<PAGE>
Filed Pursuant to Rule No. 424(B)(5)
Registration No. 333-39797
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 21, 1997)
8,416,667 SHARES
LOGO
COMMON SHARES OF BENEFICIAL INTEREST
----------------
Security Capital Industrial Trust ("SCI") is the largest publicly held
global owner and operator of distribution properties headquartered in the
United States based on equity market capitalization. SCI is an international
operating company focused exclusively on meeting the distribution space needs
of international, national, regional and local industrial real estate users
through the SCI International Operating System(TM). SCI has elected to be
taxed as a real estate investment trust (a "REIT") for federal income tax
purposes and pays regular quarterly distributions to its shareholders.
All of the common shares of beneficial interest of SCI, par value $.01 per
share (the "Common Shares"), offered hereby are being offered by SCI (the
"Offering"). The Common Shares are currently listed on the New York Stock
Exchange (the "NYSE") under the symbol "SCN." On December 19, 1997, the last
reported sale price of the Common Shares on the NYSE was $24 3/4 per Common
Share. No person or persons acting as a group may beneficially own more than
9.8% of SCI's outstanding shares. See "Description of Common Shares--
Restriction on Size of Holdings" in the accompanying Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Cohen & Steers ("Cohen") has agreed to purchase from SCI 2,166,600 of the
Common Shares offered hereby for an aggregate purchase price of $51,998,400.
Scudder Stevens and Clark ("Scudder") has agreed to purchase from SCI
3,125,000 of the Common Shares offered hereby for an aggregate purchase price
of $75,000,000. Security Capital Group Incorporated ("Security Capital") has
agreed to purchase from SCI 3,125,067 of the Common Shares offered hereby for
an aggregate purchase price of $75,001,608. Cohen and Scudder intend to sell
the Common Shares to accounts over which they exercise discretionary
authority. SCI will pay Security Capital Markets Group Incorporated ("Capital
Markets Group"), an affiliate of SCI, a fee of $2 million in connection with
its services in placing the Common Shares with Cohen, Scudder and Security
Capital.
----------------
The date of this Prospectus Supplement is December 22, 1997.
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCI is the largest publicly held, U.S.-based global owner and operator of
distribution properties based on equity market capitalization. SCI is an
international operating company focused exclusively on meeting the distribution
space needs of international, national, regional and local industrial real
estate users through the SCI International Operating System(TM). SCI
distinguishes itself from its competition by being the only entity that
combines all of the following:
1. An international operating strategy dedicated to providing services to
the 1,000 largest users of distribution facilities worldwide;
2. An organizational structure and service delivery system built around the
customer; SCI believes its service approach is unique to the real estate
industry as it combines international scope and expertise with strong
local presence;
3. A disciplined investment strategy based on proprietary research that
identifies high growth markets with sustainable demand for SCI's low
finish distribution space product; and
4. Over 270 professionals in 35 offices in the U.S., Mexico and Europe
which SCI believes comprise the deepest and most experienced management
team in industrial real estate.
The cornerstone of SCI's operating strategy is the SCI International
Operating System(TM) comprised of the Market Services Group, the Global
Services Group and the Global Development Group that utilize SCI's national and
international network of distribution space to provide an exceptional level of
customer service, including development on an international, national, regional
and local basis.
SCI engages in the acquisition, development, marketing, operation and long-
term ownership of distribution facilities, and the development of master-
planned distribution parks and corporate distribution facilities designed to
meet its customers' needs. SCI is a fully integrated operating company with
expertise in: (i) market research; (ii) building and land acquisition and due
diligence; (iii) master-planned distribution park design and building
construction; (iv) marketing, leasing and property management; and (v) capital
markets and financial operations.
SCI deploys capital in markets with excellent long-term growth prospects and
in markets where SCI can achieve a strong market position through the
acquisition and development of generic, flexible facilities for both
warehousing and light manufacturing uses. SCI expanded its operations into
Mexico and Europe in the first half of 1997 to meet the needs of its targeted
national and international customers as they expand and reconfigure their
distribution facility requirements globally. With six target market cities
identified in Mexico and 15 identified in Europe, SCI believes that there are
significant growth opportunities internationally. SCI is building a deep
organization in both Mexico and Europe similar to its U.S. organization as part
of the SCI International Operating System(TM).
USE OF PROCEEDS
The net proceeds to SCI from the sale of the Common Shares offered hereby are
expected to be approximately $200 million. SCI expects that a portion of the
net proceeds of the Offering will be used to repay borrowings under SCI's
unsecured line of credit, with the remainder used for (i) a portion of the $395
million purchase price for the acquisition of Frigoscandia AB, a European
refrigerated distribution company based in Sweden, (ii) the acquisition and
development of additional distribution properties as suitable opportunities
arise, (iii) for capital improvements to properties and (iv) for general
corporate purposes. SCI's $350 million unsecured line of credit bears interest
at the greater of the federal funds rate plus 0.5% or prime (8.5% at December
19, 1997) or, at SCI's option, LIBOR plus 0.95% (6.9188% at December 19, 1997),
based on SCI's current senior debt rating. At December 19, 1997, $164.6 million
of borrowings were outstanding under the line of credit. Pending use of the net
proceeds of the Offering for the foregoing purposes, SCI will invest such
proceeds in short-term securities.
S-2
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PLAN OF DISTRIBUTION
Under the terms and subject to the conditions set forth in Purchase
Agreements dated as of December 19, 1997, SCI has agreed to sell, and Cohen,
Scudder and Security Capital have agreed to purchase, 2,166,600, 3,125,000 and
3,125,067 Common Shares, respectively. Cohen and Scudder intend to sell the
Common Shares to accounts over which they exercise discretionary authority.
SCI will pay Capital Markets Group a fee of $2 million in connection with its
services in placing the Common Shares with Cohen, Scudder and Security
Capital.
VALIDITY OF COMMON SHARES
The validity of the issuance of the Common Shares offered pursuant to this
Prospectus Supplement will be passed upon for SCI by Mayer, Brown & Platt,
Chicago, Illinois.
S-3
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PROSPECTUS
LOGO
[LOGO OF SECURITY CAPITAL INDUSTRIAL TRUST APPEARS HERE]
$600,000,000 DEBT SECURITIES, PREFERRED SHARES AND COMMON SHARES*
----------------
Security Capital Industrial Trust ("SCI") may from time to time offer in one
or more series its (i) unsecured senior debt securities (the "Debt
Securities"), (ii) Preferred Shares of Beneficial Interest, par value $0.01
per share (the "Preferred Shares"), and (iii) Common Shares of Beneficial
Interest, par value $0.01 per share (the "Common Shares"). The Debt
Securities, Preferred Shares and Common Shares (collectively, the "Offered
Securities") may be offered, separately or together, in separate series, in
amounts, at prices and on terms to be set forth in a supplement to this
Prospectus (a "Prospectus Supplement").
The specific terms of the Offered Securities in respect of 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, 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 SCI or repayment at
the option of the Holder, terms for sinking fund payments, and any initial
public offering price; (ii) in the case of Preferred Shares, the specific
title and stated value, any dividend, liquidation, redemption, conversion,
voting and other rights, and any initial public offering price; and (iii) in
the case of Common Shares, any initial public offering price. In addition,
such specific terms may include limitations on direct or beneficial ownership
and restrictions on transfer of the Offered Securities, in each case as may be
appropriate to preserve the status of SCI as a real estate investment trust
("REIT") for federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered
Securities covered by such Prospectus Supplement.
The Offered Securities may be offered directly by SCI, through agents
designated from time to time by SCI, or to or through underwriters or dealers.
If any agents or underwriters are involved in the sale of any of the Offered
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 the applicable Prospectus
Supplement. See "Plan of Distribution." No Offered Securities may be sold
without delivery of the applicable Prospectus Supplement describing the method
and terms of the offering of such series of Offered Securities.
----------------
*Pursuant to Rule 429 under the Securities Act of 1933, as amended (the
"Securities Act"), this Prospectus also relates to an additional $167,707,626
of the Offered Securities which were registered under a previous registration
statement.
----------------
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 ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
----------------
THE DATE OF THIS PROSPECTUS IS NOVEMBER 21, 1997
<PAGE>
AVAILABLE INFORMATION
SCI is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and
other information can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of such material can be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Such material can also be obtained from the
Commission's worldwide web site at http://www.sec.gov. SCI's outstanding
Common Shares, Series A Cumulative Redeemable Preferred Shares of Beneficial
Interest, par value $0.01 per share (the "Series A Preferred Shares") and
Series B Cumulative Convertible Redeemable Preferred Shares of Beneficial
Interest, par value $0.01 per share (the "Series B Preferred Shares") are
listed on the New York Stock Exchange (the "NYSE") under the symbols "SCN",
"SCN-PRA" and "SCN-PRB", respectively, and all such reports, proxy statements
and other information filed by SCI with the NYSE may be inspected at the
NYSE's offices at 20 Broad Street, New York, New York 10005.
This Prospectus constitutes part of a registration statement on Form S-3
(together with all amendments and exhibits, the "Registration Statement")
filed by SCI with the Commission under the Securities Act. This Prospectus
does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is hereby
made to the Registration Statement.
INCORPORATION BY REFERENCE
There are incorporated herein by reference the following documents
heretofore filed by SCI with the Commission (File No. 1-12846):
(a) SCI's Annual Report on Form 10-K for the fiscal year ended December
31, 1996;
(b) SCI's Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997;
(c) SCI's Current Reports on Form 8-K filed January 27, January 30, March
26, July 11, September 9, 1997 and November 13, 1997;
(d) The description of the Series A Preferred Shares contained under the
caption "Description of Series A Preferred Shares" in SCI's prospectus
supplement dated June 16, 1995 to the prospectus dated April 27, 1995
forming a part of SCI's registration statement on Form S-3 (File No. 33-
90940) filed with the Commission pursuant to Rule 424(b) under the
Securities Act and the related description contained under the caption
"Description of Preferred Shares" in such prospectus;
(e) The description of the Series B Preferred Shares contained under the
caption "Description of Series B Preferred Shares" in SCI's prospectus
supplement dated February 14, 1996 to the prospectus dated December 28,
1995 forming a part of SCI's registration statement on Form S-3 (File No.
33-99548) filed with the Commission pursuant to Rule 424(b) under the
Securities Act and the related description contained under the caption
"Description of Preferred Shares" in such prospectus;
(f) The description of the Cumulative Redeemable Preferred Shares of
Beneficial Interest, par value $0.01 per share (the "Series C Preferred
Shares") contained under the caption "Description of Series C Preferred
Shares" in SCI's prospectus supplement dated November 7, 1996 to the
prospectus dated October 31, 1996 forming a part of SCI's registration
statement on Form S-3 (File No. 333-13909) filed with the Commission
pursuant to Rule 424(b) under the Securities Act and the related
description contained under the caption "Description of Preferred Shares"
in such prospectus;
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<PAGE>
(g) The description of the Common Shares contained in SCI's registration
statement on Form 8-A; and
(h) The description of SCI's preferred share purchase rights contained in
SCI's registration statement on Form 8-A.
All documents subsequently filed by SCI pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act prior to the termination of the offering of
the Offered 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. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein, or in any subsequently filed document which is incorporated
or deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
SCI will provide without charge to each person, including any beneficial
owner, to whom a copy of this Prospectus is delivered, upon the written or
oral request of such person, a copy of any or all of the documents
incorporated herein by reference, other than exhibits to such documents unless
such exhibits are specifically incorporated by reference into such documents.
Requests should be addressed to Secretary, Security Capital Industrial Trust,
14100 East 35th Place, Aurora, Colorado 80011, telephone number: (303) 375-
9292.
SECURITY CAPITAL INDUSTRIAL TRUST
SCI is the largest publicly held, U.S.-based global owner and operator of
distribution properties based on equity market capitalization. SCI is an
international operating company focused exclusively on meeting the
distribution space needs of international, national, regional and local
industrial real estate users through the SCI International Operating
System(TM). SCI distinguishes itself from its competition by being the only
entity that combines all of the following:
1. An international operating strategy dedicated to providing services to
the 1,000 largest users of distribution facilities worldwide;
2. An organizational structure and service delivery system built around the
customer--SCI believes its service approach is unique to the real estate
industry as it combines international scope and expertise with strong
local presence;
3. A disciplined investment strategy based on proprietary research that
identifies high growth markets with sustainable demand for SCI's low
finish distribution space product; and
4. Over 270 professionals in 35 offices in the U.S., Mexico and Europe
which SCI believes comprise the deepest and most experienced management
team in industrial real estate.
The cornerstone of SCI's operating strategy is the SCI International
Operating System(TM) comprised of the Market Services Group, the Global
Services Group and the Global Development Group that utilize SCI's national
and international network of distribution space to provide an exceptional
level of customer service, including development on an international,
national, regional and local basis.
SCI engages in the acquisition, development, marketing, operation and long-
term ownership of distribution facilities, and the development of master-
planned distribution parks and corporate distribution facilities designed to
meet its customers' needs. SCI is a fully integrated operating company with
expertise in: (i) market research; (ii) building and land acquisition and due
diligence; (iii) master-planned distribution park design and building
construction; (iv) marketing, leasing and property management; and (v) capital
markets and financial operations.
SCI deploys capital in markets with excellent long-term growth prospects and
in markets where SCI can achieve a strong market position through the
acquisition and development of generic, flexible facilities for both
warehousing and light manufacturing uses. SCI expanded its operations into
Mexico and Europe in the first half
3
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of 1997 to meet the needs of its targeted national and international customers
as they expand and reconfigure their distribution facility requirement
globally. With six target market cities identified in Mexico and 15 identified
in Europe, SCI believes that there are significant growth opportunities
internationally. SCI is building a deep organization in both Mexico and Europe
similar to its U.S. organization as part of the SCI International Operating
System(TM).
SCI's executive offices are located at 14100 East 35th Place, Aurora,
Colorado 80011 and its telephone number is (303) 375-9292. SCI's predecessor
was formed in June 1991 as a Delaware corporation, and SCI was re-formed as a
Maryland real estate investment trust in January 1993.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the net
proceeds from the sale of the Offered Securities will be used for the
acquisition and development of additional distribution properties as suitable
opportunities arise, for the repayment of certain outstanding indebtedness at
such time, for capital improvements to properties and for general corporate
purposes.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED SHARE DIVIDENDS
For the purpose of computing these ratios, (a) "earnings" consist of
earnings from operations plus fixed charges other than capitalized interest
and (b) "fixed charges" consist of interest on borrowed funds (including
capitalized interest) and amortization of debt discount and expense.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to combined fixed
charges
and Preferred Share dividends......... (a) 11.3 3.3 1.7 1.5 1.4 (b)
</TABLE>
- --------
(a) While SCI was researching markets and assembling its initial assets,
earnings were insufficient to cover combined fixed charges and preferred
share dividends for the year ended December 31, 1992 by $311,000.
(b) Due to a one-time expense of $75.4 million incurred upon acquiring the
management companies from a related party, earnings were insufficient to
cover combined fixed charges and preferred share dividends for the nine
months ended September 30, 1997 by $35.0 million.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities are to be issued under an Indenture, dated as of March
1, 1995 (the "Indenture"), between SCI and State Street Bank and Trust Company
(the "Trustee"). The Indenture has been incorporated by reference as an
exhibit to the Registration Statement of which this Prospectus is a part and
is available for inspection at the corporate trust office of the Trustee at
225 Franklin Street, Boston, Massachusetts 02110 or as described above under
"Available Information." 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 Debt Securities 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 the provisions of the Indenture and such Debt Securities. All section
references appearing herein are to sections of the Indenture, and capitalized
terms used but not defined herein shall have the respective meanings set forth
in the Indenture.
GENERAL
The Debt Securities will be direct, unsecured and unsubordinated obligations
of SCI and will rank equally with all other unsecured and unsubordinated
indebtedness of SCI from time to time outstanding. The Indenture provides that
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
in or pursuant to authority granted by a resolution of the Board of Trustees
(the "Board") of SCI or as established in one or more indentures supplemental
to the
4
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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 the Debt Securities of such series, for issuances of
additional Debt Securities of such series (Section 301).
Reference is made to the Prospectus Supplement relating to the series of
Debt Securities being offered for the specific terms thereof, including:
(1) the title of such series of Debt Securities;
(2) the aggregate principal amount of such series of Debt Securities and
any limit on such principal amount;
(3) the percentage of the principal amount at which the Debt Securities
of such series will be issued and, if other than the full principal amount
thereof, the portion of the principal amount thereof payable upon
declaration of acceleration of the maturity thereof, or the method by which
any such portion shall be determined;
(4) the date or dates, or the method by which such date or dates will be
determined, on which the principal of the Debt Securities of such series
will be payable and the amount of principal payable thereon;
(5) the rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which the Debt Securities
of such series will bear interest, if any;
(6) the date or dates, or the method by which such date or dates will be
determined, from which any such interest will accrue, the Interest Payment
Dates on which any such interest will be payable, the Regular Record Dates
for such Interest Payment Dates, or the method by which such dates shall be
determined, the Person to whom, and the manner in which, such interest
shall be payable, and the basis upon which interest shall be calculated if
other than that of a 360-day year comprised of twelve 30-day months;
(7) the place or places where the principal of (and premium or Make-Whole
Amount (as defined), if any) and interest and Additional Amounts, if any,
on the Debt Securities of such series will be payable, where such Debt
Securities may be surrendered for registration of transfer or exchange and
where notices or demands to or upon SCI in respect of such Debt Securities
and the Indenture may be served;
(8) the period or periods within which, the price or prices (including
the premium or Make-Whole Amount, if any) at which, the currency or
currencies in which, and the other terms and conditions upon which the Debt
Securities of such series may be redeemed, as a whole or in part, at the
option of SCI, if SCI is to have such an option;
(9) the obligation, if any, of SCI to redeem, repay or purchase the Debt
Securities of such series pursuant to any sinking fund or analogous
provision or at the option of a Holder thereof, and the period or periods
within which, the date or dates upon which, the price or prices at which,
the currency or currencies, currency unit or units or composite currency or
currencies in which, and the other terms and conditions upon which such
Debt Securities shall be redeemed, repaid or purchased, as a whole or in
part, pursuant to such obligation;
(10) if other than United States dollars, the currency or currencies in
which the Debt Securities of such series 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;
(11) whether the amount of payments of principal of (and premium or Make-
Whole Amount, if any) or interest, if any, on the Debt Securities of such
series may be determined with reference to an index, formula or other
method (which index, formula or method may be, but need not be, based on a
currency, currencies, currency unit or units or composite currency or
currencies) and the manner in which such amounts shall be determined;
(12) whether the principal of (and premium or Make-Whole Amount, if any)
or interest or Additional Amounts, if any, on the Debt Securities of such
series are to be payable, at the election of SCI or a Holder, 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,
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<PAGE>
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 in which such Debt Securities are denominated or stated to be
payable and the currency or currencies in which such Debt Securities are to
be so payable;
(13) any deletions from, modifications of or additions to the terms of
such series of Debt Securities with respect to the Events of Default or
covenants set forth in the Indenture;
(14) whether the Debt Securities of such series will be issued in
certificated or book-entry form;
(15) whether the Debt Securities of such series 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 if other than $5,000 and the terms and conditions
relating thereto;
(16) the applicability, if any, of the defeasance and covenant defeasance
provisions of Article Fourteen of the Indenture to such series of Debt
Securities and any provisions in modification thereof, in addition thereto
or in lieu thereof;
(17) if the Debt Securities of such series are to be issued upon the
exercise of debt warrants, the time, manner and place for such Debt
Securities to be authenticated and delivered;
(18) whether and under what circumstances SCI will pay Additional Amounts
as contemplated in the Indenture on the Debt Securities of such series in
respect of any tax, assessment or governmental charge and, if so, whether
SCI will have the option to redeem such Debt Securities rather than pay
such Additional Amounts; and
(19) any other terms of such series of Debt Securities not inconsistent
with the provisions of the Indenture (Section 301).
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
or bear no interest or bear interest at a rate which at the time of issuance
is below market rates ("Original Issue Discount Securities"). Special United
States federal income tax, accounting and other considerations applicable to
Original Issue Discount Securities will be described in the applicable
Prospectus Supplement.
Except as set forth below under "--Certain Covenants--Limitations on
Incurrence of Debt," the Indenture does not contain any other provisions that
would limit the ability of SCI to incur indebtedness or that would afford
Holders of Debt Securities protection in the event of a highly leveraged or
similar transaction involving SCI or in the event of a change of control.
However, SCI's Amended and Restated Declaration of Trust, as amended and
supplemented (the "Declaration of Trust"), restricts beneficial ownership of
SCI's outstanding shares of beneficial interest by a single person, or persons
acting as a group, to 9.8% of such shares, with certain exceptions (including
an exception in the case of Security Capital Group Incorporated "SCG"). See
"Description of Common Shares--Restriction on Size of Holdings." Additionally,
the Articles Supplementary relating to the Series A Preferred Shares and
Series B Preferred Shares restrict beneficial ownership of the Series A
Preferred Shares or the Series B Preferred Shares by a person, or persons
acting as a group, to 25% of the Series A Preferred Shares or the Series B
Preferred Shares, with limited exceptions. Similarly, the Articles
Supplementary for each other series of Preferred Shares will contain certain
provisions restricting the ownership and transfer of the Preferred Shares. See
"Description of Preferred Shares--Restrictions on Ownership." These
restrictions are designed to preserve SCI's status as a REIT and, therefore,
may act to prevent or hinder a change of control. 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
SCI that are described below, including any addition of a covenant or other
provision providing event risk or similar protection.
DENOMINATIONS
Unless otherwise described in the applicable Prospectus Supplement, the Debt
Securities of any series issued in registered form will be issuable in
denominations of $1,000 and integral multiples thereof. Unless otherwise
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described in the applicable Prospectus Supplement, the Debt Securities of any
series issued in bearer form will be issuable in denominations of $5,000
(Section 302).
PRINCIPAL AND INTEREST
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and 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, initially located at 225 Franklin Street, Boston, Massachusetts
02110; provided that, at the option of SCI, payment of interest may be made by
check mailed to the address of the Person entitled thereto as it appears in
the Security Register or by wire transfer of funds to such Person to an
account maintained within the United States (Sections 301, 305, 306, 307 and
1002).
If any Interest Payment Date, Principal Payment Date or the Maturity Date
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, Principal 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 Boston, Massachusetts are not required or authorized
by law or executive order to close. Any interest not punctually paid or duly
provided for on any Interest Payment Date with respect to any Debt Security
("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, notice of which 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 Indenture (Section 307).
MERGER, CONSOLIDATION OR SALE
SCI may 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 SCI shall be the continuing entity, or the successor entity (if other
than SCI) formed by or resulting from any such consolidation or merger or
which shall have received the transfer of such assets is a Person organized
and existing under the laws of the United States or any State thereof and
shall expressly assume payment of the principal of (and premium or Make-Whole
Amount, if any) and any interest (including Additional Amounts, if any) on all
of the Debt Securities outstanding and the due and punctual performance and
observance of all of the covenants and conditions contained in the Indenture;
(b) immediately after giving effect to such transaction and treating any
indebtedness which becomes an obligation of SCI or any Subsidiary as a result
thereof as having been incurred by SCI or such Subsidiary at the time of such
transaction, no Event of Default 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 officer's
certificate and legal opinion covering such conditions shall be delivered to
the Trustee (Sections 801 and 803).
CERTAIN COVENANTS
Limitations on Incurrence of Debt. SCI will not, and will not permit any
Subsidiary to, incur any Debt (as defined below) if, immediately after giving
effect to the incurrence of such additional Debt and the application of the
proceeds thereof, the aggregate principal amount of all outstanding Debt of
SCI and its Subsidiaries on a consolidated basis determined in accordance with
generally accepted accounting principles is greater than 60% of the sum of
(without duplication) (i) SCI's Total Assets (as defined below) as of the end
of the calendar quarter covered in SCI'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 Debt 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 Debt), by SCI or any Subsidiary since the end of
such calendar quarter, including those proceeds obtained in connection with
the incurrence of such additional Debt (Section 1004).
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In addition to the foregoing limitation on the incurrence of Debt, SCI will
not, and will not permit any Subsidiary to, incur any Debt secured by any
mortgage, lien, charge, pledge, encumbrance or security interest of any kind
upon any of the property of SCI or any Subsidiary if, immediately after giving
effect to the incurrence of such additional Debt and the application of the
proceeds thereof, the aggregate principal amount of all outstanding Debt of
SCI and its Subsidiaries on a consolidated basis which is secured by any
mortgage, lien, charge, pledge, encumbrance or security interest on property
of SCI or any Subsidiary is greater than 40% of the sum of (i) SCI's Total
Assets as of the end of the calendar quarter covered in SCI'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
Debt 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 Debt), by SCI or any
Subsidiary since the end of such calendar quarter, including those proceeds
obtained in connection with the incurrence of such additional Debt (Section
1004).
In addition to the foregoing limitations on the incurrence of Debt, no
Subsidiary may incur any unsecured Debt other than intercompany Debt
subordinate to the Debt Securities; provided, however, that SCI or a
Subsidiary may acquire an entity that becomes a Subsidiary that has unsecured
Debt if the incurrence of such Debt (including any guarantees of such Debt
assumed by SCI or any Subsidiary) was not intended to evade the foregoing
restrictions and the incurrence of such Debt (including any guarantees of such
Debt assumed by SCI or any Subsidiary) would otherwise be permitted under the
Indenture (Section 1004).
SCI and its Subsidiaries may not at any time own Total Unencumbered Assets
equal to less than 150% of the aggregate outstanding principal amount of the
Unsecured Debt of SCI and its Subsidiaries on a consolidated basis (Section
1004).
In addition to the foregoing limitations on the incurrence of Debt, SCI will
not, and will not permit any Subsidiary to, incur any Debt 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 Debt
is to be incurred shall have been less than 1.5, 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 Debt and any other Debt incurred by
SCI and its Subsidiaries since the first day of such four-quarter period and
the application of the proceeds therefrom, including to refinance other Debt,
had occurred at the beginning of such period; (ii) the repayment or retirement
of any other Debt by SCI and its Subsidiaries since the first day of such
four-quarter period had been incurred, repaid or retired at the beginning of
such period (except that, in making such computation, the amount of Debt under
any revolving credit facility shall be computed based upon the average daily
balance of such Debt during such period); (iii) in the case of Acquired Debt
(as defined below) or Debt 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 SCI 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 Debt 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 (Section 1004).
Existence. Except as permitted under "--Merger, Consolidation or Sale," SCI
will do or cause to be done all things necessary to preserve and keep in full
force and effect its existence, rights (charter and statutory) and franchises;
provided, however, that SCI shall not be required to preserve any right or
franchise if it determines that the preservation thereof is no longer
desirable in the conduct of its business and that the loss thereof is not
disadvantageous in any material respect to the Holders of the Debt Securities
(Section 1005).
Maintenance of Properties. SCI will cause all of its 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
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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 SCI may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all
times; provided, however, that SCI and its Subsidiaries shall not be prevented
from selling or otherwise disposing for value its properties in the ordinary
course of business (Section 1006).
Insurance. SCI will, and will cause each of its Subsidiaries to, keep all of
its insurable properties insured against loss or damage at least equal to
their then full insurable value with financially sound and reputable insurance
companies (Section 1007).
Payment of Taxes and Other Claims. SCI will 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 SCI 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 SCI or any Subsidiary;
provided, however, that SCI shall not be required to pay or discharge or cause
to be paid or discharged any such tax, assessment, charge or claim whose
amount, applicability or validity is being contested in good faith by
appropriate proceedings (Section 1008).
Provision of Financial Information. Whether or not SCI is subject to Section
13 or 15(d) of the Exchange Act, SCI will, to the extent permitted under the
Exchange Act, file with the Commission the annual reports, quarterly reports
and other documents which SCI would have been required to file with the
Commission pursuant to such Section 13 or 15(d) (the "Financial Statements")
if SCI were so subject, such documents to be filed with the Commission on or
prior to the respective dates (the "Required Filing Dates") by which SCI would
have been required so to file such documents if SCI were so subject. SCI will
also in any event (x) within 15 days of each Required Filing Date (i) transmit
by mail to all Holders of Debt Securities, as their names and addresses appear
in the Security Register, without cost to such Holders, copies of the annual
reports and quarterly reports which SCI would have been required to file with
the Commission pursuant to Section 13 or 15(d) of the Exchange Act if SCI were
subject to such Sections and (ii) file with the Trustee copies of the annual
reports, quarterly reports and other documents which SCI would have been
required to file with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act if SCI were subject to such Sections and (y) if filing such
documents by SCI with the Commission is not permitted under the Exchange Act,
promptly upon written request and payment of the reasonable cost of
duplication and delivery, supply copies of such documents to any prospective
Holder (Section 1009).
EVENTS OF DEFAULT, NOTICE AND WAIVER
The Indenture provides 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 or Additional Amounts payable on
any Debt Security of such series which continues for 30 days; (b) default in
the payment of the principal of (or premium or Make-Whole Amount, if any, on)
any Debt Security of such series at its Maturity; (c) default in making any
sinking fund payment as required for any Debt Security of such series; (d)
default in the performance of any other covenant of SCI 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 Indenture; (e)
default in the payment of an aggregate principal amount exceeding $10,000,000
of any evidence of indebtedness of SCI or any mortgage, indenture or other
instrument under which such indebtedness is issued or by which such
indebtedness is secured, such default having occurred after the expiration of
any applicable grace period and having resulted in the acceleration of the
maturity of such indebtedness, but only if such indebtedness is not discharged
or such acceleration is not rescinded or annulled; (f) the entry by a court of
competent jurisdiction of one or more judgments, orders or decrees against SCI
or any of its Subsidiaries in an aggregate amount (excluding amounts fully
covered by insurance) in excess of $10,000,000 and such judgments, orders or
decrees remain undischarged, unstayed and unsatisfied in an aggregate amount
(excluding amounts fully covered by insurance) in excess of $10,000,000 for
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a period of 30 consecutive days; (g) certain events of bankruptcy, insolvency
or reorganization, or court appointment of a receiver, liquidator or trustee
of SCI or any Significant Subsidiary or for all or substantially all of either
of its property; and (h) any other Event of Default provided with respect to a
particular series of Debt Securities (Section 501). The term "Significant
Subsidiary" means each significant subsidiary (as defined in Regulation S-X
promulgated under the Securities Act) of SCI.
If an Event of Default under the Indenture with respect to Debt Securities
of any series at the time Outstanding occurs and is continuing, then in every
such case, unless the principal of all of the Outstanding Debt Securities of
such series shall already have become due and payable, the Trustee or the
Holders of not less than 25% in principal amount of the Outstanding Debt
Securities of such series may declare the principal (or, if the Debt
Securities of such series are Original Issue Discount Securities or Indexed
Securities, such portion of the principal as may be specified in the terms
thereof) of, and the Make-Whole Amount, if any, on, all of the Debt Securities
of such series to be due and payable immediately by written notice thereof to
SCI (and to the Trustee if given by the Holders). However, at any time after
such a declaration of acceleration with respect to Debt Securities of any
series has been made, but before a judgment or decree for payment of the money
due has been obtained by the Trustee, the Holders of not less than a majority
in principal amount of the Outstanding Debt Securities of such series may
rescind and annul such declaration and its consequences if (a) SCI shall have
deposited with the Trustee all required payments of the principal of (and
premium or Make-Whole Amount, if any) and interest, and any Additional
Amounts, on the Debt Securities of such series, plus certain fees, expenses,
disbursements and advances of the Trustee and (b) all Events of Default, other
than the nonpayment of accelerated principal (or specified portion thereof and
the Make-Whole Amount, if any) or interest, with respect to Debt Securities of
such series have been cured or waived as provided in the Indenture (Section
502). The Indenture also provides that the Holders of not less than a majority
in principal amount of the Outstanding Debt Securities of any series 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 or Additional Amounts payable on any Debt Security
of such series or (y) in respect of a covenant or provision contained in the
Indenture that cannot be modified or amended without the consent of the Holder
of each Outstanding Debt Security affected thereby (Section 513).
The Trustee is required to give notice to the Holders of Debt Securities
within 90 days of a default under the Indenture; provided, however, that the
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 or
Additional Amounts payable 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 the Responsible Officers of the Trustee consider such
withholding to be in the interest of such Holders (Section 601).
The Indenture provides that no Holders of Debt Securities of any series may
institute any proceedings, judicial or otherwise, with respect to the
Indenture or for any remedy thereunder, except in the case of failure of the
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 reasonable indemnity (Section 507). 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), interest on, and Additional Amounts
payable with respect to, such Debt Securities at the respective due dates
thereof (Section 508).
Subject to provisions in the Indenture relating to its duties in case of
default, the Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any Holders of any
series of Debt Securities then Outstanding under the Indenture, unless such
Holders shall have offered to the Trustee reasonable security or indemnity
(Section 602). The Holders of not less than a majority in principal amount of
the Outstanding Debt Securities of any series shall have the right to direct
the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or of exercising any trust or power
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conferred upon the Trustee. However, the Trustee may refuse to follow any
direction which is in conflict with any law or the Indenture, which may
involve the Trustee in personal liability or which may be unduly prejudicial
to the Holders of Debt Securities of such series not joining therein (Section
512).
Within 120 days after the close of each fiscal year, SCI must deliver to the
Trustee a certificate, signed by one of several specified officers, stating
whether or not such officer has knowledge of any default under the Indenture
and, if so, specifying each such default and the nature and status thereof
(Section 1010).
MODIFICATION OF THE INDENTURE
Modifications and amendments of the Indenture may be made with the consent
of the Holders of not less than a majority in principal amount of all
Outstanding Debt Securities which are 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 premium or Make-Whole
Amount, if any), or any installment of principal of or interest or Additional
Amounts payable on, any such Debt Security; (b) reduce the principal amount
of, or the rate or amount of interest on, or any premium or Make-Whole Amount
payable on redemption of, or any Additional Amounts payable with respect to,
any such Debt Security, or reduce the amount of principal of an Original Issue
Discount Security or Make-Whole Amount, if any, 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 (and premium or Make-Whole Amount, if any), or
interest on, or any Additional Amounts payable with respect to, 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 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 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 (Section 902).
The Holders of not less than a majority in principal amount of Outstanding
Debt Securities have the right to waive compliance by SCI with certain
covenants in the Indenture (Section 1012).
Modifications and amendments of the Indenture may be made by SCI and the
Trustee without the consent of any Holder of Debt Securities for any of the
following purposes: (i) to evidence the succession of another Person to SCI as
obligor under the Indenture; (ii) to add to the covenants of SCI for the
benefit of the Holders of all or any series of Debt Securities or to surrender
any right or power conferred upon SCI in the 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 the 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 the 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 and any
related coupons; (viii) to provide for the acceptance of appointment by a
successor Trustee or facilitate the administration of the trusts under the
Indenture by more than one Trustee; (ix) to cure any ambiguity, defect or
inconsistency in the Indenture or to make any other changes, provided that in
each case, such action shall not adversely affect the interests of Holders of
Debt Securities of any series in any material respect; (x) to close the
Indenture with respect to the authentication and delivery of additional series
of Debt Securities or to qualify, or maintain qualification of, the Indenture
under the TIA; or (xi) to supplement any of the provisions of the Indenture to
the extent necessary to permit or facilitate
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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
Debt Securities of any series in any material respect (Section 901).
The Indenture provides 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 a Debt Security denominated in a Foreign Currency that shall be
deemed outstanding shall be the United States 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 United States 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 to Section 301 of the Indenture; and (iv) Debt
Securities owned by SCI or any other obligor upon the Debt Securities or any
Affiliate of SCI or of such other obligor shall be disregarded (Section 101).
The Indenture contains provisions for convening meetings of the Holders of
Debt Securities of a series (Section 1501). A meeting may be called at any
time by the Trustee, and also, upon request, by SCI or the Holders of at least
10% in principal amount of the Outstanding Debt Securities of such series, in
any such case upon notice given as provided in the Indenture (Section 1502).
Except for any consent that must be given by the Holder of each Debt Security
affected by certain modifications and amendments of the 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 such 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 such series. Any
resolution passed or decision taken at any meeting of Holders of Debt
Securities of any series duly held in accordance with the Indenture will be
binding on all Holders of Debt Securities of such 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 (Section 1504).
Notwithstanding the foregoing provisions, 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 or other
action that the 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 the
Indenture (Section 1504).
Any request, demand, authorization, direction, notice, consent, waiver or
other action provided by the Indenture to be given or taken by a specified
percentage in principal amount of the Holders of any or all series of Debt
Securities may be embodied in and evidenced by one or more instruments of
substantially similar tenor
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signed by such specified percentage of Holders in person or by agent duly
appointed in writing; and, except as otherwise expressly provided in the
Indenture, such action shall become effective when such instrument or
instruments are delivered to the Trustee. Proof of execution of any instrument
or of a writing appointing any such agent shall be sufficient for any purpose
of the Indenture and (subject to Article Six of the Indenture) conclusive in
favor of the Trustee and SCI, if made in the manner specified above (Section
1507).
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
SCI may discharge certain obligations to Holders of any series of Debt
Securities that have not already been delivered to the 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 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 and Additional Amounts
payable 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
(Section 1401).
The Indenture provides that, if the provisions of Article Fourteen are made
applicable to the Debt Securities of or within any series pursuant to Section
301 of the Indenture, SCI 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 and to hold moneys for payment in trust)
("defeasance") (Section 1402) or (b) to be released from its obligations with
respect to such Debt Securities under Sections 1004 to 1009, inclusive, of the
Indenture (being the restrictions described under "--Certain Covenants") and,
if provided pursuant to Section 301 of the Indenture, its obligations with
respect to any other covenant, and any omission to comply with such
obligations shall not constitute a default or an Event of Default with respect
to such Debt Securities ("covenant defeasance") (Section 1403), in either case
upon the irrevocable deposit by SCI with the 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 (Section 1404).
Such a trust may only be established if, among other things, SCI has
delivered to the Trustee an Opinion of Counsel (as specified in the Indenture)
to the effect that the Holders of such Debt Securities will not recognize
income, gain or loss for United States federal income tax purposes as a result
of such defeasance or covenant defeasance and will be subject to United States
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, must
refer to and be based upon a ruling of the Internal Revenue Service or a
change in applicable United States federal income tax law occurring after the
date of the Indenture (Section 1404).
"Government Obligations" means securities which 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 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
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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 (Section 101).
Unless otherwise provided in the applicable Prospectus Supplement, if after
SCI 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 Section 301 of the 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 shall 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 (Section 1405). "Conversion Event" means the
cessation of use of (i) a currency, currency unit or composite currency (other
than the ECU or other currency unit) 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 provided
in the applicable Prospectus Supplement, all payments of principal of (and
premium or Make-Whole Amount, 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 United States dollars (Section 101).
In the event SCI 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 Sections 1004 to 1009, inclusive, of the 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 plus Government Obligations on deposit with the 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, SCI 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.
REGISTRATION AND TRANSFER
Subject to certain limitations imposed upon Debt Securities issued in book-
entry form, the Debt Securities of any series will be exchangeable for other
Debt Securities of the same series and of a like aggregate principal amount
and tenor of different authorized denominations upon surrender of such Debt
Securities at the corporate trust office of the Trustee referred to above. 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 thereof at the corporate trust office
of the Trustee referred to above. Every Debt Security
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surrendered for registration of transfer or exchange shall be duly endorsed or
accompanied by a written instrument of transfer. No service charge will be
made for any registration of transfer or exchange of any Debt Securities, but
SCI may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith (Section 305). SCI may at
any time designate a transfer agent (in addition to the Trustee) with respect
to any series of Debt Securities. If SCI has designated such a transfer agent
or transfer agents, SCI may at any time rescind the designation of any such
transfer agent or approve a change in the location at which any such transfer
agent acts, except that SCI will be required to maintain a transfer agent in
each Place of Payment for such series (Section 1002).
Neither SCI nor the Trustee shall be required to (i) issue, register the
transfer of or exchange Debt Securities of any series during a period
beginning at the opening of business 15 days before any selection of Debt
Securities of that series to be redeemed and ending at the close of business
on the day of mailing of the relevant notice of redemption; (ii) register the
transfer of or exchange any Debt Security, or portion thereof, called for
redemption, except the unredeemed portion of any Debt Security being redeemed
in part; or (iii) issue, register the transfer of or exchange any Debt
Security which 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 (Section
305).
BOOK-ENTRY PROCEDURES
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 applicable Prospectus Supplement relating to such series. Global
Securities, if any, are expected to be deposited with The Depository Trust
Company, as Depository. Global Securities may be issued in fully registered
form and may be issued 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 the 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 applicable Prospectus Supplement
relating to such series. Unless otherwise indicated in the applicable
Prospectus Supplement, SCI anticipates that 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 SCI if such Debt Securities are offered and sold directly by
SCI. Ownership of beneficial interests in a Global Security will be limited to
Participants or persons that may hold interests through Participants.
Ownership of beneficial interests in such Global Security will be shown on,
and the transfer of that ownership will be effected only through, records
maintained by the applicable Depository 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). 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 interests 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 the Debt
Securities represented by such Global Security for all purposes under the
Indenture. Except as provided below or in the applicable Prospectus
Supplement, owners of beneficial interests in a Global Security will not be
entitled to have any of the individual Debt Securities of the series
represented by such Global Security registered in their names, will not
receive or be entitled to receive physical delivery of any such Debt
Securities of such series in definitive form and will not be considered the
owners or holders thereof under the Indenture.
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Payments of principal of, any premium or Make-Whole Amount and any interest
on, or any Additional Amounts payable with respect to, individual Debt
Securities represented by a Global Security registered in the name of a
Depository or its nominee will be made to the Depository or its nominee, as
the case may be, as the registered owner of the Global Security representing
such Debt Securities. None of SCI, 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, supervising or reviewing any records relating
to such beneficial ownership interests.
SCI expects that the Depository for a series of Debt Securities or its
nominee, upon receipt of any payment of principal, premium, Make-Whole Amount
or interest in respect of a permanent Global Security representing any of such
Debt Securities, immediately will credit Participants' accounts with payments
in amounts proportionate to their respective beneficial interests in the
principal amount of such Global Security for such Debt Securities as shown on
the records of such Depository or its nominee. SCI 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." Such payments will be
the responsibility of such Participants.
If a Depository for a series of Debt Securities is at any time unwilling,
unable or ineligible to continue as depository and a successor depository is
not appointed by SCI within 90 days, SCI will issue individual Debt Securities
of such series in exchange for the Global Security representing such series of
Debt Securities. In addition, SCI may, at any time and in its sole discretion,
subject to any limitations described in the applicable Prospectus Supplement
relating to such Debt Securities, determine not to have any Debt Securities of
such series represented by one or more Global Securities and, in such event,
will issue individual Debt Securities of such series in exchange for the
Global Security or Securities representing such series of Debt Securities.
Individual Debt Securities of such series so issued will be issued in
denominations, unless otherwise specified by SCI, of $1,000 and integral
multiples thereof.
CERTAIN DEFINITIONS
"Acquired Debt" means Debt 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 Debt incurred in connection
with, or in contemplation of, such Person becoming a Subsidiary or such
acquisition. Acquired Debt 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" as of any date means the maximum amount which is
payable in any period for interest on, and original issue discount of, Debt of
SCI and its Subsidiaries and the amount of dividends which are payable 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 SCI and its Subsidiaries plus
amounts which have been deducted, and minus amounts which have been added, for
the following (without duplication): (a) interest on Debt of SCI and its
Subsidiaries, (b) provision for taxes of SCI and its Subsidiaries based on
income, (c) amortization of debt discount, (d) provisions for gains and losses
on properties and property depreciation and amortization, (e) the effect of
any noncash charge resulting from a change in accounting principles in
determining Earnings from Operations for such period and (f) amortization of
deferred charges.
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"Debt" of SCI or any Subsidiary means any indebtedness of SCI or any
Subsidiary, whether or not contingent, in respect of (i) borrowed money or
evidenced by bonds, notes, debentures or similar instruments, (ii)
indebtedness secured by any mortgage, pledge, lien, charge, encumbrance or any
security interest existing on property owned by SCI or any Subsidiary, (iii)
the reimbursement obligations, contingent or otherwise, in connection with any
letters of credit actually issued 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 SCI or any
Subsidiary with respect to redemption, repayment or other repurchase of any
Disqualified Stock or (v) any lease of property by SCI or any Subsidiary as
lessee which is reflected on SCI's Consolidated Balance Sheet as a capitalized
lease in accordance with generally accepted accounting principles, 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 SCI's Consolidated Balance Sheet in accordance with generally accepted
accounting principles, and also includes, to the extent not otherwise
included, any obligation by SCI 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), Debt of another Person (other than SCI or
any Subsidiary) (it being understood that Debt shall be deemed to be incurred
by SCI or any Subsidiary whenever SCI or such Subsidiary shall create, assume,
guarantee or otherwise become liable in respect thereof).
"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,
(ii) is convertible into or exchangeable or exercisable for Debt or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the Stated Maturity of the
series of Debt Securities.
"Earnings from Operations" for any period means net earnings excluding gains
and losses on sales of investments, net, as reflected in the financial
statements of SCI and its Subsidiaries for such period determined on a
consolidated basis in accordance with generally accepted accounting
principles.
"Encumbrance" means any mortgage, pledge, lien, charge, encumbrance or any
security interest existing on property owned by SCI or any Subsidiary securing
indebtedness for borrowed money, other than a Permitted Encumbrance.
"Permitted Encumbrances" means leases, Encumbrances securing taxes,
assessments and similar charges, mechanics liens and other similar
Encumbrances.
"Subsidiary" means, with respect to any Person, any corporation or other
entity of which a majority of (a) the voting power of the voting equity
securities or (b) in the case of a partnership or any other entity other than
a corporation, the outstanding equity interest of which 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) Undepreciated Real Estate
Assets and (ii) all other assets of SCI and its Subsidiaries determined in
accordance with generally accepted accounting principles (but excluding
accounts receivable and intangibles).
"Total Unencumbered Assets" means the sum of (i) those Undepreciated Real
Estate Assets not subject to an Encumbrance and (ii) the value (determined in
accordance with generally accepted accounting principles) of all other assets
(other than accounts receivable and intangibles) of SCI and its Subsidiaries
not subject to an Encumbrance.
"Undepreciated Real Estate Assets" as of any date means the cost (original
cost plus capital improvements) of real estate assets of SCI and its
Subsidiaries on such date, before depreciation and amortization determined on
a consolidated basis in accordance with generally accepted accounting
principles.
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"Unsecured Debt" means Debt of the types described in clauses (i), (iii) and
(iv) of the definition thereof which is not secured by any mortgage, lien,
charge, pledge or security interest of any kind upon any of the properties of
SCI or any Subsidiary.
NO PERSONAL LIABILITY
No past, present or future trustee, officer, employee or shareholder, as
such, of SCI or any successor thereof shall have any liability for any
obligations of SCI under the Debt Securities or the Indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Debt Securities by accepting such Debt Securities waives and
releases all such liability. The waiver and release are part of the
consideration for the issue of Debt Securities (Section 111).
TRUSTEE
The Indenture provides that there may be more than one Trustee thereunder,
each with respect to one or more series of Debt Securities. Any Trustee under
the 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 (Section 608). 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 Indenture separate and apart
from the trust administered by any other Trustee (Sections 101 and 609), and,
except as otherwise indicated herein, any action described herein to be taken
by the 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 Indenture.
DESCRIPTION OF PREFERRED SHARES
GENERAL
Subject to limitations prescribed by Maryland law and the Declaration of
Trust, the Board is authorized to issue, from the authorized but unissued
shares of beneficial interest of SCI, Preferred Shares in series and to
establish from time to time the number of Preferred Shares to be included in
such series and to fix the designation and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the shares of each
series, and such other subjects or matters as may be fixed by resolution of
the Board or duly authorized committee thereof. At November 14, 1997,
5,400,000 Series A Preferred Shares were issued and outstanding and held of
record by approximately 315 shareholders, 8,050,000 Series B Preferred Shares
were issued and outstanding and held of record by approximately 35
shareholders and 2,000,000 Series C Preferred Shares were issued and
outstanding and held of record by one shareholder.
Reference is made to the Prospectus Supplement relating to the series of
Preferred Shares offered thereby for the specific terms thereof, including:
(1) The title and stated value of such series of Preferred Shares;
(2) The number of shares of such series of Preferred Shares offered, the
liquidation preference per share and the offering price of such Preferred
Shares;
(3) The dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to Preferred Shares of such series;
(4) The date from which dividends on Preferred Shares of such series
shall cumulate, if applicable;
(5) The procedures for any auction and remarketing, if any, for Preferred
Shares of such series;
(6) The provision for a sinking fund, if any, for Preferred Shares of
such series;
(7) The provision for redemption, if applicable, of Preferred Shares of
such series;
(8) Any listing of such series of Preferred Shares on any securities
exchange;
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(9) The terms and conditions, if applicable, upon which Preferred Shares
of such series will be convertible into Common Shares, including the
conversion price (or manner of calculation thereof);
(10) Whether interests in Preferred Shares of such series will be
represented by global securities;
(11) Any other specific terms, preferences, rights, limitations or
restrictions of such series of Preferred Shares;
(12) A discussion of federal income tax considerations applicable to
Preferred Shares of such series;
(13) The relative ranking and preferences of Preferred Shares of such
series as to dividend rights and rights upon liquidation, dissolution or
winding up of the affairs of SCI;
(14) Any limitations on issuance of any series of Preferred Shares
ranking senior to or on a parity with such series of Preferred Shares as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of SCI; and
(15) Any limitations on direct or beneficial ownership and restrictions
on transfer of Preferred Shares of such series, in each case as may be
appropriate to preserve the status of SCI as a REIT.
RANK
Unless otherwise specified in the applicable Prospectus Supplement, the
Preferred Shares of each series will, with respect to dividend rights and
rights upon liquidation, dissolution or winding up of the affairs of SCI, rank
(i) senior to all classes or series of Common Shares, and to all equity
securities ranking junior to such series of Preferred Shares; (ii) on a parity
with all equity securities issued by SCI the terms of which specifically
provide that such equity securities rank on a parity with Preferred Shares of
such series; and (iii) junior to all equity securities issued by SCI the terms
of which specifically provide that such equity securities rank senior to
Preferred Shares of such series.
DIVIDENDS
Holders of Preferred Shares of each series shall be entitled to receive,
when, as and if declared by the Board, out of assets of SCI 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 share transfer books of SCI
on such record dates as shall be fixed by the Board.
Dividends on any series of the Preferred Shares may be cumulative or
noncumulative, 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 fails to declare a dividend
payable on a dividend payment date on any series of the Preferred Shares for
which dividends are noncumulative, then the holders of such series of the
Preferred Shares will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and SCI 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 Shares of any series are outstanding, no full dividends shall
be declared or paid or set apart for payment on the Preferred Shares of SCI of
any other series ranking, as to dividends, on a parity with or junior to the
Preferred Shares of such series for any period unless (i) if such series of
Preferred Shares 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 set apart for such payment on the Preferred
Shares of such series for all past dividend periods and the then current
dividend period or (ii) if such series of Preferred Shares 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 set apart for such payment on the Preferred
Shares of such series. When dividends are not paid in full (or a sum
sufficient for such full payment is not so set apart) upon the Preferred
Shares of any series and the shares of any other series of Preferred Shares
ranking on a parity as to dividends with the Preferred Shares of such series,
all dividends declared upon Preferred
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Shares of such series and any other series of Preferred Shares ranking on a
parity as to dividends with such Preferred Shares shall be declared pro rata
so that the amount of dividends declared per share on the Preferred Shares of
such series and such other series of Preferred Shares shall in all cases bear
to each other the same ratio that accrued dividends per share on the Preferred
Shares of such series (which shall not include any cumulation in respect of
unpaid dividends for prior dividend periods if such series of Preferred Shares
does not have a cumulative dividend) and such other series of Preferred Shares
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 Shares of
such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Shares has a cumulative dividend, full cumulative
dividends on the Preferred Shares of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient of
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 Shares
does not have a cumulative dividend, full dividends on the Preferred Shares 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 dividends (other than in Common Shares or
other capital shares ranking junior to the Preferred Shares of such series as
to dividends and upon liquidation) shall be declared or paid or set aside for
payment or other distribution shall be declared or made upon the Common Shares
or any other capital shares of SCI ranking junior to or on a parity with the
Preferred Shares 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
shares of any such series) by SCI (except by conversion into or exchange for
other capital shares of SCI ranking junior to the Preferred Shares of such
series as to dividends and upon liquidation).
Any dividend payment made on a series of Preferred Shares 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 provided in the applicable Prospectus Supplement, the Preferred Shares
of a series will be subject to mandatory redemption or redemption at the
option of SCI, 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 Shares that is
subject to mandatory redemption will specify the number of Preferred Shares of
such series that shall be redeemed by SCI 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 series of Preferred Shares does not have a cumulative dividend,
include any cumulation 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 Shares of any series is payable only
from the net proceeds of the issuance of capital shares of SCI, the terms of
such series of Preferred Shares may provide that, if no such capital shares
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, Preferred
Shares of such series shall automatically and mandatorily be converted into
shares of the applicable capital shares of SCI pursuant to conversion
provisions specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred Shares
has a cumulative dividend, full cumulative dividends on all Preferred Shares
of any series 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
such series of Preferred Shares does not have a cumulative dividend, full
dividends on all Preferred Shares of any series shall 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
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dividend period, no Preferred Shares of any series shall be redeemed unless
all outstanding Preferred Shares of such series are simultaneously redeemed;
provided, however, that the foregoing shall not prevent the purchase or
acquisition of Preferred Shares of such series pursuant to a purchase or
exchange offer made on the same terms to holders of all outstanding Preferred
Shares of such series, and, unless (i) if such series of Preferred Shares has
a cumulative dividend, full cumulative dividends on all Preferred Shares of
any series 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
such series of Preferred Shares does not have a cumulative dividend, full
dividends on all Preferred Shares of any series shall 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, SCI shall not purchase or otherwise acquire directly or indirectly any
Preferred Shares of such series (except by conversion into or exchange for
capital shares of SCI ranking junior to the Preferred Shares of such series as
to dividends and upon liquidation).
If fewer than all of the outstanding Preferred Shares of any series are to
be redeemed, the number of shares to be redeemed will be determined by SCI and
such shares may be redeemed pro rata from the holders of record of Preferred
Shares of such series in proportion to the number of Preferred Shares of such
series held by such holders (with adjustments to avoid redemption of
fractional shares) or by lot in a manner determined by SCI.
Notice of redemption will be mailed at least 30 days but not more than 90
days before the redemption date to each holder of record of Preferred Shares
of any series to be redeemed at the address shown on the share transfer books
of SCI. Each notice shall state: (i) the redemption date; (ii) the number of
shares and series of the Preferred Shares to be redeemed; (iii) the redemption
price; (iv) the place or places where certificates for such Preferred Shares
are to be surrendered for payment of the redemption price; (v) that dividends
on the Preferred 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 Preferred Shares shall terminate. If fewer than all the Preferred
Shares of any series are to be redeemed, the notice mailed to each such holder
thereof shall also specify the number of Preferred Shares to be redeemed from
each such holder. If notice of redemption of any Preferred Shares has been
given and if the funds necessary for such redemption have been set aside by
SCI in trust for the benefit of the holders of any Preferred Shares so called
for redemption, then from and after the redemption date dividends will cease
to accrue on such Preferred Shares, and all rights of the holders of such
Preferred 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 SCI, then, before any distribution or payment shall be made to
the holders of any Common Shares or any other class or series of shares of
beneficial interest of SCI ranking junior to such series of Preferred Shares
in the distribution of assets upon any liquidation, dissolution or winding up
of SCI, the holders of each series of Preferred Shares shall be entitled to
receive out of assets of SCI legally available for distribution to
shareholders liquidating distributions in the amount of the liquidation
preference per share (set forth in the applicable Prospectus Supplement), plus
an amount equal to all dividends accrued and unpaid thereon (which shall not
include any cumulation in respect of unpaid dividends for prior dividend
periods if such series of Preferred Shares does not have a cumulative
dividend). After payment of the full amount of the liquidating distributions
to which they are entitled, the holders of Preferred Shares of such series
will have no right or claim to any of the remaining assets of SCI. In the
event that, upon any such voluntary or involuntary liquidation, dissolution or
winding up, the available assets of SCI are insufficient to pay the amount of
the liquidating distributions on all outstanding Preferred Shares of such
series and the corresponding amounts payable on all shares of other classes or
series of capital shares of SCI ranking on a parity with Preferred Shares of
such series in the distribution of assets, then the holders of Preferred
Shares of such series and all other such classes or series of capital shares
shall share ratably in any such distribution of assets in proportion to the
full liquidating distributions to which they would otherwise be respectively
entitled.
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If liquidating distributions shall have been made in full to all holders of
Preferred Shares of such series, the remaining assets of SCI shall be
distributed among the holders of any other classes or series of capital shares
ranking junior to the Preferred Shares of such series 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 SCI with or into any other
entity, or the sale, lease or conveyance of all or substantially all of the
property or business of SCI, shall not be deemed to constitute a liquidation,
dissolution or winding up of SCI.
VOTING RIGHTS
Holders of the Preferred Shares of each series will not have any voting
rights, except as set forth below or in the applicable Prospectus Supplement
or as otherwise required by applicable law. The following is a summary of the
voting rights that, unless provided otherwise in the applicable Prospectus
Supplement, will apply to each series of Preferred Shares (as in the case of
the Series A Preferred Shares).
If six quarterly dividends (whether or not consecutive) payable on the
Preferred Shares of such series or any other series of Preferred Shares
ranking on a parity with such series of Preferred Shares with respect in each
case to the payment of dividends, amounts upon liquidation, dissolution and
winding up ("Parity Shares") are in arrears, whether or not earned or
declared, the number of Trustees then constituting the Board will be increased
by two, and the holders of Preferred Shares of such series, voting together as
a class with the holders of any other series of Parity Shares (any such other
series, the "Voting Preferred Shares"), will have the right to elect two
additional trustees to serve on the Board at any annual meeting of
shareholders or a properly called special meeting of the holders of Preferred
Shares of such series and such Voting Preferred Shares and at each subsequent
annual meeting of shareholders until all such dividends and dividends for the
current quarterly period on the Preferred Shares of such series and such other
Voting Preferred Shares have been paid or declared and set aside for payment.
Such voting rights will terminate when all such accrued and unpaid dividends
have been declared and paid or set aside for payment. The term of office of
all trustees so elected will terminate with the termination of such voting
rights. For so long as SCG and certain of its affiliates beneficially own in
excess of 10% of the outstanding Common Shares, in any such vote by holders of
Preferred Shares of such series, SCG and certain of its affiliates shall vote
their Preferred Shares of such series, if any, in the same respective
percentages as the Preferred Shares of such series and Voting Preferred Shares
that are not held by such persons.
The approval of two-thirds of the outstanding Preferred Shares of such
series and all other series of Voting Preferred Shares similarly affected,
voting as a single class, is required in order to (i) amend the Declaration of
Trust to affect materially and adversely the rights, preferences or voting
power of the holders of the Preferred Shares of such series or the Voting
Preferred Shares; (ii) enter into a share exchange that affects the Preferred
Shares of such series, consolidate with or merge into another entity, or
permit another entity to consolidate with or merge into SCI, unless in each
such case each Preferred Share of such series remains outstanding without a
material and adverse change to its terms and rights or is converted into or
exchanged for preferred shares of the surviving entity having preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms or conditions of redemption thereof
identical to that of a Preferred Share of such series (except for changes that
do not materially and adversely affect the holders of the Preferred Shares of
such series); or (iii) authorize, reclassify, create, or increase the
authorized amount of any class of shares having rights senior to the Preferred
Shares of such series with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding up. However, SCI may create additional
classes of Parity Shares and other series of Preferred Shares ranking junior
to such series of Preferred Shares with respect in each case to the payment of
dividends, amounts upon liquidation, dissolution and winding up ("Junior
Shares"), increase the authorized number of Parity Shares and Junior Shares
and issue additional series of Parity Shares and Junior Shares without the
consent of any holder of Preferred Shares of such series.
Except as provided above and as required by law, the holders of Preferred
Shares of each series will not be entitled to vote on any merger or
consolidation involving SCI or a sale of all or substantially all of the
assets of SCI.
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CONVERSION RIGHTS
The terms and conditions, if any, upon which Preferred Shares of any series
are convertible into Common Shares will be set forth in the applicable
Prospectus Supplement relating thereto. Such terms will include the number of
Common Shares into which the Preferred Shares of such series 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 Shares of such series or SCI, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of the Preferred Shares of such series.
RESTRICTIONS ON OWNERSHIP
As discussed below under "Description of Common Shares--Restriction on Size
of Holdings," for SCI 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
shares of beneficial interest may be owned by five or fewer individuals at any
time during the last half of any taxable year. Therefore, the Articles
Supplementary for each series of Preferred Shares will contain certain
provisions restricting the ownership and transfer of the Preferred Shares (the
"Preferred Shares Ownership Limit Provision"). Except as otherwise described
in the applicable Prospectus Supplement relating thereto, the provisions of
each Articles Supplementary relating to the Preferred Shares Ownership Limit
will provide (as in the case of the Series A Preferred Shares, the Series B
Preferred Shares and the Series C Preferred Shares) as summarized below.
The Preferred Shares Ownership Limit Provision will provide that, subject to
certain exceptions contained in such Articles Supplementary, no person, or
persons acting as a group, may beneficially own more than 25% of any series of
Preferred Shares outstanding at any time, except as a result of SCI's
redemption of Preferred Shares. Shares acquired in excess of the Preferred
Shares Ownership Limit Provision must be redeemed by SCI at a price equal to
the average daily per share closing sale price during the 30-day period ending
on the business day prior to the redemption date. Such redemption is not
applicable if a person's ownership exceeds the limitations due solely to SCI's
redemption of Preferred Shares; provided that thereafter any additional
Preferred Shares acquired by such person shall be Excess Shares (as
hereinafter defined). See "Description of Common Shares--Restriction on Size
of Holdings." From and after the date of notice of such redemption, the holder
of the Preferred Shares thus redeemed shall cease to be entitled to any
distribution (other than distributions declared prior to the date of notice of
redemption), voting rights and other benefits with respect to such shares
except the right to receive payment of the redemption price determined as
described above. The Preferred Shares Ownership Limit Provision may not be
waived with respect to certain affiliates of SCI.
All certificates representing shares of Preferred Shares will bear a legend
referring to the restrictions described above.
DESCRIPTION OF COMMON SHARES
GENERAL
The Declaration of Trust authorizes SCI to issue up to 180,000,000 Shares of
Beneficial Interest, par value $0.01 per share, consisting of Common Shares,
Preferred Shares and such other types or classes of shares of beneficial
interest as the Board may create and authorize from time to time. At November
14, 1997, approximately 108,773,707 Common Shares were issued and outstanding
and held of record by approximately 1,210 shareholders.
The following description sets forth certain general terms and provisions of
the Common Shares to which any Prospectus Supplement may relate, including a
Prospectus Supplement which provides for Common Shares issuable pursuant to
subscription offerings or rights offerings or upon conversion of Preferred
Shares which are offered pursuant to such Prospectus Supplement and
convertible into Common Shares for no additional
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consideration. The statements below describing the Common Shares are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Declaration of Trust and SCI's Bylaws.
The outstanding Common Shares are fully paid and, except as set forth below
under "--Shareholder Liability," non-assessable. Each Common Share entitles
the holder to one vote on all matters requiring a vote of shareholders,
including the election of Trustees. Holders of Common Shares do not have the
right to cumulate their votes in the election of Trustees, which means that
the holders of a majority of the outstanding Common Shares can elect all of
the Trustees then standing for election. Holders of Common Shares are entitled
to such distributions as may be declared from time to time by the Board out of
funds legally available therefor. Holders of Common Shares have no conversion,
redemption, preemptive or exchange rights to subscribe to any securities of
SCI. In the event of a liquidation, dissolution or winding up of the affairs
of SCI, the holders of the Common Shares are entitled to share ratably in the
assets of SCI remaining after provision for payment of all liabilities to
creditors and payment of liquidation preferences and accrued dividends, if
any, on the Series A Preferred Shares, Series B Preferred Shares and Series C
Preferred Shares, and subject to the rights of holders of other series of
Preferred Shares, if any. The right of holders of the Common Shares are
subject to the rights and preferences established by the Board for the Series
A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares
and any other series of Preferred Shares which may subsequently be issued by
SCI. See "Description of Preferred Shares."
PURCHASE RIGHTS
On December 7, 1993, the Board declared a dividend of one preferred share
purchase right (a "Purchase Right") for each Common Share outstanding, payable
to holders of Common Shares of record at the close of business on December 31,
1993. The holders of any additional Common Shares issued after such date and
before the redemption or expiration of the Purchase Rights are also entitled
to receive one Purchase Right for each such additional Common Share. Each
Purchase Right entitles the holder under certain circumstances to purchase
from SCI one one-hundredth of a share of Series A Junior Participating
Preferred Shares, par value $0.01 per share (the "Participating Preferred
Shares") at a price of $40.00 per one one-hundredth of a Participating
Preferred Share, subject to adjustment. Purchase Rights are exercisable when a
person or group of persons (other than SCG) acquires 20% or more of the
outstanding Common Shares or announces a tender offer or exchange offer for
25% or more of the outstanding Common Shares. Under certain circumstances,
each Purchase Right entitles the holder to purchase, at the Purchase Right's
then current exercise price, a number of Common Shares having a market value
of twice the Purchase Right's exercise price. The acquisition of SCI pursuant
to certain mergers or other business transactions would entitle each holder to
purchase, at the Purchase Right's then current exercise price, a number of the
acquiring company's common shares having a market value at that time equal to
twice the Purchase Right's exercise price. The Purchase Rights held by certain
20% shareholders (other than SCG) would not be exercisable. The Purchase
Rights will expire on December 7, 2003 and are subject to redemption in whole,
but not in part, at a price of $0.01 per Purchase Right payable in cash,
shares of SCI or any other form of consideration determined by the Board.
TRANSFER AGENT
The transfer agent and registrar for the Common Shares is BankBoston, N.A.,
150 Royall Street, Canton, Massachusetts 02021. The Common Shares are listed
on the NYSE under the symbol "SCN."
RESTRICTION ON SIZE OF HOLDINGS
The Declaration of Trust restricts beneficial ownership of SCI's outstanding
shares of beneficial interest by a single person, or persons acting as a
group, to 9.8% of such shares. The purposes of the restriction are to assist
in protecting and preserving SCI's REIT status and to protect the interest of
shareholders in takeover transactions by preventing the acquisition of a
substantial block of shares unless the acquiror makes a cash tender offer for
all outstanding shares. For SCI to qualify as a REIT under the Code, not more
than 50% in value of its
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outstanding shares of beneficial interest may be owned by five or fewer
individuals at any time during the last half of any taxable year. The
restriction permits five persons to acquire up to a maximum of 9.8% each, or
an aggregate of 49% of the outstanding shares, and, thus, assists the Board in
protecting and preserving SCI's REIT status for tax purposes. This restriction
does not apply to SCG, which counts as numerous holders for purposes of the
tax rule, because its shares are attributed to its shareholders for purposes
of this rule.
Shares of beneficial interest owned by a person or group of persons in
excess of 9.8% (other than SCG and 30% in the case of certain shareholders who
acquired shares prior to SCI's initial public offering) of the outstanding
shares of beneficial interest ("Excess Shares") are subject to redemption by
SCI, at its option, upon 30 days' notice, at a price equal to the average
daily per share closing sale price during the 30-day period ending on the
business day prior to the redemption date. SCI may make payment of the
redemption price at any time or times up to the earlier of five years after
the redemption date or liquidation of SCI. SCI may refuse to effect the
transfer of any shares of beneficial interest which would make the transferee
a holder of Excess Shares. Shareholders of SCI are required to disclose, upon
demand of the Board, such information with respect to their direct and
indirect ownership of shares of SCI as the Board deems necessary to comply
with the provisions of the Code pertaining to qualification, for tax purposes,
of REITs, or to comply with the requirements of any other appropriate taxing
authority.
The 9.8% restriction does not apply to acquisitions by an underwriter in a
public offering and sale of shares of beneficial interest of SCI or to any
transaction involving the issuance of shares of beneficial interest in which a
majority of the Board determines that the eligibility of SCI to qualify as a
REIT for federal income tax purposes will not be jeopardized or the
disqualification of SCI as a REIT is advantageous to the shareholders. SCG's
ownership of shares is attributed for tax purposes to its shareholders. The
Board has exempted SCG from this restriction and has permitted certain other
shareholders who acquired shares prior to SCI's initial public offering to
acquire up to 30% of the outstanding shares of beneficial interest.
TRUSTEE LIABILITY
The Declaration of Trust provides that Trustees shall not be individually
liable for any obligation or liability incurred by or on behalf of SCI or by
Trustees for the benefit and on behalf of SCI. Under the Declaration of Trust
and Maryland law governing REITs, Trustees are not liable to SCI or the
shareholders for any act or omission except for acts or omissions which
constitute bad faith, willful misfeasance or gross negligence in the conduct
of his duties.
SHAREHOLDER LIABILITY
Both Maryland statutory law governing REITs organized under the laws of that
state and the Declaration of Trust provide that shareholders shall not be
personally or individually liable for any debt, act, omission or obligation of
SCI or the Board. The Declaration of Trust further provides that SCI shall
indemnify and hold each shareholder harmless from all claims and liabilities
to which the shareholder may become subject by reason of his being or having
been a shareholder and that SCI shall reimburse each shareholder for all legal
and other expenses reasonably incurred by the shareholder in connection with
any such claim or liability, except to the extent that such claim or liability
arises out of the shareholder's bad faith, willful misconduct or gross
negligence and provided that such shareholder gives SCI prompt notice of any
such claim or liability and permits SCI to conduct the defense thereof. In
addition, SCI is required to, and as a matter of practice does, insert a
clause in its management and other contracts providing that shareholders
assume no personal liability for obligations entered into on behalf of SCI.
Nevertheless, with respect to tort claims, contractual claims where
shareholder liability is not so negated, claims for taxes and certain
statutory liability, the shareholders may, in some jurisdictions, be
personally liable to the extent that such claims are not satisfied by SCI.
Inasmuch as SCI carries public liability insurance which it considers
adequate, any risk of personal liability to shareholders is limited to
situations in which SCI's assets plus its insurance coverage would be
insufficient to satisfy the claims against SCI and its shareholders.
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FEDERAL INCOME TAX CONSIDERATIONS
SCI intends to operate in a manner that permits it to satisfy the
requirements for taxation as a REIT under the applicable provisions of the
Code. No assurance can be given, however, that such requirements will be met.
The following is a description of the federal income tax consequences to SCI
and its shareholders of the treatment of SCI as a REIT. Since these provisions
are highly technical and complex, each prospective purchaser of the Offered
Securities is urged to consult his or her own tax advisor with respect to the
federal, state, local, foreign and other tax consequences of the purchase,
ownership and disposition of the Offered Securities.
Based upon certain representations of SCI with respect to the facts as set
forth and explained in the discussion below, in the opinion of Mayer, Brown &
Platt, counsel to SCI, SCI has been organized in conformity with the
requirements for qualification as a REIT beginning with its taxable year
ending December 31, 1993, and its proposed method of operation described in
this Prospectus and as represented by management will enable it to satisfy the
requirements for such qualification.
This opinion is based on certain assumptions relating to the organization
and operation of SCI Limited Partnership--I, SCI Limited Partnership--II, SCI
Limited Partnership--III and SCI Limited Partnership--IV (the "Partnerships")
and of any other partnerships in which SCI will hold an interest, and is
conditioned upon certain representations made by SCI as to certain factual
matters relating to SCI's organization and intended or expected manner of
operation. In addition, this opinion is based on the law existing and in
effect on the date hereof. SCI's qualification and taxation as a REIT will
depend upon SCI's ability to meet on a continuing basis, through actual
operating results, asset composition, distribution levels and diversity of
stock ownership, the various qualification tests imposed under the Code
discussed below. Mayer, Brown & Platt will not review compliance with these
tests on a continuing basis. No assurance can be given that SCI will satisfy
such tests on a continuing basis.
In brief, if certain detailed conditions imposed by the REIT provisions of
the Code are met, entities, such as SCI, that invest primarily in real estate
and that otherwise would be treated for federal income tax purposes as
corporations, are generally not taxed at the corporate level on their "REIT
taxable income" that is currently distributed to shareholders. This treatment
substantially eliminates the "double taxation" (at both the corporate and
shareholder levels) that generally results from the use of corporations.
If SCI fails to qualify as a REIT in any year, however, it will be subject
to federal income taxation as if it were a domestic corporation, and its
shareholders will be taxed in the same manner as shareholders of ordinary
corporations. In this event, SCI could be subject to potentially significant
tax liabilities, and therefore the amount of cash available for distribution
to its shareholders would be reduced or eliminated.
SCI elected REIT status effective beginning with its taxable year ended
December 31, 1993 and the Board believes that SCI has operated and currently
intends that SCI will operate in a manner that permits it to qualify as a REIT
in each taxable year thereafter. There can be no assurance, however, that this
expectation will be fulfilled, since qualification as a REIT depends on SCI
continuing to satisfy numerous asset, income and distribution tests described
below, which in turn will be dependent in part on SCI's operating results.
The following summary is based on the Code, its legislative history,
administrative pronouncements, judicial decisions and Treasury regulations,
subsequent changes to any of which may affect the tax consequences described
herein, possibly on a retroactive basis. The following summary is not
exhaustive of all possible tax considerations and does not give a detailed
discussion of any state, local, or foreign tax considerations, nor does it
discuss all of the aspects of federal income taxation that may be relevant to
a prospective shareholder in light of his or her particular circumstances or
to certain types of shareholders (including insurance companies, tax-exempt
entities, financial institutions or broker-dealers, foreign corporations and
persons who are not citizens or residents of the United States) subject to
special treatment under the federal income tax laws.
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TAXATION OF SCI
General
In any year in which SCI qualifies as a REIT, in general it will not be
subject to federal income tax on that portion of its REIT taxable income or
capital gain which is distributed to shareholders. SCI may, however, be
subject to tax at normal corporate rates upon any taxable income or capital
gain not distributed.
Notwithstanding its qualification as a REIT, SCI may also be subject to
taxation in certain other circumstances. If SCI should fail to satisfy either
the 75% or the 95% gross income test (as discussed below), and nonetheless
maintains its qualification as a REIT because certain other requirements are
met, it will be subject to a 100% tax on the greater of the amount by which
SCI fails to satisfy either the 75% test or the 95% test, multiplied by a
fraction intended to reflect SCI's profitability. SCI will also be subject to
a tax of 100% on net income from any "prohibited transaction", as described
below, and if SCI has (i) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or (ii) other non-qualifying income from
foreclosure property, it will be subject to tax on such income from
foreclosure property at the highest corporate rate. In addition, if SCI should
fail to distribute during each calendar year at least the sum of (i) 85% of
its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year and (iii) any undistributed taxable income from prior
years, SCI would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. For taxable years
beginning after August 5, 1997, the Taxpayer Relief Act of 1997 (the "1997
Act") permits a REIT, with respect to undistributed net long-term capital
gains it received during the taxable year, to designate in a notice mailed to
shareholders within 60 days of the end of the taxable year (or in a notice
mailed with its annual report for the taxable year) such amount of such gains
which its shareholders are to include in their taxable income as long-term
capital gains. Thus, if SCI made this designation, the shareholders of SCI
would include in their income as long-term capital gains their proportionate
share of the undistributed net capital gains as designated by SCI and SCI
would have to pay the tax on such gains within 30 days of the close of its
taxable year. Each shareholder of SCI would be deemed to have paid such
shareholder's share of the tax paid by SCI on such gains, which tax would be
credited or refunded to the shareholder. A shareholder would increase his tax
basis in his SCI stock by the difference between the amount of income to the
holder resulting from the designation less the holder's credit or refund for
the tax paid by SCI. SCI may also be subject to the corporate "alternative
minimum tax", as well as tax in certain situations and on certain transactions
not presently contemplated. SCI will use the calendar year both for federal
income tax purposes and for financial reporting purposes.
In order to qualify as a REIT, SCI must meet, among others, the following
requirements:
Share Ownership Test
SCI's shares of stock must be held by a minimum of 100 persons for at least
335 days in each taxable year (or a proportional number of days in any short
taxable year). In addition, at all times during the second half of each
taxable year, no more than 50% in value of the stock of SCI may be owned,
directly or indirectly and by applying certain constructive ownership rules,
by five or fewer individuals, which for this purpose includes certain tax-
exempt entities. Any stock held by a qualified domestic pension or other
retirement trust will be treated as held directly by its beneficiaries in
proportion to their actuarial interest in such trust rather than by such
trust. Pursuant to the constructive ownership rules, Security Capital's
ownership of shares is attributed to its shareholders for purposes of the 50%
test. Under the 1997 Act, for taxable years beginning after August 5, 1997, if
SCI complies with the Treasury regulations for ascertaining its actual
ownership and did not know, or exercising reasonable diligence would not have
reason to know, that more than 50% in value of its outstanding shares of stock
were held, actually or constructively, by five or fewer individuals, then SCI
will be treated as meeting such requirement.
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In order to ensure compliance with the 50% test SCI has placed certain
restrictions on the transfer of the shares of its stock to prevent additional
concentration of ownership. Moreover, to evidence compliance with these
requirements under United States Treasury Department ("Treasury") regulations,
SCI must maintain records which disclose the actual ownership of its
outstanding shares of stock. In fulfilling its obligations to maintain
records, SCI must and will demand written statements each year from the record
holders of designated percentages of shares of its stock disclosing the actual
owners of such shares (as prescribed by Treasury regulations). A list of those
persons failing or refusing to comply with such demand must be maintained as a
part of SCI's records. A shareholder failing or refusing to comply with SCI's
written demand must submit with his or her tax returns a similar statement
disclosing the actual ownership of shares of SCI's stock and certain other
information. In addition, SCI's Charter provides restrictions regarding the
transfer of shares of its stock that are intended to assist SCI in continuing
to satisfy the share ownership requirements. See "Description of Common
Shares--Restriction on Size of Holdings". SCI intends to enforce the 9.8%
limitation on ownership of shares of its stock to assure that its
qualification as a REIT will not be compromised.
ASSET TESTS
At the close of each quarter of SCI's taxable year, SCI must satisfy certain
tests relating to the nature of its assets (determined in accordance with
generally accepted accounting principles). First, at least 75% of the value of
SCI's total assets must be represented by interests in real property,
interests in mortgages on real property, shares in other REITs, cash, cash
items, and government securities, and qualified temporary investments. Second,
although the remaining 25% of SCI's assets generally may be invested without
restriction, securities in this class may not exceed either (i) in the case of
securities of any non-government issuer, 5% of the value of SCI's total assets
or (ii) 10% of the outstanding voting securities of any one issuer.
GROSS INCOME TESTS
There are currently three separate percentage tests relating to the sources
of SCI's gross income which must be satisfied for each taxable year. For
purposes of these tests, where SCI invests in a partnership, SCI will be
treated as receiving its share of the income and loss of the partnership, and
the gross income of the partnership will retain the same character in the
hands of SCI as it has in the hands of the partnership. The three tests are as
follows:
1. The 75% Test. At least 75% of SCI's gross income for the taxable year
must be "qualifying income". Qualifying income generally includes: (i) rents
from real property (except as modified below); (ii) interest on obligations
collateralized by mortgages on, or interests in, real property; (iii) gains
from the sale or other disposition of interests in real property and real
estate mortgages, other than gain from property held primarily for sale to
customers in the ordinary course of SCI's trade or business ("dealer
property"); (iv) dividends or other distributions on shares in other REITs, as
well as gain from the sale of such shares; (v) abatements and refunds of real
property taxes; (vi) income from the operation, and gain from the sale, of
property acquired at or in lieu of a foreclosure of the mortgage
collateralized by such property ("foreclosure property"); and (vii) commitment
fees received for agreeing to make loans collateralized by mortgages on real
property or to purchase or lease real property.
Rents received from a tenant will not, however, qualify as rents from real
property in satisfying the 75% test (or the 95% gross income test described
below) if SCI, or an owner of 10% or more of SCI, directly or constructively
owns 10% or more of such resident. In addition, if rent attributable to
personal property leased in connection with a lease of real property is
greater than 15% of the total rent received under the lease, then the portion
of rent attributable to such personal property will not qualify as rents from
real property. Moreover, an amount received or accrued will not qualify as
rents from real property (or as interest income) for purposes of the 75% and
95% gross income tests if it is based in whole or in part on the income or
profits of any person, although an amount received or accrued generally will
not be excluded from "rents from real property" solely by reason of being
based on a fixed percentage or percentages of receipts or sales. Finally, for
rents received to qualify as rents from real property, SCI generally must not
operate or manage the property or furnish or render
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services to tenants, other than through an "independent contractor" from whom
SCI derives no income, except that the "independent contractor" requirement
does not apply to the extent that the services provided by SCI are "usually or
customarily rendered" in connection with the rental of properties for
occupancy only, or are not otherwise considered "rendered to the occupant for
his convenience". For taxable years beginning after August 5, 1997, a REIT is
permitted to render a de minimis amount of impermissible services to tenants,
or in connection with the management of property, and still treat amounts
received with respect to that property as rent from real property. The amount
received or accrued by the REIT during the taxable year for the impermissible
services with respect to a property may not exceed one percent of all amounts
received or accrued by the REIT directly or indirectly from the property. The
amount received for any service (or management operation) for this purpose
shall be deemed to be not less than 150% of the direct cost of the REIT in
furnishing or rendering the service (or providing the management or
operation).
2. The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of SCI's gross income for the taxable year
must be derived from the above-described qualifying income, or from dividends,
interest or gains from the sale or disposition of stock or other securities
that are not dealer property. Dividends (other than on REIT shares) and
interest on any obligations not collateralized by an interest in real property
are included for purposes of the 95% test, but not for purposes of the 75%
test.
For purposes of determining whether SCI complies with the 75% and 95% income
tests, gross income does not include income from prohibited transactions. A
"prohibited transaction" is a sale of dealer property (excluding foreclosure
property) unless such property is held by SCI for at least four years and
certain other requirements (relating to the number of properties sold in a
year, their tax bases, and the cost of improvements made thereto) are
satisfied. See "--Taxation of SCI--General".
Even if SCI fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may still qualify as a REIT for such year if it
is entitled to relief under certain provisions of the Code. These relief
provisions will generally be available if: (i) SCI's failure to comply was due
to reasonable cause and not to willful neglect; (ii) SCI reports the nature
and amount of each item of its income included in the tests on a schedule
attached to its tax return; and (iii) any incorrect information on this
schedule is not due to fraud with intent to evade tax. If these relief
provisions apply, however, SCI will nonetheless be subject to a special tax
upon the greater of the amount by which it fails either the 75% or 95% gross
income test for that year.
3. The 30% Test. SCI must derive less than 30% of its gross income for each
taxable year from the sale or other disposition of: (i) real property held for
less than four years (other than foreclosure property and involuntary
conversions); (ii) stock or securities held for less than one year; and (iii)
property in a prohibited transaction. SCI does not anticipate that it will
have any substantial difficulty in complying with this test. The 30% gross
income test has been repealed by the 1997 Act for taxable years beginning
after August 5, 1997.
Annual Distribution Requirements
In order to qualify as a REIT, SCI is required to make distributions (other
than capital gain dividends) to its shareholders each year in an amount at
least equal to (i) the sum of (a) 95% of SCI's REIT taxable income (computed
without regard to the dividends paid deduction and the REIT's net capital
gain) and (b) 95% of the net income (after tax), if any, from foreclosure
property, minus (ii) the sum of certain items of non-cash income. For taxable
years beginning after August 5, 1997, the 1997 Act (i) expands the class of
non-cash income that is excluded from the distribution requirement to include
income from the cancellation of indebtedness and (ii) extends the treatment of
original issue discount ("OID") (over cash and the fair market value of
property received on the instrument) as such non-cash income to OID
instruments generally and for REITs, like SCI, that use an accrual method of
accounting. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before SCI timely files
its tax return for such year and if paid on or before the first regular
dividend payment after such declaration. To the extent that SCI does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its REIT taxable income, as adjusted, it will be subject to tax
on the undistributed amount at regular capital gains or ordinary corporate tax
rates, as the
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case may be. For taxable years beginning after August 5, 1997, the 1997 Act
permits a REIT, with respect to undistributed net long-term capital gains it
received during the taxable year, to designate in a notice mailed to
shareholders within 60 days of the end of the taxable year (or in a notice
mailed with its annual report for the taxable year) such amount of such gains
which its shareholders are to include in their taxable income as long-term
capital gains. Thus, if SCI made this designation, the shareholders of SCI
would include in their income as long-term capital gains their proportionate
share of the undistributed net capital gains as designated by SCI and SCI
would have to pay the tax on such gains within 30 days of the close of its
taxable year. Each shareholder of SCI would be deemed to have paid such
shareholder's share of the tax paid by SCI on such gains, which tax would be
credited or refunded to the shareholder. A shareholder would increase his tax
basis in his SCI stock by the difference between the amount of income to the
holder resulting from the designation less the holder's credit or refund for
the tax paid by SCI.
SCI intends to make timely distributions sufficient to satisfy the annual
distribution requirements. It is possible that SCI may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement, due to
timing differences between the actual receipt of income and actual payment of
expenses on the one hand, and the inclusion of such income and deduction of
such expenses in computing SCI's REIT taxable income on the other hand. To
avoid any problem with the 95% distribution requirement, SCI will closely
monitor the relationship between its REIT taxable income and cash flow and, if
necessary, intends to borrow funds in order to satisfy the distribution
requirement. However, there can be no assurance that such borrowing would be
available at such time.
If SCI fails to meet the 95% distribution requirement as a result of an
adjustment to SCI's tax return by the Internal Revenue Service (the "IRS"),
SCI may retroactively cure the failure by paying a "deficiency dividend" (plus
applicable penalties and interest) within a specified period.
Tax Aspects of SCI's Investments in the Partnerships
A significant portion of SCI's investments are through the Partnerships. SCI
will include its proportionate share of (i) each Partnership's income, gains,
losses, deductions and credits for purposes of the various REIT gross income
tests and in its computation of its REIT taxable income and (ii) the assets
held by each Partnership for purposes of the REIT asset tests.
SCI's interest in the Partnerships involves special tax considerations,
including the possibility of a challenge by the Internal Revenue Service (the
"IRS") of the status of the Partnerships as partnerships (as opposed to
associations taxable as corporations) for federal income tax purposes. If a
Partnership were to be treated as an association, such Partnership would be
taxable as a corporation and therefore subject to an entity-level tax on its
income. In such a situation, the character of SCI's assets and items of gross
income would change, which may preclude SCI from satisfying the REIT asset
tests and may preclude SCI from satisfying the REIT gross income tests (see
"--Failure to Qualify" below, for a discussion of the effect of SCI's failure
to meet such tests). Based on certain representations of SCI, in the opinion
of Mayer, Brown, & Platt, under existing federal income tax law and
regulations, the Partnerships will be treated for federal income tax purposes
as partnerships, and not as associations taxable as corporations. Such
opinion, however, is not binding on the IRS.
Failure to Qualify
If SCI fails to qualify for taxation as a REIT in any taxable year and
certain relief provisions do not apply, SCI will be subject to tax (including
applicable alternative minimum tax) on its taxable income at regular corporate
rates. Distributions to shareholders in any year in which SCI fails to qualify
as a REIT will not be deductible by SCI, nor generally will they be required
to be made under the Code. In such event, to the extent of current and
accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income, and subject to certain limitations in the Code,
corporate distributees may be eligible for the dividends-received deduction.
Unless entitled to relief under specific statutory provisions, SCI also will
be disqualified from re-electing taxation as a REIT for the four taxable years
following the year during which qualification was lost.
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TAXATION OF SCI'S SHAREHOLDERS
Taxation of Taxable Domestic Shareholders
As long as SCI qualifies as a REIT, distributions made to SCI's taxable
domestic shareholders out of current or accumulated earnings and profits (and
not designated as capital gain dividends) will be taken into account by them
as ordinary income and will not be eligible for the dividends-received
deduction for corporations. Distributions (and for tax years beginning after
August 5, 1997, undistributed amounts) that are designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed SCI's actual net capital gain for the taxable year) without regard to
the period for which the shareholder has held its Shares. However, corporate
shareholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. To the extent that SCI makes distributions in
excess of current and accumulated earnings and profits, these distributions
are treated first as a tax-free return of capital to the shareholder, reducing
the tax basis of a shareholder's Shares by the amount of such distribution
(but not below zero), with distributions in excess of the shareholder's tax
basis taxable as capital gains (if the Shares are held as a capital asset). In
addition, any dividend declared by SCI in October, November or December of any
year and payable to a shareholder of record on a specific date in any such
month shall be treated as both paid by SCI and received by the shareholder on
December 31 of such year, provided that the dividend is actually paid by SCI
during January of the following calendar year. Shareholders may not include in
their individual income tax returns any net operating losses or capital losses
of SCI. Federal income tax rules may also require that certain minimum tax
adjustments and preferences be apportioned to SCI shareholders.
In general, any loss upon a sale or exchange of Shares by a shareholder who
has held such Shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss, to the extent of
distributions from SCI required to be treated by such shareholder as long-term
capital gains.
The 1997 Act made certain changes to the Code with respect to taxation of
long-term capital gains earned by taxpayers other than a corporation. In
general, for sales made after May 6, 1997, the maximum tax rate for individual
taxpayers on net long-term capital gains (i.e., the excess of net long-term
capital gain over net short-term capital loss) is lowered to 20% for most
assets. This 20% rate applies to sales on or after July 29, 1997 only if the
asset was held for more than 18 months at the time of disposition. Capital
gains on the disposition of assets on or after July 29, 1997 held for more
than one year and up to 18 months at the time of disposition will be taxed as
"mid-term gain" at a maximum rate of 28%. Also, so called "unrecaptured
section 1250 gain" is subject to a maximum federal income tax rate of 25%.
"Unrecaptured section 1250 gain" generally includes the long-term capital gain
realized on (i) the sale after May 6, 1997 of a real property asset described
in Section 1250 of the Code or (ii) the sale after July 28, 1997 of a real
property asset described in Section 1250 of the Code which the taxpayer has
held for more than 18 months, but in each case not in excess of the amount of
depreciation (less the gain, if any, treated as ordinary income under Code
Section 1250) taken on such asset. A rate of 18% instead of 20% will apply
after December 31, 2000 for assets held for more than 5 years. However, the
18% rate applies only to assets acquired after December 31, 2000 unless the
taxpayer elects to treat an asset held prior to such date as sold for fair
market value on January 1, 2001. In the case of individuals whose ordinary
income is taxed at a 15% rate, the 20% rate is reduced to 10% and the 10% rate
for assets held for more than 5 years is reduced to 8%.
Certain aspects of the new legislation are currently unclear, including how
the reduced rates will apply to gains earned by REITs such as SCI. Until the
Service issues some guidance, it is unclear whether or how the 20% or 10%
rates will apply to distributions of long- term capital gains by SCI. The 1997
Act gives the Service authority to apply the 1997 Act's new rules on taxation
of capital gains to sales by pass-thru entities, including REITs. It is
possible that the Service could provide in such regulations that REIT capital
gain dividends must be determined by looking through to the assets sold by the
REIT and treated by REIT shareholders as "long-term capital gain", "mid-term
gain" and "unrecaptured section 1250 gain" to the extent of such respective
gain realized by the REIT. No regulations have yet been issued. Such
regulations, if and when issued, may have a retroactive affect.
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Shareholders of SCI should consult their tax advisor with regard to (i) the
application of the changes made by the 1997 Act with respect to taxation of
capital gains and capital gain dividends and (ii) to state, local and foreign
taxes on capital gains.
Backup Withholding
SCI will report to its domestic shareholders and to the IRS the amount of
distributions paid during each calendar year, and the amount of tax withheld,
if any, with respect thereto. Under the backup withholding rules, a
shareholder may be subject to backup withholding at applicable rates with
respect to distributions paid unless such shareholder (i) is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact or (ii) provides a taxpayer identification number, certifies as to
no loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A shareholder that
does not provide SCI with its correct taxpayer identification number may also
be subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be credited against the shareholder's income tax liability.
In addition, SCI may be required to withhold a portion of capital gain
distributions made to any shareholders who fail to certify their non-foreign
status to SCI.
Taxation of Tax-Exempt Shareholders
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not
constitute unrelated business taxable income ("UBTI"). Subject to the
discussion below regarding a "pension-held REIT", based upon the ruling, the
analysis therein and the statutory framework of the Code, distributions by SCI
to a shareholder that is a tax-exempt entity should also not constitute UBTI,
provided that the tax-exempt entity has not financed the acquisition of its
Shares with "acquisition indebtedness" within the meaning of the Code, and
that the Shares are not otherwise used in an unrelated trade or business of
the tax-exempt entity, and that SCI, consistent with its present intent, does
not hold a residual interest in a real estate mortgage investment conduit.
However, if any pension or other retirement trust that qualifies under
Section 401(a) of the Code ("qualified pension trust") holds more than 10% by
value of the interests in a "pension-held REIT" at any time during a taxable
year, a portion of the dividends paid to the qualified pension trust by such
REIT may constitute UBTI. For these purposes, a "pension-held REIT" is defined
as a REIT if (i) such REIT would not have qualified as a REIT but for the
provisions of the Code which look through such a qualified pension trust in
determining ownership of stock of the REIT and (ii) at least one qualified
pension trust holds more than 25% by value of the interests of such REIT or
one or more qualified pension trusts (each owning more than a 10% interest by
value in the REIT) hold in the aggregate more than 50% by value of the
interests in such REIT.
Taxation of Foreign Shareholders
SCI will qualify as a "domestically-controlled REIT" so long as less than
50% in value of its Shares is held by foreign persons (i.e., nonresident
aliens and foreign corporations, partnerships, trust and estates). It is
currently anticipated that SCI will qualify as a domestically controlled REIT.
Under these circumstances, gain from the sale of the Shares by a foreign
person should not be subject to U.S. taxation, unless such gain is effectively
connected with such person's U.S. business or, in the case of an individual
foreign person, such person is present within the U.S. for more than 182 days
in such taxable year.
Distributions of cash generated by SCI's real estate operations (but not by
its sale or exchange of such properties) that are paid to foreign persons
generally will be subject to U.S. withholding tax at a rate of 30%, unless (i)
an applicable tax treaty reduces that tax and the foreign shareholder files
with SCI the required form evidencing such lower rate or (ii) the foreign
shareholder files an IRS Form 4224 with SCI claiming that the distribution is
"effectively connected" income. Recently promulgated Treasury Regulations
revise in certain respects the rules applicable to foreign shareholders with
respect to payments made after December 31, 1998.
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Distributions of proceeds attributable to the sale or exchange by SCI of
U.S. real property interests are subject to income and withholding taxes
pursuant to the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"), and may be subject to branch profits tax in the hands of a
shareholder which is a foreign corporation if it is not entitled to treaty
relief or exemption. SCI is required by applicable Treasury regulations to
withhold 35% of any distribution to a foreign person that could be designated
by SCI as a capital gain dividend; this amount is creditable against the
foreign shareholder's FIRPTA tax liability.
The federal income taxation of foreign persons is a highly complex matter
that may be affected by many other considerations. Accordingly, foreign
investors in SCI should consult their own tax advisors regarding the income
and withholding tax considerations with respect to their investment in SCI.
OTHER TAX CONSIDERATIONS
SCI Development Services Incorporated and SCI Logistics Services Incorporated
SCI Development Services Incorporated and SCI Logistics Services
Incorporated will pay Federal and state income taxes at the full applicable
corporate rates on its income prior to payment of any dividends. SCI
Development Services Incorporated and SCI Logistics Services Incorporated will
attempt to minimize the amount of such taxes, but there can be no assurance
whether or the extent to which measures taken to minimize taxes will be
successful. To the extent that SCI Development Services Incorporated or SCI
Logistics Services Incorporated is required to pay Federal, state or local
taxes, the cash available for distribution by either company to its
shareholders will be reduced accordingly.
Tax on Built-in Gain
Pursuant to Notice 88-19. 1988-1 C.B. 486, a C corporation that elects to be
taxed as a REIT has to recognize any gain that would have been realized if the
C corporation had sold all of its assets for their respective fair market
values at the end of its last taxable year before the taxable year in which it
qualifies to be taxed as a REIT and immediately liquidated unless the REIT
elects to be taxed under rules similar to the rules of Section 1374 of the
Code.
Since SCI has made this election, if during the 10-year period beginning on
the first day of the first taxable year for which SCI qualifies as a REIT (the
"Recognition Period"), SCI recognizes gain on the disposition of any asset
held by SCI as of the beginning of such Recognition Period, then, to the
extent of the excess of (a) the fair market value of such asset as of the
beginning of such Recognition Period over (b) SCI's adjusted basis in such
asset as of the beginning of such Recognition Period (the "Built-in Gain"),
such gain will be subject to tax at the highest regular corporate rate.
Because SCI acquires many of its properties in fully taxable transactions and
presently expects to hold each property beyond the Recognition Period, it is
not anticipated that SCI will pay a substantial corporate level tax on its
Built-in Gain.
Possible Legislative or Other Actions Affecting Tax Consequences
Prospective shareholders should recognize that the present federal income
tax treatment of an investment in SCI may be modified by legislative, judicial
or administrative action at any time and that any such action may affect
investments and commitments previously made. The rules dealing with federal
income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the Treasury, resulting in revisions of
regulations and revised interpretations of established concepts as well as
statutory changes. Revisions in federal tax laws and interpretations thereof
could adversely affect the tax consequences of an investment in SCI.
State and Local Taxes
SCI and its shareholders may be subject to state or local taxation in
various jurisdictions, including those in which it or they transact business
or reside. The state and local tax treatment of SCI and its shareholders may
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not conform to the federal income tax consequences discussed above.
Consequently, prospective shareholders should consult their own tax advisors
regarding the effect of state and local tax laws on an investment in the
offered securities of SCI.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP, AND SALES OF COMMON SHARES, PREFERRED SHARES OR DEBT SECURITIES IN
AN ENTITY ELECTING TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING
THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
PLAN OF DISTRIBUTION
SCI may sell the Offered Securities to one or more underwriters for public
offering and sale by them or may sell the Offered Securities to investors
directly or through agents, which agents may be affiliated with SCI. Direct
sales to investors may be accomplished through subscription offerings or
through subscription rights distributed to SCI's shareholders. In connection
with subscription offerings or the distribution of subscription rights to
shareholders, if all of the underlying Offered Securities are not subscribed
for, SCI may sell such unsubscribed Offered Securities to third parties
directly or through agents and, in addition, whether or not all of the
underlying Offered Securities are subscribed for, SCI may concurrently offer
additional Offered Securities to third parties directly or through agents,
which agents may be affiliated with SCI. Any underwriter or agent involved in
the offer and sale of the Offered Securities will be named in the applicable
Prospectus Supplement.
The distribution of the Offered Securities may be effected from time to time
in one or more transactions at a fixed price or prices, which may be changed,
or at prices related to the prevailing market prices at the time of sale or at
negotiated prices (any of which may represent a discount from the prevailing
market price). SCI also may, from time to time, authorize underwriters acting
as SCI's agents to offer and sell the Offered Securities upon the terms and
conditions set forth in the applicable Prospectus Supplement. In connection
with the sale of Offered Securities, underwriters may be deemed to have
received compensation from SCI in the form of underwriting discounts or
commissions and may also receive commissions from purchasers of Offered
Securities for whom they may act as agent. Underwriters may sell Offered
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 agent.
Any underwriting compensation paid by SCI to underwriters or agents in
connection with the offering of Offered Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters,
dealers and agents participating in the distribution of the Offered Securities
may be deemed to be underwriters, and any discounts and commissions received
by them and any profit realized by them on resale of the Offered Securities
may be deemed to be underwriting discounts and commissions, under the
Securities Act. Underwriters, dealers and agents may be entitled, under
agreements entered into with SCI, to indemnification against and contribution
toward certain civil liabilities, including liabilities under the Securities
Act. Any such indemnification agreements will be described in the applicable
Prospectus Supplement.
If so indicated in the applicable Prospectus Supplement, SCI will authorize
dealers acting as SCI's agents to solicit offers by certain institutions to
purchase Offered Securities from SCI 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 Offered 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
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but will in all cases be subject to the approval of SCI. Contracts will not be
subject to any conditions except (i) the purchase by an institution of the
Offered 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 Offered Securities are being sold
to underwriters, SCI shall have sold to such underwriters the total principal
amount of the Offered Securities less the principal amount thereof covered by
Contracts.
Certain of the underwriters and their affiliates may be customers of, engage
in transactions with and perform services for SCI and its subsidiaries in the
ordinary course of business.
EXPERTS
The financial statements and related schedules of SCI incorporated by
reference herein and in the Registration Statement have been audited or
reviewed by Arthur Andersen LLP, independent public accountants, to the extent
and for the periods indicated in their reports, and have been incorporated by
reference herein and in the Registration Statement in reliance upon the
authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Offered Securities will be passed upon for SCI by Mayer,
Brown & Platt, Chicago, Illinois. Mayer, Brown & Platt has in the past
represented and is currently representing SCI and certain of its affiliates,
including Security Capital.
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