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RULE NO. 424(b)(2)
REGISTRATION NO. 333-13909
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 31, 1996)
3,500,000 SHARES
LOGO
COMMON SHARES OF BENEFICIAL INTEREST
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Security Capital Industrial Trust ("SCI") is the largest publicly held owner
and operator of distribution properties in the United States and the sixth
largest real estate investment trust ("REIT") based on equity market
capitalization. SCI is a national operating company focused exclusively on
meeting the distribution space needs of national, regional and local
industrial real estate users through the SCI National Operating System(TM).
See "Business." SCI has elected to be taxed as 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"). See "Underwriting." The Common Shares are currently listed on the
New York Stock Exchange (the "NYSE") under the symbol "SCN." On February 3,
1997, the last reported sale price of the Common Shares on the NYSE was
$21 1/8 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.
The Underwriter has agreed to purchase from SCI the Common Shares offered
hereby at a purchase price of $20.015 per Common Share, resulting in proceeds
to SCI of $70,052,500. SCI has granted to the Underwriter a 30-day option to
purchase up to 525,000 additional Common Shares at a purchase price of $20.015
per Common Share, solely to cover over-allotments, if any. If such option is
exercised in full, the total proceeds to SCI will be $80,560,375, before
deducting expenses payable by SCI, estimated at approximately $200,000.
The Common Shares offered hereby may be offered by the Underwriter from time
to time in one or more transactions on the NYSE or otherwise, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, or at negotiated prices. See "Underwriting."
SCI has agreed to indemnify the Underwriter against certain liabilities,
including liabilities under the Securities Act of 1933. See "Underwriting."
The Common Shares are offered by the Underwriter subject to prior sale,
withdrawal, cancellation or modification of the offer without notice, to
delivery and acceptance by the Underwriter and to certain further conditions.
It is expected that delivery of the Common Shares will be made in New York,
New York on or about February 7, 1997.
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MERRILL LYNCH & CO.
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The date of this Prospectus Supplement is February 3, 1997.
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[LOGO OF MAP APPEARS HERE]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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SECURITY CAPITAL INDUSTRIAL TRUST
SCI is the largest publicly held owner and operator of distribution
properties in the United States based on equity market capitalization. SCI is
a national operating company focused exclusively on meeting the distribution
space needs of national, regional and local industrial real estate users
through the SCI National Operating System(TM). SCI distinguishes itself from
its competition by being the only entity that combines all of the following:
1. A national operating strategy targeting Fortune 1000 users of
distribution space;
2. A disciplined investment strategy based on proprietary research that
identifies high growth markets with sustainable demand for SCI's low
finish distribution space product;
3. 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 national scope and expertise with strong local
presence; and
4. Over 280 professionals in 29 offices which SCI believes comprise the
deepest and most experienced management team in industrial real estate.
The cornerstone of SCI's national operating strategy is the SCI National
Operating System(TM) comprised of the Market Services Group, the National
Services Group and the National Development Group (described under the caption
"Business") that provides an exceptional level of customer service and
development on a 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 build-to-suit facilities for its customers.
Through its REIT Management Agreement with Security Capital Industrial
Incorporated (the "REIT Manager" or "REIT Management"), SCI has access to the
services provided by the REIT Manager and its specialized service affiliates
which provide SCI with access to the same resources as a fully integrated
operating company. SCI, through the REIT Manager, has a significant level of
expertise in market research; building and land acquisition and due diligence;
master-planned distribution park design and building construction; marketing;
asset and leasing management; 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 designed for both warehousing
and light manufacturing uses.
SCI highlights include:
.As of December 31, 1996, SCI was servicing over 2,400 customers including
296 national customers of which 191 are multiple market customers.
.As of December 31, 1996, SCI's portfolio contained 80.6 million square
feet in 942 buildings and had an additional 5.9 million square feet under
development in 47 buildings for a total of 86.5 million square feet in 989
buildings. The total aggregate cost of the 86.5 million square feet
(including properties under development at total budgeted cost) is $2.6
billion ($30.06 per square foot average).
.As of December 31, 1996, SCI's stabilized portfolio of 71.1 million square
feet was 96.84% leased (96.27% occupied), and the total operating
portfolio of 80.6 million square feet, which includes 9.5 million pre-
stabilized square feet, was 93.35% leased (91.21% occupied).
.During 1996, a total of 23.1 million square feet was leased in 1,055
transactions through the operation of the SCI National Operating
System(TM). During 1996, rental rates on new and renewed leases on
previously leased space for the operating portfolio increased an average
of 13.0%.
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.In 1996, SCI acquired 11.7 million square feet of distribution space for a
total expected investment of $319.1 million in 38 transactions, an average
of $27.27 per square foot.
.As of December 31, 1996, SCI had under letter of intent or contingent
contract, subject to the completion of due diligence, acquisition
opportunities totalling 1.3 million square feet of distribution properties
at an acquisition cost of $41.0 million. Additionally, as of December 31,
1996, SCI was in active negotiations for acquisition opportunities
totalling approximately 6.8 million square feet of distribution
properties, at an acquisition cost of approximately $230.6 million.
.During 1996, SCI commenced development of 8.2 million square feet of
distribution space in 25 target markets. As of December 31, 1996, SCI had
5.9 million square feet of distribution space under development in 20
target markets.
.Inventory building starts totalled 6.2 million square feet during 1996.
Build-to-suit starts totalled 2.0 million square feet during 1996. In
addition, as of December 31, 1996, SCI was in active negotiations for 3.7
million square feet of additional build-to-suit projects. As of December
31, 1996, completed buildings were 83.46% leased and 86.65% leased or
committed.
.As of December 31, 1996, SCI owned 1,273 acres of development land and had
fixed price options and rights of first refusal to acquire 515.2 acres and
36.9 acres, respectively, which in the aggregate, will permit the
development of approximately 31.7 million square feet of additional
distribution space in 29 target market cities. Also, as of December 31,
1996, SCI had an additional 415.8 acres under letter of intent or
contingent contract, subject to the completion of due diligence, which
will permit the development of approximately 6.7 million square feet of
additional distribution space.
.Security Capital Group Incorporated ("SCG"), SCI's largest shareholder,
which owned 46.0% of the Common Shares as of January 31, 1997, owns the
REIT Manager and has provided common equity investment capital to SCI at
the same times and on the same terms made available to public investors
and other shareholders.
.SCI's pro forma percentage of debt to total book capitalization (including
accumulated depreciation) as of September 30, 1996 was 29.4% after giving
effect to this Offering, the collection in October 1996 of $75.1 million
in subscriptions receivable for 4,352,406 Common Shares sold in September
1996, the issuance and sale of 2,000,000 Series C Cumulative Redeemable
Preferred Shares of Beneficial Interest, par value $.01 per share (the
"Series C Preferred Shares") on November 13, 1996, the sale of
$100,000,000 of Medium-Term Notes, Series A, due 2015 (the "Series A 2015
Notes") expected to be issued on February 4, 1997 and the use of the
proceeds therefrom. At February 3, 1997, SCI had $62.1 million of
borrowings under its $350 million unsecured line of credit facility.
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.
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BUSINESS
SCI GROWTH AND OPERATING STRATEGY
Based on thorough research, SCI was created in June 1991 to take advantage
of two strategic opportunities: first, the opportunity to build a national
distribution and light manufacturing asset base at prices significantly below
replacement cost and a land inventory at attractive prices; and second, to
create, for the first time, a national operating company which would
differentiate itself from its competition through its ability to address and
service a corporate customer's distribution space requirements on a national,
regional and local basis. SCI's objective is to achieve long-term sustainable
growth in cash flow through: first, focusing its investments in markets with
excellent long-term growth prospects and markets where SCI can achieve a
strong market position through the acquisition and development of generic,
flexible facilities designed for both warehousing and light manufacturing
uses; second, the SCI National Operating System(TM); and third, ownership or
control of a significant inventory of land to enable SCI to take advantage of
market opportunities and accommodate expansion or build-to-suit requirements
of customers through development of new facilities.
SCI's operating strategy is to achieve significant market presence in each
target market city and selected submarkets in those cities through
acquisitions and master-planned distribution park development. SCI defines
market presence not only in terms of square feet of buildings and acres of
development land owned, but also by the extent of SCI's relationships with
customers having current and expected future space needs in such markets.
SCI's growth and operating strategy is designed to meet not only the needs
of today's distribution space users, which means providing functional, cost-
effective facilities and a comprehensive level of service, but also to shape
the future trends of the industry through innovation, service and product
leadership consistent with SCI's long-term investment horizon.
The SCI National Operating System(TM) is designed to provide substantial
benefits to existing and prospective SCI customers, including:
Relocation Capability. User requirements can change frequently, and SCI's
presence in 36 target markets and ownership structure of its facilities permit
SCI to accommodate the needs of its customers by moving an existing customer
within a market or between markets both regionally and nationally.
Expansion Capability. SCI, through its development program, land inventory
and existing facilities, works with existing customers who have expansion
requirements to meet their growing business needs. Expansion may result in
relocating a customer to larger SCI spaces in a given market or in developing
a build-to-suit facility for such customer.
Nationally Coordinated Program. SCI provides a single point of contact for
multi-location national users through National Services Group professionals
who are charged with building long-term customer relationships and ensuring
that all SCI services and products are consistent in quality throughout the
United States. SCI's experience to date suggests that many major corporate
customers prefer working with one firm to meet their national distribution
space needs.
Development/Build-to-Suit Expertise. SCI's team of development professionals
are focused exclusively on building facilities for SCI customers that
incorporate the latest technology with respect to building design and building
systems. SCI has developed national standards and procedures that it strictly
adheres to in the development of all its facilities throughout the United
States.
The SCI National Operating System(TM) is comprised of three groups: the
Market Services Group, the National Services Group and the National
Development Group.
Market Services Group. This group is comprised of 22 Market Officers, four
regional directors and 102 property management and leasing professionals.
Market Officers have extensive experience (with an average of over 14 years)
in marketing distribution space and are responsible for understanding the
needs of existing and
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prospective customers in their respective markets. To meet such needs, Market
Officers utilize their extensive knowledge of local market conditions,
including the cost and availability of alternative space, and are supported by
their team of property management and leasing professionals. Additionally,
Market Officers have access to information regarding existing SCI customers
who are expanding or relocating to various markets. A key role of the Market
Officers is assisting the National Services Group in identifying SCI customers
with national, multi-market requirements. SCI believes that the Market
Officers' access to national SCI resources provides significant stature and
profile and improves their ability to serve customers in the local market.
On a regular basis, the Market Officer communicates with senior management
in charge of that Market Officer's region for guidance on lease terms, as well
as for national and local marketing assistance, and is able to take advantage
of SCI's fully integrated national development and service capabilities.
Market Officers do not develop projects or borrow or commit capital; they
focus strictly on creating and maintaining relationships with industrial space
users and industrial brokers, marketing SCI's products and identifying
potential build-to-suit, acquisition and leasing opportunities in their target
market cities.
National Services Group. The National Services Group, comprised of 10
professionals, is dedicated to marketing SCI's services and products to 1,000
key domestic and international users of distribution space. The National
Services Group is headquartered in Denver and has regional offices in Atlanta,
Chicago, Dallas, the Los Angeles metropolitan area and the New York
metropolitan area. A key function of this group is identifying companies whose
reconfiguration and expansion of their distribution networks will create
multi-market and/or build-to-suit opportunities and coordinating SCI services
to those companies with the respective Market Officers and the National
Development Group. National Services Group professionals build long-term
relationships with SCI national customers and provide a single point of
contact to simplify and streamline the execution of such customers' national
distribution space plans. An ancillary benefit is research insights into
national distribution and logistics trends gained through continuous
interaction with National Services Group clients.
National Development Group. The National Development Group, comprised of 46
professionals, focuses substantial research and development efforts on
creating industry-leading, master-planned distribution parks and buildings.
Its members have extensive experience in development and construction of these
facilities.
This group is comprised principally of professionally trained architects,
engineers and construction professionals who oversee every aspect of the land
planning and building design processes. This group also monitors the
construction process and oversees the performance of third-party general
contractors. The group's build-to-suit specialists are based in Denver while
project managers (with an average experience level of 16 years) operate
regionally to better serve their markets. The project managers supervise each
project with continual oversight from national headquarters, pursuant to
uniform standards, procedures and specifications which have been carefully
designed to achieve consistent quality.
SCI believes the depth and breadth of the National Development Group enhance
the effectiveness of the National Services Group and gives the Market Officers
a distinct competitive advantage for development and build-to-suit
opportunities in their respective markets.
FOCUS ON RESEARCH-BASED GROWTH-ORIENTED MARKETS
Based on its research, the REIT Manager has focused SCI on selected
distribution markets, where supply and demand factors have permitted high
occupancies at increasing rental rates. The research indicates that demand for
distribution and light manufacturing space in SCI's target market cities
should be stable to strong in the near to medium term which should have a
positive effect on leasing rates and cash flow growth. SCI believes that the
primary factors influencing future supply and demand for distribution real
estate in SCI's target market cities will be continued job and population
growth, related regional and local company growth, reconfiguration
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of distribution networks, and quality and cost of labor. In addition, SCI
believes that short construction cycles targeted for SCI's distribution
facilities, fragmented ownership and undercapitalization of local developers
also contribute to the attractive supply and demand fundamentals in SCI's
target markets.
SCI focuses on three types of industrial investment markets: export/import
growth markets, low cost manufacturing markets and growth distribution markets.
SCI is being asked by its customers to expand its geographic scope and is
evaluating these opportunities. SCI is also evaluating alternatives to increase
the services it provides to its customers.
MARKET PRESENCE
In each target market city (or in selected submarkets in cities such as
Dallas and Atlanta) in which SCI invests, SCI intends to become one of the
major distribution space owners and operators within a four to seven-year
period. SCI believes that significant market presence will provide the
following benefits:
Value Enhancement. The significant local owners and developers in a given
market can usually generate above-market performance as measured by lease rates
and occupancy because of their ability to reduce turnover through meeting their
customers' needs to either expand or contract, by relocating them within SCI's
existing inventory of distribution space or by developing new facilities. SCI
believes that providing this flexibility permits it to realize higher effective
lease rates and lower levels of ongoing tenant improvement investment.
Effective implementation of this strategy requires a critical mass of customers
and space and ongoing communication between customers and the Market Officers.
SCI believes it has achieved this critical mass in the following 26 markets:
Atlanta, Austin, Birmingham, Charlotte, Chattanooga, Cincinnati, Columbus,
Dallas/Fort Worth, Denver, El Paso, Houston, Indianapolis, Kansas City, Las
Vegas, Memphis, Nashville, Orlando, Phoenix, Portland, Reno, Salt Lake City,
San Antonio, San Francisco (East Bay area), San Francisco (South Bay area),
Tampa and Washington, D.C./Baltimore, and believes that it is close to
achieving critical mass in two additional markets.
Maximum Market Exposure. Size and market presence provide visibility and
access to and knowledge of potential leasing and build-to-suit transactions.
The industrial brokerage community and corporate users are often motivated to
develop a relationship with the significant owners and developers in a
particular market in order to achieve their respective business objectives. The
opportunity to compete for the majority of customers' space requirements in
each target submarket is a crucial factor in achieving SCI's operating
objectives.
CUSTOMER BASE OBJECTIVE
SCI's objective is to develop a customer base in each target market city
which is diverse in terms of industry concentration and represents a broad
spectrum of national, regional and local distribution space users who have
potential for growth in demand for space. SCI had 2,899 customer leases in 73.5
million square feet of occupied space as of December 31, 1996. SCI believes
that having a large number of customers with generic space requirements in each
submarket will provide the opportunity to maximize cash flow through
intensively managing its customer base. At the same time, exposure to overall
occupancy declines is reduced by achieving a broad spectrum of customers in
each submarket. SCI's largest customer accounted for less than 1.5% of SCI's
December 1996 rental income (on an annualized basis), and the annualized base
rent for SCI's 20 largest customers accounted for less than 12.9% of SCI's
December 1996 rental income (on an annualized basis). Between December 31, 1996
and December 31, 1997, approximately 23.2% of the leased square feet in SCI's
portfolio will expire, creating opportunities for SCI to increase rents upon
renewal or replacement of those leases.
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GEOGRAPHIC DISTRIBUTION
Substantially all of SCI's properties are located in 36 target markets. The
table below demonstrates the geographic distribution of SCI's equity real
estate investments as of December 31, 1996. This chart does not include land
held for future development, which is less than 5% of assets, based on cost.
<TABLE>
<CAPTION>
PERCENTAGE OF ASSETS
NUMBER OF PROPERTIES BASED ON COST(1)
-------------------- --------------------
<S> <C> <C>
Atlanta, Georgia..................... 100 8.12%
Austin, Texas........................ 35 3.09
Birmingham, Alabama.................. 6 1.32
Charlotte, North Carolina............ 23 2.54
Chattanooga, Tennessee............... 5 0.60
Chicago, Illinois.................... 28 4.26
Cincinnati, Ohio..................... 30 2.44
Columbus, Ohio....................... 15 2.10
Dallas/Fort Worth, Texas............. 63 4.95
Denver, Colorado..................... 22 2.32
El Paso, Texas....................... 22 2.51
Fort Lauderdale/Miami, Florida....... 3 0.71
Houston, Texas....................... 70 5.58
Indianapolis, Indiana................ 48 4.71
Kansas City, Kansas/Missouri......... 28 2.10
Las Vegas, Nevada.................... 14 2.11
Louisville, Kentucky................. 2 0.44
Los Angeles/Orange County,
California.......................... 15 3.89
Memphis, Tennessee................... 26 2.04
Nashville, Tennessee................. 24 1.92
New Jersey/I-95 Corridor............. 6 1.91
Oklahoma City, Oklahoma.............. 10 0.57
Orlando, Florida..................... 13 1.06
Phoenix, Arizona..................... 22 1.59
Portland, Oregon..................... 25 2.45
Reno, Nevada......................... 17 1.94
Rio Grande Valley, Texas............. 14 0.96
Salt Lake City, Utah................. 8 2.25
San Antonio, Texas................... 61 4.49
San Diego, California................ 3 0.54
San Francisco (East Bay area),
California.......................... 42 4.60
San Francisco (South Bay area),
California.......................... 66 7.66
Seattle, Washington.................. 9 1.61
Tampa, Florida....................... 60 4.37
Tulsa, Oklahoma...................... 10 0.50
Washington D.C./Baltimore............ 35 4.96
Other................................ 9 0.79
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Total............................ 989(2) 100.00%
=== ======
</TABLE>
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(1) Includes properties under development at their budgeted total development
costs, rather than costs incurred to date.
(2) Includes 47 buildings under development.
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STRATEGIC AND OPERATING ACCOMPLISHMENTS
SCI's strategic and operating objectives have been furthered by the
following accomplishments:
.Creation of the SCI National Operating System(TM). The REIT Manager
developed the SCI National Operating System(TM) which provides an
exceptional level of customer service, marketing and development on a
national, regional and local basis through its 82 professionals and is a
key component of SCI's growth and operating strategy.
.Build-to-Suit Program. The build-to-suit program enhances SCI's ability to
meet customer needs. SCI's build-to-suit program is targeted to
distribution customers whose facility requirements are generic, not
special purpose, so as to facilitate the property's future marketability
and functionality. From inception through December 31, 1996, SCI completed
or commenced development of build-to-suit facilities totalling 7.4 million
square feet with an expected total investment of $250.2 million including
655,000 square feet that was disposed of in 1995 and 1996. In addition,
SCI is currently in active negotiations for 3.7 million square feet of
additional build-to-suit projects.
.Critical Mass in 26 Markets. Another key element of SCI's growth and
operating strategy is to build a critical mass of properties and customers
in each target market city through acquisition and development of
distribution space. SCI believes it has achieved critical mass in 26
markets and believes that it is close to achieving critical mass in two
additional markets.
.Target Market Expansion. SCI selectively evaluates the potential expansion
of its target markets to include other target market cities which have
strong growth prospects. From January 1, 1994 through December 31, 1996,
SCI's target market expanded to include 21 cities to more effectively
service the national distribution space needs of its customers bringing
the total of SCI's target market cities to 36.
.Land Inventory/Master-Planned Park Development. SCI's land inventory and
master-planned park development strategy is essential to meeting the
expansion and relocation needs of SCI's existing customer base and to
further penetrate its target markets. At December 31, 1996, SCI owned or
controlled through option, right of first refusal, letter of intent, or
contingent contract 2,240.9 acres of land in 30 target market cities,
which will permit the development of approximately 38.5 million square
feet of additional distribution space. SCI believes that master-planned
park development will provide an important source of growth. Since
inception, SCI has commenced development of 60 master-planned parks in 28
of its target market cities.
.Inventory Building Program. In SCI's master-planned distribution parks,
SCI commences development of an inventory building when it perceives an
emerging demand in a specific submarket from both existing SCI customers
who are expanding and potential new customers whose leases for their
current space are approaching expiration. By having an appropriate supply
of distribution space, SCI can meet the expansion needs of existing
customers and can accommodate new customers. From inception through
December 31, 1996, SCI completed or commenced development of 16.2 million
square feet of inventory buildings with a total investment cost of $557.3
million in 28 target market cities.
USE OF PROCEEDS
The net proceeds to SCI from the sale of the Common Shares offered hereby
are expected to be approximately $69.9 million ($80.4 million if the
Underwriter's over-allotment option is exercised in full). SCI expects that
the net proceeds of this Offering will be used for the acquisition and
development of additional distribution properties, as suitable opportunities
arise, for capital improvements to properties and for general corporate
purposes.
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PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS
The Common Shares are listed on the NYSE under the symbol "SCN." The
following table sets forth the range of high and low sales prices of the
Common Shares as reported in the New York Stock Exchange Composite Tape, as
well as the distributions declared, for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
------- ------- ---------
<S> <C> <C> <C>
1995
First quarter.............................. $17 3/4 $15 1/4 $0.23375(1)
Second quarter............................. 17 1/2 14 1/2 0.23375
Third quarter.............................. 16 1/2 15 0.23375
Fourth quarter............................. 17 5/8 16 0.23375
1996
First quarter.............................. $18 7/8 $16 1/2 $ 0.2525(2)
Second quarter............................. 18 16 7/8 0.2525
Third quarter.............................. 18 1/4 16 7/8 0.2525
Fourth quarter............................. 22 1/2 17 7/8 0.2525
1997
First Quarter (through February 3, 1997)... $22 1/8 $19 7/8 $ 0.2675(3)
</TABLE>
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(1) Declared in the fourth quarter of 1994 and paid in the first quarter of
1995.
(2) Declared in the fourth quarter of 1995 and paid in the first quarter of
1996.
(3) The Board of Trustees declared a distribution of $0.2675 per Common Share
in the fourth quarter of 1996 payable on February 18, 1997 to shareholders
of record on February 4, 1997. Purchasers of Common Shares in this
Offering will not be entitled to such distribution.
See the cover page of this Prospectus Supplement for the price of a Common
Share as of a recent date. On January 31, 1997, SCI had approximately
93,676,546 Common Shares outstanding, which were held of record by
approximately 1,100 shareholders.
SCI, in order to qualify as a REIT, is required to make distributions (other
than capital gain distributions) to its shareholders in amounts at least equal
to (i) the sum of (A) 95% of its "REIT taxable income" (computed without
regard to the dividends paid deduction and its 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 noncash income. SCI's distribution strategy is to
distribute what it believes is a conservative percentage of its cash flow,
permitting SCI to retain funds for capital improvements and other investments
while funding its distributions.
SCI announces the following year's projected annual distribution level after
the annual budget review and approval in December of each year by SCI's Board
of Trustees. At its December 1996 board meeting, the Board of Trustees
announced a projected increase in the annual distribution level from $1.01 to
$1.07 per Common Share. The payment of distributions is subject to the
discretion of the Board of Trustees and is dependent upon the financial
condition and operating results of SCI.
For federal income tax purposes, distributions may consist of ordinary
income, capital gains, non-taxable return of capital or a combination thereof.
Distributions that exceed SCI's current and accumulated earnings and profits
(calculated for tax purposes) constitute a return of capital rather than a
dividend and reduce the shareholder's basis in his or her Common Shares. To
the extent that a distribution exceeds both current and accumulated earnings
and profits and the shareholder's basis in his or her Common Shares, it will
generally be treated as gain from the sale or exchange of that shareholder's
Common Shares. SCI annually notifies shareholders of the taxability of
distributions paid during the preceding year. Approximately 13% of the
distribution for 1996 constituted a non-taxable return of capital for federal
income tax purposes and approximately 87% was ordinary income.
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Under federal income tax rules, SCI's earnings and profits are first
allocated to its preferred shares, which increases the portion of the Common
Shares distribution classified as return of capital. SCI's tax returns have not
been examined by the Internal Revenue Service and, therefore, the taxability of
distributions is subject to change. The portion of distributions characterized
as return of capital results primarily from the excess of distributions over
earnings, primarily because non-cash charges such as depreciation are added to
earnings in determining distribution levels. Depreciation has increased as new
properties have been added. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."
DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN
In March 1995, SCI adopted a Dividend Reinvestment and Share Purchase Plan
(the "Plan"). The Plan allows holders of Common Shares the opportunity to
acquire additional Common Shares by automatically reinvesting distributions.
Common Shares are acquired pursuant to the Plan at a price equal to 98% of the
market price of such Common Shares, without payment of any brokerage commission
or service charge. The Plan also allows participating shareholders to purchase
a limited number of additional Common Shares at 98% of the market price of such
Common Shares, by making optional cash payments, without payment of any
brokerage commission or service charge. Shareholders who do not participate in
the Plan continue to receive distributions as declared.
S-11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of SCI at September 30,
1996, and as adjusted to give effect to the collection in October 1996 of
$75.1 million in subscriptions receivable for 4,352,406 Common Shares sold in
September 1996, the issuance and sale of 2,000,000 Series C Preferred Shares
on November 13, 1996, the sale of the Series A 2015 Notes expected to be
issued on February 4, 1997, and the issuance and sale of the 3,500,000 Common
Shares offered hereby, and the application of the net proceeds therefrom. The
table should be read in conjunction with the financial statements of SCI
incorporated by reference herein and in the accompanying Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
HISTORICAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
7.125% Notes due 1998.................................. $ 15,000 $ 15,000
Original issue discount on 7.125% Notes.............. (8) (8)
7.25% Notes due 2000................................... 17,500 17,500
Original issue discount on 7.25% 2000 Notes.......... (55) (55)
7.30% Notes due 2001................................... 17,500 17,500
Original issue discount on 7.30% Notes............... (68) (68)
7.25% Notes due 2002................................... 50,000 50,000
Original issue discount on 7.25% 2002 Notes.......... (52) (52)
7.95% Notes due 2008................................... 100,000 100,000
Original issue discount on 7.95% Notes............... (163) (163)
7.875% Notes due 2009.................................. 75,000 75,000
Original issue discount on 7.875% Notes.............. (340) (340)
8.72% Notes due 2009................................... 150,000 150,000
9.34% Notes due 2015................................... 50,000 50,000
8.65% Notes due 2016................................... 50,000 50,000
Original issue discount on 8.65% Notes............... (143) (143)
7.81% Series A 2015 Notes.............................. -- 100,000
---------- ----------
Total unsecured long term debt......................... 524,171 624,171
Mortgage notes and assessment bonds payable............ 146,399 146,399
Minority Interest...................................... 57,465 57,465
Shareholders' Equity:
Shares of Beneficial Interest, par value $.01 per
share; 150,000,000 shares authorized:
Series A Preferred Shares (liquidation preference
$25.00 per share); 5,400,000 shares outstanding... 135,000 135,000
Series B Preferred Shares (liquidation preference
$25.00 per share);
8,050,000 shares outstanding...................... 201,250 201,250
Series C Preferred Shares (liquidation preference
$50.00 per share);
2,000,000 shares outstanding as adjusted.......... -- 100,000
Common Shares; 89,319,307 shares outstanding;
97,171,713 shares outstanding as adjusted(1)...... 937 972
Additional paid-in capital......................... 1,260,225 1,327,143
Subscriptions receivable........................... (75,079) --
Distributions in excess of net earnings............ (63,340) (63,340)
---------- ----------
Total Shareholders' Equity(2).................... 1,458,993 1,701,025
---------- ----------
Total Capitalization(2).......................... $2,187,028 $2,529,060
========== ==========
</TABLE>
- --------
(1) Excludes 4,833 Common Shares issued on November 14, 1996 under SCI's
Dividend Reinvestment and Share Purchase Plan, 10,320,513 Common Shares
reserved for issuance upon conversion of the Series B Preferred Shares,
5,194,258 Common Shares reserved for issuance upon exchange of partnership
units held by limited partners in certain partnerships, 1,366,139 Common
Shares reserved for issuance pursuant to SCI's Dividend Reinvestment and
Share Purchase Plan, 100,000 Common Shares reserved for issuance pursuant
to SCI's Share Option Plan for Outside Trustees and 11,764 Common Shares
reserved for issuance upon exercise of outstanding warrants. The "As
Adjusted" column includes 4,352,406 Common Shares issued in October 1996
upon the collection of the $75.1 million of subscriptions receivable.
(2) If all additional Common Shares are sold, Total Shareholders' Equity and
Total Capitalization, as adjusted, will be $1,711,532 and $2,539,567,
respectively.
S-12
<PAGE>
SELECTED FINANCIAL DATA(1)
The following tables set forth selected financial data for SCI and should be
read in conjunction with the financial statements and notes thereto included
or incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus (amounts in thousands, except ratios and per share
data).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, PERIODS ENDED DECEMBER 31,
---------------------- --------------------------------------------------
1996 1995 1995 1994 1993 1992 1991(2)
---------- ---------- ---------- ---------- -------- ------- -------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Rental Income.......... $ 163,814 $ 108,613 $ 153,879 $ 70,609 $ 9,963 $ 1,592 $ 86
Interest Expense....... 28,723 24,301 32,005 7,568 321 504 29
Capitalized Interest... 11,512 5,613 8,599 2,208 98 124 68
Series A Preferred
Share Dividends....... 9,518 3,525 6,698 -- -- -- --
Series B Preferred
Share Dividends net... 8,544 -- -- -- -- -- --
Net Earnings (Loss)
Attributable to Common
Shares................ 36,555 27,950 42,015 25,101 4,412 (59) (127)
Common Share
Distributions......... $ 61,688 $ 45,416 $ 64,445 $ 37,698 $ 7,001 $ 390 $ --
PER SHARE DATA:
Series A Preferred
Share Dividends....... $ 1.7625 $ 0.6528 $ 1.24 -- -- -- --
Series B Preferred
Share Dividends....... 1.06458 -- -- -- -- -- --
Net Earnings (Loss)
Attributable to Common
Shares................ 0.45 0.43 0.61 0.57 0.47 (0.06) (0.38)
Common Share
Distributions......... $ 0.7575 $ 0.70125 $ 0.935 $ 0.85 $ 0.75 $ 0.45 $ --
Weighted Average Common
Shares Outstanding.... 81,462 64,790 68,924 44,265 9,334 930 337
OTHER DATA:
Net Cash Provided by
Operating Activities.. $ 101,043 $ 68,269 $ 100,154 $ 47,222 $ 12,084 $ 865 $ 559
Net Cash Used in
Investing Activities.. (486,226) (436,042) (628,795) (631,871) (260,780) (31,549) (8,266)
Net Cash Provided by
Financing Activities.. 405,230 470,006 529,606 599,382 254,770 31,032 7,822
Funds from Operations
Attributable to Common
Shares(3)............. $ 82,270 $ 58,634 $ 84,060 $ 46,307 $ 7,189 $ 499 $ (95)
Ratio of Funds from
Operations to Combined
Fixed Charges and
Preferred Share
Distributions(4)...... 2.2 2.6 2.6 5.5 17.9 1.6 (5)
Ratio of Earnings to
Combined Fixed Charges
and Preferred Share
Distributions(6)...... 1.4 1.7 1.7 3.3 11.3 (5) (5)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------------- --------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- -------- ------- -------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Income Producing Real
Estate Owned, at Cost. $2,087,715 $1,473,116 $1,622,404 $1,073,026 $354,436 $35,114 $2,936
Land Held for
Development........... 86,934 47,942 60,363 42,147 21,667 5,886 5,464
Total Assets........... 2,334,528 1,746,655 1,833,972 1,194,937 401,855 42,253 10,423
Mortgage Notes Payable. 146,399 145,762 145,276 144,262 40,109 -- --
Long Term Debt......... 524,171 324,455 324,527 -- -- -- --
Total Liabilities...... 818,070 631,035 639,040 350,607 141,618 1,684 5,456
Minority Interest...... 57,465 59,158 58,741 66,555 50,786 -- 1,690
Total Shareholders'
Equity................ $1,458,993 $1,056,462 $1,136,191 $ 777,775 $209,451 $40,569 $3,277
Number of Common Shares
Outstanding........... 89,319 74,571 81,416 64,587 19,762 4,111 337
</TABLE>
- --------
(1) These tables present selected operating, balance sheet and other data for
the periods presented. Certain factors which may affect the comparability
of the data presented are set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(2) For the period from June 14, 1991 (the date of SCI's inception) to
December 31, 1991.
(3) SCI believes that Funds from Operations is helpful in understanding a
property portfolio in that such calculation reflects cash flow from
operating activities and the properties' ability to support interest
payments and general operating expenses before the impact of certain
activities, such as gains or losses from
S-13
<PAGE>
sales of depreciated property and changes in accounts receivable and
accounts payable. For an explanation of Funds from Operations, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." Funds from Operations should
not be considered as an alternative to net income or any other generally
accepted accounting principles ("GAAP") measurement of performance as an
indicator of SCI's operating performance or as an alternative to cash flows
from operating, investing or financing activities as a measure of
liquidity. The Funds from Operations measure presented by SCI may not be
comparable to other similarly titled measures of other REITs. In January
1995, SCI changed to a more conservative policy of expensing the
amortization of loan costs in determining Funds from Operations. For
comparability, prior period amounts have been restated to conform to this
policy.
(4) For purposes of computing the ratio of Funds from Operations to combined
fixed charges and preferred share distributions, Funds from Operations
consists of Funds from Operations plus fixed charges, other than
capitalized interest. Fixed charges consist of interest on borrowed funds
(including capitalized interest) and amortization of debt discount and
expense.
(5) While SCI was researching markets and assembling its initial assets, Funds
from Operations were insufficient to cover fixed charges for the period
ended December 31, 1991 by $163,000, and earnings were insufficient to
cover fixed charges for the periods ended December 31, 1992 and 1991 by
$311,000 and $195,000, respectively.
(6) For purposes of computing the ratio of earnings to combined fixed charges
and preferred share distributions, earnings consist of earnings from
operations plus fixed charges other than capitalized interest, and
amortization of debt discount and expense.
RECENT DEVELOPMENTS
For the fourth quarter ended December 31, 1996, SCI generated Funds from
Operations attributable to Common Shares of $34.6 million (unaudited) on total
revenues of $66.9 million (unaudited) compared to $25.4 million (unaudited) on
total revenues of $48.2 million (unaudited) for the quarter ended December 31,
1995. For the fourth quarter ended December 31, 1996, net earnings
attributable to Common Shares were $16.9 million (unaudited), compared to
$14.1 million (unaudited) for the quarter ended December 31, 1995. For the
year ended December 31, 1996, Funds from Operations attributable to Common
Shares was $116.9 million (unaudited) on total revenues of $233.5 million
(unaudited), compared to $84.1 million on total revenues of $158.5 million for
the year ended December 31, 1995. For the year ended December 31, 1996, net
earnings attributable to Common Shares were $53.5 million (unaudited),
compared to $42.0 million for the year ended December 31, 1995. The foregoing
information for the quarter and the year ended December 31, 1996 has been
derived from SCI's preliminary unaudited results of operations.
On January 22, 1997, SCI announced that it received a proposal from SCG to
exchange the REIT Manager and SCI Client Services Incorporated ("SCI Client
Services"), the REIT Manager's property management affiliate, for Common
Shares. As a result of the transaction, SCI would become an internally managed
REIT, and SCG would remain SCI's largest shareholder. SCI's Board of Trustees
has formed a special committee comprised of independent Trustees to review the
proposed transaction. The transaction is subject to approval by the special
committee and the full Board of Trustees. If the Board of Trustees approves
the transaction, a proxy statement, subject to review by the Securities and
Exchange Commission, will be mailed to SCI shareholders prior to a shareholder
vote on the proposed transaction.
S-14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and all of the financial statements incorporated by reference
in this Prospectus Supplement and the accompanying Prospectus. Historical
results and percentage relationships set forth in "Selected Financial Data" and
in such financial statements should not be taken as indicative of future
operations of SCI.
The statements contained in this discussion that are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Among the
important factors that could cause SCI's actual results to differ materially
from those expressed in the forward-looking statements are (i) changes in
general economic conditions in its target markets that could adversely affect
demand for SCI's properties and the creditworthiness of SCI's customers and
(ii) changes in financial markets and interest rates that could adversely
affect SCI's cost of capital and its ability to meet its financing needs and
obligations.
OVERVIEW
SCI's operating results depend primarily upon net operating income from
distribution properties, which is substantially influenced by (i) the demand
for and supply of distribution properties in SCI's target market cities, (ii)
the pace and economic returns at which SCI can acquire and develop additional
distribution properties, and (iii) the extent to which SCI can sustain improved
market performance as measured by lease rates and occupancy. SCI's target
market cities and submarkets have benefitted substantially in recent periods
from demographic trends (including population and job growth) which influence
the demand for distribution properties. REIT Management believes SCI's ability
to compete is significantly enhanced relative to other companies because of the
REIT Manager's depth of management, including the SCI National Operating
System(TM), which includes acquisition and development personnel, and presence
in local markets. The REIT Manager is Security Capital Industrial Incorporated,
a subsidiary of SCG, SCI's largest shareholder. As a result of acquisitions and
developments for the last three months of 1995 and the first nine months of
1996, SCI's rentable square footage increased by 21.4 million square feet or
40.1% to 74.8 million square feet as of September 30, 1996 from 53.4 million
square feet as of September 30, 1995. As of September 30, 1996, the portfolio
was 94.37% leased. REIT Management expects that SCI's ability to acquire and
develop distribution properties at favorable economic returns will continue
through the remainder of 1996. Over the longer term, SCI expects masterplanned,
full service distribution park developments to constitute an increasing
percentage of SCI's growth. Additionally, SCI Development Services Incorporated
("SCI Development Services") (see "--Other Real Estate Income") is expected to
contribute an increasing level of income in subsequent periods. As of September
30, 1996, 2.1 million square feet of SCI's 8.8 million square feet under
development consisted of build-to-suits under development representing a total
expected investment of $77.3 million.
SCI frequently acquires properties which are underleased and develops
properties which are not fully leased at the start of construction, which
reduces SCI's overall occupancy rate below its stabilized level but provides
opportunities to increase revenues. The term "stabilized" means that capital
improvements, repositioning, new management and new marketing programs (or
development and marketing, in the case of newly developed properties) have been
completed and in effect for a sufficient period of time (but in no case longer
than 12 months for properties acquired by SCI and 12 months after shell
completion for properties developed by SCI) to achieve stabilized occupancy
(typically 93%, but ranging from 90% to 95%, depending on the submarket and
product type) at market rents. SCI has been successful in increasing
occupancies on acquired and developed properties during their initial months of
operations resulting in an occupancy rate of 96.46% for stabilized properties
owned as of September 30, 1996. The average increase in rental rates for new
and renewed leases on previously leased space during the first nine months of
1996 was 13.1%. As leases are renewed or new leases are acquired, SCI expects
most lease rates on renewals or new leases to increase in the remainder of
1996. These factors should improve SCI's results of operations.
S-15
<PAGE>
No assurance can be given that expected trends for the remainder of 1996 in
leasing rates, occupancy rates and economic returns on acquired and developed
properties will be realized.
The following discussion outlines SCI's financial condition and results of
operations for the first nine months of 1996 compared to the first nine months
of 1995. A discussion of other fiscal periods, financial condition and results
of operations is contained in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" in SCI's Form 10-K for the year
ended December 31, 1995, which is incorporated herein by reference.
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Interim Period Comparisons
Net earnings attributable to Common Shares increased by $8.6 million or 30.7%
to $36.6 million for the first nine months of 1996 from $28.0 million for the
same period in 1995.
Net earnings are expected to increase in subsequent periods due to the
acquisition and development of additional operating properties and the
continued increase in the stabilized portfolio rental rates.
Historically, the primary components of revenue and earnings growth have been
SCI's acquisition and development activity. SCI has acquired and developed $2.1
billion of operating properties from its inception through September 30, 1996.
Projected 1996 property level earnings before interest, taxes, depreciation and
amortization ("EBITDA") for these properties is 10.24% of SCI's aggregate cost.
Aggregate cost for the properties includes the purchase price, closing costs
and budgeted capital improvements and marketing costs prior to stabilization
(and all development costs, in the case of developed properties). Projected
EBITDA is based on current lease rates for stabilized properties and current
market rates for properties being stabilized and anticipated operating
expenses. No assurance can be given that projected levels of EBITDA will be
achieved by these properties nor that future acquisitions and developments will
achieve the same level of EBITDA relative to SCI's investment basis. The EBITDA
measure presented by SCI may not be comparable to other similarly titled
measures of other REITs.
Rental Revenues
Rental revenues for the first nine months of 1996 increased by $55.2 million
or 50.8% to $163.8 million, as compared to $108.6 million for the same period
in 1995. Of this increase, $24.5 million was generated by the 180 properties
acquired in 1995, $10.8 million was generated by the 48 developments completed
in 1995, $10.7 million was generated by the 91 properties acquired in 1996, and
$6.8 million was generated by the 57 developments completed in 1996. The
remaining $2.4 million increase was attributable to revenue increases in the
521 properties owned at January 1, 1995.
Other Real Estate Income
Other real estate income consists of gains on disposition of property and
fees and other income from build-to-suit customers generated primarily by SCI
Development Services. SCI Development Services is expected to generate
recurring income in subsequent periods. SCI owns a preferred stock interest
representing 95% of the net operating cash flow of SCI Development Services.
SCI Development Services develops build-to-suit distribution space facilities
or works on a fee basis for customers whose space needs do not meet SCI's
strict investment criteria for long-term ownership. Through its preferred stock
ownership, SCI will realize substantially all economic benefits of SCI
Development Services activities. The activities of SCI Development Services are
consolidated with SCI. SCI Development Services pays federal and state taxes at
the applicable corporate rate.
Interest Income
Interest income for the first nine months of 1996 increased $19,000 from the
same period in 1995. The increase in interest income was a result of higher
average balances in interest bearing accounts in the first nine months of 1996
compared to the same period in 1995.
S-16
<PAGE>
Rental Expenses
Rental expenses, net of recoveries, increased by $7.2 million or 58.5% to
$19.5 million for the first nine months of 1996 from $12.3 million for the
same period in 1995. The increase in rental expenses is primarily attributable
to acquisitions and developments for the last three months of 1995 and the
first nine months of 1996, which increased SCI's rentable square footage by
21.4 million square feet to 74.8 million square feet.
Interest Expense
Interest expense increased by $4.4 million or 18.1% to $28.7 million for the
first nine months of 1996 from $24.3 million for the same period in 1995.
Total interest capitalized increased by $5.9 million or 105.4% to $11.5
million for the first nine months of 1996 from $5.6 million for the same
period in 1995. The increase in interest expense was principally caused by the
1995 issuance of $325 million in Senior Notes and the issuance of $200 million
in Senior Notes on May 17, 1996 (See "--Liquidity and Capital Resources"). The
capitalized interest increase is attributable to increased development
activity in the first nine months of 1996 as compared to the first nine months
of 1995.
REIT Management Fee
The REIT management fee paid by SCI is based on SCI's cash flow (as defined
in the REIT Management Agreement between SCI and the REIT Manager) before the
REIT management fee and therefore increased for the first nine months of 1996
as compared to the same period in 1995 because cash flow increased
substantially.
Other Expenses
Other expenses increased by $803,000 or 73.0% to $1.9 million for the first
nine months of 1996 from $1.1 million for the same period in 1995. Other
expenses consist of land holding costs and acquisition and build-to-suit
pursuit cost write-offs. Land holding costs were $1,150,000 for the first nine
months of 1996 compared to $686,000 for the same period in 1995, and
acquisition and build-to-suit pursuit cost write-offs were $753,000 for the
first nine months of 1996 compared to $414,000 for the same period in 1995.
The increase in land holding costs is principally the result of the increase
in the average balance in land holdings.
Preferred Share Dividends
In June 1995, SCI issued $135 million of Series A Cumulative Redeemable
Preferred Shares (the "Series A Preferred Shares") that are entitled to
receive an annual dividend of $2.35 per share (9.4% annual dividend rate),
which amounted to $9.5 million for the first nine months of 1996 compared to
$3.5 million for the period from the June 21, 1995 issue date through
September 30, 1995. In February 1996, SCI issued $201.3 million of Series B
Cumulative Convertible Redeemable Preferred Shares (the "Series B Preferred
Shares") that are entitled to receive an annual dividend of $1.75 per share
(7% annual dividend rate) which amounted to $8.5 million for the period from
the February 21, 1996 issue date through September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities increased from $68.3 million in the
first nine months of 1995 to approximately $101.0 million in the first nine
months of 1996. Cash used in investing activities increased from approximately
$436.0 million in the first nine months of 1995 to approximately $486.2
million in the first nine months of 1996. Cash provided by financing
activities was approximately $405.2 million in the first nine months of 1996
compared to approximately $470.0 million in the first nine months of 1995.
Cash provided by financing activities for the first nine months of 1996
consisted primarily of $134.9 million of net proceeds from the sale of Common
Shares, $192 million of net proceeds from the sale of the Series B Preferred
Shares, $199.6 million net proceeds from the May debt offering and a net
repayment on the line of credit of $16.4 million. Cash provided by financing
activities in the first nine months of 1995 consisted primarily of $130.4
million net proceeds from the sale of the Series A Preferred Shares, $324.5
million of net proceeds from the March and May long-term
S-17
<PAGE>
debt offerings, $144.5 million of net proceeds from the September 29, 1995
rights offering, and a $60.1 million net repayment on the line of credit.
Additionally, distributions paid to common and preferred shareholders used
$30.9 million more cash in the first nine months of 1996 as compared to the
first nine months of 1995.
On January 30, 1997, SCI priced the Series A 2015 Notes offered under its
Medium-Term Note program established in November 1996. The Series A 2015 Notes
will bear interest at 7.81%, payable semi-annually on February 1 and August 1,
commencing August 1, 1997. Installments of principal will be paid annually on
each February 1, commencing February 1, 2010, in the following amounts: $20
million in 2010, $15 million in 2011, $15 million in 2012, $20 million in
2013, $20 million in 2014 and $10 million in 2015. The Series A 2015 Notes
have a weighted average life to maturity of 15.35 years and a final maturity
extending to 2015. The average effective interest cost is 7.73%, including all
costs associated with the offering plus $1.7 million in proceeds received on
January 31, 1997 in connection with two interest rate protection agreements
entered into in August and November 1996 in anticipation of the debt offering.
Both the August 1996 and the November 1996 interest rate protection agreements
were in the form of a Forward Treasury Lock Agreement with an investment bank.
The August agreement included a notional principal amount of $30.0 million and
a reference price of 99.653 on the thirty year Treasury Bond. The November
agreement included a notional principal amount of $50.0 million and a
reference price of 101 29/32 on the ten year Treasury Note. The settlement
date on both contracts was January 31, 1997. The debt offering is expected to
close on February 4, 1997.
On November 13, 1996, SCI issued 2,000,000 Series C Preferred Shares. The
Series C Preferred Shares have a liquidation preference of $50.00 per share
for an aggregate liquidation preference of $100 million plus accrued but
unpaid dividends. The net proceeds (after underwriting commission and other
offering costs) of the Series C Preferred Shares issued was $97.1 million.
Holders of the Series C Preferred Shares are entitled to receive, when, as and
if declared by the Board of Trustees, out of funds legally available for
payment of distributions, cumulative preferential cash distributions at a rate
of 8.54% of the liquidation preference per annum (equivalent to $4.27 per
share). On or after November 13, 2026, the Series C Preferred Shares may be
redeemed for cash at the option of SCI. The redemption price (other than the
portion thereof consisting of accrued and unpaid distributions) is payable
solely out of the sale proceeds of other capital shares of SCI, which may
include shares of other series of preferred shares.
On August 21, 1996, SCI commenced a rights offering to purchase 6,767,806
Common Shares at $17.25 per Common Share and also authorized an additional
3,393,903 Common Shares for oversubscriptions or third party subscribers. In
September 1996, SCI issued 7,865,645 Common Shares of the 10,181,709 Common
Shares subscribed for and recorded subscriptions receivable of $40.0 million.
In October 1996, 2,316,064 Common Shares were issued and all subscriptions
receivable collected. Gross proceeds from the offering totaled $175.6 million.
On September 24, 1996, SCI offered 2,036,342 Common Shares to third party
subscribers to SCI's rights offering of August 21, 1996 that were not accepted
in whole or in part due to demand in excess of the Common Shares offered. All
of the Common Shares were subscribed for as of September 30, 1996 and
subscriptions receivable for gross proceeds of $35.1 million recorded. In
October 1996, all of such Common Shares were issued and subscriptions
receivable collected.
On May 17, 1996, SCI issued $50 million of Senior Notes due 2002 (the "2002
Notes"), $100 million of Senior Notes due 2008 (the "2008 Notes"), and $50
million of Senior Notes due 2016 (the "2016 Notes" and together with the 2002
Notes and the 2008 Notes, the "May 1996 Notes"). The 2002 Notes bear interest
at 7.25% per annum and require annual principal payments of $12.5 million,
commencing May 15, 1999. The 2008 Notes bear interest at 7.95% per annum and
require annual principal payments of $25 million, commencing May 15, 2005. The
2016 Notes bear interest at 8.65% per annum and require aggregate annual
principal payments of $5 million, commencing 2010 through 2013, $7.5 million
in 2014, $10 million in 2015, and $12.5 million in 2016. In order to lock in
interest rates for the 2016 Notes prior to pricing of such Notes, SCI entered
into an interest rate protection agreement in the form of a Forward Treasury
Lock Agreement with an investment bank on May 9, 1996. The agreement included
a determination date of May 15, 1996 and a settlement date of May
S-18
<PAGE>
16, 1996. The notional amount was $50 million with a reference price of
97.203%. On May 14, 1996, the Forward Treasury Lock Agreement was unwound at a
price of 99.375% and SCI paid $1.086 million in settlement. The lower interest
rates obtained on the pricing date of May 14, 1996 plus the $1.086 million
settlement payment resulted in SCI achieving the equivalent of the rates that
were locked in on May 9, 1996 for the 2016 Notes. In order to lock in the
interest rates on a portion of the 2008 Notes prior to pricing such Notes, SCI
entered into an Interest Rate Swap Agreement with an investment bank on May 9,
1996. The agreement included an effective date of May 15, 1996 and a
termination date of May 15, 2006. The notional amount of the Interest Rate Swap
Agreement was $50 million. On May 14, 1996, the Interest Rate Swap Agreement
was terminated and SCI paid $837,000 in settlement. The lower interest rates
obtained on the pricing date of May 14, 1996 plus the $837,000 settlement
resulted in SCI achieving the equivalent of the rates that were locked in on
May 9, 1996 for a portion of the 2008 Notes. Collectively, the May 1996 Notes
originally had an average life to maturity of 10.8 years and an average
effective interest cost, inclusive of offering discounts, issuance costs and
the interest rate protection agreements of 8.41% per annum.
In February 1996, SCI issued a total of 8,050,000 Series B Preferred Shares.
The Series B Preferred Shares have a liquidation preference of $25 per share
for an aggregate liquidation preference of $201,250,000 plus any accrued and
unpaid dividends. Holders of the Series B Preferred Shares are only entitled to
limited voting rights under certain conditions. The Series B Preferred Shares
are convertible at any time, unless previously redeemed, at the option of the
holders thereof into Common Shares at a conversion price of $19.50 per Common
Share (equivalent to a conversion rate of 1.282 Common Shares for each Series B
Preferred Share), subject to adjustment in certain circumstances. Holders of
the Series B Preferred Shares are entitled to receive, when, as and if declared
by the Board of Trustees, out of funds legally available for the payment of
distributions, cumulative preferential cash distributions in an amount per
share equal to the greater of 7% of the liquidation preference per annum
(equivalent to $1.75 per share) or the distributions on the Common Shares, or
portion thereof, into which a Series B Preferred Share is convertible.
Distributions on the Series B Preferred Shares are cumulative from the date of
original issue and are payable quarterly in arrears on the last day of March,
June, September and December of each year. The Series B Preferred Shares are
redeemable at the option of SCI on or after February 21, 2001. The Series A
Preferred Shares, Series B Preferred Shares and Series C Preferred Shares rank
on a parity with respect to payment of distributions and amounts upon
liquidation.
On September 29, and October 3, 1995, SCI completed a $250.0 million public
offering and issued a total of 16,260,163 Common Shares at a price of $15.375
per Common Share in conjunction with a rights offering.
On June 21, 1995, SCI issued 5,400,000 Series A Preferred Shares. The Series
A Preferred Shares have a liquidation preference of $25 per share for an
aggregate liquidation preference of $135 million plus any accrued but unpaid
dividends. The net proceeds (after underwriting commission and other offering
costs) of the Series A Preferred Shares issued were $130.4 million. Holders of
the Series A Preferred Shares are entitled only to
limited voting rights under certain conditions. Holders of the Series A
Preferred Shares will be entitled to receive, when, as and if declared by the
Board of Trustees, out of funds legally available for the payment of
distributions, cumulative preferential cash distributions at the rate of 9.4%
of the liquidation preference per annum (equivalent to $2.35 per share). The
Series A Preferred Shares are redeemable at the option of SCI on or after June
21, 2000. The redemption price (other than the portion thereof consisting of
accrued and unpaid distributions) is payable solely out of the sale proceeds of
other capital shares of SCI, which may include shares of other series of
preferred shares.
On May 16, 1995, SCI issued $75 million of Senior Notes due 2009 (the "May
2009 Notes"), $17.5 million of Senior Notes due 2001 (the "2001 Notes"), $17.5
million of Senior Notes due 2000 (the "2000 Notes") and $15 million of Senior
Notes due 1998 (the "1998 Notes," together with the May 2009 Notes, the 2001
Notes and the 2000 Notes, collectively referred to herein as the "May 1995
Notes"). The May 2009 Notes bear interest at 7.875% per annum and require
annual principal payments of $9.375 million, commencing May 15, 2002. The 2001
Notes, 2000 Notes and 1998 Notes bear interest at 7.30%, 7.25% and 7.125% per
annum, respectively, with the principal payable at maturity. Collectively, the
May 1995 Notes originally had an average life to maturity of 8.2 years and an
average effective interest cost, inclusive of offering discount and issuance
costs, of 7.92% per annum.
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<PAGE>
On March 2, 1995, SCI issued $150 million of Senior Notes due 2009 (the
"March 2009 Notes") and $50 million of Senior Notes due 2015 (the "2015 Notes,"
together with the March 2009 Notes, collectively referred to herein as the
"March 1995 Notes"). The March 2009 Notes bear interest at 8.72% per annum and
require annual principal payments of $18.75 million, commencing March 1, 2002.
The 2015 Notes bear interest at 9.34% per annum and require aggregate annual
principal payments of $5 million in 2010, $6.25 million in 2011, $7.5 million
in 2012, $8.75 million in 2013, $10 million in 2014 and $12.5 million in 2015.
Collectively, the March 1995 Notes originally had an average life to maturity
of 12.38 years and an average effective interest cost, inclusive of offering
discount and issuance costs, of 9.04% per annum.
All of the foregoing notes (the May 1996 Notes, the May 1995 Notes and the
March 1995 Notes, collectively referred to herein as the "Notes") are
redeemable at any time at the option of SCI, in whole or in part, at a
redemption price equal to the sum of the principal amount of the notes being
redeemed plus accrued interest thereon to the redemption date plus an
adjustment, if any, based on the yield to maturity relative to market yields
available at redemption. Such notes are governed by the terms and provisions of
an indenture agreement (the "Indenture") between SCI and State Street Bank and
Trust Company, as trustee.
Under the terms of the Indenture, SCI can incur additional debt only if,
after giving effect to the debt being incurred and application of proceeds
therefrom, (i) the ratio of debt to total assets, as defined in the Indenture,
does not exceed 60%, (ii) the ratio of secured debt to total assets, as defined
in the Indenture, does not exceed 40% and (iii) SCI's pro forma interest
coverage ratio, as defined in the Indenture, for the four preceding fiscal
quarters is not less than 1.5:1. In addition, SCI may not at any time own Total
Unencumbered Assets, as defined in the Indenture, equal to less than 150% of
the aggregate outstanding principal amount of SCI's unsecured debt. At December
31, 1996, SCI was in compliance with all debt covenants.
On June 1, 1995, SCI increased its line of credit agented by NationsBank
Texas N.A. ("NationsBank"), to $350 million. The line of credit, as amended and
restated effective May 2, 1996, bears interest at SCI's option at either (a)
the greater of the federal funds rate plus 0.5% and prime, or (b) LIBOR plus
1.25%, based upon SCI's current senior debt ratings, and is scheduled to mature
in May 1998. This line may be extended annually for an additional year with the
approval of NationsBank and the other participating lenders. All debt
incurrences are subject to a covenant that SCI maintain a debt to tangible net
worth ratio of not greater than 1 to 1. Additionally, SCI is required to
maintain an adjusted net worth (as defined) of at least $1.0 billion, to
maintain interest payment coverage of not less than 2 to 1, and to maintain a
fixed charge coverage ratio (as defined) of not less than 1.4 to 1. As of
December 31, 1996, SCI was in compliance with all covenants, and as of February
3, 1997, $62.1 million of borrowings were outstanding.
From inception through December 31, 1996, SCI had invested $2.3 billion for
the acquisition and development of 942 distribution properties. These
acquisitions and developments were financed with cash on hand, the issuance of
limited partnership units, the assumption of existing mortgage debt and
borrowings under SCI's line of credit which were repaid with the proceeds of
SCI's equity and debt offerings.
On December 31, 1996, SCI had $220.9 million of budgeted development cost for
developments in process, of which $106.6 million was unfunded. In addition, at
December 31, 1996, SCI had letters of intent or contingent contracts, subject
to SCI's final due diligence, for the acquisition of 1.3 million square feet of
distribution properties in various target market cities with an acquisition
cost of $41.0 million. The foregoing transactions are subject to a number of
conditions, and SCI cannot predict with certainty that any of them will be
consummated.
SCI expects to finance construction, development and acquisitions primarily
with cash on hand, borrowings under its line of credit and cash from future
securities offerings. When issuing debt, SCI intends primarily to arrange fully
amortizing, fixed rate, 10-year to 20-year debt to finance additional
acquisitions and developments. To a lesser extent, under certain circumstances,
SCI may arrange for debt with different maturities in order to optimize its
debt maturity schedule.
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<PAGE>
SCI considers its liquidity and ability to generate cash from operations and
financings to be adequate and expects it to continue to be adequate to meet
SCI's acquisition, development, operating, debt service and shareholder
distribution requirements.
SCI's current distribution policy is to pay quarterly distributions to
shareholders based upon what it considers to be a reasonable percentage of cash
flow. Because depreciation is a non-cash expense, cash flow typically will be
greater than earnings from operations and net earnings. Therefore, quarterly
distributions will consistently be higher than quarterly earnings.
Pursuant to the terms of the Series A Preferred Shares, the Series B
Preferred Shares and the Series C Preferred Shares, SCI is restricted from
declaring or paying any distribution with respect to the Common Shares unless
all cumulative distributions with respect to the Series A Preferred Shares, the
Series B Preferred Shares and the Series C Preferred Shares have been paid and
sufficient funds have been set aside for distributions that have been declared
for the then current distribution period with respect to the Series A Preferred
Shares, the Series B Preferred Shares and the Series C Preferred Shares. The
Series A Preferred Share, Series B Preferred Share and Series C Preferred Share
dividends do not reduce the amount SCI has budgeted for Common Share
distributions, but do increase the percentage of the Common Share distribution
that constitutes a non-taxable return of capital.
Funds from Operations
Funds from Operations attributable to Common Shares increased $23.7 million
or 40.4% from $58.6 million for the first nine months of 1995 to $82.3 million
for the same period in 1996. SCI believes that Funds from Operations is helpful
in understanding a property portfolio in that such calculation reflects cash
flow from operating activities and the properties' ability to support interest
payments and general operating expenses before the impact of certain
activities, such as changes in accounts receivable and accounts payable. Funds
from Operations should not be considered as an alternative to net earnings or
any other GAAP measurement of performance as an indicator of SCI's operating
performance or as an alternative to cash flows from operating, investing or
financing activities as a measure of liquidity. The Funds from Operations
measure presented by SCI may not be comparable to other similarly titled
measures of other REITs.
Funds from Operations represents SCI's net earnings (computed in accordance
with GAAP) before minority interest and before gains/losses on disposition of
depreciated property, plus depreciation and amortization. In January 1995, SCI
changed to a more conservative policy of expensing loan cost amortization in
determining Funds from Operations.
STATEMENTS OF FUNDS FROM OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net earnings attributable to Common Shares................... $ 36,555 $ 27,950
Add:
Depreciation and amortization............................ 43,187 28,138
Minority interest........................................ 2,499 2,546
Loss on disposition of depreciated real estate........... 29 --
-------- --------
Funds from operations attributable to Common Shares.......... $ 82,270 $ 58,634
======== ========
</TABLE>
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REIT MANAGEMENT AGREEMENT
Effective December 1, 1991, SCI entered into an agreement (as amended and
restated, the "REIT Management Agreement") pursuant to which the REIT Manager
assumed the day-to-day management of SCI. On January 22, 1997, SCI announced
that it had received a proposal from SCG, SCI's largest shareholder and owner
of the REIT Manager and SCI Client Services, to exchange the REIT Manager and
SCI Client Services for Common Shares. As a result of the transaction, SCI
would become an internally managed REIT, and SCG would remain SCI's largest
shareholder. See "Recent Developments."
The REIT Management Agreement requires SCI to pay a base annual fee of
approximately 16% of cash flow as defined in the REIT Management Agreement.
See "REIT Management" for a description of the services included in the REIT
Management fee. Cash flow is calculated by reference to SCI's cash flow from
operations, plus (i) fees paid to the REIT Manager, (ii) extraordinary
expenses incurred at the request of the independent Trustees of SCI and (iii)
33% of any interest paid by SCI on convertible subordinated debentures (of
which there are currently none) and, after deducting actual or assumed
regularly scheduled principal and interest payments for long term debt and
distributions actually paid with respect to non-convertible preferred shares
of beneficial interest, such as the Series A Preferred Shares and the Series C
Preferred Shares. The REIT Management Agreement provides that the Notes
described above under "--Liquidity and Capital Resources" are treated as
having regularly scheduled principal and interest payments like a 20-year
level monthly payment, fully amortizing mortgage, and the assumed principal
and interest payments are deducted from cash flow in determining the fee. SCI
does not currently plan to issue any convertible debt. The REIT Management fee
calculation includes a portion of the interest on convertible debt because of
the equity characteristics represented by the conversion feature of such debt.
Cash flow does not include interest and dividend income from SCI Development
Services, realized gains from dispositions of investments or income from cash
equivalent investments. The REIT Manager also receives a fee of 0.20% per year
on the average daily balance of cash equivalent investments.
Total real estate operating, general and administrative costs will increase
due to SCI's larger asset size following each security offering, as well as
unforeseen changes which may occur. REIT Management fees paid by SCI will
increase if cash flow of SCI, as defined in the REIT Management Agreement,
increases, including such increases that may relate to increases in SCI's
assets. SCI does not expect its other operating costs and expenses to increase
except as a result of inflation, market conditions or other factors over which
the REIT Manager has no control. Operating costs for particular items,
however, may be increased if they are expected to result in greater decreases
in other expenses or increases in revenues from SCI assets. For example, land
holding costs and pursuit cost writeoffs fluctuate in relation to SCI's
acquisition and development activity.
SCI is obligated to reimburse the REIT Manager for all expenses incurred by
the REIT Manager on behalf of SCI relating to SCI's operations, primarily
including third party legal, accounting, property development and similar fees
paid on behalf of SCI, and travel expenses incurred in seeking financing,
property acquisitions, property development, property sales, attending SCI
Board of Trustees and shareholder meetings and similar activities on behalf of
SCI. Under the REIT Management Agreement, the REIT Manager or any of its
affiliates are not precluded from rendering services to other investors,
including other REITs, even if such investors compete with SCI. Since the REIT
Manager is a wholly owned subsidiary of SCI's largest shareholder, the REIT
Manager has no intention of rendering services to investors who compete with
SCI.
The REIT Management Agreement is renewable by SCI annually, subject to a
determination by the independent Trustees that the REIT Manager's performance
has been satisfactory and that the compensation payable to the REIT Manager is
fair. Each of SCI and the REIT Manager may terminate the REIT Management
Agreement on 60 days' notice. Because of the year-to-year nature of the
agreement, its maximum effect on SCI's results of operations cannot be
predicted, other than that REIT Management fees will generally increase or
decrease in proportion to cash flow increases or decreases.
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To better serve national companies which are valued SCI customers and enable
SCI to exclusively meet all of their distribution space needs, SCI Development
Services develops build-to-suit distribution space facilities or works on a fee
basis for customers whose space needs do not meet SCI's strict investment
criteria for long-term ownership. SCI will not own these buildings but owns a
preferred stock interest representing 95% of the net operating cash flow of SCI
Development Services. Through its preferred stock ownership, SCI will realize
substantially all economic benefits of SCI Development Services' activities.
Under a separate agreement, the REIT Manager provides SCI Development Services
with day-to-day management for a fee based on 16% of SCI Development Services'
pre-tax cash flow, including gains and losses realized on property sales. The
fee incurred for the first nine months of 1996 was approximately $970,000.
Dividends and interest paid by SCI Development Services to SCI are excluded
from SCI's cash flow for determining the REIT Management fee paid by SCI.
REIT MANAGEMENT
GENERAL
The REIT Manager provides SCI with strategic and day-to-day management,
research, investment analysis, acquisition and due diligence, development,
marketing, asset management, capital markets, disposition of assets, management
information systems support and legal and accounting services, all of which are
included in the REIT Management fee. Hence, SCI depends upon the quality of the
management provided by the REIT Manager. SCI believes that its relationship
with the REIT Manager provides SCI with access to high quality and depth of
management personnel and resources, savings from a capital markets group, and
access to centralized research, information systems, accounting and legal
support.
SCG, the owner of the REIT Manager, has a substantial shareholder interest in
SCI, creating commonality of interest with SCI's shareholders, and the REIT
Management Agreement requires approval of the Independent Trustees for
transactions between SCI and the REIT Manager and its affiliates. Furthermore,
the REIT Manager provides all of its services for one fee, and an affiliate
provides property management services at or below market rates in a competitive
environment. The REIT Manager does not receive additional fees for investment
banking, financing, asset sales or similar services.
SCI believes that the quality of management should be assessed in light of
the following factors:
Management Depth/Succession. SCI believes that management should have several
senior executives with the leadership, operational, investment and financial
skills and experience to oversee the entire operations of the REIT. SCI
believes that several of its senior officers could serve as the principal
executive officer and continue SCI's performance. See "--Directors, Trustees
and Officers of SCI, the REIT Manager and Relevant Affiliates" below.
Strategic Vision. SCI believes that management should have the strategic
vision to determine an investment focus which provides favorable initial yields
and long-term growth prospects. The REIT Manager has demonstrated its strategic
vision by focusing SCI on building a national distribution asset base at prices
significantly below replacement cost and a land inventory at attractive prices.
In addition, the REIT Manager differentiated SCI from its competition by
positioning SCI, through the SCI National Operating System(TM), as the first
national operating company that was able to address and service a corporate
customer's distribution space requirements on a national, regional and local
basis. The REIT Manager also focused SCI on selected distribution markets,
where demographic and supply factors have permitted high occupancies at
increasing rents, conditions which are consistent with the long term
demographic forecast for SCI's target market cities. See "Security Capital
Industrial Trust" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Research Capability. SCI believes that management should have the means for
researching markets to determine appropriate investment opportunities. SCI
divides its target market cities into numerous submarkets for analysis
purposes. The REIT Manager and its affiliate, Security Capital Investment
Research Incorporated
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<PAGE>
("Security Capital Investment Research"), devote substantial time to research,
on a submarket-by-submarket basis, under the supervision of the Managing
Directors of the REIT Manager; hence, the REIT Manager's research has
supplemented SCI's strategic focus and investment program.
Investment Committee Process. SCI believes that investment committees should
provide discipline and guidance to the investment activities of the REIT in
order to achieve its investment goals. The members of the REIT Manager's
investment committee have a combined 164 years experience in the real estate
industry. See
"--Directors, Trustees and Officers of SCI, the REIT Manager and Relevant
Affiliates" below. The investment committee receives detailed written analyses
and research, in a standardized format, from the REIT Manager's acquisition
personnel and evaluates all prospective investments pursuant to uniform
underwriting criteria prior to submission of investment recommendations to the
investment committee of the Board of Trustees. The quality of the REIT
Manager's investment committee process is evident from the ability of SCI to
achieve its investment goals, generally realizing its projected initial
returns and growth from distribution property investments.
Acquisitions Capability/Due Diligence Process. SCI believes that management
should have experienced senior personnel dedicated to acquiring investments
and performing intelligent and thorough due diligence. The REIT Manager has 11
full time acquisition and due diligence professionals and has developed
uniform systems and procedures for due diligence. As described under "Security
Capital Industrial Trust," the REIT Manager's acquisition and due diligence
personnel have screened and selected a large volume of successful investments.
Development/Redevelopment Capability. SCI believes that by internally
developing projects and redeveloping well located operating facilities,
management can capture for the REIT the value which normally escapes through
sales premiums paid to successful developers. The REIT Manager's 46
development professionals have substantial development and redevelopment
experience, as described in "--Directors, Trustees and Officers of SCI, the
REIT Manager and Relevant Affiliates" below. As of December 31, 1996, the REIT
Manager was developing 5.9 million square feet of distribution space for SCI,
with a total budgeted cost of $220.9 million. REIT Management has engaged in
substantial development on behalf of SCI at attractive yields which have
exceeded projections and believes that development will provide growth when
the market for acquisitions becomes less favorable. The REIT Manager has
commenced development on behalf of SCI of 60 master-planned parks in 28 target
market cities. As important, as of December 31, 1996, SCI owned 1,273 acres of
additional land and had fixed price options and rights of first refusal to
acquire 515.2 acres and 36.9 acres, respectively, which will permit the
development of approximately 31.7 million square feet of additional
distribution space in 29 cities. Also, as of December 31, 1996, SCI had an
additional 415.8 acres under letter of intent or contingent contract, subject
to completion of due diligence, which will permit the development of
approximately 6.7 million square feet of additional distribution space. See
"Security Capital Industrial Trust."
Capital Markets Capability. SCI believes that management must be able
effectively to raise equity and debt capital for the REIT in order for the
REIT to achieve growth through investment. As described under "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources," REIT Management has successfully arranged
funding for SCI's investment program, including SCI's initial public offering
in March 1994 which was arranged at no commission cost, following which SCI
commenced trading on the NYSE.
Operating Capability. SCI believes that management can substantially improve
Funds from Operations by actively and effectively managing assets. The REIT
Manager conceived of and developed the SCI National Operating System(TM) to
effectively operate SCI's business and provide customers with an exceptional
level of coordinated, comprehensive services. In addition, SCI Client
Services, an affiliate of the REIT Manager, provides a high level of property
management services to customers. SCI Client Services provides property
management services in accordance with uniform quality standards, thus
assuring a high quality of services to customers in all properties managed by
SCI Client Services. As of December 31, 1996, SCI Client Services managed
approximately 90.0% of SCI's operating portfolio. Through the SCI National
Operating System(TM) and SCI Client Services, the REIT Manager controls and
effectively administers the management of SCI's distribution portfolio.
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<PAGE>
Communications/Shareholder Relations Capability. SCI believes that a REIT's
success in capital markets and asset acquisition activities can be enhanced by
management's ability to effectively communicate the REIT's strategy and
performance to investors, sellers of property and the financial media. The REIT
Manager provides at its expense full time personnel who prepare informational
materials for and conduct periodic meetings with the investment community and
analysts.
SCI believes that successfully combining the foregoing attributes
significantly enhances a REIT's ability to increase cash flow and its market
valuation. SCI's cash flow from operating activities and market valuation have
increased under the REIT Manager's administration.
DIRECTORS, TRUSTEES AND OFFICERS OF SCI, THE REIT MANAGER AND RELEVANT
AFFILIATES
Members of the REIT Manager's investment committee are designated by an
asterisk (*).
Trustees of SCI and Directors of the REIT Manager
*K. DANE BROOKSHER--57--Mr. Brooksher was elected as a Trustee in October of
1993 and as Co-Chairman and Chief Operating Officer of SCI and the REIT Manager
in November 1993, and is a Director of the REIT Manager. Prior thereto, Mr.
Brooksher was Area Managing Partner and Chicago Office Managing Partner of KPMG
Peat Marwick, independent public accountants, where he served on the Board of
Directors and Management Committee and as International Development Partner for
Belgium and the Netherlands. Mr. Brooksher's term as Trustee expires in 1999.
STEPHEN L. FEINBERG--52--Mr. Feinberg was elected as a Trustee in January
1993. Since 1970, he has been Chairman of the Board and Chief Executive Officer
of Dorsar Investment Co., a diversified holding company with interests in real
estate, manufacturing and venture capital. Mr. Feinberg is also a Director of
Continental Transmission Corporation (private investment company) and Feinberg
Foundation, Inc. and a former director of Farrar, Strauss and Giroux, Inc.
(private publishing company). Mr. Feinberg is currently Chairman of the Board
of Visitors and Governors of St. John's College and a director of other
charitable organizations. Mr. Feinberg's term as Trustee expires in 1999.
DONALD P. JACOBS--69--Mr. Jacobs was appointed a Trustee in February 1996.
Mr. Jacobs has been a member of the J.L. Kellogg Graduate School of Management
of Northwestern University since 1957, and Dean since 1975. Mr. Jacobs is
Chairman of the Public Review Board of Andersen Worldwide and a member of the
Board of Directors of Commonwealth Edison, First National Bank of Chicago,
Hartmarx Corporation, Unocal Corporation, and Whitman Industries. From 1990 to
1992, Mr. Jacobs was Chairman of the Advisory Committee of the Oversight Board
of the Resolution Trust Corporation for the third region; from 1975 to 1979,
Chairman of the Board of AMTRAK; from 1970 to 1971, Co-Staff Director of the
Presidential Commission on Financial Structure and Regulation; from 1963 to
1964, Senior Economist for the Banking and Currency Committee of the U.S. House
of Representatives. Mr. Jacobs' term as Trustee expires in 1998.
JOHN T. KELLEY--56--Advisory Trustee of SCI; Trustee of Security Capital
Pacific Trust, El Paso, Texas (development and ownership of multifamily
properties in the western United States), a REIT affiliated with SCG; Managing
Member of J. Edwards Jewelry Distributing Company, L.L.C. since July 1995; from
1987 to 1991, Chairman of the Board, Kelley-Harris Company, Inc., El Paso,
Texas (real estate investment company); from 1968 to 1987, Managing Director,
LaSalle Partners Limited, Chicago, Illinois (corporate real estate services).
Mr. Kelley is also a director of SCG and Texas Commerce Bank El Paso, National
Association.
*IRVING F. LYONS, III--47--Mr. Lyons was elected as a Trustee in March 1996
and as Managing Director of SCI and the REIT Manager in December 1993, where he
has responsibility for the Pacific region of the United States, and is a
Director of the REIT Manager. Prior thereto, Mr. Lyons was the Managing Partner
of King & Lyons (a San Francisco Bay Area industrial real estate development
and management company) since its inception in 1979, where he was responsible
for supervising development, asset management and day-to-day activities. Mr.
Lyons has been involved in the development of over 3.5 million square feet of
industrial space in
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the San Francisco Bay Area. Prior to forming King & Lyons, Mr. Lyons spent five
years as a Vice President of Wells Fargo Mortgage Company. Mr. Lyons' term as
Trustee expires in 1997.
WILLIAM G. MYERS--69--Mr. Myers was elected as a Trustee in January 1995. He
is also a Trustee of Security Capital Pacific Trust, a REIT affiliated with
SCG; Chief Executive Officer of Ojai Ranch and Investment Company, Inc., Santa
Barbara, California, which he founded in 1963 (agri-business and other
investments); Director, Idetek, Inc., Sunnyvale, California (food diagnostic
start-up company). Mr. Myers' term as Trustee expires in 1997.
JOHN E. ROBSON--66--Mr. Robson was appointed a Trustee as of April 1, 1994.
Since October 1993, Mr. Robson has served as Senior Advisor of Robertson,
Stephens & Co., a San Francisco-based investment banking company. From 1989 to
1992, Mr. Robson served as Deputy Secretary of the United States Treasury. From
1986 to 1989, Mr. Robson was Dean and Professor of Management, Emory University
School of Business Administration. From 1977 to 1985, he served as President
and Chief Executive Officer and as Executive Vice President of G.D. Searle &
Co. (pharmaceutical and consumer products). Mr. Robson is currently a director
of Age Wave Inc. (mature market products and services), Calgene Inc.
(agricultural products), Northrop Grumman Corporation (aerospace), Ralin
Medical, Inc. (medical devices and services) and Rand McNally & Co.
(publishing) and a past director of AOA Corporation (insurance), Chiron
Corporation (biotechnology), Continental Airlines and Conrail (railroad), among
others. Mr. Robson's term as Trustee expires in 1997.
*THOMAS G. WATTLES--44--Mr. Wattles was elected as a Trustee in January 1993;
he was a Director of SCI's predecessor since its formation in June 1991 and has
been Co-Chairman and Chief Investment Officer of SCI and the REIT Manager since
November 1993; Managing Director of SCI and the REIT Manager from January 1993
to November 1993, and Director of the REIT Manager since June 1991. From
January 1991 to December 1992, Mr. Wattles served as Managing Director of
Security Capital Pacific Incorporated, the REIT Manager for Security Capital
Pacific Trust; from July 1989 to December 1990, Managing Partner of Stanwich
Advisors Incorporated (real estate advisory and development services); and from
July 1985 to June 1989, Senior Vice President--Property Finance Group of
LaSalle Partners Limited (corporate real estate services). Mr. Wattles' term as
Trustee expires in 1999.
*JEFFREY H. SCHWARTZ--37--Director of the REIT Manager; Managing Director of
the REIT Manager since October 1994, where he has overall responsibility for
national development activities, and Managing Director of SCI; prior thereto,
Mr. Schwartz was a founder and managing partner of The Krauss/Schwartz Company,
one of the largest industrial real estate developers in Florida; from April
1986 to October 1988, Mr. Schwartz was a Partner at Anderson Properties in
Atlanta, Georgia.
*ROBERT J. WATSON--47--Director of the REIT Manager; Managing Director of SCI
since January 1993 and of the REIT Manager since November 1992, where he is
Managing Director and Chief Operating Officer of SCI Client Services; from
April 1991 to November 1992, private consultant in the real estate industry;
from June 1977 to April 1991, Area and then Regional Partner for Trammell Crow
Commercial Company, a real estate development and management company, in
Denver, Colorado and a member of that firm's Management Board. As Regional
Partner, Mr. Watson was responsible for Trammell Crow Commercial Company's
commercial/industrial development, leasing and management activities in both
the inter-mountain and the southwestern United States. In his position prior to
affiliation with the REIT Manager, Mr. Watson was responsible for over $1
billion in assets and developed over 3.5 million square feet of industrial and
other commercial space.
Other Officers
ROBERT O. ALTER--37--Vice President of the REIT Manager since August 1995,
where he has responsibility for coordinating build-to-suits nationwide, and
Vice President of SCI; from August 1992 to August 1995, Managing Director of
Faison in Tampa, Florida; from May 1989 to August 1992, Director with Oxford
Properties Florida, Inc., also in Tampa.
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ARIEL AMIR--37--Vice President of SCG since June 1994; from September 1985 to
April 1994, an attorney with the law firm of Weil, Gotshal & Manges, New York,
New York, where he practiced securities and corporate law. Mr. Amir provides
securities offerings and corporate acquisition services to SCI.
GARY E. ANDERSON--31--Vice President of the REIT Manager since September
1996, where he has been responsible for research on special investment
opportunities since August 1995, and Vice President of SCI; from August 1994 to
August 1995, Mr. Anderson was a member of the Management Development Program;
in June 1994, Mr. Anderson received his M.B.A. from the Anderson Graduate
School of Management at UCLA; from October 1988 to June 1992, Project Manager
with Spancrete of California, a construction company in Irwindale, California.
*NED K. ANDERSON--49--Senior Vice President of the REIT Manager since
December 1993, where he has Market Officer responsibilities for the San
Francisco Bay Area, and Senior Vice President of SCI; since 1985, he was a
partner at King & Lyons, where he directed the development, leasing and
management of the 250 acre Bayside Business Park in Fremont, where King & Lyons
developed approximately 1.5 million square feet of buildings, which are
occupied by approximately 130 tenants. He also helped oversee King & Lyons East
Bay properties, which total 2.5 million square feet of buildings; prior
thereto, Mr. Anderson was a Vice President of Wells Fargo Realty Finance.
GREGORY J. ARNOLD--41--Vice President of the REIT Manager since January 1996
where he is a member of the National Services Group and Vice President of SCI;
from January 1995 to September 1995, Project Executive and General Manager for
ROI Realty Services, Inc.; from November 1985 to January 1995, Equity Vice
President and Senior Leasing Specialist at LaSalle Partners in Washington, D.C.
CLAUDE A. BILLINGS--56--Vice President of the REIT Manager since January
1994, where he is a member of the National Services Group, and Vice President
of SCI; from March 1991 to February 1994, Senior Vice President and Regional
Manager of the Staubach Company, a Dallas, Texas corporate real estate service
firm; from March 1989 to March 1991, Vice President of the Leasing and Equity
Departments for Walker & Dunlop, Inc.; prior thereto, Vice President of the
Investment Properties Division of J.E. Robert Companies; for five years during
the mid-1980s, Mr. Billings was a Vice President with LaSalle Partners Limited,
where he acquired, financed and marketed income-producing real estate assets.
DARCY B. BORIS--34--Vice President of Security Capital Investment Research
since June 1995, and an associate from December 1994 to June 1995, where she
conducts strategic market analysis for SCI and affiliated companies; from
August 1993 to November 1994, Ms. Boris worked for Security Capital Markets
Group Incorporated ("Capital Markets Group"); from January 1987 to September
1991, Ms. Boris was associated with Summerhill Development Company, the
multifamily development subsidiary of Marcus & Millichap Incorporated, where
she managed the development of multifamily housing, and prior thereto, she was
an analyst for its property investment subsidiary.
ERIC D. BROWN--36--Vice President of the REIT Manager since December 1996,
where he is the Regional Property Manager for the Central region, and Vice
President of SCI; Vice President of SCI Client Services since January 1995
where he had property management responsibilities since May 1994; prior thereto
from May 1993 to April 1994, Vice President and partner of Crow-Barshop
Properties, Inc., a property management, development and brokerage firm in San
Antonio, Texas, where he was responsible for property management and daily
operations of the firm; from January 1991 to April 1993, Director of Asset
Management for Crow-Barshop Properties, Inc.
MARK R. CASHMAN--36--Vice President of the REIT Manager since November 1995,
where he has Market Officer responsibilities for Dallas, Texas, and Vice
President of SCI; prior thereto, Vice President of Security Capital Pacific
Trust since January 1995, where he was a member of the asset management group;
from September 1992 to January 1995, First Vice President/Portfolio Manager
with First Nationwide Financial Corporation in Los Angeles, California, where
he was responsible for the property management department
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holdings throughout the western United States; from May 1990 to September 1992,
Vice President/Senior Asset Manager with American Real Estate Group in Irvine,
California.
LISA M. CERNY--33--Vice President of the REIT Manager since June 1995, where
she is controller for the National Development Group, and Vice President of
SCI; prior thereto, Ms. Cerny provided accounting services for the National
Development Group from October 1993; from January 1988 to June 1993, Director
of Corporate Services and Portfolio Manager with The Koll Company in Newport
Beach, California, where she managed corporate financial services.
MARK J. CHAPMAN--39--Vice President of Security Capital Investment Research
since November 1995, where he is director of the group and conducts strategic
market analyses for affiliates of the firm; from November 1994 to November
1995, Mr. Chapman was a Vice President of Security Capital Pacific Trust with
asset management responsibilities in five major markets; from July 1989 to
November 1994, Vice President with Copley Real Estate Advisors, Inc., where he
directed asset management for Copley assets in its New England, mid-Atlantic
and Texas regions, valued in excess of $1.5 billion.
JAMES D. COCHRAN--36--Vice President of the REIT Manager since March 1994,
where he has Market Officer responsibilities for Denver, Colorado and Kansas
City, Kansas, and Vice President of SCI; from August 1988 to March 1994, Vice
President for TCW Realty Advisors, where he was responsible for industrial
acquisitions in southern California; from September 1984 to August 1987,
Associate with Economics Research Associates, where he performed market and
financial feasibility studies for a wide variety of land use development
projects.
PAUL C. CONGLETON--42--Vice President of the REIT Manager since January 1995,
where he has Market Officer responsibilities for Houston and Austin, Texas, and
Vice President of SCI; from October 1990 to December 1994, Principal with
Overland Company, a property management, development and investment services
firm in Tucson, Arizona; from March 1985 to October 1990, Partner with Trammell
Crow Company in Tucson, Arizona.
R. STAN CONWAY, JR.--33--Vice President of the REIT Manager since November
1994, where he has Market Officer responsibilities for Atlanta, Georgia, and
Vice President of SCI; from October 1989 to October 1994, Vice President of
Marketing for Bullock, Terrell and Mannelly; from April 1987 to October 1989,
Vice President of Industrial Sales for Royal LePage.
MICHAEL S. CURLESS--33--Vice President of the REIT Manager since August 1995,
where he has Market Officer responsibilities for Indianapolis, and Vice
President of SCI; from June 1989 to August 1995, Marketing Director with
Trammell Crow Company, where he was responsible for the development and
marketing of industrial projects; from July 1986 to July 1987, Financial
Analyst with General Electric.
DAVID B. DANIEL--30--Vice President of the REIT Manager since June 1996 where
he is a member of the due diligence team, and Vice President of SCI; prior
thereto, a member of due diligence since April 1995; from February 1994 to
April 1995, Senior Underwriter with Remsen Partners Ltd. in New York, New York
where he was involved in all phases of a loan origination and securitization
program; from May 1992 to February 1994, Associate Consultant with Kenneth
Leventhal & Co. in Houston, Texas and New York, New York, where he performed
due diligence and evaluation on a variety of real estate transactions.
MARK H. DEGNER--35--Vice President of the REIT Manager since April 1994,
where he is responsible for portfolio acquisitions and dispositions, and Vice
President of SCI; from October 1988 to April 1994, Manager for the Hahn Company
in San Diego, California, where he was Manager of Development and Acquisitions,
Corporate Development and most recently, Dispositions.
WILLIAM H. EAGER--55--Vice President of the REIT Manager since June 1996
where he is a member of the National Services Group and Vice President of SCI;
from June 1976 to June 1996, Mr. Eager was a First Vice President of CB
Commercial where he was involved in over $350 million of industrial real estate
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transactions; prior thereto, Mr. Eager was an account executive and assistant
to the president of Leo Burnett Advertising from September 1968 to June 1976
where he was active in developing marketing and advertising strategies.
FRANK H. FALLON--35--Vice President of the REIT Manager since January 1995,
where he has Market Officer responsibilities in Memphis, Nashville and
Chattanooga, Tennessee, and Vice President of SCI; prior to joining SCI, Mr.
Fallon was with Trammell Crow Company from March 1987 to December 1994, where
he was responsible for leasing, management, acquisition and disposition of
industrial properties in the Dallas/Fort Worth, Texas area.
GABE L. FINKE--31--Vice President of the REIT Manager since September 1996,
where he has been a member of the land acquisitions group since September 1995,
and Vice President of SCI; prior thereto, Mr. Finke was a member of the
Management Development Program from July 1994 to August 1995; in May of 1994
Mr. Finke received his M.B.A. from the Harvard Graduate School of Business
Administration.
KURT R. FULLER--38--Vice President of the REIT Manager since October 1994,
where he has Project Manager responsibilities for tenant improvement
construction in the San Francisco Bay Area, Reno, Portland, Seattle and Salt
Lake City, and Vice President of SCI; from February 1989 to October 1994,
Project Manager/Estimator for Wentz Builders, Inc. in San Carlos, California,
where he was responsible for managing tenant improvement and special projects.
THOMAS P. GARRIGAN--47--Vice President of the REIT Manager since March 1995,
where he is a member of the National Services Group, and Vice President of SCI;
from June 1993 to February 1995, he was Senior Vice President of SCG and its
affiliates, where he oversaw accounting operations; from July 1981 to June
1993, Audit Partner with KPMG Peat Marwick in Midland and El Paso, Texas; from
July 1971 to July 1981, on the professional staff of KPMG Peat Marwick.
JOHN R. HANSON--46--Vice President of the REIT Manager since May 1995, where
he has Project Manager responsibilities for the Pacific region, and Vice
President of SCI; from July 1994 to May 1995, Vice President of Jack & Cohen
Builders, Inc. in Palo Alto, California, where he was responsible for a wide
variety of construction projects; from January 1991 to July 1994, Project
Director of Jack & Cohen; prior thereto, Project Manager of L.E. Wentz Company
in San Carlos, California from April 1987 to January 1991.
LARRY H. HARMSEN--36--Vice President of the REIT Manager since February 1995,
where he has Market Officer responsibilities for San Diego and Orange County,
California, and Vice President of SCI; from January 1988 to February 1995, Vice
President/Managing General Partner with Lincoln Property Company in Southern
California, where he was responsible for all aspects of asset and property
management for a portfolio of office and industrial space containing over 2.5
million square feet; from July 1985 to January 1988, Development/
Marketing Manager with Lincoln Property N.C., Inc.
DONALD L. HARRIER--37--Vice President of the REIT Manager since May 1994,
where he has Project Manager responsibilities in the Pacific region, and Vice
President of SCI; from May 1993 to May 1994, Senior Partner with Donald L.
Harrier, AIA, Architecture; from August 1986 to May 1993, Project Director with
DES Architects & Engineers in Redwood City and Fremont, California, where he
was involved in project management, architecture and marketing.
JAMES J. JACHETTA--43--Vice President of the REIT Manager since December
1996, where he has Project Manager responsibilities in the Pacific region, and
Vice President of SCI; prior thereto, from October 1995 to October 1996, Mr.
Jachetta was a project manager consultant to SCI; from May 1992 to September
1995, Mortgage Broker with Southern Cal Financial Group in Newport Beach,
California; from May 1986 to April 1992, Senior Project Manager of The
O'Donnell Group, a commercial developer in Irvine, California.
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*M. MARC JASON--35--Vice President of the REIT Manager since December 1993,
where he is responsible for acquisition due diligence, and Vice President of
SCI; from January 1993 to December 1993, President of Aslan Communications, a
regional telecommunications company; from December 1986 to December 1992,
employed with Trammell Crow Company, most recently as Senior Vice President and
Finance Manager, where he managed the finance and accounting departments for
the company's $1 billion southern California asset base; prior thereto, an
accountant with Price Waterhouse.
KENT W. JOHNSON--43--Senior Vice President of the REIT Manager since July
1995, where he heads the National Services Group, and Senior Vice President of
SCI; from March 1994 to June 1995, National Director for Sequent Computer
Systems, where he was recognized as World-Wide Manager of the Year; from
January 1977 to March 1994, with IBM in various positions, including National
Account Director and Branch Manager.
M. GORDON KEISER--52--Senior Vice President of the REIT Manager since October
1995, where he is Chief Financial Officer and is responsible for accounting,
financial reporting and coordination of financing, and Senior Vice President of
SCI; from August 1988 to October 1995, Senior Vice President of JMB Realty
Corporation, where he was responsible for structuring joint venture development
transactions, capital markets financing and corporate acquisition financing.
DOUGLAS A. KIERSEY, JR.--36--Vice President of the REIT Manager since May
1994, where he has Market Officer responsibilities for Seattle, Washington and
Portland, Oregon, and Vice President of SCI; from September 1983 to May 1994, a
member of the Industrial/Technology Group at Cushman & Wakefield of Oregon,
Inc., where he specialized in the sale and leasing of industrial properties.
JEFFREY A. KLOPF--48--Senior Vice President and Secretary of SCI, the REIT
Manager and SCG since January 1996; from 1988 to December 1995, Partner with
Mayer, Brown & Platt where he practiced corporate and securities law. Mr. Klopf
provides securities offering and corporate acquisitions services to SCI and its
affiliates and oversees the provision of legal services to SCI and its
affiliates.
ROBERT A. KRITT--35--Vice President of the REIT Manager since November 1991,
where he has responsibility for coordinating build-to-suits nationwide, and
Vice President of SCI; from January 1991 to December 1992, Vice President of
Security Capital Pacific Incorporated, the REIT Manager for Security Capital
Pacific Trust, where he was responsible for acquisition due diligence; from
1986 to December 1990, Vice President of Sanders Partners Incorporated,
Chicago, Illinois (multibusiness holding company); prior thereto, senior tax
consultant with Arthur Andersen & Co.
EDWARD F. LONG--40--Vice President and Controller of SCI and the REIT Manager
since January 1996, where he supervises accounting and financial reporting;
from June 1995 to January 1996, Controller for SCI Client Services; from
December 1990 to June 1995, Director of Financial Services for Coopers and
Lybrand in Central Florida and the Carolinas.
A. JOHN LOW--43--Vice President of the REIT Manager since December 1996 where
he has Project Manager responsibilities in the Pacific region, and Vice
President of SCI; from July 1994 to October 1996, Director of Architecture,
Design and Construction for Waban, Inc., a national chain of home improvement
centers in Irvine, California, where he was responsible for development and
construction of warehouses; from March 1994 to July 1994, Portfolio Manager for
Insignia O'Donnell Properties, Inc., a development and management company in
Irvine, California; from March 1990 to March 1994, Director of Real Estate for
Catellus Development Corporation in Anaheim, California, where he had marketing
responsibilities for the Southern California region.
DONALD W. MADSEN--53--Senior Vice President of the REIT Manager since July
1993, where he supervises development services related to construction
management and build-to-suit facilities, and Senior Vice President of SCI; from
July 1992 to June 1993, Vice President, Business Development for Windward,
Ltd., a Dallas, Texas-based design/build general construction company; from
December 1990 to July 1992, Managing
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Director and from December 1978 to December 1990, Partner of Construction
Management, Dallas Industrial Division of Trammell Crow Company; prior thereto,
Mr. Madsen was an industrial architect with Trammell Crow Company. In his prior
positions, Mr. Madsen supervised the development of over 38 million square feet
of industrial space.
DAVID W. MAJORS--52--Vice President of the REIT Manager since December 1996,
where he has Market Officer responsibilities for Albuquerque, New Mexico and El
Paso, Texas, and Vice President of SCI; from September 1988 to September 1996,
President and Chief Operating Officer of Remington Capital Group in Dallas,
Texas where he was responsible for all aspects of development of build-to-suit
industrial, office and retail facilities.
BRIAN N. MARSH--31--Vice President of the REIT Manager since January 1995,
where he has Market Officer responsibilities for Columbus, Ohio, and Vice
President of SCI; from June 1990 to January 1995, with Pizzuti Realty Inc., in
Columbus, Ohio, where he was responsible for master planning, development and
marketing of a 400 acre plus, mixed-use development; prior thereto, Marketing
Associate with Wears Kahn McMenamy in Columbus, Ohio.
J. THOMAS MERCER--37--Vice President of the REIT Manager since January 1995,
where he is responsible for coordinating build-to-suits nationwide, and Vice
President of SCI; from September 1987 to January 1995, Senior Marketing
Representative with Friendswood Development Company in Houston, Texas, where he
completed over $15 million in land transactions; prior thereto, Industrial
Leasing Specialist with The Horne Company in Houston, Texas, where he leased
more than 500,000 square feet of industrial space.
*STEVEN K. MEYER--48--Senior Vice President of the REIT Manager since
December 1995, where he has responsibility for the Central Region of the United
States, and Senior Vice President of SCI; prior thereto, Vice President of the
REIT Manager since September 1994; from 1990 to July 1994, Executive Vice
President with Trammell Crow Company, where he directed leasing and development
activities for the Industrial Division; from 1983 to 1990, Project Partner with
Trammell Crow, where he developed and/or acquired 77 projects totalling over 7
million square feet; prior thereto, Mr. Meyer was a Leasing Agent with Trammell
Crow.
JOSEPH H. MIKES--36--Vice President of the REIT Manager since August 1995,
where he has Market Officer responsibilities for the Chicago area, and Vice
President of SCI; from March 1988 to August 1995, Senior Director of Opus North
Corporation, where he managed office and industrial real estate activities;
from April 1984 to March 1988, Director of Real Estate for Opus, in Florida.
RON W. MILLS--38--Vice President of the REIT Manager since April 1993, where
he has been a member of the National Services Group since July 1996, and Vice
President of SCI; prior thereto, Mr. Mills had Market Officer responsibilities
for San Antonio, Austin and Rio Grande Valley, Texas; from February 1991 to May
1992, Vice President of Commercial Operations for SCG Realty Services
Incorporated, a regional real estate services organization; prior thereto, Vice
President of Asset Management and Property Management for Operations for USAA
Real Estate Company.
RICK D. MIRANDA--43--Vice President of the REIT Manager since December 1996
where he has Project Manager responsibilities in the Pacific region, and Vice
President of SCI; from April 1996 to September 1996, President of Realty
Development Management Services, Inc. in Newport Beach, California, where he
was responsible for all aspects of development and construction of office and
industrial facilities; from May 1995 to March 1996, Vice President with Arnel
Development Company in Costa Mesa, California, where he was responsible for the
design and construction of a retail center; from August 1987 to February 1995,
Vice President with Bramalea U.S. Properties in Oakland, California, where he
was responsible for development, design and construction management for the
Pacific region.
R.A.D. MORTON, III--39--Vice President of the REIT Manager since July 1993,
where he has Market Officer responsibilities for El Paso, San Antonio and Rio
Grande Valley, Texas, and Vice President of SCI; from January 1991 to July
1993, President of The Morton Group, which specialized in corporate industrial
real estate
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services, asset management and development services; from June 1988 to January
1991, Principal with Trammell Crow Company in its El Paso Commercial Division,
where he was responsible for industrial development.
DAVID S. MORZE--36--Vice President of the REIT Manager since March 1995,
where he has Market Officer responsibilities for Reno, Nevada and Salt Lake
City, Utah, and Vice President of SCI; from May 1993 to March 1995, Director of
Marketing for Northern California for SARES*REGIS; from January 1993 to May
1993, Real Estate Consultant to The Moreno Bavarian Corporation in Portola
Valley, California; from September 1983 to January 1993, Partner with Cabot &
Forbes in Northern California, where he developed and acquired over
$140,000,000 of office, research and development and industrial projects.
DONALD E. MYERS--53--Vice President of the REIT Manager since March 1993,
where he is responsible for asset management of SCI's portfolio, and Vice
President of SCI; from July 1988 to March 1993, a Senior Vice President of
Dreyfus Realty Advisors, where he was responsible for asset management; from
March 1984 to June 1988, Senior Vice President with Realco International, a
private real estate investment and development company; and from July 1978 to
February 1984, Vice President of LaSalle Partners Limited in its Land Group,
where he provided acquisition and disposition services for clients of the firm.
MICHAEL NACHAMKIN--43--Vice President of the REIT Manager since March 1996
where he has Market Officer responsibilities for New Jersey I-95 corridor and
Vice President of SCI; from 1984 to February 1996, Director of Investment
Sales, Tenant Representation and Marketing at Cushman & Wakefield of New
Jersey; prior thereto, a salesperson with Coldwell Banker Real Estate Services
from 1983 to 1984.
AUGUST J. NAPOLITANO--49--Vice President of the REIT Manager since May 1995,
where he is a member of the National Services Group, and Vice President of SCI;
from November 1992 to December 1994, Director/Branch Manager of Cushman &
Wakefield in Orange County, California, where he managed all aspects of the
Newport Beach and Anaheim Commercial brokerage offices; from January 1981 to
November 1992, Senior Vice President/Broker with CB Commercial, also in Orange
County.
EDWARD S. NEKRITZ--31--Vice President of the REIT Manager since September
1995, where he is responsible for coordinating the national leasing program,
overseeing environmental issues and providing asset management and legal
services, and Vice President of SCI; from October 1990 to September 1995,
attorney with Mayer, Brown & Platt, where he specialized in commercial real
estate transactions, including acquisitions and dispositions, leasing,
development and zoning.
PETER J. NIELSEN--50--Vice President of the REIT Manager since March 1994,
where he has Project Manager responsibility for build-to-suit projects, and
Vice President of SCI; from November 1984 to February 1994, Vice President of
Project Development for Dueck Group of Companies, a development firm in Denver,
Colorado; and from November 1980 to November 1984, Design-Build Project Manager
for Voth Brothers Construction, a contractor/development company in Abbotsford,
British Columbia. Mr. Nielsen has supervised the development of over 4 million
square feet of industrial and commercial space.
WILLIAM D. PETSAS--39--Vice President of the REIT Manager since July 1994,
where he has Market Officer responsibilities for Phoenix, Arizona, and Vice
President of SCI; from June 1993 to June 1994, Mr. Petsas was a consultant to
SCI in the area of due diligence and acquisitions; from May 1992 to May 1993,
Mr. Petsas was a director of business development for residential properties in
the Southwest for Trammell Crow Company; from June 1986 to April 1992, Mr.
Petsas was with the Industrial Division of Trammell Crow Company in Phoenix,
Arizona, where he was a marketing principal beginning in 1989.
*WALTER C. RAKOWICH--39--Senior Vice President of the REIT Manager since
November 1994, where he has responsibility for the Mid-Atlantic region of the
United States, and Senior Vice President of SCI; from July 1994 to November
1994, Vice President of the REIT Manager; from October 1993 to June 1994, Mr.
Rakowich was a consultant to SCI in the area of due diligence and acquisitions;
from 1985 to September 1993, Mr. Rakowich was with Trammell Crow Company, where
he was involved in the acquisition, development, financing, marketing,
management and disposition of property and was a Senior Vice President and
Principal beginning in 1992.
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THOMAS M. RAY--33--Vice President of the REIT Manager since March 1996 where
he is responsible for coordinating build-to-suits nationwide, and Vice
President of SCI; prior thereto, a member of the build-to-suit group since
September 1995; from October 1994 to September 1995, Mr. Ray supervised land
acquisitions in due diligence; from August 1994 to October 1994, a member of
the land acquisitions due diligence group; from March 1994 to August 1994, a
member of the Management Development Program where he assisted with multifamily
portfolio acquisitions; from February 1991 to August 1992, General Counsel with
Richardson International Corp. in Fort Collins, Colorado.
BETTY J. REMSTEDT--51--Vice President of the REIT Manager since December
1993, where she provides accounting, financial analysis and budgeting services
for the REIT Manager with respect to SCI's Pacific region properties, and Vice
President of SCI; from December 1988 to December 1993, Chief Financial Officer
of King & Lyons; prior thereto, Controller at Barratt Southern California,
Inc., a real estate development company in San Jose, California.
*JOHN W. SEIPLE--38--Senior Vice President of the REIT Manager since November
1994, where he has responsibility for the Southeast region of the United
States, and Senior Vice President of SCI; from October 1993 to November 1994,
Vice President of the REIT Manager; from January 1992 to June 1993, Senior Vice
President, and from June 1988 to December 1991, Partner, with Trammell Crow
Dallas Industrial, Inc., a subsidiary of Trammell Crow Company, where he was
responsible for leasing, development, acquisition, financing, tenant build-out
and property management of 7.5 million square feet of industrial properties;
from June 1987 to May 1988, Marketing Principal, and from May 1985 to May 1987,
Leasing Agent with Trammell Crow Company.
STEVEN O. SPAULDING--54--Vice President of the REIT Manager since May 1993,
where he has Market Officer responsibilities for Las Vegas, Nevada, and Vice
President of SCI; from June 1992 to May 1993, Area Manager with Dermody
Properties in Las Vegas, where he was responsible for its management portfolio
and new development activities; from November 1991 to June 1992, independent
consultant; from 1987 to November 1991, Managing Partner of St. Louis division,
and from 1983 to 1987, Industrial Partner of Trammell Crow Company in St.
Louis.
RICHARD H. STRADER--37--Vice President of the REIT Manager since June 1994,
where he has Market Officer responsibilities for Charlotte, Raleigh-Durham and
Winston-Salem, North Carolina, and Vice President of SCI; from October 1987 to
May 1994, Mr. Strader was with the Dallas Industrial Division of Trammell Crow
Company, where he was the Managing Director of the Central and Southwest Dallas
Industrial office since 1990.
CHARLES E. SULLIVAN--39--Vice President of the REIT Manager since October
1994, where he has Market Officer responsibilities for Miami, Orlando and
Tampa, Florida, and Vice President of SCI; from July 1989 to October 1994,
Senior Industrial Broker with Cushman & Wakefield.
STANLEY G. THOMAS--51--Vice President of the REIT Manager since April 1995,
where he has Project Manager responsibilities for the Central Region, and Vice
President of SCI; from January 1990 to March 1995, Project manager for Cushman
& Wakefield Development Consulting Group in Dallas, Texas, where he was
responsible for the total design and construction process for projects
including build-to-suits and tenant fit-up, ranging from 25,000 to 200,000
square feet; from April 1987 to December 1989, Senior Project Manager with
Neiman Marcus' Planning, Architecture, Construction & Facilities Management
Group in Dallas, Texas; prior thereto, managing principal of Pickle & Thomas,
Inc., Architecture/Interiors.
JEFFREY M. TODD--39--Vice President of the REIT Manager since January 1995,
where he has Project Manager responsibilities for build-to-suit projects, and
Vice President of SCI; from November 1994 to January 1995, Project Manager for
Smallwood, Reynolds, Stewart, Stewart & Associates, Inc., where he was
responsible for managing industrial architecture; from June 1984 to November
1994, Project Architect for Wakefield/Beasley & Associates.
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JAMES E. TROUT--33--Vice President of the REIT Manager since June 1995, where
he has Project Manager responsibilities for the Central Region, and Vice
President of SCI; prior thereto, Mr. Trout was a member of the National
Development Group from June 1993; from February 1992 to May 1993, Real Estate
Consultant with Douglas A. Edwards, Incorporated in New York, New York; from
June 1991 to January 1992, Assistant to President of Solow Realty and
Development in New York, New York; prior thereto, Management Associate with
Citicorp in New York, New York.
MARY JANE VIETZE--43--Vice President of the REIT Manager since April 1996
where she is responsible for accounting and financial reporting and Vice
President of SCI; prior thereto, a member of the accounting group since
September 1993; from July 1990 to September 1993, Senior Accountant for Price
Waterhouse; from October 1983 to July 1990, Controller for a group of privately
owned real estate investment companies.
EDWIN D. WAGERS--53--Vice President of the REIT Manager since January 1995,
where he has Project Manager responsibilities for the Mid-Atlantic region of
the United States, and Vice President of SCI; from April 1991 to December 1994,
Chief Operating Officer of National Real Estate Development at Muirfield
Village Development in Columbus, Ohio; from August 1988 to April 1991, Senior
Vice President of Galbreath Huff Companies in Columbus, Ohio; from May 1977 to
August 1988, Senior Vice President of the Midwest Division with Vantage
Companies.
DAVID L. WELCH--35--Vice President of the REIT Manager since February 1995,
where he has Market Officer responsibilities for Washington D.C. and Baltimore,
Maryland, and Vice President of SCI; from September 1992 to January 1995,
Associate Senior Vice President with Carey Winston Co. in Washington D.C.,
where he managed the leasing and marketing program for over 1.5 million square
feet of industrial space in Northern Virginia; from May 1984 to September 1992,
Vice President with CB Commercial, where he specialized in industrial leasing,
land and building sales in Northern Virginia.
JAMES E. WHITE--40--Vice President of the REIT Manager since July 1995, where
he has Market Officer responsibilities for Cincinnati, Ohio and Louisville,
Kentucky and Vice President of SCI; from July 1994 to July 1995, Senior
Regional Director with First Industrial Realty Trust, Inc. in Southfield,
Michigan; prior thereto, Chief Financial Officer with Damone/Andrew Enterprises
in Troy, Michigan from August 1989 to July 1994.
JAMES P. WILSON--52--Vice President of the REIT Manager since October 1994,
where he has Project Manager responsibilities for the Southeast region, and
Vice President of SCI; from March 1988 to October 1994, Vice President of
Development and Construction for The Krauss/Schwartz Company; from April 1986
to March 1988, Vice President of Development and Construction for The Hogan
Group, a real estate development and property management company.
Shareholder Relations and Capital Markets
The following persons provide shareholder relations and capital markets
services to SCI:
K. SCOTT CANON--34--President of Capital Markets Group since January 1996;
prior thereto, Vice President of Capital Markets Group since August 1993 and a
member of Capital Markets Group since March 1992; from September 1991 to March
1992, a personal account director for Chase Manhattan Investment Services; from
August 1987 to September 1991, a member of private client services for Goldman,
Sachs & Co. Mr. Canon is registered with the National Association of Securities
Dealers, Inc.
JAMES J. EVANS, JR.--43--Senior Vice President of Capital Markets Group since
December 1994; from December 1992 to November 1994, Managing Director of Copley
Real Estate Advisors, where he was responsible for all acquisitions in the
western United States, and worked on new business initiatives (designing and
marketing business products), capital raising and asset management; from
December 1988 to December 1992, Vice President and Principal of Copley, where
he was responsible for new investments in Southern California; prior thereto,
Associate at Copley. Mr. Evans is registered with the National Association of
Securities Dealers, Inc.
S-34
<PAGE>
ROBERT H. FIPPINGER--53--Vice President of Capital Markets Group since June
1995, where he directs corporate communications services for affiliates of the
firm; prior thereto, Mr. Fippinger headed corporate communications for the firm
from October 1994; from November 1991 to October 1994, with Grubb & Ellis in
San Francisco, California, where he represented corporate clients and provided
tenant advisory services; from October 1989 to October 1991, Executive Director
with Techmart in Santa Clara, California, where he was responsible for
management, marketing, operations, leasing and program development of
commercial properties.
GERARD DE GUNZBURG--49--Senior Vice President of Capital Markets Group since
January 1997 and Vice President from January 1993 to December 1996 in its New
York office; from June 1988 to December 1992, a consultant to American and
European companies; prior thereto, Director and Partner of Lincoln Property
Company, Europe, where he arranged real estate financing from 1976 to 1988. Mr.
de Gunzburg is registered with the National Association of Securities Dealers,
Inc.
ALISON C. HEFELE--37--Vice President of Capital Markets Group since February
1994, where she provides capital markets services for affiliates of the firm;
from 1990 to February 1994, Vice President with Prudential Real Estate
Investors (strategic planning and business development for institutional real
estate investment management services); from September 1985 to January 1990, a
management consultant with McKinsey & Company; prior thereto, a financial
analyst with Morgan Stanley Realty Inc. Ms. Hefele is registered with the
National Association of Securities Dealers, Inc.
GARRETT C. HOUSE--31--Vice President of Capital Markets Group since September
1996, where he provides capital markets services for affiliates of the firm;
from May 1994 to August 1996 he assisted with financing activities for
affiliates of SCG and prior thereto Mr. House was a member of the Management
Development Program from May 1993 to May 1994; in May 1993 Mr. House obtained
his M.B.A. from Harvard Graduate School of Business Administration; from July
1989 to July 1991 Project Manager for Nansay Corporation in Los Angeles,
California; from July 1987 to July 1989, Analyst with Merrill Lynch Capital
Markets in New York.
BRADFORD W. HOWE--32--Vice President of Capital Markets Group since January
1996, where he provides capital markets services for affiliates of the firm and
where he has been an associate since December 1994; from March 1993 to December
1994, Assistant Vice President in the real estate investment banking group of
Kidder Peabody & Co., Incorporated; from June 1992 to March 1993, Mr. Howe was
a real estate consultant at Coopers & Lybrand. Mr. Howe is registered with the
National Association of Securities Dealers, Inc.
JAMES H. POLK, III--54--Managing Director of Capital Markets Group since
August 1992; Trustee of Security Capital Pacific Trust. Mr. Polk has been
affiliated with the REIT Manager since March 1991; prior thereto, he was
President and Chief Executive Officer of Security Capital Pacific Trust for
sixteen years. Mr. Polk is registered with the National Association of
Securities Dealers, Inc. and is a past President and Trustee of the National
Association of Real Estate Investment Trusts, Inc.
DONALD E. SUTER--40--Senior Vice President of Capital Markets Group since
September 1996; from October 1995 to April 1996, President and Chief Operating
Officer for Cullinan Properties Limited in Peoria, Illinois; from July 1984 to
October 1995 Mr. Suter was with LaSalle Partners in Chicago, Illinois where his
last position held was Senior Vice President, Corporate Finance Group.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain federal income tax matters of general
application pertaining to the holding and disposing of Common Shares under the
Code. This discussion is general in nature and is not exhaustive of all
possible tax considerations, nor does the discussion address any state, local
or foreign tax considerations. The discussion is based on current law, is for
general information only, and is not tax advice. This discussion does not
purport to deal with all aspects of federal income taxation that may be
relevant to
S-35
<PAGE>
particular shareholders in light of their personal investment or tax
circumstances, or to certain types of shareholders (including insurance
companies, tax exempt organizations, financial institutions or broker dealers,
foreign corporations and persons who are not citizens or residents of the
United States) subject to special treatment under the federal income tax laws.
SCI has not requested and will not request a ruling from the Internal Revenue
Service (the "Service") with respect to any of the federal income tax issues
discussed below.
This Prospectus Supplement does not address the taxation of SCI or the impact
on SCI of its election to be taxed as a REIT. Such matters are addressed in the
accompanying Prospectus under "Federal Income Tax Considerations--Taxation of
SCI." Prospective investors should consult, and must depend on, their own tax
advisors regarding the state, local, foreign and other tax consequences of
holding and disposing of Common Shares.
Dividends and Other Distributions. For a discussion regarding the taxation of
dividends and other distributions, see "Federal Income Tax Considerations--
Taxation of SCI's Shareholders" in the accompanying Prospectus.
Backup Withholding. For a discussion of backup withholding, see "Federal
Income Tax Considerations--Backup Withholding" in the accompanying Prospectus.
Sale or Exchange of Common Shares. Upon the sale or exchange of Common Shares
to a party other than SCI, a holder of Common Shares will realize a capital
gain or loss measured by the difference between the amount realized on the sale
or other disposition and the holder's adjusted tax basis in the Common Shares
(provided the Common Shares are held as a capital asset). Such gain or loss
will be a long term capital gain or loss if the holder's holding period with
respect to the Common Shares is more than one year at the time of the sale or
exchange. Further, any loss on a sale of Common Shares which were held by the
holder for six months or less and with respect to which a capital gain dividend
was received will be treated as a long term capital loss, up to the amount of
the capital gain dividend received with respect to such shares.
UNDERWRITING
Subject to the terms and conditions contained in the purchase agreement
between the Underwriter and SCI (the "Purchase Agreement"), the Underwriter has
agreed to purchase from SCI, and SCI has agreed to sell to the Underwriter, the
entire amount of the Common Shares offered hereby.
The Purchase Agreement provides that the Underwriter's obligation to purchase
Common Shares is subject to the satisfaction of certain conditions, including
the receipt of certain legal opinions. The nature of the Underwriter's
obligation is such that it is committed to purchase all of the Common Shares if
any are purchased.
The Underwriter has advised SCI that it proposes to offer the Common Shares
offered hereby for sale, from time to time, to purchasers directly or through
agents, or through brokers in brokerage transactions on the NYSE, or to
underwriters or dealers in negotiated transactions or in a combination of such
methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices.
Brokers, dealers, agents and underwriters that participate in the
distribution of the Common Shares offered hereby may be deemed to be
underwriters under the Securities Act of 1933. Those who act as underwriter,
broker, dealer or agent in connection with the sale of the Common Shares
offered hereby will be selected by the Underwriter and may have other business
relationships with SCI and its subsidiaries or affiliates in the ordinary
course of business.
SCI has granted to the Underwriter an option to purchase up to an additional
525,000 Common Shares, solely to cover over-allotments, if any. Such option may
be exercised at any time until 30 days after the date of this Prospectus
Supplement at the price set forth on the cover page of this Prospectus
Supplement.
S-36
<PAGE>
SCI and certain of its officers and Trustees have agreed not to offer, sell,
contract to sell or otherwise dispose of any Common Shares or securities which
are convertible into or exchangeable for Common Shares for 90 days after the
last date of delivery of Common Shares to the Underwriter without the prior
written consent of the Underwriter. SCG has agreed that it will not offer,
sell, contract to sell or otherwise dispose of any Common Shares owned or to
be acquired by it or any securities which are convertible into or exchangeable
for Common Shares for 90 days after the last date of delivery of Common Shares
to the Underwriter without the prior written consent of the Underwriter.
In the Purchase Agreement, SCI has agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act of
1933, as amended.
VALIDITY OF 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, and for the Underwriter by Brown & Wood LLP, New York, New
York.
S-37
<PAGE>
PROSPECTUS
[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 $77,988,613
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 OCTOBER 31, 1996.
<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, 1995, as amended by Form 10-K/A Amendment No. 1;
(b) SCI's Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, 1996 and June 30, 1996;
(c) SCI's Current Reports on Form 8-K filed January 16, 1996, February
16, 1996, May 16, 1996 and August 20, 1996;
(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 Common Shares contained in SCI's registration
statement on Form 8-A; and
(g) 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.
2
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
SCI is the largest publicly held owner and operator of distribution
properties in the United States based on equity market capitalization. SCI is
a national operating company focused exclusively on meeting the distribution
space needs of national, regional and local industrial real estate users
through the SCI National Operating System(TM). SCI distinguishes itself from
its competition by being the only entity that combines all of the following:
1. A national operating strategy targeting 1,000 key users of distribution
space;
2. A disciplined investment strategy based on proprietary research that
targets high growth markets with sustainable demand for SCI's low finish
distribution space product;
3. 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 national scope and expertise with strong local
presence; and
4. Over 270 professionals in 28 offices 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 National Operating
System(TM) comprised of the Market Officer Group, the National Services Group
and the National Development Group that provides an exceptional level of
customer service, marketing and development on a 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 build-to-suit facilities for its customers.
Through its REIT Management Agreement with Security Capital Industrial
Incorporated (the "REIT Manager"), SCI has access to the services provided by
the REIT Manager and its specialized service affiliates, which provide SCI
with access to the same resources as a fully integrated operating company.
SCI, through the REIT Manager, has a significant level of expertise in market
research; building and land acquisition and due diligence; master-planned
distribution park design and building construction; marketing; asset and
leasing management; 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 designed for both warehousing and
light manufacturing uses.
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.
3
<PAGE>
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>
SIX MONTHS
ENDED
PERIOD ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------
1991(a) 1992 1993 1994 1995 1995 1996
------- ----- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to combined fixed
charges
and Preferred Share dividends....... --(b) --(b) 11.3 3.3 1.7 1.8 1.5
</TABLE>
- --------
(a) For the period from June 14, 1991 (the date of SCI's inception) to
December 31, 1991.
(b) While SCI was researching markets and assembling its initial assets,
earnings were insufficient to cover combined fixed charges and preferred
share dividends for the periods ended December 31, 1991 and December 31,
1992 by $195,000 and $311,000, respectively.
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 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
4
<PAGE>
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, 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
5
<PAGE>
(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
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
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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).
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).
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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 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
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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 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
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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 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,
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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 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
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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 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
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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
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
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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 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
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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.
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
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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.
"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
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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.
"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.
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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 October 28, 1996, 5,400,000
Series A Preferred Shares were issued and outstanding and held of record by
approximately 290 shareholders and 8,050,000 Series B Preferred Shares were
issued and outstanding and held of record by approximately 50 shareholders.
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;
(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.
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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 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.
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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 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
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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.
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
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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.
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 and the Series B
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
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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 150,000,000 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 October
28, 1996, approximately 93,671,713 Common Shares were issued and outstanding
and held of record by approximately 1,100 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 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 and Series B 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 and
Series B 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
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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 The First National
Bank of Boston, 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 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
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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.
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.
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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 existing law, 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.
TAXATION OF SCI
To qualify as a REIT under the Code for a taxable year, SCI must meet
certain organizational and operational requirements.
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
For each taxable year at least 75% of SCI's gross income must be derived
from certain real estate sources, including rents from real property and
interest on mortgage obligations. Real estate sources for purposes of those
requirements also include gains from the sale of real property not held
primarily for sale to customers in the ordinary course of business, dividends
on REIT shares, interest on loans secured by mortgages on real property and
income from foreclosure property. For rents to qualify, they may not be based
on the income or profits of any person, except that they may be based on a
percentage or percentages of gross income or receipts, and, subject to certain
limited exceptions, the REIT's management of the property and rendering of
services to tenants must either be with respect to usual or customary services
or furnished through a qualified independent contractor.
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 real estate sources described above or from dividends, interest, gains
from the sale or disposition of stock or other securities that are not dealer
property and specified other items. Dividends (including SCI's share of any
dividends paid by SCI Development Services Incorporated) and interest on any
obligations not collateralized by an interest in real property qualify for
purposes of the 95% test, but not for purposes of the 75% test.
SCI must also 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 by reason of
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involuntary conversion); (ii) stock or securities held for less than one year;
and (iii) property in a prohibited transaction.
For purposes of the gross income tests, where SCI invests in a partnership,
including the Partnerships, 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.
Ownership Restrictions
SCI must satisfy certain ownership restrictions under the Code that limit
(i) concentration of ownership of its shares of capital stock by specified
persons and (ii) ownership by SCI of its tenants. The Declaration of Trust
restricts the transfer of shares when necessary to maintain SCI's
qualification as a REIT under these standards. See "Description of Common
Shares--Restrictions on Size of Holdings." However, because the Code imposes
broad attribution rules in determining constructive ownership, no assurance
can be given that these restrictions would be effective in maintaining SCI's
REIT status.
Annual Distribution Requirements
So long as SCI qualifies for taxation as a REIT and distributes at least 95%
of its real estate investment trust taxable income (computed without respect
to net capital gains or the dividends paid deduction) for each taxable year to
its shareholders annually, SCI itself will not be subject to federal income
tax on that portion of such income distributed to shareholders. SCI will be
taxed at regular corporate rates on all income not distributed to
shareholders. Nevertheless, it is SCI's policy to distribute at least 95% of
its taxable income. REITs may also incur taxes for certain other activities.
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
Distributions paid to SCI's shareholders out of current or accumulated
earnings and profits of SCI will generally be taxed to them as ordinary
income. Such distributions are not eligible for the dividends-received
deduction for corporations. SCI's earnings and profits will first be allocated
to any outstanding Preferred Shares. A distribution of net capital gains by
SCI will generally be treated as a long-term capital gain to shareholders to
the extent properly designated by SCI as a capital gain distribution and
regardless of the length of time a shareholder has held his shares. Capital
gains distributions are not eligible for the dividends-received deduction for
corporations. Any loss on a sale of shares that were held for six months or
less and with respect to which a capital gain distribution was received will
be treated as a long-term capital loss, up to the amount of the capital gain
distribution received with respect to such shares. A distribution in excess of
current or accumulated earnings and profits will constitute a nontaxable
return of capital, to the extent of the shareholder's basis in his shares. To
the extent such a distribution exceeds such basis, it will be treated as
capital gain to those shareholders holding their shares as capital assets. SCI
will notify each shareholder as to the portions of each distribution that, in
its view, constitute ordinary income, capital gain or return of capital.
Should SCI incur ordinary or capital losses, shareholders will not be entitled
to include such losses in their own income tax returns.
OTHER TAX CONSIDERATIONS
SCI Development Services Incorporated
SCI Development 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 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 is required to pay Federal, state
or local taxes, the cash available for distribution by SCI Development
Services Incorporated 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.
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
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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.
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 SCG.
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPO-
RATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN CONNEC-
TION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY SCI OR THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, THE SHARES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS OR IN THE
AFFAIRS OF SCI SINCE THE DATE HEREOF.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Security Capital Industrial Trust......................................... S-3
Business.................................................................. S-5
Strategic and Operating Accomplishments................................... S-9
Use of Proceeds........................................................... S-9
Price Range of Common Shares and Distributions............................ S-10
Capitalization............................................................ S-12
Selected Financial Data................................................... S-13
Recent Developments....................................................... S-14
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... S-15
REIT Management........................................................... S-23
Certain Federal Income Tax Considerations................................. S-35
Underwriting.............................................................. S-36
Validity of Shares........................................................ S-37
PROSPECTUS
Available Information..................................................... 2
Incorporation by Reference................................................ 2
Security Capital Industrial Trust......................................... 3
Use of Proceeds........................................................... 3
Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividends. 4
Description of Debt Securities............................................ 4
Description of Preferred Shares........................................... 18
Description of Common Shares.............................................. 23
Federal Income Tax Considerations......................................... 25
Plan of Distribution...................................................... 29
Experts................................................................... 30
Legal Matters............................................................. 30
</TABLE>
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3,500,000 SHARES
LOGO
A REAL ESTATE INVESTMENT TRUST
COMMON SHARES
OF BENEFICIAL INTEREST
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
FEBRUARY 3, 1997
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