<PAGE>
PROSPECTUS SUPPLEMENT File Pursuant to Rule 424(b)(2)
(TO PROSPECTUS DATED NOVEMBER 21, 1997) Registration No. 333-39797
3,750,000 SHARES
LOGO
COMMON SHARES OF BENEFICIAL INTEREST
---------------
Security Capital Industrial Trust ("SCI") is the largest publicly held,
U.S.-based global owner and operator of distribution properties based on
equity market capitalization. SCI is an international operating company
focused exclusively on meeting the distribution space needs of international,
national, regional and local industrial real estate users through the SCI
International Operating System(TM). See "Business." SCI has elected to be
taxed as a real estate investment trust ("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 $0.01 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 March 12,
1998, the last reported sale price of the Common Shares on the NYSE was $25
3/8 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. SCI
is contemplating making an offering (the "Contemplated Preferred Share
Offering") of approximately $125 million of preferred shares having terms
substantially similar to SCI's Series C Preferred Shares (as defined herein).
There can be no assurances, however, that the Contemplated Preferred Share
Offering will be consummated on the terms outlined in the preceding sentence.
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.
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed to purchase from SCI the Common Shares offered hereby at a purchase
price of $24.045 per Common Share, resulting in proceeds to SCI of
$90,168,750. SCI has granted to the Underwriter a 30-day option to purchase up
to 562,500 additional Common Shares at a purchase price of $24.045 per Common
Share, solely to cover over-allotments, if any. If such option is exercised in
full, the total proceeds to SCI will be $103,694,063, before deducting
expenses payable by SCI, estimated at approximately $300,000.
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 March 18, 1998.
---------------
MERRILL LYNCH & CO.
---------------
The date of this Prospectus Supplement is March 12, 1998.
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[LOGO OF MAP APPEARS HERE]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES.
SPECIFICALLY, THE UNDERWRITER MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, COMMON SHARES IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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SECURITY CAPITAL INDUSTRIAL TRUST
Security Capital Industrial Trust ("SCI") is the largest publicly held,
U.S.-based global owner and operator of distribution properties based on
equity market capitalization. SCI is an international operating company
focused exclusively on meeting the distribution space needs of international,
national, regional and local industrial real estate users through the SCI
International Operating System(TM). SCI distinguishes itself from its
competition by being the only entity that combines all of the following:
1. An international operating strategy dedicated to providing services to
the 1,000 largest users of distribution facilities worldwide;
2. An organizational structure and service delivery system built around
the customer--SCI believes its service approach is unique to the real
estate industry as it combines international scope and expertise with
strong local presence;
3. A disciplined investment strategy based on proprietary research that
identifies high growth markets with sustainable demand for SCI's
distribution facilities;
4. Over 275 professionals in 37 offices in the United States, Mexico and
Europe which SCI believes comprise the deepest and most experienced
management team in industrial real estate; and
5. Over 2,500 customers globally.
The cornerstone of SCI's operating strategy is the SCI International
Operating System(TM) comprised of the Market Services Group, the Global
Services Group and the Global Development Group that utilizes SCI's
international network of corporate distribution facilities to meet customer
expansion and reconfiguration needs globally.
SCI engages in the acquisition, development, marketing, operation and long-
term ownership of distribution facilities. SCI has the resources to provide a
full array of financial, development and operating services, including: (i)
expertise in market research, (ii) building and land acquisition and due
diligence, (iii) master-planned distribution park design and building
construction, (iv) marketing, asset and leasing management and (v) capital
markets and financial operations.
SCI deploys capital in markets with excellent long-term growth prospects and
in markets where SCI can achieve a strong market position through the
acquisition and development of flexible facilities for warehousing,
distribution and light manufacturing uses. SCI expanded its operations into
Mexico and Europe in the first half of 1997 to meet the needs of its targeted
national and international customers as they expand and reconfigure their
distribution facility requirements globally. With six target market cities
identified in Mexico and 20 identified in Europe, SCI believes that there are
significant growth opportunities internationally. SCI is building its
organization in both Mexico and Europe as part of the SCI International
Operating System(TM).
SCI's highlights include:
. As of January 31, 1998, SCI was servicing over 2,500 customers in the
United States, Mexico and Europe, including 336 global customers of which
209 were multiple market customers, and refrigerated warehousing in which
SCI has invested had over 975 customers in the United States and 4,750
customers in eight countries in Europe. See "--Focus on Research-Based
Growth-Oriented Markets and Customer Driven Expansion."
. As of January 31, 1998, SCI's distribution portfolio contained 92.5
million square feet in 1,019 buildings and had an additional 9.3 million
square feet under development in 63 buildings for a total of 101.8
million square feet in 1,082 buildings. The total aggregate cost of the
101.8 million square feet (including properties under development at
total budgeted cost) is $3.172 billion (an average of $31.16 per square
foot).
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. As of January 31, 1998, SCI's stabilized portfolio of 86.6 million square
feet was 96.35% leased (95.01% occupied), and the total operating
portfolio of 92.5 million square feet, which includes 5.9 million
pre-stabilized square feet, was 93.60% leased (91.48% occupied).
. During 1997, a total of 28.1 million square feet of distribution space
was leased in 1,017 transactions through the operation of the SCI
International Operating System(TM). During 1997, rental rates on new and
renewed leases on previously leased distribution space for the operating
portfolio increased an average of 19.2%.
. In 1997, SCI acquired 6.35 million square feet of distribution space in
the United States and internationally for a total expected investment of
$207.84 million in 28 transactions, for an average cost of $32.73 per
square foot. In addition, during 1997, SCI invested $85.6 million in
U.S.-based refrigerated warehousing totaling 78.6 million cubic feet
either operating or under development, and in January 1998, invested in
European refrigerated warehousing totaling 180 million cubic feet with a
net cost of $395.0 million.
. During 1997, SCI commenced development of 9.7 million square feet of
distribution space in 31 target market cities in the United States,
Mexico and Europe with a total expected investment of $370.3 million.
Inventory building starts totaled 6.3 million square feet in 1997 and
corporate distribution facility starts totaled 3.4 million square feet
during 1997. In addition, as of January 31, 1998, SCI was in active
negotiations for 6.3 million square feet of additional corporate
distribution facility projects on a global basis. Since inception, SCI
has completed developments totaling 26.0 million square feet (excluding
dispositions of 1.6 million square feet), which were 86.93% leased and
89.50% leased or committed as of January 31, 1998.
. As of January 31, 1998, SCI owned 1,634 acres of development land, and
had fixed price options and rights of first refusal to acquire 505 acres
and 36 acres, respectively, which in the aggregate will permit the
development of approximately 37.2 million square feet of additional
distribution space in 32 target market cities. Also, as of January 31,
1998, SCI had an additional 656 acres under letters of intent or
contingent contracts, subject to the completion of due diligence, which,
if acquired, will permit the development of approximately 12.0 million
square feet of additional distribution space. Of the total acres owned or
controlled through options, rights of first refusal, letters of intent or
contingent contracts at January 31, 1998, 2,567 acres were in the United
States, 231 acres were in Mexico, and 33 acres were in Europe.
. During the third quarter of 1997, SCI became an internally managed REIT
when it acquired the operations of Security Capital Industrial
Incorporated (the "REIT Manager") and SCI Client Services Incorporated
(the "Property Manager") owned by Security Capital Group Incorporated
("Security Capital") in exchange for 3,692,023 Common Shares (the
"Merger"). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview--Consummation of Merger
Transaction."
. Security Capital, SCI's largest shareholder, which owned approximately
42.52% of SCI's Common Shares as of March 12, 1998, 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. On a fully
diluted basis, Security Capital owned 36.76% of SCI's Common Shares as of
March 12, 1998.
. SCI's long-term debt as a percentage of long-term book capitalization
(including accumulated depreciation) was 28.0% at December 31, 1997. At
March 12, 1998, SCI had $275.0 million of borrowings outstanding under
its $350 million unsecured line of credit facility and had $200.0 million
due to NationsBank of Texas, N.A. ("NationsBank") on an unsecured bridge
loan due March 31, 1998.
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 extensive research, SCI was formed in June 1991 to take advantage
of two strategic opportunities: first, the opportunity to build a 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 facility requirements on a national, regional and
local basis. SCI expanded its operations into Mexico and Europe in the first
half of 1997 to meet the needs of its targeted national and international
customers as they expand and reconfigure their distribution facility
requirements globally. With six target market cities identified in Mexico and
20 identified in Europe, SCI believes that there are significant growth
opportunities internationally. SCI is building its organization in both Mexico
and Europe as part of the SCI International Operating System(TM). Consistent
with SCI's objective of expanding the services platform for its targeted
customer base, in 1997 the SCI International Operating System(TM) expanded to
serve the refrigerated warehousing needs of its customers where it is
efficiently establishing an international refrigerated warehousing network,
positioning SCI to become the global leader in this rapidly consolidating
industry. SCI's objective is to achieve long-term sustainable growth in cash
flow through (i) 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 flexible facilities designed for
warehousing, distribution and light manufacturing uses; (ii) the SCI
International Operating System(TM) comprised of the Market Services Group, the
Global Services Group and the Global Development Group as described below; and
(iii) ownership or control of a significant inventory of land to enable SCI to
take advantage of market opportunities and accommodate expansion or corporate
distribution facility 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 of 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 distribution space needs in such
markets. SCI's growth and operating strategy is designed not only to meet 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.
SCI INTERNATIONAL OPERATING SYSTEM(TM)
The SCI International Operating System(TM) is designed to provide
substantial benefits to existing and prospective SCI customers, including:
Relocation Capability. User requirements can change frequently. SCI's
presence in 37 U.S. target markets and seven of its 26 targeted international
markets for distribution space permits SCI to accommodate the needs of its
customers by moving an existing customer within a market or between markets
both nationally and globally.
Expansion Capability. SCI, through its development program, land inventory
and existing facilities, works with existing and prospective 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 corporate distribution facility for such customer.
Centrally Coordinated Program. SCI provides a single point of contact for
multi-location global users of distribution facilities through Global Services
Group professionals who are charged with building long-term customer
relationships and ensuring that all SCI services and products are consistent
in quality. SCI's experience to date suggests that many major corporate
customers prefer working with one firm to meet their distribution facility
requirements.
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Corporate Distribution Facilities Services. SCI's team of development
professionals are focused on building facilities that meet SCI customers'
needs and that incorporate the latest technology with respect to building
design and building systems. SCI has developed consistent standards and
procedures that it strictly adheres to in the development of all of its
facilities throughout the United States and internationally.
The SCI International Operating System(TM) provides an exceptional level of
customer service including development on an international, national, regional
and local basis through its 210 professionals, and is a key component of SCI's
growth and operating strategy. The SCI International Operating System(TM) is
comprised of the three groups described below: the Market Services Group, the
Global Services Group and the Global Development Group.
Market Services Group. This group is comprised of 25 market officers
("Market Officers"), a managing director in Europe, four regional directors
and 120 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 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 Global Services Group in identifying SCI customers
with international or national, multi-market requirements. SCI believes that
the Market Officers' access to national and international SCI resources
provides significant stature and profile and improves their ability to serve
customers in the local market.
On a regular basis, each Market Officer communicates with senior management
for guidance on lease terms, as well as for international, national and local
marketing assistance, and is able to take advantage of SCI's fully integrated
international development and service capabilities. Market Officers do not
develop projects or borrow or commit capital; they focus strictly on creating
and maintaining relationships with distribution space users and industrial
brokers, marketing SCI's products and identifying potential corporate
distribution facilities services, acquisition and leasing opportunities in
their target market cities.
Global Services Group. The Global Services Group, comprised of 10
professionals, is dedicated to providing service to the largest 1,000 users of
distribution space and is focused on making SCI the preferred provider of
distribution space to these companies. The Global Services Group is
headquartered in Denver and Amsterdam and has regional offices in Atlanta,
Chicago, Houston, the Los Angeles metropolitan area and the New York City
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 corporate distribution facilities services opportunities
and coordinating SCI services to those companies with the respective Market
Officers and the Global Development Group. Global Services Group professionals
build long-term relationships with SCI international and national customers
and provide a single point of contact to simplify and streamline the execution
of such customers' international and national distribution space plans. An
ancillary benefit is research insight into international and national
distribution and logistics trends gained through continuous interaction with
Global Services Group clients.
Global Development Group. The Global Development Group, comprised of 50
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 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
corporate distribution facility specialists and project managers (with an
average experience level of over 16 years) operate regionally to better serve
their markets. The project managers supervise each project with continual
oversight from SCI headquarters, pursuant to uniform standards, procedures and
specifications which have been carefully designed to achieve consistent
quality.
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SCI believes the depth and breadth of the Global Development Group enhance
the effectiveness of the Global Services Group and give the Market Officers a
distinct competitive advantage for development and corporate distribution
facilities services opportunities in their respective markets.
The SCI International Operating System(TM) with its customer focus and
service level, single point of contact and distribution solutions on a global
basis, offers significant potential in building relationships, as well as
additional business, with its global customers in a rapidly consolidating
industry.
FOCUS ON RESEARCH-BASED GROWTH-ORIENTED MARKETS AND CUSTOMER DRIVEN EXPANSION
Based on its proprietary research, SCI focuses on selected distribution
markets in the United States, Mexico and Europe where supply and demand
factors permit high occupancies at increasing rental rates. Management
believes the research indicates that demand for distribution and light
manufacturing space in SCI's target markets 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 of distribution networks, and quality and cost
of labor. In addition, SCI believes that the 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 distribution investment markets: export/import
growth markets, low cost manufacturing markets and growth distribution
markets. As a result of customer demand, SCI expanded its operations into
Mexico and Europe in the first half of 1997 to meet the needs of its targeted
national and international customers as they expand and reconfigure their
distribution facility requirements globally. SCI believes that the investment
opportunities in Mexico and Europe provide significant growth opportunities
for SCI as it expands its service platform.
Additionally, during 1997, SCI expanded into refrigerated warehousing
through an unconsolidated subsidiary's investment in CS Integrated LLC
("CSI"). As of December 31, 1997, SCI's unconsolidated subsidiary owned 77% of
CSI which operated or had under development 78.6 million cubic feet of
refrigerated warehousing facilities in the United States, and SCI's investment
in and advances to its unconsolidated subsidiary totaled $85.6 million. In
January 1998, an unconsolidated subsidiary of SCI acquired Frigoscandia AB
("Frigoscandia"), for a net cost of $395 million. SCI believes that
Frigoscandia is Europe's largest owner of refrigerated warehousing facilities
with 90 facilities in eight European countries totalling over 180 million
cubic feet and over 4,750 customers. SCI believes that the capital-intensive
nature of refrigerated warehousing creates significant barriers to entry,
limiting new competitors. As a result of SCI's ongoing research into key
logistics trends, SCI believes that refrigerated warehousing represents an
outstanding investment opportunity which should create significant shareholder
value.
Export/Import Growth Markets. The dollar volume of U.S. exports increased
from $250.2 billion in 1987 to $678.3 billion in 1997, an increase of 171.1%,
as reported by the U.S. Census Bureau, Foreign Trade Division. The dollar
volume of U.S. imports increased from $477.4 billion in 1989 to $877.3 billion
for 1997, as reported by the U.S. Census Bureau, Foreign Trade Division.
SCI intends to capitalize on this trend by targeting key ports (air, sea and
land) which are well positioned to benefit from continued combined growth in
trade with the Pacific Rim, Mexico and Europe. The total dollar volume of
exports from the United States to these three international trade areas grew
by approximately $142.2 billion between December 31, 1987 and December 31,
1997, as reported by the U.S. Census Bureau, Foreign Trade Division. In line
with SCI's strategy to target key ports, SCI entered both the Rotterdam and
Amsterdam markets during 1997. Rotterdam is the largest port in the world and
in addition to its ability to accomodate all sizes of ocean-going vessels, its
success is linked to its comprehensive infrastructure that facilitates
distribution throughout Europe by air, rail, truck and waterways. Schiphol
Airport in Amsterdam is the thirteenth largest airport in the world based on
passenger and cargo volume. SCI believes that the growth in exports and
imports represents favorable growth prospects for related distribution space.
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Low Cost Manufacturing Markets. SCI has targeted markets that possess long-
term cost and quality of labor advantages for domestic and foreign
manufacturers. One important influence on SCI's target market cities in Mexico
and on those with close proximity to Mexico is the impact of the maquiladora
(U.S./Mexico twin plant) program, which encourages companies to manufacture
and assemble products close to the Mexican border. After paying a nominal
value added tax, companies participating in this program ship finished
products into the United States or to foreign countries for distribution or
further processing. Export and import trade between the United States and
Mexico exceeded $71.3 billion for the twelve month period ended December 31,
1997, as reported by the U.S. Census Bureau, and should continue to be
positively affected by the North American Free Trade Agreement. Mexico ranked
as the second largest trading partner with the United States for the twelve-
month period ended December 31, 1997. SCI believes that the prospects for low
cost manufacturing growth in these target markets are excellent.
Growth Distribution Markets. The distribution markets that SCI targets must
have access to transportation networks, including interstate highways, rail
service, air cargo, intermodal facilities and/or port terminals. They must
also offer cost advantages in terms of transportation rates, rental costs and
state income and inventory taxes. Finally, there must be strong overnight
truck delivery area demographics within a 500-mile radius. Examples of these
markets include Amsterdam and Rotterdam in Europe, and Seattle, Dallas,
Columbus and Indianapolis in the United States.
MARKET PRESENCE
In each target market city for which SCI has not yet achieved critical mass
(or in selected submarkets in large distribution markets such as Dallas and
Atlanta), 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 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 27 target markets in the United States: Atlanta, Austin, Birmingham,
Charlotte, Chattanooga, Cincinnati, Columbus, Dallas/Fort Worth, Denver, East
Bay Area (San Francisco), El Paso, Houston, Indianapolis, Kansas City, Las
Vegas, Memphis, Nashville, Oklahoma City, Orlando, Phoenix, Portland, Reno,
Salt Lake City, San Antonio, South Bay Area (San Francisco), Tampa and
Washington, D.C./Baltimore.
Maximum Market Exposure. Size and market presence provides visibility and
access to and knowledge of potential leasing and corporate distribution
facilities services 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 international, national, regional and local distribution space
users who have potential for growth in demand for space. SCI had 2,944
customer leases in 84.5 million square feet of occupied space as of January
31, 1998. 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 1.0% of SCI's 1997 rental income (on an annualized basis), and the
annualized base rent for SCI's 20 largest customers accounted for less than
12.4% of SCI's 1997 rental income (on an annualized basis). Between January
31,
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1998 and December 31, 1998, approximately 18.7% 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.
GEOGRAPHIC DISTRIBUTION
Substantially all of SCI's distribution properties are located in 44 target
market cities. The table below demonstrates the geographic distribution of
SCI's equity real estate investments as of December 31, 1997 and 1996. This
chart does not include land held for future development, which was less than
6% of assets, based on cost at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
PERCENTAGE OF ASSETS BASED ON COST (1)(2)
-------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- ---------------------
PERCENTAGE PERCENTAGE
OF ASSETS OF ASSETS
NUMBER OF BASED ON NUMBER OF BASED ON
PROPERTIES COST(1) PROPERTIES COST(1)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Markets
Atlanta, Georgia................. 107 8.16% 100 8.08%
Austin, Texas.................... 32 2.25 35 3.05
Birmingham, Alabama.............. 6 1.14 6 1.34
Charlotte, North Carolina........ 27 2.48 23 2.53
Chattanooga, Tennessee........... 5 0.51 5 0.61
Chicago, Illinois................ 36 4.93 28 4.29
Cincinnati, Ohio................. 38 2.86 30 2.44
Columbus, Ohio................... 17 2.08 15 2.10
Dallas/Fort Worth, Texas......... 67 5.38 63 4.98
Denver, Colorado................. 23 2.20 22 2.31
East Bay (San Francisco), Cali-
fornia.......................... 44 4.09 42 4.60
El Paso, Texas................... 26 2.64 22 2.51
Fort Lauderdale/Miami, Florida... 7 1.02 3 0.72
Houston, Texas................... 70 4.68 70 5.54
Indianapolis, Indiana............ 42 3.79 48 4.74
Kansas City, Kansas/Missouri..... 28 1.78 28 2.11
Las Vegas, Nevada................ 14 1.75 14 2.12
Los Angeles/Orange County, Cali-
fornia.......................... 22 5.45 15 3.88
Louisville, Kentucky............. 3 0.55 2 0.43
Memphis, Tennessee............... 28 1.89 26 2.05
Nashville, Tennessee............. 24 1.66 24 1.93
New Jersey/I-95 Corridor......... 11 3.42 6 1.94
Oklahoma City, Oklahoma.......... 6 0.34 10 0.57
Orlando, Florida................. 15 1.11 13 1.05
Phoenix, Arizona................. 25 1.59 22 1.58
Portland, Oregon................. 27 2.23 25 2.44
Reno, Nevada..................... 19 2.05 17 1.93
Rio Grande Valley (Brownsville),
Texas........................... 15 1.00 14 0.97
Salt Lake City, Utah............. 7 1.41 8 2.26
San Antonio, Texas............... 50 3.30 61 4.46
San Diego, California............ 3 0.45 3 0.54
Seattle, Washington.............. 9 1.39 9 1.59
South Bay (San Francisco), Cali-
fornia.......................... 70 7.26 66 7.64
St. Louis, Missouri.............. 11 0.92 -- --
Tampa, Florida................... 59 3.85 60 4.39
Tulsa, Oklahoma.................. 10 0.44 10 0.50
Washington, D.C./Baltimore....... 40 5.00 35 4.98
Other............................ 7 0.34 9 0.80
</TABLE>
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<TABLE>
<CAPTION>
PERCENTAGE OF ASSETS BASED ON COST (1)(2)
--------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------- ---------------------
PERCENTAGE PERCENTAGE
OF ASSETS OF ASSETS
NUMBER OF BASED ON NUMBER OF BASED ON
PROPERTIES COST(1) PROPERTIES COST(1)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
International Markets
Amsterdam, Netherlands............ 1 0.33 -- --
Juarez, Mexico.................... 3 0.29 -- --
Lyons, France..................... 1 0.28 -- --
Monterrey, Mexico................. 5 0.55 -- --
Paris, France..................... 1 0.25 -- --
Reynosa, Mexico................... 4 0.36 -- --
Rotterdam, Netherlands............ 2 0.55 -- --
----- ------ --- ------
Total............................. 1,067(3) 100.00% 989(4) 100.00%
===== ====== === ======
</TABLE>
- --------
(1) Includes properties under development at their budgeted total development
costs, rather than costs incurred to date.
(2) Does not include refrigerated warehousing facilities.
(3) Includes 62 buildings under development.
(4) Includes 47 buildings under development.
Consistent with SCI's strategy to build a critical mass in the three key
target markets of Chicago, Los Angeles and the New Jersey/I-95 corridor, the
combined percentage of real estate investments for these markets to SCI's
total real estate investments, increased from 10.11% at December 31, 1996 to
13.80% at December 31, 1997.
There are numerous other distribution properties located in close proximity
to each of SCI's properties. The amount of rentable space available in any
target market city could have a material effect on SCI's ability to rent space
and on the rents charged. In addition, in many of SCI's submarkets,
institutional investors and owners and developers of distribution facilities
compete for the acquisition, development and leasing of distribution space.
Many of these persons have substantial resources and experience.
SCI operates nationally and internationally and has no markets with a
concentration of investment in excess of 10% of its total portfolio
investment. In SCI's major markets, 1997 vacancy rates were below the average
rates for the period from 1991 through 1997. (Source: CB Commercial/Torto
Wheaton Research). Competition for acquisition of existing distribution
facilities from institutional capital sources and other REITs has increased
substantially in the past several years.
STRATEGIC AND OPERATING ACCOMPLISHMENTS
SCI's strategic and operating objectives have been furthered by the
following accomplishments:
.Creation of the SCI International Operating System(TM). SCI developed the
SCI International Operating System(TM) which provides an exceptional level
of customer service, marketing and development on an international,
national, regional and local basis through its 210 professionals and is a
key component of SCI's growth and operating strategy.
.Corporate Distribution Facilities Services. Corporate distribution
facilities services enhances SCI's ability to meet customer needs. This
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 January 31,
1998, SCI completed or commenced development of corporate distribution
facilities totalling 11.6 million square feet with an expected total
investment of
S-10
<PAGE>
$410.8 million including 1.4 million square feet that was disposed of
through January 31, 1998. In addition, SCI is currently in active
negotiations for 6.3 million square feet of additional corporate
distribution facilities projects.
.Critical Mass in 27 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 through acquisition and development of distribution
space. SCI believes it has achieved critical mass in 27 U.S. markets. SCI
has begun its international expansion and has not yet achieved critical
mass in any international market. See "Business--Market Presence--Value
Enhancement."
.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 January 31, 1998,
SCI's target market expanded to include 37 U.S. target markets and 26
international target markets to more effectively service the international
and national distribution space needs of its customers bringing the total
of SCI's target markets to 63.
.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 January 31, 1998, SCI owned or
controlled through option, right of first refusal, letter of intent or
contingent contract 2,831 acres of land in 38 target market cities, which
will permit the development of approximately 49.2 million square feet of
additional distribution space. SCI believes that master-planned park
development will provide an important source of growth.
.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
January 31, 1998, SCI completed or commenced development of 24.0 million
square feet of inventory buildings with a total investment cost of $858.8
million in 33 target market cities including 200,000 square feet disposed
of to date.
USE OF PROCEEDS
The net proceeds to SCI from the sale of the Common Shares offered hereby
are expected to be approximately $89.9 million ($103.4 million if the
Underwriter's over-allotment option is exercised in full). SCI expects that
the net proceeds of this offering will be used to repay borrowings under SCI's
unsecured line of credit facility. SCI's $350 million unsecured revolving line
of credit bears interest at SCI's option, at either (a) the greater of the
federal funds rate plus 0.5% and the prime rate (8.5% at March 12, 1998) or
(b) LIBOR plus 0.95%, based upon SCI's current senior debt rating (6.6375% at
March 12, 1998), and is scheduled to mature in May 1998. At March 12, 1998,
$275 million of borrowings were outstanding under this line of credit.
Outstanding borrowings are expected to be approximately $280 million at the
time of closing of this offering. SCI expects to make additional borrowings
under the line of credit following this offering.
S-11
<PAGE>
PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS
SCI's Common Shares are listed on the NYSE under the symbol "SCN." The
following table sets forth the high and low sale prices of the Common Shares
as reported in the NYSE Composite Tape, and distributions per Common Share,
for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTIONS
---- ---- -------------
<S> <C> <C> <C>
1996:
First Quarter.............................. $18 7/8 $16 1/2 $0.2525(1)
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.............................. $22 1/2 $19 7/8 $0.2675(2)
Second Quarter............................. 21 3/4 18 7/8 0.2675
Third Quarter.............................. 23 5/8 20 3/4 0.2675
Fourth Quarter............................. 25 1/2 22 1/2 0.2675
1998:
First Quarter (through March 12, 1998)..... $26 1/2 $24 3/16 $0.285 (3)(4)
</TABLE>
- --------
(1) Declared in the fourth quarter of 1995 and paid in the first quarter of
1996.
(2) Declared in the fourth quarter of 1996 and paid in the first quarter of
1997.
(3) Declared in the fourth quarter of 1997 and paid in the first quarter of
1998.
(4) On March 5, 1998, the Board announced a projected increase in the 1998
distribution level to $1.24 per Common Share which would increase the
quarterly distribution for the remaining quarters of 1998 to $0.3183 per
Common Share.
See the cover page of this Prospectus Supplement for the price of a Common
Share as of a recent date. On March 12, 1998, SCI had approximately
117,388,358 Common Shares outstanding, which were held of record by
approximately 1,200 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 Board's annual budget review and approval in December of each year. At its
December 1997 Board meeting, the Board announced a projected increase in the
annual distribution level from $1.07 to $1.14 per Common Share. On March 5,
1998, the Board announced a projected increase in the 1998 distribution level
to $1.24 per Common Share. The payment of distributions is subject to the
discretion of the Board and is dependent upon the financial condition and
operating results of SCI and may be adjusted at the discretion of the Board
during the budget year.
After the closing of the Merger, holders of SCI's Common Shares (other than
Security Capital), Series B Preferred Shares and limited partnership units as
of September 16, 1997, received warrants from Security Capital to purchase
3,608,202 shares of Security Capital's Class B common stock, in the ratio of
0.046549 warrants for each Common Share held, 0.059676 warrants for each
Series B Preferred Share held and 0.046549 warrants for each limited
partnership unit held. Each warrant can be exercised for one share of Security
Capital's Class B common stock at an exercise price of $28.00 per share
through September 18, 1998. Security Capital issued these warrants to SCI's
shareholders as an incentive to vote in favor of the Merger and to raise
additional equity capital at a relatively low cost, in addition to other
benefits. The warrants are traded on the NYSE and at the close of business on
March 12, 1998 were trading at $3.00 per warrant.
S-12
<PAGE>
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 the Common Shares. To the
extent that a distribution exceeds both current and accumulated earnings and
profits and the shareholder's basis in the 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. The following summarizes the taxability of
distributions paid in 1996 and 1995 on the Common Shares and the estimated
taxability for 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------
1997 1996 1995
----- ------ ------
<S> <C> <C> <C>
Per Common Share:
Ordinary Income......................................... $1.07 $0.879 $0.692
Capital Gains........................................... -- -- --
Return of Capital....................................... 0.00 0.131 0.243
----- ------ ------
Total.................................................. $1.07 $ 1.01 $0.935
===== ====== ======
</TABLE>
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. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
SCI's tax return for the year ended December 31, 1997 has not been filed,
and the taxability information for 1997 is based upon the best available data.
SCI's tax returns for prior years have not been examined by the Internal
Revenue Service and, therefore, the taxability of distributions is subject to
change.
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-13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of SCI at December 31,
1997, and as adjusted to give effect to the issuance and sale of the 3,750,000
Common Shares offered hereby, and the application of the net proceeds
therefrom. The table does not give effect to the Contemplated Preferred Share
Offering. The table should be read in conjunction with the financial
statements of SCI incorporated by reference herein and in the accompanying
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
HISTORICAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
7.125% Notes due 1998.................................. $ 15,000 $ 15,000
Original issue discount on 7.125% Notes.............. (2) (2)
7.25% Notes due 2000................................... 17,500 17,500
Original issue discount on 7.25% 2000 Notes.......... (37) (37)
7.30% Notes due 2001................................... 17,500 17,500
Original issue discount on 7.30% Notes............... (51) (51)
7.25% Notes due 2002................................... 50,000 50,000
Original issue discount on 7.25% 2002 Notes.......... (38) (38)
7.95% Notes due 2008................................... 100,000 100,000
Original issue discount on 7.95% Notes............... (149) (149)
7.875% Notes due 2009.................................. 75,000 75,000
Original issue discount on 7.875% Notes.............. (306) (306)
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............... (139) (139)
7.81% Series A 2015 Notes.............................. 100,000 100,000
7.625% Notes due 2017.................................. 100,000 100,000
Original issue discount on 7.625% Notes.............. (226) (226)
---------- ----------
Total unsecured long term debt......................... 724,052 724,052
Mortgage notes and assessment bonds payable............ 133,028 133,028
Minority Interest...................................... 53,304 53,304
Shareholders' Equity:
Shares of Beneficial Interest, par value $0.01 per
share; 180,000,000 shares authorized:
Series A Preferred Shares (liquidation preference
$25.00 per share); 5,400,000 shares outstanding... 135,000 135,000
Series B Convertible Preferred Shares (liquidation
preference $25.00 per share); 8,000,300 shares
outstanding....................................... 200,008 200,008
Series C Preferred Shares (liquidation preference
$50.00 per share);
2,000,000 shares outstanding...................... 100,000 100,000
Common Shares; 117,364,148 shares outstanding;
121,114,148 shares outstanding as adjusted........ 1,174 1,211
Additional paid-in capital......................... 1,773,465 1,863,296
Employees share purchase notes..................... (27,186) (27,186)
Cumulative translation adjustments................. (63) (63)
Distributions in excess of net earnings............ (205,661) (205,661)
---------- ----------
Total Shareholders' Equity....................... 1,976,737 2,066,605
---------- ----------
Total Capitalization............................. $2,887,121 $2,976,989
========== ==========
</TABLE>
S-14
<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
incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus (amounts in thousands, except ratios and per share data).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Rental Income.......... $ 284,533 $ 227,000 $ 153,879 $ 70,609 $ 9,963
Series A Preferred
Share Dividends....... 12,690 12,690 6,698 -- --
Series B Preferred
Share Dividends....... 14,088 12,066 -- -- --
Series C Preferred
Share Dividends....... 8,540 1,139 -- -- --
Net Earnings Attribut-
able to Common Shares. 4,431(2) 53,460 42,015 25,101 4,412
Common Share Distribu-
tions................. $ 106,556 $ 85,340 $ 64,445 $ 37,698 $ 7,001
PER SHARE DATA:
Net Earnings Attribut-
able to Common Shares
(Basic and Diluted)... $ 0.04(2) $ 0.63 $ 0.61 $ 0.57 $ 0.47
Series A Preferred
Share Dividends....... 2.35 2.35 1.24 -- --
Series B Preferred
Share Dividends....... 1.75 1.50 -- -- --
Series C Preferred
Share Dividends....... 4.27 0.57 -- -- --
Common Share Distribu-
tions................. $ 1.07 $ 1.01 $ 0.935 $ 0.85 $ 0.75
Weighted Average Common
Shares Outstanding
(Basic)............... 100,729 84,504 68,924 44,265 9,334
Weighted Average Common
Shares Outstanding
(Diluted)............. 100,869 84,511 74,422 44,277 9,336
OTHER DATA:
Net Cash Provided by
Operating Activities.. $ 192,273 $ 136,201 $ 100,154 $ 47,222 $ 12,084
Net Cash Used in In-
vesting Activities.... (570,861) (665,878) (628,795) (631,871) (260,780)
Net Cash Provided by
Financing Activities.. 398,827 512,212 529,606 599,382 254,770
Funds from Operations
Attributable to Common
Shares (3)............ $ 161,059 $ 116,890 $ 84,060 $ 46,307 $ 7,189
Ratio of Funds from Op-
erations to Combined
Fixed Charges and Pre-
ferred Share Distribu-
tions (4)............. 2.3 2.2 2.6 5.5 17.9
Ratio of Earnings to
Combined Fixed Charges
and Preferred Share
Distributions (5)..... --(6) 1.5 1.7 3.3 11.3
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Income Producing Real
Estate Owned, at Cost. $2,653,604 $2,274,684 $1,622,404 $1,073,026 $ 354,436
Land Held for Develop-
ment.................. 159,645 109,316 60,363 42,147 21,667
Total Assets........... 3,033,953 2,462,306 1,833,972 1,194,937 401,855
Mortgage Notes Payable. 133,028 139,952 145,276 144,262 40,109
Long-Term Debt......... 724,052 524,191 324,527 -- --
Total Liabilities...... 1,003,912 805,933 639,040 350,607 141,618
Minority Interest...... 53,304 56,984 58,741 66,555 50,786
Total Shareholders' Eq-
uity.................. $1,976,737 $1,599,389 $1,136,191 $ 777,775 $ 209,451
Number of Common Shares
Outstanding........... 117,364 93,677 81,416 64,587 19,762
</TABLE>
S-15
<PAGE>
- --------
(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) Net earnings attributable to Common Shares for 1997 includes a one-time
adjustment of $75.4 million relating to the costs incurred in acquiring
the REIT Manager and the Property Manager from Security Capital in
September 1997. This expense is not deducted for the purposes of
calculating funds from operations due to its non-recurring and non-cash
nature.
(3) Funds from operations represents net earnings computed in accordance with
generally accepted accounting principles ("GAAP") before minority interest
and before gains/losses on disposition of depreciated property, plus real
estate depreciation and amortization, significant non-recurring items and
significant non-cash items. 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. SCI believes that funds from
operations is helpful to a reader as a measure of the performance of an
equity REIT because, along with cash flow from operating activities,
financing activities and investing activities, it provides a reader with
an indication of the ability of SCI to incur and service debt, to make
capital expenditures and to fund other cash needs. On January 1, 1995, SCI
adopted the National Association of Real Estate Investment Trusts'
("NAREIT") revised definition of funds from operations. Under this more
conservative definition, loan cost amortization is not added back to net
earnings in determining funds from operations. For comparability, funds
from operations for the periods prior to January 1, 1995 give effect to
the revised definition. The funds from operations measure presented by
SCI, while consistent with the NAREIT definition, will not be comparable
to similarly titled measures of other REITs which do not compute funds
from operations in a manner consistent with SCI. Funds from operations are
not intended to represent cash made available to shareholders. Cash
distributions paid to shareholders are presented above in the "Operating
Data."
(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) 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.
(6) Earnings were insufficient to cover combined fixed charges and preferred
share dividends for the year ended December 31, 1997 by $21.3 million due
to a one-time, non-recurring charge of $75.4 million relating to the cost
incurred in acquiring the REIT management and property management
companies from Security Capital. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview--Consummation
of Merger Transaction."
S-16
<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, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements are based on current
expectations, estimates and projections about the industry and markets in
which SCI operates, management's beliefs, and assumptions made by management.
Words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions ("Future Factors") which are difficult to predict. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements. Future Factors include: (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, (ii) changes in financial markets and interest rates that could
adversely affect SCI's cost of capital and its ability to meet its financial
needs and obligations, (iii) increased or unanticipated competition for
distribution properties in SCI's target markets and (iv) those factors
discussed below. These are representative of the Future Factors that could
affect the outcome of the forward-looking statements.
OVERVIEW
General
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, (iii) the extent to which SCI can sustain improved
market performance as measured by lease rates and occupancy and (iv) the
operating performance of SCI's unconsolidated subsidiaries (see "--Results of
Operations--Income from Unconsolidated Subsidiaries").
No assurance can be given that expected trends for the remainder of 1998 in
leasing rates and economic returns on acquired and developed properties will
be realized. There are risks associated with SCI's development and acquisition
activities which include Future Factors such as: development and acquisition
opportunities explored by SCI may be abandoned, construction costs of a
project may exceed original estimates due to increased materials, labor or
other expenses; and construction and lease-up may not be completed on
schedule, resulting in increased debt service expense and construction costs.
Acquisition activities entail risks that investments will fail to perform in
accordance with expectations and that analysis with respect to the cost of
improvements to bring an acquired project up to standards will prove
inaccurate, as well as general investment risks associated with any new real
estate investment. Although SCI undertakes a thorough evaluation of the
physical condition of each proposed investment before it is acquired, certain
defects or necessary repairs may not be detected until after it is acquired,
which could increase SCI's total acquisition cost. Risks include the
occurrence of any of the events described above that could adversely affect
SCI's ability to achieve its projected returns on acquisitions and projects
under development and could hinder SCI's ability to make expected
distributions.
S-17
<PAGE>
SCI's target market cities and submarkets have benefited substantially in
recent periods from demographic trends (including population and job growth)
which influence the demand for distribution properties. SCI believes its
ability to compete is significantly enhanced relative to other companies
because of its depth of management and ability to serve customers through the
SCI International Operating System(TM), which includes acquisition,
development, and property management personnel, and presence in local markets.
SCI expanded its operations into Mexico and Europe in the first half of 1997
to meet the needs of its targeted national and international customers as they
expand and reconfigure their distribution facility requirements globally. With
six target market cities identified in Mexico and 20 identified in Europe, SCI
believes that there are significant growth opportunities internationally. As a
result of acquisitions and developments of distribution properties for the
twelve months of 1997, SCI's rentable square footage of operating properties
increased by 10.2 million square feet or 12.7% to 90.8 million square feet as
of December 31, 1997 from 80.6 million square feet as of December 31, 1996.
SCI frequently acquires distribution properties, which are underleased, and
develops such 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
95.5% and a leased rate of 96.4% for stabilized properties owned as of
December 31, 1997. The average increase in rental rates for new and renewed
leases on previously leased space (17.8 million square feet) during 1997 was
19.2%. As leases are renewed or new leases are acquired, SCI expects most
lease rates on renewals or new leases to increase in 1998. These factors
should improve SCI's results of operations. Capital and credit market
conditions which affect SCI's cost of equity and debt capital may influence
future growth in operating results.
Consummation of Merger Transaction
On September 8, 1997, SCI terminated its REIT management agreement with the
REIT Manager and its property management agreement with the Property Manager
(collectively the "Management Companies"), pursuant to the Merger whereby SCI
acquired the operations and businesses of the Management Companies valued at
approximately $81.9 million from Security Capital in exchange for 3,692,023
Common Shares. The number of Common Shares issued to Security Capital was
determined using a per Common Share price of $22.175 (the average market price
of Common Shares over the five-day period prior to the August 6, 1997 record
date for determining SCI's shareholders entitled to vote on the Merger). The
Board of Trustees approved the Merger transaction based on the recommendation
of a special committee comprised of independent Trustees. The Merger, which
required the approval of a majority of SCI's outstanding Common Shares, was
approved by approximately 99% of the shareholders voting on the transaction on
September 8, 1997. As a result of the transaction, SCI became an internally
managed REIT and Security Capital remains SCI's largest shareholder (42.52%
ownership based on outstanding Common Shares as of December 31, 1997 and
36.76% on a diluted basis assuming conversion of Series B Preferred Shares and
limited partnership units and the exercise of options and warrants).
The financial impact of the Merger is discussed in more detail below under
"--Results of Operations" and "--Liquidity and Capital Resources."
Impact of Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Certain computer
programs that have time-sensitive software may recognize a date
S-18
<PAGE>
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar business activities.
SCI has undertaken a review of all of its computer systems and applications
to determine if these programs are Year 2000 compliant and if not, the efforts
that will be necessary to bring the programs into compliance. SCI has not
identified any computer system or application that, upon failure to be Year
2000 compliant, would have a material adverse impact on its business
activities or results of operations. However, the preliminary results of this
review indicate that some of SCI's accounting and financial reporting
applications are not Year 2000 compliant. For purposes of enhancing operating
efficiencies, SCI has already undertaken a project that will replace its core
financial systems with computer software that will better serve SCI in the
future. This new software, that is expected to be fully operational by the end
of 1999, is Year 2000 compliant.
SCI is currently evaluating any necessary modifications to other existing
software programs such that the programs will function properly with respect
to dates in the year 2000. The cost of these modifications is not expected to
be material and all conversions and modifications are expected to be completed
in a timely manner.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Net earnings attributable to Common Shares for the year ended December 31,
1997 and 1996 were $4.4 million and $53.5 million, respectively, a decrease of
$49.1 million (91.8%). This decrease resulted primarily from a one-time, non-
cash charge of approximately $75.4 million related to the costs incurred in
acquiring the businesses and operations of the Management Companies from
Security Capital. See "--Cost Incurred in Acquiring Management Companies from
a Related Party." The impact of this one-time charge, a $6.4 million foreign
exchange loss, see "--Foreign Exchange Loss," increased depreciation expense,
increased preferred share dividends and higher interest expense (due to larger
debt balances) was partially offset by a $7.0 million increase in Other Real
Estate Income, $3.3 million of income from 1997 investments in unconsolidated
subsidiaries, a $7.4 million increase in gains on dispositions of real estate
and an increase in earnings from SCI's distribution properties.
Historically, the primary components of revenue and earnings growth have
been from rental and occupancy rate growth in existing properties and
acquisition and development activity. As of December 31, 1997, SCI owned 1,005
operating properties totaling 90.8 million square feet with a historical cost
of $2.7 billion. A discussion of the major components of SCI's results of
operations follows. Net earnings are expected to increase in subsequent
periods due to the acquisition and development of additional operating
properties, continued increases in the prestabilized portfolio rental and
occupancy rates and in the stabilized portfolio rental rates, and additional
investments in unconsolidated subsidiaries.
Rental Revenues
Rental revenues for 1997 increased by $57.5 million or 25.3% to $284.5
million, as compared to $227.0 million for 1996. Of this increase, $16.8
million was generated by the 110 properties acquired in 1996, $24.2 million
was generated by the 86 development properties completed in 1996, $6.3 million
was generated by the 52 properties acquired in 1997, and $8.9 million was
generated by the 65 development properties completed in 1997. The remaining
$1.3 million increase was attributable to a $5.4 million increase in revenues
from the 703 properties owned at January 1, 1996 less a $4.1 million decrease
in revenues from the 52 properties owned at January 1, 1996 that were disposed
of between January 1, 1996 and December 31, 1997. Of the properties acquired
and developed in 1997 and 1996, 11 have been disposed of as of December 31,
1997.
Other Real Estate Income
Other real estate income increased by $7.0 million or 132% to $12.3 million
for 1997 from $5.3 million for 1996. Other real estate income consists
primarily of gains on disposition of undepreciated property and fees and
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other income from the corporate distribution facilities services business, the
majority of which is generated by SCI Development Services Incorporated ("SCI
Development Services"). SCI Development Services develops corporate
distribution facilities that do not meet SCI's investment criteria for long-
term ownership and works on a fee basis for customers who want to own their
own facilities. SCI Development Services is expected to generate recurring
income in subsequent periods. 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.
Income from Unconsolidated Subsidiaries
Income from unconsolidated subsidiaries relates to SCI's 1997 investments in
SCI Logistics Services Incorporated ("SCI Logistics"), and notes receivable
from SCI Logistics and CS Integrated LLC ("CSI"). SCI Logistics' primary
source of income is its ownership interest in CSI. At the time of SCI's
initial investment in SCI Logistics on April 24, 1997, SCI Logistics owned 60%
of CSI. On September 1, 1997, SCI Logistics increased its ownership interest
to 71.1% of CSI through additional capital contributions in conjunction with
the acquisition of Texas Cold Storage, adding 9.7 million cubic feet to CSI's
refrigerated warehousing network. On November 4, 1997, SCI made additional
capital contributions for the purchase of Continental Freezers, adding another
11 million cubic feet to CSI's refrigerated warehousing network and bringing
SCI's ownership interest to 77.1%. As of December 31, 1997, CSI operated or
had under development 78.6 million cubic feet of refrigerated warehousing.
Interest Income
Interest income for 1997 increased by $1.3 million to $2.4 million, from
$1.1 million in 1996. The increase in interest income was a result of higher
interest rates and higher cash balances in interest bearing accounts.
Rental Expenses and Acquisition of Property Manager
Rental expenses, including property management fees paid to a related party,
net of recoveries from customers, increased by $300,000 or 1.1% to $27.0
million for 1997 from $26.7 million for 1996. Gross expenses, before the
deduction of amounts recovered from tenants, were approximately 26% of rental
income for both 1997 and 1996. Net rental expenses (including property
management fees paid to a related party) decreased to 9.5% of total rental
revenues compared to 11.8% for 1996.
As a result of the Merger on September 8, 1997, SCI acquired the operations
of the Property Manager, which managed approximately 96% of SCI's operating
portfolio prior to the Merger. Subsequent to September 8, 1997, SCI no longer
pays a property management fee on the properties managed by its Property
Manager; however, SCI has included actual personnel and other operating costs
of this property management function in rental expenses on its Statement of
Operations.
Interest Expense
Interest expense increased by $13.9 million or 35.8% to $52.7 million for
1997 from $38.8 million for 1996. Total interest capitalized increased by $2.3
million or 14.3% to $18.4 million for 1997 from $16.1 million for 1996. The
increase in interest expense was principally due to the issuance of $200
million in Senior Notes on May 17, 1996, the issuance of $100 million of
Medium-Term Notes Series A on February 4, 1997 and the issuance of $100
million of Senior Notes on July 11, 1997, see "--Liquidity and Capital
Resources." The capitalized interest increase is attributable to increased
development activity in 1997.
REIT Management Fee and Acquisition of REIT Manager
The REIT management fee paid by SCI decreased by approximately $3.7 million
to $17.8 million or 17.2% during 1997 as compared to $21.5 million in 1996 due
to the termination of the REIT management agreement
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upon consummation of the Merger on September 8, 1997. Pursuant to the
consummation of the Merger, SCI acquired the REIT Manager and Property Manager
and became an internally managed REIT. Subsequent to September 8, 1997, the
REIT management fee was replaced with the actual personnel and other operating
costs associated with the REIT management function. These costs are recorded
as general and administrative expenses. Direct and incremental costs related
to successful development, acquisition and leasing activities have been
capitalized in accordance with GAAP.
Upon consummation of the Merger, SCI entered into an administrative services
agreement (the "Administrative Services Agreement") with Security Capital for
services which include, but are not limited to, payroll and human resources,
cash management, accounts payable, MIS support and other computer services,
research, investor relations and insurance, legal and tax administration.
These services are provided in exchange for a fee equal to Security Capital's
direct cost of providing the service plus an overhead factor of 20%, subject
to a maximum of approximately $2.0 million during 1997 and $5.1 million for
1998. Administrative Services Agreement fees from the Merger date through
December 31, 1997, under this agreement aggregated $1.1 million. The
Administrative Services Agreement, which expires on December 31, 1998,
provides for automatic renewals of consecutive one-year terms, subject to
approval by a majority of the independent Trustees. See "SCI Management--
Administrative Services Agreement."
Cost Incurred in Acquiring Management Companies from a Related Party
The market value of the 3,692,023 Common Shares issued to Security Capital
on the Merger date was approximately $79.8 million, based on the $21.625 per
share closing price of the Common Shares on September 9, 1997, the date the
Merger became effective, of which approximately $4.4 million was allocated to
the estimated fair value of the tangible net assets acquired. The $75.4
million difference was accounted for as costs incurred in acquiring the
Management Companies from a related party, rather than "goodwill," since for
accounting purposes the Management Companies were not considered "businesses"
for purposes of applying APB Opinion No. 16 "Business Combinations." This one-
time adjustment was recorded as an expense on SCI's Statement of Operations
but was not deducted for purposes of calculating funds from operations, due to
the non-recurring and non-cash nature of this expense.
Foreign Exchange Loss
On December 22, 1997, SCI entered into two separate contracts to (1)
exchange $373.8 million for 2.9 billion Swedish krona and (2) exchange 310.0
million German marks for $175.0 million in anticipation of the January 1998
acquisition and planned European currency denominated financing of
Frigoscandia AB; see "--Liquidity and Capital Resources." The contracts were
marked to market at December 31, 1997, resulting in a net foreign exchange
loss of $6.0 million due to the U.S. dollar's strength against these
currencies. These foreign exchange hedges were one-time, non recurring
contracts that fixed the exchange rate between the U.S. dollar and the Swedish
krona and German mark after SCI had entered into the purchase agreement to
acquire Frigoscandia AB, which required payment in Swedish krona. The
contracts were executed exclusively for the acquisition and financing of
Frigoscandia AB and were not entered into to hedge on-going income in foreign
currencies. The remeasurement of intercompany debt on the financial statements
of SCI's consolidated foreign subsidiaries into their functional currency
resulted in a foreign exchange loss of $348,000 for the year ended December
31, 1997. The loss was associated with the remeasurement of intercompany loans
between a wholly owned foreign subsidiary of SCI and its associated foreign
subsidiaries.
Other Expense
Other expense increased by $1.0 million or 34.5% to $3.9 million for 1997
from $2.9 million for 1996. Other expenses consist of land holding costs and
acquisition and corporate distribution facilities services pursuit cost write-
offs. Land holding costs were $2.3 million for 1997 compared to $1.5 million
for 1996, and acquisition and corporate distribution facilities services
pursuit cost write-offs were $1.6 million for 1997 compared to $1.4 million in
1996. The increase is primarily the result of increased acreage and value in
land holdings.
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Preferred Share Dividends
In June 1995, SCI issued $135.0 million of Series A Cumulative Redeemable
Preferred Shares ("Series A Preferred Shares") that have an annual dividend of
$2.35 per share (equivalent to an annual dividend rate of 9.4% of the
liquidation preference), which totaled $12.7 million annually for 1997 and
1996. In February 1996, SCI issued $201.3 million of Series B Cumulative
Convertible Redeemable Preferred Shares ("Series B Preferred Shares") that
have an annual dividend of $1.75 per share (equivalent to an annual dividend
rate of 7% of the liquidation preference) which totaled $14.1 million for 1997
compared to $12.1 million for the period from the February issue date through
December 31, 1996. In November 1996, SCI issued $100 million of Series C
Cumulative Redeemable Preferred Shares ("Series C Preferred Shares") that have
an annual dividend of $4.27 per share (equivalent to an annual dividend rate
of 8.54% of the liquidation preference) which totaled $8.5 million for 1997
and $1.1 million from the November issue date to December 31, 1996.
1996 COMPARED TO 1995
Net earnings attributable to Common Shares increased by $11.5 million or
27.4% to $53.5 million in 1996 from $42.0 million in 1995. The increase in net
earnings was principally due to the increase in the number of distribution
properties in operation, resulting from 1996 and 1995 acquisition and
development activity. Historically, the primary components of revenue and
earnings growth have been SCI's acquisition and development activity. SCI
acquired and developed 942 operating properties totalling 80.6 million square
feet from its inception through December 31, 1996 at a historical cost of $2.3
billion. As a result of 1996 acquisition and development activity, SCI's
rentable square footage increased by 22.1 million square feet or 37.8% to 80.6
million square feet as of December 31, 1996 from 58.5 million square feet as
of December 31, 1995.
Rental Revenues
Rental revenues for 1996 increased by $73.1 million or 47.5% to $227.0
million, as compared to $153.9 million for 1995. Of this increase, $27.8
million was generated by the 181 properties acquired in 1995, $11.5 million
was generated by the 49 developments completed in 1995, $18.6 million was
generated by the 111 properties acquired in 1996, and $12.9 million was
generated by the 86 developments completed in 1996. The remaining $2.3 million
increase was attributable to revenue increases in the 526 properties owned at
January 1, 1995. The revenue increase in properties owned at January 1, 1995
was due to an increase in their average occupancy level from 94.33% for 1995
to 95.69% for 1996 and increased rental rates on leases signed on previously
occupied space.
Other Real Estate Income
Other real estate income consists primarily of gains on disposition of
undepreciated property and fees and other income from corporate distribution
facilities customers generated to a large extent by SCI Development Services.
SCI Development Services develops corporate distribution 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 1996 decreased $604,000 from 1995, primarily resulting
from the investment of lower average balances of cash and cash equivalents in
interest bearing accounts in 1996 as compared to 1995.
Rental Expenses
Rental expenses, net of recoveries, increased by $8.2 million or 44.3% to
$26.7 million in 1996 from $18.5 million in 1995. The increase in rental
expenses was primarily attributable to 1995 and 1996 acquisitions and
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developments, which increased SCI's rentable square footage by 19.4 million
square feet in 1995 and 22.1 million square feet in 1996, to 80.6 million
square feet as of December 31, 1996 from 39.1 million square feet as of
December 31, 1994.
Interest Expenses
Interest expense increased by $6.8 million or 21.3% to $38.8 million in 1996
from $32.0 million in 1995. Total interest capitalized increased by $7.5
million or 87.2% to $16.1 million in 1996 from $8.6 million in 1995. The
increase in interest expense was principally caused by the issuance of $325
million in Senior Notes during 1995 and the issuance of $200 million in
additional Senior Notes in May 1996 (see "--Liquidity and Capital Resources").
The capitalized interest increase was attributable to increased development
activity in 1996.
REIT Management Fee
The REIT management fee paid by SCI was based on SCI's cash flow before the
REIT management fee and therefore increased in 1996 to $21.5 million from
$14.2 million in 1995 because cash flow increased substantially. See "--
Overview--Consummation of Merger Transaction."
Other Expense
Other expense increased by $0.7 million or 31.8% to $2.9 million in 1996
from $2.2 million in 1995. Other expenses consist of land holding costs and
acquisition and corporate distribution facilities services pursuit cost write-
offs. Land holding costs were $1.5 million in 1996 compared to $1.1 million in
1995, and acquisition and corporate distribution facilities services pursuit
cost write-offs were $1.4 million in 1996 compared to $1.1 million in 1995.
The increase is principally the result of the increased acreage and value in
land holdings and an increase in the amount of build-to-suit activity.
Preferred Share Dividends
In June 1995, SCI issued $135.0 million of Series A Preferred Shares that
are entitled to receive an annual dividend of $2.35 per share (equivalent to
an annual dividend rate of 9.4% of the liquidation preference), which amounted
to $12.7 million in 1996 compared to $6.7 million for the period from the June
1995 issue date through December 31, 1995. In February 1996, SCI issued $201.3
million of Series B Preferred Shares that are entitled to receive an annual
dividend of $1.75 per share (equivalent to an annual dividend rate of 7% of
the liquidation preference), which amounted to $12.1 million for the period
from the February 1996 issue date through December 31, 1996. On November 13,
1996, SCI issued $100.0 million of Series C Preferred Shares that are entitled
to receive an annual dividend of $4.27 per share (equivalent to an annual
dividend rate of 8.54% of the liquidation preference) which amounted to $1.1
million for the period from the November 1996 issue date to December 31, 1996.
ENVIRONMENTAL MATTERS
SCI did not experience any environmental condition on its properties which
materially adversely affected its results of operations or financial position.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities increased by $56.1 million or 41.2%
from $136.2 million in 1996 to $192.3 million in 1997, primarily as a result
of increased properties in operation. Cash used in investing activities
decreased from $665.9 million in 1996 to $570.9 million in 1997. Cash provided
by financing activities decreased to $398.8 million in 1997 compared to $512.2
million in 1996. Cash provided by financing activities for 1997 consisted
primarily of $199.8 million of proceeds from the long-term debt offerings in
February and July 1997
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and $405.0 million of net proceeds from SCI's offerings of Common Shares in
February, September and December of 1997, less $38.6 million net repayment of
the line of credit. Cash provided by financing activities for 1996 consisted
primarily of $199.6 million of proceeds from the May 1996 long-term debt
offering, $289.4 million of net proceeds from the sale of the Series B
Preferred Shares and Series C Preferred Shares and $210.8 million of net
proceeds from SCI's rights offering of Common Shares, less $42.4 million net
repayment of the line of credit. Additionally, distributions paid to common
and preferred shareholders and to minority interests were $147.5 million in
1997 compared to $116.5 million in 1996, and mortgage payments were $19.7
million in 1997 compared to $23.4 million in 1996.
On December 22, 1997, SCI raised net proceeds of $200.0 million from a
private placement of 8,416,667 Common Shares at a price of $24 per share. SCI
paid Security Capital Markets Group Incorporated, a registered broker-dealer
subsidiary of Security Capital ("Capital Markets Group"), a $2.0 million fee
for their services in connection with the offering.
On September 8, 1997, SCI's shareholders approved a long-term incentive
plan. Approximately 9.4 million Common Shares have been reserved for issuance
under this plan. On September 8, 1997, SCI granted options (that have five- or
nine-year vesting schedules) to purchase 3,068,152 Common Shares at $21.21875
per share to officers and certain employees of SCI. Also under the long-term
incentive plan, certain officers and employees of SCI purchased 1,356,834
Common Shares at a price of $21.21875 per share (the average of the high and
low market price on September 8, 1997) and SCI financed 95% of the total
purchase price through ten-year, recourse loans to the participants
aggregating $27.3 million.
On August 6, 1997, in connection with the consummation of the Merger, SCI
issued 3,692,023 Common Shares to Security Capital and commenced a rights
offering to sell 4,970,352 Common Shares at $21 per share. On September 9,
1997, SCI offered 994,070 additional Common Shares at $21 per share to third
party subscribers in the rights offering that were not accepted in whole or in
part due to demand in excess of the Common Shares offered. All of these Common
Shares were issued in September 1997, and net proceeds from these offerings
totaled $124.9 million.
On July 11, 1997, SCI issued $100 million of Senior Notes due 2017 (the
"July 1997 Notes"). The July 1997 Notes bear interest at 7.625% per annum
payable semi-annually on January 1 and July 1 of each year. The principal will
mature on July 1, 2017. The average effective interest cost is 7.73%,
including all costs associated with the offering plus $235,759 of combined
proceeds from the termination of a forward treasury lock agreement and a swap
agreement entered into in November 1996 in anticipation of the July debt
offering. The forward treasury lock agreement was on a notional amount of $26
million of U.S. Treasury bonds maturing August 15, 2026 with a base price of
103.453% and effectively fixed the 30-year Treasury bond used to price the
July 1997 Notes at a rate of 6.56%. The termination of the forward treasury
lock resulted in a gain of $174,319. The swap agreement had a notional amount
of $33.0 million and required SCI to pay a fixed rate of 6.61% on the notional
amount in exchange for a floating rate equal to the three-month LIBOR rate.
The termination of the swap on July 8, 1997 resulted in a gain of $61,440.
On February 7, 1997, SCI completed a public offering of 4,025,000 Common
Shares. Net proceeds to SCI after underwriting discounts and offering costs
were $80.4 million.
On February 4, 1997, SCI issued $100.0 million of Series A 2015 Notes under
its $200 million Medium-Term Note program (the "Medium-Term Note program").
The Series A 2015 Notes bear interest at 7.81%, payable semi-annually on
February 1 and August 1. 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. 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
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with two interest rate protection agreements entered into in August 1996 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.
In November 1996, SCI established the Medium-Term Note program. Under such
program, SCI may offer up to $200.0 million in Medium-Term Notes, Series A,
due nine months or more from the date of issue. Each note will bear interest
at a fixed rate or at a variable rate determined by reference to an interest
rate formula and will be issued either as an amortizing note or as an original
issue discount note. As of March 12, 1998, $100.0 million remains available to
be issued under this program.
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 $100.0 million plus accrued and
unpaid dividends. The net proceeds (after underwriting commission and other
offering costs) of the Series C Preferred Shares issued were $97.1 million.
Holders of the Series C Preferred Shares are entitled to only limited voting
rights under certain conditions. 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), payable quarterly in arrears on the last day
of March, June, September and December of each year. 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. The Series C Preferred Shares rank on a parity with the
Series A Preferred Shares and the Series B Preferred Shares with respect to
payment of distributions and amounts upon liquidation. In anticipation of the
Series C Preferred Share offering, an interest rate swap agreement was entered
into on October 31, 1996 with a termination date of November 11, 1996. The
notional principal amount was $90.0 million with a fixed rate of 6.707%
payable by SCI in exchange for a floating rate equal to the bid yield-to-
maturity on the 6% U.S. Treasury Bond due February 15, 2026. SCI paid $224,721
to terminate the swap agreement on November 11, 1996.
On August 21, 1996, SCI commenced a rights offering to sell 6,787,806 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 were 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 all subscriptions
receivable were collected.
On May 17, 1996, SCI issued $50.0 million of Senior Notes due 2002 (the
"2002 Notes"), $100.0 million of Senior Notes due 2008 (the "2008 Notes"), and
$50.0 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 $25.0 million, commencing May
15, 2005. The 2016 Notes bear interest at 8.65% per annum and require
aggregate annual principal payments of $5.0 million, commencing 2010 through
2013, $7.5 million in 2014, $10.0 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
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investment bank on May 9, 1996. The agreement included a determination date of
May 15, 1996 and a settlement date of May 16, 1996. The notional amount was
$50 million with a reference price of 97.203. On the pricing date of 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 rate obtained on the
pricing date of May 14, 1996 plus the $1.086 million settlement payment
resulted in SCI achieving the equivalent of the rate that was locked in on May
9, 1996 for the 2016 Notes. In order to hedge 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 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 rate obtained on the pricing date of May 14,
1996 plus the $837,000 settlement resulted in SCI achieving an interest rate
which approximated market interest rates 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.
On February 21, 1996 and February 26, 1996, SCI issued a total of 8,050,000
Series B Preferred Shares. The Series B Preferred Shares have a liquidation
preference of $25.00 per share for an aggregate liquidation preference of
$201.3 million plus any accrued and unpaid dividends. Holders of the Series B
Preferred Shares are entitled only 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. As of March 12, 1998, 7,981,700 Series B
Preferred Shares remain outstanding. Holders of the Series B Preferred Shares
are entitled to receive, when, as and if declared by the Board, 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. Such distributions will equal the number of
Common Shares, or portion thereof, into which a Series B Preferred Share is
convertible. Such distributions 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 B Preferred Shares
rank on parity with the Series A Preferred Shares and the Series C Preferred
Shares with respect to payment of distributions and amounts upon liquidation.
As of December 31, 1997, SCI had outstanding notes with a face value of
$725.0 million, which include the July 1997 Notes, the Series A 2015 Notes and
the May 1996 Notes (the "Notes"), and which 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 to 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. As of December 31, 1997, SCI was in compliance with all such debt
covenants.
SCI has a $350.0 million unsecured revolving line of credit agreement with
NationsBank of Texas, N.A. (as agent for a bank group). Borrowings bear
interest at SCI's option, at either an annual rate equal to the lesser of (a)
the greater of the federal funds rate plus 0.5% and the prime rate, or (b)
LIBOR plus 0.95%, based upon SCI's current senior debt ratings. Additionally,
there is a commitment fee ranging from 0.125% to 0.20% per annum of the unused
line of credit balance. The line is scheduled to mature in May 1999 and may be
extended
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for an additional year with the approval of NationsBank and the other
participating lenders; if not extended, at SCI's election, will either (a)
convert to a three-year term note, or (b) continue on a revolving basis with
the remaining one-year maturity. 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 $1.25 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 1.75 to 1. As of December 31, 1997, SCI was in
compliance with all covenants contained in the line of credit. Additionally,
SCI has a $25.0 million short-term unsecured borrowing agreement with
NationsBank through October 1998. The interest rate and the maturity date of
each advance on such agreement are determined by agreement between SCI and
NationsBank of the time of each advance. As of March 12, 1998, $275.0 million
of short-term borrowings were outstanding on these credit facilities.
SCI utilizes derivative instruments in anticipation of future financing
transactions in order to manage well defined interest rate risk. Through
hedging, SCI can effectively manage the risk of increases in interest rates on
future debt issuances. In anticipation of debt offerings in 1998, on October
28, 1997, SCI entered into two interest rate protection agreements. A forward
treasury lock agreement was executed with a notional amount of $75.0 million
on the 6 3/8% Treasury bond due August 2027 and a swap agreement was entered
into with a notional amount of $75.0 million on the 6 5/8% Treasury bond due
February 2027. The forward treasury lock has a termination date of March 31,
1998 and effectively locks in the 30-year treasury rate used to price SCI's
debt, at 6.316%. The swap agreement has a termination date of May 31, 1998,
and carries a fixed rate of 6.721% which is a combination of the treasury rate
plus the swap spread and the forward premium.
SCI intends to also utilize derivative instruments in order to manage
currency risk exposure associated with foreign currency denominated purchase
contracts and income in excess of interest expense. As described below, SCI
had two open foreign currency contracts as of December 31, 1997, related to
the January 1998 acquisition of Frigoscandia AB. In future periods SCI will
consider using selective currency hedges through foreign exchange forwards or
options in order to minimize on-going currency gains and losses.
On January 16, 1998, an unconsolidated subsidiary of SCI acquired
Frigoscandia AB, which SCI believes is Europe's largest refrigerated
warehousing company, for a net cost of $395.0 million. The acquisition of
Frigoscandia AB was financed primarily with a short-term $200.0 million bridge
loan from NationsBank, due on March 31, 1998, and $190.0 million of borrowings
on SCI's $350.0 million line of credit. The bridge loan bears interest at an
annual rate equal to the lesser of (a) the greater of the sum of the Federal
Funds Rate plus one-half percent, and (b) the prime rate or the Eurodollar
Rate plus 0.95%. Accrued interest is due and payable as it accrues on the last
day of each month, commencing on January 31, 1998. SCI anticipates repaying
the $200.0 million bridge loan when Frigoscandia AB arranges financing and
repays SCI a $200.0 million short-term loan made by SCI on January 16, 1998.
On December 22, 1997, SCI entered into foreign exchange forward contracts to
fix the purchase price of the Frigoscandia acquisition (U.S. dollar versus
Swedish krona) and to hedge the cost of the planned European currency
denominated financing of the acquisition (German mark versus U.S. dollar). To
fix the purchase price of Frigoscandia which was denominated in Swedish krona,
SCI agreed to purchase 2.9 billion krona against the U.S. dollar at 7.7583 on
January 15, 1998. The price of the krona was at 8.015 on the January 15, 1998
settlement date, resulting in a total loss of $12.0 million, of which $7.9
million was recognized in the financial statements as of December 31, 1997.
The net effect of the hedge is that SCI fixed its purchase price in dollars as
of December 22, 1997. If the hedge had not been entered into, SCI would have
paid $12.0 million less due to the dollar appreciating against the Swedish
krona. To hedge the cost of the Frigoscandia financing to be denominated in
German marks, SCI agreed to sell 310.0 million German marks against the U.S.
dollar at 1.7715 on March 16, 1998. This contract, which will be settled in
March 1998, was marked to market as of December 31, 1997 for a foreign
exchange gain of $1.9 million.
From inception through December 31, 1997, SCI invested $2.7 billion for the
acquisition and development of 1,005 operating distribution properties and had
invested $85.6 million in refrigerated warehousing through its subsidiary, SCI
Logistics. 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.
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At December 31, 1997, SCI had $326.7 million of budgeted development cost
for developments in process, of which $146.4 million was unfunded. 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, fixed rate,
10-year to 30-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.
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 the Board and management consider 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 (the "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
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 Preferred Shares. The Preferred Share dividends do not
reduce the amount SCI has budgeted for Common Share distributions, but could
increase the percentage of the Common Share distribution that constitutes a
non-taxable return of capital.
Net cash flow provided by operating activities was $192.3 million for 1997,
compared to $136.2 million for 1996, and $100.2 million for 1995. The primary
differences between the periods relate to new property acquisitions and
development completions as described under "--Results of Operations." SCI's
investment activities used approximately $570.9 million, $665.9 million and
$628.8 million of cash in 1997, 1996 and 1995, respectively. After deducting
distributions to shareholders, SCI's financing activities provided net cash
flow of $398.8 million, $512.2 million and $529.6 million for 1997, 1996 and
1995, respectively.
FUNDS FROM OPERATIONS
Funds from operations attributable to Common Shares increased $44.2 million
or 37.8% to $161.1 million in 1997 from $116.9 million in 1996. 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 real estate depreciation and amortization, significant non-
recurring items and significant non-cash items. SCI believes that funds from
operations is helpful to a reader as a measure of the performance of an equity
REIT because, along with cash flow from operating activities, financing
activities and investing activities, it provides a reader with an indication
of the ability of SCI to incur and service debt, to make capital expenditures
and to fund other cash needs. On January 1, 1995, SCI adopted the NAREIT
revised definition of funds from operations. Under this more conservative
definition, loan cost amortization is not added back to net earnings in
determining funds from operations. The funds from operations measure presented
by SCI, while consistent with the NAREIT definition, will not be comparable to
similarly titled measures of other REITs which do not compute funds from
operations in a manner consistent with SCI. Funds from operations are not
intended to represent cash made available to shareholders. Cash distributions
paid to shareholders is presented in "Selected Financial Data." 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.
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<PAGE>
STATEMENT OF FUNDS FROM OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Net earnings attributable to Common Shares......... $ 4,431 $ 53,460 $42,015
Add (Deduct):
Depreciation and amortization, including share of
unconsolidated subsidiaries..................... 78,694 59,850 39,767
Minority interest................................ 3,560 3,326 3,331
Costs incurred in acquiring management companies
from a related party............................ 75,376 -- --
(Gain)/loss on disposition of depreciated real
estate.......................................... (7,378) 29 (1,053)
Non-recurring foreign exchange loss.............. 6,376 -- --
Other............................................ -- 225 --
-------- -------- -------
Funds from operations attributable to Common
Shares............................................ $161,059 $116,890 $84,060
======== ======== =======
</TABLE>
SCI MANAGEMENT
SCI's success depends upon management's ability to provide strategic and
day-to-day management, research, investment analysis, acquisition and due
diligence, development, marketing, asset management, capital markets, asset
disposition, management information systems support and legal and accounting
services. The majority of these services are provided internally by SCI's
management, while certain other services are provided by Security Capital
pursuant to the Administrative Services Agreement as discussed under "--
Administrative Services Agreement."
Internalization of Management and Consummation of Merger Transaction. During
the third quarter of 1997, SCI became an internally managed REIT when it
acquired the operations of the REIT Manager and the Property Manager owned by
Security Capital in exchange for 3,692,023 SCI Common Shares. As a result of
the Merger, SCI became an internally managed REIT and personnel employed by
the REIT Manager and the Property Manager became employees of SCI. SCI
believes the internalization of management will have a positive impact on
earnings growth as the company continues to grow. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Overview--
Consummation of Merger Transaction."
Administrative Services Agreement. Upon closing of the Merger, SCI entered
into the Administrative Services Agreement with Security Capital for services
which include, but are not limited to, payroll and human resources, cash
management, accounts payable, MIS support and other computer services,
research, investor relations and insurance, legal and tax administration.
These services are provided in exchange for a fee equal to Security Capital's
direct cost of providing the service plus an overhead factor of 20%, subject
to a maximum of approximately $2.0 million during 1997 and $5.1 million for
1998. In 1997, $1.1 million was paid to Security Capital under the
Administrative Services Agreement. The Administrative Services Agreement,
which expires on December 31, 1998, provides for automatic renewals of
consecutive one-year terms, subject to approval by a majority of the
independent Trustees.
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 "--Officers and Trustees
of SCI."
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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. SCI's management has demonstrated its
strategic vision by focusing on building an international distribution network
at prices below replacement cost and a land inventory at attractive prices.
SCI also focuses 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. In addition, SCI differentiated itself from its competition through
the SCI International Operating System(TM), as the first international
operating company that was able to address and service a corporate customer's
distribution space requirements on an international, national, regional and
local basis. See "Business--SCI Growth and Operating Strategy" 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. As part of the Administrative Services Agreement, Security Capital
Real Estate Research Group Incorporated ("RERG"), an affiliate of Security
Capital, devotes substantial time to research, on a submarket-by-submarket
basis, under the supervision of the Managing Directors of SCI; hence, RERG
supplements SCI's strategic focus and investment program.
Investment Committee Process. SCI believes that internal investment
committees should provide discipline and guidance to the investment activities
of the REIT in order to achieve its investment goals. The eleven members of
SCI's investment committee have a combined 164 years of experience in the real
estate industry. See "--Officers and Trustees of SCI." The internal investment
committee receives detailed written analyses and research, in a standardized
format, from SCI'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. The
quality of the investment committee process is evident from the ability of SCI
to achieve its investment goals. From inception through December 31, 1997, SCI
has generally realized its projected initial returns and growth from
distribution property investments.
Acquisitions Capability/Due Diligence Process. SCI believes that management
should include experienced senior personnel dedicated to acquiring investments
and performing intelligent and thorough due diligence. SCI employs 19 full
time acquisition and due diligence professionals and has developed uniform
systems and procedures for due diligence. SCI's acquisition and due diligence
group has screened and selected a large volume of successful investments.
Development Capability. SCI believes that by internally developing projects,
management can capture for the REIT the value which normally escapes through
sales premiums paid to successful developers. SCI's 50 development
professionals have substantial development experience, as described in "--
Officers and Trustees of SCI." SCI has engaged in substantial development of
distribution space at attractive yields and believes that development will
provide growth when the market for acquisitions becomes less favorable. From
inception through January 31, 1998, SCI has commenced or completed development
of 35.6 million square feet of distribution space with a total expected
investment of $1.270 billion, including 1.6 million square feet that has been
disposed of through January 31, 1998. SCI has commenced development of 78
master-planned parks in 33 target market cities in the United States, Mexico
and Europe. As of January 31, 1998, SCI owned 1,634 acres of additional land
and had fixed price options and rights of first refusal to acquire 505 acres
and 36 acres, respectively, which in the aggregate will permit the development
of approximately 37.2 million square feet of additional distribution space in
32 target market cities. Also, as of January 31, 1998, SCI had an additional
656 acres under letters of intent or contingent contracts, subject to
completion of due diligence, which will permit the development of
approximately 12.0 million square feet of additional distribution space.
Operating Capability. SCI believes that management can substantially improve
Funds from Operations (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Funds from Operations" and "Selected
Financial Data"), by actively and effectively managing assets. SCI conceived
of and developed the SCI International Operating System(TM) to effectively
operate SCI's business and provide
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customers with an exceptional level of coordinated, comprehensive services,
including property management. The management of SCI's distribution facilities
is controlled and effectively administered through the SCI International
Operating System(TM).
Capital Markets Capability. SCI believes that management must be able to
effectively raise equity and debt capital in order for SCI to achieve superior
growth through investment. Capital Markets Group, a subsidiary of Security
Capital, has successfully assisted in or arranged funding for SCI's investment
program, including SCI's initial public offering in March 1994 after which SCI
commenced trading on the NYSE. Following the acquisition of the REIT Manager
in September 1997 as described under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview--Consummation of
Merger Transaction," SCI has the capability in-house to raise debt and equity
capital, or may use the services of Capital Markets Group for a fee to arrange
such offerings as in the December 1997 private equity placement described
under "--Capital Markets."
Communications/Shareholder Relations Capability. SCI's success in capital
markets and asset acquisition activities can be enhanced by management's
ability to effectively communicate SCI's strategy and performance to
investors, sellers of property and the financial media. SCI has 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 current administration.
OFFICERS AND TRUSTEES OF SCI
Trustees and Senior Officers of SCI
K. DANE BROOKSHER--59--Mr. Brooksher was elected as a Trustee in October
1993 and as Co-Chairman and Chief Operating Officer of SCI in November 1993,
and is Co-Chairman and Chief Operating Officer and a Director of Security
Capital Industrial Management Incorporated ("Security Capital Industrial
Management") since September 1997. Mr. Brooksher was Co-Chairman and Chief
Operating Officer of the REIT Manager from January 1994 to September 1997, and
a Director of the REIT Manager from November 1993 to September 1997. 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),
Harvill Press Limited 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 1998.
DONALD P. JACOBS--70--Mr. Jacobs was elected as 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
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<PAGE>
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--Mr. Kelley is an Advisory Trustee. He is also a Trustee
of Security Capital Pacific Trust ("PTR"), a REIT affiliated with Security
Capital; Chairman of Pacific Retail Trust (ownership and development of infill
retail properties in the southwestern United States). From 1987 to 1991, he
was 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 Security Capital and Tri State Media.
IRVING F. LYONS, III--48--Mr. Lyons was elected as a Trustee in March 1996
and as Co-Chairman and Chief Investment Officer of SCI in March 1997, and as a
Director and Co-Chairman and Chief Investment Officer of Security Capital
Industrial Management since September 1997. From December 1993 to March 1997,
he was Managing Director of SCI; from December 1993 to September 1997, he was
Managing Director of the REIT Manager and a Director of the REIT Manager from
January 1994 to September 1997. 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 the San Francisco Bay Area. Mr. Lyons' term
as Trustee expires in 1998.
WILLIAM G. MYERS--70--Mr. Myers was elected as a Trustee in January 1995. He
is also a Trustee of PTR, a REIT affiliated with Security Capital; Chief
Executive Officer of Ojai Ranch and Investment Company, Inc., Santa Barbara,
California, which he founded in 1963 (agri-business and other investments);
and director, Chalone Wine Group, Napa, California. Mr. Myers' term as Trustee
expires in 2000.
JOHN E. ROBSON--67--Mr. Robson was appointed a Trustee as of April 1, 1994.
Since October 1993, Mr. Robson has served as Senior Advisor of BancAmerica
Robertson Stephens, 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 Calgene Inc. (agricultural products),
Northrop Grumman Corporation (aerospace) and Monsanto Company. Mr. Robson's
term as Trustee expires in 2000.
THOMAS G. WATTLES--46--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 Non-Executive Chairman since March 1997. He has been Non-Executive
Chairman and a Director of Security Capital Industrial Management since
September 1997. Mr. Wattles was Co-Chairman and Chief Investment Officer of
SCI from November 1993 to March 1997, and Managing Director of SCI and the
REIT Manager from January 1993 to November 1993. From November 1993 to
September 1997, he was Co-Chairman and Chief Investment Officer of the REIT
Manager, and a Director of the REIT Manager from June 1991 to September 1997.
Mr. Wattles' term as Trustee expires in 1999.
WALTER C. RAKOWICH--40--Managing Director of SCI since December 1997 and
Senior Vice President of Security Capital Industrial Management since
September 1997, where he has responsibility for the Mid-Atlantic region. From
November 1994 to December 1997, Mr. Rakowich was Senior Vice President of SCI;
from November 1994 to September 1997, he was Senior Vice President of the REIT
Manager and Vice President of the REIT Manager from July 1994 to November
1994; from October 1993 to June 1994, a consultant to SCI in the area of due
diligence and acquisitions. Prior thereto, 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.
JEFFREY H. SCHWARTZ--38--Managing Director of SCI since December 1994, where
he has overall responsibility for all European and Asia-Pacific investment
activities and operations. He has been a Director of
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Security Capital Global Realty since November 1997 and Managing Director of
Security Capital Industrial Management since September 1997. Mr. Schwartz was
Managing Director and a Director of the REIT Manager from October 1994 to
September 1997. 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.
JOHN W. SEIPLE--39--Managing Director of SCI since December 1997 and Senior
Vice President of Security Capital Industrial Management since September 1997,
where he has responsibility for the South-East region. From November 1994 to
December 1997, Mr. Seiple was Senior Vice President of SCI; from November 1994
to September 1997, he was Senior Vice President of the REIT Manager, and Vice
President of the REIT Manager from October 1993 to November 1994. Prior
thereto, from January 1992 to June 1993, Senior Vice President.
ROBERT J. WATSON--48--Managing Director of SCI since January 1993 and
Managing Director and a Director of Security Capital Industrial Management
since September 1997. From November 1992 to September 1997, Mr. Watson was a
Director and Managing Director of the REIT Manager.
Other Officers
ROBERT O. ALTER--38--Vice President of Security Capital Industrial
Management since September 1997, where he is corporate distribution facilities
officer in the Southeast region, and Vice President of SCI since August 1995;
from August 1995 to September 1997, Vice President of the REIT Manager.
GARY E. ANDERSON--32--Vice President of Security Capital Industrial
Management since September 1997, where he is responsible for marketing in
SCI's Mexico target markets and Vice President of SCI since September 1996;
from September 1996 to September 1997, Vice President of the REIT Manager;
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.
NED K. ANDERSON--50--Senior Vice President of Security Capital Industrial
Management since September 1997, where he has responsibility for the Pacific
region; previously he had Market Officer responsibilities for the San
Francisco Bay Area, and Senior Vice President of SCI since December 1993; from
January 1994 to September 1997, Senior Vice President of the REIT Manager;
Prior thereto, from 1985 to December 1993, he was a partner at King & Lyons,
where he directed the development, leasing and management of the 250 acre
Bayside Business Park in Fremont. He also helped oversee King & Lyons East Bay
properties, which total 2.5 million square feet of buildings.
GREGORY J. ARNOLD--42--Vice President of Security Capital Industrial
Management since September 1997 where he is a member of the Global Services
Group with responsibilities for SCI's national clients in the northeast
region, and Vice President of SCI since January 1996; from January 1996 to
September 1997, Vice President of the REIT Manager; 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.
GREGORY A. BAUER--36--Vice President of Security Capital Management
Incorporated since December 1997 with Project Manager responsibilities for the
Southeast region, and Vice President of SCI; from July 1996 to December 1997,
he was Project Manager for the Southeast region. Prior thereto, from May 1994
to July 1996, he was Project Manager of the Facility Group; and from July 1992
to May 1994, he was Project Manager of Gibbs & Register, Inc.
LISA M. BENNETT--34--Vice President of Security Capital Industrial
Management since September 1997, where she is controller for the Global
Development Group, and Vice President of SCI since June 1995; from June 1995
to September 1997, Vice President of the REIT Manager. Prior thereto, Ms.
Bennett provided accounting services for the Global Development Group from
October 1993. Ms. Bennett is a Certified Public Accountant.
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CLAUDE A. BILLINGS--57--Vice President of Security Capital Industrial
Management since September 1997, where he is a member of the Global Services
Group, and Vice President of SCI since January 1994; from January 1994 to
September 1997, Vice President of the REIT Manager; from March 1991 to
February 1994, Senior Vice President and Regional Manager of the Staubach
Company, a Dallas, Texas corporate real estate service firm.
PATRICK D. BREWER--44--Vice President of Security Capital Industrial
Management since September 1997, where he is responsible for marketing
activities in Texas and Mexico; from April 1996 to September 1997, he was Vice
President of the REIT Manager; from April 1993 to April 1996, he was with SCI
Client Services.
ERIC D. BROWN--37--Vice President of Security Capital Industrial Management
since September 1997, where he is the Regional Property Manager for the
Central region, and Vice President of SCI since December 1996; from December
1996 to September 1997, Vice President of the REIT Manager; from May 1994 to
September 1997, Vice President of Client Services with property management
responsibilities for Austin, Brownsville, El Paso and San Antonio, Texas.
MARK R. CASHMAN--37--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Dallas, Texas, and Vice President of SCI since November 1995. Prior
thereto, from January 1995 to November 1995, Vice President of Security
Capital Pacific Trust 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 holdings throughout
the western United States.
PAMELA P. CAVALIERE--45--Vice President Security Capital Industrial
Management since September 1997, where she is responsible for Client Services
for the Southeast Region; from March 1997 to September 1997, she was a Vice
President of the REIT Manager; from August 1995 to March 1997, she was Senior
Property Manager for SCI Client Services, Inc. Prior thereto, from June 1992
to July 1995, she was General Manager of Florida Real Estate for Paragon
Group, Inc.
JOHN M. CLINTON--41--Vice President of Security Capital Management
Incorporated since December 1997, where he is responsible for the Dallas
Metroplex and San Antonio markets, and Vice President of SCI; he has acted as
Project Manager for SCI since September 1994. Prior thereto, from April 1991
to September 1994, he was Engineering Group Leader for the Superconducting
Super Collider Laboratory.
STEPHEN M. CLOUD--35--Vice President of Security Capital Management
Incorporated since December 1997 where he is responsible for marketing
activities and leasing in the Washington, D.C. area, and Vice President of
SCI; from November 1995 to December 1997, he was a marketing representative of
SCI. Prior thereto, from August 1988 to October 1995, he was a Senior
Associate with CB Commercial Real Estate.
JAMES D. COCHRAN--37--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Denver, Colorado and Kansas City, Kansas, and Vice President of SCI since
March 1994; from August 1988 to March 1994, Vice President for TCW Realty
Advisors, where he was responsible for industrial acquisitions in southern
California.
PAUL C. CONGLETON--43--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Houston and Austin, Texas, and Vice President of SCI since January 1995;
from January 1995 to September 1997, Vice President of the REIT Manager; from
October 1990 to December 1994, Principal with Overland Company, a property
management, development and investment services firm in Tucson, Arizona.
R. STAN CONWAY, JR.--34--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Atlanta, Georgia, and Vice President of SCI since November 1994; from
November 1994 to September 1997, Vice President of the REIT Manager; from
October 1989 to October 1994, Vice President of Marketing for Bullock, Terrell
and Mannelly.
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MICHAEL S. CURLESS--34--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Indianapolis, and Vice President of SCI since August 1995; from August
1995 to September 1997, Vice President of the REIT Manager; from June 1989 to
August 1995, Marketing Director with Trammell Crow Company, where he was
responsible for the development and marketing of industrial projects.
DAVID B. DANIEL--31--Vice President of Security Capital Industrial
Management since September 1997, where he has been a member of the due
diligence team since April 1995, and Vice President of SCI since June 1996;
from June 1996 to September 1997, Vice President of the REIT Manager. Prior
thereto, 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, where he performed due diligence and evaluation on a variety of real
estate transactions.
MARK H. DEGNER--36--Vice President of Security Capital Industrial Management
since September 1997, where he is responsible for portfolio acquisitions and
dispositions, and Vice President of SCI since April 1994; from April 1994 to
September 1997, Vice President of the REIT Manager; 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.
GREGORY S. DELONG--45--Vice President of Security Capital Industrial
Management since September 1997, where he is the corporate distribution
facilities officer for the Pacific Region, and Vice President of SCI; from
August 1995 to August 1997, he was a self-employed consultant for corporate
real estate site acquisition. Prior thereto, from January 1993 to August 1995,
he was Vice President of Acquisitions for Pacwest Development in the western
U.S.
DAVID A. DITZ--43--Vice President of Security Capital Industrial Management
since December 1997 where he is a member of the Global Development Group with
project management responsibilities for the Central Region, and Vice President
of SCI; from August 1995 to December 1997, he had project management
responsibilities for the Pacific Region. Prior thereto, from January 1992 to
August 1995, he was founder and principal of True Adams Company.
WILLIAM H. EAGER--57--Vice President of Security Capital Industrial
Management since September 1997, where he is a member of the Global Services
Group and Vice President of SCI since June 1996; from June 1996 to September
1997, Vice President of the REIT Manager. Prior thereto, 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 transactions.
FRANK H. FALLON--36--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
in Memphis, Nashville and Chattanooga, Tennessee, and Vice President of SCI
since January 1995; from January 1995 to September 1997, Vice President of the
REIT Manager. Prior thereto, 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--32--Vice President of Security Capital Industrial Management
since September 1997, where he is a member of the European operations group
and Vice President of SCI since September 1996; from September 1996 to
September 1997, Vice President of the REIT Manager. Prior thereto, Mr. Finke
was a member of the Management Development Program from July 1994 to August
1995; in May 1994 Mr. Finke received his M.B.A. from the Harvard Graduate
School of Business Administration.
KURT R. FULLER--39--Vice President of Security Capital Industrial Management
since September 1997, where he has Project Manager responsibilities for tenant
improvement construction in the San Francisco Bay
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Area, Reno, Portland, Seattle and Salt Lake City, and Vice President of SCI
since October 1994; from October 1994 to September 1997, Vice President of the
REIT Manager; 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.
JANE E. GRIFFITH--43--Vice President of Security Capital Industrial
Management since September 1997, where she is the Regional Property Manager
for the Pacific region; from November 1996 to September 1997, she was Vice
President of the REIT Manager; from December 1994 to November 1996, she was
Senior Property Manager of SCI Client Services. Prior thereto, from October
1989 to December 1994, she was with Trammell Crow Company.
JOHN R. HANSON--47--Vice President of Security Capital Industrial Management
since September 1997, where he has Project Manager responsibilities for the
Pacific region, and Vice President of SCI since May 1995; from May 1995 to
September 1997, Vice President of the REIT Manager; 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.
LARRY H. HARMSEN--37--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for San Diego and Orange County, California, and Vice President of SCI since
February 1995; from February 1995 to September 1997, Vice President of the
REIT Manager; 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.
DONALD L. HARRIER--39--Vice President of Security Capital Industrial
Management since September 1997, where he has Project Manager responsibilities
for the Pacific region, and Vice President of SCI since May 1994; from May
1994 to September 1997, Vice President of the REIT Manager; 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 JACHETTA--44--Vice President of Security Capital Industrial Management
since September 1997, where he has project manager responsibilities for the
Pacific region, and Vice President of SCI since December 1996; from December
1996 to September 1997, Vice President of the REIT Manager. 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.
KENT W. JOHNSON--44--Senior Vice President of Security Capital Industrial
Management since September 1997, where he heads the Global Services Group, and
Senior Vice President of SCI since July 1995; from July 1995 to September
1997, Vice President of the REIT Manager; 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 JR.--53--Senior Vice President of Security Capital
Industrial Management since September 1997, where he is Chief Financial
Officer and is responsible for accounting, financial reporting and financing,
and Senior Vice President of SCI since October 1995; from October 1995 to
September 1997, Senior Vice President of the REIT Manager; from August 1988 to
October 1995, Senior Vice President of JMB Realty Corporation, where he was
responsible for corporate finance and capital markets financing. Previously,
he was with KPMG Peat Marwick. Mr. Keiser is a Certified Public Accountant.
DAVID C. KELLY--37--Vice President of Security Capital Industrial Management
since September 1997, where he is responsible for leasing and marketing of
Cincinnati and Louisville properties; from June 1996 to September 1997, he was
Vice President of SCI Client Services, where he was Marketing Representative
from
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December 1994 to June 1996. Prior thereto, from March 1992 to December 1994,
he was Leasing Manager for Heitman Financial.
DOUGLAS A. KIERSEY, JR.--37--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Seattle, Washington and Portland, Oregon, and Vice President of SCI since
May 1994; from May 1994 to September 1997, Vice President of the REIT Manager;
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--49--Senior Vice President and Secretary of SCI and
Security Capital Group since January 1996 and Security Capital Industrial
Management since September 1997; from January 1996 to September 1997, Senior
Vice President and Secretary of the REIT Manager. Prior thereto, 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.
WAYNE P. KLOTZ--42--Vice President of SCI since December 1997, where he is
responsible for Project Management of Development and Construction in
Washington, D.C., Baltimore, Maryland and Virginia markets; from April 1996 to
December 1997, he was Project Manager for SCI with similar responsibilities.
Prior thereto, from April 1995 to April 1996, he was Senior Project Manager
for R.W. Murray Construction Co.; and Vice President Corporate Services
Group/The Service Company from October 1993 to April 1995.
ROBERT A. KRITT--36--Vice President of Security Capital Industrial
Management since September 1997, where he has responsibility for coordinating
corporate distribution facilities in the Mid-Atlantic region, and Vice
President of SCI since November 1991; from November 1991 to September 1997,
Vice President of the REIT Manager; 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.
EDWARD F. LONG--41--Vice President and Controller of SCI since January 1996,
where he supervises accounting and financial reporting; Vice President of
Security Capital Industrial Management since September 1997; from June 1995 to
January 1996, Controller for SCI Client Services; from January 1996 to
September 1997, Vice President and Controller of the REIT Manager; from
December 1990 to June 1995, Director of Financial Services for Coopers &
Lybrand in Central Florida and the Carolinas. Mr. Long is a Certified Public
Accountant.
DONALD W. MADSEN--54--Senior Vice President of Security Capital Industrial
Management since September 1997, where he supervises development services
related to construction management and corporate distribution facilities, and
Senior Vice President of SCI since July 1993; from July 1993 to September
1997, Senior Vice President of the REIT Manager; from July 1992 to June 1993,
Vice President, Business Development for Windward, Ltd., a Dallas, Texas-based
design/build general construction company.
DAVID W. MAJORS--54--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Albuquerque, New Mexico and El Paso, Texas, and Vice President of SCI
since December 1996; from December 1996 to September 1997, Vice President of
the REIT Manager; 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 corporate distribution, office
and retail facilities.
CHRISTOPHER R. MANLEY--27--Vice President of Security Capital Industrial
Management since September 1997, with Market Officer responsibilities for
Tampa, Orlando and South Florida, and Vice President of SCI; from September
1993 to September 1997, he was a member of the Security Capital Industrial
Trust Acquisitions/Due Diligence team.
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BRIAN N. MARSH--33--Vice President of Security Capital Industrial Management
since September 1997, where he has Market Officer responsibilities for
Columbus, Ohio, and Vice President of SCI since January 1995; from January
1995 to September 1997 Vice President of the REIT Manager; 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.
DEBRA A. MCRIGHT--38--Vice President of Security Capital Industrial
Management since September 1997, where she is responsible for global property
management operations; from September 1995 to September 1997, she was Vice
President with SCI Client Services. Prior thereto, from June 1989 to February
1995, she was with Paragon Group, Inc.
J. THOMAS MERCER--38--Vice President of Security Capital Industrial
Management since September 1997, where he is corporate distribution facilities
officer in the Central Region, and Vice President of SCI since January 1995;
from January 1995 to September 1997 Vice President of the REIT Manager; 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--49--Senior Vice President of Security Capital Industrial
Management since September 1997, where he has responsibility for the Central
region of the United States, and Senior Vice President of SCI since December
1995; from December 1995 to September 1997, Senior Vice President of the REIT
Manager; from September 1994 to December 1995 Vice President of the REIT
Manager; from 1990 to July 1994, Executive Vice President with Trammell Crow
Company, where he directed leasing and development activities for the
Industrial Division.
JOSEPH H. MIKES--37--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for the Chicago area, and Vice President of SCI since August 1995; from August
1995 to September 1997, Vice President of the REIT Manager; from March 1988 to
August 1995, Senior Director of Opus North Corporation, where he managed
office and industrial real estate activities.
MICHAEL E. MILLER--44--Vice President of SCI since October 1997, where he is
responsible for Security Capital Logistar International operations in Central
Europe, including Poland, the Czech Republic, and Hungary. Prior thereto, from
October 1996 to September 1997, he was an Executive Vice President of CEENIS
Property Fund; from January 1996 to October 1996, he was a Managing Partner of
Belmont Capital; from October 1989 to December 1995, he was Director of
Aetna's Investment Management Group.
RICK D. MIRANDA--44--Vice President of Security Capital Industrial
Management since September 1997, where he has Project Manager responsibilities
for the Pacific region, and Vice President of SCI since December 1996; from
December 1996 to September 1997, Vice President of the REIT Manager. Prior
thereto, 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--40--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for El Paso, San Antonio and Rio Grande Valley, Texas and Vice President of
SCI since July 1993; from July 1993 to September 1997, Vice President of the
REIT Manager; from January 1991 to July 1993, President of The Morton Group,
which specialized in corporate industrial real estate services, asset
management and development services.
DAVID S. MORZE--37--Vice President of Security Capital Industrial Management
since September 1997, where he has Market Officer responsibilities for Reno,
Nevada and Salt Lake City, Utah, and Vice President of
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SCI since March 1995; from March 1995 to September 1997, Vice President of the
REIT Manager; 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.
MICHAEL NACHAMKIN--44--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for New Jersey/I-95 Corridor and Vice President of SCI since March 1996; from
March 1996 to September 1997, Vice President of the REIT Manager; from 1984 to
February 1996, Director of Investment Sales, Leasing, Land, Tenant
Representation and Marketing at Cushman & Wakefield of New Jersey.
AUGUST J. NAPOLITANO--50--Vice President of Security Capital Industrial
Management since September 1997, where he is a member of the Global Services
Group, and Vice President of SCI since May 1995; from May 1995 to September
1997, Vice President of the REIT Manager; 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.
JAMES R. NASS, III--36--Vice President of Security Capital Industrial
Management since September 1997, where he has had Project Manager
responsibilities for the Mid-Atlantic Region since December 1996 with the
former REIT Manager; from March 1997 to September 1997, he was Vice President
of the former REIT Manager. Prior thereto, from March 1989 to December 1996,
he was a Project Manager for Opus North Corporation.
EDWARD S. NEKRITZ--32--Vice President of Security Capital Industrial
Management since September 1997, 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 since September 1995;
from September 1995 to September 1997, Vice President of the REIT Manager;
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--51--Vice President of Security Capital Industrial
Management from September 1997, where he has Project Manager responsibility
for corporate distribution facility projects, and Vice President of SCI since
March 1994; from March 1994 to September 1997, Vice President of the REIT
Manager; from November 1984 to February 1994, Vice President of Project
Development for Dueck Group of Companies, a development firm in Denver,
Colorado.
WILLIAM D. PETSAS--40--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Phoenix, Arizona, and Vice President of SCI since July 1994; from July
1994 to September 1997, Vice President of the REIT Manager; 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.
JOHN R. PICCHIOTTI--37--Vice President of Security Capital Industrial
Management since December 1997, and has had Market Representative
responsibilities in Chicago, Illinois, since joining SCI in March 1996, and
Vice President of SCI. Prior thereto, from September 1994 to March 1996, he
was the Area Director for Southwest Suburban Chicago, Young Life; from July
1989 to September 1994, he was with Grubb and Ellis Company.
THOMAS M. RAY--35--Vice President of Security Capital Industrial Management
since September 1997, where he is responsible for coordinating corporate
distribution facilities in the Pacific region, and Vice President of SCI since
March 1996; from March 1996 to September 1997, Vice President of the REIT
Manager. Prior thereto, a member of the corporate distribution facility 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
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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.
BETTY J. REMSTEDT--52--Vice President of Security Capital Industrial
Management since September 1997, where she provides accounting, financial
analysis and budgeting services with respect to SCI's Pacific region
properties, and Vice President of SCI since December 1993; from December 1993
to September 1997, Vice President of the REIT Manager; from December 1988 to
December 1993, Chief Financial Officer of King & Lyons.
GERALD W. RICKER--50--Vice President of Security Capital Industrial
Management since January 1998, where he is a member of the Global Services
Group, and Vice President of SCI. Prior thereto, from March 1993 to January
1998, he was Senior Vice President for Development at Hilton Hotels
Corporation; from March 1991 to February 1993, he was Owners' Representative
for the National Education Association.
MICHAEL J. RUEN--31--Vice President of Security Capital Industrial
Management since December 1997, where he has Market Officer responsibilities
for Birmingham, Alabama, and Chattanooga, Tennessee, and Senior
Leasing/Marketing responsibilities for Atlanta, Georgia, and Vice President of
SCI; from February 1995 to November 1997, he was Senior Leasing Manager for
SCI Client Services. Prior thereto, from January 1992 to January 1995, he was
Senior Associate for Koll Real Estate Services.
CALVIN R. SCHREINER--40--Vice President of Security Capital Industrial
Management since December 1997, where he is responsible for capital
improvements of SCI's portfolio, and Vice President of SCI; from July 1995 to
December 1997, he was Due Diligence Regional Construction Manager for SCI in
the Southeast and Mid-Atlantic regions. Prior thereto, from November 1988 to
July 1995, he was Construction Manager/Estimator in Business Development for
Raytheon Engineers & Constructors.
STEVEN O. SPAULDING--56--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Las Vegas, Nevada, and Vice President of SCI since May 1993; from May 1993
to September 1997, Vice President of the REIT Manager; 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.
RICHARD H. STRADER--38--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Charlotte, Raleigh-Durham and Winston-Salem, North Carolina, and Vice
President of SCI since June 1994; from June 1994 to September 1997, Vice
President of the REIT Manager; 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--40--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Mexico and Vice President of SCI since October 1994; from October 1994 to
September 1997, Vice President of the REIT Manager; from July 1989 to October
1994, Senior Industrial Broker with Cushman & Wakefield.
DAVID ANDRE TIRMAN--42--Vice President of SCI since September 1997, where he
is responsible for European project management. Prior thereto, from September
1990 to August 1997, he was Senior Development manager with Euro Disney S.A.
and the Walt Disney Company.
JEFFREY M. TODD--40--Vice President of Security Capital Industrial
Management since September 1997, where he has Project Manager responsibilities
for corporate distribution facility projects, and Vice President of SCI since
January 1995; from January 1995 to September 1997, Vice President of the REIT
Manager; 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--35--Vice President of Security Capital Industrial Management
since September 1997, where he has Project Manager responsibilities for the
Central Region, and Vice President of SCI since June 1995; from June 1995 to
September 1997, Vice President of the REIT Manager; from June 1993 to June
1995, a member of the Global Development Group; prior thereto, from February
1992 to May 1993, Real Estate Consultant with Douglas A. Edwards, Incorporated
in New York, New York.
MARY JANE VIETZE--44--Vice President of Security Capital Industrial
Management since September 1997, where she is responsible for accounting and
financial reporting and Vice President of SCI since April 1996; from April
1996 to September 1997, Vice President of the REIT Manager. Prior thereto, a
member of the accounting group since September 1993; from July 1990 to
September 1993, Senior Accountant for Price Waterhouse. Ms. Vietze is a
Certified Public Accountant.
ROBIN P. R. VON WEILER--41--Senior Vice President of SCI since October 1997,
where he is responsible for Global Customers, Corporate Distribution Facility
Program and Marketing. Prior thereto, from April 1982 to September 1997, he
was Vice Managing Director, Real Estate Agent and Corporate Advisor for DTZ
Zadelhoff V.O.F. in Rotterdam, the Netherlands.
EDWIN D. WAGERS--54--Vice President of Security Capital Industrial
Management since September 1997, where he has Project Manager responsibilities
for the Mid-Atlantic region of the United States, and Vice President of SCI
from January 1995; from January 1995 to September 1997, Vice President of the
REIT Manager; prior thereto from April 1991 to December 1994, Chief Operating
Officer of National Real Estate Development at Muirfield Village Development
in Columbus, Ohio.
MARGARET B. WATTS--35--Vice President of Security Capital Industrial
Management since September 1997, where she is the Regional Property Manager
for the Mid-Atlantic region of the United States; from December 1996 to
September 1997, she was Vice President of the REIT Manager; from October 1994
to December 1996, she was Senior Property Manager for SCI Client Services.
Prior thereto, from July 1985 to September 1994, she was with Trammell Crow
Company.
DAVID L. WELCH--36--Vice President of Security Capital Industrial Management
since September 1997, where he has Market Officer responsibilities for
Washington, D.C. and Baltimore, Maryland, and Vice President of SCI since
February 1995; from February 1995 to September 1997, Vice President of the
REIT Manager; 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.
WILLIAM ROBERT WENDT--39--Vice President of Security Capital Industrial
Management since December 1997, where he has Market Representative
responsibilities for the Austin area, and Vice President of SCI; from
September 1994 to November 1997, he was a Marketing Representative for SCI for
the Austin area. Prior thereto, from May 1993 to September 1994, he was an
industrial broker with Oxford Commercial and Cushman & Wakefield.
JAMES E. WHITE--41--Vice President of Security Capital Industrial Management
since September 1997, where he has Market Officer responsibilities for
Cincinnati, Ohio and Louisville, Kentucky, and Vice President of SCI since
July 1995; from July 1995 to September 1997, Vice President of the REIT
Manager; 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--53--Vice President of Security Capital Industrial
Management since September 1997, where he has Project Manager responsibilities
for the Southeast region, and Vice President of SCI since October 1994; from
October 1994 to September 1997, Vice President of the REIT Manager; from March
1988 to October 1994, Vice President of Development and Construction for The
Krauss/Schwartz Company.
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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
Internal Revenue Code of 1986, as amended. 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 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 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. For a discussion regarding taxation of
sales or exchanges of Common Shares, see "Federal Income Tax Considerations--
Taxation of SCI's Shareholders" in the accompanying Prospectus.
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,
S-42
<PAGE>
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
562,500 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.
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 order to facilitate the offering of the Common Shares, the Underwriter
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Shares. Specifically, the Underwriter may over-allot in
connection with the offering, creating a short position in the Common Shares
for its own account. In addition, to cover over-allotments or to stabilize the
price of the Common Shares, the Underwriter may bid for, and purchase, Common
Shares in the open market. Finally, the Underwriter may reclaim selling
concessions allowed to a dealer for distributing the Common Shares in the
offering, if the Underwriter repurchases previously distributed Common Shares
in transactions to cover short positions, in stabilization transactions or
otherwise. Any of these activities may stabilize or maintain the market price
of the Common Shares above independent market levels. The Underwriter is not
required to engage in these activities and may end any of these activities at
any time.
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-43
<PAGE>
PROSPECTUS
LOGO
[LOGO OF SECURITY CAPITAL INDUSTRIAL TRUST APPEARS HERE]
$600,000,000 DEBT SECURITIES, PREFERRED SHARES AND COMMON SHARES*
----------------
Security Capital Industrial Trust ("SCI") may from time to time offer in one
or more series its (i) unsecured senior debt securities (the "Debt
Securities"), (ii) Preferred Shares of Beneficial Interest, par value $0.01
per share (the "Preferred Shares"), and (iii) Common Shares of Beneficial
Interest, par value $0.01 per share (the "Common Shares"). The Debt
Securities, Preferred Shares and Common Shares (collectively, the "Offered
Securities") may be offered, separately or together, in separate series, in
amounts, at prices and on terms to be set forth in a supplement to this
Prospectus (a "Prospectus Supplement").
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable: (i) in the case of Debt
Securities, the specific title, aggregate principal amount, currency, form
(which may be registered or bearer, or certificated or global), authorized
denominations, maturity, rate (or manner of calculation thereof) and time of
payment of interest, terms for redemption at the option of SCI or repayment at
the option of the Holder, terms for sinking fund payments, and any initial
public offering price; (ii) in the case of Preferred Shares, the specific
title and stated value, any dividend, liquidation, redemption, conversion,
voting and other rights, and any initial public offering price; and (iii) in
the case of Common Shares, any initial public offering price. In addition,
such specific terms may include limitations on direct or beneficial ownership
and restrictions on transfer of the Offered Securities, in each case as may be
appropriate to preserve the status of SCI as a real estate investment trust
("REIT") for federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered
Securities covered by such Prospectus Supplement.
The Offered Securities may be offered directly by SCI, through agents
designated from time to time by SCI, or to or through underwriters or dealers.
If any agents or underwriters are involved in the sale of any of the Offered
Securities, their names, and any applicable purchase price, fee, commission or
discount arrangement between or among them, will be set forth, or will be
calculable from the information set forth, in the applicable Prospectus
Supplement. See "Plan of Distribution." No Offered Securities may be sold
without delivery of the applicable Prospectus Supplement describing the method
and terms of the offering of such series of Offered Securities.
----------------
*Pursuant to Rule 429 under the Securities Act of 1933, as amended (the
"Securities Act"), this Prospectus also relates to an additional $167,707,626
of the Offered Securities which were registered under a previous registration
statement.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
----------------
THE DATE OF THIS PROSPECTUS IS NOVEMBER 21, 1997
<PAGE>
AVAILABLE INFORMATION
SCI is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and
other information can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of such material can be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Such material can also be obtained from the
Commission's worldwide web site at http://www.sec.gov. SCI's outstanding
Common Shares, Series A Cumulative Redeemable Preferred Shares of Beneficial
Interest, par value $0.01 per share (the "Series A Preferred Shares") and
Series B Cumulative Convertible Redeemable Preferred Shares of Beneficial
Interest, par value $0.01 per share (the "Series B Preferred Shares") are
listed on the New York Stock Exchange (the "NYSE") under the symbols "SCN",
"SCN-PRA" and "SCN-PRB", respectively, and all such reports, proxy statements
and other information filed by SCI with the NYSE may be inspected at the
NYSE's offices at 20 Broad Street, New York, New York 10005.
This Prospectus constitutes part of a registration statement on Form S-3
(together with all amendments and exhibits, the "Registration Statement")
filed by SCI with the Commission under the Securities Act. This Prospectus
does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is hereby
made to the Registration Statement.
INCORPORATION BY REFERENCE
There are incorporated herein by reference the following documents
heretofore filed by SCI with the Commission (File No. 1-12846):
(a) SCI's Annual Report on Form 10-K for the fiscal year ended December
31, 1996;
(b) SCI's Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997;
(c) SCI's Current Reports on Form 8-K filed January 27, January 30, March
26, July 11, September 9, 1997 and November 13, 1997;
(d) The description of the Series A Preferred Shares contained under the
caption "Description of Series A Preferred Shares" in SCI's prospectus
supplement dated June 16, 1995 to the prospectus dated April 27, 1995
forming a part of SCI's registration statement on Form S-3 (File No. 33-
90940) filed with the Commission pursuant to Rule 424(b) under the
Securities Act and the related description contained under the caption
"Description of Preferred Shares" in such prospectus;
(e) The description of the Series B Preferred Shares contained under the
caption "Description of Series B Preferred Shares" in SCI's prospectus
supplement dated February 14, 1996 to the prospectus dated December 28,
1995 forming a part of SCI's registration statement on Form S-3 (File No.
33-99548) filed with the Commission pursuant to Rule 424(b) under the
Securities Act and the related description contained under the caption
"Description of Preferred Shares" in such prospectus;
(f) The description of the Cumulative Redeemable Preferred Shares of
Beneficial Interest, par value $0.01 per share (the "Series C Preferred
Shares") contained under the caption "Description of Series C Preferred
Shares" in SCI's prospectus supplement dated November 7, 1996 to the
prospectus dated October 31, 1996 forming a part of SCI's registration
statement on Form S-3 (File No. 333-13909) filed with the Commission
pursuant to Rule 424(b) under the Securities Act and the related
description contained under the caption "Description of Preferred Shares"
in such prospectus;
2
<PAGE>
(g) The description of the Common Shares contained in SCI's registration
statement on Form 8-A; and
(h) The description of SCI's preferred share purchase rights contained in
SCI's registration statement on Form 8-A.
All documents subsequently filed by SCI pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act prior to the termination of the offering of
the Offered Securities, shall be deemed to be incorporated by reference in
this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein, or in any subsequently filed document which is incorporated
or deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
SCI will provide without charge to each person, including any beneficial
owner, to whom a copy of this Prospectus is delivered, upon the written or
oral request of such person, a copy of any or all of the documents
incorporated herein by reference, other than exhibits to such documents unless
such exhibits are specifically incorporated by reference into such documents.
Requests should be addressed to Secretary, Security Capital Industrial Trust,
14100 East 35th Place, Aurora, Colorado 80011, telephone number: (303) 375-
9292.
SECURITY CAPITAL INDUSTRIAL TRUST
SCI is the largest publicly held, U.S.-based global owner and operator of
distribution properties based on equity market capitalization. SCI is an
international operating company focused exclusively on meeting the
distribution space needs of international, national, regional and local
industrial real estate users through the SCI International Operating
System(TM). SCI distinguishes itself from its competition by being the only
entity that combines all of the following:
1. An international operating strategy dedicated to providing services to
the 1,000 largest users of distribution facilities worldwide;
2. An organizational structure and service delivery system built around the
customer--SCI believes its service approach is unique to the real estate
industry as it combines international scope and expertise with strong
local presence;
3. A disciplined investment strategy based on proprietary research that
identifies high growth markets with sustainable demand for SCI's low
finish distribution space product; and
4. Over 270 professionals in 35 offices in the U.S., Mexico and Europe
which SCI believes comprise the deepest and most experienced management
team in industrial real estate.
The cornerstone of SCI's operating strategy is the SCI International
Operating System(TM) comprised of the Market Services Group, the Global
Services Group and the Global Development Group that utilize SCI's national
and international network of distribution space to provide an exceptional
level of customer service, including development on an international,
national, regional and local basis.
SCI engages in the acquisition, development, marketing, operation and long-
term ownership of distribution facilities, and the development of master-
planned distribution parks and corporate distribution facilities designed to
meet its customers' needs. SCI is a fully integrated operating company with
expertise in: (i) market research; (ii) building and land acquisition and due
diligence; (iii) master-planned distribution park design and building
construction; (iv) marketing, leasing and property management; and (v) capital
markets and financial operations.
SCI deploys capital in markets with excellent long-term growth prospects and
in markets where SCI can achieve a strong market position through the
acquisition and development of generic, flexible facilities for both
warehousing and light manufacturing uses. SCI expanded its operations into
Mexico and Europe in the first half
3
<PAGE>
of 1997 to meet the needs of its targeted national and international customers
as they expand and reconfigure their distribution facility requirement
globally. With six target market cities identified in Mexico and 15 identified
in Europe, SCI believes that there are significant growth opportunities
internationally. SCI is building a deep organization in both Mexico and Europe
similar to its U.S. organization as part of the SCI International Operating
System(TM).
SCI's executive offices are located at 14100 East 35th Place, Aurora,
Colorado 80011 and its telephone number is (303) 375-9292. SCI's predecessor
was formed in June 1991 as a Delaware corporation, and SCI was re-formed as a
Maryland real estate investment trust in January 1993.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the net
proceeds from the sale of the Offered Securities will be used for the
acquisition and development of additional distribution properties as suitable
opportunities arise, for the repayment of certain outstanding indebtedness at
such time, for capital improvements to properties and for general corporate
purposes.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED SHARE DIVIDENDS
For the purpose of computing these ratios, (a) "earnings" consist of
earnings from operations plus fixed charges other than capitalized interest
and (b) "fixed charges" consist of interest on borrowed funds (including
capitalized interest) and amortization of debt discount and expense.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to combined fixed
charges
and Preferred Share dividends......... (a) 11.3 3.3 1.7 1.5 1.4 (b)
</TABLE>
- --------
(a) While SCI was researching markets and assembling its initial assets,
earnings were insufficient to cover combined fixed charges and preferred
share dividends for the year ended December 31, 1992 by $311,000.
(b) Due to a one-time expense of $75.4 million incurred upon acquiring the
management companies from a related party, earnings were insufficient to
cover combined fixed charges and preferred share dividends for the nine
months ended September 30, 1997 by $35.0 million.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities are to be issued under an Indenture, dated as of March
1, 1995 (the "Indenture"), between SCI and State Street Bank and Trust Company
(the "Trustee"). The Indenture has been incorporated by reference as an
exhibit to the Registration Statement of which this Prospectus is a part and
is available for inspection at the corporate trust office of the Trustee at
225 Franklin Street, Boston, Massachusetts 02110 or as described above under
"Available Information." The Indenture is subject to, and governed by, the
Trust Indenture Act of 1939, as amended (the "TIA"). The statements made
hereunder relating to the Indenture and the Debt Securities to be issued
thereunder are summaries of certain provisions thereof, do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all the provisions of the Indenture and such Debt Securities. All section
references appearing herein are to sections of the Indenture, and capitalized
terms used but not defined herein shall have the respective meanings set forth
in the Indenture.
GENERAL
The Debt Securities will be direct, unsecured and unsubordinated obligations
of SCI and will rank equally with all other unsecured and unsubordinated
indebtedness of SCI from time to time outstanding. The Indenture provides that
the Debt Securities may be issued without limit as to aggregate principal
amount, in one or more series, in each case as established from time to time
in or pursuant to authority granted by a resolution of the Board of Trustees
(the "Board") of SCI or as established in one or more indentures supplemental
to the
4
<PAGE>
Indenture. All Debt Securities of one series need not be issued at the same
time and, unless otherwise provided, a series may be reopened, without the
consent of the Holders of the Debt Securities of such series, for issuances of
additional Debt Securities of such series (Section 301).
Reference is made to the Prospectus Supplement relating to the series of
Debt Securities being offered for the specific terms thereof, including:
(1) the title of such series of Debt Securities;
(2) the aggregate principal amount of such series of Debt Securities and
any limit on such principal amount;
(3) the percentage of the principal amount at which the Debt Securities
of such series will be issued and, if other than the full principal amount
thereof, the portion of the principal amount thereof payable upon
declaration of acceleration of the maturity thereof, or the method by which
any such portion shall be determined;
(4) the date or dates, or the method by which such date or dates will be
determined, on which the principal of the Debt Securities of such series
will be payable and the amount of principal payable thereon;
(5) the rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which the Debt Securities
of such series will bear interest, if any;
(6) the date or dates, or the method by which such date or dates will be
determined, from which any such interest will accrue, the Interest Payment
Dates on which any such interest will be payable, the Regular Record Dates
for such Interest Payment Dates, or the method by which such dates shall be
determined, the Person to whom, and the manner in which, such interest
shall be payable, and the basis upon which interest shall be calculated if
other than that of a 360-day year comprised of twelve 30-day months;
(7) the place or places where the principal of (and premium or Make-Whole
Amount (as defined), if any) and interest and Additional Amounts, if any,
on the Debt Securities of such series will be payable, where such Debt
Securities may be surrendered for registration of transfer or exchange and
where notices or demands to or upon SCI in respect of such Debt Securities
and the Indenture may be served;
(8) the period or periods within which, the price or prices (including
the premium or Make-Whole Amount, if any) at which, the currency or
currencies in which, and the other terms and conditions upon which the Debt
Securities of such series may be redeemed, as a whole or in part, at the
option of SCI, if SCI is to have such an option;
(9) the obligation, if any, of SCI to redeem, repay or purchase the Debt
Securities of such series pursuant to any sinking fund or analogous
provision or at the option of a Holder thereof, and the period or periods
within which, the date or dates upon which, the price or prices at which,
the currency or currencies, currency unit or units or composite currency or
currencies in which, and the other terms and conditions upon which such
Debt Securities shall be redeemed, repaid or purchased, as a whole or in
part, pursuant to such obligation;
(10) if other than United States dollars, the currency or currencies in
which the Debt Securities of such series are denominated and payable, which
may be a foreign currency or units of two or more foreign currencies or a
composite currency or currencies, and the terms and conditions relating
thereto;
(11) whether the amount of payments of principal of (and premium or Make-
Whole Amount, if any) or interest, if any, on the Debt Securities of such
series may be determined with reference to an index, formula or other
method (which index, formula or method may be, but need not be, based on a
currency, currencies, currency unit or units or composite currency or
currencies) and the manner in which such amounts shall be determined;
(12) whether the principal of (and premium or Make-Whole Amount, if any)
or interest or Additional Amounts, if any, on the Debt Securities of such
series are to be payable, at the election of SCI or a Holder, in a currency
or currencies, currency unit or units or composite currency or currencies,
other than that in which such Debt Securities are denominated or stated to
be payable, the period or periods within which,
5
<PAGE>
and the terms and conditions upon which, such election may be made, and the
time and manner of, and identity of the exchange rate agent with
responsibility for, determining the exchange rate between the currency or
currencies in which such Debt Securities are denominated or stated to be
payable and the currency or currencies in which such Debt Securities are to
be so payable;
(13) any deletions from, modifications of or additions to the terms of
such series of Debt Securities with respect to the Events of Default or
covenants set forth in the Indenture;
(14) whether the Debt Securities of such series will be issued in
certificated or book-entry form;
(15) whether the Debt Securities of such series will be in registered or
bearer form and, if in registered form, the denominations thereof if other
than $1,000 and any integral multiple thereof and, if in bearer form, the
denominations thereof if other than $5,000 and the terms and conditions
relating thereto;
(16) the applicability, if any, of the defeasance and covenant defeasance
provisions of Article Fourteen of the Indenture to such series of Debt
Securities and any provisions in modification thereof, in addition thereto
or in lieu thereof;
(17) if the Debt Securities of such series are to be issued upon the
exercise of debt warrants, the time, manner and place for such Debt
Securities to be authenticated and delivered;
(18) whether and under what circumstances SCI will pay Additional Amounts
as contemplated in the Indenture on the Debt Securities of such series in
respect of any tax, assessment or governmental charge and, if so, whether
SCI will have the option to redeem such Debt Securities rather than pay
such Additional Amounts; and
(19) any other terms of such series of Debt Securities not inconsistent
with the provisions of the Indenture (Section 301).
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
or bear no interest or bear interest at a rate which at the time of issuance
is below market rates ("Original Issue Discount Securities"). Special United
States federal income tax, accounting and other considerations applicable to
Original Issue Discount Securities will be described in the applicable
Prospectus Supplement.
Except as set forth below under "--Certain Covenants--Limitations on
Incurrence of Debt," the Indenture does not contain any other provisions that
would limit the ability of SCI to incur indebtedness or that would afford
Holders of Debt Securities protection in the event of a highly leveraged or
similar transaction involving SCI or in the event of a change of control.
However, SCI's Amended and Restated Declaration of Trust, as amended and
supplemented (the "Declaration of Trust"), restricts beneficial ownership of
SCI's outstanding shares of beneficial interest by a single person, or persons
acting as a group, to 9.8% of such shares, with certain exceptions (including
an exception in the case of Security Capital Group Incorporated "SCG"). See
"Description of Common Shares--Restriction on Size of Holdings." Additionally,
the Articles Supplementary relating to the Series A Preferred Shares and
Series B Preferred Shares restrict beneficial ownership of the Series A
Preferred Shares or the Series B Preferred Shares by a person, or persons
acting as a group, to 25% of the Series A Preferred Shares or the Series B
Preferred Shares, with limited exceptions. Similarly, the Articles
Supplementary for each other series of Preferred Shares will contain certain
provisions restricting the ownership and transfer of the Preferred Shares. See
"Description of Preferred Shares--Restrictions on Ownership." These
restrictions are designed to preserve SCI's status as a REIT and, therefore,
may act to prevent or hinder a change of control. Reference is made to the
applicable Prospectus Supplement for information with respect to any deletions
from, modifications of or additions to the Events of Default or covenants of
SCI that are described below, including any addition of a covenant or other
provision providing event risk or similar protection.
DENOMINATIONS
Unless otherwise described in the applicable Prospectus Supplement, the Debt
Securities of any series issued in registered form will be issuable in
denominations of $1,000 and integral multiples thereof. Unless otherwise
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<PAGE>
described in the applicable Prospectus Supplement, the Debt Securities of any
series issued in bearer form will be issuable in denominations of $5,000
(Section 302).
PRINCIPAL AND INTEREST
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and premium or Make-Whole Amount, if any) and interest on any
series of Debt Securities will be payable at the corporate trust office of the
Trustee, initially located at 225 Franklin Street, Boston, Massachusetts
02110; provided that, at the option of SCI, payment of interest may be made by
check mailed to the address of the Person entitled thereto as it appears in
the Security Register or by wire transfer of funds to such Person to an
account maintained within the United States (Sections 301, 305, 306, 307 and
1002).
If any Interest Payment Date, Principal Payment Date or the Maturity Date
falls on a day that is not a Business Day, the required payment shall be made
on the next Business Day as if it were made on the date such payment was due
and no interest shall accrue on the amount so payable for the period from and
after such Interest Payment Date, Principal Payment Date or the Maturity Date,
as the case may be. "Business Day" means any day, other than a Saturday or
Sunday, on which banks in Boston, Massachusetts are not required or authorized
by law or executive order to close. Any interest not punctually paid or duly
provided for on any Interest Payment Date with respect to any Debt Security
("Defaulted Interest") will forthwith cease to be payable to the Holder on the
applicable Regular Record Date and may either be paid to the person in whose
name such Debt Security is registered at the close of business on a special
record date (the "Special Record Date") for the payment of such Defaulted
Interest to be fixed by the Trustee, notice of which shall be given to the
Holder of such Debt Security not less than 10 days prior to such Special
Record Date, or may be paid at any time in any other lawful manner, all as
more completely described in the Indenture (Section 307).
MERGER, CONSOLIDATION OR SALE
SCI may consolidate with, or sell, lease or convey all or substantially all
of its assets to, or merge with or into, any other entity, provided that (a)
either SCI shall be the continuing entity, or the successor entity (if other
than SCI) formed by or resulting from any such consolidation or merger or
which shall have received the transfer of such assets is a Person organized
and existing under the laws of the United States or any State thereof and
shall expressly assume payment of the principal of (and premium or Make-Whole
Amount, if any) and any interest (including Additional Amounts, if any) on all
of the Debt Securities outstanding and the due and punctual performance and
observance of all of the covenants and conditions contained in the Indenture;
(b) immediately after giving effect to such transaction and treating any
indebtedness which becomes an obligation of SCI or any Subsidiary as a result
thereof as having been incurred by SCI or such Subsidiary at the time of such
transaction, no Event of Default under the Indenture, and no event which,
after notice or the lapse of time, or both, would become such an Event of
Default, shall have occurred and be continuing; and (c) an officer's
certificate and legal opinion covering such conditions shall be delivered to
the Trustee (Sections 801 and 803).
CERTAIN COVENANTS
Limitations on Incurrence of Debt. SCI will not, and will not permit any
Subsidiary to, incur any Debt (as defined below) if, immediately after giving
effect to the incurrence of such additional Debt and the application of the
proceeds thereof, the aggregate principal amount of all outstanding Debt of
SCI and its Subsidiaries on a consolidated basis determined in accordance with
generally accepted accounting principles is greater than 60% of the sum of
(without duplication) (i) SCI's Total Assets (as defined below) as of the end
of the calendar quarter covered in SCI's Annual Report on Form 10-K or
Quarterly Report on Form 10-Q, as the case may be, most recently filed with
the Commission (or, if such filing is not permitted under the Exchange Act,
with the Trustee) prior to the incurrence of such additional Debt and (ii) the
purchase price of any real estate assets or mortgages receivable acquired, and
the amount of any securities offering proceeds received (to the extent that
such proceeds were not used to acquire real estate assets or mortgages
receivable or used to reduce Debt), by SCI or any Subsidiary since the end of
such calendar quarter, including those proceeds obtained in connection with
the incurrence of such additional Debt (Section 1004).
7
<PAGE>
In addition to the foregoing limitation on the incurrence of Debt, SCI will
not, and will not permit any Subsidiary to, incur any Debt secured by any
mortgage, lien, charge, pledge, encumbrance or security interest of any kind
upon any of the property of SCI or any Subsidiary if, immediately after giving
effect to the incurrence of such additional Debt and the application of the
proceeds thereof, the aggregate principal amount of all outstanding Debt of
SCI and its Subsidiaries on a consolidated basis which is secured by any
mortgage, lien, charge, pledge, encumbrance or security interest on property
of SCI or any Subsidiary is greater than 40% of the sum of (i) SCI's Total
Assets as of the end of the calendar quarter covered in SCI's Annual Report on
Form 10-K or Quarterly Report on Form 10-Q, as the case may be, most recently
filed with the Commission (or if such filing is not permitted under the
Exchange Act, with the Trustee) prior to the incurrence of such additional
Debt and (ii) the purchase price of any real estate assets or mortgages
receivable acquired, and the amount of any securities offering proceeds
received (to the extent that such proceeds were not used to acquire real
estate assets or mortgages receivable or used to reduce Debt), by SCI or any
Subsidiary since the end of such calendar quarter, including those proceeds
obtained in connection with the incurrence of such additional Debt (Section
1004).
In addition to the foregoing limitations on the incurrence of Debt, no
Subsidiary may incur any unsecured Debt other than intercompany Debt
subordinate to the Debt Securities; provided, however, that SCI or a
Subsidiary may acquire an entity that becomes a Subsidiary that has unsecured
Debt if the incurrence of such Debt (including any guarantees of such Debt
assumed by SCI or any Subsidiary) was not intended to evade the foregoing
restrictions and the incurrence of such Debt (including any guarantees of such
Debt assumed by SCI or any Subsidiary) would otherwise be permitted under the
Indenture (Section 1004).
SCI and its Subsidiaries may not at any time own Total Unencumbered Assets
equal to less than 150% of the aggregate outstanding principal amount of the
Unsecured Debt of SCI and its Subsidiaries on a consolidated basis (Section
1004).
In addition to the foregoing limitations on the incurrence of Debt, SCI will
not, and will not permit any Subsidiary to, incur any Debt if the ratio of
Consolidated Income Available for Debt Service (as defined below) to the
Annual Service Charge (as defined below) for the four consecutive fiscal
quarters most recently ended prior to the date on which such additional Debt
is to be incurred shall have been less than 1.5, on a pro forma basis after
giving effect thereto and to the application of the proceeds therefrom, and
calculated on the assumption that (i) such Debt and any other Debt incurred by
SCI and its Subsidiaries since the first day of such four-quarter period and
the application of the proceeds therefrom, including to refinance other Debt,
had occurred at the beginning of such period; (ii) the repayment or retirement
of any other Debt by SCI and its Subsidiaries since the first day of such
four-quarter period had been incurred, repaid or retired at the beginning of
such period (except that, in making such computation, the amount of Debt under
any revolving credit facility shall be computed based upon the average daily
balance of such Debt during such period); (iii) in the case of Acquired Debt
(as defined below) or Debt incurred in connection with any acquisition since
the first day of such four-quarter period, the related acquisition had
occurred as of the first day of such period with the appropriate adjustments
with respect to such acquisition being included in such pro forma calculation;
and (iv) in the case of any acquisition or disposition by SCI or its
Subsidiaries of any asset or group of assets since the first day of such four-
quarter period, whether by merger, stock purchase or sale, or asset purchase
or sale, such acquisition or disposition or any related repayment of Debt had
occurred as of the first day of such period with the appropriate adjustments
with respect to such acquisition or disposition being included in such pro
forma calculation (Section 1004).
Existence. Except as permitted under "--Merger, Consolidation or Sale," SCI
will do or cause to be done all things necessary to preserve and keep in full
force and effect its existence, rights (charter and statutory) and franchises;
provided, however, that SCI shall not be required to preserve any right or
franchise if it determines that the preservation thereof is no longer
desirable in the conduct of its business and that the loss thereof is not
disadvantageous in any material respect to the Holders of the Debt Securities
(Section 1005).
Maintenance of Properties. SCI will cause all of its properties used or
useful in the conduct of its business or the business of any Subsidiary to be
maintained and kept in good condition, repair and working order and
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supplied with all necessary equipment and will cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all as
in the judgment of SCI may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all
times; provided, however, that SCI and its Subsidiaries shall not be prevented
from selling or otherwise disposing for value its properties in the ordinary
course of business (Section 1006).
Insurance. SCI will, and will cause each of its Subsidiaries to, keep all of
its insurable properties insured against loss or damage at least equal to
their then full insurable value with financially sound and reputable insurance
companies (Section 1007).
Payment of Taxes and Other Claims. SCI will pay or discharge or cause to be
paid or discharged, before the same shall become delinquent, (i) all taxes,
assessments and governmental charges levied or imposed upon it or any
Subsidiary or upon the income, profits or property of SCI or any Subsidiary
and (ii) all lawful claims for labor, materials and supplies which, if unpaid,
might by law become a lien upon the property of SCI or any Subsidiary;
provided, however, that SCI shall not be required to pay or discharge or cause
to be paid or discharged any such tax, assessment, charge or claim whose
amount, applicability or validity is being contested in good faith by
appropriate proceedings (Section 1008).
Provision of Financial Information. Whether or not SCI is subject to Section
13 or 15(d) of the Exchange Act, SCI will, to the extent permitted under the
Exchange Act, file with the Commission the annual reports, quarterly reports
and other documents which SCI would have been required to file with the
Commission pursuant to such Section 13 or 15(d) (the "Financial Statements")
if SCI were so subject, such documents to be filed with the Commission on or
prior to the respective dates (the "Required Filing Dates") by which SCI would
have been required so to file such documents if SCI were so subject. SCI will
also in any event (x) within 15 days of each Required Filing Date (i) transmit
by mail to all Holders of Debt Securities, as their names and addresses appear
in the Security Register, without cost to such Holders, copies of the annual
reports and quarterly reports which SCI would have been required to file with
the Commission pursuant to Section 13 or 15(d) of the Exchange Act if SCI were
subject to such Sections and (ii) file with the Trustee copies of the annual
reports, quarterly reports and other documents which SCI would have been
required to file with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act if SCI were subject to such Sections and (y) if filing such
documents by SCI with the Commission is not permitted under the Exchange Act,
promptly upon written request and payment of the reasonable cost of
duplication and delivery, supply copies of such documents to any prospective
Holder (Section 1009).
EVENTS OF DEFAULT, NOTICE AND WAIVER
The Indenture provides that the following events are "Events of Default"
with respect to any series of Debt Securities issued thereunder: (a) default
in the payment of any installment of interest or Additional Amounts payable on
any Debt Security of such series which continues for 30 days; (b) default in
the payment of the principal of (or premium or Make-Whole Amount, if any, on)
any Debt Security of such series at its Maturity; (c) default in making any
sinking fund payment as required for any Debt Security of such series; (d)
default in the performance of any other covenant of SCI contained in the
Indenture (other than a covenant added to the Indenture solely for the benefit
of a series of Debt Securities issued thereunder other than such series),
continued for 60 days after written notice as provided in the Indenture; (e)
default in the payment of an aggregate principal amount exceeding $10,000,000
of any evidence of indebtedness of SCI or any mortgage, indenture or other
instrument under which such indebtedness is issued or by which such
indebtedness is secured, such default having occurred after the expiration of
any applicable grace period and having resulted in the acceleration of the
maturity of such indebtedness, but only if such indebtedness is not discharged
or such acceleration is not rescinded or annulled; (f) the entry by a court of
competent jurisdiction of one or more judgments, orders or decrees against SCI
or any of its Subsidiaries in an aggregate amount (excluding amounts fully
covered by insurance) in excess of $10,000,000 and such judgments, orders or
decrees remain undischarged, unstayed and unsatisfied in an aggregate amount
(excluding amounts fully covered by insurance) in excess of $10,000,000 for
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a period of 30 consecutive days; (g) certain events of bankruptcy, insolvency
or reorganization, or court appointment of a receiver, liquidator or trustee
of SCI or any Significant Subsidiary or for all or substantially all of either
of its property; and (h) any other Event of Default provided with respect to a
particular series of Debt Securities (Section 501). The term "Significant
Subsidiary" means each significant subsidiary (as defined in Regulation S-X
promulgated under the Securities Act) of SCI.
If an Event of Default under the Indenture with respect to Debt Securities
of any series at the time Outstanding occurs and is continuing, then in every
such case, unless the principal of all of the Outstanding Debt Securities of
such series shall already have become due and payable, the Trustee or the
Holders of not less than 25% in principal amount of the Outstanding Debt
Securities of such series may declare the principal (or, if the Debt
Securities of such series are Original Issue Discount Securities or Indexed
Securities, such portion of the principal as may be specified in the terms
thereof) of, and the Make-Whole Amount, if any, on, all of the Debt Securities
of such series to be due and payable immediately by written notice thereof to
SCI (and to the Trustee if given by the Holders). However, at any time after
such a declaration of acceleration with respect to Debt Securities of any
series has been made, but before a judgment or decree for payment of the money
due has been obtained by the Trustee, the Holders of not less than a majority
in principal amount of the Outstanding Debt Securities of such series may
rescind and annul such declaration and its consequences if (a) SCI shall have
deposited with the Trustee all required payments of the principal of (and
premium or Make-Whole Amount, if any) and interest, and any Additional
Amounts, on the Debt Securities of such series, plus certain fees, expenses,
disbursements and advances of the Trustee and (b) all Events of Default, other
than the nonpayment of accelerated principal (or specified portion thereof and
the Make-Whole Amount, if any) or interest, with respect to Debt Securities of
such series have been cured or waived as provided in the Indenture (Section
502). The Indenture also provides that the Holders of not less than a majority
in principal amount of the Outstanding Debt Securities of any series may waive
any past default with respect to such series and its consequences, except a
default (x) in the payment of the principal of (or premium or Make-Whole
Amount, if any) or interest or Additional Amounts payable on any Debt Security
of such series or (y) in respect of a covenant or provision contained in the
Indenture that cannot be modified or amended without the consent of the Holder
of each Outstanding Debt Security affected thereby (Section 513).
The Trustee is required to give notice to the Holders of Debt Securities
within 90 days of a default under the Indenture; provided, however, that the
Trustee may withhold notice to the Holders of any series of Debt Securities of
any default with respect to such series (except a default in the payment of
the principal of (or premium or Make-Whole Amount, if any) or interest or
Additional Amounts payable on any Debt Security of such series or in the
payment of any sinking fund installment in respect of any Debt Security of
such series) if the Responsible Officers of the Trustee consider such
withholding to be in the interest of such Holders (Section 601).
The Indenture provides that no Holders of Debt Securities of any series may
institute any proceedings, judicial or otherwise, with respect to the
Indenture or for any remedy thereunder, except in the case of failure of the
Trustee, for 60 days, to act after it has received a written request to
institute proceedings in respect of an Event of Default from the Holders of
not less than 25% in principal amount of the Outstanding Debt Securities of
such series, as well as an offer of reasonable indemnity (Section 507). This
provision will not prevent, however, any Holder of Debt Securities from
instituting suit for the enforcement of payment of the principal of (and
premium or Make-Whole Amount, if any), interest on, and Additional Amounts
payable with respect to, such Debt Securities at the respective due dates
thereof (Section 508).
Subject to provisions in the Indenture relating to its duties in case of
default, the Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any Holders of any
series of Debt Securities then Outstanding under the Indenture, unless such
Holders shall have offered to the Trustee reasonable security or indemnity
(Section 602). The Holders of not less than a majority in principal amount of
the Outstanding Debt Securities of any series shall have the right to direct
the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or of exercising any trust or power
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conferred upon the Trustee. However, the Trustee may refuse to follow any
direction which is in conflict with any law or the Indenture, which may
involve the Trustee in personal liability or which may be unduly prejudicial
to the Holders of Debt Securities of such series not joining therein (Section
512).
Within 120 days after the close of each fiscal year, SCI must deliver to the
Trustee a certificate, signed by one of several specified officers, stating
whether or not such officer has knowledge of any default under the Indenture
and, if so, specifying each such default and the nature and status thereof
(Section 1010).
MODIFICATION OF THE INDENTURE
Modifications and amendments of the Indenture may be made with the consent
of the Holders of not less than a majority in principal amount of all
Outstanding Debt Securities which are affected by such modification or
amendment; provided, however, that no such modification or amendment may,
without the consent of the Holder of each such Debt Security affected thereby,
(a) change the Stated Maturity of the principal of (or premium or Make-Whole
Amount, if any), or any installment of principal of or interest or Additional
Amounts payable on, any such Debt Security; (b) reduce the principal amount
of, or the rate or amount of interest on, or any premium or Make-Whole Amount
payable on redemption of, or any Additional Amounts payable with respect to,
any such Debt Security, or reduce the amount of principal of an Original Issue
Discount Security or Make-Whole Amount, if any, that would be due and payable
upon declaration of acceleration of the maturity thereof or would be provable
in bankruptcy, or adversely affect any right of repayment of the Holder of any
such Debt Security; (c) change the Place of Payment, or the coin or currency,
for payment of principal of (and premium or Make-Whole Amount, if any), or
interest on, or any Additional Amounts payable with respect to, any such Debt
Security; (d) impair the right to institute suit for the enforcement of any
payment on or with respect to any such Debt Security; (e) reduce the above-
stated percentage of Outstanding Debt Securities of any series necessary to
modify or amend the Indenture, to waive compliance with certain provisions
thereof or certain defaults and consequences thereunder or to reduce the
quorum or voting requirements set forth in the Indenture; or (f) modify any of
the foregoing provisions or any of the provisions relating to the waiver of
certain past defaults or certain covenants, except to increase the required
percentage to effect such action or to provide that certain other provisions
may not be modified or waived without the consent of the Holder of such Debt
Security (Section 902).
The Holders of not less than a majority in principal amount of Outstanding
Debt Securities have the right to waive compliance by SCI with certain
covenants in the Indenture (Section 1012).
Modifications and amendments of the Indenture may be made by SCI and the
Trustee without the consent of any Holder of Debt Securities for any of the
following purposes: (i) to evidence the succession of another Person to SCI as
obligor under the Indenture; (ii) to add to the covenants of SCI for the
benefit of the Holders of all or any series of Debt Securities or to surrender
any right or power conferred upon SCI in the Indenture; (iii) to add Events of
Default for the benefit of the Holders of all or any series of Debt
Securities; (iv) to add or change any provisions of the Indenture to
facilitate the issuance of, or to liberalize certain terms of, Debt Securities
in bearer form, or to permit or facilitate the issuance of Debt Securities in
uncertificated form, provided that such action shall not adversely affect the
interests of the Holders of the Debt Securities of any series in any material
respect; (v) to change or eliminate any provisions of the Indenture, provided
that any such change or elimination shall become effective only when there are
no Debt Securities Outstanding of any series created prior thereto which are
entitled to the benefit of such provision; (vi) to secure the Debt Securities;
(vii) to establish the form or terms of Debt Securities of any series and any
related coupons; (viii) to provide for the acceptance of appointment by a
successor Trustee or facilitate the administration of the trusts under the
Indenture by more than one Trustee; (ix) to cure any ambiguity, defect or
inconsistency in the Indenture or to make any other changes, provided that in
each case, such action shall not adversely affect the interests of Holders of
Debt Securities of any series in any material respect; (x) to close the
Indenture with respect to the authentication and delivery of additional series
of Debt Securities or to qualify, or maintain qualification of, the Indenture
under the TIA; or (xi) to supplement any of the provisions of the Indenture to
the extent necessary to permit or facilitate
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defeasance and discharge of any series of such Debt Securities, provided that
such action shall not adversely affect the interests of the Holders of the
Debt Securities of any series in any material respect (Section 901).
The Indenture provides that in determining whether the Holders of the
requisite principal amount of Outstanding Debt Securities of a series have
given any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of Holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security
that shall be deemed to be outstanding shall be the amount of the principal
thereof that would be due and payable as of the date of such determination
upon declaration of acceleration of the maturity thereof; (ii) the principal
amount of a Debt Security denominated in a Foreign Currency that shall be
deemed outstanding shall be the United States dollar equivalent, determined on
the issue date for such Debt Security, of the principal amount (or, in the
case of an Original Issue Discount Security, the United States dollar
equivalent on the issue date of such Debt Security of the amount determined as
provided in (i) above); (iii) the principal amount of an Indexed Security that
shall be deemed outstanding shall be the principal face amount of such Indexed
Security at original issuance, unless otherwise provided with respect to such
Indexed Security pursuant to Section 301 of the Indenture; and (iv) Debt
Securities owned by SCI or any other obligor upon the Debt Securities or any
Affiliate of SCI or of such other obligor shall be disregarded (Section 101).
The Indenture contains provisions for convening meetings of the Holders of
Debt Securities of a series (Section 1501). A meeting may be called at any
time by the Trustee, and also, upon request, by SCI or the Holders of at least
10% in principal amount of the Outstanding Debt Securities of such series, in
any such case upon notice given as provided in the Indenture (Section 1502).
Except for any consent that must be given by the Holder of each Debt Security
affected by certain modifications and amendments of the Indenture, any
resolution presented at a meeting or adjourned meeting duly reconvened at
which a quorum is present may be adopted by the affirmative vote of the
Holders of a majority in principal amount of the Outstanding Debt Securities
of such series; provided, however, that, except as referred to above, any
resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action that may be made, given or taken by
the Holders of a specified percentage, which is less than a majority, in
principal amount of the Outstanding Debt Securities of a series may be adopted
at a meeting or adjourned meeting duly reconvened at which a quorum is present
by the affirmative vote of the Holders of such specified percentage in
principal amount of the Outstanding Debt Securities of such series. Any
resolution passed or decision taken at any meeting of Holders of Debt
Securities of any series duly held in accordance with the Indenture will be
binding on all Holders of Debt Securities of such series. The quorum at any
meeting called to adopt a resolution, and at any reconvened meeting, will be
Persons holding or representing a majority in principal amount of the
Outstanding Debt Securities of a series; provided, however, that if any action
is to be taken at such meeting with respect to a consent or waiver which may
be given by the Holders of not less than a specified percentage in principal
amount of the Outstanding Debt Securities of a series, the Persons holding or
representing such specified percentage in principal amount of the Outstanding
Debt Securities of such series will constitute a quorum (Section 1504).
Notwithstanding the foregoing provisions, if any action is to be taken at a
meeting of Holders of Debt Securities of any series with respect to any
request, demand, authorization, direction, notice, consent, waiver or other
action that the Indenture expressly provides may be made, given or taken by
the Holders of a specified percentage in principal amount of all Outstanding
Debt Securities affected thereby, or of the Holders of such series and one or
more additional series: (i) there shall be no minimum quorum requirement for
such meeting and (ii) the principal amount of the Outstanding Debt Securities
of such series that vote in favor of such request, demand, authorization,
direction, notice, consent, waiver or other action shall be taken into account
in determining whether such request, demand, authorization, direction, notice,
consent, waiver or other action has been made, given or taken under the
Indenture (Section 1504).
Any request, demand, authorization, direction, notice, consent, waiver or
other action provided by the Indenture to be given or taken by a specified
percentage in principal amount of the Holders of any or all series of Debt
Securities may be embodied in and evidenced by one or more instruments of
substantially similar tenor
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signed by such specified percentage of Holders in person or by agent duly
appointed in writing; and, except as otherwise expressly provided in the
Indenture, such action shall become effective when such instrument or
instruments are delivered to the Trustee. Proof of execution of any instrument
or of a writing appointing any such agent shall be sufficient for any purpose
of the Indenture and (subject to Article Six of the Indenture) conclusive in
favor of the Trustee and SCI, if made in the manner specified above (Section
1507).
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
SCI may discharge certain obligations to Holders of any series of Debt
Securities that have not already been delivered to the Trustee for
cancellation and that either have become due and payable or will become due
and payable within one year (or scheduled for redemption within one year) by
irrevocably depositing with the Trustee, in trust, funds in such currency or
currencies, currency unit or units or composite currency or currencies in
which such Debt Securities are payable in an amount sufficient to pay the
entire indebtedness on such Debt Securities in respect of principal (and
premium or Make-Whole Amount, if any) and interest and Additional Amounts
payable to the date of such deposit (if such Debt Securities have become due
and payable) or to the Stated Maturity or Redemption Date, as the case may be
(Section 1401).
The Indenture provides that, if the provisions of Article Fourteen are made
applicable to the Debt Securities of or within any series pursuant to Section
301 of the Indenture, SCI may elect either (a) to defease and be discharged
from any and all obligations with respect to such Debt Securities (except for
the obligation to pay Additional Amounts, if any, upon the occurrence of
certain events of tax, assessment or governmental charge with respect to
payments on such Debt Securities and the obligations to register the transfer
or exchange of such Debt Securities, to replace temporary or mutilated,
destroyed, lost or stolen Debt Securities, to maintain an office or agency in
respect of such Debt Securities and to hold moneys for payment in trust)
("defeasance") (Section 1402) or (b) to be released from its obligations with
respect to such Debt Securities under Sections 1004 to 1009, inclusive, of the
Indenture (being the restrictions described under "--Certain Covenants") and,
if provided pursuant to Section 301 of the Indenture, its obligations with
respect to any other covenant, and any omission to comply with such
obligations shall not constitute a default or an Event of Default with respect
to such Debt Securities ("covenant defeasance") (Section 1403), in either case
upon the irrevocable deposit by SCI with the Trustee, in trust, of an amount,
in such currency or currencies, currency unit or units or composite currency
or currencies in which such Debt Securities are payable at Stated Maturity, or
Government Obligations (as defined below), or both, applicable to such Debt
Securities which through the scheduled payment of principal and interest in
accordance with their terms will provide money in an amount sufficient to pay
the principal of (and premium or Make-Whole Amount, if any) and interest on
such Debt Securities, and any mandatory sinking fund or analogous payments
thereon, on the scheduled due dates therefor (Section 1404).
Such a trust may only be established if, among other things, SCI has
delivered to the Trustee an Opinion of Counsel (as specified in the Indenture)
to the effect that the Holders of such Debt Securities will not recognize
income, gain or loss for United States federal income tax purposes as a result
of such defeasance or covenant defeasance and will be subject to United States
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance or covenant defeasance
had not occurred, and such Opinion of Counsel, in the case of defeasance, must
refer to and be based upon a ruling of the Internal Revenue Service or a
change in applicable United States federal income tax law occurring after the
date of the Indenture (Section 1404).
"Government Obligations" means securities which are (i) direct obligations
of the United States of America or the government which issued the Foreign
Currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged or (ii) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America or such government which
issued the Foreign Currency in which the Debt Securities of such series are
payable, the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America or such other
government, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and shall also include a depository receipt
issued by a bank or trust company as custodian with respect to any such
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Government Obligation or a specific payment of interest on or principal of any
such Government Obligation held by such custodian for the account of the
holder of a depository receipt, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to
the holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt (Section 101).
Unless otherwise provided in the applicable Prospectus Supplement, if after
SCI has deposited funds and/or Government Obligations to effect defeasance or
covenant defeasance with respect to Debt Securities of any series, (a) the
Holder of a Debt Security of such series is entitled to, and does, elect
pursuant to Section 301 of the Indenture or the terms of such Debt Security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security or
(b) a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which such deposit has been made, the
indebtedness represented by such Debt Security shall be deemed to have been,
and will be, fully discharged and satisfied through the payment of the
principal of (and premium or Make-Whole Amount, if any) and interest on such
Debt Security as they become due out of the proceeds yielded by converting the
amount so deposited in respect of such Debt Security into the currency,
currency unit or composite currency in which such Debt Security becomes
payable as a result of such election or such cessation of usage based on the
applicable market exchange rate (Section 1405). "Conversion Event" means the
cessation of use of (i) a currency, currency unit or composite currency (other
than the ECU or other currency unit) both by the government of the country
which issued such currency and for the settlement of transactions by a central
bank or other public institutions of or within the international banking
community, (ii) the ECU both within the European Monetary System and for the
settlement of transactions by public institutions of or within the European
Communities or (iii) any currency unit or composite currency other than the
ECU for the purposes for which it was established. Unless otherwise provided
in the applicable Prospectus Supplement, all payments of principal of (and
premium or Make-Whole Amount, if any) and interest on any Debt Security that
is payable in a Foreign Currency that ceases to be used by its government of
issuance shall be made in United States dollars (Section 101).
In the event SCI effects covenant defeasance with respect to any Debt
Securities and such Debt Securities are declared due and payable because of
the occurrence of any Event of Default other than the Event of Default
described in clause (d) under "--Events of Default, Notice and Waiver" with
respect to Sections 1004 to 1009, inclusive, of the Indenture (which Sections
would no longer be applicable to such Debt Securities) or described in clause
(g) under "--Events of Default, Notice and Waiver" with respect to any other
covenant as to which there has been covenant defeasance, the amount in such
currency, currency unit or composite currency in which such Debt Securities
are payable plus Government Obligations on deposit with the Trustee, will be
sufficient to pay amounts due on such Debt Securities at the time of their
Stated Maturity but may not be sufficient to pay amounts due on such Debt
Securities at the time of the acceleration resulting from such Event of
Default. However, SCI would remain liable to make payment of such amounts due
at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions, if
any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
REGISTRATION AND TRANSFER
Subject to certain limitations imposed upon Debt Securities issued in book-
entry form, the Debt Securities of any series will be exchangeable for other
Debt Securities of the same series and of a like aggregate principal amount
and tenor of different authorized denominations upon surrender of such Debt
Securities at the corporate trust office of the Trustee referred to above. In
addition, subject to certain limitations imposed upon Debt Securities issued
in book-entry form, the Debt Securities of any series may be surrendered for
conversion or registration of transfer thereof at the corporate trust office
of the Trustee referred to above. Every Debt Security
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surrendered for registration of transfer or exchange shall be duly endorsed or
accompanied by a written instrument of transfer. No service charge will be
made for any registration of transfer or exchange of any Debt Securities, but
SCI may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith (Section 305). SCI may at
any time designate a transfer agent (in addition to the Trustee) with respect
to any series of Debt Securities. If SCI has designated such a transfer agent
or transfer agents, SCI may at any time rescind the designation of any such
transfer agent or approve a change in the location at which any such transfer
agent acts, except that SCI will be required to maintain a transfer agent in
each Place of Payment for such series (Section 1002).
Neither SCI nor the Trustee shall be required to (i) issue, register the
transfer of or exchange Debt Securities of any series during a period
beginning at the opening of business 15 days before any selection of Debt
Securities of that series to be redeemed and ending at the close of business
on the day of mailing of the relevant notice of redemption; (ii) register the
transfer of or exchange any Debt Security, or portion thereof, called for
redemption, except the unredeemed portion of any Debt Security being redeemed
in part; or (iii) issue, register the transfer of or exchange any Debt
Security which has been surrendered for repayment at the option of the Holder,
except the portion, if any, of such Debt Security not to be so repaid (Section
305).
BOOK-ENTRY PROCEDURES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities ("Global Securities") that will be
deposited with, or on behalf of, a depository (the "Depository") identified in
the applicable Prospectus Supplement relating to such series. Global
Securities, if any, are expected to be deposited with The Depository Trust
Company, as Depository. Global Securities may be issued in fully registered
form and may be issued in either temporary or permanent form. Unless and until
it is exchanged in whole or in part for the individual Debt Securities
represented thereby, a Global Security may not be transferred except as a
whole by the Depository for such Global Security to a nominee of such
Depository or by a nominee of such Depository to such Depository or another
nominee of such Depository or by the Depository or any nominee of such
Depository to a successor Depository or any nominee of such successor.
The specific terms of the depository arrangement with respect to a series of
Debt Securities will be described in the applicable Prospectus Supplement
relating to such series. Unless otherwise indicated in the applicable
Prospectus Supplement, SCI anticipates that the following provisions will
apply to depository arrangements.
Upon the issuance of a Global Security, the Depository for such Global
Security or its nominee will credit on its book-entry registration and
transfer system the respective principal amounts of the individual Debt
Securities represented by such Global Security to the accounts of persons that
have accounts with such Depository ("Participants"). Such accounts shall be
designated by the underwriters, dealers or agents with respect to such Debt
Securities or by SCI if such Debt Securities are offered and sold directly by
SCI. Ownership of beneficial interests in a Global Security will be limited to
Participants or persons that may hold interests through Participants.
Ownership of beneficial interests in such Global Security will be shown on,
and the transfer of that ownership will be effected only through, records
maintained by the applicable Depository or its nominee (with respect to
beneficial interests of Participants) and records of Participants (with
respect to beneficial interests of persons who hold through Participants). The
laws of some states require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and laws
may impair the ability to own, pledge or transfer beneficial interests in a
Global Security.
So long as the Depository for a Global Security or its nominee is the
registered owner of such Global Security, such Depository or such nominee, as
the case may be, will be considered the sole owner or holder of the Debt
Securities represented by such Global Security for all purposes under the
Indenture. Except as provided below or in the applicable Prospectus
Supplement, owners of beneficial interests in a Global Security will not be
entitled to have any of the individual Debt Securities of the series
represented by such Global Security registered in their names, will not
receive or be entitled to receive physical delivery of any such Debt
Securities of such series in definitive form and will not be considered the
owners or holders thereof under the Indenture.
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Payments of principal of, any premium or Make-Whole Amount and any interest
on, or any Additional Amounts payable with respect to, individual Debt
Securities represented by a Global Security registered in the name of a
Depository or its nominee will be made to the Depository or its nominee, as
the case may be, as the registered owner of the Global Security representing
such Debt Securities. None of SCI, the Trustee, any Paying Agent or the
Security Registrar for such Debt Securities will have any responsibility or
liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in the Global Security for such Debt
Securities or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
SCI expects that the Depository for a series of Debt Securities or its
nominee, upon receipt of any payment of principal, premium, Make-Whole Amount
or interest in respect of a permanent Global Security representing any of such
Debt Securities, immediately will credit Participants' accounts with payments
in amounts proportionate to their respective beneficial interests in the
principal amount of such Global Security for such Debt Securities as shown on
the records of such Depository or its nominee. SCI also expects that payments
by Participants to owners of beneficial interests in such Global Security held
through such Participants will be governed by standing instructions and
customary practices, as is the case with securities held for the account of
customers in bearer form or registered in "street name." Such payments will be
the responsibility of such Participants.
If a Depository for a series of Debt Securities is at any time unwilling,
unable or ineligible to continue as depository and a successor depository is
not appointed by SCI within 90 days, SCI will issue individual Debt Securities
of such series in exchange for the Global Security representing such series of
Debt Securities. In addition, SCI may, at any time and in its sole discretion,
subject to any limitations described in the applicable Prospectus Supplement
relating to such Debt Securities, determine not to have any Debt Securities of
such series represented by one or more Global Securities and, in such event,
will issue individual Debt Securities of such series in exchange for the
Global Security or Securities representing such series of Debt Securities.
Individual Debt Securities of such series so issued will be issued in
denominations, unless otherwise specified by SCI, of $1,000 and integral
multiples thereof.
CERTAIN DEFINITIONS
"Acquired Debt" means Debt of a Person (i) existing at the time such Person
becomes a Subsidiary or (ii) assumed in connection with the acquisition of
assets from such Person, in each case, other than Debt incurred in connection
with, or in contemplation of, such Person becoming a Subsidiary or such
acquisition. Acquired Debt shall be deemed to be incurred on the date of the
related acquisition of assets from any Person or the date the acquired Person
becomes a Subsidiary.
"Annual Service Charge" as of any date means the maximum amount which is
payable in any period for interest on, and original issue discount of, Debt of
SCI and its Subsidiaries and the amount of dividends which are payable in
respect of any Disqualified Stock.
"Capital Stock" means, with respect to any Person, any capital stock
(including preferred stock), shares, interests, participations or other
ownership interests (however designated) of such Person and any rights (other
than debt securities convertible into or exchangeable for corporate stock),
warrants or options to purchase any thereof.
"Consolidated Income Available for Debt Service" for any period means
Earnings from Operations (as defined below) of SCI and its Subsidiaries plus
amounts which have been deducted, and minus amounts which have been added, for
the following (without duplication): (a) interest on Debt of SCI and its
Subsidiaries, (b) provision for taxes of SCI and its Subsidiaries based on
income, (c) amortization of debt discount, (d) provisions for gains and losses
on properties and property depreciation and amortization, (e) the effect of
any noncash charge resulting from a change in accounting principles in
determining Earnings from Operations for such period and (f) amortization of
deferred charges.
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"Debt" of SCI or any Subsidiary means any indebtedness of SCI or any
Subsidiary, whether or not contingent, in respect of (i) borrowed money or
evidenced by bonds, notes, debentures or similar instruments, (ii)
indebtedness secured by any mortgage, pledge, lien, charge, encumbrance or any
security interest existing on property owned by SCI or any Subsidiary, (iii)
the reimbursement obligations, contingent or otherwise, in connection with any
letters of credit actually issued or amounts representing the balance deferred
and unpaid of the purchase price of any property or services, except any such
balance that constitutes an accrued expense or trade payable, or all
conditional sale obligations or obligations under any title retention
agreement, (iv) the principal amount of all obligations of SCI or any
Subsidiary with respect to redemption, repayment or other repurchase of any
Disqualified Stock or (v) any lease of property by SCI or any Subsidiary as
lessee which is reflected on SCI's Consolidated Balance Sheet as a capitalized
lease in accordance with generally accepted accounting principles, to the
extent, in the case of items of indebtedness under (i) through (iii) above,
that any such items (other than letters of credit) would appear as a liability
on SCI's Consolidated Balance Sheet in accordance with generally accepted
accounting principles, and also includes, to the extent not otherwise
included, any obligation by SCI or any Subsidiary to be liable for, or to pay,
as obligor, guarantor or otherwise (other than for purposes of collection in
the ordinary course of business), Debt of another Person (other than SCI or
any Subsidiary) (it being understood that Debt shall be deemed to be incurred
by SCI or any Subsidiary whenever SCI or such Subsidiary shall create, assume,
guarantee or otherwise become liable in respect thereof).
"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person which by the terms of such Capital Stock (or by the terms of any
security into which it is convertible or for which it is exchangeable or
exercisable), upon the happening of any event or otherwise (i) matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise,
(ii) is convertible into or exchangeable or exercisable for Debt or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the Stated Maturity of the
series of Debt Securities.
"Earnings from Operations" for any period means net earnings excluding gains
and losses on sales of investments, net, as reflected in the financial
statements of SCI and its Subsidiaries for such period determined on a
consolidated basis in accordance with generally accepted accounting
principles.
"Encumbrance" means any mortgage, pledge, lien, charge, encumbrance or any
security interest existing on property owned by SCI or any Subsidiary securing
indebtedness for borrowed money, other than a Permitted Encumbrance.
"Permitted Encumbrances" means leases, Encumbrances securing taxes,
assessments and similar charges, mechanics liens and other similar
Encumbrances.
"Subsidiary" means, with respect to any Person, any corporation or other
entity of which a majority of (a) the voting power of the voting equity
securities or (b) in the case of a partnership or any other entity other than
a corporation, the outstanding equity interest of which are owned, directly or
indirectly, by such Person. For the purposes of this definition, "voting
equity securities" means equity securities having voting power for the
election of directors, whether at all times or only so long as no senior class
of security has such voting power by reason of any contingency.
"Total Assets" as of any date means the sum of (i) Undepreciated Real Estate
Assets and (ii) all other assets of SCI and its Subsidiaries determined in
accordance with generally accepted accounting principles (but excluding
accounts receivable and intangibles).
"Total Unencumbered Assets" means the sum of (i) those Undepreciated Real
Estate Assets not subject to an Encumbrance and (ii) the value (determined in
accordance with generally accepted accounting principles) of all other assets
(other than accounts receivable and intangibles) of SCI and its Subsidiaries
not subject to an Encumbrance.
"Undepreciated Real Estate Assets" as of any date means the cost (original
cost plus capital improvements) of real estate assets of SCI and its
Subsidiaries on such date, before depreciation and amortization determined on
a consolidated basis in accordance with generally accepted accounting
principles.
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"Unsecured Debt" means Debt of the types described in clauses (i), (iii) and
(iv) of the definition thereof which is not secured by any mortgage, lien,
charge, pledge or security interest of any kind upon any of the properties of
SCI or any Subsidiary.
NO PERSONAL LIABILITY
No past, present or future trustee, officer, employee or shareholder, as
such, of SCI or any successor thereof shall have any liability for any
obligations of SCI under the Debt Securities or the Indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Debt Securities by accepting such Debt Securities waives and
releases all such liability. The waiver and release are part of the
consideration for the issue of Debt Securities (Section 111).
TRUSTEE
The Indenture provides that there may be more than one Trustee thereunder,
each with respect to one or more series of Debt Securities. Any Trustee under
the Indenture may resign or be removed with respect to one or more series of
Debt Securities, and a successor Trustee may be appointed to act with respect
to such series (Section 608). In the event that two or more persons are acting
as Trustee with respect to different series of Debt Securities, each such
Trustee shall be a Trustee of a trust under the Indenture separate and apart
from the trust administered by any other Trustee (Sections 101 and 609), and,
except as otherwise indicated herein, any action described herein to be taken
by the Trustee may be taken by each such Trustee with respect to, and only
with respect to, the one or more series of Debt Securities for which it is
Trustee under the Indenture.
DESCRIPTION OF PREFERRED SHARES
GENERAL
Subject to limitations prescribed by Maryland law and the Declaration of
Trust, the Board is authorized to issue, from the authorized but unissued
shares of beneficial interest of SCI, Preferred Shares in series and to
establish from time to time the number of Preferred Shares to be included in
such series and to fix the designation and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the shares of each
series, and such other subjects or matters as may be fixed by resolution of
the Board or duly authorized committee thereof. At November 14, 1997,
5,400,000 Series A Preferred Shares were issued and outstanding and held of
record by approximately 315 shareholders, 8,050,000 Series B Preferred Shares
were issued and outstanding and held of record by approximately 35
shareholders and 2,000,000 Series C Preferred Shares were issued and
outstanding and held of record by one shareholder.
Reference is made to the Prospectus Supplement relating to the series of
Preferred Shares offered thereby for the specific terms thereof, including:
(1) The title and stated value of such series of Preferred Shares;
(2) The number of shares of such series of Preferred Shares offered, the
liquidation preference per share and the offering price of such Preferred
Shares;
(3) The dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to Preferred Shares of such series;
(4) The date from which dividends on Preferred Shares of such series
shall cumulate, if applicable;
(5) The procedures for any auction and remarketing, if any, for Preferred
Shares of such series;
(6) The provision for a sinking fund, if any, for Preferred Shares of
such series;
(7) The provision for redemption, if applicable, of Preferred Shares of
such series;
(8) Any listing of such series of Preferred Shares on any securities
exchange;
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(9) The terms and conditions, if applicable, upon which Preferred Shares
of such series will be convertible into Common Shares, including the
conversion price (or manner of calculation thereof);
(10) Whether interests in Preferred Shares of such series will be
represented by global securities;
(11) Any other specific terms, preferences, rights, limitations or
restrictions of such series of Preferred Shares;
(12) A discussion of federal income tax considerations applicable to
Preferred Shares of such series;
(13) The relative ranking and preferences of Preferred Shares of such
series as to dividend rights and rights upon liquidation, dissolution or
winding up of the affairs of SCI;
(14) Any limitations on issuance of any series of Preferred Shares
ranking senior to or on a parity with such series of Preferred Shares as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of SCI; and
(15) Any limitations on direct or beneficial ownership and restrictions
on transfer of Preferred Shares of such series, in each case as may be
appropriate to preserve the status of SCI as a REIT.
RANK
Unless otherwise specified in the applicable Prospectus Supplement, the
Preferred Shares of each series will, with respect to dividend rights and
rights upon liquidation, dissolution or winding up of the affairs of SCI, rank
(i) senior to all classes or series of Common Shares, and to all equity
securities ranking junior to such series of Preferred Shares; (ii) on a parity
with all equity securities issued by SCI the terms of which specifically
provide that such equity securities rank on a parity with Preferred Shares of
such series; and (iii) junior to all equity securities issued by SCI the terms
of which specifically provide that such equity securities rank senior to
Preferred Shares of such series.
DIVIDENDS
Holders of Preferred Shares of each series shall be entitled to receive,
when, as and if declared by the Board, out of assets of SCI legally available
for payment, cash dividends at such rates and on such dates as will be set
forth in the applicable Prospectus Supplement. Each such dividend shall be
payable to holders of record as they appear on the share transfer books of SCI
on such record dates as shall be fixed by the Board.
Dividends on any series of the Preferred Shares may be cumulative or
noncumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board fails to declare a dividend
payable on a dividend payment date on any series of the Preferred Shares for
which dividends are noncumulative, then the holders of such series of the
Preferred Shares will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and SCI will have no
obligation to pay the dividend accrued for such period, whether or not
dividends on such series are declared payable on any future dividend payment
date.
If Preferred Shares of any series are outstanding, no full dividends shall
be declared or paid or set apart for payment on the Preferred Shares of SCI of
any other series ranking, as to dividends, on a parity with or junior to the
Preferred Shares of such series for any period unless (i) if such series of
Preferred Shares has a cumulative dividend, full cumulative dividends have
been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for such payment on the Preferred
Shares of such series for all past dividend periods and the then current
dividend period or (ii) if such series of Preferred Shares does not have a
cumulative dividend, full dividends for the then current dividend period have
been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for such payment on the Preferred
Shares of such series. When dividends are not paid in full (or a sum
sufficient for such full payment is not so set apart) upon the Preferred
Shares of any series and the shares of any other series of Preferred Shares
ranking on a parity as to dividends with the Preferred Shares of such series,
all dividends declared upon Preferred
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Shares of such series and any other series of Preferred Shares ranking on a
parity as to dividends with such Preferred Shares shall be declared pro rata
so that the amount of dividends declared per share on the Preferred Shares of
such series and such other series of Preferred Shares shall in all cases bear
to each other the same ratio that accrued dividends per share on the Preferred
Shares of such series (which shall not include any cumulation in respect of
unpaid dividends for prior dividend periods if such series of Preferred Shares
does not have a cumulative dividend) and such other series of Preferred Shares
bear to each other. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on Preferred Shares of
such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Shares has a cumulative dividend, full cumulative
dividends on the Preferred Shares of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient of
the payment thereof set apart for payment for all past dividend periods and
the then current dividend period or (ii) if such series of Preferred Shares
does not have a cumulative dividend, full dividends on the Preferred Shares of
such series have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof set apart for payment for the
then current dividend period, no dividends (other than in Common Shares or
other capital shares ranking junior to the Preferred Shares of such series as
to dividends and upon liquidation) shall be declared or paid or set aside for
payment or other distribution shall be declared or made upon the Common Shares
or any other capital shares of SCI ranking junior to or on a parity with the
Preferred Shares of such series as to dividends or upon liquidation be
redeemed, purchased or otherwise acquired for any consideration (or any moneys
be paid to or made available for a sinking fund for the redemption of any
shares of any such series) by SCI (except by conversion into or exchange for
other capital shares of SCI ranking junior to the Preferred Shares of such
series as to dividends and upon liquidation).
Any dividend payment made on a series of Preferred Shares shall first be
credited against the earliest accrued but unpaid dividend due with respect to
shares of such series which remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the Preferred Shares
of a series will be subject to mandatory redemption or redemption at the
option of SCI, as a whole or in part, in each case upon the terms, at the
times and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Shares that is
subject to mandatory redemption will specify the number of Preferred Shares of
such series that shall be redeemed by SCI in each year commencing after a date
to be specified, at a redemption price per share to be specified, together
with an amount equal to all accrued and unpaid dividends thereon (which shall
not, if such series of Preferred Shares does not have a cumulative dividend,
include any cumulation in respect of unpaid dividends for prior dividend
periods) to the date of redemption. The redemption price may be payable in
cash or other property, as specified in the applicable Prospectus Supplement.
If the redemption price for Preferred Shares of any series is payable only
from the net proceeds of the issuance of capital shares of SCI, the terms of
such series of Preferred Shares may provide that, if no such capital shares
shall have been issued or to the extent the net proceeds from any issuance are
insufficient to pay in full the aggregate redemption price then due, Preferred
Shares of such series shall automatically and mandatorily be converted into
shares of the applicable capital shares of SCI pursuant to conversion
provisions specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred Shares
has a cumulative dividend, full cumulative dividends on all Preferred Shares
of any series shall have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment
for all past dividend periods and the then current dividend period or (ii) if
such series of Preferred Shares does not have a cumulative dividend, full
dividends on all Preferred Shares of any series shall have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for the then current
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dividend period, no Preferred Shares of any series shall be redeemed unless
all outstanding Preferred Shares of such series are simultaneously redeemed;
provided, however, that the foregoing shall not prevent the purchase or
acquisition of Preferred Shares of such series pursuant to a purchase or
exchange offer made on the same terms to holders of all outstanding Preferred
Shares of such series, and, unless (i) if such series of Preferred Shares has
a cumulative dividend, full cumulative dividends on all Preferred Shares of
any series shall have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment
for all past dividend periods and the then current dividend period or (ii) if
such series of Preferred Shares does not have a cumulative dividend, full
dividends on all Preferred Shares of any series shall have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for the then current dividend
period, SCI shall not purchase or otherwise acquire directly or indirectly any
Preferred Shares of such series (except by conversion into or exchange for
capital shares of SCI ranking junior to the Preferred Shares of such series as
to dividends and upon liquidation).
If fewer than all of the outstanding Preferred Shares of any series are to
be redeemed, the number of shares to be redeemed will be determined by SCI and
such shares may be redeemed pro rata from the holders of record of Preferred
Shares of such series in proportion to the number of Preferred Shares of such
series held by such holders (with adjustments to avoid redemption of
fractional shares) or by lot in a manner determined by SCI.
Notice of redemption will be mailed at least 30 days but not more than 90
days before the redemption date to each holder of record of Preferred Shares
of any series to be redeemed at the address shown on the share transfer books
of SCI. Each notice shall state: (i) the redemption date; (ii) the number of
shares and series of the Preferred Shares to be redeemed; (iii) the redemption
price; (iv) the place or places where certificates for such Preferred Shares
are to be surrendered for payment of the redemption price; (v) that dividends
on the Preferred Shares to be redeemed will cease to accrue on such redemption
date; and (vi) the date upon which the holder's conversion rights, if any, as
to such Preferred Shares shall terminate. If fewer than all the Preferred
Shares of any series are to be redeemed, the notice mailed to each such holder
thereof shall also specify the number of Preferred Shares to be redeemed from
each such holder. If notice of redemption of any Preferred Shares has been
given and if the funds necessary for such redemption have been set aside by
SCI in trust for the benefit of the holders of any Preferred Shares so called
for redemption, then from and after the redemption date dividends will cease
to accrue on such Preferred Shares, and all rights of the holders of such
Preferred Shares will terminate, except the right to receive the redemption
price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of SCI, then, before any distribution or payment shall be made to
the holders of any Common Shares or any other class or series of shares of
beneficial interest of SCI ranking junior to such series of Preferred Shares
in the distribution of assets upon any liquidation, dissolution or winding up
of SCI, the holders of each series of Preferred Shares shall be entitled to
receive out of assets of SCI legally available for distribution to
shareholders liquidating distributions in the amount of the liquidation
preference per share (set forth in the applicable Prospectus Supplement), plus
an amount equal to all dividends accrued and unpaid thereon (which shall not
include any cumulation in respect of unpaid dividends for prior dividend
periods if such series of Preferred Shares does not have a cumulative
dividend). After payment of the full amount of the liquidating distributions
to which they are entitled, the holders of Preferred Shares of such series
will have no right or claim to any of the remaining assets of SCI. In the
event that, upon any such voluntary or involuntary liquidation, dissolution or
winding up, the available assets of SCI are insufficient to pay the amount of
the liquidating distributions on all outstanding Preferred Shares of such
series and the corresponding amounts payable on all shares of other classes or
series of capital shares of SCI ranking on a parity with Preferred Shares of
such series in the distribution of assets, then the holders of Preferred
Shares of such series and all other such classes or series of capital shares
shall share ratably in any such distribution of assets in proportion to the
full liquidating distributions to which they would otherwise be respectively
entitled.
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If liquidating distributions shall have been made in full to all holders of
Preferred Shares of such series, the remaining assets of SCI shall be
distributed among the holders of any other classes or series of capital shares
ranking junior to the Preferred Shares of such series upon liquidation,
dissolution or winding up, according to their respective rights and
preferences and in each case according to their respective number of shares.
For such purposes, the consolidation or merger of SCI with or into any other
entity, or the sale, lease or conveyance of all or substantially all of the
property or business of SCI, shall not be deemed to constitute a liquidation,
dissolution or winding up of SCI.
VOTING RIGHTS
Holders of the Preferred Shares of each series will not have any voting
rights, except as set forth below or in the applicable Prospectus Supplement
or as otherwise required by applicable law. The following is a summary of the
voting rights that, unless provided otherwise in the applicable Prospectus
Supplement, will apply to each series of Preferred Shares (as in the case of
the Series A Preferred Shares).
If six quarterly dividends (whether or not consecutive) payable on the
Preferred Shares of such series or any other series of Preferred Shares
ranking on a parity with such series of Preferred Shares with respect in each
case to the payment of dividends, amounts upon liquidation, dissolution and
winding up ("Parity Shares") are in arrears, whether or not earned or
declared, the number of Trustees then constituting the Board will be increased
by two, and the holders of Preferred Shares of such series, voting together as
a class with the holders of any other series of Parity Shares (any such other
series, the "Voting Preferred Shares"), will have the right to elect two
additional trustees to serve on the Board at any annual meeting of
shareholders or a properly called special meeting of the holders of Preferred
Shares of such series and such Voting Preferred Shares and at each subsequent
annual meeting of shareholders until all such dividends and dividends for the
current quarterly period on the Preferred Shares of such series and such other
Voting Preferred Shares have been paid or declared and set aside for payment.
Such voting rights will terminate when all such accrued and unpaid dividends
have been declared and paid or set aside for payment. The term of office of
all trustees so elected will terminate with the termination of such voting
rights. For so long as SCG and certain of its affiliates beneficially own in
excess of 10% of the outstanding Common Shares, in any such vote by holders of
Preferred Shares of such series, SCG and certain of its affiliates shall vote
their Preferred Shares of such series, if any, in the same respective
percentages as the Preferred Shares of such series and Voting Preferred Shares
that are not held by such persons.
The approval of two-thirds of the outstanding Preferred Shares of such
series and all other series of Voting Preferred Shares similarly affected,
voting as a single class, is required in order to (i) amend the Declaration of
Trust to affect materially and adversely the rights, preferences or voting
power of the holders of the Preferred Shares of such series or the Voting
Preferred Shares; (ii) enter into a share exchange that affects the Preferred
Shares of such series, consolidate with or merge into another entity, or
permit another entity to consolidate with or merge into SCI, unless in each
such case each Preferred Share of such series remains outstanding without a
material and adverse change to its terms and rights or is converted into or
exchanged for preferred shares of the surviving entity having preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms or conditions of redemption thereof
identical to that of a Preferred Share of such series (except for changes that
do not materially and adversely affect the holders of the Preferred Shares of
such series); or (iii) authorize, reclassify, create, or increase the
authorized amount of any class of shares having rights senior to the Preferred
Shares of such series with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding up. However, SCI may create additional
classes of Parity Shares and other series of Preferred Shares ranking junior
to such series of Preferred Shares with respect in each case to the payment of
dividends, amounts upon liquidation, dissolution and winding up ("Junior
Shares"), increase the authorized number of Parity Shares and Junior Shares
and issue additional series of Parity Shares and Junior Shares without the
consent of any holder of Preferred Shares of such series.
Except as provided above and as required by law, the holders of Preferred
Shares of each series will not be entitled to vote on any merger or
consolidation involving SCI or a sale of all or substantially all of the
assets of SCI.
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CONVERSION RIGHTS
The terms and conditions, if any, upon which Preferred Shares of any series
are convertible into Common Shares will be set forth in the applicable
Prospectus Supplement relating thereto. Such terms will include the number of
Common Shares into which the Preferred Shares of such series are convertible,
the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the
holders of the Preferred Shares of such series or SCI, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of the Preferred Shares of such series.
RESTRICTIONS ON OWNERSHIP
As discussed below under "Description of Common Shares--Restriction on Size
of Holdings," for SCI to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), not more than 50% in value of its outstanding
shares of beneficial interest may be owned by five or fewer individuals at any
time during the last half of any taxable year. Therefore, the Articles
Supplementary for each series of Preferred Shares will contain certain
provisions restricting the ownership and transfer of the Preferred Shares (the
"Preferred Shares Ownership Limit Provision"). Except as otherwise described
in the applicable Prospectus Supplement relating thereto, the provisions of
each Articles Supplementary relating to the Preferred Shares Ownership Limit
will provide (as in the case of the Series A Preferred Shares, the Series B
Preferred Shares and the Series C Preferred Shares) as summarized below.
The Preferred Shares Ownership Limit Provision will provide that, subject to
certain exceptions contained in such Articles Supplementary, no person, or
persons acting as a group, may beneficially own more than 25% of any series of
Preferred Shares outstanding at any time, except as a result of SCI's
redemption of Preferred Shares. Shares acquired in excess of the Preferred
Shares Ownership Limit Provision must be redeemed by SCI at a price equal to
the average daily per share closing sale price during the 30-day period ending
on the business day prior to the redemption date. Such redemption is not
applicable if a person's ownership exceeds the limitations due solely to SCI's
redemption of Preferred Shares; provided that thereafter any additional
Preferred Shares acquired by such person shall be Excess Shares (as
hereinafter defined). See "Description of Common Shares--Restriction on Size
of Holdings." From and after the date of notice of such redemption, the holder
of the Preferred Shares thus redeemed shall cease to be entitled to any
distribution (other than distributions declared prior to the date of notice of
redemption), voting rights and other benefits with respect to such shares
except the right to receive payment of the redemption price determined as
described above. The Preferred Shares Ownership Limit Provision may not be
waived with respect to certain affiliates of SCI.
All certificates representing shares of Preferred Shares will bear a legend
referring to the restrictions described above.
DESCRIPTION OF COMMON SHARES
GENERAL
The Declaration of Trust authorizes SCI to issue up to 180,000,000 Shares of
Beneficial Interest, par value $0.01 per share, consisting of Common Shares,
Preferred Shares and such other types or classes of shares of beneficial
interest as the Board may create and authorize from time to time. At November
14, 1997, approximately 108,773,707 Common Shares were issued and outstanding
and held of record by approximately 1,210 shareholders.
The following description sets forth certain general terms and provisions of
the Common Shares to which any Prospectus Supplement may relate, including a
Prospectus Supplement which provides for Common Shares issuable pursuant to
subscription offerings or rights offerings or upon conversion of Preferred
Shares which are offered pursuant to such Prospectus Supplement and
convertible into Common Shares for no additional
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consideration. The statements below describing the Common Shares are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Declaration of Trust and SCI's Bylaws.
The outstanding Common Shares are fully paid and, except as set forth below
under "--Shareholder Liability," non-assessable. Each Common Share entitles
the holder to one vote on all matters requiring a vote of shareholders,
including the election of Trustees. Holders of Common Shares do not have the
right to cumulate their votes in the election of Trustees, which means that
the holders of a majority of the outstanding Common Shares can elect all of
the Trustees then standing for election. Holders of Common Shares are entitled
to such distributions as may be declared from time to time by the Board out of
funds legally available therefor. Holders of Common Shares have no conversion,
redemption, preemptive or exchange rights to subscribe to any securities of
SCI. In the event of a liquidation, dissolution or winding up of the affairs
of SCI, the holders of the Common Shares are entitled to share ratably in the
assets of SCI remaining after provision for payment of all liabilities to
creditors and payment of liquidation preferences and accrued dividends, if
any, on the Series A Preferred Shares, Series B Preferred Shares and Series C
Preferred Shares, and subject to the rights of holders of other series of
Preferred Shares, if any. The right of holders of the Common Shares are
subject to the rights and preferences established by the Board for the Series
A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares
and any other series of Preferred Shares which may subsequently be issued by
SCI. See "Description of Preferred Shares."
PURCHASE RIGHTS
On December 7, 1993, the Board declared a dividend of one preferred share
purchase right (a "Purchase Right") for each Common Share outstanding, payable
to holders of Common Shares of record at the close of business on December 31,
1993. The holders of any additional Common Shares issued after such date and
before the redemption or expiration of the Purchase Rights are also entitled
to receive one Purchase Right for each such additional Common Share. Each
Purchase Right entitles the holder under certain circumstances to purchase
from SCI one one-hundredth of a share of Series A Junior Participating
Preferred Shares, par value $0.01 per share (the "Participating Preferred
Shares") at a price of $40.00 per one one-hundredth of a Participating
Preferred Share, subject to adjustment. Purchase Rights are exercisable when a
person or group of persons (other than SCG) acquires 20% or more of the
outstanding Common Shares or announces a tender offer or exchange offer for
25% or more of the outstanding Common Shares. Under certain circumstances,
each Purchase Right entitles the holder to purchase, at the Purchase Right's
then current exercise price, a number of Common Shares having a market value
of twice the Purchase Right's exercise price. The acquisition of SCI pursuant
to certain mergers or other business transactions would entitle each holder to
purchase, at the Purchase Right's then current exercise price, a number of the
acquiring company's common shares having a market value at that time equal to
twice the Purchase Right's exercise price. The Purchase Rights held by certain
20% shareholders (other than SCG) would not be exercisable. The Purchase
Rights will expire on December 7, 2003 and are subject to redemption in whole,
but not in part, at a price of $0.01 per Purchase Right payable in cash,
shares of SCI or any other form of consideration determined by the Board.
TRANSFER AGENT
The transfer agent and registrar for the Common Shares is BankBoston, N.A.,
150 Royall Street, Canton, Massachusetts 02021. The Common Shares are listed
on the NYSE under the symbol "SCN."
RESTRICTION ON SIZE OF HOLDINGS
The Declaration of Trust restricts beneficial ownership of SCI's outstanding
shares of beneficial interest by a single person, or persons acting as a
group, to 9.8% of such shares. The purposes of the restriction are to assist
in protecting and preserving SCI's REIT status and to protect the interest of
shareholders in takeover transactions by preventing the acquisition of a
substantial block of shares unless the acquiror makes a cash tender offer for
all outstanding shares. For SCI to qualify as a REIT under the Code, not more
than 50% in value of its
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outstanding shares of beneficial interest may be owned by five or fewer
individuals at any time during the last half of any taxable year. The
restriction permits five persons to acquire up to a maximum of 9.8% each, or
an aggregate of 49% of the outstanding shares, and, thus, assists the Board in
protecting and preserving SCI's REIT status for tax purposes. This restriction
does not apply to SCG, which counts as numerous holders for purposes of the
tax rule, because its shares are attributed to its shareholders for purposes
of this rule.
Shares of beneficial interest owned by a person or group of persons in
excess of 9.8% (other than SCG and 30% in the case of certain shareholders who
acquired shares prior to SCI's initial public offering) of the outstanding
shares of beneficial interest ("Excess Shares") are subject to redemption by
SCI, at its option, upon 30 days' notice, at a price equal to the average
daily per share closing sale price during the 30-day period ending on the
business day prior to the redemption date. SCI may make payment of the
redemption price at any time or times up to the earlier of five years after
the redemption date or liquidation of SCI. SCI may refuse to effect the
transfer of any shares of beneficial interest which would make the transferee
a holder of Excess Shares. Shareholders of SCI are required to disclose, upon
demand of the Board, such information with respect to their direct and
indirect ownership of shares of SCI as the Board deems necessary to comply
with the provisions of the Code pertaining to qualification, for tax purposes,
of REITs, or to comply with the requirements of any other appropriate taxing
authority.
The 9.8% restriction does not apply to acquisitions by an underwriter in a
public offering and sale of shares of beneficial interest of SCI or to any
transaction involving the issuance of shares of beneficial interest in which a
majority of the Board determines that the eligibility of SCI to qualify as a
REIT for federal income tax purposes will not be jeopardized or the
disqualification of SCI as a REIT is advantageous to the shareholders. SCG's
ownership of shares is attributed for tax purposes to its shareholders. The
Board has exempted SCG from this restriction and has permitted certain other
shareholders who acquired shares prior to SCI's initial public offering to
acquire up to 30% of the outstanding shares of beneficial interest.
TRUSTEE LIABILITY
The Declaration of Trust provides that Trustees shall not be individually
liable for any obligation or liability incurred by or on behalf of SCI or by
Trustees for the benefit and on behalf of SCI. Under the Declaration of Trust
and Maryland law governing REITs, Trustees are not liable to SCI or the
shareholders for any act or omission except for acts or omissions which
constitute bad faith, willful misfeasance or gross negligence in the conduct
of his duties.
SHAREHOLDER LIABILITY
Both Maryland statutory law governing REITs organized under the laws of that
state and the Declaration of Trust provide that shareholders shall not be
personally or individually liable for any debt, act, omission or obligation of
SCI or the Board. The Declaration of Trust further provides that SCI shall
indemnify and hold each shareholder harmless from all claims and liabilities
to which the shareholder may become subject by reason of his being or having
been a shareholder and that SCI shall reimburse each shareholder for all legal
and other expenses reasonably incurred by the shareholder in connection with
any such claim or liability, except to the extent that such claim or liability
arises out of the shareholder's bad faith, willful misconduct or gross
negligence and provided that such shareholder gives SCI prompt notice of any
such claim or liability and permits SCI to conduct the defense thereof. In
addition, SCI is required to, and as a matter of practice does, insert a
clause in its management and other contracts providing that shareholders
assume no personal liability for obligations entered into on behalf of SCI.
Nevertheless, with respect to tort claims, contractual claims where
shareholder liability is not so negated, claims for taxes and certain
statutory liability, the shareholders may, in some jurisdictions, be
personally liable to the extent that such claims are not satisfied by SCI.
Inasmuch as SCI carries public liability insurance which it considers
adequate, any risk of personal liability to shareholders is limited to
situations in which SCI's assets plus its insurance coverage would be
insufficient to satisfy the claims against SCI and its shareholders.
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FEDERAL INCOME TAX CONSIDERATIONS
SCI intends to operate in a manner that permits it to satisfy the
requirements for taxation as a REIT under the applicable provisions of the
Code. No assurance can be given, however, that such requirements will be met.
The following is a description of the federal income tax consequences to SCI
and its shareholders of the treatment of SCI as a REIT. Since these provisions
are highly technical and complex, each prospective purchaser of the Offered
Securities is urged to consult his or her own tax advisor with respect to the
federal, state, local, foreign and other tax consequences of the purchase,
ownership and disposition of the Offered Securities.
Based upon certain representations of SCI with respect to the facts as set
forth and explained in the discussion below, in the opinion of Mayer, Brown &
Platt, counsel to SCI, SCI has been organized in conformity with the
requirements for qualification as a REIT beginning with its taxable year
ending December 31, 1993, and its proposed method of operation described in
this Prospectus and as represented by management will enable it to satisfy the
requirements for such qualification.
This opinion is based on certain assumptions relating to the organization
and operation of SCI Limited Partnership--I, SCI Limited Partnership--II, SCI
Limited Partnership--III and SCI Limited Partnership--IV (the "Partnerships")
and of any other partnerships in which SCI will hold an interest, and is
conditioned upon certain representations made by SCI as to certain factual
matters relating to SCI's organization and intended or expected manner of
operation. In addition, this opinion is based on the law existing and in
effect on the date hereof. SCI's qualification and taxation as a REIT will
depend upon SCI's ability to meet on a continuing basis, through actual
operating results, asset composition, distribution levels and diversity of
stock ownership, the various qualification tests imposed under the Code
discussed below. Mayer, Brown & Platt will not review compliance with these
tests on a continuing basis. No assurance can be given that SCI will satisfy
such tests on a continuing basis.
In brief, if certain detailed conditions imposed by the REIT provisions of
the Code are met, entities, such as SCI, that invest primarily in real estate
and that otherwise would be treated for federal income tax purposes as
corporations, are generally not taxed at the corporate level on their "REIT
taxable income" that is currently distributed to shareholders. This treatment
substantially eliminates the "double taxation" (at both the corporate and
shareholder levels) that generally results from the use of corporations.
If SCI fails to qualify as a REIT in any year, however, it will be subject
to federal income taxation as if it were a domestic corporation, and its
shareholders will be taxed in the same manner as shareholders of ordinary
corporations. In this event, SCI could be subject to potentially significant
tax liabilities, and therefore the amount of cash available for distribution
to its shareholders would be reduced or eliminated.
SCI elected REIT status effective beginning with its taxable year ended
December 31, 1993 and the Board believes that SCI has operated and currently
intends that SCI will operate in a manner that permits it to qualify as a REIT
in each taxable year thereafter. There can be no assurance, however, that this
expectation will be fulfilled, since qualification as a REIT depends on SCI
continuing to satisfy numerous asset, income and distribution tests described
below, which in turn will be dependent in part on SCI's operating results.
The following summary is based on the Code, its legislative history,
administrative pronouncements, judicial decisions and Treasury regulations,
subsequent changes to any of which may affect the tax consequences described
herein, possibly on a retroactive basis. The following summary is not
exhaustive of all possible tax considerations and does not give a detailed
discussion of any state, local, or foreign tax considerations, nor does it
discuss all of the aspects of federal income taxation that may be relevant to
a prospective shareholder in light of his or her particular circumstances or
to certain types of shareholders (including insurance companies, tax-exempt
entities, financial institutions or broker-dealers, foreign corporations and
persons who are not citizens or residents of the United States) subject to
special treatment under the federal income tax laws.
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TAXATION OF SCI
General
In any year in which SCI qualifies as a REIT, in general it will not be
subject to federal income tax on that portion of its REIT taxable income or
capital gain which is distributed to shareholders. SCI may, however, be
subject to tax at normal corporate rates upon any taxable income or capital
gain not distributed.
Notwithstanding its qualification as a REIT, SCI may also be subject to
taxation in certain other circumstances. If SCI should fail to satisfy either
the 75% or the 95% gross income test (as discussed below), and nonetheless
maintains its qualification as a REIT because certain other requirements are
met, it will be subject to a 100% tax on the greater of the amount by which
SCI fails to satisfy either the 75% test or the 95% test, multiplied by a
fraction intended to reflect SCI's profitability. SCI will also be subject to
a tax of 100% on net income from any "prohibited transaction", as described
below, and if SCI has (i) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or (ii) other non-qualifying income from
foreclosure property, it will be subject to tax on such income from
foreclosure property at the highest corporate rate. In addition, if SCI should
fail to distribute during each calendar year at least the sum of (i) 85% of
its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year and (iii) any undistributed taxable income from prior
years, SCI would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. For taxable years
beginning after August 5, 1997, the Taxpayer Relief Act of 1997 (the "1997
Act") permits a REIT, with respect to undistributed net long-term capital
gains it received during the taxable year, to designate in a notice mailed to
shareholders within 60 days of the end of the taxable year (or in a notice
mailed with its annual report for the taxable year) such amount of such gains
which its shareholders are to include in their taxable income as long-term
capital gains. Thus, if SCI made this designation, the shareholders of SCI
would include in their income as long-term capital gains their proportionate
share of the undistributed net capital gains as designated by SCI and SCI
would have to pay the tax on such gains within 30 days of the close of its
taxable year. Each shareholder of SCI would be deemed to have paid such
shareholder's share of the tax paid by SCI on such gains, which tax would be
credited or refunded to the shareholder. A shareholder would increase his tax
basis in his SCI stock by the difference between the amount of income to the
holder resulting from the designation less the holder's credit or refund for
the tax paid by SCI. SCI may also be subject to the corporate "alternative
minimum tax", as well as tax in certain situations and on certain transactions
not presently contemplated. SCI will use the calendar year both for federal
income tax purposes and for financial reporting purposes.
In order to qualify as a REIT, SCI must meet, among others, the following
requirements:
Share Ownership Test
SCI's shares of stock must be held by a minimum of 100 persons for at least
335 days in each taxable year (or a proportional number of days in any short
taxable year). In addition, at all times during the second half of each
taxable year, no more than 50% in value of the stock of SCI may be owned,
directly or indirectly and by applying certain constructive ownership rules,
by five or fewer individuals, which for this purpose includes certain tax-
exempt entities. Any stock held by a qualified domestic pension or other
retirement trust will be treated as held directly by its beneficiaries in
proportion to their actuarial interest in such trust rather than by such
trust. Pursuant to the constructive ownership rules, Security Capital's
ownership of shares is attributed to its shareholders for purposes of the 50%
test. Under the 1997 Act, for taxable years beginning after August 5, 1997, if
SCI complies with the Treasury regulations for ascertaining its actual
ownership and did not know, or exercising reasonable diligence would not have
reason to know, that more than 50% in value of its outstanding shares of stock
were held, actually or constructively, by five or fewer individuals, then SCI
will be treated as meeting such requirement.
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In order to ensure compliance with the 50% test SCI has placed certain
restrictions on the transfer of the shares of its stock to prevent additional
concentration of ownership. Moreover, to evidence compliance with these
requirements under United States Treasury Department ("Treasury") regulations,
SCI must maintain records which disclose the actual ownership of its
outstanding shares of stock. In fulfilling its obligations to maintain
records, SCI must and will demand written statements each year from the record
holders of designated percentages of shares of its stock disclosing the actual
owners of such shares (as prescribed by Treasury regulations). A list of those
persons failing or refusing to comply with such demand must be maintained as a
part of SCI's records. A shareholder failing or refusing to comply with SCI's
written demand must submit with his or her tax returns a similar statement
disclosing the actual ownership of shares of SCI's stock and certain other
information. In addition, SCI's Charter provides restrictions regarding the
transfer of shares of its stock that are intended to assist SCI in continuing
to satisfy the share ownership requirements. See "Description of Common
Shares--Restriction on Size of Holdings". SCI intends to enforce the 9.8%
limitation on ownership of shares of its stock to assure that its
qualification as a REIT will not be compromised.
ASSET TESTS
At the close of each quarter of SCI's taxable year, SCI must satisfy certain
tests relating to the nature of its assets (determined in accordance with
generally accepted accounting principles). First, at least 75% of the value of
SCI's total assets must be represented by interests in real property,
interests in mortgages on real property, shares in other REITs, cash, cash
items, and government securities, and qualified temporary investments. Second,
although the remaining 25% of SCI's assets generally may be invested without
restriction, securities in this class may not exceed either (i) in the case of
securities of any non-government issuer, 5% of the value of SCI's total assets
or (ii) 10% of the outstanding voting securities of any one issuer.
GROSS INCOME TESTS
There are currently three separate percentage tests relating to the sources
of SCI's gross income which must be satisfied for each taxable year. For
purposes of these tests, where SCI invests in a partnership, SCI will be
treated as receiving its share of the income and loss of the partnership, and
the gross income of the partnership will retain the same character in the
hands of SCI as it has in the hands of the partnership. The three tests are as
follows:
1. The 75% Test. At least 75% of SCI's gross income for the taxable year
must be "qualifying income". Qualifying income generally includes: (i) rents
from real property (except as modified below); (ii) interest on obligations
collateralized by mortgages on, or interests in, real property; (iii) gains
from the sale or other disposition of interests in real property and real
estate mortgages, other than gain from property held primarily for sale to
customers in the ordinary course of SCI's trade or business ("dealer
property"); (iv) dividends or other distributions on shares in other REITs, as
well as gain from the sale of such shares; (v) abatements and refunds of real
property taxes; (vi) income from the operation, and gain from the sale, of
property acquired at or in lieu of a foreclosure of the mortgage
collateralized by such property ("foreclosure property"); and (vii) commitment
fees received for agreeing to make loans collateralized by mortgages on real
property or to purchase or lease real property.
Rents received from a tenant will not, however, qualify as rents from real
property in satisfying the 75% test (or the 95% gross income test described
below) if SCI, or an owner of 10% or more of SCI, directly or constructively
owns 10% or more of such resident. In addition, if rent attributable to
personal property leased in connection with a lease of real property is
greater than 15% of the total rent received under the lease, then the portion
of rent attributable to such personal property will not qualify as rents from
real property. Moreover, an amount received or accrued will not qualify as
rents from real property (or as interest income) for purposes of the 75% and
95% gross income tests if it is based in whole or in part on the income or
profits of any person, although an amount received or accrued generally will
not be excluded from "rents from real property" solely by reason of being
based on a fixed percentage or percentages of receipts or sales. Finally, for
rents received to qualify as rents from real property, SCI generally must not
operate or manage the property or furnish or render
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services to tenants, other than through an "independent contractor" from whom
SCI derives no income, except that the "independent contractor" requirement
does not apply to the extent that the services provided by SCI are "usually or
customarily rendered" in connection with the rental of properties for
occupancy only, or are not otherwise considered "rendered to the occupant for
his convenience". For taxable years beginning after August 5, 1997, a REIT is
permitted to render a de minimis amount of impermissible services to tenants,
or in connection with the management of property, and still treat amounts
received with respect to that property as rent from real property. The amount
received or accrued by the REIT during the taxable year for the impermissible
services with respect to a property may not exceed one percent of all amounts
received or accrued by the REIT directly or indirectly from the property. The
amount received for any service (or management operation) for this purpose
shall be deemed to be not less than 150% of the direct cost of the REIT in
furnishing or rendering the service (or providing the management or
operation).
2. The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of SCI's gross income for the taxable year
must be derived from the above-described qualifying income, or from dividends,
interest or gains from the sale or disposition of stock or other securities
that are not dealer property. Dividends (other than on REIT shares) and
interest on any obligations not collateralized by an interest in real property
are included for purposes of the 95% test, but not for purposes of the 75%
test.
For purposes of determining whether SCI complies with the 75% and 95% income
tests, gross income does not include income from prohibited transactions. A
"prohibited transaction" is a sale of dealer property (excluding foreclosure
property) unless such property is held by SCI for at least four years and
certain other requirements (relating to the number of properties sold in a
year, their tax bases, and the cost of improvements made thereto) are
satisfied. See "--Taxation of SCI--General".
Even if SCI fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may still qualify as a REIT for such year if it
is entitled to relief under certain provisions of the Code. These relief
provisions will generally be available if: (i) SCI's failure to comply was due
to reasonable cause and not to willful neglect; (ii) SCI reports the nature
and amount of each item of its income included in the tests on a schedule
attached to its tax return; and (iii) any incorrect information on this
schedule is not due to fraud with intent to evade tax. If these relief
provisions apply, however, SCI will nonetheless be subject to a special tax
upon the greater of the amount by which it fails either the 75% or 95% gross
income test for that year.
3. The 30% Test. SCI must derive less than 30% of its gross income for each
taxable year from the sale or other disposition of: (i) real property held for
less than four years (other than foreclosure property and involuntary
conversions); (ii) stock or securities held for less than one year; and (iii)
property in a prohibited transaction. SCI does not anticipate that it will
have any substantial difficulty in complying with this test. The 30% gross
income test has been repealed by the 1997 Act for taxable years beginning
after August 5, 1997.
Annual Distribution Requirements
In order to qualify as a REIT, SCI is required to make distributions (other
than capital gain dividends) to its shareholders each year in an amount at
least equal to (i) the sum of (a) 95% of SCI's REIT taxable income (computed
without regard to the dividends paid deduction and the REIT's net capital
gain) and (b) 95% of the net income (after tax), if any, from foreclosure
property, minus (ii) the sum of certain items of non-cash income. For taxable
years beginning after August 5, 1997, the 1997 Act (i) expands the class of
non-cash income that is excluded from the distribution requirement to include
income from the cancellation of indebtedness and (ii) extends the treatment of
original issue discount ("OID") (over cash and the fair market value of
property received on the instrument) as such non-cash income to OID
instruments generally and for REITs, like SCI, that use an accrual method of
accounting. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before SCI timely files
its tax return for such year and if paid on or before the first regular
dividend payment after such declaration. To the extent that SCI does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its REIT taxable income, as adjusted, it will be subject to tax
on the undistributed amount at regular capital gains or ordinary corporate tax
rates, as the
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case may be. For taxable years beginning after August 5, 1997, the 1997 Act
permits a REIT, with respect to undistributed net long-term capital gains it
received during the taxable year, to designate in a notice mailed to
shareholders within 60 days of the end of the taxable year (or in a notice
mailed with its annual report for the taxable year) such amount of such gains
which its shareholders are to include in their taxable income as long-term
capital gains. Thus, if SCI made this designation, the shareholders of SCI
would include in their income as long-term capital gains their proportionate
share of the undistributed net capital gains as designated by SCI and SCI
would have to pay the tax on such gains within 30 days of the close of its
taxable year. Each shareholder of SCI would be deemed to have paid such
shareholder's share of the tax paid by SCI on such gains, which tax would be
credited or refunded to the shareholder. A shareholder would increase his tax
basis in his SCI stock by the difference between the amount of income to the
holder resulting from the designation less the holder's credit or refund for
the tax paid by SCI.
SCI intends to make timely distributions sufficient to satisfy the annual
distribution requirements. It is possible that SCI may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement, due to
timing differences between the actual receipt of income and actual payment of
expenses on the one hand, and the inclusion of such income and deduction of
such expenses in computing SCI's REIT taxable income on the other hand. To
avoid any problem with the 95% distribution requirement, SCI will closely
monitor the relationship between its REIT taxable income and cash flow and, if
necessary, intends to borrow funds in order to satisfy the distribution
requirement. However, there can be no assurance that such borrowing would be
available at such time.
If SCI fails to meet the 95% distribution requirement as a result of an
adjustment to SCI's tax return by the Internal Revenue Service (the "IRS"),
SCI may retroactively cure the failure by paying a "deficiency dividend" (plus
applicable penalties and interest) within a specified period.
Tax Aspects of SCI's Investments in the Partnerships
A significant portion of SCI's investments are through the Partnerships. SCI
will include its proportionate share of (i) each Partnership's income, gains,
losses, deductions and credits for purposes of the various REIT gross income
tests and in its computation of its REIT taxable income and (ii) the assets
held by each Partnership for purposes of the REIT asset tests.
SCI's interest in the Partnerships involves special tax considerations,
including the possibility of a challenge by the Internal Revenue Service (the
"IRS") of the status of the Partnerships as partnerships (as opposed to
associations taxable as corporations) for federal income tax purposes. If a
Partnership were to be treated as an association, such Partnership would be
taxable as a corporation and therefore subject to an entity-level tax on its
income. In such a situation, the character of SCI's assets and items of gross
income would change, which may preclude SCI from satisfying the REIT asset
tests and may preclude SCI from satisfying the REIT gross income tests (see
"--Failure to Qualify" below, for a discussion of the effect of SCI's failure
to meet such tests). Based on certain representations of SCI, in the opinion
of Mayer, Brown, & Platt, under existing federal income tax law and
regulations, the Partnerships will be treated for federal income tax purposes
as partnerships, and not as associations taxable as corporations. Such
opinion, however, is not binding on the IRS.
Failure to Qualify
If SCI fails to qualify for taxation as a REIT in any taxable year and
certain relief provisions do not apply, SCI will be subject to tax (including
applicable alternative minimum tax) on its taxable income at regular corporate
rates. Distributions to shareholders in any year in which SCI fails to qualify
as a REIT will not be deductible by SCI, nor generally will they be required
to be made under the Code. In such event, to the extent of current and
accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income, and subject to certain limitations in the Code,
corporate distributees may be eligible for the dividends-received deduction.
Unless entitled to relief under specific statutory provisions, SCI also will
be disqualified from re-electing taxation as a REIT for the four taxable years
following the year during which qualification was lost.
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TAXATION OF SCI'S SHAREHOLDERS
Taxation of Taxable Domestic Shareholders
As long as SCI qualifies as a REIT, distributions made to SCI's taxable
domestic shareholders out of current or accumulated earnings and profits (and
not designated as capital gain dividends) will be taken into account by them
as ordinary income and will not be eligible for the dividends-received
deduction for corporations. Distributions (and for tax years beginning after
August 5, 1997, undistributed amounts) that are designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed SCI's actual net capital gain for the taxable year) without regard to
the period for which the shareholder has held its Shares. However, corporate
shareholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. To the extent that SCI makes distributions in
excess of current and accumulated earnings and profits, these distributions
are treated first as a tax-free return of capital to the shareholder, reducing
the tax basis of a shareholder's Shares by the amount of such distribution
(but not below zero), with distributions in excess of the shareholder's tax
basis taxable as capital gains (if the Shares are held as a capital asset). In
addition, any dividend declared by SCI in October, November or December of any
year and payable to a shareholder of record on a specific date in any such
month shall be treated as both paid by SCI and received by the shareholder on
December 31 of such year, provided that the dividend is actually paid by SCI
during January of the following calendar year. Shareholders may not include in
their individual income tax returns any net operating losses or capital losses
of SCI. Federal income tax rules may also require that certain minimum tax
adjustments and preferences be apportioned to SCI shareholders.
In general, any loss upon a sale or exchange of Shares by a shareholder who
has held such Shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss, to the extent of
distributions from SCI required to be treated by such shareholder as long-term
capital gains.
The 1997 Act made certain changes to the Code with respect to taxation of
long-term capital gains earned by taxpayers other than a corporation. In
general, for sales made after May 6, 1997, the maximum tax rate for individual
taxpayers on net long-term capital gains (i.e., the excess of net long-term
capital gain over net short-term capital loss) is lowered to 20% for most
assets. This 20% rate applies to sales on or after July 29, 1997 only if the
asset was held for more than 18 months at the time of disposition. Capital
gains on the disposition of assets on or after July 29, 1997 held for more
than one year and up to 18 months at the time of disposition will be taxed as
"mid-term gain" at a maximum rate of 28%. Also, so called "unrecaptured
section 1250 gain" is subject to a maximum federal income tax rate of 25%.
"Unrecaptured section 1250 gain" generally includes the long-term capital gain
realized on (i) the sale after May 6, 1997 of a real property asset described
in Section 1250 of the Code or (ii) the sale after July 28, 1997 of a real
property asset described in Section 1250 of the Code which the taxpayer has
held for more than 18 months, but in each case not in excess of the amount of
depreciation (less the gain, if any, treated as ordinary income under Code
Section 1250) taken on such asset. A rate of 18% instead of 20% will apply
after December 31, 2000 for assets held for more than 5 years. However, the
18% rate applies only to assets acquired after December 31, 2000 unless the
taxpayer elects to treat an asset held prior to such date as sold for fair
market value on January 1, 2001. In the case of individuals whose ordinary
income is taxed at a 15% rate, the 20% rate is reduced to 10% and the 10% rate
for assets held for more than 5 years is reduced to 8%.
Certain aspects of the new legislation are currently unclear, including how
the reduced rates will apply to gains earned by REITs such as SCI. Until the
Service issues some guidance, it is unclear whether or how the 20% or 10%
rates will apply to distributions of long- term capital gains by SCI. The 1997
Act gives the Service authority to apply the 1997 Act's new rules on taxation
of capital gains to sales by pass-thru entities, including REITs. It is
possible that the Service could provide in such regulations that REIT capital
gain dividends must be determined by looking through to the assets sold by the
REIT and treated by REIT shareholders as "long-term capital gain", "mid-term
gain" and "unrecaptured section 1250 gain" to the extent of such respective
gain realized by the REIT. No regulations have yet been issued. Such
regulations, if and when issued, may have a retroactive affect.
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Shareholders of SCI should consult their tax advisor with regard to (i) the
application of the changes made by the 1997 Act with respect to taxation of
capital gains and capital gain dividends and (ii) to state, local and foreign
taxes on capital gains.
Backup Withholding
SCI will report to its domestic shareholders and to the IRS the amount of
distributions paid during each calendar year, and the amount of tax withheld,
if any, with respect thereto. Under the backup withholding rules, a
shareholder may be subject to backup withholding at applicable rates with
respect to distributions paid unless such shareholder (i) is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact or (ii) provides a taxpayer identification number, certifies as to
no loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A shareholder that
does not provide SCI with its correct taxpayer identification number may also
be subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be credited against the shareholder's income tax liability.
In addition, SCI may be required to withhold a portion of capital gain
distributions made to any shareholders who fail to certify their non-foreign
status to SCI.
Taxation of Tax-Exempt Shareholders
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not
constitute unrelated business taxable income ("UBTI"). Subject to the
discussion below regarding a "pension-held REIT", based upon the ruling, the
analysis therein and the statutory framework of the Code, distributions by SCI
to a shareholder that is a tax-exempt entity should also not constitute UBTI,
provided that the tax-exempt entity has not financed the acquisition of its
Shares with "acquisition indebtedness" within the meaning of the Code, and
that the Shares are not otherwise used in an unrelated trade or business of
the tax-exempt entity, and that SCI, consistent with its present intent, does
not hold a residual interest in a real estate mortgage investment conduit.
However, if any pension or other retirement trust that qualifies under
Section 401(a) of the Code ("qualified pension trust") holds more than 10% by
value of the interests in a "pension-held REIT" at any time during a taxable
year, a portion of the dividends paid to the qualified pension trust by such
REIT may constitute UBTI. For these purposes, a "pension-held REIT" is defined
as a REIT if (i) such REIT would not have qualified as a REIT but for the
provisions of the Code which look through such a qualified pension trust in
determining ownership of stock of the REIT and (ii) at least one qualified
pension trust holds more than 25% by value of the interests of such REIT or
one or more qualified pension trusts (each owning more than a 10% interest by
value in the REIT) hold in the aggregate more than 50% by value of the
interests in such REIT.
Taxation of Foreign Shareholders
SCI will qualify as a "domestically-controlled REIT" so long as less than
50% in value of its Shares is held by foreign persons (i.e., nonresident
aliens and foreign corporations, partnerships, trust and estates). It is
currently anticipated that SCI will qualify as a domestically controlled REIT.
Under these circumstances, gain from the sale of the Shares by a foreign
person should not be subject to U.S. taxation, unless such gain is effectively
connected with such person's U.S. business or, in the case of an individual
foreign person, such person is present within the U.S. for more than 182 days
in such taxable year.
Distributions of cash generated by SCI's real estate operations (but not by
its sale or exchange of such properties) that are paid to foreign persons
generally will be subject to U.S. withholding tax at a rate of 30%, unless (i)
an applicable tax treaty reduces that tax and the foreign shareholder files
with SCI the required form evidencing such lower rate or (ii) the foreign
shareholder files an IRS Form 4224 with SCI claiming that the distribution is
"effectively connected" income. Recently promulgated Treasury Regulations
revise in certain respects the rules applicable to foreign shareholders with
respect to payments made after December 31, 1998.
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Distributions of proceeds attributable to the sale or exchange by SCI of
U.S. real property interests are subject to income and withholding taxes
pursuant to the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"), and may be subject to branch profits tax in the hands of a
shareholder which is a foreign corporation if it is not entitled to treaty
relief or exemption. SCI is required by applicable Treasury regulations to
withhold 35% of any distribution to a foreign person that could be designated
by SCI as a capital gain dividend; this amount is creditable against the
foreign shareholder's FIRPTA tax liability.
The federal income taxation of foreign persons is a highly complex matter
that may be affected by many other considerations. Accordingly, foreign
investors in SCI should consult their own tax advisors regarding the income
and withholding tax considerations with respect to their investment in SCI.
OTHER TAX CONSIDERATIONS
SCI Development Services Incorporated and SCI Logistics Services Incorporated
SCI Development Services Incorporated and SCI Logistics Services
Incorporated will pay Federal and state income taxes at the full applicable
corporate rates on its income prior to payment of any dividends. SCI
Development Services Incorporated and SCI Logistics Services Incorporated will
attempt to minimize the amount of such taxes, but there can be no assurance
whether or the extent to which measures taken to minimize taxes will be
successful. To the extent that SCI Development Services Incorporated or SCI
Logistics Services Incorporated is required to pay Federal, state or local
taxes, the cash available for distribution by either company to its
shareholders will be reduced accordingly.
Tax on Built-in Gain
Pursuant to Notice 88-19. 1988-1 C.B. 486, a C corporation that elects to be
taxed as a REIT has to recognize any gain that would have been realized if the
C corporation had sold all of its assets for their respective fair market
values at the end of its last taxable year before the taxable year in which it
qualifies to be taxed as a REIT and immediately liquidated unless the REIT
elects to be taxed under rules similar to the rules of Section 1374 of the
Code.
Since SCI has made this election, if during the 10-year period beginning on
the first day of the first taxable year for which SCI qualifies as a REIT (the
"Recognition Period"), SCI recognizes gain on the disposition of any asset
held by SCI as of the beginning of such Recognition Period, then, to the
extent of the excess of (a) the fair market value of such asset as of the
beginning of such Recognition Period over (b) SCI's adjusted basis in such
asset as of the beginning of such Recognition Period (the "Built-in Gain"),
such gain will be subject to tax at the highest regular corporate rate.
Because SCI acquires many of its properties in fully taxable transactions and
presently expects to hold each property beyond the Recognition Period, it is
not anticipated that SCI will pay a substantial corporate level tax on its
Built-in Gain.
Possible Legislative or Other Actions Affecting Tax Consequences
Prospective shareholders should recognize that the present federal income
tax treatment of an investment in SCI may be modified by legislative, judicial
or administrative action at any time and that any such action may affect
investments and commitments previously made. The rules dealing with federal
income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the Treasury, resulting in revisions of
regulations and revised interpretations of established concepts as well as
statutory changes. Revisions in federal tax laws and interpretations thereof
could adversely affect the tax consequences of an investment in SCI.
State and Local Taxes
SCI and its shareholders may be subject to state or local taxation in
various jurisdictions, including those in which it or they transact business
or reside. The state and local tax treatment of SCI and its shareholders may
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not conform to the federal income tax consequences discussed above.
Consequently, prospective shareholders should consult their own tax advisors
regarding the effect of state and local tax laws on an investment in the
offered securities of SCI.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP, AND SALES OF COMMON SHARES, PREFERRED SHARES OR DEBT SECURITIES IN
AN ENTITY ELECTING TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING
THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
PLAN OF DISTRIBUTION
SCI may sell the Offered Securities to one or more underwriters for public
offering and sale by them or may sell the Offered Securities to investors
directly or through agents, which agents may be affiliated with SCI. Direct
sales to investors may be accomplished through subscription offerings or
through subscription rights distributed to SCI's shareholders. In connection
with subscription offerings or the distribution of subscription rights to
shareholders, if all of the underlying Offered Securities are not subscribed
for, SCI may sell such unsubscribed Offered Securities to third parties
directly or through agents and, in addition, whether or not all of the
underlying Offered Securities are subscribed for, SCI may concurrently offer
additional Offered Securities to third parties directly or through agents,
which agents may be affiliated with SCI. Any underwriter or agent involved in
the offer and sale of the Offered Securities will be named in the applicable
Prospectus Supplement.
The distribution of the Offered Securities may be effected from time to time
in one or more transactions at a fixed price or prices, which may be changed,
or at prices related to the prevailing market prices at the time of sale or at
negotiated prices (any of which may represent a discount from the prevailing
market price). SCI also may, from time to time, authorize underwriters acting
as SCI's agents to offer and sell the Offered Securities upon the terms and
conditions set forth in the applicable Prospectus Supplement. In connection
with the sale of Offered Securities, underwriters may be deemed to have
received compensation from SCI in the form of underwriting discounts or
commissions and may also receive commissions from purchasers of Offered
Securities for whom they may act as agent. Underwriters may sell Offered
Securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent.
Any underwriting compensation paid by SCI to underwriters or agents in
connection with the offering of Offered Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters,
dealers and agents participating in the distribution of the Offered Securities
may be deemed to be underwriters, and any discounts and commissions received
by them and any profit realized by them on resale of the Offered Securities
may be deemed to be underwriting discounts and commissions, under the
Securities Act. Underwriters, dealers and agents may be entitled, under
agreements entered into with SCI, to indemnification against and contribution
toward certain civil liabilities, including liabilities under the Securities
Act. Any such indemnification agreements will be described in the applicable
Prospectus Supplement.
If so indicated in the applicable Prospectus Supplement, SCI will authorize
dealers acting as SCI's agents to solicit offers by certain institutions to
purchase Offered Securities from SCI at the public offering price set forth in
such Prospectus Supplement pursuant to Delayed Delivery Contracts
("Contracts") providing for payment and delivery on the date or dates stated
in such Prospectus Supplement. Each Contract will be for an amount not less
than, and the aggregate principal amount of Offered Securities sold pursuant
to Contracts shall be not less nor more than, the respective amounts stated in
the applicable Prospectus Supplement. Institutions with whom Contracts, when
authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions, and other institutions
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but will in all cases be subject to the approval of SCI. Contracts will not be
subject to any conditions except (i) the purchase by an institution of the
Offered Securities covered by its Contracts shall not at the time of delivery
be prohibited under the laws of any jurisdiction in the United States to which
such institution is subject, and (ii) if the Offered Securities are being sold
to underwriters, SCI shall have sold to such underwriters the total principal
amount of the Offered Securities less the principal amount thereof covered by
Contracts.
Certain of the underwriters and their affiliates may be customers of, engage
in transactions with and perform services for SCI and its subsidiaries in the
ordinary course of business.
EXPERTS
The financial statements and related schedules of SCI incorporated by
reference herein and in the Registration Statement have been audited or
reviewed by Arthur Andersen LLP, independent public accountants, to the extent
and for the periods indicated in their reports, and have been incorporated by
reference herein and in the Registration Statement in reliance upon the
authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Offered Securities will be passed upon for SCI by Mayer,
Brown & Platt, Chicago, Illinois. Mayer, Brown & Platt has in the past
represented and is currently representing SCI and certain of its affiliates,
including Security Capital.
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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-10
Use of Proceeds........................................................... S-11
Price Range of Common Shares and Distributions............................ S-12
Capitalization............................................................ S-14
Selected Financial Data................................................... S-15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... S-17
SCI Management............................................................ S-29
Certain Federal Income Tax Considerations................................. S-42
Underwriting.............................................................. S-42
Validity of Shares........................................................ S-43
PROSPECTUS
Available Information..................................................... 2
Incorporation by Reference................................................ 2
Security Capital Industrial Trust......................................... 3
Use of Proceeds........................................................... 4
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......................................... 26
Plan of Distribution...................................................... 34
Experts................................................................... 35
Legal Matters............................................................. 35
</TABLE>
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3,750,000 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.
MARCH 12, 1998
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