<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-15875
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION PURSUANT TO RULE 424
UNDER THE SECURITIES ACT OF 1933. A REGISTRATION STATEMENT RELATING TO
THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF 1933. A FINAL
PROSPECTUS SUPPLEMENT AND PROSPECTUS WILL BE DELIVERED TO PURCHASERS OF
THESE SECURITIES. THIS PROSPECTUS SUPPLEMENT SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION
OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH JURISDICTION.
SUBJECT TO COMPLETION; DATED JUNE 16, 1997
PRELIMINARY PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 21, 1997)
[LOGO] 2,000,000 SHARES
BAY APARTMENT COMMUNITIES, INC.
% SERIES C CUMULATIVE REDEEMABLE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
------------------------
Dividends on the % Series C Cumulative Redeemable Preferred Stock, par
value $.01 per share (the "Series C Preferred Stock"), of Bay Apartment
Communities, Inc. (the "Company") are cumulative from the date of original
issuance and are payable quarterly, commencing September 15, 1997, at the rate
of % per annum of the $25.00 liquidation preference (equivalent to a fixed
annual rate of $____ per share). See "Description of Preferred Stock--Series C
Preferred Stock--Dividends."
Except in certain circumstances relating to the Company's qualification as
a real estate investment trust (a "REIT"), the Series C Preferred Stock is not
redeemable prior to June , 2002. On and after June , 2002, the Series C
Preferred Stock may be redeemed for cash at the option of the Company, in whole
or in part, at a redemption price of $25.00 per share, plus accrued and unpaid
dividends, if any, thereon to the redemption date. The redemption price (other
than the portion thereof consisting of accrued and unpaid dividends) shall be
payable solely out of the sale proceeds of other capital stock of the Company,
which may include other series of the Company's preferred stock, par value $.01
per share ("Preferred Stock"), and from no other source. The Series C Preferred
Stock has no stated maturity and will not be subject to any sinking fund or
mandatory redemption and will not be convertible into any other securities of
the Company. See "Description of Preferred Stock--Series C Preferred
Stock--Redemption." In order to ensure that the Company remains a qualified REIT
for federal income tax purposes, shares of Series C Preferred Stock may be
exchanged for shares of Excess Stock (as defined in the accompanying Prospectus)
if a holder owns more than 9.0% of the Series C Preferred Stock, and the Company
will have the right to purchase Excess Stock from the holder. See "Restrictions
on Transfers of Capital Stock" in the accompanying Prospectus.
Application has been made to list the Series C Preferred Stock on the New
York Stock Exchange (the "NYSE") and the Pacific Exchange (the "PCX"). If
approved, trading of the Series C Preferred Stock on the NYSE and the PCX is
expected to commence within a 30-day period after the initial delivery of the
Series C Preferred Stock. See "Underwriting."
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE S-5 FOR A DISCUSSION OF CERTAIN RISK
FACTORS RELEVANT TO AN INVESTMENT IN THE SERIES C PREFERRED 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>
<CAPTION>
Underwriting
Price to Discounts Proceeds to
Public(1) and Commissions(2) Company(3)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................................... $ $ $
- ---------------------------------------------------------------------------------------------------------
Total........................................... $ $ $
- ---------------------------------------------------------------------------------------------------------
Total Assuming Full Exercise of Over-Allotment
Option(4)..................................... $ $ $
</TABLE>
================================================================================
(1) Plus accrued dividends, if any, from the date of original issuance.
(2) The Company has agreed to indemnify the underwriters (the "Underwriters")
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $100,000.
(4) Assuming exercise in full of the 30-day option granted by the Company to the
Underwriters to purchase up to 300,000 additional shares of Series C
Preferred Stock, on the same terms, solely to cover over-allotments. See
"Underwriting."
------------------------
The shares of Series C Preferred Stock are offered by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to their right to reject orders in whole or in part. It
is expected that delivery of the shares of Series C Preferred Stock will be made
in New York, New York on or about , 1997.
------------------------
PAINEWEBBER INCORPORATED MORGAN STANLEY DEAN WITTER
------------------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE , 1997.
<PAGE> 2
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PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus Supplement and the
accompanying Prospectus or incorporated herein and therein by reference. Unless
the context otherwise requires, all references in this Prospectus Supplement to
the "Company" refer to Bay Apartment Communities, Inc. and its subsidiaries on a
consolidated basis. This Prospectus Supplement contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Company's actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
are discussed in the section entitled "Risk Factors" starting on page S-5 of
this Prospectus Supplement. The Company cautions the reader, however, that the
factors discussed in that section may not be exhaustive.
THE COMPANY
The Company is a fully integrated apartment company with in-house
acquisition, development, construction, reconstruction, marketing, leasing and
management expertise, and is one of the most experienced developers and
operators of upscale apartment communities in Northern California and, in
particular, the San Francisco Bay Area (i.e., Alameda, Contra Costa, Marin,
Napa, San Francisco, San Mateo, Santa Clara, Solano and Sonoma Counties). The
Company has been in business since 1978 and its senior executives have overseen
the development, acquisition or management of over 30,000 apartment homes. In
addition, the Company has a well-trained staff of over 365 real estate
professionals and associates.
The Company owns, or holds substantially all of the ownership interests in,
and manages 41 apartment communities (the "Communities") containing 10,544
apartment homes. A substantial majority of the Communities, 33 out of 41, are
located in Northern California (principally in the San Francisco Bay Area), with
a concentration in the counties of San Francisco, San Mateo, Alameda and Santa
Clara (the "Primary Markets"). As of March 31, 1997, the 36 Communities owned at
that time, excluding four Communities undergoing substantial reconstruction, had
an average monthly rental rate of $1,014 per apartment home and an average
physical occupancy rate of 97.7%. The average age of the Communities is 14
years. In addition to the Communities, the Company owns three land sites
containing a total of 34.6 acres. The Company is building or plans to commence
building in the near future three communities on these sites, which will contain
an aggregate of 1,325 apartment homes (the "Current Development Communities").
If all of the Current Development Communities are developed as currently
anticipated, the Company will increase its apartment homes portfolio by
approximately 12.6%.
The Company believes that apartment communities in the San Francisco Bay
Area and, in particular, the Primary Markets will continue to be attractive
long-term investments. The high cost of home ownership and current economic
conditions in the San Francisco Bay Area, including limited new apartment
construction, continued population and household growth, and high income levels,
make the upscale apartment community market particularly attractive. With its
experience and in-house capabilities, the Company believes it is well-positioned
to continue to take advantage of the strong demand for upscale apartment homes
and the development and acquisition opportunities presented by the current
economic conditions in Northern California. Additionally, the Company believes
the Southern California market is attractive for long-term investment. The
Company will continue to explore opportunistic acquisitions in Southern
California, where it has acquired eight Communities since July 1996.
The Company elected to be taxed as a real estate investment trust (a
"REIT") for federal income tax purposes for the year ending December 31, 1994
and has not revoked such election. The Company was incorporated under the laws
of the State of California in 1978 and was reincorporated in the State of
Maryland in July 1995. Its executive offices are located at 4340 Stevens Creek
Boulevard, Suite 275, San Jose, California 95129 and its telephone number is
(408) 983-1500.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES C PREFERRED
STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF THE SERIES C PREFERRED
STOCK TO STABILIZE ITS MARKET PRICE AND THE PURCHASE OF THE SERIES C PREFERRED
STOCK TO COVER SHORT POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
S-2
<PAGE> 3
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THE OFFERING
SECURITIES OFFERED........ 2,000,000 shares of % Series C Cumulative
Redeemable Preferred Stock (the "Series C Preferred
Stock").
RANKING................... With respect to the payment of dividends and amounts
upon liquidation, the Series C Preferred Stock will
rank senior to the Company's common stock, par value
$.01 per share ("Common Stock"), and the Company's
Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock, which, together with the
Common Stock, represent the only capital stock of the
Company currently outstanding. See "Description of
Preferred Stock -- Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock" and
"-- Series C Preferred Stock."
USE OF PROCEEDS........... The net proceeds from the sale of the Series C
Preferred Stock will be used to repay borrowings
under the Company's $200 million unsecured line of
credit (the "Unsecured Credit Facility"). See "Use of
Proceeds."
DIVIDENDS................. Dividends on the Series C Preferred Stock are
cumulative from the date of original issuance and are
payable quarterly on or about the 15th day of each
March, June, September and December, commencing on
September 15, 1997 at the rate of % per annum of
the $25.00 liquidation preference (equivalent to a
fixed annual rate of $ per share). The first dividend
will be for less than a full quarter. Dividends on
the Series C Preferred Stock will accrue whether or
not the Company's credit facilities at any time
prohibit the current payment of dividends, whether or
not the Company has earnings, whether or not there
are funds legally available for the payment of such
dividends and whether or not such dividends are
declared. See "Description of Preferred Stock --
Series C Preferred Stock -- Dividends."
LIQUIDATION PREFERENCE.... The liquidation preference for each share of Series C
Preferred Stock is $25.00, plus an amount equal to
all accrued and unpaid dividends. See "Description of
Preferred Stock -- Series C Preferred Stock --
Liquidation Preference."
REDEMPTION................ Except in certain circumstances relating to the
preservation of the Company's status as a REIT (see
"Restrictions on Transfers of Capital Stock" in the
accompanying Prospectus), the Series C Preferred
Stock is not redeemable prior to June , 2002. On
and after June , 2002, the Series C Preferred Stock
may be redeemed for cash at the option of the
Company, in whole or in part, at $25.00 per share,
plus all accrued and unpaid dividends thereon to the
date fixed for redemption. The redemption price
(other than the portion thereof consisting of accrued
and unpaid dividends) shall be payable solely out of
the sale proceeds of other capital stock of the
Company, which may include other series of Preferred
Stock, and from no other source. See "Description of
Preferred Stock -- Series C Preferred Stock --
Redemption."
VOTING RIGHTS............. Holders of Series C Preferred Stock will generally
have no voting rights except as required by law.
However, whenever dividends on any shares of Series C
Preferred Stock shall be in arrears for six or more
quarterly periods, the holders of the Series C
Preferred Stock (voting separately as a class with
all other series of Preferred Stock upon which like
voting rights have been conferred and are
exercisable) will be entitled to vote for the
election of a total of two directors of the Company
until all dividends accumulated on such shares of
Series C Preferred Stock have been fully
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S-3
<PAGE> 4
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paid or declared and a sum sufficient for the payment
thereof set aside for payment. See "Description of
Preferred Stock -- Series C Preferred Stock -- Voting
Rights."
CONVERSION................ The Series C Preferred Stock is not convertible into
or exchangeable for any other property or securities
of the Company, except that the shares of Series C
Preferred Stock may be exchanged by the Company for
shares of Excess Stock in order to ensure that the
Company remains a qualified REIT for federal income
tax purposes. See "Restrictions on Transfers of
Capital Stock" in the accompanying Prospectus.
RESTRICTIONS ON
OWNERSHIP................. Ownership by a single holder of more than 9.0% of any
class or series of the capital stock of the Company,
including the Series C Preferred Stock, is restricted
in order to ensure that the Company remains a
qualified REIT for federal income tax purposes. See
"Restrictions on Transfers of Capital Stock" in the
accompanying Prospectus.
TRADING................... Application has been made to list the Series C
Preferred Stock on the NYSE and the PCX. If approved,
trading of the Series C Preferred Stock on the NYSE
and the PCX is expected to commence within a 30-day
period after the initial delivery of the shares of
Series C Preferred Stock.
RISK FACTORS
An investment in the Series C Preferred Stock involves various risks, and
prospective investors should carefully consider the matters discussed under
"Risk Factors" commencing on page S-5 of this Prospectus Supplement before
making any investment in the Company.
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S-4
<PAGE> 5
RISK FACTORS
An investment in the Company involves various risks. Prospective
stockholders should consider the following risk factors:
DEVELOPMENT AND ACQUISITION RISKS
The Company intends to continue to pursue the development and construction
of apartment home communities in accordance with the Company's development and
underwriting policies. Risks associated with the Company's development and
construction activities may include: the abandonment of development and
acquisition opportunities explored by the Company; construction costs of a
community may exceed original estimates due to increased materials, labor or
other expenses, which could make completion of the community uneconomical;
occupancy rates and rents at a newly completed community are dependent on a
number of factors, including market and general economic conditions, and may not
be sufficient to make the community profitable; financing may not be available
on favorable terms for the development of a community; and construction and
lease-up may not be completed on schedule, resulting in increased debt service
expense and construction costs. Development activities are also subject to risks
relating to the inability to obtain, or delays in obtaining, all necessary
zoning, land-use, building, occupancy, and other required governmental permits
and authorizations. The occurrence of any of the events described above could
adversely affect the Company's ability to achieve its projected yields on
communities under development or reconstruction and could prevent the Company
from making expected distributions. See "-- Real Estate Investment Risks."
Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that judgments with respect to the costs of
improvements to bring an acquired community up to standards established for the
market position intended for that community will prove inaccurate, as well as
general investment risks associated with any new real estate investment.
Although the Company undertakes an evaluation of the physical condition of each
new community before it is acquired, certain defects or necessary repairs may
not be detected until after the community is acquired, which could significantly
increase the Company's total acquisition costs.
REAL ESTATE INVESTMENT RISKS
General Risks. Real property investments are subject to varying degrees of
risk. The yields available from equity investments in real estate depend on the
amount of income generated and expenses incurred. If the Communities do not
generate revenues sufficient to meet operating expenses, including debt service
and capital expenditures, the Company's cash flow and ability to pay
distributions to its stockholders will be adversely affected.
An apartment community's revenues and value may be adversely affected by a
number of factors, including the national economic climate; the local economic
climate (which may be adversely impacted by plant closings, industry slowdowns,
military base closings and other factors); local real estate conditions (such as
an oversupply of or a reduced demand for apartment homes); the perceptions by
prospective residents of the safety, convenience and attractiveness of the
community; the ability of the owner to provide adequate management, maintenance
and insurance; and increased operating costs (including real estate taxes and
utilities). Certain significant expenditures associated with each equity
investment (such as mortgage payments, if any, real estate taxes, insurance and
maintenance costs) are generally not reduced when circumstances cause a
reduction in income from the investment. If a community is mortgaged to secure
payment of indebtedness, and if the Company is unable to meet its mortgage
payments, a loss could be sustained as a result of foreclosure on the community
or the exercise of other remedies by the mortgagee. In addition, real estate
values and income from communities are also affected by such factors as the cost
of compliance with government regulation, including zoning and tax laws,
interest rate levels and the availability of financing.
Operating Risks. Each of the Communities is subject to all operating risks
common to apartment communities in general, any and all of which might adversely
affect apartment home occupancy or rental rates. Increases in unemployment and a
decline in household formation in Northern or Southern California
S-5
<PAGE> 6
generally might adversely affect occupancy or rental rates. Increases in
operating costs due to inflation and other factors may not be offset by
increased rents. Residents may be unable or unwilling to pay rent increases.
Rent control or rent stabilization laws or other laws regulating housing are
applicable in certain of the cities in the Primary Markets where the Company
owns Communities and may be enacted in the future in the jurisdictions in which
one or more communities are located or may be acquired; if enacted, compliance
with these laws may prevent the Company from raising rents to offset increases
in operating costs. Similarly, the local rental market may limit the extent to
which rents may be increased to meet increased expenses without decreasing
occupancy rates. If any of the above occurs, the Company's ability to achieve
its projected yields on the Communities and to make expected distributions to
stockholders could be adversely affected.
Market Illiquidity. Equity real estate investments are relatively illiquid.
Such illiquidity will tend to limit the ability of the Company to vary its
portfolio promptly in response to changes in economic or other conditions. In
addition, the Internal Revenue Code of 1986, as amended (the "Code"), limits the
Company's ability to sell properties held for fewer than four years, which may
affect the Company's ability to sell properties without adversely affecting
returns to holders of Common Stock.
Competition. There are numerous housing alternatives that compete with the
Communities in attracting residents. The Communities compete directly with other
rental apartments and single-family homes that are available for rent in the
markets in which the Communities are located. The Communities also compete for
residents with the new and existing home markets. The number of competitive
residential properties in a particular area could have a material effect on the
Company's ability to lease apartment homes and on the rents charged. In
addition, competitors for acquisitions and development projects may have greater
resources than the Company thereby putting the Company at a competitive
disadvantage.
Affordable Housing Laws or Restrictions. A number of the Communities are,
and will be in the future, subject to federal, state and local statutes or other
restrictions requiring that a percentage of apartment homes be made available to
residents satisfying certain income requirements. The Company must comply with
these restrictions as a condition to obtaining tax-exempt financing for these
Communities. These laws and restrictions, as well as any changes thereto making
it more difficult to meet such requirements, or a reduction in or elimination of
certain financing advantages available in some instances to persons satisfying
such requirements, could adversely affect the Company's profitability and its
development and acquisition projects in the future.
DEPENDENCE ON NORTHERN CALIFORNIA AND PRIMARY MARKETS
Although the Company may expand further outside of Northern California, and
intends to make additional selective acquisitions in Southern California from
time to time, currently a substantial majority of the Communities are located in
Northern California (primarily in the San Francisco Bay Area), where the Company
has most of its acquisition, development, construction and marketing expertise.
The Company's performance, therefore, is dependent upon economic conditions in
these markets. A decline in the economy in these markets may adversely affect
the ability of the Company to make expected distributions to stockholders.
Similarly, a decline in demand for discretionary consumer goods and leisure
travel, as well as heightened competition in high technology industries, could
have an adverse impact upon Northern California. Reductions in the level of
government spending in the defense industry may also have an impact upon
employment and demand for residential real estate in the Company's markets.
NEW SOUTHERN CALIFORNIA MARKETS
In 1996, the Company expanded beyond Northern California and has since
acquired eight Communities located in Southern California (including Orange, Los
Angeles and San Diego Counties). The Company also intends to make other
selective acquisitions in Southern California from time to time. The Company's
historical experience is in Northern California, primarily in the San Francisco
Bay Area, and it is possible that the Company's expertise in those markets may
not assist it in Southern California. In such event, the Company may be exposed
to, among others, risks associated with (i) a lack of market knowledge and
understanding of the local economy, (ii) an inability to access land and
property acquisition opportunities,
S-6
<PAGE> 7
(iii) an inability to obtain construction tradespeople, (iv) sudden adverse
shifts in supply and demand factors and (v) an unfamiliarity with local
governmental procedures.
NATURAL DISASTERS
Many of the Communities are located in the general vicinity of active
earthquake faults. In July 1996, the Company obtained a seismic risk analysis
from an engineering firm which estimated the probable maximum loss ("PML") for
each of the 27 Communities owned at that time individually and for all of such
Communities combined. To establish a PML, the engineers first define a severe
earthquake event for the applicable geographic area, which is an earthquake that
has only a 10% likelihood of occurring over a 50-year period. The PML is
determined as the structural and architectural damage and business interruption
loss that has a 10% probability of being exceeded in the event of such an
earthquake. Because the Communities are concentrated in the San Francisco Bay
Area, the engineers' analysis defined an earthquake on the San Andreas Fault
with a Richter Scale magnitude of 8.0 as a severe earthquake with a 10%
probability of occurring within a 50-year period, and established an aggregate
PML at that time of $45.9 million for the 27 Communities owned at that time,
which is a PML level that is expected to be exceeded only 10% of the time in the
event of such a severe earthquake. This aggregate PML could be higher as a
result of variations in soil classifications and structural vulnerabilities. One
Community's individual PML was 30%, while four Communities had PMLs of 25%, and
the remaining 22 Communities owned at such time each had PMLs of 20% or less.
The Company has obtained individual PML assessments for thirteen of the fourteen
Communities acquired or developed since July 1996. One of those Communities has
an individual PML of 30%, three of those Communities have individual PMLs of 25%
and the remaining Communities have individual PMLs of 20% or less. The Company
obtained an initial seismic risk analysis on the fourteenth Community, which
indicated a PML of approximately 31%. The Company is in the process of obtaining
a final seismic risk analysis for this Community from the same engineering firm
that conducted the seismic risk analysis for the other Communities. While the
Company has not yet obtained an engineers' analysis establishing an aggregate
PML for all of the Communities combined, the Company is currently in the process
of obtaining such an aggregate PML in order to assist it in evaluating
appropriate levels of insurance coverage. No assurance can be given that an
earthquake would not cause damage or losses greater than the PML assessments
indicate, that future PML levels will not be higher than the current PML levels
for the Communities, or that future acquisitions or developments will not have
PML assessments indicating the possibility of greater damage or losses than
currently indicated.
In July 1996, the Company obtained earthquake insurance, both for physical
damage and lost revenues, with respect to the 27 Communities then owned. In
addition, the Communities acquired subsequent to July 1996 are included under
the Company's earthquake insurance policy. For any single occurrence, the
Company self-insures the first $20 million of loss, and has in place $25 million
of coverage above this amount, with a 20% deductible. In addition, the Company's
general liability and property casualty insurance provides coverage for personal
liability and fire damage. In the event that an uninsured disaster or a loss in
excess of insured limits were to occur, the Company could lose its capital
invested in the affected Community, as well as anticipated future revenues from
such Community, and would continue to be obligated to repay any mortgage
indebtedness or other obligations related to the Community. Any such loss could
materially and adversely affect the business of the Company and its financial
condition and results of operations.
REAL ESTATE FINANCING RISKS
Risks Relating to the Credit Enhancement. As of March 31, 1997, the
Company was obligated for certain mortgage indebtedness funded by tax-exempt
bonds (the "Bonds") in the aggregate principal amount of approximately $224.5
million on 12 Communities (Waterford Apartments, Villa Mariposa, Fairway Glen
Apartments, Foxchase Apartments, Barrington Hills, Crossbrook, Rivershore,
Canyon Creek, Sea Ridge, City Heights, Countrybrook and Larkspur Canyon).
Principal and interest payments due to holders of the Bonds are secured by a
first deed of trust on the Community associated with the applicable Bond issue.
Scheduled principal and interest payments due on the Bonds financing
Foxchase, Fairway Glen, Waterford and Villa Mariposa (the "1994 Bonds") are
guaranteed by an insurance policy (the "FGIC Credit
S-7
<PAGE> 8
Enhancement") issued by Financial Guaranty Insurance Company ("FGIC"). The FGIC
Credit Enhancement will terminate on March 17, 2004 and, if the FGIC Credit
Enhancement is not renewed or replaced, the 1994 Bond documents may require
balloon payments in 2004 aggregating approximately $87.4 million, less any
unscheduled principal amortization. Scheduled interest and principal payments
due on the Bonds financing Barrington Hills, Crossbrook, Rivershore, Canyon
Creek and Sea Ridge (the "1995 Bonds") are supported by a 30-year credit
enhancement (the "FNMA Credit Enhancement" and, together with the FGIC Credit
Enhancement, the "Credit Enhancements") provided by the Federal National
Mortgage Association ("FNMA").
Each of the Credit Enhancements contains certain provisions under which a
default of certain payment obligations or covenants by the Company would entitle
FGIC or FNMA, as the case may be, to declare a default under its respective
Credit Enhancement documents and exercise its remedies (including foreclosure)
under mortgages that encumber nine of the 12 Bond-financed Communities and eight
additional Communities, with a consequent loss of income and asset value to the
Company. In addition, gross rents collected from the residents of these 17
Communities have been and will continue to be deposited in cash collateral
accounts established with financial institutions acceptable to FGIC or FNMA, as
applicable. The Company does not have access to these funds until all required
monthly debt service payments due on the Bonds and certain other payments are
made. A default under either of the Credit Enhancements or the Bond documents
may adversely affect the ability of the Company to make expected distributions
to shareholders, including distributions required to maintain its REIT status.
See "Certain Federal Income Tax Considerations."
Bond Compliance Requirements. The 12 Bond-financed Communities are subject
to deed restrictions or restrictive covenants relating to tax-exempt bond
financing. In addition, the Code and the regulations promulgated thereunder
impose various restrictions, conditions and requirements relating to the
exclusion from gross income for federal income tax purposes of interest on
qualified Bond obligations, including requirements that at least 20% of
apartment homes be made available to residents with gross incomes that do not
exceed 80% of the median income (50% in the case of the Canyon Creek, City
Heights and Sea Ridge Communities) in the area, measured annually. Some of the
Communities financed with Bonds are also subject to a requirement that the
rental rates for the 20% of the apartment homes that are subject to the
foregoing requirement may not exceed 30% of one-half of the applicable median
income. In addition to federal requirements, certain state and local authorities
may impose rental restrictions. The Bond compliance requirements and the
requirements of any future tax-exempt bond financing utilized by the Company may
have the effect of limiting the Company's income from the Bond-financed
Communities if the Company is required to lower its rental rates materially to
attract residents who satisfy the median income test. If the required number of
apartment homes are not reserved for residents satisfying these income
requirements, the tax-exempt status of the Bonds may be terminated, the
obligations of the Company under the Bond documents may be accelerated and other
contractual remedies against the Company may be available.
Risk of Rising Interest Rates. The Company had variable rate indebtedness
aggregating approximately $244.7 million outstanding as of March 31, 1997,
consisting of $204.5 million of tax-exempt financing and $40.2 million of
borrowings under the Company's Unsecured Credit Facility. Of the Company's
$204.5 million of variable rate tax-exempt financing, approximately $176 million
has been fixed through interest rate swap agreements, of which an aggregate of
$87.4 million has been fixed at an all-inclusive interest rate of 5.88% per
annum until March 2004 and an aggregate of $88.7 million has been fixed at an
all-inclusive interest rate of 6.48% per annum until June 2010. Additional
indebtedness that the Company may incur under the Unsecured Credit Facility will
also bear interest at a variable rate. To the extent the Company uses variable
rate debt for future financings, and with respect to the portion of the
Company's outstanding indebtedness that will bear interest at a variable rate,
increases in these interest rates could adversely affect the Company's ability
to make distributions to stockholders. Consideration will be given to acquiring
interest rate hedging or protection agreements, if appropriate and cost
effective, with respect to future variable rate indebtedness to seek to reduce
exposure to interest rate increases on such debt.
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POTENTIAL ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws, a current or
previous owner or operator of real estate may be required (typically regardless
of knowledge or responsibility) to investigate and remediate the effects of
hazardous or toxic substances or petroleum product releases at such property,
and may be held liable to a governmental entity or to third parties for property
damage and for investigation and remediation costs incurred by such parties in
connection with the contamination, which costs may be substantial. The presence
of such substances (or the failure to properly remediate the contamination) may
adversely affect the owner's ability to borrow against, sell or rent such
property.
Certain federal, state and local laws and regulations govern the removal,
encapsulation or disturbance of asbestos-containing materials ("ACMs") when such
materials are in poor condition or in the event of construction, remodeling,
renovation or demolition of a building. Such laws may impose liability for
release of ACMs and may provide for third parties to seek recovery from owners
or operators of real properties for personal injury associated with ACMs. In
connection with its ownership and operation of the Communities, the Company
potentially may be liable for such costs. The Company is not aware that any ACMs
were used in connection with (i) the construction of the Communities developed
by the Company, all of which were constructed after 1983, or (ii) the
construction of any of the Communities acquired by the Company other than
Regatta Bay, Sea Ridge, Village Square, Sunset Towers, Mill Creek, Crowne Ridge
(formerly Channing Heights), Lafayette Place (formerly Martinique Gardens),
SummerWalk (formerly Rancho Penasquitos), The Village, Banbury Cross, Cardiff
Gardens and Genesee Gardens. The Company does not anticipate that it will incur
any material liabilities in connection with the presence of ACMs at the
Communities. The Company currently has in place or intends to implement an
operations and maintenance program for ACMs at the Regatta Bay, Sea Ridge,
Village Square, Sunset Towers, Mill Creek, Crowne Ridge, Lafayette Place,
SummerWalk, The Village, Banbury Cross, Cardiff Gardens and Genesee Gardens
Communities.
All of the Communities, and all of the Current Development Communities,
have been subjected to a Phase I or similar environmental assessment (which
involves general inspections without soil sampling or groundwater analysis and
generally without radon testing). These assessments have not revealed any
environmental liability that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations. However, one
Community and one Current Development Community are subject to soil and
groundwater remediation of contamination from adjacent landowners. In the case
of one of the Current Development Communities, Toscana, National Semiconductor
Corporation is causing remediation to occur and has provided an indemnity which
the Company may rely upon for certain environmental liabilities. Additionally,
another Current Development Community, Paseo Alameda, may require underground
storage tank removal and other environmental cleanup. Nevertheless, it is
possible that the assessments do not reveal all environmental liabilities or
there are material environmental liabilities of which the Company is unaware. No
assurances can be given that (i) future laws, ordinances or regulations will not
impose material environmental liability, or (ii) the current environmental
condition of the Communities or the Current Development Communities will not be
affected by the condition of land or operations in the vicinity of such
Communities (such as the presence of underground storage tanks), or by third
parties unrelated to the Company.
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<PAGE> 10
THE COMPANY
The Company is a fully-integrated apartment company with in-house
acquisition, development, construction, reconstruction, financing, marketing,
leasing and management expertise and is one of the most experienced developers
and operators of upscale apartment communities in Northern California and, in
particular, in the San Francisco Bay Area. The Company has been in business
since 1978 and its senior executives have overseen the development, acquisition
or management of over 30,000 apartment homes. In addition, the Company has a
well-trained staff of over 365 real estate professionals and associates. With
its experience and in-house capabilities, the Company believes it is
well-positioned to continue to take advantage of the strong demand for upscale
apartment homes and the development and acquisition opportunities presented by
the current economic conditions in Northern and Southern California.
The Company is a self-administered and self-managed REIT that owns, or
holds substantially all of the ownership interests in, and manages 41
Communities containing 10,544 apartment homes. The largest Community has 544
apartment homes and the smallest has 135 apartment homes. As of March 31, 1997,
the 36 Communities owned at that time, excluding four Communities undergoing
substantial reconstruction, had an average monthly rental rate per apartment
home of approximately $1,014 and an average physical occupancy rate of 97.7%.
The average age of the Communities is 14 years. Since the Company's initial
public offering in March 1994 (the "Initial Offering"), the Company has
completed the development of three Communities: Carriage Square, a 324 apartment
home community located in San Jose, California; Canyon Creek, a 348 apartment
home community located in Campbell, California; and Rosewalk, a 300 apartment
home community located in San Jose, California. The Company also owns three land
sites on which it is building or plans to commence building in the near future
three apartment communities, which will contain an aggregate of 1,325 apartment
homes. The Company has received substantially all of the discretionary permits
required to develop communities on these sites and is in the process of
obtaining all other required permits. There can be no assurance that the Company
will be able to construct apartment home communities on these sites. See "Risk
Factors -- Development and Acquisition Risks."
A substantial majority of the Communities, 33 out of 41, are located in
Northern California (principally in the San Francisco Bay Area), where the
Company believes that apartment communities provide attractive long-term
investments. The high cost of home ownership and current economic conditions in
the San Francisco Bay Area, including limited new apartment construction,
continued population and household growth, and high income levels, make the
upscale apartment home community market particularly attractive.
Since the Initial Offering, the Company has pursued an aggressive growth
strategy, developing and building new apartment communities as well as acquiring
and rebuilding well-located but poorly maintained and managed communities.
During this period, the Company completed the acquisition of 6,108 apartment
homes in 25 Communities, representing a total investment of approximately $428.8
million. As of March 31, 1997, the Company has spent approximately $20.4
million, and currently has budgeted to spend an additional $45.9 million
(including amounts budgeted for Communities acquired since March 31, 1997), in
repositioning the Communities.
The Company believes that the combination of increasing rental rates and
declining vacancy rates in the Primary Markets provides an opportunity for
future revenue growth. However, there are practical limitations on the Company's
ability to increase rental rates for existing residents and the Company
currently has a policy of limiting rent increases for most lease renewals by
existing residents to 10% per year. Consequently, the actual market rental rates
for apartments in the Primary Markets have been rising more rapidly than the
Company's rental rates. As a result, as of March 31, 1997, the difference
between the revenues generated by the Company's existing leases and revenues
that would be generated at current market rental rates (the "loss to lease") was
approximately 8%, or $741,546 per month. The Company believes that the Primary
Markets will continue to be attractive markets in which to develop and build, or
acquire and rebuild, apartment communities because of (i) an increasing demand
for rental households, (ii) the limited supply of new apartment homes, and (iii)
the high cost of alternatives to apartment homes.
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COMPANY PHILOSOPHY
The Company's primary business is to own and operate upscale apartment
communities with extensive landscaping and amenities, well-maintained common
facilities and convenient access to shopping areas, transportation or other
services. The Company has consistently followed this philosophy since it was
founded in 1978. In operating the Company, management emphasizes the following
philosophies:
- Quality and Reputation. The Company believes that by setting high
standards with respect to the design, development, construction and
operation of its Communities, it has established an excellent reputation
and tradition of service in the Primary Markets. This dedication to
service and quality is designed to minimize resident turnover, reduce
operating expenses, and enhance the occupancy levels of its Communities.
- Long-Term Competitive Advantage. The Company, operating primarily in the
fully-developed metropolitan areas of Northern California, has
consistently aimed to build or acquire and own apartment community sites
which, as a result of their location and design, give the Company a
long-term competitive advantage. The Company seeks sites in urban
settings where no other comparable apartment can be built in the
foreseeable future. The Company also purchases sites with non-residential
buildings on them, then removes the old structures and builds new
apartment homes in otherwise fully developed neighborhoods. The Company
also buys existing apartments in fully developed neighborhoods and
substantially rebuilds them to a quality higher than any existing
apartment in the area, which frequently results in the Company owning the
highest quality apartment community or the best rental value apartment
community in a neighborhood.
- Successful In-fill Development Strategy. The Company also favors in-fill
development sites that make its apartment locations very attractive to
the largest possible segment of the rental market. The Company
selectively seeks opportunities to acquire development sites or existing
apartment communities that have high drive-by traffic volume, very good
transportation access, convenient shopping and schools, close proximity
to major employment centers, lower than normal land or improvement costs,
significant public financial assistance, favorable tax-exempt financing
and other significant advantages which make the Company's apartment
locations very attractive. Management believes that the in-fill
characteristics and superior locations of its communities and the strict
growth controls in the Primary Markets are likely to limit new
competition and enhance the current and long-term value of the Company's
overall portfolio.
- Service Ethic. The Company believes that the best way to attract and
retain residents is to provide comprehensive personal service. The
Company has well-trained property managers, leasing agents and
maintenance managers each of whose objective is to be courteous and
responsive to resident needs 24 hours a day and to ensure that the
Communities are always maintained in their best condition. These
employees frequently attend educational programs to improve their
management and marketing skills. The Company also offers or makes
available many services to residents that make living in the Communities
more convenient, including package and laundry pick up and delivery
services, aerobics classes, community social activities and, for certain
communities, business centers with computers, printers, fax and copy
machines.
- Hands-on Construction. The Company carefully designs each development
project and serves as its own general contractor for new construction and
renovation work. It designs each community with full participation of key
Company development, construction, marketing, financial, and property
management personnel, as well as with building and landscape architects,
civil, soil, structural, mechanical, electrical, sound and environmental
engineers and a wide variety of major subcontractors that will be
involved in the construction and maintenance of the communities. In its
construction design and specifications, the Company includes as many
long-term, durable materials and equipment as are financially feasible to
minimize future maintenance costs. The Company takes significant steps to
control costs and schedules, such as widely bidding all phases of the
construction project and negotiating detailed contracts with
subcontractors so that the construction process is less likely to have
change orders or unanticipated costs. The Company maintains detailed
budgets, budget to actual cost
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analyses and construction schedules to control all phases of the
construction operation at its communities.
- Conservative Capital Structure. The Company intends to maintain a
conservative capital structure that will allow it continued cost
effective access to the capital markets. The Company intends to maintain
a conservative balance sheet and currently has a policy of incurring debt
in the future only if upon such incurrence its
debt-to-total-market-capitalization ratio (i.e., total consolidated debt
of the Company as a percentage of the market value of outstanding shares
of capital stock of the Company plus total consolidated debt) is 50% or
less. The Company's debt-to-total-market-capitalization ratio as of March
31, 1997 was 24.1%. Since the Initial Offering, the Company has
maintained a conservative capital structure, and intends to continue to
maintain a disciplined financing policy to ensure maximum financial
flexibility. This conservative policy has enabled the Company to
repeatedly access the equity capital markets at opportune times to
finance its activities.
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THE COMMUNITIES
The Company owns, or holds substantially all of the ownership interests in,
and manages 41 apartment Communities containing 10,544 apartment homes, most of
which are located in Northern California, primarily in the San Francisco Bay
Area. Since the Initial Offering, the Company has designed, developed and
constructed three of the Communities, representing an aggregate of 972 apartment
homes, each of which has operated at an average occupancy rate of greater than
95% since stabilized occupancy, and has acquired, or acquired and redeveloped or
initiated redevelopment programs at, 25 of the Communities. Stabilized occupancy
is defined as the first month in which the Community achieves 95% occupancy,
which typically occurs between six and nine months after completion of
construction, depending on the size of the Community. All of the Communities are
managed by the Company.
The Communities generally are in locations that provide them with a
competitive advantage. The Company frequently selects in-fill, urban locations
where no other comparable, competitive apartment community can be built.
Similarly, the Company's high quality standards for the development and
construction of new communities as well as the reconstruction of acquired
communities often results in the communities being the most attractive and
having the best rental value within their immediate market. Generally, the
Communities also have the advantage of being located in high visibility areas in
close proximity to major transportation arteries, mass transit lines, commercial
districts, shopping or other services. Apartment communities located in high
visibility areas not only provide many conveniences to residents, but also
encourage greater walk-in traffic and, consequently, improve leasing
opportunities and allow the Company to operate with reduced marketing costs.
With the exception of those mid-rise Communities located in the most urban
areas of San Francisco, the Communities typically are contemporary two- and
three-story buildings in extensively landscaped settings with lush gardens,
fountains or waterscapes. The objectives of the site layout and building design
are to provide residents with convenient indoor or covered parking, ample
private storage areas and a comfortable living environment. Most of the
Communities feature solar-heated swimming pools, hydro-jet spas, high-tech
fitness facilities, and expansive community areas. The apartment homes typically
offer spacious, open living areas with an abundance of natural light, and many
of the following amenities: ceiling fans, vaulted ceilings, patios or balconies,
fireplaces, designer coordinated carpeting and window treatment, separate
in-home laundry rooms with washing machines and dryers, and fully-equipped
kitchens often with built-in buffets, microwaves, disposals and dishwashers. In
many cases, the Company makes certain other services available to residents such
as business centers, aerobics classes, dry cleaning pick-up and delivery, and
mail drops and package acceptance.
In addition to the physical advantages of the Communities, the Company
attributes its success to a highly-trained professional on-site management and
maintenance staff that provides courteous and responsive service to the
residents of each Community. Management believes that excellent design and
intensive, service-oriented property management that is focused on the specific
needs of residents create a very desirable living environment for residents.
This combination of features allows the Company to achieve higher rental rates
and occupancy levels while minimizing resident turnover and operating expenses
and maximizing current and long-term cash flow and the value of the Communities.
The Company designs its Communities to control costs both during
construction and operation and to provide maximum long-term investment value and
resident appeal. In connection with the preparation of the design and plans for
each Community and the apartment homes therein, the Company's employees have
regular meetings with all of the major trade contractors associated with the
project to ensure that the Communities are well-planned and construction is
well-coordinated, thereby minimizing the possibility for construction cost
overruns. The Company takes additional steps to control construction costs, such
as widely bidding all phases of the construction project and negotiating
detailed contracts with subcontractors so that the construction process has
little or no change orders or unanticipated costs.
The Company includes many long-term durable features in the design of
Communities that it constructs to maximize the useful life of the Communities.
For example, on newly constructed Communities, the Company typically uses
concrete tile roofs or heavy duty fire resistant composition shingles, cast iron
drains,
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waste and vent pipes, copper water pipes, extra deep base rock and asphalt
lifts. In addition, extensive measures are employed to minimize noise between
apartment homes. The Company uses condominium standards for this purpose,
including the use of double walls and double insulation between apartment homes,
lightweight concrete on floors and insulation between ceilings and floors.
Whenever possible, the Company locates closets, bathrooms, and laundries in
locations that minimize sound transmission.
RECENT DEVELOPMENTS
In January 1997, the Company sold in an underwritten public offering
1,400,000 shares of Common Stock at a price of $37.125 per share. The net
proceeds from the sale, approximately $49.3 million, were used to repay
borrowings under the Company's Unsecured Credit Facility, which were used to
fund the acquisition and development of additional apartment communities,
including amounts borrowed in connection with the acquisition of the SummerWalk
Community.
In April 1997, the Company sold 1,662,000 shares of Common Stock in a
direct placement to two institutional investors at a price of $36.125 per share.
The net proceeds from the sale, approximately $58.7 million, were used to repay
borrowings under the Company's Unsecured Credit Facility. Such borrowings were
used to fund the acquisition and development of additional apartment
communities, including amounts borrowed in connection with the acquisition of
The Village, Banbury Cross and Cardiff Gardens. The net proceeds per share from
the April offering were approximately $35.34 compared with approximately $35.19
in net proceeds per share received in the January offering.
Since January 1, 1997, the Company has acquired seven apartment
communities, containing 1,742 apartment homes, for an aggregate purchase price
of approximately $122 million, and currently has budgeted to spend an additional
$24 million in repositioning these Communities.
USE OF PROCEEDS
The net proceeds to the Company from this offering, after all anticipated
issuance costs, are estimated to be approximately $48.3 million (approximately
$55.6 million if the Underwriters' over-allotment option is exercised in full).
The Company will use the net proceeds from this offering to repay borrowings
under the Unsecured Credit Facility, which were used to fund the acquisition and
development of additional apartment communities, including amounts borrowed to
fund the acquisition of the Villa Serena, Amador Oaks and Genesee Gardens
Communities. The Unsecured Credit Facility bears interest at the 30-day London
Interbank Offered Rate (based on a maturity selected by the Company) plus 1.55%
per annum (7.24% per annum as of June 16, 1997) and matures in May 1999.
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CAPITALIZATION
The following table sets forth the historical capitalization for the
Company as of March 31, 1997 and the pro forma capitalization for the Company as
of such date to reflect the issuance of Common Stock in April 1997, and as
adjusted to give effect to this offering, including the use of the net proceeds
derived therefrom as described in "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------------------
HISTORICAL PRO FORMA AS ADJUSTED
----------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable............................................. $ 224,531 $ 224,531 $224,531
Unsecured Credit Facility(1).............................. 40,200 -- --
Minority interest......................................... 6,098 6,098 6,098
Shareholders' equity:
Preferred Stock, $.01 par value, 25,000,000 authorized,
outstanding: 2,713,822 at March 31, 1997 and pro
forma, and 4,713,822 as adjusted..................... 27 27 47
Common Stock, $.01 par value, 40,000,000 authorized,
outstanding: 20,472,785 at March 31, 1997, 22,134,785
pro forma and as adjusted(2)......................... 205 222 222
Dividends in excess of accumulated earnings............. (25,433) (25,433) (25,433)
Paid in capital......................................... 485,904 544,587 592,867
----------- --------------- ------------
Total shareholders' equity........................... 460,703 519,403 567,703
----------- --------------- ------------
Total capitalization................................. $ 731,532 $ 750,032 $798,332
======== =========== =========
</TABLE>
- ---------------
(1) As of June 16, 1997 there was $96.4 million outstanding under the Unsecured
Credit Facility.
(2) Excludes 1,441,425 shares of Common Stock reserved for issuance under the
1994 Stock Incentive Plan, as amended and restated.
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The following table sets forth the Company's consolidated ratios of
earnings to combined fixed charges and preferred stock dividends for the periods
shown:
<TABLE>
<CAPTION>
YEAR YEAR
JANUARY 1 - ENDED ENDED MARCH 17 - JANUARY 1 - YEAR ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 16, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1994(1) 1993(1) 1992(1)
------------ ------------- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio....... 2.00x 1.61x 1.26x 1.76x .71x .96x .71x
</TABLE>
- ---------------
(1) Ratios for the period January 1 - March 16, 1994 and the years ended 1993
and 1992 reflect periods prior to the recapitalization and initial public
offering of the Company on March 17, 1994. The earnings for these periods
were inadequate to cover fixed charges as follows:
<TABLE>
<S> <C>
Period January 1 - March 16, 1994............................ $ 716,000
Year ended December 31, 1993................................. 447,000
Year ended December 31, 1992................................. 3,916,000
</TABLE>
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of pre-tax income from
continuing operations plus fixed charges. Fixed charges consist of interest
expense, capitalized interest and the amortization of debt issuance costs. The
Company issued 2,308,800 shares of Series A Convertible Preferred Stock, par
value $.01 per share (the "Series A Convertible Preferred Stock"), in October
1995 and 405,022 shares of Series B Convertible Preferred Stock, par value $.01
per share (the "Series B Convertible Preferred Stock"), in May 1996.
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DESCRIPTION OF PREFERRED STOCK
This description of the particular terms of the Preferred Stock supplements
and, to the extent inconsistent therewith, replaces the description of the
general terms and provisions of the Preferred Stock set forth in the
accompanying Prospectus, to which description reference is hereby made.
GENERAL
The Company is authorized to issue up to 25,000,000 shares of Preferred
Stock in one or more series, with such terms, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption, in each
case, if any, as are permitted by Maryland law and as the Board of Directors of
the Company may determine by adoption of an amendment of the Company's Articles
of Incorporation, as amended (the "Articles"), without any further vote or
action by the Company's stockholders. See "Description of Preferred Stock" in
the accompanying Prospectus. The Series C Preferred Stock is a series of the
Company's Preferred Stock.
Prior to the completion of the offering, the Board of Directors of the
Company will adopt an amendment (the "Designating Amendment") of the Articles
determining the terms of a series of Preferred Stock consisting of up to
2,300,000 shares, designated % Series C Cumulative Redeemable Preferred Stock.
The following summary of the terms and provisions of the Preferred Stock does
not purport to be complete and is qualified in its entirety by reference to the
pertinent sections of the Articles and the Articles Supplementary creating the
Series A Convertible Preferred Stock and Series B Convertible Preferred Stock
and the Articles Supplementary to be adopted with respect to the Series C
Preferred Stock (the "Designating Amendment"), each of which is available from
the Company.
The transfer agent, registrar and dividend disbursing agent for the Series
C Preferred Stock will be American Stock Transfer & Trust Company of New York,
New York.
SERIES A CONVERTIBLE PREFERRED STOCK AND SERIES B CONVERTIBLE PREFERRED STOCK
The Company currently has outstanding 2,308,800 shares of Series A
Convertible Preferred Stock and 405,022 shares of Series B Convertible Preferred
Stock. The Series A Convertible Preferred Stock and the Series B Convertible
Preferred Stock have substantially the same terms and conditions. Both Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock are
entitled to receive dividends equal to one hundred and three percent (103%) of
the dividends, if any, paid on the Common Stock. The Series C Preferred Stock
will rank senior to the Series A Convertible Preferred Stock and the Series B
Convertible Preferred Stock with respect to the payment of dividends and
payments upon liquidation. The Series A Convertible Preferred Stock and the
Series B Convertible Preferred Stock generally have no voting rights and, except
in certain limited circumstances, cannot be converted into Common Stock prior to
October 1998. Thereafter, the Series A Convertible Preferred Stock and the
Series B Convertible Preferred Stock may be converted on a share-for-share basis
into shares of Common Stock, subject to certain ownership limitations. In
October 2005, all outstanding shares of Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock will be automatically converted into shares
of Common Stock. The Series A Convertible Preferred Stock and the Series B
Convertible Preferred Stock are not traded on any securities exchange and the
Company does not have any obligation to list or quote those securities on any
securities exchange. The holders of the Series A Convertible Preferred Stock and
the Series B Convertible Preferred Stock have registration rights with respect
to the shares of Common Stock issuable upon conversion of those securities.
SERIES C PREFERRED STOCK
DIVIDENDS
Holders of shares of the Series C Preferred Stock shall be entitled to
receive, when and as declared by the Board of Directors, out of funds legally
available for the payment of dividends, cumulative preferential cash dividends
at the rate of % per annum of the $25.00 liquidation preference (equivalent to
a fixed annual rate of $ per share). Such dividends shall be cumulative from
the date of original issue and shall be payable quarterly in arrears on or
before the 15th day of each March, June, September and December or, if such day
is
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not a business day, the next succeeding business day (each, a "Dividend Payment
Date"). The first dividend, which will be paid on September 15, 1997, will be
for less than a full quarter. Such dividend and any dividend payable on the
Series C Preferred Stock for any partial dividend period will be computed on the
basis of a 360-day year consisting of twelve 30-day months. Dividends will be
payable to holders of record as they appear in the stock records of the Company
at the close of business on the applicable record date, which shall be the first
day of the calendar month in which the applicable Dividend Payment Date falls or
on such other date designated by the Board of Directors of the Company for the
payment of dividends that is not more than 30 nor less than 10 days prior to
such Dividend Payment Date (each, a "Dividend Record Date"). The Series C
Preferred Stock will rank senior to the Common Stock, the Series A Convertible
Preferred Stock and the Series B Convertible Preferred Stock with respect to the
payment of dividends.
No dividends on shares of Series C Preferred Stock shall be declared by the
Board of Directors of the Company or paid or set apart for payment by the
Company at such time as the terms and provisions of any agreement of the
Company, including any agreement relating to its indebtedness, prohibits such
declaration, payment or setting apart for payment or provides that such
declaration, payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such declaration or payment shall be
restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Series C Preferred Stock
will accrue whether or not the Company has earnings, whether or not there are
funds legally available for the payment of such dividends and whether or not
such dividends are declared. Accrued but unpaid dividends on the Series C
Preferred Stock will accumulate as of the Dividend Payment Date on which they
first become payable. Except as set forth in the next sentence, no dividends
will be declared or paid or set apart for payment on any capital stock of the
Company or any other series of Preferred Stock ranking, as to dividends, on a
parity with or junior to the Series C Preferred Stock (other than a dividend in
shares of the Company's Common Stock or in any other class of capital stock
ranking junior to the Series C Preferred Stock as to dividends and upon
liquidation) for any period unless full cumulative dividends have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for such payment on the Series C Preferred Stock
for all past dividend periods and the then current dividend period. When
dividends are not paid in full (or a sum sufficient for such full payment is not
so set apart) upon the Series C Preferred Stock and the shares of any other
series of Preferred Stock ranking on a parity as to dividends with the Series C
Preferred Stock, all dividends declared upon the Series C Preferred Stock and
any other series of Preferred Stock ranking on a parity as to dividends with the
Series C Preferred Stock shall be declared pro rata so that the amount of
dividends declared per share of Series C Preferred Stock and such other series
of Preferred Stock shall in all cases bear to each other the same ratio that
accrued dividends per share on the Series C Preferred Stock and such other
series of Preferred Stock (which shall not include any accrual in respect of
unpaid dividends for prior dividend periods if such Preferred Stock does not
have a cumulative dividend) bear to each other. No interest, or sum of money in
lieu of interest, shall be payable in respect of any dividend payment or
payments on the Series C Preferred Stock which may be in arrears.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Series C Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for payment for all past dividend periods and the
then current dividend period, no dividends (other than in shares of Common Stock
or other shares of capital stock ranking junior to the Series C Preferred Stock
as to dividends and upon liquidation) shall be declared or paid or set aside for
payment nor shall any other distribution be declared or made upon the Common
Stock, or any other capital stock of the Company ranking junior to or on a
parity with the Series C Preferred Stock as to dividends or upon liquidation,
nor shall any shares of Common Stock, or any other shares of capital stock of
the Company ranking junior to or on a parity with the Series C Preferred Stock
as to dividends or upon liquidation be redeemed, purchased or otherwise acquired
for any consideration (or any moneys be paid to or made available for a sinking
fund for the redemption of any such shares) by the Company (except by conversion
into or exchange for other capital stock of the Company ranking junior to the
Series C Preferred Stock as to dividends and upon liquidation). Holders of
shares of the Series C Preferred Stock shall not be entitled to any dividend,
whether payable in cash, property or stock, in excess of full cumulative
dividends on the Series C Preferred Stock as provided above. Any dividend
payment made on shares of the Series C Preferred Stock
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<PAGE> 18
shall first be credited against the earliest accrued but unpaid dividend due
with respect to such shares which remains payable. See "Description of Preferred
Stock -- Dividends" in the accompanying Prospectus.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, the holders of shares of Series C Preferred Stock
are entitled to be paid out of the assets of the Company legally available for
distribution to its stockholders a liquidation preference of $25.00 per share,
plus an amount equal to any accrued and unpaid dividends to the date of payment,
before any distribution of assets is made to holders of Common Stock or any
other class or series of capital stock of the Company that ranks junior to the
Series C Preferred Stock as to liquidation rights. After payment of the full
amount of the liquidating distributions to which they are entitled, the holders
of Series C Preferred Stock will have no right or claim to any of the remaining
assets of the Company. The consolidation or merger of the Company with or into
any other corporation, trust or entity or of any other corporation with or into
the Company, or the sale, lease or conveyance of all or substantially all of the
property or business of the Company, shall not be deemed to constitute a
liquidation, dissolution or winding up of the Company. For further information
regarding the rights of the holders of the Series C Preferred Stock upon the
liquidation, dissolution or winding up of the Company, see "Description of
Preferred Stock -- Liquidation Preference" in the accompanying Prospectus.
REDEMPTION
The Series C Preferred Stock is not redeemable prior to June , 2002.
However, in order to ensure that the Company remains a qualified REIT for
federal income tax purposes, Series C Preferred Stock owned by a stockholder in
excess of the Ownership Limit (as defined in the accompanying Prospectus) may
automatically be exchanged for shares of Excess Stock, and the Company will have
the right to purchase Excess Stock from the holder. See "Restrictions on
Transfers of Capital Stock" in the accompanying Prospectus. On and after June
, 2002, the Company, at its option upon not less than 30 nor more than 60
days' written notice, may redeem shares of the Series C Preferred Stock, in
whole or in part, at any time or from time to time, for cash at a redemption
price of $25.00 per share, plus all accrued and unpaid dividends thereon to the
date fixed for redemption (except as provided below), without interest. The
redemption price of the Series C Preferred Stock (other than the portion thereof
consisting of accrued and unpaid dividends) is payable solely out of the sale
proceeds of other capital stock of the Company, which may include other series
of Preferred Stock, and from no other source. For purposes of the preceding
sentence, "capital stock" means any equity securities (including Common Stock
and Preferred Stock), shares, interest, participation or other ownership
interests (however designated) and any rights (other than debt securities
convertible into or exchangeable for equity securities) or options to purchase
any of the foregoing. Holders of Series C Preferred Stock to be redeemed shall
surrender such Series C Preferred Stock at the place designated in such notice
and shall be entitled to the redemption price and any accrued and unpaid
dividends payable upon such redemption following such surrender. If notice of
redemption of any shares of Series C Preferred Stock has been given and if the
funds necessary for such redemption have been set aside by the Company in trust
for the benefit of the holders of any shares of Series C Preferred Stock so
called for redemption, then from and after the redemption date dividends will
cease to accrue on such shares of Series C Preferred Stock, such shares of
Series C Preferred Stock shall no longer be deemed outstanding and all rights of
the holders of such shares will terminate, except the right to receive the
redemption price. If less than all of the outstanding shares of Series C
Preferred Stock is to be redeemed, the Series C Preferred Stock to be redeemed
shall be selected pro rata (as nearly as may be practicable without creating
fractional shares) or by any other equitable method determined by the Company.
Unless full cumulative dividends on all shares of Series C Preferred Stock
shall have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past dividend
periods and the then current dividend period, no shares of Series C Preferred
Stock shall be redeemed unless all outstanding shares of Series C Preferred
Stock are simultaneously redeemed and the Company shall not purchase or
otherwise acquire directly or indirectly any shares of Series C Preferred Stock
(except by exchange for capital stock of the Company ranking junior to the
Series C Preferred Stock as to dividends and upon liquidation); provided,
however, that the foregoing shall not prevent the purchase by the Company of
shares of Excess Stock in order to ensure that the Company remains qualified
S-18
<PAGE> 19
as a REIT for federal income tax purposes, as described under "Restrictions on
Transfers of Capital Stock" in the accompanying Prospectus, or the purchase or
acquisition of shares of Series C Preferred Stock pursuant to a purchase or
exchange offer made on the same terms to holders of all outstanding shares of
Series C Preferred Stock.
Notice of redemption will be given by publication in a newspaper of general
circulation in the City of New York, such publication to be made once a week for
two successive weeks commencing not less than 30 nor more than 60 days prior to
the redemption date. A similar notice will be mailed by the Company, postage
prepaid, not less than 30 nor more than 60 days prior to the redemption date,
addressed to the respective holders of record of the Series C Preferred Stock to
be redeemed at their respective addresses as they appear on the stock transfer
records of the Company. No failure to give such notice or any defect thereto or
in the mailing thereof shall affect the validity of the proceedings for the
redemption of any shares of Series C Preferred Stock except as to the holder to
whom notice was defective or not given. Each notice shall state: (i) the
redemption date; (ii) the redemption price; (iii) the number of shares of Series
C Preferred Stock to be redeemed; (iv) the place or places where the Series C
Preferred Stock is to be surrendered for payment of the redemption price; and
(v) that dividends on the shares to be redeemed will cease to accrue on such
redemption date. If less than all of the Series C Preferred Stock held by any
holder is to be redeemed, the notice mailed to such holder shall also specify
the number of shares of Series C Preferred Stock held by such holder to be
redeemed.
The holders of Series C Preferred Stock at the close of business on a
Dividend Record Date will be entitled to receive the dividend payable with
respect to such Series C Preferred Stock on the corresponding Dividend Payment
Date notwithstanding the redemption thereof between such Dividend Record Date
and the corresponding Dividend Payment Date or the Company's default in the
payment of the dividend due. Except as provided above, the Company will make no
payment or allowance for unpaid dividends, whether or not in arrears, on called
Series C Preferred Stock.
The Series C Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption. However, in order to ensure that
the Company remains a qualified REIT for federal income tax purposes, Series C
Preferred Stock owned by a stockholder in excess of the Ownership Limit may
automatically be exchanged for shares of Excess Stock, and the Company will have
the right to purchase Excess Stock from the holder.
VOTING RIGHTS
Holders of the Series C Preferred Stock will not have any voting rights,
except as set forth below or as otherwise from time to time required by law.
Whenever dividends on any shares of Series C Preferred Stock shall be in
arrears for six or more quarterly periods (a "Preferred Dividend Default"), the
holders of such shares of Series C Preferred Stock (voting separately as a class
with all other series of Preferred Stock ranking on a parity with the Series C
Preferred Stock as to dividends or upon liquidation ("Parity Preferred") upon
which like voting rights have been conferred and are exercisable) will be
entitled to vote for the election of a total of two directors of the Company
(the "Preferred Stock Directors") at a special meeting called by the holders of
record of at least 20% of the Series C Preferred Stock or the holders of any
other series of Parity Preferred so in arrears (unless such request is received
less than 90 days before the date fixed for the next annual or special meeting
of the stockholders) or at the next annual meeting of stockholders, and at each
subsequent annual meeting until all dividends accrued on such shares of Series C
Preferred Stock for the past dividend periods and the then current dividend
period shall have been fully paid or declared and a sum sufficient for the
payment thereof set aside for payment. If and when all accumulated dividends and
the dividend for the then current dividend period on the Series C Preferred
Stock shall have been paid in full or set aside for payment in full, the holders
thereof shall be divested of the foregoing voting rights (subject to revesting
in the event of each and every Preferred Dividend Default) and, if all
accumulated dividends and the dividend for the then current dividend period have
been paid in full or set aside for payment in full on all series of Parity
Preferred upon which like voting rights have been conferred and are exercisable,
the term of office of each Preferred Stock Director so
S-19
<PAGE> 20
elected shall terminate. Any Preferred Stock Director may be removed at any time
with or without cause by, and shall not be removed otherwise than by the vote
of, the holders of record of a majority of the outstanding shares of the Series
C Preferred Stock when they have the voting rights described above (voting
separately as a class with all other series of Parity Preferred upon which like
voting rights have been conferred and are exercisable). So long as a Preferred
Dividend Default shall continue, any vacancy in the office of a Preferred Stock
Director may be filled by written consent of the Preferred Stock Director
remaining in office, or if none remains in office, by a vote of the holders of
record of a majority of the outstanding shares of Series C Preferred Stock when
they have the voting rights described above (voting separately as a class with
all other series of Parity Preferred upon which like voting rights have been
conferred and are exercisable). The Preferred Stock Directors shall each be
entitled to one vote per director on any matter.
So long as any shares of Series C Preferred Stock remain outstanding, the
Company will not, without the affirmative vote or consent of the holders of at
least two-thirds of the shares of the Series C Preferred Stock outstanding at
the time, given in person or by proxy, either in writing or at a meeting (voting
separately as a class), (a) authorize or create, or increase the authorized or
issued amount of, any class or series of capital stock ranking senior to the
Series C Preferred Stock with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up or reclassify
any authorized capital stock of the Company into such shares, or create,
authorize or issue any obligation or security convertible into or evidencing the
right to purchase any such shares; or (b) amend, alter or repeal the provisions
of the Articles or the Designating Amendment, whether by merger, consolidation
or otherwise (an "Event"), so as to materially and adversely affect any right,
preference, privilege or voting power of the Series C Preferred Stock or the
holders thereof; provided, however, with respect to the occurrence of any Event
set forth in (b) above, so long as the Series C Preferred Stock remains
outstanding with the terms thereof materially unchanged, taking into account
that upon the occurrence of an Event the Company may not be the surviving
entity, the occurrence of any such Event shall not be deemed to materially and
adversely affect such rights, preferences, privileges or voting power of holders
of the Series C Preferred Stock and provided further that (i) any increase in
the amount of the authorized Preferred Stock or the creation or issuance of any
other series of Preferred Stock, or (ii) any increase in the amount of
authorized shares of such series, in each case ranking on a parity with or
junior to the Series C Preferred Stock with respect to payment of dividends or
the distribution of assets upon liquidation, dissolution or winding up, shall
not be deemed to materially and adversely affect such rights, preferences,
privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of Series C Preferred Stock shall have been
redeemed or called for redemption upon proper notice and sufficient funds shall
have been deposited in trust to effect such redemption.
CONVERSION
The Series C Preferred Stock is not convertible into or exchangeable for
any other property or securities of the Company, except that the shares of
Series C Preferred Stock may be exchanged for shares of Excess Stock in order to
ensure that the Company remains qualified as a REIT for federal income tax
purposes. See "Restrictions on Transfers of Capital Stock" in the accompanying
Prospectus.
RESTRICTIONS ON OWNERSHIP
For information regarding restrictions on ownership of the Series C
Preferred Stock, see "Restrictions on Transfers of Capital Stock" in the
accompanying Prospectus.
S-20
<PAGE> 21
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations is based
on current law, is for general information only, and is not tax advice. This
discussion does not purport to address all aspects of taxation that may be
relevant to particular stockholders in light of their personal investment or tax
circumstances, or to certain types of stockholders (including insurance
companies, tax exempt organizations, financial institutions or broker dealers,
foreign corporations and persons who are not citizens or residents of the United
States) subject to special treatment under the federal income tax laws.
The Company intends to operate in a manner that will enable it to qualify
as a REIT under the Code. Although management of the Company believes that the
Company is organized and operates in such a manner, no assurance can be given
that the Company qualifies or will remain qualified as a REIT. Qualification as
a REIT involves the application of highly technical and complex Code provisions
for which there are only limited judicial and administrative interpretations.
The determination of various factual matters and circumstances not entirely
within the Company's control may affect the Company's ability to qualify as a
REIT. If the Company fails to qualify as a REIT, it will be subject to Federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. In addition, unless entitled to relief under
certain statutory provisions, the Company will be disqualified from treatment as
a REIT for the four taxable years following the year during which qualification
is lost. The additional tax would significantly reduce the cash flow available
for distribution to stockholders. This Prospectus Supplement does not address
the taxation of the Company or the impact on the Company of its election to be
taxed as a REIT. The discussion set forth below assumes that the Company
qualifies as a REIT under the Code.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
Dividends and Other Distributions. As long as the Company qualifies as a
REIT, distributions made to the Company's taxable domestic stockholders
(including holders of Series C Preferred Stock) out of current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
taken into account by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. For purposes of determining
whether distributions on the Series C Preferred Stock are out of current or
accumulated earnings and profits, the earnings and profits of the Company will
be allocated first to the Company's outstanding Series C Preferred Stock, next
to the Company's outstanding Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock on a pari passu basis, and then allocated to the
Company's Common Stock. Distributions that are designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed the Company's actual net capital gain for the taxable year) without
regard to the period for which the holder has held its Series C Preferred Stock.
However, corporate holders may be required to treat up to 20% of certain capital
gain dividends as ordinary income. Distributions in excess of current and
accumulated earnings and profits will not be taxable to a holder to the extent
that they do not exceed the adjusted tax basis of the holder's shares, but
rather will reduce the adjusted basis of such shares. To the extent that such
distributions exceed the adjusted basis of a holder's shares they will be
included in income as long-term capital gain (or short-term capital gain if the
shares have been held for one year or less) assuming the shares are a capital
asset in the hands of the holder. In addition, any dividend declared by the
Company in October, November or December of any year payable to a stockholder of
record on a specified date in any such month shall be treated as both paid by
the Company and received by the stockholder on December 31 of such year,
provided that the dividend is actually paid by the Company during January of the
following calendar year. Stockholders may not include in their individual income
tax returns any net operating losses or capital losses of the Company.
Sale or Redemption of Series C Preferred Stock. On the sale of shares of
Series C Preferred Stock, gain or loss will be recognized by the holder in an
amount equal to the difference between (i) the amount of cash and fair market
value of any property received on such sale, and (ii) the holder's adjusted
basis in the Series C Preferred Stock. Such gain or loss will be capital gain or
loss if the shares of Series C Stock are held as capital assets, and will be
long-term gain or loss if such shares are held for more than one year. In
general, any loss upon a sale or exchange of shares by a holder who has held
such shares for six months or less (after applying
S-21
<PAGE> 22
certain holding period rules), will be treated as a long-term capital loss to
the extent of distributions from the Company required to be treated by such
holder as long-term capital gain.
A redemption of Series C Preferred Stock will be treated under Section 302
of the Code as a distribution that is taxable at ordinary income tax rates as a
dividend (to the extent of the Company's current or accumulated earnings and
profits), unless the redemption satisfies certain tests set forth in Section
302(b) of the Code enabling the redemption to be treated as a sale of the Series
C Preferred Stock. The redemption will satisfy such tests if it (i) is
"substantially disproportionate" with respect to the holder (which will not be
the case if only Series C Preferred Stock is redeemed, since it generally does
not have voting rights), (ii) results in a "complete termination" of the
holder's stock interest in the Company, or (iii) is "not essentially equivalent
to a dividend" with respect to the holder, all within the meaning of Section
302(b) of the Code. In determining whether any of these tests have been met,
shares considered to be owned by the holder by reason of certain constructive
ownership rules set forth in the Code, as well as shares actually owned, must
generally be taken into account. Because the determination as to whether any of
the alternative tests of Section 302(b) of the Code will be satisfied with
respect to any particular holder of Series C Preferred Stock depends upon the
facts and circumstances at the time that the determination must be made,
prospective investors are advised to consult their own tax advisors to determine
such tax treatment.
If a redemption of the Series C Preferred Stock is treated as a
distribution that is taxable as a dividend, the amount of the distribution will
be measured by the amount of cash and the fair market value of any property
received by the stockholders. The stockholder's adjusted tax basis in such
redeemed Series C Preferred Stock will be transferred to the holder's remaining
stockholdings in the Company. If, however, the stockholder has no remaining
stockholdings in the Company, such basis could be transferred to a related
person or it may be lost.
BACKUP WITHHOLDING
The Company will report to its domestic stockholders and the Internal
Revenue Service (the "IRS") the amount of dividends paid during each calendar
year, and the amount of tax withheld, if any. Under the backup withholding
rules, a stockholder may be subject to backup withholding at the rate of 31%
with respect to dividends paid and redemptions unless such holder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (b) provides a taxpayer identification number,
certifies that the holder is not subject to backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules. A
stockholder that does not provide the Company with his correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the stockholder's
income tax liability.
TAXATION OF CERTAIN TAX-EXEMPT STOCKHOLDERS
Generally, a tax-exempt investor that is exempt from tax on its investment
income, such as an individual retirement account ("IRA") or a Section 401(k)
plan, that holds the Series C Preferred Stock as an investment will not be
subject to tax on dividends paid by the Company. However, if such tax-exempt
investor is treated as having purchased its Series C Preferred Stock with
borrowed funds, some or all of its dividends from the Series C Preferred Stock
will be subject to tax. In addition, under some circumstances certain pension
plans (including Section 401(k) plans but not, for example, IRA's) that own more
than 10% (by value) of the Company's outstanding capital stock, including Common
Stock, could be subject to tax on a portion of their Series C Preferred Stock
dividends even if their Series C Preferred Stock is held for investment and is
not treated as acquired with borrowed funds.
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they own
property, transact business or reside. The state and local tax treatment of the
Company and its stockholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in the Company.
S-22
<PAGE> 23
UNDERWRITING
Subject to the terms and conditions in an underwriting agreement between
the Company and the Underwriters (the "Underwriting Agreement"), the Company has
agreed to sell to each of the Underwriters named below, and each of such
Underwriters has severally agreed to purchase from the Company, the respective
number of shares of Series C Preferred Stock set forth opposite its name.
Pursuant to the terms of the Underwriting Agreement, the Underwriters are
obligated to purchase all of such shares of Series C Preferred Stock if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
SHARES TO BE
UNDERWRITERS PURCHASED
------------ -------------
<S> <C>
PaineWebber Incorporated.....................................
Morgan Stanley & Co. Incorporated............................
---------
Total 2,000,000
=========
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the shares of Series C Preferred Stock directly to the public at the
public offering price set forth on the cover page of this Prospectus Supplement,
and to certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow, and such dealers may reallow, a discount
not in excess of $ per share on sales to certain other dealers after the
public offering of the Series C Preferred Stock.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus Supplement, to purchase up
to 300,000 additional shares of Series C Preferred Stock to cover
over-allotments, if any, at the public offering price, less the underwriting
discounts and commissions set forth on the cover page of this Prospectus
Supplement.
Pursuant to the Underwriting Agreement, the Company has agreed to indemnify
the Underwriters against certain civil liabilities, including liabilities under
the Securities Act of 1933, as amended, or to contribute to payments the
Underwriters may be required to make in respect thereof.
Application has been made to list the Series C Preferred Stock on the NYSE
and the PCX. If approved, trading of the Series C Preferred Stock on the NYSE
and the PCX is expected to commence within the 30-day period after initial
delivery of the Series C Preferred Stock. The Underwriters have advised the
Company that they intend to make a market in the Series C Preferred Stock prior
to the commencement of trading on the NYSE and the PCX. The Underwriters will
have no obligation to make a market in the Series C Preferred Stock, however,
and may cease market-making activities, if commenced, at any time.
Until the distribution of the Series C Preferred Stock is completed, rules
of the Securities and Exchange Commission may limit the ability of the
Underwriters to bid for and purchase the Series C Preferred Stock. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Series C Preferred Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Series C Preferred Stock.
If the Underwriters create a short position in the Series C Preferred Stock
in connection with this offering, i.e., if they sell more shares of Series C
Preferred Stock than are set forth on the cover page of this Prospectus
Supplement, the Underwriters may reduce that short position by purchasing shares
of Series C Preferred Stock in the open market. The Underwriters may also elect
to reduce any short position by exercising all or part of the over-allotment
option described above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above might have on the price of the Series C Preferred Stock. In
addition, neither the Company nor any of the Underwriters makes any
S-23
<PAGE> 24
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
In the ordinary course of business, the Underwriters and their affiliates
have in the past engaged and may in the future engage in investment banking
transactions with the Company.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Goodwin,
Procter & Hoar LLP, Boston, Massachusetts as securities and tax counsel to the
Company and for the Underwriters by O'Melveny & Myers LLP, San Francisco,
California.
S-24
<PAGE> 25
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH THEY RELATE. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary.............. S-2
Risk Factors............................... S-5
The Company................................ S-10
Company Philosophy......................... S-11
The Communities............................ S-13
Recent Developments........................ S-14
Use of Proceeds............................ S-14
Capitalization............................. S-15
Ratios of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.... S-15
Description of Preferred Stock............. S-16
Certain Federal Income Tax
Considerations........................... S-21
Underwriting............................... S-23
Legal Matters.............................. S-24
PROSPECTUS
Available Information...................... 2
Incorporation of Certain Documents by
Reference................................ 2
The Company................................ 3
Use of Proceeds............................ 3
Ratios of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.... 4
Description of Preferred Stock............. 5
Description of Common Stock................ 10
Restrictions on Transfers of Capital
Stock.................................... 11
Plan of Distribution....................... 12
Legal Matters.............................. 13
Experts.................................... 13
</TABLE>
================================================================================
================================================================================
2,000,000 SHARES
[BAY APARTMENT COMMUNITIES, INC. LOGO]
% SERIES C CUMULATIVE REDEEMABLE
PREFERRED STOCK
---------------------------------
PROSPECTUS SUPPLEMENT
---------------------------------
PAINEWEBBER INCORPORATED
MORGAN STANLEY DEAN WITTER
------------------------
JUNE , 1997
================================================================================
