<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported) March 13, 1998
--------------------------------
SECURITY CAPITAL INDUSTRIAL TRUST
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Maryland
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
1-12846 74-2604728
- ------------------------------------ ------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
14100 East 35th Place, Aurora, Colorado 80011
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(303) 375-9292
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Note Applicable
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
================================================================================
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits.
Exhibit No. Document Description
----------- --------------------
1 Underwriting Agreement
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
99 Financial statements as of December 31, 1997 and 1996 and
for each of the three years in the period ended
December 31, 1997.
-2-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SECURITY CAPITAL INDUSTRIAL TRUST
Dated: March 16, 1998 By: /s/ Jeffrey A. Klopf
------------------------------
Jeffrey A. Klopf
Secretary
-3-
<PAGE>
EXHIBIT INDEX
Exhibit No. Document Description
- ----------- --------------------
1 Underwriting Agreement
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
99 Financial statements as of December 31, 1997 and 1996 and
for each of the three years in the period ended
December 31, 1997.
-4-
<PAGE>
Security Capital Industrial Trust
Common Shares of Beneficial Interest
(par value $0.01 per share)
Purchase Agreement
------------------
March 12, 1998
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
World Financial Center, North Tower
New York, New York 10281
Ladies and Gentlemen:
Security Capital Industrial Trust, a real estate investment trust organized
under the laws of the State of Maryland (the "Company"), proposes, subject to
the terms and conditions stated herein, to issue and sell to Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter")
3,750,000 Common Shares of Beneficial Interest, par value $0.01 per share (the
"Firm Shares"), of the Company (the "Common Shares"), and, at the election of
the Underwriter, up to 562,500 additional Common Shares (the "Optional Shares")
(the Firm Shares and the Optional Shares which the Underwriter elects to
purchase pursuant to Section 2 hereof being collectively called the "Shares").
1. The Company represents and warrants to, and agrees with, the
Underwriter that:
(a) A registration statement on Form S-3 (File No. 333-39797) in
respect of the Shares has been filed with the Securities and Exchange
Commission (the "Commission"); such registration statement and any
post-effective amendment thereto, each in the form heretofore
delivered or to be delivered to the Underwriter, has been declared
effective by the Commission in such form; no other document with
respect to such registration statement or document incorporated by
reference therein has heretofore been filed, or transmitted for
filing, with the Commission (other than prospectuses filed pursuant to
Rule 424(b) of the rules and regulations of the Commission under the
Securities Act of 1933, as amended (the "Act"), each in the form
heretofore delivered to the Underwriter); and no stop order suspending
the effectiveness of any such registration statement has been issued
and no proceedings for that purpose have been initiated or threatened
by the Commission (any preliminary prospectus included in such
registration statement or filed with the Commission pursuant to Rule
424(a) under the Act is hereinafter called a "Preliminary Prospectus";
the various parts of such registration statement, including all
exhibits thereto and the documents incorporated by reference in the
prospectus contained in the registration statement at the time such
part of the registration statement became effective, each as amended
at the time such part of the registration statement became effective,
are hereinafter collectively called the "Registration Statement";
<PAGE>
the prospectus relating to the Shares, in the form in which it has
most recently been filed, or transmitted for filing, with the
Commission on or prior to the date of this Agreement, is hereinafter
called the "Prospectus"; any reference herein to any Preliminary
Prospectus or the Prospectus shall be deemed to refer to and include
the documents incorporated by reference therein pursuant to Item 12 of
Form S-3 under the Act, as of the date of such Preliminary Prospectus
or Prospectus, as the case may be; any reference to any amendment or
supplement to any Preliminary Prospectus or the Prospectus shall be
deemed to refer to and include any documents filed after the date of
such Preliminary Prospectus or Prospectus, as the case may be, under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and incorporated by reference in such Preliminary Prospectus or
Prospectus, as the case may be; any reference to any amendment to the
Registration Statement shall be deemed to refer to and include any
annual report of the Company filed pursuant to Section 13(a) or 15(d)
of the Exchange Act after the effective date of the Registration
Statement that is incorporated by reference in the Registration
Statement; and any reference to the Prospectus as amended or
supplemented shall be deemed to refer to the Prospectus as amended or
supplemented in the form in which it is filed with the Commission
pursuant to Rule 424(b) under the Act in accordance with Section 5(a)
hereof, including any documents incorporated by reference therein as
of the date of such filing);
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations
of the Commission thereunder, and did not contain an untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that this representation and warranty shall not
apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by the
Underwriter expressly for use therein;
(c) The documents incorporated by reference in the Prospectus, when
they became effective or were filed with the Commission, as the case
may be, conformed in all material respects to the requirements of the
Act or the Exchange Act, as applicable, and the rules and regulations
of the Commission thereunder, and none of such documents contained an
untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; and any further documents so filed and
incorporated by reference in the Prospectus or any further amendment
or supplement thereto, when such documents become effective or are
filed with the Commission, as the case may be, will conform in all
material respects to the requirements of the Act or the Exchange Act,
as applicable, and the rules and regulations of the Commission
thereunder and will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or
2
<PAGE>
omissions made in reliance upon and in conformity with information
furnished in writing to the Company by the Underwriter expressly for
use in the Prospectus as amended or supplemented;
(d) The Registration Statement and the Prospectus conform, and any
amendments or supplements to the Registration Statement or the
Prospectus conform or will conform, in all material respects to the
requirements of the Act and the rules and regulations of the
Commission thereunder and do not and will not, as of the applicable
effective date as to the Registration Statement and any amendment
thereto and as of the applicable filing date as to the Prospectus and
any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided, however, that this representation and warranty shall not
apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by the
Underwriter expressly for use in the Prospectus as amended or
supplemented relating to such Shares;
(e) Neither the Company nor any of its subsidiaries has sustained
since the date of the latest audited financial statements included or
incorporated by reference in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, there has not been any change in the
capital stock or long-term debt of the Company or any of its
subsidiaries, or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
general affairs, management, financial position, shareholders' equity,
or results of operations of the Company and its subsidiaries,
otherwise than as set forth or contemplated in the Prospectus as
amended or supplemented (as used herein, "subsidiaries" shall include
any entities in which the Company owns, directly or indirectly, any
controlling or general partnership interest or a majority of the
economic interest);
(f) The Company and its subsidiaries have good and marketable title
in fee simple to all real property described in the Prospectus as
amended or supplemented as owned by them, and good and marketable
title to all personal property (including interests in partnerships or
other entities) owned by them, in each case free and clear of all
liens, encumbrances and defects except such as are described in the
Prospectus as amended or supplemented or such as do not materially
affect the value of such property and do not interfere with the use
made or proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by
the Company and its subsidiaries and described in the Prospectus are
held by them under valid, subsisting and enforceable leases with such
exceptions as are not material and do
3
<PAGE>
not interfere with the use made or proposed to be made of such
property and buildings by the Company and its subsidiaries;
(g) The Company has been duly organized and is validly existing as a
real estate investment trust of unlimited duration with transferable
shares of beneficial interest in good standing under the laws of the
State of Maryland, with power and authority to own its properties and
conduct its business as described in the Prospectus as amended or
supplemented, and has been duly qualified for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification, or is subject to no
material liability or disability by reason of the failure to be so
qualified in any such jurisdiction; and each subsidiary of the Company
has been duly organized and is validly existing as a corporation,
partnership or trust in good standing under the laws of its
jurisdiction of organization;
(h) The Company has an authorized capitalization as set forth in the
Prospectus as amended or supplemented, and all of the issued shares of
capital stock of the Company have been duly and validly authorized and
issued, are fully paid and, except as described in the Prospectus as
amended or supplemented, non-assessable and conform to the description
thereof contained in the Prospectus; and all of the issued shares of
capital stock or other equity interest of each subsidiary of the
Company have been duly and validly authorized and issued, are fully
paid and, with respect to subsidiaries that are corporations, non-
assessable and (except for directors' qualifying shares and except as
set forth in the Prospectus) are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances, equities or
claims;
(i) The unissued Shares have been duly and validly authorized, and,
when issued and delivered against payment therefor as provided herein,
will be duly and validly issued and fully paid and, except as
described in the Prospectus as amended or supplemented, non-assessable
and will conform to the description of the Shares contained in the
Prospectus as amended or supplemented, and the holders of outstanding
capital stock of the Company are not entitled to preemptive or other
rights afforded by the Company to subscribe for the Shares;
(j) The issue and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this Agreement
and the consummation of the transactions contemplated herein will not
conflict with or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries is bound or to
which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any violation
of the provisions of the Amended and Restated Declaration of Trust, as
amended (the "Declaration of Trust"), or Bylaws of the Company or any
statute or any order, rule or regulation of any court or governmental
agency or
4
<PAGE>
body having jurisdiction over the Company or any of its subsidiaries
or any of their properties; and no consent, approval, authorization,
order, registration or qualification of or with any such court or
governmental agency or governmental body is required for the issue and
sale of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement, except (A) the
registration under the Act of the Shares and (B) such consents,
approvals, authorizations, registrations or qualifications as may be
required under state securities or blue sky laws in connection with
the purchase and distribution of the Shares by the Underwriter;
(k) Neither the Company nor any of its subsidiaries is in violation
of its declaration of trust, certificate or articles of incorporation,
partnership agreement or bylaws, as applicable, or in default in the
performance or observance of any material obligation, covenant or
condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or any other agreement or instrument to which it is a
party or by which it or its properties may be bound;
(l) The statements set forth in the Prospectus as amended or
supplemented under the caption "Certain Federal Income Tax
Considerations" and in the Prospectus under the caption "Description
of Common Shares," insofar as they purport to constitute a summary of
the terms of the Common Shares, and under the caption "Federal Income
Tax Considerations," insofar as they purport to describe factual
matters and the provisions of the laws and the documents referred to
therein, are accurate and complete in all material respects;
(m) Other than as set forth in the Prospectus as amended or
supplemented, there are no legal or governmental proceedings pending
to which the Company or any of its subsidiaries is a party or of which
any property of the Company or any of its subsidiaries is the subject,
which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material
adverse effect on the consolidated financial position, shareholders'
equity or results of operations of the Company and its subsidiaries
taken as a whole; and, to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental authorities
or threatened by others;
(n) Arthur Andersen LLP, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of
the Commission thereunder;
(o) With respect to all tax periods regarding which the Internal
Revenue Service is or will be entitled to assert any claim, the
Company has met the requirements for qualification as a real estate
investment trust under Sections 856 through 860 of the Internal
Revenue Code, as amended, and the Company's present and contemplated
operations, assets and income will enable the Company to continue to
meet such requirements; and the Company is not an open-end investment
company, unit investment trust, closed-end investment company or face
amount certificate company that is or is required to be registered
under
5
<PAGE>
Section 8 of the Investment Company Act of 1940, as amended (the
"Investment Company Act");
(p) The Company has no knowledge of (i) the presence of any hazardous
substances, hazardous materials, toxic substances or waste materials
(collectively, "Hazardous Materials") on any of the properties owned
by it in violation of law or in excess of regulatory action levels, or
of (ii) any unlawful spills, releases, discharges or disposal of
Hazardous Materials that have occurred or are presently occurring on
or off such properties as a result of any construction on or operation
and use of such properties, which presence or occurrence would
materially adversely affect the condition, financial or otherwise, or
the earnings, business affairs or business prospects of the Company.
In connection with the construction on or operation and use of the
properties owned by the Company, the Company represents that, as of
the date of this Agreement, it has no knowledge of any material
failure to comply with all applicable local, state and federal
environmental laws, regulations, ordinances and administrative and
judicial orders relating to the generation, recycling, reuse, sale,
storage, handling, transport, and disposal of any Hazardous Materials;
and
(q) Each of the partnership agreements (the "Partnership Agreements")
of SCI Limited Partnership-I, SCI Limited Partnership-II, SCI Limited
Partnership-III and SCI Limited Partnership-IV described in the
Company's 1995 Annual Report on Form 10-K incorporated by reference in
the Prospectus has been duly authorized, executed and delivered by the
Company or a wholly owned subsidiary thereof and constitutes a legal,
valid and binding agreement enforceable in accordance with its terms,
subject as to enforcement to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and the
effect of general principles of equity, whether enforcement is
considered in a proceeding in equity or at law, and the discretion of
the court before which any proceeding therefor may be brought; and the
execution and delivery of each such agreement and the performance
thereof by the Company or such subsidiary are within the power and
authority of the Company, did not and do not violate any provision of
or constitute a default under any agreement or instrument to which the
Company or such subsidiary is a party or by which the Company or such
subsidiary is bound, and do not require the consent, approval,
authorization or order of any court or governmental agency or body.
2. Subject to the terms and conditions herein set forth, (a) the Company
agrees to issue and sell to the Underwriter, and the Underwriter agrees to
purchase from the Company, at a purchase price per share of $24.045, the number
of Firm Shares set forth above and (b) in the event and to the extent that the
Underwriter shall exercise the election to purchase Optional Shares as provided
below, the Company agrees to issue and sell to the Underwriter, and the
Underwriter agrees to purchase from the Company, at the purchase price per share
set forth in clause (a) of this Section 2, the number of Optional Shares as to
which such election shall have been exercised.
6
<PAGE>
The Company hereby grants to the Underwriter the right to purchase at its
election up to 450,000 Optional Shares, at the purchase price per share set
forth in the paragraph above, for the sole purpose of covering over-allotments
in the sale of the Firm Shares. Any such election to purchase Optional Shares
may be exercised only by written notice from you to the Company, given within a
period of 30 calendar days after the date of this Agreement, setting forth the
number of Optional Shares to be purchased and the date on which such Optional
Shares are to be delivered, as determined by you but in no event earlier than
the First Time of Delivery (as defined in Section 4 hereof) or, unless you and
the Company otherwise agree in writing, earlier than two or later than ten
business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
Underwriter proposes to offer the Firm Shares for sale upon the terms and
conditions set forth in the Prospectus as amended or supplemented.
4. Certificates for the Firm Shares and the Optional Shares to be
purchased by the Underwriter hereunder, and in such authorized denominations and
registered in such names as the Underwriter may request upon at least forty-
eight hours' prior notice to the Company, shall be delivered by or on behalf of
the Company to the Underwriter, against payment by the Underwriter of the
purchase price therefor by wire transfer or certified or official bank check or
checks, payable to the order of the Company in immediately available funds, all
at the offices of Brown & Wood llp, One World Trade Center, New York, New York
10048. The time and date of such delivery and payment shall be, with respect to
the Firm Shares, 9:00 a.m., New York time, on March 18, 1998, or at such other
time and date as you and the Company may agree upon in writing, and, with
respect to the Optional Shares, 9:00 a.m., New York time, on the date specified
by you in the written notice given by you of the Underwriter's election to
purchase such Optional Shares, or at such other time and date as you and the
Company may agree upon in writing. Such time and date for delivery of the Firm
Shares is herein called the "First Time of Delivery," such time and date for
delivery of the Optional Shares, if not the First Time of Delivery, is herein
called the "Second Time of Delivery," and each such time and date for delivery
is herein called a "Time of Delivery." Such certificates will be made available
for checking and packaging at least twenty-four hours prior to each Time of
Delivery at the office of Merrill Lynch, Pierce, Fenner & Smith Incorporated,
World Financial Center, North Tower, New York, New York 10281.
5. The Company agrees with the Underwriter:
(a) To prepare the Prospectus as amended or supplemented in a form
approved by you and to file such Prospectus pursuant to Rule 424(b)
under the Act not later than the Commission's close of business on the
second business day following the execution and delivery of this
Agreement, or, if applicable, such earlier time as may be required by
Rule 424(b); to make no further amendment or any supplement to the
Registration Statement or Prospectus as amended or supplemented prior
to the last Time of Delivery which shall be reasonably disapproved by
you promptly after reasonable notice thereof; to advise you, promptly
after it receives notice thereof, of the time when the Registration
Statement, or any amendment thereto, has been filed or becomes
effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to
7
<PAGE>
furnish you with copies thereof; to file promptly all reports and any
definitive proxy or information statements required to be filed by the
Company with the Commission pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act for so long as the delivery of a prospectus
is required in connection with the offering or sale of the Shares; to
advise you, promptly after it receives notice thereof, of the issuance
by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or Prospectus, of the
suspension of the qualification of the Shares for offering or sale in
any jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the
amending or supplementing of the Registration Statement or Prospectus
or for additional information; and, in the event of the issuance of
any such stop order or of any such order preventing or suspending the
use of any prospectus relating to the Shares or suspending any such
qualification, promptly to use its best efforts to obtain the
withdrawal of such order;
(b) If necessary, promptly from time to time to take such action as
you may reasonably request to qualify the Shares for offering and sale
under the securities laws of such jurisdictions as you may request and
to comply with such laws so as to permit the continuance of sales and
dealings therein in such jurisdictions for as long as may be necessary
to complete the distribution of the Shares, provided that in
connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process
in any jurisdiction;
(c) On the business day next succeeding the date hereof, and from
time to time, to furnish the Underwriter with copies of the Prospectus
as amended or supplemented in New York City in such quantities as you
may reasonably request, and, if the delivery of a prospectus is
required at any time prior to the expiration of nine months after the
time of issue of the Prospectus as amended or supplemented in
connection with the offering or sale of the Shares and if at such time
any event shall have occurred as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not
misleading, or, if for any other reason it shall be necessary during
such same period to amend or supplement the Prospectus or to file
under the Exchange Act any document incorporated by reference in the
Prospectus in order to comply with the Act or the Exchange Act, to
notify you and upon your request to file such document and to prepare
and furnish without charge to you and to any dealer in securities as
many copies as you may from time to time reasonably request of an
amended Prospectus or a supplement to the Prospectus which will
correct such statement or omission or effect such compliance;
(d) To make generally available to its security holders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule
158(c) under the Act), an earning
8
<PAGE>
statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and
regulations of the Commission thereunder (including, at the option of
the Company, Rule 158);
(e) During a period of 90 days from the last Time of Delivery,
without the prior written consent of the Underwriter, not to, directly
or indirectly, offer, sell, contract to sell or otherwise dispose of
any Common Shares or securities which are convertible into or
exchangeable for Common Shares, except for shares issued in connection
with property acquisitions by the Company or shares issued pursuant to
the Company's Share Option Plan for Outside Trustees or pursuant to
the Company's Dividend Reinvestment Plan or shares issued upon
exchange of limited partnership units or upon exercise or conversion
of outstanding options or warrants and except for the issuance of
limited partnership interests (which partnership interests may be
exchangeable for common shares of beneficial interest after such 90-
day period);
(f) To cause Security Capital Group Incorporated ("SCG") and certain
officers and each trustee of the Company 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 Time of Delivery, without the prior written consent of
the Underwriter;
(g) To furnish to its shareholders as soon as practicable after the
end of each fiscal year an annual report (including a balance sheet
and statements of income, shareholders' equity and cash flows of the
Company and its consolidated subsidiaries, certified by independent
public accountants) and, as soon as practicable after the end of each
of the first three quarters of each fiscal year (beginning with the
fiscal quarter ending after the effective date of the Registration
Statement), consolidated summary financial information of the Company
and its subsidiaries for such quarter in reasonable detail;
(h) During a period of three years from the date of this Agreement,
to furnish to the Underwriter copies of all reports or other
communications (financial or other) furnished to shareholders, and to
deliver to the Underwriter (i) as soon as they are available, copies
of any reports and financial statements furnished to or filed with the
Commission or any national securities exchange on which any class of
securities of the Company is listed; and (ii) such additional
information concerning the business and financial condition of the
Company as the Underwriter may from time to time reasonably request
(such financial statements to be on a consolidated basis to the extent
the accounts of the Company and its subsidiaries are consolidated in
reports furnished to its shareholders generally or to the Commission);
(i) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the
Prospectus under the caption "Use of Proceeds";
9
<PAGE>
(j) To continue to elect to qualify as a "real estate investment
trust" under the Internal Revenue Code of 1986, as amended, and to use
its best efforts to continue to meet the requirements to qualify as a
"real estate investment trust"; and
(k) Not to be or become, at any time prior to the expiration of three
years after the last Time of Delivery, an open-end investment trust,
unit investment trust, closed-end investment company or face-amount
certificate company that is or is required to be registered under
Section 8 of the Investment Company Act.
6. The Company covenants and agrees with the Underwriter that the Company
will pay or cause to be paid the following: (a) the fees, disbursements and
expenses of the Company's counsel and accountants in connection with the
registration of the Shares under the Act and all other expenses in connection
with the preparation, printing and filing of the Registration Statement, any
Preliminary Prospectus and the Prospectus and amendments and supplements thereto
and the mailing and delivering of copies thereof to the Underwriter and dealers;
(b) the cost of printing or producing this Agreement, any blue sky Memorandum
and any other documents in connection with the offering, purchase, sale and
delivery of the Shares; (c) all expenses in connection with the qualification of
the Common Shares for offering and sale under state securities laws as provided
in Section 5(b) hereof, including the fees and disbursements of counsel for the
Underwriter in connection with such qualification and in connection with the
blue sky survey(s); (d) all fees and expenses in connection with the listing of
the Shares on the New York Stock Exchange and, if any, the filing fees incident
to securing any required review by the NASD of the terms of sale of the Shares;
(e) the cost of preparing certificates for the Shares; (f) the cost and charges
of any transfer agent or registrar or dividend disbursing agent; and (g) all
other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section. It
is understood, however, that, except as provided in this Section, and Sections 8
and 10 hereof, the Underwriter will pay all of its own costs and expenses,
including the fees of counsel for the Underwriter, transfer taxes on resale of
any of the Shares by them, and any advertising expenses connected with any
offers they may make.
7. The obligations of the Underwriter hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in the discretion of the
Underwriter, to the condition that all representations and warranties and other
statements of the Company herein are, at and as of such Time of Delivery, true
and correct, the condition that the Company shall have performed all of its
obligations hereunder theretofore to be performed, and the following additional
conditions:
(a) The Prospectus as amended or supplemented shall have been filed
with the Commission pursuant to Rule 424(b) within the applicable time
period prescribed for such filing by the rules and regulations under
the Act and in accordance with Section 5(a) hereof; no stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission; and all
requests for additional information on the part of the Commission
shall have been complied with to your reasonable satisfaction;
10
<PAGE>
(b) Brown & Wood llp, counsel to the Underwriter, shall have
furnished to you such opinion or opinions, dated such Time of
Delivery, with respect to the validity of the Shares being delivered
at such Time of Delivery, the Registration Statement, the Prospectus
and such other related matters as you may reasonably request, and such
counsel shall have received such papers and information as they may
reasonably request to enable them to pass upon such matters;
(c) Mayer, Brown & Platt shall have furnished to you their written
opinion, dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company has been duly organized and is validly existing as a
real estate investment trust in good standing under the laws of the
State of Maryland, with power and authority to own its properties and
conduct its business as described in the Prospectus as amended or
supplemented;
(ii) The Company has an authorized capitalization as set forth in the
Prospectus as amended or supplemented; and all of the issued shares of
beneficial interest of the Company (including the Shares being
delivered at such Time of Delivery) have been duly and validly
authorized and issued and are fully paid and, except as described in
the Prospectus as amended or supplemented, non-assessable; and the
Common Shares conform, in all material respects, to the description
thereof contained in the Prospectus as amended or supplemented; and
the holders of outstanding capital stock of the Company are not
entitled to preemptive or other rights afforded by the Company to
subscribe for the Shares;
(iii) The Company has been duly qualified for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties, or conducts any
business, so as to require such qualification, or is subject to no
material liability or disability by reason of failure to be so
qualified in any such jurisdiction (such counsel being entitled to
rely in respect of the opinion in this clause upon opinions of local
counsel and in respect of matters of fact upon certificates of public
officials or officers of the Company, provided that such counsel shall
state that they believe that both you and they are justified in
relying upon such opinions and certificates);
(iv) Each subsidiary of the Company has been duly organized and is
validly existing in good standing under the laws of its jurisdiction
of organization; and all of the issued shares of capital stock or
other equity interest of each such subsidiary have been duly and
validly authorized and issued, are fully paid and, with respect to
subsidiaries that are corporations, non-assessable, and (except for
directors' qualifying shares and except as otherwise set forth in the
Prospectus) are owned directly or indirectly by the Company, free and
clear of all perfected liens, encumbrances, equities or claims (such
counsel being entitled to rely in respect of the opinion in this
clause upon opinions of local counsel and in respect of matters of
fact upon certificates of public officials or officers of the Company
11
<PAGE>
or its subsidiaries, provided that such counsel shall state that they
believe that both you and they are justified in relying upon such
opinions and certificates);
(v) To the best of such counsel's knowledge and other than as set
forth in the Prospectus as amended or supplemented, there are no legal
or governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any
of its subsidiaries is the subject which, if determined adversely to
the Company or any of its subsidiaries, would individually or in the
aggregate have a material adverse effect on the consolidated financial
position, shareholders' equity, or results of operations of the
Company and its subsidiaries; and, to the best of such counsel's
knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
(vi) This Agreement has been duly authorized, executed and delivered
by the Company;
(vii) The issue and sale of the Shares being delivered at such Time of
Delivery by the Company and the compliance by the Company with all of
the provisions of this Agreement and the consummation of the
transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument known to such counsel
to which the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries is bound or to which any of the
property or assets of the Company or any of its subsidiaries is
subject, nor will such action result in any violation of the
provisions of the Declaration of Trust or Bylaws of the Company or any
statute or any order, rule or regulation known to such counsel of any
court or governmental agency or governmental body having jurisdiction
over the Company or any of its subsidiaries or any of their
properties, the breach or violation of which is of material
significance in respect of the business or financial condition of the
Company;
(viii) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or
governmental body is required for the issue and sale of the Shares or
the consummation by the Company of the transactions contemplated by
this Agreement or the terms of the Shares, except such as have been
obtained under the Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under state
securities or blue sky laws in connection with the purchase and
distribution of the Shares by the Underwriter;
(xi) Neither the Company nor any of its subsidiaries is in violation
of its declaration of trust, certificate or articles of incorporation,
partnership agreement or bylaws, as applicable, or in default in the
performance or observance of any material obligation, covenant or
condition contained in any indenture, mortgage,
12
<PAGE>
deed of trust, loan agreement, lease or any other agreement or
instrument known to them to which it is a party or by which it or its
properties may be bound;
(x) The statements set forth in the Prospectus as amended or
supplemented under the caption "Certain Federal Income Tax
Considerations" and in the Prospectus under the captions "Description
of Common Shares" and "Federal Income Tax Considerations," to the
extent such statements relate to matters of law or regulation or
constitute summaries of documents described therein, are true and
accurate in all material respects;
(xi) The Company has qualified to be taxed as a real estate investment
trust pursuant to Sections 856 through 860 of the Internal Revenue
Code, as amended, for its taxable years ended December 31, 1993,
December 31, 1994, December 31, 1995, December 31, 1996 and December
31, 1997, and the Company's present and contemplated organization,
ownership, method of operation, assets and income are such that the
Company is in a position under present law to so qualify for the
taxable year ending December 31, 1998 and in the future; SCI Limited
Partnership-I, SCI Limited Partnership-II, SCI Limited Partnership-III
and SCI Limited Partnership-IV are properly treated (x) as
partnerships for federal income tax purposes and (y) not as "publicly
traded partnerships"; and the Company is not an open-end investment
company, unit investment trust, closed-end investment company or face-
amount certificate company that is or is required to be registered
under Section 8 of the Investment Company Act;
(xii) The investments of the Company described in the Prospectus are
permitted investments under the Declaration of Trust of the Company;
(xiii) The documents incorporated by reference in the Prospectus or
any further amendment or supplement thereto made by the Company prior
to such Time of Delivery (other than the financial statements and
related schedules therein and other financial information included or
incorporated by reference therein, as to which such counsel need
express no opinion), when they became effective or were filed with the
Commission, as the case may be, complied as to form in all material
respects with the requirements of the Act or the Exchange Act, as
applicable, and the rules and regulations of the Commission
thereunder; and they have no reason to believe that any of such
documents, when such documents became effective or were so filed, as
the case may be, contained, in the case of a registration statement
which became effective under the Act, an untrue statement of a
material fact, or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or, in the case of other documents which were filed under
the Exchange Act with the Commission, an untrue statement of a
material fact or omitted to state a material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made when such documents were so filed, not
misleading; and
13
<PAGE>
(xiv) The Registration Statement and the Prospectus and any further
amendments and supplements thereto made by the Company prior to such
Time of Delivery (other than the financial statements and related
schedules therein and other financial information included or
incorporated by reference therein, as to which such counsel need
express no opinion) comply as to form in all material respects with
the requirements of the Act and the rules and regulations thereunder;
they have no reason to believe that, as of its effective date, the
Registration Statement or any further amendment thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related schedules therein, as to which such counsel
need express no opinion) contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading or that, as
of its date, the Prospectus or any further amendment or supplement
thereto made by the Company prior to such Time of Delivery (other than
the financial statements and related schedules therein and other
financial information included or incorporated by reference therein,
as to which such counsel need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading or that, as of
such Time of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related schedules therein and other financial
information included or incorporated by reference therein, as to which
such counsel need express no opinion) contains an untrue statement of
a material fact or omits to state a material fact necessary to make
the statements therein, in light of the circumstances in which they
were made, not misleading; and they do not know of any amendment to
the Registration Statement required to be filed or of any contracts or
other documents of a character required to be filed as an exhibit to
the Registration Statement or required to be incorporated by reference
into the Prospectus or required to be described in the Registration
Statement or the Prospectus which are not filed or incorporated by
reference or described as required.
In rendering such opinion, Mayer, Brown & Platt may rely as to matters
governed by the laws of states other than Illinois, New York or Federal laws on
local counsel in such jurisdictions, provided that in each case, Mayer, Brown &
Platt shall state that they believe that they and the Underwriter are reasonably
justified in relying on such other counsel. In rendering the opinions contained
in paragraphs (xii) (insofar as said opinion refers to information in the
Prospectus under the caption "Federal Income Tax Considerations") and (xiii),
such opinions may be based upon (a) the Internal Revenue Code, as amended, and
the rules and regulations promulgated thereunder, (b) Maryland and Delaware law
existing and applicable to the Company, (c) facts and other matters set forth in
the Prospectus, (d) the provisions of the Declaration of Trust of the Company
and the REIT Management Agreement, and (e) certain statements and
representations made by the Company to Mayer, Brown & Platt.
(d) On the date hereof and also at each Time of Delivery, Arthur Andersen
LLP shall have furnished to you a letter or letters, dated the respective date
of delivery thereof, in form and substance satisfactory to you, to the effect
set forth in Annex I hereto;
14
<PAGE>
(e) (i) Neither the Company, nor any of its subsidiaries, shall have
sustained since the date of the latest audited financial statements included or
incorporated by reference in the Prospectus any loss or interference with its
business from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as set forth or contemplated in the Prospectus, and
(ii) since the respective dates as of which information is given in the
Prospectus, there shall not have been any change in the capital stock or long-
term debt of the Company or any of its subsidiaries or any change, or any
development involving a prospective change, in or affecting the general affairs,
management, financial position, shareholders' equity, or results of operations
of the Company and its subsidiaries, otherwise than as set forth or contemplated
in the Prospectus, the effect of which, in any such case described in clause (i)
or (ii), is in your judgment so material and adverse as to make it impracticable
or inadvisable to proceed with the public offering or the delivery of the Shares
on the terms and in the manner contemplated in the Prospectus as amended or
supplemented;
(f) On or after the date hereof, there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange; (ii) a suspension or material
limitation in trading in the Company's securities on the New York Stock
Exchange; (iii) a general moratorium on commercial banking activities declared
by either Federal or New York State authorities; or (iv) the outbreak or
escalation of hostilities involving the United States or the declaration by the
United States of a national emergency or war, if the effect of any such event
specified in this clause (iv) in your judgment makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the Firm
Shares or Optional Shares or both on the terms and in the manner contemplated in
the Prospectus;
(g) On or after the date hereof (i) no downgrading shall have occurred in
the rating accorded the Company's debt securities or preferred shares by any
"nationally recognized statistical rating organization," as that term is defined
by the Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such
organization shall have publicly announced that it has under surveillance or
review, with possible negative implications, its rating of any of the Company's
debt securities or preferred shares;
(h) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of Prospectuses as amended or supplemented
on the business day next succeeding the date hereof; and
(i) The Company shall have furnished or caused to be furnished to you at
each Time of Delivery certificates of officers of the Company satisfactory to
you as to the accuracy of the representations and warranties of the Company
herein at and as of such Time of Delivery, as to the performance by the Company
of all of its obligations hereunder to be performed at or prior to such Time of
Delivery, as to the matters set forth in subsections (a) and (e) of this Section
and as to such other matters as you may reasonably request.
8. (a) The Company will indemnify and hold harmless the Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
the Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or
15
<PAGE>
actions in respect thereof) arise out of or are based upon an untrue statement
or alleged untrue statement of a material fact contained in any Preliminary
Prospectus, any preliminary prospectus supplement, the Registration Statement,
the Prospectus as amended or supplemented and any other prospectus relating to
the Shares, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse the Underwriter for any legal or other expenses reasonably
incurred by the Underwriter in connection with investigating or defending any
such action or claim as such expenses are incurred; provided, however, that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage or liability (or action in respect thereof) arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, any preliminary prospectus
supplement, the Registration Statement, the Prospectus as amended or
supplemented and any other prospectus relating to the Shares, or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by the Underwriter expressly for use
therein; and provided further, that the foregoing indemnity with respect to any
Preliminary Prospectus shall not inure to the benefit of the Underwriter (or to
the benefit of any person controlling the Underwriter) if the person asserting
any such losses, claims, damages or liabilities purchased Shares from the
Underwriter and if such untrue statement or omission or alleged untrue statement
or omission made in such Preliminary Prospectus is eliminated or remedied in the
Prospectus (as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) and, if required by law, a copy of the
Prospectus (as so amended or supplemented) shall not have been furnished to such
person at or prior to the written confirmation of the sale of such Shares to
such person.
(b) The Underwriter will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, any preliminary prospectus supplement, the Registration
Statement, the Prospectus as amended or supplemented and any other prospectus
relating to the Shares, or any amendment or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in any Preliminary Prospectus, any preliminary prospectus supplement, the
Registration Statement, the Prospectus as amended or supplemented and any other
prospectus relating to the Shares, or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by the Underwriter expressly for use therein; and will reimburse the
Company for any legal or other expenses reasonably incurred by the Company in
connection with investigating or defending any such action or claim as such
expenses are incurred.
(c) Promptly after receipt by the indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, the indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the
16
<PAGE>
indemnifying party shall not relieve it from any liability which it may have to
the indemnified party otherwise than under such subsection. In case any such
action shall be brought against the indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, assume
the defense thereof, with counsel satisfactory to the indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to the
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to the indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by the indemnified party, in connection with the
defense thereof other than reasonable costs of investigation. Neither the
indemnifying nor the indemnified party shall, without the written consent of the
other party, effect the settlement or compromise of, or consent to the entry of
any judgment with respect to, any pending or threatened action or claim in
respect of which indemnification or contribution may be sought hereunder
(whether or not the other party is an actual or potential party to such action
or claim) unless such settlement, compromise or judgment (i) includes an
unconditional release of the other party from all liability arising out of such
action or claim and (ii) does not include a statement as to or an admission of
fault, culpability or a failure to act, by or on behalf of the other party.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless the indemnified party under subsection (a)
or (b) above in respect of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein, then the indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriter on the other from
the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection (c) above,
then the indemnifying party shall contribute to such amount paid or payable by
the indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company on the one
hand and the Underwriter on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriter on the other shall be deemed to be in the same proportion as
the total net proceeds from such offering (before deducting expenses) received
by the Company bear to the total underwriting discounts and commissions received
by the Underwriter. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the Underwriter on the
other and the party's relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
the Underwriter agree that it would not be just and equitable if contributions
pursuant to this subsection (d) were determined by pro rata allocation or by any
other method of allocation which does not take account of the equitable
considerations referred to above in this subsection (d). The amount paid or
payable by the indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this subsection
(d) shall be deemed to include any legal or other expenses reasonably incurred
by the indemnified party in
17
<PAGE>
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), the Underwriter shall not
be required to contribute any amount in excess of the amount by which the total
price at which the applicable Shares underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which the
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls the
Underwriter within the meaning of the Act; and the obligations of the
Underwriter under this Section 8 shall be in addition to any liability which the
Underwriter may otherwise have and shall extend, upon the same terms and
conditions, to each officer and trustee of the Company and to each person, if
any, who controls the Company within the meaning of the Act.
9. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the Underwriter, as set forth in this
Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of the Underwriter or any controlling person of the Underwriter, or the Company
or any officer or trustee or controlling person of the Company, and shall
survive delivery of and payment for the Shares.
10. If the Shares are not delivered by or on behalf of the Company as
provided herein, the Company will reimburse the Underwriter for all out-of-
pocket expenses, including fees and disbursements of counsel, reasonably
incurred by the Underwriter in making preparations for the purchase, sale and
delivery of the Shares not so delivered, but the Company shall then be under no
further liability to the Underwriter except as provided in Sections 6 and 8
hereof.
11. All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriter shall be delivered or sent by mail, telex or
facsimile transmission to Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, at World Financial Center, North Tower, New York, New York
10281, Attention: Tjarda V.S. Clagett; and if to the Company shall be delivered
or sent by mail, telex or facsimile transmission to the address of the Company
set forth in the Registration Statement, Attention: Secretary.
12. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriter, the Company and, to the extent provided in Sections 8 and 9
hereof, the officers and trustees of the Company and each person who controls
the Company or the Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from the Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
18
<PAGE>
13. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
14. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
15. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such respective counterparts shall together constitute one and
the same instrument.
16. Under the terms of the Company's Declaration of Trust, all persons
dealing with the Company shall look solely to the Company property for
satisfaction of claims of any nature, and no trustee, officer, agent or
shareholder of the Company shall be held to any person liable in tort, contract
or otherwise as the result of the execution and delivery of this Agreement by
the Company.
19
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us four counterparts hereof, and upon the acceptance hereof by you,
this letter and such acceptance hereof shall constitute a binding agreement
between you and the Company.
Very truly yours,
Security Capital Industrial Trust
By: /s/ Jeffrey A. Klopf
----------------------
Name: Jeffrey A. Klopf
Title: Senior Vice President
Accepted as of the date hereof:
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By: Elizabeth Anne Casey
--------------------
Authorized Signatory
20
<PAGE>
ANNEX I
Pursuant to Section 7(d) of the Purchase Agreement, Arthur Andersen LLP
shall furnish letters to the Underwriter to the effect that:
(i) They are independent certified public accountants with respect to the
Company and its subsidiaries within the meaning of the Act and the applicable
published rules and regulations thereunder;
(ii) In their opinion, the financial statements and financial statement
schedule audited by them and included or incorporated by reference in the
Registration Statement or the Prospectus comply as to form in all material
respects with the applicable accounting requirements of the Act or the Exchange
Act, as applicable, and the related published rules and regulations thereunder;
and they have made a review in accordance with standards established by the
American Institute of Certified Public Accountants of the consolidated interim
financial statements, selected financial data, pro forma financial information,
financial forecasts and/or condensed financial statements derived from audited
financial statements of the Company for the periods specified in such letter, as
indicated in their reports thereon, copies of which have been separately
furnished to the Underwriter;
(iii) They have made a review in accordance with standards established by the
American Institute of Certified Public Accountants of the unaudited condensed
consolidated statements of income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus and/or included in the
Company's quarterly report on Form 10-Q incorporated by reference into the
Prospectus as indicated in their reports thereon copies of which have been
separately furnished to the Underwriter; and on the basis of specified
procedures including inquiries of officials of the Company who have
responsibility for financial and accounting matters regarding whether the
unaudited condensed consolidated financial statements referred to in paragraph
(v)(A)(i) below comply as to form in all material respects with the applicable
accounting requirements of the Act and the Exchange Act and the related
published rules and regulations, nothing came to their attention that caused
them to believe that the unaudited condensed consolidated financial statements
do not comply as to form in all material respects with the applicable accounting
requirements of the Act and the Exchange Act and the related published rules and
regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company for the
five most recent fiscal years included in the Prospectus and included or
incorporated by reference in Item 6 of the Company's Annual Report on Form 10-K
for the most recent fiscal year agrees with the corresponding amounts (after
restatement where applicable) in the audited consolidated financial statements
for such five fiscal years which were included or incorporated by reference in
the Company's Annual Reports on Form 10-K for such fiscal years;
(v) On the basis of limited procedures, not constituting an audit in
accordance with generally accepted auditing standards, consisting of a reading
of the unaudited financial statements and other information referred to below, a
reading of the latest available interim financial statements of the Company and
its subsidiaries, inspection of the minute books of the Company and its
21
<PAGE>
subsidiaries since the date of the latest audited financial statements included
or incorporated by reference in the Prospectus, inquiries of officials of the
Company and its subsidiaries responsible for financial and accounting matters
and such other inquiries and procedures as may be specified in such letter,
nothing came to their attention that caused them to believe that:
(A) (i) the unaudited condensed consolidated statements of earnings,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus and/or included or incorporated by reference in
the Company's Quarterly Reports on Form 10-Q incorporated by reference in
the Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Exchange Act as it applies to
Form 10-Q and the related published rules and regulations thereunder (ii)
or any material modifications should be made to the unaudited consolidated
statements of earnings, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus and/or included in the
Company's Quarterly Reports on Form 10-Q incorporated by reference in the
Prospectus for them to be in conformity with generally accepted accounting
principles;
(B) any other unaudited income statement data and balance sheet items
included in the Prospectus do not agree with the corresponding items in the
unaudited consolidated financial statements from which such data and items
were derived, and any such unaudited data and items were not determined on
a basis substantially consistent with the basis for the corresponding
amounts in the audited consolidated financial statements included or
incorporated by reference in the Company's Annual Report on Form 10-K for
the most recent fiscal year;
(C) the unaudited financial statements which were not included in the
Prospectus but from which were derived the unaudited condensed financial
statements referred to in Clause (A) and any unaudited income statement
data and balance sheet items included in the Prospectus and referred to in
Clause (B) were not determined on a basis substantially consistent with the
basis for the audited financial statements included or incorporated by
reference in the Company's Annual Report on Form 10-K for the most recent
fiscal year;
(D) any unaudited pro forma consolidated condensed financial statements
included or incorporated by reference in the Prospectus do not comply as to
form in all material respects with the applicable accounting requirements
of the Act and the published rules and regulations thereunder or the pro
forma adjustments have not been properly applied to the historical amounts
in the compilation of those statements;
(E) as of a specified date not more than three days prior to the date of
such letter, there have been any changes in the shareholder's equity (other
than issuances of capital stock upon exercise of options which were
outstanding on the date of the latest balance sheet included or
incorporated by reference in the Prospectus) or any increase in the
consolidated long-term debt of the Company and its subsidiaries, or any
decreases in consolidated net current assets or net assets or other items
specified by the Underwriter, or any increases in any items specified by
the Underwriter, in each case as compared with amounts shown in the latest
balance sheet included or incorporated by reference in the
22
<PAGE>
Prospectus, except in each case for changes, increases or decreases which
the Prospectus discloses have occurred or may occur or which are described
in such letter; and
(F) for the period from the date of the latest financial statements
included or incorporated by reference in the Prospectus to the specified
date referred to in Clause (E) there were any decreases in consolidated net
income or net earnings from operations or the total or per share amounts of
consolidated net income or other items specified by the Underwriter, or any
increases in any items specified by the Underwriter, in each case as
compared with the comparable period of the preceding year and with any
other period of corresponding length specified by the Underwriter, except
in each case for increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(vi) In addition to the audit referred to in their report(s) included or
incorporated by reference in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to in
paragraphs (iii) and (v) above, they have carried out certain specified
procedures, not constituting an audit in accordance with generally accepted
auditing standards, with respect to certain amounts, percentages and financial
information specified by the Underwriter which are derived from the general
accounting records of the Company and its subsidiaries, which appear in the
Prospectus (excluding documents incorporated by reference) or in Part II of, or
in exhibits and schedules to, the Registration Statement specified by the
Underwriter or in documents incorporated by reference in the Prospectus
specified by the Underwriter, and have compared certain of such amounts,
percentages and financial information with the accounting records of the Company
and its subsidiaries and have found them to be in agreement.
23
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 8-K, into the Trust's previously filed
Registration Statement File Nos. 33-91366, 33-92490, 333-4961, 333-31421,
333-39797 and 333-38515.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 13, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
Form 10-K for the twelve months ended December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 25,009
<SECURITIES> 0
<RECEIVABLES> 98,693
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,006,236
<DEPRECIATION> 171,525
<TOTAL-ASSETS> 3,033,953
<CURRENT-LIABILITIES> 0
<BONDS> 857,080
<COMMON> 1,174
0
435,008
<OTHER-SE> 1,540,555
<TOTAL-LIABILITY-AND-EQUITY> 3,033,953
<SALES> 284,533
<TOTAL-REVENUES> 302,494
<CGS> 0
<TOTAL-COSTS> 27,008
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,704
<INCOME-PRETAX> 4,431
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,431
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,431
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
<PAGE>
Exhibit 99
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees and Shareholders of
Security Capital Industrial Trust:
We have audited the accompanying consolidated balance sheets of Security
Capital Industrial Trust and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Security Capital
Industrial Trust and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Chicago, Illinois
March 13, 1998
F-2
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
ASSETS
------
<S> <C> <C>
Real Estate............................................ $3,006,236 $2,508,747
Less accumulated depreciation........................ 171,525 109,147
---------- ----------
2,834,711 2,399,600
Investments in and Advances to Unconsolidated
Subsidiaries.......................................... 86,139 --
Cash and Cash Equivalents.............................. 25,009 4,770
Accounts Receivable.................................... 12,554 5,397
Other Assets........................................... 75,540 52,539
---------- ----------
Total assets....................................... $3,033,953 $2,462,306
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Line of credit....................................... $ -- $ 38,600
Long-term debt....................................... 724,052 524,191
Mortgage notes payable............................... 87,937 91,757
Securitized debt..................................... 33,197 36,025
Assessment bonds payable............................. 11,894 12,170
Accounts payable and accrued expenses................ 62,850 35,357
Construction payable................................. 27,221 24,645
Net amount due to a related party.................... 1,138 --
Distributions payable................................ 33,449 25,058
Other liabilities.................................... 22,174 18,130
---------- ----------
Total liabilities.................................. 1,003,912 805,933
---------- ----------
Commitments and Contingencies
Minority Interest...................................... 53,304 56,984
Shareholders' Equity:
Series A Preferred Shares; $0.01 par value; 5,400,000
shares issued and outstanding at December 31, 1997
and 1996; stated liquidation preference of $25 per
share............................................... 135,000 135,000
Series B Convertible Preferred Shares; $0.01 par
value; 8,000,300 shares issued and outstanding at
December 31, 1997 and 8,050,000 shares issued and
outstanding at December 31, 1996; stated liquidation
preference of $25 per share......................... 200,008 201,250
Series C Preferred Shares; $0.01 par value; 2,000,000
shares issued and outstanding at December 31, 1997
and 1996; stated liquidation preference of $50 per
share............................................... 100,000 100,000
Common shares of beneficial interest, $0.01 par
value; 117,364,148 shares issued and outstanding at
December 31, 1997 and 93,676,546 shares issued and
outstanding at December 31, 1996.................... 1,174 937
Additional paid-in capital............................. 1,773,465 1,257,347
Employee share purchase notes.......................... (27,186) --
Cumulative translation adjustments..................... (63) --
Distributions in excess of net earnings................ (205,661) (95,145)
---------- ----------
Total shareholders' equity......................... 1,976,737 1,599,389
---------- ----------
Total liabilities and shareholders' equity......... $3,033,953 $2,462,306
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Income:
Rental income.................................... $284,533 $227,000 $153,879
Other real estate income......................... 12,291 5,342 2,899
Income from unconsolidated subsidiaries.......... 3,278 -- --
Interest income.................................. 2,392 1,121 1,725
-------- -------- --------
Total income................................... 302,494 233,463 158,503
-------- -------- --------
Expenses:
Rental expenses, net of recoveries of $42,288 in
1997, $30,469 in 1996 and $17,788 in 1995....... 23,187 21,734 17,028
Property management fees paid to a related party,
net of recoveries of $3,870 in 1997, $3,208 in
1996 and $2,351 in 1995......................... 3,821 4,940 1,432
Depreciation and amortization.................... 76,562 59,850 39,767
Interest expense................................. 52,704 38,819 32,005
REIT management fee paid to a related party...... 17,791 21,472 14,207
Administrative services fee paid to a related
party........................................... 1,113 -- --
General and administrative....................... 5,742 1,025 839
Costs incurred in acquiring management companies
from a related party............................ 75,376 -- --
Foreign exchange loss............................ 6,376 -- --
Other expense.................................... 3,891 2,913 2,234
-------- -------- --------
Total expenses................................. 266,563 150,753 107,512
-------- -------- --------
Net earnings before minority interest and
gain/(loss) on disposition of real estate......... 35,931 82,710 50,991
Minority interest share in net earnings............ 3,560 3,326 3,331
-------- -------- --------
Net earnings before gain/(loss) on disposition of
real estate....................................... 32,371 79,384 47,660
Gain/(loss) on disposition of real estate.......... 7,378 (29) 1,053
-------- -------- --------
Net earnings....................................... 39,749 79,355 48,713
Less preferred share dividends..................... 35,318 25,895 6,698
-------- -------- --------
Net Earnings Attributable to Common Shares......... $ 4,431 $ 53,460 $ 42,015
======== ======== ========
Weighted Average Common Shares Outstanding (Basic). 100,729 84,504 68,924
======== ======== ========
Weighted Average Common Shares Outstanding
(Diluted)......................................... 100,869 84,511 74,422
======== ======== ========
Per Share Net Earnings Attributable to Common
Shares:
Basic............................................ $ 0.04 $ 0.63 $ 0.61
======== ======== ========
Diluted.......................................... $ 0.04 $ 0.63 $ 0.61
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED PREFERRED PREFERRED
SHARES AT SHARES AT SHARES AT CUMU-
COMMON AGGREGATE AGGREGATE AGGREGATE LATIVE DISTRI-
SHARES LIQUI- LIQUI- LIQUI- ADDI- TRANS- BUTIONS EMPLOYEE TOTAL
------------------ DATION DATION DATION TIONAL LATION IN EXCESS SHARE SHARE-
NUMBER PAR PREFER- PREFER- PREFER- PAID-IN ADJUST- OF NET PURCHASE HOLDERS
OF SHARES VALUE ENCE ENCE ENCE CAPITAL MENTS EARNINGS NOTES EQUITY
--------- -------- --------- --------- --------- ---------- ------- --------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1994. 64,587 $ 645.8 $ -- $ -- $ -- $ 808,003 $-- $ (30,874) $ -- $ 777,775
Sale of common
shares........... 16,260 162.6 -- -- -- 249,837 -- -- -- 250,000
Sale of preferred
shares........... -- -- 135,000 -- -- -- -- -- 135,000
Dividend
reinvestment and
share purchase
plan............. 13 0.1 -- -- -- 217 -- -- -- 217
Less cost of
raising capital.. -- -- -- (5,022) -- -- -- (5,022)
Limited
partnership units
converted to
common shares.... 556 5.6 -- -- -- 6,107 -- -- -- 6,112
Net earnings
before gain on
disposition of
real estate...... -- -- -- -- -- -- -- 47,660 -- 47,660
Gain on
disposition of
real estate...... -- -- -- -- -- -- -- 1,053 -- 1,053
Common share
distributions.... -- -- -- -- -- -- -- (49,348) -- (49,348)
Series A
Preferred Share
dividends........ -- -- -- -- -- -- -- (6,698) -- (6,698)
Distributions
accrued.......... -- -- -- -- -- -- -- (20,558) -- (20,558)
------- -------- -------- -------- -------- ---------- ---- --------- -------- ----------
Balances at
December 31, 1995. 81,416 814.1 135,000 -- -- 1,059,142 -- (58,765) -- 1,136,191
Sale of common
shares........... 12,218 122.5 -- 210,639 -- -- -- 210,762
Sales of
preferred shares. -- -- -- 201,250 100,000 -- -- -- 301,250
Dividend
reinvestment and
share purchase
plan............. 21 .2 -- -- -- 356 -- -- -- 356
Common shares
issued upon
exercise of
warrants......... 22 .2 -- -- -- 218 -- -- -- 218
Less cost of
raising capital.. -- -- -- -- -- (13,008) -- -- -- (13,008)
Net earnings
before loss on
disposition of
real estate...... -- -- -- -- -- -- -- 79,384 -- 79,384
Loss on
disposition of
real estate...... -- -- -- -- -- -- -- (29) -- (29)
Common share
distributions.... -- -- -- -- -- -- -- (64,782) -- (64,782)
Preferred share
dividends........ -- -- -- -- -- -- -- (25,895) -- (25,895)
Distributions
accrued.......... -- -- -- -- -- -- -- (25,058) -- (25,058)
------- -------- -------- -------- -------- ---------- ---- --------- -------- ----------
Balances at
December 31, 1996. 93,677 937.0 135,000 201,250 100,000 1,257,347 -- (95,145) -- 1,599,389
Sale of common
shares........... 22,147 221.5 -- -- -- 488,432 -- -- -- 488,653
Dividend
reinvestment and
share purchase
plan............. 20 0.2 -- -- -- 429 -- -- -- 429
Limited
partnership units
converted to
common shares.... 105 1.0 -- -- -- 1,587 -- -- -- 1,588
Series B
Preferred Shares
converted to
common shares.... 63 0.6 -- (1,242) -- 1,241 -- -- -- 0
Common shares
issued under
employee share
purchase plan,
net.............. 1,352 13.5 -- -- -- 28,677 -- -- (27,186) 1,505
Less cost of
raising capital.. -- -- -- -- -- (4,248) -- -- -- (4,248)
Cumulative
translation
adjustments for
fluctuations in
foreign currency
rates............ -- -- -- -- -- -- (63) -- -- (63)
Net earnings
before gain on
disposition of
real estate...... -- -- -- -- -- -- -- 32,371 -- 32,371
Gain on
disposition of
real estate...... -- -- -- -- -- -- -- 7,378 -- 7,378
Common share
distributions.... -- -- -- -- -- -- -- (81,498) -- (81,498)
Preferred share
dividends........ -- -- -- -- -- -- -- (35,318) -- (35,318)
Distributions
accrued.......... -- -- -- -- -- -- -- (33,449) -- (33,449)
------- -------- -------- -------- -------- ---------- ---- --------- -------- ----------
Balances at
December 31, 1997. 117,364 $1,173.8 $135,000 $200,008 $100,000 $1,773,465 $(63) $(205,661) $(27,186) $1,976,737
======= ======== ======== ======== ======== ========== ==== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Net earnings................................. $ 39,749 $ 79,355 $ 48,713
Minority interest............................ 3,560 3,326 3,331
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization.............. 76,275 59,850 39,767
(Gain)/loss on disposition of real estate.. (7,378) 29 (1,053)
Rent leveling.............................. (5,435) (4,777) (4,364)
Costs incurred in acquiring management
companies from a related party............ 75,376 -- --
Change in investment in and advances to
unconsolidated subsidiaries............... (770) -- --
Foreign exchange loss on remeasurement..... 348 -- --
Amortization of deferred financing costs... 1,977 2,339 2,092
Increase in accounts receivable and other
assets...................................... (24,103) (10,166) (14,392)
Increase in accounts payable and accrued
expenses.................................... 27,492 2,531 19,028
Increase in other liabilities................ 4,044 3,714 7,032
Increase in net amount due to a related
party....................................... 1,138 -- --
--------- --------- ---------
Net cash provided by operating
activities.............................. 192,273 136,201 100,154
--------- --------- ---------
Investing Activities:
Real estate investments...................... (601,577) (657,873) (633,251)
Investments in and advances to
unconsolidated subsidiaries................. (85,369) -- --
Tenant improvements and lease commissions.... (15,539) (14,806) (6,163)
Recurring capital expenditures............... (5,523) (2,851) (330)
Proceeds from disposition of real estate..... 137,147 9,652 10,949
--------- --------- ---------
Net cash used in investing activities.... (570,861) (665,878) (628,795)
--------- --------- ---------
Financing Activities:
Proceeds from sale of shares, net of
expenses.................................... 330,005 434,587 279,977
Net proceeds from sale of shares to a
related party............................... 75,000 64,416 100,001
Proceeds from exercised warrants and
dividend reinvestment and share purchase
plan........................................ 429 574 217
Proceeds from long-term debt offerings....... 199,772 199,632 324,455
Debt issuance costs.......................... (2,469) (4,698) (6,194)
Distributions paid to common shareholders.... (106,556) (85,340) (64,445)
Distributions paid to minority interest
holders..................................... (5,665) (5,237) (5,033)
Preferred share dividends.................... (35,318) (25,895) (6,698)
Reduction of employee share purchase notes... 64 -- --
Termination of interest rate contracts....... 1,894 -- --
Proceeds from line of credit................. 530,991 411,200 361,100
Payments on line of credit................... (569,591) (453,600) (440,100)
Regularly scheduled principal payments on
mortgage notes payable...................... (4,925) (3,738) (3,491)
Balloon principal payments made upon
maturity.................................... (14,804) (19,689) (10,183)
--------- --------- ---------
Net cash provided by financing
activities.............................. 398,827 512,212 529,606
--------- --------- ---------
Net Increase/(Decrease) in Cash and Cash
Equivalents.................................. 20,239 (17,465) 965
Cash and Cash Equivalents, beginning of year.. 4,770 22,235 21,270
--------- --------- ---------
Cash and Cash Equivalents, end of year........ $ 25,009 $ 4,770 $ 22,235
========= ========= =========
Supplemental Schedule of Noncash Investing and
Financing Activities:
In conjunction with real estate acquired:
Assumption of existing mortgage notes...... $ 12,805 $ 18,103 $ 14,688
Issuance of common shares.................. $ 1,000 $ -- $ --
In conjunction with the acquisition of
management companies
Issuance of common shares to a related
party..................................... $ 79,840 $ -- $ --
Purchase of computer and telephone
equipment................................. $ (4,464) $ -- $ --
Notes received from employees for common
shares issued............................... $ 27,250 $ -- $ --
Cumulative adjustment for translation of
foreign currency, net....................... $ 63 $ -- $ --
Conversion of partnership units into common
shares...................................... $ 1,588 $ -- $ 6,112
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Security Capital Industrial Trust ("SCI"), a Maryland real estate investment
trust ("REIT"), is a publicly held global owner and operator of distribution
properties 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 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 for its customers. SCI deploys
capital in markets with excellent long-term growth prospects where SCI can
achieve a strong market position through the acquisition and development of
generic, flexible facilities designed for both warehousing and light
manufacturing uses. As of December 31, 1997, SCI's portfolio contained
90,843,000 square feet in 1,005 operating buildings and SCI had an additional
8,442,000 square feet under development in 62 buildings for a total of
99,285,000 square feet in 44 target market cities in the United States, Mexico
and Europe.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REIT Organization Status
In January 1993, SCI was formed as a Maryland real estate investment trust.
In February 1993, Security Capital Industrial Investors Incorporated, a
Delaware corporation, was merged with and into SCI. SCI has made an election
to be taxed as a REIT under the Internal Revenue Code of 1986, as amended.
REITs are not required to pay federal income taxes if minimum distribution
and income, asset and shareholder tests are met. During 1997, 1996 and 1995,
SCI was in compliance with the REIT requirements. Thus, no federal income tax
provision has been reflected in the accompanying consolidated financial
statements.
Basis of Presentation
The accompanying consolidated financial statements include the results of
SCI, its subsidiaries and its majority-owned and controlled partnerships. The
effects of intercompany transactions have been eliminated. Certain amounts
included in the consolidated financial statements for prior years have been
reclassified to conform with the 1997 financial statement presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Real Estate and Depreciation
Real estate is carried at cost. Costs directly related to the acquisition,
renovation or development of real estate are capitalized and are depreciated
over the following useful lives:
<TABLE>
<S> <C>
Tenant improvements................. 10 years
Acquired buildings.................. 30 years
Developed buildings................. 40 years
</TABLE>
Depreciation is computed using a straight-line method. Certain real estate
was acquired through the formation of partnerships (Note 6) wherein SCI
contributed cash and the limited partners contributed real estate
F-7
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
in exchange for partnership units which are ultimately exchangeable for SCI's
Common Shares of Beneficial Interest, par value $0.01 per share (the "Common
Shares"). In consolidating the partnerships' assets, real estate cost includes
the estimated fair value attributable to the limited partners' interests at
the acquisition dates because (1) SCI's cash contributions constituted over
50% of the acquisition prices, (2) the acquisitions were from unrelated third-
parties and (3) the limited partners were not considered "promoters" under SEC
Staff Accounting Bulletin 48. The limited partners' interests will be
reflected as minority interest in the consolidated financial statements until
the units are exchanged for SCI Common Shares.
Long-Lived Assets
Long-lived assets to be disposed of are reported at the lower of their
carrying amount or fair value less cost to sell. SCI's management also
periodically reviews long-lived assets to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying amount
of such assets may not be recoverable. In management's opinion, long-lived
assets, including real estate assets, are not carried at amounts in excess of
their estimated net realizable values.
Capitalized Compensation and Overhead Costs
Compensation and overhead costs incurred for development, renovation,
acquisition, and leasing activities that are incremental and identifiable to
specific and successful projects or leases are capitalized and depreciated
over their useful lives as discussed in Real Estate and Depreciation or, in
the case of leasing costs, amortized over SCI's average lease term of four
years.
Recent Accounting Pronouncements
Effective December 15, 1997, SCI adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128
supersedes APB Opinion No. 15 and requires restatement of prior years'
earnings per share. SFAS No. 128 replaces the presentation of primary and
fully diluted earnings per share with a presentation of basic and diluted
earnings per share. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue Common Shares were
exercised or converted into Common Shares or resulted in the issuance of
Common Shares that then shared in earnings. The adoption of SFAS No. 128 had
no effect on SCI's reported earnings per share for the years ended December
31, 1997, 1996, and 1995.
The FASB has also released Statement of Financial Accounting Standards No.
129, "Disclosure of Information about Capital Structure" ("SFAS No. 129"). SCI
already complied with the requirements of the statement which is effective for
periods ending after December 15, 1997.
Capitalized Interest
SCI capitalizes interest costs incurred during the land development or
construction period of qualifying projects.
Deferred Loan Fees
Included in other assets as of December 31, 1997 and 1996 are costs of $7.9
million and $9.2 million, respectively, associated with obtaining financing
(Note 5) which have been capitalized and are being amortized (to interest
expense or capitalized interest, as appropriate) over the life of the loan
using the effective interest rate method.
F-8
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in bank accounts and funds
invested in money market funds.
Minority Interest
Minority interest is carried at cost and represents limited partners'
interests in various real estate partnerships controlled by SCI. As discussed
in Real Estate and Depreciation, certain minority interests are carried at the
pro rata share of the estimated fair value of property at the acquisition
dates. Common Shares of SCI issued upon exchange of limited partnership units
will be accounted for at the cost of the minority interest surrendered. As of
December 31, 1997, a total of 5,089,258 limited partnership units were held by
minority interest limited partners in the various real estate partnerships
(Note 6). Limited partners are entitled to exchange each partnership unit for
one Common Share of SCI.
Interest Rate Contracts
SCI utilizes various interest rate contracts to hedge interest rate risk on
anticipated debt offerings. These anticipatory hedges are designated, and
effective, as hedges of identified debt issuances which have a high
probability of occurring. Gains and losses resulting from changes in the
market value of these contracts are deferred and amortized into interest
expense over the life of the related debt issuance.
Foreign Currency Exchange Contracts
Foreign currency forward contracts used in conjunction with the purchase and
financing of a business are marked to market at the financial statement date
and the gain or loss, if any, is reflected in the consolidated results of
operations.
Foreign Currency Translation/Remeasurement
For foreign subsidiaries whose functional currency is not the U.S. dollar,
assets and liabilities are translated at the exchange rates in effect at the
end of the year and income statement accounts are translated at the average
exchange rates for the year. Translation gains and losses are included as a
separate component of stockholders' equity in a Cumulative Translation
Adjustments account. For foreign subsidiaries who have transactions
denominated in currencies other than their functional currency, nonmonetary
assets and liabilities are remeasured at historical rates, monetary assets and
liabilities are remeasured at the exchange rates in effect at the end of the
year, and income statement accounts are remeasured at average exchange rates
for the year. The remeasurement gains and losses of such foreign subsidiaries
are included in the consolidated results of operations as foreign exchange
gains or losses.
Employee Stock Based Compensation
SCI has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS No. 123") and continues to
apply the accounting provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25") as allowed under SFAS No. 123 and makes
proforma fair value disclosures required by SFAS No. 123. In accordance with
APB No. 25, total compensation cost is measured by the difference between the
quoted market price of stock at the date of grant or award and the price, if
any, to be paid by an employee and is recognized as expense over the period
the employee performs related services.
F-9
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Unconsolidated Subsidiaries
SCI's investment in 100% of the preferred stock of SCI Logistics Services
Incorporated ("SCI Logistics") is accounted for under the equity method
because SCI exercises significant influence over the operating and financial
activities of SCI Logistics (Note 4). Accordingly, the investment in SCI
Logistics is carried at cost as adjusted for SCI's proportionate share of SCI
Logistics' earnings or losses.
3. REAL ESTATE
Real estate investments are comprised of income producing distribution
facilities, construction in progress and land held for distribution facility
development in the following markets:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL COST
--------------
DECEMBER 31,
--------------
1997 1996
------ ------
<S> <C> <C>
U.S. MARKETS
Atlanta, Georgia.............................................. 7.90% 7.99%
Austin, Texas................................................. 2.40 3.32
Birmingham, Alabama........................................... 1.16 1.33
Charlotte, North Carolina..................................... 2.45 2.39
Chattanooga, Tennessee........................................ 0.52 0.60
Chicago, Illinois............................................. 5.43 3.80
Cincinnati, Ohio.............................................. 2.86 2.57
Columbus, Ohio................................................ 2.16 2.16
Dallas/Fort Worth, Texas...................................... 5.40 4.79
Denver, Colorado.............................................. 2.11 2.37
East Bay (San Francisco), California.......................... 3.99 4.49
El Paso, Texas................................................ 2.96 2.99
Fort Lauderdale/Miami, Florida................................ 1.13 1.05
Houston, Texas................................................ 5.05 5.16
Indianapolis, Indiana......................................... 3.85 4.69
Kansas City, Kansas/Missouri.................................. 1.82 1.95
Las Vegas, Nevada............................................. 2.10 1.99
Los Angeles/Orange County, California......................... 4.75 3.65
Louisville, Kentucky.......................................... 0.45 0.46
Memphis, Tennessee............................................ 2.05 2.03
Nashville, Tennessee.......................................... 1.78 1.87
New Jersey/I-95 Corridor...................................... 2.90 1.92
Oklahoma City, Oklahoma....................................... 0.35 0.56
Orlando, Florida.............................................. 1.08 1.15
Phoenix, Arizona.............................................. 1.51 1.69
Portland, Oregon.............................................. 2.37 2.29
Reno, Nevada.................................................. 1.99 2.01
Rio Grande Valley (Brownsville), Texas........................ 0.93 0.89
Salt Lake City, Utah.......................................... 1.60 2.35
San Antonio, Texas............................................ 3.54 4.56
San Diego, California......................................... 0.46 0.61
</TABLE>
F-10
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL COST
--------------
DECEMBER 31,
--------------
1997 1996
------ ------
<S> <C> <C>
U.S. MARKETS (CONTINUED)
Seattle, Washington........................................ 1.46 1.57
South Bay (San Francisco), California...................... 7.22 7.84
St. Louis, Missouri........................................ 0.94 --
Tampa, Florida............................................. 4.02 4.53
Tulsa, Oklahoma............................................ 0.45 0.49
Washington, D.C./Baltimore................................. 4.69 5.08
Other...................................................... 0.35 0.81
INTERNATIONAL MARKETS
Amsterdam, Netherlands..................................... 0.01 --
Juarez, Mexico............................................. 0.27 --
Lyons, France.............................................. 0.29 --
Monterrey, Mexico.......................................... 0.38 --
Paris, France.............................................. 0.25 --
Reynosa, Mexico............................................ 0.18 --
Rotterdam, Netherlands..................................... 0.44 --
------ ------
100.00% 100.00%
====== ======
</TABLE>
The following summarizes real estate investments as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land held for development................................ $ 159,645 $ 109,316
Land under development................................... 65,773 40,465
Improved land............................................ 420,019 356,428
Buildings and improvements............................... 2,233,585 1,918,256
Construction in progress................................. 114,495 77,506
Capitalized preacquisition costs......................... 12,719 6,776
---------- ----------
Total real estate...................................... 3,006,236 2,508,747
Less accumulated depreciation............................ 171,525 109,147
---------- ----------
Net real estate........................................ $2,834,711 $2,399,600
========== ==========
</TABLE>
Capitalized preacquisition costs include $3,644,000 and $1,634,000 of funds
on deposit with title companies as of December 31, 1997 and 1996,
respectively, for property acquisitions. In addition to the December 31, 1997
construction payable accrual of $27.2 million, SCI had unfunded commitments on
its contracts for developments under construction totaling $146.4 million.
Other real estate income consists primarily of gains on disposition of
undepreciated property and fees and other income from corporate distribution
facilities services generated to a large extent by SCI Development Services
Incorporated ("SCI Development Services"). SCI Development Services develops
corporate distribution facilities to meet customer requirements 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 100% preferred stock ownership,
SCI will realize substantially all economic benefits of SCI Development
Services' activities. Further, SCI advances mortgage loans to SCI Development
Services to fund acquisition, development and construction
F-11
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
("AD&C") activity. In accordance with accounting guidance for AD&C lending,
SCI accounts for these loans as real estate investments, effectively
consolidating the activities of SCI Development Services. As of December 31,
1997, the outstanding balances of development and mortgage loans made by SCI
to SCI Development Services for the purchase of distribution facilities and
land for distribution facility development aggregated $184.8 million. SCI
Development Services pays federal and state taxes at the applicable corporate
rate.
SCI leases its properties to customers under agreements which are classified
as operating leases. The leases generally provide for payment of all or a
portion of utilities, property taxes and insurance by the customer. 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). Minimum lease payments receivable on non-cancelable leases
with lease periods greater than one year are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 286,305
1999........................................................ 242,379
2000........................................................ 189,299
2001........................................................ 140,487
2002........................................................ 93,776
Thereafter.................................................. 200,875
-----------
$ 1,153,121
===========
</TABLE>
4. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES:
On September 1, 1997, SCI Development Services acquired 9.6% of the
outstanding common shares of Insight, Inc., a privately owned logistics
optimization consulting company, for $500,000, and committed to invest an
additional $2.0 million over the next two years to increase its ownership to
33%. SCI Development Services has accounted for this investment on the cost
method.
On April 24, 1997, SCI Logistics acquired a 60% interest in a refrigerated
warehousing company, renamed CS Integrated LLC ("CSI"). During the third and
fourth quarters of 1997 SCI Logistics contributed additional capital to CSI
which increased its ownership to 77.1%. As of December 31, 1997, CSI owned
refrigerated warehousing totaling 69.0 million cubic feet and also had 9.6
million cubic feet under construction. SCI owns 100% of the non-voting
preferred stock of SCI Logistics. An unrelated third party owns 100% of the
common stock of SCI Logistics. Through its 100% preferred stock ownership, SCI
will realize substantially all economic benefits of SCI Logistics' activities.
As of December 31, 1997, Investments in and Advances to Unconsolidated
Subsidiaries consists of the following items (in thousands):
<TABLE>
<S> <C>
Investment in Insight, Inc..................................... $ 500
Investment in preferred stock of SCI Logistics................. 7,404
Note receivable from SCI Logistics............................. 75,207
Accrued interest and other receivables......................... 3,028
-------
Total........................................................ $86,139
=======
</TABLE>
The note receivable from SCI Logistics is an unsecured loan, which bears
interest at 13% per annum payable on the 24th of April of each year,
commencing April 24, 1998, and matures on April 24, 2002.
F-12
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. BORROWINGS:
Mortgage notes payable, assessment bonds payable and securitized debt
consisted of the following at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
BALLOON
PERIODIC PAYMENT
INTEREST MATURITY PAYMENT PRINCIPAL DUE AT
DESCRIPTION MARKET RATE DATE DATE BALANCE MATURITY
----------- ----------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Mortgage Notes Payable:
Eigenbrodt Way
Distribution Center
#1.................... East Bay 8.590% 04/01/03 (1) $ 1,692 $ 1,479
Gateway Corporate
Center #10............ South Bay 8.590 04/01/03 (1) 2,002 1,361
Hayward Industrial
Center I & II......... East Bay 8.590 04/01/03 (1) 14,280 12,480
Kennedy International
Cargo Center Land #1.. New Jersey 6.000 01/12/98 (1) 3,900 3,900
MGI Portfolio.......... St. Louis 7.750 10/01/10 (2) 8,594 --
Oxmoor Distribution
Center #1............. Birmingham 8.390 04/01/99 (1) 4,032 3,895
Oxmoor Distribution
Center #2............. Birmingham 8.100 05/01/99 (1) 1,487 1,439
Oxmoor Distribution
Center #3............. Birmingham 8.100 05/01/99 (1) 1,476 1,426
Peter Cooper
Distribution Center
#1.................... El Paso 10.625 06/01/99 (1) 2,647 2,619
Platte Valley
Industrial Center #1.. Kansas City 9.750 03/01/00 (1) 448 256
Platte Valley
Industrial Center #3.. Kansas City 9.750 06/01/98 (1) 1,114 1,091
Platte Valley
Industrial Center #4.. Kansas City 10.100 11/01/21 (2) 2,080 --
Platte Valley
Industrial Center #8.. Kansas City 8.750 08/01/04 (1) 1,950 1,488
Platte Valley
Industrial Center #9.. Kansas City 8.100 04/01/17 (2) 3,407 --
Princeton Distribution
Center................ Cincinnati 9.250 02/19/99 (1) 378 378
Rio Grande Industrial
Center #1............. Brownsville 8.875 09/01/01 (1) 3,218 2,544
Riverside Industrial
Center #3............. Kansas City 8.750 08/01/04 (1) 1,532 1,170
Riverside Industrial
Center #4............. Kansas City 8.750 08/01/04 (1) 4,140 3,161
Southwide Lamar
Industrial Center #1.. Memphis 7.670 05/01/24 (1) 424 674
Sullivan 75
Distribution Center
#1.................... Atlanta 9.960 04/01/04 (1) 1,838 1,663
Tampa West Distribution
Center #20............ Tampa 9.125 11/30/00 (2) 157 --
Thornton Business
Center #1--#4......... South Bay 8.590 04/01/03 (1) 9,366 8,185
Titusville Industrial
Center #1............. Orlando 10.000 09/01/01 (1) 4,808 4,181
Vista Del Sol
Industrial Center #1.. El Paso 9.680 08/01/07 (2) 2,810 --
Vista Del Sol
Industrial Center #3.. El Paso 9.680 08/01/07 (2) 1,189 --
West One Business
Center #1............. Las Vegas 8.250 09/01/00 (1) 4,505 4,252
West One Business 4,463
Center #3............. Las Vegas 9.000 09/01/04 (1) ------- 3,847
8.65% Weighted average $87,937
rate =======
Assessment Bonds
Payable:
City of Las Vegas...... Las Vegas 8.75% 10/01/13 (2) $ 303 --
City of Las Vegas...... Las Vegas 8.75 10/01/13 (2) 299 --
City of Las Vegas...... Las Vegas 8.75 10/01/13 (2) 200 --
City of Hayward........ South Bay 7.00 03/01/98 (2) 2 --
City of Fremont........ South Bay 7.00 03/01/11 (2) 10,404 --
City of Wilsonville.... Portland 6.82 08/19/04 (2) 147 --
City of Kent........... Seattle 7.85 06/20/05 (2) 119 --
City of Kent........... Seattle 7.98 05/20/09 (2) 70 --
City of Portland....... Portland 7.25 11/07/15 (2) 108 --
City of Portland....... Portland 7.25 11/17/07 (2) 5 --
City of Portland....... Portland 7.25 09/15/16 (2) 237 --
-------
7.14% Weighted average $11,894
rate =======
Securitized Debt:
Tranche A.............. (3) 7.74% 02/01/04 (1) $24,973 $20,821
Tranche B.............. (3) 9.94 02/01/04 (1) 8,224 7,215
-------
8.29% Weighted average $33,197
rate =======
</TABLE>
- --------
(1) Amortizing monthly with a balloon payment due at maturity.
(2) Fully amortizing.
(3) Secured by real estate located primarily in Fort Lauderdale/Miami, Orlando
and Tampa.
F-13
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Mortgage notes payable are secured by real estate with an aggregate
undepreciated cost of $164.1 million at December 31, 1997. Assessment bonds
payable are secured by real estate with an aggregate undepreciated cost of
$224.3 million at December 31, 1997. Securitized debt is collateralized by
real estate with an aggregate undepreciated cost of $66.7 million at December
31, 1997.
Line of Credit
SCI has a $350.0 million unsecured revolving line of credit agreement with
NationsBank of Texas, N.A. ("NationsBank") (as agent for a bank group).
Borrowings bear interest at SCI's option, at either (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. The prime rate was 8.5% and the 30-day
LIBOR rate was 5.71875% at December 31, 1997. Additionally, there is a
commitment fee ranging from .125% to .20% per annum of the unused line of
credit balance. The line is scheduled to mature in May 1998 and may be
extended annually for an additional year with the approval of NationsBank and
the other participating lenders; if not extended, at SCI's election, the
facility 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 of not less than 1.75 to 1. SCI is in compliance with
all covenants contained in the line of credit, and as of December 31, 1997, no
borrowings were outstanding on the line of credit.
On October 1, 1997, SCI extended its $25.0 million short-term unsecured
discretionary line of credit with NationsBank through October 1, 1998. The
rate of interest and the maturity date of each advance will be determined by
agreement between SCI and NationsBank at the time of each advance. There were
no borrowings outstanding on the line of credit at December 31, 1997.
A summary of SCI's line of credit borrowings is as follows for the years
ended December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Weighted average daily interest rate..................... 6.75% 7.02%
Borrowings outstanding at December 31.................... $ -- $ 38,600
Weighted average daily borrowings........................ $ 56,938 $ 44,268
Maximum borrowings outstanding at any month end.......... $143,800 $124,200
Total line of credit at December 31...................... $375,000 $350,000
</TABLE>
Long-Term Debt
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
8.72% Senior Unsecured Notes, issued on March 2, 1995 in an
original principal amount of $150,000,000. Interest is
payable March 1 and September 1 of each year. The Notes are
payable in eight consecutive annual installments of
$18,750,000 commencing March 1, 2002 and maturing on March
1, 2009.................................................... $150,000 $150,000
9.34% Senior Unsecured Notes, issued on March 2, 1995 in an
original principal amount of $50,000,000. Interest is
payable March 1 and September 1 of each year. The Notes are
payable in six consecutive annual installments ranging from
$5,000,000 to $12,500,000 commencing on March 1, 2010 and
maturing on March 1, 2015.................................. 50,000 50,000
</TABLE>
F-14
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
7.125% Senior Unsecured Notes due 1998, issued on May 16,
1995 in an original principal amount of $15,000,000, net of
original issue discount. Interest is payable May 15 and
November 15 of each year.................................... $ 14,998 $ 14,993
7.25% Senior Unsecured Notes due 2000, issued on May 16, 1995
in an original principal amount of $17,500,000, net of
original issue discount. Interest is payable May 15 and
November 15 of each year.................................... 17,463 17,448
7.30% Senior Unsecured Notes due 2001, issued on May 16, 1995
in an original principal amount of $17,500,000, net of
original issue discount. Interest is payable May 15 and
November 15 of each year.................................... 17,449 17,435
7.875% Senior Unsecured Notes, issued on May 16, 1995 in an
original principal amount of $75,000,000, net of original
issue discount. Interest is payable May 15 and November 15
of each year. The Notes are payable in eight annual
installments of $9,375,000 beginning May 15, 2002 and
maturing on May 15, 2009.................................... 74,694 74,668
7.25% Senior Unsecured Notes, issued on May 17, 1996 in an
original principal amount of $50,000,000, net of original
issue discount. Interest is payable May 15 and November 15
of each year. The Notes are payable in four annual
installments of $12,500,000 beginning May 15, 1999 and
maturing on May 15, 2002.................................... 49,962 49,951
7.95% Senior Unsecured Notes, issued on May 17, 1996 in an
original principal amount of $100,000,000, net of original
issue discount. Interest is payable May 15 and November 15
of each year. The Notes are payable in four annual
installments of $25,000,000 beginning May 15, 2005 and
maturing on May 15, 2008.................................... 99,851 99,840
8.65% Senior Unsecured Notes, issued on May 17, 1996 in an
original principal amount of $50,000,000, net of original
issue discount. Interest is payable May 15 and November 15
of each year. The Notes are payable in seven annual
installments ranging from $5,000,000 to $12,500,000
beginning May 15, 2010 and maturing on May 15, 2016......... 49,861 49,856
7.81% Medium-Term Notes, issued on February 4, 1997 in an
original principal amount of $100,000,000. Interest is
payable February 1 and August 1 of each year. The Notes are
payable in six annual installments ranging from $10,000,000
to $20,000,000 beginning February 1, 2010 and maturing on
February 1, 2015............................................ 100,000 --
7.625% Senior Unsecured Notes, due July 1, 2017, issued July
11, 1997 in an original principal amount of $100,000,000,
net of original issue discount. Interest is payable January
1 and July 1 of each year................................... 99,774 --
-------- --------
Total long-term debt, net of original issue discount........ $724,052 $524,191
======== ========
</TABLE>
All of the foregoing Notes are redeemable at any time at the option of SCI,
in whole or in part, at a redemption price equal to the sum of the principal
amount of the Notes being redeemed plus accrued interest thereon to the
redemption date plus an adjustment, if any, based on the yield to maturity
relative to market yields available at redemption. The 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.
F-15
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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. At December 31, 1997, SCI was in compliance with all debt covenants
contained in the Indenture.
Approximate principal payments due on long-term debt, mortgage notes
payable, assessment bonds payable and securitized debt during each of the
years in the five-year period ending December 31, 2002 and thereafter are as
follows (in thousands):
<TABLE>
<S> <C>
1998.......................................................... $ 24,062
1999.......................................................... 26,480
2000.......................................................... 38,887
2001.......................................................... 41,175
2002.......................................................... 45,148
2003 and thereafter........................................... 682,276
--------
Total principal due........................................... 858,028
Less: Original issue discount................................. (948)
--------
Total carrying value........................................ $857,080
========
</TABLE>
During 1997, 1996 and 1995, interest expense was $52,704,000, $38,819,000,
and $32,005,000, respectively, which was net of capitalized interest of
$18,365,000, $16,138,000 and $8,599,000, respectively. Total amortization of
deferred loan fees included in interest expense was $1,977,000, $2,339,000 and
$2,092,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
The total interest paid in cash on all outstanding debt was $61,251,000,
$50,704,000 and $33,634,000 during 1997, 1996 and 1995, respectively.
6. MINORITY INTEREST:
Minority interest represents limited partners' interests in five real estate
partnerships controlled by SCI.
SCI owns a 70.0% general partnership interest in Red Mountain Joint Venture,
which owns approximately $3.0 million of property in Albuquerque, New Mexico.
On December 22, 1993, SCI acquired a 68.7% controlling general partnership
interest in SCI Limited Partnership-I, which owns distribution facilities
primarily in the San Francisco Bay area. Limited partners are entitled to
exchange each partnership unit for one Common Share and are entitled to
receive preferential cumulative quarterly distributions per unit equal to the
quarterly distribution in respect of Common Shares. At December 31, 1997,
4,520,532 limited partnership units were outstanding and no units had been
exchanged.
During the first two quarters of 1994, SCI acquired an 81.2% controlling
general partnership interest in
SCI Limited Partnership-II, which owns distribution facilities primarily in
Austin, Charlotte, Dallas, Denver,
El Paso and the San Francisco Bay area. Limited partners are entitled to
exchange each partnership unit for one Common Share and are entitled to
receive preferential cumulative quarterly distributions per unit equal to the
quarterly distribution in respect of Common Shares. During the third quarter
of 1995 certain limited partners in SCI Limited Partnership-II exercised their
conversion rights to exchange partnership units for Common Shares on a one for
one basis. As a result of these conversions, SCI's general partnership
interest in SCI Limited
F-16
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Partnership-II increased to 97.6%, and SCI's outstanding Common Shares
increased by 555,651 shares. As of December 31, 1997, there were 90,213
limited partnership units outstanding in SCI Limited Partnership-II.
In October 1994, SCI acquired a 50.4% controlling general partnership
interest in SCI Limited Partnership-III, which owns distribution facilities
primarily in Tampa, Florida. During 1995, SCI contributed an additional $11.9
million to this partnership for asset acquisitions which increased SCI's
general partnership interest to 71.8%. During 1996, SCI contributed $4.2
million for a property acquisition in San Antonio, Texas which increased SCI's
general partnership interest from 71.8% to 75.6%. Limited partners are
entitled to exchange each partnership unit for one Common Share and are
entitled to receive preferential cumulative quarterly distributions per unit
equal to the quarterly distribution in respect of Common Shares. During the
fourth quarter of 1997 certain limited partners in SCI Limited Partnership-III
exercised their conversion rights to exchange partnership units for Common
Shares on a one for one basis. As a result of these conversions, SCI's general
partnership interest in SCI Limited Partnership-III increased to 80.6%, and
SCI's outstanding Common Shares increased by 105,000 shares. As of December
31, 1997, there were 409,901 limited partnership units outstanding in SCI
Limited Partnership-III.
In October 1994, SCI IV, Inc., a wholly-owned subsidiary of SCI, made a
$27.5 million cash contribution to SCI Limited Partnership-IV, a Delaware
limited partnership ("Partnership-IV"), in exchange for a 96.4% general
partner interest in Partnership-IV, and third party investors that were not
affiliated with SCI contributed an aggregate of $1.0 million in assets to
Partnership-IV in exchange for limited partner interests totaling 3.6% in
Partnership-IV. SCI contributed an additional $2.5 million to the partnership
between January 1, 1996 and December 31, 1997, in conjunction with tax
deferred exchanges of real estate, which increased SCI's interest from 96.4%
to 96.7%. SCI IV, Inc., as general partner, manages the activities of
Partnership-IV and has fiduciary responsibilities to Partnership-IV and its
other partners. At December 31, 1997, there were 68,612 limited partnership
units outstanding in Partnership-IV and no units had been exchanged.
Both Partnership-IV and SCI IV, Inc. are legal entities that are separate
and distinct from SCI, its affiliates and each other, and each has separate
assets, liabilities, business functions and operations. The assets owned by
Partnership-IV consist of income producing, improved real property located in
Florida, Ohio and Oklahoma. The sole assets owned by SCI IV, Inc. are its
general partner advances to and interest in Partnership-IV. SCI and its
affiliates had no borrowings from Partnership-IV at December 31, 1997 and
1996. Partnership-IV had $8.9 million and $1.4 million of borrowings from SCI
IV, Inc. at December 31, 1997 and 1996, respectively. SCI IV, Inc. had $8.9
million and $1.4 million of borrowings from SCI and its affiliates at December
31, 1997 and 1996, respectively. For financial reporting purposes, the assets,
liabilities, results of operations and cash flows of each of Partnership-IV
and SCI IV, Inc. are included in SCI's consolidated financial statements, and
the third party investors' interests in Partnership-IV are reflected as
minority interest. Limited partners are entitled to exchange each partnership
unit for one Common Share and are entitled to receive preferential cumulative
quarterly distributions per unit equal to the quarterly distribution in
respect of Common Shares.
7. SHAREHOLDERS' EQUITY:
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 Group Incorporated ("Security Capital"), a $2.0
million fee for their services in connection with the offering. Security
Capital, SCI's largest shareholder, purchased 3,125,067 Common Shares in the
December offering at $24 per share. At December 31, 1997, Security Capital
owned 42.5% of SCI's Common Shares.
On August 6, 1997, in connection with the consummation of the Merger (see
Note 11), SCI commenced a rights offering to sell 4,970,352 Common Shares at
$21 per share. The rights offering was designed to allow
F-17
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SCI's shareholders, other than Security Capital, the opportunity to maintain
their relative ownership in SCI by purchasing additional Common Shares at a
price which was below the price at which Security Capital received Common
Shares in the Merger. On September 9, 1997, SCI offered an additional 994,070
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 June 24, 1997, SCI's shareholder's voted to increase SCI's authorized
capitalization from 150 million to 180 million shares of beneficial interest.
On March 24, 1997, SCI issued 48,809 Common Shares in conjunction with an
acquisition of property. 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 November 13, 1996, SCI issued 2,000,000 Series C Cumulative Redeemable
Preferred Shares (the "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 receive, when, as and if declared by SCI's
Board of Trustees (the "Board"), out of funds legally available for payment of
distributions, cumulative preferential cash distributions at a rate of 8.54%
of the liquidation preference per annum (equivalent to $4.27 per share). On or
after November 13, 2026, the Series C Preferred Shares may be redeemed for
cash at the option of SCI. The redemption price (other than the portion
thereof consisting of accrued and unpaid distributions) is payable solely out
of the sale proceeds of other capital shares of SCI, which may include shares
of other series of preferred shares.
On August 21, 1996, SCI commenced a rights offering to 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 in the rights offering that were not accepted in whole or in
part due to demand in excess of the Common Shares offered. Security Capital
purchased 3,734,240 Common Shares in connection with the September rights
offering at the same price paid by the public.
In February 1996, SCI issued a total of 8,050,000 Series B Cumulative
Convertible Redeemable Preferred Shares (the "Series B Preferred Shares"). The
Series B Preferred Shares have a liquidation preference of $25.00 per share
for an aggregate liquidation preference at the time of issuance of $201.3
million plus any accrued and unpaid dividends. Holders of the Series B
Preferred Shares are only entitled to limited voting rights under certain
conditions. The Series B Preferred Shares are convertible at any time, unless
previously redeemed, at the option of the holders thereof into Common Shares
at a conversion price of $19.50 per share (equivalent to a conversion rate of
1.282 Common Shares for each Series B Preferred Share), subject to adjustment
in certain circumstances. Holders of the Series B Preferred Shares are
entitled to receive, when, as and if declared by the Board, 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
distribution on the Common Shares, or portion thereof, into which a Series B
Preferred Share is convertible. Distributions on the Series B Preferred Shares
are cumulative from the date of original issue and 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. There were 49,700 Series B Preferred
F-18
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Shares converted into 63,720 Common Shares in the fourth quarter of 1997.
There were 8,000,300 Series B Preferred Shares outstanding as of December 31,
1997.
On September 29, 1995, SCI issued 9,421,505 Common Shares at $15.375 per
share and received subscriptions for 6,838,658 additional Common Shares at the
same price in conjunction with a rights offering (gross proceeds of $250.0
million). The additional Common Shares were issued on October 3, 1995.
Security Capital purchased 6,504,148 Common Shares in this offering (40% of
the shares sold).
On June 21, 1995, SCI issued 5,400,000 Series A Cumulative Redeemable
Preferred Shares of Beneficial Interest (the "Series A Preferred Shares"). The
Series A Preferred Shares have a liquidation preference of $25.00 per share
for an aggregate liquidation preference of $135.0 million plus any accrued and
unpaid dividends. The net proceeds (after underwriting commission and other
offering costs) of the Series A Preferred Shares issued were $130.4 million.
Holders of the Series A Preferred Shares are entitled only to limited voting
rights under certain conditions. Holders of the Series A Preferred Shares will
be entitled to receive, when, as and if declared by the Board, out of funds
legally available for the payment of distributions, cumulative preferential
cash distributions at the rate of 9.4% of the liquidation preference per annum
(equivalent to $2.35 per share). 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 A Preferred
Shares are redeemable at the option of SCI on or after June 21, 2000. The
redemption price (other than the portion thereof consisting of accrued and
unpaid distributions) is payable solely out of the sale proceeds of other
capital shares of SCI, which may include shares of other series of preferred
shares.
Long-Term Incentive Plan and Share Option Plan for Outside Trustees
On September 8, 1997, SCI's common shareholders approved a long-term
incentive plan (the "Incentive Plan"), which provides for awards consisting of
the following: 1) options to purchase Common Shares, 2) dividend equivalent
units ("DEUs") on options, 3) a share purchase program, and 4) share awards.
No more than 9,600,000 Common Shares in the aggregate may be awarded under the
Incentive Plan and no individual may be granted awards with respect to more
than 500,000 Common Shares in any one-year period. On July 16, 1997, SCI filed
a registration statement with the SEC to register the issuance of Common
Shares in connection with the Incentive Plan.
Under the Incentive Plan, certain employees of SCI purchased 1,356,834
Common Shares on September 8, 1997, at a price of $21.21875 per share (the
average of the high and low price per share on September 8, 1997). SCI
financed 95% of the total purchase price through ten-year, recourse loans to
the participants aggregating $27.3 million (including $22.5 million due from
officers of SCI). The loans, which have been recognized as a deduction from
Shareholders' Equity, bear interest at the lower of SCI's annual dividend
yield or 6% per annum. The loans are secured by the Common Shares purchased.
For each Common Share purchased, participants were granted options to purchase
two additional Common Shares at a price of $21.21875. As of December 31, 1997,
the outstanding balance on employee share purchase notes due to SCI totaled
$27.2 million.
Also, on September 8, 1997, SCI awarded options to purchase 354,484 Common
Shares for $21.21875 per share to officers and certain employees of SCI. On
December 10, 1997, additional options were awarded to officers for 20,860
Common Shares at a price of $23.97. These option awards are entitled to DEUs
each December 31, depending on the relationship between SCI's Common Share
dividend yield and the S&P 500 average dividend yield for the year. On
December 31, 1997, 2,636 DEUs were awarded to option holders under this plan.
DEU's will vest as the applicable options vest and entitle the holder to one
Common Share for each DEU. The 3,077,291 options outstanding under the
Incentive Plan on December 31, 1997 have five or nine year vesting schedules.
F-19
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In accordance with the accounting provisions of APB No. 25, no compensation
cost has been recognized in the accompanying financial statements for
outstanding stock options. Had compensation cost for the Incentive Plan been
determined consistent with SFAS No. 123, SCI's net income and earnings per
share for the year ended December 31, 1997 would have been reduced to the
following pro forma amounts:
<TABLE>
<S> <C> <C>
Net earnings attributable to
Common Shares (in thousands): As reported $4,431
======
Pro forma $4,016
======
Basic net earnings per share
attributable to Common Shares: As reported $ 0.04
======
Pro forma $ 0.04
======
Diluted net earnings per share
attributable to Common Shares: As reported $ 0.04
======
Pro forma $ 0.04
======
</TABLE>
Since employee stock options vest over several years and additional grants
are likely to be made in future years, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The weighted average fair value of options granted pursuant to SCI's
Incentive Plan during 1997 was $6.7 million. Under SFAS No. 123, compensation
cost is recognized for the fair value of the employees' purchase rights, which
was estimated using the Black-Scholes model with the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 6.35%
Forecasted dividend yield................................... 7.36%
Volatility.................................................. 19.20%
Weighted average option life................................ 6.75 years
</TABLE>
In April 1994, SCI adopted its Share Option Plan for Outside Trustees (the
"Outside Trustees Plan"). Under the Outside Trustees Plan, there are 100,000
Common Shares approved which can be granted to non-employee Trustees. All
options granted are for a term of five years and are immediately exercisable
in whole or in part. The exercise price of the options granted may not be less
than the fair market value of Common Shares on the date of the grant. At
December 31, 1997 there were 26,000 options outstanding under the Outside
Trustees Plan.
F-20
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of SCI's stock option plans as of December 31, 1997,
1996 and 1995, and changes during the years then ended is presented below. All
grants prior to 1997 relate to the Outside Trustees Plan.
<TABLE>
<CAPTION>
NUMBER OF
NUMBER WEIGHTED AVERAGE OPTIONS
OF OPTIONS EXERCISE PRICE EXERCISABLE
---------- ---------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1994........... 6,000 $15.50 6,000
Granted.............................. 6,000 16.00 6,000
Forfeited............................ (2,000) 15.50 (2,000)
--------- ------ ------
Balance at December 31, 1995........... 10,000 15.80 10,000
Granted.............................. 8,000 17.50 8,000
Exercised............................ -- -- --
--------- ------ ------
Balance at December 31, 1996........... 18,000 16.56 18,000
--------- ------ ------
Granted.............................. 3,097,012 21.24 8,000
Exercised............................ -- -- --
Forfeited............................ (11,721) 21.22 --
--------- ------ ------
Balance at December 31, 1997........... 3,103,291 $21.21 26,000
========= ====== ======
</TABLE>
Following is a summary of stock options outstanding, exercise prices,
expiration dates, and weighted average remaining lives as of December 31,
1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE EXPIRATION REMAINING
OF OPTIONS PRICE(1) DATE LIFE
---------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Outside Trustees Plan
(2).................... 26,000 $15.50-$20.50 1999--2002 3.33 years
Matching options on
share purchase program. 2,704,244 $21.21875 Sept. 8, 2007 9.7 years
Incentive Plan--1997
option awards (4)...... 373,047 $21.21875 Sept. 8, 2007 9.7 years
---------
Total................. 3,103,291
=========
</TABLE>
- --------
(1) Exercise price was equal to market price on the date of grant.
(2) Options are fully exercisable.
(3) Vesting at various rates over periods from five to nine years.
(4) The holders under this plan are awarded dividend equivalent units each
year of the plan. The DEUs awarded will vest beginning on September 8,
1999 at a rate of 25% per year through September 8, 2002.
Additionally, as of December 31, 1997, there were 11,764 warrants
outstanding with an exercise price of $10.00. The warrants were issued on
February 3, 1993 and expire June 21, 2003.
Establishment of 401(k) Plan and Nonqualified Savings Plan
In 1997, the Board established and approved the adoption of a 401(k) Plan
for the benefit of its employees, effective January 1, 1998. The 401(k) Plan
provides for matching employer contributions in Common Shares of 50 cents for
every dollar contributed by an employee, up to 6% of the employees' annual
compensation up to the statutory compensation limit. The vesting of
contributed Common Shares is based on years of service, with 20% vesting each
year of service, over a five-year period. On July 16, 1997, SCI filed a
registration statement with the SEC to register the issuance of 190,000 Common
Shares in connection with the 401(k) Plan.
In 1997, the Trustees also established and approved the adoption of the
Nonqualified Savings Plan (the "NSP") to provide benefits for a select group
of management or highly compensated employees, effective January 1, 1998. The
purpose of the NSP is to allow highly compensated employees the opportunity to
defer the receipt and income taxation of a portion of compensation in excess
of the amount permitted under the 401(k)
F-21
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Plan. Under the NSP, these employees may defer up to 35% of their annual
salary and 100% of their annual target bonus and in coordination with the
401(k) Plan, SCI will match the lesser of (a) 50% of the sum of deferrals
under the 401(k) Plan plus deferrals under the NSP, and (b) 3% of total
compensation up to $160,000 minus the amount of match contributed by SCI under
the 401(k) Plan. The matching account will vest in the same manner as the
401(k) Plan.
Dividend Reinvestment and Share Purchase Plan
In March 1995, SCI adopted a Dividend Reinvestment and Share Purchase Plan
(the "1995 Plan"), which commenced in April 1995. The 1995 Plan allows holders
of Common Shares the opportunity to acquire additional Common Shares by
automatically reinvesting distributions. Common Shares are acquired pursuant
to the 1995 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
1995 Plan also allows participating common 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. Holders of Common Shares who do not participate
in the 1995 Plan continue to receive distributions as declared.
Shareholder Purchase Rights
On December 7, 1993, the Board declared a dividend of one preferred share
purchase right ("Right") for each outstanding Common Share to be distributed
to all holders of record of the Common Shares on December 31, 1993. Each Right
entitles the registered holder to purchase one-hundredth of a Participating
Preferred Share for an exercise price of $40.00 per one-hundredth of a
Participating Preferred Share, subject to adjustment as provided in the Rights
Agreement. The Rights will generally be exercisable only if a person or group
(other than certain affiliates of SCI) acquires 20% or more of the Common
Shares or announces a tender offer for 25% or more of the Common Shares. Under
certain circumstances, upon a shareholder acquisition of 20% or more of the
Common Shares (other than certain affiliates of SCI), each Right will entitle
the holder to purchase, at the Right's then-current exercise price, a number
of Common Shares having a market value of twice the Right's exercise price.
The acquisition of SCI pursuant to certain mergers or other business
transactions will entitle each holder of a Right to purchase, at the 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 Right's exercise price.
The Rights held by certain 20% shareholders will not be exercisable. The
Rights will expire on December 7, 2003, unless the expiration date of the
Rights is extended, and the Rights are subject to redemption at a price of
$0.01 per Right under certain circumstances.
F-22
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8.EARNINGS PER SHARE:
Following is a reconciliation of the denominator used to calculate basic
earnings per share to the denominator used to calculate diluted earnings per
share under SFAS No. 128 for the periods indicated (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net earnings attributable to Common Shares........ $ 4,431 $53,460 $42,015
Minority interest................................. -- -- 3,331
------- ------- -------
Adjusted net earnings attributable to Common
Shares........................................... $ 4,431 $53,460 $45,346
======= ======= =======
Weighted average Common Shares outstanding (Ba-
sic)............................................. 100,729 84,504 68,924
Incremental options and warrants.................. 140 7 13
Weighted average effect of conversion of partner-
ship units into common shares.................... -- -- 5,485
------- ------- -------
Adjusted weighted average Common Shares
Outstanding (Diluted)............................ 100,869 84,511 74,422
======= ======= =======
Per share net earnings attributable to Common
Shares:
Basic........................................... $ 0.04 $ 0.63 $ 0.61
======= ======= =======
Diluted (a)..................................... $ 0.04 $ 0.63 $ 0.61
======= ======= =======
</TABLE>
(a) For the years ended December 31, 1997 and 1996 there were 5,190 and
5,194 weighted average partnership units outstanding and 10,319 and
8,831 weighted average Series B Preferred Shares outstanding on an as-
converted basis, respectively, that were not assumed converted into
Common Shares since they were antidilutive to earnings per share. These
securities may become dilutive to earnings per share in subsequent
years.
9. DISTRIBUTIONS:
The annual distribution per Common Share was $1.07 in 1997, $1.01 in 1996
and $0.935 in 1995. Distributions attributable to realized gains on the
disposition of real estate may be considered for payment to shareholders on a
special, as-incurred basis. At December 31, 1997 and 1996, SCI had no
accumulated undistributed net realized gain on disposition of real estate.
For Federal income tax purposes, the following summarizes the taxability of
distributions paid on Common Shares in 1996 and 1995 and the estimated
taxability for 1997:
<TABLE>
<CAPTION>
1997 1996 1995
----- ------ ------
<S> <C> <C> <C>
Per Common Share:
Ordinary income...................................... $1.07 $0.879 $0.692
Capital gains........................................ -- -- --
Return of capital.................................... -- 0.131 0.243
----- ------ ------
Total.............................................. $1.07 $1.010 $0.935
===== ====== ======
</TABLE>
On December 11, 1997, SCI declared a distribution of $0.285 per Common Share
payable on February 24, 1998 to shareholders of record as of February 10,
1998. At the same time, SCI announced that it set an annualized distribution
level of $1.14 per Common Share for 1998.
F-23
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the terms of 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.
For Federal income tax purposes, the following summary reflects the
taxability of dividends paid on the Series A Preferred Shares, Series B
Preferred Shares, and Series C Preferred Shares for 1996, periods prior to
1996 and the estimated taxability for 1997:
<TABLE>
<CAPTION>
DATE OF ISSUANCE TO
1997 1996 DECEMBER 31, 1995
----- ----- -------------------
<S> <C> <C> <C>
Per Series A Preferred Share:
Ordinary Income......................... $2.35 $2.35 $1.24
Capital Gains........................... -- -- --
----- ----- -----
Total................................. $2.35 $2.35 $1.24
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
DATE OF ISSUANCE TO
1997 DECEMBER 31, 1996
----- -------------------
<S> <C> <C>
Per Series B Preferred Share:
Ordinary Income................................ $1.75 $1.50
Capital Gains.................................. -- --
----- -----
Total........................................ $1.75 $1.50
===== =====
Per Series C Preferred Share:
Ordinary Income................................ $4.27 $0.57
Capital Gains.................................. -- --
----- -----
Total........................................ $4.27 $0.57
===== =====
</TABLE>
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 have not been examined by the Internal Revenue Service and,
therefore, the taxability of the distributions is subject to change.
F-24
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Selected quarterly financial data (in thousands, except for per share
amounts) for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED, YEAR
---------------------------------- ENDED
3-31 6-30 9-30 12-31 12-31
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
1997:
Rental income..................... $67,386 $69,157 $ 72,376 $75,614 $284,533
======= ======= ======== ======= ========
Earnings from operations.......... $26,456 $29,051 $(48,363) $28,787 $ 35,931
Minority interest share in net
earnings......................... 895 940 928 797 3,560
Gain on disposition of real es-
tate............................. -- 3,773 2,756 849 7,378
------- ------- -------- ------- --------
Net earnings...................... 25,561 31,884 (46,535) 28,839 39,749
Less preferred share dividends.... 8,829 8,830 8,829 8,830 35,318
------- ------- -------- ------- --------
Net earnings attributable to Com-
mon Shares....................... $16,732 $23,054 $(55,364) $20,009 $ 4,431
======= ======= ======== ======= ========
Basic and Diluted net earnings per
Common Share..................... $ 0.17 $ 0.24 $ (0.55) $ 0.18 $ 0.04
======= ======= ======== ======= ========
1996:
Rental income..................... $50,062 $54,361 $ 59,391 $63,186 $227,000
======= ======= ======== ======= ========
Earnings from operations.......... $17,262 $19,456 $ 20,427 $25,565 $ 82,710
Minority interest share in net
earnings......................... 756 884 859 827 3,326
Loss on disposition of real es-
tate............................. (29) -- -- -- (29)
------- ------- -------- ------- --------
Net earnings...................... 16,477 18,572 19,568 24,738 79,355
Less preferred share dividends.... 4,673 6,695 6,694 7,833 25,895
------- ------- -------- ------- --------
Net earnings attributable to Com-
mon Shares....................... $11,804 $11,877 $ 12,874 $16,905 $ 53,460
======= ======= ======== ======= ========
Basic and Diluted net earnings per
Common Share..................... $ 0.14 $ 0.15 $ 0.16 $ 0.18 $ 0.63
======= ======= ======== ======= ========
</TABLE>
11.CONSUMMATION OF MERGER:
On September 8, 1997, SCI's shareholders voted to approve an agreement with
Security Capital to exchange Security Capital's REIT management and property
management companies for 3,692,023 Common Shares (the "Merger"). As a result,
SCI became an internally managed REIT on September 9, 1997 with Security
Capital remaining as SCI's largest shareholder. The $81.9 million value of the
management companies was approved by the independent Trustees and a fairness
opinion was obtained from a third party investment bank. Pursuant to the terms
of the Merger Agreement, the number of shares issued to Security Capital was
based on the average market price of the Common Shares ($22.175) over the
five-day period prior to the August 6, 1997 record date for determining the
SCI shareholders entitled to vote on the Merger. The market value of the
Common Shares issued to Security Capital on September 9, 1997 was $79.8
million of which $4.4 million was allocated to the net tangible assets
acquired and the $75.4 million difference was accounted for as costs incurred
in acquiring the management companies from a related party. For accounting
purposes the management companies were not considered "businesses" for
purposes of applying APB Opinion No. 16, "Business Combinations", and
therefore the market value of the Common Shares issued in excess of the fair
value of the net tangible assets acquired was charged to operating income
rather than capitalized as goodwill.
F-25
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As a result of the Merger, SCI no longer pays REIT management and property
management fees to Security Capital through Security Capital's former
subsidiaries, Security Capital Industrial Incorporated (the "REIT Manager")
and SCI Client Services Incorporated (the "Property Manager"), respectively.
All employees of the REIT Manager and Property Manager became employees of SCI
and SCI directly incurs the personnel and other costs related to these
functions. The costs relating to property management are recorded as rental
expenses whereas the costs associated with managing the REIT are recorded as
general and administrative expenses. Direct and incremental costs related to
successful development, acquisition, and leasing activities are capitalized in
accordance with generally accepted accounting principles.
Upon consummation of the Merger, SCI and Security Capital entered into an
administrative services agreement (the "Administrative Services Agreement"),
pursuant to which Security Capital will provide SCI with certain
administrative and other services with respect to certain aspects of SCI's
business, as selected from time to time by SCI at its option. These services
are expected to 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. Fees
payable to Security Capital will be equal to Security Capital's cost of
providing such services, plus an overhead factor of 20%, subject to a maximum
amount of approximately $7.1 million during the initial term of the agreement,
which expires on December 31, 1998. Cost savings under the Administrative
Services Agreement will accrue to SCI. The agreement will be automatically
renewed for consecutive one-year terms subject to approval by a majority of
the independent Trustees. Fees paid to Security Capital for services rendered
from the period September 9, 1997 to December 31, 1997 totaled $1.1 million.
In addition, after the closing of the Merger, Security Capital issued $101.0
million of warrants pro rata to holders of SCI's Common Shares (other than
Security Capital), Series B Preferred Shares and limited partnership units
("Unitholders"), to acquire 3,608,202 shares of Class B common stock of
Security Capital. SCI common shareholders and Unitholders received 0.046549
warrants for each Common Share or unit held and Series B preferred
shareholders received 0.059676 warrants for each preferred share held. Each
warrant can be exercised for one share of Security Capital Class B common
stock at an exercise price of $28 per share and has a term of one year from
the date of issuance. Security Capital issued these warrants as an incentive
to SCI shareholders to vote in favor of the Merger and to raise additional
equity capital at a relatively low cost in addition to other benefits.
12.RELATED PARTY TRANSACTIONS:
SCI leases space to related parties on market terms that management believes
are no less favorable to SCI than those that could be obtained with
unaffiliated third parties. These transactions are summarized as follows:
<TABLE>
<CAPTION>
SECURITY
CAPITAL & REIT PROPERTY
AFFILIATES MANAGER (A) MANAGER (A) TOTAL
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Rental revenue during the year
ended December 31, 1995......... $415,264 $210,856 $194,335 $ 820,455
Rental revenue during the year
ended December 31, 1996......... $593,657 $210,856 $571,970 $1,376,483
Rental revenue during the year
ended December 31, 1997......... $833,150 $145,244 $550,092 $1,528,486
Square feet leased as of December
31, 1997........................ 122,856 25,007 97,077 244,940
Annualized revenue for leases in
effect at December 31, 1997..... $870,324 n/a n/a $ 870,324
</TABLE>
F-26
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(a) For the REIT Manager and the Property Manager, amounts included for
the year ended December 31, 1997 are for the period January 1, 1997
through September 8, 1997 (Note 11).
13. FINANCIAL INSTRUMENTS:
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is presented in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments". The estimated fair
value amounts have been determined by SCI using available market information
and valuation methodologies.
As of December 31, 1997 and 1996, the carrying amounts of certain financial
instruments employed by SCI, including cash and cash equivalents, accounts and
notes receivable, accounts payable and accrued expenses were representative of
their fair values because of the short-term maturity of these instruments. As
of December 31, 1997 and 1996, the fair values of the long-term debt and
mortgages have been estimated based on quoted market prices for the same or
similar issues or by discounting the future cash flows using rates currently
available for debt with similar terms and maturities. The increase in the fair
value of long-term debt and mortgages over the carrying value in the table
below is a result of a net reduction in the interest rates available to SCI at
December 31, 1997 and 1996, from the interest rates in effect at the dates of
issuance. The long-term debt and many of the mortgages contain pre-payment
penalties or yield maintenance provisions which would make the cost of
refinancing exceed the benefit of refinancing at the lower rates.
As of December 31, 1997 and 1996, the fair value of all derivative financial
instruments are amounts at which they could be settled, based on quoted market
prices or estimates obtained from brokers. The following table reflects the
carrying amount and estimated fair value of SCI's financial instruments at
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------------------- -------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Balance sheet financial
instruments
Long-term debt............... $724,052 $755,799 $524,191 $549,613
Mortgages.................... $133,028 $137,628 $139,952 $142,643
Derivative financial instru-
ments
Interest rate contracts...... $ -- $ (8,621) $ -- $ 1,218
Foreign currency contracts... $ (6,028) $ (6,028) $ -- $ --
</TABLE>
Derivative Financial Instruments
SCI has only limited involvement with derivative financial instruments and
does not use them for trading purposes. SCI uses derivatives to manage well-
defined risk associated with interest and foreign currency rate fluctuations
on existing obligations or anticipated transactions.
The primary risks associated with derivative instruments are market risk
(price risk) and credit risk. Price risk is defined as the potential for loss
in the value of the derivative due to adverse changes in market prices
(interest rates or foreign currency rates). SCI utilizes derivative
instruments in anticipation of future transactions to manage well-defined
risk. Through hedging, SCI can effectively manage the risk of increases in
interest rates and fluctuations in foreign currency exchange rates.
F-27
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Credit risk is the risk that one of the parties to a derivative contract
fails to perform or meet their financial obligation under the contract. SCI
does not obtain collateral to support financial instruments subject to credit
risk but monitors the credit standing of counterparties. As of December 31,
1997, the counterparties to all outstanding contracts were financial
institutions with AA+ or A+ credit ratings. SCI does not anticipate non-
performance by any of the counterparties to its derivative contracts. Should a
counterparty fail to perform, however, SCI would incur a financial loss to the
extent of the positive fair market value of the derivative instruments.
The following table summarizes the activity in interest rate and foreign
currency contracts for the years ended December 31, 1997 and 1996 (in
millions):
<TABLE>
<CAPTION>
INTEREST
INTEREST RATE RATE
INTEREST RATE CONTRACTS ----------------- ----------
FUTURES CONTRACTS SWAPS
----------------- ----------
<S> <C> <C> <C>
Notional amount at December 31, 1995.......... $ -- $ --
New contracts................................. 156.0 173.0
Matured or expired contracts (1).............. (50.0) --
Terminated contracts (1)...................... -- (140.0)
----------- ----------
Notional amount at December 31, 1996.......... $ 106.0 $ 33.0
----------- ----------
New contracts................................. 75.0 75.0
Matured or expired contracts (2).............. (106.0) (33.0)
Terminated contracts.......................... -- --
----------- ----------
Notional amount at December 31, 1997 (3)...... $ 75.0 $ 75.0
=========== ==========
<CAPTION>
SWEDISH GERMAN
FOREIGN CURRENCY CONTRACTS ----------------- ----------
KRONA MARKS
----------------- ----------
<S> <C> <C> <C>
Contracts outstanding at December 31, 1996.... -- --
New contracts................................. SEK 2,900.0 DEM (310.0)
Terminated contracts.......................... -- --
----------- ----------
Contracts outstanding at December 31, 1997.... SEK 2,900.0 DEM (310.0)
=========== ==========
Exchange rates................................ 7.7583 1.7715
=========== ==========
$ Equivalent of contracts..................... $ (373.8) $ 175.0
=========== ==========
$ Equivalent at December 31, 1997 (4)......... $ (365.9) $ 173.1
=========== ========== ===
</TABLE>
- --------
(1) Deferred losses totalling $1.9 million on matured, expired or terminated
contracts were recorded on the balance sheet as of December 31, 1996.
These losses relate to the unwind of hedges placed for the May 1996 debt
offering (Note 5) and are being amortized into interest expense over a
weighted average amortization period of 10.8 years.
(2) Deferred gains totaling $1.9 million on matured, expired or terminated
contracts were recorded on the balance sheet as of December 31, 1997.
These gains relate to the unwind of hedges placed for the February and
July 1997 debt offerings (Note 5) and are being amortized into income
over 18 years and 20 years, respectively.
(3) 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.
F-28
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) On December 22, 1997, SCI entered into a foreign exchange forward contract
to fix the purchase price of the Frigoscandia AB acquisition, denominated
in Swedish krona, and the cost of financing a portion of the transaction
denominated in German marks (Note 15). Statement of Financial Accounting
Standards No. 52 requires these foreign currency contracts to be marked to
market at the financial statement date and the gain or loss, if any,
reflected in the consolidated results of operations. A net foreign
exchange loss of $6.0 million was recognized for the year ended December
31, 1997 relating to foreign exchange contracts outstanding at December
31, 1997.
14. COMMITMENTS AND CONTINGENCIES:
Environmental Matters
All of the properties acquired by SCI have been subjected to Phase I
environmental reviews. While some of these assessments have led to further
investigation and sampling, none of the environmental assessments has
revealed, nor is SCI aware of any environmental liability (including asbestos
related liability) that SCI believes would have a material adverse effect on
SCI's business, financial condition or results of operations.
15. SUBSEQUENT EVENTS:
On January 16, 1998, Frigoscandia SA, a new preferred stock subsidiary of
SCI based in Luxembourg acquired Frigoscandia AB, Europe's largest
refrigerated warehousing company for $395.0 million. The acquisition of
Frigoscandia AB was financed primarily with a $200.0 million bridge loan due
March 31, 1998 from NationsBank 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%.
On January 15, 1998, SCI settled its foreign currency forward contract to
purchase 2.9 billion Swedish krona at 7.7583 per U.S. dollar (Note 13). The
krona traded at 8.015 on January 15, 1998, resulting in a total loss of $12.0
million. Of this amount, $7.9 million was reflected in the consolidated
results of operations for the year ended December 31, 1997.
On March 5, 1998, SCI announced it increased its annual dividend per Common
Share to $1.24 per share from $1.14 per share, resulting in distributions of
$0.3183 per Common Share to be paid in the last three quarters of 1998.
On March 12, 1998, Merrill Lynch & Co. agreed to buy 3,750,000 SCI Common
Shares at $24.045 per share pursuant to an underwriting agreement. In
connection with the offering, SCI granted Merrill Lynch & Co. a 30-day option
to acquire an additional 562,500 Common Shares at $24.045 per share. The
offering is expected to close on March 18, 1998.
F-29
