<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
File No. 333-41511
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 26, 1998)
[AVALON BAY LOGO]
AVALON BAY COMMUNITIES, INC.
$100,000,000 6.50% SENIOR NOTES DUE 2003
$150,000,000 6.80% SENIOR NOTES DUE 2006
------------------------
Avalon Bay Communities, Inc. (the "Company") will issue the 6.50% Senior
Notes due 2003 (the "2003 Notes") and the 6.80% Senior Notes due 2006 (the "2006
Notes" and, together with the 2003 Notes, the "Notes") offered hereby (the
"Offering") in an aggregate principal amount of $250,000,000. Interest on the
Notes is payable semi-annually in arrears on January 15 and July 15 of each year
commencing January 15, 1999. See "Description of Notes -- Principal and
Interest." The 2003 Notes will mature on July 15, 2003 and the 2006 Notes will
mature on July 15, 2006. The Notes may be redeemed at any time at the option of
the Company, in whole or in part, at a redemption price equal to the sum of (i)
the principal amount of the Notes being redeemed plus accrued interest thereon
to the redemption date, and (ii) the Make-Whole Amount (as defined in
"Description of Notes -- Optional Redemption"), if any. See "Description of
Notes -- Optional Redemption." The Notes are unsecured obligations of the
Company and will rank equally with all unsecured and unsubordinated indebtedness
of the Company. The Notes are not subject to any mandatory sinking fund. See
"Description of Notes."
The 2003 Notes and the 2006 Notes each constitute a separate series of debt
securities which will be represented by a single fully registered global note in
book-entry form without coupons (each a "Global Note") registered in the name of
The Depository Trust Company ("DTC") or its nominee. Beneficial interests in the
Global Notes will be shown on, and transfers thereof will be effected only
through, records maintained by DTC and its participants. Owners of beneficial
interests in the Global Notes will be entitled to physical delivery of Notes in
certificated form equal in principal amount to their respective beneficial
interests only under the limited circumstances described under "Description of
Notes -- Book-Entry System." Settlement of the Notes will be made in immediately
available funds. The Notes will trade in DTC's Same-Day Funds Settlement System
until maturity or earlier redemption, as the case may be, or until the Notes are
issued in certificated form, and secondary market trading activity in the Notes
will therefore settle in immediately available funds. All payments of principal
and interest in respect of the Notes will be made by the Company in immediately
available funds. See "Description of Notes -- Same-Day Settlement and Payment."
SEE "RISK FACTORS" COMMENCING ON PAGE S-8 OF THIS PROSPECTUS SUPPLEMENT
FOR A DISCUSSION OF CERTAIN RISK FACTORS RELEVANT TO AN INVESTMENT IN THE NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================================
Price to Underwriting Discounts Proceeds to
Public(1) and Commissions(2) Company(1)(3)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per 2003 Note............................... 99.719% 0.550% 99.169%
- -----------------------------------------------------------------------------------------------------------------------
Per 2006 Note............................... 99.723% 0.625% 99.098%
- -----------------------------------------------------------------------------------------------------------------------
Total....................................... $249,303,500 $1,487,500 $247,816,000
=======================================================================================================================
</TABLE>
(1) Plus accrued interest, if any, from July 7, 1998.
(2) The Company has agreed to indemnify the Underwriters (as defined herein)
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $200,000.
------------------------
The Notes are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters and subject to their right
to withdraw, cancel or modify such offer and to reject orders in whole or in
part. It is expected that delivery of the Notes will be made in New York, New
York on or about July 7, 1998.
------------------------
PAINEWEBBER INCORPORATED
FIRST UNION CAPITAL MARKETS
J.P. MORGAN & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
------------------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JULY 1, 1998.
<PAGE> 2
FORWARD-LOOKING STATEMENTS
This Prospectus Supplement and the accompanying Prospectus, including the
information incorporated by reference into each of them, contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The words "believe,"
"expect," "anticipate," "intend," "estimate," "assume" and other similar
expressions which are predictions of or indicate future events and trends and
which do not relate solely to historical matters identify forward-looking
statements. In addition, information concerning acquisition, construction,
reconstruction, development, redevelopment, occupancy and completion of the
Company's communities and related cost and EBITDA estimates are forward-looking
statements. Reliance should not be placed on forward-looking statements because
they involve known and unknown risks, uncertainties and other factors, which are
in some cases beyond the control of the Company and may cause the actual
results, performance or achievements of the Company to differ materially from
anticipated future results, performance or achievements expressed or implied by
such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
the following: the Company may fail to secure or may abandon development or
redevelopment opportunities; construction or reconstruction costs of a community
may exceed original estimates; construction or reconstruction and lease-up may
not be completed on schedule, resulting in increased debt service expense and
construction or reconstruction costs and reduced rental revenues; occupancy
rates and market rents may be adversely affected by local economic and market
conditions which are beyond management's control; financing may not be
available, or may not be available on favorable terms; the Company's cash flow
may be insufficient to meet required payments of principal and interest; and
existing indebtedness may mature in an unfavorable credit environment,
preventing such indebtedness from being refinanced, or, if refinanced, causing
such refinancing to occur on terms that are not as favorable as the terms of
existing indebtedness. In addition, the factors described under "Risk Factors"
in this Prospectus Supplement may result in such differences. Prospective
purchasers of the Notes offered hereby should carefully review all of these
factors, which may not be an exhaustive list of such factors.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF NOTES IN THE OPEN MARKET TO STABILIZE
THE MARKET PRICE OF THE NOTES AND THE PURCHASE OF NOTES TO COVER SHORT
POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
S-2
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus Supplement and the
accompanying Prospectus or incorporated herein and therein by reference. Unless
the context otherwise requires, all references in this Prospectus Supplement to
the "Company" refer to Avalon Bay Communities, Inc. and its subsidiaries on a
consolidated basis.
THE COMPANY
Avalon Bay Communities, Inc. (the "Company" or the "Merged Company") is a
real estate investment trust (a "REIT") that is focused exclusively on the
ownership of institutional-quality apartment communities in high
barrier-to-entry markets of the United States. These markets include Northern
and Southern California and selected states in the Mid-Atlantic, Northeast,
Midwest and Pacific Northwest regions of the country. The Company is the
surviving entity from the merger (the "Merger") of Avalon Properties, Inc.
("Avalon") with and into Bay Apartment Communities, Inc. (sometimes hereinafter
referred to as "Bay" before the Merger) on June 4, 1998. Concurrently with the
Merger, the Company changed its name to Avalon Bay Communities, Inc. The Merger
brings together a senior management team ("Management") with over 150 years of
real estate experience. Collectively, we have demonstrated proficiency in the
acquisition, development, redevelopment, construction, reconstruction,
financing, leasing, marketing and management of institutional-quality apartment
communities. The Company's common stock, par value $.01 per share ("Common
Stock" or, after the Merger, "Avalon Bay Common Stock"), trades on the New York
Stock Exchange and the Pacific Exchange under the ticker symbol "AVB."
We believe that ownership of institutional-quality apartment communities in
markets where new supply of apartment homes is limited helps assure more
predictable cash flows. Combined with an emphasis on superior service to
residents, this should result in longer average lease periods (as measured by
annual turnover) and reduced operating costs. Further, we believe that
maintaining a conservative financial strategy allows greater flexibility in
responding to changing financial market conditions, and enhances the Company's
access to cost effective capital.
The Company currently owns 146 communities containing 42,074 apartment
homes, which consist of 105 stabilized operating communities (the "Current
Communities"), 17 communities that are under development (the "Development
Communities") and 24 communities for which redevelopment has either begun or is
scheduled to begin (the "Redevelopment Communities"). We also have rights to
develop an additional 20 communities (the "Development Rights") which are
controlled primarily through options on land. The Development Rights include
three land parcels owned by the Company or partnerships in which the Company has
a controlling interest. We expect to start construction of new apartment
communities on these three land parcels by the end of 1999. The Company obtains
ownership in apartment communities by developing vacant land into a new
community or by acquiring and either repositioning or redeveloping an existing
community. In selecting sites for development, redevelopment or acquisition, we
place emphasis on locations with close proximity to expanding employment centers
and convenience to recreation areas, entertainment, shopping and dining. As a
result, we consider the Current Communities, the Development Communities, the
Redevelopment Communities and the land underlying the Development Rights to be
well-located.
The average occupancy of the Current Communities is 96.8% and the average
monthly rent is $1,021. The broad geographic diversification of the Current
Communities, based on the number of apartment homes, includes a presence in 29
markets which can be summarized by region as follows: 30.6% in the Mid-Atlantic,
27.4% in Northern California, 23.9% in the Northeast, 13.7% in the Midwest, 3.5%
in Southern California and 0.9% in the Pacific Northwest.
The Company elected to be taxed as a REIT for federal income tax purposes
for the year ending December 31, 1994 and has not revoked that election. The
Company was incorporated under the laws of the State of California in 1978 and
was reincorporated in the State of Maryland in July 1995. Its principal
executive offices are located at 2900 Eisenhower Avenue, Suite 300, Alexandria,
Virginia 22314 and its telephone number at that location is (703) 329-6300. The
Company also maintains super-regional offices in San Jose, California and
Wilton, Connecticut and acquisition, development, redevelopment, construction,
reconstruction or administrative offices in Boston, Massachusetts; Chicago,
Illinois; Minneapolis, Minnesota;
S-3
<PAGE> 4
Newport Beach, California; New York, New York; Princeton, New Jersey; Richmond,
Virginia; and Seattle, Washington.
RECENT DEVELOPMENTS
Merger. On June 4, 1998, pursuant to an Agreement and Plan of Merger,
dated as of March 9, 1998 (the "Merger Agreement"), by and between Bay and
Avalon, Avalon was merged with and into Bay, with Bay as the surviving
corporation. In connection with the Merger, Bay changed its name to Avalon Bay
Communities, Inc.
Operating Results. On April 14, 1998, Avalon reported Funds from
Operations ("FFO") of $0.54 per share on a diluted basis for the first quarter
of 1998, as compared to FFO of $0.46 per share on a diluted basis for the first
quarter of 1997, an increase of 17.4%. On April 22, 1998, Bay reported FFO of
$0.68 per share on a diluted basis for the first quarter of 1998, as compared to
FFO of $0.58 per share on a diluted basis in the first quarter of 1997, an
increase of 17.2%. Management generally considers FFO to be an appropriate
measure of the operating performance of the Company because it provides
investors an understanding of the ability of the Company to incur and service
debt and to make capital expenditures. FFO is determined in accordance with a
resolution adopted by the Board of Governors of the National Association of Real
Estate Investment Trusts, Inc. ("NAREIT"), and is defined as net income (loss),
computed in accordance with generally accepted accounting principles ("GAAP"),
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation of real estate assets and after adjustments for unconsolidated
partnerships and joint ventures. FFO does not represent cash generated from
operating activities in accordance with GAAP and therefore should not be
considered an alternative to net income as an indication of the Company's
performance, or to net cash flows from operating activities as determined by
GAAP as a measure of liquidity, and is not necessarily indicative of cash
available to fund cash needs. Further, FFO as disclosed by other REITs may not
be comparable to the Company's calculation of FFO.
Financing Activities. On April 29, 1998, Bay sold 1,244,147 shares of
Common Stock for aggregate net proceeds of approximately $44.0 million, which it
used to reduce its borrowings under its then-existing unsecured revolving credit
facility. On June 23, 1998, the Company replaced three unsecured credit
facilities aggregating $575 million with a new $600 million unsecured credit
facility (the "Unsecured Credit Facility"). The terms of the new Unsecured
Credit Facility are substantially the same as the previous unsecured credit
facilities. See "Underwriting."
Completed Acquisitions. Since March 31, 1998, Avalon, Bay or the Company
have purchased five communities with a total of 1,362 apartment homes for a
total purchase price of approximately $107.2 million. One community is located
in Minneapolis, one community is located in St. Louis and three communities are
located in the Seattle metropolitan area. The community acquired in St. Louis
and one of the communities acquired in the Seattle metropolitan area were
purchased pursuant to presale agreements with an unaffiliated developer. Since
March 31, 1998, Avalon and Bay have announced the purchase of a total of four
parcels of land on which the Company has either begun development (three
communities with 607 homes, two of which are located in Connecticut and one of
which is located in Massachusetts) or intends to begin development by the end of
1999 (one community with up to 288 homes located in California). The total
budgeted construction cost for these four communities is $118.8 million.
Current Acquisition. On January 15, 1998, Avalon announced that it was
negotiating with The Prudential Insurance Company of America to purchase the
residential component of the Prudential Center in Boston, Massachusetts. Since
that time the parties have entered into a purchase and sale agreement for the
property. This property contains 781 apartment homes and related underground
parking. The Company expects to complete this acquisition on or about July 10,
1998 for a total purchase price of approximately $130.0 million. The Company
expects the initial year unleveraged return on cost for this community to be
8.2% and the first year stabilized unleveraged return on cost (1999/2000) to be
9.1%. However, there can be no assurance that the Company will be able to
achieve these anticipated returns.
Industry Awards. On April 22, 1998, Avalon was named Development Firm of
the Year and its Avalon Grove community was named the Best Mid- or High-Rise
Apartment Community of the Year under the
S-4
<PAGE> 5
National Association of Home Builders' ("NAHB") highly competitive "Pillars of
the Industry" awards program. This is the second consecutive year that one of
Avalon's communities has been named the Best Mid-or High-Rise Community of the
Year. In addition, Avalon was named Property Management Company of the Year in
1996/1997 under the same awards program. The Pillars of the Industry awards
program is conducted annually to recognize companies that demonstrate the
highest standards in multifamily housing design and management, and who promote
a positive image of the multifamily housing industry.
BUSINESS STRATEGY
Our principal operating objectives are to increase operating cash flow
growth, FFO and, as a result, long-term stockholder value. Our strategies to
achieve these objectives include (i) generating consistent, sustained earnings
growth at each community through increased revenue (balancing high occupancy
with premium pricing) and increased operating margins (from aggressive expense
management), (ii) investing selectively in new acquisition, development and
redevelopment communities in certain targeted market areas with high
barriers-to-entry and, when appropriate, selectively disposing of communities
which no longer meet the Company's investment objectives, and (iii) maintaining
a conservative capital structure to provide continued access to capital markets
at the lowest possible cost. We believe these strategies are generally best
implemented by acquiring, building, rebuilding and managing
institutional-quality assets in supply-constrained markets while maintaining the
financial discipline to ensure maximum balance sheet flexibility. We believe
that these strategies will lead to higher occupancy levels, increased rental
rates and predictable and growing cash flow, although no assurance can be given
that such results will be achieved.
S-5
<PAGE> 6
THE OFFERING
SECURITIES OFFERED............ $100,000,000 aggregate principal amount of the
2003 Notes and $150,000,000 aggregate principal
amount of the 2006 Notes.
MATURITY...................... July 15, 2003 with respect to the 2003 Notes
and July 15, 2006 with respect to the 2006
Notes.
INTEREST PAYMENT DATES........ Semi-annually in arrears on January 15 and July
15, commencing January 15, 1999.
RANKING....................... The Notes will be senior unsecured obligations
of the Company and will rank equally with the
Company's other unsecured and unsubordinated
indebtedness. The Notes will be effectively
subordinated to mortgages and other secured
indebtedness of the Company and to indebtedness
and other liabilities of any of the Company's
subsidiaries.
OPTIONAL REDEMPTION........... The Notes are redeemable at any time at the
option of the Company, in whole or in part, at
a redemption price equal to the sum of (i) the
principal amount of the Notes being redeemed
plus accrued interest thereon to the redemption
date and (ii) the Make-Whole Amount (as
defined), if any, with respect to such Notes.
See "Description of Notes -- Optional
Redemption."
USE OF PROCEEDS............... The net proceeds of approximately $247.6
million from the sale of the Notes will be used
to reduce borrowings under the Company's $600
million Unsecured Credit Facility. See "Use of
Proceeds" and "Underwriting."
LIMITATIONS ON INCURRENCE OF
INDEBTEDNESS.................. The Notes contain various covenants including
the following:
- Neither the Company nor any Subsidiary (as
defined) may incur any Indebtedness (as
defined) if, after giving effect thereto, the
aggregate principal amount of all outstanding
Indebtedness of the Company and its
Subsidiaries on a consolidated basis is
greater than 60% of the sum of (i) the Total
Assets (as defined) of the Company and its
Subsidiaries as of the end of the most recent
calendar quarter and (ii) the purchase price
of any real estate assets or mortgages
receivable acquired, and the amount of any
securities offering proceeds received (to the
extent that such proceeds were not used to
acquire real estate assets or mortgages
receivable or used to reduce Indebtedness),
by the Company or any Subsidiary since the
end of such calendar quarter, including those
proceeds obtained in connection with the
incurrence of such additional Indebtedness.
- Neither the Company nor any Subsidiary may
incur any Indebtedness secured by any
mortgage or other lien upon any of the
property of the Company or any Subsidiary if,
after giving effect thereto, the aggregate
principal amount of all outstanding
Indebtedness of the Company and its
Subsidiaries on a consolidated basis which is
secured by any mortgage or other lien on the
property of the Company or any Subsidiary is
greater than
S-6
<PAGE> 7
40% of the sum of (i) the Total Assets of the
Company and its Subsidiaries as of the end of
the most recent calendar quarter and (ii) the
purchase price of any real estate assets or
mortgages receivable acquired, and the amount
of any securities offering proceeds received
(to the extent that such proceeds were not
used to acquire real estate assets or
mortgages receivable or used to reduce
Indebtedness), by the Company or any
Subsidiary since the end of such calendar
quarter, including those proceeds obtained in
connection with the incurrence of such
additional Indebtedness.
- The Company and its Subsidiaries may not at
any time own Total Unencumbered Assets (as
defined) equal to less than 150% of the
aggregate outstanding principal amount of the
Unsecured Indebtedness (as defined) of the
Company and its Subsidiaries on a
consolidated basis.
- Neither the Company nor any Subsidiary may
incur any Indebtedness if, after giving
effect thereto, the ratio of Consolidated
Income Available for Debt Service (as
defined) to the Annual Service Charge (as
defined) for the four consecutive fiscal
quarters most recently ended prior to the
date on which such additional Debt is to be
incurred shall have been less than 1.5:1 on a
pro forma basis after giving effect to
certain assumptions.
For a more complete description of the terms
and definitions used in the foregoing
limitations, see "Description of
Notes -- Certain Covenants."
RISK FACTORS
An investment in the Notes involves various risks, and prospective
investors should carefully consider the matters discussed under "Risk Factors"
commencing on page S-8 of this Prospectus Supplement before making any
investment in the Notes. Certain statements contained in this Prospectus
Supplement or incorporated herein by reference are "forward-looking statements,"
which investors should not rely on because they are subject to a variety of
risks that may cause material differences between actual and anticipated
results, performance or achievements. See "Forward-Looking Statements" on page
S-2.
S-7
<PAGE> 8
RISK FACTORS
An investment in the Notes involves various risks. Prospective investors
should consider the following risk factors:
FAILURE TO MANAGE RAPID GROWTH AND INTEGRATE OPERATIONS FOLLOWING THE MERGER
The Company is currently in a period of rapid growth as a result of the
Merger and through the acquisition and development of additional apartment
communities. As of June 16, 1998, after completing the Merger, the Company owned
146 apartment communities with approximately 42,074 apartment homes (in each
case, including those under development and redevelopment), an increase of
23,433 in the number of apartment homes in Bay's pre-Merger portfolio. The
integration of the departments, systems, operating procedures and information
technologies of Bay and Avalon, as well as future acquisitions and developments,
will present a significant challenge to Management. The failure to successfully
integrate those systems and procedures into one operating philosophy could have
a material adverse effect on the results of operations and financial condition
of the Company. There can be no assurance that the Merged Company will be able
to integrate and manage these operations effectively or maintain or improve the
historical financial performances of Bay and Avalon.
POSSIBILITY THAT THE EXPECTED BENEFITS OF THE MERGER WILL NOT BE REALIZED
Based on anticipated savings in expenses and other factors, the Merger is
expected to have an accretive effect on the Company's FFO per share on a pro
forma basis for the second half of fiscal year 1998 and for future periods.
However, no assurance can be given that the anticipated expense reductions will
be realized or that unanticipated costs will not arise as a result of the
Merger. For example, although we believe that we have reasonably estimated the
likely costs of integrating the operations of Bay and Avalon, as well as the
incremental costs of operating as a combined company, it is possible that
unexpected future operating expenses (such as increased personnel costs,
increased property taxes or increased travel expenses) could have a material
adverse effect on the results of operations and financial condition of the
Company. If the expected savings are not realized or unexpected costs are
incurred, the Merger could have a significant dilutive effect on the Company's
FFO per share. For a description of the manner in which FFO is calculated, see
"Business Strategy -- Strong Earnings Growth Record."
INABILITY TO CONTINUE EXTERNAL GROWTH RATE
The Company has a real estate asset base in excess of $3.1 billion as of
March 31, 1998, which is significantly larger than the asset base managed by the
respective management teams of Bay and Avalon in the past. This should make it
possible for the Company to access capital for the acquisition, development and
redevelopment of apartment communities on more favorable terms. However, we may
be forced to limit our acquisition, development and redevelopment activities as
we attempt to integrate the two companies' operations. Furthermore, as a result
of the Company's revised minimum required target returns, particularly for new
community acquisitions that do not require redevelopment, and current market
conditions, we anticipate that acquisition activity will diminish significantly
for the remainder of 1998. Accordingly, there can be no assurances that the
external growth rate of the Company will equal or exceed the historical external
growth rates of either Bay or Avalon.
DEVELOPMENT, REDEVELOPMENT AND ACQUISITION RISKS
We intend to continue to develop and redevelop apartment home communities
using integrated development, redevelopment and underwriting policies derived
from the respective strengths of Bay and Avalon. In addition to the risk that we
will be unable to successfully integrate the development and redevelopment as
well as construction and reconstruction policies of Bay and Avalon, other risks
associated with the Company's development and redevelopment activities may
include: development and redevelopment opportunities explored by the Company may
be abandoned; construction and reconstruction costs of a community may exceed
original estimates due to increased materials, labor or other costs, which could
make completion of the community uneconomical; occupancy rates and rents at a
newly completed development or
S-8
<PAGE> 9
redevelopment community may fluctuate depending on a number of factors,
including market and general economic conditions, and may not be sufficient to
make the original estimated unleveraged returns on cost for the community;
financing may not be available on favorable terms for the development or
redevelopment of a community; and construction or reconstruction and lease-up
may not be completed on schedule, resulting in increased debt service expense
and construction or reconstruction costs. Development activities are also
subject to risks relating to the inability to obtain, or delays in obtaining,
all necessary zoning, land-use, building, occupancy, and other required
governmental permits and authorizations. The occurrence of any of the events
described above could have a material adverse effect on the Company's ability to
achieve its projected yields on communities under development or redevelopment
and could prevent the Company from making expected distributions to
stockholders. See "--Real Estate Investment Risks."
Construction costs have been increasing in the Company's target markets.
The cost to develop new communities and redevelop acquired communities has, in
some cases, exceeded Management's original estimates. We may experience similar
cost increases in the future. There can be no assurance that we will be able to
charge rents upon completing the development or redevelopment of communities
that will be sufficient to offset the effects of any increases in construction
or reconstruction costs.
Acquisitions entail risks that investments will fail to generate expected
returns and that estimates of the costs of improvements to bring an acquired
community up to standards established for the market position intended for that
community will prove inaccurate. Acquisitions also involve general investment
risks associated with any new real estate investment. Although we will undertake
an evaluation of the physical condition of each new community before it is
acquired, certain defects or necessary repairs may not be detected until after
the community is acquired, which could significantly increase our total
acquisition costs.
NEW MARKETS
The Company (including Avalon before the Merger) has expanded its ownership
and operations of apartment communities into new markets in recent years. In
1996, Bay expanded beyond Northern California and subsequently acquired 19
communities located in Southern California (including Orange, Los Angeles and
San Diego Counties), five communities located in the state of Washington and one
community in Oregon. Similarly, before the Merger, Avalon had expanded its
operations beyond its historical Mid-Atlantic and Northeast market areas into
certain Midwest and Pacific Northwest markets. We intend to make other selective
investments in these markets from time to time and may also make other selective
investments in high barrier-to-entry markets outside of our current market areas
if appropriate opportunities arise. We have significant management expertise in
Northern California, the Mid-Atlantic and the Northeast. However, this expertise
may not assist us in our expansion into new markets. Like the risks associated
with the addition of a substantial number of new communities, our entry into new
market areas will require, among other things, that we successfully apply our
experience to these new market areas. While we intend to maintain a management
team in each expansion market, we may be exposed to risks associated with, among
other things, (i) a lack of market knowledge and understanding of the local
economy, (ii) an inability to obtain land for development and to identify
property acquisition opportunities, (iii) an inability to obtain construction
tradespeople, (iv) sudden adverse shifts in supply and demand factors and (v) an
unfamiliarity with local governmental and permitting procedures.
DEPENDENCE ON PRIMARY MARKETS
Bay's historical experience is in Northern California (primarily in the San
Francisco Bay Area), where 41 of the Company's 146 communities are located.
Avalon's historical experience is in the Mid-Atlantic and Northeast markets,
where 66 of the Company's 146 communities are located. Consequently, economic
conditions in these markets will significantly influence the future performance
of the Company. As a result of the Merger, the Company has a more geographically
diverse portfolio, which should provide additional stability in the event of
adverse economic conditions in any one region or market. However, a decline in
the economy in one or more of these markets, or in the United States generally,
may materially and adversely affect our operating results and our ability to
make expected distributions to stockholders.
S-9
<PAGE> 10
REAL ESTATE FINANCING RISKS
No Limitation on Debt. The ratio of debt to total market capitalization of
the Company immediately following the Merger on June 4, 1998 was 32%. Certain
debt covenants in credit facilities and senior unsecured debt offerings of the
Company limit the amount of debt that can be incurred, but the charter and
bylaws of the Company do not contain any limitation on the amount of
indebtedness the Company may incur. Without restrictions in the Company's
charter or bylaws, the Company could increase the amount of outstanding
indebtedness at any time.
Existing Debt Maturities, Balloon Payments and Refinancing Risks. We are
subject to the risks normally associated with debt financing, including the risk
that our cash flow will be insufficient to meet required payments of principal
and interest. We anticipate that only a small portion of the principal of the
Company's indebtedness will be repaid prior to maturity. Although the Company
may be able to use its cash flow to make future principal payments, there can be
no assurances that sufficient cash flow will be available to make all required
principal payments. Therefore, it may be necessary to refinance at least a
portion of its outstanding debt as it matures. Accordingly, there is a risk that
existing indebtedness will not be able to be refinanced or that the terms of any
refinancing will not be as favorable as the terms of the existing indebtedness.
Risk of Rising Interest Rates. We expect to incur variable rate
indebtedness under credit facilities or in connection with the acquisition,
construction and reconstruction of multifamily apartment communities in the
future, as well as for other purposes. Accordingly, increases in interest rates
will increase our interest costs (to the extent that the related indebtedness is
not protected by interest rate protection arrangements).
Bond Compliance Requirements. Certain of the Company's apartment
communities are financed with obligations issued by various local government
agencies or instrumentalities, the interest on which is exempt from federal
income taxation. These obligations are commonly referred to as "tax-exempt
bonds." Compared to unsecured debt, tax-exempt bonds are less cost competitive
than in prior years and, moreover, generally must be secured by communities.
Because of the Company's greater access to unsecured debt compared to prior
years and the required encumbrances for tax-exempt bonds, we expect that our use
of tax-exempt bonds to finance communities will decline. Under the terms of
tax-exempt bonds, we will have to comply with various restrictions on the use of
the communities financed by such bonds, including a requirement that a
percentage of apartments be made available to low and middle income households.
The bond compliance requirements for the Company's current tax-exempt bonds, and
the requirements of any future tax-exempt bond financing of the Company, may
have the effect of limiting the Company's income from communities subject to
such financing. In addition, certain of the tax-exempt bond financing documents
require that a financial institution (the "credit enhancer") guarantee payment
of principal of, and interest on, the bonds, which may take the form of a letter
of credit, surety bond, guarantee agreement or other additional collateral. If
the credit enhancer defaults in its credit enhancement obligations, or we are
unable to renew the applicable credit enhancement or otherwise post satisfactory
collateral, a default will occur under the applicable tax-exempt bonds and the
community could be foreclosed upon.
REAL ESTATE INVESTMENT RISKS
General Risks. Real property investments are subject to varying degrees of
risk. The yields available from equity investments in real estate depend on the
amount of income generated and expenses incurred. If the communities do not
generate revenues sufficient to meet operating expenses, including debt service
and capital expenditures, the Company's cash flow and ability to pay
distributions to its stockholders will be adversely affected.
An apartment community's revenues and value may be adversely affected by a
number of factors, including the national economic climate; the local economic
climate (which may be adversely impacted by plant closings, industry slowdowns
and other factors); local real estate conditions (such as an oversupply of or a
reduced demand for apartment homes); the perceptions by prospective residents of
the safety, convenience and attractiveness of the community; the ability of the
owner to provide adequate management, maintenance
S-10
<PAGE> 11
and insurance; and increased operating costs (including real estate taxes and
utilities). Certain significant expenditures associated with each equity
investment (such as mortgage payments, if any, real estate taxes, insurance and
maintenance costs) are generally not reduced when circumstances cause a
reduction in income from the investment. If a community is mortgaged to secure
payment of indebtedness, and if we are unable to meet the mortgage payments, a
loss could be sustained as a result of foreclosure on the community or the
exercise of other remedies by the mortgagee. In addition, real estate values and
income from communities are also affected by such factors as the cost of
compliance with government regulations, including zoning and tax laws, interest
rate levels and the availability of financing.
Operating Risks. Each of the Company's communities is subject to all of
the operating risks common to apartment communities in general, any and all of
which might adversely affect apartment home occupancy or rental rates. Increases
in unemployment and a decline in household formation might adversely affect
occupancy or rental rates. Increases in operating costs due to inflation and
other factors may not be offset by increased rents. Residents may be unable or
unwilling to pay rent increases. Rent control or rent stabilization laws or
other laws regulating housing are applicable in certain of the cities in the
markets where the Company owns communities and may be enacted in the future in
other locations where the Company's communities are located or may be acquired;
compliance with these laws may prevent us from raising rents to offset increases
in operating costs. Similarly, the local rental market may limit the extent to
which rents may be increased to meet increased expenses without decreasing
occupancy rates. If any of the above occurs, the Company's ability to achieve
its desired yields on its communities and to make expected distributions to
stockholders could be adversely affected.
Market Illiquidity. Equity real estate investments are relatively
illiquid. This illiquidity will tend to limit our ability to vary our portfolio
promptly in response to changes in economic or other conditions. In addition,
our ability to sell communities held for fewer than four years will be limited
by the Code, which may affect our ability to sell communities without adversely
affecting returns to stockholders.
Competition. There are numerous housing alternatives that compete with the
Company's apartment communities in attracting residents. The communities compete
directly with other rental apartments and single-family homes that are available
for rent in the markets in which the communities are located. The communities
also compete for residents with the new and existing single-family home markets.
The number of competitive residential communities in a particular area could
have a material adverse effect on our ability to lease apartment homes and on
the rents charged. In addition, competitors for acquisitions and development
communities may have greater resources than the Company, thereby putting us at a
competitive disadvantage.
NATURAL DISASTERS
Many of the Company's West Coast communities are located in the general
vicinity of active earthquake faults. In June 1997, the Company obtained a
seismic risk analysis from an engineering firm which estimated the probable
maximum loss ("PML") for each of the 41 communities that Bay owned at that time
and Toscana, a community under development, individually and for all of those
communities and Toscana combined. To establish a PML, the engineers first define
a severe earthquake event for the applicable geographic area, which is an
earthquake that has only a 10% likelihood of occurring over a 50-year period.
The PML is determined as the structural and architectural damage and business
interruption loss that has a 10% probability of being exceeded in the event of
such an earthquake. Because 22 of the Company's communities are located in the
San Francisco Bay Area, the engineers' analysis defined an earthquake on the San
Andreas Fault with a Richter Scale magnitude of 8.0 as a severe earthquake with
a 10% probability of occurring within a 50-year period. The engineers then
established an aggregate PML at that time of $63.8 million for the 41
communities that Bay owned at that time and Toscana. The $63.8 million PML for
those communities was a PML level that the engineers expected to be exceeded
only 10% of the time in the event of such a severe earthquake. The actual
aggregate PML could be higher or lower as a result of variations in soil
classifications and structural vulnerabilities. For each community, the
engineers' analysis calculated an individual PML as a percentage of the
community's replacement cost and projected revenues. Two of the Company's
communities had individual PMLs of 30%, while seven communities had PMLs of 25%,
and the remaining 32 communities
S-11
<PAGE> 12
owned at that time and Toscana each had PMLs of 20% or less. The Company has
obtained an individual PML assessment for each of the 20 communities acquired on
the West Coast since June 1997. One community had an individual PML of 50%, one
had an individual PML of 30%, one had an individual PML of 25%, three had
individual PMLs of 24%, one had an individual PML of 21%, and the remaining 13
communities had individual PMLs of 20% or less. While the Company has not yet
obtained an engineers' analysis establishing an aggregate PML for all of its
communities located on the West Coast on a combined basis, we currently intend
to do so in the future on an annual basis in order to assist in evaluating
appropriate levels of insurance coverage. The Company does not currently intend
to obtain engineers' analyses, or earthquake insurance, for the communities
owned by Avalon at the time of the Merger, or for communities acquired or
developed in the future that are not in the vicinity of known active earthquake
faults. No assurance can be given that an earthquake would not cause damage or
losses greater than the PML assessments indicate, that future PML levels will
not be higher than the current PML levels for the Company's communities located
on the West Coast, or that future acquisitions or developments will not have PML
assessments indicating the possibility of greater damage or losses than
currently indicated.
In July 1997, Bay renewed its earthquake insurance, both for physical
damage and lost revenue, with respect to the 41 communities it owned at that
time and Toscana. In addition, the 20 communities acquired by the Company
subsequent to June 1997 are included under the Company's earthquake insurance
policy. For any single occurrence, the Company self-insures the first $25
million of loss, and has in place $35 million of coverage above this amount. In
addition, the Company's general liability and property casualty insurance
provides coverage for personal liability and fire damage. In the event that an
uninsured disaster or a loss in excess of insured limits were to occur, the
Company could lose its capital invested in the affected community, as well as
anticipated future revenue from that community, and would continue to be
obligated to repay any mortgage indebtedness or other obligations related to the
community. Any such loss could materially and adversely affect the business of
the Company and its financial condition and results of operations.
INCLEMENT WEATHER
The Company's communities in the Northeast and Midwest expose the Company
to risks associated with inclement winter weather, including increased costs for
the removal of snow and ice, as well as delays in the construction,
reconstruction, development or redevelopment of apartment communities. In
addition, such inclement weather could increase the need for maintenance and
repairs on the communities. Similarly, unusually high rainfall or other
inclement weather along the West Coast could result in increased costs due to
delays in the construction, reconstruction, development or redevelopment of
apartment communities.
POTENTIAL ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required (often regardless of knowledge or responsibility) to investigate and
remediate the effects of hazardous or toxic substances or petroleum product
releases at its properties, and may be held liable to a governmental entity or
to third parties for property damage and for investigation and remediation costs
incurred by them in connection with the contamination, which costs may be
substantial. The presence of such substances (or the failure to properly
remediate the contamination) may have a material adverse effect on the owner's
ability to borrow against, sell or rent the affected property. In addition,
certain environmental laws create liens on contaminated sites in favor of the
government for damages and costs it incurs in connection with the contamination.
Certain federal, state and local laws and regulations govern the removal,
encapsulation or disturbance of asbestos-containing materials ("ACMs") when such
materials are in poor condition or in the event of reconstruction, remodeling,
renovation or demolition of a building. Those laws may impose liability for
release of ACMs and may provide for third parties to seek recovery from owners
or operators of real properties for personal injury associated with ACMs. In
connection with its ownership and operation of the communities, the Company may
potentially be liable for such costs.
S-12
<PAGE> 13
We are not aware that any ACMs were used in connection with the
construction of the communities developed by the Company. However, ACMs were
used in connection with the construction of several of the communities acquired
by the Company (including communities acquired by Avalon before the Merger). We
do not anticipate that the Company will incur any material liabilities in
connection with the presence of ACMs at its communities. The Company currently
has in place or intends to implement an operations and maintenance program for
each of the communities at which ACMs have been detected.
All of the Company's Current Communities, and all of the communities
currently under development or redevelopment, have been subjected to a Phase I
or similar environmental assessment (which generally does not involve invasive
techniques such as soil or ground water sampling). These assessments have not
revealed any environmental conditions that we believe will have a material
adverse effect on the Company's business, assets, financial condition or results
of operations, and the Company is not aware of any other environmental
conditions which the Company believes would have such a material adverse effect.
However, the Company is aware that groundwater beneath one community under
development, Toscana, has been affected by the migration of contamination from
an upgradient landowner in the vicinity of the community. The upgradient
landowner is undertaking remedial response actions and it is expected that the
upgradient landowner will take all necessary response actions. The upgradient
landowner has also provided an indemnity that runs to current and future owners
of the Toscana property and upon which the Company may be able to rely should
the Company incur environmental liability arising from the groundwater
contamination at issue. We are also aware that certain communities have lead
paint and we are undertaking or intend to undertake appropriate remediation or
management activity. Furthermore, prior to their respective initial public
offerings, Bay and Avalon had each been occasionally involved in developing,
managing, leasing and operating various properties for third parties and may be
considered an operator of such properties and, therefore, potentially liable for
removal or remediation costs or other potential costs which could relate to
hazardous or toxic substances. The Company is not aware of any material
environmental liabilities with respect to properties it has managed or developed
for such third parties.
No assurance can be given that the environmental assessments identified all
potential environmental liabilities, that no prior owner created any material
environmental condition not known to the Company or the consultants preparing
the assessments, that no environmental liabilities may have developed since such
environmental assessments were prepared, that the condition of land or
operations in the vicinity of the Company's communities (such as the presence of
underground storage tanks) will not affect the environmental condition of such
communities, or that future uses or conditions (including, without limitation,
changes in applicable environmental laws and regulations) will not result in
imposition of environmental liability.
FEDERAL INCOME TAX RISKS -- FAILURE TO QUALIFY AS A REIT
The Company intends to operate in a manner that will allow it to continue
to qualify as a REIT. Although we believe that the Company has been organized
and operated in such a manner, no assurance can be given that the Company
qualifies as a REIT or that the Company will remain qualified as a REIT in the
future. Qualification as a REIT involves the application of highly technical and
complex Code provisions for which there are only limited judicial or
administrative interpretations and involves the determination of various factual
matters and circumstances not entirely within our control. If either Bay or
Avalon failed to qualify as a REIT prior to the Merger, this failure could also
disqualify the Merged Company as a REIT and/or subject it to significant tax
liabilities.
If the Company fails to qualify as a REIT, the Company will be subject to
federal income tax at regular corporate rates. In this event, the Company could
be subject to potentially significant tax liabilities, and the amount of cash
available for distribution to stockholders would be reduced and possibly
eliminated. Unless entitled to relief under certain statutory provisions, the
Company would also be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost.
S-13
<PAGE> 14
THE COMPANY
GENERAL
The Company is a REIT that is focused exclusively on the ownership of
institutional-quality apartment communities in high barrier-to-entry markets of
the United States. These markets include Northern and Southern California and
selected states in the Mid-Atlantic, Northeast, Midwest and Pacific Northwest
regions of the country. The Company is the surviving entity from the Merger of
Avalon with and into Bay on June 4, 1998, at which time the Company changed its
name to Avalon Bay Communities, Inc. The Merger brings together a senior
management team with over 150 years of real estate experience. Collectively, we
have demonstrated proficiency in the acquisition, development, redevelopment,
construction, reconstruction, financing, leasing, marketing and management of
institutional-quality apartment communities.
The Merger combined two companies of similar size with similar business
strategies and operating philosophies. Bay traditionally focused on the
acquisition, development, redevelopment and management of institutional-quality
communities in high barrier-to-entry markets in Northern and Southern California
and the Pacific Northwest. Avalon traditionally focused on the development,
acquisition and management of institutional-quality communities in high
barrier-to-entry markets in the Northeast and Mid-Atlantic regions of the United
States. In December 1997, Avalon entered certain high barrier-to-entry markets
in the Midwest when it acquired selected properties and operations of Trammell
Crow Residential Midwest ("TCR/MW"). Concurrent with the announcement of the
Merger, Avalon announced that it had entered into a definitive agreement to
acquire eight communities, which are expected to contain an aggregate of
approximately 2,411 apartment homes, in the Seattle and Portland markets on a
presale basis from Trammell Crow Residential - Pacific Northwest for a total
investment of up to $279 million. The presale acquisitions are expected to be
completed during the next two to three years.
Avalon and Bay have each focused on providing well maintained communities
with numerous amenities which are designed to enhance the market appeal of their
communities. Additionally, each has emphasized the delivery of superior service
to the residents of their apartment communities. Avalon and Bay also utilized
similar financing strategies, including the maintenance of conservative ratios
of debt to total market capitalization and debt and preferred stock to total
market capitalization. As a result of the Merger, we anticipate that the
successful implementation of the best practices of both Avalon and Bay will
improve our ability to profitably acquire, develop and redevelop
institutional-quality apartment communities as well as our ability to deliver
superior service to our residents. We believe that the Company will benefit from
the application of the respective strengths previously possessed by Bay and
Avalon, such as Bay's redevelopment expertise and Avalon's advanced information
systems, throughout the Company. To assist in the identification and
implementation of these and other such best practices, prior to the Merger,
Avalon and Bay engaged the services of outside merger integration consultants.
These best practices have been identified and are currently being implemented,
which should result in greater efficiencies.
We believe that ownership of institutional-quality apartment communities in
markets where new supply of apartment homes is limited helps assure more
predictable cash flows. Barriers to competitors entering these markets, which
provide constraints on supply, include a difficult and lengthy entitlement
process with local jurisdictions and dense, infill locations where zoned and
entitled land is not available. In addition, high single family home prices in
most of our markets serve to create a "barrier-to-exit" for residents of our
communities which are located in such markets. Combined with an emphasis on
superior service to residents, this should result in longer average lease
periods (as measured by annual turnover) and reduced operating costs. Further,
we believe that maintaining a conservative financial strategy allows greater
flexibility in responding to changing financial market conditions, and enhances
the Company's access to cost effective capital.
The Company currently owns 146 communities containing 42,074 apartment
homes, of which 105 are stabilized Current Communities, 17 are Development
Communities and 24 are Redevelopment Communities. We also have 20 Development
Rights which are controlled primarily through options on land. The Development
Rights include three land parcels owned by the Company or partnerships in which
the Company has a controlling interest. We expect to start construction of new
apartment communities on these three land parcels by the end of 1999. The
Company obtains ownership in apartment communities by developing vacant land
into a new community or by acquiring and either repositioning or redeveloping an
existing community. In
S-14
<PAGE> 15
selecting sites for development, redevelopment or acquisition, we place emphasis
on locations with close proximity to expanding employment centers and
convenience to recreation areas, entertainment, shopping and dining. As a
result, we consider the Current Communities, the Development Communities, the
Redevelopment Communities and the land underlying the Development Rights to be
well located.
BUSINESS STRATEGY
Our principal operating objectives are to increase operating cash flow
growth, FFO and, as a result, long-term stockholder value. Our strategies to
achieve these objectives include (i) generating consistent, sustained earnings
growth at each community through increased revenue (balancing high occupancy
with premium pricing) and increased operating margins (from aggressive expense
management), (ii) investing selectively in new acquisition, development and
redevelopment communities in certain targeted market areas with high
barriers-to-entry and, when appropriate, selectively disposing of communities
which no longer meet the Company's investment objectives, and (iii) maintaining
a conservative capital structure to provide continued access to capital markets
at the lowest possible cost. We believe that these strategies are generally best
implemented by acquiring, building, rebuilding and managing
institutional-quality assets in supply-constrained markets while maintaining the
financial discipline to ensure maximum balance sheet flexibility. We believe
that these strategies will lead to higher occupancy levels, increased rental
rates and predictable and growing cash flow, although no assurance can be given
that such results will be achieved.
Acquisition Strategy. Historically, the acquisition strategies of Bay and
Avalon have been focused on individual, opportunistic investments. During 1997,
however, Bay and Avalon each completed significant portfolio acquisitions, Bay
in Southern California and Avalon in the Midwest. Additionally, during 1997
Avalon agreed to purchase communities to be developed on a presale basis from
unaffiliated developers. These portfolio acquisitions achieved both rapid
penetration of supply-constrained markets new to Avalon and Bay and the addition
of skilled management teams (in the case of Avalon's acquisition of the Midwest
portfolio) that could take advantage of the acquired portfolio as a platform for
future growth. We believe that through our acquisition strategy we have now
targeted and penetrated many of the high barrier-to-entry markets of the United
States.
Bay and Avalon each historically maintained a core competency in new
development that allowed each company to be selective in evaluating acquisition
candidates. The Company continues this capability and will seek to take
advantage of its industry-leading development, redevelopment, construction and
reconstruction capabilities.
As a result of the Company's revised minimum required target returns for
new community acquisitions and current market conditions, we anticipate that
acquisition activity will diminish significantly for the remainder of 1998.
Consequently, we will refocus our efforts toward development and redevelopment
of apartment communities where we believe attractive initial and long-term
return targets are more likely to be achieved. In addition, we expect to expand
the redevelopment and reconstruction expertise that the Company has implemented
on the West Coast to selected high barrier-to-entry markets of the Midwest,
Mid-Atlantic and Northeast. We will also focus on dispositions of assets that do
not meet our current operating, market or growth requirements. We anticipate
reinvesting capital raised through dispositions in higher yielding new
Development Communities and Redevelopment Communities with superior long-term
growth potential greater than those that we plan to sell. There can be no
assurance that the Company will be successful in disposing of any communities,
or in investing the proceeds in new communities without adverse tax
consequences.
Financing Strategy. Bay and Avalon have each consistently maintained, and
the Company intends to continue to maintain, a conservative capital structure,
largely comprised of common equity. Immediately following the Merger on June 4,
1998, the Company's debt-to-total market capitalization was 32%, and long-term
floating rate debt was only 1.6% of total market capitalization. We currently
intend to limit long-term floating rate debt to less than 10% of total market
capitalization, although that policy may change from time to time.
Development Strategy. The Company's development strategy is to carefully
select land for development and to follow established procedures that are
designed to minimize both the cost and the risks of development.
S-15
<PAGE> 16
As one of the largest developers of multifamily apartment communities in high
barrier-to-entry markets of the United States, the Company is able to capitalize
on its local market presence and access to local market information through
regional and super-regional offices. In addition to its principal executive
offices in Alexandria, Virginia, the Company maintains super-regional offices in
San Jose, California and Wilton, Connecticut and regional acquisition,
development, redevelopment, construction, reconstruction or administrative
offices in Boston, Massachusetts; Chicago, Illinois; Minneapolis, Minnesota;
Newport Beach, California; New York, New York; Princeton, New Jersey; Richmond,
Virginia; and Seattle, Washington. After selecting a target site, the Company
negotiates for the right to acquire the site either through an option or a
long-term conditional contract, generally subject to obtaining zoning and
permitting approvals and appropriate environmental review. The Company generally
begins design work before purchasing the land, with the expenditure of design
funds carefully monitored based on the likelihood of obtaining approvals and
financing. After the land is acquired, the focus shifts to construction. The
Company believes it achieves higher quality, more control over schedules and
significant cost savings by acting as its own general contractor. Construction
progress is monitored by the development team and the property management team
to ensure high quality workmanship and a smooth and timely transition into the
leasing and operational phase.
Redevelopment Strategy. The Company's redevelopment strategy is to
selectively seek existing under-managed apartment communities in fully-developed
neighborhoods and create value by substantially re-building them at
significantly below replacement cost to a quality which the Company believes to
be the highest quality apartment community or best rental value for an
institutional-quality apartment community in its local area. The Company has
established procedures that are designed to minimize both the cost and risks of
redevelopment. After the apartment community is acquired, the focus shifts to
reconstruction. Again, the Company believes it achieves significant cost savings
by acting as its own general contractor. Reconstruction progress is monitored by
the redevelopment team, which includes key redevelopment, construction and
property management personnel. This ensures high quality design and workmanship
and a smooth and timely transition into the lease-up and re-stabilization phase.
Property Management Strategy. The Company intends to increase earnings
through innovative, proactive property management that will result in higher
revenue from its communities. Intense focus on resident satisfaction, increasing
rents as market conditions permit and managing community occupancy for optimal
rental revenue levels comprise the principal strategies for maximizing revenue.
Lease terms are generally staggered based on vacancy exposure by apartment type
so that lease expirations are better matched to each community's traffic
patterns. On-site property management teams receive bonuses based largely upon
the net operating income produced at their respective communities.
Controlling operating expenses is another way in which the Company intends
to increase earnings growth. An increase in growth in the Company's portfolio
and the resulting increase in revenue allows the Company to spread fixed
operating costs over a larger volume of revenue, thereby increasing operating
margins. The Company also aggressively pursues real estate tax appeals and
scrutinizes other operating costs. Invoices are recorded on-site to ensure the
careful monitoring of budgeted versus actual expenses, supplies are purchased in
bulk where possible, third-party contracts are bid on a volume basis, turnover
work is performed in-house or by third parties generally depending upon the
least costly alternative, and preventive maintenance is undertaken regularly to
maximize resident satisfaction and property and equipment life. In addition,
Management strives to retain residents through high levels of service in order
to eliminate the cost of preparing an apartment home for a new resident and to
reduce marketing and utilities costs.
The Company will also consider managing properties for third parties, if
such management will provide information about its new markets and provide an
acquisition opportunity, thereby enhancing the Company's opportunities for
growth.
Strong Earnings Growth Record. Historically, both Avalon and Bay have
consistently achieved both strong internal growth and increases in FFO per
share. Since its initial public offering in March 1994, Bay has increased its
quarterly FFO per share on a diluted basis from $0.41 per share to $0.68 per
share, representing an annualized growth rate of approximately 14.4%. Similarly,
since its initial public offering in November 1993, Avalon has increased its
quarterly FFO per share on a diluted basis from $0.39 per share to $0.54 per
S-16
<PAGE> 17
share, representing an annualized growth rate of approximately 8.5%. The growth
rates have accelerated recently for both Avalon and Bay. For the first quarter
of 1998 compared to 1997, FFO per share on a diluted basis increased 17.4% for
Avalon and 17.2% for Bay. Management generally considers FFO to be an
appropriate measure of the operating performance of the Company because it
provides investors an understanding of the ability of the Company to incur and
service debt and to make capital expenditures. The Company believes that in
order to facilitate a clear understanding of the operating results of the
Company, FFO should be examined in conjunction with net income as presented in
the Company's consolidated financial statements incorporated by reference in the
accompanying Prospectus. FFO is determined in accordance with a resolution
adopted by NAREIT, and is defined as net income (loss), computed in accordance
with GAAP, excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation of real estate assets and after adjustments for
unconsolidated partnerships and joint ventures. FFO does not represent cash
generated from operating activities in accordance with GAAP and therefore should
not be considered an alternative to net income as an indication of the Company's
performance, or to net cash flows from operating activities as determined by
GAAP as a measure of liquidity, and is not necessarily indicative of cash
available to fund cash needs. Further, FFO as disclosed by other REITs may not
be comparable to the Company's calculation of FFO.
S-17
<PAGE> 18
RECENT DEVELOPMENTS
OPERATING RESULTS
On April 14, 1998, Avalon reported FFO of $0.54 per share on a diluted
basis for the first quarter of 1998, as compared to FFO of $0.46 per share on a
diluted basis for the first quarter of 1997, an increase of 17.4%. Avalon's
earnings before interest, income taxes, depreciation and amortization ("EBITDA")
on a "same store" basis increased by approximately 6.0% in the first quarter of
1998 over the first quarter of 1997.
On April 22, 1998, Bay reported FFO of $0.68 per share on a diluted basis
for the first quarter of 1998, as compared to FFO of $0.58 per share on a
diluted basis in the first quarter of 1997, an increase of 17.2%. Bay's EBITDA
on a "same store" basis increased by approximately 11.4% in the first quarter of
1998 over the first quarter of 1997.
MERGER
On June 4, 1998, pursuant to the Merger Agreement, Avalon merged with and
into Bay, with Bay as the surviving corporation. In connection with the Merger,
Bay changed its name to Avalon Bay Communities, Inc.
Pursuant to the Merger Agreement, (i) holders of Avalon common stock, par
value $.01 per share ("Avalon Common Stock"), are entitled to receive, for each
such share held by them on June 4, 1998 at 10:00 p.m. (the "Effective Time"),
0.7683 of a share of the Company's Common Stock and an equal number of
associated rights ("Rights") to purchase, under certain circumstances, one
one-thousandth of a share of the Company's Series E Junior Participating
Cumulative Preferred Stock, par value $.01 per share, (ii) holders of Avalon
9.00% Series A Cumulative Redeemable Preferred Stock, par value $.01 per share,
are entitled to receive, for each such share held by them at the Effective Time,
one share of the Company's 9.00% Series F Cumulative Redeemable Preferred Stock,
par value $.01 per share ("Series F Preferred Stock"), and (iii) holders of
Avalon 8.96% Series B Cumulative Redeemable Preferred Stock, par value $.01 per
share, are entitled to receive, for each such share held by them at the
Effective Time, one share of the Company's 8.96% Series G Cumulative Redeemable
Preferred Stock, par value $.01 per share ("Series G Preferred Stock").
The aggregate liquidation value of the Series F Preferred Stock and Series
G Preferred Stock issued in the Merger is approximately $218.9 million. In
connection with the Merger, the Company also assumed outstanding liabilities of
Avalon of approximately $646.0 million.
FINANCING ACTIVITIES
Sale of Common Stock. On April 29, 1998, Bay sold 1,244,147 shares of Bay
Common Stock for aggregate net proceeds of approximately $44.0 million. Bay used
the net proceeds from the offering to reduce its borrowings under its
then-existing unsecured revolving credit facility.
New Credit Facility. On June 23, 1998, the Company refinanced its three
unsecured credit facilities aggregating $575.0 million with the new $600.0
million Unsecured Credit Facility. The terms of the Unsecured Credit Facility
are substantially the same as the previous unsecured credit facilities of Bay
and Avalon.
COMPLETED ACQUISITIONS
Acquisitions of Existing Communities. On May 6, 1998, Bay purchased a 356
apartment home community, Avalon Ridge, which is located in Renton, Washington
for approximately $21.3 million, and on June 11, 1998 the Company purchased
Sunpointe, a 64 apartment home community adjacent to Avalon Ridge, for
approximately $3.8 million. The Company plans a major redevelopment program at
these communities, which will include, but not be limited to, the replacement of
all exterior siding, installation of door and window flashing, redesign of
exterior landings and staircases, roof repair and carport reconstruction. In
addition, the Company plans to renovate interior units upon turnover, replacing
floor and wall coverings, some appliances and some electrical fixtures. The
Company also plans to renovate the leasing office and fitness center and upgrade
the landscape.
S-18
<PAGE> 19
On May 6, 1998, Avalon, through a limited partnership in which Avalon had a
99% general partner interest, acquired a fee simple interest in a 480 apartment
home community, Pinnacle at Oxford Hill, located in St. Louis, Missouri for
approximately $29.8 million, consisting of approximately $29.4 million in cash
and operating partnership units of the limited partnership valued at $400,000.
The community is part of the previously announced TCR/MW acquisition. The seller
recently completed a renovation program on the property, originally constructed
between 1970 and 1972, costing approximately $5.0 million. The capital budget
included replacing the asphalt pitched roofs and adding vinyl siding, 75
detached garages, a new clubhouse, an indoor and outdoor pool, lighted tennis
courts, barbecue and picnic areas and an exercise room.
On May 29, 1998, Avalon, through a limited partnership in which Avalon had
a 99% general partner interest, acquired a fee simple interest in a 198
apartment home community, Gates of Edinburgh, located in Minneapolis, Minnesota
for approximately $18.0 million, consisting of approximately $15.2 million in
cash and operating partnership units of the limited partnership valued at $2.8
million. The property, completed in 1991, is adjacent to an 18-hole public golf
course, which is ranked in the Top 100 Public Golf Courses by Golf Digest.
On June 16, 1998, the Company, through a limited partnership in which the
Company had a 62% general partner interest, acquired a fee simple interest in a
264 apartment home community, Verandas at Bear Creek, located in Redmond,
Washington for approximately $34.3 million, consisting of approximately $30.4
million in cash and operating partnership units of the limited partnership
valued at $3.9 million. The community was completed in 1998.
Land Acquisition for New Development. On April 7, 1998 Avalon announced
that it had completed the acquisition of a 17 acre site for the Avalon Valley
Development Community, a 268 apartment home community in Danbury, Connecticut.
Avalon Valley is budgeted to cost approximately $26.1 million. We began
construction of Avalon Valley during the first quarter of 1998 and we expect to
achieve stabilized operations by the first quarter of 2000. Avalon also
announced the purchase of a 32 acre site for Avalon Lake, planned as a sister
community to Avalon Valley in Danbury. Avalon Lake will offer 135 apartment
homes and is budgeted to cost approximately $17.0 million. We began construction
during the second quarter of 1998 and expect stabilized operations to be
achieved by the first quarter of 2000. Both are located within three-quarters of
a mile of Interstate 84, the region's major East-West highway. The Danbury
submarket does not currently contain any institutional-quality residential
apartment communities, and lacks additional zoned land for multifamily
development. In the last fifteen years, no rental communities have been built in
Danbury.
On April 21, 1998, Avalon announced that it had purchased a 22 acre site in
Wilmington, Massachusetts for the development of 204 luxury apartment homes to
be known as Avalon Oaks. Avalon Oaks will be the first apartment community built
in the I-93 corridor in over a decade. The property is located approximately 15
miles northwest of Boston. Avalon Oaks is budgeted to cost approximately $21.9
million. We began construction in the second quarter of 1998 and expect
stabilized operations to be achieved by the first quarter of 2000.
On April 22, 1998, Bay announced that it had purchased a five acre site on
the Alameda in downtown San Jose, California on which it plans to build, subject
to certain governmental approvals, an apartment community with up to 288
apartment homes and approximately 8,500 square feet of retail space. This
development is budgeted to cost approximately $53.8 million. The property is
within walking distance to downtown San Jose office buildings, restaurants,
museums and the San Jose Arena, home to the San Jose Sharks of the National
Hockey League. Additionally, the property is located two blocks from the Diridon
Station, the major transportation hub for San Jose serving CalTrain, Amtrak,
Greyhound, Santa Clara Valley Transit Agency ("SCVTA") bus and a planned
extension of the SCVTA light rail.
CURRENT ACQUISITION
On January 15, 1998, Avalon announced that it was negotiating with The
Prudential Insurance Company of America to purchase the residential component of
the Prudential Center in Boston, Massachusetts. Since that time, the parties
have entered into a purchase and sale agreement for the property. This property
contains 781 apartment homes and related underground parking. The Company
expects to complete the acquisition on
S-19
<PAGE> 20
or about July 10, 1998 for a total purchase price of approximately $130.0
million. The Company expects the initial year unleveraged return on cost for
this community to be 8.2% and the first year stabilized unleveraged return on
cost (1999/2000) to be 9.1%. However, there can be no assurances that the
Company will be able to achieve these anticipated returns.
INDUSTRY AWARDS
On April 22, 1998, Avalon was named Development Firm of the Year and its
Avalon Grove community was named the Best Mid- or High-Rise Apartment Community
of the Year under the NAHB's highly competitive "Pillars of the Industry" awards
program. This is the second consecutive year that one of Avalon's communities
has been named the Best Mid- or High-Rise Community of the Year. In addition,
Avalon was named Property Management Company of the Year in 1996/1997 under the
same awards program. The Pillars of the Industry awards program is conducted
annually to recognize companies that demonstrate the highest standards in
multifamily housing design and management, and who promote a positive image of
the multifamily housing industry. A panel of 11 industry professionals who
judged the award selected this year's winners from more than 200 entries
submitted nationally. In making their selection of Avalon as the Development
Firm of the Year, the judges considered Avalon's consistent level of delivery
and high quality execution of its development activity. The panel further noted
that Avalon has achieved an extremely high volume of quality development
opportunities in areas of the country with particularly difficult permitting and
approval processes. Additionally, Avalon was congratulated for the active
involvement by a variety of Avalon associates in many professional, governmental
and local organizations. In their selection of Avalon Grove, located in
Stamford, Connecticut, the judges cited the long and difficult approval process,
the outstanding architecture, and the very attractive yield.
THE COMMUNITIES
THE CURRENT COMMUNITIES
The Current Communities are primarily upscale, garden-style apartment
communities consisting of two-and three-story buildings in landscaped settings.
The Current Communities also include eight high-rise apartment communities, two
four-story mid-rise apartment communities and one six-story mid-rise community.
All of the Current Communities are institutional-quality assets. The Current
Communities offer many attractive amenities designed to enhance their market
appeal to discriminating residents who are willing to pay premium rental rates
to live in these communities. Such amenities include vaulted ceilings, lofts,
fireplaces, patios/decks and modern appliances. Other features include swimming
pools, fitness centers, tennis courts and business centers. As of the date of
this Prospectus Supplement, there were 105 Current Communities.
The Company owns most of its Current Communities, Development Communities
and Redevelopment Communities through a simple corporate structure whereby the
Company holds a fee simple ownership interest in 89 Current Communities, 23
Redevelopment Communities, and 15 Development Communities. The Company owns its
other communities through a variety of organizational structures, including
general partnership interests (six communities, including four non-majority
interests); controlling general partner interests in DownREIT limited
partnerships(12 communities); and a 100% interest in a senior participating
mortgage note secured by one operating community which is accounted for as an
investment in real estate.
The existing DownREITs have been structured so that substantially all of
the economic interest of these partnerships, other than the stated distributions
to the limited partners on their operating partnership units ("OP Units"),
accrue to the benefit of the Company. The Company believes that it is unlikely
that the limited partners in these partnerships will receive any financial
return on their limited partnership interest other than the stated distributions
on their OP Units or the possible future conversion of their OP Units into
shares of Common Stock.
All of the Current Communities are managed and operated by the Company. As
of March 31, 1998 (the latest practicable date for which this information is
available), the Current Communities had an economic occupancy rate of 96.8%. The
average age of the Current Communities, weighted according to the applicable
S-20
<PAGE> 21
number of apartment homes and adjusted to reflect the year of completion for
substantial reconstruction, is approximately eight years.
The following is a summary by major market of the Company's Current
Communities, Development Communities and Redevelopment Communities as of the
date of this Prospectus Supplement:
APARTMENT HOMES BY MARKET
<TABLE>
<CAPTION>
CURRENT DEVELOPMENT REDEVELOPMENT TOTAL
COMMUNITIES(1) COMMUNITIES(2) COMMUNITIES(3) COMMUNITIES
-------------- --------------- --------------- --------------
# OF % OF # OF % OF # OF % OF # OF % OF
MARKET HOMES TOTAL HOMES TOTAL HOMES TOTAL HOMES TOTAL
- ------ ------ ----- ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. Northern Virginia....... 3,275 11.0% 694 14.6% -- -- 3,969 9.4%
2. Santa Clara County,
CA........................ 3,144 10.5% -- -- 546 7.3% 3,690 8.8%
3. Los Angeles, CA......... -- -- -- -- 2,823 38.0% 2,823 6.7%
4. Alameda County, CA...... 2,523 8.4% -- -- -- -- 2,523 6.0%
5. Fairfield County, CT.... 1,846 6.2% 403 8.5% -- -- 2,249 5.4%
6. San Mateo County, CA.... 508 1.7% 1,482 31.3% 195 2.6% 2,185 5.2%
7. Southern Maryland....... 2,083 7.0% 96 2.0% -- -- 2,179 5.2%
8. Orange County, CA....... 870 2.9% -- -- 1,152 15.5% 2,022 4.8%
9. Philadelphia, PA........ 1,504 5.0% 351 7.4% -- -- 1,855 4.4%
10. Boston, MA.............. 1,397 4.7% 375 7.9% -- -- 1,772 4.2%
11. Central Valley, CA...... 1,200 4.0% -- -- 302 4.1% 1,502 3.6%
12. Baltimore, MD........... 1,348 4.5% -- -- -- -- 1,348 3.2%
13. San Francisco, CA....... 819 2.7% 226 4.8% 243 3.3% 1,288 3.1%
14. Richmond, VA............ 1,243 4.2% -- -- -- -- 1,243 3.0%
15. Westchester, NY......... 393 1.3% 841 17.8% -- -- 1,234 2.9%
16. San Diego, CA........... 176 0.6% -- -- 1,057 14.2% 1,233 2.9%
17. Minneapolis, MN......... 1,102 3.7% -- -- -- -- 1,102 2.6%
18. Seattle, WA............. 264 0.9% -- -- 832 11.2% 1,096 2.6%
19. Detroit, MI............. 983 3.3% -- -- -- -- 983 2.3%
20. Hartford, CT............ 932 3.1% -- -- -- -- 932 2.2%
21. Norfolk, VA............. 904 3.0% -- -- -- -- 904 2.2%
22. Chicago, IL............. 887 3.0% -- -- -- -- 887 2.1%
23. Northern New Jersey..... 504 1.7% 269 5.7% -- -- 773 1.8%
24. Long Island, NY......... 575 1.9% -- -- -- -- 575 1.4%
25. St. Louis, MO........... 480 1.6% -- -- -- -- 480 1.1%
26. Indianapolis, IN........ 376 1.2% -- -- -- -- 376 0.9%
27. Washington, DC.......... 308 1.0% -- -- -- -- 308 0.7%
28. Portland, OR............ -- -- -- -- 279 3.8% 279 0.7%
29. Cincinnati, OH.......... 264 0.9% -- -- -- -- 264 0.6%
------ ----- ----- ----- ----- ----- ------ -----
Totals................. 29,908 100.0% 4,737 100.0% 7,429 100.0% 42,074 100.0%
====== ===== ===== ===== ===== ===== ====== =====
</TABLE>
- ---------------
(1) Current Communities are apartment communities on which construction or
reconstruction has been completed and which have either reached stabilized
occupancy or are in the lease-up process. A Current Community can be (i) a
"Stabilized Community" that has completed its lease-up and has attained a
physical occupancy level of 95%, or has been completed for one year (without
regard to physical occupancy level), whichever occurs earlier, and/or (ii)
an "Established Community" that has been a Stabilized Community with
stabilized operating costs during the current and prior year reporting
periods such that its operating results are comparable between periods.
S-21
<PAGE> 22
(2) Development Communities are communities that are under construction and may
be partially complete and operating and for which a final certificate of
occupancy has not been received or a physical occupancy level of 95% has not
been attained.
(3) Redevelopment Communities are communities for which substantial
redevelopment has either begun or is scheduled to begin. Redevelopment is
considered substantial when additional capital invested during the
reconstruction effort exceeds the lesser of $5 million or 10% of the
community's acquisition cost.
The following chart illustrates the geographical distribution of the
apartment homes in the Company's Current Communities, Development Communities
and Redevelopment Communities as of the date of this Prospectus Supplement
(based on the number of apartment homes, after giving effect to the completion
of the Development Communities):
[APARTMENT PIE CHART]
DEVELOPMENT COMMUNITIES
As of the date of this Prospectus Supplement, 17 Development Communities
were under construction. The total capitalized cost of these Development
Communities when completed is currently expected to be approximately $692.1
million. There can be no assurance that the Company will complete the
Development Communities, that the Company's budgeted costs, leasing, start
dates, completion dates, occupancy or estimates of "EBITDA as % of Total
Budgeted Cost" will be realized or that future developments will realize
comparable returns. See "Risk Factors -- Development, Redevelopment and
Acquisition Risks."
We maintain an active development capacity that we believe provides a
continuing source of portfolio growth. During the lease-up period of the
development process, the Development Communities will experience operating
deficits for a three to six month period until such time as new communities
approach stabilized occupancy. The amount and duration of operating deficits to
be incurred are dependent upon a number of factors, including the size of the
community, the season in which leasing activity occurs and the extent to which
delivery of new apartment homes coincides with leasing and occupancy of these
new apartment homes (which is dependent on local market conditions).
S-22
<PAGE> 23
The following is a summary of the Company's Development Communities as of
the date of this Prospectus Supplement:
DEVELOPMENT COMMUNITIES SUMMARY
<TABLE>
<CAPTION>
PROJECTED
EBITDA AS %
NUMBER OF BUDGETED ESTIMATED ESTIMATED OF TOTAL
APARTMENT COST CONSTRUCTION INITIAL COMPLETION STABILIZED BUDGETED
COMMUNITY HOMES ($ MILLIONS) START OCCUPANCY DATE DATE(1) COST(2)
- --------- --------- ------------- ------------ --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1. Toscana
Sunnyvale, CA 710 $116.5 Q3 1996 Q3 1997 Q4 1998 Q1 1999 11.1%
2. Avalon Gardens
Nanuet, NY 504 53.8 Q3 1996 Q2 1997 Q3 1998 Q1 1999 10.8%
3. Avalon at Fair Lakes
Fairfax, VA 234 23.3 Q1 1997 Q4 1997 Q2 1998 Q4 1998 10.4%
4. CentreMark
San Jose, CA 311 47.5 Q1 1997 Q3 1998 Q1 1999 Q2 1999 10.5%
5. Avalon at Faxon Park
Quincy, MA 171 15.8 Q1 1997 Q4 1997 Q2 1998 Q4 1998 12.1%
6. Avalon Willow
Mamaroneck, NY 227 41.8 Q2 1997 Q3 1998 Q1 1999 Q2 1999 9.2%
7. Avalon at Cameron Court
Alexandria, VA 460 44.7 Q2 1997 Q1 1998 Q4 1998 Q1 1999 11.0%
8. Paseo Alameda
San Jose, CA 305 52.7 Q3 1997 Q4 1998 Q2 1999 Q3 1999 10.1%
9. Avalon Fields II
Gaithersburg, MD 96 9.2 Q3 1997 Q2 1998 Q4 1998 Q1 1999 10.2%
10. Bay Towers
San Francisco, CA 226 65.9 Q4 1997 Q3 1999 Q4 1999 Q1 2000 9.6%
11. Avalon Crest
Fort Lee, NJ 351 57.4 Q4 1997 Q2 1999 Q4 1999 Q1 2000 10.1%
12. Rosewalk II
San Jose, CA 156 20.3 Q4 1997 Q4 1998 Q1 1999 Q2 1999 11.1%
13. Avalon Cove South
Jersey City, NJ 269 51.8 Q1 1998 Q2 1999 Q3 1999 Q4 1999 10.0%
14. The Avalon
Bronxville, NY 110 26.4 Q1 1998 Q2 1999 Q3 1999 Q4 1999 9.7%
15. Avalon Valley
Danbury, CT 268 26.1 Q1 1998 Q1 1999 Q3 1999 Q1 2000 10.1%
16. Avalon Lake
Danbury, CT 135 17.0 Q2 1998 Q2 1999 Q3 1999 Q1 2000 10.1%
17. Avalon Oaks
Wilmington, MA 204 21.9 Q2 1998 Q1 1999 Q3 1999 Q1 2000 10.3%
----- ------ ------
Total/Weighted
Average 4,737 $692.1 10.4%
===== ====== ======
</TABLE>
- ---------------
(1) Stabilized occupancy is defined as the first full quarter of 95% or greater
physical occupancy after initial lease-up, or one year after completion
(without regard to physical occupancy level), whichever occurs earlier.
(2) Projected EBITDA represents gross potential earnings projected to be
achieved based on current rents prevailing in the respective community's
local market and before interest, income taxes, depreciation, amortization
and extraordinary items, minus (a) economic vacancy and (b) projected
stabilized operating expenses. Total budgeted cost includes all capitalized
costs projected to be incurred to develop the respective Development
Community, including land acquisition costs, construction costs, real estate
taxes, capitalized interest and loan fees, permits, professional fees,
allocated development overhead and other regulatory fees. EBITDA is relevant
to an understanding of the economics of the Company because it indicates
cash flow available from Company operations to service fixed obligations.
EBITDA should not be considered as an alternative to operating income, as
determined in accordance with GAAP, as an indicator of the Company's
operating performance, or to cash flows from operating activities (as
determined in accordance with GAAP) as a measure of liquidity. EBITDA as
disclosed by other REITs may not be comparable to the Company's calculation
of EBITDA. Coopers & Lybrand L.L.P., the
S-23
<PAGE> 24
Company's independent accountants (see "Experts" in the accompanying
Prospectus), has not examined, compiled or performed agreed upon procedures
with respect to the Projected EBITDA and accordingly does not express an
opinion or any other form of assurance on it.
REDEVELOPMENT COMMUNITIES
As of the date of this Prospectus Supplement, the Company has 24
Redevelopment Communities. The total budgeted cost of these Redevelopment
Communities, including the cost of acquisition and redevelopment when completed,
is expected to be approximately $725.9 million, of which approximately $164.0
million is the additional capital invested or expected to be invested above the
original purchase cost.
The cost to redevelop an existing apartment community is difficult to
budget and estimate. Accordingly, we expect that actual costs may vary over a
wider range than for a new development community. We cannot provide any
assurance that we will not exceed budgeted costs, either individually or in the
aggregate, or that projected unleveraged returns on cost will be achieved.
S-24
<PAGE> 25
The following is a summary of the Company's Redevelopment Communities as of
the date of this Prospectus Supplement:
REDEVELOPMENT COMMUNITIES SUMMARY
<TABLE>
<CAPTION>
NUMBER TOTAL
OF APARTMENT ACQUISITION ACQUISITION BUDGETED
COMMUNITY NAME LOCATION HOMES DATE COST COST(1)
- -------------- --------------------------- ------------ ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
1. Sunset Towers San Francisco, CA 243 Q2 1996 $ 24.3 $ 27.6
2. TimberWood West Covina, CA 209 Q1 1997 9.8 14.9
3. SunScape Huntington Beach, CA 400 Q2 1997 28.0 36.7
4. The Arbors Campbell, CA 252 Q2 1997 18.9 29.7
5. Mission Woods San Diego, CA 200 Q2 1997 13.6 20.8
6. Cedar Ridge Daly City, CA 195 Q3 1997 13.9 24.4
7. The Park Hacienda Heights, CA 351 Q3 1997 20.9 28.7
8. Lakeside Burbank, CA 750 Q3 1997 50.3 67.1
9. Gallery Place Redmond, WA 222 Q3 1997 21.7 24.9
10. Creekside Mountain View, CA 294 Q4 1997 29.0 38.8
11. Governor's Square Sacramento, CA 302 Q4 1997 24.7 31.6
12. Viewpointe Woodland Hills, CA 663 Q4 1997 64.2 72.6
13. Mission Bay Club San Diego, CA 564 Q4 1997 43.8 57.2
14. Westwood Club Los Angeles, CA 363 Q4 1997 32.1 39.9
15. Pacifica Club Huntington Beach, CA 304 Q4 1997 26.8 33.9
16. Landing West Seattle, WA 190 Q4 1997 9.0 12.3
17. Waterhouse Place Beaverton, OR 279 Q4 1997 15.6 19.4
18. Warner Oaks Woodland Hills, CA 227 Q1 1998 20.0 24.8
19. Amber Way Anaheim, CA 272 Q1 1998 17.6 21.0
20. Arbor Park Upland, CA 260 Q1 1998 12.5 13.8
21. Laguna Brisas Laguna Niguel, CA 176 Q1 1998 17.2 19.4
22. Cabrillo Square San Diego, CA 293 Q1 1998 22.9 29.7
23. Avalon Ridge Renton, WA 356 Q2 1998 21.3 31.3
24. Sunpointe Renton, WA 64 Q2 1998 3.8 5.4
----- ------ ------
Total 7,429 $561.9 $725.9
===== ====== ======
</TABLE>
- ---------------
(1) Total Budgeted Cost consists of all capitalized costs incurred as of May 31,
1998, including costs to acquire the community and any amounts spent to date
to redevelop the community, or projected to be incurred thereafter,
principally in 1998 and 1999.
DEVELOPMENT RIGHTS
The Company is considering the development of 20 new apartment communities.
The status of these Development Rights ranges from land under contract for which
design and architectural planning has just commenced, to land under contract or
owned by the Company with completed site plans and drawings where construction
can commence almost immediately. There can be no assurance that the Company will
succeed in obtaining zoning and other necessary governmental approvals or the
financing required to develop these communities, or that the Company will decide
to develop any particular community. Further, there can be no assurance that
construction of any particular community will be undertaken or, if undertaken,
will begin at the expected times assumed in the financial projections or be
completed at the total budgeted cost. Although there is no assurance that all or
any of these communities will proceed to development, the successful completion
of all of these communities would ultimately add approximately 5,410
institutional-quality apartment homes to the Company's portfolio. See "Risk
Factors -- Development, Redevelopment and Acquisition Risks." At
S-25
<PAGE> 26
March 31, 1998, the cumulative capitalized costs incurred in pursuit of the 20
Development Rights were approximately $28.2 million, including the capitalized
cost of approximately $21.3 million related to the purchase of land in New
Canaan, Connecticut and Mountain View, California. Many of these apartment homes
will offer features like those offered by the communities currently owned by the
Company. As of the date of this Prospectus Supplement, the 20 Development Rights
that the Company is currently pursuing are summarized below.
DEVELOPMENT RIGHTS SUMMARY
<TABLE>
<CAPTION>
ESTIMATED TOTAL
NUMBER OF BUDGETED COST
LOCATION APT HOMES ($ MILLIONS)
- -------- --------- -------------
<C> <S> <C> <C>
1. Peabody, MA................................................. 434 $ 35.9
2. San Jose, CA................................................ 288 53.8
3. Mountain View, CA........................................... 200 50.0
4. Hull, MA.................................................... 162 17.0
5. New Rochelle, NY............................................ 408 62.7
6. Stamford, CT................................................ 195 30.5
7. Freehold, NJ................................................ 452 38.4
8. Herndon, VA................................................. 165 19.5
9. Melville--II, NY............................................ 340 40.3
10. Orange, CT.................................................. 172 15.5
11. New Canaan, CT(1)........................................... 104 24.1
12. Darien, CT.................................................. 172 26.1
13. Yonkers, NY................................................. 256 33.7
14. Greenburgh--II, NY.......................................... 500 74.0
15. Greenburgh--III, NY......................................... 266 39.3
16. Florham Park, NJ............................................ 270 37.5
17. Ridgefield, CT.............................................. 240 30.2
18. Naperville, IL.............................................. 200 22.0
19. Westbury, NY................................................ 361 47.6
20. Providence, RI.............................................. 225 26.4
----- ------
Total....................................................... 5,410 $724.5
===== ======
</TABLE>
- ---------------
(1) Currently anticipated that the land seller will retain a minority limited
partner interest.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes, after all
anticipated issuance costs, are estimated to be approximately $247.6 million.
The Company will use the net proceeds from this offering to reduce borrowings
under the Unsecured Credit Facility, which were used to fund the acquisition and
development of additional apartment communities. Certain lenders under the
Unsecured Credit Facility, namely Morgan Guaranty Trust Company of New York,
NationsBank, N.A. and First Union National Bank, are affiliates of certain
Underwriters of the Offering and will receive their proportionate share of such
repayment. See "Underwriting." The Unsecured Credit Facility currently bears
interest at the London Interbank Offered Rate (based on a maturity selected by
the Company) plus 0.60% per annum (0.86% pro forma per annum as of May 31, 1998)
and matures in June 2001.
S-26
<PAGE> 27
CAPITALIZATION
The following table sets forth the historical capitalization for Bay as of
March 31, 1998 and the pro forma capitalization for the Company as of such date
to reflect (1) the completion of the Merger (including the issuance of Common
Stock and associated Rights, Series F Cumulative Redeemable Preferred Stock and
Series G Cumulative Redeemable Preferred Stock in connection with the Merger),
(2) the acquisition of five communities by Avalon, Bay or the Merged Company
subsequent to March 31, 1998 (Avalon Ridge, Sunpointe, Verandas at Bear Creek,
Pinnacle at Oxford Hill and Gates of Edinburgh) and one community that is a
probable acquisition (Prudential Center) and (3) the conversion of Bay Series A
Preferred Stock and Bay Series B Preferred Stock for Bay Common Stock, in each
case as if the Merger or such acquisition or conversion had occurred on March
31, 1998, and as adjusted to give effect to this offering, including the use of
the net proceeds derived therefrom as described in "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------------
HISTORICAL PRO FORMA AS ADJUSTED
---------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
DEBT:
Unsecured Credit Facilities(1)........................... $ 182,000 $ 464,344 $ 216,728
Mortgages and other notes payable........................ 273,191 497,844 497,844
Senior unsecured notes payable........................... 150,000 459,683 709,683
---------- ---------- ----------
Total debt............................................ 605,191 1,421,871 1,424,255
---------- ---------- ----------
Minority interest of unitholders in consolidated
operating partnership................................. 9,124 25,291 25,291
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par values; 50,000,000 authorized;
outstanding: 8,281,522 (Historical) and 14,322,700
(Pro Forma) at March 31, 1998(2)...................... 83 144 144
Common Stock, $.01 par value; 300,000,000 authorized;
26,197,865 (Historical) and 62,047,522 (Pro Forma)
issued and outstanding at March 31, 1998(3)........... 262 620 620
Additional paid-in capital............................... 826,792 2,265,799 2,265,799
Deferred compensation.................................... -- (5,967) (5,967)
Accumulated deficit...................................... (33,222) (33,222) (33,222)
---------- ---------- ----------
Total stockholders' equity............................ 793,915 2,227,374 2,227,374
---------- ---------- ----------
Total capitalization.................................. $1,408,230 $3,674,536 $3,676,920
========== ========== ==========
</TABLE>
- ---------------
(1) On June 23, 1998 the Company replaced three unsecured credit facilities
(aggregating $575 million) with the Unsecured Credit Facility in the amount
of $600 million. As of July 1, 1998 there was $374.0 million of outstanding
borrowings under the Company's Unsecured Credit Facility.
(2) Includes 2,308,800 (Historical) shares of Series A Preferred Stock, par
value $.01 per share, 405,022 (Historical) shares of Series B Preferred
Stock, par value $.01 per share, 2,300,000 (Historical) shares of Series C
Cumulative Redeemable Preferred Stock, par value $.01 per share, 3,267,700
(Historical) shares of Series D Cumulative Redeemable Preferred Stock, par
value $.01 per share, 4,455,000 (Pro Forma) shares of Series F Cumulative
Redeemable Preferred Stock, par value $.01 per share, and 4,300,000 (Pro
Forma) shares of Series G Cumulative Redeemable Preferred Stock, par value
$.01 per share. Does not include 2,713,822 (Pro Forma) shares of Series A
Preferred Stock and Series B Preferred Stock that have been converted to
Common Stock.
(3) Excludes 2,500,000 shares of Common Stock reserved for issuance under the
1994 Stock Incentive Plan, as amended and restated, and 2,769,530 shares of
Common Stock issuable pursuant to Avalon stock options outstanding at the
time of the Merger and assumed in the Merger and 898,041 shares of Common
Stock that may be issuable upon conversion of OP Units in DownREITs.
Includes 2,713,822 (Pro Forma) shares of Series A Preferred Stock and Series
B Preferred Stock that have been converted to Common Stock.
S-27
<PAGE> 28
DESCRIPTION OF NOTES
The following description of the particular terms of the Notes offered
hereby supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the "Debt Securities" set
forth under "Description of Debt Securities" in the accompanying Prospectus, to
which reference is hereby made.
The 2003 Notes and the 2006 Notes each constitute a separate series of
Senior Securities (which are more fully described in the accompanying
Prospectus) to be issued under an Indenture, dated as of January 16, 1998 (the
"Original Indenture"), a First Supplemental Indenture, dated as of January 20,
1998, and a Second Supplemental Indenture, dated as of July 7, 1998
(collectively and together with the Original Indenture, the "Indenture"), each
between the Company and State Street Bank and Trust Company (the "Trustee"). The
form of the Original Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus Supplement and the accompanying Prospectus
are a part and is available for inspection at the corporate trust office of the
Trustee at Two International Place, Boston, Massachusetts 02110. The Indenture
is subject to, and governed by, the Trust Indenture Act of 1939, as amended (the
"TIA"). The statements made hereunder relating to the Indenture and the Notes to
be issued thereunder are summaries of certain provisions thereof, do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to all provisions of the Indenture and such Notes.
GENERAL
The 2003 Notes will be limited to an aggregate principal amount of
$100,000,000 and the 2006 Notes will be limited to an aggregate principal amount
of $150,000,000. The Notes will be direct, senior unsecured obligations of the
Company and will rank equally with all other unsecured and unsubordinated
indebtedness of the Company from time to time outstanding. The Notes will be
effectively subordinated to mortgages and other secured indebtedness of the
Company and to indebtedness and other liabilities of any Subsidiaries now
existing or that may be formed by the Company in the future. Accordingly, such
indebtedness will have to be satisfied in full before holders of the Notes will
be able to realize any value from the secured or indirectly-held properties.
As of July 1, 1998, on a pro forma basis after giving effect to the
issuance and sale of the Notes offered hereby and the application of the
proceeds from this Offering, the total outstanding indebtedness of the Company
was approximately $1.3 billion. The Company may incur additional indebtedness,
including secured indebtedness, subject to the provisions described below under
"Certain Covenants -- Limitations on Incurrence of Indebtedness."
PRINCIPAL AND INTEREST
The 2003 Notes will bear interest at 6.50% per annum and will mature on
July 15, 2003. The 2006 Notes will bear interest at 6.80% per annum and will
mature on July 15, 2006. The Notes will bear interest from July 7, 1998 or from
the immediately preceding Interest Payment Date (as defined below) to which
interest has been paid, payable semi-annually in arrears on January 15 and July
15 of each year, commencing on January 15, 1999 (each, an "Interest Payment
Date"), to the persons in whose name the Notes are registered in the register
for the Notes (the "Security Register") on the preceding December 31 or June 30
(whether or not a Business Day, as defined below), as the case may be (each, a
"Regular Record Date"). Interest on the Notes will be computed on the basis of a
360-day year of twelve 30-day months.
If any Interest Payment Date or Stated Maturity falls on a day that is not
a Business Day, the required payment shall be made on the next Business Day as
if it were made on the date such payment was due and no interest shall accrue on
the amount so payable for the period from and after such Interest Payment Date
or the Maturity Date, as the case may be. "Business Day" means any day, other
than a Saturday or Sunday, on which banks in the City of New York are not
required or authorized by law or executive order to close.
Payment of principal of (and premium or Make-Whole Amount (as defined
below), if any) and interest on the Notes will be made by check mailed to the
address of the Person entitled thereto as it appears in the
S-28
<PAGE> 29
Security Register or by wire transfer of funds to such Person at an account
maintained within the United States.
OPTIONAL REDEMPTION
The Notes may be redeemed at any time at the option of the Company, in
whole or in part, at a redemption price equal to the sum of (i) the principal
amount of the Notes being redeemed plus accrued interest thereon to the
redemption date (the "Redemption Date") and (ii) the Make-Whole Amount, if any,
with respect to such Notes (the "Redemption Price").
If notice has been given as provided in the Indenture and funds for the
redemption of any Notes called for redemption shall have been made available on
the Redemption Date referred to in such notice, such Notes will cease to bear
interest on such Redemption Date and the only right of the Holders of the Notes
will be to receive payment of the Redemption Price.
Notice of any optional redemption of any Notes will be given to Holders at
their addresses, as shown in the Security Register, not more than 60 nor less
than 30 days prior to the Redemption Date. The notice of redemption will
specify, among other items, the Redemption Date, the Redemption Price and the
principal amount of the Notes held by such Holder to be redeemed.
If less than all the Notes are to be redeemed at the option of the Company,
the Company will notify the Trustee at least 45 days prior to the redemption (or
such shorter period as is satisfactory to the Trustee) of the aggregate
principal amount of Notes to be redeemed and the Redemption Date. The Trustee
shall select, in such manner as it shall deem fair and appropriate, Notes to be
redeemed in whole or in part. Notes may be redeemed in part in the minimum
authorized denomination for Notes or in any integral multiple thereof.
"Make-Whole Amount" means, in connection with any optional redemption or
accelerated payment of any Note, the excess, if any, of (i) the aggregate
present value as of the date of such redemption or accelerated payment of each
dollar of principal being redeemed or paid and the amount of interest (exclusive
of interest accrued to the date of redemption or accelerated payment) that would
have been payable in respect of such dollar if such redemption or accelerated
payment had not been made, determined by discounting, on a semiannual basis,
such principal and interest at the Reinvestment Rate (determined on the third
Business Day preceding the date such notice of redemption is given or
declaration of acceleration is made) from the respective dates on which such
principal and interest would have been payable if such redemption or accelerated
payment had not been made, over (ii) the aggregate principal amount of the Notes
being redeemed or paid.
"Reinvestment Rate" means 0.25% (twenty-five one hundredths of one percent)
plus the arithmetic mean of the yields under the respective headings "This Week"
and "Last Week" published in the Statistical Release under the caption "Treasury
Constant Maturities" for the maturity (rounded to the nearest month)
corresponding to the remaining life to maturity, as of the payment date of the
principal being redeemed or paid. If no maturity exactly corresponds to such
maturity, yields for the two published maturities most closely corresponding to
such maturity shall be calculated pursuant to the immediately preceding sentence
and the Reinvestment Rate shall be interpolated or extrapolated from such yields
on a straight-line basis, rounding in each of such relevant periods to the
nearest month. For such purposes of calculating the Reinvestment Rate, the most
recent Statistical Release published prior to the date of determination of the
Make-Whole Amount shall be used.
"Statistical Release" means the statistical release designated "H.15(519)"
or any successor publication which is published weekly by the Federal Reserve
System and which establishes yields on actively traded United States government
securities adjusted to constant maturities or, if such statistical release is
not published at the time of any determination of the Make-Whole Amount under
the Indenture, then such other reasonably comparable index which shall be
designated by the Company.
S-29
<PAGE> 30
CERTAIN COVENANTS
Limitations on Incurrence of Indebtedness. The Company will not, and will
not permit any Subsidiary to, incur any Indebtedness (as defined below) if,
immediately after giving effect to the incurrence of such additional
Indebtedness and the application of the proceeds thereof, the aggregate
principal amount of all outstanding Indebtedness of the Company and its
Subsidiaries on a consolidated basis determined in accordance with GAAP is
greater than 60% of the sum of (without duplication)(i) the Total Assets (as
defined below) of the Company and its Subsidiaries as of the end of the calendar
quarter covered in the Company's Annual Report on Form 10-K or Quarterly Report
on Form 10-Q, as the case may be, most recently filed with the Securities and
Exchange Commission (the "Commission") (or, if such filing is not permitted
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with
the Trustee) prior to the incurrence of such additional Indebtedness and (ii)
the purchase price of any real estate assets or mortgages receivable acquired,
and the amount of any securities offering proceeds received (to the extent that
such proceeds were not used to acquire real estate assets or mortgages
receivable or used to reduce Indebtedness), by the Company or any Subsidiary
since the end of such calendar quarter, including those proceeds obtained in
connection with the incurrence of such additional Indebtedness.
In addition to the foregoing limitation on the incurrence of Indebtedness,
the Company will not, and will not permit any Subsidiary to, incur any
Indebtedness secured by any Encumbrance (as defined below) upon any of the
property of the Company or any Subsidiary if, immediately after giving effect to
the incurrence of such additional Indebtedness and the application of the
proceeds thereof, the aggregate principal amount of all outstanding Indebtedness
of the Company and its Subsidiaries on a consolidated basis which is secured by
any Encumbrance on property of the Company or any Subsidiary is greater than 40%
of the sum of (without duplication) (i) the Total Assets of the Company and its
Subsidiaries as of the end of the calendar quarter covered in the Company's
Annual Report on Form 10-K or Quarterly Report on Form 10-Q, as the case may be,
most recently filed with the Commission (or, if such filing is not permitted
under the Exchange Act, with the Trustee) prior to the incurrence of such
additional Indebtedness and (ii) the purchase price of any real estate assets or
mortgages receivable acquired, and the amount of any securities offering
proceeds received (to the extent that such proceeds were not used to acquire
real estate assets or mortgages receivable or used to reduce Indebtedness), by
the Company or any Subsidiary since the end of such calendar quarter, including
those proceeds obtained in connection with the incurrence of such additional
Indebtedness.
The Company and its Subsidiaries may not at any time own Total Unencumbered
Assets (as defined below) equal to less than 150% of the aggregate outstanding
principal amount of the Unsecured Indebtedness of the Company and its
Subsidiaries on a consolidated basis.
In addition to the foregoing limitations on the incurrence of Indebtedness,
the Company will not, and will not permit any Subsidiary to, incur any
Indebtedness if the ratio of Consolidated Income Available for Debt Service (as
defined below) to the Annual Service Charge (as defined below) for the four
consecutive fiscal quarters most recently ended prior to the date on which such
additional Indebtedness is to be incurred shall have been less than 1.5:1, on a
pro forma basis after giving effect thereto and to the application of the
proceeds therefrom, and calculated on the assumption that (i) such Indebtedness
and any other Indebtedness incurred by the Company and its Subsidiaries since
the first day of such four-quarter period and the application of the proceeds
therefrom, including to refinance other Indebtedness, had occurred at the
beginning of such period; (ii) the repayment or retirement of any other
Indebtedness by the Company and its Subsidiaries since the first day of such
four-quarter period had been repaid or retired at the beginning of such period
(except that, in making such computation, the amount of Indebtedness under any
revolving credit facility shall be computed based upon the average daily balance
of such Indebtedness during such period); (iii) in the case of Acquired
Indebtedness (as defined below) or Indebtedness incurred in connection with any
acquisition since the first day of such four-quarter period, the related
acquisition had occurred as of the first day of such period with the appropriate
adjustments with respect to such acquisition being included in such pro forma
calculation; and (iv) in the case of any acquisition or disposition by the
Company or its Subsidiaries of any asset or group of assets since the first day
of such four-quarter period, whether by merger, stock purchase or sale, or asset
purchase or sale, such acquisition or disposition or any related repayment of
Indebtedness had occurred as of the first day of such period with the
appropriate adjustments with respect to such acquisition or disposition being
included in such pro forma calculation.
S-30
<PAGE> 31
As used herein, and in the Indenture:
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from such Person, in each case, other than Indebtedness
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary or such acquisition. Acquired Indebtedness shall be deemed to be
incurred on the date of the related acquisition of assets from any Person or the
date the acquired Person becomes a Subsidiary.
"Annual Service Charge" for any period means the maximum amount which is
payable during such period for interest on, and original issue discount of,
Indebtedness of the Company and its Subsidiaries and the amount of dividends
which are payable during such period in respect of any Disqualified Stock.
"Capital Stock" means, with respect to any Person, any capital stock
(including preferred stock), shares, interests, participations or other
ownership interests (however designated) of such Person and any rights (other
than debt securities convertible into or exchangeable for corporate stock),
warrants or options to purchase any thereof.
"Consolidated Income Available for Debt Service" for any period means
Earnings from Operations (as defined below) of the Company and its Subsidiaries,
plus amounts which have been deducted, and minus amounts which have been added,
for the following (without duplication): (i) interest on Indebtedness of the
Company and its Subsidiaries, (ii) provision for taxes of the Company and its
Subsidiaries based on income, (iii) amortization of debt discount and other
deferred financing costs, (iv) provisions for gains and losses on properties and
property depreciation and amortization, (v) the effect of any noncash charge
resulting from a change in accounting principles in determining Earnings from
Operations for such period and (vi) amortization of deferred charges.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
of such Person which by the terms of such Capital Stock (or by the terms of any
security into which it is convertible or for which it is exchangeable or
exercisable), upon the happening of any event or otherwise (i) matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise
(other than Capital Stock which is redeemable solely in exchange for common
stock), (ii) is convertible into or exchangeable or exercisable for Indebtedness
or Disqualified Stock or (iii) is redeemable at the option of the holder
thereof, in whole or in part (other than Capital Stock which is redeemable
solely in exchange for Capital Stock which is not Disqualified Stock), in each
case on or prior to the Stated Maturity of the Notes.
"Earnings from Operations" for any period means net earnings excluding
gains and losses on sales of investments, extraordinary items and property
valuations losses, net as reflected in the financial statements of the Company
and its Subsidiaries for such period determined on a consolidated basis in
accordance with GAAP.
"Encumbrance" means any mortgage, lien, charge, pledge or security interest
of any kind.
"Indebtedness" of the Company or any Subsidiary means, without duplication,
any indebtedness of the Company or any Subsidiary, whether or not contingent, in
respect of (i) borrowed money or evidenced by bonds, notes, debentures or
similar instruments, (ii) indebtedness for borrowed money secured by any
Encumbrance existing on property owned by the Company or any Subsidiary, (iii)
the reimbursement obligations, contingent or otherwise, in connection with any
letters of credit actually issued (other than letters of credit issued to
provide credit enhancement or support with respect to other indebtedness of the
Company or any Subsidiary otherwise reflected as Indebtedness hereunder) or
amounts representing the balance deferred and unpaid of the purchase price of
any property or services, except any such balance that constitutes an accrued
expense or trade payable, or all conditional sale obligations or obligations
under any title retention agreement, (iv) the principal amount of all
obligations of the Company or any Subsidiary with respect to redemption,
repayment or other repurchase of any Disqualified Stock, (v) any lease of
property by the Company or any Subsidiary as lessee which is reflected on the
Company's consolidated balance sheet as a capitalized lease in accordance with
GAAP or (vi) interest rate swaps, caps or similar agreements and foreign
exchange contracts, currency swaps or similar agreements, to the extent, in the
case of items of indebtedness under (i) through (iii) above, that any such items
(other than letters of credit) would appear as a liability on
S-31
<PAGE> 32
the Company's consolidated balance sheet in accordance with GAAP, and also
includes, to the extent not otherwise included, any obligation by the Company or
any Subsidiary to be liable for, or to pay, as obligor, guarantor or otherwise
(other than for purposes of collection in the ordinary course of business),
Indebtedness of another Person (other than the Company or any Subsidiary) (it
being understood that Indebtedness shall be deemed to be incurred by the Company
or any Subsidiary whenever the Company or such Subsidiary shall create, assume,
guarantee or otherwise become liable in respect thereof).
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Significant Subsidiary" means any Subsidiary which is a "significant
subsidiary" (as defined in Article I, Rule 1-02 of Regulation S-X, promulgated
under the Securities Act of 1933, as amended) of the Company.
"Subsidiary" means, with respect to any Person, any corporation, limited
liability company, partnership or other entity of which a majority of (i) the
voting power of the voting equity securities or (ii) the outstanding equity
interests are owned, directly or indirectly, by such Person. For the purposes of
this definition, "voting equity securities" means equity securities having
voting power for the election of directors, whether at all times or only so long
as no senior class of security has such voting power by reason of any
contingency.
"Total Assets" as of any date means the sum of (i) the Undepreciated Real
Estate Assets (as defined below) and (ii) all other assets of the Company and
its Subsidiaries determined in accordance with GAAP (but excluding accounts
receivable and intangibles).
"Total Unencumbered Assets" means the sum of (i) those Undepreciated Real
Estate Assets not subject to an Encumbrance for borrowed money and (ii) all
other assets of the Company and its Subsidiaries not subject to an Encumbrance
for borrowed money, determined in accordance with GAAP (but excluding accounts
receivable and intangibles).
"Undepreciated Real Estate Assets" as of any date means the cost (original
cost plus capital improvements) of real estate assets of the Company and its
Subsidiaries on such date, before depreciation and amortization, determined on a
consolidated basis in accordance with GAAP.
"Unsecured Indebtedness" means Indebtedness which is not secured by any
Encumbrance upon any of the properties of the Company or any Subsidiary.
See "Description of Debt Securities -- Certain Covenants" in the
accompanying Prospectus for a description of additional covenants applicable to
the Company.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company may, without the consent of the holders of any outstanding Debt
Securities, consolidate with, or sell, lease or convey all or substantially all
of its assets to, or merge with or into, any other entity provided that (a)
either the Company shall be the continuing entity, or the successor entity (if
other than the Company) formed by or resulting from any such consolidation or
merger or which shall have received the transfer of such assets is organized
under the laws of any domestic jurisdiction and assumes the Company's
obligations to pay principal of (and premium or Make-Whole Amount, if any) and
interest on all of the Debt Securities and the due and punctual performance and
observance of all of the covenants and conditions contained in each Indenture;
(b) immediately after giving effect to such transaction and treating any
indebtedness that becomes an obligation of the Company or any Subsidiary as a
result thereof as having been incurred by the Company or such Subsidiary at the
time of such transaction, no Event of Default (as defined in the Indenture)
under the Indenture, and no event which, after notice or the lapse of time, or
both, would become such an Event of Default, shall have occurred and be
continuing; and (c) an officers' certificate and legal opinion covering such
conditions shall be delivered to each Trustee.
S-32
<PAGE> 33
EVENTS OF DEFAULT, NOTICE AND WAIVER
The Indenture provides that the following events are "Events of Default"
with respect to the Notes: (a) default in the payment of any interest on any
Notes when such interest becomes due and payable that continues for a period of
30 days; (b) default in the payment of the principal of (or premium or
Make-Whole Amount, if any, on) any Notes when due and payable; (c) default in
the performance, or breach, of any other covenant or warranty of the Company in
the Indenture with respect to the Notes and continuance of such default or
breach for a period of 60 days after written notice as provided in the
Indenture: (d) default under any bond, debenture, note, mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any indebtedness for money borrowed by the Company (or by any
Subsidiary, the repayment of which the Company has guaranteed or for which the
Company is directly responsible or liable as obligor or guarantor), having an
aggregate principal amount outstanding of at least $10,000,000, whether such
indebtedness now exists or shall hereafter be created, which default shall have
resulted in such indebtedness becoming or being declared due and payable prior
to the date on which it would otherwise have become due and payable, without
such indebtedness having been discharged, or such acceleration having been
rescinded or annulled, within a period of 10 days after written notice to the
Company as provided in the Indenture, provided, however, that such a default on
indebtedness which constitutes tax-exempt financing having an aggregate
principal amount outstanding not exceeding $25,000,000 that results solely from
a failure of an entity providing credit support for such indebtedness to honor a
demand for payment on a letter of credit shall not constitute an Event of
Default; (e) the entry by a court of competent jurisdiction of one or more
orders or decrees against the Company or any Significant Subsidiary under any
bankruptcy law that (i) is for relief in an involuntary case, (ii) appoints a
custodian of the Company or any Significant Subsidiary or for all or
substantially all of either of its property, or (iii) orders the liquidation of
the Company or any Significant Subsidiary, and such order or decree remains
unstayed and in effect for 90 days; or (f) the Company or any Significant
Subsidiary voluntarily commences certain events of bankruptcy, insolvency or
reorganization, or court appointment of a receiver, liquidator or trustee of the
Company or any Significant Subsidiary or for all or substantially all of either
of its property.
See "Description of Debt Securities -- Events of Default, Notice and
Waiver" in the accompanying Prospectus for a description of rights, remedies and
other matters relating to Events of Default.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The provisions of Article 14 of the Indenture relating to defeasance and
covenant defeasance, which are described in the accompanying Prospectus, will
apply to the Notes, including, without limitation, the covenants described under
"Description of Notes -- Certain Covenants."
BOOK-ENTRY SYSTEM
The Notes will be issued in the form of one or more fully registered Global
Notes which will be deposited with, or on behalf of, DTC and registered in the
name of DTC's nominee, Cede & Co. The provisions described under "Description of
Debt Securities -- Book-Entry System and Global Securities" in the accompanying
Prospectus will apply to the Notes.
DTC has advised the Company of the following information regarding DTC: DTC
is a limited-purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking Law, a member
of the Federal Reserve System, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code and a "clearing agency" registered pursuant
to the provisions of Section 17A of the Exchange Act. DTC holds securities that
its Participants deposit with DTC. DTC also facilitates the settlement among its
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry charges in its
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants of DTC include securities brokers
and dealers (including the Underwriters), banks, trust companies, clearing
corporations, and certain other organizations. DTC is owned by a number of its
direct Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of
S-33
<PAGE> 34
Securities Dealers, Inc. Access to the DTC system is also available to others
such as securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a direct Participant of DTC,
either directly or indirectly. The rules applicable to DTC and its participants
are on file with the Commission.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Underwriters in immediately
available funds. All payments of principal and interest in respect of the Notes
will be made by the Company in immediately available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing house or next-day funds. In contrast, the Notes
will trade in DTC's Same-Day Funds Settlement System until maturity or earlier
redemption, as the case may be, or until the Notes are issued in certificated
form, and secondary market trading activity in the Notes will therefore be
required by DTC to settle in immediately available funds. No assurance can be
given as to the effect, if any, of settlement in immediately available funds on
trading activity in the Notes.
GOVERNING LAW
The Indenture is governed by and shall be construed in accordance with the
laws of the State of New York.
NO PERSONAL LIABILITY OR RECOURSE
No recourse under or upon any obligation, covenant or agreement contained
in the Indenture or the Notes, or because of any indebtedness evidenced thereby,
shall be had against any past, present or future stockholder, employee, officer
or director, as such, of the Company or any successor, either directly or
through the Company or any successor, under any rule of law, statute or
constitutional provision or by the enforcement of any assessment or by any legal
or equitable proceeding or otherwise. Each holder of Notes waives and releases
all such liability by accepting such Notes. The waiver and release are part of
the consideration for the issue of the Notes.
S-34
<PAGE> 35
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") between the Company and the underwriters named
below (the "Underwriters"), the Company has agreed to sell to the Underwriters,
and each Underwriter has agreed to purchase from the Company, the respective
principal amount of Notes set forth opposite its name. Pursuant to the terms of
the Underwriting Agreement, the Underwriters are obligated to purchase the
entire aggregate principal amount of such Notes if any are purchased.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
UNDERWRITERS OF 2003 NOTES OF 2006 NOTES
- ------------ ------------- -------------
<S> <C> <C>
PaineWebber Incorporated.................................. $100,000,000 $ 37,500,000
First Union Capital Markets, a division of
Wheat First Securities, Inc............................. 0 37,500,000
J.P. Morgan Securities Inc................................ 0 37,500,000
NationsBanc Montgomery Securities LLC..................... 0 37,500,000
------------ ------------
Total................................................ $100,000,000 $150,000,000
============ ============
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the Notes in part to the public at the public offering price set forth on
the cover page of this Prospectus Supplement, and in part to certain securities
dealers (which may include the Underwriters) at such price less a concession not
in excess of 0.300% of the principal amount of the 2003 Notes and 0.375% of the
principal amount of the 2006 Notes. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of 0.250% of the principal amount of the
Notes to certain other dealers, including the Underwriters. Following the
completion of the initial offering of the Notes, the public offering price,
concession and reallowance may change.
Each of the Notes is a new issue of securities with no established trading
market. The Company has been advised by the Underwriters that the Underwriters
intend to make a market in the Notes but are not obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the liquidity of the trading market for the Notes.
Pursuant to the Underwriting Agreement, the Company has agreed to indemnify
the Underwriters against certain civil liabilities, including liabilities under
the Securities Act of 1933, as amended, or to contribute to payments the
Underwriters may be required to make in respect thereof.
Until the distribution of the Notes is completed, rules of the Commission
may limit the ability of the Underwriters to bid for and purchase the Notes. As
an exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Notes. Such transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price of
the Notes.
If the Underwriters create a short position in the Notes in connection with
the Offering, i.e., if the Underwriters sell a greater aggregate principal
amount of Notes than is set forth on the cover page of this Prospectus
Supplement, the Underwriters may reduce that short position by purchasing Notes
in the open market. In general, purchases of a security for the purpose of
stabilization or to reduce a short position could cause the price of the
security to be higher than it might be in the absence of such purchases.
Neither the Company nor the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above might have on the price of the Notes. In addition, neither the
Company nor the Underwriters makes any representation that the Underwriters will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
In the ordinary course of their respective businesses, the Underwriters and
certain of their affiliates have engaged, and may in the future engage, in
commercial banking and investment banking transactions with the Company and its
affiliates. In addition, Morgan Guaranty Trust Company of New York (an affiliate
of J.P. Morgan Securities Inc., one of the Underwriters), is a Co-Lead Agent for
the banks and lenders under the Company's Unsecured Credit Facility, and
NationsBank, N.A. (an affiliate of NationsBanc Montgomery Securities LLC, one of
the Underwriters) and First Union National Bank (an affiliate of First Union
Capital
S-35
<PAGE> 36
Markets, one of the Underwriters) are lenders under the Company's Unsecured
Credit Facility. The entire net proceeds from the Offering (approximately $247.6
million) will be used to reduce borrowings under the Company's Unsecured Credit
Facility. Morgan Guaranty Trust Company of New York, NationsBank, N.A. and First
Union National Bank expect to receive approximately $49.5 million, $20.6 million
and $20.6 million, respectively, in repayment of amounts outstanding under the
Company's Unsecured Credit Facility. See "Use of Proceeds."
LEGAL MATTERS
Certain legal matters, including the legality of the Notes, will be passed
upon for the Company by Goodwin, Procter & Hoar LLP, Boston, Massachusetts, and
for the Underwriters by O'Melveny & Myers LLP, San Francisco, California.
S-36
<PAGE> 37
PROSPECTUS
$600,000,000
AVALON BAY COMMUNITIES, INC.
DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
------------------------
Avalon Bay Communities, Inc. (the "Company") may offer from time to time in
one or more series (i) unsecured debt securities ("Debt Securities"), (ii)
shares of preferred stock, par value $.01 per share ("Preferred Stock"), and
(iii) shares of common stock, par value $.01 per share ("Common Stock"), with an
aggregate public offering price of up to $600,000,000 in amounts, at prices and
on terms to be determined at the time of offering. The Debt Securities,
Preferred Stock and Common Stock (collectively, the "Securities") may be offered
separately or together, in separate series, in amounts, at prices and on terms
to be set forth in one or more supplements to this Prospectus (each a
"Prospectus Supplement").
The specific terms of the Securities for which this Prospectus is being
delivered will be set forth in the applicable Prospectus Supplement and will
include, where applicable: (i) in the case of Debt Securities, the specific
title, aggregate principal amount, ranking, currency, form (which may be
registered or bearer, or certificated or global), authorized denominations,
maturity, rate (or manner of calculation thereof) and time of payment of
interest, terms for redemption at the option of the Company or repayment at the
option of the holder, terms for sinking fund payments, terms for conversion into
Common Stock or Preferred Stock, covenants and any initial public offering
price, (ii) in the case of Preferred Stock, the specific designation and stated
value per share, any dividend, liquidation, redemption, conversion, voting and
other rights, and any initial public offering price, and (iii) in the case of
Common Stock, any initial public offering price. In addition, such specific
terms may include limitations on direct or beneficial ownership and restrictions
on transfer of the Securities, in each case as may be consistent with the
Company's Articles of Incorporation, as amended (the "Articles of
Incorporation"), or otherwise appropriate to preserve the status of the Company
as a real estate investment trust ("REIT") for federal income tax purposes. See
"Restrictions on Transfers of Capital Stock."
The applicable Prospectus Supplement will also contain information, where
appropriate, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities covered
by such Prospectus Supplement.
The Securities may be offered by the Company directly to one or more
purchasers, through agents designated from time to time by the Company or to or
through underwriters or dealers. If any agents or underwriters are involved in
the sale of any of the Securities, their names, and any applicable purchase
price, fee, commission or discount arrangement between or among them, will be
set forth, or will be calculable from the information set forth, in an
accompanying Prospectus Supplement. See "Plan of Distribution." No Securities
may be sold without delivery of a Prospectus Supplement describing the method
and terms of the offering of such Securities.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is June 26, 1998.
<PAGE> 38
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Securities. This
Prospectus, which constitutes part of the Registration Statement, omits certain
of the information contained in the Registration Statement and the exhibits
thereto on file with the Commission pursuant to the Securities Act and the rules
and regulations of the Commission thereunder. The Registration Statement,
including exhibits thereto, may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the Commission's Regional Offices at 7 World
Trade Center, 13th Floor, New York, New York 10048, and Northwestern Atrium
Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and
copies may be obtained at the prescribed rates from the Public Reference Section
of the Commission at its principal office in Washington, D.C. In addition, the
Company is required to file electronic versions of these documents with the
Commission through the Commission's Electronic Data Gathering, Analysis and
Retrieval (EDGAR) system, and such electronic versions are available to the
public at the Commission's World-Wide Web Site, http://www.sec.gov. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the locations described above. Copies of such materials
can be obtained via EDGAR or by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at
prescribed rates. In addition, the Company's Common Stock, 8.50% Series C
Cumulative Redeemable Preferred Stock, par value $.01 per share (the "Series C
Preferred Stock"), 8.00% Series D Cumulative Redeemable Preferred Stock, par
value $.01 per share (the "Series D Preferred Stock"), 9.00% Series F Cumulative
Redeemable Preferred Stock, par value $.01 per share (the "Series F Preferred
Stock"), and 8.96% Series G Cumulative Redeemable Preferred Stock, par value
$.01 per share (the "Series G Preferred Stock"), are listed on the New York
Stock Exchange (the "NYSE") and the Pacific Exchange (the "PCX"), and such
reports and information can be inspected at the NYSE, 20 Broad Street, New York,
New York 10005, and at the PCX, 301 Pine Street, San Francisco, California
94104.
In accordance with Section 2-210 of the Maryland General Corporation Law,
as amended (the "MGCL"), the Board of Directors has authorized the issuance of
some or all of the shares of any or all of its classes or series of capital
stock without certificates. In addition, the Company has the authority to
designate and issue more than one class or series of capital stock having
various preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption. See "Description of Preferred Stock" and "Description of Common
Stock." The Company's Articles of Incorporation impose limitations on the
ownership and transfer of the Company's capital stock. See "Restrictions on
Transfers of Capital Stock." The Company will furnish a full statement of the
relative rights and preferences of each class or series of capital stock of the
Company which has been so designated and any restrictions on the ownership or
transfer of capital stock of the Company to any stockholder upon request and
without charge. Written requests for such copies should be directed to: Avalon
Bay Communities, Inc., 2900 Eisenhower Avenue, Suite 300, Alexandria, Virginia
22314, Attention: Chief Financial Officer.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Company with the Commission
pursuant to the Exchange Act are incorporated by reference in this Prospectus:
(i) Annual Reports on Form 10-K for the fiscal years ended December 31, 1996,
and December 31, 1997 (ii) Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 1997, June 30, 1997, September 30, 1997 and March 31,
1998 (iii) Current Report on Form 8-K filed January 21, 1997, (iv) Current
Report on Form 8-K filed April 18, 1997, as amended by Current Reports on Form
8-K filed on April 21, 1997 and June 16, 1997, respectively,
2
<PAGE> 39
(v) Current Report on Form 8-K filed July 25, 1997, (vi) Current Report on Form
8-K filed August 14, 1997, (vii) Current Report on Form 8-K filed September 9,
1997, (viii) Current Report on Form 8-K filed September 16, 1997, (ix) Current
Report on Form 8-K filed October 28, 1997, (x) Current Report on Form 8-K filed
December 11, 1997, (xi) Current Report on Form 8-K filed December 16, 1997,
(xii) Current Report on Form 8-K filed December 22, 1997, (xiii) Current Report
on Form 8-K filed January 8, 1998, (xiv) Current Report on Form 8-K filed
January 21, 1998, (xv) Current Report on Form 8-K filed March 11, 1998, (xvi)
Current Report on Form 8-K filed March 27, 1998, (xvii) Current Report on Form
8-K field April 16, 1998, (xviii) Current Report on Form 8-K filed April 22,
1998, (xix) Current Report on Form 8-K filed June 19, 1998, (xx) Current Report
on Form 8-K filed June 25, 1998, (xxi) the description of the Company's Common
Stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock contained in the Company's Registration Statement on Form 8-A filed June
18, 1997, (xxii) the description of the Company's Series D Preferred Stock
contained in the Company's Registration Statement on Form 8-A filed December 17,
1997, (xxiii) the description of the Company's Preferred Stock Purchase Rights
contained in the Company's Registration Statement on Form 8-A filed March 11,
1998, (xxiv) the description of the Company's Series F Preferred Stock contained
in the Registration Statement on Form 8-A of Avalon Properties, Inc. filed
February 15, 1996 and (xxv) the description of the Company's Series G Preferred
Stock contained in the Registration Statement on Form 8-A of Avalon Properties,
Inc. filed October 16, 1996, as amended by Registration Statement on Form 8-A/A
filed October 23, 1996.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of all Securities shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. The Company will provide, without charge, to
each person, including any beneficial owner, to whom a copy of this Prospectus
is delivered, at the request of such person, a copy of any or all of the
documents incorporated herein by reference (other than exhibits thereto, unless
such exhibits are specifically incorporated by reference into such documents).
Written requests for such copies should be directed to: Avalon Bay Communities,
Inc., 2900 Eisenhower Avenue, Suite 300, Alexandria, Virginia 22314, Attention:
Chief Financial Officer.
Any statement contained herein or in a document incorporated or deemed to
be incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in an applicable Prospectus Supplement) or in any subsequently filed
document that is incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed to
constitute a part of this Prospectus or any Prospectus Supplement, except as so
modified or superseded.
3
<PAGE> 40
THE COMPANY
The Company is a REIT that is focused exclusively on the ownership of
institutional-quality apartment communities in high barrier-to-entry markets of
the United States. These markets include Northern and Southern California and
selected states in the Mid-Atlantic, Northeast, Midwest and Pacific Northwest
regions of the country. The Company is the surviving entity from the merger (the
"Merger") of Avalon Properties, Inc. ("Avalon") with and into Bay Apartment
Communities, Inc. (sometimes hereinafter referred to as "Bay" before the Merger)
on June 4, 1998. Concurrently with the Merger, the Company changed its name to
Avalon Bay Communities, Inc.
The Company is a fully-integrated real estate organization with in-house
acquisition, development, redevelopment, construction, reconstruction,
financing, marketing, leasing and management expertise. With its experience and
in-house capabilities, the Company believes it is well-positioned to continue to
take advantage of opportunities to develop and acquire upscale apartment homes
in its target markets.
The Company elected to be taxed as a REIT for federal income tax purposes
for the year ending December 31, 1994 and has not revoked that election. The
Company was incorporated under the laws of the State of California in 1978 and
was reincorporated in the State of Maryland in July 1995. Its principal
executive offices are located at 2900 Eisenhower Avenue, Suite 300, Alexandria,
Virginia 22314 and its telephone number at that location is (703) 329-6300. The
Company also maintains super-regional offices in San Jose, California and
Wilton, Connecticut and acquisition, development, redevelopment, construction,
reconstruction or administrative offices in Boston, Massachusetts; Chicago,
Illinois; Minneapolis, Minnesota; Newport Beach, California; New York, New York;
Princeton, New Jersey; Richmond, Virginia; and Seattle, Washington.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of Securities for general
corporate purposes, which may include the acquisition or development of
additional properties, the repayment of outstanding debt or the improvement of
certain properties already in the Company's portfolio.
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The following table sets forth Bay's historical and the Company's pro forma
consolidated ratios of earnings to combined fixed charges and preferred stock
dividends for the periods shown:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
QUARTER ENDED YEAR ENDED QUARTER ENDED YEAR ENDED YEAR ENDED YEAR ENDED MARCH 17-
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998(2) 1997(2) 1998 1997 1996 1995 1994
------------- ------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio................ 1.34x 1.31x 1.45x 1.84x 1.61x 1.26x 1.76x
<CAPTION>
JANUARY 1- YEAR ENDED YEAR ENDED
MARCH 16, DECEMBER 31, DECEMBER 31,
1994(1) 1993(1) 1992(1)
------------ ------------ ------------
<S> <C> <C> <C>
Ratio................ .71x .96x .71x
</TABLE>
- ---------------
(1) Ratios for the period January 1 through March 16, 1994 and the years ended
1993 and 1992 reflect periods prior to the recapitalization and initial
public offering of the Company on March 17, 1994. The earnings for these
periods were inadequate to cover fixed charges as follows:
<TABLE>
<S> <C>
Period January 1 through March 16, 1994..................... $ 716,000
Year ended December 31, 1993................................ 447,000
Year ended December 31, 1992................................ 3,916,000
</TABLE>
The ratios of earnings to combined fixed charges and preferred stock
dividends were computed by dividing earnings by combined fixed charges and
preferred stock dividends. For this purpose, earnings consist of pre-tax
income from continuing operations plus fixed charges less capitalized
interest. Fixed charges consist of interest expense, capitalized interest,
and the amortization of debt issuance costs.
4
<PAGE> 41
(2) Calculated to reflect the impact of (1) the completion of the Merger
(including the issuance of Common Stock and associated Rights, Series F
Cumulative Redeemable Preferred Stock and Series G Cumulative Redeemable
Preferred Stock in connection with the Merger), (2) the acquisition of five
communities by Avalon, Bay or the Merged Company subsequent to March 31,
1998 (Avalon Ridge, Sunpointe, Verandas at Bear Creek, Pinnacle at Oxford
Hill and Gates of Edinburgh) and one community that is a probable
acquisition (Prudential Center) and (3) the conversion of Bay Series A
Preferred Stock and Bay Series B Preferred Stock for Bay Common Stock, in
each case as if the Merger or such acquisition or conversion had occurred on
March 31, 1998.
The Company issued 2,308,800 shares of Series A Preferred Stock, par value
$.01 per share (the "Series A Preferred Stock"), in October 1995, 405,022 shares
of Series B Preferred Stock, par value $.01 per share (the "Series B Preferred
Stock"), in May 1996, 2,300,000 shares of Series C Preferred Stock in June 1997,
3,267,700 shares of Series D Preferred Stock in December 1997, 4,455,000 shares
of Series F Preferred Stock in June 1998 and 4,300,000 shares of Series G
Preferred Stock in June 1998.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's consolidated ratios of
earnings to fixed charges for the periods shown:
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED YEAR ENDED YEAR ENDED MARCH 17- JANUARY 1- YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 16, DECEMBER 31,
1998 1997 1996 1995 1994 1994(1) 1993(1)
------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio................ 2.07x 2.48x 2.00x 1.33x 1.76x .71x .96x
<CAPTION>
YEAR ENDED
DECEMBER 31,
1992(1)
------------
<S> <C>
Ratio................ .71x
</TABLE>
- ---------------
(1) Ratios for the period January 1 through March 16, 1994 and the years ended
1993 and 1992 reflect periods prior to the recapitalization and initial
public offering of the Company on March 17, 1994. The earnings for these
periods were inadequate to cover fixed charges as follows:
<TABLE>
<S> <C>
Period January 1 through March 16, 1994..................... $ 716,000
Year ended December 31, 1993................................ 447,000
Year ended December 31, 1992................................ 3,916,000
</TABLE>
The ratios of earnings to fixed charges was computed by dividing earnings by
fixed charges. For this purpose, earnings consist of pre-tax income from
continuing operations plus fixed charges less capitalized interest. Fixed
charges consist of interest expense, capitalized interest and the amortization
of debt issuance costs.
5
<PAGE> 42
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities will be direct unsecured obligations of the Company and
may be either senior Debt Securities ("Senior Securities") or subordinated Debt
Securities ("Subordinated Securities"). The Debt Securities will be issued under
one or more indentures, each dated as of a date prior to the issuance of the
Debt Securities to which it relates. Senior Securities and Subordinated
Securities may be issued pursuant to separate indentures (respectively, a
"Senior Indenture" and a "Subordinated Indenture"), in each case between the
Company and a trustee (a "Trustee"), which may be the same Trustee, and in the
form that has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part, subject to such amendments or supplements as may be
adopted from time to time. The Senior Indenture and the Subordinated Indenture,
as amended or supplemented from time to time, are sometimes hereinafter referred
to collectively as the "Indentures." The Indentures will be subject to and
governed by the Trust Indenture Act of 1939, as amended (the "TIA"). The
statements made under this heading relating to the Debt Securities and the
Indentures are summaries of the anticipated provisions thereof, do not purport
to be complete and are qualified in their entirety by reference to the
Indentures and such Debt Securities.
Capitalized terms used herein and not defined shall have the meanings
assigned to them in the applicable Indenture.
TERMS
Unless otherwise indicated in the applicable Prospectus Supplement, the
indebtedness represented by the Senior Securities will rank equally with all
other unsecured and unsubordinated indebtedness of the Company. The indebtedness
represented by Subordinated Securities will be subordinated in right of payment
to the prior payment in full of the Senior Debt of the Company as described
under "-- Subordination." The particular terms of the Debt Securities offered by
a Prospectus Supplement will be described in the applicable Prospectus
Supplement, along with any applicable modifications of or additions to the
general terms of the Debt Securities as described herein and in the applicable
Indenture and any applicable federal income tax considerations. Accordingly, for
a description of the terms of any series of Debt Securities, reference must be
made to both the Prospectus Supplement relating thereto and the description of
the Debt Securities set forth in this Prospectus.
Except as set forth in any Prospectus Supplement, the Debt Securities may
be issued without limit as to aggregate principal amount, in one or more series,
in each case as established from time to time by the Company or as set forth in
the applicable Indenture or in one or more indentures supplemental to such
Indenture. All Debt Securities of one series need not be issued at the same time
and, unless otherwise provided, a series may be reopened, without the consent of
the holders of such series, for issuance of additional Debt Securities of such
series.
Each Indenture will provide that the Company may, but need not, designate
more than one Trustee thereunder, each with respect to one or more series of
Debt Securities. Any Trustee under an Indenture may resign or be removed with
respect to one or more series of Debt Securities and a successor Trustee may be
appointed to act with respect to such series. In the event that two or more
persons are acting as Trustee with respect to different series of Debt
Securities, each such Trustee shall be a Trustee of a trust under the applicable
Indenture separate and apart from the trust administered by any other Trustee,
and, except as otherwise indicated herein, any action described herein to be
taken by each Trustee may be taken by each such Trustee with respect to, and
only with respect to, the one or more series of Debt Securities for which it is
Trustee under the applicable Indenture.
6
<PAGE> 43
The following summaries set forth certain general terms and provisions of
the Indentures and the Debt Securities. The Prospectus Supplement relating to
the series of Debt Securities being offered will contain further terms of such
Debt Securities, including the following specific terms:
(1) The title of such Debt Securities and whether such Debt Securities
are Senior Securities or Subordinated Securities;
(2) The aggregate principal amount of such Debt Securities and any
limit on such aggregate principal amount;
(3) The price (expressed as a percentage of the principal amount
thereof) at which such Debt Securities will be issued and, if other than
the principal amount thereof, the portion of the principal amount thereof
payable upon declaration of acceleration of the maturity thereof, or (if
applicable) the portion of the principal amount of such Debt Securities
that is convertible into Common Stock or Preferred Stock, or the method by
which any such portion shall be determined;
(4) If convertible, the terms on which such Debt Securities are
convertible, including the initial conversion price or rate and the
conversion period and any applicable limitations on the ownership or
transferability of the Common Stock or Preferred Stock receivable on
conversion;
(5) The date or dates, or the method for determining such date or
dates, on which the principal of such Debt Securities will be payable;
(6) The rate or rates (which may be fixed or variable), or the method
by which such rate or rates shall be determined, at which such Debt
Securities will bear interest, if any;
(7) The date or dates, or the method for determining such date or
dates, from which any such interest will accrue, the dates on which any
such interest will be payable, the record dates for such interest payment
dates, or the method by which such dates shall be determined, the persons
to whom such interest shall be payable, and the basis upon which interest
shall be calculated if other than that of a 360-day year of twelve 30-day
months;
(8) The place or places where the principal of (and premium or
Make-Whole Amount, if any) and interest, if any, on such Debt Securities
will be payable, where such Debt Securities may be surrendered for
conversion or registration of transfer or exchange and where notices or
demands to or upon the Company in respect of such Debt Securities and the
applicable Indenture may be served;
(9) The period or periods, if any, within which, the price or prices
at which, and the other terms and conditions upon which, such Debt
Securities may, pursuant to any optional or mandatory redemption
provisions, be redeemed, as a whole or in part, at the option of the
Company;
(10) The obligation, if any, of the Company to redeem, repay or
purchase such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a holder thereof, and the period or periods
within which, the price or prices at which and the other terms and
conditions upon which such Debt Securities will be redeemed, repaid or
purchased, as a whole or in part, pursuant to such obligation;
(11) If other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite currency
or currencies, and the terms and conditions relating thereto;
(12) Whether the principal of (and premium or Make-Whole Amount, if
any) or interest on the Debt Securities of the series are to be payable, at
the election of the Company or a holder thereof, in a currency or
currencies, currency unit or units or composite currency or currencies
other than that in which such Debt Securities are denominated or stated to
be payable, the period or periods within which, and the terms and
conditions upon which, such election may be made, and the time and manner
of, and identity of the exchange rate agent with responsibility for,
determining the exchange rate between the currency or currencies, currency
unit or units or composite currency or currencies in which such Debt
Securities are denominated or stated to be payable and the currency or
currencies, currency unit or units or composite currency or currencies in
which such Debt Securities are to be so payable;
7
<PAGE> 44
(13) Provisions, if any, granting special rights to the holders of
Debt Securities of the series upon the occurrence of such events as may be
specified;
(14) Whether the amount of payments of principal of (and premium or
Make-Whole Amount, if any) or interest, if any, on such Debt Securities may
be determined with reference to an index, formula or other method (which
index, formula or method may, but need not be, based on the yield on or
trading price of other securities, or on a currency, currencies, currency
unit or units, or composite currency or currencies) and the manner in which
such amounts shall be determined;
(15) Whether such Debt Securities will be issued in certificated or
book-entry form and, if so, the identity of the depository for such Debt
Securities;
(16) Whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the denominations
thereof and terms and conditions relating thereto, any restrictions
applicable to the offer, sale or delivery of Bearer Securities and the
terms upon which Bearer Securities of the series may be exchanged for
Registered Securities of the series and vice versa (if permitted by
applicable laws and regulations), whether any Debt Securities of the series
are to be issuable initially in temporary global form and whether any Debt
Securities of the series are to be issuable in permanent global form with
or without coupons and, if so, whether beneficial owners of interests in
any such permanent Global Security (as defined under "-- Book-Entry System
and Global Securities") may exchange such interests for Debt Securities of
such series and of like tenor of any authorized form and denomination and
the circumstances under which any such exchanges may occur, if other than
in the manner provided in the Indenture, and, if Registered Securities of
the series are to be issuable as a Global Security, the identity of the
depository for such series;
(17) The applicability, if any, of the defeasance and covenant
defeasance provisions described herein or set forth in the applicable
Indenture, or any modification thereof;
(18) Whether and under what circumstances the Company will pay any
additional amounts on such Debt Securities in respect of any tax,
assessment or governmental charge and, if so, whether the Company will have
the option to redeem such Debt Securities in lieu of making such payment;
(19) Any deletions from, modifications of or additions to the events
of default or covenants of the Company, to the extent different from those
described herein or set forth in the applicable Indenture with respect to
such Debt Securities, and any change in the right of any Trustee or any of
the holders to declare the principal amount of any of such Debt Securities
due and payable; and
(20) Any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture.
If so indicated in the applicable Prospectus Supplement, the Debt
Securities may be issued at a discount below their principal amount and provide
for less than the entire principal amount thereof to be payable upon declaration
of acceleration of the maturity thereof ("Original Issue Discount Securities").
In such cases, any special U.S. federal income tax, accounting and other
considerations applicable to Original Issue Discount Securities will be
described in the applicable Prospectus Supplement.
Except as may be set forth in any Prospectus Supplement, the Debt
Securities will not contain any provisions that would limit the ability of the
Company to incur indebtedness or that would afford holders of Debt Securities
protection in the event of a highly leveraged or similar transaction involving
the Company or in the event of a change of control. Restrictions on ownership
and transfers of the Common Stock and Preferred Stock are designed to preserve
its status as a REIT and, therefore, may act to prevent or hinder a change of
control. See "Restrictions on Transfers of Capital Stock." Reference is made to
the applicable Prospectus Supplement for information with respect to any
deletions from, modifications of, or additions to, the events of default or
covenants of the Company that are described below, including any addition of a
covenant or other provision providing event risk or similar protection.
8
<PAGE> 45
DENOMINATION, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the
Debt Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof.
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium or Make-Whole Amount, if any) and interest
on any series of Debt Securities will be payable at the corporate trust office
of the applicable Trustee, the address of which will be stated in the applicable
Prospectus Supplement; provided that, at the option of the Company, payment of
interest may be made by check mailed to the address of the person entitled
thereto as it appears in the applicable register for such Debt Securities or by
wire transfer of funds to such person at an account maintained within the United
States.
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security in registered form ("Defaulted
Interest") will forthwith cease to be payable to the holder on the applicable
Regular Record Date and may either be paid to the Person in whose name such Debt
Security is registered at the close of business on a special record date (the
"Special Record Date") for the payment of such Defaulted Interest to be fixed by
the Trustee, in which case notice thereof shall be given to the holder of such
Debt Security not less than 10 days prior to such Special Record Date, or may be
paid at any time in any other lawful manner, all as more completely described in
the applicable Indenture.
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for any
authorized denomination of other Debt Securities of the same series and of a
like aggregate principal amount and tenor upon surrender of such Debt Securities
at the corporate trust office of the applicable Trustee or at the office of any
transfer agent designated by the Company for such purpose. In addition, subject
to certain limitations imposed upon Debt Securities issued in book-entry form,
the Debt Securities of any series may be surrendered for conversion or
registration of transfer or exchange thereof at the corporate trust office of
the applicable Trustee or at the office of any transfer agent designated by the
Company for such purpose. Every Debt Security surrendered for conversion,
registration of transfer or exchange must be duly endorsed or accompanied by a
written instrument of transfer, and the person requesting such action must
provide evidence of title and identity satisfactory to the applicable Trustee or
transfer agent. No service charge will be made for any registration of transfer
or exchange of any Debt Securities, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith. If the applicable Prospectus Supplement refers to any transfer agent
(in addition to the applicable Trustee) initially designated by the Company with
respect to any series of Debt Securities, the Company may at any time rescind
the designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts, except that the Company will be
required to maintain a transfer agent in each place of payment for such series.
The Company may at any time designate additional transfer agents with respect to
any series of Debt Securities.
Neither the Company nor any Trustee shall be required (i) to issue,
register the transfer of or exchange Debt Securities of any series during a
period beginning at the opening of business 15 days before the selection of any
Debt Securities for redemption and ending at the close of business on the day of
mailing of a notice of redemption; (ii) to register the transfer of or exchange
any Debt Security, or portion thereof, so selected for redemption, in whole or
in part, except the unredeemed portion of any Debt Security being redeemed in
part; or (iii) to issue, register the transfer of or exchange any Debt Security
that has been surrendered for repayment at the option of the holder, except the
portion, if any, of such Debt Security not to be so repaid.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indentures will provide that Company may, without the consent of the
holders of any outstanding Debt Securities, consolidate with, or sell, lease or
convey all or substantially all of its assets to, or merge with or into, any
other entity provided that (a) either the Company shall be the continuing
entity, or the successor entity (if other than the Company) formed by or
resulting from any such consolidation or merger or which shall have received the
transfer of such assets is organized under the laws of any domestic jurisdiction
and assumes the Company's obligations to pay principal of (and premium or
Make-Whole Amount, if any) and interest on all of the Debt Securities and the
due and punctual performance and observance of all of the
9
<PAGE> 46
covenants and conditions contained in each Indenture; (b) immediately after
giving effect to such transaction and treating any indebtedness that becomes an
obligation of the Company or any subsidiary as a result thereof as having been
incurred by the Company or such subsidiary at the time of such transaction, no
Event of Default under the Indentures, and no event which, after notice or the
lapse of time, or both, would become such an Event of Default, shall have
occurred and be continuing; and (c) an officers' certificate and legal opinion
covering such conditions shall be delivered to each Trustee.
CERTAIN COVENANTS
The applicable Prospectus Supplement will describe any material covenants
in respect of a series of Debt Securities that are not described in this
Prospectus. Unless otherwise indicated in the applicable Prospectus Supplement,
Senior Debt Securities will include the following covenants of the Company:
Existence. Except as permitted under "--Merger, Consolidation or Sale of
Assets," the Indentures will require the Company to do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, rights (by articles of incorporation, by-laws and statute) and
franchises; provided, however, that the Company shall not be required to
preserve any right or franchise if its Board of Directors determines that the
preservation thereof is no longer desirable in the conduct of its business.
Maintenance of Properties. The Indentures will require the Company to
cause all of its material properties used or useful in the conduct of its
business or the business of any subsidiary to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and will cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Company may
be necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, however, that the
Company and its subsidiaries shall not be prevented from selling or otherwise
disposing of their properties for value in the ordinary course of business.
Insurance. The Indentures will require the Company to cause each of its
and its subsidiaries' insurable properties to be insured against loss or damage
in an amount deemed reasonable by the Board of Directors with insurers of
recognized responsibility and, if described in the applicable Prospectus
Supplement, having a specified rating from a recognized insurance rating
service.
Payment of Taxes and Other Claims. The Indentures will require the Company
to pay or discharge or cause to be paid or discharged, before the same shall
become delinquent, (i) all taxes, assessments and governmental charges levied or
imposed upon it or any subsidiary or upon the income, profits or property of the
Company or any subsidiary and (ii) all lawful claims for labor, materials and
supplies which, if unpaid, might by law become a lien upon the property of the
Company or any subsidiary unless such lien would not have a material adverse
effect upon such property; provided, however, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim (i) whose amount, applicability or validity is being
contested in good faith or (ii) for which the Company has set apart and
maintains an adequate reserve.
Provision of Financial Information. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, the Indentures will require the
Company, within 15 days of each of the respective dates by which the Company
would have been required to file annual reports, quarterly reports and other
documents with the Commission if the Company were so subject, (i) to transmit by
mail to all holders of Debt Securities, as their names and addresses appear in
the applicable register for such Debt Securities, without cost to such holders,
copies of the annual reports, quarterly reports and other documents that the
Company would have been required to file with the Commission pursuant to Section
13 or 15(d) of the Exchange Act if the Company were subject to such sections,
(ii) to file with the applicable Trustee copies of the annual reports, quarterly
reports and other documents that the Company would have been required to file
with the Commission pursuant to Section 13 or 15(d) of the Exchange Act if the
Company were subject to such Sections and (iii) to supply, promptly upon written
request and payment of the reasonable cost of duplication and delivery, copies
of such documents to any prospective holder.
10
<PAGE> 47
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless otherwise described in the applicable Prospectus Supplement, each
Indenture will provide that the following events are "Events of Default" with
respect to any series of Debt Securities issued thereunder: (a) default in the
payment of any installment of interest on any Debt Security of such series when
such interest becomes due and payable that continues for a period of 30 days;
(b) default in the payment of principal of (or premium or Make-Whole Amount, if
any, on) any Debt Security of such series when due and payable; (c) default in
making any sinking fund payment as required for any Debt Security of such
series; (d) default in the performance or breach of any other covenant or
warranty of the Company contained in the Indenture (other than a covenant added
to the Indenture solely for the benefit of a series of Debt Securities issued
thereunder other than such series), continued for 60 days after written notice
as provided in the applicable Indenture; (e) a default under any bond,
debenture, note or other evidence of indebtedness for money borrowed by the
Company or any of its subsidiaries in an aggregate principal amount in excess of
$25,000,000 or under any mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any indebtedness for
money borrowed by the Company or any of its subsidiaries in an aggregate
principal amount in excess of $25,000,000, whether such indebtedness exists on
the date of such Indenture or shall thereafter be created, which default shall
have resulted in such indebtedness becoming or being declared due and payable
prior to the date on which it would otherwise have become due and payable or
such obligations being accelerated, without such indebtedness having been
discharge or such acceleration having been rescinded or annulled within a
specified period of time; (f) certain events of bankruptcy, insolvency or
reorganization, or court appointment of a receiver, liquidator or trustee of the
Company or any Significant Subsidiary of the Company; and (g) any other event of
default provided with respect to a particular series of Debt Securities. The
term "Significant Subsidiary" has the meaning ascribed to such term in
Regulation S-X promulgated under the Securities Act.
If an Event of Default under any Indenture with respect to any series of
Debt Securities at the time outstanding occurs and is continuing, then in every
such case the applicable Trustee or the holders of not less than 25% in
principal amount of the Debt Securities of that series will have the right to
declare the principal amount (or, if the Debt Securities of that series are
Original Issue Discount Securities or indexed securities, such portion of the
principal amount as may be specified in the terms thereof) of, and premium or
Make-Whole Amount, if any, on, all the Debt Securities of that series to be due
and payable immediately by written notice thereof to the Company (and to the
applicable Trustee if given by the holders). However, at any time after such a
declaration of acceleration with respect to Debt Securities of such series (or
of all Debt Securities then outstanding under any Indenture, as the case may be)
has been made, but before a judgment or decree for payment of the money due has
been obtained by the applicable Trustee, the holders of not less than a majority
in principal amount of outstanding Debt Securities of such series (or of all
Debt Securities then outstanding under the applicable Indenture, as the case may
be) may rescind and annul such declaration and its consequences if (a) the
Company shall have deposited with the applicable Trustee all required payments
of the principal of (and premium or Make-Whole Amount, if any) and interest on
the Debt Securities of such series (or of all Debt Securities then outstanding
under the applicable Indenture, as the case may be), plus certain fees,
expenses, disbursements and advances of the applicable Trustee and (b) all
Events of Default, other than the non-payment of accelerated principal (or
specified portion thereof and the premium or Make-Whole Amount, if any), with
respect to Debt Securities of such series (or of all Debt Securities then
outstanding under the applicable Indenture, as the case may be) have been cured
or waived as provided in such Indenture. The Indentures will also provide that
the holders of not less than a majority in principal amount of the outstanding
Debt Securities of any series (or of all Debt Securities then outstanding under
the applicable Indenture, as the case may be) may waive any past default with
respect to such series and its consequences, except a default (x) in the payment
of the principal of (or premium or Make-Whole Amount, if any) or interest on any
Debt Security of such series or (y) in respect of a covenant or provision
contained in the applicable Indenture that cannot be modified or amended without
the consent of the holder of each outstanding Debt Security affected thereby.
The Indentures will require each Trustee to give notice to the holders of
Debt Securities within 90 days of a default under the applicable Indenture
unless such default shall have been cured or waived; provided,
11
<PAGE> 48
however, that such Trustee may withhold notice to the holders of any series of
Debt Securities of any default with respect to such series (except a default in
the payment of the principal of (or premium or Make-Whole Amount, if any) or
interest on any Debt Security of such series or in the payment of any sinking
fund installment in respect of any Debt Security of such series) if specified
responsible officers of such Trustee consider such withholding to be in the
interest of such holders.
The Indentures will provide that no holders of Debt Securities of any
series may institute any proceedings, judicial or otherwise, with respect to
such Indenture or for any remedy thereunder, except in the case of failure of
the applicable Trustee, for 60 days, to act after it has received a written
request to institute proceedings in respect of an Event of Default from the
holders of not less than 25% in principal amount of the outstanding Debt
Securities of such series, as well as an offer of indemnity reasonably
satisfactory to it. This provision will not prevent, however, any holder of Debt
Securities from instituting suit for the enforcement of payment of the principal
of (and premium or Make-Whole Amount, if any) and interest on such Debt
Securities at the respective due dates or redemption dates thereof.
The Indentures will provide that, subject to provisions in each Indenture
relating to its duties in case of default, a Trustee will be under no obligation
to exercise any of its rights or powers under an Indenture at the request or
direction of any holders of any series of Debt Securities then outstanding under
such Indenture, unless such holders shall have offered to the Trustee thereunder
reasonable security or indemnity. The holders of not less than a majority in
principal amount of the outstanding Debt Securities of any series (or of all
Debt Securities then outstanding under an Indenture, as the case may be) shall
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the applicable Trustee, or of exercising any trust
or power conferred upon such Trustee. However, a Trustee may refuse to follow
any direction which is in conflict with any law or the applicable Indenture,
which may involve such Trustee in personal liability or which may be unduly
prejudicial to the holders of Debt Securities of such series not joining
therein.
Within 120 days after the close of each fiscal year, the Company will be
required to deliver to each Trustee a certificate, signed by one of several
specified officers of the Company, stating whether or not such officer has
knowledge of any default under the applicable Indenture and, if so, specifying
each such default and the nature and status thereof.
MODIFICATION OF THE INDENTURES
Modifications and amendments of an Indenture will be permitted to be made
only with the consent of the holders of not less than a majority in principal
amount of all outstanding Debt Securities issued under such Indenture affected
by such modification or amendment; provided, however, that no such modification
or amendment may, without the consent of the holder of each such Debt Security
affected thereby, (a) change the stated maturity of the principal of, or any
installment of interest (or premium or Make-Whole Amount, if any) on, any such
Debt Security; (b) reduce the principal amount of, or the rate or amount of
interest on, or any premium payable on redemption of, any such Debt Security, or
reduce the amount of principal of an Original Issue Discount Security that would
be due and payable upon declaration of acceleration of the maturity thereof or
would be provable in bankruptcy, or adversely affect any right of repayment of
the holder of any such Debt Security; (c) change the place of payment, or the
coin or currency, for payment of principal of, premium or Make-Whole Amount, if
any, or interest on any such Debt Security; (d) impair the right to institute
suit for the enforcement of any payment on or with respect to any such Debt
Security; (e) reduce the above-stated percentage of outstanding Debt Securities
of any series necessary to modify or amend the applicable Indenture, to waive
compliance with certain provisions thereof or certain defaults and consequences
thereunder or to reduce the quorum or voting requirements set forth in the
applicable Indenture; or (f) modify any of the foregoing provisions or any of
the provisions relating to the waiver of certain past defaults or certain
covenants, except to increase the required percentage to effect such action or
to provide that certain other provisions may not be modified or waived without
the consent of the holder of such Debt Security.
12
<PAGE> 49
The holders of a majority in aggregate principal amount of the outstanding
Debt Securities of each series may, on behalf of all holders of Debt Securities
of that series, waive, insofar as that series is concerned, compliance by the
Company with certain restrictive covenants of the applicable Indenture.
Modifications and amendments of an Indenture will be permitted to be made
by the Company and the respective Trustee thereunder without the consent of any
holder of Debt Securities for any of the following purposes: (i) to evidence the
succession of another person to the Company as obligor under such Indenture;
(ii) to add to the covenants of the Company for the benefit of the holders of
all or any series of Debt Securities or to surrender any right or power
conferred upon the Company in such Indenture; (iii) to add events of default for
the benefit of the holders of all or any series of Debt Securities; (iv) to add
or change any provisions of an Indenture to facilitate the issuance of, or to
liberalize certain terms of, Debt Securities in bearer form, or to permit or
facilitate the issuance of Debt Securities in uncertificated form, provided that
such action shall not adversely affect the interests of the holders of the Debt
Securities of any series in any material respect; (v) to change or eliminate any
provisions of an Indenture, provided that any such change or elimination shall
become effective only when there are no Debt Securities outstanding of any
series created prior thereto which are entitled to the benefit of such
provision; (vi) to secure the Debt Securities; (vii) to establish the form or
terms of Debt Securities of any series, including the provisions and procedures,
if applicable, for the conversion of such Debt Securities into Common Stock or
Preferred Stock; (viii) to provide for the acceptance of appointment by a
successor Trustee or facilitate the administration of the trusts under an
Indenture by more than one Trustee; (ix) to cure any ambiguity, defect or
inconsistency in an Indenture, provided that such action shall not adversely
affect the interests of holders of Debt Securities of any series issued under
such Indenture; or (x) to supplement any of the provisions of an Indenture to
the extent necessary to permit or facilitate defeasance and discharge of any
series of such Debt Securities, provided that such action shall not adversely
affect the interests of the holders of the outstanding Debt Securities of any
series in any material respect.
The Indentures will provide that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security that
shall be deemed to be outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (ii) the principal amount
of any Debt Security denominated in a foreign currency that shall be deemed
outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (i) above), (iii) the
principal amount of an indexed security that shall be deemed outstanding shall
be the principal face amount of such indexed security at original issuance,
unless otherwise provided with respect to such indexed security pursuant such
Indenture, and (iv) Debt Securities owned by the Company or any other obligor
upon the Debt Securities or any affiliate of the Company or of such other
obligor shall be disregarded.
The Indentures will contain provisions for convening meetings of the
holders of Debt Securities of a series. A meeting will be permitted to be called
at any time by the applicable Trustee, and also, upon request, by the Company or
the holders of at least 25% in principal amount of the outstanding Debt
Securities of such series, in any such case upon notice given as provided in
such Indenture. Except for any consent that must be given by the holder of each
Debt Security affected by certain modifications and amendments of an Indenture,
any resolution presented at a meeting or adjourned meeting duly reconvened at
which a quorum is present may be adopted by the affirmative vote of the holders
of a majority in principal amount of the outstanding Debt Securities of that
series; provided, however, that, except as referred to above, any resolution
with respect to any request, demand, authorization, direction, notice, consent,
waiver or other action that may be made, given or taken by the holders of a
specified percentage, which is less than a majority, in principal amount of the
outstanding Debt Securities of a series may be adopted at a meeting or adjourned
meeting duly reconvened at which a quorum is present by the affirmative vote of
the holders of such specified percentage in principal amount of the outstanding
Debt Securities of that series. Any resolution passed or decision taken at any
13
<PAGE> 50
meeting of holders of Debt Securities of any series duly held in accordance with
an Indenture will be binding on all holders of Debt Securities of that series.
The quorum at any meeting called to adopt a resolution, and at any reconvened
meeting, will be persons holding or representing a majority in principal amount
of the outstanding Debt Securities of a series; provided, however, that if any
action is to be taken at such meeting with respect to a consent or waiver which
may be given by the holders of not less than a specified percentage in principal
amount of the outstanding Debt Securities of a series, the persons holding or
representing such specified percentage in principal amount of the outstanding
Debt Securities of such series will constitute a quorum.
Notwithstanding the foregoing provisions, the Indentures will provide that
if any action is to be taken at a meeting of holders of Debt Securities of any
series with respect to any request, demand, authorization, direction, notice,
consent, waiver and other action that such Indenture expressly provides may be
made, given or taken by the holders of a specified percentage in principal
amount of all outstanding Debt Securities affected thereby, or of the holders of
such series and one or more additional series: (i) there shall be no minimum
quorum requirement for such meeting, and (ii) the principal amount of the
outstanding Debt Securities of such series that vote in favor of such request,
demand, authorization, direction, notice, consent, waiver or other action shall
be taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been made,
given or taken under such Indenture.
SUBORDINATION
Unless otherwise provided in the applicable Prospectus Supplement,
Subordinated Securities will be subject to the following subordination
provisions.
Upon any distribution to creditors of the Company in a liquidation,
dissolution or reorganization, the payment of the principal of and interest on
any Subordinated Securities will be subordinated to the extent provided in the
applicable Indenture in right of payment to the prior payment in full of all
Senior Debt (as defined below), but the obligation of the Company to make
payments of the principal of and interest on such Subordinated Securities will
not otherwise be affected. No payment of principal or interest will be permitted
to be made on Subordinated Securities at any time if a default on Senior Debt
exists that permits the holders of such Senior Debt to accelerate its maturity
and the default is the subject of judicial proceedings or the Company receives
notice of the default. After all Senior Debt is paid in full and until the
Subordinated Securities are paid in full, holders will be subrogated to the
rights of holders of Senior Debt to the extent that distributions otherwise
payable to holders have been applied to the payment of Senior Debt. The
Subordinated Indenture will not restrict the amount of Senior Indebtedness or
other indebtedness of the Company and its subsidiaries. As a result of these
subordination provisions, in the event of a distribution of assets upon
insolvency, holders of Subordinated Indebtedness may recover less, ratably, than
general creditors of the Company.
Senior Debt will be defined in the applicable Indenture as the principal of
and interest on, or substantially similar payments to be made by the Company in
respect of, the following, whether outstanding at the date of execution of the
applicable Indenture or thereafter incurred, created or assumed: (a)
indebtedness of the Company for money borrowed or represented by purchase-money
obligations, (b) indebtedness of the Company evidenced by notes, debentures, or
bonds, or other securities issued under the provisions of an indenture, fiscal
agency agreement or other agreement, (c) obligations of the Company as lessee
under leases of property either made as part of any sale and leaseback
transaction to which the Company is a party or otherwise, (d) indebtedness of
partnerships and joint ventures which is included in the consolidated financial
statements of the Company, (e) indebtedness, obligations and liabilities of
others in respect of which the Company is liable contingently or otherwise to
pay or advance money or property or as guarantor, endorser or otherwise or which
the Company has agreed to purchase or otherwise acquire, and (f) any binding
commitment of the Company to fund any real estate investment or to fund any
investment in any entity making such real estate investment, in each case other
than (1) any such indebtedness, obligation or liability referred to in clauses
(a) through (f) above as to which, in the instrument creating or evidencing the
same pursuant to which the same is outstanding, it is provided that such
indebtedness, obligation or liability is not superior in right of payment to the
Subordinated Securities or ranks pari passu with the Subordinated
14
<PAGE> 51
Securities, (2) any such indebtedness, obligation or liability which is
subordinated to indebtedness of the Company to substantially the same extent as
or to a greater extent than the Subordinated Securities are subordinated, and
(3) the Subordinated Securities. There will not be any restrictions in any
Indenture relating to Subordinated Securities upon the creation of additional
Senior Debt.
If this Prospectus is being delivered in connection with a series of
Subordinated Securities, the accompanying Prospectus Supplement or the
information incorporated herein by reference will set forth the approximate
amount of Senior Debt outstanding as of the end of the Company's most recent
fiscal quarter.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise indicated in the applicable Prospectus Supplement, the
Company will be permitted, at its option, to discharge certain obligations to
holders of any series of Debt Securities issued under any Indenture that have
not already been delivered to the applicable Trustee for cancellation and that
either have become due and payable or will become due and payable within one
year (or scheduled for redemption within one year) by irrevocably depositing
with the applicable Trustee, in trust, funds in such currency or currencies,
currency unit or units or composite currency or currencies in which such Debt
Securities are payable in an amount sufficient to pay the entire indebtedness on
such Debt Securities in respect of principal (and premium or Make-Whole Amount,
if any) and interest to the date of such deposit (if such Debt Securities have
become due and payable) or to the stated maturity or redemption date, as the
case may be.
The Indentures will provide that, unless otherwise indicated in the
applicable Prospectus Supplement, the Company may elect either (a) to defease
and be discharged from any and all obligations with respect to such Debt
Securities (except for the obligation to pay additional amounts, if any, upon
the occurrence of certain events of tax, assessment or governmental charge with
respect to payments on such Debt Securities and the obligations to register the
transfer or exchange of such Debt Securities, to replace temporary or mutilated,
destroyed, lost or stolen Debt Securities, to maintain an office or agency in
respect of such Debt Securities, to hold moneys for payment in trust and, with
respect to Subordinated Debt Securities which are convertible or exchangeable,
the right to convert or exchange) ("defeasance") or (b) to be released from its
obligations with respect to such Debt Securities under the applicable Indenture
(including the restrictions described under "-- Certain Covenants") or, if
provided in the applicable Prospectus Supplement, its obligations with respect
to any other covenant, and any omission to comply with such obligations shall
not constitute an Event of Default with respect to such Debt Securities
("covenant defeasance"), in either case upon the irrevocable deposit by the
Company with the applicable Trustee, in trust, of an amount, in such currency or
currencies, currency unit or units or composite currency or currencies in which
such Debt Securities are payable at stated maturity, or Government Obligations
(as defined below), or both, applicable to such Debt Securities, which through
the scheduled payment of principal and interest in accordance with their terms
will provide money in an amount sufficient to pay the principal of (and premium
or Make-Whole Amount, if any) and interest on such Debt Securities, and any
mandatory sinking fund or analogous payments thereon, on the scheduled due dates
therefor.
Such a trust will only be permitted to be established if, among other
things, the Company has delivered to the applicable Trustee an opinion of
counsel (as specified in the applicable Indenture) to the effect that the
holders of such Debt Securities will not recognize income, gain or loss for U.S.
federal income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to U.S. federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
defeasance or covenant defeasance had not occurred, and such opinion of counsel,
in the case of defeasance, will be required to refer to and be based upon a
ruling received from or published by the Internal Revenue Service or a change in
applicable United States federal income tax law occurring after the date of the
Indenture. In the event of such defeasance, the holders of such Debt Securities
would thereafter be able to look only to such trust fund for payment of
principal (and premium or Make-Whole Amount, if any) and interest.
"Government Obligations" means securities that are (i) direct obligations
of the United States of America or the government which issued the foreign
currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged or (ii) obligations of
a person
15
<PAGE> 52
controlled or supervised by and acting as an agency or instrumentality of the
United States of America or such government which issued the foreign currency in
which the Debt Securities of such series are payable, the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America or such other government, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such Government obligation or a specific payment of interest on
or principal of any such Government Obligation held by such custodian for the
account of the holder of a depository receipt, provided that (except as required
by law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt.
Unless otherwise indicated in the applicable Prospectus Supplement, if
after the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any series,
(a) the holder of a Debt Security of such series is entitled to, and does, elect
pursuant to the applicable Indenture or the terms of such Debt Security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security, or
(b) a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which such deposit has been made, the
indebtedness represented by such Debt Security will be deemed to have been, and
will be, fully discharged and satisfied through the payment of the principal of
(and premium or Make-Whole Amount, if any) and interest on such Debt Security as
they become due out of the proceeds yielded by converting the amount so
deposited in respect of such Debt Security into the currency, currency unit or
composite currency in which such Debt Security becomes payable as a result of
such election or such cessation of usage based on the applicable market exchange
rate. "Conversion Event" means the cessation of use of (i) a currency, currency
unit or composite currency both by the government of the country which issued
such currency and for the settlement of transactions by a central bank or other
public institutions of or within the international banking community, (ii) the
ECU both within the European Monetary System and for the settlement of
transactions by public institutions of or within the European Communities or
(iii) any currency unit or composite currency other than the ECU for the
purposes for which it was established. Unless otherwise indicated in the
applicable Prospectus Supplement, all payments of principal of (and premium, if
any) and interest on any Debt Security that is payable in a foreign currency
that ceases to be used by its government of issuance shall be made in U.S.
dollars.
In the event the Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because of
the occurrence of any Event of Default other than the Event of Default described
in clause (d) under "-- Events of Default, Notice and Waiver" with respect to
specified sections of an Indenture (which sections would no longer be applicable
to such Debt Securities) or described in clause (g) under "-- Events of Default,
Notice and Waiver" with respect to any other covenant as to which there has been
covenant defeasance, the amount in such currency, currency unit or composite
currency in which such Debt Securities are payable, and Government Obligations
on deposit with the applicable Trustee, will be sufficient to pay amounts due on
such Debt Securities at the time of their stated maturity but may not be
sufficient to pay amounts due on such Debt Securities at the time of the
acceleration resulting from such Event of Default. However, the Company would
remain liable to make payment of such amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions,
if any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock or Preferred Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include
whether such Debt Securities are convertible into shares of Common Stock or
Preferred Stock, the conversion price (or manner of calculation thereof), the
conversion period, provisions as to whether conversion
16
<PAGE> 53
will be at the option of the holders or the Company, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of such Debt Securities and any restrictions on
conversion, including restrictions directed at maintaining the Company's REIT
status.
PAYMENT
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium or Make-Whole Amount, if any) and interest
on any series of Debt Securities will be payable at the corporate trust office
of the Trustee, the address of which will be stated in the applicable Prospectus
Supplement; provided that, at the option of the Company, payment of interest may
be made by check mailed to the address of the person entitled thereto as it
appears in the applicable register for such Debt Securities or by wire transfer
of funds to such person at an account maintained within the United States.
All moneys paid by the Company to a paying agent or a Trustee for the
payment of the principal of or any premium or interest on any Debt Security
which remain unclaimed at the end of two years after such principal, premium or
interest has become due and payable will be repaid to the Company, and the
holder of such Debt Security thereafter may look only to the Company for payment
thereof.
BOOK-ENTRY SYSTEM AND GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities ("Global Securities") that will be
deposited with, or on behalf of, a depository (the "Depository") identified in
the Prospectus Supplement relating to such series. Global Securities, if any,
issued in the United States are expected to be deposited with The Depository
Trust Company ("DTC"), as Depository. Global Securities may be issued in either
fully registered or bearer form and in either temporary or permanent form.
Unless and until it is exchanged in whole or in part for the individual Debt
Securities represented thereby, a Global Security may not be transferred except
as a whole by the Depository for such Global Security to a nominee of such
Depository or by a nominee of such Depository to such Depository or another
nominee of such Depository or by such Depository or any nominee of such
Depository to a successor Depository or any nominee of such successor.
The specific terms of the depository arrangement with respect to a series
of Debt Securities will be described in the Prospectus Supplement relating to
such series. The Company expects that unless otherwise indicated in the
applicable Prospectus Supplement, the following provisions will apply to
depository arrangements.
Upon the issuance of a Global Security, the Depository for such Global
Security or its nominee will credit on its book-entry registration and transfer
system the respective principal amounts of the individual Debt Securities
represented by such Global Security to the accounts of persons that have
accounts with such Depository ("Participants"). Such accounts shall be
designated by the underwriters, dealers or agents with respect to such Debt
Securities or by the Company if such Debt Securities are offered directly by the
Company. Ownership of beneficial interests in such Global Security will be
limited to Participants or persons that may hold interests through Participants.
The Company expects that, pursuant to procedures established by DTC,
ownership of beneficial interests in any Global Security with respect to which
DTC is the Depository will be shown on, and the transfer of that ownership will
be effected only through, records maintained by DTC or its nominee (with respect
to beneficial interests of Participants) and records of Participants (with
respect to beneficial interests of persons who hold through Participants).
Neither the Company nor the Trustee will have any responsibility or liability
for any aspect of the records of DTC or for maintaining, supervising or
reviewing any records of DTC or any of its Participants relating to beneficial
ownership interests in the Debt Securities. The laws of some states require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and laws may impair the ability to own, pledge or
transfer beneficial interest in a Global Security.
So long as the Depository for a Global Security or its nominee is the
registered owner of such Global Security, such Depository or such nominee, as
the case may be, will be considered the sole owner or holder of
17
<PAGE> 54
the Debt Securities represented by such Global Security for all purposes under
the applicable Indenture. Except as described below or in the applicable
Prospectus Supplement, owners of beneficial interest in a Global Security will
not be entitled to have any of the individual Debt Securities represented by
such Global Security registered in their names, will not receive or be entitled
to receive physical delivery of any such Debt Securities in definitive form and
will not be considered the owners or holders thereof under the applicable
Indenture. Beneficial owners of Debt Securities evidenced by a Global Security
will not be considered the owners or holders thereof under the applicable
Indenture for any purpose, including with respect to the giving of any
direction, instructions or approvals to the Trustee thereunder. Accordingly,
each person owning a beneficial interest in a Global Security with respect to
which DTC is the Depository must rely on the procedures of DTC and, if such
person is not a Participant, on the procedures of the Participant through which
such person owns its interests, to exercise any rights of a holder under the
applicable Indenture. The Company understands that, under existing industry
practice, if it requests any action of holders or if an owner of a beneficial
interest in a Global Security desires to give or take any action which a holder
is entitled to give or take under the applicable Indenture, DTC would authorize
the Participants holding the relevant beneficial interest to give or take such
action, and such Participants would authorize beneficial owners through such
Participants to give or take such actions or would otherwise act upon the
instructions of beneficial owners holding through them.
Payments of principal of (and applicable premium or Make-Whole Amount, if
any) and interest on individual Debt Securities represented by a Global Security
registered in the name of a Depository or its nominee will be made to or at the
direction of the Depository or its nominee, as the case may be, as the
registered owner of the Global Security under the applicable Indenture. Under
the terms of the applicable Indenture, the Company and the Trustee may treat the
persons in whose name Debt Securities, including a Global Security, are
registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial owners
of Debt Securities (including principal, premium or Make-Whole Amount, if any,
and interest). The Company believes, however, that it is currently the policy of
DTC to immediately credit the accounts of relevant Participants with such
payments, in amounts proportionate to their respective holdings of beneficial
interests in the relevant Global Security as shown on the records of DTC or its
nominee. The Company also expects that payments by Participants to owners of
beneficial interests in such Global Security held through such Participants will
be governed by standing instructions and customary practices, as is the case
with securities held for the account of customers in bearer form or registered
in street name, and will be the responsibility of such Participants. Redemption
notices with respect to any Debt Securities represented by a Global Security
will be sent to the Depository or its nominee. If less than all of the Debt
Securities of any series are to be redeemed, the Company expects the Depository
to determine the amount of the interest of each Participant in such Debt
Securities to be redeemed to be determined by lot. None of the Company, the
Trustee, any Paying Agent or the Security Registrar for such Debt Securities
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Security for such Debt Securities or for maintaining any records with respect
thereto.
Neither the Company nor the Trustee will be liable for any delay by the
holders of a Global Security or the Depository in identifying the beneficial
owners of Debt Securities and the Company and the Trustee may conclusively rely
on, and will be protected in relying on, instructions from the holder of a
Global Security or the Depository for all purposes. The rules applicable to DTC
and its Participants are on file with the Commission.
If a Depository for any Debt Securities is at any time unwilling, unable or
ineligible to continue as depository and a successor depository is not appointed
by the Company within 90 days, the Company will issue individual Debt Securities
in exchange for the Global Security representing such Debt Securities. In
addition, the Company may at any time and in its sole discretion, subject to any
limitations described in the Prospectus Supplement relating to such Debt
Securities, determine not to have any of such Debt Securities represented by one
or more Global Securities and in such event will issue individual Debt
Securities in exchange for the
18
<PAGE> 55
Global Security or Securities representing such Debt Securities. Individual Debt
Securities so issued will be issued in denominations of $1,000 and integral
multiples thereof.
The Debt Securities of a series may also be issued in whole or in part in
the form of one or more bearer global securities (a "Bearer Global Security")
that will be deposited with a depository, or with a nominee for such depository,
identified in the applicable Prospectus Supplement. Any such Bearer Global
Securities may be issued in temporary or permanent form. The specific terms and
procedures, including the specific terms of the depository arrangement, with
respect to any portion of a series of Debt Securities to be represented by one
or more Bearer Global Securities will be described in the applicable Prospectus
Supplement.
19
<PAGE> 56
DESCRIPTION OF PREFERRED STOCK
The description of the Company's Preferred Stock set forth below does not
purport to be complete and is qualified in its entirety by reference to the
Company's Articles of Incorporation and Bylaws, as amended (the "Bylaws").
GENERAL
Under the Company's Articles of Incorporation, the Company has authority to
issue fifty (50) million shares of Preferred Stock, of which 2,308,800 shares
have been designated Series A Preferred Stock, 950,064 of which are currently
outstanding, 405,022 shares have been designated Series B Preferred Stock and
are currently outstanding, 2,300,000 shares have been designated Series C
Preferred Stock and are currently outstanding, 3,450,000 shares have been
designated Series D Preferred Stock of which 3,267,700 are currently
outstanding, 1,000,000 shares have been designated Series E Junior Participating
Cumulative Preferred Stock none of which are currently outstanding, 4,455,000
shares have been designated Series F Preferred Stock and are currently
outstanding, and 4,300,000 shares have been designated Series G Preferred Stock
and are currently outstanding. The Series C Preferred Stock, Series D Preferred
Stock, Series F Preferred Stock and Series G Preferred Stock are listed on the
NYSE and the PCX under the symbols "AVB PrC," "AVB PrD," "AVB PrF," and "AVB
PrG," respectively. Shares of Preferred Stock may be issued from time to time,
in one or more series, as authorized by the Board of Directors of the Company.
Prior to the issuance of shares of each series, the Board of Directors is
required by the MGCL, and the Company's Articles of Incorporation, to fix for
each series, subject to the provisions of the Company's Articles of
Incorporation regarding excess stock, $.01 par value per share ("Excess Stock"),
the terms, preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption, as are permitted by Maryland law. The Preferred Stock
will, when issued following the receipt of full consideration therefor, be fully
paid and nonassessable and will have no preemptive rights. The Board of
Directors could authorize the issuance of shares of Preferred Stock with terms
and conditions that could have the effect of discouraging a takeover or other
transactions that holders of Common Stock might believe to be in their best
interests or in which holders of some, or a majority, of the shares of Common
Stock might receive a premium for their shares over the then market price of
such shares of Common Stock.
TERMS
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Company's Articles of Incorporation and Bylaws and
any applicable amendment to the Articles of Incorporation designating terms of a
series of Preferred Stock (a "Designating Amendment").
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including:
(1) The title and stated value of such Preferred Stock;
(2) The number of shares of such Preferred Stock offered, the
liquidation preference per share and the offering price of such Preferred
Stock;
(3) The dividend rate(s), period(s) and/or payment date(s) or
method(s) of calculation thereof applicable to such Preferred Stock;
(4) The date from which dividends on such Preferred Stock shall
accumulate, if applicable;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) The provision for a sinking fund, if any, for such Preferred
Stock;
(7) The provision for redemption, if applicable, of such Preferred
Stock;
(8) Any listing of such Preferred Stock on any securities exchange;
20
<PAGE> 57
(9) The terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into Common Stock, including the conversion price
(or manner of calculation thereof);
(10) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock;
(11) A discussion of federal income tax considerations applicable to
such Preferred Stock;
(12) The relative ranking and preference of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company;
(13) Any limitations on issuance of any series of Preferred Stock
ranking senior to or on a parity with such series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company; and
(14) Any limitations on direct or beneficial ownership and
restrictions on transfer, in each case as may be appropriate to preserve
the status of the Company as a REIT.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to dividend rights and rights upon liquidation,
dissolution or winding up of the Company, rank (i) senior to all classes or
series of Common Stock of the Company, and to all equity securities ranking
junior to such Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company; (ii) on a parity with all
equity securities issued by the Company the terms of which specifically provide
that such equity securities rank on a parity with the Preferred Stock with
respect to dividend rights or rights upon liquidation, dissolution or winding up
of the Company; and (iii) junior to all equity securities issued by the Company
the terms of which specifically provide that such equity securities rank senior
to the Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company. The term "equity
securities" does not include convertible debt securities.
DIVIDENDS
Holders of the Preferred Stock of each series will be entitled to receive,
when, as and if declared by the Board of Directors of the Company, out of assets
of the Company legally available for payment, cash dividends at such rates and
on such dates as will be set forth in the applicable Prospectus Supplement. Each
such dividend shall be payable to holders of record as they appear on the stock
transfer books of the Company on such record dates as shall be fixed by the
Board of Directors of the Company.
Dividends on any series of the Preferred Stock may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors of the Company fails
to declare a dividend payable on a dividend payment date on any series of the
Preferred Stock for which dividends are non-cumulative, then the holders of such
series of the Preferred Stock will have no right to receive a dividend in
respect of the dividend period ending on such dividend payment date, and the
Company will have no obligation to pay the dividend accrued for such period,
whether or not dividends on such series are declared payable on any future
dividend payment date.
If Preferred Stock of any series is outstanding, no dividends will be
declared or paid or set apart for payment on any Common Stock of the Company or
any other series of Preferred Stock ranking, as to dividends, on a parity with
or junior to the Preferred Stock of such series for any period unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof is set apart for such payment on the
Preferred Stock of such series for all past dividend periods and the then
current dividend period, or (ii) if such series of Preferred Stock does not have
a cumulative dividend, full dividends for the then current dividend period have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof is set apart for such payment on the Preferred Stock of
such series. When
21
<PAGE> 58
dividends are not paid in full (and a sum sufficient for such full payment is
not so set apart) upon Preferred Stock of any series and the shares of any other
series of Preferred Stock ranking on a parity as to dividends with the Preferred
Stock of such series, all dividends declared upon Preferred Stock of such series
and any other series of Preferred Stock ranking on a parity as to dividends with
such Preferred Stock shall be declared pro rata so that the amount of dividends
declared per share of Preferred Stock of such series and such other series of
Preferred Stock shall in all cases bear to each other the same ratio that
accrued dividends per share on the Preferred Stock of such series (which shall
not include any accumulation in respect of unpaid dividends for prior dividend
periods if such Preferred Stock does not have a cumulative dividend) and such
other series of Preferred Stock bear to each other. No interest, or sum of money
in lieu of interest, shall be payable in respect of any dividend payment or
payments on Preferred Stock of such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
is set apart for payment for all past dividend periods and the then current
dividend period, or (ii) if such series of Preferred Stock does not have a
cumulative dividend, full dividends on the Preferred Stock of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof is set apart for payment for the then current dividend
period, no dividends (other than in shares of Common Stock or other shares of
capital stock ranking junior to the Preferred Stock of such series as to
dividends and upon liquidation) shall be declared or paid or set aside for
payment nor shall any other distribution be declared or made upon the Common
Stock, or any other capital stock of the Company ranking junior to or on a
parity with the Preferred Stock of such series as to dividends or upon
liquidation, nor shall any shares of Common Stock, or any other shares of
capital stock of the Company ranking junior to or on a parity with the Preferred
Stock of such series as to dividends or upon liquidation be redeemed, purchased
or otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any such shares) by the
Company (except by conversion into or exchange for other capital stock of the
Company ranking junior to the Preferred Stock of such series as to dividends and
upon liquidation).
Any dividend payment made on shares of a series of Preferred Stock shall
first be credited against the earliest accrued but unpaid dividend due with
respect to shares of such series which remains payable.
REDEMPTION
If so indicated in the applicable Prospectus Supplement, the Preferred
Stock will be subject to mandatory redemption or redemption at the option of the
Company, as a whole or in part, in each case upon the terms, at the times and at
the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon (which
shall not, if such Preferred Stock does not have a cumulative dividend, include
any accumulation in respect of unpaid dividends for prior dividend periods) to
the date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of shares of capital stock of the Company, then the
terms of such Preferred Stock may provide that, if no such shares of capital
stock shall have been issued or to the extent the net proceeds from any issuance
are insufficient to pay in full the aggregate redemption price then due, then
such Preferred Stock shall automatically and mandatorily be converted into the
applicable shares of capital stock of the Company pursuant to conversion
provisions specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if a series of Preferred Stock
has a cumulative dividend, full cumulative dividends on all shares of such
series of Preferred Stock shall have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for all past dividend periods and the then current dividend period, or
(ii) if a series of Preferred Stock does not have a
22
<PAGE> 59
cumulative dividend, full dividends on all shares of the Preferred Stock of such
series have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for payment for the then
current dividend period, no shares of such series of Preferred Stock shall be
redeemed unless all outstanding shares of Preferred Stock of such series are
simultaneously redeemed; provided, however, that the foregoing shall not prevent
the purchase or acquisition of Preferred Stock of such series to preserve the
REIT status of the Company or pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding shares of Preferred Stock of such
series. In addition, unless (i) if such series of Preferred Stock has a
cumulative dividend, full cumulative dividends on all outstanding shares of such
series of Preferred Stock have been or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof set apart for payment
for all past dividend periods and the then current dividend period, or (ii) if
such series of Preferred Stock does not have a cumulative dividend, full
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for the then current dividend period, the Company shall
not purchase or otherwise acquire directly or indirectly any shares of Preferred
Stock of such series (except by conversion into or exchange for capital shares
of the Company ranking junior to the Preferred Stock of such series as to
dividends and upon liquidation); provided, however, that the foregoing shall not
prevent the purchase or acquisition of shares of Preferred Stock of such series
to preserve the REIT status of the Company or pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding shares of Preferred
Stock of such series.
If fewer than all of the outstanding shares of Preferred Stock of any
series are to be redeemed, the number of shares to be redeemed will be
determined by the Company and such shares may be redeemed pro rata from the
holders of record of such shares in proportion to the number of such shares held
or for which redemption is requested by such holder (with adjustments to avoid
redemption of fractional shares) or by any other equitable manner determined by
the Company.
Notice of redemption will be mailed at least thirty (30) days but not more
than sixty (60) days before the redemption date to each holder of record of
Preferred Stock of any series to be redeemed at the address shown on the stock
transfer books of the Company. Each notice shall state: (i) the redemption date;
(ii) the number of shares and series of the Preferred Stock to be redeemed;
(iii) the redemption price; (iv) the place or places where certificates for such
Preferred Stock are to be surrendered for payment of the redemption price; (v)
that dividends on the shares to be redeemed will cease to accrue on such
redemption date; and (vi) the date upon which the holder's conversion rights, if
any, as to such shares shall terminate. If fewer than all the shares of
Preferred Stock of any series are to be redeemed, the notice mailed to each such
holder thereof shall also specify the number of shares of Preferred Stock to be
redeemed from each such holder. If notice of redemption of any Preferred Stock
has been given and if the funds necessary for such redemption have been set
aside by the Company in trust for the benefit of the holders of any Preferred
Stock so called for redemption, then from and after the redemption date
dividends will cease to accrue on such Preferred Stock, and all rights of the
holders of such shares will terminate, except the right to receive the
redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Common Stock or any other class or series of capital
stock of the Company ranking junior to the Preferred Stock in the distribution
of assets upon any liquidation, dissolution or winding up of the Company, the
holders of each series of Preferred Stock shall be entitled to receive out of
assets of the Company legally available for distribution to stockholders
liquidating distributions in the amount of the liquidation preference per share,
if any, set forth in the applicable Prospectus Supplement, plus an amount equal
to all dividends accrued and unpaid thereon (which shall not include any
accumulation in respect of unpaid noncumulative dividends for prior dividend
periods). After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Preferred Stock will have no right or
claim to any of the remaining assets of the Company. In the event that, upon any
such voluntary or involuntary liquidation, dissolution or winding up, the
available assets of the Company are insufficient to pay the amount of the
liquidating distributions on all outstanding shares of Preferred Stock and
23
<PAGE> 60
the corresponding amounts payable on all shares of other classes or series of
capital stock of the Company ranking on a parity with the Preferred Stock in the
distribution of assets, then the holders of the Preferred Stock and all other
such classes or series of capital stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Stock, then the remaining assets of the Company shall be distributed
among the holders of any other classes or series of capital stock ranking junior
to the Preferred Stock upon liquidation, dissolution or winding up, according to
their respective rights and preferences and in each case according to their
respective number of shares. For such purposes, the consolidation or merger of
the Company with or into any other corporation, trust or entity, or the sale,
lease or conveyance of all or substantially all of the property or business of
the Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock of a series remain outstanding, the Company will not,
without the affirmative vote or consent of the holders of at least two-thirds of
the shares of such series of Preferred Stock outstanding at the time, given in
person or by proxy, either in writing or at a meeting (such series voting
separately as a class), (i) authorize or create, or increase the authorized or
issued amount of, any class or series of capital stock ranking prior to such
series of Preferred Stock with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up or reclassify
any authorized capital stock of the Company into such shares, or create,
authorize or issue any obligation or security convertible into or evidencing the
right to purchase any such shares; or (ii) amend, alter or repeal the provisions
of the Company's Articles of Incorporation or the Designating Amendment for such
series of Preferred Stock, whether by merger, consolidation or otherwise (an
"Event"), so as to materially and adversely affect any right, preference,
privilege or voting power of such series of Preferred Stock or the holders
thereof; provided, however, with respect to the occurrence of any of the Events
set forth in (ii) above, so long as the Preferred Stock remains outstanding with
the terms thereof materially unchanged, taking into account that upon the
occurrence of an Event the Company may not be the surviving entity, the
occurrence of any such Event shall not be deemed to materially and adversely
affect such rights, preferences, privileges or voting power of holders of
Preferred Stock, and provided further that (x) any increase in the amount of the
authorized Preferred Stock or the creation or issuance of any other series of
Preferred Stock, or (y) any increase in the amount of authorized shares of such
series or any other series of Preferred Stock, in each case ranking on a parity
with or junior to the Preferred Stock of such series with respect to payment of
dividends or the distribution of assets upon liquidation, dissolution or winding
up, shall not be deemed to materially and adversely affect such rights,
preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Stock shall have
been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred Stock
is convertible into Common Stock will be set forth in the applicable Prospectus
Supplement relating thereto. Such terms will include the number of shares of
Common Stock into which the shares of Preferred Stock are convertible, the
conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the holders of the
Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such series of Preferred Stock.
24
<PAGE> 61
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), not more than 50% in value of its outstanding
capital stock may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities) during the last half of a
taxable year. To assist the Company in meeting this requirement, the Company may
take certain actions to limit the beneficial ownership, directly or indirectly,
by a single person of the Company's outstanding equity securities, including any
Preferred Stock of the Company. Therefore, in addition to limitations already
included in the Company's Articles of Incorporation, the Designating Amendment
for each series of Preferred Stock may contain provisions restricting the
ownership and transfer of the Preferred Stock. The applicable Prospectus
Supplement will specify any additional ownership limitation relating to a series
of Preferred Stock. See "Restrictions on Transfers of Capital Stock."
TRANSFER AGENT
The transfer agent and registrar for the Preferred Stock will be set forth
in the applicable Prospectus Supplement.
25
<PAGE> 62
DESCRIPTION OF COMMON STOCK
The description of the Company's Common Stock set forth below does not
purport to be complete and is qualified in its entirety by reference to the
Company's Articles of Incorporation and Bylaws.
GENERAL
Under the Articles of Incorporation, the Company has authority to issue 300
million shares of Common Stock. Under Maryland law, stockholders generally are
not responsible for the Company's debts or obligations. As of June 25, 1998, the
Company had outstanding 63,539,285 shares of Common Stock. The Common Stock is
listed on the NYSE and the PCX under the symbol "AVB."
TERMS
Subject to the preferential rights of any other shares or series of capital
stock and to the provisions of the Company's Articles of Incorporation regarding
Excess Stock, holders of shares of Common Stock will be entitled to receive
dividends on shares of Common Stock if, as and when authorized and declared by
the Board of Directors of the Company out of assets legally available therefor
and to share ratably in the assets of the Company legally available for
distribution to its stockholders in the event of its liquidation, dissolution or
winding-up after payment of, or adequate provision for, all known debts and
liabilities of the Company.
Subject to the provisions of the Company's Articles of Incorporation
regarding Excess Stock, each outstanding share of Common Stock entitles the
holder to one vote on all matters submitted to a vote of stockholders, including
the election of Directors and, except as otherwise required by law or except as
provided with respect to any other class or series of capital stock, the holders
of Common Stock will possess the exclusive voting power. There is no cumulative
voting in the election of Directors, which means that, subject to any rights to
elect Directors that are granted to the holders of any class or series of
Preferred Stock, the holders of a majority of the outstanding shares of Common
Stock can elect all of the Directors then standing for election, and the holders
of the remaining shares of Common Stock will not be able to elect any Directors.
Holders of Common Stock have no conversion, sinking fund or redemption
rights, or preemptive rights to subscribe for any securities of the Company.
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by an independent public accounting firm and quarterly reports for the
first three quarters of each fiscal year containing unaudited financial
information.
Subject to the provisions of the Company's Articles of Incorporation
regarding Excess Stock, all shares of Common Stock will have equal dividend,
distribution, liquidation and other rights, and will have no preference,
appraisal or exchange rights.
Pursuant to the MGCL, a corporation generally cannot dissolve, amend its
Articles of Incorporation, merge, sell all or substantially all of its assets,
engage in a share exchange or engage in similar transactions outside the
ordinary course of business unless approved by the affirmative vote of
stockholders holding at least two-thirds of the shares entitled to vote on the
matter unless a lesser percentage is set forth in the Company's Articles of
Incorporation, which percentage shall not in any event be less than a majority
of all of the shares entitled to vote on such matter. The Company's Articles of
Incorporation do not provide for a lesser percentage in such situations.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding capital stock may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year. To assist the Company in meeting this
requirement, the Company may take certain actions to limit the beneficial
ownership, directly or indirectly, by a single person of the Company's
outstanding equity securities. See "Restrictions on Transfers of Capital Stock."
26
<PAGE> 63
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is First Union
National Bank of Charlotte, North Carolina.
RESTRICTIONS ON TRANSFERS OF CAPITAL STOCK
For the Company to qualify as a REIT under the Code, among other things,
not more than 50% in value of its outstanding capital stock may be owned,
directly or indirectly, by five or fewer individuals (defined in the Code to
include certain entities) during the last half of a taxable year, and such
capital stock must be beneficially owned by 100 or more persons during at least
335 days of a taxable year of twelve (12) months or during a proportionate part
of a shorter taxable year (in each case, other than the first such year). To
ensure that the Company remains a qualified REIT, the Articles of Incorporation,
subject to certain exceptions, provide that no holder may own, or be deemed to
own by virtue of the attribution provisions of the Code, more than nine percent
(9%) (the "Ownership Limit") of any class or series of the Company's capital
stock. The Board of Directors may waive the Ownership Limit if evidence
satisfactory to the Board of Directors and the Company's tax counsel is
presented that the changes in ownership will not then or in the future
jeopardize the Company's status as a REIT. Any transfer of capital stock or any
security convertible into capital stock that would create a direct or indirect
ownership of capital stock in excess of the Ownership Limit or that would result
in the disqualification of the Company as a REIT, including any transfer that
results in the capital stock being owned by fewer than 100 persons or results in
the Company being "closely held" within the meaning of Section 856(h) of the
Code, shall be null and void, and the intended transferee will acquire no rights
to the capital stock. The Board of Directors may, in its discretion, determine
that it is no longer in the best interests of the Company to attempt to qualify,
or to continue to qualify, as a REIT.
Capital stock owned, or deemed to be owned, or transferred to a stockholder
in excess of the Ownership Limit will automatically be exchanged for shares of
Excess Stock that will be transferred, by operation of law, to the Company as
trustee of a trust for the exclusive benefit of the transferees to whom such
capital stock may be ultimately transferred without violating the Ownership
Limit. While the Excess Stock is held in trust, it will not be entitled to vote,
it will not be considered for purposes of any stockholder vote or the
determination of a quorum for such vote and, except upon liquidation, it will
not be entitled to participate in dividends or other distributions. Any dividend
or distribution paid to a proposed transferee of Excess Stock prior to the
discovery by the Company that capital stock has been transferred in violation of
the provisions of the Company's Articles of Incorporation shall be repaid to the
Company upon demand. The Excess Stock is not treasury stock, but rather
constitutes a separate class of issued and outstanding stock of the Company. The
original transferee-stockholder may, at any time the Excess Stock is held by the
Company in trust, transfer the interest in the trust representing the Excess
Stock to any individual whose ownership of the capital stock exchanged into such
Excess Stock would be permitted under the Ownership Limit, at a price not in
excess of the price paid by the original transferee-stockholder for the capital
stock that was exchanged in Excess Stock. Immediately upon the transfer to the
permitted transferee, the Excess Stock will automatically be exchanged for
capital stock of the class from which it was converted. If the foregoing
transfer restrictions are determined to be void or invalid by virtue of any
legal decision, statute, rule or regulation, then the intended transferee of any
Excess Stock may be deemed, at the option of the Company, to have acted as an
agent on behalf of the Company in acquiring the Excess Stock and to hold the
Excess Stock on behalf of the Company.
In addition to the foregoing transfer restrictions, the Company will have
the right, for a period of 90 days during the time any Excess Stock is held by
the Company in trust, to purchase all or any portion of the Excess Stock from
the original transferee-stockholder for the lesser of the price paid for the
capital stock by the original transferee-stockholder or the market price (as
determined in the manner set forth in the Articles of Incorporation) of the
capital stock on the date the Company exercises its option to purchase. The
90-day period begins on the date on which the Company receives written notice of
the transfer or other event resulting in the exchange of capital stock for
Excess Stock.
Each stockholder shall upon demand be required to disclose to the Company
in writing any information with respect to the direct, indirect and constructive
ownership of beneficial interests as the Board of Directors
27
<PAGE> 64
deems necessary to comply with the provisions of the Code applicable to REITs,
to comply with the requirements of any taxing authority or governmental agency
or to determine any such compliance.
This ownership limitation may have the effect of precluding acquisition of
control of the Company unless the Board of Directors determines that maintenance
of REIT status is no longer in the best interests of the Company.
FEDERAL INCOME TAX CONSIDERATIONS
The Company believes it has operated, and the Company intends to continue
to operate, in such manner as to qualify as a REIT under the Code, but no
assurance can be given that it will at all times so qualify.
The provisions of the Code pertaining to REITs are highly technical and
complex. The following is a brief and general summary of certain provisions that
currently govern the federal income tax treatment of the Company and its
stockholders. For the particular provisions that govern the federal income tax
treatment of the Company and its stockholders, reference is made to Sections 856
through 860 of the Code and the regulations promulgated thereunder. The
following summary is qualified in its entirety by such reference.
Under the Code, if certain requirements are met in a taxable year, a REIT
generally will not be subject to federal income tax with respect to income that
it distributes to its stockholders. If the Company fails to qualify during any
taxable year as a REIT, unless certain relief provisions are available, it will
be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates, which could have a material adverse
effect upon its stockholders.
To qualify as a REIT, the Company must comply with a number of annual
requirements regarding its income, assets and distributions. These requirements
impose a number of restrictions on the Company's operations. For example, the
Company may not lease property if the lease has the effect of giving the Company
a share of the net income of the lessee. The amount of personal property that
may be included under a lease may not exceed a defined, low level, and the
Company may not provide services to its tenants, other than customary services
and (beginning in 1998) de minimis non-customary services. The Company's ability
to acquire non-real estate assets is restricted, and a 100% tax is imposed on
any gain that the Company realizes from sales of property to customers in the
ordinary course of business (other than property acquired by reason of certain
foreclosures), effectively preventing the Company from participating directly in
condominium projects and other projects involving the development of property
for resale. Minimum distribution requirements also generally require the Company
to distribute at least 95% of its taxable income each year (excluding any net
capital gain).
In any year in which the Company qualifies to be taxed as a REIT,
distributions made to its stockholders out of current or accumulated earnings
and profits will be taxed to stockholders as ordinary income except that
distributions of net capital gains designated by the Company as capital gain
dividends will be taxed as long-term capital gain income to the stockholders. To
the extent that distributions exceed current or accumulated earnings and
profits, they will constitute a return of capital, rather than dividend or
capital gain income, and will reduce the basis for the stockholder's Securities
with respect to which the distribution is paid or, to the extent that they
exceed such basis, will be taxed in the same manner as gain from the sale of
those Securities.
Investors are urged to consult their own tax advisors with respect to the
appropriateness of an investment in the Securities offered hereby and with
respect to the tax consequences arising under federal law and the laws of any
state, municipality or other taxing jurisdiction, including tax consequences
resulting from such investor's own tax characteristics. In particular, foreign
investors should consult their own tax advisors concerning the tax consequences
of an investment in the Company, including the possibility of United States
income tax withholding on Company distributions.
28
<PAGE> 65
PLAN OF DISTRIBUTION
The Company may sell Securities to or through one or more underwriters or
dealers for public offering and sale by or through them, directly to one or more
purchasers, through agents or through any combination of these methods of sale.
Direct sale to investors also may be accomplished through subscription rights
distributed to the Company's stockholders on a pro rata basis. In connection
with any distribution of subscription rights to stockholders, if all of the
underlying Securities are not subscribed for, the Company may sell the
unsubscribed Securities directly to third parties or may engage the services of
one or more underwriters, dealers or agents, including standby underwriters, to
sell the unsubscribed Securities to third parties.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, or at negotiated prices (any of which may represent a discount
from the prevailing market prices).
In connection with the sale of Securities, underwriters or agents may
receive compensation from the Company or from purchasers of Securities, for whom
they may act as agents, in the form of discounts, concessions or commissions.
Underwriters may sell Securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agents. Underwriters, dealers, and agents that participate in the distribution
of Securities may be deemed to be underwriters under the Securities Act, and any
discounts or commissions they receive from the Company and any profit on the
resale of Securities they realize may be deemed to be underwriting discounts and
commissions under the Securities Act. Any such underwriter or agent will be
identified, and any such compensation received from the Company will be
described, in the applicable Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, each class
or series of Securities will be a new issue with no established trading market,
other than the Common Stock and the Series C Preferred Stock, which are listed
on the NYSE and the PCX. Any shares of Common Stock sold pursuant to a
Prospectus Supplement will be listed on the NYSE and the PCX, subject to
official notice of issuance. The Company may elect to list any series of Debt
Securities or Preferred Stock on an exchange, but is not obligated to do so. It
is possible that one or more underwriters may make a market in a series of
Securities, but will not be obligated to do so and may discontinue any market
making at any time without notice. Therefore, no assurance can be given as to
the liquidity of, or the trading market for, the Securities.
Under agreements into which the Company may enter, underwriters, dealers
and agents who participate in the distribution of Securities may be entitled to
indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, or be tenants of, the Company in the ordinary course of
business.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Securities from the Company at the public offering
price set forth in such Prospectus Supplement pursuant to delayed delivery
contracts ("Contracts") providing for payment and delivery on the date or dates
stated in such Prospectus Supplement. Each Contract will be for an amount not
less than, and the aggregate principal amount of Securities sold pursuant to
Contracts shall be not less nor more than, the respective amounts stated in the
applicable Prospectus Supplement. Institutions with whom Contracts, when
authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions, and other institutions, but will in all cases be subject to the
approval of the Company. Contracts will not be subject to any conditions except
(i) the purchase by an institution of the Securities covered by its Contracts
shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject, and (ii)
if the Securities are being sold to underwriters, the Company shall have sold to
such underwriters the total principal amount of the Securities less the
principal amount thereof
29
<PAGE> 66
covered by Contracts. The underwriters and such other agents will not have any
responsibility in respect of the validity or performance of such Contracts.
In order to comply with the securities laws of certain states, if
applicable, the Securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states Securities may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, under
certain circumstances a person engaged in the distribution of the Securities
offered hereby may not simultaneously engage in market making activities with
respect to the Securities for a specified period prior to the commencement of
such distribution.
LEGAL MATTERS
Certain legal matters, including the legality of the Securities, will be
passed upon for the Company by Goodwin, Procter & Hoar LLP, Boston,
Massachusetts.
EXPERTS
The financial statements and schedule thereto incorporated by reference in
this Prospectus or elsewhere in the Registration Statement, to the extent and
for the periods indicated in their reports have been audited by Coopers &
Lybrand L.L.P., independent accountants, and are incorporated herein in reliance
upon the authority of said firm as experts in giving said reports.
30
<PAGE> 67
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH THEY RELATE. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary.................. S-3
Risk Factors................................... S-8
The Company.................................... S-14
Recent Developments............................ S-18
The Communities................................ S-20
Use of Proceeds................................ S-26
Capitalization................................. S-27
Description of Notes........................... S-28
Underwriting................................... S-35
Legal Matters.................................. S-36
PROSPECTUS
Available Information.......................... 2
Incorporation of Certain Documents by
Reference.................................... 2
The Company.................................... 4
Use of Proceeds................................ 4
Ratios of Earnings to Combined Fixed Charges
and Preferred Stock Dividends................ 4
Ratios of Earnings to Fixed Charges............ 5
Description of Debt Securities................. 6
Description of Preferred Stock................. 20
Description of Common Stock.................... 26
Restrictions on Transfers of Capital Stock..... 27
Federal Income Tax Considerations.............. 28
Plan of Distribution........................... 29
Legal Matters.................................. 30
Experts........................................ 30
</TABLE>
================================================================================
[AVALON BAY LOGO]
$100,000,000 6.50% SENIOR NOTES DUE 2003
$150,000,000 6.80% SENIOR NOTES DUE 2006
---------------------------------
PROSPECTUS SUPPLEMENT
---------------------------------
PAINEWEBBER INCORPORATED
FIRST UNION CAPITAL MARKETS
J.P. MORGAN & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
------------------------
JULY 1, 1998
================================================================================
