<PAGE> 1
Filed Pursuant to Rule 424b(2)
Registration No. 333-41511
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 16, 1997)
[BAY APARTMENT COMM
LOGO] BAY APARTMENT COMMUNITIES, INC.
$50,000,000 6.250% SENIOR NOTES DUE 2003
$50,000,000 6.500% SENIOR NOTES DUE 2005
$50,000,000 6.625% SENIOR NOTES DUE 2008
------------------------
Bay Apartment Communities, Inc. (the "Company") will issue the 6.250%
Senior Notes due 2003 (the "2003 Notes"), the 6.500% Senior Notes due 2005 (the
"2005 Notes") and the 6.625% Senior Notes due 2008 (the "2008 Notes" and,
together with the 2003 Notes and the 2005 Notes, the "Notes") offered hereby
(the "Offering") in an aggregate principal amount of $150,000,000. Interest on
the Notes is payable semi-annually in arrears on January 15 and July 15 of each
year commencing July 15, 1998. See "Description of Notes -- Principal and
Interest." The 2003 Notes will mature on January 15, 2003, the 2005 Notes will
mature on January 15, 2005 and the 2008 Notes will mature on January 15, 2008.
The Notes may be redeemed at any time at the option of the Company, in whole or
in part, at a redemption price equal to the sum of (i) the principal amount of
the Notes being redeemed plus accrued interest thereon to the redemption date,
and (ii) the Make-Whole Amount (as defined in "Description of Notes -- Optional
Redemption"), if any. See "Description of Notes -- Optional Redemption." The
Notes are unsecured obligations of the Company and will rank equally with all
unsecured and unsubordinated indebtedness of the Company. The Notes are not
subject to any mandatory sinking fund. See "Description of Notes."
Each of the 2003 Notes, the 2005 Notes and the 2008 Notes constitutes a
separate series of debt securities which will be represented by a single fully
registered global note in book-entry form without coupons (each a "Global Note")
registered in the name of The Depository Trust Company ("DTC") or its nominee.
Beneficial interests in the Global Notes will be shown on, and transfers thereof
will be effected only through, records maintained by DTC and its participants.
Owners of beneficial interests in the Global Notes will be entitled to physical
delivery of Notes in certificated form equal in principal amount to their
respective beneficial interests only under the limited circumstances described
under "Description of Notes -- Book-Entry System." Settlement of the Notes will
be made in immediately available funds. The Notes will trade in DTC's Same-Day
Funds Settlement System until maturity or earlier redemption, as the case may
be, or until the Notes are issued in certificated form, and secondary market
trading activity in the Notes will therefore settle in immediately available
funds. All payments of principal and interest in respect of the Notes will be
made by the Company in immediately available funds. See "Description of
Notes -- Same-Day Settlement and Payment."
SEE "RISK FACTORS" COMMENCING ON PAGE S-5 OF THIS PROSPECTUS SUPPLEMENT FOR
A DISCUSSION OF CERTAIN RISK FACTORS RELEVANT TO AN INVESTMENT IN THE NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===========================================================================================================
Price to Underwriting Discounts Proceeds to
Public(1) and Commissions(2) Company(1)(3)
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<S> <C> <C> <C>
Per 2003 Note............................... 99.969% 0.550% 99.419%
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Per 2005 Note............................... 99.749% 0.625% 99.124%
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Per 2008 Note............................... 99.710% 0.650% 99.060%
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Total....................................... $149,714,000 $912,500 $148,801,500
===========================================================================================================
</TABLE>
(1) Plus accrued interest, if any, from January 15, 1998.
(2) The Company has agreed to indemnify the Underwriters (as defined herein)
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $150,000.
------------------------
The Notes are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters and subject to their right
to withdraw, cancel or modify such offer and to reject orders in whole or in
part. It is expected that delivery of the Notes will be made in New York, New
York on or about January 20, 1998.
------------------------
PAINEWEBBER INCORPORATED
MORGAN STANLEY DEAN WITTER
UBS SECURITIES
------------------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JANUARY 14, 1998.
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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, 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, 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 520 real estate
professionals and associates.
The Company currently owns, or holds substantially all of the ownership
interests in, and manages 55 apartment communities (the "Communities")
containing 15,524 apartment homes, including homes delivered at Toscana, a
partially developed community. A substantial majority of the Communities, 37 out
of 55, 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"), while fifteen Communities are located
in Southern California, two Communities are located in the Seattle, Washington
area and one Community is located in the Portland, Oregon area. As of September
30, 1997, the 46 Communities owned at that time, excluding six Communities
undergoing substantial reconstruction and one Community under construction and
lease-up, had an average monthly rental rate of $1,039 per apartment home and an
average physical occupancy rate of 97.9%. The average age of the Communities,
excluding Toscana, is 17 years. In addition to the Communities, the Company owns
six land sites on which it is building or plans to commence building in the
future six communities, which will contain an aggregate of approximately 1,698
apartment homes, including the remaining apartment homes under construction at
Toscana (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 11%.
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. The Company believes that its other
target markets are also attractive for long-term investment. The Company will
continue to explore opportunistic acquisitions in Southern California, where it
has acquired fifteen Communities since July 1996, and the Pacific Northwest,
where it has acquired three Communities since September 1997.
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 NOTES. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF NOTES IN THE OPEN MARKET TO STABILIZE
THE MARKET PRICE OF THE NOTES AND THE PURCHASE OF NOTES TO COVER SHORT
POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
S-2
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THE OFFERING
SECURITIES OFFERED............ $50,000,000 aggregate principal amount of the
Notes due 2003,
$50,000,000 aggregate principal amount of the
Notes due 2005 and $50,000,000 aggregate
principal amount of the Notes due 2008.
MATURITY...................... January 15, 2003 with respect to the 2003
Notes, January 15, 2005 with respect to the
2005 Notes and January 15, 2008 with respect to
the 2008 Notes.
INTEREST PAYMENT DATES........ Semi-annually in arrears on January 15 and July
15, commencing July 15, 1998.
RANKING....................... The Notes will be senior unsecured obligations
of the Company and will rank equally with the
Company's other unsecured and unsubordinated
indebtedness. The Notes will be effectively
subordinated to mortgages and other secured
indebtedness of the Company and to indebtedness
and other liabilities of any of the Company's
subsidiaries.
OPTIONAL REDEMPTION........... The Notes are redeemable at any time at the
option of the Company, in whole or in part, at
a redemption price equal to the sum of (i) the
principal amount of the Notes being redeemed
plus accrued interest thereon to the redemption
date and (ii) the Make-Whole Amount (as
defined), if any, with respect to such Notes.
See "Description of Notes -- Optional
Redemption."
USE OF PROCEEDS............... The net proceeds of approximately $148.7
million from the sale of the Notes will be used
to reduce borrowings under the Company's $350
million unsecured line of credit from Union
Bank of Switzerland and other participating
banks (the "Unsecured Credit Facility"). See
"Use of Proceeds" and "Underwriting."
LIMITATIONS ON INCURRENCE OF
INDEBTEDNESS.................. The Notes contain various covenants including
the following:
- Neither the Company nor any Subsidiary (as
defined) may incur any Indebtedness (as
defined) if, after giving effect thereto, the
aggregate principal amount of all outstanding
Indebtedness of the Company and its
Subsidiaries on a consolidated basis is
greater than 60% of the sum of (i) the Total
Assets (as defined) of the Company and its
Subsidiaries as of the end of the most recent
calendar quarter and (ii) the purchase price
of any real estate assets or mortgages
receivable acquired, and the amount of any
securities offering proceeds received (to the
extent that such proceeds were not used to
acquire real estate assets or mortgages
receivable or used to reduce Indebtedness),
by the Company or any Subsidiary since the
end of such calendar quarter, including those
proceeds obtained in connection with the
incurrence of such additional Indebtedness.
- Neither the Company nor any Subsidiary may
incur any Indebtedness secured by any
mortgage or other lien upon any of the
property of the Company or any Subsidiary if,
after giving effect thereto, the aggregate
principal amount of all outstanding In-
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S-3
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debtedness of the Company and its
Subsidiaries on a consolidated basis which is
secured by any mortgage or other lien on the
property of the Company or any Subsidiary is
greater than 40% of the sum of (i) the Total
Assets of the Company and its Subsidiaries as
of the end of the most recent calendar
quarter and (ii) the purchase price of any
real estate assets or mortgages receivable
acquired, and the amount of any securities
offering proceeds received (to the extent
that such proceeds were not used to acquire
real estate assets or mortgages receivable or
used to reduce Indebtedness), by the Company
or any Subsidiary since the end of such
calendar quarter, including those proceeds
obtained in connection with the incurrence of
such additional Indebtedness.
- The Company and its Subsidiaries may not at
any time own Total Unencumbered Assets (as
defined) equal to less than 150% of the
aggregate outstanding principal amount of the
Unsecured Indebtedness (as defined) of the
Company and its Subsidiaries on a
consolidated basis.
- Neither the Company nor any Subsidiary may
incur any Indebtedness if, after giving
effect thereto, the ratio of Consolidated
Income Available for Debt Service (as
defined) to the Annual Service Charge (as
defined) for the four consecutive fiscal
quarters most recently ended prior to the
date on which such additional Debt is to be
incurred shall have been less than 1.5:1 on a
pro forma basis after giving effect to
certain assumptions.
For a more complete description of the terms
and definitions used in the foregoing
limitations, see "Description of
Notes -- Certain Covenants."
RISK FACTORS
An investment in the Notes 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 Notes.
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S-4
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RISK FACTORS
An investment in the Notes involves various risks. Prospective investors
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 required payments under the Notes and paying distributions to its
stockholders. See "-- Real Estate Investment Risks."
For new development communities, the Company's goal, on average, is to
achieve projected earnings before interest, income taxes, depreciation and
amortization ("EBITDA") as a percentage of total budgeted construction cost of
approximately 10%. Projected EBITDA as a percentage of total budgeted
construction cost represents EBITDA projected to be received in the first
calendar year after a community reaches stabilized occupancy (i.e., the first
month when the community has a weighted average physical occupancy of at least
95%), based on current market rents, less projected stabilized property
operating and maintenance expenses, before interest, income taxes, depreciation
and amortization. Total budgeted construction cost is based on current
construction costs, including interest capitalized during the construction
period. Market rents and construction costs reflect those prevailing in the
community's market at the time the Company's development budgets are prepared
while taking into consideration certain changes to those market conditions
anticipated by the Company at the time. Although the Company attempts to
anticipate changes in market conditions, the Company cannot predict with
certainty what those changes will be. For example, upon the acquisition of the
Toscana land site in May 1996, the Company estimated that the total budgeted
construction cost for this Current Development Community would be $95.7 million.
Since that time, the Company has obtained bids for the construction of the first
two phases of this four-phase project. Construction costs are increasing and
management believes that when the last two phases are bid in early 1998, the
total construction cost for this development will be higher than the original
budget. Nonetheless, because of increases in prevailing market rents, management
believes that it will still be able to achieve projected EBITDA as a percentage
of total budgeted construction cost of at least 10%. Management believes that it
will experience similar increases in construction costs and market rents with
respect to the CentreMark and Paseo Alameda Current Development Communities.
However, there can be no assurances that market rents in effect at the time the
Current Development Communities are leased-up will be sufficient to fully offset
the effects of any increased construction costs.
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.
S-5
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As described above, construction costs are increasing and the cost to
reposition Communities that have been acquired has, in some cases, exceeded
management's original estimates. Management believes that it may experience
similar increases in the future. There can be no assurances that the Company
will be able to charge rents upon completing the repositioning of the
Communities that will be sufficient to fully offset the effects of any increases
in construction 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 make required
payments under the Notes and 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 the Company's target markets 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
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 desired yields on the Communities, to make required
payments under the Notes and to pay 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 the Company's common stock, par value $.01 per share (the
"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 adverse effect
on the Company's ability to lease apartment
S-6
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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, the
State of Washington and the State of Oregon 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 required payments under the Notes and to pay expected
distributions to stockholders. Similarly, a decline in demand for discretionary
consumer goods and leisure travel, as well as a deterioration of market
fundamentals affecting 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 Primary Markets.
NEW MARKETS
In 1996, the Company expanded beyond Northern California and has since
acquired fifteen Communities located in Southern California (including Orange,
Los Angeles and San Diego Counties), two Communities located in the Seattle,
Washington area and one Community located in the Portland, Oregon area. The
Company has also agreed to acquire a 264 apartment home community currently
under construction in Redmond, Washington. This proposed acquisition will not be
consummated until 90 days after construction is completed and the community is
90% occupied by residents. Because the consummation of the acquisition is
subject to the satisfaction of certain conditions that are not within the
control of the Company, there can be no assurance that the Company will acquire
the community or, if the community is acquired, that it will be purchased on the
terms currently contemplated. The Company also intends to make other selective
acquisitions in these markets and other new markets 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 the Company in its new markets. 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, (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 June 1997, the Company obtained a seismic risk analysis
from an engineering firm which estimated the probable maximum loss ("PML") for
each of the 41 Communities owned at that time and Toscana, a Current Development
Community, individually and for all of such Communities and Toscana 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
S-7
<PAGE> 8
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 $63.8 million for the 41 Communities owned at that time and
Toscana, which is a PML level that is expected to be exceeded only 10% of the
time in the event of such a severe earthquake. The actual aggregate PML could be
higher as a result of variations in soil classifications and structural
vulnerabilities. Two of the Communities had individual PMLs of 30%, while seven
Communities had PMLs of 25%, and the remaining 32 Communities owned at such time
and Toscana each had PMLs of 20% or less. The Company has obtained an individual
PML assessment for each of the thirteen Communities acquired since June 1997.
One Community had an individual PML of 30%, three had individual PMLs of 24%,
one had an individual PML of 21%, and the remaining eight Communities had
individual PMLs of 20% or less. While the Company has not yet obtained an
engineers' analysis establishing an aggregate PML for all of the Communities
combined, the Company currently intends to do so on an annual basis 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 loss 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 loss than currently indicated.
In July 1997, the Company renewed its earthquake insurance, both for
physical damage and lost revenue, with respect to the 41 Communities then owned
and Toscana. In addition, the thirteen Communities acquired subsequent to June
1997 are included under the Company's earthquake insurance policy. For any
single occurrence, the Company self-insures the first $25 million of loss, and
has in place $35 million of coverage above this amount, with a 5% deductible
subject to a maximum deductible of $2.43 million. 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 revenue from
such Community, and would continue to be obligated to repay any mortgage
indebtedness or other obligations related to the Community. Any such loss could
materially and adversely affect the business of the Company and its financial
condition and results of operations.
REAL ESTATE FINANCING RISKS
Risks Relating to the Credit Enhancement. As of September 30, 1997, the
Company was obligated for certain mortgage indebtedness funded by tax-exempt
bonds (the "Bonds") in the aggregate principal amount of approximately $224
million on 12 Communities (Waterford, Villa Mariposa, Fairway Glen, Foxchase,
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 respective Bond issue.
Scheduled principal and interest payments due on the Bonds financing
Foxchase, Fairway Glen, Waterford and Villa Mariposa (the "1994 Bonds") are
guaranteed by an insurance policy (the "FGIC Credit Enhancement") issued by
Financial Guaranty Insurance Company ("FGIC"). The FGIC Credit 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, Sea Ridge,
City Heights and Larkspur Canyon are supported by a 30-year credit enhancement,
expiring June 15, 2025 (the "FNMA Credit Enhancement" and, together with the
FGIC Credit Enhancement, the "Credit Enhancements"), provided by the Federal
National Mortgage Association ("FNMA"). The Bonds financing Countrybrook are
also supported by a credit enhancement provided by FNMA through April 1, 2002.
Each of the Credit Enhancements contains certain provisions under which a
default of certain payment obligations (e.g., a default in respect of required
payments under the Notes) or covenants would entitle FGIC or FNMA, as the case
may be, to declare a default under its respective Credit Enhancement documents
and exercise its remedies (including foreclosure) under mortgages that encumber
11 of the 12 Bond-financed
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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 19 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
required payments under the Notes and to pay expected distributions to
stockholders, including distributions required to maintain its REIT status. See
"Federal Income Tax Considerations" in the accompanying Prospectus.
Bond Compliance Requirements. The 12 Bond-financed Communities are subject
to deed restrictions and 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
have imposed 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. As of September 30, 1997, the Company had
outstanding variable rate indebtedness aggregating approximately $291 million,
consisting of $204 million of tax-exempt financing and $87 million of borrowings
under the Company's Unsecured Credit Facility. As of such date, all of the
Company's $204 million of variable rate tax-exempt financing had been fixed
through interest rate swap agreements, of which an aggregate of $87.4 million
had been fixed at an all-inclusive interest rate of 5.88% per annum until March
2004, an aggregate of $88.3 million had been fixed at an all-inclusive interest
rate of 6.48% per annum until June 2010, $20.7 million had been fixed at an
all-inclusive interest rate of 5.80% per annum until July 2007 and $7.6 million
had been fixed at an all-inclusive interest rate of 5.50% per annum until
September 2002. 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.
POTENTIAL ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws, a current or
previous owner or operator of real estate may be required (in many instances
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
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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 the construction of the Communities developed by the Company,
all of which were constructed after 1983. The Company is aware that ACMs were
used in connection with the construction of the following Communities acquired
by the Company: Regatta Bay, Sea Ridge, Village Square, Sunset Towers, Mill
Creek, Crowne Ridge (formerly Channing Heights), Lafayette Place (formerly
Martinique Gardens), SummerWalk (formerly Rancho Penasquitos), TimberWood
(formerly The Village), SunScape (formerly Banbury Cross), Cardiff Gardens,
Mission Woods (formerly Genesee Gardens), Cedar Ridge (formerly Regency), The
Park, Lakeside, Creekside, Governor's Square, Viewpointe, Mission Bay Club,
Westwood Club, Pacifica Club, Parc Centre and Warner Oaks. The Company currently
has in place or intends to implement an operations and maintenance program for
ACMs at these Communities. The Company does not anticipate that it will incur
any material liabilities in connection with the presence of ACMs at the
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, required underground
storage tank removal and other environmental cleanup. The Company is also aware
that certain of the Communities have lead paint and the Company is undertaking
or intends to undertake appropriate remediation activity. 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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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 520 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 its target markets.
The Company is a self-administered and self-managed REIT that currently
owns, or holds substantially all of the ownership interests in, and manages 55
Communities containing 15,524 apartment homes, including homes delivered at
Toscana, a partially developed community. The largest Community has 750
apartment homes and the smallest has 135 apartment homes. As of September 30,
1997, the 46 Communities owned at that time, excluding six Communities
undergoing substantial reconstruction and one Community under construction and
lease-up, had an average monthly rental rate per apartment home of approximately
$1,039 and an average physical occupancy rate of 97.9%. The average age of the
Communities, excluding Toscana, is 17 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 has also completed 276
apartment homes at Toscana, a 710 apartment home community located in Sunnyvale,
California. The Company also owns six land sites on which it is building or
plans to commence building in the future six apartment communities, which will
contain an aggregate of approximately 1,698 apartment homes, including the
remaining apartment homes under construction at Toscana. 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, 37 out of 55, 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 Company's initial public offering in March 1994 (the "Initial
Offering"), the Company has pursued an aggressive growth strategy, developing
and building new apartment communities as well as acquiring and rebuilding
well-located but poorly maintained and managed communities. During this period,
the Company completed the acquisition of 10,812 apartment homes in 38
Communities, representing a total investment of approximately $800.8 million. As
of September 30, 1997, the Company has spent approximately $42.5 million 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 no more than 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 September 30, 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 7.4%, or $870,872 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 home
communities in otherwise fully-developed neighborhoods. The Company also
buys existing apartment communities in fully-developed neighborhoods and
substantially rebuilds them to a quality which the Company believes to be
among the highest of all existing apartment communities in the area,
which frequently results in the Company owning what it believes to be 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 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
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change orders or unanticipated costs. The Company maintains detailed
budgets, budget to actual cost analyses and construction schedules to
control all phases of the construction operation at its communities.
- 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
September 30, 1997 was 22.4%. 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 55 apartment Communities containing 15,524 apartment homes, a
substantial majority 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, has completed 276
apartment homes at Toscana, a partially completed Current Development Community,
and has acquired, or acquired and redeveloped or initiated redevelopment
programs at, 38 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 few
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
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Company typically uses concrete tile roofs or heavy duty fire resistant
composition shingles, cast iron drains, waste and vent pipes, copper water
pipes, extra deep base rock and asphalt lifts. In addition, extensive measures
are employed to minimize noise between apartment homes. The Company uses
condominium standards for this purpose, including the use of double walls and
double insulation between apartment homes, lightweight concrete on floors and
insulation between ceilings and floors. Whenever possible, the Company locates
closets, bathrooms, and laundries in locations that minimize sound transmission.
RECENT DEVELOPMENTS
FINANCING ACTIVITIES
Since September 30, 1997, the Company has completed the following
offerings:
In December 1997, the Company sold 1,026,187 shares of Common Stock at a
price of $39.125 per share in a direct placement of 869,587 shares to a number
of institutional investors and an underwritten public offering of 156,600
shares. The net proceeds from the sales, approximately $39.5 million after all
anticipated issuance costs, were used to reduce borrowings under the Company's
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 Gallery Place, Landing West and Creekside
Communities and one land site in San Jose, California.
Also in December 1997, the Company sold in an underwritten public offering
3,267,700 shares (including 267,700 shares sold pursuant to the exercise of the
underwriters' over-allotment option) of 8.00% Series D Cumulative Redeemable
Preferred Stock, par value $.01 per share (the "Series D Preferred Stock"), at a
price of $25.00 per share. Dividends on the Series D Preferred Stock are
cumulative from the date of original issuance and are payable quarterly,
commencing March 15, 1998, at the rate of 8.00% per annum of the liquidation
preference (equivalent to a fixed annual rate of $2.00 per share). The net
proceeds from the sale, approximately $79.0 million after all anticipated
issuance costs, were used to reduce borrowings under the Company's Unsecured
Credit Facility, which were used to fund the acquisition of the Governor's
Square Community and the ongoing development of the Current Development
Communities.
PROPERTY ACQUISITIONS
Since September 30, 1997, the Company has acquired nine Communities,
containing 3,186 apartment homes, for an aggregate purchase price of
approximately $265.2 million. Included in these acquisitions was the Company's
initial entry into the Portland, Oregon market, where the Company acquired one
Community in December 1997. In addition, the Company expanded its growing
presence in Southern California and the Seattle, Washington market, where the
Company acquired five Communities and one Community, respectively. The remaining
two Communities acquired since September 30, 1997 are located in Northern
California.
In October 1997, the Company acquired a land site adjacent to its Rosewalk
Community in San Jose, California, for a purchase price of approximately $4.7
million, on which it intends to build a second-phase 156 apartment home
expansion of Rosewalk.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes, after all
anticipated issuance costs, are estimated to be approximately $148.7 million.
The Company will use the net proceeds from this Offering to reduce 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 Viewpointe, Waterhouse Place, Mission Bay Club,
Westwood Club, Pacifica Club and Warner Oaks Communities. The Unsecured Credit
Facility bears interest at the London Interbank Offered Rate (based on a
maturity selected by the Company) plus 0.90% per annum (6.83% per annum as of
December 31, 1997) and matures in May 2000.
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CAPITALIZATION
The following table sets forth the historical capitalization for the
Company as of September 30, 1997 and the pro forma capitalization for the
Company as of such date to reflect the issuance of Common Stock and Series D
Cumulative Redeemable Preferred Stock in December 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>
SEPT. 30, 1997
--------------------------------------------
HISTORICAL PRO FORMA AS ADJUSTED
----------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable........................................... $ 249,552 $ 249,552 $ 399,552
Unsecured Credit Facility(1)............................ 87,000 -- --
Minority interest....................................... 9,345 9,345 9,345
Shareholders' equity:
Preferred Stock, $.01 par value, 25,000,000
authorized, outstanding: 5,013,822 at September 30,
1997, and 8,281,522 pro forma and as adjusted...... 50 83 83
Common Stock, $.01 par value, 40,000,000 authorized,
outstanding: 24,968,136 at September 30, 1997, and
25,994,323 pro forma and as adjusted(2)............ 250 260 260
Dividends in excess of accumulated earnings........... (29,612) (29,612) (29,612)
Paid in capital....................................... 701,717 820,150 820,150
----------- ----------- -----------
Total shareholders' equity......................... 672,405 790,881 790,881
----------- ----------- -----------
Total capitalization............................... $ 1,018,302 $ 1,049,778 $1,199,778
=========== =========== =========
</TABLE>
- ---------------
(1) As of December 31, 1997 there was $224.2 million outstanding under the
Unsecured Credit Facility.
(2) Excludes 1,415,474 shares of Common Stock reserved for issuance under the
1994 Stock Incentive Plan, as amended and restated.
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DESCRIPTION OF NOTES
The following description of the particular terms of the Notes offered
hereby supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the "Debt Securities" set
forth under "Description of Debt Securities" in the accompanying Prospectus, to
which reference is hereby made.
The 2003 Notes, the 2005 Notes and the 2008 Notes each constitutes a
separate series of Senior Securities (which are more fully described in the
accompanying Prospectus) to be issued under an Indenture, dated as of January
16, 1998 (the "Original Indenture"), and a First Supplemental Indenture, dated
as of January 20, 1998 (together with the Original Indenture, the "Indenture"),
between the Company and State Street Bank and Trust Company (the "Trustee"). The
form of the Original Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus Supplement and the accompanying Prospectus
are a part and is available for inspection at the corporate trust office of the
Trustee at Two International Place, Boston, Massachusetts 02110. The Indenture
is subject to, and governed by, the Trust Indenture Act of 1939, as amended (the
"TIA"). The statements made hereunder relating to the Indenture and the Notes to
be issued thereunder are summaries of certain provisions thereof, do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to all provisions of the Indenture and such Notes.
GENERAL
The 2003 Notes will be limited to an aggregate principal amount of
$50,000,000, the 2005 Notes will be limited to an aggregate principal amount of
$50,000,000 and the 2008 Notes will be limited to an aggregate principal amount
of $50,000,000. The Notes will be direct, senior unsecured obligations of the
Company and will rank equally with all other unsecured and unsubordinated
indebtedness of the Company from time to time outstanding. The Notes will be
effectively subordinated to mortgages and other secured indebtedness of the
Company and to indebtedness and other liabilities of any Subsidiaries now
existing or that may be formed by the Company in the future. Accordingly, such
indebtedness will have to be satisfied in full before holders of the Notes will
be able to realize any value from the secured or indirectly-held properties.
As of December 31, 1997, on a pro forma basis after giving effect to the
issuance and sale of the Notes offered hereby and the application of the
proceeds from this Offering, the total outstanding indebtedness of the Company
was approximately $489 million. The Company may incur additional indebtedness,
including secured indebtedness, subject to the provisions described below under
"Certain Covenants -- Limitations on Incurrence of Indebtedness."
PRINCIPAL AND INTEREST
The 2003 Notes will bear interest at 6.250% per annum and will mature on
January 15, 2003. The 2005 Notes will bear interest at 6.500% per annum and will
mature on January 15, 2005. The 2008 Notes will bear interest at 6.625% per
annum and will mature on January 15, 2008. The Notes will bear interest from
January 15, 1998 or from the immediately preceding Interest Payment Date (as
defined below) to which interest has been paid, payable semi-annually in arrears
on January 15 and July 15 of each year, commencing on July 15, 1998 (each, an
"Interest Payment Date"), to the persons in whose name the applicable Notes are
registered in the register for each series of the Notes (the "Security
Register") on the preceding December 31 or June 30 (whether or not a Business
Day, as defined below), as the case may be (each, a "Regular Record Date").
Interest on the Notes will be computed on the basis of a 360-day year of twelve
30-day months.
If any Interest Payment Date or Stated Maturity falls on a day that is not
a Business Day, the required payment shall be made on the next Business Day as
if it were made on the date such payment was due and no interest shall accrue on
the amount so payable for the period from and after such Interest Payment Date
or the Maturity Date, as the case may be. "Business Day" means any day, other
than a Saturday or Sunday, on which banks in the City of New York are not
required or authorized by law or executive order to close.
Payment of principal of (and premium or Make-Whole Amount (as defined
below), if any) and interest on the Notes will be made by check mailed to the
address of the Person entitled thereto as it appears in the
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Security Register or by wire transfer of funds to such Person at an account
maintained within the United States.
OPTIONAL REDEMPTION
The Notes may be redeemed at any time at the option of the Company, in
whole or in part, at a redemption price equal to the sum of (i) the principal
amount of the Notes being redeemed plus accrued interest thereon to the
redemption date (the "Redemption Date") and (ii) the Make-Whole Amount, if any,
with respect to such Notes (the "Redemption Price").
If notice has been given as provided in the Indenture and funds for the
redemption of any Notes called for redemption shall have been made available on
the Redemption Date referred to in such notice, such Notes will cease to bear
interest on such Redemption Date and the only right of the Holders of the Notes
will be to receive payment of the Redemption Price.
Notice of any optional redemption of any Notes will be given to Holders at
their addresses, as shown in the Security Register, not more than 60 nor less
than 30 days prior to the Redemption Date. The notice of redemption will
specify, among other items, the Redemption Date, the Redemption Price and the
principal amount of the Notes held by such Holder to be redeemed.
If less than all the Notes are to be redeemed at the option of the Company,
the Company will notify the Trustee at least 45 days prior to the redemption (or
such shorter period as is satisfactory to the Trustee) of the aggregate
principal amount of Notes to be redeemed and the Redemption Date. The Trustee
shall select, in such manner as it shall deem fair and appropriate, Notes to be
redeemed in whole or in part. Notes may be redeemed in part in the minimum
authorized denomination for Notes or in any integral multiple thereof.
"Make-Whole Amount" means, in connection with any optional redemption or
accelerated payment of any 2003 Note, 2005 Note or 2008 Note, as the case may
be, the excess, if any, of (i) the aggregate present value as of the date of
such redemption or accelerated payment of each dollar of principal being
redeemed or paid and the amount of interest (exclusive of interest accrued to
the date of redemption or accelerated payment) that would have been payable in
respect of such dollar if such redemption or accelerated payment had not been
made, determined by discounting, on a semiannual basis, such principal and
interest at the Reinvestment Rate (determined on the third Business Day
preceding the date such notice of redemption is given or declaration of
acceleration is made) from the respective dates on which such principal and
interest would have been payable if such redemption or accelerated payment had
not been made, over (ii) the aggregate principal amount of the Notes being
redeemed or paid.
"Reinvestment Rate" means .25% (twenty-five one hundredths of one percent)
plus the arithmetic mean of the yields under the respective headings "This Week"
and "Last Week" published in the Statistical Release under the caption "Treasury
Constant Maturities" for the maturity (rounded to the nearest month)
corresponding to the remaining life to maturity, as of the payment date of the
principal being redeemed or paid. If no maturity exactly corresponds to such
maturity, yields for the two published maturities most closely corresponding to
such maturity shall be calculated pursuant to the immediately preceding sentence
and the Reinvestment Rate shall be interpolated or extrapolated from such yields
on a straight-line basis, rounding in each of such relevant periods to the
nearest month. For such purposes of calculating the Reinvestment Rate, the most
recent Statistical Release published prior to the date of determination of the
Make-Whole Amount shall be used.
"Statistical Release" means the statistical release designated "H.15(519)"
or any successor publication which is published weekly by the Federal Reserve
System and which establishes yields on actively traded United States government
securities adjusted to constant maturities or, if such statistical release is
not published at the time of any determination of the Make-Whole Amount under
the Indenture, then such other reasonably comparable index which shall be
designated by the Company.
S-18
<PAGE> 19
CERTAIN COVENANTS
Limitations on Incurrence of Indebtedness. The Company will not, and will
not permit any Subsidiary to, incur any Indebtedness (as defined below) if,
immediately after giving effect to the incurrence of such additional
Indebtedness and the application of the proceeds thereof, the aggregate
principal amount of all outstanding Indebtedness of the Company and its
Subsidiaries on a consolidated basis determined in accordance with GAAP is
greater than 60% of the sum of (without duplication)(i) the Total Assets (as
defined below) of the Company and its Subsidiaries as of the end of the calendar
quarter covered in the Company's Annual Report on Form 10-K or Quarterly Report
on Form 10-Q, as the case may be, most recently filed with the Securities and
Exchange Commission (the "Commission") (or, if such filing is not permitted
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with
the Trustee) prior to the incurrence of such additional Indebtedness and (ii)
the purchase price of any real estate assets or mortgages receivable acquired,
and the amount of any securities offering proceeds received (to the extent that
such proceeds were not used to acquire real estate assets or mortgages
receivable or used to reduce Indebtedness), by the Company or any Subsidiary
since the end of such calendar quarter, including those proceeds obtained in
connection with the incurrence of such additional Indebtedness.
In addition to the foregoing limitation on the incurrence of Indebtedness,
the Company will not, and will not permit any Subsidiary to, incur any
Indebtedness secured by any Encumbrance (as defined below) upon any of the
property of the Company or any Subsidiary if, immediately after giving effect to
the incurrence of such additional Indebtedness and the application of the
proceeds thereof, the aggregate principal amount of all outstanding Indebtedness
of the Company and its Subsidiaries on a consolidated basis which is secured by
any Encumbrance on property of the Company or any Subsidiary is greater than 40%
of the sum of (without duplication) (i) the Total Assets of the Company and its
Subsidiaries as of the end of the calendar quarter covered in the Company's
Annual Report on Form 10-K or Quarterly Report on Form 10-Q, as the case may be,
most recently filed with the Commission (or, if such filing is not permitted
under the Exchange Act, with the Trustee) prior to the incurrence of such
additional Indebtedness and (ii) the purchase price of any real estate assets or
mortgages receivable acquired, and the amount of any securities offering
proceeds received (to the extent that such proceeds were not used to acquire
real estate assets or mortgages receivable or used to reduce Indebtedness), by
the Company or any Subsidiary since the end of such calendar quarter, including
those proceeds obtained in connection with the incurrence of such additional
Indebtedness.
The Company and its Subsidiaries may not at any time own Total Unencumbered
Assets (as defined below) equal to less than 150% of the aggregate outstanding
principal amount of the Unsecured Indebtedness of the Company and its
Subsidiaries on a consolidated basis.
In addition to the foregoing limitations on the incurrence of Indebtedness,
the Company will not, and will not permit any Subsidiary to, incur any
Indebtedness if the ratio of Consolidated Income Available for Debt Service (as
defined below) to the Annual Service Charge (as defined below) for the four
consecutive fiscal quarters most recently ended prior to the date on which such
additional Indebtedness is to be incurred shall have been less than 1.5:1, on a
pro forma basis after giving effect thereto and to the application of the
proceeds therefrom, and calculated on the assumption that (i) such Indebtedness
and any other Indebtedness incurred by the Company and its Subsidiaries since
the first day of such four-quarter period and the application of the proceeds
therefrom, including to refinance other Indebtedness, had occurred at the
beginning of such period; (ii) the repayment or retirement of any other
Indebtedness by the Company and its Subsidiaries since the first day of such
four-quarter period had been repaid or retired at the beginning of such period
(except that, in making such computation, the amount of Indebtedness under any
revolving credit facility shall be computed based upon the average daily balance
of such Indebtedness during such period); (iii) in the case of Acquired
Indebtedness (as defined below) or Indebtedness incurred in connection with any
acquisition since the first day of such four-quarter period, the related
acquisition had occurred as of the first day of such period with the appropriate
adjustments with respect to such acquisition being included in such pro forma
calculation; and (iv) in the case of any acquisition or disposition by the
Company or its Subsidiaries of any asset or group of assets since the first day
of such four-quarter period, whether by merger, stock purchase or sale, or asset
purchase or sale, such acquisition or disposition or any related repayment of
Indebtedness had occurred as of the first day of such period with the
appropriate adjustments with respect to such acquisition or disposition being
included in such pro forma calculation.
S-19
<PAGE> 20
As used herein, and in the Indenture:
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from such Person, in each case, other than Indebtedness
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary or such acquisition. Acquired Indebtedness shall be deemed to be
incurred on the date of the related acquisition of assets from any Person or the
date the acquired Person becomes a Subsidiary.
"Annual Service Charge" for any period means the maximum amount which is
payable during such period for interest on, and original issue discount of,
Indebtedness of the Company and its Subsidiaries and the amount of dividends
which are payable during such period in respect of any Disqualified Stock.
"Capital Stock" means, with respect to any Person, any capital stock
(including preferred stock), shares, interests, participations or other
ownership interests (however designated) of such Person and any rights (other
than debt securities convertible into or exchangeable for corporate stock),
warrants or options to purchase any thereof.
"Consolidated Income Available for Debt Service" for any period means
Earnings from Operations (as defined below) of the Company and its Subsidiaries,
plus amounts which have been deducted, and minus amounts which have been added,
for the following (without duplication): (i) interest on Indebtedness of the
Company and its Subsidiaries, (ii) provision for taxes of the Company and its
Subsidiaries based on income, (iii) amortization of debt discount and other
deferred financing costs, (iv) provisions for gains and losses on properties and
property depreciation and amortization, (v) the effect of any noncash charge
resulting from a change in accounting principles in determining Earnings from
Operations for such period and (vi) amortization of deferred charges.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
of such Person which by the terms of such Capital Stock (or by the terms of any
security into which it is convertible or for which it is exchangeable or
exercisable), upon the happening of any event or otherwise (i) matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise
(other than Capital Stock which is redeemable solely in exchange for common
stock), (ii) is convertible into or exchangeable or exercisable for Indebtedness
or Disqualified Stock or (iii) is redeemable at the option of the holder
thereof, in whole or in part (other than Capital Stock which is redeemable
solely in exchange for Capital Stock which is not Disqualified Stock), in each
case on or prior to the Stated Maturity of the Notes.
"Earnings from Operations" for any period means net earnings excluding
gains and losses on sales of investments, extraordinary items and property
valuations losses, net as reflected in the financial statements of the Company
and its Subsidiaries for such period determined on a consolidated basis in
accordance with GAAP.
"Encumbrance" means any mortgage, lien, charge, pledge or security interest
of any kind.
"Indebtedness" of the Company or any Subsidiary means, without duplication,
any indebtedness of the Company or any Subsidiary, whether or not contingent, in
respect of (i) borrowed money or evidenced by bonds, notes, debentures or
similar instruments, (ii) indebtedness for borrowed money secured by any
Encumbrance existing on property owned by the Company or any Subsidiary, (iii)
the reimbursement obligations, contingent or otherwise, in connection with any
letters of credit actually issued (other than letters of credit issued to
provide credit enhancement or support with respect to other indebtedness of the
Company or any Subsidiary otherwise reflected as Indebtedness hereunder) or
amounts representing the balance deferred and unpaid of the purchase price of
any property or services, except any such balance that constitutes an accrued
expense or trade payable, or all conditional sale obligations or obligations
under any title retention agreement, (iv) the principal amount of all
obligations of the Company or any Subsidiary with respect to redemption,
repayment or other repurchase of any Disqualified Stock, (v) any lease of
property by the Company or any Subsidiary as lessee which is reflected on the
Company's consolidated balance sheet as a capitalized lease in accordance with
GAAP or (vi) interest rate swaps, caps or similar agreements and foreign
exchange contracts, currency swaps or similar agreements, to the extent, in the
case of items of indebtedness under (i) through (iii) above, that any such items
(other than letters of credit) would appear as a liability on
S-20
<PAGE> 21
the Company's consolidated balance sheet in accordance with GAAP, and also
includes, to the extent not otherwise included, any obligation by the Company or
any Subsidiary to be liable for, or to pay, as obligor, guarantor or otherwise
(other than for purposes of collection in the ordinary course of business),
Indebtedness of another Person (other than the Company or any Subsidiary) (it
being understood that Indebtedness shall be deemed to be incurred by the Company
or any Subsidiary whenever the Company or such Subsidiary shall create, assume,
guarantee or otherwise become liable in respect thereof).
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Significant Subsidiary" means any Subsidiary which is a "significant
subsidiary" (as defined in Article I, Rule 1-02 of Regulation S-X, promulgated
under the Securities Act of 1933, as amended) of the Company.
"Subsidiary" means, with respect to any Person, any corporation, limited
liability company, partnership or other entity of which a majority of (i) the
voting power of the voting equity securities or (ii) the outstanding equity
interests are owned, directly or indirectly, by such Person. For the purposes of
this definition, "voting equity securities" means equity securities having
voting power for the election of directors, whether at all times or only so long
as no senior class of security has such voting power by reason of any
contingency.
"Total Assets" as of any date means the sum of (i) the Undepreciated Real
Estate Assets (as defined below) and (ii) all other assets of the Company and
its Subsidiaries determined in accordance with GAAP (but excluding accounts
receivable and intangibles).
"Total Unencumbered Assets" means the sum of (i) those Undepreciated Real
Estate Assets not subject to an Encumbrance for borrowed money and (ii) all
other assets of the Company and its Subsidiaries not subject to an Encumbrance
for borrowed money, determined in accordance with GAAP (but excluding accounts
receivable and intangibles).
"Undepreciated Real Estate Assets" as of any date means the cost (original
cost plus capital improvements) of real estate assets of the Company and its
Subsidiaries on such date, before depreciation and amortization, determined on a
consolidated basis in accordance with GAAP.
"Unsecured Indebtedness" means Indebtedness which is not secured by any
Encumbrance upon any of the properties of the Company or any Subsidiary.
See "Description of Debt Securities -- Certain Covenants" in the
accompanying Prospectus for a description of additional covenants applicable to
the Company.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company may, without the consent of the holders of any outstanding Debt
Securities, consolidate with, or sell, lease or convey all or substantially all
of its assets to, or merge with or into, any other entity provided that (a)
either the Company shall be the continuing entity, or the successor entity (if
other than the Company) formed by or resulting from any such consolidation or
merger or which shall have received the transfer of such assets is organized
under the laws of any domestic jurisdiction and assumes the Company's
obligations to pay principal of (and premium or Make-Whole Amount, if any) and
interest on all of the Debt Securities and the due and punctual performance and
observance of all of the covenants and conditions contained in each Indenture;
(b) immediately after giving effect to such transaction and treating any
indebtedness that becomes an obligation of the Company or any Subsidiary as a
result thereof as having been incurred by the Company or such Subsidiary at the
time of such transaction, no Event of Default (as defined in the Indenture)
under the Indenture, and no event which, after notice or the lapse of time, or
both, would become such an Event of Default, shall have occurred and be
continuing; and (c) an officers' certificate and legal opinion covering such
conditions shall be delivered to each Trustee.
S-21
<PAGE> 22
EVENTS OF DEFAULT, NOTICE AND WAIVER
The Indenture provides that the following events are "Events of Default"
with respect to the Notes: (a) default in the payment of any interest on any
Notes when such interest becomes due and payable that continues for a period of
30 days; (b) default in the payment of the principal of (or premium or
Make-Whole Amount, if any, on) any Notes when due and payable; (c) default in
the performance, or breach, of any other covenant or warranty of the Company in
the Indenture with respect to the Notes and continuance of such default or
breach for a period of 60 days after written notice as provided in the
Indenture: (d) default under any bond, debenture, note, mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any indebtedness for money borrowed by the Company (or by any
Subsidiary, the repayment of which the Company has guaranteed or for which the
Company is directly responsible or liable as obligor or guarantor), having an
aggregate principal amount outstanding of at least $10,000,000, whether such
indebtedness now exists or shall hereafter be created, which default shall have
resulted in such indebtedness becoming or being declared due and payable prior
to the date on which it would otherwise have become due and payable, without
such indebtedness having been discharged, or such acceleration having been
rescinded or annulled, within a period of 10 days after written notice to the
Company as provided in the Indenture, provided, however, that such a default on
indebtedness which constitutes tax-exempt financing having an aggregate
principal amount outstanding not exceeding $25,000,000 that results solely from
a failure of an entity providing credit support for such indebtedness to honor a
demand for payment on a letter of credit shall not constitute an Event of
Default; (e) the entry by a court of competent jurisdiction of one or more
orders or decrees against the Company or any Significant Subsidiary under any
bankruptcy law that (i) is for relief in an involuntary case, (ii) appoints a
custodian of the Company or any Significant Subsidiary or for all or
substantially all of either of its property, or (iii) orders the liquidation of
the Company or any Significant Subsidiary, and such order or decree remains
unstayed and in effect for 90 days; or (f) the Company or any Significant
Subsidiary voluntarily commences certain events of bankruptcy, insolvency or
reorganization, or court appointment of a receiver, liquidator or trustee of the
Company or any Significant Subsidiary or for all or substantially all of either
of its property.
See "Description of Debt Securities -- Events of Default, Notice and
Waiver" in the accompanying Prospectus for a description of rights, remedies and
other matters relating to Events of Default.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The provisions of Article 14 of the Indenture relating to defeasance and
covenant defeasance, which are described in the accompanying Prospectus, will
apply to the Notes, including, without limitation, the covenants described under
"Description of Notes -- Certain Covenants."
BOOK-ENTRY SYSTEM
Each of the 2003 Notes, the 2005 Notes and the 2008 Notes will be issued in
the form of one or more fully registered Global Notes which will be deposited
with, or on behalf of, DTC and registered in the name of DTC's nominee, Cede &
Co. The provisions described under "Description of Debt Securities -- Book-Entry
System and Global Securities" in the accompanying Prospectus will apply to the
Notes.
DTC has advised the Company of the following information regarding DTC: DTC
is a limited-purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking Law, a member
of the Federal Reserve System, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code and a "clearing agency" registered pursuant
to the provisions of Section 17A of the Exchange Act. DTC holds securities that
its Participants deposit with DTC. DTC also facilitates the settlement among its
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry charges in its
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants of DTC include securities brokers
and dealers (including the Underwriters), banks, trust companies, clearing
corporations, and certain other organizations. DTC is owned by a number of its
direct Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of
S-22
<PAGE> 23
Securities Dealers, Inc. Access to the DTC system is also available to others
such as securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a direct Participant of DTC,
either directly or indirectly. The rules applicable to DTC and its participants
are on file with the Commission.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Underwriters in immediately
available funds. All payments of principal and interest in respect of the Notes
will be made by the Company in immediately available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing house or next-day funds. In contrast, the Notes
will trade in DTC's Same-Day Funds Settlement System until maturity or earlier
redemption, as the case may be, or until the Notes are issued in certificated
form, and secondary market trading activity in the Notes will therefore be
required by DTC to settle in immediately available funds. No assurance can be
given as to the effect, if any, of settlement in immediately available funds on
trading activity in the Notes.
GOVERNING LAW
The Indenture is governed by and shall be construed in accordance with the
laws of the State of New York.
NO PERSONAL LIABILITY OR RECOURSE
No recourse under or upon any obligation, covenant or agreement contained
in the Indenture or the Notes, or because of any indebtedness evidenced thereby,
shall be had against any past, present or future stockholder, employee, officer
or director, as such, of the Company or any successor, either directly or
through the Company or any successor, under any rule of law, statute or
constitutional provision or by the enforcement of any assessment or by any legal
or equitable proceeding or otherwise. Each holder of Notes waives and releases
all such liability by accepting such Notes. The waiver and release are part of
the consideration for the issue of the Notes.
S-23
<PAGE> 24
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") between the Company and the underwriters named
below (the "Underwriters"), the Company has agreed to sell to the Underwriters,
and each Underwriter has agreed to purchase from the Company, the respective
principal amount of Notes set forth opposite its name. Pursuant to the terms of
the Underwriting Agreement, the Underwriters are obligated to purchase the
entire aggregate principal amount of such Notes if any are purchased.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT AMOUNT
UNDERWRITERS OF 2003 NOTES OF 2005 NOTES OF 2008 NOTES
------------ ------------- ------------- -------------
<S> <C> <C> <C>
PaineWebber Incorporated........................ $ 30,000,000 30,000,000 30,000,000
Morgan Stanley & Co. Incorporated............... $ 10,000,000 10,000,000 10,000,000
UBS Securities LLC.............................. $ 10,000,000 10,000,000 10,000,000
------------ ---------- ----------
Total...................................... $ 50,000,000 50,000,000 50,000,000
============ ========== ==========
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the Notes in part to the public at the public offering price set forth on
the cover page of this Prospectus Supplement, and in part to certain securities
dealers (which may include the Underwriters) at such price less a concession not
in excess of 0.300% of the principal amount of the 2003 Notes, 0.375% of the
principal amount of the 2005 Notes and 0.400% of the principal amount of the
2008 Notes. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of 0.250% of the principal amount of the Notes to
certain other dealers, including the Underwriters. Following the completion of
the initial offering of the Notes, the public offering price, concession and
reallowance may change.
The 2003 Notes, the 2005 Notes and the 2008 Notes are each a new issue of
securities with no established trading market. The Company has been advised by
the Underwriters that the Underwriters intend to make a market in the Notes but
are not obligated to do so and may discontinue market making at any time without
notice. No assurance can be given as to the liquidity of the trading market for
the Notes.
Pursuant to the Underwriting Agreement, the Company has agreed to indemnify
the Underwriters against certain civil liabilities, including liabilities under
the Securities Act of 1933, as amended, or to contribute to payments the
Underwriters may be required to make in respect thereof.
Until the distribution of the Notes is completed, rules of the Commission
may limit the ability of the Underwriters to bid for and purchase the Notes. As
an exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Notes. Such transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price of
the Notes.
If the Underwriters create a short position in the Notes in connection with
the Offering, i.e., if the Underwriters sell a greater aggregate principal
amount of Notes than is set forth on the cover page of this Prospectus
Supplement, the Underwriters may reduce that short position by purchasing Notes
in the open market. In general, purchases of a security for the purpose of
stabilization or to reduce a short position could cause the price of the
security to be higher than it might be in the absence of such purchases.
Neither the Company nor the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above might have on the price of the Notes. In addition, neither the
Company nor the Underwriters makes any representation that the Underwriters will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
In the ordinary course of their respective businesses, the Underwriters and
certain of their affiliates have engaged, and may in the future engage, in
commercial banking and investment banking transactions with the Company and its
affiliates. In addition, Union Bank of Switzerland (New York Branch) and Union
Bank of California, N.A., which are affiliates of UBS Securities LLC, one of the
Underwriters, are co-agents (the "Agents") for the banks and lenders under the
Company's Unsecured Credit Facility. The entire net proceeds
S-24
<PAGE> 25
from the Offering (approximately $148.7 million) will be used to reduce
borrowings under the Unsecured Credit Facility. See "Use of Proceeds."
LEGAL MATTERS
Certain legal matters, including the legality of the Notes, will be passed
upon for the Company by Goodwin, Procter & Hoar LLP, Boston, Massachusetts, and
for the Underwriters by O'Melveny & Myers LLP, San Francisco, California.
S-25
<PAGE> 26
================================================================================
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-11
Company Philosophy......................... S-12
The Communities............................ S-14
Recent Developments........................ S-15
Use of Proceeds............................ S-15
Capitalization............................. S-16
Description of Notes....................... S-17
Underwriting............................... S-24
Legal Matters.............................. S-25
PROSPECTUS
Available Information...................... 2
Incorporation of Certain Documents by
Reference................................ 2
The Company................................ 4
Use of Proceeds............................ 4
Ratios of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.... 4
Description of Debt Securities............. 5
Description of Preferred Stock............. 19
Description of Common Stock................ 25
Restrictions on Transfers of Capital
Stock.................................... 26
Federal Income Tax Considerations.......... 27
Plan of Distribution....................... 28
Legal Matters.............................. 29
Experts.................................... 29
</TABLE>
================================================================================
================================================================================
[BAY APARTMENT COMM LOGO]
$50,000,000 6.250% SENIOR NOTES DUE 2003
$50,000,000 6.500% SENIOR NOTES DUE 2005
$50,000,000 6.625% SENIOR NOTES DUE 2008
---------------------------------
PROSPECTUS SUPPLEMENT
---------------------------------
PAINEWEBBER INCORPORATED
MORGAN STANLEY DEAN WITTER
UBS SECURITIES
------------------------
JANUARY 14, 1998
================================================================================
