)............ 64 Chairman of the Board, Chief Executive Officer and
President
James E. Mead............. 37 Senior Vice President, Chief Financial Officer and
Secretary
Tyler H. Rose............. 36 Senior Vice President and Treasurer
William W. Thompson....... 51 Senior Vice President, Off-Ranch Activities
Hank Baker................ 48 Vice President, Marketing
Bruce N. Dorfman.......... 36 Vice President, Development
Shawn Howie............... 41 Vice President and Controller
Robert J. Hughes.......... 46 Vice President, Construction
Richard E. Lamprecht...... 37 Vice President, Development
David A. McAllister....... 62 Vice President, Construction
Scott A. Reinert.......... 38 Vice President, Asset Management
Anthony M. Frank(2)(4).... 65 Director
John F. 58 Director
Grundhofer(2)(4)........
Bowen H. McCoy(1)(2)(3)... 59 Director
William F. McFarland(1)... 56 Director
Michael D. McKee(1)....... 51 Director
Jack W. Peltason(2)(4).... 73 Director
John F. Seymour, 59 Director
Jr.(2)(3) ..............
</TABLE>
- ---------------
(1) Member of Executive Committee
(2) Member of Independent Directors Committee
(3) Member of Compensation Committee
(4) Member of Audit Committee
Pursuant to the Company's Articles of Incorporation and Amended Bylaws (the
"Bylaws") a majority of the Directors of the Company must be persons who are not
(i) affiliates, or an officer, director or employee, of The Irvine Company or
(ii) the spouse, ancestor and lineal descendant or brother or sister of Mr. Bren
("Unaffiliated Directors").
In accordance with the Company's Bylaws, the Board of Directors has
established an Independent Directors Committee which is responsible for
approving all transactions between (i) the Company or the Operating Partnership
and (ii) The Irvine Company and affiliates of The Irvine Company or Mr. Bren,
including, but not limited to, whether or not the Company shall exercise any of
its rights under the Land Rights Agreement and the terms of any agreement
between the Company or the Operating Partnership or The Irvine Company or
affiliates of The Irvine Company or Mr. Bren. In addition, the Independent
Directors Committee is responsible for selecting the independent appraiser on
behalf of the Company pursuant to the Land Rights Agreement. Pursuant to the
Company Bylaws, the Independent Directors Committee consists of at least five
persons, each of whom is an Unaffiliated Director and a person who has not been
employed by The Irvine Company or any of its subsidiaries within the five years
preceding such person's election as a director of the Company. The Independent
Directors Committee has also retained an independent real estate consultant to
advise it with respect to land acquisitions under the Land Rights Agreement.
S-17
<PAGE> 20
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, has severally agreed to
purchase from the Company, the number of shares of Common Stock set forth
opposite its name below. Pursuant to the Underwriting Agreement, the
Underwriters are committed to purchase all of such shares of Common Stock if any
are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................. 287,500
Dean Witter Reynolds Inc.................................................. 287,500
Montgomery Securities..................................................... 287,500
J.P. Morgan Securities Inc................................................ 287,500
---------
Total........................................................ 1,150,000
=========
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the shares of Common Stock to the public at the public offering price set
forth on the cover page of this Prospectus Supplement, and to certain dealers at
such price less a concession not in excess of $.80 per share of Common Stock.
The Underwriters may allow, and such dealers may reallow, a discount not in
excess of $.10 per share of Common Stock on sales to certain other dealers.
After the Offering, the public offering price, concession and discount may be
changed.
The Company has granted the Underwriters an option exercisable for 30 days
after the date hereof to purchase up to 172,500 additional shares of Common
Stock to cover over-allotments, if any, at the public offering price, less the
underwriting discount set forth on the cover page of this Prospectus Supplement.
If the Underwriters exercise this option, each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the foregoing table bears to the number of shares of
Common Stock initially offered hereby.
In the Underwriting Agreement, the Company and the Operating Partnership
have agreed to indemnify the several 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.
The Company, its directors and executive officers and The Irvine Company
have also agreed, with limited exceptions, including the issuance of Common
Stock under employee and director stock plans and the issuance of Common Stock
or OP Units in connection with the acquisition of any land site, not to offer,
sell, contract to sell, or otherwise dispose of any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
or OP Units for a period of 90 days after the date of this Prospectus Supplement
without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
S-18
<PAGE> 21
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, which have been filed with the Commission, are
hereby incorporated by reference:
1. Annual Report on Form 10-K of the Company for the year ended
December 31, 1995, as amended on Form 10-K/A filed February 11,
1997;
2. Quarterly Reports on Form 10-Q for the quarters ended March 31,
1996, June 30, 1996 and September 30, 1996, in each case as amended
on Form 10-Q/A filed February 11, 1997;
3. Description of the Company's Common Stock contained in a
Registration Statement of the Company on Form 8-B dated April 30,
1996 and declared effective as of May 2, 1996; and
4. Current Report on Form 8-K dated July 1, 1996.
All documents filed by the Company after the date of this Prospectus
Supplement pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act,
prior to the termination of the offering of the Common Stock offered hereby,
shall be deemed to be incorporated herein by reference and to be a part hereof
from the date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus Supplement to the
extent that a statement contained herein (or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein)
modifies or supersedes such statement. Any statements so modified or superseded
shall be deemed to constitute a part of this Prospectus Supplement, except as so
modified or superseded.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus Supplement is delivered,
upon written or oral request of such person, a copy of any or all of the
documents referred to above which have been or may be incorporated by reference
in this Prospectus Supplement (other than certain exhibits to such documents).
Requests for such documents should be directed to Irvine Apartment Communities,
Inc., 550 Newport Center Drive, Suite 300, Newport Beach, California 92660,
Attention: James E. Mead (Telephone: (714) 720-5500).
EXPERTS
The consolidated and combined financial statements of the Company included
in the Annual Report on Form 10-K/A of the Company for the year ended December
31, 1995 have been audited by Ernst & Young LLP, independent accountants, as
stated in its report dated January 31, 1996 and are incorporated herein by
reference in reliance upon the report of such firm, which report is given upon
their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Piper & Marbury L.L.P., Baltimore, Maryland. Certain
legal matters relating to the Offering will be passed upon for the Company by
Davis Polk & Wardwell, New York, New York and for the Underwriters by Latham &
Watkins, Costa Mesa, California.
S-19
<PAGE> 22
PROSPECTUS
$160,731,250
IRVINE APARTMENT COMMUNITIES, INC.
DEBT SECURITIES, PREFERRED STOCK, COMMON STOCK
AND
WARRANTS TO PURCHASE THE ABOVE SECURITIES
------------------------
Irvine Apartment Communities, Inc. (the "Company") may offer and issue from
time to time (i) its debt securities (the "Debt Securities"), (ii) shares of its
Preferred Stock, par value $1.00 per share (the "Preferred Stock"), (iii) shares
of its Common Stock, par value $.01 per share (the "Common Stock"), or (iv)
warrants to purchase Debt Securities, Preferred Stock or Common Stock (the
"Warrants"). The Debt Securities, Preferred Stock, Common Stock and Warrants are
herein collectively referred to as the "Securities". The Securities may be
offered in one or more separate classes or series, in amounts, at prices and on
terms to be determined by market conditions at the time of sale and to be set
forth in a supplement or supplements to this Prospectus (a "Prospectus
Supplement"). Any Securities may be offered with other Securities or separately.
Debt Securities or Preferred Stock may be convertible into shares of Common
Stock. The aggregate offering price of the Securities will not exceed
$160,731,250.
Certain terms of any Debt Securities in respect of which this Prospectus is
being delivered will be set forth in the accompanying Prospectus Supplement
including, without limitation, the specific designation (including whether such
Debt Securities are senior or subordinated and whether such Debt Securities are
convertible), aggregate principal amount, purchase price, maturity, interest
rate (which may be fixed or variable) and time of payment of interest (if any),
terms (if any) for the subordination, redemption or conversion thereof, listing
(if any) on a securities exchange and any other specific terms of the Debt
Securities. Certain terms of any Preferred Stock in respect of which this
Prospectus is being delivered will be set forth in the accompanying Prospectus
Supplement including, without limitation, the designation, number of shares,
liquidation preference, purchase price, dividends, voting, redemption and
conversion provisions and any listing on a securities exchange. Certain terms of
any Warrants in respect of which this Prospectus is being delivered will be set
forth in the accompanying Prospectus Supplement, including the specific
designation, number, duration, purchase price and terms thereof, any listing of
the Warrants or the underlying securities on a securities exchange and any other
terms in connection with the offering, sale and exercise of the Warrants, as
well as the terms on which and the securities for which such Warrants may be
exercised. In addition, terms of the Securities may include limitations on
direct and beneficial ownership and restrictions on transfer of the Securities,
in each case as may be appropriate to preserve the status of the Company as a
real estate investment trust for federal income tax purposes.
To ensure that the Company maintains its qualification as a real estate
investment trust ("REIT"), ownership of Common Stock by any person (other than
The Irvine Company and certain related persons) is, with certain exceptions,
limited to 7.4% of the outstanding shares. The Common Stock is listed on the New
York Stock Exchange and the Pacific Stock Exchange under the trading symbol
"IAC".
See "Risk Factors" in the Prospectus Supplement for a description of
certain factors that should be considered by purchasers of the Securities
offered hereby.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The Securities may be sold on a negotiated or competitive bid basis to or
through underwriters or dealers designated from time to time or to other
purchasers directly or through agents designated from time to time. Certain
terms of the offering and sale of the Securities, including, where applicable,
the names of the underwriters, dealers or agents, if any, the principal amount
or number of shares or Warrants to be purchased, the purchase price of the
Securities and the proceeds to the Company from such sale, and any applicable
commissions, discounts and other items constituting compensation of such
underwriters, dealers or agents, will also be set forth in the accompanying
Prospectus Supplement.
THE DATE OF THIS PROSPECTUS IS MAY 8, 1996.
<PAGE> 23
IN CONNECTION WITH AN OFFERING, THE UNDERWRITERS FOR SUCH OFFERING MAY
OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE
OF THE SECURITIES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE,
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained or incorporated by
reference in this Prospectus or any Prospectus Supplement, and, if given or
made, such information or representation must not be relied upon as having been
authorized by the Company or by any underwriter, agent or dealer. This
Prospectus and any Prospectus Supplement shall not constitute an offer to sell
or a solicitation of an offer to buy any of the Securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction. Neither the delivery of this Prospectus and
any Prospectus Supplement nor any sale made thereunder shall, under any
circumstances, create any implication that the information therein is correct as
of any time subsequent to the date thereof.
------------------------
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 and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 or at its Regional Offices located at Suite
1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661 and at Seven World Trade Center, 13th Floor, New York, New York 10048, and
copies of such material can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company's Common Stock is listed on the New York Stock Exchange, Inc. (the
"New York Stock Exchange") and the Pacific Stock Exchange, Inc. (the "Pacific
Stock Exchange"). In addition, reports, proxy statements and other information
concerning the Company can be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005, at the offices of the
Pacific Stock Exchange at 301 Pine Street, San Francisco, California 94104 or on
the Internet at http://www.sec.gov.
This Prospectus constitutes a part of Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") filed with the Commission under the Securities Act of 1933, as
amended (the "Securities Act"). This Prospectus omits certain of the information
set forth in such Registration Statement in accordance with the rules and
regulations of the Commission. Reference is hereby made to such Registration
Statement and to the exhibits relating thereto for further information with
respect to the Company and the Securities. Any statements contained herein
concerning the provisions of any document 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 or otherwise filed with the Commission for a more
complete description of the matter involved. Each such statement is qualified in
its entirety by such reference.
2
<PAGE> 24
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, which have been filed with the Commission, are
hereby incorporated by reference:
1. Annual Report on Form 10-K of the Company for the year ended
December 31, 1995; and
2. Description of the Company's Common Stock contained in a
Registration Statement of the Company on Form 8-B dated April 30,
1996 and declared effective as of May 2, 1996.
All documents filed by the Company after the date of this Prospectus
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to
the termination of the offering of the Securities offered hereby, shall be
deemed to be incorporated herein by reference and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein (or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein) modifies or
supersedes such statement. Any statements so modified or superseded shall be
deemed to constitute a part of this Prospectus, except as so modified or
superseded.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon written
or oral request of such person, a copy of any or all of the documents referred
to above which have been or may be incorporated by reference in this Prospectus
(other than certain exhibits to such documents). Requests for such documents
should be directed to Irvine Apartment Communities, Inc., 550 Newport Center
Drive, Suite 300, Newport Beach, California 92660, Attention: James E. Mead
(Telephone: (714) 720-5500).
3
<PAGE> 25
THE COMPANY
The Company is a self-administered equity real estate investment trust
engaged in the development and operation of apartment communities on the Irvine
Ranch in Orange County, California. The Company was formed in December 1993 to
continue and expand the apartment community business of The Irvine Company, a
real estate and community development company. At March 31, 1996 the Company had
a 45.4% general partnership interest in Irvine Apartment Communities, L.P. (the
"Operating Partnership") and was its sole managing general partner. At such
date, The Irvine Company and certain of its subsidiaries held a 54.6% limited
partnership interest in the Operating Partnership and were its only limited
partners. The Operating Partnership's management and operating decisions are
under the unilateral control of the Company.
At March 31, 1996, the Operating Partnership owned and operated 11,334
units in 43 apartment communities. The units had an average economic occupancy
for the quarter ended March 31, 1996 of 93.4%. The Company also had 2,734 units
in seven additional apartment communities under construction or lease-up, with
1,850 units completed at March 31, 1996 (together with completed communities,
the "Properties"). All of the Properties are located on the Irvine Ranch. Until
July 31, 2020, the Company has the exclusive right, but not the obligation, to
acquire land from The Irvine Company for development of additional apartment
communities on the Irvine Ranch. The developed portion of the Irvine Ranch,
which borders approximately six miles of the Pacific Ocean, includes significant
parts of the cities of Irvine, Newport Beach and Tustin. The Irvine Ranch has
been developed over the past 30 years in accordance with an original master plan
and is now one of the major commercial, industrial, retail and residential
centers in Southern California.
The Company was originally incorporated in Delaware in 1993. On May 2, 1996
the Company reincorporated in Maryland. Such reincorporation did not result in
any change in the Company's business, assets or liabilities or have any impact
on the Company's status as a real estate investment trust. The reincorporation
was accounted for as a pooling of interests under generally accepted accounting
principles.
The Company's executive offices are located at 550 Newport Center Drive,
Newport Beach, California 92660 and its telephone number is (714) 720-5500.
USE OF PROCEEDS
Unless otherwise set forth in the applicable Prospectus Supplement,
proceeds from the sale of the Securities will be used by the Company for general
corporate purposes, which may include the development of new apartment
communities and the repayment of existing indebtedness. Proceeds from the sale
of Securities initially may be temporarily invested in short-term securities.
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the consolidated ratios of earnings to fixed
charges for the Company and for the predecessor to the Company prior to December
8, 1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993 1992
---- ---- ---- ----
<S> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges.............. 1.44x 1.25x .99 x .96 x
</TABLE>
For the purpose of calculating the ratio of earnings to fixed charges,
earnings consist of net earnings before income taxes, extraordinary items,
minority/predecessor interest income and fixed charges. Fixed charges consist of
interest expense, capitalized interest and amortization of deferred financing
costs.
Prior to completion of the Company's initial public offering in December
1993, the predecessor of the Company operated in a highly leveraged manner. As a
result, although the Company and the predecessor have historically generated
positive net cash flow, the financial statements of the predecessor show net
losses for the periods prior to December 8, 1993. Consequently, the computation
of the ratio of earnings to fixed charges for such periods indicate that
earnings were inadequate to cover fixed charges by approximately $0.6 million,
$2.2 million and $5.8 million for the years ended December 31, 1993, 1992 and
1991, respectively.
4
<PAGE> 26
DESCRIPTION OF THE DEBT SECURITIES
The following sets forth certain general terms and provisions of the
indentures under which the Debt Securities are to be issued. The particular
terms of the Debt Securities will be set forth in a Prospectus Supplement
relating to such Debt Securities.
The Debt Securities will represent unsecured general obligations of the
Company, unless otherwise provided in the Prospectus Supplement. As indicated in
the applicable Prospectus Supplement, the Debt Securities will either be senior
debt, senior to all future subordinated indebtedness of the Company and pari
passu with other current and future unsecured, unsubordinated indebtedness of
the Company or, in the alternative, subordinated debt, subordinate in right of
payment to current and future senior debt and pari passu with other future
subordinated indebtedness of the Company. The Debt Securities will be issued
under one or more indentures to be executed by the Company and one or more
trustees (each a "Trustee"). The Indentures will be 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 are adopted from time to time
(each an "Indenture" and collectively, the "Indentures"). The following summary
of certain provisions of the Indentures does not purport to be complete and is
subject to, and qualified in its entirety by, reference to all the provisions of
the Indentures, including the definitions therein of certain terms. Wherever
particular sections or defined terms of the Indentures are referred to, it is
intended that such sections or defined terms shall be incorporated herein by
reference.
GENERAL
The Indentures will not limit the amount of Debt Securities which may be
issued thereunder. Reference is made to the Prospectus Supplement for the
following terms of the Debt Securities offered pursuant thereto: (i) designation
(including whether they are senior debt or subordinated debt and whether such
debt is convertible), aggregate principal amount, purchase price and
denomination; (ii) the date of maturity; (iii) interest rate or rates (or method
by which such rate will be determined), if any; (iv) the dates on which any such
interest will be payable; (v) the place or places where the principal of and
interest, if any, on the Debt Securities will be payable; (vi) any redemption or
sinking fund provisions; (vii) any rights of the holders of Debt Securities
(each a "Holder") to convert the Debt Securities into other securities or
property of the Company; (viii) the terms, if any, on which such Debt Securities
will be subordinate to other debt of the Company; (ix) if other than the
principal amount thereof, the portion of the principal amount of the Debt
Securities which will be payable upon declaration of acceleration of the
maturity thereof or provable in bankruptcy; (x) any Events of Default in
addition to or in lieu of those described herein and remedies therefor; (xi) any
trustees, authenticating or paying agents, transfer agents or registrars or any
other agents with respect to the Debt Securities; (xii) listing (if any) on a
securities exchange; (xiii) whether such Debt Securities will be certificated or
in book-entry form; and (xiv) any other specific terms of the Debt Securities,
including any additional events of default or covenants provided for with
respect to Debt Securities, and any terms which may be required by or advisable
under United States laws or regulations.
Debt Securities may be presented for exchange or transfer in the manner, at
the places and subject to the restrictions set forth in the Debt Securities and
the Prospectus Supplement. Such services will be provided without charge, other
than any tax or other governmental charge payable in connection therewith, but
subject to the limitations provided in the Indentures.
Debt Securities will bear interest at a fixed rate or a floating rate. Debt
Securities bearing no interest or interest at a rate which, at the time of
issuance, is below the prevailing market rate, will be sold at a discount below
its stated principal amount. Special United States federal income tax
considerations applicable to any such discounted Debt Securities or to any Debt
Securities issued at par which is treated as having been issued at a discount
for United States income tax purposes will be described in the relevant
Prospectus Supplement.
The Indentures will not contain any covenant or other specific provision
affording protection to Holders of the Debt Securities in the event of a highly
leveraged transaction or a change in control of the Company, except to the
limited extent described under "Consolidation, Merger and Sale of Assets".
Restrictions on ownership and transfers of the Company's Common Stock are
designed to preserve its status as a REIT and,
5
<PAGE> 27
therefore, may act to prevent or hinder a change of control. The Company's
articles of incorporation and by-laws also contain other provisions which may
prevent or limit a change of control. See, "Description of the Capital Stock."
MODIFICATION AND WAIVER
Each Indenture will provide that modifications and amendments of such
Indenture may be made by the Company and the applicable Trustee, with the
consent of the Holders of a majority in aggregate principal amount of the
outstanding Debt Securities issued under such Indenture which are affected by
the modification or amendment voting as one class; provided that no such
modification or amendment may, without the consent of the Holder of each such
Debt Security affected thereby, among other things: (a) extend the final
maturity of such Debt Securities, or reduce the principal amount thereof, or
reduce the rate or extend the time of payment of interest thereon, or reduce any
amount payable on redemption thereof, or reduce the amount of the principal of
Debt Securities issued with original issue discount that would be due and
payable upon an acceleration of the maturity thereof or the amount thereof
provable in bankruptcy, or extend the time or reduce the amount of any payment
to any sinking fund or analogous obligation relating to such Debt Securities, or
materially and adversely affect any right to convert such Debt Securities in
accordance with such Indenture or impair or affect the right of any Holder of
Debt Securities to institute suit for the payment thereof or, if such Debt
Securities provide therefor, any right of repayment at the option of the Holder,
(b) reduce the aforesaid percentage of such Debt Securities of any series, the
consent of the Holders of which is required for any such supplemental indenture,
or (c) reduce the percentage of such Debt Securities of any series necessary to
consent to waive any past default under such Indenture to less than a majority,
or (d) modify any of the provisions of the sections of such Indenture relating
to supplemental indentures with the consent of the Holders, except to increase
any such percentage or to provide that certain other provisions of such
Indenture cannot be modified or waived without the consent of each Holder
affected thereby, provided, however, that this clause shall not be deemed to
require the consent of any Holder with respect to changes in the references to
"the Trustee" and concomitant changes in such section or the deletion of this
proviso. (Indenture Section 7.2)
Each Indenture will provide that a supplemental indenture which changes or
eliminates any covenant or other provision of such Indenture which has expressly
been included solely for the benefit of one or more particular series of Debt
Securities, or which modifies the rights of the Holders of such series with
respect to such covenant or other provision, shall be deemed not to affect the
rights under such Indenture of the Holders of Debt Securities of any other
series. (Indenture Section 7.2)
Each Indenture will provide that modifications and amendments of such
Indenture may be made by the Company and the applicable Trustee, without the
consent of the Holders of any series of Debt Securities issued thereunder: (1)
to secure any Debt Securities issued thereunder; (2) to evidence the succession
of another corporation to the Company and the assumption by any such successor
of the covenants, agreements and obligations of the Company, in such Indenture
and in the Debt Securities issued thereunder; (3) to add to the covenants of the
Company or to add any additional events of default; (4) to cure any ambiguity,
to correct or supplement any provision in such Indenture that may be
inconsistent with any other provision of such Indenture or to make any other
provisions with respect to matters or questions arising under such Indenture,
provided that such action shall not adversely affect the interests of the
Holders of any series of Debt Securities issued thereunder in any material
respect; (5) to establish the form and terms of Debt Securities issued
thereunder; (6) to evidence and provide for a successor trustee under such
Indenture with respect to one or more series of Debt Securities issued
thereunder or to provide for or facilitate the administration of the trusts
under such Indenture by more than one trustee; (7) to permit or facilitate the
issuance of Debt Securities in global form or bearer form or to provide for
uncertificated Debt Securities to be issued thereunder; (8) to change or
eliminate any provision of such Indenture, provided that any such change or
elimination shall become effective only when there are no Debt Securities
outstanding of any series created prior to the execution of such supplemental
indenture which are entitled to the benefit of such provision; or (9) to amend
or supplement any provision contained in such Indenture, which was required to
be contained in the Indenture in order for the Indenture to be qualified under
the Trust Indenture Act of 1939, if the Trust Indenture Act of
6
<PAGE> 28
1939 or regulations thereunder change what is so required to be included in
qualified indentures, in any manner not inconsistent with what then may be
required for such qualification. (Indenture Section 7.1)
EVENTS OF DEFAULT
The following will be events of default under each Indenture with respect
to each series of Debt Securities issued thereunder: (a) failure to pay
principal (or premium, if any) on any series of the Debt Securities outstanding
under such Indenture when due; (b) failure to pay any interest on any series of
the Debt Securities outstanding under such Indenture when due, continued for 30
days; (c) default in the payment, if any, of any sinking fund installment when
due, payable by the terms of such series of Debt Securities; (d) failure to
perform any other covenant or warranty of the Company contained in such
Indenture or such Debt Securities continued for 90 days after written notice;
and (e) certain events of bankruptcy, insolvency or reorganization of the
Company. In case an event of default described in (a), (b) or (c) above shall
occur and be continuing with respect to any series of such Debt Securities, the
applicable Trustee or the Holders of not less than 25% in aggregate principal
amount of the Debt Securities of such series then outstanding (each such series
acting as a separate class) may declare the principal (or, in the case of
discounted Debt Securities, the amount specified in the terms thereof) of such
series to be due and payable. In case an event of default described in (d) above
shall occur and be continuing, the applicable Trustee or the Holders of not less
than 25% in aggregate principal amount of all Debt Securities of each affected
series then outstanding under such Indenture (treated as one class) may declare
the principal (or, in the case of discounted Debt Securities, the amount
specified in the terms thereof) of all Debt Securities of all such series to be
due and payable. If an event of default described in (e) above shall occur and
be continuing then the principal amount (or, in the case of discounted Debt
Securities, the amount specified in the terms thereof) of all the Debt
Securities outstanding shall be and become due and payable immediately, without
notice or other action by any Holder or the applicable Trustee, to the full
extent permitted by law. Any event of default with respect to particular series
of Debt Securities under such Indenture may be waived by the Holders of a
majority in aggregate principal amount of the outstanding Debt Securities of
such series (voting as a class), except in each case a failure to pay principal
of or premium, if any, or interest on such Debt Securities or a default in
respect of a covenant or provision which cannot be modified or amended without
the consent of each Holder affected thereby. (Indenture Sections 4.1, 4.10)
Each Indenture will provide that the applicable Trustee may withhold notice
to the Holders of any default with respect to any series of Debt Securities
(except in payment of principal of or interest or premium on, or sinking fund
payment in respect of, the Debt Securities) if the applicable Trustee considers
it in the interest of Holders to do so. (Indenture Section 4.11)
The Company will be required to furnish to each Trustee annually a
statement as to its compliance with all conditions and covenants in the
applicable Indenture. (Indenture Section 3.5)
Each Indenture will contain a provision entitling the applicable Trustee to
be indemnified by the Holders before proceeding to exercise any trust or power
under such Indenture at the request of such Holders (Indenture Section 5.2).
Each Indenture will provide that the Holders of a majority in aggregate
principal amount of the then outstanding Debt Securities of any series may
direct the time, method and place of conducting any proceedings for any remedy
available to the applicable Trustee or of exercising any trust or power
conferred upon the applicable Trustee with respect to the Debt Securities of
such series, provided, however, that the applicable Trustee may decline to
follow any such direction if, among other reasons, the applicable Trustee,
determines in good faith that the actions or proceedings as directed may not
lawfully be taken, would involve the applicable Trustee in personal liability or
would be unduly prejudicial to the Holders of the Debt Securities of such series
not joining in such direction (Indenture Section 4.9). The right of a Holder to
institute a proceeding with respect to the applicable Indenture will be subject
to certain conditions precedent including, without limitation, that the Holders
of not less than 25% in aggregate principal amount of the Debt Securities of
such series then outstanding under such Indenture make a written request upon
the applicable Trustee to exercise its powers under such Indenture, indemnify
the applicable Trustee and afford the applicable Trustee reasonable opportunity
to act, but the Holder has an absolute right to receipt of the principal of,
premium, if any, and interest when due on the Debt Securities, to require
conversion of Debt
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Securities if such Indenture provides for convertibility at the option of the
Holder and to institute suit for the enforcement thereof. (Indenture Sections
4.6, 4.7).
CONSOLIDATION, MERGER AND SALE OF ASSETS
Each Indenture will provide that the Company may not consolidate with,
merge into or sell, convey or lease all or substantially all of its assets to
any Person unless the Company is the surviving corporation or the successor
Person is a corporation organized under the laws of any domestic jurisdiction
and assumes the Company's obligations on the Debt Securities issued thereunder,
and under such Indenture, and after giving effect thereto no event of default,
and no event which, after notice or lapse of time or both, would become an event
of default shall have occurred and be continuing, and that certain other
conditions are met. (Indenture Sections 8.1, 8.2)
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock will be set forth in the applicable Prospectus
Supplement relating thereto. Such terms will include 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 redemption of such Debt Securities and any
restrictions on conversion, including restrictions directed at maintaining the
Company's REIT status.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Each Indenture will provide with respect to each series of Debt Securities
issued thereunder that the Company may terminate its obligations under such Debt
Securities of a series and such Indenture with respect to Debt Securities of
such series if: (i) all Debt Securities of such series previously authenticated
and delivered, with certain exceptions, have been delivered to the applicable
Trustee for cancellation and the Company has paid all sums payable by it under
the Indenture; or (ii)(A) the Debt Securities of such series mature within one
year or all of them are to be called for redemption within one year under
arrangements satisfactory to the applicable Trustee for giving the notice of
redemption, (B) the Company irrevocably deposits in trust with the applicable
Trustee, as trust funds solely for the benefit of the Holders of such Debt
Securities, for that purpose, money or U.S. Government Obligations or a
combination thereof sufficient (unless such funds consist solely of money, in
the opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the applicable
Trustee), without consideration of any reinvestment, to pay principal of and
interest on the Debt Securities of such series to maturity or redemption, as the
case may be, and to pay all other sums payable by it under such Indenture, and
(C) the Company delivers to the applicable Trustee an officers' certificate and
an opinion of counsel, in each case stating that all conditions precedent
provided for in such Indenture relating to the satisfaction and discharge of
such Indenture with respect to the Debt Securities of such series have been
complied with. With respect to the foregoing clause (i), only the Company's
obligations to compensate and indemnify the applicable Trustee under the
Indenture shall survive. With respect to the foregoing clause (ii) only the
Company's obligations to execute and deliver Debt Securities of such series for
authentication, to maintain an office or agency in respect of the Debt
Securities of such series, to have moneys held for payment in trust, to register
the transfer or exchange of Debt Securities of such series, to deliver Debt
Securities of such series for replacement or to be cancelled, to compensate and
indemnify the applicable Trustee and to appoint a successor trustee, and its
right to recover excess money held by the applicable Trustee shall survive until
such Debt Securities are no longer outstanding. Thereafter, only the Company's
obligations to compensate and indemnify the applicable Trustee, and its right to
recover excess money held by the applicable Trustee shall survive. (Indenture
Section 9.1)
Each Indenture will provide that the Company (i) will be deemed to have
paid and will be discharged from any and all obligations in respect of the Debt
Securities issued thereunder of any series, and the provisions of such Indenture
will, except as noted below, no longer be in effect with respect to the Debt
Securities of such series ("legal defeasance") and (ii) may omit to comply with
any term, provision, covenant
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or condition of such Indenture, and such omission shall be deemed not to be an
Event of Default under clause (d) of the first paragraph of "-- Events of
Default" with respect to the outstanding Debt Securities of such series
("covenant defeasance"); provided that the following conditions shall have been
satisfied: (A) the Company has irrevocably deposited in trust with the
applicable Trustee as trust funds solely for the benefit of the Holders of the
Debt Securities of such series, for payment of the principal of and interest of
the Debt Securities of such series, money or U.S. Government Obligations or a
combination thereof sufficient (unless such funds consist solely of money, in
the opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the applicable
Trustee) without consideration of any reinvestment and after payment of all
federal, state and local taxes or other charges and assessments in respect
thereof payable by the applicable Trustee, to pay and discharge the principal of
and accrued interest on the outstanding Debt Securities of such series to
maturity or earlier redemption (irrevocably provided for under arrangements
satisfactory to the applicable Trustee), as the case may be; (B) such deposit
will not result in a breach or violation of, or constitute a default under, such
Indenture or any other material agreement or instrument to which the Company is
a party or by which it is bound; (C) no default with respect to such Debt
Securities of such series shall have occurred and be continuing on the date of
such deposit; (D) the Company shall have delivered to such Trustee an opinion of
counsel that (1) the Holders of the Debt Securities of such series will not
recognize income, gain or loss for federal income tax purposes as a result of
the Company's exercise of its option under this provision of such Indenture and
will be subject to federal income tax on the same amount and in the same manner
and at the same times as would have been the case if such deposit and defeasance
had not occurred and (2) the Holders of the Debt Securities of such series have
a valid security interest in the trust funds subject to no prior liens under the
Uniform Commercial Code, and (E) the Company has delivered to the applicable
Trustee an officers' certificate and an opinion of counsel, in each case stating
that all conditions precedent provided for in such Indenture relating to the
defeasance contemplated have been complied with. In the case of legal defeasance
under clause (i) above, the opinion of counsel referred to in clause (D)(1)
above may be replaced by a ruling directed to the applicable Trustee received
from the Internal Revenue Service to the same effect. Subsequent to a legal
defeasance under clause (i) above, the Company's obligations to execute and
deliver Debt Securities of such series for authentication, to maintain an office
or agency in respect of the Debt Securities of such series, to have moneys held
for payment in trust, to register the transfer or exchange of Debt Securities of
such series, to deliver Debt Securities of such series for replacement or to be
cancelled, to compensate and indemnify the applicable Trustee and to appoint a
successor trustee, and its right to recover excess money held by the applicable
Trustee shall survive until such Debt Securities are no longer outstanding.
After such Debt Securities are no longer outstanding, in the case of legal
defeasance under clause (i) above, only the Company's obligations to compensate
and indemnity the applicable Trustee and its right to recover excess money held
by the applicable Trustee shall survive. (Indenture Sections 9.2 and 9.3)
APPLICABLE LAW
The Indentures will provide that the Debt Securities and the Indentures
will be governed by and construed in accordance with the laws of the State of
New York. (Indenture Section 10.8)
DESCRIPTION OF THE CAPITAL STOCK
The authorized capital stock of the Company consists of 150,000,000 shares
of common stock, par value $0.01 per share ("Common Stock"), 10,000,000 shares
of preferred stock, par value $1.00 per share ("Preferred Stock") and
160,000,000 shares of excess stock, par value $0.01 per share ("Excess Stock"),
of which 150,000,000 shares are designated Excess Common Stock and 10,000,000
shares are designated Excess Preferred Stock. As of March 31, 1996, there were
issued and outstanding 16,985,000 shares of Common Stock and the Company had no
Preferred Stock or Excess Stock outstanding.
The following summary does not purport to be complete and is qualified in
its entirety by reference to the applicable provisions of Maryland law and the
Company's Articles of Amendment and Restatement (the "Articles of
Incorporation") and Amended By-Laws (the "Bylaws").
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Common Stock
Subject to such preferential rights as may be granted by the Board of
Directors of the Company (the "Board of Directors") in connection with the
future issuance of Preferred Stock (and any related series of Excess Preferred
Stock as described under "Preferred Stock" below), holders of shares of Common
Stock are entitled to one vote per share on all matters to be voted on by
shareholders and are entitled to receive ratably such dividends as may be
declared on the Common Stock by the Board of Directors in its discretion from
funds legally available therefor. In the event of the liquidation, dissolution
or winding up of the Company, after payment of all debts and other liabilities
and any liquidation preference of the holders of Preferred Stock (and any
related series of Excess Preferred Stock as described under "Preferred Stock"
below), each holder of shares of Common Stock is entitled to receive, ratably
with each other holder of Common Stock, $1.00 per share out of the net assets of
the Company available for distribution to its stockholders, and after such
payment, holders of shares of Common Stock are entitled to share ratably with
holders of Excess Common Stock (see "Restrictions on Ownership and Transfer"
below) in all remaining assets of the Company available for distribution to its
stockholders increased in the case of the Common Stock by any amounts that
result from the limitation of the liquidation rights of Excess Common Stock. See
"Restrictions on Ownership and Transfer -- Ownership Limit Provisions." Holders
of Common Stock have no subscription, redemption, conversion or preemptive
rights. See "Participation Rights." Matters submitted for shareholder approval
generally require a majority vote of the shares of Common Stock present and
voting thereon. The outstanding shares of Common Stock are fully paid and
nonassessable.
Preferred Stock
The Board of Directors is empowered by the Company's Articles of
Incorporation to designate and issue from time to time, without stockholder
approval, Preferred Stock in one or more series. The Board of Directors may
affix and determine the relative rights, preferences and privileges of each
series of Preferred Stock so issued, including, but not limited to ownership
limit restrictions. Because the Board of Directors has the power to establish
the preferences and rights of each series of Preferred Stock, it may afford the
holders in any series of Preferred Stock preferences, powers and rights, voting
or otherwise, senior to the rights of holders of Common Stock and Excess Common
Stock. The issuance of Preferred Stock could have the effect of delaying or
preventing a change in control of the Company. At such time as the Board of
Directors authorizes a series of Preferred Stock, without any further or
separate action of the Board of Directors, there shall be deemed to be
authorized a series of Excess Preferred Stock consisting of the number of shares
included in the series of Preferred Stock and having terms, rights, restrictions
and qualifications identical thereto, except to the extent that the Articles of
Incorporation require different terms.
The applicable Prospectus Supplement will describe the following terms of
any Preferred Stock in respect of which this Prospectus is being delivered (to
the extent applicable to such Preferred Stock): (1) the specific designation,
number of shares, seniority and purchase price; (2) any liquidation preference
per share; (3) any date of maturity; (4) any redemption, repayment or sinking
fund provisions; (5) any dividend rate or rates and the dates on which any such
dividends will be payable (or the method by which such rates or dates will be
determined); (6) any voting rights; (7) whether the Preferred Stock is
convertible and, if so, the securities or rights into which such Preferred Stock
is convertible (which may include other Preferred Stock) and the terms and
conditions upon which such conversions will be effected including the initial
conversion prices or rates, the conversion period and any other related
provisions; (8) the place or places where dividends and other payments on the
Preferred Stock will be payable; (9) any ownership limit restrictions applicable
to such Preferred Stock; and (10) any additional voting, dividend, liquidation,
redemption and other rights, preferences, privileges, limitations and
restrictions, including restrictions directed at maintaining the Company's REIT
status. The shares of Preferred Stock offered hereby will, when issued, be fully
paid and nonassessable.
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CHARTER AND BYLAW PROVISIONS
Certain provisions of the Articles of Incorporation and the Bylaws which
are summarized below, may make it more difficult to change the composition of
the Board of Directors and may discourage or make more difficult any attempt by
a person or group to obtain control of the Company.
Staggered Board of Directors. The Articles of Incorporation and Bylaws
provide that the Board of Directors is divided into three classes of directors
serving staggered terms. Each class holds office until the third annual meeting
for election of directors following the election of such class.
Number of Directors; Removal; Filling Vacancies. The Articles of
Incorporation provide that, subject to any rights of holders of Preferred Stock
(and any related series of Excess Preferred Stock) to elect additional directors
under specified circumstances, the number of directors will be fixed by the
Board of Directors, but must consist of not more than ten nor less than three
directors. The Articles of Incorporation provide that all vacancies on the Board
of Directors resulting from death or resignation may be filled solely by a
majority of the directors then in office. In accordance with the Maryland
General Corporation Law (the "MGCL"), the Articles of Incorporation provide that
vacancies resulting from removal by the stockholders may be filled by such
stockholders and vacancies resulting from an increase in the number of directors
may be filled by a majority of the entire Board of Directors. If a director is
elected by the Board of Directors to fill a vacancy, such director shall serve
only until the next annual meeting of the stockholders. The Articles of
Incorporation and Bylaws do not provide for a stockholder vote to fill vacancies
unless a vacancy results from the removal of a director. The Articles of
Incorporation provide that, subject to the rights of holders of Preferred Stock
(and any related series of Excess Preferred Stock) to elect additional directors
under specified circumstances, directors may not be removed by the stockholders
except for cause with the affirmative vote of holders of not less than 66 2/3%
of the total voting power of all outstanding securities then entitled to vote
generally for the election of directors, voting together as a single class.
Pursuant to the Company's Articles of Incorporation and Bylaws, a majority
of the directors of the Company must be persons who are not (i) affiliates, or
an officer, director or employee, of The Irvine Company or (ii) the spouse,
ancestor or lineal descendant or brother or sister of Mr. Donald Bren, the
majority stockholder of The Irvine Company and the Chairman of the Board of
Directors of the Company.
Board Quorum and Special Voting Requirements. The Articles of
Incorporation provide that a majority of the entire Board of Directors of the
Company, including at least one director who was nominated for election as a
director by The Irvine Company (see "Provisions of the Miscellaneous Rights
Agreement Included in Bylaws" below) shall constitute a quorum for the
transaction of business at any annual or special meeting of the Board of
Directors and, except as provided below, that the affirmative vote of a majority
of the directors present at a meeting at which a quorum is present shall be the
act of the Board of Directors. Notwithstanding the foregoing, the approval of
more than 75% of the entire Board of Directors (the "Required Directors") shall
be required to approve the following: (i) a Change of Control (as defined below)
of the Company or the Operating Partnership, (ii) any amendment to the Company's
Articles of Incorporation or Bylaws, or any amendment to the agreement of
limited partnership of the Operating Partnership (the "Partnership Agreement");
(iii) any waiver or modification of any applicable Ownership Limit Provision (as
defined under "Restrictions on Ownership and Transfer -- Ownership Limit
Provisions"); (iv) any merger, consolidation, statutory share exchange or sale
of all or substantially all of the assets of the Company or the Operating
Partnership; (v) the issuance of any equity securities of the Company or any
securities convertible into, or exchangeable or exercisable for, any equity
securities of the Company, provided that the affirmative vote of the Required
Directors shall not be required with respect to the issuance of equity
securities (excluding for purposes of this proviso, equity securities (other
than Common Stock) having any voting rights other than voting rights required
under Maryland law or by the rules of the New York Stock Exchange or the Pacific
Stock Exchange) (a) pursuant to any stock incentive plan adopted by the Company,
(b) in connection with The Irvine Company's exercise of the Exchange Rights or
the Cash Tender Rights (each as defined below) provided for in the Partnership
Agreement, (c) in connection with the acquisition of certain land sites on the
Irvine Ranch for Common Stock pursuant to the land rights and non-competition
agreement among the Company, the Operating Partnership, The Irvine Company and
Donald Bren (the "Land Rights Agreement") or (d) in a bona fide underwritten
public offering managed by one or more nationally recognized investment
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<PAGE> 33
banking firms; (vi) for the Company to take title to assets (other than
temporarily in connection with an acquisition prior to contributing such assets
to the Operating Partnership) or to conduct business other than through the
Operating Partnership, or for the Company or the Operating Partnership to engage
in any business other than the ownership, construction, development and
operation of multifamily rental apartment communities; (vii) for the Company or
the Operating Partnership to make a general assignment for the benefit of
creditors or to institute any proceedings in bankruptcy or for the liquidation,
dissolution, reorganization or winding up of the Company or the Operating
Partnership or to consent to the taking of any such action against the Company
or the Operating Partnership; and (viii) to terminate the Company's status as a
real estate investment trust for federal income tax purposes. A Change of
Control of the Company or the Operating Partnership will generally be deemed to
have occurred if any person or group acquires 20% or more of the combined voting
power of the Company or the Operating Partnership, as the case may be.
Special Meetings of Stockholders. Under the Bylaws, a special meeting of
stockholders may be called by the Chairman of the Board or the President or by a
majority of the Board of Directors, and by the holders of shares entitled to
cast such percentage of all votes entitled to be cast at the meeting which
represents the maximum percentage as may be permitted for such purpose under the
MGCL, as amended from time to time; however, a special meeting need not be held
to consider any matter which is substantially the same as a matter voted upon at
a special meeting within the last 12 months unless requested by a majority of
the shares entitled to vote at such special meeting.
Action by Written Consent of Stockholders. The MGCL provides that any
action that may be taken at a stockholders meeting may be taken without a
meeting only if (i) a unanimous written consent setting forth the matter is
signed by each stockholder entitled to vote on the matter and (ii) a written
waiver of any right to dissent is signed by each stockholder entitled to notice
of the meeting but not entitled to vote at it.
Advance Notice of Director Nominations and New Business. The Bylaws
provide that with respect to an annual meeting of stockholders, the proposal of
business to be considered by stockholders may be made only (i) by or at the
direction of the Board of Directors, or (ii) by a stockholder who is entitled to
vote at the meeting and has complied with the advance notice procedures set
forth in the Bylaws. In addition, with respect to any meeting of stockholders,
nominations of persons for election to the Board of Directors may be made only
(i) by or at the direction of the Board of Directors or (ii) by any stockholder
of the Company who is entitled to vote at the meeting and has complied with the
advance notice provisions. The advance notice provisions are not applicable to
The Irvine Company.
The advance notice provisions of the Bylaws could have the effect of
discouraging a takeover or other transaction in which holders of some, or a
majority, of the shares of Common Stock might receive a premium for their shares
over the then prevailing market price or which such holders might believe to be
otherwise in their best interests.
Provisions of the Miscellaneous Rights Agreement Included in Bylaws. The
Bylaws provide that the provisions of the Miscellaneous Rights Agreement (the
"Miscellaneous Rights Agreement") among the Company, the Operating Partnership
and The Irvine Company with respect to matters relating to the governance of the
Company (including the right to designate nominees for election as a director,
to designate persons to fill vacancies on the Board of Directors and limitations
on increasing or decreasing the size of the Board of Directors) (the
"Miscellaneous Rights") will have the same effect as bylaws of the Company. This
provision of the Bylaws further provides that in the event of any inconsistency
between any Miscellaneous Right and any other provision of the Bylaws, the
Miscellaneous Right shall control (except with respect to any Bylaw adopted by
stockholder vote prior to the execution and delivery of any amendment to the
Miscellaneous Rights Agreement creating such Miscellaneous Right). This Bylaw
provision is intended to enhance The Irvine Company's ability to enforce the
Miscellaneous Rights and to ensure that the general public is aware of the
existence of the Miscellaneous Rights.
Pursuant to the Miscellaneous Rights Agreement, The Irvine Company has the
right, and will continue to have the right so long as it, its shareholders or
its affiliates beneficially own at least 20% of the outstanding Common Stock
(including for this purpose Common Stock issuable upon exchange of its limited
partnership interests ("L.P. Units") in the Operating Partnership), to nominate
three persons for election to the Board of
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<PAGE> 34
Directors of the Company. In the event this ownership falls below 20% but is at
least 15%, The Irvine Company will have the right to nominate two persons for
election to the Board of Directors; and if this ownership falls below 15% but is
at least 10%, The Irvine Company will have the right to nominate one person for
election to the Board of Directors.
MARYLAND BUSINESS COMBINATION LAW
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and an "Interested Stockholder" or an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Stockholder becomes an Interested Stockholder. An Interested Stockholder is any
person who beneficially owns 10% or more of the voting power of the
corporation's shares or an affiliate or associate of the corporation who, at any
time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation. After the five year period, any such business
combination must be recommended by the board of directors of the corporation and
approved by the affirmative vote of at least (i) 80% of the votes entitled to be
cast by holders of outstanding voting shares of the corporation and (ii)
two-thirds of the votes entitled to be cast by holders of outstanding voting
shares of the corporation other than shares held by the Interested Stockholder
with whom (or with whose affiliate) the business combination is to be effected,
unless, among other conditions, the corporation's common stockholders receive a
minimum price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of Maryland law do not apply,
however, to business combinations that are approved or exempted by the board of
directors of the corporation prior to the time that the Interested Stockholder
becomes an Interested Stockholder. The Articles of Incorporation and resolutions
adopted by the Board of Directors have exempted from these provisions of the
MGCL any business combination with The Irvine Company, or any affiliates of The
Irvine Company or Mr. Bren, or any members of the immediate family of Mr. Bren
and any other person acting in concert or as a group with any of the foregoing.
All other stockholders are subject to the business combination statute.
BUSINESS COMBINATIONS
The Articles of Incorporation require that, except in certain
circumstances, Business Combinations involving the Company be approved by the
affirmative vote of the holders of at least 66 2/3% of the outstanding voting
stock of the Company. A Business Combination is defined in the Articles of
Incorporation as (i) any merger or consolidation or statutory share exchange of
the Company in which (a) the Company fails to survive that involves all or any
"Substantial Part" (as defined) of the assets of the Company or (b) more than
20% of the voting control of the Company is transferred, (ii) any sale,
exchange, transfer or other disposition of all or substantially all of the
assets of the Company and (iii) the execution of any agreement, contract or
other arrangement providing for any of the transactions described in the
definition of Business Combination. The term "Substantial Part" means more than
25% of the total market capitalization of the Company (including outstanding
shares of Common Stock and L.P. Units that are exchangeable for shares of Common
Stock plus total debt) as of the end of the most recent quarter or fiscal year
ending prior to the time the determination is being made.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
the acquiror, or in respect of which the acquiror is able to exercise or direct
the exercise of voting power except solely by virtue of a revocable proxy, would
entitle the acquiror to exercise voting power in electing directors within one
of the following ranges of voting power: (i) one-fifth or more but less than
one-third; (ii) one-third or more but less than a majority; or (iii) a majority
of all voting
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<PAGE> 35
power. Control shares do not include shares the acquiring person is entitled to
vote as a result of having previously obtained stockholder approval. A "control
share acquisition" means the acquisition of control shares, subject to certain
exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses and
delivery of an "acquiring person statement"), may compel the corporation's board
of directors to call a special meeting of stockholders to be held within 50 days
of demand to consider the voting rights of the shares. If no request for a
meeting is made, the corporation may itself present the question at any
stockholders' meeting.
Unless the corporation's articles of incorporation or bylaws provide
otherwise, if voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement within ten (10) days
following a control share acquisition then, subject to certain conditions and
limitations, the corporation may redeem any or all of the control shares (except
those for which voting rights have previously been approved) for fair value
determined, without regard to the absence of voting rights for the control
shares, as of the date of the last control share acquisition or of any meeting
of stockholders at which the voting rights of such shares are considered and not
approved. Moreover, unless the corporation's articles of incorporation or bylaws
provide otherwise, if voting rights for control shares are approved at a
stockholders' meeting and the acquiror becomes entitled to exercise or direct
the exercise of a majority or more of all voting power other stockholders may
exercise appraisal rights. The fair value of the shares as determined for
purposes of such appraisal rights may not be less than the highest price per
share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the articles of
incorporation or bylaws of the corporation.
The Articles of Incorporation and resolutions adopted by the Board of
Directors have exempted control share acquisitions involving The Irvine Company,
or any affiliates of The Irvine Company or Mr. Bren, or any members of the
immediate family of Mr. Bren and any other person acting in concert or as a
group with any of the foregoing. All other stockholders are subject to the
control share acquisition statute.
PARTICIPATION RIGHTS
In the event that the Company issues (whether for cash or property) any
shares of Common Stock or securities convertible into, or exchangeable or
exercisable for, shares of Common Stock, The Irvine Company, subject to certain
limited exceptions, including the issuance of Common Stock pursuant to any stock
incentive plan adopted by the Company or pursuant to The Irvine Company's
exercise of the Exchange Rights or the Cash Tender Rights described below under
"Exchange Rights" and "Cash Tender Rights," will have the right to purchase
Common Stock, L.P. Units or such securities at a purchase price equal to the
purchase price in the transaction giving rise to the participation rights in
order to maintain its interest in the Company and the Operating Partnership on a
consolidated basis. However, other stockholders of the Company would have no
participation rights to purchase shares of Common Stock or such securities and
any such issuance might cause a dilution of a stockholder's investment in the
Company.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY; INDEMNIFICATION
Pursuant to the MGCL and the Articles of Incorporation, the liability of
directors of the Company to the Company or to any stockholder of the Company for
money damages has been eliminated except (i) to the extent that it is
established that such directors actually received an improper benefit or profit
in money, property or services, for the amount of the benefit or profit in
money, property or services actually received and (ii) to the extent that a
judgment or other final adjudication adverse to such directors is entered in a
proceeding based on a finding in the proceeding that such directors' action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. Maryland law also
extends the right to limit the liability of officers of a corporation. The
Articles of
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<PAGE> 36
Incorporation utilize this extension, limiting the liability of officers to the
same extent directors' liability is limited.
The Articles of Incorporation provide indemnification to directors and
officers, including the advance of legal expenses, to the full extent authorized
by applicable law and allow the Board of Directors to extend such
indemnification to other employees and agents as the Board of Directors shall
determine to be appropriate. Under the MGCL, a director of a corporation may be
indemnified (including in connection with a derivative action so long as the
director has not been found liable) unless it is established that (a) the act or
omission of the director was material to the matter giving rise to the
proceeding and either was committed in bad faith or was the result of active and
deliberate dishonesty; (b) the director actually received an improper personal
benefit in money, property, or services; or (c) in the case of any criminal
proceeding, the director had reasonable cause to believe that the act or
omission was unlawful. The Articles of Incorporation extend this right of
indemnification to officers and otherwise grant the Board of Directors the
authority to indemnify other employees and agents.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
Ownership Limit Provisions. The Articles of Incorporation contain certain
restrictions on the number of shares of Common Stock that individual
shareholders may own. For the Company to qualify as a real estate investment
trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"),
no more than 50% in number of its outstanding shares of Common 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 (other
than the first year) or during a proportionate share of a shorter taxable year
(the "Five or Fewer Test"). The Common Stock must also be beneficially owned by
100 or more persons during at least 335 days of a taxable year or during a
proportionate part of a shorter taxable year. Because the Company expects to
continue to qualify as a REIT, the Articles of Incorporation contain
restrictions on the acquisition of Common Stock intended to ensure compliance
with these requirements.
Subject to certain exceptions specified in the Articles of Incorporation,
no holder other than The Irvine Company, certain related parties and certain
look-through entities may own, or be deemed to own by virtue of the attribution
provisions of the Code, more than 7.4% (the "Ownership Limit") of the issued and
outstanding shares of Common Stock. The ownership limit for The Irvine Company
and certain related persons will be 20% of the issued and outstanding Common
Stock in the aggregate (the "Related Party Limit"). In addition, the ownership
limit applicable to certain of the types of entities that are looked-through for
purposes of the Five or Fewer Test under the Code will be 15% of the outstanding
Common Stock (the "Look-Through Ownership Limit" and, together with the
Ownership Limit and the Related Party Limit, the "Ownership Limit Provisions").
Generally, under the Articles of Incorporation certain pension trusts qualifying
under Section 401(a) of the Code and United States investment companies
registered under the Investment Act of 1940 will be subject to the Look-Through
Ownership Limit. Any shares held in excess of the Related Party Limit or
Look-Through Ownership Limit will be subject to all of the terms, conditions and
restrictions under the Articles of Incorporation on any shares held in excess of
the Ownership Limit. The Board of Directors may, with a ruling from the Internal
Revenue Service or an opinion of counsel satisfactory to it, waive the Ownership
Limit with respect to a holder if such holder's ownership will not then or in
the future jeopardize the Company's status as a REIT.
If shares of Common Stock in excess of the Ownership Limit, Related Party
Limit or Look-Through Ownership Limit are issued or transferred to any person,
or shares which would cause the Company to be beneficially owned by fewer than
100 persons are transferred to any person, such issuance or transfer shall be
null and void and the intended transferee will acquire no rights to the stock.
In addition, shares of Common Stock owned, or deemed to be owned, or
transferred to a stockholder in excess of the applicable Ownership Limit
Provision will automatically be exchanged for shares of Excess Common Stock that
shall be deemed to have been transferred to a person as trustee of a trust for
the exclusive benefit of one or more qualifying charitable organizations
designated by the Company. While shares of Excess Common Stock are held in
trust, the trustee of the trust will be deemed to hold the shares of Excess
Common
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<PAGE> 37
Stock for the exclusive benefit of the charitable beneficiary, the intended
original transferee-stockholder will acquire no rights to such stock, except as
described below, and the trustee of the trust will have all voting and dividend
rights pertaining to the transferred shares. Subject to such preferential rights
as may be granted by the Board of Directors in connection with the future
issuance of Preferred Stock (and the related series of Excess Preferred Stock)
and the $1.00 preferential right of the Common Stock referred to under "Common
Stock" above, in liquidation, the intended original transferee-stockholder of
shares of Excess Common Stock shall be entitled to share ratably with holders of
Common Stock and Excess Common Stock in all remaining assets of the Company
available for distribution to its stockholders, provided that the original
transferee-stockholder's ratable share of the Company's assets would be limited
to the price paid by the original transferee-stockholder for the Common Stock in
the purported transfer that resulted in the Excess Common Stock or, if no value
was given, a price per share equal to the closing market price on the date of
the purported transfer that resulted in the Excess Common Stock.
Excess Common Stock is not transferable except as hereinafter described.
The original transferee-stockholder may, at any time the shares of Excess Common
Stock are held in trust, transfer the Excess Common Stock to any person whose
ownership of such shares would be permitted under the Ownership Limit
Provisions, at a price per share not in excess of the lesser of (i) the price
per share paid by the original transferee-stockholder for the shares of Common
Stock in the purported transfer that resulted in the Excess Common Stock or, if
no value was given, the price per share equal to the closing market price on the
date of the purported transfer that resulted in the Excess Common Stock or (ii)
the price per share received by the original transferee-stockholder in the
transfer to the person whose ownership of such shares would be permitted under
the Ownership Limit Provisions. Immediately upon transfer to such permitted
transferee, the shares of Excess Common Stock will automatically be exchanged
for Common Stock. In addition, the Company would have the right, for a period of
90 days during the time the Excess Common Stock is held in trust, to purchase
all or any portion of the Excess Common Stock from the original
transferee-stockholder at a price per share equal to the lesser of (i) the price
per share paid by the original transferee-stockholder in the transaction that
created such Excess Common Stock (or, in the case of a devise or gift, the
closing market price at the time of such devise or gift) and (ii) the closing
market price for the stock on the date the Company exercises its option to
purchase. The 90-day period begins on the date of the violative transfer if the
original transferee-stockholder gives notice to the Company of the transfer or
(if no such notice is given) the date the Board of Directors determines that a
violative transfer has been made.
The Ownership Limit Provisions will not be automatically removed even if
the REIT provisions of the Code are changed so as to no longer contain any
ownership concentration limitation or if the ownership concentration limitation
is increased. In addition to preserving the Company's status as a REIT, the
effect of the Ownership Limit Provisions is to prevent any person from acquiring
unilateral control of the Company. Any change in the Ownership Limit Provisions
would require an amendment to the Articles of Incorporation. Such an amendment
to the Articles of Incorporation would require the approval of the Required
Directors and the affirmative vote of holders owning not less than 66 2/3% of
the outstanding Common Stock.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 0.5% (or such other percentage between 0.5% and 5.0%, as
determined by the Board of Directors) of the outstanding Common Stock must file
an affidavit with the Company containing the information specified in the
Articles of Incorporation within 30 days after January 1 of each year. In
addition, each stockholder shall upon demand be required to disclose to the
Company in writing such information with respect to the direct, indirect and
constructive ownership of shares as the Board of Directors deems necessary to
comply with the provisions of the Code applicable to a REIT or to comply with
the requirements of any taxing authority or governmental agency.
If the Company authorizes the issuance of any series of Preferred Stock in
the future, the Board of Directors will at the time of authorization establish
ownership limits applicable to such series to ensure
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<PAGE> 38
compliance with the REIT qualification provisions of the Code. Such ownership
limit restrictions will be described in the applicable Prospectus Supplement.
AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS; TERMINATION OF REIT STATUS
In general, the Articles of Incorporation may not be amended without the
affirmative vote of at least a majority of the total number of shares of all
classes outstanding and entitled to vote thereon. The provisions of the Articles
of Incorporation under the captions "Charter and Bylaw Provisions -- Staggered
Board of Directors"; "--Number of Directors; Removal; Filling Vacancies";
"-- Board Quorum and Special Voting Requirements"; "Business Combinations";
"Limitation of Directors' and Officers' Liability; Indemnification"; and
"Restrictions on Ownership and Transfer" and the exclusion of The Irvine Company
and certain other persons from the provisions of the Maryland business
combination statute and control share acquisition statute as described under the
captions "Maryland Business Combination Law" and "Control Share Acquisitions,"
may be amended only upon the vote of the holders of at least 66 2/3% of the
capital stock entitled to vote generally in the election of directors, voting as
a single group. The Bylaws may be amended by either the affirmative vote of
holders of 66 2/3% of all shares outstanding and entitled to vote generally in
the election of directors, voting as a single group, unless a greater percentage
is specified with respect to a specific Bylaw provision, or by an affirmative
vote of the Required Directors. In addition, the affirmative vote of holders of
at least 66 2/3% of the capital stock entitled to vote generally in the election
of directors, voting as a single group, is required to terminate the Company's
status as a real estate investment trust for federal tax purposes.
LIMITATIONS ON CHANGES IN CONTROL
The provisions of the Articles of Incorporation and the Bylaws providing
for ownership limitations, a staggered Board of Directors, authorizing the Board
of Directors to issue Preferred Stock without stockholder approval, requiring
the affirmative vote of 66 2/3% of the Company's stockholders to engage in
certain Business Combinations, and the business combination and control share
provisions of the MGCL could have the effect of delaying, deferring or
preventing a change in control of the Company or the removal of existing
management, and as a result could prevent the stockholders of the Company from
being paid a premium for their shares of Common Stock.
EXCHANGE RIGHTS
The Irvine Company and certain related persons will have the right (subject
to the applicable Ownership Limit Provision), exercisable once in each
twelve-month period, to exchange up to one-third of the number of L.P. Units
owned by them for shares of Common Stock or if The Irvine Company and certain
related persons own 6,149,000 L.P. Units or less, then they may, subject to the
applicable Ownership Limit Provision, exchange all of their L.P. Units for
shares of Common Stock. As of the date of this Prospectus, The Irvine Company
and its subsidiaries own 20,425,162 L.P. Units in the aggregate. The exchange
ratio shall be one share of Common Stock for each L.P. Unit, subject to
adjustment in certain events, including the Company paying a dividend or making
a distribution on the Common Stock in shares of Common Stock and subdivisions
and combinations of the Common Stock. L.P. Units that are acquired by the
Company pursuant to the exercise of Exchange Rights will be converted
automatically into units of general partnership interest in the Operating
Partnership.
The exercise of Exchange Rights is subject to (i) the expiration or
termination of the applicable waiting period, if any, under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, and (ii) the satisfaction
of the Ownership Limit or the Related Party Limit, as applicable, after giving
effect to the exchange. The Related Party Limit applicable to The Irvine Company
and certain related persons will be 20% of the issued and outstanding shares of
Common Stock in the aggregate; however, certain persons who will have the right
to exchange L.P. Units for Common Stock pursuant to the Exchange Rights, will be
subject to the 7.4% Ownership Limit. For purposes of determining the number of
L.P. Units which may be exchanged for shares of Common Stock pursuant to the
Exchange Rights at any point in time, there shall be taken into account the
number of issued and outstanding shares of Common Stock which are beneficially
owned by The Irvine Company and its affiliates at such time. Accordingly,
beneficial ownership of shares of Common Stock
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<PAGE> 39
reduces the number of L.P. Units which may be exchanged pursuant to the Exchange
Rights at any point in time.
CASH TENDER RIGHTS
The Irvine Company and certain related persons have the right, exercisable
once in any twelve-month period, subject to certain limitations, to sell to the
Company for cash up to one-third of the number of L.P. Units owned by them or if
The Irvine Company and certain related persons own 6,149,000 L.P. Units or less,
then they may tender all of their L.P. Units to the Company. L.P. Units that are
acquired by the Company as a result of the exercise of Cash Tender Rights will
be converted automatically into units of general partnership interest in the
Operating Partnership.
The Company will have to pay for such L.P. Units solely out of the proceeds
of a registered offering of newly issued shares of Common Stock. The price
payable for an L.P. Unit tendered will be equal to the average of the daily
market prices for the Common Stock for the 10 consecutive trading days
immediately preceding the date of receipt by the Company of a notice of cash
tender (each L.P. Unit being equivalent to one share of Common Stock, subject to
adjustment as described above), except that the purchase price for such L.P.
Units will be reduced by any decrease in the price of the Common Stock that
occurs between the exercise date and the pricing of the Common Stock being sold
pursuant to the registered offering and underwriting discounts and commissions.
The Irvine Company will thus bear the risk of any such reduction, subject to
certain withdrawal rights. Any proceeds in excess of the purchase price will be
for the sole benefit of the Company. The Company shall be required to promptly
file with the Commission a registration statement with respect to any registered
offering.
After an exercise of Cash Tender Rights, The Irvine Company may not
exercise its Cash Tender Rights until 90 days after the completion of the
registered offering of shares of Common Stock, if applicable.
Registration Rights
The Company has granted certain "demand" and "piggyback" registration
rights with respect to shares of Common Stock owned by The Irvine Company or any
of its affiliates, whether acquired pursuant to the Exchange Rights, in
connection with the Land Rights Agreement, in the open market or otherwise.
Transfer Agent
The transfer agent and registrar for the Company's Common Stock is The
First National Bank of Boston.
DESCRIPTION OF WARRANTS
The Company may issue warrants to purchase Debt Securities (the "Debt
Warrants"), Preferred Stock (the "Preferred Stock Warrants") or Common Stock
(the "Common Stock Warrants", collectively with the Debt Warrants and the
Preferred Stock Warrants the "Warrants"). Warrants may be issued independently
or together with any Securities and may be attached to or separate from such
Securities. The Warrants are to be issued under warrant agreements (each a
"Warrant Agreement") to be entered into between the Company and a bank or trust
company, as warrant agent (the "Warrant Agent"), all as shall be set forth in
the Prospectus Supplement relating to the Warrants being offered pursuant
thereto.
DEBT WARRANTS
The applicable Prospectus Supplement will describe the terms of Debt
Warrants offered thereby, the Warrant Agreement relating to such Debt Warrants
and the debt warrant certificates representing such Debt Warrants, including the
following: (1) the title of such Debt Warrants; (2) the aggregate number of such
Debt Warrants; (3) the price or prices at which such Debt Warrants will be
issued; (4) the designation, aggregate principal amount and terms of the Debt
Securities purchasable upon exercise of such Debt Warrants, and the procedures
and conditions relating to the exercise of such Debt Warrants; (5) the
designation and terms of any related Debt Securities with which such Debt
Warrants are issued, and the
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<PAGE> 40
number of such Debt Warrants issued with each such security; (6) the date, if
any, on and after which such Debt Warrants and the related Debt Securities will
be separately transferable; (7) the principal amount of Debt Securities
purchasable upon exercise of each Debt Warrant, and the price at which such
principal amount of Debt Securities may be purchased upon such exercise; (8) the
date on which the right to exercise such Debt Warrants shall commence, and the
date on which such right shall expire; (9) the maximum or minimum number of such
Debt Warrants which may be exercised at any time; (10) a discussion of material
federal income tax considerations, if any; and (11) any other terms of such Debt
Warrants and terms, procedures and limitations relating to the exercise of such
Debt Warrants.
Debt Warrant certificates will be exchangeable for new Debt Warrant
certificates of different denominations, and Debt Warrants may be exercised at
the corporate trust office of the Warrant Agent or any other office indicated in
the Prospectus Supplement. Prior to the exercise of their Debt Warrants, holders
of Debt Warrants will not have any of the rights of holders of the securities
purchasable upon such exercise and will not be entitled to payments of principal
of (or premium, if any) or interest, if any, on the securities purchasable upon
such exercise.
OTHER WARRANTS
The applicable Prospectus Supplement will describe the following terms of
Preferred Stock Warrants and Common Stock Warrants in respect of which this
Prospectus is being delivered: (1) the title of such Warrants; (2) the
Securities for which such Warrants are exercisable; (3) the price or prices at
which such Warrants will be issued; (4) the number of such Warrants issued with
each share of Preferred Stock or Common Stock; (5) any provisions for adjustment
of the number or amount of shares of Preferred Stock or Common Stock receivable
upon exercise of such Warrants or the exercise price of such Warrants; (6) if
applicable, the date on and after which such Warrants and the related Preferred
Stock or Common Stock will be separately transferable; (7) if applicable, a
discussion of material federal income tax considerations; (8) any other terms of
such Warrants, including terms, procedures and limitations relating to the
exchange and exercise of such Warrants; (9) the date on which the right to
exercise such Warrants shall commence, and the date on which such right shall
expire; and (10) the maximum or minimum number of such Warrants which may be
exercised at any time.
EXERCISE OF WARRANTS
Each Warrant will entitle the holder of Warrants to purchase for cash such
principal amount of Debt Securities or shares of Preferred Stock or Common Stock
at such exercise price as shall in each case be set forth in, or be determinable
as set forth in, the Prospectus Supplement relating to the Warrants offered
thereby. Warrants may be exercised at any time up to the close of business on
the expiration date set forth in the Prospectus Supplement relating to the
Warrants offered thereby. After the close of business on the expiration date,
unexercised Warrants will become void.
Warrants may be exercised as set forth in the Prospectus Supplement
relating to the Warrants offered thereby. Upon receipt of payment and the
warrant certificate properly completed and duly executed at the corporate trust
office of the Warrant Agent or any other office indicated in the Prospectus
Supplement, the Company will, as soon as practicable, forward the Debt
Securities or shares of Preferred Stock or Common Stock purchasable upon such
exercise. If less than all of the Warrants represented by such warrant
certificate are exercised, a new warrant certificate will be issued for the
remaining Warrants.
FEDERAL INCOME TAX CONSIDERATIONS
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.
The Company believes it has operated, and the Company intends to continue
to operate, in such a 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. For the
particular
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<PAGE> 41
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.
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 stockholders' Securities
with respect to which the distribution is paid and, 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 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 (i) income taxes on effectively
connected income, (ii) withholding taxes on dividends or interest, (iii) branch
profits taxes, (iv) taxes imposed under the Foreign Investment in Real Property
Tax Act, and (v) other tax consequences that may arise under federal, state or
local law.
PLAN OF DISTRIBUTION
The Securities may be sold (i) through agents, (ii) through underwriters,
(iii) through dealers or (iv) directly to purchasers (through a specific bidding
or auction process or otherwise). The distribution of Securities may be effected
from time to time in one or more transactions at a fixed price or prices, which
may be changed, or at market prices prevailing at the time of sale, at prices
relating to such prevailing market prices or at negotiated prices.
Offers to purchase the Securities may be solicited by agents designated by
the Company from time to time. Any such agent involved in the offer or sale of
the Securities will be named, and any commissions payable by the Company to such
agent will be set forth in the Prospectus Supplement. Unless otherwise indicated
in the Prospectus Supplement, any such agent will be acting on a best efforts
basis for the period of its appointment. Any such agent may be deemed to be an
underwriter, as that term is defined in the Securities Act, of the Securities so
offered and sold.
If an underwriter or underwriters are utilized in the sale of Securities,
the Company will execute an underwriting agreement with such underwriter or
underwriters at the time an agreement for such sale is reached, and the names of
the specific managing underwriter or underwriters, as well as any other
underwriters, and the terms of the transactions, including compensation of the
underwriters and dealers, if any, will be set forth in the Prospectus
Supplement, which will be used by the underwriters to make resales of the
Securities.
If a dealer is utilized in the sale of the Securities, the Company will
sell such Securities to the dealer, as principal. The dealer may then resell
such Securities to the public at varying prices to be determined by such dealer
at the time of resale. The name of the dealer and the terms of the transactions
will be set forth in the Prospectus Supplement relating thereto.
Offers to purchase the Securities may be solicited directly by the Company
and sales thereof may be made by the Company directly to institutional investors
or others. The terms of any such sales, including the
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<PAGE> 42
terms of any bidding or auction process, if utilized, will be described in the
Prospectus Supplement relating thereto.
Agents, underwriters and dealers may be entitled under agreements which may
be entered into with the Company to indemnification by the Company against
certain liabilities, including liabilities under the Securities Act, and any
such agents, underwriters or dealers, or their affiliates may be customers of,
engage in transactions with or perform services for the Company in the ordinary
course of business.
If so indicated in the Prospectus Supplement, the Company will authorize
agents and underwriters to solicit offers by certain institutions to purchase
Debt Securities from the Company at the public offering price set forth in the
Prospectus Supplement pursuant to Delayed Delivery Contracts ("Contracts")
providing for payment and delivery on the date stated in the Prospectus
Supplement. Such Contracts will be subject to only those conditions set forth in
the Prospectus Supplement. A commission indicated in the Prospectus Supplement
will be paid to underwriters and agents soliciting purchases of Debt Securities
pursuant to Contracts accepted by the Company.
EXPERTS
The consolidated and combined financial statements of the Company included
in the Annual Report on Form 10-K of the Company for the year ended December 31,
1995 have been audited by Ernst & Young LLP, independent auditors, as stated in
its report dated January 31, 1996 and are incorporated herein by reference in
reliance upon the report of such firm, which report is given upon their
authority as experts in accounting and auditing.
Any financial statements and schedules hereafter incorporated by reference
in the registration statement of which this prospectus is a part that have been
audited and are the subject of a report by independent auditors will be
incorporated herein by reference in reliance upon such reports and upon the
authority of such firms as experts in accounting and auditing to the extent
covered by consents filed with the Commission.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Davis Polk & Wardwell, New York, New York. Davis Polk & Wardwell will
rely as to matters of Maryland law on Piper & Marbury L.L.P., Baltimore,
Maryland.
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER AND THEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary........ S-1
Risk Factors......................... S-3
Recent Developments.................. S-6
Use of Proceeds...................... S-10
Price Range of Common Stock and
Distribution History............... S-10
Capitalization....................... S-11
Selected Consolidated Financial
Information........................ S-12
Business and Properties.............. S-14
Management........................... S-17
Underwriting......................... S-18
Incorporation of Certain Information
by Reference....................... S-19
Experts.............................. S-19
Legal Matters........................ S-19
PROSPECTUS
Available Information................ 2
Incorporation of Certain Information
By Reference....................... 3
The Company.......................... 4
Use of Proceeds...................... 4
Consolidated Ratios of Earnings to
Fixed Charges...................... 4
Description of the Debt Securities... 5
Description of the Capital Stock..... 9
Description of Warrants.............. 18
Federal Income Tax Considerations.... 19
Plan of Distribution................. 20
Experts.............................. 21
Legal Matters........................ 21
</TABLE>
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1,150,000 SHARES
LOGO
COMMON STOCK
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
DEAN WITTER REYNOLDS INC.
MONTGOMERY SECURITIES
J.P. MORGAN & CO.
FEBRUARY 13, 1997
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