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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Date of Report (Date of earliest event reported): MARCH 8, 1998
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BAY APARTMENT COMMUNITIES, INC.
(Exact name of Registrant as specified in charter)
MARYLAND 1-12672 77-0404318
- ---------------------------- ------------------------ -------------------
(State or other jurisdiction (Commission file number) (IRS employer
of incorporation) identification no.)
4340 STEVENS CREEK BOULEVARD, SUITE 275, SAN JOSE, CA 95129
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(Address of principal executive offices) (Zip Code)
(408) 983-1500
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(Registrant's telephone number, including area code)
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ITEM 5 - OTHER EVENTS
On March 9, 1998, Bay Apartment Communities, Inc. (the "Company") and
Avalon Properties, Inc. ("Avalon") entered into an Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which Avalon will merge (the "Merger") with
and into the Company, with the Company being the surviving corporation. Pursuant
to the Merger Agreement, at the effective time of the Merger each outstanding
share of common stock of Avalon (the "Avalon Common Stock") will be converted
into the right to receive 0.7683 shares of common stock of the Company (the
"Company Common Stock"). Holders of preferred stock of Avalon will receive
shares of comparable preferred stock of the Company on a one-for-one basis.
A copy of the Merger Agreement is attached hereto as Exhibit 99.1 and
is incorporated herein by reference, and a copy of the Press Release of the
Company issued in connection with the execution of the Merger Agreement is
attached hereto as Exhibit 99.2 and is incorporated herein by reference.
In connection with the execution of the Merger Agreement, the Company
and Avalon entered into a Stock Option Agreement pursuant to which Avalon
granted to the Company an option to purchase, upon the occurrence of certain
events, up to an aggregate of 19.9% of the outstanding shares of Avalon Common
Stock. In addition, the Company and Avalon entered into a Stock Option Agreement
pursuant to which the Company granted to Avalon an option to purchase, upon the
occurrence of certain events, up to an aggregate of 19.9% of the outstanding
shares of Company Common Stock. Copies of the Stock Option Agreements are
attached hereto as Exhibits 99.3 and 99.4 and are incorporated herein by
reference.
The Board of Directors of the Company also has adopted a Shareholder
Rights Agreement (the "Rights Agreement"). In connection with the adoption of
the Rights Agreement, the Board of Directors declared a dividend distribution of
one Preferred Stock Purchase Right (a "Right") for each outstanding share of
Company Common Stock to stockholders of record as of the close of business on
March 10, 1998 (the "Record Date"). Each Right entitles the registered holder
thereof to purchase from the Company a unit consisting of one one-thousandth of
a share of Series E Junior Participating Cumulative Preferred Stock, par value
$0.01 per share, of the Company, at a cash exercise price of $160.00 per Unit,
subject to adjustment.
Initially, the Rights are not exercisable and are attached to and trade
with all shares of Company Common Stock outstanding as of, or issued subsequent
to, the Record Date. The Rights will separate from the Company Common Stock and
will become exercisable upon the earlier of (i) the close of business on the
tenth calendar day following the first public announcement that a person or
group of affiliated or associated persons has acquired beneficial ownership of
10% or more of the outstanding shares of Company Common Stock (an "Acquiring
Person"), or (ii) the close of business on the tenth business day following the
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commencement of a tender offer or exchange offer that would result upon its
consummation in a person or group becoming the beneficial owner of 10% or more
of the outstanding shares of Company Common Stock.
In the case of certain stockholders of the Company who beneficially
owned 10% or more of the outstanding shares of Company Common Stock as of
March 9, 1998 (such stockholders are referred to in the Rights Agreement as
"grandfathered persons"), the Rights generally will be distributed only if any
such stockholder acquires or proposes to acquire additional shares of Company
Common Stock. In addition, a "grandfathered person" generally will become an
Acquiring Person only if such person acquires additional shares of Company
Common Stock. The description and terms of the Rights are set forth in the
Rights Agreement, which is incorporated herein by reference to Exhibit 4.1 of
the Company's Registration Statement on Form 8-A filed with the Securities and
Exchange Commission in connection with the adoption of the Rights Agreement.
ITEM 7 - FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
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Exhibit 4.1 Shareholder Rights Agreement, dated March 9, 1998, between
Bay Apartment Communities, Inc. and American Stock Transfer
and Trust Company, as Rights Agent (including the form of
Rights Certificate as EXHIBIT B) (incorporated by reference
to the Registration Statement on Form 8-A of Bay Apartment
Communities, Inc., File No. 001-12672).
Exhibit 4.2 Text of Amendment to Bylaws of Bay Apartment Communities,
Inc.
Exhibit 99.1 Agreement and Plan of Merger, dated as of March 9, 1998, by
and between Bay Apartment Communities, Inc. and Avalon
Properties, Inc.
Exhibit 99.2 Text of Press Release relating to the Merger and the adoption
of the Shareholder Rights Agreement
Exhibit 99.3 Stock Option Agreement, dated as of March 9, 1998, by and
between Bay Apartment Communities, Inc., as issuer, and
Avalon Properties, Inc.
Exhibit 99.4 Stock Option Agreement, dated as of March 9, 1998, by and
between Avalon Properties, Inc., as issuer, and Bay Apartment
Communities, Inc.
Exhibit 99.5 Presentation Materials used at investor and analyst meetings
relating to the Merger.
Exhibit 99.6 Certain materials posted on the website of Bay Apartment
Communities, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has duly caused this report to be filed on its behalf by
the undersigned thereunto duly authorized.
BAY APARTMENT COMMUNITIES, INC.
Dated: March 10, 1998 By: /s/ Gilbert M. Meyer
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Name: Gilbert M. Meyer
Title: President and Chief Executive
Officer
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EXHIBIT INDEX
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EXHIBIT NO. DESCRIPTION
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4.1 Shareholder Rights Agreement, dated March 9, 1998, between Bay
Apartment Communities, Inc. and American Stock Transfer and Trust
Company, as Rights Agent (including the form of Rights Certificate
as EXHIBIT B) (incorporated by reference to the Registration
Statement on Form 8-A of Bay Apartment Communities, Inc., File No.
001-12672).
4.2 Text of Amendment to Bylaws of Bay Apartment Communities, Inc.
99.1 Agreement and Plan of Merger, dated as of March 9, 1998, by and
between Bay Apartment Communities, Inc. and Avalon Properties, Inc.
99.2 Text of Press Release relating to the Merger and the adoption of the
Shareholder Rights Agreement.
99.3 Stock Option Agreement, dated as of March 9, 1998, by and between
Bay Apartment Communities, Inc., as issuer, and Avalon Properties,
Inc.
99.4 Stock Option Agreement, dated as of March 9, 1998, by and between
Avalon Properties, Inc., as issuer, and Bay Apartment Communities,
Inc.
99.5 Presentation Materials used at investor and analyst meetings
relating to the Merger.
99.6 Certain materials posted on the website of Bay Apartment
Communities, Inc.
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EXHIBIT 4.2
BAY APARTMENT COMMUNITIES, INC.
(the "Corporation")
AMENDMENT TO BYLAWS
On March 3, 1998, the Board of Directors of the Corporation
unanimously resolved to amend the Bylaws of the Corporation by deleting
therefrom ARTICLE I, Section 1.04 and inserting the following in lieu thereof:
"1.04 SPECIAL MEETINGS. The Chairman of the Board of Directors
(the "Chairman of the Board"), the President or a majority of the Board
of Directors may call special meetings of the Stockholders. In
addition, the Secretary of the Corporation shall call a special meeting
of the Stockholders on the written request of Stockholders entitled to
cast a majority of all the votes entitled to be cast at the meeting.
Such request shall state the purpose or purposes of such meeting and
the matters proposed to be acted on thereat. Notwithstanding the
preceding sentence, unless requested by Stockholders entitled to cast a
majority of all the votes entitled to be cast at the meeting, a special
meeting need not be called to consider any matter which is
substantially the same as a matter voted on at any special meeting of
the Stockholders held during the preceding twelve (12) months. The
date, time, place and record date for any special meeting, including a
special meeting called at the request of Stockholders, shall be
established by the Board of Directors or officer calling the same."
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EXHIBIT 99.1
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AGREEMENT AND PLAN OF MERGER
by and between
BAY APARTMENT COMMUNITIES, INC.
and
AVALON PROPERTIES, INC.
Dated as of March 9, 1998
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TABLE OF CONTENTS
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ARTICLE I CERTAIN DEFINITIONS...................................... 1
Section 1.1. Certain Definitions.................................... 1
ARTICLE II THE MERGER; EFFECTS OF THE MERGER........................ 7
Section 2.1. The Merger............................................. 7
Section 2.2. Charter and By-Laws.................................... 7
Section 2.3. Closing................................................ 7
Section 2.4. Effectiveness and Effects of the Merger................ 7
Section 2.5. Tax Consequences....................................... 8
Section 2.6. Accounting Treatment................................... 8
Section 2.7. Boards, Committees and Officers........................ 8
ARTICLE III MERGER CONSIDERATION; EXCHANGE PROCEDURES................ 8
Section 3.1. Merger Consideration................................... 8
Section 3.2. Rights as Stockholders; Stock Transfers................ 9
Section 3.3. Fractional Shares...................................... 9
Section 3.4. Exchange Procedures.................................... 9
Section 3.5. Anti-Dilution Provisions............................... 10
Section 3.6. Treasury Shares........................................ 11
Section 3.7. Options................................................ 11
ARTICLE IV ACTIONS PENDING MERGER................................... 11
Section 4.1. Ordinary Course........................................ 12
Section 4.2. Stock.................................................. 12
Section 4.3. Dividends, Etc......................................... 12
Section 4.4. Compensation; Employment Agreements; Etc............... 13
Section 4.5. Benefit Plans.......................................... 13
Section 4.6. Acquisitions, Dispositions and Capital Expenditures.... 13
Section 4.7. Amendments............................................. 14
Section 4.8. Accounting Methods..................................... 14
Section 4.9. Adverse Actions........................................ 14
Section 4.10. Agreements............................................. 14
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ARTICLE V REPRESENTATIONS AND WARRANTIES........................... 14
Section 5.1. Disclosure Schedules................................... 14
Section 5.2. Standard............................................... 15
Section 5.3. Representations and Warranties......................... 15
ARTICLE VI COVENANTS................................................ 25
Section 6.1. Best Efforts........................................... 25
Section 6.2. Stockholder Approvals.................................. 25
Section 6.3. Registration Statement................................. 25
Section 6.4. Press Releases......................................... 26
Section 6.5. Access; Information.................................... 27
Section 6.6. Acquisition Proposals.................................. 27
Section 6.7. Affiliate Agreements................................... 28
Section 6.8. Takeover Laws.......................................... 28
Section 6.9. No Rights Triggered.................................... 28
Section 6.10. Shares Listed.......................................... 28
Section 6.11. Filings; Consents...................................... 28
Section 6.12. Indemnification; Directors' and Officers' Insurance.... 29
Section 6.13. Compensation and Benefit Plans......................... 31
Section 6.14. Transfer and Gains Taxes............................... 31
Section 6.15. Headquarters........................................... 31
Section 6.16. Notification of Certain Matters........................ 31
Section 6.17. Interim Transactions Committee......................... 32
ARTICLE VII CONDITIONS TO CONSUMMATION OF THE MERGER................. 32
Section 7.1. Stockholder Vote....................................... 32
Section 7.2. Governmental Approvals................................. 32
Section 7.3. Third Party Consents................................... 32
Section 7.4. No Injunction, Etc..................................... 32
Section 7.5. Representations, Warranties and Covenants of Avalon.... 32
Section 7.6. Representations, Warranties and Covenants of Bay....... 33
Section 7.7. Effective Registration Statement....................... 33
Section 7.8. Tax Opinion Relating to the Merger..................... 33
Section 7.9. Tax Opinion Relating to REIT Status.................... 34
Section 7.10. NYSE Listing........................................... 34
Section 7.11. Rights Agreement....................................... 34
Section 7.12. REIT Income............................................ 34
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ARTICLE VIII TERMINATION.............................................. 34
Section 8.1. Termination............................................ 34
Section 8.2. Effect of Termination and Abandonment.................. 35
Section 8.3. Break-Up Expenses...................................... 35
ARTICLE IX MISCELLANEOUS............................................ 36
Section 9.1. Survival............................................... 36
Section 9.2. Waiver; Amendment...................................... 36
Section 9.3. Counterparts........................................... 36
Section 9.4. Governing Law.......................................... 37
Section 9.5. Expenses............................................... 37
Section 9.6. Confidentiality........................................ 37
Section 9.7. Notices................................................ 37
Section 9.8. Understanding; No Third Party Beneficiaries............ 38
Section 9.9. Headings; Interpretation............................... 38
EXHIBIT A Board of Directors, Committees and Officers of the Surviving
Corporation
EXHIBIT B Form of Affiliate Letter Addressed to Bay
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AGREEMENT AND PLAN OF MERGER, dated as of March 9, 1998 (this
"AGREEMENT"), by and between Bay Apartment Communities, Inc., a Maryland
corporation ("BAY"), and Avalon Properties, Inc., a Maryland corporation
("AVALON").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of Bay and Avalon have determined that
it is in the best interests of their respective companies and their stockholders
to consummate the strategic business merger transaction provided for herein, in
which Avalon will, subject to the terms and conditions set forth herein, merge
(the "MERGER") with and into Bay so that Bay is the surviving corporation in the
Merger;
WHEREAS, in connection with the execution of this Agreement, Bay and
Avalon are entering into a stock option agreement, with Bay as issuer and Avalon
as grantee (the "BAY STOCK OPTION AGREEMENT");
WHEREAS, in connection with the execution of this Agreement, Avalon and
Bay are entering into a stock option agreement, with Avalon as issuer and Bay as
grantee (the "AVALON STOCK OPTION AGREEMENT" and, together with Bay Stock Option
Agreement, the "STOCK OPTION AGREEMENTS"); and
WHEREAS, the parties desire to make certain representations, warranties
and agreements in connection with the Merger and also to prescribe certain
conditions to the Merger;
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and intending to be
legally bound hereby, the parties agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
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1.1. CERTAIN DEFINITIONS. As used in this Agreement, the following
terms shall have the meanings set forth below:
"AFFILIATE" shall have the meaning set forth in Section 6.7(a).
"AGREEMENT" shall have the meaning set forth in the preamble to this
Agreement.
"ARTICLES OF MERGER" shall have the meaning set forth in Section 2.4.
"AVALON" shall have the meaning set forth in the preamble to this
Agreement.
"AVALON COMMON STOCK" shall have the meaning set forth in
Section 3.1(a).
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"AVALON COMPENSATION AND BENEFIT PLANS" shall mean the Compensation and
Benefit Plans of Avalon.
"AVALON MEETING" shall have the meaning set forth in Section 6.2.
"AVALON PARTNERSHIP AGREEMENT" shall mean, collectively, the Agreement
of Limited Partnership of Avalon Ballston II, L.P., dated as of January 13, 1997
and the Second Amended and Restated Agreement of Limited Partnership of Avalon
DownREIT V, L.P., dated as of December 22, 1997.
"AVALON PREFERRED STOCK" shall mean, collectively, Avalon Series A
Preferred Stock and Avalon Series B Preferred Stock.
"AVALON RIGHT" shall have the meaning set forth in Section 3.1(a).
"AVALON RIGHTS AGREEMENT" shall have the meaning set forth in
Section 3.1(a).
"AVALON SERIES A PREFERRED STOCK" shall have the meaning set forth in
Section 3.1(b).
"AVALON SERIES B PREFERRED STOCK" shall have the meaning set forth in
Section 3.1(b).
"AVALON STOCK" shall mean Avalon Common Stock and Avalon Preferred
Stock.
"AVALON STOCK OPTION" shall have the meaning set forth in
Section 3.7(a).
"AVALON STOCK OPTION AGREEMENT" shall have the meaning set forth in the
recitals to this Agreement.
"AVALON STOCK OPTION PLANS" shall have the meaning set forth in
Section 3.7(a).
"BAY" shall have the meaning set forth in the preamble to this
Agreement.
"BAY COMMON STOCK" shall have the meaning set forth in Section 3.1(a).
"BAY MEETING" shall have the meaning set forth in Section 6.2.
"BAY PARTNERSHIP AGREEMENTS" shall mean, collectively, the Agreement of
Limited Partnership of Bay Countrybrook, L.P., dated as of July 12, 1996 and
Agreement of Limited Partnership of Bay Pacific Northwest, L.P., dated as of
September 12, 1997.
"BAY PREFERRED HOLDER" shall have the meaning set forth in
Section 5.3(u).
"BAY PREFERRED STOCK" shall mean, collectively, the Bay Series A
Preferred Stock, the Bay Series B Preferred Stock, the Bay Series C Preferred
Stock and the Bay Series D Preferred Stock.
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"BAY RIGHT" shall have the meaning set forth in Section 3.1(a).
"BAY RIGHTS AGREEMENT" shall have the meaning set forth in
Section 3.1(a).
"BAY SERIES A PREFERRED STOCK" shall have the meaning set forth in
Section 3.1(d).
"BAY SERIES B PREFERRED STOCK" shall have the meaning set forth in
Section 3.1(d).
"BAY SERIES C PREFERRED STOCK" shall have the meaning set forth in
Section 3.1(d).
"BAY SERIES D PREFERRED STOCK" shall have the meaning set forth in
Section 3.1(d).
"BAY STOCK" shall mean Bay Common Stock and Bay Preferred Stock.
"BAY STOCK OPTION AGREEMENT" shall have the meaning set forth in the
recitals to this Agreement.
"BREAK-UP EXPENSES" shall have the meaning set forth in Section 8.3.
"BREAK-UP EXPENSES TAX OPINION" shall have the meaning set forth in
Section 8.3.
"CLAIM" shall have the meaning set forth in Section 6.12(a).
"CLOSING" shall have the meaning set forth in Section 2.3.
"CLOSING DATE" shall have the meaning set forth in Section 2.3.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMPENSATION AND BENEFIT PLANS" shall have the meaning set forth in
Section 5.3(l)(i).
"CONFIDENTIALITY AGREEMENT" shall mean the Confidentiality Agreement,
dated as of March 7, 1998, between Bay and Avalon.
"DISCLOSURE SCHEDULE" shall have the meaning set forth in Section 5.1.
"EFFECTIVE DATE" shall have the meaning set forth in Section 2.4.
"EFFECTIVE TIME" shall have the meaning set forth in Section 2.4.
"ENCUMBRANCES" shall have the meaning set forth in Section 5.3(o)(ii).
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"ERISA AFFILIATE" shall have the meaning set forth in
Section 5.3(l)(iv).
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"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
"EXCHANGE AGENT" shall have the meaning set forth in Section 3.4(a).
"EXCHANGE FUND" shall have the meaning set forth in Section 3.4(a).
"EXCHANGE RATIO" shall have the meaning set forth in Section 3.1(a).
"FINAL COMPANY DIVIDEND" shall have the meaning set forth in
Section 7.12.
"GAAP" shall have the meaning set forth in Section 2.6.
"GOVERNMENTAL ENTITY" shall mean any court, administrative agency,
commission or other governmental authority or instrumentality, whether local,
state, federal or foreign.
"HAZARDOUS MATERIALS" shall have the meaning set forth in
Section 5.3(p).
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
"INDEMNIFIED PARTIES" shall have the meaning set forth in
Section 6.12(a).
"JOINT PROXY STATEMENT" shall have the meaning set forth in
Section 6.3(a).
"LIENS" shall mean any charge, mortgage, pledge, security interest,
restriction, claim, lien, or encumbrance.
"MATERIAL ADVERSE EFFECT" shall mean with respect to Bay or Avalon,
respectively, any effect that (i) is material and adverse to the financial
position, results of operations, assets or business of Bay and its Subsidiaries
taken as a whole, or Avalon and its Subsidiaries taken as a whole, respectively,
or (ii) would materially impair the ability of Bay or Avalon, respectively, to
perform its obligations under this Agreement or otherwise materially threaten or
materially impede the consummation of the Merger and the other transactions
contemplated by this Agreement; PROVIDED, HOWEVER, that Material Adverse Effect
shall not be deemed to include the impact of (a) changes in laws of general
applicability or interpretations thereof by courts or governmental authorities,
(b) changes in generally accepted accounting principles, (c) actions or
omissions of Bay or Avalon taken with the prior written consent of Bay or
Avalon, as applicable, in contemplation of the transactions contemplated hereby,
(d) circumstances affecting real estate investment trusts or real estate
companies generally, and (e) the effects of the Merger and compliance by either
party with the provisions of this Agreement on the financial position, results
of operations, assets or business of such party and its Subsidiaries, or the
other party and its Subsidiaries, as the case may be.
"MEETING" shall have the meaning set forth in Section 6.2.
"MERGER" shall have the meaning set forth in the recitals to this
Agreement and in Section 2.1.
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"MERGER CONSIDERATION" shall have the meaning set forth in Section 2.1.
"MGCL" shall have the meaning set forth in Section 2.4.
"MULTIEMPLOYER PLANS" shall have the meaning set forth in
Section 5.3(l)(iii).
"NEW CERTIFICATES" shall have the meaning set forth in Section 3.4(a).
"NYSE" shall mean The New York Stock Exchange, Inc.
"OLD CERTIFICATES" shall have the meaning set forth in Section 3.4(a).
"PAYOR" shall have the meaning set forth in Section 8.3.
"PCX" shall mean the Pacific Exchange, Inc.
"PENSION PLAN" shall have the meaning set forth in Section 5.3(l)(iii).
"PERSON" or "PERSON" shall mean any individual, bank, corporation,
partnership, limited liability company, association, joint-stock company,
business trust or unincorporated organization.
"PLANS" shall have the meaning set forth in Section 5.3(l)(iii).
"PREVIOUSLY DISCLOSED" by a party shall mean information set forth in
its Disclosure Schedule.
"PROPERTIES" shall have the meaning set forth in Section 5.3(o)(i).
"PROPERTY RESTRICTIONS" shall have the meaning set forth in Section
5.3(o)(ii).
"QUALIFYING INCOME" shall have the meaning set forth in Section 8.3.
"RECIPIENT" shall have the meaning set forth in Section 8.3.
"REGISTRATION STATEMENT" shall have the meaning set forth in
Section 6.3(a).
"REIT" shall mean a real estate investment trust within the meaning of
Section 856 of the Code.
"REIT REQUIREMENTS" shall have the meaning set forth in Section 8.3.
"RIGHTS" shall mean, with respect to any person, securities or
obligations convertible into or exchangeable for, or giving any person any right
to subscribe for or acquire, or any options, calls or commitments relating to,
shares of stock of such person.
"SDAT" shall have the meaning set forth in Section 2.4.
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"SEC" shall mean the Securities and Exchange Commission.
"SEC DOCUMENTS" shall have the meaning set forth in Section 5.3(g).
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and
the rules and regulations thereunder.
A "SIGNIFICANT SUBSIDIARY" of a person shall mean a Subsidiary,
including its Subsidiaries, in which such person's total investment or
proportionate share of total assets of such subsidiary exceeds 10% of the total
assets of such person and its subsidiaries consolidated as of the end of the
most recently completed fiscal year.
"STOCK OPTION AGREEMENTS" shall have the meaning set forth in the
recitals to this Agreement.
A "SUBSIDIARY" of a person shall mean a person in which at least 10% of
the voting power of the voting securities is held, directly or indirectly, by
such person.
"SURVIVING CORPORATION" shall have the meaning set forth in
Section 2.1.
"SURVIVING CORPORATION SERIES F PREFERRED STOCK" shall have the meaning
set forth in Section 3.1(b).
"SURVIVING CORPORATION SERIES G PREFERRED STOCK" shall have the meaning
set forth in Section 3.1(b).
"TAKEOVER LAWS" shall have the meaning set forth in Section 5.3(n)(i).
"TAX RETURNS" shall have the meaning set forth in Section 5.3(q).
"TAXES" shall mean (i) all taxes, charges, fees, levies or other
assessments, including all net income, gross income, gross receipts, sales, use,
ad valorem, goods and services, capital, transfer, franchise, profits, license,
withholding, payroll, employment, employer health, excise, estimated, severance,
stamp, occupation, property or other taxes, custom duties, fees, assessments or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any taxing authority; and (ii)
any liability for the payment of amounts with respect to payments of a type
described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group, or as a result of any obligation under
any tax sharing arrangement or tax indemnity agreement.
"TRANSFER AND GAINS TAXES" shall have the meaning set forth in
Section 6.14.
"TREASURY SHARES" shall have the meaning set forth in Section 3.1(a).
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ARTICLE II
THE MERGER; EFFECTS OF THE MERGER
---------------------------------
2.1. THE MERGER. At the Effective Time, Avalon shall merge with and
into Bay (the "MERGER"), the separate corporate existence of Avalon shall cease
and Bay shall survive and continue to exist as a Maryland corporation (Bay, as
the surviving corporation in the Merger, being sometimes referred to herein as
the "SURVIVING CORPORATION"). The parties hereto may by mutual agreement at any
time change the method of effecting the combination between Bay and Avalon
(including the provisions of this Article II) if and to the extent the parties
deem such change to be desirable, including to provide for a merger of Avalon
with an affiliate of Bay in a transaction in which Bay causes the assets of
Avalon to be directed to such affiliate; provided, HOWEVER, that no such change
shall (A) alter or change the amount or kind of consideration to be issued to
holders of Avalon Stock as provided for in this Agreement (the "MERGER
CONSIDERATION"), (B) adversely affect the tax treatment of Avalon's stockholders
as a result of receiving the Merger Consideration or (C) materially impede or
delay consummation of the transactions contemplated by this Agreement.
2.2. CHARTER AND BY-LAWS. Unless the same already shall have been
adopted, the Articles of Merger shall provide that, at the Effective Time, (i)
the charter of the Surviving Corporation shall be the charter of Bay, as such
charter may be amended as agreed to by Bay and Avalon and set forth in the
Articles of Merger or any articles of amendment filed prior to the Effective
Time and (ii) the corporate name of the Surviving Corporation shall be Avalon
Bay Communities, Inc. The by-laws of the Surviving Corporation shall be the
by-laws of Bay at the Effective Time, which by-laws shall be agreed upon by Bay
and Avalon prior to the Effective Time.
2.3. CLOSING. The closing of the Merger (the "CLOSING") will occur at
10:00 a.m., New York time, on the date to be specified by the parties, which
(subject to the satisfaction or waiver of the conditions as set forth in Article
VII in accordance with this Agreement) shall be no later than the third business
day to occur after the last of the conditions set forth in Sections 7.1, 7.2,
7.3, 7.7 and 7.10 shall have been satisfied or waived in accordance with the
terms of this Agreement (the "CLOSING DATE"), at the offices of Goodwin, Procter
& Hoar LLP, 599 Lexington Avenue, New York, New York 10022, unless another date
or place is agreed to in writing by the parties.
2.4. EFFECTIVENESS AND EFFECTS OF THE MERGER. On the Closing Date, or
at such time as may otherwise be agreed by the parties, Bay and Avalon shall
execute and file with the State Department of Assessments and Taxation of
Maryland (the "SDAT") articles of merger (the "ARTICLES OF MERGER"). The Merger
shall become effective (the "EFFECTIVE TIME") when the Articles of Merger are
accepted for record by the SDAT or such other time, if any, as Bay and Avalon
shall specify in the Articles of Merger. The Merger shall have the effects
prescribed in Section 3-114 of the Maryland General Corporation Law ("MGCL").
The date on which the Effective Time occurs is referred to as the "EFFECTIVE
DATE."
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2.5. TAX CONSEQUENCES. It is intended that the Merger shall qualify as
a reorganization under Section 368(a) of the Code, and that the Agreement shall
constitute a "plan of reorganization" for purposes of Section 368 of the Code.
2.6. ACCOUNTING TREATMENT. It is intended that the Merger be accounted
for as a purchase under generally accepted accounting principles ("GAAP").
2.7. BOARDS, COMMITTEES AND OFFICERS. At the Effective Time, the Board
of Directors, committees of the Board of Directors, composition of such
committees (including chairmen thereof) and certain officers of the Surviving
Corporation (as indicated in Exhibit A) shall be as set forth on Exhibit A until
the earlier of the resignation or removal of any individual listed on or
designated in accordance with Exhibit A or until their respective successors are
duly appointed or elected and qualified, as the case may be. If any officer
listed on or appointed in accordance with Exhibit A ceases to be a full-time
employee of Bay or Avalon prior to the Effective Time, or if any director,
committee member or committee chairman listed or designated on Exhibit A is not
serving as a director at the Effective Time, the Board of Directors of Bay or
Avalon, as the case may be, after consultation with the other party, shall
designate another person to serve in such person's stead in accordance with
Exhibit A.
ARTICLE III
MERGER CONSIDERATION; EXCHANGE PROCEDURES
MERGER CONSIDERATION. Subject to the provisions of this Agreement, at
the Effective Time, automatically by virtue of the Merger and without any action
on the part of any party or stockholder:
(a) OUTSTANDING AVALON COMMON STOCK. Each share (excluding (i) shares
held by Avalon or any of its Subsidiaries or by Bay or any of its Subsidiaries,
other than in a fiduciary capacity ("TREASURY SHARES")) of the common stock, par
value $.01 per share, of Avalon, including each attached right (a "AVALON
RIGHT") issued pursuant to the Rights Agreement, dated as of March 9, 1998, as
amended (the "AVALON RIGHTS AGREEMENT"), between Avalon and the Rights Agent
named therein (the "AVALON COMMON STOCK"), issued and outstanding immediately
prior to the Effective Time shall be converted into and become the right to
receive 0.7683 shares (subject to adjustment as set forth herein, the "EXCHANGE
RATIO") of common stock, par value $.01 per share, of Bay (the "BAY COMMON
STOCK"). One preferred share purchase right (a "BAY RIGHT") issued pursuant to
the Rights Agreement, dated as of March 9, 1998, as amended (the "BAY RIGHTS
AGREEMENT") shall be issued together with and shall attach to each share of Bay
Common Stock issued pursuant to the Merger, unless the Bay Rights have been
redeemed prior to the Effective Time.
(b) OUTSTANDING AVALON PREFERRED STOCK. Each share of Avalon 9%
Series A Cumulative Redeemable Preferred Stock, par value $.01 per share,
liquidation preference $25 per share (the "AVALON SERIES A PREFERRED STOCK"),
excluding any Treasury Shares, issued and outstanding immediately prior to the
Effective Time shall become and be converted into the right to
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<PAGE> 13
receive one share of a newly created series of preferred stock of the Surviving
Corporation (the "SURVIVING CORPORATION SERIES F PREFERRED STOCK") having terms
(to be set forth in the charter of the Surviving Corporation) substantially
identical to those of the Avalon Series A Preferred Stock. Each share of Avalon
8.96% Series B Cumulative Redeemable Preferred Stock, par value $.01 per share,
liquidation preference $25 per share (the "AVALON SERIES B PREFERRED STOCK,"
collectively with the Avalon Series B Preferred Stock, the "AVALON PREFERRED
STOCK"), excluding any Treasury Shares, issued and outstanding immediately prior
to the Effective Time, shall become and be converted into the right to receive
one share of a newly created series of preferred stock of the Surviving
Corporation (the "SURVIVING CORPORATION SERIES G PREFERRED STOCK") having terms
(to be set forth in the charter of the Surviving Corporation) substantially
identical to those of the Avalon Series B Preferred Stock.
(c) OUTSTANDING BAY COMMON STOCK. Each share of Bay Common Stock,
including each attached Bay Right (unless redeemed prior to the Effective Time),
issued and outstanding immediately prior to the Effective Time shall remain
outstanding following the Effective Time.
(d) OUTSTANDING BAY PREFERRED STOCK. Each share of Bay Series A
Preferred Stock (the "BAY SERIES A PREFERRED STOCK"), Bay Series B Preferred
Stock (the "BAY SERIES B PREFERRED STOCK"), Bay 8.50% Series C Preferred Stock
(the "BAY SERIES C PREFERRED STOCK"), and Bay 8.00% Series D Preferred Stock
(the "BAY SERIES D PREFERRED STOCK") issued and outstanding immediately prior to
the Effective Time shall remain outstanding following the Effective Time.
3.2. RIGHTS AS STOCKHOLDERS; STOCK TRANSFERS. At the Effective Time,
holders of Avalon Stock shall cease to be, and shall have no rights as,
stockholders of Avalon, other than to receive any dividend or other distribution
with respect to such Avalon Stock with a record date occurring prior to the
Effective Time and to receive the consideration provided under this Article III.
After the Effective Time, there shall be no transfers on the stock transfer
books of Avalon of shares of Avalon Stock.
3.3. FRACTIONAL SHARES. Notwithstanding any other provision hereof, no
fractional shares of Bay Common Stock and no certificates or scrip therefor, or
other evidence of ownership thereof, will be issued in the Merger; instead, Bay
shall pay to each holder of Avalon Common Stock who would otherwise be entitled
to a fractional share of Bay Common Stock (after taking into account all Old
Certificates delivered by such holder) an amount in cash to be paid in lieu of
fractional shares (without interest) determined by multiplying such fraction by
the average of the last sale prices of Bay Common Stock, as reported by the NYSE
Composite Transactions reporting system (as reported in The Wall Street Journal
or, if not reported therein, in another authoritative source), for the five NYSE
trading days immediately preceding the Effective Date.
3.4. EXCHANGE PROCEDURES. (a) At or prior to the Effective Time, Bay
shall deposit, or shall cause to be deposited, with a bank or trust company
selected by Bay and reasonably acceptable to Avalon (the "EXCHANGE AGENT"), for
the benefit of the holders of certificates formerly representing shares of
Avalon Stock ("OLD CERTIFICATES"), for exchange in accordance
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<PAGE> 14
with this Article III, certificates representing the shares of Bay Stock ("NEW
CERTIFICATES") and an estimated amount of cash to be paid in lieu of fractional
shares (such cash and New Certificates, together with any dividends or
distributions with respect thereto (without any interest thereon), being
hereinafter referred to as the "EXCHANGE FUND") to be paid pursuant to this
Article III in exchange for outstanding shares of Avalon Stock.
As promptly as practicable after the Effective Date, Bay shall send or
cause to be sent to each former holder of record of shares (other than Treasury
Shares) of Avalon Stock immediately prior to the Effective Time transmittal
materials for use in exchanging such stockholder's Old Certificates for the
consideration set forth in this Article III. Bay shall cause the New
Certificates into which shares of a stockholder's Avalon Stock are converted on
the Effective Date and/or any check in respect of any fractional share interests
or dividends or distributions which such person shall be entitled to receive to
be delivered to such stockholder upon delivery to the Exchange Agent of Old
Certificates representing such shares of Avalon Stock (or indemnity reasonably
satisfactory to Bay and the Exchange Agent, if any of such certificates are
lost, stolen or destroyed) owned by such stockholder. No interest will be paid
on any such cash to be paid pursuant to this Article III upon such delivery.
(c) Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto or any affiliate thereof shall be liable to any former holder of
Avalon Stock for any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(d) No dividends or other distributions with respect to Bay Stock
with a record date occurring after the Effective Time shall be paid to the
holder of any unsurrendered Old Certificate representing shares of Avalon Stock
converted in the Merger into shares of such Bay Stock until the holder thereof
shall surrender such Old Certificate in accordance with this Article III. After
the surrender of an Old Certificate in accordance with this Article III, the
record holder thereof shall be entitled to receive any such dividends or other
distributions, without any interest thereon, which theretofore had become
payable with respect to shares of Bay Stock represented by such Old Certificate.
(e) Any portion of the Exchange Fund that remains unclaimed by the
stockholders of Avalon for twelve months after the Effective Time shall be paid
to Bay. Any stockholders of Avalon who have not theretofore complied with this
Article III shall thereafter look only to Bay for payment of the shares of Bay
Stock, cash in lieu of any fractional shares and unpaid dividends and
distributions on the Bay Stock deliverable in respect of each share of Avalon
Stock such stockholder holds as determined pursuant to this Agreement, in each
case, without any interest thereon.
3.5. ANTI-DILUTION PROVISIONS. In the event Bay or Avalon changes (or
establishes a record date for changing) the number of, or provides for the
exchange of, shares of Bay Common Stock or Avalon Common Stock issued and
outstanding prior to the Effective Date as a result of a stock split, stock
dividend, recapitalization, reclassification, reorganization or similar
transaction with respect to the outstanding Bay Common Stock or Avalon Common
Stock and
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<PAGE> 15
the record date therefor shall be prior to the Effective Date, the Exchange
Ratio shall be proportionately and appropriately adjusted.
3.6. TREASURY SHARES. Each of the shares of Avalon Stock constituting
Treasury Shares immediately prior to the Effective Time shall be canceled and
retired at the Effective Time and no consideration shall be issued in exchange
therefor.
3.7. OPTIONS. (a) At the Effective Time, all employee and director
stock options to purchase shares of Avalon Common Stock (each, a "AVALON STOCK
OPTION"), which are then outstanding and unexercised, shall cease to represent a
right to acquire shares of Avalon Stock and shall be converted automatically
into options to purchase shares of Bay Common Stock, and Bay shall assume each
such Avalon Stock Option subject to the terms of any of the stock option plans
listed under "Stock Plans" in Section 5.3(l)(i) of Avalon's Disclosure Schedule
(collectively, the "AVALON STOCK OPTION PLANS"), and the agreements evidencing
grants thereunder; PROVIDED, HOWEVER, that from and after the Effective Time,
(i) the number of shares of Bay Common Stock purchasable upon exercise of such
Avalon Stock Option shall be equal to the number of shares of Avalon Common
Stock that were purchasable under such Avalon Stock Option immediately prior to
the Effective Time multiplied by the Exchange Ratio, rounding to the nearest
whole share, and (ii) the per share exercise price under each such Avalon Stock
Option shall be adjusted by dividing the per share exercise price of each such
Avalon Stock Option by the Exchange Ratio, rounding to the nearest cent. The
terms of each Avalon Stock Option shall, in accordance with its terms, be
subject to further adjustment as appropriate to reflect any stock split, stock
dividend, recapitalization or other similar transaction with respect to Bay
Common Stock on or subsequent to the Effective Date. Notwithstanding the
foregoing, the number of shares and the per share exercise price of each Avalon
Stock Option which is intended to be an "incentive stock option" (as defined in
Section 422 of the Code) shall be adjusted in accordance with the requirements
of Section 424 of the Code. Accordingly, with respect to any incentive stock
options, fractional shares shall be rounded down to the nearest whole number of
shares and where necessary the per share exercise price shall be rounded up to
the nearest cent.
(b) At or prior to the Effective Time, Bay shall reserve for issuance
the number of shares of Bay Common Stock necessary to satisfy Bay's obligations
under Section 3.7(a). At the Effective Time, Bay shall file with the SEC a
registration statement on an appropriate form under the Securities Act with
respect to the shares of Bay Common Stock subject to options to acquire Bay
Common Stock issued pursuant to Section 3.7(a) hereof, and shall use its best
efforts to maintain the current status of the prospectus contained therein, as
well as comply with any applicable state securities or "blue sky" laws, for so
long as such options remain outstanding.
ARTICLE IV
ACTIONS PENDING MERGER
----------------------
From the date hereof until the Effective Time, except as set forth in
the Disclosure Schedule or expressly contemplated by this Agreement, without the
prior written consent of the
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<PAGE> 16
Interim Transactions Committee, (i) Bay will not, and will cause each of its
Subsidiaries not to, and (ii) Avalon will not, and will cause each of its
Subsidiaries not to:
4.1. ORDINARY COURSE. Conduct the business of it and its Subsidiaries
other than in the ordinary and usual course or, to the extent consistent
therewith, fail to use reasonable efforts to preserve intact their business
organizations and assets and maintain their rights, franchises and existing
relations with customers, suppliers, employees, tenants, landlords and business
associates, or take any action that would (i) adversely affect the ability of
any party to obtain any necessary approvals of any Governmental Entities
required for the transactions contemplated hereby or (ii) adversely affect its
ability to perform any of its material obligations under this Agreement.
4.2. STOCK. Other than (i) pursuant to Rights or other stock options
or stock-based awards Previously Disclosed in its Disclosure Schedule or as
otherwise set forth in the Disclosure Schedule, (ii) upon conversion of shares
of its preferred stock pursuant to the terms thereof, (iii) pursuant to the Bay
Option Agreement (in the case of Bay) or the Avalon Option Agreement (in the
case of Avalon), or (iv) pursuant to the Bay Rights Agreement (in the case of
Bay) or the Avalon Rights Agreement (in the case of Avalon), (w) issue, sell or
otherwise permit to become outstanding, or authorize the creation of, any
additional shares of stock, any securities (including units of beneficial
ownership interest in any partnership or limited liability company) convertible
into or exchangeable for any additional shares of stock, stock appreciation
rights or any Rights, any stock appreciation rights or any Rights or take any
action related to such issuance or sale, (x) enter into any agreement with
respect to the foregoing, (y) permit any additional shares of stock, any
securities (including units of beneficial ownership interest in any partnership
or limited liability company) convertible into or exchangeable for any
additional shares of stock, stock appreciation rights or any Rights, any stock
appreciation rights or any Rights to become subject to new grants of employee
stock options, stock appreciation rights, or similar stock-based employee
rights, or (z) change (or establish a record date for changing) the number of,
or provide for the exchange of, shares of its stock, any securities (including
units of beneficial ownership interest in any partnership or limited liability
company) convertible into or exchangeable for any additional shares of stock,
stock appreciation rights or any Rights, any stock appreciation rights or any
Rights issued and outstanding prior to the Effective Date as a result of a stock
split, stock dividend, recapitalization, reclassification, reorganization or
similar transaction with respect to its outstanding stock or any other such
securities.
4.3. DIVIDENDS, ETC. (1) Make, declare or pay any dividend other than
(i) in the case of Bay, (A) regular quarterly cash dividends on Bay Stock in the
ordinary course consistent with past practice (PROVIDED that it is understood
and agreed that Bay will, on the date of announcement of the transactions
contemplated hereby, also announce that Bay is increasing its regular quarterly
dividend by an amount equal to $0.09 per share of Bay Stock in excess of Bay's
current quarterly dividend, effective with respect to all dividends payable from
and after the Effective Time, and PROVIDED, FURTHER, that should Bay so
determine, Bay's current quarterly dividend may be so increased prior to the
Effective Time) and (B) dividends from greater than 95%-owned Subsidiaries to
Bay or another greater than 95%-owned Subsidiary of Bay, as applicable, and (ii)
in the case of Avalon, (A) regular quarterly cash dividends on Avalon Stock in
the ordi-
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<PAGE> 17
nary course consistent with past practice and (B) dividends from greater than
95%-owned Subsidiaries to Avalon or another greater than 95%-owned Subsidiary of
Avalon, as applicable) on or in respect of, or declare or make any distribution
on any shares of its stock, or (2) other than (A) as Previously Disclosed in its
Disclosure Schedule or (B) in the ordinary course pursuant to employee benefit
plans, directly or indirectly combine, redeem, reclassify, purchase or otherwise
acquire, any shares of its stock. After the date hereof, each of Bay and Avalon
shall coordinate with the other the declaration of any dividends in respect of
Bay Common Stock and Avalon Common Stock and the record dates and payment dates
relating thereto, it being the intention of the parties hereto that holders of
Bay Common Stock or Avalon Common Stock shall not receive two dividends for any
single calendar quarter with respect to their shares of Bay Common Stock and/or
Avalon Common Stock and any shares of Bay Common Stock any such holder receives
in exchange therefor in the Merger. In addition, notwithstanding the foregoing,
Avalon shall be permitted to pay the Final Company Dividend, and if Avalon shall
declare the Final Company Dividend, Bay shall be permitted to declare a dividend
per share to holders of Bay Common Stock, the record date for which shall be the
close of business on the last business day prior to the Effective Time, in an
amount per share of Bay Common Stock equal to the quotient obtained by dividing
(x) the Final Company Dividend per share of Avalon Common Stock paid by Avalon
by (y) the Exchange Ratio.
4.4. COMPENSATION; EMPLOYMENT AGREEMENTS; ETC. Except as set forth on
Section 6.13 of the Bay Disclosure Schedule or on Section 6.13 of the Avalon
Disclosure Schedule, enter into or amend any written employment, severance or
similar agreements or arrangements with any of its directors, officers or
employees, or grant any salary or wage increase or increase any employee benefit
(including incentive or bonus payments), except for (i) normal individual
increases in compensation to employees in the ordinary course of business
consistent with past practice or (ii) other changes as are provided for herein
or as may be required by law or to satisfy contractual obligations listed on the
Disclosure Schedule existing as of the date hereof or additional grants of
awards to newly hired employees consistent with past practice or such changes
that, either individually or in the aggregate, would not reasonably be expected
to result in a material liability to it or its Subsidiaries.
4.5. BENEFIT PLANS. Except as set forth on Section 6.13 of the Bay
Disclosure Schedule or on Section 6.13 of the Avalon Disclosure Schedule, enter
into or amend (except as may be required by applicable law, to satisfy
contractual obligations existing as of the date hereof or amendments which,
either individually or in the aggregate, would not reasonably be expected to
result in a material liability to it or its Subsidiaries) any pension,
retirement, stock option, stock purchase, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other employee benefit,
incentive or welfare contract, plan or arrangement, or any trust agreement
related thereto, in respect of any of its directors, officers or other
employees, including taking any action that accelerates the vesting or exercise
of any benefits payable thereunder.
4.6. ACQUISITIONS, DISPOSITIONS AND CAPITAL EXPENDITURES. Except as
Previously Disclosed in its Disclosure Schedule, (i) dispose of or discontinue
any portion of its assets, business or properties which is material to it and
its Subsidiaries taken as a whole (other than sales of
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<PAGE> 18
its or any of its Subsidiaries' "for sale" housing units and condominiums sold
or developed for sale in the ordinary course of business), or acquire all or any
portion of, the business or property of any other entity which is material to it
and its Subsidiaries taken as a whole, (ii) make any acquisition, or take any
other action, which would materially and adversely affect its ability to
consummate the transactions contemplated by this Agreement or (iii) make or
agree to make any development or capital expenditures, except (A) in accordance
with capital expenditure budgets previously delivered to and agreed to by the
other party, or (B) in connection with acquisition, development,
pre-development, investigation and due diligence activities related to future
development which future development has been previously discussed with and
approved in writing by the other party.
4.7. AMENDMENTS. Amend its charter or by-laws in a manner that would
adversely affect either party's ability to consummate the Merger or the economic
benefits of the Merger to either party or amend, redeem or waive any rights
under the Bay Rights Agreement or the Avalon Rights Agreement, as the case may
be.
4.8. ACCOUNTING METHODS. Implement or adopt any change in its
accounting principles, practices or methods, other than as may be required by
generally accepted accounting principles.
4.9. ADVERSE ACTIONS. (1) Knowingly take any action that would, or
would be reasonably likely to, prevent or impede the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code or render either
party ineligible for REIT status or constitute a prohibited transaction under
the REIT rules; or (2) knowingly take any action that is intended or is
reasonably likely to result in (x) any of its representations and warranties set
forth in this Agreement being or becoming untrue in any material respect at any
time prior to the Effective Time, (y) any of the conditions to the Merger set
forth in Article VII not being satisfied, or (z) a material violation of any
provision of this Agreement, except, in each case, as may be required by
applicable law.
4.10. AGREEMENTS. Agree or commit to do anything prohibited by this
Article IV.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
------------------------------
DISCLOSURE SCHEDULES. On or prior to the date hereof, Bay has delivered
to Avalon and Avalon has delivered to Bay a schedule (respectively, its
"DISCLOSURE SCHEDULE") setting forth, among other things, items the disclosure
of which is necessary or appropriate in relation to any or all of its
representations and warranties; PROVIDED, HOWEVER, that (i) no such item is
required to be set forth in a Disclosure Schedule as an exception to a
representation or warranty if its absence is not reasonably likely to result in
the related representation or warranty being deemed untrue or incorrect under
the standards established by Section 5.2, and (ii) the mere inclusion of an item
in a Disclosure Schedule shall not be deemed an admission by a party that
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<PAGE> 19
such item represents a material exception or fact, event or circumstance or that
such item is reasonably likely to result in a Material Adverse Effect. To the
extent applicable, every disclosure and statement made in either party's
Disclosure Schedule under a particular section heading of such party's
Disclosure Schedule shall be deemed a disclosure and statement under all other
section headings of such party's Disclosure Schedule.
5.2. STANDARD. No representation or warranty of Bay or Avalon
contained in Section 5.3 shall be deemed untrue or incorrect, and no party
hereto shall be deemed to have breached a representation or warranty, as a
consequence of the existence of any fact, circumstance or event unless such
fact, circumstance or event, individually or taken together with all other
facts, circumstances or events inconsistent with any paragraph of Section 5.3,
has had or is reasonably expected to have a Material Adverse Effect; PROVIDED,
HOWEVER, that the foregoing standard shall not apply to representations and
warranties contained in subsections (b), (e), and (u) of Section 5.3, which
shall be deemed untrue, incorrect and breached if they are not true and correct
in all material respects.
5.3. REPRESENTATIONS AND WARRANTIES. Subject to Sections 5.1 and 5.2
and except as Previously Disclosed in its Disclosure Schedule, Bay hereby
represents and warrants to Avalon, to the extent applicable, and Avalon hereby
represents and warrants to Bay, to the extent applicable, in each case with
respect to itself and its Subsidiaries, as follows:
(a) ORGANIZATION, STANDING AND AUTHORITY. Such party is a corporation
duly organized, validly existing and in good standing under the laws of
Maryland. Such party is duly qualified to do business and is in good standing in
the states of the United States and foreign jurisdictions where its ownership or
leasing of property or the conduct of its business requires it to be so
qualified. It has in effect all federal, state, local, and foreign governmental
authorizations necessary for it to own or lease its properties and assets and to
carry on its business as it is now being conducted.
(b) CAPITALIZATION. (i) As of the date hereof, the authorized stock
of Bay consists solely of 40,000,000 shares of Bay Common Stock, of which, as of
the date hereof, 26,195,515 shares were outstanding, and 25,000,000 shares of
preferred stock, of which, as of the date hereof, (A) 2,308,800 shares
designated as Bay Series A Preferred Stock were outstanding, (B) 405,022 shares
designated as Bay Series B Preferred Stock were outstanding, (C) 2,300,000
shares designated as Bay 8.50% Series C Preferred Stock were outstanding and (D)
3,267,700 shares designated as Bay 8.00% Series D Preferred Stock were
outstanding. As of the date hereof, there are partnership units presently
outstanding under the Bay Partnership Agreements which may be convertible,
exchangeable or redeemable into cash, but which Bay may, in its sole discretion,
exchange for an aggregate of 295,011 shares of Bay Common Stock (and which Bay
may exchange for the same aggregate number of shares of Bay Common Stock
immediately following the Effective Time). As of the date hereof, the authorized
stock of Avalon consists solely of 80,000,000 shares of Avalon Common Stock, of
which, as of March 5, 1998, 43,139,392.33 shares were outstanding, and
20,000,000 shares of preferred stock, of which, as of the date hereof, (A)
4,455,000 shares of
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<PAGE> 20
Avalon Series A Preferred Stock were outstanding and (B) 4,300,000 shares of
Avalon Series B Preferred Stock were outstanding. As of the date hereof, there
are partnership units presently outstanding under the Avalon Partnership
Agreements which may be convertible, exchangeable or redeemable into cash, but
which Avalon may, in its sole discretion, exchange for an aggregate of 605,188
shares of Avalon Common Stock (and which Bay may exchange for shares of Bay
Common Stock immediately following the Effective Time). The outstanding shares
of such party's stock are validly issued and outstanding, fully paid and
nonassessable, and subject to no preemptive rights (and were not issued in
violation of any preemptive rights). As of the date hereof, there are no shares
of such party's stock authorized and reserved for issuance, such party does not
have any Rights issued or outstanding with respect to its stock, and such party
does not have any commitment to authorize, issue or sell any such shares or
Rights, except pursuant to this Agreement, the Stock Option Agreements,
Compensation and Benefit Plans, the Bay Rights Agreement and the Avalon Rights
Agreement, as the case may be. Since September 30, 1997, neither Bay nor Avalon
has issued any shares of its stock or rights in respect thereof or reserved any
shares for such purposes except pursuant to plans or commitments Previously
Disclosed in its Disclosure Schedule.
(ii) The number of shares of Bay Common Stock which are issuable
and reserved for issuance upon exercise of any employee and director stock
options to purchase shares of Bay Common Stock as of the date hereof is set
forth in Bay's Disclosure Schedule, and the number of shares of Avalon Common
Stock which are issuable and reserved for issuance upon exercise of Avalon Stock
Options as of the date hereof is set forth in Avalon's Disclosure Schedule.
(c) SUBSIDIARIES. (i) (A) Such party has Previously Disclosed in its
Disclosure Schedule a list of all of its Subsidiaries together with the
jurisdiction of organization of each such Subsidiary, (B) it owns, directly or
indirectly, at least 99% of the issued and outstanding shares of each of its
Significant Subsidiaries, (C) no equity securities of any of its Significant
Subsidiaries are or may become required to be issued (other than to it or a
Subsidiary of it) by reason of any Rights, (D) there are no contracts,
commitments, understandings or arrangements by which any of such Significant
Subsidiaries is or may be bound to sell or otherwise transfer any shares of the
stock of any such Significant Subsidiaries (other than to it or a Subsidiary of
it), (E) there are no contracts, commitments, understandings, or arrangements
relating to its rights to vote or to dispose of such shares (other than to it or
a Subsidiary of it), and (F) all of the shares of stock of each such Significant
Subsidiary held by it or its Subsidiaries have been duly authorized and validly
issued, are fully paid and nonassessable and not subject to preemptive rights
and are owned by it or its Subsidiaries free and clear of any Liens.
(ii) Other than interests in the Subsidiaries listed on its
Disclosure Schedule, such party does not own (other than in a bona fide
fiduciary capacity) beneficially, directly or indirectly, any shares of any
equity securities or similar interests of any person, or any interest in a
partnership or joint venture of any kind.
(iii) Each of such party's Significant Subsidiaries has been
duly organized and is validly existing in good standing under the laws of the
jurisdiction of its organi-
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<PAGE> 21
zation, and is duly qualified to do business and in good standing in the
jurisdictions where its ownership or leasing of property or the conduct of its
business requires it to be so qualified. Each of such Significant Subsidiaries
has in effect all federal, state, local, and foreign governmental authorizations
necessary for it to own or lease its properties and assets and to carry on its
business as it is now conducted.
(d) CORPORATE POWER. Such party and each of its Significant
Subsidiaries has the corporate power and authority to carry on its business as
it is now being conducted and to own all its properties and assets; and it has
the corporate power and authority to execute, deliver and perform its
obligations under this Agreement and the Stock Option Agreements and to
consummate the transactions contemplated hereby and thereby.
(e) CORPORATE AUTHORITY. This Agreement and the Stock Option
Agreements and the transactions contemplated hereby and thereby, and subject in
the case of this Agreement to approval by the holders of two-thirds of the
shares of Bay Common Stock entitled to vote thereon and, if required, the
requisite vote of the holders of Bay Preferred Stock (in the case of Bay) and by
the holders of two-thirds of the shares of Avalon Common Stock entitled to vote
thereon (in the case of Avalon), have been authorized by all necessary corporate
action of such party, and each of this Agreement and the Stock Option Agreements
is a legal, valid and binding agreement of such party, enforceable in accordance
with its terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
similar laws of general applicability relating to or affecting creditors' rights
or by general principles of equity).
(f) NO DEFAULTS. Subject to the receipt of regulatory approvals
referred to in Section 7.2, if any, and the required filings under federal and
state securities laws, the execution, delivery and performance of this Agreement
and the Stock Option Agreements and the consummation of the transactions
contemplated hereby and thereby by such party do not and will not (i) constitute
a breach or violation of, or a default under, any law, rule or regulation or any
judgment, decree, order, permit, license, credit agreement, indenture, loan,
note, bond, mortgage, reciprocal easement agreement, lease, instrument,
concession, franchise or other agreement of it or of any of its Significant
Subsidiaries or to which it or any of its Significant Subsidiaries, properties
or assets is subject or bound, (ii) constitute a breach or violation of, or a
default under, its articles of incorporation or by-laws, or (iii) except as
disclosed on Section 5.3(f) of its Disclosure Schedule, require the consent or
approval of any third party or Governmental Entity under any such law, rule,
regulation, judgment, decree, order, permit, license, credit agreement,
indenture, loan, note, bond, mortgage, reciprocal easement agreement, lease,
instrument, concession, franchise or other agreement.
(g) FINANCIAL REPORTS AND SEC DOCUMENTS. It or its predecessor has
filed its Annual Report on Form 10-K for the fiscal year ended December 31,
1996, and all other reports, registration statements, definitive proxy
statements or information statements required to be filed by it or any of its
Subsidiaries subsequent to December 31, 1994 under the Securities Act, or under
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act (collectively, its "SEC
DOCUMENTS"), with the SEC, and all its SEC Documents filed with the SEC, in the
form filed or to be filed, (i)
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complied or will comply in all material respects as to form with the applicable
requirements under the Securities Act or the Exchange Act, as the case may be,
and (ii) did not and will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances under which they were
made, not misleading; and each of the balance sheets contained in or
incorporated by reference into any such SEC Document (including the related
notes and schedules thereto) fairly presents and will fairly present the
financial position of the entity or entities to which such balance sheet relates
as of its date, and each of the statements of income and changes in
stockholders' equity and cash flows or equivalent statements in such SEC
Documents (including any related notes and schedules thereto) fairly presents
and will fairly present the results of operations, changes in stockholders'
equity and changes in cash flows, as the case may be, of the entity or entities
to which such statement relates for the periods to which it relates, in each
case in accordance with GAAP consistently applied during the periods
involved, except in each case as may be noted therein, subject to normal
year-end audit adjustments in the case of unaudited statements. Except as set
forth in its SEC Documents, neither it nor any of its Subsidiaries has any
liabilities or obligations of any nature (whether accrued, absolute, contingent
or otherwise) required by GAAP to be set forth on its consolidated balance sheet
or in the notes thereto.
(h) LITIGATION; REGULATORY ACTION. (i) Other than personal injury and
other routine tort litigation arising from the ordinary course of its operations
(x) which are covered by adequate insurance or (y) for which all material costs
and liabilities arising therefrom are reimbursable pursuant to common area
maintenance or similar agreements, no litigation, claim or other proceeding
before any court or governmental agency is pending against it or any of its
Subsidiaries and, to the best of its knowledge, no such litigation, claim or
other proceeding has been threatened.
(ii) Neither it nor any of its Subsidiaries or properties is a
party to or is subject to any order, decree, agreement, memorandum of
understanding or similar arrangement with any Governmental Entity.
(iii) Neither it nor any of its Subsidiaries has been advised by
any Governmental Entity that such Governmental Entity is contemplating issuing
or requesting (or is considering the appropriateness of issuing or requesting)
any such order, decree, agreement, memorandum of understanding or similar
arrangement.
(i) COMPLIANCE WITH LAWS. It and each of its Subsidiaries:
(i) in the conduct of its business, is in compliance with all
applicable federal, state, local and foreign statutes, laws, regulations,
ordinances, rules, judgments, orders or decrees applicable thereto or to the
employees conducting such businesses, including laws relating to discriminatory
business practices;
(ii) has all permits, licenses, authorizations, orders and
approvals of, and has made all filings, applications and registrations with, all
Governmental Entities that are required in order to permit them to conduct their
businesses substantially as presently conducted;
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all such permits, licenses, certificates of authority, orders and approvals are
in full force and effect and, to the best of its knowledge, no suspension or
cancellation of any of them is threatened; and
(iii) has received, since December 31, 1994, no notification or
communication from any Governmental Entity (A) asserting that it or any of its
Subsidiaries is not in compliance with any of the statutes, regulations, or
ordinances which such Governmental Entity enforces, (B) threatening to revoke
any license, franchise, permit, or governmental authorization or (C) failing to
approve any proposed acquisition, development or construction or stating its
intention not to approve acquisitions, developments or constructions proposed to
be effected by it within a certain time period or indefinitely.
(j) CONTRACTUAL DEFAULTS. Neither it nor any of its Subsidiaries is
in default under any contract, agreement, commitment, arrangement, lease,
insurance policy, or other instrument to which it is a party, by which its
assets, business, or operations may be bound or affected, or under which it or
its respective assets, business, or operations receives benefits, and there has
not occurred any event that, with the lapse of time or the giving of notice or
both, would constitute such a default.
(k) NO BROKERS. No action has been taken by it that would give rise
to any valid claim against any party hereto for a brokerage commission, finder's
fee or other like payment with respect to the transactions contemplated by this
Agreement, excluding, in the case of Bay, fees to be paid to Morgan Stanley &
Co. Incorporated and, in the case of Avalon, fees to be paid to PaineWebber
Incorporated and Lazard Freres & Co. LLC, in each case pursuant to letter
agreements copies of which have been heretofore delivered to the other party.
(l) EMPLOYEE BENEFIT PLANS. (i) Such party's Disclosure Schedule
contains a complete list of all material written bonus, vacation, deferred
compensation, pension, retirement, profit-sharing, thrift, savings, employee
stock ownership, stock bonus, stock purchase, restricted stock and stock option
plans, all employment or severance contracts, all medical, dental, disability,
health and life insurance plans, all other employee benefit and fringe benefit
plans, contracts or arrangements and any applicable "change of control" or
similar provisions in any plan, contract or arrangement maintained or
contributed to by it or any of its Subsidiaries for the benefit of officers,
former officers, employees, former employees, directors, former directors, or
the beneficiaries of any of the foregoing (collectively, "COMPENSATION AND
BENEFIT PLANS").
(ii) True and complete copies of its Compensation and Benefit
Plans, including, but not limited to, any trust instruments and/or insurance
contracts, if any, forming a part thereof, and all amendments thereto have been
made available to the other party.
(iii) Each of its Compensation and Benefit Plans has been
administered in accordance with the terms thereof. All "employee benefit plans"
within the meaning of Section 3(3) of ERISA, other than "multiemployer plans"
within the meaning of Section 3(37) of ERISA ("MULTIEMPLOYER PLANS"), covering
employees or former employees of it and its Subsidiaries (its "PLANS"), to the
extent subject to ERISA, are in material compliance with ERISA, the Code and
other applicable laws. Each Compensation and Benefit Plan of it or its
Subsidiaries
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which is an "employee pension benefit plan" within the meaning of Section 3(2)
of ERISA ("PENSION PLAN") and which is intended to be qualified under Section
401(a) of the Code has received a favorable determination letter from the
Internal Revenue Service, and it is not aware of any circumstances reasonably
likely to result in the revocation or denial of any such favorable determination
letter. There is no pending or, to its knowledge, threatened litigation or
governmental audit, examination or investigation relating to the Plans.
(iv) No liability under Title IV of ERISA has been or is
expected to be incurred by it or any of its Subsidiaries with respect to any
ongoing, frozen or terminated "single-employer plan," within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by any of them,
or the single-employer plan of any entity which is considered one employer with
it under Section 4001(a)(15) of ERISA or Section 414 of the Code (an "ERISA
AFFILIATE"). Neither it nor any of its Subsidiaries presently contributes to a
Multiemployer Plan, nor has it or any of its Subsidiaries contributed to such a
plan within the past five calendar years. No notice of a "reportable event,"
within the meaning of Section 4043 of ERISA for which the 30-day reporting
requirement has not been waived, has been required to be filed for any Pension
Plan of it or any of its Subsidiaries or by any ERISA Affiliate within the past
12 months or will be required to be filed as a result of the transactions
contemplated hereby.
(v) All contributions, premiums and payments required to be
made under the terms of any Compensation and Benefit Plan of it or any of its
Subsidiaries have been made or have been accrued on the balance sheets contained
in its SEC Documents. Neither any Pension Plan of it or any of its Subsidiaries
nor any single-employer plan of an ERISA Affiliate of it or any of its
Subsidiaries has an "accumulated funding deficiency" (whether or not waived)
within the meaning of Section 412 of the Code or Section 302 of ERISA. Neither
it nor any of its Subsidiaries has provided, or is required to provide, security
to any Pension Plan or to any single-employer plan of an ERISA Affiliate
pursuant to Section 401(a)(29) of the Code.
(vi) Under each Pension Plan of it or any of its Subsidiaries
which is a single-employer plan, as of the last day of the most recent plan year
ended prior to the date hereof, the actuarially determined present value of all
"benefit liabilities," within the meaning of Section 4001(a)(16) of ERISA (as
determined on the basis of the actuarial assumptions contained in the Plan's
most recent actuarial valuation) did not exceed the then current value of the
assets of such Plan, and there has been no adverse change in the financial
condition of such Plan (with respect to either assets or benefits) since the
last day of the most recent Plan year.
(vii) Neither it nor any of its Subsidiaries has any obligations
under any Compensation and Benefit Plans to provide benefits, including death or
medical benefits, with respect to employees of it or its Subsidiaries beyond
their retirement or other termination of service other than (i) coverage
mandated by Part 6 of Title I of ERISA or Section 4980B of the Code, (ii)
retirement or death benefits under any employee pension benefit plan (as defined
under Section 3(2) of ERISA), (iii) disability benefits under any employee
welfare plan that have been fully provided for by insurance or otherwise, (iv)
benefits in the nature of severance pay or (v) benefits the full cost of which
are borne by the former employee or such employee's beneficiary.
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(viii) Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will (i) result in any
payment (including severance, unemployment compensation, golden parachute or
otherwise) becoming due to any director or any employee of it or any of its
Subsidiaries under any Compensation and Benefit Plan or otherwise from it or any
of its Subsidiaries, (ii) increase any benefits otherwise payable under any
Compensation and Benefit Plan or (iii) result in any acceleration of the time of
payment or vesting of any such benefit.
(m) LABOR MATTERS. Neither it nor any of its Subsidiaries is a party
to, or is bound by any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization, nor is it
nor any of its Subsidiaries the subject of a proceeding asserting that it or any
such Subsidiaries has committed an unfair labor practice (within the meaning of
the National Labor Relations Act) or seeking to compel it or such Subsidiaries
to bargain with any labor organization as to wages and conditions of employment.
(n) TAKEOVER LAWS; RIGHTS PLANS. (i) It has taken all action required
to be taken by it in order to exempt this Agreement and the Stock Option
Agreements and the transactions contemplated hereby and thereby from, and this
Agreement and the Stock Option Agreements and the transactions contemplated
hereby and thereby are exempt from, the requirements of any "moratorium,"
"control share," "fair price" or other takeover defense laws and regulations
(collectively, "TAKEOVER LAWS") of the State of Maryland, including Sections
3-601 to 3-603 of the MGCL. It has taken all action required to waive any excess
share or similar ownership limitations in its charter with regard to the other
party for the transactions contemplated by this Agreement and the Stock Option
Agreement.
(ii) In the case of Bay, it has taken all action necessary or
appropriate so that the entering into of this Agreement and the Stock Option
Agreements, and the consummation of the transactions contemplated hereby
(including the Merger) and thereby, do not and will not result in the ability of
any person to exercise any Bay Rights under the Bay Rights Agreement or enable
or require Bay Rights to separate from the shares of Bay Common Stock to which
they are attached or to be triggered or become exercisable.
(iii) In the case of Bay, there is no "Acquiring Person", and no
"Distribution Date" or "Stock Acquisition Date" (as such terms are defined in
the Bay Rights Agreement) has occurred.
(iv) In the case of Avalon, it has taken all action necessary
or appropriate (x) so that the entering into of this Agreement and the Stock
Option Agreements, and the consummation of the transactions contemplated hereby
(including the Merger) and thereby, do not and will not result in the ability of
any person to exercise any Avalon Rights under the Avalon Rights Agreement or
enable or require Avalon Rights to separate from the shares of Avalon Common
Stock to which they are attached or to be triggered or become exercisable and
(y) to ensure that the Avalon Rights will expire at the Effective Time.
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(v) In the case of Avalon, there is no "Acquiring Person", and
no "Distribution Date" or "Shares Acquisition Date" (as such terms are defined
in the Avalon Rights Agreement) has occurred.
(o) PROPERTIES. (i) It or one of its Subsidiaries owns fee simple
title or a leasehold estate in each of the real properties listed in its SEC
Documents or has such other title or interest in such listed real properties as
is described in its SEC Documents (all such listed properties, collectively, its
"PROPERTIES").
(ii) Its Properties are not subject to any Liens, security
interests or other encumbrances on title (collectively, "ENCUMBRANCES") and are
not subject to any rights of way, written agreements, laws, ordinances and
regulations affecting building use or occupancy, or reservations of an interest
in title (collectively, "PROPERTY RESTRICTIONS"), except for Encumbrances and
Property Restrictions disclosed on existing title reports or existing surveys
which would not have a Material Adverse Effect. None of its Properties is
subject to any restriction on the sale or other disposition thereof or on the
financing or release of any financing thereon, except for due-on-sale and
due-on-encumbrance clauses contained in mortgages, deeds of trust or other
financing documents, copies of which have been delivered to the other party and
except for restrictions which may be contained in documentation relating to
tax-exempt bonds.
(iii) Valid policies of title insurance have been issued
insuring its or its applicable Subsidiary's fee simple title or leasehold
estate, as the case may be, to its Properties in amounts which are at least
equal to the purchase price thereof paid by it or its applicable Subsidiary
therefor.
(iv) To the best of its knowledge, (A) there is no necessary
certificate, permit or license from any governmental authority having
jurisdiction over any of its Properties or agreement, easement or other right
which is necessary to permit the lawful use and operation of the buildings and
improvements on any of its Properties or which is necessary to permit the lawful
use and operation of all driveways, roads and other means of egress and ingress
to and from any of its Properties which has not been obtained or is not in full
force and effect, and there is no pending threat of modification or cancellation
of any of the same, (B) there is no written notice of any violation of any
federal, state or municipal law, ordinance, order, rule, regulation or
requirement affecting any of its Properties issued by any governmental
authorities and (C) there are no structural defects relating to its Properties,
the building systems in each of its Properties is in working order and there is
no physical damage to any Property for which there is no insurance in effect
covering the cost of restoration, any current renovation or uninsured
restoration.
(v) Neither it nor any of its Subsidiaries has received any
written or published notice to the effect that (A) any condemnation or rezoning
proceedings are pending or threatened with respect to any of its Properties or
(B) any zoning, building or similar law, code, ordinance, order or regulation is
or will be violated by the continued maintenance, operation or use of any
buildings or other improvements on any of its Properties or by the continued
maintenance, operation or use of the parking areas associated with any of its
Properties.
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<PAGE> 27
(vi) All work to be performed, payments to be made and actions
to be taken by it or its Subsidiaries prior to the date hereof pursuant to any
agreement entered into with a governmental body or authority in connection with
a site approval, zoning reclassification or similar action relating to any of
its Properties, has been performed, paid or taken, as the case may be, and to
the best of its knowledge, there is not any planned or proposed work, payment or
action that may be required after the date hereof pursuant to any such
agreement.
(vii) All properties currently under development or construction
by it or its Subsidiaries and all properties currently proposed for acquisition,
development or commencement of construction prior to the Effective Time by it
and its Subsidiaries are listed as such on its Disclosure Schedule. All
executory agreements entered into by it or any of its Subsidiaries relating to
the development or construction of multifamily residential or other real estate
properties (other than agreements for architectural, engineering, planning,
accounting, legal or other professional services, or construction agreements for
material or labor) are listed on its Disclosure Schedule. Copies of such
agreements, all of which have previously been delivered or made available to the
other party, are listed on its Disclosure Schedule and are true and correct.
(p) ENVIRONMENTAL MATTERS. (A) Neither it nor any of its Subsidiaries
or, to the best of its knowledge, any other person has caused or permitted the
unlawful presence of any hazardous substances, hazardous materials, toxic
substances or waste materials (collectively, "HAZARDOUS MATERIALS") on or under
any of its Properties and (B) no unlawful spills, releases, discharges or
disposals of Hazardous Materials have occurred or are presently occurring on,
under or from its Properties as a result of any construction on or operation and
use of such Properties. In connection with the construction on or operation and
use of its Properties, it and its Subsidiaries have not failed to comply in any
material respect with all applicable local, state and federal environmental
laws, regulations, ordinances and administrative and judicial orders relating to
the generation, recycling, reuse, sale, storage, handling, transport and
disposal of any Hazardous Materials.
(q) TAXES. Each of it and its Subsidiaries (A) has filed (or there
has been filed on its behalf) all material returns, declarations, reports
estimates, information returns and statements required to be filed under
federal, state, local or any foreign Tax laws ("TAX RETURNS"), and all such Tax
Returns are accurate and complete in all material respects, and (B) has paid (or
payment has been made on its behalf) all Taxes shown on such Tax Returns as
required to be paid by it. The most recent audited financial statements
contained in its SEC Documents reflect an adequate reserve for all material
Taxes payable by it and its Subsidiaries for all taxable periods and portions
thereof through the date of such financial statements. Since September 30, 1997,
it has incurred no liability for Taxes under Sections 857(b), 860(c) or 4981 of
the Code, including any Tax arising from a prohibited transaction described in
Section 857(b)(6) of the Code, and neither it nor any of its Subsidiaries has
incurred any material liability for Taxes other than in the ordinary course of
business. No event has occurred, and no condition or circumstance exists, which
presents a material risk that any material Tax described in the preceding
sentence will be imposed upon it. To the best of its knowledge, no deficiencies
for any Taxes have been proposed, asserted or assessed against it or any of its
Subsidiaries, and no requests for waivers of the time to assess any such Taxes
are pending. It (A) has been organized in conformity with the
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requirements for qualification as a REIT, (B) has operated, and intends to
continue to operate, in such a manner as to qualify as a REIT for the current
period through the Closing Date and (C) has not taken or omitted to take any
action which would reasonably be expected to result in a challenge to or
revocation of its status as a REIT, and to the best of its knowledge, no such
challenge or revocation is pending or threatened. Each of its Subsidiaries which
is a partnership, joint venture or limited liability company (i) has been
treated since such Subsidiary's formation and continues to be treated for
federal income tax purposes as a partnership and not as a corporation or as an
association taxable as a corporation and (ii) has not since the later of such
Subsidiary's formation or the acquisition by Bay (in the case of Bay's
Subsidiaries) or Avalon (in the case of Avalon's Subsidiaries) of a direct or
indirect interest therein, owned any assets (including securities) that would
cause such party to violate Section 856(c)(5) of the Code. Each of its
Subsidiaries which is a corporation has been since its formation a qualified
REIT subsidiary under Section 856(i) of the Code. Neither it nor any of its
Subsidiaries holds any asset (x) the disposition of which would be subject to
rules similar to Section 1374 of the Code as a result of a notice under Internal
Revenue Service Notice 88-19 or (y) which is subject to a consent filed pursuant
to Section 341(f) of the Code and the regulations thereunder.
(r) INVESTMENT COMPANY ACT OF 1940. Neither it nor any of its
Subsidiaries is, or at the Effective Time will be, required to be registered
under the Investment Company Act of 1940, as amended.
(s) HSR ACT. For purposes of determining whether compliance with the
HSR Act is required, it confirms that the conduct of its business consists
solely of investing in, owning and operating real estate for the benefit of its
stockholders.
(t) TAX-EXEMPT FINANCING. Since October 31, 1997, no tax-exempt bonds
have been issued or reissued of which it is a beneficiary.
(u) CONVERSION OF BAY PREFERRED STOCK. In the case of Bay, Bay has
entered into agreements (true, correct and complete copies of which have
previously been provided to Avalon), which are binding and enforceable and in
full force and effect, with the sole holder of the shares of Bay Series A
Preferred Stock and Bay Series B Preferred Stock (the "BAY PREFERRED HOLDER") to
the effect that, (i) two business days after the record date for the Bay
Meeting, shares of Bay Series A Preferred Stock and Bay Series B Preferred Stock
shall be converted into a number of common shares of Bay Common Stock equaling
4.9% of the total issued and outstanding shares of Bay Common Stock as of the
date thereof, and (ii) the Bay Preferred Holder agrees to approve and agree to
certain modifications to the terms of such Bay Series A Preferred Stock, all as
more fully set forth in such agreements.
(v) NO MATERIAL ADVERSE EFFECT. Since September 30, 1997, except as
disclosed in its SEC Documents filed with the SEC on or before the date hereof,
(i) it and its Subsidiaries have conducted their respective businesses in the
ordinary and usual course (excluding the incurrence of expenses related to this
Agreement and the transactions contemplated hereby) and (ii) no event has
occurred or circumstance arisen that, individually or taken together with all
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other facts, circumstances and events (described in any paragraph of Section 5.3
or otherwise), is reasonably likely to have a Material Adverse Effect with
respect to it.
ARTICLE VI
COVENANTS
Bay hereby covenants to and agrees with Avalon, and Avalon hereby
covenants to and agrees with Bay, that:
6.1. BEST EFFORTS. Subject to the terms and conditions of this
Agreement, it shall use its reasonable best efforts in good faith to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or desirable, or advisable under applicable laws, so as to
permit consummation of the Merger as promptly as practicable and otherwise to
enable consummation of the transactions contemplated hereby, including effecting
all filings and obtaining (and cooperating with the other party hereto to
obtain) any permit, consent, authorization, order or approval of, or any
exemption by, any Governmental Entity and any other third party that is required
to be obtained by Bay or Avalon or any of their respective Subsidiaries in
connection with the Merger and the other transactions contemplated by this
Agreement, and using reasonable efforts to lift or rescind any injunction or
restraining order or other order adversely affecting the ability of the parties
to consummate the transactions contemplated hereby, and using reasonable efforts
to defend any litigation seeking to enjoin, prevent or delay the consummation of
the transactions contemplated hereby or seeking material damages, and each shall
cooperate fully with the other parties hereto to that end.
6.2. STOCKHOLDER APPROVALS. Each of them shall take, in accordance
with applicable law, applicable stock exchange rules and its articles of
incorporation and by-laws, all action necessary to convene, respectively, an
appropriate meeting of stockholders of Bay to consider and vote upon the
approval of this Agreement and the Merger and any other matters required to be
approved by Bay stockholders for consummation of the Merger (including any
adjournment or postponement, the "BAY MEETING"), and an appropriate meeting of
stockholders of Avalon to consider and vote upon the approval of this Agreement
and any other matters required to be approved by Avalon's stockholders for
consummation of the Merger (including any adjournment or postponement, the
"AVALON MEETING"; and each of the Bay Meeting and the Avalon Meeting, a
"MEETING"), as promptly as practicable after the date hereof. Subject to their
respective duties under Maryland law, the Board of Directors of each of Bay and
Avalon shall recommend such approval, and each of Bay and Avalon shall take all
reasonable lawful action to solicit such approval by its stockholders.
6.3. REGISTRATION STATEMENT. (a) Bay and Avalon agree to cooperate in
the preparation of a registration statement on Form S-4 (the "REGISTRATION
STATEMENT") to be filed by Bay with the SEC in connection with the issuance of
Bay Stock in the Merger (including the joint proxy statement and prospectus and
other proxy solicitation materials of Bay and Avalon constituting a part thereof
(the "JOINT PROXY STATEMENT") and all related documents). Bay and Avalon agree
to file a draft of the Joint Proxy Statement with the SEC as promptly as
practicable,
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but in no event later than 45 days after the date hereof. Each of Bay and Avalon
agrees to use all reasonable efforts to cause the Registration Statement to be
filed and declared effective under the Securities Act as promptly as reasonably
practicable after the SEC has cleared the Joint Proxy Statement. Bay also agrees
to use all reasonable efforts to obtain all necessary state securities law or
"blue sky" permits and approvals required to carry out the transactions
contemplated by this Agreement. Avalon agrees to promptly furnish to Bay all
information concerning Avalon, its Subsidiaries, officers, directors and
stockholders as may be reasonably requested in connection with the foregoing.
(b) Each of Bay and Avalon agrees, upon request, to furnish the other
party with all information concerning itself, its Subsidiaries, directors,
officers and stockholders and such other matters as may be reasonably necessary
or advisable in connection with the Registration Statement, the Joint Proxy
Statement or any filing, notice or application made by or on behalf of such
other party or any of its Subsidiaries to any Governmental Entity in connection
with the transactions contemplated hereby. Each of Bay and Avalon agrees, as to
itself and its Subsidiaries, that none of the information supplied or to be
supplied by it for inclusion or incorporation by reference in (i) the
Registration Statement will, at the time the Registration Statement and each
amendment or supplement thereto, if any, becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and (ii) the Joint Proxy Statement and any amendment or
supplement thereto will, at the date of mailing to stockholders and at the times
of the Bay Meeting and the Avalon Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading or any statement
which, in the light of the circumstances under which such statement is made,
will be false or misleading with respect to any material fact, or which will
omit to state any material fact necessary in order to make the statements
therein not false or misleading or necessary to correct any statement in any
earlier statement in the Joint Proxy Statement or any amendment or supplement
thereto. Each of Bay and Avalon further agrees that if it shall become aware
prior to the Effective Date of any information that would cause any of the
statements in the Joint Proxy Statement to be false or misleading with respect
to any material fact, or to omit to state any material fact necessary to make
the statements therein not false or misleading, it shall promptly inform the
other party thereof and shall take the necessary steps to correct the Joint
Proxy Statement.
(c) In the case of Bay, Bay will advise Avalon, promptly after Bay
receives notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment has been filed, of the issuance of any
stop order or the suspension of the qualification of the Bay Stock for offering
or sale in any jurisdiction, of the initiation or threat of any proceeding for
any such purpose, or of any request by the SEC for the amendment or supplement
of the Registration Statement or for additional information.
6.4. PRESS RELEASES. It will consult with the other party before
issuing any press release with respect to the transactions contemplated by this
Agreement and will not, without the prior approval of the other party hereto,
issue any press release or written statement for
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general circulation relating to the transaction contemplated hereby, except as
otherwise required by applicable law or regulation or the rules of the NYSE or
PCX.
6.5. ACCESS; INFORMATION. (a) Upon reasonable notice and subject to
applicable laws relating to the exchange of information, it shall, and shall
cause its Subsidiaries to, afford the other party and its officers, employees,
counsel, accountants and other authorized representatives, access, during normal
business hours throughout the period prior to the Effective Date, to all of its
properties, books, contracts, commitments and records, and to its officers,
employees, accountants, counsel or other representatives, and, during such
period, it shall, and shall cause its Subsidiaries to, furnish promptly to such
other parties and representatives (i) a copy of each material report, schedule
and other document filed by it pursuant to the requirements of federal or state
securities laws (other than reports or documents that Bay or Avalon, or their
respective Subsidiaries, as the case may be, are not permitted to disclose under
applicable law), and (ii) all other information concerning the business,
properties and personnel of it as the other may reasonably request. Neither Bay
nor Avalon nor any of their respective Subsidiaries shall be required to provide
access to or to disclose information where such access or disclosure would
violate or contravene any law, rule, regulation, order, judgment, decree,
fiduciary duty or binding agreement entered into prior to the date hereof. The
parties hereto will make appropriate substitute disclosure arrangements under
the circumstances in which the restrictions of the preceding sentence apply.
(b) It will not use any information obtained pursuant to this
Section 6.5 for any purpose unrelated to the consummation of the transactions
contemplated by this Agreement and, if this Agreement is terminated, will hold
all information and documents obtained pursuant to this paragraph in confidence
(as provided in, and subject to the provisions of, the Confidentiality
Agreement, as if it were the Receiving Party, as defined therein). No
investigation by either party of the business and affairs of the other shall
affect or be deemed to modify or waive any representation, warranty, covenant or
agreement in this Agreement, or the conditions to either party's obligation to
consummate the transactions contemplated by this Agreement.
6.6. ACQUISITION PROPOSALS. From the date hereof until the earlier of
the Effective Date or the termination of this Agreement, without the prior
written consent of the other party hereto, it shall not, and shall cause its
Subsidiaries and its and its Subsidiaries' officers, directors, agents, advisors
and affiliates not to, solicit or encourage inquiries or proposals with respect
to, or engage in any negotiations concerning, or provide any confidential
information to, or have any discussions with, any such person relating to, any
tender offer or exchange offer for, or any proposal for the acquisition of a
substantial equity interest in, or a substantial portion of the assets of, or
any merger or consolidation with, it or any of its Significant Subsidiaries;
PROVIDED, HOWEVER, that it may, and may authorize and permit its officers,
directors, employees or agents to, furnish or cause to be furnished confidential
information and may participate in such discussions and negotiations if its
Board of Directors, after having consulted with and considered the advice of
outside counsel, has determined that the failure to provide such information or
participate in such negotiations and discussions could cause the members of such
Board of Directors to breach their duties under applicable laws. It shall advise
the other party of its receipt of any such
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proposal or inquiry, of the substance thereof, and of the identity of the person
making such proposal or inquiry within 24 hours of the receipt thereof.
6.7. AFFILIATE AGREEMENTS. (a) Not later than the 15th day prior to
the mailing of the Joint Proxy Statement, each of Bay and Avalon shall deliver
to the other, a schedule of each person that, to the best of its knowledge, is
or is reasonably likely to be, as of the date of the relevant Meeting, deemed to
be an "affiliate" of it (each, an "AFFILIATE") as that term is used in SEC
Accounting Series Releases 130 and 135 and, in the case of Avalon only, in Rule
145 under the Securities Act.
(b) Avalon shall use its reasonable best efforts to cause each
person who may be deemed to be an Affiliate of Bay or Avalon, as the case may
be, to execute and deliver to Avalon on or before the date of mailing of the
Joint Proxy Statement an agreement in the form attached hereto as Exhibit B.
6.8. TAKEOVER LAWS. Neither party shall take any action that would
cause the transactions contemplated by this Agreement and the Stock Option
Agreements to be subject to requirements imposed by any Takeover Law and each of
them shall take all necessary steps within its control to exempt (or ensure the
continued exemption of) the transactions contemplated by this Agreement and the
Stock Option Agreements from, or if necessary challenge the validity or
applicability of, any applicable Takeover Law, as now or hereafter in effect,
that purports to apply to this Agreement, the Stock Option Agreements or the
transactions contemplated hereby or thereby.
6.9. NO RIGHTS TRIGGERED. Each of Bay and Avalon shall take all steps
necessary to ensure that the entering into of this Agreement and the
consummation of the transactions contemplated hereby and any other action or
combination of actions, or any other transactions contemplated hereby, do not
and will not result in the grant of any rights to any person (i) under its
charter or by-laws, (ii) under any material agreement to which it or any of its
Subsidiaries is a party, or (iii) to exercise or receive certificates for Bay
Rights or Avalon Rights, or acquire any property in respect of Bay Rights or
Avalon Rights, under the Bay Rights Agreement or the Avalon Rights Agreement, as
the case may be.
6.10. SHARES LISTED. In the case of Bay, Bay shall use its reasonable
best efforts to list, prior to the Effective Date, on the NYSE and PCX, upon
official notice of issuance, the shares of Bay Common Stock to be issued to the
holders of Avalon Common Stock in the Merger.
6.11. FILINGS; CONSENTS. Each of Bay and Avalon shall have the right
to review in advance, and to the extent practicable each will consult with the
other, in each case subject to applicable laws relating to the exchange of
information, with respect to, all material written information submitted to any
third party or any Governmental Entity in connection with the transactions
contemplated by this Agreement. In exercising the foregoing right, each of the
parties hereto agrees to act reasonably and as promptly as practicable. Each
party hereto agrees that it will consult with the other party hereto with
respect to the obtaining of all material permits, consents, approvals and
authorizations of all third parties and Governmental Entities necessary or
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advisable to consummate the transactions contemplated by this Agreement and each
party will keep the other parties apprised of the status of material matters
relating to completion of the transactions contemplated hereby.
6.12. INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE. (a) In the
event of any threatened or actual claim, action, suit, proceeding or
investigation, whether civil, criminal or administrative, in which any person
who is now, or has been at any time prior to the date hereof, or who becomes
prior to the Effective Time, a director, officer or employee of Avalon or any of
its Subsidiaries or of Bay or any of its Subsidiaries is, or is threatened to
be, made a party based in whole or in part on, or arising in whole or in part
out of, or pertaining to this Agreement, the Stock Option Agreements, or any of
the transactions contemplated hereby or thereby or any actions taken by any such
person in connection herewith or therewith, whether in any case asserted or
arising before or after the Effective Time, the parties hereto agree to
cooperate and use their best efforts to defend against and respond thereto. It
is understood and agreed that after the Effective Time, Bay shall indemnify and
hold harmless, as and to the fullest extent permitted by Maryland law, each
person who is now, or has been at any time prior to the date hereof, or who
becomes prior to the Effective Time, a director or officer of Avalon or any of
its Subsidiaries (the "INDEMNIFIED PARTIES") against any losses, claims,
damages, liabilities, costs, expenses (including advancing reasonable attorney's
fees and expenses in advance of the final disposition of any claim, suit,
proceeding or investigation to each Indemnified Party to the fullest extent
permitted by law upon receipt of an undertaking from such Indemnified Party to
repay such advanced expenses if it is finally and unappealably determined that
such Indemnified Party was not entitled to indemnification hereunder),
judgments, fines and amounts paid in settlement in connection with any such
threatened or actual claim, action, suit, proceeding or investigation, and in
the event of any such threatened or actual claim, action, suit, proceeding or
investigation (whether asserted or arising before or after the Effective Time
and including any such threatened or actual claim, action, suit, proceeding or
investigation based in whole or in part on, or arising in whole or in part out
of, or pertaining to (i) the fact that he or she is or was a director, officer
or employee of Avalon, any of Avalon's Subsidiaries or any of their respective
predecessors or was prior to the Effective Time serving at the request of any
such party as a director, officer, employee, fiduciary or agent of another
corporation, partnership, trust or other enterprise, or (ii) this Agreement, the
Stock Option Agreements, or any of the transactions contemplated hereby or
thereby and all actions taken by an Indemnified Party in connection herewith or
therewith), and the Indemnified Parties may retain counsel after consultation
with Bay; PROVIDED, HOWEVER, that (1) Bay shall have the right to assume the
defense thereof and upon such assumption Bay shall not be liable to any
Indemnified Party for any legal expenses of other counsel or any other expenses
subsequently incurred by any Indemnified Party in connection with the defense
thereof, except that if Bay elects not to assume such defense, or counsel for
the Indemnified Parties reasonably advises the Indemnified Parties that there
are or may be (whether or not any have yet actually arisen) issues which raise
conflicts of interest between Bay and the Indemnified Parties, the Indemnified
Parties may retain counsel reasonably satisfactory to them, and Bay shall pay
the reasonable fees and expenses of such counsel for the Indemnified Parties,
(2) Bay shall be obligated pursuant to this paragraph to pay for only one firm
of counsel for all Indemnified Parties, (3) Bay shall not be liable for any
settlement effected without its prior written consent (which consent shall not
be unreasonably withheld) and (4) Bay shall have no obligation hereunder to
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any Indemnified Party when and if a court of competent jurisdiction shall
ultimately determine, and such determination shall have become final and
nonappealable, that indemnification of such Indemnified Party in the manner
contemplated hereby is prohibited by applicable law. Any Indemnified Party
wishing to claim indemnification under this Section 6.12, upon learning of any
such claim, action, suit, proceeding or investigation, shall notify Bay thereof,
PROVIDED that the failure to so notify shall not affect the obligations of Bay
under this Section 6.12 except (and only) to the extent such failure to notify
materially prejudices Bay. Bay's obligations under this Section 6.12 shall
continue in full force and effect for a period of six (6) years from the
Effective Time; PROVIDED, HOWEVER, that all rights to indemnification in respect
of any claim (a "CLAIM") asserted or made within such period shall continue
until the final disposition of such Claim.
(b) Without limiting any of the obligations under paragraph (a) of
this Section 6.12, Bay agrees that all rights to indemnification and all
limitations of liability existing in favor of the Indemnified Parties as
provided in Avalon's charter or by-laws or in the similar governing documents of
any of Avalon's Subsidiaries as in effect as of the date hereof with respect to
matters occurring on or prior to the Effective Time shall survive the Merger and
shall continue in full force and effect, without any amendment thereto, for a
period of six (6) years from the Effective Time; PROVIDED, HOWEVER, that all
rights to indemnification in respect of any Claim asserted or made within such
period shall continue until the final disposition of such Claim; PROVIDED
FURTHER, HOWEVER, that nothing contained in this Section 6.12(b) shall be deemed
to preclude the liquidation, consolidation or merger of Avalon or any Avalon
Subsidiary, in which case all of such rights to indemnification and limitations
on liability shall be deemed to so survive and continue notwithstanding any such
liquidation, consolidation or merger and shall constitute rights which may be
asserted against Bay. Nothing contained in this Section 6.12(b) shall be deemed
to preclude any rights to indemnification or limitations on liability provided
in Avalon's Amended and Restated Articles of Incorporation or the similar
governing documents of any of Avalon's Subsidiaries with respect to matters
occurring subsequent to the Effective Time to the extent that the provisions
establishing such rights or limitations are not otherwise amended to the
contrary.
(c) Bay shall use its best efforts to cause the persons serving as
officers and directors of Avalon immediately prior to the Effective Time to be
covered for a period of six (6) years from the Effective Time by the directors'
and officers' liability insurance policy maintained by Avalon (PROVIDED that Bay
may substitute therefor policies of at least the same coverage and amounts
containing terms and conditions which are not less advantageous to such
directors and officers of Avalon than the terms and conditions of such existing
policy) with respect to acts or omissions occurring prior to the Effective Time
which were committed by such officers and directors in their capacity as such.
(d) In the event Bay or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers or conveys all or substantially all of its properties and
assets to any person, then, and in each such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of Bay shall
assume the obligations set forth in this Section 6.12.
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(e) The provisions of this Section 6.12 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or her
heirs and representatives.
6.13. COMPENSATION AND BENEFIT PLANS. (a) It is the intention of the
parties that the Surviving Corporation shall formulate Compensation and Benefit
Plans for the Surviving Corporation and its Subsidiaries, with respect to
employees of both Bay and Avalon that provide benefits for services after the
Effective Time on a basis that does not discriminate between such employees.
Employees of Avalon and its Subsidiaries immediately prior to the Effective Time
who become employees of the Surviving Corporation or one of its Subsidiaries
immediately after the Effective Time shall be given credit for purposes of
eligibility and vesting of employee benefits and benefit accrual for service
with Avalon and its affiliates, and predecessors of Avalon and its affiliates,
prior to the Effective Time under each benefit plan of the Surviving Corporation
and its Subsidiaries to the extent such service had been credited under employee
benefit plans of Avalon or its Subsidiaries, PROVIDED that no such crediting of
service results in duplication of benefits.
(b) In the case of Avalon Compensation and Benefit Plans under which
the employees' interests are based upon Avalon Common Stock, such interests
shall be based upon Bay Common Stock in accordance with Section 3.7 with respect
to Avalon Stock Options and otherwise in accordance with the terms of the Avalon
Compensation and Benefit Plans and in an equitable manner.
6.14. TRANSFER AND GAINS TAXES. Bay and Avalon shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added stock transfer and stamp taxes, any transfer, recording,
registration and other fees and any similar taxes which become payable in
connection with the Transactions (together with any related interests, penalties
or additions to tax, "TRANSFER AND GAINS TAXES"). From and after the Effective
Time, the Surviving Company shall pay, without deduction or withholding from any
amounts payable to the holders of Bay Common Stock (including former holders of
Avalon Common Stock), all Transfer and Gains Taxes (other than any such taxes
that are solely the liability of the holders of Bay Common Stock under
applicable state law).
6.15. HEADQUARTERS. The Surviving Corporation's executive headquarters
shall be located in the Alexandria, Virginia area, or in such other location
where the Chief Executive Officer shall be based, and the Surviving Corporation
shall have super-regional offices in the San Jose, California area, where the
President and Chief Operating Officer shall be based, and in the Wilton,
Connecticut area.
6.16. NOTIFICATION OF CERTAIN MATTERS. Each of Bay and Avalon shall
give prompt notice to the other of any fact, event or circumstance known to it
that (i) is reasonably likely, individually or taken together with all other
facts, events and circumstances known to it, to result in any Material Adverse
Effect with respect to it or (ii) notwithstanding the standards set forth in
Section 5.2, would cause or constitute a material breach of any of its
representations, warranties, covenants or agreements contained herein.
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6.17. INTERIM TRANSACTIONS COMMITTEE. Bay and Avalon shall establish
an interim transactions committee (the "INTERIM TRANSACTIONS COMMITTEE")
consisting of the individuals listed on Exhibit A. Subject to any approvals that
may be required by law or otherwise on the part of Bay or Avalon, the Interim
Transactions Committee shall approve acquisition, budget and capital improvement
activities (including activities otherwise prohibited by Article IV of this
Agreement) of each of Bay and Avalon between the date hereof and the Effective
Time.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of each of the parties to consummate the Merger is
conditioned upon the satisfaction at or prior to the Effective Time of each of
the following:
7.1. STOCKHOLDER VOTE. Approval of this Agreement and the transactions
contemplated hereby by the requisite votes of the respective stockholders of Bay
and of Avalon.
7.2. GOVERNMENTAL APPROVALS. All approvals of Governmental Entities
(except any approvals or consents relating to tax-exempt bonds) required to
consummate the transactions contemplated hereby shall have been obtained and
shall remain in full force and effect and all statutory waiting periods in
respect thereof (including the waiting period under the HSR Act, if applicable)
shall have expired.
7.3. THIRD PARTY CONSENTS. All necessary consents or approvals of all
persons (other than Governmental Entities, except as related to tax-exempt
bonds) required for the consummation of the Merger (including those listed on
Section 5.3(f) of each party's respective Disclosure Schedule) shall have been
obtained and shall be in full force and effect, unless the failure to obtain any
such consent or approval is not reasonably likely to have, individually or in
the aggregate, a Material Adverse Effect on Bay or Avalon, as the case may be.
7.4. NO INJUNCTION, ETC. No order, decree or injunction of any court
or agency of competent jurisdiction shall be in effect, and no law, statute or
regulation shall have been enacted or adopted, that enjoins, prohibits or makes
illegal consummation of any of the transactions contemplated hereby; PROVIDED,
HOWEVER, that each of Bay and Avalon shall have used its reasonable best efforts
to prevent any such rule, regulation, injunction, decree or other order, and to
appeal as promptly as possible any injunction, decree or other order that may be
entered.
7.5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF AVALON. In the case
of Bay's obligation to consummate the Merger: (i) each of the representations
and warranties contained herein of Avalon shall be true and correct as of the
date hereof and upon the Effective Date with the same effect as though all such
representations and warranties had been made on the Effective Date, except for
any such representations and warranties made as of a specified date, which shall
be true and correct as of such date, in any case subject to the standard set
forth in Section 5.2, (ii) each and all of the agreements and covenants of
Avalon to be performed and complied with pursuant to this Agreement on or prior
to the Effective Date shall have been duly
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performed and complied with in all material respects, and (iii) Bay shall have
received a certificate signed by the President, Chief Executive Officer or Chief
Financial Officer of Avalon, dated the Effective Date, to the effect set forth
in clauses (i) and (ii) of this Section 7.5.
7.6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BAY. In the case of
Avalon's obligation to consummate the Merger: (i) each of the representations
and warranties contained herein of Bay shall be true and correct as of the date
hereof and upon the Effective Date with the same effect as though all such
representations and warranties had been made on the Effective Date, except for
any such representations and warranties made as of a specified date, which shall
be true and correct as of such date, in any case subject to the standard set
forth in Section 5.2, (ii) each and all of the agreements and covenants of Bay
to be performed and complied with pursuant to this Agreement on or prior to the
Effective Date shall have been duly performed and complied with in all material
respects, and (iii) Avalon shall have received a certificate signed by the
President, Chief Executive Officer or Chief Financial Officer of Bay, dated the
Effective Date, to the effect set forth in clauses (i) and (ii) of this
Section 7.6.
7.7. EFFECTIVE REGISTRATION STATEMENT. The Registration Statement
shall have become effective and no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC or any other
Governmental Entity.
7.8. TAX OPINION RELATING TO THE MERGER. Bay and Avalon shall have
received an opinion from Goodwin, Procter & Hoar LLP, in the case of Bay, and
Wachtell, Lipton, Rosen & Katz, in the case of Avalon, dated in each case as of
the Closing Date, substantially to the effect that, on the basis of the facts,
representations and assumptions set forth in such opinions which are consistent
with the state of facts existing at the Closing Date, the Merger will be treated
for Federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code and that accordingly:
(i) No gain or loss will be recognized by Bay or Avalon as
a result of the Merger;
(ii) No gain or loss will be recognized by the stockholders
of Avalon who exchange all of their Avalon Common Stock solely for Bay
Common Stock pursuant to the Merger (except with respect to cash
received in lieu of a fractional share interest in Bay Common Stock);
and
(iii) The aggregate tax basis of the Bay Common Stock
received by stockholders who exchange all of their Avalon Common Stock
solely for Bay Common Stock in the Merger will be the same as the
aggregate tax basis of Avalon Common Stock surrendered in exchange
therefor (reduced by any amount allocable to a fractional share
interest for which cash is received).
In rendering such opinions, such counsel may require and rely upon
representations and covenants including those contained in certificates of
officers of Bay, Avalon and others, reasonably satisfactory in form and
substance to such counsel.
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7.9. TAX OPINION RELATING TO REIT STATUS. Bay and Avalon shall have
received an opinion from Goodwin, Procter & Hoar LLP, dated as of the Closing
Date, substantially to the effect that the Surviving Corporation will continue
to qualify as a REIT for federal income tax purposes immediately after the
Effective Time. In rendering such opinion, Goodwin, Procter & Hoar LLP may
require and rely upon customary assumptions, representations and covenants
including those contained in certificates of officers of Bay, Avalon and others,
reasonably satisfactory in form and substance to such counsel.
7.10. NYSE LISTING. The shares of Bay Common Stock issuable pursuant
to this Agreement shall have been approved for listing on the NYSE, subject to
official notice of issuance.
7.11. RIGHTS AGREEMENTS. In the case of Bay's obligation to consummate
the Merger, there shall exist no "Share Acquisition Date", "Distribution Date"
or "Triggering Event" (as each of such terms is defined in the Avalon Rights
Agreement) under the Avalon Rights Agreement. In the case of Avalon's obligation
to consummate the Merger, there shall exist no "Stock Acquisition Date",
"Distribution Date" or "Triggering Event" (as each of such terms is defined in
the Bay Rights Agreement) under the Bay Rights Agreement.
7.12. REIT INCOME. In the case of Bay's obligation to consummate the
Merger, prior to the Effective Date, to the extent necessary to satisfy the
requirements of Section 857(a)(1) of the Code for the taxable year of Avalon
ending at the Effective Time (and avoid the payment of tax with respect to
undistributed income), Avalon shall declare a dividend (the "FINAL COMPANY
DIVIDEND") to holders of Avalon Common Shares, the record date for which shall
be the close of business on the last business day prior to the Effective Time,
in an amount equal to the minimum dividend sufficient to permit Avalon to
satisfy such requirements. If Avalon determines it necessary to declare the
Final Company Dividend, it shall notify Bay at least 15 days prior to the
Effective Date.
It is specifically provided, however, that a failure to satisfy the
conditions set forth in Sections 7.5 or 7.12 shall only constitute a condition
if asserted by Bay, and a failure to satisfy the condition set forth in Section
7.6 shall only constitute a condition if asserted by Avalon.
ARTICLE VIII
TERMINATION
8.1. TERMINATION. This Agreement may be terminated, and the Merger
may be abandoned:
(a) MUTUAL CONSENT. At any time prior to the Effective Time, by the
mutual consent of Bay and Avalon in a written instrument, if the Board of
Directors of each so determines by vote of a majority of the members of its
entire Board.
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(b) BREACH. At any time prior to the Effective Time, by Bay or Avalon
(PROVIDED that the terminating party is not then in material breach of any
representation, warranty, covenant or other agreement contained herein), if its
Board of Directors so determines by vote of a majority of the members of its
entire Board, in the event of either: (i) a breach by the other party of any
representation or warranty contained herein (subject to the standards set forth
in Section 5.2), which breach cannot be or has not been cured within 30 days
after the giving of written notice to the breaching party of such breach; or
(ii) a material breach by the other party of any of the covenants or agreements
contained herein, which breach cannot be or has not been cured within 30 days
after the giving of written notice to the breaching party of such breach.
(c) DELAY. At any time prior to the Effective Time, by Bay or Avalon,
if its Board of Directors so determines by vote of a majority of the members of
its entire Board, in the event that the Merger is not consummated by November
30, 1998, except to the extent that the failure of the Merger then to be
consummated arises out of or results from the failure of the party seeking to
terminate this Agreement to perform or observe the covenants and agreements of
such party set forth herein.
(d) NO APPROVAL. By Bay or Avalon, if its Board of Directors so
determines by a vote of a majority of the members of its entire Board, in the
event (i) any Governmental Entity of competent jurisdiction shall have issued a
final nonappealable order enjoining or otherwise prohibiting the consummation of
the transactions contemplated by this Agreement, or (ii) any stockholder
approval required by Section 7.1 herein is not obtained at the Bay Meeting or
the Avalon Meeting.
(e) RECOMMENDATION ALTERED. By either the Board of Directors of Bay
or the Board of Directors of Avalon, if the Board of Directors of the other
party shall have withdrawn, modified or changed in a manner adverse to the
terminating party its approval or recommendation of this Agreement and the
transactions contemplated hereby.
8.2. EFFECT OF TERMINATION AND ABANDONMENT. In the event of
termination of this Agreement and the abandonment of the Merger pursuant to this
Article VIII, no party to this Agreement shall have any liability or further
obligation to any other party hereunder except (i) as set forth in Section 8.3,
(ii) as set forth in Section 9.1, and (iii) that termination will not relieve a
breaching party from liability for any willful breach of this Agreement giving
rise to such termination.
8.3. BREAK-UP EXPENSES. In addition to any other fees and expenses
payable under this Agreement, in the event of termination of this Agreement
under Section 8.1(b) or Section 8.1(e) above, or in the event that either party
terminates this Agreement pursuant to clause (ii) of Section 8.1(d) due to the
failure to obtain the approval of stockholders of the other party, such
terminating party ("RECIPIENT") shall be entitled to receive from the other
party ("PAYOR") Break-Up Expenses at the time of such termination or at such
other time or times as provided for in this Section 8.3. "BREAK-UP EXPENSES"
shall be an amount equal to $10,000,000. Upon termination necessitating the
payment of Break-Up Ex-
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penses, Payor shall immediately deposit into escrow with an escrow agent
selected by Recipient an amount in cash equal to the Break-Up Expenses. The
escrow agent shall pay to Recipient an amount equal to the lesser of (i) the
Break-Up Expenses and (ii) the maximum amount that can be paid to Recipient
without causing Recipient, to fail to meet the requirements of Sections
856(c)(2) and (3) of the Code determined as if the payment of such amount did
not constitute income described in Sections 856(c)(2)(A)-(H) and
856(c)(3)(A)-(I) of the Code ("QUALIFYING INCOME"), as determined by the
independent accountants of Recipient. In the event that all or any portion of
the Break-Up Expenses remains in escrow after payment of the amount, if any,
required by the preceding sentence, the escrow agreement shall provide that the
Recipient shall not be entitled to the remainder of the Break-Up Expenses and no
amount thereof shall be released to Recipient unless and until the escrow agent
receives any one or combination of the following: (i) a letter from Recipient's
outside counsel ("BREAK-UP EXPENSES TAX OPINION") indicating that it has
received a ruling from the IRS the effect of which holds that Recipient's
receipt of the Break-Up Expenses would not jeopardize its status as a REIT
("REIT REQUIREMENTS"), and that receipt by Recipient of the remaining balance of
the Break-Up Expenses following the receipt of and pursuant to such ruling would
not be deemed constructively received prior thereto (in which case the escrow
agent shall release the remainder of the Break-Up Expenses in escrow to
Recipient) or (ii) a letter (or a series of letters) from the independent
accountants of Recipient, each indicating any additional amounts that Recipient
can be entitled to and can be paid at that time without causing it to fail to
meet the REIT Requirements (in which case the escrow agent shall release such
additional amounts from escrow to Recipient). The obligation of Payor to pay any
unpaid portion of the Break-Up Expenses shall terminate three years from the
date hereof, and any unpaid portion of the Break-Up Expenses remaining in escrow
three years from the date hereof shall be released to Payor and the escrow shall
terminate at that time.
ARTICLE IX
MISCELLANEOUS
9.1. SURVIVAL. All representations, warranties, agreements and
covenants contained in this Agreement shall not survive the Effective Time or
termination of this Agreement if this Agreement is terminated prior to the
Effective Time; PROVIDED, HOWEVER, that if the Effective Time occurs, the
agreements of the parties in Sections 3.4, 3.7, 6.12, 6.13, 6.14, 6.15, 9.1, 9.4
and 9.8 shall survive the Effective Time, and if this Agreement is terminated
prior to the Effective Time, the agreements of the parties in Sections 6.5(b),
8.2, 8.3, 9.1, 9.2, 9.4, 9.5, 9.6, 9.7 and 9.8 shall survive such termination.
9.2. WAIVER; AMENDMENT. Subject to compliance with applicable law,
prior to the Effective Time, any provision of this Agreement may be (i) waived
by the party benefited by the provision, or (ii) amended or modified at any
time, by an agreement in writing between the parties hereto approved by their
respective Boards of Directors and executed in the same manner as this
Agreement.
9.3. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
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9.4. GOVERNING LAW. This Agreement shall be governed by, and
interpreted in accordance with, the laws of the State of Maryland, without
regard to the conflict of law principles thereof.
9.5. EXPENSES. Each party hereto will bear all expenses incurred by it
in connection with this Agreement and the transactions contemplated hereby,
except that printing expenses and SEC filing and registration fees, HSR filing
fees, if any, and NYSE and PCX listing fees shall be shared equally between Bay
and Avalon.
9.6. CONFIDENTIALITY. Each of the parties hereto and their respective
agents, attorneys and accountants will maintain the confidentiality of all
information provided in connection herewith in accordance, and subject to the
limitations of, the Confidentiality Agreement.
9.7. NOTICES. All notices, requests and other communications hereunder
to a party shall be in writing and shall be deemed given if personally
delivered, telecopied (with confirmation) or mailed by registered or certified
mail (return receipt requested) to such party at its address set forth below or
such other address as such party may specify by notice to the parties hereto.
If to Bay, to:
Bay Apartment Communities, Inc.
4340 Stevens Creek Boulevard, #275
San Jose, California 95129
Attention: Gilbert M. Meyer, Chairman and President
Telecopier: (408) 984-7060
With copies to:
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Attention: Gilbert G. Menna, P.C.
David W. Watson, P.C.
Telecopier: (617) 523-1231
If to Avalon, to:
Avalon Properties, Inc.
2900 Eisenhower Avenue, 3rd Floor
Alexandria, Virginia 22314
Attention: Richard L. Michaux, Chairman and Chief Executive Officer
Telecopier: (703) 329-4830
With copies to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Adam O. Emmerich, Esq.
Robin Panovka, Esq.
Telecopier: (212) 403-2000
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9.8. UNDERSTANDING; NO THIRD PARTY BENEFICIARIES. Except for the
Confidentiality Agreement, which shall remain in effect, and the Stock Option
Agreements, this Agreement represents the entire understanding of the parties
hereto with reference to the transactions contemplated hereby and thereby and
supersede any and all other oral or written agreements heretofore made. Except
for Section 6.12, nothing in this Agreement, expressed or implied, is intended
to confer upon any person, other than the parties hereto or their respective
successors, any rights, remedies, obligations or liabilities under or by reason
of this Agreement.
9.9. HEADINGS; INTERPRETATION. The headings contained in this
Agreement are for reference purposes only and are not part of this Agreement.
The word "including" and words of similar import when used in this Agreement
shall mean "including, without limitation," unless the context otherwise
requires or unless otherwise specified. Words of number may be read as singular
or plural, as required by context.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
BAY APARTMENT COMMUNITIES, INC.
By: /s/ Gilbert M. Meyer
-----------------------------
Name: Gilbert M. Meyer
Title: President
AVALON PROPERTIES, INC.
By: /s/ Richard L. Michaux
------------------------------
Name: Richard L. Michaux
Title: Chief Executive Officer
<PAGE> 1
EXHIBIT 99.2
BAY APARTMENT COMMUNITIES AND AVALON PROPERTIES TO MERGE
-- RESULT WILL BE PREEMINENT LUXURY APARTMENT COMPANY IN THE U.S.
WITH $3.7 BILLION TOTAL CAPITALIZATION AND SIGNIFICANT PRESENCE IN EACH
OF THE TOP-TEN U.S. APARTMENT MARKETS --
-- AVALON ALSO ANNOUNCES PRESALE ACQUISITION OF EIGHT COMMUNITIES
IN THE PACIFIC NORTHWEST --
SAN JOSE, CA, AND ALEXANDRIA, VA, MARCH 9/PRNewswire/ -- Bay Apartment
Communities, Inc. (NYSE: BYA - news) and Avalon Properties, Inc. (NYSE: AVN -
news) announced today that they have signed a definitive merger agreement. The
surviving company, to be named Avalon Bay Communities, Inc., will be the
preeminent luxury apartment company in the U.S., with an immediate total market
capitalization of $3.7 billion, approximately 63 million shares and partnership
units outstanding, $2.7 billion of combined equity, including preferred stock,
and a portfolio of 140 communities with 40,506 apartment homes in 29 markets in
15 states and the District of Columbia.
Under the terms of the agreement, Avalon will be merged into Bay Apartment
Communities, with Bay Apartment Communities being the surviving entity, through
an exchange of shares in which Avalon common shareholders will receive 0.7683
shares of Bay Apartment Communities common stock for each share of Avalon common
stock they own. Avalon's preferred shareholders will receive comparable
preferred shares of Bay as a result of the merger.
The merger, which has been unanimously approved by the boards of directors of
both companies and is expected to close in June 1998, has been structured as a
tax-free transaction and will be accounted for as a purchase of Avalon by Bay
Apartment Communities.
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It is expected that upon completion of the transaction, the new company will
have an annual dividend of $2.04, an increase of $0.36 per share (or 21%) over
Bay Apartment Communities' current annual dividend of $1.68, and essentially
equivalent to Avalon's current annual dividend.
Avalon Bay Communities, Inc., will be listed on the New York Stock Exchange and
will be headquartered in Alexandria, VA, with super-regional offices in San
Jose, CA, and Wilton, CT.
Avalon Bay will be led by a highly experienced management team that will
include:
Gilbert M. Meyer as Executive Chairman;
Richard L. Michaux as Chief Executive Officer;
Charles H. Berman as President and Chief Operating Officer;
Bryce Blair as Senior Vice President-Development/Acquisitions;
Max L. Gardner as Senior Vice President-Merger Integration;
Morton L. Newman as Senior Vice President-Construction;
Thomas J. Sargeant as Senior Vice President and Chief Financial Officer;
Debra Lynn Shotwell as Senior Vice President-Administration;
Robert H. Slater as Senior Vice President-Property and Operations; and
Jeffrey B. Van Horn as Senior Vice President-Investments.
Gilbert M. Meyer, Chairman and President of Bay Apartment Communities, said, "It
is clear that larger, national REITs enjoy significant competitive advantages
that accrue from, among other things, a lower cost of capital and enhanced
operating efficiencies. This transaction between Avalon and Bay is an ideal
merger, and we believe that the benefits that the merger with Avalon will
provide will be very substantial."
"We are impressed by the strength and depth of Avalon's management team, its
state-of-the-art and scalable information systems, its community management
abilities, and its strategic focus on select high barrier-to-entry markets that
mirrors our own strategy."
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"Beyond a similar heritage as investment developers and builders, both companies
share a focus on superior resident service, both enjoy consistent asset quality
and resident profiles, and both have similar capital structures and financing
strategies. The extensive experience of senior management and the deep bench
strength of the entire management team will give us the best of both worlds: the
size and scope of a coast-to-coast competitor and the ability to have in place
seasoned "sharpshooters" in local and regional markets. Add to that the
complementary portfolios that will give Avalon Bay a significant presence in
each of the top-ten apartment markets and we see a transaction that holds great
promise for Avalon Bay Communities' shareholders."
Richard L. Michaux, Chairman and Chief Executive Officer of Avalon Properties,
said, "Bay and Avalon represent an ideal, complementary strategic fit which will
greatly benefit the shareholders, residents, and employees of both companies.
Geographically, we will combine Avalon's established presence in select high
barrier-to-entry markets in the Northeast, Mid-Atlantic and Midwestern states
with Bay's equally strong presence in select high barrier-to-entry markets of
Northern and Southern California and the Pacific Northwest. With this
transaction, we are equaling or exceeding the majority of the goals of our Plan
2002 by the end of 1998 with much less market risk. The merger will also provide
greater diversity in Avalon Bay Communities' mix of industries and businesses
that drive local economies."
"Functionally, Avalon Bay Communities will have unparalleled breadth of
abilities and experience within the entire spectrum of multifamily acquisition,
development, construction, reconstruction, and community management. The
complementary nature of the two companies' skill sets is compelling. Bay has
unique strengths and a proven record for construction, and particularly
reconstruction, within difficult urban environments. We see tremendous
opportunities to create incremental value not currently being realized by
applying Bay's reconstruction techniques within the Midwestern, Northeastern,
and Mid-Atlantic markets of Avalon."
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"Financially, we anticipate that shareholders of Avalon Bay Communities should
benefit from improved long-term earnings growth, greater value-creation
opportunities, enhanced liquidity, strengthened credit profile, and a
diversification of assets into additional high barrier-to-entry markets."
Charles H. Berman, President and Chief Operating Officer of Avalon Properties,
who will manage daily real estate operations, said: "We anticipate this
combination will add $0.07 per share during the remainder of 1998 and $0.15 per
share in 1999."
"The ability to integrate the substantial skills and best practices of both
companies is the key to delivering the value we expect to create for
shareholders with this merger. To ensure that we achieve a seamless integration
process and realize the full potential of this merger, we have hired two expert
merger integration consulting firms and, working with them, have initiated a
comprehensive merger integration effort. Max Gardner, one of Bay's most senior
and experienced executives, is heading this effort. Max is leading multiple task
forces comprising key leaders from both companies."
"These task forces will be charged with jointly identifying the 'best practices'
of both companies that will be implemented nationwide so that Avalon Bay
functions as a cohesive company immediately after the transaction closes. Max
and these task forces will work closely with the two merger integration
consulting firms to help ensure the successful combination of the two
organizations and the creation of one common culture within Avalon Bay.
Executives from both companies are expected to relocate to assist in the
blending of a common culture at Avalon Bay Communities."
The merger is subject to the approval of the shareholders of both companies and
other customary closing conditions. In connection with the execution of the
merger agreement, Bay and Avalon each issued to the other an option to buy 19.9%
of the issuer's outstanding common stock under certain circumstances. In
addition, Bay and Avalon each adopted shareholders' rights plans.
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Avalon Bay Communities will be governed by a twelve-member Board of Directors,
six of whom will be from Bay's Board of Directors and six of whom will be from
Avalon's Board of Directors. Nine of the twelve Board members will be
independent.
Concurrent with this transaction, Avalon announced that it has entered into a
definitive agreement to acquire selected assets on a presale basis from Trammell
Crow Residential-Pacific Northwest (TCR-NW), a leading, closely-held apartment
development and management company. The presale acquisitions are expected to be
completed during the next 24 to 36 months.
The acquisitions, which will involve a total investment of approximately $280
million, include seven communities in the Seattle market and one community in
the Portland market. The acquisitions will add significant presence in this
fast-growing, high barrier-to-entry region. Together, these eight communities
provide 2,411 apartment homes with state-of-the-art features and amenities. The
initial stabilized yield on Avalon's investment is expected to be 9.4 percent.
Several of these communities are currently in the entitlement process and no
assurance can be provided that all of these communities will be developed.
Bay Apartment Communities is a fully integrated, multifamily REIT focused on the
acquisition, development, construction, reconstruction and management of high
quality apartment home communities. The company's portfolio consists of 59
communities, containing 16,597 apartment homes, including homes delivered at
Toscana, a partially developed community in Sunnyvale, California.
The company's portfolio includes 37 apartment home communities in the San
Francisco Bay Area and Northern California, 19 communities in Southern
California, and 3 communities in the Pacific Northwest. The company also owns
five land sites in the San Francisco Bay Area on which it is building five
communities which will contain an aggregate of approximately 1,360 apartment
homes, including the remaining apartment
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homes under construction in Toscana. The company owns one additional land site
in the San Francisco Bay Area for future development. More information on Bay
Apartment Communities is available on Bay's website at
http://www.bayapartmt.com.
Avalon Properties, Inc. is an equity REIT in the business of developing,
acquiring and managing multifamily communities in the high barrier-to-entry
markets of the United States. Avalon, named the NAHB Property management Company
of the Year for 1996/1997, owns or holds an ownership interest in 66 stabilized
apartment communities containing 19,724 apartment homes in twelve states and the
District of Columbia. Eleven communities with 2,825 apartment homes are
presently under construction. More information on Avalon Properties may be found
on Avalon's Web site at http://www.avalonprop.com.
This announcement contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act
of 1934. The words "expect," "anticipate," "estimate" and other similar
expressions which are predictions of or indicate future events and trends and
which do not relate solely to historical matters, including information
concerning the companies' future FFO estimates, identify forward-looking
statements. Reliance should not be placed on forward-looking statements because
they involve known and unknown risks, uncertainties and other factors which are
in some cases beyond the control of the companies and may cause the actual
results, performance or achievements of the companies to differ materially from
anticipated future results, performance or achievements expressed or implied by
such forward-looking statements.
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Factors that might cause such a difference include, but are not limited to, the
following: occupancy rates and market rents may be adversely affected by local
economic, interest rates and market conditions which are beyond management's
control; the companies may not be able to successfully integrate large portfolio
acquisitions in new markets with then current business operations; and
additional factors discussed in the companies' periodic reports filed with the
Securities and Exchange Commission.
Contacts:
Bay Apartment Communities Avalon Properties
Gilbert M. (Mike) Meyer Richard L. Michaux
Chairman of the Board and Chairman of the Board,
President Chief Executive Officer and Director
(408) 260-3715 (703) 317-4601
# # #
7
<PAGE> 1
EXHIBIT 99.3
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO
CERTAIN PROVISIONS CONTAINED HEREIN AND TO
RESALE RESTRICTIONS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated as of March 9, 1998, by and between Bay
Apartment Communities, Inc., a Maryland corporation ("ISSUER"), and Avalon
Properties, Inc., a Maryland corporation ("GRANTEE").
W I T N E S S E T H:
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Merger dated as of the date hereof (as amended from time to time, the "MERGER
AGREEMENT"), which agreement has been executed by the parties hereto immediately
prior to the execution of this Stock Option Agreement (this "AGREEMENT"); and
WHEREAS, as a condition to Grantee's entering into the Merger Agreement
and in consideration therefor, Issuer has agreed to grant Grantee the Option (as
hereinafter defined);
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Merger Agreement, and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable
option (the "OPTION") to purchase, subject to the terms hereof, up to 5,212,000
fully paid and nonassessable shares of Issuer's Common Stock, par value $.01 per
share ("COMMON STOCK"), at a price of $37.00 per share (the "OPTION PRICE");
PROVIDED, HOWEVER, that in no event shall the number of shares of Common Stock
for which this Option is exercisable exceed 19.9% of the Issuer's issued and
outstanding shares of Common Stock without giving effect to any shares subject
to or issued pursuant to the Option. The number of shares of Common Stock that
may be received upon the exercise of the Option and the Option Price are subject
to adjustment as herein set forth.
(b) In the event that any additional shares of Common Stock are either
(i) issued or otherwise become outstanding after the date of this Agreement
(other than pursuant to this Agreement), or (ii) redeemed, repurchased, retired
or otherwise cease to be outstanding after the date of this Agreement, the
number of shares of Common Stock subject to the Option shall be increased or
decreased, as appropriate, so that, after such issuance, such number equals
19.9% of the number of shares of Common Stock then issued and outstanding
without giving effect to any shares subject or issued pursuant to the Option.
Nothing contained in this Section 1(b) or elsewhere in this Agreement shall be
deemed to authorize Issuer or Grantee to breach any provision of the Merger
Agreement.
<PAGE> 2
2. (a) Holder (as hereinafter defined) may exercise the Option, in whole
or part, and from time to time, if, but only if, a Triggering Event (as
hereinafter defined) shall have occurred prior to the occurrence of an Exercise
Termination Event (as hereinafter defined), PROVIDED that Holder shall have sent
to Issuer written notice of such exercise (as provided in subsection (e) of this
Section 2) within 90 days following such Triggering Event (or if, following the
occurrence of a Triggering Event, and prior to an Exercise Termination Event,
there shall have occurred an Extension Event, within 90 days following such
Extension Event). Each of the following shall be an "EXERCISE TERMINATION
EVENT": (i) the Effective Time (as defined in the Merger Agreement) of the
Merger; (ii) termination of the Merger Agreement in accordance with the
provisions thereof if such termination occurs prior to the occurrence of a
Triggering Event except a termination by Grantee pursuant to Section 8.1(b) of
the Merger Agreement (unless the breach by Issuer giving rise to such right of
termination is non-volitional); or (iii) the passage of 18 months after
termination of the Merger Agreement if such termination follows the occurrence
of a Triggering Event or is a termination by Grantee pursuant to Section 8.1(b)
of the Merger Agreement (unless the breach by Issuer giving rise to such right
of termination is non-volitional). The term "HOLDER" shall mean the holder or
holders of the Option.
(b) The term "TRIGGERING EVENT" shall mean any of the following events
or transactions occurring after the date hereof:
(i) Issuer or any of its Subsidiaries (each, an "ISSUER
SUBSIDIARY"), without having received Grantee's prior written consent,
shall have entered into an agreement to engage in an Acquisition
Transaction (as hereinafter defined) with any person (the term
"person" for purposes of this Agreement having the meaning assigned
thereto in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange
Act of 1934, as amended (the "1934 ACT"), and the rules and
regulations thereunder) other than Grantee or any of its Subsidiaries
(each a "GRANTEE SUBSIDIARY"), or the Board of Directors of Issuer
shall have recommended that the stockholders of Issuer approve or
accept any Acquisition Transaction. For purposes of this Agreement,
"ACQUISITION TRANSACTION" shall mean (w) a merger or consolidation, or
any similar transaction, involving Issuer or any Significant
Subsidiary (as defined in Rule 1-02 of Regulation S-X promulgated by
the Securities and Exchange Commission (the "SEC")) of Issuer, (x) a
purchase, lease or other acquisition or assumption of all or a
substantial portion of the assets of Issuer or any Significant
Subsidiary of Issuer, (y) a purchase or other acquisition (including
by way of merger, consolidation, share exchange or otherwise) of
securities representing 10% or more of the voting power of Issuer, or
(z) any substantially similar transaction; PROVIDED, HOWEVER, that in
no event shall (A) the transactions contemplated by the Merger
Agreement or the entering into of the Merger Agreement constitute an
Acquisition Transaction or (B) any merger, consolidation, purchase or
similar transaction involving only the Issuer and one or more of its
Subsidiaries or involving only any two or more of such Subsidiaries be
deemed to be an Acquisition Transaction, provided such transaction is
not entered into in violation of the terms of the Merger Agreement;
(ii) Issuer or any Issuer Subsidiary, without having received
Grantee's prior written consent, shall have authorized, recommended,
proposed, or publicly
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<PAGE> 3
announced its intention to authorize, recommend or propose, an
Acquisition Transaction with any person other than Grantee or a
Grantee Subsidiary, or the Board of Directors of Issuer shall have
publicly withdrawn or modified, or publicly announced its intention to
withdraw or modify, in any manner adverse to Grantee, its
recommendation that the stockholders of Issuer approve the
transactions contemplated by the Merger Agreement in anticipation of
engaging in an Acquisition Transaction with any person other than
Grantee or Grantee Subsidiary, or the Board of Directors of Issuer
shall have publicly announced its intention not to recommend that the
stockholders of Issuer approve the transactions contemplated by the
Merger Agreement because of or in connection with an actual or
proposed Acquisition Transaction involving any person other than
Grantee or Grantee Subsidiary;
(iii) Any person other than Grantee or any Grantee Subsidiary (and
also excluding any person who shall have beneficial ownership or the
right to acquire beneficial ownership of 10% or more of the
outstanding shares of Common Stock as of immediately following the
time the Merger Agreement is entered into, unless and until any such
person shall have beneficial ownership or the right to acquire
beneficial ownership of a percentage of the outstanding shares of
Common Stock that is 110% or more of such person's level of beneficial
ownership as of such time) shall have acquired beneficial ownership or
the right to acquire beneficial ownership of 10% or more of the
outstanding shares of Common Stock (the term "beneficial ownership"
for purposes of this Agreement having the meaning assigned thereto in
Section 13(d) of the 1934 Act, and the rules and regulations
thereunder);
(iv) Any person other than Grantee or any Grantee Subsidiary shall
have made a bona fide proposal to Issuer or its stockholders by public
announcement or written communication that is or becomes the subject
of public disclosure to engage in an Acquisition Transaction; or
(v) After an overture is made by any person other than Grantee or
any Grantee Subsidiary to Issuer or its stockholders to engage in an
Acquisition Transaction, Issuer shall have breached any covenant or
obligation contained in the Merger Agreement and such breach (x) would
entitle Grantee to terminate the Merger Agreement and (y) shall not
have been cured prior to the Notice Date (as defined below).
(c) The term "EXTENSION EVENT" shall mean either of the following
events or transactions occurring after the date hereof:
(i) The acquisition by any person of beneficial ownership of 20%
or more of the then outstanding Common Stock; or
(ii) The occurrence of the Triggering Event described in paragraph
(i) of subsection (b) of this Section 2, except that the percentage
referred to in clause (y) thereof shall be 20%.
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<PAGE> 4
(d) Issuer shall notify Grantee promptly in writing of the occurrence
of any Triggering Event or Extension Event of which Issuer has notice, it being
understood and agreed that the giving of such notice by Issuer shall not be a
condition to the right of Holder to exercise the Option.
(e) In the event Holder is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the date of which being herein
referred to as the "NOTICE DATE") specifying (i) the total number of shares of
Common Stock it will purchase pursuant to such exercise and (ii) a place and
date not earlier than three business days nor later than 60 business days from
the Notice Date for the closing of such purchase (the "CLOSING DATE"); PROVIDED
that if prior notification to or approval of any governmental authority is
required in connection with such purchase, Holder and Issuer shall promptly file
the required notice, form or application for approval and shall expeditiously
process the same and the period of time that otherwise would run pursuant to
this sentence shall run instead from the date on which any required notification
periods have expired or been terminated or such approvals have been obtained and
any requisite waiting period or periods shall have passed. Any exercise of the
Option shall be deemed to occur on the Notice Date relating thereto.
(f) At the closing referred to in subsection (e) of this Section 2,
Holder shall pay to Issuer the aggregate purchase price for the shares of Common
Stock purchased pursuant to the exercise of the Option in immediately available
funds by wire transfer to a bank account designated by Issuer, PROVIDED that
failure or refusal of Issuer to designate such a bank account shall not preclude
Holder from exercising the Option.
(g) At such closing, simultaneously with the delivery of the purchase
price as provided in subsection (f) of this Section 2, Issuer shall deliver to
Holder a certificate or certificates representing the number of shares of Common
Stock purchased by Holder and, if the Option shall have been exercised in part
only, a new Option evidencing the rights of Holder thereof to purchase the
balance of the shares of Common Stock purchasable hereunder, and Holder shall
deliver to Issuer a copy of this Agreement. By receipt of any shares of Common
Stock issuable hereunder Holder will agree, and does hereby agree, not to offer
to sell or otherwise dispose of such shares in violation of the Securities Act
of 1933, as amended (the "1933 ACT"), other applicable law or the provisions of
this Agreement.
(h) Certificates for shares of Common Stock delivered at a closing
hereunder may be endorsed with a restrictive legend that shall read
substantially as follows:
"The transfer of the shares represented by this certificate is subject
to certain provisions of an agreement between the registered holder
hereof and Issuer and to resale restrictions arising under the
Securities Act of 1933, as amended. A copy of such agreement is on
file at the principal office of Issuer and will be provided to the
holder hereof without charge upon receipt by Issuer of a written
request therefor."
(i) The reference to the resale restrictions of the 1933 Act, in the
above legend shall be removed by delivery of substitute certificate(s) without
such reference if Holder shall
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<PAGE> 5
have delivered to Issuer a copy of a letter from the staff of the SEC, or an
opinion of counsel, in form and substance reasonably satisfactory to Issuer, to
the effect that such legend is not required for purposes of the 1933 Act; (ii)
the reference to the provisions to this Agreement in the above legend shall be
removed by delivery of substitute certificate(s) without such reference if the
shares have been sold or transferred in compliance with the provisions of this
Agreement and under circumstances that do not require the retention of such
reference; and (iii) the legend shall be removed in its entirety if the
conditions in the preceding clauses (i) and (ii) are both satisfied. In
addition, such certificates shall bear any other legend as may be required by
law.
(j) Upon the giving by Holder to Issuer of the written notice of
exercise of the Option provided for under subsection (e) of this Section 2 and
the tender of the applicable purchase price under subsection (f) of this Section
2, Holder shall be deemed to be the holder of record of the shares of Common
Stock issuable upon such exercise, notwithstanding that the stock transfer books
of Issuer shall then be closed or that certificates representing such shares of
Common Stock shall not then be actually delivered to Holder. Issuer shall pay
all expenses, and any and all United States federal, state and local taxes and
other charges that may be payable in connection with the preparation, issue and
delivery of stock certificates under this Section 2 in the name of Holder or its
assignee, transferee or designee.
3. Issuer agrees: (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase Common Stock; (ii)
that it will not, by charter amendment or through reorganization, consolidation,
merger, dissolution or sale of assets, or by any other voluntary act, avoid or
seek to avoid the observance or performance of any of the covenants,
stipulations or conditions to be observed or performed hereunder by Issuer;
(iii) that it shall promptly take all action as may from time to time be
required in order to permit Holder to exercise the Option and Issuer duly and
effectively to issue shares of Common Stock pursuant hereto; and (iv) that it
shall promptly take all action provided herein to protect the rights of Holder
against dilution and otherwise hereunder.
4. This Agreement (and the Option granted hereby) are exchangeable, without
expense, at the option of Holder, upon presentation and surrender of this
Agreement at the principal office of Issuer, for other Agreements providing for
Options of different denominations entitling the holder thereof to purchase, on
the same terms and subject to the same conditions as are set forth herein, in
the aggregate the same number of shares of Common Stock purchasable hereunder.
The terms "Agreement" and "Option" as used herein include any Agreements and
related Options for which this Agreement (and the Option granted hereby) may be
exchanged. Upon receipt by Issuer of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Agreement, and (in the case
of loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Agreement, if mutilated, Issuer will
execute and deliver a new Agreement of like tenor and date. Any such new
Agreement executed and delivered shall constitute an additional contractual
obligation on the part of Issuer, whether or not this Agreement so lost, stolen,
destroyed or mutilated shall at any time be enforceable by anyone.
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<PAGE> 6
5. In addition to the adjustment in the number of shares of Common Stock
that are purchasable upon exercise of the Option pursuant to Section 1 of this
Agreement, the number of shares of Common Stock purchasable upon the exercise of
the Option and the Option Price shall be subject to adjustment from time to time
as provided in this Section 5. In the event of any change in, or distributions
in respect of, the Common Stock by reason of stock dividends, split-ups,
mergers, recapitalizations, combinations, subdivisions, conversions, exchanges
of shares, distributions on or in respect of the Common Stock that would be
prohibited under the terms of the Merger Agreement, or the like, the type and
number of securities purchasable upon exercise hereof and the Option Price shall
be appropriately adjusted in such manner as shall fully preserve the economic
benefits provided hereunder and proper provision shall be made in any agreement
governing any such transaction to provide for, and the inclusion and validity of
such provision shall be a condition to, the validity and consummation of any
such transaction, such proper adjustment and the full satisfaction of the
Issuer's obligations hereunder.
6. Upon the occurrence of a Triggering Event that occurs prior to an
Exercise Termination Event, Issuer shall, at the request of Grantee delivered
within 90 days of such Triggering Event (whether on its own behalf or on behalf
of any subsequent holder of this Option (or part thereof) or any of the shares
of Common Stock issued pursuant hereto), promptly prepare, file and keep current
a shelf registration statement under the 1933 Act covering any shares issued and
issuable pursuant to this Option and shall use its reasonable best efforts to
cause such registration statement to become effective and remain current in
order to permit the sale or other disposition of any shares of Common Stock
issued upon total or partial exercise of this Option ("OPTION SHARES") in
accordance with any plan of distribution requested by Grantee. Issuer will use
its reasonable best efforts to cause such registration statement promptly to
become effective and then to remain effective for a period of 180 days from the
day such registration statement first becomes effective. Grantee shall have the
right to demand two such registrations. The foregoing notwithstanding, if, at
the time of any request by Grantee for registration of Option Shares as provided
above, Issuer is in registration with respect to an underwritten public offering
of shares of Common Stock, and if in the good faith judgment of the managing
underwriter or managing underwriters, or, if none, the sole underwriter or
underwriters, of such offering the inclusion of Option Shares would interfere
with the successful marketing of the shares of Common Stock offered by Issuer,
the number of Option Shares otherwise to be covered in the registration
statement contemplated hereby may be reduced; PROVIDED, HOWEVER, that if such
reduction occurs, then the Issuer shall file a registration statement for the
balance as promptly as practical and no reduction shall thereafter occur. Each
such Holder shall provide all information reasonably requested by Issuer for
inclusion in any registration statement to be filed hereunder. If requested by
any such Holder in connection with such registration, Issuer shall become a
party to any underwriting agreement relating to the sale of such shares, but
only to the extent of obligating itself in respect of representations,
warranties, indemnities and other agreements customarily included in secondary
offering underwriting agreements for the Issuer. Upon receiving any request
under this Section 6 from any Holder, Issuer agrees to send a copy thereof to
any other person known to Issuer to be entitled to registration rights under
this Section 6, in each case by promptly mailing the same, postage prepaid, to
the address of record of the persons entitled to receive such copies.
Notwithstanding anything to the contrary contained herein, in no event shall
Issuer be obligated to effect more than two registrations pursuant to this
Section 6 by reason of the fact
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<PAGE> 7
that there shall be more than one Grantee as a result of any assignment or
division of this Agreement.
7. (a) (i) At the request of Holder or of the owner of Option Shares (the
"OWNER"), delivered following the occurrence of a Triggering Event and prior to
the occurrence of a Repurchase Event (as defined below), and prior to an
Exercise Termination Event, Issuer (or any successor thereto) shall, immediately
prior to the Repurchase Event, repurchase (x) in the case of a request from
Holder, the Option from Holder at a price (the "OPTION REPURCHASE PRICE") equal
to the amount by which (A) the Market/Offer Price (as defined below) exceeds (B)
the Option Price, multiplied by the number of shares then subject to the Option,
and (y) in the case of a request from the Owner, such number of Option Shares
from the Owner as the Owner shall designate at a price (the "OPTION SHARE
REPURCHASE PRICE") equal to the Market/Offer Price multiplied by the number of
Option Shares so designated, and (ii) at the request of Holder or the Owner,
delivered within 90 days after such Repurchase Event (or such later period as
provided in Section 10), Issuer shall repurchase (x) in the case of a request
from Holder, the Option from Holder at the Option Repurchase Price, and (y) in
the case of a request from the Owner, such number of Option Shares from the
Owner as the Owner shall designate at the Option Share Repurchase Price. The
term "MARKET/OFFER PRICE" shall mean the highest of (i) the price per share of
Common Stock at which a tender offer or exchange offer therefor has been made in
connection with such Repurchase Event or within the six-month period immediately
preceding the date Holder gives notice of the required repurchase of this Option
or the Owner gives notice of the required repurchase of Option Shares, as the
case may be, (ii) the price per share of Common Stock to be paid by any third
party pursuant to an agreement with Issuer in connection with such Repurchase
Event, (iii) the highest closing price for shares of Common Stock within the
six-month period immediately preceding the date Holder gives notice of the
required repurchase of this Option or the Owner gives notice of the required
repurchase of Option Shares, as the case may be, and (iv) in the event of a sale
of all or a substantial portion of Issuer's assets, the sum of the price paid in
such sale for such assets and the current market value of the remaining assets
of Issuer as determined by a nationally recognized investment banking firm
selected by Holder or the Owner, as the case may be, and reasonably acceptable
to the Issuer, divided by the number of shares of Common Stock of Issuer
outstanding at the time of such sale. In determining the Market/Offer Price, the
value of consideration other than cash shall be determined by a nationally
recognized investment banking firm selected by Holder or Owner, as the case may
be, and reasonably acceptable to the Issuer.
(b) Holder and the Owner, as the case may be, may exercise its right to
require Issuer to repurchase the Option and any Option Shares pursuant to this
Section 7 by surrendering for such purpose to Issuer, at its principal office, a
copy of this Agreement or certificates for Option Shares, as applicable,
accompanied by a written notice or notices stating that Holder or the Owner, as
the case may be, elects to require Issuer to repurchase this Option and/or the
Option Shares in accordance with the provisions of this Section 7. Prior to the
later to occur of (x) five business days after the surrender of the Option
and/or certificates representing Option Shares and the receipt of such notice or
notices relating thereto and (y) the time that is immediately prior to the
occurrence of a Repurchase Event, Issuer shall deliver or cause to be delivered
to Holder the Option Repurchase Price and/or to the Owner the Option Share
Repurchase Price therefor or the
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<PAGE> 8
portion thereof, if any, that Issuer is not then prohibited under applicable law
and regulations from so delivering.
(c) To the extent that Issuer is prohibited under applicable law or
regulation from repurchasing the Option and/or the Option Shares in full, Issuer
shall immediately so notify Holder and/or the Owner and thereafter deliver or
cause to be delivered, from time to time, to Holder and/or the Owner, as
appropriate, the portion of the Option Repurchase Price and the Option Share
Repurchase Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; PROVIDED, HOWEVER, that if Issuer at any time after delivery of a
notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited
under applicable law or regulation from delivering, to Holder and/or the Owner,
as appropriate, the Option Repurchase Price and the Option Share Repurchase
Price, respectively, in full (and Issuer hereby undertakes to use its best
efforts to obtain all required regulatory and legal approvals and to file any
required notices, in each case as promptly as practicable in order to accomplish
such repurchase), Holder or Owner may revoke its notice of repurchase of the
Option or the Option Shares either in whole or to the extent of the prohibition,
whereupon, in the latter case, Issuer shall promptly (i) deliver to Holder
and/or the Owner, as appropriate, that portion of the Option Repurchase Price or
the Option Share Repurchase Price that Issuer is not prohibited from delivering;
and (ii) deliver, as appropriate, either (A) to Holder, a new Agreement
evidencing the right of Holder to purchase that number of shares of Common Stock
obtained by multiplying the number of shares of Common Stock for which the
surrendered Agreement was exercisable at the time of delivery of the notice of
repurchase by a fraction, the numerator of which is the Option Repurchase Price
less the portion thereof theretofore delivered to Holder and the denominator of
which is the Option Repurchase Price, or (B) to the Owner, a certificate for the
Option Shares it is then so prohibited from repurchasing.
(d) For purposes of this Section 7, a "REPURCHASE EVENT" shall be
deemed to have occurred upon either (i) the consummation of any merger,
consolidation or similar transaction involving Issuer or any purchase, lease or
other acquisition of all or a substantial portion of the assets of Issuer, other
than any such transaction which would not constitute an Acquisition Transaction
pursuant to the proviso to Section 2(b)(i), or (ii) the acquisition by any
person of beneficial ownership of 50% or more of the then outstanding shares of
Common Stock, in either case before an Exercise Termination Event. Prior to the
occurrence of any Repurchase Event, the Issuer shall notify in writing the
Holder and each Owner of such Repurchase Event.
8. (a) In the event that prior to an Exercise Termination Event, Issuer
shall enter into an agreement (i) to consolidate with or merge into any person,
other than Grantee or one of its Subsidiaries, and shall not be the continuing
or surviving corporation of such consolidation or merger, (ii) to permit any
person, other than Grantee or one of its Subsidiaries, to merge into Issuer and
Issuer shall be the continuing or surviving corporation, but, in connection with
such merger, the then outstanding shares of Common Stock shall be changed into
or exchanged for stock or other securities of any other person or cash or any
other property or the then outstanding shares of Common Stock shall after such
merger represent less than 50% of the outstanding voting shares and voting share
equivalents of the merged company, or (iii) to sell or otherwise transfer all or
substantially all of its assets to any person, other than Grantee or one of its
Subsidiaries,
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<PAGE> 9
then, and in each such case, the agreement governing such transaction shall make
proper provision so that the Option shall, upon the consummation of any such
transaction and upon the terms and conditions set forth herein, be converted
into, or exchanged for, an option (the "SUBSTITUTE OPTION"), at the election of
Holder, of either (x) the Acquiring Corporation (as hereinafter defined) or (y)
any person that controls the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(i) "ACQUIRING CORPORATION" shall mean (i) the continuing or
surviving corporation of a consolidation or merger with Issuer (if other than
Issuer), (ii) Issuer in a merger in which Issuer is the continuing or surviving
person, and (iii) the transferee of all or substantially all of Issuer's assets.
(ii) "SUBSTITUTE COMMON STOCK" shall mean the common stock issued
by the issuer of the Substitute Option upon exercise of the Substitute Option.
(iii) "ASSIGNED VALUE" shall mean the Market/Offer Price, as
defined in Section 7.
(iv) "AVERAGE PRICE" shall mean the average closing price of a
share of the Substitute Common Stock for the one year immediately preceding the
consolidation, merger or sale in question, but in no event higher than the
closing price of the shares of Substitute Common Stock on the day preceding such
consolidation, merger or sale; PROVIDED that if Issuer is the issuer of the
Substitute Option, the Average Price shall be computed with respect to a share
of common stock issued by the person merging into Issuer or by any company which
controls or is controlled by such person, as Holder may elect.
(c) The Substitute Option shall have the same terms as the Option;
PROVIDED, that if the terms of the Substitute Option cannot, for legal reasons,
be the same as the Option, such terms shall be as similar as possible to those
of the Option and in no event less advantageous to Holder of the Option. The
issuer of the Substitute Option shall also enter into an agreement with the then
Holder or Holders of the Substitute Option in substantially the same form as
this Agreement, which shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of
shares of Substitute Common Stock as is equal to the Assigned Value multiplied
by the number of shares of Common Stock for which the Option is then
exercisable, divided by the Average Price. The exercise price of the Substitute
Option per share of Substitute Common Stock shall be equal to the Option Price
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock for which the Option is then exercisable and the denominator of
which shall be the number of shares of Substitute Common Stock for which the
Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than 19.9% of the shares of Substitute
Common Stock outstanding prior to exercise of the Substitute Option. In the
event that the Substitute Option would be exercisable for more than 19.9% of the
shares of Substitute Common Stock outstanding prior to
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<PAGE> 10
exercise but for this clause (e), the issuer of the Substitute Option (the
"SUBSTITUTE OPTION ISSUER") shall make a cash payment to Holder equal to the
excess of (i) the value of the Substitute Option without giving effect to the
limitation in this clause (e) over (ii) the value of the Substitute Option after
giving effect to the limitation in this clause (e). This difference in value
shall be determined by a nationally recognized investment banking firm selected
by Holder or the Owner, as the case may be, and reasonably acceptable to the
Acquiring Corporation.
(f) Issuer shall not enter into any transaction described in subsection
(a) of this Section 8 unless the Acquiring Corporation and any person that
controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
9. (a) At the request of the holder of the Substitute Option (the
"SUBSTITUTE OPTION HOLDER"), the Substitute Option Issuer shall repurchase the
Substitute Option from the Substitute Option Holder at a price (the "SUBSTITUTE
OPTION REPURCHASE PRICE") equal to (x) the amount by which (i) the Highest
Closing Price (as hereinafter defined) exceeds (ii) the exercise price of the
Substitute Option, multiplied by the number of shares of Substitute Common Stock
for which the Substitute Option may then be exercised plus (y) Grantee's
reasonable out-of-pocket expenses (to the extent not previously reimbursed), and
at the request of the owner (the "SUBSTITUTE SHARE OWNER") of shares of
Substitute Common Stock (the "SUBSTITUTE SHARES"), the Substitute Option Issuer
shall repurchase the Substitute Shares at a price (the "SUBSTITUTE SHARE
REPURCHASE PRICE") equal to (x) the Highest Closing Price multiplied by the
number of Substitute Shares so designated plus (y) Grantee's reasonable
out-of-pocket expenses (to the extent not previously reimbursed). The term
"HIGHEST CLOSING PRICE" shall mean the highest closing price for shares of
Substitute Common Stock within the six-month period immediately preceding the
date the Substitute Option Holder gives notice of the required repurchase of the
Substitute Option or the Substitute Share Owner gives notice of the required
repurchase of the Substitute Shares, as applicable.
(b) The Substitute Option Holder and the Substitute Share Owner, as the
case may be, may exercise its respective right to require the Substitute Option
Issuer to repurchase the Substitute Option and the Substitute Shares pursuant to
this Section 9 by surrendering for such purpose to the Substitute Option Issuer,
at its principal office, the agreement for such Substitute Option (or, in the
absence of such an agreement, a copy of this Agreement) and certificates for
Substitute Shares accompanied by a written notice or notices stating that the
Substitute Option Holder or the Substitute Share Owner, as the case may be,
elects to require the Substitute Option Issuer to repurchase the Substitute
Option and/or the Substitute Shares in accordance with the provisions of this
Section 9. As promptly as practicable, and in any event within five business
days after the surrender of the Substitute Option and/or certificates
representing Substitute Shares and the receipt of such notice or notices
relating thereto, the Substitute Option Issuer shall deliver or cause to be
delivered to the Substitute Option Holder the Substitute Option Repurchase Price
and/or to the Substitute Share Owner the Substitute Share Repurchase Price
therefor or, in either case, the portion thereof which the Substitute Option
Issuer is not then prohibited under applicable law and regulation from so
delivering.
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<PAGE> 11
(c) To the extent that the Substitute Option Issuer is prohibited under
applicable law or regulation from repurchasing the Substitute Option and/or the
Substitute Shares in part or in full, the Substitute Option Issuer following a
request for repurchase pursuant to this Section 9 shall immediately so notify
the Substitute Option Holder and/or the Substitute Share Owner and thereafter
deliver or cause to be delivered, from time to time, to the Substitute Option
Holder and/or the Substitute Share Owner, as appropriate, the portion of the
Substitute Share Repurchase Price, respectively, which it is no longer
prohibited from delivering, within five business days after the date on which
the Substitute Option Issuer is no longer so prohibited; PROVIDED, HOWEVER, that
if the Substitute Option Issuer is at any time after delivery of a notice of
repurchase pursuant to subsection (b) of this Section 9 prohibited under
applicable law or regulation from delivering to the Substitute Option Holder
and/or the Substitute Share Owner, as appropriate, the Substitute Option
Repurchase Price and the Substitute Share Repurchase Price, respectively, in
full (and the Substitute Option Issuer shall use its best efforts to obtain any
such required regulatory and legal approvals, in each case as promptly as
practicable, in order to accomplish such repurchase), the Substitute Option
Holder or Substitute Share Owner may revoke its notice of repurchase of the
Substitute Option or the Substitute Shares either in whole or to the extent of
the prohibition, whereupon, in the latter case, the Substitute Option Issuer
shall promptly (i) deliver to the Substitute Option Holder or Substitute Share
Owner, as appropriate, that portion of the Substitute Option Repurchase Price or
the Substitute Share Repurchase Price that the Substitute Option Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the
Substitute Option Holder, a new Substitute Option evidencing the right of the
Substitute Option Holder to purchase that number of shares of the Substitute
Common Stock obtained by multiplying the number of shares of the Substitute
Common Stock for which the surrendered Substitute Option was exercisable at the
time of delivery of the notice of repurchase by a fraction, the numerator of
which is the Substitute Option Repurchase Price less the portion thereof
theretofore delivered to the Substitute Option Holder and the denominator of
which is the Substitute Option Repurchase Price, or (B) to the Substitute Share
Owner, a certificate for the Substitute Common Shares it is then so prohibited
from repurchasing.
10. The 90-day period for exercise of certain rights under Sections 2, 6, 7
and 14 shall be extended: (i) to the extent necessary to obtain all legal and
regulatory approvals for the exercise of such rights, for the expiration of all
statutory waiting periods; and (ii) to the extent necessary to avoid liability
under Section 16(b) of the 1934 Act by reason of such exercise.
11. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Issuer and no other corporate proceedings on the part of
Issuer are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly executed
and delivered by Issuer.
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<PAGE> 12
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Common Stock equal to the maximum number of shares of Common Stock at any time
and from time to time issuable hereunder, and all such shares, upon issuance
pursuant hereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
(c) Issuer has taken all action so that the entering into of this
Agreement, the acquisition of shares of Common Stock hereunder and the other
transactions contemplated hereby do not and will not result in the grant of any
rights to any person under the Bay Rights Agreement (as defined in the Merger
Agreement) or enable or require the Bay Rights (as defined in the Merger
Agreement) to be exercised, distributed or triggered.
12. Grantee hereby represents and warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to enter
into this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Grantee. This Agreement has been duly executed and delivered by Grantee.
(b) The Option is not being, and any shares of Common Stock or other
securities acquired by Grantee upon exercise of the Option will not be, acquired
with a view to the public distribution thereof and will not be transferred or
otherwise disposed of except in a transaction registered or exempt from
registration under the Securities Act.
13. (a) Notwithstanding anything to the contrary herein, in no event
shall Grantee's Total Profit (as hereinafter defined) exceed $75 million.
(b) Notwithstanding anything to the contrary herein, the Option may
not be exercised for a number of shares as would, as of the date of exercise,
result in a Notional Total Profit (as hereinafter defined) of more than $75
million; PROVIDED, that nothing in this sentence shall restrict any exercise of
the Option permitted hereby on any subsequent date.
(c) As used herein, the term "TOTAL PROFIT" shall mean the aggregate
amount (before taxes) of the following: (i) the amount received by Holder
pursuant to Issuer's repurchase of the Option (or any portion thereof) pursuant
to Section 7, (ii) (x) the amount received by Owner pursuant to Issuer's
repurchase of Option Shares pursuant to Section 7, less (y) Owner's purchase
price for such Option Shares, (iii) (x) the net amounts received by Owner
pursuant to the sale or other disposition of Option Shares (or any other
securities into which such Option Shares shall be converted or exchanged) to any
unaffiliated party in connection with any Acquisition Transaction or at a time
when any Acquisition Transaction is pending or proposed or the subject of any
public announcement, less (y) Owner's purchase price of such Option Shares, (iv)
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<PAGE> 13
any amounts received by Holder on the transfer of the Option (or any portion
thereof) to any unaffiliated party, and (v) any equivalent amount with respect
to the Substitute Option.
(d) As used herein, the term "NOTIONAL TOTAL PROFIT" with respect to
any number of shares as to which Holder may propose to exercise the Option shall
be the Total Profit determined as of the date of such proposed exercise assuming
that the Option were exercised on such date for such number of shares and
assuming that such shares, together with all other Option Shares held by Holder
and its affiliates as of such date, were sold for cash at the closing market
price for the Issuer Common Stock as of the close of business on the preceding
trading day (less customary brokerage commissions).
14. Neither of the parties hereto may assign any of its rights or
obligations under this Agreement or the Option created hereunder to any other
person, without the express written consent of the other party, except that in
the event a Triggering Event shall have occurred prior to an Exercise
Termination Event, Grantee, subject to the express provisions hereof, may assign
in whole or in part its rights and obligations under this Agreement or the
Option created hereunder within 90 days following such Triggering Event (or such
later period as provided in Section 10).
15. Each of Grantee and Issuer will use its best efforts to make all filings
with, and to obtain consents of, all third parties and governmental authorities
necessary to the consummation of the transactions contemplated by this
Agreement, including without limitation making application to list the shares of
Common Stock issuable hereunder on the New York Stock Exchange upon official
notice of issuance.
16. Grantee hereby agrees and acknowledges that for a period of two (2)
years from the exercise of the Option, it and its affiliates (as defined in Rule
12b-2 under the 1934 Act) will not (and Grantee and they will not assist,
provide or arrange financing to or for others or encourage others to), directly
or indirectly, acting alone or in concert with others, unless specifically
requested in writing in advance by the Board of Directors of the Issuer:
(a) acquire or agree, offer, seek or propose to acquire (or
request permission to do so), ownership (including, but not limited to,
beneficial ownership as defined in Rule 13d-3 under the 1934 Act) of
any of the assets or businesses of the Issuer or any securities issued
by the Issuer (excluding the exercise of the Option itself), or any
rights or options to acquire such ownership (including from a third
party),
(b) seek or propose to influence or control the management or
the policies of the Issuer or to obtain representation on the Issuer's
Board of Directors, or solicit, or participate in the solicitation of,
any proxies or consents with respect to any securities of the Issuer,
(c) enter into any discussions, negotiations, arrangements or
understandings with any third party with respect to any of the
foregoing, or
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<PAGE> 14
(d) seek or request permission to do any of the foregoing or
make or seek permission to make any public announcement with respect to
any of the foregoing.
If at any time after a Triggering Event Grantee is approached by
any third party concerning Grantee's or any affiliates participation in a
transaction involving the assets or businesses of the Issuer or securities
issued by the Issuer, Grantee will promptly inform the Issuer of the nature of
such contact and the parties thereto.
17. The parties hereto acknowledge that damages would be an inadequate
remedy for a breach of this Agreement by either party hereto, that irreparable
damage would occur in the event any provision of this Agreement was not
performed in accordance with the terms hereof or was otherwise breached, and
that the parties will be entitled to specific relief hereunder, including,
without limitation, an injunction or injunctions to prevent and enjoin breaches
of the provisions of this Agreement and to enforce specifically the terms and
provisions hereof, in addition to any other remedy at law or in equity to which
they may be entitled at law or in equity. Any requirements for the securing or
posting of any bond with respect to any such remedy are hereby waived.
18. If any term, provision, covenant or restriction contained in this
Agreement is held by a court or other governmental authority of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions and covenants and restrictions contained in this Agreement shall
remain in full force and effect, and shall in no way be affected, impaired or
invalidated. If for any reason such court or governmental authority determines
that Holder is not permitted to acquire, or Issuer is not permitted to
repurchase pursuant to Section 7, the full number of shares of Common Stock
provided in Section 1(a) (as adjusted pursuant to Section 1(b) or 5), it is the
express intention of Issuer to allow Holder to acquire or to require Issuer to
repurchase such lesser number of shares as may be permissible, without any
amendment or modification hereof.
19. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
cable, telegram, telecopy or telex, or by registered or certified mail (postage
prepaid, return receipt requested) at the respective addresses of the parties
set forth in the Merger Agreement.
20. This Agreement shall be governed by and construed in accordance with the
laws of the State of Maryland, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws thereof.
21. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, but all of which shall constitute one
and the same agreement.
22. Except as otherwise expressly provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
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<PAGE> 15
23. Except as otherwise expressly provided herein or in the Merger
Agreement, this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereof, written or oral. The terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assigns.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors and
permitted assigns, any rights, remedies, obligations or liabilities under or by
reason of this Agreement, except as expressly provided herein.
24. Capitalized terms used in this Agreement and not defined herein shall
have the meanings assigned thereto in the Merger Agreement.
25. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto. Any waiver of any rights under
this Agreement shall only be valid if set forth in an instrument in writing
signed by the party to be charged therewith.
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<PAGE> 16
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
BAY APARTMENT COMMUNITIES, INC.
By: /s/ Gilbert M. Meyer
------------------------------
Name: Gilbert M. Meyer
Title: President
AVALON PROPERTIES, INC.
By: /s/ Richard L. Michaux
------------------------------
Name: Richard L. Michaux
Title: Chief Executive Officer
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<PAGE> 1
EXHIBIT 99.4
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO
CERTAIN PROVISIONS CONTAINED HEREIN AND TO
RESALE RESTRICTIONS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated as of March 9, 1998, by and between
Avalon Properties, Inc., a Maryland corporation ("ISSUER"), and Bay Apartment
Communities, Inc., a Maryland corporation ("GRANTEE").
W I T N E S S E T H:
WHEREAS, Grantee and Issuer have entered into an Agreement and
Plan of Merger dated as of the date hereof (as amended from time to time, the
"MERGER AGREEMENT"), which agreement has been executed by the parties hereto
immediately prior to the execution of this Stock Option Agreement (this
"AGREEMENT"); and
WHEREAS, as a condition to Grantee's entering into the Merger
Agreement and in consideration therefor, Issuer has agreed to grant Grantee the
Option (as hereinafter defined);
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Merger Agreement, and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable
option (the "OPTION") to purchase, subject to the terms hereof, up to 8,584,000
fully paid and nonassessable shares of Issuer's Common Stock, par value $.01 per
share ("COMMON STOCK"), at a price of $28.8125 per share (the "OPTION PRICE");
PROVIDED, HOWEVER, that in no event shall the number of shares of Common Stock
for which this Option is exercisable exceed 19.9% of the Issuer's issued and
outstanding shares of Common Stock without giving effect to any shares subject
to or issued pursuant to the Option. The number of shares of Common Stock that
may be received upon the exercise of the Option and the Option Price are subject
to adjustment as herein set forth.
(b) In the event that any additional shares of Common Stock are either
(i) issued or otherwise become outstanding after the date of this Agreement
(other than pursuant to this Agreement), or (ii) redeemed, repurchased, retired
or otherwise cease to be outstanding after the date of this Agreement, the
number of shares of Common Stock subject to the Option shall be increased or
decreased, as appropriate, so that, after such issuance, such number equals
19.9% of the number of shares of Common Stock then issued and outstanding
without giving effect to any shares subject or issued pursuant to the Option.
Nothing contained in this Section 1(b) or elsewhere in this Agreement shall be
deemed to authorize Issuer or Grantee to breach any provision of the Merger
Agreement.
<PAGE> 2
2. (a) Holder (as hereinafter defined) may exercise the Option, in whole
or part, and from time to time, if, but only if, a Triggering Event (as
hereinafter defined) shall have occurred prior to the occurrence of an Exercise
Termination Event (as hereinafter defined), PROVIDED that Holder shall have sent
to Issuer written notice of such exercise (as provided in subsection (e) of this
Section 2) within 90 days following such Triggering Event (or if, following the
occurrence of a Triggering Event, and prior to an Exercise Termination Event,
there shall have occurred an Extension Event, within 90 days following such
Extension Event). Each of the following shall be an "EXERCISE TERMINATION
EVENT": (i) the Effective Time (as defined in the Merger Agreement) of the
Merger; (ii) termination of the Merger Agreement in accordance with the
provisions thereof if such termination occurs prior to the occurrence of a
Triggering Event except a termination by Grantee pursuant to Section 8.1(b) of
the Merger Agreement (unless the breach by Issuer giving rise to such right of
termination is non-volitional); or (iii) the passage of 18 months after
termination of the Merger Agreement if such termination follows the occurrence
of a Triggering Event or is a termination by Grantee pursuant to Section 8.1(b)
of the Merger Agreement (unless the breach by Issuer giving rise to such right
of termination is non-volitional). The term "HOLDER" shall mean the holder or
holders of the Option.
(b) The term "TRIGGERING EVENT" shall mean any of the following events
or transactions occurring after the date hereof:
(i) Issuer or any of its Subsidiaries (each, an "ISSUER
SUBSIDIARY"), without having received Grantee's prior written consent, shall
have entered into an agreement to engage in an Acquisition Transaction (as
hereinafter defined) with any person (the term "person" for purposes of this
Agreement having the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3)
of the Securities Exchange Act of 1934, as amended (the "1934 ACT"), and the
rules and regulations thereunder) other than Grantee or any of its Subsidiaries
(each a "GRANTEE SUBSIDIARY"), or the Board of Directors of Issuer shall have
recommended that the stockholders of Issuer approve or accept any Acquisition
Transaction. For purposes of this Agreement, "ACQUISITION TRANSACTION" shall
mean (w) a merger or consolidation, or any similar transaction, involving Issuer
or any Significant Subsidiary (as defined in Rule 1-02 of Regulation S-X
promulgated by the Securities and Exchange Commission (the "SEC")) of Issuer,
(x) a purchase, lease or other acquisition or assumption of all or a substantial
portion of the assets of Issuer or any Significant Subsidiary of Issuer, (y) a
purchase or other acquisition (including by way of merger, consolidation, share
exchange or otherwise) of securities representing 10% or more of the voting
power of Issuer, or (z) any substantially similar transaction; PROVIDED,
HOWEVER, that in no event shall (A) the transactions contemplated by the Merger
Agreement or the entering into of the Merger Agreement constitute an Acquisition
Transaction or (B) any merger, consolidation, purchase or similar transaction
involving only the Issuer and one or more of its Subsidiaries or involving only
any two or more of such Subsidiaries be deemed to be an Acquisition Transaction,
provided such transaction is not entered into in violation of the terms of the
Merger Agreement;
(ii) Issuer or any Issuer Subsidiary, without having received
Grantee's prior written consent, shall have authorized, recommended, proposed,
or publicly
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<PAGE> 3
announced its intention to authorize, recommend or propose, an Acquisition
Transaction with any person other than Grantee or a Grantee Subsidiary, or the
Board of Directors of Issuer shall have publicly withdrawn or modified, or
publicly announced its intention to withdraw or modify, in any manner adverse to
Grantee, its recommendation that the stockholders of Issuer approve the
transactions contemplated by the Merger Agreement in anticipation of engaging in
an Acquisition Transaction with any person other than Grantee or Grantee
Subsidiary, or the Board of Directors of Issuer shall have publicly announced
its intention not to recommend that the stockholders of Issuer approve the
transactions contemplated by the Merger Agreement because of or in connection
with an actual or proposed Acquisition Transaction involving any person other
than Grantee or Grantee Subsidiary;
(iii) Any person other than Grantee or any Grantee Subsidiary (and
also excluding any person who shall have beneficial ownership or the right to
acquire beneficial ownership of 10% or more of the outstanding shares of Common
Stock as of immediately following the time the Merger Agreement is entered into,
unless and until any such person shall have beneficial ownership or the right to
acquire beneficial ownership of a percentage of the outstanding shares of Common
Stock that is 110% or more of such person's level of beneficial ownership as of
such time) shall have acquired beneficial ownership or the right to acquire
beneficial ownership of 10% or more of the outstanding shares of Common Stock
(the term "beneficial ownership" for purposes of this Agreement having the
meaning assigned thereto in Section 13(d) of the 1934 Act, and the rules and
regulations thereunder);
(iv) Any person other than Grantee or any Grantee Subsidiary shall
have made a bona fide proposal to Issuer or its stockholders by public
announcement or written communication that is or becomes the subject of public
disclosure to engage in an Acquisition Transaction; or
(v) After an overture is made by any person other than Grantee or
any Grantee Subsidiary to Issuer or its stockholders to engage in an Acquisition
Transaction, Issuer shall have breached any covenant or obligation contained in
the Merger Agreement and such breach (x) would entitle Grantee to terminate the
Merger Agreement and (y) shall not have been cured prior to the Notice Date (as
defined below).
(c) The term "EXTENSION EVENT" shall mean either of the following
events or transactions occurring after the date hereof:
(i) The acquisition by any person of beneficial ownership of 20%
or more of the then outstanding Common Stock; or
(ii) The occurrence of the Triggering Event described in paragraph
(i) of subsection (b) of this Section 2, except that the percentage referred to
in clause (y) thereof shall be 20%.
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<PAGE> 4
(d) Issuer shall notify Grantee promptly in writing of the occurrence
of any Triggering Event or Extension Event of which Issuer has notice, it being
understood and agreed that the giving of such notice by Issuer shall not be a
condition to the right of Holder to exercise the Option.
(e) In the event Holder is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the date of which being herein
referred to as the "NOTICE DATE") specifying (i) the total number of shares of
Common Stock it will purchase pursuant to such exercise and (ii) a place and
date not earlier than three business days nor later than 60 business days from
the Notice Date for the closing of such purchase (the "CLOSING DATE"); PROVIDED
that if prior notification to or approval of any governmental authority is
required in connection with such purchase, Holder and Issuer shall promptly file
the required notice, form or application for approval and shall expeditiously
process the same and the period of time that otherwise would run pursuant to
this sentence shall run instead from the date on which any required notification
periods have expired or been terminated or such approvals have been obtained and
any requisite waiting period or periods shall have passed. Any exercise of the
Option shall be deemed to occur on the Notice Date relating thereto.
(f) At the closing referred to in subsection (e) of this Section 2,
Holder shall pay to Issuer the aggregate purchase price for the shares of Common
Stock purchased pursuant to the exercise of the Option in immediately available
funds by wire transfer to a bank account designated by Issuer, PROVIDED that
failure or refusal of Issuer to designate such a bank account shall not preclude
Holder from exercising the Option.
(g) At such closing, simultaneously with the delivery of the purchase
price as provided in subsection (f) of this Section 2, Issuer shall deliver to
Holder a certificate or certificates representing the number of shares of Common
Stock purchased by Holder and, if the Option shall have been exercised in part
only, a new Option evidencing the rights of Holder thereof to purchase the
balance of the shares of Common Stock purchasable hereunder, and Holder shall
deliver to Issuer a copy of this Agreement. By receipt of any shares of Common
Stock issuable hereunder Holder will agree, and does hereby agree, not to offer
to sell or otherwise dispose of such shares in violation of the Securities Act
of 1933, as amended (the "1933 ACT"), other applicable law or the provisions of
this Agreement.
(h) Certificates for shares of Common Stock delivered at a closing
hereunder may be endorsed with a restrictive legend that shall read
substantially as follows:
"The transfer of the shares represented by this certificate is subject
to certain provisions of an agreement between the registered holder
hereof and Issuer and to resale restrictions arising under the
Securities Act of 1933, as amended. A copy of such agreement is on file
at the principal office of Issuer and will be provided to the holder
hereof without charge upon receipt by Issuer of a written request
therefor."
(i) The reference to the resale restrictions of the 1933 Act, in the
above legend shall be removed by delivery of substitute certificate(s) without
such reference if Holder shall
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<PAGE> 5
have delivered to Issuer a copy of a letter from the staff of the SEC, or an
opinion of counsel, in form and substance reasonably satisfactory to Issuer, to
the effect that such legend is not required for purposes of the 1933 Act; (ii)
the reference to the provisions to this Agreement in the above legend shall be
removed by delivery of substitute certificate(s) without such reference if the
shares have been sold or transferred in compliance with the provisions of this
Agreement and under circumstances that do not require the retention of such
reference; and (iii) the legend shall be removed in its entirety if the
conditions in the preceding clauses (i) and (ii) are both satisfied. In
addition, such certificates shall bear any other legend as may be required by
law.
(j) Upon the giving by Holder to Issuer of the written notice of
exercise of the Option provided for under subsection (e) of this Section 2 and
the tender of the applicable purchase price under subsection (f) of this Section
2, Holder shall be deemed to be the holder of record of the shares of Common
Stock issuable upon such exercise, notwithstanding that the stock transfer books
of Issuer shall then be closed or that certificates representing such shares of
Common Stock shall not then be actually delivered to Holder. Issuer shall pay
all expenses, and any and all United States federal, state and local taxes and
other charges that may be payable in connection with the preparation, issue and
delivery of stock certificates under this Section 2 in the name of Holder or its
assignee, transferee or designee.
3. Issuer agrees: (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase Common Stock; (ii)
that it will not, by charter amendment or through reorganization, consolidation,
merger, dissolution or sale of assets, or by any other voluntary act, avoid or
seek to avoid the observance or performance of any of the covenants,
stipulations or conditions to be observed or performed hereunder by Issuer;
(iii) that it shall promptly take all action as may from time to time be
required in order to permit Holder to exercise the Option and Issuer duly and
effectively to issue shares of Common Stock pursuant hereto; and (iv) that it
shall promptly take all action provided herein to protect the rights of Holder
against dilution and otherwise hereunder.
4. This Agreement (and the Option granted hereby) are exchangeable, without
expense, at the option of Holder, upon presentation and surrender of this
Agreement at the principal office of Issuer, for other Agreements providing for
Options of different denominations entitling the holder thereof to purchase, on
the same terms and subject to the same conditions as are set forth herein, in
the aggregate the same number of shares of Common Stock purchasable hereunder.
The terms "Agreement" and "Option" as used herein include any Agreements and
related Options for which this Agreement (and the Option granted hereby) may be
exchanged. Upon receipt by Issuer of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Agreement, and (in the case
of loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Agreement, if mutilated, Issuer will
execute and deliver a new Agreement of like tenor and date. Any such new
Agreement executed and delivered shall constitute an additional contractual
obligation on the part of Issuer, whether or not this Agreement so lost, stolen,
destroyed or mutilated shall at any time be enforceable by anyone.
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<PAGE> 6
5. In addition to the adjustment in the number of shares of Common Stock
that are purchasable upon exercise of the Option pursuant to Section 1 of this
Agreement, the number of shares of Common Stock purchasable upon the exercise of
the Option and the Option Price shall be subject to adjustment from time to time
as provided in this Section 5. In the event of any change in, or distributions
in respect of, the Common Stock by reason of stock dividends, split-ups,
mergers, recapitalizations, combinations, subdivisions, conversions, exchanges
of shares, distributions on or in respect of the Common Stock that would be
prohibited under the terms of the Merger Agreement, or the like, the type and
number of securities purchasable upon exercise hereof and the Option Price shall
be appropriately adjusted in such manner as shall fully preserve the economic
benefits provided hereunder and proper provision shall be made in any agreement
governing any such transaction to provide for, and the inclusion and validity of
such provision shall be a condition to, the validity and consummation of any
such transaction, such proper adjustment and the full satisfaction of the
Issuer's obligations hereunder.
6. Upon the occurrence of a Triggering Event that occurs prior to an
Exercise Termination Event, Issuer shall, at the request of Grantee delivered
within 90 days of such Triggering Event (whether on its own behalf or on behalf
of any subsequent holder of this Option (or part thereof) or any of the shares
of Common Stock issued pursuant hereto), promptly prepare, file and keep current
a shelf registration statement under the 1933 Act covering any shares issued and
issuable pursuant to this Option and shall use its reasonable best efforts to
cause such registration statement to become effective and remain current in
order to permit the sale or other disposition of any shares of Common Stock
issued upon total or partial exercise of this Option ("OPTION SHARES") in
accordance with any plan of distribution requested by Grantee. Issuer will use
its reasonable best efforts to cause such registration statement promptly to
become effective and then to remain effective for a period of 180 days from the
day such registration statement first becomes effective. Grantee shall have the
right to demand two such registrations. The foregoing notwithstanding, if, at
the time of any request by Grantee for registration of Option Shares as provided
above, Issuer is in registration with respect to an underwritten public offering
of shares of Common Stock, and if in the good faith judgment of the managing
underwriter or managing underwriters, or, if none, the sole underwriter or
underwriters, of such offering the inclusion of Option Shares would interfere
with the successful marketing of the shares of Common Stock offered by Issuer,
the number of Option Shares otherwise to be covered in the registration
statement contemplated hereby may be reduced; PROVIDED, HOWEVER, that if such
reduction occurs, then the Issuer shall file a registration statement for the
balance as promptly as practical and no reduction shall thereafter occur. Each
such Holder shall provide all information reasonably requested by Issuer for
inclusion in any registration statement to be filed hereunder. If requested by
any such Holder in connection with such registration, Issuer shall become a
party to any underwriting agreement relating to the sale of such shares, but
only to the extent of obligating itself in respect of representations,
warranties, indemnities and other agreements customarily included in secondary
offering underwriting agreements for the Issuer. Upon receiving any request
under this Section 6 from any Holder, Issuer agrees to send a copy thereof to
any other person known to Issuer to be entitled to registration rights under
this Section 6, in each case by promptly mailing the same, postage prepaid, to
the address of record of the persons entitled to receive such copies.
Notwithstanding anything to the contrary contained herein, in no event shall
Issuer be obligated to effect more than two registrations pursuant to this
Section 6 by reason of the fact
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<PAGE> 7
that there shall be more than one Grantee as a result of any assignment or
division of this Agreement.
7. (a) (i) At the request of Holder or of the owner of Option Shares (the
"OWNER"), delivered following the occurrence of a Triggering Event and prior to
the occurrence of a Repurchase Event (as defined below), and prior to an
Exercise Termination Event, Issuer (or any successor thereto) shall, immediately
prior to the Repurchase Event, repurchase (x) in the case of a request from
Holder, the Option from Holder at a price (the "OPTION REPURCHASE PRICE") equal
to the amount by which (A) the Market/Offer Price (as defined below) exceeds (B)
the Option Price, multiplied by the number of shares then subject to the Option,
and (y) in the case of a request from the Owner, such number of Option Shares
from the Owner as the Owner shall designate at a price (the "OPTION SHARE
REPURCHASE PRICE") equal to the Market/Offer Price multiplied by the number of
Option Shares so designated, and (ii) at the request of Holder or the Owner,
delivered within 90 days after such Repurchase Event(or such later period as
provided in Section 10), Issuer shall repurchase (x) in the case of a request
from Holder, the Option from Holder at the Option Repurchase Price, and (y) in
the case of a request from the Owner, such number of Option Shares from the
Owner as the Owner shall designate at the Option Share Repurchase Price. The
term "MARKET/OFFER PRICE" shall mean the highest of (i) the price per share of
Common Stock at which a tender offer or exchange offer therefor has been made in
connection with such Repurchase Event or within the six-month period immediately
preceding the date Holder gives notice of the required repurchase of this Option
or the Owner gives notice of the required repurchase of Option Shares, as the
case may be, (ii) the price per share of Common Stock to be paid by any third
party pursuant to an agreement with Issuer in connection with such Repurchase
Event, (iii) the highest closing price for shares of Common Stock within the
six-month period immediately preceding the date Holder gives notice of the
required repurchase of this Option or the Owner gives notice of the required
repurchase of Option Shares, as the case may be, and (iv) in the event of a sale
of all or a substantial portion of Issuer's assets, the sum of the price paid in
such sale for such assets and the current market value of the remaining assets
of Issuer as determined by a nationally recognized investment banking firm
selected by Holder or the Owner, as the case may be, and reasonably acceptable
to the Issuer, divided by the number of shares of Common Stock of Issuer
outstanding at the time of such sale. In determining the Market/Offer Price, the
value of consideration other than cash shall be determined by a nationally
recognized investment banking firm selected by Holder or Owner, as the case may
be, and reasonably acceptable to the Issuer.
(b) Holder and the Owner, as the case may be, may exercise its right
to require Issuer to repurchase the Option and any Option Shares pursuant to
this Section 7 by surrendering for such purpose to Issuer, at its principal
office, a copy of this Agreement or certificates for Option Shares, as
applicable, accompanied by a written notice or notices stating that Holder or
the Owner, as the case may be, elects to require Issuer to repurchase this
Option and/or the Option Shares in accordance with the provisions of this
Section 7. Prior to the later to occur of (x) five business days after the
surrender of the Option and/or certificates representing Option Shares and the
receipt of such notice or notices relating thereto and (y) the time that is
immediately prior to the occurrence of a Repurchase Event, Issuer shall deliver
or cause to be delivered to Holder the Option Repurchase Price and/or to the
Owner the Option Share Repurchase Price therefor or the
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<PAGE> 8
portion thereof, if any, that Issuer is not then prohibited under applicable law
and regulations from so delivering.
(c) To the extent that Issuer is prohibited under applicable law or
regulation from repurchasing the Option and/or the Option Shares in full, Issuer
shall immediately so notify Holder and/or the Owner and thereafter deliver or
cause to be delivered, from time to time, to Holder and/or the Owner, as
appropriate, the portion of the Option Repurchase Price and the Option Share
Repurchase Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; PROVIDED, HOWEVER, that if Issuer at any time after delivery of a
notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited
under applicable law or regulation from delivering, to Holder and/or the Owner,
as appropriate, the Option Repurchase Price and the Option Share Repurchase
Price, respectively, in full (and Issuer hereby undertakes to use its best
efforts to obtain all required regulatory and legal approvals and to file any
required notices, in each case as promptly as practicable in order to accomplish
such repurchase), Holder or Owner may revoke its notice of repurchase of the
Option or the Option Shares either in whole or to the extent of the prohibition,
whereupon, in the latter case, Issuer shall promptly (i) deliver to Holder
and/or the Owner, as appropriate, that portion of the Option Repurchase Price or
the Option Share Repurchase Price that Issuer is not prohibited from delivering;
and (ii) deliver, as appropriate, either (A) to Holder, a new Agreement
evidencing the right of Holder to purchase that number of shares of Common Stock
obtained by multiplying the number of shares of Common Stock for which the
surrendered Agreement was exercisable at the time of delivery of the notice of
repurchase by a fraction, the numerator of which is the Option Repurchase Price
less the portion thereof theretofore delivered to Holder and the denominator of
which is the Option Repurchase Price, or (B) to the Owner, a certificate for the
Option Shares it is then so prohibited from repurchasing.
(d) For purposes of this Section 7, a "REPURCHASE EVENT" shall be
deemed to have occurred upon either (i) the consummation of any merger,
consolidation or similar transaction involving Issuer or any purchase, lease or
other acquisition of all or a substantial portion of the assets of Issuer, other
than any such transaction which would not constitute an Acquisition Transaction
pursuant to the proviso to Section 2(b)(i), or (ii) the acquisition by any
person of beneficial ownership of 50% or more of the then outstanding shares of
Common Stock, in either case before an Exercise Termination Event. Prior to the
occurrence of any Repurchase Event, the Issuer shall notify in writing the
Holder and each Owner of such Repurchase Event.
8. (a) In the event that prior to an Exercise Termination Event, Issuer
shall enter into an agreement (i) to consolidate with or merge into any person,
other than Grantee or one of its Subsidiaries, and shall not be the continuing
or surviving corporation of such consolidation or merger, (ii) to permit any
person, other than Grantee or one of its Subsidiaries, to merge into Issuer and
Issuer shall be the continuing or surviving corporation, but, in connection with
such merger, the then outstanding shares of Common Stock shall be changed into
or exchanged for stock or other securities of any other person or cash or any
other property or the then outstanding shares of Common Stock shall after such
merger represent less than 50% of the outstanding voting shares and voting share
equivalents of the merged company, or (iii) to sell or otherwise transfer all or
substantially all of its assets to any person, other than Grantee or one of its
Subsidiaries,
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<PAGE> 9
then, and in each such case, the agreement governing such transaction shall make
proper provision so that the Option shall, upon the consummation of any such
transaction and upon the terms and conditions set forth herein, be converted
into, or exchanged for, an option (the "SUBSTITUTE OPTION"), at the election of
Holder, of either (x) the Acquiring Corporation (as hereinafter defined) or (y)
any person that controls the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(i) "ACQUIRING CORPORATION" shall mean (i) the continuing or
surviving corporation of a consolidation or merger with Issuer (if
other than Issuer), (ii) Issuer in a merger in which Issuer is the
continuing or surviving person, and (iii) the transferee of all or
substantially all of Issuer's assets.
(ii) "SUBSTITUTE COMMON STOCK" shall mean the common stock issued
by the issuer of the Substitute Option upon exercise of the Substitute
Option.
(iii) "ASSIGNED VALUE" shall mean the Market/Offer Price, as
defined in Section 7.
(iv) "AVERAGE PRICE" shall mean the average closing price of a
share of the Substitute Common Stock for the one year immediately preceding
the consolidation, merger or sale in question, but in no event higher than
the closing price of the shares of Substitute Common Stock on the day
preceding such consolidation, merger or sale; PROVIDED that if Issuer is
the issuer of the Substitute Option, the Average Price shall be computed
with respect to a share of common stock issued by the person merging into
Issuer or by any company which controls or is controlled by such person, as
Holder may elect.
(c) The Substitute Option shall have the same terms as the Option;
PROVIDED, that if the terms of the Substitute Option cannot, for legal reasons,
be the same as the Option, such terms shall be as similar as possible to those
of the Option and in no event less advantageous to Holder of the Option. The
issuer of the Substitute Option shall also enter into an agreement with the then
Holder or Holders of the Substitute Option in substantially the same form as
this Agreement, which shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of
shares of Substitute Common Stock as is equal to the Assigned Value multiplied
by the number of shares of Common Stock for which the Option is then
exercisable, divided by the Average Price. The exercise price of the Substitute
Option per share of Substitute Common Stock shall be equal to the Option Price
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock for which the Option is then exercisable and the denominator of
which shall be the number of shares of Substitute Common Stock for which the
Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than 19.9% of the shares of Substitute
Common Stock outstanding prior to exercise of the Substitute Option. In the
event that the Substitute Option would be exercisable for more than 19.9% of the
shares of Substitute Common Stock outstanding prior to
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<PAGE> 10
exercise but for this clause (e), the issuer of the Substitute Option (the
"SUBSTITUTE OPTION ISSUER") shall make a cash payment to Holder equal to the
excess of (i) the value of the Substitute Option without giving effect to the
limitation in this clause (e) over (ii) the value of the Substitute Option after
giving effect to the limitation in this clause (e). This difference in value
shall be determined by a nationally recognized investment banking firm selected
by Holder or the Owner, as the case may be, and reasonably acceptable to the
Acquiring Corporation.
(f) Issuer shall not enter into any transaction described in subsection
(a) of this Section 8 unless the Acquiring Corporation and any person that
controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
9. (a) At the request of the holder of the Substitute Option (the
"SUBSTITUTE OPTION HOLDER"), the Substitute Option Issuer shall repurchase the
Substitute Option from the Substitute Option Holder at a price (the "SUBSTITUTE
OPTION REPURCHASE PRICE") equal to (x) the amount by which (i) the Highest
Closing Price (as hereinafter defined) exceeds (ii) the exercise price of the
Substitute Option, multiplied by the number of shares of Substitute Common Stock
for which the Substitute Option may then be exercised plus (y) Grantee's
reasonable out-of-pocket expenses (to the extent not previously reimbursed), and
at the request of the owner (the "SUBSTITUTE SHARE OWNER") of shares of
Substitute Common Stock (the "SUBSTITUTE SHARES"), the Substitute Option Issuer
shall repurchase the Substitute Shares at a price (the "SUBSTITUTE SHARE
REPURCHASE PRICE") equal to (x) the Highest Closing Price multiplied by the
number of Substitute Shares so designated plus (y) Grantee's reasonable
out-of-pocket expenses (to the extent not previously reimbursed). The term
"HIGHEST CLOSING PRICE" shall mean the highest closing price for shares of
Substitute Common Stock within the six-month period immediately preceding the
date the Substitute Option Holder gives notice of the required repurchase of the
Substitute Option or the Substitute Share Owner gives notice of the required
repurchase of the Substitute Shares, as applicable.
(b) The Substitute Option Holder and the Substitute Share Owner, as
the case may be, may exercise its respective right to require the Substitute
Option Issuer to repurchase the Substitute Option and the Substitute Shares
pursuant to this Section 9 by surrendering for such purpose to the Substitute
Option Issuer, at its principal office, the agreement for such Substitute Option
(or, in the absence of such an agreement, a copy of this Agreement) and
certificates for Substitute Shares accompanied by a written notice or notices
stating that the Substitute Option Holder or the Substitute Share Owner, as the
case may be, elects to require the Substitute Option Issuer to repurchase the
Substitute Option and/or the Substitute Shares in accordance with the provisions
of this Section 9. As promptly as practicable, and in any event within five
business days after the surrender of the Substitute Option and/or certificates
representing Substitute Shares and the receipt of such notice or notices
relating thereto, the Substitute Option Issuer shall deliver or cause to be
delivered to the Substitute Option Holder the Substitute Option Repurchase Price
and/or to the Substitute Share Owner the Substitute Share Repurchase Price
therefor or, in either case, the portion thereof which the Substitute Option
Issuer is not then prohibited under applicable law and regulation from so
delivering.
-10-
<PAGE> 11
(c) To the extent that the Substitute Option Issuer is prohibited under
applicable law or regulation from repurchasing the Substitute Option and/or the
Substitute Shares in part or in full, the Substitute Option Issuer following a
request for repurchase pursuant to this Section 9 shall immediately so notify
the Substitute Option Holder and/or the Substitute Share Owner and thereafter
deliver or cause to be delivered, from time to time, to the Substitute Option
Holder and/or the Substitute Share Owner, as appropriate, the portion of the
Substitute Share Repurchase Price, respectively, which it is no longer
prohibited from delivering, within five business days after the date on which
the Substitute Option Issuer is no longer so prohibited; PROVIDED, HOWEVER, that
if the Substitute Option Issuer is at any time after delivery of a notice of
repurchase pursuant to subsection (b) of this Section 9 prohibited under
applicable law or regulation from delivering to the Substitute Option Holder
and/or the Substitute Share Owner, as appropriate, the Substitute Option
Repurchase Price and the Substitute Share Repurchase Price, respectively, in
full (and the Substitute Option Issuer shall use its best efforts to obtain any
such required regulatory and legal approvals, in each case as promptly as
practicable, in order to accomplish such repurchase), the Substitute Option
Holder or Substitute Share Owner may revoke its notice of repurchase of the
Substitute Option or the Substitute Shares either in whole or to the extent of
the prohibition, whereupon, in the latter case, the Substitute Option Issuer
shall promptly (i) deliver to the Substitute Option Holder or Substitute Share
Owner, as appropriate, that portion of the Substitute Option Repurchase Price or
the Substitute Share Repurchase Price that the Substitute Option Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the
Substitute Option Holder, a new Substitute Option evidencing the right of the
Substitute Option Holder to purchase that number of shares of the Substitute
Common Stock obtained by multiplying the number of shares of the Substitute
Common Stock for which the surrendered Substitute Option was exercisable at the
time of delivery of the notice of repurchase by a fraction, the numerator of
which is the Substitute Option Repurchase Price less the portion thereof
theretofore delivered to the Substitute Option Holder and the denominator of
which is the Substitute Option Repurchase Price, or (B) to the Substitute Share
Owner, a certificate for the Substitute Common Shares it is then so prohibited
from repurchasing.
10. The 90-day period for exercise of certain rights under Sections 2, 6, 7
and 14 shall be extended: (i) to the extent necessary to obtain all legal and
regulatory approvals for the exercise of such rights, for the expiration of all
statutory waiting periods; and (ii) to the extent necessary to avoid liability
under Section 16(b) of the 1934 Act by reason of such exercise.
11. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Issuer and no other corporate proceedings on the part of
Issuer are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly executed
and delivered by Issuer.
-11-
<PAGE> 12
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Common Stock equal to the maximum number of shares of Common Stock at any time
and from time to time issuable hereunder, and all such shares, upon issuance
pursuant hereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
(c) Issuer has taken all action so that the entering into of this
Agreement, the acquisition of shares of Common Stock hereunder and the other
transactions contemplated hereby do not and will not result in the grant of any
rights to any person under the Avalon Rights Agreement (as defined in the Merger
Agreement) or enable or require the Avalon Rights (as defined in the Merger
Agreement) to be exercised, distributed or triggered.
12. Grantee hereby represents and warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to enter
into this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Grantee. This Agreement has been duly executed and delivered by Grantee.
(b) The Option is not being, and any shares of Common Stock or other
securities acquired by Grantee upon exercise of the Option will not be, acquired
with a view to the public distribution thereof and will not be transferred or
otherwise disposed of except in a transaction registered or exempt from
registration under the Securities Act.
13. (a) Notwithstanding anything to the contrary herein, in no event shall
Grantee's Total Profit (as hereinafter defined) exceed $75 million.
(b) Notwithstanding anything to the contrary herein, the Option may not
be exercised for a number of shares as would, as of the date of exercise, result
in a Notional Total Profit (as hereinafter defined) of more than $75 million;
PROVIDED, that nothing in this sentence shall restrict any exercise of the
Option permitted hereby on any subsequent date.
(c) As used herein, the term "TOTAL PROFIT" shall mean the aggregate
amount (before taxes) of the following: (i) the amount received by Holder
pursuant to Issuer's repurchase of the Option (or any portion thereof) pursuant
to Section 7, (ii) (x) the amount received by Owner pursuant to Issuer's
repurchase of Option Shares pursuant to Section 7, less (y) Owner's purchase
price for such Option Shares, (iii) (x) the net amounts received by Owner
pursuant to the sale or other disposition of Option Shares (or any other
securities into which such Option Shares shall be converted or exchanged) to any
unaffiliated party in connection with any Acquisition Transaction or at a time
when any Acquisition Transaction is pending or proposed or the subject of any
public announcement, less (y) Owner's purchase price of such Option Shares, (iv)
-12-
<PAGE> 13
any amounts received by Holder on the transfer of the Option (or any portion
thereof) to any unaffiliated party, and (v) any equivalent amount with respect
to the Substitute Option.
(d) As used herein, the term "NOTIONAL TOTAL PROFIT" with respect to
any number of shares as to which Holder may propose to exercise the Option shall
be the Total Profit determined as of the date of such proposed exercise assuming
that the Option were exercised on such date for such number of shares and
assuming that such shares, together with all other Option Shares held by Holder
and its affiliates as of such date, were sold for cash at the closing market
price for the Issuer Common Stock as of the close of business on the preceding
trading day (less customary brokerage commissions).
14. Neither of the parties hereto may assign any of its rights or
obligations under this Agreement or the Option created hereunder to any other
person, without the express written consent of the other party, except that in
the event a Triggering Event shall have occurred prior to an Exercise
Termination Event, Grantee, subject to the express provisions hereof, may assign
in whole or in part its rights and obligations under this Agreement or the
Option created hereunder within 90 days following such Triggering Event (or such
later period as provided in Section 10).
15. Each of Grantee and Issuer will use its best efforts to make all filings
with, and to obtain consents of, all third parties and governmental authorities
necessary to the consummation of the transactions contemplated by this
Agreement, including without limitation making application to list the shares of
Common Stock issuable hereunder on the New York Stock Exchange upon official
notice of issuance.
16. Grantee hereby agrees and acknowledges that for a period of two (2)
years from the exercise of the Option, it and its affiliates (as defined in Rule
12b-2 under the 1934 Act) will not (and Grantee and they will not assist,
provide or arrange financing to or for others or encourage others to), directly
or indirectly, acting alone or in concert with others, unless specifically
requested in writing in advance by the Board of Directors of the Issuer:
(a) acquire or agree, offer, seek or propose to acquire (or
request permission to do so), ownership (including, but not limited to,
beneficial ownership as defined in Rule 13d-3 under the 1934 Act) of
any of the assets or businesses of the Issuer or any securities issued
by the Issuer (excluding the exercise of the Option itself), or any
rights or options to acquire such ownership (including from a third
party),
(b) seek or propose to influence or control the management or
the policies of the Issuer or to obtain representation on the Issuer's
Board of Directors, or solicit, or participate in the solicitation of,
any proxies or consents with respect to any securities of the Issuer,
(c) enter into any discussions, negotiations, arrangements or
understandings with any third party with respect to any of the
foregoing, or
-13-
<PAGE> 14
(d) seek or request permission to do any of the foregoing or
make or seek permission to make any public announcement with respect to
any of the foregoing.
If at any time after a Triggering Event Grantee is approached by any
third party concerning Grantee's or any affiliates participation in a
transaction involving the assets or businesses of the Issuer or securities
issued by the Issuer, Grantee will promptly inform the Issuer of the nature of
such contact and the parties thereto.
17. The parties hereto acknowledge that damages would be an inadequate
remedy for a breach of this Agreement by either party hereto, that irreparable
damage would occur in the event any provision of this Agreement was not
performed in accordance with the terms hereof or was otherwise breached, and
that the parties will be entitled to specific relief hereunder, including,
without limitation, an injunction or injunctions to prevent and enjoin breaches
of the provisions of this Agreement and to enforce specifically the terms and
provisions hereof, in addition to any other remedy at law or in equity to which
they may be entitled at law or in equity. Any requirements for the securing or
posting of any bond with respect to any such remedy are hereby waived.
18. If any term, provision, covenant or restriction contained in this
Agreement is held by a court or other governmental authority of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions and covenants and restrictions contained in this Agreement shall
remain in full force and effect, and shall in no way be affected, impaired or
invalidated. If for any reason such court or governmental authority determines
that Holder is not permitted to acquire, or Issuer is not permitted to
repurchase pursuant to Section 7, the full number of shares of Common Stock
provided in Section 1(a) (as adjusted pursuant to Section 1(b) or 5), it is the
express intention of Issuer to allow Holder to acquire or to require Issuer to
repurchase such lesser number of shares as may be permissible, without any
amendment or modification hereof.
19. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
cable, telegram, telecopy or telex, or by registered or certified mail (postage
prepaid, return receipt requested) at the respective addresses of the parties
set forth in the Merger Agreement.
20. This Agreement shall be governed by and construed in accordance with the
laws of the State of Maryland, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws thereof.
21. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, but all of which shall constitute one
and the same agreement.
22. Except as otherwise expressly provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
-14-
<PAGE> 15
23. Except as otherwise expressly provided herein or in the Merger
Agreement, this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereof, written or oral. The terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assigns.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors and
permitted assigns, any rights, remedies, obligations or liabilities under or by
reason of this Agreement, except as expressly provided herein.
24. Capitalized terms used in this Agreement and not defined herein shall
have the meanings assigned thereto in the Merger Agreement.
25. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto. Any waiver of any rights under
this Agreement shall only be valid if set forth in an instrument in writing
signed by the party to be charged therewith.
-15-
<PAGE> 16
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
AVALON PROPERTIES, INC.
By: /s/ Richard L. Michaux
-----------------------------------
Name: Richard L. Michaux
Title: Chief Executive Officer
BAY APARTMENT COMMUNITIES, INC.
By: /s/ Gilbert M. Meyer
-----------------------------------
Name: Gilbert M. Meyer
Title: President
-16-
<PAGE> 1
EXHIBIT 99.5
Avalon Bay Communities, Inc.
<PAGE> 2
- -------------------------------------------------------------------------------
Transaction Summary
These materials contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Act of 1934. The words "except," "anticipate," "estimate" and other similar
expressions which are predictions of or indicate future events and trends
and which do not relate solely to historical matters, including information
concerning the companies' future FFO estimates, identify forward-looking
statements. Reliance should not be placed on forward-looking statements
because they involve known and unknown risks, uncertainties and other
factors which are in some cases beyond the control of the companies and may
cause the actual results, performance or achievements of the companies to
differ materially from anticipated future results, performance or
achievements expressed or implied by such forward looking statements.
<PAGE> 3
Transaction Summary
- ------------------------------------------------------------------------------
Overview
* Preeminent Luxury Apartment Company
* National High "Barrier-to-Entry" Strategy
* Significant Presence in Top 10 Apartment Markets
* Expanded Construction and Reconstruction Capabilities
* $3.7 Billion Total Market Capitalization
* Superior Shareholder Value Creation
<PAGE> 4
Transaction Summary
- ------------------------------------------------------------------------------
* Company Name: Avalon Bay Communities, Inc.
* Exchange Ratio: .7683 BYA Shares Issued per AVN Share
* Accretion: $0.15 per Share Estimated in 1999
* Dividend: Increased from $1.68 to $2.04 per Share
* Accounting Treatment: Purchase Accounting
* Board Composition: 9 Independents, 3 Members of Senior Management
* Headquarters: Alexandria, VA; Super-regional Offices in
San Jose, CA and Wilton, CT
* Anticipated Closing: June 1998
<PAGE> 5
Transaction Summary
- -------------------------------------------------------------------------------
Office of the Executive
Executive Chairman
Gilbert M. Meyer
Chief Executive Officer
Richard L. Michaux
(Line to Meyer)
President & C.O.O.
Charles H. Berman
(Line to Michaux)
<PAGE> 6
Transaction Summary
- ------------------------------------------------------------------------------
Senior Management
Executive Chairman
Gilbert M. Meyer
(line to Meyer)
Chief Executive Officer
Richard L. Michaux
(line to Michaux)
President & C.O.O.
Charles H. Berman
(line to Michaux)
CFO Development/ Property Operations Investments
Thomas J. Sargeant Acquisition Robert H. Slater Jeffrey B. Van Horn
(line to Michaux) Bryce Blair (line to Berman) (line to Michaux)
(line to Berman)
Integration Construction Administration
Max L. Gardner Morton L. Newman Debra Lynn Shotwell
(line to Michaux) (line to Berman) (line to Michaux)
<PAGE> 7
Transaction Summary
- -------------------------------------------------------------------------------
Merger Integration
* Management and Board Committed to Integration Process
* Merger Iintegration Firms Retained
* "Best Practices" Focus
* Relocation of President & C.O.O.
* Scaleable Information Systems
* Waiving Acceleration of Options and Grants
<PAGE> 8
- ------------------------------------------------------------------------------
Strategic Rationale
<PAGE> 9
Strategic Rationale - Common Heritage
- -------------------------------------------------------------------------------
* Identical High "Barrier-to-Entry" Strategies
* Similar Backgrounds as Investments Developers/Builders
* Consistent High Quality Asset and Resident Profile
* "Superior Resident Service" Ethic
* Similar Capital Structures and Financing Strategies
<PAGE> 10
The Combined Company
Community Locations
- -------------------------------------------------------------------------------
[Map of the United States indicating development
community, community, pre-sale community, corporate headquarters,
regional office]
<PAGE> 11
Strategic Rationale - Market Strength
- -------------------------------------------------------------------------------
1998 Top Ten Apartment Markets
----------------------------------------------------------------------------
Metropolitan Area Bay Avalon Combined
----------------------------------------------------------------------------
1. San Francisco x x
2. Orange County x x
3. Boston x x
4. San Jose x x
5. New York/Nassau Suffolk x x
6. San Diego x x
7. Oakland/East Bay x x
8. Seattle x x x
9. Los Angeles x x
10. Minneapolis x x
----------------------------------------------------------------------------
------------------
Source: Jan/Feb Multi-Housing News, 1998.
<PAGE> 12
Strategic Rationale -
Improved Geographic Diversification
- -------------------------------------------------------------------------------
[Pie chart indicating geographic diversification]
<PAGE> 13
Strategic Rationale - Management
- -------------------------------------------------------------------------------
Outstanding Management
* "Local Sharpshooter" in All Markets
* Unparalleled Management Expertise
- Acquisition
- Development
- Construction
- Reconstruction
- Property Operations
* Significant Management Bench Strength
* Incentive Compensation to Encourage Employee Retention
<PAGE> 14
Strategic Rationale - Credit Profile
- -------------------------------------------------------------------------------
Improved Financial Flexibility
* Strong Financial Ratios
* Improved Stability of Cash Flows
* Broader Geographic Diversification
* Improved Liquidity
* Positive Response from Rating Agencies
<PAGE> 15
Strategic Rationale - Improved Liquidity
- -------------------------------------------------------------------------------
[Graph indicating Average Monthly Trading Volume of Bay ($46.71 million),
Avalon ($42.07 million) and Combined ($88.78 million)]
------------------------
Note: Average monthly trading volume for 1997
multiplied by the average daily price for the year.
<PAGE> 16
Strategic Rationale - Synergies
- ------------------------------------------------------------------------------
* Lower Cost of Capital
* Lower General and Administrative Expenses
- Corporate Governance
- Information and Accounting Systems
- Telecommunication
* Operating Efficiencies Due to Critical Mass
- Operating Expenses (Economies of Scale)
- Bulk Purchasing
- Insurance
- Alternative Revenue Sources
<PAGE> 17
- -------------------------------------------------------------------------------
Value Creation
<PAGE> 18
Value Creation - Infrastructure
------------------------------------------------------------------------------
* Coast-to-Coast Presence
* 11 Regional Offices and 1,600 Employees
* Operating History in 29 Supply-Constrained Markets
* Local Development and Acquisition Expertise
* Construction and Reconstruction Capabilities
* Proven Scaleable Systems
<PAGE> 19
Value Creation - Financial Strength
- --------------------------------------------------------------------------------
* Intelligent Balance Sheet
- Minimal Floating Rate Debt
- Low Leverage
- Staggered Maturities
* $60 Million FFO in Excess of Dividends in 1998
* $575 Million Existing Credit Lines
* Proven Access to Capital
<PAGE> 20
Value Creation - Internal
- -------------------------------------------------------------------------------
* 140 Communities; 40,506 Apartment Homes
* 8%+ "Same Store" FFO Growth
* $0.32 per Share Loss to Lease
* $0.05 per Share Loss to Reconstruction
* Greater Base for Non-Rental Revenue
<PAGE> 21
Value Creation - External
- -------------------------------------------------------------------------------
New Construction
($ in millions) Number of Number of Approximate Weighted Average
Communities Homes Cost Return
----------- -------- -------------- --------------
Completed 20 5,273 $554 12.0%(1)
In Construction 16 4,533 668 10.3%(2)
In Planning 19 5,200 694 N/A
----- --------- ---------- -------
Total 55 15,006 $1,916
=== ====== ======
-------------------------
(1) Current Yield.
(2) Budgeted Yield.
<PAGE> 22
Value Creation - External
- -------------------------------------------------------------------------------
Reconstruction
Total
($ in Total
millions) Number of Number of Purchase Reconstructed Weighted Average
Communities Homes Price Cost Return
---------- ------ -------- ----------- ------------
Completed 18 4,358 $310 $ 349 10.2%(1)
In Re-
construction 24 7,455 563 720 9.4%(2)
Total 42 11,813 $873 $ 1,069
==== ======= ==== =======
-------------------------
(1) Current Yield.
(2) Budgeted Yield.
<PAGE> 23
Value Creation - Strategy
- ------------------------------------------------------------------------------
* Focus on High Barrier-to-Entry Markets
* Reconstruction in Midwest and Eastern Regions
* Increase Construction and Reconstruction in
Pacific Northwest
* New Construction in the Midwest and Southern
California
* Urban, In-Fill Communities
* Establish Position as Buyer of Choice
<PAGE> 24
- -------------------------------------------------------------------------------
Financial Highlights
<PAGE> 25
Financial Highlights - Capital Structure
- -------------------------------------------------------------------------------
[Pie chart indicating capital structure]
Preferred Equity 9%
Common Equity 63% Debt 28%
$3.7 Billion Total Market Capitalization
<PAGE> 26
Financial Highlights - Debt Composition
- ------------------------------------------------------------------------------
[Pie chart indicating debt composition]
Fixed Rate Fixed Rate
Secured Debt Unsecured Debt
6% 45%
Fixed Rate
Tax-Exempt Debt Unsecured
36% Variable Rate Credit Facility
Tax-Exempt Debt 7%
6%
$1.0 Billion Total Debt
<PAGE> 27
Financial Highlights - Debt Maturities
- -------------------------------------------------------------------------------
[Graph indicating debt maturities for the years 1999
through 2037]
<PAGE> 28
Financial Highlights - Financial Ratios
- -------------------------------------------------------------------------------
Pro Forma 1997 (1)
-----------------------
Fixed Charge Coverage (2) 3.5x
Debt to Total Market Cap 28%
LT Floating Rate Debt to Total Market Cap 2%
Debt & Preferred to Total Market Cap 37%
FFO Payout Ratio 69%
----------------------------
(1) Pro forma as of December 31, 1997 as adjusted for offerings by either
company. Fixed charge coverage and FFO payout ratio are for the fourth
quarter of 1997.
(2) Without capitalized interest.
<PAGE> 29
- -------------------------------------------------------------------------------
Summary
<PAGE> 30
Summary
- -------------------------------------------------------------------------------
* Preeminent Luxury Apartment Home Company in the
U.S.
* Significant Presence in Top 10 Apartment Markets
* Shareholder Value Creation
- $0.07 per Share Accretion Estimated for
Remainder of 1998
- $0.15 per Share Accretion Estimated for 1999
- $0.36 Dividend Increase
- Lower Cost of Capital and Expanded Growth
Platform
<PAGE> 1
EXHIBIT 99.6
Avalon Bay Communities, Inc.
March 9, 1998
<PAGE> 2
Special Note: Statements in the Bay Apartment Communities, Inc. Web site
relating to Bay's ownership, management, development and acquisition of
multifamily apartment communities are forward-looking statements. There are a
number of important factors that could cause actual events to differ materially
from those indicated by such forward-looking statements. These factors include,
among others, local economic and market conditions which are beyond management's
control and may adversely affect occupancy rates and market rents; the
possibility that the Company may not be able to successfully integrate large
portfolio acquisitions in new markets with its current business operations; and
additional factors discussed periodically in the Company's reports filed with
the Securities and Exchange Commission.
<PAGE> 3
Table of Contents
- --------------------------------------------------------------------------------
I. Transaction Summary
II. The Combined Company
III. Financial Highlights
IV. Conclusion
<PAGE> 4
- -------------------------------------------------------------------------------
Transaction Summary
<PAGE> 5
Transaction Summary
Overview
- -------------------------------------------------------------------------------
- - Preeminent Luxury Apartment Company
- - National High "Barrier-to-Entry" Strategy
- - Significant Presence in Top 10 Apartment Markets
- - Expanded Construction and Reconstruction Capabilities
- - $3.7 Billion Total Market Capitalization
- - Superior Shareholder Value Creation
<PAGE> 6
Transaction Summary
- --------------------------------------------------------------------------------
- - Company Name: Avalon Bay Communities, Inc.
- - Exchange Ratio: .7683 BYA shares issued per AVN share
- - Accretion: $0.15 estimated in 1999
- - Dividend: Increased from $1.68 to $2.04
- - Accounting Treatment: Purchase Accounting
- - Board Composition: 9 Independents, 3 Members of Senior
Management
- - Headquarters: Alexandria, VA; Super-regional Offices
in San Jose, CA and Wilton, CT
- - Anticipated Closing: June 1998
<PAGE> 7
Transaction Summary
Common Heritage
- ------------------------------------------------------------------------------
- Identical High "Barrier-to-Entry" Strategies
- Similar Backgrounds as Investment Developers/ Builders
- Consistent High Quality Asset and Resident Profile
- "Superior Resident Service" Ethic
- Similar Capital Structures and Financing Strategies
<PAGE> 8
Transaction Summary
Merger Integration
- -------------------------------------------------------------------------------
- Management and Board Committed to Integration Process
- Merger Integration Firms Retained
- "Best Practices" Focus
- Relocation of President & C.O.O.
- Scaleable Information Systems
- Waiving Acceleration of Options and Grants
<PAGE> 9
Transaction Summary
Post-Closing
- ------------------------------------------------------------------------------
- $2.7 Billion of Combined Equity, including Preferred Stock
- $1.0 Billion of Combined Debt
- 140 Communities (1) with 40,506 Apartment Homes
- 16 States (including D.C.), 29 Distinct Markets
------------------
(1) Includes Communities under development and in lease-up.
<PAGE> 10
- -------------------------------------------------------------------------------
The Combined Company
<PAGE> 11
The Combined Company
Office of the Executive
- ------------------------------------------------------------------------------
Executive Chairman
Gilbert M. Meyer
- Real Estate Strategy
- Construction and Reconstruction
- West and National New Business
Chief Executive Officer
Richard L. Michaux
- Corporate and Financial Management
- Integration
- Internal and External Communication
- Mid-Atlantic New Business
(line to Meyer)
President & C.O.O.
Charles H. Berman
- Daily Operations
- Strategy Implementation
- Best Practices
- Northeast and National New Business
(line to Michaux)
<PAGE> 12
The Combined Company
Senior Management
- ------------------------------------------------------------------------------
Executive Chairman
Gilbert M. Meyer
Chief Executive Officer
Richard L. Michaux
(line to Meyer)
President & C.O.O.
Charles H. Berman
(line to Michaux)
CFO Development/ Property Operations Investments
Thomas J. Sargent Acquisitions Robert H. Slater Jeffrey B. Van Horn
(line to Michaux) Bryce Blair (line to Berman) (line to Michaux)
(line to Berman)
Integration Construction Administration
Max L. Gardner Morton L. Newman Debra Lynn Shotwell
(line to Michaux) (line to Berman) (line to Michaux)
<PAGE> 13
The Combined Company
Organizational Model
- ------------------------------------------------------------------------------
- Office of the Executive-Executive Chairman, CEO and President
- Each Serves on Board of Directors
- New Business
- Mentorship
- Localized Acquisition, Development and Construction
- Regionalized Property Operations
- Senior Vice President--Investments
- Capital Strategies and Allocation
- Strategic Market Research and New Business
- Investment Performance Evaluation
<PAGE> 14
The Combined Company
Strength of Management
- -------------------------------------------------------------------------------
- "Local Sharpshooter" in All Markets
- Unparalleled Management Expertise
- Acquisition
- Development
- Construction
- Reconstruction
- Property Operations
- Significant Management Bench Strength
- Incentive Compensation to Encourage Employee Retention
<PAGE> 15
The Combined Company
Office Locations
- ------------------------------------------------------------------------------
[Map of the United States indicating corporate headquarters and regional
office.]
<PAGE> 16
The Combined Company
Offices and Development Communities
- ------------------------------------------------------------------------------
[Map of the United States indicating development community, corporate
headquarters and regional office.]
<PAGE> 17
The Combined Company
Community Locations
- ------------------------------------------------------------------------------
[Map of the United States indicating development community, community,
pre-sale community, corporate headquarters and regional office.]
<PAGE> 18
The Combined Company
Portfolio Summary
- ------------------------------------------------------------------------------
Bay Avalon Combined
---- ------ ----------
Current Communities 58 66 124
Development Communities 5 11 16
Homes(1) 17,957 22,549 40,506
States 3 13(2) 16(2)
Markets 11 18 29
Average Age(3) 8 8 8
Economic Occupancy(4) 96.6% 96.2% 96.4%
- ----------------------------
(1) Includes homes under development.
(2) Includes District of Columbia.
(3) Average age based on year constructed or reconstructed and excludes
communities under reconstruction.
(4) Reflects average economic occupancy for stabilized communities for 1997.
<PAGE> 19
The Combined Company
Community Locations
- ------------------------------------------------------------------------------
Number of Communities Number of Homes
--------------------- -----------------
Current Development Development Current Development Development
Communities Communities Rights Communities Communities Rights
State
California 55 5 1 15,558 1,708 200
Connecticut 7 2 5 2,778 403 883
Illinois 3 - 1 887 - 200
Indiana 2 - - 376 - -
Maryland 12 1 - 3,430 96 -
Massachusetts 5 1 3 1,172 171 800
Michigan 3 - - 983 - -
Minnesota 3 - - 904 - -
New Jersey 5 2 3 2,008 620 1,182
New York 5 3 5 968 841 1,770
Ohio 1 - - 264 - -
Oregon 1 - - 279 - -
Rhode Island 1 - - 225 - -
Virginia 18 2 1 5,421 694 165
Washington 2 - - 412 - -
Washington, 1 - - 308 - -
D.C
---- ----- ----- ----- ----- -----
Total 124 16 19 35,973 4,533 5,200
--- -- -- ------ ----- ------
<PAGE> 20
The Combined Company
Geographic Diversification by State
- ------------------------------------------------------------------------------
[Pie chart of Bay representing [Pie chart of Avalon representing
geographic diversification geographic diversification by
by state] state]
Note: By number of Apartment Homes. Does not include communities under
development.
<PAGE> 21
The Combined Company
Geographic Diversification by State
- ------------------------------------------------------------------------------
[Pie chart of Bay/Avalon combined representing geographic diversification by
state.]
-----------------------------------
Note: By number of Apartment Homes. Does not include communities under
development.
<PAGE> 22
The Combined Company
Geographic Diversification by Market
- ------------------------------------------------------------------------------
[Pie chart representing Bay/Avalon combined geographic diversification by
market.]
- --------------------------
Note: By number of Apartment Homes. Does not include communities under
development.
<PAGE> 23
The Combined Company
Strength of Markets - Top Ten Apartment Markets
- -------------------------------------------------------------------------------
----------------------------------------------------------------------------
Metropolitan Area Bay Avalon Combined
----------------------------------------------------------------------------
1. San Francisco x x
2. Orange County x x
3. Boston x x
4. San Jose x x
5. New York/Nassau Suffolk x x
6. San Diego x x
7. Oakland/East Bay x x
8. Seattle x x x
9. Los Angeles x x
10. Minneapolis x x
----------------------------------------------------------------------------
------------------
Source: Jan/Feb Multi-Housing News, 1998.
<PAGE> 24
- ------------------------------------------------------------------------------
Financial Highlights
<PAGE> 25
Financial Highlights
Combined Capital Structure
- ------------------------------------------------------------------------------
[Pie chart representing combined capital structure.]
Preferred Equity
9%
Debt
28%
Common
Equity
63%
$3.7 Billion Total Market Capitalization
<PAGE> 26
Financial Highlights
Combined Debt Composition
- ------------------------------------------------------------------------------
[Pie chart representing combined debt composition.]
Fixed Rate Fixed Rate
Secured Debt Unsecured Debt
6% 45%
Fixed Rate
Tax-Exempt
Debt
36%
Unsecured
Variable Rate Credit Facility
Tax-Exempt Debt 7%
6%
$1.0 Billion Total Debt
<PAGE> 27
Financial Highlights
Debt Summary as of 12/31/97 (1)
- ------------------------------------------------------------------------------
-------------------------------------------------------------------------
($ in millions) Weighted Average Weighted Average Principal
Interest Rate Years to Maturity Balance
-------------------------------------------------------------------------
Conventional - Fixed Rate Mortgages 7.792% 5.7 $58.2
Unsecured Debt - Fixed Rate 6.794% 7.3 $460.0
Tax - Exempt - Fixed Rate Bonds 6.581% 21.4 $376.8
Tax - Exempt - Variable Rate Bonds 4.765% 25.3 $63.7
Unsecured Credit Facility Libor + 0.90% 2.3 $75.5
------------ ---------- --------
Total/Weighted Average 6.626% 13.1 $1,034.2
========== ====== ========
- -------------------
(1) Pro Forma for $150 million notes issued by Bay on January 20, 1998 and
$100 million notes issued by Avalon on January 22, 1998. Proceeds of both
offerings were used to reduce the respective lines of credit.
<PAGE> 28
- -------------------------------------------------------------------------------
Conclusion
<PAGE> 29
Conclusion
- -------------------------------------------------------------------------------
* Preeminent Luxury Apartment Home Company in the U.S.
* Significant Presence in Top 10 Apartment Markets
* Shareholder Value Creation
* $0.07 per Share Accretion Estimated for Remainder of 1998
* $0.15 per Share Accretion Estimated for 1999
* $0.36 Dividend Increase
* Low Cost of Capital and Expanded Growth Platform
<PAGE> 30
Avalon Bay Communities, Inc.
