<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from to
Commission File Number 1-13355
SECURITY CAPITAL GROUP INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
Maryland 36-3692968
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
125 Lincoln Avenue
Santa Fe, New Mexico 87501
(Address of Principal Executive Offices and Zip Code)
(505) 982-9292
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
<S> <C>
Class A Common Stock, par value $.01 per
share New York Stock Exchange
Class B Common Stock, par value $.01 per
share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Based on the closing price of the registrant's Class A and Class B Common
Stock on March 5, 1999, the aggregate market value of the voting common equity
held by non-affiliates of the registrant was $1,518,409,298.
At March 5, 1999, there were 1,460,156 shares of the registrant's Class A
Common Stock outstanding and 49,061,540 shares of the registrant's Class B
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 1999 annual
meeting of its shareholders are incorporated by reference in Part III of this
report.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Description Page
---- ----------- ----
PART I
<C> <S> <C>
1. Business........................................................... 1
2. Properties......................................................... 22
3. Legal Proceedings.................................................. 30
4. Submission of Matters to a Vote of Security Holders................ 30
PART II
Market for the Registrant's Common Equity and Related Stockholder
5. Matters............................................................ 31
6. Selected Financial Data............................................ 32
Management's Discussion and Analysis of Financial Condition and
7. Results of Operations.............................................. 33
7A. Quantitative and Qualitative Disclosure About Market Risk.......... 56
8. Financial Statements and Supplementary Data........................ 57
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure Matters....................................... 57
PART III
10. Directors and Executive Officers of the Registrant................. 57
11. Executive Compensation............................................. 57
12. Security Ownership of Certain Beneficial Owners and Management..... 57
13. Certain Relationships and Related Transactions..................... 58
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 58
</TABLE>
<PAGE>
PART I
Item 1. Business
Overview
Security Capital Group Incorporated ("Security Capital") is a global real
estate research, investment and operating management company. Security Capital
operates its businesses through two divisions. The Capital Division generates
EBDADT* (earnings before depreciation, amortization and deferred taxes)
principally from its ownership of private and public strategic real estate
operating company investments. The Financial Services Division generates
EBDADT through service fees for real estate research, capital management,
capital markets and other corporate and financial services. The Capital
Division accounted for 89.9% and the Financial Services Division accounted for
10.1% of Security Capital's $234.4 million of reported EBDADT for 1998. At
December 31, 1998, Security Capital's fully converted shareholders' equity,
based on fair value, assuming conversion of all convertible securities and
common stock equivalents, was $3.38 billion.
The Capital Division provides business strategy and operating and capital
deployment oversight to the companies in which Security Capital has direct and
indirect strategic ownership positions. Since its inception, the Capital
Division has directed significant expenditures, both in the United States and
internationally, in research and development to create new, fully integrated,
value-added real estate operating companies with proprietary customer-delivery
systems. The Capital Division works closely with the management of affiliated
private start-up and public investees to ensure their long-term sustainable
cash flow growth. At December 31, 1998, the Capital Division oversaw strategic
investments in 17 private and public real estate operating companies focused
in apartment communities, assisted living residential communities, city center
retail, corporate extended stay lodging, corporate office, international
distribution, luxury and upscale hotels, manufactured housing communities,
neighborhood infill shopping centers, parking and self-storage. The Capital
Division also oversees several new niche businesses that are currently at
various stages of research and development. These operating companies had a
combined total market capitalization of $24.0 billion at December 31, 1998.
The Financial Services Division's Capital Markets Group provides capital
markets services to various affiliates, including operating companies and
investment entities. The Corporate Services Group provides administrative,
processing and technology services to various affiliated operating companies
and investment entities. The Global Capital Management Group manages capital
invested in real estate securities with both short to intermediate-term and
long-term investment objectives. At December 31, 1998, the Global Capital
Management Group provided real estate securities management services for
entities with total assets under management of $4.99 billion. The Real Estate
Research Group conducts proprietary real estate research and provides analyses
of short-term trends and long-term market conditions to Security Capital's
affiliates.
As of December 31, 1998, Security Capital employed 578 people at the
corporate level, and its affiliated operating companies employed 14,958
people. The principal offices of Security Capital and its directly owned
affiliates are in Amsterdam, Atlanta, Brussels, Chicago, Denver, El Paso,
Houston, London, Luxembourg, New York, Santa Fe and Tokyo.
The global real estate industry is in the early stages of a dramatic
transition from ownership in "passive hands" to becoming a securitized
industry with a more rational approach to capital allocation and operating
management. As public real estate investment enterprises become more
prevalent, a greater percentage of the
- --------
*Management considers EBDADT to be the appropriate measure of the performance
of real estate enterprises, as it most clearly reflects the impact of both
operating performance and capital structure. EBDADT represents earnings
before depreciation, amortization and deferred taxes. EBDADT should not be
considered as an alternative to net earnings or any other generally
accepted accounting principles ("GAAP") measurement of performance as an
indicator of Security Capital's operating performance or as an alternative
to cash flows from operating, investing or financing activities as a
measure of Security Capital's liquidity.
1
<PAGE>
industry's new capital is moving to publicly traded, fully integrated, value-
added operating companies. Securitized holdings offer significant benefits to
institutional and retail investors, including enhanced liquidity, real-time
pricing and the opportunity for optimal growth and sustainable competitive
rates of return.
The following chart shows the components of the Capital Division and the
Financial Services Division.
[ART WORK]
<TABLE>
<S> <C>
* Archstone Communities Trust Capital Markets Group
* BelmontCorp Corporate Services Group
* Homestead Village Incorporated Global Capital Management Group
* ProLogis Trust Investment Funds/Separate Accounts
* Strategic Hotel Capital Managed Entities
Incorporated
** Access Self-Storage S.A. Real Estate Research Group
** Akeler S.A.
** Bernheim-Comofi S.A. and
Interparking S.A.
** City & West End Properties S.A.
** London and Henley S.A.
*** CarrAmerica Realty Corporation
*** City Center Retail Trust
*** CWS Communities Trust
*** InterParking Incorporated
*** Regency Realty Corporation
*** Storage USA, Inc.
*** Urban Growth Property Trust
</TABLE>
- --------
* Directly owned by Security Capital
** Indirectly owned through Security Capital European Realty
***Indirectly owned through Security Capital U.S. Realty
2
<PAGE>
The Capital Division
The Capital Division provides business strategy and operating and capital
deployment oversight to the companies in which Security Capital has direct or
indirect strategic ownership positions. Security Capital plans to pursue
investments in private companies that have highly focused business strategies
that management believes have prospects for sustained growth and may become
leaders in their respective sectors. Security Capital expects to benefit as
these companies experience growth in earnings and increases in share prices.
No assurance can be given that Security Capital will achieve these results on
future strategic investments.
<TABLE>
<CAPTION>
Direct/Indirect Direct/Indirect
Common Share Full Equity Market
Investees Ownership Ownership(1) Capitalization(1)
--------- --------------- --------------- -----------------
(in millions)
<S> <C> <C> <C>
Archstone Communities
Trust.................... 38.1% 36.2% $3,050
BelmontCorp............... 100.0 100.0 40
Homestead Village
Incorporated(2).......... 69.8 43.6 275
ProLogis Trust(3)......... 40.4 35.4 2,926
Strategic Hotel Capital
Incorporated............. 30.4 23.7 1,710
Security Capital European
Realty(4)................ 34.6 34.6 1,500
Access Self-Storage
S.A.(5)(6)............. 97.2 98.5 231
Akeler S.A.(5).......... 94.2 89.0 250
Bernheim-Comofi S.A./
Interparking
S.A.(5)(7)............. 100.0 100.0 355
City & West End
Properties S.A.(5)..... 99.3 97.9 268
London and Henley
S.A.(5)................ 91.5 97.2 265
Security Capital U.S.
Realty(4)................ 35.0 30.8 1,949
CarrAmerica Realty
Corporation(5)......... 42.9 34.7 1,976
City Center Retail
Trust(5)............... 99.9 99.9 350
CWS Communities
Trust(5)............... 96.1 83.7 388
InterParking
Incorporated(5)........ 6.9 38.4 16
Regency Realty
Corporation(5)(8)...... 60.9 55.3 1,379
Storage USA, Inc.(5).... 42.4 37.4 1,035
Urban Growth Property
Trust(5)............... 98.7 99.2 300
</TABLE>
- --------
(1) Full ownership and equity market capitalization are as of December 31,
1998, and assume contractual equity commitments by investors have been
funded, convertible instruments have been converted into common shares,
and options and warrants for common shares have been exercised (excluding
conversions or exercises with a strike price more than the December 31,
1998, market value). The resulting number of common shares is multiplied
by the closing price of the common shares on such date for those companies
listed on an exchange or, in the case of private entities, the last
private equity offering price. See "Operating Companies' Market Price
Information and Financial Performance."
(2) Ownership of Homestead Village Incorporated ("Homestead") assumes that all
convertible mortgage notes have been funded and converted into shares of
Homestead common stock. Ownership of Homestead does not include any
indirect ownership Security Capital may obtain in Homestead upon
conversion of convertible mortgage notes.
(3) On completion of the merger between ProLogis Trust ("ProLogis") and
Meridian Industrial Trust (discussed below), Security Capital's common
share ownership in ProLogis will be 30.9% and ProLogis' equity market
capitalization is expected to be approximately $4.0 billion.
(4) The European management and Boards of Directors of Security Capital
European Realty ("SC-European Realty") and Security Capital U.S. Realty
("SC-U.S.Realty") receive operating and investment advice from Security
Capital European Realty Management S.A. and Security Capital U.S. Realty
Management S.A., respectively, who subcontract certain research and
advisory activities from their affiliates, the Global Capital Management
Group and the Capital Division.
3
<PAGE>
(5) This company is an investee of SC-European Realty or SC-U.S.Realty through
a subsidiary and is not directly owned by Security Capital. The ownership
percentage reflected is that of SC-European Realty or SC-U.S.Realty.
(6) SC-European Realty's storage interests are operated under two groups,
Access Self-Storage in Europe and Millers Storage in Australia.
(7) SC-European Realty owns 100% of Bernheim-Comofi S.A., which in turn owns
73.6% of Interparking S.A.
(8) Represents Regency Realty Corporation ("Regency") and Pacific Retail Trust
("Pacific Retail") as if the merger between them had taken place as of
December 31, 1998 (see discussion below) and converts Pacific Retail
shares to Regency's valuation.
For further information with respect to (i) Security Capital's direct
ownership interests in Archstone, Homestead, ProLogis and SC-U.S.Realty, (ii)
the historical high and low sale prices of the common shares for such
companies, as well as the cash dividends declared by such companies, and (iii)
Security Capital's unrealized appreciation or depreciation in its investment
in the securities of such companies, see "Operating Companies' Market Price
Information and Financial Performance."
Capital Division strategic investments include the following:
. Archstone Communities Trust ("Archstone") (NYSE: ASN). Archstone is a
leading real estate operating company. Archstone's focus is on the
development, acquisition, redevelopment, operation and long-term ownership
of apartment communities in growing markets with high barriers to entry
across the United States. Archstone is focused on generating long-term,
sustainable growth in per share cash flow. Archstone expects to achieve
long-term cash flow growth by maximizing the operating performance of its
core assets through value-added asset management and by executing a
research-based investment strategy that allows Archstone to redeploy capital
from existing assets with limited growth prospects into targeted
developments with optimal prospects for growth. In July 1998 Archstone and
Security Capital Atlantic Incorporated ("Atlantic") consummated their
merger. Pursuant to the merger transaction, Atlantic was merged into
Archstone, which continues its existence under the name "Archstone
Communities Trust". Security Capital is Archstone's largest shareholder. As
of December 31, 1998, Archstone had 305 apartment communities representing
88,631 units, including 12,120 units under construction and an estimated
7,170 units in planning, owned or under control. Archstone has $221.3
million in principal amount of convertible mortgage notes which will be
convertible into a total of 19,246,402 shares of Homestead common stock,
which would represent approximately 31.4% of the fully converted common
shares of Homestead as of December 31, 1998.
. BelmontCorp ("Belmont"). Belmont was formed in February 1997 and is focused
on becoming the preeminent developer, owner and operator of moderately
priced senior assisted living facilities in the United States. Belmont
intends to create shareholder value through its purpose built facility
design, moderate priced positioning and proprietary operating system.
Belmont opened its first property in November 1998, and has three properties
under development and eight properties in planning as of December 31, 1998.
Belmont is creating its communities in large metropolitan markets with
excellent senior demographics and high barriers to entry. Each community
site is in an infill location with easy access to medical facilities in a
prime suburban area of a large metropolitan market.
. Homestead Village Incorporated (NYSE: HSD). Homestead is committed to
creating significant shareholder value by becoming a leading operator of
moderate priced, extended stay lodging properties in the United States.
Homestead's strategic focus is on the corporate business traveler. Homestead
was created in 1992 through extensive research and development and became a
public company in October 1996. Homestead seeks to achieve long-term growth
in cash flow by focusing on infill locations proximate to major business
centers and convenient to services desired by customers. Homestead seeks to
build a national brand recognized and valued by major corporate customers by
concentrating on delivering high-quality service and product in desirable
locations. As of December 31, 1998, Homestead had 120 Homestead Village
properties in operation with 16,180 total rooms and had 16 properties under
construction with 2,040 rooms.
. ProLogis Trust (NYSE: PLD). ProLogis is the largest U.S.-based global
provider of integrated distribution services, with nearly 1,250 distribution
facilities owned and operating throughout North America and Europe.
4
<PAGE>
ProLogis has built the industry's first and only global network of
distribution facilities with the primary objective of building shareholder
value by becoming the leading provider of distribution services. ProLogis
expects to achieve this objective through the ProLogis Operating System(TM),
and its commitment to be "The Global Distribution Solution" by providing
exceptional corporate distribution services and facilities to meet customer
expansion and reconfiguration needs globally. As of December 31, 1998,
ProLogis, including its unconsolidated subsidiaries, had 126.1 million square
feet of operating industrial distribution facilities.
In November 1998, ProLogis agreed to merge with Meridian Industrial Trust
("Meridian") (NYSE:MDN), strengthening ProLogis' position in Los Angeles,
Chicago and Dallas/Fort Worth--three of the largest logistics markets in the
United States. The Meridian merger is subject to shareholder approval and is
expected to be completed by the end of March 1999. Upon completion of the
merger, ProLogis is expected to have an equity market capitalization of
approximately $4.0 billion, based on the closing price of ProLogis shares on
March 5, 1999. The combined company will own nearly 1,500 distribution
facilities, based on the real estate assets held by ProLogis and Meridian as
of December 31, 1998. The combined real estate assets, including assets held
by unconsolidated subsidiaries and joint ventures, will consist of
approximately 157.5 million square feet of operating distribution facilities.
Also, the combined company will have 10.8 million square feet of distribution
facilities under development at a total expected investment of $473.1 million
in 94 North American and European markets. Additionally, the combined company
will own or control approximately 5,100 acres of land for the future
development of approximately 87.9 million square feet of distribution
facilities. Following the merger, Security Capital will own approximately
30.9% of ProLogis' common shares and will continue to be ProLogis' largest
shareholder.
. Strategic Hotel Capital Incorporated ("Strategic Hotel"). Strategic Hotel
was formed in March 1997 and has focused on becoming the preeminent owner of
luxury and upscale full-service hotel properties that are subject to long-
term management contracts with leading global hotel management companies.
Strategic Hotel uses research driven capital deployment to identify
investment opportunities in markets with high barriers to entry, develop
strategic relationships with preferred operators of superior brands and
enhance operating results through active, disciplined asset management. As
of December 31, 1998, Strategic Hotel had made strategic investments of
$2.04 billion in 25 hotels.
. Security Capital European Realty. SC-European Realty is a research-driven,
European-based real estate company which has the objective of becoming a
preeminent publicly traded real estate operating company that owns strategic
control positions in highly focused, fully integrated real estate
operating/service companies predominately in Europe. SC-European Realty is
deploying its capital into start-up or existing public or private real
estate operating companies seeking long-term, sustainable per share cash
flow growth. SC-European Realty invests in companies which have the
objective of becoming leaders in their respective product and geographic
niches. SC-European Realty's strategic ownership positions as of December
31, 1998, include proactive ownership positions in and commitments to five
European real estate companies with a combined market capitalization of
approximately $1.65 billion. SC-European Realty follows the strategy of SC-
U.S.Realty (described below) as it relates to investment strategy,
management, governance, operating strategies, capital policies and stock
listings. The primary contrast to SC-U.S.Realty is that SC-European Realty
invests in companies which operate outside of the United States. Similar to
SC-U.S.Realty, SC-European Realty is organized under Luxembourg law. The
European management and Board of Directors of SC-European Realty receive
operating and investment advice from Security Capital European Realty
Management S.A., which subcontracts certain research and advisory activities
from its affiliates including the Global Capital Management Group and the
Capital Division.
SC-European Realty's Strategic Ownership Positions:
. Access Self-Storage S.A. ("Access"). Access is a leading London-based
private operator and developer of self-storage facilities. In the second
quarter of 1998, SC-European Realty acquired a 91.6% interest in Acorn
Storage S.A. ("Acorn"). Since then, Acorn has acquired Abacus Self-
Storage and is in the process of acquiring two other self-storage
companies operating in France and Germany owned by Bernheim-Comofi S.A.
(Arbistock and Access). The four companies will operate under the name
Access. In Europe,
5
<PAGE>
Access owns, operates or has under development 32 facilities in the UK, 17
in France, and three in Germany. In addition, on December 31, 1998, SC-
European Realty acquired the leading self-storage company in Australia
where it owns or operates 20 facilities mainly in the Sydney metropolitan
area.
. Akeler S.A. ("Akeler") and Bernheim-Comofi S.A. ("Bernheim-Comofi"). SC-
European Realty's suburban office interests are operated by two private
companies, Akeler and Bernheim-Comofi, which focus on the UK and
continental Europe, respectively. Both companies are focused on customer
driven development strategies to create a pan-European presence. Akeler
owns, operates and develops suburban office and office parks primarily in
the UK. As of December 31, 1998, Akeler owned and operated or had under
contract to acquire or develop projects totaling over 1.1 million
leasable square feet. Bernheim-Comofi owns, operates and develops
suburban office and office parks primarily in Brussels. As of December
31, 1998, Bernheim-Comofi owned and operated or had under contract to
acquire or develop projects totaling over 1.5 million leasable square
feet.
. City & West End Properties S.A. ("City & West End"). City & West End is a
private owner, operator and redeveloper of office space in the West End
of London. At December 31, 1998, City & West End owned five operating
properties (approximately 438,000 square feet of space) with another
three office properties under development.
. Interparking S.A. ("Interparking S.A."). Interparking S.A. is a leading
private owner/operator of off-street public parking facilities in
continental Europe. As of December 31, 1998, Interparking S.A. operated
223 facilities with 110,500 parking spaces in 70 cities across six
countries.
. London and Henley S.A. ("London and Henley"). London and Henley is a
leading private UK apartment owner, operator and developer. As of
December 31, 1998, London and Henley's portfolio of apartment properties
included 61 operating properties and 18 properties under development.
. Security Capital U.S. Realty (Amsterdam Stock Exchange: SCUSR). SC-
U.S.Realty has the objective of becoming a preeminent European-based real
estate operating company owning, through a wholly owned subsidiary,
significant strategic positions in leading value-added real estate operating
companies based in the United States. Through a proactive ownership role,
appropriate board representation and ongoing consultation, SC-U.S.Realty
expects to influence the business strategies and operations of the companies
in which it invests to increase per share cash flow. SC-U.S.Realty's
strategic ownership positions as of December 31, 1998, include proactive
ownership positions in and commitments to public and private U.S. real
estate operating companies with a combined total market capitalization of
approximately $8.78 billion. The European management and Board of Directors
of SC-U.S.Realty receive operating and investment advice from Security
Capital U.S. Realty Management S.A., which subcontracts certain research and
advisory activities from its affiliates including the Global Capital
Management Group and the Capital Division. Security Capital has advised SC-
U.S.Realty that it does not intend to make its own direct strategic
investments in public equity-oriented REITs in the future, other than those
in which Security Capital currently owns a strategic ownership position.
SC-U.S.Realty seeks to have 85% to 90% of its assets deployed in long-term
strategic ownership positions in real estate operating companies organized as
REITs and real estate operating companies which are expected in due course to
become REITs.
SC-U.S.Realty also seeks to acquire up to 10% (but generally less than 5%)
of the shares of publicly traded real estate companies and to hold such
positions for an intermediate term of 12 to 18 months (or shorter if the
targeted returns are realized more quickly) with the objective of obtaining
attractive total returns through dividends and share price appreciation. SC-
U.S.Realty seeks to have 10% to 15% of its assets deployed in such publicly
traded positions and, as of December 31, 1998, SC-U.S.Realty had $248.0
million (market value) of publicly traded positions in 26 companies. See
"Security Capital Global Capital Management Group--SC-U.S.Realty: Special
Opportunity Positions."
6
<PAGE>
As of December 31, 1998, SC-U.S.Realty owned 52,430.89 shares of Security
Capital's Class A common stock, par value $.01 per share ("Class A Shares"),
1,964,286 shares of Security Capital's Class B common stock, par value $.01
per share ("Class B Shares"), and $55 million of Security Capital's 6 1/2%
convertible subordinated debentures due 2016 ("2016 Convertible Debentures").
SC-U.S.Realty purchased securities of Security Capital at arm's-length
prices.
SC-U.S.Realty's Strategic Ownership Positions:
. CarrAmerica Realty Corporation ("CarrAmerica") (NYSE: CRE). CarrAmerica
is a national company focused on becoming the leading owner, operator and
developer of value-driven office properties in key growth markets
throughout the United States. Management of CarrAmerica seeks to achieve
these objectives by offering corporate customers exceptional customer
service on a national basis. At December 31, 1998, CarrAmerica owned 292
properties (approximately 22.4 million square feet of space) with another
48 office properties under construction.
. City Center Retail Trust ("City Center Retail") is a private strategic
operating company, established in 1997 to provide quality customer
service and premier urban-infill locations to top U.S. and international
retailers. City Center Retail is focused on the acquisition, development,
operation and ownership of well-designed and well-managed urban-infill
retail properties across the United States. At December 31, 1998, City
Center Retail owned 27 properties (approximately 2.2 million square feet
of space).
. CWS Communities Trust ("CWS Communities") is one of the leading private
manufactured home community operations in the United States. At December
31, 1998, CWS Communities owned and operated or managed, or had under
development, or had under contract to acquire or develop, a total of 53
communities in nine states and Canada with a total of 17,962 homesites.
. InterParking Incorporated ("InterParking"), formerly Parking Services
International, is a private company focused on becoming the preferred
provider of management services for top parking facility owners in the
United States. InterParking expects to achieve this objective by
providing superior operating and parking solutions for parking facility
owners and customers on a national, regional and local basis.
. Regency Realty Corporation (NYSE: REG). Regency is focused on becoming
the leading national owner and operator of grocery-anchored, neighborhood
infill shopping centers in selected growth markets throughout the United
States. As of December 31, 1998, Regency had an investment in real estate
of $1.3 billion in 129 retail properties operating or under development
totaling 14.7 million square feet of retail space in 16 states. In
February 1999, Regency completed its merger with Pacific Retail, a
Dallas-based private real estate investment trust controlled by SC-
U.S.Realty, which had been focused on owning and developing grocery-
anchored, neighborhood infill shopping centers in the western United
States. At December 31, 1998, Pacific Retail had an investment in real
estate of $1.1 billion in 72 retail properties containing 8.5 million
square feet of retail space. The combined company operates under the
Regency name. Regency became the first national owner, operator and
developer of grocery-anchored, neighborhood infill retail centers with
total assets exceeding $2.4 billion, including 201 retail properties
totaling more than 23.2 million square feet.
. Storage USA, Inc. ("Storage USA") (NYSE: SUS). Storage USA is a national
company formed to acquire, develop, construct, franchise and own and
operate self-storage facilities in the United States. Storage USA's
strategy is to maximize rents, occupancy and profitability at each of its
facilities while increasing its market share in this highly fragmented
self-storage real estate niche. At December 31, 1998, Storage USA owned
or managed 485 self-storage facilities aggregating 31.9 million square
feet in 31 states and the District of Columbia.
. Urban Growth Property Trust ("Urban Growth") is a private company focused
on acquiring, developing and owning strategically located income-
producing parking assets and urban land (initially used for parking or
car parks) in key urban infill locations in selected target markets
throughout the United States. At December 31, 1998, Urban Growth owned 22
properties with a total of 16,429 parking spaces representing a total
expected investment of $246.4 million.
7
<PAGE>
The Financial Services Division
The Financial Services Division provides real estate research as well as
corporate and financial services to Security Capital and its affiliates. In
addition, through the Global Capital Management Group, the Financial Services
Division manages assets invested in real estate securities for open-end and
closed-end entities, and institutional clients.
Corporate Services
SCGroup Incorporated ("SCGroup") provides accounting, cash management,
human resources and benefits administration, information systems, internal
audit, risk management and tax planning and compliance services for negotiated
fees under administrative services agreements. These services are made
available to the companies in which Security Capital has direct or indirect
investments. As a result, Security Capital's operating affiliates realize the
benefits of economies of scale by consolidating several management activities
in a centralized operations center. In addition, operating affiliates in a
start-up mode have access to proven and efficient critical services.
Security Capital Global Capital Management Group ("Global Capital Management
Group")
The Global Capital Management Group manages or advises capital invested
either in focused funds or in strategic operating companies that seek to
maximize total return over an intermediate time horizon of up to 42 months.
The Global Capital Management Group's principal focus is on publicly traded
real estate companies that it believes should outperform the market due to
factors such as an emerging new strategy or opportunity, imminent changes in
supply and demand that would affect asset performance, market inefficiencies
that result in mispriced securities, or consolidation opportunities. The
Global Capital Management Group, through its clients, will also commit capital
to private start-up companies that have significant prospects for sustained
growth, that can utilize both strategic and operating consulting and capital,
and that have the prospect of becoming public companies. The Global Capital
Management Group's clients will generally take ownership positions not
exceeding 4.99% of the equity securities of its investees, except with respect
to SC-European Realty, Security Capital Preferred Growth Incorporated and SC-
U.S.Realty, which may take larger ownership positions.
The Global Capital Management Group currently provides investment research
and advice to Security Capital U.S. Realty Management S.A., the advisor to SC-
U.S.Realty, in connection with certain investments in publicly traded
companies and to Security Capital European Realty Management S.A., the advisor
to SC-European Realty. In addition, the Global Capital Management Group
currently manages Security Capital Preferred Growth Incorporated, third party
separate accounts and Security Capital Real Estate Mutual Funds Incorporated,
an open-end management investment company currently composed of two series:
Security Capital U.S. Real Estate Shares and Security Capital European Real
Estate Shares.
. Security Capital European Real Estate Shares ("SC-European Real Estate
Shares"). SC-European Real Estate Shares is a highly focused, no-load
real estate investment fund that seeks to provide shareholders with above
average returns, including current income and capital appreciation
through investments in real estate securities in Europe. SC-European Real
Estate Shares is domiciled in the United States. Long term, SC-European
Real Estate Shares' objective is to achieve top quartile total returns as
compared to other investment funds that invest primarily in real estate
securities in Europe by integrating in-depth proprietary real estate
market research with sophisticated capital markets research and modeling
techniques. The Global Capital Management Group serves as both investment
adviser and administrator to SC-European Real Estate Shares and separate
European real estate investment accounts. As of December 31, 1998, these
assets under management totaled $16.0 million.
. Security Capital Preferred Growth Incorporated ("SC-Preferred Growth").
SC-Preferred Growth is a private real estate company investing on an
intermediate-term basis primarily in the convertible securities of public
and private real estate companies that can benefit from SC-Preferred
Growth's capital and
8
<PAGE>
operating guidance. SC-Preferred Growth utilizes a proprietary investment
process to identify, analyze and structure privately negotiated
investments in real estate companies with strong prospects for growth over
the intermediate term. As of December 31, 1998, SC-Preferred Growth had
$800.2 million of investments in 13 public and private real estate
operating companies.
. Security Capital U.S. Real Estate Shares ("SC-US Real Estate Shares")
(NASDAQ: SUSIX). SC-US Real Estate Shares is a highly focused, no-load
real estate investment fund that seeks to provide shareholders with above
average returns, including current income and capital appreciation
through investments in publicly traded real estate securities in the
United States. SC-US Real Estate Shares' long-term objective is to
achieve top-quartile returns as compared with other investment funds that
invest in securities of publicly traded real estate companies in the
United States by integrating in-depth proprietary real estate market
research with sophisticated capital markets research and modeling
techniques. As of December 31, 1998, SC-US Real Estate Shares had $94.8
million of assets under management.
. Security Capital U.S. Realty: Special Opportunity Positions. SC-
U.S.Realty is a strategic operating company. See "The Capital Division--
Security Capital U.S. Realty." It also utilizes some of its capital to
invest on an intermediate-term basis. In this capacity, it identifies
publicly traded companies with solid growth prospects and invests,
through a wholly owned subsidiary, with the objective of realizing
attractive total returns through dividends and share price appreciation.
As of December 31, 1998, the SC-U.S.Realty Special Opportunity Positions
had a fair market value of $248.0 million.
Security Capital Markets Group Incorporated ("Capital Markets")
Capital Markets is a registered broker dealer which provides investment
banking and brokerage services to private and public companies within the
Security Capital organization and to institutional clients. Capital Markets
services include acting as placement agent for private and public offerings of
equity securities of affiliates of Security Capital, providing financial
advisory services to affiliates of Security Capital, distribution of
investment funds shares managed by the Global Capital Management Group, and
arranging block trades of publicly traded securities of Security Capital and
its affiliates and other real estate companies as agent among institutional
clients. By providing these services, Capital Markets maintains strong
relationships with institutional investors that have invested in Security
Capital and its public and private affiliates. Capital Markets provides these
services from offices in Chicago, New York and San Francisco.
In 1998, Security Capital Markets Group Limited was formed which operates
from London and provides similar services to Security Capital affiliates in
the UK and Europe.
Security Capital Real Estate Research Group ("Real Estate Research")
Real Estate Research provides the Global Capital Management Group, the
Capital Division and affiliates with proprietary economic and real estate
research that assists them in their capital deployment decisions. This
research provides a point-of-view on both short and long-term supply and
demand fundamentals and how they will influence rental income growth.
Real Estate Research conducts an economic base analysis for major
metropolitan markets in the United States. Economic base analysis identifies
the key industry sectors which drive a market's economy by exporting goods or
services outside the area. By examining the stability and growth potential of
these industries, as well as the diversity of their mix, Real Estate Research
assesses the risks and long-term growth prospects for that particular market.
The demand models created by Real Estate Research incorporate demographic
factors such as population, household income, age, education, employment and
housing characteristics for an area as small as one-sixteenth of a square mile
in certain markets. The economic and demographic analyses are translated into
an overall evaluation of the demand prospects for each property type in each
market.
9
<PAGE>
On a short-term basis, Real Estate Research monitors real estate market
conditions such as occupancy and rent growth to forecast the near-term (one to
two years) demand/supply balance of each property type in the market.
Future Strategy
Security Capital's future strategic objectives include deploying its
capital at attractive long-term rates of return and leveraging its skills and
market knowledge in the real estate industry. Key elements of Security
Capital's strategic planning include:
. Pursuing extensive research and development to identify opportunities
where it can invest in the start-up of new businesses that will lead
their respective sectors and to identify new investment services which
may provide substantial new sources of revenue for Security Capital.
. Capitalizing and further developing the organization and operations of
thoroughly researched start-up businesses to create companies that
deliver strong financial returns and create valued franchises with their
chosen customer base.
. Redeploying capital from lower return opportunities to higher return
opportunities.
Security Capital has followed this strategy since its inception. Examples
of businesses which were researched, funded and developed include Belmont,
Homestead, ProLogis, SC-European Realty, and SC-U.S.Realty.
Security Capital is considering directly or indirectly, through SC-
U.S.Realty or SC-European Realty, several new private business initiatives in
which it has recently made or agreed to make investments. Security Capital
expects that its principal focus of future initiatives will be private, start-
up businesses. While none of these initiatives is material at present to
Security Capital's results of operations or financial condition, an important
new component of Security Capital's future growth is expected to come from
these and future new business initiatives which are in varying stages of
research and development. No assurances can be given that these initiatives
will be successful.
Operating Companies' Market Price Information and Financial Performance
The following table sets forth, for the periods indicated, the high and low
sales prices of the common shares of Archstone, ProLogis and Homestead (since
April 1, 1998, and before that, on the American Stock Exchange) on the NYSE,
and SC-U.S.Realty on the AEX Stock Exchange (Amsterdam), and the cash
dividends declared by such companies per outstanding common share:
<TABLE>
<CAPTION>
Archstone ProLogis
--------------------------- ---------------------------
Cash Cash
Dividend Dividend
High Low Declared High Low Declared
--------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
1997:
First Quarter......... $25 1/8 $21 $0.325 $22 1/2 $19 7/8 $0.2657
Second Quarter........ 24 1/4 21 1/2 0.325 21 3/4 18 7/8 0.2657
Third Quarter......... 24 3/8 21 5/8 0.325 23 5/8 20 3/4 0.2657
Fourth Quarter........ 25 1/8 21 7/8 0.325 25 1/2 22 3/4 0.2657
1998:
First Quarter......... $24 1/2 $22 1/8 $0.340 $26 1/2 $24 $0.2850
Second Quarter........ 24 1/16 21 1/4 0.340 26 1/4 22 3/4 0.3183
Third Quarter......... 23 11/16 18 0.355 26 1/8 19 13/16 0.3183
Fourth Quarter........ 21 1/2 17 7/8 0.355 23 1/16 19 3/4 0.3183
1999:
First Quarter (through
March 5)............. $21 1/16 $19 3/16 $0.370 $22 3/16 $18 5/8 $0.3183
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Homestead SC-U.S.Realty
--------------------------- --------------------------
Cash Cash
Dividend Dividend
High Low Declared High Low Declared
-------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1997:
First Quarter......... $20 7/8 $16 5/8 -- $14 1/2 $24 7/10 --
Second Quarter........ 18 1/2 15 7/8 -- 16 13 2/5 --
Third Quarter......... 20 1/8 16 -- 15 3/10 14 --
Fourth Quarter........ 18 1/4 13 11/16 -- 15 1/2 13 1/2 --
1998:
First Quarter......... $15 3/4 $13 9/16 -- $16 $12 3/5 --
Second Quarter........ 16 11 -- 14 12 --
Third Quarter......... 13 3/16 6 1/4 -- 13 1/5 9 3/5 --
Fourth Quarter........ 8 3/16 3 6/16 -- 10 7/10 7 9/10 --
1999:
First Quarter (through
March 5)............. $ 4 3/4 $ 3 -- $ 9 4/5 $ 7 1/2 --
</TABLE>
On March 5, 1999, the last reported sale price of a common share of (i)
Archstone was $19 1/2, (ii) Homestead was $3 11/16, (iii) ProLogis was $19
3/4, and (iv) SC-U.S.Realty was $7 4/5. On March 5, 1999, Security Capital
owned (i) 54,540,283 common shares of Archstone, (ii) 26,697,454 common shares
of Homestead, (iii) 49,903,814 common shares of ProLogis, and (iv) 60,602,717
common shares of SC-U.S.Realty.
The following table presents Security Capital's total cost for its
investments in the following public companies' securities, the closing price
of those securities on December 31, 1998, on the principal exchange on which
the securities are listed, the aggregate market valuation of those securities
based on such closing prices and the unrealized appreciation or depreciation
on those investments at December 31, 1998 (in millions, except per share
data):
<TABLE>
<CAPTION>
Security
Capital's
Unrealized
Operating Company and Total Market Value Total Appreciation/
Security Cost per Share(1) Market Value (Depreciation)
--------------------- ------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Archstone common shares.. $ 799 $20.25 $1,104 $305
Homestead common shares.. 319 4.50 120 (199)
ProLogis common shares... 658 20.75 1,036 378
SC-U.S.Realty common
shares.................. 732 9.90 600 (132)
------ ------ ----
Total at December 31,
1998................ $2,508 $2,860 $352
====== ====== ====
</TABLE>
- --------
(1) Represents the closing prices of the common shares on December 31, 1998,
on the principal exchange on which the shares are listed.
Employees
As of December 31, 1998, Security Capital employed 578 personnel at the
corporate level, and its affiliated operating companies employed 14,958
persons. None of Security Capital's employees are covered by collective
bargaining agreements. Security Capital believes its relations with its
employees to be good.
Competition
There are numerous developers, operators, real estate companies and other
owners of real estate that compete with Security Capital's operating companies
in seeking land for development on which to operate their
11
<PAGE>
respective businesses. Security Capital's operating companies compete on a
global, regional and national basis with no individual market material to
Security Capital as a whole. All of the properties of Security Capital's
operating companies are located in developed areas that include various
competitors. The number of competitive properties in a particular market could
have a material adverse effect on Security Capital's operating companies and
on the rents or guest rates charged by them. Security Capital's operating
companies may be competing with others that have greater resources and whose
officers and directors have more experience than the officers, directors and
trustees of Security Capital's operating companies.
The global real estate securities management business of Security Capital
competes for capital and investment opportunities with a large number of
investment management firms as well as certain insurance companies, commercial
banks and other financial institutions, some of which may have greater access
to capital and other resources and which may offer a wider range of services
than Security Capital. Real estate securities investment management firms can
be formed with relatively small amounts of capital and depend most
significantly on the continued involvement of their professional staff.
Security Capital believes that competition among real estate securities
investment management firms is affected principally by investment performance,
development and implementation of investment strategies, information
technologies and databases and client service performance.
The investment fund industry is highly competitive. SC-European Real Estate
Shares and SC-US Real Estate Shares are in direct competition with other real
estate investment funds sold directly by investment management firms, broker-
dealers, as well as other investment alternatives offered by banks and other
financial institutions. There are over 60 investment funds which focus on
publicly traded real estate company securities. Many of these investment funds
have longer histories and may have greater access to capital through more
established distribution channels. Competition in the sale of investment funds
is affected by a number of factors including industry/sector returns,
performance, advertising and sales promotion efforts, the level of fees, and
distribution channels available.
Trademarks and Service Marks
Security Capital uses a number of trademarks, including "Security Capital"
and variants thereof. All trademarks, service marks and copyright
registrations associated with the business of Security Capital are registered
in the name of Security Capital and, if not maintained, expire over various
periods of time beginning in 2005. Certain variants of the name Security
Capital have been licensed to Archstone and ProLogis. Security Capital intends
to defend vigorously against infringement of its trademarks, service marks and
copyrights.
Government Regulation
The real estate operating companies in which Security Capital has an
investment are subject to governmental regulations. Government authorities at
the federal, state and local levels are actively involved in the issuance and
enforcement of regulations relating to land use and zoning restrictions.
Regulations may be issued which could have the effect of restricting or
curtailing certain uses of existing structures or requiring that the
structures be renovated or altered in some fashion. The issuance of any such
regulations could have the effect of increasing the expenses and lowering the
profitability of any of the properties affected. Security Capital does not
believe that any of these regulations will have a material impact on it or the
operating companies in which it has an investment.
A number of states regulate the licensing of hotels by requiring
registration, disclosure statements and compliance with specific standards of
conduct. Homestead believes that each of its properties has the necessary
permits and approvals to operate its respective business, and Homestead
intends to continue to obtain such permits and approvals for its new
properties.
Under the Americans with Disabilities Act (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. Although Security Capital's operating
12
<PAGE>
companies have attempted to satisfy ADA requirements in the designs for their
properties to the extent ADA is applicable to their property type, no
assurance can be given that a material ADA claim will not be asserted against
any of Security Capital's operating companies, which could result in a
judicial order requiring compliance and the expenditure of substantial sums to
achieve compliance, an imposition of fines or an award of damages to private
litigants.
Most states require a license to operate an assisted living community.
Regulations vary across state lines and affect the physical and operating
characteristics of a community. Life safety is of primary concern to
regulators, given the age and frailty of the senior assisted living
population. Belmont believes that its communities meet the standards set by
regulators in each of the markets it has entered. Certain states require that
an assisted living provider obtain a Certificate of Need prior to applying for
a building permit or operating license. While Belmont to date has been
successful with this requirement in all the states where it has sought to do
business, the process is arduous and may impede entry into some markets in the
future.
Capital Markets is registered as a broker-dealer with the Securities and
Exchange Commission ("SEC"), all states, the District of Columbia, and is a
member of the National Association of Securities Dealers, Inc. ("NASD"). All
of its activities as a broker-dealer are subject to extensive federal, state
and NASD regulation and oversight. Capital Markets Limited is a broker-dealer
member firm of the Securities and Futures Authority in the U.K.
The Global Capital Management Group is registered as an investment adviser
with the SEC and its advisory activities are subject to extensive federal
regulation.
Environmental Matters
The operating companies in which Security Capital has an investment are
subject to environmental and health and safety laws and regulations related to
the ownership, operation, development and acquisition of real estate. Under
those laws and regulations, the operating companies may be liable for, among
other things, the costs of removal or remediation of certain hazardous
substances, including asbestos-related liability. Those laws and regulations
often impose liability without regard to fault.
As part of their due diligence procedures, the operating companies in which
Security Capital has an investment have conducted Phase I environmental
assessments on each of their properties prior to their acquisition; however no
assurance can be given that those assessments have revealed all potential
environmental liabilities. Security Capital is not aware of any environmental
condition on any of the properties of the companies in which it has an
investment which is likely to have a material adverse effect on its
consolidated financial position or results of operations; however, no
assurance can be given that any such condition does not exist or may not arise
in the future.
Significant Developments During 1998
New Business Initiatives
During 1998, Security Capital had several new business initiatives which
became operational during the year, including Belmont and SC-European Realty.
During 1998, SC-U.S.Realty had one new business initiative, CWS Communities.
During 1998, SC-European Realty invested in Access, Akeler, Bernheim-Comofi,
Interparking S.A., City & West End, and London and Henley. Security Capital,
SC-U.S.Realty and SC-European Realty have several other new business
initiatives which are in various stages of research and development. Security
Capital's policy is to announce new business initiatives following extensive
research and development and after Security Capital has committed to make
investments in excess of $25 million in the new business. Security Capital
believes that an important component of its future growth will come from new
business initiatives and the implementation of new business strategies,
although there can be no assurance that new business initiatives will be
continued or prove successful. Because of unfavorable capital market
conditions for
13
<PAGE>
real estate companies generally, new business initiatives may be delayed or
curtailed until additional financing becomes available.
Major Business Combinations
Since the beginning of 1998, several direct or indirect investees of
Security Capital participated in the following business combinations:
Archstone and Atlantic Merger
In July 1998, Atlantic merged into Security Capital Pacific Trust to
form Archstone. As a result of the merger, Archstone became a national
apartment company. See "The Capital Division -- Archstone Communities
Trust."
ProLogis and Meridian Merger
In November 1998, ProLogis agreed to merge with Meridian, a REIT which
engages principally in the business of owning, acquiring, developing,
managing and leasing income-producing warehouse/distribution and light
industrial properties. ProLogis will be the surviving company. That merger
is expected to occur in late March 1999. See "The Capital Division --
ProLogis Trust."
Regency and Pacific Retail Merger
In February 1999, Regency and Pacific Retail, two direct investees of
SC-U.S.Realty, completed their merger with Regency as the surviving
company. The combined company became the first national owner, operator and
developer of grocery-anchored, neighborhood infill retail centers with
total assets exceeding $2.4 billion. See "The Capital Division Regency --
Realty Corporation."
Issuance of Senior Unsecured Notes
In June 1998, Security Capital issued $500 million of Senior Unsecured
Notes in three tranches with interest rates ranging from 6.95% to 7.70% and
maturities ranging from 2005 to 2028. In late 1998 through January 1999,
Security Capital instituted a medium term note program and issued a total of
$200 million of Senior Unsecured Notes in five tranches, with interest rates
ranging from 7.66% to 7.80% and with maturities ranging from 2003 to 2005.
The proceeds of the Senior Unsecured Notes were used to pay down Security
Capital's line of credit and to fund various investments. All of the foregoing
Senior Unsecured Notes are redeemable at any time at the option of Security
Capital, in whole or in part, at a redemption price equal to the sum of the
principal amount of the Senior Unsecured 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.
Investment Fund Activity
Security Capital Real Estate Mutual Funds Incorporated launched two new
investment fund series in 1998: Security Capital Asia/Pacific Real Estate
Shares ("SC-Asia Pacific Real Estate Shares") and Security Capital Real Estate
Arbitrage Shares ("SC-Real Estate Arbitrage Shares"). In addition, Security
Capital Real Estate Mutual Funds Incorporated hired additional personnel and
began to actively market its other series, SC-US Real Estate Shares and SC-
European Real Estate Shares. Based on market conditions, SC-Asia Pacific Real
Estate Shares and SC-Real Estate Arbitrage Shares were terminated as of
December 31, 1998. As a result of several factors, including a general outflow
of capital from the real estate investment funds sector, lower-than-
anticipated capital inflow into SC-US Real Estate Shares and a general
reduction in public market valuations of real estate company securities
generally, Security Capital decided to change its strategy related to the
retail distribution of real estate investment funds and reduced personnel and
associated costs. Primarily in conjunction with such determination, a special
charge of $3.8 million was taken in 1998.
14
<PAGE>
Agreements with Operating Companies
Security Capital is a party to the following agreements with its affiliated
real estate operating companies:
Investor Agreements
Security Capital has entered into investor agreements with several of its
direct investees, including Archstone, Belmont, Homestead, ProLogis and SC-
European Realty. The investor agreements provide Security Capital with certain
rights with the existence and scope of such rights dependent on Security
Capital's percentage ownership of the common stock of the investee. Generally,
so long as Security Capital owns at least 10% of the outstanding common stock
of the investee, Security Capital has the right to approve any increase in the
size of the board of directors or trustees and to nominate a number of
directors or trustees of the investee, in proportion to Security Capital's
percentage ownership of the investee's common stock. However, with respect to
any investee with publicly traded common stock, the number of trustees or
directors Security Capital may nominate is limited to less than a majority of
the board of trustees or directors. The investor agreements also provide
Security Capital with the right to prior approval or consultation on certain
matters and actions, including the issuance of securities and the incurrence
of indebtedness, and provide Security Capital with registration rights
regarding the common stock of such investee held by Security Capital. Security
Capital retains approval rights so long as Security Capital owns at least 25%
of the investee's common stock, and retains the consultation rights so long as
Security Capital retains a nominee on the board of trustees or directors. The
investor agreements do not limit Security Capital's ownership in the investee
other than with respect to Archstone, in which Security Capital is limited to
no more than 49% ownership.
Administrative Services Agreements
The Financial Services Division, through SCGroup, a wholly owned subsidiary
of Security Capital, provides a variety of administrative services, including
cash management, human resource, information systems, legal services, payroll,
accounts payable processing, risk management and tax administration to
subsidiaries and other affiliates of Security Capital under administrative
service agreements. Each service recipient can elect which services to
purchase under its agreement. In 1998 SCGroup received fees for such services
based upon negotiated fee schedules amounting to $17.6 million. Each
administrative service agreement has a one-year term and is subject to annual
review by the independent directors or trustees of the service recipient. No
assurances can be given that all or any of these administrative services
agreements will continue to be renewed.
Advisory Agreements
Security Capital U.S. Realty Management S.A. and another wholly owned
subsidiary of Security Capital provide SC-U.S.Realty with advice with respect
to strategy, investments, financing, administrative and other operating
matters. These Security Capital subsidiaries receive fees based upon the value
of SC-U.S.Realty's investments. During 1998, these Security Capital
subsidiaries received fees of $35.2 million for the services provided. The
advisory agreements are subject to bi-annual review and approval by the
independent directors of SC-U.S.Realty.
Other wholly owned subsidiaries of Security Capital provide SC-European
Realty with advice with respect to strategy, investments, financings,
administrative and other matters. Fees for such services are based upon the
value of SC-European Realty's investments. During 1998, such fees totaled $6.7
million. The advisory agreements are subject to bi-annual review and approval
by the independent directors of SC-European Realty.
No assurances can be given that these advisory agreements will continue to
be renewed. Termination of these advisory agreements could have a material
adverse effect on the financial performance of Security Capital.
Sub-Advisory Agreement
Pursuant to an agreement dated July 1, 1997, the SC-U.S.Realty Adviser
appointed Security Capital Investment Research Incorporated, a wholly owned
subsidiary of Security Capital ("Security Capital Investment
15
<PAGE>
Research"), as sub-adviser to provide fundamental research, investment
identification, investment due diligence and investment monitoring services.
Pursuant to its sub-advisory agreement, Security Capital Investment Research
receives (i) an annual fee based on .06% on the aggregate average monthly
market value of strategic investments up to $1 billion and .03% on the
aggregate average monthly value of strategic investments in excess of $1
billion, (ii) a one-time fee equal to .10% of the consideration payable each
time SC-U.S.Realty makes a strategic investment, (iii) an annual fee equal to
.50% on SC-U.S.Realty's other investments and (iv) reimbursement of certain
expenses. The agreement expires on July 1, 1999 and is automatically renewable
for successive two-year periods unless the SC-U.S.Realty Adviser notifies
Security Capital Investment Research that such agreement will not be renewed;
provided, however, after the first anniversary date of the agreement or at any
time during a renewal period, the SC-U.S.Realty Adviser may terminate such
agreement on not less than sixty days' prior written notice to Security
Capital Investment Research. During the year ended December 31, 1998, Security
Capital Investment Research earned $3.4 million pursuant to this agreement.
Directors and Executive Officers of Security Capital
The following are directors and executive officers of Security Capital or
certain affiliates:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
C. Ronald Blankenship... 49 Vice Chairman, Chief Operating Officer and Director
Samuel W. Bodman........ 60 Director
Hermann Buerger......... 55 Director
John P. Frazee, Jr...... 54 Director
Cyrus F. Freidheim, Jr.. 63 Director
H. Laurance Fuller...... 60 Director
Ray L. Hunt............. 55 Director
John T. Kelley, III..... 58 Director
William D. Sanders...... 57 Chairman, Chief Executive Officer and Director
Peter S. Willmott....... 61 Director
Thomas B. Allin......... 49 Managing Director, Capital Division
Didier J. Cherpitel..... 54 Managing Director, Capital Markets Limited
Jeffrey A. Cozad........ 34 Managing Director, SC-U.S.Realty
Steven F. Dichter....... 46 Managing Director, Capital Division
John H. Gardner, Jr..... 45 Managing Director, Global Capital Management Group
C. Robert Heaton........ 53 Managing Director, Capital Division
W. Joseph Houlihan...... 50 Managing Director, EU Management
Jeff A. Jacobson........ 37 Managing Director, Global Capital Management Group
Gordon S. Kerr.......... 55 Managing Director, Capital Division
Jeffrey A. Klopf........ 50 Senior Vice President and Secretary, Security Capital
Anthony R. Manno, Jr.... 47 Managing Director, Global Capital Management Group
Todd W. Mansfield....... 41 Managing Director, SC-European Realty
Caroline S. McBride..... 45 Managing Director, Capital Division
Daniel F. Miranda....... 45 Managing Director, Global Capital Management Group
A. Richard Moore........ 53 Managing Director, Capital Division
Constance B. Moore...... 43 Managing Director, Capital Division
Jeremy J. Plummer....... 39 Managing Director, SC-European Realty
Kenneth D. Statz........ 40 Managing Director, Global Capital Management Group
Donald E. Suter......... 42 Managing Director, Capital Markets
James C. Swaim.......... 46 Senior Vice President, Security Capital
Paul E. Szurek.......... 38 Managing Director, SCGroup and
Chief Financial Officer, Security Capital
Robert S. Underhill..... 43 Managing Director, Capital Division
Jean-Francois van Hecke. 48 Managing Director, Security Capital (U.K.)
Management Limited
Thomas G. Wattles....... 47 Managing Director, Security Capital
Hai-Ou Yang............. 45 Managing Director, Capital Division
</TABLE>
16
<PAGE>
C. Ronald Blankenship. Director, Vice Chairman and Chief Operating Officer
since May 1998. Previously, Mr. Blankenship was Managing Director of Security
Capital since 1991. Prior to June 1997 he was the Chairman of Archstone. Mr.
Blankenship is an Advisory Trustee of Archstone, Director of Strategic Hotel,
Storage USA and CarrAmerica, and an Advisory Director of Homestead. Mr.
Blankenship's term as Director expires in 1999.
Samuel W. Bodman. Chairman and Chief Executive Officer of Cabot Corporation
since 1988. Mr. Bodman is a Director of Cabot Corporation, Cabot Oil & Gas
Corporation, John Hancock Mutual Life Insurance Company and Westvaco, Inc. He
is also a Trustee and a member of the Executive Committee of the Board of
Trustees of MIT, and a member of the American Academy of Arts and Sciences, a
Trustee of Isabella Stewart Gardner Museum, a Trustee of the New England
Aquarium and a Trustee of The French Library and Cultural Center. Mr. Bodman's
term as Director expires in 2000.
Hermann Buerger. Executive Vice President of Commerzbank AG in New York.
Mr. Buerger is also Co-Chairman of the Business Advisory Committee of the
American Council on Germany, a Trustee of the Virginia Tech Foundation and a
Director of United Dominion Industries and Paging Network Incorporated. Mr.
Buerger's term as Director expires in 2000.
John P. Frazee, Jr. Chairman, President and Chief Executive Officer of
Paging Network Incorporated since August 1997. Formerly President and Chief
Operating Officer of Sprint Corporation and, prior to the March 1993 merger of
Sprint and Centel Corporation, Mr. Frazee was the Chairman and Chief Executive
Officer of Centel Corporation. He is a Director of Cable Satellite Public
Affairs Network ("C-SPAN"), Dean Foods Company, Nalco Chemical Company and
Homestead. He also is a Director of the Foundation for Independent Higher
Education, a Life Trustee of Rush-Presbyterian St. Luke's Medical Center and a
National Trustee of The Newberry Library. Mr. Frazee's term as Director
expires in 2000.
Cyrus F. Freidheim, Jr. Vice Chairman of BoozAllen & Hamilton, Inc., an
international management consulting firm, which he joined in 1966. Mr.
Freidheim is a Director of Household International, Inc. and Microage Inc. He
is a Trustee of Rush-Presbyterian-St. Luke's Medical Center and The Orchestral
Association (the Chicago Symphony Orchestra). He is also a member of the
America-China Society, the Council on Foreign Relations and the U.S. Japan
Business Council. Mr. Freidheim's term as Director expires in 2001.
H. Laurance Fuller. Co-Chairman and Director of BP Amoco p.l.c. since
January 1999. Formerly Chairman and Chief Executive Officer of Amoco
Corporation, a company he joined in 1961. Mr. Fuller is a Director of Abbott
Laboratories, the Chase Manhattan Corporation and Motorola Inc. Mr. Fuller is
also Chairman of the American Petroleum Institute, a Trustee of The Orchestral
Association (the Chicago Symphony Orchestra) and a Trustee of the University
Council of Cornell University. Mr. Fuller's term as Director expires in 2001.
Ray L. Hunt. Chairman and Chief Executive Officer of Hunt Oil Company, an
international oil and gas exploration and production company in Dallas, Texas,
and Chairman, President and Chief Executive Officer of Hunt Consolidated Inc.
Mr. Hunt is also a Class C Director of the Federal Reserve Bank of Dallas; and
a Director of The Halliburton Company, Pepsico, Inc., Electronic Data Systems
Corporation, and Ergo Science Corporation. Mr. Hunt's term as Director expires
in 2001.
John T. Kelley, III. Founding Officer of ProLogis, Trustee of Archstone
since January 1988, and an Advisory Trustee of ProLogis since December 1993.
Mr. Kelley has been a Director of Regency since February 1999 and prior
thereto served as Chairman of the Board of the former Pacific Retail Trust.
Mr. Kelley's term as Director expires in 1999.
William D. Sanders. Founder, Chairman and Chief Executive Officer of
Security Capital. Mr. Sanders currently serves as a Director of CarrAmerica,
SC-U.S.Realty, SC-European Realty, Storage USA and Strategic Hotel, and an
Advisory Director of Regency. He is a member of the Board of Governors of the
National Association of Real Estate Investment Trusts ("NAREIT"). Mr. Sander's
term as Director expires in 1999.
17
<PAGE>
Peter S. Willmott. Chairman and Chief Executive Officer of Willmott
Services, Inc. since 1989. Mr. Willmott is a Director of Federal Express
Corporation and Zenith Electronics Corporation. He is also the former Chairman
of the Executive Committee of Williams College, and serves on the Board of
Children's Memorial Hospital, Chicago, Illinois. Mr. Willmott's term as
Director expires in 1999.
Thomas B. Allin. Managing Director of the Capital Division since December
1998, where he provides operating oversight for companies in which Security
Capital has direct or indirect ownership positions. From April 1998 to
December 1998, Mr. Allin was President and Chief Operating Officer of
Strategic Hotel. From April 1996 to December 1997, Mr. Allin was President and
Chief Executive Officer of Gordon Biersch. From 1973 to April 1996, Mr. Allin
was with McDonald's Corp., most recently as Senior Vice President and Zone
Manager from February 1993 to April 1996.
Didier J. Cherpitel. Managing Director of Capital Markets Limited since
September 1998. From July 1996 to September 1998, Mr. Cherpitel was a Managing
Director of J.P. Morgan. From October 1988 to July 1996, Mr. Cherpitel served
as Chairman of the Paris Management Committee of Morgan Guaranty Trust Company
in New York, and also served as a member of the European Management Committee
of the Bank from 1991 to 1997. He currently serves as an Advisory Director of
SC-U.S.Realty and SC-European Realty. Mr. Cherpitel is a Securities
Representative with the Securities and Futures Authority.
Jeffrey A. Cozad. Managing Director and a Director of SC-U.S.Realty since
June 1996, where he is responsible for operations investment oversight.
Previously, he was a Senior Vice President of Capital Markets in its New York
office, where he was a co-head of capital markets activities and where he
provided capital markets services for affiliates of Security Capital from 1991
to 1996. Mr. Cozad has been a director of Regency since February 1999.
Steven F. Dichter. Managing Director of the Capital Division since January
1998, where he leads global real estate and economic research and provides
operating oversight for companies in which Security Capital has direct or
indirect ownership positions. Prior thereto, from 1979 to January 1998, he was
a partner with McKinsey & Company, Inc.
John H. Gardner, Jr. Managing Director of the Global Capital Management
Group since July 1997 and a Director of Security Capital Real Estate Mutual
Funds Incorporated. Prior thereto, Mr. Gardner was a Senior Vice President of
Archstone and a Director of Archstone's former REIT Manager from September
1994 to June 1997. Prior to joining Security Capital, Mr. Gardner was with
Copley Real Estate Advisors in Boston from 1984 to 1994, most recently as
Managing Director. Mr. Gardner is an investment company and variable contracts
products principal registered with the NASD.
C. Robert Heaton. Managing Director of the Capital Division since December
1997, where he oversees human capital for Security Capital and companies in
which Security Capital has direct and indirect ownership positions. From March
1996 to December 1997, Mr. Heaton was Senior Vice President of Human Capital
for Security Capital. From March 1994 to February 1996, Mr. Heaton was Senior
Vice President with Right Management Consultants, Inc., a worldwide career
management and human resources consulting firm.
W. Joseph Houlihan. Managing Director of EU Management since April 1997 and
located in Brussels, where he is responsible for investment research of
European real estate companies and strategic investments; former Director of
SC-U.S.Realty from July 1995 to April 1997. Prior thereto, he was Executive
Vice President and Director of Institutional Management Group at GIM Algemeen
Vermogensbeheer ("GIM"), a Netherlands-based investment management company
where he specialized in publicly traded real estate investments since joining
GIM in 1977.
Jeff A. Jacobson. Managing Director of the Global Capital Management Group
since January 1999 where he is responsible for new product development. From
June 1998 until December 1998, Managing Director of the Capital Division where
he was responsible for identifying new business opportunities. From September
1997 to June 1998, Mr. Jacobson was a Senior Vice President of the Capital
Division. From September 1990 to May 1997, Mr. Jacobson was with LaSalle
Partners Limited where his most recent position was Managing Director of
LaSalle Advisors Limited.
18
<PAGE>
Gordon S. Kerr. Managing Director of Information Technology for the Capital
Division since July 1997. Prior thereto, Mr. Kerr was Senior Vice President of
Information Services at GE Capital Corporation from November 1994 to July
1997. From February 1987 to November 1994, Mr. Kerr was Senior Vice President
of MIS for Hyatt Hotels Corporation.
Jeffrey A. Klopf. Senior Vice President and Secretary of Security Capital
since January 1996; from January 1988 to December 1995, a partner with Mayer,
Brown & Platt, where he practiced corporate and securities law. Mr. Klopf
provides securities offering and corporate acquisitions services and legal
services to Security Capital and its directly-owned operating companies.
Anthony R. Manno, Jr. Managing Director of the Global Capital Management
Group since January 1995. Mr. Manno was a member of Security Capital's
Investment Committee from March 1994 to June 1996. Prior thereto, Mr. Manno
was a Managing Director of LaSalle Partners Limited from March 1980 to March
1994.
Todd W. Mansfield. Managing Director and a Director of SC-European Realty
since May 1997, where he is responsible for operating and financial oversight
and for companies in which SC-European Realty has an ownership position. Prior
thereto, from 1986 to May 1997, he was Executive Vice President and General
Manager of Disney Development Company, where he was responsible for Disney's
non-theme-park real estate activities worldwide.
Caroline S. McBride. Managing Director of the Capital Division since March
1997, where she provides operating oversight for companies in which Security
Capital has direct or indirect ownership positions. From June 1996 to July
1997, Mrs. McBride was Managing Director of the Global Capital Management
Group. Prior thereto, Mrs. McBride was with IBM from July 1978 to May 1996.
Mrs. McBride is a director of the Real Estate Research Institute, CarrAmerica,
Storage USA, Belmont and a Trustee of CWS Communities.
Daniel F. Miranda. Managing Director of the Global Capital Management Group
since September 1996, and President and Managing Director of SC-Preferred
Growth since April 1997. Prior thereto, Mr. Miranda was Regional Vice
President and later a Managing Director of GE Capital Real Estate Finance and
Services from September 1991 to September 1996, where he was responsible for a
real estate portfolio in the fourteen-state Midwest region.
A. Richard Moore. Managing Director of the Capital Division since May 1998,
where he provides operating oversight for companies in which Security Capital
has direct or indirect ownership positions. Prior thereto, from March 1990 to
May 1998, Mr. Moore was a Vice President with Goldman, Sachs & Co., where his
most recent position was in the Equity Research Department.
Constance B. Moore. Managing Director of the Capital Division since January
1999, where she provides operating oversight for companies in which Security
Capital has direct or indirect ownership positions. From July 1998 to December
1998, Ms. Moore was Co-Chairman, Chief Operating Officer and Trustee of
Archstone. From January 1996 to July 1998, Ms. Moore was Co-Chairman, Chief
Operating Officer and Director of Atlantic, and from May 1994 to December
1995, she was Managing Director of Archstone. From March 1993 to April 1994,
Ms. Moore was Senior Vice President of Security Capital.
Jeremy J. Plummer. Managing Director and a Director of SC-European Realty
since October 1997, where he is responsible for strategic investments in real
estate companies in Europe. Prior thereto, from October 1993 to October 1997,
he was Head of International Real Estate for SPP Investment Management; from
1992 to October 1993, Mr. Plummer was Chief Executive Officer of London &
Edinburgh Trust Ventures.
Kenneth D. Statz. Managing Director of the Global Capital Management Group
since December 1997, where he is responsible for the development and
implementation of portfolio investment strategy. From July 1996 to December
1997, Mr. Statz was Senior Vice President of the Global Capital Management
Group; from May 1995 to June 1996, Vice President of the Global Capital
Management Group. Prior thereto, Mr. Statz was a Vice President in the
investment research department of Goldman, Sachs & Co., from February 1993 to
January 1995, concentrating on research and underwriting for the REIT
industry.
19
<PAGE>
Donald E. Suter. Managing Director of Capital Markets since July 1997,
where he provides capital markets services for affiliates of Security Capital.
From May 1996 to June 1997, Mr. Suter was Senior Vice President of Capital
Markets. Prior thereto, from October 1995 to April 1996, Mr. Suter was
President and Chief Operating Officer for Cullinan Properties Limited in
Peoria, Illinois. From July 1984 to October 1995, Mr. Suter was with LaSalle
Partners Limited in Chicago, Illinois, where his last position held was Senior
Vice President, Corporate Finance Group. Mr. Suter is a general securities
principal registered with the NASD.
James C. Swaim. Senior Vice President of Security Capital since December
1998 and Vice President of Security Capital from December 1997 to December
1998. Mr. Swaim is the principal accounting officer for Security Capital.
Prior thereto, from July 1996 to December 1997, he was a private business and
financial consultant. From December 1984 to March 1996, Mr. Swaim was employed
by Farah Incorporated, where his most recent position was Executive Vice
President and Chief Financial Officer, and where he was a member of the Board
of Directors.
Paul E. Szurek. Managing Director of SCGroup and Chief Financial Officer of
Security Capital since July 1997. From January 1996 through June 1997, Mr.
Szurek was Managing Director of SC-U.S.Realty and EU Management, where he was
responsible for operations, corporate finance and mergers and acquisitions.
Prior thereto, Mr. Szurek was Senior Vice President of Security Capital from
June 1993 to January 1996, and was Vice President of Security Capital from
April 1991 to June 1993.
Robert S. Underhill. Managing Director of the Capital Division since August
1997, where he provides operating oversight for companies in which Security
Capital has direct or indirect ownership positions. Prior thereto, Mr.
Underhill was Senior Vice President of Security Capital from February 1995 to
August 1997 and Senior Vice President of the Global Capital Management Group.
Mr. Underhill was a consultant for affiliates of Security Capital from
November 1994 to February 1995. Prior thereto, Mr. Underhill was a Senior Vice
President of LaSalle Partners Limited from September 1984 to October 1994.
Jean-Francois van Hecke. Managing Director of Security Capital (U.K.)
Management Limited since January 1999. Mr. Van Hecke is a Managing Director of
Security Capital European Realty Management S.A. and has been Chief Executive
Officer of Bernheim--Comofi since 1993. Prior thereto, Mr. Van Hecke was a
Managing Director of Compagnie Nationale a Portefeuille, and a Director of
several Groupe Bruxelles Lambert affiliates between 1989 and 1993. Previously,
Mr. Van Hecke was the Chief Financial Officer at 3 Suisses Benelux.
Thomas G. Wattles. Managing Director of Security Capital since 1991 and a
Trustee of ProLogis since 1993. He was a Director of ProLogis' predecessor
since its formation in 1991, and was Non-Executive Chairman of ProLogis from
March 1997 to May 1998. Prior thereto, Mr. Wattles was Co-Chairman and Chief
Investment Officer of ProLogis and its former REIT Manager from November 1993
to March 1997, and Director of the former REIT Manager from June 1991 to March
1997. Mr. Wattles is a Trustee of CWS Communities and a Director of Strategic
Hotel.
Hai-Ou Yang. Managing Director of the Capital Division since May 1998,
where he is responsible for identifying new business oportunities. Prior
thereto, from April 1985 to April 1998, Mr. Yang was with the Prudential
Insurance Company of America where his most recent position was Managing Vice
President of the Prudential Realty Group.
Senior Officers of Certain Affiliates of Security Capital
George W. Ahl III--38--Senior Vice President of Capital Markets in its New
York office since July 1997. Prior thereto, he was Vice President, Investment
Services, for the Union Bank of Switzerland, The Private Bank, from May 1996
to July 1997. Mr. Ahl was with Crimson Capital Corporation from January 1993
to March 1996, where he served as Managing Director in Warsaw, Poland, and as
Advisor to the Czech Ministry of Privatization. Mr. Ahl is a general
securities representative registered with the NASD.
20
<PAGE>
Kevin W. Bedell--43--Senior Vice President of the Global Capital Management
Group since November 1997, where he directs the Investment Analyst Team. Mr.
Bedell was Vice President of the Global Capital Management Group from July
1996 to November 1997. Prior thereto, from January 1987 to January 1996, Mr.
Bedell was with LaSalle Partners Limited, most recently as an Equity Vice
President.
Gerard de Gunzburg--51--Senior Vice President of Capital Markets Limited in
London since August 1998. Mr. de Gunzburg was Senior Vice President of Capital
Markets in its New York office from January 1997 to July 1998. Prior thereto,
Mr. de Gunzburg was Vice President of Capital Markets from January 1993 to
January 1997. Mr. de Gunzburg is a general securities principal registered
with the NASD and a Securities Representative with the Securities and Futures
Authority.
Alison C. Hefele--39--Senior Vice President of the Capital Division since
June 1997, where she oversees strategic communications for Security Capital
and its affiliates. From March 1997 to May 1997, Ms. Hefele was Vice President
of the Capital Division. Prior thereto, Ms. Hefele was with Capital Markets
from February 1994 to February 1997, where she provided capital markets
services for affiliates of Security Capital.
Garret C. House--34--Senior Vice President of Capital Markets since
December 1997 and Director of Capital Markets since March 1999. Prior thereto,
Vice President of Capital Markets from September 1996 to December 1997, where
he assists with financing activities for affiliates of Security Capital. From
May 1994 to August 1996, he assisted with financing activities for affiliates
of Security Capital and prior thereto, Mr. House was a member of Security
Capital's Management Development Program from May 1993 to May 1994. He is a
general securities principal registered with the NASD.
Peter N. James--42--Senior Vice President of the Capital Division since
January 1998, where he is responsible for international tax planning and
structuring. Prior thereto, from 1989 to January 1998, Mr. James was an
international tax partner with Price Waterhouse L.L.P.
M. Marc Jason--37--Senior Vice President of the Capital Division since
February 1998, where he heads the due diligence group for SC-European Realty.
From December 1993 to February 1998, he was Vice President of ProLogis and its
former REIT Manager.
Thomas N. Kendall--43--Senior Vice President and Chief Information Officer
of SCGroup since March 1998, where he is responsible for overseeing technology
products and services, applications development and the customer service
center. Prior thereto, from May 1994 to March 1998, Mr. Kendall was with
Andersen Consulting, where he was Senior Manager from April 1995 to March
1998; from 1992 to May 1994, he was with J. E. Robert Company.
Mary R. McCarthy--45--Senior Vice President of Capital Markets since March
1998. Ms. McCarthy joined Capital Markets in January 1998. Prior thereto, she
was with Clarion Partners from June 1993 to January 1998, where her most
recent position was Senior Director from July 1996 to January 1998. Ms.
McCarthy is a general securities principal registered with the NASD.
Robert I.S. Meyer--38--Senior Vice President of Capital Markets Limited in
London since June 1998. Prior thereto, Mr. Meyer was Vice President of SC-
U.S.Realty and EU Management from April 1997 to June 1998. From June 1993 to
March 1997, Mr. Meyer was Vice President of J.P. Morgan Securities Limited.
Mr. Meyer is a Securities Representative with the Securities and Futures
Authority.
Gerald R. Morgan, Jr.--36--Senior Vice President of Security Capital (UK)
Management Limited since December 1997, where he is responsible for financial
operations, and a Senior Vice President of SC-European Realty. From March 1995
to December 1997, Mr. Morgan was Vice President of Security Capital, where he
was involved in treasury and corporate finance services for affiliates of
Security Capital. Prior thereto, Mr. Morgan was in Security Capital's
Management Development Program since July 1993.
21
<PAGE>
David E. Rosenbaum--30--Senior Vice President of the Global Capital
Management Group since January 1999. From May 1997 to January 1999, Mr.
Rosenbaum was Vice President of the Global Capital Management Group, and from
September 1996 to May 1997, he was a Vice President at Lazard Freres & Co.
LLC. From August 1991 to September 1996, Mr. Rosenbaum was a member of Lazard
Freres Real Estate Investment Banking Group.
David A. Roth--32--Senior Vice President of SC-European Realty since April
1997 where he is responsible for mergers and acquisitions. From October 1995
to March 1997, Mr. Roth was Vice President of Investment Research Group, where
he was responsible for mergers and acquisitions of SC-U.S.Realty. From
December 1993 to October 1995 he was an associate responsible for researching
corporate acquisitions. Prior thereto, he was an associate attorney with the
law firm of Wachtell, Lipton, Rosen and Katz in New York from December 1991 to
December 1993.
Charles I. Stannard--55--Senior Vice President of Real Estate Research
since November 1997. Prior thereto, Mr. Stannard was a Senior Vice
President/Director of research for the advertising agency D'Arcy Masius Benton
and Bowles, where he was employed from April 1983 to November 1997 and where
he was actively involved in D'Arcy's General Motors account and new business.
Item 2. Properties
The principal offices of Security Capital are located at 125 Lincoln Avenue
in Santa Fe, New Mexico and its telephone number is (505) 982-9292. Security
Capital's affiliates also have administrative offices in El Paso, Texas, which
are leased from ProLogis at an annual rental of $676,000. Security Capital and
its affiliates operate out of other offices in the United States (Atlanta,
Chicago, Denver, Houston and New York), Europe (Amsterdam, Brussels, London
and Luxembourg) and Asia (Tokyo). Security Capital believes its properties are
adequately insured. Although Archstone, Belmont, Homestead, ProLogis and
Strategic Hotel own an extensive number of properties, no single property is
materially important to Security Capital and its affiliates.
Properties of the Direct Investees
The following discussion sets forth, with respect to the operating
companies in which Security Capital has a direct ownership position, a
description of the properties owned or operated by such companies, the markets
in which such companies operate and the general competitive conditions faced
by such companies. No single property is materially important to any of the
direct investees (except in the case of Strategic Hotel and Belmont), and
there are no mortgages, liens or other encumbrances against any properties
which are material to any such operating company (except in the case of
Homestead). Whereas none of the direct investees has at present any material
plans for the renovation or improvement of properties in operation except as
discussed below, each direct investee budgets for regular maintenance, repair
and upgrades to its properties. As set forth below, each such company, except
Strategic Hotel, is actively engaged in the development of additional
properties. Because of capital constraints, Homestead may be limited to
developing only these properties currently under construction. In the opinion
of management of Security Capital, the properties of the direct investees are
adequately insured.
Archstone
Archstone is a leading real estate operating company focused on the
development, acquisition, redevelopment, operation and ownership of apartment
communities in markets and sub-markets with high barriers to entry across the
United States. As of December 31, 1998, Archstone had 305 apartment
communities, consisting of 88,631 units, including 19,290 units in its
development pipeline under construction and in planning, representing a total
expected investment of $6.933 billion. In July 1998, Atlantic, an apartment
REIT which operated primarily in the mid-Atlantic and southeastern United
States, was merged with and into Archstone. The transaction added more than
33,000 units to Archstone's portfolio and development pipeline. In addition,
the acquisition added several new markets in the eastern United States to
Archstone's portfolio. As of December 31, 1998, Archstone's apartment
communities are located in markets that include 30 of the nation's 50 largest
metropolitan markets.
22
<PAGE>
Archstone places considerable emphasis on the creation of value through the
development of carefully planned apartment communities. Currently, Archstone's
development pipeline totals $1.75 billion, including $1.05 billion of
communities under construction and $699.7 million of communities in planning.
Archstone had 20 apartment communities, representing $405.3 million in
total expected investment undergoing significant redevelopment activities as
of December 31, 1998. Overall redevelopment expenditures (including revenue-
enhancing and expense-reducing expenditures) aggregated $57.2 million during
the year ended December 31, 1998. This category includes: (1) redevelopment
initiatives intended to reposition the community in the marketplace, including
upgrades to interiors, exteriors, landscaping and amenities; (2) revenue-
enhancing expenditures expected to produce incremental community revenues,
such as garages/carports, storage facilities and gating; and (3) expense-
reducing expenditures, including such items as submetering systems and
xeriscaping that reduce future operating costs.
There are numerous commercial developers, real estate companies and other
owners of real estate that compete with Archstone in seeking land for
development, communities for acquisition and disposition and residents for
communities. All of Archstone's apartment communities are located in developed
areas that include other apartment communities. The number of competitive
apartment communities in a particular area could have a material adverse
effect on Archstone's ability to lease units and on the rents charged. In
addition, other forms of single family and apartment communities provide
housing alternatives to residents and potential residents of Archstone's
apartment communities.
Archstone has five percent or more of its apartment portfolio located in
each of the following individual target markets, based on total expected
investment: Atlanta, Georgia; Raleigh, North Carolina; Southeast Florida;
Washington, D.C.; Phoenix, Arizona; San Francisco Bay Area, California;
Seattle, Washington and Southern California. As a result, Archstone is subject
to increased exposure (positive or negative) to the economic and other
competitive factors specific to these markets. The majority of Archstone's
development efforts emphasize the development of apartment communities
targeted at moderate income households. Archstone's management believes that
moderate income households represent one of the largest and most underserved
segments of the renter population. These households exhibit a number of very
important characteristics that make them particularly desirable. For example,
moderate income households typically consist of longer-term residents, which
results in lower resident turnover and, therefore, lower overall costs to
refurbish units for re-leasing. In addition, there is relatively limited
competition for this segment of the market because most developers target the
upper income segment of the market. Archstone believes that focusing on the
moderate income segment will allow it to achieve more consistent rental
increases and higher occupancies over the long-term and, thereby, realize
sustainable cash flow growth and appreciation in value.
Belmont
Belmont is a fully integrated developer, owner and operator of senior
assisted living communities operating under the name Belmont Village. The
first Belmont Village community opened in November 1998 in Houston and
features 155 residences, including 24 designated for people with dementia. In
addition there are three Belmont Village communities under development and
eight in planning in six major metropolitan U.S. markets.
Belmont's management believes that the senior assisted living industry
affords opportunity for growth. Demand for senior assisted living residential
services is expected to outstrip supply as the size of the population age 65
and over will nearly double over the next 30 years. This is especially true in
large metropolitan areas, which lack adequate supply of these facilities and
present greater development challenges. In addition, the market for senior
assisted living is highly fragmented, with less than 15% of existing supply in
the hands of organized national competitors. The majority of supply exists in
small or tertiary markets and is provided by regional or single-asset
companies.
Belmont's strategy is to create communities in large metropolitan areas
with exceptional senior demographics where much of this demand is
concentrated. Belmont will focus on infill sites in these markets, which offer
high barriers to entry and few built-to-purpose competitors.
23
<PAGE>
There are numerous commercial developers, real estate companies, medical
facility companies, health care providers and others that compete with Belmont
in seeking land for development of senior assisted living communities, the
operation of senior assisted living communities, and seeking residents for
senior assisted living communities. Belmont's properties are located in
developed areas that include other senior assisted living communities. The
number of competitive senior assisted living facilities in a particular area
could have a material adverse effect on occupancy and revenues.
Homestead
Homestead is a leading owner and operator of moderately priced, corporate
extended stay lodging properties in the United States. Homestead is focused on
the corporate business traveler, and has developed a proprietary operating
system to ensure its customers a consistent, high-quality, uniform lodging
experience. The company's site selection program targets infill locations
proximate to major business centers and convenient to services desired by its
customers. Homestead seeks to build a national brand recognized and valued by
its major corporate customers by concentrating on delivering high-quality
service and product in strategic locations. Homestead's 120 completed
properties, 16 properties under construction and 18 properties in planning and
owned, with a combined total expected investment of $1.59 billion, are located
in 38 metropolitan areas in 25 states and the District of Columbia. No
individual market represents more than 10% of Homestead's lodging properties.
As of December 31, 1998, Homestead's mortgage notes payable and lines of
credit were collateralized by substantially all of Homestead's operating
properties.
Each Homestead property is, or will be, located in a developed area that
includes competing properties, including traditional hotels and corporate
apartments. The number of competitors in a particular area could have a
material adverse effect on occupancy, average weekly rates and revenues for a
Homestead Village Property in that market. Competition within the extended-
stay lodging market has increased substantially. In several markets where
Homestead has properties, there is intense competition for the extended stay
customer, which has already affected occupancy and revenue for these
properties. In addition, since the lodging industry has historically been
characterized by cyclical trends, there can be no assurance that the current
state of supply/demand fundamentals will continue into the future. Competition
within the lodging industry is based generally on convenience of location,
price, range of services and guest amenities offered and quality of customer
service. Homestead considers the reasonableness of its room rates, the
location of its properties and the services and the guest amenities provided
by it to be among the most important competitive factors in the business. A
number of other lodging chains and developers have developed or are developing
competitive extended-stay properties. In particular, some of these entities
have targeted the moderately priced segment of the extended-stay market in
which Homestead competes. Homestead competes for guests and for new
development sites with certain of these established entities which may have
greater financial resources than Homestead and better relationships with
lenders and real estate sellers. These entities may be able to accept more
risk than Homestead can prudently manage. Further, there can be no assurance
that new or existing competitors will not significantly reduce their rates or
offer greater convenience, services or amenities or significantly expand or
improve properties in markets in which Homestead competes, thereby materially
adversely affecting Homestead's business and results of operations.
ProLogis
ProLogis is an owner and lessor of industrial distribution facilities with
nearly 1,250 facilities being leased to industrial users throughout North
America and Europe, making it the largest publicly held, U.S.-based company to
do so. ProLogis is an international company focused exclusively on meeting the
distribution space needs of international, national, regional and local
industrial real estate users through the ProLogis Operating System(TM). As of
December 31, 1998, ProLogis, including its unconsolidated subsidiaries, had
134.7 million square feet of industrial distribution facilities, which
included 126.1 million square feet of operating facilities. Additionally,
ProLogis had 8.6 million square feet under development at a total expected
investment of $391.9 million in 90 North American and European markets. Also,
as of December 31, 1998, ProLogis, including its unconsolidated subsidiaries,
owned or controlled 4,678 acres of land for the future development of
approximately
24
<PAGE>
81.6 million square feet of distribution facilities. As of December 31, 1998,
93.0% of ProLogis' operating facilities and facilities under development
(based on cost) were located in the United States, 4.7% were located in Europe
and 2.3% were located in Mexico.
Upon completion of the merger with Meridian in late March 1999, the
combined company will own nearly 1,500 distribution facilities, based on the
real estate assets held by ProLogis and Meridian as of December 31, 1998. The
combined real estate assets, including assets held by unconsolidated
subsidiaries and joint ventures, will consist of approximately 157.5 million
square feet of operating distribution facilities. Also, the combined company
will have 10.8 million square feet of distribution facilities under
development at a total expected investment of $473.1 million in 94 North
American and European markets. Additionally, the combined company will own or
control approximately 5,100 acres of land for the future development of
approximately 87.9 million square feet of distribution facilities.
There are numerous other industrial properties located in close proximity
to each of ProLogis' properties. The amount of rentable space available in any
target market city could have a material effect on ProLogis' ability to rent
space and on the rents charged. In addition, in many of ProLogis' submarkets,
institutional investors and owners and developers of industrial facilities
compete for the acquisition, development and leasing of industrial space. Many
of these persons have substantial resources and experience.
ProLogis operates nationally and internationally and has no markets with a
concentration of investment in excess of 10% of its total portfolio
investment. Competition for acquisition of existing distribution facilities
from institutional capital sources and other REITs has increased substantially
in the past several years.
Strategic Hotel
Strategic Hotel has focused on becoming the preeminent owner of luxury and
upscale full-service hotel properties that are subject to long-term management
contracts with leading global hotel management companies. Strategic Hotel uses
research driven capital deployment to identify investment opportunities in
markets with high barriers to entry, develop strategic relationships with
preferred operators of superior brands and enhance operating results through
active, disciplined asset management. As of December 31, 1998, Strategic
Hotel's portfolio was comprised of 25 full-service hotels in 20 markets in the
United States, Europe, and Mexico representing total expected investments of
$1.8 billion, $172.3 million, and $64.0 million, respectively.
Each Strategic Hotel property is located in a developed area that includes
competing properties. The number and type of competitors in a particular area
could have a material adverse impact on occupancy and revenues. In addition,
since the lodging industry has historically been characterized by cyclical
trends, there can be no assurance that the current state of supply/demand
fundamentals will continue in the future. Competition within the lodging
industry is based generally on convenience of location, price, range of
services, guest amenities offered and quality of service. A number of chains
have targeted the upscale or luxury end of the lodging industry. Strategic
Hotel owns a portfolio of "branded" hotels that competes with certain of these
established entities, each of which may have greater resources than Strategic
Hotel. These entities may be able to accept more risk than Strategic Hotel can
prudently manage. Further, there can be no assurance that new or existing
competitors will not significantly change the rates, offer greater
convenience, service or amenities or significantly expand or improve their
properties in markets in which Strategic Hotel competes, thereby materially
adversely affecting Strategic Hotel's business and results of operations.
Properties of SC-European Realty
The following discussion sets forth, with respect to the real estate
operating companies in which SC-European Realty has acquired a material long-
term strategic ownership position, a description of the properties owned or
operated by such companies, the markets in which each of such companies
operates and the general competitive conditions faced by such companies. No
single property is materially important to any of the strategic investees of
SC-European Realty and there are no mortgages, liens or other encumbrances
against any
25
<PAGE>
properties which are material to any such strategic investee of SC-European
Realty except City & West End. Whereas none of the strategic investees of SC-
European Realty has at present any material plans for the renovation or
improvement of properties in operation except as noted below, each strategic
investee of SC-European Realty budgets for regular maintenance, repair and
upgrades to its properties. To the extent set forth below, certain investees
are actively engaged in the development of additional properties that would be
material to the investee. In the opinion of management of SC-European Realty,
the properties of the strategic investees of SC-European Realty are adequately
insured in the aggregate.
Access
Access is in the process of being created from the combination of four
private self-storage companies by integrating those companies' operations,
management teams and systems to create a strong operating platform designed to
achieve rapid growth throughout Europe. As of December 31, 1998, the combined
group owned 52 self-storage facilities in Europe: 32 in the UK, 17 in France
and three in Germany. These facilities represent a combined total expected
investment of $145.1 million, of which 71% is in the UK, 22% is in France, and
7% is in Germany. In addition, on December 31, 1998, SC-European Realty
acquired Millers Storage, the leading self-storage company in Australia where
it owns or operates 20 facilities mainly in the Sydney metropolitan area.
The global self-storage sector, with a strategic focus predominantly in
Europe, is considered a highly attractive sector in which to deploy capital
for a number of key reasons. The self-storage sector is in the early stage of
growth outside of the United States. In contrast to the United States where
there are over 25,000 facilities, management estimates that there are
approximately 200 facilities in Europe. The ratio of storage space square feet
per capita in the United States is 3.8 square feet and is estimated to be only
a fraction of this amount in Europe. The growth potential of this market as
consumer awareness builds is very significant. The next largest competitor in
Europe has 14 facilities. Consistent with the United States experience, there
is an opportunity at this early state to be first to market, secure attractive
infill locations, and build the leading brand. Access is focused on protected
urban redevelopment. Given the scarcity and extremely high cost of land in
major European cities, infill sites will generate the highest growth in cash
flow over the long-term.
Akeler and Bernheim-Comofi
SC-European Realty's suburban office interests are operated by two
companies, Akeler and Bernheim-Comofi, which primarily focus on the UK and
continental Europe, respectively. Both companies are focused on customer
driven development strategies. As of December 31, 1998, Akeler owned and
operated or had under contract to acquire or develop projects totaling over
1.1 million leaseable square feet representing a total expected investment of
approximately $432 million. Bernheim-Comofi owns, operates and develops
suburban office and office parks primarily in Brussels. As of December 31,
1998, Bernheim-Comofi owned and operated or had under contract to acquire or
develop projects totaling over 1.5 million leasable square feet representing a
total expected investment of approximately $226 million.
Security Capital identified the pan-European suburban office sector as an
attractive segment for two reasons: first, there is a strong demand for office
space from multinational companies as they position themselves to take
advantage of a strong economic environment in Europe and the restructuring
taking place as evidenced by EMU; and second, there is a shortage of modern,
flexible office space across Europe. Given the low levels of construction over
the past three to five years in major European cities, the majority of office
stock does not adequately meet the needs of large, multinational corporations.
City & West End
City & West End, a redeveloper, owner and operator of office properties
focused exclusively on London's West End, operated five properties in London
totaling 438,000 square feet with a total expected investment of $237.4
million as of December 31, 1998. Additionally, City & West End had 142,000
square feet of properties in London under development as of December 31, 1998,
representing a total expected investment of $180.6 million.
26
<PAGE>
The West End of London is considered one of the most attractive central
business district markets in Europe for long-term growth. The West End is the
most development-constrained London sub-market. Supply is added to this market
in small increments and is typically represented by redevelopment of the
building shell so as to preserve historic facades. For example, the two prime
submarkets in the West End, Mayfair and St. James', have approximately 15.3
million square feet of office space. Space deliveries in 1999 and 2000 in
these markets are expected to total only 434,000 and 398,000 square feet,
respectively.
Interparking S.A.
Interparking S.A. is the leading owner, developer and operator of public
off-street parking facilities in continental Europe. As of December 31, 1998,
Interparking S.A. operated 223 facilities with 110,500 parking spaces in 70
cities across six countries.
The parking sector across Europe demonstrates attractive demand and supply
fundamentals, driving strong revenue growth. Car ownership and in-commuting
city center traffic is growing across Europe and this increases demand for
parking facilities. Significant barriers to entry exist as government and
local authorities are increasingly looking to reduce reliance on private car
usage by discouraging on-street parking, restricting the amount of private
off-street parking spaces (in commercial and residential buildings) and by
limiting new public off-street parking development. The parking industry is
becoming more sophisticated not only in terms of facility design and
specifications, customer and product segmentation, but also through the
increasing role of technology. Interparking S.A. believes that there is a
significant opportunity to upgrade technology and information systems to
improve property revenues and operating margins.
The public parking sector in Europe is still a very fragmented industry,
where facilities are still often owned and/or operated by local authorities or
small private companies. Local government budgetary procedures are expected to
result in widespread privatization of public off-street parking management,
creating significant growth opportunities over the next five years. The
required investment levels to benefit from these opportunities as well as to
upgrade technology are prohibitive for small operations. Interparking S.A.
believes that the industry is at the early stages of consolidation.
London and Henley
London and Henley, a leading UK apartment owner, operator and redeveloper,
focuses exclusively on London submarkets. As of December 31, 1998, the
portfolio of apartment properties included 61 operating properties with a
total expected investment of $95.0 million and 18 properties under development
with a total expected investment of $140.6 million.
The UK is one of the only unregulated apartment markets in Europe. The
existing rental housing stock in the UK as a percentage of total housing stock
is 10.2% as contrasted with 30% in the US. There are no large owners, public
or private, of apartment properties in the UK, and few opportunities to
acquire blocks of apartment properties. Projections for the UK housing market
show extremely robust growth. Government estimates show an average annual
demand through 2016 of 253,000 dwelling units per annum. This strong level of
forecast demand, almost double the average annual supply over the past six
years of 139,000 homes, should translate into strong demand for apartments.
There is limited ability to acquire or develop new properties in central
London due to development restrictions and a shortage of undeveloped land.
These barriers create the need for highly specialized redevelopment skills to
create product.
Properties of SC-U.S.Realty Investees
The following discussion sets forth, with respect to the real estate
operating companies in which SC-U.S.Realty has acquired a material long-term
strategic ownership position, a description of the properties owned or
operated by such companies, the markets in which each of such companies
operates and the general competitive conditions faced by such companies. No
single property is materially important to any of the strategic investees of
SC-U.S.Realty (except in the case of City Center Retail, CWS Communities and
Urban Growth) and there are no mortgages, liens or other encumbrances against
any properties which are material to any such strategic investee of SC-
U.S.Realty. Whereas none of the strategic investees of SC-U.S.Realty has at
present any material plans for the renovation or improvement of properties in
operation except as noted below,
27
<PAGE>
each strategic investee of SC-U.S.Realty budgets for regular maintenance,
repair and upgrades to its properties. To the extent set forth below, certain
investees are actively engaged in the development of additional properties
that would be material to the investee. In the opinion of management of SC-
U.S.Realty, the properties of the strategic investees of SC-U.S.Realty are
adequately insured.
CarrAmerica
CarrAmerica owns, develops and operates office properties in 16 markets
throughout the United States. The company is committed to becoming America's
leading office workplace company by meeting the rapidly changing needs of its
customers with superior service, a large portfolio of quality office
properties, extraordinary development capabilities and land positions and,
through its affiliates, the availability of executive suites. Currently,
CarrAmerica and its affiliates own a controlling interest in a portfolio of
approximately 292 operating office properties and another 48 office buildings
under construction in key growth markets.
CarrAmerica believes that, as a result of its national operating system,
market research capabilities, access to capital, and experience as an owner,
operator and developer of real estate, it will continue to be able to identify
and consummate acquisition opportunities and to operate its portfolio more
effectively than competitors without such capabilities. CarrAmerica, however,
competes in many of its target markets with other real estate operators, some
of whom may have been active in such markets for a longer period than
CarrAmerica.
City Center Retail
City Center Retail was created to provide quality customer service and
premier urban-infill retail locations to top U.S. and international retailers.
City Center Retail is focused on the acquisition, development, operation and
ownership of well-designed and well-managed urban-infill retail properties
across the United States.
As of December 1998, City Center Retail had made investments in 27 projects
for a total expected investment of $458.1 million containing approximately 2.2
million square feet.
Security Capital's strategic research in the retail sector uncovered
several key trends in the United States which Security Capital believes result
in an attractive opportunity in the urban infill retail property niche to
create the first national company focused on developing, acquiring, operating
and owning real estate in downtown markets. Security Capital's research
indicated that a number of high-growth national and regional retailers in the
United States are focusing their growth away from suburban shopping malls in
favor of high-density urban infill locations. These locations have a
competitive advantage in the form of physical barriers to entry provided by
the surrounding buildings. They are also well-positioned to attract
significant foot traffic from surrounding workplaces and neighborhoods, as
well as that of conference attendees and tourists, and typically offer large,
open floor space that many retailers find attractive for promotional, retail
and entertainment centers. Security Capital believes that there is an
increasing recognition by top retailers of the strong and sustainable
viability of urban retail space in leading U.S. cities. In addition, Security
Capital's research indicates that there is a move to revitalize urban and
downtown centers, with a focus on retailing, and an evolution in urban design
that combines retail, food and entertainment uses (along with other uses such
as office or hotel) in a multi-story urban redevelopment. Historically, top
retailers have generally been required to deal with different real estate
entities in each market in which they have a presence, and a company with a
national presence should be able to more effectively meet customers' needs.
CWS Communities
CWS Communities is one of the largest private owners, operators and
developers of manufactured housing communities in the United States. As of
December 31, 1998, CWS Communities owned and operated, managed, or had under
development, or had under contract to acquire or develop, a total of 53
communities with over 17,962 spaces in nine states and Canada for a total
estimated cost of approximately $403.5 million.
Based on Security Capital's strategic research, CWS Communities believes
that underlying demand, supply and growth fundamentals for manufactured
housing communities in the United States are strong. Demand is being driven by
first-time home buyers, as well as an aging population, attracted to the
relative affordability,
28
<PAGE>
improved product quality and enhanced amenities of new manufactured housing
communities compared to traditional site-built homes. CWS Communities believes
that supply is constrained due to the difficulty of identifying attractive
sites and receiving zoning approval by municipalities for new development.
There are numerous commercial developers, real estate companies and other
owners of real estate that compete with CWS Communities in seeking land for
development, communities for acquisition, and residents for communities. All
of CWS Communities' properties are located in developed areas that include
other communities. The number of competitive manufactured housing communities
in a particular area could have a material adverse effect on CWS Communities'
ability to lease spaces and on the rents charged. In addition, other forms of
single family and apartment communities provide housing alternatives to
residents and potential residents of CWS Communities' manufactured housing
communities.
Regency
Regency is dedicated to being the leading operator, owner, and developer of
grocery-anchored neighborhood infill retail centers. As of December 31, 1998,
the company owned 129 retail properties operating or under development
totaling 14.7 million square feet of retail space in 16 states. Upon
completion of the merger with Pacific Retail on February 28, 1999, Regency
owned 201 retail properties totaling 23.2 million square feet of retail space
in 20 states.
There are numerous shopping center developers, real estate companies and
other owners of real estate that operate in the same markets as Regency and
compete with Regency in seeking retail tenants to occupy vacant space, for the
acquisition of shopping centers, and for the development of new shopping
centers. However, ownership of neighborhood infill centers historically has
been highly fragmented with local ownership, as institutional capital has
generally avoided the relatively small size of the centers and their
management-intensive nature. In addition, such centers targeted by Regency are
generally located within densely populated neighborhoods where little or no
land is available for development of competing centers.
Storage USA
Storage USA is a fully integrated, self-administered and self-managed real
estate investment trust which is engaged in the management, acquisition,
development, construction and franchising of self-storage facilities. Of its
current total of 485 self-storage facilities aggregating 31.9 million square
feet located in 31 states and the District of Columbia, Storage USA currently
owns 421 facilities and manages 64 facilities, including franchises.
Storage USA has recently taken advantage of its in-house development
capability to selectively develop new facilities in areas where suitable
acquisitions may not be available. The development activities consist
primarily of additions to existing facilities and construction of new
facilities.
Competition exists in all of the market areas in which the facilities are
located. Storage USA principally faces competitors who seek to attract tenants
primarily on the basis of lower prices. However, Storage USA usually does not
seek to be the lowest-priced competitor. Rather, based on the quality of its
facilities and its customer service-oriented managers and amenities, Storage
USA's strategy is to lead particular markets in terms of prices.
The pool of self-storage users has increased in recent years due to greater
consumer awareness, cost reduction programs by businesses, increased mobility
in the general population and an increasing mix of products and services
offered by self-storage facilities. Although circumstances vary among markets,
Storage USA believes that current demand for self-storage facilities is strong
when compared to the available supply of self-storage space. At the same time,
Storage USA believes that few operators of self-storage facilities are
currently constructing additional facilities or have access to the capital and
the development and construction expertise necessary to do so. Therefore,
Storage USA believes that the supply of self-storage facilities will remain
relatively limited for some time, and that the industry generally will
continue to experience strong occupancy and increasing rental rates. Storage
USA believes that its access to capital markets as a public company, the
systems and methods it has developed and the skilled personnel it has gathered
and trained for acquiring and
29
<PAGE>
managing self-storage facilities with potential for increased occupancy and
rental rates, and its expertise in facility development and construction,
place Storage USA in a position to capitalize on these market conditions for
the benefit of its shareholders.
Storage USA is the second largest self-storage manager, with 31.9 million
square feet in 485 facilities as of December 31, 1998. In addition to Storage
USA, there are four other publicly traded self-storage REITs and numerous
private and regional operators. These other entities may generally be able to
accept more risk than Storage USA can prudently manage, including risks with
respect to the geographic proximity of its investments and the payment of
higher facility acquisition prices. This competition may generally reduce the
number of suitable acquisition opportunities offered to Storage USA and
increase the price required to be able to consummate the acquisition of
particular facilities. Further, Storage USA believes that competition from
entities organized for purposes substantially similar to Storage USA's
objectives could increase. Nevertheless, Storage USA believes that the
operations, development and financial experience of its executive officers and
directors and its customer-oriented approach to management of self-storage
facilities should enable Storage USA to compete effectively.
Urban Growth
Urban Growth is focused on acquiring, developing and owning strategically
located land that is income-producing parking assets and urban land (initially
used for parking or car parks) situated in key urban infill locations in
selected target markets throughout the United States. As of December 31, 1998,
Urban Growth owned 22 properties in 10 cities throughout the United States
with a total of 16,429 parking spaces representing a total expected investment
of $246.4 million.
Based on Security Capital's strategic research, Urban Growth believes that
a company focused on acquiring, developing and owning strategically located
income-producing land in key urban infill and certain suburban locations in
selected target markets throughout the United States can generate attractive
returns. Security Capital's research also indicates that the underlying
demand, supply and growth fundamentals for parking lots and car parks in urban
infill and certain suburban locations in selected target markets in the United
States is strong. Growth is a function of increased demand driven by new
developments at such locations and the absence of adequate supply.
Item 3. Legal Proceedings
Security Capital and its subsidiaries are parties to certain legal
proceedings arising in the ordinary course of their business, none of which
are expected to have a material adverse impact on Security Capital.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
30
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Class A Shares are listed on the NYSE under the symbol "SCZ.A" and the
Class B Shares are listed on the NYSE under the symbol "SCZ". The table below
indicates the range of the high and low sales prices of the Class A Shares and
the Class B Shares since September 18, 1997 (the date that Security Capital's
securities were first traded).
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
CLASS A SHARES:
1997:
Third Quarter (trading commenced September 18, 1997
on a when-issued basis)............................. $ 1,750 $ 1,700
Fourth Quarter....................................... $ 1,650 $ 1,500
1998:
First Quarter........................................ $ 1,600 $ 1,472
Second Quarter....................................... $ 1,570 $ 1,300
Third Quarter........................................ $ 1,375 $ 885
Fourth Quarter....................................... $ 810 $ 600
1999:
First Quarter (through March 5, 1999)................ $ 685 $ 594
CLASS B SHARES:
1997:
Third Quarter (trading commenced September 18, 1997
on a when-issued basis)............................. $35.500 $33.125
Fourth Quarter....................................... $34.500 $29.500
1998:
First Quarter........................................ $32.500 $29.500
Second Quarter....................................... $31.625 $25.875
Third Quarter........................................ $27.250 $17.125
Fourth Quarter....................................... $18.000 $11.875
1999:
First Quarter (through March 5, 1999)................ $14.125 $11.625
</TABLE>
At March 5, 1999, there were approximately 706 holders of record of the
Class A Shares and 139 holders of record of the Class B Shares.
Holders of Class A Shares are entitled to receive ratably such dividends as
may be authorized by the Board of Directors of Security Capital (the "Board")
out of funds legally available therefor. Holders of Class B Shares are
entitled to dividends equal to one-fiftieth (1/50th) of the amount per share
declared by the Board for each Class A Share. Dividends with respect to the
Class B Shares will be paid in the same form and at the same time as dividends
with respect to the Class A Shares, except that, in the event of a stock split
or stock dividend, holders of Class A Shares will receive Class A Shares and
holders of Class B Shares will receive Class B Shares, unless otherwise
specifically designated by resolution of the Board.
Security Capital has not paid any dividends on its Class A Shares (since
1994) or Class B Shares. Any determination as to the payment of dividends will
depend upon the results of operations, capital requirements and financial
condition of Security Capital and such other factors as the Board deems
relevant. The Board intends to follow a policy of retaining earnings to
finance Security Capital's growth and for general corporate purposes and,
therefore, Security Capital has no present intention to pay a dividend on
Class A Shares or Class B Shares in the future.
31
<PAGE>
Security Capital's line of credit covenants provide for the following
restrictions on dividends. During a non-monetary default, no payments other
than dividends paid on Security Capital's Series B Preferred Shares are
permitted. Distributions and dividends paid, other than those on Security
Capital's Series B Preferred Shares, cannot exceed 50% of the cash flow
available for distributions, provided no event of default has occurred and is
continuing. In the event of a monetary default, all distributions are
prohibited.
Security Capital's 6.5% Debentures permit dividend payments so long as
Security Capital's shareholders' equity (under GAAP, measured both before and
after payment) exceeds $300 million and so long as the ratio of debt to equity
does not exceed 5 to 1.
Item 6. Selected Financial Data
The following table sets forth selected financial information for Security
Capital as of and for the years ended December 31, 1998, 1997, 1996, 1995 and
1994 (dollars in thousands, except per share data). The Company's consolidated
financial information included below has been derived from the Company's
consolidated financial statements. Arthur Andersen LLP's report on the
consolidated financial statements for the years ended December 31, 1998 and
1997 is included in this report on page 60. The following selected financial
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and with the
consolidated financial statements and notes thereto included in this report.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1998 1997(1) 1996 1995(2) 1994
--------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
Operating Data:
Equity in earnings (loss) of
investees.................... $ (64,249) $170,576 $168,473 $ 45,685 $ 8,812
Rental revenues............... 144,374 58,397 145,907 103,634 55,071
Financial Services Division
revenues(3).................. 93,850 105,941 77,512 49,404 --
Total revenues................ 173,178 367,704 398,122 200,534 156,855
Rental expenses............... 63,339 25,089 58,259 40,534 23,052
Financial Services Division
expenses(3).................. 76,093 87,190 79,296 56,317 --
General, administrative and
other(3)..................... 62,774 54,940 32,617 20,197 6,172
Costs incurred in acquiring
Financial Services
Division(3).................. -- -- -- 158,444 --
Gain on sale of management
companies.................... -- 93,395 -- -- --
Interest expense:
Security Capital:
Convertible
Debentures/notes(4)....... 21,016 94,749 93,912 78,785 29,647
Long-term debt............. 19,844 -- -- -- --
Line of credit............. 18,360 7,631 6,256 5,977 6,424
Majority-owned
subsidiaries:(5)............ 22,983 2,054 17,056 19,042 8,057
--------- -------- -------- --------- -------
Total interest expense... 82,203 104,434 117,224 103,804 44,128
--------- -------- -------- --------- -------
Net earnings (loss)
attributable to Class B
Shares....................... $(152,098) $106,154 $ 32,067 $(201,634) $(7,685)
========= ======== ======== ========= =======
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1998 1997(1) 1996 1995(2) 1994
--------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
Per Share Data:
Series A Preferred Share cash
dividends(6)................. $ 27.50 $ 75.00 $ 56.25 -- --
Series B Preferred Share cash
dividends(6)................. $ 44.33 -- -- -- --
Class A Share distributions
paid(7)...................... -- -- -- -- $ 33.50
Net earnings (loss) per Class
B Share:
Basic........................ $ (1.25) $ 1.39 $ 0.61 $ (4.50) $ (0.33)
Diluted...................... $ (1.25) $ 1.28 $ 0.57 $ (4.50) $ (0.33)
Weighted average Class B
Shares outstanding:
Basic........................ 121,325 76,577 52,950 44,834 22,947
Diluted...................... 121,325 93,054 56,686 44,834 22,947
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------
1998 1997(1) 1996 1995(2) 1994
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Investments, at equity... $3,071,204 $2,658,748 $1,438,937 $ 930,043 $ 230,756
Real estate, net of
accumulated
depreciation............ 1,164,869 716,882 1,365,373 865,367 2,005,957
Total assets............. 4,509,789 3,614,239 2,929,284 1,855,056 2,300,613
Long-term debt:
Security Capital(4)..... 937,010 323,024 940,197 718,611 514,383
Majority-owned
subsidiaries(5)........ 343,362 301,606 257,099 118,524 301,787
Minority interests....... 132,718 107,135 394,537 159,339 554,752
Total shareholders'
equity.................. $2,422,610 $2,548,873 $ 918,702 $ 528,539 $ 359,859
</TABLE>
- --------
(1) Prior to 1997, Security Capital consolidated the accounts of Atlantic.
During 1997, Security Capital's ownership of Atlantic decreased to less
than 50%. Accordingly, Atlantic was not consolidated effective January 1,
1997.
(2) Prior to 1995, Security Capital consolidated the accounts of ProLogis and
Security Capital Pacific Incorporated ("Pacific"). During 1995, Security
Capital's ownership of ProLogis decreased to less than 50% and Pacific was
merged into Archstone. Accordingly, these entities were not consolidated
effective January 1, 1995.
(3) Security Capital resulted from the January 1, 1995 merger of two
affiliates, but not commonly controlled, entities, Security Capital Group
Incorporated, a Delaware corporation, and Security Capital Realty
Incorporated, a Maryland corporation which survived the merger and later
changed its name to Security Capital Group Incorporated.
(4) During 1994, Security Capital made a $757.50 per Class A Share
distribution of 2014 Convertible Debentures resulting in a total increase
of $417.2 million in outstanding 2014 Convertible Debentures. The 2014
Convertible Debentures were redeemed during 1997.
(5) Security Capital does not guarantee the debt of any of its consolidated or
unconsolidated operating companies.
(6) 257,642 Series B Preferred Shares were issued on May 12, 1998, in exchange
for the 139,000 Series A Preferred Shares and 3,293,288 Class B Shares.
(7) For the year ended December 31, 1994, Security Capital elected to be taxed
as a REIT and made cash distributions to its shareholders.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with Security
Capital's consolidated financial statements and the notes thereto in Item 14
of this report.
Forward Looking Statements and Risk Factors
The statements contained in this report that are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements are based on current expectations, management's
beliefs, and assumptions made by management. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. Security Capital undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. Security Capital's financial performance depends on the
operating results of the Capital Division investees and the Financial Services
Division. Among the important factors that could cause Security Capital's
actual results to differ materially from those expressed in the forward-
looking statements are (i) changes in general economic conditions that would
affect the operating results of the Capital Division investees or the
33
<PAGE>
revenues earned by the Financial Services Division; (ii) changes in financial
markets and interest rates that could adversely affect Security Capital and
the Capital Division's investees' cost of capital and their ability to meet
their financing needs and obligations; (iii) increased or unexpected
competition for the Capital Division's investees; (iv) changes in capital
markets generally or the market for real estate securities specifically that
could affect the revenues earned by the Financial Services Division; (v)
impact of rapid growth on Security Capital, including management and staffing;
and (vi) changes in tax laws that could affect the Capital Division's
investees which operate as REITs.
The following matters may affect Security Capital's future financial
performance.
Reliance on Dividends and Transfers from, and Earnings of, Companies in which
Security Capital Invests
Security Capital conducts all of its operations through financial service
business subsidiaries and real estate operating companies in which it has an
investment. Security Capital is dependent on dividends and fees it receives
from these companies to meet its operating expense needs and to pay principal
and interest on its debt. Security Capital's results of operations are
affected by the results of operations of these companies. Although Security
Capital has influence over the real estate operating companies in which it
invests because of its significant ownership interest and contractual rights,
it has a non-majority ownership interest in many of these companies and there
are significant third-party shareholders, often with substantial aggregate
ownerships, in other companies. Accordingly, Security Capital's ability to
control these companies or cause them to make distributions or other payments
to Security Capital or its ability to affect the financial performance of
these companies may be limited.
Dependence on Key Personnel
Security Capital's success depends on its ability, and the ability of the
companies in which it invests, to attract and retain the services of executive
officers, senior officers and company managers. There is substantial
competition for qualified personnel in the real estate, capital management and
capital markets industries. Security Capital believes it has effective
succession plans in place, and that several of its officers could serve as its
senior executive officers and continue its performance, but the loss of any of
these key personnel could have an adverse effect on Security Capital.
Leverage
As of December 31, 1998, Security Capital had approximately $1.3 billion of
consolidated outstanding long-term indebtedness (of which $343.4 million
represented indebtedness of Security Capital's consolidated subsidiaries) and
$520.5 million of consolidated outstanding short-term indebtedness (of which
$357.1 million represented indebtedness of Security Capital's consolidated
subsidiaries). In addition, many of the companies in which Security Capital
has a direct or indirect investment have a substantial amount of indebtedness
and, in certain cases, have issued preferred stock to third parties.
Based on Security Capital's current level of operations and anticipated
growth as a result of new business initiatives, Security Capital anticipates
being able to satisfy its anticipated cash requirements for operations and
currently committed investments for existing businesses for the next twelve
months. The source of this cash is expected to be cash flow from operations
and funds available under its unsecured line of credit. If Security Capital
were to enter new businesses, or expand its investment materially in existing
businesses, such investments would be financed through selective sales from
time-to-time of existing assets or through the proceeds of the offering of
equity and debt securities and borrowings under its unsecured line of credit,
which could be refinanced with the issuance of long-term debt or equity
securities. Security Capital anticipates that its operating companies will
separately finance their activities through cash flow from operations, sales
of equity and debt securities and the incurrence of mortgage debt or line of
credit borrowings. The degree to which Security Capital is leveraged and to
which it is able to meet its financial obligations could affect its ability to
refinance existing indebtedness or to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, investments in
new businesses or general corporate purposes.
34
<PAGE>
Borrowing Risks
Debt Financing Risks
To the extent Security Capital or its investees incur debt, Security
Capital will be subject to the risks associated with debt financing. These
risks include the risks that Security Capital or an investee will not have
sufficient cash flow from operations to meet required payments of principal
and interest, that Security Capital or its investees will be unable to
refinance current or future indebtedness, that the terms of any refinancing
will not be as favorable as the terms of existing indebtedness and that
Security Capital or its investees will be unable to make necessary investments
in new business initiatives due to lack of available funds. Security Capital
does not guarantee the indebtedness of any of its investees. If Security
Capital uses securities of its investees to secure its indebtedness, and if
Security Capital is unable to make required payments on that indebtedness, the
securities could be transferred to the lender with a consequent loss of income
and asset value to Security Capital. If any of Security Capital's investees
mortgages a property owned by it to secure indebtedness, and the company is
unable to make its required payments on that indebtedness, the property would
be transferred to the mortgagee with a consequent loss of income and asset
value to that company. Security Capital's policy will be generally to arrange
unsecured, fixed rate long-term debt. Certain of its investees may incur
selective mortgage debt which provides greater long-term value.
Variable Interest Rate Risk
Increases in interest rates could increase Security Capital's interest
expense, which would adversely affect Security Capital's net earnings and cash
available for payment of obligations. At December 31, 1998, Security Capital
and its consolidated subsidiaries had $520.5 million of variable interest rate
borrowings outstanding on their lines of credit and a $122.0 million variable
interest rate mortgage note payable outstanding.
Availability of Capital
During the last half of 1998 and continuing into 1999, the prices for real
estate company equity securities generally declined and real estate companies
experienced a reduced supply of favorably-priced equity and debt capital. This
has resulted in a decreased level of new investment activity by many real
estate companies, including investees of Security Capital. Although Security
Capital believes these capital constraints will positively affect supply-
demand situations in certain sectors, a prolonged period in which real estate
companies cannot effectively access the equity capital markets may affect the
ability of Security Capital and its investees to undertake new business
initiatives, may adversely affect the growth of Security Capital and its
investees and could affect the ability of Security Capital and its investees
to refinance existing indebtedness on acceptable terms.
Conflicts of Interest
Allocation of New Business Opportunities
Security Capital will deploy its capital (both its corporate and third-
party managed capital) through investments in public and private companies
with highly focused business strategies and which are engaged in real estate
related activities. The allocation of new business opportunities may present
conflicts between Security Capital and its investees. Security Capital will
generally present new opportunities in existing property types within the
United States, for example, apartment communities or distribution space, to
its investees which are engaged in owning and operating those types of
properties. Security Capital will generally allocate long-term strategic
investment opportunities in equity oriented REITs located in the United
States, which are not engaged in operating property types in which Security
Capital currently owns a strategic position, to SC-U.S.Realty. Security
Capital expects to pursue directly all other investment opportunities in
unrelated real estate operating companies located in the United States, and it
may form new entities to develop those opportunities.
35
<PAGE>
Interests of Certain Directors and Officers in Companies in which Security
Capital has an Investment
Several of Security Capital's directors or senior officers are directors or
trustees of the companies in which Security Capital has a direct or indirect
investment. Several of these directors and officers also own shares of
Security Capital's stock and shares of the stock of companies in which
Security Capital has an investment. From time to time there may be
transactions between Security Capital and the companies in which it has an
investment or among the companies in which it has an investment. The interests
of the persons described above may differ from the interests of Security
Capital's shareholders as a result of their positions in the companies in
which Security Capital has an investment or their ownership of securities of
the companies in which Security Capital has an investment. As a result, those
persons may have an incentive to place the interests of the companies in which
Security Capital has an investment over the interests of Security Capital.
Principal Transactions with Officers, Directors and Investees of Security
Capital
Security Capital has engaged in transactions with certain of its officers
and directors or companies in which one of its directors may have a material
interest. Security Capital will not borrow from or make loans to affiliates,
other than loans to officers or loans to affiliates in which it owns a
substantial economic interest, or where its board of directors believes that
the loans are in its and its shareholders' best long-term interests. In those
cases where Security Capital engages in these types of transactions, it has
obtained or will obtain, after appropriate disclosure of all material
interests, board of directors approval for officer transactions, disinterested
director approval for interested director transactions and, where appropriate
under Maryland law or required by its charter or bylaws, shareholder approval.
Neither Security Capital's charter nor its bylaws contain any restrictions on
interested party transactions with directors and officers. Under the laws of
Maryland (where Security Capital is organized), each director is obligated to
offer to Security Capital any opportunity (with certain limited exceptions)
which comes to him and which Security Capital could reasonably be expected to
have an interest in developing. In addition, under Maryland law, any contract
or other transaction between Security Capital and a director or an entity in
which the director has a material financial interest is voidable unless (i) it
is approved, after disclosure of the interest, by the affirmative vote of a
majority of disinterested directors or by the affirmative vote of a majority
of the votes cast by disinterested shareholders or (ii) it is fair and
reasonable to Security Capital. Transactions with companies in which Security
Capital has a direct investment have been and will be considered, after
appropriate disclosure of all material interests by Security Capital's entire
board of directors. Security Capital owns substantial positions in the
companies in which it has a direct investment which, together with certain
investor agreements, advisory agreements, board representation or other
control rights, allows it to exert significant influence over the operations
of each of these entities. SC-U.S.Realty and SC-European Realty generally have
investor agreements and board representation for companies in which Security
Capital has an indirect investment.
Certain Risks Relating to the Investment Company Act
Security Capital is not registered under the Investment Company Act of
1940, as amended ("the Investment Company Act"), in reliance on an exemption
provided by Rule 3a-1 issued under the Investment Company Act. Security
Capital is not required to register as an investment company because Security
Capital is principally engaged in the real estate business through companies
which it primarily controls. Significant stock ownership (generally 25% or
greater), investor agreements, advisory agreements, board representation and
other control rights allow Security Capital to exert significant influence
over the operations of each of these entities. Security Capital intends to
exert similar influence over any other operating company in which it makes
future investments. However, to the extent Security Capital and its affiliates
do not elect to participate in future equity offerings by the companies in
which Security Capital has an investment or such companies issue substantial
additional equity securities in a business combination to unaffiliated
parties, Security Capital's ownership interest in and control over those
companies could diminish. Under these circumstances, Security Capital could
potentially be required to register as an investment company under the
Investment Company Act. Security Capital would be materially adversely
affected if it were required to register as an investment company under the
Investment Company Act.
36
<PAGE>
Real Estate Investment Risks
General
The return which Security Capital achieves from real estate operating
companies in which it has an investment is dependent on the performance of the
real property investments held by those companies, which are subject to
varying degrees of risk. Real estate cash flows and values are affected by a
number of factors, including changes in the general economic climate, local,
regional or national conditions (such as an oversupply of properties or a
reduction in rental demand in a specific area), the quality and philosophy of
management, competition from other available properties and the ability to
provide adequate maintenance and insurance and to control operating costs.
Although Security Capital seeks to minimize these risks through its market
research and asset and property management capabilities, it cannot eliminate
these risks. Real estate cash flows and values are also affected by such
factors as government regulations, including zoning, usage and tax laws,
interest rate levels, the availability of financing, the possibility of
bankruptcies of tenants, potential liability under environmental and other
laws, and changes in environmental and other laws. Since a significant portion
of the income from the REITs in which Security Capital has an investment is
derived from rental income and other payments from real property, their income
and distributable cash flow would be adversely affected if a significant
number of their tenants were unable to meet their obligations, or if they were
unable to lease properties on economically favorable terms.
Risks of Real Estate Development
Certain companies in which Security Capital has an investment have
developed or commenced development on properties and expect to develop
additional properties in the future. Real estate development involves
significant risks in addition to those involved in the ownership and operation
of established properties, including the risks that financing, if needed, may
not be available on favorable terms for development projects, that
construction may not be completed on schedule (resulting in increased debt
service expense and construction costs), that estimates of the costs of
construction may prove to be inaccurate and that properties may not be
occupied, leased or rented on profitable terms. These risks may cause the
development to fail to perform as the company expected. Timely construction
may be affected by local weather conditions, local or national strikes and by
local or national shortages in materials, insulation, building supplies or
energy and fuel for equipment.
Renewal of Leases and Re-leasing of Space
Certain of the companies in which Security Capital has a direct or indirect
investment are subject to the risks that leases may not be renewed, space may
not be re-leased or the terms of the renewal or re-leasing may be less
favorable than current lease terms. If those companies are unable to promptly
renew leases or re-lease or if the rental rates upon the renewal or re-lease
are significantly lower than expected, their cash flow, and accordingly
Security Capital's cash flow, may be adversely affected.
Illiquidity of Real Estate Investments
Equity real estate investments are relatively illiquid and therefore may
tend to limit the ability of the real estate operating companies in which
Security Capital has an investment to react promptly to changes in economic or
other conditions. In addition, certain significant expenditures associated
with equity investments (such as mortgage payments, real estate taxes and
operating and maintenance costs) are generally not reduced when circumstances
cause a reduction in income from the investments. Further, the REITs in which
Security Capital has an investment must comply with tax rules which enable
them to avoid punitive taxation. Thus, the ability of those REITs to sell
assets to change their asset base is restricted by tax rules which impose
holding periods for assets and potential disqualification as a REIT upon
certain asset sales.
37
<PAGE>
Changes in Laws
Real estate operating companies in which Security Capital has an investment
generally may not be able to pass increased costs resulting from increases in
real estate, income or transfer taxes or other governmental requirements
directly to residents, tenants or lessees. This may inhibit the ability of
those companies to recover those costs. Substantial increases in rents, as a
result of those increased costs, may affect the ability of a resident, tenant
or lessee to pay rent, causing increased vacancy. Changes in laws increasing
potential liability for environmental conditions or increasing the
restrictions on discharges or other conditions may result in significant
unanticipated expenditures. Security Capital can give no assurance that new
legislation, regulations, administrative interpretations or court decisions
will not significantly change the laws with respect to the qualification as
REITs of certain of the companies in which Security Capital has an investment,
or the federal income tax consequences of that qualification to those
companies.
Uninsured Loss
The real estate operating companies in which Security Capital has an
investment carry comprehensive liability, fire, flood, earthquake, extended
coverage and rental loss insurance with respect to their properties. This
insurance has policy specifications and insured limits customarily carried for
similar properties. The real estate operating companies believe these
specifications and limits are appropriate under the circumstances. There are,
however, certain types of losses (such as from wars) which may be uninsurable
or not economically insurable. If an uninsured loss or a loss in excess of
insured limits occurs, the real estate operating company could lose both its
capital invested in and anticipated profits from one or more properties.
Effects of Changes in Real Estate Company Securities Prices on Security
Capital's Results of Operations
Changes in the prices of real estate company equity securities have and
will impact Security Capital's results of operations. Security Capital holds
investments in certain investment entities holding publicly traded real estate
company equity securities whose results of operations are included in Security
Capital's results of operations. Therefore, Security Capital's results of
operations are affected by the realized trading and investment results of
these investment entities. In addition, the Global Capital Management Group
provides investment management services to various investment entities and
separate accounts. The fees earned by the Global Capital Management Group are
generally based upon assets under management and therefore are affected by a
reduction in the value of the securities held by the various investment
entities and separate accounts. These fees are based on advisory agreements
which are subject to annual or bi-annual review by independent directors of
the advised entities, or in the case of separate accounts, are terminable on
short notice. The results of operations of Security Capital are also affected
by the level of fees generated by Capital Markets. These fees depend upon the
number and size of transactions handled by Capital Markets, which may vary
from period to period. During the last half of 1998, prices of real estate
company equity securities generally declined, which adversely affected
Security Capital's operating results.
OVERVIEW
Security Capital is a global real estate research, investment and operating
management company. Security Capital obtains income from five sources: (1) the
Capital Division's share of earnings from its investees; (2) Capital Markets
revenues; (3) Corporate Services revenues for information technology,
accounting and administrative services; (4) Global Capital Management Group
revenues and (5) Real Estate Research revenues. Revenues from Corporate
Services, Capital Markets, Global Capital Management Group and Real Estate
Research are all included in the Financial Services Division and are only
reflected in Security Capital's consolidated financial statements if they were
earned from investees not consolidated in the financial statements. Financial
Services Division revenues earned from consolidated investees (Homestead, SC-
US Real Estate Shares, SC-European Real Estate Shares and, during 1996,
Atlantic) are eliminated in Security Capital's consolidated financial
statements.
38
<PAGE>
SC-U.S.Realty and SC-European Realty, in accordance with generally accepted
accounting principles, account for their investments at market value or
estimated fair value (depending on whether the investment is publicly traded)
and reflect changes in such values in their statements of income pursuant to
fair value accounting principles. Security Capital accounts for its investment
in SC-U.S.Realty and SC-European Realty using the equity method and, as a
consequence, Security Capital's results of operations are affected by changes
in the fair value of SC-U.S.Realty's and SC-European Realty's investments. SC-
U.S.Realty values its investments in publicly traded companies at market
determined by using closing market prices as of the relevant balance sheet
date. SC-U.S.Realty and SC-European Realty value their investments in private
companies at fair value, generally determined at cost, or an appropriate lower
value if the investment is not performing as expected. If substantial
additional capital is raised by an investee from independent third parties in
a private placement, SC-U.S.Realty and SC-European Realty value their
investment at the price at which that capital was raised when a substantial
percentage of the new subscriptions have been funded. In addition, there are
Financial Services Division subsidiaries that are the operating advisors to
SC-U.S.Realty and SC-European Realty and, for their services, earn advisory
fees based on a percentage of the fair value of SC-U.S.Realty's and SC-
European Realty's investments (not including short-term investments and
investments in Security Capital).
SC-US Real Estate Shares and SC-European Real Estate Shares, in accordance
with generally accepted accounting principles, account for their investments
at market value and reflect changes in such values in their statements of
income pursuant to fair value accounting principles. Security Capital
consolidates SC-US Real Estate Shares and SC-European Real Estate Shares, and
as a consequence, Security Capital's results of operations are affected by
changes in the fair value of their investments.
SC-Preferred Growth, in accordance with generally accepted accounting
principles, accounts for its investments at market value or estimated fair
value (depending on whether the investment is publicly traded). Security
Capital accounts for its investment in SC-Preferred Growth using the equity
method and, as a consequence, Security Capital's results of operations are
affected by changes in the fair value of SC-Preferred Growth's investments.
SC-Preferred Growth makes intermediate-term investments primarily in the
convertible securities of real estate operating companies. SC-Preferred Growth
values its investments in publicly traded securities at market determined by
using closing market prices as of the relevant balance sheet date. SC-
Preferred Growth values its investments in privately held securities by using
closing market prices, as of the relevant balance sheet date, of an identical
class of publicly traded securities if it exists. The fair value of other
privately held securities is determined by consistently applying policies and
procedures which consider many factors.
As a result of accounting for these investments at market value, Security
Capital's results of operations, as reflected under generally accepted
accounting principles, have been and will be subject to substantial volatility
from period to period.
RESULTS OF OPERATIONS
1998 Compared to 1997
Sale of REIT and Property Managers
Prior to September 1997, certain Security Capital Financial Services
Division subsidiaries managed the operations (REIT Managers) of and provided
property management services (Property Managers) to various REITs (Archstone,
Atlantic and ProLogis) in which the Capital Division was a significant owner.
Effective September 9, 1997, Security Capital exchanged the REIT and Property
Managers for additional common shares of Archstone (3,295,533 shares),
Atlantic (2,306,591 shares) and ProLogis (3,692,024 shares).
Archstone and Atlantic Merger
In July 1998 Security Capital Pacific Trust and Atlantic merged to form
Archstone Communities Trust. Pursuant to the merger transaction, Atlantic was
merged into Archstone. In accordance with the terms of the
39
<PAGE>
merger, each outstanding Atlantic common share was converted into one
Archstone common share and each outstanding Atlantic Series A preferred share
was converted into one comparable Archstone Series C preferred share. Security
Capital remained Archstone's largest shareholder.
Capital Division Investments
Dividends Received
Security Capital's dividends received increased from $128.1 million to
$151.9 million, a 19% increase for the year ended December 31, 1998, compared
to 1997. The increase resulted primarily from (a) the purchase of additional
shares in ProLogis and SC-US Real Estate Shares; (b) additional shares
received from Archstone, Atlantic and ProLogis in their acquisition of their
REIT and property management companies from Security Capital in September
1997; (c) additional investments in SC-Preferred Growth and (d) increases in
the per share dividend rates of most of its investees (see "dividends per
investee share" chart in note 2 to the consolidated financial statements).
Equity in Earnings of Investees
Security Capital includes in its earnings its share of the earnings of its
unconsolidated investees. The equity in earnings of SC-U.S.Realty and SC-
Preferred Growth and the earnings of SC-US Real Estate Shares and
SC-European Real Estate Shares, in accordance with generally accepted
accounting principles, include the change in unrealized gains or losses on
their investments in their earnings. This component of earnings or loss
fluctuates with changes in the prevailing market prices for the shares of the
real estate companies in which they invest. The fluctuation in market prices
does not have an impact on cash flow, but the general decline in real estate
equity security prices during 1998 had a significant adverse impact on
Security Capital's equity in earnings of these investees.
Presented below is Security Capital's equity in earnings (loss) of
affiliates for the years ended December 31, 1998 and 1997, and Security
Capital's common share ownership interest in affiliates as of December 31,
1998 and 1997 ($'s in millions):
<TABLE>
<CAPTION>
Equity in %
Earnings Ownership
(Loss) as of
Year Ended December
December 31, 31,
--------------- ----------
1998 1997 1998 1997
------- ------ ---- ----
<S> <C> <C> <C> <C>
Archstone.................................... $ 75.1 $ 45.6 38.1% 33.1%
ProLogis..................................... 25.5 2.1 40.4 42.5
SC-European Realty........................... 4.2 -- 34.6 --
SC-Preferred Growth.......................... (3.8) 6.2 9.8 12.9
SC-U.S.Realty................................ (163.7) 120.1 35.0 32.9
Strategic Hotel.............................. (1.5) (3.4) 30.4 39.5
------- ------
$ (64.2) $170.6
======= ======
</TABLE>
The increase in Security Capital's equity in ProLogis' earnings for the
year ended December 31, 1998, is primarily due to the one-time non-cash
expense of $75.4 million, in September 1997, related to ProLogis' acquisition
of its REIT and property management companies from Security Capital; partially
offset by interest rate hedge expense, increases in depreciation expense,
preferred share dividends and lower relative ownership by Security Capital in
1998. Additionally there was an increased number of distribution properties in
operation in 1998 as compared to 1997 and increased rental rates on renewal
leases for previously occupied space and an overall decrease in operating and
general and administrative expenses.
40
<PAGE>
The increase in Security Capital's equity in Archstone's earnings for the
year ended December 31, 1998, compared to 1997, is primarily due to a one-time
non-cash expense of $71.7 million, in September 1997, related to Archstone's
acquisition of its REIT and property management companies from Security
Capital, the merger of Atlantic into Archstone in July 1998, and an increase in
gains on dispositions of real estate.
The decrease in Security Capital's equity in SC-U.S.Realty's earnings for
the year ended December 31, 1998, compared to 1997, is primarily due to the
change in unrealized gain or loss on investments ($642.4 million decrease in
1998 and a $265.0 million increase in 1997) due to the decline in the market
value of REIT stocks generally, including those owned by SC-U.S.Realty. SC-
U.S.Realty's realized gains on its non-strategic real estate portfolio
investments decreased by $8.2 million for the year ended 1998 compared to 1997.
SC-U.S.Realty's net investment income (defined as dividends and other
investment income net of administrative expenses, advisor fees, taxes and
interest) increased by $17.6 million for the year ended 1998 compared to 1997.
The decrease in Security Capital's equity in SC-Preferred Growth's earnings
for the year ended December 31, 1998, compared to 1997, is primarily due to a
change in unrealized gain or loss on investments ($66.6 million decrease in
1998 and $49.9 million increase in 1997) due to the decline in the fair value
of stocks owned by SC-Preferred Growth.
The decline in the real estate equity markets in 1998 may impact the near-
term ability of operating affiliates of Security Capital to access the equity
and debt markets, which could adversely impact their ability to maintain their
historical growth rates. However, this should be partially mitigated by the
affiliates' ability to maximize the performance of their portfolio of operating
properties.
Room Revenue and Rental Expenses from Homestead
Homestead's room revenue increased from $58.4 million to $144.4 million, a
147% increase for the year ended December 31, 1998, compared to 1997.
Homestead's rental expenses increased from $25.1 million to $63.3 million, a
152% increase for the year ended December 31, 1998, compared to 1997.
Homestead's new property openings during 1998 and properties open for their
first full year in 1998 were the primary reason for both the increases in room
revenue and rental expenses.
At year end 1998, Homestead's development program included 18 land sites
owned. Homestead intends to finance the completion of the properties under
construction with cash on hand, $21 million borrowed under its Working Capital
Facilities (described under Lines of Credit below) in January 1999,
approximately $21 million additional capacity available under its Working
Capital Facilities upon renewal, cash flow from operations, and with additional
financing described below.
Development of the 18 land sites (which includes 6 sites in urban
metropolitan areas) is estimated at $354 million. Homestead's ability to move
into the construction phase of development on the owned sites is dependent upon
Homestead obtaining additional financing. Homestead is seeking funding to
continue development of these sites and may seek additional lines of credit,
issue debt or equity securities, or enter into other arrangements to provide
for development of the properties. However, there is no assurance that
Homestead will be able to obtain such financing when required or on acceptable
terms.
If Homestead cannot secure adequate funding or complete other development
arrangements then it may have to discontinue the development process on some or
all of the land sites owned resulting in expensing of carrying costs, such as
interest and property taxes, and expensing costs of its internal development
group. Similarly, if pursuits of some or all of the land sites are abandoned
Homestead may incur write-offs of pursuit costs and loss of non-refundable
earnest money deposits. If discontinuance of development of land sites is
required or pursuits of land sites for acquisition are abandoned due to
financing constraints, then Homestead intends to mitigate incurrence of
expenses and cash outflows by seeking to sell land sites, sell and assign
rights to acquire sites under pursuit, terminate personnel, or take other
appropriate actions, all of which may result in additional losses.
41
<PAGE>
Homestead expects that its results for the first quarter of 1999 will be
below management's prior expectations. Lower than expected occupancy rates in
certain markets has led to lower than expected revenues for certain
properties. Lower than expected increases in occupancy rates for newly-opened
properties in the northeast and midwest, caused in part by adverse weather
conditions, also are expected to impact revenues. These lower than expected
results may adversely affect Security Capital's results in 1999.
Financial Services Division Revenues
The components of Financial Services Division revenues were as follows for
the years ended December 31, 1998 and 1997 (in millions):
<TABLE>
<CAPTION>
1998 1997
----- ------
<S> <C> <C>
Capital Markets............................................ $31.1 $ 13.4
Corporate Services......................................... 17.6 5.3
Global Capital Management.................................. 49.2 26.2
Real Estate Research....................................... 1.5 0.8
REIT and property management fees.......................... -- 63.2
----- ------
Total Financial Services Division revenues............... 99.4 108.9
Less amounts eliminated in consolidation................. (5.5) (3.0)
----- ------
Consolidated Financial Services
Division revenues........................................ $93.9 $105.9
===== ======
</TABLE>
The decrease in Financial Services Division revenues for the year ended
December 31, 1998, compared to 1997 was primarily attributable to the
September 9, 1997, sale of the Archstone, Atlantic and ProLogis REIT Managers
and Property Managers substantially offset by: (a) the growth in assets
managed by Global Capital Management (shown in the following table), which
generated increased advisory and management fees; (b) an increase in capital
markets fees generated by transactions related to new affiliates; and (c) an
increase in corporate services and real estate research services revenue.
The following table reflects the market value of assets under management by
the Global Capital Management Group as of December 31, 1998 and 1997 (in
millions):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
SC-European Realty.......................................... $1,156 $ --
SC-Preferred Growth......................................... 800 461
SC-U.S.Realty............................................... 2,847 2,930
Investment Funds............................................ 111 133
Other....................................................... 79 --
------ ------
$4,993 $3,524
====== ======
</TABLE>
Growth in Financial Services Division revenues is expected to come
primarily from management and advisory revenues earned by the Global Capital
Management Group and fees earned by Corporate Services and Real Estate
Research. The decline in real estate security stock prices may make it more
difficult to attract assets to the company's investment funds and investees
which could, in turn, impact future revenue growth for the Global Capital
Management Group or Capital Markets. Additionally, the decline in real estate
securities prices in 1998 reduced the value of assets under management in
closed-end managed entities, thereby decreasing fee income to Security Capital
for managing such entities. Any reduced growth could be partially offset by
increases in other Financial Services revenues as Security Capital continues
to expand in this area, although no assurance of this growth can be given.
Realized capital gains (losses)
Realized capital gains decreased from net capital gains of $8.0 million to
net capital losses of $11.6 million (net of $1.0 million adjustment for
minority interest) for the year ended December 31, 1998, compared to 1997.
42
<PAGE>
This decrease is due to the decrease in the market value of SC-US Real Estate
Shares', SC-European Real Estate Shares' and SC-Real Estate Arbitrage Shares'
investments. SC-Real Estate Arbitrage Shares was closed as of December 31,
1998.
Change in unrealized gain or loss on investments
The change in unrealized gain or loss on investments was a decrease of
$13.8 million in 1998 compared to an increase of $12.4 million in 1997. The
decrease in 1998 is due to the decrease in the market value of SC-US Real
Estate Shares, SC-European Real Estate Shares and SC-Real Estate Arbitrage
investments.
At December 31, 1998, SC-US Real Estate Shares had investments at cost and
fair market value of approximately $90.5 million and $85.2 million,
respectively. At December 31, 1998, SC-European Real Estate Shares had
investments at cost and fair market value of approximately $17.5 million and
$16.0 million, respectively.
Other Income, net
Other income increased from $12.4 million to $25.6 million for the year
ended December 31, 1998, compared to 1997. The increase is primarily due to
interest income on Strategic Hotel debentures and additional dividend income
earned by the investment funds.
Financial Services Division Expenses
Financial Services Division expenses decreased from $87.2 million to $76.1
million, a 13% decrease for the year ended December 31, 1998, compared to
1997. This decrease primarily resulted from the sale of the REIT and property
management companies, which incurred $69.9 million of expenses for the year
ended December 31, 1997. This decrease was partially offset by increased
personnel expenses and a $3.8 million fourth quarter special charge which was
incurred primarily due to a change in strategy related to the retail
distribution of real estate investment funds, which resulted in a reduction of
personnel and associated costs. This change in strategy is expected to result
in an annualized cost savings of approximately $6.2 million.
General, Administrative and Other
General, administrative and other expenses increased from $54.9 million to
$62.8 million, a 14% increase for the year ended December 31, 1998, compared
to 1997. These increases resulted primarily from additional personnel and
related costs and Homestead's special charge related to a reduction in
development activity. Security Capital's share of Homestead's fourth quarter
special charge was $4.7 million.
Interest Expense
Interest expense for the years ended December 31, 1998 and 1997, is
summarized as follows (in millions):
<TABLE>
<CAPTION>
Security
Capital Homestead Total
------------- -------------- --------------
1998 1997 1998 1997 1998 1997
----- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Convertible debentures.... $21.0 $ 94.7 $ -- $ -- $ 21.0 $ 94.7
Lines of credit........... 19.8 7.6 16.9 2.2 36.7 9.8
Senior unsecured notes.... 19.8 -- -- -- 19.8 --
Mortgage notes payable.... -- -- 31.4 69.8 31.4 69.8
Capitalized interest...... (1.4) (0.1) (25.3) (69.8) (26.7) (69.9)
----- ------ ------ ------ ------ ------
Total................. $59.2 $102.2 $ 23.0 $ 2.2 $ 82.2 $104.4
===== ====== ====== ====== ====== ======
</TABLE>
43
<PAGE>
Interest expense on the Convertible Debentures decreased primarily due to
the conversion of $715.8 million principal amount of 2014 Convertible
Debentures to Class A Common Shares in the fourth quarter of 1997. The
increase in Security Capital's line of credit interest expense is primarily
due to increased weighted average borrowings. The increase in Homestead's net
interest expense is due to increased investments in properties.
Depreciation and Amortization
Depreciation and amortization increased from $15.3 million to $37.4
million, a 144% increase for the year ended December 31, 1998, compared to
1997. These increases primarily resulted from additional Homestead property
openings, and, to a lesser degree, additional computer hardware, software and
office leasehold improvements in the Financial Services Division.
Provision for Income Taxes
The effective tax rate for the year ending December 31, 1998, was less than
35%. This reduced rate reflects the impact of the unrecognized deferred tax
benefit in consolidated subsidiaries and state and foreign taxes partially
offset by a substantially lower tax rate on permanently invested earnings
generated in foreign jurisdictions. The effective tax rate for the year ending
December 31, 1997, was affected primarily by the reversal of the valuation
allowance applicable to net operating loss carryforwards, the value ($49.9
million) assigned to the nondeductible warrants issued to Archstone and
ProLogis shareholders and the $6.6 million non-cash, non-recurring charge (see
note 6 to the consolidated financial statements).
Preferred Share Dividends
Preferred Share dividends increased from $10.4 million to $35.1 million for
the year ended December 31, 1998, compared to 1997. This increase is due to
the exchange of Series A Preferred Shares and certain Class B Common Shares
for new Series B Preferred Shares in May 1998. See note 6 to the consolidated
financial statements for further discussion.
Extraordinary item
The extraordinary loss on the early extinguishment of debt, net of minority
interest, in the amount of $17.7 million for the year ended December 31, 1998,
relates to the mortgage loan purchase agreement entered into by Homestead with
Atlantic and Merrill Lynch Mortgage Capital Inc. (MLMC). See the description
of this transaction in Mortgage Notes Payable under Liquidity and Capital
Resources.
1997 Compared to 1996
Capital Division Investments
Dividends Received
Security Capital's dividends received increased from $108.6 million to
$128.1 million, an 18% increase for the year ended December 31, 1997, compared
to 1996. The increase results primarily from (a) the purchase of additional
shares in Atlantic and ProLogis; (b) additional shares received from
Archstone, Atlantic and ProLogis in exchange for the REIT Managers and
Property Managers; (c) dividends from SC-US Real Estate Shares of $9.6 million
during 1997; and (d) an increase in per share dividend rates of its investees.
44
<PAGE>
Equity in Earnings of Investees
Presented below is Security Capital's equity in earnings (loss) of
affiliates for the years ended December 31, 1997 and 1996, and Security
Capital's common share ownership interest in affiliates as of December 31,
1997 and 1996 ($'s in millions):
<TABLE>
<CAPTION>
Equity in %
Earnings Ownership
(Loss) as of
Year Ended December
December 31, 31,
-------------- ----------
1997 1996 1997 1996
------ ------ ---- ----
<S> <C> <C> <C> <C>
Archstone...................................... $ 18.9 $ 39.9 33.1% 36.3%
Atlantic....................................... 26.7 24.8 49.9 56.9
ProLogis....................................... 2.1 25.4 42.5 46.0
SC-Preferred Growth............................ 6.2 -- 12.9 --
SC-U.S.Realty.................................. 120.1 103.2 32.9 39.4
Strategic Hotel................................ (3.4) -- 39.5 --
------ ------
$170.6 $193.3
====== ======
</TABLE>
The decrease in Security Capital's equity in ProLogis' earnings for the
year ended December 31, 1997, compared to 1996, is primarily due to the one-
time non-cash expense of $75.4 million, in September 1997, related to
ProLogis' acquisition of its REIT and property management companies from
Security Capital; partially offset by a $6.9 million increase in other real
estate income, $3.3 million of income from unconsolidated subsidiaries
acquired during 1997, a $7.4 million increase in gains on sale of properties
and an increase in the amount of distribution space owned and leased by
ProLogis.
The decrease in Security Capital's equity in Archstone's earnings, for the
year ended December 31, 1997, compared to 1996, is primarily due to a one-time
non-cash expense of $71.7 million, in September 1997, related to Archstone's
acquisition of its REIT and property management companies from Security
Capital; partially offset by an $18.5 million increase in net rental income,
$10.7 million increase in gains on sales of properties during 1997 and $14.7
million of interest income on Homestead convertible mortgage notes during
1997. Archstone's earnings were impacted by an increase in interest expense of
$25.9 million primarily due to the issuance of long-term debt during the year
ended December 31, 1996 ($380 million) and in March 1997 ($50 million), and
short-term borrowings of $100 million in 1997.
Security Capital consolidated Atlantic's operations in 1996 and reported
earnings of Atlantic based on the equity method in 1997. For purposes of
comparison between years, Atlantic's results of operations for 1996 are
discussed below as if the equity method was in effect for 1996. The increase
in Security Capital's equity in Atlantic's earnings, for the year ended
December 31, 1997, compared to 1996, is primarily due to an increase in net
rental income of $21.1 million partially offset by (a) reduced gains on
disposal of real estate assets from 1996 to 1997 and (b) decreased ownership
in Atlantic in 1997.
The increase in Security Capital's equity in SC-U.S.Realty's earnings for
the year ended December 31, 1997, compared to 1996, is primarily due to an
increase in the change in unrealized gain on investments ($265.0 million for
1997 and $252.3 million for 1996) primarily related to the acquisition
activity of SC-U.S.Realty during 1997 and the increase in the market value of
REIT stocks owned by SC-U.S.Realty during 1997. SC-U.S.Realty's realized gains
on its non-strategic real estate portfolio investments increased by $37.6
million for the year ended 1997 compared to 1996. SC-U.S.Realty's net
investment income (defined as dividends and other investment income net of
administrative expenses, advisor fees, taxes and interest) increased by $47.4
million for the year ended 1997 compared to 1996 due to increased investments
in SC-U.S.Realty during 1997.
Room Revenue and Rental Expenses from Homestead
Homestead's room revenue increased from $8.2 million to $58.4 million for
the year ended December 31, 1997, compared to 1996. Homestead's rental
expenses increased from $4.0 million to $25.1 million for the year ended
December 31, 1997, compared to 1996. The increase in both room revenue and
rental expenses are
45
<PAGE>
attributable to the fact that Homestead initially acquired operating
properties in October 1996 and to new property openings during 1997.
Financial Services Division Revenues
The components of Financial Services Division revenues were as follows for
the years ended December 31, 1997 and 1996 (in millions):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Capital Markets........................................... $ 13.4 $ 2.6
Corporate Services........................................ 5.3 --
Global Capital Management................................. 26.2 8.0
Real Estate Research...................................... 0.8 --
REIT and property management fees......................... 63.2 81.6
------ ------
Total Financial Services Division revenues.............. 108.9 92.2
Less amounts eliminated in consolidation................ (3.0) (14.7)
------ ------
Consolidated Financial Services
Division revenues....................................... $105.9 $ 77.5
====== ======
</TABLE>
The increase in Financial Services Division revenues in 1997 compared to
1996 was primarily attributable to (i) the growth in assets managed by Global
Capital Management (shown in the following table), which generated increased
advisory and management fees; (ii) an increase in capital markets fees; and
(iii) corporate services and real estate research services revenues during
1997; partially offset by the impact of the September 9, 1997, sale of the
REIT and Property Managers.
The following table reflects the market value of assets under management by
the Global Capital Management Group as of December 31, 1997 and 1996 (in
millions):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
SC-Preferred Growth......................................... $ 461 $ --
SC-U.S.Realty............................................... 2,930 1,431
Investment Funds............................................ 133 10
------ ------
$3,524 $1,441
====== ======
</TABLE>
Realized capital gains (losses)
There were net capital gains of $8.0 million for the year ended December
31, 1997, due to investments in SC-US Real Estate Shares in 1997 and an
increase in the value of investments held during 1997.
Change in unrealized gain or loss on investments
The change in unrealized gain or loss on investments was an increase of
$0.3 million in 1996 compared to an increase of $12.4 million in 1997. This
increase is due to additional investments in SC-US Real Estate Shares and SC-
European Real Estate Shares and the increase in the market value of both
investment funds.
At December 31, 1997, SC-US Real Estate Shares had investments at cost and
fair market value of approximately $100.0 million and $115.2 million,
respectively. At December 31, 1997, SC-European Real Estate Shares had
investments at cost and fair market value of approximately $16.5 million and
$16.0 million, respectively.
46
<PAGE>
Other Income, net
Other income increased from $2.7 million to $12.4 million for the year
ended December 31, 1997, compared to 1996. The increase is primarily due to
dividend income earned by SC-US Real Estate Shares, increase in interest on
short-term investments due to temporary investment of proceeds from the
initial public offering and interest income on Strategic Hotel debentures
during 1997.
Financial Services Division Expenses
Financial Services Division expenses increased from $79.3 million to $87.2
million, a 10% increase for the year ended December 31, 1997, compared to
1996. This increase resulted from the expansion of the Financial Services
Division, including the hiring of additional professionals, primarily for the
REIT Managers and Property Managers and the Global Capital Management Group.
Financial Services Division expenses amounting to $69.9 million represent
expenses incurred by the REIT Managers and Property Managers through September
9, 1997 (date of the sale of the REIT and Property Managers). These expenses
were not incurred in the fourth quarter of 1997.
General, Administrative and Other
General, administrative and other expenses increased from $29.2 million to
$54.9 million, an 88% increase for the year ended December 31, 1997, compared
to 1996. This increase resulted primarily from (a) additional personnel and
related costs and professional fees applicable to researching new business
opportunities, enhancing information systems designed for global operations,
and to a lesser extent, additional personnel for human resources and other
administrative support functions ($7.6 million); (b) a non-cash, non-recurring
charge to earnings of $6.6 million in the second quarter of 1997 associated
with an exchange of Class A Shares for shares of a corporate entity (SCGPG
Incorporated) owned by Security Capital's chairman, whose sole assets were
warrants and options to purchase Class A Shares; the charge represents the
value applicable to the holders' ability to defer exercising the warrants and
options until 2002 in accordance with their terms; and (c) consolidation of
Homestead's accounts for the full year in 1997 versus 1996 ($11.3 million).
Interest Expense
Interest expense for the years ended December 31, 1997 and 1996, is
summarized as follows (in millions):
<TABLE>
<CAPTION>
Security
Capital Homestead Total
-------------- ------------ --------------
1997 1996 1997 1996 1997 1996
------ ------ ------ ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Convertible debentures....... $ 94.7 $ 93.9 $ -- $-- $ 94.7 $ 93.9
Lines of credit.............. 7.6 6.2 2.2 -- 9.8 6.2
Mortgage notes payable....... -- -- 69.8 2.1 69.8 2.1
Capitalized interest......... (0.1) -- (69.8) (1.2) (69.9) (1.2)
------ ------ ------ ---- ------ ------
Total.................... $102.2 $100.1 $ 2.2 $0.9 $104.4 $101.0
====== ====== ====== ==== ====== ======
</TABLE>
Interest expense on the Convertible Debentures increased primarily due to
the 2016 Convertible Debentures which were issued in March 1996 totaling $323
million, offset by the conversion of 2014 Convertible Debentures to Class A
Shares in the fourth quarter of 1997 (see note 5 to the consolidated financial
statements).
The increase in Security Capital's line of credit interest expense is
primarily due to the increase in the weighted average borrowings. In addition,
Homestead's mortgage interest expense increased due to additional borrowings
during 1997 under its funding commitment agreements with Archstone and
Atlantic for development of extended-stay lodging.
47
<PAGE>
Depreciation and Amortization
Depreciation and amortization increased from $4.6 million to $15.3 million
for the year ended December 31, 1997, compared to 1996. This increase
primarily resulted from Homestead being in operation for a full year in 1997
versus two and one-half months during 1996, and additional computer hardware
and software and office leasehold improvements in the Financial Services
Division.
Provision for Income Taxes
The provision for income taxes increased by $25.5 million in 1997 compared
to 1996 primarily due to deferred income taxes on the equity in earnings of
Security Capital's unconsolidated investees and the gain on sale of the REIT
Managers and Property Managers to Archstone and ProLogis. The effective rate
(see note 9 to the consolidated financial statements) for 1997 is affected by
(a) reversal of the valuation allowance applicable to net operating loss
carryforwards, (b) the value ($49.9 million) assigned to the nondeductible
Warrants issued to the Archstone and ProLogis shareholders (see note 3 to the
consolidated financial statements) and (c) the $6.6 million non-cash, non-
recurring charge (see note 6 to the consolidated financial statements).
Minority Interests
Minority interests decreased from $13.4 million to $1.2 million for the
year ended December 31, 1997, compared to 1996, primarily as a result of the
deconsolidation of Atlantic's accounts during 1997.
Preferred Share Dividends
Preferred Share dividends increased from $7.8 million to $10.4 million, a
33% increase for the year ended December 31, 1997, compared to 1996. The
increase is due to the 139,000 Series A Preferred Shares not being issued
until April 1, 1996. The Series A Preferred Shares carried a 7.5% preferential
cash dividend rate paid quarterly.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Security Capital's investment activities consist primarily of investments
in the common shares of its Capital Division investees and research and
capital expenditures relating to expansion of its Financial Services Division
business. The investment activities of Security Capital's investee operating
companies consist primarily of the acquisition and development of real estate,
or strategic ownership positions in companies which conduct such activities.
Other affiliates make portfolio investments in the securities of publicly
traded real estate companies and/or intermediate-term investments primarily in
the convertible securities of publicly-traded real estate operating companies.
Security Capital has historically financed its investment activities through
the sale of stock and convertible securities, borrowings under lines of credit
and, in 1998, issuance of unsecured long-term debt.
1998 compared to 1997 Operating Activities
Cash provided by operating activities increased by $113.5 million in 1998
compared to 1997. This increase is primarily due to a $34.7 million increase
in distributions from unconsolidated investees to $144.8 million for the year
ended December 31, 1998. The $78.8 million increase in net non-cash
adjustments is related to the equity in earnings of unconsolidated investees,
provision for deferred taxes, the change in unrealized gain or loss on
investments, depreciation and amortization and the gain on sale of management
companies in the third quarter of 1997.
48
<PAGE>
1998 compared to 1997 Investing and Financing Activities
Security Capital's investing activities used approximately $655.1 million
of cash, and Homestead's used $461.8 million, for the year ended December 31,
1998, compared to $772.9 million and $388.2 million, respectively, for the
year ended December 31, 1997. Security Capital's investing activities during
the year ended December 31, 1998, primarily consisted of: (i) $375.3 million
investment by Security Capital in common shares of SC-European Realty; (ii)
$175.0 million investment by Security Capital in securities of Strategic
Hotel; (ii) $70.5 million investment in securities of various other
affiliates, including SC-U.S.Realty, SC-Preferred Growth and others; and (iii)
$25.6 million investment by Belmont in real estate. Security Capital's
investing activities during the year ended December 31, 1997, consisted
primarily of: (i) $629.6 million investment by Security Capital in securities
of various affiliates, (ii) $106.2 million investment by Security Capital in
securities of other publicly traded real estate securities and (iii) $7.7
million investment by Belmont in real estate.
Security Capital's financing activities provided net cash flow of $978.0
million for the year ended December 31, 1998, as compared to $1,126.0 million
for the year ended December 31, 1997. Security Capital's financing activities
in 1998 primarily consisted of: (i) net proceeds from the lines of credit
borrowings of $347.7 million; (ii) proceeds from the issuance of senior
unsecured notes of $614.2 million; and (iii) proceeds from the sale of common
stock to minority interest holders (Homestead) of $30.9 million; offset by
Homestead's payment to extinguish debt of $25.3 million. Security Capital's
financing activities in 1997 primarily consisted of: (i) $692.9 million of net
proceeds from the issuance of common shares; (ii) $98.7 million of net
proceeds from the issuance of convertible debt; (iii) $138.8 million of net
proceeds from the lines of credit borrowings; and (iv) $191.8 million of
proceeds from the issuance of mortgage notes payable by Homestead.
Security Capital has committed, through June 30, 1999, to purchase up to
$200 million of subordinated convertible debentures of Homestead. Security
Capital and its affiliates have committed to $518 million in equity
subscriptions to SC-European Realty, of which $375.7 million had been funded
as of December 31, 1998. In addition, as of December 31, 1998, Security
Capital has committed to invest an additional $40.2 million in Belmont.
Based on Security Capital's current level of operations and anticipated
growth as a result of pending new business initiatives, Security Capital
expects that cash flows from operations (including dividends and fees received
from its operating companies) and funds currently available under its
revolving line of credit will be sufficient to enable Security Capital to
satisfy its anticipated cash requirements for operations and currently
committed investments. In the longer term, Security Capital intends to finance
its business activities (including investments in new business initiatives and
additional investments in existing affiliates) through the selective sale of
assets and redeployment of capital, its line of credit and future issuances of
equity and debt securities. In September 1998 Security Capital filed a $1
billion shelf registration statement with the Securities and Exchange
Commission, which can be issued as equity or debt as needed by Security
Capital, subject to market conditions. Subsequently, $200 million was reserved
to be issued under a medium-term note program as long-term debt, of which the
entire $200 million had been issued as of mid-January 1999. In addition,
Security Capital anticipates that its operating affiliates will separately
finance their activities through cash flow from operations, selective sales of
assets and redeployment of capital, sales of equity and debt securities and
the incurrence of mortgage debt or line of credit borrowings. Security Capital
does not guarantee the obligations of its operating affiliates.
Security Capital's consolidated investee had the following financing
activities subsequent to year-end:
. On February 23, 1999, Homestead completed a sale and lease-back of 18 of
the 26 properties collaterizing the $122 million mortgage note held by
Merrill Lynch Mortgage Capital Inc. ("MLMC"). Hospitality Properties
Trust purchased the properties for $145 million. Proceeds of the sale
were used to repay the $122 million debt which was due June 1999.
Homestead will continue to operate the properties under a long-term lease
through 2015 with options to renew through 2045 and pay minimum rent of
approximately $16 million per year which rent may increase based on
payment of percentage rents beginning July 2000 based on increases in
revenues over a base period. Homestead also posted a security deposit
equal to one year's rent. As a result of payment of the $122 million
mortgage note eight properties
49
<PAGE>
which were used as collateral for the mortgage note were subsequently
pledged as collateral for its Working Capital Facilities, described below
under "Lines of Credit--Homestead", to draw approximately $21 million in
additional borrowings under one of the facilities.
. On March 18, 1999, Homestead renewed its Working Capital Facilities with
an extension of the maturity date to December 31, 2000. In addition to
the renewal, Homestead's lines of credit were amended. See "Lines of
Credit--Homestead," below.
. On March 25, 1999, Homestead announced a rights offering for $225 million
of common stock, the proceeds of which will be used to repay Homestead's
$200 million bridge facility and for purposes allowed under Homestead's
Working Capital Facilities. The bridge facility is secured by a pledge of
Security Capital's obligations under a subscription agreement for the
purchase of $200 million of subordinated convertible debentures. Security
Capital will participate in the rights offering. To the extent rights
remain available Security Capital has agreed to purchase enough shares of
Homestead common stock in the rights offering to ensure that the proceeds
of the offering are no less than $205 million, based on current market
prices and subject to final documentation. To the extent Homestead raises
proceeds of up to $200 million in the rights offering from third parties
or Security Capital which are used to repay the Bridge Facility, Security
Capital's obligation under its subscription agreement for Homestead
convertible subordinated debentures will be reduced or terminated.
1996 Operating Activities
Cash provided by operating activities was $34.6 million for the year ended
December 31, 1996, which is related to the equity in earnings of unconsolidated
investees, provision for deferred taxes, the change in unrealized gain or loss
on investments and depreciation and amortization.
1996 Investing and Financing Activities
Security Capital recorded investments of approximately $832.3 million in
1996, consisting primarily of (i) $287.4 million invested by Atlantic for the
development and acquisition of multifamily communities; (ii) $65 million
invested by Homestead for development of extended-stay lodging properties from
October 17, 1996, to December 31, 1996; (iii) $95.2 million invested by
Security Capital for common shares of Atlantic and ProLogis; and (iv) $392.9
million invested by Security Capital for common shares of SC-U.S.Realty.
Security Capital's 1996 net financing activity of $807.7 million consisted
primarily of (i) net proceeds from sales of common and preferred stock of
$438.3 million and $139.0 million, respectively; (ii) $221.6 million in net
proceeds from the issuance of Convertible Debentures; (iii) a $45.9 million
increase in outstanding mortgage loans for Atlantic and Homestead; (iv) net
repayments on lines of credit of $10.0 million; and (v) other financing
transactions resulting in an aggregate use of cash of $27.1 million.
Security Capital completed the following non-cash transaction in 1996:
On October 17, 1996, Security Capital, Archstone, Atlantic and Homestead
consummated the merger transactions which created Homestead. Since
Homestead and Atlantic were consolidated with Security Capital in 1996,
only the effect of Archstone's transaction with Homestead is reflected in
Security Capital's consolidated financial statements for the year ended
December 31, 1996. With respect to the transaction between Archstone and
Homestead, Homestead acquired, at the date of merger, approximately $166
million of net assets in exchange for the issuance of 9,485,727 shares of
Homestead common stock and $76 million of convertible mortgage notes
payable.
Lines of Credit
Security Capital
Security Capital has a $650 million revolving line of credit with Wells
Fargo, as agent for a syndicate of lenders. The line was increased from $400
million to $700 million on April 6, 1998, and then on June 5, 1998,
50
<PAGE>
the line became unsecured and was reduced to $650 million. The agreement is
effective through April 6, 2000, with an option to renew for successive one-
year periods with the approval of Wells Fargo and participating lenders.
Borrowings bear interest at the LIBOR rate plus 1%. Commitment fees range from
0.125% to 0.20% per annum depending on the average unfunded line of credit
balance. The line of credit is guaranteed by SC Realty which is a wholly owned
subsidiary of Security Capital. Security Capital has requested the extension
of the line of credit to 2002 and a reduction of the line to match its
anticipated near-term requirements.
The line of credit contains various financial and other covenants
applicable to Security Capital, including a minimum shareholders' equity test,
a total liabilities-to-net-worth ratio, a cash flow/fixed charge coverage
ratio, a secured debt limit, an unsecured liabilities to unencumbered pool
value ratio, as well as restrictions on Security Capital's ability to incur
indebtedness and effect consolidations, mergers (other than a consolidation or
merger in which Security Capital is the surviving entity) and sales of assets.
The agreement provides that so long as no event of default has occurred and is
continuing, Security Capital may pay cash dividends in an aggregate amount not
to exceed 50% of cash flow available for distribution and pay cash dividends
to the holders of the Series B Preferred Shares. As of December 31, 1998,
there was $163.4 million outstanding under this line of credit and Security
Capital and SC Realty were in compliance with all financial covenants.
Homestead
Homestead's Working Capital Facilities were amended along with the
extension of the lines on March 18, 1999. The line secured by suburban
properties has been increased to $170 million total borrowing capacity from
$150 million and the sliding interest terms amended to be 2.0% to 3.0% over
LIBOR and 1% to 2% over prime or 1.5% to 2.5% over the federal funds rate.
Future additional collateral will be limited to suburban properties which are
construction complete and stabilized. The line secured by urban properties has
been decreased to $30 million total borrowing capacity from $50 million and
the interest terms amended to 3.0% over LIBOR and 2.0% over prime or 2.5% over
the federal funds rate.
The renewed and amended Working Capital Facilities require maintenance of
the following financial covenants effective with first quarter 1999:
. limiting total liabilities of no more than 55% of gross asset value, as
defined;
. limiting total indebtedness of no more than 50% of gross asset value, as
defined;
. maintaining various ratios of earnings before interest, taxes,
depreciation and amortization, as defined, to interest expense ranging
from 1.25 to 1.0 to 1.90 to 1.0;
. maintaining various ratios of earnings before interest, taxes,
depreciation and amortization, as defined, to debt service and preferred
stock dividends ranging from 1.0 to 1.0 to 1.25 to 1.0;
. maintaining various ratios of net property operating income to implied
debt service, as defined, ranging from 1.4 to 1.0 to 2.25 to 1.0;
. maintaining a minimum tangible net worth, as defined, of no less than 85%
of the year end 1998 amount, as defined, adjusted for net proceeds of
equity offerings; and
. maintaining positive net sources and uses of funds.
In addition, under the renewed and amended Working Capital Facilities
distributions or dividends on equity are prohibited, except on up to $250
million of preferred stock which may be issued in the future; total cost, as
defined, of projects in development cannot exceed 25% of gross asset value, as
defined, in 1999 or 15% in 2000; Homestead's business activities will be
limited to development, ownership and operation of extended stay hotels; and
no other additional indebtedness other than non-recourse indebtedness may be
incurred.
Homestead has significant leverage, and its properties provide revenues to
customers on very short-term commitments (one week or less). If occupancy or
room revenue were to decline materially, Homestead could be required to
renegotiate its financial covenants in its debt agreements or refinance that
debt, as to which no
51
<PAGE>
assurance can be given.
In addition to the 16 properties under construction at December 31, 1998,
Homestead also owned 18 development sites and had an additional 16 sites under
contractual control. Costs to develop the sites owned are estimated at $354
million. Costs to acquire and develop the sites under contractual control are
estimated at $200 million.
Capital resources in addition to those described above will be needed to
fund future developments, land acquisitions, and to repay or refinance
existing debt upon its maturity. Homestead may, subject to lender consent,
seek additional credit facilities and may seek to issue additional debt or
equity securities under its existing shelf registration statement, or
otherwise. However, there is no assurance that Homestead will be able to
obtain such financing when required or on acceptable terms. If Homestead
cannot secure adequate funding or complete other development arrangements then
it may have to discontinue the development process on some or all of the land
sites owned resulting in expensing of carrying costs, such as interest and
property taxes, and expensing costs of its internal development group.
Similarly, if pursuits of some or all of the land sites are abandoned
Homestead may incur write-offs of pursuit costs and loss of non-refundable
earnest money deposits. If discontinuance of development of land sites is
required or pursuits of land sites for acquisition are abandoned due to
financing constraints, then Homestead intends to mitigate incurrence of
expenses and cash outflows by seeking to sell land sites, sell and assign
rights to acquire sites under pursuit, terminate personnel, or take other
appropriate actions, all of which may result in additional losses.
Senior Unsecured Notes
On June 23, 1998, Security Capital issued $500 million of Senior Unsecured
Notes in three tranches: (i) 6.95% notes, with an original principal amount of
$200 million, net of original issue discount, due June 15, 2005; (ii) 7.15%
notes, with an original principal amount of $100 million, net of original
issue discount, due June 15, 2007; and (iii) 7.70% notes, with an original
principal amount of $200 million, due June 15, 2028. Interest is payable on
all notes on June 15 and December 15 of each year, commencing December 15,
1998. Such notes were exchanged for substantially identical registered
securities on September 4, 1998.
Under a medium term note program, on November 15, 1998, Security Capital
issued 7.75% Senior Unsecured Notes, with an original principal amount of $100
million, net of original issue discount, due November 15, 2003, on December
21, 1998, Security Capital issued 7.66% Senior Unsecured Notes, with an
original principal amount of $14.7 million, net of original issue premium, due
December 21, 2004, and in January 1999, Security Capital issued $85.3 million
of Senior Unsecured Notes, with interest rates ranging from 7.75% to 7.80% and
due dates in 2005.
All of the foregoing Senior Unsecured Notes are redeemable at any time at
the option of Security Capital, in whole or in part, at a redemption price
equal to the sum of the principal amount of the Senior Unsecured 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.
Under the terms of the Indentures, Security Capital can incur additional
debt only if, after giving effect to the debt being incurred, (i) the ratio of
debt to adjusted total assets, as defined, does not exceed 50%, and (ii) the
fixed charge coverage ratio, as defined, for the four preceding fiscal
quarters is not less than 1.5 to 1.0. In addition Security Capital will not at
any time permit its consolidated tangible net worth, as defined, to be less
than $1.5 billion. At December 31, 1998, Security Capital was in compliance
with all debt covenants relating to the Senior Unsecured Notes.
Derivative Financial Instruments
Security Capital utilizes derivative financial instruments in anticipation
of future financing transactions in order to manage well-defined interest rate
risk. Through hedging, Security Capital believes it can effectively manage the
risk of increases in interest rates on future debt issuances. In May 1998, in
anticipation of the June 1998 $500 million debt offering, Security Capital
entered into three forward treasury lock transactions with a
52
<PAGE>
total notional amount of $375 million. Upon the closing of the debt offering,
these contracts were terminated on June 18, 1998, resulting in losses totaling
$9.5 million. Such loss will be amortized and included as a component of
interest expense over the term of the related notes. As of December 31, 1998,
Security Capital had no interest rate hedging contracts outstanding.
Mortgage Notes Payable
Homestead has $221.3 million of convertible mortgage notes which are
convertible, at the option of Archstone, into shares of Homestead common stock.
The conversion price is equal to one share of Homestead common stock for every
$11.50 of principal amount outstanding.
On July 6, 1998, Homestead entered into a mortgage loan purchase agreement
with Atlantic and Merrill Lynch Mortgage Capital Inc. ("MLMC") whereby $98
million of Homestead convertible mortgage notes that were held by Archstone
were modified to, among other things, eliminate their convertibility feature in
exchange for a payment of $21.4 million from Homestead to Atlantic. The amount
paid to Atlantic was based on trailing market prices of Homestead common stock
at the time the agreement was entered into, which exceeded the conversion price
of the mortgage at that date. Homestead funded the payment with the proceeds
received from the sale of $24 million of 7.5% convertible subordinated
debentures. Also pursuant to the mortgage loan purchase agreement Atlantic sold
such modified notes to MLMC for $98 million. On August 7, 1998, Homestead
converted the $98 million of mortgage notes and the $24 million of 7.5%
convertible subordinated debentures into a $122 million mortgage of a newly
formed special purpose subsidiary of Homestead. The note was collateralized by
26 Homestead properties (totaling $227.4 million of historical cost at December
31, 1998) which were formerly collateral for the Atlantic mortgage notes. On
February 23, 1999, 18 of the 26 properties were released from collateral as a
result of the sale and leaseback agreement with Hospitality Properties Trust
discussed above. The $122 million mortgage note was due to mature on June 30,
1999 (subject to extension by the holder of the mortgage notes), and provided
for interest-only monthly payments of LIBOR plus 1.70% through September 30,
1998, LIBOR plus 2.0% through November 30, 1998 and LIBOR plus 2.25%
thereafter.
The transaction resulted in an early extinguishment of debt measured as the
difference between the $98.0 million carrying amount of the original mortgage
notes to Atlantic and the amount paid to extinguish the debt, including
transaction costs. Such loss on extinguishment of debt and transaction costs
amounted to $25.3 million and was recorded as an extraordinary item in the
third quarter of 1998.
The $122 million of indebtedness was repaid in February 1999 with a portion
of the proceeds of the sale and leaseback transaction between Homestead and
Hospitality Properties Trust.
2016 Convertible Debentures
At December 31, 1998, Security Capital had approximately $322.8 million
principal amount of 2016 Convertible Debentures outstanding. The 2016
Convertible Debentures accrue interest at an annual rate of 6.5% and require
semi-annual cash interest payments. The principal amount of the 2016
Convertible Debentures are convertible into Class A Common Shares at $1,153.90
per share (compared to a December 31, 1998, NYSE closing price of $660 per
share) at the option of the holder. The 2016 Convertible Debentures became
convertible on September 18, 1998. Security Capital may redeem the 2016
Convertible Debentures at any time after March 29, 1999, in whole or in part,
at par plus accrued and unpaid interest to the date of redemption.
EARNINGS BEFORE DEPRECIATION, AMORTIZATION AND DEFERRED TAXES ("EBDADT")
Fully converted EBDADT increased from $214.3 million to $234.4 million, a 9%
increase for the year ended December 31, 1998, primarily due to increased
investments in the Capital Division. EBDADT represents net earnings computed in
accordance with generally accepted accounting principles before gains/losses on
dispositions of depreciated property, plus real estate deprecation and
amortization, plus deferred tax expense, plus EBDADT net of dividends received
by SC-U.S.Realty and SC-European Realty from their strategic
53
<PAGE>
investees, plus unrealized losses, minus unrealized gains, and plus other non-
cash, non-recurring items. Management considers EBDADT to be the appropriate
measure of its ownership of real estate enterprises, as it most clearly
reflects the impact of both operating performance and capital structure.
With respect to Security Capital investees in which Security Capital has
less than a 20% interest, and does not have the ability to significantly
influence management, Security Capital includes only dividends or interest
received in its EBDADT. SC-U.S.Realty and SC-European Realty use the same
approach for investees in which they own less than 20%. EBDADT is not to be
construed as a substitute for net earnings in evaluating operating results nor
as a substitute for cash flow in evaluating liquidity.
Presented below is a reconciliation of net earnings (loss) to EBDADT for
the years ended December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Net earnings (loss) attributable to common
shares...................................... $(152,098) $106,154 $ 32,067
Investee reconciling items:
Real estate depreciation................... 153,542 76,307 59,276
Gain on sale of depreciated real estate.... (25,503) (20,912) (18,339)
Unrealized (gains) losses.................. 214,361 (104,730) (96,866)
Loss on sale of management companies....... -- 62,042 --
EBDADT, net of dividends, from Strategic
Investees of SC-U.S.Realty and SC-European
Realty.................................... 25,619 9,015 4,720
Interest rate hedge expense................ 13,642 -- --
Loss on extinguishment of debt............. 17,657 -- 2,808
Other...................................... (1,640) 6,430 1,082
--------- -------- --------
397,678 28,152 (47,319)
--------- -------- --------
Security Capital reconciling items:
Deferred tax (benefit) expense............. (51,793) 56,378 30,872
Convertible debenture interest expense..... 21,016 94,749 93,912
Series A preferred share dividends......... 19,843 10,425 7,819
Gain on sale of management companies....... -- (93,395) --
Pro forma effect of the sale of the REIT
and Property management companies......... -- 11,813 16,925
Other...................................... (203) -- 2,801
--------- -------- --------
(11,137) 79,970 152,329
--------- -------- --------
Fully Converted EBDADT....................... $ 234,443 $214,276 $137,077
========= ======== ========
</TABLE>
YEAR 2000 ISSUE
The "Year 2000 Issue" has arisen because many existing computer programs
and chip-based embedded technology systems use only the last two digits to
refer to a year, and therefore do not properly recognize a year that begins
with "20" instead of the familiar "19." If not corrected, many computer
applications could fail or create erroneous results. The following disclosure
provides information regarding the current status of Security Capital's Year
2000 compliance program.
Security Capital has been working on the Year 2000 issue since July 1997.
Security Capital and most of its affiliates have had action programs since
that time to certify or replace all technology systems that might be affected,
including "embedded" systems such as elevators and HVAC equipment. As of March
1, 1999, Security Capital has either certified or replaced all of its critical
systems with Year 2000 compliant systems. The remaining non-critical systems
are expected to be upgraded or replaced by June 1999. Among Security Capital's
affiliates three have certified all of their systems; the other affiliates are
in various stages of conversion to Year 2000 compliant systems. The latest
expected date for full compliance is July 1999.
54
<PAGE>
Security Capital, as a real estate research, investment and operating
management company, believes that it has relatively modest potential exposure
to Year 2000 issues. Security Capital intends to focus its efforts to ensure
that none of its affiliates will encounter the Year 2000 issue, including
providing direct and indirect assistance to those companies.
The majority of the operating and financial management functions of the
affiliated operating companies supported by computer systems are billing
tenants and leasing space. Neither of these functions is likely in the worst
case scenarios to represent a serious financial impact since they could be
manually corrected or circumvented without significant revenue loss to the
affiliated operating companies.
Exposure to embedded system problems in elevators, HVAC, access control and
refrigeration systems for affiliated operating companies is expected to be
minimal. Most of these systems are no more than 6 years old and partially
completed surveys conducted by affiliates show that these systems are already
compliant or can be readily upgraded to Year 2000 compliant versions. Most of
the potential costs for determining compliance of embedded systems is due to
the internal and external staffing costs to identify, survey and test each
system.
Assessing suppliers' readiness for Year 2000 has not been completed.
Security Capital and its affiliates have numerous properties throughout the
United States and in Europe and Mexico serviced by many generic service
providers such as utilities and telecommunications. In general, tenants have
individual contracts for generic services, so Security Capital's affiliates'
exposure is generally limited to "common area" facilities. Security Capital and
its affiliates have little influence over utility providers and local exchange
carriers; however, Security Capital expects little potential risk in this
highly scrutinized area.
Specialty (as opposed to commodity) services providers such as banks and
benefit administration companies have responded to surveys stating that they
expect to be Year 2000 compliant early in 1999. Security Capital and its
affiliates will perform tests of these systems during the first half of 1999
but expect no major problem or exposure from any of the specialty service
providers. There are no commodity or specialty services provided to Security
Capital or its affiliates that are believed to represent a material risk or
result in a material adverse financial impact in the most likely worst case
scenario.
Security Capital provides shared service functions to a number of affiliated
companies. These services include accounting, cash management, human resources
and benefits administration, information systems, internal audit, risk
management and tax planning and compliance services. All of the internal
computer systems used to provide these services are Year 2000 compliant, with
the exception of payroll for one affiliate and depreciation accounting, both of
which are expected to be converted to compliant systems in the near future.
Outside suppliers of services that support the shared service functions, such
as banks that perform electronic funds transfers, have been surveyed to
determine their Year 2000 compliance level. The survey process has not been
completed, but all respondents so far have stated that they are Year 2000
compliant, and Security Capital believes that there are no outside suppliers
that have not yet responded that represent a material risk to the provision of
shared services to its affiliates. The survey of suppliers is expected to be
completed by the end of the second quarter of 1999.
All of the major systems used by Security Capital are Year 2000 compliant,
specifically the corporate accounting, mutual fund management and cash
management systems. Security Capital is a tenant in a number of office
buildings in the United States and Europe. Landlord and supplier surveys for
those buildings are not yet complete, but no material impact is expected to be
caused by building related problems.
Third party costs to address the Year 2000 issue have been less than $50,000
to date and are not expected to exceed $250,000 in any likely worst case
scenario. Security Capital's internal costs incurred for Year 2000 compliance
issues have been less than $50,000 to date. Such costs are principally the
related payroll costs of its information technology group. Security Capital's
investment in new accounting, payroll and cash management systems is due to
rapid growth over the last five years and a desire to automate a greater number
of processes, and is not attributable to Year 2000 issues. However, in
considering and implementing these new systems, Security Capital believes it
took all appropriate steps to ensure that these new systems are Year 2000
compliant.
55
<PAGE>
Contingency plans to deal with unexpected and undetected problems caused by
the Year 2000 issue are focused on manual correction and rework. No material
revenue loss is expected to be caused by late billings or accounting entries.
Potential liabilities to third parties would be limited to private and
public investors, because Security Capital is not providing management or
operating real estate. There is no "reasonably likely worst case" known or
apparent to Security Capital that would result in a material liability to a
third party. The risk of increased cost or lost revenue in the event of the
most reasonably likely worst case scenario is not expected to be material in
any series of events or potential problems caused by the Year 2000 issue,
either for Security Capital directly or to any of its affiliated companies.
There can be no assurance that the Year 2000 issue remediation by Security
Capital and its affiliates or third parties will be properly and timely
completed and failure to do so could have a material adverse effect on Security
Capital, its business and its financial condition. Security Capital cannot
predict the actual effects to it of the Year 2000 issue, which depends on
numerous uncertainties, many of which are outside its control, such as (i)
whether significant third parties, such as banks and utilities, properly and
timely address the Year 2000 issue and (ii) whether broad-based or systemic
economic failures may occur. Security Capital will continue to monitor these
issues through its Year 2000 compliance program.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Security Capital's exposures to market risks consist of interest rate risks
related primarily to its variable rate line of credit, equity price risks
related to its investments in marketable equity securities and interest rate
risk related to its consolidated investment in Homestead described below.
Security Capital's interest rate risk management objective is to limit the
impact of interest rate changes on earnings and cash flows and to lower its
overall borrowing costs. To achieve its objective, Security Capital borrows on
a long-term basis primarily at fixed rates and staggered maturities with its
primary interest rate risk being related to its variable rate line of credit.
Security Capital has in the past, and intends in the future, to occasionally
utilize derivative financial instruments as hedges in anticipation of future
long-term debt transactions to manage well-defined interest rate risk exposure.
Security Capital had no outstanding interest rate hedges as of December 31,
1998 or 1997. Security Capital manages its equity price risks by limiting the
percentage of its assets invested in marketable equity securities for trading
purposes. As of December 31, 1998 and 1997, less than 3% and less than 4%,
respectively, of total assets were invested in marketable equity securities
that were available for sale.
Sensitivity Analysis
During the year ended December 31, 1998, Security Capital had weighted
average outstanding borrowings of $247.3 million on its $650 million variable
rate line of credit. If interest rates had been 10% higher during 1998,
interest expense on the line of credit would have increased $1.8 million to
$19.7 million. As of December 31, 1998, Security Capital held $117.9 million of
publicly traded real estate securities at market value through its consolidated
investment funds, SC-US Real Estate Shares and SC-European Real Estate Shares.
These securities have exposure to price risk. A hypothetical 10% decrease in
quoted market prices would amount to a decrease in the recorded value of
investments of approximately $11.8 million.
Homestead's Interest Rate Risk
Homestead's exposure to market risk for changes in interest rates relates
primarily to its line of credit facilities and variable rate mortgage note
debt. Homestead has no involvement with derivative financial instruments.
56
<PAGE>
The table below presents the: (i) effective interest rates; (ii) expected
maturity/principal repayment schedules; (iii) carrying values; and (iv)
estimated fair values for Homestead's interest rate sensitive liabilities as of
December 31, 1998:
<TABLE>
<CAPTION>
Expected Maturity/Principal Repayment December 31,
Effective ---------------------------------------------------------
Interest Total Fair
Rate 1999 2000 2001 2002 2003 Thereafter Balance Value
--------- -------- ---- ---- ---- ---- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive
Liabilities:
Lines of Credit
Facilities--variable
rate (1).............. 7.30% $357,080 $-- $-- $-- $-- $ -- $357,080 $357,080
Convertible Mortgage
Notes--fixed rate .... 9.00% $ -- $-- $-- $-- $-- $221,334 $221,334 $218,363
Mortgage Note Payable--
variable rate (2)..... 7.88% $122,028 $-- $-- $-- $-- $ -- $122,028 $122,028
Other Long-Term
Obligation--fixed
rate.................. 9.74% $ -- $ 12 $ 13 $ 14 $ 16 $ 17 $ 8,075 $ 8,064
</TABLE>
- --------
(1) On March 18, 1999, Homestead renewed and amended its lines of credit
Working Capital Facilities ($157,080 outstanding in the above amounts),
including an extension of their maturity to December 31, 2000.
Additionally, on March 25, 1999, Homestead initiated a rights offering for
$225 million of common stock, the proceeds of which will be used to repay
Homestead's $200 million bridge facility and for purposes allowed under
Homestead's Working Capital Facilities.
(2) The $122 million mortgage note scheduled to mature June 1999 was repaid
with the proceeds of a sale lease-back transaction on February 23, 1999.
Item 8. Financial Statements and Supplementary Data
Security Capital's Consolidated Balance Sheets as of December 31, 1998 and
1997, and its Consolidated Statements of Operations, Shareholders' Equity and
Cash Flows for each of the years in the three-year period ended December 31,
1998, together with the report of Arthur Andersen LLP, independent public
accountants, are included under Item 14 of this report and are incorporated
herein by reference. Selected quarterly financial data is presented in Note 11
of Notes to Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure Matters
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
For information regarding the directors and executive officers of Security
Capital, see "Item 1. Business--Directors and Executive Officers of Security
Capital." The information regarding the directors of Security Capital is
incorporated herein by reference to the description under the captions
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in Security Capital's definitive proxy statement for its 1999
annual meeting of shareholders (the "1999 Proxy Statement").
Item 11. Executive Compensation
Incorporated herein by reference to the description under the captions
"Election of Directors" and "Executive Compensation" in the 1999 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to the description under the caption
"Principal Shareholders" in the 1999 Proxy Statement.
57
<PAGE>
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference to the description under the caption
"Certain Relationships and Transactions" in the 1999 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following documents are filed as a part of this report:
(a) Financial Statements and Schedules:
1. Financial Statements:
See Index to Financial Statements below, which is incorporated
herein by reference.
2. Financial Statement Schedules:
Schedule I.
All other schedules have been omitted since the required information is
presented in the financial statements and the related notes or is not
applicable.
3. Exhibits:
See Index to Exhibits, which is incorporated herein by
reference.
(b) Reports on Form 8-K: The following reports on Form 8-K were filed
during the last quarter of the period covered by this report:
<TABLE>
<CAPTION>
Item Financial
Date Reported Statements
---- -------- ----------
<S> <C> <C>
November 18, 1998..................................... 5 No
December 7, 1998...................................... 5 No
December 21, 1998..................................... 5 No
</TABLE>
(c) Exhibits: The Exhibits required by Item 601 of Regulation S-K are
listed in the Index to Exhibits, which is incorporated herein by reference.
58
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Security Capital Group Incorporated
Report of Independent Public Accountants................................ 60
Consolidated Balance Sheets as of December 31, 1998 and 1997............ 61
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996.................................................... 62
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1997 and 1998....................................... 63
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.................................................... 64
Notes to Consolidated Financial Statements.............................. 66
Schedule I--Condensed Financial Information of Registrant............... 90
Archstone Communities Trust
Independent Auditors' Report............................................ 96
Balance Sheets as of December 31, 1998 and 1997......................... 97
Statements of Earnings for the years ended December 31, 1998, 1997 and
1996................................................................... 98
Statements of Shareholders' Equity for the years ended December 31,
1998, 1997 and 1996.................................................... 99
Statements of Cash Flows for the years ended December 31, 1998, 1997 and
1996................................................................... 100
Notes to Financial Statements........................................... 101
Independent Auditors' Report............................................ 123
Schedule III--Real Estate and Accumulated Depreciation as of December
31, 1998............................................................... 124
ProLogis Trust
Report of Independent Public Accountants................................ 133
Consolidated Balance Sheets as of December 31, 1998 and 1997............ 134
Consolidated Statements of Earnings and Comprehensive Income for the
years ended December 31, 1998, 1997 and 1996........................... 135
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1997 and 1998....................................... 136
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.................................................... 138
Notes to Consolidated Financial Statements.............................. 139
Report of Independent Public Accountants................................ 169
Schedule III--Real Estate and Accumulated Depreciation as of December
31, 1998............................................................... 170
Security Capital U.S. Realty
Report of Independent Accountants....................................... 190
Consolidated Statements of Net Assets at December 31, 1998 and 1997..... 191
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996.................................................... 192
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.................................................... 193
Consolidated Statements of Changes in Net Assets for the years ended
December 31, 1998, 1997 and 1996....................................... 194
Consolidated Statements of Changes in Shares Outstanding for the years
ended December 31, 1998, 1997 and 1996................................. 194
Consolidated Financial Highlights for the years ended December 31, 1998,
1997 and 1996.......................................................... 194
Consolidated Schedules of Strategic Investment Positions at December 31,
1998 and 1997.......................................................... 195
Consolidated Schedules of Special Opportunity Positions at December 31,
1998 and 1997.......................................................... 196
Notes to the Consolidated Financial Statements.......................... 197
Homestead Village Incorporated
Report of Independent Public Accountants................................ 206
Security Capital Atlantic Incorporated
Report of Independent Public Accountants................................ 207
</TABLE>
59
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Security Capital Group Incorporated:
We have audited the accompanying consolidated balance sheets of Security
Capital Group Incorporated (a Maryland Corporation) and subsidiaries as of
December 31, 1998 and 1997 and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years
ended December 31, 1998. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
schedule referred to below based on our audits. We did not audit the financial
statements of Archstone Communities Trust, Security Capital Atlantic
Incorporated, Security Capital U.S. Realty, Security Capital European Realty
and Homestead Village Incorporated (prior to January 1, 1997) for which the
accompanying statements reflect $1,999,510,000 (44.3%) and $1,741,155,000
(48.2%) of the total consolidated assets of Security Capital Group
Incorporated and subsidiaries as of December 31, 1998 and 1997, respectively,
and $228,379,000 (44.7%), $165,700,000 (45.1%) and $289,515,000 (72.7%) of the
total consolidated income in the consolidated statements of operations of
Security Capital Group Incorporated and subsidiaries for each of the three
years ended December 31, 1998, respectively. Those statements were audited by
other auditors whose reports have been furnished to us and our opinion,
insofar as it relates to the amounts included for those entities, is based
solely on the reports of other auditors.
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 and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Security Capital Group Incorporated and
subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years ended December 31,
1998, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The attached Schedule I is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
based on our audits and the reports of other auditors, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
March 10, 1999
60
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------
ASSETS 1998 1997
------ ---------- ----------
<S> <C> <C>
Investments, at equity:
Archstone Communities Trust.......................... $ 827,977 $ 831,574
ProLogis Trust....................................... 623,715 660,078
Security Capital European Realty..................... 379,971 --
Security Capital Preferred Growth Incorporated....... 77,782 60,821
Security Capital U.S. Realty......................... 791,562 909,581
Strategic Hotel Capital Incorporated................. 370,197 196,694
---------- ----------
3,071,204 2,658,748
---------- ----------
Real estate, less accumulated depreciation............. 1,164,869 716,882
Investments in publicly traded real estate securities,
at market value....................................... 117,878 129,334
---------- ----------
Total real estate investments...................... 4,353,951 3,504,964
Cash and cash equivalents.............................. 13,209 11,454
Other assets........................................... 142,629 97,821
---------- ----------
Total assets....................................... $4,509,789 $3,614,239
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Lines of credit...................................... $ 520,480 $ 172,808
Mortgage notes payable............................... 343,362 301,606
Long-term debt....................................... 614,236 --
Convertible debentures............................... 322,774 323,024
Accounts payable and accrued expenses................ 118,152 73,543
Deferred income taxes................................ 35,457 87,250
---------- ----------
Total liabilities.................................. 1,954,461 958,231
Minority interests..................................... 132,718 107,135
Shareholders' Equity:
Class A Shares, $.01 par value; 20,000,000 shares
authorized; 1,487,109 and 2,045,601 shares issued
and outstanding in 1998 and 1997, respectively...... 15 20
Class B Shares, $.01 par value; 229,537,385 shares
authorized; 47,628,481 and 22,627,541 shares issued
and outstanding in 1998 and 1997, respectively...... 476 226
Series A Preferred Shares, $.01 par value; 139,000
shares issued and outstanding in 1997; stated
liquidation preference of $1,000 per share.......... -- 139,000
Series B Preferred Shares, $.01 par value; 257,642
shares issued and outstanding in 1998; stated
liquidation preference of $1,000 per share.......... 257,642 --
Additional paid-in capital........................... 2,416,123 2,509,175
Accumulated deficit.................................. (251,646) (99,548)
---------- ----------
Total shareholders' equity......................... 2,422,610 2,548,873
---------- ----------
Total liabilities and shareholders' equity......... $4,509,789 $3,614,239
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
61
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
INCOME:
Equity in earnings (loss) of:
Archstone Communities Trust................... $ 75,076 $ 45,587 $ 39,864
ProLogis Trust................................ 25,514 2,101 25,439
Security Capital European Realty.............. 4,234 -- --
Security Capital Preferred Growth
Incorporated................................. (3,831) 6,175 --
Security Capital U.S. Realty.................. (163,745) 120,113 103,170
Strategic Hotel Capital Incorporated.......... (1,497) (3,400) --
Realized capital gains (losses)................. (12,582) 8,024 --
Change in unrealized gain or loss on
investments.................................... (13,785) 12,375 296
Financial Services Division revenues from
related parties................................ 93,850 105,941 77,512
Other income, net............................... 25,570 12,391 2,715
Homestead Village room revenue.................. 144,374 58,397 8,178
Security Capital Atlantic Incorporated income... -- -- 140,948
--------- -------- --------
173,178 367,704 398,122
--------- -------- --------
EXPENSES:
Interest expense................................ 82,203 104,434 101,043
Financial Services Division expenses............ 76,093 87,190 79,296
General, administrative and other............... 62,774 54,940 29,189
Depreciation and amortization................... 37,419 15,319 4,613
Homestead Village rental expenses............... 63,339 25,089 4,014
Security Capital Atlantic Incorporated
expenses....................................... -- -- 95,839
--------- -------- --------
321,828 286,972 313,994
--------- -------- --------
Earnings (loss) from operations.................. (148,650) 80,732 84,128
Gain on sale of management companies............ -- 93,395 --
--------- -------- --------
Earnings (loss) before income taxes, minority
interest and extraordinary charge............... (148,650) 174,127 84,128
--------- -------- --------
Provision for income tax expense (benefit):
Current......................................... 4,698 -- --
Deferred........................................ (51,793) 56,378 30,872
--------- -------- --------
Total income tax expense (benefit)............... (47,095) 56,378 30,872
Minority interests in net earnings (loss) of
subsidiaries................................. (2,202) 1,170 13,370
--------- -------- --------
Earnings (loss) before extraordinary charge...... (99,353) 116,579 39,886
Less Preferred Share dividends................... 35,088 10,425 7,819
--------- -------- --------
Earnings (loss) before extraordinary charge
attributable to common shares................... (134,441) 106,154 32,067
Extraordinary charge--loss on early
extinguishment of debt, net of minority
interests of $7,687.......................... 17,657 -- --
--------- -------- --------
Net earnings (loss) attributable to common
shares.......................................... $(152,098) $106,154 $ 32,067
========= ======== ========
Weighted-average Class B common shares
outstanding:
Basic........................................... 121,325 76,577 52,950
========= ======== ========
Diluted......................................... 121,325 93,054 56,686
========= ======== ========
Earnings (loss) per share:
Basic earnings (loss) before extraordinary
charge......................................... $ (1.10) $ 1.39 $ 0.61
Extraordinary charge--loss on early
extinguishment of debt......................... (0.15) -- --
--------- -------- --------
Basic net earnings (loss) attributable to
common shares.................................. $ (1.25) $ 1.39 $ 0.61
========= ======== ========
Diluted earnings (loss) before extraordinary
charge......................................... $ (1.10) $ 1.28 $ 0.57
Extraordinary charge--loss on early
extinguishment of debt......................... (0.15) -- --
--------- -------- --------
Diluted net earnings (loss) attributable to
common shares.................................. $ (1.25) $ 1.28 $ 0.57
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
62
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1996, 1997 and 1998
(In thousands, except shares)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------------------------------ at Liquidation
Class A Class B Value
----------------- ------------------ ------------------ Additional Total
Shares Par Shares Par Paid-in Accumulated Shareholders'
Outstanding Value Outstanding Value Series A Series B Capital Deficit Equity
----------- ----- ----------- ----- -------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995................... 994,791 $10 -- $-- $ -- $ -- $ 766,298 $(237,769) $ 528,539
Sale of subscriptions
for common shares, net
of offering costs..... 307,958 3 -- -- -- -- 320,116 -- 320,119
Less subscriptions
receivable............ (92,012) (1) -- -- -- -- (96,521) -- (96,522)
Issuance of Series A
Preferred Shares...... -- -- -- -- 139,000 -- -- -- 139,000
Repurchase of common
shares................ (12,326) -- -- -- -- -- (11,483) -- (11,483)
Interest reinvestment
plan.................. 5,214 -- -- -- -- -- 5,516 -- 5,516
Exercise of stock
options............... 5,353 -- -- -- -- -- 1,430 -- 1,430
Issuance of common
shares................ 31 -- -- -- -- -- 36 -- 36
Net earnings........... -- -- -- -- -- -- -- 39,886 39,886
Series A Preferred
Share dividends....... -- -- -- -- -- -- -- (7,819) (7,819)
--------- --- ---------- ---- -------- -------- ---------- --------- ----------
Balances at December 31,
1996................... 1,209,009 $12 -- $-- $139,000 $ -- $ 985,392 $(205,702) $ 918,702
Issuance of Class A
Shares, net........... 110,544 1 -- -- -- -- 101,435 -- 101,436
Issuance of Class B
Shares, initial public
offering.............. -- -- 22,569,710 226 -- -- 591,440 -- 591,666
Conversion of 2014
Convertible Debentures
to Class A Shares 684,349 7 -- -- -- -- 757,747 -- 757,754
Issuance of warrants... -- -- -- -- -- -- 61,428 -- 61,428
Interest reinvestment
plans................. 5,222 -- -- -- -- -- 6,964 -- 6,964
Exercise of stock
options and warrants.. 36,477 -- 57,831 -- -- -- 4,543 -- 4,543
Income tax benefit from
stock options
exercised............. -- -- -- -- -- -- 226 -- 226
Net earnings........... -- -- -- -- -- -- -- 116,579 116,579
Series A Preferred
Share dividends....... -- -- -- -- -- -- -- (10,425) (10,425)
--------- --- ---------- ---- -------- -------- ---------- --------- ----------
Balances at December 31,
1997................... 2,045,601 $20 22,627,541 $226 $139,000 $ -- $2,509,175 $ (99,548) $2,548,873
Conversion of Class A
Shares to Class B
Shares................ (565,040) (5) 28,251,899 283 -- -- (278) -- --
Exercise of stock
options and warrants.. 1,488 -- 34,849 -- -- -- 1,918 -- 1,918
Issuance of Series B
Preferred Shares...... -- -- (3,296,640) (33) (139,000) 257,642 (98,766) (19,843) --
Conversion of 2016
Convertible Debentures
to Class B Shares..... -- -- 10,832 -- -- -- 250 -- 250
Issuance of Class A
Shares, net........... 5,060 -- -- -- -- -- 4,318 -- 4,318
Cost of raising
capital............... -- -- -- -- -- -- (494) -- (494)
Net loss............... -- -- -- -- -- -- -- (117,010) (117,010)
Preferred Share
dividends............. -- -- -- -- -- -- -- (15,245) (15,245)
--------- --- ---------- ---- -------- -------- ---------- --------- ----------
Balances at December 31,
1998................... 1,487,109 $15 47,628,481 $476 $ -- $257,642 $2,416,123 $(251,646) $2,422,610
========= === ========== ==== ======== ======== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
63
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Operating Activities:
Net earnings (loss)...................... $ (117,010) $ 116,579 $ 39,886
Adjustments to reconcile net earnings
(loss) to cash flows provided by
operating activities:
Deferred income tax expense (benefit).. (51,793) 56,378 30,872
Minority interests..................... (2,202) 1,170 13,370
Extraordinary charge--loss on early
extinguishment of debt, net of
minority interest..................... 17,657 -- --
Equity in (earnings) loss of
unconsolidated investees.............. 64,249 (170,576) (168,473)
Distributions from unconsolidated
investees............................. 144,757 110,082 74,653
Change in unrealized gain or loss on
investments........................... 13,785 (12,375) (296)
Depreciation and amortization.......... 37,419 15,319 4,613
Gain on sale of management companies... -- (93,395) --
Other.................................. 5,946 18,353 (17,942)
Decrease (increase) in other assets...... (24,215) (13,886) 1,074
Increase (decrease) in accounts payable
and accrued expenses.................... 52,135 (383) 37,107
Net operating cash flows of Security
Capital Atlantic Incorporated........... -- -- 19,727
----------- ----------- ---------
Net cash flows provided by operating
activities.......................... 140,728 27,266 34,591
----------- ----------- ---------
Investing Activities:
Real estate investments.................. (487,447) (395,896) (65,138)
Investments in and advances to:
ProLogis Trust......................... -- (75,002) (64,528)
Security Capital U.S. Realty........... (45,726) (273,042) (392,922)
Security Capital European Realty....... (375,265) -- --
Strategic Hotel Capital Incorporated... (175,000) (200,000) --
Security Capital Preferred Growth
Incorporated.......................... (25,000) (54,850) --
Publicly traded real estate securities,
net................................... 228 (106,163) --
Homestead Village Incorporated
warrants.............................. -- (26,682) --
Security Capital Atlantic Incorporated. -- -- (30,700)
Other.................................... (8,727) (29,490) 8,397
Net investing cash flows of Security
Capital Atlantic Incorporated........... -- -- (287,418)
----------- ----------- ---------
Net cash flows used in investing
activities.......................... (1,116,937) (1,161,125) (832,309)
----------- ----------- ---------
Financing Activities:
Proceeds from lines of credit............ 1,359,878 532,308 532,000
Payments on lines of credit.............. (1,012,206) (393,500) (580,000)
Proceeds from long-term debt offerings... 614,236 -- --
Proceeds from unsecured note and
mortgage notes payable.................. 163,041 191,750 25,363
Payments on mortgage notes payable....... (122,028) -- --
Proceeds from issuance of convertible
debt.................................... -- 98,729 229,426
Repurchase of convertible debt........... -- (72) (7,840)
Proceeds from issuance of common shares,
net..................................... 5,656 691,043 219,096
Proceeds from issuance of Series A
Preferred Shares........................ -- -- 139,000
Proceeds from issuance of common shares
to minority interest holders............ 30,911 18,346 81
Preferred dividends paid................. (15,245) (10,425) (7,819)
Debt issuance costs...................... (20,543) (2,409) (3,116)
Homestead payment to extinguish debt..... (25,344) -- --
Other.................................... (392) 220 6,599
Net cash flows of Security Capital
Atlantic Incorporated................... -- -- 254,882
----------- ----------- ---------
Net cash flows provided by financing
activities.......................... 977,964 1,125,990 807,672
----------- ----------- ---------
Net increase (decrease) in cash and cash
equivalents.............................. 1,755 (7,869) 9,954
Cash and cash equivalents, beginning of
year..................................... 11,454 19,323 9,369
----------- ----------- ---------
Cash and cash equivalents, end of year.... $ 13,209 $ 11,454 $ 19,323
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
64
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
----------- ----------- --------
<S> <C> <C> <C>
Non-Cash Investing and Financing
Activities:
Receipt of Security Capital European
Realty shares in satisfaction of
indebtedness............................. $ 70,772 $ -- $ --
=========== =========== ========
Issuance of Series B Preferred Shares:
Series B Preferred Shares issued........ $ 257,642 $ -- $ --
Series A Preferred Shares retired....... (139,000) -- --
Fair value of Class B Shares retired.... (98,799) -- --
Series A Preferred dividend recorded.... (19,843) -- --
----------- ----------- --------
$ -- $ -- $ --
=========== =========== ========
Shares issued to acquire SCGPB
Incorporated............................. $ -- $ (6,600) $ --
=========== =========== ========
Shares received from Archstone in
exchange for management companies........ $ -- $ 75,838 $ --
=========== =========== ========
Shares received from ProLogis in exchange
for management companies................. $ -- $ 81,871 $ --
=========== =========== ========
Issuance of warrants to Atlantic
shareholders............................. $ -- $ 11,530 $ --
=========== =========== ========
Issuance of common stock under debenture
interest reinvestment plans.............. $ -- $ 6,964 $ 5,516
=========== =========== ========
Conversion of 2014 and 2016 Convertible
Debentures............................... $ 250 $ 757,754 $ --
=========== =========== ========
Increase in property and equipment and
development cost payable................. $ 12,250 $ 22,752 $ 4,347
=========== =========== ========
Homestead Village Incorporated purchase
from Archstone Communities Trust:
Depreciated cost of assets acquired..... $ -- $ -- $177,983
Liabilities assumed..................... -- -- (11,818)
Convertible mortgages issued............ -- -- (75,946)
Reallocation of investment in Archstone
Communities Trust to Homestead......... -- -- (42,376)
Minority interest contributed............. -- -- (48,271)
Net cash acquired......................... -- -- 428
----------- ----------- --------
$ -- $ -- $ --
=========== =========== ========
Dividend distribution declared for 1st
quarter 1997 to minority interest
holders.................................. $ -- $ -- $ 6,375
=========== =========== ========
Assumption of existing mortgage notes
payable in conjunction with real estate
acquired by Atlantic..................... $ -- $ -- $ 17,867
=========== =========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
65
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business and Summary of Significant Accounting Policies
Business:
Security Capital Group Incorporated ("Security Capital") is a global real
estate research, investment and operating management company. Its strategy is
to create the optimal organization to lead and profit from global real estate
securitization. Security Capital has invested in various companies (the
Capital Division) (see note 2) and provides various capital management and
financial services through a Financial Services Division (see note 3). The
Capital Division invests in real estate investment trusts and other real
estate-related companies either directly or indirectly. Its objective is to
identify and underwrite attractive new investment opportunities and enhance
the value of existing investee companies. The Financial Services Division
provides, operational and capital deployment oversight, capital management,
capital markets, corporate services and research services primarily for the
companies in which Security Capital and its affiliates have invested either
directly or indirectly. Security Capital is a Maryland corporation.
Principles of Financial Presentation:
The accompanying consolidated financial statements include the results of
Security Capital, its wholly owned Financial Services Division subsidiaries
and its majority-owned Capital Division investees which include Homestead
Village Incorporated ("Homestead"), BelmontCorp ("Belmont"), Security Capital
U.S. Real Estate Shares ("SC-US Real Estate Shares") and Security Capital
European Real Estate Shares ("SC-European Real Estate Shares"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. At December 31, 1998, minority interest is comprised mainly of
the minority shareholders of Homestead and SC-US Real Estate Shares.
Security Capital accounts for its 20% or greater (but not more than 50%)
owned investees, and those over which it has substantial influence as the
manager or advisor, by the equity method. For an investee accounted for under
the equity method, Security Capital's share of net earnings or losses of the
investee is reflected in income as earned and dividends reduce the investment
as received. Three of Security Capital's equity method investees, Security
Capital European Realty ("SC-European Realty"), Security Capital Preferred
Growth Incorporated ("SC-Preferred Growth") and Security Capital U.S. Realty
("SC-U.S.Realty"), account for their investments at fair value in accordance
with the specialized industry accounting rules prescribed by the American
Institute of Certified Public Accountants Audit and Accounting Guide for
Investment Companies. Under fair value accounting, unrealized gains or losses
are determined by comparing the fair value of the securities held to the cost
of such securities. Unrealized gains or losses relating to changes in the fair
values of SC-European Realty's, SC-Preferred Growth's and SC-U.S.Realty's
investments are reported as a component of their net earnings.
In 1996, Security Capital owned more than 50% of Security Capital Atlantic
("Atlantic") and therefore consolidated Atlantic's financial results. In 1997,
Security Capital's ownership was less than 50% and therefore Atlantic's
results were reflected on the equity method of accounting.
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.
Certain amounts in the 1997 and 1996 consolidated financial statements and
notes to consolidated financial statements have been reclassified to conform
to the 1998 presentation.
Cash and Cash Equivalents:
Security Capital considers all cash on hand, demand deposits with financial
institutions, and short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents.
66
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Real Estate and Depreciation:
Real estate, which is comprised of real estate assets owned by Homestead
and Belmont, is carried at cost, which is not in excess of net realizable
value. Costs directly related to land acquisition, and development or
renovation of real estate are capitalized. Costs incurred in connection with
the pursuit of unsuccessful acquisitions or developments are expensed at the
time the pursuit is abandoned.
Repairs and maintenance are expensed as incurred. Renovations and
improvements are capitalized and depreciated over their estimated useful
lives.
Depreciation is computed over the expected useful lives of depreciable
property on a straight-line basis. Properties are depreciated principally over
the useful lives of 20 to 40 years for buildings and improvements and 2 to 10
years for furnishings and other equipment.
Capitalized Interest:
Security Capital capitalizes interest as part of the cost of real estate
projects under development by its consolidated subsidiaries. See interest
costs table in note 5.
Deferred Loan Fees:
Costs incurred in connection with the issuance or renewal of debt are
capitalized, included with other assets and amortized over the term of the
related loan (issuance costs) or twelve months (renewal costs). See interest
costs table in note 5.
Revenue Recognition:
Rental, fee and interest income are recorded on the accrual method of
accounting. A provision for possible loss is made when collection of
receivables is considered doubtful.
Per Share Data:
Security Capital adopted Financial Accounting Standards No. 128, Earnings
per Share ("SFAS 128"), effective December 15, 1997. Previously reported
earnings per share data have been restated to conform to SFAS 128.
Recent Accounting Pronouncements:
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 is effective for fiscal years
beginning after June 15, 1999, but may be implemented for fiscal quarters
beginning after June 15, 1998. The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Security Capital has not yet quantified the impacts of adopting SFAS 133 on
its financial statements and has not determined the timing of or method of its
adoption of SFAS 133.
In April 1998 the Accounting Standards Executive Committee issued Statement
of Position 98-5 ("SOP 98-5") "Reporting on the Costs of Start-Up Activities,"
establishing accounting standards requiring the expensing of organizational,
pre-opening, and start-up costs. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998. Restatement of financial statements for
earlier periods is prohibited. Upon adoption, any material unamortized
organizational, pre-opening and start-up costs will be required to be written
off in 1999 as
67
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
a cumulative effect of adoption of an accounting standard. Security Capital
and its subsidiaries are in the process of evaluating SOP 98-5 and will adopt
the standard in the first quarter of 1999. The cumulative impact of the
adoption of SOP 98-5 on Security Capital's results of operation and financial
position is expected to be approximately $15,700,000 in the first quarter of
1999.
Interest Rate Contracts
Security Capital 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.
Employee Stock Based Compensation
Security Capital has adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") and continues
to apply the accounting provisions of ABP Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") as allowed under SFAS 123 and makes the
proforma fair value disclosures required by SFAS 123. In accordance with APB
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 the related services.
(2) Real Estate Investments
Security Capital holds the following investments at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
Security Capital's Net
% Ownership Investments
as of (Redemptions) for the
December 31, Year Ended December 31,
------------ ------------------------
Investment Type of Entity 1998 1997 1998 1997
---------- -------------- ----- ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
EQUITY-METHOD INVESTEES:
Archstone Communities Apartment REIT 38.1% 33.1%(a) $ -- $89,553,000(b)
Trust-- (publicly traded)
formerly Security
Capital Pacific Trust
("Archstone")
ProLogis Trust-- Industrial REIT 40.4% 42.5% -- 156,873,000(b)
formerly Security (publicly traded)
Capital Industrial
Trust ("ProLogis")
Security Capital Global real estate 34.6% -- (c) 375,737,000 --
European Realty investments (private
formerly Security entity)
Capital Global Realty
Security Capital Preferred stock 9.8% 12.9% 25,000,000 54,850,000
Preferred Growth investments in real
Incorporated estate companies
(private REIT)
Security Capital U.S. U.S. real estate 35.0% 32.9% 45,726,000 273,042,000
Realty investments
(publicly traded)
Strategic Hotel Capital Luxury and upscale 30.4% 39.5% 175,000,000 200,000,000
Incorporated (d) hotels (private
("Strategic Hotel") entity)
CONSOLIDATED INVESTEES:
BelmontCorp Senior assisted 100% 100% 30,487,000 9,763,000
living
(private entity)
Homestead Village Extended-stay lodging 69.8% 65.0% 129,108,000 91,503,000
Incorporated (publicly traded)
Security Capital European real estate 99.9% 100.0% 1,000,000 16,500,000
European Real Estate securities fund
Shares (investment fund)
Security Capital U.S. U.S. real estate 89.9% 98.3% (9,500,000) 90,073,000
Real Estate Shares securities fund
(investment fund)
</TABLE>
68
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------
(a) In July 1998 Security Capital Pacific Trust and Atlantic merged to form
Archstone Communities Trust. Pursuant to the merger transaction, Atlantic
was merged into Archstone, which is traded on the NYSE under the symbol
"ASN". In accordance with the terms of the merger, each outstanding
Atlantic common share was converted into one Archstone common share and
each outstanding Atlantic Series A preferred share was converted into one
comparable Archstone Series C preferred share. Upon consummation of the
merger, Security Capital continued to be Archstone's largest shareholder.
(b) Of the total investment, $89,494,000 and $81,871,000 relate to the stock
received in exchange for the sale of the management companies to Archstone
and ProLogis, respectively.
(c) SC-European Realty was formed in 1998 and owns strategic control positions
in fully integrated real estate operating companies mainly in Europe. In
April 1998 SC-European Realty completed a $1,500,000,000 equity
subscription offering, of which Security Capital and its subsidiaries
subscribed for $518,258,000 of common shares.
(d) As of December 31, 1998, Security Capital's investment in Strategic Hotel
consisted of $200,000,000 of common stock (19,166,666 shares),
$125,000,000 of 7.5% convertible subordinated debentures (7.5% debentures)
and $50,000,000 of 6.5% convertible subordinated debentures (6.5%
debentures). The 7.5% debentures are convertible into Strategic Hotel
stock at $11.50 per share, bear interest at 7.5% per annum and have a
"mandatory" interest pay rate of 3% per annum. Deferred interest accrues
interest at 7.5% per annum and the difference between the total deferred
interest and mandatory interest is payable upon maturity or redemption of
the debentures. During 1998 and 1997 Strategic Hotel paid interest at the
3% mandatory rate. The 6.5% debentures are convertible into Strategic
Hotel stock at $13.20 per share and bear interest at 6.5% per annum.
Security Capital received dividends and interest (Strategic Hotel only)
from its investees for the years ended December 31, 1998, 1997 and 1996, as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Dividends Received
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Dividends:
Archstone................................... $ 59,591 $ 36,679 $ 33,963
Atlantic.................................... 19,083 34,512 33,975
ProLogis.................................... 61,876 47,090 40,689
SC-European Real Estate Shares.............. 26 -- --
SC-Preferred Growth......................... 4,207 204 --
SC-US Real Estate Shares.................... 7,098 9,600 --
-------- -------- --------
151,881 128,085 108,627
-------- -------- --------
Interest:
Strategic Hotel............................. 11,090 1,297 --
-------- -------- --------
$162,971 $129,382 $108,627
======== ======== ========
<CAPTION>
Dividend Amount Per
Investee Share
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Archstone..................................... $ 1.3900 $ 1.3000 $ l.2400
Atlantic...................................... 0.8000 1.5600 1.6500
ProLogis...................................... 1.2399 1.0628 1.0100
SC-European Real Estate Shares................ 0.0440 -- --
SC-Preferred Growth........................... 1.1000 0.2000 --
SC-US Real Estate Shares...................... 0.7521 0.9955 --
</TABLE>
69
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes real estate investments of Security Capital's
consolidated investees as of December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Extended-stay lodging properties (Homestead)
Operating properties................................ $ 939,107 $472,668
Developments under construction..................... 110,891 213,283
Developments in planning............................ 126,054 32,984
Land held for future development.................... -- 1,463
Land held for sale.................................. 4,332 6,655
---------- --------
Total real estate, at cost........................ 1,180,384 727,053
Less accumulated depreciation..................... 48,783 17,824
---------- --------
Subtotal........................................ 1,131,601 709,229
---------- --------
Senior assisted living properties (Belmont)
Operating properties................................ 15,054 --
Developments under construction..................... 13,565 6,607
Developments in planning............................ 2,712 1,046
Land held for future development.................... 1,320 --
Land held for sale.................................. 650 --
---------- --------
Total real estate, at cost........................ 33,301 7,653
Less accumulated depreciation..................... 33 --
---------- --------
Subtotal........................................ 33,268 7,653
---------- --------
Total real estate.................................... $1,164,869 $716,882
========== ========
</TABLE>
Presented below is summarized balance sheet information for Security
Capital's equity-method investees as of December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
Archstone Atlantic(a) ProLogis Strategic Hotel
--------------------- ----------- --------------------- ---------------------
1998 1997 1997 1998 1997 1998 1997
---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net real estate
investments............ $4,875,973 $2,760,439 $1,298,946 $3,403,212 $2,834,711 $1,986,580 $ 814,489
Cash and other assets... 183,925 45,247 142,465 927,517 199,242 148,714 203,803
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total assets......... $5,059,898 $2,805,686 $1,441,411 $4,330,729 $3,033,953 $2,135,294 $1,018,292
========== ========== ========== ========== ========== ========== ==========
Total liabilities....... $2,410,114 $1,265,250 $ 550,430 $2,023,066 $1,003,912 $1,206,855 $ 638,013
Minority interest....... 21,459 -- -- 51,295 53,304 267,198 108,030
Total shareholders'
equity................. 2,628,325 1,540,436 890,981 2,256,368 1,976,737 661,241 272,249
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders'
equity.............. $5,059,898 $2,805,686 $1,441,411 $4,330,729 $3,033,953 $2,135,294 $1,018,292
========== ========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SC-European SC-Preferred
Realty(b) Growth SC-U.S.Realty
----------- ----------------- ----------------------
1998 1998 1997 1998 1997
----------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Investments in real estate
operating companies...... $1,165,964 $800,202 $521,697 $ 2,730,399 $2,728,054
Investments in common
shares and debentures of
Security Capital (at
market in 1998, at cost
in 1997)................. -- -- -- 116,245 165,000
Cash and other assets..... 8,717 40,041 76,050 26,983 8,767
---------- -------- -------- ----------- ----------
Total assets........... $1,174,681 $840,243 $597,747 $ 2,873,627 $2,901,821
========== ======== ======== =========== ==========
Total liabilities......... $ 90,951 $ 18,114 $ 52,836 $ 647,243 $ 143,400
Total shareholders'
equity................... 1,083,730 822,129 544,911 2,226,384 2,758,421
---------- -------- -------- ----------- ----------
Total liabilities and
shareholders' equity.. $1,174,681 $840,243 $597,747 $ 2,873,627 $2,901,821
========== ======== ======== =========== ==========
</TABLE>
- --------
(a) Atlantic merged into Archstone in July 1998.
(b) SC-European Realty was formed in 1998.
70
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Presented below is summarized earnings information for Security Capital's
equity-method investees for the years ended December 31, 1998, 1997 and 1996
(in thousands):
<TABLE>
<CAPTION>
Archstone Atlantic(a)
-------------------------- ------------------
1998 1997 1996 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Rental revenue and other
income, net................... $513,645 $355,662 $326,246 $101,532 $175,157
-------- -------- -------- -------- --------
Expenses:
Operating, general and
administrative
and other expenses.......... 381,216 259,269 233,027 75,357 122,434
Costs incurred in acquiring
management companies from
Security Capital............ -- 71,707 -- -- --
-------- -------- -------- -------- --------
381,216 330,976 233,027 75,357 122,434
-------- -------- -------- -------- --------
Net earnings before minority
interest...................... 132,429 24,686 93,219 26,175 52,723
Minority interest share of net
earnings...................... -- -- -- -- --
-------- -------- -------- -------- --------
Net earnings from operations... 132,429 24,686 93,219 26,175 52,723
Gain on disposition of
depreciated real estate....... 65,531 48,232 37,492 -- --
-------- -------- -------- -------- --------
Net earnings................... 197,960 72,918 130,711 26,175 52,723
Less Preferred Share dividends. 20,938 19,384 24,167 2,156 1,569
-------- -------- -------- -------- --------
Net earnings attributable to
common shares................. $177,022 $ 53,534 $106,544 $ 24,019 $ 51,154
======== ======== ======== ======== ========
Security Capital share of net
earnings...................... $ 63,078 $ 18,849 $ 39,864 $ 11,998 $ 26,738
======== ======== ======== ======== ========
<CAPTION>
Strategic
ProLogis Hotel(b)
-------------------------- ------------------
1998 1997 1996 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Rental, room revenue and other
income, net................... $372,795 $296,118 $233,463 $547,388 $ 72,000
Expenses:
Operating, general and
administrative
and other expenses.......... 262,350 184,811 150,753 542,513 83,513
Costs incurred in acquiring
management companies from
Security Capital............ -- 75,376 -- -- --
-------- -------- -------- -------- --------
262,350 260,187 150,753 542,513 83,513
-------- -------- -------- -------- --------
Net earnings (loss) before
minority interest............. 110,445 35,931 82,710 4,875 (11,513)
Minority interest share of net
earnings...................... 4,681 3,560 3,326 9,461 1,063
-------- -------- -------- -------- --------
Net earnings (loss) from
operations.................... 105,764 32,371 79,384 (4,586) (12,576)
Gain (loss) on disposition of
depreciated real estate....... 5,565 7,378 (29) -- --
-------- -------- -------- -------- --------
Net earnings (loss)............ 111,329 39,749 79,355 (4,586) (12,576)
Less Preferred Share dividends. 49,098 35,318 25,895 -- --
-------- -------- -------- -------- --------
Net earnings (loss)
attributable to common shares. $ 62,231 $ 4,431 $ 53,460 $ (4,586) $(12,576)
======== ======== ======== ======== ========
Security Capital share of net
earnings (loss)............... $ 25,514 $ 2,101 $ 25,439 $ (1,497) $ (3,400)
======== ======== ======== ======== ========
</TABLE>
71
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
SC-
SC-European Preferred
Realty(c) Growth(d) SC-U.S.Realty
----------- ----------------- ----------------------------
1998 1998 1997 1998 1997 1996
----------- -------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net investment income
(loss)................. $(12,526) $ 35,238 $ 1,482 $ 77,899 $ 60,308 $ 12,939
Realized gains on
investments............ 1,580 -- -- 32,878 41,073 3,480
Increase (decrease) in
market value of
investments............ 23,215 (66,618) 49,866 (642,372) 264,974 252,294
Elimination of a related
party transaction...... -- -- -- 48,755 -- --
-------- -------- ------- --------- -------- --------
Adjusted net earnings
(loss)................. $ 12,269 $(31,380) $51,348 $(482,840) $366,355 $268,713
======== ======== ======= ========= ======== ========
Security Capital share
of adjusted net
earnings (loss)........ $ 4,234 $ (3,831) $ 6,175 $(163,745) $120,113 $103,170
======== ======== ======= ========= ======== ========
</TABLE>
- --------
(a) Atlantic was consolidated by Security Capital in 1996. Atlantic merged
into Archstone in July 1998.
(b) Strategic Hotel was formed in 1997.
(c) SC-European Realty was formed in 1998.
(d) SC-Preferred Growth was formed in 1997.
A condensed consolidating balance sheet for Security Capital as of December
31, 1998, follows (in thousands):
<TABLE>
<CAPTION>
Investment
Security Capital (a) Homestead (b) Funds (b)(c) Consolidated (d)
-------------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Investments, at equity.. $3,523,429 $ -- $ -- $3,071,204
Net real estate
investments............ 33,268 1,137,869 -- 1,164,869
Investments in publicly
traded real estate
securities, at market
value.................. 7,778 -- 110,100 117,878
Cash and other assets... 116,882 80,522 5,265 155,838
---------- ---------- -------- ----------
Total assets........ $3,681,357 $1,218,391 $115,365 $4,509,789
========== ========== ======== ==========
Lines of credit......... $ 163,400 $ 357,080 $ -- $ 520,480
Long-term debt.......... 937,010 343,362 -- 1,280,372
Other liabilities....... 134,105 59,923 4,557 153,609
---------- ---------- -------- ----------
Total liabilities... 1,234,515 760,365 4,557 1,954,461
Minority interests...... 19,488 -- -- 132,718
Shareholders' equity.... 2,427,354 458,026 110,808 2,422,610
---------- ---------- -------- ----------
Total liabilities
and shareholders'
equity............. $3,681,357 $1,218,391 $115,365 $4,509,789
========== ========== ======== ==========
</TABLE>
- --------
(a) Includes Homestead and the Investment Funds on the equity method.
(b) Reflects the carrying amount prior to elimination entries.
(c) The Investment Funds, which invest in securities of real estate companies,
include SC-US Real Estate Shares and SC-European Real Estate Shares.
(d) Consolidated amounts include effect of elimination entries.
72
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A condensed consolidating statement of operations for Security Capital for
the year ended December 31, 1998, follows (in thousands):
<TABLE>
<CAPTION>
Security Investment
Capital (a) Homestead (b) Funds (b)(c) Consolidated (d)
----------- ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Equity in earnings
(loss) of investees.... $(103,324) $ -- $ -- $ (64,249)
Financial Services
Division revenues from
related parties........ 99,395 -- -- 93,850
Room revenue............ -- 144,374 -- 144,374
Other income (loss)..... 16,754 2,030 (17,160) (797)
--------- -------- -------- ---------
12,825 146,404 (17,160) 173,178
--------- -------- -------- ---------
Interest expense........ 59,253 23,189 -- 82,203
Financial Services
Division expenses (e).. 76,093 -- -- 76,093
General, administrative
and other (f).......... 35,097 29,520 2,185 62,774
Depreciation and
amortization........... 5,596 34,244 -- 37,419
Rental expenses......... -- 63,339 -- 63,339
--------- -------- -------- ---------
176,039 150,292 2,185 321,828
--------- -------- -------- ---------
Earnings (loss) before
income taxes, minority
interests, and
extraordinary charge... (163,214) (3,888) (19,345) (148,650)
Income tax benefit...... (47,095) -- -- (47,095)
Minority interests...... -- -- -- (2,202)
--------- -------- -------- ---------
Net earnings (loss)
before extraordinary
charge................. (116,119) (3,888) (19,345) (99,353)
Less Preferred Share
dividends.............. 35,088 -- -- 35,088
--------- -------- -------- ---------
Earnings (loss)
attributable to common
shares................. (151,207) (3,888) (19,345) (134,441)
Extraordinary loss on
early extinguishment of
debt, net.............. -- (25,344) -- (17,657)
--------- -------- -------- ---------
Net loss attributable to
common shares.......... $(151,207) $(29,232) $(19,345) $(152,098)
========= ======== ======== =========
</TABLE>
- --------
(a) Includes Homestead and the Investment Funds on the equity method.
(b) Reflects the carrying amount prior to elimination entries.
(c) The Investment Funds, which invest in securities of real estate companies,
include SC-US Real Estate Shares and SC-European Real Estate Shares.
(d) Consolidated amounts include effect of elimination entries.
(e) Includes a special charge of $3.8 million in the fourth quarter, which was
principally due to a change in Security Capital's strategy related to the
retail distribution of real estate investment funds, which resulted in a
reduction of personnel and associated costs.
(f) On October 28, 1998, Homestead announced a reduction in development
activity and an associated special charge related to sites on which
Homestead may choose not to develop new facilities. Security Capital's
share of Homestead's fourth quarter special charge was $4.7 million.
73
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Financial Services Division
Security Capital's Financial Services Division earns fee income from
providing the services described below. Such services are furnished primarily
to direct and indirect investees.
Capital Management Services
The Global Capital Management Group provides oversight, guidance and/or
management to various entities which own real estate securities on a
strategic, intermediate-term or short-term basis. Customers include managed
entities such as SC-U.S.Realty, SC-European Realty and SC-Preferred Growth,
and open-end entities, including the company's various investment funds as
well as third-party accounts.
Operating Advisors
A Financial Services Division subsidiary domiciled in Luxembourg advises on
all investment and operational activities of SC-U.S.Realty. The SC-U.S.Realty
Advisor is paid an operating advisor fee of 1.25% of SC-U.S.Realty's average
monthly investments at fair value (other than liquid short-term investments
and investments in Security Capital). Another Financial Services Division
subsidiary domiciled in Luxembourg serves as the operating advisor to SC-
European Realty and is paid an operating advisor fee of 1.25% of SC-European
Realty's average monthly investments at fair value.
Management Company
A U.S. subsidiary headquartered in Chicago manages SC-Preferred Growth (a
REIT), and SC-US Real Estate Shares and SC-European Real Estate Shares, which
are open-end investment funds. The management fees earned by this subsidiary
range from 0.62% to 1.00% of the fair value of the average assets under
management.
Capital Markets Services
The Capital Markets Group provides capital markets services, mainly through
private placement offerings, for public and private affiliated operating
companies and investment entities.
Corporate Services
The Corporate Services Group provides accounting, human resources and
benefits administration, tax planning and compliance, risk management, cash
management, internal audit and information systems services to various
affiliates. These services are provided at negotiated rates, based on market
terms. The Corporate Services Group focuses on centralized services where
economies of scale, volume purchasing power and effective use of technology
are expected to generate cost efficiencies.
Real Estate Research Services
The Real Estate Research Group conducts proprietary real estate research
and provides analysis of long-term market conditions and short-term trends to
Security Capital's affiliated operating companies and investment entities.
Formerly Owned REIT Managers and Property Managers
Prior to September 1997, certain Security Capital Financial Services
Division subsidiaries, under the terms of separate agreements, managed the
operations ("REIT Managers") of various REITs in which Security Capital is a
principal owner, and other subsidiaries ("Property Managers") provided
property management services to those REITs. Each REIT Manager was paid a REIT
management fee based on a percentage of the REIT's pre-management fee cash
flow, after deducting actual and assumed regularly scheduled principal
payments for long-term debt and dividends paid on non-convertible preferred
shares, as defined in the REIT management agreements. The fee was generally
16% of cash flow, as defined, of the REIT. Property management fees were at
market rates and were paid separately to Security Capital's property
management subsidiaries.
74
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On September 9, 1997, Security Capital exchanged the REIT and Property
Managers with Archstone, Atlantic and ProLogis for additional shares of the
respective REITs (the "Mergers"), resulting in each of the REITs becoming
internally managed. Archstone, Atlantic and ProLogis issued $75,838,457
(3,295,533 shares), $51,754,136 (2,306,591 shares) and $81,870,626 (3,692,024
shares) of their common shares to Security Capital, respectively, in exchange
for the respective REIT Managers and Property Managers and operating systems.
Security Capital recorded a gain on the sale of the management companies to
Archstone and ProLogis totaling $143,293,000. For financial reporting
purposes, the gain was reduced by the value ($49,898,000) of warrants
("Warrants") to purchase Class B Shares issued to Archstone and ProLogis
shareholders, as described below, resulting in a net gain of $93,395,000. At
the time of the transaction, Security Capital owned 50.3% in Atlantic and
therefore Atlantic was an entity under common control and consequently no gain
was recognized on the sale to Atlantic. The value ($11,530,000) of the
Warrants issued to Atlantic's shareholders was included in the basis of
Security Capital's investment in Atlantic, which subsequently merged with
Archstone.
Financial Services Division revenues for the years ended December 31, 1998,
1997 and 1996, were earned from the following sources (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Capital Markets Group fees.................. $31,091 $ 13,397 $ 2,561
Corporate Services Group fees............... 17,644 5,334 --
Global Capital Management Group fees........ 49,199 26,210 8,041
Real Estate Research Group fees............. 1,461 840 --
Property management fees.................... -- 23,785 27,491
REIT management fees........................ -- 39,379 54,108
------- -------- --------
Total Financial Services Division
revenues............................... 99,395 108,945 92,201
Less amounts eliminated in consolidation.... (5,545) (3,004) (14,689)
------- -------- --------
Consolidated Financial Services Division
revenues from related parties.............. $93,850 $105,941 $ 77,512
======= ======== ========
</TABLE>
(4) Segment Reporting
For internal management purposes, Security Capital uses Earnings Before
Depreciation, Amortization and Deferred Taxes ("EBDADT") to measure its
performance. Security Capital believes that EBDADT is the best measure of
operating performance for Security Capital and its affiliates. For EBDADT
purposes, all investees (including consolidated investees) are accounted for
on the the equity method. In general, EBDADT is defined for Security Capital
and its consolidated and equity-method investees as follows:
Net earnings plus or minus:
<TABLE>
<C> <S>
Plus Real estate depreciation (depreciation will not be added back
for non-real estate assets whose value is declining over time)
Plus Amortization of real estate related non-cash items (e.g.,
goodwill)
Plus Other non-cash, non-recurring expenses
Minus Dividends received by SC-U.S.Realty and SC-European Realty from
their strategic investees
Plus/Minus Deferred tax expense (benefit)
Plus/Minus Losses (gains) on the disposition of depreciated real estate
Plus/Minus Unrealized losses (gains)
</TABLE>
75
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
With respect to Security Capital investees in which Security Capital has
less than a 20% interest, and does not have the ability to significantly
influence management, Security Capital includes only dividends or interest
received in its EBDADT. SC-U.S.Realty and SC-European Realty use the same
approach for investees in which they own less than 20%.
Security Capital operates its business based on two reportable segments.
These segments are managed separately due to the nature of their operations.
The first segment, the Capital Division, records revenues by reporting its
pro-rata share of its investees' EBDADT and the second segment, the Financial
Services Division, records revenues based on the services provided to its
customers. These segments are described in notes 2 and 3 above.
Presented below is a Statement of EBDADT by reportable segment for the
years ended December 31, 1998, 1997 and 1996 (in thousands).
<TABLE>
<CAPTION>
1998 1997(1) 1996(1)
-------- -------- --------
<S> <C> <C> <C>
Capital Division:
Equity in Investees' EBDADT.................. $301,213 $227,706 $153,601
Interest and other income.................... 2,238 4,085 2,911
-------- -------- --------
303,451 231,791 156,512
-------- -------- --------
Operating expenses........................... 36,347 27,375 14,826
Interest expense(2).......................... 38,204 7,464 6,227
Current income tax expense................... 2,997 -- --
Convertible preferred share dividends(2)..... 15,245 -- --
-------- -------- --------
Capital Division EBDADT(3)................. 210,658 196,952 135,459
-------- -------- --------
Financial Services Division:
Revenues..................................... 99,395 53,411 19,183
-------- -------- --------
Operating expenses........................... 73,909 35,512 17,565
Current income tax expense................... 1,701 575 --
-------- -------- --------
Financial Services Division EBDADT......... 23,785 17,324 1,618
-------- -------- --------
Total EBDADT............................... $234,443 $214,276 $137,077
======== ======== ========
</TABLE>
- --------
(1) The 1997 and 1996 EBDADT information reflects pro forma data assuming the
September 9, 1997, exchange of Security Capital's REIT management and
property management companies for common shares of ProLogis and Archstone
occurred as of the beginning of 1996.
(2) Assumes conversion of all convertible securities that are dilutive (and,
for 1997 and 1996, the 2014 Convertible Debentures which were converted
prior to December 31, 1997).
(3) For purposes of calculating Capital Division EBDADT, Security Capital
applies all interest expense, preferred share dividends and similar
charges for invested capital to the Capital Division. Operating expenses
include the direct costs of personnel assigned to the Capital Division
plus a proportionate share of general and administrative costs based on
revenues.
76
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Presented below is a reconciliation of net earnings (loss) to EBDADT for
the years ended December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Net earnings (loss) attributable to
common shares........................... $(152,098) $ 106,154 $ 32,067
Investee reconciling items:
Real estate depreciation............... 153,542 76,307 59,276
Gain on sale of undepreciated real
estate................................ (25,503) (20,912) (18,339)
Unrealized (gains) losses.............. 214,361 (104,730) (96,866)
Loss on sale of management companies... -- 62,042 --
EBDADT, net of dividends from Strategic
Investees of SC-U.S.Realty and
SC-European Realty.................... 25,619 9,015 4,720
Interest rate hedge expense............ 13,642 -- --
Loss on extinguishment of debt......... 17,657 -- 2,808
Other.................................. (1,640) 6,430 1,082
--------- --------- --------
397,678 28,152 (47,319)
--------- --------- --------
Security Capital reconciling items:
Deferred tax (benefit) expense......... (51,793) 56,378 30,872
Convertible debenture interest expense. 21,016 94,749 93,912
Series A preferred share dividends..... 19,843 10,425 7,819
Gain on sale of management companies... -- (93,395) --
Pro forma effect of the sale of the
REIT and Property management
companies............................. -- 11,813 16,925
Other.................................. (203) -- 2,801
--------- --------- --------
(11,137) 79,970 152,329
--------- --------- --------
Total EBDADT......................... $ 234,443 $ 214,276 $137,077
========= ========= ========
</TABLE>
Presented below is a reconciliation of segment assets at fair value to
assets presented in accordance with generally accepted accounting principles
("GAAP") as of December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Capital Division Assets at fair value (1)........ $3,973,091 $4,476,667
Excess of assets at fair value over
unconsolidated GAAP assets.................... (300,707) (928,900)
Consolidation of Homestead and investment
funds......................................... 847,584 513,758
Proceeds from assumed exercise of options and
warrants (2).................................. (10,179) (447,286)
---------- ----------
GAAP Assets.................................. $4,509,789 $3,614,239
========== ==========
</TABLE>
- --------
(1) For internal management purposes, Security Capital values its Capital
Division assets at fair value and does not allocate a value to the
Financial Services Division.
(2) Includes only those options and warrants whose exercise price is equal to
or less than market value as of these dates.
77
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Indebtedness
Lines of Credit:
A summary of the lines of credit borrowings as of and for the years ended
December 31, 1998 and 1997, is as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------------- -----------------------------
Security Security
Capital Homestead Combined Capital Homestead Combined
-------- --------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Total lines of credit... $650,000 $400,000 $1,050,000 $400,000 $100,000 $500,000
Borrowings outstanding
at December 31......... 163,400 357,080 520,480 76,000 96,808 172,808
Weighted average daily
borrowings............. 247,283 179,958 427,241 60,049 14,308 74,357
Maximum borrowings
outstanding at any
month end.............. 523,000 357,080 654,200 188,500 96,808 188,500
Weighted average daily
interest rate.......... 7.13% 7.51% 7.29% 7.19% 7.83% 7.31%
Weighted average
interest rate as of
December 31............ 6.35% 7.30% 7.00% 7.50% 8.21% 7.90%
</TABLE>
At December 31, 1998, Security Capital had a $650,000,000 unsecured
revolving line of credit with Wells Fargo Bank, National Association (Wells
Fargo), as agent for a group of lenders. The agreement is effective through
April 6, 2000, with an option to renew for successive one-year periods with
the approval of lenders. Borrowings bear interest at LIBOR plus a margin
(1.00% as of December 31, 1998) based upon Security Capital's credit rating or
a Base Rate (defined as the higher of Wells Fargo prime rate or the Federal
Funds rate plus .50%). Security Capital has requested the extension of the
line of credit to 2002 and a reduction of the line to match its anticipated
intermediate-term requirements.
Commitment fees range from 0.125% to 0.20% per annum based on the average
unfunded line of credit balance. The line is guaranteed by SC Realty, which is
a wholly owned subsidiary of Security Capital.
During a non-monetary default, no payments other than dividends paid on
Security Capital's Series B Preferred Shares are permitted. Distributions and
dividends paid, other than those on Security Capital's Series B Preferred
Shares, cannot exceed 50% of the cash flow available for distributions,
provided no event of default has occurred and is continuing. In the event of a
monetary default, all distributions are prohibited.
Homestead's lines of credit as of December 31, 1998, are summarized as
follows:
<TABLE>
<CAPTION>
Fee on average
Amount Maturity Interest rate range unfunded balances Collateral
- ------------ -------------- -------------------------- ----------------- ---------------------------------
<S> <C> <C> <C> <C>
$150,000,000 April 23, 1999 Eurodollar rate plus 1.5% 0.375% Real estate
to 2.5% or the higher
of prime plus 0.5% to
1.5% or the federal funds
rate plus 1% to 2%
$ 50,000,000 April 23, 1999 Eurodollar rate plus 2.75% 0.5% Real estate
or the higher of prime
plus 1.75% or the Federal
Funds rate plus 2.25%
$200,000,000 April 23, 1999 Eurodollar rate plus 1.25% 0.25% Subscription receivable from
or base rate of prime Security Capital for $200,000,000
plus 0.25% of Homestead convertible
subordinated debentures, which
Homestead may convert to
Homestead common stock
if it is not in default
</TABLE>
78
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Both the $150,000,000 and the $50,000,000 lines of credit were extended
past their due dates of April 23, 1999 subsequent to year end. See note 14 .
Each line of credit requires maintenance of certain financial covenants.
Security Capital, SC Realty and Homestead were in compliance with all such
covenants at December 31, 1998.
Senior Unsecured Notes:
During 1998 Security Capital issued the following long-term debt, all of
which was outstanding as of December 31, 1998 (in thousands):
<TABLE>
<S> <C>
6.95% Senior Unsecured Notes, due June 15, 2005, original principal
of $200,000,000, net of original issue discount. Interest is
payable on June 15 and December 15 of each year, commencing
December 15, 1998................................................. $199,802
7.15% Senior Unsecured Notes, due June 15, 2007, original principal
of $100,000,000, net of original issue discount. Interest is
payable on June 15 and December 15 of each year, commencing
December 15, 1998................................................. 99,824
7.70% Senior Unsecured Notes, due June 15, 2028, original principal
of $200,000,000. Interest is payable on June 15 and December 15 of
each year, commencing December 15, 1998........................... 200,000
7.75% Unsecured Medium-Term Notes, due November 15, 2003, original
principal of $100,000,000, net of original issue discount.
Interest is payable on May 15 and November 15 of each year,
commencing May 15, 1999........................................... 99,908
7.66% Unsecured Medium-Term Notes, due December 21, 2004, original
principal of $14,700,000, including original issue premium.
Interest is payable on March 15 and September 15 of each year,
commencing March 15, 1999......................................... 14,702
--------
$614,236
========
</TABLE>
All of the Notes are redeemable at any time at the option of Security
Capital, 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.
Under the terms of the indentures, Security Capital may incur additional
debt only if, after giving effect to the debt being incurred, (i) the ratio of
debt to adjusted total assets, as defined in the indentures, does not exceed
50%, and (ii) the fixed charge coverage ratio, as defined in the indentures,
for the four preceding fiscal quarters is not less than 1.5 to 1.0. In
addition, Security Capital may not at any time permit its consolidated
tangible net worth, as defined in the indentures, to be less than
$1,500,000,000. At December 31, 1998, Security Capital was in compliance with
all debt covenants contained in the indentures.
Convertible Debt:
As of December 31, 1998 and 1997, Security Capital had $322,774,000 and
$323,024,000, respectively, of 6.50% convertible subordinated debentures due
2016 ("2016 Convertible Debentures") outstanding. The 2016 Convertible
Debentures accrue interest at 6.5% per annum and pay interest semi-annually in
June and December.
As of September 18, 1998, the 2016 Convertible Debentures became
convertible into Class A Shares at $1,153.90 per share, at the option of the
holder. Security Capital may redeem the 2016 Convertible Debentures at par
plus accrued interest at any time after March 29, 1999, upon not less than 60
days nor more than 90 days' prior written notice to the holders.
79
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Security Capital's 2014 Convertible Debentures were called for redemption
on September 29, 1997. A total of $8,900 of 2014 Convertible Debentures were
redeemed on December 1, 1997, at a redemption price of $1,000 plus accrued
interest. In 1997, substantially all 2014 Convertible Debenture holders
elected to convert their debentures into shares of Security Capital's Class A
common stock, par value $.01 per share ("Class A Shares"), at the conversion
price of $1,046 per share. On conversion of the 2014 Convertible Debentures,
any accrued interest was deemed to be paid in full upon delivery of the Class
A Shares to the debenture holder. A total of $715,830,000 principal amount of
2014 Convertible Debentures was converted into 684,349 Class A Shares. The
principal amount of the converted debentures ($715,830,000) plus the unpaid
interest ($41,924,000) was recorded as an addition to shareholders' equity.
Homestead Convertible Mortgage Notes Payable:
Homestead has $221,300,000 of convertible mortgage notes which are
convertible, at the option of Archstone, into shares of Homestead common
stock. The conversion price is equal to one share of Homestead common stock
for every $11.50 of principal amount outstanding.
On July 6, 1998, Homestead entered into a mortgage loan purchase agreement
with Atlantic and Merrill Lynch Mortgage Capital Inc. ("MMLC") whereby
$98,000,000 of Homestead convertible mortgage notes held by Archstone were
modified to, among other things, eliminate their convertibility feature in
exchange for a payment of $21,400,000 from Homestead to Atlantic. The amount
paid to Atlantic was based on trailing market prices of Homestead common stock
at the time the agreement was entered into, which exceeded the conversion
price of the convertible mortgage notes at that date. Homestead funded the
payment with the proceeds received from the sale of $24,000,000 of 7.5%
convertible subordinated debentures. Also pursuant to the mortgage loan
purchase agreement Atlantic sold the modified notes to MMLC for $98,000,000.
On August 7, 1998, Homestead converted the $98,000,000 of mortgage notes and
the $24,000,000 of 7.5% convertible subordinated debentures into a
$122,000,000 mortgage of a newly formed special purpose subsidiary of
Homestead. The mortgage note was collateralized by 26 Homestead properties
(totaling $227,400,000 of historical cost at December 31, 1998) which were
formerly collateral for the Atlantic mortgage notes. The $122,000,000 mortgage
note matures June 30, 1999, and provided for interest-only monthly payments of
LIBOR plus 1.70% through September 30, 1998, LIBOR plus 2.0% through November
30, 1998, and LIBOR plus 2.25% thereafter, with options to extend.
The transaction resulted in an early extinguishment of debt measured as the
difference between the $98,000,000 carrying amount of the original mortgage
notes to Atlantic and the amount paid to extinguish the debt, including
transaction costs. Such loss on extinguishment of debt and transaction costs
amounted to $25,344,000 and was recorded as an extraordinary item in the third
quarter of 1998.
As described in note 14, on February 23, 1999, Homestead sold and leased
back 18 of the 26 properties securing the mortgage note and repaid the
$122,000,000 note and all accrued interest.
Interest:
Presented below are the interest costs incurred by Security Capital and its
consolidated subsidiaries for the years ended December 31, 1998, 1997 and 1996
(in thousands).
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Total interest incurred....................... $108,906 $174,317 $103,146
======== ======== ========
Homestead and Belmont capitalized interest
included in total interest incurred.......... $ 26,703 $ 69,883 $ 2,103
======== ======== ========
Interest paid in cash......................... $ 92,963 $111,445 $ 75,756
======== ======== ========
Amortization of deferred financing costs
included in interest expense................. $ 6,360 $ 5,031 $ 1,943
======== ======== ========
</TABLE>
80
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Shareholders' Equity
On April 17, 1997, Security Capital shareholders approved an amended and
restated charter which created Class A Shares and Class B Shares. All
outstanding common shares as of April 18, 1997, were automatically
reclassified as Class A Shares. The rights of holders of Class A Shares and
Class B Shares differ as follows: the holders of Class A Shares are entitled
to one vote, while the holders of Class B Shares are entitled to one two-
hundredth (1/200th) of a vote, for each share held of record on all matters
submitted to a vote of shareholders; and holders of Class B Shares are
entitled to receive dividends and distributions (including liquidating
distributions) equal to one-fiftieth (1/50th) of the amount per share for each
Class A Share. As of January 1, 1998, at the option of the holder, each Class
A Share can be converted into 50 Class B Shares. Class B Shares are not
convertible into Class A Shares.
Shelf Registration:
On September 30, 1998, Security Capital filed a $1,000,000,000 shelf
registration statement with the Securities and Exchange Commission ("SEC")
which was declared effective on October 13, 1998. These securities can be
issued in the form of Class A Shares, Class B Shares, unsecured debt
securities, preferred shares or warrants to purchase any of the above
securities. They will be issued on an as-needed basis, subject to Security
Capital's ability to effect an offering on satisfactory terms. On November 18,
1998, $200,000,000 of the shelf registration was designated to be issued under
a medium-term note program as Senior Unsecured Notes through the filing of a
Prospectus Supplement. As of December 31, 1998, $114,700,000 of the
$200,000,000 were issued and outstanding and the entire $200,000,000 were
issued and outstanding as of mid-January 1999.
Series B Preferred Shares:
On May 12, 1998, Security Capital issued 257,642 shares of Series B
Preferred Shares, par value $.01 per share, to Commerzbank Aktiengesellshaft
(Commerzbank), in exchange for 139,000 Series A Preferred Shares and 3,293,288
Class B Shares held by Commerzbank. Security Capital also paid a cash dividend
to Commerzbank on the Series A Preferred Shares for the period from April 1,
1998, to May 12, 1998, of $1,216,250.
The Series B Preferred Shares have a liquidation preference of $1,000 per
share for an aggregate preference of $257,642,000 plus any accrued and unpaid
dividends. Subject to certain adjustments, each Series B Preferred Share is
convertible, at the option of the holder at any time, into 25.641026 Class B
Shares (a conversion price of $39.00 per share). The Series B Preferred Shares
are initially convertible into a total of 6,606,205 Class B Shares and are
entitled to receive cumulative preferential cash distributions at the rate of
7.0% per annum. The Series B Preferred Shares are redeemable, at the option of
Security Capital, after May 12, 2003, at a redemption price equal to $1,000
per share plus any accrued and unpaid dividends.
The exchange of the Series B Preferred Shares for the Series A Preferred
Shares and 3,293,288 Class B Shares was based on the fair value of those
securities at the date of the Exchange Agreement. For financial accounting
purposes, the fair value of the Series B Preferred Shares issued
($257,642,000) less the sum of (a) the carrying value of the Series A
Preferred Shares ($139,000,000) and (b) the fair value of the Class B Shares
($98,799,000) was recorded as a dividend ($19,843,000).
Series A Preferred Shares:
The 139,000 Series A Preferred Shares, which were exchanged for Series B
Preferred Shares as described above, were issued on April 1, 1996. The Series
A Preferred Shares had a liquidation preference of $1,000 per share for an
aggregate preference of $139,000,000 plus any accrued but unpaid dividends.
Holders of the Series
81
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A Preferred Shares received cash distributions at the rate of 7.5% of the
liquidation preference per annum (equivalent to $75.00 per share).
Initial Public Offering:
On September 23, 1997, Security Capital completed an initial public
offering of 22,569,710 Class B Shares at an average net price of $27.69 per
share. The proceeds from the sale of these shares, net of underwriters'
commission and other expenses, were approximately $591,666,000. The proceeds
were used for the repayment of outstanding bank indebtedness, investment in
new businesses and for general corporate purposes. SC-U.S.Realty purchased
1,964,286 shares in the offering without payment of any underwriters'
commission.
Warrants:
Security Capital issued registered Warrants to acquire $250,000,000 of its
Class B Shares (8,928,572 Warrants) to common and convertible preferred
shareholders of ProLogis, Archstone and Atlantic, and limited partnership
unitholders of ProLogis. The exercise price of a Warrant was $28 per Class B
Share, and the Warrants expired on September 18, 1998. There were 92,680
Warrants exercised between the issuance and expiration dates.
Private Capital Offerings:
Security Capital received subscriptions from a March 1996 private placement
offerings of securities totaling $787,097,000. Such subscriptions consisted of
Series A Preferred Shares of $139,000,000, Class A Shares of $323,048,500, and
2016 Convertible Debentures of $323,048,500. All subscriptions were funded as
of March 31, 1997. Included in the fundings was $110,000,000 received from SC-
U.S.Realty.
Debenture Interest Reinvestment Plan:
Participants in Security Capital's Debenture Interest Reinvestment Plan may
reinvest the cash portion of their interest payments applicable to Security
Capital's 2016 Convertible Debentures, and 2014 Convertible Debentures
(through June 30, 1997), in Class A Shares at the fair value per share
determined as of the prior quarter end date. Originally, 20,000 Class A Shares
were reserved for issuance under the plan applicable to the 2016 Convertible
Debentures.
Acquisition of SCGPB Incorporated:
Included in general, administrative and other expenses in 1997 is a
$6,600,000 charge associated with an exchange of Class A Shares for shares of
a corporate entity (SCGPB Incorporated) owned by Security Capital's chairman,
whose sole assets were warrants and options to purchase Class A Shares. The
above-described charge represents the value applicable to the holders' ability
to defer exercising the warrants and options until 2002 in accordance with
their terms.
82
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Per Share Data:
The following is a reconciliation of the numerators and denominators used
to calculate basic and diluted earnings per Class B Common Share under SFAS
128 for the periods indicated (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1998 1997 1996
--------- -------- -------
<S> <C> <C> <C>
Net income (loss) attributable to common
shares...................................... $(152,098) $106,154 $32,067
Debenture interest expense, net of tax....... -- 12,860 --
--------- -------- -------
Net income (loss) attributable to common
shares and assumed conversions.............. $(152,098) $119,014 $32,067
========= ======== =======
Weighted-average Class B common shares
outstanding--Basic.......................... 121,325 76,577 52,950
Increase in shares which would result from:
Exercise of options........................ -- 1,302 --
Exercise of warrants....................... -- 2,605 3,736
Conversion of debentures................... -- 12,570 --
--------- -------- -------
Adjusted weighted-average Class B common
shares outstanding--Diluted................. 121,325 93,054 56,686
========= ======== =======
Per share net earnings (loss) attributable to
Class B common shares:
Basic...................................... $ (1.25) $ 1.39 $ 0.61
========= ======== =======
Diluted.................................... $ (1.25) $ 1.28 $ 0.57
========= ======== =======
</TABLE>
For all periods (except the year ended December 31, 1997), the Convertible
Debentures and the Convertible Preferred Shares are not assumed converted for
the purpose of calculating diluted earnings per Class B Common Share as the
effects are anti-dilutive, and for loss periods the conversion of options and
warrants is not assumed as the effect is anti-dilutive.
(7) Stock Based Compensation
Security Capital has stock option plans for directors, officers and key
employees which provide for grants of non-qualified stock options and
incentive options. Prior to 1996, all options and warrants were issued in
units consisting of Class A Shares and 2014 Convertible Debentures. In 1996,
most option grants were for Class A Shares only. Concurrent with the
conversion of the 2014 Convertible Debentures (see note 5), all option grants
that had been issued in units of Class A Shares and 2014 Convertible
Debentures were modified so that they are exercisable only for Class A Shares.
Under all option plans, the option exercise price equals the fair value of the
stock or stock and debentures, as applicable, as of the date of grant. Vesting
of the options commences no more than three years from grant date and options
are fully vested no more than six years from grant date. Options expire ten
years from date of grant. As of December 31, 1998, options to purchase 15,771
Class A Shares are available for issue.
During 1998, pursuant to the Security Capital 1998 Long-Term Incentive
Plan, the Company awarded options for the purchase of Class B Shares to
officers and key employees. On September 23, 1998, options to purchase
1,478,698 Class B Shares at a price of $18.4375 per share were awarded. On
December 9, 1998, options to purchase an additional 2,272,075 Class B Shares
at a price of $14.4375 per share were awarded. The options vest 25% on each of
the first through fourth anniversaries of the grant date and expire on the
tenth anniversary
83
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the grant date unless earlier expiration occurs as a result of participant
termination. As of December 31, 1998, options to purchase 7,265,710 Class B
Shares are available for issue.
Security Capital has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for the option plans. As
permitted by SFAS 123, Security Capital has applied its provisions to options
granted subsequent to December 31, 1994. Since the SFAS 123 method of
accounting has not been applied to options granted prior to 1995, the
resulting pro forma compensation cost may not be representative of such costs
to be expected in future years. The pro forma effect of SFAS 123 is summarized
as follows (in thousands, except share data):
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- -------
<S> <C> <C> <C>
Net earnings (loss)--as reported............. $(152,098) $106,154 $32,067
Net earnings (loss)--pro forma for SFAS 123.. $(160,764) $102,435 $28,837
Basic earnings (loss) per share--as reported. $ (1.25) $ 1.39 $ 0.61
Basic earnings (loss) per share--pro forma... $ (1.33) $ 1.34 $ 0.54
Diluted earnings (loss) per share--as
reported.................................... $ (1.25) $ 1.28 $ 0.57
Diluted earnings (loss) per share--pro forma. $ (1.33) $ 1.21 $ 0.51
</TABLE>
Pro forma net earnings for 1998 and 1997 include a deferred tax benefit of
$4,666,000 and $4,630,000, respectively. There was no such tax benefit for
1996.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: risk-free
interest rates of 4.74% (4.72% for Class B), 5.87% and 6.32%; expected lives
of 6.7, 7 and 7 for Class A shares, and 6.25 years for Class B shares in 1998;
expected dividends--none; and expected volatility of 43% (30% for Class B) for
1998, 22% for 1997 and 20% for 1996.
A summary of the status of Security Capital's stock option plans at
December 31, 1998, 1997 and 1996, and changes during the years then ended is
presented in the following table:
<TABLE>
<CAPTION>
2014 Convertible
Common Stock Debentures
--------------------------------------- ------------------------
Class A Wtd. Avg. Class B Wtd. Avg. Conversion
Shares Ex. Price Shares Ex. Price Amount Price
------- --------- --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December
31, 1995............... 99,236 $ 384 -- $ -- $ 58,216,786 $1,045
Granted............... 47,982 1,132 -- -- 2,099,880 1,133
Exercised............. (5,353) 217 -- -- (2,659,650) 1,046
Forfeited............. (1,551) 785 -- -- (917,342) 1,045
------- --------- ------------
Outstanding at December
31, 1996............... 140,314 639 -- -- 56,739,674 $1,048
======= ========= ============ ======
Converted to common
stock options........ 54,144 1,055 -- -- (56,739,674)
Granted............... 53,035 1,476 -- -- --
Acquisition of SCGPB
Incorporated (see
note 5).............. (23,836) 475 -- -- --
Exercised............. (7,472) 684 -- -- --
Forfeited............. (8,228) 944 -- -- --
------- --------- ------------
Outstanding at December
31, 1997............... 207,957 966 -- -- --
------- --------- ------------
Granted............... 8,666 1,446 3,901,841 15.99 --
Exercised............. (1,488) 647 -- -- --
Forfeited............. (10,208) 1,090 (4,068) 18.44 --
------- --------- ------------
Outstanding at December
31, 1998............... 204,927 $ 983 3,897,773 $15.98 $ --
======= ========= ============
</TABLE>
84
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------
Wtd. Avg.
Range of Exercise Remaining Wtd. Avg. Wtd. Avg.
Prices for Class A and B Number Contractual Exercise Number Exercise
Shares Outstanding Life Price Exercisable Price
------------------------ ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Class A Shares:
$62-948............... 65,952 4.4 years $ 414 42,266 $ 258
$1,016-1,139.......... 80,875 6.3 years $1,089 35,058 $1,071
$1,154-1,600.......... 58,100 8.8 years $1,480 1,350 $1,253
--------- ------
204,927 78,674
========= ======
Class B Shares:
$14-24................ 3,897,773 9.9 years $ 16 -- n/a
</TABLE>
The weighted-average fair value per share of Class A options granted during
1998, 1997 and 1996, was $744, $567 and $447, respectively. For Class B
options granted during 1998, the weighted-average fair value per share was
$6.39.
Restricted Stock Awards
On December 9, 1998, Security Capital awarded 1,268,000 restricted Class B
Share units to certain officers. Each restricted Class B share unit provides
the holder with an award of one Class B share, subject to either a four year,
five year or performance-related vesting schedule. The related compensation
expense of $18,300,000 will be recognized over the vesting periods.
(8) Leases
Minimum future rental payments due under non-cancelable operating leases,
principally for office space and equipment, having remaining terms in excess
of one year as of December 31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, Amount
----------------------- --------
<S> <C>
1999............................ $ 5,449
2000............................ 5,407
2001............................ 5,164
2002............................ 4,355
2003............................ 2,778
Thereafter...................... 9,095
--------
$ 32,248
========
</TABLE>
Lease expense for the years ended December 31, 1998, 1997 and 1996, was
$4,094,000, $3,550,000 and $3,659,000, respectively, including $676,000,
$1,445,000 and $1,390,000 in 1998, 1997 and 1996, respectively, paid to
ProLogis. Included above are lease agreements with ProLogis with total
remaining obligations of $4,694,000.
85
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Income Taxes
Security Capital accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting For Income Taxes ("SFAS 109").
Security Capital files a consolidated Federal income tax return. Homestead
also accounts for income taxes under SFAS 109 and its tax effects are included
in Security Capital's consolidated financial statements. Homestead files a
separate Federal income tax return. SC-US Real Estate Shares and SC-European
Real Estate Shares have complied with the provisions of the Internal Revenue
Code available to regulated investment companies and intend to distribute
investment company net taxable income and net capital gains to shareholders.
Therefore, no provision for federal income taxes has been made in Security
Capital's consolidated financial statements for SC-US Real Estate Shares or
SC-European Real Estate Shares.
A reconciliation of income tax expense computed at the U.S. federal
statutory tax rate of 35% in 1998, 1997 and 1996 to the amount recorded in the
consolidated financial statements is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Computed U.S. Federal expected
provision/(benefit)......................... $(52,028) $60,944 $29,445
Increases (decreases) resulting from:
Minority interest.......................... 771 (410) (4,840)
Change in valuation allowance.............. -- (21,375) (2,674)
Non-taxable foreign income, net............ (3,874) (3,955) (896)
State and foreign taxes.................... 1,337 -- --
Issuance of shares to SCGPB Incorporated... -- 2,310 --
Non-deductible warrant issuance............ -- 17,464 --
Increase (decrease) in unrecognized
deferred tax benefit in consolidated
subsidiaries.............................. 3,053 (814) 10,824
Other...................................... 3,646 2,214 (987)
-------- ------- -------
$(47,095) $56,378 $30,872
======== ======= =======
</TABLE>
Security Capital had tax net operating loss carryforwards ("NOLs") of
approximately $57,300,000 and $61,400,000 at December 31, 1997 and 1996,
respectively. The NOLs were used entirely during 1998.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1998 and 1997,
are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Security Capital's net operating loss carryforwards
(NOL)............................................. $ -- $ 21,490
Homestead's NOLs................................... 29,144 6,819
Deferred financing costs........................... 17,322 12,708
Mortgages and other liabilities.................... 6,274 2,886
-------- --------
Gross deferred tax assets.......................... 52,740 43,903
Homestead valuation allowance...................... (29,662) (15,536)
Other.............................................. 700 --
-------- --------
Gross deferred tax assets, net of valuation
allowances...................................... 23,778 28,367
-------- --------
Deferred tax liabilities:
Investments in equity method operating companies... (36,157) (108,740)
Depreciable assets................................. (23,078) (6,877)
-------- --------
Net deferred tax liability....................... $(35,457) $(87,250)
======== ========
</TABLE>
86
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Derivative Financial Instruments
Security Capital uses derivatives to manage well-defined risks associated
with interest rate fluctuations on anticipated transactions. In May 1998, in
anticipation of the June 1998 debt offering (see note 5), Security Capital
entered into the following forward treasury lock transactions:
<TABLE>
<CAPTION>
Notional
Trade Date Reference Treasury Amount
---------- ------------------ --------
<S> <C> <C>
May 22, 1998 6.125% of Nov. 2027 $187,500,000
May 22, 1998 6.5% of May 2005 75,000,000
May 26, 1998 5.625% of May 2008 112,500,000
------------
$375,000,000
============
</TABLE>
These contracts were terminated on June 18, 1998, resulting in deferred
losses totaling $9,500,000. These losses are being amortized into interest
expense over the life of the related Senior Unsecured Notes which have a
weighted average maturity of 16.6 years. As of December 31, 1998, Security
Capital had no interest rate hedge contracts outstanding.
(11) Selected Quarterly Financial Data (unaudited)
Selected quarterly financial data (in thousands except per share amounts)
for 1998 and 1997 are summarized below. Net earnings (loss) per share for each
period presented have been restated to conform with the requirements of SFAS
128. The sum of the quarterly earnings (loss) per Class B Share amounts may
not equal the annual earnings per Class B Share amounts due to the impact of
equity issuances.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------- Year Ended
March 31, June 30, September 30, December 31, December 31,
--------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1998:
Revenues including
Equity in Earnings
(loss)............... $66,431 $ 49,596 $ (56,198) $113,349 $ 173,178
Earnings (loss) from
operations........... 10,625 (24,144) (139,578) 4,447 (148,650)
Net earnings (loss)... 4,027 (42,070) (115,067) 1,012 (152,098)
Basic earnings (loss)
per Class B Share.... 0.03 (0.35) (0.96) 0.01 (1.25)
Diluted earnings
(loss) per Class B
Share................ 0.03 (0.35) (0.96) 0.01 (1.25)
1997:
Revenues including
Equity in Earnings... $84,170 $ 94,541 $ 93,193 $ 95,800 $ 367,704
Earnings from
operations........... 14,993 10,184 13,019 42,536 80,732
Net earnings (loss)... 3,349 (981) 47,926 55,860 106,154
Basic earnings (loss)
per Class B Share.... 0.05 (0.02) 0.71 0.50 1.39
Diluted earnings
(loss) per Class B
Share................ 0.05 (0.02) 0.55 0.45 1.28
</TABLE>
Included in the 1998 net loss are $26,367,000 of realized and unrealized
losses on direct investments in real estate equity securities and a
$163,745,000 loss related to Security Capital's equity investment in SC-
U.S.Realty which accounts for its investments in real estate securities on the
fair value method.
87
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(12) Fair Values of Financial Instruments
The following disclosures of the estimated fair value of financial
instruments were determined by Security Capital 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.
Considerable judgement and a high degree of subjectivity are involved in
developing these estimates and accordingly they are not necessarily indicative
of amounts that Security Capital could realize upon disposition.
The carrying amount of cash and cash equivalents, other assets, accounts
payable and accrued expenses approximate fair value as of December 31, 1998
and 1997, because of the short maturity of these instruments. Similarly, the
carrying value of lines of credit borrowings and the carrying value of the
Homestead mortgage note payable approximate fair value at the balance sheet
dates since the interest rates fluctuate based on published market rates.
The following table reflects the carrying amount and estimated fair value
of Security Capital's long-term debt at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Long-term debt................... $614,236 $575,514 $ -- $ --
Convertible debt................. $322,774 $261,253 $323,024 $291,755
Homestead convertible mortgage
notes payable................... $221,334 $218,363 $301,606 $395,038
</TABLE>
(13) Commitments and Contingencies
Security Capital and its investees are parties to various claims and
routine litigation arising in the ordinary course of business. Based on advice
of legal counsel, Security Capital does not believe that the results of all
claims and litigation, individually or in the aggregate, will have a material
adverse effect on its business, financial position or results of operations.
Security Capital's investees are subject to environmental and health and
safety laws and regulations related to the ownership, operation, development
and acquisition of real estate. Under such laws and regulations, Security
Capital's investees may be liable for, among other things, the costs of
removal or remediation of certain hazardous substances, including asbestos-
related liability. Such laws and regulations often impose liability without
regard to fault.
As part of their due diligence procedures, Security Capital's investees
conduct Phase I environmental assessments on each property prior to
acquisition. The cost of complying with environmental regulations was not
material to Security Capital's results of operations. Security Capital and its
investees are not aware of any environmental condition on any of their
properties which is likely to have a material adverse effect on Security
Capital's financial condition or results of operations.
Security Capital and its affiliates have committed to invest up to
$518,258,000 in equity securities of SC-European Realty (see note 2). As of
December 31, 1998, $375,737,000 had been funded by Security Capital and its
affiliates.
At December 31, 1998, Homestead had approximately $68,000,000 of unfunded
commitments for developments under construction.
88
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with a line of credit agreement entered into by Homestead in
June 1998, Security Capital committed, during the eight month term of the line
of credit, to retain its ownership of Homestead common shares and to purchase
up to $200,000,000 of subordinated convertible debentures of Homestead under
certain circumstances (which amount may be reduced if Security Capital
purchases other Homestead securities or if Homestead obtains other qualifying
equity investments from third parties). Homestead may convert these debentures
to common stock if it is not in default under its credit agreements. Homestead
has pledged this investment obligation of Security Capital as security under
Homestead's June 1998 line of credit.
In addition, on March 25, 1999, Homestead announced a rights offering for
$225,000,000 of common stock, the proceeds of which will be used to repay
Homestead's $200,000,000 bridge facility and for purposes allowed under the
Working Capital Facilities. Security Capital will participate in the rights
offering. To the extent rights remain available Security Capital has agreed to
purchase enough shares of Homestead common stock in the rights offering to
ensure that the proceeds of the offering are no less than $205,000,000, based
on current market prices and subject to final documentation. To the extent
Homestead raises proceeds of up to $200,000,000 in the rights offering from
third parties or Security Capital which are used to repay the Bridge Facility,
Security Capital's obligation under its subscription agreement for Homestead
convertible subordinated debentures will be reduced or terminated.
As of December 31, 1998, $40,251,000 had been funded by Security Capital to
Belmont and an additional $40,178,000 of unfunded commitments remained. At
December 31, 1998, Belmont had approximately $13,500,000 of unfunded
commitments for developments under construction.
(14) Homestead Subsequent Events
Lines of Credit
On March 18, 1999 Homestead executed an agreement with its bank lenders to
renew and amend the Working Capital Facilities to December 31, 2000. The line
secured by suburban properties has been increased to $170,000,000 total
borrowing capacity from $150,000,000 and the sliding interest terms amended to
be 2.0% to 3.0% over LIBOR and 1% to 2% over prime or 1.5% to 2.5% over the
federal funds rate. Future additional collateral will be limited to suburban
properties which are construction complete and stabilized. The line secured by
urban properties has been decreased to $30,000,000 total borrowing capacity
from $50,000,000 and the interest terms amended to 3.0% over LIBOR and 2.0%
over prime or 2.5% over the federal funds rate.
Sale and Leaseback of Properties
On February 23, 1999, Homestead completed the sale and leaseback of 18
Homestead Village properties with Hospitality Properties Trust (NYSE: HPT).
Hospitality Properties Trust purchased the properties for $145,000,000.
Homestead will continue to operate the properties under a long-term lease
through December 2015 and pay a minimum rent of approximately $16,000,000 per
year. Homestead has posted a security deposit equal to one year's rent. The
properties sold were among the 26 properties pledged as collateral for the
$122,000,000 mortgage note due to mature in June 1999.
The lease is considered a capital lease for financial reporting purposes
and thus the present value of the minimum lease payments will be recorded as
an asset, to be amortized over the lease term, and an obligation, which will
be reduced over the term of the lease by allocating rent payments between
interest expense and reduction of the lease obligation. The lease also
provides for two extension periods of 15 years each at the option of
Homestead, requires payment of percentage rents beginning July 2000 based on
increases in revenues over a base period and requires a percentage of revenues
be paid to a reserve to be used for capital expenditures.
89
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS (Unconsolidated)
December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ---------- ----------
<S> <C> <C>
Investments in and advances to subsidiaries............ $3,505,117 $2,840,951
Cash and cash equivalents.............................. 85 802
Other assets........................................... 35,538 39,779
---------- ----------
Total assets....................................... $3,540,740 $2,881,532
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Long-term debt....................................... $ 614,236 $ --
Convertible debt..................................... 322,774 323,024
Line of credit....................................... 163,400 --
Accounts payable and accrued expenses................ 17,982 9,899
---------- ----------
Total liabilities.................................. 1,118,392 332,923
---------- ----------
Shareholders' Equity:
Class A Shares, $.01 par value; 20,000,000 shares
authorized; 1,487,109 and 2,045,601 shares issued
and outstanding in 1998 and 1997, respectively...... 15 20
Class B Shares, $.01 par value; 229,537,385 shares
authorized; 47,628,481 and 22,627,541 shares issued
and outstanding in 1998 and 1997, respectively...... 476 226
Series A Preferred Shares, $.01 par value; 139,000
shares issued and outstanding in 1997; stated
liquidation preference of $1,000 per share.......... -- 139,000
Series B Preferred Shares, $.01 par value; 257,642
shares issued and outstanding in 1998; stated
liquidation preference of $1,000 per share.......... 257,642 --
Additional paid-in capital........................... 2,415,861 2,508,912
Accumulated deficit.................................. (251,646) (99,549)
---------- ----------
Total shareholders' equity......................... 2,422,348 2,548,609
---------- ----------
Total liabilities and shareholders' equity......... $3,540,740 $2,881,532
========== ==========
</TABLE>
See notes to consolidated financial statements and accompanying notes.
90
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS (Unconsolidated)
December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Income:
Equity in earnings (loss) of subsidiaries....... $ (36,037) $172,145 $136,943
Interest and other income....................... 6,450 6,905 7,384
--------- -------- --------
(29,587) 179,050 144,327
--------- -------- --------
Expenses:
General, administrative and other............... 21,750 33,830 10,529
Interest expense--convertible debt.............. 21,016 94,749 93,912
Interest expense--long-term debt................ 19,844 -- --
Interest expense--line of credit................ 8,659 -- --
--------- -------- --------
71,269 128,579 104,441
--------- -------- --------
Earnings (loss) from operations................... (100,856) 50,471 39,886
Gain on sale of management companies............ -- 93,395 --
--------- -------- --------
Earnings (loss) before income taxes............... (100,856) 143,866 39,886
--------- -------- --------
Provision for income expense (benefit):
Current....................................... (4,636) -- --
Deferred...................................... 20,790 27,287 --
--------- -------- --------
Total income tax expense.................... 16,154 27,287 --
Net earnings (loss)............................... (117,010) 116,579 39,886
Less Series A Preferred Share dividends......... 35,088 10,425 7,819
--------- -------- --------
Net earnings (loss) attributable to common shares. $(152,098) $106,154 $ 32,067
========= ======== ========
</TABLE>
See notes to consolidated financial statements and accompanying notes.
91
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS (Unconsolidated)
December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
Operating Activities:
Net earnings (loss).......................... $(117,010) $116,579 $ 39,886
Adjustments to reconcile net earnings (loss)
to cash flows provided by operating
activities:
Equity in (earnings) loss of subsidiaries.. 36,037 (172,145) (136,943)
Distributions from subsidiaries............ 191,296 65,739 51,964
Provisions for deferred income taxes....... 20,790 27,287 --
Gain on sale of management companies....... -- (93,395) --
Decrease (increase) in other assets.......... 5,317 2,575 (6,765)
Increase (decrease) in accrued interest on
convertible debt............................ -- (527) 17,927
Increase in accounts payable and accrued
expenses.................................... (13,407) 2,880 5,269
--------- -------- ---------
Net cash provided by (used) in operating
activities.............................. 123,023 (51,007) (28,662)
--------- -------- ---------
Investing Activities:
Investments in and advances to subsidiaries.. (361,497) (733,486) (535,510)
Other........................................ (375) (2,309) (350)
--------- -------- ---------
Net cash flows used in investing
activities.............................. (361,872) (735,795) (535,860)
--------- -------- ---------
Financing Activities:
Proceeds from issuance of convertible debt... -- 98,729 229,426
Proceeds from sale of common shares, net of
expense..................................... 6,382 692,877 230,579
Proceeds from line of credit................. 354,800 -- --
Payments on line of credit................... (721,400) -- --
Proceeds from long-term debt offerings....... 614,236 -- --
Proceeds from sale of Series A Preferred
Shares...................................... -- -- 139,000
Repurchase of common shares.................. (641) (1,834) (11,483)
Retirement of convertible debt............... -- (72) (7,840)
Preferred dividends paid..................... (15,245) (10,425) (7,819)
Other........................................ -- 453 --
--------- -------- ---------
Net cash flows provided by financing
activities.............................. 238,132 779,728 571,863
--------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................... (717) (7,074) 7,341
Cash and cash equivalents, beginning of year... 802 7,876 535
--------- -------- ---------
Cash and cash equivalents, end of year......... $ 85 $ 802 $ 7,876
========= ======== =========
Non-Cash Investing and Financing Activities:
Issuance of Series B Preferred Shares:
Series B Preferred Shares issued........... $ 257,642 $ -- $ --
Series A Preferred Shares retired.......... (139,000) -- --
Fair value of Class B Shares retired....... (98,799) -- --
Series A Preferred dividend recorded....... (19,843) -- --
--------- -------- ---------
$ -- $ -- $ --
========= ======== =========
Transfer of line of credit from SC Realty.... $ 530,000 $ -- $ --
--------- -------- ---------
Shares issued to acquire SCGPB Incorporated.. $ -- $ 6,600 $ --
--------- -------- ---------
Shares received from Archstone in exchange
for management companies.................... $ -- $ 75,838 $ --
--------- -------- ---------
Shares received from ProLogis in exchange for
management companies........................ $ -- $ 81,871 $ --
--------- -------- ---------
Issuance of Warrants to Atlantic
shareholders................................ $ -- $ 11,530 $ --
--------- -------- ---------
Conversion of 2014 and 2016 Debentures....... $ 250 $757,754 $ --
--------- -------- ---------
Contribution of shares to SC Realty:
Security Capital ProLogis Trust............ $ -- $ 81,871 $ --
Security Capital Archstone Communities
Trust..................................... -- 75,838 $ --
Security Capital Atlantic Incorporated..... -- 13,655 $ --
--------- -------- ---------
171,364
Less deferred income taxes................. -- (48,777) --
--------- -------- ---------
$ -- $122,587 $ --
--------- -------- ---------
Security Capital U.S. Real Estate Shares... $ -- $ 9,927 $ --
--------- -------- ---------
Homestead Village Incorporated............. $ -- $ 748 $ --
--------- -------- ---------
Contribution of Belmont note receivable to SC
Realty...................................... $ -- $ 9,453 $ --
--------- -------- ---------
</TABLE>
See notes to consolidated financial statements and accompanying notes.
92
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unconsolidated)
1. Investments in Subsidiaries
Security Capital has investments in SC Realty Incorporated ("SC Realty")
and a Financial Services Division. SC Realty and the entities that comprise
the Financial Services Division are wholly owned subsidiaries of Security
Capital.
At December 31, 1998, SC Realty holds interests in the following companies:
Archstone Communities Trust (formerly Security Capital Pacific Trust which
merged with Security Capital Atlantic Incorporated in July 1998), BelmontCorp,
Homestead Village Incorporated, ProLogis Trust (formerly Security Capital
Industrial Trust), Security Capital European Realty, Security Capital European
Real Estate Shares, Security Capital Preferred Growth, Security Capital U.S.
Real Estate Shares, Security Capital U.S. Realty and Strategic Hotel
Incorporated. The Financial Services Division provides operational and capital
deployment oversight, capital management, capital markets, corporate services
and research services for the companies in which SC Realty has directly and
indirectly invested.
Dividends from consolidated subsidiaries amounted to $191,296,000,
$65,739,000 and $51,964,000 during 1998, 1997 and 1996, respectively.
2. Indebtedness
Line of Credit:
Borrowings outstanding on Security Capital's revolving bank line of credit
at December 31, 1998 totaled $163,400,000.
At December 31, 1998, Security Capital had a $650,000,000 unsecured
revolving line of credit with Wells Fargo Bank, National Association (Wells
Fargo), as agent for a group of lenders. The agreement is effective through
April 6, 2000, with an option to renew for successive one-year periods with
the approval of lenders. Borrowings bear interest at LIBOR plus a margin
(1.00% as of December 31, 1998) based upon Security Capital's credit rating or
a Base Rate (defined as the higher of Wells Fargo prime rate or the Federal
Funds rate plus .50%). Security Capital has requested the extension of the
line of credit to 2002 and a reduction of the line to match its anticipated
intermediate-term requirements.
Commitment fees range from 0.125% to 0.20% per annum based on the average
unfunded line of credit balance. The line is guaranteed by SC Realty.
93
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unconsolidated)--(Continued)
Senior Unsecured Notes:
During 1998, Security Capital issued the following long-term debt, all of
which was outstanding as of December 31, 1998 (in thousands):
<TABLE>
<S> <C>
6.95% Senior Unsecured Notes, due June 15, 2005, original principal
of $200,000,000, net of original issue discount. Interest is
payable on June 15 and December 15 of each year, commencing
December 15, 1998................................................. $199,802
7.15% Senior Unsecured Notes, due June 15, 2007, original principal
of $100,000,000, net of original issue discount. Interest is
payable on June 15 and December 15 of each year, commencing
December 15, 1998................................................. 99,824
7.70% Senior Unsecured Notes, due June 15, 2028, original principal
of $200,000,000. Interest is payable on June 15 and December 15 of
each year, commencing December 15, 1998........................... 200,000
7.75% Unsecured Medium-Term Notes, due November 15, 2003, original
principal of $100,000,000, net of original issue discount.
Interest is payable on May 15 and November 15 of each year,
commencing May 15, 1999........................................... 99,908
7.66% Unsecured Medium-Term Notes, due December 21, 2004, original
principal of $14,700,000, including original issue premium.
Interest is payable on March 15 and September 15 of each year,
commencing March 15, 1999......................................... 14,702
--------
$614,236
========
</TABLE>
All of the Notes are redeemable at any time at the option of Security
Capital, 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.
Under the terms of the indentures, Security Capital may incur additional
debt only if, after giving effect to the debt being incurred, (i) the ratio of
debt to adjusted total assets, as defined in the indentures, does not exceed
50%, and (ii) the fixed charge coverage ratio, as defined in the indentures,
for the four preceding fiscal quarters is not less than 1.5 to 1.0. In
addition, Security Capital may not at any time permit its consolidated
tangible net worth, as defined in the indentures, to be less than
$1,500,000,000. At December 31, 1998, Security Capital was in compliance with
all debt covenants contained in the indentures.
Convertible Debt:
As of December 31, 1998 and 1997, Security Capital had $322,774,000 and
$323,024,000, respectively, of 6.50% convertible subordinated debentures due
2016 (2016 Convertible Debentures) outstanding. The 2016 Convertible
Debentures accrue interest at 6.5% per annum and pay interest semi-annually in
June and December.
As of September 18, 1998, the 2016 Convertible Debentures became
convertible into Class A Shares at $1,153.90 per share, at the option of the
holder. Security Capital may redeem the 2016 Convertible Debentures at par
plus accrued interest at any time after March 29, 1999, upon not less than 60
days nor more than 90 days' prior written notice to the holders.
Security Capital's 2014 Convertible Debentures were called for redemption
on September 29, 1997. A total of $8,900 of 2014 Convertible Debentures were
redeemed on December 1, 1997, at a redemption price of $1,000
94
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unconsolidated)--(Concluded)
plus accrued interest. In 1997, substantially all 2014 Convertible Debenture
holders elected to convert their debentures into shares of Security Capital's
Class A common stock, par value $.01 per share ("Class A Shares"), at the
conversion price of $1,046 per share. On conversion of the 2014 Convertible
Debentures, any accrued interest was deemed to be paid in full upon delivery
of the Class A Shares to the debenture holder. A total of $715,830,000
principal amount of 2014 Convertible Debentures was converted into 684,349
Class A Shares. The principal amount of the converted debentures
($715,830,000) plus the unpaid interest ($41,924,000) was recorded as an
addition to shareholder's equity.
3. Income Taxes
Security Capital files a consolidated Federal income tax return which
includes SC Realty and the Financial Services Division companies. At December
31, 1997, Security Capital's consolidated tax net operating loss ("NOL")
carryforwards amounted to approximately $57,300,000. The NOL's were used
entirely during 1998. Security Capital's income tax expense ($16,154,000) in
1998 is comprised of $4,636,000 of current income tax benefit offset by the
deferred tax expense of $20,790,000 related to the utilization of the deferred
tax assets related to the NOL carryforward. Security Capital's income tax
expense ($27,287,000) in 1997 is comprised of $48,777,000 of deferred tax
expense applicable to the gain on sale of the management companies offset by
the effect of the deferred tax asset ($21,490,000) applicable to Security
Capital's NOL carryforwards. A deferred tax asset in 1998 and liability in
1997 and 1996 was recorded by SC Realty applicable to its equity method
investments. Accordingly, Security Capital's equity in earnings of SC Realty
for 1998, 1997 and 1996 has been reduced (increased) by deferred income tax
expense (benefit) of ($72,583,000), $29,091,000 and $30,872,000, respectively.
4. Reclassifications
Certain amounts in 1997 have been reclassified to conform to the 1998
presentation.
95
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders
Archstone Communities Trust:
We have audited the accompanying balance sheets of Archstone Communities
Trust as of December 31, 1998 and 1997, and the related statements of
earnings, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998. These financial statements are the
responsibility of the Company'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 Archstone Communities
Trust as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the years in the three-year period ended December
31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
January 22, 1999, except as to Note 15,
which is as of March 5, 1999
96
<PAGE>
ARCHSTONE COMMUNITIES TRUST
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Real estate............................................ $4,869,801 $2,604,919
Less accumulated depreciation.......................... 205,795 129,718
---------- ----------
4,664,006 2,475,201
Mortgage notes receivable, net......................... 211,967 285,238
---------- ----------
Net investments.................................... 4,875,973 2,760,439
Cash and cash equivalents.............................. 10,119 4,927
Restricted cash in tax-deferred exchange escrow........ 90,874 --
Other assets........................................... 82,932 40,320
---------- ----------
Total assets....................................... $5,059,898 $2,805,686
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unsecured credit facilities.......................... $ 264,651 $ 231,500
Long-Term Unsecured Debt............................. 1,231,167 630,000
Mortgages payable.................................... 676,613 265,652
Distributions payable................................ 53,364 31,495
Accounts payable..................................... 55,649 35,352
Accrued expenses..................................... 83,114 39,623
Other liabilities.................................... 45,556 31,628
---------- ----------
Total liabilities.................................. 2,410,114 1,265,250
---------- ----------
Minority interest...................................... 21,459 --
---------- ----------
Shareholders' equity:
Series A Convertible Preferred Shares (4,700,615
shares in 1998 and 5,408,393 in 1997; stated
liquidation preference of $25 per share)............ 117,515 135,210
Series B Preferred Shares (4,200,000 shares; stated
liquidation preference of $25 per share)............ 105,000 105,000
Series C Preferred Shares (2,000,000 shares; stated
liquidation preference of $25 per share)............ 50,000 --
Common Shares (143,313,015 in 1998 and 92,633,724 in
1997)............................................... 143,313 92,634
Additional paid-in capital........................... 2,350,239 1,251,503
Unrealized holding gain on convertible mortgage notes
receivable.......................................... -- 83,794
Distributions in excess of net earnings.............. (137,742) (127,705)
---------- ----------
Total shareholders' equity......................... 2,628,325 1,540,436
---------- ----------
Total liabilities and shareholders' equity......... $5,059,898 $2,805,686
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
97
<PAGE>
ARCHSTONE COMMUNITIES TRUST
STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Rental revenues................................... $484,539 $335,060 $322,046
Other income...................................... 29,106 20,602 4,200
-------- -------- --------
513,645 355,662 326,246
-------- -------- --------
Expenses:
Rental expenses (including $7,642 and $11,610 paid
to affiliates for the years ended December 31,
1997 and 1996)................................... 133,079 95,665 101,160
Real estate taxes................................. 40,681 27,386 26,962
Depreciation on real estate investments........... 96,337 52,893 44,887
Interest.......................................... 83,350 61,153 35,288
General and administrative:
Paid to affiliate............................... 4,635 14,314 22,191
Other........................................... 11,457 4,036 1,077
Nonrecurring expenses:
Branding strategy and Atlantic Merger
integration.................................... 2,193 -- --
Costs incurred in acquiring Management Companies
from an affiliate.............................. -- 71,707 --
Provision for possible loss on investments........ 4,700 3,000 --
Other............................................. 3,287 822 592
-------- -------- --------
379,719 330,976 232,157
-------- -------- --------
Earnings from operations............................ 133,926 24,686 94,089
Gains on dispositions of depreciated real estate,
net.............................................. 65,531 48,232 37,492
-------- -------- --------
Earnings before extraordinary items................. 199,457 72,918 131,581
Less extraordinary items.......................... 1,497 -- 870
-------- -------- --------
Net earnings........................................ 197,960 72,918 130,711
Less Preferred Share dividends.................... 20,938 19,384 24,167
-------- -------- --------
Net earnings attributable to Common Shares--Basic... $177,022 $ 53,534 $106,544
======== ======== ========
Weighted average Common Shares outstanding--Basic... 118,592 81,870 73,057
-------- -------- --------
Weighted average Common Shares outstanding--
Diluted............................................ 125,825 81,908 84,340
-------- -------- --------
Earnings before extraordinary item per Common Share:
Basic............................................. $ 1.51 $ 0.65 $ 1.47
======== ======== ========
Diluted........................................... $ 1.50 $ 0.65 $ 1.45
======== ======== ========
Net earnings per Common Share:
Basic............................................. $ 1.49 $ 0.65 $ 1.46
======== ======== ========
Diluted........................................... $ 1.49 $ 0.65 $ 1.44
======== ======== ========
Distributions paid per Common Share................. $ 1.39 $ 1.30 $ 1.24
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
98
<PAGE>
ARCHSTONE COMMUNITIES TRUST
STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Series A Unrealized
Convertible Series B Series C holding gain
Preferred Preferred Preferred (loss) on
Shares at Shares at Shares at convertible
aggregate aggregate aggregate Common Additional mortgage Distributions
liquidation liquidation liquidation Shares at paid-in notes in excess of
preference preference preference par value capital receivable net earnings Total
----------- ----------- ----------- --------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December
31, 1995.............. $230,000 $105,000 $ -- $ 72,376 $ 950,742 $ -- $ (82,450) $1,275,668
Comprehensive income:
Net earnings.......... -- -- -- -- -- -- 130,711 130,711
Preferred Share
dividends paid....... -- -- -- -- -- -- (24,167) (24,167)
Other comprehensive
income-- unrealized
holding gain on
convertible mortgage
notes receivable..... -- -- -- -- -- 74,923 -- 74,923
----------
Comprehensive income
attributable to
Common Shares........ -- -- -- -- -- -- -- 181,467
----------
Common Share
distributions........ -- -- -- -- -- -- (92,828) (92,828)
Distribution of
Homestead common
stock and warrants at
book value, net of
transaction
expenses............. -- -- -- -- (96,914) -- -- (96,914)
Other, net............ (67,626) -- -- 3,135 64,606 -- -- 115
-------- -------- ------- -------- ---------- ------- --------- ----------
Balances at December
31, 1996.............. 162,374 105,000 -- 75,511 918,434 74,923 (68,734) 1,267,508
Comprehensive income:
Net earnings.......... -- -- -- -- -- -- 72,918 72,918
Preferred Share
dividends paid....... -- -- -- -- -- -- (19,384) (19,384)
Other comprehensive
income-- change in
unrealized holding
gain on convertible
mortgage notes
receivable........... -- -- -- -- -- 8,871 -- 8,871
----------
Comprehensive income
attributable to
Common Shares........ -- -- -- -- -- -- -- 62,405
----------
Common Share
distributions........ -- -- -- -- -- -- (112,505) (112,505)
Issuance of shares to
affiliate............ -- -- -- 3,296 68,780 -- -- 72,076
Sale of shares, net of
expenses............. -- -- -- 11,420 236,956 -- -- 248,376
Other, net............ (27,164) -- -- 2,407 27,333 -- -- 2,576
-------- -------- ------- -------- ---------- ------- --------- ----------
Balances at December
31, 1997.............. 135,210 105,000 -- 92,634 1,251,503 83,794 (127,705) 1,540,436
Comprehensive income:
Net earnings.......... -- -- -- -- -- -- 197,960 197,960
Preferred Share
dividends paid....... -- -- -- -- -- -- (20,938) (20,938)
Other comprehensive
income-- change in
unrealized holding
gain on convertible
mortgage notes
receivable........... -- -- -- -- -- (83,794) -- (83,794)
----------
Comprehensive income
attributable
to Common Shares..... -- -- -- -- -- -- -- 93,228
----------
Common Share
distributions........ -- -- -- -- -- -- (187,059) (187,059)
Atlantic Merger....... -- -- 50,000 47,752 1,038,390 -- -- 1,136,142
Sale of shares, net of
expenses............. -- -- -- 2,050 41,959 -- -- 44,009
Other, net............ (17,695) -- -- 877 18,387 -- -- 1,569
-------- -------- ------- -------- ---------- ------- --------- ----------
Balances at December
31, 1998.............. $117,515 $105,000 $50,000 $143,313 $2,350,239 $ -- $(137,742) $2,628,325
======== ======== ======= ======== ========== ======= ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
99
<PAGE>
ARCHSTONE COMMUNITIES TRUST
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Operating activities:
Net earnings............................... $ 197,960 $ 72,918 $130,711
Adjustments to reconcile net earnings to
net cash flow provided by operating
activities:
Depreciation and amortization............ 96,908 54,541 46,911
Gains on dispositions of depreciated real
estate, net............................. (65,531) (48,232) (37,492)
Provision for possible loss on
investments............................. 4,700 3,000 --
Costs incurred in acquiring Management
Companies from an affiliate............. -- 71,707 --
Non-cash extraordinary item.............. 1,497 -- --
Change in accounts payable................. (9,714) 4,000 565
Change in accrued expenses and other
liabilities............................... 16,886 11,034 11,286
Change in other assets..................... (21,172) (9,244) (8,042)
---------- ---------- --------
Net cash flow provided by operating
activities.............................. 221,534 159,724 143,939
---------- ---------- --------
Investing activities:
Real estate investments.................... (688,151) (616,100) (628,640)
Proceeds from dispositions, net of closing
costs..................................... 401,031 297,895 291,056
Cash acquired in Atlantic Merger........... 79,359 -- --
Change in tax-deferred exchange escrow..... (90,874) -- --
Funding of convertible mortgage notes
receivable................................ (11,895) (85,750) (25,242)
Other, net................................. 1,385 843 1,891
---------- ---------- --------
Net cash flow used in investing
activities.............................. (309,145) (403,112) (360,935)
---------- ---------- --------
Financing activities:
Proceeds from Long-Term Unsecured Debt..... 447,200 50,000 380,000
Proceeds from Fannie Mae secured debt...... 268,450 -- --
Debt issuance costs incurred............... (14,281) (1,518) (5,659)
Principal prepayment of mortgages payable.. (76,261) (49,847) (43,005)
Regularly scheduled principal payments on
mortgages payable......................... (35,064) (3,284) (2,037)
Proceeds from unsecured credit facilities.. 1,184,419 1,175,609 510,985
Principal payments on unsecured credit
facilities................................ (1,541,040) (1,054,309) (529,785)
Proceeds from sale of Common Shares, net... 44,009 249,199 --
Cash distributions paid on Common Shares... (165,190) (105,547) (90,728)
Cash dividends paid on Preferred Shares.... (20,938) (19,384) (24,167)
Other, net................................. 1,499 1,753 116
---------- ---------- --------
Net cash flow provided by financing
activities.............................. 92,803 242,672 195,720
---------- ---------- --------
Net change in cash and cash equivalents...... 5,192 (716) (21,276)
Cash and cash equivalents at beginning of
year........................................ 4,927 5,643 26,919
---------- ---------- --------
Cash and cash equivalents at end of year..... $ 10,119 $ 4,927 $ 5,643
========== ========== ========
</TABLE>
See Note 14 for supplemental information on significant non-cash investing
and financing activities.
The accompanying notes are an integral part of the financial statements.
100
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(1) Description of Business and Summary of Significant Accounting Policies
In July 1998, Security Capital Atlantic Incorporated ("Atlantic") was
merged with and into Security Capital Pacific Trust ("PTR"). This transaction
is hereafter referred to as the "Atlantic Merger". Upon consummation of the
Atlantic Merger, the name of the company was changed to Archstone Communities
Trust ("Archstone"). Financial information and references throughout this
document are labeled "Archstone" for both pre- and post- transaction periods
as a result of this name change. Archstone's financial statements and related
footnotes as of and for the period from the merger date (July 1998) to
December 31, 1998 give effect to the Atlantic Merger which was accounted for
under the purchase method. See Note 2 for a more complete discussion of the
Atlantic Merger.
Business
Archstone is an equity real estate investment trust ("REIT") organized in
1963 under the laws of the state of Maryland, which primarily owns, develops,
acquires, redevelops and operates income-producing apartment communities in
its strategically located target markets throughout the United States.
Principles of Financial Presentation
The accounts of Archstone and its controlled subsidiaries are consolidated
in the accompanying financial statements. All significant intercompany
accounts and transactions have been eliminated in consolidation. Archstone
uses the equity method to account for its investments when it does not control
but has the ability to exercise significant influence over the operating and
financial policies of the investee. For an investee accounted for under the
equity method, Archstone's share of net earnings or losses of the investee is
reflected in income as earned and dividends are credited against the
investment as received.
The preparation of these financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual amounts realized or paid could differ from those estimates.
Cash and Cash Equivalents
Archstone considers all cash on hand, demand deposits with financial
institutions and short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents.
Real Estate and Depreciation
Real estate, other than land and properties held for sale, is carried at
depreciated cost. Long-lived assets to be disposed of are reported at the
lower of their carrying amount or fair value less cost to sell. Archstone
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. This review involves comparing an
investment's current and future operating performance, the most significant of
which is Net Operating Income (defined as rental revenues less rental expenses
and real estate taxes) capitalized at prevailing market rates, to its carrying
value.
Archstone capitalizes direct and certain related indirect costs associated
with the successful acquisition, development or improvement of real estate.
Archstone no longer capitalizes any indirect or internal costs associated with
apartment community acquisitions, in accordance with Emerging Issues Task
Force Issue 97-11,
101
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accounting for Internal Costs Relating to Real Estate Property Acquisitions,
which was effective on April 1, 1998. Capitalized costs associated with
unsuccessful acquisition or development pursuits are expensed at the time the
pursuit is abandoned.
Depreciation is computed over the expected useful lives of depreciable
property on a straight-line basis as follows:
<TABLE>
<S> <C>
Buildings and improvements....... 20-40 years
Furnishings and other............ 2-10 years
</TABLE>
Interest
During 1998, 1997 and 1996, the total interest paid in cash on all
outstanding debt, was $96,410,000, $73,111,000 and $40,572,000, respectively.
Archstone capitalizes interest incurred during the construction period as
part of the cost of apartment communities under development. Interest
capitalized during 1998, 1997 and 1996 aggregated $29,942,000, $17,606,000 and
$16,941,000, respectively.
Cost of Raising Capital
Costs incurred in connection with the issuance of equity securities are
deducted from shareholders' equity. Costs incurred in connection with the
issuance or renewal of debt and are capitalized as other assets and are
amortized into interest expense over the term of the related loan or the
renewal period. The balance of any unamortized loan costs associated with
refinanced debt is expensed upon replacement with new debt. Amortization of
loan costs included in interest expense for 1998, 1997 and 1996 was
$3,318,000, $3,181,000 and $2,233,000, respectively.
Archstone occasionally utilizes derivative financial instruments as cash
flow hedges in anticipation of future debt transactions to manage well-defined
interest rate risk or to minimize exposure to variable rate debt. The costs
associated with entering into these agreements, as well as the related gains
or losses on such agreements, are deferred and are amortized into interest
expense over the term of the underlying debt.
Revenue and Gain Recognition
Archstone generally leases its apartment units under operating leases with
terms of one year or less. Rental income is recognized according to the terms
of the underlying leases which approximates the revenue which would be
recognized if spread evenly over the lease term.
Gains on sales of real estate are recorded when the recognition criteria
set forth by GAAP have been met.
Rental Expenses
Rental expenses shown on the accompanying Statements of Earnings include
costs associated with on-site and property management personnel, utilities,
repairs and maintenance, make-ready, property insurance, marketing,
landscaping, and other on-site and related administrative costs.
Federal Income Taxes
Archstone has made an election to be taxed as a REIT under the Internal
Revenue Code of 1986, as amended and believes it qualifies as a REIT.
Accordingly, no provision has been made for federal income taxes in the
accompanying financial statements.
102
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Comprehensive Income
Comprehensive income, which is defined as all changes in equity during each
period except those resulting from investments by or distributions to
shareholders, is displayed in the accompanying Statements of Shareholders'
Equity.
Per Share Data
Following is a reconciliation of basic earnings per share ("EPS") and
diluted EPS calculated in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings per Share, for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Reconciliation of numerator between basic and
diluted net earnings per Common Share (1):
Net earnings attributable to Common Shares--Basic... $177,022 $53,534 $106,544
Dividends on Series A Convertible Preferred
Shares........................................... 9,332 -- 14,717
Minority interest................................. 645 -- --
-------- ------- --------
Net earnings attributable to Common Shares--
Diluted............................................ $186,999 $53,534 $121,261
======== ======= ========
Reconciliation of denominator between basic and
diluted net earnings per Common Share (1):
Weighted average number of Common Shares
outstanding--Basic................................. 118,592 81,870 73,057
Assumed conversion of Series A Convertible
Preferred Shares into Common Shares.............. 6,765 -- 11,197
Minority interest................................. 458 -- --
Incremental options outstanding................... 10 38 86
-------- ------- --------
Weighted average number of Common Shares
outstanding--Diluted............................... 125,825 81,908 84,340
======== ======= ========
</TABLE>
- --------
(1) Excludes the impact of potentially dilutive equity securities during the
periods in which they are anti-dilutive.
Expected Impact of New Accounting Rules
In April 1998, Statement of Position 98-5, Reporting on the Costs of Start-
Up Activities, was issued which requires that costs associated with start-up
activities such as the opening of a new business or division be expensed as
incurred. The new rules, which became effective January 1, 1999, will not have
a material impact on Archstone's financial position or results of operations.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued which established standards for the accounting
and reporting of derivative instruments. The new rules, which become effective
January 1, 2000, are not expected to have a material impact on Archstone's
financial position or results of operations. See Note 5 for a discussion of
certain interest rate swap agreements and interest rate cap agreements that
Archstone entered into as cash flow hedges against rising interest rates in
December 1998 and January 1999.
Reclassifications
Certain of the 1997 and 1996 amounts have been reclassified to conform to
the 1998 presentation.
103
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) Atlantic Merger
In July 1998, Atlantic, an apartment REIT which operated primarily in the
southeast and mid-Atlantic markets of the United States, was merged with and
into PTR. The combined company continued its existence under the name
Archstone and is traded on the New York Stock Exchange ("NYSE") under the
symbol "ASN". In accordance with the terms of the Atlantic Merger, each
outstanding Atlantic common share was converted into the right to receive one
Archstone common share of beneficial interest, par value $1.00 per share
("Common Share") and each outstanding Atlantic Series A Preferred Share was
converted into the right to receive one comparable share of a new class of
Archstone series C non-convertible cumulative redeemable preferred share of
beneficial interest, par value $1.00 per share ("Series C Preferred Shares") .
As a result, 47,752,052 Common Shares and 2,000,000 Series C Preferred Shares
were issued to Atlantic's shareholders in exchange for all of the outstanding
Atlantic common shares and Atlantic series A preferred shares. In addition,
Archstone assumed Atlantic's debt and other liabilities. The total purchase
price paid for Atlantic aggregated approximately $1.9 billion. The transaction
was structured as a tax-free transaction and was accounted for under the
purchase method. At December 31, 1998, Security Capital Group Incorporated
("Security Capital"), which voted its shares in favor of the Atlantic Merger,
owned approximately 38% of the outstanding Common Shares and is Archstone's
largest shareholder. See Note 6 for additional information on Archstone's
dividend and distribution levels, which were adjusted subsequent to the
Atlantic Merger.
The following summarized pro forma unaudited information represents the
combined historical operating results of PTR and Atlantic with the appropriate
purchase accounting adjustments, assuming the Atlantic Merger had occurred on
January 1, 1997. The pro forma financial information presented is not
necessarily indicative of what Archstone's actual operating results would have
been had PTR and Atlantic constituted a single entity during such periods (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Total revenues.............................................. $610,866 $550,805
======== ========
Net earnings attributable to Common Shares before
extraordinary items........................................ $201,562 $110,680
======== ========
Net earnings attributable to Common Shares.................. $199,842 $110,680
======== ========
Weighted average Common Shares outstanding:
Basic..................................................... 141,939 128,575
======== ========
Diluted................................................... 148,714 128,614
======== ========
Earnings attributable to Common Shares before extraordinary
items per Common Share:
Basic and Diluted......................................... $ 1.42 $ 0.86
======== ========
Net earnings attributable to Common Shares per Common Share:
Basic and Diluted......................................... $ 1.41 $ 0.86
======== ========
</TABLE>
104
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
(3) Real Estate
Investments in Real Estate
Equity investments in real estate, at cost, were as follows (dollar amounts
in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998(1) 1997
----------------- -----------------
Investment Units Investment Units
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Apartment Communities:
Operating communities.................... $4,027,044 69,341 $2,237,789 43,465
Communities under construction(2)........ 701,897 12,120 232,770 5,545
Development communities In Planning(2)(3)
Owned.................................. 69,710 3,398 80,781 4,468
Under Control(3)(4).................... -- 3,772 -- 6,090
---------- ------ ---------- ------
Total development communities In
Planning............................. 69,710 7,170 80,781 10,558
---------- ------ ---------- ------
Total apartment communities............ 4,798,651 88,631 2,551,340 59,568
---------- ====== ---------- ======
Other land held............................ 48,280 27,517
Other real estate assets(5)................ 22,870 26,062
---------- ----------
Total real estate.................... $4,869,801 $2,604,919
========== ==========
</TABLE>
- --------
(1) Includes the real estate assets acquired in the Atlantic Merger (See Note
2).
(2) Unit information is based on management's estimates and has not been
audited or reviewed by Archstone's independent auditors.
(3) "In Planning" is defined as parcels of land owned or Under Control upon
which construction of apartments is expected to commence within 36 months.
"Under Control" means Archstone has an exclusive right (through contingent
contract or letter of intent) during a contractually agreed-upon time
period to acquire land for future development of apartment communities,
subject to approval of contingencies during the due diligence process, but
does not currently own the land. There can be no assurance that such land
will be acquired.
(4) Archstone's investment as of December 31, 1998 and 1997 for developments
Under Control was $4.8 million and $3.8 million, respectively, and is
reflected in the "Other assets" caption of Archstone's Balance Sheets.
(5) Represents Archstone's investment in a five-story Holiday Inn hotel
located in the Fisherman's Wharf area of San Francisco, California and an
investment in an industrial building which was sold during 1998.
Capital Expenditures
In conjunction with the underwriting of each acquisition of an operating
community, Archstone prepares acquisition budgets that encompass the
incremental capital needed to achieve Archstone's investment objectives. These
expenditures, combined with the initial purchase price and related closing
costs, are capitalized and classified as "acquisition-related" capital
expenditures, as incurred.
As part of its operating strategy, Archstone conducts regular reviews of
its assets to evaluate each community's physical condition relative to
management's business objectives and the community's competitive position in
its market. In conducting these evaluations, management considers Archstone's
return on investment in relation to its long-term cost of capital as well as
its research and analysis of competitive market factors. Capital expenditures
for operating communities are classified as either "redevelopment" or
"recurring".
The redevelopment category includes: (i) redevelopment initiatives, which
are intended to reposition the community in the marketplace and include items
such as significant upgrades to the interiors, exteriors, landscaping and
amenities; (ii) revenue-enhancing expenditures, which include investments that
are expected to
105
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
produce incremental community revenues, such as building garages, carports and
storage facilities or gating a community; and (iii) expense-reducing
expenditures, which include items such as water submetering systems and
xeriscaping that reduce future operating costs.
Recurring capital expenditures consist of significant expenditures for
items having a useful life in excess of one year which are incurred to
maintain a community's long-term physical condition at a level commensurate
with Archstone's stringent operating standards. Examples of recurring capital
expenditures include roof replacements, parking lot resurfacing and exterior
painting.
Repairs, maintenance and make-ready expenditures, including the replacement
of carpet, appliances and HVAC systems, are expensed as incurred, to the
extent they are not acquisition-related costs identified during Archstone's
pre-acquisition due diligence. Make-ready expenditures are costs incurred in
preparing a vacant apartment unit for the next resident.
The change in investments in real estate, at cost, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1....................... $2,604,919 $2,153,363 $1,855,866
---------- ---------- ----------
Apartment Communities:
Real estate assets acquired in the
Atlantic Merger......................... 1,823,727 -- --
Acquisition-related expenditures......... 285,806 391,234 386,852
Redevelopment expenditures............... 57,171 43,187 21,663
Recurring capital expenditures........... 9,464 8,762 7,992
Development expenditures, excluding land
acquisitions............................ 378,161 205,619 187,396
Acquisition and improvement of land for
development............................. 67,248 75,196 76,301
Dispositions(1).......................... (344,336) (268,210) (269,693)
Provision for possible loss on
investments............................. -- (2,800) --
---------- ---------- ----------
Net apartment community activity........... 2,277,241 452,988 410,511
---------- ---------- ----------
Other:
Homestead development expenditures,
including land acquisitions (See Note
4)...................................... -- -- 54,883
Contribution of assets (See Note 4)...... -- -- (161,370)
Dispositions............................. (9,959) (1,232) (6,527)
Provision for possible loss on
investments............................. (2,400) (200) --
---------- ---------- ----------
Net other activity......................... (12,359) (1,432) (113,014)
---------- ---------- ----------
Balance at December 31..................... $4,869,801 $2,604,919 $2,153,363
========== ========== ==========
</TABLE>
- --------
(1) At December 31, 1998, Archstone held a portion of the 1998 disposition
proceeds aggregating $90.9 million in an interest bearing escrow account,
pending the acquisition of other apartment communities to complete tax-
deferred exchanges or the repayment of borrowings under Archstone's
unsecured credit facilities.
At December 31, 1998, Archstone had unfunded apartment construction and
redevelopment commitments aggregating approximately $357.6 million.
Archstone was committed to the sale of 14 apartment communities and certain
other real estate assets having an aggregate carrying value of $162.7 million
as of December 31, 1998. Each property's carrying value is less than or equal
to its estimated fair market value, net of estimated costs to sell. The
property-level earnings, after mortgage interest and depreciation, from
communities held for disposition at December 31, 1998, which are included in
Archstone's earnings from operations for 1998, 1997 and 1996, were $8.4
million, $8.0 million and $6.8 million, respectively.
106
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
(4) Mortgage Notes Receivable
Homestead Transaction
In October 1996, Archstone consummated a transaction under which it
contributed its 54 extended-stay lodging assets known as Homestead Village
properties, to Homestead Village Incorporated ("Homestead"), a newly formed
company. In exchange, Archstone received 9,485,727 shares of Homestead common
stock and approximately $84.5 million (face amount) in convertible mortgage
notes. In addition, Archstone entered into a funding commitment agreement to
provide up to $198.8 million in secured financing to Homestead, for purposes of
completing the development and construction of the properties contributed, in
exchange for up to $221.3 million in convertible mortgage notes receivable
(including those received at the transaction date). In exchange for entering
into the funding commitment agreement, Archstone received 6,363,789 warrants to
acquire additional shares of Homestead common stock at a price of $10.00 per
share. In November 1996, Archstone distributed the Homestead common stock and
warrants it received in the transaction to its Common Shareholders, which had a
market value on the date of distribution of $3.032 per Common Share.
Convertible Mortgage Note Terms
The convertible mortgage notes receivable are convertible into Homestead
common stock on the basis of one share of Homestead common stock for every
$11.50 of principal face amount outstanding. The convertible mortgage notes
receivable bear interest at 9.0% of face per annum which is received in
interest-only payments on a semi-annual basis, are callable by Homestead after
October 31, 2001 and mature on October 31, 2006. The extended-stay lodging
assets contributed by Archstone serve as collateral individually and in the
aggregate under cross-collateral provisions.
<TABLE>
<S> <C>
Face amount of convertible mortgage notes receivable............. $221,334
Original issue discount.......................................... (22,501)
--------
Amount funded.................................................... 198,833
Other adjustments(1)............................................. 4,137
--------
Carrying value at December 31, 1998.............................. $202,970
========
</TABLE>
- --------
(1) Includes the amortization of the original issue discount and the net
unamortized discount on the conversion feature.
(5) Borrowings
Unsecured Credit Facilities
Upon consummation of the Atlantic Merger in July 1998, Archstone replaced
its $350 million unsecured revolving credit facility with a $750 million
unsecured revolving credit facility provided by a group of financial
institutions led by Chase Bank of Texas, National Association ("Chase"). The
new $750 million unsecured credit facility matures in July 2001, at which time
it may be converted into a two-year term loan at Archstone's option. The new
unsecured credit facility bears interest at the greater of prime or the federal
funds rate plus 0.50%, or at Archstone's option, the London interbank offered
rate ("LIBOR") (5.62% at December 31, 1998) plus 0.65%. The spread over LIBOR
can vary from LIBOR plus 0.50% to LIBOR plus 1.25% based upon the rating of
Archstone's long-term unsecured senior notes payable ("Long-Term Unsecured
Debt"). Under a competitive bid option contained in the credit agreement,
Archstone may be able to borrow up to $375 million at a lower interest rate
spread over LIBOR, depending on market conditions. Under the new agreement,
Archstone pays a facility fee, which is equal to 0.15% of the commitment.
Archstone paid commitment fees of $781,000, $358,000 and $396,000 in 1998, 1997
and 1996, respectively.
Upon replacing the $350 million credit facility with the new $750 million
credit facility, Archstone expensed the remaining $1.5 million of unamortized
loan costs associated with the old $350 million credit facility, which was
recorded as an extraordinary item during 1998.
107
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes Archstone's unsecured credit facility
borrowings:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Total unsecured credit facility.................. $750,000 $350,000 $350,000
Borrowings outstanding at December 31............ $234,000 $223,500 $ 99,750
Weighted average daily borrowings................ $340,658 $121,038 $112,248
Weighted average daily nominal interest rate..... 6.3% 6.7% 7.3%
Weighted average daily effective interest rate... 6.8% 8.4% 8.8%
Weighted average nominal interest rate at
December 31..................................... 6.2% 6.9% 6.6%
</TABLE>
In September 1996, Archstone entered into a short-term, unsecured borrowing
agreement with Chase in order to enhance cash management flexibility. This
borrowing agreement was renegotiated by Archstone upon consummation of the
Atlantic Merger under terms similar to the previous agreement. In October 1998,
the maximum borrowing capacity under the agreement was increased to $100
million. The agreement matures in July 1999 and bears interest at an overnight
rate that ranged from 5.50% to 7.13% during 1998. At December 31, 1998 and
1997, there were $30.7 million and $8.0 million, respectively of borrowings
outstanding under this agreement.
In May 1998, Atlantic entered into a $150 million unsecured delayed draw
term loan which was assumed by Archstone in the Atlantic Merger. This credit
facility had no borrowings outstanding as of December 31, 1998. See Note 15.
Long-Term Unsecured Debt
As of December 31, 1998, Archstone had $1.2 billion of Long-Term Unsecured
Debt issued and outstanding (including $154.1 million of Long-Term Unsecured
Debt assumed in the Atlantic Merger). Archstone's Long-Term Unsecured Debt
generally features semi-annual interest payments and either amortizing annual
principal payments or balloon payments due at maturity. As of December 31,
1998, the $1.2 billion of aggregate Long-Term Unsecured Debt outstanding had a
weighted average coupon rate of 7.34%, a weighted average effective interest
rate (including offering discounts and issuance costs) of 7.51% and a weighted
average remaining life to maturity of 8.7 years. Included in the $1.2 billion
of Long-Term Unsecured Debt is $322.2 million issued through Archstone's medium
term note program during 1998. The $322.2 million of medium term notes have a
weighted average coupon rate of 6.95%, a weighted average effective interest
rate of 7.12% and a weighted average remaining life to maturity of 3.7 years as
of December 31, 1998.
The $1.2 billion of Long-Term Unsecured Debt, other than $15 million of
notes issued October 21, 1996 and due 2026, are redeemable any time at the
option of Archstone, in whole or in part. The redemption price is equal to the
sum of the principal amount of the Long-Term Unsecured Debt being redeemed plus
accrued interest through the redemption date plus an adjustment, if any, based
on the yield to maturity relating to market yields available at redemption. The
$15 million of notes issued October 21, 1996 may be repaid on October 15, 1999
at the option of the holders at their full principal amount together with
accrued interest. If the holders do not exercise their right to require
Archstone to repay these notes on October 15, 1999, they may be repaid at the
option of Archstone, in whole or in part under the redemption terms described
above. The Long-Term Unsecured Debt is governed by the terms and provisions of
an indenture agreement.
Mortgages Payable
On December 30, 1998, Archstone closed on a $268.5 million long-term secured
debt agreement with the Federal National Mortgage Association ("Fannie Mae").
The Fannie Mae secured debt matures January 2006,
108
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
although Archstone has the option to extend the term of any portion of the
original $268.5 million for up to an additional thirty-year period at any time,
subject to Fannie Mae's approval. Archstone also has the ability, at its
option, to convert any portion of the $268.5 million from a floating interest
rate to a fixed interest rate under the terms of the agreement, subject to
Fannie Mae's approval. In connection with this transaction, Archstone entered
into an interest rate cap agreement on December 30, 1998 with a notional amount
aggregating $118.5 million, which capped this portion of the debt at an
effective interest rate of 6.9% through December 2002. The actual floating
effective interest rate on the $118.5 million was 5.9% at December 31, 1998.
Additionally, Archstone entered into an interest rate swap agreement in January
1999 for the remaining $150.0 million, which effectively provides for a fixed
interest rate of 6.3% until maturity.
Archstone's mortgages payable generally feature either monthly interest and
principal payments or monthly interest only payments with balloon payments due
at maturity. A summary of all mortgages payable outstanding at December 31,
1998 follows (amounts in thousands):
<TABLE>
<CAPTION>
Principal Balance
at December 31,
Effective Interest -----------------
Type of Mortgage Rate (1) 1998 1997
---------------- ------------------ -------- --------
<S> <C> <C> <C>
Fannie Mae secured debt................... 6.12% $268,450 $ --
Conventional fixed rate................... 7.81 108,588 143,963
Tax-exempt fixed rate (2)................. 6.41 61,604 40,694
Tax-exempt floating rate (2).............. 4.45 209,316 68,440
Other (3)................................. 6.29 28,655 12,555
---- -------- --------
Total/average mortgage debt.............. 5.91% $676,613 $265,652
==== ======== ========
</TABLE>
- --------
(1) Represents the effective interest rate, including the effect of interest
rate hedges and loan cost amortization as of December 31, 1998.
(2) Tax-exempt effective interest rates include credit enhancement and other
bond-related costs, where applicable.
(3) Primarily represents bonded indebtedness associated with improvements to
public facilities and infrastructure in certain California taxing
jurisdictions known as "Mello-Roos districts".
The changes in mortgages payable during the past three years consisted of
the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Balances at January 1............................ $265,652 $217,188 $158,054
Notes assumed in Atlantic Merger............... 160,329 -- --
Notes originated or assumed.................... 362,158 101,595 104,176
Principal payments, including prepayments and
amortization.................................. (111,526) (53,131) (45,042)
-------- -------- --------
Balances at December 31.......................... $676,613 $265,652 $217,188
======== ======== ========
</TABLE>
In 1998, 1997 and 1996, Archstone prepaid $76.3 million, $49.8 million and
$43.0 million of mortgage payable balances, respectively. In 1996, Archstone
incurred approximately $0.9 million of prepayment penalties associated with the
early extinguishment of certain mortgage payable balances aggregating $25.8
million, which was recorded as an extraordinary item during this period.
109
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Scheduled Debt Maturities
Approximate principal payments due during each of the next five calendar
years and thereafter, are as follows (in thousands):
<TABLE>
<CAPTION>
Long-Term
Unsecured Mortgages
Debt Payable Total
---------- --------- ----------
<S> <C> <C> <C>
1999............................................ $ 30,310 $ 10,833 $ 41,143
2000............................................ 75,310 7,524 82,834
2001............................................ 70,010 13,446 83,456
2002............................................ 97,810 5,844 103,654
2003............................................ 171,560 26,438 197,998
Thereafter...................................... 786,167 612,528 1,398,695
---------- -------- ----------
Total........................................... $1,231,167 $676,613 $1,907,780
========== ======== ==========
</TABLE>
The average annual principal payments due from 2004 to 2018 are $87.7
million per year.
The $750 million unsecured credit facility matures in July 2001, at which
time it may be converted into a two-year term loan at Archstone's option.
Archstone's short-term $100 million unsecured borrowing agreement with Chase
matures in July 1999.
Covenants
Archstone's debt instruments generally contain certain covenants common to
the type of facility or borrowing, including financial covenants establishing
minimum debt service coverage ratios and maximum leverage ratios. Archstone was
in compliance with all covenants pertaining to its debt instruments at
December 31, 1998.
(6) Distributions to Shareholders
To maintain Archstone's status as a REIT, it is required to distribute at
least 95% of its taxable income. The payment of distributions is subject to the
discretion of Archstone's Board of Trustees (the "Board") and is dependent upon
the strategy, financial condition and operating results of Archstone. At its
December 1998 Board meeting, the Board announced an anticipated increase in the
annual distribution level from $1.42 to $1.48 per Common Share. See Note 15 for
information on recent Common Share distributions.
For federal income tax purposes, the following summarizes the taxability of
cash distributions paid on the Common Shares in 1997 and 1996 and the estimated
taxability for 1998:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Per Common Share:
Ordinary income............................................. $1.29 $1.08 $0.61
Capital gains............................................... 0.10 -- 0.11
Return of capital........................................... -- 0.22 0.52
----- ----- -----
Total..................................................... $1.39 $1.30 $1.24
===== ===== =====
</TABLE>
In November 1996, Archstone distributed 0.125694 shares of Homestead common
stock and warrants to Common Shareholders to purchase 0.084326 shares of
Homestead common stock per Common Share (the "Homestead Distribution"). These
securities were valued at $2.16 per Common Share for federal income tax
purposes, of which $1.06 was taxable as ordinary income, $0.19 was taxable as a
capital gain and $0.91 was treated as a return of capital.
110
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
For federal income tax purposes, the following summarizes the taxability of
dividends paid on series A cumulative convertible preferred shares of
beneficial interest, par value $1.00 per share ("Series A Preferred Shares"),
series B non-convertible cumulative redeemable preferred shares of beneficial
interest, par value $1.00 per share ("Series B Preferred Shares") and Series C
Preferred Shares (collectively the "Preferred Shares"), respectively, for
periods prior to 1998 and the estimated taxability for 1998:
<TABLE>
<CAPTION>
1998 1997 1996
------- ----- -----
<S> <C> <C> <C>
Per Series A Convertible Preferred Share:
Ordinary income.......................................... $1.72 $1.75 $1.47
Capital gains............................................ 0.15 -- 0.28
----- ----- -----
Total.................................................. $1.87 $1.75 $1.75
===== ===== =====
Per Series B Preferred Share:
Ordinary income.......................................... $2.07 $2.25 $1.89
Capital gains............................................ 0.18 -- 0.36
----- ----- -----
Total.................................................. $2.25 $2.25 $2.25
===== ===== =====
<CAPTION>
1998(1)
-------
<S> <C> <C> <C>
Per Series C Preferred Share:
Ordinary income.......................................... $0.99
Capital gains............................................ 0.09
-----
Total.................................................. $1.08
=====
</TABLE>
- --------
(1) Represents dividends paid in 1998 subsequent to the Atlantic Merger.
Due to the increase in the conversion ratio resulting from the Homestead
Distribution to holders of Common Shares (see Note 7), holders of Series A
Convertible Preferred Shares were deemed to have received a distribution of
$2.43 in November 1996 for federal income tax purposes. Of this amount, $1.19
was taxable as ordinary income, $0.22 was taxable as a capital gain and $1.02
was treated as a return of capital.
Archstone's tax return for the year ended December 31, 1998 has not been
filed, and the taxability information for 1998 is based upon the best available
data. Archstone's tax returns for prior years have not been examined by the
Internal Revenue Service and, therefore, the taxability of the dividends is
subject to change.
(7) Shareholders' Equity
Shares of Beneficial Interest
Archstone's Declaration of Trust authorizes Archstone to issue up to
250,000,000 Shares of Beneficial Interest, $1.00 par value per share,
consisting of Common Shares, preferred shares and such other shares of
beneficial interest as the Board may create and authorize from time to time.
The Board may classify or reclassify any unissued shares from time to time by
setting or changing the preferences, conversion rights, voting powers,
restrictions, limitations as to distributions, qualifications of terms or
conditions of redemption. Additionally, the Board may amend the Declaration of
Trust, without the consent of Archstone shareholders, to increase or decrease
the aggregate number of shares or the number of shares of any class which
Archstone has authority to issue.
Series A Convertible Preferred Shares
The Series A Convertible Preferred Shares issued in November 1993 have a
liquidation preference of $25.00 per share for an aggregate liquidation
preference at December 31, 1998 of $117.5 million. Holders of the Series
111
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
A Convertible Preferred Shares are entitled only to limited voting rights
under certain conditions. During 1998, 1997 and 1996, approximately 708,000,
1,087,000 and 2,705,000 of Series A Convertible Preferred Shares were
converted, at the option of the holders, into approximately 953,000, 1,463,000
and 3,294,000 Common Shares, respectively. This activity is included in
"Other, net" in the accompanying Statements of Shareholders' Equity.
As a result of the Homestead Distribution, Archstone adjusted the
conversion price of its Series A Convertible Preferred Shares, effective as of
the opening of business on October 30, 1996, from $20.556 to $18.561 per
Common Share (a conversion ratio of 1.3469 Common Shares for each Series A
Convertible Preferred Share). Distributions on the Series A Convertible
Preferred Shares are payable in an amount per share equal to the greater of
$1.75 per annum or the annualized quarterly Archstone distribution rate on the
Common Shares into which the Series A Convertible Preferred Shares are
convertible. The Series A Convertible Preferred Shares are redeemable at the
option of Archstone after November 30, 2003.
Series B and C Preferred Shares
The 4,200,000 Series B Preferred Shares issued in May 1995 have a
liquidation preference of $25.00 per share for an aggregate liquidation
preference of $105.0 million plus any accrued unpaid distributions. The net
proceeds (after underwriting commissions and other offering costs) to
Archstone from the sale of the Series B Preferred Shares were $101.3 million.
On and after May 24, 2000, the Series B Preferred Shares may be redeemed for
cash at the option of Archstone, in whole or in part, at a redemption price of
$25.00 per share plus any accrued but unpaid distributions, if any, to the
redemption date. 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 Archstone, which may include shares
of other series of preferred shares.
Upon consummation of the Atlantic Merger, each of the 2,000,000 outstanding
Atlantic Series A Preferred Shares were converted into the right to receive
one comparable share of a new class of Archstone Series C Preferred Share. The
Series C Preferred Shares have a liquidation preference of $25.00 per share
for an aggregate liquidation preference of $50.0 million plus any accrued but
unpaid distributions. The Series C Preferred Shares are redeemable on and
after August 20, 2002 by Archstone for cash at a stated redemption price, plus
all accrued and unpaid distributions. 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 Archstone, which
may include shares of other series of preferred shares.
The holders of Series B and C Preferred Shares have no preemptive rights
with respect to any shares of the capital securities of Archstone or any other
securities of Archstone convertible into or carrying rights or options to
purchase any such shares. The Series B and C Preferred Shares have no stated
maturity and are not subject to any sinking fund or other obligation of
Archstone to redeem or retire the Series B and C Preferred Shares and are not
convertible into any other securities of Archstone. In addition, holders of
the Series B and C Preferred Shares are entitled to receive, when and as
declared by the Board, out of funds legally available for the payment of
distributions, cumulative preferential cash distributions at the rate of 9.0%
and 8.625% of the liquidation preference per annum, respectively (equivalent
to $2.25 and $2.156 per share, respectively).
All Preferred Share distributions are cumulative from the date of original
issue and are payable quarterly in arrears on the last day of each March,
June, September and December. All dividends due and payable on Preferred
Shares have been accrued and paid as of the end of each fiscal year. All
series of Preferred Shares rank on a parity as to distributions and
liquidation proceeds.
If six quarterly dividends payable (whether or not consecutive) on the
Series A Convertible Preferred Shares, the Series B Preferred Shares, the
Series C Preferred Shares or any series or class of preferred shares
112
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
that are of equal rank with respect to dividends and any distribution of
assets, shall not be paid in full, the number of independent members of
Archstone's Board of Trustees (the "Outside Trustees") shall be increased by
two and the holders of all such preferred shares voting as a class regardless
of series or class, shall be entitled to elect the two additional Outside
Trustees. Whenever all arrears in dividends have been paid, the right to elect
the two additional Outside Trustees shall cease and the terms of such Outside
Trustees shall terminate.
Dividend Reinvestment and Share Purchase Plan
Archstone established the Dividend Reinvestment and Share Purchase Plan
("DRSP") in December 1997. Under the DRSP, Common Shareholders have the ability
to automatically reinvest their cash dividends to purchase additional Common
Shares at a two percent discount from market rates, based on the average of the
high and low sales price of a Common Share on the day of the purchase.
Additionally, existing and prospective investors have the ability to tender
cash payments that will be applied towards the purchase of Common Shares,
subject to certain limitations. In January 1998, Archstone filed a registration
statement with the Securities and Exchange Commission (the "SEC") registering
the offering of 2,000,000 Common Shares, which may be issued pursuant to the
terms of the DRSP.
Ownership Restrictions and Significant Shareholder
Archstone's Restated Declaration of Trust and the Articles Supplementary
governing the Preferred Shares restrict beneficial ownership (or ownership
generally attributed to a person under the REIT tax rules) of Archstone's
outstanding shares by a single person, or persons acting as a group, to 9.8% of
the Common Shares and 25% of each series of Preferred Shares. The purpose of
these provisions are to assist in protecting and preserving Archstone's REIT
status and to protect the interests of shareholders in takeover transactions by
preventing the acquisition of a substantial block of shares unless the acquirer
makes a cash tender offer for all outstanding shares. For Archstone to qualify
as a REIT under the Internal Revenue Code of 1986, as amended, not more than
50% in value of its outstanding capital shares may be owned by five or fewer
individuals at any time during the last half of Archstone's taxable year. The
provision permits five persons to acquire up to a maximum of 9.8% each of the
Common Shares, or an aggregate of 49% of the outstanding Common Shares.
Common Shares owned by a person or group of persons in excess of the 9.8%
limit are subject to redemption by Archstone. The provision does not apply
where a majority of the Board, in its sole and absolute discretion, waives such
limit after determining that the eligibility of Archstone to qualify as a REIT
for federal income tax purposes will not be jeopardized or the disqualification
of Archstone as a REIT is advantageous to the shareholders.
The Board has permitted Security Capital to acquire up to 49% of Archstone's
fully converted Common Shares. Security Capital's ownership of Common Shares is
attributed for tax purposes to its shareholders. Security Capital owned
approximately 38% of Archstone's total outstanding Common Shares at December
31, 1998. Pursuant to an agreement between Security Capital and Archstone,
Security Capital has agreed to acquire no more than 49% of the fully converted
Common Shares, subject to certain limited exceptions.
Purchase Rights
In 1994, the Board authorized the distribution of one preferred share
purchase right ("Purchase Right"), which entitles the holder of each right
under certain circumstances to purchase from Archstone one one-hundredth of a
share of a series of a junior participating preferred share, par value $1.00
per share ("Participating Preferred Share"), at a price of $60.00 per one one-
hundredth of a participating Preferred Share, subject to adjustment, for each
Common Share outstanding in July 1994. Holders of additional Common Shares
issued after this date and prior to the expiration of the Purchase Rights in
July 2004 will be entitled to one Purchase Right for each additional Common
Share.
113
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Each Purchase Right entitles the holder under certain circumstances to
purchase from Archstone one one-hundredth of a share of Participating Preferred
Share at a price of $60.00 per one one-hundredth of Participating Preferred
Share, subject to adjustment. Purchase Rights are exercisable when a person or
group of persons acquires beneficial ownership of 20% or more of the fully
converted Common Shares (49% in the case of Security Capital and certain
defined affiliates), commences or announces a tender offer or exchange offer
which would result in the beneficial ownership by a person or group of persons
of 25% or more of the outstanding Common Shares (49% in the case of Security
Capital and certain defined affiliates) or files or announces their intention
to file with any regulatory authority an application seeking approval of any
transaction which would result in the beneficial ownership by a person of 25%
or more of the outstanding Common Shares (49% in the case of Security Capital
and certain defined affiliates). Under certain circumstances, each Purchase
Right entitles the holder to purchase, at the Purchase Right's then current
exercise price, a number of Common Shares having a market value of twice the
Purchase Right's exercise price. The acquisition of Archstone pursuant to
certain transactions or other business transactions would entitle each holder
to purchase, at the Purchase Right's then current exercise price, a number of
the acquiring company's common shares having a market value at that time equal
to twice the Purchase Right's exercise price. The Purchase Rights will expire
in July 2004 and are subject to redemption in whole, but not in part, at a
price of $0.01 per Purchase Right payable in cash, shares of Archstone or any
other form of consideration determined by the Board.
Shelf Registration
In December 1998, Archstone filed a $750 million shelf registration with the
SEC to supplement an existing shelf registration with a balance of $77.2
million, resulting in a total of $827.2 million in shelf-registered securities
available for issuance at December 31, 1998. These securities can be issued in
the form of Long-Term Unsecured Debt, Common Shares or preferred shares on an
as-needed basis, subject to Archstone's ability to effect offerings on
satisfactory terms.
(8) Acquisition of REIT Manager and Property Manager
In September 1997, Archstone terminated its REIT management agreement with
Security Capital Pacific Incorporated (the "REIT Manager") and its property
management agreement with SCG Realty Services Incorporated (the "Property
Manager"), pursuant to a transaction whereby Archstone acquired the operations
and businesses of the Property Manager and the REIT Manager (collectively, the
"Management Companies") valued at approximately $75.8 million from Security
Capital in exchange for 3,295,533 Common Shares. The number of Common Shares
issued to Security Capital was determined using a per Common Share price of
$23.0125 (the average market price of Common Shares over the five-day period
prior to the record date for determining Archstone's shareholders entitled to
vote on the transaction). As a result of the transaction, Archstone became an
internally managed REIT.
The market value of the 3,295,533 Common Shares issued to Security Capital
in September 1997 upon Archstone's acquisition of the REIT and Property
Managers was approximately $73.3 million, based on the $22.25 per share closing
price of the Common Shares on such date. Of this amount, approximately $1.6
million was allocated to the estimated fair value of the tangible net assets
acquired. The $71.7 million difference between the market value of the Common
Shares and the estimated fair value of the net tangible assets acquired was
recorded as "Costs incurred in acquiring Management Companies from an
affiliate" (a non-recurring and non-cash expense) in Archstone's Statements of
Earnings. Since the Management Companies did not have significant operations
other than the management of Archstone and its assets, the transaction did not
qualify as the acquisition of a "business" for purposes of applying Accounting
Principles Board ("APB") Opinion No. 16, Business Combinations. Consequently,
the market value of the Common Shares issued in excess of the fair value of the
net tangible assets acquired was recorded as an operating expense rather than
capitalized as goodwill.
114
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
As a result of this transaction, Archstone no longer pays REIT and property
management fees to Security Capital. The REIT management agreement required
Archstone to pay a fee of 16% of cash flow from operations, as defined in the
agreement, none of which was capitalized. Instead, Archstone now directly
incurs the personnel and other costs related to these functions.
Concurrent with the closing of the transaction, Archstone also entered into
an Administrative Services Agreement ("ASA") with Security Capital for the
provision of certain administrative services. Archstone may purchase these
services in exchange for a fee which, through December 31, 1998, was equal to
Security Capital's direct cost of such services plus 20%. Effective January 1,
1999, the fee arrangement was revised to provide for the payment of Archstone's
specific usage at fixed rates per unit for each service provided. This new
billing arrangement is designed to provide Archstone with more control over ASA
charges. ASA costs related to successful development activities are capitalized
as part of the related real estate cost. The ASA expires on December 31, 1999
and provides for annual renewals of consecutive one-year terms, subject to
approval by a majority of the independent members of the Board. The ASA may be
modified or terminated by Archstone at any time with 90 days notice (30 days
notice for minor modifications).
(9) Benefit Plans
In September 1997, Archstone's Common Shareholders approved the long-term
incentive plan (the "Incentive Plan"). To date, there have been three types of
awards issued under the plan: (i) an employee stock purchase plan with matching
options, (ii) stock options with a dividend equivalent unit ("DEU") feature,
and (iii) restricted Common Share unit awards with a dividend feature. No more
than 8,650,000 Common Shares in the aggregate may be awarded under the
Incentive Plan and no individual may be awarded more than 500,000 Common Shares
in any one-year period. The Incentive Plan has a 10-year term.
Dividend Equivalent Units
As of December 31, 1998, there were a total of 38,534 DEU's outstanding,
awarded to 152 holders of stock options and/or restricted Common Share units. A
DEU is equal to the difference between Archstone's annual Common Share dividend
yield and the S&P 500 average dividend yield times the number of shares under
option or number of restricted Common Shares granted. Options awarded under the
employee stock purchase plan are not eligible for DEU's. DEU's (under the stock
option plan with DEU's and the restricted Common Share unit awards) are awarded
on December 31st of each year and vest under the same terms as the underlying
stock options and restricted Common Share units. The awarded and outstanding
DEU's, none of which are vested, were valued at $708,305 on December 31, 1998
based upon the market price of the Common Shares on that date. Archstone
recognizes the value of the DEU's awarded as compensation expense over the
vesting period, net of any previously recorded DEU expense related to
forfeitures.
Employee Stock Purchase Plan with Matching Options
As of December 31, 1998, certain officers and other employees of Archstone
had purchased 1,225,329 Common Shares at prices ranging from $21.19 to $24.31
per Common Share under the employee stock purchase plan (including 458,368
Common Shares held by employees that were assumed in the Atlantic Merger).
Archstone financed 95% of the total purchase price through 10-year notes from
the participants aggregating $26.3 million at December 31, 1998. The notes,
which have been recorded as a deduction in shareholders' equity and are
included in "Other, net" on the accompanying Statements of Shareholders'
Equity, bear interest at the lower of 6% per annum or the dividend yield of a
Common Share, determined based on the initial share purchase price
(approximately 7.0% at December 31, 1998). The notes are fully recourse to the
participant and are also secured by the Common Shares purchased. For each
Common Share purchased, participants were granted two options, each to purchase
one Common Share at the market price of the underlying stock on the date of
grant.
115
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
The matching stock options gradually vest over periods ranging from two to ten
years, subject to certain conditions. The matching stock options do not have a
DEU feature. A reconciliation of the notes due from employees during 1998 and
1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Date of Issuance
1998 to 12/31/97
------- ----------------
<S> <C> <C>
Beginning balance................................ $17,238 $17,100
Notes assumed in Atlantic Merger................. 11,338 --
Notes issued..................................... 1,164 209
Retirements...................................... (3,254) (71)
Principal payments received...................... (211) --
------- -------
Ending balance................................ $26,275 $17,238
======= =======
</TABLE>
Of the notes outstanding at December 31, 1998, approximately $19.2 million
were due from officers of Archstone.
Stock Options with DEU's and Trustee Options
Archstone has awarded stock options with a DEU feature to purchase one
Common Share for each stock option held to certain officers and other
employees. The exercise price of each stock option granted is equal to the
Common Share market price on the date of grant (See "Proforma Compensation
Expense" below). The stock options awarded generally vest at a rate of 25% per
year.
Additionally, Archstone has authorized 300,000 Common Shares for issuance to
Outside Trustees. The exercise price of Outside Trustee options may not be less
than the fair market value on the date of grant. Such options have a term of
five years and are exercisable in whole or in part at any time.
A summary of all stock options outstanding at December 31, 1998 follows:
<TABLE>
<CAPTION>
Weighted-
Average
Range of Remaining
Number of Exercise Expiration Contractual
Options Prices (1) Date Life
--------- -------------- ---------- -----------
<S> <C> <C> <C> <C>
Matching options under the
employee stock purchase plan.. 2,450,658 $21.19--$24.31 2007--2008 8.72 years
Stock options with DEU's....... 1,657,991 $20.25--$24.31 2007--2008 9.60 years
Outside Trustees(2)............ 48,000 $15.59--$22.28 1999--2003 2.91 years
---------
Total.......................... 4,156,649
=========
</TABLE>
- --------
(1) The exercise price was equal to market price on the date of grant. The
weighted average exercise prices for the matching options under the
employee stock purchase plan, stock options with DEU's and Outside Trustee
options were $22.21, $20.74 and $20.08 per Common Share, respectively, as
of December 31, 1998. The weighted average exercise price for all options
outstanding at December 31, 1998 was $21.60 per Common Share.
(2) Options are fully exercisable.
116
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
A summary of the status of Archstone's stock option plans as of December 31,
1998, 1997 and 1996, and changes during the years ended on those dates is
presented below. All grants prior to 1997 relate to Outside Trustees.
<TABLE>
<CAPTION>
Weighted
Average Number of
Number of Exercise Options
Options Price Exercisable
--------- -------- -----------
<S> <C> <C> <C>
Balance at December 31, 1995.................... 28,000 $15.61 28,000
--------- ------ ------
Granted....................................... 10,000 19.34 10,000
Exercised..................................... (6,000) 17.21 (6,000)
--------- ------ ------
Balance at December 31, 1996.................... 32,000 $16.48 32,000
--------- ------ ------
Granted....................................... 1,857,417 $22.06 10,000
Exercised..................................... (2,000) 16.34 (2,000)
Forfeited..................................... (2,000) 8.46 (2,000)
--------- ------ ------
Balance at December 31, 1997.................... 1,885,417 $21.99 38,000
--------- ------ ------
Assumed in the Atlantic Merger................ 1,260,138 $22.44 9,000
Granted....................................... 1,582,754 20.67 12,000
Exercised..................................... (8,000) 16.14 (8,000)
Forfeited..................................... (563,660) 22.30 (3,000)
--------- ------ ------
Balance at December 31, 1998.................... 4,156,649 $21.62 48,000
--------- ------ ------
</TABLE>
Restricted Common Share Unit Awards
During 1998, Archstone awarded 220,572 restricted Common Share units with a
dividend feature to certain employees under the Incentive Plan. Each restricted
Common Share unit provides the holder with one Common Share, subject to certain
vesting provisions. The Common Share units and related dividend feature vest at
20% per year, over a five-year period. Archstone recognizes the value of the
awards as compensation expense over the vesting period.
Proforma Compensation Expense
Archstone has adopted SFAS No. 123, Accounting for Stock-Based Compensation,
which allows Archstone to continue to account for its various stock option
plans using APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25"), and related interpretations. Under APB 25, if the exercise price of the
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. Accordingly, Archstone did not
recognize compensation expense related to stock options as the exercise price
of all options granted was equal to the market price on the date of grant. Had
compensation cost for these plans been determined using the option valuation
models prescribed by SFAS No. 123, Archstone's net earnings attributable to
Common Shares and earnings per Common Share for 1998 and 1997 would change as
follows (1996 would be the same):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Net earnings attributable to Common Shares (in
thousands):
As reported.......................................... $177,022 $53,534
-------- -------
Pro forma............................................ $175,346 $53,188
======== =======
Basic earnings per Common Share:
As reported.......................................... $ 1.49 $ 0.65
-------- -------
Pro forma............................................ $ 1.48 $ 0.65
======== =======
Diluted earnings per Common Share:
As reported.......................................... $ 1.49 $ 0.65
-------- -------
Pro forma............................................ $ 1.47 $ 0.65
======== =======
</TABLE>
117
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
The pro forma amounts above were calculated using the Black-Scholes model,
using the following assumptions:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Weighted average risk-free interest rate............. 4.74% 6.08%
Weighted average dividend yield...................... 6.43% 5.60%
Weighted average volatility.......................... 25.44% 18.35%
Weighted average expected option life................ 6.74 years 6.74 years
</TABLE>
The weighted average fair value of all options granted (excluding Trustee
options) was approximately $3.00 per option during 1998 and 1997.
401(k) Plan and Nonqualified Savings Plan
In December 1997, the Board established a 401(k) plan and a nonqualified
savings plan, which both became effective on January 1, 1998. The plans work
together to provide for matching employer contributions of fifty cents for
every dollar contributed by an employee, up to 6% of the employees' annual
compensation. The matching employer contributions are made in Common Shares,
which vest based on years of service at a rate of 20% per year.
(10) Fair Values of Financial Instruments
The following disclosures of estimated fair value of financial instruments
were determined by Archstone based on available market information and
valuation methodologies believed to be appropriate for these purposes.
Considerable judgement and a high degree of subjectivity are involved in
developing these estimates and therefore are not necessarily indicative of the
actual amounts that Archstone could realize upon disposition.
At December 31, 1998 and 1997, the carrying amount of certain financial
instruments employed by Archstone, including cash and cash equivalents,
restricted cash in tax-deferred exchange escrow, accounts receivable, accounts
payable and accrued expenses were representative of their fair values because
of the short-term maturity of these instruments. Similarly, the carrying value
of the unsecured credit facilities approximates fair value as of those dates
since the interest rates on these instruments fluctuate based on published
market rates. At December 31, 1998, the estimated fair value of Archstone's
mortgage notes receivable approximated their face value. At December 31, 1998,
the estimated fair value and the actual carrying value of the Long-Term
Unsecured Debt was approximately $1.2 billion, and the estimated fair value and
the carrying value of mortgages payable was approximately $680.0 million.
Derivative Financial Instruments
From time to time, Archstone utilizes derivative instruments as cash flow
hedges, including interest rate swap agreements and interest rate cap
agreements, in order to manage well-defined interest rate risk associated with
its planned debt issuances or to minimize exposure to variable rate debt.
However, Archstone does not use derivative instruments for trading purposes.
In January 1999, Archstone entered into two interest rate swap agreements
with notional amounts aggregating $55.0 million (with a weighted average life
to maturity of 3.7 years), related to Long-Term Unsecured Debt issued through
its medium term note program during 1998. The $55.0 million of notes, which
were originally issued at a floating weighted average effective interest rate
of 7.34%, were effectively converted to a fixed weighted average interest rate
of 7.12% through maturity.
118
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
In connection with the closing of the $268.5 million of long-term secured
debt agreement in December 1998 with Fannie Mae, Archstone entered into an
interest rate cap agreement on December 30, 1998 with a notional amount
aggregating $118.5 million, which capped this portion of the debt at an
effective interest rate of 6.9% through December 2002. The actual floating
effective interest rate on the $118.5 million was 5.9% at December 31, 1998.
There was no unrealized gain or loss relating to the fair value of this
interest rate contract at December 31, 1998. Additionally, Archstone entered
into an interest rate swap agreement in January 1999 for the remaining $150.0
million, which effectively provides for a fixed interest rate of 6.3% until
maturity in 2006.
In anticipation of a Long-Term Unsecured Debt offering that closed in March
1998, Archstone entered into four separate interest rate contracts in 1997 with
notional amounts aggregating $120 million. Upon completion of the offering,
Archstone terminated the interest rate contracts, realizing a loss of
approximately $5.5 million. Similarly in 1996, Archstone entered into interest
rate contracts with notional amounts aggregating $50 million in anticipation of
a Long-Term Unsecured Debt offering that closed March 31, 1997. Upon completion
of the offering, Archstone terminated the interest rate contracts, realizing a
gain of approximately $819,000. The resulting gains and losses were deferred
and are being amortized into interest expense over the term of the respective
debt agreements.
(11) Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data (in thousands except per share amounts)
for 1998 and 1997 is summarized below. Net earnings (loss) per Common Share for
each period presented in 1997 have been restated to conform with the
requirements of SFAS No. 128. The sum of the quarterly earnings (loss) per
Common Share amounts may not equal the annual earnings per Common Share amounts
due primarily to the impact of equity issuances.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------- Year Ended
3-31 6-30 9-30 (1) 12-31 12-31 (1)
------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
1998:
Total revenues................. $95,611 $98,176 $159,045 $160,813 $513,645
------- ------- -------- -------- --------
Earnings from operations....... 29,299 28,048 37,961 38,618 133,926
Gains on dispositions of
depreciated real estate, net.. 15,484 -- 21,204 28,843 65,531
Less extraordinary item........ -- -- 1,497 -- 1,497
Less Preferred Share
dividends..................... 4,712 4,757 5,723 5,746 20,938
------- ------- -------- -------- --------
Net earnings attributable to
Common Shares-Basic........... $40,071 $23,291 $ 51,945 $ 61,715 $177,022
======= ======= ======== ======== ========
Net earnings per Common Share:
Basic........................ $ 0.43 $ 0.25 $ 0.36 $ 0.43 $ 1.49
======= ======= ======== ======== ========
Diluted...................... $ 0.42 $ 0.25 $ 0.36 $ 0.43 $ 1.49
======= ======= ======== ======== ========
1997:
Total revenues................. $83,494 $86,180 $ 90,876 $ 95,112 $355,662
------- ------- -------- -------- --------
Earnings (loss) from
operations.................... 20,276 23,065 (46,857) 28,202 24,686
Gains on dispositions of
depreciated real estate, net.. 25,335 11,872 10,723 302 48,232
Less Preferred Share
dividends..................... 5,035 4,805 4,785 4,759 19,384
------- ------- -------- -------- --------
Net earnings (loss)
attributable to Common Shares-
Basic......................... $40,576 $30,132 $(40,919) $ 23,745 $ 53,534
======= ======= ======== ======== ========
Net earnings (loss) per Common
Share:
Basic........................ $ 0.53 $ 0.39 $ (0.50) $ 0.26 $ 0.65
======= ======= ======== ======== ========
Diluted...................... $ 0.51 $ 0.38 $ (0.50) $ 0.26 $ 0.65
======= ======= ======== ======== ========
</TABLE>
- --------
(1) Reflects the impact of a one-time, non-cash charge of $71.7 million in 1997
associated with costs incurred in acquiring the Management Companies from
an affiliate. See Note 8 for additional information regarding the
acquisition of the Management Companies.
119
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
(12) Segment Data
During 1998, Archstone adopted SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which established standards for the way
that public business enterprises report information about operating segments
in audited financial statements, as well as related disclosures about products
and services, geographic areas and major customers.
Archstone defines each of its apartment communities as individual operating
segments. Management has determined that all of its apartment communities have
similar economic characteristics and also meet the other criteria which permit
the apartment communities to be aggregated into one reportable segment.
Archstone relies primarily on Net Operating Income generated from its
apartment communities for purposes of making decisions about allocating
resources and assessing segment performance.
Following are reconciliations of the reportable segment's: (i) revenues to
Archstone's consolidated revenues, (ii) Net Operating Income to Archstone's
consolidated earnings from operations, and (iii) assets to Archstone's
consolidated assets, for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Reportable segment revenues.................. $ 478,144 $ 331,346 $293,284
Other non-reportable operating segment income
(1)......................................... 35,501 24,316 32,962
---------- ---------- --------
Total segment and consolidated revenues...... $ 513,645 $ 355,662 $326,246
========== ========== ========
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Reportable segment Net Operating Income...... $ 305,309 $ 208,423 $177,309
Other non-reportable operating segment Net
Operating Income(1)......................... 34,576 24,188 20,815
---------- ---------- --------
Total segment Net Operating Income....... 339,885 232,611 198,124
---------- ---------- --------
Reconciling items:
Depreciation on real estate investments.... (96,337) (52,893) (44,887)
Interest expense........................... (83,350) (61,153) (35,288)
General and administrative expenses........ (16,092) (18,350) (23,268)
Provision for possible loss on
investments............................... (4,700) (3,000) --
Nonrecurring expenses...................... (2,193) (71,707) --
Other expenses............................. (3,287) (822) (592)
---------- ---------- --------
Consolidated earnings from operations........ $ 133,926 $ 24,686 $ 94,089
========== ========== ========
<CAPTION>
December 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C> <C>
Reportable segment assets.................... $4,536,529 $2,422,563
Other non-reportable operating segment assets
(2)......................................... 385,587 373,120
---------- ----------
Total segment assets..................... 4,922,116 2,795,683
---------- ----------
Reconciling items:
Cash and cash equivalents.................. 5,429 1,586
Restricted cash in tax-deferred exchange
escrow.................................... 90,874 --
Other assets............................... 41,479 8,417
---------- ----------
Consolidated total assets.................... $5,059,898 $2,805,686
========== ==========
</TABLE>
- --------
(1) Includes $22.9 million, $16.7 million and $2.0 million of interest income
on the convertible mortgage notes receivable in 1998, 1997 and 1996,
respectively (see Note 4). Also includes revenues and Net Operating
Income generated from the operation or sale of other real estate assets
and other ancillary income from apartment residents. For 1996, also
includes Net Operating Income generated from the Homestead extended-stay
assets, prior to their spin-off in October 1996 (see Note 4)
120
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) Includes $203.0 million and $272.6 million of convertible mortgage notes
receivable during 1998 and 1997, respectively.
Archstone does not derive any of its consolidated revenues from foreign
countries and does not have any major customers that individually account for
10% or more of Archstone's consolidated revenues.
(13) Commitments and Contingencies
Archstone is a party to various claims and routine litigation arising in the
ordinary course of business. Archstone does not believe that the results of any
of such claims and litigation, individually or in the aggregate, will have a
material adverse effect on its business, financial position or results of
operations.
Archstone is subject to environmental regulations related to the ownership,
operation, development and acquisition of real estate. As part of its due
diligence investigation procedures, Archstone conducts Phase I environmental
assessments on each property prior to acquisition. The cost of complying with
environmental regulations was not material to Archstone's results of operations
for any of the years in the three-year period ended December 31, 1998.
Archstone is not aware of any environmental condition on any of its communities
which is likely to have a material effect on Archstone's financial condition or
results of operations.
See Note 3 for apartment construction and redevelopment commitments.
(14) Supplemental Cash Flow Information
Significant non-cash investing and financing activities for the years ended
December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<C> <S>
(i) Archstone issued 47,752,052 Common Shares valued at approximately $1.1
billion, 2,000,000 Series C Preferred Shares valued at approximately
$50.6 million and assumed debt and other liabilities valued at
approximately $778.9 million in exchange for approximately $1.9
billion of assets in the Atlantic Merger.
(ii) Archstone recorded an $83.8 million decrease, an $8.9 million increase
and a $74.9 million increase in the unrealized gain on the convertible
mortgage notes receivable during the years ended December 31, 1998,
1997 and 1996, respectively, primarily as a result of changes in the
estimated fair value of these convertible debt securities.
(iii) Holders of Series A Convertible Preferred Shares converted $17.7
million, $27.2 million and $67.6 million of their shares into Common
Shares during the years ended December 31, 1998, 1997 and 1996,
respectively.
(iv) In connection with the acquisition of apartment communities, Archstone
assumed mortgage debt (excluding mortgage debt assumed in the Atlantic
Merger) of $93.7 million, $101.6 million and $104.2 million during the
years ended December 31, 1998, 1997 and 1996, respectively.
(v) In connection with the acquisition of the Management Companies in
September 1997, Archstone issued 3,295,533 Common Shares valued at
$73.3 million in exchange for the operations and business of the
Management Companies.
(vi) Archstone had notes receivable outstanding from employees aggregating
$26.3 million (including $11.3 million assumed in the Atlantic Merger)
and $17.2 million for the purchase of Common Shares under the
Incentive Plan in 1998 and 1997, respectively.
(vii) In 1996, Archstone contributed 54 extended-stay lodging assets to
Homestead in exchange for 9,485,727 shares of Homestead common stock
and approximately $84.5 million (face-amount) in convertible mortgage
notes receivable.
</TABLE>
121
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Concluded)
(15) Subsequent Events
In February 1999, Archstone announced that the Board had authorized the
repurchase of up to $100 million of its Common Shares. Based on the closing
price of the Common Shares on the date of the announcement, this represents
approximately 3.6% of the Common Shares outstanding. Through March 5, 1999,
Archstone had repurchased 4.3 million Common Shares at a weighted average
price of $19.58 per Common Share for a total purchase price of $84.4 million.
Disposition proceeds were used to reduce Archstone's unsecured credit facility
balances, providing the capacity to fund the share purchases.
Archstone terminated its $150 million unsecured delayed draw term loan on
February 23, 1999. After giving effect to this termination, Archstone has $850
million in total borrowing capacity under its unsecured credit facilities,
with $349.0 million outstanding and an available balance of $501.0 million at
March 5, 1999.
On February 26, 1998, Archstone paid the first quarter 1999 Common Share
distribution of $0.37 per Common Share to shareholders of record on February
12, 1999, totaling approximately $53.0 million.
122
<PAGE>
Independent Auditors' Report
The Board of Trustees and Shareholders
Archstone Communities Trust:
Under date of January 22, 1999, except as to Note 15 which is as of March
5, 1999, we reported on the balance sheets of Archstone Communities Trust as
of December 31, 1998 and 1997, and the related statements of earnings,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. In connection with our audits of the
aforementioned financial statements, we also audited the related financial
statement schedule entitled Real Estate and Accumulated Depreciation. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, the financial statement schedule, as of and for the year
ended December 31, 1998, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Chicago, Illinois
January 22, 1999
123
<PAGE>
SCHEDULE III
ARCHSTONE COMMUNITIES TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Initial Cost to Gross Amount at Which Carried at
Archstone Costs December 31, 1998
--------------------- Capitalized --------------------------------
Buildings & Subsequent Buildings & Accumulated
Units Encumbrances Land Improvements Acquisition Land Improvements Totals Depreciation
------ ------------ -------- ------------ ----------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment
Communities:
Albuquerque, New
Mexico:
Commanche Wells. 179 $ -- $ 719 $ 4,072 $ 733 $ 719 $ 4,805 $ 5,524 $ 604
Entrada Pointe.. 209 -- 1,014 5,744 1,475 1,014 7,219 8,233 933
La Paloma....... 424 -- 4,135 -- 19,724 4,135 19,724 23,859 2,578
La Ventana...... 232 -- 2,210 -- 13,441 2,210 13,441 15,651 1,283
Pavilions....... 240 -- 2,182 7,624 6,142 2,182 13,766 15,948 2,658
Sandia Ridge.... 272 -- 1,339 5,358 1,611 1,339 6,969 8,308 1,361
Telegraph Hill.. 200 -- 1,216 6,889 795 1,216 7,684 8,900 468
Vista Del Sol... 168 -- 1,105 4,419 915 1,105 5,334 6,439 770
Vistas at Seven
Bar Ranch...... 572 -- 3,541 5,351 20,209 3,541 25,560 29,101 2,645
Wellington
Place.......... 280 -- 1,881 7,523 1,638 1,881 9,161 11,042 1,188
<CAPTION>
Construction Year
Year Acquired
------------ --------
<S> <C> <C>
Apartment
Communities:
Albuquerque, New
Mexico:
Commanche Wells. 1985 1994
Entrada Pointe.. 1986 1994
La Paloma....... 1996 1993
La Ventana...... 1996 1994
Pavilions....... (a) (a)
Sandia Ridge.... 1986 1992
Telegraph Hill.. 1986 1996
Vista Del Sol... 1987 1993
Vistas at Seven
Bar Ranch...... (b) (b)
Wellington
Place.......... 1981 1993
Atlanta, Georgia:
Azalea Park..... 447 15,179 4,330 24,536 27 4,330 24,563 28,893 574
Cameron Ashford. 365 -- 4,245 24,053 36 4,245 24,089 28,334 513
Cameron at
Barrett Creek.. 332 -- 1,963 11,126 10,516 1,963 21,642 23,605 5
Cameron at
Northpoint..... 264 -- 2,248 12,740 7,551 2,248 20,291 22,539 41
Cameron
Briarcliff..... 220 -- 2,515 14,250 65 2,515 14,315 16,830 306
Cameron Bridge.. 224 -- 2,119 12,010 4,571 2,119 16,581 18,700 46
Cameron Brook... 440 18,950 4,050 22,950 59 4,050 23,009 27,059 483
Cameron Creek... 664 30,355 6,791 38,484 128 6,791 38,612 45,403 1,184
Cameron Crest... 377 -- 4,135 23,430 65 4,135 23,495 27,630 490
Cameron
Dunwoody....... 238 -- 2,747 15,566 34 2,747 15,600 18,347 332
Cameron Forest.. 152 -- 931 5,275 23 931 5,298 6,229 117
Cameron Greens.. 304 10,107 2,389 13,537 40 2,389 13,577 15,966 289
Cameron Landing. 368 15,340 3,535 20,030 382 3,535 20,412 23,947 348
Cameron Place... 212 -- 1,555 8,814 35 1,555 8,849 10,404 195
Cameron Pointe.. 214 12,545 2,725 15,440 61 2,725 15,501 18,226 329
Cameron Station. 348 15,352 2,880 16,321 49 2,880 16,370 19,250 348
Cameron
Woodlands...... 644 -- 4,901 27,775 87 4,901 27,862 32,763 587
Clairmont Crest. 213 11,273 1,892 10,720 132 1,892 10,852 12,744 230
Lake Ridge at
Dunwoody....... 268 -- 3,126 17,712 19 3,126 17,731 20,857 477
Morgan's
Landing........ 165 -- 1,542 8,737 61 1,542 8,798 10,340 192
Old Salem....... 172 -- 1,490 8,446 29 1,490 8,475 9,965 184
Trolley Square.. 270 -- 2,918 16,534 64 2,918 16,598 19,516 360
Vinings Landing. 200 -- 1,787 10,126 72 1,787 10,198 11,985 215
Winters Creek... 200 4,880 1,561 8,846 26 1,561 8,872 10,433 190
Atlanta, Georgia:
Azalea Park..... 1987 1998
Cameron Ashford. 1990 1998
Cameron at
Barrett Creek.. (c) 1998
Cameron at
Northpoint..... (c) 1998
Cameron
Briarcliff..... 1989 1998
Cameron Bridge.. (c) 1998
Cameron Brook... 1988 1998
Cameron Creek... 1988 1998
Cameron Crest... 1988 1998
Cameron
Dunwoody....... 1989 1998
Cameron Forest.. 1981 1998
Cameron Greens.. 1986 1998
Cameron Landing. 1998 1998
Cameron Place... 1979 1998
Cameron Pointe.. 1987 1998
Cameron Station. (d) 1998
Cameron
Woodlands...... (e) 1998
Clairmont Crest. 1987 1998
Lake Ridge at
Dunwoody....... 1979 1998
Morgan's
Landing........ 1983 1998
Old Salem....... 1968 1998
Trolley Square.. 1989 1998
Vinings Landing. 1978 1998
Winters Creek... 1984 1998
Austin, Texas:
Hunters' Run I &
II............. 400 14,820 2,197 -- 17,732 2,197 17,732 19,929 1,862
Monterey Ranch
I.............. 168 -- 424 -- 5,025 424 5,025 5,449 (c)
Monterey Ranch
II............. 456 16,861 1,151 -- 23,038 1,151 23,038 24,189 1,754
Monterey Ranch
III............ 448 -- 1,131 -- 5,863 1,131 5,863 6,994 (c)
Ridge, The...... 326 -- 1,669 6,675 2,852 1,669 9,527 11,196 1,375
Rock Creek...... 314 -- 1,311 7,431 1,929 1,311 9,360 10,671 1,283
Shadowood....... 236 -- 1,197 4,787 1,092 1,197 5,879 7,076 787
Austin, Texas:
Hunters' Run I &
II............. (f) (f)
Monterey Ranch
I.............. (c) 1993
Monterey Ranch
II............. 1996 1993
Monterey Ranch
III............ (c) 1993
Ridge, The...... 1978 1993
Rock Creek...... 1979 1993
Shadowood....... 1985 1993
</TABLE>
124
<PAGE>
ARCHSTONE COMMUNITIES TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Initial Cost to Costs Gross Amount at Which Carried at
Archstone Capitalized December 31, 1998
--------------------- Subsequent --------------------------------
Buildings & to Buildings & Accumulated Construction
Units Encumbrances Land Improvements Acquisition Land Improvements Totals Depreciation Year
----- ------------ -------- ------------ ----------- -------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment
Communities
(continued):
Birmingham,
Alabama:
Cameron at the
Summit I....... 372 $ -- $ 3,458 $ 19,595 $ 194 $ 3,458 $ 19,789 $ 23,247 $ 429 1998
Cameron at the
Summit II...... 268 -- 698 3,955 4,326 698 8,281 8,979 (c) (c)
Cameron on the
Cahaba I....... 150 -- 1,023 5,799 33 1,023 5,832 6,855 126 1987
Cameron on the
Cahaba II...... 250 8,007 1,601 9,071 26 1,601 9,097 10,698 194 1990
<CAPTION>
Year
Acquired
--------
<S> <C>
Apartment
Communities
(continued):
Birmingham,
Alabama:
Cameron at the
Summit I....... 1998
Cameron at the
Summit II...... 1998
Cameron on the
Cahaba I....... 1998
Cameron on the
Cahaba II...... 1998
Charlotte, North
Carolina:
Cameron at
Hickory Grove.. 202 6,187 1,434 8,127 11 1,434 8,138 9,572 173 1988
Cameron
Matthews....... 212 9,035 2,034 11,526 131 2,034 11,657 13,691 227 1998
Cameron Oaks.... 264 -- 2,312 13,104 8 2,312 13,112 15,424 284 1989
Eastover Glen... 128 -- 1,431 8,107 108 1,431 8,215 9,646 171 1987
Forest at
Biltmore....... 392 -- 4,008 22,709 9 4,008 22,718 26,726 51 1996
Pinnacle at
North Cross.... 312 -- 3,573 20,264 47 3,573 20,311 23,884 388 1997
Reafield Ridge.. 324 -- 3,009 17,052 388 3,009 17,440 20,449 362 1987
Springs at
Steele Creek... 264 -- 2,475 14,028 59 2,475 14,087 16,562 292 1997
Waterford Hills. 270 -- 2,413 13,676 2 2,413 13,678 16,091 334 1995
Waterford Square
I.............. 408 -- 3,497 19,814 8 3,497 19,822 23,319 545 1996
Waterford Square
II............. 286 -- 2,723 15,429 199 2,723 15,628 18,351 274 1998
Charlotte, North
Carolina:
Cameron at
Hickory Grove.. 1998
Cameron
Matthews....... 1998
Cameron Oaks.... 1998
Eastover Glen... 1998
Forest at
Biltmore....... 1998
Pinnacle at
North Cross.... 1998
Reafield Ridge.. 1998
Springs at
Steele Creek... 1998
Waterford Hills. 1998
Waterford Square
I.............. 1998
Waterford Square
II............. 1998
Columbus, Ohio:
Arbors of
Dublin......... 288 -- 2,218 12,571 145 2,218 12,716 14,934 268 1988
Columbus, Ohio:
Arbors of
Dublin......... 1998
Dallas, Texas:
Custer Crossing. 244 -- 1,532 8,683 2,118 1,532 10,801 12,333 1,345 1985
Knoxbridge...... 334 15,650 4,668 26,453 13 4,668 26,466 31,134 59 1994
Meadows at Park
Boulevard...... 368 -- 1,373 -- 15,520 1,373 15,520 16,893 845 1997
Quail Run....... 278 -- 1,613 9,140 2,306 1,613 11,446 13,059 1,422 1983
Summerstone..... 192 -- 1,028 5,824 1,838 1,028 7,662 8,690 916 1983
Timber Ridge.... 160 -- 997 5,651 1,185 997 6,836 7,833 764 1984
Timber Ridge II. 192 -- 675 20 8,680 675 8,700 9,375 394 1998
Woodland Park... 216 -- 1,386 5,543 1,449 1,386 6,992 8,378 833 1986
Dallas, Texas:
Custer Crossing. 1993
Knoxbridge...... 1998
Meadows at Park
Boulevard...... 1996
Quail Run....... 1993
Summerstone..... 1993
Timber Ridge.... 1994
Timber Ridge II. 1996
Woodland Park... 1993
Denver, Colorado:
Archstone Dakota
Ridge.......... 480 -- 2,108 24 17,291 2,108 17,315 19,423 (c) (c)
Cambrian........ 383 -- 2,256 9,026 2,575 2,256 11,601 13,857 1,506 1983
Cedars, The..... 408 -- 3,128 12,512 4,804 3,128 17,316 20,444 2,293 1984
Fox Creek I..... 175 -- 1,167 4,669 704 1,167 5,373 6,540 718 1984
Fox Creek II.... 112 -- -- -- 6,947 6,947 6,947 (c) (c)
Legacy Heights.. 384 16,417 2,049 4 20,457 2,049 20,461 22,510 443 1998
Reflections I &
II............. 416 -- 2,396 6,362 14,034 2,396 20,396 22,792 2,224 (g)
Silvercliff..... 312 -- 2,410 13,656 837 2,410 14,493 16,903 1,834 1991
Sunwood......... 156 -- 1,030 4,596 1,982 1,030 6,578 7,608 923 1981
Denver, Colorado:
Archstone Dakota
Ridge.......... 1997
Cambrian........ 1993
Cedars, The..... 1993
Fox Creek I..... 1993
Fox Creek II.... 1995
Legacy Heights.. 1997
Reflections I &
II............. (g)
Silvercliff..... 1994
Sunwood......... 1992
El Paso, Texas:
Acacia Park..... 336 -- 1,130 -- 13,348 1,130 13,348 14,478 1,625 1995
Cielo Vista..... 378 -- 1,111 4,445 3,490 1,111 7,935 9,046 1,016 1962
Double Tree..... 284 -- 1,106 4,423 873 1,106 5,296 6,402 774 1980
Las Flores...... 468 5,726 625 6,624 1,397 625 8,021 8,646 3,775 (h)
Patriot, The.... 320 -- 1,027 -- 11,550 1,027 11,550 12,577 1,318 1996
Phoenix, The.... 336 -- 454 -- 10,463 454 10,463 10,917 1,817 1993
Tigua Village... 184 -- 161 146 2,319 161 2,465 2,626 1,377 (i)
El Paso, Texas:
Acacia Park..... 1993
Cielo Vista..... 1993
Double Tree..... 1993
Las Flores...... (h)
Patriot, The.... 1993
Phoenix, The.... 1993
Tigua Village... (i)
Ft.
Lauderdale/West
Palm Beach:
Cameron at
Bayberry Lake.. 308 -- 2,675 15,159 72 2,675 15,231 17,906 322 1988
Ft.
Lauderdale/West
Palm Beach:
Cameron at
Bayberry Lake.. 1998
</TABLE>
125
<PAGE>
ARCHSTONE COMMUNITIES TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Initial Cost to Costs Gross Amount at Which Carried at
Archstone Capitalized December 31, 1998
--------------------- Subsequent --------------------------------
Buildings & to Buildings & Accumulated Construction
Units Encumbrances Land Improvements Acquisition Land Improvements Totals Depreciation Year
----- ------------ -------- ------------ ----------- -------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment
Communities
(continued):
Ft.
Lauderdale/West
Palm Beach
(Continued):
Cameron at
Meadow Lakes... 189 $ -- $ 1,712 $ 9,702 $ 38 $ 1,712 $ 9,740 $ 11,452 $ 206 1983
Cameron at the
Villages....... 384 -- 3,298 18,686 45 3,298 18,731 22,029 400 1987
Cameron Cove.... 221 8,259 1,648 9,338 146 1,648 9,484 11,132 201 1986
Cameron Gardens. 300 -- 2,803 15,882 5,205 2,803 21,087 23,890 75 (c)
Cameron Hidden
Harbor......... 200 5,475 1,868 10,587 150 1,868 10,737 12,605 226 1986
Cameron Palms... 340 -- 2,252 12,763 11,524 2,252 24,287 26,539 (c) (c)
Cameron Park I.. 196 -- 2,129 12,063 2,443 2,129 14,506 16,635 73 (c)
Cameron View.... 176 -- 1,487 8,425 52 1,487 8,477 9,964 182 1987
Cameron
Waterways...... 300 -- 3,678 20,840 453 3,678 21,293 24,971 254 1998
Park Place at
Turtle Run..... 350 -- 2,598 14,721 44 2,598 14,765 17,363 313 1989
Parrot's Landing
I.............. 408 15,386 3,173 17,982 89 3,173 18,071 21,244 435 1986
Parrot's Landing
II............. 152 -- 1,345 7,621 42 1,345 7,663 9,008 261 1997
Pineview Lakes.. 192 -- 1,847 10,464 438 1,847 10,902 12,749 229 1988
<CAPTION>
Year
Acquired
--------
<S> <C>
Apartment
Communities
(continued):
Ft.
Lauderdale/West
Palm Beach
(Continued):
Cameron at
Meadow Lakes... 1998
Cameron at the
Villages....... 1998
Cameron Cove.... 1998
Cameron Gardens. 1998
Cameron Hidden
Harbor......... 1998
Cameron Palms... 1998
Cameron Park I.. 1998
Cameron View.... 1998
Cameron
Waterways...... 1998
Park Place at
Turtle Run..... 1998
Parrot's Landing
I.............. 1998
Parrot's Landing
II............. 1998
Pineview Lakes.. 1998
Ft. Myers,
Florida:
Forestwood...... 397 11,158 2,534 14,361 102 2,534 14,463 16,997 307 1986
Ft. Myers,
Florida:
Forestwood...... 1998
Houston, Texas:
7100 Almeda..... 348 -- 1,713 9,706 947 1,713 10,653 12,366 1,325 1984
Braeswood Park.. 240 -- 1,861 10,548 446 1,861 10,994 12,855 1,525 1984
Braeswood Park
II............. 36 -- 1,125 5 984 1,125 989 2,114 (c) (c)
Brompton Court.. 794 -- 4,058 22,993 5,969 4,058 28,962 33,020 3,646 1972
Memorial Heights
I.............. 360 14,801 3,169 -- 16,006 3,169 16,006 19,175 1,526 1996
Memorial Heights
II............. 256 12,174 9,164 -- 6,607 9,164 6,607 15,771 558 1998
Oaks at Medical
Center I....... 360 -- 4,210 -- 14,579 4,210 14,579 18,789 1,555 1996
Oaks at Medical
Center II...... 318 -- 3,368 -- 15,064 3,368 15,064 18,432 24 (c)
Houston, Texas:
7100 Almeda..... 1994
Braeswood Park.. 1993
Braeswood Park
II............. 1997
Brompton Court.. 1994
Memorial Heights
I.............. 1996
Memorial Heights
II............. 1996
Oaks at Medical
Center I....... 1994
Oaks at Medical
Center II...... 1994
Indianapolis,
Indiana:
Arbor Green..... 208 -- 1,597 9,049 347 1,597 9,396 10,993 196 1989
Archstone at
River Ridge.... 202 -- 461 2,612 3,985 461 6,597 7,058 (c) (c)
Indianapolis,
Indiana:
Arbor Green..... 1998
Archstone at
River Ridge.... 1998
Inland Empire,
California:
Crossing, The... 296 -- 2,227 12,622 1,662 2,227 14,284 16,511 1,024 1989
Miramonte....... 290 -- 2,357 13,364 1,071 2,357 14,435 16,792 1,210 1989
Sierra Hills.... 300 652 2,810 15,921 1,681 2,810 17,602 20,412 775 1990
Terracina....... 736 -- 5,780 32,757 2,934 5,780 35,691 41,471 2,484 1988
Westcourt
Village........ 515 -- 1,909 10,817 4,648 1,909 15,465 17,374 1,223 1986
Woodsong
Village........ 262 -- 1,846 10,469 826 1,846 11,295 13,141 714 1985
Inland Empire,
California:
Crossing, The... 1996
Miramonte....... 1995
Sierra Hills.... 1997
Terracina....... 1996
Westcourt
Village........ 1996
Woodsong
Village........ 1996
Jacksonville,
Florida:
Cameron
Deerwood....... 336 -- 2,782 15,763 18 2,782 15,781 18,563 619 1997
Cameron Lakes I. 302 -- 2,792 15,823 111 2,792 15,934 18,726 554 1996
Cameron Lakes
II............. 253 -- 2,476 14,032 126 2,476 14,158 16,634 457 1998
Cameron
Timberlin...... 320 -- 2,759 15,632 85 2,759 15,717 18,476 620 1997
Jacksonville,
Florida:
Cameron
Deerwood....... 1998
Cameron Lakes I. 1998
Cameron Lakes
II............. 1998
Cameron
Timberlin...... 1998
Kansas City,
Kansas:
Crown Chase..... 220 -- 1,540 -- 8,875 1,540 8,875 10,415 (c) (c)
Kansas City,
Kansas:
Crown Chase..... 1996
Las Vegas,
Nevada:
Crossings at
Lake Mead...... 444 -- 2,086 11,867 1,530 2,086 13,397 15,483 1,299 1986
Horizons at
Peccole Ranch.. 408 -- 3,173 18,048 1,000 3,173 19,048 22,221 1,889 1990
La Tierra at the
Lakes.......... 896 -- 5,904 33,561 5,510 5,904 39,071 44,975 3,958 1986
Las Vegas,
Nevada:
Crossings at
Lake Mead...... 1995
Horizons at
Peccole Ranch.. 1995
La Tierra at the
Lakes.......... 1995
</TABLE>
126
<PAGE>
ARCHSTONE COMMUNITIES TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Initial Cost to Costs Gross Amount at Which Carried at
Archstone Capitalized December 31, 1998
--------------------- Subsequent ----------------------------------
Buildings & to Buildings & Accumulated
Units Encumbrances Land Improvements Acquisition Land Improvements Totals Depreciation
----- ------------ -------- ------------ ----------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment
Communities:
<CAPTION>
Construction Year
Year Acquired
------------ --------
<S> <C> <C>
Apartment
Communities:
Los Angeles,
California:
Oakridge........ 178 $ 13,050 $ 3,212 $ 18,200 $ 124 $ 3,212 $ 18,324 $ 21,536 $ 165
Los Angeles,
California:
Oakridge........ 1985 1998
Memphis,
Tennessee:
Country Oaks.... 200 -- 1,257 7,122 7 1,257 7,129 8,386 151
Memphis,
Tennessee:
Country Oaks.... 1985 1998
Minneapolis,
Minnesota:
Eden Commons.... 196 6,317 1,973 11,181 -- 1,973 11,181 13,154 --
Minneapolis,
Minnesota:
Eden Commons.... 1987 1998
Nashville,
Tennessee:
Amberwood at
Bellevue....... 225 5,102 2,235 12,660 70 2,235 12,730 14,965 58
Arbor Creek..... 360 -- 2,471 14,003 156 2,471 14,159 16,630 352
Cameron
Overlook....... 452 -- 4,031 22,843 (40) 4,031 22,803 26,834 665
Enclave at
Brentwood...... 380 -- 2,672 15,143 98 2,672 15,241 17,913 327
Monthaven Place
I.............. 216 -- 1,210 9 7,106 1,210 7,115 8,325 (c)
Shadowbluff..... 220 5,835 1,422 8,059 97 1,422 8,156 9,578 173
Nashville,
Tennessee:
Amberwood at
Bellevue....... 1986 1998
Arbor Creek..... 1986 1998
Cameron
Overlook....... 1998 1998
Enclave at
Brentwood...... 1988 1998
Monthaven Place
I.............. (c) 1998
Shadowbluff..... 1986 1998
Orange County,
California:
Las Flores
Apartment
Homes.......... 504 7,424 8,900 264 40,716 8,900 40,980 49,880 217
Newpointe....... 160 -- 1,403 7,981 508 1,403 8,489 9,892 566
River Meadows... 152 10,000 2,082 11,797 1,334 2,082 13,131 15,213 619
Sorrento........ 241 4,822 4,872 -- 22,528 4,872 22,528 27,400 118
Villa
Marseilles..... 192 3,698 1,970 11,162 4,759 1,970 15,921 17,891 696
Orange County,
California:
Las Flores
Apartment
Homes.......... (c) 1996
Newpointe....... 1987 1996
River Meadows... 1986 1997
Sorrento........ 1998 1996
Villa
Marseilles..... 1991 1996
Orlando, Florida:
Camden Springs.. 340 -- 2,893 16,391 45 2,893 16,436 19,329 348
Cameron
Promenade...... 212 -- 2,236 12,671 1,103 2,236 13,774 16,010 119
Cameron Villas
I.............. 192 -- 1,306 7,400 87 1,306 7,487 8,793 161
Cameron Villas
II............. 42 -- 287 1,624 35 287 1,659 1,946 36
Kingston
Village........ 120 -- 1,039 5,887 77 1,039 5,964 7,003 128
Wellington I.... 192 -- 1,505 8,526 11 1,505 8,537 10,042 182
Wellington II... 120 -- 1,605 9,094 257 1,605 9,351 10,956 84
Orlando, Florida:
Camden Springs.. 1986 1998
Cameron
Promenade...... (c) 1998
Cameron Villas
I.............. 1982 1998
Cameron Villas
II............. 1981 1998
Kingston
Village........ 1982 1998
Wellington I.... 1988 1998
Wellington II... (c) 1998
Phoenix, Arizona:
Cochise at
Arrowhead I
(j)............ 272 -- 2,019 -- 16,067 2,019 16,067 18,086 149
Cochise at
Arrowhead II
(j)............ 200 -- 1,601 -- 7,298 1,601 7,298 8,899 (c)
Foxfire......... 188 -- 1,055 5,976 605 1,055 6,581 7,636 839
Miralago I...... 496 18,720 2,743 -- 22,331 2,743 22,331 25,074 1,651
Moorings at Mesa
Cove........... 406 -- 3,261 13,045 1,530 3,261 14,575 17,836 2,250
Peaks at Papago
Park........... 768 -- 5,131 23,408 8,741 5,131 32,149 37,280 3,936
Pelican Bay
Club........... 472 -- 2,797 11,188 2,215 2,797 13,403 16,200 1,756
Ridge, The...... 380 -- 1,852 10,492 965 1,852 11,457 13,309 1,561
San Marbeya..... 404 -- 3,675 93 17,396 3,675 17,489 21,164 4
San Marquis
North.......... 208 -- 1,215 -- 9,737 1,215 9,737 10,952 1,156
San Marquis
South.......... 264 -- 2,312 -- 11,336 2,312 11,336 13,648 1,629
San Palmera (j). 412 -- 3,515 -- 21,878 3,515 21,878 25,393 1,638
San Valiente I
(j)............ 376 -- 3,062 -- 19,221 3,062 19,221 22,283 1,420
San Valiente II
(j)............ 228 -- 1,647 -- 11,103 1,647 11,103 12,750 1
Scottsdale
Greens......... 644 23,465 3,489 19,774 7,008 3,489 26,782 30,271 3,583
Superstition
Park........... 376 -- 2,340 9,362 1,447 2,340 10,809 13,149 1,648
Phoenix, Arizona:
Cochise at
Arrowhead I
(j)............ (c) 1995
Cochise at
Arrowhead II
(j)............ (c) 1995
Foxfire......... 1985 1994
Miralago I...... 1997 1995
Moorings at Mesa
Cove........... 1985 1992
Peaks at Papago
Park........... (k) (k)
Pelican Bay
Club........... 1985 1993
Ridge, The...... 1987 1993
San Marbeya..... (c) 1997
San Marquis
North.......... 1994 1993
San Marquis
South.......... 1994 1993
San Palmera (j). 1997 1995
San Valiente I
(j)............ 1997 1995
San Valiente II
(j)............ (c) 1995
Scottsdale
Greens......... 1980 1994
Superstition
Park........... 1985 1992
Portland, Oregon:
Arbor Heights... 348 -- 2,669 20,631 2,669 20,631 23,300 799
Brighton........ 233 -- 1,675 9,532 1,335 1,675 10,867 12,542 678
Portland, Oregon:
Arbor Heights... 1998 1996
Brighton........ 1985 1996
</TABLE>
127
<PAGE>
ARCHSTONE COMMUNITIES TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Initial Cost to Costs Gross Amount at Which Carried at
Archstone Capitalized December 31, 1998
--------------------- Subsequent ----------------------------------
Buildings & to Buildings & Accumulated
Units Encumbrances Land Improvements Acquisition Land Improvements Totals Depreciation
----- ------------ -------- ------------ ----------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment
Communities
(continued):
Portland, Oregon
(continued):
Cambridge
Crossing....... 250 $ -- $ 2,260 $ -- $ 13,453 $ 2,260 $ 13,453 $ 15,713 $ 706
Hedges Creek.... 408 -- 3,758 162 23,503 3,758 23,665 27,423 100
Preston's
Crossing....... 228 -- 851 12,209 851 12,209 13,060 1,034
Riverwood
Heights........ 240 -- 1,479 8,410 665 1,479 9,075 10,554 900
Squire's Court.. 235 -- 1,630 9,249 595 1,630 9,844 11,474 967
Timberline...... 130 -- 1,058 5,995 530 1,058 6,525 7,583 482
<CAPTION>
Construction Year
Year Acquired
------------ --------
<S> <C> <C>
Apartment
Communities
(continued):
Portland, Oregon
(continued):
Cambridge
Crossing....... 1998 1996
Hedges Creek.... (c) 1997
Preston's
Crossing....... 1996 1995
Riverwood
Heights........ 1990 1995
Squire's Court.. 1989 1995
Timberline...... 1990 1996
Raleigh, North
Carolina:
52 Magnolia..... 228 11,765 2,732 15,482 127 2,732 15,609 18,341 324
Archstone at
Preston........ 388 -- 882 4,996 6,679 882 11,675 12,557 (c)
Cameron at Six
Forks.......... 172 -- 1,417 8,027 98 1,417 8,125 9,542 172
Cameron at
Southpoint..... 288 -- 1,719 9,741 7,375 1,719 17,116 18,835 24
Cameron Brooke.. 228 -- 2,031 11,508 179 2,031 11,687 13,718 372
Cameron Green... 320 -- 2,532 14,347 4 2,532 14,351 16,883 302
Cameron Lake I.. 196 -- 1,539 8,722 9 1,539 8,731 10,270 185
Cameron Lake II. 172 -- 1,606 9,098 73 1,606 9,171 10,777 192
Cameron Ridge... 228 -- 1,694 9,599 50 1,694 9,649 11,343 203
Cameron Square.. 268 -- 2,575 14,590 32 2,575 14,622 17,197 307
Cameron Woods... 328 -- 2,107 11,940 6,854 2,107 18,794 20,901 48
Conifer Glen.... 186 -- 2,204 12,511 27 2,204 12,538 14,742 168
Cornerstone..... 302 -- 3,748 21,239 105 3,748 21,344 25,092 443
Falls at
Duraleigh, The. 396 -- 2,614 14,819 59 2,614 14,878 17,492 63
Poplar Place.... 230 -- 2,189 12,407 556 2,189 12,963 15,152 270
Waterford
Forest......... 384 -- 3,791 21,480 38 3,791 21,518 25,309 539
Waterford Point. 336 14,560 3,136 17,772 17 3,136 17,789 20,925 497
Raleigh, North
Carolina:
52 Magnolia..... 1995 1998
Archstone at
Preston........ (c) 1998
Cameron at Six
Forks.......... 1985 1998
Cameron at
Southpoint..... (c) 1998
Cameron Brooke.. 1997 1998
Cameron Green... 1986 1998
Cameron Lake I.. 1985 1998
Cameron Lake II. 1982 1998
Cameron Ridge... 1985 1998
Cameron Square.. 1987 1998
Cameron Woods... (c) 1998
Conifer Glen.... 1997 1998
Cornerstone..... 1997 1998
Falls at
Duraleigh, The. 1987 1998
Poplar Place.... 1987 1998
Waterford
Forest......... 1997 1998
Waterford Point. 1996 1998
Reno, Nevada:
Enclave, The.... 228 -- 1,947 -- 13,795 1,947 13,795 15,742 187
Enclave II, The. 180 -- 1,538 -- 3,515 1,538 3,515 5,053 (c)
Vista Ridge..... 324 -- 2,002 -- 19,308 2,002 19,308 21,310 1,412
Reno, Nevada:
Enclave, The.... 1998 1996
Enclave II, The. (c) 1996
Vista Ridge..... 1997 1995
Richmond,
Virginia:
Archstone at
Swift Creek I.. 288 -- 812 4,604 3,372 812 7,976 8,788 (c)
Cameron at
Gayton......... 220 -- 1,905 10,796 11 1,905 10,807 12,712 228
Cameron at
Virginia
Center......... 264 -- 2,907 16,472 1,006 2,907 17,478 20,385 140
Cameron at
Virginia Center
II............. 88 -- 242 1,372 2,277 242 3,649 3,891 (c)
Cameron at
Wellesley...... 340 -- 3,376 19,132 33 3,376 19,165 22,541 410
Cameron at
Wyndham........ 312 -- 3,782 21,433 829 3,782 22,262 26,044 214
Cameron Crossing
I.............. 280 -- 3,245 18,391 92 3,245 18,483 21,728 518
Cameron Crossing
II............. 144 -- 1,723 9,764 617 1,723 10,381 12,104 100
Richmond,
Virginia:
Archstone at
Swift Creek I.. (c) 1998
Cameron at
Gayton......... 1987 1998
Cameron at
Virginia
Center......... (c) 1998
Cameron at
Virginia Center
II............. (c) 1998
Cameron at
Wellesley...... 1989 1998
Cameron at
Wyndham........ (c) 1998
Cameron Crossing
I.............. 1998 1998
Cameron Crossing
II............. 1998 1998
Salt Lake City,
Utah
Archstone River
Oaks........... 448 -- 5,400 213 13,434 5,400 13,647 19,047 (c)
Brighton Place.. 336 -- 2,091 11,892 4,253 2,091 16,145 18,236 1,490
Carrington
Place.......... 142 3,444 1,072 6,072 634 1,072 6,706 7,778 242
Cherry Creek.... 225 3,598 1,290 7,330 707 1,290 8,037 9,327 797
Cloverland...... 186 4,178 1,392 7,886 1,375 1,392 9,261 10,653 306
Crossroads, The. 240 4,435 1,521 8,619 934 1,521 9,553 11,074 557
Salt Lake City,
Utah
Archstone River
Oaks........... (c) 1997
Brighton Place.. 1979 1995
Carrington
Place.......... 1986 1997
Cherry Creek.... 1986 1995
Cloverland...... 1985 1997
Crossroads, The. 1986 1996
</TABLE>
128
<PAGE>
ARCHSTONE COMMUNITIES TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Initial Cost to Gross Amount at Which Carried at
Archstone Costs December 31, 1998
--------------------- Capitalized ----------------------------------
Buildings & Subsequent Buildings & Accumulated
Units Encumbrances Land Improvements Acquisition Land Improvements Totals Depreciation
----- ------------ -------- ------------ ----------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment
Communities
(continued):
Salt Lake City,
Utah
(continued):
Fairstone at
Riverview...... 492 $ -- $ 4,636 $ -- $ 26,640 $ 4,636 $ 26,640 $ 31,276 $ 1,026
Fox Creek....... 186 4,240 1,172 6,641 1,245 1,172 7,886 9,058 427
Greenpointe..... 224 -- 923 5,050 2,614 923 7,664 8,587 641
Mountain Shadow
I.............. 174 -- 832 4,730 1,533 832 6,263 7,095 673
Mountain Shadow
II............. 88 -- 95 -- 4,218 95 4,218 4,313 45
Raintree........ 152 -- 948 5,373 957 948 6,330 7,278 151
Remington, The.. 288 10,530 2,324 -- 14,905 2,324 14,905 17,229 1,326
Riverbend....... 200 -- 1,357 7,692 1,451 1,357 9,143 10,500 219
<CAPTION>
Construction Year
Year Acquired
------------ --------
<S> <C> <C>
Apartment
Communities
(continued):
Salt Lake City,
Utah
(continued):
Fairstone at
Riverview...... 1998 1996
Fox Creek....... 1985 1996
Greenpointe..... (l) (l)
Mountain Shadow
I.............. 1985 1995
Mountain Shadow
II............. 1996 1996
Raintree........ 1984 1998
Remington, The.. 1997 1995
Riverbend....... 1985 1998
San Antonio,
Texas:
Applegate....... 344 -- 1,455 8,248 1,160 1,455 9,408 10,863 1,269
Austin Point.... 328 -- 1,728 9,725 1,515 1,728 11,240 12,968 1,510
Camino Real..... 176 -- 1,084 4,338 1,793 1,084 6,131 7,215 855
Cobblestone
Village........ 184 -- 786 3,120 891 786 4,011 4,797 935
Contour Place... 126 -- 456 1,829 588 456 2,417 2,873 609
Crescent, The... 306 -- 1,145 -- 15,105 1,145 15,105 16,250 2,265
Dymaxion........ 190 -- 683 3,740 482 683 4,222 4,905 473
Marbach Park.... 304 -- 1,122 6,361 1,124 1,122 7,485 8,607 1,052
Rancho Mirage... 254 -- 724 2,971 1,697 724 4,668 5,392 640
Stanford
Heights........ 276 -- 1,631 -- 11,893 1,631 11,893 13,524 1,335
Sterling
Heights........ 224 -- 1,644 -- 10,661 1,644 10,661 12,305 1,213
Villas of Castle
Hills.......... 163 -- 1,037 4,148 1,075 1,037 5,223 6,260 717
Villas of St.
Tropez I....... 273 -- 2,013 8,054 1,851 2,013 9,905 11,918 1,510
Waters of
Northern Hills. 305 -- 1,251 7,105 1,338 1,251 8,443 9,694 1,080
San Antonio,
Texas:
Applegate....... 1983 1993
Austin Point.... 1982 1993
Camino Real..... 1979 1993
Cobblestone
Village........ 1984 1992
Contour Place... 1984 1992
Crescent, The... 1994 1992
Dymaxion........ 1984 1994
Marbach Park.... 1985 1993
Rancho Mirage... 1974 1993
Stanford
Heights........ 1996 1993
Sterling
Heights........ 1995 1993
Villas of Castle
Hills.......... 1971 1993
Villas of St.
Tropez I....... 1982 1992
Waters of
Northern Hills. 1982 1994
San Diego,
California:
Archstone Torrey
Hills.......... 340 -- 10,400 659 10,705 10,400 11,364 21,764 (c)
Camino Pointe
Village........ 150 -- 1,549 8,780 607 1,549 9,387 10,936 154
Carmel Del Mar.. 232 14,685 3,802 21,546 1,719 3,802 23,265 27,067 460
Club Pacifica... 264 -- 2,141 12,132 975 2,141 13,107 15,248 943
El Dorado Hills. 448 -- 4,418 25,084 3,334 4,418 28,418 32,836 1,764
La Jolla Point.. 328 21,200 4,616 26,160 1,400 4,616 27,560 32,176 1,264
Ocean Crest..... 300 -- 2,369 13,427 1,414 2,369 14,841 17,210 1,086
Palisades, The.. 296 -- 4,741 26,866 599 4,741 27,465 32,206 1,538
Seascape........ 208 15,115 2,659 15,066 570 2,659 15,636 18,295 212
San Diego,
California:
Archstone Torrey
Hills.......... (c) 1997
Camino Pointe
Village........ 1985 1998
Carmel Del Mar.. 1991 1998
Club Pacifica... 1987 1996
El Dorado Hills. 1983 1996
La Jolla Point.. 1986 1997
Ocean Crest..... 1993 1996
Palisades, The.. 1991 1996
Seascape........ 1986 1998
San Francisco
(Bay Area),
California:
Archstone
Emerald Peak... 324 -- 8,950 170 17,654 8,950 17,824 26,774 (c)
Archstone
Hacienda....... 540 5,256 18,696 668 11,091 18,696 11,759 30,455 (c)
Archstone
Monterey Grove. 224 -- 4,451 13 15,980 4,451 15,993 20,444 (c)
Ashton Place.... 948 46,204 9,782 55,429 17,483 9,782 72,912 82,694 4,011
Harborside...... 148 -- 3,213 18,210 360 3,213 18,570 21,783 989
Los Padres...... 245 -- 4,579 25,946 749 4,579 26,695 31,274 1,188
Marina Lakes.... 468 -- 5,952 33,728 846 5,952 34,574 40,526 1,702
Redwood Shores.. 304 24,280 5,608 31,778 2,132 5,608 33,910 39,518 1,992
Reflections..... 496 -- 7,820 44,311 1,488 7,820 45,799 53,619 2,351
Sundance at
Vallejo Ranch.. 396 -- 2,633 14,923 1,669 2,633 16,592 19,225 1,217
Treat Commons... 510 -- 5,788 32,802 968 5,788 33,770 39,558 2,694
San Francisco
(Bay Area),
California:
Archstone
Emerald Peak... (c) 1997
Archstone
Hacienda....... (c) 1997
Archstone
Monterey Grove. (c) 1997
Ashton Place.... 1970 1996
Harborside...... 1989 1996
Los Padres...... 1988 1997
Marina Lakes.... 1991 1997
Redwood Shores.. 1986 1996
Reflections..... 1988 1997
Sundance at
Vallejo Ranch.. 1986 1996
Treat Commons... 1988 1995
</TABLE>
129
<PAGE>
ARCHSTONE COMMUNITIES TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Initial Cost to Costs Gross Amount at Which Carried at
Archstone Capitalized December 31, 1998
--------------------- Subsequent --------------------------------
Buildings & to Buildings & Accumulated
Units Encumbrances Land Improvements Acquisition Land Improvements Totals Depreciation
------ ------------ -------- ------------ ----------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment
Communities
(continued):
Seattle,
Washington:
Archstone
Inglewood Hill.. 230 $ -- $ 2,463 $ 68 $ 8,484 $ 2,463 $ 8,552 $ 11,015 $ (c)
Archstone
Northcreek...... 524 -- 5,750 261 15,709 5,750 15,970 21,720 (c)
Cambrian, The.... 422 -- 6,231 35,309 1,194 6,231 36,503 42,734 1,556
Canyon Creek..... 336 17,324 5,250 -- 19,656 5,250 19,656 24,906 1,169
Canyon Pointe.... 250 -- 3,121 17,684 821 3,121 18,505 21,626 307
Fairwood Landing. 194 5,621 1,223 6,928 959 1,223 7,887 9,110 421
Forestview....... 192 -- 1,681 -- 13,840 1,681 13,840 15,521 171
Harbour Pointe... 230 -- 2,027 -- 13,112 2,027 13,112 15,139 579
Logan's Ridge.... 258 -- 1,950 11,118 1,326 1,950 12,444 14,394 1,187
Matanza Creek.... 152 -- 1,016 5,814 371 1,016 6,185 7,201 624
Millwood Estates. 300 -- 1,593 9,200 985 1,593 10,185 11,778 1,034
Newport Crossing. 192 -- 1,694 9,602 641 1,694 10,243 11,937 553
Pebble Cove...... 288 14,261 1,895 -- 15,655 1,895 15,655 17,550 1,143
Remington Park... 332 -- 2,795 15,593 2,073 2,795 17,666 20,461 1,645
Stonemeadow
Farms........... 280 -- 4,370 -- 18,068 4,370 18,068 22,438 90
Victorian
Village......... 216 8,020 2,705 15,330 1,151 2,705 16,481 19,186 402
Walden Pond...... 316 -- 2,033 11,535 686 2,033 12,221 14,254 1,203
Waterford Place.. 360 -- 4,131 23,407 930 4,131 24,337 28,468 817
<CAPTION>
Construction Year
Year Acquired
------------ --------
<S> <C> <C>
Apartment
Communities
(continued):
Seattle,
Washington:
Archstone
Inglewood Hill.. (c) 1997
Archstone
Northcreek...... (c) 1998
Cambrian, The.... 1991 1997
Canyon Creek..... 1997 1997
Canyon Pointe.... 1990 1997
Fairwood Landing. 1982 1996
Forestview....... 1998 1996
Harbour Pointe... 1997 1996
Logan's Ridge.... 1987 1995
Matanza Creek.... 1991 1995
Millwood Estates. 1987 1995
Newport Crossing. 1990 1997
Pebble Cove...... 1996 1995
Remington Park... 1990 1995
Stonemeadow
Farms........... (c) 1997
Victorian
Village......... 1989 1998
Walden Pond...... 1990 1995
Waterford Place.. 1989 1997
Tampa/St.
Petersburg,
Florida:
Archstone Rocky
Creek........... 264 -- 511 2,896 1,548 511 4,444 4,955 (c)
Camden Downs..... 250 -- 2,102 11,910 53 2,102 11,963 14,065 254
Cameron Bayshore. 328 -- 2,035 11,530 85 2,035 11,615 13,650 244
Cameron Lakes.... 207 -- 1,570 8,897 56 1,570 8,953 10,523 194
Cameron Palm
Harbor.......... 168 5,622 1,293 7,325 116 1,293 7,441 8,734 158
Country Place
Village I....... 88 1,967 777 4,400 31 777 4,431 5,208 93
Country Place
Village II...... 100 -- 805 4,563 100 805 4,663 5,468 98
Foxbridge on the
Bay............. 358 10,109 1,988 11,263 92 1,988 11,355 13,343 245
Tucson, Arizona:
Tierra Antigua.. 147 -- 992 3,967 769 992 4,736 5,728 991
Villa Caprice... 268 -- 1,279 7,248 630 1,279 7,878 9,157 1,090
Tampa/St.
Petersburg,
Florida:
Archstone Rocky
Creek........... (c) 1998
Camden Downs..... 1988 1998
Cameron Bayshore. 1984 1998
Cameron Lakes.... 1986 1998
Cameron Palm
Harbor.......... 1988 1998
Country Place
Village I....... 1982 1998
Country Place
Village II...... 1983 1998
Foxbridge on the
Bay............. 1986 1998
Tucson, Arizona:
Tierra Antigua.. 1979 1992
Villa Caprice... 1972 1993
Ventura County,
California:
Le Club......... 370 21,700 4,958 28,097 1,769 4,958 29,866 34,824 1,252
Pelican Point... 400 -- 4,365 24,735 1,835 4,365 26,570 30,935 1,047
Ventura County,
California:
Le Club......... 1987 1997
Pelican Point... 1985 1997
Washington, D.C.
Archstone
Governor's
Green.......... 338 -- 1,836 10,402 3,383 1,836 13,785 15,621 (c)
Bellemeade
Farms.......... 316 -- 3,250 18,416 43 3,250 18,459 21,709 165
Camden at
Kendall Ridge.. 184 -- 2,089 11,838 43 2,089 11,881 13,970 256
Cameron at
Milestone...... 444 -- 5,633 31,920 84 5,633 32,004 37,637 836
Cameron at
Saybrooke...... 252 -- 3,210 18,190 12 3,210 18,202 21,412 387
Oaks at Fair
Lakes.......... 282 15,477 3,687 20,893 5 3,687 20,898 24,585 --
Sheffield
Forest......... 256 -- 2,482 14,063 39 2,482 14,102 16,584 301
West Springfield
Terrace........ 244 -- 2,918 16,537 117 2,918 16,654 19,572 355
------ -------- -------- ---------- ---------- -------- ---------- ---------- ---------
Total Apartment
Communities
Operating and
Under
Construction.... 81,461 $676,613 $701,705 $2,888,861 $1,138,375 $701,705 $4,027,236 $4,728,941 $ 201,753
------ -------- -------- ---------- ---------- -------- ---------- ---------- ---------
Washington, D.C.
Archstone
Governor's
Green.......... (c) 1998
Bellemeade
Farms.......... 1988 1998
Camden at
Kendall Ridge.. 1990 1998
Cameron at
Milestone...... 1997 1998
Cameron at
Saybrooke...... 1990 1998
Oaks at Fair
Lakes.......... 1988 1998
Sheffield
Forest......... 1987 1998
West Springfield
Terrace........ 1978 1998
------------ --------
Total Apartment
Communities
Operating and
Under
Construction....
</TABLE>
130
<PAGE>
ARCHSTONE COMMUNITIES TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Initial Cost to Costs Gross Amount at Which Carried at
Archstone Capitalized December 31, 1998
--------------------- Subsequent --------------------------------
Buildings & to Buildings & Accumulated Construction
Units Encumbrances Land Improvements Acquisition Land Improvements Totals Depreciation Year
------ ------------ -------- ------------ ----------- -------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment
Communities
(continued):
Development
Communities in
Planning and
Owned.......... 3,398 $ -- $ 52,011 $ 8,312 $ 9,387 $ 52,011 $ 17,699 $ 69,710 $ --
------ -------- -------- ---------- ---------- -------- ---------- ---------- --------
Other Land Held. -- -- 39,054 -- 9,226 39,054 9,226 48,280 --
------ -------- -------- ---------- ---------- -------- ---------- ---------- --------
Other Real
Estate Assets.. -- -- 12,861 1,935 8,074 12,861 10,009 22,870 4,042
------ -------- -------- ---------- ---------- -------- ---------- ---------- --------
Total Real
Estate Assets.. 84,859 $676,613 $805,631 $2,899,108 $1,165,062 $805,631 $4,064,170 $4,869,801 $205,795
====== ======== ======== ========== ========== ======== ========== ========== ========
<CAPTION>
Year
Acquired
--------
<S> <C>
Apartment
Communities
(continued):
Development
Communities in
Planning and
Owned..........
Other Land Held.
Other Real
Estate Assets..
Total Real
Estate Assets..
</TABLE>
- -------
(a) Phase I (118 units) was acquired in 1991 and Phase II (122 units) was
developed in 1992.
(b) Vistas at Seven Bar Ranch (364 units) was developed in 1996 and Corrales
Pointe (208 units) was acquired in 1993.
(c) As of 12/31/98, community was under construction.
(d) Phase I (108 units) was constructed in 1981 and Phase II (240 units) was
constructed in 1983.
(e) Phase I (332 units) was constructed in 1983 and Phase II (312 units) was
constructed in 1985.
(f) Phase I (240 units) was developed in 1995 and Phase II (160 units) was
developed in 1996.
(g) Phase I (208 units) was acquired in 1993 and Phase II (208) was developed
in 1996.
(h) Phase I (120 units) was developed in 1980, Phase II (60 units) was
developed in 1981 and Phase III (288 units) was developed in 1983.
(i) Phase I (84 units) was developed in 1970 and Phase II (100 units) was
developed in 1978.
(j) Represents properties owned by third party developers that are subject to
presale agreements to Archstone to acquire such properties. Archstone's
investment as of December 31, 1998 represents development loans make by
Archstone to such developers.
(k) Phase I & II (624 units) were acquired in 1994 and Phase III (144 units)
was developed in 1996.
(l) Phase I (192 units) was acquired in 1995 and Phase II (32 units) was
developed in 1997.
131
<PAGE>
The following is a reconciliation of the carrying amount and related
accumulated depreciation of Archstone's investment in real estate, at cost (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
Carrying Amounts 1998 1997 1996
---------------- ---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1....................... $2,604,919 $2,153,363 $1,855,866
---------- ---------- ----------
Apartment Communities:
Real estate assets acquired in the
Atlantic Merger......................... 1,823,727 -- --
Acquisition-related expenditures......... 285,806 391,234 386,852
Redevelopment expenditures............... 57,171 43,187 21,663
Recurring capital expenditures........... 9,464 8,762 7,992
Development expenditures, excluding land
acquisitions.. 378,161 205,619 187,396
Acquisition and improvement of land for
development............................. 67,248 75,196 76,301
Dispositions............................. (344,336) (268,210) (269,693)
Provision for possible loss on
investments............................. -- (2,800) --
---------- ---------- ----------
Net apartment community activity........... 2,277,241 452,988 410,511
---------- ---------- ----------
Other:
Homestead development expenditures,
including land Acquisitions............. -- -- 54,883
Contribution of assets................... -- -- (161,370)
Dispositions............................. (9,959) (1,232) (6,527)
Provision for possible loss on
investments............................. (2,400) (200) --
---------- ---------- ----------
Net other activity......................... (12,359) (1,432) (113,014)
---------- ---------- ----------
Balance at December 31..................... $4,869,801 $2,604,919 $2,153,363
========== ========== ==========
<CAPTION>
December 31,
----------------------------------
Accumulated Depreciation 1998 1997 1996
------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1....................... $ 129,718 $ 97,574 $ 81,979
Depreciation for the year.................. 96,337 52,893 44,887
Accumulated depreciation on real estate
dispositions.............................. (20,260) (20,749) (22,653)
Contribution of assets..................... -- -- (6,639)
---------- ---------- ----------
Balance at December 31..................... $ 205,795 $ 129,718 $ 97,574
========== ========== ==========
</TABLE>
132
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees and Shareholders of
ProLogis Trust:
We have audited the accompanying consolidated balance sheets of ProLogis
Trust and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of earnings and comprehensive income, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1998. 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 did not audit the financial
statements of a subsidiary accounted for under the equity method of
accounting, in which the Trust has an investment in and advances to amounting
to $229.9 million as of December 31, 1998 and a loss from unconsolidated
subsidiary of $7.6 million in 1998. These statements were audited by other
auditors whose report was furnished to us, and our opinion, insofar as it
relates to the amounts included for that entity is based solely on the report
of the other auditors.
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 and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of ProLogis Trust and subsidiaries as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
March 5, 1999
133
<PAGE>
PROLOGIS TRUST
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------
ASSETS 1998 1997
------ ---------- ----------
<S> <C> <C>
Real estate............................................ $3,657,500 $3,006,236
Less accumulated depreciation........................ 254,288 171,525
---------- ----------
3,403,212 2,834,711
Investments in and advances to unconsolidated
subsidiaries.......................................... 733,863 86,139
Cash and cash equivalents.............................. 63,140 25,009
Accounts receivable.................................... 11,648 12,554
Other assets........................................... 118,866 75,540
---------- ----------
Total assets....................................... $4,330,729 $3,033,953
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Lines of credit...................................... $ 344,300 $ --
Short-term borrowings................................ 150,000 --
Senior unsecured debt................................ 1,083,641 724,052
Mortgage notes....................................... 184,964 87,937
Assessment bonds..................................... 11,281 11,894
Securitized debt..................................... 31,559 33,197
Accounts payable and accrued expenses................ 117,506 62,850
Construction payable................................. 34,025 27,221
Amount due to affiliate.............................. 395 1,138
Distributions payable................................ 39,283 33,449
Other liabilities.................................... 26,112 22,174
---------- ----------
Total liabilities.................................. 2,023,066 1,003,912
---------- ----------
Commitments and contingencies
Minority interest...................................... 51,295 53,304
Shareholders' equity:
Series A Preferred Shares; $0.01 par value; 5,400,000
shares issued and outstanding at December 31, 1998
and 1997; stated liquidation preference of $25.00
per share........................................... 135,000 135,000
Series B Convertible Preferred Shares; $0.01 par
value; 7,537,600 shares issued and outstanding at
December 31, 1998 and 8,000,300 shares issued and
outstanding at December 31, 1997; stated liquidation
preference of $25.00 per share...................... 188,440 200,008
Series C Preferred Shares; $0.01 par value; 2,000,000
shares issued and outstanding at December 31, 1998
and 1997; stated liquidation preference of $50.00
per share........................................... 100,000 100,000
Series D Preferred Shares; $0.01 par value;
10,000,000 shares issued and outstanding at December
31, 1998; stated liquidation preference of $25.00
per share........................................... 250,000 --
Common shares of beneficial interest; $0.01 par
value; 123,415,711 shares issued and outstanding at
December 31, 1998 and 117,364,148 shares issued and
outstanding at December 31, 1997.................... 1,234 1,174
Additional paid-in capital............................. 1,907,232 1,773,465
Employee share purchase notes.......................... (25,247) (27,186)
Accumulated other comprehensive income................. 23 (63)
Distributions in excess of net earnings................ (300,314) (205,661)
---------- ----------
Total shareholders' equity......................... 2,256,368 1,976,737
---------- ----------
Total liabilities and shareholders' equity......... $4,330,729 $3,033,953
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
134
<PAGE>
PROLOGIS TRUST
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
Years Ended December 31, 1998, 1997 and 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income:
Rental income................................... $345,046 $284,533 $227,000
Other real estate income........................ 17,250 12,291 5,342
Income from unconsolidated subsidiaries......... 2,755 3,278 --
Foreign currency exchange gains (losses), net... 2,938 (348) --
Foreign currency hedge income (expense)......... 2,054 (6,028) --
Interest........................................ 2,752 2,392 1,121
-------- -------- --------
Total income.................................. 372,795 296,118 233,463
-------- -------- --------
Expenses:
Rental expenses, net of recoveries of $57,415 in
1998, $42,288 in 1997 and $30,469 in 1996 and
including amounts paid to affiliate of $984 in
1998 and $280 in 1997.......................... 27,120 23,187 21,734
Property management fees paid to affiliate, net
of recoveries of $3,870 in 1997 and $3,208 in
1996........................................... -- 3,821 4,940
General and administrative, including amounts
paid to affiliate of $1,992 in 1998 and $657 in
1997........................................... 22,957 6,855 1,025
REIT management fee paid to affiliate........... -- 17,791 21,472
Depreciation and amortization................... 100,590 76,562 59,850
Interest........................................ 77,650 52,704 38,819
Interest rate hedge expense..................... 26,050 -- --
Costs incurred in acquiring management companies
from affiliate................................. -- 75,376 --
Other........................................... 7,983 3,891 2,913
-------- -------- --------
Total expenses................................ 262,350 260,187 150,753
-------- -------- --------
Earnings from operations.......................... 110,445 35,931 82,710
Minority interest share in earnings............... 4,681 3,560 3,326
-------- -------- --------
Earnings before gain (loss) on disposition of real
estate........................................... 105,764 32,371 79,384
Gain (loss) on disposition of real estate......... 5,565 7,378 (29)
-------- -------- --------
Net earnings...................................... 111,329 39,749 79,355
Less preferred share dividends.................... 49,098 35,318 25,895
-------- -------- --------
Net earnings attributable to Common Shares........ 62,231 4,431 53,460
Other comprehensive income:
Foreign currency translation adjustments........ 86 (63) --
-------- -------- --------
Comprehensive income.............................. $ 62,317 $ 4,368 $ 53,460
======== ======== ========
Weighted average Common Shares outstanding--Basic. 121,721 100,729 84,504
======== ======== ========
Weighted average Common Shares outstanding--
Diluted.......................................... 122,028 100,869 84,511
======== ======== ========
Per share net earnings attributable to Common
Shares:
Basic........................................... $ 0.51 $ 0.04 $ 0.63
======== ======== ========
Diluted......................................... $ 0.51 $ 0.04 $ 0.63
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
135
<PAGE>
PROLOGIS TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1996, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Preferred Preferred Preferred Preferred
Common Shares Shares at Shares at Shares at Shares at Employee Accumulated
----------------- Aggregate Aggregate Aggregate Aggregate Additional Share Other
Number Par Liquidation Liquidation Liquidation Liquidation Paid-in Purchase Comprehensive
of Shares Value Preference Preference Preference Preference Capital Notes Income
--------- ------- ----------- ----------- ----------- ----------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1995............ 81,416 $ 814.1 $135,000 $ -- $ -- $ -- $1,059,142 $ -- $--
Sale of Common
Shares.......... 12,218 122.5 -- -- -- -- 209,824 -- --
Sale of
preferred
shares.......... -- -- -- 201,250 100,000 -- (12,193) -- --
Dividend
reinvestment and
share purchase
plan............ 21 0.2 -- -- -- -- 356 -- --
Common Shares
issued upon
exercise of
warrants........ 22 0.2 -- -- -- -- 218 -- --
Net earnings.... -- -- -- -- -- -- -- -- --
Preferred share
dividends paid.. -- -- -- -- -- -- -- -- --
Common Share
distributions
paid............ -- -- -- -- -- -- -- -- --
Common Share
distributions
accrued......... -- -- -- -- -- -- -- -- --
------- ------- -------- -------- -------- -------- ---------- ------- ----
Balances at
December 31,
1996............ 93,677 937.0 135,000 201,250 100,000 -- 1,257,347 -- --
Sale of Common
Shares.......... 18,455 184.6 -- -- -- -- 405,082 -- --
Common Shares
issued under
employee share
purchase plan 1,357 13.6 -- -- -- -- 28,777 (27,345) --
Common Shares
issued in
Merger, net of
costs........... 3,692 36.9 -- -- -- -- 79,102 -- --
Dividend
reinvestment and
share purchase
plan............ 20 0.2 -- -- -- -- 429 -- --
Limited
partnership
units converted
to Common
Shares.......... 105 1.0 -- -- -- -- 1,587 -- --
Series B
Preferred Shares
converted to
Common Shares... 63 0.6 -- (1,242) -- -- 1,241 -- --
Principal
payments on
employee share
purchase notes.. -- -- -- -- -- -- -- 64 --
Retirements of
employee share
purchase notes.. (5) (0.1) -- -- -- -- (100) 95 --
Net earnings.... -- -- -- -- -- -- -- -- --
Preferred share
dividends paid.. -- -- -- -- -- -- -- -- --
Common Share
distributions
paid............ -- -- -- -- -- -- -- -- --
Common Share
distributions
accrued......... -- -- -- -- -- -- -- -- --
Accumulated
other
comprehensive
income--foreign
currency
translation
adjustments..... -- -- -- -- -- -- -- -- (63)
------- ------- -------- -------- -------- -------- ---------- ------- ----
Balances at
December 31,
1997............ 117,364 1,173.8 135,000 200,008 100,000 -- 1,773,465 (27,186) (63)
<CAPTION>
Distributions Total
In Excess of Shareholders'
Net Earnings Equity
------------- -------------
<S> <C> <C>
Balances at
December 31,
1995............ $(58,765) $1,136,191
Sale of Common
Shares.......... -- 209,947
Sale of
preferred
shares.......... -- 289,057
Dividend
reinvestment and
share purchase
plan............ -- 356
Common Shares
issued upon
exercise of
warrants........ -- 218
Net earnings.... 79,355 79,355
Preferred share
dividends paid.. (25,895) (25,895)
Common Share
distributions
paid............ (64,782) (64,782)
Common Share
distributions
accrued......... (25,058) (25,058)
------------- -------------
Balances at
December 31,
1996............ (95,145) 1,599,389
Sale of Common
Shares.......... -- 405,267
Common Shares
issued under
employee share
purchase plan -- 1,445
Common Shares
issued in
Merger, net of
costs........... -- 79,139
Dividend
reinvestment and
share purchase
plan............ -- 429
Limited
partnership
units converted
to Common
Shares.......... -- 1,588
Series B
Preferred Shares
converted to
Common Shares... -- --
Principal
payments on
employee share
purchase notes.. -- 64
Retirements of
employee share
purchase notes.. -- (5)
Net earnings.... 39,749 39,749
Preferred share
dividends paid.. (35,318) (35,318)
Common Share
distributions
paid............ (81,498) (81,498)
Common Share
distributions
accrued......... (33,449) (33,449)
Accumulated
other
comprehensive
income--foreign
currency
translation
adjustments..... -- (63)
------------- -------------
Balances at
December 31,
1997............ (205,661) 1,976,737
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
136
<PAGE>
PROLOGIS TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY--(Continued)
Years Ended December 31, 1996, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Preferred Preferred Preferred Preferred
Common Shares Shares at Shares at Shares at Shares at Employee Accumulated
------------------ Aggregate Aggregate Aggregate Aggregate Additional Share Other
Number Par Liquidation Liquidation Liquidation Liquidation Paid-in Purchase Comprehensive
of Shares Value Preference Preference Preference Preference Capital Notes Income
--------- -------- ----------- ----------- ----------- ----------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of Common
Shares.......... 5,494 54.9 -- -- -- -- 130,279 -- --
Sale of
preferred
shares.......... -- -- -- -- -- 250,000 (8,469) -- --
Dividend
reinvestment and
share purchase
plan............ 18 0.1 -- -- -- -- 403 -- --
Common Shares
issued upon
exercise of
warrants........ 12 0.1 -- -- -- -- 118 -- --
Limited
partnership
units converted
to Common
Shares.......... 20 0.2 -- -- -- -- 302 -- --
Series B
Preferred Shares
converted to
Common Shares... 593 5.9 -- (11,568) -- -- 11,562 -- --
Principal
payments on
employee share
purchase notes.. -- -- -- -- -- -- -- 143 --
Retirements of
employee share
purchase notes.. (85) (0.8) -- -- -- -- (2,039) 1,796 --
Issuance of
options to
subsidiaries.... -- -- -- -- -- -- 1,333 -- --
Stock-based
compensation.... -- -- -- -- -- -- 278 -- --
Net earnings.... -- -- -- -- -- -- -- -- --
Preferred share
dividends paid.. -- -- -- -- -- -- -- -- --
Common Share
distributions
paid............ -- -- -- -- -- -- -- -- --
Common Share
distributions
accrued......... -- -- -- -- -- -- -- -- --
Accumulated
other
comprehensive
income--foreign
currency
translation
adjustments..... -- -- -- -- -- -- -- -- 86
------- -------- -------- -------- -------- -------- ---------- -------- ---
Balances at
December 31,
1998............ 123,416 $1,234.2 $135,000 $188,440 $100,000 $250,000 $1,907,232 $(25,247) $23
======= ======== ======== ======== ======== ======== ========== ======== ===
<CAPTION>
Distributions Total
In Excess of Shareholders'
Net Earnings Equity
------------- -------------
<S> <C> <C>
Sale of Common
Shares.......... -- 130,334
Sale of
preferred
shares.......... -- 241,531
Dividend
reinvestment and
share purchase
plan............ -- 403
Common Shares
issued upon
exercise of
warrants........ -- 118
Limited
partnership
units converted
to Common
Shares.......... -- 302
Series B
Preferred Shares
converted to
Common Shares... -- --
Principal
payments on
employee share
purchase notes.. -- 143
Retirements of
employee share
purchase notes.. -- (244)
Issuance of
options to
subsidiaries.... -- 1,333
Stock-based
compensation.... -- 278
Net earnings.... 111,329 111,329
Preferred share
dividends paid.. (49,098) (49,098)
Common Share
distributions
paid............ (117,601) (117,601)
Common Share
distributions
accrued......... (39,283) (39,283)
Accumulated
other
comprehensive
income--foreign
currency
translation
adjustments..... -- 86
------------- -------------
Balances at
December 31,
1998............ $(300,314) $2,256,368
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
137
<PAGE>
PROLOGIS TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net earnings............................... $ 111,329 $ 39,749 $ 79,355
Minority interest.......................... 4,681 3,560 3,326
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Depreciation and amortization............ 100,590 76,562 59,850
(Gain) loss on disposition of real
estate.................................. (5,565) (7,378) 29
Straight-lined rents..................... (6,756) (5,435) (4,777)
Amortization of deferred loan costs...... 2,200 1,977 2,339
Stock-based compensation................. 278 -- --
(Income) loss from unconsolidated
subsidiaries............................ 11,108 (570) --
Foreign currency exchange (gains) losses,
net..................................... (3,227) 348 --
Foreign currency hedge (income) expense.. (2,054) 6,028 --
Interest rate hedge expense.............. 26,050 -- --
Costs incurred in acquiring management
companies from affiliate................ -- 75,376 --
Increase in accounts receivable and other
assets.................................... (36,156) (24,390) (10,166)
Increase in accounts payable and accrued
expenses.................................. 32,580 21,464 2,531
Increase in other liabilities.............. 3,938 4,044 3,714
Increase (decrease) in amount due to
affiliate................................. (743) 1,138 --
----------- --------- ---------
Net cash provided by operating
activities............................ 238,253 192,473 136,201
----------- --------- ---------
Investing activities:
Real estate investments.................... (695,764) (601,577) (657,873)
Tenant improvements and lease commissions.. (12,757) (15,539) (14,806)
Recurring capital expenditures............. (8,038) (5,523) (2,851)
Proceeds from dispositions of real estate.. 109,336 137,147 9,652
Investments in and advances to
unconsolidated subsidiaries............... (657,499) (85,569) --
----------- --------- ---------
Net cash used in investing activities.. (1,264,722) (571,061) (665,878)
----------- --------- ---------
Financing activities:
Proceeds from sale of Common Shares, net
of expenses............................... 130,334 330,712 145,531
Proceeds from sale of preferred shares,
net of expenses........................... 241,531 -- 289,057
Net proceeds from sale of shares to
affiliate................................. -- 75,000 64,416
Proceeds from exercised warrants, dividend
reinvestment and employee share purchase
plan...................................... 521 429 574
Repurchase of Common Shares................ (244) (5) --
Proceeds from issuance of senior unsecured
debt...................................... 374,463 199,772 199,632
Proceeds from issuance of mortgage notes... 66,000 -- --
Debt issuance and other transaction costs
incurred.................................. (5,848) (3,171) (4,699)
Payments on senior unsecured debt.......... (15,000) -- --
Distributions paid on Common Shares........ (151,050) (106,556) (85,340)
Distributions paid to minority interest
holders................................... (6,409) (5,665) (5,237)
Dividends paid on preferred shares......... (49,098) (35,318) (25,895)
Principal payments on employee share
purchase notes............................ 143 64 --
Payments on derivative financial
instruments............................... (3,974) 1,894 --
Proceeds from lines of credit and short-
term borrowings........................... 1,569,225 530,991 411,200
Payments on lines of credit and short-term
borrowings................................ (1,074,925) (569,591) (453,600)
Regularly scheduled principal payments on
secured debt.............................. (5,658) (4,925) (3,738)
Mortgage notes principal payments at
maturity.................................. (5,411) (14,804) (19,689)
----------- --------- ---------
Net cash provided by financing
activities............................ 1,064,600 398,827 512,212
----------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................ 38,131 20,239 (17,465)
Cash and cash equivalents, beginning of
year....................................... 25,009 4,770 22,235
----------- --------- ---------
Cash and cash equivalents, end of year...... $ 63,140 $ 25,009 $ 4,770
=========== ========= =========
Noncash investing and financing activities:
In conjunction with real estate acquired:
Assumption of existing mortgage notes.... $ 39,845 $ 12,805 $ 18,103
Issuance of Common Shares................ $ -- $ 1,000 $ --
In conjunction with Merger (Note 8):
Market value of Common Shares issued to
affiliate............................... $ -- $ 79,840 $ --
Market value of tangible net assets
acquired from affiliate................. $ -- $ (4,464) $ --
Notes received for Common Shares issued
under employee share purchase plan........ $ -- $ 27,345 $ --
Retirements of employee share purchase
notes..................................... $ (1,796) $ (95) $ --
Foreign currency translation adjustments... $ (86) $ 63 $ --
Conversion of limited partnership units
into Common Shares........................ $ 302 $ 1,588 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
138
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Description of Business:
Business
ProLogis Trust ("ProLogis"), formerly Security Capital Industrial Trust, a
Maryland real estate investment trust ("REIT"), is a publicly held global
owner and lessor of distribution facilities focused exclusively on meeting the
distribution space needs of international, national, regional and local
industrial real estate users through the ProLogis Operating System(TM).
ProLogis engages in the acquisition, development, marketing, leasing and long-
term ownership of industrial distribution facilities, and the development of
master-planned distribution parks and corporate distribution facilities for
its customers. ProLogis deploys capital in markets that ProLogis believes have
excellent long-term growth prospects and where ProLogis believes it can
achieve a strong market position through the acquisition and development of
flexible facilities designed for both warehousing and light manufacturing
uses. In addition, ProLogis has invested in a North American company and a
European company, both of which operate refrigerated distribution facilities.
Name Change
The company changed its name to ProLogis Trust effective July 1, 1998. The
name change is intended to create stronger name recognition among its
customers as ProLogis expands globally. ProLogis recognized $1.7 million of
expenses associated with the name change in 1998, which has been included with
other expenses.
Proposed Merger Transaction
ProLogis has entered into an Agreement and Plan of Merger dated as of
November 16, 1998, as amended, (the "Merger Agreement") with Meridian
Industrial Trust, Inc. ("Meridian"), whereby Meridian would be merged with and
into ProLogis (the "Merger"). Meridian is a publicly traded REIT that owns and
leases industrial and refrigerated distribution facilities in the United
States. The Merger Agreement, which must be approved by at least two-thirds of
the holders of ProLogis common shares of beneficial interest, par value $0.01
per share ("Common Shares") and a majority of the holders of Meridian's common
stock, provides that each share of Meridian common stock will be exchanged for
1.10 Common Shares. Meridian has approximately 34.2 million shares of common
stock and common stock equivalents outstanding as of March 5, 1999. To the
extent ProLogis' average price of Common Shares is less than $22.725 per
share, as determined over a 15-day trading period selected at random from the
30 trading days ending five trading days prior to closing, ProLogis will
contribute cash, not to exceed $2.00 per share. Additionally, ProLogis will
assume Meridian's outstanding liabilities (approximately $613.2 million as of
December 31, 1998) and will exchange a new share of ProLogis cumulative
redeemable preferred shares with an 8.75% annual dividend rate ($2.1875 per
share) for each outstanding share of Meridian Series D preferred stock
(aggregate liquidation value of $50.0 million).
The Joint Proxy Statement and Prospectus of ProLogis and Meridian was
mailed to ProLogis' shareholders and Meridian's stockholders on March 2, 1999.
ProLogis' shareholders and Meridian's stockholders will vote on the Merger at
special meetings to be held on March 30, 1999.
2. Summary of Significant Accounting Policies:
Principles of Financial Presentation
The accounts of ProLogis, its subsidiaries and its majority-owned and
controlled partnerships are consolidated in the accompanying financial
statements. The effects of intercompany transactions have been eliminated.
Certain amounts included in the consolidated financial statements for prior
years have been reclassified to conform to the 1998 financial statement
presentation.
139
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of 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.
REIT Organization Status
In January 1993, ProLogis, which has elected to be taxed as a REIT under
the Internal Revenue Code of 1986, as amended, was formed as a Maryland real
estate investment trust.
REITs are not required to pay federal income taxes if minimum distribution
and income, asset and shareholder tests are met. During 1998, 1997 and 1996,
ProLogis was in compliance with the REIT requirements. Thus, no federal income
tax provision has been reflected in the accompanying consolidated financial
statements for ProLogis and its wholly-owned subsidiaries. The foreign
countries that ProLogis operates in do not recognize REITs under their
respective tax laws. Accordingly, ProLogis has recognized the applicable
foreign country income taxes in its results of operations.
Real Estate and Depreciation
Real estate is carried at cost, which is not in excess of estimated fair
market value. Costs directly associated with the successful acquisition,
renovation or development of real estate are capitalized. Direct costs
associated with unsuccessful acquisitions are expensed at the time the pursuit
is abandoned.
Depreciation is computed over the estimated useful lives of depreciable
property on a straight-line basis: 10 years for tenant improvements, 30 years
for acquired buildings and 40 years for buildings developed by ProLogis.
Long-lived assets (primarily real estate) to be disposed of are reported at
the lower of their carrying amount or fair value less cost to sell. ProLogis'
management also periodically reviews long-lived assets (primarily real estate)
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
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", management's review involves comparing
current and future operating performance of the assets, the most significant
of which is undiscounted operating cash flows, to the carrying value of the
assets. Based on this analysis, a provision for possible loss (based upon a
comparison of discounted cash flows to ProLogis' carrying value) is recognized
if necessary. In management's opinion, long-lived assets, including real
estate assets, are not carried at amounts in excess of their estimated net
realizable values.
ProLogis acquired certain real estate through the formation of partnerships
(as discussed in Note 6) wherein ProLogis contributed cash and the limited
partners contributed real estate in exchange for partnership units which are
ultimately exchangeable for Common Shares. In consolidating the partnerships'
assets, real estate cost includes the estimated fair value attributable to the
limited partners' interests as of the acquisition dates.
ProLogis Development Services Incorporated ("ProLogis Development
Services") develops corporate distribution facilities to meet customer
requirements, which are subsequently sold to the customer or third parties.
ProLogis Development Services also contracts on a fee basis to develop
distribution facilities for customers. ProLogis owns 100% of the preferred
stock of ProLogis Development Services and realizes substantially all economic
benefits of its activities. Because ProLogis advances mortgage loans to
ProLogis Development
140
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Services to fund its acquisition, development and construction activities,
ProLogis Development Services is consolidated with ProLogis. Accordingly,
these loans are reflected as real estate investments in ProLogis' consolidated
financial statements. ProLogis Development Services is not a qualified REIT
subsidiary of ProLogis. Accordingly, provisions for federal income taxes are
recognized, as appropriate.
Capitalization Policy
Renovations and improvements are capitalized and depreciated over their
estimated useful lives. Repairs and maintenance costs are expensed as incurred
to the extent they are not acquisition-related renovation costs identified
during ProLogis' pre-acquisition due diligence.
Management costs incurred for development (including land acquisitions),
renovation and leasing activities that are incremental and identifiable to a
specific activity are capitalized. Prior to April 1, 1998, ProLogis also
capitalized direct and incremental management costs incurred in connection
with the acquisition of operating facilities. In accordance with Emerging
Issues Task Force Issue 97-11, "Accounting for Internal Costs Relating to Real
Estate Property Acquisitions", which was effective on April 1, 1998, such
costs are no longer capitalized.
Costs capitalized to real estate are depreciated over the estimated useful
lives of the real estate. Costs capitalized related to leasing activities are
included with other assets and are amortized over the lease term. ProLogis'
average lease term is between four and five years.
ProLogis capitalizes interest costs incurred during the land development or
construction period of qualifying projects.
Unconsolidated Subsidiaries
ProLogis' investments in the preferred stock of certain companies
(excluding ProLogis Development Services) are accounted for under the equity
method. Accordingly, these investments are recognized at ProLogis' cost as
adjusted for ProLogis' proportionate share of the earnings or losses of the
companies. ProLogis' proportionate share of the earnings or losses of these
companies is recognized in total income.
Cash and Cash Equivalents
ProLogis considers all cash on hand, demand deposits with financial
institutions and short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents.
Costs of Raising Capital
Costs incurred in connection with the issuance of shares are deducted from
shareholders' equity. Costs incurred in connection with the incurrence or
renewal of debt are capitalized, included with other assets, and amortized
over the term of the related loan or the renewal term.
Minority Interest
Minority interest is carried at cost and represents limited partners'
interests in various real estate partnerships controlled by ProLogis. Certain
minority interests are carried at the pro rata share of the estimated fair
value of the real estate contributed as of the acquisition dates, as adjusted
for subsequent earnings, contributions and distributions. Common Shares issued
upon exchange of limited partnership units will be accounted for at the cost
of the minority interest surrendered.
141
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Interest Rate Contracts
ProLogis utilizes various interest rate contracts to hedge interest rate
risk on anticipated debt offerings. To the extent the interest rate contracts
are designated and effective as hedges of identified debt issuances which have
a high probability of occurring, gains or losses resulting from changes in the
market value of these contracts are deferred and amortized as a component of
interest expense over the term of the related debt issuance. Management
periodically evaluates the interest rate contracts in light of current market
conditions. Should management determine that an interest rate contract can no
longer be considered an effective hedge or if the occurrence of the
anticipated debt issuance can no longer be considered a high probability, the
interest rate contract will be marked to market value as of the end of the
period and the associated income or expense will be recognized in net
earnings.
Foreign Currency Exchange Gains or Losses
ProLogis' consolidated subsidiaries whose functional currency is not the
U.S. dollar translate their financial statements into U.S. dollars. Assets and
liabilities are translated at the exchange rate in effect as of the financial
statement date. Income statement accounts are translated using the average
exchange rate for the period. Gains and losses resulting from the translation
are included in accumulated other comprehensive income as a separate component
of shareholders' equity.
Foreign subsidiaries of ProLogis have certain transactions denominated in
currencies other than their functional currency. In these instances,
nonmonetary assets and liabilities are remeasured at the historical exchange
rate, monetary assets and liabilities are remeasured at the exchange rate in
effect at the end of the period, and income statement accounts are remeasured
at the average exchange rate for the period. Remeasurement gains and losses of
such foreign subsidiaries are included in ProLogis' results of operations.
ProLogis recognized a gain from remeasurement of $3,227,000 and a loss from
remeasurement of $348,000 for the years ended December 31, 1998 and 1997,
respectively. ProLogis did not have foreign subsidiaries in 1996.
Transaction gains or losses occur when a transaction, denominated in a
currency other than the functional currency, is settled and the functional
currency cash flows realized are more or less than expected based upon the
exchange rate in effect when the transaction was initiated. Transaction gains
and losses are included in ProLogis' results of operations. ProLogis
recognized a net foreign currency exchange transaction loss of $289,000 for
the year ended December 31, 1998. ProLogis did not incur transaction gains or
losses in 1997 due to its limited foreign operations in that year. ProLogis
had no foreign subsidiaries in 1996.
Revenue Recognition
ProLogis leases its operating facilities under operating leases and
recognizes the total lease payments provided for under the leases on a
straight-line basis over the lease term. A provision for possible loss is made
when collection of receivables is considered doubtful.
Gains or losses on the disposition of real estate are recorded when the
recognition criteria set forth under GAAP have been met, generally at the time
title is transferred and ProLogis has no future obligations under the
contract.
Rental Expenses
Rental expenses include costs of on-site and property management personnel,
utilities, repairs and maintenance, property insurance and real estate taxes,
net of amounts recovered from tenants under the terms of the respective
leases.
142
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
ProLogis adopted SFAS No. 123, "Accounting for Stock-Based Compensation",
which allows ProLogis to continue to account for its various stock-based
compensation plans using Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. Under
APB No. 25, if the exercise price of the stock options issued equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized, however, certain pro forma earnings per
share disclosures are required. See Note 11.
Comprehensive Income
ProLogis adopted SFAS No. 130, "Reporting Comprehensive Income", on January
1, 1998. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components. Comprehensive income is the total of
net earnings attributable to Common Shares and other comprehensive income.
The adoption of this standard did not have a significant effect on the
consolidated financial position, results of operations or financial statement
disclosures of ProLogis. For the years ended December 31, 1998 and 1997,
ProLogis had one item of other comprehensive income, the cumulative
translation adjustments account. This account has been recognized as a
component of shareholders' equity. ProLogis had no items of other
comprehensive income in 1996. ProLogis' displays comprehensive income and its
components in its consolidated statements of earnings and comprehensive
income.
Earnings Per Share
SFAS No. 128, "Earnings Per Share" was adopted in 1997. SFAS No. 128
replaced 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 would result if securities or other
contracts to issue Common Shares were exercised or converted to Common Shares
or resulted in the issuance of Common Shares that then shared in earnings. The
adoption of SFAS No. 128 did not result in the restatement of previously
reported earnings per share. See Note 10.
Segment Reporting
ProLogis adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information" in 1998. SFAS No. 131 provides standards for the
reporting of financial information about a public enterprise's operating
segments, as well as related disclosures about products and services,
geographic locations and major customers. See Note 16.
Recent Accounting Pronouncements
In April 1998 Statement of Position ("SOP") 98-5 "Reporting on the Costs of
Start-Up Activities" was issued which requires that costs associated with
organizational, pre-opening, and start-up activities be expensed as incurred.
SOP 98-5 is effective for fiscal years beginning after December 15, 1998.
Through December 31, 1998, ProLogis capitalized costs associated with start-up
activities and amortized such costs over an appropriate period, generally five
years. Beginning January 1, 1999, ProLogis will adopt SOP 98-5 and will
expense all unamortized organizational and start-up costs, approximating $1.6
million, as a cumulative effect of a change in accounting principle in the
first quarter of 1999.
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities" was issued in June 1998. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999 and early adoption is allowed. SFAS No.
133 provides comprehensive guidelines for the recognition and measurement of
derivatives and hedging activities and, specifically, requires all derivatives
to be recorded on the balance sheet at fair value as an asset or liability,
with an offset to accumulated other comprehensive income. Management does not
believe this standard will have a significant effect on ProLogis' consolidated
financial position, results of operations or financial statement disclosures.
143
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Real Estate
Real estate investments consisting of income producing industrial
distribution facilities, facilities under development and land held for future
development, at cost, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Operating facilities:
Improved land........................... $ 517,803(1) $ 420,019(1)
Buildings and improvements.............. 2,731,203(1) 2,233,585(1)
---------- ----------
3,249,006 2,653,604
---------- ----------
Facilities under development (including
cost of land)............................ 209,670(2)(3) 180,268(2)
Land held for development................. 180,796(4) 159,645(4)
Capitalized preacquisition costs.......... 18,028(5) 12,719(5)
---------- ----------
Total real estate..................... 3,657,500 3,006,236
Less accumulated depreciation............. 254,288 171,525
---------- ----------
Net real estate....................... $3,403,212 $2,834,711
========== ==========
</TABLE>
- --------
(1) As of December 31, 1998 and 1997, ProLogis had 1,099 and 1,005 operating
buildings, respectively, consisting of 104,540,000 and 90,843,000 square
feet, respectively.
(2) Facilities under development consist of 55 buildings aggregating 8,022,000
square feet as of December 31, 1998 and 62 buildings aggregating 8,442,000
square feet as of December 31, 1997.
(3) In addition to the December 31, 1998 construction payable of $34.0
million, ProLogis had unfunded commitments on its contracts for facilities
under construction totaling $131.7 million.
(4) Land held for future development consisted of 1,673 acres as of December
31, 1998 and 1,702 acres as of December 31, 1997.
(5) Capitalized preacquisition costs include $2,199,000 and $3,644,000 of
funds on deposit with title companies as of December 31, 1998 and 1997,
respectively, for future acquisitions.
ProLogis' operating facilities, facilities under development and land held
for future development are located in the United States, Mexico and Europe as
follows (percentage based upon total cost):
<TABLE>
<CAPTION>
December
31,
------------
1998 1997
----- -----
<S> <C> <C>
United States............................................... 93.06% 97.92%
Europe...................................................... 4.66 1.10
Mexico...................................................... 2.28 0.98
----- -----
100.0% 100.0%
===== =====
</TABLE>
No individual market represents more than 10% of ProLogis' real estate
assets.
ProLogis Development Services
The outstanding balances of development and mortgage loans made by ProLogis
to ProLogis Development Services for the purchase of distribution facilities
and land for distribution facility development aggregated $247.5 million and
$184.8 million as of December 31, 1998 and 1997, respectively. The gains
recognized on disposition of undepreciated property by ProLogis Development
Services and the fees generated by ProLogis Development Services are reflected
as other real estate income by ProLogis.
144
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Operating Lease Agreements
ProLogis leases its facilities 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 tenant. As
of December 31, 1998, minimum lease payments receivable on leases with lease
periods greater than one year are as follows (in thousands):
<TABLE>
<S> <C>
1999.......................... $ 349,921
2000.......................... 297,911
2001.......................... 234,219
2002.......................... 176,005
2003.......................... 121,663
Thereafter.................... 279,075
----------
$1,458,794
==========
</TABLE>
4. Unconsolidated Subsidiaries:
Investments in and advances to unconsolidated subsidiaries are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
-------- -------
<S> <C> <C>
Insight................................................. $ 1,520 $ 500
-------- -------
ProLogis Logistics:
Investment (1)........................................ 13,241 7,404
Note receivable....................................... 128,634 75,207
Accrued interest and other receivables................ 9,146 3,028
-------- -------
151,021 85,639
-------- -------
Frigoscandia S.A.:
Investment (1)........................................ 2,900 --
Note receivable from Frigoscandia S.A................. 85,148 --
Note receivable from Frigoscandia Holding AB.......... 91,519 --
Mortgage note receivable from Frigoscandia Limited UK. 30,000 --
Accrued interest and other receivables................ 11,998 --
-------- -------
221,565 --
-------- -------
Kingspark S.A.:
Investment (1)........................................ 22,413 --
Note receivable from Kingspark S.A.................... 111,744 --
Note receivable from ProLogis Kingspark............... 34,391 --
Mortgage note receivable from ProLogis Kingspark...... 52,371 --
Accrued interest and other receivables................ 3,850 --
-------- -------
224,769 --
-------- -------
Garonor Holdings:
Investment (1)........................................ 5,508 --
Note receivable....................................... 129,395 --
Accrued interest receivable........................... 85 --
-------- -------
134,988 --
-------- -------
Total................................................... $733,863 $86,139
======== =======
</TABLE>
145
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
- --------
(1) Investment represents ProLogis' investment in the preferred stock of the
respective companies as adjusted for ProLogis' share of each company's net
earnings or loss.
Insight
ProLogis Development Services has a 23.1% ownership interest in Insight,
Inc. ("Insight"), a privately owned logistics optimization consulting company.
ProLogis Development Services invested an additional $500,000 in Insight on
January 2, 1999 and is committed to investing an additional $500,000 through
July 1, 1999, which would bring its ownership interest to 33.3%. This
investment is accounted for under the equity method. ProLogis recognized
$19,700 of income from its investment in Insight for the year ended December
31, 1998. Prior to July 1, 1998, this investment was accounted for under the
cost method.
ProLogis Logistics
ProLogis owns 100% of the preferred stock of ProLogis Logistics Services
Incorporated ("ProLogis Logistics"). ProLogis Logistics owns 100% of the
membership interests of a refrigerated distribution company operating in the
United States and Canada, CS Integrated LLC ("CSI"). Prior to June 12, 1998,
ProLogis Logistics owned, at various points in time, between 60.0% and 77.1%
of CSI. As of December 31, 1998, ProLogis had invested $19.9 million in the
preferred stock of ProLogis Logistics. As of December 31, 1998, CSI owned or
operated refrigerated distribution facilities aggregating 114.1 million cubic
feet.
The common stock of ProLogis Logistics is owned by an unrelated party.
ProLogis recognizes substantially all economic benefits of ProLogis Logistics
and its subsidiaries.
As of December 31, 1998, ProLogis had a $128.6 million note receivable from
ProLogis Logistics. The note is unsecured, bears interest at 8% per annum
(reduced from 10% on November 1, 1998) and matures on April 24, 2002. Interest
payments on the note are due annually.
ProLogis accounts for its investment in ProLogis Logistics under the equity
method. ProLogis recognized income (including interest income on the note
receivable and a management fee payable from CSI) from its investment in
ProLogis Logistics of $7.3 million and $3.3 million for the years ended
December 31, 1998 and 1997, respectively.
Frigoscandia S.A.
On January 16, 1998, ProLogis invested in 100% of the preferred stock of
Frigoscandia S.A., a Luxembourg company, which acquired on that date a
refrigerated distribution company headquartered in Sweden, Frigoscandia AB.
Frigoscandia AB is 100% owned by Frigoscandia Holding AB, which is 100% owned
by a wholly owned subsidiary of Frigoscandia S.A. As of December 31, 1998,
Frigoscandia AB, which operates in nine European countries, owned or leased
192.0 million cubic feet of refrigerated distribution facilities. As of
December 31, 1998, ProLogis had invested $28.5 million in the preferred stock
of Frigoscandia S.A. Prior to September 30, 1998, the common stock of
Frigoscandia S.A. was owned by Security Capital Group Incorporated ("Security
Capital"), ProLogis' largest shareholder. On that date, the common stock of
Frigoscandia S.A. was contributed to a limited liability company, in which
unrelated parties own 100% of the voting interests and Security Capital owns
100% of the non-voting interests. ProLogis recognizes substantially all
economic benefits of the activities of Frigoscandia S.A. and its subsidiaries.
As of December 31, 1998, ProLogis had a $91.5 million note receivable from
Frigoscandia Holding AB and an $85.1 million note receivable from Frigoscandia
S.A. These unsecured notes bear interest at 5% per
146
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
annum (reduced from 8% on November 1, 1998) and are due on demand ($80.0
million of the note receivable from Frigoscandia S.A. is due on July 15,
2008). Additionally, as of December 31, 1998, ProLogis had a $30.0 million
mortgage note receivable from Frigoscandia Limited UK, a subsidiary of
Frigoscandia AB. The mortgage note receivable, which provides for interest at
7% per annum (reduced from 8% on April 1, 1998) and matures on March 20, 2018,
is secured by refrigerated distribution facilities.
ProLogis accounts for its investment in Frigoscandia S.A. under the equity
method. ProLogis recognized a loss of $7.5 million for 1998 (including
interest income on the mortgage note and notes receivable) from its investment
in Frigoscandia S.A.
Frigoscandia AB has a multi-currency, three-year revolving credit agreement
through a consortium of 11 European banks in the currency equivalent of
approximately $200 million as of December 31, 1998. The loan bears interest at
each currency's LIBOR rate plus 0.55%. ProLogis has entered into a guaranty
agreement for 25% of the loan balance.
Kingspark S.A.
On August 14, 1998, ProLogis invested in 100% of the preferred stock of
Kingspark Holding S.A. ("Kingspark S.A."), a Luxembourg company, that acquired
on that date an industrial real estate development company, Kingspark Group
Holdings Limited ("ProLogis Kingspark"), operating in the United Kingdom. As
of December 31, 1998, ProLogis Kingspark had 0.4 million square feet of
operating facilities, 0.4 million square feet of facilities under development
and 0.2 million square feet of facilities being developed under construction
management agreements. Additionally, as of December 31, 1998, ProLogis
Kingspark owned 554 acres and controlled 1,489 acres of land through letters
of intent or contingent contracts for future development of 35.8 million
square feet of distribution facilities. As of December 31, 1998, ProLogis had
invested $24.0 million in the preferred stock of Kingspark S.A. The common
stock of Kingspark S.A. is currently owned by Security Capital. However,
Security Capital has indicated that it plans to sell or contribute the common
stock to a limited liability company. ProLogis recognizes substantially all
economic benefits of the activities of Kingspark S.A. and its subsidiaries.
As of December 31, 1998, ProLogis had a $111.7 million note receivable from
Kingspark S.A. and a $34.4 million note receivable from ProLogis Kingspark.
These unsecured notes bear interest at 8% per annum and are due on demand. The
interest rate on the note receivable from Kingspark S.A. was reduced to 5% per
annum effective January 1, 1999. Also, as of December 31, 1998, ProLogis had a
$52.4 million mortgage note receivable from ProLogis Kingspark which bears
interest at 8% per annum and is secured by certain land parcels.
ProLogis accounts for its investment in Kingspark S.A. under the equity
method. ProLogis recognized $2.9 million of income in 1998 (including interest
income on the mortgage note and notes receivable) from its investment in
Kingspark S.A.
Subsequent to December 31, 1998, ProLogis Kingspark entered into a line of
credit agreement with a bank in the United Kingdom. The credit agreement,
which provides for borrowings of up to 10.0 million British pounds
(approximately $16.6 million as of December 31, 1998), has been guaranteed by
ProLogis.
Garonor Holdings
On December 29, 1998, ProLogis invested in 100% of the preferred stock of
Garonor Holdings S.A. ("Garonor Holdings"), a Luxembourg company, that
acquired on that date in excess of 99% of the voting stock of Garonor S.A. As
of December 31, 1998, ProLogis had invested $5.6 million in the preferred
stock of Garonor
147
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Holdings. Garonor S.A. owns and leases approximately 5.25 million square feet
of industrial distribution facilities located in France. Garonor Holdings is
in the process of acquiring the remaining voting stock of Garonor S.A.
The common stock of Garonor Holdings is owned by Security Capital. Security
Capital can require ProLogis to purchase the Garonor Holdings' common stock
held by Security Capital beginning January 1, 2000. ProLogis recognizes
substantially all of the economic benefits of Garonor Holdings and its
subsidiaries.
ProLogis accounts for this investment under the equity method. Should
Garonor Holdings acquire 100% of the voting stock of Garonor S.A., it is
anticipated that the ownership of Garonor Holdings will be restructured such
that ProLogis would become the sole owner and Garonor Holdings, as a wholly-
owned subsidiary of ProLogis, would be consolidated with the accounts of
ProLogis. ProLogis recognized income of $6,000 from its investment in Garonor
Holdings in 1998.
As of December 31, 1998, ProLogis had a $129.4 million note receivable from
Garonor Holdings. The note is unsecured, bears interest at 8.0% per annum and
is due on demand. Interest payments on the note are due annually.
In connection with the acquisition of Garonor S.A., Garonor Holdings
obtained two credit facilities from a French bank. One facility is in the
amount of 200.0 million French francs ($35.6 million as of December 31, 1998)
and is guaranteed by ProLogis. ProLogis has guaranteed an additional 10.0
million French francs ($1.8 million as of December 31, 1998), which
approximates the annual interest to be charged on the facility. The second
facility, in the amount of 870.0 million French francs (of which 770.0 million
French francs was outstanding as of December 31, 1998), is secured by the real
estate owned by Garonor S.A. ProLogis has guaranteed 50.0 million French
francs of the amount outstanding as of December 31, 1998 ($8.9 million as of
December 31, 1998). Garonor has the ability to borrow an additional 100.0
million French francs under this facility of which ProLogis will guarantee
50.0 million French francs. The total guaranty of 100.0 million French francs
can be reduced as Garonor S.A. meets certain operating covenants.
Summarized Financial Information
Summarized financial information for ProLogis' unconsolidated subsidiaries
as of and for the year ended December 31, 1998 is presented below (in millions
of U.S. dollars).
<TABLE>
<CAPTION>
ProLogis Frigoscandia Kingspark Garonor
Logistics (1) S.A. (2) S.A. (3) Holdings (4)
------------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Total assets............ $272.1 $613.6 $297.4 $380.0
Total liabilities (5)... $258.7 $606.7 $272.0 $374.3
Minority interest....... $ -- $ 2.0 $ -- $ --
Shareholders' equity.... $ 13.4 $ 4.9 $ 25.4 $ 5.7
Revenues................ $134.5 $399.1 $ 7.6 $ 0.2
Adjusted EBITDA (6)..... $ 22.9 $ 55.0 $ 5.8 $ 0.2
Net earnings (loss) (7)
(8).................... $ 4.6 $(27.0)(9) $ (1.6)(10) $ --
</TABLE>
- --------
(1) On June 15, 1998, additional refrigerated distribution facilities were
acquired at a cost of $61.3 million.
(2) Frigoscandia S.A. was acquired on January 16, 1998.
(3) Kingspark S.A. was acquired on August 14, 1998.
(4) Garonor Holdings was acquired on December 29, 1998.
(5) Includes amounts due to ProLogis of $137.8 million from ProLogis
Logistics, $218.7 million from Frigoscandia S.A., $202.4 million from
Kingspark S.A. and $129.5 million from Garonor Holdings.
148
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
(6) Adjusted EBITDA represents earnings from operations before interest
expense, interest income, current and deferred income taxes, depreciation,
amortization and adjustments from the remeasurement of intercompany and
other debt based on current foreign currency exchange rates.
(7) ProLogis' share of the net earnings (loss) and interest income recognized
by ProLogis on intercompany notes and mortgage notes receivable are
recognized in the Statements of Earnings and Comprehensive Income as
"Income (loss) from Unconsolidated Subsidiaries".
(8) Net earnings (loss) of each company includes interest expense on
intercompany notes and mortgage notes payable.
(9) Includes a net loss of $13.3 million from the remeasurement of
intercompany and other debt based on the foreign currency exchange rates
in effect as of December 31, 1998.
(10) Includes a net loss of $0.9 million from the remeasurement of
intercompany debt based on foreign currency exchange rates in effect as
of December 31, 1998.
5. Borrowings:
Lines of Credit
ProLogis has a credit agreement with NationsBank, N.A. ("NationsBank") as
agent for a bank group that provides for a $350.0 million unsecured revolving
line of credit. Borrowings bear interest at ProLogis' option, at either (a)
the greater of the federal funds rate plus 0.5% and the prime rate, or (b)
LIBOR plus 0.75% based upon ProLogis' current senior debt ratings. The prime
rate was 7.75% and the 30-day LIBOR rate was 5.0641% as of December 31, 1998.
Additionally, the credit agreement provides for a commitment fee of 0.15% per
annum of the unused line of credit balance. Under a competitive bid option
contained in the credit agreement, ProLogis may be able to borrow at a lower
interest rate spread over LIBOR, depending on market conditions. This option
is available on up to $100.0 million of borrowings. The line of credit matures
on May 1, 2000 and may be extended annually for an additional year with the
approval of NationsBank and the other participating lenders. ProLogis was in
compliance with all covenants contained in the credit agreement as of December
31, 1998. As of December 31, 1998, $329.0 million of borrowings were
outstanding on the line of credit.
In addition, ProLogis has a $25.0 million short-term unsecured
discretionary line of credit with NationsBank that matures on October 1, 1999.
By agreement between ProLogis and NationsBank, the rate of interest on and the
maturity date of each advance are determined at the time of each advance.
There were $15.3 million of borrowings outstanding on the line of credit as of
December 31, 1998.
A summary of ProLogis' lines of credit borrowings is as follows (dollar
amounts in thousands):
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Weighted average daily interest rate....... 6.46% 6.75% 7.02%
Borrowings outstanding at December 31...... $344,300 $ -- $ 38,600
Weighted average daily borrowings.......... $174,901 $ 56,938 $ 44,268
Maximum borrowings outstanding at any month
end....................................... $344,300 $143,800 $124,200
Total lines of credit at December 31....... $375,000 $375,000 $350,000
</TABLE>
Short-term Borrowings
ProLogis has a credit agreement with NationsBank that provides for a short-
term loan of $150.0 million. The credit agreement expires on May 1, 1999.
Borrowings bear interest at LIBOR plus 1.00% and are subject to the covenants
contained in the $350.0 million unsecured credit agreement with NationsBank.
As of December 31, 1998, ProLogis was in compliance with all such covenants.
149
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Senior Unsecured Debt
ProLogis has issued senior unsecured notes and medium-term unsecured notes
that bear interest at fixed rates, payable semi-annually (the "Notes"). The
Notes are summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Principal Principal
Date of Original Coupon Maturity Outstanding at Payment
Issuance Principal Rate Date December 31, 1998 (1) Requirement
-------- --------- ------ -------- --------------------- -----------
<S> <C> <C> <C> <C> <C>
May 16,
1995 $ 17,500 7.250% 05/15/00 $ 17,478 (2)
May 16,
1995 17,500 7.300% 05/15/01 17,462 (2)
May 17,
1996 50,000 7.250% 05/15/02 49,975 (3)
October 9,
1998 125,000 7.000% 10/01/03 125,000 (2)
July 20,
1998 250,000 7.050% 07/15/06 249,493 (2)
May 17,
1996 100,000 7.950% 05/15/08 99,863 (4)
March 2,
1995 150,000 8.720% 03/01/09 150,000 (5)
May 16,
1995 75,000 7.875% 05/15/09 74,724 (6)
February
4, 1997 100,000 7.810% 02/01/15 100,000 (7)
March 2,
1995 50,000 9.340% 03/01/15 50,000 (8)
May 17,
1996 50,000 8.650% 05/15/16 49,866 (9)
July 11,
1997 100,000 7.625% 07/01/17 99,780 (2)
---------- ----------
$1,085,000 $1,083,641
========== ==========
</TABLE>
- --------
(1)Amounts are net of unamortized original issue discount.
(2)Principal due at maturity.
(3)Annual principal payments of $12.5 million from 5/15/99 to 5/15/02.
(4)Annual principal payments of $25.0 million from 5/15/05 to 5/15/08.
(5)Annual principal payments of $18.75 million from 3/1/02 to 3/1/09.
(6)Annual principal payments of $9.375 million from 5/15/02 to 5/15/09.
(7)Annual principal payments ranging from $10.0 million to $20.0 million from
2/1/10 to 2/1/15.
(8)Annual principal payments ranging from $5.0 million to $12.5 million from
3/1/10 to 3/1/15.
(9)Annual principal payments ranging from $5.0 million to $12.5 million from
5/15/10 to 5/15/16.
The Notes rank equally with all other unsecured and unsubordinated
indebtedness of ProLogis from time to time outstanding. The Notes are
redeemable at any time at the option of ProLogis. Such redemption and other
terms are governed by the provisions of an indenture agreement between
ProLogis and State Street Bank and Trust Company, as trustee.
Under the terms of the indenture agreement, ProLogis must meet certain
financial covenants and ProLogis was in compliance with all such covenants as
of December 31, 1998.
150
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Mortgage Notes, Assessment Bonds and Securitized Debt
Mortgage notes, assessment bonds and securitized debt consisted of the
following as of December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Balloon
Periodic Payment
Interest Maturity Payment Principal Due at
Description Rate (1) Date Date Balance Maturity
----------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Mortgage notes:
Princeton Distribution
Center..................... 9.250% 02/19/99 (2) $ 378 $ 378
Oxmoor Distribution Center
#1......................... 8.390 04/01/99 (2) 3,924 3,895
Oxmoor Distribution Center
#2......................... 8.100 05/01/99 (2) 1,449 1,439
Oxmoor Distribution Center
#3......................... 8.100 05/01/99 (2) 1,439 1,426
Peter Cooper Distribution
Center #1.................. 10.625 06/01/99 (2) 2,628 2,619
Platte Valley Industrial
Center #1.................. 9.750 03/01/00 (2) 364 256
West One Business Center #1. 8.250 09/01/00 (2) 4,420 4,252
Tampa West Distribution
Center #20................. 9.125 11/30/00 (3) 107 --
Rio Grande Industrial Center
#1......................... 8.875 09/01/01 (2) 3,055 2,544
Titusville Industrial Center
#1......................... 10.000 09/01/01 (2) 4,659 4,181
Eigenbrodt Way Distribution
Center #1.................. 8.590 04/01/03 (2) 1,659 1,479
Gateway Corporate Center
#10........................ 8.590 04/01/03 (2) 1,901 1,361
Hayward Industrial Center I
& II....................... 8.590 04/01/03 (2) 13,997 12,480
Thornton Business Center
#1--#4..................... 8.590 04/01/03 (2) 9,180 8,185
Sullivan 75 Distribution
Center #1.................. 9.960 04/01/04 (2) 1,817 1,663
Oceanie Distribution Center
#1 and Epone Distribution
Center #1.................. 8.000 07/01/04 (3) 5,970 --
Platte Valley Industrial
Center #8.................. 8.750 08/01/04 (2) 1,896 1,488
Riverside Industrial Center
#3......................... 8.750 08/01/04 (2) 1,489 1,170
Riverside Industrial Center
#4......................... 8.750 08/01/04 (2) 4,025 3,161
West One Business Center #3. 9.000 09/01/04 (2) 4,399 3,847
Raines Distribution Center.. 9.500 01/01/05 (2) 6,264 5,902
Societe Generale (4)........ 5.700 12/01/06 (2) 23,244 8,940
CIGNA (5)................... 7.080 03/01/07 (2) 66,000 (5)
Vista Del Sol Industrial
Center #1.................. 9.680 08/01/07 (3) 2,625 --
Vista Del Sol Industrial
Center #3.................. 9.680 08/01/07 (3) 1,111 --
Earth City Industrial Center
#3......................... 8.500 07/01/10 (3) 2,281 --
GMAC Commercial Mortgage
(6)........................ 7.750 10/01/10 (3) 8,186 --
Executive Park Distribution
Center #3.................. 8.190 03/01/11 (3) 1,108 --
Platte Valley Industrial
Center #9.................. 8.100 04/01/17 (3) 3,330 --
Platte Valley Industrial
Center #4.................. 10.100 11/01/21 (3) 2,059 --
---------
$ 184,964
=========
</TABLE>
151
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Balloon
Periodic Payment
Interest Maturity Payment Principal Due at
Description Rate (1) Date Date Balance Maturity
----------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Assessment bonds:
City of Wilsonville.......... 6.82% 08/19/04 (3) $ 129 $ --
City of Kent................. 5.50 05/01/05 (3) 18 --
City of Kent................. 7.85 06/20/05 (3) 104 --
City of Portland............. 8.33 11/17/07 (3) 7 --
City of Kent................. 7.98 05/20/09 (3) 64 --
City of Fremont.............. 7.00 03/01/11 (3) 9,890 --
City of Las Vegas............ 8.75 10/01/13 (3) 294 --
City of Las Vegas............ 8.75 10/01/13 (3) 289 --
City of Las Vegas............ 8.75 10/01/13 (3) 163 --
City of Portland............. 7.25 11/07/15 (3) 99 --
City of Portland............. 7.25 09/15/16 (3) 224 --
--------
$ 11,281
========
Securitized debt:
Tranche A.................... 7.74% 02/01/04 (2) $ 23,462 $20,821
Tranche B.................... 9.94 02/01/04 (2) 8,097 7,215
--------
$ 31,559
========
</TABLE>
- --------
(1) The weighted average interest rates for mortgage notes payable, assessment
bonds payable and securitized debt in 1998 were 7.06%, 7.12% and 8.30%,
respectively.
(2) Monthly amortization with a balloon payment due at maturity.
(3) Fully amortizing.
(4) Mortgage debt is secured by Mitry-Mory #1, Isle d'Abeau Distribution
Center #1 and Longjumeau Distribution Center #1 located in France.
(5) On December 23, 1998, ProLogis entered into a $150.0 million secured
financing agreement with Connecticut General Life Insurance Company. On
that date, $66.0 million was funded under the agreement and the remaining
$84.0 million was funded on January 22, 1999. A payment of $134.4 million
is due at maturity. Under the terms of the agreement, ProLogis pledged
distribution facilities ($207.0 million undepreciated cost as of December
31, 1998) as collateral under the agreement.
(6) Mortgage debt is secured by Earth City Industrial Center #5, Westport
Service Center #1 and #2, Westport Distribution Center #1, #2 and #3 and
Hazelwood Distribution Center #1.
Mortgage notes are secured by real estate with an aggregate undepreciated
cost of $209.3 million as of December 31, 1998. Assessment bonds are secured
by real estate with an aggregate undepreciated cost of $242.4 million as of
December 31, 1998. Securitized debt is collateralized by real estate with an
aggregate undepreciated cost of $66.2 million as of December 31, 1998.
Subsequent Events
On February 22, 1999, ProLogis entered into a $182.0 million secured
financing agreement with Teachers Insurance and Annuity Association of
America. Of the total borrowings, $119.4 million was funded on February 22,
1999, $35.7 million was funded on March 5, 1999 and the remaining amount is
expected to be funded before the end of May 1999. The loan bears interest at
7.20% and provides for monthly interest payments through
152
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 2002 and monthly principal and interest payments from April 2002 to
March 2009, at which time the remaining balance will be due. ProLogis pledged
distribution facilities with an undepreciated cost of $216.2 million as of
December 31, 1998 as collateral under the agreement and will pledge additional
distribution facilities upon completion of the final funding.
On February 5, 1999, ProLogis received a commitment from Morgan Guaranty
Trust Company of New York ("MGT") whereby MGT will lend $200.0 million to
ProLogis. The loan, which will be secured by distribution facilities and will
have a 25-year term, provides for interest only payments for the first six
years and principal and interest payments thereafter with the remaining
balance due at maturity. The loan bears interest at 7.58% per annum and is
expected to be funded by the end of the first quarter of 1999.
Long-term Debt Maturities
Approximate principal payments due on senior unsecured debt, mortgage notes
payable, assessment bonds payable, securitized debt and other secured debt
during each of the years in the five-year period ending December 31, 2003 and
thereafter are as follows (in thousands):
<TABLE>
<S> <C>
1999.......................................................... $ 27,581
2000.......................................................... 40,017
2001.......................................................... 43,771
2002.......................................................... 49,212
2003.......................................................... 184,930
2004 and thereafter........................................... 967,293
----------
Total principal due....................................... 1,312,804
Less: Original issue discount................................. (1,359)
----------
Total carrying value...................................... $1,311,445
==========
</TABLE>
Interest Expense
For 1998, 1997 and 1996, interest expense was $77.7 million, $52.7 million,
and $38.8 million, respectively, which was net of capitalized interest of
$19.2 million, $18.4 million and $16.1 million, respectively. Amortization of
deferred loan costs included in interest expense was $2.2 million, $2.0
million and $2.3 million for 1998, 1997 and 1996, respectively. The total
interest paid in cash on all outstanding debt was $83.2 million, $61.3 million
and $50.7 million during 1998, 1997 and 1996, respectively.
6. Minority Interest:
Minority interest represents the limited partners' interests in real estate
partnerships controlled by ProLogis. With respect to each of the partnerships
either ProLogis or a subsidiary of ProLogis is the sole general partner with
all management powers over the business and affairs of the partnership. The
limited partners of each partnership generally do not have the right to
participate in or exercise management control over the business and affairs of
the partnership. With respect to each partnership the general partner may not,
without the written consent of all of the limited partners, take any action
that would prevent such partnership from conducting its business, possess the
property of the partnership, admit an additional partner or subject a limited
partner to the liability of a general partner.
ProLogis owns a 70.0% general partnership interest in Red Mountain Joint
Venture, which owns a $3.8 million industrial distribution facility in
Albuquerque, New Mexico. In addition to this joint venture, ProLogis is the
controlling general partner in four partnerships. In each of these four
partnerships, the limited partners are entitled to exchange partnership units
for Common Shares on a one for one basis. Additionally, the limited
153
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
partners are entitled to receive preferential cumulative quarterly
distributions per unit equal to the quarterly distributions in respect of
Common Shares. These four partnerships are as follows:
. ProLogis Limited Partnership-I, which owned approximately $208.2 million
of industrial distribution facilities located primarily in the San
Francisco Bay area as of December 31, 1998, was formed in December 1993.
ProLogis had a 68.7% controlling general partnership interest and there
were 4,520,532 limited partnership units outstanding as of December 31,
1998.
. ProLogis Limited Partnership-II, which owned approximately $58.7 million
of industrial distribution facilities located primarily in Austin,
Charlotte, Dallas, Denver, El Paso and the San Francisco Bay area as of
December 31, 1998, was formed in May 1994. ProLogis' initial 81.2%
controlling general partnership interest has subsequently been increased
to 97.8% (the ownership interest as of December 31, 1998) due to the
conversion of limited partnership units into Common Shares. There were
90,213 limited partnership units outstanding as of December 31, 1998.
. ProLogis Limited Partnership-III, which owned approximately $55.3 million
of industrial distribution facilities located primarily in Tampa, Florida
as of December 31, 1998, was formed in October 1994. ProLogis had a 50.4%
controlling general partnership interest at formation, which has
subsequently been increased to 86.9% (the ownership interest as of
December 31, 1998) as the result of additional contributions by ProLogis
and the conversion of limited partnership units into Common Shares. There
were 389,900 limited partnership units outstanding as of December 31,
1998.
. ProLogis Limited Partnership-IV, which owned approximately $86.0 million
of industrial distribution facilities located primarily in Florida, Ohio,
Oklahoma and Texas as of December 31, 1998, was formed in October 1994
through a cash contribution from a wholly owned subsidiary of ProLogis,
ProLogis IV, Inc., and the contribution of industrial distribution
facilities from the limited partner. ProLogis' initial 96.4% controlling
general partnership interest has been increased to 97.7% (the ownership
interest as of December 31, 1998) as the result of additional
contributions by ProLogis. There were 68,612 limited partnership units
outstanding as of December 31, 1998.
ProLogis Limited Partnership-IV and ProLogis IV, Inc. are legal entities
separate and distinct from ProLogis, its affiliates and each other, and
each has separate assets, liabilities, business functions and operations.
The sole assets of ProLogis IV, Inc. are its general partner advances to
and its interest in ProLogis Limited Partnership-IV. As of December 31,
1998, ProLogis Limited Partnership-IV had outstanding borrowings from
ProLogis IV, Inc. of $1.4 million and ProLogis IV, Inc. had outstanding
borrowings from ProLogis and its affiliates of $1.4 million.
For financial reporting purposes, the assets, liabilities, results of
operations and cash flows of each of the five partnerships are included in
ProLogis' consolidated financial statements, and the interests of the limited
partners are reflected as minority interest.
7. Shareholders' Equity:
Shares Authorized
As of December 31, 1998, 230,000,000 shares were authorized (increased from
180,000,000 shares on June 30, 1998 through a shareholder-approved amendment
to ProLogis' Declaration of Trust). ProLogis' Board of Trustees (the "Board")
may classify or reclassify any unissued shares of ProLogis stock from time to
time by setting or changing the preferences, conversion or other rights,
voting powers, restrictions, limitations as of distributions, qualifications
and terms or conditions of redemption of such shares.
154
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Preferred Shares
As of December 31, 1998, ProLogis had three series of cumulative redeemable
preferred shares of beneficial interest outstanding (Series A, C and D) and
one series of cumulative convertible redeemable preferred shares of beneficial
interest outstanding (Series B). Holders of each series of preferred shares
have, subject to certain conditions, limited voting rights. The holders of the
preferred shares are entitled to receive cumulative preferential distributions
based upon each series' respective liquidation preference. Such distributions
are payable quarterly in arrears on the last day of March, June, September and
December, when, and if, declared by the Board, out of funds legally available
for payment of distributions. After the respective redemption dates, each
series can be redeemed for a cash redemption price which (other than the
portion consisting of accrued and unpaid distributions) is payable solely out
of the sales proceeds of other capital shares of ProLogis, which may include
shares of other series of preferred shares. With respect to payment of
distributions, each series of preferred shares ranks on parity with ProLogis'
other series of preferred shares.
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).
ProLogis' preferred shares are summarized as follows:
<TABLE>
<CAPTION>
Number of Shares Stated Equivalent Based Optional
Outstanding as of Liquidation Dividend on Liquidation Redemption
December 31, 1998 Preference Rate Preference Date (1)
----------------- ----------- -------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Series A................ 5,400,000 $25.00 9.40% $2.35 per share 06/21/00
Series B (2)............ 7,537,600 $25.00 7.00% $1.75 per share 02/21/01
Series C................ 2,000,000 $50.00 8.54% $4.27 per share 11/13/26
Series D................ 10,000,000 $25.00 7.92% $1.98 per share 04/13/03
</TABLE>
- --------
(1) After this date, the preferred shares can be redeemed at ProLogis' option.
(2) During 1998 and 1997, Series B preferred shares of 462,700 and 49,700,
respectively, were converted into 593,181 and 63,720, respectively, Common
Shares.
Completed Common Equity Offerings
From inception (June 14, 1991) through March 31, 1994, ProLogis raised
capital through various private offerings of its Common Shares. A total of
36,714,533 shares were sold during this period at prices ranging from $10.00
to $11.50 per Common Share.
On March 31, 1994, ProLogis completed an initial public offering of
3,260,870 Common Shares at a price of $11.50 per Common Share. After its
initial public offering and through December 31, 1998, ProLogis sold an
additional 76,989,752 Common Shares at prices ranging from $15.125 to $24.50
per Common Share, of which 4,000,000 Common Shares were sold on March 18, 1998
and 1,493,878 Common Shares were sold on April 29, 1998. The sales in 1998
were made through underwritten public offerings and generated proceeds, net of
underwriting discounts and offering costs of $95.6 million and $34.7 million,
respectively. In total, ProLogis has raised approximately $1.84 billion in net
proceeds from private and public offerings of its Common Shares since its
inception.
Shelf Registration
On May 15, 1998, ProLogis filed an $800.0 million shelf registration
statement with the Securities and Exchange Commission, which was declared
effective on May 29, 1998. This shelf registration supplemented an
155
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
existing shelf registration with a remaining balance of $183.0 million. As a
result of this filing, ProLogis can issue securities in the form of debt
securities, preferred shares, Common Shares, rights to purchase Common Shares
and preferred share purchase rights on an as-needed basis, subject to
ProLogis' ability to effect offerings on satisfactory terms. As of March 5,
1999, ProLogis had $608.0 million of shelf-registered securities available for
issuance.
Ownership Restrictions and Significant Shareholder
For ProLogis to qualify as a REIT under the Internal Revenue Code of 1986,
as amended, not more than 50% in value of its outstanding shares of stock may
be owned by five or fewer individuals at any time during the last half of
ProLogis' taxable year. Therefore, ProLogis' Declaration of Trust restricts
beneficial ownership (or ownership generally attributed to a person under the
REIT tax rules) of ProLogis' outstanding shares by a single person, or persons
acting as a group, to 9.8% of ProLogis' outstanding shares. This provision
assists ProLogis in protecting and preserving its REIT status and protects the
interest of shareholders in takeover transactions by preventing the
acquisition of a substantial block of shares.
Shares owned by a person or group of persons in excess of these limits are
subject to redemption by ProLogis. The provision does not apply where a
majority of the Board, in its sole and absolute discretion, waives such limit
after determining that the status of ProLogis as a REIT for federal income tax
purposes will not be jeopardized or the disqualification of ProLogis as a REIT
is advantageous to the shareholders.
The Board has exempted Security Capital from the ownership restrictions
described above. Security Capital owned 40.4% of the outstanding Common Shares
as of December 31, 1998. For tax purposes, Security Capital's ownership is
attributed to its shareholders.
Dividend Reinvestment and Share Purchase Plan
In March 1995, ProLogis 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 ProLogis) 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 ProLogis), 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 ProLogis 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
156
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
8. 1997 Merger Transaction:
On September 8, 1997, ProLogis' shareholders approved an agreement with
Security Capital to exchange Security Capital's REIT management and property
management companies for 3,692,023 Common Shares (the "1997 Merger"). As a
result, ProLogis became an internally managed REIT on September 9, 1997 with
Security Capital remaining as ProLogis' largest shareholder. The $81.9 million
value of the management companies was approved by the independent members of
the Board and a fairness opinion was obtained from a third party financial
advisor. The number of Common 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 ProLogis
shareholders entitled to vote on the 1997 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 the cost
incurred in acquiring the management companies. Because the management
companies did not have significant operations other than the management of
ProLogis and ProLogis' assets, the transaction did not qualify as the
acquisition of a business for purposes of applying APB Opinion No. 16,
"Business Combinations". Consequently, 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.
As a result of the 1997 Merger, ProLogis terminated its REIT management and
property management agreements. All employees of the management companies
became employees of ProLogis and ProLogis 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 corporate entity are recorded as general and administrative
expenses.
Also on September 8, 1997, ProLogis and Security Capital entered into an
administrative services agreement (the "ASA"). Under the ASA, Security Capital
provides ProLogis with certain administrative and other services as determined
by ProLogis. Fees payable to Security Capital under the ASA are 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 expired on December 31, 1998. From
September 8, 1997 through December 31, 1997, and for the year ended December
31, 1998, ProLogis' actual fees under the ASA were $1.1 million and $3.7
million, respectively, of which $0.2 million and $0.7 million, respectively,
were capitalized. The ASA was renewed for an additional one-year term expiring
on December 31, 1999 with fees charged by Security Capital for this period to
be based on negotiated rates for each service provided.
9. Distributions and Dividends:
ProLogis' annual distribution per Common Share was $1.24 in 1998, $1.07 in
1997 and $1.01 in 1996. For Federal income tax purposes, the following
summarizes the taxability of cash distributions paid on Common Shares in 1997
and 1996 and the estimated taxability for 1998:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Per Common Share:
Ordinary income................................. $ 1.12 $ 1.07 $ 0.88
Return of capital............................... 0.12 -- 0.13
------- ------- -------
Total......................................... $ 1.24 $ 1.07 $ 1.01
======= ======= =======
</TABLE>
157
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
On December 15, 1998, ProLogis declared a distribution of $0.3183 per
Common Share payable on February 24, 1999 to shareholders of record as of
February 10, 1999.
In connection with the 1997 Merger discussed in Note 8, Security Capital
issued $101.0 million of warrants pro rata to holders of Common Shares (other
than Security Capital), Series B preferred shares and limited partnership
units to acquire 3,608,202 shares of Class B common stock of Security Capital.
Holders of Common Shares and holders of limited partnership units received
0.046549 warrants for each Common Share or unit held and holders of Series B
preferred shares received 0.059676 warrants for each preferred share held.
Each warrant was exercisable into one share of Security Capital Class B common
stock at an exercise price of $28.00 per share. The warrants expired in
September 1998. Security Capital issued the warrants as an incentive to
ProLogis' shareholders to vote in favor of the 1997 Merger and to raise
additional equity capital at a relatively low cost, in addition to other
benefits.
The dividends paid on the Series A, Series B, Series C and Series D
preferred shares are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 (1) 1997 (1) 1996 (1)
-------- -------- --------
<S> <C> <C> <C>
Series A..................................... 2.35 2.35 2.35
Series B..................................... 1.75 1.75 1.50(2)
Series C..................................... 4.27 4.27 0.57(2)
Series D..................................... 1.42(3) -- --
</TABLE>
- --------
(1) For federal income tax purposes all of the preferred dividends are
ordinary income to the holders of the preferred shares.
(2) For the period from date of issuance to December 31, 1996.
(3) For the period from date of issuance to December 31, 1998.
ProLogis' tax return for the year ended December 31, 1998 has not been
filed, therefore the taxability information for 1998 is based upon the best
available data. ProLogis' tax returns have not been examined by the Internal
Revenue Service. Consequently, the taxability of the distributions and
dividends is subject to change.
Pursuant to the terms of its preferred shares, ProLogis 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.
10. Earnings Per Share:
A reconciliation of the denominator used to calculate basic earnings per
share to the denominator used to calculate diluted earnings per share for the
periods indicated (in thousands, except per share amounts) is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Net earnings attributable to Common Shares..... $ 62,231 $ 4,431 $53,460
======== ======== =======
Weighted average Common Shares outstanding--
basic......................................... 121,721 100,729 84,504
Incremental effect of common stock equivalents. 307 140 7
-------- -------- -------
Adjusted weighted average Common Shares
outstanding--diluted.......................... 122,028 100,869 84,511
======== ======== =======
Per share net earnings attributable to Common
Shares:
Basic........................................ $ 0.51 $ 0.04 $ 0.63
======== ======== =======
Diluted...................................... $ 0.51 $ 0.04 $ 0.63
======== ======== =======
</TABLE>
158
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1998, 1997 and 1996 there were 5,070,000,
5,190,000 and 5,194,000 weighted average limited partnership units outstanding
and 10,055,000, 10,319,000 and 8,831,000 weighted average Series B preferred
shares outstanding on an as-converted basis, respectively, that were not
assumed converted into Common Shares because they were antidilutive to
earnings per share. These securities may become dilutive to earnings per share
in subsequent years.
11. Long-Term Compensation
Long-Term Incentive Plan and Share Option Plan for Outside Trustees
ProLogis has a long-term incentive plan (the "Incentive Plan"), which
includes an employee stock purchase plan, a stock option plan and a restricted
share unit plan. No more than 9,410,000 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. The
Incentive Plan has a ten-year term.
Additionally, ProLogis has 100,000 Common Shares authorized for issuance
under its Share Option Plan for Outside Trustees (the "Outside Trustees Plan")
and 190,000 Common Shares authorized for issuance under the 401(k) Savings
Plan and Trust that became effective on January 1, 1998.
Employee Stock Purchase Plan
Under the employee stock purchase plan, certain employees of ProLogis
purchased 1,356,834 Common Shares on September 8, 1997 at a price of $21.21875
per share. ProLogis financed 95% of the total purchase price through ten-year,
recourse notes to the participants aggregating $27.3 million. The loans, which
have been recognized as a deduction from shareholders' equity, bear interest
at the lower of ProLogis' annual dividend yield on Common Shares or 6% per
annum. The loans are secured by the Common Shares purchased. For each Common
Share purchased, participants were granted two options to purchase Common
Shares at a price of $21.21875. As of December 31, 1998, there were 1,246,480
Common Shares securing the employee stock purchase notes. The changes in the
notes receivable from employees during 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Balances at January 1................................... $27,186 $ --
Notes issued............................................ -- 27,345
Principal payments received............................. (143) (64)
Retirements............................................. (1,796) (95)
------- -------
Balances at December 31................................. $25,247 $27,186
======= =======
</TABLE>
The outstanding notes receivable at December 31, 1998 of $25,247,000
include $22,273,000 due from officers of ProLogis.
159
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Options
ProLogis has granted stock options under the Incentive Plan and the Outside
Trustees Plan. Stock options outstanding as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Expiration Remaining
Options Exercise Price (1) Date Life
--------- ------------------- ---------- ---------
<S> <C> <C> <C> <C>
Outside Trustees Plan
(2).................... 34,000 $15.50-$25.00 1999-2003 2.8 years
Employee stock purchase
plan (3)............... 2,493,054 $21.21875 2007 8.7 years
Stock option plan (3)
(4):
1997 awards........... 338,689 $21.21875-$23.96875 2007 8.7 years
1998 awards........... 1,525,548 $20.9375-$24.625 2008 9.8 years
Options sold to
unconsolidated
subsidiaries (3) (4)... 471,919 $20.9375-$24.65625 2008 9.8 years
---------
Total............... 4,863,210
=========
</TABLE>
- --------
(1) Exercise price was equal to market price on the date of grant.
(2) Options are fully exercisable.
(3) Graded vesting at various rates over periods from two to ten years,
subject to certain conditions.
(4) The holders are awarded dividend equivalent units each year of the plan.
The weighted average fair value of the options issued under the Incentive
Plan (excluding options sold to unconsolidated subsidiaries) and the Outside
Trustees Plan during 1998 was approximately $2.39 per option. The weighted
average fair value of the options sold to unconsolidated subsidiaries in 1998
was approximately $2.82 per option. The activity with respect to ProLogis'
stock option plans for the years ended December 31, 1998, 1997 and 1996 is
presented below. All grants during 1996 relate to the Outside Trustees Plan.
<TABLE>
<CAPTION>
Weighted
Average Number of
Number of Exercise Options
Options Price Exercisable
--------- -------- -----------
<S> <C> <C> <C>
Balance at December 31, 1995.............. 10,000 $15.80 10,000
Granted................................. 8,000 17.50 8,000
Forfeited............................... -- -- --
--------- ------ ------
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
Granted/Sold............................ 2,011,392 21.17 8,000
Exercised............................... -- -- --
Forfeited............................... (251,473) 21.22 --
--------- ------ ------
Balance at December 31, 1998.............. 4,863,210 $21.19 34,000
========= ====== ======
</TABLE>
ProLogis did not recognize compensation expense in 1998, 1997 or 1996
related to stock options granted as the exercise price of all options granted
was equal to the market price on the date of grant. Had compensation
160
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
expense for these plans been determined using an option valuation model as
provided in SFAS No. 123, ProLogis' net earnings attributable to Common Shares
and net earnings per Common Share would change as follows:
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Net earnings attributable to Common Shares:
As reported............................................. $62,231 $4,431
Pro forma............................................... 60,805 4,016
Basic and diluted net earnings per Common Share:
As reported............................................. $ 0.51 $ 0.04
Pro forma............................................... 0.50 0.04
</TABLE>
Since employee stock options vest over several years and additional grants
are likely to be made in future years, the pro forma compensation cost may not
be representative of that to be expected in future years.
The pro forma amounts above were calculated using the Black-Scholes model
and the following assumptions:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Risk-free interest rate............................. 4.74% 6.35%
Forecasted dividend yield........................... 7.36% 7.36%
Volatility.......................................... 27.37% 19.20%
Weighted average option life........................ 6.75 years 6.75 years
</TABLE>
Restricted Share Units
On October 15, 1998, the Board granted 377,500 restricted share units
("RSU") to twelve officers of ProLogis. The RSUs vest 25% per year beginning
December 31, 1999 through December 31, 2002 and earn DEUs in accordance with
the DEU awards under the Incentive Plan. The RSUs are valued on the award date
based upon the market price of Common Shares on that date and ProLogis
recognizes that value as compensation expense over the underlying vesting
period. The RSUs granted in 1998 were valued at $8.0 million, of which
ProLogis recognized $272,700 of compensation expense in 1998, net of amounts
capitalized.
Dividend Equivalent Units ("DEUs")
DEUs in the form of Common Shares are awarded at a rate of one Common Share
per DEU on December 31st of each year of the ten-year stock option plan and
are vested to the same extent the underlying stock options are vested. The
DEUs are valued on the award date based upon the market price of the Common
Shares on that date and ProLogis recognizes that value as compensation expense
over the underlying vesting period. As of December 31, 1998, there were 32,510
DEUs outstanding (30,129 awarded on December 31, 1998 and 2,381 awarded on
December 31, 1997). ProLogis recognized compensation expense related to the
DEUs of $5,000 in 1998, net of amounts capitalized.
401(k) Savings Plan and Trust
ProLogis has a 401(k) Savings Plan and Trust, that 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
(within the statutory compensation limit). The vesting of contributed Common
Shares is based on the employee's years of service, with 20% vesting each year
of service, over a five-year period. Through December 31, 1998, no Common
Shares have been issued under the 401(k) Savings Plan and Trust as all
matching contributions have been made with Common Shares purchased in the
public market.
Nonqualified Savings Plan
Effective January 1, 1998, ProLogis established the Nonqualified Savings
Plan to provide benefits for a select group of management. The purpose of this
plan is to allow highly compensated employees the opportunity
161
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
to defer the receipt and income taxation of a certain portion of their
compensation in excess of the amount permitted under the 401(k) Savings Plan
and Trust. ProLogis will match the lesser of (a) 50% of the sum of deferrals
under both the 401(k) Savings Plan and Trust and this plan, and (b) 3% of
total compensation up to certain levels. The matching account will vest in the
same manner as the 401(k) Savings Plan and Trust.
Warrants
During 1998, 11,764 warrants were exercised at an exercise price of $10.00.
There were no outstanding warrants as of December 31, 1998.
12. Selected Quarterly Financial Data (Unaudited):
Selected quarterly financial data (in thousands, except for per share
amounts) for 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Ended,
--------------------------------------------
June
March 31, 30, September 30, December 31, Total
--------- ------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
1998:
Rental income......... $78,565 $84,353 $ 88,687 $93,441 $345,046
======= ======= ======== ======= ========
Earnings from
operations........... $35,458 $35,589 $ 6,407 $32,991 $110,445
Minority interest
share in earnings.... 979 1,075 1,047 1,580 4,681
Gain on disposition of
real estate.......... 2,066 2,212 -- 1,287 5,565
------- ------- -------- ------- --------
Net earnings.......... 36,545 36,726 5,360 32,698 111,329
Less preferred share
dividends............ 8,799 13,075 13,669 13,555 49,098
------- ------- -------- ------- --------
Net earnings (loss)
attributable to
Common Shares........ $27,746 $23,651 $ (8,309) $19,143 $ 62,231
======= ======= ======== ======= ========
Basic net earnings
(loss) attributable
to Common Shares..... $ 0.24 $ 0.19 $ (0.07) $ 0.16 $ 0.51
======= ======= ======== ======= ========
Diluted net earnings
(loss) attributable
to Common Shares..... $ 0.23 $ 0.19 $ (0.07) $ 0.16 $ 0.51
======= ======= ======== ======= ========
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 earnings.... 895 940 928 797 3,560
Gain on disposition of
real estate.......... -- 3,773 2,756 849 7,378
------- ------- -------- ------- --------
Net earnings (loss)... 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 (loss)
attributable to
Common Shares........ $16,732 $23,054 $(55,364) $20,009 $ 4,431
======= ======= ======== ======= ========
Basic net earnings
(loss) attributable
to Common Shares..... $ 0.17 $ 0.24 $ (0.55) $ 0.18 $ 0.04
======= ======= ======== ======= ========
Diluted net earnings
(loss) attributable
to Common Shares..... $ 0.17 $ 0.23 $ (0.55) $ 0.18 $ 0.04
======= ======= ======== ======= ========
</TABLE>
162
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
13. Related Party Transactions:
ProLogis leases space to related parties on market terms that management
believes are no less favorable to ProLogis than those that could be obtained
with unaffiliated third parties. These transactions are summarized as follows:
<TABLE>
<CAPTION>
Security REIT Property
Capital & Management Management
Affiliates Company Company Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
Rental revenue during the
year ended December 31,
1998........................ $716,725 n/a n/a $ 716,725
Square feet leased as of
December 31, 1998........... 113,139 n/a n/a 113,139
Annualized revenue for leases
in effect as of December 31,
1998........................ $740,309 n/a n/a $ 740,309
</TABLE>
The management companies were merged with and into ProLogis on September 8,
1997 as discussed in Note 8. For the REIT management company and the property
management company, amounts included for the year ended December 31, 1997 are
for the period from January 1, 1997 to September 8, 1997.
14. Financial Instruments:
Fair Value of Financial Instruments
The following estimates of the fair value of financial instruments have
been determined by ProLogis using available market information and valuation
methodologies believed to be appropriate for these purposes. Considerable
judgement and a high degree of subjectivity are involved in developing these
estimates and, accordingly, they are not necessarily indicative of amounts
ProLogis would realize upon disposition.
As of December 31, 1998 and 1997, the carrying amounts of certain financial
instruments employed by ProLogis, including cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses were representative
of their fair values because of the short-term maturity of these instruments.
Similarly, the carrying values of the lines of credit and short-term
borrowings balances approximate fair value as of those dates since the
interest rate fluctuates based on published market rates. As of December 31,
1998 and 1997, the fair values of the senior unsecured debt and the secured
debt (including mortgage notes, assessment bonds and securitized debt) have
been estimated based upon 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
ProLogis' senior unsecured debt and secured debt over the carrying value in
the table below is a result of a net reduction in the interest rates available
to ProLogis as of December 31, 1998 and 1997, from the interest rates in
effect at the dates of issuance. The senior unsecured debt and many of the
secured debt issues 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, 1998 and 1997, the fair value of ProLogis' derivative
financial instruments are the amounts at which they could be settled, based on
quoted market prices or estimates obtained from brokers. The
163
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
following table reflects the carrying amount and estimated fair value of
ProLogis' financial instruments (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1998 1997
---------------------- ------------------
Carrying Carrying Fair
Amount Fair Value Amount Value
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Balance sheet financial
instruments
Senior unsecured debt.... $1,083,641 $1,108,692 $724,052 $755,799
Secured debt............. $ 227,804 $ 232,809 $133,028 $137,628
Derivative financial
instruments
Interest rate contracts.. $ (26,050) $ (26,050) $ -- $ (8,621)
Foreign currency
contracts............... $ -- $ -- $ (6,028) $ (6,028)
</TABLE>
Derivative Financial Instruments
ProLogis occasionally uses derivative financial instruments as hedges to
manage well-defined risk associated with interest and foreign currency rate
fluctuations on existing obligations or anticipated transactions. ProLogis
does not use derivative financial instruments for trading purposes.
The primary risks associated with derivative instruments are market risk
and credit risk. Market 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). Through hedging, ProLogis can effectively manage the
risk of increases in interest rates and fluctuations in foreign currency
exchange rates.
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.
ProLogis does not obtain collateral to support financial instruments subject
to credit risk but monitors the credit standing of counterparties. ProLogis
does not anticipate non-performance by any of the counterparties to its
derivative contracts. Should a counterparty fail to perform, however, ProLogis
would incur a financial loss to the extent of the positive fair market value
of the derivative instruments, if any.
The following table summarizes the activity in interest rate contracts for
the years ended December 31, 1998 and 1997 (in millions):
<TABLE>
<CAPTION>
Interest Rate Interest Rate
Futures Contracts Swaps
----------------- -------------
<S> <C> <C>
Notional amount as of December 31, 1996.. $ 106.0 $ 33.0
New contracts (1)........................ 75.0 75.0
Matured or expired contracts (2)......... (106.0) (33.0)
Terminated contracts..................... -- --
------- ------
Notional amount as of December 31, 1997.. 75.0 75.0
------- ------
New contracts............................ -- --
Matured or expired contracts............. -- --
Terminated contracts..................... -- --
------- ------
Notional amount as of December 31, 1998
(1)..................................... $ 75.0 $ 75.0
======= ======
</TABLE>
- --------
(1) In October 1997, in anticipation of debt offerings in 1998, ProLogis
entered into two interest rate protection agreements which have been
renewed past the original termination dates. These agreements were entered
into by ProLogis to fix the interest rate on anticipated financings.
164
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
During the third quarter of 1998, ProLogis determined that the interest
rate protection agreements would no longer qualify for hedge accounting
treatment under GAAP based upon the following:
. Due to changing conditions in the public debt markets, it was no longer
considered probable that ProLogis would complete the anticipated 1998
longer term debt offerings that prompted ProLogis to enter into these
interest rate protection agreements in 1997 (i.e., ProLogis would not be
exposed to the interest rate risk that these instruments were intended to
hedge); and
. ProLogis determined, through internal analysis and through communications
with independent third parties, that a high degree of correlation no
longer existed between changes in the market values of these interest
rate protection agreements and the "market values" of the anticipated
debt offerings (i.e., the interest rate at which the debt could be issued
by ProLogis under existing market conditions).
Accordingly, ProLogis began marking these agreements to market as of
September 30, 1998. For 1998, ProLogis recognized a non-cash expense of
$26.1 million. These agreements were terminated in February 1999 at a cost
of $27.0 million and were used to set the interest rate associated with the
$200.0 million secured financing transaction with MGT that is scheduled to
be completed in the first quarter of 1999.
(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 offerings of senior unsecured debt offerings and are being
amortized over the term of the related debt.
On December 22, 1997, ProLogis entered into two separate contracts to (i)
exchange $373.8 million for 2.9 billion Swedish krona, and (ii) exchange 310.0
million German marks for $175.0 million in anticipation of the January 1998
acquisition and planned European currency denominated financing of
Frigoscandia AB by Frigoscandia S.A., ProLogis' unconsolidated subsidiary. The
contracts were marked to market as of December 31, 1997 and ProLogis
recognized a net loss of $6.0 million in 1997. Both contracts were settled
during the first quarter of 1998 at a net loss of $4.0 million. Accordingly,
ProLogis recognized a net gain of $2.0 million in 1998. These foreign currency
exchange hedges were one-time, non-recurring contracts that fixed the exchange
rate between the U.S. dollar and the Swedish krona and German mark. ProLogis
executed these hedges after the execution of the purchase agreement to acquire
Frigoscandia AB, which required payment in Swedish krona. The contracts were
executed exclusively for the acquisition and financing of Frigoscandia AB and
were not entered into to hedge on-going income in foreign currencies.
15. Commitments and Contingencies:
Environmental Matters
All of the facilities acquired by ProLogis 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 ProLogis aware of any environmental liability (including
asbestos related liability) that ProLogis believes would have a material
adverse effect on ProLogis' business, financial condition or results of
operations.
16. Business Segments:
ProLogis has three reportable business segments:
. acquisition and development of industrial distribution facilities for
long-term ownership and leasing in the United States, Europe (a portion
of which is owned through Garonor Holdings, an unconsolidated subsidiary)
and Mexico--each operating facility is considered to be an individual
operating segment having similar economic characteristics which are
combined within the reportable segment based upon geographic location;
165
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
. operation of refrigerated distribution facilities through unconsolidated
subsidiaries in the United States (ProLogis Logistics) and Europe
(Frigoscandia S.A.)--each subsidiary's operating facilities are
considered to be individual operating segments having similar economic
characteristics which are combined within the reportable segment based
upon geographic location; and
. development of distribution facilities for future sale or on a fee basis
in the United States and Mexico and in the United Kingdom through an
unconsolidated subsidiary (Kingspark S.A.)--the development activities of
ProLogis and its unconsolidated subsidiary are considered to be
individual operating segments having similar economic characteristics
which are combined within the reportable segment based upon geographic
location.
Reconciliations of the three reportable segments': (i) income from external
customers to ProLogis' total income; (ii) net operating income from external
customers to ProLogis' earnings from operations (ProLogis' chief operating
decision makers rely primarily on net operating income to make decisions about
allocating resources and assessing segment performance); and, (iii) assets to
ProLogis' total assets are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income:
Leasing activities:
United States.............................. $333,494 $283,909 $227,000
Europe (1)................................. 8,059 -- --
Mexico..................................... 3,499 624 --
-------- -------- --------
Total leasing activities segment......... 345,052 284,533 227,000
======== ======== ========
Refrigerated operations:
United States (2) (3)...................... 7,349 3,278 --
Europe (4) (5)............................. (7,535) -- --
-------- -------- --------
Total refrigerated operations segment.... (186) 3,278 --
-------- -------- --------
Development activities:
United States.............................. 17,137 12,374 5,342
Europe (United Kingdom) (6) (7)............ 2,915 -- --
Mexico..................................... 133 (83) --
-------- -------- --------
Total development activities segment..... 20,185 12,291 5,342
-------- -------- --------
Reconciling items:
Foreign currency exchange gains (losses),
net....................................... 2,938 (348) --
Foreign currency hedge income (expense).... 2,054 (6,028) --
Interest income............................ 2,752 2,392 1,121
-------- -------- --------
Total reconciling items.................. 7,744 (3,984) 1,121
-------- -------- --------
Total income............................. $372,795 $296,118 $233,463
======== ======== ========
</TABLE>
166
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net operating income:
Leasing activities:
United States.......................... $ 306,920 $ 256,953 $ 200,326
Europe (1)............................. 7,710 -- --
Mexico................................. 3,302 572 --
--------- --------- ---------
Total leasing activities segment..... 317,932 257,525 200,326
--------- --------- ---------
Refrigerated operations:
United States (2) (3).................. 7,349 3,278 --
Europe (4) (5)......................... (7,535) -- --
--------- --------- ---------
Total refrigerated operations
segment............................. (186) 3,278 --
--------- --------- ---------
Development activities:
United States.......................... 17,137 12,374 5,342
Europe (United Kingdom) (6) (7)........ 2,915 -- --
Mexico................................. 133 (83) --
--------- --------- ---------
Total development activities segment. 20,185 12,291 5,342
--------- --------- ---------
Reconciling items:
Foreign currency exchange gains
(losses), net......................... 2,938 (348) --
Foreign currency hedge income
(expense)............................. 2,054 (6,028) --
Interest income........................ 2,752 2,392 1,121
General and administrative expense..... (22,957) (6,855) (1,025)
REIT management fee paid to affiliate.. -- (17,791) (21,472)
Depreciation and amortization.......... (100,590) (76,562) (59,850)
Interest expense....................... (77,650) (52,704) (38,819)
Interest rate hedge expense............ (26,050) -- --
Costs incurred in acquiring management
companies from affiliate.............. -- (75,376) --
Other expense.......................... (7,983) (3,891) (2,913)
--------- --------- ---------
Total reconciling items.............. (227,486) (237,163) (122,958)
--------- --------- ---------
Earnings from operations................. $ 110,445 $ 35,931 $ 82,710
========= ========= =========
</TABLE>
167
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Assets:
Leasing activities:
United States..................................... $3,073,248 $2,787,118
Europe (1)........................................ 309,639 --
Mexico............................................ 74,494 27,828
---------- ----------
Total leasing activities segment................ 3,457,381 2,814,946
---------- ----------
Refrigerated operations:
United States (2) (3)............................. 151,021 85,639
Europe (4)........................................ 221,566 --
---------- ----------
Total refrigerated operations segment........... 372,587 85,639
---------- ----------
Development activities:
United States..................................... 149,521 86,415
Europe (United Kingdom) (6)....................... 224,769 --
Mexico............................................ 16,465 3,522
---------- ----------
Total development activities segment............ 390,755 89,937
---------- ----------
Reconciling items:
Cash.............................................. 63,140 25,009
Accounts receivable............................... 1,313 167
Other assets...................................... 45,553 18,255
---------- ----------
Total reconciling items......................... 110,006 43,431
---------- ----------
Total assets...................................... $4,330,729 $3,033,953
========== ==========
</TABLE>
- --------
(1) Includes $6,000 of income recognized under the equity method of accounting
related to ProLogis' investment in Garonor Holdings. See Note 4 for
summarized financial information of Garonor Holdings.
(2) Represents amount recognized under the equity method of accounting related
to ProLogis' investment in ProLogis Logistics. See Note 4 for summarized
financial information of ProLogis Logistics.
(3) Includes one facility in Canada.
(4) Represents amount recognized under the equity method of accounting related
to ProLogis' investment in Frigoscandia S.A. See Note 4 for summarized
financial information of Frigoscandia S.A.
(5) Includes a net loss of $13.3 million from the remeasurement of
intercompany and other debt based on the foreign currency exchange rates
in effect as of December 31, 1998.
(6) Represents amount recognized under the equity method of accounting related
to ProLogis' investment in Kingspark S.A. See Note 4 for summarized
financial information of Kingspark S.A.
(7) Includes a net loss of $0.9 million from the remeasurement of intercompany
debt based on the foreign currency exchange rates in effect as of December
31, 1998.
ProLogis' largest customer accounted for 1.16% of ProLogis' 1998 rental
income (on an annualized basis), and the annualized base rent for ProLogis' 20
largest customers accounted for approximately 12.56% of ProLogis' 1998 rental
income (on an annualized basis).
168
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees and Shareholders of ProLogis Trust:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of ProLogis Trust included in this Form 10-K, and
have issued our report thereon dated March 5, 1999. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The
supplemental Schedule III--Real Estate and Accumulated Depreciation ("Schedule
III") is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
Schedule III has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
March 5, 1999
169
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried
ProLogis as of December 31, 1998
------------------- Costs Capitalized -------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ------ ------------ ----------------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating
Properties
Amsterdam,
Netherlands
Schiphol
Distribution
Center.......... 2 $6,322 $ -- $15,608 $6,761 $15,169 $21,930 $ (152)
Zaandam
Distribution
Center.......... 1 1,265 7,171 972 2,022 7,386 9,408 (183)
Atlanta, Georgia
Atlanta Airport
Distribution
Center.......... 6 3,437 -- 13,834 5,188 12,083 17,271 (598)
Atlanta NE
Distribution
Center.......... 8 5,582 3,047 24,278 6,276 26,631 32,907 (1,817)
Atlanta West
Distribution
Center.......... 20 6,771 34,785 10,109 6,776 44,889 51,665 (5,299)
Carter-Pacific
Business Center. 3 556 3,151 552 556 3,703 4,259 (362)
International
Airport
Industrial
Center.......... 9 (d) 2,939 14,146 4,926 2,972 19,039 22,011 (2,525)
LaGrange
Distribution
Center.......... 1 174 986 122 174 1,108 1,282 (167)
Northeast
Industrial
Center.......... 4 1,109 6,283 149 1,050 6,491 7,541 (609)
Northmont
Industrial
Center.......... 1 566 3,209 187 566 3,396 3,962 (482)
Oakcliff
Industrial
Center.......... 3 608 3,446 387 608 3,833 4,441 (466)
Olympic
Industrial
Center.......... 2 698 3,956 1,573 757 5,470 6,227 (520)
Peachtree
Commerce
Business Center. 4 (d) 707 4,004 676 707 4,680 5,387 (704)
Peachtree
Distribution
Center.......... 1 302 1,709 37 302 1,746 2,048 (232)
Piedmont Court
Distribution
Center.......... 2 885 5,013 483 885 5,496 6,381 (257)
Plaza Industrial
Center.......... 1 66 372 85 66 457 523 (53)
Pleasantdale
Industrial
Center.......... 2 541 3,184 403 541 3,587 4,128 (460)
Regency
Industrial
Center.......... 9 1,853 10,480 802 1,856 11,279 13,135 (1,579)
Riverside
Distribution
Center.......... 1 271 -- 2,939 294 2,916 3,210 (222)
Sullivan 75
Distribution
Center.......... 3 (d) 728 4,123 558 728 4,681 5,409 (638)
Tradeport
Distribution
Center.......... 3 1,464 4,563 5,267 1,479 9,815 11,294 (1,028)
Weaver
Distribution
Center.......... 2 935 5,182 577 935 5,759 6,694 (747)
Westfork
Industrial
Center.......... 10 2,483 14,115 697 2,483 14,812 17,295 (1,729)
Zip Industrial
Center.......... 4 533 3,023 (237) 485 2,834 3,319 --
Austin, Texas
Corridor Park
Corporate
Center.......... 6 2,109 1,681 13,413 2,113 15,090 17,203 (1,406)
Montopolis
Distribution
Center.......... 1 580 3,384 657 580 4,041 4,621 (677)
Pecan Business
Center.......... 4 630 3,572 404 631 3,975 4,606 (452)
</TABLE>
<TABLE>
<CAPTION>
Date of
Construction/
Description Acquisition
----------- ---------------
<S> <C>
Operating
Properties
Amsterdam,
Netherlands
Schiphol
Distribution
Center.......... 1998
Zaandam
Distribution
Center.......... 1998
Atlanta, Georgia
Atlanta Airport
Distribution
Center.......... 1996,1997, 1998
Atlanta NE
Distribution
Center.......... 1996,1997
Atlanta West
Distribution
Center.......... 1994,1996
Carter-Pacific
Business Center. 1995
International
Airport
Industrial
Center.......... 1994,1995
LaGrange
Distribution
Center.......... 1994
Northeast
Industrial
Center.......... 1996
Northmont
Industrial
Center.......... 1994
Oakcliff
Industrial
Center.......... 1995
Olympic
Industrial
Center.......... 1996
Peachtree
Commerce
Business Center. 1994
Peachtree
Distribution
Center.......... 1994
Piedmont Court
Distribution
Center.......... 1997
Plaza Industrial
Center.......... 1995
Pleasantdale
Industrial
Center.......... 1995
Regency
Industrial
Center.......... 1994
Riverside
Distribution
Center.......... 1997
Sullivan 75
Distribution
Center.......... 1994,1995
Tradeport
Distribution
Center.......... 1994,1996
Weaver
Distribution
Center.......... 1995
Westfork
Industrial
Center.......... 1995
Zip Industrial
Center.......... 1996
Austin, Texas
Corridor Park
Corporate
Center.......... 1995,1996
Montopolis
Distribution
Center.......... 1994
Pecan Business
Center.......... 1995
</TABLE>
170
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost Gross Amounts At Which Carried as
To ProLogis of December 31, 1998
------------------- Costs Capitalized --------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ------ ------------ ----------------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rutland
Distribution
Center.......... 2 $ 460 $ 2,617 $ 220 $ 462 $ 2,835 $ 3,297 $ (473)
Southpark
Corporate
Center.......... 7 1,946 -- 15,199 1,946 15,199 17,145 (1,576)
Walnut Creek
Corporate
Center.......... 12 2,707 5,649 16,134 2,707 21,783 24,490 (2,171)
<CAPTION>
Date of Construction/
Description Acquisition
----------- ----------------------
<S> <C>
Rutland
Distribution
Center.......... 1993
Southpark
Corporate
Center.......... 1994,1995,1996
Walnut Creek
Corporate
Center.......... 1994,1995,1996
Birmingham,
Alabama
Oxmoor
Distribution
Center.......... 4 (d) 2,398 13,591 858 2,398 14,449 16,847 (2,213)
Perimeter
Distribution
Center.......... 2 2,489 14,109 645 2,490 14,753 17,243 (2,283)
Birmingham,
Alabama
Oxmoor
Distribution
Center.......... 1994
Perimeter
Distribution
Center.......... 1994
Charlotte, North
Carolina
Barringer
Industrial
Center.......... 3 308 1,746 476 308 2,222 2,530 (337)
Bond
Distribution
Center.......... 2 905 5,126 889 905 6,015 6,920 (937)
Charlotte
Commerce Center. 10 4,341 24,954 2,189 4,342 27,142 31,484 (4,130)
Charlotte
Distribution
Center.......... 9 4,579 -- 23,698 6,096 22,181 28,277 (1,423)
Interstate North
Business Park... 2 535 3,030 205 535 3,235 3,770 (180)
Northpark
Distribution
Center.......... 2 1,183 6,707 243 1,184 6,949 8,133 (396)
Charlotte, North
Carolina
Barringer
Industrial
Center.......... 1994
Bond
Distribution
Center.......... 1994
Charlotte
Commerce Center. 1994
Charlotte
Distribution
Center.......... 1995, 1996, 1997, 1998
Interstate North
Business Park... 1997
Northpark
Distribution
Center.......... 1994,1998
Chattanooga,
Tennessee
Stone Fort
Distribution
Center.......... 4 2,063 11,688 189 2,063 11,877 13,940 (1,685)
Tiftonia
Chattanooga,Distribution
TennesseeCenter.......... 1 146 829 184 146 1,013 1,159 (122)
Stone Fort
Distribution
Center.......... 1994
Tiftonia
Distribution
Center.......... 1995
Chicago, Illinois
Addison
Distribution
Center.......... 1 646 3,662 393 640 4,061 4,701 (276)
Alsip
Distribution
Center.......... 1 1,268 7,185 3,680 1,273 10,860 12,133 (392)
Bedford Park
Distribution
Center.......... 1 473 2,678 40 473 2,718 3,191 (211)
Bensenville
Distribution
Center.......... 2 1,668 9,448 2,506 1,667 11,955 13,622 (370)
Bridgeview
Distribution
Center.......... 4 1,302 7,378 675 1,303 8,052 9,355 (668)
Des Plaines
Distribution
Center.......... 3 2,158 12,232 590 2,159 12,821 14,980 (1,190)
Elk Grove
Distribution
Center.......... 10 (d) 4,024 22,798 2,685 4,023 25,484 29,507 (2,197)
Elmhurst
Distribution
Center.......... 1 713 4,043 60 713 4,103 4,816 (209)
Glenview
Distribution
Center.......... 1 (d) 214 1,213 49 214 1,262 1,476 (95)
Itasca
Distribution
Center.......... 3 1,613 9,143 162 1,613 9,305 10,918 (302)
Mitchell
Distribution
Center.......... 1 (d) 1,236 7,004 606 1,236 7,610 8,846 (641)
North Avenue
Distribution
Center.......... 3 3,201 -- 17,185 3,934 16,452 20,386 (140)
Northlake
Distribution
Center.......... 1 372 2,106 51 372 2,157 2,529 (192)
O'Hare Cargo
Distribution
Center.......... 2 3,566 -- 13,115 5,924 10,757 16,681 (126)
Remington Lakes
Business Park... 1 1,023 -- 6,510 1,193 6,340 7,533 --
Tri-Center
Distribution
Center.......... 3 889 5,038 263 889 5,301 6,190 (402)
Woodale
Distribution
Center.......... 1 263 1,490 64 263 1,554 1,817 (82)
Chicago, Illinois
Addison
Distribution
Center.......... 1997
Alsip
Distribution
Center.......... 1998
Bedford Park
Distribution
Center.......... 1996
Bensenville
Distribution
Center.......... 1997, 1998
Bridgeview
Distribution
Center.......... 1996
Des Plaines
Distribution
Center.......... 1995, 1996
Elk Grove
Distribution
Center.......... 1995,1996,1997,1998
Elmhurst
Distribution
Center.......... 1997
Glenview
Distribution
Center.......... 1996
Itasca
Distribution
Center.......... 1996, 1997, 1998
Mitchell
Distribution
Center.......... 1996
North Avenue
Distribution
Center.......... 1997, 1998
Northlake
Distribution
Center.......... 1996
O'Hare Cargo
Distribution
Center.......... 1997
Remington Lakes
Business Park... 1998
Tri-Center
Distribution
Center.......... 1996
Woodale
Distribution
Center.......... 1997
</TABLE>
171
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost Gross Amounts At Which Carried
to ProLogis as of December 31, 1998
------------------- Costs Capitalized -------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ------ ------------ ----------------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cincinnati, Ohio
Airpark
Distribution
Center.......... 3 $2,126 $ -- $14,010 $2,380 $13,756 $16,136 $ (988)
Blue
Ash/Interstate
Distribution
Center.......... 1 144 817 497 144 1,314 1,458 (130)
Capital
Distribution
Center I........ 4 1,750 9,922 924 1,751 10,845 12,596 (1,400)
Capital
Distribution
Center II....... 5 1,953 11,067 1,334 1,953 12,401 14,354 (1,681)
Capital
Industrial
Center I........ 10 1,039 5,885 1,475 1,039 7,360 8,399 (913)
Empire
Distribution
Center.......... 3 529 2,995 442 529 3,437 3,966 (374)
Kentucky Drive
Business Center. 4 553 3,134 583 553 3,717 4,270 (219)
Princeton
Distribution
Center.......... 1 816 -- 4,182 1,070 3,928 4,998 --
Production
Distribution
Center.......... 2 (e) 717 2,717 2,505 700 5,239 5,939 (389)
Sharonville
Distribution
Center.......... 3 1,761 -- 11,167 2,426 10,502 12,928 (216)
Springdale
Commerce Center. 3 421 2,384 858 421 3,242 3,663 (315)
Union Center
Business Park... 1 409 -- 9,576 580 9,405 9,985 --
<CAPTION>
Date of
Construction/
Description Acquisition
----------- ---------------
<S> <C>
Cincinnati, Ohio
Airpark
Distribution
Center.......... 1996,1998
Blue
Ash/Interstate
Distribution
Center.......... 1995
Capital
Distribution
Center I........ 1994
Capital
Distribution
Center II....... 1994
Capital
Industrial
Center I........ 1994,1995
Empire
Distribution
Center.......... 1995
Kentucky Drive
Business Center. 1997
Princeton
Distribution
Center.......... 1997
Production
Distribution
Center.......... 1994,1998
Sharonville
Distribution
Center.......... 1997,1998
Springdale
Commerce Center. 1996
Union Center
Business Park... 1998
Columbus, Ohio
Capital Park
South
Distribution
Center.......... 4 2,266 -- 25,076 2,297 25,045 27,342 (1,706)
Columbus West
Industrial
Center.......... 3 645 3,655 691 645 4,346 4,991 (501)
Corporate Park
West............ 2 679 3,849 242 679 4,091 4,770 (342)
Fisher
Distribution
Center.......... 1 1,197 6,785 759 1,197 7,544 8,741 (988)
International
Street Commerce. 1 235 -- 2,815 249 2,801 3,050 (34)
McCormick
Distribution
Center.......... 5 1,664 9,429 1,056 1,664 10,485 12,149 (1,410)
New World
Distribution
Center.......... 1 207 1,173 548 207 1,721 1,928 (242)
Westbelt
Business Center. 2 465 2,635 115 465 2,750 3,215 (69)
Columbus, Ohio
Capital Park
South
Distribution
Center.......... 1996,1998
Columbus West
Industrial
Center.......... 1995
Corporate Park
West............ 1996
Fisher
Distribution
Center.......... 1995
International
Street Commerce. 1997
McCormick
Distribution
Center.......... 1994
New World
Distribution
Center.......... 1994
Westbelt
Business Center. 1998
Dallas/Fort
Worth, Texas
Carter
Industrial
Center.......... 1 334 -- 2,323 334 2,323 2,657 (190)
Dallas Corporate
Center.......... 9 (d) 4,753 -- 26,751 4,900 26,604 31,504 (1,494)
Franklin
Distribution
Center.......... 2 528 2,991 736 528 3,727 4,255 (575)
Freeport
Distribution
Center.......... 4 1,393 5,549 3,280 1,440 8,782 10,222 (388)
Great Southwest
Distribution
Center.......... 16 (d) 4,848 19,430 10,590 4,966 29,902 34,868 (2,308)
Great Southwest
Industrial
Center I........ 2 (d) 308 1,744 178 308 1,922 2,230 (203)
Great Southwest
Industrial
Center II....... 1 836 -- 6,077 1,010 5,903 6,913 --
Lone Star
Distribution
Center.......... 2 967 5,477 214 967 5,691 6,658 (498)
Metropolitan
Distribution
Center.......... 1 201 1,097 722 297 1,723 2,020 (192)
Dallas/Fort
Worth, Texas
Carter
Industrial
Center.......... 1996
Dallas Corporate
Center.......... 1996,1997, 1998
Franklin
Distribution
Center.......... 1994
Freeport
Distribution
Center.......... 1996,1997, 1998
Great Southwest
Distribution 1994,1995,1996,
Center.......... 1997,1998
Great Southwest
Industrial
Center I........ 1995
Great Southwest
Industrial
Center II....... 1997
Lone Star
Distribution
Center.......... 1996
Metropolitan
Distribution
Center.......... 1995
</TABLE>
172
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost Gross Amounts At Which Carried
to ProLogis as of December 31, 1998
------------------- Costs Capitalized -------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ------ ------------ ----------------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Northgate
Distribution
Center.......... 5 $1,570 $ 8,897 $ 898 $1,570 $ 9,795 $11,365 $(1,348)
Northpark
Business Center. 2 467 2,648 226 467 2,874 3,341 (272)
Redbird
Distribution
Center.......... 1 196 1,112 78 196 1,190 1,386 (195)
Royal Commerce
Center.......... 4 (d) 1,975 11,190 460 1,975 11,650 13,625 (504)
Stemmons
Distribution
Center.......... 1 272 1,544 473 272 2,017 2,289 (239)
Stemmons
Industrial
Center.......... 11 1,497 8,484 1,526 1,497 10,010 11,507 (1,228)
Trinity Mills
Distribution
Center.......... 4 (d) 1,709 9,684 1,197 1,709 10,881 12,590 (972)
<CAPTION>
Date of Construction/
Description Acquisition
----------- ------------------------
<S> <C>
Northgate
Distribution
Center.......... 1994,1996
Northpark
Business Center. 1995,1996
Redbird
Distribution
Center.......... 1994
Royal Commerce
Center.......... 1997
Stemmons
Distribution
Center.......... 1995
Stemmons
Industrial
Center.......... 1994,1995,1996
Trinity Mills
Distribution
Center.......... 1996
Denver, Colorado
Denver Business
Center.......... 6 1,687 7,486 10,470 1,742 17,901 19,643 (1,929)
Havana
Distribution
Center.......... 1 401 2,281 240 401 2,521 2,922 (440)
Moline
Distribution
Center.......... 1 327 1,850 159 327 2,009 2,336 (323)
Moncrieff
Distribution
Center.......... 1 314 2,493 401 314 2,894 3,208 (559)
Pagosa
Distribution
Center.......... 1 406 2,322 407 406 2,729 3,135 (514)
Upland
Distribution
Center I........ 6 820 5,710 8,015 821 13,724 14,545 (2,234)
Upland
Distribution
Center II....... 6 2,456 13,946 974 2,489 14,887 17,376 (2,600)
Denver, Colorado
Denver Business
Center.......... 1992,1994,1996,1998
Havana
Distribution
Center.......... 1993
Moline
Distribution
Center.......... 1994
Moncrieff
Distribution
Center.......... 1992
Pagosa
Distribution
Center.......... 1993
Upland
Distribution
Center I........ 1992,1994,1995
Upland
Distribution
Center II....... 1993,1994
East Bay (San
Francisco),
California
East Bay
Industrial
Center.......... 1 531 3,009 187 531 3,196 3,727 (472)
Eigenbrodt Way
Distribution
Center.......... 1 (d) 393 2,228 83 393 2,311 2,704 (387)
Hayward Commerce
Center.......... 4 1,933 10,955 518 1,933 11,473 13,406 (1,920)
Hayward Commerce
Park............ 9 2,764 15,661 1,740 2,764 17,401 20,165 (2,837)
Hayward
Distribution
Center.......... 6 (f) 2,906 19,165 729 3,327 19,473 22,800 (3,227)
Hayward
Industrial
Center.......... 13 (d) 4,481 25,393 1,545 4,481 26,938 31,419 (4,490)
Patterson Pass
Business Center. 7 3,340 4,885 13,921 3,530 18,616 22,146 (1,044)
San Leandro
Distribution
Center.......... 3 1,387 7,862 258 1,387 8,120 9,507 (1,382)
East Bay (San
Francisco),
California
East Bay
Industrial
Center.......... 1994
Eigenbrodt Way
Distribution
Center.......... 1993
Hayward Commerce
Center.......... 1993
Hayward Commerce
Park............ 1994
Hayward
Distribution
Center.......... 1993
Hayward
Industrial
Center.......... 1993
Patterson Pass
Business Center. 1993,1997,1998
San Leandro
Distribution
Center.......... 1993
El Paso, Texas
Billy the Kid
Distribution
Center.......... 1 273 1,547 526 273 2,073 2,346 (297)
Broadbent
Industrial
Center.......... 3 676 5,183 473 676 5,656 6,332 (1,069)
Goodyear
Distribution
Center.......... 1 511 2,899 61 511 2,960 3,471 (453)
Northwestern
Corporate
Center.......... 6 1,552 -- 16,507 2,205 15,854 18,059 (1,548)
Pan Am
Distribution
Center.......... 1 318 -- 2,370 318 2,370 2,688 (306)
Peter Cooper
Distribution
Center.......... 1 (d) 495 2,816 88 495 2,904 3,399 (441)
Vista Corporate
Center.......... 4 1,945 -- 10,922 1,946 10,921 12,867 (1,183)
Vista Del Sol
Industrial
Center.......... 10 (d) 3,501 12,782 19,796 4,893 31,186 36,079 (3,165)
El Paso, Texas
Billy the Kid
Distribution
Center.......... 1994
Broadbent
Industrial
Center.......... 1993
Goodyear
Distribution
Center.......... 1994
Northwestern
Corporate
Center.......... 1992,1993,1994,1997,1998
Pan Am
Distribution
Center.......... 1995
Peter Cooper
Distribution
Center.......... 1994
Vista Corporate
Center.......... 1994,1995,1996
Vista Del Sol
Industrial
Center.......... 1994,1995,1996
</TABLE>
173
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost Gross Amounts At Which Carried
to ProLogis as of December 31, 1998
------------------- Costs Capitalized -------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ------ ------------ ----------------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fort
Lauderdale/Miami,
Florida
Airport West
Distribution
Center.......... 2 $1,253 $ 3,825 $ 3,399 $1,973 $ 6,504 $ 8,477 $ (408)
Copans
Distribution
Center.......... 2 504 2,857 389 504 3,246 3,750 (175)
North Andrews
Distribution
Center.......... 1 (e) 698 3,956 92 698 4,048 4,746 (562)
Port 95
Distribution
Center I........ 5 4,874 6,654 21,225 6,531 26,222 32,753 (1,030)
<CAPTION>
Date of Construction/
Description Acquisition
----------- -----------------------------
<S> <C>
Fort
Lauderdale/Miami,
Florida
Airport West
Distribution
Center.......... 1995,1998
Copans
Distribution
Center.......... 1997,1998
North Andrews
Distribution
Center.......... 1994
Port 95
Distribution
Center I........ 1995,1997,1998
Houston, Texas
Crosstimbers
Distribution
Center.......... 1 359 2,035 434 359 2,469 2,828 (383)
Hempstead
Distribution
Center.......... 3 1,013 5,740 679 1,013 6,419 7,432 (1,006)
I-10 Central
Distribution
Center.......... 2 181 1,023 190 181 1,213 1,394 (190)
I-10 Central
Service Center.. 1 58 330 105 58 435 493 (67)
Pine Forest
Business Center. 18 (d) 4,859 27,557 2,168 4,859 29,725 34,584 (3,790)
Post Oak
Business Center. 16 (d) 3,462 17,966 4,467 3,462 22,433 25,895 (3,036)
Post Oak
Distribution
Center.......... 7 (d) 2,115 12,017 2,308 2,115 14,325 16,440 (2,399)
South Loop
Distribution
Center.......... 5 1,051 5,964 1,706 1,052 7,669 8,721 (1,042)
Southwest
Freeway
Industrial
Center.......... 1 84 476 144 84 620 704 (79)
West by
Northwest
Industrial
Center.......... 16 4,132 8,382 32,150 4,368 40,296 44,664 (3,425)
White Street
Distribution
Center.......... 1 469 2,656 232 469 2,888 3,357 (368)
Houston, Texas
Crosstimbers
Distribution
Center.......... 1994
Hempstead
Distribution
Center.......... 1994
I-10 Central
Distribution
Center.......... 1994
I-10 Central
Service Center.. 1994
Pine Forest
Business Center. 1993,1994,1995
Post Oak
Business Center. 1993,1994,1996
Post Oak
Distribution
Center.......... 1993,1994
South Loop
Distribution
Center.......... 1994
Southwest
Freeway
Industrial
Center.......... 1994
West by
Northwest
Industrial
Center.......... 1993,1994,1995,1996,1997,1998
White Street
Distribution
Center.......... 1995
Indianapolis,
Indiana
Eastside
Distribution
Center.......... 2 471 2,668 289 472 2,956 3,428 (302)
North by
Northeast
Distribution
Center.......... 1 1,058 -- 5,964 1,059 5,963 7,022 (788)
Park 100
Industrial
Center.......... 24 9,770 55,369 4,088 9,665 59,562 69,227 (6,707)
Indianapolis,
Indiana
Eastside
Distribution
Center.......... 1995
North by
Northeast
Distribution
Center.......... 1995
Park 100
Industrial
Center.......... 1994,1995
</TABLE>
174
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost Gross Amounts At Which Carried
to ProLogis as of December 31, 1998
-------------------- Costs Capitalized --------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ------- ------------ ----------------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Park Fletcher
Distribution
Center.......... 9 $ 2,687 $15,224 $ 1,863 $ 2,736 $17,038 $19,774 $(1,771)
Plainfield Park
Distribution
Center.......... 2 885 -- 8,460 1,389 7,956 9,345 --
Shadeland
Industrial
Center.......... 3 428 2,431 585 429 3,015 3,444 (350)
<CAPTION>
Date of
Construction/
Description Acquisition
----------- -------------------
<S> <C>
Park Fletcher
Distribution
Center.......... 1994,1995,1996
Plainfield Park
Distribution
Center.......... 1997,1998
Shadeland
Industrial
Center.......... 1995
Juarez, Mexico
Salvarcar
Industrial
Center.......... 3 1,509 -- 6,899 2,066 6,342 8,408 (121)
Juarez, Mexico
Salvarcar
Industrial
Center.......... 1998
Kansas City,
Kansas/Missouri
44th Street
Business Center. 1 143 813 319 143 1,132 1,275 (106)
Congleton
Distribution
Center.......... 3 518 2,937 341 518 3,278 3,796 (478)
Executive Park
Distribution
Center.......... 1 (d) 258 1,463 42 258 1,505 1,763 (17)
Lamar
Distribution
Center.......... 1 323 1,829 529 323 2,358 2,681 (366)
Macon Bedford
Distribution
Center.......... 1 304 1,725 389 304 2,114 2,418 (199)
Platte Valley
Industrial
Center.......... 11 (d) 3,867 20,017 6,121 4,002 26,003 30,005 (3,050)
Riverside
Distribution
Center.......... 5 (d) 533 3,024 731 534 3,754 4,288 (524)
Riverside
Industrial
Center.......... 5 (d) 1,012 5,736 372 1,012 6,108 7,120 (850)
Terrace &
Lackman
Distribution
Center.......... 1 285 1,615 432 285 2,047 2,332 (304)
Kansas City,
Kansas/Missouri
44th Street
Business Center. 1996
Congleton
Distribution
Center.......... 1994
Executive Park
Distribution
Center.......... 1998
Lamar
Distribution
Center.......... 1994
Macon Bedford
Distribution
Center.......... 1996
Platte Valley
Industrial
Center.......... 1994,1997
Riverside
Distribution
Center.......... 1994
Riverside
Industrial
Center.......... 1994
Terrace &
Lackman
Distribution
Center.......... 1994
Las Vegas, Nevada
Black Mountain
Distribution
Center.......... 2 1,108 -- 6,547 1,206 6,449 7,655 (122)
Hughes Airport
Center.......... 1 876 -- 3,331 910 3,297 4,207 (495)
Las Vegas
Corporate
Center.......... 7 (f) 4,157 -- 21,198 4,763 20,592 25,355 (1,795)
West One
Business Center. 4 (d) 2,468 13,985 467 2,468 14,452 16,920 (1,125)
Las Vegas, Nevada
Black Mountain
Distribution
Center.......... 1997
Hughes Airport
Center.......... 1994
Las Vegas
Corporate
Center.......... 1994,1995,1996,1997
West One
Business Center. 1996
Los Angeles /
Orange County,
California
Foothill
Business Center. 3 (g) 5,530 -- 14,305 5,814 14,021 19,835 (338)
Freeway
Distribution
Center.......... 3 (g) 3,305 18,729 130 3,305 18,859 22,164 (744)
Mid-Counties
Distribution
Center.......... 8 (g) 16,082 15,895 22,801 19,177 35,601 54,778 (2,125)
North County
Distribution
Center.......... 2 (g) 16,543 -- 22,415 16,374 22,584 38,958 (1,665)
Ontario
Distribution
Center.......... 5 (g) 8,085 45,817 369 8,085 46,186 54,271 --
Pacific Business
Center.......... 5 (g) 4,196 -- 21,291 4,379 21,108 25,487 (850)
Santa Ana
Distribution
Center.......... 1 (g) 647 3,668 63 647 3,731 4,378 (497)
Union Pacific
Distribution
Center.......... 1 559 3,166 6 559 3,172 3,731 --
Los Angeles /
Orange County,
California
Foothill
Business Center. 1997,1998
Freeway
Distribution
Center.......... 1997
Mid-Counties
Distribution
Center.......... 1995,1997,1998
North County
Distribution
Center.......... 1996
Ontario
Distribution
Center.......... 1998
Pacific Business
Center.......... 1996,1997
Santa Ana
Distribution
Center.......... 1994
Union Pacific
Distribution
Center.......... 1998
</TABLE>
175
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried as
ProLogis of December 31, 1998
-------------------- Costs Capitalized --------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ------- ------------ ----------------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Louisville,
Kentucky
Airpark Commerce
Center........... 3 $ 1,361 $ 7,715 $ 351 $ 1,361 $ 8,066 $ 9,427 $ (131)
Louisville
Distribution
Center........... 3 1,298 3,402 10,562 1,329 13,933 15,262 (456)
<CAPTION>
Date of Construction/
Description Acquisition
----------- ------------------------
<S> <C>
Louisville,
Kentucky
Airpark Commerce
Center........... 1998
Louisville
Distribution
Center........... 1995,1996,1998
Lyon, France......
L'Isle d'Abeau
Distribution
Center........... 2 (d) 2,495 7,062 7,559 2,652 14,464 17,116 (302)
Lyon, France......
L'Isle d'Abeau
Distribution
Center........... 1997,1998
Memphis, Tennessee
Airport
Distribution
Center........... 14 3,923 22,233 3,917 3,923 26,150 30,073 (2,906)
Delp
Distribution
Center........... 8 2,308 13,079 2,424 2,308 15,503 17,811 (1,756)
Fred Jones
Distribution
Center........... 1 125 707 88 125 795 920 (110)
Raines
Distribution
Center........... 1 (d) 1,635 9,264 2,458 1,635 11,722 13,357 (325)
Memphis, Tennessee
Airport
Distribution
Center........... 1995,1996
Delp
Distribution
Center........... 1995,1997
Fred Jones
Distribution
Center........... 1994
Raines
Distribution
Center........... 1998
Monterrey, Mexico
Monterrey
Industrial Park.. 5 2,714 3,785 9,015 3,773 11,741 15,514 (407)
Ojo de Agua
Industrial
Center........... 1 983 -- 5,438 1,138 5,283 6,421 (15)
Monterrey, Mexico
Monterrey
Industrial Park.. 1997,1998
Ojo de Agua
Industrial
Center........... 1998
Nashville,
Tennessee
Bakertown
Distribution
Center.......... 2 463 2,626 151 463 2,777 3,240 (289)
I-40 Industrial
Center.......... 3 665 3,774 240 666 4,013 4,679 (479)
Interchange City
Distribution
Center.......... 7 3,524 12,585 8,967 4,279 20,797 25,076 (1,359)
Space Park South
Distribution
Center.......... 15 3,499 19,830 2,388 3,499 22,218 25,717 (3,071)
Nashville,
Tennessee
Bakertown
Distribution
Center.......... 1995
I-40 Industrial
Center.......... 1995,1996
Interchange City
Distribution
Center.......... 1994,1995,1996,1997,1998
Space Park South
Distribution
Center.......... 1994
New Jersey / I-95
Corridor
Brunswick
Distribution
Center.......... 2 870 4,928 1,451 870 6,379 7,249 (453)
Clearview
Distribution
Center.......... 1 2,232 12,648 318 2,232 12,966 15,198 (903)
Cranbury
Business Park... 2 3,022 -- 20,918 5,361 18,579 23,940 (90)
Kilmer
Distribution
Center.......... 4 2,526 14,313 630 2,526 14,943 17,469 (1,100)
Meadowland
Industrial
Center.......... 8 5,676 32,167 10,882 5,677 43,048 48,725 (2,094)
National
Distribution
Center.......... 2 513 2,908 796 513 3,704 4,217 (58)
New Jersey / I-95
Corridor
Brunswick
Distribution
Center.......... 1997
Clearview
Distribution
Center.......... 1996
Cranbury
Business Park... 1998
Kilmer
Distribution
Center.......... 1996
Meadowland
Industrial
Center.......... 1996,1998
National
Distribution
Center.......... 1998
Oklahoma City,
Oklahoma
Melcat
Distribution
Center.......... 1 240 1,363 366 240 1,729 1,969 (237)
Meridian
Business Center. 2 195 1,109 563 196 1,671 1,867 (208)
Oklahoma
Distribution
Center.......... 3 893 5,082 646 893 5,728 6,621 (1,017)
Oklahoma City,
Oklahoma
Melcat
Distribution
Center.......... 1994
Meridian
Business Center. 1994
Oklahoma
Distribution
Center.......... 1993
</TABLE>
176
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried as
ProLogis of December 31, 1998
-------------------- Costs Capitalized --------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ------- ------------ ----------------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Orlando, Florida
33rd Street
Industrial
Center.......... 9 (d)(e) $ 1,980 $ 11,237 $ 886 $ 1,980 $ 12,123 $ 14,103 $ (1,360)
Chancellor
Distribution
Center.......... 1 380 2,156 1,077 380 3,233 3,613 (375)
La Quinta
Distribution
Center.......... 1 354 2,006 576 354 2,582 2,936 (329)
Orlando Central
Park............ 3 1,378 -- 9,080 1,871 8,587 10,458 (210)
Titusville
Industrial
Center.......... 1 (d) 283 1,603 86 283 1,689 1,972 (231)
<CAPTION>
Date of Construction/
Description Acquisition
----------- ----------------------
<S> <C>
Orlando, Florida
33rd Street
Industrial
Center.......... 1994,1995,1996
Chancellor
Distribution
Center.......... 1994
La Quinta
Distribution
Center.......... 1994
Orlando Central
Park............ 1997,1998
Titusville
Industrial
Center.......... 1994
Paris, France
Epone
Distribution
Center.......... 1 255 3,952 -- 255 3,952 4,207 (11)
Longjumeau
Distribution
Center.......... 1 (d) 1,233 6,988 663 1,343 7,541 8,884 (166)
Mitry Mory
Distribution
Center.......... 1 (d) 1,083 6,137 1,286 1,313 7,193 8,506 (362)
Oceanie
Distribution
Center.......... 1 (d) 389 7,068 -- 389 7,068 7,457 (39)
Paris, France
Epone
Distribution
Center.......... 1998
Longjumeau
Distribution
Center.......... 1998
Mitry Mory
Distribution
Center.......... 1997
Oceanie
Distribution
Center.......... 1998
Phoenix, Arizona
24th Street
Industrial
Center.......... 2 503 2,852 288 503 3,140 3,643 (528)
Alameda
Distribution
Center.......... 2 820 4,977 318 820 5,295 6,115 (633)
Hohokam 10
Industrial
Center.......... 5 2,940 -- 11,434 2,941 11,433 14,374 (982)
I-10 West
Business Center. 3 263 1,525 147 263 1,672 1,935 (306)
Kyrene Commons
Distribution
Center.......... 2 586 2,656 1,251 587 3,906 4,493 (644)
Kyrene Commons
South
Distribution
Center.......... 2 1,096 -- 4,338 1,163 4,271 5,434 (49)
Martin Van Buren
Distribution
Center.......... 6 572 3,285 448 572 3,733 4,305 (592)
Papago
Distribution
Center.......... 1 420 2,383 99 420 2,482 2,902 (392)
Pima
Distribution
Center.......... 1 306 1,742 216 306 1,958 2,264 (333)
Watkins
Distribution
Center.......... 1 242 1,375 192 243 1,566 1,809 (210)
Phoenix, Arizona
24th Street
Industrial
Center.......... 1994
Alameda
Distribution
Center.......... 1992,1998
Hohokam 10
Industrial
Center.......... 1996
I-10 West
Business Center. 1993
Kyrene Commons
Distribution
Center.......... 1992,1998
Kyrene Commons
South
Distribution
Center.......... 1998
Martin Van Buren
Distribution
Center.......... 1993,1994
Papago
Distribution
Center.......... 1994
Pima
Distribution
Center.......... 1993
Watkins
Distribution
Center.......... 1995
Portland, Oregon
Argyle
Distribution
Center.......... 3 946 5,388 448 946 5,836 6,782 (983)
Columbia
Distribution
Center.......... 2 550 3,121 192 551 3,312 3,863 (456)
Jennifer
Distribution
Center.......... 1 915 -- 3,978 1,222 3,671 4,893 (49)
PDX Corporate
Center East..... 4 (f) 2,198 -- 13,647 3,573 12,272 15,845 (376)
PDX Corporate
Center North.... 7 (f) 2,405 -- 10,648 2,542 10,511 13,053 (1,080)
The Evergreen
Park............ 4 1,092 -- 7,537 1,533 7,096 8,629 --
Wilsonville
Corporate
Center.......... 6 (f) 2,963 -- 11,548 2,964 11,547 14,511 (1,212)
Portland, Oregon
Argyle
Distribution
Center.......... 1993
Columbia
Distribution
Center.......... 1994
Jennifer
Distribution
Center.......... 1998
PDX Corporate
Center East..... 1997,1998
PDX Corporate
Center North.... 1995,1996
The Evergreen
Park............ 1997
Wilsonville
Corporate
Center.......... 1995,1996
</TABLE>
177
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried as
ProLogis of December 31, 1998
-------------------- Costs Capitalized --------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ------- ------------ ----------------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reno, Nevada
Golden Valley
Distribution
Center.......... 2 $ 560 $ -- $ 9,306 $ 2,028 $ 7,838 $ 9,866 $ (344)
Meredith Kleppe
Business Center. 5 1,573 8,949 1,068 1,573 10,017 11,590 (1,684)
Pacific
Industrial
Center.......... 4 2,501 -- 10,651 2,501 10,651 13,152 (1,226)
Packer Way
Business Center. 3 458 2,604 499 458 3,103 3,561 (534)
Packer Way
Distribution
Center.......... 2 506 2,879 359 506 3,238 3,744 (568)
Spice Island
Distribution
Center.......... 1 435 2,466 1,075 435 3,541 3,976 (262)
<CAPTION>
Date of Construction/
Description Acquisition
----------- ----------------------
<S> <C>
Reno, Nevada
Golden Valley
Distribution
Center.......... 1996,1998
Meredith Kleppe
Business Center. 1993
Pacific
Industrial
Center.......... 1994,1995
Packer Way
Business Center. 1993
Packer Way
Distribution
Center.......... 1993
Spice Island
Distribution
Center.......... 1996
Reynosa, Mexico
Del Norte
Industrial
Center.......... 2 809 -- 5,976 1,011 5,774 6,785 (36)
Reynosa
Industrial
Center.......... 5 1,810 1,038 10,572 2,076 11,344 13,420 (155)
Reynosa, Mexico
Del Norte
Industrial
Center.......... 1998
Reynosa
Industrial
Center.......... 1997,1998
Rio Grande
Valley, Texas
McAllen
Distribution
Center.......... 1 452 -- 6,224 530 6,146 6,676 --
Rio Grande
Distribution
Center.......... 5 (d) 527 2,987 660 527 3,647 4,174 (412)
Rio Grande
Industrial
Center.......... 8 (d) 2,188 12,399 1,839 2,188 14,238 16,426 (1,659)
Valley
Industrial
Center.......... 1 230 -- 3,745 363 3,612 3,975 (103)
Rio Grande
Valley, Texas
McAllen
Distribution
Center.......... 1998
Rio Grande
Distribution
Center.......... 1995
Rio Grande
Industrial
Center.......... 1995
Valley
Industrial
Center.......... 1997
Rotterdam,
Netherlands
Eamhaven
Industrial Park. 2 -- 7,562 8,458 -- 16,020 16,020 (544)
Rotterdam,
Netherlands
Eamhaven
Industrial Park. 1997,1998
Salt Lake City,
Utah
Centennial
Distribution
Center.......... 2 1,149 -- 8,289 1,149 8,289 9,438 (944)
Clearfield
Distribution
Center.......... 2 2,500 14,165 506 2,481 14,690 17,171 (1,505)
Crossroads
Corporate
Center.......... 1 816 -- 4,940 898 4,858 5,756 --
Salt Lake
International
Distribution
Center.......... 2 1,364 2,792 7,724 1,364 10,516 11,880 (888)
Salt Lake City,
Utah
Centennial
Distribution
Center.......... 1995
Clearfield
Distribution
Center.......... 1995
Crossroads
Corporate
Center.......... 1998
Salt Lake
International
Distribution
Center.......... 1994,1996
San Antonio,
Texas
10711
Distribution
Center.......... 2 582 3,301 497 582 3,798 4,380 (633)
Coliseum
Distribution
Center.......... 2 1,102 2,380 10,387 1,613 12,256 13,869 (1,665)
Distribution
Drive Center.... 1 473 2,680 563 473 3,243 3,716 (640)
Downtown
Distribution
Center.......... 1 241 1,364 227 241 1,591 1,832 (269)
I-10 Central
Distribution
Center.......... 1 223 1,275 178 240 1,436 1,676 (317)
I-35 Business
Center.......... 4 663 3,773 485 663 4,258 4,921 (800)
Landmark One
Distribution
Center.......... 1 341 1,933 315 341 2,248 2,589 (326)
Macro
Distribution
Center.......... 1 225 1,282 219 225 1,501 1,726 (294)
San Antonio,
Texas
10711
Distribution
Center.......... 1994
Coliseum
Distribution
Center.......... 1994,1995
Distribution
Drive Center.... 1992
Downtown
Distribution
Center.......... 1994
I-10 Central
Distribution
Center.......... 1992
I-35 Business
Center.......... 1993
Landmark One
Distribution
Center.......... 1994
Macro
Distribution
Center.......... 1993
</TABLE>
178
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried as
ProLogis of December 31, 1998
-------------------- Costs Capitalized --------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ------- ------------ ----------------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Perrin Creek
Corporate
Center.......... 6 $ 1,547 $ -- $ 9,646 $ 1,635 $ 9,558 $ 11,193 $ (735)
San Antonio
Distribution
Center I........ 13 2,154 12,247 2,842 2,154 15,089 17,243 (3,087)
San Antonio
Distribution
Center II....... 3 969 -- 5,693 885 5,777 6,662 (879)
San Antonio
Distribution
Center III...... 7 2,042 9,684 3,390 1,709 13,407 15,116 (986)
Tri-County
Distribution
Center.......... 1 496 -- 5,887 680 5,703 6,383 --
Woodlake
Distribution
Center.......... 2 248 1,405 91 248 1,496 1,744 (235)
<CAPTION>
Date of Construction/
Description Acquisition
----------- ----------------------
<S> <C>
Perrin Creek
Corporate
Center.......... 1995,1996
San Antonio
Distribution
Center I........ 1992,1993,1994
San Antonio
Distribution
Center II....... 1994
San Antonio
Distribution
Center III...... 1996,1998
Tri-County
Distribution
Center.......... 1997
Woodlake
Distribution
Center.......... 1994
San Diego,
California
Carmel Mountain
Ranch Industrial
Center.......... 3 3,732 -- 9,688 3,773 9,647 13,420 (518)
San Diego,
California
Carmel Mountain
Ranch Industrial
Center.......... 1996,1997
Seattle,
Washington
Andover East
Business Center. 2 535 3,033 237 535 3,270 3,805 (471)
Fife Corporate
Center.......... 3 4,059 -- 9,859 4,209 9,709 13,918 (622)
Kent Corporate
Center.......... 2 (f) 2,882 1,987 8,398 3,216 10,051 13,267 (1,234)
Van Doren's
Distribution
Center.......... 2 (f) 2,473 -- 8,638 2,860 8,251 11,111 (505)
Seattle,
Washington
Andover East
Business Center. 1994
Fife Corporate
Center.......... 1996
Kent Corporate
Center.......... 1995
Van Doren's
Distribution
Center.......... 1995,1997
South Bay (San
Francisco),
California
Bayside Business
Center.......... 2 (f) 2,088 -- 4,454 2,088 4,454 6,542 (300)
Bayside
Corporate
Center.......... 7 (f) 4,365 -- 15,824 4,365 15,824 20,189 (2,106)
Bayside Plaza I. 12 (f) 5,212 18,008 625 5,216 18,629 23,845 (3,131)
Bayside Plaza
II.............. 2 (f) 634 -- 2,844 634 2,844 3,478 (666)
Gateway
Corporate
Center.......... 11 (d)(f) 7,575 24,746 3,945 7,575 28,691 36,266 (5,057)
Mowry Business
Center.......... 4 5,933 -- 17,579 7,815 15,697 23,512 (362)
Shoreline
Business Center. 8 (f) 4,328 16,101 427 4,328 16,528 20,856 (2,779)
Shoreline
Business Center
II.............. 2 (f) 922 -- 4,589 922 4,589 5,511 (822)
Spinnaker
Business Center. 12 (f) 7,043 25,220 947 7,043 26,167 33,210 (4,447)
Thornton
Business Center. 5 (d) 3,988 11,706 6,176 3,989 17,881 21,870 (2,478)
Trimble
Distribution
Center.......... 5 2,836 16,067 830 2,836 16,897 19,733 (2,792)
South Bay (San
Francisco),
California
Bayside Business
Center.......... 1996
Bayside
Corporate
Center.......... 1995,1996
Bayside Plaza I. 1993
Bayside Plaza
II.............. 1994
Gateway
Corporate
Center.......... 1993,1996
Mowry Business
Center.......... 1997,1998
Shoreline
Business Center. 1993
Shoreline
Business Center
II.............. 1995
Spinnaker
Business Center. 1993
Thornton
Business Center. 1993,1996
Trimble
Distribution
Center.......... 1994
St. Louis,
Missouri
Earth City
Industrial
Center.......... 9 (d) 4,468 19,144 6,218 4,493 25,337 29,830 (847)
Hazelwood
Distribution
Center.......... 1 (d) 233 1,322 45 233 1,367 1,600 (61)
Westport
Distribution
Center.......... 3 (d) 761 4,310 127 761 4,437 5,198 (193)
Westport Service
Center.......... 2 (d) 486 2,754 46 486 2,800 3,286 --
St. Louis,
Missouri
Earth City
Industrial
Center.......... 1997,1998
Hazelwood
Distribution
Center.......... 1997
Westport
Distribution
Center.......... 1997
Westport Service
Center.......... 1997
</TABLE>
179
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried as
ProLogis of December 31, 1998
-------------------- Costs Capitalized --------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ------- ------------ ----------------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tampa, Florida
Adamo
Distribution
Center.......... 1 $ 105 $ 595 $ 308 $ 105 $ 903 $ 1,008 $ (76)
Clearwater
Distribution
Center.......... 2 (e) 92 524 85 92 609 701 (80)
Commerce Park
Distribution
Center.......... 4 811 4,597 369 811 4,966 5,777 (683)
Eastwood
Distribution
Center.......... 1 (e) 122 690 88 122 778 900 (106)
Joe's Creek
Distribution
Center.......... 2 (e) 161 909 124 160 1,034 1,194 (149)
Lakeland
Distribution
Center.......... 1 938 5,313 560 938 5,873 6,811 (885)
Orchid Lake
Industrial
Center.......... 1 41 235 12 41 247 288 (34)
Plant City
Distribution
Center.......... 1 (e) 206 1,169 64 206 1,233 1,439 (169)
Sabal Park
Distribution
Center.......... 7 2,776 6,224 10,401 2,678 16,723 19,401 (525)
Silo Bend
Distribution
Center.......... 4 (e) 2,887 16,358 742 2,887 17,100 19,987 (2,270)
Silo Bend
Industrial
Center.......... 1 (e) 525 2,975 246 525 3,221 3,746 (446)
St. Petersburg
Service Center.. 1 35 197 21 35 218 253 (29)
Tampa East
Distribution
Center.......... 11 (e) 2,700 15,302 1,850 2,700 17,152 19,852 (2,349)
Tampa East
Industrial
Center.......... 2 (e) 332 1,880 (212) 332 1,668 2,000 (289)
Tampa West
Distribution
Center.......... 15 (d)(e) 3,273 18,659 2,179 3,383 20,728 24,111 (2,794)
Tampa West
Industrial
Center.......... 4 (e) 437 471 5,622 717 5,813 6,530 (380)
Tampa West
Service Center.. 4 (e) 970 5,501 501 971 6,001 6,972 (828)
<CAPTION>
Date of Construction/
Description Acquisition
----------- ----------------------
<S> <C>
Tampa, Florida
Adamo
Distribution
Center.......... 1995
Clearwater
Distribution
Center.......... 1994
Commerce Park
Distribution
Center.......... 1994
Eastwood
Distribution
Center.......... 1994
Joe's Creek
Distribution
Center.......... 1994
Lakeland
Distribution
Center.......... 1994
Orchid Lake
Industrial
Center.......... 1994
Plant City
Distribution
Center.......... 1994
Sabal Park
Distribution
Center.......... 1996,1997,1998
Silo Bend
Distribution
Center.......... 1994
Silo Bend
Industrial
Center.......... 1994
St. Petersburg
Service Center.. 1994
Tampa East
Distribution
Center.......... 1994
Tampa East
Industrial
Center.......... 1994
Tampa West
Distribution
Center.......... 1994,1995
Tampa West
Industrial
Center.......... 1994,1996,1998
Tampa West
Service Center.. 1994
Tulsa, Oklahoma
52nd Street
Distribution
Center.......... 1 340 1,924 192 340 2,116 2,456 (304)
70th East
Distribution
Center.......... 1 129 733 248 129 981 1,110 (123)
East 55th Street
Distribution
Center.......... 1 (e) 210 1,191 83 210 1,274 1,484 (179)
Expressway
Distribution
Center.......... 4 573 3,280 670 573 3,950 4,523 (727)
Henshaw
Distribution
Center.......... 3 500 2,829 152 499 2,982 3,481 (424)
Tulsa, Oklahoma
52nd Street
Distribution
Center.......... 1994
70th East
Distribution
Center.......... 1994
East 55th Street
Distribution
Center.......... 1994
Expressway
Distribution
Center.......... 1993
Henshaw
Distribution
Center.......... 1994
Warsaw, Poland
Warsaw
Industrial
Center.......... 4 2,668 30,682 -- 967 32,383 33,350 (728)
Warsaw, Poland
Warsaw
Industrial
Center.......... 1998
Washington,
D.C./Baltimore
Airport Commons
Distribution
Center.......... 2 2,320 -- 9,236 2,360 9,196 11,556 (376)
Ardmore
Distribution
Center.......... 3 1,431 8,110 392 1,431 8,502 9,933 (1,140)
Ardmore
Industrial
Center.......... 2 984 5,581 285 985 5,865 6,850 (788)
Chantilly
Distribution
Center.......... 1 592 -- 5,716 1,235 5,073 6,308 (165)
Concorde
Industrial
Center.......... 4 1,538 8,717 641 1,538 9,358 10,896 (1,098)
Washington,
D.C./Baltimore
Airport Commons
Distribution
Center.......... 1997
Ardmore
Distribution
Center.......... 1994
Ardmore
Industrial
Center.......... 1994
Chantilly
Distribution
Center.......... 1997
Concorde
Industrial
Center.......... 1995
</TABLE>
180
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried as
ProLogis of December 31, 1998
-------------------- Costs Capitalized --------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ------- ------------ ----------------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
De Soto Business
Park.............. 5 $ 1,774 $ 10,055 $ 3,261 $ 1,774 $ 13,316 $ 15,090 $ (1,298)
Eisenhower
Industrial
Center............ 3 1,240 7,025 1,368 1,240 8,393 9,633 (1,121)
Fleet
Distribution
Center............ 8 3,198 18,121 921 3,198 19,042 22,240 (1,893)
Gateway
Distribution
Center............ 3 774 -- 6,835 1,402 6,207 7,609 (107)
Hampton Central
Distribution
Center............ 2 1,769 -- 9,832 2,248 9,353 11,601 (449)
Meadowridge
Distribution
Center............ 1 1,757 -- 5,714 1,896 5,575 7,471 (175)
Patapsco
Distribution
Center............ 1 270 1,528 1,072 270 2,600 2,870 (239)
Sunnyside
Industrial
Center............ 3 1,541 8,733 1,333 1,541 10,066 11,607 (1,335)
Other Markets...... 8 (e) 1,619 8,635 8,789 1,716 17,327 19,043 (957)
----- ------- --------- --------- ------- --------- --------- --------
Total Operating
Properties...... 1,099 483,056 1,637,702 1,128,248 517,803 2,731,203 3,249,006 (254,288)
----- ------- --------- --------- ------- --------- --------- --------
Land Under
Development
Amsterdam,
Netherlands
Schiphol
Distribution
Center............ -- -- 86 86 -- 86 --
<CAPTION>
Date of Construction/
Description Acquisition
----------- ----------------------
<S> <C>
De Soto Business
Park.............. 1996
Eisenhower
Industrial
Center............ 1994
Fleet
Distribution
Center............ 1996
Gateway
Distribution
Center............ 1998
Hampton Central
Distribution
Center............ 1996, 1997
Meadowridge
Distribution
Center............ 1998
Patapsco
Distribution
Center............ 1995
Sunnyside
Industrial
Center............ 1994
Other Markets...... 1991, 1994, 1996, 1998
Total Operating
Properties......
Land Under
Development
Amsterdam,
Netherlands
Schiphol
Distribution
Center............ 1998
Atlanta, Georgia
Atlanta NE at
Sugarloaf......... 1,616 -- 686 2,302 -- 2,302 --
Cobb Place
Distribution
Center............ 1,579 -- 413 1,992 -- 1,992 --
Atlanta, Georgia
Atlanta NE at
Sugarloaf......... 1997, 1998
Cobb Place
Distribution
Center............ 1998
Austin, Texas
Walnut Creek
Corporate Center.. 857 -- 54 911 -- 911 --
Austin, Texas
Walnut Creek
Corporate Center.. 1994, 1996
Charlotte, North
Carolina
Charlotte
Distribution
Center South...... 312 -- 648 960 -- 960 --
Charlotte, North
Carolina
Charlotte
Distribution
Center South...... 1997
Chicago, Illinois
Bloomingdale 100
Business Center... 940 -- 560 1,500 -- 1,500 --
Chicago, Illinois
Bloomingdale 100
Business Center... 1997
Cincinnati, Ohio
Airpark
International
Distribution
Center............ 479 -- 254 733 -- 733 --
Union Center
Commerce Park..... 2,442 -- 338 2,780 -- 2,780 --
Cincinnati, Ohio
Airpark
International
Distribution
Center............ 1997
Union Center
Commerce Park..... 1998
Columbus, Ohio
Capital Park
South
Distribution
Center............ 285 -- 32 317 -- 317 --
International
Street Commerce
Center............ 220 -- 13 233 -- 233 --
Columbus, Ohio
Capital Park
South
Distribution
Center............ 1998
International
Street Commerce
Center............ 1998
</TABLE>
181
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried as
ProLogis of December 31, 1998
-------------------- Costs Capitalized --------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ------- ------------ ----------------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dallas/Fort
Worth, Texas
Dallas Corporate
Center.......... $ 961 $ -- $ 113 $ 1,074 $ -- $ 1,074 $ --
Great Southwest
Distribution
Center.......... 2,330 -- 58 2,388 -- 2,388 --
<CAPTION>
Date of Construction/
Description Acquisition
----------- ----------------------
<S> <C>
Dallas/Fort
Worth, Texas
Dallas Corporate
Center.......... 1995
Great Southwest
Distribution
Center.......... 1997
Denver, Colorado
Coors Technology
Center.......... 1,222 -- 65 1,287 -- 1,287 --
Denver Business
Center.......... 457 -- 43 500 -- 500 --
Peoria
Distribution
Center.......... 1,363 -- 272 1,635 -- 1,635 --
Denver, Colorado
Coors Technology
Center.......... 1998
Denver Business
Center.......... 1997
Peoria
Distribution
Center.......... 1997
Fort
Lauderdale/Miami,
Florida
CenterPort
Distribution
Center.......... 1,008 -- 182 1,190 -- 1,190 --
Fort
Lauderdale/Miami,
Florida
CenterPort
Distribution
Center.......... 1998
Houston, Texas
Jersey Village
Corporate
Center.......... 1,536 -- 516 2,052 -- 2,052 --
West by
Northwest
Industrial
Center.......... 277 -- 41 318 -- 318 --
World Houston
Distribution
Center.......... 425 -- 40 465 -- 465 --
Houston, Texas
Jersey Village
Corporate
Center.......... 1998
West by
Northwest
Industrial
Center.......... 1998
World Houston
Distribution
Center.......... 1998
Juarez, Mexico
Salvacar
Industrial
Center.......... 176 -- 65 241 -- 241 --
Juarez, Mexico
Salvacar
Industrial
Center.......... 1997
London, England
Beavers Lane
Distribution
Center.......... 19,895 -- (77) 19,818 -- 19,818 --
London, England
Beavers Lane
Distribution
Center.......... 1998
Los
Angeles/Orange
County,
California
Foothills
Distribution
Center.......... 1,070 -- 118 1,188 -- 1,188 --
Los
Angeles/Orange
County,
California
Foothills
Distribution
Center.......... 1996
Louisville,
Kentucky
Airpark Commerce
Center.......... 175 -- 47 222 -- 222 --
Riverport
Distribution
Center.......... 396 -- 85 481 -- 481 --
Louisville,
Kentucky
Airpark Commerce
Center.......... 1998
Riverport
Distribution
Center.......... 1996
Lyon, France
Isle d'Abeau
Distribution
Center.......... 739 -- 147 886 -- 886 --
Lyon, France
Isle d'Abeau
Distribution
Center.......... 1998
Memphis,
Tennessee
Memphis
Industrial Park. 890 -- 1,055 1,945 -- 1,945 --
Memphis,
Tennessee
Memphis
Industrial Park. 1997
Monterrey, Mexico
Monterrey
Industrial
Center II....... 1,662 -- 1,929 3,591 -- 3,591 --
Monterrey, Mexico
Monterrey
Industrial
Center II....... 1998
New Jersey/I-95
Corridor
Cranbury
Business Park... 998 -- 877 1,875 -- 1,875 --
Mahwah
Distribution
Center.......... 1,247 -- 1,913 3,160 -- 3,160 --
New Jersey/I-95
Corridor
Cranbury
Business Park... 1997
Mahwah
Distribution
Center.......... 1998
</TABLE>
182
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried as
ProLogis of December 31, 1998
-------------------- Costs Capitalized --------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ------- ------------ ----------------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Orlando, Florida
Orlando Corporate
Center............ $ 1,118 $ -- $ 315 $ 1,433 $ -- $ 1,433 $ --
<CAPTION>
Date of Construction/
Description Acquisition
----------- ----------------------
<S> <C>
Orlando, Florida
Orlando Corporate
Center............ 1996
Portland, Oregon
PDX Corporate
Center East....... 769 -- 248 1,017 -- 1,017 --
Portland, Oregon
PDX Corporate
Center East....... 1997
Reynosa, Mexico
Reynosa
Industrial Center
III............... 549 -- (26) 523 -- 523 --
Reynosa, Mexico
Reynosa
Industrial Center
III............... 1998
Salt Lake City,
Utah
Crossroads
Corporate Center.. 441 -- 44 485 -- 485 --
Salt Lake
International
Distribution
Center............ 528 -- 54 582 -- 582 --
San Antonio, Texas
San Antonio
Distribution
Center III........ 497 -- 496 993 -- 993 --
Salt Lake City,
Utah
Crossroads
Corporate Center.. 1996
Salt Lake
International
Distribution
Center............ 1998
San Antonio, Texas
San Antonio
Distribution
Center III........ 1998
Seattle, Washington
Van Doren's
Distribution
Center............ (f) 1,190 -- 58 1,248 -- 1,248 --
Seattle, Washington
Van Doren's
Distribution
Center............ 1998
Tijuana, Mexico
Tijuana
Industrial
Center............ 2,364 -- 629 2,993 -- 2,993 --
Tijuana, Mexico
Tijuana
Industrial
Center............ 1998
Warsaw, Poland
Blonie Industrial
Park.............. 2,237 -- (544) 1,693 -- 1,693 --
Warsaw, Poland
Blonie Industrial
Park.............. 1998
Washington
D.C./Baltimore
Hampton Central
Distribution
Center............ 865 -- 1,485 2,350 -- 2,350 --
------- --------- ------- ------- --------- --------- --------
Total Land Under
Development..... 56,115 -- 13,332 69,447 -- 69,447 --
------- --------- ------- ------- --------- --------- --------
Land Held for
Development
Amsterdam,
Netherlands
Schiphol
Distribution
Center............ 3,543 -- 253 3,796 -- 3,796 --
Venlo
Distribution
Center............ 1,373 -- 268 1,641 -- 1,641 --
Washington
D.C./Baltimore
Hampton Central
Distribution
Center............ 1994
Total Land Under
Development.....
Land Held for
Development
Amsterdam,
Netherlands
Schiphol
Distribution
Center............ 1998
Venlo
Distribution
Center............ 1998
</TABLE>
183
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried as
ProLogis of December 31, 1998
-------------------- Costs Capitalized --------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ------- ------------ ----------------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Atlanta, Georgia
Atlanta NE at
Sugarloaf....... $ 954 $ -- $ 468 $ 1,422 $ -- $1,422 $ --
Atlanta West
Distribution
Center.......... 713 -- 39 752 -- 752 --
Breckenridge
Distribution
Center.......... 4,147 -- 1,145 5,292 -- 5,292 --
Riverside
Distribution
Center.......... 1,107 -- 96 1,203 -- 1,203 --
<CAPTION>
Date of Construction/
Description Acquisition
----------- ----------------------
<S> <C>
Atlanta, Georgia
Atlanta NE at
Sugarloaf....... 1997
Atlanta West
Distribution
Center.......... 1994
Breckenridge
Distribution
Center.......... 1997
Riverside
Distribution
Center.......... 1996
Austin, Texas
Corridor Park
Corporate
Center.......... 1,289 -- 82 1,371 -- 1,371 --
Southpark
Corporate
Center.......... 525 -- 64 589 -- 589 --
Walnut Creek
Corporate
Center.......... 227 -- (52) 175 -- 175 --
Austin, Texas
Corridor Park
Corporate
Center.......... 1994
Southpark
Corporate
Center.......... 1996
Walnut Creek
Corporate
Center.......... 1994, 1996
Charlotte, North
Carolina
Charlotte
Distribution
Center.......... 895 -- 503 1,398 -- 1,398 --
Charlotte
Distribution
Center South.... 663 -- 1,029 1,692 -- 1,692 --
Interstate North
Business Park... 343 -- 8 351 -- 351 --
Charlotte, North
Carolina
Charlotte
Distribution
Center.......... 1994, 1995, 1996
Charlotte
Distribution
Center South.... 1997
Interstate North
Business Park... 1997
Chicago, Illinois
Bloomingdale 100
Business Center. 4,857 -- 1,925 6,782 -- 6,782 --
O'Hare Cargo
Distribution
Center.......... 8,949 -- 3,610 12,559 -- 12,559 --
Remington Lakes
Business Park... 3,236 -- 296 3,532 -- 3,532 --
Chicago, Illinois
Bloomingdale 100
Business Center. 1997
O'Hare Cargo
Distribution
Center.......... 1996, 1997
Remington Lakes
Business Park... 1997
Cincinnati, Ohio
Airpark
International
Distribution
Center.......... 375 -- 189 564 -- 564 --
Princeton
Distribution
Center.......... (d) 436 -- (52) 384 -- 384 --
Union Center
Commerce Park... 2,276 -- 352 2,628 -- 2,628 --
Cincinnati, Ohio
Airpark
International
Distribution
Center.......... 1997
Princeton
Distribution
Center.......... 1996
Union Center
Commerce Park... 1997
</TABLE>
184
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried as
ProLogis of December 31, 1998
-------------------- Costs Capitalized --------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ------- ------------ ----------------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Columbus, Ohio
Capital Park
South
Distribution
Center.......... $ 1,505 $ -- $ 833 $ 2,338 $ -- $2,338 $ --
International
Street Commerce
Center.......... 101 -- (3) 98 -- 98 --
<CAPTION>
Date of Construction/
Description Acquisition
----------- ----------------------------
<S> <C>
Columbus, Ohio
Capital Park
South
Distribution
Center.......... 1994, 1995, 1996, 1997, 1998
International
Street Commerce
Center.......... 1996
Dallas/Fort
Worth, Texas
Great Southwest
Industrial
Center I........ 492 -- 26 518 -- 518 --
Royal Lane
Distribution
Center.......... 3,220 -- 38 3,258 -- 3,258 --
Dallas/Fort
Worth, Texas
Great Southwest
Industrial
Center I........ 1996
Royal Lane
Distribution
Center.......... 1997
Denver, Colorado
Denver Business
Center Land..... 799 -- -- 799 -- 799 --
Downing
Distribution
Center.......... 3,487 -- 52 3,539 -- 3,539 --
Upland
Distribution
Center I........ 1,647 -- 47 1,694 -- 1,694 --
Denver, Colorado
Denver Business
Center Land..... 1998
Downing
Distribution
Center.......... 1998
Upland
Distribution
Center I........ 1994, 1997
El Paso, Texas
Northwestern
Corporate
Center.......... 2,629 -- 5,191 7,820 -- 7,820 --
Vista Corporate
Center.......... 351 -- 123 474 -- 474 --
Vista Del Sol
Industrial
Center.......... 1,727 -- 273 2,000 -- 2,000 --
El Paso, Texas
Northwestern
Corporate
Center.......... 1991, 1992
Vista Corporate
Center.......... 1993
Vista Del Sol
Industrial
Center.......... 1994, 1996
Fort
Lauderdale/Miami,
Florida
Center Port
Land............ 1,008 -- 169 1,177 -- 1,177 --
Port 95
Distribution
Center I........ 2,505 -- 280 2,785 -- 2,785 --
Fort
Lauderdale/Miami,
Florida
Center Port
Land............ 1998
Port 95
Distribution
Center I........ 1996
Houston, Texas
Jersey Village
Corporate
Center.......... 3,217 -- 918 4,135 -- 4,135 --
West by
Northwest
Industrial
Center.......... 1,263 -- 101 1,364 -- 1,364 --
Houston, Texas
Jersey Village
Corporate
Center.......... 1997
West by
Northwest
Industrial
Center.......... 1993
</TABLE>
185
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost Gross Amounts At Which Carried
to ProLogis as of December 31, 1998
------------------ Costs Capitalized -------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ----- ------------ ----------------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Indianapolis,
Indiana
Lebanon Commerce
Park Land....... $ 827 $-- $ 263 $1,090 $-- $1,090 $--
North by
Northeast
Distribution
Center.......... 435 -- 56 491 -- 491 --
North Plainfield
Park............ 849 -- 87 936 -- 936 --
Plainfield Park
Distribution
Center.......... 1,082 -- 557 1,639 -- 1,639 --
<CAPTION>
Date of
Construction/
Description Acquisition
----------- ----------------
<S> <C>
Indianapolis,
Indiana
Lebanon Commerce
Park Land....... 1998
North by
Northeast
Distribution
Center.......... 1994
North Plainfield
Park............ 1998
Plainfield Park
Distribution
Center.......... 1996
Juarez, Mexico
Salvacar
Industrial Park. 2,484 -- 796 3,280 -- 3,280 --
Juarez, Mexico
Salvacar
Industrial Park. 1997
Kansas City,
Missouri
Executive Park.. 1,266 -- 203 1,469 -- 1,469 --
Kansas City,
Missouri
Executive Park.. 1998
Las Vegas, Nevada
Black Mountain
Distribution
Center.......... 2,845 -- 164 3,009 -- 3,009 --
Hughes Airport
Center.......... 263 -- 11 274 -- 274 --
Las Vegas
Corporate
Center.......... (f) 5,068 -- 519 5,586 -- 5,586 --
Las Vegas, Nevada
Black Mountain
Distribution
Center.......... 1995, 1996
Hughes Airport
Center.......... 1997
Las Vegas
Corporate
Center.......... 1993, 1995, 1997
Lille, France
Lesquin Gris
Land............ 1,268 -- 7 1,275 -- 1,275 --
Lille, France
Lesquin Gris
Land............ 1998
Los Angeles /
Orange County,
California
Foothills
Business Center. 6,577 -- (85) 6,492 -- 6,492 --
Mid-Counties
Distribution
Center.......... 8,828 -- 21 8,849 -- 8,849 --
Los Angeles /
Orange County,
California
Foothills
Business Center. 1995, 1996
Mid-Counties
Distribution
Center.......... 1997
Louisville,
Kentucky
Airpark Commerce
Center.......... 700 -- 2 702 -- 702 --
Riverport
Distribution
Center.......... 218 -- (9) 209 -- 209 --
Riverport
Distribution
Center II....... 796 -- 33 829 -- 829 --
Louisville,
Kentucky
Airpark Commerce
Center.......... 1998
Riverport
Distribution
Center.......... 1998
Riverport
Distribution
Center II....... 1998
Memphis,
Tennessee
Memphis
Industrial Park. 1,673 -- 1,803 3,476 -- 3,476 --
Memphis,
Tennessee
Memphis
Industrial Park. 1997
Monterrey, Mexico
Monterrey
Industrial Park
II.............. 1,151 -- 645 1,796 -- 1,796 --
Ojo de Aqua
Industrial
Center.......... 649 -- 45 694 -- 694 --
Monterrey, Mexico
Monterrey
Industrial Park
II.............. 1998
Ojo de Aqua
Industrial
Center.......... 1998
Nashville,
Tennessee
Nashville/l-24
Distribution
Center.......... 776 -- 2,497 3,273 -- 3,273 --
Nashville,
Tennessee
Nashville/l-24
Distribution
Center.......... 1996
</TABLE>
186
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost Gross Amounts At Which Carried
to ProLogis as of December 31, 1998
-------------------- Costs Capitalized --------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- ------- ------------ ----------------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
New Jersey / I-95
Corridor
Cranbury
Business Park... $ 2,137 $-- $1,299 $ 3,436 $-- $ 3,436 $--
Meadowland
Industrial
Center.......... 1,600 -- 2 1,602 -- 1,602 --
<CAPTION>
Date of
Construction/
Description Acquisition
----------- -------------
<S> <C>
New Jersey / I-95
Corridor
Cranbury
Business Park... 1997
Meadowland
Industrial
Center.......... 1997
Orlando, Florida
Orlando
Corporate
Center.......... 2,116 -- 468 2,584 -- 2,584 --
Orlando, Florida
Orlando
Corporate
Center.......... 1996
Phoenix, Arizona
Kyrene Commons
Distribution
Center.......... 1,278 -- 22 1,300 -- 1,300 --
Phoenix, Arizona
Kyrene Commons
Distribution
Center.......... 1992, 1996
Portland, Oregon
Jennifer
Distribution
Center.......... 2,935 -- 985 3,920 -- 3,920 --
Portland, Oregon
Jennifer
Distribution
Center.......... 1997
Reno, Nevada
Damonte Ranch... 10,528 -- 1,196 11,724 -- 11,724 --
Golden Valley
Distribution
Center.......... 347 -- 659 1,006 -- 1,006 --
Reno, Nevada
Damonte Ranch... 1998
Golden Valley
Distribution
Center.......... 1995
Reynosa, Mexico
Reynosa
Industrial
Center.......... 587 -- 2 589 -- 589 --
Reynosa
Industrial
Center III...... 1,533 -- (74) 1,459 -- 1,459 --
Reynosa, Mexico
Reynosa
Industrial
Center.......... 1997
Reynosa
Industrial
Center III...... 1998
Rio Grande
Valley, Texas
Rio Grande
Distribution
Center.......... 429 -- 10 439 -- 439 --
Rio Grande
Valley, Texas
Rio Grande
Distribution
Center.......... 1995
Salt Lake City,
Utah
Clearfield
Industrial
Center.......... 125 -- 13 138 -- 138 --
Crossroads
Distribution
Center.......... 1,469 -- 137 1,606 -- 1,606 --
Salt Lake
Industrial
Center.......... 746 -- 433 1,179 -- 1,179 --
Salt Lake
Industrial
Center II....... 634 -- 17 651 -- 651 --
Salt Lake City,
Utah
Clearfield
Industrial
Center.......... 1997
Crossroads
Distribution
Center.......... 1996
Salt Lake
Industrial
Center.......... 1994, 1995
Salt Lake
Industrial
Center II....... 1995
San Antonio,
Texas
Coliseum
Distribution
Center.......... 611 -- 327 938 -- 938 --
Landmark One
Distribution
Center.......... 127 -- 5 132 -- 132 --
Perrin Creek
Corporate
Center.......... 2,637 -- 193 2,830 -- 2,830 --
San Antonio
Distribution
Center III...... 458 -- 66 524 -- 524 --
San Antonio,
Texas
Coliseum
Distribution
Center.......... 1994
Landmark One
Distribution
Center.......... 1997
Perrin Creek
Corporate
Center.......... 1996
San Antonio
Distribution
Center III...... 1996
Seattle,
Washington
Port of Tacoma
(Carr-
Gottstein)...... 1,540 -- 485 2,025 -- 2,025 --
Seattle,
Washington
Port of Tacoma
(Carr-
Gottstein)...... 1998
</TABLE>
187
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Concluded)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Initial Cost Gross Amounts At Which Carried
to ProLogis as of December 31, 1998
--------------------- Costs Capitalized ---------------------------------- Accumulated
No. of Encum- Building & Subsequent Building & Depreciation
Description Bldgs. brances Land Improvements to Acquisition Land Improvements Total (a)(b) (c)
----------- ------ ------- -------- ------------ ----------------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
St. Louis, Missouri
Earth City
Industrial
Center............ $ 1,282 $ -- $ 33 $ 1,315 $ -- $ 1,315 $ --
<CAPTION>
Date of
Construction/
Description Acquisition
----------- -------------
<S> <C>
St. Louis, Missouri
Earth City
Industrial
Center............ 1998
Tampa, Florida
Sabal Park
Distribution
Center............ 1,800 -- 366 2,166 -- 2,166 --
Tampa East
Distribution
Center............ 2,810 -- (184) 2,626 -- 2,626 --
Tampa, Florida
Sabal Park
Distribution
Center............ 1995, 1997
Tampa East
Distribution
Center............ 1994
Tijuana, Mexico
Tijuana
Industrial
Center............ 5,977 -- 951 6,928 -- 6,928 --
Tijuana, Mexico
Tijuana
Industrial
Center............ 1998
Warsaw, Poland
Blonie Industrial
Park.............. 1,118 -- 937 2,055 -- 2,055 --
Warsaw, Poland
Blonie Industrial
Park.............. 1998
Washington,
D.C./Baltimore
Meadowridge
Distribution
Center............ 3,390 -- 735 4,125 -- 4,125 --
-------- ---------- ---------- -------- ---------- ---------- ---------
Total Land Held
for Development. 145,828 -- 34,968 180,796 -- 180,796 --
-------- ---------- ---------- -------- ---------- ---------- ---------
Grand Total..... $684,999 $1,637,702 $1,176,548 $768,046 $2,731,203 $3,499,249 $(254,288)
======== ========== ========== ======== ========== ========== =========
Washington,
D.C./Baltimore
Meadowridge
Distribution
Center............ 1996
Total Land Held
for Development.
Grand Total.....
</TABLE>
188
<PAGE>
PROLOGIS TRUST
NOTE TO SCHEDULE III
As of December 31, 1998
(a) Reconciliation of total cost to balance sheet caption as of December 31,
1998 (in thousands):
<TABLE>
<S> <C>
Total per Schedule III...................................... $3,499,249
Facilities under development (excluding cost of land)....... 140,223
Capitalized preacquisition costs............................ 18,028
----------
Total real estate....................................... $3,657,500(h)
==========
</TABLE>
(b) The aggregate cost for federal income tax purposes was approximately
$3,428,712,000.
(c) Buildings are depreciated over their estimated useful lives (30 years for
acquisitions, 40 years for developments).
(d) $416,347,000 of these facilities secure $184,964,000 of mortgage notes.
Subsequent to December 31, 1998, the mortgage notes were increased by
$84,000,000.
(e) $66,163,000 of these facilities secure $31,559,000 of securitized debt.
(f) $242,414,000 of these facilities secure $11,281,000 of assessment bonds.
(g) Subsequent to December 31, 1998, $216,237,000 of these facilities will
secure $182,000,000 of mortgage notes.
(h) A summary of activity for real estate and accumulated depreciation as of
December 31, 1998 is as follows (in thousands):
<TABLE>
<S> <C>
Real estate:
Balance at beginning of year................................ $3,006,236
Additions:
Acquisitions and completions of operating facilities...... 407,866
Improvements to operating facilities...................... 277,730
Dispositions................................................ (65,370)
Change in facilities under development balance.............. 25,729
Change in capitalized preacquisition costs balance.......... 5,309
----------
Balance at end of year...................................... $3,657,500
==========
Accumulated depreciation:
Balance at beginning of year................................ $ 171,525
Depreciation expense........................................ 85,001
Accumulated depreciation associated with dispositions....... (2,238)
----------
Balance at end of year...................................... $ 254,288
==========
</TABLE>
189
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of SECURITY CAPITAL
U.S. REALTY
In our opinion, the consolidated statements of net assets (including the
schedules of investments) at 31 December 1998 and 1997 and the related
consolidated statements of operations, of cash flows, of changes in net assets
and of changes in shares outstanding, and the consolidated financial
highlights present fairly, in all material respects, the financial position of
SECURITY CAPITAL U.S. REALTY (the "Company") and its subsidiaries for each of
the three years ended 31 December 1998, 1997, and 1996, in conformity with
accounting principles generally accepted in the United States. These financial
statements and financial highlights (hereafter collectively referred to as
"financial statements") are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance
with International Standards on Auditing, which are substantially equivalent
to auditing standards generally accepted in the United States, which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE SARL
Luxembourg
10 March 1999
190
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENTS OF NET ASSETS
At 31 December 1998 and 1997
(in thousands U.S. $ except per share amounts)
Audited
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Strategic investment positions at value:
CarrAmerica (Cost $699,851; $636,387, respectively)..... $ 686,482 $ 838,343
City Center Retail (Cost $304,035; $83,665,
respectively).......................................... 304,035 83,300
CWS Communities (Cost $153,563; $92,600, respectively).. 153,563 91,646
Pacific Retail (Cost $524,038; $523,459, respectively).. 501,805 610,811
Regency (Cost $235,750; $225,695, respectively)......... 260,775 312,438
Storage USA (Cost $394,272; $348,444, respectively)..... 380,178 422,265
Urban Growth Property (Cost $181,082; $17,703,
respectively).......................................... 181,082 17,241
Special opportunity positions at value:
Security Capital Group Incorporated (Cost $165,000;
$165,000, respectively)................................ 116,245 165,000
Other special opportunity positions (Cost $314,031;
$282,708, respectively)................................ 262,480 352,010
---------- ----------
Total investments......................................... $2,846,645 $2,893,054
Cash and cash equivalents................................. 2,994 1,970
Accounts receivable and other............................. 23,989 6,796
---------- ----------
TOTAL ASSETS.............................................. $2,873,628 $2,901,820
---------- ----------
LIABILITIES
Accounts payable and accrued expenses..................... $ 13,497 $ 12,382
Taxes payable............................................. 1,306 1,018
Line of credit............................................ 262,500 130,000
Convertible notes......................................... 369,940 --
---------- ----------
TOTAL LIABILITIES......................................... $ 647,243 $ 143,400
---------- ----------
TOTAL NET ASSETS (SHAREHOLDERS' EQUITY)................... $2,226,385 $2,758,420
========== ==========
Authorised 500,000,000 shares of $2.00 par value,
173,123,743 shares
issued and outstanding at 31 December 1998 and 31 December
1997..................................................... $ 346,247 $ 346,247
Legal reserve............................................. 30,375 27,304
Share premium account..................................... 1,749,158 1,749,598
---------- ----------
PAID-IN CAPITAL........................................... $2,125,780 $2,123,149
Undistributed net operating income........................ $ 148,152 $ 73,324
Accumulated net realised gain............................. 77,431 44,553
Unrealised (depreciation)/appreciation on strategic
investment and special opportunity positions............. (124,978) 517,394
---------- ----------
SHAREHOLDERS' EQUITY...................................... $2,226,385 $2,758,420
========== ==========
Net Asset Value per share................................. $ 12.86 $ 15.93
</TABLE>
The accompanying notes form an integral part of the financial statements.
191
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended 31 December 1998, 1997 and 1996
(in thousands U.S. $ except per share amounts)
Audited
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
REVENUES
Dividends from strategic investment positions (net
of withholding tax--Note 9):
CarrAmerica..................................... $ 44,117 $ 35,262 $ 11,552
CWS Communities................................. 4,593 -- --
Pacific Retail.................................. 39,012 18,372 8,123
Regency......................................... 17,569 9,742 658
Storage USA..................................... 25,136 20,859 7,408
Urban Growth Property........................... 3,659 -- --
--------- -------- --------
$ 134,086 $ 84,235 $ 27,741
Dividends from special opportunity positions (net
of withholding tax--Note 9)...................... 18,032 14,981 4,422
--------- -------- --------
$ 152,118 $ 99,216 $ 32,163
Interest income from affiliate.................... 3,575 2,896 504
Interest income from non-affiliate and other in-
come............................................. 1,132 805 2,169
--------- -------- --------
TOTAL REVENUES.................................... $ 156,825 $102,917 $ 34,836
--------- -------- --------
EXPENSES
Operating advisor fees (Note 8)................... $ 35,220 $ 24,632 $ 8,041
Custodian fees.................................... 459 470 318
Directors fees.................................... 103 85 57
Professional expenses............................. 1,843 810 1,023
Administrative expenses........................... 2,057 1,159 845
Amortisation of convertible notes deferred costs.. 959 -- --
Amortisation of formation expenses................ -- -- 1,654
Formation expenses................................ -- -- 172
Taxes............................................. 2,429 1,857 628
Line of credit arrangement and commitment fees.... 2,561 2,259 2,991
Interest on line of credit........................ 18,434 11,336 6,168
Interest on convertible notes..................... 14,861 -- --
--------- -------- --------
TOTAL EXPENSES.................................... $ 78,926 $ 42,608 $ 21,897
--------- -------- --------
NET OPERATING INCOME.............................. $ 77,899 $ 60,309 $ 12,939
NET REALISED AND UNREALISED (LOSS)/GAIN ON STRATE-
GIC
INVESTMENT AND SPECIAL OPPORTUNITY POSITIONS
Net realised gain on special opportunity posi-
tions............................................ $ 32,878 $ 41,073 $ 3,480
Net (decrease)/increase in appreciation on strate-
gic investment and
special opportunity positions..................... (642,372) 264,974 252,294
--------- -------- --------
NET (LOSS)/GAIN ON STRATEGIC INVESTMENT AND
SPECIAL OPPORTUNITY POSITIONS..................... $(609,494) $306,047 $255,774
--------- -------- --------
(DECREASE)/INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS....................................... $(531,595) $366,356 $268,713
========= ======== ========
</TABLE>
The accompanying notes form an integral part of the financial statements.
192
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended 31 December 1998, 1997 and 1996
(in thousands U.S. $ except per share amounts)
Audited
<TABLE>
<CAPTION>
1998 1997 1996
--------- ----------- -----------
<S> <C> <C> <C>
Operating Activities:
(Decrease)/Increase in net assets
resulting from operations............... $(531,595) $ 366,356 $ 268,713
Adjustments to reconcile
(decrease)/increase in net assets
resulting from operations to net cash
provided by operating activities:
Movement in unrealised gain............ 642,372 (264,974) (252,294)
Movement in accretion on convertible
notes................................. 9,387 -- --
Movement in convertible notes deferred
costs................................. 959 -- --
Amortisation of formation expenses..... -- -- 1,654
Changes in operating assets and
liabilities:
Accounts receivable and other........ (10,266) 1,498 (8,289)
Interest receivable from affiliate... -- 366 (366)
Accounts payable and accrued
expenses............................ (256) 2,488 2,426
Operating advisor fees payable....... 1,371 4,629 2,594
Taxes payable........................ 286 625 386
--------- ----------- -----------
Net cash provided by operating
activities........................ $ 112,258 $ 110,988 $ 14,824
--------- ----------- -----------
Investing Activities:
Fundings in strategic investment posi-
tions:
CarrAmerica............................ $ (63,464) $ (207,971) $ (428,416)
City Center Retail..................... (220,370) (83,665) --
CWS Communities........................ (60,963) (92,600) --
Pacific Retail......................... (579) (313,145) (157,255)
Regency................................ (10,055) (158,596) (67,098)
Storage USA............................ (45,828) (76,561) (271,883)
Urban Growth Property.................. (163,379) (17,703) --
Fundings in Security Capital Group....... -- (142,500) (22,500)
Fundings in other special opportunity
positions, net.......................... (31,323) (104,700) (176,413)
--------- ----------- -----------
Net cash used in investing
activities.......................... $(595,961) $(1,197,441) $(1,123,565)
--------- ----------- -----------
Financing Activities:
Net proceeds from shares offering...... $ -- $ 1,072,966 $ 987,238
Net proceeds from convertible notes
offering.............................. 352,667 -- --
Offering expenses charged against the
share premium account................. (440) -- --
Drawdowns from line of credit.......... 340,000 1,425,000 376,500
Repayment of line of credit............ (207,500) (1,464,500) (207,000)
--------- ----------- -----------
Net cash provided by financing
activities.......................... $ 484,727 $ 1,033,466 $ 1,156,738
--------- ----------- -----------
Net increase/(decrease) in cash and cash
equivalents............................. $ 1,024 $ (52,987) $ 47,997
Cash and cash equivalents, beginning of
the year................................ 1,970 54,957 6,960
--------- ----------- -----------
Cash and cash equivalents, end of the
year.................................... $ 2,994 $ 1,970 $ 54,957
========= =========== ===========
Supplemental disclosure of cash flow
information:
Tax paid............................... $ 2,141 $ 1,232 $ 242
========= =========== ===========
Interest paid on borrowings............ $ 22,987 $ 11,929 $ 5,522
========= =========== ===========
</TABLE>
The accompanying notes form an integral part of the financial statements.
193
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
For the years ended 31 December 1998, 1997 and 1996
(in thousands U.S. $ except per share amounts)
Audited
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
OPERATIONS:
Net operating income........................ $ 77,899 $ 60,309 $ 12,939
Realised gain on special opportunity posi-
tions...................................... 32,878 41,073 3,480
(Decrease)/Increase in appreciation on stra-
tegic investment and special opportunity
positions.................................. (642,372) 264,974 252,294
---------- ---------- ----------
(Decrease)/Increase in net assets resulting
from operations............................ $ (531,595) $ 366,356 $ 268,713
CAPITAL TRANSACTIONS:
Net proceeds from offerings................. $ -- $1,072,965 $ 987,238
(Decrease)/Increase in share premium ac-
count...................................... (440) -- --
---------- ---------- ----------
(Decrease)/Increase in net assets resulting
from capital transactions.................. $ (440) $1,072,965 $ 987,238
NET ASSETS:
(Decrease)/Increase in net assets during the
year....................................... $ (532,035) $1,439,321 $1,255,951
Net assets at the beginning of the year..... 2,758,420 1,319,099 63,148
---------- ---------- ----------
Net assets at the end of the year (includes
undistributed net operating income of
$148,252 for 1998, $73,324 for 1997, and
$13,015 for 1996)........................... $2,226,385 $2,758,420 $1,319,099
========== ========== ==========
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHARES OUTSTANDING
For the years ended 31 December 1998, 1997 and 1996
Audited
<TABLE>
<CAPTION>
Number of shares
----------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
At the beginning of the year................. 173,123,743 96,492,710 6,294,573
Issued during the year....................... -- 76,631,033 90,198,137
----------- ----------- ----------
At the end of the year....................... 173,123,743 173,123,743 96,492,710
=========== =========== ==========
</TABLE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
For the years ended 31 December 1998, 1997 and 1996
Audited
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Per share data:
Net asset value at the beginning of the year........... $15.93 $13.67 $10.03
Net operating income................................... 0.45 0.37 0.12
Net change in movement in unrealised appreciation and
realised gain on strategic investment and special
opportunity positions in the year..................... (3.52) 1.89 3.52
------ ------ ------
Net asset value per share at the end of the year......... $12.86 $15.93 $13.67
====== ====== ======
</TABLE>
The accompanying notes form an integral part of the financial statements.
194
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED SCHEDULES OF STRATEGIC INVESTMENT POSITIONS
At 31 December 1998
(in thousands U.S. $ except shares held and percentages)
Audited
<TABLE>
<CAPTION>
Number of Percentage
Strategic Investment Positions Security Type Shares Held Cost Value of Total Assets
- ------------------------------ ------------- ----------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
CarrAmerica............. Common Stock 28,603,417 $ 699,851 $ 686,482 23.9%
City Center Retail...... Common Stock 30,390,000 304,035 304,035 10.6%
CWS Communities......... Common Stock 15,323,358 153,563 153,563 5.3%
Pacific Retail(1)....... Common Stock 46,985,459 524,038 501,805 17.5%
Regency(1).............. Common Stock 11,720,216 235,750 260,775 9.1%
Storage USA............. Common Stock 11,765,654 394,272 380,178 13.2%
Urban Growth Property... Common Stock 18,074,100 181,082 181,082 6.3%
---------- ---------- ----
Total investment in
strategic positions.... $2,492,591 $2,467,920 85.9%
========== ========== ====
</TABLE>
- --------
(1) See Note 3A and Note 13 to the consolidated financial statements regarding
the merger of Pacific Retail and Regency.
At 31 December 1997
(in thousands U.S. $ except shares held and percentages)
Audited
<TABLE>
<CAPTION>
Number of Percentage
Strategic Investment Positions Security Type Shares Held Cost Value of Total Assets
- ------------------------------ ------------- ----------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
CarrAmerica............. Common Stock 26,456,583 $ 636,387 $ 838,343 28.9%
City Center Retail...... Common Stock 8,330,000 83,665 83,300 2.9%
CWS Communities......... Common Stock 9,164,597 92,600 91,646 3.2%
Pacific Retail.......... Common Stock 46,985,459 523,459 610,811 21.0%
Regency................. Common Stock 11,284,439 225,695 312,438 10.8%
Storage USA............. Common Stock 10,573,154 348,444 422,265 14.6%
Urban Growth Property... Common Stock 1,724,100 17,703 17,241 0.6%
---------- ---------- ----
Total investment in
strategic positions.... $1,927,953 $2,376,044 82.0%
========== ========== ====
</TABLE>
The accompanying notes form an integral part of the financial statements.
195
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED SCHEDULES OF SPECIAL OPPORTUNITY POSITIONS
At 31 December 1998
(in thousands U.S. $ except percentages)
Audited
<TABLE>
<CAPTION>
Percentage
Property Type Cost Value of Total Assets
- ------------- -------- -------- ---------------
<S> <C> <C> <C>
Companies in which SC-U.S. Realty owns a 5%
or greater interest:
Retail.................................... $ 35,493 $ 37,646 1.3%
Other..................................... 14,446 14,446 0.5%
Companies in which SC-U.S. Realty owns less
than a 5% interest:
Office/Industrial......................... 107,905 97,658 3.4%
Hotel..................................... 79,600 41,356 1.4%
Multifamily............................... 29,044 28,727 1.0%
Diversified............................... 13,683 11,004 0.4%
Storage................................... 10,227 11,350 0.4%
Retail.................................... 8,406 6,949 0.2%
Other..................................... 15,227 13,344 0.5%
-------- -------- ----
Total investment in other special
opportunity positions...................... $314,031 $262,480 9.1%
Investment in Security Capital Group Incor-
porated.................................... 165,000 116,245 4.0%
-------- -------- ----
Total investment in special opportunity po-
sitions.................................... $479,031 $378,725 13.1%
======== ======== ====
</TABLE>
At 31 December 1997
(in thousands U.S. $ except percentages)
Audited
<TABLE>
<CAPTION>
Percentage
Property Type Cost Value of Total Assets
- ------------- -------- -------- ---------------
<S> <C> <C> <C>
Companies in which SC-U.S. Realty owns a 5%
or greater interest:
Other..................................... $ 7,506 $ 7,049 0.2%
Companies in which SC-U.S. Realty owns less
than a 5% interest:
Office/Industrial......................... 81,558 112,635 3.9%
Storage................................... 53,311 63,045 2.2%
Retail.................................... 48,265 63,026 2.2%
Multifamily............................... 45,646 58,117 2.0%
Hotel..................................... 46,422 48,138 1.7%
-------- -------- ----
Total investment in other special
opportunity positions...................... $282,708 $352,010 12.2%
Investment in Security Capital Group Incor-
porated.................................... 165,000 165,000 5.7%
-------- -------- ----
Total investment in special opportunity po-
sitions.................................... $447,708 $517,010 17.9%
======== ======== ====
</TABLE>
The accompanying notes form an integral part of the financial statements.
196
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANISATION
Security Capital U.S. Realty (the "Company") (Amsterdam Stock Exchange
ISIN Code: LU0060100673, Bloomberg Symbol: SCUS NA, Reuters Symbol: CAPAu.AS)
was incorporated on 7 July 1995 and is a research-driven, growth-orientated
real estate management company focused on taking significant strategic
investment positions (with board representation, consultation and other
rights) in value-added real estate operating companies based in the United
States. The Company's primary capital deployment objective is to take a pro-
active ownership role in businesses that it believes can potentially generate
above-average rates of return. The Company is organised in Luxembourg as a
Societe d'Investissement a Capital Fixe (a company with a fixed capital).
The Company owns its assets through its direct and indirect wholly owned
subsidiaries, including Security Capital Holdings S.A. (such subsidiaries
collectively referred to herein as "HOLDINGS"). All accounts of HOLDINGS have
been consolidated with the Company and all significant intercompany
transactions have been eliminated upon consolidation. References herein to SC-
U.S. Realty are to the consolidated entity consisting of Security Capital U.S.
Realty and HOLDINGS, unless noted otherwise.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") in the United States and with
Luxembourg regulatory requirements. The preparation of financial statements in
accordance with GAAP requires the Company's management to make estimates of
certain reported amounts in the financial statements. Actual results may
differ from those estimates.
A. Fair Value Basis of Presentation
SC-U.S. Realty accounts for its investments at fair value in accordance
with the U.S. specialised industry accounting rules prescribed by the American
Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide
for Investment Companies (the "Guide"). Thus, SC-U.S. Realty's investments in
publicly traded companies are valued at market determined by using closing
market prices on the New York Stock Exchange ("NYSE") or other recognised
stock exchange when appropriate as of the balance sheet date, subject to an
appropriate adjustment for trade restrictions, if any. Except for Pacific
Retail, which is valued based on the exchange ratio and the closing stock
price of Regency on the NYSE (see Note 3A and Note 13 below), for privately
held investments in which SC-U.S. Realty has an ownership interest, SC-U.S.
Realty will, whenever the Board of Directors believes significant developments
have occurred affecting the value of an investment and on at least an annual
basis, utilise valuation evidence and methodologies appropriate to the nature
of the investment to derive fair value. These will include external
valuations, cash flow valuation techniques and valuation information derived
through placements of private companies' securities as well as review by
management for other specific indicators of changes in value relating to
property performance and/or significant changes in local or general market
conditions. The Board of Directors, in its discretion, may permit some other
method of valuation to be used, if it determines that such valuation better
reflects the fair value of any assets of the Company.
Under fair value accounting, unrealised gains or losses are determined by
comparing the fair value of the securities held to the cost of such
securities. Unrealised gains or losses relating to changes in fair value of
SC-U.S. Realty's investments are reported as a component of net earnings.
Deferred income taxes, if any, are recorded at the applicable statutory rate
as the estimate of taxes payable as if such gains were realised. Under current
tax laws, and in light of SC-U.S. Realty's operating methods and plans, SC-
U.S. Realty's investment gains generally are not subject to income taxes.
197
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of 31 December 1998 and 1997, 40.6% (23.0% excluding the investment in
Pacific Retail which merged with Regency on 28 February 1999, see Note 3A and
Note 13) and 27.8%, respectively, of SC-U.S. Realty's investments were in
private or untraded securities valued at their fair value as determined by the
Board of Directors, using the methodology described above. This value may
differ from the value that would have been used had a trading market for these
securities existed. The valuation of assets assumes that any assets disposed
of would be sold in an orderly process; any forced sale of assets under short-
term pressures, which is not foreseen, could adversely affect realisable
values.
B. Accounting for Investments and Income
All purchases and sales of publicly traded securities are recorded as of
the trade date (i.e., the date that SC-U.S. Realty's broker actually executes
an order to buy or sell). All purchases and sales of privately held securities
are recorded as of the date the actual purchase or sale is made. Dividend
income is recorded on the ex-dividend date for each dividend declared by an
issuer. Dividends received are presented net of withholding taxes. HOLDINGS
may be entitled to refunds on a portion of the withholding tax because the
withholding tax is not levied on the portion of dividends which is a return of
capital. Interest income is recorded on the accrual basis. Interest received
is also stated net of withholding taxes. Realised gains and losses on sales of
shares are determined on the average cost method.
C. Cash and Cash Equivalents
SC-U.S. Realty considers all cash on hand, demand deposits with financial
institutions and short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents.
D. Deferred Financing Costs/Discounts
Underwriting fees relating to the issue of the $450 million aggregate
principal amount at maturity of the Company's 2% Senior Unsecured Convertible
Notes due 2003 (the "Convertible Notes") are capitalised and amortised over
the term of the obligation. Discounts on the Convertible Notes are accreted as
a component of interest expense using the effective interest method over the
term of the obligation.
E. New Accounting Pronouncements
During June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities".
This statement provides new accounting and reporting standards for the use of
derivative instruments. Adoption of this statement is required by the Company
effective 1 January 2000. Management intends to adopt the statement as
required in fiscal 2000. Although the Company has not historically used such
instruments, it is not precluded from doing so. Management believes that the
impact of such adoption will not be material to the financial statements.
NOTE 3--INVESTMENTS
SC-U.S. Realty aims to have 85% to 90% of its assets deployed in
strategic investment positions and 10% to 15% invested in special opportunity
positions.
A. Strategic Investment Positions
Strategic investment positions represent significant (minimum of 25% to a
general maximum of 49% of each issuer's fully diluted common stock
outstanding) equity ownership positions in public companies, or in private
companies that will be positioned to be taken public. With private companies
which SC-U.S. Realty sponsors, it expects to own substantially more than 50%
of the voting shares until such companies become
198
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
publicly traded, at which time SC-U.S. Realty expects its ownership of such
shares will begin to be diluted until it reaches 35% to 45% on a fully diluted
basis. SC-U.S. Realty will be the largest shareholder of its strategic
investees, have representation on their boards of directors, and influence
their operations and strategies through ongoing consultation and research.
Strategic investees are characterised by the perceived potential for a
superior market niche and the ultimate potential for market preeminence with a
focused strategy and product.
On 24 September 1998, it was announced that Regency agreed to merge with
Pacific Retail in a tax-free transaction. The merger occurred on 28 February
1999. Pursuant to the terms of the merger agreement, shareholders of Pacific
Retail received 0.48 shares of Regency common stock for each common share of
Pacific Retail they owned. Since the merger had not occurred at 31 December
1998, SC-U.S. Realty has reflected in its financial statements the number of
shares and value of its investment in Pacific Retail using the market price of
Regency's common stock and the exchange ratio of 0.48.
B. Special Opportunity Positions
Special opportunity positions primarily consist of ownership positions of
less than 10% of the fully diluted stock in publicly traded entities taxed as
real estate investment trusts under the U.S. Internal Revenue Code of 1986, as
amended ("REITs") and other publicly traded U.S. real estate companies. The
investments have and will take the form of either direct investments in, or
public market purchases of, shares of companies that SC-U.S. Realty believes
possess the requisite fundamentals to generate strong cash flow growth and/or
value appreciation. In exceptional circumstances, and to a very limited
extent, SC-U.S. Realty may make special opportunity investments in companies
which are not publicly traded. Typically such an investment would be in a
company which does not at the time of investment fulfill the criteria for a
strategic investment position, but in which SC-U.S. Realty may take a
strategic investment position in the future.
As of 31 December 1998 and 1997, SC-U.S. Realty had deployed a total of
$165 million in securities of Security Capital Group. This amount is made up
of an investment of $110 million (representing 52,430.9 shares of Class A
common stock and $55 million aggregate principal amount of 6.5% convertible
subordinated debentures due 2016) and an additional $55 million (representing
1,964,286 shares of Class B common stock) invested during Security Capital
Group's initial public offering in September 1997.
NOTE 4--ACCOUNTS RECEIVABLE AND OTHER
<TABLE>
<CAPTION>
At 31 December
---------------------------
1998 1997
------------- -------------
(in thousands (in thousands
U.S. $) U.S. $)
<S> <C> <C>
Dividends........................................ $ 8,162 $1,668
Receivable from brokers on investments sold...... 8,219 4,905
Deferred issue costs on Convertible Notes (1).... 6,927 --
Interest......................................... 580 --
Refund of withholding tax........................ 97 223
Other............................................ 4 --
------- ------
$23,989 $6,796
======= ======
</TABLE>
- --------
(1) Represents the underwriting fees of $7.9 million relating to the issuance
of Convertible Notes (see Note 7). The fees have been deferred and will be
fully amortised over a period of five years starting from the date of
issue on 22 May 1998.
199
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
At 31 December
---------------------------
1998 1997
------------- -------------
(in thousands (in thousands
U.S. $) U.S. $)
<S> <C> <C>
Operating advisor fees........................... $ 8,614 $ 7,243
Offering expenses................................ -- 1,739
Line of credit arrangement fees.................. -- 860
Interest payable on line of credit............... 762 53
Interest payable on Convertible Notes............ 975 --
Custodian fees................................... 110 110
Other............................................ 3,036 2,377
------- -------
$13,497 $12,382
======= =======
</TABLE>
NOTE 6--LINE OF CREDIT
SC-U.S. Realty's total indebtedness under the line of credit as of 31
December 1998 and 1997 was $262.5 million and $130.0 million, respectively.
In an effort to secure investment-grade credit ratings, on 8 December
1998, SC-U.S. Realty converted its $700 million secured line of credit into a
$400 million unsecured line of credit from Commerzbank Aktiengesellschaft and
a consortium of European and international banks, of which $262.5 million was
drawn and outstanding as of 31 December 1998. SC-U.S. Realty received
investment-grade ratings from each of Moody's Investors Service (Baa3),
Standard & Poor's Ratings Services (BBB-) and Duff & Phelps Credit Rating Co.
(BBB-). The earliest date on which this line of credit will expire is 8
December 2000, but SC-U.S. Realty has the right on 8 December 1999 to convert
the then outstanding borrowings into a four-year term loan with quarterly
amortisation payments to be made over the four-year period, which would
effectively extend the final loan payment to 8 December 2003. Borrowings under
the line of credit (and the four-year term loan, if applicable) bear interest
at (a) the sum of (x) the greater of the federal funds rate plus 0.5% or the
United States prime rate and (y) a margin of 0% to 0.625% per annum (based on
SC-U.S. Realty's current senior unsecured long-term debt ratings) or (b) at
SC-U.S. Realty's option, LIBOR plus a margin of 0.85% to 1.625% per annum
(also based on SC-U.S. Realty's current senior unsecured long-term debt).
Additionally, there is a commitment fee of 0.15% to 0.25% per annum (based on
the amount of the line which remains undrawn). All borrowings under the line
of credit are subject to covenants that SC-U.S. Realty must maintain at all
times, including: (i) unsecured liabilities may not exceed 40% of the market
value of a borrowing base of owned securities, (ii) shareholders' equity must
exceed the sum of 75% of shareholders' equity as of 8 December 1998 and 75% of
the net proceeds of sales of equity securities thereafter, (iii) a ratio of
total liabilities to net worth of not more than 1:1, (iv) a fixed charge
coverage ratio of not less than 1.5:1, (v) an interest coverage ratio of not
less than 2:1 and (vi) secured debt may not exceed 10% of consolidated market
net worth. As of 31 December 1998, SC-U.S. Realty was in compliance with these
covenants.
Average daily borrowings under the line of credit were $274.4 million,
$136.2 million and $84.9 million for the years ended 31 December 1998, 1997
and 1996, respectively. The weighted average interest rates for these same
periods were 6.67%, 7.27% and 7.18%, respectively.
200
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--CONVERTIBLE NOTES
<TABLE>
<CAPTION>
At 31 December
--------------
1998
--------------
(in thousands
U.S. $)
<S> <C>
Convertible Notes proceeds.................................... $360,553
Accumulated accretion on Convertible Notes.................... 9,387
--------
$369,940
========
</TABLE>
The Company completed a convertible debt offering in May 1998. The
Convertible Notes are convertible at the option of the holder at any time prior
to maturity at a conversion rate equal to 52.7819 shares of the Company, each
having a par value of $2.00 (the "Shares"), per $1,000 aggregate principal
amount at maturity of the Convertible Notes. Interest is payable semi-annually
at the rate of 2% per annum on 22 May and 22 November of each year commencing
on 22 November 1998. Effective 1 January 1999, the interest rate payable on the
Convertible Notes was increased to 2.5% per annum. The 2.5% interest rate will
be in effect until SC-U.S. Realty lists certain equity securities on the NYSE
and registers the Convertible Notes and related equity securities for resale.
The Convertible Notes were sold at a discount to their principal amount at
maturity and additional interest will accrete at a rate of 4.75%, compounded
semi-annually, to par by 22 May 2003. The Convertible Notes may be redeemed, in
whole or in part, at the option of the Company on or after 23 May 2001 at the
accreted value, together with accrued and unpaid interest. Upon a change in
control of the Company, each holder of Convertible Notes shall have the right,
at the holder's option, to require the Company to repurchase such holder's
Convertible Notes, in whole or in part, at a purchase price equal to the
accreted value, together with accrued and unpaid interest through the
repurchase date.
Conversion of the Convertible Notes would be anti-dilutive for the year
ended 31 December 1998.
NOTE 8--ADVISORY AGREEMENT
SC-U.S. Realty has an advisory agreement with Security Capital U.S. Realty
Management S.A. (the "Operating Advisor"), a wholly owned subsidiary of
Security Capital Group. This agreement requires the Operating Advisor to
provide SC-U.S. Realty with advice with respect to strategy, investments,
financing and certain other administrative matters affecting SC-U.S. Realty.
The Operating Advisor has agreed to identify tangible capital deployment
opportunities in U.S. real estate companies and evaluate such companies'
competitive positions, management expertise, strategic direction, financial
strength and prospects for long-term sustainable per share cash flow growth.
The Operating Advisor also advises SC-U.S. Realty on obtaining board and
committee representation and management rights from strategic investees. The
agreement automatically renews for successive two-year periods unless either
party gives notice it will not renew. The Operating Advisor subcontracts for
certain services through affiliates based in London, United Kingdom and
Chicago, Illinois, United States. The Operating Advisor is entitled to an
advisory fee, payable quarterly in arrears, at an annual rate of 1.25% of the
average monthly value of invested assets (excluding investments in Security
Capital Group securities and investments of short-term cash and cash
equivalents). SC-U.S. Realty pays its own third party operating and
administrative expenses and transaction costs, although the Operating Advisor's
fee will be reduced to the extent that third party operating and administrative
expenses (but not transaction costs) exceed 0.25% per annum of average monthly
value of invested assets (excluding investments in Security Capital Group
securities and investments of short-term cash and cash equivalents). Such third
party operating and administrative costs as a ratio of average monthly value of
assets were 0.09%, 0.13% and 0.19% for the years ended 31 December 1998, 1997
and 1996, respectively.
SC-U.S. Realty pays fees to (i) Banque Internationale a Luxembourg as
Administrative Agent, Corporate Agent and Paying Agent, (ii) First European
Transfer Agent S.A. as Registrar and Transfer Agent,
201
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and (iii) Security Capital European Services S.A. as Domiciliary Agent and
Service Agent, in accordance with usual practice in Luxembourg. Such fees are
payable quarterly and are based on SC-U.S. Realty's gross assets.
NOTE 9--TAXATION
The Company, as separate from HOLDINGS, is not liable for any Luxembourg
tax on income. The Company is liable in Luxembourg for a capital tax of 0.06%
per annum of its net asset value. Cash dividends and interest received by the
Company or HOLDINGS on their investments may be subject to non-recoverable
withholding or other taxes in the countries of origin. U.S. withholding tax
rates of 15% were generally in effect for dividends received for all periods
presented.
Under the current United States-Luxembourg tax treaty, the Company
believes that HOLDINGS qualifies for a 15% rate of withholding tax on
dividends of operating income from the REIT investments currently held by
HOLDINGS and from its future REIT investments (if any). The Company also
believes that HOLDINGS will qualify for a 15% rate of withholding tax under
the proposed United States-Luxembourg tax treaty recently ratified by the
United States on most, if not all, of the REIT investments currently held by
HOLDINGS and from future REIT investments (if any). The Company's beliefs are
based on the advice of tax counsel and the manner in which management intends
to operate the Company. There can be no assurance that these favourable rates
will be achieved as to all such investments. These benefits are also dependent
on HOLDINGS meeting the "limitations on benefits" test under Article 24 of the
proposed new treaty. The tests prescribed by Article 24, particularly in terms
of stock ownership requirements, base erosion and publicly traded criteria are
inherently factual in nature. Such tests will only need to be applied to
HOLDINGS (or other subsidiaries of HOLDINGS or of the Company) at a future,
and presently indeterminate, point in time and will be dependent on the
particular facts at such time. However, management will use its best efforts
to ensure that HOLDINGS meets the conditions for claiming the reduced treaty
withholding tax rate at the relevant times and the Company currently believes
that such conditions will be met.
HOLDINGS, an ordinary corporate taxpayer under Luxembourg law, owns all
of the consolidated group's interests in REITs and other U.S. real estate
companies. Corporations which are resident Luxembourg taxpayers are taxed on
their worldwide net income, determined on the basis of gross income less costs
incurred. Certain items of income and capital gains are excluded from the
calculation of income received for tax purposes, including income and capital
gains from certain investments which meet certain holding period (generally
one calendar year) and size requirements. HOLDINGS operates so as to have the
highest possible percentage of its investments qualify for the exclusion.
Interest accrued on advances from the Company to HOLDINGS is deducted in
determining HOLDINGS' taxable income.
Income paid from HOLDINGS to the Company is subject to various levels of
tax, including withholding taxes. Gross cash (but not accrued) interest
payments from HOLDINGS to the Company are subject to withholding tax at a rate
of 3.75%. No dividends were paid to the Company during the reporting periods.
<TABLE>
<CAPTION>
For the years ended
31 December
----------------------
1998 1997 1996
------- ------- ------
(in thousands U.S. $)
<S> <C> <C> <C>
Gross cash interest payments......................... $25,262 $15,264 $5,030
======= ======= ======
Capital tax.......................................... $ 1,481 $ 1,285 $ 439
Withholding tax...................................... 947 572 189
------- ------- ------
$ 2,428 $ 1,857 $ 628
======= ======= ======
</TABLE>
202
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As discussed in Note 2B, dividends received are presented net of the
following withholding taxes (net of expected refunds) for each investment as
follows:
<TABLE>
<CAPTION>
For the years ended
31 December
-----------------------
1998 1997 1996
------- ------- ------
(in thousands U.S. $)
<S> <C> <C> <C>
CarrAmerica......................................... $ 7,882 $ 6,150 $2,015
CWS Communities..................................... 190 -- --
Pacific Retail...................................... (2,834) 3,204 1,359
Regency............................................. 2,675 1,699 115
Storage USA......................................... 4,798 3,638 1,292
Urban Growth Property............................... 679 -- --
Special opportunity positions....................... 2,876 2,613 770
------- ------- ------
$16,266 $17,304 $5,551
======= ======= ======
</TABLE>
NOTE 10--DIRECTORS' SHARE OPTION EQUIVALENTS
Each of the Company's independent directors has received share option
equivalents ("SOE") of 50,000 Shares at strike prices ranging from $8.60 to
$14.44 per Share. All grants of SOEs were for services rendered by the Board
of Directors subsequent to their grant. A SOE granted prior to 30 June 1998
does not represent a right to purchase Shares from the Company, but a right to
receive a restricted cash payment equal to the excess, if any, of the net
asset value of 50,000 Shares on the day of exercise over the strike price,
which was the net asset value on the date of grant. Such payments must be
applied to the purchase of Shares to be issued at net asset value on the date
of exercise. SOEs granted after 30 June 1998 do not represent a right to
purchase Shares from the Company, but a right to receive a restricted cash
payment equal to the excess, if any, of the closing stock price of 50,000
Shares on the day of exercise over the strike price, which was the closing
stock price on the date of grant. Such payments must be applied to the
purchase of Shares to be issued at the closing stock price on the date of
exercise. Directors were granted a vested right to exercise one-half of their
SOEs immediately, and rights to the balance vest on the fourth anniversary of
their issuance. The right to exercise all SOEs expires five years from the
date of grant.
<TABLE>
<CAPTION>
For the years ended 31 December
---------------------------------------------------
1998 1997 1996
----------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
SOEs outstanding at
beginning of year...... 250,000 $11.27 200,000 $10.48 100,000 $10.00
SOEs issued............. 100,000 8.60 50,000 14.44 100,000 10.95
SOEs forfeited.......... (25,000) 10.95 -- -- -- --
SOEs exercised.......... (25,000) 10.95 -- -- -- --
------- ------ ------- ------ ------- ------
SOEs outstanding at end
of year................ 300,000 $10.47 250,000 $11.27 200,000 $10.48
======= ====== ======= ====== ======= ======
SOEs currently
exercisable............ 150,000 $10.47 125,000 $11.27 100,000 $10.48
======= ====== ======= ====== ======= ======
</TABLE>
No SOEs have expired during the years represented above, except for an
SOE in respect of 25,000 Shares granted to a director in October 1998 upon his
retirement. The retiring director exercised the remaining part of such SOE in
respect of 25,000 Shares in December 1998. The Company accrues a liability for
the total
203
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the SOE granted. Since the SOEs are redeemable in cash, this accrual is
adjusted for changes in the Company's net asset value or closing stock price,
as the case may be, at each balance sheet date with the resultant change
representing a charge (reduction) to administrative expenses for the period in
the consolidated statement of operations.
NOTE 11--COMMITMENTS
SC-U.S. Realty's existing and committed fundings at cost as of 31
December 1998 were as follows:
<TABLE>
<CAPTION>
Total Total Cost Amount
Amount (Amount to be
Committed Funded)(1) Funded (1)
---------- ---------- ----------
(in thousands U.S. $)
<S> <C> <C> <C>
CarrAmerica (NYSE:CRE).................... $ 699,851 $ 699,851 $ --
City Center Retail (Private)(2)........... 350,135 304,035 46,100(3)
CWS Communities (Private)................. 300,329 153,563 146,766(3)
Pacific Retail (Private)(4)............... 524,038 524,038 --
Regency (NYSE:REG)(4)..................... 235,750 235,750 --
Storage USA (NYSE:SUS).................... 394,272 394,272 --
Urban Growth Property (Private)........... 181,082 181,082 --
Special opportunity positions(5).......... 479,031 479,031 --
---------- ---------- --------
Total................................. $3,164,488 $2,971,622 $192,866
========== ========== ========
</TABLE>
- --------
(1) Included in Total Amount Committed.
(2) In January 1999, the contractual obligation in respect of City Center
Retail was increased by up to $25 million.
(3) Represents a contractual obligation.
(4) On 24 September 1998, it was announced that Regency agreed to merge with
Pacific Retail. The merger occurred on 28 February 1999. See Note 3A and
Note 13 to the Consolidated Financial Statements.
(5) Includes an aggregate of $165 million invested in shares of common stock
and convertible subordinated debentures of Security Capital Group.
SC-U.S. Realty's existing and committed fundings at cost as of 31
December 1997 were as follows:
<TABLE>
<CAPTION>
Total Total Cost Amount
Amount (Amount to be
Committed Funded) (1) Funded (1)
---------- ----------- ----------
(in thousands U.S. $)
<S> <C> <C> <C>
CarrAmerica (NYSE:CRE)................... $ 636,387 $ 636,387 $ --
City Center Retail (Private)............. 151,865 83,665 68,200(2)
CWS Communities (Private)................ 300,954 92,600 208,354(2)
Pacific Retail (Private)................. 523,459 523,459 --
Regency (NYSE:REG)....................... 225,695 225,695 --
Storage USA (NYSE:SUS)................... 348,444 348,444 --
Urban Growth Property (Private).......... 150,837 17,703 133,134(2)
Special opportunity positions(3)......... 447,708 447,708 --
---------- ---------- --------
Total................................ $2,785,349 $2,375,661 $409,688
========== ========== ========
</TABLE>
- --------
(1) Included in Total Amount Committed.
(2) Represents a contractual obligation.
(3) Includes an aggregate of $165 million invested in shares of common stock
and convertible subordinated debentures of Security Capital Group.
204
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Capital deployed to additional strategic investment positions, as well as
further funding to existing strategic investees, will generally be initially
funded with borrowings under the Company's line of credit. These borrowings
are expected to be reduced by internally generated free cash flow and the
proceeds of future issuances of debt or equity securities.
NOTE 12--LEGAL RESERVE
According to Luxembourg law, an annual transfer of 5% of the net profit
to a legal reserve is required until this reserve equals 10% of the value of
the issued Share capital. A transfer of $3.1 million was made in 1998 upon the
shareholders' approval of the 1997 financial statements. No transfer will be
made in 1999 as a result of the decrease in net assets resulting from
operations for the year ended 31 December 1998.
NOTE 13--SUBSEQUENT EVENTS
The merger of Pacific Retail and Regency occurred on 28 February 1999.
Shareholders of Pacific Retail received 0.48 shares of Regency common stock
for each common share of Pacific Retail they owned.
205
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Homestead Village Incorporated
We have audited the accompanying balance sheet of Homestead Village
Incorporated as of December 31, 1996, and the related statements of
operations, shareholders' equity, and cash flows for the year ended December
31, 1996. The financial statements are the responsibility of Homestead Village
Incorporated's management. Our responsibility is to express an opinion on the
financial statements and schedule based on our audit.
We conducted our audit 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 audit provides 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 Homestead Village
Incorporated at December 31, 1996, and the results of its operations and its
cash flows for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
February 24, 1997
206
<PAGE>
The Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have audited the accompanying balance sheets of Security Capital
Atlantic Incorporated as of December 31, 1996 and 1995, and the related
statements of earnings, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements and schedule 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 Atlantic
Incorporated at December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
February 3, 1997
207
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of Security Capital Group
Incorporated, a Maryland corporation, and the undersigned Directors and
officers of Security Capital Group Incorporated, hereby constitutes and
appoints William D. Sanders, C. Ronald Blankenship, Thomas G. Wattles, Paul E.
Szurek, James C. Swaim, Jeffrey A. Klopf, Mark W. Pearson and Edward J.
Schneidman its or his true and lawful attorneys-in-fact and agents, for it or
him and in its or his name, place and stead, in any and all capacities, with
full power to act alone, to sign any and all amendments to this report, and to
file each such amendment to this report, with all exhibits thereto, and any
and all documents in connection therewith, with the Securities and Exchange
Commission, hereby granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform any and all acts and
things requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as it or he might or could do in person, hereby
ratifying and confirming all that said attorneys in-fact and agents, or any of
them may lawfully do or cause to be done by virtue hereof.
208
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Security Capital Group Incorporated
/s/ William D. Sanders
By: _________________________________
William D. Sanders
Chairman, Director and
Chief Executive Officer
(Principal Executive Officer)
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William D. Sanders Chairman, Director and Chief March 30, 1999
____________________________________ Executive Officer
William D. Sanders (Principal Executive
Officer)
/s/ Paul E. Szurek Chief Financial Officer March 30, 1999
____________________________________ (Principal Financial
Paul E. Szurek Officer)
/s/ James C. Swaim Principal Accounting Officer March 30, 1999
____________________________________
James C. Swaim
/s/ C. Ronald Blankenship Director, Vice Chairman March 30, 1999
____________________________________
C. Ronald Blankenship
/s/ Samuel W. Bodman Director March 30, 1999
____________________________________
Samuel W. Bodman
/s/ Hermann Buerger Director March 30, 1999
____________________________________
Hermann Buerger
/s/ John P. Frazee, Jr. Director March 30, 1999
____________________________________
John P. Frazee, Jr.
/s/ Cyrus F. Freidheim, Jr. Director March 30, 1999
____________________________________
Cyrus F. Freidheim, Jr.
/s/ H. Laurance Fuller Director March 30, 1999
____________________________________
H. Laurance Fuller
/s/ Ray L. Hunt Director March 30, 1999
____________________________________
Ray L. Hunt
/s/ John T. Kelley III Director March 30, 1999
____________________________________
John T. Kelley III
/s/ Peter S. Willmott Director March 30, 1999
____________________________________
Peter S. Willmott
</TABLE>
209
<PAGE>
INDEX TO EXHIBITS
Certain of the following documents are filed herewith. Certain other of the
following documents have been previously filed with the Securities and
Exchange Commission and, pursuant to Rule 12b-32, are incorporated herein by
reference.
<TABLE>
<CAPTION>
Exhibit
No. Document Description
------- --------------------
<C> <S> <C>
3.1 Security Capital Articles of Amendment and Restatement
(incorporated by reference to Exhibit 4.1 to Security
Capital's registration statement on Form S-11 (File No. 333-
20637))
3.2 Security Capital Articles Supplementary--Series B Cumulative
Convertible Redeemable Voting Preferred Stock (incorporated by
reference to Exhibit 3 to Security Capital's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1998)
3.3 Security Capital Amended and Restated Bylaws (incorporated by
reference to Exhibit 4.2 to Security Capital's Registration
Statement on Form S-11 (File No. 333-20637))
3.4 Bylaw Amendments (incorporated by reference to Exhibit 3.1 to
Security Capital's Current Report on Form 8-K, dated December
10, 1998)
4.1 Rights Agreement, dated as of April 21, 1997, between Security
Capital and The First National Bank of Boston, as rights
Agent, including form of Rights Certificate (incorporated by
reference to exhibit 4.1 to Security Capital's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1997)
4.2 Form of stock certificate for shares of Class A common stock
of Security Capital (incorporated by reference to Exhibit 4.4
to Security Capital's Registration Statement on Form S-11
(File No. 333-20637))
4.3 Form of stock certificate for shares of Class B common stock
of Security Capital (incorporated by reference to Exhibit 4.5
to Security Capital's Registration Statement on Form S-11
(File No. 333-20637))
4.4 Form of 6.50% Convertible Subordinated Debentures due March
29, 2016 (incorporated by reference to Exhibit 4.7 to Security
Capital's Registration Statement on Form S-11 (File No. 333-
20737))
4.5 Registration Rights Agreement, dated May 7, 1998, between
Security Capital and Commerzbank Aktiengesellschaft, Grand
Cayman Branch (incorporated by reference to Exhibit 4.2 to
Security Capital's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998)
4.6 Indenture, dated June 18, 1998, from Security Capital to State
Street Bank and Trust Company, as trustee (incorporated by
reference to Exhibit 4.1 to Security Capital's Registration
Statement on Form S-4 (File No. 333-61401))
4.7 Form of 6.95% Exchange Notes due 1005 (incorporated by
reference to Exhibit 4.2 to Security Capital's Registration
Statement on Form S-4 (File No. 333-61401))
4.8 Form of 7.15% Exchange Notes due 1007 (incorporated by
reference to Exhibit 4.3 to Security Capital's Registration
Statement on Form S-4 (File No. 333-61401))
4.9 Form of 7.70% Exchange Notes due 2028 (incorporated by
reference to Exhibit 4.4 to Security Capital's Registration
Statement on Form S-4 (File No. 333-61401))
4.10 Indenture, dated as of November 16, 1998, from Security
Capital to State Street Bank and Trust Company, as trustee
</TABLE>
210
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Document Description
------- --------------------
<C> <S> <C>
4.11 Resolution of the Board of Directors of Security Capital
adopted November 16, 1998, pursuant to Section 301 of the
Indenture, dated as of November 16, 1998, from Security
Capital to State Street Bank and Trust Company, as trustee
4.12 Form of Fixed Rate Note under the Indenture, dated as of
November 16, 1998, from Security Capital to State Street Bank
and Trust Company, as trustee
4.13 Form of Floating Rate Note under the Indenture, dated as of
November 16, 1998, from Security Capital to State Street Bank
and Trust, as trustee
4.14 Form of Proposed Subordinated Indenture (incorporated by
reference to Security Capital's Registration Statement on Form
S-3 (File No. 333-64979))
10.1 Investor Agreement, dated as of October 17, 1996, by and
between Homestead and Security Capital (incorporated by
reference to Exhibit 10.2 to Homestead's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1996 )
10.2 Third Amended and Restated Investor Agreement, dated September
9, 1997, between Archstone and Security Capital (incorporated
by reference to Exhibit 10.2 to Homestead's Quarter Report for
the quarterly period ended September 30, 1996)
10.3 Third Amended and Restated Investor Agreement, dated September
9, 1997, between ProLogis and Security Capital (incorporated
by reference to Exhibit 10.3 to Homestead's Quarterly Report
for the quarterly period ended September 30, 1996)
10.4 Administrative Services Agreement, dated as of October 17,
1996, between Homestead and Security Capital (incorporated by
reference to Exhibit 10.11 to Homestead's Quarterly Report for
the quarterly period ended September 30, 1996)
10.5 Administrative Services Agreement, dated September 9, 1997,
between Archstone and Security Capital (incorporated by
reference to Exhibit 10.5 to Security Capital's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1997)
10.6 Administrative Services Agreement, dated September 9, 1997,
between ProLogis and Security Capital (incorporated by
reference to Exhibit 10.5 to Security Capital's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1997)
10.7 Advisory Agreement dated July 1, 1997, between Security
Capital U.S. Realty, Security Capital Holdings, S.A. and
Security Capital (EU) Management S.A. (incorporated by
reference to Exhibit 10.21 to the SC Form S-11)
10.8 Acquisition Agreement and Plan of Reorganization dated as of
April 24, 1997 among Security Capital, Security Capital BVI
Holdings Incorporated and William D. Sanders (incorporated by
reference to Exhibit 10.22 to the SC Form S-11)
10.9 Credit Agreement, dated as of June 5, 1998, among Security
Capital and Chase Bank of Texas, National Association, and
Wells Fargo Bank, National Association, as agents for the
financial institutions identified therein (incorporated by
reference to Exhibit 10.1 to Security Capital's Registration
Statement on Form S-4 (File No. 333-61401))
10.10 Form of Indemnification Agreement entered into between
Security Capital and each of its directors and employees
(incorporated by reference to Exhibit 10.26 to Security
Capital's Registration Statement on Form S-11 (File No. 333-
20637))
10.11 Security Capital Group Incorporated 1998 Long-Term Incentive
Plan
10.12 1996 Security Capital Outside Directors Plan (incorporated by
reference to Exhibit 10.27 to Security Capital's Registration
Statement on Form S-11 (File No. 333-20637))
</TABLE>
211
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Document Description
------- --------------------
<C> <S> <C>
10.13 Security Capital 1995 Option Plan (as amended and restated
effective as of December 3, 1996) (incorporated by reference
to Exhibit 10.28 to Security Capital's Registration Statement
on Form S-11 (File No. 333-20637))
10.14 Security Capital Deferred Fee Plan for Directors (incorporated
by reference to Exhibit 10.29 to Form S-11 to Security
Capital's Registration Statement on Form S-11 (File No. 333-
20637)
10.15 Security Capital 1991 Option Plan A (as amended and restated
effective as of December 3, 1996) (incorporated by reference
to Exhibit 10.30 to Security Capital's Registration Statement
on Form S-11 (File No. 333-20637))
10.16 Security Capital 1991 Option Plan B (as amended and restated
effective as of December 3, 1996) (incorporated by reference
to Exhibit 10.31 to Security Capital's Registration Statement
on Form S-11 (File No. 333-20637))
10.17 Security Capital 1992 Option Plan A (as amended and restated
effective as of December 3, 1996) (incorporated by reference
to Exhibit 10.32 to Security Capital's Registration Statement
on Form S-11 (File No. 333-20637))
10.18 Security Capital 1992 Option Plan B (as amended and restated
effective as of December 3, 1996) (incorporated by reference
to Exhibit 10.33 to Security Capital's Registration Statement
on Form S-11 (File No. 333-20637))
10.19 Security Capital Realty Investors 1991 Option Plan A (as
amended and restated effective December 3, 1996) (incorporated
by reference to Exhibit 10.34 to Security Capital's
Registration Statement on Form S-11 (File No. 333-20637))
10.20 Security Capital Realty Investors 1991 Option Plan B (as
amended and restated effective December 3, 1996) (incorporated
by reference to Exhibit 10.35 to Security Capital's
Registration Statement on Form S-11 (File No. 333-20637))
10.21 Form of Secured Promissory Note from certain executive
officers to Security Capital (incorporated by reference to
Exhibit 10.36 to Security Capital's Registration Statement on
Form S-11 (File No. 333-20637))
21 Subsidiaries of Security Capital
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of KPMG LLP
23.4 Consent of KPMG
23.5 Opinion from KPMG
23.6 Consent of Price Waterhouse SARL
23.7 Consent of Ernst & Young LLP
23.8 Consent of Ernst & Young LLP
24 Power of Attorney (included at page 208)
27 Financial Data Schedule--Year Ended December 31, 1998
</TABLE>
212
<PAGE>
Exhibit 4.10
SECURITY CAPITAL GROUP INCORPORATED
TO
STATE STREET BANK AND TRUST COMPANY
Trustee
Indenture
Dated as of November 16, 1998
Senior Debt Securities
<PAGE>
TABLE OF CONTENTS
=================
<TABLE>
<CAPTION>
Page
----
<S> <C>
RECITALS
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 101. Definitions .................................... 1
Act....................................................... 2
Additional Amounts........................................ 2
Affiliate................................................. 2
Authenticating Agent...................................... 2
Authorized Newspaper...................................... 2
Bankruptcy Law............................................ 2
Bearer Security........................................... 2
Board of Directors........................................ 2
Board Resolution.......................................... 2
Business Day.............................................. 2
Capital Stock............................................. 3
CEDEL..................................................... 3
Commission................................................ 3
Common Depositary......................................... 3
Common Shares............................................. 3
Company................................................... 3
Company Certificate....................................... 3
Company Request and Company Order......................... 3
Conversion Event.......................................... 3
Corporate Trust Office.................................... 4
corporation............................................... 4
coupon.................................................... 4
covenant defeasance....................................... 4
Custodian................................................. 4
Defaulted Interest........................................ 4
defeasance................................................ 4
Dollar or $............................................... 4
DTC....................................................... 4
ECU....................................................... 4
Euroclear................................................. 4
European Communities...................................... 4
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
European Monetary System.................................. 4
Event of Default.......................................... 4
Exchange Act.............................................. 4
Exchange Date............................................. 5
Foreign Currency.......................................... 5
GAAP...................................................... 5
Government Obligations.................................... 5
Hedging Obligations....................................... 5
Holder.................................................... 5
Indenture................................................. 5
Indexed Security.......................................... 6
interest.................................................. 6
Interest Payment Date..................................... 6
Make-Whole Amount......................................... 6
mandatory sinking fund payment............................ 6
Maturity.................................................. 6
Notice of Default......................................... 6
Opinion of Counsel........................................ 6
optional sinking fund payment............................. 6
Original Issue Discount Security.......................... 6
Outstanding............................................... 7
Paying Agent.............................................. 8
Payment Default........................................... 8
Permitted Investments..................................... 8
Person....................................................10
Place of Payment..........................................10
Predecessor Security......................................10
Qualified GIC.............................................10
Redemption Date...........................................11
Redemption Price..........................................11
Registered Security.......................................11
Regular Record Date.......................................11
Repayment Date............................................11
Repayment Price...........................................11
Required Filing Dates.....................................11
Responsible Officer.......................................11
Securities Act............................................11
Security..................................................11
Security Register and Security Registrar..................12
Significant Subsidiary....................................12
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Special Record Date.............................12
Stated Maturity.................................12
Subsidiary......................................12
Trust Indenture Act.............................12
Trustee.........................................12
United States...................................13
United States person............................13
Yield to Maturity...............................13
SECTION 102. Compliance Certificates and Opinions.........13
SECTION 103. Form of Documents Delivered to Trustee.......14
SECTION 104. Acts of Holders..............................14
SECTION 105. Notices to Trustee and Company...............16
SECTION 106. Notice to Holders; Waiver....................16
SECTION 107. Effect of Headings and Table of Contents.....17
SECTION 108. Successors and Assigns.......................17
SECTION 109. Separability Clause..........................18
SECTION 110. Benefits of Indenture........................18
SECTION 111. No Personal Liability........................18
SECTION 112. Governing Law................................18
SECTION 113. Legal Holidays...............................18
SECTION 114. Counterparts.................................18
ARTICLE TWO
SECURITIES FORMS
SECTION 201. Forms of Securities..........................19
SECTION 202. Form of Trustee's Certificate of
Authentication...............................19
SECTION 203. Securities Issuable in Global Form...........19
ARTICLE THREE
THE SECURITIES
SECTION 301. Amount Unlimited; Issuable in Series.........20
SECTION 302. Denominations................................24
SECTION 303. Execution, Authentication, Delivery
and Dating...................................24
SECTION 304. Temporary Securities.........................27
SECTION 305. Registration, Registration of
Transfer and Exchange........................29
SECTION 306. Mutilated, Destroyed, Lost and Stolen
Securities...................................33
SECTION 307. Payment of Interest; Interest Rights
Preserved....................................34
SECTION 308. Persons Deemed Owners........................36
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 309. Cancellation.................................37
SECTION 310. Computation of Interest......................37
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. Satisfaction and Discharge of Indenture......37
SECTION 402. Application of Trust Funds...................39
ARTICLE FIVE
REMEDIES
SECTION 501. Events of Default............................39
SECTION 502. Acceleration of Maturity; Rescission
and Annulment................................41
SECTION 503. Collection of Indebtedness and Suits
for Enforcement by Trustee...................42
SECTION 504. Trustee May File Proofs of Claim.............43
SECTION 505. Trustee May Enforce Claims Without
Possession of Securities or Coupons..........44
SECTION 506. Application of Money Collected...............44
SECTION 507. Limitation on Suits..........................45
SECTION 508. Unconditional Right of Holders to
Receive Principal, Premium or Make-Whole
Amount, Interest and Additional Amounts......45
SECTION 509. Restoration of Rights and Remedies...........46
SECTION 510. Rights and Remedies Cumulative...............46
SECTION 511. Delay or Omission Not Waiver.................46
SECTION 512. Control by Holders of Securities.............46
SECTION 513. Waiver of Past Defaults......................47
SECTION 514. Waiver of Usury, Stay or Extension Laws......47
SECTION 515. Undertaking for Costs........................47
ARTICLE SIX
THE TRUSTEE
SECTION 601. Notice of Defaults...........................48
SECTION 602. Certain Rights of Trustee....................48
SECTION 603. Not Responsible for Recitals or
Issuance of Securities.......................49
SECTION 604. May Hold Securities..........................50
SECTION 605. Money Held in Trust; Permitted
Investments..................................50
SECTION 606. Compensation and Reimbursement...............51
SECTION 607. Trustee Eligibility; Conflicting Interests...51
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 608. Resignation and Removal; Appointment
of Successor.................................52
SECTION 609. Acceptance of Appointment by Successor.......53
SECTION 610. Merger, Conversion, Consolidation or
Succession to Business.......................54
SECTION 611. Appointment of Authenticating Agent..........55
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 701. Disclosure of Names and Addresses of
Holders......................................56
SECTION 702. Reports by Trustee...........................57
SECTION 703. Company to Furnish Trustee Names and
Addresses of Holders.........................57
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE, LEASE OR CONVEYANCE
SECTION 801. Consolidations and Mergers of Company
and Sales, Leases and Conveyances............57
SECTION 802. Rights and Duties of Successor Entity........57
SECTION 803. Company Certificate and Opinion of Counsel...58
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. Supplemental Indentures Without Consent
of Holders...................................58
SECTION 902. Supplemental Indentures with Consent
of Holders...................................60
SECTION 903. Execution of Supplemental Indentures.........61
SECTION 904. Effect of Supplemental Indentures............61
SECTION 905. Conformity with Trust Indenture Act..........61
SECTION 906. Reference in Securities to Supplemental
Indentures...................................61
SECTION 907. Notice of Supplemental Indentures............62
ARTICLE TEN
COVENANTS
SECTION 1001. Payment of Principal, Premium or
Make-Whole Amount, Interest and
Additional Amounts..........................62
SECTION 1002. Maintenance of Office or Agency.............62
SECTION 1003. Money for Securities Payments to Be
Held in Trust...............................64
SECTION 1004. Existence...................................65
SECTION 1005. Maintenance of Properties...................65
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1006. Insurance...................................66
SECTION 1007. Payment of Taxes and Other Claims...........66
SECTION 1008. Reports.....................................66
SECTION 1009. Statement as to Compliance..................67
SECTION 1010. Additional Amounts..........................68
SECTION 1011. Waiver of Certain Covenants.................69
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
SECTION 1101. Applicability of Article....................69
SECTION 1102. Election to Redeem; Notice to Trustee.......69
SECTION 1103. Selection by Trustee of Securities to
Be Redeemed.................................69
SECTION 1104. Notice of Redemption........................70
SECTION 1105. Deposit of Redemption Price.................71
SECTION 1106. Securities Payable on Redemption Date.......71
SECTION 1107. Securities Redeemed in Part.................72
ARTICLE TWELVE
SINKING FUNDS
SECTION 1201. Applicability of Article....................73
SECTION 1202. Satisfaction of Sinking Fund Payments with
Securities..................................73
SECTION 1203. Redemption of Securities for Sinking Fund...73
ARTICLE THIRTEEN
REPAYMENT AT THE OPTION OF HOLDERS
SECTION 1301. Applicability of Article....................74
SECTION 1302. Repayment of Securities.....................74
SECTION 1303. Exercise of Option..........................74
SECTION 1304. When Securities Presented for Repayment
Become Due and Payable......................75
SECTION 1305. Securities Repaid in Part...................76
ARTICLE FOURTEEN
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1401. Applicability of Article; Company's
Option to Effect Defeasance or Covenant
Defeasance..................................76
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1402. Defeasance and Discharge....................76
SECTION 1403. Covenant Defeasance.........................77
SECTION 1404. Conditions to Defeasance or Covenant
Defeasance..................................77
SECTION 1405. Deposited Money and Government Obligations
to Be Held in Trust; Other Miscellaneous
Provisions..................................79
ARTICLE FIFTEEN
MEETINGS OF HOLDERS OF SECURITIES
SECTION 1501. Purposes for Which Meetings May Be
Called......................................81
SECTION 1502. Call, Notice and Place of Meetings..........81
SECTION 1503. Persons Entitled to Vote at Meetings........81
SECTION 1504. Quorum; Action..............................81
SECTION 1505. Determination of Voting Rights;
Conduct and Adjournment of Meetings.........83
SECTION 1506. Counting Votes and Recording Action
of Meetings.................................84
SECTION 1507. Evidence of Action Taken by Holders.........84
SECTION 1508. Proof of Execution of Instruments...........84
TESTIMONIUM
SIGNATURES
ACKNOWLEDGMENTS
EXHIBIT A - FORMS OF CERTIFICATION
</TABLE>
vii
<PAGE>
Reconciliation and tie between
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"),
and Indenture
<TABLE>
<CAPTION>
Trust Indenture Act Section Indenture Section
--------------------------- -----------------
<S> <C>
310(a)(1), (2) and (5) 607(a)
310(a)(3) and (4) Not applicable
310(b) 608(d)
310(c) Not applicable
311 Not applicable
312(a) 704
312(b) Not applicable
312(c) 701
313(a) and (c) 702
313(b) Not applicable
314(a)(1), (2) and (3) 1008
314(a)(4) 1008
314(b) Not applicable
314(c) and (e) 102
314(d) Not applicable
315(a), (c), (d) and (e) Not applicable
315(b) 601
316(a) (last sentence) 101 ("Outstanding")
316(a)(1)(A) 512
316(a)(1)(B) 513
316(a)(2) and (c) Not applicable
316(b) 508
317(a)(1) 503
317(a)(2) 504
317(b) Not applicable
318(a) 112
</TABLE>
NOTE: This reconciliation and tie shall not, for any purpose, be deemed to
be a part of the Indenture.
Attention should also be directed to Section 318(c) of the Trust
Indenture Act, which provides that the provisions of Sections 310 to
and including 317 of the Trust Indenture Act are a part of and govern
every qualified indenture, whether or not physically contained
therein.
viii
<PAGE>
INDENTURE, dated as of November 16, 1998, from SECURITY CAPITAL GROUP
INCORPORATED, a Maryland corporation (hereinafter called the "Company"), having
-------
its principal office at 125 Lincoln Avenue, Santa Fe, New Mexico 87501 to STATE
STREET BANK AND TRUST COMPANY, a Massachusetts trust company, as Trustee
hereunder (hereinafter called the "Trustee"), currently having its Corporate
-------
Trust Office at Two International Place, Corporate Trust Division, Boston,
Massachusetts 02110.
RECITALS
The Company deems it necessary to issue from time to time for its lawful
purposes senior debt securities (hereinafter called the "Securities") evidencing
----------
its unsecured and unsubordinated indebtedness, and has duly authorized the
execution and delivery of this Indenture to provide for the issuance from time
to time of the Securities, unlimited as to aggregate principal amount, to bear
interest at the rates or formulas, to mature at such times and to have such
other provisions as shall be fixed therefor as hereinafter provided.
All things necessary to make this Indenture a valid agreement of the
Company, in accordance with its terms, have been done.
This Indenture is subject to the provisions of the Trust Indenture Act (as
herein defined) and the rules and regulations of the Commission (as herein
defined) promulgated thereunder which are required to be part of this Indenture
and, to the extent applicable, shall be governed by such provisions.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Securities
by the Holders (as herein defined) thereof, it is mutually covenanted and
agreed, for the equal and proportionate benefit of all Holders of the
Securities, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 101 Definitions. For all purposes of this Indenture, except as
-----------
otherwise expressly provided or the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein, and the terms "cash transaction" and "self-
---------------- ----
liquidating paper," as used in Section 311 of the
-----------------
1
<PAGE>
Trust Indenture Act, shall have the meanings assigned to them in the rules
of the Commission adopted under the Trust Indenture Act;
(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP (as herein defined); and
(4) the words "herein," "hereof" and "hereunder" and other words of
------ ------ ---------
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.
"Act" has the meaning specified in Section 104(a).
----
"Additional Amounts" means any additional amounts which are required by a
-------------------
Security, under circumstances specified therein, to be paid by the Company in
respect of certain taxes imposed on certain Holders and which are owing to such
Holders.
"Affiliate" when used with respect to any Person, means any other Person
----------
directly or indirectly controlling or controlled by or under direct or indirect
common control with such Person. For the purposes of this definition, "control"
-------
when used with respect to any specified Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
- ------------ ----------
"Authenticating Agent" means any authenticating agent appointed by the
---------------------
Trustee pursuant to Section 611.
"Authorized Newspaper" means a newspaper, printed in the English language
---------------------
or in an official language of the country of publication, customarily published
on each Business Day, whether or not published on Saturdays, Sundays or
holidays, and of general circulation in each place in connection with which the
term is used or in the financial community of each such place. Whenever
successive publications are required to be made in Authorized Newspapers, the
successive publications may be made in the same or in different Authorized
Newspapers in the same city meeting the foregoing requirements and in each case
on any Business Day.
"Bankruptcy Law" has the meaning specified in Section 501.
---------------
"Bearer Security" means a Security which is payable to bearer.
----------------
"Board of Directors" means the board of directors of the Company, the
-------------------
executive committee or any other committee of such board duly authorized to act
for it in respect hereof.
2
<PAGE>
"Board Resolution" means a copy of a resolution certified by the Secretary
-----------------
or an Assistant Secretary of the Company to have been duly adopted by the Board
of Directors, and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" when used with respect to any Place of Payment or any other
-------------
particular location referred to in this Indenture or in the Securities, means,
unless otherwise specified with respect to any Securities pursuant to Section
301, any day, other than a Saturday or Sunday, which is neither a legal holiday
nor a day on which banking institutions in such Place of Payment or particular
location are authorized or required by law, regulation or executive order to
close.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
--------------
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation which
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"CEDEL" means Centrale de Livraison de Valeurs Mobilieres, S.A., or its
------
successor.
"Commission" means the Securities and Exchange Commission, as from time to
-----------
time constituted, created under the Exchange Act, or, if at any time after
execution of this instrument such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties on such date.
"Common Depositary" has the meaning specified in Section 304(b).
------------------
"Common Shares" means the shares of common stock, par value $.01 per
--------------
share, of the Company.
"Company" means the Person named as the "Company" in the first paragraph
--------
of this Indenture until a successor corporation has become such pursuant to the
applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor corporation, and any other obligor on the Securities.
"Company Certificate" means a certificate signed by the Chairman or a Co-
--------------------
Chairman, Managing Director, Senior Vice President or Vice President of the
Company and by the Treasurer, an Assistant Treasurer, the Secretary or an
Assistant Secretary of the Company, and delivered to the Trustee.
"Company Request" and "Company Order" mean, respectively, a written
---------------- -------------
request or order signed in the name of the Company by the Chairman or a Co-
Chairman, Managing Director,
3
<PAGE>
Senior Vice President or Vice President of the Company and by the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary of the Company, and
delivered to the Trustee.
"Conversion Event" means the cessation of use of (i) a Foreign Currency
-----------------
(other than the ECU or other currency unit) both by the government of the
country which issued such currency and for the settlement of transactions by a
central bank or other public institutions of or within the international banking
community, (ii) the ECU both within the European Monetary System and for the
settlement of transactions by public institutions of or within the European
Communities or (iii) any currency unit (or composite currency) other than the
ECU for the purposes for which it was established.
"Corporate Trust Office" means the office of the Trustee at which, at any
-----------------------
particular time, its corporate trust business is principally administered, which
office at the date hereof is located at Two International Place, Corporate Trust
Division, Boston, Massachusetts 02110.
"corporation" includes corporations, associations, companies, real estate
------------
investment trusts and business trusts.
"coupon" means any interest coupon appertaining to a Bearer Security.
-------
"covenant defeasance" has the meaning specified in Section 1403.
--------------------
"Custodian" has the meaning specified in Section 501.
----------
"Defaulted Interest" has the meaning specified in Section 307.
-------------------
"defeasance" has the meaning specified in Section 1402.
-----------
"Dollar" or "$" means a dollar or other equivalent unit in such coin or
------- -
currency of the United States of America as at the time is legal tender for the
payment of public and private debts.
"DTC" means The Depository Trust Company.
----
"ECU" means the European Currency Unit as defined and revised from time to
----
time by the Council of the European Communities.
"Euroclear" means Morgan Guaranty Trust Company of New York, Brussels
----------
Office, or its successor as operator of the Euroclear System.
"European Communities" means the European Economic Community, the European
---------------------
Coal and Steel Community and the European Atomic Energy Community.
4
<PAGE>
"European Monetary System" means the European Monetary System established
-------------------------
by the Resolution of December 5, 1978 of the Council of the European
Communities.
"Event of Default" has the meaning specified in Section 501.
-----------------
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
-------------
the rules and regulations promulgated thereunder by the Commission.
"Exchange Date" has the meaning specified in Section 304(b).
--------------
"Foreign Currency" means any currency, currency unit or composite
-----------------
currency, including, without limitation, the ECU issued by the government of one
or more countries other than the United States of America or by any recognized
confederation or association of such governments.
"GAAP" means generally accepted accounting principles as used in the
-----
United States applied on a consistent basis as in effect from time to time,
provided that, solely for purposes of calculating any financial covenants,
- --------
"GAAP" shall mean generally accepted accounting principles as used in the United
States on the date hereof, applied on a consistent basis.
"Government Obligations" means securities which are (i) direct obligations
-----------------------
of the United States of America or the government which issued the Foreign
Currency in which the Securities of a particular series are payable, for the
payment of which its full faith and credit is pledged, or (ii) obligations of a
Person controlled or supervised by and acting as an agency or instrumentality of
the United States of America or such government which issued the Foreign
Currency in which the Securities of such series are payable, the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States of America or such other government, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and also
includes a depository receipt issued by a bank or trust company as custodian
with respect to any such Government Obligation or a specific payment of interest
on or principal of any such Government Obligation held by such custodian for the
account of the holder of a depository receipt, provided that (except as required
--------
by law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt.
"Hedging Obligations" means, with respect to any Person, the greater of
--------------------
(a) the net obligations of such Person under (i) interest rate swap agreements,
interest rate cap agreements and interest rate collar agreements, (ii) foreign
exchange contracts or currency swap agreements and (iii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or currency values or (b) zero.
5
<PAGE>
"Holder" when used with respect to a Registered Security, means the Person
-------
in whose name such Registered Security is registered in the Security Register
and, when used with respect to a Bearer Security or any coupon, means the bearer
thereof.
"Indenture" means this instrument as originally executed or as it may from
----------
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof, and includes
the terms of particular series of Securities established as contemplated by
Section 301; provided, however, that, if at any time more than one Person is
-------- -------
acting as Trustee under this instrument, "Indenture" when used with respect to
any one or more series of Securities with respect to which such Person is acting
as Trustee, shall mean this instrument as originally executed or as it may from
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof and shall
include the terms of those particular series of Securities with respect to which
such Person is acting as Trustee established as contemplated by Section 301,
exclusive, however, of any provisions or terms which relate solely to other
series of Securities with respect to which such Person is not acting as Trustee,
regardless of when such terms or provisions were adopted, and exclusive of any
provisions or terms adopted by means of one or more indentures supplemental
hereto executed and delivered after such Person had become such Trustee but to
which such Person, as such Trustee, was not a party.
"Indexed Security" means a Security the terms of which provide that the
-----------------
principal amount thereof payable at Stated Maturity may be more or less than the
principal face amount thereof at original issuance.
"interest" when used with respect to an Original Issue Discount Security
---------
which by its terms bears interest only after Maturity, means interest payable
after Maturity, and, when used with respect to a Security which provides for the
payment of Additional Amounts pursuant to Section 1010, includes such Additional
Amounts.
"Interest Payment Date" when used with respect to any Security, means the
----------------------
Stated Maturity of an installment of interest on such Security.
"Make-Whole Amount" means the amount, if any, in addition to principal
------------------
which is required by a Security, under the terms and conditions specified
therein or as otherwise specified as contemplated by Section 301, to be paid by
the Company to the Holder thereof in connection with any optional redemption or
accelerated payment of such Security.
"mandatory sinking fund payment" has the meaning specified in Section
-------------------------------
1201.
"Maturity" when used with respect to any Security, means the date on which
---------
the principal of such Security or an installment of principal become due and
payable as therein or herein
6
<PAGE>
provided, whether at the Stated Maturity or by declaration of acceleration,
notice of redemption, notice of option to elect repayment, repurchase or
otherwise.
"Notice of Default" has the meaning specified in Section 501.
------------------
"Opinion of Counsel" means a written opinion of counsel, who may be an
-------------------
employee of or counsel for the Company or other counsel satisfactory to the
Trustee.
"optional sinking fund payment" has the meaning specified in Section 1201.
------------------------------
"Original Issue Discount Security" means any Security which provides for
---------------------------------
an amount less than the principal amount thereof to be due and payable upon a
declaration of acceleration of the Maturity thereof pursuant to Section 502.
"Outstanding" when used with respect to Securities, means, as of the date
------------
of determination, all Securities theretofore authenticated and delivered under
this Indenture, exclusive of:
(1) Securities theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
(2) Securities, or portions thereof, for whose payment or redemption
or repayment at the option of the Holder money in the necessary amount has
been theretofore deposited with the Trustee or any Paying Agent (other than
the Company) in trust or set aside and segregated in trust by the Company
(if the Company is acting as its own Paying Agent) for the holders of such
Securities and any coupons appertaining thereto, provided that, if such
--------
Securities are to be redeemed, notice of such redemption has been duly
given pursuant to this Indenture or other provision therefor satisfactory
to the Trustee has been made;
(3) Securities, except solely to the extent provided in Section 401,
1402 or 1403, as applicable, with respect to which the Company has effected
defeasance and/or covenant defeasance as provided in Article Four or
Fourteen; and
(4) Securities which have been paid pursuant to Section 306 or in
exchange for or in lieu of which other Securities have been authenticated
and delivered pursuant to this Indenture, other than any such Securities in
respect of which there has been presented to the Trustee proof satisfactory
to it that such Securities are held by a bona fide purchaser in whose hands
such Securities are valid obligations of the Company;
provided, however, that in determining whether the Holders of the required
- -------- -------
principal amount of the Outstanding Securities have concurred in any request,
demand, authorization, direction, notice, consent or waiver hereunder or are
present at a meeting of Holders for quorum purposes,
7
<PAGE>
and for the purpose of making the calculations required by Section 313 of the
Trust Indenture Act, (i) the principal amount of an Original Issue Discount
Security which may be counted in making such determination or calculation and
which shall be deemed Outstanding for such purpose shall be equal to the amount
of principal thereof which would be (or has been declared to be) due and
payable, at the time of such determination, upon a declaration of acceleration
of the maturity thereof pursuant to Section 502, (ii) the principal amount of
any Security denominated in a Foreign Currency which may be counted in making
such determination or calculation and which shall be deemed Outstanding for such
purpose shall be equal to the Dollar equivalent, determined pursuant to Section
301 as of the date such Security is originally issued by the Company, of the
principal amount (or, in the case of an Original Issue Discount Security, the
Dollar equivalent as of such date of original issuance of the amount determined
as provided in clause (i) above) of such Security, (iii) the principal amount of
any Indexed Security which may be counted in making such determination or
calculation and which shall be deemed Outstanding for such purpose shall be
equal to the principal face amount of such Indexed Security at original
issuance, unless otherwise provided with respect to such Indexed Security
pursuant to Section 301, and (iv) Securities owned by the Company or any other
obligor on the Securities or any Affiliate of the Company or of such other
obligor shall be disregarded and deemed not Outstanding, except that, for the
purposes of determining whether the Trustee is protected in making such
calculation or in relying on any such request, demand, authorization, direction,
notice, consent or waiver, only Securities which the Trustee knows are so owned
shall be so disregarded. Securities so owned which have been pledged in good
faith may be regarded as Outstanding if the pledgee establishes to the
satisfaction of the Trustee the pledgee's right so to act with respect to such
Securities and that the pledgee is not the Company or any other obligor on the
Securities or any Affiliate of the Company or of such other obligor.
"Paying Agent" means any Person authorized by the Company to pay the
-------------
principal of (and premium or Make-Whole Amount, if any, on) and interest and
Additional Amounts, if any, on any Securities or coupons on behalf of the
Company, or if no such Person is authorized, the Company.
"Payment Default" means any failure to pay any scheduled installment of
----------------
principal of, premium, if any, or interest on any indebtedness within the grace
period provided for such payment in the documentation governing such
indebtedness.
"Permitted Investments" means:
----------------------
(1) Government Obligations;
(2) Direct obligations and fully guaranteed certificates of beneficial
interest of the Export-Import Bank of the United States; consolidated debt
obligations and letter of credit-backed issues of the Federal Home Loan
Banks; participation certificates and senior debt obligations of the
Federal Home Loan Mortgage Corporation; debentures of the Federal
8
<PAGE>
Housing Administration; mortgage-backed securities (except stripped
mortgage securities which are valued greater than par on the portion of
unpaid principal) and senior debt obligations of the Federal National
Mortgage Association; participation certificates of the General Services
Administration; guaranteed mortgage-backed securities and guaranteed
participation certificates and guaranteed pool certificates of the Small
Business Administration; debt obligations and letter of credit-backed
issues of the Student Loan Marketing Association; local authority bonds of
the U.S. Department of Housing and Urban Development; guaranteed Title XI
financing of the U.S. Maritime Administration; guaranteed transit bonds of
the Washington Metropolitan Area Transit Authority; or Resolution Funding
Corporation securities;
(3) Direct obligations of any state of the United States of America or
any subdivision or agency thereof whose unsecured, uninsured and
unguaranteed general obligation debt is rated, at the time of purchase, at
least as high as the rating then in effect on the Securities by Standard &
Poor's Rating Services, or any obligation fully and unconditionally
guaranteed by any state, subdivision or agency whose unsecured, uninsured
and unguaranteed general obligation debt is rated, at the time of purchase,
at least as high as the rating then in effect on the Securities by Standard
& Poor's Rating Services;
(4) Commercial paper (having original maturities of not more than 270
days) rated, at the time of purchase, "A-1+" by Standard & Poor's Rating
Services or "P-1" by Moody's Investors Services, Inc.;
(5) Federal funds, unsecured certificates of deposit, time deposits or
bankers acceptances (in each case having maturities of not more than 365
days) of any domestic bank (including the Trustee in its commercial
capacity), including a branch office of a foreign bank which branch office
is located in the United States, provided that written legal opinions in
--------
form acceptable to the Trustee are received to the effect that full and
timely payment of such deposit or similar obligation is enforceable against
the principal office or any branch of such bank, which, at the time of
purchase, has a rating of "A-1+" by Standard & Poor's Rating Services or
"P-1" by Moody's Investors Services, Inc.;
(6) Deposits of any bank or savings and loan association which has
combined capital, surplus and undivided profits of not less than
$3,000,000, provided that such deposits are continuously and fully insured
--------
by the Federal Deposit Insurance Corporation, including, without
limitation, an insured money market account of the Trustee;
(7) Investments in money-market funds rated in the highest rating
category by Standard & Poor's Rating Services or Moody's Investors
Services, Inc.; such funds may include those for which the Trustee or an
affiliate of the Trustee provides services for a fee, whether as investment
advisor, custodian, transfer agent, sponsor, distributor or otherwise;
9
<PAGE>
(8) Shares of an open-end, diversified investment company which is
registered under the Investment Company Act of 1940, as amended, and which
(i) invests exclusively in permitted investments of the type set forth in
clauses (1) through (7) above; (ii) seeks to maintain a constant net asset
value per share in accordance with regulations of the Commission; and (iii)
has aggregate net assets of at least $50,000,000 on the date of purchase;
and
(9) Qualified GICs.
Any investment made in accordance with this Indenture may (i) be executed by the
Trustee or the Company with or through the Trustee or its affiliates and (ii) be
made in securities of any entity for which the Trustee or any of its affiliates
serves as offeror, distributor, advisor or other service provider.
"Person" means any individual, corporation, partnership, limited liability
-------
company, joint venture, association, joint-stock company, real estate investment
trust, business trust, unincorporated organization or government or any agency
or political subdivision thereof.
"Place of Payment" when used with respect to the Securities of or within
-----------------
any series, means the Corporate Trust Office of the Trustee and any place or
places which the Company may from time to time designate as the place or places
where the principal of (and premium or Make-Whole Amount, if any, on) and
interest and Additional Amounts, if any, on such Securities are payable as
specified as contemplated by Sections 301 and 1002 and presentations,
surrenders, notices and demands with respect to such Securities and this
Indenture may be made.
"Predecessor Security" when used with respect to any particular Security,
---------------------
means every previous Security evidencing all or a portion of the same debt as
evidenced by such Security; and, for the purposes of this definition, any
Security authenticated and delivered under Section 306 in exchange for or in
lieu of a mutilated, destroyed, lost or stolen Security or a Security to which a
mutilated, destroyed, lost or stolen coupon appertains shall be deemed to
evidence the same debt as the mutilated, destroyed, lost or stolen Security or
the Security to which the mutilated, destroyed, lost or stolen coupon
appertains.
"Qualified GIC" means an investment contract providing for the investment
--------------
of funds held by the Trustee and insuring a minimum or fixed rate of return on
investments of such funds, which contract shall:
(1) be an obligation of an insurance company or bank whose senior
long-term debt obligations are rated in one of the two highest rating
categories by both Moody's Investors Services, Inc. and Standard & Poor's
Rating Services;
10
<PAGE>
(2) provide that the Trustee may exercise all of the rights under such
contract without the necessity of the taking of action by any other person;
(3) provide that, if at any time the then current credit standing of
the obligor under such guaranteed investment contract has been lowered or
withdrawn by Moody's Investors Services, Inc. or Standard & Poor's Rating
Services, the Trustee may terminate such contract without penalty and be
entitled to the return of all funds previously invested thereunder,
together with accrued interest thereon at the interest rate provided under
such contract through the date of delivery of such funds to the Trustee;
(4) provide that interest shall be payable not less than annually;
(5) provide that the Trustee may withdraw funds invested without
penalty at any time and from time to time to be applied for the purposes
described therein;
(6) be accompanied by an enforceability opinion from counsel to the
obligor under such guaranteed investment contract in form and substance
satisfactory to the Trustee; and
(7) provide that the Trustee's interest thereunder shall be
transferable to any successor Trustee hereunder.
"Redemption Date" when used with respect to any Security to be redeemed,
----------------
means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price" when used with respect to any Security to be redeemed,
-----------------
means the price at which it is to be redeemed pursuant to this Indenture.
"Registered Security" means any Security which is registered in the
--------------------
Security Register.
"Regular Record Date" when used with respect to an installment of interest
--------------------
payable on any Interest Payment Date on the Registered Securities of or within
any series, means the date specified for that purpose as contemplated by Section
301, whether or not a Business Day.
"Repayment Date" when used with respect to any Security to be repaid or
---------------
repurchased at the option of the Holder, means the date fixed for such repayment
or repurchase by or pursuant to this Indenture.
"Repayment Price" when used with respect to any Security to be repaid or
----------------
repurchased at the option of the Holder, means the price at which it is to be
repaid or repurchased by or pursuant to this Indenture.
11
<PAGE>
"Required Filing Dates" has the meaning specified in Section 1008.
----------------------
"Responsible Officer" when used with respect to the Trustee, means any
--------------------
vice president (whether or not designated by numbers or words added before or
after said title), any assistant vice president, any assistant secretary or any
other officer or assistant officer of the Trustee in the corporate trust
department or similar group of the Trustee or, with respect to any particular
matter arising hereunder, any officer of the Trustee to whom such matter has
been assigned.
"Securities Act" means the Securities Act of 1933, as amended, and the
---------------
rules and regulations promulgated thereunder by the Commission.
"Security" has the meaning specified in the first recital of this
---------
Indenture and, more particularly, means any Security or Securities authenticated
and delivered under this Indenture; provided, however, that, if at any time
-------- -------
there is more than one Person acting as Trustee under this Indenture,
"Securities" when used with respect to the Indenture with respect to which such
Person is acting as Trustee, shall have the meaning stated in the first recital
of this Indenture and shall more particularly mean Securities authenticated and
delivered under this Indenture, exclusive, however, of Securities of or within
any series with respect to which such Person is not acting as Trustee.
"Security Register" and "Security Registrar" have the respective meanings
------------------ ------------------
specified in Section 305.
"Significant Subsidiary" means a Subsidiary which otherwise meets the
-----------------------
tests ascribed to the term in Regulation S-X promulgated by the Commission under
the Securities Act, except that the tests therein shall be based on 20% of total
assets or income instead of 10%, unless the Company owns or controls, directly
or indirectly, at least 75% of the total voting power of such Subsidiary's
shares of Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
(such percentage to be calculated on a fully diluted basis), in which case the
tests shall be based on 10% of total assets or income.
"Special Record Date" when used with respect to the payment of any
--------------------
Defaulted Interest on the Registered Securities of or within any series, means a
date fixed by the Trustee pursuant to Section 307.
"Stated Maturity" when used with respect to any Security or any
----------------
installment of principal thereof or interest thereon or any Additional Amounts
with respect thereto, means the date specified in such Security or a coupon
representing such installment of interest as the fixed date on which the
principal of such Security or such installment of principal or interest is, or
such Additional Amounts are, due and payable.
12
<PAGE>
"Subsidiary" means, with respect to any Person, (i) any corporation,
-----------
association or other business entity of which more than 50% of the total equity
capital and more than 50% of the total voting power of shares of Capital Stock
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person (or a combination thereof) and (ii) any partnership
(a) the sole general partner or the managing general partner of which is such
Person or a Subsidiary of such Person or (b) the only general partners of which
are such Person or one or more Subsidiaries of such Person (or any combination
thereof).
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended
--------------------
and as in force at the date as of which this Indenture was executed, except as
provided in Section 905.
"Trustee" means the Person named as the "Trustee" in the first paragraph
--------
of this Indenture until a successor Trustee has become such pursuant to the
applicable provisions of this Indenture, and thereafter "Trustee" shall mean or
include each Person who is then acting as a Trustee hereunder; provided,
--------
however, that, if at any time there is more than one such Person, "Trustee" when
- -------
used with respect to the Securities of or within any series, shall mean only the
Trustee with respect to the Securities of such series, and no Trustee of
Securities for any series shall be responsible for the acts or omissions of a
Trustee for any other series of Securities.
"United States" means, unless otherwise specified with respect to any
--------------
Securities pursuant to Section 301, the United States of America (including the
states and the District of Columbia), its territories, its possessions and other
areas subject to its jurisdiction.
"United States person" means, unless otherwise specified with respect to
---------------------
any Securities pursuant to Section 301, an individual who is a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or an estate or
trust the income of which is subject to United States federal income taxation
regardless of its source.
"Yield to Maturity" means the yield to maturity, computed at the time of
------------------
issuance of a Security (or, if applicable, at the most recent redetermination of
interest on such Security) and as set forth in such Security in accordance with
generally accepted United States bond yield computation principles.
SECTION 102. Compliance Certificates and Opinions. Upon any application or
------------------------------------
request by the Company to the Trustee to take any action under any provision of
this Indenture, the Company shall furnish to the Trustee a Company Certificate
stating that all conditions precedent, if any, provided for in this Indenture
(including any covenants, compliance with which constitute conditions precedent)
relating to the proposed action have been complied with and an Opinion of
Counsel stating that, in the opinion of such counsel, all such conditions
precedent, if any, have
13
<PAGE>
been complied with, except that, in the case of any such application or request
as to which the furnishing of such documents is specifically required by any
provision of this Indenture relating to such particular application or request,
no additional certificate or opinion need be furnished.
Every certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture (other than certificates provided
pursuant to Section 1009) shall include:
(1) a statement that each individual signing such certificate or
opinion has read such condition or covenant and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the examination or
investigation on which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he or
she has made such examination or investigation as is necessary to enable
him or her to express an informed opinion as to whether or not such
condition or covenant has been complied with; and
(4) a statement as to whether or not, in the opinion of each such
individual, such condition or covenant has been complied with.
SECTION 103. Form of Documents Delivered to Trustee. In any case in which
--------------------------------------
several matters are required to be certified by, or covered by an opinion of,
any specified Person, it is not necessary that all such matters be certified by,
or covered by the opinion of, only one such Person, or that they be so certified
or covered by only one document, but one such Person may certify or give an
opinion as to some matters and one or more other such Persons as to other
matters, and any such Person may certify or give an opinion as to such matters
in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, on an Opinion of Counsel, or a
certificate or representations by counsel, unless such officer knows, or in the
exercise of reasonable care should know, that the opinion, certificate or
representations with respect to the matters on which his or her certificate or
opinion is based are erroneous. Any such Opinion of Counsel or certificate or
representations may be based, insofar as it relates to factual matters, on a
certificate or opinion of, or representations by, an officer or officers of the
Company stating that the information as to such factual matters is in the
possession of the Company, unless such counsel knows that the certificate or
opinion or representations as to such matters are erroneous.
14
<PAGE>
If any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 104. Acts of Holders.
---------------
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders of the Outstanding Securities of all series or one or more series,
as the case may be, may be embodied in and evidenced by one or more
instruments of substantially similar tenor signed by such Holders in person
or by agents duly appointed in writing. If Securities of a series are
issuable as Bearer Securities, any request, demand, authorization,
direction, notice, consent, waiver or other action provided by this
Indenture to be given or taken by Holders of the Outstanding Securities of
such series may, alternatively, be embodied in and evidenced by the record
of such Holders voting in favor thereof, either in person or by proxies
duly appointed in writing, at any meeting of such Holders duly called and
held in accordance with the provisions of Article Fifteen, or a combination
of such instruments and any such record. Except as herein otherwise
expressly provided, such action shall become effective when such instrument
or instruments or record or both are delivered to the Trustee and, if
expressly required herein, to the Company. Such instrument or instrument
and any such record (and the action embodied therein and evidenced thereby)
are herein sometimes referred to as the "Act" of the Holders signing such
---
instrument or instruments or so voting at any such meeting. Proof of
execution of any such instrument or of a writing appointing any such agent,
or of the holding by any Person of a Security, shall be sufficient for any
purpose of this Indenture and conclusive in favor of the Trustee and the
Company and any agent of the Trustee or the Company, if made in the manner
provided in this Section. The record of any meeting of Holders of
Securities shall be proved in the manner provided in Section 1506.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by a certificate of a notary public or
other officer authorized by law to take acknowledgments of deeds,
certifying that the individual signing such instrument or writing
acknowledged to him or her the execution thereof or by any other means
acceptable to the Trustee. If such execution is by a signer acting in a
capacity other than his individual capacity, such certificate or affidavit
shall also constitute sufficient proof of his authority. The fact and date
of the execution of any such instrument or writing, or the authority of the
Person executing the same, may also be proved in any other reasonable
manner which the Trustee deems sufficient.
(c) The ownership of Registered Securities shall be proved by the
Security Register.
15
<PAGE>
(d) The ownership of Bearer Securities may be proved by the production
of such Bearer Securities or by a certificate executed, as depositary, by
any trust company, bank, banker or other depositary, wherever situated, if
such certificate is deemed by the Trustee to be satisfactory, showing that
at the date therein mentioned such Person had on deposit with such
depositary, or exhibited to it, the Bearer Securities therein described; or
such facts may be proved by the certificate or affidavit of the Person
holding such Bearer Securities, if such certificate or affidavit is deemed
by the Trustee to be satisfactory. The Trustee and the Company may assume
that such ownership of any Bearer Security continues until (i) another
certificate or affidavit bearing a later date issued in respect of the same
Bearer Security is produced, (ii) such Bearer Security is produced to the
Trustee by some other Person, (iii) such Bearer Security is surrendered in
exchange for a Registered Security or (iv) such Bearer Security is no
longer Outstanding. The ownership of Bearer Securities may also be proved
in any other manner which the Trustee deems sufficient.
(e) If the Company shall solicit from the Holders of Registered
Securities any request, demand, authorization, direction, notice, consent,
waiver or other Act, the Company may, at its option, in or pursuant to a
Board Resolution, fix in advance a record date for the determination of
Holders entitled to give such request, demand, authorization, direction,
notice, consent, waiver or other Act, but the Company shall not be
obligated to do so. Notwithstanding Section 316(c) of the Trust Indenture
Act, such record date shall be the record date specified in or pursuant to
such Board Resolution, which shall be a date not earlier than the date 30
days prior to the first solicitation of Holders generally in connection
therewith and not later than the date such solicitation is completed. If
such a record date is fixed, such request, demand, authorization,
direction, notice, consent, waiver or other Act may be given before or
after such record date, but only the Holders of record at the close of
business on such record date shall be deemed to be Holders for the purpose
of determining whether Holders of the requisite proportion of Outstanding
Securities have authorized or agreed or consented to such request, demand,
authorization, direction, notice, consent, waiver or other Act, and for
that purpose the Outstanding Securities shall be computed as of such record
date; provided that no such authorization, agreement or consent by the
--------
Holders on such record date shall be deemed effective unless it shall
become effective pursuant to the provisions of this Indenture not later
than eleven months after the record date.
(f) Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Security shall bind every future
Holder of the same Security and the Holder of every Security issued upon
the registration of transfer thereof or in exchange therefor or in lieu
thereof in respect of anything done, omitted or suffered to be done by the
Trustee, any Security Registrar, any Paying Agent, any Authenticating Agent
or the Company in reliance thereon, whether or not notation of such action
is made on such Security.
16
<PAGE>
SECTION 105. Notices to Trustee and Company. Any request, demand,
------------------------------
authorization, direction, notice, consent, waiver or Act of Holders or other
document provided or permitted by this Indenture to be made on, given or
furnished to, or filed with:
(1) the Trustee by any Holder or the Company shall be sufficient for
every purpose hereunder if in writing and mailed, first class postage
prepaid, to the Trustee addressed to it at the address of its Corporate
Trust Office specified in the first paragraph of this Indenture, Attention:
Corporate Trust Administration; or
(2) the Company by the Trustee or any Holder shall be sufficient for
every purpose hereunder (unless otherwise herein expressly provided) if in
writing and mailed, first class postage prepaid, to the Company addressed
to it at the address of its principal office specified in the first
paragraph of this Indenture or at any other address previously furnished in
writing to the Trustee by the Company.
SECTION 106. Notice to Holders; Waiver. When this Indenture provides for
-------------------------
notice of any event to Holders of Registered Securities by the Company or the
Trustee, such notice shall be sufficiently given (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage prepaid, to
each such Holder affected by such event, at such Holder's address as it appears
in the Security Register, not later than the latest date, and not earlier than
the earliest date, prescribed for the giving of such notice. In any case in
which notice to Holders of Registered Securities is given by mail, neither the
failure to mail such notice, nor any defect in any notice so mailed, to any
particular Holder shall affect the sufficiency of such notice with respect to
other Holders of Registered Securities or the sufficiency of any notice to
Holders of Bearer Securities given as provided herein. Any notice mailed to a
Holder in the manner herein prescribed shall be conclusively deemed to have been
received by such Holder, whether or not such Holder actually receives such
notice.
If, by reason of the suspension of or irregularities in regular mail
service or by reason of any other cause, it is impracticable to give such notice
by mail, then such notification to Holders of Registered Securities as is made
with the approval of the Trustee shall constitute a sufficient notification to
such Holders for every purpose hereunder.
Except as otherwise expressly provided herein or otherwise specified with
respect to any Securities pursuant to Section 301, when this Indenture provides
for notice to Holders of Bearer Securities of any event, such notices shall be
sufficiently given if published in an Authorized Newspaper in The City of New
York and in such other city or cities as may be specified in such Securities
and, if the Securities of such series are listed on any securities exchange
outside the United States, in any place at which such Securities are listed on a
securities exchange to the extent that such securities exchange so requires, on
a Business Day, such publication to be not later than the latest date, and not
earlier than the earliest date, prescribed for the giving of such
17
<PAGE>
notice. Any such notice shall be deemed to have been given on the date of such
publication or, if published more than once, on the date of the first such
publication.
If, by reason of the suspension of publication of any Authorized Newspaper
or Authorized Newspapers or by reason of any other cause, it is impracticable to
publish any notice to Holders of Bearer Securities as provided above, then such
notification to Holders of Bearer Securities as is given with the approval of
the Trustee shall constitute sufficient notice to such Holders for every purpose
hereunder. Neither the failure to give notice by publication to any particular
Holder of Bearer Securities as provided above, nor any defect in any notice so
published, shall affect the sufficiency of such notice with respect to other
Holders of Bearer Securities or the sufficiency of any notice to Holders of
Registered Securities given as provided herein.
Any request, demand, authorization, direction, notice, consent or waiver
required or permitted under this Indenture shall be in the English language,
except that any published notice may be in an official language of the country
of publication.
When this Indenture provides for notice in any manner, such notice may be
waived in writing by the Person entitled to receive such notice, either before
or after the event, and such waiver shall be the equivalent of such notice.
Waivers of notice by Holders shall be filed with the Trustee, but such filing
shall not be a condition precedent to the validity of any action taken in
reliance on such waiver.
SECTION 107. Effect of Headings and Table of Contents. The Article and
----------------------------------------
Section headings herein and the Table of Contents are for convenience only and
shall not affect the construction hereof.
SECTION 108. Successors and Assigns. All covenants and agreements in this
----------------------
Indenture by the Company shall bind its successors and assigns, whether so
expressed or not.
SECTION 109. Separability Clause. In case any provision in this Indenture
-------------------
or in any Security or any coupon shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
SECTION 110. Benefits of Indenture. Nothing in this Indenture or in any
---------------------
Security or any coupon, express or implied, shall give to any Person, other than
the parties hereto, any Security Registrar, any Paying Agent, any Authenticating
Agent and their successors hereunder and the Holders any benefit or any legal or
equitable right, remedy or claim under this Indenture.
SECTION 111. No Personal Liability. No recourse under or on any obligation,
---------------------
covenant or agreement contained in this Indenture or in any Security or any
coupon, or because of any indebtedness evidenced thereby, shall be had against
any promoter, as such or, against any past, present or future director, officer,
employee or shareholder, as such, of the Company or of any
18
<PAGE>
successor, either directly or through the Company or any successor, under any
rule of law, statute or constitutional provision or by the enforcement of any
assessment or by any legal or equitable proceeding or otherwise, all such
liability being expressly waived and released by the acceptance of the
Securities by the Holders thereof and as part of the consideration for the issue
of the Securities.
SECTION 112. Governing Law. This Indenture and the Securities and any
-------------
coupons shall be governed by and construed in accordance with the law of the
State of New York. This Indenture is subject to the provisions of the Trust
Indenture Act which, by the provisions thereof, are deemed or required to be
part of this Indenture and shall, to the extent applicable, be governed by such
provisions. If any provision of this Indenture limits, qualifies or conflicts
with the duties imposed by operation of Section 318(c) of the Trust Indenture
Act, the imposed duties shall control.
SECTION 113. Legal Holidays. In any case in which any Interest Payment
--------------
Date, Redemption Date, Repayment Date, sinking fund payment date, Stated
Maturity or Maturity of any Security is not a Business Day at any Place of
Payment, then (notwithstanding any other provision of this Indenture or any
Security or any coupon other than a provision in the Securities of any series
which specifically states that such provision shall apply in lieu hereof),
payment of the principal of (and premium or Make-Whole Amount, if any, on) or
interest or Additional Amounts, if any, on such Security need not be made at
such Place of Payment on such date, but may be made on the next succeeding
Business Day at such Place of Payment with the same force and effect as if made
on the Interest Payment Date, Redemption Date, Repayment Date or sinking fund
payment date, or at the Stated Maturity or Maturity; provided, however, that no
-------- -------
interest shall accrue on the amount so payable for the period from and after
such Interest Payment Date, Redemption Date, Repayment Date, sinking fund
payment date, Stated Maturity or Maturity, as the case may be.
SECTION 114. Counterparts. This Indenture may be executed in several
------------
counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
ARTICLE TWO
SECURITIES FORMS
SECTION 201. Forms of Securities. The Registered Securities, if any, of
-------------------
each series and the Bearer Securities, if any, and any coupons of each series,
shall be in substantially the forms as are established in or pursuant to one or
more indentures supplemental hereto or Board Resolutions, shall have such
appropriate insertions, omissions, substitutions and other variations as are
required or permitted by this Indenture or any indenture supplemental hereto,
and may have such letters, numbers or other marks of identification or
designation and such legends or endorsements placed thereon as the Company may
deem appropriate and as are not inconsistent
19
<PAGE>
with the provisions of this Indenture, or as may be required to comply with any
law or with any rule or regulation made pursuant thereto or with any rule or
regulation of any stock exchange on which the Securities may be listed, or to
conform to usage.
Unless otherwise specified as contemplated by Section 301, Bearer
Securities shall have interest coupons attached.
The definitive Securities and coupons shall be printed, lithographed or
engraved or produced by any combination of these methods on a steel engraved
border or steel engraved borders or may be produced in any other manner, all as
determined by the officers executing such Securities or coupons, as evidenced by
their execution of such Securities or coupons.
SECTION 202. Form of Trustee's Certificate of Authentication. Subject to
-----------------------------------------------
Section 611, the Trustee's certificate of authentication shall be in
substantially the following form:
This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.
STATE STREET BANK AND TRUST
COMPANY,
as Trustee
By:
Authorized Officer
SECTION 203. Securities Issuable in Global Form. If Securities of or within
----------------------------------
a series are issuable in global form, as specified as contemplated by Section
301, then, notwithstanding clause (8) of Section 301 and the provisions of
Section 302, any such Security shall represent such of the Outstanding
Securities of such series as are specified therein and may provide that it shall
represent the aggregate amount of Outstanding Securities of such series from
time to time endorsed thereon and that the aggregate amount of Outstanding
Securities of such series represented thereby may from time to time be increased
or decreased to reflect exchanges. Any endorsement of a Security in global form
to reflect the amount, or any increase or decrease in the amount, of Outstanding
Securities represented thereby shall be made by the Trustee in the manner and in
accordance with instructions given by such Person or Persons specified therein
or in the Company Order to be delivered to the Trustee pursuant to Section 303
or 304. Subject to the provisions of Section 303 and, if applicable, Section
304, the Trustee shall deliver and redeliver any Security in permanent global
form in the manner and in accordance with instructions given by the Person or
Persons specified therein or in the applicable Company Order. If a Company Order
pursuant to Section 303 or 304 has been, or simultaneously is, delivered, any
instructions
20
<PAGE>
by the Company with respect to endorsement or delivery or redelivery of a
Security in global form shall be in writing but need not comply with Section 102
and need not be accompanied by an Opinion of Counsel.
The provisions of the last sentence of Section 303 shall apply to any
Security represented by a Security in global form if such Security was never
issued and sold by the Company and the Company delivers to the Trustee the
Security in global form together with written instructions (which need not
comply with Section 102 and need not be accompanied by an Opinion of Counsel)
with regard to the reduction in the principal amount of Securities represented
thereby, together with the written statement contemplated by the last sentence
of Section 303.
Notwithstanding the provisions of Section 307, unless otherwise specified
as contemplated by Section 301, payment of principal of (and premium or Make-
Whole Amount, if any, on) and interest and Additional Amounts, if any, on any
Security in permanent global form shall be made to the Person or Persons
specified therein.
Notwithstanding the provisions of Section 308 and except as provided in the
preceding paragraph, the Company, the Trustee and any agent of the Company or
the Trustee shall treat as the Holder of such principal amount of Outstanding
Securities represented by a permanent global Security (i) in the case of a
permanent global Security in registered form, the Holder of such permanent
global Security in registered form, or (ii) in the case of a permanent global
Security in bearer form, Euroclear or CEDEL.
ARTICLE THREE
THE SECURITIES
SECTION 301. Amount Unlimited; Issuable in Series. The aggregate principal
------------------------------------
amount of Securities which may be authenticated and delivered under this
Indenture is unlimited.
The Securities may be issued in one or more series. There shall be
established in or pursuant to one or more Board Resolutions, or indentures
supplemental hereto, prior to the issuance of Securities of any series, any or
all of the following, as applicable (each of which (except for the matters set
forth in clauses (1), (2) and (15) below), if so provided, may be determined
from time to time by the Company with respect to unissued Securities of or
within the series when issued from time to time):
(1) the title of the Securities of or within the series (which shall
distinguish the Securities of such series from all other series of
Securities);
(2) any limit on the aggregate principal amount of the Securities of
or within the series which may be authenticated and delivered under this
Indenture (except for Securities authenticated and delivered upon
registration of transfer of, or in exchange for,
21
<PAGE>
or in lieu of, other Securities of or within the series pursuant to Section
304, 305, 306, 906, 1107 or 1305);
(3) the date or dates, or the method by which such date or dates will
be determined, on which the principal of the Securities of or within the
series shall be payable and the amount of principal payable thereon;
(4) the rate or rates at which the Securities of or within the series
shall bear interest, if any, or the method by which such rate or rates
shall be determined, the date or dates from which such interest shall
accrue or the method by which such date or dates shall be determined, the
Interest Payment Dates on which such interest will be payable and the
Regular Record Date, if any, for the interest payable on any Registered
Security on any Interest Payment Date, or the method by which such date
shall be determined, and the basis on which interest shall be calculated if
other than a 360-day year comprised of twelve 30-day months;
(5) the place or places, if any, other than or in addition to the
Corporate Trust Office where the principal of (and premium or Make-Whole
Amount, if any, on) and interest and Additional Amounts, if any, on
Securities of or within the series shall be payable, any Registered
Securities of or within the series may be surrendered for registration of
transfer, exchange or conversion and notices or demands to or on the
Company in respect of the Securities of or within the series and this
Indenture may be served;
(6) the period or periods within which, the price or prices (including
the premium or Make-Whole Amount, if any) at which, the currency or
currencies, currency unit or units or composite currency or currencies in
which, and other terms and conditions upon which Securities of or within
the series may be redeemed, in whole or in part, at the option of the
Company, if the Company is to have the option;
(7) the obligation, if any, of the Company to redeem, repay or
purchase Securities of or within the series pursuant to any sinking fund or
analogous provision or at the option of a Holder thereof, and the period or
periods within which or the date or dates on which, the price or prices at
which, the currency or currencies, currency unit or units or composite
currency or currencies in which, and other terms and conditions upon which
Securities of or within the series shall be redeemed, repaid or purchased,
in whole or in part, pursuant to such obligation;
(8) if other than denominations of $1,000 and any integral multiple
thereof, the denominations in which any Registered Securities of or within
the series shall be issuable and, if other than the denomination of $5,000,
the denomination or denominations in which any Bearer Securities of or
within the series shall be issuable;
22
<PAGE>
(9) if other than the Trustee, the identity of each Security Registrar
and/or Paying Agent;
(10) the percentage of the principal amount at which Securities will be
issued and, if other than the principal amount thereof, the portion of the
principal amount of Securities of or within the series which shall be
payable upon declaration of acceleration of the Maturity thereof pursuant
to Section 502, or, if applicable, the portion of the principal amount of
Securities which is convertible in accordance with the provisions of this
Indenture, or the method by which such portion shall be determined;
(11) if other than Dollars, the Foreign Currency or Currencies in which
payment of the principal of (and premium or Make-Whole Amount, if any, on)
or interest or Additional Amounts, if any, on the Securities of or within
the series shall be payable or in which the Securities of or within the
series shall be denominated;
(12) whether the amount of payments of the principal of (and premium or
Make-Whole Amount, if any, on) or interest or Additional Amounts, if any,
on the Securities of or within the series may be determined with reference
to an index, formula or other method (which index, formula or method may be
based, without limitation, on one or more currencies, currency units,
composite currencies, commodities, equity indices or other indices), and
the manner in which such amounts shall be determined;
(13) whether the principal of (and premium or Make-Whole Amount, if
any, on) or interest or Additional Amounts, if any, on the Securities of or
within the series are to be payable, at the election of the Company or a
Holder thereof, in a currency or currencies, currency unit or units or
composite currency or currencies other than that in which such Securities
are denominated or stated to be payable, the period or periods within which
(including the Election Date), and the terms and conditions upon which,
such election may be made, and the time and manner of, and identity of the
exchange rate agent with responsibility for, determining the exchange rate
between the currency or currencies, currency unit or units or composite
currency or currencies in which such Securities are denominated or stated
to be payable and the currency or currencies, currency unit or units or
composite currency or currencies in which such Securities are to be so
payable;
(14) provisions, if any, granting special rights to the Holders of
Securities of or within the series on the occurrence of such events as may
be specified;
(15) any deletions from, modifications of or additions to the Events of
Default or covenants of the Company with respect to Securities of or within
the series, whether or not such Events of Default or covenants are
consistent with the Events of Default or covenants set forth herein;
23
<PAGE>
(16) whether Securities of or within the series are to be issuable as
Registered Securities, Bearer Securities (with or without coupons) or both,
any restrictions applicable to the offer, sale or delivery of Bearer
Securities and the terms upon which Bearer Securities of or within the
series may be exchanged for Registered Securities of or within the series
and vice versa (if permitted by applicable laws and regulations), whether
any Securities of or within the series are to be issuable initially in
temporary global form and whether any Securities of or within the series
are to be issuable in permanent global form (with or without coupons) and,
if so, whether beneficial owners of interests in any such permanent global
Security may exchange such interests for Securities of such series and of
like tenor of any authorized form and denomination and the circumstances
under which any such exchanges may occur, if other than in the manner
provided in Section 305, and, if Registered Securities of or within the
series are to be issuable as a global Security, the identity of the
depositary for such series, and the date as of which any Bearer Securities
of or within the series and any temporary global Security representing
Outstanding Securities of or within the series shall be dated if other than
the date of original issuance of the first Security of the series to be
issued;
(17) the Person to whom any interest on any Registered Security of the
series shall be payable, if other than the Person in whose name such
Security (or one or more Predecessor Securities) is registered at the close
of business on the Regular Record Date for such interest, the manner in
which, or the Person to whom, any interest on any Bearer Security of the
series shall be payable, if otherwise than upon presentation and surrender
of the coupons appertaining thereto as they severally mature, and the
extent to which, or the manner in which, any interest payable on a
temporary global Security on an Interest Payment Date will be paid if other
than in the manner provided in Section 304;
(18) the applicability, if any, of Sections 1402 and/or 1403 to the
Securities of or within the series and any provisions in modification of,
in addition to or in lieu of any of the provisions of Article Fourteen;
(19) if the Securities of such series are to be issuable in definitive
form (whether upon original issue or upon exchange of a temporary Security
of such series) only upon receipt of certain certificates or other
documents or satisfaction of other conditions, then the form and/or terms
of such certificates, documents or conditions;
(20) if the Securities of or within the series are to be issued upon
the exercise of debt warrants, the time, manner and place for such
Securities to be authenticated and delivered;
(21) whether and under what circumstances the Company will pay
Additional Amounts as contemplated by Section 1010 on the Securities of or
within the series to any Holder who is not a United States person
(including any modification to the definition of
24
<PAGE>
such term) in respect of any tax, assessment or governmental charge and, if
so, whether the Company will have the option to redeem such Securities
rather than pay such Additional Amounts (and the terms of any such option);
(22) the obligation, if any, of the Company to permit the conversion of
the Securities of such series into Common Shares or other securities of the
Company, and the terms and conditions on which such conversion shall be
effected (including, without limitation, the initial conversion price or
rate, the conversion period, any adjustment of the applicable conversion
price and any requirements relative to the reservation of such shares for
purposes of conversion; and
(23) any other terms of the series (which terms shall not be
inconsistent with the provisions of this Indenture).
All Securities of any one series and the coupons appertaining to any Bearer
Securities of such series, if any, shall be substantially identical except, in
the case of Registered or Bearer Securities issued in global form, as to
denomination and except as may otherwise be provided in or pursuant to such
Board Resolution or in any such indenture supplemental hereto. All Securities of
any one series need not be issued at the same time and, unless otherwise
provided, a series may be reopened, without the consent of the Holders, for
issuances of additional Securities of such series.
If any of the terms of the Securities of any series are established by
action taken pursuant to one or more Board Resolutions or supplemental
indentures, a copy of an appropriate record of such action(s) shall be certified
by the Secretary or an Assistant Secretary of the Company and delivered to the
Trustee at or prior to the delivery of the Company Order for authentication and
delivery of such Securities.
SECTION 302. Denominations. The Securities of each series shall be issuable
-------------
as Bearer Securities, as Registered Securities or in any combination thereof,
and in such denominations and amounts as are specified as contemplated by
Section 301. With respect to any series denominated in Dollars, in the absence
of any such provisions with respect to the Securities of any series, the
Registered Securities of such series, other than Registered Securities issued in
global form (which may be of any denomination), shall be issuable in
denominations of $1,000 and any integral multiple thereof and the Bearer
Securities of such series, other than Bearer Securities issued in global form
(which may be of any denomination), shall be issuable in denominations of
$5,000.
SECTION 303. Execution, Authentication, Delivery and Dating. The Securities
----------------------------------------------
and any coupons shall be executed on behalf of the Company by the Chairman or a
Co-Chairman, Managing Director, Senior Vice President, Vice President or the
Treasurer of the Company, and attested by the Company's Secretary or one of its
Assistant Secretaries. The signature of any of these officers on the Securities
and any coupons may be manual or facsimile signatures of the
25
<PAGE>
present or any future such authorized officer and may be imprinted or otherwise
reproduced on the Securities and such coupons.
Any Securities or any coupons bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the Company shall bind
the Company notwithstanding that such individuals or any of them have ceased to
hold such offices prior to the authentication and delivery of such Securities or
did not hold such offices at the date of such Securities or any coupons.
At any time and from time to time after the execution and delivery of this
Indenture, the Company may deliver Securities of any series, together with any
coupons, executed by the Company, to the Trustee for authentication, together
with a Company Order for the authentication and delivery of such Securities, and
the Trustee shall authenticate and deliver such Securities in accordance with
the Company Order; provided, however, that, in connection with its original
-------- -------
issuance, no Bearer Security shall be mailed or otherwise delivered to any
location in the United States; and provided, further, that, unless otherwise
-------- -------
specified with respect to any series of Securities pursuant to Section 301, a
Bearer Security may be delivered in connection with its original issuance only
if the Person entitled to received such Bearer Security has furnished a
certificate to Euroclear or CEDEL, as the case may be, in the form set forth in
Exhibit A-1 to this Indenture or such other certificate as may be specified with
respect to any series of Securities pursuant to Section 301, dated no earlier
than 15 days prior to the earlier of the date on which such Bearer Security is
delivered and the date on which any temporary Security first becomes
exchangeable for such Bearer Security in accordance with the terms of such
temporary Security and this Indenture.
Except as permitted by Section 306, the Trustee shall not authenticate and
deliver any Bearer Security unless all appurtenant coupons for interest then
matured have been detached and canceled. If all of the Securities of any series
are not to be issued at one time and if the Board Resolution or supplemental
indenture establishing such series so permits, such Company Order may set forth
procedures acceptable to the Trustee for the issuance of such Securities and
determining the terms of particular Securities of such series, such as the
interest rate or formula, maturity date, date of issuance and date from which
interest shall accrue.
In authenticating such Securities, and accepting the additional
responsibilities under this Indenture in relation to such Securities and any
coupons appertaining thereto, the Trustee shall be entitled to receive, and
(subject to Section 315(a) through 315(d) of the Trust Indenture Act) shall be
fully protected in relying on:
(1) an Opinion of Counsel complying with Section 102 and stating that:
(A) the form or forms of such Securities and any coupons
appertaining thereto have been, or will have been upon compliance with
such procedures as may
26
<PAGE>
be specified therein, established in conformity with the provisions of
this Indenture;
(B) the terms of such Securities and any coupons appertaining
thereto have been, or will have been upon compliance with such
procedures as may be specified therein, established in conformity with
the provisions of this Indenture; and
(C) such Securities, together with any coupons appertaining
thereto, when executed by the Company, completed pursuant to such
procedures as may be specified therein and delivered by the Company to
the Trustee for authentication in accordance with this Indenture,
authenticated and delivered by the Trustee in accordance with this
Indenture and issued by the Company in the manner and subject to any
conditions specified in such Opinion of Counsel, will constitute
legal, valid and binding obligations of the Company, enforceable in
accordance with their terms, subject to applicable bankruptcy,
insolvency, reorganization and other similar laws of general
applicability relating to or affecting the enforcement of creditors'
rights generally and to general equitable principles and to such other
matters as may be specified therein; and
(2) a Company Certificate complying with Section 102 and stating that
all conditions precedent provided for in this Indenture relating to the
issuance of such Securities have been, or will have been upon compliance
with such procedures as may be specified therein, complied with and that,
to the best of the knowledge of the signers of such certificate, no Event
of Default with respect to such Securities has occurred and is continuing.
The Trustee shall not be required to authenticate such Securities if the issue
of such Securities pursuant to this Indenture will affect the Trustee's own
rights, duties, obligations or immunities under the Securities and this
Indenture or otherwise in a manner which is not reasonably acceptable to the
Trustee.
Notwithstanding the provisions of Section 301 and of the preceding
paragraph, if all the Securities of any series are not to be issued at one time,
it shall not be necessary to deliver a Company Order, an Opinion of Counsel or a
Company Certificate otherwise required pursuant to the preceding paragraph at
the time of issuance of each Security of such series, but such order, opinion
and certificate with appropriate modifications to cover such future issuances,
shall be delivered at or before the time of issuance of the first Security of
such series.
Each Registered Security shall be dated the date of its authentication and
each Bearer Security shall be dated as of the date specified as contemplated by
Section 301.
27
<PAGE>
No Security or coupon shall be entitled to any benefit under this Indenture
or be valid or obligatory for any purpose unless there appears on such Security
or the Security to which such coupon appertains a certificate of authentication
substantially in the form provided for herein duly executed by the Trustee by
manual signature of an authorized officer, and such certificate on any Security
shall be conclusive evidence, and the only evidence, that such Security has been
duly authenticated and delivered hereunder and is entitled to the benefits of
this Indenture. Notwithstanding the foregoing, if any Security has been
authenticated and delivered hereunder but never issued and sold by the Company,
and the Company delivers such Security to the Trustee for cancellation as
provided in Section 309 together with a written statement (which need not comply
with Section 102 and need not be accompanied by an Opinion of Counsel) stating
that such Security has never been issued or sold by the Company, for all
purposes of this Indenture such Security shall be deemed never to have been
authenticated and delivered hereunder and shall never be entitled to the
benefits of this Indenture.
SECTION 304. Temporary Securities.
--------------------
(a) Pending the preparation of definitive Securities of any series,
the Company may execute, and upon a Company Order the Trustee shall
authenticate and deliver, temporary Securities which are printed,
lithographed, typewritten, mimeographed or otherwise produced, in any
authorized denomination, substantially of the tenor of the definitive
Securities in lieu of which they are issued, in registered form, or, if
authorized, in bearer form (with or without coupons), and with such
appropriate insertions, omissions, substitutions and other variations as
the officers executing such Securities may determine, as conclusively
evidenced by their execution of such Securities. In the case of Securities
of any series, such temporary Securities may be in global form.
Except in the case of temporary Securities in global form (which shall
be exchanged in accordance with Section 304(b) or as otherwise provided in
or pursuant to a Board Resolution), if temporary Securities of any series
are issued, the Company shall cause definitive Securities of such series to
be prepared without unreasonable delay. After the preparation of definitive
Securities of such series, the temporary Securities of such series shall be
exchangeable for definitive Securities of such series upon surrender of the
temporary Securities of such series at the office or agency of the Company
in a Place of Payment for such series, without charge to the Holder. Upon
surrender for cancellation of any one or more temporary Securities of any
series, together with any non-matured coupons appertaining thereto, the
Company shall execute and the Trustee shall authenticate and deliver in
exchange therefor a like principal amount of definitive Securities of the
same series of authorized denominations; provided, however, that no
-------- -------
definitive Bearer Security shall be delivered in exchange for a temporary
Registered Security; and provided, further, that a definitive Bearer
-------- -------
Security shall be delivered in exchange for a temporary Bearer Security
only in compliance with the conditions set forth in Section 303. Until so
exchanged, the temporary Securities or coupons appertaining thereto of any
series shall
28
<PAGE>
in all respects be entitled to the same benefits under this Indenture as
definitive Securities or coupons appertaining thereto of such series.
(b) Unless otherwise provided as contemplated in Section 301, this
Section 304(b) shall govern the exchange of temporary Securities issued in
global form other than through the facilities of DTC. If any such temporary
Security is issued in global form, then such temporary global Security
shall, unless otherwise provided therein, be delivered to the London office
of a depositary or common depositary (the "Common Depositary"), for the
-----------------
benefit of Euroclear and CEDEL.
Without unnecessary delay but in any event not later than the date
specified in, or determined pursuant to the terms of, any such temporary
global Security (the "Exchange Date"), the Company shall deliver to the
-------------
Trustee definitive Securities, in an aggregate principal amount equal to
the principal amount of such temporary global Security, executed by the
Company. On or after the Exchange Date, such temporary global Security
shall be surrendered by the Common Depositary to the Trustee, as the
Company's agent for such purpose, to be exchanged, in whole or from time to
time in part, for definitive Securities without charge, and the Trustee
shall authenticate and deliver, in the name of Euroclear or CEDEL, as the
case may be, in exchange for each portion of such temporary global
Security, an equal aggregate principal amount of definitive Securities of
or within the same series of authorized denominations and of like tenor as
the portion of such temporary global Security to be exchanged. The
definitive Securities to be delivered in exchange for any such temporary
global Security shall be in bearer form, registered form, permanent global
bearer form or permanent global registered form, or any combination
thereof, as specified as contemplated by Section 301, and, if any
combination thereof is so specified, as requested by the Common Depository;
provided, however, that, unless otherwise specified in such temporary
-------- -------
global Security, upon such presentation by the Common Depositary, such
temporary global Security shall be accompanied by a certificate dated the
Exchange Date or a subsequent date and signed by Euroclear as to the
portion of such temporary global Security held for its account then to be
exchanged and a certificate dated the Exchange Date or a subsequent date
and signed by CEDEL as to the portion of such temporary global Security
held for its account then to be exchanged, each in the form set forth in
Exhibit A-2 to this Indenture or in such other form as may be established
pursuant to Section 301; and provided, further, that definitive Bearer
-------- -------
Securities shall be delivered in exchange for a portion of a temporary
global Security only in compliance with the requirements of Section 303.
Unless otherwise specified in such temporary global Security, the
interest of a beneficial owner of Securities of a series in a temporary
global Security shall be exchanged for definitive Securities of the same
series and of like tenor following the Exchange Date when the account
holder instructs Euroclear or CEDEL, as the case may be, to request such
exchange on his behalf and delivers to Euroclear or CEDEL, as the case may
be, a
29
<PAGE>
certificate in the form set forth in Exhibit A-1 to this Indenture
(or in such other form as may be established pursuant to Section 301),
dated no earlier than 15 days prior to the Exchange Date, copies of which
certificate shall be available from the offices of Euroclear and CEDEL, the
Trustee, any Authenticating Agent appointed for such series of Securities
and each Paying Agent. Unless otherwise specified in such temporary global
Security, any such exchange shall be made free of charge to the beneficial
owners of such temporary global Security, except that a Person receiving
definitive Securities must bear the cost of insurance, postage,
transportation and the like unless such Person takes delivery of such
definitive Securities in person at the offices of Euroclear or CEDEL.
Definitive Securities in bearer form to be delivered in exchange for any
portion of a temporary global Security shall be delivered only outside the
United States.
Until exchanged in full as hereinabove provided, the temporary
Securities of any series shall in all respects be entitled to the same
benefits under this Indenture as definitive Securities of the same series
and of like tenor authenticated and delivered hereunder, except that,
unless otherwise specified as contemplated by Section 301, interest payable
on a temporary global Security on an Interest Payment Date for Securities
of such series occurring prior to the applicable Exchange Date shall be
payable to Euroclear and CEDEL on such Interest Payment Date upon delivery
by Euroclear and CEDEL to the Trustee of a certificate or certificates in
the form set forth in Exhibit A-2 to this Indenture (or in such other forms
as may be established pursuant to Section 301), for credit without further
interest on or after such Interest Payment Date to the respective accounts
of Persons who are the beneficial owners of such temporary global Security
on such Interest Payment Date and who have each delivered to Euroclear or
CEDEL, as the case may be, a certificate dated no earlier than 15 days
prior to the Interest Payment Date occurring prior to such Exchange Date in
the form set forth in Exhibit A-1 to this Indenture (or in such other forms
as may be established pursuant to Section 301). Notwithstanding anything to
the contrary herein contained, the certifications made pursuant to this
paragraph shall satisfy the certification requirements of the preceding two
paragraphs of this Section 304(b) and of the third paragraph of Section 303
of this Indenture and the interests of the Persons who are the beneficial
owners of the temporary global Security with respect to which such
certification was made will be exchanged for definitive Securities of the
same series and of like tenor on the Exchange Date or the date of
certification if such date occurs after the Exchange Date, without further
act or deed by such beneficial owners. Except as otherwise provided in this
paragraph, no payments of principal or interest owing with respect to a
beneficial interest in a temporary global Security will be made unless and
until such interest in such temporary global Security has been exchanged
for an interest in a definitive Security. Any interest so received by
Euroclear and CEDEL and not paid as herein provided shall be returned to
the Trustee prior to the expiration of two years after such Interest
Payment Date in order to be repaid to the Company.
30
<PAGE>
SECTION 305. Registration, Registration of Transfer and Exchange. The
---------------------------------------------------
Company shall cause to be kept at the Corporate Trust Office of the Trustee or
in any office or agency of the Company in a Place of Payment a register for each
series of Securities (the registers maintained in such office or in any such
office or agency of the Company in a Place of Payment being herein sometimes
referred to collectively as the "Security Register") in which, subject to such
-----------------
reasonable regulations as it may prescribe, the Company shall provide for the
registration of Registered Securities and of transfers of Registered Securities.
The Security Register shall be in written form or any other form capable of
being converted into written form within a reasonable time. The Trustee, at its
Corporate Trust Office, is hereby initially appointed "Security Registrar" for
------------------
the purpose of registering Registered Securities and transfers of Registered
Securities on such Security Register as herein provided. In the event that the
Trustee ceases to be Security Registrar, it shall have the right to examine the
Security Register at all reasonable times.
Subject to the provisions of this Section 305, upon surrender for
registration of transfer of any Registered Security of any series at any office
or agency of the Company in a Place of Payment for such series, the Company
shall execute, and the Trustee shall authenticate and deliver, in the name of
the designated transferee or transferees, one or more new Registered Securities
of the same series, of any authorized denominations and of a like aggregate
principal amount, being a number not contemporaneously outstanding, and
containing identical terms and provisions.
Subject to the provisions of this Section 305, at the option of the Holder,
Registered Securities of any series may be exchanged for other Registered
Securities of the same series, of any authorized denomination or denominations
and of a like aggregate principal amount, containing identical terms and
provisions, upon surrender of the Registered Securities to be exchanged at any
such office or agency. Whenever any such Registered Securities are so
surrendered for exchange, the Company shall execute, and the Trustee shall
authenticate and deliver, the Registered Securities which the Holder making the
exchange is entitled to receive. Unless otherwise specified with respect to any
series of Securities as contemplated by Section 301, Bearer Securities may not
be issued in exchange for Registered Securities.
If (but only if) permitted as contemplated by Section 301, at the option of
the Holder, Bearer Securities of any series may be exchanged for Registered
Securities of the same series of any authorized denominations and of a like
aggregate principal amount and tenor, upon surrender of the Bearer Securities to
be exchanged at any such office or agency, with all unmatured coupons and all
matured coupons in default appertaining thereto. If the Holder of a Bearer
Security is unable to produce any such unmatured coupon or coupons or matured
coupon or coupons in default, any such permitted exchange may be effected if the
Bearer Securities are accompanied by payment in funds acceptable to the Company
in an amount equal to the face amount of such missing coupon or coupons, or the
surrender of such missing coupon or coupons may be waived by the Company and the
Trustee if there is furnished to them such security or indemnity as they may
require to save each of them and any Paying Agent harmless. If thereafter the
Holder of such
31
<PAGE>
Bearer Security surrenders to any Paying Agent any such missing
coupon in respect of which such a payment has been made, such Holder shall be
entitled to receive the amount of payment; provided, however, that, except as
-------- -------
otherwise provided in Section 1002, interest represented by a coupon shall be
payable only upon presentation and surrender of such coupons at an office or
agency located outside the United States. Notwithstanding the foregoing, in case
a Bearer Security of any series is surrendered at any such office or agency in a
permitted exchange for a Registered Security of the same series and like tenor
after the close of business at such office or agency on (i) any Regular Record
Date and before the opening of business at such office or agency on the relevant
Interest Payment Date or (ii) any Special Record Date and before the opening of
business at such office or agency on the related proposed date for payment of
Defaulted Interest, such Bearer Security shall be surrendered without the coupon
relating to such Interest Payment Date or proposed date for payment, as the case
may be, and interest or Defaulted Interest, as the case may be, will not be
payable on such Interest Payment Date or proposed date for payment, as the case
may be, in respect of the Registered Security issued in exchange for such Bearer
Security, but will be payable only to the Holder of such coupon when due in
accordance with the provisions of this Indenture. Whenever any Securities are so
surrendered for exchange, the Company shall execute, and the Trustee shall
authenticate and deliver, the Securities which the Holder making the exchange is
entitled to receive.
Notwithstanding the foregoing, except as otherwise specified as
contemplated by Section 301, any permanent global Security shall be exchangeable
only as provided in this paragraph. If the depositary for any permanent global
Security is DTC, then, unless the terms of such global Security expressly permit
such global Security to be exchanged in whole or in part for definitive
Securities, a global Security may be transferred, in whole but not in part, only
to a nominee of DTC, or by a nominee of DTC to DTC, or to a successor to DTC for
such global Security selected and approved by the Company or to a nominee of
such successor to DTC. If at any time DTC notifies the Company that it is
unwilling or unable to continue as depositary for the applicable global Security
or Securities or if at any time DTC ceases to be a clearing agency registered
under the Exchange Act if so required by applicable law or regulation, the
Company shall appoint a successor depositary with respect to such global
Security or Securities. If (i) a successor depositary for such global Security
or Securities is not appointed by the Company within 90 days after the Company
receives such notice or becomes aware of such unwillingness, inability or
ineligibility, (ii) an Event of Default has occurred and is continuing and the
beneficial owners representing a majority in principal amount of the applicable
series of Securities represented by such global Security or Securities advise
DTC to cease acting as depositary for such global Security or Securities or
(iii) the Company, in its sole discretion, determines at any time that all
Outstanding Securities (but not less than all) Securities of any series issued
or issuable in the form of one or more global Securities shall no longer be
represented by such global Security or Securities (provided, however, that the
-------- -------
Company may not make such determination during the 40-day restricted period
provided by Regulation S under the Securities Act or during any other similar
period during which the Securities must be held in global form as may be
required by the Securities Act), then, upon surrender of the global Security or
Securities appropriately endorsed,
32
<PAGE>
the Company shall execute, and the Trustee shall authenticate and deliver
definitive Securities of like series, rank, tenor and terms in definitive form
in an aggregate principal amount equal to the principal amount of such global
Security or Securities. If any beneficial owner of an interest in a permanent
global Security is otherwise entitled to exchange such interest for Securities
of such series and of like tenor and principal amount of another authorized form
and denomination, as specified as contemplated by Section 301 and provided that
any applicable notice provided in the permanent global Security has been given,
then without unnecessary delay but in any event not earlier than the earliest
date on which such interest may be so exchanged, upon surrender of the global
Security or Securities appropriately endorsed, the Company shall execute, and
the Trustee shall authenticate and deliver definitive Securities in aggregate
principal amount equal to the principal amount of such beneficial owner's
interest in such permanent global Security. On or after the earliest date on
which such interests may be so exchanged, such permanent global Security shall
be surrendered for exchange by DTC or such other depositary as is specified in
the Company Order with respect thereto to the Trustee, as the Company's agent
for such purpose; provided, however, that no such exchanges may
-------- -------
occur during a period beginning at the opening of business 15 days before any
selection of Securities to be redeemed and ending on the relevant Redemption
Date if the Security for which exchange is requested may be among those selected
for redemption; and provided, further, that no Bearer Security delivered in
-------- -------
exchange for a portion of a permanent global Security shall be mailed or
otherwise delivered to any location in the United States. If a Registered
Security is issued in exchange for any portion of a permanent global Security
after the close of business at the office or agency where such exchange occurs
on (i) any Regular Record Date and before the opening of business at such office
or agency on the relevant Interest Payment Date or (ii) any Special Record Date
and before the opening of business at such office or agency on the related
proposed date for payment of Defaulted Interest, interest or Defaulted Interest,
as the case may be, will not be payable on such Interest Payment Date or
proposed date for payment, as the case may be, in respect of such Registered
Security, but will be payable on such Interest Payment Date or proposed date for
payment, as the case may be, only to the Person to whom interest in respect of
such portion of such permanent global Security is payable in accordance with the
provisions of this Indenture.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company evidencing the same
debt, and entitled to the same benefits under this Indenture, as the Securities
surrendered upon such registration of transfer or exchange.
Every Registered Security presented or surrendered for registration of
transfer or for exchange or redemption shall be duly endorsed, or be accompanied
by a written instrument of transfer in form satisfactory to the Company and the
Security Registrar, duly executed by the Holder thereof or his attorney duly
authorized in writing.
No service charge shall be made for any registration of transfer or
exchange of Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge which may be imposed in connection
with any registration of transfer or exchange of
33
<PAGE>
Securities, other than exchanges pursuant to Section 304, 906, 1107 or 1305 not
involving any transfer.
The Company or the Trustee, as applicable, shall not be required (i) to
issue, register the transfer of or exchange any Security if such Security may be
among those selected for redemption during a period beginning at the opening of
business 15 days before selection of the Securities to be redeemed under Section
1103 and ending at the close of business on (A) if such Securities are issuable
only as Registered Securities, the day of the mailing of the relevant notice of
redemption and (B) if such Securities are issuable as Bearer Securities, the day
of the first publication of the relevant notice of redemption or, if such
Securities are also issuable as Registered Securities and there is no
publication, the day of the mailing of the relevant notice of redemption, or
(ii) to register the transfer of or exchange any Registered Security so selected
for redemption in whole or in part, except, in the case of any Registered
Security to be redeemed in part, the portion thereof not to be redeemed, or
(iii) to exchange any Bearer Security so selected for redemption except that
such a Bearer Security may be exchanged for a Registered Security of such series
and like tenor, provided that such Registered Security is simultaneously
--------
surrendered for redemption, or (iv) to issue, register the transfer of or
exchange any Security which has been surrendered for repayment at the option of
the Holder, except the portion, if any, of such Security not to be so repaid.
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities. If any
------------------------------------------------
mutilated Security or a Security with a mutilated coupon appertaining thereto is
surrendered to the Trustee or the Company, together with, in proper cases, such
security or indemnity as may be required by the Company or the Trustee to save
each of them or any of their agents harmless, the Company shall execute and the
Trustee shall authenticate and deliver in exchange therefor a new Security of
the same series and principal amount, containing identical terms and provisions
and bearing a number not contemporaneously outstanding, with coupons
corresponding to the coupons, if any, appertaining to the surrendered Security.
If there is delivered to the Company and the Trustee (i) evidence to their
satisfaction of the destruction, loss or theft of any Security or coupon, and
(ii) such security or indemnity as may be required by them to save each of them
and any of their agents harmless, then, in the absence of notice to the Company
or the Trustee that such Security or coupon has been acquired by a bona fide
purchaser, the Company shall execute, and upon Company Request the Trustee shall
authenticate and deliver, in lieu of any such destroyed, lost or stolen Security
or in exchange for the Security to which a destroyed, lost or stolen coupon
appertains (with all appurtenant coupons not destroyed, lost or stolen), a new
Security of the same series and principal amount, containing identical terms and
provisions and bearing a number not contemporaneously outstanding, with coupons
corresponding to the coupons, if any, appertaining to such destroyed, lost or
stolen Security or to the Security to which such destroyed, lost or stolen
coupon appertains.
34
<PAGE>
Notwithstanding the provisions of the previous two paragraphs, in case any
such mutilated, destroyed, lost or stolen Security or coupon has become or is
about to become due and payable, the Company in its discretion may, instead of
issuing a new Security, with coupons corresponding to the coupons, if any,
appertaining to such destroyed, lost or stolen Security or to the Security to
which such destroyed, lost or stolen coupon appertains, pay such Security or
coupon; provided, however, that payment of principal of (and premium or Make-
-------- -------
Whole Amount, if any, on) and interest and Additional Amounts, if any, on any
Bearer Securities shall, except as otherwise provided in Section 1002, be
payable only at an office or agency located outside the United States and,
unless otherwise specified as contemplated by Section 301, any interest on
Bearer Securities shall be payable only upon presentation and surrender of the
coupons appertaining thereto.
Upon the issuance of any new Security under this Section, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge which may be imposed in relation thereto and any other expenses
(including the fees and expenses of the Trustee) connected therewith.
Every new Security of any series and any coupons appertaining thereto
issued pursuant to this Section in lieu of any destroyed, lost or stolen
Security, or in exchange for a Security to which a destroyed, lost or stolen
coupon appertains, shall constitute an original additional contractual
obligation of the Company, whether or not the destroyed, lost or stolen Security
and any coupons appertaining thereto or the destroyed, lost or stolen coupon are
at any time enforceable by anyone, and shall be entitled to all the benefits of
this Indenture equally and proportionately with any and all other Securities of
such series and any coupons appertaining thereto duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities or coupons.
SECTION 307. Payment of Interest; Interest Rights Preserved. Except as
----------------------------------------------
otherwise specified with respect to a series of Securities in accordance with
the provisions of Section 301, interest on any Registered Security which is
payable, and is punctually paid or duly provided for, on any Interest Payment
Date shall be paid to the Person in whose name such Security (or one or more
Predecessor Securities) is registered at the close of business on the Regular
Record Date for such interest at the office or agency of the Company maintained
for such purpose pursuant to Section 1002; provided, however, that each
-------- -------
installment of interest on any Registered Security may at the Company's option
be paid by (i) mailing a check for such interest, payable to or upon the written
order of the Person entitled thereto pursuant to Section 308, to the address of
such Person as it appears on the Security Register or (ii) transfer to an
account maintained by the payee located inside the United States.
35
<PAGE>
Unless otherwise provided as contemplated by Section 301 with respect to
the Securities of any series, payment of interest may be made, in the case of a
Bearer Security, by transfer to an account maintained by the payee with a bank
located outside the United States.
Unless otherwise provided as contemplated by Section 301, every permanent
global Security will provide that interest, if any, payable on any Interest
Payment Date will be paid to DTC, Euroclear and/or CEDEL, as the case may be,
with respect to that portion of such permanent global Security held for its
account by Cede & Co. or the Common Depositary, as the case may be, for the
purpose of permitting such party to credit the interest received by it in
respect of such permanent global Security to the accounts of the beneficial
owners thereof.
In case a Bearer Security of any series is surrendered in exchange for a
Registered Security of such series after the close of business (at an office or
agency in a Place of Payment for such series) on any Regular Record Date and
before the opening of business (at such office or agency) on the next succeeding
Interest Payment Date, such Bearer Security shall be surrendered without the
coupon relating to such Interest Payment Date and interest will not be payable
on such Interest Payment Date in respect of the Registered Security issued in
exchange for such Bearer Security, but will be payable only to the Holder of
such coupon when due in accordance with the provisions of this Indenture.
Except as otherwise specified with respect to a series of Securities in
accordance with the provisions of Section 301, any interest on any Registered
Security of any series which is payable, but is not punctually paid or duly
provided for, on any Interest Payment Date ("Defaulted Interest") shall
------------------
forthwith cease to be payable to the registered Holder thereof upon the relevant
Regular Record Date by virtue of having been such Holder, and such Defaulted
Interest may be paid by the Company, at its election, as provided in paragraph
(1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest to
the Persons in whose names the Registered Securities of such series (or
their respective Predecessor Securities) are registered at the close of
business on a Special Record Date for the payment of such Defaulted
Interest, which shall be fixed in the following manner. The Company shall
notify the Trustee in writing of the amount of Defaulted Interest proposed
to be paid on each Registered Security of such series and the date of the
proposed payment (which shall not be less than 20 days after such notice is
received by the Trustee), and at the same time the Company shall deposit
with the Trustee an amount of money in the currency or currencies, currency
unit or units or composite currency or currencies in which the Securities
of such series are payable (except as otherwise specified pursuant to
Section 301 for the Securities of such series) equal to the aggregate
amount proposed to be paid in respect of such Defaulted Interest or shall
make arrangements satisfactory to the Trustee for such deposit on or prior
to the date of the proposed payment, such money when deposited to be held
in trust for the benefit of the Persons entitled to such Defaulted Interest
as provided in this paragraph. Thereupon, the Trustee shall fix a Special
Record
36
<PAGE>
Date for the payment of such Defaulted Interest which shall be not
more than 15 days and not less than 10 days prior to the date of the
proposed payment and not less than 10 days after the receipt by the Trustee
of the notice of the proposed payment. The Trustee shall promptly notify
the Company of such Special Record Date and, in the name and at the expense
of the Company shall cause notice of the proposed payment of such Defaulted
Interest and the Special Record Date therefor to be mailed, first-class
postage prepaid, to each Holder of Registered Securities of such series at
such Holder's address as it appears in the Security Register not less than
10 days prior to such Special Record Date. The Trustee may, in its
discretion, in the name and at the expense of the Company cause a similar
notice to be published at least once in an Authorized Newspaper in each
place of payment, but such publications shall not be a condition precedent
to the establishment of such Special Record Date. Notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor
having been mailed as aforesaid, such Defaulted Interest shall be paid to
the Persons in whose names the Registered Securities of such series (or
their respective Predecessor Securities) are registered at the close of
business on such Special Record Date and shall no longer be payable
pursuant to paragraph (2) below. In case a Bearer Security of any series is
surrendered at the office or agency in a Place of Payment for such series
in exchange for a Registered Security of such series after the close of
business at such office or agency on any Special Record Date and before the
opening of business at such office or agency on the related proposed date
for payment of Defaulted Interest, such Bearer Security shall be
surrendered without the coupon relating to such proposed date of payment
and Defaulted Interest will not be payable on such proposed date of payment
in respect of the Registered Security issued in exchange for such Bearer
Security, but will be payable only to the Holder of such coupon when due in
accordance with the provisions of this Indenture.
(2) The Company may make payment of any Defaulted Interest on the
Registered Securities of any series in any other lawful manner not
inconsistent with the requirements of any securities exchange on which such
Securities may be listed, and on such notice as may be required by such
exchange, if, after notice given by the Company to the Trustee of the
proposed payment pursuant to this paragraph, such manner of payment is
deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section and Section 305, each
Security delivered under this Indenture upon registration of transfer of or in
exchange for or in lieu of any other Security shall carry the rights to interest
accrued and unpaid, and to accrue, which were carried by such other Security.
SECTION 308. Persons Deemed Owners. Prior to due presentment of a
---------------------
Registered Security for registration of transfer, the Company, the Trustee and
any agent of the Company or the Trustee may treat the Person in whose name such
Registered Security is registered as the owner of such Security for the purpose
of receiving payment of principal of (and premium or
37
<PAGE>
Make-Whole Amount, if any, on) and (subject to Sections 305 and 307) interest
and Additional Amounts, if any, on such Registered Security and for all other
purposes whatsoever, whether or not such Registered Security be overdue, and
neither the Company, the Trustee nor any agent of the Company or the Trustee
shall be affected by notice to the contrary.
Title to any Bearer Security and any coupons shall pass by delivery. The
Company, the Trustee and any agent of the Company or the Trustee may treat the
Holder of any Bearer Security and the Holder of any coupon as the absolute owner
of such Security or coupon for the purpose of receiving payment thereof or on
account thereof and for all other purposes whatsoever, whether or not such
Security or coupon be overdue, and neither the Company, the Trustee nor any
agent of the Company or the Trustee shall be affected by notice to the contrary.
None of the Company, the Trustee, any Paying Agent or the Security
Registrar shall have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of a Security in global form or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Notwithstanding the foregoing, with respect to any global Security, nothing
herein shall prevent the Company, the Trustee, or any agent of the Company or
the Trustee, from giving effect to any written certification, proxy or other
authorization furnished by any depositary, as a Holder, with respect to such
global Security or impair, as between such depositary and owners of beneficial
interests in such global Security, the operation of customary practices
governing the exercise of the rights of such depositary (or its nominee) as
Holder of such global Security.
SECTION 309. Cancellation. All Securities and coupons surrendered for
------------
payment, redemption, repayment at the option of the Holder, registration of
transfer or exchange or for credit against any sinking fund payment shall, if
surrendered to any Person other than the Trustee, be delivered to the Trustee,
and any such Securities and coupons and any Securities and coupons surrendered
directly to the Trustee for any such purpose shall be promptly canceled by it.
The Company may at any time deliver to the Trustee for cancellation any
Securities previously authenticated and delivered hereunder which the Company
may have acquired in any manner whatsoever, and may deliver to the Trustee (or
to any other Person for delivery to the Trustee) for cancellation any Securities
previously authenticated hereunder which the Company has not issued and sold,
and all Securities so delivered shall be promptly canceled by the Trustee. If
the Company so acquires any of the Securities, however, such acquisition shall
not operate as a redemption or satisfaction of the indebtedness represented by
such Securities unless and until the same are surrendered to the Trustee for
cancellation. No Securities shall be authenticated in lieu of or in exchange for
any Securities canceled as provided in this Section, except as expressly
permitted by this Indenture. Canceled Securities and coupons held by the Trustee
shall be destroyed by the Trustee and the Trustee shall deliver a certificate of
such destruction to the Company unless the Company delivers a Company Order
which directs their return to it.
38
<PAGE>
SECTION 310. Computation of Interest. Except as otherwise specified as
-----------------------
contemplated by Section 301 with respect to Securities of any series, interest
on the Securities of each series shall be computed on the basis of a 360-day
year consisting of twelve 30-day months.
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. Satisfaction and Discharge of Indenture. This Indenture shall
---------------------------------------
upon Company Request cease to be of further effect with respect to any series of
Securities specified in such Company Request (except as to any surviving rights
of registration of transfer or exchange of Securities of such series herein
expressly provided for and any right to receive Additional Amounts, as provided
in Section 1010), and the Trustee, upon receipt of a Company Order and at the
expense of the Company, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture as to such series when:
(1) either:
(A) all Securities of such series theretofore authenticated and
delivered and any coupons appertaining thereto (other than (i) coupons
appertaining to Bearer Securities surrendered for exchange for
Registered Securities and maturing after such exchange, whose
surrender is not required or has been waived as provided in Section
305, (ii) Securities of such series and coupons appertaining thereto
which have been destroyed, lost or stolen and which have been replaced
or paid as provided in Section 306, (iii) coupons appertaining to
Securities called for redemption and maturing after the relevant
Redemption Date, whose surrender has been waived as provided in
Section 1106, and (iv) Securities of such series and coupons
appertaining thereto for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company and
thereafter repaid to the Company or discharged from such trust, as
provided in Section 1003) have been delivered to the Trustee for
cancellation; or
(B) all Securities of such series and, in the case of clauses (i)
and (ii) below, any coupons appertaining thereto not theretofore
delivered to the Trustee for cancellation:
(i) have become due and payable, or
(ii) will become due and payable at their Stated Maturity
within one year, or
(iii) if redeemable at the option of the Company, are to be
called for redemption within one year under arrangements
satisfactory to the
39
<PAGE>
Trustee for the giving of notice of redemption by the Trustee in
the name, and at the expense, of the Company,
and the Company, in the case of clause (i), (ii) or (iii) above, has
irrevocably deposited or caused to be deposited with the Trustee funds
in trust for the purpose, in the currency or currencies, currency unit
or units or composite currency or currencies in which the Securities
of such series are payable, and in an amount sufficient to pay and
discharge the entire indebtedness on such Securities and such coupons
not theretofore delivered to the Trustee for cancellation, for the
principal (and premium or Make-Whole Amount, if any) and interest and
Additional Amounts, if any, to the date of such deposit (in the case
of Securities which have become due and payable) or the Stated
Maturity or Redemption Date, as the case may be;
(2) The Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(3) The Company has delivered to the Trustee a Company Certificate and
an Opinion of Counsel, each stating that all conditions precedent herein
provided for relating to the satisfaction and discharge of this Indenture
as to such series have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee and any predecessor Trustee under
Section 606, the obligations of the Company to any Authenticating Agent under
Section 611 and, if money has been deposited with and held by the Trustee
pursuant to subparagraph (B) of paragraph (1) of this Section, the obligations
of the Trustee under Section 402 and the last paragraph of Section 1003, shall
survive.
SECTION 402. Application of Trust Funds. Subject to the provisions of the
--------------------------
last paragraph of Section 1003, all money deposited with the Trustee pursuant to
Section 401 shall be held in trust and applied by it, in accordance with the
provisions of the Securities, the coupons and this Indenture, to the payment,
either directly or through any Paying Agent (including the Company acting as its
own Paying Agent) as the Trustee may determine, to the Persons entitled thereto,
of the principal (and premium or Make-Whole Amount, if any) and interest and
Additional Amounts, if any, for the payment of which such money has been
deposited with or received by the Trustee, but such money need not be segregated
from other funds except to the extent required by law.
40
<PAGE>
ARTICLE FIVE
REMEDIES
SECTION 501. Events of Default. Subject to any modifications, additions or
-----------------
deletions relating to any series of Securities as contemplated pursuant to
Section 301, "Event of Default," whenever used herein with respect to any
----------------
particular series of Securities, means any one of the following events (whatever
the reason for such Event of Default and whether or not it is voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court or any order, rule or regulation of any administrative or
governmental body):
(1) default in the payment of any interest on or any Additional
Amounts payable in respect of any Security of or within such series or of
any coupon appertaining thereto, when such interest, Additional Amounts or
coupon becomes due and payable, and continuance of such default for a
period of 30 days; or
(2) default in the payment of the principal of (or premium or Make-
Whole Amount, if any, on) any Security of such series when due and payable
at its Maturity; or
(3) default in the deposit of any sinking fund payment, when and as
due by the terms of any Security of such series; or
(4) default in the performance, or breach, of any covenant or warranty
of the Company in this Indenture with respect to any Security of such
series (other than a covenant or warranty a default in the performance of
which or the breach of which is elsewhere specifically provided for in this
Section), and continuance of such default or breach for a period of 60 days
after there has been given, by registered or certified mail, to the Company
by the Trustee or to the Company and the Trustee by the Holders of at least
25% in principal amount of the Outstanding Securities of such series, a
written notice specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default" hereunder;
-----------------
or
(5) default under any bond, debenture, note or other evidence of
indebtedness of the Company or under any mortgage, indenture or other
instrument of the Company (including a default with respect to Securities
of any series other than such series) under which there may be issued or by
which there may be secured any indebtedness of the Company (or by any
Significant Subsidiary, the repayment of which the Company has guaranteed
or for which the Company is directly responsible or liable as obligor or
guarantor), whether such indebtedness now exists or is hereafter created,
which, after the termination of any applicable grace or cure period, (a)
constitutes a Payment Default or (b) results in the acceleration of such
indebtedness prior to its express maturity and, in each case, the principal
amount of any indebtedness, together with the principal amount of any other
such indebtedness under which there has been a Payment Default or which has
been so accelerated, aggregates $25,000,000 or more; provided that, in
calculating the aggregate principal amount of any such indebtedness, the
Hedging Obligations of any Person under which there has been a Payment
Default or which
41
<PAGE>
has been so accelerated, aggregates $25,000,000 or more; provided that, in
---------
calculating the aggregate principal amount of any such indebtedness, the
Hedging Obligations of any Person under which there has been a Payment
Default or which has been so accelerated shall not be netted against any
other Hedging Obligation of such Person, within a period of 10 days after
there has been given, by registered or certified mail, to the Company by
the Trustee or to the Company and the Trustee by the Holders of at least
10% in principal amount of the Outstanding Securities of such series a
written notice specifying such default and requiring the Company to cause
such indebtedness to be discharged or cause such acceleration to be
rescinded or annulled and stating that such notice is a "Notice of Default"
-----------------
hereunder; or
(6) the entry by a court of competent jurisdiction of one or more
final judgments, orders or decrees against the Company or any Significant
Subsidiary of the Company in an aggregate amount (excluding amounts covered
by insurance) in excess of $25,000,000 and such judgments, orders or
decrees remain undischarged, unstayed and unsatisfied in an aggregate
amount (excluding amounts covered by insurance) in excess of $25,000,000
for a period of 60 consecutive days; or
(7) the Company or any Significant Subsidiary of the Company pursuant
to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it in an
involuntary case,
(C) consents to the appointment of a Custodian of it or for all
or substantially all of its property, or
(D) makes a general assignment for the benefit of its creditors;
or
(8) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(A) is for relief against the Company or any Significant
Subsidiary of the Company in an involuntary case,
(B) appoints a Custodian of the Company or any Significant
Subsidiary of the Company or for all or substantially all of its
property, or
(C) orders the liquidation of the Company or any Significant
Subsidiary of the Company,
42
<PAGE>
and the order or decree remains unstayed and in effect for 90 days; or
(9) any other Event of Default provided with respect to Securities of
such series.
As used in this Section 501, the term "Bankruptcy Law" means Title 11, U.S. Code
--------------
or any similar Federal or state law for the relief of debtors and the term
"Custodian" means any receiver, trustee, assignee, liquidator or other similar
- ----------
official under any Bankruptcy Law.
SECTION 502. Acceleration of Maturity; Rescission and Annulment. If an
--------------------------------------------------
Event of Default (other than an Event of Default set forth in Section 501(7) or
(8)) with respect to Securities of any series at the time Outstanding occurs and
is continuing, then and in every such case, unless the principal of all of the
Outstanding Securities of such series already has become due and payable, the
Trustee or the Holders of not less than 25% in principal amount of the
Outstanding Securities of such series may declare the principal (or, if any
Securities are Original Issue Discount Securities or Indexed Securities, such
portion of the principal as may be specified in the terms thereof) of, and the
Make-Whole Amount, if any, on, all the Securities of such series to be due and
payable immediately, by a notice in writing to the Company (and to the Trustee
if given by the Holders), and upon any such declaration such principal or
specified portion thereof shall become immediately due and payable. If an Event
of Default set forth in Section 501(7) or (8) occurs and is continuing with
respect to the Securities of any series, then in each such case, the principal
of, and the Make-Whole Amount, if any, on, all the Securities of such series
shall be due and payable immediately, without notice to the Company.
At any time after such a declaration of acceleration with respect to
Securities of any series has been made and before a judgment or decree for
payment of the money due has been obtained by the Trustee as hereinafter
provided in this Article, the Holders of a majority in principal amount of the
Outstanding Securities of such series, by written notice to the Company and the
Trustee, may rescind and annul such declaration and its consequences if:
(1) The Company has paid or deposited with the Trustee a sum
sufficient to pay, in the currency, currency unit or composite currency in
which the Securities of such series are payable (except as otherwise
specified pursuant to Section 301 for the Securities of such series):
(A) all overdue installments of interest on and any Additional
Amounts payable in respect of all Outstanding Securities of such
series and any coupons appertaining thereto;
(B) the principal of (and premium or Make-Whole Amount, if any,
on) any Outstanding Securities of such series which have become due
otherwise than
43
<PAGE>
by such declaration of acceleration and interest thereon at the rate
or rates borne by or provided for in such Securities;
(C) to the extent that payment of such interest is lawful,
interest on overdue installments of interest and any Additional
Amounts at the rate or rates borne by or provided for in such
Securities; and
(D) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel; and
(2) all Events of Default with respect to Securities of such series,
other than the nonpayment of the principal of (or premium or Make-Whole
Amount, if any, on) or interest or Additional Amounts, if any, on
Securities of such series which have become due solely by such declaration
of acceleration, have been cured or waived as provided in Section 513.
No such rescission shall affect any subsequent default or impair any right
resulting therefrom.
SECTION 503. Collection of Indebtedness and Suits for Enforcement by
-------------------------------------------------------
Trustee. The Company covenants that if:
- -------
(1) default is made in the payment of any installment of interest or
Additional Amounts, if any, on any Security of any series or any coupon
appertaining thereto when such interest or Additional Amount becomes due
and payable and such default continues for a period of 30 days, or
(2) default is made in the payment of the principal of (or premium or
Make-Whole Amount, if any, on) any Security of any series at its Maturity,
then the Company shall, upon demand of the Trustee, pay to the Trustee, for the
benefit of the Holders of the Securities of such series and any such coupons,
the whole amount then due and payable on such Securities and any such coupons
for principal (and premium or Make-Whole Amount, if any) and interest and
Additional Amounts, if any, with interest on any overdue principal (and premium
or Make-Whole Amount, if any) and, to the extent that payment of such interest
is legally enforceable, on any overdue installments of interest or Additional
Amounts, if any, at the rate or rates borne by or provided for in such
Securities, and, in addition thereto, such further amount as is sufficient to
cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel.
44
<PAGE>
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, and may
prosecute such proceeding to judgment or final decree, and may enforce the same
against the Company or any other obligor on the Securities of such series and
collect the moneys adjudged or decreed to be payable in the manner provided by
law out of the property of the Company or any other obligor on the Securities of
such series, wherever situated.
If an Event of Default with respect to Securities of any series occurs and
is continuing, the Trustee may in its discretion proceed to protect and enforce
its rights and the rights of the Holders of Securities of such series and any
coupons appertaining thereto by such appropriate judicial proceedings as the
Trustee deems most effectual to protect and enforce any such rights, whether for
the specific enforcement of any covenant or agreement in this Indenture or in
aid of the exercise of any power granted herein, or to enforce any other proper
remedy.
SECTION 504. Trustee May File Proofs of Claim. In case of the pendency of
--------------------------------
any receivership, insolvency, liquidation, bankruptcy, reorganization,
arrangement, adjustment, composition or other judicial proceeding relative to
the Company or any other obligor on the Securities of such series or the
property of the Company or of such other obligor or their creditors, the Trustee
(irrespective of whether the principal of the Securities of any series is then
due and payable as therein expressed or by declaration or otherwise and
irrespective of whether the Trustee has made any demand on the Company for the
payment of overdue principal, premium or Make-Whole Amount, if any, or interest
or Additional Amounts, if any) shall be entitled and empowered, by intervention
in such proceeding or otherwise:
(1) to file and prove a claim for the whole amount, or such lesser
amount as may be provided for in the Securities of such series, of
principal (and premium or Make-Whole Amount, if any) and interest and
Additional Amounts, if any, owing and unpaid in respect of the Securities
of such series and to file such other papers or documents and take such
other action, including participating as a member of any official creditors
committee appointed in the matter, as it may deem necessary or advisable in
order to have the claims of the Trustee (including any claim for the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel) and of the Holders allowed in such
judicial proceeding, and
(2) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator (or
other similar official) in any such judicial proceeding is hereby authorized by
each Holder of Securities of such series and any coupons appertaining thereto to
make such payments to the Trustee, and in the event that the Trustee consents to
the making of such payments directly to the Holders, to pay to the Trustee
45
<PAGE>
any amount due to it for the reasonable compensation, expenses, disbursements
and advances of the Trustee and any predecessor Trustee, their agents and
counsel, and any other amounts due the Trustee or any predecessor Trustee under
Section 606.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder of a Security
or coupon any plan of reorganization, arrangement, adjustment or composition
affecting the Securities or coupons or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Holder of a
Security or coupon in any such proceeding.
SECTION 505. Trustee May Enforce Claims Without Possession of Securities or
--------------------------------------------------------------
Coupons. All rights of action and claims under this Indenture or any of the
- -------
Securities or any coupons may be prosecuted and enforced by the Trustee without
the possession of any of the Securities or coupons or the production thereof in
any proceeding relating thereto, and any such proceeding instituted by the
Trustee shall be brought in its own name as trustee of an express trust, and any
recovery of judgment shall, after provision for the payment of the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, be for the ratable benefit of the Holders of the Securities and
coupons in respect of which such judgment has been recovered.
SECTION 506. Application of Money Collected. Any money collected by the
------------------------------
Trustee pursuant to this Article shall be applied in the following order, at the
date or dates fixed by the Trustee and, in case of the distribution of such
money on account of principal (or premium or Make-Whole Amount, if any) or
interest or Additional Amounts, if any, on presentation of the Securities or
coupons, or both, as the case may be, and the notation thereon of the payment if
only partially paid and upon surrender thereof if fully paid:
(1) to the payment of all amounts due the Trustee and any predecessor
Trustee under Section 606;
(2) to the payment of the amounts then due and unpaid on the
Securities and coupons for principal (and premium or Make-Whole Amount, if
any) and interest and Additional Amounts, if any, payable, in respect of
which or for the benefit of which such money has been collected, ratably,
without preference or priority of any kind, according to the aggregate
amounts due and payable on such Securities and coupons for principal (and
premium or Make-Whole Amount, if any) and interest and Additional Amounts,
if any, respectively; and
(3) to the payment of the remainder, if any, to the Company.
SECTION 507. Limitation on Suits. No Holder of any Security of any series
-------------------
or any coupon appertaining thereto shall have any right to institute any
proceeding, judicial or otherwise,
46
<PAGE>
with respect to this Indenture, or for the appointment of a receiver or trustee,
or for any other remedy hereunder, unless:
(1) such Holder has previously given written notice to the Trustee of
a continuing Event of Default with respect to the Securities of such
series;
(2) the Holders of not less than 25% in principal amount of the
Outstanding Securities of such series have made written request to the
Trustee to institute proceedings in respect of such Event of Default in its
own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding; and
(5) no direction inconsistent with such written request has been given
to the Trustee during such 60-day period by the Holders of a majority in
principal amount of the Outstanding Securities of such series;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other of
such Holders, or to obtain or to seek to obtain priority or preference over any
other of such Holders or to enforce any right under this Indenture, except in
the manner herein provided and for the equal and ratable benefit of all such
Holders.
SECTION 508. Unconditional Right of Holders to Receive Principal, Premium
------------------------------------------------------------
or Make-Whole Amount, Interest and Additional Amounts. Notwithstanding any other
- -----------------------------------------------------
provision in this Indenture, the Holder of any Security or coupon shall have the
right which is absolute and unconditional to receive payment of the principal of
(and premium or Make-Whole Amount, if any, on ) and (subject to Sections 305 and
307) interest and Additional Amounts, if any, on such Security or payment of
such coupon on or after the respective due dates expressed in such Security or
coupon (or, in the case of redemption, on the Redemption Date) and to institute
suit for the enforcement of any such payment, and such rights shall not be
impaired or affected without the consent of such Holder.
SECTION 509. Restoration of Rights and Remedies. If the Trustee or any
----------------------------------
Holder of a Security or coupon has instituted any proceeding to enforce any
right or remedy under this Indenture and such proceeding has been discontinued
or abandoned for any reason, or has been determined adversely to the Trustee or
to such Holder, then and in every such case the Company, the Trustee and the
Holders of Securities and coupons shall, subject to any determination in such
proceeding, be restored severally and respectively to their former positions
hereunder and
47
<PAGE>
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
SECTION 510. Rights and Remedies Cumulative. Except as otherwise provided
------------------------------
with respect to the replacement or payment of mutilated, destroyed, lost or
stolen Securities or coupons in the last paragraph of Section 306, no right or
remedy herein conferred on or reserved to the Trustee or to the Holders of
Securities or coupons is intended to be exclusive of any other right or remedy,
and every right and remedy shall, to the extent permitted by law, be cumulative
and in addition to every other right and remedy given hereunder or now or
hereafter existing at law or in equity or otherwise. The assertion or employment
of any right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
SECTION 511. Delay or Omission Not Waiver. No delay or omission of the
----------------------------
Trustee or of any Holder of any Security or coupon to exercise any right or
remedy accruing upon any Event of Default shall impair any such right or remedy
or constitute a waiver of any such Event of Default or an acquiescence therein.
Every right and remedy given by this Article or by law to the Trustee or to the
Holders may be exercised from time to time, and as often as may be deemed
expedient, by the Trustee or by the Holders of Securities or coupons, as the
case may be.
SECTION 512. Control by Holders of Securities. The Holders of not less than
--------------------------------
a majority in principal amount of the Outstanding Securities of any series shall
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee, or exercising any trust or power
conferred on the Trustee with respect to the Securities of such series, provided
--------
that:
(1) such direction is not in conflict with any rule of law or with
this Indenture,
(2) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction, and
(3) the Trustee need not take any action which might involve it in
personal liability or be unduly prejudicial to the Holders of Securities of
such series not joining therein (but the Trustee shall have no obligation
as to the determination of such undue prejudice).
SECTION 513 Waiver of Past Defaults. The Holders of at least a majority in
-----------------------
principal amount of the Outstanding Securities of any series may on behalf of
the Holders of all the Securities of such series and any coupons appertaining
thereto waive any past default hereunder with respect to such series and its
consequences, except a default:
48
<PAGE>
(1) in the payment of the principal of (or premium or Make-Whole
Amount, if any, on) or interest or Additional Amounts, if any, on any
Security of such series or any coupons appertaining thereto, or
(2) in respect of a covenant or provision hereof which under Article
Nine cannot be modified or amended without the consent of the Holder of
each Outstanding Security of such series affected thereby.
Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
default or Event of Default or impair any right resulting therefrom.
SECTION 514. Waiver of Usury, Stay or Extension Laws. The Company covenants
---------------------------------------
(to the extent which it may lawfully do so) that it shall not at any time insist
on, or plead, or in any manner whatsoever claim or take the benefit or advantage
of, any usury, stay or extension law wherever enacted, now or at any time
hereafter in force, which may affect the covenants or the performance of this
Indenture; and the Company (to the extent which it may lawfully do so) hereby
expressly waives all benefit or advantage of any such law, and covenants that it
shall not hinder, delay or impede the execution of any power herein granted to
the Trustee, but shall suffer and permit the execution of every such power as
though no such law had been enacted.
SECTION 515. Undertaking for Costs. All parties to this Indenture agree,
---------------------
and each Holder of any Security by such Holder's acceptance thereof shall be
deemed to have agreed, that any court may in its discretion require, in any suit
for the enforcement of any right or remedy under this Indenture, or in any suit
against the Trustee for any action taken or omitted by it as Trustee, the filing
by any party litigant in such suit of any undertaking to pay the costs of such
suit, and that such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigant in such suit
having due regard to the merits and good faith of the claims or defenses made by
such party litigant; but the provisions of this Section shall not apply to any
suit instituted by the Trustee, to any suit instituted by any Holder, or group
of Holders, holding in the aggregate more than 10% in principal amount of the
Outstanding Securities, or to any suit instituted by any Holder for the
enforcement of the payment of the principal of (or premium or Make-Whole Amount,
if any, on) or interest or Additional Amounts, if any, on any Security on or
after the respective Stated Maturities expressed in such Security (or, in the
case of redemption, on or after the Redemption Date).
ARTICLE SIX
THE TRUSTEE
SECTION 601. Notice of Defaults. Within 90 days after the occurrence of any
------------------
default hereunder with respect to the Securities of any series, the Trustee
shall give to the Holders of the
49
<PAGE>
Securities of such series, in the manner and to the extent provided in Section
313(c) of the Trust Indenture Act, notice of such default hereunder known to the
Trustee, unless such default has been cured or waived; provided, however, that,
-------- -------
except in the case of a default in the payment of the principal of (or premium
or Make-Whole Amount, if any, on) or interest or Additional Amounts, if any, on
any Security of such series, or in the payment of any sinking fund installment
with respect to the Securities of such series, the Trustee shall be protected in
withholding such notice if and so long as Responsible Officers of the Trustee in
good faith determine that the withholding of such notice is in the interests of
the Holders of the Securities and coupons of such series; and provided, further,
-------- -------
that in the case of any default or breach of the character specified in clause
(4) of Section 501 with respect to the Securities of such series and any coupons
appertaining thereto, no such notice to Holders shall be given until at least 60
days after the occurrence thereof. For the purposes of this Section, the term
"default" means any event which is, or after notice or lapse of time or
-------
both would become, an Event of Default with respect to the Securities of
such series.
SECTION 602. Certain Rights of Trustee. Subject to the provisions of
-------------------------
Section 315(a) through 315(d) of the Trust Indenture Act:
(1) the Trustee shall perform only such duties as are expressly
undertaken by it to perform under this Indenture;
(2) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, coupon or other paper or document believed by it to
be genuine and to have been signed or presented by the proper party or
parties;
(3) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order (other than
delivery of any Security, together with any coupons appertaining thereto,
to the Trustee for authentication and delivery pursuant to Section 303,
which shall be sufficiently evidenced as provided therein) and any
resolution of the Board of Directors shall be sufficiently evidenced by a
Board Resolution;
(4) whenever, in the administration of this Indenture, the Trustee
deems it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other
evidence is specifically prescribed herein) may, in the absence of bad
faith on its part, rely on a Company Certificate;
(5) the Trustee may consult with counsel and the advice of such
counsel or any Opinion of Counsel shall be full and complete authorization
and protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon;
50
<PAGE>
(6) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction
of any of the Holders of Securities of any series or any coupons
appertaining thereto pursuant to this Indenture, unless such Holders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with
such request or direction;
(7) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, coupon or other paper or document, but the Trustee,
in its discretion, may make such further inquiry or investigation into such
facts or matters as it may see fit, and, if the Trustee determines to make
such further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Company, personally or by agent or
attorney;
(8) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by
it hereunder;
(9) the Trustee shall not be liable for any action taken, suffered or
omitted by it in good faith and reasonably believed by it to be authorized
or within the discretion or rights or powers conferred on it by this
Indenture;
(10) The Trustee shall not be deemed to have knowledge of any event or
fact upon the occurrence of which it may be required to take action
hereunder unless a Responsible Officer of the Trustee has actual knowledge
of the occurrence of such event or fact; and
(11) The Trustee shall not be required to expend or risk its own funds
or otherwise incur any financial liability in the performance of any of its
duties hereunder, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured
to it.
SECTION 603. Not Responsible for Recitals or Issuance of Securities. The
------------------------------------------------------
recitals contained herein and in the Securities, except the Trustee's
certificate of authentication, and in any coupons shall be taken as the
statements of the Company and neither the Trustee nor any Authenticating Agent
assumes any responsibility for their correctness. The Trustee makes no
representations as to the validity or sufficiency of this Indenture or of the
Securities or any coupons, except that the Trustee represents that it is duly
authorized to execute and deliver this Indenture, authenticate the Securities
and perform its obligations hereunder. Neither the Trustee
51
<PAGE>
nor any Authenticating Agent shall be accountable for the use or application by
the Company of Securities or the proceeds thereof.
SECTION 604. May Hold Securities. The Trustee, any Paying Agent, Security
-------------------
Registrar, Authenticating Agent or any other agent of the Company, in its
individual or any other capacity, may become the owner or pledgee of Securities
and coupons and, subject to Sections 310(b) and 311 of the Trust Indenture Act,
may otherwise deal with the Company with the same rights it would have if it
were not Trustee, Paying Agent, Security Registrar, Authenticating Agent or such
other agent.
SECTION 605. Money Held in Trust; Permitted Investments. Money held by the
------------------------------------------
Trustee in trust hereunder need not be segregated from other funds except to the
extent required by law. The Trustee shall be under no liability for interest on,
or investment of, any money received by it hereunder except as otherwise agreed
with and for the sole benefit of the Company.
Pending their use under this Indenture, moneys held by the Trustee
hereunder may be invested in Permitted Investments maturing or redeemable at the
option of the holder at or before the time when such moneys are expected to be
needed by the Trustee and shall be so invested pursuant to a Company Order if no
Event of Default known to the Trustee then exists under this Indenture and
otherwise at the discretion of the Trustee. Any investment pursuant to this
Section 605 shall be held by the Trustee as a part of the moneys held by the
Trustee hereunder, as applicable, and shall be sold or redeemed to the extent
necessary to make payments or transfers or anticipated payments from such
moneys.
The Trustee shall be entitled to rely on all written investment
instructions provided by the Company hereunder, and shall have no duty to
monitor the compliance thereof with the restrictions set forth herein. The
Trustee shall have no responsibility or liability for any depreciation in the
value of any investment or for any loss, direct or indirect, resulting from any
investment made in accordance with a Company Order. The Trustee shall be without
liability to the Company or any Holder or any other person in the event that any
investment made in accordance with a Company Order shall cause any person to
incur any liability or rebates or other monies payable pursuant to the Internal
Revenue Code of 1986, as amended.
Any interest realized on investments and any profit realized upon the sale
or other disposition thereof shall be credited to moneys held by the Trustee
hereunder and any loss shall be charged thereto.
SECTION 606. Compensation and Reimbursement. The Company agrees:
------------------------------
(1) to pay to the Trustee from time to time reasonable compensation
for all services rendered by it hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee
of an express trust);
52
<PAGE>
(2) except as otherwise expressly provided herein, to reimburse each
of the Trustee and any predecessor Trustee upon its request for all
reasonable expenses, disbursements and advances incurred or made by it in
connection with its administration of the trust hereunder (including the
reasonable compensation and the expenses and disbursements of its agents
and counsel), except to the extent any such expense, disbursement or
advance may be attributable to its negligence or bad faith; and
(3) to indemnify each of the Trustee and any predecessor Trustee for,
and to hold it harmless against, any loss, liability or expense, arising
out of or in connection with the acceptance or administration of the trust
or trusts or the performance of its duties hereunder, including the costs
and expenses of defending itself against any claim or liability in
connection with the exercise or performance of any of its powers or duties
hereunder except to the extent any such loss, liability or expense may be
attributable to its own negligence or bad faith.
As security for the performance of the obligations of the Company under
this Section, the Trustee shall have a lien prior to the Securities on all
property and funds held or collected by the Trustee as such, except funds held
in trust for the payment of principal of (or premium or Make-Whole Amount, if
any, on) or interest or Additional Amounts, if any, on particular Securities or
any coupons.
The provisions of this Section shall survive the termination of this
Indenture.
SECTION 607. Trustee Eligibility; Conflicting Interests. There shall at all
------------------------------------------
times be a Trustee hereunder which is eligible to act as Trustee under Section
310(a)(1) of the Trust Indenture Act and has a combined capital and surplus of
at least $50,000,000. If such Trustee publishes reports of condition at least
annually, pursuant to law or the requirements of Federal, State, Territorial or
District of Columbia supervising or examining authority, then for the purposes
of this Section, the combined capital and surplus of such Trustee shall be
deemed to be its combined capital and surplus as set forth in its most recent
report of condition so published. No obligor on the Securities or Affiliate of
any such obligor shall serve as Trustee on such Securities. If at any time the
Trustee ceases to be eligible in accordance with the provisions of this Section,
it shall resign immediately in the manner and with the effect hereinafter
specified in this Article.
SECTION 608. Resignation and Removal; Appointment of Successor.
-------------------------------------------------
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of Section 609.
53
<PAGE>
(b) The Trustee may resign at any time with respect to the Securities
of one or more series by giving written notice thereof to the Company. If
an instrument of acceptance by a successor Trustee has not been delivered
to the Trustee within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time with respect to the
Securities of any series by Act of the Holders of a majority in principal
amount of the Outstanding Securities of such series delivered to the
Trustee and the Company.
(d) If at any time:
(1) the Trustee fails to comply with the provisions of Section
310(b) of the Trust Indenture Act after written request therefor by
the Company or any Holder of a Security who has been a bona fide
Holder of a Security for at least six months, or
(2) the Trustee ceases to be eligible under Section 607 and fails
to resign after written request therefor by the Company or any Holder
of a Security who has been a bona fide Holder of a Security for at
least six months, or
(3) the Trustee becomes incapable of acting or is adjudged a
bankrupt or insolvent or a receiver of the Trustee or of its property
is appointed or any public officer takes charge or control of the
Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company, by or pursuant to a Board
Resolution, may remove the Trustee and appoint a successor Trustee with
respect to all Securities, or (ii) subject to Section 315(e) of the Trust
Indenture Act, any Holder of a Security who has been a bona fide Holder of
a Security for at least six months may, on behalf of such Holder and all
others similarly situated, petition any court of competent jurisdiction for
the removal of the Trustee with respect to all Securities and the
appointment of a successor Trustee or Trustees.
(e) If the Trustee resigns, is removed or becomes incapable of acting,
or if a vacancy occurs in the office of Trustee for any cause with respect
to the Securities of one or more series, the Company, by or pursuant to a
Board Resolution, shall promptly appoint a successor Trustee or Trustees
with respect to the Securities of such series (it being understood that any
such successor Trustee may be appointed with respect to the Securities of
one or more or all of such series and that at any time there shall be only
one Trustee with respect to the Securities of any particular series). If,
within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor
54
<PAGE>
Trustee with respect to the Securities of any series is appointed by Act of
the Holders of a majority in principal amount of the Outstanding Securities
of such series delivered to the Company and the retiring Trustee, the
successor Trustee so appointed shall, forthwith upon its acceptance of such
appointment, become the successor Trustee with respect to the Securities of
such series and to that extent supersede the successor Trustee appointed by
the Company. If no successor Trustee with respect to the Securities of any
series has been so appointed by the Company or the Holders of Securities
and accepted appointment in the manner hereinafter provided, any Holder of
a Security who has been a bona fide Holder of a Security of such series for
at least six months may, on behalf of such Holder and all others similarly
situated, petition any court of competent jurisdiction for the appointment
of a successor Trustee with respect to Securities of such series.
(f) The Company shall give notice of each resignation and each removal
of the Trustee with respect to the Securities of any series and each
appointment of a successor Trustee with respect to the Securities of any
series in the manner provided for notices to the Holders of Securities in
Section 106. Each notice shall include the name of the successor Trustee
with respect to the Securities of such series and the address of its
Corporate Trust Office.
SECTION 609 Acceptance of Appointment by Successor.
--------------------------------------
(a) In case of the appointment hereunder of a successor Trustee with
respect to all Securities, every such successor Trustee shall execute,
acknowledge and deliver to the Company and the retiring Trustee an
instrument accepting such appointment, and, thereupon, the resignation or
removal of the retiring Trustee shall become effective and such successor
Trustee, without any further act, deed or conveyance, shall become vested
with all the rights, powers, trusts and duties of the retiring Trustee;
but, on request of the Company or the successor Trustee, such retiring
Trustee shall, upon payment of its charges, execute and deliver an
instrument transferring to such successor Trustee all the rights, powers
and trusts of the retiring Trustee, and shall duly assign, transfer and
deliver to such successor Trustee all property and money held by such
retiring Trustee hereunder, subject nevertheless to its claim, if any,
provided for in Section 606.
(b) In case of the appointment hereunder of a successor Trustee with
respect to the Securities of one or more (but not all) series, the Company,
the retiring Trustee and each successor Trustee with respect to the
Securities of one or more series shall execute and deliver an indenture
supplemental hereto, pursuant to Article Nine, wherein each successor
Trustee shall accept such appointment and which (i) shall contain such
provisions as are necessary or desirable to transfer and confirm to, and to
vest in, each successor Trustee all the rights, powers, trusts and duties
of the retiring Trustee with respect to the Securities of such series to
which the appointment of such successor Trustee relates, (ii) if the
retiring Trustee is not retiring with respect to all Securities, shall
contain
55
<PAGE>
such provisions as are necessary or desirable to confirm that all the
rights, powers, trusts and duties of the retiring Trustee with respect to
the Securities of such series as to which the retiring Trustee is not
retiring shall continue to be vested in the retiring Trustee and (iii)
shall add to or change any of the provisions of this Indenture as are
necessary to provide for or facilitate the administration of the trusts
hereunder by more than one Trustee, it being understood that nothing herein
or in such supplemental indenture shall constitute such Trustees co-
trustees of the same trust and that each such Trustee shall be trustee of a
trust or trusts hereunder separate and apart from any trust or trusts
hereunder administered by any other such Trustee; and, upon the execution
and delivery of such supplemental indenture, the resignation or removal of
the retiring Trustee shall become effective to the extent provided therein
and each such successor Trustee, without any further act, deed or
conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee with respect to the Securities of such
series to which the appointment of such successor Trustee relates; but, on
request of the Company or any successor Trustee, such retiring Trustee
shall duly assign, transfer and deliver to such successor Trustee all
property and money held by such retiring Trustee hereunder with respect to
the Securities of such series to which the appointment of such successor
Trustee relates.
(c) Upon request of any such successor Trustee, the Company shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Trustee all such rights, powers and trusts
referred to in paragraph (a) or (b) of this Section, as the case may be.
(d) No successor Trustee shall accept its appointment unless at the
time of such acceptance such successor Trustee shall be qualified and
eligible under this Article.
SECTION 610 Merger, Conversion, Consolidation or Succession to Business.
-----------------------------------------------------------
Any corporation into which the Trustee may be merged or converted or with which
it may be consolidated, or any corporation resulting from any merger, conversion
or consolidation to which the Trustee shall be a party, or any corporation
succeeding to all or substantially all of the corporate trust business of the
Trustee, shall be the successor of the Trustee hereunder, provided that such
--------
corporation shall be otherwise qualified and eligible under this Article,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Securities or coupons have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Securities or coupons so authenticated with
the same effect as if such successor Trustee had itself authenticated such
Securities or coupons. In case any Securities or coupons have not been
authenticated by such predecessor Trustee, any such successor Trustee may
authenticate and deliver such Securities or coupons, in either its own name or
that of its predecessor Trustee, with the full force and effect which this
Indenture provides for the certificate of authentication of the Trustee.
56
<PAGE>
SECTION 611 Appointment of Authenticating Agent. At any time when any of
-----------------------------------
the Securities remain Outstanding, the Trustee may appoint an Authenticating
Agent or Agents with respect to one or more series of Securities which shall be
authorized to act on behalf of the Trustee to authenticate Securities of such
series issued upon exchange, registration of transfer or partial redemption or
repayment thereof, and Securities so authenticated shall be entitled to the
benefits of this Indenture and shall be valid and obligatory for all purposes as
if authenticated by the Trustee hereunder. Any such appointment shall be
evidenced by an instrument in writing signed by a Responsible Officer of the
Trustee, a copy of which instrument shall be promptly furnished to the Company.
Whenever reference is made in this Indenture to the authentication and delivery
of Securities by the Trustee or the Trustee's certificate of authentication,
such reference shall be deemed to include authentication and delivery on behalf
of the Trustee by an Authenticating Agent and a certificate of authentication
executed on behalf of the Trustee by an Authenticating Agent. Each
Authenticating Agent shall be acceptable to the Company and, except as may
otherwise be provided pursuant to Section 301, shall at all times be a bank or
trust company or corporation organized and doing business and in good standing
under the laws of the United States of America or of any State or the District
of Columbia, authorized under such laws to act as Authenticating Agent, having a
combined capital and surplus of not less than $50,000,000 and subject to
supervision or examination by Federal or State or District of Columbia
authorities. If such Authenticating Agent publishes reports of condition at
least annually, pursuant to law or the requirements of the aforesaid supervising
or examining authority, then for the purposes of this Section, the combined
capital and surplus of such Authenticating Agent shall be deemed to be its
combined capital and surplus as set forth in its most recent report of condition
so published. In case at any time an Authenticating Agent ceases to be eligible
in accordance with the provisions of this Section, such Authenticating Agent
shall resign immediately in the manner and with the effect specified in this
Section.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
is a party, or any corporation succeeding to the corporate agency or corporate
trust business of an Authenticating Agent, shall continue to be an
Authenticating Agent, provided such corporation is otherwise eligible under this
Section, without the execution or filing of any paper or further act on the part
of the Trustee or the Authenticating Agent.
An Authenticating Agent for any series of Securities may at any time resign
by giving written notice of resignation to the Trustee for such series and the
Company. The Trustee for any series of Securities may at any time terminate the
agency of an Authenticating Agent by giving written notice of termination to
such Authenticating Agent and the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent ceases to be eligible in accordance with the provisions of
this Section, the Trustee for such series may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall give notice of such
appointment to all Holders of Securities of or within the series with
57
<PAGE>
respect to which such Authenticating Agent will serve in the manner set forth in
Section 106. Any successor Authenticating Agent upon acceptance of its
appointment hereunder shall become vested with all the rights, powers and duties
of its predecessor hereunder, with like effect as if originally named as an
Authenticating Agent herein. No successor Authenticating Agent shall be
appointed unless eligible under the provisions of this Section.
The Company agrees to pay to each Authenticating Agent from time to time
reasonable compensation including reimbursement of its reasonable expenses for
its services under this Section.
If an appointment with respect to one or more series is made pursuant to
this Section, the Securities of such series may have endorsed thereon, in
addition to or in lieu of the Trustee's certificate of authentication, an
alternate certificate of authentication substantially in the following form:
This is one of the Securities of the series designated therein
referred to in the within-mentioned Indenture.
STATE STREET BANK AND TRUST
COMPANY,
as Trustee
By: ,
as Authenticating Agent
By:
Authorized Officer
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 701 Disclosure of Names and Addresses of Holders. Every Holder of
--------------------------------------------
Securities or coupons, by receiving and holding the same, agrees with the
Company and the Trustee that neither the Company nor the Trustee nor any
Authenticating Agent nor any Paying Agent nor any Security Registrar shall be
held accountable by reason of the disclosure of any information as to the names
and addresses of the Holders of Securities in accordance with Section 312 of the
Trust Indenture Act, regardless of the source from which such information was
derived, and that the Trustee shall not be held accountable by reason of mailing
any material pursuant to a request made under Section 312(b) of the Trust
Indenture Act.
58
<PAGE>
SECTION 702 Reports by Trustee. Within 60 days after February 1 of each
------------------
year commencing with the first February 1 after the first issuance of Securities
pursuant to this Indenture, the Trustee shall transmit by mail to all Holders of
Securities as provided in Section 313(c) of the Trust Indenture Act a brief
report dated as of such February 1 if required by Section 313(a) of the Trust
Indenture Act.
SECTION 703 Company to Furnish Trustee Names and Addresses of Holders. The
---------------------------------------------------------
Company shall furnish or cause to be furnished to the Trustee:
(a) semi-annually, not later than 15 days after the Regular Record
Date for interest for each series of Securities, a list, in such form as
the Trustee may reasonably require, of the names and addresses of the
Holders of Registered Securities of such series as of such Regular Record
Date, or if there is no Regular Record Date for interest for such series of
Securities, semi-annually, on such dates as are set forth in the Board
Resolution or indenture supplemental hereto authorizing such series, and
(b) at such other times as the Trustee may request in writing, within
30 days after the receipt by the Company of any such request, a list of
similar form and content as of a date not more than 15 days prior to the
time such list is furnished;
provided, however, that, so long as the Trustee is the Security Registrar, no
- -------- -------
such list shall be required to be furnished.
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE, LEASE OR CONVEYANCE
SECTION 801 Consolidations and Mergers of Company and Sales, Leases and
-----------------------------------------------------------
Conveyances. The Company will not consolidate or merge with or into (whether or
- -----------
not the Company is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions, to another Person unless (i) the
surviving Person or the Person formed by or surviving such consolidation or
merger (if other than the Company) or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made (the "Surviving
Entity") is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the Surviving Entity
assumes all the obligations, including the due and punctual payment of the
principal of (and premium or Make-Whole Amount, if any, on) and interest and
Additional Amounts, if any, on all Securities, according to their tenor, and the
due and punctual performance and observance of all covenants and conditions, of
the Company under the Securities and the Indenture pursuant to a supplemental
Indenture in form reasonably satisfactory to the Trustee; and (iii) immediately
before and after giving effect to such transaction and treating any indebtedness
which becomes an obligation of the Company as a result of such transaction as
having been incurred by the Company at the time of the transaction, no Event of
59
<PAGE>
Default and no event which, after notice or the lapse of time or both, would
become an Event of Default shall have occurred and be continuing.
SECTION 802 Rights and Duties of Successor Entity. In case of any such
-------------------------------------
consolidation, merger, sale, lease or conveyance and upon any such assumption by
the successor entity, such successor entity shall succeed to and be substituted
for the Company, with the same effect as if it had been named herein as the
party of the first part, and the predecessor entity, except in the event of a
lease, shall be relieved of any further obligation under this Indenture and the
Securities. Such successor entity thereupon may cause to be signed, and may
issue either in its own name or in the name of the Company, any or all of the
Securities issuable hereunder which theretofore have not been signed by the
Company and delivered to the Trustee; and, upon the order of such successor
entity, instead of the Company, and subject to all the terms, conditions and
limitations in this Indenture prescribed, the Trustee shall authenticate and
shall deliver any Securities which previously have been signed and delivered by
the officers of the Company to the Trustee for authentication, and any
Securities which such successor entity thereafter shall cause to be signed and
delivered to the Trustee for that purpose. All the Securities so issued shall in
all respects have the same legal rank and benefit under this Indenture as the
Securities theretofore or thereafter issued in accordance with the terms of this
Indenture as though all of such Securities had been issued at the date of the
execution hereof.
In case of any such consolidation, merger, sale, lease or conveyance, such
changes in phraseology and form (but not in substance) may be made in the
Securities thereafter to be issued as may be appropriate.
SECTION 803 Company Certificate and Opinion of Counsel. Any consolidation,
------------------------------------------
merger, sale, lease or conveyance permitted under Section 801 is also subject to
the condition that the Trustee receive a Company Certificate and an Opinion of
Counsel to the effect that any such consolidation, merger, sale, lease or
conveyance, and the assumption by any successor entity, complies with the
provisions of this Article and that all conditions precedent herein provided for
relating to such transaction have been complied with.
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901 Supplemental Indentures Without Consent of Holders. Without
--------------------------------------------------
the consent of any Holders of Securities or coupons, the Company, when
authorized by or pursuant to a Board Resolution, and the Trustee, at any time
and from time to time, may enter into one or more indentures supplemental
hereto, in form satisfactory to the Trustee, for any of the following purposes:
60
<PAGE>
(1) to evidence the succession of another Person to the Company and
the assumption by any such successor of the covenants of the Company
contained herein and in the Securities; or
(2) to add to the covenants of the Company for the benefit of the
Holders of all or any series of Securities (and if such covenants are to be
for the benefit of less than all series of Securities, stating that such
covenants are expressly being included solely for the benefit of such
series) or to surrender any right or power herein conferred on the Company;
or
(3) to add any additional Events of Default for the benefit of the
Holders of all or any series of Securities (and if such Events of Default
are to be for the benefit of less than all series of Securities, stating
that such Events of Default are expressly being included solely for the
benefit of such series); provided, however, that, in respect of any such
-------- -------
additional Events of Default, such supplemental indenture may provide for a
particular period of grace after default (which period may be shorter or
longer than that allowed in the case of other defaults) or may provide for
an immediate enforcement upon such default or may limit the remedies
available to the Trustee upon such default or may limit the right of the
Holders of a majority in aggregate principal amount of such series of
Securities to which such additional Events of Default apply to waive such
default; or
(4) to add to or change any of the provisions of this Indenture to
provide that Bearer Securities may be registrable as to principal, to
change or eliminate any restrictions on the payment of the principal of (or
premium or Make-Whole Amount, if any, on) or interest or Additional
Amounts, if any, on Bearer Securities, to permit Bearer Securities to be
issued in exchange for Registered Securities, to permit Bearer Securities
to be issued in exchange for Bearer Securities of other authorized
denominations or to permit or facilitate the issuance of Securities in
uncertificated form, provided that any such action shall not adversely
--------
affect the interests of the Holders of Securities of any series or any
coupons appertaining thereto in any material respect; or
(5) to change or eliminate any of the provisions of this Indenture,
provided that any such change or elimination shall become effective only
--------
when there is no Security Outstanding of any series created prior to the
execution of such supplemental indenture which is entitled to the benefit
of such provision; or
(6) to secure the Securities; or
(7) to establish the form or terms of Securities of any series and any
coupons appertaining thereto as permitted by Sections 201 and 301,
including the provisions and procedures, if applicable, for the conversion
of such Securities into Common Shares or other securities of the Company;
or
61
<PAGE>
(8) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Securities of one or
more series and to add to or change any of the provisions of this Indenture
as are necessary to provide for or facilitate the administration of the
trusts hereunder by more than one Trustee; or
(9) to cure any ambiguity, to correct or supplement any provision
hereof which may be defective or inconsistent with any other provision
hereof, or to make any other provisions with respect to matters or
questions arising under this Indenture which shall not be inconsistent with
the provisions of this Indenture or to make any other changes, provided
--------
that, in each case, such provisions shall not adversely affect the
interests of the Holders of Securities of any series or any coupons
appertaining thereto in any material respect; or
(10) to close this Indenture with respect to the authentication and
delivery of additional series of Securities or to qualify, or maintain
qualification of, this Indenture under the Trust Indenture Act; or
(11) to supplement any of the provisions of this Indenture to such
extent as are necessary to permit or facilitate the defeasance and
discharge of any series of Securities pursuant to Sections 401, 1402 and
1403; provided that, in each case, any such action shall not adversely
--------
affect the interests of the Holders of Securities of such series and any
coupons appertaining thereto or any other series of Securities in any
material respect.
SECTION 902 Supplemental Indentures with Consent of Holders. With the
-----------------------------------------------
consent of the Holders of not less than a majority in principal amount of all
Outstanding Securities affected by such supplemental indenture, by Act of such
Holders delivered to the Company and the Trustee, the Company (when authorized
by or pursuant to a Board Resolution) and the Trustee may enter into an
indenture or indentures supplemental hereto for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Indenture or of modifying in any manner the rights of the Holders of
Securities and coupons under this Indenture; provided, however, that no such
-------- -------
supplemental indenture shall, without the consent of the Holder of each
Outstanding Security affected thereby:
(1) change the Stated Maturity of the principal of (or premium or
Make-Whole Amount, if any, on) or any installment of principal of or
interest on, any Security; or reduce the principal amount thereof or the
rate or amount of interest thereon or any Additional Amounts payable in
respect thereof, or any premium or Make-Whole Amount payable upon the
redemption thereof, or change any obligation of the Company to pay
Additional Amounts pursuant to Section 1010 (except as contemplated by
clause (1) of Section 801 and permitted by clause (1) of Section 901), or
reduce the amount of the principal of an Original Issue Discount Security
or Make-Whole Amount, if any, which would be due and payable upon a
declaration of acceleration of the Maturity thereof
62
<PAGE>
pursuant to Section 502 or the amount thereof provable in bankruptcy
pursuant to Section 504; or adversely affect any right of repayment at the
option of the Holder of any Security, or change any Place of Payment where,
or the currency or currencies, currency unit or units or composite currency
or currencies in which, the principal of any Security or any premium or
Make-Whole Amount or any Additional Amounts payable in respect thereof or
the interest thereon is payable; or impair the right to institute suit for
the enforcement of any such payment on or after the Stated Maturity thereof
(or, in the case of redemption or repayment at the option of the Holder, on
or after the Redemption Date or the Repayment Date, as the case may be); or
(2) reduce the percentage in principal amount of the Outstanding
Securities of any series, the consent of the Holders of which is required
for any such supplemental indenture, or the consent of the Holders of which
is required for any waiver with respect to such series (or compliance with
certain provisions of this Indenture or certain defaults hereunder and
their consequences) provided for in this Indenture, or reduce the
requirements of Section 1504 for quorum or voting; or
(3) modify any of the provisions of this Section, Section 513 or
Section 1011, except to increase the required percentage to effect such
action or to provide that certain other provisions of this Indenture cannot
be modified or waived without the consent of the Holder of each Outstanding
Security affected thereby.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act approves the substance thereof.
A supplemental indenture which changes or eliminates any covenant or other
provision of this Indenture which has expressly been included for the benefit of
one or more particular series of Securities, or which modifies the rights of the
Holders of Securities of such series with respect to such covenant or other
provision, shall be deemed not to affect the rights under this Indenture of the
Holders of Securities of any other series.
SECTION 903 Execution of Supplemental Indentures. In executing, or
------------------------------------
accepting the additional trusts created by, any supplemental indenture permitted
by this Article or the modification thereby of the trusts created by this
Indenture, the Trustee shall be entitled to receive, and shall be fully
protected in relying on, an Opinion of Counsel stating that the execution of
such supplemental indenture is authorized or permitted by this Indenture. The
Trustee may, but shall not be obligated to, enter into any such supplemental
indenture which affects the Trustee's own rights, duties or immunities under
this Indenture or otherwise.
SECTION 904 Effect of Supplemental Indentures. Upon the execution of any
---------------------------------
supplemental indenture under this Article, this Indenture shall be modified in
accordance
63
<PAGE>
therewith, and such supplemental indenture shall form a part of this Indenture
for all purposes; and every Holder of Securities theretofore or thereafter
authenticated and delivered hereunder and of any coupon appertaining thereto
shall be bound thereby.
SECTION 905 Conformity with Trust Indenture Act. Every supplemental
-----------------------------------
indenture executed pursuant to this Article shall conform to the requirements of
the Trust Indenture Act as then in effect.
SECTION 906 Reference in Securities to Supplemental Indentures. Securities
--------------------------------------------------
of any series authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall, if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company so determines, new
Securities of any series so modified as to conform, in the opinion of the
Trustee and the Company, to any such supplemental indenture may be prepared and
executed by the Company and authenticated and delivered by the Trustee in
exchange for Outstanding Securities of such series.
SECTION 907 Notice of Supplemental Indentures. Promptly after the
---------------------------------
execution by the Company and the Trustee of any supplemental indenture pursuant
to the provisions of Section 902, the Company shall give notice thereof to the
Holders of each Outstanding Security affected, in the manner provided for in
Section 106, setting forth in general terms the substance of such supplemental
indenture.
ARTICLE TEN
COVENANTS
SECTION 1001. Payment of Principal, Premium or Make-Whole Amount, Interest
------------------------------------------------------------
and Additional Amounts. The Company covenants and agrees for the benefit of the
- ----------------------
Holders of each series of Securities that it shall duly and punctually pay to
the Trustee prior to 12:00 noon on the applicable date of payment the principal
of (and premium or Make-Whole Amount, if any, on) and interest and Additional
Amounts, if any, on the Securities of such series in accordance with the terms
of such series of Securities, any coupons appertaining thereto and this
Indenture. Unless otherwise specified as contemplated by Section 301 with
respect to any series of Securities, any interest and Additional Amounts, if
any, on Bearer Securities on or before Maturity, other than Additional Amounts,
if any, payable as provided in Section 1010 in respect of principal of (or
premium or Make-Whole Amount, if any, on) such a Security, shall be payable only
upon presentation and surrender of the several coupons for such interest
installments as are evidenced thereby as they severally mature. Unless otherwise
specified with respect to Securities of any series pursuant to Section 301, at
the option of the Company, all payments of principal may be paid by check to the
registered Holder of the Registered Security or other person entitled thereto
against surrender of such Security.
64
<PAGE>
SECTION 1002. Maintenance of Office or Agency. If Securities of a series are
-------------------------------
issuable only as Registered Securities, the Company shall maintain in each Place
of Payment for any series of Securities an office or agency where Securities of
such series may be presented or surrendered for payment, where Securities of
such series may be surrendered for registration of transfer or exchange and
where notices and demands to or on the Company in respect of the Securities of
such series and this Indenture may be served. If Securities of a series are
issuable as Bearer Securities, the Company shall maintain: (i) in the city of
[Boston, Massachusetts], an office or agency where any Registered Securities of
such series may be presented or surrendered for payment, where any Registered
Securities of such series may be surrendered for exchange, where notices and
demands to or on the Company in respect of the Securities of such series and
this Indenture may be served and where Bearer Securities of such series and any
coupons appertaining thereto may be presented or surrendered for payment in the
circumstances described in the following paragraph (and not otherwise); (ii)
subject to any laws or regulations applicable thereto, in a Place of Payment for
such series which is located outside the United States, an office or agency
where Securities of such series and any coupons appertaining thereto may be
presented and surrendered for payment (including payment of any Additional
Amounts payable on Securities of such series pursuant to Section 1010);
provided, however, that if the Securities of such series are listed on the
- -------- -------
Luxembourg Stock Exchange, The International Stock Exchange or any other stock
exchange located outside the United States and such stock exchange so requires,
the Company shall maintain a Paying Agent for the Securities of such series in
Luxembourg, London or any other required city located outside the United States,
as the case may be, so long as the Securities of such series are listed on such
exchange; and (iii) subject to any laws or regulations applicable thereto, in a
Place of Payment for such series located outside the United States an office or
agency where any Securities of such series may be surrendered for registration
of transfer, where Securities of such series may be surrendered for exchange and
where notices and demands to or on the Company in respect of the Securities of
such series and this Indenture may be served. The Company shall give prompt
written notice to the Trustee of the location, and any change in the location,
of each such office or agency. If at any time the Company fails to maintain any
such required office or agency or fails to furnish the Trustee with the address
thereof, such presentations, surrenders, notices and demands may be made or
served at the Corporate Trust Office of the Trustee, except that Bearer
Securities of such series and the related coupons may be presented and
surrendered for payment (including payment of any Additional Amounts payable on
Bearer Securities of such series pursuant to Section 1010) at the offices
specified in the Security, in London, England, and the Company hereby appoints
the same as its agent to receive all such presentations, surrenders, notices and
demands, and the Company hereby appoints the Trustee as its agent to receive all
such presentations, surrenders, notices and demands.
Unless otherwise specified with respect to any Securities pursuant to
Section 301, no payment of the principal of (or premium or Make-Whole Amount, if
any, on) or interest or Additional Amounts, if any, on Bearer Securities shall
be made at any office or agency of the Company in the United States or by check
mailed to any address in the United States or by transfer to an account
maintained with a bank located in the United States; provided, however,
-------- -------
65
<PAGE>
that, if the Securities of a series are payable in Dollars, payment of the
principal of (and premium and Make-Whole Amount, if any, on) and interest and
Additional Amounts; if any, on any Bearer Security shall be made at the office
of the Company's Paying Agent in the city of Boston, Massachusetts if (but only
if) payment in Dollars of the full amount of such principal, premium, Make-Whole
Amount, interest or Additional Amounts, as the case may be, at all offices or
agencies outside the United States maintained for the purpose by the Company in
accordance with this Indenture, is illegal or effectively precluded by exchange
controls or other similar restrictions.
The Company may from time to time designate one or more other offices or
agencies where the Securities of one or more series and any coupons appertaining
thereto may be presented or surrendered for any or all of such purposes, and may
from time to time rescind such designations; provided, however, that no such
-------- -------
designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency in accordance with the requirements
set forth above for Securities of any series for such purposes. The Company
shall give prompt written notice to the Trustee of any such designation or
rescission and of any change in the location of any such other office or agency.
Unless otherwise specified with respect to any Securities pursuant to Section
301, the Company hereby designates as a Place of Payment for each series of
Securities the office or agency of the Company in the city of Boston,
Massachusetts, and initially appoints the Trustee at its Corporate Trust Office
as Paying Agent in such city and as its agent to receive all such presentations,
surrenders, notices and demands.
Unless otherwise specified with respect to any Securities pursuant to
Section 301, if and so long as the Securities of any series (i) are denominated
in a Foreign Currency or (ii) may be payable in a Foreign Currency, or so long
as it is required under any other provision of the Indenture, then the Company
shall maintain with respect to each such series of Securities, or as so
required, at least one exchange rate agent.
SECTION 1003. Money for Securities Payments to Be Held in Trust. If the
-------------------------------------------------
Company at any time acts as its own Paying Agent with respect to any series of
any Securities and any coupons appertaining thereto, it shall, on or before each
due date of the principal of (and premium or Make-Whole Amount, if any, on) or
interest or Additional Amounts, if any, on any of the Securities of such series,
segregate and hold in trust for the benefit of the Persons entitled thereto a
sum in the currency or currencies, currency unit or units or composite currency
or currencies in which the Securities of such series are payable (except as
otherwise specified pursuant to Section 301 for the Securities of such series)
sufficient to pay the principal (and premium or Make-Whole Amount, if any) or
interest or Additional Amounts, if any, so becoming due until such sums shall be
paid to such Persons or otherwise disposed of as herein provided, and shall
promptly notify the Trustee of its action or failure so to act.
Whenever the Company has one or more Paying Agents for any series of
Securities and any coupons appertaining thereto, it shall, on or before each due
date of the principal of (and premium or Make-Whole Amount, if any, on) or
interest or Additional Amounts, if any, on any
66
<PAGE>
Securities of such series, deposit with a Paying Agent a sum (in the currency or
currencies, currency unit or units or composite currency or currencies described
in the preceding paragraph) sufficient to pay the principal (and premium or
Make-Whole Amount, if any) or interest or Additional Amounts, if any, so
becoming due, such sum to be held in trust for the benefit of the Persons
entitled to such principal, premium, Make-Whole Amount, interest or Additional
Amounts and (unless such Paying Agent is the Trustee) the Company shall promptly
notify the Trustee of its action or failure so to act.
The Company shall cause each Paying Agent other than the Trustee to execute
and deliver to the Trustee an instrument in which such Paying Agent shall agree
with the Trustee, subject to the provisions of this Section, that such Paying
Agent shall:
(1) hold all sums held by it for the payment of principal of (and
premium or Make-Whole Amount, if any, on) or interest or Additional
Amounts, if any, on Securities in trust for the benefit of the Persons
entitled thereto until such sums shall be paid to such Persons or otherwise
disposed of as herein provided;
(2) give the Trustee notice of any default by the Company (or any
other obligor on the Securities) in the making of any such payment of
principal (and premium or Make-Whole Amount, if any) or interest or
Additional Amounts, if any; and
(3) at any time during the continuance of any such default, on the
written request of the Trustee, forthwith pay to the Trustee all sums so
held in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or for any other purpose, pay, or by Company
Order direct any Paying Agent to pay, to the Trustee all sums held in trust by
the Company or such Paying Agent, such sums to be held by the Trustee on the
same trusts as those on which such sums were held by the Company or such Paying
Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying
Agent shall be released from all further liability with respect to such sums.
Except as otherwise provided in the Securities of any series, any money
deposited with the Trustee or any Paying Agent, or then held by the Company, in
trust for the payment of the principal of (and premium or Make-Whole Amount, if
any, on) or interest or Additional Amounts, if any, on any Security of any
series and remaining unclaimed for two years after such principal (and premium
or Make-Whole Amount, if any) interest or Additional Amounts, if any, has become
due and payable shall be paid to the Company upon Company Request or (if then
held by the Company) shall be discharged from such trust; and the Holder of such
Security shall thereafter, as an unsecured general creditor, look only to the
Company for payment of the principal of (and premium or Make-Whole Amount, if
any, on) and interest and any Additional Amounts, if any, on any Security of
such series, without interest thereon, and all liability of the
67
<PAGE>
Trustee or such Paying Agent with respect to such trust money, and all liability
of the Company as trustee thereof, shall thereupon cease; provided, however,
-------- -------
that the Trustee or such Paying Agent, before being required to make any such
repayment, may at the expense of the Company cause to be published once, in an
Authorized Newspaper, notice that such money remains unclaimed and that, after a
date specified therein, which shall not be less than 30 days from the date of
such publication, any unclaimed balance of such money then remaining will be
repaid to the Company.
SECTION 1004. Existence. Subject to Article Eight, the Company shall do or
---------
cause to be done all things necessary to preserve and keep in full force and
effect the existence, rights (charter and statutory) and franchises of the
Company and its Subsidiaries; provided, however, that the Company shall not be
-------- -------
required to preserve any right or franchise if the Board of Directors determines
that the preservation thereof is no longer desirable in the conduct of the
business of the Company and its Subsidiaries as a whole and that the loss
thereof is not disadvantageous in any material respect to the Holders of
Securities of any series.
SECTION 1005. Maintenance of Properties. The Company shall cause all of its
-------------------------
properties used or useful in the conduct of its business or the business of any
Subsidiary to be maintained and kept in good condition, repair and working order
and supplied with all necessary equipment and shall cause to be made all
necessary repairs, renewals, replacements, betterments and improvements thereof,
all as in the judgment of the Company may be necessary so that the business
carried on in connection therewith may be properly and advantageously conducted
at all times; provided, however, that nothing in this Section shall prevent the
-------- -------
Company or any Subsidiary from selling or otherwise disposing for value its
properties in the ordinary course of its business.
SECTION 1006. Insurance. The Company shall, and shall cause each of its
---------
Subsidiaries to, keep all of its insurable properties insured against loss or
damage at least equal to their then full insurable value with financially sound
and reputable insurance companies.
SECTION 1007. Payment of Taxes and Other Claims. The Company shall pay or
---------------------------------
discharge or cause to be paid or discharged, before the same become delinquent,
(i) all taxes, assessments and governmental charges levied or imposed on the
Company or any Subsidiary or on the income, profits or property of the Company
or any Subsidiary and (ii) all lawful claims for labor, materials and supplies
which, if unpaid, might by law become a lien on the property of the Company or
any Subsidiary; provided, however, that the Company shall not be required to pay
-------- -------
or discharge or cause to be paid or discharged any such tax, assessment, charge
or claim whose amount, applicability or validity is being contested in good
faith by appropriate proceedings.
68
<PAGE>
SECTION 1008. Reports.
-------
(1) So long as any Securities of any series are outstanding, the
Company will furnish to Holders of Securities of such series, within 45
days of the filing thereof with the Commission copies of the annual reports
on Form 10-K, within 20 days of the filing thereof with the Commission
copies of the quarterly reports on Form 10-Q and within 15 days after the
filing thereof with the Commission copies of the other information,
documents and other reports (or copies of such portions of any of the
foregoing as the Commission may by rules and regulations prescribe) that
the Company is required to file with the Commission pursuant to Section 13
or 15(d) of the Exchange Act provided that the Company's obligation to
furnish such reports will be deemed satisfied to the extent the Company
complies with Section 1008(2) and (4). All obligors on the Securities shall
comply with the provisions of Section 314(a) of the Trust Indenture Act.
Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act or otherwise report
on an annual and quarterly basis on forms provided for such annual and
quarterly reporting pursuant to rules and regulations promulgated by the
Commission, the Company shall file with the Commission and provide to the
Trustee (i) within 135 days after the end of each fiscal year, annual
reports on Form 10-K (or any successor or comparable form) containing the
information required to be contained therein (or required in such successor
or comparable form), including a "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and a report thereon by the
Company's certified public accountants; (ii) within 65 days after the end
of each of the first three fiscal quarters of each fiscal year, reports on
Form 10-Q (or any successor or comparable form) containing the information
required to be contained therein (or required in any successor or
comparable form), including a "Manage ment's Discussion and Analysis of
Financial Condition and Results of Operations"; and (iii) promptly from
time to time after the occurrence of an event required to be therein
reported, such other reports on Form 8-K (or any successor or comparable
form) containing the information required to be contained therein (or
required in any successor or comparable form); provided, however, that the
Company shall not be in default of the provisions of this Section 1008(1)
for any failure to file reports with the Commission solely by the refusal
of the Commission to accept the same for filing. Each of the financial
statements contained in such reports shall be prepared in accordance with
GAAP.
(2) The Company's obligations under this Section 1008 will be deemed
satisfied to the extent the Company provides the Trustee with a sufficient
number of annual reports, information, documents and reports for the
Trustee to provide or make available such annual reports, information,
documents and reports to the Holders. The Trustee, at the Company's
expense and written direction, shall promptly mail copies of all such
annual reports, information, documents and other reports provided to the
Trustee pursuant to Section 1008(1) hereof to the Holders at their
addresses appearing in the Security Register.
69
<PAGE>
(3) Whether or not required by the rules and regulations of the
Commission, the Company shall file a copy of all such information and
reports with the Commission for public availability and make such
information available to securities analysts and prospective investors upon
request.
(4) The Company shall provide the Trustee with a sufficient number of
copies of all reports and other documents and information which the Trustee
may be required to deliver to the Holders under this Section 1008.
(5) Delivery of such reports, information and documents to the Trustee
is for informational purposes only and the Trustee's receipt of such shall
not constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
SECTION 1009. Statement as to Compliance. The Company shall deliver to the
--------------------------
Trustee, within 135 days after the end of each fiscal year, a brief certificate
from the principal executive officer, principal financial officer or principal
accounting officer as to his or her knowledge of the Company's compliance with
all conditions and covenants under this Indenture verified in the case of
conditions precedent compliance with which is subject to verification by
accountants by the certificate or opinion of an accountant and, in the event of
any noncompliance, specifying such noncompliance and the nature and status
thereof. For purposes of this Section 1009, such compliance shall be determined
without regard to any period of grace or requirement of notice provided under
this Indenture.
SECTION 1010. Additional Amounts. If any Securities of a series provide for
------------------
the payment of Additional Amounts, the Company covenants and agrees for the
benefit of the Holders of Securities of such series that it shall pay to the
Holder of any Security of such series or any coupon appertaining thereto
Additional Amounts as may be specified as contemplated by Section 301. Whenever
in this Indenture there is mentioned, in any context except in the case of
clause (1) of Section 502, the payment of the principal of or of any premium,
Make-Whole Amount or interest on, or in respect of, any Security of any series
or payment of any coupon or the net proceeds received on the sale or exchange of
any Security of any series, such mention shall be deemed to include mention of
the payment of Additional Amounts provided by the terms of such series
established pursuant to Section 301 to the extent that, in such context,
Additional Amounts are, were or would be payable in respect thereof pursuant to
such terms and express mention of the payment of Additional Amounts (if
applicable) in any provisions hereof shall not be construed as excluding
Additional Amounts in those provisions hereof in which such express mention is
not made.
Except as otherwise specified as contemplated by Section 301, if the
Securities of a series provide for the payment of Additional Amounts, at least
10 days prior to the first Interest Payment
70
<PAGE>
Date with respect to Securities of such series (or if the Securities of such
series will not bear interest prior to Maturity, the first day on which a
payment of principal and any premium is made), and at least 10 days prior to
each date of payment of principal and any premium or Make-Whole Amount or
interest, if there has been any change with respect to the matters set forth in
the below-mentioned Company Certificate, the Company shall furnish the Trustee
and the principal Paying Agent or Paying Agents, if other than the Trustee, with
a Company Certificate instructing the Trustee and such Paying Agent or Paying
Agents whether such payment of principal of and any premium or Make-Whole Amount
or interest on the Securities of such series shall be made to Holders of
Securities of such series or any coupons appertaining thereto who are not United
States persons without withholding for or on account of any tax, assessment or
other governmental charge described in the Securities of or within the series.
If any such withholding is required, then such Company Certificate shall specify
by country the amount, if any, required to be withheld on such payments to such
Holders of Securities of such series or any coupons appertaining thereto and the
Company shall pay to the Trustee or such Paying Agent the Additional Amounts
required by the terms of such Securities. In the event that the Trustee or any
Paying Agent, as the case may be, shall not so receive the above-mentioned
certificate, then the Trustee or such Paying Agent shall be entitled (i) to
assume that no such withholding or deduction is required with respect to any
payment of principal or interest with respect to any Securities of such series
or any coupons appertaining thereto until it has received a certificate advising
otherwise and (ii) to make all payments of principal and interest with respect
to the Securities of such series or any coupons appertaining thereto without
withholding or deductions until otherwise advised. The Company covenants to
indemnify the Trustee and any Paying Agent for, and to hold them harmless
against, any loss, liability or expense reasonably incurred without negligence
or bad faith on their part arising out of or in connection with actions taken or
omitted by any of them or in reliance on any Company Certificate furnished
pursuant to this Section or in reliance on the Company's not furnishing such a
Company Certificate.
SECTION 1011. Waiver of Certain Covenants. The Company may omit in any
---------------------------
particular instance to comply with any term, provision or condition set forth in
Sections 1004 to 1008, inclusive, and with any other term, provision or
condition with respect to the Securities of any series specified in accordance
with Section 301 (except any such term, provision or condition which could not
be amended without the consent of all Holders of Securities of such series
pursuant to Section 902), if before or after the time for such compliance the
Holders of at least a majority in principal amount of all outstanding Securities
of such series, by Act of such Holders, either waive such compliance in such
instance or generally waive compliance with such covenant or condition, but no
such waiver shall extend to or affect such covenant or condition except to the
extent so expressly waived, and, until such waiver shall become effective, the
obligations of the Company and the duties of the Trustee in respect of any such
term, provision or condition shall remain in full force and effect.
71
<PAGE>
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
SECTION 1101. Applicability of Article. Securities of any series which are
------------------------
redeemable before their Stated Maturity shall be redeemable in accordance with
their terms and (except as otherwise specified as contemplated by Section 301
for Securities of any series) in accordance with this Article.
SECTION 1102. Election to Redeem; Notice to Trustee. The election of the
-------------------------------------
Company to redeem any Securities shall be evidenced by or pursuant to a Board
Resolution. In case of any redemption at the election of the Company of less
than all of the Securities of any series, the Company shall, at least 30 days
prior to the giving of the notice of redemption in Section 1104 (unless a
shorter notice shall be satisfactory to the Trustee), notify the Trustee of such
Redemption Date and of the principal amount of Securities of such series to be
redeemed. In the case of any redemption of Securities prior to the expiration of
any restriction on such redemption provided in the terms of such Securities or
elsewhere in this Indenture, the Company shall furnish the Trustee with a
Company Certificate evidencing compliance with such restriction.
SECTION 1103. Selection by Trustee of Securities to Be Redeemed. If less
-------------------------------------------------
than all the Securities of any series issued on the same day with the same terms
are to be redeemed, the particular Securities to be redeemed shall be selected
not more than 60 days prior to the Redemption Date by the Trustee, from the
Outstanding Securities of such series issued on such date with the same terms
not previously called for redemption, by such method as the Trustee deems fair
and appropriate and which may provide for the selection for redemption of
portions (equal to the minimum authorized denomination for Securities of such
series or any integral multiple thereof) of the principal amount of Securities
of such series of a denomination larger than the minimum authorized denomination
for Securities of such series.
The Trustee shall promptly notify the Company and the Security Registrar
(if other than itself) in writing of the Securities selected for redemption and,
in the case of any Securities selected for partial redemption, the principal
amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise requires,
all provisions relating to the redemption of Securities shall relate, in the
case of any Security redeemed or to be redeemed only in part, to the portion of
the principal amount of such Security which has been or is to be redeemed.
SECTION 1104. Notice of Redemption. Notice of redemption shall be given in
--------------------
the manner provided in Section 106, not less than 30 days nor more than 60 days
prior to the Redemption Date, unless a shorter period is specified by the terms
of such series established pursuant to Section 301, to each Holder of Securities
to be redeemed, but failure to give such notice in the manner herein provided to
the Holder of any Security designated for redemption as a whole or
72
<PAGE>
in part, or any defect in the notice to any such Holder, shall not affect the
validity of the proceedings for the redemption of any other such Security or
portion thereof.
Any notice which is mailed to the Holders of Registered Securities in the
manner herein provided shall be conclusively presumed to have been duly given,
whether or not the Holder receives the notice.
All notices of redemption shall state:
(1) the Redemption Date;
(2) the Redemption Price, accrued interest to the Redemption Date
payable as provided in Section 1106, if any, and Additional Amounts, if
any;
(3) if less than all Outstanding Securities of any series are to be
redeemed, the identification (and, in the case of partial redemption, the
principal amount) of the particular Security or Securities to be redeemed;
(4) in case any Security is to be redeemed in part only, the notice
which relates to such Security shall state that on and after the Redemption
Date, on surrender of such Security, the holder will receive, without a
charge, a new Security or Securities of authorized denominations for the
principal amount thereof remaining unredeemed;
(5) that on the Redemption Date, the Redemption Price and accrued
interest to the Redemption Date payable as provided in Section 1106, if
any, will become due and payable on each such Security, or the portion
thereof, to be redeemed and, if applicable, that interest thereon shall
cease to accrue on and after such date;
(6) the Place or Places of Payment where such Securities, together in
the case of Bearer Securities with all coupons appertaining thereto, if
any, maturing after the Redemption Date, are to be surrendered for payment
of the Redemption Price and accrued interest, if any;
(7) that the redemption is for a sinking fund, if such is the case;
(8) that, unless otherwise specified in such notice, Bearer Securities
of any series, if any, surrendered for redemption must be accompanied by
all coupons appertaining thereto maturing subsequent to the date fixed for
redemption or the amount of any such missing coupon or coupons will be
deducted from the Redemption Price, unless security or indemnity
satisfactory to the Company, the Trustee for such series and any Paying
Agent is furnished;
73
<PAGE>
(9) if Bearer Securities of any series are to be redeemed and any
Registered Securities of such series are not to be redeemed, and if such
Bearer Securities may be exchanged for Registered Securities not subject to
the redemption on this Redemption Date pursuant to Section 305 or
otherwise, the last date, as determined by the Company, on which such
exchanges may be made; and
(10) the CUSIP number of such Security, if any, provided that neither
--------
the Company nor the Trustee shall have any responsibility for any such
CUSIP number.
Notice of redemption of Securities to be redeemed shall be given by the
Company or, at the Company's request, by the Trustee in the name and at the
expense of the Company.
SECTION 1105. Deposit of Redemption Price. At least one Business Day prior
---------------------------
to any Redemption Date, the Company shall deposit with the Trustee or with a
Paying Agent (or, if the Company is acting as its own Paying Agent, which it may
not do in the case of a sinking fund payment under Article Twelve, segregate and
hold in trust as provided in Section 1003) an amount of money in the currency or
currencies, currency unit or units or composite currency or currencies in which
the Securities of such series are payable (except as otherwise specified
pursuant to Section 301 for the Securities of such series) sufficient to pay on
the Redemption Date the Redemption Price of, and (except if the Redemption Date
is an Interest Payment Date) accrued interest on, all the Securities or portions
thereof which are to be redeemed on such date.
SECTION 1106. Securities Payable on Redemption Date. Notice of redemption
-------------------------------------
having been given as provided above, the Securities so to be redeemed shall, on
the Redemption Date, become due and payable at the Redemption Price therein
specified in the currency or currencies, currency unit or units or composite
currency or currencies in which the Securities of such series are payable
(except as otherwise specified pursuant to Section 301 for the Securities of
such series) (together with accrued interest, if any, to the Redemption Date),
and from and after such date (unless the Company defaults in the payment of the
Redemption Price and accrued interest) such Securities shall, if the same were
interest-bearing, cease to bear interest and the coupons for such interest
appertaining to any Bearer Securities so to be redeemed, except to the extent
provided below, shall be void. Upon surrender of any such Security for
redemption in accordance with such notice, together with any coupons
appertaining thereto maturing after the Redemption Date, such Security shall be
paid by the Company at the Redemption Price, together with accrued interest, if
any, to the Redemption Date; provided, however, that installments of interest on
-------- -------
Bearer Securities whose Stated Maturity is on or prior to the Redemption Date
shall be payable only at an office or agency located outside the United States
(except as otherwise provided in Section 1002) and, unless otherwise specified
as contemplated by Section 301, only upon presentation and surrender of coupons
for such interest; and provided, further, that, installments of interest on
-------- -------
Registered Securities whose Stated Maturity is on or prior to the Redemption
Date shall be payable to the Holders of such Securities, or one or more
Predecessor Securities,
74
<PAGE>
registered as such at the close of business on the relevant Record Dates
according to their terms and the provisions of Section 307.
If any Bearer Security surrendered for redemption is not accompanied by all
coupons appertaining thereto maturing after the Redemption Date, such Security
may be paid after deducting from the Redemption Price an amount equal to the
face amount of all such missing coupons, or the surrender of such missing coupon
or coupons may be waived by the Company and the Trustee if there is furnished to
them such security or indemnity as they may require to save each of them and any
Paying Agent harmless. If thereafter the Holder of such Security surrenders to
the Trustee or any Paying Agent any such missing coupon in respect of which a
deduction has been made from the Redemption Price, such Holder shall be entitled
to receive the amount so deducted; provided, however, that interest represented
-------- -------
by a coupon shall be payable only at an office or agency located outside the
United States (except as otherwise provided in Section 1002) and, unless
otherwise specified as contemplated by Section 301, only upon presentation and
surrender of such coupon.
If any Security called for redemption is not so paid upon surrender thereof
for redemption, the principal (and premium or Make-Whole Amount, if any) shall,
until paid, bear interest from the Redemption Date at the rate borne by the
Security.
SECTION 1107. Securities Redeemed in Part. Any Security which is to be
---------------------------
redeemed only in part (pursuant to the provisions of this Article or of Article
Twelve) shall be surrendered at a Place of Payment therefor (with, if the
Company or the Trustee so requires, due endorsement by, or a written instrument
of transfer in form satisfactory to the Company and the Trustee duly executed
by, the Holder thereof or his attorney duly authorized in writing and
accompanied by appropriate evidence of genuineness and authority) and the
Company shall execute and the Trustee shall authenticate and deliver to the
Holder of such Security without service charge a new Security or Securities of
the same series, of any authorized denomination as requested by such Holder in
aggregate principal amount equal to and in exchange for the unredeemed portion
of the principal of the Security so surrendered.
ARTICLE TWELVE
SINKING FUNDS
SECTION 1201. Applicability of Article. The provisions of this Article shall
------------------------
be applicable to any sinking fund for the retirement of Securities of a series
except as otherwise specified as contemplated by Section 301 for Securities of
such series.
The minimum amount of any sinking fund payment provided for by the terms of
Securities of any series is herein referred to as a "mandatory sinking fund
----------------------
payment," and any payment in excess of such minimum amount provided for by the
- -------
terms of such Securities of any series is herein referred to as an "optional
--------
sinking fund payment." If provided for by the terms of any
- --------------------
75
<PAGE>
Securities of any series, the cash amount of any mandatory sinking fund payment
may be subject to reduction as provided in Section 1202. Each sinking fund
payment shall be applied to the redemption of Securities of any series as
provided for by the terms of Securities of such series.
SECTION 1202. Satisfaction of Sinking Fund Payments with Securities. The
-----------------------------------------------------
Company may, in satisfaction of all or any part of any mandatory sinking fund
with respect to the Securities of a series, (i) deliver Outstanding Securities
of such series (other than any previously called for redemption), together in
the case of any Bearer Securities of such series with all unmatured coupons
appertaining thereto, and (ii) apply as a credit Securities of such series which
have been redeemed either at the election of the Company pursuant to the terms
of such Securities or through the application of permitted optional sinking fund
payments pursuant to the terms of such Securities, as provided for by the terms
of such Securities, or which have otherwise been acquired by the Company,
provided that such Securities so delivered or applied as a credit have not been
- --------
previously so credited. Such Securities shall be received and credited for such
purpose by the Trustee at the applicable Redemption Price specified in such
Securities for redemption through operation of the sinking fund and the amount
of such mandatory sinking fund payment shall be reduced accordingly.
SECTION 1203. Redemption of Securities for Sinking Fund. Not less than 60
-----------------------------------------
days prior to each sinking fund payment date for Securities of any series, the
Company shall deliver to the Trustee a Company Certificate specifying the amount
of the next ensuing mandatory sinking fund payment for such series pursuant to
the terms of such series, the portion thereof, if any, which is to be satisfied
by payment of cash in the currency or currencies, currency unit or units or
composite currency or currencies in which the Securities of such series are
payable (except as otherwise specified pursuant to Section 301 for the
Securities of such series) and the portion thereof, if any, which is to be
satisfied by delivering and crediting Securities of such series pursuant to
Section 1202, and the optional amount, if any, to be added in cash to the next
ensuing mandatory sinking fund payment, and shall also deliver to the Trustee
any Securities to be so delivered and credited. If such Company Certificate
specifies an optional amount to be added in cash to the next ensuing mandatory
sinking fund payment, the Company shall thereupon be obligated to pay the amount
therein specified. Not less than 30 days before each such sinking fund payment
date the Trustee shall select the Securities to be redeemed on such sinking fund
payment date in the manner specified in Section 1103 and cause notice of the
redemption thereof to be given in the name of and at the expense of the Company
in the manner provided in Section 1104. Such notice having been duly given, the
redemption of such Securities shall be made upon the terms and in the manner
stated in Sections 1106 and 1107.
ARTICLE THIRTEEN
REPAYMENT AT THE OPTION OF HOLDERS
SECTION 1301. Applicability of Article. Repayment of Securities of any
------------------------
series before their Stated Maturity at the option of Holders thereof shall be
made in accordance with the terms
76
<PAGE>
of such Securities, if any, and (except as otherwise specified by the terms of
such series established pursuant to Section 301) in accordance with this
Article.
SECTION 1302. Repayment of Securities. Securities of any series subject to
-----------------------
repayment in whole or in part at the option of the Holders thereof will, unless
otherwise provided in the terms of such Securities, be repaid at a price equal
to the principal amount thereof, together with interest, if any, thereon accrued
to the Repayment Date specified in or pursuant to the terms of such Securities.
The Company covenants that at least one Business Day prior to the Repayment Date
it shall deposit with the Trustee or with a Paying Agent (or, if the Company is
acting as it own Paying Agent, segregate and hold in trust as provided in
Section 1003) an amount of money in the currency or currencies, currency unit or
units or composite currency or currencies in which the Securities of such series
are payable (except as otherwise specified pursuant to Section 301 for the
Securities of such series) sufficient to pay the principal (or, if so provided
by the terms of the Securities of any series, a percentage of the principal) of,
and (except if the Repayment Date is an Interest Payment Date) accrued interest
on, all the Securities or portions thereof, as the case may be, to be repaid on
such date.
SECTION 1303. Exercise of Option. Securities of any series subject to
------------------
repayment at the option of the Holders thereof will contain an "Option to Elect
Repayment" form on the reverse of such Securities. In order for any Security to
be repaid at the option of the Holder, the Trustee must receive at the Place of
Payment therefor specified in the terms of such Security (or at such other place
or places of which the Company shall from time to time notify the Holders of
such Securities), not earlier than 60 days nor later than 30 days prior to the
Repayment Date, (i) the Security so providing for such repayment together with
the "Option to Elect Repayment" form on the reverse thereof duly completed by
the Holder (or by the Holder's attorney duly authorized in writing) or (ii) a
telegram, telex, facsimile transmission or a letter from a member of a national
securities exchange, or the National Association of Securities Dealers, Inc., or
a commercial bank or trust company in the United States setting forth the name
of the Holder of the Security, the principal amount of the Security, the
principal amount of the Security to be repaid, the CUSIP number, if any, or a
description of the tenor and terms of the Security, a statement that the option
to elect repayment is being exercised thereby and a guarantee that the Security
to be repaid, together with the duly completed form entitled "Option to Elect
Repayment" on the reverse of the Security, will be received by the Trustee not
later than the fifth Business Day after the date of such telegram, telex,
facsimile transmission or letter; provided, however, that such telegram, telex,
-------- -------
facsimile transmission or letter shall only be effective if such Security and
form duly completed are received by the Trustee by such fifth Business Day. If
less than the entire principal amount of such Security is to be repaid in
accordance with the terms of such Security, the principal amount of such
Security to be repaid, in increments of the minimum denomination for Securities
of such series, and the denomination or denominations of the Security or
Securities to be issued to the Holder for the portion of the principal amount of
such Security surrendered which is not to be repaid, must be specified. The
principal amount of any Security providing for prepayment at the option of the
Holder thereof may not be repaid in part if, following such
77
<PAGE>
repayment, the unpaid principal amount of such Security would be less than the
minimum authorized denomination of Securities of or within the series of which
such Security to be repaid is a part. Except as otherwise may be provided by the
terms of any Security providing for repayment at the option of the Holder
thereof, exercise of the repayment option by the Holder shall be irrevocable
unless waived by the Company.
SECTION 1304. When Securities Presented for Repayment Become Due and
------------------------------------------------------
Payable. If Securities of any series providing for repayment at the option of
the Holders thereof have been surrendered as provided in this Article and as
provided by or pursuant to the terms of such Securities, such Securities or the
portions thereof, as the case may be, to be repaid shall become due and payable
and shall be paid by the Company on the Repayment Date therein specified, and on
and after such Repayment Date (unless the Company defaults in the payment of
such Securities on such Repayment Date) such Securities shall, if the same were
interest-bearing, cease to bear interest and the coupons for such interest
appertaining to any Bearer Securities so to be repaid, except to the extent
provided below, shall be void. Upon surrender of any such Security for repayment
in accordance with such provisions, together with any coupons appertaining
thereto maturing after the Repayment Date, the principal amount of such security
so to be repaid shall be paid by the Company, together with accrued interest, if
any, to the Repayment Date; provided, however, that coupons whose Stated
-------- -------
Maturity is on or prior to the Repayment Date shall be payable only at an office
or agency located outside the United States (except as otherwise provided in
Section 1002) and, unless otherwise specified pursuant to Section 301, only upon
presentation and surrender of such coupons; and provided, further, that, in the
-------- -------
case of Registered Securities, installments of interest, if any, whose Stated
Maturity is on or prior to the Repayment Date shall be payable (but without
interest thereon, unless the Company defaults in the payment thereof) to the
Holders of such Securities, or one or more Predecessor Securities, registered as
such at the close of business on the relevant Record Dates according to their
terms and the provisions of Section 307.
If any Bearer Security surrendered for repayment is not accompanied by all
coupons appertaining thereto maturing after the Repayment Date, such Security
may be paid after deducting from the amount payable therefor as provided in
Section 1302 an amount equal to the face amount of all such missing coupons, or
the surrender of such missing coupon or coupons may be waived by the Company and
the Trustee if there is furnished to them such security or indemnity as they may
require to save each of them and any Paying Agent harmless. If thereafter the
Holder of such Security surrenders to the Trustee or any Paying Agent any such
missing coupon in respect of which a deduction has been made as provided in the
preceding sentence, such Holder shall be entitled to receive the amount so
deducted; provided, however, that interest represented by a coupon shall be
-------- -------
payable only at an office or agency located outside the United States (except as
otherwise provided in Section 1002) and, unless otherwise specified as
contemplated by Section 301, only upon presentation and surrender of such
coupon.
78
<PAGE>
If the principal amount of any Security surrendered for repayment shall not
be so repaid upon surrender thereof, such principal amount (together with
interest, if any, thereon accrued to such Repayment Date) shall, until paid,
bear interest from the Repayment Date at the rate of interest or Yield to
Maturity (in the case of Original Issue Discount Securities) set forth in such
Security.
SECTION 1305. Securities Repaid in Part. Upon surrender of any Registered
-------------------------
Security which is to be repaid in part only, the Company shall execute and the
Trustee shall authenticate and deliver to the Holder of such Security, without
service charge and at the expense of the Company, a new Registered Security or
Securities of the same series, of any authorized denomination specified by the
Holder, in an aggregate principal amount equal to and in exchange for the
portion of the principal of such Security so surrendered which is not to be
repaid.
ARTICLE FOURTEEN
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1401. Applicability of Article; Company's Option to Effect
----------------------------------------------------
Defeasance or Covenant Defeasance. If, pursuant to Section 301, provision is
- ---------------------------------
made for either or both of (i) defeasance of the Securities of or within a
series under Section 1402 or (ii) covenant defeasance of the Securities of or
within a series under Section 1403 to be applicable to the Securities of any
series, then the provisions of such Section or Sections, as the case may be,
together with the other provisions of this Article (with such modifications
thereto as may be specified pursuant to Section 301 with respect to any
Securities), shall be applicable to such Securities and any coupons appertaining
thereto, and the Company may at its option by Board Resolution, at any time,
with respect to such Securities and any coupons appertaining thereto, elect to
defease such Outstanding Securities and any coupons appertaining thereto
pursuant to Section 1402 (if applicable) or Section 1403 (if applicable) upon
compliance with the conditions set forth below in this Article.
SECTION 1402. Defeasance and Discharge. Upon the Company's exercise of the
------------------------
above option applicable to this Section with respect to any Securities of or
within a series, the Company shall be deemed to have been discharged from its
obligations with respect to such Outstanding Securities and any coupons
appertaining thereto on the date the conditions set forth in Section 1404 are
satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means
----------
that the Company shall be deemed to have paid and discharged the entire
indebtedness represented by such Outstanding Securities and any coupons
appertaining thereto, which shall thereafter be deemed "Outstanding" only for
the purposes of Section 1405 and the other Sections of this Indenture referred
to in clauses (i) and (ii) below, and to have satisfied all of its other
obligations under such Securities and any coupons appertaining thereto and this
Indenture insofar as such Securities and any coupons appertaining thereto are
concerned (and the Trustee, at the expense of the Company, shall execute proper
instruments acknowledging the same), except for the following which shall
survive until otherwise terminated or discharged hereunder: (i) the rights of
Holders of such Outstanding Securities and any coupons appertaining thereto to
receive, solely
79
<PAGE>
from the trust fund described in Section 1404 and as more fully set forth in
such Section, payments in respect of the principal of (and premium or Make-Whole
Amount, if any, on) and interest and Additional Amounts, if any, on such
Securities and any coupons appertaining thereto when such payments are due; (ii)
the Company's obligations with respect to such Securities under Sections 305,
306, 1002 and 1003 and with respect to the payment of Additional Amounts, if
any, on such Securities as contemplated by Section 1010; (iii) the rights,
powers, trusts, duties and immunities of the Trustee hereunder; and (iv) this
Article. Subject to compliance with this Article Fourteen, the Company may
exercise its option under this Section notwithstanding the prior exercise of its
option under Section 1403 with respect to such Securities and any coupons
appertaining thereto.
SECTION 1403. Covenant Defeasance. Upon the Company's exercise of the above
-------------------
option applicable to this Section with respect to any Securities of or within a
series, the Company shall be released from its obligations under Sections 1004
to 1008, inclusive, and, if specified pursuant to Section 301, its obligations
under any other covenant, with respect to such Outstanding Securities and any
coupons appertaining thereto on and after the date the conditions set forth in
Section 1404 are satisfied (hereinafter, "covenant defeasance"), and such
-------------------
Securities and any coupons appertaining thereto shall thereafter be deemed not
"Outstanding" for the purposes of any direction, waiver, consent or declaration
or Act of Holders (and the consequences of any thereof) in connection with
Sections 1004 to 1008, inclusive, or such other covenant, but shall continue to
be deemed "Outstanding" for all other purposes hereunder. For this purpose, such
covenant defeasance means that, with respect to such Outstanding Securities and
any coupons appertaining thereto, the Company may omit to comply with and shall
have no liability in respect of any term, condition or limitation set forth in
any such Section or such other covenant, whether directly or indirectly, by
reason of any reference elsewhere herein to any such Section or such other
covenant or by reason of reference in any such Section or such other covenant to
any other provision herein or in any other document and such omission to comply
shall not constitute a default or an Event of Default under clause (4) or (9) of
Section 501 or otherwise, as the case may be, but, except as specified above,
the remainder of this Indenture and such Securities and any coupons appertaining
thereto shall be unaffected thereby.
SECTION 1404. Conditions to Defeasance or Covenant Defeasance. The following
-----------------------------------------------
shall be the conditions to application of Section 1402 or Section 1403 to any
Outstanding Securities of or within a series and any coupons appertaining
thereto:
(a) The Company has irrevocably deposited or caused to be deposited
with the Trustee (or another trustee satisfying the requirements of Section
607 who shall agree to comply with the provisions of this Article Fourteen
applicable to it) funds in trust for the purpose of making the following
payments, specifically pledged as security for, and dedicated solely to,
the benefit of the Holders of such Securities and any coupons
80
<PAGE>
appertaining thereto: (i) an amount in such currency or currencies,
currency unit or units or composite currency or currencies in which such
Securities and any coupons appertaining thereto are then specified as
payable at Stated Maturity, or (ii) Government Obligations applicable to
such Securities and any coupons appertaining thereto (determined on the
basis of the currency or currencies, currency unit or units or composite
currency or currencies in which such Securities and any coupons
appertaining thereto are then specified as payable at Stated Maturity)
which through the scheduled payment of principal and interest in respect
thereof in accordance with their terms will provide, not later than one day
before the due date of any payment of principal of (and premium or Make-
Whole Amount, if any, on) and interest and Additional Amounts, if any, on
such Securities and any coupons appertaining thereto, money in an amount,
or (iii) a combination thereof in an amount, sufficient, without
consideration of any reinvestment of such principal and interest, in the
opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, to
pay and discharge, and which shall be applied by the Trustee (or other
qualifying trustee) to pay and discharge, (A) the principal of (and premium
or Make-Whole Amount, if any, on) and interest and Additional Amounts, if
any, on such Outstanding Securities and any coupons appertaining thereto on
the Stated Maturity of such principal or installment of principal or
interest and (B) any mandatory sinking fund payments or analogous payments
applicable to such Outstanding Securities and any coupons appertaining
thereto on the day on which such payments are due and payable in accordance
with the terms of this Indenture and of such Securities and any coupons
appertaining thereto, provided that the Trustee has been irrevocably
--------
instructed to apply such money or the proceeds of such Government
Obligations to such payments with respect to such Securities. Before such a
deposit, the Company may give to the Trustee, in accordance with Section
1102, a notice of its election to redeem all or any portion of such
Outstanding Securities at a future date in accordance with the terms of the
Securities of such series and Article Eleven, which notice shall be
irrevocable. Such irrevocable redemption notice, if given, shall be given
effect in applying the foregoing.
(b) Such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, this Indenture or
any other material agreement or instrument to which the Company is a party
or by which it is bound (and shall not cause the Trustee to have a
conflicting interest pursuant to Section 310(b) of the Trust Indenture Act
with respect to any Security of the Company).
(c) No Event of Default or event which with notice or lapse of time or
both would become an Event of Default with respect to such Securities and
any coupons appertaining thereto has occurred and is continuing on the date
of such deposit or, insofar as clauses (7) and (8) of Section 501 are
concerned, at any time during the period ending on the 91st day after the
date of such deposit (it being understood that this condition shall not be
deemed satisfied until the expiration of such period).
81
<PAGE>
(d) In the case of an election under Section 1402, the Company has
delivered to the Trustee an Opinion of Counsel stating that (i) the Company
has received from, or there has been published by, the Internal Revenue
Service a ruling, or (ii) since the date of execution of this Indenture,
there has been a change in the applicable Federal income tax law, in either
case to the effect that, and based thereon such opinion shall confirm that,
the Holders of such Outstanding Securities and any coupons appertaining
thereto will not recognize income, gain or loss for Federal income tax
purposes as a result of such defeasance and will be subject to Federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such defeasance had not occurred.
(e) In the case of an election under Section 1403, the Company has
delivered to the Trustee an Opinion of Counsel to the effect that the
Holders of such Outstanding Securities and any coupons appertaining thereto
will not recognize income, gain or loss for Federal income tax purposes as
a result of such covenant defeasance and will be subject to Federal income
tax on the same amounts, in the same manner and at the same times as would
have been the case if such covenant defeasance had not occurred.
(f) The Company has delivered to the Trustee a Company Certificate and
an Opinion of Counsel, each stating that all conditions precedent to the
defeasance under Section 1402 or the covenant defeasance under Section 1403
(as the case may be) have been complied with and an Opinion of Counsel to
the effect that either (i) as a result of a deposit pursuant to paragraph
(a) above and the related exercise of the Company's option under Section
1402 or Section 1403 (as the case may be), registration is not required
under the Investment Company Act of 1940, as amended, by the Company with
respect to the trust funds representing such deposit or by the Trustee for
such trust funds or (ii) all necessary registrations under such Act have
been effected.
(g) After the 91st day following the deposit, the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally.
(h) Notwithstanding any other provisions of this Section, such
defeasance or covenant defeasance shall be effected in compliance with any
additional or substitute terms, conditions or limitations which may be
imposed on the Company in connection therewith pursuant to Section 301.
SECTION 140 Deposited Money and Government Obligations to Be Held in
--------------------------------------------------------
Trust; Other Miscellaneous Provisions. Subject to the provisions of the last
- -------------------------------------
paragraph of Section 1003, all money and Government Obligations (or other
property as may be provided pursuant to Section 301) (including the proceeds
thereof) deposited with the Trustee (or other qualifying trustee) pursuant to
Section 1404 in respect of any Outstanding Securities of any series and any
82
<PAGE>
coupons appertaining thereto shall be held in trust and applied by the Trustee
or such other qualifying trustee, in accordance with the provisions of such
Securities and any coupons appertaining thereto and this Indenture, to the
payment, either directly or through any Paying Agent (including the Company
acting as its own Paying Agent) as the Trustee or such other qualifying trustee
may determine, to the Holders of such Securities and any coupons appertaining
thereto of all sums due and to become due thereon in respect of principal (and
premium or Make-Whole Amount, if any) and interest and Additional Amounts, if
any, but such money need not be segregated from other funds except to the extent
required by law.
Unless otherwise specified with respect to any Security pursuant to Section
301, if, after a deposit referred to in Section 1404(a) has been made, (i) the
Holder of a Security in respect of which such deposit was made is entitled to,
and does, elect pursuant to Section 301 or the terms of such Security to receive
payment in a currency, currency unit or composite currency other than that in
which the deposit pursuant to Section 1404(a) has been made in respect of such
Security or (ii) a Conversion Event occurs in respect of the currency, currency
unit or composite currency in which the deposit pursuant to Section 1404(a) has
been made, the indebtedness represented by such Security and any coupons
appertaining thereto shall be deemed to have been, and will be, fully discharged
and satisfied through the payment of the principal of (and premium or Make-Whole
Amount, if any, on), and interest and Additional Amounts, if any, on such
Security as the same become due out of the proceeds yielded by converting (from
time to time as specified below in the case of any such election) the amount or
other property deposited in respect of such Security into the currency, currency
unit or composite currency in which such Security becomes payable as a result of
such election or Conversion Event based on the applicable market exchange rate
for such currency, currency unit or composite currency in effect on the second
Business Day prior to each payment date, except, with respect to a Conversion
Event, for such currency, currency unit or composite currency in effect (as
nearly as feasible) at the time of the Conversion Event.
The Company shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the Government Obligations deposited
pursuant to Section 1404 or the principal and interest received in respect
thereof other than any such tax, fee or other charge which by law is for the
account of the Holders of such Outstanding Securities and any coupons
appertaining thereto.
Anything in this Article to the contrary notwithstanding, the Trustee or
such other qualifying trustee shall deliver or pay to the Company, from time to
time upon Company Request, any money or Government Obligations (or other
property and any proceeds therefrom) held by it as provided in Section 1404
which, in the opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to the
Trustee or such other qualifying trustee, are in excess of the amount thereof
which would then be required to be deposited to effect a defeasance or covenant
defeasance, as applicable, in accordance with this Article.
83
<PAGE>
ARTICLE FIFTEEN
MEETINGS OF HOLDERS OF SECURITIES
SECTION 1501. Purposes for Which Meetings May Be Called. A meeting of
-----------------------------------------
Holders of Securities of any series may be called at any time and from time to
time pursuant to this Article to make, give or take any request, demand,
authorization, direction, notice, consent, waiver or other action provided by
this Indenture to be made, given or taken by Holders of Securities of such
series.
SECTION 1502. Call, Notice and Place of Meetings.
----------------------------------
(a) The Trustee may at any time call a meeting of Holders of
Securities of any series for any purpose specified in Section 1501, to be
held at such time and at such place in the city of Boston, Massachusetts,
as the Trustee determines. Notice of every meeting of Holders of Securities
of any series, setting forth the time and the place of such meeting and in
general terms the action proposed to be taken at such meeting, shall be
given, in the manner provided in Section 106, not less than 21 nor more
than 180 days prior to the date fixed for the meeting.
(b) In case at any time the Company, pursuant to a Board Resolution,
or the Holders of at least 10% in principal amount of the Outstanding
Securities of any series have requested the Trustee to call a meeting of
the Holders of Securities of such series for any purpose specified in
Section 1501, by written request setting forth in reasonable detail the
action proposed to be taken at the meeting, and the Trustee has not made
the first publication of the notice of such meeting within 21 days after
receipt of such request or does not thereafter proceed to cause the meeting
to be held as provided herein, then the Company or the Holders of
Securities of such series in the amount above specified, as the case may
be, may determine the time and the place in the city of Boston,
Massachusetts, for such meeting and may call such meeting for such purposes
by giving notice thereof as provided in paragraph (a) above.
SECTION 1503. Persons Entitled to Vote at Meetings. To be entitled to vote
------------------------------------
at any meeting of Holders of Securities of any series, a Person shall be (i) a
Holder of one or more Outstanding Securities of such series or (ii) a Person
appointed by an instrument in writing as proxy for a Holder or Holders of one or
more Outstanding Securities of such series by such Holder or Holders. The only
Persons who shall be entitled to be present or to speak at any meeting of
Holders of Securities of any series are the Persons entitled to vote at such
meeting and their counsel, any representatives of the Trustee and its counsel,
and any representatives of the Company and its counsel.
SECTION 1504. Quorum; Action. The Persons entitled to vote a majority in
--------------
principal amount of the Outstanding Securities of a series shall constitute a
quorum for a meeting of Holders
84
<PAGE>
of Securities of such series; provided, however, that if any action is to be
-------- -------
taken at such meeting with respect to a consent or waiver which this Indenture
expressly provides may be given by the Holders of not less than a specified
percentage in principal amount of the Outstanding Securities of a series, the
Persons entitled to vote such specified percentage in principal amount of the
Outstanding Securities of such series shall constitute a quorum. In the absence
of a quorum within 30 minutes after the time appointed for any such meeting, the
meeting shall, if convened at the request of Holders of Securities of such
series, be dissolved. In any other case the meeting may be adjourned for a
period of not less than 10 days as determined by the chairman of the meeting
prior to the adjournment of such meeting. In the absence of a quorum at any such
adjourned meeting, such adjourned meeting may be further adjourned for a period
of not less than 10 days as determined by the chairman of the meeting prior to
the adjournment of such adjourned meeting. Notice of the reconvening of any
adjourned meeting shall be given as provided in Section 1502(a), except that
such notice need be given only once not less than five days prior to the date on
which the meeting is scheduled to be reconvened. Notice of the reconvening of
any adjourned meeting shall state expressly the percentage, as provided above,
of the principal amount of the Outstanding Securities of such series which shall
constitute a quorum.
Except as limited by the proviso to Section 902, any resolution presented
to a meeting or adjourned meeting duly reconvened at which a quorum is present
as aforesaid may be adopted by the affirmative vote of the Holders of a majority
in principal amount of the Outstanding Securities of such series; provided,
--------
however, that, except as limited by the proviso to Section 902, any resolution
- -------
with respect to any request, demand, authorization, direction, notice, consent,
waiver or other action which this Indenture expressly provides may be made,
given or taken by the Holders of a specified percentage, which is less than a
majority, in principal amount of the Outstanding Securities of a series may be
adopted at a meeting or an adjourned meeting duly reconvened and at which a
quorum is present as aforesaid by the affirmative vote of the Holders of such
specified percentage in principal amount of the Outstanding Securities of such
series.
Any resolution passed or decision taken at any meeting of Holders of
Securities of any series duly held in accordance with this Section shall be
binding on all the Holders of Securities of such series and any coupons
appertaining thereto, whether or not present or represented at the meeting.
Notwithstanding the foregoing provisions of this Section 1504, if any
action is to be taken at a meeting of Holders of Securities of any series with
respect to any request, demand, authorization, direction, notice, consent,
waiver or other action which this Indenture expressly provides may be made,
given or taken by the Holders of a specified percentage in principal amount of
all Outstanding Securities affected thereby, or of the Holders of such series
and one or more additional series;
(1) there shall be no minimum quorum requirement for such meeting; and
85
<PAGE>
(2) the principal amount of the Outstanding Securities of such series
which vote in favor of such request, demand, authorization, direction,
notice, consent, waiver or other action shall be taken into account in
determining whether such request, demand, authorization, direction, notice,
consent, waiver or other action has been made, given or taken under this
Indenture.
SECTION 1505. Determination of Voting Rights; Conduct and Adjournment of
----------------------------------------------------------
Meetings.
- --------
(a) Notwithstanding any provisions of this Indenture, the Trustee may
make such reasonable regulations as it may deem advisable for any meeting
of Holders of Securities of a series in regard to proof of the holding of
Securities of such series and of the appointment of proxies and in regard
to the appointment and duties of inspectors of votes, the submission and
examination of proxies, certificates and other evidence of the right to
vote, and such other matters concerning the conduct of the meeting as it
deems appropriate. Except as otherwise permitted or required by any such
regulations, the holding of Securities shall be proved in the manner
specified in Section 104 and the appointment of any proxy shall be proved
in the manner specified in Section 104 or by having the signature of the
Person executing the proxy witnessed or guaranteed by any trust company,
bank or banker authorized by Section 104 to certify to the holding of
Bearer Securities. Such regulations may provide that written instruments
appointing proxies, regular on their face, may be presumed valid and
genuine without the proof specified in Section 104 or other proof.
(b) The Trustee shall, by an instrument in writing appoint a temporary
chairman of the meeting, unless the meeting has been called by the Company
or by Holders of Securities as provided in Section 1502(b), in which case
the Company or the Holders of Securities of or within the series calling
the meeting, as the case may be, shall in like manner appoint a temporary
chairman. A permanent chairman and a permanent secretary of the meeting
shall be elected by vote of the Persons entitled to vote a majority in
principal amount of the Outstanding Securities of such series represented
at the meeting.
(c) At any meeting each Holder of a Security of such series or proxy
shall be entitled to one vote for each $1,000 principal amount of the
Outstanding Securities of such series held or represented by such Holder;
provided, however, that no vote shall be cast or counted at any meeting in
-------- -------
respect of any Security challenged as not Outstanding and ruled by the
chairman of the meeting to be not Outstanding. The chairman of the meeting
shall have no right to vote, except as a Holder of a Security of such
series or proxy.
(d) Any meeting of Holders of Securities of any series duly called
pursuant to Section 1502 at which a quorum is present may be adjourned from
time to time by Persons entitled to vote a majority in principal amount of
the Outstanding Securities of such series
86
<PAGE>
represented at the meeting, and the meeting may be held as so adjourned
without further notice.
SECTION 1506. Counting Votes and Recording Action of Meetings. The vote on
-----------------------------------------------
any resolution submitted to any meeting of Holders of Securities of any series
shall be by written ballots on which shall be subscribed the signatures of the
Holders of Securities of such series or of their representatives by proxy and
the principal amounts and series numbers of the Outstanding Securities of such
series held or represented by them. The permanent chairman of the meeting shall
appoint two inspectors of votes who shall count all votes cast at the meeting
for or against any resolution and who shall make and file with the secretary of
the meeting their verified written reports in duplicate of all votes cast at the
meeting. A record, at least in duplicate, of the proceedings of each meeting of
Holders of Securities of any series shall be prepared by the secretary of the
meeting and there shall be attached to such record the original reports of the
inspectors of votes on any vote by ballot taken thereat and affidavits by one or
more persons having knowledge of the fact, setting forth a copy of the notice of
the meeting and showing that such notice was given as provided in Section 1502
and, if applicable, Section 1504. Each copy shall be signed and verified by the
affidavits of the permanent chairman and secretary of the meeting and one such
copy shall be delivered to the Company and another to the Trustee to be
preserved by the Trustee, the latter to have attached thereto the ballots voted
at the meeting. Any record so signed and verified shall be conclusive evidence
of the matters therein stated.
SECTION 1507. Evidence of Action Taken by Holders. Any request, demand,
-----------------------------------
authorization, direction, notice, consent, waiver or other action provided by
this Indenture to be given or taken by a specified percentage in principal
amount of the Holders of any or all series may be embodied in and evidenced by
one or more instruments of substantially similar tenor signed by such specified
percentage of Holders in person or by agent duly appointed in writing; and,
except as otherwise expressly provided herein, such action shall become
effective when such instrument or instruments are delivered to the Trustee.
Proof of execution of any instrument or of a writing appointing any such agent
shall be sufficient for any purpose of this Indenture and (subject to Article
Six) conclusive in favor of the Trustee and the Company, if made in the manner
provided in this Article.
SECTION 1508. Proof of Execution of Instruments. Subject to Article Six, the
---------------------------------
execution of any instrument by a Holder or his agent or proxy may be proved in
accordance with such reasonable rules and regulations as may be prescribed by
the Trustee or in such manner as shall be satisfactory to the Trustee.
87
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed as of the day and year first above written.
SECURITY CAPITAL GROUP INCORPORATED
By: /s/ JEFFREY A. KLOPF
--------------------
Jeffrey A. Klopf
Senior Vice President and Secretary
Attest:
/s/ MARK W. PEARSON
- -------------------
Mark W. Pearson
Vice President
STATE STREET BANK AND TRUST COMPANY,
As Trustee
By: /s/ ANDREW M. SINASKY
---------------------
Andrew M. Sinasky
Assistant Vice President
Attest:
/s/ LORI L. LAPENTIS
- --------------------
Lori L. Lapentis
Assistant Secretary
88
<PAGE>
STATE OF NEW MEXICO )
) ss:
COUNTY OF SANTA FE )
On the 17th day of November, 1998, before me personally came Jeffrey A.
Klopf, to me known, who, being by me duly sworn, did depose and say that he
resides at 707 Joaquin Lane, that he is a Senior Vice President and Secretary of
Security Capital Group Incorporated, one of the entities described in and which
executed the foregoing instrument, and that he signed his name thereto by
authority of the Board of Directors of such entitiy.
[Notarial Seal]
/s/ LISA M. VIGIL
-----------------
Notary Public
Commission Expires: February 20, 2001
STATE OF MASSACHUSETTS )
) ss:
COUNTY OF SUFFOLK )
On the 16th day of November, 1998, before me personally came Andrew M.
Sinasky, to me known, who, being by me duly sworn, did depose and say that he
resides at Holden, Mass, that he is an Assistant Vice President of State Street
Bank and Trust Company, one of the entities described in and which executed the
foregoing instrument, and that he signed his name thereto by authority of the
Board of Directors of such entity.
[Notarial Seal]
/s/ ROSE MARIE MOGAURO
----------------------
Notary Public
Commission Expires: January 14, 2005
89
<PAGE>
EXHIBIT A
FORMS OF CERTIFICATION
EXHIBIT A-1
FORM OF CERTIFICATE TO BE GIVEN BY PERSON ENTITLED
TO RECEIVE BEARER SECURITY OR TO OBTAIN INTEREST
PAYABLE PRIOR TO THE EXCHANGE DATE
CERTIFICATE
[Insert title or sufficient description of Securities to be delivered]
This is to certify that, as of the date hereof, and except as set forth
below, the above-captioned Securities held by you for our account (i) are owned
by person(s) which are not citizens or residents of the United States, domestic
partnerships, domestic corporations or any estate or trust the income of which
is subject to United States federal income taxation regardless of its source
("United States person(s)"), (ii) are owned by United States person(s) which are
(a) foreign branches of United States financial institutions (financial
institutions, as defined in United States Treasury Regulations Section 1.165-
12(c)(1)(v) are herein referred to as "financial institutions") purchasing for
their own account or for resale, or (b) United States person(s) who acquired the
Securities through foreign branches of United States financial institutions and
who hold the Securities through such United States financial institutions on the
date hereof (and in either case (a) or (b), each such United States financial
institution hereby agrees, on its own behalf or through its agent, that you may
advise Security Capital Group Incorporated or its agent that such financial
institution will provide a certificate within a reasonable time stating that it
agrees to comply with the requirements of Section 165(j)(3)(A), (B) or (C) of
the United States Internal Revenue Code of 1986, as amended, and the regulations
thereunder), or (iii) are owned by a financial institution for purposes of
resale during the restricted period (as defined in United States Treasury
Regulations Section 1.163-5(c)(2)(i)(D)(7)), and, such financial institution
described in clause (iii) above (whether or not also described in clause (i) or
(ii)), certifies that it has not acquired the Securities for purposes of resale
directly or indirectly to a United States person or to a person within the
United States or its possessions.
As used herein, "United States" means the United States of America
(including the States and the District of Columbia); and its "possessions"
include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island
and the Northern Mariana Islands.
We undertake to advise you promptly by tested telex on or prior to the date
on which you intend to submit your certification relating to the above-captioned
Securities held by you for our
<PAGE>
account in accordance with your Operating Procedures if any applicable statement
herein is not correct on such date, and in the absence of any such notification
it may be assumed that this certification applies as of such date.
This certificate excepts and does not relate to [U.S.$] _______________ of
such interest in the above-captioned Securities in respect of which we are not
able to certify and as to which we understand an exchange for an interest in a
Permanent Global Security or an exchange for and delivery of definitive
Securities (or, if relevant, collection of any interest) cannot be made until we
do so certify.
We understand that this certificate may be required in connection with
certain tax legislation in the United States. If administrative or legal
proceedings are commenced or threatened in connection with which this
certificate is or would be relevant, we irrevocably authorize you to produce
this certificate or a copy thereof to any interested party in such proceedings.
Dated: __________ ___, 19___
[To be dated no earlier than the 15th day prior
to the earlier of (i) the Exchange Date or
(ii) the relevant Interest Payment Date occurring
prior to the Exchange Date, as applicable]
[Name of Person Making Certification]
(Authorized Signatory)
Name:
Title:
<PAGE>
EXHIBIT A-2
FORM OF CERTIFICATE TO BE GIVEN BY EUROCLEAR
AND CEDEL S.A. IN CONNECTION WITH THE EXCHANGE OF
A PORTION OF A TEMPORARY GLOBAL SECURITY OR TO
OBTAIN INTEREST PAYABLE PRIOR TO THE EXCHANGE DATE
CERTIFICATE
[Insert title or sufficient description of Securities to be delivered]
This is to certify that, based solely on written certifications that we
have received in writing, by tested telex or by electronic transmission from
each of the persons appearing in our records as persons entitled to a portion of
the principal amount set forth below (our "Member Organizations") substantially
in the form attached hereto, as of the date hereof, [U.S.$] _______________
principal amount of the above-captioned Securities (i) is owned by person(s)
which are not citizens or residents of the United States, domestic partnerships,
domestic corporations or any estate or trust the income of which is subject to
United States Federal income taxation regardless of its source ("United States
person(s)"), (ii) is owned by United States persons(s) which are (a) foreign
branches of United States financial institutions (financial institutions, as
defined in United States Treasury Regulations Section 1.165-12(c)(1)(v) are
herein referred to as "financial institutions") purchasing for their own account
or for resale, or (b) United States person(s) who acquired the Securities
through foreign branches of United States financial institutions and who hold
the Securities through such United States financial institutions on the date
hereof (and in either case (a) or (b), each such financial institution has
agreed, on its own behalf or through its agent, that we may advise Security
Capital Group Incorporated or its agent that such financial institution will
provide a certificate within a reasonable time stating that it agrees to comply
with the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal
Revenue Code of 1986, as amended, and the regulations thereunder), or (iii) is
owned by a financial institution for purposes of resale during the restricted
period (as defined in United States Treasury Regulations Section 1.163-
5(c)(2)(i)(D)(7)), and that such financial institutions described in clause
(iii) above (whether or not also described in clause (i) or (ii)) have certified
that they have not acquired the Securities for purposes of resale directly or
indirectly to a United States person or to a person within the United States or
its possessions.
As used herein, "United States" means the United States of America
(including the States and the District of Columbia); and its "possessions"
include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island
and the Northern Mariana Islands.
We further certify that (i) we are not making available herewith for
exchange (or, if relevant, collection of any interest) any portion of the
temporary global Security representing the above-captioned Securities excepted
in the above-referenced certificates of Member Organizations
<PAGE>
and (ii) as of the date hereof we have not received any notification from any of
our Member Organizations to the effect that the statements made by such Member
Organizations with respect to any portion of the part submitted herewith for
exchange (or, if relevant, collection of any interest) are no longer true and
cannot be relied on as of the date hereof.
We understand that this certification is required in connection with
certain tax legislation in the United States. If administrative or legal
proceedings are commenced or threatened in connection with which this
certificate is or would be relevant, we irrevocably authorize you to produce
this certificate or a copy thereof to any interested party in such proceedings.
Dated: __________ ___, 19___
[To be dated no earlier than the earlier of
the Exchange Date or the relevant Interest
Payment Date occurring prior to the Exchange
Date, as applicable]
[Morgan Guaranty Trust Company of New York,
Brussels Office,] as Operator of the Euroclear
System
[Cedel S.A.]
By:
<PAGE>
Exhibit 4.11
Board Resolution Pursuant to
Section 301 of the Indenture
----------------------------
Pursuant to Section 301 of the Indenture dated as of November 16, 1998 (the
"Indenture") between Security Capital Group Incorporated (the "Company") and
State Street Bank and Trust Company (the "Trustee"), the undersigned on behalf
of the Company and in their respective capacities indicated, hereby certify that
we have examined resolutions duly adopted at a meeting of the Board of Directors
of the Company on September 23, 1998. Acting pursuant to such Board resolutions,
the undersigned hereby establish a series of Securities (the "Notes") by means
of this Board Resolution, in accordance with the provisions of Section 301 of
the Indenture:
1. The Company desires, for its corporate purposes, to create and issue from
time to time under and in accordance with the provisions of the Indenture, up to
$200 million principal amount of Securities to be known as its Medium-Term
Notes, Series A (the "Medium-Term Notes") and to add to the covenants of the
Company contained in the Indenture for the benefit of the Holders of the Medium-
Term Notes.
1. The maximum aggregate principal amount of the Notes which may be
authenticated and delivered under the Indenture (except for Notes authenticated
and delivered upon registration of, transfer of, or in exchange for, or in lieu
of, other Notes pursuant to Section 304, 305, 306, 906, 1107 or 1405 of the
Indenture and except for any Notes which pursuant to Section 303 are deemed
never to have been authenticated and delivered) is $200 million.
1. Solely for the benefit of the Holders of the Notes, the following shall be
additions to the
(1) covenants set forth in Article Ten of the Indenture:
SECTION 1012. Limitations on Indebtedness. The Company will not,
and will not permit any of its Wholly Owned Subsidiaries to, directly
or indirectly, Incur any Indebtedness (including Acquired
Indebtedness), if, immediately after such Indebtedness is Incurred (i)
the total aggregate Indebtedness of the Company and its Wholly Owned
Subsidiaries exceeds 50% of the Adjusted Total Assets of the Company
and its Wholly Owned Subsidiaries; or (ii) the Fixed Charge Coverage
Ratio for the Company and its Wholly Owned Subsidiaries for the most
recently ended four fiscal quarters for which internal financial
statements are available immediately preceding the date on which such
additional Indebtedness is Incurred would have been less than 1.5 to
1.0, determined on a pro forma basis as if such Indebtedness had been
incurred on the first day of such four-quarter period.
SECTION 1013. Required Minimum Consolidated Tangible Net Worth.
The Company will not at any time permit its Consolidated Tangible Net
Worth to be less than $1,500,000,000.
<PAGE>
SECTION 1014. Limitations on Liens. The Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly,
create, incur, assume or suffer to exist any Lien (other than
Permitted Liens) which secures obligations under any Indebtedness of
the Company or any of its Wholly Owned Subsidiaries on any asset now
owned or hereafter acquired by the Company or any of its Subsidiaries,
or any income or profits therefrom, or assign or convey any right to
receive income therefrom.
SECTION 1015. Restrictions on Lines of Business. The Company will
not, and will not permit any of its Subsidiaries to, make Investments
in any business other than the business conducted by the Company and
its Subsidiaries on the Issue Date and any other business related to,
or servicing, the real estate industry unless the aggregate amount of
such Investments is less than 10% of the Consolidated Assets of the
Company.
(2) definitions set forth in Article One of the Indenture
"Acquired Indebtedness" means, with respect to any specified
Person, (i) Indebtedness of any other Person existing at the time such
other Person is merged with or into such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into such
specified Person, and (ii) Indebtedness secured by a Lien encumbering
any asset acquired by such specified Person.
"Adjusted Fixed Charges" means, with respect to any Person for
any period, the sum, without duplication, of the total amount of
accrued or paid interest (including, without limitation, interest
expense attributable to Capitalized Lease Obligations, but excluding
amortization of original issue discount on any Indebtedness, the
interest portion of any deferred payment obligation and non-cash
interest which is payable in kind with additional Indebtedness and
dividend payments on any series of Disqualified Stock) with regard to
Indebtedness of such Person and its Wholly Owned Subsidiaries for such
period.
"Adjusted Net Income" means, with respect to any Person for any
period, the aggregate Net Income of such Person for such period,
provided that (i) amortization of original issue discount on any
Indebtedness shall be excluded; (ii) the Net Income of any Person
which is not a Wholly Owned Subsidiary or which is accounted for by
the equity method of accounting shall be included only to the extent
of the amount of dividends or other distributions paid in cash to such
Person; (iii) the Net Income attributable to any Person shall be
excluded to the extent that the declaration or payment of dividends or
similar distributions by that Person to the Company is not at the date
of determination permitted by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Person or its shareholders;
and (iv) the cumulative effect of any change in accounting principles
shall be excluded.
<PAGE>
"Adjusted Total Assets" means, with respect to any Person as of
any date, the sum, without duplication, of (i) such Person's cash,
(ii) the Market Value of Publicly Traded Securities owned by such
Person and (iii) the net book value of all other assets of such
Person.
"Capital Lease Obligation" means, at the time any determination
thereof is to be made, the amount of the liability in respect of a
capital lease which would at such time be required to be capitalized
on a balance sheet in accordance with GAAP.
"Capital Management Clients" means a Person for whom the Company
or any Subsidiary provides investment management or investment
advisory services pursuant to any contract or agreement or series of
contracts or agreements.
"Capital Management Fees" means, with respect to any Person and
for any period, fees accrued to such Person from such Person's Capital
Management Clients calculated in relation to the assets under
management for each such Client; provided that neither performance
fees nor fees (or any portion thereof) which ultimately inure to the
benefit of a third party shall be included in the calculation of the
Capital Management Fees.
"Capital Market Clients" means a Person for whom the Company or
any Subsidiary provides investment banking, placement agent,
underwriting, financial or strategic consulting, or similar services.
"Capital Market Fees" means, with respect to any Person and for
any period, fees accrued to such Person from such Person's Capital
Market Clients for services provided; provided that neither
performance fees nor fees (or any portion thereof) which ultimately
inure to the benefit of a third party shall be included in the
calculation of the Capital Market Fees.
"Capital Stock" means (i) in the case of a corporation, corporate
stock, (ii) in the case of an association or business entity, any and
all shares, interests, participations, rights or other equivalents
(however designated) of corporate stock, (iii) in the case of a
partnership, partnership interests (whether general or limited) and
(iv) any other interest or participation which confers on a Person the
right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person.
"Cash Flow" means, with respect to any Person for any period, the
Adjusted Net Income of such Person for such period plus (i) provisions
for taxes based on income or profits of such Person for such period,
to the extent such provisions for taxes were included in computing
Adjusted Net Income, plus (ii) Adjusted Fixed Charges of such Person
for such period, to the extent such Adjusted Fixed Charges were
deducted in computing Adjusted Net Income, plus (iii) depreciation and
amortization of such Person for such period, to the extent that such
charges were deducted in computing Adjusted Net Income.
<PAGE>
"Consolidated Assets" means, with respect to any Person at any
date, the consolidated assets of such Person at such date determined
in accordance with GAAP.
"Consolidated Subsidiary" means, with respect to any Person, at
any date, any Subsidiary the accounts of which would be consolidated
with those of such Person in its consolidated financial statements in
accordance with GAAP if such statements were prepared as of such date.
"Consolidated Tangible Net Worth" means, with respect to any
Person as of any date, the consolidated stockholders' equity of such
Person and its Consolidated Subsidiaries less their consolidated
Intangible Assets (to the extent reflected in determining consolidated
stockholders' equity), and excluding the cumulative effect of any
change in accounting principles.
"Disqualified Stock" means Capital Stock which, by its terms (or
by the terms of any security into which it is convertible or for which
it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or redeemable at the option of the holder thereof, in whole
or in part, on or prior to the date on which the Securities of the
relevant series mature.
"Equity Interests" means Capital Stock and all warrants, options
or other rights to acquire Capital Stock (but excluding any debt
security which is convertible into, or exchangeable for, Capital
Stock).
"Fixed Charge Coverage Ratio" means, with respect to any Person
for any period, the ratio of the Cash Flow of such Person for such
period to the Adjusted Fixed Charges of such Person for such period.
If a Person Incurs or redeems any Indebtedness (other than revolving
credit borrowings) during or after the period for which the Fixed
Charge Coverage Ratio is being calculated, but prior to the date on
which the event for which the calculation of the Fixed Charge Coverage
Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage
Ratio shall be calculated giving pro forma effect to such Incurrence
or redemption, as if the same had occurred on the first day of such
period. In addition, for purposes of making the computation referred
to above, (i) acquisitions which have been made by the Person,
including through mergers or consolidations and including any related
financing transactions, during or after the period, but prior to the
Calculation Date shall be deemed to have occurred on the first day of
the period for which the Fixed Charge Coverage Ratio is being
calculated, (ii) the Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be
excluded, (iii) the interest expense attributable to any Indebtedness
(whether existing or being Incurred) bearing a floating interest rate
shall be computed as if the rate in effect on the Calculation Date had
been the applicable rate for the entire period, and (iv) the Adjusted
Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, but only to the
extent that the obligations
<PAGE>
giving rise to such Adjusted Fixed Charges will not be obligations of
the Person following the Calculation Date.
"Guarantee" means a guarantee (other than by endorsement of
negotiable instruments for collection in the ordinary course of
business), direct or indirect, in any manner (including, without
limitation, letters of credit and reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Incurs" (including, with correlative meanings, the term
"Incurrence") means, with respect to any Indebtedness, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly
liable, contingently or otherwise, with respect to such Indebtedness
(including Acquired Indebtedness).
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such
Person for borrowed money, (ii) all obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments,
(iii) all obligations of such Person in respect of letters of credit
or bankers' acceptance or other similar instruments (or reimbursement
obligations with respect thereto), (iv) all obligations of such Person
to pay the deferred purchase price of property or services, except
Trade Payables, (v) all obligations of such Person as lessee under
Capital Lease Obligations, (vi) all Indebtedness of others secured by
a Lien on any asset of such Person, whether or not such Indebtedness
is assumed by such Person; provided that, for purposes of determining
the amount of any Indebtedness of the type described in this clause,
if recourse with respect to such Indebtedness is limited to such
asset, the amount of such Indebtedness shall be limited to the lesser
of the fair market value of such asset or the amount of such
Indebtedness, (vii) all Indebtedness of others Guaranteed by such
Person to the extent such Indebtedness is Guaranteed by such Person,
(viii) all Disqualified Stock valued at the greater of its voluntary
or involuntary liquidation preference plus accrued and unpaid
dividends and (ix) to the extent not otherwise included in this
definition, all obligations of such Person under Hedging Obligations.
"Intangible Assets" means, with respect to any Person, the
intangible assets of that Person determined in accordance with GAAP.
"Investments" means, with respect to any Person, all investments
by such Person in other Persons (including Affiliates) in the forms of
direct or indirect loans (including Guarantees of Indebtedness or
other obligations), advances or capital contributions, purchases or
other acquisitions for consideration of Indebtedness, Equity Interests
or other securities and all other items which are or would be
classified as investments on a balance sheet prepared in accordance
with GAAP.
"Issue Date" means the original issue date of the Securities.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in
respect of such asset
<PAGE>
given to secure Indebtedness, whether or not filed, recorded or
otherwise perfected under applicable law (including any conditional
sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction with respect to any such lien, pledge, charge or
security interest).
"Market Value" means, with respect to a Publicly Traded Security
and on the date of determination thereof, (i) if such Publicly Traded
Security is listed on the New York Stock Exchange, the American Stock
Exchange, or some other principal national securities exchange in the
United States of America, the reported last sale price of a unit of
such Publicly Traded Security regular way on a given day, or, in case
no such sale takes place on such day, the average of the reported
closing bid and asked prices regular way, in each case on the New York
Stock Exchange Composite Tape, the American Stock Exchange Composite
Tape or the principal national securities exchange in the United
States of America on which such Publicly Traded Security is listed or
admitted to trading, as applicable, (ii) if such Publicly Traded
Security is not listed or admitted to trading on any national
securities exchange in the United States of America, but prices for
such Publicly Traded Security are disseminated by means of an
automated quotation system by the National Association of Securities
Dealers, Inc., the closing sales price, or if there is no closing
sales price, the average of the closing bid and asked prices, in the
automated quotation system, or (iii) with respect to a Publicly Traded
Security listed on a principal national securities exchange in
Luxembourg, Amsterdam or other European country, the price of such
Publicly Traded Security as reported on such exchange by the most
widely recognized reporting method customarily relied upon by
financial institutions in such country and if such Publicly Traded
Security is listed on more than one such exchange, the principal
securities exchange on which such Publicly Traded Security is listed.
Any determination of the "Market Value" of a Publicly Traded Security
pursuant to this definition shall be based on the assumption that
offers of such Publicly Traded Security are exempt from registration
under the Securities Act.
"Net Income" of any Person for any period means the net income
(loss) of such Person for such period, determined in accordance with
GAAP, excluding, (i) any gain or loss, together with any related
provision for taxes on such gain or loss, realized in connection with
(a) any sale, lease, conveyance or other disposition of any Strategic
Investments (including, without limitation, dispositions pursuant to
sale and leaseback transactions) by such Person, (b) the disposition
of any securities (other than Portfolio Securities) by such Person or
(c) the extinguishment of any Indebtedness of such Person; (ii) any
extraordinary or nonrecurring gain or loss, together with any related
provision for taxes on such extraordinary or nonrecurring gain or
loss; and (iii) any unrealized gain or loss caused by the increase or
decrease in the Market Value of any Publicly Traded Security held,
directly or indirectly, by that Person. In addition, for the
calculation of Net Income for any Person for any period, (i) the
Capital Management Fees based on assets under management accruing to
such Person
<PAGE>
for such period shall be calculated as if the fees accruing and assets
under management on the last day of such period (or the closest
practicable date of determination) were the fees accruing and assets
under management as of the beginning of such period; (ii) the Capital
Market Fees accruing to such Person for such period shall be
calculated as if the amount of such fees accrued during such period
was equal to the amount of such fees accrued during the six month
period immediately preceding the last day of such period (or the
closest practicable date of determination), adjusted for the duration
of such period; and (iii) the dividend rates and interest rates in
effect with respect to payments accruing to such Person from its
investees as of the last day of such period (or the closest
practicable date of determination) shall be deemed to have been in
effect as of the beginning of such period.
"Non-Recourse" to a Person as applied to any Indebtedness (or
portion thereof) means that such Person is not directly or indirectly
liable to make any payments with respect to such Indebtedness (or
portion thereof) and that no Guarantee of such Indebtedness (or
portion thereof) has been made by such Person.
"Permitted Liens" means (i) Liens on real property securing
Indebtedness which is Non-Recourse to the Company or any of its
Subsidiaries; or (ii) Liens on any asset securing Indebtedness (other
than Indebtedness referred to in clause (i) above), provided that,
after giving effect to the Incurrence of such Indebtedness (a) the
aggregate principal amount of Indebtedness secured pursuant to this
clause (ii) is less than 10% of the Total Capitalization of the
Company and its Consolidated Subsidiaries and (b) the aggregate net
book value of the assets of the Company and its Subsidiaries securing
such Indebtedness shall not be greater than 200% of the principal
amount of such secured Indebtedness. For purposes of the definition of
Permitted Lien, the aggregate principal amount of Indebtedness shall
mean the principal amount of such Indebtedness at maturity.
"Portfolio Securities" means Securities (a) issued by a fund or
company (an "Investment Company") either (i) registered under the
Investment Company Act of 1940, as amended, and the rules and
regulations of the Commission promulgated thereunder (the "Investment
Company Act"), or (ii) which makes passive investments in companies or
funds in which the Investment Company does not have representation on
the board of directors or similar body or participate on a regular
basis in the management ("Portfolio Investees") and which is exempt
from registration under the Investment Company Act or (b) issued by
Portfolio Investees.
"Publicly Traded Security" means a security which is listed on
the New York Stock Exchange, the American Stock Exchange or any other
principal national securities exchange in the United States,
Luxembourg, Amsterdam or other European country or whose prices are
disseminated by means of an automated quotation system by the National
Association of Securities Dealers, Inc.
<PAGE>
As used in this definition only, "security" has the meaning given
that term in Article 8 of the Uniform Commercial Code.
"Strategic Investment" of any specified Person means any other
Person in which an Investment has been made by the specified Person,
other than Portfolio Securities, where either (a) the undepreciated
book value, or (b) if the Strategic Investment is a Publicly Traded
Security, the Market Value of the Investment exceeds $100 million.
"Total Capitalization" means, with respect to any Person as of
any date, the consolidated long-term Indebtedness and consolidated
stockholders' equity of such Person and its Consolidated Subsidiaries
less their consolidated Intangible Assets (to the extent reflected in
determining consolidated stockholders' equity), all determined as of
such date in accordance with GAAP, and excluding the cumulative effect
of a change in accounting principles.
"Trade Payables" means, with respect to any Person, (i) any
accounts payable or any other Indebtedness or monetary obligation to
trade creditors created, assumed or Guaranteed by such Person arising
in the ordinary course of business in connection with the acquisition
of goods or services, (ii) obligations Incurred in the ordinary course
to pay the purchase price of securities so long as such obligations
are paid within customary settlement periods and (iii) obligations to
purchase securities pursuant to subscription or stock purchase
agreements in the ordinary course of business. Notwithstanding the
foregoing, for purposes of Section 1013, accounts payables (other than
deferred compensation) of the Company in excess of 3.0% of the
undepreciated book value (determined in accordance with GAAP) of the
assets of the Company at any time outstanding shall be treated as
Indebtedness to the extent of such excess.
"Wholly Owned Subsidiary" means a Subsidiary of any Person all of
the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares or minimal interests issued
to other Persons to satisfy legal requirements) are at the time owned
by such Person or by one or more Wholly Owned Subsidiaries of such
Person or by such Person and one or more Wholly Owned Subsidiaries of
such Person.
1. Solely for the benefit of the Holders of the Notes, the following shall be
an altered and restated Section 801 of the Indenture:
SECTION 801 Consolidations and Mergers of Company and Sales,
Leases and Conveyances. The Company will not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another Person unless (i) the surviving Person or the
Person formed by or surviving such consolidation or merger (if other
than the Company) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made (the "Surviving
Entity") is a corporation organized or existing under the laws of the
United States, any state thereof or the District of Columbia; (ii) the
Surviving
<PAGE>
Entity assumes all the obligations, including the due and punctual
payment of the principal of (and premium or Make-Whole Amount, if any,
on) and interest and Additional Amounts, if any, on all Securities,
according to their tenor, and the due and punctual performance and
observance of all covenants and conditions, of the Company under the
Securities and the Indenture pursuant to a supplemental Indenture in
form reasonably satisfactory to the Trustee; (iii) immediately before
and after giving effect to such transaction and treating any
indebtedness which becomes an obligation of the Company as a result of
such transaction as having been incurred by the Company at the time of
the transaction, no Event of Default and no event which, after notice
or the lapse of time or both, would become an Event of Default shall
have occurred and be continuing; and (iv) Security Capital or the
Surviving Entity will, at the time of the transaction and after giving
pro forma effect thereto as if the transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to Incur
at least $1.00 of additional Indebtedness pursuant Section 1012
hereof.
<PAGE>
Capitalized terms used herein which are defined in the Indenture are
used herein as so defined.
Dated: November 16, 1998
SECURITY CAPITAL GROUP
INCORPORATED
By: /s/ JEFFREY A. KLOPF
------------------------
Jeffrey A. Klopf
Senior Vice President and Secretary
By: /s/ MARK W. PEARSON
------------------------
Mark W. Pearson
Vice President
<PAGE>
Exhibit 4.12
THIS NOTE IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER
REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITARY OR A NOMINEE OF THE
DEPOSITARY. THIS NOTE IS EXCHANGEABLE FOR NOTES REGISTERED IN THE NAME OF A
PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE ONLY IN THE LIMITED
CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND MAY NOT BE TRANSFERRED EXCEPT AS A
WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE
DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY.
THIS NOTE IS A BOOK-ENTRY SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A
NOMINEE OF A DEPOSITARY. THIS NOTE IS EXCHANGEABLE FOR NOTES REGISTERED IN THE
NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE ONLY IN THE LIMITED
CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER
THAN A TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE
DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER
NOMINEE OF THE DEPOSITARY) MAY BE REGISTERED EXCEPT IN SUCH LIMITED
CIRCUMSTANCES.
REGISTERED REGISTERED
SECURITY CAPITAL GROUP INCORPORATED
MEDIUM-TERM NOTE, SERIES A
(Fixed Rate)
FORM OF FACE OF FIXED RATE REGISTERED NOTE
REGISTERED PRINCIPAL AMOUNT
No.: _______ $25,750,000
CUSIP No.: 81413TAB3
Unless this Note is presented by an authorized representative of The Depository
Trust Company (55 Water Street, New York, New York) to the issuer or its agent
for registration of transfer, exchange or payment, and any Note issued is
registered in the name of Cede & Co. or such other name as requested by an
authorized representative of The Depository Trust Company and any
<PAGE>
payment is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner
hereof, Cede & Co., has an interest herein./*/
IF APPLICABLE, THE "TOTAL AMOUNT OF OID," THE "ORIGINAL ISSUE DATE," THE "YIELD
TO MATURITY," AS WELL AS THE METHOD USED TO DETERMINE THE YIELD TO MATURITY
WHERE THERE IS A SHORT ACCRUAL PERIOD AND THE AMOUNT OF OID ALLOCABLE TO SUCH
SHORT ACCRUAL PERIOD WILL BE SET FORTH BELOW. THE CALCULATION OF THE AMOUNT OF
OID UPON (A) OPTIONAL REDEMPTION OR (B) DECLARATION OF ACCELERATION IS DISCUSSED
ON THE REVERSE HEREOF.
ISSUE PRICE: 100% INITIAL ACCRUAL PERIOD OID: N/A
ORIGINAL ISSUE DATE: January 19, 1999 OPTION TO ELECT REPAYMENT:
[ ] YES [X] NO
STATED MATURITY: January 19, 2005
OPTIONAL REPAYMENT DATE(S): N/A
SPECIFIED CURRENCY: USD
EXCHANGE RATE AGENT: N/A
AUTHORIZED DENOMINATIONS: $1,000
AMORTIZING SECURITY:
INTEREST RATE: 7.80% [ ] YES [X] NO
INTEREST PAYMENT DATES: March 15 AMORTIZATION FORMULA: N/A
and September 15
INTEREST PAYMENT PERIODS: Semi-Annual AMORTIZATION PAYMENT
DATE(S): N/A
ORIGINAL ISSUE DISCOUNT SECURITY:
[ ] YES [X] NO
TOTAL AMOUNT OF OID: N/A
YIELD TO MATURITY:
- ---------------------------
/*/ Applies only if this Note is a Registered Global Security.
2
<PAGE>
ADDENDUM ATTACHED:
[ ] YES [X] NO
OPTIONAL REDEMPTION:
[X] YES [ ] NO
INITIAL REDEMPTION DATE:
REDEMPTION PRICE: [X] 100% of the Principal Amount plus a Make-Whole
Premium or [ ] Initially ________% of Principal Amount and declining by
__________% of the Principal Amount on each anniversary of the Initial
Redemption Date until the Redemption Price is 100% of the Principal Amount.
OPTIONAL EXTENSIONS OF
MATURITY: [ ] YES [X] NO
EXTENSION PERIOD: N/A
NUMBER OF EXTENSION
PERIODS: N/A
FINAL MATURITY DATE: N/A
INDEXED NOTE:
[ ] YES [X] NO
REFERENCE INDEX OR RATE: N/A
OTHER/ADDITIONAL PROVISIONS: N/A
3
<PAGE>
Security Capital Group Incorporated, a corporation organized and existing
under the laws of the State of Maryland (hereinafter called the "Company," which
term shall include any successor under the Indenture hereinafter referred to),
for value received, hereby promises to pay to DTC Cede & Co. or registered
assigns, the principal sum of Twenty-Five Million Seven Hundred Fifty Thousand
Dollars ($25,750,000) on the Stated Maturity specified above (except to the
extent redeemed or repaid prior to the Stated Maturity) and to pay interest
thereon at the Interest Rate per annum specified above from the Original Issue
Date specified above until the principal hereof is paid or duly made available
for payment (except as provided below), in arrears monthly, quarterly,
semiannually, or annually as specified above as the Interest Payment Period on
each Interest Payment Date (as specified above), commencing with the first
Interest Payment Date next succeeding the Original Issue Date specified above,
and on the Stated Maturity (or any redemption or repayment date); provided,
however, that if the Original Issue Date occurs between a Record Date, as
defined below, and the next succeeding Interest Payment Date, interest payments
will commence on the second Interest Payment Date succeeding the Original Issue
Date to the registered holder of this Note on the Record Date with respect to
such second Interest Payment Date.
Payment of the principal of this Note, any premium and the interest due at
the Stated Maturity (or any redemption or repayment date), or any prior date on
which the principal or an installment of principal of this Note becomes due and
payable, whether by the declaration of acceleration or otherwise, will be made
in immediately available funds upon presentation and surrender of this Note
(and, with respect to any applicable repayment of this Note, upon presentation
and surrender of this Note and a duly completed election form as contemplated on
the reverse hereof) at the office or agency of such paying agent as the Company
may determine maintained for that purpose in the City of Boston, Commonwealth of
Massachusetts (a "Paying Agent"), or at the office or agency of such other
Paying Agent as the Company may determine; provided, however, that if the
Specified Currency specified above is other than U.S. dollars and such payment
is to be made in the Specified Currency in accordance with the provisions on the
reverse hereof, such payment will be made by wire transfer of immediately
available funds to an account with a bank designated by the holder hereof at
least 15 calendar days prior to Maturity, provided that such bank has
appropriate facilities therefor and that this Note (and, if applicable, a duly
completed repayment election form) is presented and surrendered at the
aforementioned office or agency maintained by the Company in time for the
Trustee to make such payment in such funds in accordance with its normal
procedures. Payment of interest due on any Interest Payment Date other than
Maturity will be made at the aforementioned office or agency maintained by the
Company or, at the option of the Trustee, by check mailed to the address of the
person entitled thereto as such address shall appear in the Security Register
maintained by the Trustee; provided, however, that a holder of U.S. $1,000,000
(or, if the Specified Currency is other than U.S. dollars, the equivalent
thereof in the Specified Currency) or more in aggregate principal amount of
Notes (whether having identical or different terms and provisions) will be
entitled to receive interest payments on any Interest Payment Date other than
Maturity by wire transfer of immediately available funds if appropriate wire
transfer instructions have been
4
<PAGE>
received in writing by the Trustee not less than 15 calendar days prior to such
Interest Payment Date. Any such wire transfer instructions received by the
Trustee shall remain in effect until revoked by such holder.
If the Specified Currency shown above is other than U.S. dollars, payments
of principal of (and premium, if any) and interest on the Notes will be made in
the applicable Specified Currency, except as provided on the reverse hereof.
Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, and, if so specified on the face hereof, in the Addendum
hereto, which further provisions shall for all purposes have the same effect as
if set forth at this place.
Notwithstanding any provisions to the contrary contained herein, if the
face of this Note specifies that an Addendum is attached hereto or that
"Other/Additional Provisions" apply to this Note, this Note shall be subject to
the terms set forth in such Addendum or such "Other/Additional Provisions".
Unless the certificate of authentication hereon has been executed by the
Trustee or its Authenticating Agent, as defined on the reverse hereof, by manual
signature, this Note shall not be entitled to any benefit under the Indenture,
as defined on the reverse hereof, or be valid or obligatory for any purpose.
5
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by the undersigned officer.
SECURITY CAPITAL GROUP INCORPORATED
By:
-----------------------------------
Attest:
By:
---------------------------------------
Name:
Its:
Dated:
------------------------------------
TRUSTEE'S CERTIFICATE OF AUTHENTICATION:
This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.
STATE STREET BANK AND TRUST
COMPANY, as Trustee
BY:
-----------------------------
Authorized Officer
6
<PAGE>
FORM OF REVERSE OF NOTE
General. This Note is one of a duly authorized issue of Medium-Term Notes
having maturities nine months or more from the date of issue (the "Notes") of
the Company. The Notes are issuable under an Indenture, dated as of November
16, 1998, as supplemented by a Board Resolution dated as of November 16, 1998
(as so supplemented, the "Indenture"), between the Company and State Street Bank
and Trust Company, as trustee (the "Trustee," which term includes any successor
trustee under the Indenture), to which Indenture and all indentures supplemental
thereto reference is hereby made for a statement of the respective rights,
limitations of rights, duties and immunities of the Company, the Trustee and
holders of the Notes and the terms upon which the Notes are, and are to be,
authenticated and delivered. State Street Bank and Trust Company has been
appointed Authenticating Agent (the "Authenticating Agent," which term includes
any successor authenticating agent) with respect to the Notes, and State Street
Bank and Trust Company at its corporate trust office at Two International Place,
Boston, MA 02110 has been appointed registrar and Paying Agent with respect to
the Notes. The terms of individual Notes may vary with respect to interest
rates, interest rate formulas, issue dates, maturity dates, or otherwise, all as
provided in the Indenture. To the extent not inconsistent herewith, the terms
of the Indenture are hereby incorporated by reference herein.
This Note is unsecured and ranks pari passu with all other unsecured and
unsubordinated indebtedness of the Company (excluding subsidiary debt) for
borrowed money.
Payments. Interest payments on each Interest Payment Date for this Note
will include accrued interest from and including the Original Issue Date or from
and including the last date in respect of which interest has been paid, as the
case may be, to, but excluding such Interest Payment Dates or the Stated
Maturity (or earlier redemption or repayment date), as the case may be.
Interest payments for this Note will be computed and paid on the basis of a 360-
day year of twelve 30-day months. The interest so payable, and punctually paid
or duly provided for, on any Interest Payment Date, will, subject to certain
exceptions described herein, be paid to the person in whose name this Note (or
one or more predecessor Notes) is registered at the close of business on the
date 15 days prior to an Interest Payment Date (whether or not a Business Day)
(each such date a "Record Date"); provided, however, that interest payable on
the Stated Maturity (or any redemption or repayment date) will be payable to the
person to whom the principal hereof shall be payable.
In the case where the Interest Payment Date or the Stated Maturity (or any
redemption or repayment date) does not fall on a Business Day, or if this Note
is payable in a Specified Currency other than U.S. dollars, a Business Day in
the country issuing the Specified Currency (or, for ECUs, Brussels), payment of
interest, premium, if any, or principal otherwise payable on such date need not
be made on such date, but may be made on the next succeeding Business Day with
the same force and effect as if made on the Interest Payment Date or on the
Stated Maturity (or any redemption or repayment date), and no interest shall
accrue for the period from and after
7
<PAGE>
the Interest Payment Date or the Stated Maturity (or any redemption or repayment
date) to such next succeeding Business Day.
If the Specified Currency shown on the face of this Note is other than U.S.
dollars, payments of principal of (and premium, if any) and interest on the
Notes will be made in the applicable Specified Currency; provided, however, that
payments of principal (and premium, if any) and interest on Notes denominated in
other than U.S. dollars will nevertheless be made in U.S. dollars:
(a) at the option of the holders of the Notes under the procedures
described in the two following paragraphs; and
(b) at the Company's option in the case of imposition of exchange
controls or other circumstances beyond the Company's control.
Except as provided in the next paragraph, if the Specified Currency shown
on the face of this Note is other than U.S. dollars, payments of interest and
principal (and premium, if any) will be made in U.S. dollars if the registered
holder of such Note on the relevant Record Date, or at Maturity, as the case may
be, has transmitted a written request for such payment in U.S. dollars to the
Paying Agent at the office of the Paying Agent on or before such Record Date, or
the date 15 days before Maturity, as the case may be. Such request may be in
writing (mailed or hand delivered) or by cable, or other form of facsimile
transmission. Any such request will remain in effect for any further payments
of interest and principal (and premium, if any) on such Note payable to such
holder, unless such request is revoked on or before the relevant Record Date or
the date 15 days before Maturity, as the case may be.
The U.S. dollar amount to be received by a holder of a Note denominated in
other than U.S. dollars who elects to receive payment in U.S. dollars will be
determined by the exchange rate agent, or any successor thereto (the "Exchange
Rate Agent"), at approximately 11:00 a.m., New York City time, on the second
Business Day preceding the applicable Payment Date, by selecting the indicative
quotations for the Specified Currency appearing at such time on the bank
composite or multi-contributor pages of the Quoting Source (as defined below)
for the first three banks, in descending order of their appearance on a list of
banks to be agreed to by the Company and the Exchange Rate Agent prior to such
second Business Day, which are offering quotes on the Quoting Source. The
Exchange Rate Agent shall select from among the selected quotations the one
which will yield the largest number of U.S. dollars upon conversion from such
Specified Currency. The "Quoting Source" shall mean Reuters Monitor Foreign
Exchange Service, or if the Exchange Rate Agent determines that such service is
not available, Telerate Monitor Foreign Exchange Service. If the Exchange Rate
Agent determines that neither Service is available, the Company and the Exchange
Rate Agent shall agree on a comparable display or other comparable manner of
obtaining quotations and such display or manner shall become the Quoting Source.
8
<PAGE>
In the case of a Specified Currency other than ECUs, if (i) fewer than
three bid quotations are available at the time a determination is to be made by
the Exchange Rate Agent pursuant to the preceding paragraph, or (ii) the
Exchange Rate Agent received no later than 12:00 noon, New York City time, on
such second Business Day preceding the applicable Payment Date notice from the
Company that there exist exchange controls or other circumstances beyond the
Company's control rendering such Specified Currency unavailable, then the
Exchange Rate Agent shall, prior to such Payment Date, notify the Company and
the Trustee of the noon buying rate in New York City for cable transfers, in the
Specified Currency indicated in such notice, as certified for customers purposes
by the Federal Reserve Bank of New York (the "Market Exchange Rate") as of such
second Business Day. If the Market Exchange Rate for such date is not then
available, the Exchange Rate Agent shall immediately notify the Company and the
Trustee of the most recently available Market Exchange Rate for such Specified
Currency. In the case of ECUs, if: (i) fewer than three bid quotations are
available at the time a determination is to be made by the Exchange Rate Agent
pursuant to the preceding paragraph, or (ii) the Exchange Rate Agent receives no
later than 12:00 noon, New York City time, on such second Business Day preceding
the applicable Payment Date notice from the Company that (A) there exist
exchange controls or other circumstances beyond the Company's control, rendering
ECUs unavailable or (B) ECUs are no longer used in the European Monetary System,
rendering ECUs unavailable, then the Exchange Rate Agent shall, prior to such
Payment Date, notify the Company and the Trustee of the rate of conversion for
ECUs into U.S. dollars, determined as of such second Business Day on the
following basis: The component currencies of the ECUs for this purpose (the
"Components") shall be the currency amounts that were components of the ECUs as
of the last date on which ECUs were used in the European Monetary System. The
equivalent of ECUs in U.S. dollars shall be calculated by aggregating the U.S.
dollar equivalent of the Components. The U.S. dollar equivalent of each of the
Components shall be determined by the Exchange Rate Agent on the basis of the
most recently available Market Exchange Rate for the Components, or as otherwise
specified to the Exchange Rate Agent by the Company.
If the Specified Currency shown on the face hereof is a currency or
currency unit other than U.S. dollars, and such Specified Currency is not
available due to the imposition of exchange controls or other circumstances
beyond the control of the Company, the Company shall be entitled to satisfy its
obligations to the holder of this Note by making such payment in U.S. dollars on
the basis of the most recently available noon-buying rate for cable transfers in
The City of New York, as determined by the Federal Reserve Bank of New York.
Any payment made under such circumstances in U.S. dollars where the required
payment is other than U.S. dollars will not constitute an Event of Default.
All percentages resulting from any calculations under this Note will be
rounded, if necessary, to the nearest one hundred thousandth of a percentage
point (with five one-millionths of a percentage point being rounded upward) and
all currency or currency unit amounts used in or resulting from any such
calculation in respect of the Notes will be rounded to the nearest one-hundredth
of a unit (with five one-thousandths being rounded upward).
9
<PAGE>
Sinking Fund. This Note will not be subject to any sinking fund and,
unless otherwise provided on the face hereof in accordance with the provisions
of the following two paragraphs, will not be redeemable or subject to repayment
at the option of the holder prior to Maturity.
Redemption. Unless otherwise indicated on the face of this Note, this Note
may not be redeemed prior to the Stated Maturity. If the face of this Note
indicates that this Note is subject to optional redemption, this Note will be
redeemable at the Company's option, as a whole or from time to time in part in
increments of U.S. $1,000 or the minimum Authorized Denomination (provided that
any remaining principal amount hereof shall be at least U.S. $1,000 or such
minimum Authorized Denomination) on and after the Initial Redemption Date set
forth on the face of this Note, on any date prior to the Stated Maturity at a
redemption price (the "Redemption Price"), as specified on the face of this
Note, equal to either (i) the price specified as a percentage of the face amount
to be redeemed plus accrued interest to the Redemption Date (subject to the
right of holders of record on the relevant Record Date to receive interest due
on an Interest Payment Date that is on or prior to the Redemption Date) or (ii)
100% of the principal amount thereof plus accrued interest to the Redemption
Date (subject to the right of holders of record on the relevant Record Date to
receive interest due on an Interest Payment Date that is on or prior to the
Redemption Date), plus a Make-Whole Premium, if any.
The "Make-Whole Premium" in respect of this Note is intended to be the
amount, if any, which, when added to the then outstanding principal amount of
this Note, would, if invested on the Redemption Date of this Note in U.S.
Treasury securities with maturities equal to the Remaining Life of this Note,
have a yield to maturity equal to the original yield to maturity of this Note,
based on the initial public offering price of this Note. The amount of the
Make-Whole Premium in respect of the principal amount of this Note will be
calculated by the Company and will be the excess, if any, of (i) the sum of the
present values, as of the Redemption Date of this Note, of (A) the respective
interest payments (exclusive of the amount of accrued interest to the Redemption
Date) on this Note that, but for such redemption, would have been payable on
their respective Interest Payment Dates after such Redemption Date, and (B) the
payment of such principal amount that, but for such redemption, would have been
payable on the Stated Maturity over (ii) the amount of such principal to be
redeemed. Such present values will be determined in accordance with generally
accepted principles of financial analysis by discounting the amounts of such
payments of interest and principal from their respective Stated Maturities to
such Redemption Date at a discount rate equal to the Treasury Yield.
The "Treasury Yield" in respect of this Note shall be determined as of the
date on which notice of redemption of this Note is sent to the holder hereof by
reference to the most recent Federal Reserve Statistical Release H.15(519) (or
successor publication) which has become publicly available not more than two
Business Days prior to such date (or, if such Statistical Release (or successor
publication) is no longer published or no longer contains the applicable data,
to the most recently published issue of The Wall Street Journal (Eastern
Edition) published not more than two Business Days prior to such date that
contains such data or, if The Wall Street
10
<PAGE>
Journal (Eastern Edition) is no longer published or no longer contains such
data, to any publicly available source of similar market data), and shall be the
most recent weekly average yield on actively traded U.S. Treasury securities
adjusted to a constant maturity equal to the Remaining Life of this Note and, if
applicable, converted to a bond equivalent yield basis as described below. The
"Remaining Life of this Note" shall equal the number of years from the
Redemption Date to the Stated Maturity of this Note; provided that if the
Remaining Life of this Note is not equal to the constant maturity of a U.S.
Treasury security for which a weekly average yield is specified in the
applicable source, then the Remaining Life of this Note shall be rounded to the
nearest one-twelfth of one year and the Treasury Yield shall be obtained by
linear interpolation (computed to the fifth decimal place (one thousandth of a
percentage point) and then rounded to the fourth decimal place (one hundredth of
a percentage point)), after rounding to the nearest one-twelfth of one year,
from the weekly average yields of (a) the actively traded U.S. Treasury security
with a maturity closest to and less than the Remaining Life of this Note and (b)
the actively traded U.S. Treasury security with a maturity closest to and
greater than the Remaining Life of this Note, except that if the Remaining Life
of this Note is less than three months, the weekly average yield on actively
traded U.S. Treasury securities adjusted to a constant maturity of three months
shall be used. The Treasury Yield shall, if expressed on a yield basis other
than that equivalent to a bond equivalent yield basis, be converted to a bond
equivalent yield basis and shall be computed to the fifth decimal place (one
thousandth of a percentage point) and then rounded to the fourth decimal place
(one hundredth of a percentage point).
Notice of redemption will be provided by mailing a notice of such
redemption to each holder by first class mail, postage prepaid, at least 30 days
and not more than 60 days prior to the date fixed for redemption to the
respective address of each holder as that address appears in the Security
Register. In the event of redemption of this Note in part only, a new Note or
Notes for the amount of the unredeemed portion hereof shall be issued in the
name of the holder hereof upon the presentation and cancellation hereof.
Repayment. Unless otherwise indicated on the face of this Note, this Note
shall not be subject to repayment at the option of the holder prior to the
Stated Maturity. If so indicated on the face of this Note, this Note may be
subject to repayment at the option of the holder on the date or dates, if any,
specified on the face hereof (the "Optional Redemption Date" or "Optional
Redemption Dates") on the terms set forth herein.
On any Optional Repayment Date, this Note will be repayable in whole or in
part in increments of U.S. $1,000 or the minimum Authorized Denomination of the
Specified Currency indicated on the face hereof (provided that any remaining
principal amount hereof shall not be less than the minimum Authorized
Denomination hereof) at the option of the holder hereof at a price equal to 100%
of the principal amount to be repaid, together with interest hereon payable to
the date of repayment. For this Note to be repaid in whole or in part at the
option of the holder hereof, the Company must receive at the corporate trust
office of the Paying Agent in the City of Boston, Commonwealth of Massachusetts
or New York, New York, at least 30 days but not
11
<PAGE>
more than 60 days prior to the repayment, (i) this Note with the form entitled
"Option to Elect Repayment" on the reverse hereof duly completed or (ii) a
telegram, facsimile transmission or a letter from a member of a national
securities exchange or a member of the National Association of Securities
Dealers, Inc. (the "NASD") or a commercial bank or trust company in the United
States which must set forth the name of the holder of this Note, the principal
amount of this Note, the principal amount of this Note to be repaid, the
certificate number or a description of the tenor and terms of this Note, a
statement that the option to elect repayment is being exercised thereby and a
guarantee that this Note to be repaid, together with the duly completed form
entitled "Option to Elect Repayment" on the reverse hereof, will be received by
the Paying Agent not later than the third Business Day after the date of such
telegram, facsimile transmission or letter; provided, that such telegram,
facsimile transmission or a letter from a member of a national securities
exchange or a member of the NASD or a commercial bank or trust company in the
United States shall only be effective if in such case, this Note and form duly
completed are received by the Paying Agent by such third Business Day. Exercise
of such repayment option by the holder hereof shall be irrevocable. In the event
of repayment of this Note in part only, a new Note or Notes of like tenor for
the amount of the unpaid portion hereof and otherwise having the same terms as
this Note shall be issued in the name of the holder hereof upon cancellation
hereof.
Optional Extension of Maturity. If so specified on the face hereof, the
Stated Maturity of this Note may be extended at the option of the Company for
the period or periods of whole years specified on the face hereof (each an
"Extension Period") up to but not beyond the date (the "Final Maturity") set
forth on the face hereof. If the Company exercises such option, the Paying
Agent will mail to the holder of this Note not later than 40 calendar days prior
to the old Stated Maturity a notice (the "Extension Notice"), first class
postage prepaid, indicating (a) the election of the Company to extend the
Maturity; (b) the new Stated Maturity; (c) the interest rate applicable to the
Extension Period; and (d) the provisions, if any, for redemption during the
Extension Period, including the date or dates on which, the period or periods
during which and the price or prices at which such redemption may occur during
the Extension Period. Upon the Paying Agent's mailing of the Extension Notice,
the Stated Maturity of this Note shall be extended automatically and, except as
modified by the Extension Notice and as described in the next paragraph, this
Note will have the same terms as prior to the mailing of such Notice.
Notwithstanding the foregoing, not later than 10:00 a.m., New York City
time, on the twentieth calendar day prior to the Maturity then in effect (or, if
such day is not a Business Day, not later than 10:00 a.m., New York City time,
on the immediately succeeding Business Day), the Company may, at its option,
revoke the Spread and/or Spread Multiplier provided for in the Extension Notice
and establish a higher interest rate for the Extension Period by causing the
Paying Agent to send notice of such Spread and/or Spread Multiplier to the
holder of such Note by first class mail, postage prepaid, or by such other means
as shall be agreed between the Company and the Paying Agent. Such notice shall
be irrevocable. All Notes with respect to which the Maturity is extended in
accordance with an Extension Notice will bear such Spread and/or Spread
Multiplier for the Extension Period, whether or not tendered for payment.
12
<PAGE>
If the Company extends the Maturity of this Note, the holder will have the
option to require the Company to repay such Note on Maturity then in effect at a
price equal to the principal amount thereof plus all accrued and unpaid interest
to such date. In order to obtain repayment on the old Stated Maturity once the
Company has extended the Maturity hereof, the holder must follow the procedures
set forth for optional repayment, except that the period for delivery of this
Note or notification to the Paying Agent shall be at least 25 but not more than
35 calendar days prior to the old Stated Maturity and except that if holder has
tendered this Note for repayment pursuant to an Extension Notice, the holder
may, by written notice to the Paying Agent, revoke any such tender for repayment
until 3:00 p.m., New York City time, on the twentieth calendar day prior to the
old Stated Maturity (or, if such day is not a Business Day, until 3:00 p.m., New
York City time, on the immediately succeeding Business Day).
Indexed Notes. If so stated on the face hereof, the amount of principal,
premium and/or interest payable in respect hereof will be determined with
reference to the price or prices of specific commodities or stocks, or to the
exchange rate of one or more designated currencies (including composite
currencies) relative to an indexed currency or to such other price(s) or
exchange rate(s), as specified on the face hereof.
Registration of Transfer. State Street Bank and Trust Company has been
appointed registrar for the Notes (the "Registrar," which term includes any
successor registrar appointed by the Company), and the Registrar will maintain
at its office at Two International Place, Boston, MA 02110 a register for the
registration and transfer of Notes. This Note may be transferred at the
aforesaid office of the Registrar by surrendering this Note for cancellation,
accompanied by a written instrument of transfer in form approved by the
Registrar and duly executed by the registered holder hereof in person or by the
holder's attorney duly authorized in writing, and thereupon the Registrar shall
issue in the name of the transferee or transferees, in exchange herefor, a new
Note or Notes having identical terms and provisions for an equal aggregate
principal amount in authorized denominations, subject to the terms and
conditions set forth herein; provided, however, that the Registrar will not be
required to register the transfer of or exchange any Note that has been called
for redemption in whole or in part, or as to which the holder thereof has
elected to cause such Note to be repaid in whole or in part, except the
unredeemed or unpaid portion of Notes being redeemed or repaid in part, or to
register the transfer of or exchange Notes to the extent and during the period
so provided in the Indenture with respect to the redemption of Notes. Notes are
exchangeable at said office for other Notes of other authorized denominations of
equal aggregate principal amount having identical terms and provisions. All
such exchanges and transfers of Notes will be free of charge, but the Company
may require payment of a sum sufficient to cover any tax or other governmental
charge in connection therewith. All Notes surrendered for exchange shall be
accompanied by a written instrument of transfer in form approved by the
Registrar and executed by the registered holder in person or by the holder's
attorney duly authorized in writing. The date of registration of any Note
delivered upon any exchange or transfer of Notes shall be such that no gain or
loss of interest results from such exchange or transfer.
13
<PAGE>
In case any Note shall at any time become mutilated, defaced or be
destroyed, lost or stolen and such Note or evidence of the loss, theft or
destruction thereof (together with the indemnity hereinafter referred to and
such other documents or proof as may be required in the premises) shall be
delivered to the Registrar, a new Note of like tenor will be issued by the
Company in exchange for the Note so mutilated or defaced, or in lieu of the Note
so destroyed or lost or stolen, but, in the case of any destroyed or lost or
stolen Note, only upon receipt of evidence satisfactory to the Registrar and the
Company that such Note was destroyed or lost or stolen and, if required, upon
receipt also of indemnity satisfactory to each of them. All expenses and
reasonable charges associated with procuring such indemnity and with the
preparation, authentication and delivery of a new Note shall be borne by the
owner of the Note mutilated, defaced, destroyed, lost or stolen.
This Note, and any Note or Notes issued upon transfer or exchange hereof,
is issuable only in fully registered form, without coupons, in denominations of
U.S. $1,000 or any integral multiple of U.S. $1,000 or the minimum Authorized
Denomination. If the Specified Currency shown on the face of this Note is other
than U.S. Dollars, the authorized denominations shall be the amount of the
Specified Currency for such Note equivalent, at the noon buying rate in The City
of New York for cable transfers for such Specified Currency (the "Exchange
Rate") on the sixth Business Day in The City of New York and in the country
issuing such currency (or, for ECUs, Brussels) next preceding the date of issue
of such Note, to U.S. $1,000 (rounded to the nearest 1,000 units of such
Specified Currency) and any greater amount that is an integral multiple of 1,000
units of such Specified Currency.
Events of Default. If an Event of Default (as defined in the Indenture)
with respect to the Notes of this series shall occur and be continuing, the
principal of the Notes of this series may be declared due and payable in the
manner and with the effect provided in the Indenture.
Original Issue Discount Notes. Notwithstanding anything herein to the
contrary, if this Note is an Original Issue Discount Note, the amount payable in
the event of redemption or repayment prior to the Stated Maturity hereof in lieu
of the principal amount due at the Stated Maturity hereof shall be the Amortized
Face Amount of this Note as of the Redemption Date or the date of repayment, as
the case may be, multiplied by the Redemption Price. The "Amortized Face
Amount" of this Note shall be the amount equal to (a) the Issue Price (as set
forth on the face hereof) plus (b) that portion of the difference between the
Issue Price and the principal amount hereof that has accrued at the Yield to
Maturity (as set forth on the face hereof) (computed in accordance with
generally accepted United States bond yield computation principles using a
constant yield method) at the date as of which the Amortized Face Amount is
calculated but in no event shall the Amortized Face Amount of this Note exceed
its principal amount.
The constant yield will be calculated using a 30-day month, 360-day year
convention, a compounding period that, except for the Initial Period (as defined
below), corresponds to the
14
<PAGE>
shortest period between Interest Payment Dates (with ratable accruals within a
compounding period, a coupon rate equal to the initial coupon rate applicable to
this Note and an assumption that the Maturity of this Note will not be
accelerated). If the period from the Original Issue Date to the initial Interest
Payment Date (the "Initial Period") is shorter than the compounding period for
this Note, a proportionate amount of the yield for an entire compounding period
will be accrued. If the Initial Period is longer than the compounding period,
then such period will be divided into a regular compounding period and a short
period, with the short period being treated as provided in the preceding
sentence.
Modifications and Waivers; Obligation of the Company Absolute. The
Indenture permits, with certain exceptions as therein provided, the amendment
thereof and the modification of the rights and obligations of the Company and
the rights of the holders of the Securities of each series to be affected under
the Indenture at any time by the Company and the Trustee with the consent of the
holders of a majority in principal amount of the Securities at the time
Outstanding of each series to be affected. The Indenture also contains
provisions permitting the holders of specified percentages in principal amount
of the Securities of each series at the time Outstanding, on behalf of the
holders of all Securities of such series, to waive compliance by the Company
with certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the holder of
this Note shall be conclusive and binding upon such holder and upon all future
holders of this Note and of any Note issued upon the registration of transfer
hereof or in exchange hereof or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Note.
No provision of this Note or of the Indenture shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
principal of, premium, if any, and interest on this Note at the time, place, and
rate or formula, and in the coin or currency, herein and in the Indenture
prescribed unless otherwise agreed between the Company and the registered holder
of this Note.
Registered Holder Treated as Owner. Prior to due presentment of this Note
for registration of transfer, the Company or any agent of the Company, the
Registrar or the Trustee may treat the holder in whose name this Note is
registered as the owner hereof for all purposes, whether or not this Note be
overdue, and neither the Company, the Registrar, the Trustee nor any such agent
shall be affected by notice to the contrary.
No Recourse Against Certain Persons. No recourse under or upon any
obligation, covenant or agreement contained in the Indenture or in this Note, or
because of any indebtedness evidenced thereby, shall be had against any
promoter, as such, or against any past, present or future shareholder, officer
or trustee, as such, of the Company or of any successor, either directly or
through the Company or any successor, under any rule of law, statute or
constitutional provision or by the enforcement of any assessment or by any legal
or equitable proceeding or
15
<PAGE>
otherwise, all such liability being expressly waived and released by the
acceptance of this Note by the holder hereof and as part of the consideration
for the issue of this Note.
Governing Law. This Note shall for all purposes be governed by, and
construed in accordance with, the laws of the State of New York.
CUSIP Number. Pursuant to a recommendation promulgated by the Committee on
Uniform Security Identification Procedures, the Company has caused "CUSIP"
numbers to be printed on this Note as a convenience to the holders of this Note.
No representation is made as to the correctness or accuracy of such CUSIP
numbers as printed on this Note, and reliance may be placed only on the other
identification numbers printed hereon.
Defined Terms. All terms used in this Note which are defined in the
Indenture shall have the meanings assigned to them in the Indenture.
Defeasance. The Indenture contains provisions for defeasance at any time
of (a) the entire indebtedness of the Company on this Note and (b) certain
restrictive covenants and the related defaults and Events of Default applicable
to the Company, in each case, upon compliance by the Company with certain
conditions set forth in the Indenture, which provisions apply to this Note.
16
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED, the undersigned hereby
sells, assigns and transfers unto
PLEASE INSERT SOCIAL
SECURITY OR OTHER IDENTIFYING
NUMBER OF ASSIGNEE
- -----------------------------------------------
| |
| |
- -----------------------------------------------
- --------------------------------------------------------------------------------
(Please Print or Typewrite Name and Address including
Zip Code of Assignee)
- --------------------------------------------------------------------------------
the within Security of Security Capital Group Incorporated and hereby does
irrevocably constitute and appoint
- ----------------------------------------------------------------------- Attorney
to transfer said Security on the books of the within-named Company with full
power of substitution in the premises.
Dated: . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . .
NOTICE: The signature to this assignment must correspond with the name as it
appears on the first page of the within Security in every particular, without
alteration or enlargement or any change whatever.
17
<PAGE>
FORM OF OPTION TO ELECT REPAYMENT
The undersigned hereby irrevocably request(s) and instruct(s) the
Company to repay the within Note (or portion thereof specified below) pursuant
to its terms at a price equal to 100% of the principal amount to be repaid,
together with unpaid interest to the Repayment Date, to the undersigned, at
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(Please print or typewrite name and address of the undersigned)
If less than the entire principal amount of the within Note is to be repaid,
specify the portion thereof (which shall be increments of U.S. $1,000 (or if the
Specified Currency is other than U.S. dollars, the minimum Authorized
Denomination specified on the face hereof)) which the holder elects to have
repaid: ;
------------------------------------------------------------------------
and specify the denomination or denominations (which shall not be less than the
minimum authorized denomination) of the Notes to be issued to the holder for the
portion of the within Note not being repaid (in the absence of any such
specification, one such Note will be issued for the portion not being
repaid):
------------------------------------------------------------------------
Dated:
------------------------
NOTICE: The signature on this Option to Elect Repayment must correspond with the
name as written upon the face of the within instrument in every particular
without alteration or enlargement.
18
<PAGE>
ADDENDUM
The Notes will be redeemable, in whole or in part, at the option of the
Company at any time at a redemption price equal to the greater of (i) 100% of
the principal amount of such Notes, and (ii) as determined by the Quotation
Agent (as defined below), the sum of the present values of the remaining
scheduled payments of principal and interest thereon (not including any portion
of such payments of interest accrued as of the date of redemption) discounted to
the date of redemption on a semi-annual basis (assuming a 360-day year
consisting of twelve 30-day months) at the Adjusted Treasury Rate (as defined
below) plus 25 basis points plus, in each case, accrued interest thereon to the
date of redemption.
"Adjusted Treasury Rate" means, with respect to any redemption date, the
rate per annum equal to the semi-annual equivalent yield to maturity to the
Comparable Treasury Issue (as defined below), assuming a price for the
Comparable Treasury Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price for such redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the remaining
term of the Notes to be redeemed that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the remaining term
of such Notes.
"Comparable Treasury Price" means, with respect to any redemption date, (i)
the average of the Reference Treasury Dealer Quotations (as defined below) for
such redemption date, after excluding the highest and lowest such Reference
Treasury Dealer Quotations, or (ii) if the Trustee obtains fewer than three such
Reference Treasury Dealer Quotations, the average of all such Quotations.
"Quotation Agent" means the Reference Treasury Dealer (as defined below)
appointed by the Company.
"Reference Treasury Dealer" means (i) each of J.P. Morgan Securities Inc.,
Goldman, Sachs & Co., Merrill Lynch & Co. and Chase Securities Inc. and their
respective successors; provided, however, that if the foregoing shall cease to
be a primary U.S. Government securities dealer in New York City (a "Primary
Treasury Dealer"), the Company shall substitute therefor another Primary
Treasury Dealer, and (ii) any other Primary Treasury Dealer selected by the
Company.
"Reference Treasury Dealer Quotation" means, with respect to each Reference
Treasury Dealer and any redemption date, the average, as determined by the
Company, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its
Addendum - Page 1
<PAGE>
principal amount) quoted in writing to the Trustee by such Reference Treasury
Dealer at 5:00 p.m., New York City time, on the third Business Day preceding
such redemption date.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of the Notes to be redeemed.
Unless the Company defaults in payment of the redemption price, on and after the
redemption date, interest will cease to accrued on the Notes or portions thereof
called for redemption.
# # #
Addendum - Page 2
<PAGE>
Exhibit 4.13
THIS NOTE IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER
REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITARY OR A NOMINEE OF THE
DEPOSITARY. THIS NOTE IS EXCHANGEABLE FOR NOTES REGISTERED IN THE NAME OF A
PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE ONLY IN THE LIMITED
CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND MAY NOT BE TRANSFERRED EXCEPT AS A
WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE
DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY.
THIS NOTE IS A BOOK-ENTRY SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A
NOMINEE OF A DEPOSITARY. THIS NOTE IS EXCHANGEABLE FOR NOTES REGISTERED IN THE
NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE ONLY IN THE LIMITED
CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER
THAN A TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE
DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER
NOMINEE OF THE DEPOSITARY) MAY BE REGISTERED EXCEPT IN SUCH LIMITED
CIRCUMSTANCES.
REGISTERED REGISTERED
SECURITY CAPITAL GROUP INCORPORATED
MEDIUM-TERM NOTE, SERIES A
(Floating Rate)
FORM OF FACE OF FLOATING RATE REGISTERED NOTE
REGISTERED PRINCIPAL AMOUNT
No.: _______ ________________
CUSIP No.: _____________
Unless this Note is presented by an authorized representative of The Depository
Trust Company (55 Water Street, New York, New York) to the issuer or its agent
for registration of transfer, exchange or payment, and any Note issued is
registered in the name of Cede & Co. or such other name as requested by an
authorized representative of The Depository Trust Company and any
<PAGE>
payment is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner
hereof, Cede & Co., has an interest herein./*/
IF APPLICABLE, THE "TOTAL AMOUNT OF OID", THE "ORIGINAL ISSUE DATE", THE "YIELD
TO MATURITY," AS WELL AS THE METHOD USED TO DETERMINE THE YIELD TO MATURITY
WHERE THERE IS A SHORT ACCRUAL PERIOD AND THE AMOUNT OF OID ALLOCABLE TO SUCH
SHORT ACCRUAL PERIOD WILL BE SET FORTH BELOW. THE CALCULATION OF THE AMOUNT OF
OID UPON (A) OPTIONAL REDEMPTION OR (B) DECLARATION OF ACCELERATION IS DISCUSSED
ON THE REVERSE HEREOF.
ISSUE PRICE: INVERSE FLOATING RATE NOTE:
[ ] YES [ ] NO
ORIGINAL ISSUE DATE:
FIXED INTEREST RATE:
STATED MATURITY:
OPTION TO ELECT REPAYMENT:
SPECIFIED CURRENCY: [ ] YES [ ] NO
BASE RATE: OPTIONAL REPAYMENT
[ ] Commercial Paper DATE(S):
Rate
[ ] CD Rate OPTIONAL REDEMPTION:
[ ] Federal Funds Rate [ ] YES [ ] NO
[ ] LIBOR:
[ ] LIBOR REUTERS INITIAL REDEMPTION DATE:
PAGE:
[ ] LIBOR TELERATE REDEMPTION PRICE: [ ] 100%
PAGE: of the Principal Amount plus a
[ ] Prime Rate Make-Whole Amount or [ ]
[ ] Treasury Rate Initially _____ % of Principal
[ ] CMT Rate: Amount and declining by _____% of
Designated CMT the Principal Amount on each
Telerate Page: anniversary of the Initial
If Telerate Page Redemption Date until the
7052: Redemption Price is 100% of the
Principal Amount.
- ----------------------------------
/*/ Applies only if this Note is a Registered Global Security.
2
<PAGE>
[ ] Weekly Average ORIGINAL ISSUE DISCOUNT
[ ] Monthly Average SECURITY:
Designated CMT [ ] YES [ ] NO
Maturity Index:
[ ] Eleventh District Cost of TOTAL AMOUNT OF OID:
Funds Rate
YIELD TO MATURITY:
INITIAL INTEREST RATE:
INITIAL ACCRUAL PERIOD OID:
INDEX MATURITY:
SPREAD (PLUS OR MINUS):
SPREAD MULTIPLIER: AUTHORIZED DENOMINATION:
[ ] $1,000 and integral multiples
CALCULATION AGENT: thereof
[ ] Other:
MAXIMUM INTEREST RATE:
EXCHANGE RATE AGENT:
MINIMUM INTEREST RATE:
AMORTIZING SECURITY:
INTEREST RESET PERIOD: [ ] YES [ ] NO
INTEREST RESET DATE(S): AMORTIZATION FORMULA:
INTEREST PAYMENT PERIOD: AMORTIZATION PAYMENT
DATE(S):
INTEREST PAYMENT DATES:
ADDENDUM ATTACHED:
[ ] YES [ ] NO
FLOATING/FIXED RATE NOTE:
[ ] YES [ ] NO RENEWABLE NOTE:
[ ] YES [ ] NO
FIXED INTEREST RATE:
ELECTION DATE:
FIXED INTEREST RATE
COMMENCEMENT DATE: MINIMUM ELECTION DATE
NOTICE:
OPTIONAL EXTENSION OF MAXIMUM ELECTION DATE
MATURITY: [ ] YES [ ] NO NOTICE:
3
<PAGE>
LENGTH OF EXTENSION PERIOD: FINAL MATURITY DATE
REDEEMABLE:
NUMBER OF EXTENSION PERIODS: [ ] YES [ ] NO
FINAL MATURITY DATE: INITIAL REDEMPTION DATE:
INDEXED NOTE:
[ ] YES [ ] NO
REFERENCE INDEX OR RATE:
OTHER/ADDITIONAL PROVISIONS:
4
<PAGE>
Security Capital Group Incorporated, a corporation organized and existing
under the laws of the State of Maryland (hereinafter called the "Company," which
term shall include any successor under the Indenture hereinafter referred to),
for value received, hereby promises to pay to ____________________________
___________________ or registered assignees, the principal sum of
__________________________ on the Stated Maturity specified above (except to the
extent redeemed or repaid prior to the Stated Maturity) and to pay interest
thereon, from the Original Issue Date specified above at a rate per annum equal
to the Initial Interest Rate specified above until the first Interest Reset Date
next succeeding the Original Issue Date specified above, and thereafter at a
rate per annum determined in accordance with the provisions specified above and
on the reverse hereof or in an Addendum hereto with respect to one or more Base
Rates specified above until the principal hereof is paid or duly made available
for payment. The Company will pay interest in arrears monthly, quarterly,
semiannually or annually as specified above as the Interest Payment Period on
each Interest Payment Date (as specified above), commencing with the first
Interest Payment Date next succeeding the Original Issue Date specified above,
and on the Stated Maturity (or any redemption or repayment date); provided,
however, that if the Original Issue Date occurs between a Record Date, as
defined below, and the next succeeding Interest Payment Date, interest payments
will commence on the second Interest Payment Date succeeding the Original Issue
Date to the registered holder of this Note on the Record Date with respect to
such second Interest Payment Date; and provided, further, that if an Interest
Payment Date or the Stated Maturity or redemption or repayment date would fall
on a day that is not a Business Day (this and certain other capitalized terms
used herein are defined on the reverse of this Note), such Interest Payment
Date, Stated Maturity or redemption or repayment date shall be the following day
that is a Business Day, except that if the Base Rate Specified above is LIBOR
and such next Business Day falls in the next calendar month, the Interest
Payment Date, Stated Maturity or redemption or repayment date shall be the
immediately preceding day that is a Business Day.
Payment of the principal of this Note, any premium and the interest due at
the Stated Maturity (or any redemption or repayment date), or any prior date on
which the principal or an installment of principal of this Note becomes due and
payable, whether by declaration of acceleration or otherwise, will be made in
immediately available funds upon presentation and surrender of this Note (and,
with respect to any applicable repayment of this Note, upon presentation and
surrender of this Note and a duly completed election form as contemplated on the
reverse hereof) at the office or agency of such paying agent as the Company may
determine maintained for that purpose in The City of Boston, Massachusetts (a
"Paying Agent"), or at the office or agency of such other Paying Agent as the
Company may determine; provided, however, that if the Specified Currency
specified above is other than U.S. dollars and such payment is to be made in the
Specified Currency in accordance with the provisions on the reverse hereof, such
payment will be made by wire transfer of immediately available funds to an
account with a bank designated by the holder hereof at least 15 calendar days
prior to Maturity, provided that such bank has appropriate facilities therefor
and that this Note (and, if applicable, a duly completed repayment election
form) is presented and surrendered at the aforementioned office or agency
5
<PAGE>
maintained by the Company in time for the Trustee to make such payment in such
funds in accordance with its normal procedures. Payment of interest due on any
Interest Payment Date other than Maturity will be made at the aforementioned
office or agency maintained by the Company or, at the option of the Trustee, by
check mailed to the address of the person entitled thereto as such address shall
appear in the Security Register maintained by the Trustee; provided, however,
that a holder of U.S. $1,000,000 (or, if the Specified Currency is other than
U.S. dollars, the equivalent thereof in the Specified Currency) or more in
aggregate principal amount of Notes (whether having identical or different terms
and provisions) will be entitled to receive interest payments on any Interest
Payment Date other than Maturity by wire transfer of immediately available funds
if appropriate wire transfer instructions have been received in writing by the
Trustee not less than 15 calendar days prior to such Interest Payment Date. Any
such wire transfer instructions received by the Trustee shall remain in effect
until revoked by such holder.
If the Specified Currency shown above is other than U.S. dollars, payments
of principal of (and premium, if any) and interest on the Notes will be made in
the applicable Specified Currency, except as provided on the reverse hereof.
Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, and, if so specified on the face hereof, in the Addendum
hereto, which further provisions shall for all purposes have the same effect as
if set forth at this place.
Notwithstanding any provisions to the contrary contained herein, if the
face of this Note specifies that an Addendum is attached hereto or that
"Other/Additional Provisions" apply to this Note, this Note shall be subject to
the terms set forth in such Addendum or such "Other/Additional Provisions".
Unless the certificate of authentication hereon has been executed by the
Trustee or its Authenticating Agent, as defined on the reverse hereof, by manual
signature, this Note shall not be entitled to any benefit under the Indenture,
as defined on the reverse hereof, or be valid or obligatory for any purpose.
6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by the undersigned officer.
SECURITY CAPITAL GROUP
INCORPORATED
By:___________________________
Attest:
By:_________________________
Name:
Its:
Dated: _________________, _____
TRUSTEE'S CERTIFICATE OF AUTHENTICATION:
This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.
STATE STREET BANK AND TRUST
COMPANY, as Trustee
BY:________________________
Authorized Officer
7
<PAGE>
FORM OF REVERSE OF NOTE
General. This Note is one of a duly authorized issue of Medium-Term Notes
having maturities nine months or more from the date of issue (the "Notes") of
the Company. The Notes are issuable under an Indenture, dated as of November
16, 1998, as supplemented by a Board Resolution dated as of November 16, 1998
(as so supplemented, the "Indenture"), between the Company and State Street Bank
and Trust Company, as trustee (herein called the "Trustee," which term includes
any successor trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties and immunities of the Company,
the Trustee and holders of the Notes and the terms upon which the Notes are, and
are to be, authenticated and delivered. State Street Bank and Trust Company has
been appointed Authenticating Agent and Calculation Agent (the "Authenticating
Agent" and "Calculation Agent," respectively, which terms include any successor
authenticating agent or calculation agent, as the case may be) with respect to
the Notes, and State Street Bank and Trust Company at its corporate trust office
at Two International Place, Boston, MA 02110 has been appointed the registrar
and a Paying Agent with respect to the Notes. The terms of individual Notes may
vary with respect to interest rates, interest rate formulas, issue dates,
maturity dates, or otherwise, all as provided in the Indenture. To the extent
not inconsistent herewith, the terms of the Indenture are hereby incorporated by
reference herein.
This Note is unsecured and ranks pari passu with all other unsecured and
unsubordinated indebtedness of the Company (excluding subsidiary debt) for
borrowed money.
Interest Rate Calculations. The interest borne by this Note shall be
determined as follows:
(i) Unless designated as a Floating Rate/Fixed Rate Note or an
Inverse Floating Rate Note, this Note will be designated a "Regular
Floating Rate Note" and, except as described below or in an Addendum
hereto, will bear interest at the rate determined by reference to the Base
Rate (i) plus or minus the Spread, if any, and/or (ii) multiplied by the
Spread Multiplier, if any.
(ii) If designated as a Floating Rate/Fixed Rate Note, then, except as
described below or in an Addendum hereto, this Note will initially bear
interest at the rate determined by reference to the Base Rate (i) plus or
minus the Spread, if any, and/or (ii) multiplied by the Spread Multiplier,
if any. The interest rate in effect commencing on, and including, the
Fixed Rate Commencement Date to Maturity shall be the Fixed Interest Rate,
if such rate is specified on the face of this Note, or if no such Fixed
Interest Rate is so specified and the Floating Rate/Fixed Rate Note is
still outstanding on such day, the interest rate in effect thereon on the
day immediately preceding the Fixed Rate Commencement Date.
8
<PAGE>
(iii) If designated as an Inverse Floating Rate Note, then, except as
described below or in an Addendum hereto, this Note will bear interest
equal to the Fixed Interest Rate specified on the face of this Note minus
the rate determined by reference to the Base Rate (i) plus or minus the
Spread, if any, and/or (ii) multiplied by the applicable Spread Multiplier,
if any; provided, however, unless otherwise specified on the face of this
Note or in an Addendum hereto, the interest rate thereon will not be less
than zero.
Commencing with the first Interest Reset Date specified on the face hereof
following the Original Issue Date, the rate at which interest on this Note is
payable shall be reset daily, weekly, monthly, quarterly, semiannually, annually
or otherwise as shown on the face hereof under "Interest Reset Period";
provided, however, that the interest rate in effect from the Original Issue Date
to the first Interest Reset Date specified on the face hereof will be the
Initial Interest Rate. Each such reset rate shall be applicable on and after the
Interest Reset Date to which it relates to but not including the next succeeding
Interest Reset Date or until Maturity, as the case may be. Unless otherwise
specified on the face hereof, the Interest Reset Date will be, if the interest
rate on this Note is to be reset daily, each Business Day; if the interest rate
on this Note is to be reset weekly, Wednesday of each week, unless the Base Rate
of this Note is the Treasury Rate, in which case the Interest Reset Date will be
Tuesday of each week (except that if in any week an auction of Treasury bills
falls on a Tuesday, the Interest Reset Date will be on Wednesday of that week);
if the interest rate on this Note is to be reset monthly, the third Wednesday of
each month; if the interest rate on this Note is to be reset quarterly, the
third Wednesday of March, June, September and December; if the interest rate on
this Note is to be reset semiannually, the third Wednesday of each of two months
specified on the face hereof; and if the interest rate on this Note is to reset
annually, the third Wednesday of the month specified on the face hereof. If any
Interest Reset Date specified on the face hereof would otherwise be a day that
is not a Market Day, such Interest Reset Date shall be postponed to the next day
that is a Market Day, except that if the rate of interest on this Note shall be
determined in accordance with the provisions of the heading "Determination of
LIBOR" below, and such Market Day is in the next succeeding calendar month, such
Interest Reset Date shall be the immediately preceding Market Day. Subject to
applicable provisions of law and except as specified herein, on each Interest
Reset Date the rate of interest on this Note shall be the rate determined in
accordance with the provisions of the applicable heading below. In addition, if
the Treasury Rate is an applicable Base Rate and the Interest Determination Date
would otherwise fall on an Interest Reset Date, then such Interest Reset Date
will be postponed to the next succeeding Business Day.
The Interest Determination Date pertaining to an Interest Reset Date for a
Commercial Paper Rate Note, for a Prime Rate Note, for a CD Rate Note, for a CMT
Rate Note, for a Federal Funds Rate Note and for an Eleventh District Cost of
Funds Rate Note will be the second Market Day preceding such Interest Reset
Date. The Interest Determination Date pertaining to an Interest Reset Date for
a LIBOR Note will be the second London Business Day preceding such Interest
Reset Date. The Interest Determination Date pertaining to an Interest Reset
Date for a Treasury Rate Note will be the day of the week in which such Interest
Reset Date falls on which
9
<PAGE>
Treasury bills would normally be auctioned. If an auction date shall fall on
any Interest Reset Date for a Treasury Rate Note, then such Interest Reset Date
shall instead be the first Market Day immediately following such auction date.
"Calculation Date" pertaining to any Interest Determination Date will be
the earlier of (i) the tenth calendar day after such Interest Determination
Date, or if, such day is not a Business Day, the next succeeding Business Day or
(ii) the Business Day immediately preceding the applicable Interest Payment Date
or the Stated Maturity, as the case may be.
"Market Day" means: (a) with respect to any Note, any Business Day in The
City of New York and the City of Boston; and (b) with respect to any LIBOR Note,
any Business Day in The City of New York and The City of Boston which is also a
day on which dealings in deposits in U.S. dollars are transacted in the London
interbank market (a "London Business Day").
Determination of Commercial Paper Rate. If the Base Rate specified on the
face hereof is the Commercial Paper Rate, the Commercial Paper Rate with respect
to this Note shall be determined on each Interest Determination Date and shall
be the Money Market Yield (calculated as described below) of the per annum rate
(quoted on a bank discount basis) for the relevant Interest Determination Date
for commercial paper having the specified Index Maturity as published by the
Board of Governors of the Federal Reserve System in "Statistical Release
H.15(519), Selected Interest Rates" or any successor publication of the Board of
Governors of the Federal Reserve System ("H.15(519)") under the heading
"Commercial Paper--Nonfinancial." If such rate is not published before 3:00
p.m., New York City time, on the relevant Calculation Date, then the Commercial
Paper Rate for such Interest Reset Date shall be the Money Market Yield of such
rate on such Interest Determination Date for commercial paper having the
specified Index Maturity as published by the Federal Reserve Bank of New York on
the Internet, under the heading "Federal Reserve Release--Commercial Paper." If
by 3:00 p.m., New York City time, on such Calculation Date such rate is not yet
published in either H.15(519) or by the Federal Reserve Bank of New York, the
Commercial Paper Rate for such interest Reset Date shall be calculated by the
Calculation Agent and shall be the Money Market Yield of the arithmetic mean of
the offered per annum rates (quoted on a bank discount basis), as of 11:00 a.m.,
New York City time, on such Interest Determination Date, of three leading
dealers of commercial paper in The City of New York (which may include the
Agents) selected by the Calculation Agent for commercial paper of the specified
Index Maturity placed for a nonfinancial issuer whose bond rating is "AA," or
the equivalent, from a nationally recognized rating agency; provided, however,
that if fewer than three dealers selected by the Calculation Agent are quoting
as mentioned in this sentence, the Commercial Paper Rate for such Interest Reset
Date will be the Commercial Paper Rate in effect on such Interest Determination
Date.
"Money Market Yield" shall be a yield (expressed as a percentage)
calculated in accordance with the following formula:
10
<PAGE>
Money Market Yield = 100 x 360 x D
-------------------
360 -- (D x M)
where "D" refers to the per annum rate for commercial paper quoted on a bank
discount basis and expressed as a decimal and "M" refers to the actual number of
days in the period from the Interest Reset Date to but excluding the day that
numerically corresponds to such Interest Rate Date (or, if there is not any such
numerically corresponding day, the last day) in the calendar month that is the
number of months corresponding to the specified Index Maturity after the month
in which such Interest Reset Date falls.
Determination of CD Rate. If the Base Rate specified on the face hereof is
the CD Rate, the CD Rate with respect to this Note shall be determined on each
Interest Determination Date and shall be the rate for the relevant Interest
Determination Date for negotiable U.S. dollar certificates of deposit having the
specified Index Maturity as published in H.15(519) under the heading "CDs
(Secondary Market)." If such rate is not published before 3:00 p.m., New York
City time, on the relevant Calculation Date, then the CD Rate for such Interest
Reset Date shall be the rate on such Interest Determination Date for negotiable
certificates of deposit having the specified Index Maturity as published in
Composite Quotations under the heading "Certificates of Deposit." If by 3:00
p.m., New York City time, on such Calculation Date such rate is not published in
either H.15(519) or Composite Quotations, the CD Rate for such Interest Reset
Date shall be calculated by the Calculation Agent and shall be the arithmetic
mean of the secondary market offered rates, as of 10:00 a.m., New York City
time, on such Interest Determination Date, of three leading nonbank dealers of
negotiable U.S. dollar certificates of deposit in The City of New York selected
by the Calculation Agent for negotiable U.S. dollar certificates of deposit of
major United States money market banks in the market for negotiable U.S. dollar
certificates of deposit with a remaining maturity closest to the specified Index
Maturity in a denomination of U.S. $5,000,000; provided, however, that if fewer
than three dealers selected as provided above by the Calculation Agent are
quoting as mentioned in this sentence, the CD Rate for such Interest Reset Date
will be the CD Rate in effect on such Interest Determination Date.
Determination of Federal Funds Rate. If the Base Rate specified on the
face hereof is the Federal Funds Rate, the Federal Funds Rate with respect to
this Note shall be determined on each Interest Determination Date and shall be
the rate on the relevant Interest Determination Date for Federal Funds as
published in H.15(519) under the heading "Federal Funds (Effective)." If such
rate is not published before 3:00 p.m., New York City time, on the relevant
Calculation Date, then the Federal Funds Rate for such Interest Reset Date will
be the rate on such Interest Determination Date as published in Composite
Quotations under the heading "Federal Funds/Effective Rate." If by 3:00 p.m.,
New York City time, on such Calculation Date such rate is not published in
either H.15(519) or Composite Quotations, the Federal Funds Rate for such
Interest Reset Date shall be calculated by the Calculation Agent and shall be
the arithmetic mean of the rates, as of 9:00 a.m., New York City time, on such
Interest Determination Date, for the last transaction in overnight Federal Funds
arranged by three leading brokers of Federal Funds
11
<PAGE>
transactions in The City of New York selected by the Calculation Agent;
provided, however, that if fewer than three brokers selected by the Calculation
Agent are quoting as mentioned in this sentence, the Federal Funds Rate for
such Interest Reset Date will be the Federal Funds Rate in effect on such
Interest Determination Date.
Determination of LIBOR. If the Base Rate specified on the face hereof is
LIBOR, LIBOR with respect to this Note shall be determined on each Interest
Determination Date as follows:
(a) The Calculation Agent will determine either (i) the arithmetic
mean of the offered rates for deposits in U.S. dollars for the period of
the applicable Index Maturity commencing on the Interest Reset Date which
appear on the Reuters Screen LIBO Page at approximately 11:00 a.m., London
time, on such Interest Determination Date if at least two such offered
rates appear on the Reuters Screen LIBO Page ("LIBOR Reuters"), or (ii) the
rate for deposits in U.S. dollars for the period of the applicable Index
Maturity commencing on the Interest Reset Date that appears on the Telerate
Page 3750 as of 11:00 a.m., London time, on such Interest Determination
Date ("LIBOR Telerate"). "Reuters Screen LIBO Page" means the display
designated as Page "LIBO" on the Reuters Monitor Money Rate Service (or
such other page as may replace the LIBO page on the service for the purpose
of displaying London interbank offered rates of major banks). "Telerate
Page 3750" means the display designated as page "3750" on the Telerate
Service (or such other page as may replace the 3750 page on that service or
such other service or services as may be nominated by the British Bankers'
Association for the purpose of displaying London interbank offered rates
for U.S. dollar deposits). If neither LIBOR Reuters nor LIBOR Telerate is
specified on the face hereof, LIBOR will be determined as if LIBOR Telerate
had been specified. If fewer than two offered rates appear on the Reuters
Screen LIBO Page, or if no rate appears on the Telerate Page 3750, as
applicable, LIBOR in respect of that Interest Determination Date will be
determined as if the parties had specified the rate described in (b) below.
(b) If fewer than two offered rates appear on the Reuters Screen LIBO
Page or no rate appears on Telerate Page 3750, as applicable, the
Calculation Agent will request the principal London offices of four major
banks in the London interbank market, as selected by the Calculation Agent,
to provide the Calculation Agent with its offered quotation for deposits in
U.S. dollars for the period of the applicable Index Maturity to prime banks
in the London interbank market at approximately 11:00 a.m., London time,
commencing on the second London Business Day immediately following such
Interest Determination Date and in a principal amount equal to an amount of
not less than U.S. $1 million that is representative of a single
transaction in such market at such time. If at least two quotations are
provided, LIBOR in respect of that Interest Determination Date will be the
arithmetic
12
<PAGE>
mean of such quotations. If fewer than two quotations are provided, LIBOR
in respect of that Interest Determination Date will be the arithmetic mean
of the rates quoted by three major banks in The City of New York selected
by the Calculation Agent at approximately 11:00 a.m., New York City time,
commencing on the second London Business Day immediately following such
Interest Determination Date for loans in U.S. dollars to leading European
banks, for the period of the applicable Index Maturity and in a principal
amount equal to an amount of not less than U.S. $1 million that is
representative for a single transaction in such market at such time;
provided, however, that if fewer than three banks selected as aforesaid by
the Calculation Agent are quoting rates as mentioned in this sentence, the
rate of interest in effect for the applicable period will be the LIBOR in
effect on such Interest Determination Date.
Determination of Prime Rate. If the Base Rate specified on the face hereof
is the Prime Rate, the Prime Rate with respect to this Note shall be determined
on each Interest Determination Date and shall be the rate set forth for the
relevant Interest Determination Date in H.15(519) under the heading "Bank Prime
Loan." If such rate is not published before 3:00 p.m., New York City time, on
the relevant Calculation Date, then the Prime Rate for such Interest Reset Date
will be the arithmetic mean of the rates of interest publicly announced by each
bank that appears on the display designated as page "USPRIME1" on the Reuters
Monitor Money Rates Service or any successor service (or such other page as may
replace the USPRIME1 page on that service or any successor service for the
purpose of displaying prime rates or base lending rates of major United States
banks) ("Reuters Screen USPRIME1 Page") as such bank's prime rate or base
lending rate as in effect for such Interest Determination Date as quoted on the
Reuters Screen USPRIME1 Page on such Interest Determination Date. If fewer than
four such rates appear on the Reuters Screen USPRIME1 Page on such Interest
Determination Date, the Prime Rate for such Interest Reset Date will be the
arithmetic mean of the prime rates or base lending rates (quoted on the basis of
the actual number of days in the year divided by a 360-day year) as of the close
of business on such Interest Determination Date by four major banks in The City
of New York selected by the Calculation Agent; provided, however, that if fewer
than four banks selected as provided above by the Calculation Agent are quoting
as mentioned in this sentence, the Prime Rate for such Interest Reset Date will
be the Prime Rate in effect on such Interest Determination Date.
Determination of Treasury Rate. If the Base Rate specified on the face
hereof is the Treasury Rate, the Treasury Rate with respect to this Note shall
be determined on each Interest Determination Date and shall be the rate for the
auction on the relevant Interest Determination Date of direct obligations of the
United States ("Treasury Bills") having the specified Index Maturity as
published in H.15(519) under the heading "U.S. Government Securities/Treasury
Bills/Auction Average (Investment)" or, if not so published by 3:00 p.m., New
York City time, on the relevant Calculation Date, the auction average rate
(expressed as a bond equivalent, on the basis of a year of 365 or 366 days, as
applicable, and applied on a daily basis) for such auction as otherwise
announced by the United States Department of the Treasury. If the results of
such auction of Treasury bills having the specified Index Maturity are not
published or reported as provided above by 3:00 p.m., New York City time, on
such Calculation Date, or if no such
13
<PAGE>
auction is held during such week, then the Treasury Rate shall be the rate set
forth in H.15(519) for the relevant Interest Determination Date for the
specified Index Maturity under the heading "U.S. Government Securities/Treasury
Bills/Secondary Market." If such rate is not so published by 3:00 p.m., New
York City time, on the relevant Calculation Date, the Treasury Rate for such
Interest Reset Date shall be calculated by the Calculation Agent and shall be a
yield to maturity (expressed as a bond equivalent, on the basis of a year of
365 or 366 days, as applicable, and applied on a daily basis) of the arithmetic
mean of the secondary market bid rates as of approximately 3:30 p.m., New York
City time, on such Interest Determination Date, of three primary United States
government securities dealers in The City of New York selected by the
Calculation Agent for the issue of Treasury bills with a remaining maturity
closest to the specified Index Maturity; provided, however, that if fewer than
three dealers selected as provided above by the Calculation Agent are quoting
as mentioned in this sentence, the Treasury Rate for such Interest Reset Date
will be the Treasury Rate in effect on such Interest Determination Date.
Determination of CMT Rate. If the Base Rate specified on the face hereof
is the CMT Rate, the CMT Rate with respect to this Note shall be determined on
each Interest Determination Date and shall be the rate displayed on the
Designated CMT Telerate Page under the caption ". . . Treasury Constant
Maturities . . . Federal Reserve Board Release H.15 . . . Mondays Approximately
3:45 p.m.," under the column for the Designated CMT Maturity Index for (i) if
the Designated CMT Telerate Page is 7055, the rate on such Interest
Determination Date and (ii) if the Designated CMT Telerate Page is 7052, the
weekly or monthly average, as specified on the face hereof, for the week or the
month, as applicable, ended immediately preceding the week in which the related
Interest Determination Date occurs. If such rate is no longer displayed on the
relevant page or is not displayed by 3:00 p.m., New York City time, on the
related Calculation Date, then the CMT Rate for such Interest Determination Date
will be such treasury constant maturity rate for the Designated CMT Maturity
Index as published in the relevant H.15(519). If such rate is no longer
published or is not published by 3:00 p.m., New York City time, on the related
Calculation Date, then the CMT Rate on such Interest Determination Date will be
such treasury constant maturity rate for the Designated CMT Maturity Index (or
other United States Treasury rate for the Designated CMT Maturity Index) for the
Interest Determination Date with respect to such Interest Reset Date as may then
be published by either the Board of Governors of the Federal Reserve System or
the United States Department of the Treasury that the Calculation Agent
determines to be comparable to the rate formerly displayed on the Designated CMT
Telerate Page and published in the relevant H.15(519). If such information is
not provided by 3:00 p.m., New York City time, on the related Calculation Date,
then the CMT Rate on the Interest Determination Date will be calculated by the
Calculation Agent and will be a yield to maturity, based on the arithmetic mean
of the secondary market closing offer side prices as of approximately 3:30 p.m.,
New York City time, on such Interest Determination Date reported, according to
their written records, by three leading primary United States government
securities dealers (each, a "Reference Dealer") in The City of New York (which
may include the Agent or its affiliates) selected by the Calculation Agent (from
five such Reference Dealers selected by the Calculation Agent and eliminating
the highest quotation (or, in the event of equality, one of the
14
<PAGE>
highest) and the lowest quotation (or, in the event of equality, one of the
lowest)), for the most recently issued direct noncallable fixed rate
obligations of the United States ("Treasury Notes") with an original maturity
of approximately the Designated CMT Maturity Index and a remaining term to
maturity of not less than such Designated CMT Maturity Index minus one year.
If the Calculation Agent is unable to obtain three such Treasury Note
quotations, the CMT Rate on such Interest Determination Date will be calculated
by the Calculation Agent and will be a yield to maturity based on the
arithmetic mean of the secondary market offer side prices as of approximately
3:30 p.m., New York City time, on such Interest Determination Date of three
Reference Dealers in The City of New York (from five such Reference Dealers
selected by the Calculation Agent and eliminating the highest quotation (or, in
the event of equality, one of the highest) and the lowest quotation (or, in the
event of equality, one of the lowest)), for Treasury Notes with an original
maturity of the number of years that is the next highest to the Designated CMT
Maturity Index and a remaining term to maturity closest to the Designated CMT
Maturity Index and in an amount of at least U.S. $100 million. If three or
four (and not five) of such Reference Dealers are quoting as described above,
then the CMT Rate will be based on the arithmetic mean of the offer prices
obtained and neither the highest nor the lowest of such quotes will be
eliminated; provided, however, that if fewer than three Reference Dealers so
selected by the Calculation Agent are quoting as mentioned herein, the CMT Rate
determined as of such Interest Determination Date will be the CMT Rate in
effect on such Interest Determination Date. If two Treasury Notes with an
original maturity as described in the second preceding sentence have remaining
terms to maturity equally close to the Designated CMT Maturity Index, the
Calculation Agent will obtain from five Reference Dealers quotations for the
Treasury Note with the shorter remaining term to maturity and will use such
quotations to calculate the CMT Rate as set forth above.
"Designated CMT Telerate Page" means the display on the Dow Jones Telerate
Service (or any successor service) on the page specified on the face hereof (or
any other page as may replace such page on that service (or any successor
service) for the purpose of displaying Treasury Constant Maturities as reported
in H.15(519)) for the purpose of displaying Treasury Constant Maturities as
reported in H.15(519). If no such page is specified on the face hereof, the
Designated CMT Telerate Page shall be 7052 for the most recent week.
"Designated CMT Maturity Index" means the original period to maturity of
the U.S. Treasury securities (either 1, 2, 3, 5, 7, 10, 20 or 30 years)
specified on the face hereof with respect to which the CMT Rate will be
calculated. If no such maturity is specified on the face hereof, the Designated
CMT Maturity Index shall be 2 years.
Determination of Eleventh District Cost of Funds Rate. If the Base Rate
specified on the face hereof is the Eleventh District Cost of Funds Rate, the
Eleventh District Cost of Funds Rate with respect to this Note shall be
determined on each Interest Determination Date and shall be the rate equal to
the monthly weighted average cost of funds for the calendar month immediately
preceding the month in which such Eleventh District Cost of Funds Rate Interest
Determination
15
<PAGE>
Date falls, as set forth under the caption "11th District" on Telerate Page
7058 as of 11:00 A.M., San Francisco time, on such Eleventh District Cost of
Funds Rate Interest Determination Date. If such rate does not appear on
Telerate Page 7058 on such Eleventh District Cost of Funds Rate Interest
Determination Date then the Eleventh District Cost of Funds Rate on such
Eleventh District Cost of Funds Rate Determination Date shall be the monthly
weighted average cost of funds paid by member institutions of the Eleventh
Federal Home Loan Bank District that was most recently announced (the "Index")
by the FHLB of San Francisco, as such cost of funds for the calendar month
immediately preceding such Eleventh District Cost of Funds Rate Interest
Determination Date. If the FHLB of San Francisco fails to announce the Index
on or prior to such Eleventh District Cost of Funds Rate Interest Determination
Date for the calendar month immediately preceding such Eleventh District Cost
of Funds Rate Interest Determination Date, the Eleventh District Cost of Funds
Rate determined as of such Eleventh District Cost of Funds Rate Determination
Date will be the Eleventh District Cost of Funds Rate in effect on such
Eleventh District Cost of Funds Rate Interest Determination Date.
Notwithstanding the foregoing, the interest rate hereon shall not be
greater than the Maximum Interest Rate, if any, or less than the Minimum
Interest Rate, if any, specified on the face hereof. The Calculation Agent
shall calculate the interest rate hereon in accordance with the foregoing on or
before each Calculation Date. The interest rate on this Note will in no event
be higher than the maximum rate permitted by New York law, as the same may be
modified by United States Federal law of general application.
At the request of the holder hereof, the Calculation Agent will provide to
the holder hereof the interest rate hereon then in effect and, if determined,
the interest rate that will become effective as of the next Interest Reset Date.
The Calculation Agent's determination of any interest rate will be final
and binding in the absence of manifest error.
Payments. Interest payments on this Note will include interest accrued to
but excluding the Interest Payment Dates or the Stated Maturity (or earlier
redemption or repayment date), as the case may be; provided, however, that if
the Interest Reset Period with respect to this Note is daily or weekly, interest
payable on any Interest Payment Date, other than interest payable on any date on
which principal hereof is payable, will include interest accrued through and
including the Record Date next preceding the applicable Interest Payment Date.
Accrued interest hereon shall be an amount calculated by multiplying the face
amount hereof by an accrued interest factor. Such accrued interest factor shall
be computed by adding the interest factor calculated for each day in the period
for which interest is being paid. The interest factor for each such date shall
be computed by dividing the interest rate applicable to such day by 360 if the
Base Rate is CD Rate, Commercial Paper Rate, Federal Funds Rate, Prime Rate,
LIBOR or Eleventh District Cost of Funds Rate, as specified on the face hereof,
or by the actual number of days in the year if the Base Rate is the Treasury
Rate or the CMT Rate, as specified on the face
16
<PAGE>
hereof. All percentages resulting from any calculation of the rate of interest
on this Note will be rounded, if necessary, to the nearest one
hundred-thousandth of a percentage point (.0000001), with five one-millionths
of a percentage point rounded upward, and all dollar amounts used in or
resulting from such calculation on this Note will be rounded to the nearest
cent (with one-half cent rounded upward). The interest rate in effect on any
Interest Reset Date will be the applicable rate as reset on such date. The
interest rate applicable to any other day is the interest rate from the
immediately preceding Interest Reset Date (or, if none, the Initial Interest
Rate).
If an Interest Payment Date (other than at Stated Maturity, a Redemption
Date or an repayment date at the option of the holder) would otherwise fall on a
day that is not a Market Day with respect to this Note (and if this Note is
payable in a Specified Currency other than U.S. dollars, a Business Day in the
country issuing the Specified Currency (or, for ECUs, Brussels)), such Interest
Payment Date will be on the next succeeding Market Day (with interest accruing
to but excluding the next succeeding Market Day) (or, in the case of a LIBOR
Note, if such day falls in the next calendar month, the next preceding Market
Day (with interest accruing to but excluding the next preceding Market Day)).
If the Stated Maturity, Redemption Date or repayment date at the option of the
holder falls on a day that is not a Market Day (and if this Note is payable in a
Specified Currency other than U.S. dollars, a Business Day in the country
issuing the Specified Currency (or, for ECUs, Brussels)), the required payment
of principal, premium, if any, and interest will be made on the next succeeding
Market Day as if made on the date such payment was due, and no interest will
accrue on such payment for the period from and after the Stated Maturity,
Redemption Date or repayment date at the option of the holder, as the case may
be, to the date of such payment on the next succeeding Market Day.
If the Specified Currency shown on the face of this Note is other than U.S.
dollars, payments of principal of (and premium, if any) and interest on the
Notes will be made in the applicable Specified Currency; provided, however, that
payments of principal (and premium, if any) and interest on Notes denominated in
other than U.S. dollars will nevertheless be made in U.S. dollars:
(a) at the option of the holders of the Notes under the procedures
described in the two following paragraphs; and
(b) at the Company's option in the case of imposition of exchange
controls or other circumstances beyond the Company's control.
Except as provided in the next paragraph, if the Specified Currency shown
on the face of this Note is other than U.S. dollars, payments of interest and
principal (and premium, if any) will be made in U.S. dollars if the registered
holder of such Note on the relevant Record Date, or at Maturity, as the case may
be, has transmitted a written request for such payment in U.S. dollars to the
Paying Agent at the office of the Paying Agent on or before such Record Date, or
the date 15 days before Maturity, as the case may be. Such request may be in
writing (mailed or hand
17
<PAGE>
delivered) or by cable or other form of facsimile transmission. Any such
request will remain in effect for any further payments of interest and
principal (and premium, if any) on such Note payable to such holder, unless
such request is revoked on or before the relevant Record Date or the date 15
days before Maturity, as the case may be.
The U.S. dollar amount to be received by a holder of a Note denominated in
other than U.S. dollars who elects to receive payment in U.S. dollars will be
determined by the exchange rate agent, or any successor thereto (the "Exchange
Rate Agent"), at approximately 11:00 a.m., New York City time, on the second
Business Day preceding the applicable Payment Date, by selecting the indicative
quotations for the Specified Currency appearing at such time on the bank
composite or multi-contributor pages of the Quoting Source (as defined below)
for the first three banks, in descending order of their appearance on a list of
banks to be agreed to by the Company and the Exchange Rate Agent prior to such
second Business Day, which are offering quotes on the Quoting Source. The
Exchange Rate Agent shall select from among the selected quotations the one
which will yield the largest number of U.S. dollars upon conversion from such
Specified Currency. The "Quoting Source" shall mean Reuters Monitor Foreign
Exchange Service, or if the Exchange Rate Agent determines that such service is
not available, Telerate Monitor Foreign Exchange Service. If the Exchange Rate
Agent determines that neither Service is available, the Company and the Exchange
Rate Agent shall agree on a comparable display or other comparable manner of
obtaining quotations and such display or manner shall become the Quoting Source.
In the case of a Specified Currency other than ECUs, if (i) fewer than
three bid quotations are available at the time a determination is to be made by
the Exchange Rate Agent pursuant to the preceding paragraph, or (ii) the
Exchange Rate Agent received no later than 12:00 noon, New York City time, on
such second Business Day preceding the applicable Payment Date notice from the
Company that there exist exchange controls or other circumstances beyond the
Company's control rendering such Specified Currency unavailable, then the
Exchange Rate Agent shall, prior to such Payment Date, notify the Company and
the Trustee of the noon buying rate in New York City for cable transfers, in the
Specified Currency indicated in such notice, as certified for customers purposes
by the Federal Reserve Bank of New York (the "Market Exchange Rate") as of such
second Business Day. If the Market Exchange Rate for such date is not then
available, the Exchange Rate Agent shall immediately notify the Company and the
Trustee of the most recently available Market Exchange Rate for such Specified
Currency. In the case of ECUs, if: (i) fewer than three bid quotations are
available at the time a determination is to be made by the Exchange Rate Agent
pursuant to the preceding paragraph, or (ii) the Exchange Rate Agent receives no
later than 12:00 noon, New York City time, on such second Business Day preceding
the applicable Payment Date notice from the Company that (A) there exist
exchange controls or other circumstances beyond the Company's control, rendering
ECUs unavailable or (B) ECUs are no longer used in the European Monetary System,
rendering ECUs unavailable, then the Exchange Rate Agent shall, prior to such
Payment Date, notify the Company and the Trustee of the rate of conversion for
ECUs into U.S. dollars, determined as of such second Business Day on the
following basis: The component currencies of the ECUs for
18
<PAGE>
this purpose (the "Components") shall be the currency amounts that were
components of the ECUs as of the last date on which ECUs were used in the
European Monetary System. The equivalent of ECUs in U.S. dollars shall be
calculated by aggregating the U.S. dollar equivalent of the Components. The
U.S. dollar equivalent of each of the Components shall be determined by the
Exchange Rate Agent on the basis of the most recently available Market Exchange
Rate for the Components, or as otherwise specified to the Exchange Rate Agent
by the Company.
If the Specified Currency shown on the face hereof is a currency or
currency unit other than U.S. dollars, and such Specified Currency is not
available due to the imposition of exchange controls or other circumstances
beyond the control of the Company, the Company shall be entitled to satisfy its
obligations to the holder of this Note by making such payment in U.S. dollars on
the basis of the most recently available noon-buying rate for cable transfers in
The City of New York, as determined by the Federal Reserve Bank of New York.
Any payment made under such circumstances in U.S. dollars where the required
payment is other than U.S. dollars will not constitute an Event of Default.
Sinking Fund. This Note will not be subject to any sinking fund and,
unless otherwise provided on the face hereof in accordance with the provisions
of the following two paragraphs, will not be redeemable or subject to repayment
at the option of the holder prior to Maturity.
Redemption. Unless otherwise indicated on the face of this Note, this Note
may not be redeemed prior to the Stated Maturity. If the face of this Note
indicates that this Note is subject to optional redemption, this Note will be
redeemable at the Company's option, as a whole or from time to time in part in
increments of U.S. $1,000 or the minimum Authorized Denomination (provided that
any remaining principal amount hereof shall be at least U.S. $1,000 or such
minimum Authorized Denomination) on and after the Initial Redemption Date set
forth on the face of this Note, on any date prior to the Stated Maturity at a
redemption price (the "Redemption Price"), as specified on the face of this
Note, equal to either (i) the price specified as a percentage of the face amount
to be redeemed plus accrued interest to the Redemption Date (subject to the
right of holders of record on the relevant Record Date to receive interest due
on an Interest Payment Date that is on or prior to the Redemption Date) or (ii)
100% of the principal amount thereof plus accrued interest to the Redemption
Date (subject to the right of holders of record on the relevant Record Date to
receive interest due on an Interest Payment Date that is on or prior to the
Redemption Date), plus a Make-Whole Premium, if any.
The "Make-Whole Premium" in respect of this Note is intended to be the
amount, if any, which, when added to the then outstanding principal amount of
this Note, would, if invested on the Redemption Date of this Note in U.S.
Treasury securities with maturities equal to the Remaining Life of this Note,
have a yield to maturity equal to the original yield to maturity of this Note,
based on the initial public offering price of this Note. The amount of the
Make-Whole Premium in respect of the principal amount of this Note will be
calculated by the Company and will be the excess, if any, of (i) the sum of the
present values, as of the Redemption Date of this
19
<PAGE>
Note, of (A) the respective interest payments (exclusive of the amount of
accrued interest to the Redemption Date) on this Note that, but for such
redemption, would have been payable on their respective Interest Payment Dates
after such Redemption Date, and (B) the payment of such principal amount that,
but for such redemption, would have been payable on the Stated Maturity over
(ii) the amount of such principal to be redeemed. Such present values will be
determined in accordance with generally accepted principles of financial
analysis by discounting the amounts of such payments of interest and principal
from their respective Stated Maturities to such Redemption Date at a discount
rate equal to the Treasury Yield.
The "Treasury Yield" in respect of this Note shall be determined as of the
date on which notice of redemption of this Note is sent to the holder hereof by
reference to the most recent Federal Reserve Statistical Release H.15(519) (or
successor publication) which has become publicly available not more than two
Business Days prior to such date (or, if such Statistical Release (or successor
publication) is no longer published or no longer contains the applicable data,
to the most recently published issue of The Wall Street Journal (Eastern
Edition) published not more than two Business Days prior to such date that
contains such data or, if The Wall Street Journal (Eastern Edition) is no longer
published or no longer contains such data, to any publicly available source of
similar market data), and shall be the most recent weekly average yield on
actively traded U.S. Treasury securities adjusted to a constant maturity equal
to the Remaining Life of this Note and, if applicable, converted to a bond
equivalent yield basis as described below. The "Remaining Life of this Note"
shall equal the number of years from the Redemption Date to the Stated Maturity
of this Note; provided that if the Remaining Life of this Note is not equal to
the constant maturity of a U.S. Treasury security for which a weekly average
yield is specified in the applicable source, then the Remaining Life of this
Note shall be rounded to the nearest one-twelfth of one year and the Treasury
Yield shall be obtained by linear interpolation (computed to the fifth decimal
place (one thousandth of a percentage point) and then rounded to the fourth
decimal place (one hundredth of a percentage point)), after rounding to the
nearest one-twelfth of one year, from the weekly average yields of (a) the
actively traded U.S. Treasury security with a maturity closest to and less than
the Remaining Life of this Note and (b) the actively traded U.S. Treasury
security with a maturity closest to and greater than the Remaining Life of this
Note, except that if the Remaining Life of this Note is less than three months,
the weekly average yield on actively traded U.S. Treasury securities adjusted to
a constant maturity of three months shall be used. The Treasury Yield shall, if
expressed on a yield basis other than that equivalent to a bond equivalent yield
basis, be converted to a bond equivalent yield basis and shall be computed to
the fifth decimal place (one thousandth of a percentage point) and then rounded
to the fourth decimal place (one hundredth of a percentage point).
Notice of redemption will be provided by mailing a notice of such
redemption to each holder by first class mail, postage prepaid, at least 30 days
and not more than 60 days prior to the date fixed for redemption to the
respective address of each holder as that address appears in the Security
Register. In the event of redemption of this Note in part only, a new Note or
Notes for
20
<PAGE>
the amount of the unredeemed portion hereof shall be issued in the name of the
holder hereof upon the presentation and cancellation hereof.
Repayment. Unless otherwise indicated on the face of this Note, this Note
shall not be subject to repayment at the option of the holder prior to the
Stated Maturity. If so indicated on the face of this Note, this Note may be
subject to repayment at the option of the holder on the date or dates, if any,
specified on the face hereof (the "Optional Redemption Date" or "Optional
Redemption Dates") on the terms set forth herein.
On any Optional Repayment Date, this Note will be repayable in whole or in
part in increments of U.S. $1,000 or the minimum Authorized Denomination of the
Specified Currency indicated on the face hereof (provided that any remaining
principal amount hereof shall not be less than U.S. $1,000 or such minimum
Authorized Denomination hereof) at the option of the holder hereof at a price
equal to 100% of the principal amount to be repaid, together with interest
hereon payable to the date of repayment. For this Note to be repaid in whole or
in part at the option of the holder hereof, the Company must receive at the
corporate trust office of the Paying Agent in the City of Boston, Commonwealth
of Massachusetts or New York, New York, at least 30 days but not more than 60
days prior to the repayment, (i) this Note with the form entitled "Option to
Elect Repayment" on the reverse hereof duly completed or (ii) a telegram,
facsimile transmission or a letter from a member of a national securities
exchange or a member of the National Association of Securities Dealers, Inc.
(the "NASD") or a commercial bank or trust company in the United States which
must set forth the name of the holder of this Note, the principal amount of this
Note, the principal amount of this Note to be repaid, the certificate number or
a description of the tenor and terms of this Note, a statement that the option
to elect repayment is being exercised thereby and a guarantee that this Note to
be repaid, together with the duly completed form entitled "Option to Elect
Repayment" on the reverse hereof, will be received by the Paying Agent not later
than the third Business Day after the date of such telegram, facsimile
transmission or letter; provided, that such telegram, facsimile transmission or
a letter from a member of a national securities exchange or a member of the NASD
or a commercial bank or trust company in the United States shall only be
effective if in such case, this Note and form duly completed are received by the
Paying Agent by such third Business Day. Exercise of such repayment option by
the holder hereof shall be irrevocable. In the event of repayment of this Note
in part only, a new Note or Notes of like tenor for the amount of the unpaid
portion hereof and otherwise having the same terms as this Note shall be issued
in the name of the holder hereof upon cancellation hereof.
Optional Extension of Maturity. If so specified on the face hereof, the
Stated Maturity of this Note may be extended at the option of the Company for
the period or periods of whole years specified on the face hereof (each an
"Extension Period") up to but not beyond the date (the "Final Maturity") set
forth on the face hereof. If the Company exercises such option, the Paying
Agent will mail to the holder of this Note not later than 40 calendar days prior
to the old Stated Maturity a notice (the "Extension Notice"), first class
postage prepaid, indicating (a) the election
21
<PAGE>
of the Company to extend the Maturity; (b) the new Stated Maturity; (c) the
interest rate applicable to the Extension Period; and (d) the provisions, if
any, for redemption during the Extension Period, including the date or dates on
which, the period or periods during which and the price or prices at which such
redemption may occur during the Extension Period. Upon the Paying Agent's
mailing of the Extension Notice, the Stated Maturity of this Note shall be
extended automatically and, except as modified by the Extension Notice and as
described in the next paragraph, this Note will have the same terms as prior to
the mailing of such Notice.
Notwithstanding the foregoing, not later than 10:00 a.m., New York City
time, on the twentieth calendar day prior to the Maturity then in effect (or, if
such day is not a Business Day, not later than 10:00 a.m., New York City time,
on the immediately succeeding Business Day), the Company may, at its option,
revoke the Spread and/or Spread Multiplier provided for in the Extension Notice
and establish a higher interest rate for the Extension Period by causing the
Paying Agent to send notice of such Spread and/or Spread Multiplier to the
holder of such Note by first class mail, postage prepaid, or by such other means
as shall be agreed between the Company and the Paying Agent. Such notice shall
be irrevocable. All Notes with respect to which the Maturity is extended in
accordance with an Extension Notice will bear such Spread and/or Spread
Multiplier for the Extension Period, whether or not tendered for payment.
If the Company extends the Maturity of this Note, the holder will have the
option to require the Company to repay such Note on Maturity then in effect at a
price equal to the principal amount thereof plus all accrued and unpaid interest
to such date. In order to obtain repayment on the old Stated Maturity once the
Company has extended the Maturity hereof, the holder must follow the procedures
set forth for optional repayment, except that the period for delivery of this
Note or notification to the Paying Agent shall be at least 25 but not more than
35 calendar days prior to the old Stated Maturity and except that if holder has
tendered this Note for repayment pursuant to an Extension Notice, the holder
may, by written notice to the Paying Agent, revoke any such tender for repayment
until 3:00 p.m., New York City time, on the twentieth calendar day prior to the
old Stated Maturity (or, if such day is not a Business Day, until 3:00 p.m., New
York City time, on the immediately succeeding Business Day).
Renewable Notes. If this Note is a Renewable Note, this Note will mature
at Stated Maturity (the "Initial Maturity Date"), unless the Maturity of all or
any portion of the principal amount thereof is extended in accordance with the
procedures described below. On Election Date (which must be an Interest Payment
Date), the Maturity of this Note will be extended to the Interest Payment Date
occurring twelve months after such Election Date, unless the holder elects to
terminate the automatic extension of the Maturity of this Note or of any portion
thereof having a principal amount of U.S. $1,000 or any multiple of U.S. $1,000
in excess thereof, provided that the principal amount for which such option is
not exercised is at least U.S. $1,000 or any larger amount that is an integral
multiple of U.S. $1,000, by delivering a notice to such effect to the Paying
Agent not less than the Minimum Election Date Notice days nor more than Maximum
Election Date Notice days prior to such Election Date. Notwithstanding the
foregoing, the
22
<PAGE>
Maturity of this Note may not be extended beyond the Final Maturity Date. If
the holder elects to terminate the automatic extension of the Maturity of any
portion of the principal amount of this Note and such election is not revoked
as described below, such portion will become due and payable on the Interest
Payment Date falling six months (or such other time specified herein) after the
Election Date prior to which the holder made such election.
An election to terminate the automatic extension of Maturity may be revoked
as to any portion of this Note having a principal amount of U.S. $1,000 or any
multiple of U.S. $1,000 in excess thereof by delivering a notice to such effect
to the Paying Agent on any day following the effective date of the election to
terminate the automatic extension of Maturity and prior to the fifteenth
calendar day before the date on which such portion would otherwise mature. Such
a revocation may be made for less than the entire principal amount of this Note
for which the automatic extension of Maturity has been terminated; provided,
however, that the principal amount of this Note for which the automatic
extension of Maturity has been terminated and for which such a revocation has
not been made is at least U.S. $1,000 or any larger amount that is an integral
multiple of U.S. $1,000. Notwithstanding the foregoing, a revocation may not be
made during the period from and including a Record Date to but excluding the
immediately succeeding Interest Payment Date.
An election to terminate the automatic extension of the Maturity of the
Renewable Notes, if not revoked as described above by the holder making the
election or any subsequent holder, will be binding upon such subsequent holder.
If this Note is a Renewable Note, this Note may be redeemed in whole or in
part at the option of the Company on any Interest Payment Date, commencing with
the Interest Payment Date specified on the face hereof or in an Addendum hereto,
at a redemption price of 100% of the principal amount of this Note to be
redeemed, together with accrued and unpaid interest to the date of redemption.
Notice of redemption will be provided by mailing a notice of such redemption to
each holder by first class mail, postage prepaid, at least 30 and not more than
60 calendar days prior to the date fixed for redemption.
Indexed Notes. If so stated on the face hereof, the amount of principal,
premium and/or interest payable in respect hereof will be determined with
reference to the price or prices of specific commodities or stocks, or to the
exchange rate of one or more designated currencies (including composite
currencies) relative to an indexed currency or to such other price(s) or
exchange rate(s), as specified on the face hereof.
Registration of Transfer. State Street Bank and Trust Company has been
appointed registrar for the Notes (the "Registrar," which term includes any
successor registrar appointed by the Company), and the Registrar will maintain
at its office at Two International Place, Boston, MA 02110 a register for the
registration and transfer of Notes. This Note may be transferred at the
aforesaid office of the Registrar by surrendering this Note for cancellation,
accompanied by a
23
<PAGE>
written instrument of transfer in form approved by the Registrar and duly
executed by the registered holder hereof in person or by the holder's attorney
duly authorized in writing, and thereupon the Registrar shall issue in the name
of the transferee or transferees, in exchange herefor, a new Note or Notes
having identical terms and provisions for an equal aggregate principal amount
in authorized denominations, subject to the terms and conditions set forth
herein; provided, however, that the Registrar will not be required to register
the transfer of or exchange any Note that has been called for redemption in
whole or in part, or as to which the holder thereof has elected to cause such
Note to be repaid in whole or in part, except the unredeemed or unpaid portion
of Notes being redeemed or repaid in part, or to register the transfer of or
exchange Notes to the extent and during the period so provided in the Indenture
with respect to the redemption of Notes. Notes are exchangeable at said office
for other Notes of other authorized denominations of equal aggregate principal
amount having identical terms and provisions. All such exchanges and transfers
of Notes will be free of charge, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge in connection
therewith. All Notes surrendered for exchange shall be accompanied by a
written instrument of transfer in form approved by the Registrar and executed
by the registered holder in person or by the holder's attorney duly authorized
in writing. The date of registration of any Note delivered upon any exchange
or transfer of Notes shall be such that no gain or loss of interest results
from such exchange or transfer.
In case any Note shall at any time become mutilated, defaced or be
destroyed, lost or stolen and such Note or evidence of the loss, theft or
destruction thereof (together with the indemnity hereinafter referred to and
such other documents or proof as may be required in the premises) shall be
delivered to the Registrar, a new Note of like tenor will be issued by the
Company in exchange for the Note so mutilated or defaced, or in lieu of the Note
so destroyed or lost or stolen, but, in the case of any destroyed or lost or
stolen Note, only upon receipt of evidence satisfactory to the Registrar and the
Company that such Note was destroyed or lost or stolen and, if required, upon
receipt also of indemnity satisfactory to each of them. All expenses and
reasonable charges associated with procuring such indemnity and with the
preparation, authentication and delivery of a new Note shall be borne by the
owner of the Note mutilated, defaced, destroyed, lost or stolen.
This Note, and any Note or Notes issued upon transfer or exchange hereof,
is issuable only in fully registered form, without coupons, in denominations of
U.S. $1,000 or any integral multiple of U.S. $1,000 or the minimum Authorized
Denomination. If the Specified Currency shown on the face of this Note is other
than U.S. Dollars, the authorized denominations shall be the amount of the
Specified Currency for such Note equivalent, at the noon buying rate in The City
of New York for cable transfers for such Specified Currency (the "Exchange
Rate") on the sixth Business Day in The City of New York and in the country
issuing such currency (or, for ECUs, Brussels) next preceding the date of issue
of such Note, to U.S. $1,000 (rounded to the nearest 1,000 units of such
Specified Currency) and any greater amount that is an integral multiple of 1,000
units of such Specified Currency.
24
<PAGE>
Events of Default. If an Event of Default (as defined in the Indenture)
with respect to the Notes of this series shall occur and be continuing, the
principal of the Notes of this series may be declared due and payable in the
manner and with the effect provided in the Indenture.
Original Issue Discount Notes. Notwithstanding anything herein to the
contrary, if this Note is an Original Issue Discount Note as specified on the
face hereof, the amount payable in the event of redemption or repayment prior to
the Stated Maturity hereof in lieu of the principal amount due at the Stated
Maturity hereof shall be the Amortized Face Amount of this Note as of the
Redemption Date or the date of repayment, as the case may be, multiplied by the
Redemption Price. The "Amortized Face Amount" of this Note shall be the amount
equal to (a) the Issue Price (as set forth on the face hereof) plus (b) that
portion of the difference between the Issue Price and the principal amount
hereof that has accrued at the Yield to Maturity (as set forth on the face
hereof) (computed in accordance with generally accepted United States bond yield
computation principles using a constant yield method) at the date as of which
the Amortized Face Amount is calculated but in no event shall the Amortized Face
Amount of this Note exceed its principal amount.
The constant yield will be calculated using a 30-day month, 360-day year
convention, a compounding period that, except for the Initial Period (as defined
below), corresponds to the shortest period between Interest Payment Dates (with
ratable accruals within a compounding period, a coupon rate equal to the initial
coupon rate applicable to this Note and an assumption that the Maturity of this
Note will not be accelerated). If the period from the Original Issue Date to the
initial Interest Payment Date (the "Initial Period") is shorter than the
compounding period for this Note, a proportionate amount of the yield for an
entire compounding period will be accrued. If the Initial Period is longer than
the compounding period, then such period will be divided into a regular
compounding period and a short period, with the short period being treated as
provided in the preceding sentence.
Modifications and Waivers; Obligation of the Company Absolute. The
Indenture permits, with certain exceptions as therein provided, the amendment
thereof and the modification of the rights and obligations of the Company and
the rights of the holders of the Securities of each series to be affected under
the Indenture at any time by the Company and the Trustee with the consent of the
holders of a majority in principal amount of the Securities at the time
Outstanding of each series to be affected. The Indenture also contains
provisions permitting the holders of specified percentages in principal amount
of the Securities of each series at the time Outstanding, on behalf of the
holders of all Securities of such series, to waive compliance by the Company
with certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the holder of
this Note shall be conclusive and binding upon such holder and upon all future
holders of this Note and of any Note issued upon the registration of transfer
hereof or in exchange hereof or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Note.
25
<PAGE>
No provision of this Note or of the Indenture shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
principal of, premium, if any, and interest on this Note at the time, place, and
rate or formula, and in the coin or currency, herein and in the Indenture
prescribed unless otherwise agreed between the Company and the registered holder
of this Note.
Registered Holder Treated as Owner. Prior to due presentment of this Note
for registration of transfer, the Company or any agent of the Company, the
Registrar or the Trustee may treat the holder in whose name this Note is
registered as the owner hereof for all purposes, whether or not this Note be
overdue, and neither the Company, the Registrar, the Trustee nor any such agent
shall be affected by notice to the contrary.
No Recourse Against Certain Persons. No recourse under or upon any
obligation, covenant or agreement contained in the Indenture or in this Note, or
because of any indebtedness evidenced thereby, shall be had against any
promoter, as such, or against any past, present or future shareholder, officer
or trustee, as such, of the Company or of any successor, either directly or
through the Company or any successor, under any rule of law, statute or
constitutional provision or by the enforcement of any assessment or by any legal
or equitable proceeding or otherwise, all such liability being expressly waived
and released by the acceptance of this Note by the holder hereof and as part of
the consideration for the issue of this Note.
Governing Law. This Note shall for all purposes be governed by, and
construed in accordance with, the laws of the State of New York.
CUSIP Number. Pursuant to a recommendation promulgated by the Committee on
Uniform Security Identification Procedures, the Company has caused "CUSIP"
numbers to be printed on this Note as a convenience to the holders. No
representation is made as to the correctness or accuracy of such CUSIP numbers
as printed on this Note, and reliance may be placed only on the other
identification numbers printed hereon.
Defined Terms. All terms used in this Note which are defined in the
Indenture shall have the meanings assigned to them in the Indenture.
Defeasance. The Indenture contains provisions for defeasance at any
time of (a) the entire indebtedness of the Company on this Note and (b) certain
restrictive covenants and the related defaults and Events of Default applicable
to the Company, in each case, upon compliance by the Company with certain
conditions set forth in the Indenture, which provisions apply to this Note.
26
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED, the undersigned hereby
sells, assigns and transfers unto
PLEASE INSERT SOCIAL
SECURITY OR OTHER IDENTIFYING
NUMBER OF ASSIGNEE
=======================================
| |
=======================================
................................................................................
(Please Print or Typewrite Name and Address including
Zip Code of Assignee)
................................................................................
the within Security of Security Capital Group Incorporated and hereby does
irrevocably constitute and appoint
....................................................................... Attorney
to transfer said Security on the books of the within-named Company with full
power of substitution in the premises.
Dated: . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . .
NOTICE: The signature to this assignment must correspond with the name as it
appears on the first page of the within Security in every particular, without
alteration or enlargement or any change whatever.
27
<PAGE>
FORM OF OPTION TO ELECT REPAYMENT
The undersigned hereby irrevocably request(s) and instruct(s) the Company
to repay the within Note (or portion thereof specified below) pursuant to its
terms at a price equal to 100% of the principal amount to be repaid, together
with unpaid interest to the Repayment Date, to the undersigned, at
________________________________________________________________________________
(Please print or typewrite name and address of the undersigned)
If less than the entire principal amount of the within Note is to be repaid,
specify the portion thereof (which shall be increments of U.S. $1,000 (or if the
Specified Currency is other than U.S. dollars, the minimum Authorized
Denomination specified on the face hereof)) which the holder elects to have
repaid: _____________________________________________________________________;
and specify the denomination or denominations (which shall not be less than the
minimum authorized denomination) of the Notes to be issued to the holder for the
portion of the within Note not being repaid (in the absence of any such
specification, one such Note will be issued for the portion not being
repaid): _______________________________________________________________________
Dated: ______________________
NOTICE: The signature on this Option to Elect Repayment must correspond with the
name as written upon the face of the within instrument in every particular
without alteration or enlargement.
28
<PAGE>
Exhibit 10.11
SECURITY CAPITAL GROUP INCORPORATED
1998 LONG-TERM INCENTIVE PLAN
-----------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
SECTION 1.................................................... 1
GENERAL................................................ 1
1.1. Purpose....................................... 1
1.2. Participation................................. 1
SECTION 2.................................................... 2
OPTIONS................................................ 2
2.1. Definition.................................... 2
2.2. Eligibility................................... 2
2.3. Price......................................... 2
2.4. Exercise...................................... 3
2.5. Post-Exercise Limitations..................... 4
2.6. Expiration Date............................... 4
SECTION 3.................................................... 6
SHARE AWARDS........................................... 6
3.1. Definition.................................... 6
3.2. Eligibility................................... 6
3.3. Terms and Conditions of Awards................ 6
SECTION 4.................................................... 7
OPERATION AND ADMINISTRATION............................ 7
4.1. Effective Date................................ 7
4.2. Shares Subject to Plan........................ 7
4.3. Individual Limits on Awards................... 8
4.4. Adjustments to Shares......................... 8
4.5. Change in Control.............................11
4.6. Limit on Distribution.........................13
4.7. Liability for Cash Payments...................13
4.8. Performance-Based Compensation................13
4.9. Withholding...................................14
4.10. Transferability...............................14
4.11. Notices.......................................14
4.12. Form and Time of Elections....................15
4.13. Agreement With Company........................15
4.14. Limitation of Implied Rights..................15
4.15. Evidence......................................16
4.16. Action by Company or Related Company..........16
4.17. Gender and Number.............................16
4.18. Applicable Law................................16
4.19. Foreign Employees.............................16
SECTION 5....................................................16
COMMITTEE..............................................16
5.1. Administration................................16
5.2. Selection of Committee........................16
5.3. Powers of Committee...........................17
5.4. Delegation by Committee.......................18
<PAGE>
5.5. Information to be Furnished to Committee......18
5.6. Liability and Indemnification of Committee....18
SECTION 6....................................................18
AMENDMENT AND TERMINATION..............................18
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
1998 LONG-TERM INCENTIVE PLAN
-----------------------------
SECTION 1
----------
GENERAL
--------
1.1 Purpose. The Security Capital Group Incorporated 1998 Long-Term
-------
Incentive Plan (the "Plan") has been established by Security Capital Group
Incorporated (the "Company") to:
(a) attract and retain employees and other persons providing services to
the Company and the Related Companies (as defined below);
(b) motivate Participants (as defined in subsection 1.2), by means of
appropriate incentives, to achieve long-range goals;
(c) provide incentive compensation opportunities that are competitive with
those of other corporations; and
(d) further identify Participants' interests with those of the Company's
other stockholders through compensation that is based on the value of
the Company's common shares;
and thereby promote the long-term financial interest of the Company and the
Related Companies, including the growth in value of the Company's equity and
enhancement of long-term stockholder return. The term "Related Company" means
any company during any period in which it is a "subsidiary corporation" (as that
term is defined in section 424(f) of the Internal Revenue Code of 1986, as
amended (the "Code")), with respect to the Company or any affiliate of the
Company which is designated as a Related Company by the Committee.
1.2 Participation. Subject to the terms and conditions of the Plan, the
-------------
Committee (as described in Section 5) shall determine and designate, from time
to time, from among the Eligible Individuals (as defined below), those persons
who will be granted one or more awards under Sections 2 or 3 of the Plan (an
"Award"), and thereby become "Participants" in the Plan. In the discretion of
the Committee, and subject to the terms of the Plan, a Participant may be
granted any Award permitted under the provisions of the Plan, and more than one
Award may be granted to a Participant. Except as otherwise agreed by the
Company and the Participant, or except as otherwise provided in the Plan, an
Award under the Plan shall not affect any previous Award under the Plan or an
award under any other plan maintained by the
<PAGE>
Company or the Related Companies. For purposes of the Plan, the term "Eligible
Individual" shall mean any employee of the Company or a Related Company or other
person providing services thereto; provided, however, that a member of the Board
of Directors of the Company (the "Board") who is not an employee of the Company
or a Related Company shall not be an "Eligible Individual".
SECTION 2
----------
OPTIONS
--------
2.1 Definitions. The grant of an "Option" under this Section 2 entitles
-----------
the Participant to purchase shares of Class B common stock of the Company
("Shares") at a price fixed at the time the Option is granted, subject to the
terms of this Section. Options granted under this Section may be either
Incentive Stock Options or Non-Qualified Stock Options, as determined in the
discretion of the Committee. An "Incentive Stock Option" is an Option that is
intended to satisfy the requirements applicable to an "incentive stock option"
described in section 422 of the Code. A "Non-Qualified Stock Option" is an
Option that is not intended to be an Incentive Stock Option.
2.2 Eligibility. The Committee shall designate the Participants to whom
-----------
Options are to be granted under this Section and shall determine the number of
Shares subject to each such Option. If the Committee grants Incentive Stock
Options, to the extent that the aggregate fair market value of Shares with
respect to which Incentive Stock Options are exercisable for the first time by
any individual during any calendar year (under all plans of the Company and all
related companies within the meaning of section 424(f) of the Code) exceeds
$100,000, such options shall be treated as Non-Qualified Stock Options, to the
extent required by section 422 of the Code.
2.3 Price. The determination and payment of the purchase price of a
-----
Share under each Option granted under this Section shall be subject to the
following:
(a) The purchase price shall be established by the Committee at the time
the Option is granted; provided, however, that in no event shall such
price be less than the greater of the Fair Market Value (defined
below) of a Share on the date the Option is granted or the par value
of a Share.
(b) Subject to the following provisions of this subsection, the full
purchase price of each Share purchased upon the exercise of any Option
shall be paid at the time of such exercise (or such later date as may
be permitted
2
<PAGE>
by the Committee in the case of a cashless exercise) and,
as soon as practicable thereafter (subject to an election under
subsection 2.4), a certificate representing the Shares so purchased
shall be delivered to the person entitled thereto.
(c) The purchase price shall be payable in cash or by tendering Shares by
actual delivery or attestation (valued at Fair Market Value as of the
day of exercise) that have been held by the Participant at least six
months, or in any combination thereof, as determined by the Committee.
(d) The "Fair Market Value" of a Share as of any date shall be determined
in accordance with the following rules:
(i) If the Shares are at the time listed or admitted to trading on
any stock exchange, then the Fair Market Value shall be the
closing price per Share on such date on the principal exchange on
which the Shares are then listed or admitted to trading or, if no
such sale is reported on that date, on the last preceding date on
which a sale was so reported.
(ii) If the Shares are not at the time listed or admitted to trading
on a stock exchange, the Fair Market Value shall be the average
of the closing reported bid and asked prices regular way of the
Shares on the date in question in the over-the-counter market, as
such prices are reported in a publication of general circulation
selected by the Committee and regularly reporting the market
price of Shares in such market.
(iii) If the Shares are not listed or admitted to trading on any stock
exchange or traded in the over-the-counter market, the Fair
Market Value shall be as determined by the Committee in good
faith.
(iv) For purposes of determining the Fair Market Value of Shares that
are sold pursuant to a cashless exercise program, Fair Market
Value shall be the price at which such Shares are sold.
2.4 Exercise. Except as otherwise expressly provided in the Plan, an
--------
Option granted under this Section shall be exercisable in accordance with the
following terms of this subsection:
3
<PAGE>
(a) The terms and conditions relating to exercise of an Option shall be
established by the Committee, and may include, without limitation,
conditions relating to completion of a specified period of service
(subject to paragraph (b) below), achievement of performance standards
prior to exercise of the Option or the achievement of Share ownership
objectives by the Participant. The Committee, in its sole discretion,
may accelerate the vesting of any Option under circumstances
designated by it at the time the Option is granted or thereafter.
(b) No Option may be exercised by a Participant after the Expiration Date
(as defined in subsection 2.6) applicable to that Option.
(c) Prior to the date the Shares would otherwise be transferred pursuant
to the exercise of an Option, to the extent permitted by the
Committee, a Participant may irrevocably elect to defer receipt of
such Shares until the last date of a later calendar year, but in no
event later than the Participant's Date of Termination (as defined in
subsection 2.6), provided, that if the Date of Termination of a
Participant who is a member of a select group of management or a
highly compensated employee within the meaning of section 401(a)(1) of
the Employee Retirement Income Security Act of 1974, as amended,
occurs by reason of Retirement (as defined in subsection 2.6), the
Participant may elect to defer receipt for a period up to the last day
of the calendar year in which occurs the fifteenth anniversary of the
Participant's Retirement. Any such deferral election shall be made in
such form and at such times as the Committee may determine and shall
be subject to such other terms, conditions and limitations as the
Committee may establish, provided, however, any election to defer
payment beyond a Participant's Retirement which has not been on file
at least 12 months prior to the Participant's Retirement shall be
disregarded.
2.5 Post-Exercise Limitations. The Committee, in its discretion, may
-------------------------
impose such restrictions on Shares acquired pursuant to the exercise of an
Option as it determines to be desirable, including, without limitation,
restrictions relating to disposition of the shares and forfeiture restrictions
based on service, performance, Share ownership by the Participant and such other
factors as the Committee determines to be appropriate.
2.6 Expiration Date. The "Expiration Date" with respect to an Option
---------------
means the date established as the Expiration Date by
4
<PAGE>
the Committee at the time of the grant; provided, however, that unless
determined otherwise by the Committee, the Expiration Date with respect to any
Option shall not be later than the earliest to occur of:
(a) the ten-year anniversary of the date on which the Option is granted;
(b) if the Participant's Date of Termination occurs by reason of death,
Disability or Retirement, the one-year anniversary of such Date of
Termination;
(c) if the Participant's Date of Termination occurs for reasons other than
Retirement, death, Disability or Cause, the three-month anniversary of
such Date of Termination; or
(d) if the Participant's Date of Termination occurs for reasons of Cause,
such Date of Termination.
For purposes of the Plan, a Participant's "Date of Termination" shall be the
date on which he both ceases to be an employee of the Company and the Related
Companies and ceases to perform material services for the Company and the
Related Companies, regardless of the reason for the cessation; provided that a
"Date of Termination" shall not be considered to have occurred during the period
in which the reason for the cessation of services is a leave of absence approved
by the Company or the Related Company which was the recipient of the
Participant's services. Except as otherwise provided by the Committee, a
Participant shall be considered to have a "Disability" during the period in
which he is unable, by reason of a medically determinable physical or mental
impairment, to engage in the material and substantial duties of his regular
occupation, which condition is expected to be permanent. "Retirement" of a
Participant shall mean the occurrence of a Participant's Date of Termination,
other than for Cause, death or Disability, after providing at least five years
of service to the Company or the Related Companies and attaining age 60. For
purposes of the Plan, "Cause" shall mean, in the reasonable judgment of the
Committee (i) the willful and continued failure by the Participant to
substantially perform his duties with the Company or any Related Company after
written notification by the Company or Related Company, (ii) the willful
engaging by the Participant in conduct which is demonstrably injurious to the
Company or any Related Company, monetarily or otherwise, or (iii) the engaging
by the Participant in egregious misconduct involving serious moral turpitude.
For purposes hereof, no act, or failure to act, on the Participant's part shall
be deemed "willful" unless done, or omitted to be done, by the Participant not
in good faith and without reasonable belief
5
<PAGE>
that such action was in the best interest of the Company or Related Company.
SECTION 3
---------
SHARE AWARDS
-------------
3.1 Definition. Subject to the terms of this Section, a Share Award
----------
under the Plan is a grant of Shares to a Participant, the earning, vesting or
distribution of which is subject to one or more conditions established by the
Committee, provided, that in no event will Share Awards under the Plan exceed
20% of the Shares reserved under the Plan. Such conditions may relate to events
(such as performance or continued employment) occurring before or after the date
the Share Award is granted, or the date the Shares are earned by, vested in or
delivered to the Participant. If the vesting of Share Awards is subject to
conditions occurring after the date of grant, the period beginning on the date
of grant of a Share Award and ending on the vesting or forfeiture of such Shares
(as applicable) is referred to as the "Restricted Period". To the extent that
the vesting of a Share Award is contingent on performance, the performance shall
be measured over a period of not less than one year. Share Awards may provide
for delivery of the shares of Shares at the time of grant or may provide for a
deferred delivery date. A Share Award may, but need not, be made in conjunction
with a cash-based incentive compensation program maintained by the Company and
may, but need not, be in lieu of cash otherwise awardable under such program.
3.2 Eligibility. The Committee shall designate the Participants to whom
-----------
Share Awards are to be granted and the number of Shares that are subject to each
such Award.
3.3 Terms and Conditions of Awards. Share Awards granted to Participants
------------------------------
under the Plan shall be subject to the following terms and conditions:
(a) Beginning on the date of grant (or, if later, the date of
distribution) of Shares comprising a Share Award, and including any
applicable Restricted Period, the Participant as owner of such Shares
shall have the right to vote such Shares.
(b) Payment of dividends, if any, with respect to Share Awards shall be
subject to the following:
(i) On and after the date that a Participant has a fully earned and
vested right to the Shares comprising a Share Award and the
Shares have been
6
<PAGE>
distributed to the Participant, the Participant
shall have all dividend rights (and other rights) of a
stockholder with respect to such Shares.
(ii) Prior to the date that a Participant has a fully earned and
vested right to the shares comprising a Share Award, the
Committee, in its sole discretion, may award Dividend Rights
with respect to such shares.
(iii) On and after the date that a Participant has a fully earned and
vested right to the Shares comprising a Share Award, but before
the Shares have been distributed to the Participant, the
Participant shall be entitled to Dividend Rights with respect to
such Shares, at the time and in the form determined by the
Committee.
(iv) A "Dividend Right" with respect to shares comprising a Share
Award shall entitle the Participant, as of each dividend payment
date, to an amount equal to the dividends payable with respect
to a Share multiplied by the number of such Shares. Dividend
Rights shall be settled in cash or in Shares valued at Fair
Market Value as of the date of settlement, as determined by the
Committee, shall be payable at the time determined by the
Committee and shall be subject to such other terms and
conditions as the Committee may determine.
SECTION 4
----------
OPERATION AND ADMINISTRATION
-----------------------------
4.1 Effective Date. The Plan shall be effective as of the date it is
--------------
approved by the Company's stockholders. The Plan shall be unlimited in duration
and, in the event of Plan termination, shall remain in effect as long as any
Awards awarded under it are outstanding and not fully vested; provided, however,
that no new Awards shall be made under the Plan on or after the tenth
anniversary of the date on which the Plan is adopted by the Board.
4.2 Shares Subject to Plan. The Shares with respect to which Awards may
----------------------
be made under the Plan shall be shares currently authorized but unissued or
currently held or subsequently acquired by the Company as treasury shares,
including shares purchased in the open market or in private transactions.
Subject to the provisions of subsection 4.4, the number of Shares which
7
<PAGE>
may be issued with respect to Awards under the Plan shall not exceed 12,257,733
Shares in the aggregate. Except as otherwise provided herein, any Shares subject
to an Award which for any reason expires or is terminated without issuance of
Shares (including Shares that are not issued because Shares are tendered
pursuant to subsection 2.3(c) or 4.9) shall again be available under the Plan.
4.3 Individual Limits on Awards. Notwithstanding any other provision of
---------------------------
the Plan to the contrary, no Participant shall receive any Award of an Option
under the Plan to the extent that the sum of:
(a) the number of Shares subject to such Award;
(b) the number of Shares subject to all other prior Awards of Options
under the Plan during the one-year period ending on the date of the
Award; and
(c) the number of Shares subject to all other prior share options granted
to the Participant under other plans or arrangements of the Company
during the one-year period ending on the date of the Award;
would exceed the Participant's Individual Limit under the Plan. The
determination made under the foregoing provisions of this subsection shall be
based on the Shares subject to the Awards at the time of grant, regardless of
when the Awards become exercisable. Subject to the provisions of subsection
4.4, a Participant's "Individual Limit" shall be 1,000,000 Shares.
4.4 Adjustments to Shares.
---------------------
(a) If the Company shall effect any subdivision or consolidation of Shares
or other capital readjustment, payment of stock dividend, stock split,
combination of shares or recapitalization or other increase or
reduction of the number of Shares outstanding without receiving
compensation therefor in money, services or property, then the
Committee shall equitably adjust (i) the number of Shares available
under the Plan; (ii) the number of shares available under any
individual or other limits; (iii) the number of Shares subject to
outstanding Awards; and (iv) the per-share price under any outstanding
Award to the extent that the Participant is required to pay a purchase
price per Share with respect to the Award.
(b) If the Company is reorganized, merged or consolidated or is party to a
plan of exchange with another corporation, pursuant to which
reorganization, merger,
8
<PAGE>
consolidation or plan of exchange, the stockholders of the Company
receive any shares of stock or other securities or property, or the
Company shall distribute securities of another corporation to its
stockholders, there shall be substituted for the Shares subject to
outstanding Awards an appropriate number of shares of each class of
stock or amount of other securities or property which were distributed
to the stockholders of the Company in respect of such Shares, subject
to the following:
(i) If the Committee determines that the substitution described in
accordance with the foregoing provisions of this paragraph would
not be fully consistent with the purposes of the Plan or the
purposes of the outstanding Awards under the Plan, the Committee
may make such other adjustments to the Awards to the extent that
the Committee determines such adjustments are consistent with
the purposes of the Plan and of the affected Awards.
(ii) All or any of the Awards may be cancelled by the Committee on or
immediately prior to the effective date of the applicable
transaction, but only if the Committee gives reasonable advance
notice of the cancellation to each affected Participant, and
only if either: (A) the Participant is permitted to exercise all
Awards that will be cancelled (without regard to whether such
Awards would otherwise be exercisable) for a reasonable period
prior to the effective date of the cancellation; or (B) the
Participant receives payment or other benefits that the
Committee determines to be reasonable compensation for the value
of all cancelled Awards (without regard to whether such Awards
would otherwise be vested).
(iii) Upon the occurrence of a reorganization of the Company or any
other event described in this paragraph (b), any successor to
the Company shall be substituted for the Company to the extent
that the Company and the successor agree to such substitution.
(c) Upon (or, in the discretion of the Committee, immediately prior to)
the sale to (or exchange with) a third party unrelated to the Company
of all or substantially all of the assets of the Company, all Awards
shall be cancelled. If Awards are cancelled
9
<PAGE>
under this paragraph, then, with respect to any affected Participant,
either:
(i) the Participant shall be provided with reasonable advance notice
of the cancellation, and the Participant shall be permitted to
exercise all Awards that will be cancelled (without regard to
whether such Awards would otherwise be exercisable) for a
reasonable period prior to the effective date of the
cancellation; or
(ii) the Participant shall receive payment or other benefits that the
Committee determines to be reasonable compensation for the value
of all cancelled Awards (without regard to whether such cancelled
Awards would otherwise be vested).
The foregoing provisions of this paragraph shall also apply to the
sale of all or substantially all of the assets of the Company to a
related party, if the Committee determines such application is
appropriate. Notwithstanding the foregoing provisions of this
paragraph (c), in lieu of cancellation of outstanding Awards, the
Committee and the purchaser of all or substantially all of the
Company's assets may provide that an appropriate number of shares or
securities of the purchaser or its affiliates shall be substituted for
Shares with respect to outstanding Awards under the Plan, provided
that such substituted awards shall be comparable in value and contain
terms and conditions similar to the Awards.
(d) In determining what action, if any, is necessary or appropriate under
the foregoing provisions of this subsection, the Committee shall act
in a manner that it determines to be consistent with the purposes of
the Plan and of the affected Awards and, where applicable or otherwise
appropriate, in a manner that it determines to be necessary to
preserve the benefits and potential benefits of the affected Awards
for the Participants and the Company.
(e) The existence of this Plan and the Awards granted hereunder shall not
affect in any way the right or power of the Company or its
stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's
capital structure or its business, any merger or consolidation of the
Company, any issue of bonds, debentures, preferred or prior preference
stocks ahead of or affecting the Company's Shares or the rights
10
<PAGE>
thereof, the dissolution or liquidation of the Company, any sale or
transfer of all or any part of its assets or business, or any other
corporate act or proceeding, whether of a similar character or
otherwise.
(f) Except as expressly provided by the terms of this Plan, the issue by
the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, for cash or property or for labor
or services, either upon direct sale, upon the exercise of rights or
warrants to subscribe therefor or upon conversion of shares or
obligations of the Company convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof,
shall be made with respect to Awards then outstanding hereunder.
(g) Awards under the Plan are subject to adjustment under this subsection
only during the period in which they are considered to be outstanding
under the Plan. For purposes of this subsection, an Award is
considered "outstanding" on any date if the Participant's ability to
obtain all benefits with respect to the Award is subject to limits
imposed by the Plan (including any limits imposed by the Agreement
reflecting the Award). The determination of whether an Award is
outstanding shall be made by the Committee.
4.5 Change in Control. In the event that (i) a Participant's employment
-----------------
is terminated by the Company or the successor to the Company or an affiliated
entity which is his or her employer for reasons other than Cause following a
Change in Control of the Company (as defined below), or (ii) the Plan is
terminated by the Company or its successor following a Change in Control without
provision for the continuation of outstanding Awards hereunder, all Options
which have not otherwise expired shall become immediately exercisable and all
other Awards shall become fully vested. For purposes of the Plan, a "Change in
Control" means the happening of any of the following:
(a) the stockholders of the Company approve a definitive agreement to
merge the Company into or consolidate the Company with another entity,
sell or otherwise dispose of all or substantially all of its assets or
adopt a plan of liquidation, provided, however, that a Change in
Control shall not be deemed to have occurred by reason of a
transaction, or a substantially concurrent or otherwise related series
of transactions, upon the completion of which 50% or more of the
beneficial ownership of the voting power of the Company, the surviving
corporation or corporation directly or
11
<PAGE>
indirectly controlling the Company or the surviving corporation, as
the case may be, is held by the same persons (as defined below)
(although not necessarily in the same proportion) as held the
beneficial ownership of the voting power of the Company immediately
prior to the transaction or the substantially concurrent or otherwise
related series of transactions, except that upon the completion
thereof, employees or employee benefit plans of the Company may be a
new holder of such beneficial ownership; provided, further, that a
transaction with an "Affiliate" of the Company (as defined in the
Securities Exchange Act of 1934, as amended (the "Exchange Act"))
shall not be treated as a Change in Control; or
(b) the "beneficial ownership" (as defined in Rule 13d-3 under the
Exchange Act) of securities representing 50% or more of the combined
voting power of the Company is acquired, other than from the Company,
by any "person" as defined in Sections 13(d) and 14(d) of the Exchange
Act (other than by an Affiliate or any trustee or other fiduciary
holding securities under an employee benefit or other similar stock
plan of the Company); or
(c) at any time during any period of two consecutive years, individuals
who at the beginning of such period were members of the Board of
Directors of the Company cease for any reason to constitute at least a
majority thereof (unless the election, or the nomination for election
by the Company's stockholders, of each new Director was approved by a
vote of at least two-thirds of the Directors still in office at the
time of such election or nomination who were Directors at the
beginning of such period).
For purposes of this subsection, a Participant's employment shall be deemed to
be terminated by the Company or the successor to the Company or an affiliated
entity if the Participant terminates employment after (i) a substantial adverse
alteration in the nature of the Participant's status or responsibilities from
those in effect immediately prior to the Change in Control, or (ii) a material
reduction in the Participant's annual base salary and target bonus, if any, as
in effect immediately prior to the Change in Control. If, upon a Change in
Control, awards in other shares or securities are substituted for outstanding
Awards pursuant to Section 4.4, and immediately following the Change in Control
the Participant becomes employed by the entity into which the Company merged, or
the purchaser of substantially all of the assets of the Company, or a successor
to such entity or purchaser, the Participant shall not be treated as having
terminated employment for purposes of this Section 4.5 until such
12
<PAGE>
time as the Participant terminates employment with the merged entity or
purchaser (or successor), as applicable.
4.6 Limit on Distribution. Distribution of Shares or other amounts under
---------------------
the Plan shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, the Company shall
have no liability to deliver any Shares under the Plan or make any
other distribution of benefits under the Plan unless such delivery or
distribution would comply with all applicable laws and the applicable
requirements of any securities exchange or similar entity.
(b) In the case of a Participant who is subject to Section 16(a) and 16(b)
of the Exchange Act, the Committee may, at any time, add such
conditions and limitations to any Award to such Participant, or any
feature of any such Award, as the Committee, in its sole discretion,
deems necessary or desirable to comply with Section 16(a) or 16(b) and
the rules and regulations thereunder or to obtain any exemption
therefrom.
(c) To the extent that the Plan provides for issuance of certificates to
reflect the transfer of Shares, the transfer of such Shares may be
effected on a non-certificated basis, to the extent not prohibited by
applicable law or the rules of any stock exchange.
4.7 Liability for Cash Payments. Subject to the provisions of this
---------------------------
Section, each Related Company shall be liable for payment of cash due under the
Plan with respect to any Participant to the extent that such benefits are
attributable to the service rendered for that Related Company by the
Participant. Any disputes relating to liability of a Related Company for cash
payments shall be resolved by the Committee.
4.8 Performance-Based Compensation. To the extent that the Committee
------------------------------
determines that it is necessary or desirable to conform any Awards under the
Plan with the requirements applicable to "Performance-Based Compensation", as
that term is used in Code section 162(m)(4)(C), it may, at or prior to the time
an Award is granted, take such steps and impose such restrictions with respect
to such Award as it determines to be necessary to satisfy such requirements
including, without limitation:
(a) The establishment of performance goals that must be satisfied prior to
the payment or distribution of benefits under such Awards.
13
<PAGE>
(b) The submission of such Awards and performance goals to the Company's
stockholders for approval and making the receipt of benefits under
such Awards contingent on receipt of such approval.
(c) Providing that no payment or distribution be made under such Awards
unless the Committee certifies that the goals and the applicable terms
of the Plan and Agreement reflecting the Awards have been satisfied.
To the extent that the Committee determines that the foregoing requirements
relating to Performance-Based Compensation do not apply to Awards under the Plan
because the Awards constitute Options, the Committee may, at the time the Award
is granted, conform the Awards to alternative methods of satisfying the
requirements applicable to Performance-Based Compensation.
4.9 Withholding. All Awards and other payments under the Plan are
-----------
subject to withholding of all applicable taxes, which withholding obligations
may be satisfied, with the consent of the Committee, through the surrender of
Shares which the Participant already owns or to which a Participant is otherwise
entitled under the Plan; provided, however, except to the extent permitted by
the Committee, previously-owned Shares that have been held by the Participant
less than six months or Shares to which the Participant is entitled under the
Plan may only be used to satisfy the minimum tax withholding required by
applicable law.
4.10. Transferability. Awards under the Plan are not transferable except
---------------
as designated by the Participant by will or by the laws of descent and
distribution or, to the extent provided by the Committee, pursuant to a
qualified domestic relations order (within the meaning of the Code and
applicable rules thereunder). To the extent that the Participant who receives
an Award under the Plan has the right to exercise such Award, the Award may be
exercised during the lifetime of the Participant only by the Participant.
Notwithstanding the foregoing provisions of this subsection, Awards under the
Plan may be transferred to or for the benefit of the Participant's family
(including, without limitation, to a trust or partnership for the benefit of a
Participant's family), subject to such procedures as the Committee may
establish. In no event shall an Incentive Stock Option be transferable to the
extent that such transferability would violate the requirements applicable to
such option under Code section 422.
4.11. Notices. Any notice or document required to be filed with the
-------
Committee under the Plan will be properly filed if delivered or mailed by
registered mail, postage prepaid, to the Committee, in care of the Company, at
its principal executive offices. The Committee may, by advance written notice
to
14
<PAGE>
affected persons, revise such notice procedure from time to time. Any notice
required under the Plan (other than a notice of election) may be waived by the
person entitled to notice.
4.12. Form and Time of Elections. Unless otherwise specified herein, each
--------------------------
election required or permitted to be made by any Participant or other person
entitled to benefits under the Plan, and any permitted modification or
revocation thereof, shall be in writing filed with the Committee at such times,
in such form, and subject to such restrictions and limitations, not inconsistent
with the terms of the Plan, as the Committee shall require.
4.13. Agreement With Company. At the time of an Award to a Participant
----------------------
under the Plan, the Committee may require a Participant to enter into an
agreement with the Company (the "Agreement") in a form specified by the
Committee, agreeing to the terms and conditions of the Plan and to such
additional terms and conditions, not inconsistent with the Plan, as the
Committee may, in its sole discretion, prescribe.
4.14. Limitation of Implied Rights.
----------------------------
(a) Neither a Participant nor any other person shall, by reason of the
Plan, acquire any right in or title to any assets, funds or property
of the Company or any Related Company whatsoever, including, without
limitation, any specific funds, assets, or other property which the
Company or any Related Company, in its sole discretion, may set aside
in anticipation of a liability under the Plan. A Participant shall
have only a contractual right to the amounts, if any, payable under
the Plan, unsecured by any assets of the Company and any Related
Company. Nothing contained in the Plan shall constitute a guarantee
by the Company or any Related Company that the assets of such
companies shall be sufficient to pay any benefits to any person.
(b) The Plan does not constitute a contract of employment, and selection
as a Participant will not give any employee the right to be retained
in the employ of the Company or any Related Company, nor any right or
claim to any benefit under the Plan, unless such right or claim has
specifically accrued under the terms of the Plan. Except as otherwise
provided in the Plan, no Award under the Plan shall confer upon the
holder thereof any right as a stockholder of the Company prior to the
date on which he fulfills all service requirements and other
conditions for receipt of such rights and Shares are registered in
his name.
15
<PAGE>
4.15. Evidence. Evidence required of anyone under the Plan may be by
--------
certificate, affidavit, document or other information which the person acting on
it considers pertinent and reliable, and signed, made or presented by the proper
party or parties.
4.16. Action by Company or Related Company. Any action required or
------------------------------------
permitted to be taken by the Company or any Related Company shall be by
resolution of its board of directors or trustees, as applicable, or by action of
one or more members of the board (including a committee of the board) who are
duly authorized to act for the board or (except to the extent prohibited by
applicable law or the rules of any stock exchange) by a duly authorized officer
of the Company.
4.17. Gender and Number. Where the context admits, words in any gender
-----------------
shall include any other gender, words in the singular shall include the plural
and the plural shall include the singular.
4.18. Applicable Law. The provisions of the Plan shall be construed in
--------------
accordance with the laws of the State of Maryland, without giving effect to
choice of law principles.
4.19. Foreign Employees. Notwithstanding any other provision of the Plan
-----------------
to the contrary, the Committee may grant Awards to eligible persons who are
foreign nationals on such terms and conditions different from those specified in
the Plan as may, in the judgment of the Committee, be necessary or desirable to
foster and promote achievement of the purposes of the Plan. In furtherance of
such purposes, the Committee may make such modifications, amendments, procedures
and subplans as may be necessary or advisable to comply with provisions of laws
in other countries or jurisdictions in which the Company or a Related Company
operates or has employees.
SECTION 5
----------
COMMITTEE
----------
5.1 Administration. The authority to control and manage the operation
--------------
and administration of the Plan shall be vested in a committee (the "Committee")
in accordance with this Section 5.
5.2 Selection of Committee. So long as the Company is subject to section
----------------------
16 of the Exchange Act, the Committee shall be selected by the Board and shall
consist of not fewer than two members of the Board or such greater number as may
be required for compliance with Rule 16b-3 issued under the Exchange Act, none
of whom shall be eligible to receive Awards under the Plan.
16
<PAGE>
5.3 Powers of Committee. The authority to manage and control the
-------------------
operation and administration of the Plan shall be vested in the Committee,
subject to the following:
(a) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to select individuals to receive Awards, to
determine the time or times of receipt, to determine the types of
Awards and the number of Shares covered by the Awards, to establish
the terms, conditions, performance criteria, restrictions, and other
provisions of such Awards, and to cancel or suspend Awards. In making
such Award determinations, the Committee may take into account the
nature of services rendered by the respective employee, the
individual's present and potential contribution to the Company's
success and such other factors as the Committee deems relevant.
(b) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to determine the extent to which Awards under
the Plan will be structured to conform to the requirements applicable
to Performance-Based Compensation, and to take such action, establish
such procedures, and impose such restrictions at the time such Awards
are granted as the Committee determines to be necessary or appropriate
to conform to such requirements.
(c) The Committee will have the authority and discretion to interpret the
Plan, to establish, amend and rescind any rules and regulations
relating to the Plan, to determine the terms and provisions of any
agreements made pursuant to the Plan and to make all other
determinations that may be necessary or advisable for the
administration of the Plan.
(d) Any interpretation of the Plan by the Committee and any decision made
by it under the Plan is final and binding on all persons.
(e) Except as otherwise expressly provided in the Plan, where the
Committee is authorized to make a determination with respect to any
Award, such determination shall be made at the time the Award is made,
except that the Committee may reserve the authority to have such
determination made by the Committee in the future (but only if such
reservation is made at the time the Award is granted and is expressly
stated in the Agreement reflecting the Award).
17
<PAGE>
5.4 Delegation by Committee. Except to the extent prohibited by
-----------------------
applicable law or the rules of any stock exchange or NASDAQ (if appropriate),
the Committee may allocate all or any portion of its responsibilities and powers
to any one or more of its members and may delegate all or any part of its
responsibilities and powers to any person or persons selected by it. Any such
allocation or delegation may be revoked by the Committee at any time.
5.5 Information to be Furnished to Committee. The Company and Related
----------------------------------------
Companies shall furnish the Committee such data and information as may be
required for it to discharge its duties. The records of the Company and Related
Companies as to an employee's or Participant's employment (or other provision of
services), termination of employment (or cessation of the provision of
services), leave of absence, reemployment and compensation shall be conclusive
on all persons unless determined to be incorrect. Participants and other
persons entitled to benefits under the Plan must furnish the Committee such
evidence, data or information as the Committee considers desirable to carry out
the terms of the Plan.
5.6 Liability and Indemnification of Committee. No member or authorized
------------------------------------------
delegate of the Committee shall be liable to any person for any action taken or
omitted in connection with the administration of the Plan unless attributable to
his own fraud or willful misconduct; nor shall the Company or any Related
Company be liable to any person for any such action unless attributable to fraud
or willful misconduct on the part of a Director or employee of the Company or
Related Company. The Committee, the individual members thereof, and persons
acting as the authorized delegates of the Committee under the Plan, shall be
indemnified by the Company against any and all liabilities, losses, costs and
expenses (including legal fees and expenses) of whatsoever kind and nature which
may be imposed on, incurred by or asserted against the Committee or its members
or authorized delegates by reason of the performance of a Committee function if
the Committee or its members or authorized delegates did not act dishonestly or
in willful violation of the law or regulation under which such liability, loss,
cost or expense arises. This indemnification shall not duplicate but may
supplement any coverage available under any applicable insurance.
SECTION 6
----------
AMENDMENT AND TERMINATION
--------------------------
Subject to obtaining such approvals as may be required under the Code,
Federal securities law, Maryland corporate law or stock exchange requirements,
the Board may, at any time, amend or terminate the Plan, provided that, subject
to subsection 4.4 (relating to certain adjustments to shares), no amendment or
18
<PAGE>
termination may materially adversely affect the rights of any Participant or
beneficiary under any Award made under the Plan prior to the date such amendment
is adopted by the Board.
19
<PAGE>
Exhibit 12.1
SECURITY CAPITAL GROUP INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1998 1997 1996 1995 (a) 1994
-------- -------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Net Earnings (loss) from Operations $ 67,480 $ 38,241 $ (9,693) $(21,274) $11,849
Add:
Interest Expense 82,203 104,434 117,224 103,804 53,789
-------- -------- -------- -------- -------
Earnings as Adjusted $149,683 $142,675 $107,531 $ 82,530 $65,638
======== ======== ======== ======== =======
Fixed Charges:
Interest Expense $ 82,203 $104,434 $117,224 $103,804 $53,789
Capitalized Interest 26,703 69,883 11,448 4,404 3,184
-------- -------- -------- -------- -------
Total Fixed Charges $108,906 $174,317 $128,672 $108,208 $56,973
======== ======== ======== ======== =======
Ratio of Earnings to Fixed Charges 1.4 0.8 0.8 0.8 1.2
======== ======== ======== ======== =======
</TABLE>
(a) Excludes a one-time non-cash expense item ($158.4 million) incurred
in acquiring the Financial Services Division from a related party.
<PAGE>
Exhibit 12.2
SECURITY CAPITAL GROUP INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED SHARE DIVIDENDS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1998 1997 1996 1995(a) 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Earnings (loss) from Operations $ 67,480 $ 38,241 $ (9,693) $ (21,274) $ 11,849
Add:
Interest Expense 82,203 104,434 117,224 103,804 53,789
--------- --------- --------- --------- ---------
Earnings as Adjusted $ 149,683 $ 142,675 $ 107,531 $ 82,530 $ 65,638
========= ========= ========= ========== =========
Combined Fixed Charges and
Preferred Share Dividends:
Interest Expense $ 82,203 $ 104,434 $ 117,224 $ 103,804 $ 53,789
Capitalized Interest 26,703 69,883 11,448 4,404 3,184
--------- --------- --------- --------- ---------
108,906 174,317 128,672 108,208 56,973
Preferred Share Dividends (b) (c) 22,315(d) 15,416 12,352 -- --
--------- --------- --------- --------- ---------
Combined Fixed Charges and
Preferred Share Dividends $ 131,221 $ 189,733 $ 141,024 $ 108,208 $ 56,973
========= ========= ========= ========= =========
Ratio of Earnings to Combined Fixed
Charges and Preferred Share
Dividends 1.1 0.8 0.8 0.8 1.2
========= ========= ========= ========= =========
</TABLE>
(a) Excludes a one-time non-cash expense item ($158.4 million) incurred in
acquiring the Services Division from a related party.
(b) The Preferred dividends have been increased to show a pretax basis.
(c) Security Capital had no preferred dividends prior to 1996.
(d) Excludes a one-time non-cash dividend of $19.8 million incurred in
conjunction with the exchange of Series A Preferred Shares for Series B
Preferred Shares.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report on Security Capital Group Incorporated dated March 10, 1999 and
our reports on ProLogis Trust dated March 5, 1999 into Security Capital Group
Incorporated's previously filed Registration Statements File Nos. 333-38521,
333-38523, 333-38525, 333-38527, 333-38531, 333-38533, 333-38537, 333-38539,
333-48167, 333-61395, 333-61401 and 333-64979.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 25, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in
this Form 10-K of our reports dated March 5, 1999 on ProLogis Trust. It should
be noted that we have not audited any financial statements of ProLogis Trust
subsequent to December 31, 1998, or performed any audit procedures subsequent to
the date of our reports.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 25, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use of our reports dated January 22, 1999, except as to
Note 15 which is as of March 5, 1999, relating to the balance sheets of
Archstone Communties Trust as of December 31, 1998 and 1997, and the related
statements of earnings, shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998, and the related
schedule, in the December 31, 1998, annual report on Form 10-K of Security
Capital Group Incorporated. Further, we consent to the incorporation by
reference of the aforementioned report into the registration statements filed by
Security Capital Group Incorporated on Form S-8 No's. 333-38521, 333-38523, 333-
38525, 333-38527, 333-38531, 333-38533, 333-38537, 333-48167, 333-38539, 333-
61395, Form S-4 No. 333-61401 and Form S-3 No. 333-64979.
KPMG LLP
Chicago, Illinois
March 25, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants of Frigoscandia Holding AB, we hereby consent
to the use of our report dated January 28, 1999, included in the Security
Capital Group, Incorporated Form 10-K for the year ended December 31, 1998. It
should be noted that we have not audited any financial statements of the company
subsequent to December 31, 1998 or performed any audit procedures subsequent to
the date of our reports.
Stockholm, March 26, 1999
KPMG
<PAGE>
Exhibit 23.5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
AUDIT REPORT
To the general meeting of the shareholders of Frigoscandia Holding AB
Corporate identity number 556542-7704
We have audited the annual accounts, the consolidated accounts, the accounting
records and the administration of the board of directors and the managing
director of Frigoscandia Holding AB for the year 1998. These accounts and the
administration of the company are the responsibility of the board of directors
and the managing director. Our responsibility is to express an opinion on the
annual accounts, the consolidated accounts and the administration based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards
in Sweden. Those standards require that we plan and perform the audit to obtain
reasonable assurance that the annual accounts and the consolidated accounts are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the accounts. An audit also
includes assessing the accounting principles used and their application by the
board of directors and the managing director, as well as evaluating the overall
presentation of information in the annual accounts and the consolidated
accounts. We examined significant decisions, actions taken and circumstances of
the company in order to be able to determine the liability, if any, to the
company of any board member or the managing director and whether they have in
any other way acted in contravention of the Companies Act, the Annual Accounts
Act or the Articles of Association. We believe that our audit provides a
reasonable basis for our opinion set out below.
The annual accounts and the consolidated accounts have been prepared in
accordance with the Annual Accounts Act, and, consequently we recommend that the
income statements and the balance sheets of the parent company and the group be
adopted, and that the profit of the parent company be dealt with in accordance
with the proposal in the administration report.
The board members and the managing director have not committed any act or been
guilty of any omission, which, in our opinion, could give rise to any liability
to the company. We therefore recommend that the members of the board of
directors and the managing director be discharged from liability for the
financial year.
Stockholm January 28, 1999
KPMG
<PAGE>
Exhibit 23.6
Consent of Independent Accountants
We hereby consent to the use of our reports dated February 28, 1997, February
25, 1998 and March 10, 1999 relating to the consolidated financial statements of
Security Capital U.S. Realty in Security Capital Group Incorporated's Form 10-K
and to the incorporation by reference of such reports into Security Capital
Group Incorporated's previously filed Registration Statements File Numbers
333-38521, 333-38523, 333-38525, 333-38527, 333-38531, 333-38533, 333-38537,
333-38539, 333-48167, 333-61395, 333-61401 and 333-64979.
Price Waterhouse SARL
Luxembourg
March 26, 1999
<PAGE>
Exhibit 23.7
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-64979 and Form S-4 No. 333-61401) of Security Capital Group
Incorporated and in the related Prospectus and the Registration Statements (Form
S-8 Nos. 333-61395, 333-38521, 333-38523, 333-38525, 333-38527, 333-38531,
333-38533, 333-38537, 333-48167 and 333-38539) of Security Capital Group
Incorporated of our report dated February 3, 1997, with respect to the financial
statements of Security Capital Atlantic Incorporated for the two years ended
December 31, 1996.
Ernst & Young LLP
March 24, 1999
Dallas, Texas
<PAGE>
Exhibit 23.8
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-64979 and Form S-4 No. 333-61401) of Security Capital Group
Incorporated and in the related Prospectus and the Registration Statements (Form
S-8 Nos. 333-61395, 333-38521, 333-38523, 333-38525, 333-38527, 333-38531,
333-38533, 333-38537, 333-48167 and 333-38539) of Security Capital Group
Incorporated of our report dated February 24, 1997, with respect to the
financial statements of Homestead Village Incorporated for the year ended
December 31, 1996.
Ernst & Young LLP
March 24, 1999
Dallas, Texas
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
Form 10-K for the year ended December 31, 1998, 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 13,209
<SECURITIES> 117,878
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,213,685
<DEPRECIATION> 48,816
<TOTAL-ASSETS> 4,509,789
<CURRENT-LIABILITIES> 0
<BONDS> 1,280,372
0
257,642
<COMMON> 491
<OTHER-SE> 2,164,477
<TOTAL-LIABILITY-AND-EQUITY> 4,509,789
<SALES> 0
<TOTAL-REVENUES> 173,178
<CGS> 0
<TOTAL-COSTS> 239,625
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,203
<INCOME-PRETAX> (148,650)
<INCOME-TAX> (47,095)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 17,657
<CHANGES> 0
<NET-INCOME> (152,098)
<EPS-PRIMARY> (1.25)
<EPS-DILUTED> (1.25)
</TABLE>
